initiation: a key player in china’s unconventional oil and...

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Investment case Although Anton Oilfield Services Group’s (Anton) share price has risen by 23% YTD, we believe there is further upside. We expect continued strong demand for oil services for both conventional and unconventional oil and gas basins, supported by government policies. Helped by this, we forecast a 34% EPS CAGR over 2012-15. We believe Anton’s exposure to the tight-gas market in China is under-appreciated by investors and will continue to generate profit growth for the company. In addition, the lack of investable alternative China oilfield-services companies leveraged to onshore China warrants a premium, in our view.

We initiate coverage with a six-month DCF/PER/PBR-based target price of HKD7.00 and Buy (1) rating. ■ Catalysts Over the next six months, potential catalysts should include news flow on: 1) orders from domestic or overseas customers, 2) strong operational performances for 1Q13 and 1H13, 3) a potential acquisition to strengthen the company’s onshore China business, and 4) the roll-out of new policies to support development of the unconventional gas industry, including a third round of shale-gas block auctions. ■ Valuation Our 10-year DCF utilises a 12.5% WACC and a 2.5% terminal-growth rate, while our respective target 2013 PER and PBR multiples are 25.0x and 4.0x. These multiples represent Anton’s average and high since its IPO in 2007, respectively. Our target PER multiple may be conservative given that Anton is in the nascent stages of a multi-year growth phase in China’s onshore oilfield services. At our target price, the stock would trade at 2014 and 2015 PER (on our EPS forecasts) of 20.5x and 16.1x, respectively. We do not consider this demanding given our view that the company will see robust earnings quality from its core conventional and

tight-gas business, as well as its long-term exposure to China’s shale-gas industry. ■ Risks Risks include lower oil prices and, as a consequence, reduced exploration and production capex, the sustainability of order flow, and operational risks related to oil and gas extraction.

Energy / China3337 HK

16 April 2013

Anton Oilfield Services Group

Initiation: a key player in China’s unconventional oil and gas space

• We initiate coverage with a Buy rating and six-month target price of HKD7.00

• We forecast a 34% EPS CAGR over 2012-15 due to continued growth in tight-gas exploration and production in China

• Share-price catalysts should include new orders from domestic and overseas customers, and strong 1Q13 and 1H13 numbers

Source: FactSet, Daiwa forecasts

Energy / China

Anton Oilfield Services Group3337 HK

Target (HKD): 7.00Upside: 32.3%15 Apr price (HKD): 5.29

Buy (initiation)

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12-month range 1.13-5.54Market cap (USDbn) 1.443m avg daily turnover (USDm) 11.50Shares outstanding (m) 2,116Major shareholder Pro Development Holdings (32.6%)

Financial summary (CNY)Year to 31 Dec 13E 14E 15ERevenue (m) 2,864 3,851 4,904Operating profit (m) 1,017 1,374 1,756Net profit (m) 408 555 712Core EPS (fully-diluted) 0.191 0.262 0.336EPS change (%) 35.1 37.2 28.3Daiwa vs Cons. EPS (%) 1.7 1.7 (2.5)PER (x) 22.1 16.1 12.5Dividend yield (%) 1.5 2.1 2.6DPS 0.064 0.087 0.111PBR (x) 4.0 3.4 2.9EV/EBITDA (x) 7.9 6.0 4.7ROE (%) 19.4 22.8 24.9

Adrian Loh(65) 6499 6548

[email protected]

Benjamin Lim(65) 6321 [email protected]

Maurine Wan(852) 2848 4451

[email protected]

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

Energy / China 3337 HK

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Growth outlook Anton: net profit vs. free cash flow

The company’s annual net profit was predictably weak in 2009 during the global financial crisis. However since then, Anton’s net profit has increased materially due to a rise in the volume of work from its customers, as well as EBITDA-margin expansion. We forecast a net-profit CAGR of 36% over 2012-15, largely driven by continued high levels of demand in the unconventional oil and gas space.

Source: Company, Daiwa forecasts

Valuation Anton: PER bands since IPO in 2007

Our target PER multiple of 25.0x, applied to our 2013 EPS forecast, values Anton at HKD7.62. This target multiple is based on the stock’s average PER since the company listed in 2007. Importantly, we believe this 25x PER multiple accounts for the company’s revenue and profit CAGR for the 2012-15 period, which we forecast at 35% and 36%, respectively. We note that the stock’s PEG ratio is 0.74x based on Daiwa’s target PER multiple and 2012-15 EPS CAGR.

Source: Bloomberg

Earnings revisions Anton: 12-month EPS-forecast revisions

Over the past 12 months, there have been gradual upward revisions to the Bloomberg consensus 2013 and 2014 EPS forecasts. However, there were meaningful increases after Anton announced a strong 2012 net profit, up 291% YoY. We note that the upward revisions to 2014 EPS were larger than that for 2013, implying a greater sense of confidence about the company’s growth prospects. Daiwa’s 2013 and 2014 EPS forecasts are about 2% higher than those of the consensus, which we attribute to our higher EBITDA-margin and revenue-growth expectations.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

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Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EDownhole operations EBITDA margin 57.6 37.8 40.4 45.4 55.0 53.0 53.0 53.0Well completion EBITDA margin (%) 63.9 42.8 43.1 34.3 31.8 32.0 32.0 32.0Drilling technology EBITDA margin 39.3 25.4 35.3 23.0 24.9 25.0 25.0 25.0Tubular services EBITDA margin (%) 26.9 17.8 32.3 23.5 41.0 40.0 40.0 40.0No. of employees 1,158 1,210 1,038 1,262 1,613 2,097 2,726 3,544

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EDownhole operations 112 100 344 570 857 1,285 1,799 2,338Well completion 241 214 325 320 458 596 774 968Other Revenue 411 376 282 369 690 983 1,278 1,598Total Revenue 763 690 951 1,259 2,005 2,864 3,851 4,904Other income (15) 4 1 2 11 2 2 2COGS (344) (368) (395) (572) (865) (1,232) (1,657) (2,110)SG&A (126) (115) (124) (136) (266) (430) (694) (981)Other op.expenses (50) (42) (111) (158) (147) (187) (129) (60)Operating profit 229 168 322 395 737 1,017 1,374 1,756Net-interest inc./(exp.) (38) 2 (3) (16) (31) (7) (9) (11)Assoc/forex/extraord./others (86) (132) (177) (267) (339) (476) (640) (814)Pre-tax profit 105 38 142 112 367 534 725 930Tax (33) (1) (16) (21) (50) (80) (109) (140)Min. int./pref. div./others (4) (6) (9) (14) (15) (45) (62) (79)Net profit (reported) 68 32 117 77 303 408 555 712Net profit (adjusted) 68 32 117 77 303 408 555 712EPS (reported)(CNY) 0.033 0.015 0.056 0.037 0.144 0.193 0.262 0.336EPS (adjusted)(CNY) 0.033 0.015 0.056 0.037 0.144 0.193 0.262 0.336EPS (adjusted fully-diluted)(CNY) 0.037 0.015 0.056 0.037 0.141 0.191 0.262 0.336DPS (CNY) 0.027 0.009 0.019 0.017 0.046 0.064 0.087 0.111EBIT 142 38 145 175 398 541 734 941EBITDA 255 203 373 454 830 1,168 1,586 2,030

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 105 38 142 112 367 534 725 930Depreciation and amortisation 26 35 51 59 93 151 212 274Tax paid (27) (15) (10) (28) (49) (80) (109) (140)Change in working capital (175) (26) (173) 5 (133) (153) (630) (672)Other operational CF items 94 22 15 72 71 (83) 108 99Cash flow from operations 23 54 26 220 350 368 306 492Capex (85) (153) (93) (160) (232) (400) (400) (350)Net (acquisitions)/disposals (290) (126) (44) (35) (46) 0 0 0Other investing CF items (153) 205 62 (3) 5 (50) 0 0Cash flow from investing (528) (74) (76) (198) (273) (450) (400) (350)Change in debt (157) 43 135 157 12 51 100 100Net share issues/(repurchases) 43 0 0 5 24 0 0 0Dividends paid 0 (57) (25) (39) (47) (135) (183) (235)Other financing CF items n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Cash flow from financing (113) (14) (30) 258 (11) (84) (83) (135)Forex effect/others 0 0 0 0 0 0 0 0Change in cash (618) (34) (80) 281 65 (166) (177) 7Free cash flow (62) (99) (67) 61 117 (32) (94) 142

Financial summary


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Balance sheet (CNYm)

Key ratios (%)


Company profile

Anton Oilfield, founded in 1999, has four principal business divisions, namely Drilling Technology, Well Completion, Downhole Operations and Tubular Services. With these divisions, the company can act as a one-stop service center for the upstream oil and gas industry. Schlumberger is a major shareholder of the company with 19.8% interest, and has an agreement to exclusively work with Anton within China.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 423 344 339 478 539 373 197 204Inventory 203 212 265 271 487 573 771 981Accounts receivable 453 430 672 671 948 948 948 948Other current assets 229 83 70 121 240 220 296 377Total current assets 1,307 1,068 1,347 1,541 2,214 2,115 2,212 2,511Fixed assets 248 334 419 539 955 1,506 2,117 2,742Goodwill & intangibles 291 312 346 365 371 380 390 400Other non-current assets 78 77 79 53 52 206 129 183Total assets 1,925 1,791 2,191 2,498 3,593 4,208 4,848 5,835Short-term debt 7 50 185 320 212 212 212 212Accounts payable 339 181 331 393 960 1,046 1,403 1,783Other current liabilities 23 12 22 29 37 29 32 33Total current liabilities 369 243 538 742 1,209 1,287 1,647 2,028Long-term debt 0 0 0 0 299 350 450 550Other non-current liabilities 5 2 2 16 4 216 25 54Total liabilities 375 245 540 758 1,512 1,853 2,122 2,632Share capital 197 197 197 198 201 201 201 201Reserves/R.E./others 1,322 1,314 1,417 1,468 1,771 2,045 2,416 2,893Shareholders' equity 1,519 1,511 1,614 1,666 1,972 2,245 2,617 3,094Minority interests 31 35 37 74 109 109 109 109Total equity & liabilities 1,925 1,791 2,191 2,498 3,593 4,208 4,848 5,835EV 8,483 8,610 8,751 8,832 8,996 9,213 9,489 9,582Net debt/(cash) (416) (294) (154) (158) (28) 188 465 558BVPS (CNY) 0.726 0.722 0.771 0.794 0.932 1.061 1.237 1.463

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 54.7 (9.6) 37.8 32.4 59.2 42.9 34.5 27.3EBITDA (YoY) 76.8 (20.3) 83.8 21.8 82.7 40.7 35.8 28.0Operating profit (YoY) 6.3 (73.5) 287.7 20.2 127.7 36.0 35.7 28.2Net profit (YoY) (39.4) (53.2) 264.1 (33.7) 291.4 35.0 35.9 28.3Core EPS (fully-diluted) (YoY) (48.0) (58.9) 264.8 (34.1) 286.0 35.1 37.2 28.3Gross-profit margin 54.9 46.6 58.4 54.6 56.8 57.0 57.0 57.0EBITDA margin 33.3 29.4 39.2 36.1 41.4 40.8 41.2 41.4Operating-profit margin 18.6 5.4 15.3 13.9 19.9 18.9 19.1 19.2Net profit margin 9.0 4.6 12.3 6.1 15.1 14.3 14.4 14.5ROAE 4.7 2.1 7.5 4.7 16.6 19.4 22.8 24.9ROAA 3.6 1.7 5.9 3.3 9.9 10.5 12.3 13.3ROCE 9.1 2.4 8.5 9.0 17.1 19.7 23.3 25.6ROIC 19.2 13.8 20.7 20.9 35.0 37.6 40.7 42.9Net debt to equity net cash net cash net cash net cash net cash 8.4 17.8 18.0Effective tax rate 31.6 1.9 11.5 18.5 13.5 15.0 15.0 15.0Accounts receivable (days) 184.6 233.6 211.5 194.7 147.4 120.9 89.9 70.6Current ratio (x) 3.5 4.4 2.5 2.1 1.8 1.6 1.3 1.2Net interest cover (x) 3.8 n.a. 53.9 10.9 13.0 72.7 80.1 85.8Net dividend payout 82.7 56.2 33.7 46.1 31.8 33.0 33.0 33.0Free cash flow yield n.a. n.a. n.a. 0.7 1.3 n.a. n.a. 1.6

Financial summary continued …


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Growth from conventional and unconventional oil and gas

We initiate coverage of Anton with a Buy rating as we believe the macroeconomic environment, coupled with supportive policies from the PRC Government, will increase the company’s ability to expand over the next five years

Positive macro environment

Conventional oil and gas: still room to grow Over the 2002-12 period, the three China oil majors’ upstream capex totalled USD340bn. Even if we assume that 10% of this capex was spent internationally, the resulting upstream capex spend of about USD300bn in China is still very high. Exploration and development expenditure by the three China oil majors

Source: Companies

In our view, this capex growth is the result of a number of factors.

• China’s onshore oil basins are mature and require increasing amounts of capex to extract the marginal barrels of oil that are left.

• Many of the country’s new frontier basins are far from the demand centres, eg, the Tarim Basin in the northwest of China, and thus have high production costs, especially from the transportation of oil and gas.

• Oil and gas demand growth in China increased significantly over 2002-12, which has encouraged high levels of exploration and development activity. Clearly, the oil price rise over that period supported the increased capex of the oil companies upstream.

Over the next 3-5 years, we believe these factors will still be relevant, and thus continue to exert a demand pull on oil services in China. Therefore, we expect the country’s upstream capex to continue to rise, and benefit companies such as Anton. In addition, we note that oil and gas lifting costs for both PetroChina and Sinopec rose by CAGRs of about 13% over the 2004-12 period and we expect them to continue to rise until at least 2015 (see the following chart). Historical and forecast lifting costs for PetroChina and Sinopec

Source: Companies, Daiwa forecasts

Unconventional oil and gas in China: tight gas a reality, shale gas a long-term When looking at unconventional oil and gas, we note that it is important to differentiate between tight gas and shale gas. We estimate that 35-40% of Anton’s revenue for 2012 came from tight gas while there was no revenue from shale gas. We believe that in the next 3-5 years, revenue from tight gas will continue to increase compared with conventional gas and that shale-gas revenue could represent another leg of profit growth over the same time frame. What are the differences between tight gas and shale gas? Tight gas: this is gas that is stuck in a very tight formation underground, trapped in hard rock, or unusually impermeable/non-porous sandstone or limestone. In 2006, the Society of Petroleum Engineers

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defined a tight-gas reservoir as “a reservoir that cannot be produced at economic flow rates nor recover economic volumes of natural gas unless the well is stimulated by a large hydraulic fracture treatment or produced by use of a horizontal wellbore or multilateral wellbores”. Shale gas: shale is a sedimentary rock that can be broken into thin, parallel layers. Shale-gas resources form within organic-rich shale source rock, which has very low permeability, thus inhibiting the gas from moving to more permeable reservoir rocks, while conventional gas reservoirs exist in permeable reservoir rock. As a result, the extraction of natural gas from shale formations is more difficult and often more expensive than that of conventional natural gas. Unconventional reservoirs explained

Source: Energy Information Administration

In our view, tight-gas production has largely been widely overlooked by investors because:

• the success of the US shale-gas revolution has overshadowed it, and

• the prevalence of, and growth in, tight-gas production has resulted in the market assuming that such production is easy and part of the overall conventional-gas production growth.

If we look at tight-gas production by the two major China oil companies in 2012 compared with their 2015 targets, it would appear that Anton’s revenue-growth opportunity is high over the next 2-3 years.

Tight gas in China: 2012 production vs. 2015 target production

Source: Companies, Daiwa forecasts

In addition, we note that data released by the China National Petroleum Corporation (CNPC) in April 2011 indicated that tight oil and gas accounted for more than 80% of the proven reserves added in the previous three years (2008-10). Thus it would appear that incremental production capacity in China over the following five years (2012-17) is likely to rely on fracture-stimulation technologies to develop these tight resources. In our view, Anton’s exposure to the tight-gas market in China is under-appreciated by investors and should continue to generate profit growth for the company. Supportive government policies China’s high level of interest in the development of its gas sector can be seen in the supportive policies that were rolled out in 2012. The most significant of these, in our view, was the 12th Five-Year Plan, which included plans to encourage the use of natural gas in extended industries, prioritise natural gas in the country’s integrated energy strategy, and strengthen government support for the development of natural gas in the areas of exploration, production, transportation and consumption. Other specific plans have included the following.

• October 2012: the new Natural Gas Utilisation Policy (2012 Gas Policy) announced by the National Development and Reform Commission, which provides specifics in terms of how natural-gas pricing should be reformed: 1) establishing a link with the oil price to reflect upstream and midstream costs, and 2) exploring and implementing a differential pricing mechanism, such as seasonal pricing and interruptible pricing.

• November 2012: a subsidy of CNY0.40/m³of shale-gas production to producers in China from 2012-15 in a bid to promote exploration and encourage production.

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The net effect of the above two policies has been to increase natural-gas prices in China and thus attract more capital into the upstream gas sector, specifically the unconventional gas sector. Policies formulated by the National Energy Administration and the Ministry of Land and Resources (MLR) have been finalised and are likely to be unveiled in the next three months. These are likely to include guidelines regulating the award of mineral rights, and bids for acreage. In addition, the new policies will address technology, and the research and infrastructure aspects of shale-gas development to support continued investment.

New entrants in China’s oil and gas industry are inexperienced

In December 2012, the MLR announced the results of the country’s second shale-gas acreage auction, covering over 20,000 sq km across eight provinces. It was notable that the winners of the 19 shale-gas blocks were not oil and gas companies, but instead ranged from coal companies to utilities and consumer-related companies (see the following table). List of winners in China’s second shale-gas acreage auction in December 2012 Block No. Location Successful bidder 1 Suiyang, Guizhou Huadian Coal Mining Group 2 Fenggang No.1, Guizhou China Coal Geology Engineering Co. 3 Fenggang No.2, Guizhou Haying Shanxi Energy Investment Co. 4 Fenggang No.3, Guizhou Beijing Taitan Tongyuan Natural Gas Tech Co. 5 Cengong, Guizhou Tongren Energy Investment Co. 6 Qianjiang, Chongqing Chongqing Energy Investment Co. 7 Youyang, Chongqing Chongqing Mining Resources Development Co. 8 Chengkou, Chongqing State Development & Investment Co. 9 Longshan, Hunan Hunan Huacheng Energy Investment Co. 10 Baojing, Hunan Shenhua Geological Exploration Co. 11 Huayuan, Hunan China Huadian Engineering Corp. 12 Sangzhi, Hunan China Coal Geology Engineering Co. 13 Yongshun, Hunan Hunan Natural Gas Development Co. 14 Laifen, Hubei Huadian Hubei Power Co. 15 Hefeng, Hubei Huadian Hubei Power Co. 16 Xiuwu, Jiangxi Jiangxi Natural Gas Co. 17 Lin'an, Zhejiang Anhui Energy Group 18 Wenxia, Henan Henan Yukuang Geological Exploration Co. 19 Zhongmou, Henan Henan Yukuang Geological Exploration Co.

Source: China Ministry of Land and Resources

Given that the winners of the 19 shale-gas blocks have little or no experience in drilling for oil and gas (let alone shale-gas drilling, which involves horizontal wells with multiple-stage hydraulic fracturing), it appears to us that the clear winners from this shale-gas auction are the oil-services companies such as Anton. We believe that these new entrants to the shale-gas business will need to depend heavily on oil-services companies both in China as well as internationally, as

such companies have the necessary knowledge and expertise to drill and complete shale wells.

Partnering with the best

In our view, much of the operational risk that Anton faces in its business has been mitigated by leading oil-services company Schlumberger (SLB US, Not rated) holding a 19.8% stake in the company, which was acquired in July 2012 for USD82m. Schlumberger has been involved with Anton since 2010, when it signed a two-year strategic co-operation agreement in drilling fluids and well-cementing services. While Schlumberger is not involved in daily operations, it has appointed Jean Francois Poupeau, executive vice-president, as a non-executive director to Anton’s board of directors. Mr. Poupeau is currently the chairman of Anton’s Quality, Health, Safety and Environment Committee of the board, tasked with providing guidance and advice on strategies to ensure that the quality of the company’s services meets international standards. What does Schlumberger bring to the table? We believe that Schlumberger’s stake in Anton was acquired with a view towards cementing its position in China’s growing, but potentially game-changing, shale-gas industry. Even more importantly for Anton, Schlumberger is one of the world’s leading oil-services companies with core competencies in seismic processing and interpretation, drilling technologies, reservoir characterisation, well completions and production, and well intervention. The two particular areas on which Anton has focused attention are drilling fluids and well cementing.

• Drilling fluid systems and products: Schlumberger’s wholly-owned subsidiary, M-I SWACO, is involved in engineering drilling-fluid systems and additives that improve efficiencies, reduce costs and minimise the impact on the environment. In particular, the company has developed drilling-fluid systems for specific applications, such as deepwater, shale-gas and heavy-oil extraction, while in some instances, specialised additives are used to optimise drilling efficiency by targeting down-hole problems that increase costs.

• Well cementing: cement supports and protects well casings, and helps achieve the isolation of various zones within the well. Importantly for shale wells, cement prevents leakage of the hydraulic fluids that


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are used in the fracturing process and thus is critical to safer and environmentally sound wells.

This will be important over the long term as Anton and the PRC Government attempt to discover whether the country’s technically large shale-gas resources can be quickly commercialised in order to reach its production targets. In what ways are US oil-services companies better than the China ones? One of the key questions from investors relates to the US oil-services companies and their competitive advantage over the China oil-services companies. In this section, we broadly outline the areas in which Schlumberger is better than its China peers. A. Technology We can broadly place oilfield-service activities into three categories: 1) drilling, 2) evaluating the formation, and 3) producing the well. These three activities obviously require tools that either sit on the drilling rig or are lowered into the wellbore or hole. These tools can be purely mechanical (easy to reverse-engineer) or electronics-heavy (much more difficult to reverse engineer). Schlumberger’s channel fracturing using HiWAY™ vs. conventional fracturing

Source: Company

Electronics-heavy tools are found particularly in drilling and formation-evaluation activities, and these are hard to reverse-engineer because of the software, firmware coding, or need for reliability of the electrical components at high temperatures. Even in well production, more electronics such as sensors are being introduced.

Other areas where US services companies may have advantages are drilling muds and chemicals, which are used in the hydraulic fracturing of shale-gas wells, for example. Schlumberger has developed its own proprietary chemical, HiWAY™, which requires 40% less water than other chemicals, and therefore less equipment to be taken to the well site. Apart from reduced water costs, which lower all-in production costs, increased levels of gas production have been achieved due to the “channels” formed by this chemical, according to the company. While Schlumberger’s competitors may be able to discover the ingredients of this chemical, the recipe – such as the amount of heat required, and when to mix it or how to mix it – are specific to the success and effectiveness of the chemical. B. Execution In our view, this is the area in which the US oil-services companies have the biggest advantage over their China peers. For example, Schlumberger’s focus on workflow (rather than individual activities) means it enters a project from the start to provide an integrated and seamless service for the customer, from drilling to evaluating the formation and ultimately to producing the well.

Financials and returns

We forecast a strong net profit CAGR of 36% over 2012-15 After its IPO in 2007, the company’s annual net profit was predictably weak in 2009 post the global financial crisis. Since then, however, Anton’s net profit has grown materially due to a higher volume of work from its clients, as well as margin expansion. We forecast the company’s net profit to rise at a CAGR of 36% over 2012-15, driven largely by continued high levels of demand in the unconventional oil and gas space. Seasonality in revenue and earnings We note that Anton’s revenue in the second half of the year tends to be higher relative to the first half due to a number of factors. In China, the oilfield services industry typically has a revenue collection cycle of 3-6 months due to the nature of oil exploration and production operations, and more product and service deliveries and collections tend to occur in 4Q. In addition, most of Anton’s customers are state-owned enterprises, which typically set their annual budgets early in the year, while incurring higher levels of capex in 4Q.


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EBITDA margins should remain stable On the margin front, we note that two of its four business segments (down-hole operations and tubular services) saw EBITDA margin expansion over 2008-12. Over the next three years to 2015, we forecast the EBITDA margins for all four business segments to remain stable. We believe that this is a reasonable assumption given our view that demand for Anton’s services will remain strong due to China’s thirst for energy, and thus its need to chase after unconventional oil and gas. Anton: historical and forecast EBITDA margins by business segment


Dividend policy Anton’s stated dividend policy is to pay out one-third of its recurring profits (i.e. net profit less exceptional items). At present, we estimate that the company will pay out 35% of its net profit for the 2013-15 period. Anton: historical and forecast dividend payout ratio


Solid balance sheet In our view, Anton has a solid balance sheet, and we forecast the company to remain in a net cash position by the end of 2013, followed by a net debt-to-equity of 0.2% by the end of 2014.

As at the end of 2012, Anton had cash and bank deposits of around CNY539m, representing a 13% YoY increase compared with the end of 2011. As at the end of 2012, it had total debt of CNY215m, while credit facilities granted to Anton by Chinese domestic banks amounted to CNY530m, of which less than CNY100m had been drawn down. Thus, we do not expect any equity capital raising from the company, as Anton’s capex appears to be adequately funded for at least the next three years. Returns While Anton’s Return on Average Assets (ROAA) and Return on Capital Employed (ROCE) (as seen in the chart below) averaged below 4% and c.7%, respectively, between 2008 and 2011, these numbers took a meaningful jump in 2012. Its ROAA tripled to 9.9% in 2012 versus 3.3% in 2011, while its ROCE nearly doubled to 17.1% in 2012 versus 9% in 2011. In our view, this is attributable to the company’s new businesses, such as drilling fluids and pressure pumping, which made their maiden revenue contributions in 2012. We also note that Anton’s returns have been helped by a favourable tax regime in China that recognises the company’s spending on research and development capabilities. In addition, some of its subsidiaries enjoy tax benefits granted to high-tech enterprises under certain Chinese tax laws and regulations, which reduce their income tax rates to 0-7.5%. We expect the lower-than-normal tax rate to continue during our forecast period of 2013-15, as we estimate Anton to incur an effective tax rate of 15% per year. Anton: historical and forecast ROAA and ROCE


0%

10%

20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013E 2014E 2015E

Downhole operations Well completion

Drilling technology Tubular services

84%

56%

34%

47%

33% 33%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2008 2009 2010 2011 2012 2013E0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E

ROAA ROCE


16 April 2013

- 10 -

Share-price performance

Over the past 12 months, the company’s share-price performance has been stellar, rising by 382% from March 2012-March 2013. In 2012, the stock rose by nearly 300% over the course of the year. We attribute this strong share-price performance to a combination of issues:

• Lack of alternative oil services companies to invest in within the Hong Kong/China market.

• Better earnings visibility heading into 2013-14 as Chinese oil companies focus more intensively on drilling for unconventional oil and gas.

• A stronger investor relations team within the company that has been effective in enunciating the company’s growth opportunities.

• Schlumberger’s investment in Anton in July 2012, thus giving the market greater confidence in the company’s business model.

Share-price catalysts over the next six months In the next six months, the potential catalysts we see for a further rerating of the company’s share price include news flow on:

• orders from domestic or overseas clients,

• a strong operational performance announcement for 1Q13 and 1H13,

• potential acquisition to strengthen its onshore China business, and

• the roll-out of new policies to support development of the unconventional gas industry, including a third round of shale-gas block auctions.

Valuation

Our PER/PBR/DCF-based six-month target price for Anton is HKD7.00, which represents 32% upside from current levels. At our target price, the stock would trade at 2013 and 2014 PERs of 28.8x and 20.5x, respectively. We highlight our forecast that the company will generate a 19% ROE for 2013, which justifies the relatively high 2013E PBR of 4.0x.

Anton: blended valuation CNYm HKD/share

Target PER of 25.0x 12,808 7.62 Target PBR of 4.0x 9,418 5.60 10-year DCF (WACC of 12.5%; terminal growth rate of 2.5%) 13,067 7.77 Average 6.99

Source: Daiwa estimates

Our target PER of 25x, applied to our 2013E EPS, values Anton at HKD7.62. This target multiple is based on the company’s average PER since its IPO in 2007. Importantly, we believe this 25x PER accounts for the company’s revenue and profit CAGRs for the 2012-15 period, which we forecast at 35% and 36%, respectively. We note that the company’s PEG ratio is 0.74x, based on Daiwa’s target PER and 2012-15 EPS CAGR forecast. Our target PBR of 4.0x is pegged to the company’s historical high since its 2007 IPO, which we believe is reasonable given our forecast for Anton to continue generating high ROAs and ROEs. Anton: PER since IPO in 2007

Source: Bloomberg

Our 10-year DCF, valuing the company at HKD7.77, utilises a 12.5% WACC and a 2.5% terminal growth rate. We forecast the company’s operating profit margin to plateau at 21% for 2015, and thereafter decline to less than 18% in 2020 and beyond. Based on Anton’s oil services comparable companies in the Asia-Pacific region, the company is trading currently at a 14-18% PER premium to the regional average, which we believe is reasonable given that its 34% EPS CAGR over 2012-15E is more than 2.5x higher than the regional average EPS CAGR of c.13%. In addition, we forecast Anton to generate 51-75% higher ROAs and ROEs for 2013 and 2014 compared with the regional average.

0

10

20

30

40

50

60

70

80

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

PER (x) +1 SD -1 SD Avg PER (x)

PER (x)Average: 25.0xHigh: 68.8xLow: 5.5xMedian: 20.2x


16 April 2013

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Regional oil services comparable companies

Company Bloomberg Share price Mkt cap Rating PER (x) EV/EBITDA Dividend yield (%) PBR ROA (%) ROE (%)

code (l.c.) USDm FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY13E FY14E FY13E FY14E Anton Oilfield Services 3337.HK 5.29 1,440 Buy (1) 22.1 16.1 7.9 6.0 1.5 2.1 4.0 10.5 12.3 19.4 22.8China Oilfield Services 2883.HK 15.40 10,410 Buy (1) 10.4 9.6 8.2 7.7 1.7 1.9 1.9 7.3 7.6 15.3 14.7Honghua Group 196.HK 3.71 1,546 Not rated 12.9 11.1 7.3 6.2 2.0 2.3 2.3 10.1 9.2 18.9 18.5Shengli Oil & Gas Pipe 1080.HK 0.82 262 Not rated 35.7 21.6 18.4 14.4 0.4 1.1 1.0 1.8 2.2 2.4 4.0SPT Energy Group 1251.HK 3.59 706 Not rated 17.3 13.7 8.5 6.6 1.1 1.4 3.0 12.4 13.4 18.8 20.5Zhejiang Kingland Pipeland 002443.CH 8.91 425 Not rated 21.4 17.6 14.5 13.2 0.0 0.0 1.8 NA NA 9.1 9.4Yantai Jereh Oilfield 002353.CH 77.60 5,760 Not rated 38.5 28.1 30.2 21.7 0.5 0.7 8.8 19.2 20.5 24.4 26.0Xinjiang Guotong Pipeline 002205.CH 11.85 222 Not rated 28.7 20.1 NA NA 0.4 0.7 1.4 NA NA 6.4 8.9Jiangsu Yulong Steel Pipe 601028.CH 8.26 424 Not rated 15.4 11.0 NA NA 0.0 0.0 NA NA NA NA NASembcorp Marine SMM.SP 4.32 7,296 Outperform (2) 14.8 12.3 10.0 8.2 3.7 4.3 3.2 10.0 10.3 23.6 24.2Keppel Corp KEP.SP 11.39 16,619 Outperform (2) 12.9 12.4 13.3 12.6 4.0 0.0 2.1 5.3 5.4 16.4 15.6Swiber Holdings SWIB.SP 0.63 311 Not rated 6.6 5.7 7.3 6.5 1.4 1.3 0.8 2.8 3.5 11.5 12.0Ezra Holdings EZRA.SP 1.05 831 Not rated 18.4 10.5 10.6 8.2 0.6 0.8 1.0 2.2 2.9 5.1 6.8KS Energy KST.SP 0.48 201 Not rated 95.0 33.9 NA NA 0.0 0.0 NA NA NA 0.8 2.2Mermaid Maritime MMT.SP 0.39 247 Not rated 26.6 14.6 6.0 5.8 0.0 0.0 0.0 1.5 2.6 2.3 3.7KNM Group KNMG.MK 0.47 227 Not rated 8.7 6.8 6.8 6.3 2.3 2.1 0.4 2.3 2.8 3.4 3.9SapuraKencana SAKP.MK 3.05 5,018 Not rated 26.8 17.2 18.6 10.8 0.5 0.6 2.6 5.1 5.8 10.5 13.1Dialog Group DLG.MK 2.36 1,864 Not rated 26.8 22.3 22.3 18.9 1.6 1.9 4.3 10.4 11.1 19.7 20.8Mean* 20.2 14.8 12.7 10.2 1.3 1.2 2.4 7.2 7.8 13.4 14.4Median* 18.4 13.7 10.0 8.2 1.1 1.1 2.0 6.3 6.7 15.3 14.7

Source: Bloomberg, Daiwa estimates for rated stocks

Note: Priced as at close of business on 15 April 2013; * excludes KS Energy

Anton: PBR since IPO in 2007

Source: Bloomberg

Risks Failure to find commercial quantities of shale gas in China. Currently, China’s oil and gas companies are ramping up their exploration activity to ascertain the size and scope of the country’s shale gas acreage. Should exploration and drilling results prove to be disappointing in the next 12-24 months, this could lower the future growth prospects for Anton. This could negatively impact its share price, despite the fact that there may be no EPS change. Runaway growth. Over 2009-12, the company recorded revenue and net profit CAGRs of 43% and 104%, respectively. At the same time, its number of employees increased by 33% over the period, with the company commenting during its 2012 results meeting that it expects its employee numbers to nearly double from 2012 levels to over 3,000 by 2015. The risk is that the company’s size and scope of activity may expand

too rapidly, and thus put a strain on such things as the training of new employees and management, cash flow, capital investment, coordination across sites, etc. Execution risks. Given the volatile and dangerous nature of oil and gas operations, poor execution of projects may lead to delays which may cause financial penalties to be levied, and the potential loss of future earnings due to the withdrawal of contracts by Anton’s clients. Regulatory and policy risk. In other parts of the world, the poor usage of horizontal drilling and hydraulic fracturing (fracking) may have led to water contamination and unnatural geological occurrences. As a result, some countries have placed significant limitations on fracking, and there is no guarantee that the Chinese government will not do likewise. This may cause a significant loss of business for Anton and negatively impact its profitability and cash flow. In addition, the government may limit the company’s access to the large quantities of water that is required for the fracking process, thereby negatively impacting Anton’s business. Lower oil and gas prices. Given that much of Anton’s future revenue and profit growth hinges on unconventional resources, which have higher production costs compared to conventional resources, any meaningful decline in oil and gas prices may have an outsized negative impact on the company’s profits and cash flow, as oil companies curtail capex spending.

0.0

0.5

1.0

1.5

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2.5

3.0

3.5

4.0

4.5

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

PBR (x) Avg PBR (x) +1 SD -1 SD

PBR (x)

Average: 1.3xHigh: 4.0xLow: 0.6xMedian: 1.0x


16 April 2013

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Exchange rate risk. Over 77% of Anton’s revenue comes from China, and thus is mainly denominated in Renminbi. Nevertheless, there may be exchange-rate risk as the company does import and export some oilfield tools which are settled in foreign currencies. In addition, there is also exchange-rate risk from Anton’s foreign currency deposits and trade receivables, which are denominated in foreign currencies. Any fluctuation in the Renminbi exchange-rate against the US Dollar would have a negative impact on Anton’s operating results and financial position.


16 April 2013

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Background

Anton’s four business segments allow it to offer an integrated solution for the Chinese oil and gas industry

Introduction

Anton was founded in Beijing in 2002 by Mr. Luo Lin together with Mr. Ma Jian and Mr. He Zhigang, with the aim of providing oilfield services and products that cover various stages in the life of an oil and gas field. The company estimates that it has between a 1% and 2% market share among the non-government-owned oilfield services providers in China, which total over 1,200 companies. The company derives a significant amount of its revenue from the three China oil majors and their listed and unlisted subsidiaries. The three wholly state-owned oil majors are CNPC (Not listed), China Petroleum and Chemical Corporation (CPCC – often known as Sinopec Group, Not listed), and China National Offshore Oil Corporation (CNOOC, Not listed). In addition, Anton has been able to win contracts from these oil majors for their international businesses; for example Anton has been working for PetroChina at the latter’s Halfaya oil field in Iraq since 2010.

Services

Anton’s businesses are divided into the following four segments: 1. Drilling technology This segment provides services and products during the drilling stage, which includes directional drilling, technical assessment of the well while drilling, etc. Anton also provides integrated project management services that take care of a client’s needs, from initial drilling all the way to well completion.

• Directional drilling is relatively self-explanatory. It refers to a service whereby the drillbit is steered or deviated away from vertical (see following chart). Such diagonally drilled wells are also known as ‘sidetrack wells’ and are used in order to enhance oil

and gas recovery rates by reaching the best position within the oil or gas reservoir, or to hit multiple target zones within mature fields so that the longevity of the field is assured. In addition, Anton’s drilling technology allows it to drill in various complicated environments, such as High Temperature High Pressure (HPHT) conditions, and reservoirs with thin pay zones.

A simple vertical well versus a directionally drilled well

Vertical well A sidetracked well using directional drilling

Source: Company

2. Well completion Well completion refers to the preparation of a well for oil and gas production post the drilling operations. A successful well completion should optimise oil production efficiency, protect the reservoir and maximise the life of the oil and gas production.

• Well completion integration provides specifically designed well-completion solutions, as well as the tools necessary for well cementing and completion.

• Screen well completion services comprise sand prevention techniques (since the ingress of sand into a wellbore would negatively impact production) that enhance production, as well as the tools needed for this activity.

• Gravel packing well completion is a sand prevention and production enhancement technique used for difficult situations, such as unconsolidated formations, thick but water-resistant reserves, etc.

3. Down-hole operations This segment provides oil companies with engineering technical services and products during the well completion and oil production stages.

• Production enhancement operations are used to develop low pressure or low permeability reservoirs to enhance their production and recovery rates, and is especially applicable to the development of tight


16 April 2013

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gas and shale gas. Such operations include acidising and fracturing production enhancement technology.

• Coiled tubing operation is a special operation which continuously inserts small-sized coiled tubing into the wells in order to carry out various well development operations.

• Tubular helium testing is used to test leaks in natural gas wells and is important to guarantee the safe production from various types of wells. In addition, Anton is also promoting this type of testing on surface facilities such as underground gas storage facilities and natural gas fields from conventional natural gas wells.

• Oil production technology includes technical services related to Enhanced Oil Recovery (EOR), water shut-off, well flushing and gas lift services, all of which enhance production and recovery rates from oil and gas fields.

4. Tubular services

• Tubular technical services include drilling tool multi-zone testing, tubing repair, coatings for drill pipes and tubes and the leasing of drilling tools.

• Production and sale of tubular goods such as ordinary and heavyweight drilling pipes, drilling collars, etc.

Geographic reach In 2012, Anton sourced around 22% of its revenue internationally, with the largest contribution coming from the Middle East. This is expected to continue in the next 3-5 years given that it will continue catering to PetroChina’s Halfaya project in Iraq. Anton: source of revenue in 2012

Source: Company

Key basins focused in China Anton has stated that it will prioritise its businesses in three particular natural-gas basins where it believes it has a competitive advantage, given that it has worked

there for a long time, and thus is familiar with the geology of the area as well as having the logistics back-up. These basins are the Tarim Basin, Ordos Basin, and the Sichuan Basin, where it is seeing significant demand for normal and high-end services. China’s three natural-gas basins where Anton seeks to prioritise business expansion

Source: Company, Daiwa estimates

Competitive landscape for oilfield services in China

In our view, China’s oilfield services sector is dominated by the subsidiaries of CNPC, CPCC (Sinopec), and CNOOC. Only CNOOC’s oil services subsidiary, China Oilfield Services Limited (2883 HK, HKD15.96, Buy [1]), is listed on the Hong Kong Stock Exchange. While foreign oilfield services companies are present in China, we believe they are more active offshore China relative to the onshore exploration and production blocks. In addition, there are numerous unlisted domestic oilfield services and equipment companies active in the onshore market; however, these companies operate on a much smaller scale, and thus constitute a very fragmented market. Although the government has tried to encourage the consolidation and growth of the private oilfield services sector as a means to speeding up technological and operational efficiencies, we view this as largely a failure.

NW China27.8%

N China26.4%

NE China13.2%

SW China10.2%

Middle East17.0%

Central Asia4.3%

Africa0.6%

Americas0.5%Other

5.4%

TIBET

QINGHAI

SICHUAN

INNER MONGOLIA

SHAANXI

SICHUAN BASIN

TARIM BASINORDOS BASIN

XINJIANG

HEILONGJIANG

LIAONING

JILIN

SHANXI

HENAN

JIANGXI

ANHUI

NINGXIA

GANSU

GUIZHOU

Hong Kong

BEIJING

GUANGDONG

FUJIAN

ZHEJIANG

HUNAN

HUBEI

SHANDONG

YUNNAN

GUANGXI

JIANGSU

HEBEI

HAINAN

TAIWAN


16 April 2013

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China’s oilfield services: Market share by participant in 2010

Source: Companies, Daiwa estimates

Shareholding structure and management

Anton’s largest shareholder, at 33%, is Pro Development Holdings, which is beneficially owned by Mr. Luo Lin. As indicated previously, Schlumberger is the second-largest shareholder of Anton with a 19.8% stake in the company.

Profile of Anton’s management

Name Age Position Years in oil and

gas industry Education Experience

Luo Lin 40 Chairman, CEO, Co-Founder 15 Bachelor’s degree in well bore engineering from Southwest Petroleum Institute

Tarim Basin Oil Field; deputy general manager of a subsidiary of the Southwest Petroleum Bureau

Ma Jian 39 Executive Director, Co-Founder 16 Bachelor’s degree in well bore drilling engineering from Jianghan Petroleum University; MBA from Huazhong University

1991-99: petroleum engineer at the Drilling Company in Jianghan Oilfield; 2000-02: well bore project manager at Halliburton China

Pan Weiguo 44 Executive Director - Well services and Research and Development

17 Bachelor’s and Master's degree in well bore drilling from Daqing Petroleum Institute

1990-96: deputy chief engineer and chief engineer at China Petroleum North Petroleum Control Board Well Bore Drilling Research Institute

He Zhigang 34 Executive Vice President - Drilling, Co-Founder

13 Bachelor’s degree in well exploration from Southwest Petroleum Institute; doctoral degree in oil and gas engineering from Southwest Petroleum Institute

1994-95: Xinjiang Tuha Petroleum Well Bore Drilling Company

Yang Bin 45 Executive Vice President - Oilfield services equipment & manufacturing and logistics centre

20 Bachelor’s degree in industrial engineering Director of the Jianghan Oilfield Design Institute; project manager and senior engineer of CNPC International Exploration Development Limited

Li Bingnan 38 Executive Vice President - Oilfield services

16 Bachelor's degree in well bore engineering from Jianghan Petroleum University

1991-2002: manager of environmental protection at the Jianghan Oil Bureau

Chen Wei 42 Executive Vice President - Sales management, Southwestern District of China

20 Bachelor's degree in oil exploration from the Southwest Petroleum Institute

Sichuan Petroleum Administration Bureau Chuan Zhong Oil and Gas Company

Han Yanping 34 Executive Vice President - Sales management, Northeastern District of China

n.a. Degree in oil and gas geology and exploration, Central Petroleum College

Production supervisor in the Tarim oilfield; joined Foyou Tech in 2001.

Shen Haihong 38 Executive Vice President - Operations management

16 Bachelor’s degree in well exploration engineering from Southwestern Petroleum Institute; MBA degree from the Qinghua University

Deputy general manager of the Toha Oil Well Drilling Company; Deputy director of the Enterprises Department of the Toha Directorate

Tang Shenghe 37 Executive Vice President - Finance and Investment management

5 Bachelor's degree in economics from Anhui University; Master’s degree in law from the Capital Economic and Trade University

Director of the Ministry of Agriculture Zhonglong Certified Public Accountants; Senior manager at Ernst & Young; Chief accountant and deputy general manager of Beijing Caike Pharmaceutical; Deputy general manager of Beijing Pharmaceutical Group

He Jun 38 Chief Financial Officer 5 Bachelor's degree from the Beijing Broadcasting Institute; MBA from the University of Massachusetts

Equity analyst at various international brokerage and asset management companies; Vice president at Citigroup Global Markets Asia

Source: Company

Incentive-based remuneration Being a private company, Anton is able to grant options to its management and executive staff as incentives, and thus potentially attract new, and retain current, staff in a very competitive environment for talent. In 2012, the group granted a total of 61.9m ordinary share options to over 170 staff. These include:

• 40.0m exercisable at a price of HKD1.072,



• 8.7m exercisable at a price of HKD2.61, and

• 128,800 exercisable at a price of HKD3.82.

State-owned enterprises

85.0%

Foreign companies

5.0%

Private sector10.0%


16 April 2013

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Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion

Mingchun SUN (852) 2773 8751 [email protected] Head of China Research; Chief Economist (Regional)

Dave DAI (852) 2848 4068 [email protected] Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)

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

Chi SUN (852) 2848 4427 [email protected] Macro Economics (China)

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

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

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

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

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China)

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

Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

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

Bing ZHOU (852) 2773 8782 [email protected] Consumer/Retail (Hong Kong, China); Hotels, Restaurants and Leisure - Casinos and Gaming (Hong Kong, Macau)

Cris XU (852) 2773 8736 [email protected] Household & Personal Products (China)

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

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

John CHOI (852) 2773 8730 [email protected] Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Internet (China)

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

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

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

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

PHILIPPINES

Rommel RODRIGO (63) 2 813 7344 ext 302

[email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

SOUTH KOREA

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

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

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

Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance

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

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

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

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

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

SoYoung WANG (82) 2 787 9133 [email protected] Transportation/Logistics

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)

Birdy LU (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement

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

Rita HSU (886) 2 8758 6254 [email protected] Small/Mid Cap

INDIA

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

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

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

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

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

Materials

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

SINGAPORE

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

Srikanth VADLAMANI (65) 6499 6570 [email protected] Banking (ASEAN)

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

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


16 April 2013

- 17 -

Daiwa’s Offices

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Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

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

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

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Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

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Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Sihuan Pharmaceutical Holdings Group Limited (460 HK); China Sanjiang Fine Chemicals Company Limited (2198 HK); SBI Holdings, Inc (8473 JP); Beijing Jingneng Clean Energy Company Limited (579 HK); REXLot Holdings Limited (555 HK); Huadian Fuxin Energy Corporation Limited (816 HK); Chaowei Power Holdings Limited (951 HK); CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent


16 April 2013

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permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany

This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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