asia pacific dailyasiaresearch.daiwacm.com/eg/cgi-bin/files/daily03oct16.pdf · 2016 hk 27 feb-3...

Asia Pacific Daily

See important disclosures, including any required research certifications, beginning on page 59.

3 October 2016

Major changes Analyst Rating Page

Li Ning (2331 HK) Adrian Chan Outperform P.3

Further margin improvement expected

Target price ↑26.1% to HKD5.80 Other research

Discovery John Choi P.7

Asia small-cap weekly

Postal Savings Bank of China Leon Qi P.8

Lowest LDR among the 6 state-owned banks

China Longyuan Power (916 HK) Dennis Ip Buy P.10

Selloff from news of likely tariff cut appears overdone

Korea Cosmetic Sector Iris Park Positive P.14

China to lower consumption tax on cosmetics

CMS Edu (225330 KS) Thomas Y. Kwon No Rating P.16

A leading premium private education service in Korea

AVY Precision Technology (5392 TT) Steven Tseng No Rating P.18

An emerging smartphone metal casing play

Ascendas Real Estate Investment Trust (AREIT SP)

David Lum Hold P.20

More Australia, less China

Cityneon Holdings (CITN SP) Royston Tan No Rating P.24

Marvel immersion

Bangkok Dusit Medical (BDMS TB) Siriporn Arunothai Buy P.26

BDMS Wellness Clinic

Gunkul Engineering Pcl (GUNKUL TB) Supanna

Suwankird

Buy P.27

Powering up from 4Q

Indonesia Tobacco Michael W Setjoadi Neutral P.28

2017 excise tax hike: Bad for health Macro research

ASEAN Intelligence Rohan Dalziell P.29

What matters this week

Weekly Investment Strategy (abridged version)

Kazuhiro Miyake P.30

End to return reversals, attention to shift to non-financial domestic demand-oriented names

Company Roadshows

Date Company Event Venue 4-5 Oct Thai Beverage PCL (THBEV SP) NDR HK 4-5 Oct CITIC Telecom (1883 HK) NDR US 10-14 Oct Value Partners (806 HK) NDR US 11-12 Oct Tunas Baru Lampung (TBLA IJ) NDR SG 13 Oct GOME (493 HK) Telecon. HK 13 Oct Nine Dragons Paper (2689 HK) Group

LuncheonHK

13 Oct Nine Dragons Paper (2689 HK) Group Luncheon (VC)

SG

19 Oct Sa Sa International (178 HK) Group Luncheon

HK

24-28 Oct Texhong Textiles (2678 HK) NDR EU 28 Oct Frasers Centrepoint Trust (FCT SP) NDR Tokyo 28 Oct Mapletree Logistics Trust (MLT SP) NDR Tokyo 17 Nov Lee&Man Paper Group

LuncheonHK

21-25 Nov President Chain Store (2912 TT) NDR EU 22 Nov Angang Steel (347 HK) Telecon. HK 30 Nov - 2 Dec

L'Occitane (973 HK) NDR US

Daiwa Asian Events

Date Company Venue 11-Oct Daiwa ASEAN Conference - IDX-Daiwa-

Bahana Best of Indonesia Singapore 2016SG

13-14 Oct Daiwa ASEAN Conference - IDX-Daiwa-Bahana Best of Indonesia Tokyo 2016

Tokyo

8-11 Nov Daiwa Investment Conference Hong Kong 2016

HK

27 Feb-3 Mar 2017

Daiwa Investment Conference Tokyo 2017

Tokyo

Source: Daiwa

Regional indices

Performance chg

(%) EPS growth

(%) PER (x)

Market 1D 1M YTD 16E 17E 16E 17ETPX (1.5) (0.5) (14.5) 10.1 10.5 14.0 12.7 HSCEI (2.2) 0.4 (0.8) (3.8) 5.5 7.2 6.9 HSI (1.9) 1.4 6.3 (2.4) 9.7 12.9 11.8 KOSPI (1.2) 0.4 4.2 28.1 10.0 10.9 9.9 TWSE (1.1) 1.1 9.9 (1.3) 10.8 14.9 13.6 SENSEX* 0.1 (2.1) 6.7 12.2 18.4 19.4** 16.4** FSSTI (0.6) 1.7 (0.5) (5.1) 4.8 13.7 13.0 FBMKLCI* (1.0) (1.5) (2.4) (3.6) 7.2 16.8** 15.7** SET* (0.6) (4.2) 15.2 11.1 12.3 15.5** 13.8** PCOMP* (1.1) (2.0) 9.7 8.2 8.6 19.8** 18.3** JCI* (1.2) (0.4) 16.8 5.9 15.5 18.3** 15.9** AS51 (0.6) 0.1 2.6 7.4 8.0 16.1 14.9 Source: Thomson Reuters *Valuation based on MSCI Universe **MSCI index priced as of 29 Sep

Asia Pacific Daily | 1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/DIC HK 2016_Save the Date (Combined Version).pdf#page=1�

Thailand Economics Kampon

Adireksombat

P.31

Improving exports

U.S. Economic Comment Michael Moran P.32

Potential Fiscal Changes Under a New Administration

Euro wrap-up Chris Scicluna P.33

Overview

Yen 4Sight Emily Nicol P.39

Highlights Memos – quick updates

China Department Store sector Anson Chan P.43

Lower consumption tax for cosmetics

Global SCM Sector Rick Hsu P.45

Our read for the potential QCOM-NXP team-up: longer-term positive

Kerry Logistics Network (KLN) (636 HK) Kelvin Lau P.48

Disapproval of land-conversion plan a slight negative

Mando Corporation (Mando) (204320 KS) Sung Yop Chung P.49

Sued by Bosch over patents for ABS

Korea: share prices and Daiwa recommendation trends P.50 Daiwa’s Banner Products P.52 Analysts’ company visits P.53 Rating and target-price information P.54 Recently published reports P.55


See important disclosures, including any required research certifications, beginning on page 5

China Consumer Discretionary

What's new: We met with Li Ning’s management on 28 September to

discuss its latest operational updates. Overall, our positive stance on the

company’s financial turnaround, driven by its cost control efforts and new-product mix driven margin improvements, remains unchanged. What's the impact: Latest operational updates. Management noted that

SSSG in 3Q16 seems to have carried on the momentum from 2Q16 with

positive YoY growth, while channel inventory has seen gradual

improvements from 1H16’s 6.8 months. E-commerce channel sales were

said to be robust and are likely to see double-digit YoY growth. Catalysts: 1) New product mix. In 1H16, new products (together for its

current and previous season) accounted for 76% of the brand’s sell-through. Management targets to improve this ratio to 85% in 1-2 years.

Given new products’ lower retail discounts of 20-30% (vs. an overall retail

discount of c.40%), an improving new product mix is expected to bode well

for further gross margin expansion in 2017-18. 2) Recovery of ailing

distributors. According to management, 4 of Li Ning’s distributors in

southern China struggled due to an unfit product assortment that did not

take into consideration the climate and consumer differences (ie, sizing)

between the northern and southern regions. Management noted that

measures have been taken since 1Q17’s trade fair to rectify these issues

through order guidance. 3) Renovation of old stores. Management noted

that renovation is due for a number of its stores. We expect the sales

efficiency for these stores to improve after the necessary renovations are

complete in the near- to mid-term. 4) Dividends. While the company is still

in the early stages of recovery, resumption of dividend payments in the

near term would be a surprise on the upside, in our view. EPS revisions. We raise our 2017-18E EPS by 2% and 16%, respectively,

on higher gross profit margin assumptions driven by its new product mix

and after factoring in partial A&P savings as we expect its Chinese

Basketball Association sponsorship (c. CNY400-500m pa) to likely be

discontinued in September 2017. What we recommend: We reaffirm our Outperform (2) rating and raise our

12-month TP to HKD5.80, based on 20x the average of our 2016-17E EPS

(from HKD4.60, on 16x 2016-17E EPS), on our increasing confidence in its

gross margin improvement and EPS CAGR forecast of 70% for 2017-18

(previous: 58%). Key risk: lower-than-expected gross-profit margin. How we differ: We are slightly more cautious on the brand’s longer-term

growth given the competitive landscape in China.

30 September 2016

Further margin improvement expected

3Q16 SSSG continues momentum from 2Q16 We expect further gross margin improvement on new product mix Reiterating our Outperform (2) rating; raising TP to HKD5.80

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Li Ning (2331 HK)

Target price: HKD5.80 (from HKD4.60)

Share price (30 Sep): HKD5.31 | Up/downside: +9.2%

Adrian Chan, CFA(852) 2848 4427

[email protected]

Anson Chan, CFA(852) 2532 4350

[email protected]

Forecast revisions (%)

Year to 31 Dec 16E 17E 18E

Revenue change - - -

Net profit change - 2.3 15.8

Core EPS (FD) change - 2.3 15.8

90

104

118

131

145

3.0

3.6

4.3

4.9

5.5

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Share price performance

Li Ning (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 3.12-5.49

Market cap (USDbn) 1.26

3m avg daily turnover (USDm) 7.75

Shares outstanding (m) 1,847

Major shareholder Mr. Li Ning (29.8%)

Financial summary (CNY)


Revenue (m) 8,081 9,143 10,123

Operating profit (m) 514 909 1,425

Net profit (m) 380 700 1,100

Core EPS (fully-diluted) 0.176 0.324 0.510

EPS change (%) n.a. 84.2 57.1

Daiwa vs Cons. EPS (%) 6.8 32.4 60.3

PER (x) 25.9 14.1 9.0

Dividend yield (%) 0.0 0.0 0.0

DPS 0.000 0.000 0.000

PBR (x) 2.3 1.9 1.5

EV/EBITDA (x) 9.1 5.4 3.3

ROE (%) 11.2 17.6 22.4


2

Li Ning (2331 HK): 30 September 2016

Li Ning: sell-through mix Li Ning: channel inventory mix

Source: Company Note: H:\Consumer Team\_Sportswear\Li Ning\2016-09-30 Li Ning Model.xlsx

Source: Company Note: H:\Consumer Team\_Sportswear\Li Ning\2016-09-30 Li Ning Model.xlsx

Li Ning: SSSG trend

Source: Company data, Daiwa Note: H:\Consumer Team\_Sportswear\Li Ning\2016-09-30 Li Ning Model.xlsx

Li Ning: A&P expenses

Source: Company, Daiwa forecasts Note: H:\Consumer Team\_Sportswear\Li Ning\2016-09-30 Li Ning Model.xlsx

Li Ning: operating expenses and operating margin

Source: Company, Daiwa forecasts Note: H:\Consumer Team\_Sportswear\Li Ning\2016-09-30 Li Ning Model.xlsx

35% 31% 31% 31%24%

65% 69% 69% 69%76%

0%

20%

40%

60%

80%

100%

1H14 2H14 1H15 2H15 1H16

Old product New product (current and last season)

53% 56% 49% 55% 53%

20% 21%21%

17% 22%

27% 23% 30% 28% 26%

0%

20%

40%

60%

80%

100%

Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

6 months or less 7-12 months Over 12 months

0%

20%

40%

60%

80%

100%

120%

140%

(5%)

0%

5%

10%

15%

20%

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Overall Platform (LHS) Retail (LHS) Wholesale (LHS) E-commerce (RHS)

18%20%

24%

20%

14%13%

12%

9%

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

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

CNYm

A&P expenses (LHS) As a ratio of revenue (RHS)

-3%

-11%

2%

6%

10%

14%

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

0

1,000

2,000

3,000

4,000

2013 2014 2015 2016E 2017E 2018E

CNYm

A&P expenses Staff costs Transportation and logistics expense

Rental expenses R&D expenses OPM


3


Financial summary

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Li Ning brand retail sales (YoY%) 20.6 (16.4) 27.1 28.2 11.0 8.5 8.0 7.0

Li Ning brand wholesale sales (YoY%) (11.9) (30.5) (26.6) 1.6 15.6 9.0 7.5 5.0

Li Ning brand GPm (%) 46.1 38.7 45.3 45.0 45.1 47.0 47.8 48.8

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Li Ning brand retail sales 1,559 1,304 1,657 2,124 2,357 2,557 2,761 2,955

Li Ning brand wholesale sales 6,450 4,480 3,289 3,340 3,862 4,210 4,526 4,752

Other Revenue 919 893 879 584 871 1,314 1,856 2,417

Total Revenue 8,929 6,676 5,824 6,047 7,089 8,081 9,143 10,123

Other income 143 169 147 32 31 63 63 63

COGS (4,886) (4,162) (3,230) (3,329) (3,897) (4,285) (4,775) (5,187)

SG&A (3,555) (4,282) (2,910) (3,393) (3,067) (3,345) (3,523) (3,576)

Other op.expenses 0 0 0 0 0 0 0 0

Operating profit 631 (1,599) (169) (643) 157 514 909 1,425

Net-interest inc./(exp.) (82) (202) (150) (142) (133) (95) (46) (33)

Assoc/forex/extraord./others (2) (5) 2 7 7 328 72 75

Pre-tax profit 547 (1,806) (317) (778) 31 748 934 1,467

Tax (136) (149) (42) (52) (74) (107) (233) (367)

Min. int./pref. div./others (25) (24) (32) (38) (47) 0 0 0

Net profit (reported) 386 (1,979) (392) (868) (90) 640 700 1,100

Net profit (adjusted) 386 (1,979) (392) (781) 14 380 700 1,100

EPS (reported)(CNY) 0.367 (1.880) (0.313) (0.628) (0.049) 0.347 0.379 0.596

EPS (adjusted)(CNY) 0.367 (1.880) (0.313) (0.565) 0.008 0.206 0.379 0.596

EPS (adjusted fully-diluted)(CNY) 0.366 (1.726) (0.269) (0.500) 0.007 0.176 0.324 0.510

DPS (CNY) 0.110 0.000 0.000 0.000 0.000 0.000 0.000 0.000

EBIT 631 (1,599) (169) (643) 157 514 909 1,425

EBITDA 892 (1,372) 24 (464) 387 828 1,293 1,813

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Profit before tax 547 (1,806) (317) (778) 31 748 934 1,467

Depreciation and amortisation 260 225 192 197 251 314 385 388

Tax paid (412) (136) 4 (46) (48) (74) (107) (233)

Change in working capital (585) (832) 566 (1) 352 (299) (150) (122)

Other operational CF items 205 1,617 (459) 119 (39) 27 (25) (43)

Cash flow from operations 16 (932) (14) (508) 546 715 1,036 1,457

Capex (296) (121) (104) (241) (293) (423) (323) (323)

Net (acquisitions)/disposals (11) (7) 0 5 6 267 7 7

Other investing CF items (94) (86) (111) (93) (70) 160 (100) (100)

Cash flow from investing (400) (214) (215) (329) (357) 4 (416) (416)

Change in debt 529 1,352 (1,045) 602 (449) (330) (47) (38)

Net share issues/(repurchases) 12 2 1,482 3 1,230 0 0 0

Dividends paid (348) (23) 0 0 0 0 0 0

Other financing CF items (73) (153) (122) (102) (108) (148) (53) (43)

Cash flow from financing 120 1,178 316 503 673 (478) (101) (80)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash (265) 32 87 (334) 862 242 519 961

Free cash flow (280) (1,053) (117) (749) 253 292 713 1,134


4


Financial summary continued …

Balance sheet (CNYm)

Key ratios (%)


As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Cash & short-term investment 1,210 1,255 1,283 1,034 1,813 1,788 2,300 3,254

Inventory 1,133 901 942 1,289 960 1,131 1,189 1,215

Accounts receivable 2,439 1,713 1,734 1,639 1,749 1,950 2,166 2,365

Other current assets 0 36 3 0 962 0 0 0

Total current assets 4,782 3,906 3,962 3,963 5,484 4,869 5,655 6,833

Fixed assets 832 857 791 861 740 905 904 903

Goodwill & intangibles 752 423 381 446 266 287 303 316

Other non-current assets 964 834 883 770 408 684 684 684

Total assets 7,329 6,020 6,017 6,040 6,897 6,746 7,546 8,737

Short-term debt 838 1,447 200 551 366 37 29 23

Accounts payable 2,125 1,693 1,751 2,058 1,694 1,767 1,890 1,993

Other current liabilities 100 124 67 70 412 80 80 80

Total current liabilities 3,063 3,264 2,018 2,679 2,472 1,884 1,999 2,096

Long-term debt 0 652 846 975 910 910 870 838

Other non-current liabilities 601 292 262 217 105 105 105 105

Total liabilities 3,664 4,207 3,125 3,870 3,487 2,899 2,974 3,039

Share capital 112 112 137 142 177 177 177 177

Reserves/R.E./others 3,360 1,502 2,548 1,810 3,002 3,439 4,164 5,290

Shareholders' equity 3,472 1,614 2,684 1,952 3,180 3,616 4,341 5,467

Minority interests 193 199 208 218 231 231 231 231

Total equity & liabilities 7,329 6,020 6,017 6,040 6,897 6,746 7,546 8,737

EV 8,245 9,466 8,392 9,124 8,102 7,521 6,961 5,970

Net debt/(cash) (372) 844 (237) 491 (537) (841) (1,401) (2,392)

BVPS (CNY) 3.303 1.532 2.147 1.412 1.721 1.957 2.350 2.959

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Sales (YoY) (5.8) (25.2) (12.8) 3.8 17.2 14.0 13.1 10.7

EBITDA (YoY) (49.3) n.a. n.a. n.a. n.a. 114.0 56.2 40.2

Operating profit (YoY) (59.2) n.a. n.a. n.a. n.a. 227.4 76.7 56.8

Net profit (YoY) (65.2) n.a. n.a. n.a. n.a. 2,557.5 84.2 57.1

Core EPS (fully-diluted) (YoY) (65.0) n.a. n.a. n.a. n.a. 2,557.5 84.2 57.1

Gross-profit margin 45.3 37.7 44.5 44.9 45.0 47.0 47.8 48.8

EBITDA margin 10.0 n.a. 0.4 n.a. 5.5 10.2 14.1 17.9

Operating-profit margin 7.1 n.a. n.a. n.a. 2.2 6.4 9.9 14.1

Net profit margin 4.3 (29.6) (6.7) (12.9) 0.2 4.7 7.7 10.9

ROAE 11.3 n.a. n.a. n.a. 0.6 11.2 17.6 22.4

ROAA 5.6 n.a. n.a. n.a. 0.2 5.6 9.8 13.5

ROCE 15.1 n.a. n.a. n.a. 3.7 10.8 17.7 23.7

ROIC 16.6 (53.8) (6.4) (24.2) (7.9) 15.0 22.1 33.0

Net debt to equity n.a. 52.3 n.a. 25.2 n.a. n.a. n.a. n.a.

Effective tax rate 24.9 n.a. n.a. n.a. 239.4 14.3 25.0 25.0

Accounts receivable (days) 89.0 113.5 108.0 101.8 87.2 83.5 82.2 81.7

Current ratio (x) 1.6 1.2 2.0 1.5 2.2 2.6 2.8 3.3

Net interest cover (x) 7.7 n.a. n.a. n.a. 1.2 5.4 19.6 43.4

Net dividend payout 30.1 n.a. n.a. n.a. n.a. 0.0 0.0 0.0

Free cash flow yield n.a. n.a. n.a. n.a. 3.0 3.5 8.5 13.4

Company profile

Li Ning is a major domestic sportswear company in China, founded in 1990 by former Chinese

Olympic Gymnast Mr. Li Ning.



Asia ex Japan Small Cap

What’s new: This week, we published a special report on the regional

textile sector, specifically on why the market may be overstating the impact

of the Trans-Pacific Partnership (TPP) on regional textile companies that

have production facilities in Vietnam. While we believe the TPP will not be

passed anytime in the foreseeable future, we find that the companies that

already have Vietnam operations tend to be winners regardless of the TPP,

benefiting from Vietnam’s tax incentives, lower labour costs and improving

supply chain/infrastructure. We make no changes to our top-5 small cap

picks this week. Discovery idea: Cityneon Holdings (CITN SP, not rated), whose

traditional business lies in Interior Architecture, Exhibitions, Events and

Experiential Environments, has seen a transformation in its business model

after acquiring Victory Hill Exhibitions (VHE) in September 2015. Using the

latest technological capabilities and storytelling techniques, VHE aims to

deliver immersive and interactive exhibits that allow visitors to participate in

a “once in a lifetime sensory adventure”. Management said that clinching a

third IP could be a catalyst for business growth over the coming months. Pick of the week: As part of our regional textile sector report, our overall top

picks (regardless of the TPP) are the vertically integrated players with

established Vietnam operations, such as Shenzhou International (2313

HK, HKD53.95, Buy [1]) and Eclat Textiles (1476 TT, TWD377.5, Buy [1]).

For Shenzhou, we have raised our 12-month TP to HKD61 (from HKD57)

based on a target PER of 23x applied to our average 2016-17E EPS, after

building in a lower blended tax rate from the company’s tax benefits in

Vietnam. We also like Texhong Textiles (2678 HK, HKD10.58, Buy [1]),

which would be a major beneficiary of TPP’s yarn-forward rule, and is

actively expanding its downstream businesses in Vietnam. Daiwa’s small-cap top picks

Company Stock code

Mkt cap LCY Rating

Stock Target % FY1E FY1E FY1E EV/ FY1E Div. Investment summary

(USDm) price price upside PER PBR EBITDA ROE yield

Best Pacific International

2111 HK 876.88 HKD Buy 6.7 8.4 26.3% 14.7 3.4 9.8 24.75 2.74 The company is transitioning into a major sportswear fabrics supplier and we expect an accelerated sales and earnings growth in 2016-18E. The ramp up of its lace business should help sustain its gross margin.

CJ CGV 079160 KS 1,611.79 KRW Buy 85,300 124,000 45.4% 30.8 3.6 13.2 12.64 n.a. CJ CGV is successfully penetrating China’s movie market with its 4DX offering. Its recent acquisition of Mars (top movie chain in Turkey) should expand its earnings potential.

IMAX China Holding

1970 HK 1,777.62 HKD Buy 39 49 26.3% 33.0 8.4 21.7 29.14 n.a. One of the best stocks to capture the upside in China's growing discretionary spending and box office boom. The earnings quality should improve in 2016-18E, with increasing recurring revenues.

Taiwan Paiho 9938 TT 1,064.33 TWD Buy 111.00 115 3.6% 22.3 4.3 11.1 19.78 2.91 Gross margin should continue to expand on rising mix of profitable products. New shoe-face orders from Adidas, New Balance and Under Armour should start contributing to the top line in 2H16.

Tong Yang Industry 1319 TT 1,403.47 TWD Buy 76.00 75 -1.3% 17.9 2.3 8.5 13.10 2.79 The after-market business revenue growth should resume in 2016 after restocking post US west coast port issues; China OEM business should benefit from China’s automotive stimulus policies.

Source: FactSet, Daiwa forecasts; prices as of 29 Sep 2016; Note: O/P = Outperform

30 September 2016

Discovery

Asia small-cap weekly

Regardless of the TPP, we believe vertically-integrated regional textile players with established Vietnam operations will be winners

Discovery idea: Cityneon Holdings Pick of the week: Regional Textile Sector

Regional Small-cap Team

Recent company visits (19 – 30 Sep)

Company Bloomberg code

Honworld Group 2226 HK

China Travel International 308 HK

Texwinca 321 HK

Source: Daiwa *Note: results

Forthcoming company visits

Company Bloomberg code

China Lotsynergy 1371 HK

Global Brands 787 HK

Source: Daiwa *Note: results

John Choi(852) 2773 8730

[email protected]

Regional Small-cap Team



China Financials

Background: Postal Savings Bank of China (PSBC, 1658 HK) debuted on

the Hong Kong Stock Exchange on 28 September. The IPO was

oversubscribed and the stock has traded flat since listing (see also Deep-

rooted deposit franchise, published on 5 Jul 2016 and Agency outlet

arrangement stable but expensive, published on 15 Sep 2016). Highlights: Stronger capital base. The IPO raised USD7.4bn, which is

equivalent to 17.3% of PSBC’s core capital, based on 1H16 figures. After

the IPO, PSBC’s core tier-1 capital ratio is likely to rise from 8.17% at end-1H16 to around 9.58% (assuming unchanged risk-weighted assets), but

still lower than the average of 11.50% for the other 5 state-owned banks. Low loan-to-deposit ratio (LDR). PSBC’s LDR at end-1H16 was 40.02%,

much lower than the average of 73.5% for the other 5 state-owned banks.

As at end-1H16, PSBC had allocated 34.6% of its total assets to loans and

39.4% of assets to investment instruments. These consisted mainly of debt

securities traded on the China interbank market, issued by the China

government and financial institutions, accounting for 15.9% and 59.4% of

these investments, respectively. The average yield of PSBC’s fixed-income investment was 4.03% in 1H16,

lower than 5.18% for its loans. Thus, PSBC is looking to focus on its loan

business. PSBC’s gross loans grew by 11.6% HoH in 1H16, faster than the

6.2% HoH growth for the other state-owned banks. PSBC’s net liability positions are mainly short term (less than 1-year), while

its net asset positions are long term. According to our calculations, in 1H16

its liability duration was 0.50 years, much lower than its asset duration of

2.59 years. Its net asset position for those with durations of more than 5

years rose by 8.05% HoH, mainly due to an increase in long-term loans.

PSBC’s loan repricing could lag behind its deposit repricing amid declining

interest rates. Stock trading within narrow range since listing. It should be noted that

Goldman Sachs (Asia) is acting as a stabilising manager to stabilise or

support PSBC’s H-share market price. This role will end on 20 October, 30

days after the last day investors can subscribe to the initial public offering. Valuation: PSBC’s current share price of HKD4.77 implies a PBR of 1.0x,

based on 30 June 2016 BVPS adjusted for the IPO proceeds. The H-share

listed China banks are currently trading at an average 2016E PBR of 0.78x

and 2015 PBR of 0.87x.

30 September 2016

Postal Savings Bank of China

Lowest LDR among the 6 state-owned banks

Loan-to-deposit ratio lower than peers; more assets allocated to debt security investments

Short-term net liability position and long-term net asset position mean asset durations are longer than liability durations

Stock trading within narrow range since listing; stabilisation period to end on 20 October

PSBC: core CAR

Source: Company, Daiwa

Major China banks: loan-to-deposit ratio

Source: Companies, Daiwa Note: at end-1H16

Major China banks: NIM


Leon Qi, CFA(852) 2532 4381

[email protected]

Yan Li(852) 2773 8822

[email protected]

7.72% 8.44% 8.53% 8.35% 8.17%

4%

5%

6%

7%

8%

9%

10%

2013 2014 2015 1Q16 1H16

73.0% 75.9% 77.5% 64.7%

84.1%

40.0%

0%

20%

40%

60%

80%

100%

ICBC CCB BOC ABC BoCom PSBC

2.47 2.63

2.12

2.66

2.22

2.81

2.21 2.32

1.90

2.31

1.97

2.30

1.0

1.5

2.0

2.5

3.0


(%)

2015 1H16


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20160705cn_Postal_Savings_Bank_of_China.pdf




- 2 -

Postal Savings Bank of China: 30 September 2016

Major China banks: NPL ratio and SML ratio

Major China banks: provision coverage ratios

NPL ratio SML ratio

ICBC 1.55% 4.91%

CCB 1.63% 3.06%

BOC 1.47% 2.84%

ABC 2.40% 4.17%

BoCom 1.54% 3.07%

PSBC 0.78% 1.25%

Source: Companies, Daiwa

Note: at end-1H16


Major China banks: core CARs Major China banks: loan balance and growth


Source: Company, Daiwa Note: the average yields are in 2015, as PSBC did not disclose 1H16 average yields

China Banks Sector: valuation comparison

Company Ticker Rating Current Mkt cap P/B

P/E P/PPOP Div Yield ROE EPS growth

price (US$m) FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

ICBC 1398 HK O 4.99 235,514 0.80 0.73 5.47 5.39 3.28 3.15 5.5% 5.6% 15.5% 14.1% 0.7% 1.5%

CCB 939 HK H 5.89 190,025 0.80 0.73 5.49 5.44 3.09 2.93 5.5% 5.5% 15.4% 14.1% 1.0% 1.1%

BOC 3988 HK H 3.61 145,530 0.69 0.63 5.30 5.26 2.75 2.91 5.7% 5.7% 13.6% 12.5% 0.7% 0.8%

ABC 1288 HK S 3.41 152,100 0.76 0.69 5.28 5.26 2.93 2.88 5.7% 5.7% 15.1% 13.7% 0.0% 0.2%

BOCOM 3328 HK B 6.11 60,220 0.69 0.63 5.79 5.43 3.18 2.97 5.2% 5.5% 12.4% 12.1% 1.2% 6.7%

CMB 3968 HK B 19.84 67,476 1.07 0.96 7.19 6.80 2.81 2.50 4.2% 4.4% 15.7% 14.9% 3.6% 5.7%

CITIC 998 HK H 5.23 40,395 0.63 0.58 5.24 4.95 2.02 1.82 4.8% 5.1% 12.6% 12.1% -0.3% 5.9%

Minsheng 1988 HK U 8.96 48,950 0.83 0.74 6.06 5.73 2.80 2.59 3.1% 3.2% 14.7% 13.7% 2.1% 5.8%

CEB 6818 HK U 3.70 25,863 0.72 0.66 5.44 5.42 2.57 2.60 5.5% 5.5% 13.8% 12.7% -7.6% 0.4%

Sector

966,072 0.78 0.71 5.58 5.46 2.97 2.87 5.3% 5.4% 14.7% 13.6% 0.7% 2.1%

Source: Companies, Daiwa forecasts

Note: prices as of 29 Sep 2016; B=Buy, O=Outperform; H=Hold; U=Underperform; S=Sell

143.0% 151.6% 155.1%

177.7%

150.5%

293.4%

100%

150%

200%

250%

300%

350%


12.54% 13.06%

11.05% 10.06%

10.92%

8.17%

2%

4%

6%

8%

10%

12%

14%

16%


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000


(CNYm)

2015 1H16 HoH growth (RHS)



China Utilities

What's new: Local news outlets reported on 29 September that the NDRC is considering a further cut to wind power benchmark tariffs in 2018, by CNY0.03/kWh or a further 5-7%, to CNY0.41-0.55/kWh for zones I-IV. The news has caused the share price to fall by 9% today, which we think is an overreaction and suggest investors buy on weakness. What's the impact: 1.6-2.0pp decline in IRR after the cut. Based on our calculations, the new benchmark tariffs should lead to a fall in wind farm equity IRRs of 1.6-2.0pps to 10.2-11.9% in 2018, assuming no curtailment issues, which is still acceptable in our view. No earnings impact likely for Longyuan before 2019. The new wind-power benchmark tariffs will apply only to the wind farms that: 1) are approved after 1 January 2018, or 2) obtain approval before 1 January 2018 but are not connected to the grid as at end-2019. Hence, as Longyuan had already obtained approval for a total of 6.5GW wind capacity in its pipeline by end-1H16, its planned 2GW new wind capacity in 2018 should still be able to charge the current benchmark tariffs. Hence, we do not expect any future impact on the company’s earnings before 2019. Most defensive to tariff cut on new wind farms going forward. Given the potential tariff cut will only apply to new wind farms, Longyuan’s large exposure to existing wind farms render the company more defensive to the impact on average wind tariffs from the cut. Focus on continued utilisation recovery from 4Q16 to 2018. We expect the grid curtailment issue in the northern provinces to gradually come to an end from 4Q16-2018, and give rise to stronger growth in wind utilisation hours (4.5% CAGR for 2016-18, on our forecast) for Longyuan over its peers. Given weak 1Q16 utilisation, an over 10% recovery in wind utilisation hours may be sustained for the next 6 months, in our view, which would serve as a share-price catalyst. What we recommend: We believe the impact of the potential cut is remote and reiterate our confidence in Longyuan riding on a strong utilisation recovery. Also, we believe Longyuan will be the earliest in the sector to have positive FCF (2018E) before the proposed wind power tariff cut becomes effective. We reaffirm our Buy (1) rating and 12-month TP of HKD8.00 based on a 2016-17 average PER of 13x. Risk: weaker-than-expected utilisation hours. How we differ: We prefer Longyuan, which we expect to post higher net-profit growth in 2017-18, while the street prefers Huaneng Renewables (HNR, 958 HK, not rated) for its stronger growth in 2016E.

30 September 2016

Selloff from news of likely tariff cut appears overdone

Tariff cut unlikely to impact Longyuan’s earnings before 2019E Focus on continued utilisation recovery from 4Q16 to 2018 Reiterating Buy (1) call and TP of HKD8.00



China Longyuan Power (916 HK)

Target price: HKD8.00 (from HKD8.00)

Share price (30 Sep): HKD6.30 | Up/downside: +26.9%

Dennis Ip, CFA(852) 2848 4068

[email protected]

Daniel Yang(852) 2848 4443

[email protected]



Revenue change - - -

Net profit change - - -

Core EPS (FD) change - - -

50

64

78

91

105

3

5

6

8

9



Longyuan P (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Guodian Group (58.4%)

Financial summary (CNY)


Revenue (m) 21,852 24,696 27,153

Operating profit (m) 8,877 10,301 11,415

Net profit (m) 3,814 4,671 5,291

Core EPS (fully-diluted) 0.475 0.581 0.658

EPS change (%) 32.4 22.5 13.3

Daiwa vs Cons. EPS (%) 6.6 10.3 6.4

PER (x) 11.4 9.3 8.2

Dividend yield (%) 1.7 2.0 1.9

DPS 0.092 0.109 0.101

PBR (x) 1.1 1.0 0.9

EV/EBITDA (x) 8.5 7.8 7.4

ROE (%) 9.6 10.9 11.3


2

China Longyuan Power (916 HK): 30 September 2016

China: potential further wind tariffs cut in 2018

Utility zone Benchmark on-grid tariff (CNY/KWh, VAT incl.)

2015 2016-17 2018 Old 2018 New % change of the new cut in 2018

Zone I 0.51 0.47 0.44 0.41 -6.80%

Zone II 0.54 0.50 0.47 0.44 -6.40%

Zone III 0.58 0.54 0.51 0.48 -5.90%

Zone IV 0.61 0.60 0.58 0.55 -5.20%

Source: NDRC, escn.com, Daiwa

China: IRR impact on wind farms from potential tariff cut Longyuan and HNR: wind utilisation hour forecasts

Source: Daiwa

Source: Companies, Daiwa forecasts Note: We expect Longyuan to deliver stronger utilisation growth than HNR in 2017-18

Longyuan: monthly wind utilisation hour data HNR: monthly wind utilisation hour data

Source: Company Note: Low base for Longyuan in 1H16

Source: Company Note: High base for HNR in 1H16

Longyuan and HNR: exposure and utilisation outlook in northern provinces

LYP HNR

Province Region Exposure Utilisation in 1H16 YoY Up/downside 2017 Up/downside 2018 Exposure Utilisation in 1H16 YoY Up/downside 2017 Up/downside 2018

Inner Mongolia N 16% 937 -16% 25% 942 2%

Heilongjiang NE 8% 842 -14% 0% N.A N.A N.A N.A

Jilin NE 3% 698 -5% - 4% 873 -11% -

Liaoning NE 6% 1098 9% - - 14% 1047 14% - -

Gansu NW 8% 611 -21% - 0% N.A N.A N.A N.A

Xinjiang NW 9% 703 -29% - 5% 1151 18% - -

Ningxia NW 4% 822 -13% 0% N.A N.A N.A N.A


14.4%13.4% 13.0%

14.1%13.0%

12.1% 11.9%

13.5%

11.0%10.3% 10.2%

11.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Zone I Zone II Zone III Zone IV

2016 2018 2018E - new proposal

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2013 2014 2015 2016E 2017E 2018E

Longyuan HNR

80

100

120

140

160

180

200

220

240

260

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2014 2015 2016

(hours)

60

80

100

120

140

160

180

200

220

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2014 2015 2016

(hours)


3


Financial summary

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Consolidated capacity - Total (MW) 10,571 12,698 14,073 15,698 17,950 19,770 21,790 23,810

Consolidated capacity - wind (MW) 8,598 10,544 11,910 13,543 15,765 17,565 19,565 21,565

Wind power utilization hours (hours) 2,026 1,985 2,111 1,980 1,888 1,897 2,011 2,072

Consolidated wind power output (Million

Kwh)13,061 16,027 20,565 22,131 24,350 29,141 34,881 39,904

Unit fuel cost (CNY/MWh) 245 234 201 181 146 131 128 128

Average on-grid wind farm tariff 0.578 0.582 0.583 0.585 0.590 0.587 0.584 0.581

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Sales of electricity 10,695 12,404 14,710 14,934 15,856 17,945 20,681 23,058

Service concession construction

revenue793 519 667 228 662 788 891 964

Other Revenue 5,096 4,365 3,770 3,066 3,130 3,119 3,124 3,131

Total Revenue 16,585 17,288 19,147 18,228 19,649 21,852 24,696 27,153

Other income 1,296 1,296 432 437 447 444 444 444

COGS (8,302) (7,126) (6,672) (5,010) (5,044) (5,119) (5,333) (5,516)

SG&A (1,113) (1,326) (1,515) (1,606) (1,789) (1,856) (2,304) (2,639)

Other op.expenses (3,362) (4,086) (5,381) (5,489) (6,137) (6,443) (7,202) (8,027)

Operating profit 5,103 6,045 6,011 6,561 7,125 8,877 10,301 11,415

Net-interest inc./(exp.) (1,638) (2,518) (2,538) (2,960) (3,025) (3,494) (3,776) (4,037)

Assoc/forex/extraord./others 60 140 60 454 576 576 506 506

Pre-tax profit 3,526 3,667 3,533 4,055 4,676 5,959 7,031 7,885

Tax (305) (342) (561) (510) (600) (875) (1,075) (1,251)

Min. int./pref. div./others (642) (732) (921) (990) (1,196) (1,270) (1,285) (1,343)

Net profit (reported) 2,578 2,593 2,052 2,554 2,881 3,814 4,671 5,291

Net profit (adjusted) 2,578 2,593 2,052 2,554 2,881 3,814 4,671 5,291

EPS (reported)(CNY) 0.345 0.347 0.255 0.318 0.358 0.475 0.581 0.658

EPS (adjusted)(CNY) 0.345 0.347 0.255 0.318 0.358 0.475 0.581 0.658

EPS (adjusted fully-diluted)(CNY) 0.345 0.347 0.255 0.318 0.358 0.475 0.581 0.658

DPS (CNY) 0.032 0.057 0.071 0.071 0.088 0.092 0.109 0.101

EBIT 5,103 6,045 6,011 6,561 7,125 8,877 10,301 11,415

EBITDA 8,101 9,742 10,412 11,572 12,680 14,733 16,783 18,572

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Profit before tax 3,526 3,667 3,533 4,055 4,676 5,959 7,031 7,885

Depreciation and amortisation 2,998 3,697 4,401 5,011 5,554 5,855 6,483 7,156

Tax paid (305) (342) (561) (510) (600) (875) (1,075) (1,251)

Change in working capital (3,538) (3,051) 2,988 (2,794) 4,029 (2,585) (1,339) (1,908)

Other operational CF items 2,961 3,027 3,250 7,120 2,665 1,045 3,639 3,618

Cash flow from operations 5,641 6,998 13,611 12,881 16,325 9,399 14,739 15,501

Capex (14,505) (12,461) (11,534) (13,635) (16,193) (13,458) (14,845) (14,940)

Net (acquisitions)/disposals 0 0 (175) (867) (745) 0 0 0

Other investing CF items (261) (1,656) 1,220 (6,362) 619 0 0 0

Cash flow from investing (14,766) (14,117) (10,489) (20,864) (16,319) (13,458) (14,845) (14,940)

Change in debt 11,058 8,067 (1,112) 12,035 4,405 7,648 5,050 4,599

Net share issues/(repurchases) 0 2,295 0 0 0 0 0 0

Dividends paid (403) (515) (512) (382) (480) (763) (934) (1,058)

Other financing CF items (2,333) (992) (3,862) (4,000) (3,418) (3,713) (3,935) (4,026)

Cash flow from financing 8,322 8,856 (5,486) 7,653 507 3,172 181 (485)

Forex effect/others (13) (13) (15) (6) (22) 0 0 0

Change in cash (815) 1,723 (2,379) (336) 491 (887) 75 76

Free cash flow (8,863) (5,463) 2,077 (754) 132 (4,059) (106) 561


4



Balance sheet (CNYm)

Key ratios (%)


As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Cash & short-term investment 3,740 5,369 3,445 2,835 3,274 2,387 2,462 2,538

Inventory 926 816 753 1,017 1,081 931 853 846

Accounts receivable 5,430 7,998 6,710 6,416 4,238 5,783 6,948 8,378

Other current assets 3,377 3,603 2,899 4,526 4,104 4,847 5,145 5,618

Total current assets 13,473 17,786 13,807 14,795 12,697 13,948 15,407 17,380

Fixed assets 64,967 73,352 79,985 88,555 98,609 106,742 115,634 123,947

Goodwill & intangibles 8,174 8,333 8,697 8,542 8,699 8,250 7,800 7,351

Other non-current assets 8,010 8,368 8,618 11,921 13,468 13,963 14,389 14,816

Total assets 94,624 107,840 111,106 123,813 133,473 142,903 153,230 163,493

Short-term debt 19,078 26,170 24,697 36,114 44,688 47,620 48,794 51,447

Accounts payable 1,597 1,261 2,142 1,021 1,902 1,455 1,500 1,489

Other current liabilities 9,161 8,644 9,936 9,194 9,057 6,965 7,176 7,124

Total current liabilities 29,836 36,075 36,775 46,328 55,647 56,040 57,471 60,060

Long-term debt 31,828 32,482 33,205 33,922 29,970 34,686 38,561 40,658

Other non-current liabilities 2,634 2,861 2,997 2,658 3,323 3,323 3,323 3,323


Share capital 7,464 8,036 8,036 8,036 8,036 8,036 8,036 8,036

Reserves/R.E./others 18,444 21,393 22,917 25,071 30,063 33,114 36,851 41,084

Shareholders' equity 25,909 29,429 30,954 33,107 38,100 41,151 44,888 49,121

Minority interests 4,417 6,992 7,176 7,797 6,433 7,703 8,988 10,331


EV 93,566 101,686 102,873 114,932 116,532 125,761 131,515 137,026

Net debt/(cash) 47,166 53,283 54,457 67,200 71,384 79,918 84,894 89,568

BVPS (CNY) 3.471 3.662 3.852 4.120 4.741 5.121 5.586 6.112

Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E

Sales (YoY) 16.6 4.2 10.7 (4.8) 7.8 11.2 13.0 9.9

EBITDA (YoY) 28.4 20.3 6.9 11.1 9.6 16.2 13.9 10.7

Operating profit (YoY) 25.3 18.5 (0.6) 9.1 8.6 24.6 16.0 10.8

Net profit (YoY) 28.1 0.6 (20.9) 24.5 12.8 32.4 22.5 13.3

Core EPS (fully-diluted) (YoY) 28.1 0.3 (26.3) 24.5 12.8 32.4 22.5 13.3

Gross-profit margin 49.9 58.8 65.2 72.5 74.3 76.6 78.4 79.7

EBITDA margin 48.8 56.3 54.4 63.5 64.5 67.4 68.0 68.4

Operating-profit margin 30.8 35.0 31.4 36.0 36.3 40.6 41.7 42.0

Net profit margin 15.5 15.0 10.7 14.0 14.7 17.5 18.9 19.5

ROAE 10.5 9.4 6.8 8.0 8.1 9.6 10.9 11.3

ROAA 3.0 2.6 1.9 2.2 2.2 2.8 3.2 3.3

ROCE 7.0 6.9 6.3 6.3 6.2 7.1 7.6 7.8

ROIC 6.8 6.6 5.5 5.7 5.5 6.2 6.5 6.7

Net debt to equity 182.0 181.1 175.9 203.0 187.4 194.2 189.1 182.3

Effective tax rate 8.7 9.3 15.9 12.6 12.8 14.7 15.3 15.9

Accounts receivable (days) 98.2 141.7 140.2 131.4 99.0 83.7 94.1 103.0

Current ratio (x) 0.5 0.5 0.4 0.3 0.2 0.2 0.3 0.3

Net interest cover (x) 3.1 2.4 2.4 2.2 2.4 2.5 2.7 2.8

Net dividend payout 9.4 16.4 27.7 22.3 24.4 19.4 18.7 15.3

Free cash flow yield n.a. n.a. 4.8 n.a. 0.3 n.a. n.a. 1.3

Company profile

Listed in December 2009, China Longyuan Power is Asia's largest and the world's second-largest wind-farm operator, with total operational experience of 22 years. Total attributable capacity of wind farms reached 16,547 MW as of 1H16. The group has developed projects across 23 provinces and autonomous regions in China and overseas. China Guodian Group, one of the big-five independent power producer groups, is the company's largest shareholder.



Korea Consumer Discretionary / Consumer Staples

What’s new: China today announced plans to lower the consumption tax on cosmetic products with effect from 1 October 2016, a move that we expect to have a positive impact on Korea’s cosmetics companies. What’s the impact: Lower consumption tax. According to Daiwa’s China consumer analyst, Anson Chan, the 30% consumption tax on non-luxury cosmetics (priced at less than CNY10/ml or CNY15/unit) will be removed altogether, while cosmetics products priced at more than CNY10/ml or CNY15/unit will be subject to a tax of 15% (vs. 30% currently). The change looks to be aimed at boosting China’s domestic consumption. Cut could affect duty-free sales (DFS) in Korea. With the change, the price gap between Korea DFS and China onshore sales will shrink, which could affect DFS sales. However, companies may not reduce their onshore prices to fully reflect the change in tax rates, in our view. If retail prices decline to a meaningful extent, this may have negative impact on the brand-name cosmetics companies’ earnings as margins in duty-free stores are higher than for onshore China business. We believe this potential negative impact will be less on LG H&H (051900 KS, KRW950,000,

Outperform [2]), as its DFS sales contribution is lower than that of Amorepacific (090430 KS, KRW390,000, Buy [1]) (6% vs 28% in 2016E). Cosmax (192820 KS, KRW147,000, Buy [1]) likely the biggest

beneficiary, as: 1) it has the most sales exposure (38% of 2016E revenue) to China’s cosmetics market, 2) most of its China revenue comes from makers of low-end cosmetics, on which the consumption tax will be removed, and 3) it should have the capacity to absorb any increase in demand (vs. the start of the year, its end-2016 production capacity is planned to be 2.5x higher). What we recommend: We remain Positive on the sector and look for increased consumption by Chinese consumers to boost onshore revenue. Overall, we expect the ODM companies to benefit the most, as they should see the biggest volume increase. As for the brand companies, we see a mixed impact as demand potentially shifts from Korea DFS to onshore business. Longer term, however, the change should be positive for the brand companies as they become less dependent on DFS sales and expand their China onshore business. How we differ: Relative to the market, we are more bullish on Amorepacific, LG H&H and Cosmax, due partly to our expectation of rising revenue in 2016 associated with Chinese demand.

30 September 2016

Korea Cosmetic Sector

China to lower consumption tax on cosmetics

The tax on cosmetics will be reduced from 1 October 2016 Increased spending on cosmetics by Chinese consumers should

benefit Korea’s cosmetics players We reiterate our Buy (1) call on Cosmax, which see as being the

biggest beneficiary of this policy change

Chinese consumption tax changes

Source: China Finance of Ministry

Iris Park(82) 2787 9165

[email protected]

30% 15%

17%

17%

17%

0%

20%

40%

60%

Before Low/mid-end High-end

Consumption tax VAT


2

Korea Cosmetic Sector: 30 September 2016

Korea Cosmetics: Revenue contribution comparison (2016E) Korea Cosmetics: OPM comparison (2016E)

Source: Daiwa forecasts Source: Daiwa forecasts

Cosmax: China revenue Cosmax: production capacity

Source: Daiwa forecasts Source: Company

Cosmax: EPS sensitivity to China revenue growth

33% 35% 38% (our current forecast) 41% 44%

2017E EPS growth 47.3% 49.5% 52.7% 56.0% 59.3%


Korea Cosmetics: Valuations

Company Ticker Stock price (local curr.) Total Return (%) PERx PBRx ROE (%) EPS Growth (%)

1M 6M YTD 16Y 17Y 16Y 17Y 16Y 17Y 16Y 17Y

Amorepacific 090430 KS Equity 390000 0.8 1.0 6.8 33.4 27.4 6.4 5.3 20.1 20.7 18.2 22.0

LG H&H 051900 KS Equity 950000 -0.4 0.2 15.8 25.2 21.4 6.0 4.8 26.6 25.1 19.9 17.7

Cosmax 192820 KS Equity 147000 -1.3 19.5 -30.6 35.7 24.0 10.4 7.5 32.1 36.0 74.2 48.8

Korea Kolmar 161890 KS Equity 96200 6.9 16.5 -1.1 34.3 27.2 7.5 6.0 24.1 24.4 30.3 26.0

Global peers

L'OREAL OR FP Equity 168 -1.7 9.6 14.7 26.0 24.4 3.8 3.5 14.7 14.9 4.2 6.8

Estee Lauder EL US Equity 87 -2.4 -4.9 16.1 24.9 24.9 8.2 8.3 32.3 35.6 4.9 9.0

P&G PG US Equity 88 0.4 7.7 29.2 22.7 22.7 4.1 4.1 16.7 19.2 -8.7 5.9

SHISEIDO 4911 JP Equity 2690 6.3 4.0 5.6 34.8 33.5 2.6 2.5 8.3 7.7 -8.6 4.0

Shanghai Jahwa 600315 CH Equity 28 2.1 10.0 28.9 28.1 24.7 3.2 3.0 12.0 13.1 -69.8 13.8

Average 29.5 25.6 5.8 5.0 20.8 21.8 7.2 17.1

Source: Daiwa forecasts, Bloomberg, Pricing as of 30 September 2016

27.5

18.2 19.7

5.8

0

5

10

15

20

25

30

Amorepacific LG H&H

(%)

Duty-free store China

25

30

12.2

23.8

0

5

10

15

20

25

30

35

Amorepacific LG H&H

(%)

Duty-free store China

123.3

204.8 281.4

388.4

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

300

350

400

450

2014 2015 2016E 2017E

(%) (KRW bn)

China revenue (LHS) % of total sales (RHS)

190 230 300

150 240

500

50

100

100

40

40

40

0

200

400

600

800

1,000

2014 2015 2016E

(mn units)

Korea China US Indonesia



Korea Consumer Discretionary

Background: From our discussion with its management on 30 September,

we learned that CMS Edu is a leading mathematics educational program

and content developer for elementary and junior high school students in

Korea. The company was listed on the Kosdaq on 7 April 2016. The 1H16

revenue breakdown: education services (89.2%), content products (10.8%). Highlights: Niche market: CMS Edu has penetrated a niche market

despite an industry-wide slowdown in educational services in Korea.

According to Kostat and the MOE (Ministry of Education) in Korea, the

student population in Korea shrank by 22.3% in 2009-15, while the private

education market size fell by 21.3% for the same period. However, thanks

to its unique program that targets the top 10% of elementary and junior

high school students in Korea, it has positioned itself at a niche market and

has built high barriers to entry. Its total revenue saw a CAGR of 22.9% for

2012-15 and an operating-profit margin of 17.0-18.9%. Power of content: CMS Edu has content that does not overlap with other

private education courses in Korea. CEO, Chung Guk Lee, and the

company have been developing this education program for 10 years, and

have found the 500 best teaching themes, while conducting student trials to

seek the most effective method to teach. As its competitiveness lies in its

content, unlike other private education providers, CMS Edu’s program is

more standardised and it does not have a risk of its best lecturer leaving for

other educational services. Out of the total 789 students accepted in 8

science high schools in Korea in 2016, 30.4% were enrolled at CMS Edu. Expansion: CMS Edu has been continuously expanding its Korea

business, while targeting overseas markets. CMS Edu’s direct branches

have increased from 13 in 2012 to 24 in 2Q16. It plans to add 4 direct

branches per year till 2021, and expects the number of students to increase

by 10% per year. Also, the company aims to export its competitive content

and programs. It has exchanged an MOU with an agency of the Ministry of

Education in Thailand to supply content for a pilot program, and expects to

generate revenue from November 2016. Also, it had discussions with Ho

Chi Minh City’s office of education in March-April 2016 to run a pilot

program till September, and it expects to supply content from 2017. Valuation: CMS Edu shares are trading at PERs of 14.1x for 2016 and

11.9x for 2017, based on the Bloomberg consensus. Management expects

revenue to grow by 15% YoY in 2016, while recording a 19% operating-profit margin. Its dividend payout ratio was 54.6-66.1% for 2013-15, and

management expects it to be at a similar level in 2016. Based on its closing

price on 30 September, CMS Edu’s 2015 dividend yield is 3.9%.

30 September 2016

A leading premium private education service in Korea

Firm positioning by offering mathematics education to top students Unique content and program has driven student growth Management planning expansion in Korea and globally

12-month range 21,900.00-31,750.00




CMS Edu (225330 KS)

Target price: n.a.

Share price (30 Sep): KRW29,350 | Up/downside: -

Thomas Y. Kwon(82) 2 787 9181

[email protected]

85

95

105

115

125

20,000

23,000

26,000

29,000

32,000

Apr-16 Jul-16


CMS Edu Co (LHS)Relative to KOSPI (RHS)

(KRW) (%)


2

CMS Edu (225330 KS): 30 September 2016

CMS Edu: revenue mix and trends (2012-2H16, KRWbn) CMS Edu: shareholding structure (as at end-2Q16)

Source: Company

Source: Company Note: KoFC (KoFC POSCO HANWHA KB Shared Growth No.2 PEF), lockup period for

employment stock ownership (2.8% of total shares) due to expire on 7 Oct 2016 Korea: private education market size per major subject (2015) Korea: number of students vs. private education market size

(2007-15)

Source: Kostat, Ministry of Education Note: Market size only includes elementary and junior high school students

Source: Kostat, Ministry of Education Note: Number of students includes elementary school, junior high, and high school

CMS Edu: positioning among the education services CMS Edu: quarterly-earnings trend (KRWbn)

Preschool

Elementary school

Junior high

High school

Adult

Science school prep CMS Edu

Mathematics

English

Neungyule(053290 KS), JLS(040420 KS)

YBM Sisa (057030 KS)

General

Megastudy (072870 KS), Digital Daesung

(068930 KS)

Home-school materials

Woongjin (016880 KS), Daekyo (019680 KS)

Others

Credu (067280 KS)

(KRWbn) 2012 2013 2014 2015 1H16

Total revenue 26.0 31.9 40.0 48.2 28.9

YoY growth (%) 22.7 25.6 20.4 18.3

Operating profit 4.4 6.0 7.6 8.8 6.1

YoY growth (%)

35.3 26.2 17.1 10.4

Operating-profit margin (%) 17.0 18.8 18.9 18.4 21.1

Net profit 3.6 5.3 6.1 7.0 4.9

YoY growth (%)

48.7 14.7 15.7 8.4

Net profit margin (%) 13.7 16.6 15.2 14.6 16.9

Source: Company Source: Company

CMS Edu: no. of direct branches and franchises (2012-2H16) CMS Edu: students accepted at science schools vs. KMO awardees

Source: company Note: Junior high programs are prep courses for science or talented high schools

Source: company Note: 1) KMO (Korean Mathematics Olympiad); 2) KMO awardees for 2016 smaller as 2nd

round of competition ongoing

0

5

10

15

20

25

30

0

10

20

30

40

50

60

2012 2013 2014 2015 1H16

Tuition Content (teaching material)Franchise and others YoY growth (%, RHS)

Chungdahm Learning 47.6%

KoFC 10.0%

Employee stock ownership association

6.7%

Others 35.8%

Korean 7.3%

English 44.8%

Mathematics 36.8%

Science and Social studies

5.2%

Second language, Chinese

character and Computer

1.9% Essay 4.1%

(6)

(1)

4

9

14

16

18

20

22

24

2007 2008 2009 2010 2011 2012 2013 2014 2015

Private education market size (KRWtn)Number of students (m, RHS)Private education market size YoY growth (%, RHS)

0

10

20

30

40

50

0

5,000

10,000

15,000

2012 2013 2014 2015 2H16

Junior high school lectures Elementary school lecturesFranchise lectures Direct branches (RHS)Franchises (RHS)

0

100

200

300

400

500

2011 2012 2013 2014 2015 2016

Number of students accepted by talented schoolNumber of KMO awardees (3rd place and above)



Taiwan Information Technology

Background: Founded in 1975, AVY Precision Technology (AVY) is a digital

still camera (DSC) enclosure (metal and plastic) manufacturer, which has been

active in the smartphone casing market since 2013. While the company’s other

businesses include auto parts and power tool manufacturing, management

considers smartphone metal casings the most important growth driver going

forward. Highlights: Differentiation strategy. AVY has a different strategy as it is

much smaller than leading metal casing suppliers such as Foxconn and

Catcher. While tier-1 players use extrusion and CNC machining to produce

high-end unibody casings, AVY combines stamping and CNC machining. The

stamping process helps to form the basic shape of the case, while the CNC

machine undertakes further processing. AVY believes this process results in

similar quality but at lower cost, due to much shorter CNC processing time.

AVY is also confident of its competiveness in providing clients more choices of

colours and metal/plastic hybrid designs due to its previous DSC enclosure

manufacturing experience. Capacity and clients. AVY has around 1,000 CNC machines and is able to

secure a further 500 units from its outsourcing partners. Its monthly capacity is

capable of reaching 0.7-0.8m pcs, but its actual shipments are usually around

0.5m pcs due to production yield. AVY expects no new capex in the near term,

as its top priorities are capacity utilisation and yield improvement. AVY has 3

smartphone clients currently (2 in China and 1 in Taiwan), and targets to add 2

more in 2017 (likely in Japan and China).

Financial update. Smartphone casing revenue (21% in 1H16) has been the

main revenue driver since 2015. AVY’s operating margin turned positive in

1H16 for the first time since 2013, thanks mainly to an improved learning curve

and rising shipment scale in metal casings. AVY expects revenue to peak in

3Q16, while a key client’s high-end smartphone project (to be announced in

early October) could provide further revenue upside in 4Q16. No major impact from glass adoption. AVY supplies metal casings for

projects that use 2.5D glass casings and expects some of its clients to unveil

3D glass casing models in early 2017. Despite a rising adoption of glass

casings, AVY does not expect any major impact on its ASP, as: 1) glass

casings actually need stronger metal parts for structural support, and 2) such

metal parts could also involve a longer processing time, due to more

sophisticated design and inlay to facilitate component assembly. Valuation: AVY is trading at a PBR of 1.2x on the Bloomberg consensus

2016E BVPS, compared to 0.8-2.2x over the past 3 years (average of 1.3x).

30 September 2016

An emerging smartphone metal casing play

The company’s main focus is smartphone metal casings production Operating margin turned positive in 1H16, the first time since 2013 It sees no major ASP pressure from the rising adoption of glass casings


AVY Precision Technology (5392 TT)

Target price: n.a.

Share price (30 Sep): TWD55.10 | Up/downside: -

Steven Tseng(886) 2 8758 6252

[email protected]

Jack Lin(886) 2 8758 6253

[email protected]

85

93

100

108

115

40

48

55

63

70



AVY (LHS) Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 43.60-65.30




2

AVY Precision Technology (5392 TT): 30 September 2016

AVY: quarterly and annual P&L statement

2014 2015 2016

(TWDm) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 2011 2012 2013 2014 2015 1H16

Revenue 766 833 1,071 1,053 916 1,559 1,695 1,785 1,537 1,737

4,056 4,409 3,866 3,722 5,954 3,274

COGS 708 755 958 933 849 1,373 1,506 1,577 1,272 1,478

3,151 3,705 3,573 3,353 5,305 2,749

Gross profit 58 78 113 120 67 186 189 208 265 259

905 704 293 369 649 524

Operating Expenses 133 119 124 141 132 218 221 281 230 234

499 473 549 517 851 464

R&D expenditure 10 10 9 8 9 9 8 8 15 15

7 11 35 37 35 30

Operating profit (76) (40) (11) (22) (65) (32) (32) (73) 35 26

406 231 (256) (149) (202) 60

Non-operating profit 179 30 105 (43) 114 83 16 233 14 37

(21) (16) 519 344 307 51

Pre-tax profit 103 (10) 94 (65) 49 51 (15) 160 48 63

385 215 263 196 105 112

Income taxes (4) (24) 39 (28) 11 36 19 171 (10) 18

90 94 91 56 98 8

Net profit 107 14 55 (36) 38 15 (34) (11) 58 45

295 121 172 139 7 103

EPS (TWD) 1.33 0.16 0.64 (0.42) 0.42 0.16 (0.35) (0.11) 0.59 0.46

3.82 1.57 2.21 1.64 0.08 1.05

Margin analysis

Gross margin 7.6% 9.4% 10.5% 11.4% 7.3% 11.9% 11.1% 11.7% 17.2% 14.9%

22.3% 16.0% 7.6% 9.9% 10.9% 16.0%

Operating margin -9.9% -4.9% -1.0% -2.1% -7.1% -2.1% -1.9% -4.1% 2.3% 1.5%

10.0% 5.2% -6.6% -4.0% -3.4% 1.8%

Pre-tax margin 13.5% -1.2% 8.8% -6.1% 5.4% 3.3% -0.9% 9.0% 3.1% 3.6%

9.5% 4.9% 6.8% 5.3% 1.8% 3.4%

Net margin 14.0% 1.6% 5.1% -3.4% 4.2% 0.9% -2.0% -0.6% 3.8% 2.6%

7.3% 2.7% 4.4% 3.7% 0.1% 3.2%

YoY growth (%)

Revenue -31% 3% -1% 23% 20% 87% 58% 70% 68% 11%

-15% 9% -12% -4% 60% 32%

Gross profit -39% 11% 16% 291% 15% 137% 67% 74% 297% 40%

-31% -22% -58% 26% 76% 108%

Operating profit n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m.

-48% -43% n.m. n.m. n.m. n.m.

Pre-tax profit 13% n.m. 6% n.m. -52% n.m. n.m. n.m. -2% 24%

-53% -44% 22% -26% -46% 11%

Net profit 97% -93% -13% n.m. -64% 8% n.m. n.m. 53% 207%

-60% -59% 42% -19% -95% 96%

QoQ growth (%)

Revenue -10% 9% 29% -2% -13% 70% 9% 5% -14% 13%

Gross profit 89% 35% 44% 6% -44% 178% 2% 10% 27% -2%

Operating profit n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. n.m. -25%

Pre-tax profit n.m. n.m. n.m. n.m. n.m. 3% n.m. n.m. -70% 31%

Net profit n.m. -87% 306% n.m. n.m. -62% n.m. n.m. n.m. -23%

Source: Company

AVY: revenue mix by product (as of 1H16) Metal casing adoption on the rise

Meitu M6 Lenovo K6 HTC 10

Source: Company

Source: Companies

AVY: 1-year-forward PBR AVY: Company organisation structure


46%

29%

21%

3%

Autoparts Electrical Tools and Powder Metallurgy

Metal Casings Plastic Casings (DSC)

20

40

60

80

100

120

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

(TWD)

share price 0.9x 1.3x 1.8x 2.2x



Singapore Real Estate

What's new: We had a call with management to discuss some operational developments and get general feedback from AREIT’s recent meetings with investors. We still view AREIT units as “fairly valued” amid the current environment of yield compression. Accordingly, we maintain our Hold (3) call. What's the impact: On the “pre-emptive” private placement of SGD157.7m (64m units at SGD2.417 per new unit) on 11 August 2016, shortly ahead of the acquisition of 2 Australian properties for AUD168.2m announced on 9 September 2016, management regarded the timing as almost “back-to-back” and did not think the amount raised was large. On its foray into Australia, management said that almost all of the questions from investors were related to the leasing progress (the Australia portfolio occupancy rate fell QoQ, from 94.7% to 90.9% as at the end of June 2016). Fortunately, management has been seeing positive take-up on this front. AREIT has already found a tenant for about 50% of the space vacated by Linfox Sydney. Moreover, the one-and-a-half buildings that were vacant in the initial Australia portfolio are also seeing some leasing. Management said AREIT is not officially exiting China, after divesting 2 properties there YTD, because the 5% yields offered by the buyers were very attractive. Management is seeing steady leasing activity at its 1 remaining property in China (A-REIT City @ Jinqiao) and expects an occupancy rate in excess of 80% soon (from 59.9% as at 30 June 2016). Management noted that some investors were “happier” with the reconstituted portfolio because it regards China as an emerging market and views Australia exposure as identical to Singapore (both are developed markets with highly transparent and strong legal frameworks). We have made minor changes, mostly upward, to our DPU forecasts after incorporating all of the announcements since 1 August 2016 (AREIT’s

private placement, acquisitions, and conversion of exchangeable collateralised securities to new units). We also raise our 12-month TP pegged to our DDM valuation to SGD2.41 from SGD2.38. What we recommend: We maintain our Hold (3) rating and would set any possible market exuberance against management’s reminder that “things in Singapore are still challenging”. A positive risk would be more DPU-accretive acquisitions in Singapore, while a negative risk would be a severe deterioration (vacancies or negative rental reversions) in the portfolio. How we differ: Our TP is about 7% below the consensus’s SGD2.59, and we would remain wary of TPs that are significantly higher than NAV.

30 September 2016

More Australia, less China

Some leasing progress in Australia; Singapore remains challenging Minor changes to DPU forecasts after Aug-Sep announcements Maintain Hold (3) rating; raising TP to SGD2.41



Ascendas Real Estate Investment Trust (AREIT SP)

Target price: SGD2.410 (from SGD2.380)

Share price (30 Sep): SGD2.520 | Up/downside: -4.3%

David Lum, CFA(65) 6329 2102

[email protected]


Year to 31 Mar 17E 18E 19E

Revenue change 0.6 1.5 1.9

Net-property-income chg 0.7 1.8 2.2

DPU change 0.2 (0.2) 0.2

85

93

100

108

115

2.10

2.23

2.35

2.48

2.60



Asc REIT (LHS) Relative to FSSTI (RHS)

(SGD) (%)

12-month range 2.130-2.560




Major shareholder Ascendas-Singbridge (19.1%)

Financial summary (SGD)Year to 31 Mar 17E 18E 19E

Revenue (m) 858 885 883

Net property income (m) 618 640 635

Distribution (m) 437 469 481

DPU 0.161 0.163 0.167

DPU change (%) 4.6 1.3 2.4

Daiwa vs Cons. DPU (%) 2.3 3.0 2.2

DPU yield (%) 6.4 6.5 6.6

PER (x) 16.6 15.8 15.5

Core EPU (fully-diluted) 0.152 0.159 0.163

P/BV (x) 1.2 1.2 1.2

ROE (%) 7.2 7.7 7.9


2

Ascendas Real Estate Investment Trust (AREIT SP): 30 September 2016

AREIT: asset-value breakdown AREIT: Daiwa DDM valuation

Business and science parks 33%

Hi-specs industrial 15%

Data centres 6%

Light industrial 7%

Flatted factories 3%

Integrated development, retail 7%

Logistics & distribution centres 14%

Australia logistics & distribution centres 11%

Australia business park 2%

China business park 2%

Total 100%

Weighted-average remaining leasehold (years) 59.0

Cost of equity 8.5%

Long-term growth rate 1.7%

Effective cap rate 6.8%

PV of 10-year DPU forecasts (SGD) 1.23

PV of terminal value (SGD) 1.19

PV of debt obligation (SGD) (0.01)

DDM valuation (SGD) 2.41

Source: AREIT Note: As of September 2016

Source: Daiwa estimates


3


Financial summary

Key assumptions

Profit and loss (SGDm)

Cash flow (SGDm)


Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E

Funds from operations (SGDm) 274 264 336 307 364 422 460 470

Funds from operations per unit (SGD) 0.132 0.119 0.140 0.128 0.148 0.155 0.159 0.163

Aggregate leverage (%) 36.6 28.3 30.0 33.5 37.2 32.8 32.8 32.7

Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E

Total revenue 503 576 614 673 761 858 885 883

Operating expenses (135) (167) (178) (211) (227) (241) (244) (249)

Net property income 368 409 436 463 534 618 640 635

Other income 0 0 0 0 0 0 0 0

Management fees (29) (33) (36) (38) (43) (49) (50) (50)

Other operating expenses (5) (12) (5) (6) (24) (27) (27) (7)


EBIT 334 364 395 419 466 541 564 578

Net-int. income/(expenses) (59) (99) (36) (105) (77) (114) (100) (103)

Share of associates 0 0 0 0 0 0 0 0

Revaluation gains/(loss) 224 73 131 47 (2) 0 0 0

Except./other inc./(exp.) (5) (1) 15 44 (6) (9) 0 0

Profit before tax 495 337 505 404 381 418 464 475

Taxation (2) (1) (23) (7) (25) (4) (4) (5)

Min. int./pref. div./others 0 0 0 (0) 0 (0) 0 0

Net profit 493 336 482 398 356 413 460 470

Total return 493 336 482 398 356 413 460 470

Adjustments (211) (31) (140) (46) 23 24 10 11

Distributable income 282 306 342 351 378 437 469 481

Distribution rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Distribution 282 306 342 351 378 437 469 481

EPU (SGD) 0.129 0.118 0.146 0.146 0.146 0.152 0.159 0.163

DPU (SGD) 0.136 0.137 0.142 0.146 0.154 0.161 0.163 0.167

Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E

Profit before tax 495 337 505 404 381 418 464 475


Net-interest expenses 59 99 36 105 77 114 100 103

Share of associate 0 0 0 0 0 0 0 0

Change in working capital (12) 4 (1) (10) 11 0 0 0

Tax paid (0) (0) (1) (2) (4) 0 0 0

Other operating CF items (212) (64) (138) (135) 16 28 (10) (10)

Cash flow from operation 329 375 401 362 482 560 554 568

Capex (549) (183) (164) (652) (1,514) (255) (26) 0

Net investment and sale of FA (197) (54) 70 9 17 158 (0) (0)

Other investing CF items (105) (20) (40) 6 4 5 4 4

Cash flow from investing (850) (257) (135) (638) (1,492) (92) (22) 4

Change in debt 479 (430) 170 577 920 (124) 0 0

Equity raised/(repaid) 400 705 0 0 345 0 0 0

Distribution paid (270) (309) (326) (261) (442) (398) (442) (463)

Other financing CF items (76) (84) (71) (68) 213 (112) (102) (106)

Cash flow from financing 533 (119) (227) 249 1,036 (634) (545) (569)

Forex effect/others (0) (0) 0 1 (2) 0 0 0

Change in cash 12 (0) 40 (26) 24 (166) (13) 3


4



Balance sheet (SGDm)

Key ratios (%)


As at 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E

Cash & cash equivalent 20 20 66 42 56 45 32 35

Accounts receivable 38 47 66 90 89 89 89 89

Other current assets 2 2 1 1 35 35 35 35

Total current assets 60 69 132 133 181 170 156 159

Investment properties 6,170 6,447 6,933 7,893 9,599 9,684 9,710 9,710

Fixed assets 2 1 0 0 0 0 0 0

Associates 0 0 0 0 0 0 0 0

Goodwill and intangible assets 0 0 0 0 0 0 0 0

Other long-term assets 333 442 291 135 97 58 58 58

Total assets 6,564 6,959 7,357 8,160 9,876 9,911 9,924 9,927

Short-term debt 0 0 0 0 0 0 0 0

Accounts payable 114 135 127 191 174 172 172 172

Other current liabilities 64 77 112 140 162 162 162 162

Total current liabilities 178 212 239 330 336 334 334 334

Long-term debt 2,398 1,979 2,177 2,728 3,665 3,241 3,241 3,241

Other non-current liabilities 70 107 93 89 78 78 78 78


Unitholders' funds 3,917 4,661 4,849 5,014 5,797 6,258 6,271 6,274

Minority interests 0 0 0 0 0 0 0 0


Book Value per unit 1.879 1.942 2.018 2.083 2.061 2.066 2.067 2.065

Year to 31 Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E

Total revenue (YoY) 12.4 14.4 6.6 9.8 13.0 12.8 3.1 (0.1)

Net property income (YoY) 8.5 11.0 6.6 6.1 15.3 15.7 3.7 (0.9)

Net profit (YoY) 14.9 (1.9) 33.1 (0.1) 2.1 15.4 11.2 2.3

Distribution (YoY) 13.6 8.5 11.9 2.7 7.7 15.5 7.4 2.5

EPU (YoY) 3.6 (8.5) 23.4 (0.2) (0.0) 4.2 4.9 2.2

DPU (YoY) 2.5 1.3 3.6 2.5 5.2 4.6 1.3 2.4

ROE 7.5 6.1 7.4 7.1 6.8 7.2 7.7 7.9

ROA 4.5 3.9 4.9 4.5 4.0 4.2 4.6 4.7

ROCE 5.8 5.6 5.8 5.7 5.4 5.7 5.9 6.1

ROIC 5.8 5.7 5.5 5.6 5.0 5.6 5.9 6.0

Debt to asset 36.5 28.4 29.6 33.4 37.1 32.7 32.7 32.6

Net debt to equity 60.7 42.0 43.5 53.6 62.2 51.1 51.2 51.1

Effective tax rate 0.3 0.3 4.6 1.7 6.6 1.1 1.0 1.0

Company profile

Listed on 19 November 2002, AREIT is the largest industrial-property S-REIT. AREIT's portfolio consisted of 103 properties in Singapore, 27 in Australia, and 2 in China with a total asset value of SGD9.66bn as at 31 March 2016. The portfolio accommodates a tenant base of 1,470 companies and comprises business and science parks, hi-tech industrial properties, light-industrial properties, logistics and distribution centres, and integrated development amenities and retail facilities.



Singapore Industrials

Background: Cityneon Holdings (CITN), whose traditional business lies in

Interior Architecture, Exhibitions, Events and Experiential Environments,

has seen a transformation in its business model following its acquisition of

Victory Hill Exhibitions (VHE) in September 2015. Using the latest

technological capabilities and storytelling techniques, VHE aims to delivers

immersive and interactive exhibits that allow visitors to participate in a

“once in a lifetime sensory adventure”. Highlights: New business at large. CITN has secured 2 IP rights: 1) The

Avengers S.T.A.T.I.O.N. (Scientific Training and Tactical Intelligence

Operative Network), expiring in 2024, and 2) Transformers, expiring in

2023. The company has held Avengers S.T.A.T.I.O.N. exhibitions (travelling

set) in New York, Korea and Paris, with the latest being a permanent set

installation in Las Vegas. It has since signed term sheets to bring these

travelling sets to China, Australia, Taiwan, the Middle East and Europe over

the coming 2-3 years. Avengers S.T.A.T.I.O.N. will be at the Singapore

Science Centre from October 2016 to March 2017. There are currently no

restrictions on the locations in which it can exercise these IP rights. Travelling sets: earnings driver. According to management, a key

earnings driver for CITN will be the deployment of the travelling sets, where

the company is not exposed to execution risk. Revenue is derived from 2

sources: 1) a fixed portion, which includes a pre-agreed licence fee and

minimum guaranteed royalty, and 2) a varying royalty portion, which depends

on ticket/merchandise sales performance, among other factors. Gross

margins on this business model can be as high as 80-90%, according to

guidance. The construction cost of the first travelling set for each IP is USD8-9m, with sets built thereafter costing approximately one-third of the original

sum given greater familiarity with the construction process. But management

has no intention of mass-producing the sets, preferring to limit the total

number of travelling sets to 8, based on its 2 IPs currently. Key business catalysts. Management said that clinching a third IP could

be a positive for the business over the coming months. Its collaboration

with CMC Holdings (CMC), whose general partners include Alibaba Group

and Tencent Holdings, could also help entrench VHE’s relationship with

studios through CMC’s existing partnerships with Disney and Warner Bros. Strong turnaround in financials. CITN posted 1H16 core net profit of

SGD4.7m (vs. a SGD0.7m loss in 1H15), largely backed by contributions

from VHE. Valuation: CITN is trading at 12x 2017E PER (Bloomberg consensus).

30 September 2016

Marvel immersion

Management sees interactive exhibits as a new earnings driver Scalable business model supported by use of travelling sets Company views possible third IP as a potential business catalyst


Cityneon Holdings (CITN SP)

Target price: n.a.

Share price (30 Sep): SGD0.905 | Up/downside: -

Royston Tan(65) 6321 3086

[email protected]

0

150

300

450

600

0.1

0.3

0.6

0.8

1.1



Cityneon (LHS) Relative to FSSTI (RHS)

(SGD) (%)





2

Cityneon Holdings (CITN SP): 30 September 2016

VHE: travelling set in Paris VHE: permanent exhibition in Las Vegas


CITN: project pipeline Top10-grossing films above USD1bn mark

Avengers S.T.A.T.I.O.N. Transformers Awakening

Avengers Set 1 Transformers Set 1

Las Vegas Jun-16 Las Vegas 2017

Avengers Set 2

Transformers Set 2

Paris Apr 2016 - Sep 2016 China 2017-2018

Singapore Oct 2016 - Feb 2017 Transformers Set 3

Taiwan Jun 2017 - Sep 2017 Europe 2017 - 2019

Australia Dec 2017 - Mar 2018 Middle East 2018

Avengers Set 3 and 4

Australia 2018-2019

China 2017 - 2019

Middle East 2017

Europe 2017

Rank Date Title Gross

1 27/12/2015 Star Wars; The Force Awakens 1,086,058,914

2 24/06/2015 Jurassic World 1,065,400,000

3 19/04/2015 Furious 7 1,008,854,000

4 03/01/2010 Avatar 1,020,000,000

5 31/07/2011 Harry Potter & The Deathly Halllows: Part II 1,008,500,000

6 13/05/2012 The Avengers 1,000,200,000

7 16/05/2013 Iron Man 3 1,000,800,000

8 15/05/2015 Avengers: Age of Ultron 1,142,000,000

9 22/05/2016 Captain America: Civil War 1,000,000,000

10 03/08/2011 Transformers: Dark of the Moon 1,001,000,000

Source: Company

Source: Company

CITN: business model – permanent installations CITN: business model – Travelling sets


CITN: historical revenue (SGD m) CITN: historical earnings (SGD m)

Source: Bloomberg Source: Bloomberg

77.4 83.0

67.8

78.0

96.5

46.0

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 1H16

0.6

-4.7

0.9

2.3

0.9

4.7

(6)

(4)

(2)

0

2

4

6

2011 2012 2013 2014 2015 1H16


Please see the important notice on the back page

BUY (Unchanged) TP: Bt 28.00 (Unchanged) 30 SEPTEMBER 2016

Change in Numbers Upside : 29.6%

Bangkok Dusit Medical (BDMS TB)

SIRIPORN ARUNOTHAI 662 – 617 4973

[email protected]

BDMS Wellness Clinic

BDMS announced a plan to build the BDMS Wellness Clinic. We are relatively neutral about this project in the long term while we foresee loss contributions over the medium term, leading us to cut our 2017-18F earnings by 4%. Despite reaffirming our BUY call on BDMS shares, we now prefer CHG for its stronger earnings-growth profile.

A sizeable new investment BDMS has announced a plan to build the BDMS Wellness Clinic. It aims to become one of the world’s leading providers of wellness services, with a full scope of medical and wellness services such as longevity, neuroscience, dental, fertility, sport science, etc. This project is to be located on 15 rai of land in the Swissotel Nai Lert Park area on Wireless Road, Pathumwan district, Bangkok. The project will focus on premium customers – 20% Thais and 80% international customers. The outpatient (OPD) service is due to be launched at the beginning of 2017 and the inpatient (IPD) service in 2H17.

Mostly debt financing Total investment for the project is Bt13bn – Bt11bn for all the acquired assets (15 rai of land and three buildings including the Park Nai Lert Hotel, the Promenade building and the staff canteen building with a total area of 60,000 sq m) and Bt2bn for renovation, equipment and others. BDMS pans to finance the project mostly via debentures. The company expects funding costs to be no higher than 3.5%. We estimate BDMS’s net gearing and net debt/EBITDA would rise from 0.4x and 2.1x in 2016F to 0.5x and 2.7x in 2017F, vs. BDMS’s debt covenants in those years of 1.75x and 3.25x, respectively.

Losses in 2017-19F According to BDMS, the global wellness sector’s market size is US$2.8tn with growth expected at 9% p.a. in 2012-17. In our view, the Wellness Clinic should not only cater for the uptrend in demand but also create a fully-integrated platform and provide synergy benefits to BDMS over the longer term. However, we see the Bt13bn investment as large at 24% of BDMS's equity base or 4% of its market cap and in our model assume this new project will make losses of Bt494m, Bt492m and Bt205m in 2017-19F.

Changing our top pick to CHG We have a neutral view on this deal as top-end demand growth is becoming more mature, both for Thai and foreign patients. In the medium term we also expect some level of cannibalization of BDMS’s main Bangkok Hospital campus. Also, we expect this project to make losses in the first three years of operations and we cut our earnings forecasts by 2-4% in 2017-19F (though we lift our earnings by 3% over the long term). Our DCF-based 12-month TP, using a base year of 2017F, is maintained at Bt28.0/share. With an earnings CAGR of 13% over 2017-19F, we reaffirm our BUY rating on BDMS shares, but now prefer Chularat Hospital Group (CHG TB, Bt2.68, BUY) on its stronger earnings growth profile(21% earnings CAGR over the same period).

COMPANY VALUATION

Y/E Dec (Bt m) 2015A 2016F 2017F 2018F

Sales 60,262 65,399 71,515 78,525

Net profit 7,917 8,459 9,205 10,542

Consensus NP 8,715 10,180 12,022

Diff frm cons (%) (2.9) (9.6) (12.3)

Norm profit 7,709 8,397 9,205 10,542

Prev. Norm profit 8,397 9,606 10,946

Chg frm prev (%) 0.0 (4.2) (3.7)

Norm EPS (Bt) 0.5 0.5 0.6 0.7

Norm EPS grw (%) 5.5 8.9 9.6 12.8

Norm PE (x) 43.4 39.8 36.3 32.2

EV/EBITDA (x) 33.6 31.5 28.7 24.7

P/BV (x) 6.2 5.8 5.3 4.4

Div yield (%) 1.2 1.3 1.4 1.5

ROE (%) 15.3 15.0 15.2 14.9

Net D/E (%) 43.6 39.1 52.8 27.9

PRICE PERFORMANCE

(5)05101520253035

10

15

20

25

30

Sep-15 Jan-16 May-16 Sep-16

(%)(Bt/shr) BDMS

Rel to SET Index

COMPANY INFORMATION

Price as of 29-Sep-16 (Bt) 21.60

Market Cap (US$ m) 9,660.0

Listed Shares (m shares) 15,491.0

Free Float (%) 51.7

Avg Daily Turnover (US$ m) 22.6

12M Price H/L (Bt) 24.60/18.50

Sector Health Care

Major Shareholder Prasarttong-Osoth Family 30.5%

Sources: Bloomberg, Company data, Thanachart estimates

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BUY (Unchanged) TP: Bt 6.00 (Unchanged)

Change in Numbers Upside : 28.8% 30 SEPTEMBER 2016

Gunkul Engineering Pcl (GUNKUL TB)

SUPANNA SUWANKIRD 662 – 617 4972

[email protected]

Powering up from 4Q

We cut GUNKUL’s 2016-18F earnings due to lower trading revenues, but see more stable wind-power earnings emerging quickly as capacity gradually starts up over 4Q16-18F. We believe our 119% and 57% normalized earnings growth in 2017-18F and ROE more than doubling in 2018F from 2016F levels, justify a 21x 2017F PE.

Cutting earnings but maintaining TP We maintain our SOTP-derived DCF-based 12-month TP (base year of 207F) for GUNKUL of Bt6.0, despite cutting our 2016F earnings by 30% on lower trading revenues given a delay in the government tendering for its “Solar For Government” program until 2017, and 2018F’s by 14% on delayed start-up operations at a wind project. Our TP now incorporates the valuation of a new solar project in Japan (Kentos), and lower interest given a planned Bt10bn bond issuance. GUNKUL looks to be entering a new earnings-base cycle with more stable power earnings from 4Q16F. We see upside from capacity expansion via: 1) up to 1.5GW of renewable power capacity in Thailand in 2017-20F; 2) and 100MW of potential solar power from Japan.

Higher efficiency at wind projects GUNKUL is confident that its Wind Energy Development (WED) Phase 3 (50MW) should operate commercially in October as planned (Phase 1 and 2 of 10MW already started up in March) and the firm is more positive on output than it originally targeted. GUNKUL expects WED to earn Bt7-8m p.a. in profit/MW (we conservatively maintain our estimate at Bt6-8m p.a.). GUNKUL is also confident that its two wind projects, Greenovation Power (60MW) and Korat Wind Farm (50MW of which the start-up assumption is delayed by 8 months to 1Q18), will generate higher output given the height of wind turbines today of 150 meters (138 meters for WED). GUNKUL is in the process of selecting wind-turbine technology with COD targeted for 4Q17.

Plans to acquire Kentos solar plant GUNKUL recently has acquired Kentos - a 67MW solar power plant in Tochigi province Japan (installed capacity of 72.8MW) with a feed-in tariff (FiT) of JPY36/kWh over 20 years. With estimated capex of Bt8.4bn (including the acquisition costs), a debt-to-equity structure of 80:20, and an interest rate of 3.0%, we expects the project’s EiRR to be around 11% under the tokumei kumiai (TK) structure. Kentos is scheduled to operate commercially in 2022 and we incorporate a valuation for the project of Bt0.3/share in our TP.

Mulling launch of infrastructure fund GUNKUL is studying plans to launch an infrastructure fund in 2018 when all its three wind-power projects are due to be fully operational. We see no major benefits given the projects’ capital costs of 5-6%, close to the range of its target dividend yield, unless GUNKUL has no new projects offering higher returns. If GUNKUL can obtain Bt2.5bn from the 440m warrants due to be exercised in 2017, and if it has no major expansion plans, we believe the company may reconsider launching the fund.

COMPANY VALUATION

Y/E Dec (Bt m) 2015A 2016F 2017F 2018F

Sales 4,460 4,430 6,929 7,117

Net profit 685 631 1,384 2,105

Consensus NP ― 841 1,582 2,237

Diff frm cons (%) ― (25.0) (12.5) (5.9)

Norm profit 607 631 1,384 2,105

Prev. Norm profit ― 896 1,403 2,534

Chg frm prev (%) ― (29.6) (1.4) (16.9)

Norm EPS (Bt) 0.1 0.1 0.2 0.3

Norm EPS grw (%) 14.6 (6.9) 119.3 52.1

Norm PE (x) 43.7 47.0 21.4 14.1

EV/EBITDA (x) 49.4 30.4 13.9 10.3

P/BV (x) 3.6 2.0 1.9 1.7

Div yield (%) 0.3 0.1 0.5 1.1

ROE (%) 10.6 5.6 9.1 12.5

Net D/E (%) 7.7 28.4 68.3 59.9

PRICE PERFORMANCE

(20)

0

20

40

60

80

2.03.04.05.06.07.08.0


(%)(Bt/shr) GUNKULRel to SET Index

COMPANY INFORMATION

Price as of 30-Sep-16 (Bt) 4.66

Market Cap (US$ m) 854.9

Listed Shares (m shares) 6,358.8

Free Float (%) 30.7

Avg Daily Turnover (US$ m) 1.4

12M Price H/L (Bt) 5.90/3.96

Sector Utilities

Major Shareholder Gunkul family 59.97%

Sources: Bloomberg, Company data, Thanachart estimates

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Asiamoney’s

2013

Best Domestic

Equity House

Sector flash

30 September 2016

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in

making their investment decision.

Please see the important disclaimer information on the back of this report

*Based on consensus’ recent changes ↑ (up), ↓ (down), ↔ (unchanged)

8 August 2016

Indonesia Tobacco NEUTRAL (Unchanged)

Michael W Setjoadi E-mail: [email protected] Phone: +6221 250 5081 ext. 3620

2017 excise tax hike: Bad for health

Real excise hike higher than historical levels: A volume depressant

The government recently announced the 2017 excise tariff hike of 10.5% y-y

(Bahana estimate: 10-12%). Given the low inflationary outlook ahead

(Bahana: 3.3% inflation in 2016F; 3.8% in 2017F), the hike is considerably

high, compared to levels seen in 2010-15 (exhibit 3), and is likely to adversely

impact smokers’ purchasing power. Note that, as of 27 September 2016, the

government has only received 54% of the FY16 excise revenue target,

although this experienced an uptrend in 9M16 relative to 7M16 (exhibit 5).

Exhibit 3. Excise tax net of inflation, 2010-17F

1.8 1.8 2.4

(0.5)(0.5)

3.9

5.0

8.1

4.3

(0.8)

(2.3)

1.4

(6.4)(6.4)(6.4)

4.3

5.5

(0.9)

12.3 13.1

7.0 6.7 6.7 6.7

6.2% 6.2%6.0%

5.6%

5.0%

4.8%

5.1%

5.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

-8

-3

2

7

12

SKM SPM SKT SKM SPM SKT SKM SPM SKT SKM SPM SKT SKM SPM SKT SKM SPM SKT SKM SPM SKT SKM SPM SKT

2010 2011 2012 2013 2014 2015 2016F 2017F

Excise hike net of inflation GDP growth (RHS)

(%)

Source: Nielsen, Bahana

Exhibit 5. Government excise tax receipt vs. FY realization, 7M14-16F

72.1

69.8

65.9

62.0

63.0

64.0

65.0

66.0

67.0

68.0

69.0

70.0

71.0

72.0

73.0

9M14 9M15* 9M16*

(%)

Excise duty receipt

57.2

52.4

48.7

44.0

46.0

48.0

50.0

52.0

54.0

56.0

58.0

7M14 7M15* 7M16*

(%)

Excise duty receipt

Source: MoF, Bahana; Note: *assuming 2M16 advance excise receipt being distributed back to

January and February 2016

August 2016 cigarette stick sales: -0.3% y-y

Based on the Nielsen retail survey, we observe a continued drop in August

retail sales volume (-0.3% m-m) with a 0.3% m-m ASP growth (exhibit 8).

This is attributed to the white cigarette (SPM) which was down 12.3% ytd and

hand-rolled clove cigarette (SKT) (-4.9% ytd). On the other hand, we see a

demand shift towards the machine-rolled clove cigarettes (SKM) that recorded

a 5.5% growth for the full-flavour SKM and a flat growth for the SKM light

segment.

Exhibit 1. Sector relative valuations, 2017F CP TP MKT CAP 2017F 2017F 2017F 2017F

RATING (IDR) (IDR) (USDm) PER (X) PBV (X) EV/EBITDA ROE (%)

HMSP IJ BUY 3,950 4,800 35,205 35.3 13.2 25.4 38.1

GGRM IJ BUY 62,000 72,300 9,141 18.0 2.8 11.4 14.9

Tobacco 44,345 31.7 11.1 22.5 33.3

Source: Bloomberg, Bahana Note: pricing as of 30 Sept 2016

Exhibit 2. Indonesia tobacco volume, 2005-18F

217 229 238 247 251 255

280 303 308 314 314 309 312 314

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

(bn sticks)

Machine-rolled clove Hand-rolled clove White cigarette


Exhibit 4. Indo cigarette breakdown, Aug 16

19%

36%

39%

6%

SKT SKM FF SKM LTLN SPM


Exhibit 6. HMSP relative share performance

(11.8)

(0.4)

(3.0)

(10.4) (10.9)

3.1

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

ytd 1M 3M 6M 9M 12M

(%) (%)

HMSP IJ relative to JCI Source: Bloomberg, Bahana

Exhibit 7. GGRM relative share performance

(4.1) (3.3)

(17.1) (15.8)

(3.1)

16.6

(20)

(15)

(10)

(5)

0

5

10

15

20

(20)

(15)

(10)

(5)

0

5

10

15

20

ytd 1M 3M 6M 9M 12M

(%) (%)

GGRM IJ relative to JCI Source: Bloomberg, Bahana



ASEAN Strategy

Indonesia (page 5): 3Q16 should be a strong quarter for the poultry sector,

led by culling and lower import quotas. The July-August DOC ASP at around

IDR4,911 (up 3.1% from the 2Q16 average) and the broiler ASP of

IDR17,356/kg (down 0.6% from the 2Q16 average) remained relatively robust

despite the historical trend of prices falling 10-25% post the Lebaran holiday.

Japfa (JPFA IJ, INR1,625) should post the strongest earnings, according to

Bahana analyst Michael W Setjoadi, as it has the highest contribution to

sales from the DOC and broiler divisions. Reaffirm Buy rating with a new

target price of IDR2,000 (previously IDR1,750) based on a 15x 2017E PER. Thailand (page 11): Thanachart analyst Chatchawin Lertapiruk reaffirmed

his Buy rating on KCE Electronics (KCE TB, THB104) after meeting with

management last week. Despite capacity additions and Baht strength

during the quarter, Chatchawin still expects fatter margins and record-high

profit in 3Q16. He does not see longer-term prospects having changed,

with room for further margin expansion and continued market-share gains.

Reaffirm Buy rating and DCF-based target price of THB113 per share. Malaysia (page 17): Gamuda’s (GAM MK, MYR4.90, Buy) FY16 results

were within market expectations, with net profit falling by 8% YoY on lower

construction and property earnings. However, Affin Hwang analyst Loong

Chee Wei believes the current construction order book of MYR17bn and

unbilled property sales of MYR1.2bn will underpin a 15% YoY earnings

rebound in FY17 and thus reiterated his Buy rating with a new 12-month

RNAV-based target price of MYR5.74 (previously MYR5.70). Singapore (page 21): A recent discussion with Raffles Medical Group

(RFMD SP, SGD1.525, Hold [3]) suggests the company continues to make

steady progress on its various expansion initiatives. However, Daiwa

analyst Jame Osman believes cost pressures associated with the

execution of these plans could weigh on near-term profitability, while

existing valuations adequately capture its longer-term upside potential.

Maintain Hold (3) with an unchanged DCF-based 12-month target price of

SGD1.57. ASEAN: major markets

Index (as at 29 Sep) Index (as at 22 Sep) WoW change (%) Index 2015-end YTD chg (%) End-2016 index target Upside to target (%)

Indonesia (JCI) 5,431.96 5,380.26 0.96% 4,593.01 18.27% 5,600 3.1%

Malaysia (KLCI) 1,669.64 1,669.66 0.00% 1,692.51 -1.35% 1,746 4.6%

Thailand (SET) 1,491.43 1,505.99 -0.97% 1,288.02 15.79% 1,550 3.9%

Source: Daiwa, Bahana, Thanachart and Affin Hwang

30 September 2016

ASEAN Intelligence

What matters this week

Highlighting the week’s top ASEAN stories from Daiwa and its alliance partners, which together cover some 375 stocks

3Q16 was unusually strong for the Indonesian poultry sector led by culling and lower import quotas; buy Japfa Comfeed for exposure

A strong construction order book and unbilled property sales should drive a 15% FY17E EPS rebound for Gamuda (Buy)

Rohan Dalziell (852) 2848 4938

[email protected]

ASEAN rising: In this report, we feature

the week’s top stories among the 375

stocks and 5 markets that Daiwa and its

alliance partners cover in ASEAN. Our

goal is to provide on-the-ground colour

from our team of local experts: Bahana

Securities (Indonesia), Thanachart

Securities (Thailand), Affin Hwang

Investment Bank (Malaysia), and

Daiwa’s own teams in Singapore and

the Philippines.

No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia.

ASEAN Intelligence | 1Asia Pacific Daily | 29

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Weekly Investment Strategy (abridged version)

End to return reversals, attention to shift to

non-financial domestic demand-oriented names

Y/$ rate to be flat for time being, risk of dollar depreciation over slightly longer term, BOJ to deepen negative rates if yen strengthens

New BOJ framework bringing end to rally in financials; non-financial domestic demand-oriented/defensive stocks to attract interest

US employment data, BOJ Tankan survey, Monthly Labor Survey warrant attention

Investment conditions: Due in part to disappointing US employment data for August, the Fed held off from a rate hike at the September FOMC meeting. September employment data warrants attention as it will determine US monetary policy and currency market trends going forward. The Fed is apparently considering raising interest rates at the December FOMC meeting, and, if this materializes, the dollar would likely appreciate. However, the probability of a rate hike is only 50-60% based on market expectations. The Y/$ rate will probably be flat for the next two to three months, in a state of delicate equilibrium. In 2017, we think a rate hike will be increasingly viewed as a weak-dollar factor as it is expected to lead to a US economic slowdown and subsequently to monetary easing. Meanwhile, any further easing measures by the Bank of Japan (BOJ), whose priority appears to be on preventing further yen appreciation, will likely be centered on deepening negative interest rates. Market outlook: Since July, the Japanese stock market has seen financials and foreign demand-oriented names rebound sharply due to a swing back from the pessimism that followed the Brexit vote, a rise in long-term interest rates, and expectations for a US rate hike/stronger dollar. However, the rally in financials appears to have run its course as the BOJ set a cap on long-term interest rates and also said that it would deepen negative interest rates if the yen appreciates further. We think the rebound in foreign demand-oriented stocks is also ending, with expectations for dollar strength slightly receding. With return reversals coming to an end, non-financial domestic demand-oriented, defensive, and small/medium-cap stocks should again attract attention. Key upcoming events: Domestic releases include the BOJ Tankan survey on 3 October, and Monthly Labor Survey and Indexes of Business Conditions on the 7th. US releases include the Manufacturing ISM Report on Business on the 3rd, Non-manufacturing ISM Report on Business on the 5th, ADP National Employment Report and trade balance on the 5th, and change in non-farm payroll employment and unemployment rate on the 7th. Earnings estimate revisions: The weekly revision index (RI) for FY16 was a low –20.9% amid a relatively small number of revisions. However, the four-week RI continued to improve and will likely return to positive territory in October. Since the four-week RI for domestic demand-oriented firms has already turned positive, this will depend on whether that for multinationals, which are sensitive to macroeconomic variables, will continue to improve. Market rotation: By sector, consumer goods, materials, and technology advanced vs. TOPIX while financials plunged. Transport/utilities and capital goods also declined. By factor, amid strong momentum effects, high valuation (high-P/B, high-P/E, low-yield), high-ROE, high-quality, low-beta, and small-cap stocks outperformed.

Japan Strategy 30 September 2016 Japanese report: 30 September 2016

Kazuhiro Miyake (81) 3 5555-7215

[email protected]



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THAILAND ECONOMICS NOTE 30 SEPTEMBER 2016

Thailand Economics

KAMPON ADIREKSOMBAT, Ph.D.

Economist 662 – 617 4982

[email protected]

Improving exports

August data suggest Thai exports, the Manufacturing Production Index and capacity utilization may have found their bottom. Looking forward, the gradual recovery in the manufacturing sector should continue. However, the consumption recovery has softened and private investment remains sluggish.

Softening consumption recovery The August 2016 Private Consumption Index suggested that the consumption recovery is continuing but at a slower pace (+3.2% y-y vs. 3.4% previously). The biggest slowdown was found in service sector spending (7.3% y-y vs. 9.5% previously) due to hotel cancellations after the bombings in the Upper South and Hua Hin. This is consistent with the slight slowdown in tourist arrivals (+9.9% y-y vs. +10.8% previously). Sales of durable goods bounced back (+6.5% vs. +3.8% previously) due to a strong rebound in motorcycle sales (+24.2% y-y), backed by improving farm income (+5.6% y-y; +15.2% in prices and -8.3% in production). Note that passenger car sales continued to improve (+8.8% y-y), while commercial car sales remained sluggish (-1% y-y). Sales of small-ticket items were up slightly (+1.8% y-y vs. -0.1% previously), while tourist spending remained strong (+14.0% y-y vs. 14.4% previously).

Weak private investment continues The Private Investment Index still showed no signs of recovery (-0.3% y-y). A strong rebound in domestic machinery sales (+6.6% y-y vs. 0.7% previously), combined with a small improvement in car sales (+1.0% y-y vs. -3.0% previously) was not enough to offset declining permitted construction area (-7.5% y-y vs. -8.1% previously), imports of capital goods (-1.4% y-y) and sales of construction materials (-0.3% y-y). On the bright side, production indicators started to show signs of improvement. The Manufacturing Production Index bounced back strongly at +3.1% y-y (vs. -5.0% y-y previously) on the back of a strong rebound in electrical appliances and IC. However, automotive MPI continued to fall (-6.4% y-y vs. -9.8% previously). Industrial capacity utilization (sa) also rebounded to 65.7% (vs. 62.1% previously) with strong increases in rubber and plastics, IC and semiconductors (see details in Exhibit 2).

Rebound in manufacturing exports Excluding gold, export value bounced back by +5.0% y-y with a strong rebound in manufacturing exports, namely electronics (+3.2% y-y), electrical appliances (+13.5% y-y) and automotive (+34.5% y-y). Only agriculture- and petroleum-related continued to contract. With early signs of recovery and the very low base from last year, we expect exports to continue to rebound in 4Q16F. Imports, excluding gold, also stopped contracting (+0.6% y-y) on the back of accelerating imports of consumer goods (+14% y-y), another sign supporting a gradual continued recovery in consumption.

Current account surplus breaks 2015 record The trade balance remained in surplus (US$2.7bn). With improving exports and robust tourism revenue, the YTD current account surplus reached US$33.2bn, exceeding the 2015 level of US$32.1bn.

ECONOMIC MONITOR

Private Consumption Index (PCI)

(15)

(10)

(5)

0

5

10

15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

(y-y %) HL PCINon-durablesDurablesServices

Source: Bank of Thailand

Private Investment Index (PII)

(20)

(15)

(10)

(5)

0

5

10A

ug-1

5S

ep-1

5O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb-

16M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6A

ug-1

6

(y-y %)HL PIIConstruction material salesImports of capital goodsCar sales

Source: Bank of Thailand Note: Car sales includes sales of passenger and commercial car sales

External Performance

Jun-16 Jul-16 Aug-16

Tourist arrivals (y-y %) 7.2 10.8 9.9

Exports (y-y %) 1.9 (4.6) 3.7

Imports (y-y %) (9.3) (8.6) 5.6

Trade balance (US$ bn) 3.5 2.5 2.7

Current account (US$ bn) 3.1 3.6 3.8

Source: Bank of Thailand

Key Forecasts

2016F 2017F 2018F

Real GDP growth 3.5 4.8 5.0

CA (% to GDP) 12.5 8.9 7.7

Headline CPI 1.7 2.0 2.5

Bt/US$ - average 35.3 35.9 37.0

Policy rate 1.50 2.00 2.50

Source: Thanachart estimates

Than

acha

rtSe

curit

ies


This report is issued by Daiwa Securities Group Inc. through its relevant group companies. Daiwa Securities Group Inc. is the global brand name of Daiwa Securities Co. Ltd., Tokyo (“Daiwa Securities”) and its subsidiaries worldwide that are authorized to do business within their respective jurisdictions. These include: Daiwa Capital Markets Hong Kong Ltd. (Hong Kong), regulated by the Hong Kong Securities and Futures Commission, Daiwa Capital Markets Europe Limited (London), regulated by the Financial Conduct Authority and a member of the London Stock Exchange, and Daiwa Capital Markets America Inc. (New York), a U.S. brokerdealer registered with the U.S. Securities and Exchange Commission, a futures commission merchant regulated by the U.S. Commodity Futures Trading Commission, and a primary dealer in U.S. government securities. The data contained in this report were taken from statistical services, reports in our possession, and from other sources believed to be reliable. The opinions and estimates expressed are our own, and we make no representation or guarantee either as to accuracy, completeness or as to the existence of other facts or interpretations that might be significant.

Potential Fiscal Changes Under a New Administration With presidential campaigns now in full swing, it seems appropriate to begin exploring how each candidate

will attempt to alter the taxing and spending programs of the federal government. This is a difficult task because often the proposals lack specificity, and thus some judgment must be exercised to quantify the platforms of each candidate. Various organizations have assessed the proposals, and estimates vary because of the judgment involved, but a generally clear picture emerges of the changes that would unfold if the new president were able to turn his or her vision into reality. The figures presented below were published by the Committee for a Responsible Federal Budget, a reputable bipartisan think tank in Washington, DC.

Both Hillary Clinton and Donald Trump have ambitious plans. Mrs. Clinton would like to boost federal spending, with free college tuition, family-support initiatives, infrastructure spending, and additional outlays for health-care accounting for most of the increase. She plans to pay for these efforts by raising taxes on upper-income individuals and businesses, leaving little net effect on the underlying budget position.

Mr. Trump plans to focus on the tax side of the ledger, proposing sizeable reductions in marginal tax rates for both individuals and businesses. He also hopes to eliminate the estate tax and the alternative minimum tax and to enhance tax credits for child and dependent care. He provides some offsets to these tax reductions by limiting the amount of deductions individuals can claim and by taxing carried interest at ordinary rates rather than capital gains rates. He also has proposed net reductions on the outlay side (increases in infrastructure and defense offset by unspecified cuts elsewhere). On balance, his plan would leave a marked widening in the deficit of the federal government.

Digging into the details of the programs shows that both have flaws. We were struck by an evaluation of one budget expert, Howard Gleckman of the Tax Policy Center (a joint venture of the Urban Institute and the Brookings Institution). He described Mrs. Clinton’s plan as “irresponsible” and Mr. Trump’s as “madness”.

Mrs. Clinton’s plan might seem prudent at first blush, as she pays for her spending efforts with new taxes and leaves little change in the budget from its current trajectory. Some background on the government’s current and expected fiscal position is necessary to see why Clinton’s plan might be described as irresponsible.

The federal government is not in a comfortable financial position at this time, as federal debt held by the public totals approximately 77 percent of GDP, substantially higher than readings in the neighborhood of 35 percent before the recession (chart, next page). This run up can perhaps be justified by the necessity to stir the economy with a sizeable fiscal package during the deep recession.

US Economic Research 30 September 2016

U.S. Economic Comment Clinton & Trump fiscal proposals: irresponsibility vs. madness Recent economic statistics: Q3 begins to take shape; better than Q1 & Q2 PCE inflation: a small step up in core inflation

Michael Moran Daiwa Capital Markets America 212-612-6392 [email protected]

Fiscal Proposals of Presidential Candidates

Source: Committee for a Responsible Federal Budget, “Promises and Price Tags: A Preliminary Update,” September 22, 2016. Daiwa Capital Markets America.

Clinton Trump

Revenues +1.50 -5.80

Outlays +1.65 -1.20

Primary Balance Effect -0.15 -4.60

Interest Effect +0.05 +0.70

Total Balance -0.20 -5.30

$ trillions


Follow one of the WSJ’s top 50 financial twitter feeds @DaiwaEurope

Euro area Inflation is rising but unemployment is flat-lining

As expected, according to the flash estimate, euro area inflation rose 0.2ppt in September to 0.4%Y/Y, the highest rate since January. While that might appear a cause for encouragement, the increase was principally due to a smaller drag from energy prices, which dropped 3.0%Y/Y, the least in twenty-two months. Meanwhile, a slight increase in services inflation was broadly offset by a slower increase in prices of non-energy industrial goods, and so core CPI remained stubbornly low at 0.8%Y/Y, towards the bottom of the range of the past year. Looking ahead, we expect headline CPI to rise gradually to back above 1%Y/Y at the start of next year as energy inflation gradually turns positive. However, the improving trend in the euro area labour market has seemingly petered out over recent months – the euro area unemployment rate was unchanged for the fifth consecutive month in August at 10.1%, well above any sensible estimate of the long-run equilibrium level, while average wages in the euro area in Q2 rose less than 1%Y/Y, the least since 2013. As a result, core inflation risks remaining below 1%Y/Y at least through to March, and below 1½%Y/Y for the foreseeable future, forcing the ECB to maintain QE through next year and beyond. Consumption shifting to a weaker growth path?

As well as weighing on inflation, if it is lasting, the slowdown in the labour market – which tallies with a weakening of consumer confidence over the past few quarters to well below the range seen throughout 2015 – represents a potential headwind to economic growth. While it accounted for more than half of the expansion in euro area GDP over the past two years, consumption slowed in Q216, rising just 0.2%Q/Q, the weakest rate since the first quarter of 2014. And the monthly data for spending in Q3 so far have been mixed. Spending in Germany, where the unemployment rate remains at a post-reunification low, appears to have maintained an upwards trajectory, albeit one of debatable vigour. German retail sales declined 0.4%M/M in August and growth the previous month was revised down significantly to just 0.5%M/M, but the profile over previous months raises the likelihood of positive growth over the third quarter as a whole. But in France, where the unemployment rate rose back to 10.5%, the highest level in a year, a drop in consumption in Q3 would not be a surprise, with the 0.7%M/M rebound in consumer spending on goods in August having followed four consecutive months of declines. The week ahead in the euro area and US

Deutsche Bank will no doubt remain the prime focus of attention for investors in the coming week, while the flow of euro area economic data will be lighter than of late. The most notable data in the first half of the week will be the final September PMIs, with the manufacturing indices due on Monday and the services indices due Wednesday – despite a rise in the flash euro

Euro area: Inflation and components Euro area: Unemployment rates

Source: Thomson Reuters and Daiwa Capital Markets Europe Ltd. Source: Thomson Reuters and Daiwa Capital Markets Europe Ltd.

-12

-8

-4

0

4

8

12

16

20

-2

-1

0

1

2

3

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

CPINon-energy industrial goodsServicesEnergy (rhs)

%, Y/Y %, Y/Y

F'cast

8

12

16

20

24

28

4

6

8

10

12

14

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Euro areaFranceItalyGermanySpain (rhs)

%

%

Europe Economic Research 30 September 2016

Euro wrap-up

Overview

• Bunds were little changed as euro area inflation rose to its highest since January but core inflation remained weak and unemployment remained stubbornly high.

• Gilts made losses following an upwards revision to UK Q2 GDP and an upside surprise to the first services output figures since the referendum.

• The coming week brings September’s euro area and UK PMIs, and figures for euro area retail sales, UK trade, and German, UK and French IP.

Chris Scicluna +44 20 7597 8326

Grant Lewis +44 20 7597 8334

Daily bond market movementsBond Yield Change*

BKO 0 09/18 -0.684 +0.011 OBL 0 10/21 -0.574 +0.005 DBR 0 08/26 -0.118 +0.001

UKT 1¼ 07/18 0.116 +0.039 UKT 3¾ 09/21 0.236 +0.036 UKT 1½ 07/26 0.758 +0.036

*Change from close as at 4.30pm BST. Source: Bloomberg


- 2 -

Europe Euro wrap-up 30 September 2016

area manufacturing PMI to its highest this year, a weaker showing from the German services sector left the flash euro area composite PMI at the lowest level since the start of 2015. Wednesday also brings August euro area retail sales figures, which seem likely to post a decline following a relatively firm start to the third quarter. Attention at the back end of the week turns to the industrial sector, with German factory orders and IP data due Thursday and Friday respectively, and French IP and goods trade figures also due Friday. The account of the September Governing Council meeting, which agreed to launch a study of options to ensure smooth implementation of the QE programme, will be published on Thursday. In the bond markets, Germany will sell 10Y Bunds on Wednesday while France will sell 10Y, 15Y and 50Y paper on Thursday. In the US, the coming week brings a number of top-tier data releases, with the most notable being Friday’s labour market report. Expectations are for a further increase in non-farm payrolls of around 175k to leave the unemployment rate unchanged at 4.9%. Ahead of this, Monday brings September’s manufacturing ISM, which is expected to have risen back above the key 50-mark from the seven-month low of 49.4 in August. The equivalent non-manufacturing ISM (due Wednesday), meanwhile, is also expected to report a notable improvement in conditions at the end of Q3. Wednesday also brings the full trade report for August and factory orders data for the same month. Other labour market indicators include the ADP employment survey (Wednesday), the Challenger job cuts figures and weekly initial jobless claims (Thursday). Policy-wise, there are various FOMC members in action, including voting members Fischer, Mester, George and Brainard at various events on Friday. Finally, there are no UST bond auctions scheduled in the coming week.

UK Q2 GDP revised higher

We already knew that the UK economy grew pretty strongly in the second quarter of the year, and today’s final GDP release saw a modest, 0.1ppt, upward revision to the original 0.6%Q/Q estimate, to 0.7%Q/Q. However, with various modest revisions elsewhere, there was a small, 0.1ppt, downward revision to the year-on-year rate to 2.1%Y/Y. The upward revision was in part driven by faster-than-previously expected growth in investment, with gross fixed capital formation estimated to have risen 1.6%Q/Q, making a 0.3ppt contribution to quarterly growth. Elsewhere, household consumption made a 0.5ppt contribution while there was a sizeable increase in inventories too. Net trade, meanwhile, provided a mammoth 0.8ppt drag on growth, with exports dropping 1% on the quarter and imports rising 1.3%. Current account deficit widens further

The weakness of the UK’s external position was further highlighted by the Q2 current account numbers, which showed a further deterioration in the trade balance in Q2, with the deficit rising to £15.7bn from £12.2bn in Q1. The current account deficit, meanwhile, rose to £28.7bn in Q2 (5.9% of GDP), from £27bn in Q1 (5.7% of GDP). This is by far the largest current account deficit (as a % of GDP) of any major economy and, in the words of Mark Carney, leaves the UK relying on the “kindness of strangers” to finance it. Certainly, the dramatic drop in sterling in the wake of the referendum highlighted the extent to which changes in foreign perceptions of prospects for the UK economy can affect capital flows and hence the exchange rate. And while this drop in sterling will help to narrow the current account deficit over time (primarily through the fact that overseas earnings by the UK will automatically rise in sterling terms), the requirement to finance what will remain a still-large current account deficit will leave sterling vulnerable to further falls. This will be all the more so if, as all the signs increasingly suggest, the UK Government moves towards a “hard Brexit”, a move that would seriously affect the flow of foreign direct investment into the UK, which up to now has been by far the preferred location for EU-based investments. But if single market membership is lost, with the increase in tariffs and non-tariff costs that implies when exporting to the rest of the EU, a key attraction of investing in the UK will be lost, as will an important source of financing the UK’s current account deficit.

UK: Services output and PMI UK: Current account balance and components

Source: Markit, Thomson Reuters and Daiwa Capital Markets Europe Ltd. Source: Thomson Reuters and Daiwa Capital Markets Europe Ltd.

40

45

50

55

60

65

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-07 Feb-08 Mar-09 Apr-10 May-11 Jun-12 Jul-13 Aug-14 Sep-15

Services output

Services PMI - Business activity (rhs)

%, 3M/3M Index, 3mma

-8

-6

-4

-2

0

2

4

Q110 Q111 Q112 Q113 Q114 Q115 Q116

Trade balance Income balance

Current transfers Current account

% of GDP


- 3 -


Early Q3 data not as bad as feared

Today’s data also provided the first real insight into GDP growth in the immediate aftermath of the referendum, with the release of the July index of services numbers. And these surprised on the upside, with growth estimated at 0.4%M/M, well above expectations of 0.1%. This left 3M/3M growth at 0.6%, unchanged from June. This was obviously in sharp contrast to the PMI numbers, which pointed to a marked slowdown in July. And there was more good news from the GfK consumer confidence survey, which suggested that sentiment has returned to the pre-referendum level, with a larger-than-expected rise in the headline index to -1, the same level as in May and June and bang in line with the average of the past twelve months. The survey detail suggested that consumers felt more upbeat in every aspect, from their assessments of the economic situation to their readiness to make major purchases. But BoE will remain concerned about outlook

These data will have been an upward surprise for the MPC and, if maintained, will lessen the chances of a further reduction in Bank Rate when it next meets in November. However, the MPC’s primary concern about the economy in the near term was about investment, and the signs there are less positive. Certainly the Bank of England’s own regional agents have reported a greater reticence by firms to commit to investment given the heightened economic uncertainty in the wake of the referendum result. And Nissan, which yesterday indicated that it would not invest further in its flagship factory in Sunderland for as long as the threat of tariff and non-tariff barriers being imposed on its exports to the EU remains, will not be the only car firm taking such a stance. And this will be repeated across multiple sectors of the economy where single market membership is vital to business viability. So while the MPC will be relieved that household spending, etc. appears to have held up well, this was not unexpected. And as firms’ currency hedges on their imports expire over coming months and the prices of consumer goods inevitably rise, this will dampen household spending, adding to the downward pressure on GDP growth. The week ahead in the UK

The focus in the first half of the coming week will be the September PMIs, with the manufacturing, construction and services indices out on Monday, Tuesday and Wednesday respectively. All three output PMIs fell sharply in July, but then subsequently rebounded in August, on average pointing to zero GDP growth in Q3. So a further increase in the survey indicators in September will be consistent with modest positive economic growth in the third quarter, a marked slowdown from the 0.7%Q/Q growth seen in Q2. Meanwhile, the second half of the week brings a few notable hard economic data releases. Following Q2 labour productivity figures on Thursday, the latest industrial production and trade data are due on Friday. While industrial output growth is expected to have moderated in August from the 2.1%Y/Y pace reported in July, exports are expected to have picked up, leaving the trade deficit slightly lower than in recent months. Among less notable new data releases, the BRC Shop Price index is due on Wednesday, new car registration figures are out on Thursday, and the NIESR GDP estimate for September is out on Friday.


- 4 -


European calendar Today’s results

Economic data

Country Release Period Actual Market consensus/

Daiwa forecast Previous Revised

EMU Unemployment rate % Aug 10.1 10.0 10.1 -

Flash CPI estimate Y/Y% Sep 0.4 0.4 0.2 -

Flash core CPI estimate Y/Y% Sep 0.8 0.8 0.8 -

Germany Retail sales M/M% (Y/Y%) Aug -0.4 (3.7) -0.2 (1.8) 1.7 (-1.5) 0.5 (-)

France Preliminary EU-harmonised CPI Y/Y% Sep 0.5 0.5 0.4 -

Consumer spending M/M% (Y/Y%) Aug 0.7 (1.0) 0.5 (0.9) -0.2 (0.5) -0.3 (0.1)

Italy Unemployment rate % Aug 11.4 11.4 11.4 -

Preliminary EU-harmonised CPI Y/Y% Sep 0.1 0.1 -0.1 -

Spain Current account balance €bn Jul 3.0 - 2.0 -

UK Lloyds business barometer Sep 24 - 16 -

GfK consumer confidence survey Sep -1 -5 -7 -

Nationwide house price index M/M% (Y/Y%) Sep 0.3 (5.3) 0.3 (5.0) 0.6 (5.6) -

GDP – second release Q/Q% (Y/Y%) Q2 0.7 (2.1) 0.6 (2.2) 0.4 (2.0) -

Index of services M/M% (3M/3M%) Jul 0.4 (0.6) 0.1 (0.3) 0.2 (0.5) 0.3 (0.6)

Current account balance £bn Q2 -28.7 -30.6 -32.6 -27.0

Auctions

Country Auction

- Nothing to report -

Source: Bloomberg and Daiwa Capital Markets Europe Ltd.


- 5 -


Coming week’s data calendar Key data releases

Country BST Release PeriodMarket consensus/

Daiwa forecast Previous

Monday 03 October 2016

EMU 09:00 Final manufacturing PMI Sep 52.6 51.7

14:45 ECB public sector asset purchases €bn Weekly 16.0 15.4

Germany 08:55 Final manufacturing PMI Sep 54.3 53.6

France 08:50 Final manufacturing PMI Sep 49.5 48.3

Italy 08:45 Manufacturing PMI Sep 50.3 49.8

Spain 08:15 Manufacturing PMI Sep 51.5 51.0

UK 09:30 Manufacturing PMI Sep 52.1 53.3

Tuesday 04 October 2016

Spain 08:00 Unemployment M/M ‘000s Sep 23.3 14.4

UK 09:30 Construction PMI Sep 49.0 49.2

Wednesday 05 October 2016

EMU 09:00 Final services PMI (final composite PMI) Sep 52.1 (52.6) 52.8 (52.9)

10:00 Retail sales M/M% (Y/Y%) Aug -0.3 (1.5) 1.1 (2.9)

Germany 08:55 Final services PMI (final composite PMI) Sep 50.6 (52.7) 51.7 (53.3)

France 08:50 Final services PMI (final composite PMI) Sep 54.1 (53.3) 52.3 (51.9)

Italy 08:45 Services PMI (composite PMI) Sep 52.0 (51.6) 52.3 (51.9)

Spain 08:15 Services PMI (composite PMI) Sep 54.7 (53.8) 56.0 (54.8)

UK 00:01 BRC shop price index Y/Y% Sep - -2.0

09:30 Services PMI (composite PMI) Sep 52.0 (52.3) 52.9 (53.6)

Thursday 06 October 2016

Germany 07:00 Factory orders M/M% (Y/Y%) Aug 0.3 (1.7) 0.2 (-0.7)

UK 09:00 New car registrations Y/Y% Sep - 3.3

09:30 Unit labour costs Y/Y% Q2 - 1.9

Friday 07 October 2016

Germany 07:00 Industrial production M/M% (Y/Y%) Aug 1.0 (0.5) -1.5 (-1.2)

France 07:45 Trade balance €bn Aug -4.0 -4.5

07:45 Current account balance €bn Aug - -2.6

07:45 Industrial production M/M% (Y/Y%) Aug 0.6 (-1.3) -0.6 (-0.1)

07:45 Manufacturing production M/M% (Y/Y%) Aug 0.3 (-1.4) -0.3 (0.4)

Spain 08:00 Industrial production M/M% (Y/Y%) Aug -0.1 (1.6) 0.2 (0.3)

UK 08:30 Halifax house price index M/M% (3M/Y%) Sep 0.0 (5.9) -0.2 (6.9)

09:30 Industrial production M/M% (Y/Y%) Aug 0.2 (1.3) 0.1 (2.1)

09:30 Manufacturing production M/M% (Y/Y%) Aug 0.4 (0.9) -0.9 (0.8)

09:30 Visible trade balance £bn Aug -11.2 -11.8

09:30 Total trade balance £bn Aug -4.0 -4.5

15:00 NIESR GDP 3M/3M% Sep - 0.3



- 6 -


Coming week’s events/auctions calendar Key events & auctions

Country BST Event / Auction

Monday 03 October 2016

UK 09:30 BoE publishes record of FPC meeting held on 20 September 2016

14:50 BoE APF operation: To purchase 3-7Y Gilts

Tuesday 04 October 2016

UK 10:30 Auction: To sell £2.75bn of 0.5% 2022 bonds (22-Jul-2022)

14:50 BoE APF operation: To purchase 15Y+ Gilts

Wednesday 05 October 2016

Germany 10:30 Auction: To sell €4bn of 0% 2026 bonds (15-Aug-2026)

UK 14:50 BoE APF operation: To purchase 7-15Y Gilts

Thursday 06 October 2016

EMU 12:30 ECB publishes account of the monetary policy meeting held on 7-8 September

France 09:50 Auction: To sell 0.25% 2026 bonds (25-Nov-2026)

09:50 Auction: To sell 1.5% 2031 bonds (25-May-2031)

09:50 Auction: To sell 1.75% 2066 bonds (25-May-2066)

UK 10:30 Auction: To sell £2bn of 1.5% 2047 bonds (22-Jul-2047)

Friday 07 October 2016

- Nothing scheduled -


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CPI back at pre-QQE level

While the BoJ’s commitment to try to overshoot its 2%Y/Y inflation target was a text-book response to the steady decline in inflation expectations seen over past quarters, there has understandably also been no shortage of scepticism. After all, the BoJ has failed to hit the target, even briefly, in the 3½ years since Kuroda launched QQE, and headline CPI has averaged just ½%Y/Y since Q113. And data published in the past week confirmed that inflation is now back at multi-year lows, with the main figures firmly in negative territory. In particular, headline CPI fell 0.1ppt in August to -0.5%Y/Y, matching the three-year low reached in May. The various core measures signalled persistently subdued underlying inflationary pressures too. For example, the BoJ’s forecast core measure of CPI (excl. fresh foods) was flat in August at -0.5%Y/Y, the lowest since before Kuroda took office, while the ‘core core’ rate (excl. food and energy) fell 0.1ppt to 0.2%Y/Y, a near-three-year low. And perhaps most notably, the BoJ’s new preferred core rate (excl. fresh foods and energy) fell to just 0.4%Y/Y, an eighteen-month low and down almost 1ppt from end-2015. Downward price pressures to remain to the fore

Admittedly, the weakness in August was principally due to a decline in fresh food inflation to -1.7%Y/Y, the steepest drop since November 2014. But there was also a further moderation in services and non-energy industrial goods inflation to their lowest rates since 2013, with the latter no doubt related to the impact of the stronger yen. This was partly offset by a softer pace of decline in energy prices, which eased more than 1ppt to -10%Y/Y. But while past drops in energy prices will steadily fall out of the arithmetic over coming quarters, not least given the stronger yen, downward price pressures seem set to remain to fore over the near term. Indeed, while the month- ahead Tokyo headline CPI measure was unchanged at -0.5%Y/Y in September, the ‘core core’ rate (excl. food and energy) fell 0.2ppt to -0.1%Y/Y the first negative reading since April 2015. So our colleagues in Tokyo now expect national core CPI to return to positive territory only in early 2017. And in the absence of higher fuel costs, core CPI would likely remain in negative territory through to summer next year. Consumption-related indicators softer in August With respect to the latest economic activity figures, the past week’s releases were a mixed bag. While private consumption accounted for almost three-quarters of GDP growth in the first

Japan Economic Research

30 September 2016

Yen 4Sight

Highlights

While the BoJ has pledged to overshoot its inflation target, all measures of CPI were at their lowest in more than a year in August.

Household spending figures for August were disappointingly weak, but IP surprised on the upside.

Sentiment surveys will dominate the data flow in the coming week, with the BoJ’s Tankan due Monday. August wages data

are also due on Friday.

Emily Nicol +44 20 7597 8331 Emily. [email protected]

Interest and exchange rate forecasts

End period 30-Sep Q416 Q117 Q217 BoJ IOER % -0.10 -0.10 -0.20 -0.20 10Y JGB % -0.09 -0.10 -0.10 -0.10 JPY/USD 101 104 104 104 JPY/EUR 113 116 116 116 Source: Bloomberg, BoJ and Daiwa Capital Markets Europe Ltd.

Consumer price inflation

Source: MIC, BoJ, Thomson Reuters and Daiwa Capital Markets Europe Ltd.

Selected CPI components

Source: MIC, BoJ, Thomson Reuters and Daiwa Capital Markets Europe Ltd.

Core CPI forecast

Source: MIC, BoJ and Daiwa Securities

-2

-1

0

1

2

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16Headline CPIBoJ's forecast core CPI (ex fresh food)Core core CPI (ex food & energy)New core CPI (ex fresh food & energy)

%, Y/Y BoJ's inflation target

-20

-15

-10

-5

0

5

10

15

-4

-3

-2

-1

0

1

2

3

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

HeadlineCPI

Food,excludingfresh foods

Non-energyindustrialgoods

Services

Energy(rhs)

%, Y/Y %, Y/Y

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17Services & water/electric charges Other goodsOil products Durable consumer goodsFood (excl. fresh food) Core CPI, %, Y/Y

% point contribution

F'cast


https://twitter.com/DaiwaEurope

mailto:Emily.%[email protected]

- 2 -

Japan Yen 4Sight

30 September 2016

half of the year, and made a positive start to the third quarter, the latest consumption-related indicators for August disappointed. Perhaps most striking was household spending, which declined more than 3½%M/M, the steepest monthly drop for eighteen months to leave it down more than 4½%Y/Y. While the weakness likely reflected some payback from the strength seen in July, on average in the first two months of Q3 spending was down more than ½% compared with Q2. It is, however, worth noting that the household spending figures have not necessarily provided the best guide to the national accounts measure of consumption in the recent past. And overall the message from this release contrasts with the findings from the past week’s retail sales figures, which despite declining more than 1% on the month, signalled an ongoing moderate upward trend in the middle of Q3. Higher employment to support spending?

The latest labour market figures were also, at face value, softer, with employment down for the first month in six in August and by 120k to leave the unemployment rate rising to 3.1% from the more than two-decade low of 3% previously. But the drop in employment comes on the back of a notable pickup over recent months – for example, the number of people in employment has still risen by almost 700k so far this year and by more than 2mn since Abe took office at the end of 2012. Indeed, annual employment growth was last higher in 1991. And with the job-to-applicant ratio unchanged at 1.37 – its highest since the early 1990s – and firms continuing to report insufficient staffing levels, we would expect employment to rise again over coming months. So, with real disposable income having also picked up in August, while consumer confidence remains at the top end of the recent range, we might well see a moderate recovery in household spending over coming months too. External demand to provide limited support in Q3

The BoJ might well feel uneasy about the weakening of consumption in August. And at face value the goods trade report for that month didn’t look so encouraging either. This showed the value of exports moving sideways on the month, to leave them 5½% lower than their level at the start of the year. However, the near-9½% drop compared with a year earlier principally reflected export prices, which were down 10½%Y/Y in August, while export volumes were up almost 1%Y/Y. When also adjusting for seasonal effects, export volumes were up on the month in August too, by a little more than 1%M/M, with a notable pickup in demand for IT-related and capital goods. But this followed a much steeper pace of decline in July. So, while volumes on a three-month basis rose to their highest level since early 2011, on average in the first two months of Q3 they were up just 0.2% compared with Q2. And with import volumes on the same basis up almost ½%, this report suggests that net trade remained a modest drag on GDP at the start of Q3. IP much stronger than expected in August

Notwithstanding the evidence of continued subdued domestic and external demand, August’s industrial production release injected a degree of positivity into the mix. In particular, manufacturing output increased a much stronger-than- expected 1½%M/M, to leave it up more than 4½% compared with a year earlier, the largest annual increase since April 2015. And in the absence of a near-5%M/M decline in autos production – related to a marked drop in shipments to the US

Household spending and private consumption

Source: MIC, Cabinet Office, Thomson Reuters and

Daiwa Capital Markets Europe Ltd.

Indicators of consumption

Source: MIC, Cabinet Office, Thomson Reuters and


Employee growth

Source: MIC, Thomson Reuters and Daiwa Capital Markets Europe Ltd.

Unemployment rate and job-to-applicant ratio

Source: MIC, MHLW, Thomson Reuters and


-12

-10

-8

-6

-4

-2

0

2

4

6

-6

-5

-4

-3

-2

-1

0

1

2

3


Consumption (GDP measure)

Total spending (rhs)

Core spending (rhs)

%, Q/Q %, 3M/3M

88

90

92

94

96

98

100

102

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Household spending Retail salesSynthetic consumption Core spending

Index: Mar-14=100, 3mma

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

MaleFemaleTotal, %, Y/Y, 3mma

% point contribution

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Job-to-applicant ratio Unemployment rate (rhs)

Ratio of job offers to applicants %


- 3 -

Japan Yen 4Sight

30 September 2016

– the increase in manufacturing output would have been closer to 2%M/M. So, despite the weakness at the start of the quarter, on average in the first two months of Q3, manufacturing output was up 1% compared with Q2. And if the METI’s production forecast for growth of around 2%M/M in September materialises, this would result in the firmest quarterly growth (2%Q/Q) for five years. Admittedly, a decline in shipments and small rise in inventories suggests that a notable pickup in output over coming months is unlikely. Nevertheless, in the absence of a decline of 3½%M/M or more in September, industrial production will still rise over the third quarter as a whole. And looking through monthly volatility, on the whole recent indicators provide cause for cautious optimism that GDP chalked up the third successive quarter of positive growth in Q3 for the first time since the early stages of Abenomics. The week ahead in Japan and the US

The coming week will be another busy one for Japanese economic data, with several key sentiment surveys due in the first half of the week. Most noteworthy will be the BoJ’s quarterly Tankan on Monday, which is expected to show that large manufacturers and non-manufacturers alike assessed conditions in the third quarter to be little changed from Q2. And large firms are expected to have nudged up very slightly their expectations for capex growth in the current fiscal year. Meanwhile, the associated inflation expectations survey, due Tuesday, is likely to show that businesses remained downbeat about the inflation outlook over coming years. Other monthly sentiment surveys for September include the final manufacturing PMI (Monday), consumer confidence (Tuesday) and services and composite PMIs (Wednesday). Also of interest at the end of the week will be labour earnings data for August, as well as the BoJ’s consumption activity index for the same month. In the JGB market, a 10Y auction will be conducted on Tuesday, followed by a 10Y index-linked auction on Thursday. In the US, the coming week brings a number of top-tier data releases, with the most notable being Friday’s labour market report. Expectations are for a further increase in non-farm payrolls of around 175k to leave the unemployment rate unchanged at 4.9%. Ahead of this, Monday brings September’s manufacturing ISM, which is expected to have risen back above the key 50-mark from the seven-month low of 49.4 in August. The equivalent non-manufacturing ISM (due Wednesday), meanwhile, is also expected to report a notable improvement in conditions at the end of Q3. Wednesday also brings the full trade report for August and factory orders data for the same month. Other labour market indicators include the ADP employment survey (Wednesday), the Challenger job cuts figures and weekly initial jobless claims (Thursday). Policy-wise, there are various FOMC members in action, including voting members Fischer, Mester, George and Brainard at various events on Friday. Finally, there are no UST bond auctions scheduled in the coming week.

Real disposable income

Source: MIC, Thomson Reuters and Daiwa Capital Markets Europe Ltd.

Export volumes by sector

Source: BoJ, Bloomberg and Daiwa Capital Markets Europe Ltd.

Manufacturing production by sector

Source: METI and Daiwa Capital Markets Europe Ltd.

Key selected indicators

Source: BoJ, MIC, METI, Thomson Reuters and


-8

-6

-4

-2

0

2

4


%, Y/Y, 3mma

90

95

100

105

110

115

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

Total Autos and related goodsCapital goods and parts Intermediate goodsIT-related goods

Index: Dec-12 = 100, 3mma

80859095

100105110115120125130

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16Electronic parts and devices General machineryTransport equipment Electrical machineryICT equipment

Index: Dec-12 = 100, 3mma

96

98

100

102

104

106

108

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16Retail sales Industrial outputExports Industrial inventories

Index: Oct-13 = 100, 3mma

Consumption tax hike


- 4 -

Japan Yen 4Sight

30 September 2016

Economic calendar Key data releases – September/October

26 27 28 29 30 BOJ FLOW OF FUNDS (Q2)

40Y JGB AUCTION SERVICES PPI Y/Y% JUL 0.3 AUG 0.2 BOJ MINUTES (28-29 JULY MEETING)

SMALL BUSINESS CONFIDENCE AUG 46.3 SEP 47.7

3M TB AUCTION 2Y JGB AUCTION RETAIL SALES Y/Y% JUL -0.2 AUG -2.1

NATIONAL CPI Y/Y% JUL AUG -0.4 -0.5 EX FRESH FOOD -0.5 -0.5

EX FOOD/ENERGY 0.3 0.2

EX FRESH FOOD/ENERGY 0.5 0.4 TOKYO CPI Y/Y% AUG SEP -0.5 -0.5 EX FRESH FOOD -0.4 -0.5

EX FOOD/ENERGY 0.1 -0.1

HOUSEHOLD SPENDING Y/Y% JUL -0.5 AUG -4.6 UNEMPLOYMENT RATE % JUL 3.0 AUG 3.1 JOB-TO-APPLICANT RATIO JUL 1.37 AUG 1.37 INDUSTRIAL PRODUCTION Y/Y% JUL -4.2 AUG 4.6 HOUSING STARTS Y/Y% JUL 8.9 AUG 2.5 CONSTRUCTION ORDERS Y/Y% JUL -10.9 AUG 13.8 BOJ SUMMARY OF OPINIONS (20-21 SEPTEMBER MEETING)

03 04 05 06 07 BOJ TANKAN – LARGE MANUFACTURES DI Q2 6 Q3 6 LARGE NON-MANUFACTURERS DI Q2 19 Q3 18 MANUFACTURING PMI AUG 49.5 SEP F 50.3 VEHICLE SALES Y/Y% AUG 5.7 SEP N/A

10Y JGB AUCTION (APPROX ¥2.4TRN) BOJ TANKAN INFLATION EXPECTATIONS SURVEY (Q3) CONSUMER CONFIDENCE AUG 42.0 SEP 41.8 MONETARY BASE Y/Y% AUG 24.2 SEP N/A

6M TB AUCTION (APPROX ¥3.5TRN) SERVICES PMI AUG 49.6 SEP N/A COMPOSITE PMI AUG 49.8 SEP N/A

3M TB AUCTION (APPROX ¥4.4TRN) 10Y JGBI AUCTION (APPROX ¥0.4TRN)

AVERAGE WAGES Y/Y% JUL 1.2 AUG 0.4 BOJ CONSUMPTION ACTIVITY INDEX M/M% JUL 1.4 AUG N/A COINCIDENT INDEX JUL 112.1 AUG P 111.8 LEADING INDEX JUL 100.0 AUG P 101.6

10 11 12 13 14 NATIONAL HOLIDAY – HEALTH/SPORTS DAY

ECONOMY WATCHERS SURVEY (SEP) BANKRUPTCIES (SEP) MACHINE TOOL ORDERS* (SEP P)

30Y JGB AUCTION MACHINE ORDERS (AUG) CURRENT ACCOUNT BALANCE (AUG)

3M TB AUCTION TERTIARY ACTIVITY INDEX (AUG) BANK LENDING (SEP)

5Y JGB AUCTION GOODS PPI (SEP)

17 18 19 20 21 INDUSTRAL PRODUCTION (AUG F) CAPACITY UTILISATION (AUG) DEPARTMENT STORE SALES* (AUG) BOJ REGIONAL ECONOMIC REPORT (OCT)

ALL INDUSTRY ACTIVITY (AUG)

*Approximate date of release. Source: BoJ, MoF, Bloomberg & Daiwa Capital Markets Europe Ltd.


Important disclosures, including any required research certifications, are provided on the last three pages of this report.

Intime Retail (Group) Store (1833 HK)

Share price (29 Sept ‘16): HKD6.85 Rating: Buy (1) 12-month target price: HKD8.00

Golden Eagle Retail (3308 HK) Share price (29 Sept ‘16): HKD9.89 Rating: Sell (5) 12-month target price: HKD7.10 Lifestyle International (1212 HK)

Share price (29 Sept ‘16): HKD10.70 Rating: Underperform (4) 12-month target price: HKD9.60 What’s new

The China government plans to remove the consumption tax on non-luxury cosmetic

products (previous tax rate: 30%) , effective from October 1 2016, according to the Finance

of Ministry. The tax rate for imports of high-end cosmetics was also revised down to 15%

(from 30%) – (definition of high-end cosmetics: priced above CNU 10/ml or CNY 15/piece).

We believe that the change in the consumption tax rate also applies to cross-border e-commerce. Source: http://uk.reuters.com/article/uk-china-consumption-tax-idUKKCN120090 http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201609/t20160930_2431059.html

(Chinese) Impact

Department Store – high-single-digit contribution in revenue: Cosmetics were one of

the very few categories that are still growing in revenue among department store operators

in China (other growing categories include sportswear and groceries). Their gross sales

proceeds (GSP) contribution to the department-store operators we cover ranged from 8-10% in 1H16. We believe department stores mainly sell high-end cosmetics and, hence,

would see a reduction in the tax rate from 30% to 15%. But it still implies that effective

retail sales prices in China are still higher than on purchases from overseas. More to come? In May 2015, The Ministry of Finance reduced the import tariff for a wide

range of products (personal hygiene products, apparels etc) (by 50% on average). It had

been a slight negative for domestic personal care products/cosmetic brands but

neutral to mainland retailers. We believe the aim of the tariff, and this time the reduction

in the consumption tax, is to stimulate domestic consumption and attract mainlanders to

spend more locally instead of overseas as tourists. In order to further reduce the price gap

between domestic products and overseas ones, we believe the government’s next move

will be to reduce the consumption tax for various luxury or discretionary items.

x

Country

30 September 2016

ME

MO

China Department Store sector

Rating: Negative

Lower consumption tax for cosmetics

Anson Chan, CFA (852) 2532 4350 [email protected]


http://uk.reuters.com/article/uk-china-consumption-tax-idUKKCN120090

http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201609/t20160930_2431059.html

China Department Store sector

30 September 2016

2

Valuation and recommendation

We maintain our Negative stance on the sector due to fierce competition from e-commerce

and other retail formats (eg, shopping mall). We have a Buy rating on Intime due to its

asset disposal potential and more initiatives on the O2O business; our SOTP-based 12-month TP is HKD8.0. We maintain our Sell (5) rating on Golden Eagle and 12-month TP of

HKD10.70 (based on a 10x PER applied to our 2H16E-1H17E EPS), and Underperform (4)

rating on Lifestyle International with an SOTP-based 12-month TP of HKD9.60. Risks

Intime: downside risk would be weaker-than-expected consumer sentiment in Hong Kong

and China. Golden Eagle: upside risk would be an unexpected increase in consumer sentiment in

China. Lifestyle: upside risk would be a sharper-than-expected increase in Mainland tourist arrival In the interests of timeliness, this document has not been edited.



TSMC (2330 TT)

Share price (29 Sep ’16): TWD185.5 Rating: Outperform (2) 12-month target price: TWD199 Advanced Semiconductor Engineering (2311 TT) Share price (29 Sep ’16): TWD37.60

Rating: Buy (1) 12-month target price: TWD45.00 SMIC (981 HK) Share price (29 Sep ’16): HKD0.89 Rating: Outperform (2) 12-month target price: HKD0.99 What’s new

Qualcomm could potentially acquire NXP to become the second-largest chipmaker in the

world (ex-memory) with a 13% market share, only behind Intel. We see this move as

having limited implications for the Asian SCM makers in the near term, but longer term

view this as positive since size matters in the tech space to facilitate the next demand

cycle of the BigData/IoT, in order capture market-share gains. What’s the impact

QCOM to acquire NXP? According to the Wall Street Journal (WSJ), Qualcomm

(QCOM US, USD67.45, Hold [3]) is in talks to acquire Netherlands-based NXP

Semiconductors (NXPI US, USD96.12, not rated) for over USD30bn, which led to a 17%

surge in NXP’s stock on 29 September, for a market cap of USD33.2bn. NXP acquired Freescale last year. Founded over 60 years ago as a division of Royal

Philips and later on spun off as an independent entity, NXP is an IDM setup offering

standard logic and high-performance mixed-signal products for a high variety of

applications across 3C (computing, communication and consumer electronics), such as

optical drive devices and digital video platforms (Nexperia series) for consumer, DSP,

WLAN, STB and cable modem for wireless and wired communications. It acquired

Freescale Semiconductor Ltd (not listed) in 2015 to expand its footprint into the

automotive and other analog segments. NXP reported USD6.1bn revenue for 2015,

taking 2.4% share of the global chip market ex-memory, or 4.1% market share if

including Freescale, and entered the top-5 list only behind Intel (INTC US, USD37.32,

Outperform [2]), QCOM, Texas Instruments (TXN US, USD69.84, Hold [3]) and

Broadcom Ltd (AVGO US, USD172.46, Outperform [2]). M&A is a trend for the next cycle. We were indeed not surprised by this potential M&A

because we’ve flagged several times since we put out our thematic Big Data report in

January 2015 (see Big Data: the next big thing) that M&A in the technology space

should rise to become a trend in order for the incumbents to expand their product scope

and offer cross-platform/cross-demand-vertical total solutions to facilitate the rising trend

of the IoT demand cycle. (see table below)

x

Country

30 September 2016

ME

MO

Global SCM Sector

Our read for the potential QCOM-NXP team-up: longer-term positive

Rick Hsu (886) 2 8758 6261 [email protected]

Martin Lee (886) 2 8758 6262 [email protected]


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/AsiaTechSector_150102.pdf#page=1

Global SCM Sector

30 September 2016

2

Likely a second-largest powerhouse globally. Should the deal go through per the

WSJ report, the combined revenue of QCOM and NXP would reach nearly USD35bn,

controlling 13.4% market share and becoming the second-largest player in the world,

only behind Intel. Size matters in the next demand cycle of the BigData/IoT, in our view,

and we see synergy benefits to this potential QCOM-NXP link as it would be

complementary for the two’s product offerings, making the new QCOM a strong

powerhouse across MCD (mobile computing devices), automotive, consumer,

communication and industrial applications, which virtually cover all the tech spectrum as

we’ve defined under the BigData/IoT cycle except perhaps the memory devices (see

chart below). Implications to Asian food chain. QCOM and NXP have long been customers of

Asian SCM makers, including the front-end foundries of TSMC, UMC and SMIC, and the

backend OSAT makers of ASE, Amkor, SPIL and JCET. Therefore, we see limited

implications in the near term but potentially positive ones over the longer term should

the merger go through to help the new entity gain market share. Moreover, given NXP’s

IDM setup which could be less efficient than QCOM’s fabless setup, QCOM could help

convert the new entity to pure fabless, adding order potential to the Asian SCM partners

(IDM outsourcing). What we recommend

Regardless of this potential M&A adding to order upside, we keep our Positive view on the

SCM sector but remain selective when it comes to stock investments. We prefer TSMC

(2330 TT, TWD185.5, Outperform [2]) in the foundry space which we see as a quality play,

and SMIC (981 HK, HKD0.89, Outperform [2]) for capital-gain potential. In the OSAT

space, we prefer ASE (2311 TT, TWD37.6, Buy[1]) for its leadership and expect the

HoldCo – a potential JV for the ASE-SPIL team-up - to go through to further enhance its

market value. Key downside risk to our sector call would be inventory correction in 1Q17. Basis for our target prices

TSMC: our 12-month TP of TWD199 is based on an ROE-adjusted PBR of 3.5x applied to

our average 2016-17E BVPS. SMIC: our 12-month TP of HKD0.99 is based on an ROE-adjusted PBR of 1.2x. ASE: our 12-month TP of TWD45 is based on a PBR of 1.9x applied to our average 2016-17E BVPS. 2015 global semiconductor market share

Company Revenue (USDbn) Market share

INTC 55 21.5%

QCOM 24 9.3%

TXN 13 5.0%

BRCM Ltd 13 5.2%

STM 7 2.7%

IFX 7 2.7%

MTK 7 2.6%

NXP 6 2.4%

NVDA 5 1.9%

Freescale 5 1.8%

Others 116 45.0%

Total 258 100.0%

* By revenue, ex-memory Source: Company, Daiwa


Global SCM Sector

30 September 2016

3

Summary of recent M&A in semi space

Accquirer Target Deal anncounced Deal completed Deal size (USDm)

SoftBank ARM Holdings 6/15/2015 7/18/2016 30,279

Avago BRCM 5/28/2015 2/2/2016 29,806

NXP Freescale 3/2/2015 12/8/2015 15,769

Intel Altera 6/1/2015 12/29/2015 14,355

Western Digital SanDisk 10/21/2015 5/13/2016 14,292

Lam Research KLA Tencor 10/21/2015 Pending 11,033

Avago LSI 12/16/2013 5/7/2014 5,596

Dialog Semiconductor Atmel 9/20/2015 Incomplete 4,122

Tsinghua Unisplendour Western Digital 9/30/2015 Incomplete 3,775

Microchip Technology Atmel Corp 12/11/2015 4/5/2016 3,236

Skyworks Microsemi Storage Solutions 10/5/2015 Incomplete 2,260

ON Semiconductor Corp Fairchild Semiconductor 11/18/2015 9/20/2016 2,223

Avago Emulex 2/25/2015 5/5/2015 540

MTK Richtek 1/19/2016 4/29/2016 422

Nantong Fujitsu Microelectronics AMD back-end facilities 10/16/2015 4/29/2016 371

MTK Ilitek 8/26/2015 6/1/2016 104

Source: Bloomberg

Big Data/IoT matrix: application v.s. functionality

Source: Daiwa

In the interests of timeliness, this document has not been edited.

Big Data/IoT

Data access

Data process

Data transmission

Sensor/DD

AP/MCU

Connectivity/RF/FO

Data storage

Data security

Co

nsu

mer

Io

T

Sm

art

ho

me

IoT

Sm

art

car

IoT

Hea

lth

care

Io

T

Ind

ust

rial

IoT

Clo

ud

co

mp

uti

ng

Power management

Datacenter/e-memory



What’s new • The Town Planning Board (TPB) today (30 September) discussed KLN’s land-use

conversion plan of rezoning its Chai Wan warehouse into a columbarium that provides 82,000 niches, known as its Island Memorial Centre (IMC) project. The plan was disapproved by the Town Planning Board due mainly to concerns about transportation issues. We see the news as negative and which may cap stock sentiment in the near term. However, we reaffirm our Outperform (2) rating on the stock due to its sound long-term earnings-growth prospects.

Analysis • Recap of the revised plan – On 12 September, KLN submitted supplementary

documents in the hope of gaining support from the local community and to address its concerns. The major proposals were: 1) 10,000 niches to be priced at a 30% discount and reserved for residents living within 1km of the IMC, 2) 10% of profits before tax to be donated to the community and charity groups, and 3) free scheduled ferries to and from the IMC to be arranged to provide services during Ching Ming and Chung Yeung Festival. Further, KLN also said visitors’ admission would be restricted to only those that have pre-registered and booked appointments in advance.

• Reason of rejection – Previously, several government departments including the Food

and Health Bureau, Lands Department and Transport Department have already raised their concerns about the plan. Despite KLN “fine-tuning” its plan, TPB considered its major concern which is the already-congested local transportation which has yet to be solved under the revised proposal. Meanwhile, some committee members also questioned the feasibility of the proposed pre-registered policy. Hence, TPB disproved KLN’s application.

• The news may cap stock sentiment – Previously, management said to media that

they would not re-submit the application or relocate the columbarium plan if the IMC plan was disapproved by the TPB. We see the recent retreat in the share price already reflecting some of the market expectations that the plan will not sail through. Even though we do not see the market as having factored in the approval, we believe the objection would eliminate one of the potential catalysts for the stock to rebound.

Recommendation • We view the news as slightly negative even though we do not see the current

consensus including any of the gains from the land conversion. The objection would cause KLN to lose a potential share-price catalyst. We see the company's long-term growth outlook remaining intact due to its well-established service network and quality brand name. The company is also actively seeking M&A opportunities to fuel business growth. Hence, we maintain our Outperform (2) rating on the stock and SOTP-based 12-month target price of HKD11.70. Key risk to our call would be lower-than-expected logistics services demand.

In the interests of timeliness, this document has not been edited.

C

30 September 2016

ME

MO

Kerry Logistics Network (KLN) (636 HK)

Share price (29 Sep): HKD10.76 12-mth rating: Outperform (2) Target price: HKD11.70

Disapproval of land-conversion plan a slight negative

Kelvin Lau (852) 2848 4467 [email protected]



What’s new? According to Bloomberg, Germany’s Bosch (not listed) filed a complaint in the Federal court of Detroit, US, against Mando, yesterday. The largest auto-parts company globally claims that Mando has infringed on 4 patents relating to its Piston Pump and hydraulic-unit housing. As a result, Mando shares are plummeting today, down as much by 11.93% in the afternoon session. However, we are not overly concerned about this news and continue to see Mando’s long-term fundamentals as intact. What’s the impact? Lawsuits for breaching patent rights are a grey area and happen on a regular basis in the global automotive industry. According to Mando, Bosch first raised this issue back in July, and noted that the final verdict of the lawsuit will likely take a few years to come out. As Mando has been winning big-ticket orders from US automakers, and in the process taking market share away from Bosch, it appears that Bosch is trying to put a dent on Mando’s reputation. Currently, Anti-lock braking systems (ABS) account for 16% of Mando’s revenues, but the products for which Bosch claims are infringing on its patents are only around 10% of total revenues. ABS products are upgraded every 3-5 years, thus by the time of the final verdict, we do not believe that Mando will be ordered to halt production of these products even under the worst-case scenario. As far as Mando is concerned, they have not infringed on Bosch’s patents and are currently preparing for the lawsuit. What we recommend? Most Korean automobile parts’ companies are seeking a fast-follower strategy and are also gaining market share from both German and Japanese Tier-I auto parts makers. Thus, they are sometimes accused of infringing on patent rights. But based on our experience, this should be not perceived as a major risk. In other words, this could have more of an impact on sentiment, but not hurt its fundamentals. Meanwhile, we continue to look for Mando's 3Q16E operating-profit margin to increase by 0.3pp YoY to 5.3%, on our expectations of a 23.1% YoY rise in Hyundai Motor Group's China shipments to 387,000 units in 3Q16 (Mando’s operating profit contribution from China is 70%) and a further YoY rise in high-margin electronic and ADAS products revenue to 37%. We have a Buy (1) rating and 12-month DCF/PER-based target of KRW320,000, implying a target PER of 13.6x on our average 2016-2017E EPS, which is in line with global active/ADAS part makers’ 2016-17E average PER of 13.6x. Despite about a 70% rebound in the shares YTD, we expect both its upward earnings-revision cycle and multiple expansion to come to the fore over the next 12-months. Key risk: stronger non-contractual pricing pressure from OEMs. In the interests of timeliness, this document has not been edited.

C

30 September 2016

ME

MO

Mando Corporation (Mando) (204320 KS)

Share price (29 Sep): KRW285,000 12-mth rating: Buy [1] Target price: KRW320,000

Sued by Bosch over patents for ABS

Sung Yop Chung (822) 787 9157 [email protected]


Korea: share prices and Daiwa recommendation trends Amorepacific: share price and Daiwa recommendation trend

Source: Daiwa

Note: where appropriate, historical target prices have been adjusted to reflect the current share count

Cosmax: share price and Daiwa recommendation trend

Source: Daiwa


Date Target price Rating Date Target price Rating Date Target price Rating08/01/14 108,000 Outperform 22/08/14 200,000 Underperform 02/07/15 500,000 Outperform06/02/14 120,000 Outperform 16/03/15 380,000 22/10/15 460,000 Buy03/04/14 120,000 Hold 26/03/15 380,000 Outperform 07/07/16 515,000 Buy09/05/14 132,000 Hold 15/05/15 440,000 Outperform

104,00098,000 108,000120,000 132,000

200,000

380,000

440,000

500,000

460,000

515,000

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Target price (KRW) Closing Price (KRW)

Date Target price Rating Date Target price Rating Date Target price Rating26/03/15 150,000 Outperform 12/08/15 220,000 Buy 01/07/16 223,000 Buy15/05/15 165,000 Outperform 17/02/16 151,000 Outperform 13/09/16 230,000 Buy

150,000

165,000

220,000

151,000

223,000230,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16



LG Household & Health Care: share price and Daiwa recommendation trend

Source: Daiwa


Date Target price Rating Date Target price Rating Date Target price Rating23/01/14 540,000 Hold 26/03/15 850,000 Outperform 14/10/15 1,040,000 Buy07/03/14 550,000 Outperform 22/04/15 903,000 Hold 15/01/16 1,100,000 Outperform17/06/14 520,000 Outperform 25/07/15 830,000 Outperform 26/07/16 1,200,000 Outperform12/03/15 0 13/10/15 1,040,000 Outperform

600,000560,000 540,000550,000

520,000

850,000903,000

830,000

1,040,000

1,100,000

1,200,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16



Click for our latest editions

Regional Textile Sector

Regional Textile Sector: Why the market may be overstating the impact of the Trans-Pacific Partnership on regional textile players with production facilities in Vietnam 27 September 2016 We view the TPP as a positive optionality for most regional textile stocks — but there seems little chance of it being passed in the foreseeable future With or without the TPP, we favour companies that are actively migrating their facilities to Vietnam, as they can benefit from lower labour costs and attractive tax incentives We believe vertically integrated players with established Vietnam operations will be the winners. Shenzhou Int’l is our top pick, followed by Eclat Textile and Texhong Textile

John Choi (852) 2773 8730 ([email protected]) Carlton Lai, CFA (852) 2532 4349 ([email protected])

Does Swire Properties have its own “secret

sauce”?

Does Swire Properties have its own “secret sauce”?: Q&A addressing the market’s continuing misconceptions about Swire Properties and its special business model

23 September 2016

Special business model has worked well in transforming locations in Hong Kong, and is now being applied in China and Miami

But the market seems focused on the challenges facing the Pacific Place mall rather than the progress being made in the Hong Kong office and China commercial property sectors

We argue that Swire Properties merits broader recognition in the global property market, which will ultimately show in its valuation

Jonas Kan, CFA (852) 2848 4439 ([email protected])

China Environmental

Sector

China Environmental Sector: Initiation: set to boom despite economic gloom, but be selective 5 August 2016

Environmental investment in China set to double from CNY4.5tn in 2011-15 (12th FYP) to CNY9.0tn in 2016-20 (13th FYP)

Water investment should claim c.50% of the investment (CNY4.5tn during the 13th FYP), but IRR more attractive for gas distributors

Gas distributors to see strong DPS growth amid unit dollar margin risk; prefer water/waste treatment operators with coastal exposure

Dennis Ip, CFA (852) 2848 4068 ([email protected]) Marco Lai (852) 2848 4465 ([email protected])

Hong Kong Property Sector

Hong Kong Property Sector: First impressions can be deceiving: another look at the contrarian case 1 July 2016

Hong Kong Property stocks are not for the faint-hearted. They never have been. History shows us that these shares can be highly volatile, particularly during times when the physical market is facing challenges. But we think such volatility presents opportunity as well as risk. Buying Hong Kong property stocks at the right time can pay off handsomely, as it did in 4Q05, 4Q08 and 4Q13 when share prices saw 50-180% upside within a few months.

Jonas Kan, CFA (852) 2848 4439 ([email protected])

Daiwa research is available electronically on Bloomberg, Reuters, Thomson One Analytics, FactSet, Capital IQ and Daiwa’s L-ZONE. Please contact your Daiwa sales representative for more information.

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http://asiaresearch.daiwacm.com/eg/cgi-bin/files/RegionalTextileSector160927_V1.pdf

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http://asiaresearch.daiwacm.com/eg/cgi-bin/files/SwireProperties160923.pdf

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http://asiaresearch.daiwacm.com/eg/cgi-bin/files/China_Environmental_Sector_160805.pdf#page=1

Text in RED: Result BLACK: Company Visit MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

26 27 28 29 30

HK/CN Anson Chan: QinQin Food (1589 HK) Carlton Lai: Honworld (2226 HK)

Adrian Chan: Lin Ning (2331 HK) Ramakrishna Maruvada: China Telecom (728 HK)

John Choi: Baidu (BIDU US) John Choi: Vipshop (VIPS US)

TW SG KR

Analysts’ company visits


Rating and target-price information Bloomberg 12M rating 12M target price* Company name code Country Previous Latest Previous Latest DateLi Ning 2331 HK China Outperform - Outperform 4.6 ↑ 5.8 30-Sep-16Ascendas Real Estate Investment Trust AREIT SP Singapore Hold - Hold 2.38 ↑ 2.41 30-Sep-16China Everbright International 257 HK China Outperform ↓ Hold 8.9 ↑ 9.6 29-Sep-16POSCO 005490 KS Korea Buy - Buy 270000 ↑ 300000 29-Sep-16Scicom MSC Bhd SCIC MK Malaysia Buy - Buy 2.62 ↑ 2.74 29-Sep-16Minor International PCL MINT TB Thailand Buy - Buy 44 ↑ 46 29-Sep-16LG Electronics 066570 KS Korea Outperform - Outperform 61000 ↓ 56000 29-Sep-16Gamuda GAM MK Malaysia Buy - Buy 5.7 ↑ 5.74 29-Sep-16Hyundai Engineering & Construction 000720 KS Korea Outperform - Outperform 38000 ↑ 45000 28-Sep-16Naver 035420 KS Korea Buy - Buy 980000 ↑ 1022000 28-Sep-16Alibaba Group BABA US China Buy - Buy 110 ↑ 125 28-Sep-16Shenzhou International Group 2313 HK China Buy - Buy 57 ↑ 61 27-Sep-16Texwinca 321 HK China Hold - Hold 6.2 ↓ 5.2 27-Sep-16Korea Kolmar 161890 KS Korea Outperform ↑ Buy 115000 ↑ 132000 27-Sep-16CP All PCL CPALL TB Thailand Buy - Buy 52 ↑ 75 27-Sep-16Central Pattana PCL CPN TB Thailand Buy ↓ Hold 70 ↓ 64 27-Sep-16MC Group PCL MC TB Thailand Buy - Buy 16 ↑ 16.8 27-Sep-16Karmarts KAMART TB Thailand Hold - Hold 9.0 ↑ 12.2 27-Sep-16COL PCL COL TB Thailand Sell - Sell 35 ↓ 30 27-Sep-16Sido Muncul SIDO IJ Indonesia Buy - Buy 630 ↑ 650 26-Sep-16Karex KAREX MK Malaysia Hold - Hold 2.3 ↑ 2.5 26-Sep-16CT Environmental Group 1363 HK China Buy - Buy 2.75 ↑ 2.8 26-Sep-16BAIC Motor 1958 HK China Sell - Sell 5.0 ↑ 5.6 26-Sep-16Aeon Credit Service M Bhd ACSM MK Malaysia Buy - Buy 14.8 ↑ 16.6 26-Sep-16China Gas 384 HK China Buy - Buy 14.75 ↑ 15.00 23-Sep-16Pakuwon Jati Tbk PT PWON IJ Indonesia Hold - Hold 490 ↑ 650 23-Sep-16China Resources Gas 1193 HK China Buy ↓ Outperform 28 ↑ 30 23-Sep-16PTT Exploration & Production PCL PTTEP TB Thailand Sell - Sell 70 ↓ 67 23-Sep-16Win Semiconductors 3105 TT Taiwan Outperform - Outperform 65.5 ↑ 91 23-Sep-16Hanon Systems 018880 KS Korea Buy - Buy 14000 ↑ 15000 23-Sep-16

Note: Daiwa’s 30 most recent rating/target-price changes *Local currency; D: delisted


Recently published reports

Research reports* Subtitle No. of pages

Date of publication

Discovery Asia small-cap weekly 19 30-Sep-16ASEAN Intelligence What matters this week 30 30-Sep-16China Telecom Site visits: planting new seeds for growth 16 29-Sep-16China Autos – PV Weekly Monitor 1-23 September: steady sales volume sustained 12 29-Sep-16Regional Textile Sector Why the market may be overstating the impact of the Trans-Pacific

Partnership on regional textile players with production facilities in Vietnam

56 27-Sep-16

Thailand Retail Sector Value-based transformation 66 27-Sep-16Karex The Pioneering ONE 16 26-Sep-16BAIC Motor Why we remain contrarian sellers 16 26-Sep-16China Gas Maintaining high growth through diversification 14 23-Sep-16Does Swire Properties have its own “secret sauce”?

Q&A addressing some of the market’s apparent misconceptions about Swire Properties and its special business model

84 23-Sep-16

Discovery Asia small-cap weekly 17 23-Sep-16PTT Exp. & Production Multiple headwinds 15 23-Sep-16ASEAN Intelligence What matters this week 33 23-Sep-16China Telecoms Sector An oasis of calm in the region 24 22-Sep-16Asian Foundry Sector 4Q16 likely to be counter-seasonal, but the benefits won’t be

shared equally 24 21-Sep-16

IndusInd Bank Initiation: from strength to strength 25 20-Sep-16Tong Yang Industry Ready to take off 13 16-Sep-16Coal India 1Q FY17 results: weak earnings due to lower ASPs 10 14-Sep-16Khon Kaen Sugar Industry The worst looks to be over 14 12-Sep-16Discovery Asia small-cap weekly 16 9-Sep-16ASEAN Intelligence What matters this week 77 9-Sep-16China Autos – PV Weekly Monitor 1-31 August: sales volume keeps expanding 13 9-Sep-16Hong Kong Property The first leg has come; awaiting opportunities to position for the

second 9 5-Sep-16

Rajthanee Hospital Pcl. Healthy new choice 25 5-Sep-16ASEAN Intelligence What matters this week 26 2-Sep-16Discovery Asia small-cap weekly 18 2-Sep-16Naver Evolving into a leading mobile-ad platform in Asia 21 31-Aug-16Huadian Fuxin Energy Entering a fierce “Hunger Games” in Fujian 15 30-Aug-16Macau Gaming Sector Read-through from Wynn’s disappointing allocation 15 26-Aug-16Discovery Asia small-cap weekly 17 26-Aug-16ASEAN Intelligence What matters this week 36 26-Aug-16SVI Public Co Ltd Unlocking the bottleneck 12 25-Aug-16China Autos – PV Weekly Monitor 1-19 August: solid sales growth continues 12 24-Aug-16Value Partners Group Initiation: partnering with value 40 23-Aug-16Taiwan Economy Better 2H16, but what’s next? 12 22-Aug-16Discovery Asia small-cap weekly 26 19-Aug-16ASEAN Intelligence What matters this week 35 19-Aug-16Thailand Bank Sector Unjustified rally 49 18-Aug-16China Economy What would a Trump presidency mean for China? 15 18-Aug-16China Autos – PV Weekly Monitor 1-12 August: sales volume remains robust 12 17-Aug-16

*The 30 most recent reports published by Daiwa


Asia Pacific Markets Closed

Hong Kong

China SG Malaysia Korea Taiwan AustraliaNew

ZealandIndia Thailand Philippines Indonesia

Oct 16 10 3-7

3 10 3 24 11-12,

31 24 31


Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Asia Pacific Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Olivia XIA (852) 2773 8736 [email protected] Macro Economics (Hong Kong/China)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Brian LAM (852) 2532 4341 [email protected]

Auto Components; Transportation – Railway; Construction and Engineering (China)

Leon QI (852) 2532 4381 [email protected] Banking; Diversified Financials; Insurance (Hong Kong/China)

Yan LI (852) 2773 8822 [email protected]

Banking (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Adrian CHAN (852) 2848 4427 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Carlton LAI (852) 2532 4349 [email protected] Small/Mid Cap (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected] Property (China)

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Patricia Tamase (63) 2 797 3024 [email protected]

Banking

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games

Kevin JIN (82) 2 787 9168 [email protected] Small/Mid Cap

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Christie CHIEN (886) 2 8758 6257 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India)

David LUM (65) 6329 2102 [email protected]

Banking; Property and REITs

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

Shane GOH (65) 64996546 [email protected]

Property and REITs; Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)


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Office / Branch / Affiliate Address Tel Fax

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Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

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DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

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Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

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London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


Japan: Notes concerning market data and investment indicators Estimates by Daiwa Shares outstanding: Common shares outstanding (excl. treasury stock) Market cap: Based on shares outstanding and closing price as of indicated date EV: Market cap + interest-bearing debt – liquidity on hand EBITDA: Operating profit + depreciation ROE: Net income / average of start-FY and end-FY shareholders’ equity (for SEC-reporting firms net income attributable to

shareholders of the parent / average of start-FY and end-FY shareholders’ equity) Share Price Chart and per-share figures retroactively adjusted to reflect stock splits/reverse stock splits


Important Disclosures and Disclaimer This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., Thanachart Securities, Affin Hwang Investment Bank Berhad, PT.Bahana Securities, their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments. Portions of this publication are prepared by PT. Bahana Securities and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Securities in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Portions of this publication are prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa responsible for the redistribution of our research by third party aggregators. IMPORTANT This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent. Ratings Issues are rated 1, 2, 3, 4, or 5 as follows:


1: Outperform TOPIX/benchmark index by more than 15% over the next 12 months. 2: Outperform TOPIX/benchmark index by 5-15% over the next 12 months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next 12 months. 4: Underperform TOPIX/benchmark index by 5-15% over the next 12 months. 5: Underperform TOPIX/benchmark index by more than 15% over the next 12 months. Benchmark index: TOPIX for Japan, S&P 500 for US, STOXX Europe 600 for Europe, HSI for Hong Kong, STI for SG, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia. (Criteria above apply to rating assignments or updates from Jan 2015. For ratings assigned or updated prior to Jan 2015, criteria refer to performance vs. TOPIX/benchmark index over six months.) Japan Conflicts of Interest: Daiwa Securities Co. Ltd. may currently provide or may intend to provide investment banking services or other services to the company referred to in this report. In such cases, said services could give rise to conflicts of interest for Daiwa Securities Co. Ltd. Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.: Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Ownership of Securities: Daiwa Securities Co. Ltd. may currently, or in the future, own or trade either securities issued by the company referred to in this report or other securities based on such financial instruments. Daiwa Securities Group has filed major shareholding reports for the following companies of which it owns over 5% (as of 15 September 2016): DAISUE CONSTRUCTION (1814); ICHIKEN (1847); NISSEI BUILD KOGYO (1916); TAKAHASHI CURTAIN WALL (1994); Accordia Golf (2131); Genky Stores (2772); Samty (3244); MUGEN ESTATE (3299); Nippon Healthcare Investment Corporation (3308); KFC (3420); KAWADA TECHNOLOGIES (3443); KI-STAR REAL ESTATE (3465); Billing System (3623); KOEI TECMO HOLDINGS (3635); Enigmo (3665); Konoshima Chemical (4026); SEPTENI HOLDINGS (4293); Tri Chemical Laboratories (4369); RaQualia Pharma (4579); NOZAWA (5237); Nakayama Steel Works (5408); Toho Zinc (5707); TOKYO ROPE MFG. (5981); LINKBAL (6046); Allied Architects (6081); WILL GROUP (6089); NS TOOL (6157); Kamakura Shinsho (6184); HIRATA Corporation (6258); TAZMO (6266); SANSO ELECTRIC (6518); W-SCOPE (6619); MITSUMI ELECTRIC (6767); SUMIDA CORPORATION (6817); ADVANTEST (6857); Ferrotec (6890); ENOMOTO (6928); TAIYO YUDEN (6976); Astmax (7162); GMO Click Holdings (7177); Nojima (7419); Daiko Denshi Tsushin (8023); Money Partners Group (8732); Daiwa Office Investment Corporation (8976); Japan Rental Housing Investments (8986); Cerespo (9625); Imperial Hotel (9708); PARKER CORPORATION (9845). Lead Management: Daiwa Securities Co. Ltd. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelve months for the following companies: Yoshimura Food Holdings K.K. (2884); Torikizoku (3193); HOTLAND (3196); Activia Properties (3279); SIA REIT (3290); AEON REIT Investment Corporation (3292); Hulic Reit (3295); Nippon Healthcare Investment Corporation (3308); BEENOS (3328); Tosei Reit Investment Corporation (3451); Kenedix Retail REIT Corporation (3453); Samty Residential Investment Corporation (3459); KI-STAR REAL ESTATE (3465); Mitsui Fudosan Logistics Park Inc. (3471); SHOEI YAKUHIN (3537); Nousouken (3541); KOMEDA Holdings (3543); Defactostandard (3545); KUSHIKATSU TANAKA (3547); OPTiM (3694); Mynet (3928); BENEFIT JAPAN (3934); Globalway (3936); Silver Egg Technology (3961); FUSO CHEMICAL (4368); OAT Agrio (4979); Interworks (6032); FIRSTLOGIC (6037); NIPPON VIEW HOTEL (6097); Recruit Holdings (6098); Japan Post Holdings (6178); GMO Media (6180); So-net Media Networks (6185); Atrae (6194); IWAKI (6237); TSUBAKI NAKASHIMA (6464); REFINVERSE (6531); Japan Investment Adviser (7172); Japan Post Insurance (7181); Japan Post Bank (7182); THE FIRST BANK OF TOYAMA (7184); ATOM (7412); AEON Financial Service (8570); ORIX JREIT (8954); HEIWA REAL ESTATE REIT (8966); Daiwa Office Investment Corporation (8976); Japan Hotel REIT Investment Corporation (8985); GAKKYUSHA (9769). (list as of 14 September 2016) The Affiliates of Daiwa Securities Group Inc.* engaged in investment banking service (lead-manager/joint lead-manager/co-manager of public offerings and/or secondary offerings [excluding straight bonds]) in the past twelve months for the following companies: Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Affiliates of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets SG Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable to where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with our company based on the information described in this report, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, our company will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be

included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, our company also may charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident.

For derivative and margin transactions etc., our company may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by our company. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with our company. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association Disclosure of Interest of Thanachart Securities - Disclosure of Interest of Affin Hwang Investment Bank - Disclosure of Interest of Bahana Securities - Investment Banking Relationship Within the preceding 12 months, Bahana Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Aneka Tambang Persero Tbk PT (ANTM IJ); PT Telekomunikasi Indonesia (Persero) Tbk (TLKM IJ); PT Waskita Beton Precast Tbk (WSBP IJ). Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party. Name of Analyst: Iris Park/ Thomas Y. Kwon


Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the

investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the

acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the

total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or

the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated Additional information may be available upon request. SG This research is distributed in SG by Daiwa Capital Markets SG Limited and it may only be distributed in SG to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets SG Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets SG Limited’s interest and/or its representative’s interest in securities). Recipients of this research in SG may contact Daiwa Capital Markets SG Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex . This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113


United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no.212-612-7000). Ownership of Securities: For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships: For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making: For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts: For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification: For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 64.0%

Hold** 21.2%

Sell*** 14.8%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +10% over a 12-month period HOLD: Total return is expected to be between -5% and +10% over a 12-month period SELL: Total return is expected to be below -5% over a 12-month period NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation Sectors: OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months Conflict of Interest Disclosure: Affin Hwang Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research. For stocks and sectors in Indonesia covered by Bahana Securities, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more. "Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%. "Reduce": the price of the security is expected to decline by 5% or more. Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”. “Overweight”: positive fundamentals for the sector. “Neutral”: neither positive nor negative fundamentals for the sector. “Underweight”: negative fundamentals for the sector. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.


Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationships (Bahana Securities) Bahana Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Bahana Securities market making Bahana Securities may from time to time make a market in securities covered by this research. For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect: Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the rating is BUY. If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. For the sector, Thanachart looks at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word “Positive”, is used when Thanachart sees the industry trend improving. An arrow pointing down, or the word “Negative”, is used when Thanachart sees the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is Thanachart’s top-down perspective on the industry rather than a bottom-up interpretation from the stocks that Thanachart covers. An “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. “Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Investment Banking Relationships For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action . Relevant Relationships (Thanachart Securities) Thanachart Securities may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Thanachart Securities market making Thanachart Securities may from time to time make a market in securities covered by this research. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. • *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content

of each transaction etc. • When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions

regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association


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