DB Today - 15 July 2016 Global/Macro - pg.jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/15/60e0... · Deutsche Bank Group Markets Research Global Periodical DB Today - Global/Macro

Deutsche Bank Group Markets Research

Global

Periodical

DB Today - Global/Macro

Date

15 July 2016

Friday 15th July 2016

________________________________________________________________________________________________________________

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Amy Tan

Research Analyst

(+1) 212 250-5574

[email protected]

Mairead Smith

Equity Focus

(+44) 20 754-71054

[email protected]

Mark Braley, ACA

Research Analyst

(+44) 20 754-59904

[email protected]

Tim Pierotti

Quantitative

(+1) 212 250 8143

[email protected]

Table Of Contents

Section Heading Page 00





Source: Deutsche Bank

MACRO HIGHLIGHTS

Europe Strategy - European Equity Strategy - Sebastian Raedler Falling bond yields have been the main driver of equity performance since the UK referendum: German 10-year bond yields dropped by 30bps following the vote on the back of increased uncertainty and expectations for monetary easing. This has led bond proxies (consumer staples, pharma) to outperform sharply, while financials and companies with large pension liabilities have dropped and cyclicals have underperformed defensives. While low real bond yields and improving macro data have pushed US equities to an all-time high, European equities – which underperform when bond yields fall – have lagged. Details on page 8

Europe - Special Report - Euroland Strategy – Abhishek Singhania Expectations of an indication, if not announcement, of policy response from the ECB have ramped up yet again ahead of the meeting next week. The market is expecting ~20bp of cuts gradually over the next year and has priced out any term-premium further out on the money market curve. This has resulted in the 2Y fwd 1Y Eonia rate trading close to or below the 1Y fwd 1Y Eonia rate. We maintain the paid position in March-17 ECB Eonia although new positions slightly further out on the curve might offer greater value. Details on page 9

Credit Strategy - Early Morning Reid - Jim Reid We’re straight to the overnight events where firstly there’s some tragic news to report out of France. In what has just been described as a terrorist attack by President Francois Hollande, late last night a truck struck a crowd in Nice celebrating Bastille Day, resulting in a death toll of at least 80 people according to the BBC with many more said to be injured. The driver of the truck was subsequently shot by police, while weapons were discovered inside the truck. The news has dominated the wires overnight and will no doubt influence the European agenda today. Details on page 10

Asia Strategy - India Economics Weekly - Kaushik Das Markets have been remarkably patient with India this year. Subdued activity, profit disappointments, unfavorable inflation developments, banking system stress, and the departure of RBI Governor Rajan have been shrugged off so far. Expectations of a favorable monsoon and passing of GST, coupled with strong capital inflows (especially FDI) have left India's markets buoyant. Details on page 11 Cont’d on next page

GLOBAL MARKET WRAP

INDEX Close 1D YTD %Chg %Chg

S&P 500 2163.75 0.53 5.86

NASDAQ 5034.06 0.57 0.53

DOW 18506.41 0.73 6.21

DJ STOXX 50 2955.13 -0.27 -9.56

FTSE 100 INDEX 6641.27 -0.20 6.39

HANG SENG INDEX 21615.50 0.25 -1.36

MSCI Asia ex Japan 520.95 0.73 4.20

BRAZIL BOVESPA 55480.87 1.62 27.98

RTS-2 INDEX 832.40 -0.40 31.54

COMMODITY PRICES

COMMODITIES Close 1D YTD %Chg %Chg

West Texas 45.68 2.08 23.33

Brent 45.28 -0.90 26.66

CRB 190.10 0.80 7.92

Copper 224.15 0.02 4.99

Gold (Spot) 1332.29 -0.22 25.52

Alum. (LME) 1683.00 0.60 11.68

Baltic Dry 738.00 1.65 54.39

FOREIGN EXCHANGE PRICES

FOREX (vs US$) Close 1D YTD %Chg %Chg

HK$ 7.75 -0.01 -0.05

EUR 1.11 0.11 2.53

JPY 105.76 -0.39 13.67

GBP 1.34 0.09 -9.37

DERIVATIVES

Current %-ile Value Rank

SPX 3M Mat ATM-Strike Imp Vol 12.19 2.0

SPX 3M Mat 90%-110% IV Skew 8.07 0.0

SPX 3M Mat Realized Vol 13.38 25.8

Source: Bloomberg Finance Lp,

CREDIT

Credit Close 1D YTD %Chg %Chg

CDX.NA.IG 71.33101 0.00 -19.17

ITRX.Europe 71.242 0.65 -7.55

CDX.NA.HY 104.636 0.00 3.35

ITRAX.XOVER 321.8381 1.23 2.36 Source: Bloomberg Finance LP

Distributed on: 07/15/2016 08:46:48GMT

15 July 2016


Page 2 Deutsche Bank Securities Inc.

MACRO HIGHLIGHTS

Japan Stratgy - Japan Economics Weekly - Mikihiro Matsuoka It is a truth broadly acknowledged among analysts of the Japanese economy that Japanese household consumption has remained sluggish since the consumption tax hike in April 2014. Real final consumption expenditure of households in GDP statistics, the most representative and comprehensive indicator, has been roughly flat since that time. However, we argue in this report that households, especially among the elderly, are in fact enjoying growing benefits from consumption. Details on page 12

Japan Strategy - JAPAN FI Flash memo - Makoto Yamashita The focus of market attention vis-à-vis domestic politics looks likely to shift to the second FY2016 supplementary budget now that the July 10 upper house election is behind us. This budget is expected to total somewhere between JPY10 trillion and JPY20 trillion, with substantial funds allocated to infrastructure development. Even if the budget does blow out to around JPY20 trillion, we see little prospect of multi-year tax breaks or other measures likely to provide an immediate boost for the economy, and thus expect any upward pressure on JGB yields to be limited. With refunding bond issuance having already been frontloaded to the tune of around JPY40 trillion (leaving ample room for depletion), it would theoretically be possible for the government to leave calendar base market issuance unchanged. However, such an approach might set off alarm bells regarding fiscal discipline, and we thus envisage a modest increase in calendar base market issuance—primarily in the super-long sector—from October or soon thereafter. This could trigger a temporary rise in JGB yields given that opinion is currently divided as to whether or not calendar base market issuance will be hiked. Details on page 12

US Economics - US Daily Economic Notes - Joseph LaVorgna The most important release today is June retail sales, with the consumer price index (CPI) for the same month a close second. Retail sales capture approximately 25% of total consumer spending. Over the past three months, spending has accelerated to a 5.8% annualized rate, the quickest rate of advance since the three months ending June 2015. However, over the last 12 months, retail sales have increased a modest 2.6%. This is likely to remain the trend because job growth is slowing while wage pressures remain fairly modest. In fact, even though we are projecting a 4.0% increase in real Q2 consumer spending, the year-over-year rate would effectively be steady at 2.7%. Details on page 13

KEY COMPANY RESEARCH

ASIA India Consumer - The race to US$10bn - initiating on GSK, Colgate, Emami, Britannia Manoj Menon: We are initiating coverage on four India Consumer Staple companies in the market capitalization band of US$3.7bn–5.1bn – GSK Consumer (Buy); Colgate (Sell); Emami (Hold); and Britannia (Hold). Among the four, based on our detailed assessment matrix (Figure 1), we believe GSK is poised to surpass the US$10bn market cap the fastest. Our stance on Britannia, Colgate and Emami are non-consensus. We expect structural revenue growth challenges for Colgate; we see a cyclical upturn for Emami in FY2017E, like the discretionary element in GSK’s portfolio; we find Britannia fully valued at the current price. Details on page 14 GSK Consumer (GLSM.NS),INR6198.8 Buy Price Target INR7500 Manoj Menon: Initiate with Buy, tgt INR7,500. We expect a cyclical upturn in FY2016-19 after (relatively) poor revenue growth in FY2016. In the medium term, we view Horlicks (health drink) as a natural beneficiary of increasing education spending. We expect (1) the Horlicks base variant to benefit from a recovery in urban consumption, (2) continued good growth of premium variants (which account for c.25% of revenues), currently growing at c.15%, (3) launches of newer products at the >INR500/kg price-point (a white space for it currently), and (4) continued market development and share gains in North India. We initiate coverage fn GSK with a Buy rating and a DCF-based target price of INR7,500 (20% upside). Details on page 15 Britannia Industries (BRIT.NS),INR2859.75 Hold Price Target INR3200 Manoj Menon: Initiate with Hold, tgt INR3,200. The transformation of Britannia (revenues up 1.9x, PAT up 6.1x over FY2011-16) can be viewed in three segments: 1) revenue (strengthening go-to-market strategy, market-leading growth and brand building); 2) cost (supply chain productivity and efficiencies, control over capital costs, large and technologically advanced factories); and 3) capability (people and product). Over 2013-16, Britannia has delivered tangible outcomes on each of the parameters it had set for itself. However, we believe Britannia’s turnaround (under the leadership of Varun Berry since 2013-14) is now complete, and we expect a deceleration in its earnings growth trajectory; we initiate with Hold. Details on page 16

15 July 2016


Deutsche Bank Securities Inc. Page 3


ASIA Emami (EMAM.NS),INR1116.85 Hold Price Target INR1200 Manoj Menon: Initiate with Hold, tgt INR1200. We expect a cyclical upturn in FY2017E after a relatively poor FY2016. We expect: (1) revenue from Emami’s recently acquired brand, Kesh King, to recover as its channel issues are now sorted out; (2) the relaunch of key brands (Navratna, Zandu) in FY2017E with likely higher marketing activity; (3) normal weather (if any) in FY2017E (FY2016 had been affected by poor summer and winter seasons); (4) revenue acceleration in Zandu’s over-the-counter portfolio; and (5) likely benefits of market expansion for ayurvedic players with the entry of holistic brands into staples categories (refer to pp. 13-15 for a detailed analysis). At 31x FY2018E P/E, we initiate with Hold. Details on page 17 Colgate-Palmolive India (COLG.NS),INR931.2 Sell Price Target INR750 Manoj Menon: Initiate with Sell, tgt INR750. Colgate trades on 36xFY2018E P/E, an elevated multiple that suggests a much higher growth rate than we believe is possible. The volume growth is likely to disappoint and not revert to the era of 10% annual increases because 1) toothpaste category having high per capita consumption and penetration levels, 2) it is not a market leader in many of the newer/premium segments in oral care (e.g. herbal, sensitive, gel, mouthwash), 3) sustainable market share gains may not be feasible, as relative competitive intensity remains high (Dabur, HUL, Patanjali). There is further risk from margins which are at peak levels and the need for higher A&P spending. SELL. Details on page 18 Eclat Textile (1476.TW),TWD309 Buy Price Target TWD360 John Chou: Hold to Buy , tgt unchg. TWD360. After a fall of over 40%, we now argue that Eclat’s outlook has improved sufficiently to upgrade the stock to Buy. Cyclically, we see better demand in the US, driven by better-than-expected winter inventory clearance and summer sportswear sellthrough. Structurally, we have growing confidence that the new product will initiate another innovation cycle. We therefore forecast 17E/18E EPS growth of 26%/20%, with conviction that Eclat’s fundamentals should bottom out in 2Q16. We increase our 17E/18E EPS by 8%/16% and raise our target price to TWD360 (implies 19x 17E EPS). Our target price translates into 17% potential upside on top of 3.3% dividend yield; Buy. Details on page 19 China Rail Sector - New orders to lift E&C sentiment; rolling stock names lack catalysts Phyllis Wang: Constructor share prices have corrected 11% in the past quarter on market concerns about potentially lower government spending, led by a shift in policy stance from aggressive easing towards neutral. However, we believe that market concern was overdone, on the evidence of the acceleration in constructors' new orders and healthy growth of transport FAI in 2Q16. We expect orders from infrastructure projects to maintain strong momentum in the coming months. We still like constructors and CCC and CRCC are our top picks. We turn less positive on rolling stock names, on weak rail equipment investment. CRCCE is our preferred stock among equipment producers. Details on page 20 EUROPE European Telecom Equipment - Q2-16 preview: Streamlining Robert Sanders: Wireless capex trends remain very weak, decl. by 9% in 2016, as LTE rollouts taper off. The main positive is 4.5G/NB-IoT is gaining momentum, which should support growth in software-led upgrades. Still, severe cost-cutting is necessary. We believe Nokia offers value driven by ALU synergies & the patent portfolio. Ericsson needs to execute on its savings plan to barely keep earnings flat as some issues in services profitability will be difficult to fix. Details on page 21 Brenntag (BNRGn.DE),EUR45 Buy Price Target EUR51 Andy Chu; Hold to Buy, tgt unchg EUR51. We upgrade to BUY based on easier GP comps from June 2016, an improving US rig count number (which is correlated to Brenntag’s NA oil and gas GP) and a better US ISM reading in June. Therefore, whilst we would not expect a strong set of Q2 results, the organic exit rates for June and July should show growth and the outlook for the remainder of the year looks more promising as trends improve and comps get easier. Given a likely more resilient H2, we upgrade our recommendation from HOLD to BUY with a €51 target price. Details on page 22

15 July 2016




EUROPE Relx PLC (REL.L),GBp1390 Hold Price Target GBp1335 Chris Collett: Buy to Hold, tgt unchg 1,335p. We downgrade RELX to Hold (from Buy). The rationale is valuation, with the stock having moved through our TP of 1335p/EUR17. We think the outlook for the upcoming results and balance of the year will be solid, driven by the Risk division. But with the share price having moved up recently on currency benefits and as a haven from Brexit-related concerns, we think the share price is up with events, hence we move to Hold. Details on page 23 Adidas AG (ADSGn.DE),EUR129.8 Buy Price Target EUR155 Adrian Rott: Tgt EUR133 to EUR155. In a year’s time a lot will have happened. We are mindful of fashion risks but believe in a continuation of double-digit growth, which isn’t what the market has in mind. Margins should have started to move up in early 2017 and consensus could well be 10-20% higher as per our new forecasts. Also, we will have had incoming CEO Kasper Rorsted present his game plan. We explore the five big profit opportunities to go after and sketch out how scenarios could move earnings. The stock trades on 28x our updated 2016 EPS, but that multiple could be as low as 15x, subject to the quantum of improvements from "discretionary measures" one chooses to factor in. Q2s are due August 4.Details on page 24

15 July 2016



TODAY’S HEADLINES

Markets: Risk on continues as BoE leaves policy unchanged but signals easing ahead, US data & corporate earnings pleasing. Bond yields generally higher, energy firms.

USA: Fed's Harker says one to two hikes this year may be appropriate.

USA: Fed's Lockhart says can see one, possibly two rate hikes this year.

USA: Fed's George reiterates fed funds rate is to low relative to the economy.

USA: Final demand PPI up 0.5%mom/0.3%yoy in June, above mkt.

USA: Initial jobless claims unchanged at 254k, below mkt.

USA: Bloomberg consumer comfort index up 1.2pts to 44.7 last week.

CAN: New housing price index up 0.7%mom/2.7%yoy in May, above mkt.

UK: BoE leaves bank rate at 0.50%, above mkt, says most MPC members expect policy easing next month.

UK: RICS house price balance falls 3pts to 16 in June, above mkt.

AUS: Employment rises 7.9k in June, close to mkt, unemployment up 0.1pp to 5.8%, at mkt.

AUS: New motor vehicle sales up 3.1%mom/2.1%yoy in June.

NZL: ANZ job ads index up 0.5%mom in June, 3-month average rises 9.1%yoy.

NZL: BNZ-Business NZ manufacturing PMI rises 0.5pts to 57.7 in June.

NZL: ANZ-Roy Morgan consumer confidence index falls 0.7pts to 118.2 in July.

THE DAY AHEAD.

USA: Fed's Kaplan, Williams, Kashkari, Bullard speaks, CPI (Jun), Empire manufacturing (Jul), Retail sales advance (Jun), IP (Jun), Business inventories (May), U of Michigan sentiment (Jul P);

CAN: Manufacturing sales (May), Existing home sales (Jun);

EMU: CPI (Jun), Trade balance (May);

UK: BoE's Carney, Haldane speaks, Construction output (May);

ITA: Trade balance (May);

DNK: PPI (Jun);

NOR: Trade balance (Jun);

CHN: GDP (Q2), IP (Jun), Retail sales (Jun), Fixed assets ex rural (Jun), Aggregate financing (Jun, tbc), New yuan loans (Jun, tbc);

NZL: REINZ house sales (Jun)

Source: Extract from DB Daily published on 15 July 2016

15 July 2016



Forecast G7 Quarterly GDP growth

% qoq saar/annual: % yoy

Q1 15 Q2 15 Q3 15 Q4 15F Q1 16 Q2 16F Q3 16F Q4 16F 2015 2016F 2017F

US 2.9 2.7 2.1 2.0 2.1 1.4 1.2 1.3 2.4 1.5 2.2

Japan 5.2 -1.7 1.7 -1.8 1.9 -0.8 1.2 1.2 0.6 0.3 1.3

Euroland 2.2 1.5 1.3 1.7 2.2 1.4 1.8 1.8 1.6 1.5 1.5

Germany 1.6 1.6 1.1 1.1 2.7 0.4 2.1 2.1 1.7 1.7 1.6

France 2.6 -0.4 1.5 1.7 2.6 1.1 1.4 1.8 1.2 1.2 1.5

Italy 1.5 1.3 0.8 0.7 1.0 1.3 1.4 1.0 0.8 1.1 1.1

UK 1.8 2.4 1.8 2.4 1.4 2.4 2.4 2.4 2.3 1.7 2.1

Canada -1.0 -0.5 2.2 0.5 2.4 -0.6 2.3 2.1 1.1 1.3 2.0

G7 1.6 2.1 1.8 0.9 1.4 0.8 1.5 2.1 1.8 1.3 1.9 a) Euroland forecasts as at the last forecast round on 01/04/16. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)GDP figures refer to working day adjusted data, except Germany. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions. e) The world aggregate has been calculated based on the IMF weights released in October 2015. Sources: National authorities, Deutsche Bank Research Data updated from Global Economics Perspective note published on 16 June 2016

Commodities: Energy Commodities & Precious Metals Price Forecasts

USD Q4 15 2015 Q1 16 Q2 16 Q3 16 Q4 16 2016 Q1 17 Q2 17 Q3 17 Q4 17 2017 2018

WTI (bbl) 43.6 49.2 33.6 45.6 47.0 48.0 43.6 51.0 51.0 55.0 55.0 53.0 65.0

Brent (bbl) 46.5 54.2 35.2 47.0 49.0 50.0 45.4 53.0 53.0 57.0 57.0 55.0 70.0

US Natural Gas (mmBtu) 2.30 2.66 1.96 2.14 2.73 2.88 2.41 3.03 3.11 2.99 3.39 3.13 3.01

Gold 1104 1161 1184 1255 1330 1350 1280 1350 1320 1280 1360 1328 1310

Silver 14.8 15.7 14.9 16.6 18.3 18.7 17.1 18.8 18.0 17.4 18.5 18.2 18.0

Aluminium

USc/lb 67.8 75.5 68.7 71.2 69.4 70.3 69.9 69.9 69.4 69.9 69.4 69.4 71.2

USD/t 1494 1664 1515 1570 1530 1550 1541 1540 1530 1540 1530 1535 1570

Copper

USc/lb 221.9 250.1 212.3 213.2 199.6 208.7 208.5 199.6 195.1 204.2 213.2 203.0 227.9

USD/t 4890 5512 4678 4700 4400 4600 4595 4400 4300 4500 4700 4475 5023 Source: Deutsche Bank, Figures are period averages Data updated from Commodities Digest note published on 6 July 2016

CENTRAL BANK POLICY (%)

Current Q4-16F Q2 17F Q4-17F

US 0.375 0.625 0.875 1.125

Eurozone 0.00 0.00 0.00 0.00

Japan -0.10 -0.20 -0.20 -0.20

UK 0.50 0.50 0.75 1.00

China 1.50 1.25 1.25 1.25 Source: The House View published on 21 June 2016 * Updated from the House View published on 21 June 2016

15 July 2016



FORECAST FOREIGN EXCHANGE RATES

Vs US Dollar vs. Euro

Countries Current Dec 16 Jun 17 Dec 17 Current Dec 16 Jun 17 Dec 17

United States - - - - 1.11 1.05 0.98 0.90

Japan 105.77 94 94 94 117.76 99 92 85

Euroland 0.90 0.95 1.03 1.11 - - -

United Kingdom 0.75

0.87 0.87 0.87

0.83

0.91 0.85 0.78

Switzerland 0.98 1.09 1.19 1.33 1.09 1.14 1.17 1.20

Canada 1.29 1.34 1.37 1.40 1.44 1.41 1.34 1.26

China 6.68 7.00 7.00 7.00 7.44 7.35 6.86 6.30

India 67.11 68 69 69 74.71 71 67 62 * Sources: Deutsche Bank, Bloomberg, Datastream. Data last updated form ‘Macro Forecasts’ report published on 12July 2016 Current rates taken from Bloomberg Finance Lp

GOVERNMENT RATES Current Q4-16F Q2-17F Q4-17F

US 10Y yield 1.53 1.75 1.75 1.75

EUR 10Y yield -0.09 0.40 0.60 1.10 Source: The House View published on 21 June 2016 *Current Rates taken from Bloomberg Finance Lp

INDEX FORECASTS Current* 2016

DJ Stoxx 600 337.42 380

FTSE 100 6638.98 NA

Dax 600 10038.28 NA

MSCI AC World 411.70 NA

S&P 500 2163.75 2200 Source: : The Equity View published on 5 May 2016 *Current Rates taken from Bloomberg Finance Lp

CORPORATE ACCESS

UPCOMING CONFERENCES/TRIPS/EVENTS

Date Conferences

September 5 – 6, 2016 dbAccess Philippines Corporate Day @ London

September 6 – 7, 2016 Aircraft Finance and Leasing Conference @ New York September 7 – 8, 2016 15th Annual Global Emerging Markets One-on-One Conference @ New York

September 8, 2016 Airline One on One Day @ New York

September 14, 2016 dbAccess Metals & Mining Conference @ London Source: Deutsche Bank For more details log on to www.conferences.db.com

15 July 2016



European Equity Strategy Bond proxies: is the rally about to reverse?

Bond proxies: is the rally about to reverse? Falling bond yields have been the main driver of equity performance since the UK referendum: German 10-year

bond yields dropped by 30bps following the vote on the back of increased uncertainty and expectations for

monetary easing. This has led bond proxies (consumer staples, pharma) to outperform sharply, while financials

and companies with large pension liabilities have dropped and cyclicals have underperformed defensives. While

low real bond yields and improving macro data have pushed US equities to an all-time high, European equities –

which underperform when bond yields fall – have lagged.

Our fixed income strategists now see upside for bond yields. Bond yields have started to rebound earlier this

week – and our analysts expect this move to continue, given: (a) the reduced risk of an immediate macro shock

from the UK referendum; (b) the possibility of more hawkish Fed re-pricing (as markets now expect only a 4bps

increase in the Fed funds rate by year-end, despite the recent improvement in US macro data); (c) optimistic

expectations for ECB easing (the market is priced for further deposit rate cuts and a 12-month QE extension,

while our economists think only a 6-month extension is likely); (d) a reduction in macro risk due to a potential

resolution of Italy’s NPL problem; (e) rising expectations of fiscal stimulus in Japan.

Any sustained rise in bond yields could trigger a significant reversal in European sector performance, given that

relative performance, valuations and positioning for the bond proxies versus financials look extreme.

However, while a short-term reversal of sector momentum is possible, we stay overweight bond proxies

(pharma & our sustainable dividend basket) and remain cautious on financials, as we think a sizable move up in

bond yields is unlikely and see macro risks as still skewed to the downside, given that: (a) global growth is set to

slow further (as weakening US corporate profitability is set to lead to weaker hiring and investment, China’s

credit stimulus is being withdrawn and the credit impulse in Europe is likely to weaken); (b) a further Fed rate

hike, which our economists expect by December, increases the risk of renewed financial stress (via a stronger

dollar, weaker oil and higher US HY credit spreads); (c) if the USD/CNY falls to 7.0 by year-end, as our Chinese

economists expect, this could put further downside pressure on breakeven inflations (and, hence, nominal bond

yields), as some of China’s disinflationary pressure is transferred to the developed world.

We maintain our year-end target of 325 for the Stoxx 600, 4% below current levels. Some of our indicators point

to near-term upside (real bond yields, peripheral bond spreads) – but weakening global growth, the scope for a

hawkish Fed re-pricing and slightly stretched valuations lead us to remain cautious on European equities.

Screen of the week: for investors looking for a near-term reversal in sector performance, we highlight European

stocks with a positive correlation to bond yields that have underperformed since June 23rd.

Sebastian Raedler (+44) 20 754-18169

[email protected]

15 July 2016



Special Report - Euroland Strategy Expectations of a different kind

Expectations of an indication, if not announcement, of policy response from the ECB have ramped up yet again

ahead of the meeting next week.

The market is expecting ~20bp of cuts gradually over the next year and has priced out any term-premium further out

on the money market curve. This has resulted in the 2Y fwd 1Y Eonia rate trading close to or below the 1Y fwd 1Y

Eonia rate. We maintain the paid position in March-17 ECB Eonia although new positions slightly further out on the

curve might offer greater value.

The market is also pricing 9M-12M of QE extension and some changes to the technical features of the ECB QE

programme which could include (1) increase in the issue limits for non-CAC bonds at least, (2) removal of the yield

floor on purchases and (3) deviation from capital key distribution of purchases. We maintain the view that the first

option is the most likely while the third option is the least likely for now.

The steepening of the German curve and the tightening of semi-core and periphery spreads vs. Germany would

suggest that the market is increasingly pricing in the second and third options even though the first options would be

the least contentious.

Bund ASW spreads should widen on any extension of QE, could underperform front-end ASW spreads if the yield

floor on purchases is removed and could tighten if there is a significant and explicit deviation from capital key

distribution of purchases. Renewed concerns about the Italian banking situation should result in a widening of Bund

ASW spreads. Given the recent tightening of Bund ASW spreads which has bought it close to fair value on our

model, a fairly rare occurrence since the start of ECB QE, we recommend Bund ASW spread wideners.

Despite the recent sell-off there are limited concerns about a repeat of Bund tantrum as the sell-off has been more

largely a spread move, inflation breakevens remain depressed, implied volatility remains elevated and positioning in

Buxl futures suggests investors are not chasing the move as yet.

We exit the paid position in EUR 5s10s30s fly as we have added the Bund ASW widener as a risk-off hedge.

Amongst our other trades we maintain the long 30Y Belgium vs. Netherlands, long 5Y Portugal vs. 10Y Italy and long

15Y vs. 20Y Germany on ASW while we exit the paid position in Italy 10s20s30s fly.

Abhishek Singhania (+44) 20 754-74458

[email protected]

15 July 2016



Early Morning Reid Macro Strategy

We’re straight to the overnight events where firstly there’s some tragic news to report out of France. In what has

just been described as a terrorist attack by President Francois Hollande, late last night a truck struck a crowd in Nice

celebrating Bastille Day, resulting in a death toll of at least 80 people according to the BBC with many more said to

be injured. The driver of the truck was subsequently shot by police, while weapons were discovered inside the truck.

The news has dominated the wires overnight and will no doubt influence the European agenda today.

Also overnight we've seen the latest data dump in China. Most notable is the Q2 GDP report which showed growth

as holding steady at +6.7% yoy. Market expectations were for +6.6%. It also keeps China’s economy on track

relative to the government’s growth target of 6.5%-7.0%. June activity data was a bit more mixed. Retail sales

(+10.6% yoy vs. +9.9% expected) rose six-tenths from the prior month and industrial production (+6.2% mom vs.

+5.9% expected) rose two-tenths. However fixed asset investment (+9.0% ytd yoy vs. +9.4% expected) declined six-

tenths from May. Meanwhile we’ve also had the latest credit and money aggregate data this morning. M0, M1 and

M2 money supply all grew more than expected in June, while aggregate financing (1.63tn yuan vs. 1.10tn expected)

and new yuan loans (1.38tn yuan vs. 1.00tn expected) were both more than expected, expanding from 985bn yuan

and 660bn yuan respectively.

Chinese equity markets have been choppy since that data and have fluctuated between gains and losses. Bourses

are little changed as we got to print (Shanghai Comp +0.08%, CSI 300 +0.03%). Elsewhere markets are generally

firmer. The Nikkei (+1.16%) is again leading the way, while the Hang Seng (+0.80%), Kospi (+0.54%) and ASX

(+0.58%) are also up. The China sensitive AUD is up +0.34% having traded softish leading into the data, while the

Yen (-0.83%) has continued to sell off.

The Yen sell off has been one of the features of the last few days. Indeed Ben Bernanke’s visit this week has

sparked a wave of excitement after he was said to have told PM Abe to push through with Abenomics and that

there are tools left to support the economy. Special economic advisor Hamada suggested that the possibility of

helicopter money may have also been discussed in the talks. Indeed since then the chatter around helicopter money

has only really gathered momentum. Yesterday the focus was on one of Abe’s closest and well respected aides,

Etsuro Honda, who said that at a meeting with Bernanke in April the former Fed Chief was said to have floated the

idea of the government issuing perpetual bonds which the BoJ would then directly buy. The WSJ is also reporting

that Honda has suggested that the government should include a minimum of ¥10tn in its planned extra budget in

2016, as well as increasing its asset purchasing target by including new assets, increasing stock purchases and

lengthening the maturity on government bonds it buys. Hondo was quoted as saying that ‘if you take those actions,

I believe that you can produce effects similar to those than can be generated by what Bernanke refers to as

helicopter money’. Despite the exact details still being unclear, expectations for fiscal stimulus are rising by the day

at the moment with the BoJ meeting now just two weeks away. Markets have certainly been boosted by the

prospect of such with the Nikkei +9.8% this week as we type and the Yen -5.6%.

Jim Reid (+44) 20 754-72943

[email protected]

15 July 2016



India Economics Weekly Patient markets

Markets have been remarkably patient with India this year. Subdued activity, profit disappointments, unfavorable

inflation developments, banking system stress, and the departure of RBI Governor Rajan have been shrugged off so

far. Expectations of a favorable monsoon and passing of GST, coupled with strong capital inflows (especially FDI)

have left India's markets buoyant.

This disconnect however is not sustainable. Macro developments need to become more favorable to reward

investor patience, but unfortunately the pace of recovery continues to be gradual and uneven. Production, trade,

sales, credit, private investment, and inflation statistics offer scant evidence of meaningful improvement in macro

fundamentals. The recent pick-up in manufacturing PMI, for instance, should be seen in the context that the level of

the index is essentially no better than where it was three years ago.

A more energized reform agenda, assurance and evidence of prudent conduct of monetary, exchange rate, and

financial sector policies by the incoming RBI governor, and well targeted public spending would be needed, in our

view, for the cycle to attain a proper upswing. Meanwhile, state elections early next year, bottoming of

commodities, stubborn food prices, drag from bad loans in the banking system and lingering global market

uncertainty will continue to offer plenty of challenges to India's patient investors.

Does India need strong policy support to boost growth? There is no need for Indian authorities to provide

substantive policy support at this stage of the business cycle, in our view. India’s growth, even though it is below

normal, remains in a recovery mode and significantly higher than other EM peers. The slowdown in private sector

investment activity is the culmination of past investment decisions having gone wrong due to a variety of reasons,

to which there is no easy solution. In this backdrop, the ideal response should be to allow private corporate sector

to continue deleveraging and repairing their balance sheet, while the government continues its efforts with

improving business conditions and expediting growth-critical reforms.

Kaushik Das (+91) 22 7180 4909

[email protected]

15 July 2016



Japan Economics

Weekly

Sluggish 'consumption spending' vs. robust 'actual

consumption'

Rising STIK breeds confusion

It is a truth broadly acknowledged among analysts of the Japanese economy that Japanese household consumption

has remained sluggish since the consumption tax hike in April 2014. Real final consumption expenditure of

households in GDP statistics, the most representative and comprehensive indicator, has been roughly flat since that

time. However, we argue in this report that households, especially among the elderly, are in fact enjoying growing

benefits from consumption.

Consumption statistics consist of data based on who pays for it (e.g. GDP final consumption expenditures) and who

are the beneficiaries. The latter is not usually noted but is known in GDP statistics as actual consumption. The

difference in GDP data between “final” consumption expenditures and “actual” consumption is “social transfers in

kind” (STIK). This represents goods and services provided by the government and private non-profit institutions at

no cost for the final recipients of these goods and services, such as medical services and public school fees. In other

words, “final” consumption expenditures are the amount spent by households out of their pockets, while “actual”

consumption is the whole value of the goods and services, including the cost of the households paid out of their

pockets, as well as that incurred by the government. The gap between the two has widened significantly in recent

years amid an increase in STIK due to aging of the population, i.e., the growth in “actual” consumption exceeds that

in “final” consumption expenditures.

From an income perspective, STIK is included in “adjusted” disposable income but not in disposable income.

However, social security and taxes, the funding source for STIK, are deducted from disposable income. In other

words, a graying society causes STIK to increase, in turn leading to a decline in disposable income and “final”

consumption expenditures. The rise in STIK is one factor responsible for the lower growth in disposable income and

consumer spending relative to compensation for employees. We believe that Japan’s aging demographics require

us to look not only at “final” consumption expenditures and disposable income but also at “actual” consumption

and “adjusted” disposable income.

Mikihiro Matsuoka (+81) 3 5156-6768

[email protected]

JAPAN FI Flash memo

Risk of super-long JGB issuance being hiked to fund supplementary budget

Overview

The focus of market attention vis-à-vis domestic politics looks likely to shift to the second FY2016 supplementary

budget now that the July 10 upper house election is behind us. This budget is expected to total somewhere between

JPY10 trillion and JPY20 trillion, with substantial funds allocated to infrastructure development. Even if the budget

does blow out to around JPY20 trillion, we see little prospect of multi-year tax breaks or other measures likely to

provide an immediate boost for the economy, and thus expect any upward pressure on JGB yields to be limited. With

refunding bond issuance having already been frontloaded to the tune of around JPY40 trillion (leaving ample room

for depletion), it would theoretically be possible for the government to leave calendar base market issuance

unchanged. However, such an approach might set off alarm bells regarding fiscal discipline, and we thus envisage a

modest increase in calendar base market issuance—primarily in the super-long sector—from October or soon

thereafter. This could trigger a temporary rise in JGB yields given that opinion is currently divided as to whether or

not calendar base market issuance will be hiked.

Makoto Yamashita (+81) 3 5156-6622

[email protected]

15 July 2016



US Daily Economic Notes What should investors pay attention to on today's busy data docket?

Commentary for Today: The most important release today is June retail sales, with the consumer price index (CPI) for

the same month a close second. Retail sales capture approximately 25% of total consumer spending. Over the past

three months, spending has accelerated to a 5.8% annualized rate, the quickest rate of advance since the three

months ending June 2015. However, over the last 12 months, retail sales have increased a modest 2.6%. This is likely

to remain the trend because job growth is slowing while wage pressures remain fairly modest. In fact, even though

we are projecting a 4.0% increase in real Q2 consumer spending, the year-over-year rate would effectively be steady

at 2.7%. Going forward, relatively subdued income growth, which has been evident in employee tax withholding

receipts, is likely to constrain consumer spending on a sequential basis—we are projecting real consumption growth

of 2.5% this quarter and next, which would produce modest year-over-year gains of 2.6%. Besides soft income

growth, another factor that will weigh on consumer spending is the rebound in energy prices. Already, the price of oil

is above its level from a year ago, so the improvement in household cash flow that was the direct result of oil prices'

collapsing from $106 per barrel in July 2014 to a low of $31 per barrel in February 2016 has partially reversed.

Higher energy prices will be the predominant factor boosting the headline CPI, but we expect the core to round down

to 0.1% because of softer readings on apparel and rent of primary residence. In May, the former rose an outsized

0.8% while the latter increased 0.4%. In the past, rental gains of this magnitude have tended to moderate in the

ensuing month. A one-tenth gain in the core CPI would lower its year-over-year growth rate to 2.1% from 2.2%

previously. This compares to year-over-year growth in the core PCE deflator of 1.6%. The retail sales and CPI reports

should overshadow the NY Fed Empire survey. The series within the NY survey we will be paying most attention to is

the six-month outlook for general business conditions. The post-recession low was 9.5 in January, and the series

dramatically improved over the last five months to a 34.8 reading. This is slightly below its post-recession average of

36.4. Note that the manufacturing ISM has averaged 54 over the present business cycle. If the six-month outlook on

the NY Fed Empire survey improves further, then the manufacturing ISM, currently at 53.2, should edge higher. If so,

the probability of an economic downturn would decrease.

The day's remaining economic reports are also of some importance because they will give us more information

regarding the mix of Q2 output. For example, the production of computers and electronic products, which is a

subcategory of industrial production, is a key input into capex in the GDP accounts. Meanwhile, business inventories

are an important swing factor for the economy, and they are expected to be soft, consistent with our view that an

unwinding of stockpiles is dampening overall economic activity.

Joseph Lavorgna (+1) 212 250-7329

[email protected]

15 July 2016



India Consumer The race to US$10bn - initiating on GSK, Colgate, Emami, Britannia

b

Buy GSK Consumer, Sell Colgate We are initiating coverage on four India Consumer Staple companies in the market capitalization band of US$3.7bn–5.1bn – GSK Consumer (Buy); Colgate (Sell); Emami (Hold); and Britannia (Hold). Among the four, based on our detailed assessment matrix (Figure 1), we believe GSK is poised to surpass the US$10bn market cap the fastest. Our stance on Britannia, Colgate and Emami are non-consensus. We expect structural revenue growth challenges for Colgate; we see a cyclical upturn for Emami in FY2017E, like the discretionary element in GSK’s portfolio; we find Britannia fully valued at the current price.

Evaluating GSK Consumer, Colgate, Emami, Britannia on 10 parameters We evaluate the four companies on a proprietary assessment matrix considering 10 parameters (ranked on a scale of 1-10; 10 being the highest) and conclude that GSK scores the highest, followed by Emami, Britannia and Colgate. The parameters are: 1) Industry Penetration; 2) Geographical skew/Distribution expansion opportunity; 3) Market dominance/pricing power; 4) Industry growth; 5) R&D capability; 6) Exposure to Naturals/Ayurvedic segments; 7) Brand premium strength; 8) Multiple growth levers/categories; 9) Quality of management; and 10) Innovation. In our view, Figure 1 captures the ‘Winning formula.’

GSK is a preferred pick; Colgate faces structural revenue growth challenges Some investors believe that stocks with single-category exposure deserve to trade at a discount to peers. We highlight that most Indian consumer companies have single-category exposure on revenues/profits. We believe that assessing the qualitative positioning of each of the companies/categories is preferable to relying on a binary decision based on a single-category parameter. Please refer to our "Consumer Myths " report, dated 26 Feb 2013.

Three compelling reasons to read our report First, our 20-year chronicling of Colgate’s four different phases of growth (page 35); second, our deep-dive on “Holistic brands into Staples” (yoga gurus entering staples business and selling products based on the Ayurvedic positioning (perceived higher quality), page 60); and third, our evaluation of four companies on 10 parameters. We believe that there is a cyclical upturn for Emami and a cyclical downturn for Colgate. Our stance on Britannia, Colgate and Emami are non-consensus.

DCF is our preferred valuation methodology We value GSK Consumer, Colgate, Emami and Britannia on a DCF (risk-free rate of 7%, market risk premium of 7.1%, beta of 0.44 to 0.66, WACC of 10.1-11.7%, and terminal growth of 6%). Industry risks: urban consumption deceleration and slower-than-expected recovery in rural consumption.

Manoj Menon (+91) 22 7180 4358

[email protected]

15 July 2016



GSK Consumer Buy Reuters: GLSM.NS Exchange: NSI Ticker: GLSM

Initiate with Buy, tgt INR7,500. Buy the discretionary in Staples

Price (INR) 6,198.80

Price target (INR) 7,500.00

52-week range (INR) 6,787.05 -

5,418.65

Market cap (USDm) 3,896

Shares outstanding (m) 42.1

Net debt/equity (%) -110.9

Book value/share (INR) 581.46

Price/book (x) 10.7

FYE 12/31 2015A 2016E 2017E

Sales (INRm) 43,076 43,087 50,094

Net Profit (INRm)

5,836.0 6,869.1 7,893.9

DB EPS (INR) 138.77 163.32 187.68

PER (x) 43.8 38.0 33.0

Yield (net) (%) 0.9 1.1 1.4

Growing "taller, stronger, sharper" We expect a cyclical upturn in FY2016-19 after (relatively) poor revenue growth in FY2016. In the medium term, we view Horlicks (health drink) as a natural beneficiary of increasing education spending. We expect (1) the Horlicks base variant to benefit from a recovery in urban consumption, (2) continued good growth of premium variants (which account for c.25% of revenues), currently growing at c.15%, (3) launches of newer products at the >INR500/kg price-point (a white space for it currently), and (4) continued market development and share gains in North India. We initiate coverage fn GSK with a Buy rating and a DCF-based target price of INR7,500 (20% upside).

Weak volumes in FY2016; blame them on macros GSK’s volume growth in recent years has decelerated (c.-0.5% in FY2016 from c.8% in FY2013/14) as a result of a weak macro environment and constant product price increases. However, the company is now making efforts to increase consumption/penetration, especially in the North and West, and is also focused on launching new products/categories to drive growth. We forecast GSK’s sales to show a c.15% CAGR over FY2016-19, led by price growth of c.8% and volume growth of c.7%.

High margins to sustain; we forecast PAT CAGR of 15% over FY2016-19 GSK’s gross margins are amongst the highest in staples due to (1) its market dominance (c.60% market share in health food drink), (2) strong pricing power and (3) premiumization. We expect the company to sustain gross and EBITDA margins with the premiumization of its portfolio, and model 70bps/50bps expansion over FY2016-19E. We forecast a PAT CAGR of 15% over FY2016-19.

Initiating coverage with a Buy rating and a target price of INR7, 500 We value GSK Consumer on DCF (risk-free rate 7%, market risk premium 7.1%, beta 0.66, WACC 11.7%, and terminal growth 6%). Key risks: increase in competitive intensity, change in consumer preference to breakfast cereals or oats, and a change in the fee structure of GSK’s business auxiliary income.

Manoj Menon (+91) 22 7180 4358

[email protected]

15 July 2016



Britannia Industries Hold Reuters: BRIT.NS Exchange: NSI Ticker: BRIT

Initiate with Hold, tgt INR3,200 Good cookie at fair price.




2,564.20



Net debt/equity (%) 2.2


Price/book (x) 19.4

FYE 3/31 2015A 2016E 2017E

Sales (INRm) 78,584 86,788 100,272

Net Profit (INRm)

6,885.4 8,122.8 9,387.2

DB EPS (INR) 45.23 68.55 78.23

PER (x) 31.3 41.7 36.6

Yield (net) (%) 1.4 0.8 1.1

Britannia's turnaround is complete; earnings growth trajectory to decelerate The transformation of Britannia (revenues up 1.9x, PAT up 6.1x over FY2011-16) can be viewed in three segments: 1) revenue (strengthening go-to-market strategy, market-leading growth and brand building); 2) cost (supply chain productivity and efficiencies, control over capital costs, large and technologically advanced factories); and 3) capability (people and product). Over 2013-16, Britannia has delivered tangible outcomes on each of the parameters it had set for itself. However, we believe Britannia’s turnaround (under the leadership of Varun Berry since 2013-14) is now complete, and we expect a deceleration in its earnings growth trajectory; we initiate with Hold.

Expecting margin expansion to be gradual over FY2016-19E Britannia’s EBITDA margin is at an all-time high of c.14.2% in FY2016, having expanded c.740bps over FY2013-16, driven by improving gross margin (c.485bps) and cost efficiencies (c.255bps). However, while gross margin expansion can continue, driven by improving product mix and in-house manufacturing, we believe it will be more gradual going forward as the low-hanging fruits are plucked. We model c.120bps gross margin over FY2016-19E and c.115bps EBITDA expansion to c.15.4% over the same period.

Forecasting revenue CAGR of 16% and PAT CAGR of 17% over FY2016-19E We forecast Britannia’s sales to grow at a CAGR of 16% for FY2016-19, driven by c.10% volume growth and c.6% in price increases. We expect Britannia to grow its core biscuits business (by increasing penetration and market share in rural markets), and to drive growth in its non-core portfolio (cakes, rusk, dairy, snacking and international business) as a result of new launches. We forecast a PAT CAGR of 17% over FY2016-19.

Initiating coverage with a Hold rating and a target price of INR3,200 We value Britannia on DCF (risk-free rate 7%, market risk premium 7.1%, beta 0.6, WACC 11.3% and terminal growth 6%). Key upside risks: higher-than-expected EBITDA margin expansion via cost efficiencies; and market share gains. Key downside risks: inability to pass on input cost inflation; and further increase in related party transactions.

Manoj Menon (+91) 22 7180 4358

[email protected]

15 July 2016



Emami Hold Reuters: EMAM.NS Exchange: NSI Ticker: EMAM

Initiate with Hold, tgt INR1200. Expecting a cyclical upturn in FY2017E




911.80



Net debt/equity (%) 40.0


Price/book (x) 18.1

FYE 3/31 2015A 2016E 2017E

Sales (INRm) 22,172 26,238 31,321

Net Profit (INRm)

4,856.1 3,590.6 4,422.9

DB EPS (INR) 21.60 25.07 28.77

PER (x) 32.1 44.5 38.8

Yield (net) (%) 1.0 0.6 0.7

Multiple growth drivers provide visibility of long-term growth We expect a cyclical upturn in FY2017E after a relatively poor FY2016. We expect: (1) revenue from Emami’s recently acquired brand, Kesh King, to recover as its channel issues are now sorted out; (2) the relaunch of key brands (Navratna, Zandu) in FY2017E with likely higher marketing activity; (3) normal weather (if any) in FY2017E (FY2016 had been affected by poor summer and winter seasons); (4) revenue acceleration in Zandu’s over-the-counter portfolio; and (5) likely benefits of market expansion for ayurvedic players with the entry of holistic brands into staples categories (refer to pp. 13-15 for a detailed analysis). At 31x FY2018E P/E, we initiate with Hold.

A beneficiary of underpenetrated categories Emami’s strong leadership in niche underpenetrated categories and its multiple growth drivers provide visibility of long-term growth. Its strong positioning in the Ayurvedic category positions itself well to disproportionately gain from the Ayurvedic wave. We also like its strong pricing power, which allows Emami to enjoy one of the highest margins in the Indian consumer staple sector.

We forecast 18% revenue and a c.19% EPS CAGR over FY2016-19 We forecast Emami’s sales will post a c.18% YoY CAGR over FY2016-19, aided by new launches, higher growth from Kesh King and a renewed focus on its healthcare portfolio. While the EBITDA margin is at its peak, we believe it has yet to top out, sustained by a strong gross margin trajectory (aided by Zandu, Kesh King). We forecast c.110bps expansion in EBITDA margin over FY2016-19, and a PAT CAGR of c.19% in the same period.

Initiating coverage with a Hold rating and a target price of INR1,200 We value Emami on DCF (risk-free rate 7%, market risk premium 7.1%, beta 0.44, WACC 10.1%, and terminal growth 6%). We find the stock fairly valued at current price and hence recommend Hold rating. Upside risks: a faster-than-expected rural demand recovery, further correction in input prices. Downside risks: increase in competitive intensity, market share losses.

Manoj Menon (+91) 22 7180 4358

[email protected]

15 July 2016



Colgate-Palmolive India Sell Reuters: COLG.NS Exchange: NSI Ticker: COLG

Initiate with Sell, tgt INR750. Palmolive India - Bright smiles but not so bright future.

Price (INR) 931.20

Price target (INR) 750.00


805.18





Price/book (x) 24.8

FYE 3/31 2015A 2016E 2017E

Sales (INRm) 39,819 41,623 46,374

Net Profit (INRm)

5,589.8 5,765.1 6,453.7

DB EPS (INR) 20.55 22.35 23.73

PER (x) 40.3 41.7 39.2

Yield (net) (%) 1.5 1.1 1.7

Likely to face multiple headwinds Colgate trades on 36xFY2018E P/E, an elevated multiple that suggests a much higher growth rate than we believe is possible. The volume growth is likely to disappoint and not revert to the era of 10% annual increases because 1) toothpaste category having high per capita consumption and penetration levels, 2) it is not a market leader in many of the newer/premium segments in oral care (e.g. herbal, sensitive, gel, mouthwash), 3) sustainable market share gains may not be feasible, as relative competitive intensity remains high (Dabur, HUL, Patanjali). There is further risk from margins which are at peak levels and the need for higher A&P spending. SELL.

Decade-low volumes; mean reversion to historical levels of c.10% unlikely Colgate’s volume growth in FY2016 has decelerated to c.3%, a decade-low level, owing to the macro slowdown and higher competition. With incremental market share gains becoming tougher (discussed in detail in this report) and likely lower industry growth (due to high penetration levels), we assign a low probability for Colgate’s volumes to mean-revert to their historical average of c.10% in the medium term. We also chronicle Colgate’s four phases of growth over the last 20+ years (discussed in detail in this report), and we conclude that higher price growth is a necessity over the medium term for double-digit revenue growth to be achieved. Our stance is non-consensus.

Peak margins leave little room for expansion; 10% EPS CAGR over FY2016-19E We see limited room for the company to improve its FY2016 gross margin of 64% which was aided by benign input costs. We expect ad spends to remain elevated as competitive intensity remains high. We forecast EBITDA margin to decline 70bps over FY2016-19. We forecast revenue CAGR of 12.6% for FY2016-19E, with c.6.4% volume growth and an EPS CAGR of 9.7% over the same period.

Initiating coverage with a Sell rating and a target price of INR750; risks We value Colgate on a DCF (risk-free rate 7%, market risk premium 7.1%, beta 0.57, WACC 11%, terminal growth 6%). At our target price, the implied P/E would be 29x FY2018E. Key upside risks: Colgate gaining market share in newer segments of oral care leading to higher volume-led earnings growth.

Manoj Menon (+91) 22 7180 4358

[email protected]

15 July 2016



Eclat Textile Buy Reuters: 1476.TW Exchange: TAI Ticker: 1476

Hold to Buy , tgt unchg. TWD360. One More Time.

Price (TWD) 309.00

Price target (TWD) 360.00

52-week range (TWD) 532.00 - 281.50




Book value/share (TWD) 55.57

Price/book (x) 5.6

FYE 12/31 2015A 2016E 2017E

Sales (TWDm) 25,521 26,805 31,361

Net Profit (TWDm)

4,173.4 3,891.0 5,028.6

DB EPS (TWD)}) 15.03 14.86 18.70

PER (x) 28.9 20.8 16.5

Yield (net) (%) 2.4 3.3 4.2

Cyclicality has bottomed out with a new structural driver; upgrading to Buy After a fall of over 40%, we now argue that Eclat’s outlook has improved sufficiently to upgrade the stock to Buy. Cyclically, we see better demand in the US, driven by better-than-expected winter inventory clearance and summer sportswear sellthrough. Structurally, we have growing confidence that the new product will initiate another innovation cycle. We therefore forecast 17E/18E EPS growth of 26%/20%, with conviction that Eclat’s fundamentals should bottom out in 2Q16. We increase our 17E/18E EPS by 8%/16% and raise our target price to TWD360 (implies 19x 17E EPS). Our target price translates into 17% potential upside on top of 3.3% dividend yield; Buy.

Cyclicality: worst behind us; 1H17 double dip less likely Weak 2017 winter orders were fully reflected in Eclat’s soft May and June revenue, in our view. We expect accelerating YoY growth momentum from July onwards. We see better-than-expected clearance of obsolete winter channel inventory. This should provide Eclat with a clean start to sell winter products again in 1H17. With regard to its clients, Eclat’s private label clients suffered tremendously in 2016. However, we do not expect orders from this group to further deteriorate in 2017. In addition, we are seeing initial signs of restocking by one of Eclat’s major US clients, after six months of destocking.

Jacquard fabric: another new structural product cycle We believe 2017 will be the start of a (smaller) innovation cycle driven by Eclat’s new jacquard knitted stretchable fabric. This should help offset the competition and pricing power faced by Eclat’s existing products. The technological difficulty (body mapping) should also allow better entry barriers. Our recent conversation with industry experts suggests that the new jacquard fabric is getting good traction with sports brands. The brand-led efforts in promoting this product will likely lead to better consumer demand, in our view. We assume the new product will account for 15% of Eclat’s fabric output in 2017 (vs. guidance of 20%). This represents a 2% penetration of such products within all stretchable fabric and is not demanding, in our view.

Increasing forecasts and target price; downside risks We value Eclat using DCF methodology as we expect investors to focus on its long-term competitive positioning. We derive a WACC of 6.61% with a cost of equity of 7.08% (risk-free rate = 1.8%, beta = 0.94, market risk premium = 5.6%), and assume a long-term growth rate of 0%. Downside risks: less favorable FX, weak demand for the jacquard fabric, etc.

John Chou (+852 ) 2203 6196

[email protected]

15 July 2016



China Rail Sector New orders to lift E&C sentiment; rolling stock names lack catalysts

Stay positive on E&C, Buy CCC/CRCC; CRCCE-preferred stock within producers Constructor share prices have corrected 11% in the past quarter on market concerns about potentially lower government spending, led by a shift in policy stance from aggressive easing towards neutral. However, we believe that market concern was overdone, on the evidence of the acceleration in constructors' new orders and healthy growth of transport FAI in 2Q16. We expect orders from infrastructure projects to maintain strong momentum in the coming months. We still like constructors and CCC and CRCC are our top picks. We turn less positive on rolling stock names, on weak rail equipment investment. CRCCE is our preferred stock among equipment producers.

Constructors: better orders; 1H16 results are key short-term catalyst We expect CRG and CRCC to record over 20% growth in 2Q16 new contract value (vs. 16-20% yoy in 1Q16), beating our expectation, primarily due to the urban transit and property development businesses. For CCC, we estimate a recovery in 2Q16 new orders, to grow 15% from 1Q16 (2% yoy) with healthy performance in the dredging and investment business. Good funding and government policy may continue to support solid order performance. We raise our assumptions on CRCC, CRG and CCC’s new contract value by 4-6% in 2016-2017. The three constructors are to release 1H16 results in late August. We forecast their 1H16 net profit to grow over 10% yoy.

Raising earnings/TP; upgrading CRG; CCC and CRCC are top picks We raise 2016E-2017E earnings by 3% on average for constructors, mainly reflecting higher order assumptions. After the revisions, we forecast a 12-13% CAGR in their earnings in 2015-2017. We upgrade CRG to Hold from Buy on the likelihood of a better domestic construction business as well as an attractive valuation. Nearer term, we prefer CRCC due to strong 2Q16 new orders, solid earnings growth, healthy balance sheet and relatively cheap valuation (cheaper than CRG). CCC is our medium-to-long-term top pick as it is a prime beneficiary of the OBOR plan and has excellent risk management in overseas markets. It has the cheapest valuation in the sector.

Equipment: risk down the line in 2016-2017; prefer maintenance machinery Weak truck traffic clouded the demand outlook for locomotives and freight wagons. Hence, we lower our 2016-2017 railway equipment investment assumptions by 4%. We believe that the synergy from the CSR/CNR merger might be smaller than our expectation, based on our latest discussion with management. We cut CRRC’s 2016-2017 earning by 4% but raise Zhuzhou CRRC’s 2016 earnings by 6% on better margin expansion. We maintain our Hold rating on CRRC, but downgrade Zhuzhou CRRC to Hold from Buy due to its weaker medium-term outlook (caused by potentially smaller order size from CNR). CRCC High-Tech (CRCCE) is our preferred stock within the equipment segment due to its strong earnings growth (benefitting from healthy demand for rail maintenance machinery) and attractive valuation.

Valuing railway companies on DCF; risks Our preferred valuation methodology for railway names is a one-year forward FY16E DCF (WACC: 7.4% for CRG, 7.0% for CRCC, 8.0% for CCC, 8.5% for CRRC, 8.4% for Zhuzhou CRRC and 10.6% for CRCCE). Key risks include VAT reform, government spending, margins and political risk for overseas projects.

Phyllis Wang (-) - -

[email protected]

15 July 2016



European Telecom Equipment Q2-16 preview: Streamlining

Strong preference for Nokia over Ericsson Wireless capex trends remain very weak, decl. by 9% in 2016, as LTE rollouts taper off. The main positive is 4.5G/NB-IoT is gaining momentum, which should support growth in software-led upgrades. Still, severe cost-cutting is necessary. We believe Nokia offers value driven by ALU synergies & the patent portfolio. Ericsson needs to execute on its savings plan to barely keep earnings flat as some issues in services profitability will be difficult to fix.

Wireless capex to decline by 9% in 2016 and 4% in 2017 We have updated our bottom-up model on global wireless capex. We now expect a 9% USD decline in wireless capex in 2016 (previously -7%). All regions are expected to decline - APAC is expected to fall by 9% (China: -17% yoy). Europe should decline 13% (led by Vodafone), while the US is set to fall by 5% (mostly due to Sprint). Looking into 2017, we expect another 4% reduction (flat ex China) with only North America likely to grow. The sharp declines in China continue to pose a risk for wireless equipment vendors given Huawei/ZTE may become more price aggressive abroad to maintain growth.

Nokia (Buy, €6.2 target): Focus on synergies, swap-out costs and patents We expect Q2-16 sales of €5.8bn, up 3% qoq, with an adj. EBIT margin of 5.0% (cons: 6.2%). We expect the focus to be around i) the ALU cost synergy target (2018), which could be raised by €100m to €1.0bn (DBe: €1.1bn), ii) ALU swap-out costs, both below-the-line “mandatory” swap outs as well as potential swap-out costs that may need to be booked in opex (incentives), and iii) more detail around restructuring costs. We also note that the ALU squeeze-out may only be 100% complete by October, which could delay the resumption of the buyback. Recent newsflow around IPR (Samsung cross-licence) validates our long-held view that Nokia’s patent portfolio is under-valued. We maintain an above-consensus view on Technologies revenue in 2017E (DBe: €1.12bn vs cons: €0.98bn). Further news on Apple should follow by year-end.

Ericsson (Hold, SKr69 target): Consensus seems derisked but still not cheap We expect Q2-16 sales of SKr56bn, up 7% qoq, with adj core EBITA margin of 10.7% (cons: 9.7%). We note consensus has come down meaningfully over the last mos., providing likely solid setup for shares into the Q. While reports about further restructuring have caused some excitement, we are skeptical on actual earnings progress. Achievements on 9bn cost-cutting plan have been modest ongoing issues in svcs (loss-making network transformation projects) will remain. Given the weak end-demand in networks, we see restructuring required to barely keep earnings flat. At 12x FY17e P/E, val. not yet compelling.

Spirent (Hold, 70p target): Smartphone testing remains a drag Declines in smartphone testing should drive H1-16 sales down 14% HoH to $223m (cons: 218m) and EBIT margins of 6% vs. 14% in H2-15.

ADVA (Hold, €8.5 target, reduced from €10): FX looks set to be a headwind We expect Q2-16 sales of €150m, up 23% qoq/34% yoy. We expect EBIT of €5.9m/4% margin. With BT representing more than 10% of sales, we see ADVA being impacted by GBP decline, with no hedging in place. ADVA’s growth remains strong led by Web 2.0 players, but this pressures GMs. We bring our target to €8.5 (from €10) to reflect a de-rating of peers.

Valuation & risks We value European Telecom Equipment stocks using P/E, EV/EBITDA and SOTP. Risks include changes in global wireless and wireline capex, competitive intensity and FX.

Robert Sanders (+44) 20 754-58394

[email protected]

15 July 2016



Brenntag Buy Reuters: BNRGn.DE Exchange: GER Ticker: BNRGn

Hold to Buy, tgt unchg EUR51. Better outlook for H2

Price (EUR) 45.00

Price target (EUR) 51.00

52-week range (EUR) 55.76 - 40.38

Market cap (EUR)(m) 6,952.5

Shares outstanding (m) 154

DJ (.STOXXE) 316.7

Free float (%) 100

FYE 12/31 2015A 2016E 2017E

Revenue (EURm)

10,346 10,789 10,849

DB PBT (EURm) 586 625 630

Stated PBT (EURm)

549 589 594

DB EPS (EUR) 2.68 2.65 2.69

DPS (EUR) 1.00 0.98 1.00

P/E (DB EPS) (x) 19.2 17.0 16.7

Upgrade to BUY - 1) Comps easier in H2 and 2) NA: ISM and rig count better. We upgrade to BUY based on easier GP comps from June 2016, an improving US rig count number (which is correlated to Brenntag’s NA oil and gas GP) and a better US ISM reading in June. Therefore, whilst we would not expect a strong set of Q2 results, the organic exit rates for June and July should show growth and the outlook for the remainder of the year looks more promising as trends improve and comps get easier. Given a likely more resilient H2, we upgrade our recommendation from HOLD to BUY with a €51 target price.

Forecast changes: virtually no organic growth for 2016, 2017 and 2018 We are increasingly more cautious on the macro-backdrop and therefore are moving our forecasts down to reflect broadly no meaningful organic growth in 2016, 2017 and 2018. We are lowering our EBITDA forecasts by 3.4% and 8.3% for 2016E and 2017E to €826.6m and €830.8m respectively which is some 2% and 7% below Reuters consensus forecasts. In 2009 Brenntag’s EBITDA did not decline organically so we think that the downside risk to our forecasts even if the macro is weaker than expected is limited.

Attractive 6% FCF yield: BUY (from HOLD) with target price at €51 Growth will likely be muted for the foreseeable future but the cash flow remains highly attractive. Brenntag trades on a 6% FCF yield on 2017E and in the absence of any acquisition would put the company below 2x net debt/EBITDA by year end 2017E. We upgrade our recommendation from HOLD to BUY with a target price of €51. We apply a 19x 1 year forward PE multiple (broadly in-line with historical average market premium) to derive our 12 month target price of €51 which is unchanged. Risks include M&A spend, a weaker than expected macro environment and FX.

Andy Chu (+44) 20 754-11360

[email protected]

15 July 2016



Relx PLC Buy Reuters: REL.L Exchange: LSE Ticker: REL

Buy to Hold, tgt unchg 1,335p. LRELX

Price (GBP) 1,390.00

Price target (GBP) 1,335.00

52-week range (GBP) 1,425.00 -

1,011.00

Market cap (GBP)(m) 15,177.6

Shares outstanding (m) 1,092

FTSE 100 INDEX 6,654.5

Free float (%) 100

FYE 12/31 2015A 2016E 2017E

Revenue (GBPm)

5,971 6,576 6,885

DB PBT (GBPm) 1,669 1,857 1,967

Stated PBT (GBPm)

1,312 1,561 1,671

DB EPS (GBP) 60.43 68.58 74.49

DPS (GBP) 29.70 32.67 34.30

P/E (DB EPS) (x) 18.5 20.3 18.7

Downgrade RELX to Hold on valuation grounds We downgrade RELX to Hold (from Buy). The rationale is valuation, with the stock having moved through our TP of 1335p/EUR17. We think the outlook for the upcoming results and balance of the year will be solid, driven by the Risk division. But with the share price having moved up recently on currency benefits and as a haven from Brexit-related concerns, we think the share price is up with events, hence we move to Hold.

Valuation now in line with global peers RELX is now trading on 19x 2017 PE and 13x EV/EBITDA, broadly in line or towards the upper end of global peers. Thomson Reuters trades on 17x and 10.5x 2017 PE and EV/EBITDA respectively while Experian trades on 19x and 11.7x. When we upgraded RELX to Buy in October 2015, our view was that the RELX multiples could move up to trade in line with its operational peers as the market came to fully appreciate its defensive growth. This has played out with RELX’s 2017 PE multiple now at 19x.

We expect 1H results and outlook will be solid Operationally we think the reporting season will be solid for RELX, with good growth in Risk (+7% organic) and Exhibitions (+5% excl cycling) with continued modest growth in STM (+2%) Legal (+1.5%) giving 3.7% overall organic growth. With 52% of revenues from subscriptions, plus high repeat transaction business, we think the outlook for the remainder of 2016 will be reassuring. For investor seeking the safety of a defensive business model with potential currency upgrades to consensus we think RELX remains appealing.

Is there some hidden operational concern? No Some investors may wonder if our move to Hold is driven by some lurking operational concern, but the answer is no. Same as when we recommended being buyers of the stock, we regard RELX as the highest quality professional publisher in our coverage (ranked 7.0 on our proprietary ranking methodology). The strongest assets are its Insurance Solutions, Science Direct and the Exhibitions portfolio. We continue to see the Legal division as a relative laggard in the portfolio. No. 2 placed player Lexis is sandwiched between the big gorilla Westlaw at the top end and Bloomberg Law, growing double digits at the bottom.

Target price remains 1335p/EUR17 Our TP for RELX remains 1335p for the UK listing and EUR17 for the Dutch line. Our valuation is based on the average of DCF and 2016/2017 multiples for PE and EV/EBITDA, which we compare with a group of global information publishing peers. We include DCF in the average to capture longer-term opportunities. Our DCF assumptions are WACC 7.2%, terminal growth 2.5%.

Chris Collett (+44) 20 754-74083

[email protected]

15 July 2016



Adidas AG Buy Reuters: ADSGn.DE Exchange: GER Ticker: ADSGn

Tgt EUR133 to EUR155. Translating muscle into (earnings) power

Price (EUR) 129.80

Price target (EUR) 155.00

52-week range (EUR) 131.25 - 63.68

Market cap (EUR)(m) 25,686.1

Shares outstanding (m) 198

DJ (.STOXXE) 316.7

Free float (%) –

FYE 12/31 2015A 2016E 2017E

Revenue (EURm)

16,915 18,720 20,850

DB PBT (EURm) 1,073 1,315 1,677

Stated PBT (EURm)

1,039 1,370 1,677

DB EPS (EUR) 3.54 4.64 5.93

DPS (EUR) 1.60 1.80 2.10

P/E (DB EPS) (x) 20.6 28.0 21.9

Reiterate Buy with new €155 TP and 5-13% higher forecasts In a year’s time a lot will have happened. We are mindful of fashion risks but believe in a continuation of double-digit growth, which isn’t what the market has in mind. Margins should have started to move up in early 2017 and consensus could well be 10-20% higher as per our new forecasts. Also, we will have had incoming CEO Kasper Rorsted present his game plan. We explore the five big profit opportunities to go after and sketch out how scenarios could move earnings. The stock trades on 28x our updated 2016 EPS, but that multiple could be as low as 15x, subject to the quantum of improvements from "discretionary measures" one chooses to factor in. Q2s are due August 4.

Can the momentum last? Brand adidas has accelerated to 20%+ but we sense faster growth has, more than anything, fuelled concerns about the sustainability of growth, with consensus looking for a sharp slowdown in 2017. Comps are getting tougher no doubt but we suggest being more optimistic on organic trends for three reasons: #1 “good lifestyle” business is finally starting to be a part of the growth model, #2 share gains in North America are for real, #3 the new operational model matters for numbers. See pages 9-18.

Can Kasper Rorsted pull it off again? And what is “it”? There isn’t really a strong reason for why operating margins cannot get to around 10-12%, a claim we back up with benchmarkings, but discussions on how profitability can be restored tend to be too anecdotal for our liking. We have five areas in mind that Kasper Rorsted, the soon-to-be captain of the team, might inspect closely upon his arrival in August: #1 gross margin model, #2 North America, #3 Reebok, #4 retail operations, #5 overheads. We sketch out scenarios for each and estimate that between them there is a €1.1bn profit opportunity, equivalent to a 500bps margin up-lift or €3.90 EPS top-up, only a pinch of which is in our model. Those numbers aren’t discounted and should be seen in context of our 2016 forecasts since the scenarios assume today’s volumes in an attempt to control for gains from future growth. We deem Kasper Rorsted’s first term at Henkel a telling case study. See pages 19-41.

Lifting estimates by 5-13% and TP to €155 We dare to forecast low-teens growth out to 2018 and think visible gross margin expansion from early 2017 can help operating profitability reach 8.7% by 2018. That’s without a new CEO doing any magic. Our DCF-derived TP goes to €155 (WACC 7.9% and 3.0% nTGR – details on page 44). Key risks: gross margin pressure 2018+ if € weakens vs $, consumer macro in Russia & Latam.

Adrian Rott (+49) 69 910-31928

[email protected]

15 July 2016



Appendix 1

Important Disclosures

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Analyst Certification

This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

45 %49 %

7 %33 % 29 %

18 %0

200

400

600

800

1000

1200

1400

1600

Buy Hold Sell

Global Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

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