Asia Morning Line - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/MEMOIR/2013/10/16/64... · 16/10/2013 · Laurence Balanco +61 2 85714253 [email protected] The resilient price

Bohol earthquake - see But first . . . Wednesday, 16 October 2013

Please see important notice on last page *Top of the morning comment is from our sales desk Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

Trendlines (As at 15 Oct)

Sector Freefloat mkt cap (%)BUY O-PF U-PF SELL31.6 17.3 42.2 8.9

Hotels 30.6 54.4 10.4 4.6Petroleum 65.4 12.9 19.6 2.1Consumer 43.1 18.2 20.7 17.4Conglos 63.6 26.4 10.0 0.0Property 52.0 24.7 17.1 6.3Autos 59.0 30.4 4.2 6.4Technology 61.6 19.7 8.2 10.6Finance 32.5 15.4 37.8 14.3Power 25.0 24.1 20.5 30.4Internet 48.1 41.0 8.6 2.3Cap goods 2.1 1.0 95.6 1.3Transport 40.1 18.5 33.4 8.0Media 12.0 48.5 6.6 32.9Insurance 46.2 5.8 23.0 25.1

Market Target Div Total(MSCI country price yield retnclassifications) (%) (%) (%)HK 2.6 2.9 5.4China 7.9 2.7 10.6Taiwan 8.2 2.4 10.6Korea 8.0 1.4 9.4India 7.3 1.6 9.0Singapore 14.2 2.0 16.2Malaysia 4.9 0.2 5.1Asean 9.3 2.6 11.9Indonesia 0.4 2.3 2.7Thailand 11.8 3.1 14.9Philippines 17.1 1.6 18.8HK ex HSBC 3.7 2.9 6.5

CLSA 12M expected total return

CLSA rec by sector

Asia Morning Line Today’s best ideas in Asian equities

Most-clicked in past month

Top of the morning . . . with Michael Snaith*

Two questions came up repeatedly during Francis Cheung’s meetings with clients yesterday. With macro indicators apparently stalling, should we sell into the rising market? And, if not: should we rotate into laggards or stick with our autos/property/internet/Macau calls? CRR’s latest SME quarterly suggests the answer is “Don’t Sell”: the macro data should start to improve again. Smaller firms reported continued domestic-order growth in 3Q13 and the CRR team notes that since it began this series in 2007, its data have led official GDP by one quarter - clearly implying a strong finish to the year. As for what to BUY, we recommend Baidu, Country Garden, Mindray, Sino Biopharm and Xinyi Glass.

GLOBAL: Technicals. The US market seems impervious to Washington’s debt-limit shenanigans, with the S&P500 bouncing off the low of 1,640 last week. Laurence Balanco suggests the index could push past the September high of 1,730 to set a new peak at around 1,770. Meanwhile, the Kospi 200’s breakout looks unsustainable, while the SET50 continues to consolidate. Laurence sees the Thai property sector tracing out a basing pattern and highlights Asian Property and Pruksa as buy candidates.

GLOBAL: Shipbuilding. Saurabh Chugh expects Singaporean yards to do well in upcoming tenders from US and Mexican drillers, which should help ease concerns over Chinese competition and execution risk in Brazil. But Terence Park believes that while the outlook for Korean shipbuilders is improving, this will take time and the recent rally is overdone. Saurabh maintains a BUY on Sembcorp Marine and Outperform on Keppel Corp, while Terence remains a SELLer of Hyundai Heavy and DSME, preferring Hyundai Mipo and Samsung Heavy.

CHINA: SMEs. Good news from SME-land, as China Reality Research’s regular checkup finds their domestic orders grew faster in 3Q (see chart) while exports declined at a slower rate. Since CRR’s data lead official numbers by one quarter, David Murphy suggests investors prepare for a pleasing end to 2013. Demand, utilisation and margins are all improving and small firms are hiring more workers, while other major costs remain stable. The only downside is that as working-capital needs rise, credit is getting harder to find.

JAPAN: Nissan Motor. The automaker is roaring back, says Christopher Richter, who expects it to earn 60% of its FY3/14 profit in 2H. And FY3/15-16 prospects look even better as its product investments start paying off. Chris forecasts above-consensus profit and substantial margin expansion for those years and reiterates his High-Conviction BUY call.

KOREA: Market. It looks like we’re about to see that elusive Korean beast - a positive quarter - albeit a rather puny one. Shaun Cochran forecasts aggregate 3Q13 earnings to rise by 25-30% QoQ, though this is down about 20% YoY due to a high base. No sector looks set to miss substantially, but there’s also no indication that any cyclical sector will outperform and no individual stock looks likely to beat expectations significantly. Indeed, we expect most big names to miss. Only Hyundai Motor, Dongbu Insurance and Lotte Shopping seem like potential beaters.

Also inside today Australia: Banks Japan: West; Sony China: Resources; ChinaOpps; China Power Hong Kong: Huaneng Renewables Taiwan: FE New Century India: HDFC Bank; Zee Entertainment Singapore: Keppel Reit Malaysia: UEM Sunrise Thailand: Robinson Department Store Philippines: Metrobank

Leading indicator China SME order-value growth vs GDP

Source: CRR, NBS

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Asia Morning Line Wednesday, 16 October 2013

Please see important notice on last page Page 2 of 18 Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com

But first . . . Heartfelt condolences

CLSA conference call invitations Dynacolor (5489 TT) & Geovision (3356 TT)

Dynacolor - Friday, 18 October 2013: 4:30pm Hong Kong Geovision - Monday, 21 October 2013: 4pm Hong Kong Moderator: Leonne Chen, Analyst Speaker: Dynacolor - Mr Anthony Yeh, Vice President Geovision - Ms Jean Chen, IR Manager

Call us on one of the conference numbers.

Confirmation number: Dynacolor - 0304380# for all countries Geovision - 0304374# for all countries

Dial-in Dial-in Hong Kong 852 2112 1700 Philippines toll free 1 800 1855 0016 Australia toll free 1 800 007 641 South Korea toll free 00 798 8521 7321 Sydney Access (612) 8223 9907 Seoul Access +82 2 3483 1263 China Access 4008 108 333 or 4006 786 777 Singapore Access +65 6622 1173 India toll free 000 800 440 1452 Taiwan toll free 0080 185 4006 Indonesia toll free 001 803 016 1444 Taipei Access +886 2 2162 6307 Japan toll free 00 531 85 0119 Thailand toll free 001 800 852 7320 Tokyo Access +81 03 5767 9337 UK toll free 0800 068 8163 Malaysia toll free 1 800 805 462 Europe toll +44 (0203) 024 5280 KL Access +603 6207 4052

This conference call is strictly for CLSA clients. Non-clients are not permitted to join the call under any circumstance. Clients may be asked to identify themselves to the operator and the call may be momentarily disrupted for this purpose. Clients of CLSA who join this conference call are not permitted to record the conference call or redistribute the content from the call without CLSA’s prior written permission. The content, which is proprietary to CLSA and is provided for CLSA client’s personal and non-commercial use only, will be available for private circulation to professional and institutional clients via CLSA’s website following the call. This communication is for your information only and does not constitute any recommendation, representation or warranty. The content of this communication is subject to, and should be read in conjunction with, the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html. A hard copy of this may be obtained on request from CLSA Publications or CLSA Compliance Group, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.

On behalf of all at CLSA, we extend our heartfelt sympathies to the people of the Philippines as they cope with the devastation caused by the earthquake that struck yesterday as the country celebrated the Muslim holiday of Eid al-Adha. The magnitude-7.2 tremblor hit the tourist island of Bohol and caused havoc throughout the Central Philippines, jolting the

Visayas, Mindanao and southern Luzon. Centuries-old churches collapsed, modern buildings crumbled and national highways were also damaged. Our sincere condolences go to those who have lost family members and friends, and we wish those injured in this disaster a speedy recovery.

With the increasing need for surveillance given terrorist activities and traffic monitoring, growth of IP cameras is on the rise. According to IMS Research, global IP camera revenue will increase at an explosive 24% Cagr over 2012-15 to around US$11bn in 2015. Geovision (3356 TT) is our top pick in the space. We expect the company to outgrow its peers thanks to: strong channels and brands; the convenience of switching to IP

cameras, and its software lead. We forecast it to deliver a 33% sales Cagr over 2012-15. Dynacolor (5489 TT) is the largest IP camera ODM play in Taiwan, with Europe (50%) and the USA (30%) the main exposure. We like the company for its strong R&D capabilities and rich product offerings. We expect it to deliver 8%/18%/17% sales growth in 2013/14/15 and post a three-year EPS Cagr of 20% over 2012-15.



Global - Technicals Extension of the trend US still heading north, Kospi into resistance, Thai property bottoming.

Laurence Balanco +61 2 85714253 [email protected] The resilient price action in the US market, in spite of growing concerns over the country’s debt issues, keeps the uptrend off the June 2012 lows intact with the possibility of new highs above the September peak of 1,730. Across the regions we see the Korean Kospi 200 battling at major overhead resistance, while in Thailand we are witnessing evidence of basing price action in the property-development sector. Asian Property and Pruksa Real Estate are the standout stocks in this space.

US resilience. Last week’s sharp reversal off the 9 October low of 1,640 (new pivot support) accentuates the S&P500’s resilience in the face of the country’s debt-limit issues. This rebound raises the potential for another push to clear the September high at 1,730, with projections and the topside of the rising pattern coinciding at 1,753 and scope to ascend to 1,770 where we would position for a peak. Such a move would be seen as an extension of the advance off the June 2012 lows rather than a new bull phase as long as the daily/weekly momentum and breadth divergence remain intact.

Korea capped. The Kospi 200 has surged out of the tight trading range which has dominated trade over the past two weeks. However, the non-confirmation from the daily momentum indicator and major overhead resistance provided by the 2010/2013 highs at 270-273 suggests that a sustainable breakout from the large 18-month-old trading range is unlikely. As such, we would fade this move into the 270-273 area. In addition, we continue to flag slowing upside momentum and overhead resistance seen in two heavyweight stocks, namely Samsung Electronics (005930 KS - 1,457,000 won) and Hyundai Motor (005380 KS - 263,500 won).

Thai property developers base out. The SET50 continues to consolidate below major resistance at the 1,024-1,027 area following the breakdown from the 2012-13 uptrend channel. We focus on the Thai property-development sector as it has traced out an inverse head-and-shoulders basing pattern following the 40% decline from the March peak. It would take a break above 298 resistance to trigger the bullish implication of the cited basing pattern. Such a move would support a minimum upside target of 390. Key support is provided by the 50-day moving average, currently at 268. Asian Property (AP TB - Bt6.0) and Pruksa (PS TB - Bt22.7) display similar basing patterns and are presented as buy candidates.

Global - Shipbuilding Rigs ramp up Market concerns overdone, we prefer Singaporean yards to Korean.

Terence Park, CFA +82 2 397 8574 [email protected] Saurabh Chugh +65 6512 2335 [email protected] In Singapore, we believe dual concerns of rising Chinese competition and Brazilian execution risks are overdone and remain bullish on Sembcorp Marine and Keppel, and expect 40-50 jackup orders in the next 12 months. In Korea, investors seem positive on a long-term recovery, but are surprised by the recent rally, thus we believe share prices have run ahead of fundamentals, and our preference remains for Hyundai Mipo and Samsung Heavy.

For more details, please click on the AML Extra thumbnail in the sidebar.

Price Action

Climbing the wall of worry S&P500 daily log chart with 200-day MA

Source: CLSA, Bloomberg, Updata

Thai property bottoms Asian Property daily log chart

Source: CLSA, Bloomberg, Updata

Our technical view on individual stocks may differ from our fundamental recommendations.



China - SMEs Strong finish CRR’s SME data point to a good final quarter to 2013.

David Murphy +86 10 5965 2028 [email protected] Lei Chen +86 10 5965 2025 [email protected] Feedback from our regular quarterly visit to small and medium-sized private manufacturers across China confirms continued growth in domestic orders to SMEs in 3Q13. China Reality Research began this data series back in 2007. A backtest of our findings against China’s national GDP and export numbers shows that our data lead official figures by a quarter. Investors should expect a good final quarter to 2013.

Orders up. YoY growth in domestic orders to the CRR SME panel accelerated from 3.6% to 6.6% in 3Q. Meanwhile, the rate of deterioration in exports eased with average YoY growth in overseas orders to the panel at -0.8% in 3Q, compared with -2.9% in 2Q. Restocking is one reason for the better economic data. Improved fundamental demand is another. Compared to a year ago, the share of respondents complaining that “weak market demand” was the biggest obstacle to their operations has fallen from 23% to 16%. Thanks to the top-line growth, the average utilisation rate at the firms continued rising in 3Q and at 82.1% stands a little bit higher than in the same quarter of last year. The better business environment is boosting SMEs’ demand for labour.

Profitability gains. Both gross and operating margins at the SMEs are improving. Ex-factory and export prices rose by more than 1%, exceeding average growth in raw material costs per unit product of 0.9% YoY. Other major costs like wages were stable compared with 2Q. Logistics costs rose 2.4% YoY on average while growth in environmental-related expenses accelerated from 2.0% in 2Q to 2.3% in 3Q.

Credit demand rises. CRR’s Capex Index rose from 51.8 to 55.5 in 9M13 and now almost half of the firms expect their capital spending this year to exceed last year’s. Increased capex has boosted the SMEs’ demand for capital. After a sharp drop in 2012, CRR’s Credit Demand Index continued improving in the third quarter. Now more than one-third of our SMEs show a clear interest in demand for bank loans.

But credit supply worsens. However, the decline in CRR’s Credit Supply Index reveals that more SMEs are finding it harder to access bank loans than a year ago. More than half of our SMEs also report higher borrowing costs. Around 30% of the panel use banker’s acceptance bills to fund their working capital. The annualised discount rate of these bills averages 6.6% at present; “higher” than in the same period last year, according to most (77%) of the firms.

Japan - Nissan Motor Second-half comeback Set for significant growth from 2HFY3/14; High-Conviction BUY.

Christopher Richter +81 3 4578 8035 [email protected] What is the greatest second-half comeback in US sporting history? San Francisco 49ers versus Philadelphia Eagles in 1989? The Eagles’ 2010 21-point-comeback in eight minutes against the New York Giants? Or could it be Nissan in FY3/14. We expect the automaker to earn 60% of its operating profit in 2H. Moreover, with a typhoon of investment headwinds dissipating in FY3/15, we see the operating margin expanding from 6% to 8%. Nissan is our High-Conviction BUY among Japan’s automakers.

Investment payoff coming soon in FY3/15. Our FY3/14 net-earnings outlook for Nissan (7201 JP - ¥1,001 - BUY) is little changed since our last update. However, we have amended our operating-profit and equity-

In need of credit CRR SME Credit Demand Index

Note: A reading above 50 indicates an overall increase in SMEs’ demand for bank loans. Source: CRR

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Renaissance New 2014 Infiniti Q50

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income projections after seeing how the firm’s accounting changes played out in the 1QFY3/14 results. Nissan modified its accounting policy to treat its Chinese joint venture as an equity affiliate instead of proportionally consolidating it and we have amended our forecasts accordingly. We now project strong above-consensus profit growth in FY3/15-16, with substantial margin expansion as new investments pay off.

New global sales outlook. We have revamped our growth expectations for global vehicle-sales volume, leaning on the relationship between GDP-per-capita and vehicle penetration. Based on our real-GDP forecasts, sensible vehicle-scrapping assumptions and population growth, we provide a useful new-vehicle-sales forecasting mechanism. This puts our by-market vehicle-volume assumptions on a sounder footing and we will eventually roll it out to our other company forecasts. Using this approach, we expect global sales volume to enjoy a 3% Cagr from FY3/13 to FY3/20.

What new investments will do. Despite a few bumps, Nissan’s investment in products has been paying off. For example, the sales rate for the Altima, Pathfinder and Rogue are up; the Infinti Q50 and Q60 are off to a good start; and a new Tennessee-made Rogue is coming. Moreover, with a new Mexican line, constrained Sentra production will be able to rise.

Large upside on FY3/15 view. Based on the global economic-profit valuation approach, as outlined in our Walls of Jericho: Razing global valuation barriers report, we maintain our ¥1,400 target price. At 40%, Nissan has the largest implied upside among our Japanese automaker coverage and we maintain our High-Conviction BUY call on the stock.

Korea - Market Rare quarter Earnings for 3Q set to climb, yet no evidence for optimistic outlook.

Shaun Cochran, CFA +82 2 3978427 [email protected] Korea is headed for a rare positive quarter in 3Q in absolute terms with numbers set to climb 25-30% QoQ (albeit implying a c.20% YoY contraction). That said, a clear disconnect has built between decelerating top-down data and increasingly optimistic expectations for the outlook - we just don’t see it. Bottom up, there is no evidence that the cyclical sectors will systematically outperform. In fact, for most, we see modest misses. Hyundai Motor looks relatively strong, while Hana Financial is a downgrade risk.

3Q13 earnings driver changes. The won did not move substantially against any major currency on an average basis in 3Q13. On an ending balance basis, the moves were in the 3-6% range QoQ. Regional PMI data has been rising, however, the second derivative peaked in July. Quarterly exports in 3Q13 fell 3% QoQ. This is up 3% YoY. Domestically, Korea’s PMI is contracting at a slower pace. Business sentiment has turned back down but consumer sentiment is rising.

Top-down expectations. Putting the actual 3Q13 export and PMI results into our coincident model suggests 3Q13 aggregate earnings will decline about 20% YoY given the strong results last year. This translates to 22tn won, or 28% QoQ. Samsung Electronics (005930 KS - 1,457,000 won - BUY) published preliminary 3Q13 OP of 10.1tn won. This is up slightly QoQ against its 2Q12 preliminary OP. We expect earnings from other sectors to bounce back materially QoQ, similar to the experience of 2012, however, this will be followed by the traditional 4Q weakness.

Bottom-up expectations. Given the probability of bouncing earnings across the board, we do not see any sector where a material aggregate miss is probable. Interestingly, however, there is no evidence that the cyclical sectors will systematically outperform, in fact for most, we see modest misses. Our analysts did not see a single large-cap stock they would like to isolate as a significant beat candidate.

Regional PMIs are rising PMIs by major region

Source: CLSA, Bloomberg

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A third row to capture more customers 2014 Nissan Rogue

Source: Nissan Motor

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Standout stocks. Among our standout stocks we see 11 misses out of 14. Five of those we expect to be material. We expect a modest miss for SK Hynix (000660 KS - 33,450 won - O-PF), Semco (009150 KS - 86,100 won - SELL), Coway (021240 KS - 60,000 won - O-PF), Posco (005490 KS - 312,500 won - SELL), Kepco (015760 KS - 29,700 won - BUY) and Hyundai Mipo (010620 KS - 166,000 won - O-PF) and a material miss for Naver (035420 KS - 632,000 won - BUY), KT (030200 KS - 35,500 won - U-PF), Hana Financial (086790 KS - 40,100 won - U-PF), Samsung Eng (028050 KS - 78,600 won - U-PF) and Daewoo Securities (006800 KS - 9,960 won - SELL). We expect Hyundai Motor (005380 KS - 263,500 won - O-PF) to meet expectations; Dongbu Insurance (005830 KS - 45,800 won - BUY) and Lotte Shopping (023530 KS - 397,000 won - SELL) to modestly beat expectations. Within the large caps, Hyundai Motor appears a clear standout (relatively strong against its peers) while among the miss candidates we are baffled by the full-year confidence implied by Hana Financial’s estimates.

Australia - Banks Biting reforms CBA’s capital position looks stretched relative to peers.

Brian Johnson +61 2 8571 4252 [email protected] Ed Henning +61 2 8571 4257 [email protected] The proposed financial-conglomerates reforms could yet eliminate the non-recourse debt (NRD) quasi-capitalisation of Australian bank’s wealth-management businesses. Excluding this historical financial engineering, the returns on these non-bank businesses are far less compelling than the often cited “zero-capital” intensive base case of many commentators. CBA’s capital position looks stretched relative to peers. We retain our SELL call on CBA.

Level 1, 2, 3 - Thunderbirds are go! But capital upgrading to go! Presently, publicly disclosed common equity Tier-1 ratios are at the Level 2 “banking group” and distorted by the illogical treatment of life subsidiary NRD that creates equivalent CET1 through a process termed “capital upgrading”. The Australian Prudential Regulation Authority’s (APRA) financial-conglomerates reforms (scheduled to be effective January 2015) don’t impact the Level 2 reported ratios but bite at the Level 3 “financial conglomerate” level. We sense that, going forward, regulatory bank ratios will increasingly constrain at the Level 1 “regulated entity” level (ie, authorised deposit–taking institution, life insurance, general insurance) and the financial conglomerate level rather than the present banking group level.

CBA’s capital position looks stretched relative to peers. If you add up the impact of the timing of dividend payments, NRD capital upgrading and the potential imposition of a domestic-systemically important bank (D-SIB) requirement, CBA’s (CBA AU - A$73.01 - SELL) capital position looks extremely stretched relative to peers, to the point where incremental capital management would be unlikely. Conversely, Westpac’s (WBC AU - A$33.24 - U-PF) CET1 position looks strong, particularly given there is no NRD capital upgrading. As such, we believe Westpac will be able to continue to source dividend reinvestment plan (DRP) scrip issuance in-market thus mitigating the dilutive impact of DRP scrip issuance.

Optimising Australian bank’s wealth-management businesses. Furthermore, the prima-facie attractive wealth-management ROEs of the Australian banks are largely a function of NRD capital upgrading. If you strip out the NRD impact, wealth-management ROEs tumble, the only exception being Westpac. Ultimately, we expect the other banks will rationalise their wealth-management businesses by: selectively shedding higher capital-intensive general insurance/life insurance manufacturing in favour of distributing externally manufactured white labelled product; and similarly selectively shedding wealth-management manufacturing in favour of distributing open-sourced external products.

Using offshore banks and non-bank activities Bank structure overview

Source: CLSA

Australian bank Life insurance subsidiary

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Source: CLSA

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3Q13 results will aggregate to 22tn won Coincident indicator model final 3Q13 estimate

Source: CLSA, Quantiwise

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Japan - West Solar heartbeat Beats guidance and consensus, issues bold sales forecasts; BUY.

Dean Enjo +81 3 4578 8032 [email protected] West’s upbeat FY8/13 results surpassed guidance and consensus but were generally within the range of our estimates. The company announced ambitious sales guidance for FY8/14, though we feel its operating-profit numbers left room to upgrade conservative megasolar engineering, procurement and construction (EPC) targets. It also released a mid-term plan largely in line with our bullish estimates. We remain BUYers of the most-exposed name to the Japan solar growth story.

Guidance beat. Overcoming a weak 3Q, West (1407 JP - ¥1,532 - BUY) delivered on its promise of a strong 4Q with a slight beat to its guidance. This was in line with our above-consensus estimates. The 4Q strength came from robust megasolar EPC sales, which made up for unsurprising weakness in its B2C business. West reported ¥52.7bn in sales (up 105% YoY), ¥6.4bn in OP (up 328%) and ¥3.1bn in NP (up 250%). Sales and OP in 4Q were the highest quarterly results on record.

Top-line guidance bold; room for OP guidance upgrade. We expected guidance to be conservative but were surprised with the top-line forecast of ¥73.6bn versus our ¥78.5bn estimate. Its OP number is ¥8.5bn versus our ¥9.6bn, but we believe that West will be upgrading these numbers as its 87MW guidance target for megasolar EPC is much less than its annual capability of about 120MW.

Listening to investors; no equity-issuance plans. West does not hold an earnings call but, for the first time, it published earnings materials with a detailed mid-term plan with guidance until FY8/15. We take it as positive that it is listening to investors, and long-term numbers are in line with our bullish estimates. West has also made some changes to its company statutes and increased the maximum allowable shares on Jasdaq, but we confirmed it has no capital issues and no plans for equity issuance. It is also looking to diversify its business into green-energy consulting long term.

Still very cheap; reiterate BUY. The thesis for Japan solar remains strong: it is one of the fastest-growing sectors in the country, and West is the most exposed to this thematic growth. The stock also still looks cheap on valuations, trading at 6.8x FY8/14CL and 9.2x its own earnings guidance (which we believe is conservative), and has a strong fundamental growth story. We reiterate our BUY rating.

Japan - Sony Wider horizons Strong base in Japan, Europe; aiming to expand in USA, China, India.

Christian Dinwoodie +81 3 4578 8044 [email protected] Despite its success in high-ASP Japan and Europe, Sony faces an uphill battle in the critical and more-price-sensitive US and Chinese markets. It has launched its Xperia Z exclusively with T-Mobile in the USA and has several models with operators in China and India that target the high-end and mid-ranges of those markets. Its high-quality products, well-regarded global brand and improving operator relationships will help to drive profit growth in the mobile division. We tag the stock as a double bagger.

Early success in Japan and Europe. Sony (6758 JP - ¥1,919 - BUY) has enjoyed significant early success in Europe and Japan. The firm intends to continue to solidify its position in these core markets as it begins to pick up consumer and operator momentum in newer markets such as China, India and the USA. Over the medium term, these markets should offer significant potential for Sony, and we expect the company to grow its shipments to 75m globally in FY3/16.

Maintain BUY rating West’s share-price performance


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Watch Christian on CLSA TV

Megasolar EPC masters A recently completed site in Fukushima

Source: West

Global growth Sony smartphone shipment forecasts (m units) FY3/13 FY3/14CL FY3/15CL FY3/16CL Japan 6 8 11 12 Europe 16 22 29 36 North America 1 1 1 2 Emerging markets 11 15 19 25 Total 33 45 60 75 Source: CLSA



Set to maintain strong position in Japan. We forecast Sony to ship roughly 8m smartphones in Japan in FY3/14, rising to 12m smartphones by FY3/16. Sony held the leading smartphone market share in Japan in the June quarter. It has benefitted from its relationship with leading operator NTT Docomo (9437 JP - ¥1,571 - N-R) and its new policy of choosing smartphone champions instead of buying small volumes from several vendors. We expect Sony to continue to grow its business with the overall smartphone market in Japan.

Well established in Europe. Europe (east and west combined) is Sony's largest market in terms of volume and value. We forecast Sony to ship roughly 22m smartphones in Europe in FY3/14 and should reach 36m in FY3/16. Sony has strong operator relationships and channel strength in Europe from its former Sony-Ericsson footprint. It also has top-three value share in many European countries. At its recent mobile-strategy meeting for analysts, Sony management indicated that it expects to achieve over 10% market share in Europe overall within a couple of years.

Long road ahead in competitive US market. In our near-term forecast, we have modest expectations for Sony’s smartphone shipments in North America, where it has less established operator relationships. We expect it to ship roughly 1m smartphones in North America in FY3/14, and our forecast includes just 2m shipments by FY3/16. There may be significant upside to our forecast if it lands more major operator contracts. Currently, Sony sells various Xperia phones in the USA unlocked as well as through an exclusive agreement with T-Mobile for its Xperia Z line.

Enter the dragon - flexibly. China has the largest mobile market in the world. Sony’s management has indicated it believes it is possible for the company to hold 10% of China’s smartphone market within the next three years. Sony’s confidence is in part due to the strong localisation of its business in China and its past experience with localising other products. It has achieved strong brand recognition in China across several product categories. Sony is also addressing the China market from the high end with the Xperia Z series and from the mid-range with the Xperia C. To tackle the mid-range market more cost effectively, the company has chosen MediaTek (2454 TT - NT$394.0 - BUY) chipsets and will expand its outsourcing to partners such as Arima (6289 TT - NT$3.5 - N-R), Compal (2324 TT - NT$22.8 - SELL) and others.

Already well-loved in India. Sony is a top-three smartphone brand by revenue in India, and it has localised some models via its R&D team in Bangalore. The company has also restructured its distribution model by providing handsets to more than 100 regional distributors instead of having a single national distributor. Sony India also plans to set up a chain of 200 standalone Xperia franchise stores across the country by the end of this fiscal year to showcase its smartphone range.

More attention on emerging markets. To address smartphone growth in emerging markets, Sony also plans to release a low-cost smartphone with a Firefox-based operating system in 2014. Sony Mobile has indicated its goal of expanding its smartphone business in emerging economies and plans to work with Telefonica SA - a major European telecommunications company doing business in South America and Africa - to develop the new smartphone.

Tagging the stock as a double bagger Sony’s share-price performance

Source: CLSA

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110

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Sony (LHS)Rel to Topix

(¥) (%)



China - Resources Caution on coal Earnings preview; favour defensive miners over leveraged names.

Andrew Driscoll, CFA +852 2600 8528 [email protected] Daniel Meng +852 2600 8355 [email protected] The 3Q13 reporting season should show a sequential profit decline for coal producers as lower prices outpace cost decreases. We see most downside risk to consensus 2H13 estimates for China Coal and Hidili. Metal names should report relatively better earnings and Jiangxi Copper may benefit from positive inventory carry. We are cautious on the sector, but see some value in defensive names such as Shenhua and Shougang Fusha.

Coal price to pressure margins. Thermal- and coking-coal reference prices fell 8% and 10% QoQ in 3Q13, which will pressure price realisations for coal producers. Yanzhou Coal (1171 HK - HK$7.62 - SELL) has given bullish guidance for 3Q13 earnings (excluding a forex gain), which we view as unrealistic, but its prices may outperform peers on product mix. Cost trends in the quarter should be positive, but we warn of a potential uptick for all producers sequentially in 4Q13 due to the seasonal skew in the cost base. Price momentum in 4Q13 is mixed: spot thermal-coal prices are 5% below 3Q13 average prices, but spot coking-coal prices are 3% higher.

Some positive carry for metals. Gold and base-metal prices fell 2-6% QoQ in 3Q13 on average, but gold and SHFE copper prices rose 6-7% from the June to September balance dates, suggesting some positive inventory carry for integrated producer/traders such as Jiangxi Copper (358 HK - HK$15.14 - U-PF). We expect Zijin’s (2899 HK - HK$1.78 - U-PF) earnings to decline modestly QoQ on prices, but costs helped by production mix. We look for Chalco’s (2600 HK - HK$2.83 - SELL) operating profit to be about flat QoQ following the sale of its loss-making fabrication assets in June. Price momentum is a small positive for aluminium and copper (+1-2%) in 4Q13, but small negative for gold, with spot prices 2% below the 3Q13 average price.

Investors on the fence. The short covering and improvement in sentiment towards China that fuelled the July-August rally has moderated, with concerns that the momentum will fade. Investor positioning remains mixed. There is some appetite by long-only clients to add higher-quality names, while hedge-fund clients are focused on short opportunities. A decrease in liquidity reflects the lack of conviction and subdued interest: daily turnover of our basket has fallen about 10% compared to the previous month.

Select value showing. The 5-15% reduction in share prices in the past month has improved valuations for our preferred names, including Shenhua (1088 HK - HK$23.50 - O-PF), Shougang Fushan (639 HK - HK$2.59 - O-PF) and G-Resources (1051 HK - HK$0.22 - BUY). These stocks offer strong balance sheets, wide margins and reasonable valuations. Despite earnings momentum near trough levels, we remain cautious on the sector with concern over margin recovery expectations (valuations) and gearing; SELL-rated stocks include Mongolian Mining (975 HK - HK$1.23 - SELL), Yanzhou Coal and Zhaojin (1818 HK - HK$6.51 - SELL). Also see our Mongolian Mining Lowering target note.

Bouncing from recent lows Share-price performance from recent lows

Source: Bloomberg, CLSA

0 10 20 30 40 50

MMCG-Resources

RUSALHidili

FushanMSCI China

ChalcoJiangxi Copper

China CoalShenhua

Zijin MiningZhaojin MiningYanzhou Coal

(%)

Chalco is our High-Conviction SELL

Mostly below consensus 13CL/consensus EPS

Note: MMC, Yanzhou Coal and RUSAL are Ebitda. Source: CLSA

0 20 40 60 80 100 120 140

Hidili

RUSAL

China Coal

Chalco

Shenhua

Shougang Fushan

Zijin

Jiangxi Copper

Zhaojin

Yanzhou Coal

MMC

(%)

Price momentum 3Q13 and spot commodity prices Commodity 3Q13 QoQ YoY Spot/3Q13 Gold (US$/oz) 1,330 (6.4) (19.6) 98 LME aluminium (US$/lb) 0.83 (2.3) (4.9) 102 LME copper (US$/lb) 3.22 (1.4) (7.9) 102 SHFE aluminium (Rmb/t) 14,303 (2.1) (7.7) 101 SHFE copper (Rmb/t) 51,262 (2.4) (8.7) 102 QHD thermal coal spot (Rmb/t) 559 (8.2) (12.0) 95 QHD thermal contract (Rmb/t) 549 (8.3) (8.3) 95 Shanxi clean coking coal (Rmb/t) 1,024 (10.5) (25.4) 103 Coking coal benchmark (US$/t) 145 (15.7) (35.6) 103

Source: Bloomberg, CCTD, CLSA



China - ChinaOpps Market-friendly liquidity Inflation unlikely to be a concern with excess capacity and mild M1.

Francis Cheung, CFA +852 26008548 [email protected] Man Ho Lam +852 26008732 [email protected] September total social financing (TSF) slowed MoM but remained high and ensured Rmb3.8tn for the quarter, just shy of our Rmb4tn estimate. We expect 4Q13 TSF to stay strong at around Rmb4tn, bringing 14% annualised growth. September CPI grew 3.1% ahead of expectations, but is unlikely to be a concern due to excess capacity and mild M1. Our top picks are Baidu, Country Garden, Mindray, Sino Biopharm and Xinyi Glass.

Credit remained high. September TSF remained high, helping it reach Rmb3.8tn for the quarter, just shy of our Rmb4tn estimate, despite a slowdown on August. We expect 4Q13 TSF to stay strong at Rmb4tn, bringing annualised growth of 14%. Quarterly TSF has been Rmb4tn since 1Q12. The only exception was the excessive lending in 1Q13 of Rmb6tn.

Credit needed to sustain GDP. High social financing is needed to sustain GDP growth to meet the annual 7.5% GDP target, especially given a high base in 4Q. However, high liquidity is supportive of the stock market. Market expectation is high with consensus 3Q and 4Q GDP forecasts at 7.6-7.7%. Domestic bank liquidity has been managed well. Shibor was up before Golden Week, but has normalised. However, Bank WMPs average annualised rate of return rose in September, reaching 5%-plus by the end of the month.

Inflation unlikely to be a concern. September CPI grew 3.1% ahead of expectations but is unlikely to be a concern due to excess capacity and mild M1. Core CPI, excluding food and energy prices, was stable at 1.7% YoY. M2 is running ahead of target at 14.2% YoY but M1 is subdued up by 8.9% YoY, indicating low inflation risk.

Market friendly liquidity. The high liquidity is consistent with our 12 September note: ChinaOpps - ‘How long will rally last?’. We have another 7% upside to our year-end MSCI China target. Our top picks are Baidu (BIDU US - US$151.50 - BUY), Country Garden (2007 HK - HK$5.47 - BUY), Mindray (MR US - US$41.28 - BUY1), Sino Biopharm (1177 HK - HK$5.33 – BUY¹) and Xinyi Glass (868 HK - HK$7.91 - BUY). ¹ Covered by joint venture Fortune CLSA.

China - China Power A fair deal EPS inches up despite dilution from acquisition. BUY.

Charles Yonts +852 2600 8539 [email protected] Matthew Li +852 2600 8275 [email protected] Earnings growth from China Power buying Wuhu Power from its parent fully offsets the 9.3% dilution from the stock (85%) and cash (15%) deal. The acquisition will increase its generating capacity about 10% and looks to be at a fair price. CPI remains one of our preferred IPPs, thanks to its attractive valuation at 5.6x 14CL PE and 0.7x 14CL PB, and its relative insensitivity to coal-fired tariff cuts. We keep our BUY rating and tweak our target up to HK$3.50.

Asset injection from parentco, paying by stock swap/cash. China Power (2380 HK - HK$2.93 - BUY) announced Tuesday that it proposes buying 100% of Wuhu Power from its parentco, CPI Holdings, for Rmb1.45bn (HK$1.8bn). It will pay for 85% of the deal by issuing shares at HK$2.88 (a 1.4% discount to the latest close) to CPI Holdings, for a 9.3% dilution. It will pay the remaining 15% with cash. After EGM approval, it will consolidate Wuhu Power for the 2013 full year.

EPS inches up, while BVPS falls slightly Pre- vs post-deal: Our 2014 forecasts Full-year 14CL Before After Change % EPS 0.41 0.41 1.10 BVPS 3.26 3.22 (1.20) ROE (%) 12.90 13.20 0.30 14CL PB 0.9 0.9 1.20 14CL PE 7.2 7.1 (1.10) Source: CLSA

Inflation unlikely to be a concern

China CPI growth vs M1 growth

Source: CEIC, CLSA

0

5

10

15

20

25

30

35

40

45

(4)

(2)

0

2

4

6

8

10

1998 2003 2009 2014

CPI YoY (LHS)M1 YoY (leading 6M)

(%) (%)

Quarterly TSF has been Rmb4tn

Total social financing (quarterly)

Source: CEIC, CLSA

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

Rmb loans FX loansEntrusted loans Trust loansBanks acceptance bill Corp debtNonfinancial equity Implied others

6.2t

n

3.8t

n

4.0t

n

4.0t

n

3.9t

n

(Rmbbn)

3.9t

n

3.9t

n



Profitable but high-beta power plant. Wuhu Power owns two 660MW coal-fired units in Wuhua (Anhui province), near the Yangtze River, with access to both inland and cheap seaborne coal. Helped by Anhui province’s solid power demand (up c.10% YoY YTD) and a Rmb421/MWh on-grid tariff that is still reasonable after the reduction, the Wuhu project should be quite profitable. High leverage (liabilities/assets of 84%) means Wuhu Power’s earnings sensitivity to coal prices is high, and it lost money in 2011 and 1H12.

Fairly priced asset. The Rmb1.45bn consideration is based on 6x annualised 1H13 net profit (Wuhu Power’s 1H13 pretax profit was Rmb162m), in line with current IPP valuations. Due in part to its high gearing, Wuhu ran at a punchy 34% ROE in 1H (annualised), and the acquisition price implies a 1.9x PB.

EPS inches up despite dilution. Earnings expansion from the reasonably priced asset injection will fully offset the 9.3% share dilution. Overall, the acquisition boosts 13/14CL EPS by c.1%. The PB valuation for both 13CL and 14CL also climbs c.1%, but a higher ROE offsets this. All in, our Gordon-growth-model derived target climbs slightly from HK$3.42 to HK$3.50. We maintain our BUY call.

Hong Kong - Huaneng Renewables Less dilution Long-awaited placement came in light. BUY.

Charles Yonts +852 2600 8539 [email protected] The 6.8% dilution from Huaneng Renewables’ long-awaited placement of new shares is a few months earlier than we had built into our model, but more importantly, it is smaller. Adjusting to the proposed figures boosts 14/15CL EPS by 16%. We raise our DCF-based target price from HK$2.86 to HK$3.73, leaving 26% implied upside. We keep our BUY rating, with the stock’s biggest overhang removed.

Diluted at last . . . Tuesday morning, Huaneng Renewables (958 HK - HK$2.97 - BUY) announced it would raise c.HK$1.55bn through a placement of 582.3m H-shares (20% of existing H-shares; 6.8% overall dilution). The offer price of HK$2.7 represents a discount of 7.5% to Friday’s HK$2.93 close and a 2.7% premium to the 30-day average. The shares go to six to 10 ‘independent professional, institutional and other investors . . . not connected with the company’.

. . . and less than expected. Everyone and their dog have long expected a share offer from Huaneng Renewables. The actual c.7% dilution was substantially less than the 2bn share issue we had been building in for 2014. The price is also better than our HK$2.5/share assumption. The flip side is that 15CL net gearing rises from 150-160% previously to 200% now.

Back to fundamentals. With dilution out of the way, the focus should return to the company’s fundamentals, which continue to be very strong. The 1-3Q13 wind generation it announced last week was up 50% YoY, accounting for 73% of 13CL (versus 65% of 2012 actuals at this point last year). The most important province, Inner Mongolia, continues to avoid relapse, with 3Q output up 89% YoY.

Still BUYers. After adjusting for the actual proposed equity offer versus the more aggressive numbers we had expected, 14/15CL EPS jumps 16%, with a 28% 13-15CL EPS Cagr. Our DCF-based target also climbs 29% to HK$3.73, leaving 26% implied upside. Operating data has continued to surprise to the upside, and the ROE recovery from 5% in 2012 to 13% in 15CL is still running slightly ahead of pace. We keep our BUY rating.

Adding c.10% to total capacity CPI existing coal-fired capacity vs Wuhu power

Source: Company Data, CLSA

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4,000

6,000

8,000

10,000

12,000

14,000

16,000

13CL 14CL 15CL

Wuhu Electric Power

Existing consolidated coal-fired capacity

(MW)

Stalled since 2Q13 on overhang fears Share-price performance

Source: CLSA

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40

60

80

100

120

140

160

0.5

1.0

1.5

2.0

2.5

3.0

3.5


HN RenewablesRel to HSI (RHS)

(%)(HK$)

Approval on track HN Ren increase in wind generation by province (% YoY) 1Q13 2Q13 3Q13 1-3Q13 Inner Mongolia 87 67 89 81 Liaoning 26 24 12 21 Shandong 53 25 8 29 Yunnan 39 40 57 41 Shanxi 208 75 32 99 Hebei 56 - (76) 43 Guangdong 31 69 (23) 37 Xinjiang 39 40 (26) 17 Guizhou 597 (97) 2,068 194 Shanghai 8 24 (4) 8 Jilin 110 5 (1) 19 Shaanxi 4,300 249 84 245 Total 65 44 41 50 Source: CLSA, Company



Taiwan - FE New Century Acid proof BUY on stronger PTA outlook and accelerating property development.

Frank Lin +886 2 2326 8162 [email protected] Scott Wang +886 2 2326 8160 [email protected] Conglomerate FE New Century lost NT$2.8bn on weak purified terephthalic acid (PTA) margins in 2012, so a recovery will improve earnings. We expect paraxylene supply to increase by 35% in Asia in 4H13-2015, boosting margins for PTA, for which it is a key feedstock. Meanwhile, the company will begin presale of its second residential project in the Taipei Far Eastern Telecom Park (T-Park) in 1Q14 and start construction on three commercial buildings in 2014. BUY on a stronger PTA outlook and accelerating property development.

Downcycle in feedstock PX. Paraxylene is the primary feedstock of purified terephthalic acid and is used in 90% of PTA production. PX enjoys a decent spread of US$500/tonne given its limited supply and vast new PTA supply. Rising PX prices have squeezed PTA margins over the past four years. The undersupply of PX will ease from 4Q13 due to an additional 35% capacity increase in Asia in the next three years. We expect PX prices to soften from 1Q14 on the back of this huge new supply.

Stabilising PTA margin implies NT$2bn earnings increase. PTA margins have been squeezed by both the undersupply of PX and oversupply of PTA in the past three years. While demand may remain weak in 2014/15, easing PX supply will significantly improve FE New Century’s (1402 TT - NT$34.8 - BUY) cash margin. For the past four quarters, FE New Century has posted about NT$700m in OP loss from the PTA business. We expect it to cut this quarterly loss to NT$350m in 3Q13 and likely break even in 2014. This would mean a NT$3bn earnings increase.

Accelerating property development. FE New Century will pre-sell its second residential development in T-Park in 1H14 with total sales estimated at NT$3.5bn. It is also set to begin construction of three commercial buildings in T-Park in 2H14. While there will be no earnings contribution until 2016, this accelerating property development should be positive for the stock. However, FE New Century has postponed its land disposal plans this year to 2014/15 while it waits for the Ministry of Education to green-light two potential buyers (private schools).

Maintain BUY on core business recovery. We raise 2014/2015 earnings by 3%/8% on the structural change of the PTA business but cut our 2013 earnings by 6% due to the land-disposal delay. We raise NAV to NT$52.6 (from NT$51.5) and our target to NT$41.1 (from NT$39.9) on better earnings from its PTA operations but keep our multiple unchanged for the business (8x 14CL NOPAT). With 18% upside and 4.7% yield, we maintain BUY.

Huge additional PX capacity

Schedule of coming PX capacity expansion

Source: CAST, ICIS

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

(kt)

PTA operating margin already in trough PTA operating margin

Source: CAST, Datastream

(150)

(50)

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350

700

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900

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Jan 10 Apr 11 Jul 12 Oct 13

(US$/t) PTA margin (PTA-0.67*PX-130)

PTA price (LHS)(US$/t)



India - HDFC Bank A slight blip Uptick in core income key to sustaining valuations. Maintain BUY.

Aashish Agarwal +91 22 6650 5075 [email protected] Prakhar Sharma +91 22 6650 5058 [email protected] Akshat Agarwal +91 22 6650 5065 [email protected] We maintain our BUY call on HDFC Bank despite its first sub-30% expansion in profit in 40+ quarters. We were a bit disappointed by the moderation of top-line growth, but the conservative writeoff of mark-to-market losses is encouraging. A sharp rise in fees and slower cost growth boosted profit, though this may be difficult to sustain. We expect a 22% earnings Cagr over FY13-16, led by revenue growth and operating efficiencies. An uptick in core income will be key to sustaining valuations.

NII growth disappoints, but likely to pick up. The highlight for us in HDFC Bank’s (HDFCB IB - Rs651.4 - BUY) 2Q result was the moderation of net interest income (NII) growth to 15% YoY, the lowest in the past seven quarters, due to a slowdown in loan growth to 16% YoY and 30bps QoQ margin compression to 4.3%. While waning retail loans were the culprit of the sluggish loan growth, the pressure on margins reflects a rise in costs post monetary tightening. As per management, the easing interest rates in the past month, repricing of loans and mortgage buyouts are likely to push up NII growth in future.

Fees and operating cost cuts boost earnings. Sharper growth in fees, led by forex, offset lower NII growth and treasury losses. The bank made aggressive cuts to operating costs, which rose by just 9% YoY in spite of 24% growth in branch network. While we believe the cost/income ratio will fall in FY14 with the scaling up of new branches and cost controls, the pace of cost growth is unlikely to sustain near 2Q levels. Expansion into new markets has helped raise savings deposits by 18%, but overall current and savings accounts (Casa) grew by just 11% with the Casa ratio at 45%.

Asset-quality pressure manageable. During 2Q, the bank’s gross nonperforming loans rose by 38% YoY to 1.1% of loans. Management indicated that while stress in commercial vehicle (CV) loans has continued, slippages in the corporate segment have reduced. HDFC Bank has a high coverage ratio of 74%, but a rise in credit costs has limited its ability to make floating provisions.

Growth in core income will be a key to valuations. Over FY13-16, we expect a 22% earnings Cagr led by top-line growth and operating efficiencies. The bank’s lower exposure to riskier sectors is a positive, but an uptick in core income will be a key to sustaining valuations. We maintain BUY call with an Rs760 price target, based on 3.6x FY15CL adjusted PB. See our recent Indian banks package, Cracking more code, for more in-depth analysis.

Profit growth fell below 30% after 10 years Net profit growth

Source: Company, CLSA

05

101520253035404550

2QFY

03

2QFY

04

2QFY

05

2QFY

06

2QFY

07

2QFY

08

2QFY

09

2QFY

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2QFY

11

2QFY

12

2QFY

13

2QFY

14

(% YoY)

Lower NII growth was a key disappointment Net interest income growth


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35

2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

(% YoY)



India - Zee Entertainment Worries easing Sports, international concerns to abate. Maintain BUY.

Deepti Chaturvedi +91 22 6650 5066 [email protected] Abhinav Sinha +91 22 6650 5069 [email protected] Concerns over volatility in Zee’s sports business and its weak international performance should ease. With 3Q’s large cricket tour facing cuts, and no similar event over the next eight quarters, risks from sports will lessen. Management is beefing up localised content for its overseas operations, which should help boost ad revenue. Meanwhile strong growth from digitisation and higher shareholder payouts remain on track. We keep our High-Conviction BUY.

Lower risk of sports near term, FY15 may see breakeven. Zee Entertainment’s (Z IB - Rs241.7 - BUY) sports business derives revenue from multiple franchises, including wrestling, tennis, football and cricket. With cricket’s strong viewership in India, Zee holds the rights for broadcasting matches from five countries (South Africa, West Indies, Sri Lanka, Zimbabwe and Pakistan) and any Indian matches in these countries lead to a spike in its sports revenue/losses. However, fears of a jump in Zee’s sports losses in 3QFY14 are receding, as the main event of the quarter - the India vs South Africa series - is reportedly being cut in half from the original plan for 24 days of cricket. A look at the cricket calendar suggests Zee will not have to broadcast an Indian tour until 4QFY16. This implies lower volatility from the sports business in Zee’s quarterly financials. Currency depreciation is a negative here, as sports rights are typically dollar denominated and are struck over long periods.

International operations to be a growth driver. Zee plans to raise the proportion of revenue it gets from international from the current 12% to 25% over the next three to four years. Zee currently reaches 670m viewers across the world, largely tapping the Indian/South Asian diaspora for its non-India markets. International revenue has lagged since FY09, with its proportion of total revenue falling 8ppt since then. Zee now plans to better monetise its international reach by targeting the non-South Asian community as well - eg, the Middle East and Southeast Asia. It aims to boost revenue by tapping the local advertising pie, as well as subscriptions, with plans to localise content. We currently do not assume a pickup in international’s share, but note that a 5ppt gain by FY16 implies 9% upside to revenue.

RPS issue moving ahead; maintain BUY. Zee’s Rs20bn-plus redeemable-preference-share (RPS) issue received shareholder approval in a court-convened meeting earlier this week. High Court approval is the next step, and we expect the process to complete within a quarter. With digitisation driving Zee’s 21% profit Cagr over FY13-16CL and its strong cash generation, we maintain our High-Conviction BUY on the stock.

Less sports coverage No. of days of Indian cricket on Zee network

Source: CLSA, ICC

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40

FY13 FY14E FY15E FY16E

(days)

24 days of South Africa series may get cut to 13

Zee aiming to run international around International revenue

Source: CLSA

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FY09 FY13 FY16CL FY16E

International pay revenue (LHS)International as % total revenue

(Rsm) (%)

5% higher contribution implies international

revenue could be double our forecast



Singapore - Keppel Reit Better office Positive results but we remain cautious on potential cash call. SELL.

Yew Kiang Wong +65 6416 7885 [email protected] KReit’s portfolio metrics remain resilient, particularly with better occupancies for Singapore assets, although Australia dragged. Grade-A rents are stabilising, while other positives include early refinancing of its 2014 and 2015 debt - lowering risk from rate hikes. While we appreciate the earnings resilience and portfolio quality, we remain cautious on potential capital-raising to fund MBFC T3. With our S$1.05 target price implying 0.9x PB and a 6.8% yield, we remain SELLers.

Results in line in 3Q13. Keppel Reit (KREIT SP - S$1.25 - SELL) reported 3Q13 DPU of S1.97¢, bringing 9M13 DPU to S5.91¢ arriving at 74% of our full-year forecast, led by new acquisitions, improving portfolio occupancies and higher share of associate results. Property income grew 9.3% YoY, on better occupancy at Ocean Financial Centre (OFC) and new contribution from 8 Exhibition Street while net-property-income (NPI) margins slipped YoY to 78% due to higher repair and maintenance expenses.

Improvement in occupancies. Portfolio occupancy improved from 99.1% to 99.4% led by OFC and One Raffles Quay (ORQ). OFC occupancy inched up to 98.8% (97.9%) mainly on retail leases signed at podium and small office leases. Average rents for the retail podium now average S$15-20/sf, while office leases were signed at S$11-plus per square foot (services sector). Meanwhile, office rents from a materials trading firm fetched S$10-plus per square foot, nudging ORQ’s occupancy from 99.8% to 100%, although this was partly offset by 77 King Street falling from 97.4% to 95.1%. K-Reit now has 11% of net leasable land up for renewal and rent reviews until 2014, mitigating renewal risk. During the quarter, K-Reit also completed construction of 8 Chifley and a retail podium at OFC.

No further refinancing needs until 2015. K-Reit has refinanced both the S$425m and S$282m debt due in 2014. In addition, K-Reit also completed refinancing of S$60m due in 2015. As a result, it has no further refinancing needs in 2014 and 2015 with a current all in interest cost of 2.15% (2.16% in 2Q13) and leverage of 43.9% (44.2% in 2Q13).

Reiterate SELL. While we appreciate K-Reit’s earnings resilience and the quality of its Grade-A office portfolio, we remain cautious on potential capital-raising to fund MBFC T3 in the near term, which remains the key risk to further share-price outperformance. Our target price at S$1.05 implies 0.9x PB and a 6.8% dividend yield; and with 16% implied downside we remain SELLers.

We remain Underweight S-Reits. See our new S-Reit Bible for details.

OFC retail podium has received TOP OFC NPI and NPI margin

Source: CLSA, company

60

65

70

75

80

85

90

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

(%)(S$ 000) Net property incomeNPI margin (RHS)

No refinancing requirements until 2015 Debt-maturity profile

Source: CLSA, company

0

100

200

300

400

500

600

700

800

900

2013 2014 2015 2016 2017 2018 2019

(S$m)



Malaysia - UEM Sunrise Headwinds on the horizon We believe correction has reflected rising policy risks. Maintain BUY.

Chee Wei Loong, CFA +60 3 2056 7874 [email protected] UEM Sunrise has cut its planned property launches from RM4bn to RM3bn due to delays in getting approvals for some projects and is focusing on increasing take-up rates for projects launched previously. Potential property cooling measures to be imposed by federal and Johor state governments could dampen demand. We cut our target price to RM3.40 after applying a 10% discount to reduced RNAV. We believe the share-price correction has reflected the rising policy risks. Maintain BUY.

New projects launches planned. Launches of landed properties for its Nusa Idaman and Nusa Bayu projects in 3Q13 with gross development value (GDV) of RM117m in Nusajaya has seen reasonable take-up rates. This is in addition to the RM0.5bn GDV launched in 1H13 for these two projects. The launch of the first of two luxury condominium blocks in mid-September for its MK22 project in Mont Kiara has seen encouraging bookings of 50%. Total GDV is RM0.9bn for the project. The company also plans to launch the RM1.4bn GDV CS1 condominium project in 4Q13.

Sustained demand. Nearly all of UEM Sunrise’s (UEMS MK - RM2.50 - BUY) projects have seen strong cumulative take-up rates of more than 70% on average except for its Symphony Hills and the just-launched MK22 projects. But its high-end condominium projects like Arcoris was able to achieve high take-up rates due to aggressive promotions.

Potential property cooling measures. The federal government is concerned with the surge in property prices. There has been speculation that it may raise real property gains tax (RPGT), stamp duties and reduce the loan-to-value to discourage speculation in the market. The Johor state government indicated that it may raise property levy from a flat RM10k to 4-5% of property value and limit foreign buyers to buying property from other foreign owners in the secondary market. These measures will dampen demand for UEM’s properties especially in Nusajaya.

Attractive discount to RNAV. Long-term prospects for Nusajaya are good, given its strategic location near Singapore and relatively lower house prices. But policy overhang has led to the share price underperforming by 17% over the past three months. The current share-price discount of 34% to RNAV/share of RM3.80 is attractive. We maintain our BUY call with a revised target price of RM3.40 (previously RM3.90).

Thailand - Robinson Department Store Consuming BUY Domestic-consumption recovery to drive earnings rebound.

Pattawan Phanussopakul +66 2 257 4649 [email protected] We have cut our profit estimates for Robinson Department Store by 5-9% in 2013-15 due to affiliate underperformance, but maintain our BUY call as earnings are on track to recover due to consumption picking up into the festive season in 4Q and a better economic outlook in 2014. To reflect lower earnings, we adjust our target price from Bt75 to Bt70. Valuations are also attractive as the company’s multiple remains cheaper than peers despite its stronger balance sheet.

Results preview. We expect Robinson (ROBINS TB - Bt55.5 - BUY) to post 3Q13 net profit of Bt442m, up 16% YoY but down 1% QoQ. For the quarter, we believe it will report same-store sales growth (SSSG) of 4-5% compared to 3.7% in 2Q13. The company revealed that spending sentiment in 3Q13, although it did not deteriorate from 2Q13, showed only little sign of recovery due to heavy rain. Competition was also intense for

We expect solid 3Q13 earnings Robinson’s quarterly net profit


0

100

200

300

400

500

600

700

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

CL

(Btm)

Reduced target price for policy risks RNAV and target price assumptions Segment Value (RMm) NPV of existing projects 8,814 RNAV undeveloped land 8,112 Cash proceeds from land sales 182 Net cash/(debt) (740) RNAV 16,368 Number of shares 4,331 RNAV / share (RM) 3.80 Target price@10% disc to RNAV (RM) 3.40 Source: CLSA

Attractive discount to RNAV Share price discount to RNAV


(100)(90)(80)(70)(60)(50)(40)(30)(20)(10)

0

Nov 08 Jul 10 Feb 12 Oct 13

(%)

Avg = -48.5%



Bangkok areas as all shopping malls imposed aggressive promotions to draw traffic. As Robinson also used heavy promotions and marketing activities to sustain sales at its stores, we expect its margin to show a QoQ drop in 3Q13.

Better outlook. We believe 3Q13 will be Robinson’s earnings bottom as we expect a slight pickup in SSSG, contributions from new stores, margin recovery and improvement in equity income to support the better outlook from 4Q13. We don’t expect double-digit SSSG but view that the adjustment period is over which should result in better SSSG going forward. Accelerated growth in rental income from more openings of Lifestyle Centres will also be a key growth driver.

We cut earnings on poor equity income. We revised down our profit estimates for Robinson in 13-15CL by 5-9% on the back of lower-than-expected equity income especially from its electronic affiliate, Power Buy. We note that its performance has already improved in 3Q13 due to closures of nonprofitable stores, a change in product mix and cost controls. To reflect lower earnings, we also cut our target to Bt70 from Bt75.

Maintain BUY. We reiterate our BUY call on Robinson as we still like its long-term fundamentals given its dominator status in underpenetrated high-growth rural markets, and zero debt on its balance sheet. Earnings expectations are already low and we believe continued recovery in the economic outlook should see the share price rerate. Compared to its peers, Robinson also looks cheapest on a PE multiple and its share price has lagged peers by 28% YTD.

Philippines - Metrobank More noncore disposal Bank sells another 20% in Global Business Power. Retain BUY.

Alfred Dy +63 2 8604008 [email protected] Metrobank has sold another 20% stake in Global Business Power (GBP) to Meralco PowerGen Corp and while it did not reveal the price, we believe that it is about P7.15bn, which was the amount paid by Orix Corp when it bought a 20% stake in GBP in 3Q13. As such, Metrobank should realise P3bn in net gains and a 50bp accretion to tier-one capital. Moving ahead, we expect the bank to accelerate its lending business. Maintain BUY.

Selling another 20% in GBP. After selling a 20% stake in Global Business Power to Orix Corp in 3Q13, Metrobank (MBT PM - P86.95 - BUY) has disclosed that its investment-banking subsidiary First Metro Investment Corp (FMIC) has signed an agreement with Meralco PowerGen Corp (MGen) for the sale of another 20% stake in GBP. Post-deal, GBP will have an ownership structure as follows: GT Capital at 50.89%; Orix at 20%; MGen at 20%; and FMIC at 9.11%.

Potential P3bn one-time gains. Though Metrobank did not disclose the price, we believe it should be about P7.15bn, which was the price paid by Orix Corp when it bought a 20% stake in GBP from Metrobank in 3Q13. If this is the case, Metrobank should book one-time gains of P3bn given that a 20% stake in GBP has a book value of P4.15bn. The deal translates to a valuation of US$1.71m/MW or 13x 13CL PE and should result in a 50bp increase in Metrobank’s tier-one ratio to around 13.5% post Basel 3 by end-2013.

Leverage is the next game in town. With the aforesaid sale, Metrobank still has two residual noncore assets left in its balance sheet: a 9.11% stake in GBP with a book value of P3.257bn; and 16.82% in Lepanto Consolidated Mining, which has a book value of P1.367bn. We believe that these assets could still be sold in the coming quarters. Now that the bulk of the asset clean-up story is done, we believe that Metrobank will now focus on increasing its risk assets and fee-based income. This is quite timely given its current loan-to-deposit ratio of 63%.

We view consumption recovering in 2014 Thailand’s domestic consumption outlook

Source: CLSA

2.0 1.8

3.4

2.8 3.2 3.6

(2)(1)012345678

03 04 05 06 07 08 09 10 11 12

13CL

14CL

15CL

Private consumption expenditure

Private consumption exclude auto(% YoY)

Deal is accretive Tier-one ratio

Source: Metrobank, CLSA

12.7

12.8

12.9

13.0

13.1

13.2

13.3

13.4

13.5

13.6

Pre-deal Post-deal

(%)

We expect more leveraging ahead Loan-to-deposit ratio

Source: Metrobank, CLSA

50

55

60

65

70

75

80

85

2004

2005

2006

2007

2008

2009

2010

2011

2012

13CL

14CL

15CL

(%)



Maintain BUY. Metrobank remains our favourite among the big-three banks in the Philippines. It is trading at 1.6x 14CL PB with 2014 core ROE of 11.9%. We have a 12-month target price of P111.50/share, which implies 28% upside and 2x 14CL PB.

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© 2013 CLSA Limited, CLSA Americas, LLC (“CLSA Americas”) and/or Credit Agricole Securities Taiwan Co., Ltd. (“CA Taiwan”) Key to CLSA/CA Taiwan investment rankings: BUY: Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL: Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12-month forecast return (including dividends) for the local market where the stock is traded. We define stocks we expect to provide returns of 100% or higher including dividends within three years as “Double Baggers”.

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Asia Morning Line - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/MEMOIR/2013/10/16/64... · 16/10/2013 · Laurence Balanco +61 2 85714253 [email protected] The resilient price