5 November 2015
First Light Asia
[Production:Chinese Airlines please | China changeOnshore Monthlyheadline | NCsoft text colour | Asia s Bondto WHITE, Markets changeThe View headline row height to 1pt exactly before publish] What’s Changed, Research Focus, Today’s Events
Ticker Company Rating was Currency Target was EPS '15e EPS '16e Price Price At Close New 753 HK Air China-H Buy - HKD 10.10 - 0.81(RMB) 0.88(RMB) 7.15 02 Nov 670 HK CEA-H Buy - HKD 7.10 - 0.69(RMB) 0.73(RMB) 4.84 02 Nov 1055 HK CSA-H Buy - HKD 7.50 - 0.78(RMB) 0.78(RMB) 6.28 02 Nov 601021 CH Spring Hold - RMB 66.00 - 2.07 2.69 62.29 02 Nov 601111 CH Air China-A Reduce - RMB 8.10 - 0.81 0.88 8.67 02 Nov 600115 CH CEA-A Reduce - RMB 5.70 - 0.69 0.73 7.96 02 Nov 600029 CH CSA-A Reduce - RMB 6.00 - 0.78 0.78 8.19 02 Nov 603885 CH Juneyao Reduce - RMB 48.00 - 2.08 2.57 64.03 02 Nov Up 036570 KS NCsoft Buy Reduce KRW 260,000 165,000 9,159 13,622 210,000 04 Nov 981 HK SMIC Buy HKD 0.88 0.75 0.32(USD) 0.38(USD) 0.75 04 Nov IPCA IN IPCA Laboratories Hold INR 784.00 692.00 21.61(a) 21.11 752.75 03 Nov TECHM IN Tech Mahindra Hold INR 585.00 550.00 26.7(a) 29.4 556.05 02 Nov 3673 TT TPK Holding Hold TWD 109.00 97.00 -49.99 7.81 91.90 04 Nov Down MNCN IJ Media Nusantara Citra Buy IDR 2100.00 2,300 112.57 126.29 1740.00 03 Nov 192400 KS Cuckoo Electronics Buy KRW 310,000 320,000 10296.40 12702.25 246,500 03 Nov JM SP Jardine Matheson Hold USD 55.50 60.00 3.92 4.35 55.01 04 Nov 1157 HK HKD 4.90 -0.15(CNY) -0.04(CNY) 3.16 04 Nov Zoomlion Heavy Industry Hold 3.60 Source: Bloomberg, HSBC estimates Click on title to open reports Research Focus Chinese Airlines - Initiate coverage: Gridlocked airports, sky-high profits Jack Xu* Buoyant revenue outlook, low fuel prices and zero hedging are set to nearly triple industry profits in 2015e HSBC demand and supply forecasts suggest strong loads and stable yields Initiate coverage: CEA-H and Air China-H are our top picks for state-owned airlines; prefer Spring among private carriers China Onshore Monthly - Look out for a correction Zhi Ming Zhang We look at four factors that could trigger a bond correction and the potential impact on spreads Concerns about systemic credit risk are overblown for now, despite recent defaults We also assess where credit risks could surface next as fundamentals weaken
Ticker Event Rating Target Price Ticker Event NI Bbg KDDI Corp 9433 JP S1 Hold 3,200.00 2,922.5 Celgene Corp CELG US Q3 124.9 Korea Electric Power Corp 015760 KS Q3 Buy 67,000.00 51,600.0 Kraft Heinz Co/T KHC US Q3 78.7 Melco Crown Entertainment MPEL US Q3 Buy 24.10 18.4 Duke Energy Corp DUK US Q3 71.6 Singapore Airlines SIA SP Q2 Hold 12.00 11.0 EOG Resources In EOG US Q3 85.5 Cipla/India CIPLA IN Q2 Buy 800.00 691.6 Monster Beverage MNST US Q3 136.6 Source: Bloomberg, HSBC estimates
Jenny Li* Research Marketing +852 2841 8245 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: http://www.research.hsbc.com Disclaimer & Disclosures This report must be read with the disclosures in the Disclosure appendix, and the Disclaimer, which forms part of it Disclosures for companies can be accessed via the hyperlinks to the original published research, which can be found in the title THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO) First Light Asia abc 5 November 2015
Research Focus (Cont..) NCsoft (036570 KS) - Upgrade to Buy: Poised for a leg up Jena Han* 3Q falls short of expectations, but recovery likely in 4Q A stronger mobile pipeline and reasonable valuation post correction prompts us to turn positive on the stock Upgrade to Buy from Reduce as we raise our fair value target price to KRW260,000 (from KRW165,000) Asia's Bond Markets - The View - November 2015 - Onshore RMB: Look out for a correction Zhi Ming Zhang Overview: Onshore RMB: Look out for a correction Credit Strategy: Liquidity vs fundamentals Credit Review: Out of the doldrums, for now Rebalance Dynamics: Risk-on sentiment in anticipation of favourable central bank actions - ADBI and ALBI rebalancing in November 2015 Credit Research: Corporate USD perpetual: Potential risks from revision in ratings methodology
First Light Asia abc 5 November 2015
Regional New Zealand jobs report - Growth slowing and wages weak Paul Bloxham New Zealand's labour market has weakened considerably through mid-2015, with the data for Q3 softer than expected Employment fell by -0.4% q-o-q (market and HSBC expected an increase of 0.4%), and wages growth was also below expectations (1.6% y-o-y) Although we think the weakness in the numbers probably overstates the slowdown in overall economic growth, strong inwards migration and soft jobs growth suggest the labour market is loosening. China & Hong Kong Caixin China Services PMI (October) - Solid expansion thanks to golden week Jing Li The Caixin China services PMI rose to 52.0 in October, up from 50.5 in September New business rose, alongside moderate improvement in labour demand. Meanwhile, the official services PMI moderated to 53.1 from 53.4, but remained in solid expansionary territory. Sectors such as tourism, catering and transportation sectors likely benefited from the strong sales during the golden week holiday. China e-finance - New platform and vehicle for shadow assets under trial Michael Chu* Trial of new asset management plans by banks in October 2015 to create new platform for trading non-standard credits and shed light on shadow banking The new platform and tradable product could pose direct competition to existing trading platforms such as Lufaxowned Lfex, Ant Financial-owned ZhaoCaiBao However, a lack of promised yield and implicit guarantee may challenge the sales of this product to investors with limited risk appetite China Oil & Gas - 13th FYP Guidelines on Energy: clean and efficient focus Thomas C. Hilboldt* China 13th Five-Year-Plan (FYP) Guidelines stress policy that delivers clean, efficient, safe and innovative energy No hard targets, just policy signals regarding more open markets, freer prices and ongoing changes in the fuel mix Oil majors/affiliates will be affected by changes in energy supply/delivery/demand in a slower growing economy Macau Gaming - October market share review Charlene Liu* Oct GGR -28%yoy; mass yoy drop narrowed to -13%yoy vs -22% in 9M15 Galaxy led in VIP and Sands in mass Continue to prefer MGM China (an HSBC Asia Super Ten constituent) and Galaxy SMIC (981 HK/SMI US) - Reiterate Buy: Pulling in capacity to meet demand Steven C. Pelayo 2H15 upside likely from tight 200mm and 4x demand. Higher R&D credits and property sales helping too. 4Q15 outlook steady. Pulling in BJ2 ramp, depreciation likely up strongly in 2016 Not much 28nm yet, but major customers ramping: QCOM (28nm SOC and 200mm PMIC), Broadcom/Huawei (4x node) Maintain Buy. With chip inventories purging and China supporting, we raise target price to HKD0.88 (from HKD0.75) on 1.3x PB (1.1x prior). Growth outpacing TSMC in both 2015/2016E. GCL-Poly Energy (3800 HK) - Buy: 3Q15 preview Gloria Ho* Expect 3Q15 wafer revenue/earnings growth with 2H15 solar demand increases and ASP recovery; company expects ASP of USD0.20/W+ from Sep 2015 (vs 1H15: USD0.195/W) Look for updates on the proposed IPP business disposal, FBR development and wafer capacity expansion plans Reiterate Buy with unchanged TP of HKD2.0 Changan Auto (200625 CH/000625 CH) - B/A: Buy/Hold: Sales volume growth picked up in October Carson Ng* Sales volume of Changan Ford and Changan domestic brand picked up in October Changan Ford’s slowdown in new product launches in 2016- 17e remains our major concern B: Buy with TP of HKD18.3 based on a 7.4x 2015e PE; A: Hold with TP of RMB15.3 First Light Asia abc 5 November 2015
Zoomlion Heavy Industry (1157 HK) - Hold: Challenges after challenges Anderson Chow* 4Q15e loss could widen in our view because of impairment charges for accounts receivable and finance lease receivable Earnings could remain in negative territory given persistent weak demand for construction machinery and high level of USD debt Maintain Hold, lower FY15 and FY16 earnings to net loss position. TP reduced to HKD3.6 from HKD4.9 Macau Legend (1680 HK) - Reduce: Setting expectations into 3Q15 results Scott Chan* We forecast 3Q15 EBITDA HKD73m, -71%yoy or -56% yoy excluding one-off Focus on cost control measures and project updates Maintain Reduce rating and unchanged HKD1.1 target price
Korea Korea Autos - October US auto sales data Paul Choi* Cuckoo Electronics (192400 KS) - Buy: 3Q15 preview – buy on recent dip Brian Cho*
Taiwan TPK Holding (3673 TT) - Hold: Does one-time write-off mean a new beginning? Jerry Tsai* Wistron Corporation (3231 TT) - Hold: 3Q15 results a mixed bag Jenny Lai*
ASEAN Thailand - Policy rate pause extended Nalin Chutchotitham Singapore REITs - Looking better Pratik Burman Ray* CapitaLand (CAPL SP) - Buy: Cheap on valuation grounds Pratik Burman Ray* Media Nusantara Citra (MNCN IJ) - Buy: Still offers value Rajesh Raman* Jardine Matheson (JM SP) - Hold: weak 3Q15 highlights valuation is not compelling Mark Webb* Yangzijiang Shipbuilding (YZJSGD SP) - Reduce: Going downhill Tarun Bhatnagar*
India India - October services PMI rises, offsetting weakness in manufacturing Pranjul Bhandari Power Grid Corp Of India (PWGR IN) - Buy: Q2FY16 result – growth continues Arun Kumar Singh* HCL Technologies (HCLT IN) - Looking beyond the short-term volatility Yogesh Aggarwal* DLF Ltd (DLFU IN) - Hold: Sales remain weak but other triggers in sight Puneet Gulati* IPCA Laboratories (IPCA IN) - Hold: In-line quarter despite higher API sales Girish Bakhru* Tech Mahindra (TECHM IN) - Hold: 2Q16 – Concentration risks outweigh low valuations Yogesh Aggarwal*
Global GEMs Equity Strategy - What to make of Turkey after the elections? John Lomax*
Market data
Markets HSBC Last 5d % Forecast GDP (%Yr) Int Rate USD vs CCY HSBC Last 5d % Commodities HSBC Last 5d % HSI 12,700 12,373 -1.72 US 2.5 0.50-0.75 EUR 1.05 1.09 -0.60 Oil 62.5 46.3 0.87 SHCOMP 3,400 3,460 2.50 China 7.1 4.85 CNY 6.50 6.34 0.35 Gold 1,233 1109 -4.11 TAIEX 8,700 8,857 2.20 Taiw an 1.3 1.63 TWD 33.0 32.32 0.57 Coal (Thermal) 85 53 0.00 KOSPI 1,990 2,053 0.50 Korea 2.4 1.50 KRW 1,220.0 1132 -0.11 Steel (HRC China) 483 1890 -1.05 TOPIX 1,640 1,540 -0.17 Japan 0.6 0-0.10 JPY 125.0 121.6 -0.44 Aluminium 1,875 1472 2.10 BSE 30 25,800 26,553 -1.80 India 7.6 7.25 INR 67.0 65.49 -0.85 Copper 7,100 5141 -1.68
Source: Bloomberg
Transport Chinese Airlines
Buoyant revenue outlook, low fuel Chinese Airlines prices and zero hedging are set to nearly triple industry profits in 2015e Initiate coverage: Gridlocked airports, HSBC demand and supply forecasts sky-high profits suggest strong loads and stable yields
Initiate coverage: CEA-H and Air China-H
are our top picks for state-owned airlines; prefer Spring among private carriers
Summary of HSBC coverage First class profits. China’s airlines are flying high despite Company Stock code 2-Nov Target Upside/ Rating the economic slowdown. We forecast that industry recurring price price downside profit will almost triple in 2015, supporting a record CAGR Air China-A 601111 CH 8.67 8.10 -7% Reduce of 50% for 2014-17e. We expect Spring and Juneyao to have Air China-H 753 HK 7.15 10.10 41% Buy CEA-A 600115 CH 7.96 5.70 -28% Reduce the best 2016-17e earnings growth, and we forecast a sector CEA-H 670 HK 4.84 7.10 47% Buy ROE averaging 19% in 2015-17e, up from 7% over 2012-14. CSA-A 600029 CH 8.19 6.00 -27% Reduce CSA-H 1055 HK 6.28 7.50 19% Buy Following consensus earnings downgrades in 3Q15, we expect Juneyao 603885 CH 64.03 48.00 -25% Reduce earnings momentum – a reliable share price driver – to rebound. Spring 601021 CH 62.29 66.00 6% Hold Notes: CEA = China Eastern Airlines, CSA = China Southern Airlines; H-shares in HKD; A-shares in RMB Supply and demand balance. Seat capacity forecasts, based Source: Bloomberg, HSBC estimates
on fleet plans of 22 PRC airlines, show that supply will be constrained in 2016-17e. As a result, HSBC’s proprietary underlying demand model suggests new capacity can be comfortably absorbed, even assuming lower GDP growth in China. This benign demand and supply environment is supported by rapid growth in outbound travel, low oil prices and congestion at most of China’s top 10 airports. 4 November 2015 The best-placed airlines. For state-owned airlines, our scorecard shows that China Eastern (CEA) and Air China Jack Xu* Analyst are better placed, given their stronger international hubs, The Hongkong and Shanghai Banking Corporation Limited more lucrative home base cities, and higher market share on +852 2996 6566 [email protected] key routes. Among the privately owned carriers, Spring is Mark Webb* better positioned given its sustainable low-cost business Head of Conglomerate & Transport Research, Asia Pacific model, strong brand, and distribution advantages. Juneyao’s The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 [email protected] hybrid model may face challenges, particularly the business model of its start-up low-cost carrier. Eva Xie* Associate Initiate coverage. We initiate on dual-listed Air China,
View HSBC Global Research at: http://www.research.hsbc.com China Eastern, and China Southern, as well as A-share listed Spring and Juneyao. Our top picks among the state-owned *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations carriers are China Eastern-H and Air China-H; Spring is our Issuer of report: The Hongkong and Shanghai Banking preferred private carrier. Our earnings forecasts for Air Corporation Limited China, China Eastern and Spring are considerably ahead of Disclaimer & Disclosures consensus. Key risks to our estimates and ratings are renminbi This report must be read with the depreciation (versus the US dollar) and a fuel price surge. disclosures and the analyst certifications in the Disclosure appendix, and with the THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE’S REPUBLIC OF CHINA (THE “PRC”) (EXCLUDING SPECIAL Disclaimer, which forms part of it ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)
Transport Chinese Airlines abc 4 November 2015
1. Stock snapshot and scorecard ranking Company Stock code Business description Investment case Ccy 2-Nov Target Rating price price Air China-A 601111 CH China’s national flag carrier. Founded in 1988 and Strong homebase pricing power from airport RMB 8.67 8.1 Reduce Air China-H 753 HK restructured in 2002. One of the “big three” state-owned constraints in Beijing and cost reduction efforts HKD 7.15 10.1 Buy carriers. Member of Star Alliance. Owns a fleet of 559 should enable the company to generate strong cash aircrafts by 30 June 2015. Home base in Beijing and hubs flow from operations. Balance sheet could be in Shanghai and Chengdu. Operating flights to 32 deleveraged given future moderate fleet expansion countries and 159 destinations around the globe by the plan. Valued at 5-yr average ROE/COEg implied PB end of 2014. of 1.4x 2016e. Scorecard ranking: Cathay 293 HK Founded in 1946, the largest airline in Hong Kong. Strong brand and home base, leveraged to the HKD 15.12 18.75 Buy Pacific Member of Oneworld. Owns a fleet of 202 aircraft (30 improving US market and solid balance sheet. June 2015). Homebase in Hong Kong, also focuses on Relatively weak USD supports positioning versus the Pearl River Delta area. premium rivals. Valued at 1.25x 1-year forward PB Scorecard ranking: based on its average since 2000. CEA-A 600115 CH Founded in 1988 and restructured in 2002. One of the Strong demand from homebase and has deployed RMB 7.96 5.7 Reduce “big three” stated-owned carriers. Member of SkyTeam significant capacity to meet international travel CEA-H 670 HK HKD 4.84 7.1 Buy Alliance. Owns a fleet of 527 aircraft (June 30 2015). demand; Delta Airlines alliance is mutually beneficial; Home base in Shanghai and hub in Xi’an and Kunming. Shanghai airport constraints implies pricing power. Network extended to 177 countries and 1,052 Valued at 5-yr average ROE/COEg implied PB of destinations around the globe by the end of 2014. 1.5x 2016e. Scorecard ranking: CSA-A 600029 CH Founded in 1991 and restructured in 2002. The largest of CSA will get more “northern” exposure when RMB 8.19 6.0 Reduce the “big three” stated-owned carriers. Member of Beijing’s new airport opens in 2019. Constrained air CSA-H 1055 HK HKD 6.28 7.5 Buy SkyTeam Alliance. Owns a fleet of 638 aircraft (June 30 resources and airport facilities in Guangzhou imply 2015). Homebase in Guangzhou and hubs in Beijing, better pricing control. Valued at 5-yr average Urumqi and Chongqing. Operating flights to about 40 ROE/COEg implied PB of 1.2x 2016e. countries and over 190 destinations around the globe by the end of 2014. Scorecard ranking: Juneyao 603885 CH A private carrier founded in 2006. Targets mid to high-end A niche full-service carrier with a successful low cost RMB 64.03 48.0 Reduce Airlines business and leisure travellers by offering attractive structure, but the growth outlook depends on its products and services at prices slightly below other full ability to gain market share in top tier cities. Its newly service providers. Homebase in Shanghai. Subsidy 9 Air established low-cost carrier subsidiary operated in (a low-cost carrier) based in Guangzhou. Owns a fleet of Guangzhou. Our three-stage DCF/DEP valuation 47 aircraft (30 June 2015). implies 11x EV/EBITDAR and 19x PE in 2016e. Scorecard ranking: Singapore SIA SP Singapore’s flag carrier, commenced operations in 1972. Strong brand, homebase and modern fleet. Net cash SGD 10.60 12.2 Hold Airlines Home base in Singapore Changi Airport. Owns a fleet of position provides defensive appeal. Suffering from 141 aircraft (30 June 2015). strong Singapore dollar, rising competition at its Scorecard ranking: home base and growth of Middle Eastern airlines. Valued at 1.0x 1-year forward book. Spring 601021 CH A private carrier founded in 2006. China’s first and Leading and largest low-cost carrier in China, RMB 62.29 66.0 Hold Airlines leading low-cost carrier. Home base in Shanghai, hubs in favourable government policy, durable cost Shijiazhuang and Shenyang. Owns an all-Airbus fleet of advantage and evolving ancillary revenue strategy. 50 aircraft (30 June 2015). It also operates a joint venture, Our three-stage DCF/DEP valuation implies 13x Spring Airlines Japan, based in Tokyo. EV/EBITDAR and 25x PE in 2016e. Scorecard ranking:
Source: Bloomberg, HSBC estimates
2
Fixed Income China
We look at four factors that could China Onshore trigger a bond correction and the Monthly potential impact on spreads Look out for a correction Concerns about systemic credit risk are overblown for now, despite recent defaults
We also assess where credit risks could surface next as fundamentals weaken
Three separate events in October represented the most extensive credit defaults or near-misses in China’s onshore bond markets since April 2014, when problems at Chaori Solar rattled investors. We think Beijing is using these incidents as an opportunity to restore the appropriate pricing of credit risk, following the leverage-fuelled tightening of spreads in recent months. After all, the recent onshore bond rally has much in common with the speculative boom in A- shares that came to a sudden halt in the summer. 4 November 2015 While we don’t expect a proliferation of bond defaults any Zhi Ming Zhang time soon, the impact that the slowing economy is having on Head of China Research The Hongkong and Shanghai Banking Corporation Limited onshore credit fundamentals is clear. The excessively tight +852 2822 4523 [email protected] spreads – the result of ample liquidity as investors switch
Desmond Kuang from stocks to bonds – have yet to capture the deterioration Analyst in the underlying credits. As maturity peaks in 2016, we The Hongkong and Shanghai Banking Corporation Limited think more problems could surface due to weakening cash +852 2996 6557 [email protected] flow and high gearing. This report looks at: Helen Huang Analyst The four factors that could trigger a bond market The Hongkong and Shanghai Banking Corporation Limited correction: 1) signs of growth stabilising which would +852 2996 6585 [email protected] weaken expectations of further easing; 2) a stock rebound; 3) bond yields falling further; and 4) the emergence of substantial default risks.
The impact that a correction could have on spreads. We see the historical three-year average as a fair anchor point should the rally lose momentum. That represents a retreat of around 80bp for short-end AA credit spreads and 50bp for 5-year, close to the levels in late 2014 View HSBC Global Research at: http://www.research.hsbc.com when the previous bond market rally ran out of steam. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Where default risks might surface next. Based on our Disclaimer & Disclosures stress tests, the answer is local government state-owned This report must be read with the enterprises and sectors suffering from overcapacity like disclosures and the analyst certifications steel and mining. in the Disclosure appendix, and with the Disclaimer, which forms part of it THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO) Fixed Income China abc 4 November 2015
Tightening vs defaults: when will the music stop?
Despite tighter spreads, several defaults occurred last month, but concerns about systemic credit risk are overblown, for now We look at four factors that could derail the current bond rally The drag on credit fundamentals should intensify into 2016, with more risk in local SOEs and sectors suffering from overcapacity
Is a credit spread correction The bond rally that has taken place since August on the way? is a liquidity rather than fundamental play. Hence, liquidity will have a key role in the rally’s life In recent months, the leverage-fuelled bond rally span. Fig 1 shows the rapid rebound of 1-day has caused corporate credit spreads to tighten interbank repo volumes following a dip during the significantly. This is despite the fact that the period of equity volatility, and the steady rise of slowing economy is taking its toll on corporate the smaller, retail funding driven, exchange repo credit fundamentals, as shown by three recent turnover. The latter benefited from the expansion examples of defaults or near-misses that we look of the pool of collateral thanks to the boom in at later in this report. For investors, the big exchange traded corporate bonds. The increase in questions are: is a correction coming and, if so, short-end repo volumes served as the foundation how big is it likely to be? for the bonds’ bull-run. We believe the risk is clearly there, especially 1. Turnover of 1D repo on the interbank and exchange after the latest easing measures on 23 October market weakened expectations for further rate cuts in the 2500 near term and the signs of stability in the stock 2000 market in recent weeks. We see the historical three-year average as a fair anchor point should 1500 the rally lose momentum. That represents a retreat 1000 of a round 80bp for short-end AA credit spreads 500 and 50bp for 5-year, close to the levels in late 2014, when the previous bond market rally ran out 0 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 of steam. SSE 1d repo Interbank 1d repo
Source: Bloomberg, HSBC
2
Company report Telecoms, Media & Technology IT Services Equity – Korea NCsoft (036570 KS)
Buy Upgrade to Buy: Poised for a leg up Target price (KRW) 260,000 3Q falls short of expectations, but recovery likely in 4Q Share price (KRW) 210,000 Upside/Downside (%) +23.8 A stronger mobile pipeline and reasonable valuation post Dec 2014 a 2015 e 2016 e correction prompts us to turn positive on the stock HSBC EPS (KRW) 10,486 9,159 13,621 HSBC PE 20.0 22.9 15.4 Performance 1M 3M 12M Upgrade to Buy from Reduce as we raise our fair value Absolute (%) 8.5 -3.9 39.5 target price to KRW260,000 (from KRW165,000) Relative^ (%) 4.4 -4.8 31.8
NCsoft showcased a stronger-than-expected new game pipeline during its 3Q results call. Is this going to be a repeat of the same roller-coaster story six months ago? We think not; we are finally convinced NC is hands-on in mobile. We have flagged this as NC’s primary share price swing factor and we upgrade our rating on the stock to Buy from Reduce.
What has changed? The stock spiked 12% yesterday following its 3Q results call, as management painted a bullish picture for 4Q and 2016. Highlights were (1) Lineage Eternal’s close-beta test in 1H 2016 and (2) the roll-out of a handful of new mobile games planned in the 5 November 2015 next 2-3 quarters. On the surface, this may seem like the same story we heard six months ago. Jena Han* But management’s discussion of several in-house projects underway in Korea and the US Analyst The Hongkong and Shanghai Banking (most of which will be based on its PC franchises) convinced us the company is heading in the Corporation Limited, Seoul Securities right direction in nurturing its mobile development capabilities. We also think the stock is +822 3706 8772 [email protected] more attractively valued after correcting 16% since its peak (post yesterday’s 12% hike). At 15x 2016e PE, we focus on the company’s brewing new launch cycle. Chi Tsang* Head of Asia Internet Nexon overhang clears: NC shares have been weak of late as news emerged of Nexon (3659 The Hongkong and Shanghai Banking Corporation Limited JP, JPY1,681, not rated) selling its 15% stake in the company. With the overhang cleared, +852 2822 2590 technical resistance should also be removed. Meanwhile, NC’s CEO TJ Kim has made a block [email protected] purchase, raising his stake from 10% to 12%, becoming one of the largest shareholders. We think this gesture shows his commitment to the company and its minority shareholders. View HSBC Global Research at: http://www.research.hsbc.com A recap of 3Q earnings – weak, but stronger 4Q ahead: NC reported weak 3Q OP of *Employed by a non-US affiliate of KRW51bn (down 25% q-o-q), falling 17% short of consensus due to weak Lineage 1 and HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA Aion item sales. However, 4Q should see a strong recovery thanks to Guild Wars 2 expansion regulations release and better item sales seasonality across its games. In particular, we note that Lineage 1 Issuer of The Hongkong and traffic has shown a slight uptick in the past few weeks following a large-scale content update report: Shanghai Banking Corporation Limited, (the first in 7 years). This should be positive for the item sales event planned later this year. Seoul Securities Branch Disclaimer & Upgrade to Buy with c60% higher TP of KRW260,000 reflecting the following: (1) a 7% Disclosures increase in our 2016 EPS forecast in view of more mobile game launches; (2) a higher target This report must be read multiple of 18.8x, the global PC game developers’ average (previously 16.8x, or NC’s 2011- with the disclosures and 14 average); and (3) basing our valuation on 2016e EPS, rolled forward as we near year-end. the analyst certifications in ^Index KOSPI INDEX Enterprise value (KRWbn) 3,485 the Disclosure appendix, Index level 2,048 Free float (%) 85 and with the Disclaimer, RIC 036570.KS Market cap (USDm) 4,065 which forms part of it Bloomberg 036570 KS Market cap (KRWb) 4,605 Source: HSBC Source: HSBC NCsoft (036570 KS) IT Services abc 5 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (KRWb) EV/sales 4.4 4.2 3.1 2.7 Revenue 839 825 1,050 1,119 EV/EBITDA 11.6 12.9 8.0 7.1 EBITDA 315 270 409 426 EV/IC 18.9 20.8 22.1 25.0 Depreciation & amortisation -37 -34 -55 -46 PE* 20.0 22.9 15.4 14.3 Operating profit/EBIT 278 236 355 380 PB 3.4 3.1 2.7 2.4 Net interest 17 22 26 31 FCF yield (%) 5.1 5.3 6.5 7.6 PBT 289 252 375 406 Dividend yield (%) 1.6 1.3 1.9 2.1 HSBC PBT 289 252 375 406 * Based on HSBC EPS (diluted) Taxation -61 -54 -80 -86 Net profit 230 201 299 323 HSBC net profit 230 201 299 323 Price relative Cash flow summary (KRWb) 280000 280000 260000 260000 Cash flow from operations 264 254 309 361 240000 240000 Capex -19 -20 -20 -20 220000 220000 Cash flow from investment -176 -43 -43 -44 200000 200000 Dividends -75 -60 -90 -97 180000 180000 Change in net debt -223 -164 -227 -250 160000 160000 FCF equity 230 239 294 346 140000 140000 Balance sheet summary (KRWb) 120000 120000 100000 100000 Intangible fixed assets 95 93 91 90 2013 2014 2015 2016 Tangible fixed assets 241 229 196 171 NCsoft Rel to KOSPI INDEX Current assets 1,020 1,179 1,430 1,687 Source: HSBC Cash & others 898 1,062 1,288 1,538 Total assets 1,699 1,846 2,064 2,297 Operating liabilities 264 271 281 290 Note: Priced at close of 04 Nov 2015 Gross debt 0 0 0 0 Net debt -898 -1,062 -1,288 -1,538 Shareholders' funds 1,361 1,501 1,710 1,936 Invested capital 193 167 147 120
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 10.8 -1.6 27.3 6.6 EBITDA 30.9 -14.4 51.8 4.1 Operating profit 35.5 -15.3 50.4 7.1 PBT 33.7 -12.7 48.7 8.1 HSBC EPS 44.8 -12.7 48.7 8.1 Ratios (%) Revenue/IC (x) 4.3 4.6 6.7 8.4 ROIC 111.0 103.0 177.5 223.8 ROE 18.4 14.0 18.6 17.7 ROA 13.5 10.3 14.1 13.5 EBITDA margin 37.5 32.7 39.0 38.1 Operating profit margin 33.2 28.6 33.8 33.9 EBITDA/net interest (x) Net debt/equity -65.3 -70.1 -74.9 -79.2 Net debt/EBITDA (x) -2.9 -3.9 -3.1 -3.6 CF from operations/net debt Per share data (KRW) EPS reported (diluted) 10,486 9,159 13,622 14,720 HSBC EPS (diluted) 10,486 9,159 13,622 14,720 DPS 3,430 2,748 4,087 4,416 Book value 62,045 68,457 77,994 88,300
2 The
Asia’s Bond Markets VIEW November 2015
Overview: Onshore RMB: Look out for a correction
Credit Strategy: Liquidity vs fundamentals
Credit Review: Out of the doldrums, for now
Rebalance Dynamics: Risk-on sentiment in anticipation of favourable central bank actions – ADBI and ALBI rebalancing in November 2015
Credit Research: Corporate USD perpetual: Potential risks from revision in ratings methodology
Play Interview with Zhi Ming Zhang and Desmond Kuang
Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it The View Asia’s Bond Markets abc November 2015
Editorial
Three separate credit events in early October represented the most extensive credit defaults or near-misses in China’s onshore bond markets since April 2014, when Chaori’s default first rattled investors. We think Beijing is using these incidents as an opportunity to restore the appropriate pricing of credit risk, following the leverage-fuelled tightening of spreads in recent months. While we don’t expect a proliferation of bond defaults any time soon, the impact that the slowing economy is having on onshore credit fundamentals is clear. As maturity peaks in 2016, we think more problems could surface due to weakening cash flow and high gearing. Our credit tests point to relative weaker areas such as local government SOEs and upstream sectors with overcapacity problems, such as steel and mining. We think the excessively tight spreads face a risk of correction that could be triggered by a number of factors: signs of growth stabilising, which would weaken expectations of further easing; a stock rebound; bond yields falling further; and the emergence of substantial default risks. We see the historical three-year average credit spreads over Treasury as fair anchor points should the rally lose momentum. That represents a retreat of a round 80bp for short-end 1-year ‘AA’ credit spreads and 50bp for 5-year ‘AA’, close to the levels in late 2014 when the previous bond market rally ran out of steam.
In the Credit Strategy section, we retain the view that an unpredictable re-pricing of the Asian credit market will be the base case scenario in the months ahead. So, despite the spread compression witnessed last month, we stick to the HSBC ADBI and AHBI-corp spreads forecast of 300bp and 750bp, respectively, by year-end. There has been no fundamental change in the Asia Pacific region and, in particular, China, from our perspective. The reason remains unchanged – the impact of policy action in over-indebted economies should be limited until the authorities concurrently allow the reduction of excess capacity and halt capital misallocation.
Malaysia takes the limelight in this month’s sovereign section. There were no major surprises in the government’s budget for 2016, with a modest tightening of fiscal conditions from a year earlier. It was a budget for investors as well the broad electorate, doing just enough to keep the sovereign rating steady for the moment. Having said that, we believe slowing growth and growing policy paralysis will lead to investors demanding a higher risk premium to hold Malaysian credits in the months ahead.
In Credit Review, we note that the Asian credit market experienced a risk-on month, based on favourable central bank policy actions and the expectation of more to come. ADBI and AHBI-Corp gained 1.48% and 4.87% in monthly total returns1, with average credit spreads tightening 31bp and 112bp, respectively, to 244bp and 576bp. Commodity-related credits and Indonesian industrial names, underperformers in the previous sell-off, made a strong comeback in October. However, the ambiguity about when the Fed will lift interest rates has kept volatility elevated and put primary activities on hold. The sluggishness in
______1 ADBI and AHBI-Corp’s total return defined as the sum of pure capital returns and accrual returns in USD.
1 Economics - Data Reactions 04 November 2015
New Zealand jobs report Paul Bloxham Growth slowing and wages weak Chief Economist, Australia & New Zealand New Zealand's labour market has weakened considerably through mid-2015, with HSBC Bank Australia Limited the data for Q3 softer than expected. Employment fell by -0.4% q-o-q (market and +612 9255 2635 [email protected] HSBC expected an increase of 0.4%), and wages growth was also below expectations (1.6% y-o-y). Although we think the weakness in the numbers probably overstates the slowdown in overall economic growth, strong inwards Daniel migration and soft jobs growth suggest the labour market is loosening. Domestic Smith inflation pressures are likely to remain very low, presenting a challenge for the RBNZ in meeting its 2% medium-term inflation goal. We expect the RBNZ to cut its Economist HSBC Bank Australia Limited cash rate to 2.75%, most likely at the next meeting in December. +612 9006 5848 [email protected] Facts View HSBC Global Research at: - The Household Labour Force Survey showed employment fell 0.4% q-o-q (market and HSBC http://www.research.hsbc.com expected an increase of 0.4%), to be up 1.5% y-o-y. The employment measures in the Quarterly Employment Survey (which surveys businesses rather than households) showed solid employment Issuer of report growth, albeit after weak Q2 results. Filled jobs rose by 0.7% q-o-q and were up 1.7% y-o-y, while HSBC Bank Australia Limited full-time equivalents also rose 0.7% q-o-q, to be up 2.4% y-o-y. Disclaimer & Disclosures This report must be read with the disclosures and the analyst - The participation rate fell from 69.3% to 68.6%, and is now nearly 1ppt below the record high of certifications in the Disclosure 69.5% seen in Q1. The working age population continued to grow strongly, increasing by 2.2% y- appendix, and with the Disclaimer, which forms part of it o-y.
- With employment shrinking by more than the labour force, the unemployment rate edged up 0.1ppt to 6.0%. The recent low in the unemployment rate was 5.6%, in Q3 2014.
- Total hours worked rose 0.4% q-o-q, with the annual rate of growth at 1.5%.
- The labour cost index rose 0.4% q-o-q (market and HSBC expected 0.5%), with the y-o-y rate of labour cost growth steady at 1.6%. Private sector labour cost growth slowed to 1.7% y-o-y (from 1.8% previously).
Implications As is often the case, New Zealand's different labour market readings have been pointing in many directions over the past couple of quarters. But look through the noise and a clearer picture is emerging; employment growth has weakened considerably in 2015. After growing by a very strong 3.6% y-o-y over 2014, employment appears to have just about ground to a standstill through the middle of this year.
From a growth perspective, this probably overstates the weakness in the New Zealand economy as, although domestic activity readings have softened this year, they remain around average levels. There are still some clear bright spots, such as tourism and construction. However, growth is clearly running below trend and we expect GDP growth to be around 2.3% for 2015 as a whole. Economics - Data Reactions New Zealand jobs report 04 November 2015
The loosening of the labour market has serious implications for the inflation outlook. Even before the recent slowdown in employment, strong migration-driven population growth had seen the supply of labour expand rapidly, keeping wages pressures subdued. With inwards net migration currently holding at record levels, population growth remains strong for the moment. Without strong employment growth to absorb the inflow this could push the unemployment rate up further over coming quarters and further weigh on wages growth.
In short, a looser labour market suggests that wages growth will remain subdued and so will domestic inflation pressures. Non-tradable inflation is currently at the lowest rate on record. Although the lower NZD will generate some imported inflation over coming quarters, we believe the RBNZ faces a challenge in getting inflation up to 2% on a sustained basis without stronger domestically-generated price pressures.
Figure 1: Employment growth has slowed sharply Figure 2: Unemployment has been rising
Source: Statistics New Zealand Source: Statistics New Zealand
Figure 3: Population growth is very strong Figure 4: Wages growth remains subdued
Source: Statistics New Zealand Source: Statistics New Zealand
2 Economics - Data Reactions 04 November 2015
Caixin China Services PMI Jing (October) Li Economist The Hongkong and Shanghai Banking Corporation Limited Solid expansion thanks to golden week +8610 5999 8240 [email protected] The Caixin China services PMI rose to 52.0 in October, up from 50.5 in September. New business rose, alongside moderate improvement in labour demand. Meanwhile, the official services PMI moderated to 53.1 from 53.4, but remained in Julia solid expansionary territory. Sectors such as tourism, catering and transportation Wang sectors likely benefited from the strong sales during the golden week holiday. Economist, Greater China Construction activities also improved whereas financial services contribution The Hongkong and Shanghai likely fell. The signs of stabilisation not withstanding, more policy support is still Banking Corporation Limited +852 3604 3663 needed in the coming months. We forecast another 100bps reserve ratio cut for the [email protected] rest of 2015.
View HSBC Global Research at: Facts http://www.research.hsbc.com Headline business activity expanded at a faster pace Issuer of report Employment expanded at a faster facet The Hongkong and Shanghai Banking Corporation Limited Prices charged contracted at a slower pace Disclaimer & Disclosures This report must be read with the New business expanded at a faster pace disclosures and the analyst certifications in the Disclosure Input prices expanded at a faster pace appendix, and with the Disclaimer, which forms part of it Outstanding business contracted at a slower pace
Business expectations expanded at a slower pace
Implications The Caixin services PMI pointed to solid expansion in October. Thanks to golden week sales, business orders rose, driving up labour demand and input prices. According to the official PMI breakdown, sectors such as tourism, catering and transportation sectors performed strongly. Construction activities also rose on the back of the recent acceleration in infrastructure investment. Financial services contribution fell as a result of the recent asset market volatility.
The services sector has been outperforming the manufacturing sector throughout 2015. Consumer consumption has also remained resilient despite the downturn in the industrial sector. But it is not enough to offset the sluggishness in the manufacturing sector and prevent deflation from spreading, The composite PMI continued to contract in October. Prolonged weaknesses in other parts of the economy will also impact business expectations over time. Although the PMI readings in October point to tentative signs of stabilisation, more policy support is likely still needed. We forecast another 100bps reserve ratio cut before year-end. Economics - Data Reactions Caixin China Services PMI (October) 04 November 2015
Chart 1: Caixin China Services PMI-Headline Chart 2: Caixin China Services PMI-New business
Source: Caixin, Markit Source: Caixin, Markit
2
Flashnote
FIG Diversified Financials China e-finance Equity – China
New platform and vehicle for shadow assets under trial
Trial of new asset management plans by banks in October 2015 to create new platform for trading non-standard credits and shed light on shadow banking
The new platform and tradable product could pose direct competition to existing trading platforms such as Lufax- owned Lfex, Ant Financial-owned ZhaoCaiBao
However, a lack of promised yield and implicit guarantee may challenge the sales of this product to investors with limited risk appetite
New platform to trade shadow assets: On 22 October 2015, RMB10bn of new asset management plans were issued on a trial basis and successfully transacted on on a new 4 November 2015 platform set up by China Central Depository & Clearing (CCDC), according to Shanghai Michael Chu* (朱泳丞 ), CFA Securities News. This would mark the page where banks would be permitted to carry out Analyst The Hongkong and Shanghai Banking their own asset management business using this fast-track platform. Corporation Limited +852 2996 6926 The threat to existing players: The success of this new platform would mean that these [email protected] shadow banking assets (also known as non-standard credit) could be standardized and James E Garner* (金龙龘), CFA trade on a government-sponsored platform. Previously a large number of these assets were Head of Asia Financial Equity Research offloaded through channels including trust plans, broker asset management schemes, and The Hongkong and Shanghai Banking Corporation Limited segregated accounts under fund management companies, which sums to a scale of +852 2822 4321 RMB20trn in total (see breakdown on next page). The lack of liquidity in these assets has [email protected] brought up opportunities for platforms such as Lfex (owned by Lufax) and ZhaoCaiBao (owned by Ant Financial), in which the former had reached a trading volume of View HSBC Global Research at: cRMB500bn by 1H15. The success of the new platform promoted by CCDC would pose a http://www.research.hsbc.com direct threat to these platforms in our view. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA Watch the trial expansion: Currently the trial is limited to 11 banks. However, we see a regulations more ambitious goal from the regulator to promote the product to the whole sector, Issuer of report: The Hongkong and replacing existing bank wealth management products, which still carry promised yields Shanghai Banking Corporation Limited and implicit bank guarantees in most cases. The prevalence of this new product, Disclaimer & nonetheless, would depend to a large extent on its sales to corporate and retail investors, who may not welcome the lack of an indicative yield and guarantee from the bank. Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
China e-finance Diversified Financials abc 4 November 2015
Key shadow banking credit assets and holding vehicles, 1H15
Bank wealth mgmt product
Entrusted loans
Broker TAM
Bank acceptance bills
Trust loans
Segregated account under Fund Mgt Co
Asset securitization RMBbn
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000
Source: CBRC, PBOC, China Trustee Association
2
Flashnote
Natural Resources and Energy China Oil & Gas China Oil & Gas Equity – China
13th FYP Guidelines on Energy: clean and efficient focus
China 13th Five-Year-Plan (FYP) Guidelines stress policy that delivers clean, efficient, safe and innovative energy
No hard targets, just policy signals regarding more open markets, freer prices and ongoing changes in the fuel mix
Oil majors/affiliates will be affected by changes in energy supply/delivery/demand in a slower growing economy
Event: The draft version of China’s 13th FYP (2016-2020), was made public on 3 4 November 2015 November 2015 and sets out broad guidelines for China’s energy sector, including
Thomas C. Hilboldt, CFA* provisions for: deregulation, energy safety, efficiency, innovation and low emissions. Head of Oil, Gas & Petrochemicals This policy follows the recent Energy Development Strategy Action Plan (2014-20), Research, Asia-Pacific which targets a 2020 primary energy mix comprising more than 10% natural gas (vs 5.7% The Hongkong and Shanghai Banking Corporation Limited in 2014 based on the National Bureau of Statistics). This implies a 13.8% 6-year +852 2822 2922 consumption CAGR. We maintain our view that natural gas price cuts of 0.3-0.6/cm are [email protected] likely in 4Q15. Tingting Si* Analyst Implications: We expect the policy plan and required actions to have an impact on the The Hongkong and Shanghai Banking full energy value chain: supply/distribution/demand. In simple terms the guidelines Corporation Limited +852 2996 6590 reiterate policies stated many times over the last two years. The objectives are as follows: [email protected] 1) opening subsector competition to include private companies and public funds and Hanyu Zhang* pricing deregulation for oil products and natural gas; more open access into upstream Analyst (unconventional gas production), midstream (third party pipeline access) and downstream The Hongkong and Shanghai Banking Corporation Limited (retail marketing); 2) reducing the share of fossil fuels in the total energy mix (coal and oil) +852 2996 6539 and encouraging cleaner and more efficient utilization of fossil fuels and energy generally; [email protected] 3) increasing oil and gas storage capacities to protect against supply disruptions; View HSBC Global Research at: 4) encouraging the adoption of new energy vehicles (CNG/LNG vehicles); 5) control http://www.research.hsbc.com carbon emission from the chemical industry; and 6) stimulating technological innovation *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not related to new energy and new materials. registered/qualified pursuant to FINRA regulations Actions: Our preferred plays Sinopec H (386 HK, Hold, HKD5.69), Sinopec Shanghai Issuer of report: The Hongkong and Petrochemical (338 HK, Buy, HKD3.38), Sinopec Engineering (2386 HK, Buy, HKD6.69) Shanghai Banking Corporation Limited could all potentially benefit from the above actions. Focus on clean. SEG could benefit Disclaimer & from a number of different initiatives along the value chain including clean coal, LNG terminals, pipeline and refinery upgrades. Oil products. Sinopec and Sinopec Shanghai Disclosures This report must be read Petrochemical could benefit from a faster-than-expected implementation of higher prices with the disclosures and for higher specification fuels in nationwide and in Eastern China. Natural gas. A better the analyst certifications in streamlined natural gas pricing mechanism could also help to restore demand growth, the Disclosure appendix, potentially benefiting producers such as Sinopec, PetroChina and Kunlun. and with the Disclaimer, which forms part of it
THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO) China Oil & Gas China Oil & Gas abc 4 November 2015
Valuation and Risks
Name/ticker Rating TP Valuation Risks
To derive our TP, we apply a target PB of 0.89x vs an Upside risks: higher oil prices and R&C margins, better non- Sinopec expected 3-year average ROE of 7.6% to our 2015e BVPS fuel business and a potential public listing of the marketing unit. Hold HKD6.00 HKD5.69 ofHKD6.77. Downside risks: lower oil prices and R&C margins and slower (386 HK/ 600028 CH) growth of the marketing business.in global economic conditions
Our fair value target price for PetroChina-H employs a 0.75x Key upside risks: a nearly and sharp oil price recovery, 2015e PB, which is based upon a trough ROE 3% and trough PB effective cost control, changes in tax or other energy policies, multiples. Our A-share fair value TP converts the H-shareTP at earlier-than-expected accretive divestiture of the eastern section PetroChina (857 the HSBC FX team’s HKD/RMB 2015e cross of 1.20 of the West-East-Pipeline I, II and other non-performing HK/ Hold on ‘H’, HKD6.00/ HKD6.24/ upstream and downstream assets. Reduce on ‘A’ RMB5.00 RMB8.74 Key downside risk: crude oil price weakness, asset 601857 CH) impairments, China economic growth slowdown, Chinese economic policy stimulus and monetary/rate/currency policy risks, and other global macroeconomic/commodity risks.
Our target price is derived from a SOTP: DCF (WACC of 10% Upside risks: Sharp rebound of oil prices, supportive policy based on a risk-free rate of 3.5%, market risk premium of towards natural gas vehicles and execution of asset injections, a 10%, beta of 1.0, cost of debt of 4.0%, and 30% debt larger-than-expected citygate price cut. Downside risks: Kunlun weighting) for the E&P business (zero value per share)and 5- Transmission tariff cut, delay in ShaanJing IV construction, lower Hold HKD5.6 HKD6.47 (135 HK) 10x 2015e PE target multiples for the gas sales businesses: oil prices, lower gas demand growth, lower-than-expected gas sales (5x), LNG processing (5x), terminal (10x), and citygate price cut, further deprecation of KZT. pipeline business(10x).
Our H-shares target price is based on a target 1.9x PB (vs. a Key upside risks: sharp rebound in oil prices and asset 2015e ROE of 16%, 10-year high). The 1.9x target PB is the peak injections from Sinopec. valuation level of SPC-H but is the trough valuation level of SPC-A Key downside risks: narrowing chemical margins, and slower SPC(338 HK/ Buy on’H’ HKD4.3/ HKD3.38/ and is close to the average of the long-term average trading PB demand growth for petroleum and chemical products in China 600688 CH) Reduce on ‘A’ RMB3.6 RMB7.23 multiple for SPC-H (1.1x) and SPC-A (3.0x). Our A-shares TP of RMB3.6 is derived from our H-shares TP, converted using the HSBC 2015e RMB/HKD exchange rate of 1.20
Our TP is derived by applying a 9.4x PE to our Downside risks: persistent low oil prices, more 2015e EPS estimate, which is a 1x PEG ratio on downstream capex cuts, cancellation of major projects, value- 2014-17e net income CAGR of 9.4%. We use HSBC eroding M&A SEG (2386 HK) Buy HKD8.9 HKD6.69 FX team’s 2015e RMB/HKD exchange rate forecast of 1.20. Our TP implies a 2015e PB of 1.3x, consistent with SEG’s average forward PB since listing in mid-2013.
Source: HSBC estimates, Bloomberg; Closing Price date Nov 4, 2015
China Oil & Gas sector Share price performance, absolute (percent), Priced Wed close, 4 November 2015
70 49 50 40 28 30 17 13 13 11 12 13 6 8 8 9 7 10 3
-10 -2 -1 -2 -3 -1 -2 -3-2 -9 -6 -6 -6 -11 -15 -11 -12 -15 -18 -18 -18 -30 -23 -23 -24 -30 -27 -30 -27 -34 -31 -38-35 -36 -50 -43-43 -44 CNOOC-H SNP-H PTR-H COSL-H Kunlun-H SSC-H SEG-H SPC-H HK/China HSI Index Energy Avg -1M -3M -6M -1YR YTD
Source: Bloomberg
2
Consumer Brands and Retail Equity – Hong Kong
Oct GGR -28%yoy; mass yoy drop Macau Gaming narrowed to -13%yoy vs -22% in 9M15 Galaxy led in VIP and Sands in mass October market share review Continue to prefer MGM China (an HSBC Asia Super Ten constituent) and Galaxy
Mass and VIP decline narrowed: October Gross Gaming Revenue (GGR) came in at MOP20.1bn, -28%yoy. Despite normalization into 2H of October, full month daily run rate came in at MOP650m, versus MOP571m in Sep boosted by Golden Week holiday. In part helped by luck, VIP revenue was down -38%yoy versus junket rolling volume -41%yoy. Post reclassification adjustment of cHKD930m, mass was -13%yoy, significantly improved from -25% in Sep or -22% in 9M15. This is in part due to easier comp as mass smoking ban was implemented in October last year. Unveiled last week, Studio City recorded MOP47m in gaming revenue (all mass), or 0.5% in mass market share. We continue to think the pure mass 5 November 2015 property will grow the mass segment but impact to top-line revenue might not be too pronounced. Charlene Liu* Analyst Review by segment: Cotai players, benefiting from its room The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch inventory, enjoyed a strong month amid the Golden Week +65 6658 0615 [email protected] holiday. In VIP, Galaxy led in market share gain (+6.3%mom)
Scott Chan* boosted partly by win rate. This is at the expense of MGM Analyst (-5.7%) after a strong and lucky month in Sep. Setting win rate The Hongkong and Shanghai Banking Corporation Limited aside, junket volume market share change was relatively muted. +852 3941 7005 [email protected] Sands relatively outperformed (adding 0.9%mom), also Erwan Rambourg* financed by MGM (-1.6%). Sands led in mass as well, gaining Global Co-Head Consumer and Retail Research The Hongkong and Shanghai Banking Corporation Limited 2.6% mom in market share versus Wynn -3.0%mom. But +852 2996 6572 [email protected] Wynn had a strong month in slot, +3.2% mom at the cost of Sands (-0.8%mom) and Melco (-0.7%mom).
Mass performance is key: We think sequential improvement View HSBC Global Research at: http://www.research.hsbc.com in GGR, particularly in mass is vital for driving further and *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations sustainable re-rating. We continue to prefer MGM for its deep Issuer of report: The Hongkong and Shanghai Banking long term value and its favorable risk-reward profile. MGM Corporation Limited, Singapore Branch China is an Asia Super Ten portfolio constituent. We also like MICA (P) 073/06/2015 Galaxy. In the event of a VIP recovery, the operator will be best MICA (P) 136/02/2015 positioned to capture the upside. Lastly, Melco Crown will be MICA (P) 041/01/2015 the final concessionaire to report 3Q15 tomorrow evening HKT Disclaimer & Disclosures (5 Nov). We expect property EBITDA to come in at USD235m This report must be read with the (+15%qoq,-23%yoy). disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Consumer Brands and Retail Equity – Hong Kong abc 5 November 2015
Adjusted mass revenue yoy growth in Oct and Sep by operator Adjusted VIP revenue yoy growth in Oct and Sep by operator 30% 0% 18% 20% -10% 10% -20% -18% 0% -30% -10% -28% -29% -30% -7% -32% -40% -33% -20% -16% -39% -17%-18%-19% -21% -46% -30% -23% -50% -47%-46%-49% -27% -28% -30% -51% -40% -35% -60% Galaxy Sands Wynn MGM SJM MPEL Wynn MGM Galaxy MPEL Sands SJM Oct Sep Oct Sep
Source: DSEC, HSBC Source: DSEC, HSBC
Regional gaming news
Travellers, Megaworld team up for Manila project 3 Nov GGR Asia: Megaworld announced that the firm along with Travellers are spending ~PHP65bn (USD1.4bn) to develop a 76.6 acre ‘leisure and entertainment township’ at Entertainment City in Manila Bay. Macau package tourist arrivals down 25% in Sept 1 Nov Macau Business Daily: Macau recorded a total of 2.42m visitor arrivals in August, up marginally by 0.4% yoy. The number of Mainland Chinese visitors decreased 1.4% yoy to 1.57m, with those travelling under the Individual Visit Scheme (IVS) increasing marginally by 0.6% yoy. Package tour visitors from Mainland decreased 23.6% yoy in September. New opportunity for casino in Taiwan’s outlying islands 30 Sep GGRAsia: Taiwan’s Central News Agency reported that residents in Taiwan’s outlying island of Penghu could vote again on whether to allow casinos in the county. The residents are expected to cast ballots after Taiwan’s 16 January presidential election and before the 20 May presidential inauguration next year, said the media outlet. Studio City officially opens 27 Oct Macau Business Daily: Melco Crown’s USD3.2bn Hollywood-themed resort – Studio City is now officially open. The property has no VIP facility; all of the 250 authorized tables are allocated to the mass segment. Junket firm Dore to shut one VIP room: Wynn Macau 26 Oct GGRAsia: Wynn Macau confirmed that junket operator Dore is shutting down one of the three VIP rooms at hotel Wynn Macau. This comes after Dore had been a victim of internal fraud by a former employee in Sept this year. Macau junkets face tougher accounting rules from 2016 23 Oct GGR Asia: The Gaming and Inspection Coordination Bureau announced that junket operators in Macau will be subject to stricter accounting rules starting next year. As per the new guidelines all junket operators are to compile monthly accounting reports and also file with the gaming regulator details on the key personnel in charge of financial operations. Melco granted 250 mass gaming tables, 100 for Galaxy 20 Oct Macau Business Daily: The Government has granted Studio City 250 mass gaming tables – 200 can be operational on opening date and 50 will be effective 1 Jan, 2016. Galaxy Macau Ph-II has been granted another 100 mass gaming tables with 50 effective immediately, and another 50 on 1 Jan 2016.
2
Company report Telecoms, Media & Technology Semiconductors Equity – Hong Kong
SMIC (981 HK/SMI US)
Buy Reiterate Buy: Pulling in capacity to meet demand Target price (HKD) 0.88 2H15 upside likely from tight 200mm and 4x demand. Higher R&D Share price (HKD) 0.75 Upside/Downside (%) +17.3 credits and property sales helping too. 4Q15 outlook steady. Dec 2014 a 2015 e 2016 e Pulling in BJ2 ramp, depreciation likely up strongly in 2016 HSBC EPS per ADS (USD) 0.21 0.32 0.38 Not much 28nm yet, but major customers ramping: QCOM (28nm HSBC PE 22.7 15.0 12.9 SOC and 200mm PMIC), Broadcom/Huawei (4x node) Performance 1M 3M 12M Absolute (%) 2.7 10.3 -5.1 Relative^ (%) -2.1 19.3 0.3 Maintain Buy. With chip inventories purging and China supporting, we raise target price to HKD0.88 (from HKD0.75) on 1.3x PB (1.1x prior). Growth outpacing TSMC in both 2015/2016E.
Reiterate Buy. At cyclical inflection point. Purest-play on “red supply chain” and government support of chip industry. In our August 25th note titled Upgrade to Buy, China support and pullback compelling, we noted SMIC was relatively outperforming the broader foundry industry this year, despite having very little advanced capacity. We believe support 4 November 2015 from China, and key customer Huawei helped offset weakness in mid-2015 from major customers Broadcom and Qualcomm (>30% of revenue in 2014). We now believe Qualcomm Steven C. Pelayo, CFA Regional Head of Technology and Broadcom have returned and are ramping wafer starts on multiple products – most Research notably Qualcomm power management ICs on 200mm and Broadcom on 4x node for The Hongkong and Shanghai Banking Corporation Limited multiple connectivity related products. While the revenue ramp for 28nm remains slow +852 2822 4391 (likely only 2-3% of 4Q15 revenue), we believe tight 4x capacity and an increase in customer [email protected] tape-outs is resulting in a pull in of its Beijing 2 fab. For further info, see our Sept 5th report Lionel Lin* Buy: Top 10 takeaways post NDR with CEO dated September 5 for more details. Technology Analyst The Hongkong and Shanghai Banking 3Q15 upside likely, with stable outlook for 4Q15: Revenue growth to outpace TSMC in Corporation Limited +65 6658 0624 both 2015 and 2016. Significant step up in depreciation to hurt gross margins next year, [email protected] but op profit will still grow. We believe 3Q results may have some upside from increased View HSBC Global Research at: R&D subsidies and property sales, and the outlook for 4Q is stable. The biggest headwind is http://www.research.hsbc.com a likely >25% y-o-y increase in depreciation next year (starting in 4Q15). This will pressure *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not gross margins, but we believe revenue growth will offset and still allow op profit growth. As registered/qualified pursuant to FINRA a reminder, management believes “in the next few years”, once new Beijing and Shenzhen regulations fabs are at capacity, SMIC has the potential to double revenue and triple operating profit. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Raise TP to HKD0.88 from HKD0.75 on an expanded PB multiple of 1.3x (1.1 prior). While SMIC’s shares returned 21% since the trough in late August (versus HSI’s +8%), we
Disclaimer & note that there are increasing signals that chip inventories are purging (see summary table of Disclosures 3Q reports thus far). With increased confidence in the cycle and SMIC as a purer-play on This report must be read China chips, we expand our target PB multiple to prior peak levels of 1.3x (1.1x prior). We with the disclosures and apply this to our ending ‘16 book value and arrive at a new HKD0.88 target (HKD0.75 prior). the analyst certifications in ^Index HANG SENG INDEX Enterprise value (USDm) 4,458 the Disclosure appendix, Index level 22,568 Free float (%) 89 and with the Disclaimer, RIC 0981.HK Market cap (USDm) 4,070 which forms part of it Bloomberg 981 HK Market cap (HKDm) 31,542 Source: HSBC Source: HSBC SMIC (981 HK/SMI US) Semiconductors abc 4 November 2015
Notable 3Q15 foundry customer reports thus far showing excess inventories now purging 3Q q-o-q Days of inventory q-o-q Days y-o-y Days q-o-q % dollars y-o-y dollars Computer Intel 9.6% 88.6 (4.2) 15.6 3.1% 20.7% AMD. 12.6% 102.4 (18.2) 9.8 -4.8% -15.2% Cypress Semiconductor -4.3% 79.0 4.7 (12.8) -7.3% 214.2% Integrated Device Technology 5.3% 63.0 0.5 (16.6) 2.9% 16.8% Sub total 9.3% 89.4 (5.3) 13.0 1.5% 17.7% Comm - Networking Broadcom. 4.3% 49.5 (9.8) (3.2) -9.8% -11.5% PMC-Sierra 7.1% 78.7 (7.0) 0.6 -9.2% -5.0% Sub total 4.5% 50.5 (9.8) (3.1) -9.8% -11.2% Comm - Mobile MediaTek Inc. 18.8% 94.7 (25.7) 18.5 -0.9% 31.9% Silicon Laboratories -5.3% 75.3 (6.6) 6.4 -14.5% 10.5% Sub total 16.4% 93.6 (23.9) 17.9 -1.7% 30.7% Comm - PLD Xilinx Inc. -3.9% 122.9 (3.4) (18.0) -4.1% -18.9% Altera Corp. -3.5% 108.5 (19.3) 6.3 -10.3% -14.5% Lattice Semiconductor 3.1% 144.2 (7.9) (21.4) -2.2% 21.4% Sub total -4.4% 120.4 (10.2) (5.6) -6.1% -12.2% Consumer QLogic Corp. -8.9% 108.1 33.4 55.5 29.7% 66.2% Sub total -8.9% 108.1 33.4 55.5 29.7% 66.2% Diversified Texas Instruments 6.1% 112.5 (14.4) 3.2 -6.0% 1.1% STMicroelectronics. 0.2% 99.1 2.0 6.4 0.9% -0.8% Atmel -6.5% 159.0 7.2 37.7 -2.8% 1.6% FairChild -3.7% 121.7 14.8 28.9 5.4% 20.0% Cirrus Logic 8.5% 79.6 3.1 (21.0) 14.0% 18.7% Sub total 3.2% 108.8 (4.1) 6.6 -2.0% 2.4%
Source: Company data, HSBC estimates
3Q15 earnings preview
SMIC will report hold a 3Q15 earnings conference call next week on November 11 (Wednesday) at 8:30am (HKT). Dial-in details are: US +1 845-675-0437 HK +852 3018-6771 CHINA +86 400-620- 8038 TW +886 2-2650-7825 Passcode: SMIC.
We forecast 3Q15 revenue of USD559m, increasing 2.2% q-o-q, in line with management's guidance of a 1-3% q-o-q growth and consensus' +2%. Our gross margin estimate is at 29.3% (at the mid-point of management's guidance of 28-30%), and slightly higher than consensus' 28%. We expect operating expenses to be USD119m (including USD15m of R&D credits) versus management's guidance of USD134-139m (excluding effect of employee bonus accrual, government funding and gain from the disposal of living quarters). Our operating profit/margin estimates are at USD44.6m/8%, versus consensus' USD32m/5.8%. Consequently, we forecast net profit/EPS (per ADS) of USD59.6m/USD0.07, versus consensus' USD47.9m/USD0.05.
For 4Q15, we expect management to guide to relatively flattish revenue (we forecast +1% q-o-q), in line with consensus. Our 4Q gross margin estimate is at 25.5% (blame higher depreciation for the q-o-q downtick) and operating profit/margin are at USD52.8m/9.4%, versus consensus 26% and USD28.6m/5.1%. We believe consensus is not modelling enough R&D subsidies in 2H15.
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Flashnote
Nat Resources & Energy Independent Power Producers GCL-Poly Energy (3800 HK) Equity – Hong Kong
Buy Buy: 3Q15 preview Target price (HKD) 2.00 Share price (HKD) 1.70 Expect 3Q15 wafer revenue/earnings growth with 2H15 solar Upside/Downside (%) +17.6% demand increases and ASP recovery; company expects Performance 1M 3M 12M Absolute (%) 10.4 11.1 -34.6 ASP of USD0.20/W+ from Sep 2015 (vs 1H15: USD0.195/W) Relative^ (%) 5.2 20.2 -30.7 ^Index HANG SENG INDEX Look for updates on the proposed IPP business disposal, RIC 3800.HK FBR development and wafer capacity expansion plans Bloomberg 3800 HK Market cap (USDm) 3,398 Reiterate Buy with unchanged TP of HKD2.0 Market cap (HKDm) 26,332
Enterprise value (HKDm) 62,853 Free float (%) 38%% 3Q15 results: GCL-Poly will report 3Q15 results on 11 November 2015, with a call at 9pm HKT. The company will only report operating metrics and no financials. We estimate FY15e revenue of HKD37.0bn (down -0.6% YoY) and net attributable profit of 4 November 2015 HKD2,077m (down -4.2% YoY) vs consensus of HKD36.6bn and HKD2,042m. We expect the 3Q15 wafer ASP to be upbeat and in line with the spot ASP trend. GCL-Poly Gloria Ho*, CFA Analyst also saw its wafer ASP above USD0.20/W in September 2015 (vs 1H15: USD0.195/W). The Hongkong and Shanghai Banking Corporation Limited We look for management updates on: a) progress on the proposed disposal of its IPP +852 2996 6941 business. We note that there have been a few delays in the despatch of the circular to [email protected] shareholders, b) poly/wafer ASP and cost trends over the next few quarters, c) progress of Evan Li* FBR (Fluidized Bed Reactor) capacity development, d) any further wafer capacity Analyst The Hongkong and Shanghai Banking expansion plan apart from the 1GW monocrystalline capacity, e) commissioning timeline Corporation Limited for the 1GW monocrystalline capacity and any plan to delay due to recent ASP sharp +852 2996 6619 decline in monocrystalline products; f) any plan to sell the 300MW+ solar farm, [email protected] g) updates on GCL New Energy’s (451 HK, HKD0.55, Not Rated) developments vs Shanmuga Sundaram A* Associate annual installation target of 2GW. Bangalore Recap of FY15 guidance given during 1H15 results: Wafer shipments: 14GW; poly View HSBC Global Research at: cash cost not to exceed USD11/kg by end FY15; end FY16 gearing of manufacturing http://www.research.hsbc.com segment to be lower than 50%; expect poly/wafer cost to continue to decrease with *Employed by a non-US affiliate of debottlenecking and technical improvement. HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Valuation and risks: Our fair value target price of HKD2 is based on the core poly/wafer Issuer of report: The Hongkong and business valued at HKD1.62, which is based on a FY15-17e ROE implied PB of 1.22x that Shanghai Banking we apply to our 2015e BVPS of HKD1.33. We value the solar farm business at HKD0.33 Corporation Limited per share based on DCF (CoE: 10.4%, g:1%), and GCL New Energy’s guidance on solar Disclaimer & installation targets for FY15/16/17e. We maintain our Buy rating. Key downside risks: Disclosures lower-than-expected ASP, capacity utilization, reduced solar subsidies, lower-than-expected This report must be read new solar capacity in China, and new equity issuance to address balance sheet concerns. with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
GCL-Poly Energy (3800 HK) Independent Power Producers abc 4 November 2015
Financials & valuation
Financial statements Key forecast drivers Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (HKDm) Poly ASP (USD/kg) 21.7 16.9 16.0 15.5 Poly Unit CoGS (USD/kg) 15.5 14.0 12.7 12.1 Revenue 37,225 37,006 41,387 42,260 Wafer ASP (USD/W) 0.22 0.20 0.20 0.20 EBITDA 9,561 10,080 12,400 13,371 Wafer Processing (USD/W) 0.08 0.07 0.07 0.06 Depreciation & amortisation -3,410 -3,754 -3,807 -3,859 Operating profit/EBIT 6,199 6,333 8,593 9,511 Net interest -2,713 -2,506 -2,634 -2,485 PBT 3,485 3,827 5,966 7,034 HSBC PBT 3,071 3,820 5,959 7,027 Taxation -639 -987 -1,185 -1,412 Valuation data Net profit 1,962 2,395 4,330 5,085 Year to 12/2014a 12/2015e 12/2016e 12/2017e HSBC net profit 2,170 2,077 2,549 3,038 Cash flow summary (HKDm) EV/sales 1.6 1.7 1.2 1.0 EV/EBITDA 6.2 6.2 4.1 3.2 Cash flow from operations 8,810 8,862 15,486 11,951 EV/IC 1.1 1.1 1.0 0.9 Capex -6,398 -3,780 -2,500 -2,500 PE* 12.1 12.7 10.3 8.7 Cash flow from investment -9,449 -3,773 -2,493 -993 PB 1.4 1.3 1.1 1.0 Dividends 0 0 0 0 FCF yield (%) -0.1 9.0 36.2 24.4 Change in net debt 3,590 3,574 -11,591 -8,138 Dividend yield (%) 0.0 0.0 0.0 0.0 FCF equity -28 2,577 10,359 6,974 * Based on HSBC EPS (diluted)
Balance sheet summary (HKDm) Intangible fixed assets 806 782 782 782 Price relative Tangible fixed assets 50,612 53,835 49,528 45,169 3.42 3.42 Current assets 34,319 43,325 55,212 61,808 Cash & others 5,529 7,180 16,771 22,909 2.92 2.92 Total assets 89,829 102,685 110,265 112,501 Operating liabilities 26,673 31,317 37,891 38,548 2.42 2.42 Gross debt 36,206 41,431 39,431 37,431 Net debt 30,677 34,251 22,660 14,522 1.92 1.92 Shareholders' funds 18,406 20,543 23,098 26,141 Invested capital 53,536 59,446 50,860 46,302 1.42 1.42
0.92 0.92 2013 2014 2015 2016 Ratio, growth and per share analysis GCL-Poly Energy Holdings Rel to HANG SENG INDEX Year to 12/2014a 12/2015e 12/2016e 12/2017e Source: HSBC
Y-o-y % change Note: Priced at close of 03 Nov 2015 Revenue 45.8 -0.6 11.8 2.1 EBITDA 87.2 5.4 23.0 7.8 Operating profit 256.1 2.2 35.7 10.7 PBT 9.8 55.9 17.9 HSBC EPS -4.3 22.7 19.2 Ratios (%) Revenue/IC (x) 0.8 0.7 0.8 0.9 ROIC 10.2 8.3 12.5 15.6 ROE 12.6 10.7 11.7 12.3 ROA 6.4 5.3 6.7 7.0 EBITDA margin 25.7 27.2 30.0 31.6 Operating profit margin 16.7 17.1 20.8 22.5 EBITDA/net interest (x) 3.5 4.0 4.7 5.4 Net debt/equity 143.6 143.3 84.2 47.6 Net debt/EBITDA (x) 3.2 3.4 1.8 1.1 CF from operations/net debt 28.7 25.9 68.3 82.3 Per share data (HKD) EPS reported (diluted) 0.13 0.15 0.28 0.33 HSBC EPS (diluted) 0.14 0.13 0.16 0.20 DPS 0.00 0.00 0.00 0.00 Book value 1.19 1.33 1.49 1.69
2
Company report Industrials Autos Equity – China
200625 CH Buy Changan Auto (200625 CH/000625 CH) Target price (HKD) 18.40 Share price (HKD) 15.10 Upside/Downside (%) +21.9% Year to 12/14 a 12/15 e 12/16 e B/A: Buy/Hold: Sales volume growth picked up in October HSBC EPS (CNY) 1.62 2.08 2.15 PE (HSBC) 7.6 5.9 5.7 Sales volume of Changan Ford and Changan domestic Performance 1M 3M 12M brand picked up in October Absolute (%) 15.4 -3.2 -10.8 Relative (%)* 8.7 4.2 -7.0 Changan Ford’s slowdown in new product launches in 2016- * HSCEI 17e remains our major concern 000625 CH Hold Target price (CNY) 15.30 B: Buy with TP of HKD18.3 based on a 7.4x 2015e PE; Share price (CNY) 15.41 A: Hold with TP of RMB15.3 Upside/Downside (%) -0.7% Year to 12/14 a 12/15 e 12/16 e PE (HSBC) 9.5 7.4 7.2 Sales volume growth picked up in October. Benefiting from the purchase tax cut, YoY Performance 1M 3M 12M sales volume growth at Changan Ford picked up to 17.1%YoY in October 2015 driven by Absolute (%) 4.4 -12.6 5.1 Relative (%)* -3.5 -0.5 -23.8 the compact sedan Escort, which was launched in December 2014 and the mid-size SUV, * CSI 300 Index Edge, launched in May 2015. January-September sales volume of Changan Ford was up 2.6% YoY to 682k units, accounting for 81% of our FY15e forecast of 837k units (+3.8% 4 November 2015 YoY). Sales volume growth of key domestic brand sedan and SUV models (EADO/
Carson Ng* Yuexiang and CS35/75) increased to 34.3% YoY in October (versus September 2015: Analyst +28.2% YoY). We expect the profitability of Changan domestic brands to continue to The Hongkong and Shanghai Banking improve with the product scale. Corporation Limited +852 2996 6625 Production issues at new Hangzhou plant seemed resolved. Monthly production [email protected] volumes of the Ford mid-size SUV Edge increased to 9,151 units in October from 1,568 Mike Yip* Analyst units in September, suggesting to us that production issues at the new Hangzhou plant The Hongkong and Shanghai Banking have been largely resolved; this is positive for volume growth of the JV. The brand new Corporation Limited localised mid-size sedan Taurus, also produced at the Hangzhou plant, started receiving +852 2996 6942 [email protected] official pre-orders from October with delivery due to commence in late 2015/early 2016. Changan Ford weaker product cycle in 2016e-17e remains our major concern. We View HSBC Global Research at: see a slowdown in new model launches from Changan Ford in 2016-17e compared to http://www.research.hsbc.com 2013-15e, while production shifts from undercapacity to overcapacity. This would hinder *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not any further re-rating on the A-share in our view. registered/qualified pursuant to FINRA regulations B: Buy/A: Hold with TP of HKD18.4/RMB15.3. Our valuation of 7.4x 2015e PE is based Issuer of report: The Hongkong and on half a standard deviation below the three-year average forward PE. Our earnings forecasts Shanghai Banking Corporation Limited are 5% below consensus in 2015e. We have a Buy rating on B-shares and Hold on the A- Disclaimer & shares. The A-share is trading at 7.4x 2015e PE, which is largely in line with the industry average, while the B-share is trading at 5.9x, substantially lower than industry average, and Disclosures This report must be read we think the B-shares offer a good opportunity to get exposure to a quality company. with the disclosures and the analyst certifications in RIC 200625.SZ / 000625.SZ Market cap (USDm) 1,757 Free Float 200625 CH 100%% % Market cap (HKDm) 13,620 the Disclosure appendix, Free Float 000625 CH 100%% % Market cap (CNYm) 57,955 and with the Disclaimer, Source: HSBC which forms part of it THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)
Changan Auto (200625 CH/000625 CH) Autos abc 4 November 2015
Financials & valuation
Financial statements Valuation data: 200625 CH Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (CNYm) PE* 7.6 5.9 5.7 5.5 PB 2.2 1.6 1.3 1.1 Revenue 52,913 67,348 75,427 78,226 Dividend yield (%) 2.0 2.5 2.7 2.8 EBITDA 1,382 2,440 3,116 3,341 * Based on HSBC EPS (diluted) Depreciation & amortisation -1,879 -2,016 -2,164 -2,331
Operating profit/EBIT -497 424 952 1,010 Net interest -66 128 408 551 Valuation data: 000625 CH PBT 7,539 10,015 10,954 11,497 HSBC PBT 7,539 10,015 10,954 11,497 Year to 12/2014a 12/2015e 12/2016e 12/2017e Taxation -21 -304 -425 -485 PE* 9.5 7.4 7.2 6.8 Net profit 7,561 9,765 10,707 11,216 PB 2.8 1.9 1.6 1.3 HSBC net profit 7,561 9,765 10,707 11,216 Dividend yield (%) 1.6 2.0 2.2 2.3
Cash flow summary (CNYm) * Based on HSBC EPS (diluted)
Cash flow from operations 3,822 7,067 4,135 3,592 Capex -2,216 -3,441 -3,737 -4,006 Cash flow from investment 5,220 4,804 4,573 4,457 Price relative: 200625 CH Dividends -660 -1,267 -1,514 -1,660 Change in net debt -7,831 -16,356 -7,177 -6,455 26.20 26.20 FCF equity 1,009 3,389 189 -533 21.20 21.20 Balance sheet summary (CNYm) 16.20 16.20 Intangible fixed assets 3,517 4,491 5,609 6,813 Tangible fixed assets 15,849 16,295 16,768 17,267 11.20 11.20 Current assets 35,930 54,473 65,547 73,793 6.20 6.20 Cash & others 9,693 26,049 33,227 39,682 Total assets 69,687 90,986 104,880 116,246 1.20 1.20 Operating liabilities 42,115 49,350 54,073 55,930 2013 2014 2015 2016 Gross debt 2,061 2,061 2,061 2,061 China Changan Automobile Rel to HSCEI Net debt -7,632 -23,988 -31,166 -37,621 Source: HSBC Shareholders' funds 25,637 39,645 48,762 58,093 Invested capital 3,488 -141 625 2,261 Price relative: 000625 CH 28.80 28.80 Ratio, growth and per share analysis 23.80 23.80 Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change 18.80 18.80 Revenue 35.2 27.3 12.0 3.7 13.80 13.80 EBITDA 306.8 76.6 27.7 7.2 Operating profit 124.2 6.1 8.80 8.80 PBT 137.2 32.8 9.4 5.0 HSBC EPS 124.5 28.4 3.2 4.7 3.80 3.80 2013 2014 2015 2016 Ratios (%) China Changan Automobil A Rel to CSI 300 Index Source: HSBC Revenue/IC (x) 12.5 40.2 311.5 54.2 ROIC -11.7 24.6 377.9 67.0 ROE 34.0 29.9 24.2 21.0 Note: Priced at close of 04 Nov 2015 ROA 12.1 12.1 10.8 10.0 EBITDA margin 2.6 3.6 4.1 4.3 Operating profit margin -0.9 0.6 1.3 1.3 EBITDA/net interest (x) 20.9 Net debt/equity -30.0 -60.7 -64.0 -64.6 Net debt/EBITDA (x) -5.5 -9.8 -10.0 -11.3 CF from operations/net debt Per share data (CNY) EPS reported (diluted) 1.62 2.08 2.15 2.25 HSBC EPS (diluted) 1.62 2.08 2.15 2.25 DPS 0.25 0.30 0.33 0.35 Book value 5.50 7.95 9.78 11.66
2
Company report Industrials Machinery Equity – China
Zoomlion Heavy Industry (1157 HK)
Hold Hold: Challenges after challenges Target price (HKD) 3.60 4Q15e loss could widen in our view because of impairment Share price (HKD) 3.16 Upside/Downside (%) +13.9 charges for accounts receivable and finance lease receivable Dec 2014 a 2015 e 2016 e HSBC EPS (CNY) 0.08 -0.15 -0.04 Earnings could remain in negative territory given persistent HSBC PE 33.5 weak demand for construction machinery and high level of Performance 1M 3M 12M USD debt Absolute (%) 0.0 -22.2 -27.0 Relative^ (%) -5.8 -16.2 -23.9
Maintain Hold, lower FY15 and FY16 earnings to net loss position. TP reduced to HKD3.6 from HKD4.9
Impairment charges could be a feature in 4Q15 results. The company generated a net loss of RMB518m for September 2015 YTD but we think the loss could widen in 4Q15 due to potential impairment charges to the company’s accounts receivable and finance receivable book. Provision for impairment seems low given the increase in over 2 years accounts receivable and overdue profile for finance lease receivable. We also expect the company to 5 November 2015 remain in a net loss position in 2016 due to persistent weak demand for construction Anderson Chow* machinery and foreign exchange loss related to the company’s USD denominated debt. Analyst The Hongkong and Shanghai Banking No sign of fundamental demand rebound for construction machinery. We believe that Corporation Limited for construction machinery demand in China to pick up there would need to be a +852 2996 6669 [email protected] turnaround in property construction, and there has not yet been any sign of a rebound. The latest statement on the 13th Five Year Plan (2016-2020) also offered little confidence Lesley Liu* Analyst for upside surprises in infrastructure investment growth. The Hongkong and Shanghai Banking Corporation Limited Zoomlion aims to diversify the business away from construction machinery. The +852 2822 4524 company wants to have three major businesses contributing one third of the revenues each [email protected] in coming years. These are construction machinery, agriculture machinery and environmental protection operating assets. This transformation will take time and we View HSBC Global Research at: believe it will require more capital as the company becomes involved in environmental http://www.research.hsbc.com protection PPP (public private partnership) projects. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA Given falling demand and financial losses, the current 0.5x 2016e PB seems regulations reasonable. Our PB-based TP falls to HKD3.6 from HKD4.9 on a lower book value Issuer of report: The Hongkong and (adjusted for the credit risk related to accounts receivable and finance leases) and a lower Shanghai Banking Corporation Limited target PB (0.6x from 0.77x in our last report) to reflect the down cycle of the construction Disclaimer & machinery business and potential credit risks for receivables. We think share price may Disclosures remain weak until signs of a potential recovery in property construction activity become This report must be read evident which would lead to a recovery in construction machinery, albeit with a longer with the disclosures and lead time due to low usage hours currently. the analyst certifications in the Disclosure appendix, ^Index HSCEI Enterprise value (CNYm) 53,720 Index level 10,283 Free float (%) 48%% and with the Disclaimer, RIC 1157.HK Market cap (USDm) 5,733 which forms part of it Bloomberg 1157 HK Market cap (HKDm) 44,431 Source: HSBC Source: HSBC Zoomlion Heavy Industry (1157 HK) Machinery abc 5 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (CNYm) EV/sales 2.0 2.6 2.5 2.4 Revenue 25,851 20,784 22,780 25,679 EV/EBITDA 23.1 62.1 42.8 32.0 EBITDA 2,193 865 1,345 1,933 EV/IC 0.9 0.9 0.9 0.9 Depreciation & amortisation -646 -642 -673 -685 PE* 33.5 222.9 Operating profit/EBIT 1,547 224 673 1,247 PB 0.5 0.5 0.5 0.5 Net interest -692 -1,543 -1,081 -1,122 Dividend yield (%) 0.9 0.0 0.0 0.0 PBT 863 -1,319 -409 125 * Based on HSBC EPS (diluted) HSBC PBT 863 -1,319 -409 125 Taxation -235 66 102 -31 Net profit 594 -1,190 -291 89 Price relative HSBC net profit 594 -1,190 -291 89 13.50 13.50 Cash flow summary (CNYm) 11.50 11.50
Cash flow from operations -8,411 -64 -1,931 -2,355 9.50 9.50 Capex -847 -1,281 -789 -829 Cash flow from investment -1,891 -1,281 -789 -829 7.50 7.50 Dividends -1,156 -161 -18 0 5.50 5.50 Change in net debt 12,639 3,048 3,819 4,306 Balance sheet summary (CNYm) 3.50 3.50 1.50 1.50 Intangible fixed assets 3,008 2,983 2,945 2,910 2013 2014 2015 2016 Tangible fixed assets 18,052 17,991 18,431 19,025 Zoomlion Heavy Industry Rel to HSCEI Current assets 69,591 74,916 75,765 79,502 Cash & others 14,483 20,530 16,801 14,432 Source: HSBC
Total assets 93,438 98,678 99,929 104,224 Operating liabilities 20,423 18,000 19,466 21,731 Note: Priced at close of 04 Nov 2015 Gross debt 31,612 40,707 40,797 42,734 Net debt 17,129 20,177 23,996 28,302 Shareholders' funds 40,791 39,422 39,131 39,220 Invested capital 55,745 57,361 60,874 65,274
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue -32.9 -19.6 9.6 12.7 EBITDA -54.8 -60.5 55.5 43.7 Operating profit -63.9 -85.5 200.8 85.5 PBT -80.9 -252.8 HSBC EPS -84.5 -300.4 Ratios (%) Revenue/IC (x) 0.5 0.4 0.4 0.4 ROIC 2.4 0.6 1.0 1.6 ROE 1.5 -3.0 -0.7 0.2 ROA 1.8 0.8 1.1 1.4 EBITDA margin 8.5 4.2 5.9 7.5 Operating profit margin 6.0 1.1 3.0 4.9 EBITDA/net interest (x) 3.2 0.6 1.2 1.7 Net debt/equity 42.0 51.2 60.8 71.5 Net debt/EBITDA (x) 7.8 23.3 17.8 14.6 CF from operations/net debt Per share data (CNY) EPS reported (diluted) 0.08 -0.15 -0.04 0.01 HSBC EPS (diluted) 0.08 -0.15 -0.04 0.01 DPS 0.02 0.00 0.00 0.00 Book value 5.29 5.12 5.08 5.09
2
Flashnote
Consumer & Retail Hotels Restaurants & Leisure Macau Legend (1680 HK) Equity – Hong Kong
Reduce Reduce: Setting expectations into 3Q15 results Target price (HKD) 1.10 Share price (HKD) 1.16 We forecast 3Q15 EBITDA HKD73m, -71%yoy or -56% yoy Upside/Downside (%) -5.2% excluding one-off Performance 1M 3M 12M Absolute (%) 0.0 -42.3 -70.0 Focus on cost control measures and project updates Relative^ (%) -4.7 -37.6 -68.3 ^Index HANG SENG INDEX Maintain Reduce rating and unchanged HKD1.1 target price
RIC 1680.HK Bloomberg 1680 HK 3Q15 preview: Macau Legend 3Q15 results are due for release after market close on 11
Market cap (USDm) 965 November, followed by a conference call the next morning. Despite the market, VIP Market cap (HKDm) 7,475 volumes are down 18% qoq; we expect volume to pick up qoq at both Landmark and Enterprise value (HKDm) 6,841 Free float (%) 27 Babylon as the self-run business continued to ramp up. We expect mass at Landmark to
remain largely flat qoq, but Babylon to outperform the overall market. For non-gaming, 4 November 2015 given the summer holiday, we would have expected occupancy to have improved at both Landmark and Macau Fisherman’s Wharf (MFW) in 3Q15. However, on a par with what Scott Chan* we have seen in the results of some of the operators who have reported, room rates could Analyst The Hongkong and Shanghai Banking trend further down from last quarter due to the opening of Galaxy Phase 2. We forecast Corporation Limited group net revenue to come in at HKD342m (-24% yoy, +3% qoq) and adjusted EBITDA +852 3941 7005 [email protected] at HKD73m, -71% yoy (-56% yoy excluding one-off New Legend contribution in 3Q14)
Charlene Liu* or +36% qoq driven mainly by reduced loss in non-gaming and Babylon. Analyst The Hongkong and Shanghai Banking Macau Legend 3Q15 results preview Corporation Limited, Singapore Branch 3Q14 2Q15 3Q15e yoy qoq +65 6658 0615 Net gaming revenue 324 208 225 -30% 8% [email protected] Net non-gaming revenue 128 126 117 -9% -7% Erwan Rambourg* Total revenue 452 334 342 -24% 3% Adjusted EBITDA 247* 53 73 -71% 36% Global Co-Head Consumer & Retail The Hongkong and Shanghai Banking Source: Company data, HSBC estimates. *3Q14 EBITDA included an one-off HKD81.7m contribution from New Legend Corporation Limited +852 2996 6572 Look for updates on cost and projects. The key focus of the results will include updates [email protected] on cost control measures and quarter-to-date trends on gaming revenue and occupancy, View HSBC Global Research at: http://www.research.hsbc.com especially after a robust Golden Week in October. On the development side, we will be *Employed by a non-US affiliate of looking for updates on: 1) construction of the Legend Palace hotel, which is scheduled to HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA open in 2Q16; 2) budget and redevelopment plan of rest of the MFW including the regulations Legendale hotel (scheduled to open in 4Q17); 3) progress of the Cape Verde project. Issuer of report: The Hongkong and Shanghai Banking Maintain Reduce, TP HKD1.1 unchanged. As mentioned in our initiation report Not out Corporation Limited of the woods yet, 19 October 2015, we think market expectations, particularly on Macau Disclaimer & Fisherman’ Wharf, still have to come down. Potential financing needs remain an Disclosures overhang. With no dividend yield and trading at 16x FY17e EV/EBITDA, a 70% This report must be read premium to the sector, we continue to find the valuation stretched. We make no changes with the disclosures and to our estimates and maintain our Reduce rating and SOTP-derived TP of HKD1.1. the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Macau Legend (1680 HK) Hotels Restaurants & Leisure abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (HKDm) EV/sales 3.8 4.7 4.9 5.2 Revenue 1,811 1,444 1,814 2,300 EV/EBITDA 8.2 24.3 20.2 16.4 EBITDA 842 282 438 722 EV/IC 1.0 1.0 1.0 1.0 Depreciation & amortisation -296 -325 -418 -532 PE* 13.1 223.3 Operating profit/EBIT 546 -43 19 190 PB 1.0 1.0 1.0 1.0 Net interest 20 -22 -93 -162 FCF yield (%) -5.1 -8.7 -27.5 -41.6 PBT 474 -102 -74 28 Dividend yield (%) 0.0 0.0 0.0 0.0 HSBC PBT 474 -102 -74 28 * Based on HSBC EPS (diluted) Taxation 5 5 5 5 Net profit 479 -97 -69 33 HSBC net profit 571 -59 -69 33 Price relative Cash flow summary (HKDm) 10.00 10.00 Cash flow from operations 880 260 403 655 8.00 8.00 Capex -1,272 -873 -2,307 -3,513 Cash flow from investment -1,523 -46 -2,211 -3,416 6.00 6.00 Dividends 0 0 0 0 Change in net debt 113 -72 1,996 3,019 4.00 4.00 FCF equity -367 -630 -1,991 -3,014 2.00 2.00 Balance sheet summary (HKDm) 0.00 0.00 Intangible fixed assets 984 969 953 938 2013 2014 2015 2016 Tangible fixed assets 6,130 6,013 7,942 10,964 Macau Legend Development Rel to HANG SENG INDEX Current assets 5,175 5,800 6,277 5,278 Source: HSBC Cash & others 4,548 5,171 5,595 4,510 Total assets 12,538 13,022 15,405 17,405 Operating liabilities 667 680 694 708 Note: Priced at close of 04 Nov 2015 Gross debt 4,226 4,778 7,198 9,132 Net debt -321 -393 1,603 4,622 Shareholders' funds 7,460 7,379 7,328 7,380 Invested capital 7,074 6,930 8,883 11,962
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 2.7 -20.3 25.6 26.8 EBITDA -4.4 -66.5 55.2 65.0 Operating profit -15.3 -108.0 882.4 PBT -6.4 -121.6 HSBC EPS -17.1 -110.3 Ratios (%) Revenue/IC (x) 0.3 0.2 0.2 0.2 ROIC 11.2 0.7 1.4 3.2 ROE 8.7 -0.8 -0.9 0.5 ROA 5.6 0.3 0.8 2.0 EBITDA margin 46.5 19.5 24.1 31.4 Operating profit margin 30.2 -3.0 1.1 8.3 EBITDA/net interest (x) 12.9 4.7 4.5 Net debt/equity -4.3 -5.3 21.9 62.6 Net debt/EBITDA (x) -0.4 -1.4 3.7 6.4 CF from operations/net debt 25.2 14.2 Per share data (HKD) EPS reported (diluted) 0.07 -0.02 -0.01 0.01 HSBC EPS (diluted) 0.09 -0.01 -0.01 0.01 DPS 0.00 0.00 0.00 0.00 Book value 1.16 1.15 1.14 1.15
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Flashnote
Industrials Automobiles Korea Autos Equity – Korea
October US auto sales data
Korea Autos US light vehicle sales kept up a strong pace of growth in Company Stock HSBC HSBC 4-Nov Down- October, driven again by robust SUV demand (KRW) code rating TP price side
Hyundai Motor 005380 KS Hold150,000165,500 9.5% Kia Motors 000270 KS Hold 50,000 57,700 13.3% Hyundai sales outpaced the market, but as a result of higher Source: Bloomberg, HSBC estimates dealer incentives; Kia is seeing the new model effect fade and will likely need to raise incentives to clear out old inventories
We rate both Korean carmakers Hold
A streak of strong demand: US light vehicle sales rose 14% y-o-y to 1,455,153 units in October, driven by steady SUV demand and higher dealer incentives. The SAAR (seasonally adjusted annual rate) of sales reached 18.2m, its highest level since July 2005. It was also the first time annualized sales topped 18m for consecutive two months since February 2000. SUV 4 November 2015 sales were strong again, jumping 22% y-o-y for the month, while sedan sales rose just 4%. As SUV demand has been strong this year, rising 12% year-to-date, carmakers with a strong SUV Paul Choi* Analyst portfolio (Toyota, GM, Ford and Chrysler) are taking advantage of the favourable environment. The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Higher incentives at Hyundai: Hyundai sales rose 19.8% y-o-y to 60,005 units in October, Branch +822 3706 8758 outpacing the industry growth by raising dealer incentives, up 50.3% y-o-y vs. 14.2% of the [email protected] industry average. Hyundai increased dealer incentives on the Sonata by 81.0% y-o-y but the Incheol Yu* model’s sales inched up just 3.3%. The company also swelled incentives on the volume Associate model Elantra by 87.2% y-o-y to clear out inventory, ahead of its new model introduction in The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities 1Q16. However, Tucson, a fully re-designed SUV launched in the US in July, saw 103.2% Branch sales growth y-o-y even with incentives being raised by only 7.5% y-o-y, thanks to the +822 3706 8756 [email protected] popularity of the SUV segment in the US market. Despite higher incentive spending,
Hyundai’s US inventory continued to rise in October, up by 0.3 months y-o-y and 0.1 months View HSBC Global Research at: m-o-m to 3.2 months. http://www.research.hsbc.com Fading new model effect at Kia: Kia grew sales volume by 12.0% y-o-y last month, *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not slightly slower than the market growth in the US. Although the company has benefited registered/qualified pursuant to FINRA regulations from the launch of two new SUVs, Carnival and Sorento, the new model effect started to Issuer of The Hongkong and Shanghai fade in October. Carnival sales slipped 1.9% y-o-y in October, despite a 44.7% increase in report: Banking Corporation Limited, dealer incentives on the model. In addition, Optima, a newly launched sedan, also Seoul Securities Branch delivered mediocre sales of 14,381 units (vs. 13,145 units of year-to-date average until Disclaimer & September). As Kia looks ahead to the launch of its other new SUV Sportage in 1Q16, it Disclosures has begun to offer higher dealer incentives on the model to clear out old inventory. This report must be read with the disclosures and We rate both Korean carmakers Hold, as the data indicates the sales volume recovery in the analyst certifications in the US is taking place as a result of weaker pricing. The current sales growth is based on the Disclosure appendix, neither product competitiveness nor an improvement in brand recognition, but rather greater and with the Disclaimer, incentive spending, implying that the pace of sales is not structurally sustainable, in our view. which forms part of it
Korea Autos Automobiles abc 4 November 2015
October US auto sales data ______Unit sold ______Market share ______Brand Oct-15 Oct-14 Sep-15 y-o-y m-o-m Oct-15 Oct-14 Sep-15 y-o-y m-o-m Industry 1,455,153 1,281,233 1,442,113 13.6% 0.9% 100% 100% 100% - - Hyundai 60,005 50,081 64,015 19.8% -6.3% 4.1% 3.9% 4.4% 0.2%p -0.3%p Kia 50,044 44,694 49,820 12.0% 0.4% 3.4% 3.5% 3.5% 0.0%p 0.0%p Korean 2 110,049 94,775 113,835 16.1% -3.3% 7.6% 7.4% 7.9% 0.2%p -0.3%p GM 262,993 226,819 251,310 15.9% 4.6% 18.1% 17.7% 17.4% 0.4%p 0.6%p Ford 213,105 187,897 221,269 13.4% -3.7% 14.6% 14.7% 15.3% 0.0%p -0.7%p Chrysler (FCA) 196,888 171,859 194,068 14.6% 1.5% 13.5% 13.4% 13.5% 0.1%p 0.1%p Toyota 204,045 180,580 194,399 13.0% 5.0% 14.0% 14.1% 13.5% -0.1%p 0.5%p Honda 131,651 121,172 133,750 8.6% -1.6% 9.0% 9.5% 9.3% -0.4%p -0.2%p Nissan 116,047 103,117 121,782 12.5% -4.7% 8.0% 8.0% 8.4% -0.1%p -0.5%p
Source: Autonews
US dealer incentives by brand US car price vs incentives (USD) Oct-15 Oct-14 Sep-15 y-o-y m-o-m (USD/unit) Incentives ASP % Industry 3,108 2,721 3,144 14.2% -1.1% Industry 3,108 34,023 9.1% Hyundai 2,073 1,379 2,402 50.3% -13.7% Hyundai-Kia 2,508 25,733 9.7% Kia 2,943 2,491 2,817 18.1% 4.5% VW 4,120 39,110 10.5% Toyota 2,263 1,897 2,306 19.3% -1.9% Toyota 2,263 30,616 7.4% Honda 1,909 1,846 2,068 3.4% -7.7% Honda 1,909 27,483 6.9% Nissan 3,564 3,284 3,476 8.5% 2.5% Nissan 3,564 27,966 12.7% GM 3,881 3,300 4,016 17.6% -3.4% GM 3,881 38,844 10.0% Ford 3,392 3,201 3,672 6.0% -7.6% Ford 3,392 36,940 9.2% Chrysler 3,576 3,109 3,499 15.0% 2.2% Chrysler 3,576 34,821 10.3%
Source: Autodata, HSBC Source: Kelley Blue Book, Autodata, HSBC
Valuation and risks Hyundai Motor (005380 KS – KRW165,500; Hold, TP KRW150,000) We derive our unchanged target price of KRW150,000 by applying our target multiple of 0.63x to our 2015e BVPS estimate of KRW239,266. We use the Gordon growth model with our assumptions of 10.7% 2015e ROE and 11.1% COE to derive an implied PB multiple of 0.96x. We then discount this multiple by 0.33x to reflect poor capital management, which is 1 standard deviation from the last five years’ average 1-year forward PB.
Downside risks to our estimates and rating include (1) higher-than-expected competition with Japanese automakers in major overseas markets; (2) the potential failure of the new SUV model Tucson in getting traction with US car buyers; and (3) a further slowdown in the utilisation rates at plants in China. Upside risks include (1) better-than-expected sales volume of Tucson in the US, translating to lower dealer incentives; and (2) a faster-than-expected recovery in sales volume of compact cars (< 1.6L) in China, following the reduction of vehicle purchase tax by half. Kia Motors (000270 KS – KRW57,700; Hold, TP KRW50,000) We derive our unchanged target price of KRW50,000 by applying a multiple of 0.81x to our 2015e BVPS estimate of KRW61,351. We use a Gordon growth model, assuming an 11.7% 2015e ROE and 8.6% COE, to derive an implied PB of 1.37x. We then discount this multiple by 0.56x, which is 1 standard deviation from the past five years’ average 1-year forward PB, to reflect poor capital management.
Downside risks to our estimates and rating include: (1) a faster-than-expected slowdown in sales volume of the two new SUV models, Carnival and Sorento; (2) the potential failure of new sedan K5 to revive sales volume in the US and Korea as a volume model; and (3) weaker-than-expected popularity of a new SUV Sportage. Upside risks include: (1) better-than-anticipated sales in China; and (2) a faster-than-expected recovery in sales volume of compact cars (< 1.6L) in China, following the reduction of vehicle purchase tax by half.
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Flashnote
Consumer & Retail Household Products Cuckoo Electronics (192400 KS) Equity – Korea
Buy Buy: 3Q15 preview – buy on recent dip Target price (KRW) 310,000 Share price (KRW) 246,500 Earnings set to miss consensus in 3Q but recover in 4Q Upside/Downside (%) +25.8 Performance 1M 3M 12M We expect both cooker and rental margins to improve Absolute (%) -6.6 -17.7 10.3 Relative^ (%) -10.2 -19.3 5.2 ^Index KOSPI INDEX Reiterate Buy but cut TP to KRW310k (from KRW320k) RIC 192400.KS A window of opportunity: The share price has fallen 6.6% in the past month due to: 1) Bloomberg 192400 KS Market cap (USDm) 2,133 concerns over the impact of MERS (Middle East Respiratory Syndrome) on sales; 2) weaker Market cap (KRWb) 2,417 cooker exports; and 3) a slower pace of ASP hikes. We think this correction has created a Enterprise value (KRWb) 2,083 good entry point as Cuckoo is coming into the seasonally strong 4Q. We expect rice cooker Free float (%) 25% and rental sales to be strong in 4Q, driving margin improvement.
Weak 3Q ahead of a recovery in 4Q: We expect operating profit in 3Q15 to be lower than our and market consensus due to: 1) a slowdown in exports to China in September (despite strong exports in July and August); 2) incremental marketing costs for water purifier rentals; 4 November 2015 and 3) relatively weak seasonality. However, we do not think the recent decline in inbound
Brian Cho* Chinese travellers will have as much of a negative impact on business as is concerning the Analyst Street, as duty-free shop sales account for just 5% of total revenues. On the other hand, The Hongkong and Shanghai Banking Cuckoo is aggressively expanding its rental market share in Korea with lower monthly fees Corporation Limited, Seoul Securities Branch and higher sales incentives offered to new customers. Although the company reported a +822 3706 8750 disappointing operating margin (at 2.8%) from the rental business in 2Q15, we expect it to [email protected] gradually improve to a 5% level in 3Q15 and over 10% by 4Q15. Incheol Yu* Associate Recovery in Chinese visits to Korea: Although the number of Chinese inbound travellers The Hongkong and Shanghai Banking declined 30% y-o-y in 3Q, it showed a significant recovery in September after MERS Corporation Limited, Seoul Securities Branch disappeared. Our consumer analyst Karen Choi also expects a dramatic recovery in Chinese +822 3706 8756 visitor numbers in 4Q15; she sees their visitor numbers in 2015 to be similar to those of last [email protected] year. We expect Chinese inbound traveller numbers to grow 25% y-o-y to 7.6m in 2016. View HSBC Global Research at: http://www.research.hsbc.com Strong growth in 4Q: We expect the operating margins for rice cookers and the rental *Employed by a non-US affiliate of businesses to exceed 18% and 10%, respectively, in 4Q. Strong seasonality is coming, as HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA demand for rice cookers rises in cold weather. Also, the ASP of rice cookers should regulations continue to rise on a greater sales contribution from higher-priced induction heating (IH) Issuer of The Hongkong and Shanghai report: Banking Corporation Limited, rice cookers. Lastly, we expect the company to dial back spending on marketing in 4Q15, as Seoul Securities Branch Chinese travellers return to Korea to shop as concerns over MERS have dissipated. Thus, Disclaimer & we expect sales and operating profit to rise 19.7% and 85.4% y-o-y, respectively, in 4Q15. Disclosures In 2016, we think sales volume of IH cooktops will continue to grow as the company starts This report must be read to supply construction companies. with the disclosures and Reiterate Buy but lower our TP to KRW310,000 as we cut our 2016e revenue and the analyst certifications in operating profit forecasts by 5.5% and 6.7%, respectively, reflecting 1) ASP rising at a the Disclosure appendix, and with the Disclaimer, slower-than-expected pace amid less demand from Chinese travellers in 3Q and 2) higher- which forms part of it than-anticipated marketing costs in the rental business.
Cuckoo Electronics (192400 KS) Household Products abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (KRWb) EV/sales 3.8 3.1 2.5 2.1 EV/EBITDA 20.1 14.2 11.1 9.4 Revenue 567 679 785 883 EV/IC 12.7 11.7 11.0 10.0 EBITDA 107 147 179 202 PE* 26.6 23.9 19.4 17.3 Depreciation & amortisation -28 -24 -26 -28 PB 5.5 4.7 4.0 3.4 Operating profit/EBIT 79 123 153 174 FCF yield (%) 0.3 3.0 4.5 5.2 Net interest 6 0 0 0 Dividend yield (%) 0.6 1.1 1.5 1.7 PBT 118 133 164 183 HSBC PBT 118 133 164 183 * Based on HSBC EPS (diluted) Taxation -27 -32 -39 -44 Net profit 91 101 125 139 HSBC net profit 91 101 125 139 Price relative 340000.00 340000.00 Cash flow summary (KRWb) Cash flow from operations 30 108 141 156 290000.00 290000.00 Capex -19 -35 -35 -35 Cash flow from investment -52 -61 -78 -79 240000.00 240000.00 Dividends -15 -26 -35 -42 Change in net debt -14 -44 -51 -55 FCF equity 6 69 101 116 190000.00 190000.00 Balance sheet summary (KRWb) 140000.00 140000.00 Intangible fixed assets 4 4 4 3 2013 2014 2015 2016 Tangible fixed assets 120 131 140 147 Cuckoo Electronics Rel to KOSPI INDEX Current assets 298 357 421 490 Source: HSBC Cash & others 171 215 266 321 Total assets 553 644 755 872 Operating liabilities 82 98 117 131 Note: Priced at close of 03 Nov 2015 Gross debt 3 3 3 3 Net debt -168 -212 -263 -318 Shareholders' funds 441 520 615 719 Invested capital 169 178 182 189
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 11.4 19.8 15.7 12.5 EBITDA 15.2 37.1 22.0 13.0 Operating profit 13.5 56.3 24.5 14.1 PBT 59.4 12.5 23.4 11.9 HSBC EPS 58.0 11.2 23.4 11.9 Ratios (%) Revenue/IC (x) 3.8 3.9 4.4 4.8 ROIC 40.6 53.8 64.5 71.5 ROE 22.5 21.0 22.0 20.9 ROA 17.1 16.9 17.8 17.1 EBITDA margin 18.9 21.6 22.8 22.9 Operating profit margin 13.9 18.1 19.5 19.7 EBITDA/net interest (x) Net debt/equity -38.1 -40.8 -42.8 -44.2 Net debt/EBITDA (x) -1.6 -1.4 -1.5 -1.6 CF from operations/net debt Per share data (KRW) EPS reported (diluted) 9255.24 10296.40 12702.25 14218.05 HSBC EPS (diluted) 9255.24 10296.40 12702.25 14218.05 DPS 1500.00 2700.00 3600.00 4300.00 Book value 44593.89 52646.05 62350.98 72985.89
2
Company report Telecoms, Media & Technology Electronic Equipment Equity – Taiwan
TPK Holding (3673 TT)
Hold Hold: Does one-time write-off mean a new beginning? Target price (TWD) 109.00 3Q GM/OPM above HSBCe/consensus if one-time write-off is Share price (TWD) 91.90 Upside/Downside (%) +18.6 excluded Dec 2014 a 2015 e 2016 e HSBC EPS (TWD) 0.76 -49.99 7.81 Cando’s debt repayment issue still outstanding risk for TPK HSBC PE 120.3 - 11.8 Performance 1M 3M 12M Maintain Hold. Raise 2016e EPS by 3% and raise TP to TWD109 Absolute (%) 12.9 -17.2 -49.4 (from TWD97) based on a 14x 2016e PE Relative^ (%) 7.6 -19.1 -47.8
One-time write-off impacted bottom line: TPK announced a disappointing 3Q net loss of TWD19.4bn, mostly due to a one-time write-off of TWD19bn. However, if we exclude one- time charges (see page 3), 3Q15 GM was ahead of HSBCe/consensus, with OPM above HSBCe/consensus by 100-110bps, mainly due to better cost control (3Q15 opex/sales of 5.3%, vs. 6.8% in 2Q15). Net profit before the write-off was below HSBCe due to higher non-operating expenses (FX losses from RMB depreciation).
Cando’s debt repayment issue still an outstanding risk for TPK, in our view: TPK 4 November 2015 management clarified it does not see anything unusual with Cando’s debt repayment/ interest payment issues to creditors. Management also mentioned that at the end of October Jerry Tsai* Analyst Cando came to ask TPK to be its guarantor of TWD4.3bn debt but TPK refused. However, HSBC Securities (Taiwan) Corporation we believe there is potential risk for TPK given that TPK has full control of Cando. Cando is Limited TPK’s 20%-owned subsidiary and supplies it with glass-based sensors. +8862 6631 2863 [email protected] Raise 2016e EPS by 3% on lower depreciation expense, despite management guiding for a David Huang* 2016e cost saving of TWD8 per share after the write-off. We believe the decreasing Associate depreciation expense of TWD3.28bn (or TWD7.98 per share) cannot be fully reflected on the HSBC Securities (Taiwan) Corporation Limited 2016e bottom line. Furthermore, we see limited upside for the share price at the moment. +8862 6631 2865 Force Touch (Apple technology that detects the force of a tap on the trackpad or screen and [email protected] responds differently to variations in pressure) is one of the key catalysts but we think there are not too many applications to adopt up to 2017. Also, management admitted that wearable View HSBC Global Research at: device demand was weaker than its expectation. We thus raise our 2016e EPS by 3% on a http://www.research.hsbc.com mix of lower depreciation and a weaker end-demand assumption. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not Maintain Hold, raise TP to TWD109 from TWD97, as we roll over our valuation base to registered/qualified pursuant to FINRA 2016e (from 2Q15/1Q16, still based on a 14x PE). Despite upside of 18.6%, we retain our regulations Hold rating as we believe investors should wait for more catalysts. Issuer of report: HSBC Securities (Taiwan) Corporation Limited TPK trading summary Disclaimer & Rev Cons rev EPS P/E Con EPS P/B ROE Div yield 2014a 129,517 0.76 120.3 0.7 0.6 0.5 Disclosures 2015e 127,503 131,408 -49.99 - 2.20 1.3 -51.7 0.0 This report must be read 2016e 135,657 148,137 7.81 11.8 9.81 1.2 10.4 3.8 with the disclosures and Source: Company data. HSBC estimates, Bloomberg the analyst certifications in ^Index TAIWAN WEIGHTED INDEX Enterprise value (TWDm) 84,204 Index level 8,713 Free float (%) 87% the Disclosure appendix, RIC 3673.TW Market cap (USDm) 995 and with the Disclaimer, Bloomberg 3673 TT Market cap (TWDm) 32,315 which forms part of it Source: HSBC Source: HSBC
TPK Holding (3673 TT) Electronic Equipment abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (TWDm) EV/sales 0.6 0.7 0.6 0.6 EV/EBITDA 9.1 - 6.1 5.9 Revenue 129,517 127,503 135,657 139,049 EV/IC 1.0 1.3 1.3 1.3 EBITDA 8,198 -7,493 14,061 14,556 PE* 120.3 - 11.8 10.9 Depreciation & amortisation -8,053 -9,501 -9,502 -9,502 PB 0.7 1.3 1.2 1.1 Operating profit/EBIT 145 -16,994 4,559 5,054 FCF yield (%) -16.0 -14.7 9.0 15.8 Net interest -120 -288 -1,200 -1,200 Dividend yield (%) 0.5 0.0 3.8 4.1 PBT 575 -18,093 3,759 4,254 HSBC PBT 575 -18,093 3,759 4,254 * Based on HSBC EPS (diluted) Taxation -8 -884 -789 -1,063 Net profit 277 -18,923 2,957 3,190 HSBC net profit 277 -18,923 2,957 3,190 Price relative 700.00 700.00 Cash flow summary (TWDm) 600.00 600.00 Cash flow from operations 8,505 1,169 12,231 14,567 500.00 500.00 Capex -13,274 -4,500 -7,500 -7,500 Cash flow from investment -21,499 -11,902 -14,162 -13,496 400.00 400.00 Dividends -1,796 -181 -1,331 -1,331 300.00 300.00 Change in net debt 12,069 9,949 1,503 105 200.00 200.00 FCF equity -4,897 -4,503 2,741 4,803 100.00 100.00 Balance sheet summary (TWDm) 0.00 0.00 Intangible fixed assets 427 418 410 402 2013 2014 2015 2016 Tangible fixed assets 63,611 62,644 60,642 58,640 TPK Holding Rel to TAIWAN WEIGHTED INDEX Current assets 74,648 61,552 62,246 64,699 Source: HSBC Cash & others 29,540 20,590 20,088 20,983 Total assets 152,723 140,593 141,501 144,494 Operating liabilities 33,368 39,343 36,294 36,427 Note: Priced at close of 04 Nov 2015 Gross debt 73,203 74,203 75,203 76,203 Net debt 43,663 53,613 55,115 55,220 Shareholders' funds 46,151 27,047 30,004 31,864 Invested capital 75,777 64,681 66,916 66,331
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue -18.6 -1.6 6.4 2.5 EBITDA -50.5 -191.4 - 3.5 Operating profit -98.5 -11828.9 - 10.9 PBT -93.5 -3244.3 - 13.2 HSBC EPS -96.2 -6646.1 - 7.9 Ratios (%) Revenue/IC (x) 1.9 1.8 2.1 2.1 ROIC 0.4 -25.4 5.5 5.7 ROE 0.6 -51.7 10.4 10.3 ROA 1.3 -12.1 2.8 2.9 EBITDA margin 6.3 -5.9 10.4 10.5 Operating profit margin 0.1 -13.3 3.4 3.6 EBITDA/net interest (x) 68.4 - 11.7 12.1 Net debt/equity 94.6 198.2 183.7 173.3 Net debt/EBITDA (x) 5.3 -7.2 3.9 3.8 CF from operations/net debt 19.5 2.2 22.2 26.4 Per share data (TWD) EPS reported (diluted) 0.76 -49.99 7.81 8.43 HSBC EPS (diluted) 0.76 -49.99 7.81 8.43 DPS 0.50 0.00 3.52 3.79 Book value 127.20 71.45 79.26 84.17
2
Company report Telecoms, Media & Technology Computers & Peripherals Equity – Taiwan
Wistron Corporation (3231 TT)
Hold Hold: 3Q15 results a mixed bag Target price (TWD) 17.00 Margin expansion offset by one-off charges Share price (TWD) 16.85 Upside/Downside (%) +0.9% Revenue growth to remain light but margin to improve Dec 2014 a 2015 e 2016 e HSBC EPS (TWD) 1.42 0.94 1.54 Cut 2015e earnings by 11% to reflect one-off charges; TP HSBC PE 11.8 17.9 11.0 remains unchanged at TWD17 and reiterate Hold Performance 1M 3M 12M Absolute (%) -2.9 -15.1 -43.7 3Q15 results a mixed bag. Wistron reported its 3Q15 net profit of TWD657mn in the Relative^ (%) -7.4 -17.0 -41.9 quarter (versus TWD77mn profit in 2Q15), which fall shorts of consensus expectation by
33%. The gap is mainly owing to three one-off items, including a write-off loss of TWD380.9mn on closing down a service centre in Europe, an impairment loss of TWD96.8mn on a tablet investment, and a tax expense accrual of TWD306.7mn following a tax dispute with the tax authority in Taiwan. Meanwhile, there was also a foreign exchange gain of TWD1.1bn booked in the quarter owing to recent TWD depreciation against USD. The favourable forex trend also helped a 40bps q-o-q expansion on gross margin to 5.1%. As a result, operating margin expanded to 0.57% in 3Q15 from the nearly-breakeven level in 2Q15, albeit still at the low-end of its historical range of 0.5-1.2% since 2013. 4 November 2015 Margin expansion to continue amid limited top-line growth opportunity. Looking Jenny Lai*, CFA Analyst, Tech hardware/Automation forwards, management believes 4Q15 notebook PC shipments could decline q-o-q HSBC Securities (Taiwan) Corporation although other businesses, especially iPhone components/assembly, TV and server Limited +8862 6631 2860 businesses should grow on sequential basis. With the recent close-down of its loss-making [email protected] businesses, we expect the company’s 4Q15 operating margin to expand q-o-q to 0.59%.
Jane Liu* For 2016, we expect the company’s revenue growth to remain muted at 4% as iPhone Associate assembly and component orders are likely to have more moderate growth as the organic HSBC Securities (Taiwan) Corporation Limited sales growth on total iPhone sales could slow down and have an impact on supply chain +8862 6631 2869 momentum. Meanwhile, we forecast the company’s notebook PC sales to decline another [email protected] 3% y-o-y in 2016e, largely consistent with our sector unit growth forecast.
Reiterate Hold. We cut our 2015e earnings estimates by 11% to reflect 3Q15 earnings View HSBC Global Research at: http://www.research.hsbc.com but keep our 2016e/2017e forecasts unchanged. Consensus remains aggressive as our new *Employed by a non-US affiliate of 2015e/2016e estimates are 25%/13% below the street. After the shares underperformed HSBC Securities (USA) Inc, and is not the market index by 17% in last 3-months, we believe the company’s bleak outlook has registered/qualified pursuant to FINRA regulations been priced-in and we reiterate our Hold rating. Our TP is unchanged at TWD17, based Issuer of report: HSBC Securities on 11.4x (the average multiple at which it has traded since 2010) FY16e earnings. (Taiwan) Corporation Limited Wistron - financial and valuation summary Disclaimer & EPS (TWD) EPS (% YoY) Est change (%) HSBC/cons (%) PEx Div yield (%) ROE (%) PBx Disclosures 2014 1.4 -39.3 N/A N/A 11.8 7.3 5.2 0.6 2015e 0.9 -33.8 -10.9 75.0 17.9 5.9 3.3 0.6 This report must be read 2016e 1.5 63.2 0.0 86.9 11.0 6.5 5.4 0.6 with the disclosures and Source: Company, HSBC estimates, Bloomberg the analyst certifications in the Disclosure appendix, ^Index TAIWAN WEIGHTED INDEX Enterprise value (TWDm) 76,760 and with the Disclaimer, Index level 8,713 Free float (%) 88% RIC 3231.TW Market cap (USDm) 1,326 which forms part of it Bloomberg 3231 TT Market cap (TWDm) 43,060
Source: HSBC Source: HSBC Wistron Corporation (3231 TT) Computers & Peripherals abc 4 November 2015
3Q15 result details by product By product, profit from its bread-and-butter notebook PC business remains depressed owing to excessive capacity. We note that the company’s notebook PC shipments reached 5.1mn units in 3Q15, down 12% y- o-y and 45% below its peak quarterly shipments record set in 4Q11. We note that notebook PCs now represent 42% of Wistron’s top-line and should continue to decline and we expect the contribution from its notebook PC business to fall below 40% in 2016e.
Wistron - revenue contribution from notebook PCs to fall below 40%-mark in 2016e 70%
60% Notebook PC sales in revenue mix 50%
40%
30%
20%
10%
0% 2012 2013 2014 2015e 2016e 2017e
Source: Company data, HSBC estimates
Desktop PCs, servers and monitors represented the most important profit contributor as easy competition leads to robust profitability. We note these three products now contribute c. 25% of the company’s top- line but their combined profit is bigger than what was generated by its notebook PC business. In contrast, there are still a few problem areas, including smartphone assembly (iPhone and Blackberry), touchscreens, the recycle business and tablet products. All of these business divisions are running at losses and management has decided to close its touchscreen business while it has scaled down the recycled business.
Wistron - 3Q15 results review (TWDm, year-end Dec) 1Q15 2Q15 3Q15 YoY (%) QoQ (%) Act./HSBC (%) Act./Con. (%) Revenue 150,705 146,073 152,416 -2.1 4.3 10098 Gross Profit 7,030 6,839 7,793 -4.7 13.9 103 101 Operating profit 817 19 862 -35.2 4554.8 99 89 Net Profit 723 77 657 -54.6 757.4 61 67 One-off charges* 00 478 n/m n/m n/m n/m Net profit excluding one-off charges 723 77 1,135 -21.6 1480.9 105 116 Margin (%) Gross margin 4.7 4.7 5.1 Operating margin 0.5 0.0 0.6 Net margin 0.5 0.1 0.4
Source: Company, HSBC estimates, Bloomberg *Note: Wistron realized an one-off translation loss of TWD380.9 million for the liquidation of Wistron Services B.V. owing to depreciated euro and recognized an impairment loss of TWD96.8 million for long-term investments.
2 Economics - Data Reactions 04 November 2015
Thailand Nalin Chutchotitham Policy rate pause extended Economist The Hongkong and Shanghai The Bank of Thailand (BoT) today maintained its policy rate at 1.5% in a Banking Corporation Limited, unanimous vote, for the fourth meeting in a row. The policy statement was little Bangkok Branch +662 614 4887 changed from the previous meeting. The BoT cautioned that more negative [email protected] external risks could weigh on exports and investor confidence, but said that fiscal stimulus is expected to fuel the recovery. Consequently, the Monetary Policy View HSBC Global Research at: http://www.research.hsbc.com Committee (MPC) saw the need to keep policy accommodative, even as current conditions were still deemed supportive to the recovery. Whether rates will be lowered further will likely hinge on the recovery in global demand, as well as the Issuer of report The Hongkong and Shanghai effectiveness of domestic fiscal expansion. We forecast a 25bp rate cut in Banking Corporation Limited, December, on the view that more support may be needed to ensure that Thailand's Bangkok Branch economic recovery will be sustained. Admittedly this will be a close call, given the Disclaimer & Disclosures This report must be read with the slightly more optimistic MPC statement today. disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, Facts which forms part of it 4 The MPC maintained the policy rate (1-day repurchasing rate) at 1.5% in a 7-0 vote. 22 out of 23 economists polled by Bloomberg, including HSBC, had expected the decision, with one calling for a 25bp cut. 4 The BoT said the economy "gradually recovered at a pace close to the assessment at the previous meeting" in Q3 and cited improvement in domestic demand, especially for non- durables, services, and private investment in certain areas. Additionally, fiscal measures are expected to provide more support to the recovery, even though "more negative factors from abroad, particularly a slowdown in the Chinese and other Asian economies", could weigh on exports and investor confidence. 4 The BoT continued to down-play concerns about deflation, citing continued expansion of domestic demand and positive core inflation. The central bank also maintained the view that headline inflation will turn positive in 1Q16, with the public's "medium-term inflation expectations" well-anchored. 4 The MPC assessed monetary conditions and the exchange rate as "remain(ing) supportive to the economic recovery", hence justifying the policy pause. Nevertheless, the MPC said that the "policy stance should continue to be sufficiently accommodative". 4 The MPC said it would closely monitor global financial market developments and the impact of the fiscal stimulus measures on Thailand's economic recovery, while it stands ready to use the available policy tools to support the economic recovery, as well as ensuring financial stability. Economics - Data Reactions Thailand 04 November 2015
Implications Today's policy statement suggests that the MPC is comfortably in a "wait-and-see" mode, at least for the near term. While high-frequency data indicate that the economy has yet to return to a stronger footing, the MPC appears heartened by the recent pick-up in private sector spending. It also expects fiscal stimulus measures to help things tick along. Indeed, just yesterday (November 3) the latest proposal for additional tax deductions on private companies' fixed-asset investments (in 2015-2016) was approved.
The MPC's unanimous vote for a pause also suggests that the change of BoT governor and two MPC members has had little bearing on the committee's overall policy views.
In previous meetings, the MPC had cited concerns over financial stability (i.e. housing market speculation) and weaker policy transmission as some of the reasons for maintaining the policy rate. Interestingly, these points were not mentioned in today's statement, which means that we will need to wait a further two weeks for the release of the meeting minutes to find out more. Should the MPC continue to have deep concerns about these issues, the probability of another rate cut would likely be reduced.
In any case, it appears that the emphasis at this juncture is still on growth. While we expect Thailand's growth to pick up slightly in 2016 (to 3.3% from 2.6% this year), we share the MPC's concerns that downside risks remain substantial. This warrants leaving further rate cuts on the table, to ensure that the recovery is sustained particularly in this opportune environment of relative political calm (see Thailand Central Bank Watch, 30 October 2015). Domestic growth concerns are also likely to outweigh worries over capital flows as US interest rate normalization draws nearer. After all, whether the Fed begins hiking in December - as we believe they will - or later, our US economists believe that the ultimate rate- hike path will be a shallow one. Indeed, the BoT has mentioned on several occasions that the impact on Thailand from US policy normalization should be limited. That said, our view that the central bank will deliver a 25bp rate cut at its next meeting on 16 December is admittedly a close call, given the slightly more optimistic statement by the MPC today. Ahead of that meeting, key data points to be looking out for include the Q3 GDP report (16 November), and October's economic indicators, especially exports and private sector spending.
Fig 1. Up-ticks in private investment and consumption Fig 2. Exports slightly better, but generally weak. Business appeared to have reduced the BoT's growth concerns sentiment had been below the watermark
Source: CEIC, HSBC. Source: CEIC, HSBC. NB: BSI> 50 means businesses see improvement of overall business conditions over previous month.
2
FIG Singapore – Real Estate
3Q2015 suggests in line to better-than- Singapore REITs expected performance
Looking better Recent themes: overseas acquisitions, perpetual securities and privatisations
Preferred picks: CCT, KREIT and FEHT Rating and target price summary (SGD) Company name Stock 2-Nov Target FY15e 2-year Upside/ HSBC code price price dividend DPU downside rating 3Q2015 results suggest in line to better-than-expected (SP) yield CAGR performance: 3Q2015 results for SREITs under our coverage Keppel REIT KREIT 0.95 1.35 7.2% -1.0% 42.1% Buy CDL Hospitality CDREIT 1.345 1.80 7.7% 1.7% 33.8% Buy suggest in line to better-than-expected performance (mostly Trusts given expectations have been low). For the retail sector, tenant Far East Hospitality FEHT 0.67 0.80 7.0% -0.1% 19.4% Buy Trust sales and shoppers’ traffic continued to improve (now seen for CapitaLand CCT 1.385 1.65 6.1% -1.1% 19.1% Buy Commercial Trust some quarters), while for the hotel sector the pace of y/y Frasers Centrepoint FCT 1.94 2.25 5.9% 1.0% 16.0% Hold Trust deterioration in RevPAR slowed in 3Q (vs. 1H2015). As well, CapitaLand Mall CT 1.955 2.25 5.6% 2.4% 15.1% Hold for AREIT’s business parks, reversions at 13.2% were stronger Trust Suntec REIT SUN 1.64 1.85 6.1% 2.5% 12.8% Buy than the 8.3% reversion recorded in the previous quarter though Ascendas REIT AREIT 2.25 2.50 6.2% 3.4% 6.4% Hold performance of other sub-segments was more mixed. After this Source: Bloomberg, HSBC estimates results season, we believe the outlook for the office sector remains most uncertain, followed by serviced apartments.
Recent themes – overseas acquisitions, perpetual securities and privatisations: Overseas acquisitions are a recurrent theme as managers attempt to support DPU/DPU growth, with staples 5 November 2015 like CDREIT not shy to purchase through the Business Trust
Pratik Burman Ray*, CFA portion of the staple. Issuance of perpetual securities supporting Senior Property Analyst acquisitions is likely to pick up as these instruments gain The Hong Kong and Shanghai Banking Corporation Limited, increased acceptance as part of the capital structure. Last, we Singapore Branch +65 6658 0611 [email protected] think the recent SGD517m acquisition of Saizen REIT’s Japanese assets by Lone Star at close to appraisal value (the Kristy Lee* Property Analyst REIT was trading at a steep discount to NAV prior to the offer) The Hong Kong and Shanghai Banking Corporation Limited, puts focus on privatisation and public-private arbitrage Singapore Branch +65 6658 0616 [email protected] opportunities within the sector.
Utkarsh Rastogi* Preferred picks – CCT, KREIT and FEHT: Recent sector Associate performance has been largely macro-driven with 10-year SG Bangalore government bond yields declining c40bps to 2.5%, while
View HSBC Global Research at: http://www.research.hsbc.com spreads have increased c10bps to c400bps (historical average: *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is c360bps) – this is reflected in dividend yields declining from not registered/qualified pursuant to FINRA regulations 6.8% to 6.5% (historical average: 5.9%). In our view, bond Issuer of report: The Hongkong and Shanghai Banking Corporation yields and the direction of SGD vs. major global currencies are Limited, Singapore Branch likely to dictate the near-term direction of the sector. Our MICA (P) 073/06/2015 preferred picks are in the economically sensitive sectors of MICA (P) 136/02/2015 MICA (P) 041/01/2015 office and hospitality (CCT, KREIT and FEHT), where Disclaimer & Disclosures dislocations with regard to dividend yields, spreads and This report must be read with the discounts to RNAV are most acute – we acknowledge the weak disclosures and the analyst certifications in outlook, but these are more than priced in, in our view. the Disclosure appendix, and with the Disclaimer, which forms part of it
FIG Singapore – Real Estate abc 5 November 2015
Key takeaways from the major SREIT results SREIT Key takeaways from the results CapitaLand Mall Trust Rental reversions remains muted at ~4% but still positive (with JCube being the drag). Pick-up in shopper traffic (+4.2% y/y for CT SP – Hold; TP SGD2.25 9M2015) and tenant sales (+4.4% y/y for 9M2015) were positives. Momentum improved in 3Q as 1H numbers were 3.4% y/y and 2.9% y/y for shopper traffic and tenant sales respectively. Debt metrics remains amongst the strongest in the sector with average maturity of 5.8 years, 98% of debt fixed, and all of the assets unencumbered as of Sep 2015 (these come at a slightly higher debt cost of 3.3% relative to peers). Announced the payout of the SGD8m retained taxable income from 1Q2015 - paying this out to existing unitholders ahead of the placement of consideration units to its sponsor (for the purchase of Bedok Mall) is only the right thing to do in our view. Ascendas REIT Portfolio-wide like-for-like occupancy and like-for-like occupancy for multi-tenanted buildings remained largely stable at c89% and AREIT SP – Hold; TP SGD2.50 c85% respectively. Rent reversions for 2QFY15/16 were +9.1% – an uptick from 1QFY15/16 (+6.6%) and FY14/15 (+8.3%), but largely driven by Business and Science Parks (+13.2%; though management noted variations within this segment), while reversions in other segments (hi-tech industrial, light industrial and logistics & distribution centres) remained modest (lower than 1QFY15/16). We expect reversions to remain modest as the gap between existing rents and market rents have narrowed. Aggregate gearing remains moderate at 34.6% as at end-Sep 2015 and is expected to remain manageable at below 40% post the acquisition of the Australian portfolio. All-in borrowing costs remain stable at 2.73% as at end Sep-2015 (vs: end-June 2015: 2.76%) and weighted average debt maturity is 3.6 years (end-June 2015: 3.8 years). Proportion of fixed rate debt has been increased to 72.1% (end-June 2015: 69.5%) with an average hedge maturity of 3.4 years. CapitaLand Commercial Trust Portfolio-wide occupancy declined from 98.0% to 96.4%, but remains higher than CBRE's core-CBD occupancy rate of 95.8%. The CCT SP – Buy; TP SGD1.65 decline was largely due to lower occupancy at Capital Tower on the back of space given up by Mizuho (this was well flagged). Total leasing activity for the quarter was 226,000sf (including retail space: 18,000sf), of which 36% were new leases with new demand supported by tenants from diverse trade segments. Committed occupancy at CapitaGreen increased to 85.5% as at end 3QFY15and to 87.7% as at 27 Oct (from 80.4% in 2QFY15). We expect flat reversions for the portfolio in the near-term given our expectation of Grade A rents settling at cSGD10 psf pm over the next 2 years, and average expiring rents for CCT’s major assets in 2016 (SGD9.69 psf pm) and in 2017 (SGD10.26 psf pm). Aggregate gearing of 30.1% given CCT debt headroom of SGD1.3bn (at 40% gearing) - sufficient to fund the purchase of the portion of CapitaGreen that it currently does not own (cSGD940m). Keppel REIT 9MFY15 attributable leasing activity including new signings renewals, forward renewals and reviews totalled 600,000sf (3QFY15: KREIT SP – Buy; TP SGD1.35 c200,000sf) with an average positive rent reversion of 16% for the 9-month period over previously signed rents (3QFY15: 14% positive reversion). 50,000sf of space returned back in 2HFY15 (largely by Standard Chartered Bank) has been c80% back-filled and occupancy for Singapore portfolio now stands at 98.8% (vs. 99.5% as at end 2QFY15). Overall, portfolio occupancy stands at 98.5% (Singapore: 98.8%; Australia: 97.3%) and as at end-3QFY15. 70% of leases are not due for expiry until 2018 and beyond with lease expiries for rest of 2015 minimal (at 0.6%) and a sizeable portion of 2016 leases expiries related to the Keppel group companies. Aggregate leverage is 42.6% and management remains comfortable with gearing at this level; though in our view, asset divestments to bring down gearing cannot be ruled out if the price is right. Also, with increased acceptance of perpetual securities as part of a REIT’s capital structure, we see this as an additional toolkit that management can use to reduce gearing. No debt maturities in 2015, minimal debt maturities in 2016 and management has commenced early refinancing of 2017 loans. Floating and unhedged debt proportion declined to 28% (1HFY15: 35%) while debt costs are unchanged at 2.5% with weighted average debt maturity at 3.6 years (vs. 1HFY15: 3.9 years). Suntec REIT Office and retail portfolio continue to maintain high occupancy levels at 98.9% and 96.5% respectively. Suntec City Office committed SUN SP – Buy; TP SGD1.85 occupancy levels are 99.5% compared with core CBD occupancy levels of 93.9%. Management has managed to renew almost all the leases expiring in 2015 with only 1.4% of total office NLA and 1.6% of total retail NLA expiring in 2015. Aggregate gearing remains moderate at 35.8% as at end-Sep 2015 (end-June: 35.3%). All-in borrowing costs remain stable at 2.74% as at end Sep-2015 (vs: end-June 2015: 2.70%) and weighted average debt maturity is 2.8 years (end-June 2015: 3.1 years). The performance of Suntec City mall post AEI will be keenly watched in subsequent quarters. Frasers Centrepoint Trust Causeway Point, Northpoint and Changi City Point (cumulatively c85% by NPI) continue to perform well with 4Q revenue growth FCT SP – Hold; TP SGD2.25 (6.4%, 2.8% and 2.2% y/y respectively) driving portfolio revenue growth (1.7% y/y). Smaller assets are facing headwinds – seasonal for Yew Tee Point and Anchor Point (revenue growth was down y/y for 4Q but up y/y for FY), but more structural for Bedok Point. Rent reversion remains steady at 7.1% for 4QFY15 and 6.3% for FY15. Shopper traffic growth was strong for 4Q at 8.2% y/y, partly due to specifics of the quarter (SG50, haze conditions, Singapore General Elections) but this uptrend has been prevalent for the past few quarters. Tenant sales were also up 2.1% y/y for 4Q – a trend prevalent for the past few quarters, suggesting signs of stabilisation in the retail operating environment. Management estimates occupancy costs at sub-16% (declined over the past year). Northpoint AEI will commence in March 2016 and is expected to complete in phases over 18 months, but the majority of the mall is expected to remain operational. This will help better integrate the existing Northpoint with Northpoint City, which is being developed by the sponsor. No additional details on the AEI – such as ROI, DPU or any other performance metrics. Waterway Point, in which sponsor FCL has a 33.3% stake (rest: 33.3% Far East and 33.3% Sekisui House), will be operational in Feb 2016 (pre-leasing is 90%+ and with closest competitor Compass Point closing for AEI, the mall is likely to be popular). CDL Hospitality Trusts Pace of RevPAR deterioration for Singapore hotels is slowing: 9MFY15 RevPAR for CDREIT's Singapore hotels was SGD176, a CDREIT SP – Buy; TP SGD1.80 6.4% y/y decline (9MFY14: SGD188) driven largely by a 6.1% y/y decline in ARR (to SGD199 from SGD212). While negativity persists, we note the pace of y/y RevPAR decline has eased (3QFY15: -5.7% vs. 1HFY15: -7.5%) and 3QFY15 ARR of SGD201 and occupancy of 90.2% are higher q/q (2QFY15 - ARR: SGD200 and occupancy: 86.5%). Our estimates assume a moderation in y/y RevPAR decline for 4Q (FY15e: c5% decline) and FY16e y/y RevPAR decline of c2%. The acquisition of Cambridge City Hotel is only marginally DPU and RNAV accretive in our view. Far East Hospitality Trust In line with industry trends, the pace of RevPAR decline slowed in 3QFY15 at 5.6% y/y (vs. 9M15: 6.3% y/y decline to SGD146 from FEHT SP – Buy; TP SGD0.80 SGD156) with ADR declining 6.0% y/y (vs. 9MFY15: 8.5% y/y decline to SGD171 from SGD187). For the serviced apartment segment the pace of decline remains unabated with RevPAU down 9.2% y/y (vs. 9M15: 7.3% decline to SGD207 from SGD223) largely driven by ADR decline of 7.2% y/y (vs. 9M15: 6.8% to SGD234 from SGD251). While this was partly attributable to refurbishments at Regency House (impacted occupancy), management noted that demand from "relocations' business" (which can garner better rates) remained weak in what is typically a strong period (key segments - Banking & Finance and Oil & Gas had a smaller representation in 3QFY15 vs. 3QFY14). Gearing is 31.4% with minimal near-term maturities and a weighted average debt maturity of 3.6 years. Average debt cost remains unchanged at 2.5% with 60% of debt fixed - management remains open to fixing more of the debt but at the right price.
Source: HSBC 2
Flashnote
FIG Real Estate CapitaLand (CAPL SP) Equity – Singapore
Buy Buy: Cheap on valuation grounds Target price (SGD) 3.90 Share price (SGD) 3.12 No surprises in the results; we expect 4Q15 skew Upside (%) 25.0 Performance 1M 3M 12M Operations on track; we expect sizeable contribution from Absolute (%) 14.4 -3.7 -2.2 Relative^ (%) 6.8 2.7 6.7 China residential in 4Q15 due to expected handovers ^Index Straits Times Index RIC CATL.SI Target price unchanged at SGD3.90; reiterate Buy Bloomberg CAPL SP
Market cap (USDm) 9,459 No surprises in the results; we expect 4Q skew: CAPL reported 9M15 revenue of Market cap (SGDm) 13,250 SGD3.0bn (c70% of HSBC FY15e: SGD4.2bn and c80% of consensus FY15e: SGD3.7bn) Enterprise value (SGDm) 13,416 Free float (%) 59% and PATMI of SGD818m. 9M15 operating PATMI was SGD574m (including the SGD171m fair value gain arising from change of use of three development projects to investment properties in 2Q15). Stripping this off, 9M15 operating PATMI was SGD404m 4 November 2015 (c60% of HSBC FY15e: SGD706m and consensus FY15e: SGD654m). Given accounting
Pratik Burman Ray*, CFA convention around revenue/profit recognition, quarterly earnings are unlikely to be a key Senior Property Analyst driver of share price action, in our view. We note a large chunk of handovers for China The Hong Kong and Shanghai Banking residential for FY15 are in 4Q – these are also higher margin projects and thus we expect Corporation Limited, Singapore Branch +65 6658 0611 4Q revenue and earnings skew. Post results, our estimates remain unchanged. [email protected] Operations on track; expect sizeable China residential contribution in 4Q: China Kristy Lee* Analyst residential saw a pickup with 6,492 units sold for 9MFY15 (9MFY14: 3,288 units) and The Hong Kong and Shanghai Banking cRMB11.6bn in sales (9MFY14: cRMB4.3bn) – 3Q momentum declined q/q after a very Corporation Limited, Singapore Branch strong 2Q, but still registered a 2x y/y increase. Delving deeper, sales are largely from the +65 6658 0616 [email protected] CLC business (9M15: 3,924 units vs. 9M14: 1,288 units), which contribute c60% on
Utkarsh Rastogi* consolidated basis (c80% on an effective basis) and are of higher value and margins Associate (CL Townships business sold 2,568 units in 9MFY15 vs. 2,000 units in 9MFY14). Bangalore We expect sizeable contribution from China residential in 4Q15 given expected handover View HSBC Global Research at: of c2,100+ units (38% of FY15), contributing to cRMB4.4bn in sales value (48% of http://www.research.hsbc.com FY15). Other operations also remain on track – mall operations are stable with *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not improvements in key metrics (shopper traffic, tenant sales and same-mall NPI growth) in registered/qualified pursuant to FINRA regulations Singapore and China; Singapore residential (-15% y/y by units sold and +2.5% y/y by Issuer of The Hongkong and Shanghai sales value for 9MFY15) remains soft but has stabilized; and the serviced apartment report: Banking Corporation Limited, business is on track to grow to 80,000 units by 2020 (from 40,000+ units as of end 3Q15). Singapore Branch MICA (P) 073/06/2015 TP unchanged at SGD3.90; reiterate Buy: Our RNAV is unchanged at SGD4.86 – MICA (P) 136/02/2015 accordingly our TP (pegged at an unchanged 20% discount to RNAV) is also unchanged MICA (P) 041/01/2015 at SGD3.90. At current price, CAPL is trading at 36% discount to RNAV (vs. average Disclaimer & Disclosures This report must be read historical discount of c30%) and a 23% discount to NTA (vs. historic average: 12% with the disclosures and premium). While improvements in core ROE (ex-revaluation and all one-offs) will take the analyst certifications in time (we see this as a relevant metric for investors given subjectivity around revaluations the Disclosure appendix, – both its quantum and sustainability), we believe this has largely been discounted in the and with the Disclaimer, price. Based on our target price of SGD3.90, upside is 25.0% and we reiterate Buy. which forms part of it
CapitaLand (CAPL SP) Real Estate abc 4 November 2015
Financials & valuation: CapitaLand Limited Buy
Financial statements RNAV Computation (SGDm) Per Share (SGD) % of GAV Year to December 2014 2015e 2016e 2017e* CapitaLand Residential 4,306 1.01 15% Profit & loss summary (SGDm) Singapore 3,860 0.90 13% Revenue 3,925 4,199 4,160 3,756 Other Asia 362 0.08 1% EBIT 2,437 2,011 2,109 1,999 Residential fund stakes 84 0.02 0% EBIT (ex-revaluations) 1,699 2,011 2,107 1,994 CapitaLand China 6,744 1.57 23% Net interest (439) (501) (504) (508) Residential 2,055 0.48 7% PBT 1,997 1,509 1,605 1,491 Mixed 2,404 0.56 8% Taxation (267) (202) (214) (199) JV and fund stakes 1,356 0.32 5% PAT from discontinued operations 29 0 0 0 China commercial 929 0.22 3% PAT 1,760 1,308 1,390 1,292 CapitaLand Commercial 3,520 0.82 12% Minority interest (599) (601) (606) (605) Singapore Office 613 0.14 2% PATMI 1,161 706 784 687 Singapore Industrial 436 0.10 2% Total PATMI revaluations (456) 0 0 0 Other Singapore commercial 132 0.03 0% PATMI (ex-revaluations) – core 705 706 784 687 Other commercial – Overseas 500 0.12 2% Cash flow summary (SGDm) Fund stakes (including CCT) 1,790 0.42 6% Property management 49 0.01 0% Cash flow from operations 999 773 849 749 CapitaLand Retail 9,946 2.32 35% Cash flow from investing activities (339) (100) (100) (100) CapitaLand Financial Services 435 0.10 2% Cash flow from financing (4,272) (283) (283) (283) Serviced Residences – Ascott Group 3,192 0.75 11% Other adjustments 55 - - - Others 563 0.13 2% Change in cash (3,557) 390 466 366 Total GAV 28,706 6.70 100% Opening cash balance 6,306 2,749 3,140 3,605 Less: Net liabilities (7,879) (1.84) Closing cash balance 2,749 3,140 3,605 3,971 RNAV 20,827 4.86 Balance sheet summary (SGDm) No. of shares (m) 4,283 Cash and cash equivalents 2,749 3,140 3,605 3,971 RNAV per share (SGD) 4.86 Total current assets 11,580 11,970 12,436 12,802 Premium / (discount) to RNAV -20% Non-current assets 32,533 32,199 32,233 32,271 Target price (SGD) 3.90 (Rounded up) Total assets 44,113 44,169 44,669 45,073 CapitaLand Limited: PBV chart Total debt 15,986 16,086 16,186 16,286 Total liabilities 20,905 19,619 19,719 19,819 2.5 Total equity 23,209 24,550 24,951 25,254 Shareholder’s funds 16,758 18,100 18,500 18,804 2.0 +1SD: 1.53 Ratio, growth and per share analysis 1.5 Av g: 1.12 Year to December 2014 2015e 2016e 2017e* 1.0 Y-o-Y % Change 0.5 -1SD: 0.71 Revenue 12% 7% -1% -10% EBIT 8% -17% 5% -5% PBT 12% -24% 6% -7% 0.0 PATMI 38% -39% 11% -12% Jan-05 Sep-07 May-10 Feb-13 Oct-15 EPS (basic) 38% -39% 11% -12% CAPL PBV Avg Trendline Ratios (%) +1 std dev -1 std dev Source: Bloomberg ROE 7% 4% 4% 4% ROE (ex-revaluations) – core 4% 4% 4% 4% Performance relative to FSSTI ROA (ex-revaluations) – core 4% 5% 5% 4% 500 EBITDA margin 62% 48% 51% 53% EBITDA/net interest expense 5.5 4.0 4.2 3.9 400 Net debt/equity 57% 53% 50% 49% Net debt/EBITDA (x) 5.4 6.4 6.0 6.2 300 Per share data (SGD) EPS (basic) 0.27 0.17 0.18 0.16 200 EPS (diluted) 0.26 0.15 0.16 0.14 DPS 0.09 0.09 0.09 0.09 100 NTA per share 3.83 4.14 4.24 4.31 BV per share 3.94 4.25 4.34 4.42 0 Jan-05 Sep-07 May-10 Feb-13 Oct-15
*In this note, we introduce our 2017 estimates. Given accounting convention around revenue and profit CAPL FSSTI recognition for residential projects in China and Singapore, there is a high risk of changes to these estimates as we get more clarity around project sales and completions in 2016. Source: Bloomberg
2
Flashnote
Telecoms, Media & Technology Media Media Nusantara Citra (MNCN IJ) Equity – Indonesia
Buy Buy: Still offers value Target price (IDR) 2100.00 Share price (IDR) 1740.00 3Q was operationally fine except for unrealized forex losses Upside/Downside (%) +20.7 Performance 1M 3M 12M Muted outlook for 2016 but we are cautious in our forecasts Absolute (%) -2.5 -15.9 -37.7 Relative^ (%) -9.5 -11.0 -30.2 ^Index JAKARTA S E COMPOSITE TP of IDR2,100 (IDR2,300 earlier); still below historical PE RIC MNCN.JK average; reiterate Buy Bloomberg MNCN IJ
Market cap (USDm) 1,828 Operationally sound. Media Nusantara Citra (MNCN), the Indonesian free-to-air TV Market cap (IDRb) 24,840 company’s 3Q revenues came in at IDR1,699.5bn (-6.5% q-o-q, +1.7% y-o-y) vs. the 8% Enterprise value (IDRb) 26,847 Free float (%) 33 y-o-y decline for the sector for 2015 estimated by the Indonesia Advertising Co Association. We estimate EBITDA came in at IDR603bn (+2.7% y-o-y) with margins stable at c36% (+30bp y-o-y). Programming costs were up 5.7% y-o-y in 3Q, as production costs rose due to Ramadhan programmes in July and August. However, this was offset by lower G&A (-6.9% y-o-y). Operationally, we think numbers were good with 9M15 revenues and 4 November 2015 operating profits equal to c78% and c74%, respectively, of our FY15 forecasts. The Rajesh Raman* company however reported a net loss of IDR46.9bn (-111% y-o-y) for 3Q, driven by Analyst The Hongkong and Shanghai Banking unrealized forex losses of IDR311bn in the quarter. Excluding this and other non- Corporation Limited, Singapore Branch exceptional losses of IDR81bn, we estimate adjusted net profits at IDR345bn (-15% y-o-y) +65 6658 0608 [email protected] for 3Q. MNC continues to lead audience viewership with a c35% share in October 2015. Luis Hilado* Conference call highlights. 1) Forex loss is almost entirely driven by the USD250m Analyst The Hongkong and Shanghai Banking syndicated bank loan (3-month Libor + 350bp, due in 36 months) that the company Corporation Limited, Singapore Branch borrowed in September 2014. Management agreed that refinancing via rupiah debt may be +65 6658 0607 a good alternative but was not looking to hedge the USD exposure due to higher costs. [email protected] The company has very limited foreign currency exposure in programming costs. 2) View HSBC Global Research at: http://www.research.hsbc.com Management doesn’t expect a stellar 2016 and projects 4-5% adspend growth in-line with *Employed by a non-US affiliate of weaker macro trends. We are in-line with guidance. 3) Management expect margins to HSBC Securities (USA) Inc, and is not improve driven by a flat outlook for content costs and studio synergies to kick in. 4) Post registered/qualified pursuant to FINRA regulations the Supreme Court rescinding digital TV licenses, management expects a delay in Issuer of The Hongkong and Shanghai switchover timelines beyond 2018 and doesn’t expect an increase channel offerings as such. report: Banking Corporation Limited, Singapore Branch Cut TP to IDR2,100; maintain Buy. We raise our 2015-16e revenue estimates by MICA (P) 073/06/2015 3%/1% respectively, but are more cautious on margin expansion by incorporating higher MICA (P) 136/02/2015 programming costs. Consequently, we have cut recurring net profits by 7%/9% for 2015- MICA (P) 041/01/2015 Disclaimer & 16e and target price by 9%. We are 8-9% below the Street on net profits for 2015-16e and Disclosures fairly cautious in our forecasts; but as we had highlighted in Looming ratings downgrade, This report must be read but correction overdone (29 September), the stock still trades at 13.8x 2016e PE for a with the disclosures and 4.8% dividend yield, well below its long run PE average of 16x and offers 21% upside. the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Media Nusantara Citra (MNCN IJ) Media abc 4 November 2015
Financials & valuation
Financial statements Key forecast drivers Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (IDRb) FTA TV ad spend share (%) 64 64 63 63 MNC FTA market share (%) 37 36 36 36 Revenue 6,666 6,589 6,889 7,532 Program costs as % of sales (%) 39 40 39 38 EBITDA 2,779 2,590 2,800 3,163 Capex/sales (%) 19 15 7 5 Depreciation & amortisation -176 -125 -132 -144 Operating profit/EBIT 2,604 2,465 2,668 3,018 Net interest 28 -112 -170 -163 PBT 2,544 1,590 2,238 2,595 Valuation data HSBC PBT 2,626 2,343 2,488 2,845 Year to 12/2014a 12/2015e 12/2016e 12/2017e Taxation -660 -644 -597 -683 Net profit 1,762 825 1,519 1,791 EV/sales 3.9 4.1 3.9 3.5 HSBC net profit 1,844 1,577 1,769 2,041 EV/EBITDA 9.3 10.4 9.5 8.5 Cash flow summary (IDRb) EV/IC 2.6 2.5 2.3 2.2 PE* 13.2 15.5 13.8 11.9 Cash flow from operations 1,220 1,842 1,791 1,881 PB 2.7 2.7 2.6 2.5 Capex -1,289 -988 -482 -377 FCF yield (%) -0.3 3.6 5.5 6.3 Cash flow from investment -2,736 -988 -482 -377 Dividend yield (%) 3.6 3.2 4.8 5.7 Dividends -606 -883 -771 -1,170 * Based on HSBC EPS (diluted) Change in net debt 2,113 913 -157 47
FCF equity -69 854 1,309 1,505 Balance sheet summary (IDRb) Price relative Intangible fixed assets 249 249 249 249 3700.00 3700.00 Tangible fixed assets 3,246 4,110 4,460 4,692 Current assets 8,670 8,316 8,228 8,678 3200.00 3200.00 Cash & others 1,132 799 500 500 2700.00 2700.00 Total assets 13,609 14,119 14,381 15,063 Operating liabilities 1,033 1,021 990 1,005 2200.00 2200.00 Gross debt 3,182 3,763 3,307 3,353 Net debt 2,050 2,964 2,807 2,853 1700.00 1700.00 Shareholders' funds 8,907 8,961 9,310 9,700 Invested capital 10,000 10,855 11,447 12,115 1200.00 1200.00 2013 2014 2015 2016 Media Nusantara Citra Rel to JAKARTA S E COMPOSITE Source: HSBC Ratio, growth and per share analysis
Year to 12/2014a 12/2015e 12/2016e 12/2017e Note: Priced at close of 03 Nov 2015 Y-o-y % change Revenue 2.2 -1.1 4.6 9.3 EBITDA 2.1 -6.8 8.1 13.0 Operating profit 1.7 -5.3 8.2 13.1 PBT 6.3 -37.5 40.7 16.0 Ratios (%) Revenue/IC (x) 0.8 0.6 0.6 0.6 ROIC 23.0 14.1 17.5 18.9 ROE 22.6 17.7 19.4 21.5 ROA 16.6 7.6 12.7 14.0 EBITDA margin 41.7 39.3 40.6 42.0 Operating profit margin 39.1 37.4 38.7 40.1 EBITDA/net interest (x) 23.2 16.5 19.4 Net debt/equity 21.8 31.4 28.7 28.0 Net debt/EBITDA (x) 0.7 1.1 1.0 0.9 CF from operations/net debt 59.5 62.1 63.8 65.9 Per share data (IDR) EPS reported (diluted) 125.76 58.85 108.45 127.81 HSBC EPS (diluted) 131.60 112.57 126.29 145.65 DPS 63.00 55.00 83.50 100.00 Book value 635.69 639.54 664.48 692.30
2
Company report Industrials Conglomerates Equity – Singapore
Jardine Matheson (JM SP)
Hold Hold: weak 3Q15 highlights valuation is not compelling Target price (USD) 55.50 Interim management statement highlights 3Q15 y-o-y earnings Share price (USD) 55.01 Upside/Downside (%) +0.9% decline, driven by Astra, Dairy Farm and currency Dec 2014 a 2015 e 2016 e HSBC EPS (USD) 4.22 3.92 4.35 3Q15 performance in line with HSBC’s forecast, which for HSBC PE 13.0 14.0 12.6 2015e is 5% below consensus Performance 1M 3M 12M Absolute (%) 17.2 6.6 -7.5 Maintain Hold at lower target price of USD55.5 (down Relative^ (%) 7.5 16.2 10.6
from USD60)
Jardine Matheson (JM) profit down y-o-y in 3Q15. Today issued its Interim Management Statement for 3Q15. JM said that the difficult trading conditions experienced by many of the Group’s businesses in 1H15 continued into 3Q15 and as a result earnings were ‘somewhat’ below those recorded in 3Q14. In our JM recurring profit forecast for 2H15, we assume a 6% y-o-y decline. Therefore, in aggregate the performance appears to be in line with our forecast, which for 2015e is 5% below consensus.
Dairy Farm (DF) and Astra had lower y-o-y profit in 3Q15. In the statement, JM stated that while DF’s businesses in North Asia generally performed well, trading in Singapore, Malaysia and Indonesia continued to be soft, leading to an overall reduction in underlying 4 November 2015 earnings. Astra recently reported a 22% y-o-y decline in USD earnings in 3Q15. In contrast HK Land enjoyed positive rental reversions and steady occupancy in its HK office portfolio Mark Webb* Head of Conglomerate and Transport and its residential activities benefited from completions in mainland China and Singapore. Research, Asia Pacific Other businesses varied with Jardine Pacific and Mandarin Oriental relatively steady, JLT The Hongkong and Shanghai Banking mixed and Jardine Motors down y-o-y. In this report, we factor in changes to business Corporation Limited +852 2996 6574 forecasts which in aggregate cause no change in our recurring net profit estimates for JM. [email protected] Maintain Hold with new fair value TP of USD55.5 (from USD60). We cut our appraised
valuation to USD74 per share (from USD81) to reflect primarily a lower target price for View HSBC Global Research at: http://www.research.hsbc.com Dairy Farm and reduced valuation of Jardine Motors. We continue to set our target price for *Employed by a non-US affiliate of JM at a 25% discount to our appraised valuation, giving us a lower TP of USD55.5 (from HSBC Securities (USA) Inc, and is not USD60). Our target price implies a 1% upside and we argue the valuation is not compelling registered/qualified pursuant to FINRA regulations at current levels. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in ^Index STRAITS TIMES INDEX Enterprise value (USDm) 33,810 the Disclosure appendix, Index level 2,974 Free float (%) 47 RIC JARD.SI Market cap (USDm) 38,637 and with the Disclaimer, Bloomberg JM SP Source: HSBC which forms part of it Source: HSBC
Jardine Matheson (JM SP) Conglomerates abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (USDm) EV/sales 1.1 1.1 1.0 0.9 EV/EBITDA 9.2 9.7 8.5 7.7 Revenue 39,921 36,787 39,054 42,404 EV/IC 1.0 1.0 1.0 0.9 EBITDA 4,641 4,350 4,800 5,134 PE* 13.0 14.0 12.6 11.0 Depreciation & amortisation -1,007 -1,206 -1,324 -1,446 PB 1.0 1.0 0.9 0.9 Operating profit/EBIT 3,634 3,143 3,476 3,688 FCF yield (%) 0.8 4.7 10.8 12.6 Net interest -116 -99 -74 -1 Dividend yield (%) 2.6 2.4 2.5 2.9 PBT 4,910 4,115 4,499 4,957 HSBC PBT 4,451 4,137 4,499 4,956 * Based on HSBC EPS (diluted) Taxation -840 -719 -795 -844 Net profit 1,710 1,411 1,592 1,837 HSBC net profit 1,534 1,433 1,592 1,836 Price relative Cash flow summary (USDm) 68.00 68.00 Cash flow from operations 4,456 4,216 4,597 5,040 Capex -1,441 -1,431 -1,508 -1,498 63.00 63.00 Cash flow from investment -1,798 -1,731 -1,508 -1,498 58.00 58.00 Dividends -962 -910 -963 -1,116 Change in net debt 96 -624 -1,844 -2,169 53.00 53.00 FCF equity 2,244 2,099 2,423 2,791 48.00 48.00 Balance sheet summary (USDm) 43.00 43.00 Intangible fixed assets 2,679 2,848 3,021 3,192 2013 2014 2015 2016 Tangible fixed assets 30,999 31,055 31,066 30,947 Jardine Matheson Rel to STRAITS TIMES INDEX Current assets 17,768 18,369 20,753 23,719 Source: HSBC Cash & others 5,315 6,662 8,506 10,675 Total assets 66,457 68,774 71,810 75,371 Operating liabilities 8,621 8,034 8,539 9,256 Note: Priced at close of 04 Nov 2015 Gross debt 11,484 12,207 12,207 12,207 Net debt 6,169 5,545 3,701 1,532 Shareholders' funds 19,267 20,258 21,521 23,000 Invested capital 42,093 42,160 37,794 37,927
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 1.2 -7.9 6.2 8.6 EBITDA 0.0 -6.3 10.4 7.0 Operating profit 0.9 -13.5 10.6 6.1 PBT 1.7 -16.2 9.3 10.2 HSBC EPS 3.8 -7.2 11.1 15.3 Ratios (%) Revenue/IC (x) 1.0 0.9 1.0 1.1 ROIC 7.3 6.2 7.2 8.1 ROE 8.1 7.3 7.6 8.2 ROA 6.4 5.1 5.4 5.6 EBITDA margin 11.6 11.8 12.3 12.1 Operating profit margin 9.1 8.5 8.9 8.7 EBITDA/net interest (x) 40.0 43.8 64.6 8782.6 Net debt/equity 13.8 11.8 7.5 2.9 Net debt/EBITDA (x) 1.3 1.3 0.8 0.3 CF from operations/net debt 72.2 76.0 124.2 329.0 Per share data (USD) EPS reported (diluted) 4.71 3.86 4.35 5.02 HSBC EPS (diluted) 4.22 3.92 4.35 5.02 DPS 1.45 1.32 1.39 1.62 Book value 53.04 55.38 58.83 62.88
2
Flashnote
Industrials Machinery Yangzijiang Shipbuilding (YZJSGD SP) Equity – Singapore
Reduce Reduce: Going downhill Target price (SGD) 0.99 Share price (SGD) 1.26 3Q15 core net income fell by 23% y-o-y; headline net income Upside/Downside (%) -21.4% included gains from sales, losses on investments etc. Performance 1M 3M 12M Absolute (%) 10.5 -0.8 12.0 YZJ’s core earnings are expected to fall in 2016 due to a fall Relative^ (%) 3.8 6.5 23.9 in shipbuilding margins and returns on HTM investments ^Index Straits Times Index RIC YAZG.SI Reiterate Reduce rating but cut TP to SGD0.99 from SGD1.01 Bloomberg YZJSGD SP Market cap (USDm) 4,357 due to a 3 to 7% cut in our 2016-17 estimates Market cap (SGDm) 6,095
Enterprise value (CNYm) 22,201 Free float (%) 46%% Core net income in line. YZJ reported a 3Q15 headline net income of RMB681m down
16% y-o-y and 34% q-o-q. The headline number included several one-offs like compensation of RMB557m received from the government for relocation of old yard (balance RMB158m will be recognized later ), loss of RMB207m on disposal of financial assets; loss from sale of investments of RMB101m, forex losses of 158m and RMB130m related to USD debt revaluation and RMB151m of other financial income. Excluding the one offs core net income fell by 23% y-o-y and 8% q-o-q to RMB569m. The fall in core net income is due to lower HTM investment returns (down 17% y-o-y and 25% q-o-q) and 4 November 2015 lower shipbuilding margins (y-o-y down but were up q-o-q). YZJ won new orders worth Tarun Bhatnagar* USD750m in 3Q15 (vs no orders in 3Q14 and USD510m in 2Q15). Order backlog stands Analyst at USD4.8bn or 2.4x 2014 shipbuilding revenues and margins. The Hongkong and Shanghai Banking Corporation, Singapore Branch New orders on target. New orders y-t-d reached USD1.63bn vs a target of USD2bn +65 6658 0614 which the company had earlier expected to reach by 3Q15. The slower than expected new [email protected] order wins was attributed to timing and intense competition). YZJ expects good demand
from Chinese customers in this segment from the LPG/LNG segments View HSBC Global Research at: http://www.research.hsbc.com HTM financial investments are 45% of net assets. YZJ’s investments in China’s *Employed by a non-US affiliate of shadow lending sector (called held-to-maturity or HTM investments) fell by 9% q-o-q but HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA remained at an elevated level of RMB9.7bn – 35% of net assets. HTM deployment regulations materially changes YZJ’s risk profile as it carries higher balance sheet and execution risk Issuer of report: The Hongkong and and diverts management attention. In addition, losses from investments in Chinese A Shanghai Banking Corporation Limited, share market recorded in 3Q15 also raises some red flags. Singapore Branch MICA (P) 073/06/2015 Earnings are on a downward trend. We expect core earnings to fall in 2015 as MICA (P) 136/02/2015 shipbuilding margins weaken (margins in 9m15 were 17.6% versus 20.2% in FY14) as MICA (P) 041/01/2015 lower priced vessels contracts in the last few years start dominating the revenue risk Disclaimer & (average price of YZJ’s backlog has fallen by c8% since the end 2014).
Disclosures Reiterate Reduce and cut target price to SGD0.99 from SGD 1.01: We cut our target This report must be read with the disclosures and price to SGD0.99 from SGD1.01, driven by a 3 to 7% cut in our 2016-17 net income the analyst certifications in estimates. Our target price is based on a PB, EV/EBITDA and DCF average for the the Disclosure appendix, shipbuilding business and a 0.5x PB multiple for the financial business (unchanged). Key and with the Disclaimer, upside risks include better-than-expected new orders and earnings. which forms part of it
Yangzijiang Shipbuilding (YZJSGD SP) Machinery abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 12/2014a 12/2015e 12/2016e 12/2017e Year to 12/2014a 12/2015e 12/2016e 12/2017e Profit & loss summary (CNYm) EV/sales 1.6 1.4 1.6 1.4 EV/EBITDA 6.6 7.1 8.1 7.8 Revenue 15,354 16,400 14,306 15,424 EV/IC 1.3 1.2 1.1 1.0 EBITDA 3,710 3,138 2,789 2,835 PE* 6.3 9.1 10.1 10.1 Depreciation & amortisation -430 -471 -508 -524 PB 1.1 1.0 0.9 0.9 Operating profit/EBIT 3,280 2,668 2,280 2,311 FCF yield (%) 35.3 5.3 -0.5 -1.1 Net interest 197 -255 -99 -127 Dividend yield (%) 4.6 4.1 3.0 3.0 PBT 3,522 3,286 2,187 2,189 HSBC PBT 3,953 3,206 2,695 2,713 *Based on HSBC EPS (diluted) Taxation -472 -802 -539 -543 Net profit 3,053 2,486 1,649 1,648 HSBC net profit 3,483 2,407 2,157 2,172 Price relative
Cash flow summary (CNYm) 1.51 1.51 Cash flow from operations 9,082 3,330 1,076 989 1.41 1.41 Capex -729 -1,039 -650 -650 1.31 1.31 Cash flow from investment -1,002 -1,039 -650 -650 1.21 1.21 Dividends -953 -1,072 -741 -664 1.11 1.11 Change in net debt -1,448 2,268 815 825 1.01 1.01 FCF equity 7,886 953 -83 -185 0.91 0.91 0.81 0.81 Balance sheet summary (CNYm) 0.71 0.71 Intangible fixed assets 0 0 0 0 2013 2014 2015 2016 Tangible fixed assets 9,158 9,726 9,867 9,993 Yangzijiang Shipbuilding Rel to STRAITS TIMES INDEX Current assets 25,762 26,604 25,567 27,905 Source: HSBC Cash & others 5,978 7,052 6,151 6,632 Total assets 40,778 46,682 46,292 49,261 Operating liabilities 10,508 11,186 9,466 9,623 Note: Priced at close of 3 November 2015 Gross debt 8,050 11,393 11,307 12,613 Net debt 2,072 4,340 5,156 5,981 Shareholders’ funds 20,473 22,358 23,775 25,282 Invested capital 18,461 18,092 19,817 21,643
Ratio, growth and per share analysis Year to 12/2014a 12/2015e 12/2016e 12/2017e Y-o-y % change Revenue 7.1 6.8 -12.8 7.8 EBITDA -21.0 -15.4 -11.1 1.7 Operating profit -25.6 -18.7 -14.5 1.3 PBT -23.7 -6.7 -33.4 0.1 HSBC EPS 13.9 -30.9 -10.4 0.7 Ratios (%) Revenue/IC (x) 0.9 0.9 0.8 0.7 ROIC 16.6 11.0 9.1 8.4 ROE 18.2 11.2 9.4 8.9 ROA 7.9 6.5 4.1 4.0 EBITDA margin 24.2 19.1 19.5 18.4 Operating profit margin 21.4 16.3 15.9 15.0 EBITDA/net interest (x) 12.3 28.1 22.3 Net debt/equity 9.8 18.9 21.2 23.1 Net debt/EBITDA (x) 0.6 1.4 1.8 2.1 CF from operations/net debt 438.4 76.7 20.9 16.5 Per share data (CNY) EPS reported (diluted) 0.80 0.65 0.43 0.43 HSBC EPS (diluted) 0.91 0.63 0.56 0.57 DPS 0.26 0.23 0.17 0.17 Book value 5.21 5.69 6.05 6.43
2 Economics - Data Reactions 04 November 2015
India Pranjul Bhandari October services PMI rises, offsetting weakness in Chief India Economist manufacturing HSBC Securities and Capital Markets (India) Private Limited +9122 2268 1841 Business activity in services rose to an eight month high in October on the back of [email protected] stronger new business flows, which also pulled up future expectations for activity. The overall composite PMI recovered as stronger services offset the softening in manufacturing. In fact the composite index is running at a pace higher than the Prithviraj previous quarter and previous year average. This faint recovery in the index gives Srinivas us confidence that for FY16 as a whole, GVA growth is likely to improve marginally to 7.4% y-o-y from 7.2% in FY15. Meanwhile on the price front, service providers Economist HSBC Securities and Capital continued to cut final prices to boost demand even though input prices rose Markets (India) Private Limited +9122 2268 1076 during the month. [email protected]
Facts View HSBC Global Research at: http://www.research.hsbc.com - Business activity improved in October (53.2 vs. 51.3 in September) as both new businesses and future activity expectations picked up. Prices charged remained below 50, but input prices rose Issuer of report above the watermark pointing to deterioration in margins. HSBC Securities and Capital Markets (India) Private Limited - The pick-up in services offset the softening in PMI Manufacturing; the composite output index Disclaimer & Disclosures rose to 52.6 vs 51.5 in September. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, Implications which forms part of it More shades of silver …
Services activity rose to an eight month high, with activity improving in three of the six surveyed sectors, primarily 'post & telecommunication'. The increase in new business flows also helped buoy future business expectations (which improved from its series low in the previous month).
Moreover, staffing levels were left unchanged after modest retrenchment seen in the previous month. While these are good signs, it still represents only a marginal improvement from a low base.
Nevertheless, PMIs show that services activity for Jan-Oct has improved over the last year (51.6 in 2015 vs. 50.2 in 2014), unlike in manufacturing where the PMI readings for the corresponding periods were broadly unchanged (see: India - Between grey and silver: Manufacturing PMI slows but some others improve, 03 November 2015 ).
Services firms cut prices to boost demand
There was some deterioration in margins as service providers continued to cut final prices to improve "competitiveness" even as input prices inched up. A somewhat similar trend was noted for manufacturing as well where input prices rose more than output prices. It is likely that some of this is led by pre Diwali season discounts.
The start to the December quarter has been encouraging Economics - Data Reactions India 04 November 2015
The recovery in the composite PMI is running marginally above the previous quarter average (52.6 vs. 52 last quarter). In fact trend growth in the composite index has been higher so far into the year compared to last year (52.2 vs. 51 last year). For FY16 as a whole, we expect GVA growth to improve marginally to 7.4% y-o-y from 7.2% in FY15.
Pranjul Bhandari, Chief India Economist
Prithviraj Srinivas, Economist
Stuti Saksena, Economics Associate
Source: Markit, HSBC
Chart 1. PMIs indicate a divergence in momentum between services and manufacturing
Source: Markit, HSBC
2
Company report Nat Resources & Energy Electric Utilities Equity – India
Power Grid Corp Of India (PWGR IN)
Buy Buy: Q2FY16 result – growth continues Target price (INR) 168.00 Share price (INR) 131.65 Company reports 21% YoY profit growth in Q2FY16; Upside/Downside (%) +27.6 we expect growth to be sustained over the next few years Mar 2015 a 2016 e 2017 e HSBC EPS (INR) 9.50 12.05 13.17 Biswanath Chariyali–Agra line commissioning imminent; HSBC PE 13.9 10.9 10.0 we see capitalization of INR120bn for this project alone vs our Performance 1M 3M 12M Absolute (%) 0.8 -6.4 -9.1 total forecast of INR225bn for FY16 Relative^ (%) -0.6 -0.7 -4.8 Retain our Buy rating and target price of INR168; no changes to earnings estimates
Earnings growth continues: Power Grid reported profit of INR14.5bn in Q2FY16, +21% vs last year, and EBITDA margin expansion of 188bps YoY to 87.8%, in line with our FY16 expectation. Transmission income increased by 17% YoY, while Consultancy and Telecom 4 November 2015 revenue increased by 63% YoY and 55% YoY, respectively. We expect the company to
Arun Kumar Singh* continue to grow earnings at c22% CAGR over FY15-18. Analyst HSBC Securities and Capital Markets Biswanath Chariyali–Agra line commissioning imminent: The company is expected to (India) Private Limited commission its Biswanath Chariyali–Agra line soon, which will facilitate 6GW power +91 22 2268 1778 transmission between Northern and North-Eastern India. This will add another INR120bn to [email protected] capitalization. We are currently factoring in capex and capitalization of INR225bn for FY16 Darpan Thakkar* Analyst and, given the current trend, the company is likely to exceed this. Power Grid may slightly HSBC Securities and Capital Markets slow capex, however, to avoid dilution, as it has stated previously; we are factoring in 15% (India) Private Limited dilution in FY17. Power Grid has been very successful in the tariff based bidding projects and +91 22 6164 0695 [email protected] it expects to earn a similar or higher return on equity for projects won under tariff-based
bidding. We expect the company to continue with the same level of capitalization over FY17.
View HSBC Global Research at: Retain Buy with a TP of INR168: We use a DCF to value Power Grid, assuming a COE of http://www.research.hsbc.com 11.8%, based on a risk-free rate of 8.0%, risk premium of 4.75% and beta of 0.8, from *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not Bloomberg. Our target price implies upside of 27.6% and we retain our Buy rating. Our target registered/qualified pursuant to FINRA regulations price implies 1.7x FY 2017e PB and 12.8x FY 2017e PE. We have not made any changes to Issuer of report: HSBC Securities and our earnings forecasts. Downside risks to our valuation include slower capacity additions Capital Markets and longer than expected delays in the commissioning of projects. (India) Private Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in ^Index BOMBAY SE SENSITIVE INDEX Enterprise value (INRm) 1,742,413 Index level 26,591 Free float (%) 42 the Disclosure appendix, RIC PGRD.BO Market cap (USDm) 10,501 and with the Disclaimer, Bloomberg PWGR IN Market cap (INRm) 688,739 which forms part of it Source: HSBC Source: HSBC
Power Grid Corp Of India (PWGR IN) Electric Utilities abc 4 November 2015
Financials & valuation
Financial statements Key forecast drivers Year to 03/2015a 03/2016e 03/2017e 03/2018e Year to 03/2015a 03/2016e 03/2017e 03/2018e Profit & loss summary (INRm) Capex (INRbn) 225 225 225 240 Capitalisation (INRbn) 225 225 224 225 Revenue 171,772 209,537 240,955 272,054 Regulated Equity (INRbn) 338 406 473 540 EBITDA 147,984 181,239 209,462 237,175 Depreciation & amortisation -50,854 -60,167 -70,493 -80,807 Operating profit/EBIT 97,130 121,072 138,969 156,368 Net interest -39,793 -42,754 -46,191 -49,228 PBT 63,365 79,746 93,737 113,139 HSBC PBT 62,894 79,746 93,737 113,139 Taxation -13,208 -16,729 -19,684 -23,759 Valuation data Net profit 50,157 63,017 74,053 89,380 Year to 03/2015a 03/2016e 03/2017e 03/2018e HSBC net profit 49,686 63,017 74,053 89,380 Cash flow summary (INRm) EV/sales 9.4 8.3 7.4 6.9 EV/EBITDA 10.9 9.6 8.5 7.9 Cash flow from operations 90,023 109,254 137,491 166,480 EV/IC 1.2 1.1 1.1 1.0 Capex -224,500 -224,500 -224,500 -239,500 PE* 13.9 10.9 10.0 8.9 Cash flow from investment -222,750 -222,750 -224,370 -239,500 PB 1.8 1.6 1.4 1.3 Dividends -12,144 -14,270 -19,188 -21,979 FCF yield (%) -20.6 -17.1 -12.9 -11.6 Change in net debt 144,871 127,765 35,867 94,999 Dividend yield (%) 1.5 1.8 2.1 2.4 FCF equity -140,034 -116,673 -87,968 -79,019 * Based on HSBC EPS (diluted)
Balance sheet summary (INRm) Intangible fixed assets 0 0 0 0 Price relative Tangible fixed assets 1,445,240 1,609,572 1,763,579 1,922,272 Current assets 57,841 63,017 121,118 120,144 158.00 158.00 Cash & others 7,065 3,174 53,634 45,062 Total assets 1,511,317 1,679,077 1,891,054 2,048,773 138.00 138.00 Operating liabilities 150,073 145,210 145,796 149,688 Gross debt 939,461 1,063,335 1,149,662 1,236,088 Net debt 932,395 1,060,161 1,096,028 1,191,027 118.00 118.00 Shareholders' funds 382,138 430,886 555,950 623,351 Invested capital 1,345,942 1,524,205 1,685,268 1,847,667 98.00 98.00
78.00 78.00 2013 2014 2015 2016 Ratio, growth and per share analysis Power Grid Corp Of India Rel to BOMBAY SE SENSITIVE INDEX Year to 03/2015a 03/2016e 03/2017e 03/2018e Source: HSBC
Y-o-y % change Note: Priced at close of 03 Nov 2015 Revenue 14.1 22.0 15.0 12.9 EBITDA 15.8 22.5 15.6 13.2 Operating profit 10.5 24.6 14.8 12.5 PBT -0.1 25.9 17.5 20.7 HSBC EPS 5.3 26.8 9.4 12.9 Ratios (%) Revenue/IC (x) 0.1 0.1 0.2 0.2 ROIC 6.1 6.7 6.8 7.0 ROE 13.7 15.5 15.0 15.2 ROA 5.7 6.1 6.2 6.5 EBITDA margin 86.2 86.5 86.9 87.2 Operating profit margin 56.5 57.8 57.7 57.5 EBITDA/net interest (x) 3.7 4.2 4.5 4.8 Net debt/equity 244.0 246.0 197.1 191.1 Net debt/EBITDA (x) 6.3 5.8 5.2 5.0 CF from operations/net debt 9.7 10.3 12.5 14.0 Per share data (INR) EPS reported (diluted) 9.59 12.05 13.17 14.87 HSBC EPS (diluted) 9.50 12.05 13.17 14.87 DPS 2.00 2.35 2.75 3.15 Book value 73.04 82.36 92.48 103.69
2
Company report Telecoms, Media & Technology It Services Equity – India
HCL Technologies (HCLT IN)
Buy Looking beyond the short-term volatility Target price (INR) 1010.00 Larger and integrated Infra deals may have resulted in recent Share price (INR) 876.10 Upside/Downside (%) 15.3 growth volatility, but show good 6-12 month visibility Jun 2015 a 2016 e 2017 e HSBC EPS 51.28 53.88 60.78 Margins may not recover (unlike the historical precedent), but HSBC PE 17.1 16.3 14.4 even stable margins are good enough for the stock Performance 1M 3M 12M Absolute (%) 2.2 -6.7 11.5 We retain our Buy rating and INR1010 TP, and see a Relative^ (%) 0.8 -1.1 16.9
favourable risk-reward profile with an undemanding 14x FY17e valuation
We expect IMS (Infra services) growth to accelerate again in the coming quarters. The recent weakness in IMS growth has raised concerns on HCLT's outlook. We see this as a temporary blip in growth. We think HCLT now has a much higher focus and is winning larger deals (USD300m-1bn) from just mid-size deals (USD100-200m) in the past. This has resulted in lumpiness in growth and revenue volatility in recent quarters. We expect multiple similar 4 November 2015 deals to ramp up in the coming quarters, resulting in stronger growth (albeit potentially not Yogesh Aggarwal* linear, as in the past). Consequently, even if the extent of acceleration in 2Q is still uncertain, Analyst HSBC Securities and Capital Markets visibility of growth for 2H16/FY17 remains high and we expect growth to recover to double (India) Private Limited digits (11-12%) over FY17/18. Outside IMS, while applications business remains weak, deal +9122 2268 1246 momentum can improve in ER&D business, as we witnessed in FY15. This remains an upside [email protected] risk to our top-line estimates. Vivek Gedda* Analyst Margins may not recover (unlike the historical precedent), but should at least remain HSBC Securities and Capital Markets stable from here: EBIT margins have fallen sharply, by 400-500 bps, in the past two years. (India) Private Limited This has largely been led by the change in deal profile in the IMS business, in our view. Chart +91 22 3396 0693 [email protected] 2 shows that in FY10/11, margins for HCLT fell sharply as the first stage of IMS deals ramped
up. However, post the early ramp-up/transition years, margins improved as the company benefited from operating leverage (explained in detail later in this note). We believe the recent View HSBC Global Research at: http://www.research.hsbc.com fall in margins can be attributed to the second stage of IMS business, where deal sizes and *Employed by a non-US affiliate of complexity have increased significantly, leading to early-stage margin declines. HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA However, we also believe that first-stage IMS deals are coming up for renewal and the regulations incremental business for ER&D is coming in at sharply lower margins (due to rebadging and Issuer of report: HSBC Securities and aggressive deal structure). Consequently, we do not see margin expansion to the extent of that Capital Markets (India) Private Limited seen in FY12-14, but we think margins should remain close to current levels, which is in line Disclaimer & with broader Street expectations. Disclosures Valuation and estimates: We retain our Buy rating as we see a favourable risk-reward profile. This report must be read The stock is trading at ~14x FY17e EPS and we expect growth to accelerate from 2HFY17e. with the disclosures and We maintain our INR1010 target price. the analyst certifications in Index^ BOMBAY SE SENSITIVE INDEX Enterprise value (INRm) 1043904 the Disclosure appendix, Index level 26,591 Free float (%) 40 and with the Disclaimer, RIC HCLT.BO Market cap (USDm) 18,785 which forms part of it Bloomberg HCLT IN Market cap (INRm) 1,232,078 Source: HSBC Source: HSBC HCL Technologies (HCLT IN) It Services abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 06/2015a 06/2016e 06/2017e 06/2018e Year to 06/2015a 06/2016e 06/2017e 06/2018e Profit & loss summary (INRm) EV/sales 2.9 2.5 2.1 1.8 EV/EBITDA 12.6 11.2 9.6 7.9 Revenue 370,620 420,887 470,965 527,424 EV/IC 10.8 9.2 8.1 7.1 EBITDA 86,904 93,137 103,632 118,092 PE* 17.1 16.3 14.4 12.7 Depreciation & amortisation -4,496 -5,770 -6,594 -7,384 P/Book value 5.1 4.1 3.5 2.9 Operating profit/EBIT 82,408 87,367 97,038 110,708 FCF yield (%) 2.0 2.4 3.0 4.4 Net interest 9,309 9,550 13,650 14,950 Dividend yield (%) 1.8 2.3 2.3 2.3 PBT 91,525 97,139 110,688 125,658 HSBC PBT 91,525 97,139 110,688 125,658 Note: * = Based on HSBC EPS (fully diluted) Taxation -19,080 -20,897 -24,351 -27,645 Net profit 72,445 76,242 86,337 98,013 HSBC net profit 72,445 76,242 86,337 98,013 Price relative 1117 1117 Cash flow summary (INRm) 1017 1017 Cash flow from operations 57,905 84,016 92,878 104,595 917 917 Capex -12,112 -14,731 -16,484 -15,823 817 817 Cash flow from investment -12,666 -14,731 -16,484 -15,823 717 717 Dividends -28,240 -28,297 -28,411 -28,524 617 617 Change in net debt -16,335 -46,000 -47,769 -60,247 517 517 FCF equity 24,065 29,128 36,371 53,078 417 417 317 317 Balance sheet summary (INRm) 217 217 Intangible fixed assets 50,912 53,217 53,144 53,144 2013 2014 2015 2016 HCL Technologies Rel to BOMBAY SE SENSITIVE INDEX Tangible fixed assets 37,368 48,021 57,846 66,284 Current assets 231,035 283,487 342,879 416,274 Source: HSBC Cash & others 115,331 161,539 209,301 269,549 Total assets 349,405 416,177 485,276 567,110 Operating liabilities 102,640 110,296 121,889 134,234 Note: price at close of 03 Nov 2015 Gross debt 4,608 4,817 4,810 4,810 Net debt -110,723 -156,723 -204,491 -264,739 Shareholders funds 242,156 301,064 358,577 428,066 Invested capital 101,345 112,891 122,678 131,920
Ratio, growth and per share analysis Year to 06/2015a 06/2016e 06/2017e 06/2018e Y-o-y % change Revenue 12.6 13.6 11.9 12.0 EBITDA 0.3 7.2 11.3 14.0 Operating profit 3.9 6.0 11.1 14.1 PBT 15.6 6.1 13.9 13.5 HSBC EPS 13.9 5.1 12.8 13.1 Ratios (%) Revenue/IC (x) 3.9 3.9 4.0 4.1 ROIC 69.5 64.0 64.3 67.8 ROE 32.4 28.1 26.2 24.9 ROA 21.9 19.9 19.2 18.6 EBITDA margin 23.4 22.1 22.0 22.4 Operating profit margin 22.2 20.8 20.6 21.0 EBITDA/net interest (x) Net debt/equity -45.7 -52.1 -57.0 -61.8 Net debt/EBITDA (x) -1.3 -1.7 -2.0 -2.2 CF from operations/net debt Per share data (INR) EPS reported (fully diluted) 51.28 53.88 60.78 68.72 HSBC EPS (fully diluted) 51.28 53.88 60.78 68.72 DPS 16.00 20.00 20.00 20.00 Book value 171.49 212.79 252.42 300.14
2
Company report FIG Real Estate Equity – India
DLF Ltd (DLFU IN)
Hold Hold: Sales remain weak but other triggers in sight Target price (INR) 145.00 2QFY16 PAT up 20% y-o-y but new bookings remain muted Share price (INR) 122.35 +18.5 Upside/Downside (%) % Weak residential demand in NCR and litigation risks might Mar 2015 a 2016 e 2017 e still weigh on the stock; funding arrangements and focus on HSBC EPS (INR) 3.03 4.29 6.57 project execution could continue to bring positive surprise HSBC PE 40.3 28.5 18.6 Performance 1M 3M 12M Maintain Hold with an unchanged fair value of INR145 Absolute (%) -8.8 6.3 -4.8 Relative^ (%) -10.1 12.3 -0.3
2QFY16 net profit of INR1.31bn was up 20% yoy while revenues were down 7%. PAT growth largely resulted from better EBITDA as the high margin Crest project owned by DLF reached revenue recognition during the quarter. Contracted sales at INR5.75bn almost fully 04 November 2015 came from DLF ph 5 while there were some cancellations in New Gurgaon/rest of India and Puneet Gulati*, CFA sales remained sluggish in rest of India. 0.8msf of area was leased during the quarter but Analyst 0.9msf of terminations (which the company now expects to lease out at higher rentals) led to HSBC Securities and Capital Markets net leasing of (-) 0.1msf. Net debt increased by INR9bn to INR225bn. (India) Private Limited +91 22 2268 1235 Key takeaways from conference call. Supreme Court of India has allowed sale of equity [email protected] relating to DLF entities rejecting SEBI plea for restraint order. The company would like to Ashutosh Narkar* Analyst hold 50% equity in rent holding assets which will allow it to build a powerful rent HSBC Securities and Capital Markets yielding asset platform. DLF continues to have negative operating cash flow as it focuses (India) Private Limited on building and finish products which then can be monetised when demand returns. Net +91 22 2268 1474 [email protected] debt at end of year is expected to be same as beginning of the year (around INR210bn) after receiving the DT Cinemas and GIC money (total of INR23bn). It maintains earlier Saurabh Jain* Analyst sales guidance of INR35bn and EBITDA margins are guided at around 40%. There are no HSBC Securities and Capital Markets more asset sale plans but can consider if somebody puts a good value to a land parcel. (India) Private Limited +91 22 6164 0691 Why are we still Hold. Residential demand in NCR markets continues to remain weak in [email protected] the midst of high primary market prices and high levels of inventory hurting investor View HSBC Global Research at: confidence. We believe this will weigh on DLF’s ability to show substantial pick up in its http://www.research.hsbc.com sales momentum. Also, there is much litigation against the company, which will weigh on *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not the management focus. Also, capital infusion by promoters will bring public float below registered/qualified pursuant to FINRA 25% and it may necessitate an associated capital action, which we believe could put some regulations downward pressure on the stock. Issuer of report: HSBC Securities and Capital Markets (India) Private Limited Valuation and risks. We value the company on DCF based on its project cash flows. We calculate a 12m fwd fair value by applying a 26% discount (5 year mean discount) to our Disclaimer & NAV estimate of INR222. We then discount it back by one year to reflect the current fair Disclosures value TP of INR145. Upside risks: litigation relief and better-than-expected demand. This report must be read Downside risks: continued weakness in physical market. with the disclosures and the analyst certifications in ^Index BOMBAY SE SENSITIVE INDEX Enterprise value (INRm) 423,714 the Disclosure appendix, Index level 26,591 Free float (%) 21%% and with the Disclaimer, RIC DLF.NS Market cap (USDm) 3,320 which forms part of it Bloomberg DLFU IN Market cap (INRm) 218,158 Source: HSBC Source: HSBC DLF Ltd (DLFU IN) Real Estate abc 04 November 2015
Financials & valuation
Financial statements Valuation data Year to 03/2015a 03/2016e 03/2017e 03/2018e Year to 03/2015a 03/2016e 03/2017e 03/2018e Profit & loss summary (INRm) Premium/(discount) to NAV (BV) 0.7 0.7 0.7 0.7 Premium/(discount) to NAV (adj) Revenue 76,487 88,148 104,130 113,524 PE* 40.3 28.5 18.6 15.6 EBITDA 30,237 35,530 44,263 48,798 FCF yield (%) 7.5 -14.0 14.2 -3.2 Depreciation & amortisation -5,448 -8,678 -13,276 -14,220 Dividend yield (%) 1.6 2.9 2.5 2.5 Operating profit/EBIT 24,790 26,852 30,986 34,577 Net interest -23,039 -23,124 -22,250 -21,000 * Based on HSBC EPS (diluted) PBT 6,645 9,728 15,136 18,197 HSBC PBT 6,645 9,728 15,136 18,197 Taxation -1,576 -2,432 -3,784 -4,549 Price relative Net profit 5,402 7,639 11,706 14,012 HSBC net profit 5,402 7,639 11,706 14,012 290.00 290.00 Cash flow summary (INRm) 240.00 240.00 Cash flow from operations 71,095 26,193 85,906 53,984 Capex -12,568 -13,762 -15,678 -23,326 190.00 190.00 FCF enterprise 38,988 -6,692 52,379 14,277 140.00 140.00 Cash flow from investment -9,890 -16,440 -15,678 -23,326 Dividends -4,019 -7,033 -6,028 -6,028 90.00 90.00 Change in net debt -19,382 33,185 -30,854 7,767 FCF equity 15,950 -29,816 30,129 -6,723 40.00 40.00 Balance sheet summary (INRm) 2013 2014 2015 2016 DLF Ltd Rel to BOMBAY SE SENSITIVE INDEX Tangible fixed assets 241,811 248,279 250,681 259,787 Source: HSBC Current assets 388,984 301,115 310,455 313,092 Cash & others 29,050 13,852 19,705 11,938 Total assets 651,576 568,791 580,533 592,276 Note: Priced at close of 04 Nov 2015 Gross debt 207,014 225,000 200,000 200,000 Net debt 177,964 211,148 180,295 188,062 Shareholders' funds 293,063 293,669 299,347 307,330 Invested capital 461,117 492,610 466,429 482,180
Ratio, growth and per share analysis Year to 03/2015a 03/2016e 03/2017e 03/2018e Y-o-y % change Revenue -7.8 15.2 18.1 9.0 EBITDA 21.7 17.5 24.6 10.2 EBIT 36.0 8.3 15.4 11.6 PBT 31.3 46.4 55.6 20.2 HSBC EPS -16.4 41.4 53.2 19.7 Ratios (%) Revenue/IC (x) 0.2 0.2 0.2 0.2 ROIC 4.0 4.2 4.8 5.5 ROE 1.8 2.6 3.9 4.6 ROA 3.5 4.0 4.9 5.0 EBITDA margin 39.5 40.3 42.5 43.0 Operating profit margin 32.4 30.5 29.8 30.5 EBITDA/net interest (x) 1.3 1.5 2.0 2.3 Net debt/equity 60.4 71.5 59.9 60.8 Net debt/EBITDA (x) 5.9 5.9 4.1 3.9 CF from operations/net debt 39.9 12.4 47.6 28.7 Per share data (INR) EPS reported (diluted) 3.03 4.29 6.57 7.87 HSBC EPS (diluted) 3.03 4.29 6.57 7.87 DPS 2.00 3.50 3.00 3.00 NAV (Book Value) 164.51 164.85 168.04 172.52 NAV (adjusted) 0.00 0.00 0.00 0.00
2
Company report Healthcare Pharmaceuticals Equity – India IPCA Laboratories (IPCA IN)
Hold: In-line quarter despite higher API sales Hold 2QFY16 adjusted net profit was in-line despite weak Target price (INR) 784.00 formulation sales Share price (INR) 752.75 Upside/Downside (%) +4.2% India, generics, branded – all markets missed but expecting Mar 2015 a 2016 e 2017 e better 2H for all; WHO clearance to improve tender sales HSBC EPS (INR) 21.61 21.11 38.13 HSBC PE 34.8 35.7 19.7 Performance 1M 3M 12M Maintain Hold as recovery seems gradual and reflected in Absolute (%) 2.0 4.3 0.8 valuation; revise TP to INR784 (from INR692) Relative^ (%) 0.6 10.6 5.6
2QFY16 in-line after excluding forex impact: 2Q saw impact from currency depreciation in emerging markets particularly CIS and West Africa as result of which, forex loss of INR239mn depressed earnings. Excluding this, adjusted PAT at INR456mn was c2% above estimates. Overall sales missed estimates by c2% but formulations miss at c8% was significant and was led by a) lower institutional tender sales b) weak branded formulations c) muted India due to continued lower anti-malarial sales and d) some supply disruptions in UK. Export API grew c53% yoy. Despite weak formulations, EBITDA margins came at 5 November 2015 13.2% (c155bps qoq decline) in-line with HSBCe partly helped by lower staff costs. Girish Bakhru*, CFA Analyst Sales remain subdued, partial recovery in sight: India formulations sales growth at HSBC Securities and Capital Markets c1% yoy continue to see lower anti-malarial sales. Excluding this and antibacterial (India) Private Limited +91 22 22681638 segment sales, growth was c15% as per company. Ipca expects India formulation sales [email protected] growth of 16% in 2H. Promotional branded market sales declined 49% yoy due to
Damayanti Kerai* continued currency headwind in CIS & West Africa but Ipca expects growth c30% in 2H. Analyst US should see benefit from shipment of HCQS (hydroxychloroquine) which had seen HSBC Securities and Capital Markets delay due to higher scrutiny of batches. The company expects to get back its historical (India) Private Limited +91 22 3396 0692 market share of ~30% in this product over time. Within tender business, the company has [email protected] received clearance from WHO (World Health Organization) for Ratlam facility, but has yet to get nod from global funds, which accounts for 70% of tender sales. In view of this View HSBC Global Research at: uncertainty, in a worst case scenario, overall sales growth can be flat as per company and http://www.research.hsbc.com EBITDA margin ~16% for FY16 (we are forecasting c7% growth and similar margin). *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not Remain Hold as we wait for better catalysts: Remediation process at affected FDA registered/qualified pursuant to FINRA regulations facilities in on-going and associated costs continue. Ipca is targeting to invite FDA for re- Issuer of report: HSBC Securities and inspection by Dec 2015. We believe FY17 has better drivers in tender sales, HCQS and Capital Markets (India) Private Limited commercialisation of new Baroda API facility. Our revised fair value TP of INR784 (from INR692) is derived by discounting back 1yr forward TP valued using 20x (Gordon Disclaimer & Growth based PE, earlier 17x) Sep-17e EPS of INR43. Key downside risk is significant Disclosures delay in recovery in tender business. Upside risk is faster than anticipated recovery in US. This report must be read with the disclosures and the analyst certifications in ^Index BOMBAY SE SENSITIVE INDEX Enterprise value (INRm) 102,272 the Disclosure appendix, Index level 26,591 Free float (%) 54%% and with the Disclaimer, RIC IPCA.BO Market cap (USDm) 1,445 which forms part of it Bloomberg IPCA IN Market cap (INRm) 94,975 Source: HSBC Source: HSBC IPCA Laboratories (IPCA IN) Pharmaceuticals abc 5 November 2015
Financials & valuation
Financial statements Valuation data Year to 03/2015a 03/2016e 03/2017e 03/2018e Year to 03/2015a 03/2016e 03/2017e 03/2018e Profit & loss summary (INRm) EV/sales 3.2 3.1 2.6 2.2 Revenue 31,418 33,242 40,102 47,050 EV/EBITDA 19.3 19.2 12.7 10.0 EBITDA 5,291 5,336 8,176 10,181 EV/IC 3.3 3.1 2.7 2.5 Depreciation & amortisation -1,796 -1,852 -2,057 -2,274 PE* 34.8 35.7 19.7 15.5 Operating profit/EBIT 3,495 3,484 6,119 7,908 PB 4.3 4.0 3.4 2.9 Net interest -95 -290 -290 -290 FCF yield (%) -3.9 0.5 -0.9 2.4 PBT 3,611 2,739 6,229 8,018 Dividend yield (%) 0.1 0.4 0.7 0.9 HSBC PBT 3,611 2,739 6,229 8,018 * Based on HSBC EPS (diluted) Taxation -1,019 -839 -1,433 -1,924 Net profit 2,542 1,900 4,796 6,093 HSBC net profit 2,719 2,655 4,796 6,093 Price relative Cash flow summary (INRm) 950.00 950.00 Cash flow from operations 3,557 5,469 2,134 5,785 850.00 850.00 Capex -7,287 -5,000 -3,000 -3,500 750.00 750.00 Cash flow from investment -7,036 -5,000 -3,000 -3,500 Dividends -152 -435 -786 -998 650.00 650.00 Change in net debt 3,351 421 1,251 -1,687 550.00 550.00 FCF equity -3,730 469 -866 2,285 450.00 450.00 Balance sheet summary (INRm) 350.00 350.00 Intangible fixed assets 1,419 1,419 1,419 1,419 2013 2014 2015 2016 Tangible fixed assets 19,257 22,405 23,349 24,575 IPCA Laboratories Rel to BOMBAY SE SENSITIVE INDEX Current assets 17,447 16,301 20,778 23,825 Source: HSBC Cash & others 1,410 989 -262 1,425 Total assets 38,124 40,126 45,546 49,819 Operating liabilities 6,011 6,547 7,957 7,135 Note: Priced at close of 03 Nov 2015 Gross debt 8,286 8,286 8,286 8,286 Net debt 6,876 7,296 8,548 6,860 Shareholders' funds 22,084 23,550 27,560 32,656 Invested capital 30,703 32,589 37,851 41,259
Ratio, growth and per share analysis Year to 03/2015a 03/2016e 03/2017e 03/2018e Y-o-y % change Revenue -4.3 5.8 20.6 17.3 EBITDA -34.7 0.8 53.2 24.5 Operating profit -50.6 -0.3 75.6 29.2 PBT -42.7 -24.1 127.4 28.7 HSBC EPS -48.9 -2.3 80.6 27.0 Ratios (%) Revenue/IC (x) 1.1 1.1 1.1 1.2 ROIC 9.4 7.9 13.7 15.4 ROE 13.0 11.6 18.8 20.2 ROA 8.0 5.4 11.7 13.2 EBITDA margin 16.8 16.1 20.4 21.6 Operating profit margin 11.1 10.5 15.3 16.8 EBITDA/net interest (x) 55.5 18.4 28.2 35.1 Net debt/equity 31.1 31.0 31.0 21.0 Net debt/EBITDA (x) 1.3 1.4 1.0 0.7 CF from operations/net debt 51.7 75.0 25.0 84.3 Per share data (INR) EPS reported (diluted) 20.21 15.11 38.13 48.44 HSBC EPS (diluted) 21.61 21.11 38.13 48.44 DPS 1.00 2.96 5.34 6.78 Book value 175.55 187.20 219.08 259.58
2
Company report Telecoms, Media & Technology IT Services Equity – India
Tech Mahindra (TECHM IN)
Hold Hold: 2Q16 – Concentration risks outweigh low valuations Target price (INR) 585.00 TechM reports in-line quarter. FY16 organic constant Share price (INR) 556.05 Upside/Downside (%) +5.2% currency growth unlikely to be more than mid-single digit Mar 2015 a 2016 e 2017 e HSBC EPS (INR) 26.7 29.4 34.7 FY17 may be better, but still risk from high Telecom and HSBC PE 20.8 18.9 16.0 client concentration remains an overhang Performance 1M 3M 12M Absolute (%) -1.2 4.8 -11.7 Maintain Hold as we believe business risks outweigh Relative^ (%) -2.5 10.9 -7.3
undemanding valuations. We revise TP to INR585 (from INR550)
TechM reported a decent quarter with 3% q-o-q constant currency (cc) growth and 160bps improvement in EBIT margins (13.7%). Importantly, even if 2H is better than 1H and TechM grows 3% q-o-q in 3Q and 4Q (helped by LCC and Comviva seasonality and ramp-up of the Comverse deal), the FY16 full year growth will remain in mid-single digits (see chart 1). This weakness has been led by some client specific issues in the telecom business and may normalise next year, management alluded on the call. Despite 4 November 2015 this assurance, the concentration risk will remain an overhang, in our view. Telecom is
Yogesh Aggarwal* still half of the total business and the top 3 telecom clients are nearly a quarter of the total Analyst business. Further, we believe expanding margins from the current 13.7% in 2Q16 to 14.5- HSBC Securities and Capital Markets (India) Private Limited 15% (EBIT estimate for FY17) will be tough to beat in light of the impending wage hike +9122 2268 1246 and ramp-up of future deals. The stock trades at an undemanding valuation of 14x FY17e [email protected] EPS (excl treasury shares), but still in light of the lack of visibility on growth we remain Vivek Gedda* Hold on the stock. Analyst HSBC Securities and Capital Markets In-line quarter: TechM 2Q performance was in line with our expectations with USD (India) Private Limited +91 22 3396 0693 revenue growth of 2.2% q-o-q. Growth was led by Telecom and TME (technology, media [email protected] and entertainment) verticals. Outside these verticals revenue declined 0.6% sequentially. In terms of geography, growth was led by the US owing to the recent Comverse deal. The View HSBC Global Research at: http://www.research.hsbc.com margin expansion of 160bps was in line with expectations as well - led by nearly 150bps *Employed by a non-US affiliate of improvement in operational efficiencies. Benefit from currency depreciation and lower HSBC Securities (USA) Inc, and is not visa costs were offset by higher SG&A spend. Utilization improved sharply by 400bps in registered/qualified pursuant to FINRA regulations the quarter and management expects further improvement in the coming quarter. Issuer of report: HSBC Securities and Capital Markets Valuation: Given the volatility in Telecom deal wins and higher risks associated with (India) Private Limited revenue concentration, we expect TechM to trade at a discount to HCLT. We marginally Disclaimer & revise down our FY17e earnings by 3% to factor in growth headwinds in the Disclosures communication business. We maintain our valuation multiple of 17x and roll over to This report must be read twelve month forward earnings to arrive at a fair value-based TP of INR585 (from with the disclosures and INR550). We have a Hold rating on the stock. the analyst certifications in ^Index BOMBAY SE SENSITIVE INDEX Enterprise value (INRm) 496,451 the Disclosure appendix, Index level 26,559 Free float (%) 65% and with the Disclaimer, RIC TEML.BO Market cap (USDm) 8,191 which forms part of it Bloomberg TECHM IN Market cap (INRm) 537,252 Source: HSBC Source: HSBC Tech Mahindra (TECHM IN) IT Services abc 4 November 2015
Financials & valuation
Financial statements Valuation data Year to 03/2015a 03/2016e 03/2017e 03/2018e Year to 03/2015a 03/2016e 03/2017e 03/2018e Profit & loss summary (INRm) EV/sales 2.2 1.9 1.6 1.4 EV/EBITDA 12.1 11.5 9.1 7.8 Revenue 224,779 266,500 301,176 337,806 EV/IC 13.8 9.1 7.5 6.2 EBITDA 41,144 43,017 52,717 59,125 PE* 20.8 18.9 16.0 13.9 Depreciation & amortisation -6,079 -7,554 -8,433 -9,459 PB 4.5 3.8 3.3 2.8 Operating profit/EBIT 35,065 35,463 44,284 49,667 FCF yield (%) 8.4 8.3 12.2 14.0 Net interest -298 -637 -680 -680 Dividend yield (%) 1.1 1.3 1.4 1.4 PBT 38,295 38,079 47,004 53,567 HSBC PBT 38,295 38,079 47,004 53,567 * Based on HSBC EPS (diluted) Taxation -9,472 -9,768 -12,447 -13,927 Net profit 26,277 28,944 34,197 39,279 HSBC net profit 26,277 28,944 34,197 39,279 Price relative 757 757 Cash flow summary (INRm) 657 657 Cash flow from operations 23,974 21,328 36,414 42,309 Capex -11,231 -10,660 -12,047 -13,512 557 557 Cash flow from investment -19,582 -10,660 -12,047 -13,512 457 457 Dividends -5,496 -8,199 -9,372 -9,372 Change in net debt 9,858 -2,469 -14,994 -19,425 357 357 FCF equity 44,117 43,281 63,957 73,315 257 257 Balance sheet summary (INRm) 157 157 Intangible fixed assets 0 0 0 0 2013 2014 2015 2016 Tangible fixed assets 28,723 31,829 35,443 39,497 Tech Mahindra Rel to BOMBAY SE SENSITIVE INDEX Current assets 103,122 115,254 138,279 166,187 Source: HSBC Cash & others 32,090 34,559 49,553 68,978 Total assets 198,481 213,719 240,358 272,320 Operating liabilities 63,544 58,036 59,851 61,906 Note: Priced at close of 02 Nov 2015 Gross debt 6,745 6,745 6,745 6,745 Net debt -25,345 -27,814 -42,808 -62,233 Shareholders' funds 122,490 143,235 168,060 197,967 Invested capital 36,212 54,488 64,318 74,801
Ratio, growth and per share analysis Year to 03/2015a 03/2016e 03/2017e 03/2018e Y-o-y % change Revenue 19.4 18.6 13.0 12.2 EBITDA -1.7 4.6 22.5 12.2 Operating profit -4.2 1.1 24.9 12.2 PBT -9.7 -0.6 23.4 14.0 HSBC EPS -15.7 10.1 18.1 14.9 Ratios (%) Revenue/IC (x) 8.1 5.9 5.1 4.9 ROIC 94.5 58.1 54.8 52.8 ROE 24.5 21.8 22.0 21.5 ROA 16.2 14.0 15.4 15.7 EBITDA margin 18.3 16.1 17.5 17.5 Operating profit margin 15.6 13.3 14.7 14.7 EBITDA/net interest (x) 138.0 67.6 77.5 86.9 Net debt/equity -20.4 -19.2 -25.2 -31.2 Net debt/EBITDA (x) -0.6 -0.6 -0.8 -1.1 CF from operations/net debt Per share data (INR) EPS reported (diluted) 26.7 29.4 34.7 39.9 HSBC EPS (diluted) 26.7 29.4 34.7 39.9 DPS 6.0 7.0 8.0 8.0 Book value 124.5 145.5 170.7 201.1
2 First Light Asia abc 5 November 2015
Research Last Week
Ticker Company Rating was Currency Target was EPS '15e EPS '16e Price Price At Close New 600138 CH China CYTS Tours Buy RMB 26.50 0.41 0.55 20.63 28 Oct BYRCS IN Bayer CropScience Limited Buy - INR 4,500 - 104.59(a) 111.17 3,494.45 29 Oct Up BIDU US Baidu Inc Buy USD 230.00 211.00 36.88 51.56 168.99 29 Oct 5371 TT Coretronic Corp Buy TWD 44.00 43.00 3.96 4.08 30.00 30 Oct 021240 KS Coway Buy KRW 130,000 120,000 4340.62 4852.73 919,00 02 Nov 3545 TT FocalTech Systems Buy TWD 32.00 27.00 0.59 2.12 24.80 29 Oct ICBP IJ Indofood CBP Buy IDR 15500 15000 489.61 625.67 13325 29 Oct INDF IJ Indofood Sukses Makmur Buy IDR 8,400 8,000 207.96 355.59 5525.00 30 Oct JPVL IN Jaiprakash Power Ventures Buy INR 9.30 9.2 0.50(a) -0.03 6.95 30 Oct 3081 TT LandMark Optoelectronics Buy TWD 480.00 474.78 13.78 19.22 430.50 03 Nov 9437 JP NTT DoCoMo Buy JPY 3300.00 3100.00 102(a) 130 2357.50 30 Oct 601555 CH Soochow Securities Buy RMB 15.80 14.60 1.03 1.17 14.33 29 Oct 017670 KS SK Telecom Buy KRW 378,000 377,000 22,701 30,947 238,500 02 Nov SUEL IN Suzlon Energy Ltd Buy INR 32.00 30.00 -9.48(a) -1.13 24.60 02 Nov TRP IN Torrent Pharma Buy INR 1,693 1,587 37.81(a) 96.16 1541 30 Oct 6147 TT Chipbond Hold TWD 48.00 45.00 3.29 3.99 46.40 30 Oct DIVI IN Divi's Laboratories Hold INR 1,117 1,066.5 32.63(a) 40.75 1153.85 30 Oct 2238 HK GAC Group – H Hold HKD 6.00 5.70 0.56(CNY) 0.67(CNY) 6.82 30 Oct 161390 KS Hankook Tire Hold KRW 46,000 42,000 5366.45 5777.87 44,150 02 Nov KMB IN Kotak Mahindra Bank Hold INR 666 651 12.10(a) 11.96 687.65 30 Oct 030200 KS KT Corp Hold KRW 35000 34000 2477 2091 29550 30 Oct OBER IN Oberoi Realty Ltd Hold INR 290.00 285.00 9.66(a) 18.84 283.10 03 Nov 3105 TT WIN Semiconductor Hold TWD 46.00 39.00 4.52 4.55 41.75 29 Oct 2412 TT Chunghwa Telecom Reduce TWD 82.00 80.00 5.23 4.84 100.50 28 Oct 601238 CH GAC Group – A Reduce CNY 5.00 4.70 0.56 0.67 20.86 30 Oct INTP IJ Indocement Reduce IDR 15,900 15,600 1183.60 1093.16 18,425 02 Nov Down 2600 HK Aluminum Corp of China – H Hold Buy HKD 2.88 3.65 -0.15(CNY) -0.13(CNY) 2.51 30 Oct 636 HK Kerry Logistics Hold Buy HKD 13.00 12.00 0.60 0.65 11.54 02 Nov LT IN Larsen & Toubro Hold Buy INR 1,490 1,793 47.62(a) 51.19 1410.75 30 Oct 601186 CH China Railway Construction – A Reduce Hold CNY 12.10 15.8 14.5 15.29 29 Oct 011170 KS Lotte Chemical Reduce Buy KRW 205,000 330,000 30,156 30,241 240,500 30 Oct 2395 TT Advantech Co Ltd Buy TWD 263.00 274.00 7.99 9.27 233.50 30 Oct HMN IN Emami Buy INR 1450 1500 21.60(a) 18.18 1048.95 29 Oct 1310 HK Hong Kong Broadband Network Buy HKD 11.50 11.70 0.36 0.53 9.18 02 Nov 600887 CH Inner Mongolia Yili Buy RMB 22.00 23.90 0.76 0.97 15.93 30 Oct JUST IN Just Dial Buy INR 1150 1640 20.20(a) 20.90 855.80 29 Oct 002550 KS KB Insurance Buy KRW 30,000 31,000 2,934 4,738 27,200 02 Nov MAPI IJ Mitra Adiperkasa Buy IDR 5,950 6,100 16.69 135.93 3365.00 02 Nov NTPC IN NTPC Buy INR 173 174 12.11(a) 11.67 129.45 28 Oct 029780 KS Samsung Card Co Ltd Buy KRW 42,000 43,000 2,946 2,873 38,100 02 Nov 880 HK SJM Holdings Buy HKD 9.50 9.90 0.53 0.45 6.61 03 Nov YES IN Yes Bank Buy INR 1020 1025 51.5(a) 55.7 744.00 29 Oct
First Light Asia abc 5 November 2015
AUTO IJ Astra Otoparts Hold IDR 1700 1800 63.34 141.19 1670 29 Oct 2883 HK China Oilfield Services – H Hold HKD 8.80 9.00 0.34 0.67 8.90 30 Oct 390 HK China Railway Group – H Hold HKD 7.00 7.30 0.49(CNY) 0.51(CNY) 7.34 29 Oct GNP IN Glenmark Pharmaceuticals Hold INR 1071 1100 27.31(a) 33.77 942.75 29 Oct ICT PM ICTSI Hold PHP 90.00 95.00 0.07 0.07 75.90 03 Nov 2454 TT MediaTek Hold TWD 288.00 296.00 17.78 19.23 254.50 30 Oct TEL PM Philippine Long Distance Hold PHP 2450.00 2,500 163.22 167.76 2208.00 02 Nov 857 HK PetroChina – H Hold HKD 6.00 6.25 0.22 0.30 6.19 29 Oct SKF IN SKF India Limited Hold INR 1,230 1,375 - 49.68 1248.90 30 Oct ABB IN ABB India Reduce INR 801.00 810.00 13.40 19.18 1275.05 02 Nov 601600 CH Aluminum Corp of China – A Reduce CNY 2.40 3.04 -0.15 -0.13 5.14 30 Oct 601808 CH China Oilfield Services – A Reduce RMB 7.30 7.50 50.0 25.4 17.00 30 Oct 018260 KS Samsung SDS Reduce KRW 210,000 5353.64 5951.15 255,500 02 Nov 202,000 Source: Bloomberg, HSBC estimates Click on title to open reports Research Focus 04 Nov Brilliance Auto (1114 HK) - Reduce: Read through from BMW’s 3Q15 results Carson Ng* Kerry Logistics (636 HK) - Downgrade to Hold: Recent rally could stall further outperformance Parash Jain* SJM Holdings (880 HK) - Buy: 3Q15 missed; trim TP on lower margin assumptions Charlene Liu* Australia’s next opportunities in China - Moving beyond resources Paul Bloxham 03 Nov Bayer CropScience Limited (BYRCS IN) - Initiate Buy: Ticking all the right boxes Alok Deshpande* China Banks - 3Q15 wrap: NPL recognition doubts persist; provisioning coverage an issue Michael Chang* Tata Motors (TTMT IN) - Buy: Is F-PACE the new Evoque? Yogesh Aggarwal* Hong Kong Broadband Network (1310 HK) - Buy: delivering against targets, with growth set to increase Neale Anderson* China CYTS Tours (600138 CH) - Initiate at Buy: Finding the right route – ancient and 02 Nov modern Lina Yan* Aluminum Corp of China (2600 HK/601600 CH) - Downgrade H-share to Hold from Buy;maintain Reduce on A-share: Swimming against the tide Jeff Yuan* China Railway Construction (1186 HK/601186 CH) - H/A: Buy/downgrade to Reduce – Paddling hard in 3Q15 Anderson Chow* China Inside Out - Capital account reforms: From people’s bank to people’s hands Qu Hongbin Regional 04 Nov The Flying Dutchman - First look: Asia’s Q3 2015 earnings season Herald van der Linde* Slide suspended - What the latest PMIs mean for Asia Frederic Neumann RBA Observer Update - A clear easing bias Paul Bloxham 03 Nov Commodity prices snapshot - Signs of stabilisation Paul Bloxham 02 Nov BoJ Watch Update - No debate: The BoJ kept policy on hold Izumi Devalier NTT DoCoMo (9437 JP) - Buy: firing on all cylinders Neale Anderson* China & Hong Kong 04 Nov Hong Kong Retail Sales (September 2015) - Disappointing end to Q3 John Zhu China film sector - Film law coming out soon, further boosting film industry John Liu* 03 Nov Caixin China Manufacturing PMI (October) - Some improvement, but more needed Julia Wang China Oil & Gas - Implications of Sinopec’s improving cash position Tingting Si* China Cement - China’s Fifth Plenum communiqué sets out goal of “medium-high economic growth” for the next five years Wei Sim* Gree Electric (000651 CH) - Buy: 3Q15 was a pleasant positive surprise Lina Yan* Inner Mongolia Yili (600887 CH) - Buy: Selling expense higher than expected Christopher K Leung* Shanghai Jahwa United (600315 CH) - Buy: More support from major shareholder Catherine Chao* 02 Nov China - Fifth plenum refocuses on growth, more details to come Qu Hongbin
First Light Asia abc 5 November 2015
China wind - NDRC discussing tariff cuts for 2016-20 Evan Li* China Solar - Proposed solar FIT cuts to likely rush new installations Gloria Ho* BBMG Corp (2009 HK/601992 CH) - H: Buy/A: Reduce: 3Q adjusted NPAT turned negative Wei Sim* Baidu Inc (BIDU US) - Buy: Leveraging its platform to drive O2O Chi Tsang* BOCOM (3328 HK / 601328 CH) - Buy: Flat profit growth; NPL recognition falls Michael Chang* China Pacific Insurance (2601 HK/601601 CH) - Buy: Strong individual Life FYP growth is the bright spot James E Garner* Chongqing Rural Co (3618 HK) - Buy: More stable asset quality than national players Michael Chu* ICBC (1398 HK / 601398 CH) - Buy: Asset quality beats; coverage ratio nears 150% Michael Chang* Minsheng Bank (1988 HK/600016 CH) - Buy: Loan book de-risking continues Michael Chu* Soochow Securities (601555 CH) - Buy: 3Q results – not to worry about prop trading loss Eason Yi* Yongda Auto (3669 HK) - Buy: 3Q15 results – Weak margin not unexpected; looking at recovery in 4Q15e Mike Yip* Changan Auto (200625 CH/000625 CH) - B/A: Buy/Hold: Largely expected weak 3Q15 results Carson Ng* GAC Group (2238 HK/601238 CH) - Hold: 3Q15: Strong rebound in earnings Carson Ng* Sinopec (386 HK/600028 CH) - Hold: Crude oil prices levels and volatility create pressure Thomas C. Hilboldt* PetroChina (857 HK/601857 CH) - Hold: Risk/reward is improving, but not yet favourable Thomas C.Hilboldt* Angang Steel (347 HK/000898 CH) - H: Hold/A: Reduce: Poor 3Q15 results well-flagged Chris Chen* China Oilfield Services (2883 HK/601808 CH) - H: Hold / A: Reduce: Positive catalysts are absent Thomas C. Hilboldt* China Railway Group (390 HK/601390 CH) - H/A: Hold/Reduce – Slow new contract improvement Anderson Chow* CRRC Corporation (1766 HK/601766 CH) - H/A: Hold/Reduce: Slow moving train Anderson Chow* Wuhan Iron & Steel (600005 CH) - Reduce: Worst quarter ever Chris Chen* Korea 04 Nov Coway (021240 KS) - Buy: Fundamental improvement on track Karen Choi* Orion Corp (001800 KS) - Buy: Momentum building in 2H15 Karen Choi* Samsung Card Co Ltd (029780 KS) - Buy: FSC announces a plan to cut the merchant fee rate Sinyoung Park* SK Telecom (017670 KS) - Buy: CJ deal a positive; dividend update likely by year-end Neale Anderson* Wonik Materials (104830 KS) - Buy: Good combination of 3D NAND and system LSI Will Cho* Hankook Tire (161390 KS) - Hold: Upbeat 3Q15 results Paul Choi* 03 Nov After the bounce - Bank of Korea isn’t done yet Frederic Neumann Korea Autos - October shipment data Paul Choi* Memory sector - Slowing PC DRAM decline amid stable server/mobile DRAM price trend should continue Ricky Seo* Lotte Chemical (011170 KS) - Downgrade to Reduce from Buy: Deal raises multiple concerns Dennis Yoo* KB Insurance (002550 KS) - Buy: 3Q15 wiped out but wait for the turnaround Sinyoung Park* Samsung SDS (018260 KS) - Reduce: Hiccup in core businesses Ricky Seo* 02 Nov Industrial Bank of Korea (024110 KS) - Buy: Better NIM protection plus dividend yield appeal Sinyoung Park* KCC (002380 KS) - Hold: Initial thoughts on surprising 3Q15 results Yeon Lee* KT Corp (030200 KS) - Hold: solid wireless performance offset by wireline decline Neale Anderson* Samsung SDI (006400 KS) - Hold: Unclear benefit from selling chemical unit Will Cho* Taiwan 04 Nov Greater China IC design - Possible merger between MediaTek and Spreadtrum? Yolanda Wang* LandMark Optoelectronics (3081 TT) - Buy: 100G delay might be a good thing Jerry Tsai* St. Shine Optical (1565 TT) - Hold: 3Q15 net profit beat on FX gain Chloe Wu* 03 Nov Taiwan Discovery Forum - 3 November 2015 John Chung* Formosa Petrochemical (6505 TT) - Buy: NDR takeaways – upbeat fundamental outlook John Chung* Casetek Holdings (5264 TT) - Hold: 3Q Preview – better sales and margins on seasonal strength Carrie Liu* Airtac International (1590 TT) - Hold: Investor roadshow takeaways Jenny Lai*
First Light Asia abc 5 November 2015
02 Nov Taiwan GDP (Q3 2015) - Not as bad as it looks, but justifies further easing John Zhu Advantech Co Ltd (2395 TT) - Buy: rising software R&D, lower profit Jenny Lai* Coretronic Corp (5371 TT) - Buy: Margin surprise suggests company on right track Jerry Tsai* FocalTech Systems (3545 TT) - Buy: Product transition in 3Q15 Yolanda Wang* Silergy Corp (6415 TT) - Buy: Takeaways from corporate day in Taipei Yolanda Wang* Chipbond (6147 TT) - Hold: Another estimate cut; growth resumes in 2Q16 Steven C. Pelayo Chroma ATE (2360 TT) - Hold: 3Q Turnkey rebound; returning to growth in 2016 Steven C. Pelayo MediaTek (2454 TT) - Hold: Better than expected shipment but margin under pressure Yolanda Wang* WIN Semiconductor (3105 TT) - Hold: Better near-term outlook; moderate future growth Yolanda Wang* Chunghwa Telecom (2412 TT) - Reduce: move to tiered tariffs before May 2016 unlikely Neale Anderson* HTC Corp (2498 TT) - Reduce: Deteriorating visibility Yolanda Wang* ASEAN 04 Nov Vietnam at a glance - An eventful October Izumi Devalier Far East Hospitality Trust (FEHT SP) - Buy: Weak outlook is in the price Pratik Burman Ray* Mitra Adiperkasa (MAPI IJ) - Buy: Headed in the right direction Permada Darmono* ICTSI (ICT PM) - Hold: Is the worst behind us? We don’t think so as yet Parash Jain* Philippine Long Distance (TEL PM) - Hold: Road to recovery but still road blocks ahead Luis Hilado* Indocement (INTP IJ) - Reduce: 3Q proves INTP isn’t insulated from competition Shishir Singh* 03 Nov Indonesia - Weak demand continues to weigh on PMI; inflation eases Su Sian Lim Malaysia - Manufacturing PMI dips on weak domestic demand Su Sian Lim Thailand CPI (Oct) - Slowly normalising: Headline CPI slightly higher than expected Nalin Chutchotitham DBS Group (DBS SP) - Buy: It was an extremely resilient 3Q15 Kar Weng LOO* Indofood Sukses Makmur (INDF IJ) - Buy: Increase in ICBP value raises our target price Permada Darmono* Kalbe Farma (KLBF IJ) - Hold: Weak macro hurts 3Q15 results Permada Darmono* Mapletree Greater China Commercial Trust (MAGIC SP) - Hold: Investor feedback from HK non-deal roadshow Perveen Wong* 02 Nov Thailand Central Bank Watch - November rate cut unlikely, but beware of surprises Nalin Chutchotitham Building ASEAN - ASEAN real estate fortnightly Pratik Burman Ray* Indofood CBP (ICBP IJ) - Buy: Price increases offset weak volume growth Permada Darmono* UOB (UOB SP) - Buy: Stability – that is the best word to describe 3Q15 Kar Weng LOO* Astra Otoparts (AUTO IJ) - Hold: Resilience in core business but associates weaken Tarun Bhatnagar* Neptune Orient Lines (NOL SP) - Reduce: Worse than expected losses in 3Q15 Parash Jain* India 04 Nov India - Between grey and silver: Manufacturing PMI slows but some others improve Pranjul Bhandari India Pharmaceuticals - 3QCY15 Drug Master File (DMF) update Girish Bakhru* Suzlon Energy Ltd (SUEL IN) - Buy: 2Q- Strong quarter followed by upbeat outlook Ashutosh Narkar* Adani Power Limited (ADANI IN) - Hold: Q2FY16 result; losses continue Arun Kumar Singh* Indian Oil (IOCL IN) - Hold: Inventory goes the other way Kumar Manish* GAIL (GAIL IN) - Hold: Low oil price continues to hurt Kumar Manish* Oberoi Realty Ltd (OBER IN) - Hold: Only a few more triggers left Puneet Gulati* ABB India (ABB IN) - Reduce: Weak 3Q with outlook still hazy Ashutosh Narkar* Reliance Communications (RCOM IN) - Reduce: Regulatory pay-outs will decide upside Rajiv Sharma* 03 Nov India Equity Insights - Not our kind of haven Devendra Joshi* Larsen & Toubro (LT IN) - Downgrade to Hold: Growth outlook turns challenging Ashutosh Narkar* ITC (ITC IN) - Buy: Last quarter of double-digit cigarette volume decline Amit Sachdeva* Jaiprakash Power Ventures (JPVL IN) - Buy: Results in-line minus un-expected items Arun Kumar Singh* Torrent Pharma (TRP IN) - Buy: Earnings on steroids, 2H should be equally strong Girish Bakhru* Titan (TTAN IN) - Buy: Growth phase now set to begin Amit Sachdeva* Divi's Laboratories (DIVI IN) - Hold: Q-o-q margin improves on better cost control Girish Bakhru* Kotak Mahindra Bank (KMB IN) - Hold: 2QFY16 – IVB integration progressing well Tejas Mehta*
First Light Asia abc 5 November 2015
SKF India Limited (SKF IN) - Hold: Revival still a couple of quarters away Puneet Gulati* VRL LOGISTICS (VRLL IN) - Hold: Weak Q2 reflective of challenging environment Ashutosh Narkar* 02 Nov Emami (HMN IN) - Buy: 2Q a short-term blip driven by erratic monsoon Amit Sachdeva* ICICI Bank (ICICIBC IN) - Buy: 2Q FY16: On Track Sachin Sheth* Just Dial (JUST IN) - Buy: Search Plus remains a medium-term catalyst Rajiv Sharma* NTPC (NTPC IN) - Buy: Improved earnings as generation grows Arun Kumar Singh* Suzlon Energy Ltd (SUEL IN) - Buy: 2Q- Keeps getting better Ashutosh Narkar* Yes Bank (YES IN) - Buy: 2Q – marching towards scale Sachin Sheth* Glenmark Pharmaceuticals (GNP IN) - Hold: Guidance rests on US pick up Girish Bakhru* Shriram Transport Finance (SHTF IN) - Hold: Profitability bottoming in 2QFY16 Tejas Mehta* Global 04 Nov Climate: Paris pledges buy time - But not much – the carbon budget expires by 2040 Zoe Knight 03 Nov SSA Monitor - One final spurt Wilson Chin Energy beyond Paris - Future energy systems, investment flows and greenhouse gases Ashim Paun Frontier Market Equity Strategy - Chinks of light John Lomax Japanese story fading - Global Equity Data Monitor Ben M Laidler 02 Nov Equity Insights - Fund holdings: Signs of buying in emerging markets Peter Sullivan* October revival - Global bond flows compass André de Silva
First Light Asia abc 5 November 2015
Disclosure appendix
Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 04 November 2015, the distribution of all ratings published is as follows: Buy 46% (31% of these provided with Investment Banking Services) Hold 40% (29% of these provided with Investment Banking Services) Sell 14% (17% of these provided with Investment Banking Services)
First Light Asia abc 5 November 2015
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. Additional disclosures 1 This report is dated as at 05 November 2015. 2 All market data included in this report are dated as at close 04 November 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
First Light Asia abc 5 November 2015
Disclaimer
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