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Asia Pacific Daily

See important disclosures, including any required research certifications, beginning on page 57.

25 October 2013

Top story P.2

Thailand Telecom Sector Rating: Overweight Simplicity of a BUY

Our high conviction Overweight stance on the Thai cellular sector is based on three simple reasons. It is embarking on a new earnings cycle and offers the highest, most sustainable forecast yield of the consumer sectors. And it trades below its own valuation line and consumer sector peers. INTUCH remains our top sector pick.

-- Sarachada Sornsong

Major changes Analyst Rating Page

True Corporation Pcl (TRUE TB) Sarachada

Sornsong

Sell P.4

IFF ‘blue sky’ priced in

Target price ↑45.6% to Bt7.50 Macro research

ASEAN Economy Christie Chien P.5

A bottom-up look at the ASEAN economies

Technical Daily Comment Eiji Kinouchi P.6

Kinouchi’s Technical Tips for Institutions

Euro wrap-up Chris Scicluna P.7

Overview Other research

Hang Lung Properties (101 HK) Jonas Kan Buy P.9

More property-sales profits

China Property Sector Felix Lam Positive P.13

A right move

Hyundai Motor (005380 KS) Sung Yop Chung Buy P.15

Shifting up a gear for 2014

LG Electronics (066570 KS) Jae H. Lee Hold P.19

Smartphones should remain a drag on earnings

LG Innotek (011070 KS) Joshua Oh Hold P.23

Weak LED-sales momentum continues

Delta Electronics (2308 TT) Christine Wang Outperform P.27

Solid 4Q13 likely

Chroma ATE (2360 TT) Christine Wang Outperform P.31

Long-term growth remains intact

Company Roadshows

Date Company Event Venue 24-25 Oct Lippo Karawaci (LPKR SP) NDR US 25 Oct Hyundai Motor Company

(5380 KS) Telecon. US &

CA 25 Oct Sihuan Pharm (460 HK) Luncheon HK 25 Oct Sihuan Pharm (460 HK) Video Con. Tokyo 25 Oct Sihuan Pharm (460 HK) Telecon. SG 28-29 Oct Stella International (1836 HK) NDR Tokyo 30-31 Oct REXLot (555 HK) NDR Tokyo 5 Nov Origin Energy (ORG AU) NDR Tokyo 7 Nov AWE Limited (AWE AU) NDR Tokyo 18-22 Nov Kia Motors (000270 KS) NDR EU 20-26 Nov SK Telecom (017670 KS) NDR US 25-26 Nov Thaicom PCL (THCOM TB) NDR Tokyo 27 Nov Haitong Securities (6837 HK) NDR HK 29 Nov Haitong Securities (6837 HK) NDR Tokyo 2-4 Dec Haitong Securities (6837 HK) NDR US 2-3 Dec CIMC Enric (3899 HK) NDR Tokyo 11-12 Dec Cathay Financial (2882 TT) NDR EU 11-12 Dec Cathay Financial (2882 TT) NDR Tokyo 16-18 Dec Cheung Kong Infrastructure

(1038 HK) NDR Tokyo

19-20 Dec China Suntien (956 HK) NDR Tokyo

Daiwa Asian Events

Date Company Venue 19-22 Nov Daiwa Investment Conference Hong Kong

2013 HK

Source: Daiwa

Regional indices

Performance chg

(%)

EPS growth

(%) PER (x)

Market 1D 1M YTD 13E 14E 13E 14ETPX (1.3) (2.6) (9.7) 9.1 7.9 6.9 6.4 HSCEI (0.7) (1.5) 0.8 10.3 6.9 10.9 10.2 HSI 0.5 2.0 2.5 14.5 24.1 11.4 9.2 KOSPI 0.2 1.4 9.3 35.1 12.8 15.8 14.0 TWSE (0.2) 4.0 6.7 9.1 17.2 15.8** 13.5** SENSEX* 0.4 0.2 1.6 (1.8) 8.9 14.7 13.5 FSSTI 0.3 1.5 7.7 (1.4) 9.0 16.6** 15.2** FBMKLCI* 0.6 2.1 5.3 13.0 14.1 13.6** 11.9** SET* (0.8) 1.9 13.3 8.9 7.8 19.8** 18.3** PCOMP* 1.1 3.0 6.4 9.2 15.2 15.7** 13.6** JCI* 0.3 2.7 15.6 8.2 9.3 15.2 13.9 AS51 (1.3) (2.6) (9.7) 9.1 7.9 6.9 6.4

Source: Thomson Reuters *Valuation based on MSCI Universe **MSCI index priced as of 23 Oct

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/DIC HK 2013_Save the Date (Combined Version).pdf#page=1

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Japan equity research

Investment Opinion on Four Nonferrous Metal Majors

Shinichiro Ozaki

P.35

Spotlight on management capabilities

Nidec (6594 JP) Takumi Sado Buy P.36

Drive to maximize corporate value yet to be priced in

Capital Goods Sector Update Volume 18 Hirosuke Tai P.38

China Research Trip Memos – quick updates

Hong Kong Economy Christie Chien P.39

Hong Kong’s export growth picks up in September, but challenges remain ahead

Chong Hing Bank (1111 HK) Grace Wu P.40

Yue Xiu close to acquiring Chong Hing Bank

CNOOC Ltd (883 HK) Adrian Loh P.42

3Q13 operational numbers were in line

Great Wall Motor Jeff Chung P.43

Addressing the bears <Still a buy>

GS E&C (006360 KS) Mike Oh P.44

3Q13 earnings – difficult time continues

POSCO (005490 KS) Sung Yop Chung P.45

No major surprises for 3Q13 results

Sheng Siong Group (SSG SP) Jame Osman P.47

Margins better than expected

Suntec REIT (SUN SP) David Lum P.48

Everything on track

Korea: share prices and Daiwa recommendation trends P.49 Daiwa’s Banner Products P.51 Economic calendar – October 2013 P.52 Rating and target-price information P.53 Recently published reports P.53

Please see the important notice on the back page

THAILAND Sector Note 24 OCTOBER 2013

Sector Outlook Sector Weighting Overweight

Thailand Telecom Sector

Simplicity of a BUY

Sector Valuation Current Target Norm EPS grw ⎯ Norm PE ⎯ ⎯ P/BV ⎯ ⎯ Div yield ⎯ BBG price price 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F

Company Code Rec. (Bt) (Bt) (%) (%) (x) (x) (x) (x) (%) (%)

Advanced Info Service ADVANC TB BUY 260.00 340.00 8.3 16.9 20.4 17.4 16.7 15.6 4.9 5.7

Total Access Com. DTAC TB BUY 115.00 155.00 5.0 36.7 23.3 17.0 7.9 7.4 4.1 5.9

Shin Corp INTUCH TB BUY 85.00 120.00 13.9 19.2 17.2 14.4 11.2 10.5 5.9 6.9

True Corp TRUE TB SELL 9.25 7.50 na na na na 28.9 314.2 0.0 0.0

Source: Thanachart estimates

Our high conviction Overweight stance on the Thai cellular sector is based on three simple reasons. It is embarking on a new earnings cycle and offers the highest, most sustainable forecast yield of the consumer sectors. And it trades below its own valuation line and consumer sector peers. INTUCH remains our top sector pick.

SARACHADA SORNSONG

662 – 617 4900 [email protected]

New Earnings Growth Cycle

Sources: Company data, Thanachart estimates

High Dividend Yield

Sources: Thanachart estimates

Undemanding Valuation

Sources: Thanachart estimates

New earnings cycle in low-risk environment The Thai cellular industry has just entered a new earnings growth cycle, one that we see lasting beyond 2015. We estimate earnings growth of 23% p.a. in 2013-15 and 19% p.a. 2016-18. We see 2013-15 drivers of growing data and fattening margins on deregulation benefits and the operating leverage effect. Note that data penetration is 20% in 2Q13 and smartphone penetration was 22% in 2012. Post-2015 when current concessions end, the absence of 2G amortization costs should boost earnings further. We also see upside to our forecasts as we have yet to factor in any contribution from the wireless broadband business.

A sustainable 100% payout model Despite the new capex cycle, we see the sector’s high yield story and key operators’ 100% dividend payouts as sustainable. 1) The capex cycle should come along shortly with earnings and cash flow cycles. 2) The cash flow base from the old 2G platform is very large and EBITDA of the top three players is 2x annual 3G capex 3) Net D/E is low at 0.4x, excluding TRUE. 4) Heavy capex should last just three to four years while cash flows could go beyond the 15-year license period. Unless future regulations or investment requirements are changed, we see this high payout model as long lasting. This is similar to BEC World (BEC TB, Bt58.25, HOLD) which has paid out all its earnings as dividends for more than a decade.

Far below fair valuation lines The sector has performed well this year but we see a further re-rating. 1) 2014F P/E of 15x is still below the previous peak growth cycle high of 26x in the early 2000s despite better fundamentals and lower regulatory risk. 2) 2014F EV/EBITDA to growth is less than 1x while PEG is even lower at 0.48x. 3) FCF yield was negative in the previous capex cycle but is now at 4% before jumping post 2014F when 3G benefits should materialize.

We see over 30% upside We roll over our DCF model base year to 2014 and increase the TPs of our three BUY-rated telcos by an average of 8%, with each offering over 30% upside potential from current market prices. INTUCH remains our top pick as it provides cheaper access to ADVANC while offering stronger forecast growth and higher yield. We also have a BUY on DTAC. Although we are positive on TRUE’s planned infrastructure fund set-up, we see the positives as largely factored in and reaffirm our SELL.

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(Bt bn) Norm profits EBITDA

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2.1 1.9

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(%) 2014F

26.0015.48

0.44 0.350

102030

Previouspeak

grow th PE

2014 PE PEG EV/EBITDAto grow th

(x)

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Please see the important notice on the back page

SELL (Unchanged) TP: Bt 7.50 (From: Bt 5.15) 24 OCTOBER 2013

Change in Numbers Downside : -18.9%

True Corporation Pcl (TRUE TB)

SARACHADA SORNSONG

662 – 617 [email protected]

IFF ‘blue sky’ priced in

We don’t argue that setting up the IFF won’t improve TRUE’s fundamentals markedly. However, we think the share price already factors in the best outcome, which we see as difficult to achieve. Reaffirm SELL and new 12-month DCF-based TP of Bt7.5.

Positive on planned set-up of IFF TRUE’s board has approved a plan to set up an infrastructure fund (IFF) worth Bt60-80bn. Assets to be transferred comprise 6,000 telecommunication towers, 5,112km of fiber-optic cable (FOC) and the rights over revenues from renting telecommunication towers and the FOC system. TRUE is planning to invest in no less than an 18% stake in the IFF but no more than one-third. Indicative yield is set at 7-10%. As proceeds are planned to repay debts, we see the IFF cutting TRUE’s debt burden. Therefore, we view its cash call risk as having subsided.

Too high expectations priced in We like the IFF move as it we see it unlocking current balance sheet constraints, allowing TRUE to continue its 3G expansions. That said, we believe the share price after surging by 70% YTD, seems to have priced in too high expectations for the IFF. We calculate that for TRUE to be worth Bt10/share, this means it must successfully set up the IFF with an Bt80bn fund size while yield has to be at the lowest range of 7% (ie, “blue sky” scenario). We don’t see this as an easy task as TRUE has an ongoing legal dispute with CAT about the ownership of telecommunication towers on the 1800MHz spectrum. Given that TRUE wants to get the IFF established as soon as possible, we expect it to exclude those towers from the fund. In addition, with the upward rate cycle and TRUE’s weak financial position, we believe TRUE would need to offer more than a 7% yield in order to attract investors.

Operation still bleeding Leaving aside the IFF, TRUE has suffered larger cost overruns than we’d earlier anticipated. This forces us to slash our earnings forecasts and we now expect TRUE to incur steeper losses of Bt8.7bn in 2013 and Bt4.2bn in 2014. The cuts reflect our too conservative network cost and marketing expense assumptions. Despite moving to a lower cost structure under 3G, we don’t see an earnings turnaround in 2014 and expect 2015 to be the earliest year for TRUE to turn into a profitable company.

Looks overpriced; reaffirm SELL rating As we roll over our DCF model base year to 2014, we lift our TP to Bt7.5 from Bt5.15. With 19% downside, we reaffirm our SELL on TRUE. 1) We see it as expensive trading at a 2014F EV/EBITDA of 10.2x, similar to ADVANC but above DTAC, despite much weaker fundamentals. 2) Operational loss is higher than we’d anticipated and we only expect a return to profits in 2015. 3) We see the IFF as a good move but market expectations for it seem high. A successfully fund launch would only free TRUE from some of its balance sheet constraints, in our view. Thus, we still see TRUE as a relatively high debt company, with far weaker fundamentals than ADVANC and DTAC.

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COMPANY VALUATION

Y/E Dec (Bt m) 2012A 2013F 2014F 2015F

Sales 89,382 94,773 102,336 111,085

Net profit (7,427) (8,697) (4,223) 783

Consensus NP ⎯ (6,485) (3,616) (4,220)

Diff frm cons (%) ⎯ na na (118.6)

Norm profit (6,632) (8,697) (4,223) 783

Prev. Norm profit ⎯ (4,007) (2,184) 886

Chg frm prev (%) ⎯ na na (11.6)

Norm EPS (Bt) (0.5) (0.6) (0.3) 0.1

Norm EPS grw (%) na na na na

Norm PE (x) na na na 171.3

EV/EBITDA (x) 13.7 13.2 10.2 7.7

P/BV (x) 10.1 28.9 314.2 110.9

Div yield (%) 0.0 0.0 0.0 0.0

ROE (%) na na na 95.7

Net D/E (%) 673.9 2,168.1 11,472.0 6,465.6

PRICE PERFORMANCE

COMPANY INFORMATION

Price as of 22-Oct-13 (Bt) 9.25

Market Cap (US$ m) 4,312.7

Listed Shares (m shares) 14,530.2

Free Float (%) 36.8

Avg Daily Turnover (US$ m) 67.9

12M Price H/L (Bt) 11.4/4.5

Sector Telecom

Major Shareholder CP Group 36.1%

Sources: Bloomberg, Company data, Thanachart estimates

2.0

4.0

6.0

8.0

10.0

12.0

Oct-12 Feb-13 Jun-13 Oct-13

(Bt /shr)

(40)(20)020

406080100

(%)TRUE Rel to SET Index

- 5 -

■ Summary There is a lot going on in the ASEAN region. US Federal Reserve Chairman Ben Bernanke’s comments on QE tapering have spurred a round of capital outflows from the region, the migration of low-end manufacturing from China is continuing apace, and frontier markets are fast opening up. We took a field trip to Myanmar, Thailand, Vietnam, Malaysia, and Indonesia to see firsthand how the region is faring. We spoke to more than 25 companies, as well as policy think tanks and government officials. ■ Thailand and Malaysia Safe havens amid outflows. Our visit reinforced our view that Thailand and Malaysia should appeal to investors seeking safe havens amid capital outflows. Most of the company representatives we spoke to in Thailand were confident in the outlook for the economy and felt the outflows would have a limited impact on their companies. Although we are not convinced that Thailand’s economic boom will continue for the coming quarters, we do not foresee the country facing a

currency crisis or a credit crunch in the near term, as the Bank of Thailand (BOT) has done a good job of sterilising excess inflows during the QE programme, thereby reducing the risk of a domestic credit squeeze amid capital outflows. Despite Malaysia’s high public deficit level and concern over corruption, the country’s low total outstanding debt level and current-account surpluses make it a decent haven. Being an export-led economy, Malaysia should benefit more from recoveries in the US, EU and China than the domestic-driven ASEAN economies. ■ Vietnam and Indonesia Short-term issues, long-term appeal. Our trip confirmed our view of Vietnam as a major beneficiary of the migration of low-end manufacturing from China. Local residents we spoke to noted the speed at which factories are being built, and companies told us they had seen an increase in orders, backed by Vietnam’s low labour costs relative to the region, as well as its expanding domestic demand. The government is actively negotiating to join the Trans-Pacific Partnership (TPP), which respondents felt was another reason to be bullish. However, Vietnam’s bad debt problem remains a concern for respondents and us, and we think it could take the government 1-2 years to fully address the issue. In Indonesia, there is a sense that the economic boom has come to an

end. The companies we visited said they had seen a slowdown in orders and sales since mid-2012, though the consumer and property sectors appear relatively resilient. Although inflationary pressure is flowing mainly from fuel and food prices, it could spill over to the broader economy and hit firms’ margins and households’ spending power. These factors could put a lid on growth in the coming quarters, in our view. The near-term outlook for Indonesia’s economy seems subdued, with further challenges likely from the widening current account deficit, worsening fiscal balance, and over-expansion of credit during QE. Still, given its young and large population, relatively low average wage, pro-consumption culture and abundant natural resources, we are positive on the long-term prospects. It continues to appeal to multinationals, not just as a low-cost production base but for its vast consumer market. Corruption and infrastructure constraints present downside risks, in our view. ■ Myanmar Developing quickly, but still has a way to go. Yangon, the largest city in Myanmar, is developing more quickly than we had expected. Infrastructure constraints are being addressed, and the nearby special economic zone is drawing foreign investment. But, in our view, some investors will hold off from entering Myanmar until the country further develops its legal and financial systems.

24 October 2013

A bottom-up look at the ASEAN economies

• Assessing our findings from our field trip to ASEAN countries • Our trip reinforced our view that Thailand and Malaysia are

relatively safe havens amid capital outflows • Long term, Vietnam and Indonesia stand to benefit most from

the relocation of low-end manufacturing

ASEAN Economy

Economy / ASEAN

Christie Chien(852) 2848 4482

[email protected]

- 6 -

Eiji Kinouchi (81) 3 5555-7230 [email protected] Hikaru Sato (81) 3 5555-7330 [email protected]

Japan shares down at open The Tokyo stock market closed down on Wednesday and opened in negative territory this morning. Indeed, stock markets pulled back worldwide on Wednesday, and the Nikkei Stock Average was among the worst performers. Meanwhile, the dollar lost ground against the yen this morning. The US currency has gradually strengthened vs. the yen since February 2013. We think the dollar could continue the modest uptrend if it stays above Y97/$ over the short term.

New-stock markets relatively strong

In early trading, bellwether stocks generally saw a setback, but some firms attracted buying interest thanks to earnings upgrades or other positive catalysts. Among new-stock markets, the TSE Mothers index staged a rebound soon after the opening, and the JASDAQ index performed relatively strongly. Elsewhere, gas utilities pulled back sharply on Wednesday, and they fared poorly again this morning. Caution over WTI futures’

downside breakout from 26W MA WTI crude futures have recently continued declining. Media reports cited increased US crude oil inventories as a factor for

weak crude prices. As noted in our previous reports, however, we think effects of the slowing US economy due to concerns over QE3 tapering and a partial government shutdown are emerging. As shown in the chart, WTI crude futures have often fallen ahead of US shares over the past several years. Specifically, S&P 500 has typically hit a major peak when WTI futures clearly broke below the 26-week moving average after hitting a major top. Crude oil prices have recently dropped below the 26-week moving average and short-term support level. As such, US shares could enter a downtrend unless WTI futures climb back to above the 26-week moving average ($101/bbl as of 23 Oct) over the short term. (Comment following opening of morning session—24 October 2013)

Technical analysis / Japan

24 October 2013Japanese report: 24 Oct 13

Kinouchi’s Technical Tips for Institutions

Technical Daily Comment

• Japan shares down at open; caution over WTI futures’ downside breakout from 26W MA

Source: Bloomberg; compiled by Daiwa.

4/686.84

4/29113.93 2/24

109.77

9/6110.53

33.982/12

68.015/20

75.6710/4

77.696/28

84.4411/7

86.684/17

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4/231,217

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1,2786/1

1,35311/15

7/71,353

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Chris Scicluna +44 20 7597 8326

Euro area

Composite PMI consistent with ongoing recovery

Over recent months, the PMIs have provided a source of optimism about the euro area’s economic recovery. For example, the rise in the composite output PMI in September to a twenty-seven month high of 52.2 was consistent with solid growth. But today’s flash PMIs for October disappointed somewhat. Contrasting with expectations of a further gain, the euro area composite PMI fell 0.7pts on the month to a two-month low. However, we are not overly concerned. The PMIs have not provided a particularly accurate guide to the magnitude of recent changes in output, having underestimated the strength of GDP growth in Q2. And at 51.5, the composite PMI was still up 0.1pt on average for Q3, which was itself the highest since Q211. So,

while hard data suggest that GDP growth in Q3 was probably a touch weaker than the 0.3%Q/Q in Q2, today’s PMIs suggest that growth should have continued at the start of the fourth quarter at a rate broadly in line with the average of the past two quarters. Services PMIs weaker

At the country level, the composite PMIs moderated in both Germany (down 0.6pts to a three-month low of 52.6, still consistent with growth) and France (down 0.4pts to a two-month low of 50.1, suggesting that the economy is moving broadly sideways). And those declines largely reflected an easing in the pace of expansion in both countries in the service-sector, for which the euro area PMI eased more than 1pt to a two-month low of 50.9. In contrast, thanks to an increase in the respective German index, the flash euro area manufacturing PMI rose 0.2pts to a two-month high of 51.3. And with the euro area composite new orders PMI (50.8) still consistent

with expansion, growth looks set to remain in positive territory for the time being. Italian consumer sentiment moderates too

Elsewhere, the latest Italian consumer confidence survey disappointed too. Having jumped in September to a more than two-year high, the headline sentiment index more than reversed that gain in October to slip to its lowest level since June. However, once again, we are not overly surprised or concerned. Declines in the survey measures of personal financial situation and willingness to purchase durable goods were perhaps inevitable in light of the 1ppt rise in the VAT rate this month. And the headline index remains around its highest levels since 2011. So while wages growth remained subdued at 1.4%Y/Y in September, having subtracted from GDP growth in each of the past ten quarters, Italian consumer spending should now be broadly stabilising.

Euro area: Composite PMIs by country Euro area: Composite PMIs

Source: Datastream and Markit Source: Datastream and Markit

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Euro wrap-up

24 October 2013

Overview • Bunds and Gilts made modest losses despite today’s softer-than-

expected euro area flash PMIs.

• Friday brings the latest German Ifo business survey, which is expected to indicate ongoing economic recovery.

• In addition, the first estimate of UK Q3 GDP is expected to reveal the firmest quarter of growth in more than three years.

Daily bond market movements

Bond Yield Change*

BKO 0¼ 09/15 0.178 +0.016

OBL 1 10/18 0.773 +0.015

DBR 2 08/23 1.765 -0.001

UKT 4¾ 09/15 0.441 +0.030

UKT 1¼ 07/18 1.471 +0.034

UKT 2¼ 09/23 2.627 +0.027

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

Euro wrap-up 24 October 2013

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Tomorrow in the euro area and US

Tomorrow brings more sentiment data, with October's German Ifo business survey expected to show a further modest increase to a more than two-year high. Italian retail sales figures for August are also due. Policy-wise, following discussions this evening on economic issues including banking union, which we expect to be relatively inconsequential, the focus at the EU leaders’ summit tomorrow will shift to issues with an external dimension, notably relations with non-EU Eastern European countries and how to respond to recent tragic events associated with immigrants crossing the Mediterranean Sea. In the US, the week concludes with September’s durable goods orders data – which are expected to post a rise of more than 2% on the month, partly on account of strong aircraft orders – as well as the final estimate of the October University of Michigan consumer confidence index.

UK

Industrial sentiment buoyant

While the euro area flash PMIs were consistent with tepid growth, today’s CBI industrial trends survey suggested that UK manufacturing sector sentiment remains buoyant. The report was not all good news, e.g., having hit a six-year high the previous month the October measure of new orders slipped to its lowest since July, and the measure of output expectations slipped to its lowest since February. However, the quarterly forward-looking indicators remained elevated. In particular, the survey measure of business prospects optimism rose 17pts in the three months to October to +24, the highest level since April 2010, supported in particular by a bounce-back in export prospects. Employment in the sector was expected to continue to rise in the coming quarter too. And with data today showing that the auto sector is going from strength to strength – driven particularly by domestic demand car production was up almost 10%Y/Y in September, taking production in the first nine months of the year to its highest since the equivalent period in 2008 – the manufacturing sector looks set to

continue to remain a source of positive growth over the near term. Tomorrow in the UK

In the UK, tomorrow brings the most notable data release of the week, the first estimate of Q3 GDP. In line with the consensus, we forecast growth of 0.8%Q/Q, up 0.1ppt from Q2 and the strongest since Q210. While that would represent the third consecutive quarter of solid positive growth, it would still leave GDP up only 1.5%Y/Y, below the economy’s potential rate, and more than 2½% below the pre-crisis peak. The estimate of service sector activity in August is also due tomorrow.

Italy: Retail sales and consumer confidence UK: CBI factory orders balances

Source: Datastream and Daiwa Capital Markets Europe Ltd. Source: Datastream and Daiwa Capital Markets Europe Ltd.

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■ What's new Hang Lung Properties (HLP) has announced on 24 October that it is launching 366 units in The Long Beach at an average price of HKD16,487/sq ft. This is about 30% above average prices in the secondary market, but HLP will offer up to an 18% discount to buyers who sign the sale and purchase agreement before 3 November. We have visited the site to assess the initial response. ■ What's the impact Rebate method is flexible and developers may not be giving away margin for cash flow. While there seem to be concerns in the market that developers are giving away margin (by offering rebates) to generate cash flow, we believe this launch of The Long Beach illustrates that this may not be the case. We think it also illustrates that the rebate method is quite flexible, as developers generally set their own rebate levels and ASPs. Reasonable initial interest though this is not genuine discount pricing. We estimate that

in GFA terms, the average price for these 366 units was about HKD11,000/sq ft, which was about 10% above our assumption (HKD10,000/sq ft). That said, we were told that over 1,000 people had visited the flats on the first day. Also, HLP has upgraded some interiors of the units to strengthen their appeal. Potentially higher property-sales profits from Hong Kong and China. We assume that HLP can sell about 250 units in The Long Beach in 2013 at HKD10,000/sq ft (GFA), but not many market forecasts seem to have factored this in (our 2013E EPS is 14.1% above the Bloomberg consensus). In its annual report, HLP has already noted that it would pursue the development of some remaining floor area of its China projects as luxury residential units. We have estimated that HLP can sell at least 6m sq ft GFA from this over the medium term. This should help to strengthen its financial capability to fund and further invest in China, in addition to helping underpin its property-sales profits after selling out its Hong Kong landbank, in our view. ■ What we recommend We reiterate our Buy (1) rating on HLP. We think market concerns over the execution related to the group’s first mall in a tier-2 city (Palace 66) seem to have overshadowed the progress it has achieved with the three other malls it has rolled out since. In particular, we believe its Parc 66 in Jinan is showing promise and could become a showcase for the group’s execution in tier-2 cities over time. Further, we believe the potential sale of up to 366 units in The Long Beach may not have been discounted by the market and see it as a potential near-term share-price catalyst.

We maintain our six-month target price of HKD34.40, based on a 25% discount applied to our end-2014E NAV of HKD45.90. The main risk to our call would be execution risk on new mall rollouts in China. ■ How we differ Unlike some in the market, we are not overly concerned about the situation of Palace 66 and believe HLP is showing considerable progress with its execution related to premier malls in tier-2 cities. (See also our note of 4 October 2013: Execution showing promise: a buying opportunity.)

24 October 2013

More property-sales profits

• Sale of The Long Beach could be a near-term share catalyst

• Potentially higher property-sales profits from both Hong Kong and China

• Reaffirming Buy

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Financials / Hong Kong

Hang Lung Properties101 HK

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5Target (HKD): 34.40 34.40 Upside: 37.1% 24 Oct price (HKD): 25.10

Jonas Kan, CFA(852) 2848 4439

[email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change - - -Net profit change - - -Core EPS (FD) change - - -

85

91

98

104

110

24

26

28

30

32

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Share price performance

HLung Prop (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 24.05-31.25Market cap (USDbn) 14.493m avg daily turnover (USDm) 17.01Shares outstanding (m) 4,477Major shareholder Hang Lung Group (52.6%)

Financial summary (HKD)Year to 31 Dec 13E 14E 15ERevenue (m) 9,584 11,065 12,685Operating profit (m) 6,807 8,245 9,414Net profit (m) 4,780 5,840 6,700Core EPS (fully-diluted) 1.068 1.304 1.497EPS change (%) (22.6) 22.2 14.7Daiwa vs Cons. EPS (%) 14.1 3.1 (1.5)PER (x) 23.5 19.2 16.8Dividend yield (%) 2.9 3.2 3.6DPS 0.740 0.800 0.900PBR (x) 0.9 0.9 0.9EV/EBITDA (x) 17.5 14.9 13.3ROE (%) 4.0 4.8 5.4

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20131003hk_Hang_Lung_Properties.pdf#page=1

Financials / Hong Kong 101 HK

24 October 2013

- 10 -

Hang Lung Properties: price/NAV Hang Lung Properties: PBR trend

Source: Datastream, Daiwa forecasts Source: Datastream, Daiwa

HLP: rental income from Hong Kong and China HLP: residential units for sale in Hong Kong (30-Sep-13)

Project No. of unitsHarbourSide - Sea-view 176 - Garden-view 96

272The Long Beach 1,126AquaMarine 17Carmel-on-the-Hill 2

1,417

Source: Company Source: Company, Daiwa

HLP: payment terms for sales at The Long Beach Payment terms Amount Upon signing of the preliminary S&P agreement 5% of contract price (preliminary deposit) Upon signing of the formal S&P agreement (within 5 working days of signing of prelim. S&P agreement) 5% of contract price (further deposit) Discounts Amount 1) Early completion plan - balance (90%) of contract price is paid: - Within 60 days after signing of the preliminary S&P agreement 10% on the price - Within 90 days after signing of the preliminary S&P agreement 8% on the price - Within 180 days after signing of the preliminary S&P agreement 6% on the price 2) Special discount - for prelim. agreements signed on or before 3 November 2013 8% on the price

Source: Company

commercial property projects in China Project Grand Gateway 66 Plaza 66 Palace 66 Parc 66 Forum 66 Centre 66 Riverside 66 Olympia 66 Spring City 66 Heartland 66 TotalCity Shanghai Shanghai Shenyang Jinan Shenyang Wuxi Tianjin Dalian Kunming Wuhan

Land acquisition time Dec.1992 Dec.1993 Sept2005 Feb.2007 Aug2006Dec. 2006/

May2009 Feb.2005 May2009 Sept.2011 Feb.2013Year of completion 1992 1993 2010 2011 2012 2013 2014 2015 2016 2019Retail 0.9 0.5 1.2 1.8 1.1 1.3 1.6 2.4 1.8 1.9 14.5Office 0.9 1.4 - - 7.1 1.6 - - 1.9 1.6 14.5Serviced apts/hotels - - - - 1.1 1.20 - - 1.0 1.4 4.7Sub-total 1.8 1.9 1.2 1.8 9.3 4.1 1.6 2.4 4.7 4.9 33.7Car parks 0.3 0.5 0.8 0.9 2.1 1.2 1.2 1.6 1.9 2.2 12.7Total 2.1 2.4 2.0 2.7 11.4 5.3 2.8 4.0 6.6 7.1 46.4

Source: Company, Daiwa

Note: shaded areas refer to areas which may be converted for residential use

Avg since 1990= -27.6%

+1SD: -8.0%

-1SD: -47.3%

(80%)

(60%)

(40%)

(20%)

0%

20%

40%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Hang Lung Properties (disc)/prem to NAV(Disc)/prem

Current NAV disc: -42.4%

average since 1990: 1.00x

+1SD: 1.41x

-1SD: 0.59x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Hang Lung Properties PBRPBR (x)

Current PBR: 0.94x

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

(HKDm)

Hong Kong China Dividends


24 October 2013

- 11 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EGross rental income (HKDm) 3,745 4,162 4,546 5,161 6,098 6,642 7,445 8,465Rental EBIT (HKDm) 3,046 3,441 3,726 4,194 4,896 5,186 5,731 6,244Property sales profit (HKDm) 3,552 3 5,256 2 3,063 1,379 2,295 2,980

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ERental income 3,745 4,162 4,546 5,161 6,098 6,642 7,445 8,465Property sales 6,335 11 7,511 3 1,274 2,942 3,620 4,220Other Revenue 0 0 0 0 0 0 0 0Total Revenue 10,080 4,173 12,057 5,164 7,372 9,584 11,065 12,685Other income 281 157 35 231 2,774 825 842 858COGS (3,482) (729) (3,075) (968) (1,630) (3,019) (3,038) (3,462)SG&A (361) (383) (456) (512) (626) (583) (624) (667)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 6,518 3,218 8,561 3,915 7,890 6,807 8,245 9,414Net-interest inc./(exp.) (150) (69) (47) (93) (348) (437) (454) (472)Assoc/forex/extraord./others 129 23 166 98 105 106 110 117Pre-tax profit 6,497 3,172 8,680 3,920 7,647 6,476 7,901 9,059Tax (926) (476) (1,432) (815) (944) (1,134) (1,460) (1,716)Min. int./pref. div./others (448) (308) (574) (364) (525) (562) (601) (643)Net profit (reported) 5,123 2,388 6,674 2,741 6,178 4,780 5,840 6,700Net profit (adjusted) 5,123 2,388 6,674 2,741 6,178 4,780 5,840 6,700EPS (reported)(HKD) 1.236 0.576 1.605 0.613 1.380 1.068 1.304 1.497EPS (adjusted)(HKD) 1.236 0.576 1.605 0.613 1.380 1.068 1.304 1.497EPS (adjusted fully-diluted)(HKD) 1.226 0.576 1.605 0.613 1.380 1.068 1.304 1.497DPS (HKD) 0.660 0.660 0.710 0.710 0.740 0.740 0.800 0.900EBIT 6,518 3,218 8,561 3,915 7,890 6,807 8,245 9,414EBITDA 6,518 3,218 8,561 3,915 7,890 6,807 8,245 9,414

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 6,497 3,172 8,680 3,920 7,647 6,476 7,901 9,059Depreciation and amortisation 0 13 23 25 27 29 31 33Tax paid (288) (474) (1,131) (735) (1,018) (1,134) (1,460) (1,716)Change in working capital 1,658 544 1,414 620 554 (61) 740 780Other operational CF items (76) 26 (182) (73) 171 256 264 270Cash flow from operations 7,791 3,281 8,804 3,757 7,381 5,566 7,476 8,426Capex (1,347) (2,230) (3,666) (5,982) (8,088) (8,358) (6,620) (6,680)Net (acquisitions)/disposals 0 0 0 0 0 0 0 0Other investing CF items 451 869 119 124 129 134 136 140Cash flow from investing (896) (1,361) (3,547) (5,858) (7,959) (8,224) (6,484) (6,540)Change in debt (375) 0 0 0 0 0 0 0Net share issues/(repurchases) 24 6 137 10,896 0 0 0 0Dividends paid (2,404) (2,736) (2,820) (3,014) (3,183) (3,582) (3,671) (3,805)Other financing CF items (568) (1,033) (386) (392) (415) (430) (442) (460)Cash flow from financing (3,323) (3,763) (3,069) 7,490 (3,598) (4,012) (4,113) (4,265)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 3,572 (1,843) 2,188 5,389 (4,177) (6,670) (3,121) (2,379)Free cash flow 6,444 1,051 5,138 (2,225) (707) (2,792) 856 1,746

Financial summary


24 October 2013

- 12 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

Hang Lung Properties Limited is the property arm of Hang Lung Group Limited (stock code: 10) which used to be one of the largest property developers in Hong Kong before 1980s. Since the property market downturn in 1982-84, however the group's corporate strategy shifted to focusing more on developing investment properties. In recent years, the group has embarked on a strategy of focusing on developing retail properties in China, and has secured eight projects in addition to its two existing ones in Shanghai.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 10,578 8,931 11,535 27,202 36,025 33,923 26,741 24,362Inventory 6,817 7,683 5,855 5,963 6,109 5,780 4,680 3,520Accounts receivable 1,366 686 1,494 1,983 1,270 1,320 1,450 1,490Other current assets 0 0 0 0 452 250 262 270Total current assets 18,761 17,300 18,884 35,148 43,856 41,273 33,133 29,642Fixed assets 64,844 70,336 96,291 107,646 122,955 133,229 139,593 146,241Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 737 872 993 1,888 1,053 1,130 1,280 1,290Total assets 84,342 88,508 116,168 144,682 167,864 175,632 174,006 177,173Short-term debt 0 1,500 1,480 4,500 1,113 310 330 330Accounts payable 1,726 2,028 3,076 3,430 4,811 4,910 4,960 5,030Other current liabilities 829 831 1,132 1,196 392 398 420 450Total current liabilities 2,555 4,359 5,688 9,126 6,316 5,618 5,710 5,810Long-term debt 5,919 4,661 4,978 12,236 28,623 33,993 29,913 29,913Other non-current liabilities 7,217 8,158 12,876 8,396 8,947 9,010 9,068 9,120Total liabilities 15,691 17,178 23,542 29,758 43,886 48,621 44,691 44,843Share capital 4,145 4,146 4,159 4,472 4,477 4,477 4,477 4,477Reserves/R.E./others 62,232 63,892 83,785 105,247 113,451 115,849 118,018 120,913Shareholders' equity 66,377 68,038 87,944 109,719 117,928 120,326 122,495 125,390Minority interests 2,274 3,292 4,682 5,205 6,050 6,685 6,820 6,940Total equity & liabilities 84,342 88,508 116,168 144,682 167,864 175,632 174,006 177,173EV 109,988 112,895 111,978 107,112 112,134 119,438 122,695 125,194Net debt/(cash) (4,659) (2,770) (5,077) (10,466) (6,289) 380 3,502 5,881BVPS (HKD) 16.018 16.411 21.145 24.535 26.341 26.877 27.361 28.008

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 129.7 (58.6) 188.9 (57.2) 42.8 30.0 15.5 14.6EBITDA (YoY) 135.9 (50.6) 166.0 (54.3) 101.5 (13.7) 21.1 14.2Operating profit (YoY) 135.9 (50.6) 166.0 (54.3) 101.5 (13.7) 21.1 14.2Net profit (YoY) 150.1 (53.4) 179.5 (58.9) 125.4 (22.6) 22.2 14.7Core EPS (fully-diluted) (YoY) 141.4 (53.0) 178.6 (61.8) 125.1 (22.6) 22.2 14.7Gross-profit margin 65.5 82.5 74.5 81.3 77.9 68.5 72.5 72.7EBITDA margin 64.7 77.1 71.0 75.8 107.0 71.0 74.5 74.2Operating-profit margin 64.7 77.1 71.0 75.8 107.0 71.0 74.5 74.2Net profit margin 50.8 57.2 55.4 53.1 83.8 49.9 52.8 52.8ROAE 8.5 3.6 8.6 2.8 5.4 4.0 4.8 5.4ROAA 6.7 2.8 6.5 2.1 4.0 2.8 3.3 3.8ROCE 9.5 4.2 9.7 3.4 5.5 4.3 5.1 5.8ROIC 9.4 4.1 9.2 3.2 6.2 4.6 5.2 5.6Net debt to equity net cash net cash net cash net cash net cash 0.3 2.9 4.7Effective tax rate 14.3 15.0 16.5 20.8 12.3 17.5 18.5 18.9Accounts receivable (days) 39.9 89.7 33.0 122.9 80.5 49.3 45.7 42.3Current ratio (x) 7.3 4.0 3.3 3.9 6.9 7.3 5.8 5.1Net interest cover (x) 43.5 46.6 182.1 42.1 22.7 15.6 18.2 19.9Net dividend payout 53.4 114.6 44.2 115.8 53.6 69.3 61.3 60.1Free cash flow yield 5.7 0.9 4.6 n.a. n.a. n.a. 0.8 1.6

Financial summary continued …

- 13 -

■ What's new Given rising prices for residential units, on 23 October the Beijing Government announced proposed measures aimed at increasing the supply of affordable residential properties (highlighted on pg. 2.) ■ What's the impact Supply management looks like the right move. Compared with the controlling measures in place over the past three years, which were aimed at reining in purchases of residential properties, we believe the new measures will be more effective in cooling down property prices. Notably, property sales YTD have been robust especially for tier-1 cities given strong demand from end users (though investment demand has also played a role). In Beijing, residential property prices have risen by 21% YoY for 9M13. With growing market expectations that property prices will continue to rise and that the supply may lag demand, buyers are chasing properties. As such, managing buyers’ expectations of a likely boost in the

property supply should help to calm the market and ease the upward pressure on prices. We now expect property prices of low end-to-mid range properties in Beijing to stay flat or decline gently in 2014, depending on the execution of the new measures. Execution appears to be the risk. While we highly expect the new measures to cool residential property prices, the execution of these measures is the key. The land supply targets for self-used housing units (20,000 units for 2013 and 50,000 units for 2014) look quite aggressive compared with 90,000-120,000 units of new residential units sold in a year during 2010-12. Developers’ level of interest in participating in building these properties also waits to be seen. Last but not least, ensuring that most, if not all, of these units would be sold fairly and openly to households in need, is another challenge. Shanghai could follow suit. The government has been discussing putting in place a long-term mechanism for the development of China’s residential property market. We see measures similar to those proposed in Beijing, which aims at managing the supply of properties for different groups of households, to be a core part of this mechanism. We expect similar measures to be implemented in Shanghai, where prices also look overheated. Property sales should quieten down near-term. With the launch of these new measures in Beijing and the Third Plenary Session to be held in November, we expect potential property buyers to sit on the sidelines in the near term as they may be concerned that the government could launch more measures. The pace of residential property sales will likely slow and property prices should cool

down as a result. November to February is the traditional low season for property sales anyway. ■ What we recommend The policies target mainly tier-1 cities rather than the whole country, in our view. An increase in the land supply for affordable housing is unlikely to have big impact on the mid-to-high end property segment. As such, we remain positive on the China Property Sector on a mid-term horizon. We do not expect property prices to come down structurally nationwide, property sales will likely remain strong, and we believe sector valuations look undemanding. In our view, market concern of potential new policies is the major overhang for the sector currently. We should have better indications on such policies after Third Plenary Session. Property taxes for new home purchases in more cities and measures to lift the supply of affordable housing units could be launched, but we think these are largely built into investors’ expectations. We expect another sector upturn once the overhang is lifted. Country Garden (2007 HK, HKD5.06), Guangzhou R&F (2777 HK, HKD12.44), COLI (688 HK, HKD23.15) and CR Land (1109 HK, HKD21.35) remain our top picks (all rated Buy [1]). A launch of severe tightening measures would be the key risk to our sector view. ■ How we differ While the market tends to be interested mainly in big developers with fast contracted-sales growth, we see attractive investment opportunities for companies with slower asset turnover but valuable land banks and/or growing recurring income.

24 October 2013

China Property Sector

A right move

• New measures could cool

market expectations for property prices in Beijing

• More stable prices should be good not only for households but also developers

• Reaffirming Positive sector view; policy uncertainty is the major overhang

Financials / China

Positive (unchanged)

Neutral

Negative

Felix Lam(852) 2532 [email protected]

Jonas Kan, CFA(852) 2848 [email protected]

China Property Sector 24 October 2013

- 14 -

Highlights of new measures for Beijing residential property market Enhance the structure of property supply for different classes of end users and speed up the construction of self-used commodity housing units. Ensure a land supply of no less than 20,000 units of self-used commodity housing units for 2013 (the plan is to lift the supply to 50,000 units for 2014). Encourage that companies legally convert their land for building self-used commodity housing units. Encourage developers to convert their existing projects (those that they have not yet started selling) into self-used commodity housing projects. The majority of the properties in the self-used commodity housing project would have a GFA of less than 90sq m per unit; the maximum GFA cannot exceed 140 sq m per unit. The ASP for the units would be at about a 30% discount to those of the same quality in the same area. Households who are eligible to purchase properties in Beijing under Home Purchase Restrictions can buy self-used commodity housing units. Purchasing priority will be given to families (couples and couples with children who are minors) and individuals who: 1) have no properties or, 2) are currently in the queue for social housing units or commodity housing units selling at restricted prices. Each eligible household can only purchase one self-used commodity housing unit. Developers would organise open and audited ballots to determine the sequence of buyers in selecting their housing units. Owners of self-used commodity housing units cannot transfer their units within five years after purchasing them. Owners of self-used commodity housing units who transfer their units five years after purchasing them will have to pay a 30% capital gains tax (being the difference between the original purchase price and the prevailing market prices of commodity housing units in the same area). Developers will have to forfeit the purchase agreement with those buyers who illegally bought their self-used housing units; those families will be ineligible to buy residential properties within five years and could face legal charges.

Source: Beijing Municipal Commission of Housing and Urban-Rural Development

Increase in residential prices for September 2013 (YoY, %) Property sales in Beijing (no of units)

Source: National Bureau of Statistics of China Source: CREIS

Valuations of China property developers

Share price Market cap Trading disc PBR (x) PER (x) ROE (%) Dividend yield (%)

Company Code Rating (HKD) (USDm) to NAV (%) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E COLI* 688 HK Buy 23.15 24,403 (24) 1.9 1.6 10.4 9.1 19.2 18.9 2.1 2.4CR Land* 1109 HK Buy 21.35 16,052 (29) 1.6 1.5 14.5 12.5 11.9 12.6 1.9 2.2Country Garden* 2007 HK Buy 5.06 12,046 (36) 1.6 1.4 8.2 7.2 21.8 21.2 4.5 5.1Longfor Properties* 960 HK Hold 12.8 8,983 (39) 1.6 1.4 8.8 7.8 19.3 18.8 2.5 2.9Evergrande* 3333 HK Hold 3.27 6,764 (50) 0.8 0.7 5.8 4.4 16.5 17.5 0.0 0.0Guangzhou R&F* 2777 HK Buy 12.44 5,170 (52) 1.0 0.9 5.2 4.4 21.5 21.9 7.7 8.2Shui On Land* 272 HK Buy 2.61 2,694 (52) 0.5 0.4 13.0 8.0 3.7 6.2 5.1 5.5COGO* 81 HK Buy 8.84 2,602 (47) 1.9 1.4 7.1 5.7 30.6 28.5 1.4 1.8SIUD* 563 HK Buy 1.89 1,173 (51) 0.7 0.6 10.0 4.9 7.2 13.4 2.0 4.1GPI* 535 HK Buy 0.86 862 (57) 2.0 1.7 (42.1) 12.3 0.0 14.9 0.0 0.0Agile Property 3383 HK NR 9.1 4,046 (31) 0.8 0.7 5.2 4.6 16.6 16.0 4.6 5.1Franshion 817 HK NR 2.68 3,167 (49) 0.8 0.7 8.4 6.8 10.6 11.4 3.0 3.7KWG Property 1813 HK NR 4.85 1,810 (49) 0.6 0.6 4.7 4.0 14.4 15.1 5.0 5.8

Source: Bloomberg, *Daiwa forecasts Note: based on share prices as of 24 October 2013; COLI = China Overseas Land & Investment, CR Land = China Resources Land, COGO = China Overseas Grand Oceans Group, SIUD = Shanghai Industrial Urban Development Group, GPI = Gemdale Properties and Investment

0

5

10

15

20

25

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

2008 2009 2010 2011 2012 9M13

Approved for sell Sold

- 15 -

■ What’s new Hyundai Motor (HMC) announced its 3Q13 K-IFRS preliminary results on 24 October 2013. ■ What’s the impact HMC’s 3Q13 revenue and operating-profit were moderately weaker than our forecasts but were in line with the Bloomberg-consensus figures. Revenue of KRW20,819bn fell short of our forecast by 5.4% and operating profit of KRW2,010bn missed by 9.8%. The operating-profit margin was 9.7%, contracting by 0.7pp QoQ. The earnings miss was primarily due to weaker-than-expected shipments from HMC’s factories in Korea amid the adverse impact of a labour dispute. Global shipments (ex-China) fell by 8.5% QoQ to 850K units in 3Q13 from 954K units in 2Q13, falling short of our forecast of 877K units by 3.0%.This resulted in the 3Q13 global capacity utilisation rate (ex-China) falling by 11pp to 91% from 102% in 2Q13. We believe this could have resulted into a 1.23pp decline in HMC’s 3Q13 operating-profit margin, considering: 1) our sensitivity analysis of HMC’s operating-profit margin fell by

0.13pp versus a 1% decline in its capacity utilisation rate, and 2) the average KRW/USD rate for 3Q13 only appreciated by 1.9% QoQ to KRW1,111. According to our sensitivity analysis, HMC’s operating-profit margin fell by 0.1pp against a 1% appreciation in the Korean Won against the US dollar. As we had expected (see our preview note, Pressing the accelerator, published on 27 September), a significant decline in the ratio of warranty-provisioning costs to revenue of 1.2pp YoY and 1pp QoQ to 0.4% for 3Q13 offset the negative impact of weaker utilisation and the USD versus the KRW QoQ. We envisage HMC’s 4Q13 operating-profit to increase by 30.3% QoQ to KRW2,620bn (with a 0.9pp QoQ increase in the 4Q13 operating-profit margin to 10.6%), primarily due to our expectation of HMC’s 4Q13 global capacity utilisation rate (ex-China) increasing by 9pp to 100% with higher production QoQ from its Korea plant. Meanwhile, we expect HMC’s earnings revision cycle to accelerate from 2014 with a higher earnings contribution from its new model cycle (the redesigned Genesis in 4Q13, redesigned Sonata in 1Q13, redesigned Tucson in 1H14 and redesigned Elantra in 2H14). ■ What we recommend As we are near to the resumption of HMC’s new model cycle from 4Q13, we believe HMC deserves to trade at least at its past-average PER of 8.1x, versus currently trading at a 2014E PER of 6.4x (please see page 2.). We moderately lower our 2013-15E earnings on higher marketing expense assumptions for the new model cycle. Factoring in possible PER expansion to past-five-year average levels, we raise our DCF/PER-based six-month

target price to KRW320,000 (from KRW300,000), which equates to a 2014E PER of 8.1x. Further, we believe a possible announcement of HMC building a new plant or adding more production capacity in the US before 1Q14 could be a catalyst. Risks would include a rapid appreciation of the Won against the US Dollar or Yen. ■ How we differ Our 2013-15E EPS are 9-17% above the consensus, as we are more bullish on HMC’s shipments and equity-method income.

24 October 2013

Shifting up a gear for 2014

• 3Q13 moderately weaker • Upward earnings revision

cycle to accelerate from 4Q13 • Raising target price by 7% to

KRW320,000



Consumer Discretionary / Korea

Hyundai Motor005380 KS

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5Target (KRW): 300,000 320,000 Upside: 26.2% 24 Oct price (KRW): 253,500

Sung Yop Chung(82) 2 787 9157

[email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (1.7) (2.6) (3.1)Net profit change (3.1) (1.9) (2.2)Core EPS (FD) change (3.1) (1.9) (2.2)

80

89

98

106

115

180,000

202,500

225,000

247,500

270,000



Hyund Mot (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 183,000-266,000Market cap (USDbn) 52.883m avg daily turnover (USDm) 106.62Shares outstanding (m) 220Major shareholder Hyundai Mobis (20.8%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 90,084 99,366 106,968Operating profit (bn) 9,100 10,380 11,085Net profit (bn) 9,705 11,269 12,058Core EPS (fully-diluted) 33,995 39,475 42,238EPS change (%) 7.2 16.1 7.0Daiwa vs Cons. EPS (%) 9.4 16.6 15.5PER (x) 7.5 6.4 6.0Dividend yield (%) 0.7 0.7 0.7DPS 1,900 1,900 1,900PBR (x) 1.1 0.9 0.7EV/EBITDA (x) 5.3 4.5 4.1ROE (%) 19.2 19.2 17.3

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20130927kr_Hyundai_Motor.pdf#page=1

Consumer Discretionary / Korea 005380 KS

24 October 2013

- 16 -

Automakers globally: valuation summary Company Ticker Curr. Share Daiwa Mkt cap Absolute (%) Relative (%) PER (x) PBR (x) EV/ EBITDA (x) P/CF (x) ROE (%) Div. yield (%) OPM (%) Price (LC) Rating (USDm) YTD 1M 3M YTD 1M 3M 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E

US FORD F US USD 17.6 Hold 69,023 35.9 2.3 3.9 13.5 (0.3) 0.7 11.3 9.9 3.2 2.5 5.2 4.7 8.0 7.0 33.9 29.5 2.3 2.4 4.8 5.5 GM GM US USD 35.4 Outperform 48,514 22.8 (4.6) (3.3) 0.4 (7.2) (6.5) 10.5 7.6 1.6 1.4 2.9 2.4 6.6 5.5 18.3 20.7 0.0 0.0 4.6 5.9 Europe DAIMLER DAI GR EUR 58.7 Not rated 88,378 41.9 2.1 11.2 24.0 (1.8) 3.3 12.2 10.5 1.4 1.3 9.4 9.2 6.8 5.8 12.2 13.3 3.7 3.8 7.7 7.7 BMW BMW GR EUR 82.1 Not rated 73,241 12.6 2.1 13.4 (5.3) (1.8) 5.4 10.4 10.1 1.6 1.5 8.8 8.6 5.7 5.5 15.8 14.5 3.3 3.5 10.1 9.9 VW VOW GR EUR 170.6 Not rated 111,846 4.8 1.9 4.3 (13.1) (2.0) (3.7) 8.2 7.1 1.0 0.9 7.4 6.8 3.9 3.5 12.3 12.7 2.4 3.1 5.9 6.5 Japan HONDA 7267 JP JPY 3,875 Outperform 72,080 23.2 0.9 (0.8) (16.7) 1.9 0.6 10.8 9.7 1.2 1.1 8.8 7.8 6.8 6.1 12.0 12.4 2.3 2.8 7.1 7.5 NISSAN 7201 JP JPY 1,006 Buy 46,701 24.0 (0.8) (10.0) (15.9) 0.2 (8.7) 8.8 7.7 1.1 1.0 6.8 6.2 4.5 4.1 12.4 12.9 3.0 3.6 6.4 6.9 TOYOTA 7203 JP JPY 6,330 Outperform 224,126 58.1 (1.7) (1.6) 18.1 (0.8) (0.2) 12.1 10.6 1.2 1.2 10.3 9.5 7.3 6.7 10.4 11.0 2.6 2.9 9.6 10.0 China SAIC 600104 CH CHY 14.3 Not rated 25,979 (18.8) 2.3 15.6 (14.1) 4.2 9.1 6.8 6.1 1.1 1.0 9.2 8.3 7.0 7.6 17.0 16.4 3.9 4.3 4.7 4.7 DONGFENG* 489 HK HKD 11.2 Outperform 12,403 (6.7) (1.9) 8.1 (7.4) 0.4 4.0 7.1 6.8 1.2 1.1 2.9 2.4 4.8 5.1 18.7 16.7 2.1 2.9 10.0 9.1 GUANGZHOU* 2238 HK HKD 8.8 Sell 8,247 27.8 5.8 15.7 27.1 8.2 11.6 18.6 13.6 1.4 1.3 16.4 13.0 (35.0) (24.8) 7.7 9.8 1.6 2.1 14.2 15.9 India TATA MOTORS TTMT IN INR 380.0 Buy 18,133 21.5 13.8 27.2 14.4 9.2 24.6 12.1 8.8 3.2 2.4 5.9 4.6 4.7 4.1 29.8 30.9 0.5 0.5 9.0 9.7 MAHINDRA MM IN INR 888.3 Hold 8,899 (4.7) 3.2 (3.6) (11.8) (1.4) (6.1) 15.3 14.9 3.5 3.0 11.0 10.3 11.8 12.8 24.4 21.6 1.4 1.6 9.9 10.4 Korea HMC* 005380 KS KRW 253,500 Buy 52,677 16.0 (0.6) 13.4 13.5 (2.6) 6.4 7.2 6.3 1.0 0.9 5.2 4.4 7.8 6.6 19.8 19.4 0.7 0.7 10.2 10.4 KIA* 000270 KS KRW 63,300 Outperform 24,206 12.0 (7.5) 5.1 9.5 (9.4) (1.9) 6.1 5.5 1.5 1.5 6.0 5.1 5.8 5.2 25.1 27.3 1.0 1.0 7.7 8.2 Industry average 58,963 18.0 1.2 6.6 2.4 (0.2) 2.6 10.5 9.0 1.7 1.5 7.8 6.9 3.8 4.0 18.0 17.9 2.1 2.4 8.1 8.6

Source: Bloomberg, *Daiwa forecasts

Note: 1) Share prices are as of 24 October (US and Europe as of 23 October, 2013), 2) **Relative to each country’s index HMC: K-IFRS consolidated sales and earnings (KRW bn)

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13P

Daiwa 3Q13 Diff (%) 2012 2013E 1Q12

USD/KRW (Average) 1,131.0 1,152.4 1,133.0 1,090.0 1,085.0 1,122.3 1,116.4 Total shipments ('000 Unit, Ex-China) 888 918 776 964 896 954 850 877 (3.0) 3,546 3,716 888 HMC (Korea) 484 503 391 524 447 472 403 408 (1.4) 1,903 1,840 484 HMI (India) 161 165 153 162 163 169 152 151 1.0 642 644 161 HAOS (Turkey) 20 23 21 22 20 26 22 18 21.6 86 88 20 HMMA (US) 85 89 92 94 98 109 99 103 (3.4) 360 412 85 HMMC (Czech) 83 80 66 74 76 79 73 64 13.9 304 300 83 HMMR (Russia) 55 58 52 60 56 57 54 51 5.6 225 226 55 HMB (Brazil) - - 1 26 36 41 47 81 (42.5) 27 206 - BHMC & CHMC (China) 185 188 223 260 276 261 250 246 1.8 856 1,049 185Sales 20,165 21,940 19,646 22,719 21,367 23,184 20,819 21,999 (5.4) 84,470 90,084 20,165 Auto 17,249 19,074 16,230 18,754 17,663 19,057 17,055 71,307 74,576 17,249 Finance 2,082 1,959 2,157 2,465 2,433 2,683 2,227 8,663 9,704 2,082 Others 834 907 1,259 1,500 1,271 1,444 1,537 4,500 5,804 834COGS 15,525 16,531 15,202 17,715 16,663 17,865 16,215 16,895 (4.0) 64,972 69,451 15,525Gross Profit 4,640 5,409 4,444 5,004 4,704 5,319 4,604 5,104 (9.8) 19,498 20,632 4,640GPM (%) 23.0 24.7 22.6 22.0 22.0 22.9 22.1 23.2 (4.7) 23.1 22.9 23.0SG&A 2,548 2,871 2,467 3,171 2,835 2,913 2,594 2,875 (9.8) 11,061 11,728 2,548Operating Income 2,093 2,538 1,977 1,833 1,869 2,406 2,010 2,228 (9.8) 8,437 9,100 2,093 Auto 1,905 2,160 1,276 1,378 1,501 1,926 1,376 6,719 6,987 1,905 Finance 372 266 306 234 295 379 279 1,178 1,354 372 Others 40 36 89 89 81 107 104 255 339 40 OPM (%) 10.4 11.6 10.1 8.1 8.7 10.4 9.7 10.1 9.6 9.6 10.4Equity method 780 625 601 574 602 811 715 858 (16.7) 2,580 3,005 780Recurring Profit 3,150 3,146 2,781 2,528 2,744 3,195 2,815 3,187 (11.7) 11,605 12,350 3,150Net Income 2,453 2,548 2,166 1,890 2,088 2,524 2,252 2,534 (11.1) 9,056 9,705 2,453NPM (%) 12.2 11.6 11.0 8.3 9.8 10.9 10.8 11.5 10.7 10.8 12.2

Source: Company, Daiwa forecasts HMC: new model launches vs. share-price movement HMC: new-model launches scheduled globally (2012-15)

HMC 1H12 2H12 1H13 2H13 2014 2015

Korea Santa Fe Equus FL*

Santa Fe Longbody,

Avante Coupe, Tucson FL*

GenesisSonata

Tucson(1H)

Elantra(3Q)

US Genesis Coupe FL*,

i30 (GD),Azera

Veloster TurboSanta Fe

Elantra Coupe Sonata

Elantra(4Q)

China Elantra MD

Santa Fe

EU i30 (GD),

i20 FL*, AzeraSanta Fe

Santa Fe Longbody

i10 Sonata

India Sonata,i20 FL*

Avante

Source: Dataguide Source: Company, Daiwa forecasts /Note: 1) *FL: face lift, 2) above schedule includes volume sellers only

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000 (KRW)Launch of new Genesis(Jan 8, 2008)

Launch of new Sonata(Sep 17, 2009)

+29%(8 May, 2008)

+19%(24 Dec, 2008)

9.5X

8.0X

6.5X

5.0X


24 October 2013

- 17 -

Key assumptions

Profit and loss (KRWbn)

Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales volume ex. China ('000 Units) n.a. n.a. n.a. 3,319 3,546 3,716 3,877 3,981

Average Selling Price ex. China (KRW '000)

n.a. n.a. n.a. 20,225 20,108 20,066 21,184 21,786

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EAuto Revenues 41,155 48,975 57,293 67,128 71,307 74,576 82,132 86,734Finance Revenues 3,274 3,843 6,520 7,288 8,663 9,704 10,946 13,820Other Revenue 2,433 2,862 3,172 3,382 4,500 5,804 6,287 6,414Total Revenue 46,863 55,680 66,985 77,798 84,470 90,084 99,366 106,968Other income 0 0 0 0 0 0 0 0COGS (36,481) (43,490) (51,266) (58,902) (64,972) (69,451) (75,367) (81,135)SG&A (7,225) (7,928) (9,143) (10,867) (11,061) (11,728) (13,618) (14,749)Other op.expenses (423) (354) (658) 0 0 195 0 0Operating profit 2,733 3,908 5,918 8,029 8,437 9,100 10,380 11,085Net-interest inc./(exp.) 47 (562) (192) (36) 164 160 156 151Assoc/forex/extraord./others (1,038) 1,060 1,765 2,454 3,005 3,090 3,912 4,223Pre-tax profit 1,742 4,406 7,492 10,447 11,605 12,350 14,448 15,459Tax (384) (955) (1,490) (2,342) (2,549) (2,645) (3,178) (3,401)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 1,358 3,451 6,001 8,105 9,056 9,705 11,269 12,058Net profit (adjusted) 1,358 3,451 6,001 8,105 9,056 9,705 11,269 12,058EPS (reported)(KRW) 4,765 12,096 21,021 28,390 31,723 33,995 39,475 42,238EPS (adjusted)(KRW) 4,765 12,096 21,021 28,390 31,723 33,995 39,475 42,238EPS (adjusted fully-diluted)(KRW) 4,765 12,096 21,021 28,390 31,723 33,995 39,475 42,238DPS (KRW) 850 1,150 1,500 1,750 1,900 1,900 1,900 1,900EBIT 2,733 3,908 5,918 8,029 8,437 9,100 10,380 11,085EBITDA 4,339 5,648 8,102 9,615 10,159 10,937 12,406 13,266

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 1,742 4,406 7,492 10,447 11,605 12,350 14,448 15,459Depreciation and amortisation 1,606 1,740 2,183 1,586 1,722 1,837 2,026 2,181Tax paid (384) (955) (1,490) (2,342) (2,549) (2,645) (3,178) (3,401)Change in working capital 1,776 1,937 17,878 3,688 6,249 2,018 3,742 3,914Other operational CF items (5,401) 6,468 (10,115) (9,202) (11,675) (6,560) (8,680) (9,002)Cash flow from operations (660) 13,596 15,947 4,177 5,353 6,999 8,357 9,152Capex (4,967) (3,763) (2,045) (2,899) (3,000) (3,090) (3,183) (3,278)Net (acquisitions)/disposals (1,256) (2,504) (5,102) (4,224) (4,048) (2,148) (2,908) (3,228)Other investing CF items (3,373) (536) (9,642) (362) (182) (2,772) (2,698) (2,698)Cash flow from investing (9,595) (6,802) (16,789) (7,485) (7,230) (8,010) (8,789) (9,204)Change in debt 11,830 (4,047) 2,591 3,928 2,684 1,995 (16) 668Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (404) (277) (588) (458) (523) (419) (419) (419)Other financing CF items 146 (918) (944) (514) 243 367 2,134 1,221Cash flow from financing 11,572 (5,242) 1,058 2,956 2,404 1,944 1,699 1,470Forex effect/others 0 0 0 0 0 0 0 0Change in cash 1,317 1,552 217 (351) 527 933 1,268 1,418Free cash flow (5,627) 9,833 13,902 1,278 2,353 3,909 5,175 5,874

Financial summary


24 October 2013

- 18 -

Balance sheet (KRWbn)

Key ratios (%)


Company profile

Established in 1967, HMC is the largest vehicle manufacturer in Korea. With the 33.58%-owned Kia Motors, it has 6.4m units of production capacity globally. The company produces a range of vehicles, including passenger cars, SUVs, minivans and commercial vehicles.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 9,389 12,301 31,859 35,429 40,120 41,057 42,997 45,176Inventory 15,057 10,213 5,491 6,238 6,773 7,138 7,955 8,564Accounts receivable 5,412 4,892 4,469 6,013 5,925 6,756 7,452 8,023Other current assets 1,686 1,572 1,701 1,247 2,030 2,090 2,258 2,529Total current assets 31,544 28,978 43,520 48,926 54,848 57,041 60,662 64,291Fixed assets 20,202 20,260 20,236 19,548 20,740 21,993 23,150 24,247Goodwill & intangibles 2,391 2,548 2,642 2,660 2,883 3,114 3,363 3,767Other non-current assets 28,292 28,320 28,316 38,345 43,067 46,452 51,415 56,927Total assets 82,429 80,106 94,714 109,480 121,538 128,600 138,590 149,232Short-term debt 24,119 17,907 15,859 15,048 11,050 11,603 12,183 12,622Accounts payable 9,916 9,713 9,912 10,887 11,881 12,000 12,240 12,362Other current liabilities 1,349 2,651 5,674 7,229 9,904 9,409 8,468 7,621Total current liabilities 35,384 30,271 31,445 33,164 32,836 33,012 32,891 32,606Long-term debt 17,956 19,453 22,737 27,138 30,513 31,956 31,360 31,589Other non-current liabilities 2,031 2,530 7,644 8,850 10,271 10,452 10,278 9,311Total liabilities 55,371 52,254 61,826 69,152 73,620 75,420 74,529 73,505Share capital 1,489 1,489 1,489 1,489 1,489 1,489 1,489 1,489Reserves/R.E./others 25,570 26,363 31,399 38,839 46,429 51,691 62,572 74,238Shareholders' equity 27,059 27,852 32,888 40,328 47,918 53,180 64,061 75,727Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 82,429 80,106 94,714 109,480 121,538 128,600 138,590 149,232EV 88,526 80,900 62,577 62,597 57,283 58,342 56,386 54,875Net debt/(cash) 32,686 25,059 6,737 6,757 1,443 2,502 546 (966)BVPS (KRW) 123,064 126,443 149,303 183,078 217,534 241,424 290,821 343,783

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 18.3 18.8 20.3 16.1 8.6 6.6 10.3 7.7EBITDA (YoY) 18.6 30.2 43.4 18.7 5.7 7.7 13.4 6.9Operating profit (YoY) 15.9 43.0 51.5 35.7 5.1 7.9 14.1 6.8Net profit (YoY) (6.8) 154.0 73.9 35.1 11.7 7.2 16.1 7.0Core EPS (fully-diluted) (YoY) (6.9) 153.9 73.8 35.1 11.7 7.2 16.1 7.0Gross-profit margin 22.2 21.9 23.5 24.3 23.1 22.9 24.2 24.2EBITDA margin 9.3 10.1 12.1 12.4 12.0 12.1 12.5 12.4Operating-profit margin 5.8 7.0 8.8 10.3 10.0 10.1 10.4 10.4Net profit margin 2.9 6.2 9.0 10.4 10.7 10.8 11.3 11.3ROAE 5.4 12.6 19.8 22.1 20.5 19.2 19.2 17.3ROAA 1.8 4.2 6.9 7.9 7.8 7.8 8.4 8.4ROCE 4.4 5.8 8.7 10.4 9.8 9.8 10.2 9.7ROIC 3.9 5.4 10.2 14.4 13.7 13.6 13.5 12.4Net debt to equity 120.8 90.0 20.5 16.8 3.0 4.7 0.9 net cashEffective tax rate 22.0 21.7 19.9 22.4 22.0 21.4 22.0 22.0Accounts receivable (days) 37.4 33.8 25.5 24.6 25.8 25.7 26.1 26.4Current ratio (x) 0.9 1.0 1.4 1.5 1.7 1.7 1.8 2.0Net interest cover (x) n.a. 7.0 30.8 223.1 n.a. n.a. n.a. n.a.Net dividend payout 17.8 9.5 7.1 6.2 6.0 5.6 4.8 4.5Free cash flow yield n.a. 17.6 24.9 2.3 4.2 7.0 9.3 10.5


- 19 -

■ What's new LG Electronics (LGE) posted weak 3Q13 results due to higher marketing costs from the launch of its new flagship smartphone. As core business earnings remain volatile, we would wait for a more sustained operating profit contribution from the handset division before turning positive on the stock. ■ What's the impact LGE recorded 3Q13 revenue of KRW13.89tn (down 9% QoQ) and operating profit of KRW218bn (down 55% QoQ). Operating profit was below the Bloomberg-consensus forecast of KRW240bn, as the handset division posted larger-than-expected operating losses. LGE shipped 12.0m smartphones in 3Q13, compared with 12.1m units in 2Q13. Delays in the global rollout of new G2 smartphone, launched in August, resulted in weaker unit sales (just over 1m units in 3Q13), and heavy promotion of the G2 resulted

in lower profitability. For 4Q13, LGE expects to sell over 2m G2 smartphones globally, which is lower than its initial target of 1m sales per month. The company expects the handset division to post a small operating profit in 4Q13 on product mix improvements as G2 sales increase. However, as the G2 is competing with the Galaxy Note3 and the iPhone 5S in the premium smartphone segment, we think it will be challenging to control marketing costs. In the home entertainment division, the operating-profit margin improved to 2.5% in 3Q13 from 1.8% in 2Q13 as LGE focused more on profitability rather than volume sales. However, as we expect LGE to increase TV shipments to 8-9m units in 4Q13 (from 6.8m units in 3Q13), we forecast the operating-profit margin for the division to decline to 1% for the quarter. ■ What we recommend Due to weak handset earnings, we lower our 2013-15E operating profit by 7-14%. However, we reduce our EPS forecasts by 23-45% due to higher non-operating expenses from FX-related losses and higher effective tax rates. We also cut our SOTP-derived six-month target price to KRW70,000 from KRW75,000. A downside risk to our call would be weaker-than-expected demand for handsets, TVs and appliances. An upside risk would be an improved macroeconomic environment, which could lead to increased sales of LGE’s core products. Although we expect a slight decline QoQ in LGE’s 4Q13 operating profit,

we look for a sequential improvement in 1Q14 and 2Q14 earnings on a seasonal increase in appliance sales. However, since handset earnings are the key share-price catalyst, we would wait for a more sustained earnings contribution before turning positive on the stock. ■ How we differ Our 2013-15 EPS forecasts are substantially below (13-24%) those of the Bloomberg consensus as we expect lower earnings for LGE’s handset business.

24 October 2013

Smartphones should remain a drag on earnings

• Handsets revert to losses in 3Q13 on higher marketing costs

• Appliances are the only stable source of earnings

• Lowering target price to KRW70,000; maintain Hold



Consumer Discretionary / Korea

LG Electronics066570 KS

BuyOutperformHold (unchanged)

UnderperformSell

1

2

3

4

5Target (KRW): 75,000 70,000 Downside: 0.1% 24 Oct price (KRW): 70,100

Jae H. Lee(82) 2 787 9173

[email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (3.7) (3.8) (4.4)Net profit change (45.2) (29.8) (23.5)Core EPS (FD) change (45.2) (29.8) (23.5)

85

95

105

115

125

65,000

72,500

80,000

87,500

95,000



LGE (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 67,200-90,400Market cap (USDbn) 10.863m avg daily turnover (USDm) 67.66Shares outstanding (m) 164Major shareholder LG Corp (33.7%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 57,999 61,024 62,822Operating profit (bn) 1,260 1,650 1,894Net profit (bn) 465 895 1,157Core EPS (fully-diluted) 2,841 5,470 7,070EPS change (%) 411.8 92.6 29.3Daiwa vs Cons. EPS (%) (18.7) (23.5) (12.9)PER (x) 24.7 12.8 9.9Dividend yield (%) 0.4 0.6 0.7DPS 300 400 500PBR (x) 0.9 0.8 0.8EV/EBITDA (x) 6.3 5.3 4.7ROE (%) 3.6 6.6 8.0


24 October 2013

- 20 -

LGE: quarterly revenue and operating profit, by key division (KRWbn) 1Q13 2Q13 3Q13P 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2013E 2014E

Revenue Home Entertainment 4,959 5,258 5,007 5,876 4,961 5,274 5,342 6,158 21,101 21,735Mobile Communications 3,210 3,123 3,045 3,178 3,493 3,467 3,685 3,736 12,556 14,381Home Appliances 2,807 3,188 2,967 3,093 2,921 3,236 3,049 3,227 12,055 12,432AC & Energy Solution 1,217 1,734 973 710 1,226 1,725 845 761 4,633 4,557LG Innotek 1,199 1,181 1,245 1,232 1,232 1,216 1,294 1,308 4,857 5,051Others 709 749 654 685 727 767 670 702 2,797 2,867Total 14,101 15,232 13,892 14,774 14,561 15,686 14,885 15,892 57,999 61,024Operating profit Home Entertainment 13 93 124 82 50 127 139 111 313 426Mobile Communications 133 61 -80 -16 14 45 140 157 99 356Home Appliances 102 121 109 99 111 139 110 97 431 457AC & Energy Solution 82 171 20 6 69 93 27 -8 278 181LG Innotek 17 36 57 47 52 61 70 69 156 252Others 3 -3 -12 -4 -5 -6 -6 -5 -16 -22Total 349 479 218 214 291 459 480 421 1,260 1,650

Source: Company, Daiwa forecasts

Note: P - preliminary

LGE: handset shipments and operating-profit margin LGE: PBR bands


Note: P - preliminary

Source: Company, FnData, Daiwa forecasts

(3)

(2)

(1)

0

1

2

3

4

5

0

5

10

15

20

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13P 4Q13E

Smartphone Featurephone OP margin

(m units) (%)

10,000

60,000

110,000

160,000

210,000

260,000

310,000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

(KRW)

3.0x

2.0x

1.5x

1.0x

0.6x


24 October 2013

- 21 -

Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EHandset shipment(m) 100.7 117.9 116.6 88.0 56.6 71.1 81.0 86.7LCD-TV shipment (m) 10.7 16.3 23.3 24.7 26.7 28.6 32.0 35.0Smartphone shipment (m) 0.3 0.6 6.5 20.2 26.2 47.4 62.0 72.0

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EHome Entertainment 15,848 19,635 23,695 23,902 22,331 21,101 21,735 22,216Mobile Comm 16,030 18,199 12,975 11,692 10,078 12,556 14,381 15,026Other Revenue 31,402 17,657 19,084 18,662 18,551 24,342 24,907 25,579Total Revenue 63,280 55,491 55,754 54,257 50,960 57,999 61,024 62,822Other income 0 0 0 0 0 0 0 0COGS (47,707) (41,341) (43,453) (42,058) (38,653) (44,756) (46,918) (48,260)SG&A (11,519) (11,190) (12,179) (11,820) (11,171) (11,983) (12,455) (12,668)Other op.expenses (847) (279) 0 0 0 0 0 0Operating profit 3,207 2,681 122 379 1,136 1,260 1,650 1,894Net-interest inc./(exp.) (153) (293) (154) (228) (228) (325) (323) (323)Assoc/forex/extraord./others (1,435) 477 467 (550) (384) (226) (57) 70Pre-tax profit 1,619 2,865 435 (399) 524 710 1,270 1,641Tax (480) (589) (0) (33) (433) (245) (375) (484)Min. int./pref. div./others 0 74 848 0 0 0 0 0Net profit (reported) 1,139 2,350 1,282 (433) 91 465 895 1,157Net profit (adjusted) 1,139 2,350 1,282 (433) 91 465 895 1,157EPS (reported)(KRW) 7,873 16,247 8,864 (2,992) 555 2,841 5,470 7,070EPS (adjusted)(KRW) 7,873 16,247 8,864 (2,992) 555 2,841 5,470 7,070EPS (adjusted fully-diluted)(KRW) 7,873 16,247 8,864 (2,992) 555 2,841 5,470 7,070DPS (KRW) 350 1,750 200 200 200 300 400 500EBIT 3,207 2,681 122 379 1,136 1,260 1,650 1,894EBITDA 6,886 4,020 1,412 1,581 2,448 3,192 3,668 4,011

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 1,619 2,865 435 (399) 524 710 1,270 1,641Depreciation and amortisation 3,679 1,339 1,290 1,202 1,312 1,932 2,018 2,117Tax paid 0 (502) (394) (359) (494) (245) (375) (484)Change in working capital (2,310) (4) (2,640) (1,060) (1,494) (3,149) (1,715) (1,954)Other operational CF items 2,867 2,452 1,287 2,457 2,267 2,249 1,970 3,123Cash flow from operations 5,854 6,150 (23) 1,841 2,115 1,497 3,168 4,443Capex (3,972) (1,591) (1,745) (1,830) (1,404) (3,400) (2,000) (2,000)Net (acquisitions)/disposals (954) (153) 552 (53) 378 1,653 565 738Other investing CF items (570) (249) (477) (569) (324) (1,998) (450) (425)Cash flow from investing (5,496) (1,993) (1,670) (2,452) (1,350) (3,745) (1,885) (1,687)Change in debt 1,084 (4,136) 1,528 228 (806) 1,843 (674) (653)Net share issues/(repurchases) 0 (0) 1 975 9 0 0 0Dividends paid (138) (71) (308) (43) (59) (37) (55) (73)Other financing CF items 97 (1) 0 0 0 953 (11) (11)Cash flow from financing 1,043 (4,208) 1,221 1,161 (856) 2,759 (740) (736)Forex effect/others 3 (1,454) (39) (37) (59) 0 0 0Change in cash 1,405 (1,505) (511) 512 (150) 511 543 2,021Free cash flow 1,883 4,558 (1,768) 11 711 (1,903) 1,168 2,443

Financial summary


24 October 2013

- 22 -


Key ratios (%)


Company profile

LG Electronics is a leading manufacturer of consumer electronics and mobile handsets in Korea. The company has four business divisions: home entertainment, mobile communications, home appliances, and air conditioning & energy solutions. LG Electronics also has a 47.9% stake in its component affiliate, LG Innotek and a 37.9% stake in its display affiliate, LG Display.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 6,034 2,647 2,029 2,495 1,886 2,121 2,443 2,956Inventory 6,449 4,899 5,872 4,947 4,599 5,538 5,751 5,832Accounts receivable 6,105 7,637 7,002 6,753 6,519 8,117 8,318 8,546Other current assets 3,686 1,727 1,611 1,588 1,550 1,842 1,911 1,946Total current assets 22,274 16,910 16,515 15,783 14,554 17,619 18,424 19,281Fixed assets 16,253 7,709 6,500 7,290 7,518 10,559 10,927 11,209Goodwill & intangibles 774 804 763 1,036 1,077 1,257 1,316 1,348Other non-current assets 3,071 6,692 8,540 8,549 8,308 7,672 7,931 8,109Total assets 42,372 32,115 32,318 32,658 31,457 37,107 38,597 39,947Short-term debt 7,406 4,307 4,009 3,178 2,045 3,453 2,485 2,852Accounts payable 4,456 5,316 5,824 5,487 5,195 6,385 6,671 6,765Other current liabilities 8,539 6,546 5,484 5,549 5,576 6,062 6,591 7,014Total current liabilities 20,400 16,169 15,317 14,215 12,816 15,900 15,747 16,631Long-term debt 5,455 2,602 3,184 4,257 4,426 5,398 6,118 5,446Other non-current liabilities 1,724 919 958 1,038 1,512 1,694 1,788 1,853Total liabilities 27,580 19,689 19,459 19,510 18,753 22,993 23,654 23,930Share capital 809 809 809 904 904 904 904 904Reserves/R.E./others 7,510 10,995 11,835 11,990 11,550 12,262 13,071 14,124Shareholders' equity 8,319 11,804 12,644 12,894 12,454 13,166 13,975 15,028Minority interests 6,473 621 215 254 250 949 969 989Total equity & liabilities 42,372 32,115 32,318 32,658 31,457 37,107 38,597 39,947EV 31,245 16,976 17,066 16,920 16,556 20,100 19,569 18,792Net debt/(cash) 6,827 4,262 5,164 4,940 4,584 6,730 6,160 5,342BVPS (KRW) 57,515 81,606 87,413 89,140 76,105 80,451 85,396 91,830

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 18.4 (12.3) 0.5 (2.7) (6.1) 13.8 5.2 2.9EBITDA (YoY) 4.3 (41.6) (64.9) 12.0 54.8 30.4 14.9 9.4Operating profit (YoY) 23.3 (16.4) (95.4) 210.6 199.7 10.9 30.9 14.8Net profit (YoY) (44.9) 106.4 (45.4) n.a. n.a. 411.8 92.6 29.3Core EPS (fully-diluted) (YoY) (44.9) 106.4 (45.4) n.a. n.a. 411.8 92.6 29.3Gross-profit margin 24.6 25.5 22.1 22.5 24.2 22.8 23.1 23.2EBITDA margin 10.9 7.2 2.5 2.9 4.8 5.5 6.0 6.4Operating-profit margin 5.1 4.8 0.2 0.7 2.2 2.2 2.7 3.0Net profit margin 1.8 4.2 2.3 (0.8) 0.2 0.8 1.5 1.8ROAE 14.7 23.4 10.5 n.a. 0.7 3.6 6.6 8.0ROAA 3.0 6.3 4.0 n.a. 0.3 1.4 2.4 2.9ROCE 12.5 11.4 0.6 1.9 5.7 6.0 7.1 7.9ROIC 10.8 11.1 0.7 2.1 1.1 4.3 5.5 6.3Net debt to equity 82.1 36.1 40.8 38.3 36.8 51.1 44.1 35.5Effective tax rate 29.7 20.5 0.0 n.a. 82.7 34.5 29.5 29.5Accounts receivable (days) 33.1 45.2 47.9 46.3 47.5 46.1 49.2 49.0Current ratio (x) 1.1 1.0 1.1 1.1 1.1 1.1 1.2 1.2Net interest cover (x) 20.9 9.2 0.8 1.7 5.0 3.9 5.1 5.9Net dividend payout 4.4 10.8 2.3 n.a. 36.0 10.6 7.3 7.1Free cash flow yield 16.4 39.7 n.a. 0.1 6.2 n.a. 10.2 21.3


- 23 -

■ What's new For 3Q13, LG Innotek (LGI) announced an operating profit that was better than our and the Bloomberg-consensus forecasts. However, the company provided subdued guidance for 4Q13. ■ What's the impact For the quarter, LGI had revenue of KRW1.60tn (up 5% QoQ), and an operating profit of KRW56bn (up 56% QoQ), which was better than our forecast of KRW47bn and the consensus forecast (past 28 days) of KRW48bn, due to increased economies of scale and an improved product mix in camera module business. The company’s camera-module revenue rose by 11% QoQ to

KRW620bn for 3Q13 due to an increase in orders from a US smartphone maker’s new models. LGI also benefitted from an improved product mix, as 8+ mega-pixel camera modules accounted for 58% of the division’s revenue for 3Q13 compared with 53% for 2Q13. In the LED business, the division’s revenue fell by 9% QoQ due to sluggish orders from LED-TV makers. In terms of profitability, the operating margin for the division remained at a negative double-digit percentage for 3Q13 due to poor product mix, and we expect this to widen for 4Q13. We believe the company’s LED business will break even at the operating level only from 1Q15. For 4Q13, although we expect LGI to post flat revenue, we forecast its operating-profit margin to contract to 2.9% from 3.5% for 3Q13, as the LED business continues to drag down earnings. LGI: quarterly results (KRWbn) 1Q13 2Q13 3Q13P 4Q13E 2013ERevenue 1,550.9 1,521.1 1,595.5 1,578.9 6,246.5 Operating profit 15.8 35.7 55.7 46.1 153.4 OP margin (%) 1.0 2.3 3.5 2.9 2.5 Pre-tax profit (9.8) 6.8 28.9 40.7 66.7 PP margin (%) (0.6) 0.4 1.8 2.6 1.1 Net profit (6.5) 6.9 27.7 26.6 54.7 NP margin (%) (0.4) 0.5 1.7 1.7 0.9

Source: Company

Note: P- preliminary

■ What we recommend In light of the 3Q13 results, we raise our 2013-15 net-profit forecasts by 0.6-5.0%. We maintain our six-month target price of KRW85,000 which remains based on a 2013E PBR of 1.3x (the stock’s low- to mid-cycle PBR). We maintain our Hold (3) rating as we see limited share-price catalysts over the near term. The main

downside risk to our call would be weaker-than-expected demand for LGI’s LEDs, handsets, and display components. A potential upside risk is stronger-than-expected demand for these components. ■ How we differ Although our 2013 EPS forecast is 6.7% higher than that of the consensus, those for 2014 and 2015 are lower by 2.7% and 27.0%, respectively, as we are more cautious than the market on the profitability of the company’s core businesses.

24 October 2013

Weak LED-sales momentum continues

• Despite a better-than-expected 3Q13, the company is cautious on the outlook for 4Q13

• LED business likely to make operating losses throughout 2014

• Maintain Hold rating due to limited near-term share-price catalysts



Information Technology / Korea

LG Innotek011070 KS

BuyOutperformHold (unchanged)

UnderperformSell

1

2

3

4

5Target (KRW): 85,000 85,000 Downside: 5.2% 24 Oct price (KRW): 89,700

Joshua Oh, CFA(82) 2 787 9176

[email protected]

Jae H. Lee(82) 2 787 [email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change 0.3 (0.9) (5.5)Net profit change 0.9 5.0 0.6Core EPS (FD) change 0.9 5.0 0.6

85

98

110

123

135

65,000

76,250

87,500

98,750

110,000



LG Innotek (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 70,000-105,500Market cap (USDbn) 2.013m avg daily turnover (USDm) 12.54Shares outstanding (m) 24Major shareholder LG Electronics (47.9%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 6,247 6,476 6,780Operating profit (bn) 153 250 318Net profit (bn) 55 137 161Core EPS (fully-diluted) 2,310 5,785 6,789EPS change (%) n.a. 150.4 17.3Daiwa vs Cons. EPS (%) 6.7 (2.7) (26.9)PER (x) 38.8 15.5 13.2Dividend yield (%) 0.0 0.2 0.3DPS 0 200 250PBR (x) 1.3 1.2 1.1EV/EBITDA (x) 5.3 3.9 3.2ROE (%) 3.8 8.1 8.8

Information Technology / Korea 011070 KS

24 October 2013

- 24 -

LGI: quarterly earnings forecasts (KRWbn) 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13 3Q13P 4Q13E 2013E

Revenue LED 190 235 296 277 998 257 316 286 241 1,100 Camera module 385 328 269 680 1,662 641 557 620 729 2,547 Substrates 128 144 144 152 568 144 133 155 145 576 Material 184 210 236 250 879 244 255 275 222 996 Display and network 271 236 210 188 905 178 174 178 166 695 Automotive and motor 87 96 80 92 354 87 89 86 80 343 Others (11) (12) (15) (12) (49) (0) (3) (3) (3) (9)Total 1,234 1,236 1,220 1,626 5,316 1,551 1,521 1,596 1,579 6,247 Operating profit 28 17 26 6 77 16 36 56 46 153 Operating-profit margin (%) 2.2 1.4 2.2 0.4 1.5 1.0 2.3 3.5 2.9 2.5 Source: Company, Daiwa forecasts

LGI: operating-profit guidance and actual results LGI: PBR bands

Source: Company Source: Company, Daiwa forecasts

(80)

(60)

(40)

(20)

0

20

40

60

80

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13P

OP guidance Actual OP

(KRWbn)

0

50,000

100,000

150,000

200,000

250,000

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

Oct

-11

Jan-

12

Apr-1

2

Jul-1

2

Oct

-12

Jan-

13

Apr-1

3

Jul-1

3

Oct

-13

(KRW)

3.0x

1.9x

2.5x

1.4x

0.9x


24 October 2013

- 25 -

Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ELGE handset shipment (m units) 80.5 100.7 116.6 88.0 56.6 71.6 78.0 84.0LED utilisation rate (%) 56.0 58.0 61.0 38.0 42.0 60.0 67.2 78.4Camera module shipment (m units) 36.7 41.2 76.8 108.4 136.0 228.8 257.9 274.4

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ELED 97 236 905 906 998 1,100 1,231 1,437Camera modules 224 276 644 1,216 1,662 2,547 2,736 2,697Other Revenue 1,600 2,459 2,555 2,431 2,656 2,600 2,509 2,646Total Revenue 1,922 2,971 4,103 4,553 5,316 6,247 6,476 6,780Other income 0 0 0 0 0 0 0 0COGS (1,701) (2,603) (3,588) (4,160) (4,754) (5,513) (5,613) (5,808)SG&A (144) (254) (356) (438) (485) (580) (613) (655)Other op.expenses 0 0 n.a. n.a. n.a. n.a. n.a. n.a.Operating profit 76 114 160 (45) 77 153 250 318Net-interest inc./(exp.) (9) (18) (52) (90) (94) (76) (52) (47)Assoc/forex/extraord./others (16) (29) 1 (40) (1) (11) (31) (75)Pre-tax profit 52 66 109 (174) (18) 67 167 196Tax 0 (15) 17 29 (7) (12) (30) (35)Min. int./pref. div./others 0 0 70 0 0 0 0 0Net profit (reported) 52 51 196 (145) (25) 55 137 161Net profit (adjusted) 52 51 196 (145) (25) 55 137 161EPS (reported)(KRW) 4,304 2,994 9,730 (7,211) (1,240) 2,310 5,785 6,789EPS (adjusted)(KRW) 4,304 2,994 9,730 (7,211) (1,240) 2,310 5,785 6,789EPS (adjusted fully-diluted)(KRW) 4,304 2,994 9,730 (7,211) (1,240) 2,310 5,785 6,789DPS (KRW) 350 350 350 0 0 0 200 250EBIT 76 114 160 (45) 77 153 250 318EBITDA 179 280 443 374 549 649 814 899

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 52 66 109 (174) (18) 67 167 196Depreciation and amortisation 103 166 283 419 471 496 564 581Tax paid 0 (15) 17 29 (7) (12) (30) (35)Change in working capital (78) (136) (373) (45) (208) (145) (88) (4)Other operational CF items 28 51 10 63 142 63 69 65Cash flow from operations 105 132 46 291 381 468 682 803Capex (115) (324) (1,329) (632) (350) (300) (400) (400)Net (acquisitions)/disposals (5) (4) (35) 7 19 (7) (2) (2)Other investing CF items (25) 38 232 (54) (51) 2 (1) (78)Cash flow from investing (145) (290) (1,132) (680) (383) (305) (403) (480)Change in debt 46 239 705 585 (79) (378) (336) (370)Net share issues/(repurchases) 136 0 334 0 0 300 0 0Dividends paid (3) (4) (6) (7) 0 0 0 (5)Other financing CF items 0 (0) (7) 0 0 (0) (5) (1)Cash flow from financing 179 235 1,026 579 (79) (78) (341) (376)Forex effect/others 10 70 (4) (2) (2) 0 0 0Change in cash 149 147 (64) 188 (83) 85 (62) (53)Free cash flow (10) (192) (1,283) (341) 30 168 282 403

Financial summary


24 October 2013

- 26 -


Key ratios (%)


Company profile

LG Innotek is a global company specialising in components and an affiliate of the LG group. It manufactures and sells core components in the areas of LEDs, PCBs, mobiles, displays, and networks, as well as automotive components.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 162 319 288 467 384 472 410 358Inventory 137 246 365 376 478 562 583 610Accounts receivable 224 619 824 868 1,122 1,249 1,274 1,220Other current assets 71 79 26 25 89 31 33 36Total current assets 596 1,263 1,503 1,736 2,073 2,315 2,301 2,224Fixed assets 415 1,394 2,338 2,305 2,375 2,179 2,015 1,834Goodwill & intangibles 32 53 121 132 145 150 149 224Other non-current assets 41 94 172 237 294 317 344 377Total assets 1,084 2,804 4,134 4,410 4,886 4,961 4,809 4,659Short-term debt 183 293 228 696 670 1,116 881 722Accounts payable 167 409 426 495 740 781 805 837Other current liabilities 133 643 568 283 599 625 631 645Total current liabilities 484 1,345 1,222 1,474 2,009 2,521 2,317 2,204Long-term debt 85 524 1,421 1,551 1,498 684 597 397Other non-current liabilities 28 60 20 60 111 133 140 148Total liabilities 596 1,929 2,664 3,085 3,618 3,338 3,054 2,749Share capital 60 86 101 101 101 117 117 117Reserves/R.E./others 427 797 1,369 1,224 1,167 1,506 1,638 1,793Shareholders' equity 487 883 1,470 1,325 1,268 1,623 1,755 1,910Minority interests 0 (8) 0 0 0 0 0 0Total equity & liabilities 1,084 2,804 4,134 4,410 4,886 4,961 4,809 4,659EV 2,228 2,606 3,483 3,904 3,907 3,451 3,191 2,884Net debt/(cash) 105 498 1,360 1,781 1,784 1,328 1,068 761BVPS (KRW) 40,545 51,517 73,032 65,717 62,876 68,573 74,158 80,697

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) n.a. 54.6 38.1 11.0 16.8 17.5 3.7 4.7EBITDA (YoY) n.a. 56.2 58.3 (15.7) 46.8 18.3 25.4 10.5Operating profit (YoY) n.a. 49.3 40.6 n.a. n.a. 98.6 62.7 27.4Net profit (YoY) n.a. (0.9) 281.8 n.a. n.a. n.a. 150.4 17.3Core EPS (fully-diluted) (YoY) n.a. (30.4) 225.0 n.a. n.a. n.a. 150.4 17.3Gross-profit margin 11.5 12.4 12.6 8.6 10.6 11.7 13.3 14.3EBITDA margin 9.3 9.4 10.8 8.2 10.3 10.4 12.6 13.3Operating-profit margin 4.0 3.8 3.9 n.a. 1.5 2.5 3.9 4.7Net profit margin 2.7 1.7 4.8 (3.2) (0.5) 0.9 2.1 2.4ROAE n.a. 7.5 16.6 n.a. n.a. 3.8 8.1 8.8ROAA n.a. 2.6 5.6 n.a. n.a. 1.1 2.8 3.4ROCE n.a. 9.3 6.6 n.a. 2.2 4.5 7.5 10.2ROIC 12.8 9.0 7.6 (1.5) 2.5 4.2 7.1 9.5Net debt to equity 21.6 56.5 92.5 134.4 140.7 81.8 60.8 39.9Effective tax rate n.a. 22.4 n.a. n.a. n.a. 18.0 18.0 18.0Accounts receivable (days) n.a. 51.8 64.2 67.8 68.3 69.3 71.1 67.2Current ratio (x) 1.2 0.9 1.2 1.2 1.0 0.9 1.0 1.0Net interest cover (x) 8.6 6.2 3.1 n.a. 0.8 2.0 4.8 6.8Net dividend payout 8.1 11.7 3.6 n.a. n.a. 0.0 3.5 3.7Free cash flow yield n.a. n.a. n.a. n.a. 1.4 7.9 13.3 19.0

Translation: K.T. Style check: K.R. Accuracy check: K.T.


- 27 -

■ What's new Delta’s 3Q13 revenue was 2% below our forecast, largely dragged down by the industrial automation (IA) and telecoms businesses. However, the 4Q13 outlook is intact, and we see stronger earnings growth in 2014 than in 2013. The company is due to hold an analyst meeting on 28 October on the business outlook. ■ What's the impact 3Q13 results preview. We are cutting our 3Q13E EPS by 7% to TWD1.84 to reflect lower-than-expected sales, dragged down by the IA and telecoms businesses, and a lower operating margin due to lower-than-expected revenue scale. Our 3Q13E EPS is now 6% below that of the Bloomberg consensus. However, 4Q13 outlook intact. We still expect flat 4Q13 revenue QoQ, and a high single-digit rise YoY, better than the QoQ sequential fall seen over the past three years. This should be largely triggered by strong demand in the passive components business, especially smartphones and tablets, and better IA demand than for 3Q13.

With the yield rate improving to >90% currently and with capacity fully utilised for passive components, which we forecast to account for more than 11% of total sales for 4Q13 (from 10% in 3Q13) on our estimate, we forecast the overall operating margin to improve to 11.5% for 4Q13, from 10.8% for 1H13. Delta’s competitors in the mini choke (a type of passive component) segment recently said the market was a seller’s market with strong demand for smartphones and tablets. With a much bigger scale and much higher yield rate than its peers, Delta should be the main beneficiary of this. In addition, we are not too worried about the capacity expansion in the industry as our tech team forecasts 20-25% YoY smartphone shipment growth for 2014. 2014 earnings growth should outpace 2013 triggered by earnings from higher-margin data centre, IA and passive components. We forecast 2014-15 earnings growth of 16-17% YoY (vs 9% YoY for 2013E). Apart from increased sales volume for the IA and passive-components businesses, recent server shipment data indicates that Delta should benefit from China’s high server shipment growth (double digit YoY for 3Q13 vs. 1% YoY globally), as the country is one of the company’s regions of focus for white-box data centres. We are cutting our 2013 EPS by 3% to reflect our lower earnings assumptions. However, we are revising up our 2014-15E EPS slightly to reflect our higher margin assumptions as a result of the better product mix.

■ What we recommend We are raising our six-month target price to TWD164 (from TWD155), based on an unchanged 2014 target PER of 19x, which is higher than the stock’s past-five-year average. We maintain our Outperform (2) rating. The main risk to our call would be poorer-than-expected end demand. ■ How we differ Our 2013 EPS forecast is slightly below consensus, but our 2014-15E EPS are higher due to our higher operating margin assumptions.

24 October 2013

Solid 4Q13 likely

• The 4Q13 sales sequential trend could be better than in the past three years

• Passive components should drive higher margins in 4Q13

• 2014 should be a better year, with margin upside from the product mix improvement



Information Technology / Taiwan

Delta Electronics2308 TT

BuyOutperform (unchanged)

HoldUnderperformSell

1

2

3

4

5Target (TWD): 155.00 164.00 Upside: 9.7% 24 Oct price (TWD): 149.50

Christine Wang(886) 2 8758 6249

[email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (2.4) (1.5) (1.7)Net profit change (2.6) 1.1 0.5Core EPS (FD) change (2.6) 1.1 0.5

95

106

118

129

140

90

105

120

135

150



Delta Ele (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 99.80-149.50Market cap (USDbn) 12.363m avg daily turnover (USDm) 21.72Shares outstanding (m) 2,428Major shareholder AsusTek Computer Inc. (15.0%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 174,646 190,043 206,741Operating profit (m) 19,261 23,155 26,986Net profit (m) 17,600 20,535 23,785Core EPS (fully-diluted) 7.248 8.456 9.795EPS change (%) 8.9 16.7 15.8Daiwa vs Cons. EPS (%) (1.9) 0.5 5.0PER (x) 20.6 17.7 15.3Dividend yield (%) 3.5 3.5 4.1DPS 5.3 5.2 6.1PBR (x) 4.1 3.8 3.5EV/EBITDA (x) 12.6 10.5 9.1ROE (%) 20.5 22.4 23.7

Information Technology / Taiwan 2308 TT

24 October 2013

- 28 -

Delta: quarterly financial highlights 2012 2013E 2012 2013E 2014E

(TWDm) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

Net sales 40,051 45,962 47,496 42,315 38,831 43,444 46,140 46,231 175,824 174,646 190,043COGS -31,846 -35,388 -35,882 -31,355 -28,887 -32,495 -34,517 -34,291 -134,470 -130,190 -140,436Gross profit 8,205 10,574 11,614 10,960 9,944 10,949 11,623 11,939 41,353 44,455 49,607Operating costs -5,872 -6,370 -6,569 -6,592 -5,704 -6,328 -6,552 -6,611 -25,404 -25,195 -26,451Operating profit 2,333 4,203 5,045 4,368 4,240 4,621 5,071 5,328 15,950 19,261 23,155Non-operating profit 2,375 841 933 1,005 720 616 488 497 5,154 2,321 1,966Pre-tax profit 4,709 5,044 5,978 5,373 4,960 5,237 5,559 5,825 21,104 21,582 25,121Taxes -909 -519 -994 -804 -840 -570 -878 -909 -4,334 -3,982 -4,586Net profit 3,656 3,997 4,707 3,750 4,135 4,263 4,474 4,728 16,110 17,600 20,535

Pre-tax EPS (TWD) 1.96 2.09 2.47 2.22 2.04 2.16 2.29 2.40 8.72 8.89 10.34Net EPS (TWD) 1.52 1.66 1.95 1.55 1.70 1.76 1.84 1.95 6.65 7.25 8.46Outstanding shares (m) 2,406 2,409 2,417 2,421 2,426 2,427 2,428 2,428 2,421 2,428 2,428Operating ratios Gross margins 20.5% 23.0% 24.5% 25.9% 25.6% 25.2% 25.2% 25.8% 23.5% 25.5% 26.1%Operating margin 5.8% 9.1% 10.6% 10.3% 10.9% 10.6% 11.0% 11.5% 9.1% 11.0% 12.2%Pre-tax margin 11.8% 11.0% 12.6% 12.7% 12.8% 12.1% 12.0% 12.6% 12.0% 12.4% 13.2%Net margin 9.1% 8.7% 9.9% 8.9% 10.6% 9.8% 9.7% 10.2% 9.2% 10.1% 10.8%YoY % Net revenue 0% 5% 7% -3% -3% -5% -3% 9% 2% -1% 9%Gross profit -1% 0% 0% -12% -9% -8% -4% 9% 26% 8% 12%Operating income 2% 27% 36% 39% 21% 4% 0% 9% 55% 21% 20%Pre-tax income 18% 28% 52% 97% 5% 4% -7% 8% 45% 2% 16%Net income 17% 56% 65% 66% 13% 7% -5% 26% 37% 9% 17%QoQ % Net revenue -8% 15% 3% -11% -8% 12% 6% 0% Gross profit 4% 29% 10% -6% -9% 10% 6% 3% Operating income 58% 80% 20% -13% -3% 9% 10% 5% Pre-tax income 73% 7% 19% -10% -8% 6% 6% 5% Net income 62% 9% 18% -20% 10% 3% 5% 6%


Delta: Daiwa earnings-forecast revisions 2013E 2014E 2015E (TWDm) Previous New Consensus Previous New Consensus Previous New ConsensusRevenue 178,885 174,646 177,024 192,990 190,043 191,736 210,312 206,741 204,098Diff (%) -2.4% -1.3% -1.5% -0.9% -1.7% 1.3%Gross margin (%) 25.3% 25.5% 25.6% 25.7% 26.1% 26.1% 26.3% 26.7% 26.7%Operating profit 19,815 19,261 19,619 22,902 23,155 23,215 26,851 26,985 26,174Op margin (%) 11.1% 11.0% 11.1% 11.9% 12.2% 12.1% 12.8% 13.1% 12.8%Net profit 18,067 17,600 17950 20,320 20,535 20426 23,670 23,784 22654 EPS 7.44 7.25 7.39 8.37 8.46 8.41 9.75 9.79 9.33 Diff (%) -2.6% -1.9% 1.1% 0.5% 0.5% 5.0%

Source: Daiwa forecasts, Bloomberg

Delta: one-year forward PER bands Delta: QFII holdings

Source: TEJ, Daiwa forecasts Source: TEJ, Daiwa forecasts

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Oct03 Oct04 Oct05 Oct06 Oct07 Oct08 Oct09 Oct10 Oct11 Oct12 Oct13

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24 October 2013

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Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EWorldwide PC shipment (m units) 292 314 358 365 351 339 341 351

Worldwide power supply market (USDbn) YoY %

5.5 (5.5) 7.9 7.0 6.5 6.0 5.5 5.5

China AC motor drive (CNYbn) YoY% 25 12 32 7 7 10 15 15

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EPower electronics 77,134 65,138 75,752 107,086 106,525 99,747 103,081 106,383Energy management 14,611 16,157 25,955 35,430 35,732 35,406 43,543 53,613Other Revenue 50,900 44,216 69,595 29,540 33,567 39,492 43,419 46,745Total Revenue 142,645 125,511 171,302 172,056 175,824 174,646 190,043 206,741Other income 0 0 0 0 0 0 0 1COGS (116,927) (99,143) (134,699) (139,274) (134,470) (130,190) (140,436) (151,520)SG&A (8,138) (7,862) (10,434) (12,478) (14,170) (14,219) (15,338) (16,724)Other op.expenses (6,447) (6,743) (8,901) (9,986) (11,233) (10,976) (11,113) (11,512)Operating profit 11,133 11,762 17,269 10,318 15,950 19,261 23,155 26,986Net-interest inc./(exp.) 926 411 349 508 494 193 166 164Assoc/forex/extraord./others 2,728 1,364 2,528 3,758 4,660 2,128 1,800 1,800Pre-tax profit 14,787 13,538 20,146 14,585 21,104 21,582 25,121 28,950Tax (2,524) (470) (2,271) (2,826) (3,226) (3,197) (3,720) (4,296)Min. int./pref. div./others (2,012) (1,411) 2,128 0 (1,768) (784) (866) (869)Net profit (reported) 10,251 11,657 20,003 11,759 16,110 17,600 20,535 23,785Net profit (adjusted) 10,251 11,657 20,003 11,759 16,110 17,600 20,535 23,785EPS (reported)(TWD) 4.691 5.164 8.353 4.893 6.654 7.248 8.456 9.795EPS (adjusted)(TWD) 4.691 5.164 8.353 4.893 6.654 7.248 8.456 9.795EPS (adjusted fully-diluted)(TWD) 4.691 5.164 8.353 4.893 6.654 7.248 8.456 9.795DPS (TWD) 6.022 3.622 4.436 6.175 3.502 5.290 5.218 6.088EBIT 11,133 11,762 17,269 10,318 15,950 19,261 23,155 26,986EBITDA 15,568 16,562 22,660 16,829 23,979 27,730 32,722 37,599

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 14,787 13,538 20,146 14,585 21,104 21,582 25,121 28,950Depreciation and amortisation 4,435 4,800 5,391 6,511 8,029 8,469 9,567 10,613Tax paid (2,524) (470) (2,271) (2,826) (3,226) (3,197) (3,720) (4,296)Change in working capital (642) 1,300 (6,273) (6,683) (353) (1,243) (1,658) (1,803)Other operational CF items 23 2,221 5,087 6,280 (1,922) (2,226) (2,400) (2,400)Cash flow from operations 16,078 21,389 22,080 17,867 23,632 23,384 26,910 31,064Capex (7,478) (3,970) (8,860) (14,130) (10,996) (8,383) (7,982) (10,512)Net (acquisitions)/disposals 4,987 (5,143) 731 (9,131) (275) 0 0 0Other investing CF items (832) (394) (874) 1,371 (604) (427) (1,161) (918)Cash flow from investing (3,323) (9,507) (9,003) (21,890) (11,875) (8,810) (9,143) (11,431)Change in debt 3,116 7,589 4,781 23,791 (21,718) 6,281 (3,141) 1,570Net share issues/(repurchases) 168 1,490 0 0 0 0 0 0Dividends paid (12,686) (7,915) (10,013) (14,789) (8,417) (12,846) (12,672) (14,785)Other financing CF items (8) 263 662 (1,926) 6,224 (1,207) (1,087) (1,126)Cash flow from financing (9,411) 1,427 (4,569) 7,077 (23,911) (7,771) (16,899) (14,341)Forex effect/others 1,164 1,022 (5,312) 2,447 (2,600) 0 0 0Change in cash 4,508 14,331 3,197 5,500 (14,755) 6,803 867 5,292Free cash flow 8,600 17,419 13,221 3,737 12,635 15,001 18,928 20,552

Financial summary


24 October 2013

- 30 -

Balance sheet (TWDm)

Key ratios (%)


Company profile

Delta Electronics is the global leader in switching power supply products. Its products include switching power supply products, brushless fans, transformers, projector systems and industrial automation systems. Delta is expanding into green-energy related products including solar products, LEDs, electric vehicle motors and E-paper.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 44,609 58,453 61,408 68,424 52,470 58,165 58,328 62,669Inventory 9,245 9,748 14,789 19,126 15,461 16,743 18,061 19,486Accounts receivable 26,635 29,581 34,970 38,938 38,192 38,307 41,684 45,346Other current assets 1,949 1,421 2,076 3,520 15,767 15,673 14,918 10,011Total current assets 82,438 99,203 113,243 130,008 121,890 128,888 132,990 137,513Fixed assets 22,341 20,268 26,901 36,918 34,908 36,520 35,301 34,594Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 12,778 14,442 21,595 26,269 25,090 24,003 29,377 39,977Total assets 117,557 133,913 161,738 193,194 181,889 189,410 197,668 212,083Short-term debt 7,093 11,773 9,878 17,599 5,037 11,318 8,178 9,748Accounts payable 26,504 32,845 39,355 41,281 38,436 38,590 41,627 44,912Other current liabilities 3,886 3,681 9,003 9,873 15,222 12,082 13,615 12,848Total current liabilities 37,483 48,299 58,235 68,753 58,695 61,990 63,420 67,509Long-term debt 66 2,974 9,540 24,862 16,492 16,492 16,492 16,492Other non-current liabilities 7,421 6,795 6,571 7,093 7,298 7,298 6,263 7,592Total liabilities 44,969 58,068 74,346 100,708 82,485 85,780 86,175 91,592Share capital 21,850 22,573 23,948 24,034 24,212 24,284 24,284 24,284Reserves/R.E./others 36,493 40,728 51,883 53,787 59,454 63,609 71,472 80,471Shareholders' equity 58,343 63,301 75,831 77,821 83,666 87,893 95,755 104,754Minority interests 14,245 12,544 11,561 14,665 15,738 15,738 15,738 15,738Total equity & liabilities 117,557 133,913 161,738 193,194 181,889 189,410 197,668 212,084EV 339,835 331,878 332,611 351,744 347,837 348,423 345,120 342,348Net debt/(cash) (37,450) (43,706) (41,990) (25,962) (30,941) (30,355) (33,658) (36,430)BVPS (TWD) 26.701 28.043 31.665 32.379 34.556 36.194 39.432 43.138

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 9.2 (12.0) 36.5 0.4 2.2 (0.7) 8.8 8.8EBITDA (YoY) (19.8) 6.4 36.8 (25.7) 42.5 15.6 18.0 14.9Operating profit (YoY) (29.2) 5.7 46.8 (40.3) 54.6 20.8 20.2 16.5Net profit (YoY) (31.9) 13.7 71.6 (41.2) 37.0 9.3 16.7 15.8Core EPS (fully-diluted) (YoY) (34.4) 10.1 61.7 (41.4) 36.0 8.9 16.7 15.8Gross-profit margin 18.0 21.0 21.4 19.1 23.5 25.5 26.1 26.7EBITDA margin 10.9 13.2 13.2 9.8 13.6 15.9 17.2 18.2Operating-profit margin 7.8 9.4 10.1 6.0 9.1 11.0 12.2 13.1Net profit margin 7.2 9.3 11.7 6.8 9.2 10.1 10.8 11.5ROAE 17.4 19.2 28.8 15.3 20.0 20.5 22.4 23.7ROAA 8.7 9.3 13.5 6.6 8.6 9.5 10.6 11.6ROCE 14.3 13.8 17.5 8.5 12.5 15.3 17.3 19.1ROIC 25.9 33.8 39.5 14.9 20.0 23.2 26.1 28.4Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cashEffective tax rate 17.1 3.5 11.3 19.4 15.3 14.8 14.8 14.8Accounts receivable (days) 73.3 81.7 68.8 78.4 80.1 79.9 76.8 76.8Current ratio (x) 2.2 2.1 1.9 1.9 2.1 2.1 2.1 2.0Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 128.4 70.1 53.1 126.2 52.6 73.0 61.7 62.2Free cash flow yield 2.4 4.8 3.6 1.0 3.5 4.1 5.2 5.7


- 31 -

■ What's new Chroma is due to release its 3Q13 results on 28 October. We expect the results to miss the consensus forecasts. However, we see YoY revenue growth turning positive from 4Q13, for the first time since 3Q11. In addition, we believe long-term earnings growth remains intact, with IC testing and automation the main drivers. We remain positive on the stock. ■ What's the impact IC testing and automation projects to drive earnings growth. In our view, these two products’ secular growth trends should drive double-digit-percentage earnings growth YoY for the next three years. Our recent checks show that the IC testing order size in 2014 should be still larger than 2013 based on the current outlook. In addition, in terms of its automation projects, the company might be able to complete its first project in the next few months; and

the earnings from this project would contribute mainly in 2014. For every additional single new automation project the company completes, we estimate there is 5-10% earnings upside to our 2014 EPS forecast. 4Q13 revenue should exceed usual seasonal revenue levels. Even though 3Q13 earnings might be weaker than the consensus forecasts because of lower-than-expected revenue from the power and LED businesses, on the back of poor demand for PCs (power) and later-than-expected kickoff for LEDs, Chroma’s revenue growth should start to turn positive YoY in 4Q13, mainly triggered by stronger revenue for the solar business, based on current order visibility. This would be the first positive revenue growth recorded since 3Q11. In terms of a sequential comparison, we expect 4Q13 revenue to be up 3% QoQ, which would be better than the double-digit percentage decline seen over the past three years. In sum, we are cutting our 2013-14 EPS forecasts by 10-11% to reflect lower-than-expected revenue from the power business. However, we keep our 2015 EPS forecast unchanged as we are confident about the company’s long-term development of its competitive IC and automation businesses. ■ What we recommend We maintain our Outperform (2) rating and six-month target price of TWD75, now based on a target 2014E PER of 18x (the average PER over the past two years), from 16x previously (the average over the past five years). We note the automation sector has recently rerated on expectations of a stronger demand recovery from China and Europe.

The key downside risk to our view would be lower-than-expected spending on automation due to poorer-than-expected demand. ■ How we differ Our 2013E EPS is 4% below consensus, reflecting recent weakness in the power-related business. However, our 2014-15E EPS are above consensus to reflect our positive view on Chroma’s long-term development of its competitive IC and automation businesses.

24 October 2013

Long-term growth remains intact

• 3Q13 earnings could miss consensus forecasts

• However, 4Q13 YoY revenue growth likely to turn positive for the first time since 3Q11

• Long-term earnings growth remains intact



Information Technology / Taiwan

Chroma ATE2360 TT

BuyOutperform (unchanged)

HoldUnderperformSell

1

2

3

4

5Target (TWD): 75.00 75.00 Upside: 14.9% 24 Oct price (TWD): 65.30

Christine Wang(886) 2 8758 6249

[email protected]

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (7.9) (7.2) (7.8)Net profit change (10.4) (11.2) -Core EPS (FD) change (10.4) (11.2) -

80

90

100

110

120

45

53

60

68

75



Chroma Ate (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 50.00-73.50Market cap (USDbn) 0.843m avg daily turnover (USDm) 2.69Shares outstanding (m) 377Major shareholder DB & Janus Global Fund (5.8%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 4,066 4,981 5,446Operating profit (m) 937 1,422 1,686Net profit (m) 1,291 1,553 2,017Core EPS (fully-diluted) 3.427 4.121 5.352EPS change (%) 36.6 20.2 29.9Daiwa vs Cons. EPS (%) (4.0) 0.4 4.1PER (x) 19.1 15.8 12.2Dividend yield (%) 4.2 5.0 6.6DPS 2.7 3.3 4.3PBR (x) 3.1 3.0 2.8EV/EBITDA (x) 20.2 14.3 12.4ROE (%) 16.5 19.4 23.9


24 October 2013

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Chroma: quarterly financial data 2012 2013E 2012 2013E 2014E

(TWDm) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

Net sales 875 1,122 1,266 911 821 1,001 1,106 1,138 4,174 4,066 4,981COGS -396 -498 -614 -396 -363 -457 -482 -500 -1,904 -1,802 -2,227Gross profit 479 623 652 515 458 544 624 638 2,269 2,264 2,754Operating costs -315 -359 -377 -343 -312 -354 -333 -328 -1,394 -1,327 -1,332Operating profit 164 264 275 172 146 190 291 310 875 937 1,422Non-operating profit 19 93 80 29 94 264 70 61 221 489 342Pre-tax profit 183 357 355 201 240 454 360 371 1,096 1,426 1,764Taxes -19 -73 -41 -18 -21 -25 -43 -45 -151 -134 -211Net profit 164 284 314 183 219 429 317 326 945 1,291 1,553

Pre-tax EPS (TWD) 0.49 0.95 0.94 0.53 0.64 1.21 0.96 0.98 2.91 3.78 4.68Net EPS (TWD) 0.44 0.75 0.83 0.49 0.58 1.14 0.84 0.87 2.51 3.43 4.12Outstanding shares (m) 377 377 377 377 377 377 377 377 377 377 377Operating Ratios Gross margin 54.7% 55.6% 51.5% 56.5% 55.8% 54.3% 56.4% 56.1% 54.4% 55.7% 55.3%Operating margin 18.8% 23.6% 21.7% 18.9% 17.8% 19.0% 26.3% 27.3% 21.0% 23.0% 28.6%Pre-tax margin 20.9% 31.8% 28.0% 22.1% 29.3% 45.4% 32.6% 32.6% 26.3% 35.1% 35.4%Net margin 18.8% 25.3% 24.8% 20.1% 26.6% 42.9% 28.7% 28.7% 22.6% 31.8% 31.2%YoY% Net revenue -75% -73% -64% -70% -6% -11% -13% 25% -22% -3% 23%Gross profit -50% -48% -34% -33% -4% -13% -4% 24% -18% 0% 22%Operating income -60% -57% -33% -16% -11% -28% 6% 80% -34% 7% 52%Pre-tax income -59% -42% -30% -15% 31% 27% 2% 85% -36% 30% 24%Net income -58% -47% -26% 20% 33% 51% 1% 78% -38% 37% 20%QoQ% Net revenue -71% 28% 13% -28% -10% 22% 10% 3%Gross profit -38% 30% 5% -21% -11% 19% 15% 2%Operating income -20% 61% 4% -37% -15% 30% 53% 7%Pre-tax income -22% 95% -1% -43% 20% 89% -21% 3%Net income 8% 73% 10% -42% 20% 96% -26% 3%


Chroma: Daiwa earnings-forecast revisions 2013E 2014E 2015E (TWDm) Previous New Consensus Previous New Consensus Previous New ConsensusRevenue 4,414 4,066 4,287 5,368 4,981 5,415 5,905 5,446 5,511Diff (%) -7.9% -5.2% -7.2% -8.0% -7.8% -1.2%Gross Margin (%) 56.5% 55.7% 55.3% 55.7% 55.3% 55.1% 55.7% 55.4% 55.7%Operating profit 1,200 937 1,005 1,682 1,422 1,350 1,980 1,686 1,712Operating Margin (%) 27.2% 23.0% 23.4% 31.3% 28.6% 24.9% 33.5% 31.0% 31.1%Net profit 1,441 1,291 1,345 1,749 1,553 1,547 2,031 2,031 1,936EPS (TWD) 3.82 3.43 3.57 4.64 4.12 4.11 5.39 5.39 5.14 Diff (%) -10.4% -3.9% -11.2% 0.4% 0.0% 4.9%

Source: Bloomberg, Daiwa forecasts

Chroma: one-year forward PER Chroma: QFII holdings

Source: TEJ, Daiwa estimates Source: TEJ

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Chroma


24 October 2013

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Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EClean tech revenue share (%) 10.8 19.7 30.3 32.1 12.2 9.7 16.0 15.3Clean tech sales YoY (%) n.a. 50.9 151.4 0.4 (70.2) (23.2) 103.0 4.6IC revenue growth YoY (%) 0.0 (38.8) 0.5 (18.9) 46.8 38.9 26.6 25.5

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ELED testing 71 85 370 352 132 101 466 521Solar power testing 42 97 998 970 115 107 137 72Other Revenue 4,044 3,262 4,271 4,017 3,927 3,859 4,379 4,853Total Revenue 4,158 3,444 5,640 5,338 4,174 4,066 4,981 5,446Other income 0 0 0 0 0 0 0 0COGS (1,918) (1,701) (2,544) (2,562) (1,904) (1,802) (2,227) (2,429)SG&A (680) (624) (867) (827) (757) (729) (732) (731)Other op.expenses (557) (481) (603) (630) (637) (598) (600) (600)Operating profit 1,003 639 1,626 1,319 875 937 1,422 1,686Net-interest inc./(exp.) (15) (7) (1) (1) (3) 14 11 (3)Assoc/forex/extraord./others 275 327 361 400 223 474 330 642Pre-tax profit 1,263 960 1,986 1,717 1,096 1,425 1,764 2,324Tax (158) (97) (174) (195) (151) (134) (211) (308)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 1,105 863 1,812 1,523 945 1,291 1,553 2,017Net profit (adjusted) 1,105 863 1,812 1,523 945 1,291 1,553 2,017EPS (reported)(TWD) 3.348 2.467 5.001 4.041 2.509 3.427 4.121 5.352EPS (adjusted)(TWD) 3.348 2.467 5.001 4.041 2.509 3.427 4.121 5.352EPS (adjusted fully-diluted)(TWD) 3.348 2.467 5.001 4.041 2.509 3.427 4.121 5.352DPS (TWD) 3.615 2.014 2.010 3.800 2.500 2.742 3.297 4.313EBIT 1,003 639 1,626 1,319 875 937 1,422 1,686EBITDA 1,203 837 1,811 1,495 1,075 1,139 1,623 1,891

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 1,263 960 1,986 1,717 1,096 1,425 1,764 2,324Depreciation and amortisation 200 197 185 176 200 201 201 205Tax paid (158) (97) (174) (195) (151) (134) (211) (308)Change in working capital 188 72 (669) 66 414 1,472 (139) (95)Other operational CF items (96) (177) 353 (38) (346) (399) (300) (611)Cash flow from operations 1,397 956 1,681 1,727 1,213 2,566 1,315 1,515Capex (78) (152) (137) (109) (397) (65) (82) (100)Net (acquisitions)/disposals (187) (100) (48) (52) (187) (97) (96) (108)Other investing CF items 2 5 1 (182) (214) 0 0 0Cash flow from investing (263) (247) (184) (343) (797) (162) (178) (208)Change in debt 90 (130) (590) (150) 330 (25) (109) 12Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (1,100) (664) (703) (1,377) (942) (1,033) (1,242) (1,625)Other financing CF items (105) 30 61 0 (30) 13 8 5Cash flow from financing (1,115) (764) (1,232) (1,526) (642) (1,045) (1,343) (1,608)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 18 (56) 265 (142) (227) 1,359 (206) (301)Free cash flow 1,318 803 1,544 1,618 816 2,501 1,232 1,415

Financial summary


24 October 2013

- 34 -

Balance sheet (TWDm)

Key ratios (%)


Company profile

Established in 1984, Chroma ATE manufactures electronics-testing and -measurement equipment. As a leading own-brand turnkey test and measurement solution provider globally, the company’s client base covers different technology sub-sectors. Previously, it focused on providing services to traditional IT companies, but since 2007 Chroma has been providing services to clean-tech companies such as electric-vehicle makers, LED companies, and solar companies.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 454 403 665 654 547 1,906 1,700 1,413Inventory 1,050 1,008 1,367 1,373 1,073 231 288 324Accounts receivable 1,200 1,628 2,015 1,826 1,736 545 673 753Other current assets 127 159 190 70 159 159 159 159Total current assets 2,831 3,197 4,237 3,924 3,515 2,841 2,819 2,650Fixed assets 1,987 2,023 2,044 2,055 2,351 1,985 1,904 1,850Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 2,916 3,268 3,354 3,568 3,693 4,189 4,585 5,304Total assets 7,734 8,488 9,634 9,547 9,559 9,014 9,308 9,804Short-term debt 770 790 200 50 380 355 246 258Accounts payable 519 895 1,125 963 733 172 218 240Other current liabilities 166 61 422 347 185 185 185 185Total current liabilities 1,455 1,746 1,747 1,360 1,298 712 650 683Long-term debt 0 0 0 0 0 0 0 0Other non-current liabilities 223 293 329 422 465 465 465 465Total liabilities 1,677 2,039 2,076 1,782 1,764 1,178 1,115 1,148Share capital 3,299 3,498 3,623 3,768 3,768 3,768 3,768 3,768Reserves/R.E./others 2,758 2,951 3,935 3,997 4,027 4,069 4,425 4,888Shareholders' equity 6,057 6,449 7,558 7,765 7,795 7,837 8,193 8,656Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 7,734 8,488 9,634 9,547 9,559 9,014 9,308 9,804EV 24,918 24,990 24,137 23,998 24,435 23,051 23,149 23,447Net debt/(cash) 316 387 (465) (604) (167) (1,551) (1,453) (1,155)BVPS (TWD) 18.359 18.437 20.863 20.610 20.689 20.800 21.746 22.974

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) (1.2) (17.2) 63.7 (5.3) (21.8) (2.6) 22.5 9.3EBITDA (YoY) (28.7) (30.4) 116.4 (17.4) (28.1) 5.9 42.5 16.5Operating profit (YoY) (34.6) (36.2) 154.3 (18.9) (33.6) 7.0 51.8 18.6Net profit (YoY) (28.2) (21.9) 109.9 (16.0) (37.9) 36.6 20.2 29.9Core EPS (fully-diluted) (YoY) (33.8) (26.3) 102.7 (19.2) (37.9) 36.6 20.2 29.9Gross-profit margin 53.9 50.6 54.9 52.0 54.4 55.7 55.3 55.4EBITDA margin 28.9 24.3 32.1 28.0 25.8 28.0 32.6 34.7Operating-profit margin 24.1 18.6 28.8 24.7 21.0 23.0 28.6 31.0Net profit margin 26.6 25.1 32.1 28.5 22.6 31.8 31.2 37.0ROAE 17.7 13.8 25.9 19.9 12.1 16.5 19.4 23.9ROAA 13.8 10.6 20.0 15.9 9.9 13.9 16.9 21.1ROCE 14.3 9.1 21.7 16.9 11.0 11.5 17.1 19.4ROIC 13.3 8.7 21.3 16.4 10.2 12.2 19.2 20.5Net debt to equity 5.2 6.0 net cash net cash net cash net cash net cash net cashEffective tax rate 12.5 10.1 8.8 11.3 13.8 9.4 12.0 13.2Accounts receivable (days) 123.5 149.9 117.9 131.3 155.7 102.4 44.6 47.8Current ratio (x) 1.9 1.8 2.4 2.9 2.7 4.0 4.3 3.9Net interest cover (x) 65.9 95.2 1,261.2 918.4 327.8 n.a. n.a. 483.3Net dividend payout 108.0 81.6 40.2 94.0 99.7 80.0 80.0 80.6Free cash flow yield 5.4 3.3 6.3 6.6 3.3 10.2 5.0 5.8


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Shinichiro Ozaki (81) 3 5555-7062 [email protected] Jiro Iokibe (81) 3 5555-7047 [email protected]

What’s new We present our investment opinions on the four major nonferrous metal firms based on their 1Q FY13 results and recent performance. We assign a 2 (Outperform) rating to Mitsubishi Materials (5711) and Sumitomo Metal Mining (5713) and a 3 (Neutral) rating to Mitsui Mining & Smelting (5706) and Dowa Holdings (5714). What’s the impact Soaring nonferrous metal prices in the 2000s played a large part in strategies for investing in nonferrous metal stocks at that time. Looking at the share price performance of the four firms vs. TOPIX since 2005, we note that Sumitomo Metal Mining, which focuses its managerial resources on upstream operations, outperformed the most, while Mitsui Mining & Smelting, which focuses on downstream operations, underperformed the most. We think copper and other nonferrous metal prices are unlikely to rise over the medium term. Indeed, new projects and project expansions look set to increase supply, the US will likely pare back monetary easing, and China is shifting further toward a consumer-driven economy. In the absence of price increases, we think the performance of firms’ individual

operations will be the main share price catalyst for the time being. Following years of diversification and streamlining, the four firms now operate across a broad range of businesses. Mitsui Mining & Smelting focuses on downstream operations. Mitsubishi Materials allocates its managerial resources so that value can be added to each of its materials at each stage of the operation, all the way from upstream to downstream. Sumitomo Metal Mining concentrates on the upstream fields of mineral resources and smelting & refining. And environmental management & recycling is a core operation for Dowa Holdings. We think the firms’ market share and technological and cost competitiveness in each of their core income-generating areas should ensure those businesses remain earnings sources. Of note, we are focusing on earnings expansion in Mitsubishi Materials’ cement business, as growth in this area has been outpacing our expectations. What we recommend We are focusing on Mitsubishi Materials and Sumitomo Metal Mining among the four major nonferrous metal firms. Mitsubishi Materials is our top pick. The company’s robust cement business stands out among its operations, all of which are competitive, and valuation multiples look attractive. We are also bullish on Sumitomo Metal Mining. Even allowing for the impact of low nonferrous metal

prices, the shares look undervalued considering high expected shareholder returns seem likely based on the company’s emphasis on overseas mineral resources. Dowa Holdings should grow, sustained by steady earnings in its environment management & recycling, electronic materials, metal processing, and heat treatment segments, but does not look undervalued. At current copper prices, Mitsui Mining & Smelting looks likely to derive limited profit from its Caserones copper mine, the cornerstone of its profit growth prospects. In this report, we have based our six-month target prices mainly on price-to-book multiples. We calculated fair P/Bs based on historical multiples and the balance between cost of equity and near-term ROE estimates. Ratings and target prices for individual stocks

Mitsui Mining & Smelting (5706) Initiate with 3 rating Target price Y290 (23 Oct close: Y252)

Mitsubishi Materials (5711) Initiate with 2 rating Target price Y440 (Y383)

Sumitomo Metal Mining (5713) Initiate with 2 rating Target price Y1,530 (Y1,380)

Dowa Holdings (5714) Initiate with 3 rating Target price Y900 (Y907)

Nonferrous metals / Japan


Spotlight on management capabilities

• Initiate coverage on four nonferrous metal majors • Given expectations for sluggish nonferrous metal prices, performance

of individual businesses likely to be key share price catalyst • Assign 2 rating to Mitsubishi Materials, for robust cement ops, and

Sumitomo Metal Mining, for attractive valuation multiples

Investment Opinion on Four Nonferrous Metal Majors

Abridged translation

How do we justify our view?How do we justify our view?

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Drive to maximize corporate value yet to be priced in Takumi Sado (81) 3 5555-7085 [email protected]

• 2Q op profit beat firm’s target,

our estimate; firm raised FY13 projections

• Aims to maximize FCF, achieve growth not dependent on HDD motors

• Firm declared 2nd high growth stage; we see return to valuation premium

What’s new Nidec held an analysts’ briefing covering the 2Q FY13 results announced 23 October. We report on our impressions. What’s the impact Nidec reported 2Q operating profit of Y21.3 billion (up 9% y/y; 18% q/q), surpassing both its projection of Y17 billion and our estimate of Y19.6 billion. The firm raised its full-FY13 operating profit target from Y75 billion to Y80 billion, while also announcing a dividend hike. We highlight four key takeaways: (1) the automotive, appliance, commercial & industrial products segment, positioned as a new growth driver, set a new profit record on a quarterly basis, (2) HDD motor operations recorded q/q profit growth despite a sales decline, (3)

small precision motors outside the HDD area recorded higher-than-expected growth, with sales up 13.6% from 1Q, and (4) the firm highlighted its intention to curb capital spending (via sharing of group production facilities, etc.) and achieve cost synergies (Y30 bil in FY15) supported by the launch of a global business strategy office. As such, we think that both profit growth not dependent on HDD motors and maximization of free cash flow (FCF) are likely to accelerate. Of particular note, management made a declaration that the firm has now entered a second high-growth phase, having concluded a transformation of its business portfolio during FY08-12 (See Chart 3). We will revisit our earnings outlook after conducting interviews with company officials, but at this point, we have made a provisional upward revision to our estimates to reflect the 2Q overshoot as well as the clarification of group cost synergies. We now call for operating profit of Y83 billion in FY13 (up 4.7-fold y/y, previous forecast of Y80 bil) on sales of Y865 billion (up 22% y/y), followed by operating profit of Y105 billion in FY14 (up 27%, Y100 bil) on sales of Y903 billion (up 4%). What we recommend The shares are trading at 15.8X our new FY14 EPS estimate, slightly below the average of 17-18X for major electronic components makers (excl. anomalies). Nidec has been successful in reducing working capital (working capital/average monthly sales down from 2.9 months of sales in FY11 to 1.8 months in most recent quarter) on the back of a drive to improve its cash conversion cycle. Management has been working to maximize FCF

from various angles, including efforts to improve tax management (effective tax rate now in mid-20% range), and lower interest rates on debt. The firm now aims to accelerate FCF growth by curbing capital spending via more effective use of production facilities across the group. We reached a DCF theoretical value of over Y16,000 for Nidec based on a simplified DCF model (using forecasts for next two FYs, assuming zero growth from third FY). See Chart 4 (theoretical value pushed up by maximization of FCF as well as low discount rate

Electric appliances / Japan24 October 2013

Japanese report: 24 Oct 13

Nidec 6594 | TSE 1

Buy (unchanged) Outperform Neutral Underperform

Target price: Y11,500 Up/downside: +25.7% Share price (23 Oct): Y9,150 Sell

Share Price Chart

Source: Compiled by Daiwa.

Market Data (consol) 12-month range (Y) 4,550-9,330

Market cap (Y mil; 23 Oct) 1,227,739

Shares outstanding (000; 10/13) 134,179

Foreign ownership (%; 3/13) 23.5

Investment Indicators (consol)

3/13 3/14 E 3/15 E

P/E (X) 154.4 20.7 15.8

EV/EBITDA (X) 24.1 10.5 8.8

P/B (X) 2.97 - -

Dividend yield (%) 0.93 0.98 0.98

ROE (%) 2.0 - -

Income Summary (consol)

(Y mil; SEC) 3/13 3/14 E 3/15 E

Sales 709,270 865,000 903,000

Op profit 17,598 83,000 105,000

Pretax income 13,398 81,600 105,000

Net income 7,986 59,300 77,500

EPS (Y) 59.3 441.9 577.6

DPS (Y) 85.00 90.00 90.00

See end of report for notes concerning indicators.

4,000

5,300

6,600

7,900

9,200

10/10 6/11 1/12 8/12 3/13 10/13

(Y)

40

60

80

100

120Relative to TOPIX

Nidec (6594) 24 October 2013

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arising from financial leverage, low cost of debt capital). Of note, the DCF theoretical values on this methodology for major peers are not far off from their current share prices. As such, the gap between Nidec’s share price and our DCF theoretical value is striking. While Nidec shares have risen meaningfully, we suspect that the firm’s efforts to maximize corporate value have yet to be priced in.

In light of this, we see a possibility that the valuation premium previously afforded to the shares will be restored, triggered by the firm’s declaration that it has entered a second high-growth period. We set a six- to 12-month target price of Y11,500, equivalent to roughly 20X our FY14 EPS estimate. Of note, we arrived at the price objective by applying a two-to-three

multiple point premium to the average P/E for the major electronic component makers excluding anomalies. The increase from our previous price target of Y10,000 reflects our raised earnings forecasts as well as a higher average P/E afforded to the peer group. We also maintain our 1 (Buy) rating.

Chart 1: Quarterly Earnings by Segment (Y mil) FY12 13 E 14 E 13 CP 1Q 2Q 3Q 4Q (y/y %) 1Q 2Q (y/y %) (q/q %) 1H 2H E (y/y %) (y/y %) (y/y %)Sales 179,021 174,519 169,670 186,060 709,270 (3.9) 211,276 218,358 (25.1) (3.4) 429,634 435,366 865,000 (22.0) 903,000 (4.4) 850,000 (19.8) Small precision motors 89,131 79,321 74,513 76,759 319,724 (-3.5) 87,815 92,640 (16.8) (5.5) 180,455 178,545 359,000 (12.3) 360,000 (0.3) HDD motors 48,442 40,163 36,935 39,887 165,427 (-6.5) 46,598 45,829 (14.1) (-1.7) 92,427 88,573 181,000 (9.4) 172,000 (-5.0) Other small precision motors 40,689 39,158 37,578 36,872 154,297 (-0.1) 41,217 46,811 (19.5) (13.6) 88,028 89,972 178,000 (15.4) 188,000 (5.6) Automotive, appliance, commercial &

industrial products 53,973 58,660 61,605 74,226 248,464 (19.2) 84,064 79,984 (36.4) (-4.9) 164,048 173,952 338,000 (36.0) 385,000 (13.9)

Appliance, commercial & industrial motors 31,970 37,566 41,422 50,836 161,794 (30.3) 58,112 53,790 (43.2) (-7.4) 111,902 117,298 229,200 (41.7) 260,000 (13.4) Automotive motors 22,003 21,094 20,183 23,390 86,670 (2.8) 25,952 26,194 (24.2) (0.9) 52,146 56,654 108,800 (25.5) 125,000 (14.9) Machinery 15,704 15,562 15,233 17,027 63,526 (-2.1) 19,929 23,788 (52.9) (19.4) 43,717 43,283 87,000 (37.0) 78,000 (-10.3) Electronic & optical components 18,470 18,957 16,057 15,704 69,188 (-0.3) 17,511 19,918 (5.1) (13.7) 37,429 35,571 73,000 (5.5) 72,000 (-1.4) Other 1,743 2,019 2,262 2,344 8,368 (3.7) 1,957 2,028 (0.4) (3.6) 3,985 4,015 8,000 (-4.4) 8,000 (0.0)Operating profit 22,183 19,540 1,303 -25,428 17,598 (-75.9) 18,047 21,290 (9.0) (18.0) 39,337 43,663 83,000 (371.6) 105,000 (26.5) 80,000 (354.6) Small precision motors 17,825 14,221 2,575 -11,972 22,649 (-58.2) 12,013 14,328 (0.8) (19.3) 26,341 26,959 53,300 (135.3) 56,700 (6.4) Automotive, appliance, commercial &

industrial products 2,728 2,199 741 -2,990 2,678 (-71.4) 4,515 5,077 (130.9) (12.4) 9,592 12,408 22,000 (721.5) 37,500 (70.5)

Machinery 1,902 2,187 2,015 910 7,014 (5.6) 3,281 2,893 (32.3) (-11.8) 6,174 6,126 12,300 (75.4) 13,200 (7.3) Electronic & optical components 1,174 1,907 -2,092 -9,454 -8,465 (loss) -281 791 (-58.5) (profit) 510 1,390 1,900 (profit) 3,800 (100.0) Other 213 232 229 219 893 (-11.7) 175 1 (-99.6) (-99.4) 176 324 500 (-44.0) 800 (60.0) Eliminations/unallocated -1,659 -1,206 -2,165 -2,141 -7,171 (-) -1,656 -1,800 (-) (-) -3,456 -3,544 -7,000 (-) -7,000 (-)Pretax income 18,334 18,243 1,259 -24,438 13,398 (-81.1) 17,366 21,075 (15.5) (21.4) 38,441 43,159 81,600 (509.0) 105,000 (28.7) 78,000 (482.2)Net income 13,282 12,917 894 -19,107 7,986 (-80.4) 13,346 13,757 (6.5) (3.1) 27,103 32,197 59,300 (642.5) 77,500 (30.7) 55,000 (588.7)Inventories 97,395 95,564 106,178 99,826 108,268 105,764 (10.7) (-2.3) Capex - - - - 61,368 (48.1) - - 20,606 22,894 43,500 (-29.1) 50,000 (14.9) 43,500 (-29.1)Depreciation - - - - 38,255 (17.5) - - 21,983 21,517 43,500 (13.7) 45,000 (3.4) 43,500 (13.7)R&D - - - - 34,278 (14.1) - - 19,003 18,997 38,000 (10.9) 38,000 (0.0) 38,000 (10.9)Cash flow - - - - 46,241 (-36.9) - - 49,086 53,714 102,800 (122.3) 122,500 (19.2) 98,500 (113.0)EBITDA - - - - 55,853 (-47.1) - - 61,320 65,180 126,500 (126.5) 150,000 (18.6) 123,500 (121.1)

Source: Company materials; compiled by Daiwa.

E: Daiwa estimates. CP: Company projections.

Chart 2: HDD Market and Nidec’s Motor Shipments (mil units) FY12 13 1Q 2Q 3Q 4Q 1Q 2Q 3Q CP 4Q CP Nidec’s motor shipments 124 108 97 88 102 101 100 95 Total HDD shipments in market 157 139 136 136 133 138 135 130

Source: Company materials; compiled by Daiwa.

CP: Company projections

Nidec (6594): Income Summary (Y mil; y/y %)

Year to Sales Op profit Pretax income Net income EPS (Y) CFPS (Y) DPS (Y) Consol 3/11 675,988 (18) 92,869 (17) 81,966 (8) 52,333 (1) 375.9 621.5 85.00(SEC) 3/12 682,320 (1) 73,070 (-21) 70,856 (-14) 40,731 (-22) 296.3 533.0 90.00 3/13 709,270 (4) 17,598 (-76) 13,398 (-81) 7,986 (-80) 59.3 343.3 85.00 3/14 E 865,000 (22) 83,000 (372) 81,600 (509) 59,300 (643) 441.9 766.1 90.00 3/15 E 903,000 (4) 105,000 (27) 105,000 (29) 77,500 (31) 577.6 913.0 90.00 3/14 PE 856,000 (21) 80,000 (355) 78,600 (487) 57,600 (621) 429.3 749.7 85.00 3/15 PE 890,000 (4) 100,000 (25) 100,000 (27) 74,000 (28) 551.5 886.9 85.00 3/14 CP 850,000 (20) 80,000 (355) 78,000 (482) 55,000 (589) 404.3 - 90.00 3/14 PCP 820,000 (16) 75,000 (326) 73,000 (445) 53,500 (570) 398.7 - 85.00E: Daiwa estimates. PE: Previous Daiwa estimates. CP: Company projections. PCP: Previous company projections.

Notes: 1) Net income attributable to shareholders of parent. 2) We intend to revisit our forecasts after company interview.

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Hirosuke Tai (81) 3 5555-7069 [email protected]

What’s new We visited two major Chinese players in the heavy electrical machinery field, Shanghai Electric Group Co. and Dongfang Electric Corp., holding interviews with company officials and touring production facilities. We present a brief summary of our impressions. What’s the impact We highlight three focal points of our research trip. First, we investigated product lineup expansion at Shanghai Electric and Dongfang Electric, as well as the range of products they are capable of manufacturing, in response to diversification of fuel sources. Specifically, we focused on moves to expand beyond steam turbines, boilers, and generators, and strengthen operations in gas turbines and nuclear power. Second, we focused on their export businesses. While Shanghai Electric and Dongfang Electric boast overwhelming competitive strength in the domestic Chinese market for heavy electrical machinery, boosting exports to other countries stands out as a pressing issue from the perspective of their future competitiveness. We explored the question of whether they will be capable of differentiating themselves from local competition in India, a

major demand market, and ultimately how much room they have to expand exports to third-country markets. Finally, we considered the implications for Japan’s heavy electrical machinery firms. Our aim was to gauge the potential impact of Shanghai Electric’s and Dongfang Electric’s growth on Japanese companies that are joint venture partners or that participate in technology tie-ups. To sum up our key conclusions, while both Shanghai Electric and Dongfang Electric have started to manufacture and sell gas turbines, their production volumes are still low, given sluggish domestic Chinese demand amid high gas prices. The two firms aim to expand exports, particularly to the Middle East and India, but their export ratios are still not particularly high at this juncture, at only around 20-30% of total shipments. Meanwhile, local Indian makers are growing on the back of technology provided by Japanese and European partners, following a similar pattern as Chinese companies in the past. As a result, we see a growing likelihood that Chinese heavy electrical machinery players will not have an easy road to sustained export expansion. In the past, Japan’s heavy electrical machinery firms provided local Chinese makers with technology,

seeing this relationship as the best avenue to secure low-cost production bases in China. However, Chinese manufacturers now supply roughly 60-70% of global demand for boilers and steam turbines, and the relationship is transforming from teacher/pupil to direct competition. However, the Chinese players still have a low presence in more advanced areas such as gas turbines, high-capacity generators, and supercritical and ultra supercritical steam turbines, and we sense that Japanese firms will be able to maintain their competitive superiority in these markets for the time being. In our view, local Indian manufacturers could emerge as new competitive threats to Chinese firms down the road. A large number of Japanese and European players are establishing joint ventures in India and/or providing technology to local partners there. As such, we will pay close attention to the potential impact of the competition between Chinese and Indian firms on Japanese and European makers.

Capital goods / Japan


China Research Trip • Visited heavy electrical machinery makers Shanghai Electric,

Dongfang Electric • Competitive strength in steam turbines, boilers steadily increasing,

but gas turbines to show only moderate growth given uncertain demand outlook

• Chinese firms’ initiatives to step up exports pose future risk to Japanese players

• Competition between Chinese, Indian firms will be midterm focal point

Capital Goods Sector Update Volume 18

How do we justify our view?How do we justify our view?

- 39 -

■ What’s new?

• September’s exports were up 1.5% YoY, which is higher than -1.3% YoY for August and the Bloomberg consensus forecast of -3.0% YoY.

• Imports were up 0.4% YoY, also better than -0.2% YoY for August and the -2.0% YoY Bloomberg consensus forecast.

• A HKD42.0bn trade deficit was recorded for September, versus HKD39.6bn for August.

■ Our comments Shipment of consumer electronics continued to lend some support to September’s exports. Exports of “telecommunications and sound recording and reproducing apparatus and equipment” increased by 16.9% YoY for September versus 5.4% YoY for August. Export of “electrical machinery, apparatus and appliances” also surged by 10.2% YoY for September (1.7% YoY for August). Exports of other products were much weaker, however, with shipment of “office machines and automatic data processing

machines ” and “professional, scientific and controlling instruments and apparatus” declining by 16.4% YoY and 14.9% YoY for September, respectively (-15.2% YoY and -7.5% YoY for August, respectively). Exports to Korea, India and China were up by 20.9%, 11.8% and 1.9% YoY for September while exports to Japan and Malaysia fell by 12% and 10.3% YoY. Decreases were registered for shipments to most advanced markets, with exports to Germany, the UK and the US dropping by 5.8%, 3.2% and 0.2% YoY for September. Hong Kong’s trade results have been fluctuating quite a lot, reflecting an unsteady external environment in recent months. Looking ahead, the external environment will remain challenging given the tepid recovery of the advanced economies and slower growth for the emerging markets. In the medium term, we still see risks looming from capital outflows triggered by Fed’s tapering. We reiterate our cautious view on the economy and forecast the real GDP to grow at 2% YoY for 2013 and 1.8% YoY for 2014. In the interests of timeliness, this document has not been edited.

24 October 2013

Hong Kong Economy

Hong Kong’s export growth picks up in September, but challenges remain ahead Christie Chien (852) 2773 4482 [email protected] Kevin Lai (852) 2848 4926 [email protected]

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■ What’s new? According to Bloomberg, Yue Xiu Group is close to sign the agreement to acquire Chong Hing Bank (CHB, 1111 HK, not rated, HKD37.4). CHB’s share price was up 7% yesterday and is currently trading at 2.1x PBR or 33.1x PER based on the 2013E Bloomberg consensus. This has reached the bidding price range of 2.0x-2.4x PBR, as suggested by the local media previously. ■ Our view If the deal were to go through, we believe Yue Xiu Group would acquire 60% of CHB’s issued shares from the Liu family, which owns 50.2% of CHB via Liu Chong Hing Investment and another 9.66% by exercising the share options granted by the Bank of Tokyo-Mitsubishi based on an agreement signed in 1994. We understand that Yue Xiu has previously arranged a USD1bn loan at LIBOR+300bp to finance this potential acquisition. We believe this news would be an upside catalyst for other small/medium-sized Hong Kong banks / financial institutions. CHB used to trade at around 0.8x 2012 PBR before the announcement of a non-family member as chief executive on 28 Nov 2012. After

that, CHB’s share price has surged by 64% until 7 Aug 2013 when local media indicated that Yue Xiu may acquire a 60% stake in CHB and it was suspended on the same day. Since then, CHB’s price has surged another 67% and closed at HKD37.40 yesterday, implying a 2.1x 2013E PBR based on Bloomberg consensus. Among the smaller banks in Hong Kong, we prefer Dah Sing Financial (DSF, 440 HK, HKD49.00, Buy [1]) given its attractive geographical presence and valuation. DSF is currently trading below book at 0.9x 2013 PBR on our forecast. Even though some investors argue that they prefer Dah Sing Banking Group (DSBG, 2356 HK, HKD14.24, Buy [1]), which is trading at a 1.1x 2013E PBR on our forecast, as bidders are unlikely to be interested in the insurance operations of DSF, we think that shareholders of DSF would not approve of the disposal of DSBG unless they also were to benefit from such a transaction. Hence, we expect to see more upside potential in DSF than DSBG. For more detail, please kindly refer to the link of our latest flash note on M&A for Hong Kong banks below. To see the full version of this Flash

Note, please click here Wing Hang Bank (302 HK, HKD75.05, Hold [3]) could also be another candidate given its larger scale which would provide more synergies, in our belief. WHB’s share price has surged by 36% since announcing that it was approached by an independent third party for possible acquisition on 16 Sep 2013, and it is currently trading at 1.7x 2013 PBR on our forecasts. Local media (ex South China Morning Post) suggested United Oversea

Bank of Singapore and Australia & New Zealand Banking Group (ANZ) were the potential buyer. However, a news from Bloomberg reported that the CEO of ANZ, Michael Smith, believed takeover targets in Hong Kong are expensive. Historically the M&A PB in Hong Kong has averaged around 1.9x since 2000.

24 October 2013

Chong Hing Bank 1111 HK

Share price (23 Oct): HKD37.40

Yue Xiu close to acquiring Chong Hing Bank Grace Wu (852) 2532 4383 [email protected] Samuel Ng (852) 2773 8745 [email protected]

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20130917hk_Hong_Kong_Banks.pdf#page=1

Chong Hing Bank 1111 HK

24 October 2013

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Hong Kong banks: historical M&A activity Acquirer Ticker Company acquired Date PBR at transaction price (x) Bank of East Asia 23 HK First Pacific Bank Nov-00 1.50 DBS Group DBS SP Dao Heng Bank Apr-01 3.33 Fubon Bank (Hong Kong) 636 HK International Bank of Asia Sep-01 1.26 CITIC IFH 183 HK Hong Kong Chinese Bank Nov-01 1.26 Wing Hang Bank 302 HK Chekiang First Bank Aug-03 1.22 ICBC (Asia) 349 HK Fortis Bank Asia Hong Kong Aug-03 1.05 Standard Chartered 2888 HK Prime Credit Jun-04 1.99 Dah Sing Financial 440 HK Pacific Finance Jun-05 1.77 JCG Holdings 626 HK Asia Commercial Bank Feb-06 2.50 China Merchants Bank 3968 HK Wing Lung Bank Jun-08 3.00 ICBC 1398 HK ICBC (Asia) Aug-10 2.14 Fubon Financial 2881 TT Fubon Bank (Hong Kong) Jun-11 1.20 Average 1.86 Source: Companies, Daiwa

Bloomberg code

Company Name

Share price (local curr.)

MKT cap Absolute Performance (%) PBR (x) PER (x) ROE (%) Leverage (%) Div Yield (%) EPS growth (%)

(USD bn) 2012 2011 1M 3M 6M YTD FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E FY 13E FY 14E

Hong Kong

2388 HK BOCHK 25.00 34.1 31.0 (30.4) (0.6) 3.3 (2.3) 3.7 1.6 1.5 11.6 10.6 14.5 14.8 11.9 11.7 5.4 5.9 8.8 9.8

23 HK BEA 32.75 9.7 0.9 (9.7) 1.7 15.1 9.5 10.5 1.2 1.1 12.5 12.0 9.8 9.4 11.7 11.4 3.2 3.3 (3.6) 3.8

440 HK DSF 49.00 1.9 50.3 (54.3) 15.0 51.9 19.5 40.2 0.9 0.8 9.4 8.8 9.5 9.5 10.7 10.6 3.7 4.0 24.4 6.9

2356 HK DSBG 14.24 2.3 27.1 (49.8) 7.1 56.7 26.5 68.9 1.1 1.0 10.9 9.9 10.1 10.4 10.1 9.9 3.2 3.5 14.7 10.2

11 HK HSB 128.70 31.7 28.8 (27.9) 1.7 9.1 3.5 8.4 2.5 2.3 9.4 15.1 27.7 15.9 11.7 11.3 4.3 4.5 32.4 (37.7)

302 HK WHB 114.30 4.5 27.1 (40.8) (3.5) 57.9 42.1 41.3 1.7 1.6 15.7 16.4 11.1 10.0 10.2 10.0 2.6 2.8 21.8 (3.8)

5 HK HSBC* 84.60 204.6 37.8 (26.0) (2.0) (3.8) 5.7 4.1 1.1 1.1 11.4 10.5 10.6 10.7 16.1 15.3 4.7 5.2 23.6 8.3

2888 HK StanChart* 188.50 59.0 15.4 (19.8) (1.2) 4.0 (0.8) (3.8) 1.3 1.2 10.7 10.0 11.4 12.3 13.7 13.9 3.7 4.0 11.5 6.9

1111 HK Chong Hing Bank* 37.40 2.1 18.1 (35.4) 11.8 78.1 79.4 129.4 2.1 2.0 33.1 30.9 6.5 6.7 10.8 11.0 1.2 1.3 (9.6) 7.1

MKT cap weighted average 348.1 31.2 (25.4) (1.1) 1.5 4.7 4.7 1.3 1.3 11.3 11.1 12.6 11.8 14.6 14.1 4.5 4.9 19.9 3.7

Source: Companies, Daiwa, Bloomberg Note: Prices as of closing on 23 Oct 2013; * Based on Bloomberg consensus forecasts Hong Kong Banks: M&A comes to life again Financials: Hong Kong Grace Wu (852) 2532 4383 ([email protected]) Samuel Ng (852) 2773 8745 ([email protected])

Rating: Positive - Wing Hang Bank confirms takeover talks are under way - Chong Hing Bank still in talks with potential buyers, including Yue Xiu Group - Reiterate Buy on DSF, DSBG

To see the full version of this Flash Note, please click here In the interests of timeliness, this document has not been edited.

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■ What’s new? CNOOC announced its 3Q13 production numbers and revenue (after market close today) which were in line with Daiwa estimates. ■ Details 3Q13 production up YoY. CNOOC’s total net production for 3Q13 was 103.4mmboe (+17.8% YoY). Nexen contributed to most of this YoY increase, adding 16.1mmboe of net production. Stable oil price, lower gas price: the company’s realised oil price in 3Q13 was stable at USD106.26/bbl (+1.5% YoY) whereas realised gas prices slipped to USD5.43/mcf (-6.9% YoY). As a result of the production increase, and helped slightly by a steady oil price, total oil & gas revenues for 3Q13 rose 16% YoY to CNY56.1bn. Exploration highlights. During the quarter, the company met some success with regards to both China and overseas exploration programs. The highlight for us was offshore China where CNOOC made two new discoveries in Luda 5-2 and Kenli 9-5/9-6 where the oil columns of between 70-120m are quite large in our view. In addition, offshore China saw the completion of 10 appraisal

wells. For overseas operations, the company made 3 new discoveries and completed 5 appraisal wells. New production projects start up largely on track. For the full year of 2013, CNOOC is expecting a total of 10 offshore China production projects to come onstream. Four had already started production by 3Q13 and management does not expect significant problems for the remaining projects to start up production. The only slight delay will be for its Lufeng 7-2 project where the company encountered slight issues with its equipment installation, but the remaining five projects are progressing well overall. For overseas production, CNOOC expects the Rochelle gas field (CNOOC 41%) in the North Sea to come on stream during 4Q13. CNOOC did not provide guidance on what is the expected net production increase that might result from these additional production projects, but management did mention that production will be weighted towards oil which is a positive, in our view, given its higher value versus gas. We were disappointed to note the production decline at Bohai; however, we remain hopeful that this can turn around with the introduction of new technology. Entry into Brazil. CNOOC stressed that it will maintain a “disciplined” M&A strategy and

continues to evaluate its investments with a strict focus on key criteria such as resource potential and a project’s risk/reward profile. Management stressed that its entry into Brazil is no different – the company believes that the resource potential for the Libra is substantial, and based on their price that they have agreed to pay, the company expects that the move into Brazil will still be able to “generate value” for shareholders. ■ Recommendation The company is maintaining its full year production target of 338-348mmboe (excluding contribution from Nexen). With 3Q13’s production, CNOOC has reported 9M13 total net production of 300.3mmboe, approximately 74% of our full year 2013 estimate of 403.9mmboe (including Nexen). We have a Buy (1) rating on CNOOC and a six-month DCF/PER-based target price of HKD19.70. Key risks to our call include lower oil and gas prices which would lead to lower profitability for the company’s production, sovereign risk, and operational risks related to the production of oil and gas. In the interests of timeliness, this document has not been edited.

24 October 2013

CNOOC 883 HK

Share price (24 Oct): HKD15.28 6-mth rating: Buy (1) Target price: HKD19.70 (DCF/PER-based)

3Q13 operational numbers were in line Adrian Loh (65) 6499 6548 [email protected] Benjamin Lim (65) 6321 3086 [email protected]

■ CNOOC Bohai Bay oil & gas production – quarterly

Source: Company

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Unexciting 3Q results: 3Q13 revenue was up 29% YoY, with net profit up 40% YoY to CNY2.09bn (3Q13 net profit was 11.8% below our forecast). 9m13 net profit achieved 75%/69% of 2013 consensus and our forecasts, respectively. The is not an exciting set of results, with the net-profit-per-car-sold ratio staying flat at CNY11,129 in 3Q13, compared with 1H13’s CNY11,176, which was mainly due to an unchanged 3Q13 gross margin at 29% (1H13 at 29%) and a falling pre-tax margin to 17.8% (1H13 at 18.7%). Strong top-line growth offset by higher spending and lower utilization: Although 3Q13 SUV as % of sales volume reached 60%, from 1H13’s 50%, the flattish gross margin rolling from 1H13 into 3Q13 was mainly due to 1) 3Q13 export sales declining by 32% YoY, and 2) a lower utilization rate resulting from Tianjin phase 1 and 2 plant equipment relocations, and 3) the

company also said its R&D cost moved up QoQ by CNY50 million in 3Q13, with salary costs also increasing QoQ by roughly CNY20 million due to the preparation of new model (H2/H8) launches. Still above consensus: We do not believe a de-rating condition is valid at this stage because: 1) by factoring in 4Q13E sales volume at 219,172 units (17% QoQ in 4Q13E versus 4Q12’s 23%), we believe 4Q13 revenue can still reach CNY16.6 billion (15.9% QoQ in 4Q13 versus 4Q12’s 22.6%); therefore we believe 2013 revenue should reach our current forecast; and 2) we see no further downside on a potential net margin squeeze in 4Q13 from the 3Q13 level because the company has said it expects R&D and staff costs to stay flat on a QoQ basis into 4Q13. By rolling the 3Q13 net margin of 14.5% into 4Q13, this would deliver a 4Q13 net profit of CNY2.4 billion, or CNY8.6billion in full-year net profit, which remains 5% higher than consensus (compared with our forecast of 10% higher than consensus). Buy rating: We believe the above-mentioned logic should not alter our bullish 13/14/15 asset turnover ratio forecasts at 1.16x/1.31/1.33x, respectively, as we think the volume and ASP improvements remain intact. Moreover, if we were to factor a 0.7pp cut in net margin into our

13-15E earning forecasts under this scenario, it could potentially drag down our net-profit forecasts by 4.5%/4.2%/4.1%, which implies that the stock trades at PERs of 14.1x/9.3x/7.0x for 13E/14E/15E with a 40% 13-15E EPS CAGR and a 40% 14E ROE. By applying a 10.2x 14E PER (unchanged), this would give a potential TP of HK56/share, carrying 15.5% upside potential. From a risk-reward point of view, we believe the unexciting 3Q results should not affect investors awaiting the next catalyst on new model (H8/H2) launches. Catalyst: We forecast average monthly sales volume for the H8 of 3,750 units in 2014, as we expect monthly sales volume to be at least in line with the monthly average sales volume per model we forecast for the China SUV segment of about 3,600-3,759 units over 2014-15. Though we forecast the H8 to account for only 5%/6% of GWM’s sales volume for 2014/2015, 10% extra sales volume growth on top of our forecasts could lift our 2014E/2015E EPS by 2%-3%. Great Wall Motor (2333 HK): Two growth drivers expected in 2014 6-mth rating: Buy Target price: HKD50.65 -> HKD58.41 To see the full version of this Flash Note, please click here

24 October 2013

Great Wall Motor 2333 HK

Share price (24 Oct): HKD48.45 6-mth rating: Buy(1)

Addressing the bears <Still a buy> Jeff Chung (852) 2773 8783 [email protected]

■ Revenue and profit forecasts (New scenario vs Daiwa’s base case vs consensus) Envisage Daiwa Consensus

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13E 2013E 2013E 2013ERevenue 8,731 9,557 11,176 13,696 12755 13,662 14,358 16,639 57,413 57,413 54,964Gross profit 1,328 3,483 2,996 3,791 2241.2 5,410 4,160 4,825 16,636 17,057 15,163GPM 15.2% 36.4% 26.8% 27.7% 17.6% 39.6% 29.0% 29.0% 29.0% 29.7% 27.6%NP 1,107 1,247 1,488 1,851 1,898 2,189 2,085 2,413 8,585 9,021 8,187NPM 12.7% 13.0% 13.3% 13.5% 14.9% 16.0% 14.5% 14.5% 15.0% 15.7% 14.9% 1Q13 2Q13 3Q13 4Q13E 2013E Units 180,526 185,189 187,330 219,172 772,217 ASP/units 70,655 73,772 76,645 75,915 74,349 NP/units 10,515 11,821 11,129 11,008 11,681 Source: Company, Daiwa forecast

In the interests of timeliness, this document has not been edited.

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20131023cn_Great_Wall_Motor.pdf#page=1

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■ What’s new? GS E&C recorded operating and net loss in 3Q13 again due to continued cost burden from overseas projects. ■ Result details GS E&C reported KRW105bn operating loss in 3Q13. Plant division, which accounted for 45% of 3Q13 total sales, reported gross margin of -2% in 3Q13. We expect weak margin from plant division should be lingering until next year as most of low margin projects are scheduled to be finished in 2014. It also reported net loss of KRW 87n for the same period. The company said that it put KRW50bn provisioning in non-operating income side for its housing business. Given that its annual housing provisioning guidance was KRW100bn, we expect there should be at least KRW40bn provisioning in 4Q13. Its liability-to-equity ratio remained as high as 264% in 3Q13. Company’s net debt increased substantially during this year to KRW2.3tn in 3Q13 from KRW1tn in 2012. Its total PF loan balance was KRW1.8tn (including KRW1.4tn for not-started projects) as at the end of 3Q13, which we view as burdensome. We think that the company wants to delay the start of their PF housing projects as it wants to avoid additional cost burden from project initiation. So, we expect that pre-

sales should be less than 5,000 units (initial guidance of 6,500 units and 9M13 pre-sales of 3,500 units) in 2013. Its total order has fallen by 12% YoY to KRW 6.5tn in 3Q13. It has achieved weak orders in domestic civil engineering and overseas power plant projects. We maintain our new order forecast of KRW9.3tn for 2013. ■ Recommendation Management was bit hesitant to give an outlook for the company’s earnings recovery. We believe there are still uncertainties in their future quarterly earnings as there are margin pressure in overseas plant and domestic housing businesses. We have an Underperform (4) rating and a six-month target price of KRW25,000, based on our regression analysis. The risk to our view would be a strong recovery in GS E&C’s petrochemical orders in the Middle East.

24 October 2013

GS E&C 006360 KS

Share price (24 Oct): KRW37,300 6-mth rating: Underperform (4) Target price: KRW25,000

3Q13 earnings – difficult time continues Mike Oh (82) 2 787 9179 [email protected]

■ GS E&C: 3Q13 earnings results 3Q13 Difference (%) Actual Change (%) (KRWbn) Actual Daiwa Consensus Daiwa Consensus 3Q12 2Q13 YoY QoQSales 2,429 2,330 2,546 4 (5) 2,401 2,285 1 6Operating profit (105) (92) (101) n.m. n.m 49 (150) n.m. n.m.Pre-tax profit (106) (91) (135) n.m. n.m 58 (182) n.m. n.m.Net profit (87) (78) (92) n.m. n.m 37 (150) n.m. n.m.

Source: Company, Daiwa forecasts, Bloomberg

■ GS E&C: sales by division

(KRWbn) 3Q13 3Q12 2Q13 YoY (pp) QoQ (pp)Civil engineering 376 318 283 18 33Plant 1,087 1,055 830 3 31Power/Environment 350 323 320 8 10Architecture/Housing 567 390 788 (12) (28)Others 49 62 64 (20) (23)Total 2,429 2,401 2,285 1 6

Source: Company, compiled by Daiwa

■ GS E&C: gross profit margin

3Q13 3Q12 2Q13 YoY (pp) QoQ (pp)Civil engineering 5.2% (4.6%) 9.7% n.m. (5)Plant (2.0%) 9.1% (21.0%) n.m. n.m.Power/Environment 3.7% 6.3% 9.1% (3) (6)Architecture/Housing (1.7%) 9.6% 10.6% n.m. n.m.Total 0.0% 7.5% (0.9%) (8) n.m.

Source: Company, compiled by Daiwa


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■ What’s new? POSCO’s 3Q13 results (reported at 14:00pm on October 24, 2013) were broadly in-line with our forecasts. ■ What’s the impact 3Q13 results review. 3Q13 operating-profit was broadly in-line with our forecasts, reflecting :1) a 2.6% decline (KRW21,000/tonne drop QoQ) in 3Q13 carbon steel ASP to KRW773,000/tonne, against a rise in the combined iron-ore and coking coal input costs by KRW5,000/tonne QoQ to KRW399,000/tonne for its steel business. 3Q13 steel shipments also declined by 1.7% QoQ to 8,271,000 tonne on weaker demand from downstream industries. CRC and steel-plate shipments recorded the largest decline of 6.2% QoQ and 5.1% QoQ to 3,273,000 tonne and 1,389,000 tonne, respectively. POSCO’s non-steel business’s 3Q13 operating-profit also fell by 23.2% QoQ to KRW271bn with weaker operating profit across-the-board, including its steel-trading, construction and energy businesses. On a positive note, POSCO’s 3Q13 liability to equity ratio declined to 82.7% from 90.5% in 2Q13, by selling some of its marketable securities and issuing hybrid capital. No changes to 2013 guidance and plans to unwind its holdings in large conglomerates. During the analyst conference call, POSCO’s

management maintained its 2013 crude steel production, steel shipment and revenue guidance of 36m tonne, 34m tonne and KRW63tn.Management also cited that they have no further plans to divest their investments in SK telecom(017670KS, Outperform[2], KRW237,000) (2.2% of total shares), KB Financial Group(105560KS,Outperform [2], KRW42,200) (1.9% of total shares), Hyundai Heavy Industries (009540KS, Outperform[2] , KRW 274,000) (1.9% of shares), Shinhan Financial Group(055550KS, Hold [3], KRW46,500) (0.9% of total shares) and Hana Financial Group (086790KS, Buy [1], KRW40,850) (0.8% of total shares). 4Q13 could be better on lower input costs, but price increase may not become apparent. We forecast POSCO’s 4Q13 operating-profit to rise by 29% QoQ to KRW891bn, mainly due to: 1) a sharp decline in the combined input cost for iron-ore and coking coal of KRW20,000/tonne QoQ to KRW379,000/tonne, and 2) an improvement in earnings for its steel-trading and construction business. However, :1) with the widening price gap between domestic HRC and imported HRC products, and: 2) the recent downtrend in China HRC prices, we

don’t envisage POSCO to raise their product prices anytime soon. ■ Recommendation We have a Hold [3] rating and Gordon Growth Model-based six-month target price of KRW320,000. We believe POSCO’s share price will see some support given its 10.5% YTD decline, with a possible QoQ rebound in 4Q13 earnings, and with the stock trading currently at a 2013E PBR of 0.6x with a 2013E ROE of 5.3%. However, we see limited upside potential as: 1) we expect the weak pricing environment to persist for HRC given an oversupply, and 2) continued market-share losses to Hyundai Steel (004020 KS, KRW87,800, Outperform [2]) and Hyundai Hysco (010520 KS, KRW42,700, Hold [3]) in Korea. Upside catalysts to our call include a significant rebound in global steel prices. A main downside risk is weaker-than-expected demand from downstream industries.

24 October 2013

POSCO 005490 KS

Share price (24 Oct): KRW321,500 6-mth rating: Hold (3) Target price: KRW320,000 (Gordon growth model-based)

No major surprises for 3Q13 results Sung Yop Chung (AKA SY Chung) ( 82) 2 787 9157 [email protected]

■ POSCO: 3Q13 earnings review

Source: Company, Bloomberg, Daiwa forecasts

POSCO 005490 KS

24 October 2013

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■ Global steel companies: valuation summary

Company Ticker Curr. Share Daiwa Mcap Absolute (%)

**Relative (%)

P/E (x) P/BV (x)EV/

EBITDA (x)

P/CF (x)

ROE (%) Div. Yield (%)

OPM (%)

Price Rating (US$m) YTD 1M 3M YTD 1M 3M 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E 13E 14EKorea POSCO* 005490 KS KRW 321,500 Hold 26,417 (7.9) (0.8) (1.5) (10.4) (2.7) (8.6) 12.4 9.1 0.7 0.6 6.9 6.3 4.5 5.3 5.3 7.0 2.5 2.5 5.2 5.9 HYUNDAI STEEL* 004020 KS KRW 87,800 Outperform 7,059 0.0 7.7 23.1 (2.5) 5.8 16.1 11.8 9.1 0.7 0.7 11.9 8.6 1.2 1.4 6.3 7.8 0.7 0.8 6.0 8.0 HYUNDAI HYSCO* 010520 KS KRW 42,700 Hold 3,227 (6.1) (11.0) 10.3 (8.5) (13.0) 3.3 11.5 9.5 1.6 1.4 5.2 4.6 0.6 0.7 15.0 15.7 0.7 0.7 5.2 5.3 DONGKUK STEEL MILL 001230 KS KRW 16,000 Not rated 932 16.8 3.6 21.7 14.3 1.6 14.6 (7.7) (16.3) 0.4 0.4 14.7 13.2 3.8 4.4 (5.4) (1.7) 3.0 2.9 0.9 1.5 Japan NIPPON STEEL 5401 JP JPY 340 Outperform 33,175 61.9 (3.4) 11.1 21.9 (2.5) 12.5 13.4 11.6 1.2 1.2 9.4 8.4 5.7 5.5 9.1 9.7 1.4 1.7 5.6 7.0 JFE HOLDINGS 5411 JP JPY 2,454 Hold 15,481 53.2 (11.0) (6.3) 13.2 (10.0) (5.0) 10.6 8.6 0.8 0.8 7.6 6.8 4.8 4.1 8.2 9.1 2.0 2.4 5.7 7.0 KOBE STEEL 5406 JP JPY 181 Hold 5,789 66.1 1.1 16.0 26.1 2.1 17.4 9.0 10.9 1.0 0.9 8.1 7.7 3.9 4.1 11.0 8.2 0.9 1.3 5.2 5.6 China BAOSHAN IRON & STEEL 600019 CH CHY 4.1 Not rated 11,128 (16.0) (3.7) 1.2 (11.3) (1.8) (5.2) 9.7 8.6 0.6 0.6 6.6 6.0 4.7 3.8 6.1 7.1 3.9 4.5 4.9 5.7 ANGANG STEEL 347 HK CHY 4.7 Buy 3,665 (18.0) (8.6) 6.4 (18.7) (6.3) 2.3 24.6 14.8 0.6 0.5 6.3 5.8 2.5 5.2 2.3 3.8 2.0 3.4 4.0 4.9 US NUCOR CORP NUE US USD 51.4 Not rated 16,285 19.1 3.1 10.6 (3.3) 0.5 7.4 36.5 16.7 2.1 2.0 12.5 8.0 12.8 10.3 5.9 12.4 2.9 2.9 4.9 8.6 UNITED STATES STEEL X US USD 23.5 Not rated 3,320 (1.5) 14.3 23.1 (24.0) 11.7 19.9 (16.2) 32.6 0.9 0.9 8.9 5.8 6.1 5.2 (5.5) 3.5 0.9 0.9 0.3 2.0 STEEL DYNAMICS STLD US USD 18.4 Not rated 4,069 34.3 10.6 17.8 11.9 8.0 14.6 21.8 12.7 1.7 1.5 9.1 6.6 11.7 8.6 7.8 12.0 2.4 2.4 5.5 8.3 Others ARCELORMITTAL MT NA EUR 11.6 Not rated 26,866 (10.6) 11.7 17.6 (24.4) 8.9 11.8 (32.4) 13.0 0.4 0.4 7.0 5.8 5.1 3.7 (1.6) 2.6 1.8 2.2 2.4 4.0 STEEL AUTHORITY OF INDIA SAIL IN INR 61.3 Outperform 4,164 (32.4) 16.3 38.0 (39.5) 11.8 35.5 7.3 6.9 0.6 0.6 6.9 6.6 3.9 3.2 8.3 8.2 2.3 2.5 10.6 11.0 TATA STEEL TATA IN INR 335.2 Buy 5,290 (21.8) 14.2 42.9 (28.8) 9.7 40.4 (4.6) 8.5 1.4 1.2 7.3 6.5 2.4 3.0 1.0 10.0 2.2 2.9 5.0 6.1 Global Average 11,125 9.1 2.9 15.5 (5.6) 1.6 11.8 7.2 10.4 1.0 0.9 8.6 7.1 4.9 4.6 4.9 7.7 2.0 2.3 4.7 6.1

Source: Bloomberg, *Daiwa forecasts

Note: 1) Share prices are as of 24 October(US and Europe as of 23October,2013)

Note: 2) **Relative to each country index

POSCO (005490 KS): Still lacking upside momentum --Sung Yop Chung - 2H13 earnings tracking weaker than we expected - Still difficult to raise prices, despite possible demand recovery - Risk-reward profile does not look particularly appealing To see the full version of this Flash Note, please click here In the interests of timeliness, this document has not been edited.

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20131016kr_POSCO.pdf#page=1

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■ Results

• Sheng Siong reported its 3Q13 results on 23 Oct 2013. 3Q13 net profit of SGD10.6m represented a 7.8% increase YoY, 6.6% higher than our forecasts. Gross profit margins improved by 0.3pp YoY to 23.2%, while operating profit margins improved 0.1pp YoY to 7.1%. Revenues grew 4.8% YoY to SGD177.8m, in-line with our forecast.

• 9M13 revenue and net profit came in at around 74% and 76% of our respective 2013 forecasts.

■ Operational Performance

• The improvement in gross margins was mainly a result of lower-than-expected cost of sales, which was attributed to efficiencies obtained from the new distribution centre resulting in lower input costs. Management said that the competitive environment continues to be challenging but pricing remains rational. Competitor Giant has been aggressively marketing its brand following the integration of its “Shop n Save” brand in 2Q13.

• Increase in revenue was due mainly to the opening of new stores (3 new stores in 2011 and 8 new stores in 2012), which was offset by a decline in SSS (same store sales). The SGD8.1m YoY

increase in 3Q13 revenue was due to SGD12.6 in revenue from new stores, offset by lower comparable SSS of SGD4.5m. SSS has witnessed a decline due to the ongoing construction in the vicinity of certain outlets (Bedok Central and the Verge), as well as renovation works at the Ang Mo Kio outlet during the period. The company said that approximately 78% of this decline in SSS was due to the Bedok and Verge outlets.

• The company acquired the premises for its Toa Payoh outlet (3,300sq ft) for SGD3.5m during the quarter. The move appears to be generally positive, in our view, as it secures Sheng Siong’s presence in the area, given the location and likely density of customer traffic (a mature estate in Singapore), although further details were not provided.

■ Outlook

• Slight shift in strategy: Looking ahead, management highlighted that as rental conditions remain challenging, it may consider further purchases of shop spaces for new store operations. This appears to be a slight deviation in strategy since its IPO, where its focus was on an ‘asset-light’ balance sheet. However, the company remains focused on opening new stores in areas around Singapore where the Sheng Siong brand is under-represented.

• Dividends: Management said that it retains its policy of a 90%

payout of profits as dividends for 2013-14E. Beyond this timeline, potential revisions to its dividend policy will be contingent on future capex requirements for new store openings, while its ultimate aim will be focused on increasing overall shareholder value (whether through topline growth or higher dividend payout).

■ What we recommend Sheng Siong is trading at a 2013E PER of 22.2x and forward dividend yield of 4%. The company has SGD108m in cash as at 3Q13 and no debt on its balance sheet. We have a DCF-based six-month target price of SGD0.73 and an Outperform (2) rating on the stock. Further delays in opening new stores would present a risk. For my latest update (1 October 2013), please see

OUTPERFORM SHENG SIONG GROUP (SSG SP), TP SGD0.73: Company visit reaffirms positive view -- Jame Osman/ Ramakrishna Maruvada - Management highlighted initiatives to boost SSS growth - We favour the stock for its defensive qualities - Maintain Outperform rating and SGD0.73 target price To see the full version of this Flash Note, please click here In the interests of timeliness, this document has not been edited.

24 October 2013

Sheng Siong Group (SSG SP)

Share price (23 Oct): SGD0.625 6-mth rating: Outperform (2) Target price: SGD0.73

Margins better than expected Jame Osman (65) 6321 3092 [email protected] Ramakrishna Maruvada (65) 6499 6543 [email protected]

■ Sheng Shiong: 3Q13 results summarySGD m 3Q12 4Q12 1Q13 2Q13 3Q13 YoY (%) 3Q13E Variance (%)Revenue 169.683 160.897 179.390 159.783 177.818 4.8 178.263 (0.2)Gross profit 38.854 36.526 40.409 37.035 41.238 6.1 40.293 2.3 Gross profit margin (%) 22.9 22.7 22.5 23.2 23.2 0.3p.p 22.603 -0.6 p.pOperating Profit 11.938 9.553 12.416 10.210 12.620 5.7 11.761 7.3 Operating profit margin (%) 7.0 5.9 6.9 6.4 7.1 0.1p.p 6.597 -0.5 p.pNet Profit 9.814 7.989 10.503 8.502 10.578 7.8 9.920 6.6


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20131001sg_Sheng_Siong_Group_.pdf#page=1

- 48 -

■ Everything on track

• Suntec REIT (Suntec) announced its 3Q13 results on 24 October 2013 after market hours.

• The gross revenue and net-property income (NPI) exceeded our forecasts by 16.4% and 7.7% respectively.

• The positive variance came largely from a strong QoQ turnaround from 60%-owned subsidiary Suntec Singapore (convention centre and retail space). Management expects this business to improve in subsequent quarters, driven by the income from the new retail space.

• Suntec City's revenue and NPI exceeded our forecasts by SGD3.3m (8% above forecast) and SGD1.9m (6% above forecast) respectively.

• The results were only in line with our forecast at the distribution level due to a lower level of capital distribution (SGD4.5m vs. our forecast of SGD6.0m) and higher-than-expected asset-management fees and non-tax deductible expenses.

• At the Suntec City office towers, the occupancy rate improved slightly QoQ from 99.4% to 99.7%. The leasing rate averaged SGD8.55/sq ft per month for 3Q13 vs. SGD8.42/sq ft per

month for 2Q13. Management expects positive rental reversions for 2014 (assuming current market rates persist).

• Suntec announced that about 84% of the space in Phase 2 of the Suntec City retail refurbishment (about 270,000 sq ft, scheduled for completion in early 2014) has been pre-committed. For Phase 1, the achieved occupancy rate is now 99.6% and the average passing rent of the newly refurbished space if SGD13.09/sq ft per month.

• As at 30 September 2013, Suntec's gearing was 38.6%,while the book value was SGD2.05.

• We have a Buy (1) rating for Suntec, our top pick in the S-REIT sector, with a DDM-derived target price of SGD2.01.

• The risks to our call would be an unforeseen downturn in the office market or poor operating performance post-Suntec City refurbishment (though this risk appears to be diminishing rapidly, in our opinion).

24 October 2013

Suntec REIT SUN SP

Share price (24 Oct 2013): SGD1.725 6-mth rating: Buy (1) Target price: SGD2.01

Everything on track David Lum (65) 6329 2102 [email protected]

SGDm 3Q12 2Q13 3Q13 3QE Var % var Revenue 62.6 46.9 65.9 56.6 9.3 16.4 NPI 38.4 28.0 40.3 37.4 2.9 7.7 Distribution 52.8 50.9 51.8 51.9 (0.1) (0.2) DPU (S¢) 2.35 2.249 2.289 2.293 (0.004) (0.2) Source: Suntec, Daiwa forecasts


When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

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Korea: share prices and Daiwa recommendation trends LG Innotek: share price and Daiwa recommendation trend

Source: Daiwa

LG Electronics: share price and Daiwa recommendation trend

Source: Daiwa

Date Target price Rating Date Target price Rating Date Target price Rating14/12/12 85,000 Hold 01/02/13 80,000 Hold 20/06/13 85,000 Hold

85,00080,000

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Target price (KRW) Closing Price (KRW)

Date Target price Rating Date Target price Rating Date Target price Rating27/04/11 120,000 Outperform 11/10/12 70,000 Hold 12/06/13 78,000 Hold04/07/11 90,000 Hold 20/02/13 75,000 Hold 24/07/13 75,000 Hold10/09/12 72,000 Hold 18/04/13 82,000 Hold

110,000

130,000

120,000

90,000

72,00070,00075,000

82,00078,000

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Hyundai Motor: share price and Daiwa recommendation trend

Source: Daiwa

Date Target price Rating Date Target price Rating Date Target price Rating27/04/11 300,000 Buy 09/04/12 330,000 Buy 02/04/13 270,000 Buy28/07/11 330,000 Buy 08/10/12 310,000 Buy 27/09/13 300,000 Buy05/01/12 300,000 Buy 14/01/13 290,000 Buy

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- 51 -

Click for our latest editions

Pan-Asia Auto

Pan-Asia Auto: Crumbling divide between foreign, local automakers in China 3 October 2013

Traditional divide between high-quality, high-priced foreign autos and lower-quality, cheaper local autos coming down, spurring growth in new market for affordable, quality offerings

European, US parts suppliers better positioned, but Japanese players could regain market share, with Denso still in pole position

Among local makers, our focus on Geely and Great Wall Motor, which lead the way with quality improvement

Shiro Sakamaki (81) 3 5555-7067 ([email protected])

Jeff Chung (852) 2773 8783 ([email protected])

The Hong Kong

Property Toolkit

The Hong Kong Property Toolkit: A step-by-step guide to the past, present and future of the Hong Kong Property Sector Autumn 2013

The Hong Kong Property Sector seems to be an anomaly when compared with other major property markets around the world.

The same can be said of Hong Kong property stocks relative to property stocks in other major markets.

Our goal with this report is to fill in the blanks for investors seeking to capitalise on this anomaly.

Jonas Kan, CFA (852) 2848 4439 ([email protected])

Korea OLED-display Sector

Korea OLED-display Sector: Initiation: catch the next wave in OLED displays 29 August 2013

We expect fast-evolving OLED-display technology to pave the way for game-changing mobile devices and TVs

Amid ongoing capacity expansion and rising market adoption, equipment makers should benefit first, then material companies

Our picks: SEC, SFA Eng, Wonik IPS, and Duksan Hi-Metal

Jae H. Lee (82) 2 787 9173 ([email protected]) Joshua Oh, CFA (82) 2 787 9176 ([email protected])

OLED Displays MadeEasy: Get ahead of the curve 29 August 2013

In this MadeEasy report, we explain and explore the OLED-display technology now being used in an array of gadgets

We expect OLED displays to rise in prominence given their superior image quality and potential to be cheaper than LCDs

Find out about the next wave of flexible OLED displays and which companies stand to benefit as the market expands

Jae H. Lee (82) 2 787 9173 ([email protected]) Joshua Oh, CFA (82) 2 787 9176 ([email protected])

Daiwa research is available electronically on Bloomberg, Reuters, Thomson One Analytics, FactSet, TMC, Capital IQ and Daiwa’s L-ZONE. Please contact your Daiwa sales representative for more information.

Daiwa’s Banner Products

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Korea_OLED-display_Sector_130829.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/OLED_Displays_MadeEasy_130829.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/TheHongKongPropertyToolkit_130916.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/@Pan-AsiaAuto Oct03F.pdf#page=1

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Sunday Monday Tuesday Wednesday Thursday Friday Saturday 1

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CPI (Sep) Total Imports,

Trade Bal. (Aug) IP (Sep) GDP

(3Q)

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27 28 29 Policy Rate

:Jobless Rate, Retail Sales (Sep)

30 IP(Sep) GDP (3Q)

31

Policy rate Unemployment

rate (3Q F) Exp, Imp,

Trade Bal. (Sep) FOMC decision

(Sep) Unemployment

Rate (Sep)

c: Consensus; China; Hong Kong; India; Indonesia; Japan; Korea; Malaysia; Philippines; Singapore; Taiwan; Thailand; United Kingdom; United State; EuroZone

Economic calendar – September 2011 Economic calendar – October 2013

- 53 -

Rating and target-price information Bloomberg 6M rating 6M target price* Company name code Country Previous Latest Previous Latest DateHyundai Motor 005380 KS Korea Buy – Buy 300000 ↑ 320000 24-Oct-13LG Electronics 066570 KS Korea Hold – Hold 75000 ↓ 70000 24-Oct-13Delta Electronics 2308 TT Taiwan Outperform – Outperform 155 ↑ 164 24-Oct-13Great Wall Motor 2333 HK China Buy – Buy 50.65 ↑ 58.41 23-Oct-13Daewoo Engineering & Construction 047040 KS Korea Hold – Hold 7800 ↑ 8500 23-Oct-13Hindustan Zinc HZ IN India Buy – Buy 149 ↑ 159 23-Oct-13TPK 3673 TT Taiwan n.a. → Sell n.a. → 170 23-Oct-13MediaTek 2454 TT Taiwan Buy – Buy 430 ↑ 480 22-Oct-13Pegatron Corp 4938 TT Taiwan Buy ↓ Outperform 62 ↓ 46 22-Oct-13Naver 035420 KS Korea Buy – Buy 560000 ↑ 760000 22-Oct-13Asian Paints Ltd APNT IN India Hold – Hold 501 ↑ 525 22-Oct-13Mega Financial 2886 TT Taiwan Buy – Buy 28 ↑ 29 22-Oct-13Hutchison Port Holdings Trust HPHT SP Singapore Hold – Hold 0.8 ↓ 0.77 21-Oct-13Petronet LNG PLNG IN India Buy ↓ Outperform 155 ↓ 145 21-Oct-13Hon Hai Precision Industry 2317 TT Taiwan Buy – Buy 89 ↓ 87 21-Oct-13CSR Corp 1766 HK China Buy – Buy 6.45 ↑ 6.99 21-Oct-13Larsen & Toubro LT IN India Buy – Buy 1150 ↓ 1050 21-Oct-13Korea Kumho Petrochemical 011780 KS Korea Hold ↓ Underperform 79000 ↑ 89000 18-Oct-13S1 Corporation 012750 KS Korea Outperform – Outperform 65000 ↑ 69000 18-Oct-13China Communications Construction 1800 HK China Outperform ↓ Hold 6.6 ↑ 6.64 18-Oct-13

Note: Daiwa’s 20 most recent rating/target-price changes *Local currency; D: delisted

Recently published reports

Research reports* Subtitle No. of pages

Date of publication

ASEAN Economy A bottom-up look at the ASEAN economies 10 24-Oct-13TPK Initiation: bruising battles to come 29 23-Oct-13Pegatron Corp Concern over iPhone 5C demand looks priced in 12 22-Oct-13Discovery Asia small-cap weekly 15 18-Oct-13ITC Remains resilient 19 17-Oct-13Chailease Holding A window of opportunity 26 16-Oct-13China Cement and Steel Weekly Cement price rises now occurring 9 15-Oct-13MK Restaurant Group Pcl Top food retailer play 20 14-Oct-13Discovery Asia small-cap weekly 14 11-Oct-13Keppel Corp Identifying catalysts for a re-rating 13 11-Oct-13Pan Asia Real Estate Investment Trusts A few bright spots 21 7-Oct-13Hang Lung Properties Execution showing promise: a buying opportunity 48 4-Oct-13Discovery Asia small-cap weekly 15 4-Oct-13Oil & Natural Gas Corp Short-term subsidy challenge, medium-term earnings growth 13 3-Oct-13Taiwan Strategy Into a brighter 4Q13 12 3-Oct-13Coal India September volumes: back on track 12 2-Oct-13China Cement and Steel Weekly Eyeing demand post holiday 8 2-Oct-13Discovery Asia small-cap weekly 13 27-Sep-13Yes Bank Upgrading: doing much better than the market thinks 14 25-Sep-13

*The 20 most recent reports published by Daiwa

Asia Pacific Markets Closed

Hong Kong

China Singapore Malaysia Korea Taiwan AustraliaNew

ZealandIndia Thailand Philippines Indonesia

Oct 13 1, 14 1-4, 7 15 15 3, 9 10 7 28 2 23

- 54 -

Daiwa’s Asia Pacific Research Directory

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy; Banking

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research

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); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)

HONG KONG

Hiroaki KATO (852) 2532 4121 [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 Product Management

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan); Insurance (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Norman H PENA (63) 2 813 7344 ext 301

[email protected]

Banking/Property

Michael David MONTEMAYOR

(63) 2 813 7344 ext 293

[email protected]

Consumer/Retail

- 55 -

Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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(49) 69 717 080 (49) 69 723 340

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Daiwa Capital Markets Europe Limited, London, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

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(973) 17 534 452 (973) 17 535 113

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(65) 6220 3666 (65) 6223 6198

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(61) 3 9916 1300 (61) 3 9916 1330

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. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

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Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets 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 Capital Markets 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

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

- 56 -

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

- 57 -

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 Capital Markets Co. Ltd., 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., its subsidiaries or affiliates, or its 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 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.

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 six months. 2: Outperform TOPIX/benchmark index by 5-15% over the next six months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next six months. 4: Underperform TOPIX/benchmark index by 5-15% over the next six months. 5: Underperform TOPIX/benchmark index by more than 15% over the next six months.

Benchmark index: TOPIX for Japan, S&P 500 for US, DJ STOXX 600 for Europe, HSI for Hong Kong, STI for Singapore, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia.

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 31 May 2013): Komehyo (2780); Septeni Holdings (4293); Seiryo Electric (4341); RaQualia Pharma (4579); Mebiopharm(4580); Nissei ASB Machine (6284); Okada Aiyon (6294); Sansha Electric Mfg. (6882); Astmax (7162); Nihon Flush (7820); Cardinal (7855); Kimoto (7908);Daiko Denshi Tsushin (8023); Money Square Japan (8728); Money Partners Group (8732); Daiwa Office Investment Corporation (8976); Kadokawa Group Holdings (9477); Cerespo (9625); Imperial Hotel (9708).

Lead Management: Daiwa Securities Co. Ltd. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) in the past twelvemonths for the following companies: Tama Home (1419); JAPAN TOBACCO (2914); Samty (3244); Poletowin Pitcrew Holdings (3657); Ateam (3662); Enigmo (3665); TECNOS JAPAN (3666); enish, Inc. (3667); COLOPL, Inc. (3668); Awa Paper MFG Co. (3896); Prestige International (4290); DaitoPharmaceutical (4577); WASEDA ACADEMY (4718); CORONA (5909); Livesense (6054); Trenders (6069); PUNCH INDUSTRY (6165); Nabtesco (6268); EBARA (6361); ELECOM (6750); Imagica Robot Holdings (6879); Sansha Electlic Manufacturing (6882); Financial Products Group Co. (7148); ZENKOKUHOSHO Co. (7164); FALTEC (7215); TAKASHO (7590); FUJIMORI KOGYO (7917); Wakita (8125); Aozora Bank (8304); eGuarantee (8771); TOSHO(8920); Sun Frontier Fudousan (8934); ORIX JREIT (8954); Frontier Real Estate Investment Corporation (8964); HEIWA REAL ESTATE REIT (8966); Daiwa House Residential Investment Corporation (8984); Japan Hotel REIT Investment Corporation (8985); Konoike Transport (9025); Japan Airlines (9201); STEP CO. (9795). (list as of 4 June 2013)

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 thecommission 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

Investment Banking Relationship

Within the preceding 12 months, Thanachart Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: OfficeMate Pcl (OFM TB); Asia Aviation Pcl (AAV TB).

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“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. 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. 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. DHK market making DHK may from time to time make a market in securities covered by this research.

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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: Mike Oh / Joshua Oh, CFA / Jae H. Lee / Sung Yop Chung 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 six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months Additional information may be available upon request.

Singapore

This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore 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 Singapore 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 Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore 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 Stockbroking 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.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India

This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

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 Capital Markets Europe Limited 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, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

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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-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany

This document has been approved by Daiwa Capital Markets Europe Limited and 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 issued/compiled 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

This material 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. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

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 (telephone 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, 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 six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

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 (TNS)

TNS 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.

TNS market making

TNS may from time to time make a market in securities covered by this research. Additional information may be available upon request.

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