HONG KONG SmarTone 315 HK Outperform

Price (at 08:09, 10 Nov 2016 GMT) HK$11.14 Telecommunications

Valuation HK$ 15.00 - DCF Operation stable despite MVNO entry 12-month target HK$ 15.00 Upside/Downside % +34.6 Event 12-month TSR % +40.2 . As part of our ongoing series of dialogue with telecom operators in HK, we did Volatility Index Low/Medium a quick catch-up with SmarTone. Post the conversation, we reaffirm our view GICS sector that mobile ARPU should remain stable in the near term. Telecommunication Services Market cap HK$m 11,652 Impact Market cap US$m 1,502 . Competitive landscape has not deteriorated with the MVNO entry. HKBN 30-day avg turnover US$m 1.9 launched its mobile service in Sept, with part of its network capacity leased Number shares on issue m 1,046 from SmarTone. So far, SmarTone has not experienced any negative impact Investment fundamentals from HKBN’s entry into the mobile space. Looking into 2017, as operators Year end 30 Jun 2016A 2017E 2018E 2019E have to generate adequate earnings to pay the spectrum utilisation fee, we Revenue m 18,356 19,160 19,929 20,726 believe the likelihood for irrational competition is relatively low. EBIT m 1,104 1,128 1,167 1,221 EBIT growth % -11.2 2.1 3.4 4.7 . SmarTone is taking prudent steps towards 5G launch. The company Reported profit m 797 847 914 966 Adjusted profit m 797 847 914 966 recently signed a partnership with , choosing the latter as the sole EPS rep HK$ 0.75 0.78 0.85 0.89 supplier for radio access network in the coming five years. As SmarTone is EPS rep growth % -16.0 4.6 7.9 5.7 EPS adj HK$ 0.75 0.78 0.85 0.89 known for its disciplined approach towards capex spend and 5G launch is EPS adj growth % -16.0 4.6 7.9 5.7 probably around 2021, we do not expect 5G to impose imminent pressure on PER rep x 14.9 14.2 13.2 12.5 PER adj x 14.9 14.2 13.2 12.5 the company’s free cash flow. Total DPS HK$ 0.60 0.60 0.63 0.67 Total div yield % 5.4 5.4 5.7 6.0 . Outlook for the regulatory environment. The OFCA (regulatory body) has ROA % 10.4 11.4 12.2 12.3 completed the first round of consultation on arrangements for 900MHz and ROE % 19.5 19.2 19.6 19.6 EV/EBITDA x 4.3 3.9 3.8 3.7 1800MHz bands upon expiry of existing assignments. We believe the second Net debt/equity % -9.0 -14.7 -21.7 -29.3 round of consultation is likely in late 2016/early 2017. SmarTone believes a P/BV x 2.7 2.7 2.5 2.4 hybrid solution (first right of refusal + open auction) could offer potential 315 HK rel HSI performance, & rec upside as the company may obtain additional spectrum. history . With Wharf T&T wireline assets acquired by private equity, SmarTone is focusing on what it does best… wireless service. Previously, some investors worried SmarTone would take a stake in the wireline assets. With that scenario gone, we believe any overhang associated with SmarTone’s potential acquisition should be lifted. Earnings and target price revision . No change.

Note: Recommendation timeline - if not a continuous line, then there was no Price catalyst Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, November 2016 . 12-month price target: HK$15.00 based on a DCF methodology. (all figures in HKD unless noted)

. Catalyst: 1H results of FY17 will be released in March of 2017. Action and recommendation . Maintain Outperform. Our rating is based on: (1) SmarTone’s ability to grow Analyst(s) its earnings steadily in a rational competitive environment; (2) its ability to fend Macquarie Capital Limited off competition despite a smaller subscriber base than others; (3) the Danny Chu, CFA company’s guidance for FY17 DPS to stay at HK$0.60 (same as FY16) +852 3922 4762 [email protected] Macquarie Capital Securities (Japan) Limited regardless of FY17 earnings; (4) company’s CEO to drive for innovative Nathan Ramler, CFA services (just like the former CEO); (5) company’s disciplined capex spend +81 3 3512 7875 [email protected] throughout its ramp up to 5G launch. 14 November 2016 Macquarie Governance and Risk Score (MGRS) On our proprietary Governance and Risk Score SmarTone scores in the top quartile of our current universe coverage. Please refer to page 8 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Macquarie Research SmarTone Telecommunications

As we get closer to the end of 2016, we conduct dialogue with various telecom operators in such as HKT Trust (6823 HK, Outperform, HK$9.76, TP: HK$12.50), Hutchison Telecom (215 HK, Neutral, HK$2.51, TP: HK$3) to gain insight into the outlook of the Hong Kong telecoms industry in 2017. Our conversation with SmarTone covered topics including the latest competitive landscape, 5G rollout plans, and regulatory environment. We reiterate our Outperform rating. We rank SmarTone as our second preferred name in the Hong Kong telecom universe, after HKT Trust. Recap of our dialogue with the company Competitive landscape remains more or less the same. Recently, HKBN (1310 HK, not rated) launched its mobile service using the MVNO structure (i.e. leasing mobile network capacity from SmarTone as well as China Mobile Hong Kong). So far, SmarTone has not seen any material negative impact from HKBN’s mobile service launch. The company believes the MVNO arrangement with HKBN would allow it to generate additional revenue. With regards to the competitive landscape, SmarTone indicates the landscape remains roughly the same (despite HKBN’s entry as MVNO operator). The company has not seen a material deterioration or significant improvements either. SmarTone emphasized its vigilant control over costs to compete against downward pressure on earnings which could be brought along by competition. Macquarie’s view: Given HKBN has adopted the MVNO approach for its mobile business, we believe the company is more likely to focus on reselling instead of providing value-added services. However, we believe high-ARPU mobile subscribers tend to choose their service provider based on: (1) network coverage; (2) service quality; (3) provision of value-added services; and, (4) brand perception. If HKBN is focused on reselling instead of coming up with value-added services, we believe the operator may have difficulty in attracting high-ARPU mobile subscribers away from other operators. In the recent launch of iPhone 7 in Hong Kong, we note that none of the HK mobile operators have revised monthly fees on the back of the launch of marquee handset. We expect ARPU to stay relatively stable in the very near term. Adding to our comfort level, we are unaware of any mobile operators aggressively lowering mobile tariffs with the mindset simply to increase subscriber market share.

Fig 1 Handset subsidy (%) for iPhone 7 (32GB w/ 2-yr contract) Monthly fee (HK$)

CMHK 319 399 491 587 - Subsidy (%) 47.0 45.1 43.1 36.1 HKT (6823 HK) 355 465 555 695 - Subsidy (%) 42.7 44.4 38.2 30.5 Hutch (215 HK) 355 465 555 695 - Subsidy (%) 45.8 45.5 38.1 30.5 SmarTone (315 HK) 352 462 532 - Subsidy (%) 43.8 44.2 40.6 Note: Subsidy % = Handset rebate as % of monthly fee proceeds (over contract life) Source: Company data, Macquarie Research, November 2016

Signed five-year partnership with Ericsson towards 5G. Recently, SmarTone announced that it has chosen Ericsson (ERICB SS, not rated) as the sole supplier for its core and radio access network (RAN) for the coming five years. For FY17, the company intends to spend HK$550-600m on capex. As SmarTone did not split out the portion of the abovementioned capex guidance to be spent on 5G preparation, we believe the initial amount to be relatively immaterial. The company highlighted the benefits of launching 5G service: (1) uplift network capacity by multiple times; and, (2) capture business opportunities from new types of applications such as virtual reality (VR) and machine-to- machine applications.

14 November 2016 2 Macquarie Research SmarTone Telecommunications

Macquarie’s view: If mobile operators simply attempt to pitch faster data downloading speed as the value proposition for consumers to adopt 5G service, we believe the adoption rate may not be very high. We believe mobile operators should stand a better chance by emphasizing the various types of mobile applications that could run on 5G network. With the gradual rise of popularity of electric vehicles, we believe 5G service should enable mobile operators to open up a new source of revenue stream. On a separate note, at the very beginning, we believe SmarTone may not incur material amount of capex on 5G rollout (consistent with its disciplined spending style). Based on current timeframe, we believe SmarTone could launch its 5G service in 2021.

Fig 2 Bandwidth and latency requirements of potential 5G use cases

Source: GSMA Intelligence, November 2016

Fig 3 SmarTone – capex and capex/sales ratio

(HK$ m) (%) 1,400 25

1,200 20 1,000

800 15

600 10 400 5 200

0 0 2011 2012 2013 2014 2015 2016 2017E 2018E

Capex Capex/sales (RHS)

Note: For capex/sales ratio, we use services revenue for the denominator and exclude handset sales revenue. Source: Company data, Macquarie Research, November 2016

14 November 2016 3 Macquarie Research SmarTone Telecommunications

Outlook for regulatory environment. The first round of consultation on arrangements for the frequency spectrum in the 900MHz and 1800MHz bands upon expiry of the existing assignments was completed back in mid-May. Office of the Communications Authority indicated the possibility for a second round of consultation in end 2016 or early 2017. From our conversation with the company, SmarTone believes a hybrid solution (for some spectrum, first right of refusal offered to operator currently using the spectrum; for some other spectrum, reassignment via open auction) could offer potential upside (i.e. the company may obtain additional spectrum via open auction to optimize its network). Macquarie’s view: In our view, the ideal case should be SmarTone keeping the frequency bands currently used by the company. That should incur the minimal disruptions for the company. If the regulatory body leans towards a hybrid solution in which each mobile operator is allowed to keep some existing spectrum but required to give up some existing spectrum, we believe that could: (1) drive the operator to bid more aggressively in the bidding process; and (2) affect the network quality if the operator decides not to take part in the bidding process at all. We believe the mobile operators will pass through the cost for renewal of frequency spectrum to the end-consumers. Given all four mobile operators are affected by the reassignment of frequency spectrum, we do not expect any one of the four operators will absorb the entire cost internally. Therefore, we expect to see another hike of mobile tariffs post reassignment of the frequency spectrum.

Fig 4 SmarTone – frequency spectrum currently used by the company Start (MHz) End (MHz) Remarks Expiry Start (MHz) End (MHz) Remarks Expiry

832.5 837.5 SmarTone (uplink) May-26 1807.1 1808.7 SmarTone (downlink) Sep-21 877.5 882.5 SmarTone 3G (downlink) May-26 1811.9 1813.5 SmarTone 2G (downlink) Sep-21 902.3 903.1 SmarTone 2G (uplink) Jan-21 1835.1 1845.1 SmarTone (downlink) Sep-21 907.5 915 SmarTone 4G (uplink) Jan-21 1920.3 1925.3 SmarTone 4G (uplink) Oct-31 947.3 948.1 SmarTone 2G (downlink) Jan-21 1950.1 1964.9 SmarTone 3G (uplink) Oct-31 952.5 960 SmarTone 4G (downlink) Jan-21 2110.3 2115.3 SmarTone 4G (downlink) Oct-31 1712.1 1713.7 SmarTone 2G (uplink) Sep-21 2140.1 2154.9 SmarTone 3G (downlink) Oct-31 1716.9 1718.5 SmarTone 2G (uplink) Sep-21 2520 2530 SmarTone 4G (uplink) May-28 1740.1 1750.1 SmarTone 4G (uplink) Sep-21 2640 2650 SmarTone 4G (downlink) May-28 Note: Bracketed spectrum are the ones which will face expiry in 2021. Source: Office of the Communications Authority (OFCA), Macquarie Research, November 2016

Fig 5 HK telecom sector – existing spectrum owned and spectrum due to expire (A) Spectrum due to expire (B) (B)/(A) Total % of total 900 MHz 1800 MHz Total (MHz) (%) (MHz) (MHz) (MHz) (%)

CMHK 116.0 21.0 0.0 26.4 26.4 22.8 HKT 194.0 35.1 16.6 72.8 89.4 46.1 Hutchison 129.4 23.4 16.6 23.2 39.8 30.8 SmarTone 112.6 20.4 16.6 26.4 43.0 38.2 552.0 100.0 49.8 148.8 198.6 36.0 Source: Office of the Communications Authority (OFCA), Macquarie Research, November 2016

Catalysts In the short term (<12 months), we believe the catalysts that could drive the share price include: . Percentage of mobile subscribers taking up tiered data pricing plans; . Proportion of SIM-only subscribers moving back to bundled subscription plans; . Launch of flagship handsets (e.g. iPhone) that may enable operators to raise monthly tariffs; . Decision by the Communications Authority (CA) towards arrangements for the frequency spectrum in the 900MHz and 1800MHz bands upon expiry of existing assignments (i.e., those assignments will expire between Nov 2020 and Sep 2021); . Ability to maintain the existing subscriber base despite competition from other Hong Kong mobile operators.

14 November 2016 4 Macquarie Research SmarTone Telecommunications

In the long term (>12 months), we believe the catalysts are: . Ability to lower capex spend post the rollout of the 4G network; . Impact of 5G service launch upon data of usage (DOU) per subscriber and ARPU; . Regulatory roadmap to be drawn out by the Office of Communications Authority (telecom regulatory body).

Fig 6 SmarTone – recap of half-yearly financial results 1H14 2H14 1H15 2H15 1H16 2H16 FY15 FY16

Revenue (HK$ m) 6,531 6,713 8,673 9,986 10,228 8,128 18,659 18,356 h-h change (%) 5.7 2.8 29.2 15.1 2.4 (20.5) y-y change (%) 10.9 8.6 32.8 48.8 17.9 (18.6) (1.6)

EBITDA (HK$ m) 1,348 1,215 1,469 1,463 1,377 1,284 2,932 2,661 h-h change (%) (7.2) (9.9) 20.9 (0.4) (5.9) (6.8) y-y change (%) (12.3) (16.3) 9.0 20.4 (6.3) (12.2) (9.2)

EBITDA margin (%) 20.6 18.1 16.9 14.7 13.5 15.8 15.7 14.5

Net profit (HK$ m) 311 226 466 469 403 384 935 787 h-h change (%) (19.0) (27.3) 106.2 0.6 (14.1) (4.7) y-y change (%) (32.2) (41.1) 49.8 107.5 (13.5) (18.1) (15.8) Source: Company data, Macquarie Research, November 2016

14 November 2016 5 Macquarie Research SmarTone Telecommunications

Macquarie Quant View

The quant model currently holds a reasonably positive view on SmarTone Attractive Displays where the Telecommunications. The strongest style exposure is Valuations, indicating company’s ranked based on this stock is under-priced in the market relative to its peers. The weakest s l the fundamental consensus

a style exposure is Earnings Momentum, indicating this stock has received t

n Price Target and earnings downgrades and is not well liked by sell side analysts. e Macquarie’s Quantitative

m

a Alpha model. 35/180 d

n

u Two rankings: Local market Global rank in F (Hong Kong) and Global Telecommunication Services sector (Telecommunication Quant % of BUY recommendations 36% (4/11) Services) Local market rank Global sector rank Number of Price Target downgrades 1 Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score.

China Communications Serv… 1.8 China Communications Serv…

China Mobile 1.7 China Mobile

HKT Trust 1.3 HKT Trust

China Telecom 1.1 China Telecom

Hutchison Telecommunicati… 0.8 Hutchison Telecommunicati…

SmarTone Telecommunicatio… 0.7 SmarTone Telecommunicatio…

China Unicom 0.5

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 Valuations Growth Profitability Earnings Price Quality Momentum Momentum

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below.

China Communications Serv… China Communications Serv… -0.2 China Mobile China Mobile -0.2 HKT Trust HKT Trust 0.7 China Telecom China Telecom -0.3 Hutchison Telecommunicati… Hutchison Telecommunicati… -2.1

SmarTone Telecommunicatio… -1.0 SmarTone Telecommunicatio…

China Unicom -1.0 China Unicom

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative Price to Book FY0 22% Score to sector(/180) to market(/654) Alpha Model Score 0.71 Price to Book NTM 18% Valuation 0.77 Price to Sales FY0 18% Growth -0.47 250d Volatility 17% Profitability 0.44 Earnings Momentum -1.11 ROIC 12m Fwd -22% Price Momentum -0.23 Altman Z-Score -23% Quality -0.37 Capital & Funding 0.10 ROIC FY1 -24% Liquidity -1.50 Merton Score -31% Risk 0.54 Technicals & Trading 0.09 -40% -20% 0% 20% 40% 0 50 100 0 50 100 0 0 1 1

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

14 November 2016 6 Macquarie Research SmarTone Telecommunications

SmarTone Telecommunications (315 HK, Outperform, Target Price: HK$15.00) Interim Results 2H/16A 1H/17E 2H/17E 1H/18E Profit & Loss 2016A 2017E 2018E 2019E

Revenue m 9,178 9,580 9,580 9,964 Revenue m 18,356 19,160 19,929 20,726 Gross Profit m 9,178 9,580 9,580 9,964 Gross Profit m 18,356 19,160 19,929 20,726 Cost of Goods Sold m 0 0 0 0 Cost of Goods Sold m 0 0 0 0 EBITDA m 1,330 1,512 1,512 1,534 EBITDA m 2,661 3,024 3,068 3,108 Depreciation m 778 948 948 951 Depreciation m 1,556 1,897 1,902 1,887 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 552 564 564 583 EBIT m 1,104 1,128 1,167 1,221 Net Interest Income m -71 -63 -63 -42 Net Interest Income m -142 -125 -83 -75 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 481 501 501 542 Pre-Tax Profit m 962 1,003 1,083 1,146 Tax Expense m -87 -83 -83 -89 Tax Expense m -175 -165 -179 -189 Net Profit m 394 419 419 452 Net Profit m 787 837 904 957 Minority Interests m 5 5 5 5 Minority Interests m 10 10 10 10

Reported Earnings m 399 424 424 457 Reported Earnings m 797 847 914 966 Adjusted Earnings m 399 424 424 457 Adjusted Earnings m 797 847 914 966

EPS (rep) 0.37 0.39 0.39 0.42 EPS (rep) 0.75 0.78 0.85 0.89 EPS (adj) 0.37 0.39 0.39 0.42 EPS (adj) 0.75 0.78 0.85 0.89 EPS Growth yoy (adj) % -16.0 4.6 4.6 7.9 EPS Growth (adj) % -16.0 4.6 7.9 5.7 PE (rep) x 14.9 14.2 13.2 12.5 PE (adj) x 14.9 14.2 13.2 12.5

EBITDA Margin % 14.5 15.8 15.8 15.4 Total DPS 0.60 0.60 0.63 0.67 EBIT Margin % 6.0 5.9 5.9 5.9 Total Div Yield % 5.4 5.4 5.7 6.0 Earnings Split % 50.0 50.0 50.0 50.0 Basic Shares Outstanding m 1,057 1,081 1,081 1,081 Revenue Growth % -1.6 4.4 4.4 4.0 Diluted Shares Outstanding m 1,065 1,081 1,081 1,081 EBIT Growth % -11.2 2.1 2.1 3.4

Profit and Loss Ratios 2016A 2017E 2018E 2019E Cashflow Analysis 2016A 2017E 2018E 2019E

Revenue Growth % -1.6 4.4 4.0 4.0 EBITDA m 1,556 1,897 1,902 1,887 EBITDA Growth % -9.3 13.7 1.4 1.3 Tax Paid m -195 -175 -165 -179 EBIT Growth % -11.2 2.1 3.4 4.7 Chgs in Working Cap m -703 10 10 10 Gross Profit Margin % 100.0 100.0 100.0 100.0 Net Interest Paid m -142 -125 -83 -75 EBITDA Margin % 14.5 15.8 15.4 15.0 Other m 0 0 0 0 EBIT Margin % 6.0 5.9 5.9 5.9 Operating Cashflow m 516 1,607 1,663 1,643 Net Profit Margin % 4.3 4.4 4.6 4.7 Acquisitions m 0 0 0 0 Payout Ratio % 80.1 76.6 75.0 75.0 Capex m -595 -600 -600 -550 EV/EBITDA x 4.3 3.9 3.8 3.7 Asset Sales m 0 0 0 0 EV/EBIT x 10.3 10.3 10.0 9.5 Other m 0 0 0 0 Investing Cashflow m -595 -600 -600 -550 Balance Sheet Ratios Dividend (Ordinary) m -634 -644 -649 -686 ROE % 19.5 19.2 19.6 19.6 Equity Raised m 0 0 0 0 ROA % 10.4 11.4 12.2 12.3 Debt Movements m 0 0 0 0 ROIC % 33.1 23.7 25.0 26.9 Other m -72 -83 -38 41 Net Debt/Equity % -9.0 -14.7 -21.7 -29.3 Financing Cashflow m -706 -727 -687 -645 Interest Cover x 7.8 9.0 14.0 16.2 Price/Book x 2.7 2.7 2.5 2.4 Net Chg in Cash/Debt m -785 280 376 449 Book Value per Share 4.1 4.2 4.4 4.7 Free Cashflow m -79 1,007 1,063 1,093

Balance Sheet 2016A 2017E 2018E 2019E

Cash m 3,242 2,348 2,723 3,172 Receivables m 274 274 274 274 Inventories m 341 356 370 385 Investments m 1,133 1,133 1,133 1,133 Fixed Assets m 3,236 3,160 3,073 2,926 Intangibles m 0 0 0 0 Other Assets m 2,176 2,176 2,176 2,176 Total Assets m 10,403 9,448 9,751 10,067 Payables m 578 603 627 653 Short Term Debt m 126 126 126 126 Long Term Debt m 2,724 1,550 1,550 1,550 Provisions m 545 536 549 559 Other Liabilities m 2,066 2,066 2,066 2,066 Total Liabilities m 6,039 4,881 4,918 4,954 Shareholders' Funds m 4,317 4,520 4,786 5,067 Minority Interests m 47 47 47 47 Other m 0 0 0 0 Total S/H Equity m 4,364 4,567 4,833 5,114 Total Liab & S/H Funds m 10,403 9,448 9,751 10,067

All figures in HKD unless noted. Source: Company data, Macquarie Research, November 2016

14 November 2016 7 Macquarie Research SmarTone Telecommunications Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie – South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 September 2016 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients) Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients)

315 HK vs HSI, & rec history 6823 HK vs HSI, & rec history 215 HK vs HSI, & rec history

(all figures in HKD currency unless noted) (all figures in HKD currency unless noted) (all figures in HKD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, November 2016

12-month target price methodology 315 HK: HK$15.00 based on a DCF methodology 6823 HK: HK$12.50 based on a DCF methodology 215 HK: HK$3.00 based on a DCF methodology

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 27-Aug-2016 315 HK Outperform HK$15.00 01-Sep-2015 315 HK Outperform HK$16.00 19-Feb-2015 315 HK Outperform HK$15.00

Target price risk disclosures: 315 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 6823 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 215 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

14 November 2016 8 Macquarie Research SmarTone Telecommunications Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. 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14 November 2016 10

Asia Research Head of Equity Research Industrials Telecoms Peter Redhead (Global – Head) (852) 3922 4836 Janet Lewis (Asia) (852) 3922 5417 Nathan Ramler (Asia, Japan) (813) 3512 7875 Jake Lynch (Asia – Head) (852) 3922 3583 Patrick Dai (China) (8621) 2412 9082 Danny Chu (Greater China) (852) 3922 4762 David Gibson (Japan – Head) (813) 3512 7880 Leo Lin (China) (852) 3922 1098 Soyun Shin (Korea) (822) 3705 8659 Conrad Werner (ASEAN – Head) (65) 6601 0182 Kunio Sakaida (Japan) (813) 3512 7873 Chirag Jain (India) (9122) 6720 4352 James Hong (Korea) (822) 3705 8661 Prem Jearajasingam (ASEAN) (603) 2059 8989 Automobiles/Auto Parts Inderjeetsingh Bhatia (India) (9122) 6720 4087 Kervin Sisayan (Philippines) (632) 857 0893 Janet Lewis (China) (852) 3922 5417 Internet, Media and Software Transport & Infrastructure Zhixuan Lin (China) (8621) 2412 9006 Leo Lin (China) (852) 3922 1098 Wendy Huang (Asia, China) (852) 3922 3378 Janet Lewis (Asia) (852) 3922 5417 Takuo Katayama (Japan) (813) 3512 7856 David Gibson (Asia, Japan) (813) 3512 7880 Corinne Jian (Taiwan) (8862) 2734 7522 James Hong (Korea) (822) 3705 8661 Hillman Chan (China, Hong Kong) (852) 3922 3716 Azita Nazrene (ASEAN) (603) 2059 8980 Amit Mishra (India) (9122) 6720 4084 Nathan Ramler (Japan) (813) 3512 7875 Soyun Shin (Korea) (822) 3705 8659 Utilities & Renewables Financials Abhishek Bhandari (India) (9122) 6720 4088 Alan Hon (Hong Kong) (852) 3922 3589 Scott Russell (Asia) (852) 3922 3567 Oil, Gas and Petrochemicals Inderjeetsingh Bhatia (India) (9122) 6720 4087 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Prem Jearajasingam (Malaysia) (603) 2059 8989 Elaine Zhou (Hong Kong) (852) 3922 3278 Polina Diyachkina (Asia, Japan) (813) 3512 7886 Karisa Magpayo (Philippines) (632) 857 0899 Keisuke Moriyama (Japan) (813) 3512 7476 Aditya Suresh (Asia, China) (852) 3922 1265 Chan Hwang (Korea) (822) 3705 8643 Anna Park (Korea) (822) 3705 8669 Commodities Suresh Ganapathy (India) (9122) 6720 4078 Duke Suttikulpanich (ASEAN) (65) 6601 0148 Colin Hamilton (Global) (44 20) 3037 4061 Thomas Stoegner (65) 6601 0854 Isaac Chow (Malaysia) (603) 2059 8982 Ian Roper (65) 6601 0698 (Malaysia, Singapore) Pharmaceuticals and Healthcare Jim Lennon (44 20) 3037 4271 Gilbert Lopez (Philippines) (632) 857 0892 Lynn Zhao (8621) 2412 9035 Passakorn Linmaneechote (Thailand) (662) 694 7728 Abhishek Singhal (India) (9122) 6720 4086 Matthew Turner (44 20) 3037 4340 Wei Li (China, Hong Kong) (852) 3922 5494 Conglomerates Economics Property David Ng (China, Hong Kong) (852) 3922 1291 Peter Eadon-Clarke (Global) (813) 3512 7850 Conrad Werner (Singapore) (65) 6601 0182 Tuck Yin Soong (Asia, Singapore) (65) 6601 0838 Larry Hu (China, Hong Kong) (852) 3922 3778 Gilbert Lopez (Philippines) (632) 857 0892 David Ng (China, Hong Kong) (852) 3922 1291 Tanvee Gupta Jain (India) (9122) 6720 4355 Consumer and Gaming Raymond Liu (China, Hong Kong) (852) 3922 3629 Wilson Ho (China) (852) 3922 3248 Quantitative / CPG Linda Huang (Asia, China, Hong Kong) (852) 3922 4068 William Montgomery (Japan) (813) 3512 7864 Gurvinder Brar (Global) (44 20) 3037 4036 Zibo Chen (China, Hong Kong) (852) 3922 1130 Corinne Jian (Taiwan) (8862) 2734 7522 Woei Chan (Asia) (852) 3922 1421 Terence Chang (China, Hong Kong) (852) 3922 3581 Abhishek Bhandari (India) (9122) 6720 4088 Danny Deng (Asia) (852) 3922 4646 Satsuki Kawasaki (Japan) (813) 3512 7870 Aiman Mohamad (Malaysia) (603) 2059 8986 Per Gullberg (Asia) (852) 3922 1478 Mike Allen (Japan) (813) 3512 7859 Kervin Sisayan (Philippines) (632) 857 0893 Kwang Cho (Korea) (822) 3705 4953 Patti Tomaitrichitr (Thailand) (662) 694 7727 Strategy/Country KJ Lee (Korea) (822) 3705 9935 Viktor Shvets (Asia, Global) (852) 3922 3883 Stella Li (Taiwan) (8862) 2734 7514 Resources / Metals and Mining Chetan Seth (Asia) (852) 3922 4769 Amit Sinha (India) (9122) 6720 4085 Polina Diyachkina (Asia, Japan) (813) 3512 7886 David Ng (China, Hong Kong) (852) 3922 1291 Fransisca Widjaja (65) 6601 0847 Coria Chow (China) (852) 3922 1181 Erwin Sanft (China, Hong Kong) (852) 3922 1516 (Indonesia, Singapore) Anna Park (Korea) (822) 3705 8669 Peter Eadon-Clarke (Japan) (813) 3512 7850 Karisa Magpayo (Philippines) (632) 857 0899 Chan Hwang (Korea) (822) 3705 8643 Chalinee Congmuang (Thailand) (662) 694 7993 Technology Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Emerging Leaders Damian Thong (Asia, Japan) (813) 3512 7877 Inderjeetsingh Bhatia (India) (9122) 6720 4087 George Chang (Japan) (813) 3512 7854 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Jake Lynch (Asia) (852) 3922 3583 Daniel Kim (Korea) (822) 3705 8641 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Aditya Suresh (Asia) (852) 3922 1265 Allen Chang (Greater China) (852) 3922 1136 Gilbert Lopez (Philippines) (632) 857 0892 Timothy Lam (China, Hong Kong) (852) 3922 1086 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Conrad Werner (Singapore) (65) 6601 0182 Mike Allen (Japan) (813) 3512 7859 Patrick Liao (Greater China) (8862) 2734 7515 Alastair Macdonald (Thailand) (662) 694 7753 Kwang Cho (Korea) (822) 3705 4953 Louis Cheng (Greater China) (8862) 2734 7526 Corinne Jian (Taiwan) (8862) 2734 7522 Kaylin Tsai (Greater China) (8862) 2734 7523 Find our research at Marcus Yang (Taiwan) (8862) 2734 7532 Conrad Werner (ASEAN) (65) 6601 0182 Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Regional Heads of Sales cont’d Sales Trading cont’d Miki Edelman (Global) (1 212) 231 6121 Paul Colaco (San Francisco) (1 415) 762 5003 Suhaida Samsudin (Malaysia) (603) 2059 8888 Jeff Evans (Boston) (1 617) 598 2508 Amelia Mehta (Singapore) (65) 6601 0211 Michael Santos (Philippines) (632) 857 0813 Jeffrey Shiu (China, Hong Kong) (852) 3922 2061 Angus Kent (Thailand) (662) 694 7601 Chris Reale (New York) (1 212) 231 2555 Sandeep Bhatia (India) (9122) 6720 4101 Ben Musgrave (UK/Europe) (44 20) 3037 4882 Marc Rosa (New York) (1 212) 231 2555 Thomas Renz (Geneva) (41 22) 818 7712 Christina Lee (UK/Europe) (44 20) 3037 4873 Justin Morrison (Singapore) (65) 6601 0288 Daniel Clarke (Taiwan) (8862) 2734 7580 Riaz Hyder (Indonesia) (6221) 2598 8486 Sales Trading Nick Cant (Japan) (65) 6601 0210 Brendan Rake (Thailand) (662) 694 7707 John Jay Lee (Korea) (822) 3705 9988 Adam Zaki (Asia) (852) 3922 2002 Mike Keen (UK/Europe) (44 20) 3037 4905 Nik Hadi (Malaysia) (603) 2059 8888 Stanley Dunda (Indonesia) (6221) 515 1555 Eric Roles (New York) (1 212) 231 2559 Gino C Rojas (Philippines) (632) 857 0861

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