singapore market focus singapore strategy...dbs group research . equity 23 feb 2016 singapore market...

ed: JS / sa: YM

STI : 2,660.65

Analysts Janice CHUA +65 6682 3692 YEO Kee Yan +65 6682 3706 [email protected] [email protected]

LING Lee Keng +65 6682 3703 Singapore Research Team [email protected]

Key Indices

Current % Chng 1 day STI Index 2,660.65 0.1% FS Small Cap Index 528.62 40.4% USD/SGD Curncy 1.41 0.3% Daily Volume (m) 1,468 Daily Turnover (S$m) 1,042 Daily Turnover (US$m) 739

Source: Bloomberg Finance L.P. Market Key Data – DBS Coverage

(%) EPS Gth Div Yield

2015E (4.8) 4.1 2016F 7.2 4.2 2017F 7.2 4.2 (x) PER EV/EBITDA

2015E 13.9 11.3 2016F 13.0 10.4 2017F 12.1 10.2

Source: DBS Bank Stock Picks

Price ($)

22 Feb 16 Target Price

($) Rcmd

Ascendas Reit 2.39 2.52 BUY

Capitaland 2.93 3.70 BUY ComfortDelgro 2.97 3.24 BUY Innovalues Ltd 0.805 1.01 BUY

Mapletree Logistics Trust 0.975 1.15 BUY

OCBC 7.95 9.40 BUY

OSIM International 1.025 1.28 BUY

SembCorp Industries 2.70 3.30 BUY

Sheng Siong Group 0.865 1.01 BUY

SIA Engineering 3.46 3.84 BUY

ST Engineering 2.80 3.60 BUY

Thai Beverage Public 0.69 0.82 BUY

Source: Bloomberg Finance L.P; DBS Bank

DBS Group Research . Equity 23 Feb 2016

Singapore Market Focus

Singapore Strategy

Refer to important disclosures at the end of this report

Hitch hike the bounce Valuation support and possible reversal of US$ trigger

bear market rally

But market is not out of the woods yet

Trade the bounce on oversold stocks – OCBC, OSIM, SCI and Capitaland. Trim oil and gas stocks on rebound.

Stay safe with dividend plays– CD, STE, SIE, Sheng Siong, AREIT, MLT, Thai Bev. BUY Innovalues – new initiation

More red ink in 4Q15. Kitchen sinking, higher provisions, asset impairment charges were the key drags on 4Q earnings so far, leading to a splash of red ink, particularly in the oil and gas sector. Earnings disappointment is taking a toll on dividends. Companies are conserving cash ahead of challenging times. Blue chips which have cut dividends include Keppel Corp, SCI and SMM, HPH Trust and M1. We shaved STI’s earnings growth estimate for 2016 from 6% to 3.4%, as volatility in cyclical sectors continues to pose challenges for 2016. Bear market rally to provide temporary breather. A counter-trend rally from the recent low of 2530 is in the making, supported by a) US rate hike expectations have back-pedalled, a March rate hike is unlikely and consensus thinks that the FED may even hold off rate hikes this year; b) strength of US$ is less of a worry; our currency strategist has lowered his USDSGD forecast to 1.43 by year-end as rate hike expectations are lowered. A pullback in USDSGD is short-term positive for Singapore equities as funds outflow reverses; c) possible ‘buy-in-anticipation’ trade ahead of expectations that the ECB will dish out more stimulus at the next policy meeting on March 10; d) the oversold market that has led to PB and PE valuations matching several major market troughs in the past. Longer term uncertainties linger on. While we are short-term positive, we believe that even in a ‘best case’ scenario, the magnitude of the current rise in the Singapore market is unlikely to stretch beyond the 2900 level for the STI over the next 2 months. Global growth remains uncertain despite rounds of QEs with global interest rates near zero or even negative in the case of Japan and the Eurozone. Closer home, Singapore faces the rising risk of a technical recession amid the challenging macro environment and weakness of our major trading partners. Revisiting bear targets. We re-visited our bear case target prices; with downward revisions in banks, oil and gas and property companies. We are buyers of bomb out stocks trading close to their bear TPs - SCI, OCBC, OSIM and Capitaland, but will trim oil and gas plays (SMM, Vard, Nam Cheong, Mermaid) on oil price rebound. We continue to prefer companies that offer upside in terms of dividend yields in the current environment where economic growth is uncertain. Our preferred yield picks : Comfort Delgro, Thai Bev, SIA Engineering, ST Engineering, Sheng Siong, Ascendas REIT and Mapletree Logistics Trust. We initiated Innovalues(BUY, TP$1.01), demand growth for automotive sensors is supported by rising awareness and stricter regulatory standards on safety and emissions.

Market Focus

Singapore Strategy

Outlook

‘Monkeyful’ of Surprises If the YTD behavior of equity markets is anything to go by, the Year of the Fire Monkey is likely characterised by ‘wide swings’. Worries about the Chinese economy and tumbling oil prices led to a 12% slump in the STI to 2530 during the initial 3 weeks of 2016. Monetary policy easing by the BOJ and ECB as well as expectations that the FED will hold back rate hikes calmed volatile financial markets in the immediate term. The Singapore market’s attractive valuations also helped to fend off further selling below the 2500 level, and we saw the STI rebounding 5% over the past week. Reasons for a counter trend rally from 2500 In our opinion, a counter-trend rally from the recent low of 2530 has begun. The following supports our view: 1. US rate hike expectations have back-pedalled. A March

rate hike is now unlikely and consensus thinks that the FED may hold off rate hikes this year.

2. Earlier projections of a strong USD have been toned down. Our currency strategist has lowered his USDSGD forecast to 1.43 (previous 1.46) by year-end as rate hike expectations are lowered. A pullback in USDSGD is short-term positive for Singapore equities as funds outflow reverses.

3. A ‘buy-in-anticipation’ trade ahead of expectations that the ECB will dish out more stimulus at the next policy meeting on March 10.

4. PB and PE valuations “too attractive to ignore”, matching several major market troughs in the past.

1. US rate hike expectations have back-pedalled

Much has happened since the Fed initiated the rate hike cycle in mid-December. Worries about a slowdown in China have deepened. Global PMI figures have weakened. Recent US data such as industrial production, ISM manufacturing and housing starts came in worse-than-expected, casting doubts about the strength of the US recovery. Despite the recent rebound in Brent crude from USD27/bbl to USD32/bbl, the outlook for oil price remains uncertain as the supply-demand imbalance is not expected to end anytime soon. Deflation remains the bigger concern for central banks. The BOJ joined the ECB and several other European central banks in implementing negative interest rates in a bid to boost growth and lift inflation.

At the recent January FOMC meeting, the FED acknowledged that economic growth has slowed; the committee is closely monitoring global economic and financial developments as well as assessing their implications for the labour market, inflation and the US economy. US rate hike expectations have back-pedaled, swinging further away from the Fed’s forecast at last December’s FOMC meeting for four rate hikes this year. Data from CME Group FedWatch shows there is just a 44% probability for a one-off 25bps rate hike at this year’s December FOMC meeting. That is, consensus currently expects at most one, if not no rate hikes (<50% probability) for 2016. Meanwhile, our economist has lowered his FED rate hike expectation to 3 times (previously 4) that would lift the Fed funds rate to 1.25% by year-end.

2. Strong USD projection toned down USD projections have moderated, in line with lower rate hike expectations. The USD Index is 2.6% weaker since the December FOMC meeting when the FED initiated the rate hike cycle. This is in line with our observation that based on previous rate hike cycles, the USD Index tends to weaken (rather than strengthen) once the rate hike cycle starts.

December 2015

Now

2-3 rate hikes

Zero or 1 rate hike

Consensus FED Rate

Hike

Market Focus

Singapore Strategy

USD Index (Daily)

Source: DBS Bank Our currency strategist has lowered his USD forecasts (see table below). YTD, the USDSGD has pulled back from a high of 1.44 down to 1.39. The revised USDSGD forecast implies a re-test of the recent high of 1.44 in 3Q but not exceeding it.

The back-pedalling in US rate hike and lower USDSGD expectations are short-term positives for Singapore equities as it results in a reversal of the funds outflow. But there is an upside cap to this view because of the higher macro economic uncertainties.

Revised currency forecasts

Source: Philip Wee, Regional Currency Strategist at DBS Bank

3. Expectations of more ECB monetary stimuli come March 10

ECB President Mario Draghi drummed up expectations for more monetary stimulus at its next policy meeting on March 10. Draghi commented that with the decline in oil price YTD, the annual rate of inflation in 2016 is likely to be “significantly” below forecast. Just last week, he re-iterated that the ECB will not hesitate to act if the decline in commodity prices and problems in the region’s banking sector threatens price stability. Depo rates are currently -0.30%. Odds of another 10-20bps cut in March have risen. The expectation of further ECB stimuli next month may be one of the reasons why equity markets are currently on the rebound. It’s a ‘buy-in-anticipation’ trade. The MSCI Europe Index, for example, is higher by nearly 5% to 111 over the past week after touching a low of 102.

4. Attractive valuation matching previous major market

troughs At the recent low of 2530, STI traded at 10.55x (-2SD) 12-mth forward PE and the Singapore market at 1.1x PB. The table below compares current valuation levels with previous major market troughs. Based on historical trends, with the exception of the 97/98 Asian Financial Crisis (AFC) and 2008/09 Global Financial Crisis (GFC), the stock market has priced in plenty of risk and in our opinion, including that of a brief technical recession. The only exceptions were during the 97/98 AFC and 2008/09 GFC when PB valuation fell by a further 15%. We see a low risk of such a decline happening in the short-term for the simple reason - the world is not in a major financial crisis and Singapore is currently not in a technical recession yet.

The lower USDSGD forecast implies a re-test of the recent high of 1.44 in 3Q but not exceeding it

Market Focus

Singapore Strategy

Singapore market valuation at major troughs

Event MSCI SG

12-mth

fwd PE (x)

Singapore

Market P/B

(x)

97/98 Asian Financial Crisis 11.47 0.95

September 11 12.65 1.29

2003 Iraq War & SARS 13.07 1.03

Global Financial Crisis 8.16 0.90

Eurozone Crisis 10.85 1.23

Current 10.53 1.10

Source: DBS Bank, DataStream STI at various fwd PE levels

-2.5 sd

9.77x

PE

-2sd

10.55

x PE

-1.5sd

11.32x

PE

-1 sd

12.09

x PE

-0.5 sd

12.87x

PE

FY16 2,313 2,498 2,680 2,863 3,047

FY17 2,467 2,663 2,858 3,052 3,249

12-mth fwd PE 2339 2525 2710 2895 3080

Ave FY16/17 2,390 2,581 2,769 2,957 3,148

Source: DBS Bank But market is not out of the woods yet - longer term uncertainties linger on While we are short-term positive, we believe that even in a ‘best case’ scenario, the magnitude of the current rise in the Singapore market is unlikely to stretch beyond the 2900 level for the STI over the next 2 months. Global growth remains uncertain despite rounds of QEs (and QQEs) with global interest rates near zero or even turning negative in the case of Japan and Eurozone. Investors are increasingly doubtful about the central banks’ ability to lift their respective economies through monetary easing. As Singapore is an externally driven economy, the risk of a technical recession has risen amid the challenging macro environment. Growing scepticism about the central banks’ abilities to save the economy We think one of the biggest challenges facing equities this year is that investors are fast losing confidence about central banks’ ability to uplift their respective economies through monetary easing. Here’s what our economists at DBS Bank have to say about both recent and upcoming central banks’ policy moves:

1. Eurozone deposit rates are currently at -0.3% and odds are for the ECB to cut a further 10-20bps in March. Our economist is doubtful about the effectiveness of further rate cuts. The sustainability of the early pick-up in deposit growth and lending activity is in doubt. A recovery in loan growth depends on demand, which remains weak. Meanwhile, inflation expectations continue to fall. Headline inflation was flat in 2015, down from 0.4% in 2014, and far below the ECB’s target at 2%.

2. In China, the substantial CNY3.42tril (or USD520bil) jump in total social financing in Jan 2016 was not an encouraging development. It is a reflection that the potency of monetary policy in stimulating growth has been weakening due to severe overcapacity in the manufacturing and industrial sectors. We remain cautious about the growth outlook in spite of the tremendous surge in credit. The economy has already reached a point where cyclical macroeconomic policy tools cannot resolve economic ills caused by structural imbalances. Only a ‘surgical’ reform will be effective this time.

At recent low 2530, STI traded at -2SD 12-mth fwd PE.

PE valuation lower than 97/98 AFC, Sept11, 2003 Iraq War & SARS; comparable to Eurozone crisis; higher than GFC

PB valuation lower than Eurozone crisis and Sept 11; almost comparable to 2003 Iraq War & SARS; higher than 97/98 AFC and GFC

Market Focus

Singapore Strategy

China: GDP/M2

Source: DBS Bank 3. BOJ started applying negative interest rates to banks’

reserves from 16 Feb in a further bid to spur bank lending, following the path adopted by the ECB and central banks of Sweden, Switzerland and Denmark. This follows two rounds of QE that started from 2013. It remains to be seen how the latest move by the BOJ will help in lifting loans growth given structural factors such as aging population, shrinking domestic consumer base and relocation of corporate investments to overseas emerging economies. We think the impact of the BOJ’s latest policy move is likely to be reflected in the financial markets more than in the real economy.

Singapore risks a technical recession Our Singapore economist notes that global demand has weakened amid a challenging external environment. PMI, a leading indicator of manufacturing activity, remained in contraction territory for the seventh consecutive month in January. The NODX figure was equally disappointing; reflecting Singapore’s vulnerability to the weak global growth prospects as the country is a small and open economy. A recession will become a clear and present danger if the recent trend of poor economic data continues. Singapore’s January data

Event Survey Actual Prior

Purchasing Managers Index Jan 49.7 49 49.5

Electronics Sector Index Jan ‐‐ 48.5 48.9

Non‐oil Domestic Exports YoY Jan ‐7.60% ‐9.90% ‐7.20%

Electronic Exports YoY Jan ‐1.70% ‐0.60% ‐0.30%

Source: DBS Bank

STI Base case: 2550 to 2950 With the uncertain macro economic situation and corporate earnings revisions still on a downward trend, our base view remains for the STI to trade within 10.55x (-2SD) to 12.09x (-1SD) blended FY16/17F PE. However, with the persistent earnings downward revisions in the current results season, the corresponding STI levels are now lower at 2550 to 2950, compared to our mid Dec15 forecast of 2650 to 3100. We place a higher two-thirds chance of this scenario developing for the simple reason - the world is currently not in a financial crisis and Singapore is currently not in a technical recession yet. STI change in fwd PE levels since Dec15

-2.5 sd

9.77x

PE

-2sd

10.55

x PE

-1.5sd

11.32x

PE

-1 sd

12.09

x PE

-0.5 sd

12.87x

PE

FY16 2,313 2,498

(-126)

2,680

(-128)

2,863

(-131)

3,047

(-134)

FY17 2,467 2,663

(-151)

2,858

(-153)

3,052

(-158)

3,249

(-161)

12-mth fwd PE 2339 2525 2710 2895 3080

Ave FY16/17 2,390 2,581 2,769 2,957 3,148

Source: DBS Bank

Decelerating velocity of money suggests incremental credit growth is not channelled into real economic activities

Market Focus

Singapore Strategy

Straits Times Index Base Case - Range from 2500 to 2950

Source: DBS Bank Alternative scenario : STI Bear case: Down to 2250-2300 We see STI sinking lower to 2250-2300 should current uncertainties degenerate further and the fear of a financial crisis escalates. At this lower level, the STI would have retraced 61.8% of its post-GFC bull market, with PB valuation falling

to just 0.98x and PE valuation sinking below 9.77x (-2.5SD) 12-mth fwd PE, which is around the AFC and GFC troughs. We place a lower one-third chance of this scenario developing.

1. Rate hike expectations have back-peddled

2. Expecting ECB stimulus & FED holds rates steady in March

3. USD pullback, oil price rebound 4. Attractive valuation @ 1.1x PB,

10.5x (-2SD) 12mth fwd PE

1. Macroeconomic uncertainties 2. Technical recession risk 3. Monetary policies becoming ineffective

Snap back rally off 2500

1st resistance 2750

Bear case: Down to 2250-2300

Base case: A rise from 2500 cap at/below 2900

Market Focus

Singapore Strategy

Strategy Trade the rebound Markets and stocks are oversold, throwing up bargain hunting opportunities. In our stock selection, we re-visited our bear case target prices, most of which were revised down – mainly banks and oil and gas companies, which have taken the brunt of lower oil prices, higher provisions and impairment charges. We prefer stocks which are bombed out, and are close to its bear TPs, to trade the rebound. In particular, Property and Banks are about 10% from their GFC troughs. OCBC (BUY, TP $9.40), trading at 0.9x PB offers a dividend yield of 4.6%. We believe the current share price has priced in a cautious 2016 outlook – slower loan growth, flat NIM and higher provisions. OCBC’s NPL ratio has held up well vs peers despite increasing in 2015. Despite concerns of an unsustainable low credit cost, OCBC has weathered past crisis over the last 10 years. Key risks lie in its oil and gas exposure which account for 6% of its portfolio. Solid non-interest income drivers from wealth management will sustain growth in the long term. Sembcorp Industries (BUY, TP$3.30), trading below its bear case TP has been battered down due to provisions and losses at Sembcorp Marine and unwarranted rumours of the

company privatising Sembcorp Marine. Stripping out the value of Sembcorp Marine, Salalah and Gallant Ventures, its Utilities business is only trading at 0.5x PB and 5x FY16 PE vs historical mean of 11x PE. Current price offers dividend yield of 4.3%. Capitaland (BUY, TP $3.73). We believe that CAPL offers value, trading at close to its GFC low at 0.6x P/RNAV. Growth will be driven by China, we expect the group to focus on growing its commercial portfolio, while opportunistic asset recycling of mature assets into its listed REITs/funds will present upside to our earnings. We upgraded OSIM (BUY, TP$1.28) after >40% decline in its share price in the past 6 months. Valuations are attractive with dividend yield at close to 7% and forward PE (c.10x) at close to -1SD of its 7-year mean (14x). 4Q15 earnings showed sequential improvement with signs of bottoming out. We believe this will support DPS and dividend yield going forward. Our PE-based TP of S$1.28 is premised on modest earnings growth in FY16F and its target PE of 14x at historical mean.

Market Focus

Singapore Strategy

Re-visiting bear case target prices.

Company Name Rcmd

Price 19 Feb

Mkt Cap (S$ m)

Current TP

(S$)

Revised Bear Case

TP (S$)

Downside to Bear

Case % Assumptions for Bear Case TP

% chg to

bear case

TP

Reason for revision in TP

StarHub Limited

FV 3.80 6,566.1 3.30 2.58 -32% Based on 12x forward PER seen in GFC 26% Our previous bear case TP was excessively bearish and assumed

deep cut in future earnings. In 2010 cut in earnings was due to iPhone

subsidies rather than weak economy Genting Singapore

HOLD 0.69 8,281.5 0.76 0.49 -29% Pegged to 5x EV/EBITDA which is the GFC low for Genting Malaysia as Resorts World Sentosa

was not operating during the GFC.

23% Change in cash and debt assumptions

CapitaLand BUY 2.90 12,319.3 3.73 2.73 -6% Pegged to GFC Low of 0.65x PB 7% Rise in BV

Ascendas Reit BUY 2.38 6,115.1 2.52 1.79 -25% PB of 0.86x ( pegged to the average during the GFC). TP is based on rental reversions of 1.5%-

2.0%.

0% -

ComfortDelgro BUY 3.01 6,473.5 3.24 1.94 -36% Based on 12x FY16F PE, which is -1 std deviation below historical average of 15x.

Earnings should remain relatively resilient on the back of low oil prices, offset by stronger USD

and other operating costs.

0% -

HongKong Land (US$)

BUY 5.81 13,646.3 9.32 5.36 -8% 54% NAV discount, 2 standard deviation below 10-year average

0% -

SIA Engineering

BUY 3.47 3,892.6 3.84 2.00 -42% Based on 7% dividend yield, average trading band observed in post-GFC period of 2008-09

0% -

Singapore Exchange

BUY 7.18 7,694.1 7.80 5.20 -28% Peg to 15x PE, same levels as GFC 0% -

SPH HOLD 3.76 6,010.1 3.51 2.84 -24% 1.2x PB, based on GFC low. In line with 8% GFC dividend yield.

0% -

ST Engineering BUY 2.74 8,495.6 3.60 2.45 -11% Based on 14x PE and 6% dividend yield, trough valuations observed post-GFC

0% -

Thai Beverage Public

BUY 0.68 17,074.8 0.82 0.54 -21% Assume flat ASP and decline in Spirits volume. Raise discount rate to 9.4% and impute lower

values for stakes in FNN/ FCL, coupled with a weaker THB/SGD.

0% -

Wilmar BUY 3.10 19,592.0 3.70 2.40 -23% Beta at 1.2; FY16 CPO price assumed to average RM1,720 (based on fibonacci

projection) this year; consumer margins drop to 1%, oilseeds & grains margins fall to 0.1% (low

of 2014) and SGD goes to at 1.45

0% -

Noble Group HOLD 0.34 2,189.4 0.42 0.28 -23% Based on the GFC low P/B of 0.29x and latest BPS of US$0.70

-7% Change in BV due to losses and Asset impairment

Hutchison Port Hldgs Trust (US$)

BUY 0.43 5,265.8 0.61 0.40 -7% based on 10% yield as DPU forecast has been lowered

-9% DPU Forecast has been lowered

UOB HOLD 17.81 28,625.8 18.80 14.70 -17% Lower loan growth close to 2008/09 but still growth (2008/09 saw loan contraction); raised

provisions by almost double and NPL ratio by 50bps; UOB tends to face larger stress on asset quality vs peers; raised risk premium by 100bps

-9% GFC Valuation, at 0.76x P/B

OCBC BUY 7.77 31,965.8 10.00 7.35 -5% Lowered loan growth but higher than 2008/09 levels with higher base from WHB, raise

provisions to levels slightly higher than 2009 levels; NPL ratio raised by 40bps; raised risk

premium by 100bps

-10% Pegged to GFC valuation, 0.8x P/B

Global Logistic Properties

BUY 1.65 7,826.8 2.47 1.59 -4% Pegged to sector trough of 0.65x P/B – GFC low

-13% Lower P/B assumptions

SembCorp Industries

BUY 2.51 4,480.8 3.50 2.60 4% Lowered Utilities PE to 8x; SMM TP to S$1.12. This translates to 0.7x FY15 PB (36% below

GFC/AFC low of 1.1x PB)

-14% Lower marine valuation

City Development

BUY 6.93 6,301.5 10.26 5.90 -15% Pegged to sector trough of 0.65x P/B – GFC low

-15% Lower P/B assumptions

Keppel Corp HOLD 5.20 9,417.9 5.25 4.26 -18% Based on 1.5x O&M PB; and 0.7x Property PB. This translates to 0.67x FY15 PB (40% below

GFC low of 1.1x PB)

-23% Decline in NTA post provisions; lower multiples given the lower oil price

levels and prolonged downturn. SembCorp Marine

FV 1.57 3,278.9 1.24 1.12 -29% Based on 0.9x P/Bv, in line with AFC low -38% Decline in NTA post provisions; lower multiples given the lower oil price

levels and prolonged downturn. SATS HOLD 3.83 4,254.7 3.65 2.70 -30% Lower PE target to 8x GFC PE. Assumes

earnings decline by 20% in line with magnitude of earnings decline in 08-09.

n.a. -

Yangzijiang Shipbuilding

BUY 0.96 3,659.6 1.55 0.89 -7% 0.65x FY16 PB. Assume 20% discount to GFC trough of 0.8x.

n.a. -

Source: DBS Bank

Market Focus

Singapore Strategy

Stay safe We prefer companies that offer upside in terms of dividend yields in the current environment where economic growth is uncertain, with an increasing number of central banks turning towards more monetary easing policies and the FED looking increasingly unlikely to raise rates anytime soon. In addition,

the dividend yield for companies with resilient earnings has also risen with the stock market correction in recent months. Stocks will be trading cum dividends over the next two months and this should hold up share prices, amidst a market fraught with uncertainties. Our top dividend yield picks are appended below.

Mkt Pric e Ta rge t

Compa ny Ca p (S$) Pri c e %(US$m) 19-Fe b (S$) Ups ide Rcmd 16F 17F 16F 17F 16F 17F 16F 17F

Ascendas REIT * 4,351 2.38 2.52 6% BUY 16.1x 15.9x 1.1x 1.2x 6.5% 6.5% 3% 1%

ComfortDelgro 4,515 2.95 3.24 10% BUY 18.2x 17.2x 2.5x 2.4x 3.6% 3.8% 15% 6%

Mapletree Greater China* 1,741 0.89 1.11 25% BUY 14.8x 14.5x 0.8x 0.8x 8.7% 8.7% 7% 0%

Mapletree Logistics Trust * 1,705 0.965 1.15 19% BUY 12.6x 12.2x 0.9x 0.9x 8.1% 8.3% 4% 3%

SIA Engineering 2,762 3.460 3.84 11% BUY 21.6x 21.7x 2.5x 2.5x 5.1% 5.1% 1% (0.5%)

Sembcorp Industries 3,430 2.700 3.30 22% BUY 8.3x 7.7x 0.7x 0.7x 4.1% 4.2% 6% 8%

Sheng Siong 915 0.855 1.01 18% BUY 21.1x 21.0x 5.2x 5.1x 4.3% 4.3% 9% 0%

Singapore Exchange 5,567 7.30 7.80 7% BUY 20.6x 20.1x 7.5x 7.2x 4.4% 4.5% 9% 3%

ST Engineering 6,184 2.80 3.60 29% BUY 16.3x 16.0x 3.9x 3.7x 5.4% 5.4% 1% 2%

Thai Beverage 12,150 0.68 0.82 21% BUY 17.3x 16.1x 3.6x 3.3x 3.8% 3.9% (5%) 7%

EPS / DPUPE (x) P/B (x) Div Yld Growth

Source: DBS Bank

* FY17 & 18 estimate

Snapshot of 4Q15 earnings : Profit warnings on the rise, led by oil & gas companies We note that there was a 20% y-o-y rise in companies issuing profit warnings before the 4Q results were announced. One notable difference is that for this year, about 30% of these companies are from the Oil & Gas related industry, mainly attributable to the adverse impact of falling oil prices on the absence of project wins, low utilisation of offshore vessels, asset impairment charges, increasing deferment & cancellation risks and rising provisions. Companies which had issued profit warnings, due in part to asset impairment charges were Nam Cheong, Ezra, Ezion, Mermaid, KS Energy and Technics Oil & Gas. We think Nam Cheong’s loss guidance for 4Q15 could be due to a steep slowdown in revenue recognition for vessels under construction, as customers are probably attempting to stretch out delivery dates further. Order cancellations are also possible. Nam Cheong’s net margins have trended down in recent quarters, with 3Q15 just breaking even on a net profit level. Mermaid is expected to take a substantial impairment charge and consequently report a net loss, mainly attributable to non-cash provisions for impairments on the value of key assets, investments in subsidiaries as well as share of loss in an associate investment.

Cut in dividends Earnings disappointments are taking a toll on dividends. Companies are conserving cash ahead of challenging times, although REITS have taken a different route which we believe is not sustainable. Some of the blue chips companies that have cut dividends include Oil & Gas stocks – Keppel Corp, SCI and SMM. Other blue chips include HPH Trust and M1. The challenging outlook on the back of the drop in oil prices has led to the cut in dividends for the O&G stocks. The cut in dividend for HPH Trust was within our expectations. Even with a lowered expected DPU of HK 31cts in 2016F as compared to HK 34.4cts for 2015, HPH Trust offers an attractive prospective dividend yield of 8.6%. M1’s FY15 dividend payout ratio stood at 80% versus 100% in FY14 as M1 wants to reserve cash for the upcoming spectrum auction. For the smaller caps stocks, Tat Hong declared 0.5Scts for 1H16 vs 1Sct for 1H15. For 3Q16, the group registered net losses, affected by the market weakness in the ASEAN countries and Australia for crane rental. Tat Hong paid 3Scts DPS in FY15. We expect continued pressure on both day rate and utilisation fronts in the coming quarters for POSH.

Market Focus

Singapore Strategy

Companies which have cut dividends Source: DBS Bank Cyclicals hit by kitchen sinking, higher provisions The latest cut in earnings by 2.5% has led to a flattish earnings growth estimate of only 3% for 2016, in line with the dismal GDP growth outlook for Singapore and its trading partners. Hardest hit were companies from the Oil & Gas sector as the recent plunge in oil prices pushed up provisions for contracts, with the domino impact on Banks’ provisions. Slow tourist arrivals and poor luck factor also hit Genting, leading to a close to 50% decline in VIP rolling chip volumes, while losses on its investment portfolio added to its woes. Red ink and kitchen sinking quarter for Oil & Gas Oil & Gas sector suffered the steepest cut in earnings estimates, on the back of falling oil prices, low utilisation rate, rising deferments and cancellations of contracts. We cut FY16F earnings by 13.2% and 12.8% for FY17F. Key culprits are Keppel Corp, Sembcorp Marine, while red ink at Ezra, and profit warnings from other OSV asset owners pulled the sector down. Both Keppel Corp and Sembcorp Marine were hit by provisions for Sete projects and other rigs. Ezra also reported bigger than expected losses as its Subsea losses intensify as a result of low utilisation rates. Its OSV division was also loss-making. Banks – saved by higher NIM but focus on rising credit cost For the Banks, UOB reported higher 4Q15 NIM at 1.79% (+2bps q-o-q; +10bps y-o-y) while loans grew by 2% q-o-q, 4% y-o-y. Provisions were higher at S$115m in 4Q15 (3Q15: S$56m). OCBC also reported higher NIM at 1.74% (+8bps q-o-q; +7bps y-o-y) for 4Q15 but loans dipped by 1% q-o-q and were flat y-o-y. Provisions were higher q-o-q from both specific and general allowances. Key concerns for the banks are exposure to the oil & gas and commodity sectors. UOB’s exposure to oil & gas comprises is 3.6% of total loans while other commodity segments make up another 3.4%. For OCBC, exposure to the oil & gas segment amounts to S$12.4bn or 6% of total loans.

DPUs for REITS boosted by capital returns; sustainability in question Although earnings were largely in line, 4Q15 results showed cracks in the operating environment on the back of slowing business activities with retail REITs remaining the most stable. As a result, we tweaked earnings for REITS by -0.7% for FY16F and -1.3% for FY17F. We note that several S-REITs have boosted DPUs through capital distributions in 4Q15, which is timely in an environment where stable dividends are valued. However, investors will question the sustainability of this move to hold up DPUs, against the backdrop of weak operational growth outlook. Revision to sector earnings Source: DBS Bank

Sector FY16 FY17

Banking -3.6% -4.0%

Commodities Related -0.2% 0.0%

Consumer Goods 0.0% 0.1%

Consumer Services -3.9% -3.4%

Financials 1.0% 1.4%

Health Care 1.6% 1.6%

Industrials -3.4% -1.6%

Oil & Gas -13.2% -12.8%

Real Estate 3.5% -0.2%

REITS -0.7% -1.3%

Technology 0.0% 0.0%

Telecommunications 0.0% 0.0%

Grand Tota l -2.5% -2.7%

Current vs Prev. Quarte r % Chng

Company Mkt Cap ($m)

Curr. Price ($)

Target Price ($)

Target re turn (%)

Rec'n Div Yie ld (%) FY15

DPS (Scts ) FY14

DPS (Scts ) FY15 % cut

Tat Hong Holdings 263.6 0.420 0.52 23% HOLD 0.8 1.5 0.5 -67%

SembCorp Marine 3,550.4 1.700 1.24 -27% FV 3.5 13.0 6.0 -54%

Global Logistic Properties 8,135.1 1.715 2.47 44% BUY 2.1 5.8 3.7 -36%

PACC Offshore Services Holdings 507.4 0.280 0.35 23% HOLD 3.7 1.5 0.5 -67%

SembCorp Industries 4,820.0 2.700 3.30 22% BUY 4.1 16.0 11.0 -31%

Keppel Corp 9,671.4 5.340 5.25 -2% HOLD 6.4 47.9 33.9 -29%

M1 2,380.0 2.540 2.60 2% HOLD 6.0 18.9 15.3 -19%

Hutchison Port Hldgs Trust (US$) 5,692.4 0.465 0.61 32% BUY 9.5 7.4 6.2 -16%

Croesus Retail Trust 497.2 0.780 0.86 10% HOLD 9.8 8.7 7.6 -12%

CDL Hospitality Trust 1,281.0 1.295 1.54 19% BUY 7.8 11.0 10.1 -8%

Keppel REIT 2,971.5 0.920 1.12 22% BUY 7.3 7.2 6.8 -7%

SPH 6,010.1 3.760 3.51 -7% HOLD 5.3 21.0 20.0 -5%

Cambridge Industrials 668.4 0.515 0.61 19% HOLD 9.3 5.0 4.8 -4%

OUE Hospitality Trust 990.9 0.740 0.91 23% BUY 8.9 6.7 6.6 -3%

Market Focus

Singapore Strategy

Sector Valuation

CAGR PER (x) Div Yld

Sector 2015F 2016F 2017F 15-17 2015F 2016F 2017F 2015

Banking 7.2 3.8 5.5 4.6 8.5 8.2 7.8 4.5

Consumer Goods -4.3 4.8 10.8 7.7 14.8 14.1 12.7 2.4

Consumer Services -6.2 13.7 6.2 9.9 21.3 18.8 17.7 3.0

Financials 7.9 -0.7 3.9 1.5 19.7 19.9 19.1 6.1

Health Care 10.8 27.1 14.1 20.4 48.8 38.4 33.6 0.9

Industrials -25.2 37.1 17.7 27.0 21.2 15.5 13.2 3.8

Oil & Gas -47.5 18.0 7.8 12.8 11.1 9.4 8.7 4.8

Real Estate -1.8 -2.9 9.5 3.1 12.3 12.6 11.5 2.9

REITS 5.5 3.6 2.8 3.2 14.7 14.2 13.8 6.8

Technology 7.4 8.1 6.3 7.2 9.2 11.8 11.1 6.3

Telecommunications 0.0 4.6 4.9 4.7 15.5 14.8 14.1 5.0

DBS Cove ra ge -4.8 7.2 7.2 7.2 13.9 13.0 12.1 4.1

Ex-prope rty -4.8 8.2 7.0

STI DBSV Fore c a st Avg (Be fore EI )

-2 .7 3.4 5.7 4.6 11.8 11.4 10.8

STI Conse nsus Avg -3.2 3.5 6.2 11.7 11.0 11.0

Eps Growth (%)

Source: DBS Bank, Bloomberg Finance L.P.

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC

BUY Last Traded Price: S$2.26 (STI : 2,834.63) Price Target : S$2.52 (12% upside) (Prev S$2.57) Potential Catalyst: Better than expected operational results Where we differ: In line Analyst Derek Tan +65 6682 3716 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2015A 2016F 2017F 2018F Gross Revenue 673 739 813 830 Net Property Inc 463 527 582 596 Total Return 398 347 398 402 Distribution Inc 351 370 412 417 EPU (S cts) 14.6 13.6 14.8 14.9 EPU Gth (%) 0 (7) 8 1 DPU (S cts) 14.6 14.9 15.3 15.5 DPU Gth (%) 3 2 2 1 NAV per shr (S cts) 208.3 208.5 207.6 206.8 PE (X) 15.5 16.6 15.3 15.1 Distribution Yield (%) 6.5 6.6 6.8 6.8 P/NAV (x) 1.1 1.1 1.1 1.1 Aggregate Leverage (%) 33.4 35.4 35.4 35.5 ROAE (%) 7.1 6.5 7.1 7.2 Distn. Inc Chng (%): 3 10 11 Consensus DPU (S cts): 15.4 16.2 16.6 Other Broker Recs: B: 16 S: 0 H: 8

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Diversifying Out Of Hometown

Rebounding occupancy holds potential earnings upside.

Portfolio occupancy rates bottomed out in 3QCY15, increasing marginally to 88.9% (vs 88.6% in Jun-15). Looking ahead, with vacancy rates standing at c.11%, we believe that A-REIT has upside to earnings if the unoccupied space can be filled, which is not included in our earnings forecast. Modest rental growth but still expected to remain

positive despite market headwinds. A-REIT recorded 9.1% reversion in its 2QFY16 (FYE Mar) results, boosted by 13.2% rise in rents achieved for its Business Parks/Science Parks. Looking ahead, we expect rental reversion momentum to slow but still remain positive based on the positive spread between market and passing rent levels over 2H16 – FY17.This will provide a buffer against expected falling market rents. Acquisitions to drive earnings. A-REIT has acquired assets worth more than S$1bn in assets in Singapore and Australia, in search for higher returns. The medium-term strategy is to have overseas exposure form c.30% of the A-REIT revenues. In addition, A-REIT has a visible pipeline of over S$1bn worth of business park assets under the Sponsor’s balance sheet which can be acquired in the medium term. Valuation:

Our DCF-based TP is lowered to S$2.52 as we roll forward our valuations and update our assumptions from the recent placement. Maintain BUY given total returns of >10%. Key Risks to Our View:

Interest rate risk. An increase in lending rates will negatively impact distributions. However, A-REIT's strategy has been to actively manage its exposure and currently has c.70% of its interest cost hedged into fixed rates. At A Glance Issued Capital (m shrs) 2,408 Mkt. Cap (S$m/US$m) 5,442 / 3,850 Major Shareholders Ascendas Pte Ltd (%) 17.1 Blackrock (%) 6.0 Matthews International Capital

5.1 Free Float (%) 71.8 3m Avg. Daily Val (US$m) 16.8 ICB Industry : Real Estate / Real Estate Investment Trust

DBS Group Research . Equity 14 Dec 2015

Singapore Company Guide

Ascendas REIT Edition 1 Version 1 | Bloomberg: AREIT SP | Reuters: AEMN.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Relative IndexS$

Ascendas REIT (LHS) Relative STI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

Ascendas REIT

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Rebounding occupancy rates. A-REIT’s occupancy rates are bottoming out with portfolio occupancy rate increasing marginally to 88.9% (vs 88.6% in Jun-15). For multi-tenanted properties, occupancy rate was 84.9% in 3QCY15, vs 84.7% in 2QCY15. On average, occupancy rates are higher than the average for industrial properties reported by JTC. Looking ahead, with vacancy rates standing at c.11%, we believe that A-REIT has upside to earnings if the Manager is able to backfill the unoccupied space, which is not included in our earnings estimates.

Modest rental growth but still positive. A-REIT recorded reversions of 9.1% in its 2QFY16 results, boosted by 13.2% rise in rents achieved for its Business/Science Parks. Looking ahead, we see rental reversion momentum slowing down, but still expect A-REIT to achieve higher rents given the positive spread between market and passing rents over 2H16 – FY17. That said, we expect rental reversions to moderate to c.5% in the coming financial year, in view of the high supply completion rate and keen competition expected in 2016. Inorganic growth to drive contributions in Australia and

Singapore. A-REIT has regularly embarked on acquisitions and development projects, which have helped the REIT to deliver sustained growth in distributions over time. Given limited opportunities in Singapore and the fragmented market in China, the Manager has looked overseas for higher returns. Most recently, A-REIT announced the c.A$1,013m acquisition of a logistics portfolio in Australia which will propel the REIT as one of the largest landlords there. The medium-term strategy is to have overseas exposure form c.30% of the REIT’s revenue exposure. In addition, A-REIT also recently announced the acquisition of 8@Changi, which is in a prime location within Changi Business Park. The property is part of an integrated project, including a retail mall (Changi City Point, owned by Frasers Centerpoint Trust) and Capri, a hotel. The acquisition is priced at c.S$435m, implying a net property income yield of 5.9%.

Net Property Income and Margins (%)


Distribution Paid / Net Operating CF

Source: Company, DBS Bank

65.3%

67.3%

69.3%

71.3%

73.3%

75.3%

77.3%

0

100

200

300

400

500

600

2014A 2015A 2016F 2017F 2018F

S$ m

Net Property Income Net Property Income Margin %

64%

65%

66%

67%

68%

69%

70%

71%

72%

73%

95

100

105

110

115

120

125

130

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

2014A 2015A 2016F 2017F 2018F

(x)


Company Guide

Ascendas REIT

Balance Sheet:

Optimal gearing level of c.35%. Post the recent placement exercise of S$408m and S$210m in consideration units for the purchase of 8@Changi, A-REIT’s gearing is estimated to remain at the lower end of management’s comfortable range of 35%. We believe that there is still capacity for management to utilise its debt headroom for further acquisitions. Well-staggered debt maturity profile. The Manager adopts a prudent interest rate risk management strategy with a weighted average cost of debt of 2.7% with 72% hedged. The debt tenure is long at 3.4 years. Share Price Drivers:

Direction of 10-year long bonds impact share price. Seen by investors as a key S-REIT proxy, share price has typically been closely linked to investors’ perception on the direction of the benchmark 10-year bonds. A fall in 10-year yields on the back of a delay in Fed hikes is likely to mean higher share price. Capital recycling strategy. With limited acquisition opportunities in Singapore, A-REIT regularly looks to divest older, lower-yielding properties and re-cycle the capital into asset enhancement exercises (AEI), development projects or acquisitions. The aim is to optimise the portfolio returns and distributions which have a positive impact on share price. Key Risks:

Interest rate risk. Any increase in interest rates will result in higher interest payments, which will reduce income available for distribution and result in lower distribution per unit (DPU) to unitholders. Economic risk. A deterioration in the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back production and require less space; industrial rents have a strong correlation with GDP growth. Company Background

Ascendas Real Estate Investment Trust (A-REIT) is one of the leading industrial S-REITs listed on the SGX. A-REIT owns and invests in a diverse, income-producing portfolio of business parks (including science parks), light industrial, hi-tech industrial and logistic properties in Singapore.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2014A 2015A 2016F 2017F 2018F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

Avg: 6.1%

+1sd: 6.6%

+2sd: 7.1%

‐1sd: 5.7%

‐2sd: 5.2%

4.3

4.8

5.3

5.8

6.3

6.8

7.3

7.8

2011 2012 2013 2014

(%)

Avg: 1.16x

+1sd: 1.25x

+2sd: 1.33x

‐1sd: 1.07x

‐2sd: 0.99x

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Dec-11 Dec-12 Dec-13 Dec-14

(x)


Company Guide

Ascendas REIT

Income Statement (S$ m)

FY Mar 2014A 2015A 2016F 2017F 2018F Gross revenue 614 673 739 813 830 Property expenses (178) (211) (212) (231) (234) Net Property Income 436 463 527 582 596 Other Operating expenses (41) (44) (88) (57) (58) Other Non Opg (Exp)/Inc 3 42 0 0 0 Net Interest (Exp)/Inc (36) (105) (83) (108) (116) Exceptional Gain/(Loss) 12 2 0 0 0 Net Income 374 357 355 417 422 Tax (23) (7) 0 (4) (5) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 (8) (15) (15) Net Income After Tax 351 351 347 398 402 Total Return 482 398 347 398 402 Non-tax deductible Items (9) 1 23 14 15 Net Inc available for Dist. 342 351 370 412 417 Growth & Ratio Revenue Gth (%) 6.6 9.8 9.7 10.1 2.0 N Property Inc Gth (%) 6.6 6.1 13.8 10.6 2.3 Net Inc Gth (%) 32.8 0.0 (1.0) 14.5 1.2 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 71.1 68.7 71.3 71.6 71.8 Net Income Margins (%) 57.2 52.1 47.0 48.9 48.5 Dist to revenue (%) 55.7 52.1 50.1 50.7 50.2

Managers & Trustee’s fees to sales %) 6.6 6.5 12.0 7.1 6.9

ROAE (%) 7.4 7.1 6.5 7.1 7.2 ROA (%) 4.9 4.5 3.9 4.0 4.1 ROCE (%) 5.3 5.5 5.0 5.4 5.5 Int. Cover (x) 11.0 4.0 5.3 4.9 4.6


Driven mainly by acquisitions


Company Guide

Ascendas REIT

Quarterly / Interim Income Statement (S$ m)

FY Mar 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Gross revenue 163 165 172 174 181 Property expenses (47) (50) (57) (57) (56) Net Property Income 116 115 115 117 124 Other Operating expenses (11) (11) (10) (12) (11) Other Non Opg (Exp)/Inc 3 14 14 22 (13) Net Interest (Exp)/Inc (23) (20) (26) (37) (12) Exceptional Gain/(Loss) 2 (12) 0 0 0 Net Income 87 86 93 91 88 Tax (1) (1) (1) (4) 0 Minority Interest 0 0 0 0 0 Net Income after Tax 86 85 92 88 87 Total Return 86 113 92 106 92 Non-tax deductible Items 2 (26) (6) (17) 0 Net Inc available for Dist. 88 87 86 89 92 Growth & Ratio Revenue Gth (%) 4 1 4 1 4 N Property Inc Gth (%) 4 (1) 0 2 6 Net Inc Gth (%) 116 (1) 9 (5) 0 Net Prop Inc Margin (%) 71.3 69.6 66.7 67.4 68.8 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Balance Sheet (S$ m)

FY Mar 2014A 2015A 2016F 2017F 2018F Investment Properties 6,923 7,868 9,481 9,496 9,511 Other LT Assets 290 135 135 135 135 Cash & ST Invts 67 42 82 88 82 Inventory 0 0 0 0 0 Debtors 65 90 99 109 111 Other Current Assets 13 26 26 26 26 Total Assets 7,358 8,160 9,822 9,853 9,864 ST Debt 893 286 246 251 256 Creditor 128 189 207 228 232 Other Current Liab 86 33 29 33 34 LT Debt 1,231 2,442 3,230 3,240 3,250 Other LT Liabilities 171 198 203 209 214 Unit holders’ funds 4,849 5,014 5,907 5,893 5,878 Minority Interests 0 0 0 0 0 Total Funds & Liabilities 7,358 8,160 9,822 9,853 9,864 Non-Cash Wkg. Capital (136) (105) (111) (126) (129) Net Cash/(Debt) (2,057) (2,686) (3,394) (3,403) (3,424) Ratio Current Ratio (x) 0.1 0.3 0.4 0.4 0.4 Quick Ratio (x) 0.1 0.3 0.4 0.4 0.4 Aggregate Leverage (%) 28.9 33.4 35.4 35.4 35.5 Z-Score (X) 1.5 1.3 1.3 1.1 1.1


Results continue to firm on the back of new acquisitions and positive rental reversions


Company Guide

Ascendas REIT

Cash Flow Statement (S$ m)

FY Mar 2014A 2015A 2016F 2017F 2018F Pre-Tax Income 374 357 355 417 422 Dep. & Amort. 1 0 0 0 0 Tax Paid (1) (2) (4) 0 (4) Associates &JV Inc/(Loss) 0 0 0 0 0 Chg in Wkg.Cap. (1) (10) 10 11 2 Other Operating CF 29 17 (8) (15) (15) Net Operating CF 401 362 353 412 405 Net Invt in Properties 0 0 0 0 0 Other Invts (net) (95) (643) (1,613) (15) (15) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc. & JVs 0 0 0 0 0 Other Investing CF (40) 6 6 6 6 Net Investing CF (135) (638) (1,607) (9) (9) Distribution Paid (326) (261) (370) (412) (417) Chg in Gross Debt 170 577 748 15 15 New units issued 0 0 617 0 0 Other Financing CF (71) (68) 300 0 0 Net Financing CF (227) 249 1,294 (397) (402) Currency Adjustments 9 1 0 0 0 Chg in Cash 48 (26) 40 6 (6) Operating CFPS (S cts) 16.8 15.5 13.5 14.9 14.9 Free CFPS (S cts) 16.7 15.1 13.9 15.3 15.0


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 09 Jan 15 2.43 2.49 BUY

2: 26 Jan 15 2.60 2.62 BUY

3: 24 Feb 15 2.48 2.62 BUY

4: 31 Mar 15 2.59 2.65 BUY

5: 24 Apr 15 2.67 2.65 HOLD

6: 31 Aug 15 2.23 2.30 HOLD

7: 23 Sep 15 2.24 2.45 BUY

8: 10 Dec 15 2.28 2.57 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

45

6

7

8

2.05

2.15

2.25

2.35

2.45

2.55

2.65

2.75

Dec-14 Apr-15 Aug-15

S$


Company Guide

Ascendas REIT

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 14 Dec 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have proprietary positions in Ascendas REIT recommended in this report as of 30 Nov 2015.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.


Company Guide

Ascendas REIT

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Ascendas REIT as of 30 Nov 2015.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ascendas REIT in the past 12 months, as of 30 Nov 2015.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

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Wong Ming Tek, Executive Director, ADBSR

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In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:AS

BUY Last Traded Price: S$2.86 (STI : 2,613.79) Price Target : S$3.70 (29% upside) (Prev S$3.73) Potential Catalyst: Asset recycling Where we differ: We are more conservative in forecasts Analyst Derek Tan +65 6682 3716 [email protected] Singapore Research Team Mervin SONG + 65 6682 3715 [email protected]

What’s New Recurring earnings forming 61% of PATMI

highlights improved earnings quality

Strong balance sheet empowers group with

firepower to acquire opportunistically

Strong recurring cashflows offer earnings visibility

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 3,925 4,762 4,164 5,357 EBITDA 2,444 2,325 1,761 2,023 Pre-tax Profit 1,997 1,839 1,261 1,482 Net Profit 1,161 1,066 776 911 Net Pft (Pre Ex.) 1,161 1,066 776 911 Net Pft Gth (Pre-ex) (%) 32.7 (8.2) (27.2) 17.5 EPS (S cts) 27.3 25.0 18.2 21.4 EPS Pre Ex. (S cts) 27.3 25.0 18.2 21.4 EPS Gth Pre Ex (%) 33 (8) (27) 17 Diluted EPS (S cts) 36.9 25.0 18.2 21.4 Net DPS (S cts) 9.00 9.00 9.00 9.00 BV Per Share (S cts) 394 420 430 442 PE (X) 10.5 11.4 15.7 13.4 PE Pre Ex. (X) 10.5 11.4 15.7 13.4 P/Cash Flow (X) 12.2 4.9 nm 8.0 EV/EBITDA (X) 13.0 13.3 19.2 16.9 Net Div Yield (%) 3.1 3.1 3.1 3.1 P/Book Value (X) 0.7 0.7 0.7 0.6 Net Debt/Equity (X) 0.6 0.5 0.6 0.6 ROAE (%) 7.1 6.1 4.3 4.9 Earnings Rev (%): 2 (1) Consensus EPS (S cts): 14.9 20.0 Other Broker Recs: B: 17 S: 0 H: 3


Steadfast In The Face Of Uncertainty

Improved earnings quality. We believe that CAPL offers compelling value, trading at an attractive 0.7x P/Bk and 0.6x P/RNAV. We expect the group’s strategy to focus on growing its commercial portfolio, and coupled with opportunistic asset recycling of mature assets into its listed REITs/funds, will present upside to our earnings. We maintain our BUY call with a target price of S$3.70. Growing recurring revenues from its retail mall portfolio and Ascott. Its current property portfolio has up to 75% of its assets in retail malls, and commercial integrated developments, including Ascott Group, which offer strong income visibility in the medium term. We see improved operating performance for its malls, as the properties reach maturity, boosted by the completion of four Raffles City mega developments in China in the medium term. Launch of new PE funds to boost returns. Leveraging on its fund management expertise, CAPL aims to launch 5-6 private equity funds with funds under management of S$8-10bn by 2020. We think that by tapping on third-party capital, CAPL would be able to leverage on its larger scale to achieve better economies of scale, capitalise on market opportunities and at the same time de-risk its property level exposure. Valuation:

Our target price of S$3.70 is based on a 25% discount to our adjusted RNAV of S$4.94/share, tweaked slightly as we update project completion assumptions. Our RNAV is based on our estimates of the market valuations of its various property developments and investment property assets across its various divisions. Key Risks to Our View:

Slowdown in Asian economies. The risk to our view is if there is a slowdown in Asian economies, especially China, which could dampen demand for housing and private consumption expenditure and retail sales. At A Glance Issued Capital (m shrs) 4,248 Mkt. Cap (S$m/US$m) 12,149 / 8,642 Major Shareholders (%) Temasek Holdings Pte Ltd 39.6 Blackrock 6.0

Free Float (%) 54.4 3m Avg. Daily Val (US$m) 28.7 ICB Industry : Real Estate / Real Estate



CapitaLand Version 3 | Bloomberg: CAPL SP | Reuters: CATL.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

2.2

2.7

3.2

3.7

4.2

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Relative IndexS$

CapitaLand (LHS) Relative STI INDEX (RHS)


Company Guide

CapitaLand

WHAT’S NEW

FY15 a year of resilience

CapitaLand (CAPL) results in line. 4Q15 Operating PATMI came in at S$249.2m (-12% y-o-y)

on the back of a 17% rise in top line to S$1,739m. The fall in PATMI was mainly attributable to the one-off gain from the sale of Westgate Tower back in 4Q14.

Stripping off the Tower sale, operating PATMI would have increased by 55.7%.

For FY15, CAPL reported an operating PATMI of S$823.7m (inclusive of S$170.6m in FV gains).

Core PATMI would have come in at c.S$653m, in line with our expectations of S$715m (consensus estimates of S$705m).

The group has proposed a final dividend of 9 Scts/share, in line with last year.

We also note that the group recorded a provision for foreseeable losses of close to S$105m, which we understand to be mainly from the Singapore property project.

Gearing remained stable at 0.48x Debt/Equity (off balance sheet gearing for its REITs, JVs and Funds are also in the range of 0.42x-0.52x).

Interest costs remained stable at 3.5% (vs 3.4% in 2014). Salient highlights Residential China residential hit a new record high. China residential

hit record sales in 2015 – CAPL achieved a record RMB 15bn in sales (selling 9,402 units) of which a majority are from its projects in Tier 1 cities (The Paragon and Lotus

Mansion in Shanghai, Dolce Vita in Guangzhou, Riverfront in Hangzhou, The Metropolis in Kunshan, One iPark in Shenzhen, Century Park in Chengdu and La Botanica in Xian).

Looking ahead, the group have another 7,300 launch-ready units of which 65% have been pre-sold.

Rising momentum in Vietnam. The group also sold 1,321

residential units with a sales value of S$226.5m. Vietnam will be one of the few markets that the group is expecting to see increased contribution in the medium term.

Malls (CMA) Ex Westgate Tower Sale, CMA’s operating profit would

have improved by 13.9% and 13.4% for 4Q2015 and FY15 respectively .

Same-mall NPI growth across its portfolio remained stable – with China leading the wall with a 7.4% lift in NPI, while its Singapore, Malaysia and Japan operations saw NPI increasing by 2.2%. India saw a 21.6% lift in NPI but operational scale is small there.

Portfolio tenant sales are up 7.3% in China; 1.2% in Singapore on the back of an increase in traffic.

Ascott Performance remained stable. RevPAU is up 1% y-o-y

driven mainly from the group’s operations in SE Asia, Australia and China, brought down by weakness seen in Singapore and Europe.

The group opened 2,700 units in 2015 and expects to open a further 2,000 units, a majority of which will be from China and SE Asia.

Quarterly / Interim Income Statement (S$m)

FY Dec 4Q2014 3Q2015 4Q2015 % chg yoy % chg qoq

Revenue 1,518 1,076 1,740 14.6 61.7 Cost of Goods Sold (1,080) (738) (1,359) 25.9 84.2

Gross Profit 438 338 381 (13.1) 12.6 Other Oper. (Exp)/Inc (173) (30.2) (28.4) (83.5) (5.9)

Operating Profit 265 308 352 32.7 14.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 331 140 224 (32.3) 59.9 Net Interest (Exp)/Inc (97.6) (105) (97.1) (0.4) (7.8) Exceptional Gain/(Loss) 248 0.0 0.0 nm nm

Pre-tax Profit 747 343 479 (35.8) 39.9 Tax (104) (64.4) (84.7) (18.6) (31.6) Minority Interest (227) (85.6) (147) (35.3) 71.7

Net Profit 416 193 248 (40.4) 28.5 Net profit bef Except. 168 193 248 47.6 28.5 EBITDA 596 448 576 (3.3) 28.6

Margins (%)

Gross Margins 28.9 31.4 21.9 Opg Profit Margins 17.5 28.6 20.3 Net Profit Margins 27.4 17.9 14.2

Source of all data: Company, DBS Bank


Company Guide

CapitaLand


Earnings Drivers:

Growing recurring revenues from its retail mall portfolio and Ascott. While trading properties (residential development and strata offices) account for 25% of assets, we see continued strength from CAPL’s retail mall division (CapitaMalls Asia) and commercial integrated developments, including Ascott Group and its successful serviced residence brand, which forms a significant 75% of total assets and is expected to contribute to growing recurring income for the group. Looking ahead, CapitaMalls Asia continues to perform steadily despite ongoing operational headwinds. There are 88 operating properties across Asia (55 of it in China). As of Dec-15, the group’s shopping malls continued to see healthy sales and occupancy. Shopper traffic at its malls in Singapore and China rose 1.2% and 7.3% y-o-y respectively, which we expect to further moderate but remain positive despite ongoing uncertainties. Looking ahead, CAPL is expected to open another 16 properties (nine in China) in the coming few years. In addition, Raffles City integrated developments in China will continue to offer stable returns (7-8% for stabilised properties in Shanghai and Beijing, c.3% for stabilising properties in Chengdu and Ningbo). Looking ahead, the group will be opening four more Raffles City developments in 2015-2018, which will boost the group’s returns and profitability when completed. The Ascott Limited remains on the fast track to achieve its 80,000-unit target by year 2020. Ascott recently invested over S$120m in China’s largest and fastest-growing online apartment sharing platform, Tujia, which we believe enables the group to extract synergies and leverage on Tujia’s platform to reach out to a wider addressable market. The group also recently launched a US$600m joint venture fund with Qatar Investment Authority to invest in value-added opportunities globally. This fund, when fully vested, will offer its REIT, Ascott Residence Trust (ART) a viable acquisition pipeline in the medium term. Launch of new PE funds. Leveraging on its fund management expertise, CAPL aims to launch 5-6 private equity funds with funds under management of S$8-10bn by 2020. We think that by tapping on third-party capital, CAPL would be able to leverage on larger economies of scale, better capitalise on market opportunities and at the same time de-risk its property level exposure. This strategy will be able to deliver medium-term shareholder ROE of 8-12%.

Revenue growth

% Breakdown of assets by segments

Breakdown of Mall portfolio (% by country)

RNAV breakdown

Segments S$’m

Value of CapitaLand Singapore 6,981.1

Value of CapitaLand China 10,871.3

CapitaMalls Asia 17,303.4

Ascott 4,222.9

Others 846.8

GDV of CAPL Group 40,225.5

Less: Net Debt (11,552.3)

Less: devt capex (7,775.9)

RNAV of CAPL 21,017.3

Total Shares 4,258.6

RNAV per share 4.94

Discount to RNAV 25%

Target price 3.70


-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

13A 14A 15A 16F 17F 18F

S$'m

Residential & Strata Sales,

26%

Commercial & Integrated Devt,

35%

Shopping Malls, 21%

Serviced Residences ,

17%

Others, 1%

Singapore, 41%

China, 52%

Malaysia, 4%

Japan, 1% India, 2%


Company Guide

CapitaLand

Balance Sheet:

Balance sheet remains strong. We forecast debt/equity ratio to remain stable at below c.0.6x over the coming years (0.48x as of end-4Q15). Debt maturity profile remains long at 3.7 years (as of 3Q15) with an average cost of 3.5%. Approximately 70% of the interest cost is hedged into fixed rate debt. Share Price Drivers:

De-risking its Singapore residential exposure/replenishing land bank. CAPL has been actively de-risking its Singapore residential exposure through active marketing of its unsold units across its projects and most completed projects are substantially sold. As of 4Q15, its Singapore residential exposure stands at S$3.1bn in value. This is only c.6% of its total asset value, and is not likely to have a major impact on earnings if further risks arise. Looking ahead, while the group has not been an active investor in Singapore’s residential market, winning any new land tenders will imply improved confidence in the outlook for Singapore’s residential market in the medium term. Relaxation of government policies. Expectations of policy relaxation (especially cyclical measures like the Buyers’ and Sellers’ stamp duties) may improve buyers’ market sentiment and spark a revival in transactional volumes in the Singapore residential market. This is also expected to lift sentiment on property stocks, which we believe will enable CAPL to close the gap between stock price and its NAV. Asset recycling into listed S-REITs. CAPL will continue to demonstrate its ability to crystallise value through strategic divestments of mature assets to its listed REITs, which are market leaders in their respective subsectors of retail, office and hospitality. The ability to recycle capital efficiently will enable the group to free up capital, improve its balance sheet position and deploy capital to projects with higher returns. Key Risks:

Slowdown in Asian economies. The risk to our view is a slowdown in Asian economies which could dampen demand for housing and private consumption expenditure and retail sales. This in turn could result in slower-than-expected projections. Company Background

CapitaLand is one of Asia’s largest real estate companies headquartered and listed in Singapore. Its two core markets are Singapore and China; while Indonesia, Malaysia and Vietnam have been identified as new growth markets.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

S$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2013A 2014A 2015A 2016F 2017F

Avg: 14.3x

+1sd: 16.5x

+2sd: 18.7x

‐1sd: 12.2x

‐2sd: 10x

8.9

10.9

12.9

14.9

16.9

18.9

20.9


(x)

Avg: 0.85x

+1sd: 0.94x

+2sd: 1.04x

‐1sd: 0.75x

‐2sd: 0.66x

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


(x)


Company Guide

CapitaLand

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) CapitaLand Singapore 1,237 1,242 1,229 998 1,207 CapitaLand China 899 638 2,039 1,452 2,227 CMA 641 1,178 663 842 999 Ascott 635 683 744 725 775 Others 99.0 185 86.1 147 149 Total 3,511 3,925 4,761 4,164 5,357

Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 3,511 3,925 4,762 4,164 5,357 Cost of Goods Sold (2,274) (2,543) (3,287) (2,171) (3,082) Gross Profit 1,237 1,382 1,475 1,993 2,275 Other Opng (Exp)/Inc 72.5 27.7 59.4 (465) (489) Operating Profit 1,310 1,410 1,534 1,528 1,787 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 903 970 726 169 171 Net Interest (Exp)/Inc (402) (382) (422) (435) (476) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,811 1,997 1,839 1,261 1,482 Tax (205) (238) (344) (227) (267) Minority Interest (731) (599) (430) (259) (304) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 875 1,161 1,066 776 911 Net Profit before Except. 875 1,161 1,066 776 911 EBITDA 2,275 2,444 2,325 1,761 2,023 Growth Revenue Gth (%) 6.4 11.8 21.3 (12.6) 28.7 EBITDA Gth (%) 25.3 7.4 (4.9) (24.3) 14.8 Opg Profit Gth (%) 40.3 7.6 8.8 (0.4) 17.0 Net Profit Gth (Pre-ex) (%) 12.8 32.7 (8.2) (27.2) 17.5 Margins & Ratio Gross Margins (%) 35.2 35.2 31.0 47.9 42.5 Opg Profit Margin (%) 37.3 35.9 32.2 36.7 33.4 Net Profit Margin (%) 24.9 29.6 22.4 18.6 17.0 ROAE (%) 5.6 7.1 6.1 4.3 4.9 ROA (%) 2.1 2.6 2.3 1.7 2.0 ROCE (%) 3.0 3.0 3.0 2.9 3.3 Div Payout Ratio (%) 39.0 33.0 36.0 49.4 42.1 Net Interest Cover (x) 3.3 3.7 3.6 3.5 3.8


Driven by completion of various malls, and recognition of property sales


Company Guide

CapitaLand


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 1,518 915 1,031 1,076 1,740 Cost of Goods Sold (1,080) (553) (637) (738) (1,359) Gross Profit 438 362 394 338 381 Other Oper. (Exp)/Inc (173) (116) (88.0) (30.2) (28.4) Operating Profit 265 245 306 308 352 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 331 126 236 140 224 Net Interest (Exp)/Inc (97.6) (107) (112) (105) (97.1) Exceptional Gain/(Loss) 248 0.0 322 0.0 0.0 Pre-tax Profit 747 263 753 343 479 Tax (104) (50.6) (144) (64.4) (84.7) Minority Interest (227) (51.6) (146) (85.6) (147) Net Profit 416 161 464 193 248 Net profit bef Except. 168 161 142 193 248 EBITDA 596 371 543 448 576 Growth Revenue Gth (%) 65.2 (39.7) 12.7 4.3 61.7 EBITDA Gth (%) 74.6 (37.8) 46.3 (17.4) 28.6 Opg Profit Gth (%) 21.9 (7.6) 24.9 0.5 14.4 Net Profit Gth (Pre-ex) (%) 29.1 (3.9) (12.2) 36.1 28.5 Margins Gross Margins (%) 28.9 39.5 38.2 31.4 21.9 Opg Profit Margins (%) 17.5 26.8 29.7 28.6 20.3 Net Profit Margins (%) 27.4 17.6 45.0 17.9 14.2

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 666 1,047 808 908 1,007 Invts in Associates & JVs 12,673 12,781 12,858 13,118 13,379 Other LT Assets 16,583 18,705 20,760 21,560 22,360 Cash & ST Invts 6,393 2,941 4,257 1,925 2,381 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 1,167 963 1,424 1,041 1,339 Other Current Assets 7,579 7,676 6,945 6,797 6,045 Total Assets 45,063 44,113 47,053 45,349 46,511 ST Debt 1,280 3,469 2,246 2,246 2,246 Creditor 2,889 3,070 4,064 1,340 1,176 Other Current Liab 478 463 620 704 827 LT Debt 14,656 12,517 13,812 14,312 14,812 Other LT Liabilities 1,305 1,386 1,373 1,373 1,373 Shareholder’s Equity 16,109 16,758 17,905 18,298 18,826 Minority Interests 8,346 6,451 7,032 7,076 7,251 Total Cap. & Liab. 45,063 44,113 47,053 45,349 46,511 Non-Cash Wkg. Capital 5,379 5,107 3,685 5,794 5,381 Net Cash/(Debt) (9,543) (13,045) (11,801) (14,633) (14,677) Debtors Turn (avg days) 137.9 99.1 91.5 108.1 81.1 Creditors Turn (avg days) 433.2 438.9 404.1 468.2 152.2 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 3.3 1.7 1.8 2.3 2.3 Quick Ratio (x) 1.6 0.6 0.8 0.7 0.9 Net Debt/Equity (X) 0.4 0.6 0.5 0.6 0.6 Net Debt/Equity ex MI (X) 0.6 0.8 0.7 0.8 0.8 Capex to Debt (%) 0.5 0.8 0.4 1.0 1.0 Z-Score (X) 1.2 1.1 1.1 1.1 1.1


Driven mainly from improved operating PATMI, forming a substantial portfolio

Net Debt/Equity remains stable at 0.6x


Company Guide

CapitaLand

Cash Flow Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,811 1,997 1,839 1,261 1,482 Dep. & Amort. 62.8 64.6 65.0 65.0 65.0 Tax Paid (223) (256) (145) (144) (143) Assoc. & JV Inc/(loss) (903) (970) (726) (169) (171) Chg in Wkg.Cap. (53.7) 51.9 1,264 (2,192) 290 Other Operating CF 262 111 169 0.0 0.0 Net Operating CF 956 999 2,466 (1,179) 1,523 Capital Exp.(net) (76.6) (127) (64.0) (164) (164) Other Invts.(net) (190) (1,357) (718) (800) (800) Invts in Assoc. & JV 57.0 841 509 (150) (150) Div from Assoc & JV 439 406 394 59.0 59.9 Other Investing CF 141 (102) 33.0 0.0 0.0 Net Investing CF 370 (339) 154 (1,055) (1,055) Div Paid (688) (705) (727) (598) (513) Chg in Gross Debt 280 177 (212) 500 500 Capital Issues 1.64 1.38 0.0 0.0 0.0 Other Financing CF (464) (3,746) (274) 0.0 0.0 Net Financing CF (869) (4,272) (1,213) (98.1) (12.6) Currency Adjustments 352 55.0 0.0 0.0 0.0 Chg in Cash 809 (3,557) 1,407 (2,332) 456 Opg CFPS (S cts) 23.8 22.2 28.2 23.8 29.0 Free CFPS (S cts) 20.7 20.5 56.4 (31.5) 31.9



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 18 Feb 15 3.68 3.88 BUY

2: 17 Mar 15 3.50 3.88 BUY

3: 04 May 15 3.76 4.11 BUY

4: 25 Jun 15 3.46 4.11 BUY

5: 14 Jul 15 3.38 4.11 BUY

6: 15 Jul 15 3.40 4.11 BUY

7: 10 Aug 15 3.22 4.11 BUY

8: 31 Aug 15 2.82 3.73 BUY

9: 12 Oct 15 3.13 3.73 BUY

10: 05 Nov 15 3.20 3.73 BUY

11: 23 Nov 15 3.10 3.73 BUY12: 17 Dec 15 3.26 3.73 BUY13: 08 Jan 16 3.16 3.73 BUY14: 18 Jan 16 3.02 3.73 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 16 Feb 16 2.90 3.73 BUY

1 23

4

5

6

7

8

9

10

11

12

1314

15

2.54

2.74

2.94

3.14

3.34

3.54

3.74

3.94

Feb-15 Jun-15 Oct-15 Feb-16

S$


Company Guide

CapitaLand







Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may

be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

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ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

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Company Guide

CapitaLand

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

CapitaLand recommended in this report as of 31 Jan 2016


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4. Directorship/trustee interests:

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Capitaland as of 28 Feb 2015. Euleen Goh Yiu Kiang, a

member of DBS Group Holdings Board of Directors, is a Director of Capitaland as of 28 Feb 2015.










United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.


Company Guide

CapitaLand

Dubai

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DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982

Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:YM

BUY (Upgrade from HOLD)

Last Traded Price: S$2.79 (STI : 2,539.95) Price Target : S$3.24 (16% upside) (Prev S$3.00) Potential Catalyst: Upgrade in recommendation/ TP; results review Where we differ: FY17F below consensus on higher cost assumptions Analyst Andy Sim +65 6682 3718 [email protected]

What’s New Upgrade to BUY, TP raised to S$3.24

Projecting above average growth of 15% in FY16F

on lower oil price, improvement in margins

Not expecting lump sum cash from bus assets;

base case assumption is progressive asset transfer

4Q15 within expectations; FY15 posts 6% earnings

growth

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 4,051 4,112 4,138 4,278 EBITDA 800 845 893 913 Pre-tax Profit 436 452 529 553 Net Profit 284 302 347 368 Net Pft (Pre Ex.) 284 302 347 368 Net Pft Gth (Pre-ex) (%) 7.7 6.5 15.1 5.9 EPS (S cts) 13.3 14.1 16.2 17.2 EPS Pre Ex. (S cts) 13.3 14.1 16.2 17.2 EPS Gth Pre Ex (%) 7 6 15 6 Diluted EPS (S cts) 13.1 14.1 16.2 17.2 Net DPS (S cts) 8.25 9.00 10.6 11.2 BV Per Share (S cts) 102 109 116 123 PE (X) 21.1 19.8 17.2 16.2 PE Pre Ex. (X) 21.1 19.8 17.2 16.2 P/Cash Flow (X) 9.3 9.9 7.5 7.2 EV/EBITDA (X) 8.2 7.6 6.9 6.4 Net Div Yield (%) 3.0 3.2 3.8 4.0 P/Book Value (X) 2.7 2.6 2.4 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.1 13.3 14.4 14.4 Earnings Rev (%): - 1 0 Consensus EPS (S cts): 14.2 16.2 17.7 Other Broker Recs: B: 9 S: 1 H: 2


Time To Board Again Upgrade to BUY, TP raised to S$3.24. We upgrade our recommendation for ComfortDelgro (CD) to BUY (from HOLD) with a revised TP of S$3.24. Share price has weakened by c.8% YTD and we believe this presents an opportune time to accumulate as oil prices have dropped c.20% YTD, which bodes well for margins.

4Q15 results within expectations. 4Q15 net profit grew by 7.1% y-o-y to S$68.2m, while revenue reached S$1.06bn (+1.5%). For FY15, CD’s net profit ended the year at S$302m (+6.5% y-o-y) on the back of 1.5% growth in revenue to S$4.11bn. Revenue growth was driven by Bus, Taxis, Rail and Car Rental and Leasing businesses, offset by a decline in Automotive Engineering due to lower prices of diesel sales. EBIT improved marginally to 11% with increases in staff and depreciation costs offset by lower fuel and electricity costs. Despite more competition, management shared that its taxi hire-out rate remains high, as evidenced by continued growth in its operating profit.

Stronger FY16F growth projected; valuations more palatable. With share price down recently, valuations look more palatable at 17x/ 16x FY16F/17F on the back of a stronger FY16F growth. Current price is also within the S$2.70-S$2.80 range that we had earlier stated that we would be comfortable to accumulate. Though we are not expecting a significant one-time cash payout for the Singapore bus assets, the transition to the new model should bode well and relief it of future capital expenditures.

Valuation:

Our target price is raised to S$3.24, derived from the average valuations using discounted cash flow (DCF) and price-earnings ratio (PER) methods. Our TP implies a PE of 18.8x on forward FY17F earnings, which is +1 std deviation above its historical average factoring in the asset-light model for the bus operations in Singapore.

Key Risks to Our View:

Regulatory risks. Lower-than-expected fare increase, and or changes in regulations to the operations, may impact our forecasts.

At A Glance Issued Capital (m shrs) 2,151 Mkt. Cap (S$m/US$m) 6,000 / 4,292 Major Shareholders (%) Blackrock 6.8 Capital Group Companies 6.4

Free Float (%) 97.4 3m Avg. Daily Val (US$m) 9.9 ICB Industry : Consumer Services / Travel & Leisure



ComfortDelgro Version 2 | Bloomberg: CD SP | Reuters: CMDG.SI Refer to important disclosures at the end of this report

89

109

129

149

169

189

209

229

249

1.3

1.8

2.3

2.8

3.3


Relative IndexS$

ComfortDelgro (LHS) Relative STI INDEX (RHS)


Company Guide

ComfortDelgro

WHAT’S NEW

Time to board again

Time to board again; upgrade to BUY; TP S$3.24. After waiting for about a year for earnings to catch up with valuations, we upgrade our recommendation on CD to BUY, from HOLD. Our strategy seems akin to waiting for the right truck bus service, rather than going around in a loop in a feeder bus. Share price has weakened by c.8% YTD, while oil prices have slumped by 20% YTD.

We believe this presents an opportune time to accumulate the shares, coupled with the fact that we are projecting a stronger earnings growth in FY16F. While energy and fuel historically accounts for only c.8% of revenue, the recent drop in oil price will still bode well for margins.

We tweaked our FY16F earnings up by 1% to factor in lower energy prices, offset partially by a lower rate of revenue growth (diesel sales) and weaker AUD. Our TP is raised to S$3.24 (from S$3.00 previously) as we roll our valuations forward to average of FY16F/ 17F, coupled with marginally higher forecasts for FY16F. This implies c.20% total return upside, inclusive of 3.8% dividend yield.

Beneficiary of lower oil and energy prices

Lower oil prices lower costs. With oil prices falling to U.S$30/bbl, we expect to see continued benefits accruing to CD’s bottomline. We have further lowered our oil price assumption to US$45 and US$50 per bbl for FY16F and FY17F. In FY15, CD hedged about 60% of its FY15 requirements, which we believe was entered into earlier in 2014/ 2015 when oil prices were higher.

For 2016, we expect to see the benefits of lower oil prices flowing down to its bottomline. We understand that CD hedged about a quarter of its FY16F diesel/ electricity requirements in 2015. With oil prices now hovering around US$30/bbl, this should have a positive impact on earnings, particularly for its bus operations in Singapore up till Aug-16 (before the Bus Contracting model takes effect). We project fuel and electricity costs as a percentage of revenue to drop to 5.5%/ 6.5% for FY16F/17F, down from c.7-8% in previous years.

4Q15 Results Comments & Briefing Highlights 4Q15 results within expectations. Results performance was within expectations. 4Q15 net profit grew by 7.1% y-o-y to S$68.2m, while revenue reached S$1.06bn. For FY15, CD’s net profit ended at S$302m (+6.5% y-o-y) on the back of 1.5% growth in revenue to S$4.11bn. A final DPS of 5 Scts was proposed, up from FY14’s 4.5 Scts. Coupled with the interim

DPS of 4 Scts, total DPS for FY15 is 9 Scts, equating to a payout of 64%, up from FY14’s 62%. Revenue growth was driven by Bus, Taxis, Rail and Car Rental and Leasing businesses. The largest decline in revenue contribution came about from Automotive Engineering (-21% to S$238.5m) mainly due to lower prices of diesel sold to taxi drivers arising from the retreat in oil prices. Slight EBIT margin improvements. The group posted a slight improvement in EBIT margins to 11% (from 10.9% in FY14). While revenue grew by 1.5%, growth in operating costs was a tad slower at 1.4%. Increases in the larger costs items such as staff costs (+3.3%), contract services (+3%) and depreciation and amortization (+10.1%) were offset by lower fuel/ electricity costs (-8.5%), materials and consumables costs (-11.7%). Taxi still resilient despite challenges. Despite concerns on threats of online booking and private car hire (such as Uber and GrabCar), the group’s taxi operations remained resilient. Taxi Business registered a revenue growth of 3.4% and an operating margin of 12.4% in FY15, an improvement from FY14’s 11.8%. Management indicated that its hired out rate remained high at close to 100%. We believe this can be put down to its sound driver management strategy, and established network. Rail saw drop in margins, though we believe it should be better in FY16F. Rail Business registered a strong growth in revenue (+8.4% to S$213.4m), while operating margins retreated to just 1.5% in FY15, from 3.9% a year earlier. This was largely attributed to pre-operating start up costs from Downtown Line Stage 2 (DTL2) which commenced operations on 27 Dec 2015. While management guided that DTL will still register losses pending the opening of Stage 3 in 2016, we believe losses could be lower and rail operations’ margins should improve. Bus Contracting Model still in discussion with authorities. Management indicated that discussions are still in progress for the bus contracts. The parties are still working towards the 1 September 2016 timeline. With respect to the potential transfer of bus assets (if any), management was unable to give indications as it was still under discussions. At this current juncture, we opine that the authorities are unlikely to take possession and pay the operators all at once. Instead, we believe a phased approach is more likely, and we have penciled this into our operating model.


Company Guide

ComfortDelgro

Diesel and electricity hedged “comfortably”. Management did not disclose the exact amount of its fuel/ electricity requirements that have been hedged, but indicated that it was in a “comfortable” position. Based on previous results’ teleconference, we understand that it has hedged about a quarter of its FY16F requirements. We believe the company is well placed to benefit with oil prices hovering at current levels. Capex guided to remain at similar levels as previous periods, though we believe it could turn out to be lower. Management guided that its capex is likely to remain at similar levels seen in the previous years, at c.S$500m or so. We believe management is assuming a status quo position – that its Singapore bus operations still requires continued capex with the transition to the Government Bus Contracting model given ongoing discussions. Valuation & Forecasts Upgrade to BUY, valuation looks more palatable on lower oil prices, stronger growth in FY16. CD’s share price has traded within a range in the past one year whilst we had a neutral recommendation since our downgrade on 12 Feb 2015 when CD’s price was S$3.14. At that time, we believed the market was getting ahead of itself with CD’s price rallying 23% in a month. We believe it is now time to review and “board” again. With the share price retreating by c.8%, while oil prices have slumped by c.20% YTD, we believe this bodes well for CD. Furthermore, we are projecting a stronger growth in FY16F of 15%, vis-à-vis historical average on the back of lower oil price, transition to bus contracting model and improvement in rail margins. TP raised to S$3.24, providing c.20% total return upside. Our TP is raised to S$3.24 as we roll forward our valuations to average of FY16F/17F earnings and with marginally higher

earnings projections. Our TP is based on the average of PE and DCF valuation. We based on DCF methodology to account for the stable nature of CD’s businesses, while PE takes into account any potential near term earnings fluctuations. Project current yield of 3.8%-4%. We are projecting a higher DPS going into FY16F/17F, assuming a higher payout ratio of 66%/ 68%, compared to 5-year average of 58%, given our forecasts of its stronger balance sheet and net cash position. We are currently assuming that on the Singapore bus assets, the authorities could take a progressive approach in acquiring the assets in tranches rather than all at once from the start of the bus contracting model. Hence, we are not assuming a huge influx of cash from the transfer of the bus assets to the authorities.

Fuel and Electricity as % of revenue projected to drop

Source: Company, DBS Bank estimates

7.3%

8.3%7.8% 7.7%

8.1%7.3%

5.4% 6.4%

$0

$50

$100

$150

$200

$250

$300

$350

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2010 2011 2012 2013 2014 2015 2016F 2017F

Fuel and Electricity costs (S$m) [RHS]

Fuel and Electricity as % of revenue [LHS]

as % of revenue S$ mProjecting drop in oil price will result in fall in fuel & electricity costs as % of

revenue


Company Guide

ComfortDelgro



Revenue 1,047 1,048 1,063 1.5 1.5

Other Oper. (Exp)/Inc (950) (919) (965) 1.6 5.1

Operating Profit 96.8 129 97.7 0.9 (24.3)

Other Non Opg (Exp)/Inc 2.90 4.60 3.10 6.9 (32.6)

Associates & JV Inc 2.20 0.40 2.50 13.6 525.0

Net Interest (Exp)/Inc (4.6) (4.8) (4.4) (4.3) (8.3)

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 97.3 129 98.9 1.6 (23.5)

Tax (19.8) (26.1) (17.2) (13.1) 34.1

Minority Interest (13.8) (17.9) (13.5) (2.2) (24.6)

Net Profit 63.7 85.2 68.2 7.1 (20.0)

Net profit bef Except. 63.7 85.2 68.2 7.1 (20.0)

EBITDA 193 233 206 6.9 (11.3)

Margins (%)

Opg Profit Margins 9.2 12.3 9.2

Net Profit Margins 6.1 8.1 6.4



Company Guide

ComfortDelgro


Earnings Drivers:

Bus operations in Singapore and overseas. Bus operations account for c.50% and c.37% of the group’s revenue and operating profit respectively. The major profit contribution from its bus operations comes from the United Kingdom followed by Australia. Within these areas of operations, the revenue and earnings drivers are based on tenders for routes, coupled with CD meeting the service requirements set forth by the authorities. Over in Singapore, the operators undertake revenue and costs risk, though this will change from 2H2016 with the transition to the Government Contracting Model. Taxis hired out and rental rates. Taxi operations account for about one-third the group’s operating profit, with Singapore operations accounting for the majority. It has a fleet of over 17,000 taxis in Singapore with a market share of 65%. The hired out and rental rates of taxis has a direct impact on profitability, while the cost of certificates of entitlement in Singapore would also have an impact on margins (impacting depreciation). In the immediate term, we do not expect significant impact from the private car booking apps, such as Uber or Grabcar, though over the longer run, the differential in rental rates of cars and taxis could prompt drivers to switch. This is an area that would need to be monitored going forward. Oil prices. Fuel and electricity account for 8% of CD’s sales historically and a surge in oil price may impact margins. Management seeks to hedge its exposure to oil prices by entering into forward contracts, thus mitigating volatile fluctuations. We are projecting that fuel and electricity as percentage of revenue to dip to c.5% in FY16F on lower oil prices. Overseas presence through acquisitions. Since 2003, revenue contribution from overseas has increased from 35% to 40% (as of end 2014), while operating profit contribution stands at 49% (from 26%) a decade ago. Management has indicated a target of further increasing overseas revenue contribution to 70%. This is likely to be achieved through organic growth (winning of tenders) and inorganic sources, such as bite-sized acquisitions. Earnings growth of 15%/6% for 16F/17F. CD’s growth has been stable, posting average CAGR of 7% in the past 4 years (2012 to 2015). We project earnings growth of 15%/6% for FY16F/17F driven by higher ridership, rental rates for its taxis, coupled with lower energy costs (on the back of lower oil prices). The higher rate of growth in FY16F is a result of upside from the expected transition to the bus contracting model coupled with lower energy prices.

SGP bus ridership growth (%)

SGP fare chg (%)

Avg oil price (US$)

Chg in staff strength (%)

Operating Profit geographical split (FY15)


3.423.2

2.81

2.5 2.5

0.00

0.43

0.86

1.30

1.73

2.16

2.59

3.02

3.45

2013A 2014A 2015A 2016F 2017F

3.76

5.04 5.12

-2

-1

-2.20

-1.16

-0.11

0.93

1.98

3.02

4.07

5.11

2013A 2014A 2015A 2016F 2017F

9590

70

4550

0.0

19.4

38.8

58.1

77.5

96.9

2013A 2014A 2015A 2016F 2017F

4.174

1

-1 -1-1.10

-0.57

-0.05

0.48

1.01

1.53

2.06

2.58

3.11

3.64

4.16

2013A 2014A 2015A 2016F 2017F

Singapore54%United

Kingdom/ Ireland21%

China11%

Australia14%

Vietnam0%

Malaysia0%

Opg Profit FY15 - S$450.7m


Company Guide

ComfortDelgro

Balance Sheet:

Low gearing provides opportunities for inorganic growth. The group’s balance sheet remains strong with gross debt to equity at <0.2x while net debt to equity hovers near zero. This provides the group with ample headroom for overseas acquisitions to supplement growth and further diversify its geographical exposure out of Singapore. Capex to taper from FY16F. We expect capex requirements to taper from FY16F with a step down in its bus assets enhancement in Singapore, coupled with the potential divestment of buses to the authorities under the Government Contracting Model. This could provide a lift to available cash for acquisitions and/or higher dividend payout. Share Price Drivers:

Potential payout from Singapore bus contract model. With the new Government Bus Contracting model expected to be in place from 2H16, and that the government will take over the operating assets, there are general expectations that CD will see an inflow of cash from the disposal of the assets, amounting to c.S$800m. Should these be paid out to shareholders, it could provide an additional catalyst to share price. Acquisitions. CD has successfully diversified its operations outside of Singapore over the past decade through bite-sized acquisitions. Further accretive acquisitions to leverage on its strong balance sheet could provide further catalyst to share price. Key Risks:

Oil price surge. Energy and fuel costs account for about 8% of CD's sales and a surge in oil price may impact margins and vice versa, though this is partially mitigated by its hedging policies. Regulatory risks. Lower-than-expected fare increase, and or changes in regulations to the operations, may impact our forecasts. Company Background

ComfortDelGro Corporation Limited is a land transport services company. Its business includes bus, taxi, rail car rental and leasing, automotive engineering services, testing services, etc. Besides being a market leader for buses and taxis in Singapore, its business spans across other geographies such as UK, Australia, China, Vietnam and Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.9

0.9

0.9

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2013A 2014A 2015A 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 16.3x

+1sd: 18.8x

+2sd: 21.4x

‐1sd: 13.7x

‐2sd: 11.1x10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

Feb-12 Feb-13 Feb-14 Feb-15

(x)

Avg: 2.21x

+1sd: 2.65x

+2sd: 3.09x

‐1sd: 1.77x

‐2sd: 1.34x1.2

1.7

2.2

2.7

3.2

Feb-12 Feb-13 Feb-14 Feb-15

(x)


Company Guide

ComfortDelgro

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F SGP bus ridership growth 3.42 3.20 2.81 2.50 2.50 SGP fare chg (%) 3.76 5.04 5.12 (2.0) (1.0) Avg oil price (US$) 95.0 90.0 70.0 45.0 50.0 Chg in staff strength (%) 4.17 4.00 1.00 (1.0) (1.0)

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Bus & Bus Station 1,890 2,084 2,148 2,093 2,130 Rail 165 197 213 254 266 Taxi 1,198 1,284 1,327 1,450 1,522 Automotive Engn 317 303 239 156 177 Others 179 184 185 184 184 Total 3,748 4,051 4,112 4,138 4,278 EBIT (S$m) Bus & Bus Station 170 177 187 225 229 Rail 4.80 7.60 3.20 12.7 15.9 Taxi 146 151 164 180 190 Automotive Engn 52.7 51.4 41.2 31.3 31.9 Others 52.8 55.1 55.4 73.2 69.7 Total 426 442 451 522 537 EBIT Margins (%)

Bus & Bus Station 9.0 8.5 8.7 10.8 10.8 Rail 2.9 3.9 1.5 5.0 6.0 Taxi 12.2 11.8 12.4 12.4 12.5 Automotive Engn 16.7 17.0 17.3 20.0 18.0 Others 29.5 29.9 30.0 39.7 37.9 Total 11.4 10.9 11.0 12.6 12.6


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 3,748 4,051 4,112 4,138 4,278 Other Opng (Exp)/Inc (3,321) (3,609) (3,661) (3,616) (3,741) Operating Profit 426 442 451 522 537 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 4.00 4.30 4.90 5.39 5.93 Net Interest (Exp)/Inc (16.0) (10.1) (3.4) 1.03 9.96 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 414 436 452 529 553 Tax (87.0) (92.3) (88.4) (111) (111) Minority Interest (64.1) (60.5) (61.9) (70.2) (74.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 263 284 302 347 368 Net Profit before Except. 263 284 302 347 368 EBITDA 768 800 845 893 913 Growth Revenue Gth (%) 5.7 8.1 1.5 0.6 3.4 EBITDA Gth (%) 3.9 4.2 5.6 5.7 2.3 Opg Profit Gth (%) 3.4 3.7 1.9 15.9 2.8 Net Profit Gth (Pre-ex) (%) 5.7 7.7 6.5 15.1 5.9 Margins & Ratio Opg Profit Margin (%) 11.4 10.9 11.0 12.6 12.6 Net Profit Margin (%) 7.0 7.0 7.3 8.4 8.6 ROAE (%) 12.6 13.1 13.3 14.4 14.4 ROA (%) 5.3 5.5 5.8 6.6 6.9 ROCE (%) 8.2 8.2 8.6 9.7 10.0 Div Payout Ratio (%) 56.5 62.2 63.8 65.0 65.0 Net Interest Cover (x) 26.6 43.8 132.6 NM NM



Company Guide

ComfortDelgro


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 1,047 964 1,037 1,048 1,063 Other Oper. (Exp)/Inc (950) (860) (916) (919) (965) Operating Profit 96.8 103 121 129 97.7 Other Non Opg (Exp)/Inc 2.90 3.00 4.30 4.60 3.10 Associates & JV Inc 2.20 1.50 0.50 0.40 2.50 Net Interest (Exp)/Inc (4.6) (4.7) (4.5) (4.8) (4.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 97.3 103 121 129 98.9 Tax (19.8) (20.5) (24.6) (26.1) (17.2) Minority Interest (13.8) (14.8) (15.7) (17.9) (13.5) Net Profit 63.7 67.6 80.9 85.2 68.2 Net profit bef Except. 63.7 67.6 80.9 85.2 68.2 EBITDA 193 199 222 233 206 Growth Revenue Gth (%) 0.9 (8.0) 7.6 1.0 1.5 EBITDA Gth (%) (11.5) 3.3 11.2 4.9 (11.3) Opg Profit Gth (%) (21.9) 6.5 17.3 6.7 (24.3) Net Profit Gth (Pre-ex) (%) (21.2) 6.1 19.7 5.3 (20.0) Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 9.2 10.7 11.7 12.3 9.2 Net Profit Margins (%) 6.1 7.0 7.8 8.1 6.4

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 2,777 2,895 2,909 2,844 2,694 Invts in Associates & JVs 6.20 8.00 10.2 15.6 21.5 Other LT Assets 1,061 1,088 1,017 1,017 1,017 Cash & ST Invts 836 826 788 930 1,110 Inventory 70.6 72.3 75.1 75.2 77.8 Debtors 120 120 140 148 153 Other Current Assets 214 221 277 277 277 Total Assets 5,085 5,231 5,216 5,307 5,350 ST Debt 218 243 126 100 100 Creditor 665 837 833 796 823 Other Current Liab 179 178 177 239 239 LT Debt 590 494 432 300 100 Other LT Liabilities 638 640 635 635 635 Shareholder’s Equity 2,155 2,190 2,335 2,490 2,632 Minority Interests 640 649 678 748 822 Total Cap. & Liab. 5,085 5,231 5,216 5,307 5,350 Non-Cash Wkg. Capital (440) (601) (519) (535) (554) Net Cash/(Debt) 27.7 88.7 229 530 910 Debtors Turn (avg days) 12.8 10.8 11.5 12.7 12.8 Creditors Turn (avg days) 79.4 84.2 93.2 91.5 87.6 Inventory Turn (avg days) 7.9 8.0 8.2 8.4 8.3 Asset Turnover (x) 0.8 0.8 0.8 0.8 0.8 Current Ratio (x) 1.2 1.0 1.1 1.3 1.4 Quick Ratio (x) 0.9 0.8 0.8 0.9 1.1 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 51.7 63.9 69.4 75.0 110.0 Z-Score (X) 3.1 3.1 3.2 3.5 3.8



Company Guide

ComfortDelgro


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 414 436 452 529 553 Dep. & Amort. 337 354 389 365 370 Tax Paid (78.1) (83.1) (81.8) (49.1) (111) Assoc. & JV Inc/(loss) (4.0) (4.3) (4.9) (5.4) (5.9) Chg in Wkg.Cap. 5.80 23.8 (23.4) (45.9) 19.4 Other Operating CF 22.3 (87.4) (131) 0.0 0.0 Net Operating CF 698 639 600 793 825 Capital Exp.(net) (418) (471) (388) (300) (220) Other Invts.(net) (130) (28.7) (1.3) 0.0 0.0 Invts in Assoc. & JV 0.0 (0.5) 0.0 0.0 0.0 Div from Assoc & JV 2.40 3.00 2.90 0.0 0.0 Other Investing CF 13.6 12.5 14.1 0.0 0.0 Net Investing CF (532) (485) (372) (300) (220) Div Paid (138) (165) (183) (193) (226) Chg in Gross Debt 120 (61.5) (190) (159) (200) Capital Issues 35.2 22.6 17.7 0.0 0.0 Other Financing CF (55.4) 41.7 85.4 0.0 0.0 Net Financing CF (38.3) (163) (269) (351) (426) Currency Adjustments 8.40 3.40 2.80 0.0 0.0 Chg in Cash 136 (4.8) (38.0) 142 180 Opg CFPS (S cts) 32.6 28.8 29.1 39.2 37.7 Free CFPS (S cts) 13.2 7.86 9.93 23.1 28.3



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 11 May 15 3.08 3.00 HOLD

2: 14 May 15 3.06 3.00 HOLD

3: 14 Aug 15 3.11 3.00 HOLD

4: 31 Aug 15 2.81 3.00 HOLD

5: 16 Nov 15 3.00 3.00 HOLD


1

2

3

4

5

2.57

2.67

2.77

2.87

2.97

3.07

3.17

3.27

3.37

Feb-15 Jun-15 Oct-15

S$


Company Guide

ComfortDelgro









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department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking

transaction in the past twelve months and does not engage in market-making.








Company Guide

ComfortDelgro



ComfortDelgro recommended in this report as of 31 Jan 2016

















Dubai



Company Guide

ComfortDelgro



DBS Bank Ltd


Singapore 018982

Tel. 65-6878 8888


ed: TH / DT

BUY (Initiating Coverage) Last Traded Price: S$0.835 (STI : 2,660.65) Price Target : S$1.01 (21% upside) Potential Catalyst: Earnings delivery Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Revenue 108 114 128 148 EBITDA 24.7 33.7 36.0 43.1 Pre-tax Profit 17.4 26.2 27.9 34.5 Net Profit 15.8 23.0 24.4 30.0 Net Pft (Pre Ex.) 15.8 23.0 24.4 30.0 EPS (S cts) 4.89 7.12 7.55 9.29 EPS Pre Ex. (S cts) 4.89 7.12 7.55 9.29 EPS Gth (%) 81 45 6 23 EPS Gth Pre Ex (%) 144 45 6 23 Diluted EPS (S cts) 4.89 7.12 7.55 9.29 Net DPS (S cts) 2.00 3.80 3.02 3.72 BV Per Share (S cts) 21.9 25.5 30.0 35.6 PE (X) 17.1 11.7 11.1 9.0 PE Pre Ex. (X) 17.1 11.7 11.1 9.0 P/Cash Flow (X) 11.1 10.0 7.8 7.4 EV/EBITDA (X) 10.0 7.1 6.1 4.7 Net Div Yield (%) 2.4 4.6 3.6 4.5 P/Book Value (X) 3.8 3.3 2.8 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.8 30.0 27.2 28.3 Consensus EPS (S cts): 7.30 8.10 9.30 Other Broker Recs: B: 3 S: 0 H: 0 ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Precision Components and Parts


At A Glance Issued Capital (m shrs) 325 Mkt. Cap (S$m/US$m) 272 / 193 Major Shareholders (%) Goh Leng Tse 21.3 Ong Tiak Beng 9.6 Koh Boon Hwee 6.8

Free Float (%) 51.5 3m Avg. Daily Val (US$m) 0.36

DBS Group Research. Equity 22 Feb 2016

Singapore Company Focus

Innovalues Ltd Bloomberg: IP SP | Reuters: INNV.SI Refer to important disclosures at the end of this report

Going big on sensors Initiate with BUY with 21% upside to TP of S$1.01;

Beneficiary of automotive megatrend towards safety and

eco-efficiency. Innovalues is a beneficiary of raising awareness and stricter regulatory standards on safety and emissions, as it is a key supplier to Sensata, a leading global producer of automotive sensors. As Innovalues taps into the underpenetrated Chinese automotive sensor market alongside Sensata, we project earnings to grow by 30% from S$23m in FY15 to S$30m in FY17F on 30% revenue growth (from S$114m in FY15 to S$148m in FY17) and modest improvement in margins.

Beyond the automotive segment, the long-term multi-

sector application potential of sensors also bodes well for

Innovalues. Beyond automotives, the global smart sensor market is expected to grow at a 9.9% CAGR from c.US$80bn in 2013 to nearly US$154bn in 2020. Through partnerships with Sensata and TE Connectivity, leading producers of sensors, Innovalues also hopes to venture into the industrial segment, which could be the next leg of growth.

Cost advantages and focus on operating efficiency and

productivity improvements to drive earnings. Innovalues’ ability to customise machines and tools in-house enables the company to operate more efficiently than its peers. As its ongoing automation efforts are subsequently rolled out, we expect a boost to EBIT margins from 19% in FY15 to 22% in FY17F on enhanced productivity.

Valuation:

Our 12-month TP of S$1.01 offers potential upside of 21%. Our TP of S$1.01 for Innovalues is based on 12x blended FY16/17F PE, which implies a discount of 20% to peers' average PE of c.15x blended FY16/17F earnings. Its share price should re-rate as the Group ramps up on production and as earnings growth is delivered. Key Risks to Our View:

Slowdown in global automotive sales could weigh on AU segment. As the automotive segment makes up a significant proportion of Innovalues’ business, a significant slowdown in the global auto market could weigh on the segment’s outlook.

61

561

1061

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2561

0.1

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0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0


Relative IndexS$

Innovalues Ltd (LHS) Relative FSTOG INDEX (RHS)

Company Focus

Innovalues Ltd

SWOT Analysis

Strengths Weakness Long-standing manufacturing partner of leading automotive and office automation players. Proven track record and superior in-house tooling capabilities. High barriers to entry due to capex requirements.

Demand for office automation products is less predictable. Revenue from four key clients accounted for almost 70% of FY15 revenue.

Opportunities Threats Greater demand for sensor content in vehicles. Multi-sector application potential of sensors. Potential for greater operational efficiency and productivity amidst ongoing automation efforts.

Susceptibility to global economy and local policies. Slowdown in global auto sales. Competition for skilled labour.

Source: DBS Bank

Company Focus

Innovalues Ltd

Company Background

Long-standing manufacturer of customised precision parts to leading AU and OA players. Founded in 1997, Innovalues Limited initially specialised in the manufacture and assembly of customised precision machining parts, components, electronics and mechanical devices for the Office Automation (OA), Hard Disk Drives (HDD) and Automotive (AU) Industries. However, following tough operating conditions and stiffening competition for the HDD sector, Innovalues gradually divested the segment from FY09 to focus on its primary OA and growing AU segments. Later in FY11, in anticipation of a poor outlook for the OA business, Innovalues undertook another strategic decision to reposition itself – redeploying existing machinery toward the growing AU business instead, which became the company’s key engine for growth. Between FY10 and FY15, the AU segment grew strongly at 16.2% CAGR, offsetting weakness in the legacy OA business, and driving overall net revenue growth at CAGR of 2.5% over the same period.

Fig. 1: Sales Trend

Source: Company, DBS Bank Today, backed by almost two decades of experience, Innovalues not only manufactures precision components for the AU and OA sectors, but also provides complementary, surface treatment services such as Electroless Nickel plating and Zinc Phosphating, and remains a long-standing manufacturing partner to leading global AU and OA players such as Sensata, Hilite and HP, which in turn have major automobile manufacturers such as Mercedes-Benz and the Volkswagen Group as customers. Manufacturing facilities spanning c.50,000 sqm. Innovalues is headquartered in Singapore but operates manufacturing facilities in Johor (Malaysia), Ayutthaya (Thailand) and Song Jiang (China). Despite operating solely within Asia, the Group also delivers solutions to customers from other geographies, including the US, Brazil and Mexico. To better service OA client, HP, and to mitigate rising labour costs, Innovalues recently completed the shift of its OA operations out of China and back to Malaysia in 3Q15. Going

forward, expansion will likely be focused on operations in Johor and Ayutthaya.

Fig. 2: Manufacturing Facilities

Geographical Presence Area (sqm)

Malaysia Innovalues Precision Sdn Bhd 14,676

Facility 1- Pasir Gudang (AU) 11,121 Facility 2 – Pasir Gudang (OA) 2,255 Warehouse – Pasir Gudang (OA)* 1,300

Innovalues Precision (Kluang) Sdn Bhd 8,826 Facility 3A – Kluang (AU) 4,413 Facility 3B – Kluang (OA) 4,413

Innovalues Precision Microtech Sdn Bhd 3,900 Facility 4 – Pasir Gudang (AU & OA) 3,900

Thailand Innovalues Precision (Thailand) Ltd 10,400

Facility 5 – Ayutthaya (AU) 10,400#

China Innovalues Auto Precision (Shanghai) Co., Ltd 9,469

Facility 6 – Songjiang (AU) 9,469 Innovalues Industry (Shanghai) Co., Ltd 2,056

Facility 7 – Songjiang (AU)* 2,056 Innovalues Technology (Shanghai) Co., Ltd 500

Facility 8 – Songjiang (AU) 500

* In 3Q15, Innovalues completed the relocation of OA operations from Songjiang, Shanghai back to Pasir Gudang, Malaysia

# Total area of 36,800 m2, with built-up area of 10,400 m2


Fig. 3: Revenue by Geography* (2015, %)

*based on customers’ location, not end-demand

Source: Company, DBS Bank Core business. Innovalues has two key product segments: (1) Automotive segment which manufactures precision

automotive components that cater primarily to the areas of (a) Safety/Control, (2) Energy-saving, and (3) Environmental Protection.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0

20

40

60

80

100

120

140

160

180

200

2013A 2014A 2015A 2016F 2017F

S$ m

Total Revenue Revenue Growth (%) (YoY)

Singapore, 0.5% Malaysia,

5.7%

Thailand, 6.7%

PRC, 59.1%

USA, 18.3%

Brazil, 0.2%

Mexico, 6.5%

Germany, 2.6%

Others, 0.4%

Company Focus

Innovalues Ltd

These components include the micro-fused strain gage, engine and transmission valves, automotive pressure transducers, and cylinder pressure sensors.

Fig. 4: Automotive (AU) Products

Source: Company

(2) Legacy office automation segment which focuses on the manufacture of rod carriages and printing rollers, as well as roller assemblies.

Fig. 5: Office Automation (OA) Products

Source: Company

In addition, the Group also provides complementary, value-added surface treatment services in Malaysia and China, which can enhance the physical properties of both the AU and OA component parts. However, Innovalues does not own a plating licence in Thailand. According to the company, due to environmental concerns and stringent regulations, only one other manufacturer (apart from Innovalues) is licensed to operate a surface treatment facility in Song Jiang.

More favourable revenue mix. Innovalues’ revenue mix has changed significantly over the years, from an AU to OA ratio of about 0.8:1 in FY10 to almost 4:1 in FY15. Over the same period, revenue has also grown 18% from c.S$96m to c.S$114m in FY15. Meanwhile, the sale of component parts to other industries remained insignificant, at S$0.4m or 0.4% of FY15 revenues.

These other industries supported by Innovalues include Oil & Gas, Home Appliances, and Infrastructure.

Fig. 6: FY15 Revenue Breakdown by Segment (%)

Source: Company, DBS Bank Optimal utilisation for AU, but room for improvement for OA segment. In FY15, assuming a 7-day work week, Innovalues’ AU facilities were operating at an average utilisation rate of c.85% – which implies that the Group was essentially operating at full AU capacity. According to management, 85% is optimal as it provides the company with the flexibility to cater to spikes in near-term demand from key customers, when necessary. The utilisation rate for the OA segment was estimated to be between 30-40% for FY15, primarily due to Innovalues’ decision to move its OA operations back to Malaysia. Given the completion of the move in 3Q15, and the progressive ramp-up in production for HP’s new printer which was secured in FY15, we expect better utilisation of OA facilities in FY16 and beyond. Material lead time provides buffer and reduces risk when expanding AU capacity. Further, we think that with a 12-month order book, the buffer between the lead time for procurement of raw materials and time required by the company to construct additional capacity provides Innovalues with better visibility and control over future expansion needs.

Fig. 7: Buffer Reduces Uncertainty and Risk

Estimated time to: Order delivery 12 months

Procure raw materials 7 – 8 months

Expand capacity 3 – 4 months

Source: Company Three pillars of cost efficiency. Innovalues has historically been able to obtain favourable allocations from leading customers as it is among the lowest-cost producers of AU and OA precision parts. The Group has been increasingly cost efficient over the years, owing to: (1) Ability to customize machines, (2) In-house tooling capabilities, and (3) Provision of surface plating services

AU78.7%

OA21.0%

Others0.4%

OA Plotter / Wide Format Printer

OA Shafts and Roller Assemblies

Rod Carriage Pins Printing rollers Photocopy rollers Label dispenser rollers Bearing assembly Rubber-to-plastic to-metal assembly

Company Focus

Innovalues Ltd

Customisation of machines and superior in-house tooling capabilities allows for more efficient operations vs peers... Innovalues procures standard machines from Japan, and works alongside the Japanese manufacturers to customise these machines according to their tooling needs. Although the cost tends to vary quite substantially with the size and requirements of the tool, the overall in-house tooling cost for customised machines is much cheaper - at approximately 1/3 that of off-the-shelf models (typically purchased by competitors in the US and EU). As a result, Innovalues’ average cost of investments in procuring and customising both basic machine and the more complex multi-spindle machines are only at a fraction of their average retail price of about US$600k and US$1.2m, respectively, when purchased off the shelf. Also, as Innovalues customise its tools in-house, it enjoys a longer tool life. On average, the Group is able to produce up to 15,000 pcs per tool as compared to 5,000 pcs when using a standard, off-the-shelf tool. ...coupled with the provision of complementary surface treatment services... Surface treatment services improve the hardness, wear-resistance and ability of component parts to withstand corrosion. As a complementary, value-added service, the provision of surface treatment services allows Innovalues to generate higher revenue per product, thus expanding gross margins. Although surface plating is only applied to 30% of Innovalues’ products currently, we expect better utilisation ahead as fears of the potential environmental impact from failure to treat toxic waste prior to air or water emissions, has led to the increasing reluctance of governments to award surface treatment licences. ...have led to a surge in gross margins. Leveraging on its three pillars of cost efficiency, depressed raw material prices, revenue growth, more favourable revenue mix, and provision of value-added services, Innovalues has successfully expanded its gross margins from 14% in FY10 to almost 31% in FY15.

Fig. 8: Average Gross Margins of Segments

Segment

Gross Margins

Automotive 29 – 31%

Office Automation 26 – 28%

Source: Company, DBS Bank Going forward, amidst ongoing cost management efforts, more aggressive expansion into the AU business and better utilisation of plating facilities, we expect the Group to comfortably maintain gross margins between 30-31%.

Cost Structure Raw materials and labour are key costs. Innovalues has a fairly stable cost structure, of which cost of sales form the majority (>85% in FY15). Raw materials, such as aluminium, stainless steel and brass, which made up c.30% of FY15 revenues, have traditionally been the largest cost component for Innovalues. As raw materials are procured from qualified, client-designated vendors, Innovalues has largely been able to pass on cost increases to customers, which helps to protect margins. Innovalues incurred additional lay-off costs in FY15 due to the relocation of OA operations from China (which has undergone a period of double-digit wage growth) back to Malaysia. With a more favourable labour-mix following the completion of the relocation in 3Q15, and better efficiencies from the expected completion of ongoing automation efforts in China and Thailand around 3Q16, we expect the Company’s labour cost component to decline to more stable levels of around 7.5% to 8.4% of sales from FY16 and beyond. Fig. 9: Breakdown of Costs (FY15, %)

Source: Company, DBS Bank Collaborative long-term relationships with major customers reduces marketing needs. Rather than to aggressively diversify its customer base, Innovalues has focused primarily on deepening existing relationships with long-standing AU and OA clients - expanding its manufacturing portfolio in the process, and have thus been able to keep marketing and distribution costs low. In FY15, distribution expenses made up less than 2% of the Company’s total sales. Net margin expansion helped by emphasis on efficiency. Innovalues takes a three-pronged approach to the maximisation of operational efficiency:

(1) Enhancement of production processes (2) Continuous Control Improvement (3) Material Wastage Management

Marketing and distribution Cost

2.2%

Administration Expenses12.2%

Raw Materials37.1%

Depreciation7.4%

Utilities and Others41.1%

Cost of Sales85.6%

Company Focus

Innovalues Ltd

Decrease in earnings mainly due to the overall decline in the demand for products across all sectors caused by the global economic slowdown.

Due to the Thailand flood, half of operations in Innovalues’ Thailand plant were halted. In addition, flood-related charges (i.e. impairments, write-offs and restorations) amounted to S$13.6m.

As a result of its ongoing efforts toward greater operational efficiency and productivity enhancements, Innovalues has drastically increased its output value per worker. Fig. 10: Increase in Output Value per Worker

Productivity Metrics

FY10

FY15

Improvement

No. of workers

2,600 1,500 +42%

Production days per component

7 3 +57%

Output per worker S$ Output per worker increased by 93%


The greater cost savings arising from higher operational efficiencies and productivity gains among workers have resulted in a leaner and more efficient structure, as reflected by the EBIT and net profit margin of c.19.0% and 20.2% in FY15, up from c.1.8% and 1.3% respectively in FY10.

Fig. 11: Expansion of Operating and Net Margins (to 2017F)

Source: Company, DBS Bank With the machines for the OA segment being almost fully depreciated, and as more automation initiatives are gradually rolled out going forward, we expect resultant efficiencies to lift both operating and net margins to c. 22% and c. 20% respectively by FY17F. Net beneficiary of a stronger USD. Innovalues generates surplus in US$ as it receives more than 90% of its revenues in US$ while only c.30% of overall costs are incurred in US$. A stronger dollar against SGD would be positive for the Group’s earnings. All else constant, the strengthening of the US$ by 1% should lift net profit by c.1.8%. We’ve assumed lower positive forex going forward.

Management & Strategy Managed by founder. Close to 20 years after Innovalues was established, the founder – Mr Goh Leng Tse, remains actively involved in the business’s manufacturing operations. Under his leadership, together with the rest of the management team, the Group was able to navigate through challenging conditions such as the global financial crisis in 2008/09 and the severe flood in Thailand in 2011. Over the last decade, earnings have grown from S$10.1m in FY05 to S$23.0m in FY15, which represents a 10-year CAGR of 8.6%. Fig. 12: Delivering Earnings at 10-year CAGR of 9.3%


Dual strategy of both efficiency and growth. To ensure the stability of its earnings, Innovalues focuses on both top-line and bottom-line performance. By maintaining consistent standards of manufacturing and delivery, the Group remains a reliable source of component parts to key clients, and has been able to progressively grow the size of its contribution to their overall needs. For instance, Innovalues benefitted from a key client’s decision in FY15 to shift procurement of parts away from a less-consistent, existing supplier in Mexico. The continuous enhancement of production processes and streamlining of cost structure over the years have also fed through to the bottom line, as net margins expanded from 9.5% in FY05 to 20.2% in FY15, and as earnings more than doubled over the last decade – outpacing sales growth. No dividend policy.... While Innovalues does not have a fixed dividend policy, dividend payouts have hovered around c.30% of free cash flows in previous years but rose to 60% in FY15 as net profits surged 45.5% over the year. At time of announcement, this represented a yield of c. 5%. Fig. 13: Historical Dividend Payouts (% of FCF)

FY11 FY12 FY13 FY14 FY15 20% 28% 27% 33% 60%

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FY10 FY11 FY12 FY13 FY14 FY15 FY16F FY17F

Operating Margin Net Margin

-15

-10

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Company Focus

Innovalues Ltd

Fig. 14: Key Management Team

Name Position Company Tenure

Profile

Goh Leng Tse CEO/ Chairman/ Founder

19 years Over two decades of experience in the precision turned-parts industry, and leads while taking a hands-on approach to the development of Innovalues’ business and manufacturing operations

Chairman of the Board but also sits in the Audit Committee, Remuneration Committee and Nominating Committee

Holds Diploma in Business Management from the Singapore Institute of Management

Pung Tong Seng, Steven

Executive Director

15 years Responsible for Innovalues’ marketing and business development functions Carries about 20 years of experience working with MNCs such as Micropolis (S)

Ltd and Iomega Pacific Pte Ltd in the electronic and hard disk drive industries Holds an MSc in Total Quality Management from the Sheffield Hallam University

Soo King Teng Group

Financial Controller/ Company Secretary

6 years Promoted to Group Financial Controller in 2011 and is responsible for overseeing the financial and accounting functions of the Group

Has more than 15 years of accounting and finance experience across various industries

Holds a professional accountancy qualification from the Association of Chartered Certified Accountants, UK and is a Chartered Accountant of the Institute of Singapore Chartered Accountants

Ho Beng Joo Senior Project Manager

14 years Responsible for the Group’s sales, engineering and quality control functions Has more than 30 years of experience in metal machining and quality control,

including 20 years in the aerospace industry Holds a Diploma in Production Technology from German Singapore Institute

Source: Company

Company Focus

Innovalues Ltd

Industry Prospects Fig. 15: Cumulative Annual Growth (Decline) in Production of Passenger Vehicles (2010 – 2015F)

Source: International Organization of Motor Vehicle Manufacturers (OICA), World Bank, DBS Bank Uneven distribution of growth across markets. Following the greater shift in production from developed to developing nations, and the varying conditions impacting consumption patterns across regions, the key automotive markets have and are experiencing uneven distributions of growth in both production and demand. For instance, the temporary purchase tax cut for vehicles (1.6 litre and smaller) implemented in China in October 2015 led to a c.18% surge in sales, while car sales in Russia were hit by the recession, plummeting c.45% over two years . Fig. 16: Est. Production and Sales in Key Markets

Production of Passenger Vehicles

Market 2015F

Production*

3yr CAGR Global Share (%)*

China 21.2m +10.9% 31%

Europe 18.4m +1.8% 27%

Japan 7.5m -4.3% 11%

*estimated

*as at 1H15

Source: OICA, DBS Bank

Given the uneven regional sales growth, profitability of the auto industry should depend on broad global demand patterns – which we think should remain close to the aggregate level estimated for 2012 to 2015 of about 2.2% p.a. With future demand growth likely to be modest, manufacturers with wider geographical reach, such as Innovalues, are better positioned to compete in a global setting. Drivers of changing automotive trends. In recent years, the greater scrutiny of governments and regulators on the automotive sector, coupled with shifts in consumer behaviour, have transformed the priorities of auto manufacturers. Areas of increasing regulatory concern include the environmental compatibility and availability of safety-related features in motor vehicles. Meanwhile, the neutralising of differentiation among vehicles have shifted buying power to consumers, putting greater pressure on automakers to meet their demands for more high-tech and high-end features. Importance of environmental protection. The release of and increasing concentration of greenhouse gases have impacted both the environment and economy, and could result in more severe consequences if left unmanaged. The European Automobile Manufacturers’ Association (ACEA) estimates that every litre of petrol/gasoline or diesel used produces close to 2.3kg or 2.7kg of CO2 respectively.

Sales of Passenger Vehicles

Market 1H15 Sales 3yr CAGR Global Share (%)*

China 10.1m +9.9% 30%

Europe 8.5m -0.4% 26%

US 3.8m +0.9% 12%

Company Focus

Innovalues Ltd

Governments have thus been placing greater emphasis on the environmental impact of automotives, particularly fuel consumption and CO2 emissions, and have rolled out both incentives and penalties aimed at influencing buying decisions and usage patterns, which forces car manufacturers to offer more fuel-efficient cars. According to The Economist, regulators in the US are aiming for fuel-economy standards of 54.5 mpg by 2025, while regulators in China, Europe, India and Japan hope to reach standards of at least 55 mpg by 2020. Fig. 17: Increased Fuel Economy Standards for Environmental Protection

Source: International Council on Clean Transportation (ICCT) Fig. 18: Increased Emission Standards for Environmental Protection

Source: International Council on Clean Transportation (ICCT) No substitute for safety. In addition to their role in influencing fuel efficiency in automotives, governments have also been paying closer attention to in-vehicle safety. In 2015, vehicle recalls hit an all-time high of 51.2m vehicles (over 900 separate recalls) for the second consecutive year as regulators cracked down on safety defects. Governments are also increasingly mandating safety-related components. In 2011, the US mandated Electronic Stability

Control (ESC) systems – which uses multiple sensors to detect loss of steering control and automatically applies brakes to stabilise vehicles. According to the Insurance Institute for Highway Safety, this program has proven to be one of the most effective safety technologies, and could reduce fatal single-vehicle crash risk and fatal multiple-vehicle crash risk by 29% and 20% respectively. Following its adoption in the US, Europe and Korea have also mandated the use of ESC programs in all vehicles by 2014 and 2015 respectively. ESC penetration is low in China as it has yet to be mandated by the authorities, which could represent a substantial future opportunity for components manufacturers. Further, the regulatory impact from government scrutiny over safety and emissions, and increasing preference for telematics features have also led to the surge in demand for automotive sensors. The number of automotive sensors used in vehicles has been trending upwards due to: (1) Rising safety and emission standards and regulations

To ensure compliance to safety and emission standards, auto manufacturers have introduced additional safety features such as electronic stability control, occupant weight force sensing, and tyre pressure monitoring. Sensors, which facilitate communication between these applications and the vehicle or other external devices, have thus been playing an increasingly important role as more applications and electronic content are installed per vehicle.

(2) Growing preference for telematics features

A wide range of telematics features (supported by sensors) such as automatic crash notification, roadside assistance, automatic parallel parking, vehicle health diagnostics and vehicle locator have been increasingly introduced in newer vehicle models (especially higher-end varieties) as auto manufacturers seek to differentiate their products. The rising popularity of telematics and infotainment systems have thus also supported the growth of sensor content in automotives. Advent of the electric vehicle (EVs). While the market for electric vehicles is still at a relatively early stage, the International Energy Agency (IEA) estimates that there could be 20m on the road (or 2% of projected passenger cars) by 2020, from c.665,000 globally or <0.1% of total passenger cars in 2014, as governments invest in more sustainable and environmentally- friendly transportation systems. Due to the sophistication of EVs, as compared to traditional models which run on internal combustion engines, they are fitted with higher sensor content (by more than 50% on average) to ensure reliable performance. With more sensors installed in each successive generation of EVs, we think the outlook and market potential of these higher-tech vehicles bodes well for Innovalues in the long run.

Company Focus

Innovalues Ltd

Growth Prospects Greater regulatory scrutiny on safety and eco-efficiency in automotives. Tighter regulations for safety and emissions, especially post the Volkswagen emission scandal, should lift demand for eco-efficient automotive components. Drawing on the Group’s existing product portfolio (such as the Greener Automotive transmission / engine), engineering capabilities for quality automotive safety systems, and energy-saving and environmental protection features, Innovalues is well positioned to harness the expected increase in demand for such automotive content to grow its AU segment. To support growth in its AU business, management has guided for capex (60% developmental, 40% maintenance) of S$5-6m in FY2016. However, we expect capex to increase slightly from FY2017 and beyond, as Innovalues gears up for the commercial production of newly qualified components. Growing samples with PO indicative of stronger production pipeline in 2016 and 2017 and beyond. We estimate that between 2010 and 2015, the number of samples with purchase orders (PO) grew at 20% CAGR to c.300 in 2015. As close to 70% of these samples (mostly AU components) should eventually move towards commercial production two to three years after sample submissions, we expect stronger growth in the AU segment from 2H16 onward.

Fig. 19: Projected No. of Samples with PO (FY10-FY15)


Tapping on China’s growth. Innovalues has historically contributed close to 30% of some of Sensata’s component needs. In Feb 2016, Sensata identified China as a key driver of its growth, given:

(1) Low penetration rate of automotives

With a penetration rate of less than seven auto vehicles per 100 people in China vs 58-79 vehicles per 100 people in Europe and North America respectively, we think there is substantial headroom for the gap to narrow, helped by the cut in purchase tax, and rising affluence in smaller cities.

Fig. 20: Penetration Rate of Autos (Per 100 People)

Source: Sensata, DBS Bank

(2) Higher expected adoption of sensor units

Further, we estimate that current sensor content per vehicle in China is under US$10, as compared to c.US$40 per vehicle in North America and Europe. As consumer preferences mature, we believe that the growth in demand for more sensor-rich applications in China should gradually bring sensor content in Chinese vehicles up to current penetration levels observed in the West. Assuming no end-market growth in automotives in China, Sensata estimates that the following applications could grow between 3-13% CAGR ahead:

Fig. 21: Estimated Sensor Unit Growth

Source: Sensata, DBS Bank With growing exposure to this small but fast-growing market, as well as the potential arising from greater scrutiny over safety and eco-efficiency in automotives, we believe that Innovalues’ AU segment should grow between 13% to 18% p.a. from 2015 to 2017.

Venturing beyond the auto market – industrial sensors. The key benefits smart sensors provide to vehicle operators, such as vehicle efficiency, safety and lower prices, have led to the rising adoption of sensors in automotives. Between 2013

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Applications include: Projected CAGR

Gas Direct Injection 8%

Electronic Stability Control 4%

Dual Clutch 13%

Tyre Pressure Sensing 9%

Advanced Transmissions 3%

Advanced HVOR Operator Controls 12%

Company Focus

Innovalues Ltd

and 2020, BCC Research estimates that the global sensor market, largely driven by demand for automotive sensors, will grow at a 9.9% CAGR from US$79.5bn in 2013 to nearly US$154.4bn in 2020. Beyond automotives however, Innovalues has been working alongside TE Connectivity, one of the largest connectivity and sensor companies, in the manufacture of industrial sensors. While current contribution from this segment is relatively insignificant at only c.0.4% of FY15 revenue, vast potential remains in the industrial segment, as it is estimated to represent more than 30% of the global sensor business.

Fig. 22: Potential Areas of Focus for Industrial Sensor Business

Source: Company, DBS Bank In the longer term, as one of Sensata’s main component suppliers, we think Innovalues could potentially benefit from Sensata’s recent acquisition of CST’s sensing portfolio – which provides growth and diversification opportunities for both Sensata and Innovalues outside of the automotive-sensing segment. Given the multi-application potential of smart sensors beyond the automotive and industrial sector, to the medical, agricultural and aerospace industries, the sensing business presents untapped opportunities for Innovalues and widens its addressable market if it can successfully grow its range of sensors to cater to these new segments. Continuous focus on operational efficiency and productivity enhancement. Over the years, Innovalues has consistently invested in the enhancement of its operating efficiency. As part of its automation efforts, Innovalues expects to take receipt of a new batch of fully-automated machines in 2H15 for its Shanghai operations. If the Group successfully automates its operations in Shanghai, we think there could be further scope for reduction of headcount in China by c.20%. If it materialises, we expect operating margins to be lifted from 19% in FY15 to 22% in FY17 as the improved productivity should help mitigate the impact of potential wage hikes.

Profile of Key Clients (1) Sensata Technologies

Segment: AU Est. Contribution to Innovalues’ AU Revenue:

35-40%

(2) Hilite International

Segment: AU Est. Contribution to Innovalues’ AU Revenue:

20-25%

(3) TE Connectivity (Including Measurement Specialties)

Segment: AU / Others Est. Contribution to Innovalues’ AU Revenue:

10-15%

(4) HP

Segment: OA Est. Contribution to Innovalues’ OA Revenue:

60-65%

Source: Companies, DBS Bank

Company Focus

Innovalues Ltd

Key Risks

Slowdown in automotive sales. As the auto segments makes up a significant proportion of Innovalues’ business (c.78% of FY15 revenue), a significant slowdown in global auto market could weigh on the business’ outlook. However, as Innovalues is likely to place greater emphasis on auto demand in China, in line with Sensata’s strategy for 2016 and beyond, we think that the company should benefit from favourable demand conditions, helped by favourable policies, and as the current penetration rate of autos remain low at less than seven per 100 people. Key client risk. Over the years, Innovalues has substantially grown the size of its AU portfolio alongside leading AU players such as Hilite, Sensata and TE Connectivity. As more than 70% of its AU revenues are from its three key AU clients, Innovalues remains susceptible to the business direction and performance of these key customers. Potential brain drain in manufacturing. As the automotive industry advances, industry players (including automotive components suppliers) will have to deliver continuous improvements and innovation to meet the future needs of the industry. While this may not be an immediate concern, the inability to appeal to and retain workers with cutting-edge electronic manufacturing and IT skills, especially with rising competition for talent from technological firms, could hamper Innovalues’ progress on the technological advancement and innovation front in the longer term.

Company Focus

Innovalues Ltd

Segmental Forecasts Expect weaker 1H16 for AU business... We think that the AU segment will likely be weaker in 1H16 as Innovalues works alongside a key client in the management of inventory, which had weighed on 4Q15 revenues but should recover from 2Q16 onwards. We project the AU segment to make up 79% and 80% of Group revenue in 2016 and 2017 respectively. ...but expect stronger ramp-up in production from 2H16 and beyond. As Innovalues partners with Sensata to ride the growth potential in the fast-growing Chinese auto sensor market, and as the Company starts to ramp up production on samples approved in 2014 and 2015, we expect the AU business to deliver stronger growth from 2H16 and beyond. Innovalues is also in talks with HP to further ramp up production for the manufacture of rollers (project won in 2015) for its new printer. If it materialises, production volumes for this project will likely double in 2016. Assume slight decline in gross margins in 2016. As gross margins were partly bolstered to 30.7% in 2015 by positive forex movements, we expect a modest decline in gross margins in 2016 as we assume lower positive forex going forward. Key Assumptions

FY Dec 2012 2013A 2014A 2015A 2016F 2017F AU Revenue (S$ m) 61.5 76.3 87.8 89.5 101 119

OA Revenue (S$ m) 29.4 22.5 20.1 23.8 26.0 28.3

Operating Profit Margin (%) 2.63 7.10 15.2 19.0 20.4 22.0

Capital Expenditure (S$ m) 12.2 3.90 4.66 5.59 6.01 7.01

Tax Rate (%) 1.56 5.48 9.01 12.3 12.5 13.0

Segmental Breakdown

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenues (S$m)

Automotive (AU) 61.5 76.3 87.8 89.5 101 119

y-o-y growth -- 24.0% 15.1% 1.9% 13.0% 18.0%

Office Automation (OA) 29.4 22.5 20.1 23.8 26.0 28.3

y-o-y growth -- (23.5%) (10.5%) 19.4% 9.0% 9.0%

Others 0.92 0.56 0.55 0.41 0.49 0.59

Total 91.8 99.3 108 114 128 148

Gross Profit (S$m)

Automotive (AU) 9.84 14.9 23.7 27.7 31.3 37.6

y-o-y growth -- 51.2% 59.3% 17.0% 13.0% 19.9%


y-o-y growth -- (0.2%) 43.3% 43.1% 5.2% 12.9%

Others 0.44 0.27 0.31 0.21 0.26 0.30

Total 13.7 18.5 28.8 34.9 38.9 46.1

Gross Profit Margins (%)

Automotive (AU) 16.0 19.5 27.0 31.0 31.0 31.5


Others 48.4 48.6 55.7 52.0 52.0 50.0

Total 14.9 18.6 26.6 30.7 30.5 31.1 Source: Company, DBS Bank

Sensitivity Analysis 2015

USD/SGD +/- 1% Net Profit +/- 1.8% Wage rate +/- 1% Net Profit +/- 0.4%

As reinvestment allowances were fully utilised in 2013, we expect the effective tax rate to increase to 13% by 2017.

Expect stronger growth from 2H16 and beyond.

Company Focus

Innovalues Ltd

Financials – Income Statement Expect modest margin improvement ahead. Innovalues achieved record margins (gross, operating and net) in FY15, helped by favourable exchange conditions, low raw material prices and ongoing drive towards operational efficiency. As the Group continues to focus on cost management and the enhancement of operating efficiency and productivity, we expect further operating margin expansion from 19.0% in FY15 to 22.0% in FY17F, and modest net margin improvement from 20.2% in FY15 to 20.3% in FY17F. Earnings to grow on stronger production pipeline and higher efficiency. We project Innovalues to achieve better sales growth as sample orders secured in 2014 and 2015 are progressively due to come on stream, and as the Group strengthens its partnership with Sensata to tap into growth opportunities in the lucrative Chinese sensing market. Together with projected efficiencies from the ongoing automation efforts, we expect earnings to grow by c.30.5% from FY15 to FY17F. Income Statement (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenue 91.8 99.3 108 114 128 148

Cost of Goods Sold (78.1) (80.8) (79.6) (78.8) (88.7) (102)

Gross Profit 13.7 18.5 28.8 34.9 38.9 46.1

Other Opng (Exp)/Inc (11.3) (11.5) (12.4) (13.4) (12.9) (13.5)

Operating Profit 2.41 7.05 16.5 21.6 26.0 32.6

Other Non Opg (Exp)/Inc 1.59 0.66 1.27 4.83 2.00 2.00

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (1.0) (0.8) (0.4) (0.2) (0.1) (0.1)

Exceptional Gain/(Loss) 12.6 2.25 0.0 0.0 0.0 0.0

Pre-tax Profit 15.6 9.18 17.4 26.2 27.9 34.5

Tax (0.2) (0.5) (1.6) (3.2) (3.5) (4.5)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 15.4 8.68 15.8 23.0 24.4 30.0

Net Profit before Except. 2.80 6.43 15.8 23.0 24.4 30.0

EBITDA 11.4 15.0 24.7 33.7 36.0 43.1

Growth

Revenue Gth (%) 4.6 8.2 9.2 4.8 12.2 16.2

EBITDA Gth (%) 11.8 31.5 64.7 36.3 6.6 20.0

Opg Profit Gth (%) nm 192.5 133.4 31.0 20.5 25.5

Net Profit Gth (Pre-ex) (%) nm 129.8 146.1 45.5 6.0 23.1

Margins & Ratio

Gross Margins (%) 14.9 18.6 26.6 30.7 30.5 31.1

Opg Profit Margin (%) 2.6 7.1 15.2 19.0 20.4 22.0

Net Profit Margin (%) 16.7 8.7 14.6 20.2 19.1 20.3

ROAE (%) 33.2 15.9 24.8 30.0 27.2 28.3

ROA (%) 18.5 10.1 17.6 23.1 21.6 22.6

ROCE (%) 3.5 9.1 22.7 28.9 26.5 27.8

Div Payout Ratio (%) 24.9 44.4 40.9 53.4 40.0 40.0

Net Interest Cover (x) 2.5 9.1 47.1 133.1 253.7 450.5 Source: Company, DBS Bank

Margins Trend

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

2013A 2014A 2015A 2016F 2017F

Operating Margin % Net Income Margin %

Company Focus

Innovalues Ltd


FY Dec 3Q201 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 27.9 27.9 29.1 29.5 28.2 26.9

Cost of Goods Sold (19.4) (19.4) (20.1) (20.7) (20.2) (17.8)

Gross Profit 8.47 8.47 9.01 8.84 8.02 9.06

Other Oper. (Exp)/Inc (3.5) (3.5) (3.1) (3.3) (3.5) (3.5)

Operating Profit 4.97 4.97 5.89 5.57 4.55 5.53

Other Non Opg (Exp)/Inc 1.04 1.04 0.48 1.03 3.13 0.21

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (0.1) (0.1) (0.1) (0.1) 0.0 0.0

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 5.94 5.94 6.32 6.54 7.66 5.71

Tax (0.5) (0.5) (0.8) (0.6) (1.0) (0.9)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 5.44 5.44 5.53 5.90 6.72 4.85

Net profit bef Except. 5.44 5.44 5.53 5.90 6.72 4.85

EBITDA 7.87 7.87 8.25 8.50 7.69 5.73

Growth

Revenue Gth (%) 8.3 (2.2) 4.4 1.5 (4.4) (4.8)

EBITDA Gth (%) 16.5 20.2 4.9 3.0 (9.5) (25.4)

Opg Profit Gth (%) 24.2 23.5 18.5 (5.5) (18.2) 21.4

Net Profit Gth (Pre-ex) (%) 16.9 30.4 1.6 6.8 13.7 (27.7)

Margins

Gross Margins (%) 25.6 30.4 31.0 29.9 28.4 33.7

Opg Profit Margins (%) 14.1 17.8 20.2 18.9 16.1 20.6

Net Profit Margins (%) 14.6 19.5 19.0 20.0 23.8 18.1

Revenue Trend


-20%

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Net profit fell y-o-y due to an exceptionally strong 4Q14 - 1Q and 4Q have traditionally been weak quarters, and as inventory held on behalf of a key client was pushed back.

Company Focus

Innovalues Ltd

Financials – Balance Sheet Declining PPE as Group becomes increasingly efficient. PPE has been trending downwards from S$43.3m in FY12 to S$34.9m in FY15, mostly due to Innovalues’ increasing ability to customise inexpensive standardised machines in-house, thus incurring lower capital expenditures as compared to annual depreciation charges. Healthy balance sheet. Innovalues’ net cash position has strengthened significantly from S$5.2m in FY12 to almost double y-o-y from S$13.9m in FY14 to S$30.7m in FY15. All else constant, our projections show that Innovalues should be able to fund management’s planned capital expenditures of S$6m in FY16 internally, and that cash balance will continue to rise. Balance Sheet (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 43.3 39.6 38.0 34.9 33.0 31.4

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0

Other LT Assets 0.0 0.33 0.38 0.38 0.38 0.38

Cash & ST Invts 14.3 13.4 24.6 32.5 51.5 68.8

Inventory 13.9 12.7 8.38 10.1 10.9 12.6

Debtors 15.8 17.9 23.9 25.6 26.2 30.5

Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 87.3 83.9 95.3 103 122 144

ST Debt

1.54 1.15 1.18 1.02 1.02 1.02

Creditor 12.2 14.3 15.2 15.3 17.2 19.8

Other Current Liab 14.0 6.68 6.50 3.94 5.95 6.96

LT Debt 7.56 4.83 1.79 0.78 0.78 0.78

Other LT Liabilities 0.07 0.01 0.0 0.0 0.0 0.0

Shareholder’s Equity 52.0 56.9 70.7 82.4 97.1 115

Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 87.3 83.9 95.3 103 122 144

Non-Cash Wkg. Capital 3.52 9.63 10.6 16.4 14.0 16.3

Net Cash/(Debt) 5.17 7.39 21.7 30.7 49.7 67.0

Debtors Turn (avg days) 63.7 61.9 70.4 79.5 74.1 69.8

Creditors Turn (avg days) 60.9 65.8 74.2 78.0 73.5 72.1

Inventory Turn (avg days) 72.9 66.2 53.0 47.2 47.5 45.9

Asset Turnover (x) 1.1 1.2 1.2 1.1 1.1 1.1

Current Ratio (x) 1.6 2.0 2.5 3.4 3.7 4.0

Quick Ratio (x) 1.1 1.4 2.1 2.9 3.2 3.6

Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH

Capex to Debt (%) 133.8 65.3 157.0 311.3 335.0 390.7 Source: Company, DBS Bank

Asset Breakdown

Net Fixed Assets -34.5%

Assocs'/JVs -0.0%

Bank, Cash and Liquid

Assets -30.3%

Inventory -10.0%

Debtors -25.3%

Company Focus

Innovalues Ltd

Financials – Cash Flow Statement Operating cashflow of S$27m in FY15. Innovalues has consistently generated positive operating cashflow over the years. In FY15, the Group recorded operating cashflow of S$27m on improved financial performance – up 50% from S$18m in FY13. Dividend payout of 53.7% in FY15 but likely to be closer to 40% ahead. Supported by higher operating cashflows, the Group declared dividends of 3.8 Scts in FY15, up from 2.0 Scts a year ago. Based on share price of S$0.835 on the date of dividend announcement (18 Feb 2016), this represents a c.4.6% yield. Despite expectations of a growing cash hoard, we think dividend payouts will likely be closer to normalised levels of c.40% ahead as Innovalues would likely prefer to retain financial flexibility in case of higher-than-expected capital expenditures, as it expects to benefit from new orders in the near-to-medium term following Sensata’s new acquisitions of Schrader and CST. Cash Flow Statement (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 15.6 9.18 17.4 26.2 27.9 34.5

Dep. & Amort. 7.42 7.32 7.01 7.33 7.97 8.55

Tax Paid (0.3) (0.5) (1.2) (1.8) (3.5) (4.5)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (6.2) (6.1) (1.0) (5.8) 2.42 (2.3)

Other Operating CF 9.09 8.12 2.11 1.11 0.0 0.0

Net Operating CF 25.6 18.0 24.3 27.0 34.8 36.3

Capital Exp.(net) (12.2) (3.9) (4.7) (5.6) (6.0) (7.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.04 (0.3) 0.0 0.09 0.0 0.0

Net Investing CF (12.1) (4.2) (4.7) (5.5) (6.0) (7.0)

Div Paid (1.9) (3.8) (3.9) (8.5) (9.8) (12.0)

Chg in Gross Debt (8.9) (10.4) (4.2) (5.4) 0.0 0.0

Capital Issues 0.0 0.25 0.29 0.36 0.0 0.0

Other Financing CF (1.0) (0.8) (0.4) (0.3) 0.0 0.0

Net Financing CF (11.8) (14.8) (8.1) (13.7) (9.8) (12.0)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Cash 1.63 (1.0) 11.5 7.81 19.0 17.3

Opg CFPS (S cts) 10.00 7.52 7.84 10.2 10.0 11.9

Free CFPS (S cts) 4.22 4.40 6.09 6.63 8.90 9.06 Source: Company, DBS Bank

Capital Expenditure

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013A 2014A 2015A 2016F 2017F


S$m

Expect dividends to be closer to normalised levels of c.40% ahead.

Company Focus

Innovalues Ltd

Valuation We initiate coverage with a BUY rating and 12-month target price of S$1.01. This is based on 12x blended CY16/17F PE, which represents a c.20% discount to larger peers’ (Venture Corp, NGK Insulators, TE Connectivity and Sensata) PE of 15x blended CY16/17F earnings.

Fig. 23: Innovalues’ Average Discount to Larger Peers* (P/E)

*based on both internal/consensus estimates

Source: Bloomberg, DBS Bank

Innovalues has historically traded at a discount to its larger listed peers and its discount to its peers’ average has been trending downwards over the past 12 months, from above 40% in Feb 2015 to c.20% in Feb 2016. We believe this is because Innovalues has delivered faster earnings growth vs peers over the past year.

In addition, Innovalues’ PEG ratio of 0.7 is the lowest among peers, which provides support for further upside.

Assuming a 20% discount due to its smaller market cap and scale, we believe that Innovalues should be valued at 12x FY16/17F PE, similar to its average historical valuation

of 12x PE. We believe this is reasonable given Innovalues’ higher 2-year EPS CAGR of 14.3% vs the peer group average of 7.5%.

Fig. 24: Innovalues' Forward PE Band (x)

Source: DBS Bank Fig. 24: Innovalues, PB Band (x)

Source: DBS Bank

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A v g : 5 .7 x

+ 1 s d : 8 .6 x

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‐1 sd : 2 .8 x

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2.9

3.4

3.9

4.4

F e b -1 2 F eb -1 3 Fe b - 1 4 F e b -1 5

( x )

Source: DBS Bank, Thomson Reuters

Mkt Cap EPS CA GR PEG ROE CrntCompany US$m Crnt F orw (CY15-CY17) Rat io Hist Crnt Y ield

VENTURE CORP SGD 7.82 1,538 12.4 11.6 9% 1.3 1.2 1.2 8.5% 6.4%NGK INSULATORS JPY 2070.00 6,012 12.4 11.5 9% 1.4 1.7 1.6 12.1% 1.8%

TE CONNECTIV ITY USD 57.61 21,297 14.1 12.7 11% 1.3 2.6 2.7 18.3% 2.4%

SENSATA USD 34.60 5,894 19.0 16.7 1% 17.7 4.7 3.1 25.9% 0.0%A v erage 14.5 13.1 2.6 2.1 16.2% 2.6%

INNOVALUES SGD 0.81 186 10.7 8.7 14% 0.7 n.a. 2.6 26.8% 4.6%

Last Px– – - PER – – - Price- to-Book

Company Focus

Innovalues Ltd
















































Company Focus

Innovalues Ltd

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 31 Jan 2016


3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.











Dubai


Company Focus

Innovalues Ltd



DBS Bank Ltd 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: S$0.91 (STISTISTISTI : : : : 2,582.64) Price Target :Price Target :Price Target :Price Target : S$1.15 (26% upside)

Potential CatalysPotential CatalysPotential CatalysPotential Catalyst: t: t: t: Acquisitions

Where we differWhere we differWhere we differWhere we differ:::: We are more conservative in our estimates Analyst Derek Tan +65 6682 3716 [email protected] Mervin Song CFA +65 6682 3715 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY MarMarMarMar ((((S$S$S$S$ m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Gross Revenue 311 330 340 359 Net Property Inc 268 277 294 312 Total Return 293 241 182 189 Distribution Inc 180 185 185 192 EPU (S cts) 7.7 6.4 7.4 7.7 EPU Gth (%) 2 (17) 15 4 DPU (S cts) 7.3 7.5 7.5 7.8 DPU Gth (%) 7 2 0 4 NAV per shr (S cts) 97.3 102.6 102.5 102.4 PE (X) 11.9 14.3 12.4 11.9 Distribution Yield (%) 8.1 8.3 8.2 8.5 P/NAV (x) 0.9 0.9 0.9 0.9 Aggregate Leverage (%) 33.1 34.1 38.6 39.5 ROAE (%) 8.1 6.4 7.2 7.5 Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%):Distn. Inc Chng (%): 0 0 Consensus DPU Consensus DPU Consensus DPU Consensus DPU (S ctsS ctsS ctsS cts):::: 7.6 7.7

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 9 S: 0 H: 7


Treading Carefully

Steady growth from acquisitions, maintain BUY. Steady growth from acquisitions, maintain BUY. Steady growth from acquisitions, maintain BUY. Steady growth from acquisitions, maintain BUY. We maintain

our BUY rating with a TP of S$1.15, based on DCF valuation.

Recent acquisitions have placed the Trust back on a growth

path, with more to follow. Yields are attractive at >7.0%,

offering total returns of 23%.

Acquisitions and developments to drive growth as rental Acquisitions and developments to drive growth as rental Acquisitions and developments to drive growth as rental Acquisitions and developments to drive growth as rental

outlook falters. outlook falters. outlook falters. outlook falters. We are positive on MLT’s rising acquisition

growth momentum and strategy to optimise yields through

strategic redevelopments to diversify its earnings base. Growth

will come from a visible sponsor pipeline, which is currently

under various stages of development. In addition, the

completion of various AEIs will underpin medium-term growth

for the Trust. These growth drivers are expected to more than

compensate for the risk of falling rents and vacancy rates

especially in S’pore given ongoing property conversions.

Gearing is close to 40% but within management's

comfortable range. Given ongoing capex obligations for

redevelopment projects, we project gearing to stay at the

c.40% level. This means that further acquisitions are likely to

be partially funded from the issue of new equity, if opportunity

arises. Valuation:

We maintain our BUY rating with TP of S$1.15, based on DCF

valuation. At its current price, MLT offers investors dividend

yields of >8.0%.


Acquisitions ramp up faster than expected. Acquisitions ramp up faster than expected. Acquisitions ramp up faster than expected. Acquisitions ramp up faster than expected. A faster-than-

projected acquisition pace or a better-than-expected outlook

for the Singapore warehouse market will translate into positive

surprises to earnings estimates, and re-rate the stock higher. At A Glance Issued Capital (m shrs) 2,484 Mkt. Cap (S$m/US$m) 2,260 / 1,580 Major Shareholders Temasek Holdings (%) 44.4 Columbia Wanger Asset Mgmt (%)

6.4 Alliance Global Properties (%) 5.7 Free Float (%) 59.3 3m Avg. Daily Val (US$m) 2.3 ICB IndustryICB IndustryICB IndustryICB Industry : Real Estate / Real Estate Investment Trust

DBS Group Research . Equity

26 Jan 2016


Mapletree Logistics Trust Version | Bloomberg: MLT SP | Reuters: MAPL.SI Refer to important disclosures at the end of this report

86

106

126

146

166

186

206

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

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

Relative IndexS$

Mapletree Logistics Trust (LHS) Relative STI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Page 2

Company Guide

Mapletree Logistics Trust


Earnings Drivers:

MLT beats our acquisition estimates for FY16F with new MLT beats our acquisition estimates for FY16F with new MLT beats our acquisition estimates for FY16F with new MLT beats our acquisition estimates for FY16F with new

Australian foray. Australian foray. Australian foray. Australian foray. MLT continues to deliver on the acquisition

growth front. The REIT has acquired six accretive properties in

China, Singapore, Malaysia and Korea with projected NPI yields

ranging from 6.5% to 8.4% in 2015, which will contribute

positively come FY16. The REIT started FY16 strongly, delivering

close to S$300m @ weighted average yield of 6.1% in

acquisitions in Vietnam, Korea and most recently, Australia.

Its first foray in Australia is through a A$253m (S$261.5m)

premium cold warehouse located in Eastern Creek, Sydney from

BGAI Pty Ltd, a 50:50 JV between Brickworks Limited and

Goodman Australia Industrial Fund. The property is acquired at

an initial yield of 5.6% and leased on long-term tenure of 19

years to Coles Group Limited with rental escalations. Upside will

come from a potential expansion of 7,000 sqm which we have

yet to price in.

We are positive on MLT’s rising acquisition growth momentum

which would diversify its earnings base while scaling up its

presence in target growth markets in China, Korea and

Australia which will compensate for the expected dip in rentals

from its Singapore operations in the interim.

Sizeable portfolio of assets to be injected from the sponsor in Sizeable portfolio of assets to be injected from the sponsor in Sizeable portfolio of assets to be injected from the sponsor in Sizeable portfolio of assets to be injected from the sponsor in

the longer termthe longer termthe longer termthe longer term. In addition, there is a sizeable and growing

pipeline of development properties from the Sponsor,

Mapletree Investments that is available for MLT to acquire in the

medium term. Potential assets for acquisitions are mainly in the

development stages across Asia, especially

in China, Japan, HK and Vietnam, where demand for logistics

warehouses remains robust. China remains a key growth area,

where the proliferation of e-commerce will drive demand for

more logistic space.

Conversions of singleConversions of singleConversions of singleConversions of single----user facilities to multiuser facilities to multiuser facilities to multiuser facilities to multi----tenanted properties tenanted properties tenanted properties tenanted properties

to limit growth.to limit growth.to limit growth.to limit growth. MLT's historical performance has been stable,

complemented by a balance between positive rental reversions,

stable portfolio occupancies and acquisitions. The REIT has a

weighted average lease to expiry (WALE) of 4.5 years (by NLA),

which offers strong income visibility for the trust. Looking

ahead, MLT has 24%/21% of its revenues up for renewal in

FY16/17F. A majority of the leases are from Singapore, of which

we expect a number of warehouses that are leased to single-

users (SUA) to be converted into multi-tenanted properties

(MTB). We expect acquisitions to somewhat compensate the

risks in rising vacancies at its Singapore assets.



Distribution Paid / Net Operating CF

Interest Cover (x)


79.8%

81.8%

83.8%

85.8%

87.8%

89.8%

91.8%

93.8%

0

50

100

150

200

250

300

350

400

2013A 2014A 2015A 2016F 2017F

S$ m


81%

82%

83%

84%

85%

86%

87%

63

65

67

69

71

73

75

77

2Q2014

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

3Q2016


0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

2013A 2014A 2015A 2016F 2017F

(x)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2013A 2014A 2015A 2016F 2017F

(x)


Page 3

Company Guide


Balance Sheet:

Gearing of c.Gearing of c.Gearing of c.Gearing of c.39393939% remains within management's comfortable % remains within management's comfortable % remains within management's comfortable % remains within management's comfortable

range. range. range. range. With the latest acquisitions, investments into

development projects, we project gearing to settle around the

c.40% level. With a fairly optimised balance sheet, we believe

that the manager might need to raise new equity if any

acquisition opportunities arise in the medium term.

WellWellWellWell----staggered debt maturity profile; interest costs remain staggered debt maturity profile; interest costs remain staggered debt maturity profile; interest costs remain staggered debt maturity profile; interest costs remain

stable. stable. stable. stable. Interest rates remain stable at 2.1% and are expected to

stay low given that a majority of its debts are in JPY/HKD and

RMB, and as the rates there continue to fall. To hedge against

currency volatility, the manager typically takes on local-

denominated loans (pegged to maximum of asset values in each

overseas market).

MLT has a long debt-to-maturity of 3.6 years in 4QFY14/15 and

proactively renews its loans ahead of time. Over the next two

financial years, only c.23% of its total debt will be rolled over,

meaning that interest cost will remain stable.

Share Price Drivers:

Ability to drive growth through acquisitions. Ability to drive growth through acquisitions. Ability to drive growth through acquisitions. Ability to drive growth through acquisitions. We remain

optimistic on the ability of the Trust to drive growth through

acquisitions. With its first foray into Australia, we see the Trust

further deepening its exposure through strategic purchases over

the medium term. The Manager is also looking to divest low-

yielding assets in Singapore and Japan, and re-cycle the

proceeds into higher-yielding assets.

Key Risks:

Rise in interest rates. Rise in interest rates. Rise in interest rates. Rise in interest rates. The Manager has hedged a majority of its

debt into fixed rates but is expected to see increased cost of

funds when these loans are rolled over in the coming year.

Company Background

MapleTree Logistics is a real estate investment trust which

invests in logistics warehouses in the Asia Pacific region. It

currently owns warehouses in Singapore, Japan, China, South

Korea, Vietnam and Hong Kong.

Aggregate Leverage (%)

ROE (%)

Distribution Yield (%)

PB Band (x)


10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2013A 2014A 2015A 2016F 2017F

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2013A 2014A 2015A 2016F 2017F

Avg: 6.8%

+1sd: 7.6%

+2sd: 8.5%

-1sd: 6%

-2sd: 5.1%

4.6

5.6

6.6

7.6

8.6

9.6

2012 2013 2014 2015 2016

(%)

Avg: 1.14x

+1sd: 1.25x

+2sd: 1.35x

-1sd: 1.03x

-2sd: 0.93x

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


(x)


Page 4

Company Guide


Income Statement (S$ m)

FY FY FY FY MarMarMarMar 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Gross revenue 308 311 330 340 359

Property expenses (40) (43) (53) (47) (47)

Net Property IncomeNet Property IncomeNet Property IncomeNet Property Income 268268268268 268268268268 277277277277 294294294294 312312312312 Other Operating expenses (37) (18) (24) (43) (42)

Other Non Opg (Exp)/Inc 23 3 (15) 0 0

Net Interest (Exp)/Inc (38) (29) (32) (37) (46)

Exceptional Gain/(Loss) 0 0 0 0 0

Net IncomeNet IncomeNet IncomeNet Income 216216216216 224224224224 205205205205 215215215215 224224224224 Tax (14) (17) (29) (14) (16)

Minority Interest (1) (1) (1) 0 0

Preference Dividend (19) (19) (19) (19) (19)

Net Income After Tax Net Income After Tax Net Income After Tax Net Income After Tax 182182182182 187187187187 157157157157 182182182182 189189189189 Total Return 203 293 241 182 189

Non-tax deductible Items (36) (113) (56) 3 3

Net Inc available for Dist. 166 180 185 185 192

Growth & Ratio

Revenue Gth (%) (9.4) 0.9 6.2 3.1 5.4

N Property Inc Gth (%) (8.7) (0.2) 3.7 6.0 6.1

Net Inc Gth (%) (11.6) 2.7 (16.2) 15.9 4.0

Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0

Net Prop Inc Margins (%) 87.1 86.1 84.0 86.3 87.0

Net Income Margins (%) 59.3 60.3 47.6 53.4 52.8

Dist to revenue (%) 54.0 57.8 56.0 54.3 53.6

Managers & Trustee’s fees to sales %)

12.0 5.9 7.4 12.5 11.7

ROAE (%) 8.3 8.1 6.4 7.2 7.5

ROA (%) 4.3 4.3 3.4 3.7 3.7

ROCE (%) 5.3 5.5 4.9 4.9 5.1

Int. Cover (x) 6.1 8.7 7.8 6.9 5.8


Driven by acquisitions


Page 5

Company Guide



FY FY FY FY MarMarMarMar 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Gross revenue 83 85 85 87 89

Property expenses (13) (14) (14) (15) (15)

Net Property Income 69 70 71 73 74

Other Operating expenses (2) (9) (7) (19) (13)

Other Non Opg (Exp)/Inc (1) (10) 4 (1) 3


Exceptional Gain/(Loss) 0 0 0 0 0

Net IncomeNet IncomeNet IncomeNet Income 58585858 43434343 59595959 42424242 53535353 Tax (3) (20) (4) (4) (6)

Minority Interest 0 0 0 0 0

Net Income after Tax Net Income after Tax Net Income after Tax Net Income after Tax 50505050 18181818 51515151 33333333 42424242 Total Return 50 102 51 33 49

Non-tax deductible Items (4) (56) (5) 13 (3)

Net Inc available for Dist. 46 46 46 46 46

Growth & Ratio

Revenue Gth (%) 2 2 0 3 2

N Property Inc Gth (%) 1 1 1 3 2

Net Inc Gth (%) (2) (64) 185 (35) 27

Net Prop Inc Margin (%) 83.8 83.1 83.6 83.4 83.4

Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Balance Sheet (S$ m)

FY FY FY FY MarMarMarMar 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Investment Properties 4,050 4,235 4,631 4,953 5,037

Other LT Assets 0 0 0 0 0

Cash & ST Invts 150 114 107 76 80

Inventory 0 0 0 0 0

Debtors 12 16 21 9 9

Other Current Assets 24 31 29 29 29

Total AssetsTotal AssetsTotal AssetsTotal Assets 4,2374,2374,2374,237 4,3974,3974,3974,397 4,7884,7884,7884,788 5,0675,0675,0675,067 5,1555,1555,1555,155 ST Debt

289 149 57 57 57

Creditor 159 140 164 113 120

Other Current Liab 12 11 24 34 36

LT Debt 1,145 1,307 1,575 1,897 1,981

Other LT Liabilities 50 59 80 80 80

Unit holders’ funds 2,576 2,726 2,882 2,879 2,876

Minority Interests 6 6 6 6 6

Total Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & LiabilitiesTotal Funds & Liabilities 4,2374,2374,2374,237 4,3974,3974,3974,397 4,7884,7884,7884,788 5,0675,0675,0675,067 5,1555,1555,1555,155

Non-Cash Wkg. Capital (135) (103) (138) (110) (117)

Net Cash/(Debt) (1,283) (1,341) (1,525) (1,878) (1,958)

Ratio

Current Ratio (x) 0.4 0.5 0.6 0.6 0.6

Quick Ratio (x) 0.4 0.4 0.5 0.4 0.4

Aggregate Leverage (%) 33.8 33.1 34.1 38.6 39.5

Z-Score (X) 1.1 1.1 1.0 0.9 0.9


Gearing to remain fairly stable at 40%


Page 6

Company Guide


Cash Flow Statement (S$ m)

FY FY FY FY MarMarMarMar 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Pre-Tax Income 216 224 205 215 224

Dep. & Amort. 0 0 0 0 0

Tax Paid (3) (3) (4) (4) (14)

Associates &JV Inc/(Loss) 0 0 0 0 0

Chg in Wkg.Cap. 25 (25) (1) (39) 6

Other Operating CF 20 14 35 0 0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 258258258258 210210210210 236236236236 173173173173 215215215215 Net Invt in Properties (197) (101) (247) (322) (84)

Other Invts (net) 0 0 0 0 0

Invts in Assoc. & JV 0 0 0 0 0

Div from Assoc. & JVs 0 0 0 0 0

Other Investing CF 1 1 1 0 0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (197)(197)(197)(197) (100)(100)(100)(100) (246)(246)(246)(246) (322)(322)(322)(322) (84)(84)(84)(84) Distribution Paid (179) (177) (177) (185) (192)

Chg in Gross Debt 132 74 207 322 84

New units issued 0 0 0 0 0

Other Financing CF (37) (27) (30) (19) (19)

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (85)(85)(85)(85) (130)(130)(130)(130) 0000 118118118118 (128)(128)(128)(128)

Currency Adjustments (9) 0 3 0 0

Chg in Cash (33) (21) (7) (31) 4

Operating CFPS (S cts) 9.6 9.6 9.6 8.5 8.5

Free CFPS (S cts) 2.5 4.5 (0.5) (6.0) 5.3



Source: DBS Bank

S.No.S.No.S.No.S.No. DateDateDateDateClosing Closing Closing Closing

PricePricePricePrice

Target Target Target Target

PricePricePricePriceRat ing Rat ing Rat ing Rat ing

1: 02 Apr 15 1.24 1.27 HOLD

2: 22 Apr 15 1.26 1.29 HOLD

3: 26 May 15 1.20 1.29 HOLD

4: 02 Jul 15 1.13 1.31 BUY

5: 19 Aug 15 1.03 1.11 BUY

6: 20 Oct 15 1.02 1.15 BUY

7: 08 Jan 16 0.99 1.15 BUY

Note Note Note Note : Share price and Target price are adjusted for corporate actions.

1

2

3 4

5

6

7

0.86

0.91

0.96

1.01

1.06

1.11

1.16

1.21

1.26

1.31

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

S$S$S$S$

Capex for development projects


Page 7

Company Guide



STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)


GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by This report is prepared by This report is prepared by This report is prepared by DBS Bank Ltd.DBS Bank Ltd.DBS Bank Ltd.DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte


may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd..































ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION



compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 26 Jan 2016,




Page 8

Company Guide


COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES

1.1.1.1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

Mapletree Logistics Trust recommended in this report as of 31 Dec 2015

2.2.2.2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3.3.3.3. Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:





RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION RESTRICTIONS ON DISTRIBUTION

GeneralGeneralGeneralGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

AustraliaAustraliaAustraliaAustralia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong KongHong KongHong KongHong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

IndonesiaIndonesiaIndonesiaIndonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

MalaysiaMalaysiaMalaysiaMalaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.


SingaporeSingaporeSingaporeSingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

ThaThaThaThailandilandilandiland This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

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DubaiDubaiDubaiDubai



Page 9

Company Guide


United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Ltd.. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictiOther jurisdictiOther jurisdictiOther jurisdictionsonsonsons In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.DBS Bank Ltd.DBS Bank Ltd.DBS Bank Ltd.


Singapore 018982

Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS

BUY Last Traded Price: S$7.78 (STI : 2,613.79) Price Target : S$9.40 (21% upside) (Prev S$10.00) Potential Catalyst: Keeping credit costs and NPLs better than peers Where we differ: Our earnings forecasts are slightly above consensus likely due to lower credit cost assumptions Analyst LIM Sue Lin +65 8332 6843 [email protected]

What’s New 4Q/FY15 earnings were above consensus but in

line with our forecasts

Total oil & gas exposure at 6% of total loans; bulk

of new NPL formation were from this sector

Earnings trimmed on slower loan growth; flattish

NIM and higher credit costs

TP trimmed to S$9.40 after earnings revision

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Pre-prov. Profit 5,008 4,960 5,014 5,188 Net Profit 3,760 3,821 3,818 4,063 Net Pft (Pre Ex.) 3,369 3,821 3,818 4,063 Net Pft Gth (Pre-ex) (%) 25.4 13.4 (0.1) 6.4 EPS (S cts) 101 95.7 95.6 102 EPS Pre Ex. (S cts) 90.6 95.7 95.6 102 EPS Gth Pre Ex (%) 19 6 0 6 Diluted EPS (S cts) 94.2 95.7 95.6 102 PE Pre Ex. (X) 8.6 8.1 8.1 7.6 Net DPS (S cts) 36.3 36.2 36.1 37.4 Div Yield (%) 4.7 4.6 4.6 4.8 ROAE Pre Ex. (%) 12.6 12.2 10.9 10.5 ROAE (%) 14.1 12.2 10.9 10.5 ROA (%) 1.1 1.0 1.0 1.1 BV Per Share (S cts) 744 830 919 1,013 P/Book Value (x) 1.0 0.9 0.8 0.8 Earnings Rev (%): (6) (7) Consensus EPS (S cts): 93.0 96.3 Other Broker Recs: B: 18 S: 3 H: 4


Balancing act

A cautious 2016, but priced in; BUY. Focus in 2016 would likely hinge on controlling expenses and new originations to contain quality of its assets. Loan growth is expected to be at low single digits while NIM would likely stay flat. Higher credit costs are imputed given the vulnerability of its oil & gas exposure which currently stands at 6% of total loans. Current valuations appear to be unduly punitive on OCBC’s asset quality position, in our view. Maintain BUY.

Solid non-interest income drivers to sustain earnings growth. Wealth management income may stay muted due to the uncertain market environment but long-term prospects of this business remain attractive. Insurance contribution could be volatile due to interest rate movements. As such, underlying growth in new business embedded value and total weighted sales should be the focus parameters for insurance, and these have been robust.

Riding on its unappreciated Greater China franchise over the long term. While there are near-term uncertainties on Greater China growth prospects, we believe the market is still under appreciating the OCBC-WHB’s franchise over the longer term. With its enlarged Greater China presence, OCBC’s growth prospects in wealth management, retail & commercial banking and insurance are further enhanced. Active cross-selling for OCBC’s private banking and insurance businesses are key wins. Integration is still ongoing and on track.

Valuation: Our S$9.40 TP which implies 1.0x FY16F BV is derived from the Gordon Growth Model. The potential reach of its differentiated non-interest income franchise should support valuations. Current share price pressure pushing valuations close to GFC levels are unwarranted, in our view. Maintain BUY.

Key Risks to Our View: A significant upset in asset quality. While we have assumed higher credit cost and NPL ratio in FY16F, a significant deterioration in asset quality related to the oil & gas and commodities segment could pose downside risk to earnings.

Slower traction in wealth management business. As a growing income contributor, stricter regulatory requirements for private banking clients could slow growth. Additionally, weak and volatile markets could put customers on a risk-off mode, reducing investment activities.

At A Glance Issued Capital (m shrs) 4,114 Mkt. Cap (S$m/US$m) 32,008 / 22,768 Major Shareholders (%) Selat Pte Ltd 10.7

Free Float (%) 79.9 3m Avg. Daily Val (US$m) 38.8 ICB Industry : Financials / Banks



OCBC Version 4 | Bloomberg: OCBC SP | Reuters: OCBC.SI Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

6.7

7.7

8.7

9.7

10.7

11.7


Relative IndexS$

OCBC (LHS) Relative STI INDEX (RHS)


Company Guide

OCBC

WHAT’S NEW

Concerns on oil & gas exposure is key

Highlights of 4Q/FY15 results

Net profit for 4Q15 came in at S$960m (+6% q-o-q; +20% y-o-y) bringing full-year 2015 earnings to S$3,903m (+13% y-o-y; ex-one-off gain of S$391m in FY14) - 4% ABOVE consensus; in line with our forecasts.

Net interest income was slightly higher q-o-q, thanks to higher NIM at 1.74% (+8bps q-o-q; +7bps y-o-y) as loans dipped by 1% q-o-q and was flat y-o-y. On a full-year basis, NIM stood at 1.67%, 1bp lower compared to a year ago. Higher loan yields, particularly in Singapore, was offset by lower returns from money market gapping activities.

Deposits contracted by 2% q-o-q and was flat y-o-y. Overall loan-to-deposit ratio was stable at 85% with S$ loan-to-deposit ratio rising to 91% (3Q15: 90%, 4Q14: 84%) while US$ loan-to-deposit ratio was at 68% (3Q15: 66%, 4Q14: 89%). CASA-to-total deposits rose to 49% from 45% a year ago. Separately, the S$ and all currency liquidity coverage ratio stood high at 253% and 124% respectively, way above minimum requirements.

Non-interest income surged 24% q-o-q, 26% y-o-y on higher insurance income contribution partially offset by lower trading income and flat fee income. There was also higher net gain from disposal of properties in 4Q15. On a full-year basis, non-interest income (ex-one-off gains) grew 10% y-o-y on the back of higher fees from brokerage, fund management, credit cards and trading income but offset by lower insurance contribution due to unrealised mark-to-market losses in Great Eastern's bond investment portfolio. Note that there was a one-off gain of S$391m booked in FY14 for a re-measurement of OCBC's stake in Bank of Ningbo which became a 20% associate company on 30 Sep 2015.

Expenses for the full year were higher mainly due to the full consolidation of OCBC Wing Hang. Cost-to-income ratio was just up marginally to 42% from 41% a year ago.

Provisions were higher q-o-q from both specific and general allowances. Higher specific allowances were noted in Malaysia. NPL ratio stayed stable at 0.9% compared to the previous quarter but higher vs a year ago (FY14: 0.6%). Absolute NPLs rose to S$1.97bn in FY15 (FY14: S$1.28bn) largely arising from the classification of a few large corporate accounts associated with the oil & gas services sector. Separately, loan loss coverage stood at 120%, relatively stable q-o-q but lower compared to a year ago (4Q14: 171%).

Capital ratios stood strong and were higher q-o-q and y-o-y with fully loaded CET1, Tier-1 and Total CAR at 11.8%, 14.8% and 16.8% respectively (FY14: 10.6%, 13.8% and 15.9%). Risk-weighted assets hardly grew.

Separately, leverage ratio rose to 8% from 7.6% a quarter ago, way above the minimum 3% requirement.

Final DPS of 18 Scts was declared, bringing full-year DPS to 36 Scts. Scrip dividend remains applicable with shares issued at a 10% discount to the average daily volume weighted average prices between 26-28 April (26 April is the ex-date).

Key notes on OCBC's subsidiaries:

- Great Eastern reported its full-year results yesterday with lower net profit due to unrealised mark-to-market losses from its bond investment portfolio. Total weighted new sales was 8% higher y-o-y while new business embedded value was 3% higher y-o-y. Great Eastern's net profit contributed to 16% of OCBCs earnings.

- OCBC Malaysia saw a 6% increase in earnings in FY15, driven mainly by its Islamic banking business and higher non-interest income. NIM was stable q-o-q but fell y-o-y while loans grew 9% y-o-y, flat q-o-q. Provisions were stable while NPL ratio rose marginally to 2.1% from 2.0%.

- OCBC NISP (Indonesian subsidiary) achieved a record net profit which was 13% higher y-o-y, driven by higher revenues but was partially offset by higher provisions. Loans grew 26% y-o-y while NPL ratio stayed stable at 1.3%. Deposits grew 20% y-o-y driven by CASA. NIM rose significantly q-o-q.

- OCBC Wing Hang reported its first full consolidated earnings with the group in FY15. Integration is on track. With OCBC Wing Hang, the group's Greater China pre-tax profit contribution rose to 20% from 12%. Notably, NIM stayed stable and NPL ratio stayed stable and low at 0.4%.

- Bank of Singapore's assets under management rose by 7% y-o-y to US$55bn/S$77bn. Correspondingly, the group's wealth management income rose 6% y-o-y and made up 27% of total income.

Key takeaways from the analyst briefing

Details on oil & gas exposure. Exposure to the oil & gas segment amounts to S$12.4bn (6% of total loans). This compares to S$13.8bn a year ago. The exposure includes a broad range from downstream, midstream and upstream and also encompasses all oil & gas support services.

Of the S$12.4bn, 47%/c.S$6bn relates to the offshore supply services (e.g. vessels, rigs, tug/lift boats), and within this, 14%/c.S$800m) have been classified as NPL. New NPL formation over the year was largely from this segment. NPL ratio from the oil & gas segment is 0.39% (vs total NPL ratio of 0.9% in FY15). Stresses in this segment are possible so long as oil prices remain under pressure.

Sufficient specific provisions have already been made for FY15. Management did not provide any guidance on the proportion of this segment which could potentially default but instead articulated the process of containing the stress. Potentially stressed accounts will be brought up for renegotiation of terms and whether the facility needs to be restructured. Once the account is restructured, it will be classified as NPL. If there is further deterioration in the account, additional specific provisions will be required. We understand that the oil & gas-


Company Guide

OCBC

related accounts have been stress-tested for oil price at US$20 per barrel.

Commodities exposure performing well. While there was not much emphasis on the exposure to commodities, management stated that the NPL ratio for the commodities segment is only 0.03% and these are from downstream traders which are middle market companies.

China exposure explained. Total Greater China customer loans amounted to S$56bn in FY15, but only S$6bn was related to China onshore business (FY14: S$8bn). Of the S$6bn, S$3bn is from OCBC China which are large corporate and SOE loans, while the other S$3bn is from OCBC Wing Hang in China, of which 65% of it are residential mortgages by Hong Kong-ers while the remaining portion are commercial and SME loans. The unsecured SME loans are only at 1% of OCBC Wing Hang’s loans and the exposure is reducing.

Treatment for MAS’s clarification on the definition of loan commitment effective 31 Dec 2015 for OCBC. Unlike UOB, OCBC stated that the recognition of undrawn credit facilities

only adds S$2bn to its risk-weighted assets, hence there was limited impact to its capital ratios.

FY16 will be a challenging year. Management guided for a challenging year ahead with loan growth at low single digits and NIM to only be slightly better from the FY15 level of 1.67%. No credit cost guidance was provided but we expect it to be higher than that booked in FY15. We have imputed 25bps credit cost (vs its 10-year average of 20bps) in our assumptions for FY16F. Taking into account the slower loan growth, flattish NIM and higher credit costs, our FY16-17F earnings are trimmed by 6-7%.

Valuation and recommendation

Maintain BUY, TP lowered to S$9.40. Following our earnings revision, our TP is trimmed to S$9.40 from S$10.00 based on the Gordon Growth Model (11% ROE, 4% growth, 11% cost of equity). The potential reach of its differentiated non-interest income franchise should support valuations. Current share price pressure pushing valuations close to GFC levels are unwarranted in our view. Maintain BUY.


FY Dec 4Q2014 3Q2015 4Q2015 % chg yoy % chg qoq FY2014 FY2015 % chg yoy

Net Interest Income 1,277 1,317 1,341 5.0 1.8 4,736 5,189 9.6 Non-Interest Income 762 775 960 26.0 23.9 3,604 3,533 (2.0) Operating Income 2,039 2,092 2,301 12.8 10.0 8,340 8,722 4.6 Operating Expenses (954) (925) (999) 4.7 8.0 (3,332) (3,762) 12.9 Pre-Provision Profit 1,085 1,167 1,302 20.0 11.6 5,008 4,960 (1.0) Provisions (154) (150) (193) 25.3 28.7 (357) (488) 36.7 Associates 64.0 99.0 63.0 (1.6) (36.4) 112 353 215.2 Pretax Profit 995 1,116 1,172 17.8 5.0 4,763 4,825 (6.4) Taxation (146) (181) (160) 9.6 11.6 (687) (717) 4.4 Minority Interests (58.0) (33.0) (52.0) (10.3) 57.6 (234) (205) (12.4) Net Profit 791 902 960 21.4 6.4 3,842 3,903 (1.6) One-off item - - - - - 391 - nm Net Profit (ex-one-offs) 791 902 960 21.4 6.4 3,451 3,903 13.1 Net profit contribution of

b idi i

Great Eastern 169 48 180 6.5 >100 719 639 (11.1) OCBC Wing Hang 44 72 75 70.5 4.2 81 307 279.0 OCBC Malaysia 74 73 73 (1.4) - 333 306 (8.1) OCBC NISP 35 27 38 8.6 40.7 120 129 7.5

Growth (%) Net Interest Income Gth 2.5 2.7 1.8 22.0 9.6 Net Profit Gth (35.8) (13.9) 6.4 13.5 13.1

Key ratio (%) NIM 1.67 1.66 1.74 1.68 1.67 NPL ratio 0.6 0.9 0.9 0.6 0.9 Loan-to deposit 84.5 83.5 0.0 84.5 84.5 Cost-to-income 46.8 44.2 43.4 41.0 42.0 Total CAR 15.9 16.6 0.0 15.9 16.8 Source of all data: Company, DBS Bank


Company Guide

OCBC


Earnings Drivers:

NIM will be flattish going forward. Sentiments on further rate hikes have eased and as such, the quantum of loan yield increases seen in 4Q15 would unlikely be repeated. OCBC should stand out better than UOB by virtue of its higher CASA and lower S$ loan-to-deposit ratio. Funding cost pressures may be felt along the way. Muted loan growth expected. Loan demand remains weak and 2016 loan growth could stay at low single digits. OCBC believes that in an uncertain market environment, new originations should be carefully watched to contain the quality of its overall portfolio. Loan growth might be compromised but not at the expense of defaults. Non-interest income drivers remain its key differentiator. OCBC differentiates itself from peers when looking at its non-interest income composition. Its focus to grow its non-interest income franchise, especially its wealth management business, is aimed at buffering potential moderation in net interest income due to sluggish loan growth. Its insurance business, 87%-owned subsidiary, Great Eastern Holdings, remains a dominant part of its non-interest income. OCBC has no plans to sell its stake in Great Eastern as it remains complementary to its non-interest income franchise. Management believes it is still logical and beneficial to keep the insurance product manufacturing in-house. Since the acquisition of Bank of Singapore in 2010, we have seen its wealth management income growing steadily; this trend is expected to be sustainable. Minimal cost pressures. Expenses should remain stable with the bulk of integration issues set aside. Ongoing initiatives for digital banking could be a cost factor. In ASEAN, the Singapore banks are the most prepared for the digital banking phase. We note that OCBC has several key product differentiators vs peers and its regional digitisation plans are picking up speed. Regionalisation is a key item on its agenda. Malaysia remains OCBC’s second largest contributor but will likely face funding cost pressures which are intensely faced by its Malaysian banking peers. Despite a challenging year, OCBC Malaysia posted decent earnings traction. Its business proposition in Malaysia has a track record of over 80 years and its added advantage lies in its Islamic banking franchise. Management feels bullish for its operations in Indonesia. While still a small contributor, opportunities are aplenty for further growth. Greater China would be the shining star with Wing Hang Bank. Integration is still ongoing. We see the wealth management line as the key initial indicator to watch for synergies in the coming quarters. Integration of its China business is still being finalised.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.6%

1.6%

1.7%

1.7%

1.8%

1.8%

0

1,000

2,000

3,000

4,000

5,000

2013A 2014A 2015A 2016F 2017F

S$ m

Net Interest Income Net Interest Income Margin

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

2013A 2014A 2015A 2016F 2017F

S$ m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

5%

10%

15%

20%

25%

30%

0

50,000

100,000

150,000

200,000

250,000

2013A 2014A 2015A 2016F 2017F

S$ m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

73%

78%

83%

88%

93%

151,069

171,069

191,069

211,069

231,069

251,069

271,069

291,069

2013A 2014A 2015A 2016F 2017F

Loans Deposit Loan-to-Deposit Ratio (RHS)

0.36

0.38

0.4

0.42

0.44

0.46

0.48

0

2,000

4,000

6,000

8,000

10,000

12,000

2013A 2014A 2015A 2016F 2017F

Net Interest Income Non-interest Income Cost-to-income Ratio


Company Guide

OCBC

Balance Sheet:

Asset quality on watch. OCBC’s NPL ratio has held up well vs peers despite increases noted in the past year. Its credit cost has also been lower compared to peers. Despite concerns of an unsustainably low credit cost level, OCBC has successfully weathered through the storm as seen during several crisis phases over the past 10 years. That said, at such a low base, it would not be surprising to see credit cost normalise in coming years. OCBC’s oil & gas exposures were at 6% of total loans. There is risk to its oil & gas exposure depending on oil price trends but its commodity portfolio remains healthy. Capital ratios to remain stable. We believe OCBC will continue with its scrip dividend policy to shore up capital. Separately, while there are still some non-core assets the bank can divest, these are not large and not an immediate priority. There has been a continuous debate on whether OCBC should divest its insurance business, Great Eastern Holdings, as it is perceived to be capital punitive once Basel III is fully enforced. But we think that without majority control of the business, integrating it as part and parcel of its wealth management offerings would be challenging.


Ability to contain asset quality would be a key catalyst for the stock. We believe market will continue to watch OCBC’s asset quality indicators closely. New NPLs in 2015 largely arose from the oil & gas sector and risks prevail. Successful credit costs and NPL containment should prove that current valuations are undemanding. OCBC currently trades at GFC P/BV multiples which we believe is unwarranted.

Key Risks:

Slower traction in wealth management business. As a growing income contributor, stricter regulatory requirements for private banking clients could slow growth. Additionally, weak and volatile markets could cause risk-averse customers to reduce investment activities. Significant asset quality upset. While we have assumed higher credit cost and NPL ratio in FY16F, a significant deterioration in asset quality especially that related to the oil & gas and commodities segments could pose downside risk to earnings.

Company Background

The OCBC Bank group of businesses comprises a family of companies owned by Singapore's longest-established local bank. Its banking business franchise includes OCBC Bank, Bank OCBC NISP and Bank of Singapore, with branches in over 15 countries. OCBC has strategic stakes in other financial service businesses operating under independent brands such as Great Eastern, Bank of Singapore and Lion Global Investors.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0%

0.5%

1.0%

1.5%

2.0%

2013A 2014A 2015A 2016F 2017F

NPL Ratio Provision Charge-Off Rate

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2013A 2014A 2015A 2016F 2017F

Tier-1 CAR Total CAR

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 11x

+1sd: 12x

+2sd: 13.1x

‐1sd: 9.9x

‐2sd: 8.8x

6.9

7.9

8.9

9.9

10.9

11.9

12.9

13.9


(x)

Avg: 1.35x

+1sd: 1.48x

+2sd: 1.61x

‐1sd: 1.22x

‐2sd: 1.09x

0.7

0.9

1.1

1.3

1.5

1.7


(x)


Company Guide

OCBC

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F

Gross Loans Growth 17.7 23.7 0.4 2.3 3.1 Customer Deposits Growth 18.7 25.3 0.3 5.0 5.0 Yld. On Earnings Assets 2.6 2.7 2.7 2.7 2.7 Avg Cost Of Funds 1.0 1.1 1.1 1.1 1.1 Income Statement (S$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Interest Income 3,883 4,736 5,189 5,302 5,567 Non-Interest Income 2,738 3,604 3,533 3,812 4,119

Operating Income 6,621 8,340 8,722 9,114 9,686

Operating Expenses (2,842) (3,332) (3,762) (4,100) (4,498)

Pre-provision Profit 3,779 5,008 4,960 5,014 5,188 Provisions (266) (357) (488) (519) (437) Associates 54 112 353 355 375 Exceptionals 0 0 0 0 0

Pre-tax Profit 3,567 4,763 4,825 4,850 5,126 Taxation (597) (687) (717) (744) (762) Minority Interests (202) (234) (205) (206) (218) Preference Dividend (82) (82) (82) (82) (82)

Net Profit 2,686 3,760 3,821 3,818 4,063 Net Profit before Except. 2,686 3,369 3,821 3,818 4,063 Growth (%) Net Interest Income Gth 3.6 22.0 9.6 2.2 5.0 Net Profit Gth bef Except (1.2) 25.4 13.4 (0.1) 6.4

Margins, Costs & Efficiency (%) Spread 1.6 1.6 1.6 1.6 1.6 Net Interest Margin 1.6 1.7 1.7 1.7 1.7 Cost-to-Income Ratio 42.9 40.0 43.1 45.0 46.4

Business Mix (%) Net Int. Inc / Opg Inc. 58.6 56.8 59.5 58.2 57.5 Non-Int. Inc / Opg inc. 41.4 43.2 40.5 41.8 42.5 Fee Inc / Opg Income 20.5 17.9 18.8 19.4 19.9 Oth Non-Int Inc/Opg Inc 20.9 25.3 21.7 22.4 22.6

Profitability (%) ROAE Pre Ex. 11.5 12.6 12.2 10.9 10.5 ROAE 11.5 14.1 12.2 10.9 10.5 ROA Pre Ex. 0.9 1.1 1.0 1.0 1.1 ROA 0.9 1.1 1.0 1.0 1.1


Expect credit cost to escalate in FY16 on uncertain market outlook especially in the oil & gas segment

NIM to likely stay flattish from here


Company Guide

OCBC


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Net Interest Income 1,277 1,249 1,282 1,317 1,341 Non-Interest Income 762 859 939 775 960

Operating Income 2,039 2,108 2,221 2,092 2,301

Operating Expenses (954) (897) (942) (925) (999)

Pre-Provision Profit 1,085 1,211 1,279 1,167 1,302 Provisions (154) (64) (80) (150) (193) Associates 64 89 102 99 63 Exceptionals 0 0 0 0 0

Pretax Profit 995 1,236 1,301 1,116 1,172 Taxation (146) (185) (191) (181) (160) Minority Interests (58) (58) (62) (33) (52)

Net Profit 791 993 1,048 902 960 Growth (%) Net Interest Income Gth 2.5 (2.2) 2.6 2.7 1.8 Net Profit Gth (35.8) 25.5 5.5 (13.9) 6.4

Balance Sheet (S$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Cash/Bank Balance 19,341 25,314 21,180 25,859 27,152 Government Securities 20,610 22,249 21,001 22,051 23,154 Inter Bank Assets 39,573 41,220 35,791 36,563 43,814 Total Net Loans & Advs. 167,854 207,535 208,218 212,712 219,069 Investment 19,602 23,466 22,786 25,525 26,288

Associates 380 2,096 2,248 2,603 2,978 Fixed Assets 2,629 4,556 4,605 4,736 4,870 Goodwill 3,741 5,157 5,195 5,195 5,195 Other Assets 11,313 12,347 12,183 12,763 13,144 Life Ass Fund Inv Assets 53,405 57,286 56,983 56,983 56,983

Total Assets 338,448 401,226 390,190 404,990 422,647 Customer Deposits 195,974 245,519 246,277 258,591 271,520 Inter Bank Deposits 21,549 20,503 12,047 10,422 10,732 Debts/Borrowings 26,702 28,859 23,479 23,479 23,479 Others 12,961 14,936 14,282 14,658 15,092 Minorities 2,964 3,088 2,558 2,764 2,982 Shareholders' Funds 25,115 31,097 34,553 38,082 41,847 Life Ass Fund Liabs 53,183 57,224 56,994 56,994 56,994

Total Liab& S/H’s Funds 338,448 401,226 390,190 404,990 422,647


Driven by a spike in loan yields during the quarter; unlikely to be repeated

Loan growth to stay muted at low single digits


Company Guide

OCBC

Financial Stability Measures (%)

FY Dec 2013A 2014A 2015A 2016F 2017F Balance Sheet Structure Loan-to-Deposit Ratio 86.5 85.4 85.5 83.3 81.8 Net Loans / Total Assets 49.6 51.7 53.4 52.5 51.8 Investment / Total Assets 5.8 5.8 5.8 6.3 6.2 Cust . Dep./Int. Bear. Liab. 80.2 83.3 87.4 88.4 88.8

Interbank Dep / Int. Bear. 8.8 7.0 4.3 3.6 3.5

Asset Quality NPL / Total Gross Loans 0.7 0.6 0.9 1.0 0.8 NPL / Total Assets 0.4 0.3 0.5 0.5 0.4 Loan Loss Reserve Coverage 140.5 174.3 122.9 129.4 173.1 Provision Charge-Off Rate 0.2 0.2 0.2 0.2 0.2

Capital Strength Total CAR 16.3 15.9 16.8 17.2 17.7 Tier-1 CAR 14.6 13.8 14.8 15.3 15.9

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 30 Apr 15 10.68 12.70 BUY

2: 22 May 15 10.37 12.70 BUY

3: 10 Jun 15 10.06 12.80 BUY

4: 10 Aug 15 10.20 12.80 BUY

5: 31 Aug 15 8.93 10.00 BUY

6: 28 Oct 15 9.20 10.00 BUY

7: 10 Dec 15 8.64 10.00 BUY


12

3

4

5

6

7

7.07

7.57

8.07

8.57

9.07

9.57

10.07

10.57

11.07


S$

NPL ratio could be at risk although still below peers


Company Guide

OCBC

















































Company Guide

OCBC



OCBC recommended in this report as of 31 Jan 2016

















Dubai



Company Guide

OCBC



DBS Bank Ltd


Singapore 018982

Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC

BUYBUYBUYBUY (Upgrade from FULLY VALUED)

Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: S$0.94 (STISTISTISTI : : : : 2,562.45) Price Target :Price Target :Price Target :Price Target : S$1.28 (36% upside) (Prev S$1.22)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Earnings recovery

Where we differWhere we differWhere we differWhere we differ:::: Slower earnings recovery than consensus Analyst Alfie Yeo +65 6682 3717 [email protected] Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((S$S$S$S$mmmm) ) ) ) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Revenue 691 620 640 664 EBITDA 158 109 118 122 Pre-tax Profit 132 71.3 94.8 99.3 Net Profit 102 51.5 67.9 71.0 Net Pft (Pre Ex.) 108 67.5 67.9 71.0 Net Pft Gth (Pre-ex) (%) 9.8 (37.4) 0.6 4.6 EPS (S cts) 13.4 6.79 9.16 9.58 EPS Pre Ex. (S cts) 14.2 8.91 9.16 9.58 EPS Gth Pre Ex (%) 4 (37) 3 5 Diluted EPS (S cts) 12.8 6.79 8.96 9.37 Net DPS (S cts) 6.00 6.00 6.00 6.00 BV Per Share (S cts) 56.7 53.5 56.7 60.3 PE (X) 7.0 13.8 10.3 9.8 PE Pre Ex. (X) 6.6 10.6 10.3 9.8 P/Cash Flow (X) 6.1 12.3 7.3 7.1 EV/EBITDA (X) 3.2 5.2 4.3 3.9 Net Div Yield (%) 6.4 6.4 6.4 6.4 P/Book Value (X) 1.7 1.8 1.7 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 28.8 12.3 16.6 16.4 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 1 1 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S cts):::: 9.20 10.3



Deep value Upgrade to BUYUpgrade to BUYUpgrade to BUYUpgrade to BUY.... We turn positive on OSIM after a >40%

share price decline since we downgraded the stock in October

2015. Valuations are attractive with dividend yield at close to

7% and forward PE (c.10x) at close to -1SD of its 7-year mean

(14x). 4Q15 earnings showed sequential improvement with

signs of bottoming out. We believe this will support DPS and

dividend yield going forward. We hence do not see further

downside pressure on the stock. Instead, earnings recovery

momentum and valuation from a PE basis lead us to believe

that OSIM’s share price reflects value. Our PE-based TP of

S$1.28 is premised on modest earnings growth in FY16F and

its target PE of 14x at historical mean. This represents 36%

potential return from its current share price, and dividend yield

(based on DPS of 6 Scts) at its target price is 4.7%.

Sequential earnings improvement withSequential earnings improvement withSequential earnings improvement withSequential earnings improvement with minimal risk of dividend minimal risk of dividend minimal risk of dividend minimal risk of dividend

cut for now.cut for now.cut for now.cut for now. 4Q15 has recorded a smaller than expected

earnings decline. Core earnings (S$18m, -35% y-o-y) for 4Q15

was above expectations while the decline in revenue (S$169m,

-5% y-o-y) moderating on a sequential basis. Sequential

quarter growth in 4Q15 (vs 3Q15) was broad based, led by all

three brands and the Hong Kong market. OSIM has continued

to pay 6 Scts DPS from its strong balance sheet even though

core earnings fell by close to 40%. With earnings decline seen

projected to stabilise and its net cash of S$200m, we see

limited risks of dividend cuts at this stage. Downside risk

should therefore be minimal. Valuation:

Our target price of S$1.28 is based on 14x FY16F PE. OSIM has

strong net cash, cheap PE valuation, and is showing narrowing

y-o-y sales decline. Our target PE valuation of 14x is pegged to

the stock’s average 7-year historical mean valuation. Key Risks to Our View:

Our positive view is based on earnings bottoming out and

attractive dividend yield. Earnings risks and hence reduction in

DPS would dampen our optimism on the stock. At A Glance Issued Capital (m shrs) 742 Mkt. Cap (S$m/US$m) 697 / 487 Major Shareholders Chye Hock Sim (%) 68.6 Capital Group Companies Inc (%) 5.2 Free Float (%) 26.2 3m Avg. Daily Val (US$m) 1.6 ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Leisure Goods


29 Jan 2016


OSIM International Version | Bloomberg: OSIM SP | Reuters: OSIL.SI Refer to important disclosures at the end of this report

63

83

103

123

143

163

183

203

223

0.7

1.2

1.7

2.2

2.7

3.2


Relative IndexS$

OSIM International (LHS) Relative STI INDEX (RHS)


Page 2

Company Guide

OSIM International

Results Summary and ComparisonResults Summary and ComparisonResults Summary and ComparisonResults Summary and Comparison

FY Dec (S$m)FY Dec (S$m)FY Dec (S$m)FY Dec (S$m) FYFYFYFY11114444 FYFYFYFY11115555 YYYYooooYYYY ChgChgChgChg 4444Q1Q1Q1Q14444 4444Q1Q1Q1Q15555 YYYYooooYYYY ChgChgChgChg

Sales 691.1 619.6 -10% 177.7 168.7 -5%

Cost of Goods Sold (204.8) (174.8) -15% (54.1) (47.0) -13%

Gross Profit 486.3 444.8 -9% 123.5 121.7 -1%

Other Operating Income 19.1 24.6 29% 3.5 6.1 72%

Distribution Costs (122.0) (126.0) 3% (28.8) (34.5) 20%

Administration Expenses (21.8) (23.2) 6% (5.4) (6.1) 13%

R & D and other expenses (226.2) (235.8) 4% (58.7) (64.1) 9%

Other Operating Expenses (370.0) (385.0) 4% (92.9) (104.8) 13%

EBIT 135.4 84.4 -38% 34.2 23.0 -33%

Non-Operating Income 0.0 0.0 n/a 0.0 0.0 n/a

Interest Income 5.0 6.4 27% 1.8 1.5 -15%

Interest Expense (3.5) (5.0) 43% (1.2) (1.3) 4%

Share of Associates’ or JV Income 1.0 1.5 50% (0.1) 0.3 -558%

Exceptional Gains/(Losses) (5.7) (16.0) 183% (0.7) (9.0) 1276%

Pretax Profit 132.3 71.3 -46% 34.0 14.5 -57%

Tax (30.1) (21.5) -29% (6.3) (5.3) -15%

Minority Interests (0.0) 1.7 -13146% (0.3) 0.3 -205%

Net Profit 102.2 51.5 -50% 27.4 9.4 -66%

Net profit (pre-ex) 107.8 67.5 -37% 28.1 18.4 -35%

Margins (%)Margins (%)Margins (%)Margins (%)

Gross Margin 70.4 71.8

69.5 72.2

SGA % Sales 53.5 62.1

52.3 62.1

EBITDA Margin 22.8 17.4

22.3 17.3

EBIT Margin 19.6 13.6

19.2 13.6

Pre-tax Margin 19.1 11.5

19.1 8.6

Net Margin 14.8 8.3

15.4 5.6 Source: Company, DBS Bank

Core earnings above expectationsCore earnings above expectationsCore earnings above expectationsCore earnings above expectations, excluding one, excluding one, excluding one, excluding one----offs of offs of offs of offs of

S$9mS$9mS$9mS$9m.... Core earnings (S$18m, -35% y-o-y) for 4Q15 was

above expectations while the decline in revenue (S$169m, -

5% y-o-y) has moderated on a sequential basis. Growth was

broad based, led by all three brands and the Hong Kong

market. We had previously tapered our expectations to

muted levels as we believed outlook lacked visibility.

Headline earnings was S$9m but this included one-offs

amounting to S$9m for closure of GNC in Australia and legal

fees for TWG. While segment information remains

undisclosed, margins were slightly higher as we believe sales

mix of TWG had increased.

Final DPS in line with expectations.Final DPS in line with expectations.Final DPS in line with expectations.Final DPS in line with expectations. OSIM declared a final

quarterly dividend of 2 Scts bringing total DPS to 6 Scts, in

line with expectations. Due to OSIM’s strong balance sheet

and despite the 63% EPS decline, DPS remained at 6 Scts for

the full year. This represents a dividend payout ratio of 86%.

Slightly bSlightly bSlightly bSlightly better earnings visibilityetter earnings visibilityetter earnings visibilityetter earnings visibility.... We are now less pessimistic

on earnings visibility going forward. OSIM will launch new

products, expand franchise markets and adopt a more

dynamic approach to marketing this year. At GNC, closure of

GNC’s loss making Australian business will help the bottom

line. TWG will continue to expand by 15-20 stores this year,

while legal fees are likely to be lower this year.

Upgrade to BUY, TP S$1.28.Upgrade to BUY, TP S$1.28.Upgrade to BUY, TP S$1.28.Upgrade to BUY, TP S$1.28. Results were in line and

therefore we have left our earnings estimates largely intact.

Valuations are now attractive with dividend yield at close to

7% and PE valuations at near -1SD of its mean. Our TP of

S$1.28 is based on 14x FY16F PE at historical average. BUY

for 36% upside.

TradTradTradTrades close to es close to es close to es close to ----1SD of its 71SD of its 71SD of its 71SD of its 7----year meanyear meanyear meanyear mean


0

6

12

18

24

30

-

5.0

10.0

15.0

20.0

25.0

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

Quarterly earnings (RHS) Fwd PE (LHS)

+ 2 sd

+ 1 sd

Avg

- 1 sd

- 2 sd

(x) S$m


Page 3

Company Guide

OSIM International


Earnings Drivers:

Five key markets.Five key markets.Five key markets.Five key markets. OSIM primarily operates in five key markets -

Singapore, Malaysia, Taiwan, Hong Kong and China - with all

other markets indirectly owned and operated. We estimate that

OSIM’s massage products contribute close to 60% of total

revenue.

Earnings growth visEarnings growth visEarnings growth visEarnings growth visibility likely to improve. ibility likely to improve. ibility likely to improve. ibility likely to improve. We turn less

pessimistic on earnings visibility as we can now see some

positives from the OSIM, GNC and TWG brands for FY16F. As

we had previously observed, sales growth rates (ex TWG

consolidation) from 3Q12 to 1Q15 were declining. However

from 2Q15, the rate of sales decline had consistently

decelerated. We believe recovering chair sales could be driving

this and the brighter outlook is validated by plans to focus more

on marketing, introduce new products, and expand the OSIM

franchise into new markets this year. In addition, costs for

labour and rents in Singapore have eased compared to previous

quarters, providing further relief to operating expenses. Apart

from OSIM’s massage products, GNC’s earnings will also benefit

from the closure of its Australian operations which has been

loss making. TWG will continue to grow store count and will

likely enjoy ramp up of its new opened North Asian outlets in

FY16F. Besides, legal costs are likely to be much lower this year.

GNCGNCGNCGNC, more positive post closure of GNC Australia, more positive post closure of GNC Australia, more positive post closure of GNC Australia, more positive post closure of GNC Australia.... OSIM is the

sole franchisee for GNC in Singapore, Malaysia and Taiwan. This

business generally generates stable earnings and delivers

positive cashflows. We estimate that GNC contributes about

25% of total sales. Store count has decreased from the peak of

270 in 4Q11 to 197 in 4Q15 partly due to closure of the GNC

business in Australia. Following the provision of S$5.6m in

4Q15 for the closure, we are now more optimistic on the GNC

business given that GNC Australia was making losses of S$3.5m

a year for the past three years. Taiwan now has the most

headroom for GNC to scale up.

TWG is growingTWG is growingTWG is growingTWG is growing, legal expenses should be lower in FY16F , legal expenses should be lower in FY16F , legal expenses should be lower in FY16F , legal expenses should be lower in FY16F

barring court’s rulingbarring court’s rulingbarring court’s rulingbarring court’s ruling.... TWG’s development has been exciting,

growing from 26 stores in FY13 to 52 stores by 4Q15. It now

has presence in new markets including Korea, Taiwan, Macau

and China. 4Q15 saw more store openings including Four

Seasons Macau and Tea WG at Elements in Hong Kong. Going

forward, there are plans to open another 15-20 stores in 2016.

Besides store presence, it is also increasing its market share in

supplying to luxury hotel segment in Hong Kong, China and

Taiwan. We estimate TWG’s contribution to group net profit

(70% stake and after minority interest) to be small at 8-10%.

Following S$3.4m recognition for legal expenses in 4Q15,

2016’s legal fees are expected to be much lower, barring

potential damages it has to pay should the court order

compensation to its plaintiffs.

Store count

Blended sales per store (S$m)

Rate of sales decline is decelerating

Sales mix by geography FY15

EBIT Margins %


871841

783 807836

0

100

200

300

400

500

600

700

800

2013A 2014A 2015F 2016F 2017F

0.74

0.820.79 0.79 0.79

0.00

0.17

0.34

0.50

0.67

0.84

2013A 2014A 2015F 2016F 2017F

(15)

(10)

(5)

0

5

10

15

20

yoy (%)yoy (%)yoy (%)yoy (%)

TWG consolidation

North Asia55%

South Asia40%

America/Africa/Europe/ Middle

East/Oceania7%

0

4

8

12

16

20

07 08 09 10 11 12 13 14 15 16F 17F

(%)(%)(%)(%)


Page 4

Company Guide

OSIM International

Balance Sheet:

Net cash of S$2Net cash of S$2Net cash of S$2Net cash of S$200000000m.m.m.m. The business is generally cashflow positive,

generating average operating cashflow of S$100m over the

past five years. OSIM's 4Q15 balance sheet has S$358m of

cash, well equipped to make acquisitions. We believe the

company is able to serve out the call option for its convertible

bonds in 2017, provided it does not make a significant

acquisition. Net cash of S$200m is equal to over 4x annual

dividend payments at 6 Scts/share. Therefore, there is no stress

on its balance sheet in this respect.


Deep value. Deep value. Deep value. Deep value. We see deep value from a valuation perspective as

dividend yield is attractive at close to 7% while PE valuations are

below average at near -1SD of its 7-year mean. There is minimal

risk of dividend cut as earnings are showing a turnaround.

Downside risks for the stock should be supported by dividend

yield while upside is now fuelled by earnings recovery. Our PE-

based TP of S$1.28 is conservatively premised on modest

earnings growth in FY16F and its target PE of 14x at historical

mean. Our TP yields an upside of >30%. Upside risk to earnings

as our estimates are below consensus.

Key Risks:

Strong reliance on new chair sales to drive turnaround.Strong reliance on new chair sales to drive turnaround.Strong reliance on new chair sales to drive turnaround.Strong reliance on new chair sales to drive turnaround. Due to

the significant contribution of OSIM massage products to

revenue, new products OSIM massage products are expected

to lead sustainable turnaround and drive growth. New

products such as uMagic, uGallop 2, limited edit uDiva will be

launched soon. uJoy should be leading growth going forward,

if earnings turnaround is to be sustainable. Any potential

slowdown in market demand for OSIM massage products

would hamper earnings recovery.

Litigation cases pose unknown earnings risks. Litigation cases pose unknown earnings risks. Litigation cases pose unknown earnings risks. Litigation cases pose unknown earnings risks. The two ongoing

litigation cases in Singapore and Hong Kong where costs

remain relatively uncertain are two unknowns that could spring

negative surprises which could yet dampen earnings. Apart

from legal fees, there are also potential expenses on damages

which OSIM may or may not have to pay, depending on the

court’s ruling.

Consumer sentiment. Consumer sentiment. Consumer sentiment. Consumer sentiment. OSIM is ultimately a retailer of lifestyle

products, and its fortune depends on discretionary

consumption. Poor consumption sentiment will be a drag on

demand while strong consumption cycle will fuel demand for

its products.

Company Background

OSIM is a retailer and brand owner of healthy lifestyle

products. The company is the brand owner manufacturer and

retailer for the OSIM line of massage chairs and related

products worldwide; a sole franchisee for the GNC chain of

nutritional supplement retail stores in Singapore, Malaysia, and

Taiwan; and a majority owner of the TWG brand of high-end

luxury tea cafes and saloons.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.9

1.0

1.1

1.2

0.00

0.10

0.20

0.30

0.40

0.50

2013A 2014A 2015F 2016F 2017F


0.0

5.0

10.0

15.0

20.0

25.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.3x

+1sd: 21.1x

+2sd: 26x

-1sd: 11.4x

-2sd: 6.6x5.9

10.9

15.9

20.9

25.9

Jan-12 Jan-13 Jan-14 Jan-15

(x)

Avg: 5.06x

+1sd: 6.58x

+2sd: 8.11x

-1sd: 3.53x

-2sd: 2x

1.2

2.2

3.2

4.2

5.2

6.2

7.2

8.2


(x)


Page 5

Company Guide

OSIM International

Key Assumptions

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015A2015A2015A2015A 2016201620162016FFFF 2017201720172017FFFF

Store count 871 841 783 807 836 Blended sales per store (S$m)

0.74 0.82 0.79 0.79 0.79 Segmental Breakdown

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Revenues (S$m)

North Asia 353 366 341 355 377

South Asia 250 279 248 252 255 America / Africa / Europe / Middle East / Oceania

45.0 46.0 31.0 31.8 32.5

TotalTotalTotalTotal 648648648648 691691691691 620620620620 640640640640 664664664664


FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Revenue 648 691 620 640 664

Cost of Goods Sold (193) (205) (175) (179) (186)

Gross ProfitGross ProfitGross ProfitGross Profit 455455455455 486486486486 445445445445 460460460460 478478478478

Other Opng (Exp)/Inc (332) (351) (360) (368) (381)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 123123123123 135135135135 84.484.484.484.4 92.592.592.592.5 96.496.496.496.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0


Net Interest (Exp)/Inc (0.4) 1.54 1.41 0.85 1.39

Exceptional Gain/(Loss) 3.35 (5.7) (16.0) 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 129129129129 132132132132 71.371.371.371.3 94.894.894.894.8 99.399.399.399.3 Tax (27.6) (30.1) (21.5) (28.6) (30.0)

Minority Interest 0.0 0.0 1.70 1.70 1.70

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 102102102102 102102102102 51.551.551.551.5 67.967.967.967.9 71.071.071.071.0 Net Profit before Except. 98.2 108 67.5 67.9 71.0

EBITDA 140 158 109 118 122

Growth

Revenue Gth (%) 7.6 6.7 (10.4) 3.2 3.8

EBITDA Gth (%) 8.6 13.0 (31.1) 8.6 3.3

Opg Profit Gth (%) 6.9 9.8 (37.7) 9.6 4.2

Net Profit Gth (Pre-ex) (%) 13.0 9.8 (37.4) 0.6 4.6

Margins & Ratio

Gross Margins (%) 70.3 70.4 71.8 72.0 72.0

Opg Profit Margin (%) 19.0 19.6 13.6 14.5 14.5

Net Profit Margin (%) 15.7 14.8 8.3 10.6 10.7

ROAE (%) 43.5 28.8 12.3 16.6 16.4

ROA (%) 17.7 13.3 6.3 8.5 8.6

ROCE (%) 21.9 16.7 8.6 9.6 9.7

Div Payout Ratio (%) 44.5 45.4 86.4 65.5 62.7

Net Interest Cover (x) 278.4 NM NM NM NM



Page 6

Company Guide

OSIM International


FY FY FY FY DecDecDecDec 4Q4Q4Q4Q2014201420142014 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 Revenue 178 150 159 142 169

Cost of Goods Sold (54.1) (44.1) (43.7) (40.1) (47.0)

Gross ProfitGross ProfitGross ProfitGross Profit 124124124124 106106106106 116116116116 101101101101 122122122122 Other Oper. (Exp)/Inc (89.4) (87.2) (86.0) (88.4) (98.7)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 34.234.234.234.2 18.618.618.618.6 29.829.829.829.8 13.113.113.113.1 23.023.023.023.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc (0.1) 0.43 0.49 0.30 0.25

Net Interest (Exp)/Inc 0.54 0.0 0.54 0.69 0.22

Exceptional Gain/(Loss) (0.7) (1.0) (2.0) (4.0) (9.0)

PrePrePrePre----tax Profittax Profittax Profittax Profit 34.034.034.034.0 18.018.018.018.0 28.828.828.828.8 10.010.010.010.0 14.514.514.514.5 Tax (6.3) (4.9) (6.9) (4.3) (5.3)

Minority Interest (0.3) 0.49 0.49 0.45 0.28

Net ProfitNet ProfitNet ProfitNet Profit 27.427.427.427.4 13.513.513.513.5 22.422.422.422.4 6.176.176.176.17 9.409.409.409.40 Net profit bef Except. 28.1 14.5 24.4 10.2 18.4

EBITDA 39.6 24.5 36.0 19.2 29.4

Growth

Revenue Gth (%) 12.3 (15.7) 6.4 (11.2) 19.2

EBITDA Gth (%) 20.1 (38.0) 46.9 (46.8) 53.2

Opg Profit Gth (%) 26.9 (45.6) 60.4 (56.2) 76.1

Net Profit Gth (Pre-ex) (%) 31.1 (48.3) 68.0 (58.3) 80.9

Margins Gross Margins (%) 69.5 70.6 72.6 71.7 72.2

Opg Profit Margins (%) 19.2 12.4 18.7 9.2 13.6

Net Profit Margins (%) 15.4 9.0 14.0 4.4 5.6

Balance Sheet (S$m)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Net Fixed Assets 25.2 36.4 33.5 28.5 23.5

Invts in Associates & JVs 18.5 18.4 21.7 23.2 24.6

Other LT Assets 219 211 217 207 198

Cash & ST Invts 291 456 385 418 455

Inventory 72.5 71.6 78.2 80.7 83.7

Debtors 42.0 42.6 37.6 38.8 40.3

Other Current Assets 12.5 17.8 17.9 17.9 17.9

Total AssetsTotal AssetsTotal AssetsTotal Assets 680680680680 854854854854 790790790790 814814814814 842842842842

ST Debt

155 17.2 13.2 13.2 13.2

Creditor 107 77.0 76.6 79.0 82.0

Other Current Liab 35.2 64.0 50.4 50.4 50.4

LT Debt 0.06 168 173 173 173

Other LT Liabilities 39.1 35.7 29.4 29.4 29.4

Shareholder’s Equity 271 438 397 420 447

Minority Interests 72.7 53.6 50.9 49.2 47.5

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 680680680680 854854854854 790790790790 814814814814 842842842842

Non-Cash Wkg. Capital (15.4) (8.9) 6.71 7.98 9.50

Net Cash/(Debt) 136 271 199 232 269

Debtors Turn (avg days) 22.6 22.3 23.6 21.8 21.7

Creditors Turn (avg days) 201.2 183.5 184.8 183.7 182.2

Inventory Turn (avg days) 128.9 143.7 180.3 187.6 186.0

Asset Turnover (x) 1.1 0.9 0.8 0.8 0.8

Current Ratio (x) 1.4 3.7 3.7 3.9 4.1

Quick Ratio (x) 1.1 3.2 3.0 3.2 3.4

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 7.4 12.7 7.7 5.4 5.4

Z-Score (X) 0.0 0.0 0.0 0.0 0.0



Page 7

Company Guide

OSIM International


FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF Pre-Tax Profit 129 132 71.3 94.8 99.3

Dep. & Amort. 21.7 29.8 31.2 32.5 32.5

Tax Paid (29.2) (26.0) (38.8) (28.6) (30.0)

Assoc. & JV Inc/(loss) (2.9) (1.0) (1.5) (1.5) (1.5)

Chg in Wkg.Cap. 3.87 (16.0) (5.8) (1.3) (1.5)

Other Operating CF (9.5) (2.3) 1.58 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 113113113113 117117117117 58.058.058.058.0 96.096.096.096.0 98.998.998.998.9 Capital Exp.(net) (11.5) (23.6) (14.2) (10.0) (10.0)

Other Invts.(net) (3.8) (3.8) (9.7) 0.0 0.0

Invts in Assoc. & JV (7.0) 0.0 (2.6) 0.0 0.0

Div from Assoc & JV 1.36 1.21 0.69 0.0 0.0

Other Investing CF 16.5 3.19 5.29 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (4.4)(4.4)(4.4)(4.4) (23.0)(23.0)(23.0)(23.0) (20.5)(20.5)(20.5)(20.5) (10.0)(10.0)(10.0)(10.0) (10.0)(10.0)(10.0)(10.0) Div Paid (36.2) (45.5) (45.9) (44.5) (44.5)

Chg in Gross Debt 4.57 134 (4.0) 0.0 0.0

Capital Issues (7.5) 0.0 0.0 0.0 0.0

Other Financing CF (2.3) (15.1) (52.2) 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (41.4)(41.4)(41.4)(41.4) 73.473.473.473.4 (102)(102)(102)(102) (44.5)(44.5)(44.5)(44.5) (44.5)(44.5)(44.5)(44.5)

Currency Adjustments 6.19 0.85 2.93 0.0 0.0

Chg in Cash 73.6 168 (61.5) 41.5 44.4

Opg CFPS (S cts) 15.1 17.4 8.42 13.1 13.5

Free CFPS (S cts) 14.1 12.3 5.77 11.6 12.0



Source: DBS Bank





1: 04 Feb 15 2.02 1.94 HOLD

2: 06 May 15 1.74 1.82 HOLD

3: 24 Jul 15 1.54 1.61 HOLD

4: 02 Sep 15 1.47 1.61 HOLD

5: 28 Oct 15 1.44 1.22 FULLY VALUED


1

2

3

4

5

0.73

0.93

1.13

1.33

1.53

1.73

1.93

2.13

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

S$S$S$S$


Page 8

Company Guide

OSIM International









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compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 29 Jan 2016,




Page 9

Company Guide

OSIM International

COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / RESPECIFIC / RESPECIFIC / RESPECIFIC / REGULATORY DISCLOSURES GULATORY DISCLOSURES GULATORY DISCLOSURES GULATORY DISCLOSURES

1.1.1.1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 31 Dec 2015


3.3.3.3. Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:













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Page 10

Company Guide

OSIM International

United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Ltd.. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictiOther jurisdictiOther jurisdictiOther jurisdictionsonsonsons In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.



Singapore 018982

Tel. 65-6878 8888



BUY Last Traded Price: S$2.53 (STI : 2,613.79) Price Target : S$3.30 (30% upside) (Prev S$3.50)

Potential Catalyst: Ramp up of India power plant, improvement in marine business Where we differ: In line

Analyst Janice CHUA +65 6682 3692 [email protected] Pei Hwa Ho +65 6682 3714 [email protected]

What’s New 4Q15 affected by losses from Marine and slower

ramp up of Indian power plant (TPCIL) TPCIL will contribute positively from 1Q16, with

>80% utilisation since end Dec-15 Declared final DPS of 6 Scts; FY15 DPS at 11 Scts

on similar 36% payout ratio SMM privatisation chatter unsubstantiated;

Reiterate BUY, TP adjusted to S$3.30

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 10,895 9,545 8,667 9,324 EBITDA 1,612 1,015 1,311 1,393 Pre-tax Profit 1,246 426 838 895 Net Profit 801 549 581 626 Net Pft (Pre Ex.) 801 549 581 626 Net Pft Gth (Pre-ex) (%) (2.4) (31.5) 5.8 7.9 EPS (S cts) 44.9 30.7 32.5 35.1 EPS Pre Ex. (S cts) 44.9 30.7 32.5 35.1 EPS Gth Pre Ex (%) (2) (32) 6 8 Diluted EPS (S cts) 44.5 30.5 32.2 34.8 Net DPS (S cts) 16.0 11.0 11.1 11.2 BV Per Share (S cts) 315 360 382 406 PE (X) 5.6 8.2 7.8 7.2 PE Pre Ex. (X) 5.6 8.2 7.8 7.2 P/Cash Flow (X) nm nm 8.2 4.2 EV/EBITDA (X) 5.7 11.2 9.2 8.7 Net Div Yield (%) 6.3 4.3 4.4 4.4 P/Book Value (X) 0.8 0.7 0.7 0.6 Net Debt/Equity (X) 0.4 0.6 0.7 0.6 ROAE (%) 14.8 9.1 8.8 8.9 Earnings Rev (%): (8) (6) Consensus EPS (S cts): 31.1 32.8 34.8 Other Broker Recs: B: 10 S: 3 H: 4 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

SMM Privatisation Rumour Unsubstantiated Utilities’ steep discount unwarranted. Stripping out the market value of Sembcorp Marine (SMM), Salalah and Gallant Venture, SCI’s utilities business is valued at an unjustifiably low 0.5x P/B and 5x FY16F PE vs historical mean of 11x PE. We have lowered our SOTP-based TP to S$3.30, reflecting the downgrade in SMM’s TP. This translates to 0.9x P/B, which is 20-30% below GFC/AFC trough, implying 30% upside potential. We believe this is a fair multiple in view of 9% ROE and 4% dividend yield. Reiterate BUY.

Chatter on SMM privatisation does not hold water. SCI’s PATMI slid 75% y-o-y and 50% q-o-q to S$60.8m in 4Q15, due to Marine losses (S$328m), and impairment (S$70m) charges on Utilities’ PPE. In response to the privatization rumour of SembCorp Marine, management stressed that any asset acquisitions should be accretive and enhance returns to SCI shareholders. Moreover, there are more appealing opportunities in the utilities space in view of the lacklustre marine prospects. In our view, the more likely scenario of a restructuring of rigbuilders would be the merger of Keppel O&M and SMM. As such, the elimination of fear of privatisation could give an uplift to SCI’s stock prices in the near term.

Emerging markets the growth engine. SCI’s first India power plant, fully operational since Sept-2015, is expected to contribute S$70m or 12% of FY16F PATMI. It incurred startup losses of S$22.5m last year, but is expected to turn profitable in 1Q16 with the ramp-up to >80% since end 2015. This would help to mitigate the earnings decline from Singapore power plants while other overseas utility businesses are expected to be stable this year. Besides, SCI has also made its forays into other emerging markets – Bangladesh and Myanmar, underpinning longer-term growth prospects of its utilities segment.

Valuation: Given its diverse earnings stream and various listed assets, we derive our fair value on SCI based on the sum of its different parts, which include market valuations of its stakes in listed companies Sembcorp Marine (SGX-listed, 60.6% stake), Gallant Venture (SGX-listed, 11.96% stake) and Salalah (Muscat stock exchange, 40% stake) and earnings from utilities and urban development. For its holding company position, we have applied a 10% conglomerate discount to the reappraised net asset value (RNAV). Our TP is lowered slightly to S$3.30 (from S$3.50 previously) as we imputed the downgrade in SMM’s TP. We revised FY16-17F earnings down by 6-8%, factoring in weaker SMM earnings.

Key Risks to Our View: Key risks to earnings are further deferments / cancellations of marine projects, deterioration of Singapore power’s spark spreads, and execution hiccups in India power plants.

At A Glance Issued Capital (m shrs) 1,785 Mkt. Cap (S$m/US$m) 4,517 / 3,218 Major Shareholders (%) Temasek Holdings Pte Ltd 49.5 JP Morgan Chase & Co 5.0

Free Float (%) 50.1 3m Avg. Daily Val (US$m) 12.1 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Sembcorp Industries Version 4 | Bloomberg: SCI SP | Reuters: SCIL.SI Refer to important disclosures at the end of this report

46

66

86

106

126

146

166

186

206

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0


Relative IndexS$

Sembcorp Industries (LHS) Relative STI INDEX (RHS)


Company Guide

Sembcorp Industries

WHAT’S NEW

Weak 4Q15 as expected

Results review

SCI’s PATMI slid 75% y-o-y and 50% q-o-q to S$60.8m in 4Q15, with the blame largely on Marine losses (S$328m), and impairment (S$70m) losses on Utilities’ PPE due to closure of customers’ facilities and the exit from the chemical feedstock business. In addition, TPCIL earnings also missed expectations due to a cyclone hitting Chennai in Nov-Dec 2015. Otherwise, the utiltiies business was relatively stable. The losses were mitigated by S$353m disposal gains on Sembsita. On full year basis, net profit came in at S$549m (-32% y-o-y).

Utilities business was steady. Utilities’ core profit dropped 19% to S$332m in FY15 due largely to the earnings decline in Singapore’s power business, which is cash flow positive but loss-making at NPAT level. The power plants in India will be the growth driver in the next two years.

Marine dragged by massive provisions. SMM swung into a net loss of S$537m for 4Q15 (SCI: S$328m), from net profit of S$178m a year ago. While losses were expected as guided in its profit warning in early Dec-2015, the provisions taken were much larger than expected – an eye popping >S$600m for Sete projects (S$329m) and other rigs (~S$280m). We expect SMM to return to the black, achieving net profit of c. S$260m in FY16 (SCI: S$156m).

Urban Development: land sales and margins are patchy. Land sales were up 51% in FY15 to 211 hectares, but profits were down 25%to S$33.5m due to lumpy revenue recognition and lower margin mix. This was attributable to a lower proportion of higher-margin residential land sales, partially due to lower allocation of land sales quotas by the Nanjing government this year, and lumpy revenue recognition. FY16 could be a better year as land quota is expected to increase.

Gallant Venture investment written down. Gallant Venture has been reclassified as an available for sale financial asset and incurred S$34.5m fair value loss in the quarter, after marking down the investment to the current share price of S$0.22.

Declared 6Scts final dividend. SCI declared a final DPS of 6 Scts, bringing full year DPS to 11 Scts (including 5Scts interim dividend). This works out to a 36% payout ratio, translating to 4.4% dividend yield. We expect SCI to sustain a similar DPS of 11 Scts on payout ratio of 30-35% in FY16-17, implying 4% yield.

Key takeaways from briefing

TPCIL hit by cyclone in Nov-Dec 2015. TPCIL suffered loss of income as the plant was down for more than 3 weeks before resuming operations towards the end of Dec-2015, and the plant also incurred loss on inventory ie coal, repair cost (in the process of claiming ~S$5m from insurance) and lower industrial power demand during the floods. Despite this, losses narrowed to S$1.5m in 4Q15 (from S$12m loss in 3Q15). On a positive note, operations have since resumed from end Dec-15 and the plant is now running at >80% utilisation. SCI has also secured a PPA for the second unit of the TCIL plant, which means that 86% of the capacity is now on long term PPAs, allowing TPCIL to enjoy mega power status. We expect TPCIL to churn S$15-20m profit a quarter.

Second India power plant (NCCPP) commencing operation in 2016. The 45% owned NCCPP, which has a total capacity of 1,320 MW, is expected to commence operations in 2016. The first unit is expected to come onstream by May-2016 and second unit by Sept-2016. We have assumed small startup losses of S$10m in 2016.

Cleaner energy. SCI will continue to grow its portfolio in the key emerging markets – India, Indonesia, Myanmar, Bangladesh etc. It is also keeping an eye out for more renewable energy assets in the light of the long term trend towards cleaner energy.

Divestment of Yancheng. SCI announced on 5 Feb that it is divesting its entire 49% stake in Yancheng China Water for S$57m. The deal is expected to complete in mid-2016 with a net gain of S$35m. We have yet to factor this in, pending fulfilment of conditions and approval from relevant authorities.

Privatising SMM? In response to SMM privatisation rumour, management stressed that any asset acquisitions should be accretive and enhance returns to SCI shareholders. In addition, there are more appealing opportunities in the utilities space in view of the bleak marine outlook.


Company Guide

Sembcorp Industries



Revenue 2,664 2,399 2,419 (9.2) 0.8 Cost of Goods Sold (2,241) (2,110) (2,619) 16.9 24.1 Gross Profit 424 290 (200) nm nm Other Oper. (Exp)/Inc (63.3) (104) (252) 297.9 142.6 Operating Profit 360 186 (451) nm nm Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 35.4 21.2 (114) nm nm Net Interest (Exp)/Inc (37.0) (57.0) (72.6) 96.1 27.4 Exceptional Gain/(Loss) 0.0 0.0 371 nm nm Pre-tax Profit 359 150 (266) nm nm Tax (25.6) (10.9) 121 nm nm Minority Interest (92.1) (17.0) 207 nm nm Net Profit 241 122 60.8 (74.8) (50.3) Net profit bef Except. 241 122 (310) nm nm EBITDA 396 207 (565) nm nm Margins (%)

Gross Margins 15.9 12.1 (8.3) Opg Profit Margins 13.5 7.8 (18.7) Net Profit Margins 9.0 5.1 2.5


SOTP-based valuation for SCI

Value (S$ m)

Basis

Sembcorp Marine 1,571 Fair value for Sembcorp Marine Gallant Ventures 63 Share price Salalah 350 40% stake 1,984 Less: book value of listed companies (2,035) Surplus from listed companies -51 Utilities (Surplus) 267 Based on 11x FY16 PE, less book value Urban Development (441) Based on 11x FY16 PE, less book value Net Surplus -225 Book value as of end FY15 6,817 RNAV 6,592 RNAV per share (S$) 3.66 Fair value (S$) 3.30 10% conglomerate discount Implied FY16 PE (x) 10.1 Implied FY16 PB (x) 0.9


Implied valuation for utilities business

Value (S$m)

Basis

SCI's market capitalisation 4,522 Market price @ 17 Feb SCI's share of market capitalisation for: SMM 2,052 Market price @ 17 Feb Salalah 350 Market price @ 17 Feb Gallant Venture 66 Market price @ 17 Feb Congolomerate discount 10% Implied value for Utilities 2,300 Implied FY16 PE for Utilities (x) 5.2 Implied FY16 PB for Utilities (x) 0.5



Company Guide

Sembcorp Industries


Earnings Drivers:

Utilities projects pipeline should progressively add to earnings. New facilities will add to SCI’s power generation and water treatment capacities, which should increase earnings assuming the operations are profitable. A total of 3,800MW of power generation capacity, 140tph of steam capacity and 1.3million m3/day of water treatment capacity is expected to be added from now until 2018. This roughly translates to a 36%, 3% and 14% increase in power, steam and water treatment capacities respectively. Narrowing spark spreads in Singapore have hit power generation earnings. Growth in supply of electricity outpacing the growth in consumption led to Uniform Singapore Energy Price (USEP) falling by 22% y-o-y in 2013, 21% in 2014 and by further 29% in 2015, shrinking the generator’s spark spread – a barometer of profits on electricity sales. However, the impact will not be significant, as Singapore power generation only makes up <5% of SCI’s net income. Nonetheless, an increase in USEP prices going forward will help earnings. Greater contribution from non-Singapore power generation facilities would also alleviate the pressure on profitability. Marine business (SMM) earnings are orderbook-driven. Sembcorp Marine’s (SMM) orderbook has declined to S$10.4bn as of end-2015, in tandem with the downturn in the offshore oil & gas industry. Order wins of S$3.2bn in 2015 were weak but respectable amid the current environment; 2013 and 2014 saw full-year order wins of S$4.2bn. The current orderbook stretches until 2020, but there is risk of order deferments – which would spread revenues and earnings thinner – given that drilling units account for 75% of its value. It has primarily been low oil prices that saw oil majors and asset owners defer capex spending. Hence, a rebound in oil prices should trigger more order wins for SMM, which would be positive for earnings. Urban Development business provides growth opportunities. Urban Development accounts for c.6% of SCI’s bottomline. Thus, a strong performance of this segment will not move the needle too much for now, but represents an avenue for growth. SCI has about 3,500ha of saleable land remaining across China, Indonesia and Vietnam, which it can develop. However, headwinds in the form of delays in China land sales have proven to be a stumbling block recently; better sales momentum, which we are seeing a glimmer of, would give some earnings uplift.

Marine contract wins


4,193 4,192

3,150

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2013A 2014A 2015F 2016F 2017F

1.27806069

‐0.321467419

0.061017937

0.083144‐0.100755209

SCI Group Net Profit for FY15 - Total S$549m

Utilities

Marine

Urban DevelopmentOther Businesses

0.209265859

0.053884533

0.13613685

0.068852459

0.0426229510.017676408

‐0.055737705

0.527298646

Utilities FY15 Net Profit by Geography - Total S$702m

Singapore

Rest of ASEAN, Australia & IndiaChina

Middle East & Africa

UK

The Americas

Corporate

0.352179837

0.273160763

0.374659401

Utilities in Singapore FY15 Net Profits - Total S$147m

Energy

Water

On‐site Logistics & Solid Waste Management


Company Guide

Sembcorp Industries

Balance Sheet:

SCI’s gearing stood at 0.4x as of end 2015 – a stark contrast to a net cash position in 2013; increasing leverage at SMM has been the main reason for the increase in debt levels. Overall though, gearing remains at palatable levels and there is adequate debt headroom of approx S$3bn for SCI’s expansion capex and working capital. Share Price Drivers:

Oil price rebound would drive the share price higher. Investors would have greater confidence in the Marine business, as the operating environment improves. While drilling rig orders might lag oil price recovery, we could expect orders for production related facilities to flow through. Order wins in the Marine segment and land sales from Urban Development would bode well for SCI’s share price. While the oil price rebound would be an early indicator, securing contract wins by SMM is a more tangible indicator. More momentum in land sales would signal more hope for growth, and be positive to share price. Widening spark spreads at Singapore power plants. Signs of positive and widening spark spreads in Singapore would alleviate a key concern of investors and provide support to the share price. Key Risks:

Increasing competition in the Singapore power market. Total power generation supply in Singapore rose over 9% y-o-y in the past two years, marking the biggest y-o-y jumps since the electricity market started. This has depressed prices and hurt SCI’s bottom line. The oversupply of capacity and over-commitment of gas supply issues will likely continue to plague Singapore power market in the near-to-medium term. Execution of Indian power plants. The availability of coal supply and power purchase agreements (PPA) for SCI’s power plants in India have been a concern. We find comfort that the TPCIL plant is up and running on 86% of capacity committed on long term PPAs and operating on both domestic and imported coal. Company Background

Sembcorp Industries (SCI) is a trusted provider of essential energy and water solutions to both industrial and municipal customers. It has facilities with 10,600 megawatts of gross power capacity and over 10 million cubic metres of water per day in operation and under development. It is also a world leader in marine and offshore engineering (via Sembcorp Marine) as well as an established brand name in urban development (comprising industrial parks as well as business, commercial and residential space) in Vietnam, China and Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.9

0.9

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2013A 2014A 2015F 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015F 2016F 2017F

Avg: 12.2x

+1sd: 13.8x

+2sd: 15.3x

‐1sd: 10.6x

‐2sd: 9.1x

6.0

8.0

10.0

12.0

14.0

16.0


(x)

Avg: 1.69x

+1sd: 2.12x

+2sd: 2.56x

‐1sd: 1.26x

‐2sd: 0.82x

0.5

1.0

1.5

2.0

2.5


(x)


Company Guide

Sembcorp Industries

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Marine contract wins 4,193 4,192 3,150 2,500 3,000

Segmental Breakdown

FY Dec 2013A 2014A 2015AF 2016F 2017F Revenues (S$m) Utilities 5,138 4,850 4,227 4,595 4,693 Marine 5,526 5,831 4,967 3,790 4,401 Industrial Parks 12.5 6.54 7.95 8.61 10.3 Other Businesses and 122 208 342 274 219 Total 10,798 10,895 9,545 8,667 9,324 Net Profit before EI

Utilities 450 408 701 411 447 Marine 337 340 (176) 158 162 Industrial Parks 50.2 44.3 33.5 33.8 34.2 Other Businesses and (16.6) 8.78 (9.7) (22.1) (17.6) Total 820 801 549 581 626 Net Profit before EI

Utilities 8.8 8.4 16.6 8.9 9.5 Marine 6.1 5.8 (3.6) 4.2 3.7 Industrial Parks 401.4 678.1 421.3 392.9 330.7 Other Businesses and (13.6) 4.2 (2.8) (8.1) (8.0) Total 7.6 7.4 5.8 6.7 6.7


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 10,798 10,895 9,545 8,667 9,324 Cost of Goods Sold (9,510) (9,480) (8,813) (7,600) (8,175) Gross Profit 1,287 1,415 732 1,067 1,149 Other Opng (Exp)/Inc (339) (352) (524) (295) (317) Operating Profit 948 1,062 207 772 832 Other Non Opg (Exp)/Inc 212 76.7 418 38.8 38.8 Associates & JV Inc 155 158 6.20 95.7 97.6 Net Interest (Exp)/Inc (101) (50.7) (205) (69.3) (74.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,214 1,246 426 838 895 Tax (117) (162) 28.1 (154) (164) Minority Interest (277) (283) 94.5 (103) (103) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 820 801 549 581 626 Net Profit before Except. 820 801 549 581 626 EBITDA 1,619 1,612 1,015 1,311 1,393 Growth Revenue Gth (%) 6.0 0.9 (12.4) (9.2) 7.6 EBITDA Gth (%) 4.6 (0.4) (37.0) 29.1 6.3 Opg Profit Gth (%) (10.5) 12.0 (80.5) 272.6 7.7 Net Profit Gth (Pre-ex) (%) 8.9 (2.4) (31.5) 5.8 7.9 Margins & Ratio Gross Margins (%) 11.9 13.0 7.7 12.3 12.3 Opg Profit Margin (%) 8.8 9.7 2.2 8.9 8.9 Net Profit Margin (%) 7.6 7.4 5.8 6.7 6.7 ROAE (%) 16.9 14.8 9.1 8.8 8.9 ROA (%) 6.2 5.2 3.0 2.9 3.1 ROCE (%) 9.5 8.3 1.4 3.9 4.1 Div Payout Ratio (%) 37.0 35.7 35.8 34.0 32.0 Net Interest Cover (x) 9.4 21.0 1.0 11.1 11.2



Company Guide

Sembcorp Industries


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 2,664 2,338 2,388 2,399 2,419 Cost of Goods Sold (2,241) (2,050) (2,035) (2,110) (2,619) Gross Profit 424 289 353 290 (200) Other Oper. (Exp)/Inc (63.3) (74.9) (102) (104) (252) Operating Profit 360 214 251 186 (451) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 35.4 40.0 58.5 21.2 (114) Net Interest (Exp)/Inc (37.0) (25.5) (50.1) (57.0) (72.6) Exceptional Gain/(Loss) 0.0 0.0 54.5 0.0 371 Pre-tax Profit 359 228 314 150 (266) Tax (25.6) (40.5) (41.1) (10.9) 121 Minority Interest (92.1) (45.5) (49.6) (17.0) 207 Net Profit 241 142 224 122 60.8 Net profit bef Except. 241 142 169 122 (310) EBITDA 396 254 310 207 (565) Growth Revenue Gth (%) (13.2) (12.2) 2.1 0.5 0.8 EBITDA Gth (%) 22.7 (35.9) nm nm nm Opg Profit Gth (%) 21.2 (40.7) 17.6 (26.0) nm Net Profit Gth (Pre-ex) (%) 22.6 (41.0) 18.9 (27.7) (353.7) Margins Gross Margins (%) 15.9 12.3 14.8 12.1 (8.3) Opg Profit Margins (%) 13.5 9.1 10.5 7.8 (18.7) Net Profit Margins (%) 9.0 6.1 9.4 5.1 2.5

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015AF 2016F 2017F Net Fixed Assets 5,127 7,725 8,685 9,282 9,859 Invts in Associates & JVs 1,852 2,074 2,349 2,375 2,403 Other LT Assets 1,086 1,246 1,273 1,273 1,273 Cash & ST Invts 2,257 1,663 1,609 1,036 987 Inventory 2,241 3,205 4,233 4,127 4,238 Debtors 1,140 1,200 1,568 1,733 1,865 Other Current Assets 52.8 63.8 201 201 201 Total Assets 13,754 17,176 19,915 20,024 20,821 ST Debt 414 1,086 1,801 1,801 1,801 Creditor 2,692 2,745 3,388 3,076 3,310 Other Current Liab 1,796 1,526 758 691 723 LT Debt 1,485 3,649 5,032 5,032 5,032 Other LT Liabilities 837 938 894 894 894 Shareholder’s Equity 5,230 5,616 6,433 6,817 7,246 Minority Interests 1,300 1,616 1,610 1,713 1,816 Total Cap. & Liab. 13,754 17,176 19,915 20,024 20,821 Non-Cash Wkg. Capital (1,054) 198 1,856 2,295 2,272 Net Cash/(Debt) 358 (3,071) (5,223) (5,797) (5,846) Debtors Turn (avg days) 39.1 39.2 52.9 69.5 70.4 Creditors Turn (avg days) 109.5 108.3 132.8 163.9 150.3 Inventory Turn (avg days) 81.8 108.4 161.0 212.0 196.9 Asset Turnover (x) 0.8 0.7 0.5 0.4 0.5 Current Ratio (x) 1.2 1.1 1.3 1.3 1.3 Quick Ratio (x) 0.7 0.5 0.5 0.5 0.5 Net Debt/Equity (X) CASH 0.4 0.6 0.7 0.6 Net Debt/Equity ex MI (X) CASH 0.5 0.8 0.9 0.8 Capex to Debt (%) 61.3 27.4 20.2 14.6 14.6 Z-Score (X) 2.1 1.6 1.5 1.5 1.5



Company Guide

Sembcorp Industries


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,214 1,246 426 837 893 Dep. & Amort. 303 315 405 403 424 Tax Paid (125) (119) (150) (192) (154) Assoc. & JV Inc/(loss) (155) (158) (6.2) (95.7) (97.6) Chg in Wkg.Cap. 141 (1,414) (1,961) (401) 12.8 Other Operating CF 92.0 72.9 525 0.0 0.0 Net Operating CF 1,470 (57.4) (761) 552 1,079 Capital Exp.(net) (1,164) (1,298) (1,381) (1,000) (1,000) Other Invts.(net) 16.1 4.30 9.98 0.0 0.0 Invts in Assoc. & JV (284) (280) (427) 0.0 0.0 Div from Assoc & JV 94.7 122 129 70.0 70.0 Other Investing CF (21.0) 10.9 471 0.0 0.0 Net Investing CF (1,358) (1,441) (1,199) (930) (930) Div Paid (413) (539) (415) (196) (197) Chg in Gross Debt 393 393 (982) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 81.9 1,049 3,289 0.0 0.0 Net Financing CF 61.8 903 1,892 (196) (197) Currency Adjustments 22.1 1.78 14.7 0.0 0.0 Chg in Cash 196 (594) (53.0) (575) (48.6) Opg CFPS (S cts) 73.9 76.1 67.3 53.4 59.7 Free CFPS (S cts) 17.0 (76.0) (120) (25.1) 4.41



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 18 Feb 15 4.24 4.80 BUY

2: 08 May 15 4.37 4.30 HOLD

3: 10 Aug 15 3.72 4.10 BUY

4: 19 Aug 15 3.39 0.98 BUY

5: 31 Aug 15 3.42 4.00 BUY

6: 18 Sep 15 3.50 4.00 BUY

7: 23 Sep 15 3.53 4.00 BUY

8: 30 Oct 15 3.58 4.20 BUY

9: 09 Dec 15 3.04 3.80 BUY

10: 06 Jan 16 2.92 0.91 BUY

11: 22 Jan 16 2.34 3.80 BUY12: 27 Jan 16 2.23 3.50 BUY


1

2

34

5

6

7

8

9

10

1112

2.08

2.58

3.08

3.58

4.08

4.58

5.08


S$


Company Guide

Sembcorp Industries

















































Company Guide

Sembcorp Industries



Sembcorp Industries, Sembcorp Marine recommended in this report as of 31 Jan 2016

















Dubai



Company Guide

Sembcorp Industries



DBS Bank Ltd


Singapore 018982

Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: S$0.84 (STISTISTISTI : : : : 2,815.04) Price Target:Price Target:Price Target:Price Target: S$1.01 (21% upside)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Margin expansion, store growth

Where we differWhere we differWhere we differWhere we differ:::: Below, on more muted growth Analyst Alfie Yeo +65 6682 3717 [email protected] Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((S$S$S$S$mmmm) ) ) ) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Revenue 726 782 846 816 EBITDA 63.0 71.5 79.7 79.5 Pre-tax Profit 57.1 68.2 74.1 74.4 Net Profit 47.0 56.1 60.9 61.2 Net Pft (Pre Ex.) 47.0 56.1 60.9 61.2 EPS (S cts) 3.13 3.73 4.05 4.07 EPS Pre Ex. (S cts) 3.13 3.73 4.05 4.07 EPS Gth (%) 11 19 9 0 EPS Gth Pre Ex (%) 11 19 9 0 Diluted EPS (S cts) 3.13 3.73 4.05 4.07 Net DPS (S cts) 2.88 3.36 3.64 3.66 BV Per Share (S cts) 15.7 16.1 16.5 16.9 PE (X) 26.9 22.5 20.7 20.6 PE Pre Ex. (X) 26.9 22.5 20.7 20.6 P/Cash Flow (X) 17.6 17.0 15.8 17.2 EV/EBITDA (X) 18.0 15.9 14.2 14.1 Net Div Yield (%) 3.4 4.0 4.3 4.4 P/Book Value (X) 5.3 5.2 5.1 5.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.3 23.4 24.9 24.4 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): - - - Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S cts):::: 3.80 4.10 4.50



Still Going Strong

Maintain BUY; margins, store expansion, revenue and earningsMaintain BUY; margins, store expansion, revenue and earningsMaintain BUY; margins, store expansion, revenue and earningsMaintain BUY; margins, store expansion, revenue and earnings

growth remain on track. growth remain on track. growth remain on track. growth remain on track. We continue to like SSG as earnings

are firing on all cylinders. SSG is on track towards its 50-store

target, margin expansion trend is performing to our

expectations, and there is no let up in SSSG. The company is

one of the most well-run grocery retailers in ASEAN, leading

regional peers in profitability, cashflow generation and

working capital management. Dividend continues to be

attractive at 4.3% based on FY16F DPS of 3.6 Scts.

On track for store expansion, margins to improve going On track for store expansion, margins to improve going On track for store expansion, margins to improve going On track for store expansion, margins to improve going

forward, longerforward, longerforward, longerforward, longer----term drivers continue to develop. term drivers continue to develop. term drivers continue to develop. term drivers continue to develop. Sheng Siong

will have 39 stores by year-end, in line with our expectations

and eventual target of 50 stores. We see margins normalising

going into 4Q15 as 1) input prices for fresh food should ease

as logistical disruption and the haze clears up; and 2) pricing

should be less aggressive post SG50 and seventh month

promotions. Online initiative remains in the pilot phase. Online

sales for grocery retail remain in its infancy in Singapore and

we therefore believe Sheng Siong can afford to develop this

business over a longer time frame. Developments in China

continue to be on securing suitable sites in Kunming. As the

grocery retail scene in China is facing intensifying competition,

especially from online channels, we also believe time is on

Sheng Siong’s side to land the ideal location. Valuation:

Our target price for Sheng Siong is S$1.01 based on 25x FY16F

PE. Valuation is pegged to below +1SD of its historical mean

and below regional peers' average of 27x PE. Key Risks to Our View:

Store Store Store Store openings, price competition.openings, price competition.openings, price competition.openings, price competition. Revenue growth will be led

by new store openings, since SSSG is low at <0.5%. Excessive

discounts and promotions in the market by competitors will

ultimately result in lower margins. At A Glance Issued Capital (m shrs) 1,504 Mkt. Cap (S$m/US$m) 1,263 / 896 Major Shareholders SS Holdings (%) 29.9 Lim Family (%) 34.0 Hock Leng Lim (%) 11.3 Free Float (%) 36.2 3m Avg. Daily Val (US$m) 1.2 ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Services / Food & Drug Retailers


15 Dec 2015


Sheng Siong Group Edition 1 Version 2 | Bloomberg: SSG SP | Reuters: SHEN.SI Refer to important disclosures at the end of this report

82

102

122

142

162

182

202

222

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Nov-11 Nov-12 Nov-13 Nov-14 Nov-15

Relative IndexS$

Sheng Siong Group (LHS) Relative STI INDEX (RHS)


Page 79

Company Guide

Sheng Siong Group


Earnings Drivers:

Store expansion. Store expansion. Store expansion. Store expansion. Sheng Siong currently operates only 38 stores

(39 by year-end). Compared to the other local operators, it has

scope to expand its store network, particularly in areas such as

Bukit Batok, Serangoon, Hougang and Seng Kang where it has

a low presence. Management targets to ultimately operate 50

stores islandwide. In the past six years, store opening has

ranged from 0-8 stores annually, largely a function of the supply

of HDB shop space available for tender and Sheng Siong’s

ability to win the tenders. Sheng Siong mainly operates in HDB

estates.

Gross margin expansion tGross margin expansion tGross margin expansion tGross margin expansion through better sales mix. hrough better sales mix. hrough better sales mix. hrough better sales mix. The gross

margin for fresh products is estimated to be >30%, and close to

20% for non-fresh grocery items. Sheng Siong’s product mix

stands at approximately 40% fresh vs 60% non-fresh. We see

headroom for sales mix to improve to 50% as it skews its store

offering more towards fresh products.

Margin expansion through bulk purchasing at its Mandai Margin expansion through bulk purchasing at its Mandai Margin expansion through bulk purchasing at its Mandai Margin expansion through bulk purchasing at its Mandai

Distribution Centre. Distribution Centre. Distribution Centre. Distribution Centre. The Mandai Distribution Centre allows

Sheng Siong to perform direct sourcing and bulk handling. This

effectively drives down input costs, resulting in cost savings and

better margins. We estimate that the facility is currently running

at only 60% of capacity and expects it to achieve >80%

ultimately as it secures more suppliers and products to trade

through the distribution centre. Margins are expected to trend

up as utilisation increases towards optimal capacity.

Margin expansion through direct sourcing.Margin expansion through direct sourcing.Margin expansion through direct sourcing.Margin expansion through direct sourcing. Increasingly, Sheng

Siong is sourcing directly from source such as farms instead of

from middlemen. The company has the resources to place

orders in cheaper but large quantities, which is welcomed by

producers.

Generating more sameGenerating more sameGenerating more sameGenerating more same----storestorestorestore----sales growth to increase revenue. sales growth to increase revenue. sales growth to increase revenue. sales growth to increase revenue.

Sheng Siong has been able to maintain a positive SSSG since

4Q13 through longer operating hours and renovation of older

stores, offering the correct products and effective marketing.

Maintaining a positive SSSG will support earnings growth.

Future earnings drivers, Future earnings drivers, Future earnings drivers, Future earnings drivers, eeee----commerce and China JV (in commerce and China JV (in commerce and China JV (in commerce and China JV (in

Kunming).Kunming).Kunming).Kunming). Both developments are at their initial stages. The

market for e-commerce remains small and the business model

in Kunming is still under trial. This is even though Sheng Siong

already has 1) an up-and-running e-commerce operation which

services selected areas in Singapore; and 2) the JV in Kunming

has already secured the relevant licences to operate there. It

targets to open its first Kunming store in 2H15. Downside for

the JV is limited to US$6m paid-up capital which is sufficient to

open 2-3 new stores.

Rev per sqft

Operation Area (sqft)

Number of stores

Same store sales growth

Gross margin


1,7181,815

1,935 1,890 1,890

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2013A 2014A 2015F 2016F 2017F

400,000 404,000436,500

476,500 466,500

0

97,200

194,400

291,600

388,800

486,000

2013A 2014A 2015F 2016F 2017F

33 34

39

4447

0.0

9.6

19.2

28.8

38.4

47.9

2013A 2014A 2015F 2016F 2017F

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Affected by SG50 promotion and discounting

Uptick driven by seventh month festival,

18.718.718.718.7

20.520.520.520.5

21.821.821.821.8 22.122.122.122.1 22.122.122.122.123.023.023.023.0

24.224.224.224.2

15

16

17

18

19

20

21

22

23

24

25

08 09 10 11 12 13 14

GPM (%)GPM (%)GPM (%)GPM (%)

+5.5 ppt


Page 80

Company Guide

Sheng Siong Group

Balance Sheet:

Net cash of over S$1Net cash of over S$1Net cash of over S$1Net cash of over S$125252525m or m or m or m or 8888 Scts per share. Scts per share. Scts per share. Scts per share. The excess cash

allows for strategic store acquisitions if suitable real estate arises

for it to expand its store presence in the future. The business

generates positive working capital. Inventory is purchased on

credit, turned quickly and sold for cash. Over the past seven

years, the business has generated between S$20-75m of

operating cashflow each year. Dividend payout is attractive at

90%. We expect this to be maintained as long as there is no

significant requirement for cash funding.


Strong earnings growth performance. Strong earnings growth performance. Strong earnings growth performance. Strong earnings growth performance. Sheng Siong’s financial

performance has consistently met our expectations, delivering

earnings growth (CAGR of 20.4% since FY11) through a

combination of margin expansion, store growth and SSSG. It is

this consistency, together with strong dividend payout of 90%

and yield of 4%, that has led to the stock’s re-rating from 20x

to 22x FY15F PE currently. We believe continued delivery of

consistent performance and profit growth will support a strong

share price.

China China China China totototo be a wildcard. be a wildcard. be a wildcard. be a wildcard. We believe Sheng Siong’s JV in China is

a wildcard. If operations prove to be successful in time to come,

China will provide an alternate source of growth in the future.

There is scope for the number of stores to increase should

Sheng Siong’s business model work. Downside remains limited

to US$6m for now should the JV fail.

Key Risks:

Revenue growth limited by store openings. Revenue growth limited by store openings. Revenue growth limited by store openings. Revenue growth limited by store openings. Store expansion in

Singapore is largely dependent on the supply of new

supermarket retail space released by HDB and its ability to

secure the tenders.

Excessive discounts and promotions may erode margins. Excessive discounts and promotions may erode margins. Excessive discounts and promotions may erode margins. Excessive discounts and promotions may erode margins.

Heavier discounts and promotions vis-a-vis competitors would

drive sales revenue, but this could be gained at the expense of

margins.

Company Background

Sheng Siong is the third largest supermarket operator in

Singapore, behind NTUC Fairprice and Dairy Farm

International.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2013A 2014A 2015F 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015F 2016F 2017F

Avg: 19.9x

+1sd: 21.8x

+2sd: 23.7x

-1sd: 18.1x

-2sd: 16.2x

13.5

15.5

17.5

19.5

21.5

23.5

25.5


(x)

Avg: 5.03x

+1sd: 5.71x

+2sd: 6.39x

-1sd: 4.35x

-2sd: 3.67x

3.1

3.6

4.1

4.6

5.1

5.6

6.1

6.6

7.1


(x)


Page 81

Company Guide

Sheng Siong Group

Key Assumptions

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Rev per sqft 1,718 1,815 1,935 1,890 1,890

Operation Area (sqft) 400,000 404,000 436,500 476,500 466,500

Number of stores 33.0 34.0 39.0 44.0 47.0

Segmental Breakdown

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenues (S$m)

Singapore 687 726 782 846 816


Operating profit (S$m) Singapore 41.6 52.2 58.3 65.4 65.7

TotalTotalTotalTotal 41.641.641.641.6 52.252.252.252.2 58.358.358.358.3 65.465.465.465.4 65.765.765.765.7

Operating profit Margins (%)

Singapore 6.1 7.2 7.5 7.7 8.1



FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenue 687 726 782 846 816


Gross ProfitGross ProfitGross ProfitGross Profit 158158158158 176176176176 192192192192 209209209209 204204204204

Other Opng (Exp)/Inc (117) (124) (134) (143) (138)




Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0




Net ProfitNet ProfitNet ProfitNet Profit 38.938.938.938.9 47.047.047.047.0 56.156.156.156.1 60.960.960.960.9 61.261.261.261.2 Net Profit before Except. 38.9 47.0 56.1 60.9 61.2

EBITDA 51.7 63.0 71.5 79.7 79.5

Growth

Revenue Gth (%) 7.9 5.6 7.7 8.2 (3.5)

EBITDA Gth (%) 19.8 21.9 13.4 11.5 (0.2)

Opg Profit Gth (%) 19.8 25.3 11.7 12.3 0.5

Net Profit Gth (Pre-ex) (%) 24.7 20.8 19.3 8.6 0.5

Margins & Ratio

Gross Margins (%) 23.0 24.2 24.6 24.7 25.0



ROAE (%) 25.8 24.3 23.4 24.9 24.4

ROA (%) 15.9 15.8 15.9 16.6 16.3

ROCE (%) 22.3 22.0 19.8 21.8 21.3

Div Payout Ratio (%) 92.5 92.1 90.0 90.0 90.0

Net Interest Cover (x) NM NM NM NM NM


Lease of 40,000 sqft Woodlands store to expire


Page 82

Company Guide

Sheng Siong Group


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2014201420142014 4Q4Q4Q4Q2014201420142014 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 Revenue 186 178 198 179 200


Gross ProfitGross ProfitGross ProfitGross Profit 45.145.145.145.1 43.343.343.343.3 48.548.548.548.5 45.145.145.145.1 48.848.848.848.8 Other Oper. (Exp)/Inc (31.7) (29.6) (33.9) (31.5) (33.8)







Net ProfitNet ProfitNet ProfitNet Profit 12.512.512.512.5 11.811.811.811.8 14.114.114.114.1 12.612.612.612.6 12.712.712.712.7 Net profit bef Except. 12.5 11.8 14.1 12.6 12.7

EBITDA 17.4 16.5 20.0 19.2 21.2

Growth

Revenue Gth (%) 8.6 (4.3) 11.2 (9.8) 11.7

EBITDA Gth (%) 8.5 (5.4) 21.5 (4.2) 10.4

Opg Profit Gth (%) 7.8 2.0 6.6 (6.6) 10.5

Net Profit Gth (Pre-ex) (%) 12.6 (5.5) 19.2 (10.1) 0.2



Net Profit Margins (%) 6.7 6.6 7.1 7.1 6.3 Balance Sheet (S$m)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Net Fixed Assets 90.8 161 178 181 178

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0

Other LT Assets 0.0 0.0 0.0 0.0 0.0

Cash & ST Invts 99.7 130 124 132 140

Inventory 45.6 43.1 46.1 49.8 47.8

Debtors 12.3 10.8 11.5 12.4 11.9

Other Current Assets 0.0 0.0 0.0 0.0 0.0

Total AssetsTotal AssetsTotal AssetsTotal Assets 248248248248 345345345345 359359359359 375375375375 377377377377

ST Debt

0.0 0.0 0.0 0.0 0.0

Creditor 88.2 95.9 103 112 108

Other Current Liab 7.94 10.7 12.2 13.2 13.3

LT Debt 0.0 0.0 0.0 0.0 0.0

Other LT Liabilities 2.29 2.20 2.20 2.20 2.20

Shareholder’s Equity 150 236 242 248 254

Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 248248248248 345345345345 359359359359 375375375375 377377377377

Non-Cash Wkg. Capital (38.4) (52.7) (57.8) (62.7) (61.2)

Net Cash/(Debt) 99.7 130 124 132 140




Asset Turnover (x) 2.8 2.4 2.2 2.3 2.2

Current Ratio (x) 1.6 1.7 1.6 1.6 1.6

Quick Ratio (x) 1.2 1.3 1.2 1.2 1.3



Capex to Debt (%) N/A N/A N/A N/A N/A

Z-Score (X) 10.7 9.9 9.5 9.1 9.3



Page 83

Company Guide

Sheng Siong Group


FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Pre-Tax Profit 47.6 57.1 68.2 74.1 74.4

Dep. & Amort. 10.1 10.9 13.2 14.3 13.8

Tax Paid (8.7) (7.5) (10.7) (12.2) (13.2)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (2.6) 11.5 3.70 3.81 (1.5)

Other Operating CF (1.2) (0.3) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 45.145.145.145.1 71.771.771.771.7 74.474.474.474.4 80.080.080.080.0 73.573.573.573.5 Capital Exp.(net) (26.1) (80.8) (30.5) (17.5) (10.5)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 1.05 0.92 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (25.0)(25.0)(25.0)(25.0) (79.9)(79.9)(79.9)(79.9) (30.5)(30.5)(30.5)(30.5) (17.5)(17.5)(17.5)(17.5) (10.5)(10.5)(10.5)(10.5) Div Paid (40.8) (40.1) (50.5) (54.8) (55.1)

Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0

Capital Issues 0.0 79.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (40.8)(40.8)(40.8)(40.8) 38.938.938.938.9 (50.5)(50.5)(50.5)(50.5) (54.8)(54.8)(54.8)(54.8) (55.1)(55.1)(55.1)(55.1)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (20.7) 30.8 (6.5) 7.71 7.95

Opg CFPS (S cts) 3.45 4.00 4.70 5.07 4.99

Free CFPS (S cts) 1.38 (0.6) 2.92 4.16 4.19



Source: DBS Bank





1: 18 Dec 14 0.67 0.78 BUY

2: 13 Jan 15 0.71 0.82 BUY

3: 26 Feb 15 0.74 0.83 BUY

4: 24 Apr 15 0.83 0.90 BUY

5: 22 Jul 15 0.88 0.98 BUY

6: 24 Jul 15 0.89 1.00 BUY

7: 23 Oct 15 0.88 1.01 BUY


1

2

3

4 5

6

7

0.61

0.66

0.71

0.76

0.81

0.86

0.91

0.96

Nov-14 Mar-15 Jul-15 Nov-15

S$S$S$S$


Page 84

Company Guide

Sheng Siong Group









This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd,


































The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies

and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 15 Dec 2015,




1.1.1.1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 30 Nov 2015


3.3.3.3.

Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services: Compensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of

securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons

wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any

security discussed in this document should contact DBSVUSA exclusively.


Page 85

Company Guide

Sheng Siong Group










United United United United KingdomKingdomKingdomKingdom




United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other Other Other Other jurisdictionsjurisdictionsjurisdictionsjurisdictions


DBS Bank Ltd. DBS Bank Ltd. DBS Bank Ltd. DBS Bank Ltd.


Singapore 018982

Tel. 65-6878 8888



BUY Upgrade from HOLD

Last Traded Price: S$3.41 (STI : 2,602.41) Price Target : S$3.84 (13% upside)

Potential Catalyst: Special dividends, M&A acitivity Where we differ: More optimistic call than consensus based on balance sheet strength, dividend promise and M&A potential Analyst Suvro SARKAR +65 6682 3720 [email protected]

What’s New 3Q-FY16 results inspire some confidence

Worst could be over for earnings

Possibility of special dividends exists

Upgrade to BUY, TP S$3.84

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2014A 2015A 2016F 2017F Revenue 1,178 1,121 1,106 1,106 EBITDA 315 233 234 239 Pre-tax Profit 294 205 388 201 Net Profit 266 183 367 181 Net Pft (Pre Ex.) 265 177 181 181 Net Pft Gth (Pre-ex) (%) (1.7) (33.1) 1.8 0.2 EPS (S cts) 23.8 16.3 32.5 15.9 EPS Pre Ex. (S cts) 23.8 15.8 16.0 15.9 EPS Gth Pre Ex (%) (3) (33) 1 0 Diluted EPS (S cts) 23.3 16.1 32.3 15.8 Net DPS (S cts) 25.0 14.5 17.5 17.5 BV Per Share (S cts) 122 118 137 137 PE (X) 14.3 20.9 10.5 21.4 PE Pre Ex. (X) 14.4 21.6 21.3 21.4 P/Cash Flow (X) 33.7 39.8 11.7 28.4 EV/EBITDA (X) 10.5 14.7 13.8 13.8 Net Div Yield (%) 7.3 4.3 5.1 5.1 P/Book Value (X) 2.8 2.9 2.5 2.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.0 13.6 25.6 11.7 Earnings Rev (%): - - Consensus EPS (S cts): 15.5 16.3 Other Broker Recs: B: 1 S: 1 H: 5


Time for a re-look

3QFY16 results provide some relief. Headline net profit came in slightly above our expectations at S$49.4m (+ 7% y-o-y; +11% q-o-q). Two things stood out – core operating margins continued on a recovery trend to 10.5% and engine MRO centres registered sizeable rebound in profitability after some relatively weak quarters.

Outlook not the best but worst could be over. SIE’s heavy maintenance segment has been grappling with longer intervals between maintenance cycles of new planes, and engine shops’ performance has also been soft as some older engine models are phased out. However, new capabilities have been built and maintenance requirements will eventually catch up over a 2-3 year timeframe. Given that we are already about 7 quarters into a downcycle, a recovery can’t be that far off.

Limited growth in FY16/17, but there is potential for special dividends. We are not expecting strong earnings growth in FY15-17 but the fleet management JV with Boeing is up and running and will drive growth in the longer term. SIAEC has also recently restructured its shareholdings in engine MRO JVs with Rolls Royce, which will result in one-off disposal gain of S$186.8m (reflected in our FY16 forecast) once completed. This could result in special dividends either in FY16 or FY17.

Valuation:

Given the possibility of sequential earnings recovery, special dividends, and potential M&A activity, we upgrade our call to BUY. The stock is down around 15% since its recent peak last November and provides a better entry point. Our TP of S$3.84 is based on a blended valuation framework (PE, dividend yield and DCF), and includes a 10% M&A candidate premium.


Further earnings downside. While we reckon the worst could be over on the earnings front, we cannot rule out a lengthy period of slow MRO demand amid structural changes in the industry. Increasing competition in the region could also lead to renewed stress on the margins front.

At A Glance

Issued Capital (m shrs) 1,122 Mkt. Cap (S$m/US$m) 3,825 / 2,686 Major Shareholders (%) Singapore Airlines Ltd 77.6

Free Float (%) 22.4 3m Avg. Daily Val (US$m) 0.74 ICB Industry : Industrials / Industrial Transportation



SIA Engineering Version 3 | Bloomberg: SIE SP | Reuters: SIAE.SI Refer to important disclosures at the end of this report

83

103

123

143

163

183

203

2.9

3.4

3.9

4.4

4.9

5.4


Relative IndexS$

SIA Engineering (LHS) Relative STI INDEX (RHS)


Company Guide

SIA Engineering

WHAT’S NEW

Best headline numbers in six quarters

3Q-FY16 net profit for SIA Engineering came in slightly above estimates at S$49.4m (up 7% y-o-y and 11% q-o-q), boosted by one-off gains from JV/associates and decent operating margins. Revenue was up 4% y-o-y in 3Q-FY16 to S$275m on the back of higher fleet management and line maintenance volumes. Core operating margin was relatively healthy at 10.5% in 3Q-FY16, a tad higher than 2Q-FY16 levels and significantly better than FY15 operating margin of 7.5%. The y-o-y improvement was due to better control of material costs and subcontracting costs.

Some encouragement from engine centres. Share of profits from JV/ associates were up 31% y-o-y and 77% q-o-q to S$33.2m, mainly driven by one-time restructuring gains, including profit from the sale of facilities. But what was encouraging was that profit from engine MRO centres was up by S$4m y-o-y and about S$8m q-o-q to S$19.6m. Whether this improvement is one-off or can be sustained is the question of course, as management indicated that performance of the engine shops will continue to be impacted by reduced shop visits and lower work content for newer engine types.

Balance sheet further strengthened by HAESL transaction. Net book value increased by 11.2% or S$148.6m from a fair

value adjustment for the group’s interest in HAESL, in line with the earlier announcement regarding SIE’s divestment of its 10% stake in HAESL. Carrying value of the investment in HAESL increased to S$164m from S$14.6m earlier, based on the proposed sale price. To recap, SIE will be booking close to S$186.8m of gains from the restructuring of its shareholdings in Rolls Royce engine centres HAESL and SAESL (including dividends from HAESL) once the transactions are completed, likely in 4Q-FY16, pending the receipt of necessary approvals.

Focus on rationalisation. Management indicated that the operating conditions for the MRO industry remain challenging and SIE will continue its efforts to control costs and strengthen efficiencies. The group will also be looking to pursue ongoing initiatives to streamline and rationalise its core businesses. Restructuring of its shareholdings in various JV/ associates are part of this process.

Special dividends in the offing? Factoring in the cash received from the HAESL transactions, once completed, we estimate SIE’s cash reserves could swell beyond S$600m. Thus, we believe the Board could look at the possibility of special dividends in FY16 or FY17. We are currently expecting higher dividend of 17.5Scts in FY16/17 compared to 14.5Scts paid out in FY15, but we cannot rule out further dividend upside if the Board decides to pay out more of the disposal gains.


FY Mar 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 265 266 275 3.7 3.5

Cost of Goods Sold (241) (239) (246) 2.2 3.0

Gross Profit 24.3 27.0 29.0 19.3 7.4

Other Oper. (Exp)/Inc 0.0 0.0 0.0 nm nm

Operating Profit 24.3 27.0 29.0 19.3 7.4

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm


Net Interest (Exp)/Inc 2.40 1.90 1.80 (25.0) (5.3)

Exceptional Gain/(Loss) 0.10 2.80 (7.1) nm (353.6)

Pre-tax Profit 52.1 50.4 56.9 9.2 12.9

Tax (5.3) (4.9) (5.9) 11.3 (20.4)

Minority Interest (0.5) (1.0) (1.6) 220.0 60.0

Net Profit 46.3 44.5 49.4 6.7 11.0

Net profit bef Except. 46.2 41.7 56.5 22.3 35.5

EBITDA 60.6 56.5 73.2 20.8 29.6

Margins (%)

Gross Margins 9.2 10.2 10.5

Opg Profit Margins 9.2 10.2 10.5

Net Profit Margins 17.5 16.7 18.0



Company Guide

SIA Engineering


Earnings Drivers:

Close to 60% of top line is driven by parent SIA. This is mainly due to legacy reasons, as SIE was born as the in-house MRO operations centre of SIA before it was independently listed in 2000. The growth and maintenance cycle of SIA's fleet therefore strongly impact SIE’s core businesses of line maintenance, heavy maintenance and fleet management. Line maintenance division largely driven by Changi Airport traffic. SIE already captures around 90% of the line maintenance market at Changi Airport, thus market share gains are unlikely. We estimate flights handled by SIE to grow by 2% annually in FY16 and FY17. In the longer term, continued growth of Singapore as a tourism hub to the region and the addition of capacity via the upcoming Terminals 4 and 5 should help drive line maintenance revenues and earnings. Heavy maintenance headwinds prevail in near term. The heavy maintenance segment saw revenues decline sharply by 15% in FY15, which was largely attributed to the phasing in of newer aircrafts with longer maintenance cycles and less need for maintenance by virtue of just being new. This trend would weigh on SIE’s heavy maintenance business. SIE will need to adapt to an OEM-centric environment. How SIE responds to the trend of OEMs entering the aftermarket services space is important. In 2015, SIE incorporated a fleet management JV with Boeing – its first with an airframe OEM. The deal allows SIE to penetrate new markets in Asia and will be the key growth driver in the medium to long term. Entrance into similar partnerships in the future could thus boost earnings. JVs/associates contribute roughly 50-60% to the bottomline. SIE has 26 associates and JVs in nine countries, with engine overhaul centres comprising the bulk of JV/associate revenues. However, the phasing out of older generation engine models and extended maintenance cycles for their successors continue to dampen contributions from the company’s key engine MRO centres Eagle Services Asia and SAESL. The recent sale of SIE’s 10% shareholding in HK-based engine centre HAESL will result in one-time disposal gain of close to S$186.8m but loss of recurring dividends of about S$8-10m annually. Slump in oil price is a positive. The slump in fuel prices since September 2014 means airlines across the world are benefitting in terms of their bottom lines, and this should encourage more MRO spending in the medium term if oil prices stay benign. Management had indicated earlier that the aircraft MRO cycle should start to turn again over the next 2-3 years, as maintenance cycles cannot be deferred forever, even for new aircraft types.

Base maintenance revenue

Line maintenance revenue

Fleet management revenue

Profit from associates & JVs


552579

490461 452

0

73

146

219

292

366

439

512

585

2013A 2014A 2015A 2016F 2017F

421 435 442 447 447

0

91

182

274

365

456

2013A 2014A 2015A 2016F 2017F

174165

188198

207

0

42

85

127

169

212

2013A 2014A 2015A 2016F 2017F

150163

106

85 89

0

21

41

62

82

103

123

144

164

2013A 2014A 2015A 2016F 2017F


Company Guide

SIA Engineering

Balance Sheet:

Strong balance sheet provides headroom for expansion. SIE has very low leverage at only a 0.02x gross debt-to-equity ratio, and is in a net cash position with close to S$350m of cash reserves on its balance sheet. SIE therefore has ample room to take on additional debt to fund attractive projects, should they arise. Dividend boost likely. SIE had to cut dividends in FY15 owing to poorer operating and financial performance, and the outlook for FY16/17 dividends was not great either.(contradicts point on page2) But the recent sale of its 10% shareholding in HK-based engine MRO HAESL and restructuring of Singapore-based engine MRO JV SAESL have resulted in cash proceeds of around S$200m (including dividends). Net gain on sale will be around S$186.8m. This will boost SIE’s cash reserves to around S$600m in our opinion, which creates the possibility of special dividends in the near future, given no other use for the cash. Share Price Drivers:

M&A and other corporate activity is a catalyst. In order to tackle some of the structural issues, SIE may consider merging with or partnering third-party MROs with complementary business models. We continue to believe in the merits of a combination of SIA Engineering and ST Aerospace to better consolidate Singapore’s credentials as an aviation hub, as synergies are realised in the form of bigger scale, cost efficiencies and breadth of offerings. Under such a scenario, the target company – in this case, SIA Engineering – usually sees a positive reaction in share price, as other parties may need to pay a premium over market prices. Special dividends. We are currently expecting dividends of 17.5Scts each in FY16/17 (higher than 14.5Scts in FY15), but SIE could choose to be more generous with special dividends at one go. This will provide an upside catalyst. Key Risks:

Slow growth at certain associates and joint ventures (JVs). Some of the engine MRO JVs cater to older widebody models, which are being phased out. Demand may be negatively affected as a result. Risk of cannibalisation by OEM partnerships remains salient. New JVs and associates, such as the Boeing fleet management JV, carry the risk of cannibalising some of the group's existing revenue lines, which could slow growth. Company background

Leading regional aircraft maintenance, repair and overhaul (MRO) company with bases in Singapore and Philippines. A comprehensive cluster of JVs with renowned OEMs allows it to provide a full suite of MRO services.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015A 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 23.5x

+1sd: 28.2x

+2sd: 32.9x

‐1sd: 18.8x

‐2sd: 14.1x12.6

17.6

22.6

27.6

32.6


(x)

Avg: 3.66x

+1sd: 4.11x

+2sd: 4.55x

‐1sd: 3.21x

‐2sd: 2.77x

2.2

2.7

3.2

3.7

4.2

4.7


(x)


Company Guide

SIA Engineering

Segmental Breakdown

FY Mar 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Base maintenance 552 579 490 461 452 Line maintenance 421 435 442 447 447 Fleet management 174 165 188 198 207 Total 1,147 1,178 1,121 1,106 1,106


FY Mar 2013A 2014A 2015A 2016F 2017F Revenue 1,147 1,178 1,121 1,106 1,106 Cost of Goods Sold (1,019) (1,063) (1,037) (999) (1,000) Gross Profit 128 116 84.0 106 107 Other Opng (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 128 116 84.0 106 107 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 150 163 106 85.0 89.3 Net Interest (Exp)/Inc 18.3 15.1 9.20 9.20 5.29 Exceptional Gain/(Loss) 0.50 0.70 5.90 187 0.0 Pre-tax Profit 297 294 205 388 201 Tax (22.8) (23.0) (20.0) (18.1) (18.1) Minority Interest (4.1) (5.3) (2.1) (2.1) (2.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 270 266 183 367 181 Net Profit before Except. 270 265 177 181 181 EBITDA 313 315 233 234 239 Growth Revenue Gth (%) (2.0) 2.7 (4.9) (1.3) 0.1 EBITDA Gth (%) (4.0) 0.7 (26.0) 0.5 1.9 Opg Profit Gth (%) (1.2) (9.8) (27.3) 26.8 0.1 Net Profit Gth (Pre-ex) (%) 0.7 (1.7) (33.1) 1.8 0.2 Margins & Ratio Gross Margins (%) 11.2 9.8 7.5 9.6 9.6 Opg Profit Margin (%) 11.2 9.8 7.5 9.6 9.6 Net Profit Margin (%) 23.6 22.6 16.4 33.2 16.4 ROAE (%) 21.1 20.0 13.6 25.6 11.7 ROA (%) 16.7 15.9 10.9 20.8 9.6 ROCE (%) 8.9 7.6 5.3 6.7 5.9 Div Payout Ratio (%) 90.1 105.0 88.7 53.8 110.0 Net Interest Cover (x) NM NM NM NM NM


Heavy maintenance will likely be the key drag on revenues

Loss of dividend income from HAESL


Company Guide

SIA Engineering


FY Mar 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 265 276 277 266 275 Cost of Goods Sold (241) (253) (256) (239) (246) Gross Profit 24.3 23.1 20.9 27.0 29.0 Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 24.3 23.1 20.9 27.0 29.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 25.3 21.3 24.0 18.7 33.2 Net Interest (Exp)/Inc 2.40 1.90 2.00 1.90 1.80 Exceptional Gain/(Loss) 0.10 0.30 0.0 2.80 (7.1) Pre-tax Profit 52.1 46.6 46.9 50.4 56.9 Tax (5.3) (5.5) (5.2) (4.9) (5.9) Minority Interest (0.5) 0.30 (0.4) (1.0) (1.6) Net Profit 46.3 41.4 41.3 44.5 49.4 Net profit bef Except. 46.2 41.1 41.3 41.7 56.5 EBITDA 60.6 55.1 55.6 56.5 73.2 Growth Revenue Gth (%) (7.0) 4.0 0.5 (4.1) 3.5 EBITDA Gth (%) 9.4 (9.1) 0.9 1.6 29.6 Opg Profit Gth (%) 52.8 (4.9) (9.5) 29.2 7.4 Net Profit Gth (Pre-ex) (%) 9.2 (11.0) 0.5 1.0 35.5 Margins Gross Margins (%) 9.2 8.4 7.5 10.2 10.5 Opg Profit Margins (%) 9.2 8.4 7.5 10.2 10.5 Net Profit Margins (%) 17.5 15.0 14.9 16.7 18.0

Balance Sheet (S$m)

FY Mar 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 306 337 344 351 359 Invts in Associates & JVs 427 436 464 479 494 Other LT Assets 63.6 68.9 76.1 76.1 76.1 Cash & ST Invts 523 536 464 669 652 Inventory 108 107 125 123 123 Debtors 86.8 117 95.5 94.2 94.3 Other Current Assets 119 106 88.7 88.7 88.7 Total Assets 1,633 1,707 1,657 1,881 1,887 ST Debt 5.70 8.20 9.30 9.30 9.30 Creditor 246 242 227 224 225 Other Current Liab 26.2 26.0 19.8 20.5 20.5 LT Debt 0.0 13.6 23.9 23.9 23.9 Other LT Liabilities 25.3 26.8 26.6 26.6 26.6 Shareholder’s Equity 1,302 1,361 1,325 1,550 1,553 Minority Interests 27.3 29.6 24.7 26.8 28.8 Total Cap. & Liab. 1,633 1,707 1,657 1,881 1,887 Non-Cash Wkg. Capital 41.2 61.4 61.6 61.0 61.0 Net Cash/(Debt) 517 514 431 636 619 Debtors Turn (avg days) 31.0 31.5 34.5 31.3 31.1 Creditors Turn (avg days) 94.7 86.9 86.2 86.2 85.6 Inventory Turn (avg days) 41.8 38.2 42.5 47.2 46.9 Asset Turnover (x) 0.7 0.7 0.7 0.6 0.6 Current Ratio (x) 3.0 3.1 3.0 3.8 3.8 Quick Ratio (x) 2.2 2.4 2.2 3.0 2.9 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 798.2 338.5 161.1 150.6 150.6 Z-Score (X) 10.6 10.3 10.3 10.3 10.4


Assoc/ JV income better q-o-q but includes some one-off items

Loss on closure of an associated company plus provision for impairment for another associated company

Net cash position provides safety in uncertain times

Core operating margin improvement is encouraging


Company Guide

SIA Engineering


FY Mar 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 297 294 205 388 201 Dep. & Amort. 34.9 37.0 42.8 42.8 42.8 Tax Paid (26.7) (23.6) (23.3) (17.4) (18.1) Assoc. & JV Inc/(loss) (150) (163) (106) (85.0) (89.3) Chg in Wkg.Cap. (4.0) (20.6) (5.1) (0.1) 0.0 Other Operating CF (17.5) (11.2) (17.4) 0.0 0.0 Net Operating CF 134 113 96.1 328 137 Capital Exp.(net) (45.5) (73.8) (53.5) (50.0) (50.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 1.80 0.0 (20.0) (20.0) Div from Assoc & JV 138 157 112 89.8 94.3 Other Investing CF 18.5 16.1 18.9 0.0 0.0 Net Investing CF 111 101 77.7 19.8 24.3 Div Paid (242) (245) (269) (163) (198) Chg in Gross Debt 3.20 16.1 8.80 0.0 0.0 Capital Issues 22.6 30.3 17.2 20.0 20.0 Other Financing CF (2.4) (3.1) (7.9) 0.0 0.0 Net Financing CF (219) (202) (251) (143) (178) Currency Adjustments (0.1) 0.0 5.10 0.0 0.0 Chg in Cash 25.0 12.8 (72.0) 205 (16.7) Opg CFPS (S cts) 12.4 12.0 9.02 29.0 12.0 Free CFPS (S cts) 7.96 3.51 3.80 24.6 7.61



Source: DBS Bank

S.No. DateClosing

PriceT arget Price

Rat ing

1: 14 May 15 4.02 3.70 FULLY VALUED

2: 10 Aug 15 3.47 3.70 HOLD

3: 31 Aug 15 3.50 3.52 HOLD

4: 03 Nov 15 3.98 3.84 HOLD


1

2

3

4

3.09

3.29

3.49

3.69

3.89

4.09

4.29

4.49

Jan-15 May-15 Sep-15

S$

Share buybacks expected to continue


Company Guide

SIA Engineering









This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte




































compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 2 Feb 2016, the

analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended

in this report (“interest” includes direct or indirect ownership of securities).


Company Guide

SIA Engineering


1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in SIA

Engineering recommended in this report as of 31 Dec 2015

















Dubai



Company Guide

SIA Engineering

United States This report was prepared by DBS Bank Ltd.. DBSVUSA did not participate in its preparation. The research analyst(s) named on

this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.


DBS Bank Ltd.


Singapore 018982

Tel. 65-6878 8888



BUYBUYBUYBUY

Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: S$2.92 (STISTISTISTI : : : : 2,815.04) Price Target :Price Target :Price Target :Price Target : S$3.60 (23% upside)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Better earnings execution, strong order wins, M&A

Where we differWhere we differWhere we differWhere we differ:::: More conservative on FY16/17 earnings Analyst Suvro SARKAR +65 6682 3720 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((S$S$S$S$mmmm) ) ) ) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Revenue 6,539 6,345 6,194 6,155 EBITDA 835 852 861 883 Pre-tax Profit 651 660 666 686 Net Profit 532 531 536 545 Net Pft (Pre Ex.) 532 531 536 545 EPS (S cts) 17.1 17.0 17.2 17.5 EPS Pre Ex. (S cts) 17.1 17.0 17.2 17.5 EPS Gth Pre Ex (%) (9) 0 1 2 Diluted EPS (S cts) 17.1 17.0 17.2 17.5 Net DPS (S cts) 15.0 15.0 15.0 15.0 BV Per Share (S cts) 68.4 70.4 72.6 75.1 PE (X) 17.1 17.1 17.0 16.7 PE Pre Ex. (X) 17.1 17.1 17.0 16.7 P/Cash Flow (X) 14.6 13.3 13.1 13.0 EV/EBITDA (X) 10.4 10.2 10.0 9.7 Net Div Yield (%) 5.1 5.1 5.1 5.1 P/Book Value (X) 4.3 4.1 4.0 3.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.0 24.6 24.0 23.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): - - - Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S cts):::: 16.8 17.5 18.6



Invest for the long term The Electronics divThe Electronics divThe Electronics divThe Electronics division is positioned to capitalisision is positioned to capitalisision is positioned to capitalisision is positioned to capitalise on the Smart e on the Smart e on the Smart e on the Smart

Nation revolution in SingaporeNation revolution in SingaporeNation revolution in SingaporeNation revolution in Singapore, with projects worth more than

S$1bn in the near future, according to our estimates. The

division has a long track record in providing both hardware

and system integration solutions as part of its Smart City

capability build up, which breeds optimism. Additionally,

recent focus on space-related technology and robotics hold

promise as longer-term growth drivers for the company.

Targeted investmentsTargeted investmentsTargeted investmentsTargeted investments in Aerospacein Aerospacein Aerospacein Aerospace provide potenprovide potenprovide potenprovide potential upside in tial upside in tial upside in tial upside in

the the the the mediummediummediummedium----term. term. term. term. The aerospace business’s investments into

cabin interiors, VIP completions and configurations business in

the US, as well as new partnerships with OEMs across the

value chain, create new avenues for growth amidst a broadly

stable industry environment.

Orderbook Orderbook Orderbook Orderbook remains healthy.remains healthy.remains healthy.remains healthy. The group’s orderbook of

S$12.2bn remains relatively stable and covers almost two years

of revenue, securing decent visibility going forward, despite a

slowdown in Marine and Land division orders YTD in 2015. We

believe the strength in the Electronics division will support STE

over the next two years and allow the company to report

steady earnings and dividends in the near term. Valuation:

We maintain our BUY call with TP of S$3.60, based on a

blended valuation framework (blend of price-earnings,

dividend yield and discounted cash flows) to factor both

earnings growth and cash-generative nature of the business. Key Risks to Our View.:

The structural changes facing the aircraft MRO industry could

hit harder than expected, as newer airframe and engines

reduce maintenance spend and lengthen the cycle for checks

and OEMs take a larger share of the aftermarket services. Also,

continued lack of action on the M&A front could lead to

inefficient use of balance sheet and lower ROEs in the future. At A Glance Issued Capital (m shrs) 3,103 Mkt. Cap (S$m/US$m) 9,062 / 6,432 Major Shareholders Temasek Holdings Pte Ltd (%) 51.4 Aberdeen Asset Management (%) 6.9 Capital Group (%) 5.0 Free Float (%) 36.7 3m Avg. Daily Val (US$m) 7.1 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Aerospace & Defense


15 Dec 2015


ST Engineering Edition 1 Version 1 | Bloomberg: STE SP | Reuters: STEG.SI Refer to important disclosures at the end of this report

ed: TH / sa: YM

88

108

128

148

168

188

208

2.2

2.7

3.2

3.7

4.2

4.7


Relative IndexS$

ST Engineering (LHS) Relative STI INDEX (RHS)


Page 85

Company Guide

ST Engineering


Earnings Drivers:

Conglomerate with diverse interests in defense and commercial Conglomerate with diverse interests in defense and commercial Conglomerate with diverse interests in defense and commercial Conglomerate with diverse interests in defense and commercial

spheres.spheres.spheres.spheres. STE started out life as a defense contractor but has

leveraged its technical knowhow over the years to penetrate the

commercial market. It boasts multinational operations with a

global presence in 23 countries and 41 cities, and hires more

than 22,000 employees. The group has reduced its reliance on

the defense sector over time from 57% of revenues in 2002 to

the current 37%, with another 33% from government agencies

and the balance from commercial businesses.

STSTSTSTE'sE'sE'sE's four key business divisions bring diversification benefits. four key business divisions bring diversification benefits. four key business divisions bring diversification benefits. four key business divisions bring diversification benefits. Its

Aerospace, Electronics, Land Systems and Marine businesses

contributed 32%, 24%, 21% and 21% respectively to FY14

revenues, allowing the company to avoid reliance on any

particular sector. This has engendered relatively stable revenues

and earnings, weathering even crisis periods.

Acquisitions have been a key driver, accounting for around Acquisitions have been a key driver, accounting for around Acquisitions have been a key driver, accounting for around Acquisitions have been a key driver, accounting for around

40% of revenue growth over the last decade.40% of revenue growth over the last decade.40% of revenue growth over the last decade.40% of revenue growth over the last decade. However, the

dampening effect of a weakening US$ and addition of lower-

margin businesses meant earnings growth has not kept up with

top-line growth. Utilisation of its strong balance sheet and

steady cash-flows to undertake acquisitions of high ROE assets

could boost future earnings.

Healthy order book drives visibility. Healthy order book drives visibility. Healthy order book drives visibility. Healthy order book drives visibility. As of 3Q15, the order book

stood at S$12.2bn, down slightly from a high of S$13.2bn in

FY13 but nonetheless giving visibility on revenues into FY16 at a

c.1.9x book-to-bill ratio.

Aerospace MRO primed for stAerospace MRO primed for stAerospace MRO primed for stAerospace MRO primed for steady growth. eady growth. eady growth. eady growth. Continued initiatives

by ST Aerospace to broaden its capabilities should propel its

growth in the longer term. These include a partnership with

Airbus for passenger-to-freighter conversion of its A320 and

A321 jets, marking a diversification of its conversion portfolio; a

continued expansion of its cabin interior service solutions

business, particularly for VIP aircraft completions; and an aircraft

seating solutions JV with Tenryu Holdings set up in 1Q15.

Electronics division’s initiatives Electronics division’s initiatives Electronics division’s initiatives Electronics division’s initiatives should be a key longshould be a key longshould be a key longshould be a key long----term term term term

growth drivergrowth drivergrowth drivergrowth driver. . . . Within the Smart Nation framework, we estimate

there will be projects worth more than S$1bn in the near

future, as the Singaporean government pushes for smart

technology usage across the utilities, healthcare, housing and

transport spaces. The launch of its TeLEOS-1 satellite this

December will herald a new space-centered growth channel for

the division. We are also seeing increased importance placed on

robotics, which could be another future key growth driver.

Proxy to a recovery in the US. Proxy to a recovery in the US. Proxy to a recovery in the US. Proxy to a recovery in the US. Around 24% of STE's business is

derived from the US, which has seen its currency surge by

~20% since mid-2014 against a basket of other currencies. STE

is thus poised to benefit from USD-denominated orders.

Aerospace sales growth (%)

Electronics sales growth (%)

Land Systems sales growth (%)

Marine sales growth (%)


2.97

-0.87

-0.45

-1.21

0.96

-1.33

-0.96

-0.58

-0.21

0.17

0.54

0.92

1.29

1.67

2.04

2.42

2.79

2013A 2014A 2015F 2016F 2017F

4.56

-4.06

7.35

5

6.18

-4.47

-2.97

-1.47

0.03

1.53

3.03

4.53

6.03

2013A 2014A 2015F 2016F 2017F

-2.51

-5.29

-2.2

-2.87

-5.82

-5.32

-4.82

-4.32

-3.82

-3.32

-2.82

-2.32

2013A 2014A 2015F 2016F 2017F

22.5

8.3

-20.5-17.7

-15.9

-22.5-19.7-16.9-14.0-11.2-8.4-5.5-2.70.13.05.88.6

11.514.317.220.0

2013A 2014A 2015F 2016F 2017F


Page 86

Company Guide

ST Engineering

Balance Sheet:

Healthy balance sheet can drive M&A ambitions. Healthy balance sheet can drive M&A ambitions. Healthy balance sheet can drive M&A ambitions. Healthy balance sheet can drive M&A ambitions. STE was in a

net cash position of about S$931m as of end-3Q15. It thus has

ample ammunition to undertake attractive acquisitions in

growth areas.

Dividend payout should remain steady. Dividend payout should remain steady. Dividend payout should remain steady. Dividend payout should remain steady. Strong operating cash

flows and a strong balance sheet provide support to healthy

dividend yield levels of around 5.5% currently. STE has cut its

payout ratio in recent years from 100% to around 80%, owing

to cash locked up in overseas locations, which it prefers to

invest for growth rather than pay withholding taxes on

repatriation.


Strong order wins. Strong order wins. Strong order wins. Strong order wins. Order wins YTD have been sluggish at

around US$2.5bn, compared to the US$4-6bn seen in previous

years, as a result of the land systems and marine divisions

having had no major order wins this year. Meanwhile the

Aerospace and Electronics divisions have announced US$1.3bn

and US$1.2bn in order wins in 2015 respectively. More

announced wins should boost the share price.

Recovery in the Marine sector. Recovery in the Marine sector. Recovery in the Marine sector. Recovery in the Marine sector. The Marine sector is arguably

facing the strongest industry headwinds on the commercial

front, with low offshore oil & gas spending and broad

overcapacity in shipping. Cost overruns in the US exacerbate

the situation. An industry recovery, as well as better

productivity in the US, would provide more confidence in the

medium-term earnings of the business.

Key Risks:

Declining defense budgets in the West.Declining defense budgets in the West.Declining defense budgets in the West.Declining defense budgets in the West. Austerity programmes

in Europe and planned US spending cuts create the risk of

delays to some defense programmes that STE may be bidding

for.

Commercial vehicle businesses face headwinds.Commercial vehicle businesses face headwinds.Commercial vehicle businesses face headwinds.Commercial vehicle businesses face headwinds. The growth of

STE’s commercial vehicle operations in China has been affected

by weak demand and high inventory levels. Its Brazil operations

have also been affected by withdrawal of subsidies for

purchases of construction equipment.

Protracted sProtracted sProtracted sProtracted slowdown in shipbuildinglowdown in shipbuildinglowdown in shipbuildinglowdown in shipbuilding. The traditional shipping

sector has been plagued by overcapacity for some time now,

while the slide in oil prices also affects demand for offshore

vessels. Visibility on demand recovery is low at this point.

Company Background

ST Engineering (STE) is an integrated engineering group in the

aerospace, electronics, land systems and marine sectors. The

company has over the years diversified its businesses and

geographies.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

0.8

0.8

0.8

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015F 2016F 2017F

Avg: 19.6x

+1sd: 22.2x

+2sd: 24.9x

-1sd: 16.9x

-2sd: 14.2x

11.6

13.6

15.6

17.6

19.6

21.6

23.6

25.6


(x)

Avg: 5.29x

+1sd: 5.88x

+2sd: 6.47x

-1sd: 4.7x

-2sd: 4.1x

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5


(x)


Page 87

Company Guide

ST Engineering

Key Assumptions


Aerospace sales growth (%)

2.97 (0.9) (0.5) (1.2) 0.96 Electronics sales growth (%)

4.56 (4.1) 7.35 5.00 6.18 Land Systems sales growth (%)

(2.5) (5.3) (2.2) (2.1) (2.9)

Marine sales growth (%) 22.5 8.32 (20.5) (17.7) (15.9) Segmental Breakdown

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenues (S$m)

Aerospace 2,079 2,061 2,052 2,027 2,046

Electronics 1,650 1,583 1,699 1,784 1,895

Land Systems 1,475 1,397 1,366 1,338 1,299

Marine 1,238 1,341 1,066 877 738

Others 191 157 162 168 177

TotalTotalTotalTotal 6,6336,6336,6336,633 6,5396,5396,5396,539 6,3456,3456,3456,345 6,1946,1946,1946,194 6,1556,1556,1556,155

PBT (S$m) Aerospace 319 283 279 282 286

Electronics 170 184 196 200 213

Land Systems 112 56.2 76.4 80.5 82.9

Marine 146 123 100 93.4 91.3

Others (18.1) 4.70 8.09 10.1 12.4


PBT Margins (%) Aerospace 15.4 13.7 13.6 13.9 14.0

Electronics 10.3 11.6 11.5 11.2 11.2

Land Systems 7.6 4.0 5.6 6.0 6.4

Marine 11.8 9.2 9.4 10.7 12.4

Others (9.5) 3.0 5.0 6.0 7.0



FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenue 6,633 6,539 6,345 6,194 6,155

Cost of Goods Sold (5,201) (5,221) (5,013) (4,863) (4,801)

Gross ProfitGross ProfitGross ProfitGross Profit 1,4321,4321,4321,432 1,3191,3191,3191,319 1,3331,3331,3331,333 1,3321,3321,3321,332 1,3541,3541,3541,354 Other Opng (Exp)/Inc (712) (711) (706) (694) (692)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 720720720720 608608608608 626626626626 638638638638 662662662662 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0




PrePrePrePre----tax Profittax Profittax Profittax Profit 730730730730 651651651651 660660660660 666666666666 686686686686

Tax (138) (114) (119) (120) (130)

Minority Interest (10.7) (5.0) (9.8) (9.9) (10.1)


Net ProfitNet ProfitNet ProfitNet Profit 581581581581 532532532532 531531531531 536536536536 545545545545 Net Profit before Except. 581 532 531 536 545

EBITDA 893 835 852 861 883

Growth

Revenue Gth (%) 4.0 (1.4) (3.0) (2.4) (0.6)

EBITDA Gth (%) 1.9 (6.4) 1.9 1.1 2.6

Opg Profit Gth (%) 1.9 (15.5) 3.0 1.9 3.7

Net Profit Gth (Pre-ex) (%) 0.8 (8.4) (0.1) 0.9 1.6

Margins & Ratio

Gross Margins (%) 21.6 20.2 21.0 21.5 22.0



ROAE (%) 29.0 25.0 24.6 24.0 23.7

ROA (%) 6.9 6.2 6.4 6.4 6.5

ROCE (%) 12.4 10.3 10.9 10.9 11.0

Div Payout Ratio (%) 80.2 87.9 88.0 87.2 85.8

Net Interest Cover (x) 34.4 42.7 34.3 34.8 37.7



Page 88

Company Guide

ST Engineering


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2014201420142014 4Q4Q4Q4Q2014201420142014 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 Revenue 1,553 1,848 1,511 1,545 1,500


Gross ProfitGross ProfitGross ProfitGross Profit 333333333333 318318318318 292292292292 333333333333 319319319319 Other Oper. (Exp)/Inc (190) (163) (149) (185) (175)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 144144144144 156156156156 143143143143 148148148148 144144144144 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0




PrePrePrePre----tax Profittax Profittax Profittax Profit 152152152152 167167167167 151151151151 159159159159 155155155155 Tax (31.6) (21.9) (19.0) (34.0) (22.3)

Minority Interest 1.18 (5.2) (1.5) 0.44 0.81

Net ProfitNet ProfitNet ProfitNet Profit 121121121121 140140140140 130130130130 125125125125 133133133133 Net profit bef Except. 121 140 130 125 133

EBITDA 196 203 199 208 207

Growth

Revenue Gth (%) (2.1) 19.0 (18.2) 2.2 (2.9)

EBITDA Gth (%) (5.1) 3.5 (2.1) 4.5 (0.6)

Opg Profit Gth (%) (8.5) 8.5 (8.0) 3.3 (2.8)

Net Profit Gth (Pre-ex) (%) (8.9) 15.6 (7.3) (3.8) 6.6



Net Profit Margins (%) 7.8 7.6 8.6 8.1 8.9 Balance Sheet (S$m)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Net Fixed Assets 1,520 1,578 1,654 1,678 1,698

Invts in Associates & JVs 462 478 500 517 528

Other LT Assets 963 937 937 937 937

Cash & ST Invts 2,065 1,590 1,586 1,642 1,702

Inventory 1,808 1,802 1,749 1,707 1,696

Debtors 1,222 1,319 1,280 1,249 1,241

Other Current Assets 667 615 615 615 615

Total AssetsTotal AssetsTotal AssetsTotal Assets 8,7078,7078,7078,707 8,3198,3198,3198,319 8,3228,3228,3228,322 8,3458,3458,3458,345 8,4188,4188,4188,418

ST Debt

434 74.7 74.7 74.7 74.7

Creditor 1,605 1,667 1,618 1,579 1,569

Other Current Liab 2,055 1,974 1,953 1,936 1,931

LT Debt 939 944 944 944 944

Other LT Liabilities 1,414 1,395 1,395 1,395 1,395

Shareholder’s Equity 2,116 2,132 2,196 2,264 2,342

Minority Interests 144 132 142 152 162

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 8,7078,7078,7078,707 8,3198,3198,3198,319 8,3228,3228,3228,322 8,3458,3458,3458,345 8,4188,4188,4188,418

Non-Cash Wkg. Capital 37.3 94.8 73.2 56.4 52.0

Net Cash/(Debt) 692 571 568 623 683




Asset Turnover (x) 0.8 0.8 0.8 0.7 0.7

Current Ratio (x) 1.4 1.4 1.4 1.5 1.5

Quick Ratio (x) 0.8 0.8 0.8 0.8 0.8



Capex to Debt (%) 20.5 22.0 24.5 19.6 19.6

Z-Score (X) 2.4 2.5 2.5 2.5 2.5



Page 89

Company Guide

ST Engineering


FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Pre-Tax Profit 730 651 660 666 685

Dep. & Amort. 142 171 173 177 180

Tax Paid (110) (133) (119) (120) (130)

Assoc. & JV Inc/(loss) (31.1) (57.2) (52.0) (46.6) (41.0)

Chg in Wkg.Cap. 154 (72.2) 21.6 16.8 4.41

Other Operating CF 44.8 65.3 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 930930930930 624624624624 684684684684 693693693693 698698698698 Capital Exp.(net) (282) (224) (250) (200) (200)

Other Invts.(net) 70.8 79.0 0.0 0.0 0.0

Invts in Assoc. & JV (19.3) 5.67 (5.0) (5.0) (5.0)

Div from Assoc & JV 39.6 35.0 35.0 35.0 35.0

Other Investing CF (67.1) (53.4) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (258)(258)(258)(258) (157)(157)(157)(157) (220)(220)(220)(220) (170)(170)(170)(170) (170)(170)(170)(170) Div Paid (521) (499) (468) (468) (468)

Chg in Gross Debt 28.2 (394) 0.0 0.0 0.0

Capital Issues 52.2 10.7 0.0 0.0 0.0

Other Financing CF (30.9) (43.8) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (472)(472)(472)(472) (926)(926)(926)(926) (468)(468)(468)(468) (468)(468)(468)(468) (468)(468)(468)(468)

Currency Adjustments 17.7 (0.3) 0.0 0.0 0.0

Chg in Cash 218 (459) (3.6) 55.2 60.4

Opg CFPS (S cts) 25.0 22.3 21.2 21.7 22.2

Free CFPS (S cts) 20.9 12.8 13.9 15.8 16.0



Source: DBS Bank





1: 20 Jan 15 3.31 3.80 BUY

2: 02 Mar 15 3.40 3.80 BUY

3: 14 May 15 3.59 3.80 BUY

4: 10 Aug 15 3.26 3.80 BUY

5: 17 Aug 15 3.17 3.80 BUY

6: 31 Aug 15 3.07 3.40 BUY

7: 04 Nov 15 3.30 3.60 BUY

8: 09 Nov 15 3.15 3.60 BUY


1

2 3

4

5

678

2.63

2.83

3.03

3.23

3.43

3.63

3.83

Dec-14 Apr-15 Aug-15 Dec-15

S$S$S$S$


Page 90

Company Guide

ST Engineering









This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd.This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd,


































The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies

and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 15 Dec 2015,




1.1.1.1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary

position in ST Engineering recommended in this report as of 30 Nov 2015


3.3.3.3.


DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of

securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons

wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any

security discussed in this document should contact DBSVUSA exclusively.


Page 91

Company Guide

ST Engineering














United StatesUnited StatesUnited StatesUnited States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other Other Other Other jurisdictionsjurisdictionsjurisdictionsjurisdictions


DBS Bank Ltd. DBS Bank Ltd. DBS Bank Ltd. DBS Bank Ltd.


Singapore 018982

Tel. 65-6878 8888


ASIAN INSIGHTS VICKERS SECURITIES www.dbsvickers.com

ed: TH / sa: JC

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: S$0.68 (STISTISTISTI : : : : 2,959.01) Price Target :Price Target :Price Target :Price Target : S$0.82 (21% upside) (Prev S$0.81)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: M&A, corporate restructuring

Where we differWhere we differWhere we differWhere we differ:::: Higher forecasts in FY15 due to disposal gains, lower

in FY16 due to higher opex assumed Analyst Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((BtBtBtBtmmmm) ) ) ) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Revenue 162,040 166,933 175,728 184,605 EBITDA 31,427 36,510 35,871 38,465 Pre-tax Profit 25,984 31,275 30,647 32,938 Net Profit 21,694 26,359 25,079 26,959 Net Pft (Pre Ex.) 21,694 26,359 25,079 26,959 EPS (S cts) 3.42 4.15 3.95 4.25 EPS Pre Ex. (S cts) 3.42 4.15 3.95 4.25 EPS Gth (%) 13 22 (5) 7 EPS Gth Pre Ex (%) 13 22 (5) 7 Diluted EPS (S cts) 3.42 4.15 3.95 4.25 Net DPS (S cts) 2.41 2.49 2.61 2.69 BV Per Share (S cts) 16.0 17.6 19.0 20.5 PE (X) 19.9 16.4 17.2 16.0 PE Pre Ex. (X) 19.9 16.4 17.2 16.0 P/Cash Flow (X) 17.7 19.3 17.6 16.8 EV/EBITDA (X) 15.3 13.1 13.2 12.1 Net Div Yield (%) 3.6 3.7 3.8 4.0 P/Book Value (X) 4.3 3.9 3.6 3.3 Net Debt/Equity (X) 0.4 0.4 0.3 0.2 ROAE (%) 22.2 24.7 21.6 21.5 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 9 (4) - Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S cts):::: 3.6 4.0 4.1



Positioning to be a regional player

Maintain BUY, TP at S$Maintain BUY, TP at S$Maintain BUY, TP at S$Maintain BUY, TP at S$0.820.820.820.82.... We maintain our BUY recommendation with a TP of S$0.82. We believe ThaiBev is taking steps to transform into a regional beverage player. In our view, we believe ThaiBev should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serve as a bastion for the company while it invests in new avenues of growth. 3Q15 results resilient despite weak sentiment3Q15 results resilient despite weak sentiment3Q15 results resilient despite weak sentiment3Q15 results resilient despite weak sentiment. . . . ThaiBev’s 3Q15 results were within expectations. While headline net profit surged by 115%, this was on the back of a disposal gain by its associate FNN. Excluding this, net profit would have grown c.12% largely on stronger associate’s contribution. Revenue grew by 3% while EBIT slipped 7% y-o-y. This was largely a result of higher costs relating to the relaunch of Chang Beer, as well as higher losses at its Non-Alcoholic Beverages given its investment phase. Growth is projected to continue. Growth is projected to continue. Growth is projected to continue. Growth is projected to continue. We raised FY15F forecasts by 9%, taking into account the one-off gain by F&N’s disposal of its 55% stake in MBL, offset partially by a lower operating profit. While consumer sentiment remains weak, we note that the Group’s operations remained relatively resilient. With the conclusion of F&N’s disposal of the latter’s stake in Myanmar Brewery Limited, this could possibly pave the way for the eventual consolidation of FNN as a subsidiary, coupled with the eventual monetisation of its stake in Frasers Centrepoint Limited. In our view, this tie in with the Group’s announced “Vision 2020” Strategic Roadmap, in which one of the targets is to increase NAB's revenue contribution to over 50%. Valuation: Our target price is revised marginally to S$0.82 as we roll our valuations over to FY16F. Our TP is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, coupled with fair values of its stakes in F&N and Frasers Centrepoint Limited. Key Risks to Our View: Further excise tax hikes. Further excise tax hikes. Further excise tax hikes. Further excise tax hikes. Further increases in excise duties without a commensurate increase in ASP. At A Glance Issued Capital (m shrs) 25,110 Mkt. Cap (S$m/US$m) 17,075 / 12,020 Major Shareholders Siriwana Co.Ltd (%) 45.3 Maxtop Management Corp (%) 20.6 Capital Group (%) 5.0

Free Float (%) 29.1 3m Avg. Daily Val (US$m) 5.6 ICB IndustryICB IndustryICB IndustryICB Industry : Consumer Goods / Beverages


13 Nov 2015


Thai Beverage Public Company Edition 1 Version 1 | Bloomberg: THBEV SP | Reuters: TBEV.SI Refer to important disclosures at the end of this report

87

137

187

237

287

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Relative IndexS$

Thai Beverage Public Company (LHS) Relative STI INDEX (RHS)


Page 2

Company Guide

Thai Beverage Public Company

3Q15 Results Summary and Update

FY Dec (m)FY Dec (m)FY Dec (m)FY Dec (m) 3Q143Q143Q143Q14 2Q152Q152Q152Q15 3Q153Q153Q153Q15 yoy %yoy %yoy %yoy % qoq %qoq %qoq %qoq % 9M149M149M149M14 9M159M159M159M15 yoy %yoy %yoy %yoy % CommentsCommentsCommentsComments

Sales 35,276 38,992 36,472 3.4 (6.5) 116,344 121,169 4.1 Higher spirits, beer and non-al revenue, offset by drop in food contribution.

Cost of Goods Sold (24,884) (27,147) (25,851) 3.9 (4.8) (81,927) (85,050) 3.8

Gross Profit 10,392 11,845 10,621 2.2 (10.3) 34,416 36,119 4.9 Marginally lower margins in 3Q

Other Operating Income

22 (141) 44 101.9 (131.4) 44 (39) (188.3)

Selling expenses (3,188) (3,929) (3,520) 10.4 (10.4) (9,444) (10,839) 14.8

Administration Expenses

(2,518) (2,769) (2,765) 9.8 (0.1) (7,803) (8,447) 8.3

Others 0 71 0 nm (100.0) 22 71 214.9

Other Operating Expenses

(5,707) (6,627) (6,285) 10.1 (5.2) (17,246) (19,216) 11.4

EBIT 4,707 5,077 4,380 (7.0) (13.7) 17,214 16,864 (2.0) Higher A&P for Spirits and Beer due to relaunch of

Chang beer Non-Operating Income

74 613 169 130.1 (72.4) 371 891 140.2

Interest Income 20 9 1 (93.2) (84.3) 96 11 (88.5)

Interest Expense (343) (269) (326) (4.9) 21.2 (1,147) (1,028) (10.4) Lower debt which was refinanced earlier

Share of Associates' or JV Income

91 1,585 4,565 4914.8 187.9 1,917 7,045 267.6 Boosted by FNN's MBL disposal gain THB3.8bn

Pretax Profit 4,548 7,015 8,789 93.2 25.3 18,451 23,784 28.9

Tax (914) (1,064) (802) (12.3) (24.6) (3,398) (3,316) (2.4)

Minority Interests 84 (89) 9 (89.3) (110.1) 155 (34) (122.1)

Net Profit 3,718 5,862 7,996 115.1 36.4 15,208 20,434 34.4 Within expectations

Source: Company, DBS Bank Results comments

3Q15 results 3Q15 results 3Q15 results 3Q15 results within expectations, headline boosted by within expectations, headline boosted by within expectations, headline boosted by within expectations, headline boosted by

associate’s gain.associate’s gain.associate’s gain.associate’s gain. ThaiBev’s 3Q net profit surged 115% to

THB8bn, arising from a gain of THB3.8bn recognised by FNN for

its disposal of the latter’s stake in Myanmar Brewery Limited.

Excluding this, we estimate that net profit would have been

THB4.2bn, registering 12% growth y-o-y.

Despite the overall subdued Thai economy and consumer

sentiment, the Group posted a 3.4% revenue growth. This was

contributed by all segments, except Food. EBIT margins for the

Group dipped by 1.3ppts to 12% in 3Q15, arising from lower

margins from Beer due to the relaunch of Chang Beer and

higher A&P for Spirits.

SpiritsSpiritsSpiritsSpirits relatively resilient despite weak sentimentrelatively resilient despite weak sentimentrelatively resilient despite weak sentimentrelatively resilient despite weak sentiment.... Spirits

registered a 2.7% increase in revenue arising from a change in

product mix – higher proportion of higher priced brown spirits

vs white spirits. In the quarter, we saw higher A&P expenses

which management attributed to a push to increase fixtures and

displays at point-of-sale to increase the products’ presence.

Going forward and as we move into 4Q, we believe Spirits

should see better sequential performance in 4Q, and as the

recently announced government stimulus package works its

way down.

Beer Beer Beer Beer –––– positioning for bigger share with relaunchpositioning for bigger share with relaunchpositioning for bigger share with relaunchpositioning for bigger share with relaunch.... In 3Q15, the

Group relaunched Chang Beer, and discontinued its other

variants. There was a change of the bottle's colour to green,

from amber, and this increased the cost of packaging and

hence impacted on margins. In addition, the alcohol content

was lowered to 5.5%, from 6% previously. Arising from higher

costs due to the relaunch, the Beer segment registered a net

loss of THB23bn, down from a profit of THB28bn a year ago.

The impact was surprisingly less than we had envisaged.

Cost of goods for beer higher due to new bottles.Cost of goods for beer higher due to new bottles.Cost of goods for beer higher due to new bottles.Cost of goods for beer higher due to new bottles. Management

indicated that with the use of new green bottles, the cost of

packaging has gone up. This was because it had to use

completely new bottles, while previously there was a mix of old

(returnables) and new bottles (for amber ones). It is envisaged

that it could take up to a year for the trend to stabilise before

we see the cost of packaging revert to normal.

NonNonNonNon----Alcoholic Beverage Alcoholic Beverage Alcoholic Beverage Alcoholic Beverage –––– no surprises, still in investment mode.no surprises, still in investment mode.no surprises, still in investment mode.no surprises, still in investment mode.

There were no major surprises on the non-alcoholic beverage

front. In 3Q15, the segment registered a loss of THB532m, an

increase from THB408m a year ago. This is not surprising to us

given that there has been new product launches this year (Jubjai

and 100Plus), while its est cola and the flavoured carbonated

soft drinks are still in an investment mode.


Page 3

Company Guide


Valuation and forecastsValuation and forecastsValuation and forecastsValuation and forecasts

FY15F/16F forecasts +FY15F/16F forecasts +FY15F/16F forecasts +FY15F/16F forecasts +9%/9%/9%/9%/----4444%.%.%.%. We adjusted our forecasts by

+9%/-4% for FY15F/ 16F. The adjustment up for FY15 is to

take into account the disposal gain from MBL (by its associate

FNN), while we tune down our operating forecasts to account

for higher costs of goods sold and A&P expenses, particularly

for its beer.

Maintain BUY, TP adjusted to S$Maintain BUY, TP adjusted to S$Maintain BUY, TP adjusted to S$Maintain BUY, TP adjusted to S$0.820.820.820.82.... While 3Q15 operating

results registered a drop, this was a factor of higher operating

expenses due to the overhaul and relaunch of Chang Beer. In

our view, this is to position the brand for the longer term,

particularly the change in bottle colour to green, from amber,

making it more contemporary. We revised our sum-of-parts TP

slightly to S$0.82 as we roll our valuations over to FY16F, offset

partially by a lower operating profit in FY16F.

We retain our positive view of the company as it progressively

transforms itself into a regional beverage player. In our view, we

believe ThaiBev should have an advantage over its peers given

its dominant position as the leading spirits player in Thailand,

providing it with ample firepower and serve as a bastion for the

company while it invests in new avenues of growth. Chang Classic relaunch

Previous packagingPrevious packagingPrevious packagingPrevious packaging New New New New contemporary contemporary contemporary contemporary packagingpackagingpackagingpackaging

Source: Company


Page 4

Company Guide



Earnings Drivers:

SpiritsSpiritsSpiritsSpirits as the main earnings driveras the main earnings driveras the main earnings driveras the main earnings driver.... Thai Bev derives earnings

mainly from four key divisions – Spirits, Beer, Non-alcoholic

beverages and Food. Spirits division is the largest revenue

contributor, accounting for 64% (as of FY14) of the Group’s

revenue. Earnings from Spirits division are particularly

sensitive to excise tax – this accounts for 52.7% of Spirits’

revenue. Consumption of spirits has held up despite the

poorer consumer sentiments in Thailand, in part due to the

wide range of brands that cater to the wide spectrum of

consumers – from low to high income.

Building upon Chang’s popularityBuilding upon Chang’s popularityBuilding upon Chang’s popularityBuilding upon Chang’s popularity. Revenues from Beer

division contribute to 22% of the Group’s revenue in FY14.

Excise tax is also the largest cost component, accounting for

57% of the Group’s revenue. Input cost accounts for 17.4%

of Beer revenue and is affected by the prices of raw materials

such as barley, rice, tin and glass bottles. Chang Beer was

recently re-launched with the streamline of its sub-brands

into just Chang Classic and repackaged into emerald green

bottles, from amber ones. Operating expenses recently ticked

up arising from this, but the purpose is to accentuate the

brand’s offering and to grow its market share.

Alcohol sale restrictions. Alcohol sale restrictions. Alcohol sale restrictions. Alcohol sale restrictions. Alcohol sales have been subjected to

restrictions in Thailand. Most recently, laws regarding

banning the sale of alcoholic products in proximity of

education institutions have been discussed in Thailand. Given

that the alcoholic businesses – Spirits and Beer, contribute

86% of the Group’s revenue, any decline in sales revenue by

the alcoholic divisions will be significantly felt by the Group.

Expanding the Expanding the Expanding the Expanding the NonNonNonNon----alcoholic Beveragesalcoholic Beveragesalcoholic Beveragesalcoholic Beverages (NAB) division(NAB) division(NAB) division(NAB) division....

Revenues from non-alcoholic beverages make up 10% of

Group revenue in FY14. The business unit is incurring

operating losses due to its high SG&A expenses as it is

focused on building brand awareness and gaining market

share. With the launch of 100Plus in Thailand through a

collaboration with FNN, it could take time for the brand to be

built up. We project NAB's business segment to remain in the

red over the medium term as management builds traction.

Fortunately, this should not make a huge dent on Group

earnings, given the strong contribution from Spirits.

Weaker maWeaker maWeaker maWeaker macroeconomic conditions. croeconomic conditions. croeconomic conditions. croeconomic conditions. The Group derives the

majority of its sales from Thailand. In the near term, we

expect a slowdown in consumption due to the political

instability as well as a weakening tourism sector. The Group’s

alcoholic beverage businesses are not expected to be

significantly affected by the forecasted fall in tourist numbers

given its biasness towards off-trade sales – 80% to 100%

Sprits vol gwth (%)

Spirits ASP gwth (%)

Beer vol gwth (%)

Beer ASP gwth (%)

Non-Alc Bev rev gwth (%)


-1.6

-0.3

4

2 2

-1.76

-1.26

-0.75

-0.25

0.26

0.77

1.27

1.78

2.28

2.79

3.29

3.80

2013A 2014A 2015F 2016F 2017F

9

5

-1

3 3

-1.10

0.74

2.57

4.41

6.24

8.08

2013A 2014A 2015F 2016F 2017F

5.3

9.5

0

2

3

0.00

1.20

2.40

3.60

4.80

6.00

7.20

8.40

9.60

2013A 2014A 2015F 2016F 2017F

-39.9

-7.3

5 5 5

-44

-34

-24

-14

-4

2013A 2014A 2015F 2016F 2017F


Page 5

Company Guide


depending on brands. NAB and the Food division will

continue to face challenges with on-premise consumption

volumes and the growth of these two divisions could be

undermined in the near term.

Balance Sheet:

Gearing has improved Gearing has improved Gearing has improved Gearing has improved since acquisition of F&N’s stakesince acquisition of F&N’s stakesince acquisition of F&N’s stakesince acquisition of F&N’s stake. The

Group’s net gearing has improved significantly, and projected

to be c.0.4x by end-FY15F, from the high of 1.2x immediately

following its 28.5% stake acquisition in F&N. Going forward,

its healthy balance sheet will put it in a good position for

inorganic growth opportunities within the region.


Changes in excise taxes. Changes in excise taxes. Changes in excise taxes. Changes in excise taxes. More than 50% of the Group’s

revenue goes into excise duties. A change in excise tax would

impact on share price, and depending on whether the

company is able to pass on the increase costs to consumer,

share price could be positively or negatively affected.

Corporate Corporate Corporate Corporate rrrrestructuring. estructuring. estructuring. estructuring. With FNN’s arbitration and eventual

disposal of its stake in Myanmar Brewery Limited, this could

possibly pave the way for the eventual consolidation of FNN

as a subsidiary, coupled with the eventual monetisation of its

stake in Frasers Centrepoint Limited. In our view, this ties in

with the Group’s recently announced “Vision 2020” Strategic

Roadmap, in which one of the targets is to increase NAB's

revenue contribution to over 50%.

Turnaround in NABTurnaround in NABTurnaround in NABTurnaround in NAB.... We project NAB to continue in the

current investment mode in the foreseeable future. However,

in the event that this turns around faster than expected, it

could provide a catalyst to share price, underlining

management’s ability to create value for the company.

Key Risks:

Prolonged slump in consumer sentiments. Prolonged slump in consumer sentiments. Prolonged slump in consumer sentiments. Prolonged slump in consumer sentiments. A prolonged

slump in the Thai economy could impact consumption, and

hence our forecasts. Vice-versa, a pickup in economic activity

could offer upside potential.

Political situation in Thailand. Political situation in Thailand. Political situation in Thailand. Political situation in Thailand. A change or deterioration of

the uncertain political situation in Thailand could have an

adverse impact on the broader economy and private

consumption.

Further excise tax hikes. Further excise tax hikes. Further excise tax hikes. Further excise tax hikes. Further increases in excise duties

without a commensurate increase in ASP.

Company Background

ThaiBev is a leading beverage producer in Thailand, with

business segments spanning across spirits, beer, non-

alcoholic beverages and food. Its key brands are Sangsom,

Hong Thong and Chang.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


4,350.0

4,400.0

4,450.0

4,500.0

4,550.0

4,600.0

4,650.0

4,700.0

4,750.0

4,800.0

4,850.0

2013A 2014A 2015F 2016F 2017F


Btm

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 15.7x

+1sd: 18.4x

+2sd: 21.1x

-1sd: 12.9x

-2sd: 10.2x

8.3

10.3

12.3

14.3

16.3

18.3

20.3

22.3


(x)

Avg: 3.79x

+1sd: 4.43x

+2sd: 5.06x

-1sd: 3.16x

-2sd: 2.53x

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6


(x)


Page 6

Company Guide


Key Assumptions


Sprits vol gwth (%) (1.6) (0.3) 4.00 2.00 2.00

Spirits ASP gwth (%) 9.00 5.00 (1.0) 3.00 3.00

Beer vol gwth (%) (9.0) (2.4) 1.00 3.00 2.00

Beer ASP gwth (%) 5.30 9.50 0.0 2.00 3.00

Non-Alc Bev rev gwth (%) (39.9) (7.3) 5.00 5.00 5.00 Segmental Breakdown

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenues (Btm)

Spirits 99,916 104,592 107,688 113,137 118,862

Beer 32,935 35,193 35,545 37,344 39,233

Non-Alcoholic Bev. 17,018 15,775 16,564 17,392 18,262

Food 5,976 6,602 7,262 7,988 8,388

Others (74.0) (122) (126) (132) (139)


Operating profit (Btm) Spirits 23,694 25,278 25,845 27,153 28,527

Beer (681) 334 71.1 560 785

Non-Alcoholic Bev. (2,276) (2,336) (2,485) (1,391) (913)

Food 192 36.0 363 399 419

Others 73.0 68.0 68.0 68.0 68.0


Operating profit Margins (%)

Spirits 23.7 24.2 24.0 24.0 24.0

Beer (2.1) 0.9 0.2 1.5 2.0

Non-Alcoholic Bev. (13.4) (14.8) (15.0) (8.0) (5.0)

Food 3.2 0.5 5.0 5.0 5.0

Others (98.6) (55.7) (54.1) (51.4) (48.9)


Income Statement (Btm)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Revenue 155,771 162,040 166,933 175,728 184,605


Gross ProfitGross ProfitGross ProfitGross Profit 43,73843,73843,73843,738 47,33047,33047,33047,330 48,06848,06848,06848,068 52,27052,27052,27052,270 55,65455,65455,65455,654

Other Opng (Exp)/Inc (22,478) (23,886) (24,205) (25,481) (26,768)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 21,26021,26021,26021,260 23,44323,44323,44323,443 23,86323,86323,86323,863 26,78926,78926,78926,789 28,88628,88628,88628,886 Other Non Opg (Exp)/Inc 795 600 600 600 600

Associates & JV Inc 3,434 3,389 7,867 4,135 4,467

Net Interest (Exp)/Inc (2,251) (1,447) (1,055) (878) (1,015)


PrePrePrePre----tax Profittax Profittax Profittax Profit 23,23823,23823,23823,238 25,98425,98425,98425,984 31,27531,27531,27531,275 30,64730,64730,64730,647 32,93832,93832,93832,938 Tax (4,236) (4,552) (4,916) (5,567) (5,979)

Minority Interest 128 261 0.0 0.0 0.0


Net ProfitNet ProfitNet ProfitNet Profit 19,13019,13019,13019,130 21,69421,69421,69421,694 26,35926,35926,35926,359 25,07925,07925,07925,079 26,95926,95926,95926,959 Net Profit before Except. 19,130 21,694 26,359 25,079 26,959

EBITDA 25,489 31,427 36,510 35,871 38,465

Growth

Revenue Gth (%) (3.3) 4.0 3.0 5.3 5.1

EBITDA Gth (%) 13.1 23.3 16.2 (1.8) 7.2

Opg Profit Gth (%) 1.9 10.3 1.8 12.3 7.8

Net Profit Gth (Pre-ex) (%) 21.0 13.4 21.5 (4.9) 7.5

Margins & Ratio

Gross Margins (%) 28.1 29.2 28.8 29.7 30.1



ROAE (%) 21.8 22.2 24.7 21.6 21.5

ROA (%) 9.8 12.2 15.0 13.9 14.5

ROCE (%) 9.6 11.8 12.5 13.3 14.0

Div Payout Ratio (%) 57.8 70.6 60.0 66.1 63.3

Net Interest Cover (x) 9.4 16.2 22.6 30.5 28.5


Factored in gains by FNN (on disposal of MBL’s stake)


Page 7

Company Guide


Quarterly / Interim Income Statement (Btm)

FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2014201420142014 4Q4Q4Q4Q2014201420142014 1Q1Q1Q1Q2015201520152015 2Q2Q2Q2Q2015201520152015 3Q3Q3Q3Q2015201520152015 Revenue 35,276 45,696 45,704 38,992 36,472


Gross ProfitGross ProfitGross ProfitGross Profit 10,39210,39210,39210,392 12,91412,91412,91412,914 13,65313,65313,65313,653 11,84511,84511,84511,845 10,62110,62110,62110,621 Other Oper. (Exp)/Inc (5,685) (6,684) (6,245) (6,768) (6,241)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 4,7074,7074,7074,707 6,2296,2296,2296,229 7,4087,4087,4087,408 5,0775,0775,0775,077 4,3804,3804,3804,380 Other Non Opg (Exp)/Inc 73.5 229 108 613 169

Associates & JV Inc 91.0 1,472 895 1,585 4,565



PrePrePrePre----tax Profittax Profittax Profittax Profit 4,5484,5484,5484,548 7,5347,5347,5347,534 7,9807,9807,9807,980 7,0157,0157,0157,015 8,7898,7898,7898,789 Tax (914) (1,154) (1,450) (1,064) (802)

Minority Interest 83.7 106 45.8 (89.1) 8.99

Net ProfitNet ProfitNet ProfitNet Profit 3,7183,7183,7183,718 6,4856,4856,4856,485 6,5756,5756,5756,575 5,8625,8625,8625,862 7,9967,9967,9967,996 Net profit bef Except. 3,718 6,485 6,575 5,862 7,996

EBITDA 4,872 7,931 8,411 7,275 9,114

Growth

Revenue Gth (%) (11.9) 29.5 0.0 (14.7) (6.5)

EBITDA Gth (%) (30.1) 62.8 6.1 (13.5) 25.3

Opg Profit Gth (%) (17.2) 32.3 18.9 (31.5) (13.7)

Net Profit Gth (Pre-ex) (%) (32.7) 74.4 1.4 (10.8) 36.4

Margins

Gross Margins (%) 29.5 28.3 29.9 30.4 29.1


Net Profit Margins (%) 10.5 14.2 14.4 15.0 21.9 Balance Sheet (Btm)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Net Fixed Assets 46,827 46,251 46,927 47,138 47,182

Invts in Associates & JVs 75,558 67,614 73,881 76,417 79,284

Other LT Assets 11,220 11,054 10,998 10,941 10,884

Cash & ST Invts 5,108 2,230 552 556 1,273

Inventory 34,837 35,084 36,134 37,529 39,207

Debtors 3,891 3,668 3,887 4,092 4,299

Other Current Assets 5,888 6,085 6,085 6,085 6,085

Total AssetsTotal AssetsTotal AssetsTotal Assets 183,329183,329183,329183,329 171,987171,987171,987171,987 178,465178,465178,465178,465 182,757182,757182,757182,757 188,213188,213188,213188,213

ST Debt

12,357 21,947 21,947 21,947 21,947

Creditor 5,202 4,803 3,456 3,590 3,750

Other Current Liab 8,671 9,286 11,570 12,222 12,634

LT Debt 54,343 26,555 21,555 16,555 11,555

Other LT Liabilities 4,763 4,720 4,720 4,720 4,720

Shareholder’s Equity 94,286 101,263 111,802 120,309 130,193

Minority Interests 3,707 3,414 3,414 3,414 3,414

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 183,329183,329183,329183,329 171,987171,987171,987171,987 178,465178,465178,465178,465 182,757182,757182,757182,757 188,213188,213188,213188,213

Non-Cash Wkg. Capital 30,742 30,749 31,080 31,894 33,207

Net Cash/(Debt) (61,591) (46,272) (42,950) (37,947) (32,230)




Asset Turnover (x) 0.8 0.9 1.0 1.0 1.0

Current Ratio (x) 1.9 1.3 1.3 1.3 1.3

Quick Ratio (x) 0.3 0.2 0.1 0.1 0.1

Net Debt/Equity (X) 0.6 0.4 0.4 0.3 0.2

Net Debt/Equity ex MI (X) 0.7 0.5 0.4 0.3 0.2

Capex to Debt (%) 6.9 9.4 11.0 11.7 13.4

Z-Score (X) 4.8 5.8 6.2 6.6 6.6


Boosted by gains from FNN

Net debt-to-equity has dropped from 1.2x since its acquisition of a 28.5% stake in FNN


Page 8

Company Guide


Cash Flow Statement (Btm)

FY FY FY FY DecDecDecDec 2013201320132013AAAA 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF Pre-Tax Profit 23,238 25,984 31,275 30,647 32,938

Dep. & Amort. 3,935 3,997 4,182 4,348 4,515

Tax Paid (5,005) (4,884) (2,631) (4,916) (5,567)

Assoc. & JV Inc/(loss) (3,434) (3,389) (7,867) (4,135) (4,467)

Chg in Wkg.Cap. (2,428) 1,135 (2,615) (1,466) (1,724)

Other Operating CF 1,783 1,566 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 18,08918,08918,08918,089 24,40924,40924,40924,409 22,34322,34322,34322,343 24,47824,47824,47824,478 25,69425,69425,69425,694 Capital Exp.(net) (4,619) (4,570) (4,800) (4,500) (4,500)

Other Invts.(net) 40.0 6.50 0.0 0.0 0.0

Invts in Assoc. & JV 1.46 0.0 0.0 0.0 0.0

Div from Assoc & JV 34,998 6,903 1,600 1,600 1,600

Other Investing CF 2,378 268 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF 32,79832,79832,79832,798 2,6072,6072,6072,607 (3,200)(3,200)(3,200)(3,200) (2,900)(2,900)(2,900)(2,900) (2,900)(2,900)(2,900)(2,900) Div Paid (10,816) (11,359) (15,819) (16,573) (17,075)

Chg in Gross Debt (38,561) (17,202) (5,000) (5,000) (5,000)

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (1,772) (1,259) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (51,148)(51,148)(51,148)(51,148) (29,820)(29,820)(29,820)(29,820) (20,819)(20,819)(20,819)(20,819) (21,573)(21,573)(21,573)(21,573) (22,075)(22,075)(22,075)(22,075)

Currency Adjustments 820 (65.0) 0.0 0.0 0.0

Chg in Cash 559 (2,869) (1,676) 5.10 719

Opg CFPS (Bt) 3.23 3.67 3.93 4.09 4.32

Free CFPS (Bt) 2.12 3.13 2.76 3.15 3.34



Source: DBS Bank

S.No.S.No.S.No.S.No. Da teDa teDa teDa teClos ing Clos ing Clos ing Clos ing

Pric ePric ePric ePric e

Ta rgeTa rgeTa rgeTa rge

t t t t

Pric ePric ePric ePric e

Ra ting Ra ting Ra ting Ra ting

1: 17 Nov 14 0.72 0.80 BUY

2: 18 Dec 14 0.68 0.80 BUY

3: 27 Feb 15 0.70 0.80 BUY

4: 15 May 15 0.76 0.81 BUY

5: 14 Aug 15 0.77 0.81 BUY

6: 31 Aug 15 0.71 0.81 BUY


12

3

4

5

6

0.62

0.67

0.72

0.77

0.82

Nov-14 Mar-15 Jul-15 Nov-15

S$S$S$S$


Page 9

Company Guide








Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months.

ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).


1.1.1.1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary position in the Thai Beverage Public Company recommended in this report as of 30 Sep 2015.

2.2.2.2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates do not beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 30 Sep 2015.

3.3.3.3.


DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates did not receive compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.


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Company Guide


DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTIONRESTRICTIONS ON DISTRIBUTIONRESTRICTIONS ON DISTRIBUTIONRESTRICTIONS ON DISTRIBUTION











DubaiDubaiDubaiDubai This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United StatesUnited StatesUnited StatesUnited States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations. It is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

OthOthOthOther er er er jurisdictionsjurisdictionsjurisdictionsjurisdictions



12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888


Market Focus

Singapore Strategy









This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte


may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.





































Market Focus

Singapore Strategy



Ascendas REIT, CapitaLand, ComfortDelgro, ComfortDelgro, Hong Kong Land, CDL Hospitality Trusts, City Development, Cambridge Industrial

Trust, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Genting Singapore, Golden Agri Resources, Global Logistic Properties, Hutchison Port

Holdings Trust, Keppel Corporation, Keppel REIT, M1, Mapletree Logistics Trust, Noble Group, OCBC, OUE Hospitality Trust, SATS, Sembcorp

Industries, Singapore Exchange, SIA Engineering, Sembcorp Marine, SPH, Sheng Siong Group, ST Engineering, StarHub, Thai Beverage Public

Company, UOB, Wilmar International, Yangzijiang Shipbuilding recommended in this report as of 31 Oct 2015


3. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity

securities of Croesus Retail Trust as of 31 Jan 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity

securities of Croesus Retail Trust as of 31 Jan 2016.


DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment

banking services from Ascendas REIT, Croesus Retail Trust, Ezra Holdings, Keppel Corporation, Keppel REIT as of 31 Jan 2016.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for

Ascendas REIT, Croesus Retail Trust, Ezra Holdings, Keppel REIT in the past 12 months, as of 31 Jan 2016.



information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should

contact DBSVUSA exclusively.

6. Directorship

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Deputy Chairman of Capitaland as of 28 Feb 2015. Euleen Goh Yiu Kiang, a member

of DBS Group Holdings Board of Directors, is a Director of Capitaland as of 28 Feb 2015.

Danny Teoh Leong Kay, a member of DBS Group Holdings Board of Directors, is a Director of Keppel Corporation as of 28 Feb 2015.

Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Director of SATS as of 28 Feb 2015. Nihal Vijaya Devadas

Kaviratne CBE, a member of DBS Group Holdings Board of Directors, is a Director of SATS as of 28 Feb 2015.

Peter Seah Lim Huat, Chairman of DBS Group Holdings, is a Director of Starhub as of 28 Feb 2015. Nihal Vijaya Devadas Kaviratne CBE, a member

of DBS Group Holdings Board of Directors, is a Director of Starhub as of 28 Feb 2015. RESTRICTIONS ON DISTRIBUTION





Market Focus

Singapore Strategy

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received

from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.




United Kingdom


Dubai


United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions


DBS Bank Ltd. 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888


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