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Friday, 27 January 2017

SK Hynix Inc. (Outperform) 3

2017 the year of setting a new record Daniel Kim

SK Hynix more than doubled its OP in 4Q16 on QoQ basis to Won1.54tr, 10% above street consensus.We raise our top-of-the street 2017 OP forecast by 9% and raise the target price from Won62,000 toWon66,000.

Singapore Banks 4

Lower provisions to drive further re-rating Ken Ang

Asset quality remains a key concern for investors. We designed a proprietary new framework thatshows credit cost concerns to be overblown (pages 4 and 6).

KT&G (Underperform) 5

iQOS launch in Korea likely in 1H17 Kwang Cho

We argued in our previous report that a launch of heated tobacco products, such as iQOS from PhilipMorris International (PMI), is imminent in Korea, and that this would present a significant competitivethreat to KT&G.

China Oilfield Services (Upgrade to Outperform) 6

View change; underappreciated operating leverage Aditya Suresh

We double upgrade our recommendation on China Oilfield Services (COSL) to Outperform, andincrease our one-year price target from HK$6.00 to HK$12.00. Post COSL and CNOOC's respectivestrategy presentations, the key change we make is to increase our COSL EBITDA margin assumptionby an aggregate 600 basis points to reflect management's – seemingly high – confidence on turningback to black in 2017.

EVA Precision (Outperform) 7

Better order visibility in 2017 Timothy Lam

We remain positive on EVA Precision (EVA) and expect it to see further EBIT margin recovery in 2017,driven by better order outlook from its Japanese customers.

ASE (Outperform) 8

Calbee (Underperform) 9

Chinasoft International (Outperform) 10

Dahua (A-Share) (Neutral) 11

Daio Paper (Outperform) 12

Disco (Downgrade to Neutral) 13

Hyundai E&C (Outperform) 14

Please refer to page 26 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

Hyundai Mobis (Neutral) 15

Innocean Worldwide Inc (Outperform) 16

Kia Motors (Neutral) 17

Kotak Mahindra Bank (Neutral) 18

MediaTek (Outperform) 19

NAVER (Outperform) 20

ORIX Corporation (Outperform) 21

PTTEP (Neutral) 22

China Coal sector 23

Japan plant engineering 24

Macquarie Commodities Comment 25

2

Please refer to page 9 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

KOREA

000660 KS Outperform

Price (at CLOSE#, 26 Jan 2017) Won51,700

Valuation Won 66,000 - Price to Book

12-month target Won 66,000

Upside/Downside % +27.7

12-month TSR % +29.6

Volatility Index Medium

GICS sector Semiconductors & Semiconductor Equipment

Market cap Wonbn 37,638

Market cap US$m 32,282

Free float % 76

30-day avg turnover US$m 116.5

Number shares on issue m 728.0

Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E

Revenue bn 18,798 17,198 24,137 25,631 EBIT bn 5,336 3,277 8,250 9,137 EBIT growth % 4.4 -38.6 151.8 10.7

Reported profit bn 4,324 2,986 6,323 6,921 Adjusted profit bn 4,322 2,980 6,319 6,917 EPS rep Won 5,939 4,101 8,686 9,507 EPS rep growth % 2.0 -30.9 111.8 9.5 EPS adj Won 5,937 4,093 8,680 9,502 EPS adj growth % 2.2 -31.1 112.1 9.5 PER rep x 8.7 12.6 6.0 5.4 PER adj x 8.7 12.6 6.0 5.4 Total DPS Won 500 600 1,000 1,200 Total div yield % 1.0 1.2 1.9 2.3 ROA % 18.9 10.6 23.8 22.8

ROE % 21.9 13.1 23.6 21.2 EV/EBITDA x 4.2 5.1 3.0 2.7

Net debt/equity % -4.5 0.8 -5.1 -14.4 P/BV x 1.8 1.6 1.3 1.1

000660 KS rel KOSPI performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, January 2017

(all figures in Won unless noted, TP in KRW)

Analyst(s) Daniel Kim +82 2 3705 8641 [email protected] Ryan Kim +822 3705 8771 [email protected]

26 January 2017 Macquarie Securities Korea Limited

SK Hynix Inc. 2017 the year of setting a new record Event

SK Hynix more than doubled its OP in 4Q16 on QoQ basis to Won1.54tr, 10%

above street consensus. We raise our top-of-the street 2017 OP forecast by

9% and raise the target price from Won62,000 to Won66,000. Outperform.

Impact

Record-high sales of Won5.36tr in the early phase of memory upturn.

DRAM sales jumped 32% QoQ to Won3.9tr (72% of sales) in 4Q16, driven by

14% bit growth and 13% ASP rise. We calculate DRAM margin to have

expanded to 35% from 23% in the previous quarter. Meanwhile, NAND

margin improved sharply, from 3% in 3Q16 to 12% in 4Q16, on 11% QoQ rise

in sales to Won1.36tr. Hynix announced it would pay a cash dividend of

Won600 per share (versus Won500 in 2015), despite a profit decline for the

full year. This is to keep the promise of 20% payout ratio.

Surging eMCP (multi-chip package) demand from China. Chinese

smartphone vendors have low inventories of eMCP, according to SK Hynix,

belying sceptics’ fears of a supply glut. The company says it is unable to meet

phone vendors’ growing demand for eMCP (DRAM+NAND). We have long

highlighted the structural trend of 4G phone upgrade demand in emerging

markets and hardware spec competition among Chinese smartphone

vendors. eMCP is virtually a duopoly between Samsung and Hynix.

The best is yet to come in DRAM. Hynix expects DRAM demand growth of

20% in 2017, slightly exceeding supply growth in the year, resulting in

prolonged tight supply. In 1Q17, it expects a low-single-digit decline in DRAM

bit shipment, as it depleted inventory in 2016. Its focus this year is on

continued geometry migration to 21nm node (to over 60% by year-end) and

18nm node (mass production from 3Q17). While the ground floor of the M14

fab is nearly full, the remaining clean-room space is for future geometry

migration to 21nm/18nm. The company expects the new DRAM capacity in

Wuxi, China should come on stream in 2019.

Planar to 3D NAND cross-over likely in end-2017. Half of M14 fab’s 2nd

floor should start mass production of 3D NAND in 3Q17, according to

management, along with a shift to 72-layer count. As a result, 3D NAND bit

portion should rise from 10% in 2016-end to over 50% in 2017-end, achieving

cross-over. The other half on the second floor will be clean-room ready by

2017-end. New 3D NAND fab in Cheongju will be also commissioned in 2019.

Earnings and target price revision

We raise our 2017 OP forecast by 9%. TP raised from Won62,000 to

Won66,000, on the same up-cycle multiple of 1.6x to 2017E book-value.

Price catalyst

12-month price target: Won66,000 based on a Price to Book methodology.

Catalyst: Memory semicon prices. Execution in 3D NAND.

Action and recommendation

We believe it’s not too late to add more Hynix to one’s position, considering

the improved visibility in the memory market, favourable competitive

landscape and accelerating earnings momentum. Outperform.

3



SINGAPORE

Unsecured low-quality ~5% of exposure

UOB did not disclose its high-quality exposure Source: Macquarie Research, January 2017

Ratings and target prices

Ticker Mkt cap (US$bn) Rating

Target price TSR

P/BV (x)

Div yld

DBS SP 33.6 OP S$21.5 +18% 0.99 3.2% OCBC SP 27.8 OP S$10.0 +10% 1.04 3.8% UOB SP 24.4 N S$20.5 +2% 1.05 3.6%

Source: FactSet, Macquarie Research. Share prices as on 24 January 2017.

Inside

Lower provisions to drive further re-rating 3

Asset quality analysis – DBS most solid 4

Singapore banks: Asset quality stress test10

Base case: Asset quality stress peaked 12

Higher rates in a low growth environment 14

Asset quality trends improving globally,

declining domestically 17

Appendix – Valuation and bank statistics 24

Appendix – Asset quality statistics 27

DBS 31

UOB 36

OCBC 41

Analyst(s) Macquarie Capital Securities (Singapore) Pte. Limited Ken Ang, CFA +65 6601 0836 [email protected] Zhi Rong Phua +65 6601 0893 [email protected] Macquarie Capital Limited Scott Russell, FIAA +852 3922 3567 [email protected]

26 January 2017

Singapore Banks Lower provisions to drive further re-rating Asset quality remains a key concern for investors. We designed a proprietary

new framework that shows credit cost concerns to be overblown (pages 4 and 6).

Our analysis suggests that banks remain inexpensive at 1.0x PBV vs 5-yr

average of 1.21x. We think positive surprises to street estimates of loan loss

provisions will drive further re-rating for the banks. We resume coverage with

Outperform ratings on DBS (top pick and preferred play on this theme) and

OCBC, and Neutral on UOB. We transfer coverage to Ken Ang.

We think consensus is 20% too high on provisions

Our comprehensive bottom-up analysis of individual exposures (i.e. not by

sectors or management guidance) leverages the banks’ Pillar 3 Quantitative

disclosures since 2008, with a primary focus on (i) estimated probability of default

and (ii) collateralised exposure data. Our key finding is that loan loss provisions

(LLP) are likely to come in 20% below consensus estimates for 3 reasons:

(i) Quality of banks’ exposure has improved

High-risk exposures, which are mainly unsecured & low-quality exposure, have

halved to just 5% of total exposure (see chart on the left) since 2009 GFC levels.

High-quality (including mortgage) exposures have increased significantly, from

46% of total exposure during the GFC to 60% currently. Due to the build-up of

high-quality collaterals, the proportion of unsecured exposures has also

decreased. Despite recent asset quality stress, the quality of exposures has

broadly held up well with little credit migration. DBS has shown the most

improvement in portfolio quality since 2009.

(ii) Unlikely that provisioning ratio rises back to GFC levels

Given the improvements in asset quality, we see overall LLP ratios coming in

significantly lower versus GFC levels. For example, while stress levels on high-

risk exposures in 2016 were comparable to the GFC, overall LLP ratios were

only moderately higher due to the improved asset mix. Moreover, we think the

2016 provisioning taken on high-risk exposures was conservative. With the

recent rebound in commodity prices, we think the worst is over, and expect

provisions from existing NPLs to fall from here.

(iii) LLP estimates below consensus even after including a buffer

Our loan loss provision estimates remain up to 20% below consensus, even after

including an additional buffer for new NPL formation. This buffer provides for any

incremental weakness arising from domestic low-quality exposures, such as

SME, manufacturing and general commerce ex-trade finance. We think our total

estimate of provision on risky exposures is conservative at 4% (2x higher than

levels seen post GFC in 2010). Moreover, the risk in the SME segment

specifically will likely be mitigated as ~80% is secured.

Sector positioning – optimistic on quality despite little growth

Based on our asset quality analysis, we resume coverage of the SG banks with

a positive view. We see further share price upsides from asset quality surprising

on improving trends, and rising interest rates driving improvements in global

sentiment and net interest income. DBS is our top pick and preferred play on this

theme for 4 reasons: (i) most improved and best quality exposure among SG

banks; (ii) most likely to surprise street estimates positively on provisions and

earnings; (iii) biggest beneficiary of rising rates; (iv) lowest P/BV multiple

currently, while having the highest sustainable RoE based on our estimates.

4% 6% 6% 5%

securedsecured secured secured

22%27%

31%27%

65%

58%53%

59%

0%

10%

20%

30%

40%

50%

60%

DBS UOB OCBC SG banks

SG banks - Breakdown of exposure

Unsecured low quality Unsecured mid quality

High quality

4



KOREA

033780 KS Underperform

Price (at 09:31, 26 Jan 2017 GMT) Won100,500

Valuation Won 102,578 - DCF (WACC 8.0%, beta 1.0, ERP 6.0%, RFR 2.0%)


Upside/Downside % -18.4

12-month TSR % -14.8

Volatility Index Low

GICS sector Food, Beverage & Tobacco

Market cap Wonbn

13,799





Revenue bn 4,503.3 4,406.4 4,274.0 4,270.4 EBIT bn 1,470.1 1,337.8 1,243.3 1,227.1 EBIT growth % 7.6 -9.0 -7.1 -1.3 Reported profit bn 1,230.9 998.4 934.9 927.9 Adjusted profit bn 1,161.0 998.4 934.9 927.9 EPS rep Won 9,759 7,915 7,412 7,356 EPS rep growth % 18.7 -18.9 -6.4 -0.8 EPS adj Won 9,205 7,915 7,412 7,356 EPS adj growth % 12.8 -14.0 -6.4 -0.8 PER rep x 10.3 12.7 13.6 13.7

PER adj x 10.9 12.7 13.6 13.7 Total DPS Won 3,400 3,600 3,600 3,600 Total div yield % 3.4 3.6 3.6 3.6 ROA % 16.4 14.1 12.5 11.8 ROE % 17.5 13.7 12.0 11.2

EV/EBITDA x 7.3 8.0 8.5 8.6 Net debt/equity % -10.9 -17.7 -23.3 -27.4 P/BV x 1.8 1.7 1.6 1.5




(all figures in Won unless noted)

Analyst(s) Kwang Cho +82 2 3705 4953 [email protected] Rose Kim +82 2 3705 9815 [email protected]


KT&G iQOS launch in Korea likely in 1H17 Conclusion

We argued in our previous report that a launch of heated tobacco products,

such as iQOS from Philip Morris International (PMI), is imminent in Korea, and

that this would present a significant competitive threat to KT&G. Management

said during 4Q16 results presentation last week that it expects a launch of

iQOS in 1H17.

Impact

Quantifying a potential market share loss for KT&G: Although we had

previously highlighted a threat from iQOS, we had not assumed any market

share loss for KT&G because the timing of launch in Korea was uncertain.

However, as we now have more visibility on a launch schedule, we finally cut

our market share forecast. According to PMI, iQOS market share in Japan

grew from 1.6% in April to 4.9% in October 2016, which implies it was gaining

1.7ppt per quarter (Fig 1). We assume the pace of market share gain will be

only at half of Japan’s in Korea. Although the two countries share many

cultural similarities, the main difference is that the sale of liquid-based e-

cigarettes was effectively banned in Japan, while they have been allowed for

years in Korea. Thus, within the e-cigarette market, Koreans have alternatives

other than tobacco leaf-based heated cigarettes, such as iQOS. Thus, we

assume iQOS will gain market share at a pace of 0.8ppt per quarter after

being launched at the end of 2Q17 and grab a 5% share by the end of 2018

(Fig 2). Then, we assume 60% of such gain will come from KT&G, in-line with

its current market share. Such assumptions lead us to project KT&G’s market

share will fall from 59.2% in 2016 to 56.1% in 2018 (Fig 3).

Koreans loved iQOS more than the Japanese in the previous market

study: PMI says it conducted a pre-market study for iQOS in five countries

(Korea, Germany, Japan, Italy and Switzerland) in 2013-15. This study found

36.2% of Koreans converted to iQOS after a four-week observation period,

which was the highest conversion rate among the five countries. Also, once

the participants switched to iQOS, only 3.3% of Koreans reverted to

combustible cigarettes. Thus, we recognise the risk in our assumption that

iQOS will grow only at half the pace in Korea compared to Japan.


We cut our 2017-18 net profit estimates by 2-4% (Fig 4). Our new earnings

estimate for 2017 is 12% below consensus (Fig 5). We lower our TP from

Won88,000 to Won82,000, by applying the same target PER of 11x (1

standard deviation below the historical mean since 2011) to our 2018 EPS

estimate.

Price catalyst

12-month price target: Won82,000 based on a PER methodology.

Catalyst: Launch of iQOS in Korea


We reiterate Underperform.

5

Please refer to page 14 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

HONG KONG

2883 HK Outperform

Price (at 08:50, 26 Jan 2017 GMT) HK$8.29

Valuation HK$ 7.00 - DCF (WACC 8.2%, beta 1.1, ERP 6.8%, RFR 2.0%, TGR 3.0%)

12-month target HK$ 12.00



Volatility Index High

GICS sector Energy

Market cap HK$m 37,264


Free float % 33


Number shares on issue m 4,495


Revenue m 23,417 15,129 18,097 20,409 EBITDA m 5,845 -4605 4,760 5,777 EBITDA growth % -52.1 nmf nmf 21.4 Reported profit m 1,109 -9598 185 1,180 Adjusted profit m 2,098 -2458 185 1,180 EPS adj Rmb 0.44 -0.52 0.04 0.25 Total div yield % 0.9 0.0 0.2 1.0 ROA % 1.8 -10.4 1.0 2.4 ROE % 4.5 -5.9 0.5 3.1 EV/EBITDA x 10.0 -13.3 12.2 10.1 Net debt/equity % 48.5 60.8 59.8 51.8 P/BV x 0.8 1.0 0.9 0.9


(all figures in Rmb unless noted, TP in HKD)

2883 HK rel HSI performance, & rec history




Analyst(s) Aditya Suresh, CFA +852 3922 1265 [email protected]

26 January 2017 Macquarie Capital Limited

China Oilfield Services View change; underappreciated operating leverage We double upgrade our recommendation on China Oilfield Services

(COSL) to Outperform, and increase our one-year price target from

HK$6.00 to HK$12.00. Post COSL and CNOOC’s respective strategy

presentations, the key change we make is to increase our COSL EBITDA

margin assumption by an aggregate 600 basis points to reflect management’s

– seemingly high – confidence on turning back to black in 2017. This in turn,

translates to an average c.33% increase in our EBITDA estimates and at the

current capital structure implies a more meaningful uplift to COSL’s equity value.

What’s not changed?

(1) COSL’s latest fleet status report merely supported our base case

modelling. We model COSL’s jack-up fleet utilization at 70% in 2017 from 54%

in 2016, and semi-sub utilization at 49% from 37%. (fig 9, 13)

(2) We assume day-rates for both jack-up and semi-subs remain

suppressed and continue to model no up-tick in our forecast horizon. We model

COSL’s jack-up day-rates at US$70K/day for 2017-20e, and semi-sub rates at

US$165K/day. (see Global offshore drilling market facing a slow rebalance and

page 4-5 for global utilization and rate trends)

(3) We continue to apply a bull 15x one-year forward EV-EBITDA (page 7-9), to

reflect the turnaround in CNOOC’s capex profile and the implicit OPEC put on

oil. In our view, this is appropriate as our 2017-18E EBITDA estimate for COSL

is still only effectively half of what the company earned in 2012-14.

Material margin expansion likely with higher fleet utilization

COSL management expects EBIT for all four segments and group net income to

turn positive in 2017. At our Rmb18bn revenue estimate this guidance then

implies that COSL has cut operating expenses by around Rmb8bn from 2014 to

Rmb17bn today. We reflect this cost structure (fig 4-5) and now model EBITDA

margins improving from a low of 18% to 25-35% in 2017-19 (prior 20-25%). We

note that this level of margin is in-sync with that earned by other global offshore

drillers (fig 6).

The three-year buy case with 100+% upside

On a three-year view, our new bull case on COSL is HK$20/share, assuming: (a)

CNOOC capex rises to Rmb100 billion (near peak) and allocates 60% of its

capex offshore China, (b) EBITDA margins rise to 40%, and (c) a mid-cycle

target EV-EBITDA of 10x. See scenarios overleaf.

Significant risks remain

The key risk to our new base case is the sustainability of the cuts to operating

expenses. With COSL’s EBITDA margin ranging between 18% (2016) and 47%

(2010) over the past ten years, we note that every 500 basis point change in

margin assumption makes a significant c.25% impact on EBITDA (fig 3). Other

risks include: sub-$50 oil price and in-turn lower CNOOC capex; lower

negotiated day-rates with CNOOC (to be confirmed in end-March); and lower

day-rates for COSL’s semi-subs working overseas (1H16 boosted by one-off

compensation). Our bear case valuation scenario implies 30% downside.

6



HONG KONG

838 HK Outperform


Valuation HK$ 1.38 - DCF (WACC 9.8%, beta 1.0, ERP 10.1%, RFR 3.0%, TGR 1.5%)





GICS sector Capital Goods


Market cap US$m 242

Free float % 56




Revenue m 3,533.0 3,118.5 3,403.0 3,987.2 EBIT m 275.2 89.9 194.9 310.0 EBIT growth % -20.3 -67.3 116.8 59.1 Reported profit m 206.0 42.0 144.3 225.3 Adjusted profit m 223.0 42.2 144.3 225.3 EPS rep ¢ 11.1 2.2 7.6 11.9 EPS rep growth % -29.7 -80.0 243.3 56.1 EPS adj ¢ 12.0 2.2 7.6 11.9 EPS adj growth % -24.0 -81.4 241.6 56.1 PER rep x 9.1 45.4 13.2 8.5 PER adj x 8.4 45.2 13.2 8.5 Total DPS ¢ 3.3 0.7 2.3 3.6 Total div yield % 3.3 0.7 2.3 3.5 ROA % 5.3 1.6 3.4 5.2 ROE % 8.6 1.5 5.1 7.7 EV/EBITDA x 3.9 5.8 4.2 3.2 Net debt/equity % 5.7 -7.7 -6.4 -5.1 P/BV x 0.7 0.7 0.7 0.6




(all figures in HKD unless noted)

Analyst(s) Timothy Lam +852 3922 1086 [email protected]


EVA Precision Better order visibility in 2017 Conclusion

We remain positive on EVA Precision (EVA) and expect it to see further EBIT

margin recovery in 2017, driven by better order outlook from its Japanese

customers. We expect new orders from further integration of printer parts and

higher shipment volume for existing moulds. Maintain OP, as we raise our

DCF-based TP to HK$1.38 (from HK$1.28).

Although 2016 NP faced a sharp YoY decline, affected by lower shipments,

we expect shipments and EBIT margins to normalise in 2017E. We now

forecast NP of HK$144m, +242% YoY, driven by a low base and better

operating margins. We forecast 2017E EPS to reach HK$0.08.

Near-term catalysts are improvements in order volume for its key customers,

orders from the auto division with domestic carmakers, and operating cost

cuts.

Impact

We believe EVA’s order recovery is sustainable in 2017, after inventory

destocking in 2016. We believe EVA will take market share, driven by new

integrated moulds and by consolidation of equipment vendors.

We expect EVA to see ~10% YoY sales growth in 2017, and for the GP

margin to recover 150bps from 24.7% to 26.2% to drive 39% EBITDA YoY

growth.

EVA’s materials are obtained from dedicated vendors, and its product ASPs

are billed on a cost-plus model, thus less affected by spot price fluctuations.


We are raising our 2017E EPS by 6% to factor in higher sales and slightly

better operating leverage.

Our DCF-based TP of HK$1.38 equates to 18x 2017E PER and 12x 2018E

PER. We expect sector consolidation will help EVA broaden its product mix

and see more sustainable earnings growth metric.

Price catalyst

12-month price target: HK$1.38 based on a DCF methodology.

Catalyst: 1) Earnings result and guidance in end-March; 2) clarity on the order

trend of its key customers for FY17; 3) new orders for its automotive segment.


We re-iterate our OP rating on EVA. While the company’s earnings have been

affected sharply by its operating leverage, we believe there is significant

upside potential in the coming 12-24 months, with its current valuation at 0.7x

book and as ROE may return to ~10% as order visibility improves.

Path to 100% Upside We view EVA Precision as an Emerging Leader that can potentially generate a 100% return over three years. See inside for details

Macquarie Governance and Risk Score (MGRS) On our proprietary Governance and Risk Score EVA Precision scores in the third quartile of our current universe coverage.

7



TAIWAN

2311 TT Outperform

Price (at 08:50, 26 Jan 2017 GMT) NT$34.30

Valuation NT$ 42.00-43.00

- Price to Book

12-month target NT$ 42.50





Market cap NT$m 272,513





Revenue bn 274.9 304.4 339.4 380.0 Reported profit bn 21.7 25.1 29.7 34.5 EPS rep NT$ 2.74 3.17 3.74 4.34 EPS rep growth % 12.5 15.5 18.3 16.0 PER rep x 12.5 10.8 9.2 7.9 Total DPS NT$ 1.73 1.99 2.36 2.73 Total div yield % 5.0 5.8 6.9 8.0

ROA % 7.4 8.2 9.0 9.9 ROE % 12.8 14.4 16.1 17.6 EV/EBITDA x 6.1 5.7 5.3 4.9 Net debt/equity % 43.2 47.1 40.2 33.7 P/BV x 1.6 1.5 1.4 1.3

2311 TT rel TAIEX performance, & rec history



(all figures in NT$ unless noted, TP in TWD)

Analyst(s) Macquarie Capital Limited, Taiwan Securities Branch Patrick Liao +886 2 2734 7515 [email protected] Lynn Luo +886 2 2734 7534 [email protected] Patrick Liao +886 2 2734 7515 [email protected] Macquarie Capital Limited Allen Chang +852 3922 1136 [email protected]

26 January 2017

ASE Revenue growth to resume in 2017 Event

ASE reported 4Q16 results and issued its 1Q17 outlook on Thursday (Jan

26). 4Q16 earnings beat on better margins and non-op gains. 1Q17 guidance

was in line with seasonality. ASE expects 2017 revenue growth and capex to

be higher than 2016’s and is targeting a continued improvement in profitability.

We reiterate our Outperform rating with a target price of NT$42.5.

Impact

4Q16 beat on better margins and non-op gains: Previously announced

sales of NT$77.1bn (+6% QoQ) were in line with expectations. Gross margin

improved to 19.9% from 19.4% in 3Q16, with both the IC ATM and EMS

segments’ gross margins better than guidance. Operating margin also

increased in 3Q16, to 10.5% from 10.2%. Non-operating gains were mainly

from ECB valuation. Overall, 4Q16 earnings beat our/consensus estimates by

31–41%.

1Q17 in line with seasonality: ASE expects a normal seasonal pattern for

1Q17. For the IC ATM segment, it is guiding for revenue to decline ~11%

QoQ, with the gross margin sliding to ~23.5% (vs 26.8% in 4Q16). For the

EMS segment, the company is guiding for revenue to drop ~17% QoQ, and

the gross margin would be ~9.7% (vs 10.4% in 4Q16). Overall, we model a

13% QoQ decrease in ASE’s 1Q17 revenue, with gross margin at 17.8%.

Revenue growth to resume in 2017, profitability to improve: Although

ASE’s 2016 revenue saw a 3% decline, the company managed to grow

earnings 13%, thanks to the SiP rebalance. For 2017, we expect ASE to

resume top-line growth and to continue improving profitability and technology

capabilities with higher capex. ASE sees stronger demand for bumping, FC,

WLP and Fan-out this year. In particular, the company is planning to increase

Fan-out capacity from 10k WPM currently to 25k WPM by end-2017. ASE is

also targeting completion this year of the SPIL transaction, which is currently

under review by China MOFCOM and the US FTC.


We have factored in 4Q16 results and are fine-tuning our 2017/18E EPS by

less than 1%. Therefore, we are maintaining our target price of NT$42.5.

Price catalyst

12-month price target: NT$42.50 based on a Price to Book methodology.

Catalyst: Monthly sales, earnings results/outlook, progress of new SiP

products, and market demand.


We reiterate our Outperform rating with target price of NT$42.5 (1.9x 2017E

PBV). With more SiP products under development, we believe ASE is

expanding its addressable market. The SiP business rebalancing should help

ASE improve its margin. We expect ASE to continue outgrowing peers, and

we forecast strong earnings growth with decent dividend yields in 2017–19.

8



JAPAN

2229 JP Underperform

Price (at 15:09, 25 Jan 2017 GMT) ¥3,485

Valuation ¥ 3,000-3,700

- DCF

12-month target ¥ 3,100

Upside/Downside % -11.0

12-month TSR % -9.9


GICS sector Food, Beverage & Tobacco

Market cap ¥m 466,327




Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E

Revenue bn 246.1 253.5 268.8 284.1 EBIT bn 28.1 29.6 31.3 33.9 EBIT growth % 16.3 5.2 5.7 8.3 Recurring profit bn 26.5 29.7 31.4 34.0 Reported profit bn 16.8 17.7 18.7 20.2 Adjusted profit bn 17.9 18.4 19.4 20.9 EPS rep ¥ 125.9 132.5 140.0 151.2 EPS rep growth % 18.6 5.3 5.6 8.0 EPS adj ¥ 134.2 137.9 145.2 156.5 EPS adj growth % 10.5 2.7 5.3 7.7

PER rep x 27.7 26.3 24.9 23.0 PER adj x 26.0 25.3 24.0 22.3 Total DPS ¥ 35.0 40.0 42.0 45.0 Total div yield % 1.0 1.1 1.2 1.3 ROA % 16.7 16.3 15.9 15.9

ROE % 15.5 14.5 13.8 13.5 EV/EBITDA x 11.4 11.1 10.4 9.7 Net debt/equity % -39.1 -41.7 -44.2 -46.7 P/BV x 3.8 3.5 3.2 2.9

2229 JP vs TOPIX, & rec history



(all figures in JPY unless noted)

Analyst(s) Satsuki Kawasaki +81 3 3512 7879 [email protected]

26 January 2017 Macquarie Capital Securities (Japan) Limited

Calbee Nikkei 3Q preview should be viewed with caution Conclusion

On January 26, the Nikkei reported that Calbee was expected to announce

1Q-3Q operating profit of around ¥23.5bn (+8% YoY; our forecast: ¥22.5bn).

Based on the Nikkei preview, 3Q (Oct-Dec) operating profit came to ¥9.7bn

(+7% YoY) versus our ¥8.8bn (-3%) forecast.

We believe the report could lift the share price in the short term, but also that

factors behind 3Q profit growth need to be examined carefully.

Impact

We believe sales trends for Frugra brand cereal are the main reason for the

difference between our forecasts and the Nikkei preview estimates. We

estimate Frugra sales grew by around 15% YoY through October-November,

but the preview says 1-3Q sales surged more than 50% YoY. If the Nikkei

preview is accurate, 3Q Frugra sales are likely to be up more than 50% YoY.

The preview also said that North America business results failed to improve in

Oct-Dec, but that a real recovery was expected from Jan-Mar onwards. This is

in line with our forecast.


We maintain our forecasts and ¥3,100 target price.

Price catalyst

12-month price target: ¥3,100 based on a Price to Book methodology.

Catalyst: Results that illustrate the limitations of an earnings structure

dependent on domestic sales growth


We maintain our Underperform rating.

9



HONG KONG

354 HK Outperform


Valuation HK$ 4.50 - PER





GICS sector Software & Services



Free float % 85




Revenue m 5,129.1 6,021.5 7,478.8 9,071.6 EBIT m 522.0 601.3 764.8 966.9 EBIT growth % 30.4 15.2 27.2 26.4 Reported profit m 280.1 412.6 493.4 627.8 Adjusted profit m 280.1 412.6 493.4 627.8 EPS rep Rmb 0.13 0.18 0.21 0.27

EPS rep growth % 25.1 32.3 19.6 27.2 EPS adj Rmb 0.13 0.18 0.21 0.27 EPS adj growth % 25.1 32.3 19.6 27.2 PER rep x 24.7 18.7 15.6 12.3 PER adj x 24.7 18.7 15.6 12.3 Total DPS Rmb 0.00 0.00 0.00 0.00 Total div yield % 0.0 0.0 0.0 0.0 ROA % 8.9 8.7 9.3 10.0 ROE % 9.8 11.9 12.6 14.1

EV/EBITDA x 11.4 10.7 8.3 6.6 Net debt/equity % 9.7 16.0 18.8 15.5 P/BV x 2.0 1.9 1.7 1.5





Analyst(s) Timothy Lam +852 3922 1086 [email protected]


Chinasoft International Staffing up in Xi’an to Drive Sales Conclusion

We believe Chinasoft (CS) will utilise its employee base in Xi’an, which

accounted for nearly a quarter of its total employees at end-2016, to support

order growth from Huawei and multinational banks. Its lower cost base will

allow CS to compete for solutions-based business, and raise its operating and

ROE metric in FY17E.

We reiterate our Outperform rating. We expect the company to see 24% YoY

sales growth in FY17, with 20% EPS growth to Rmb0.21.

Impact

Chinasoft has been expanding its employee base, reaching 40k employees

(from 30k a year ago), with new staff mainly located at its Xi’an site and in

Shenzhen. As the company expands in the western region, it will allow

Chinasoft to compete for outsourcing projects that are more sensitive to

headcount costs. Its customers will also be able to get better services as CS

builds expertise along its key telco and financial customers.

CS obtained 90% YoY growth with Huawei in 1H16; we expect full-year

growth to be >50%, with a number of solution-based projects in its pipeline for

FY17/18E.

CS has also been generating traction with new financial customers, as it

expands its servicing capability in Southeast Asia.


We raise our FY17E and FY18E EPS by 2% to reflect stronger sales from

Huawei, and customer base expansion; our TP remains HK$4.50.

Price catalyst

12-month price target: HK$4.50 based on a PER methodology.

Catalyst: 1) Order gains from new customers; 2) rising revenue per employee

metric, to offset the rise in labour costs; and 3) improved profitability from its

JointForce platform.


Chinasoft has been one of the top-10 buys (in terms of % holding) via the

Shenzhen-Hong Kong Connect scheme, which started in December 2016. We

expect further interest from mainland China investors, given its strong growth

and its relationship with Huawei Technologies.

We believe the company’s business model is well fitted for the IT services

upgrade expected by telecom and financial vendors. Upside catalysts are 1)

clarity on its new customer growth; 2) improvement in its operating cash flows,

or better working capital management; and, 3) new MNC customers

accounting for a higher percentage of sales.

10



CHINA

002236 CH Neutral

Price (at 15:09, 25 Jan 2017 GMT) Rmb13.71

Valuation Rmb 14.50 - PER

12-month target Rmb 14.50


12-month TSR % +6.5


GICS sector Technology Hardware & Equipment

Market cap Rmbm 39,751


Free float % 76




Revenue m 10,078 13,329 15,841 20,195 EBITDA m 1,635 2,063 2,501 3,058 EBITDA growth % 26.7 26.1 21.3 22.3 EBIT m 1,544 1,978 2,375 2,895 EBIT growth % 27.4 28.1 20.1 21.9 Reported profit m 1,372 1,830 2,232 2,746

EPS rep Rmb 1.18 0.60 0.73 0.89 EPS rep growth % 192.1 -49.6 22.0 23.0 PER rep x 11.6 23.0 18.9 15.4 Total DPS Rmb 0.10 0.08 0.10 0.12 Total div yield % 0.7 0.6 0.7 0.9 ROA % 15.8 15.9 16.0 16.3 ROE % 23.5 25.2 25.0 24.9 EV/EBITDA x 24.0 20.1 16.6 13.6 Net debt/equity % -19.1 -27.1 -40.9 -47.7

P/BV x 5.6 4.8 4.0 3.2

002236 CH rel CSI 300 performance, & rec history



(all figures in Rmb unless noted, TP in CNY)

Analyst(s) Allen Chang +852 3922 1136 [email protected] Verena Jeng +852 3922 3766 [email protected] Chris Yu +86 21 24129024 [email protected]


Dahua (A-Share) Safe city: rising total solution Conclusion

Safe City in Xinjiang: Dahua announced its new framework agreement with

Xinjiang Shache County government on Safe City on Jan 26. The

announcement said this framework agreement would not significantly impact

2017 revenues and net profit. We are positive on Dahua’s Safe City projects,

given it will raise the total solution portion in the long term, supporting the

company’s gross margin. We remain Neutral on Dahua and prefer Hikvision

(002415 CH, Rmb26.06, OP, TP: Rmb32.00) from a valuation perspective.

Impact

Safe City framework agreement: Dahua signed a framework agreement

with Xinjiang Shache County government on Safe City. The investment

amount has not yet been finalised but is estimated at Rmb4bn (US$562m),

paid by the county government. Given it is still a framework agreement,

management expects no significant impact to 2017 revenues and net profit.

4Q16 preliminary results in line: Dahua released 4Q16 preliminary results

on Jan 16 (report link) and the full results will be released on April 24. 4Q16

preliminary revenue of Rmb5.4bn (+78% QoQ, +26% YoY) was in line with

the street’s estimate of Rmb5.3bn. Net income of Rmb761m (+111% QoQ,

+24% YoY) was also in line with the Street’s estimate of Rmb790m and the

company’s midpoint guidance of Rmb714m.

Surveillance – toward total solution: Dahua will continue to work on total

solutions to drive its surveillance business, especially in China. Management

guides to continue to work closely with local governments on Safe City, Smart

City projects in the coming years. We are positive on the strategy, given the

total solution could better support its GM in the long term.

Robot – leveraging surveillance expertise: Dahua’s first self-designed

service robot, Lechange Social Robot (link, Jul 7) was released in 2H16 with a

selling price of Rmb3,999 (US$598). We are positive on Dahua’s move of

leveraging its existing surveillance strength (facial recognition and

surveillance software) into diversified areas, although the near-term earnings

contribution may be limited. Read-across to our recent Robot initiation.


No change.

Price catalyst

12-month price target: Rmb14.50 based on a PER methodology.

Catalyst: 1Q17 results


Maintain Neutral.

11



JAPAN

3880 JP Outperform

Price (at 15:09, 25 Jan 2017 GMT) ¥1,289

Valuation ¥ 1,700-2,000

- DCF



12-month TSR % +9.5


GICS sector Materials






Revenue bn 474.1 475.8 492.9 512.0

EBIT bn 24.3 25.0 26.5 29.5 EBIT growth % 11.6 2.8 6.0 11.3 Recurring profit bn 21.3 21.7 24.7 27.7 Reported profit bn 14.6 13.3 15.5 17.4 Adjusted profit bn 18.6 18.6 20.3 22.2 EPS rep ¥ 94.6 79.6 92.8 104.2 EPS rep growth % 0.6 -15.8 16.5 12.3 EPS adj ¥ 119.7 111.4 121.5 132.9 EPS adj growth % -23.2 -7.0 9.1 9.4 PER rep x 13.6 16.2 13.9 12.4 PER adj x 10.8 11.6 10.6 9.7 Total DPS ¥ 10.5 10.5 11.0 13.0 Total div yield % 0.8 0.8 0.9 1.0

EV/EBITDA x 8.2 7.7 7.5 7.4 Net debt/equity % 156.2 139.5 119.7 102.0

P/BV x 1.2 1.1 1.0 0.9





Analyst(s) Satsuki Kawasaki +81 3 3512 7879 [email protected]


Daio Paper Growth scenario unchanged even in a difficult external environment Conclusion

We revise our forecasts in view of input price (raw materials and fuel), forex,

and overseas business trends. Our FY3/17 operating profit forecast is

unchanged at ¥25bn (+2.8% YoY), but we lower our FY3/18 forecast to

¥26.5bn (+6.0% YoY) from ¥28bn.

The FY3/18 downward revision mainly reflects cost increases (including super

absorbent polymer (SAP)) driven by higher oil prices, and increases in

recovered paper and coal prices. The negative impact in FY3/17 is small as

Daio Paper has already procured budgeted SAP and coal volumes.

While the operating environment is somewhat rigorous, we believe Daio

retains its unique growth potential in domestic household paper product and

overseas absorbent product businesses. Also, valuations still look compelling.

The consolidated operating profit weighting of the home and personal care

(H&PC) segment has reached 40%, but the FY3/18E P/E is only 12x. This is

slightly lower than the paper sector average of 13x, but much lower than the

22x average for our consumer products coverage.

Impact

We forecast 3Q (Oct-Dec) operating profit of ¥5.8bn (-¥1.0bn YoY).

We think the paper and paperboard business faces stronger price decline

pressure in 3Q (than in 2Q) and expect worsening of inventory conditions. We

hence project a ¥600mn YoY decline in segment OP to ¥2bn in 3Q.

The H&PC business consolidates Jul-Sep results from overseas operations in

3Q, and we expect continuation of tough forex and volume levels for China.

Sales volume in China was flat YoY in Apr-Jun and we forecast Jul-Sep

volume will also be flat. However, we understand surplus distribution channel

inventory in China has been eliminated and we believe sales momentum is

likely to have recovered in Oct-Dec.

We expect 3Q domestic paper product sales to be solid. The prices of toilet

paper and tissue paper sold under the mainstay Elleair brand remain stable

(Fig 7 and 8).


We maintain our ¥1,400 target price, based on a theoretical P/B of 1.2x (implied

P/E of 15x). We maintained our price target, despite lowering earnings

forecasts, due to revision of the previous 39% discount to a more suitable 35%

in light of our review of the share-price trend over the past two years.

Price catalyst


Catalyst: Quarterly results that reflect improving H&PC growth momentum


We maintain our Outperform rating.

12



JAPAN

6146 JP Neutral

Price (at CLOSE#, 25 Jan 2017) ¥14,580

Valuation ¥ 14,750 - Price to Book



12-month TSR % +3.4








Revenue bn 127.2 127.4 139.5 150.0 EBIT bn 30.3 27.2 34.4 40.0 EBIT growth % 13.4 -10.3 26.3 16.4 Recurring profit bn 30.7 28.2 35.0 40.6 Reported profit bn 23.2 21.8 26.2 30.5 EPS rep ¥ 648.4 611.0 733.4 852.2 EPS rep growth % 12.8 -5.8 20.0 16.2 PER rep x 22.5 23.9 19.9 17.1 Total DPS ¥ 315.0 296.0 344.0 374.0 Total div yield % 2.2 2.0 2.4 2.6

ROA % 14.8 13.0 15.9 17.2 ROE % 14.5 12.9 14.7 15.7 EV/EBITDA x 12.4 13.6 11.0 9.6 Net debt/equity % -33.9 -32.2 -33.0 -36.0 P/BV x 3.1 3.0 2.8 2.6





Analyst(s) Damian Thong, CFA +81 3 3512 7877 [email protected]


Disco Easing off after a strong run Conclusion

Following a strong run-up in the shares since mid-2016 (+42% over 6M,

outperforming TOPIX by 27% and also other SPE stocks, such as TEL), we

are downgrading the shares of Disco to Neutral while raising our TP to

¥14,750 from ¥14,550. While we are bullish on the outlook for the SPE market

(we recently forecast sustained growth in the market to US$50bn by 2020

from US$40bn in 2016, with the China market more than doubling), we have

shifted our preference more towards front-end SPE, for which we see stronger

growth in 2017/18.

We have pared estimates for Disco post its prelim report, reinforcing a

preference for Tokyo Electron (8035 JP, ¥11,340, Outperform, TP: ¥13,300),

which is at a similar P/B (2.7–2.8x FY3/18E) and lower PER (13x for TEL and

20x for Disco), while offering a higher ROE (>20% in FY3/18E vs ~15% for

Disco), stronger profit growth in FY3/18 and a higher dividend yield.

Impact

FY3/17 OP trajectory looks lower than we had forecast: 3Q consolidated

revenue of ¥30.2bn was 5% below our ¥31.8bn estimate, although only a

touch less than the consensus forecast of ¥30.7bn and, thus, unlikely to

disappoint the market. More surprising was the non-consolidated OP figure of

just ¥3.8bn, down 23% YoY. Disco’s commentary indicates that the company

is tracking to its FY guidance, which suggests that our expectation of a beat

(we had ¥29bn OP for the FY vs guidance of ¥25.4bn) was too optimistic.

We are bullish on SPE, but we believe front-end SPE stocks may have

stronger legs in 2017. We have highlighted the acceleration of new fab

construction, the impact of an acceleration of technology transitions (in NAND

flash, planar 3D and within that 48L 64L; in foundry/logic, 16/14nm

10nm 7nm) and the boost provided by aggressive Chinese ambitions (see

Semiconductors Tracker: China driving the SPE bull case, 17 Jan 2017). We

believe this will drive up capex intensity/wafer on the front end, with

proportionately stronger spending on front-end tools vs back-end tools.

Back to sidelines: We see solid long-term prospects for Disco, which has

continued to expand its addressable market reach, building on robust

technological competencies in cutting and grinding – a recent example is the

launch of a tool for CMP of sapphire and SiC wafers. But with valuations

becoming stretched, we are returning to the sidelines ahead of more visibility.


We are lowering FY3/17, FY3/18 and FY3/19 OP by 6%, 12% and 14%,

respectively. Our new TP of ¥14,750 is based on a ~2.6x P/B FY3/19E (~14.5%

LTROE / ~5.5% CoE), rolling forward from FY3/18E but trimming from 2.75x.

Price catalyst


Catalyst: FY3Q results announcement on 6 Feb.


We reaffirm our preference for other SPE/FPDE stocks such as Ulvac (6728

JP, ¥4,015, Outperform, TP: ¥4,500) and Tokyo Electron.

13



KOREA



Valuation Won 49,000-59,000

- Average P/BV vs. ROE and EV/backlog





GICS sector Capital Goods



Free float % 65




Revenue bn 19,122 18,744 20,723 20,231 EBIT bn 987 1,053 1,266 1,284 EBIT growth % 2.9 6.7 20.3 1.4 Reported profit bn 368 491 630 645 Adjusted profit bn 440 563 702 716 EPS rep Won 3,298 4,399 5,646 5,778

EPS rep growth % -12.3 33.4 28.3 2.3 EPS adj Won 3,941 5,042 6,289 6,421 EPS adj growth % -4.6 27.9 24.7 2.1 PER rep x 11.9 8.9 6.9 6.8 PER adj x 9.9 7.8 6.2 6.1 Total DPS Won 500 600 700 800 Total div yield % 1.3 1.5 1.8 2.0 ROA % 5.2 5.4 6.5 6.3 ROE % 7.8 9.3 10.8 10.1

EV/EBITDA x 4.0 3.8 3.3 3.3 Net debt/equity % 8.7 -4.3 0.5 -15.6 P/BV x 0.8 0.7 0.6 0.6





Analyst(s) James Hong +82 2 3705 8661 [email protected]


Hyundai E&C First Korean contractor w/Won1tr OP Event

Hyundai E&C reported better-than-expected 4Q16 earnings on FX translation

gains and strong domestic housing profitability. Hyundai E&C became the first

Korean contractor with Won1.0tr OP annually.

Impact

4Q16 earnings, OP in line but NP beat. Hyundai E&C reported 4Q16

revenue of Won5.3tr (-6.1% YoY and +18.9% QoQ), OP of Won302bn (OPM

of 5.7%, +60bps YoY and -50bps QoQ) and NP of Won196bn. While its OP

was in line, its NP beat our and market expectations by a large margin of 22%

on large FX translation gains. Strong profitability in domestic housing of 19%

GPM helped Hyundai E&C become first Korean construction company to

generate Won1tr OP in 2016. Total order intake in 2016 reached Won21.2tr,

+7.1% YoY, on strong domestic orders (Won12.7tr) and construction orders

(Won7.3tr, including housing).

Revenue growth to resume from 2017. We expect Hyundai E&C’s revenue

to grow +10.6% YoY in 2017 on strong revenue growth from domestic

housing and construction orders despite the slowdown in overseas revenue.

Furthermore, we expect its OP to grow by +20.3% YoY on 1) increased

revenue contribution from lucrative orders and 2) domestic housing.

Turnaround of global capex cycle should help the company book revenue

from outstanding inactive backlog, such as a refinery order in Russia and a

Gas-to-Liquid project in Uzbekistan.

Management guiding improved order flow in 2017. Hyundai E&C will

participate in the bidding of 52 projects, worth US$23bn, in 2017 vs 29

projects (US$12bn) in 2016. Key products the company focus are refinery and

power transmission in Middle East and port infrastructure and CFPP in Asia.

Hyundai E&C targets new order intake of Won24.3tr in 2017 vs Won18.4tr of

our expectations, thanks to the doubling of Middle East plant order flow

reaching US$70bn.


We raise our EPS forecasts for 2016/2017/2018 by 15%/10%/7%.

We raise our target price to Won54,000 (from Won51,000), accordingly.

Price catalyst

12-month price target: Won54,000 based on an Average P/BV vs. ROE and

EV/backlog methodology.

Catalyst: FSS accounting review (Dec 2016-March 2017), order intake.


Buying opportunity. We think concerns around FSS accounting review are

overblown. Hyundai E&C has significantly lowered its outstanding unclaimed

receivables, which has been the main reason for accounting review, to

Won3.6tr or 19% of its annual revenue, which we consider as a healthy level.

Maintain Outperform.

14



KOREA

012330 KS Neutral


Valuation Won 270,000 - PER



12-month TSR % +4.2


GICS sector Automobiles & Components



Free float % 67




Revenue bn 36,020 38,261 39,875 41,563 EBIT bn 2,935 2,905 3,226 3,528 EBIT growth % -6.6 -1.0 11.1 9.4 Reported profit bn 3,055 3,038 3,505 3,745 Adjusted profit bn 3,055 3,038 3,505 3,745 EPS rep Won 31,388 31,207 36,002 38,473

EPS rep growth % -10.7 -0.6 15.4 6.9 EPS adj Won 31,388 31,207 36,002 38,473 EPS adj growth % -10.7 -0.6 15.4 6.9 PER rep x 8.4 8.5 7.4 6.9 PER adj x 8.4 8.5 7.4 6.9 Total DPS Won 3,500 5,000 6,000 7,000 Total div yield % 1.3 1.9 2.3 2.6 ROA % 7.6 7.4 7.6 7.7 ROE % 12.5 11.3 11.8 11.5








Hyundai Mobis Ouch! Event

Hyundai Mobis (Mobis) reported disappointing 4Q16 earnings. OP came in

lower than we expected due to poor automotive business earnings despite a

pick-up in sales volume at HMC/Kia.

Impact

Poor earnings on sudden drop in automotive business profitability.

Mobis reported 4Q16 revenue of Won 10.3tr (+3.0% YoY and +17.2% QoQ),

OP of Won 680bn (OPM of 6.6%, -210bp YoY and -160bp QoQ) and NP of

Won 694bn. OP missed our and the market’s expectations by large margins,

around Won 200bn, due to a poor automotive business despite the highest

A/S parts profitability since 4Q12. Management attributed this sudden drop in

profitability to 1) a ramp-up of costs for newly opened factories, 2) warranty

provisions, 3) CNY depreciation and 4) cost pressure from HMC/Kia.

Cost pressure from HMC/Kia in China the biggest reason. We believe

cost pressure is the main reason for the lowest automotive business

profitability – 3.3% OPM – in the company’s history. Some investors, including

ourselves, believed Mobis’ automotive business profitability was immune to

margin contraction from OEMs (BHMC and DYK) and only driven by

utilization. Thus, the sudden drop in automotive business profitability despite

normalized utilization could make investors unnerved.

Mobis still benefits from structural changes, but large R&D burden

persists. Mobis remains a main supplier of autonomous driving components,

ADAS, and key components for electric vehicles. A rising volume contribution

of ADAS and EV should lead to growth in per unit revenue for the automotive

business. However, the R&D burden will remain high (~Won 700bn in 2017E

vs. Won 623bn in 2016, +12.4% YoY) through 2018E as the company focuses

on autonomous driving and EV.


We are lowering our 2016/2017/2018 EPS forecasts 5%/2%/1% on lowered

automotive business profitability. We are cutting our target price to

Won270,000 (from Won280,000).

Price catalyst


Catalyst: volume model refresh, Won depreciation, Mexico plant ramp-up and

order win from non-HMC/Kia


Maintain Neutral. We remain Neutral-rated, as the company is being

exposed to cost pressure from HMC/Kia. Furthermore, we find A/S parts

business profitability near its peak. In the Korea auto space we find Hyundai

Motor Company (005380 KS, Won142,000, Outperform, TP: Won170,000)

most attractive (Hyundai Motor Company – Domestic market matters, 25

January 2017).

15



KOREA








GICS sector Media

Market cap Wonbn

1,212


Free float % 34




Revenue bn 987.9 1,132.7 1,339.9 1,534.5 EBIT bn 93.6 116.9 142.7 168.4 EBIT growth % nmf 24.9 22.1 18.0 Reported profit bn 78.0 99.4 120.2 140.8 Adjusted profit bn 69.7 89.6 110.2 130.7 EPS rep Won 4,107 4,971 6,011 7,038

EPS rep growth % nmf 21.0 20.9 17.1 EPS adj Won 3,643 4,479 5,510 6,536 EPS adj growth % nmf 23.0 23.0 18.6 PER rep x 14.8 12.2 10.1 8.6 PER adj x 16.6 13.5 11.0 9.3 Total DPS Won 900 1,300 1,700 2,000 Total div yield % 1.5 2.1 2.8 3.3 ROA % 6.5 7.6 8.2 8.7 ROE % 11.2 13.6 14.9 15.8






Analyst(s) Soyun Shin +82 2 3705 8659 [email protected] Ryan Kim +822 3705 8771 [email protected]


Innocean Worldwide Inc OP miss on lower exposure to media buying of captive clients Event

Innocean reported disappointing 4Q16 results, with operating profit of

Won31bn, compared with our forecast of Won45bn and the consensus

estimate of Won40bn. This was mainly driven by a smaller-than-expected

contribution from the high-margin media buying business, which is likely to

see a gradual improvement throughout the rest of 2017.

Impact

4Q16 gross profit reached Won109bn, up 12% YoY, missing our estimate by

10%. While GP for the US was up 85% (or up 12% excluding the impact of

Canvas Worldwide) due to the launch of G80 and customer additions, the GP

for Korea and China fell 20% and 41%, respectively, on lower marketing

budgets of captive clients.

Canvas Worldwide, a US subsidiary, turned around, as expected, on the

executed marketing budget for the G80 launch in the US. Genesis accounts

for around 15% of the total marketing budget in the US. However, lower

marketing spending from captive clients in other markets impacted the

revenue mix and led to a larger miss in OP, by 30%. We note that GP for

media buying in Korea and also for overseas markets declined 16% YoY,

while operating expenses for 4Q16 were largely in line with our forecast.

Guiding to sequential recovery in Korea and emerging markets.

Management guided to a sequential improvement in the domestic market and

a turnaround of emerging markets, which should help the company to achieve

approximate 10% YoY GP growth in 2017 for the core business (excluding the

merger impact). This is in line with the view of our HMC analyst (Hyundai

Motor Company – Domestic market matters, James Hong).

In terms of the outlook for each region: 1) Innocean continues to be positive

on growth in the US market due to the upcoming launch of G70; 2) China

should recover along with the upcoming acquisition in this region, which is

likely to finalized in in 1H17; and 3) we are happy to hear that progress on the

addition of the KIA creative business from 2H17 is on track and we believe will

probably take place before the launch of Stinger.

Innocean management announced a year-end dividend of Won950 with a 29%

payout ratio, up from a 25.7% for 2015.


No change.

Price catalyst


Catalyst: Sequential earnings recovery.


We maintain an Outperform rating. Our earnings forecasts and target price

are under review.

16



KOREA

000270 KS Neutral






Volatility Index Low/Medium

GICS sector Automobiles & Components



Free float % 62




Revenue bn 49,521 52,713 55,536 57,367 EBIT bn 2,354 2,461 2,331 2,442 EBIT growth % -8.5 4.5 -5.3 4.8 Reported profit bn 2,631 2,755 2,015 2,912 Adjusted profit bn 2,631 2,755 2,015 2,912 EPS rep Won 6,489 6,796 4,970 7,184

EPS rep growth % -12.1 4.7 -26.9 44.6 EPS adj Won 6,489 6,796 4,970 7,184 EPS adj growth % -12.1 4.7 -26.9 44.6 PER rep x 5.8 5.5 7.5 5.2 PER adj x 5.8 5.5 7.5 5.2 Total DPS Won 1,100 1,100 1,500 2,000 Total div yield % 2.9 2.9 4.0 5.3 ROA % 5.4 5.2 4.7 4.7 ROE % 11.3 10.9 7.4 10.0








Kia Motors Too many uncertainties Conclusion

Kia Motors (Kia) reported a mixed bag of 4Q16 earnings. OP came in lower

than we expected only due to a surge in warranty provisions (non-cash item in

SG&A). However, NP was disappointing on FX loss.

Impact

Resilient OP but disappointing NP. Kia reported 4Q16 revenue of Won

12.9tr (+1.0% YoY and +1.7% QoQ), OP of Won532bn (OPM of 4.1%,

+10bps YoY and flat QoQ) and NP of Won320bn. OP missed ours but met

recently-lowered market expectations, only due to warranty provisions. Cash

margin came in at 8.5% vs our 6.0% expectation. NP failed to meet our and

market expectations due to FX loss, limiting its potential to pay higher

dividend. Full-year dividend in 2016 remains at Won1,100/sh, flattish YoY.

Earnings should see YoY decline in 2017. We expect Kia’s profitability to

deteriorate on 1) muted new model refresh and 2) slowdown in DM. Unlike

HMC, operational leverage to EM turnaround isn’t big enough to offset rising

DM cost for Kia. Furthermore, a ruling on ordinary wage litigation continues to

be delayed (due to political issues in Korea) and is now expected in 2Q17.

This should lead to a one-off charge of Won 914bn, leading NP to 0 for 2Q17.

We expect another year of flattish DPS in 2017 as rising capex requirement

(~10% YoY to Won 2.8tr) vs. poor cash generation (EBITDA).

Mexico uncertainties. While Kia targets to increase retail sales in the US by

7.9% YoY to 699k units in 2017, any trade issues between the US and Mexico

should drag on its sales volume in 2017. Due to these uncertainties, we

expect Kia’s Mexico investment to yield lower return and utilization to remain

at a sub-optimal level.


We cut our 2016 EPS forecast by -11% on 4Q16 earnings but no change in

2017/18 EPS forecasts.

No change in target price.

Price catalyst


Catalyst: Model refresh, EM recovery, ordinary wage ruling.


Maintain Neutral. We don’t find Kia’s valuation attractive, considering its

similar volume growth to HMC, uncertainties around the Mexico plant, and a

sequential decline in OP. We prefer HMC over Kia (Korea Auto – Shifting

gears, 12 December 2016).

17



INDIA

KMB IN Neutral

Price (at 08:50, 25 Jan 2017 GMT) Rs742.85

Valuation Rs 840.00 - Sum of Parts

12-month target Rs 840.00




GICS sector Banks

Market cap Rsbn 1,366


Free float % 58




Net interest Inc bn 92.8 108.8 126.2 151.4 Non interest Inc bn 76.3 91.1 106.1 124.2 Underlying profit bn 63.6 84.7 102.0 124.5 PBT bn 50.2 71.7 87.5 106.8 PBT growth % 10.4 42.7 22.0 22.1 Recurring profit bn 50.2 71.7 87.5 106.8 Reported profit bn 34.3 48.4 59.0 72.1 Adjusted profit bn 34.3 48.4 59.0 72.1 EPS rep Rs 14.96 26.38 32.19 39.30

EPS rep growth % -23.7 76.3 22.0 22.1 EPS adj Rs 16.84 26.38 32.19 39.30 EPS adj growth % -14.1 56.6 22.0 22.1 PER rep x 49.6 28.2 23.1 18.9 PER adj x 44.1 28.2 23.1 18.9 Total DPS Rs 0.88 1.00 1.00 1.00 Total div yield % 0.1 0.1 0.1 0.1

ROA % 1.8 1.9 2.0 2.0 ROE % 12.4 13.5 14.4 15.2 P/BV x 4.1 3.6 3.1 2.7

KMB IN rel BSE Sensex performance, & rec history



(all figures in INR unless noted)

Analyst(s) Suresh Ganapathy, CFA +91 22 6720 4078 [email protected] Sameer Bhise +91 22 6720 4099 [email protected]

26 January 2017 Macquarie Capital Securities India (Pvt) Ltd

Kotak Mahindra Bank Merger synergies flowing but where is the growth? Event

Kotak continues to be circumspect on growth where mid-sized banking peers

have grown at a robust pace in 3QFY17, registering strong market share

gains. While earnings growth was strong with consolidated PAT up 34% YoY

to Rs12.7bn (on a low base) and ahead of our estimates of Rs11.4bn, it was

primarily driven by cost efficiencies.

We raise our earnings estimates by 4-7% for FY17-19E to factor slightly

higher NIMs and better opex ratios. While Kotak remains one of the best

managed banks in the country, we would be willing to pay such premium

multiples only if growth had been higher. Maintain Neutral with revised TP of

Rs840 (Rs810 earlier).

Impact

Loan growth at just 12% YoY: Growth was primarily driven by two

segments – CVs (+40% YoY) and corporate banking (+23% YoY). All other

segments registered low double-digit growth. Business banking dipped 4%

QoQ as the bank witnessed repayments during the quarter. Management

indicated that it will continue its cautious stance for 1-2 quarters more before

accelerating on product segments of choice.

NIMs hold up, fee momentum strong: Consol margins held up well at 4.5%

considering the tough operating environment during the quarter. Kotak’s

margins continue to hold up well and we believe given that average SA deposit

cost is still 5.5% – downside pressures on NIMs could be limited. Hence, we

have slightly raised our NIM estimates for the next couple of years. The top line

was further buoyed by healthy fee growth. Core fees grew 20% YoY aided by

better corporate banking fees through syndication, FX transactions and cross-

sell. On the retail side, credit card and distribution fees did well.

Synergies flowing through: Standalone cost-income ratio dipped to 48%

levels and management expects further gains to come through over the next

few quarters. We expect the cost-income ratio to decline to ~47% over the

next couple of years for the standalone bank.


We are increasing our EPS estimates for FY17-19E by 4-7%, factoring in

better-than-expected NIMs and slightly better cost synergies. Our revised

target price on the stock is Rs840.

Price catalyst

12-month price target: Rs840.00 based on a Sum of Parts methodology.

Catalyst: slow growth, expensive valuations.


Maintain Neutral on expensive valuations especially in light of modest BVPS

growth – 15% BVPS CAGR over FY16-19E.

18



TAIWAN

2454 TT Outperform

Price (at 08:50, 26 Jan 2017 GMT) NT$213.50

Valuation NT$ 280.00 - PER

12-month target NT$ 280.00





Market cap NT$m 337,757





Revenue bn 275.5 289.1 301.7 314.8 Reported profit bn 23.7 29.2 36.5 36.7 EPS rep NT$ 15.16 18.69 23.35 23.44 EPS rep growth % -8.7 23.3 24.9 0.4 PER rep x 14.1 11.4 9.1 9.1 Total DPS NT$ 10.61 13.08 16.34 16.41 Total div yield % 5.0 6.1 7.7 7.7 ROA % 6.5 7.0 8.8 9.2 ROE % 10.0 12.1 14.3 13.6 EV/EBITDA x 7.9 7.3 5.8 5.4

Net debt/equity % -36.3 -35.6 -37.5 -37.6 P/BV x 1.4 1.3 1.3 1.2

2454 TT rel TAIEX performance, & rec history



(all figures in NT$ unless noted, TP in TWD)

Analyst(s) Macquarie Capital Limited, Taiwan Securities Branch Patrick Liao +886 2 2734 7515 [email protected] Lynn Luo +886 2 2734 7534 [email protected] Jeffrey Ohlweiler +886 2 2734 7512 [email protected] Macquarie Capital Limited Allen Chang +852 3922 1136 [email protected]

26 January 2017

MediaTek Emerging markets to drive 2017 growth Event

MediaTek reported 4Q16 results and 1Q17 guidance on Thursday (Jan 26),

with a 4Q16 operating profit miss being offset by non-op gains. 1Q17 sales

guidance of down 14–22% QoQ, with a GM midpoint of 34% and an OPM

midpoint of 4.5%, was lower than expected. The company expects 2017

shipment growth will be driven by emerging markets, and we maintain our

view for a GM recovery in 2H17. We reiterate our Outperform rating and TP of

NT$280.

Impact

4Q16 operating profit miss offset by non-op gains: Previously reported

sales of NT$68.7bn (down 12% QoQ) were largely in line. Gross margin of

34.5% and operating margin of 5.8% were lower than our and the consensus

estimates by 0.5ppt and 1.2–1.7ppt, respectively. However, the company

booked a total non-operating gain of NT$1.6bn, including FX gains of

NT$400–500m. Overall, EPS was NT$3.23, which was 3% below our

estimate but 3% above consensus.

1Q17 guidance weaker than expected: MediaTek guided to a 14–22% QoQ

decline in 1Q17 revenue, which is below our and the consensus expectation

of down 10% QoQ. The weaker revenue will be mainly due to normal

seasonality, while the strong USD is also impacting demand in emerging

markets. The gross margin guidance mid-point of 34% and operating margin

guidance mid-point of 4.5% were also lower than expected.

2017 growth from emerging markets; 2H GM recovery intact: MediaTek

expects shipment growth this year will be driven by emerging markets and is

forecasting smartphone unit growth of 14–16% and an increase in the

adoption of 4G from a low base. In particular, the company sees strong 4G

migration demand in India and SE Asia and believes the 4G adoption rate in

India will increase to above-50% this year from around 30% last year. In

addition, MediaTek reiterated its target to improve margins with new product

launches in 2H17. We thus maintain a GM recovery in 2H17 in our model.


After factoring in 4Q16 results, we are fine-tuning our 2017/18E EPS by less

than 1%. Therefore, we are maintaining our target price of NT$280.

Price catalyst

12-month price target: NT$280.00 based on a PER methodology.

Catalyst: monthly sales, earnings results/outlook, smartphone chip demand,

gross margin trend.


We believe MediaTek’s smartphone shipments will continue to grow, thanks

to new product launches and increasing 4G migration demand in emerging

markets. We also expect margins to gradually improve in 2017/18. We

maintain an Outperform rating with a target price of NT$280 (15x 2017E PE).

19



KOREA



Valuation Won 652,118 - DCF (WACC 10.0%, beta 1.0, ERP 6.0%, RFR 4.0%, TGR 3.0%)




Volatility Index Low/Medium

GICS sector Software & Services



Free float % 82




Revenue bn 3,251.2 4,022.6 4,831.2 5,534.0 EBIT bn 762.2 1,138.3 1,601.0 2,005.4 EBIT growth % -0.8 49.3 40.7 25.3 Reported profit bn 518.7 769.9 985.9 1,258.4 Adjusted profit bn 559.8 806.2 1,077.4 1,331.5 EPS rep Won 17,618 26,423 33,838 43,190

EPS rep growth % 23.5 50.0 28.1 27.6 EPS adj Won 19,017 27,668 36,976 45,697 EPS adj growth % 23.5 45.5 33.6 23.6 PER rep x 43.3 28.9 22.5 17.7 PER adj x 40.1 27.6 20.6 16.7 Total DPS Won 782 1,100 1,100 1,500 Total div yield % 0.1 0.1 0.1 0.2 ROA % 19.6 23.5 27.5 28.6 ROE % 28.6 32.8 33.0 30.7






Analyst(s) Macquarie Securities Korea Limited Soyun Shin +82 2 3705 8659 [email protected] Ryan Kim +822 3705 8771 [email protected] Macquarie Capital Securities (Japan) Limited David Gibson, CFA +81 3 3512 7880 [email protected]

26 January 2017

NAVER Rising presence in Korea; challenges in Japan Event

NAVER reported consolidated 4Q16 OP of Won290bn, missing our estimate

by 4%. Domestic OP beat our estimate by 6% due to a smaller-than-expected

labour cost, while LINE OP missed by 67% (CPM no growth is a big issue –

David Gibson) on higher operating cost. Accordingly, LINE accounts for only 6%

of 4Q16 OP versus our previous estimate of 18%. We believe that domestic

business-driven earnings growth is likely to continue for 2017.

Impact

Search ad revenue continues to benefit from NAVER’s rising presence

in the e-commerce market. Search ad revenue grew 16% YoY in 4Q16 on

rapid growth in mobile search ad and e-commerce-driven commission

revenue (16.4% of revenue versus our estimate of 15%). We estimate mobile

search ad revenue was up more than 30% YoY due to a boost in the number

of commercial queries/PPC growth in the high season. Overall shopping GMV

rose 56% YoY, following 60% YoY growth in 3Q16, implying NAVER’s rising

presence in the e-commerce market.

Following 18% search ad revenue growth in 2016, we forecast 16% YoY

search ad revenue growth for 2017 as: 1) there should be upside to NAVER

Pay’s current share of 7% in the Korean e-commerce market; and 2) recently-

launched shopping search ads are not yet fully adapted to the platform.

Growth of display ad continues to exceed market growth rate along with

digital content investment. Display ad revenue grew 30% YoY in 4Q16,

thanks to the increase in content-driven ad inventory and also CPM through

the adoption of targeting function. Another double-digit YoY growth for 2017 is

feasible but this should accompany the investment in digital contents across

video, webtoon, webnovel, etc. We forecast the level of commission cost, at

4Q16’s 29%, is likely to continue through 2017.

Disappointing guidance of LINE implies downside risk to LINE forecasts:

1) 1Q17 guidance for mid-teens OPM is well below our estimate of 21%, while

YoY sales growth guidance for 1Q17 to be similar to 4Q16 despite 1Q being

the high season is disappointing; 2) lack of CPM growth, which means YoY

growth forecast of 53% by Dec 2017 looks very hard to achieve; and 3)

marketing and authentication costs look to be an ongoing issue.


We cut our 2016/2017 OP forecasts by 1.1%/1.9%, respectively. If we an

operating margin of 15% in 2017 vs our current estimate of 22%, there is

roughly 8% downside risk to our 2017 OP forecast.

Price catalyst

12-month price target: Won980,000 based on a Sum of Parts methodology.

Catalyst: A rising share in the e-commerce market


We maintain Outperform due to the domestic business driven earnings growth.

Management plans to retrofit the standard of its earnings report from 1Q17 to

more transparently reflect NAVER’s recently-changed business model.

20



JAPAN

8591 JP Outperform

Price (at 08:50, 26 Jan 2017 GMT) ¥1,735

Valuation ¥ 1,700-2,200

- Price to Book





GICS sector Diversified Financials

Market cap ¥bn 2,297


Free float % 98


Foreign ownership % Number shares on issue m 1,324


Net interest Inc bn 128.1 136.8 151.3 153.6 Non interest Inc bn 2,168.3 2,278.0 2,368.3 2,455.3 Underlying profit bn 287.7 308.5 338.6 355.2 PBT bn 391.3 383.0 440.4 457.0 PBT growth % -28.4 -2.1 15.0 3.8 Recurring profit bn 391.3 383.0 440.4 457.0 Reported profit bn 260.2 254.4 294.1 305.7 EPS rep ¥ 198.4 200.0 231.2 240.3

EPS rep growth % -30.9 0.8 15.6 3.9 PER rep x 8.7 8.7 7.5 7.2 Total DPS ¥ 45.8 51.0 54.0 58.0 Total div yield % 2.6 2.9 3.1 3.3

ROA % 2.3 2.3 2.5 2.6 ROE % 11.7 10.7 11.5 11.0 P/BV x 1.0 0.9 0.8 0.8





Analyst(s) Keisuke Moriyama +81 3 3512 7476 [email protected]


ORIX Corporation Focus on the new investment pipeline Conclusion

Orix Corporation announced 3Q FY3/17 results on 26 January. Quarterly NP

rose 39% YoY to ¥74.9bn, and 1-3Q NP was up 0.8% to ¥217.1bn and

reached 85% of our full-year forecast. Key profit contributions in 3Q were

profits from selling a subsidiary in the Americas region, profits from selling

rental properties in the real estate business, and higher insurance profit in the

retail business. Concessions and aircraft financing supported healthy earnings

too.

We think 3Q results confirmed that Orix is achieving balanced growth, and we

maintain our Outperform rating as the core stock in the non-bank sector. We

will be closely monitoring Orix’s pipeline of new investments along with the

outlook for the domestic property market.

Impact

Real estate, investment and operation, and retail as drivers: 1-3Q

segment profits increased for three segments – real estate (+12% YoY),

investment and operation (+47%), and retail (+23%). At the same time, we

think it is necessary to pay attention to declines in managed asset balance in

1) the real estate business because of stricter investment criteria and 2) the

life insurance business due to retaining profits from selling JGBs in cash. We

will focus on trends in Orix’s new investment pipeline over the medium term.

Aircraft financing targets narrow-body planes: Orix’s aircraft financing

business invests in used narrow-body planes (passenger planes with a single

aisle). It is steadily increasing assets as opportunities arise, and we do not

see much impact from recent slowdown in the large aircraft orders in the

airplane market.

Assessment after share buybacks: Orix takes a stance toward share

buybacks of “not ruling it out as a strategic option and aiming for a balance

with growth investments.” Orix’s share price has risen by about 16% in the

three months since the announcement on 26 October. Orix has been unable

to sufficiently buy back shares at this point because of the steep rise in a

share price. While we believe the announcement of buybacks has positively

affected Orix’s share price, possible revision of the scheme is a concern.


No change.

Price catalyst


Catalyst: 4Q results, shareholder return policy (share buyback), outlook for

property market, and concession business


We maintain our Outperform rating as the core stock in the non-bank sector.

21



THAILAND

PTTEP TB Neutral

Price (at 08:50, 26 Jan 2017 GMT) Bt94.50

Valuation Bt 96.00 - NAV

12-month target Bt 96.00


12-month TSR % +4.8


GICS sector Energy

Market cap Btm 375,164


Free float % 34




Revenue bn 188.4 152.7 166.1 170.2 EBIT bn 40.9 35.9 43.6 46.9 EBIT growth % -56.2 -12.3 21.5 7.5 Reported profit bn -31.6 12.0 22.9 25.0 Adjusted profit bn 13.4 17.8 22.9 25.1 EPS rep Bt -7.96 3.02 5.77 6.31 EPS rep growth % nmf nmf 91.0 9.3 EPS adj Bt 3.39 4.50 5.77 6.31 EPS adj growth % -71.9 32.7 28.3 9.4

PER rep x nmf 31.3 16.4 15.0 PER adj x 27.9 21.0 16.4 15.0 Total DPS Bt 3.00 3.25 3.00 3.00 Total div yield % 3.2 3.4 3.2 3.2 ROA % 5.5 5.2 6.5 6.7 ROE % 3.3 4.4 5.6 5.9 EV/EBITDA x 2.5 3.1 2.9 2.8

Net debt/equity % -2.2 7.0 -9.6 -13.6 P/BV x 0.9 0.9 0.9 0.9

PTTEP TB rel SET performance, & rec history



(all figures in THB unless noted)

Analyst(s) Duke Suttikulpanich +65 6601 0148 [email protected]

26 January 2017 Macquarie Capital Securities (Singapore) Pte. Limited

PTTEP 4Q16 earnings review Event

PTTEP reported 4Q16 earnings with a net loss of –Bt1.7bn pressured by non-

recurring tax-related expense and an impairment charge.

Impact

Weak 4Q16 driven by one-offs and low gas prices: PTTEP’s 4Q16 NP was

–Bt1.7bn, down from Bt5.4bn in the previous quarter. The net loss was driven

by 1) asset impairment of c.Bt1.7bn related to the reserve and production

profile revisions at Natuna C in Indonesia and Yetagun in Myanmar, and 2) a

higher income tax expense of c.Bt4.1bn related to the weakening of the THB

vs USD. Stripping out the one-offs, net profit in 4Q16 would have been

c.Bt3.3bn vs. Bt4.4bn in 3Q16 on a recurring basis. We attribute the lower

recurring earnings in 4Q16 to the gas price, which averaged US$5.2/mmbtu,

down from US$5.6/mmbtu in 3Q16.

Guidance on gas price trend and cost: The management guided for

average gas selling price at US$5.1/mmbtu in 1Q17, which marks the trough

level, and US$5.3/mmbtu for 2017E. This compares to the average gas price

of US$5.6/mmbtu in 2016. Based on this guidance, we estimate PTTEP’s

ASP at US$39.4/boe in 2017, up from US$35.9/boe in 2016. The company

expects unit costs to be c.US$31/boe in 2017, up slightly from US$30.5/boe in

2016. If the company is successful in controlling costs at the guided level, this

would be taken positively, as we expect a bigger rise in the ASP.

RRR improves but reserve life is still a concern: We estimate PTTEP’s 1P

reserve replacement ratio (RRR) in 2016 at 64%, which was higher than the

five-year average of 57%. In our view, the higher RRR in 2016 is encouraging.

Nonetheless, this still means the reserve is depleting faster than it is being

replaced. Currently 1P reserve life is down to five years, which is low when

compared to regional peers at 8-14 years. Given the declining capex trend,

we are uncertain if the company can further increase the organic RRR going

forward. We have assumed a long-term RRR of 50% in our forecast.

Updating capex and cost assumptions: We update the capex and

production profile per the management guidance last week. We also reflect

the latest reserves and cost guidance in our models. As a result, our NAV

target price increases to Bt96/share, mainly driven by lower capex guidance.


We increase 2017E EPS by 16.5% to reflect the unit cost guidance.

We raise our target price from Bt85/share to Bt96/share.

Price catalyst

12-month price target: Bt96.00 based on a NAV methodology.

Catalyst: Oil price, M&A activity, resolution of the Bongkot concession


We think the share price rally since the OPEC production cut has already

captured the positive factors supporting PTTEP’s outlook in 2017. We remain

cautious on the Bongkot concession issue. Maintain Neutral rating.

22



HONG KONG/CHINA

Inside

YoY improvement, near-term downside 2

2017: working-day limit to be relaxed 7

13th FYP: capacity replacement is key 9

Changes to China coal macro 12

Stock implications: re-rating to different

extents 14

Inventory destocking for 2016-18E…

Source: sxcoal, Macquarie Research, Jan 2017

Changes in rating and TPs

Source: Bloomberg, Macquarie Research, Jan 2017

Changes in earnings forecasts

Source: Macquarie Research, Jan 2017

Valuation summary

Source: Bloomberg, Macquarie Research, Jan 2017 (price as of Jan 20 2017)

Analyst(s) Coria Chow +852 3922 1181 [email protected] Eric Zong +852 3922 4749 [email protected]


China Coal sector Still 276 days? Perhaps not ‘Beijing put’ to support the coal market

What is different from 1H16 now is we have the intervention from the China

government to support coal prices, and we believe this ‘Beijing put’ (ie policy-driven

price support) is going to continue. If we put it as a simple math, we estimate

China would probably need 284-326 working days to balance the market in 2017,

and 290 days by 2020. Both seem to suggest more than 276 working days

specified by the current policy. However, in reality, there are more complications,

such as whether the government welcomes imports, and the execution challenge

for loosening. Our global team believes there can be partial relaxation of working

days for some coal producers, and the 276-day rule should remain for those not

meeting government requirements. We update our earnings and valuations for

Chinese coal producers to reflect the latest industry dynamics, upgrading Yanzhou

Coal from Neutral to Outperform, maintaining our Outperform on China Coal, and

upgrading China Shenhua from Underperform to Neutral.

Operating capacity likely to increase under the 13th FYP

About 700mtpa of coal capacity is legally under construction as of end-2015,

i.e 200mtpa higher than the 500mtpa target for advanced capacity addition by

2020 under the 13th FYP. This suggests China should either delay or suspend

ramp-up of some of this under-construction capacity, or close more of the existing

outdated capacity. We believe the latter scenario is more likely and this suggests

a net operating capacity increase of 268mtpa, according to our global team.

Stable coal price for 2017-18E, short-term downside A partial loosening of working day limits, coupled with a stable demand outlook

(+1%pa for 2017-18E), underpins our upgrades for QHD coal price forecast for

2017E to Rmb538/t and for 2018E to Rmb520/t for 2018E (+22%/ 25% from

previous forecasts). Our analysis shows that the unit cost of the major Chinese

coal producers delivered to port rose 6% from 2015 to Rmb395/t as of 2016.

Including SG&A, interest expense and depreciation, we estimate a breakeven

level of Rmb520/t. While we expect some downside risk from the current spot

price of Rmb597/t near-term with the seasonal slowdown in restocking,

we believe 2017 will still represent a significant coal price recovery YoY and

hence earnings improvement for coal equities. The unlikely repeat of hotter-than-

usual summer as in 2016, could mean a more stable coal price outlook.

Stock implications: Yanzhou Coal is our new top pick

We upgrade Yanzhou Coal from Neutral to OP as we expect the potential

relative stabilization in RMB in 2017 to ease the cost challenges for overseas

operations, and the company’s higher exposure to coking coal (~30% of total

output, vs 10% for China Coal and 0% for Shenhua) suggests greater earnings

upside than for peers. Yanzhou also stands to benefit from the 13th FYP with

25mtpa of potential capacity located in Inner Mongolia, one of the major

production bases desired by the government. We maintain OP on China Coal

as we expect continual earnings improvement in 2017 (after turning profitable in

2016), and benefits from lower transport cost. China Coal also has 32mtpa of

outstanding capacity in the ‘Tri West region’ and we expect this to likely get

approvals for operations under 13th FYP. We upgrade China Shenhua to

Neutral, but note its valuation is already on par with other regional integrated

coal-power producers, and the challenge from lower power tariffs.

300

350

400

450

500

550

600

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2014 2015 2016E 2017E 2018E

(Rmb/t)(mt)

Raw coal output (mt) Coal demand (mt)

Difference (mt) Coal price (Rmb/t)

BBG code Old New Old New Chg (%)

Yanzhou Coal 1171 HK N OP 4.97 8.24 65.8% 40.8%

China Coal 1898 HK OP OP 5.55 5.09 -8.2% 23.5%

China Shenhua 1088 HK UP N 12.70 16.92 33.2% 3.9%

Rating TP (HK$) % upside/

(downsid

BBG code Old New Chg (%) Old New Chg (%)

Yanzhou Coal 1171 HK 0.18 0.87 382.1% 0.14 0.69 406.2%

China Coal 1898 HK 0.13 0.37 188.0% 0.15 0.31 109.2%

China Shenhua 1088 HK 0.89 1.40 57.5% 0.76 1.27 66.1%

2018E EPS2017E EPS

Name BBG ticker Rating 2017E 2018E 2017E 2018EYanzhou Coal 1171 HK OP 6.1 7.7 0.6 0.6China Coal 1898 HK OP 10.0 12.1 0.6 0.5Shenhua 1088 HK N 10.5 11.6 0.9 0.8

Trading P/B (x)Trading P/E (x)

23



JAPAN

Code Name Rec. Close

(¥) TP (¥)

U/D

1963 JGC N 2,023 2,100 +3.8% 6366 Chiyoda N 836 860 +2.9%






Source: FactSet, Macquarie Research, January 2017 (all figures in JPY unless noted)

Analyst(s) Kunio Sakaida +81 3 3512 7873 [email protected] Tomoki Takeshima +81 3 3512 7432 [email protected]


Japan plant engineering Ichthys subcontractor terminates contract Conclusion

CIMIC Group announced on 25 January that ”the UGL-CH2M JV (joint

venture) terminated its contract for construction of combined cycle power

plant (CCPP) at the Ichthys LNG project in Australia.”

We believe this is negative for JGC and Chiyoda, which are handling the LNG

plant construction for the project. We believe it will be important to closely

monitor the possibility of additional costs.

Impact

The JKC JV, which consists of JGC, KBR, and Chiyoda, has a consignment

from Inpex to build the LNG plant and related facilities for the project. The

UGL-CH2M JV was a sub-contractor of the JKC JV in charge of building the

power facilities.

The JKC JV and Inpex concluded a lump-sum turnkey contract, and this

means the JKC JV is responsible for additional costs incurred in building the

power plant.

Power plant construction is currently 89% finished; 300 workers have been

working for UGL-CH2M JV.

We spoke to IR representatives from JGC and Chiyoda who commented that

”we intend to cooperate with other sub-contractors involved in the Ichthys

project to complete the work and do not expect major impacts on our costs or

schedule at this point.”

24



GLOBAL

LME cash price

% change

US$/tonne day on day

Aluminium 1,837 -1.8

Copper 5,922 -0.1

Lead 2,405 -1.3

Nickel 9,640 -1.0

Tin 20,390 0.1

Zinc 2,788 -0.8

Cobalt 36,000 0.0

Molybdenum 14,892 0.0

Other prices

% change

day on day

Gold (US$/oz) 1,195 -1.8

Silver (US$/oz) 16.93 -1.0

Platinum (US$/oz) 979 -1.3

Palladium (US$/oz) 758 -3.9

Oil WTI 52.67 0.0

USD:EUR exchange rate 1.074 -0.2

AUD:USD exchange rate 0.756 -0.4

LME/COMEX stocks

Tonnes Change

Aluminium 2,290,075 5,350

LME copper 271,025 -1,125

Comex copper 89,142 653

Lead 194,500 -475

Nickel 380,154 4,650

Tin 5,055 450

Zinc 406,350 -3,675

Source: LME, Comex, Nymex, SHFE, Metal

Bulletin, Reuters, LBMA, Macquarie Research,

January 2017

Analyst(s) Macquarie Capital Securities (Singapore) Pte. Limited Ian Roper +65 66010698 [email protected] Macquarie Capital Limited Lynn Zhao +86 21 2412 9035 [email protected] Macquarie Capital (Europe) Limited Colin Hamilton +44 20 3037 4061 [email protected] Jim Lennon, Senior Commodities Consultant +44 20 3037 4271 [email protected] Matthew Turner +44 20 3037 4340 [email protected] Vivienne Lloyd +44 20 3037 4530 [email protected]

25 January 2017

Commodities Comment Chinese coal restrictions likely to return, but are imports at risk also? Feature article

As we wrote recently in the commodities compendium, we strongly believe

that a “Beijing put” will underwrite the global coal market in the near and

medium term. If prices continue to slide, we expect that some form of output

restrictions will come back with the “276 days” policy, which in November was

suspended until the end of 1Q, being reapplied to some mines.

Rather than restricting domestic supply, we should also consider a scenario

where Beijing looks to change its openness to coal imports as an alternative

measure to support domestic coal prices, particularly as the goal of the policy

is to provide support to the domestic mining industry.

Latest news

Precious metals had a bad day on Wednesday. In particular palladium, which

has enjoyed an impressive start to 2017, tumbled, at one point trading 6%

down DoD. Gold fell below $1,200/oz, down 1.8%, while platinum fell 1.3%.

There was little in the way of news to explain the movements except a

stronger dollar, with the extent of the falls surely exacerbated by over-

extended positioning.

China’s gold imports surged higher in December, according to our

calculations from Chinese Customs data. We estimate 227t were imported, up

from 117t in November. This seems rather odd given press reports that there

had been limits put on the number of banks allowed to import gold. The sharp

MoM increase is similar to that of last December, when we estimate 270t was

imported. Confirmation of the increase will come on Thursday with the release

of Hong Kong and Swiss export data, the two main suppliers to the mainland.

BHP Billiton reported Q4 operating results for CY2016 on Wednesday in

which misses in met coal, energy coal and copper caught our attention.

Guidance on the latter was cut by 2% to 1.62Mt from 1.66Mt previously on

weaker performance from its Olympic Dam mine due to a power outage last

year. Escondida guidance has been left alone, which we note in light of the

downside risk raised by the largest labour union’s aggressive stance in pay

negotiations recently, plus the fact that H2 FY17 production (H1 CY17) needs

to be 37% higher than the last six months to achieve this, which is calling for a

substantial ore grade improvement. Amongst the coals, thermal was worst hit,

11% below our expectations for the quarter, at 6.65Mt. Meanwhile iron ore

output was in line at 60Mt.

Antofagasta Minerals also reported today, but contrarily showed a strong beat

(against our expectations) in Q4, hitting the bottom of their CY 2016 guidance

range at 710kt of contained copper. Consensus has been <700kt contained

on weaker output in the first 9 months at Los Pelambres amongst others, but

this mine plus Centinela raised production strongly in the final quarter. Closer

analysis of this result showed a jump in grades processed at Centinela in Q4,

leading to surmissions of high-grading in some quarters, with some selling

seen on the stock later in the day after its initial rally.

25

Macquarie Research

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2016

AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)

Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)

Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)

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

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27

Asia Research Head of Equity Research

Peter Redhead (Global – Head) (852) 3922 4836

Jake Lynch (Asia – Head) (852) 3922 3583

David Gibson (Japan – Head) (813) 3512 7880

Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles/Auto Parts

Janet Lewis (China, Japan) (813) 3512 7856

Takuo Katayama (Japan) (1 212) 231 1757

James Hong (Korea) (822) 3705 8661

Amit Mishra (India) (9122) 6720 4084

Financials

Scott Russell (Asia) (852) 3922 3567

Dexter Hsu (China, Taiwan) (8862) 2734 7530

Keisuke Moriyama (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Suresh Ganapathy (India) (9122) 6720 4078

Sameer Bhise (India) (9122) 6720 4099

Gilbert Lopez (Philippines) (632) 857 0892

Ken Ang (Singapore) (65) 6601 0836

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

David Ng (China, Hong Kong) (852) 3922 1291

Conrad Werner (Singapore) (65) 6601 0182


Consumer and Gaming

Linda Huang (Asia, China, Hong Kong) (852) 3922 4068

Zibo Chen (China, Hong Kong) (852) 3922 1130

Terence Chang (China, Hong Kong) (852) 3922 3581

Sunny Chow (China, Hong Kong) (852) 3922 3768

Satsuki Kawasaki (Japan) (813) 3512 7870

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

KJ Lee (Korea) (822) 3705 9935

Stella Li (Taiwan) (8862) 2734 7514

Amit Sinha (India) (9122) 6720 4085

Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)

Karisa Magpayo (Philippines) (632) 857 0899

Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Timothy Lam (China, Hong Kong) (852) 3922 1086

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

Corinne Jian (Taiwan) (8862) 2734 7522

Marcus Yang (Taiwan) (8862) 2734 7532

Conrad Werner (ASEAN) (65) 6601 0182

Industrials

Janet Lewis (Asia) (813) 3512 7856

Patrick Dai (China) (8621) 2412 9082

Kunio Sakaida (Japan) (813) 3512 7873

William Montgomery (Japan) (813) 3512 7864

James Hong (Korea) (822) 3705 8661

Benson Pan (Taiwan) (8862) 2734 7527

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Justin Chiam (Singapore) (65) 6601 0560

Internet, Media and Software

Wendy Huang (Asia, China) (852) 3922 3378

David Gibson (Asia, Japan) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Soyun Shin (Korea) (822) 3705 8659

Abhishek Bhandari (India) (9122) 6720 4088

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Polina Diyachkina (Asia, Japan) (813) 3512 7886

Aditya Suresh (Asia, China, India) (852) 3922 1265

Anna Park (Korea) (822) 3705 8669

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Abhishek Singhal (India) (9122) 6720 4086

Wei Li (China, Hong Kong) (852) 3922 5494

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838


Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

William Montgomery (Japan) (813) 3512 7864


Abhishek Bhandari (India) (9122) 6720 4088

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Coria Chow (China) (852) 3922 1181

Anna Park (Korea) (822) 3705 8669

Sumangal Nevatia (India) (9122) 6720 4093

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Allen Chang (Greater China) (852) 3922 1136

Jeffrey Ohlweiler (Greater China) (8862) 2734 7512

Patrick Liao (Greater China) (8862) 2734 7515

Louis Cheng (Greater China) (8862) 2734 7526

Kaylin Tsai (Greater China) (8862) 2734 7523

Telecoms

Soyun Shin (Korea) (822) 3705 8659

Prem Jearajasingam (ASEAN) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417


Azita Nazrene (ASEAN) (603) 2059 8980

Utilities & Renewables

Patrick Dai (China) (8621) 2412 9082

Candice Chen (China) (8621) 2412 9087

Alan Hon (Hong Kong) (852) 3922 3589


Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (44 20) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (44 20) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (44 20) 3037 4340

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Woei Chan (Asia) (852) 3922 1421

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

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Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769


Peter Eadon-Clarke (Japan) (813) 3512 7850

Chan Hwang (Korea) (822) 3705 8643

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512


Jayden Vantarakis (Indonesia) (6221) 2598 8310

Anand Pathmakanthan (Malaysia) (603) 2059 8833


Conrad Werner (Singapore) (65) 6601 0182

Find our research at Macquarie: www.macquarieresearch.com/ideas/ Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

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Thomas Renz (Geneva) (41 22) 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Eric Roles (New York) (1 212) 231 2559

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Amelia Mehta (Singapore) (65) 6601 0211

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44 20) 3037 4882

Christina Lee (UK/Europe) (44 20) 3037 4873

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Daniel Clarke (Taiwan) (8862) 2734 7580

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44 20) 3037 4905

28

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