August 1, 2015 INITIATION Legend Holdings (3396.HK) Neutral Equity Research Leading investor in China but fairly valued; initiate at Neutral Investment view Investment Profile With management capability proven by the success of its holdings in Low High Lenovo and China Auto Rental, Legend is widely recognized for value Growth Growth creation, generating above-peer CROCI of c.14%-17% in 2012-2014. Its Returns * Returns * Multiple Multiple diversified asset portfolio with industry-leading companies is well- Volatility Volatility positioned to benefit from: 1) urbanization, 2) consumption upgrade, and Percentile 20th 40th 60th 80th 100th 3) other secular growth trends in China, while established investment Legend Holdings (3396.HK) platforms should help it attract new opportunities. However, we initiate Asia Pacific Conglomerates Peer Group Average coverage with a Neutral rating as Legend is trading close to our 12-month * Returns = Return on Capital For a complete description of the investment profile measures please refer to the NAV-based target price of HK$36.2. disclosure section of this document. Core drivers of growth Key data Current Price (HK$) 35.00 (1) We project 13% earnings CAGR for Legend in 2014-17E, driven by 12 month price target (HK$) 36.20 integration of the Motorola Mobility and x86 businesses acquired by Market cap (HK$ mn / US$ mn) 82,479.6 / 10,639.6 Foreign ownership (%) -- Lenovo in 2014, and turnaround of the modern services, food and chemical divisions. (2) As with other holding companies, Legend enjoys the flexibility 12/14 12/15E 12/16E 12/17E to invest in new segments, leveraging its sizeable capital base and EPS (Rmb) 2.08 3.77 2.63 3.42 EPS growth (%) (14.0) 81.3 (30.3) 30.1 cashflow from more mature divisions. With group capex likely peaking this EPS (diluted) (Rmb) 2.08 3.77 2.63 3.42 EPS (basic pre-ex) (Rmb) 2.76 3.08 2.63 3.42 year, FCF should turn positive in 2017E. Leveraging up its net debt to P/E (X) NM 7.4 10.7 8.2 capital (ex-Lenovo) from 41% at end-2015E to 50% could raise Rmb17.5bn. P/B (X) NM 1.2 1.1 1.0 EV/EBITDA (X) -- 8.7 7.6 5.9 Dividend yield (%) NM 1.1 0.8 1.0 Risks to the investment case ROE (%) 14.1 19.2 10.9 12.5 CROCI (%) 11.2 6.8 7.9 9.1 Capital market volatility, with 40% of FY15E NAV attributed to financial or listed investments; regulatory & operational risks for portfolio assets. Price performance chart 44 105 Valuation 43 100 42 95 Our NAV-based 12-month target price of HK$36.2 is based on a 25% 41 90 40 85 discount to 2015E NAV/sh of HK$48.3, benchmarking the mid-cycle NAV 39 80 discounts of closest comps Fosun and CITIC given similarities in sector 38 75 37 70 exposure and corporate strategy. Our TP implies 1.28x P/B and 10.2x P/E. 36 65 35 60 34 55 Industry context May-15 Jun-15 Jul-15 Diversified investment group Legend mainly conducts businesses in seven Legend Holdings (L) MSCI China (R) segments. China conglomerates now trade at 41%-63% NAV discount. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Neutral Absolute -- -- -- Rel. to MSCI China -- -- -- Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/31/2015 close. Coverage View: Neutral Janet Lu +852-2978-1642 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Simon Cheung, CFA covered in its research reports. As a result, investors should be +852-2978-6102 [email protected] Goldman Sachs (Asia) L.L.C. aware that the firm may have a conflict of interest that could Alex Ye affect the objectivity of this report. Investors should consider +852-2978-6666 [email protected] Goldman Sachs (Asia) L.L.C. this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research August 1, 2015 Legend Holdings (3396.HK) Legend Holdings: Summary Financials Profit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E Total revenue 289,475.8 345,798.4 366,263.0 399,189.6 Cash & equivalents 40,604.7 28,509.9 23,191.0 29,372.1 Cost of goods sold (243,467.5) (282,220.0) (296,558.7) (322,340.0) Accounts receivable 72,034.1 73,261.6 74,443.2 79,834.3 SG&A (27,972.1) (37,553.3) (39,156.4) (40,933.7) Inventory 20,217.4 24,185.6 24,699.8 25,599.8 R&D (6,044.3) (11,386.1) (11,747.5) (12,085.2) Other current assets 42,471.2 44,745.9 51,090.0 50,243.3 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 175,327.4 170,703.0 173,423.9 185,049.4 EBITDA 11,991.9 14,639.0 18,800.4 23,830.6 Net PP&E 28,614.8 48,420.2 55,805.7 59,855.5 Depreciation & amortization (2,866.3) (5,364.8) (5,585.3) (5,660.5) Net intangibles 56,386.5 53,242.3 49,975.0 46,612.9 EBIT 9,125.6 9,274.2 13,215.1 18,170.2 Total investments 23,216.5 30,141.7 33,360.4 37,027.9 Interest income 591.0 572.4 402.5 385.5 Other long-term assets 5,456.3 5,456.3 5,456.3 5,456.3 Interest expense (3,185.5) (3,874.1) (3,841.9) (3,914.3) Total assets 289,001.5 307,963.5 318,021.3 334,002.0 Income/(loss) from uncons. subs. 291.7 580.1 870.1 1,178.3 Others 6,098.8 7,201.9 4,152.0 4,258.7 Accounts payable 108,512.4 106,522.4 102,787.8 106,880.9 Pretax profits 12,921.6 13,754.4 14,797.8 20,078.4 Short-term debt 19,570.5 19,570.5 19,570.5 19,570.5 Income tax (3,738.1) (3,822.4) (3,665.0) (4,967.5) Other current liabilities 23,674.9 25,471.1 27,401.9 27,400.6 Minorities (3,661.8) (3,214.8) (4,935.9) (7,051.0) Total current liabilities 151,757.8 151,564.0 149,760.2 153,852.0 Long-term debt 56,550.1 52,550.1 55,320.1 55,320.1 Net income pre-preferred dividends 5,521.7 6,717.3 6,196.9 8,059.8 Other long-term liabilities 27,828.3 27,828.3 27,828.3 27,828.3 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 84,378.4 80,378.4 83,148.4 83,148.4 Net income (pre-exceptionals) 5,521.7 6,717.3 6,196.9 8,059.8 Total liabilities 236,136.3 231,942.4 232,908.6 237,000.4 Post-tax exceptionals (1,361.3) 1,500.0 0.0 0.0 Net income 4,160.4 8,217.3 6,196.9 8,059.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 31,985.9 53,587.2 60,292.0 68,771.3 EPS (basic, pre-except) (Rmb) 2.76 3.08 2.63 3.42 Minority interest 20,879.4 22,433.9 24,820.7 28,230.2 EPS (basic, post-except) (Rmb) 2.08 3.77 2.63 3.42 EPS (diluted, post-except) (Rmb) 2.08 3.77 2.63 3.42 Total liabilities & equity 289,001.5 307,963.5 318,021.3 334,002.0 DPS (Rmb) 0.170.300.210.27 Dividend payout ratio (%) 8.2 8.0 8.0 8.0 BVPS (Rmb) 15.99 22.74 25.58 29.18 Free cash flow yield (%) -- (22.4) (6.7) 9.8 Growth & margins (%) 12/14 12/15E 12/16E 12/17E Ratios 12/14 12/15E 12/16E 12/17E Sales growth 18.7 19.5 5.9 9.0 CROCI (%) 11.2 6.8 7.9 9.1 EBITDA growth 21.4 22.1 28.4 26.8 ROE (%) 14.1 19.2 10.9 12.5 EBIT growth 15.1 1.6 42.5 37.5 ROA (%) 1.6 2.8 2.0 2.5 Net income growth (14.0) 97.5 (24.6) 30.1 ROACE (%) 16.0 11.9 10.7 12.7 EPS growth (14.0) 81.3 (30.3) 30.1 Inventory days 27.9 28.7 30.1 28.5 Gross margin 15.9 18.4 19.0 19.3 Receivables days 83.1 76.7 73.6 70.5 EBITDA margin 4.1 4.2 5.1 6.0 Payable days 149.0 139.1 128.8 118.7 EBIT margin 3.2 2.7 3.6 4.6 Net debt/equity (%) 67.2 57.4 60.7 46.9 Interest cover - EBIT (X) 3.5 2.8 3.8 5.1 Cash flow statement (Rmb mn) 12/14 12/15E 12/16E 12/17E Valuation 12/14 12/15E 12/16E 12/17E Net income pre-preferred dividends 5,521.7 6,717.3 6,196.9 8,059.8 D&A add-back 2,866.3 5,364.8 5,585.3 5,660.5 P/E (analyst) (X) NM 7.4 10.7 8.2 Minorities interests add-back 3,661.8 3,214.8 4,935.9 7,051.0 P/B (X) NM 1.2 1.1 1.0 Net (inc)/dec working capital (12,116.8) (11,168.6) (9,719.7) (1,218.7) EV/EBITDA (X) -- 8.7 7.6 5.9 Other operating cash flow (3,115.6) (8,098.4) (5,660.2) (6,311.3) EV/GCI (X) -- 0.8 0.8 0.7 Cash flow from operations (3,182.6) (3,970.1) 1,338.2 13,241.3 Dividend yield (%) NM 1.1 0.8 1.0 Capital expenditures (9,087.8) (14,742.0) (7,444.4) (4,046.6) Acquisitions (18,586.3) (1,067.4) (980.2) (1,052.2) Divestitures 1,005.3 0.0 0.0 0.0 Others 5,708.0 1,715.2 2,042.2 2,324.7 Cash flow from investments (20,960.8) (14,094.2) (6,382.4) (2,774.1) Dividends paid (common & pref) (332.8) (657.2) (495.6) (644.6) Inc/(dec) in debt 31,267.4 (4,000.0) 2,770.0 0.0 Common stock issuance (repurchase) 0.0 12,287.0 0.0 0.0 Other financing cash flows (3,716.4) (1,660.3) (2,549.1) (3,641.5) Cash flow from financing 27,218.3 5,969.6 (274.8) (4,286.1) Total cash flow 3,074.8 (12,094.8) (5,318.9) 6,181.1 Note: Last actual year may include reported and estimated data.