IND: Strategy Note 17/08 Equity Research Reports…€¦ · Temasek is selling a 21% stake in Intouch to Singtel at THB60.83 per share. ... Delivering on strategy | P5 . Bapcor (HOLD

Equity research│August 19, 2016

Asia Pacific Daily - 19 August 2016

Equity Research Reports…

▌IDEA OF THE DAY | Singapore / Thailand SingTel (ADD, tp:S$4.50) - Raising bets on Thailand and India… | P2 SingTel announced today that it would acquire 21.0% of Intouch and 7.4% of Bharti Telecom for S$2.47bn (US$1.84bn). We estimate that the acquisition is only marginally core EPS accretive (FY18: +0.8%, FY19: +0.6%). We expect minimal impact on gearing. Dividend policy likely to be unchanged.

Intouch Holdings (ADD, tp:THB64.00) - From passive to active shareholder | P3 Temasek is selling a 21% stake in Intouch to Singtel at THB60.83 per share. This implies AIS’s selling price is THB162 per share. We see no immediate share price catalyst but are positive on more active collaborations between Singtel and AIS with others, i.e. Intouch, Thaicom, LTC etc. Maintain Add. ——————————————————————————————————————————————————————————————————————————————————————— ▌Australia 360 Capital Industrial Fund (ADD, tp:A$2.90▲) - Asset sales on the agenda | P4 Aventus Retail Property Fund (ADD, tp:A$2.53▲) - Delivering on strategy | P5 Bapcor (HOLD, tp:A$6.36▲) - Hold on to this little gem | P6 Beacon Lighting (ADD, tp:A$1.78▲) - A tale of two halves | P7 Brambles (HOLD, tp:A$12.66▼) - Business as usual? | P8 Collection House (HOLD, tp:A$1.35▼) - Under new management | P9 IPH (ADD, tp:A$7.47) - Investing for the future | P10 Somnomed (ADD, tp:A$3.84▲) - Building for growth | P11 Sonic Healthcare (ADD, tp:A$25.35▲) - In good health | P12 Sydney Airport (ADD, tp:A$7.85) - Onwards and upwards | P13 Tatts Group (ADD, tp:A$4.23▼) - Digital driving growth | P14 Villa World (ADD, tp:A$2.71▲) - Developing a solid track record | P15 Webjet (HOLD, tp:A$9.95▲) - Impressive year and there is more to come | P16 Whitehaven Coal (HOLD, tp:A$1.90▲) - Leverage works both ways | P17 ——————————————————————————————————————————————————————————————————————————————————————— ▌China/Hong Kong China Merchants Bank (HOLD, tp:HK$15.30) - Extent of de-risking a positive surprise | P18 Country Garden (HOLD▲, tp:HK$3.47▲) - Improved fundamentals, upgrade to Hold | P19 Lenovo Group (ADD, tp:HK$6.00) - Core earnings recovery below expectations | P20 SOHO China (REDUCE, tp:HK$3.15▲) - Weak earnings outlook remains | P21 Techtronic Industries Co (ADD, tp:HK$33.80▼) - 1H16 results: On the floor but looking up | P22 ——————————————————————————————————————————————————————————————————————————————————————— ▌Indonesia Total Bangun Persada (ADD, tp:Rp1,340.00▲) - Brighter days ahead | P23 Tower Bersama Infrastructure (HOLD, tp:Rp6,400.00▼) - Decent tenancy growth & EBITDA.. | P24 ——————————————————————————————————————————————————————————————————————————————————————— ▌Malaysia Magnum Bhd (HOLD, tp:RM2.36▼) - Hit by bad luck | P25 Malakoff Corporation (HOLD, tp:RM1.63▲) - Lacking spark | P26 Malakoff Corporation (HOLD, tp:RM1.63) - Takeaways from results briefing | P27 Malaysian Pacific Industries (HOLD, tp:RM8.40▲) - New packages driving growth | P28 ——————————————————————————————————————————————————————————————————————————————————————— ▌Taiwan Semiconductor (OVERWEIGHT) - Intel licenses ARM tech for 10nm foundry | P29 ——————————————————————————————————————————————————————————————————————————————————————— ▌Thailand Strategy Note - 2Q16 earnings turnaround | P30 ——————————————————————————————————————————————————————————————————————————————————————— ▌Vietnam Vingroup JSC (ADD, tp:VND64,000.00) - Windfall gain offsets retail business losses | P31

Showcasing CIMB Research Ideas

IND: Strategy Note 17/08 A realistic 2017 state budget >PDF

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CHN: Strategy Note 16/08 SZ-HK Connect – salvage for HK small caps? >PDF

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CHN: Strategy Note 15/08 Catch the narrowing window >PDF

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CHN/HKG: Banks 12/08 The power of the “authoritative person”? >PDF

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CHN: Property - Overall 11/08 Chinese developers offer high dividend plays >PDF

Regional Equity Research Contacts

Michael GREENALL, CFP Regional Head of Research/Head of Research Msia T: (60) 3 2261 9088 E: [email protected]

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CIMB Conference / Events |

CIMB Malaysia Healthcare & Fitness Corporate Day 05 September 2016 Theme: Kuala Lumpur Location: Malaysia

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CIMB Smartphone Corporate Day 26-27 September 2016 Theme: HKG/China, Taiwan, South Korea Location: Hong Kong

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IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Telco - Integrated│Singapore│Equity research

Company Flash Note



SingTel

Raising bets on Thailand and India

SingTel announced today that it would acquire 21.0% of Intouch and 7.4% of Bharti ■Telecom for S$2.47bn (US$1.84bn).

We estimate that the acquisition is only marginally core EPS accretive (FY18: ■+0.8%, FY19: +0.6%).

We expect minimal impact on gearing. Dividend policy likely to be unchanged. ■

SingTel to buy Intouch and Bharti Telecom stakes from Temasek ● SingTel will acquire 21.0% of Intouch Holdings for S$1.59bn and 7.4% of Bharti

Telecom (BTL) for S$884m, from Temasek Holdings. The interdependent transactions are subject to approvals by regulators and SingTel’s minority shareholders at an EGM (end-Oct). The deal should be completed by Dec 2016.

● Total consideration of S$2.47bn will be funded by: a) issuance of 385.6m new SingTel shares (2.4% of its enlarged share base) to Temasek for S$1.61bn (S$4.16/share) cash. The balance S$864m will be funded by internal cash and short-term debt. Temasek's stake in SingTel will rise from 51.1% to 52.3% post-deal.

Stakes acquired at discounts to market prices and our fair values ● SingTel is buying the stake in InTouch for THB60.83/share (20-day VWAP), or 1.9%

discount to its current share price and 5.0% below our target price.

● Meanwhile, the purchase price of BTL implies that SingTel is paying Rs323.44 per Bharti Airtel share (10% discount to 20-day VWAP). This is at a 6.4% discount to Bharti Airtel’s current share price and 28% below our target price.

● The additional effective stake in Bharti Airtel is coming before Reliance Jio’s (RJio) entry into the Indian mobile market. This should already be accounted for in Bharti's share price and further compensated by the purchase price discount, in our view. Key risk is that the impact from RJio’s entry is worse than expected.

Core EPS accretive but the impact is small ● We estimate the 21% stake in InTouch and the 3.4% rise in effective stake in Bharti

Airtel will boost our FY18 and FY19 core EPS by only 0.8% and 0.6%, respectively.

Minimal impact on gearing; Dividend policy likely unchanged ● SingTel says its dividend policy (60-75% payout) will be unchanged post-deal. We

estimate that net debt/EBITDA at end-FY18 will only rise from 1.1x to 1.2x. Given the small gearing impact, we think this deal is also unlikely to influence SingTel’s decision on paying a special dividend after the spin-off of Netlink Trust.

● There was news of Singtel’s rating facing possible downgrade by credit agencies in the event of such a deal. We think this would be mitigated by the minimal impact on SingTel’s gearing as the bulk of purchase consideration is settled via new shares.

Maintain Add call and SOP-based target price of S$4.50 ● We are neutral on this deal as it is only marginally core EPS accretive. We keep our

EPS forecasts pending deal completion. SingTel trades at FY17F/18F EV/OpFCF of 20.1x/18.6x (ASEAN telco FY17 average: c.14x) and offers decent FY17-19F dividend yields of 4.2-5.0%. Potential catalysts include rebound in regional currencies and earnings improvement at Optus. Downside risks are more intense competition in Australia, India and Singapore. Maintain Add.

Figure 1: Shareholding structure pre- and post-deal

SOURCES: CIMB, COMPANY REPORTS

▎Singapore

August 18, 2016 - 3:40 PM

ADD (no change) Consensus ratings*: Buy 15 Hold 7 Sell 0

Current price: S$4.21

Target price: S$4.50

Previous target: S$4.50

Up/downside: 6.9%

CIMB / Consensus: 6.6%

Reuters: STEL.SI

Bloomberg: ST SP

Market cap: US$49,931m

S$67,122m

Average daily turnover: US$66.20m

S$89.54m

Current shares o/s 15,944m

Free float: 43.6% * Source: Bloomberg

Key financial forecasts

Source: Bloomberg

Price performance 1M 3M 12M

Absolute (%) -1.6 7.9 5

Relative (%) 1.2 5.7 12.3

Major shareholders % held Temasek Hldgs 54.3

Analyst(s)

FOONG Choong Chen, CFA

T (60) 3 2261 9081 E [email protected]

Mar-17F Mar-18F Mar-19F

Net Profit (S$m) 3,769 4,087 4,500

Core EPS (S$) 0.24 0.26 0.28

Core EPS Growth (1.0%) 8.4% 10.1%

FD Core P/E (x) 17.80 16.42 14.91

Recurring ROE 14.8% 15.4% 16.1%

P/BV (x) 2.59 2.46 2.34

DPS (S$) 0.18 0.19 0.21

Dividend Yield 4.16% 4.56% 5.02%

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Telco - Others│Thailand│Equity research

Company Flash Note



Intouch Holdings

From passive to active shareholder

Temasek is selling a 21% stake in Intouch to Singtel at THB60.83 per share. This ■implies AIS’s selling price is THB162 per share.

We see no immediate share price catalyst but are positive on more active ■collaborations between Singtel and AIS with others, i.e. Intouch, Thaicom, LTC etc.

Maintain Add. ■

Temasek to sell 21% stake in Intouch to Singtel ● This morning, Temasek (Intouch’s major shareholder with 40.5% stake) and Singtel

(AIS’s second largest shareholder at 23.5%) entered into a conditional share sale purchase agreement, whereby Temasek agrees to sell a 21% stake in Intouch to Singtel at THB60.83 per share, a 1.9% discount from yesterday’s closing price of THB64 and 5% discount from our target price of THB64.

● As per Singtel’s conference call this morning, the acquisition of Intouch will not breach any foreign ownership requirement and will not be subject to tender offer requirements at any level. We think Singtel is opportunistic with potential growth prospects in Thailand’s telecoms industry especially with market leader AIS.

Selling price is relatively cheap ● Post transaction, Temasek will hold a 19.5% stake in Intouch and Singtel will become

the largest shareholder of Intouch with a 21% stake. Meanwhile, Singtel will effectively have an 8.5% stake in AIS, 8.6% stake in Thaicom, 2.2% stake in LTC and 3.6% stake in CSL.

● Purchase price of THB60.83 per Intouch share translates into an indirect acquisition of an 8.5% stake in AIS at THB162 per share, i.e. a 6.1% discount from yesterday’s close of THB172.5 and 21% discount from our AIS target price of THB205.

● For minority shareholders of Intouch and AIS, the deal may not offer any share price catalysts in near term since the purchase price is at a discount. We also do not expect to any abrupt change in strategy at AIS’s level as the change in shareholding structure is marginal. But we expect more aggressive strategic moves at Intouch’s level with Singtel becoming its largest shareholder.

● During Intouch’s post-results briefing yesterday, the CEO seemed more aggressive about its M&A strategy. He talked about opportunities in the government’s e-payment policy, AIS’s subscriber big data and new financial service business.

● He said Intouch has ample room to fund new investment and debt financing is his first choice given Intouch’s debt-free position. But he affirmed that dividend passthrough policy will not be affected by any new investments in the foreseeable future.

Maintain Add with unchanged target price of THB64 ● Our estimates, SOP-based target price and Add call are intact. Potential re-rating

catalysts: 1) new investment in high growth areas, 2) more rational competition in the local mobile market in 2017, and 3) possible regulatory clearance at Thaicom level.

● Our SOP-based target price is derived from the proportionate fair values of AIS and Thaicom and the applied holding discount of 15%. Meanwhile, Intouch’s value based on the market prices of AIS and Thaicom implies a 9.4% discount from Intouch’s market price (vs. 15% 5-year mean).

Key risk ● Though this transaction between Temasek and Singtel complies with relevant

regulations, it may unsettle the junta government’s nerves involving national security. This may lead to investigations into the group especially regarding its ownership of a sensitive business like satellite communication.

Figure 1: Shareholding structure

SOURCES: CIMB, COMPANY REPORTS

▎Thailand

August 18, 2016 - 2:16 PM


Current price: THB62.00

Target price: THB64.00

Previous target: THB64.00

Up/downside: 3.2%

CIMB / Consensus: -5.6%

Reuters: INTU.BK

Bloomberg: INTUCH TB


THB198,798m


THB596.8m



Key financial forecasts

Source: Bloomberg


Absolute (%) 6.9 15.3 -24.2

Relative (%) 4.2 6.4 -32.9

Major shareholders % held Aspen Holding Ltd. 40.5

Thai NVDR Co., Ltd. 17.6

Littledown Nominees Limited 3.4

Analyst(s)

Pisut NGAMVIJITVONG


Dec-16F Dec-17F Dec-18F

Net Profit (THBm) 12,438 12,926 13,887

Core EPS (THB) 3.88 4.03 4.33

Core EPS Growth (22.6%) 3.9% 7.4%

FD Core P/E (x) 15.98 15.38 14.32

Recurring ROE 87.3% 90.7% 96.4%

P/BV (x) 13.95 13.95 13.65

DPS (THB) 3.88 4.03 4.23

Dividend Yield 6.26% 6.50% 6.83%

56.0

67.1

78.2

89.3

100.4

42.0

52.0

62.0

72.0

82.0

Price Close Relative to SET (RHS)

50

100

150

Aug-15 Nov-15 Feb-16 May-16

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REIT│Australia│Equity research│August 18, 2016

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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360 Capital Industrial Fund

Asset sales on the agenda

TIX’s FY16 result was in line with guidance with higher income mainly driven by ■new acquisitions (ANI transaction) and fixed rental increases.

FY17 guidance is unchanged and comprises EPU of >21.6c and DPU of 21.6c. ■The key swing factor to FY17 EPU relates to the timing and quantum of asset sales and leasing outcomes.

We retain our Add rating with a revised price target of A$2.90. ■

FY16 result overview FY16 operating EPU of 22.7c (flat on the pcp) and DPU of 21.6c (21c in the pcp) were in line with guidance. Operating earnings of A$48.2m, up from A$28.2m in FY15, were mainly driven by higher property income from acquisitions and fixed rental increases (includes pro-forma ANI contribution). Like-for-like property income increased by 4%. Operating cash flow was A$39.5m. NTA stands at A$2.32 or A$2.37 (ex swaps). TIX has also flagged it’s in negotiations regarding a new debt facility of A$440m (likely to be finalised before December 2016) which would extend its weighted average debt term to 8.2 years from 1.7 years.

Outlook: FY17 guidance unchanged FY17 guidance is unchanged and comprises EPU of >21.6c (vs Morgans at 22.6c) and DPU of 21.6c. The key swing factor to FY17 EPU includes the timing and quantum of asset sales and leasing outcomes. We make no changes to our forecasts, however continue to assume around A$43m in asset sales in FY17. Management has guided to around A$50m in asset sales (subject to leasing outcomes) with A$22.8m currently in due diligence. We do not forecast any new acquisitions at this stage (although note TIX has debt capacity of around A$30m currently).

Portfolio and leasing update TIX’s portfolio is now valued at A$905.2m (includes revaluations gains of A$38.2m) across 37 assets. The WACR is 7.45% with the WALE solid at 4.7 years and occupancy 99.4%. Gearing is 42.6%, however post asset sales we expect gearing to fall below 40% during FY17. Management expects potential for further cap rate compression of 25-50bps across NSW assets (44% skew post ANI). FY17 lease expiries will stand at 10.5% post the sale of A$22.8m in assets and the conversion of ongoing negotiations. Management has flagged it is in advanced lease negotiations for a further 14,000sqm.

Investment view TIX offers investors exposure to Australian industrial property with quality tenants (Woolworths, Greens and Orora are the three largest tenants); cashflows are supported by stable rents underpinned by long-term leases which average around 3.3% rental growth pa; and an attractive distribution yield paid quarterly. Upcoming catalysts may include further asset re-ratings; non-core asset sales; and potential ASX 200 index inclusion. Post result our DCF valuation is now A$2.90 (from A$2.88). Key risks to our forecasts include potential falls in asset prices, lack of access to funding and lease/tenant default. We retain our Add rating with the stock offering TSR of >10%.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia

ADD (no change) Current price: A$2.73

Target price: A$2.90

Previous target: A$2.88

Up/downside: 6.4%

Reuters: TIX.AX

Bloomberg: TIX AU

Market cap: US$441.7m

A$578.6m


A$1.19m

Current shares o/s 212.0m

Free float: 87.0%


Absolute (%) 1.1 -2.2 8.8

Relative (%) -0.8 -4.8 5.7

Fiona BUCHANAN

T (61) 7 3334 4879

E [email protected]

Key metrics

Jun-15A Jun-16A Jun-17E Jun-18E Jun-19E

Income (A$m) 38.6 68.4 69.5 70.8 73.0

EBITDA (A$m) 37.5 61.9 62.7 64.0 66.1

EBIT (A$m) 37.5 61.9 62.7 64.0 66.1

NPAT (A$m) 28.2 48.2 48.0 50.5 52.6

EPS Norm. (cps) 22.8 22.7 22.6 23.6 24.5

EPS growth n/a -0.4% -0.5% 4.5% 3.8%

Normalised P/E (X) 7.6 12.0 12.1 11.5 11.1

EV/EBITDA (x) 17.6 15.6 14.7 14.4 13.9

DPS 21.0 21.6 21.6 22.5 23.3

Yield 7.7% 7.9% 7.9% 8.2% 8.5%

Payout ratio 92% 95% 95% 95% 95%

NTA (A$) 2.34 2.37

Gearing (ND/A) 39% 42% 38% 36% 35%

90.0

98.6

107.1

115.7

2.20

2.40

2.60

2.80

Price Close Relative to S&P/ASX 200 (RHS)

Source: Bloomberg

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REIT│Australia│Equity research│August 18, 2016


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Aventus Retail Property Fund

Delivering on strategy

AVN delivered a solid maiden FY result which demonstrates the strength of and ■growth opportunities within its A$1.3bn portfolio of large format retail assets.

FY17 guidance has been provided and comprises FFO of 17.5-18c and DPU of ■15.8-16.2c based on a payout ratio of 90%.

We retain our Add rating with a revised A$2.53 price target. ■

FY16 result overview FY16 funds from operations (FFO) were A$41m (11.7cps vs PDS 11.2cps). FFO is a proxy for cash available for distributing (net profit adjusted for non-cash items). A FY16 distribution of 10.3c was paid vs the PDS forecast of 10.2c. Gearing is 35.7% with cA$40m in undrawn funds available. We also note that the DRP will be activated from the September 2016 quarter distribution. NTA stands at A$2.02.

Outlook: FY17 guidance provided AVN announced FY17 guidance comprising FFO of 17.5-18c (vs Morgans at 17.8c) and DPU of 15.8-16.2c (vs Morgans at 16c) based on a payout ratio of 90% of FFO. We highlight the portfolio has minimal exposure to turnover based leases with 80% of leases on fixed or CPI based structures. The tenant base also remains diversified with national retailers representing 84% of the portfolio. There are good growth opportunities given the fragmented market as well as organic growth opportunities within the portfolio with several development projects earmarked for delivery over the medium term.

Portfolio update The portfolio is valued at A$1.273bn across 20 assets with AVN undertaking A$265.4m in acquisitions (7 centres) post its IPO in October 2015. Additionally, there was a valuation uplift of A$86.5m (+9.6%) across 14 centres since IPO. The WACR stands at 7.53% (from 8.01% at June 2015). Occupancy is 97.7% (+50bps since March 2016) with the portfolio WALE 4.1 years. AVN’s largest category of ‘non-household goods’ remains at 33% of the portfolio and is likely to increase over the medium term (includes cafes, pet/baby supplies, fitness, health, children’s playgrounds and other service/training providers). The focus also remains on FY17 lease expiries which are currently at 12%.

Investment view AVN offers exposure to Australian large format retail (LFR) assets which accounts for around 20% of total retail spend. Income is underpinned by leases to a diverse range of tenants with structured rental growth (80% subject to fixed or CPI annual rent increases). With low vacancy rates and incentives, low maintenance capex requirements, limited new supply, opportunities for consolidation in a fragmented market (AVN has 12% market share) and many large format retailers growing their footprint, in our view the outlook for the sector remains attractive. AVN also has a strong organic growth pipeline which can leverage off any future zoning and planning reforms. Future catalysts include accretive acquisitions and potential index inclusion. Post the result, our DCF valuation is A$2.53 (from A$2.48) and we retain our Add rating. Key risks include vacancy, tenant default/non-renewal.


▎Australia




Up/downside: 4.7%

Reuters: AVN.AX

Bloomberg: AVN AU


A$955.2m


A$1.22m


Free float: 66.0%


Absolute (%) 0.4 8

Relative (%) -0.5 5.2

Fiona BUCHANAN

T (61) 7 3334 4879

E [email protected]

Key metrics

Jun-16A* Jun-17E Jun-18E Jun-19E

Revenue (A$m) 55.7 94.3 100.3 108.4

EBITDA (A$m) 50.2 85.8 89.8 95.9

EBIT (A$m) 50.2 85.8 89.8 95.9

Underlying profit (A$m) 41.0 71.1 75.0 80.1

FFO (cps) 11.7 17.8 18.1 18.9

FFO growth (%) n/a 52% 1.7% 4.4%

Normalised P/E (x) 20.7 13.6 13.4 12.8

DPS (cps) 10.3 16.0 16.3 17.0

Distribution yield 4.2% 6.6% 6.7% 7.0%

Gearing (net debt/assets) 35% 31% 30% 29%

NTA (A$) 2.02

*8 month period

95.0

100.0

105.0

110.0

115.0

120.0

125.0

1.900

2.000

2.100

2.200

2.300

2.400

2.500


Source: Bloomberg

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Retail│Australia│Equity research│August 18, 2016


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Bapcor

Hold on to this little gem

BAP’s FY16 result exceeded guidance and consensus expectations with EPS ■+31%. BAP’s ability to pass through supplier price increases (from the lower AUD) was on show with the GM +280bp on FY15.

BAP provided guidance for FY17 NPAT growth of +25-30%, which implies FY17 ■NPAT of A$54.5-56.7m – another very strong year of growth for the group.

Scarcity of defensive growth and an enviable growth track record has seen BAP ■trade at a reasonable premium to the market (26.6x FY17F) which is justified in our view. Hold maintained and A$6.36 PT.

Another strong period of growth and more to come BAP’s FY16 NPAT (excluding acquisition costs) was c.1.9% above our forecast. Key highlights of the result include: +82.7% revenue growth (68% of which came from the recent ANA acquisition, while Trade increased by 11.7%); the GM +280bps to 44.2%; 86% EBITDA growth (margin +10bp); and 31% EPS growth.

+25-30% NPAT growth in FY17 BAP has provided FY17 NPAT guidance for growth of +25-30%, which implies NPAT of A$54.5-56.7m. BAP is guiding to c40 new stores in FY17. Additionally, FY17 will include a full 12-month contribution from the ANA business, as well as its Specialist Wholesale division. We expect recent Auto Trade revenue growth rates (c11-12%) will continue while the EBITDA margin should expand materially due to higher supplier rebates. Within ANA, we expect wholesale margins to remain flat given FX impacts while the Retail margin should improve incrementally.

Growth strategy remains on track BAP reiterated its guidance for optimisation EBITDA benefits of A$5.0-7.0m in FY17. BAP continues to optimise its key business units, with a vision to become Australasia’s leading provider of aftermarket automotive parts, accessories and services. Key highlights of BAP’s growth plans across its core business channels include: A$200m of turnover in Specialist Wholesale (vs cA$160m currently); 200 Burson Trade stores by 2021 (vs 150 currently); 200 Autobarn stores (vs 116 currently); 120 Opposite Lock stores (vs 67 currently); and a plan to service more of the independent retail sector (findings have been received by management). The company has a clear vision and plan for growth over the coming five years; and the company’s presence across the entire supply chain places the group well to execute on this plan.

A must HOLD; A$6.36 PT Our EPS forecasts fall by 2.% in FY17 but increase by 2.4% in FY17. Our DCF valuation/PT increases to A$6.36 (from A$5.82). The continued scarcity of defensive growth in the market has seen BAP trade at a premium to its peers (26.6x FY17F PE) which is justified, in our view. At these levels and with stock trading within 10% of our price target, we maintain a Hold rating. Key risks include: increased competitive environment; loss of key personnel; timing/integration of acquisitions; underperformance of the ANA business; and currency risk. They key upside risk relates to high-than-expected synergies from the ANA acquisition and potential offshore expansion.

SUL MTO


▎Australia

HOLD (no change) Current price: A$6.13



Up/downside: 3.7%

Reuters: BAP.AX

Bloomberg: BAP AU


A$1,510m


A$5.67m


Free float: 80.0%


Absolute (%) 11.9 24.6 77.2

Relative (%) 11 21.8 73.3

Josephine LITTLE

T (61) 7 3334 4505

E [email protected]

Financial Summary Jun-15A Jun-16A Jun-17F Jun-18F Jun-19F

Revenue (A$m) 375.3 685.6 829.8 911.8 995.8

Operating EBITDA (A$m) 41.5 78.2 99.8 111.2 122.2

Net Profit (A$m) 23.12 43.58 56.57 63.55 70.26

Normalised EPS (A$) 0.14 0.18 0.23 0.26 0.29

Normalised EPS Growth 19.2% 26.3% 28.8% 12.3% 10.6%

FD Normalised P/E (x) 43.38 34.35 26.57 23.75 21.48

DPS (A$) 0.09 0.11 0.15 0.17 0.19

Dividend Yield 1.45% 1.79% 2.44% 2.74% 3.03%

EV/EBITDA (x) 21.56 20.76 16.40 14.61 13.18

P/FCFE (x) NA NA 29.09 29.85 26.68

Net Gearing (40.4%) 34.3% 32.5% 27.8% 23.1%

P/BV (x) 3.76 4.09 3.85 3.62 3.40

ROE 12.7% 13.8% 14.9% 15.7% 16.3%

% Change In Normalised EPS Estimates (2.72%) 2.30% 4.70%

Normalised EPS/consensus EPS (x) 1.01 1.02

92

105

118

131

143

156

169

3.10

3.60

4.10

4.60

5.10

5.60

6.10

6.60


Source: Bloomberg

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Retail│Australia│Equity research│August 18, 2016


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Beacon Lighting A tale of two halves

BLX’s FY16 result came in at the top end of recent guidance with 22%1H NPAT ■growth slowing to -14.6% in the 2H.

Management confirmed our view that most of the drivers of the 2H weakness will ■prove short term in nature and we therefore forecast a return to double-digit profit growth in FY17.

While BLX’s share price has re-rated strongly post the recent pull-back, we believe ■earnings risk lies to the upside as the group cycles softer comp sales and as the emerging businesses start to contribute more meaningfully. Add maintained.

FY16 NPAT +5.1% (+22%/-14.6% 1H/2H) BLX’s FY16 result was in line with our forecasts and at the top-end of recent company guidance. Revenue growth of +7.7% was slightly below our expectations, driven by subdued lfl sales growth of 2.7% (1H/2H 5.1%/0.1%). As noted at the trading update in May, lfl sales growth moderated substantially in the 2H as a result of: 1) timing of the Easter break (key renovation period); 2) increased clearance activity and advertising by Masters; 3) a disruptive Election period; and 4) reduced exposure to key advertising initiatives (‘The Block’ and ‘Sunrise’). As previously flagged, most of these drivers will (and some have) already proven to be short term in nature. The Gross Margin (GM) fell by 80bp (to 63.9%), which reflected a step-change in BLX’s average hedge rate and an increased proportion of lower margin wholesale/trade/international business sales. The highlight of the result was the improving operating cost leverage, with the CODB as a percentage of sales falling by 80bp. The FY dividend of 4.7c was up by 11.9%, well ahead of NPAT growth (+5.1%) – a strong signal of confidence from the Board.

FY17 should see a return to double digit growth While no formal FY17 guidance or trading update was provided, management commented that lfl sales have made a positive start to FY17. In addition, management reiterated its long term GM target range of 63-64%. BLX will cycle much softer lfl sales comps in FY17. This, in addition to the rollout of six new stores and one franchise acquisition, sees us forecast c12.6% revenue growth in FY17. We expect the GM will fall further in FY17 (although rebound from depressed 2H16 levels), with our forecast 63.25%. We also forecast a continuation of the strong operating leverage BLX has achieved in recent years (80bp improvement). The above culminates in NPAT growth forecast of 11.3% in FY17 (vs underlying FY16 NPAT).

A great retailer: Maintain Add; A$1.78 PT Our EPS forecasts increase by 3.2% in FY16 and 5% in FY18, which sees our DCF/PE valuation increase to A$1.78 (from A$1.60). With c12.7% TSR on offer, we maintain an Add rating on the stock. We continue to believe most of the key drivers of 2H16 weakness will prove short term in nature and expect improved trading throughout FY17. BLX continues to boast a strong balance sheet; high ROE (>25%); industry-leading margins; and strong cash flow generation. The key risks to our forecasts and valuation include: a slow-down in general consumer spending (given BLX’s product is highly discretionary) negatively affecting lfl sales growth; heightened competition; unsuccessful pass-through of price increases in response to the lower AUD negatively impacting GP margins; and an inability to secure suitable sites hampering the store rollout.


▎Australia




Up/downside: 10.2%

Reuters: BLX.AX

Bloomberg: BLX AU


A$348.6m


A$0.80m


Free float: 44.8%


Absolute (%) 17.8 28.6 -25.7

Relative (%) 16.9 25.8 -29.6

Josephine LITTLE

T (61) 7 3334 4505

E [email protected]


Revenue (A$m) 179.4 193.2 217.6 242.5 267.9


Net Profit (A$m) 16.94 18.30 19.81 22.29 24.91

Normalised EPS (A$) 0.08 0.09 0.09 0.10 0.12



DPS (A$) 0.042 0.047 0.051 0.057 0.064

Dividend Yield 2.59% 2.90% 3.13% 3.52% 3.93%

EV/EBITDA (x) 12.33 11.67 10.33 9.00 7.84

P/FCFE (x) 44.31 49.15 22.10 17.99 15.68

Net Gearing (21.3%) (14.0%) (20.8%) (28.9%) (36.2%)

P/BV (x) 7.05 6.07 5.20 4.45 3.83

ROE 38.7% 34.3% 31.8% 30.7% 29.4%

% Change In Normalised EPS Estimates 3.32% 5.31% 7.39%


54.0

64.0

74.0

84.0

94.0

104.0

1.10

1.30

1.50

1.70

1.90

2.10

2.30


Source: Bloomberg

2

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Transport│Australia│Equity research│August 18, 2016


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Brambles

Business as usual?

BXB’s FY16 result was largely in line with our expectations. ■

The core Pallets divisions were the key drivers of earnings with Pallets Americas ■and Pallets EMEA delivering underlying EBIT growth of 8% and 14%, respectively.

CEO, Tom Gorman, has announced his retirement and will be replaced by ex-■Rexam CEO, Graham Chipchase on 1 March 2017.

We make no changes to FY17F underlying EBIT of US$1,074m. ■

Maintain Hold rating on a slightly lower A$12.66 target price (from A$12.68). ■

FY16 result in line with expectations FY16 underlying EBIT (including FX) rose 1% to US$993.2m (-1% vs Morgans), while underlying NPAT was flat at US$623.1m (-1% vs Morgans). On a constant currency basis, FY16 EBIT grew 9% to US$1,031m, which was in line with our forecast (US$1,030m) and at the upper end of management’s US$1,015-1,035m guidance range. The balance sheet remains strong with ND/EBITDA at 1.7x (FY15: 1.75x) and gearing (ND/ND+E) fell slightly to 47% (FY15: 50%). Cash flow was the main negative, in our view, with FCF down 30% to A$513.8m due to higher capex to fund growth in the Pallets business and adverse working capital movements. ROIC (excluding acquisitions) grew 10bps to 17.2% with BXB remaining confident of achieving its 20% target by FY19. Total DPS of A29cps was slightly below our A30.5cps forecast.

CEO Tom Gorman to retire in 2017 Following seven years as BXB’s CEO, Tom Gorman has announced his retirement effective 30 June 2017. He will be replaced by ex-Rexam CEO, Graham Chipchase. Graham will commence his role with BXB as CEO designate on 1 January 2017 with a two-month transition period before taking over the CEO role from 1 March 2017. We believe Graham Chipchase’s appointment is a good one given his experience at Rexam running one of the world’s largest consumer packaging companies. Similarities between Rexam and BXB’s businesses (multinational reach and FMCG customer base) should also help him transition into the role next year, in our view.

Minor changes to earnings forecasts We make no changes to our FY17 underlying EBIT forecast of US$1,074m. On a constant currency basis, we forecast 10% underlying EBIT growth to US$1,066m versus management guidance range of US$1,055m-1,075m. Our FY18 and FY19 EBIT forecasts also remain broadly unchanged, implying EBIT growth of around 9% pa over the next few years.

Hold rating maintained We maintain our Hold rating on a slightly lower A$12.66 PE-based target price (from A$12.68), due to an increase in the number of shares on issue. Despite BXB possessing dominant global market positions, defensive characteristics and a solid forecast earnings growth profile (2-year EPS CAGR 10%), trading on 22x FY17F PE we believe these attributes are largely reflected in the current share price.


▎Australia




Up/downside: -4.4%

Reuters: BXB.AX

Bloomberg: BXB AU


A$21,015m


A$52.43m


Free float: 100.0%

Key changes in this note

FY17F revenue increased by 0%.

FY17F EBIT increased by 0%.

FY17F NPAT increased by 1%.


Absolute (%) 1.1 4.7 30.2

Relative (%) 0.2 1.9 26.3

Alexander LU, CFA

T (61) 2 9043 7901

E [email protected]


Revenue (US$m) 5,465 5,535 5,855 6,227 6,682

Operating EBITDA (US$m) 1,534 1,539 1,646 1,784 1,955

Net Profit (US$m) 584.4 587.7 691.9 761.7 848.5

Normalised EPS (US$) 0.40 0.39 0.44 0.48 0.54

Normalised EPS Growth 2.4% (0.4%) 10.8% 9.7% 11.4%


DPS (A$) 0.28 0.29 0.33 0.36 0.39

Dividend Yield 2.11% 2.19% 2.49% 2.72% 2.94%

EV/EBITDA (x) 12.08 12.07 11.46 10.54 9.54

P/FCFE (x) 43.62 85.74 35.34 34.50 27.09

Net Gearing 102% 89% 91% 78% 64%

P/BV (x) 6.00 5.43 5.18 4.53 3.96

ROE 23.0% 22.3% 23.0% 22.9% 22.3%

% Change In Normalised EPS Estimates (0.69%) (0.74%) (0.94%)


93.0

102.0

111.0

120.0

129.0

138.0

9.10

10.10

11.10

12.10

13.10

14.10


Source: Bloomberg

5

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15


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Services│Australia│Equity research│August 18, 2016


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Collection House

Under new management

CLH reported underlying FY16 NPAT of A$20.9m, down 7% on the pcp and in-line ■with guidance (A$18.9-22.7m). The 2H16 result benefited from a A$4.1m (vs A$0.8m in FY15) gain on sale of PDLs into the secondary market.

No FY17 outlook statements or purchasing expectations were provided, which is ■reasonable given the new CEO has only been with CLH since July 2016. However, committed PDL acquisitions for the coming year of A$16.5m (pcp A$41.3m) are the lowest level for ~10 years.

CLH’s 2H16 operating performance pointed to increased margin pressure and at ■this stage the meaningful gain on sale of PDLs looks predominantly a one-off benefit. We believe new management has a solid base business to work with; however, short-term earnings may come under further pressure. Hold maintained.

FY16 result down on the pcp CLH reported FY16 underlying NPAT of A$20.9m, down 7% on the pcp (A$22.5m) and in line with guidance (A$18.9-22.7m; Morgans A$20.5m). A final dividend of 3.9cps was declared, down 17% on the pcp. Result drivers included a 3.4% decline in PDL cash collections (partially driven by a decline in PDL purchases vs the pcp); a marginally higher amortisation rate vs the pcp (39.5% vs 39.2%); and ~320bp decline in operating margin. 2H16 performance was overall stronger (adjusted EBITDA up 13.5% hoh); however, a A$4m profit was realised on secondary market PDL sales (A$0.8m in FY15). The Collection Services division reported a relatively weak 2H16, with revenue up 5% (on 1H) but NPBT was down 18.6%. Gross cash flow was flat, with 2H16 rebounding strongly (2H16 +14% on the pcp). Gearing (ND/ND+E) stands at 37.2%, with net debt of A$109m (vs A$118m as at Dec-2015). CLH’s debt facility limits remain at A$125.5m.

New management to take the business forward CLH will give formal earnings guidance at the November AGM, with new CEO (Anthony Rivas) only recently joining (and the appointment of a new CFO to commence in Sept-16). Initially, new management highlighted operational efficiency as a key focus area, with a number of new initiatives/products to be trialed. The Manila operations were also highlighted as a significant productivity opportunity as well as reviewing the investment strategy to consider a “wider spectrum of debt across different markets”. Short-term, CLH enters FY17 with materially lower committed PDL acquisitions (A$16.5m vs A$41.3m in the pcp) which may cause further earnings slippage if acquisitions can’t be made at satisfactory prices. In our view, CLH’s gearing position (~A$16m of available capacity under the A$125m facility) remains relatively constrained and is likely to restrict the group’s ability to purchase >A$60m of PDLs pa over FY17/18 (excluding any access to opportunities via the Balbec relationship).

Hold maintained We value CLH at A$1.35ps (from A$1.52ps) using a blended valuation. Our downgraded valuation is driven by EPS revisions (-12% FY17F EPS). Medium-term growth opportunities exist, although we remain wary of the near-term earnings pressure the group faces.


▎Australia




Up/downside: 3.8%

Reuters: CLH.AX

Bloomberg: CLH AU


A$175.5m


A$0.47m


Free float: 80.0%


FY17F EPS decreased by 12.3%.

FY18F EPS decreased by 6.3%.


Absolute (%) 15 12.5 -40.7

Relative (%) 14.1 9.7 -44.6

Scott MURDOCH

T (61) 7 3334 4516

E [email protected]


Revenue (A$m) 176.1 181.4 182.4 189.1 198.6


Net Profit (A$m) 22.48 18.56 19.73 22.87 25.03

Normalised EPS (A$) 0.17 0.16 0.15 0.17 0.19

Normalised EPS Growth 17.8% (8.5%) (6.6%) 15.7% 9.5%


DPS (A$) 0.091 0.078 0.078 0.085 0.093

Dividend Yield 6.97% 5.98% 5.98% 6.51% 7.13%

EV/EBITDA (x) 3.13 3.25 3.16 2.95 2.73

P/FCFE (x) 11.40 17.37 7.48 13.97 15.12

Net Gearing 65.5% 59.3% 49.6% 46.2% 41.2%

P/BV (x) 1.00 0.96 0.93 0.88 0.83

ROE 13.8% 11.9% 10.7% 11.7% 12.1%

% Change In Normalised EPS Estimates (12.3%) (6.3%) (5.3%)


39

61

83

106

0.70

1.20

1.70

2.20


Source: Bloomberg

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Services - Overall│Australia│Equity research│August 18, 2016


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IPH

Investing for the future

IPH’s result delivered strong growth with EBITDA up c54% on the pcp driven by ■acquisitions, FX and organic growth.

Management has outlined that in FY17 it will spend A$3-4m on Practice Insight ■(software business) ramping up its sales team. The upside in Practice Insight is clearly not being reflected in the current share price. As such, we believe any positive outcome from this division could have material upside to FY19 earnings.

We maintain our Add rating with overall market trends for patents remaining intact ■globally. As such we believe organic growth remains clearly evident longer term.

A number of catalysts remain: 1) IPH still has plenty of balance sheet capacity to ■acquire offshore acquisitions which would drive EPS growth; 2) removal of the escrow overhang post November 19

th; and 3) potential FX weakness which would

have a material positive impact to earnings.

FY16 result – 8% organic growth IPH announced underlying EBITDA of A$65.0m (Morgans at A$68.4m pre one-offs) which was up 54% on the pcp. The EBITDA growth was supported by A$12.4m of acquisitions and A$7.3m of FX tailwinds. As such, underlying constant-currency growth was 8% on the pcp. Divisionally, Asia’s result clearly demonstrated a 1H16 skew supported by the pull forward from the America’s Invents Act (AIA). Asia in 1H16 contributed cA$15m of EBITDA vs A$11.9m in the 2H. The skew was not evident in Australia given acquisition contributions. IPH’s cashflow remained strong and IPH has A$58.5m of cash on the balance sheet. IPH declared a 10cps dividend (50% franked) bringing the full year dividend to 21cps (90% payout on cash adjusted earnings).

Cash rich to fund further acquisitions IPH is engaged in discussions with several potential acquisition targets in Asia. We do not include unannounced acquisitions in our forecasts but we have fully diluted for previous raises. With A$59m of cash on hand and a considerable debt facility, we believe IPH will seek out acquisitions which provide both geographical diversity as well as a key footprint into markets it does not currently service adequately.

Investment view We have made significant changes to our forecasts which are outlined overleaf. Changes predominately relate to FX, inclusion of a A$3.6m loss from Practice Insight and rebasing of divisional forecasts post todays result. As such we are now forecasting A$71m EBITDA in FY17 (based on a 75cps FX). Post revisions to our forecasts our DCF based 12-month price target falls to A$7.47 (from A$8.09). We continue to remain attracted to IPH’s solid balance sheet, EBITDA margins, strong cashflow conversion and organic earnings growth profile. However, we acknowledge the key risk remains the potential release of escrow stock in November 2016 (c78m shares) which may weigh on the share price in the near term. Other risks include lower patent numbers, adverse FX movements, integration risk, key man risk and increased competition.


▎Australia




Up/downside: 22.4%

Reuters: IPH.AX

Bloomberg: IPH AU


A$1,152m


A$5.15m


Free float: 49.9%


Absolute (%) -3.9 -12.9 27.6

Relative (%) -4.8 -15.7 23.7

Alexandra CLARKE

T (61) 2 9043 7905

E [email protected]

Belinda MOORE

T (61) 7 3334 4532

E [email protected]


Revenue (A$m) 94.6 143.1 161.1 171.9 185.8


Net Profit (A$m) 30.92 49.16 53.48 61.93 65.83

Normalised EPS (A$) 0.20 0.28 0.28 0.33 0.35



DPS (A$) 0.14 0.21 0.23 0.26 0.28

Dividend Yield 2.21% 3.44% 3.77% 4.26% 4.59%

EV/EBITDA (x) 22.94 15.71 15.27 13.09 12.26

P/FCFE (x) 35.89 NA 29.72 22.62 17.68

Net Gearing 14.8% (26.5%) (28.6%) (29.4%) (33.8%)

P/BV (x) 27.44 4.87 4.78 4.58 4.41

ROE 228% 38% 23% 25% 26%

% Change In Normalised EPS Estimates (12.7%) (9.0%)


89

109

129

149

169

189

209

4.00

5.00

6.00

7.00

8.00

9.00

10.00


Source: Bloomberg

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Medical Equipment & Svs│Australia│Equity research│August 18, 2016


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SomnoMed

Building for growth

Overall positive result with solid sales growth in North America and Europe. ■

Underlying EBITDA growth strong although one-offs including acquisition costs ■and global CEO recruitment impacting the NPAT.

Outlook commentary was positive and growth will be driven by the SCA acquisition ■from FY18.

We maintain our positive view on the stock, with our price target increasing to ■A$3.84 and retain our Add recommendation.

FY16 results, growth and margins continue to expand SOM posted FY16 NPAT of A$0.1m, down 87% on the pcp as a result of deferred tax adjustments, one-off costs relating to the SCA acquisition and global CEO hunt. Revenues of A$44.0m were up 28% on the pcp, while volumes grew 15% to 58,983 units. North America and Europe continued to show strong sales and unit growth, with all four quarters up significantly on the pcp. North American direct sales (+25.6%) continued to lead Europe (+22.9%) and APAC (+13%) in sales growth, and accounts for c53% of regional sales splits. EBITDA rose 70% to A$1.48m as MAS gross margins grew slightly to 68.6%, and group gross margins were up to 57.5% (from 56.6% on the pcp). Adding back the SCA costs and CEO recruitment, underlying profit was A$2.1m, up 141% on the pcp. SOM maintains a strong cash position of A$17.6m.

Outlook commentary Management has guided to global direct sales growth of over 20% on the pcp which we believe is conservative. SOM has historically exceeded on their guidance. Strong growth in emerging markets along with regulatory changes in France and significant increases in managed care operations due to new contracts signed with US insurers look to offset the costs associated with the SCA startup. We expect SCA to contribute materially from FY18. SOM aims to open five SCA treatment centres in early CY17 for a cost of approximately A$4m. In a previous announcement, management guided to an estimated initial cost of A$500k per site and expects them to break even within 12 months of opening. From these comments we expect five completed centres and an additional three under contract by this time next year, ramping up to 18 centres by FY18.

Forecast changes With the increased costs associated with the SCA start-up, we have moderated our FY17 EBITDA and NPAT forecasts. We expect SCA retail stores to contribute significantly from FY18, and accordingly we have increased our unit sales growth from 20% up to 25% and 30% in FY17 and FY18, respectively.

Investment view remains positive As a result of changes to forecasts, our DCF valuation has increased to A$3.84 from A$3.72. We retain an Add recommendation. The key downside risk to our target is slower-than-expected growth in the key markets of US and Europe.


▎Australia




Up/downside: 13.6%

Reuters: SOM.AX

Bloomberg: SOM AU


A$191.7m


A$0.20m


Free float: 87.6%


Absolute (%) 2.4 11.9 20.7

Relative (%) 0.5 9.3 17.6

Scott POWER

T (61) 7 3334 4884

E [email protected]

Iain WILKIE

T (61) 7 3334 4521

E [email protected]


Revenue (A$m) 34.43 44.08 55.06 68.91 84.52


Net Profit (A$m) 0.54 0.07 (0.39) 4.21 9.47

Normalised EPS (A$) 0.01 0.00 (0.01) 0.07 0.17

Normalised EPS Growth 129% (89%) (678%) 125%

FD Normalised P/E (x) 320 2,853 NA 46 20

DPS (A$) - - - - -

Dividend Yield 0% 0% 0% 0% 0%

EV/EBITDA (x) 136 119 1,013 32 14

P/FCFE (x) NA NA 57.01 36.57 16.41

Net Gearing (38.6%) (53.2%) (64.4%) (68.7%) (75.3%)

P/BV (x) 8.03 5.79 5.85 5.19 4.13

ROE 3.2% 0.2% (1.2%) 12.1% 22.7%

% Change In Normalised EPS Estimates (107%) (49%) (22%)

Normalised EPS/consensus EPS (x) (0.12) 0.58

78.0

96.8

115.5

134.3

2.10

2.60

3.10

3.60


Source: Bloomberg

1

1

2

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Medical Equipment & Svs│Australia│Equity research│August 18, 2016


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Sonic Healthcare

In good health

FY16 underlying results were in line with our expectations, underpinned by strong ■US and EU pathology operations and integrated acquisitions, offsetting well-flagged softness in domestic businesses.

Importantly, strong organic laboratory growth, profit enhancements across the ■domestic front, coupled with significant headroom for additional scale-enhancing acquisitions and a relatively benign near-term regulatory environment, increases our confidence in the growth profile and earnings outlook.

We increase our FY17-19 earnings estimates modestly, with our DCF/SOTP-■based target price rising to A$25.35 (from A$23.47) on lower regulatory risk.

We maintain our Add rating. ■

In line underlying results and outlook… FY16 underlying results were in line with our expectation and guidance, with adjusted EBITDA of A$876m (+20%, +14% in cc; ex A$4m non-recurring gain; Morgans A$870m), equating to reported NPAT of A$451m (+30%; +24% in cc). FY17 guidance calls for cc EBITDA growth of c5%, equating to A$920m (includes A$5m sale/lease-backs; ex-acquisitions, any regulatory changes; Morgans A$923m).

…underpinned by ROW strength offsetting Oz weakness The result was driven by solid organic revenue growth (c7%) in the laboratory division, underpinned by strength in offshore operations (US; +2%, but variable between divisions; Germany, +6%; Switzerland, +9%; and UK, +46%), overcoming well-flagged softness in Australia Pathology (ie prior fee cuts, higher collection centre costs), Imaging (ie negative publicity) and Clinical Services (ie Medicare fee indexation freeze) helping to expand underlying operating margins (+20bp to 17.3%). Operating cash flow increased 38% to A$708m and cash conversation was strong on improved WC, supporting a progressive dividend (44cps, +5.7%; 30% franked).

Oz growth returns; regulatory environment looks fairly benign While challenges in domestic operations negatively impacted results, improving 2H performance points to a recovery and return to a more stable earnings growth profile. Importantly, although clarity is still needed around the government’s intention for reform and despite reports of a possible moratorium on collection centre licenses, we view the near-term regulatory environment as fairly benign, domestically as well as globally, with SHL well-placed to ride out any volatility via its diversified operations (International/Oz: 60/40; labs only, 70/30). We also see upside potential, with A$600m in headroom and an active contract pipeline, expecting multiple deals throughout the year to extract scale leverage.

Well positioned…Add maintained Our confidence in the earnings outlook has strengthened on the heels of an in-line result that showed good 2H momentum, intact fundamental growth drivers and a more subdued regulatory environment. Although shares trade above long-term multiples, we believe a premium is warranted especially in a broader market deplete of growth.


▎Australia




Up/downside: 7.8%

Reuters: SHL.AX

Bloomberg: SHL AU


A$9,759m


A$25.97m


Free float: 86.2%


Absolute (%) 7.8 7.9 16.7

Relative (%) 5.9 5.3 13.6

Dr Derek JELLINEK

T (61) 2 9043 7904

E [email protected]

Scott POWER

T (61) 7 3334 4884

E [email protected]


Revenue (A$m) 4,197 5,013 5,197 5,429 5,674

Operating EBITDA (A$m) 717 880 926 978 1,026

Net Profit (A$m) 373.8 451.4 478.1 521.2 560.9

Normalised EPS (A$) 0.90 1.10 1.16 1.27 1.37

Normalised EPS Growth (5.9%) 21.5% 5.9% 9.0% 7.6%


DPS (A$) 0.70 0.74 0.78 0.84 0.90

Dividend Yield 2.98% 3.15% 3.32% 3.57% 3.83%

EV/EBITDA (x) 15.99 13.63 12.71 11.77 10.96

P/FCFE (x) 35.97 57.96 16.32 15.26 14.37

Net Gearing 59.1% 61.1% 51.8% 42.8% 34.2%

P/BV (x) 2.87 2.63 2.50 2.37 2.25

ROE 11.4% 13.0% 12.7% 13.2% 13.4%

% Change In Normalised EPS Estimates (1.15%) (0.04%) 0.98%


85.0

92.5

100.0

107.5

115.0

16.0

18.0

20.0

22.0

24.0


Source: Bloomberg

2

4

6


Vol m

12

http://www.efa.biz/

Airports│Australia│Equity research│August 18, 2016


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Sydney Airport

Onwards and upwards

SYD upgraded its 2016 distribution guidance by 1cps to 31 cps. This implies a ■4.2% yield at current prices. We expect 8% pa CAGR in DPS across FY17-19F.

1H16 EBITDA growth of 10% was driven by strong passenger growth in the ■period. Cashflow growth of 18% benefitted from the EBITDA growth and lower interest costs.

Our target price is unchanged at $7.85ps. ADD retained. ■

1H16 result summary The EBITDA result was in-line with our forecast. Passenger growth of 6.7% drove an 11% increase in revenues. We expected that cost growth would be greater than revenue growth in the period (due to the increased service level requirements under the international aeronautical agreement and the T3 acquisition), but the front-ending of the guided cost increase surprised us. EBITDA growth, combined with reduced interest costs on increased debt, resulted in cashflow growth of 18%, as we had expected. Credit metrics continue to improve (and will improve further with the cash raised from the recent DRP), such that SYD may have its credit ratings lifted or will have capacity to fund a capital management or growth investment initiative (e.g. second Sydney airport).

Distribution outlook 2016 DPS guidance was lifted 1 cps to 31 cps, taking FY16 growth to a stellar 22%. We forecast FY17/18 DPS of 33.5/36.5 cps. Distributions are based on ~100% payout of Net Operating Receipts. EBITDA growth and flat to declining interest costs are key drivers of this growth. The unresolved issue is whether SYD will continue with 100% payout or smooth the flight path of the DPS to account for the start of tax payments next decade. Our forecasts assume the former.

Badgerys Creek There was no real update on Badgerys Creek. The Federal election stalled development. We continue to expect that the project will be financed in a separate vehicle to Kingsford Smith Airport, and that the project will be at least NPV neutral.

Other key points of interest July traffic data released today shows international passenger growth continues to be very strong, while domestic growth has moderated somewhat. While dilutive, the August DRP raised $142m of cash that will help to improve the balance sheet and reduce interest costs. SYD is holding an institutional investor briefing on 17 October.

Changes to forecast and valuation Negligible changes to EBITDA. Interest costs reduced due to paydown of debt with August DRP proceeds. 2016 DPS aligned to 31.0 cps guidance.

Investment view We continue to view SYD as a core portfolio holding, with international traffic growth a key thematic driving its growth outlook. Strong distribution growth over coming years and a solid and improving balance sheet are further attractions. High conviction ADD.


▎Australia




Up/downside: 5.7%

Reuters: SYD.AX

Bloomberg: SYD AU


A$16,694m


A$43.66m


Free float: 100.0%


Absolute (%) 4.4 2.5 31.8

Relative (%) 3.5 -0.3 27.9

Nathan LEAD

T (61) 7 3334 4548

E [email protected]

Financial Summary Dec-14A Dec-15A Dec-16E Dec-17E Dec-18E Dec-19E

International pax (million) 13.2 13.7 14.8 15.1 15.7 16.2

- growth 2.6% 4.3% 7.7% 2.1% 3.8% 3.8%

EBITDA excluding one-offs (A$m) 948 1,004 1,107 1,165 1,235 1,307

- growth 5.1% 5.7% 10.4% 5.2% 6.0% 5.8%

Net Operating Receipts (¢) 23.7 26.0 31.0 33.8 36.5 39.3

- growth 5.0% 9.7% 19.3% 8.9% 8.0% 7.8%

Distribution (¢) 23.5 25.5 31.0 33.5 36.5 39.0

- growth 4.4% 8.5% 21.6% 8.1% 9.0% 6.8%

Distribution Yield (%) 3.2% 3.4% 4.2% 4.5% 4.9% 5.3%

EV/EBITDA (x) 23.3 21.5 20.7 19.8 18.8 18.0

FFO-to-interest (x) 2.3 2.4 2.8 3.0 3.1 3.1

FFO-to-debt (%) 7.2% 7.7% 9.1% 9.5% 10.0% 10.4%

96.0

104.0

112.0

120.0

128.0

136.0

5.40

5.90

6.40

6.90

7.40

7.90


Source: Bloomberg

20

40

60

80

100


Vol m

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http://www.efa.biz/

Gaming│Australia│Equity research│August 18, 2016


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Tatts Group

Digital driving growth

The lottery result was the highlight with significant revenue and EBITDA growth. ■While FY17 is cycling a tough comp, we believe further margin expansion is possible for the lottery business.

The wagering business continues to face stiff competition with revenues declining ■for the third consecutive year. Given the shift to fixed odds betting and continued competition, we don’t forecast a significant bounce back in revenues for the group in FY17.

During the year TTS divested the Talarius business (UK gaming machines), which ■resulted in proceeds of £110m being used to repay existing £ denominated debt.

Bytecraft continued to exit unprofitable legacy contracts and the turnaround is ■gathering momentum while Maxgaming reported both revenue and margin growth.

TTS offers a 4.4% fully franked yield and defensive characteristics which should ■result in the stock remaining well supported in the current market environment. Add retained on a revised DCF-based A$4.23 target price.

FY16 result recap TTS reported revenue of A$2,928.1m vs our forecast of A$2,956.6m (up 4.4% on the pcp). Variable expenses (government share, venue share/commissions and product and program fees) grew on higher turnover volumes while other expenses were up just 0.4% on the pcp. EBITDA of A$494.7m was lower than our expectations of A$510.9m (up 0.8% on the pcp) with the lower gaming business earnings and higher unallocated expenses being the difference. Normalised NPAT came in at A$263.4m vs Morgans at A$264.0m and company guidance of A$255-265m. A final dividend of 8cps was declared taking the FY16 dividend to 17cps (97.3% payout ratio).

Digital sales momentum continues The digital transformation of the business is well and truly gathering momentum with 13.5% of lottery sales (up 32.2%) and 30.2% of wagering turnover (up 22.5%) coming through digital channels. The number of wagering and lotteries applications on customer devices has more than doubled to 1.5m (from 0.7m in FY15). We believe the company is gaining traction with the digital sales channels and expect this will drive both sales and margins over the years ahead.

FY17 is off to a good start although it’s still early days The company provided a brief trading update on FY17. Lotteries have had three jackpots above the A$15m level compared to five at the same time in FY16. Lotteries are cycling strong comps and we forecast revenue growth to slow significantly from that seen in FY16. On a positive note, the wagering business is witnessing turnover growth momentum (up 3.1%) but more importantly the win rate has improved to 15.3% (from 15.1% in FY16) and the EBITDA margin is running at 23.5% (vs 19.9% in FY16).

Retain Add recommendation An attractive 4.4% (fully franked) dividend yield coupled with TTS’ defensive characteristics see us retain our Add recommendation.


▎Australia




Up/downside: 5.9%

Reuters: TTS.AX

Bloomberg: TTS AU


A$5,843m


A$18.83m


Free float: 100.0%


Absolute (%) -1.2 2 -0.5

Relative (%) -2.1 -0.8 -4.4

James LAWRENCE

T (61) 7 3334 4547

E [email protected]


Revenue (A$m) 2,804 2,928 3,016 3,123 3,217


Net Profit (A$m) 253.9 263.4 276.1 285.1 298.2

Normalised EPS (A$) 0.18 0.18 0.19 0.19 0.20



DPS (A$) 0.17 0.17 0.18 0.18 0.19

Dividend Yield 4.14% 4.26% 4.39% 4.39% 4.64%

EV/EBITDA (x) 12.77 13.68 13.15 12.88 12.22

P/FCFE (x) NA 9.91 40.70 30.32 18.85

Net Gearing 16.7% 31.3% 34.1% 41.4% 38.8%

P/BV (x) 1.96 1.97 1.95 1.93 1.92

ROE 8.74% 8.86% 9.26% 9.48% 9.83%



91.0

96.0

101.0

106.0

111.0

116.0

121.0

3.30

3.50

3.70

3.90

4.10

4.30

4.50


Source: Bloomberg

10

20

30

40


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14

http://www.efa.biz/

Construction│Australia│Equity research│August 17, 2016


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Villa World

Developing a solid track record

VLW reported 32% FY16 NPAT growth, in-line with guidance. On an underlying ■basis, the group achieved 19% growth for the year.

NPAT growth of at least 5% has been guided for FY17, with management typically ■taking a conservative approach at this point in the year. The FY17 outlook is supported by pre-sales of A$165m (up 24% on the pcp); increased scale in the project pipeline; and supportive sector conditions.

Trading on 8x FY17 PE and 7.5% yield, we maintain our Add recommendation. ■

FY16 result – underlying growth of 19% VLW delivered FY16 NPBT of A$47.2m, up 60.7% on the pcp and in-line with guidance (A$46.6m). On an operating basis (adjusting for provisioning on legacy issues and one-offs), VLW delivered 19% growth driven by: a 31.5% increase in settlements (19 projects contributing vs 20 in the pcp); 9.8% decrease in revenue/lot (change in product and project mix); a 50bp decline in underlying gross margin (to 26.5%); and operational leverage (opex/GM improvement of 330bp). Gearing remains comfortable at ~25.6% (net debt/assets) and NTA as at 30 June was up 7.5% to A$2.15ps. VLW declared a 10cps final dividend, taking the FY16 dividend to 18cps (up 12.5% for the year). VLW achieved FY16 sales of 1,185, at the top-end of management’s 1,000-1,200 target.

Solid outlook remains in place VLW issued FY16 NPAT guidance of at least 5% growth to A$35.4m. On an underlying basis, guidance equates to ~11% growth. VLW’s guidance is supported by pre-sales of A$165.6m (+23.5% on the pcp) and an improved sales run-rate in 2H16 (114.7 sales per month vs 82.8pm in 1H16). FY17 growth is also supported by the increased scale in the development portfolio (28 projects expected to contribute through the year). Partially offsetting the step-up in scale, VLW expects gross margins on owned sites to be 24-26% (vs group underlying GM of 26.5% in FY16), due to the roll-off of mature projects and the commencement of several new projects. A minimum dividend of 18cps is expected. Our revised FY17F NPAT (+3%) sits in-line with guidance.

Add maintained; A$2.71ps price target We value VLW at A$2.71ps (from A$2.54ps), via an equally weighted NTA/PE valuation. We acknowledge sector conditions are highly supportive, however we believe VLW is building a sustainably higher earnings base, investing further (including utilising capital light structures) in projects which fit the group’s core competencies and targeted buyer segments. We believe VLW offers compelling risk/reward, with visible growth into FY17/18; a management team capable of managing the cycle and focused on sustainable growth; and paying a ~7.5% dividend yield.


▎Australia




Up/downside: 7.8%

Reuters: VLW.AX

Bloomberg: VLW AU


A$285.1m


A$0.41m


Free float: 100.0%


FY17F EPS increased by 1.2%.



Absolute (%) 14.1 15.1 15.1

Relative (%) 12.2 12.5 12

Scott MURDOCH

T (61) 7 3334 4516

E [email protected]


Revenue (A$m) 321.6 387.0 457.8 499.4 513.1


Net Profit (A$m) 25.63 33.71 35.47 38.56 41.43

Normalised EPS (A$) 0.26 0.31 0.32 0.34 0.36



DPS (A$) 0.16 0.18 0.19 0.19 0.20

Dividend Yield 6.37% 7.17% 7.37% 7.57% 7.77%

EV/EBITDA (x) 7.92 6.93 6.14 5.59 5.30

P/FCFE (x) NA 49.03 11.32 10.21 14.62

Net Gearing 31.5% 50.8% 35.6% 30.8% 29.5%

P/BV (x) 1.26 1.17 1.11 1.04 0.97

ROE 12.8% 14.7% 14.4% 14.5% 14.6%



86.0

92.3

98.5

104.8

111.0

1.80

2.00

2.20

2.40

2.60


Source: Bloomberg

1

1

2

2

3


Vol m

15

http://www.efa.biz/

Technology - Overall│Australia│Equity research│August 18, 2016


Powered by EFA

Webjet

Impressive year and there is more to come

WEB’s FY16 result beat expectations on all measures despite greater than ■expected investment in the B2B business.

After a stronger than expected result, w e have upgraded our forecasts. With ■increasing online penetration, market share w ins, the Online Republic acquisition

and WEB’s ambition to become the number one B2B player globally, the company

is w ell positioned to report double digit EPS grow th over the next few years.

We are happy holders of WEB. ■

Stronger than expected FY16 result TTV grew 29%, underlying EBITDA increased 26.5% and underlying NPA T w as up 22%.

Some of the beat compared to our forecast included A$1.0m of under lying EBITDA from

the recent acquisition of Online Republic and a low er than expected tax rate (w as 26%

vs guidance of 29%). The result benefited from the base Webjet business w inning market share (outperformed the market by >5x), increasing online penetration, greater

higher margin international tic ket sales and grow th in Zuji’s earnings. B2B earnings w ere

dow n materially on the pcp due to A$5m of increased investment associated w ith the

expansion into Europe and the US. The political environment in the Middle East also

impacted 2H16 trading. Despite a poor cashflow performance in the 1H16, 2H16

operating cashflow was extremely strong. The balance sheet w as solid (A$39.1m of net

shareholder's cash).

We upgrade our forecasts WEB intends to provide FY17 guidance at its AGM on 23 November. How ever it did say

that July bookings for the base Webjet business grew at more than 8% (some election

slow down), Zuji Asia is up over 20%, Online Republic +15%, SunHotels is up more than

40% and Lots of Hotels is grow ing >30%. After a stronger than expected FY16 result, w e

have increased our FY17 and FY18 NPA T forecasts by 6.4% and 7.0% respectively.

WEB’s FY17 earnings w ill benefit from a full year’s contribution from Online Republic

and strong improvement in the B2B business follow ing a period of investment in FY16.

WEB’s 5-year EBITDA CAGR targets for B2C and B2B remain +10% and +30%

respectively. Over the medium term, B2B w ill be a beneficiary from WEB's Sunhotels

entering into a strategic sourcing partnership to grow the complementary hotels

business of Thomas Cook. WEB w ill pay Thomas Cook £21m upfront. Sunhotels w ill

receive approx. 3,000 of Thomas Cook's hotel contracts. Thomas Cook generates about

£1bn of TTV from these hotel sales.

Investment view – Hold and A$9.95 price target Due to materially higher cashflow generation and post forecast changes, our DCF based

valuation has risen to A$9.95 from A$7.40 prev iously. Trading on an FY17 PE of 24.6x

and roughly in line w ith its international peers, w e maintain a Hold recommendation.


▎Australia




Up/downside: 2.6%

Reuters: WEB.AX

Bloomberg: WEB AU


A$941.9m


A$2.02m


Free float: 100.0%


Absolute (%) 34.9 64.4 138.9

Relative (%) 34 61.6 135

Belinda MOORE

T (61) 7 3334 4532

E [email protected]


Revenue (A$m) 119.1 154.5 214.2 251.8 292.0


Net Profit (A$m) 17.50 22.22 38.21 45.51 53.10

Normalised EPS (A$) 0.23 0.27 0.39 0.47 0.55



DPS (A$) 0.14 0.15 0.20 0.23 0.27

Dividend Yield 1.39% 1.49% 2.03% 2.42% 2.82%

EV/EBITDA (x) 25.50 20.68 14.89 12.21 10.09

P/FCFE (x) 23.69 84.35 NA 16.27 14.11

Net Gearing (39.8%) (25.8%) (33.1%) (44.9%) (55.6%)

P/BV (x) 9.46 5.86 4.62 4.12 3.66

ROE 24.2% 19.1% 21.5% 21.1% 21.9%



79

102

126

149

172

196

219

2.90

3.90

4.90

5.90

6.90

7.90

8.90


Source: Bloomberg

1

2

3

4


Vol m

16

http://www.efa.biz/

Coal Mining│Australia│Equity research│August 18, 2016


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Whitehaven Coal

Leverage works both ways

WHC’s strong FY16 result surprised both on cost-out and operating cashflow. ■

WHC’s de-gearing profile, which only 12 months ago was a legitimate risk to ■equity value, is now well and truly in hand such is WHC’s operating leverage to lower costs and higher prices.

Short-term coal prices look overdue a pullback, but we acknowledge WHC’s ■strong leverage to the upside coal price scenario ($3.07 NPV) and the likely premium it attracts as one of few listed pure coal plays able to leverage it.

We’d prefer to buy WHC on a pullback. Hold on for the ride. ■

A strong FY16 result Reported FY16 EBITDA of $224m was 5% ahead of consensus and 13% ahead of our forecasts. WHC’s cost reduction guidance again proved conservative. We infer the average cost of sales was reduced to A$54/t in the 2H (from A$58/t) helped by higher volumes of low cost production, lower oil prices, administration and more efficient logistics. Operating cashflow of $269m beat our numbers considerably ($198m) helped by lower costs and the sale of 361kt of coal inventory in addition to produced coal.

How WHC’s fortunes have changed Only 12 months ago, investors including ourselves saw WHC’s peak debt of $935m at the time as a risk given WHC’s cashflow sensitivity to coal prices and the risk that WHC would fail flagged debt covenants. This scenario posed risks to debt repayment and refinancing and to equity value. Thanks to strong production and efforts to re-base its cost structure, WHC protected its margins and commenced de-gearing (albeit slowly), making the debt burden manageable. Thanks to the coal price surge, WHC is now on track to smash its debt covenants, attain normal gearing levels and be in a position to consider dividends again within two years, in our view.

Looking ahead FY17 production guidance of 21-22Mt was in line with our prior forecast and we conservatively model costs very slightly above FY16 levels. We have adjusted our FY17-19 coal price deck higher again, lifted the medium-term met coal split and reduced the development discount on Vickery. Our DCF based valuation revises to $1.90ps (from $1.41) which equates to our price target.

Investment view is dictated by your view on coal markets Industry feedback implies that short-term coal prices are overdue a pullback (page 3). However, this is weighed against WHC’s leverage to the upside coal price scenario ($3.07ps NPV) and the likely premium it attracts as one of few surviving listed pure coal plays able to leverage surging prices. WHC has re-rated ahead of fundamentals. Upside from here is largely a coal price momentum story. We can justify 10% upside from current prices if we assume flat thermal coal pricing at US$69/t into perpetuity which looks at odds with the futures curve and with our industry feedback. We’d prefer to buy WHC for coal price leverage on a pullback, and choose to hold on for the ride for now.


▎Australia




Up/downside: -6.6%

Reuters: WHC.AX

Bloomberg: WHC AU


A$2,093m


A$8.59m


Free float: 15.0%


Absolute (%) 22.9 185.3 90.7

Relative (%) 21 182.7 87.6

Tom SARTOR

T (61) 7 3334 4503

E [email protected]


Revenue (A$m) 763 1,164 1,386 1,489 1,614


Net Profit (A$m) (342.7) 20.5 94.9 128.6 158.2

Normalised EPS (A$) 0.10 0.02 0.09 0.13 0.15

Normalised EPS Growth (80%) 363% 35% 23%


DPS (A$) - - - - -


EV/EBITDA (x) 23.67 13.18 8.34 6.67 5.38

P/FCFE (x) 39.2 142.4 46.6 7.7 8.2

Net Gearing 32.7% 29.7% 22.9% 14.1% 6.4%

P/BV (x) 0.73 0.72 0.70 0.67 0.64

ROE 3.39% 0.71% 3.23% 4.22% 4.96%

% Change In Normalised EPS Estimates 197% 48% 28%


26

66

106

146

186

0.20

0.70

1.20

1.70

2.20


Source: Bloomberg

10

20

30

40


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http://www.efa.biz/

Banks│Hong Kong│Equity research│August 18, 2016

Company Note



China Merchants Bank Extent of de-risking a positive surprise

We are most impressed with the de-risking of its loan portfolio, with business-related ■lending down 2% hoh (most since at least 2006) and mortgages up 23% hoh.

We also liked its strong capital ratios, a falling mix of non-standard assets, higher ■mix of demand deposits, falling credit costs, and an improved cost-to-income ratio.

The only dislike we had was the fall in quarterly NIM. However, as flagged in past ■reports, we see 2Q16 as a trough for quarterly NIM, with a better outlook from here.

Maintain our Hold rating, with no change in earnings estimates or valuation. ■

Look beyond the pre-announced 1H16 NPAT to de-risking CMB reported 1H16 NPAT of RMB35.2bn, up 7% yoy. Note that CMB had already pre-announced its NPAT and certain key operating metrics on 1 Aug 2016. What we were more focused on was the extent to which CMB has de-risked its loan portfolio.

What we liked most about the results The de-risking of the loan portfolio, with mortgage growth of 23% hoh, in sharp contrast to the 2% fall in business-related loans. This is CMB’s biggest hoh fall in business-related lending since its listing in HK in 2006. Also, its core Tier 1 ratio rose 126bp hoh to 12.1%, even after the payment of FY15 dividend. This was driven by a fall in the ratio of risk-weighted assets to total assets of 4.1% pts hoh and 8.7% pts yoy to 54.5%.

Other key positives about the results Another positive was the 3% pts hoh fall in the proportion of its assets that are classified as non-standard to 9.5% of assets. The mix of demand deposits rose 6.2% pts hoh to 62.3% of total deposits. The corporate demand deposit mix rose 7.7% pts hoh to 57.2%, while the retail demand deposit mix rose 3.9% pts hoh to 72.9%. Credit costs fell 20bp qoq and 12bp yoy to 2.37% of average loans. 2Q16’s cost-to-income ratio fell 217bp yoy to 28.5%, partly due to the substitution of the business tax with value added tax (VAT).

What we disliked about the results Net interest margins (NIM) fell 8bp qoq to 2.54%, driven by the impact of the VAT and a shift in loan mix, and the fact that unlike virtually all of its listed peers under our coverage, its backbook of mortgages re-prices throughout the year (peers re-price at the start of the year). We have previously flagged that we believe 2Q16 to be the trough for quarterly NIMs, with six reasons to be bullish about the NIM outlook from here (see The stars are slowly starting to align, 17 Jun 2016).

Other points of interest (i) NPL ratio rose 2bp qoq to 1.83%, with the 1H16’s NPL formation rate of 2.24%, down 16bp hoh; Special mention loan ratio was 2.48%, down 13bp hoh; the mix of >90 days overdue loans was 1.71%, up 12bp hoh; the ratio of NPLs to >90 days overdue loans was 107%, up 2% pts hoh; (ii) Provisioning coverage rose 5.9% pts qoq to 189%, while the loan loss reserve ratio rose 14bp qoq to 3.5%; (iii) NPAT rose 7.1% yoy in 2Q16, slightly faster than 1Q16’s 6.6% yoy; (iv) Loan-to-deposit ratio was flat qoq at 82%.

Maintain our Hold rating We maintain our Hold rating on CMB and leave our earnings estimates and target price of HK$15.30 unchanged. Key upside/downside risks: better/worse-than-expected asset quality.

▎Hong Kong

HOLD (no change) Consensus ratings*: Buy 15 Hold 8 Sell 4

Current price: HK$18.54

Target price: HK$15.30

Previous target: HK$15.30

Up/downside: -17.5%


Reuters: 3968.HK

Bloomberg: 3968 HK


HK$528,945m


HK$359.1m

Current shares o/s: 25,220m


Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 7.4 18.2 -9.1

Relative (%) 2.1 4.9 -4.8

Major shareholders % held China Merchants Group 33.0

Analyst(s)

Michael CHANG

T (852) 2539 1323 E [email protected]

Scott HONG T (852) 2539 1329 E [email protected]

[ X ]

SOURCE: COMPANY DATA, CIMB FORECASTS

Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Net Interest Income (Rmbm) 117,202 136,729 147,603 163,471 184,719

Total Non-Interest Income (Rmbm) 48,833 65,150 76,523 86,434 97,812

Operating Revenue (Rmbm) 166,035 201,879 224,126 249,905 282,531

Total Provision Charges (Rmbm) (31,681) (59,266) (75,682) (86,574) (99,744)

Net Profit (Rmbm) 55,911 57,696 57,708 63,181 69,970

Core EPS (Rmb) 2.11 2.18 2.17 2.38 2.64

Core EPS Growth 0.8% 3.3% (0.4%) 9.5% 10.9%

FD Core P/E (x) 7.51 7.27 7.30 6.66 6.01

DPS (Rmb) 0.67 0.69 0.69 0.75 0.83

Dividend Yield 4.22% 4.35% 4.33% 4.74% 5.25%

BVPS (Rmb) 12.47 14.31 15.90 17.72 19.75

P/BV (x) 1.27 1.11 1.00 0.89 0.80

ROE 18.4% 16.3% 14.4% 14.2% 14.1%

CIMB/consensus EPS (x) 0.97 1.00 0.99

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https://brokingrfs.cimb.com/_A92ItG8cn5esqHGIguZ_M_Dllarcs6ALfg6BFqjan_uHws7hvkDAmq2OLdywv6IKso1.pdf

https://brokingrfs.cimb.com/_A92ItG8cn5esqHGIguZ_M_Dllarcs6ALfg6BFqjan_uHws7hvkDAmq2OLdywv6IKso1.pdf

Property Development│Hong Kong│Equity research│August 18, 2016

Company Note



Country Garden Improved fundamentals, upgrade to Hold

Country Garden’s 1H16 core earnings rose 8%, i.e. 20% above our FY16 estimate. ■

We see signs of margin bottoming for Country Garden. It is actively buying land in ■second and top cities which may help its sales growth in future.

However, overseas investment, especially in Malaysia, is still our key concern. ■

We upgrade the stock from Reduce to Hold with a higher target price of HK$3.47. ■

1H16 earnings were 20% above our estimate Country Garden reported that 1H16 core earnings were up 8% yoy to c.Rmb5bn, 20% above our FY16 estimate of a 10% decline. This was due to 1) better margin, 2) lower finance cost, and 3) unexpected contribution from associates and JVs.

Gross margin may be bottoming 1H16 gross margin came in at 21%, down 2.2% pts from 23.2% in 1H15 but 3% pts better than 2H15’s 18%. Given its increasing proportion of sales from the second tier and top tier cities, we believe its gross margin should bottom out and gradually recover over FY16-18. Overall, we estimate its gross margin should widen 1.3% pts from 20.2% in FY15 to 21.5% in FY16. Gross margin for FY17 and FY18 should stay at 22-23%.

Very strong sale performance In 1H16, the company’s total sales jumped 130% yoy to Rmb125bn. Subsequently, management raised the FY16 sales target by 30% from Rmb168bn to Rmb220bn, representing about 60% growth yoy. We attribute its strong sales performance to proactive measures to build up its landbank in the past 18 months.

Increasing exposure to second tier and top tier cities As of end-Jun 16, the company has a total landbank of 117m sq m. Of these, it indicated that projects from second and top tier cities have increased to c.52% (vs. 30-40% in 12 months ago), driven by its landbank activities in the past 18 months. We estimate that it spent c.Rmb100bn on its landbank for about 75m sq m of projects, which are mainly located in second and top tier cities.

To pay off its expensive perpetual bonds by year end Country Garden surprised the market when it issued an expensive 9% perpetual bond (Rmb19bn) in 2H15. We understand that it plans to pay this off by year end, which we estimate could generate additional Rmb1.5bn to its earnings in FY17.

Overseas expansion is still a concern Its overseas expansion plan is a concern, especially its ambitious plans in Malaysia. It plans to invest more than Rmb200bn in mega project Forest City, Iskandar Malaysia. As property development tends to be a localised business, we do not see any uniqueness and strength from being a foreign developer. Besides operation risk, currency risk is another concern when investing overseas.

Upgrade from Reduce to Hold We raise our NAV estimate by 15% to factor in 1) its additional landbank in 1H16, 2) stronger than expected sales, and 3) wider gross margin. These reasons compel us to increase our FY16-18 EPS forecasts by 9-21%. Hence, our target price is up by 34% to HK$3.47 (from HK$2.58), based on 30% (previously 40%) discount to NAV. We upgrade the stock to Hold. Key risk to our upgrade is potential cooling measures from government.

▎Hong Kong

HOLD (previously REDUCE) Consensus ratings*: Buy 8 Hold 10 Sell 8




Up/downside: 1.9%


Reuters: 2007.HK

Bloomberg: 2007 HK


HK$75,517m


HK$46.59m




FY16F EPS increased by 9%.



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 5.6 13 16.4

Relative (%) 0.3 -0.3 20.7

Major shareholders % held Huiyan Yang 59.4

Analyst(s)

Raymond CHENG, CFA


[ X ]



Total Net Revenues (Rmbm) 84,549 113,223 127,095 144,290 158,657

Operating EBITDA (Rmbm) 14,539 14,945 15,874 20,146 21,419

Net Profit (Rmbm) 10,436 9,276 8,509 11,343 12,699

Core EPS (Rmb) 0.49 0.40 0.38 0.50 0.56

Core EPS Growth 14.3% (19.6%) (5.1%) 33.3% 12.0%

FD Core P/E (x) 5.80 6.87 7.59 5.79 5.17

DPS (Rmb) 0.15 0.13 0.13 0.17 0.19

Dividend Yield 5.07% 4.45% 4.42% 5.89% 6.59%

EV/EBITDA (x) 6.55 8.66 8.29 6.38 5.47

P/FCFE (x) 38.15 NA 5.91 4.99 4.24

Net Gearing 62.2% 87.9% 80.9% 68.0% 48.7%

P/BV (x) 1.04 1.01 0.92 0.81 0.72

ROE 18.8% 14.2% 12.5% 14.9% 14.8%

% Change In Core EPS Estimates 8.9% 18.1% 20.9%


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Technology - PC hardware│Hong Kong│Equity research│August 18, 2016

Company Note



Lenovo Group Core earnings recovery below expectations

Lenovo’s 1QFY17 net profit beat consensus on disposal gains and opex control, but ■the core business recovery was slower than expected.

PC was the only earnings driver, while both mobile and DCG were still loss-making. ■We believe that reaching its internal PTI target of US$900m will be challenging.

We remain positive for Lenovo as we believe valuation has bottomed while we do ■not expect its mobile and data centre to turn around in the near term.

Maintain Add. Our target price remains at HK$6, still based on 10x FY18 P/E. ■

1QFY17 results beats on unexpected disposal gains 1QFY17 net profit of US$173m was 40% above our forecast and beat consensus by 23% due to well-controlled opex and unexpected disposal gains (land in Beijing) of US$120m. Excluding disposal gains, pre-tax income (PTI) was far below our forecast. GPM narrowed from 16.6% quarter ago to 15.3% in 1Q due to forex fluctuations (Euro/Rmb) and margin decline in data centre group (DCG) and mobile business.

PC still the bright spot while tablet reverts to growth path While the market was challenging, Lenovo’s PCSD (PC and Smart Device) revenue rose 9.7% qoq in 1QFY17 thanks to PC market share expansion in all regions (except for EMEA) and its tablet shipment reverted to positive growth (+2.9% yoy). It concerns us that PC was the only profitable business unit, while all others were loss-making.

Mobile might not turn around anytime soon Management guided for 2QFY17 sales rising 10-15% qoq while PTI may stay flat qoq. As there will be no disposal gains in 2QFY17 and higher marketing expense for its mobile business ahead of new model shipments in Sep, we forecast US$97m PTI in 2QFY17. We do not expect Lenovo’s mobile business to turn a profit in the near term and that it may continue to post US$150m-200m PTI loss per quarter from the unit.

Lenovo is going after the high-end phone segment Lenovo expects higher ASP leading to sales growth outpacing shipments in smartphone business. It aims to boost high-end exposure with the launch of Moto Z (US$649), G4 (US$199) and Zuk Z2 (US$319). Unfortunately, mobile PTI margin still fell sequentially from -5.1% to -9.6% (operational-basis) given a mismatch between sales and expenses. We expect its profitability for mobile to improve in 3QFY17.

Data centre is picking up at a slower pace We were disappointed by the narrower PTI margin in data centre which was due to a slowdown of the US market and price competition in China. We believe that data centre’s profitability should recover more quickly than mobile business. We think Lenovo may leverage its strength in the PC space to increase its data centre market share.

Maintain Add on continual recovery and attractive valuation Lenovo is trading at 9x FY18 P/E and 2x FY18 P/BV, i.e. close to its cycle trough since Lehman crisis. But we do not think its fundamentals are as bad as they were in 2008. Our target price of HK$6 is based on down cycle average of 10x P/E in FY18. We keep our Add call as we believe its valuation has bottomed. Key risks to our estimates include worse-than-expected demand for PC, smartphone and data centre.

▎Hong Kong





Up/downside: 9.7%


Reuters: 0992.HK

Bloomberg: 992 HK


HK$60,764m


HK$391.1m




FY17F Revenue increased by 1%.

FY17-18F EPS decreased by 1-13%.


Source: Bloomberg


Relative (%) 1.7 -6.9 -17.8

Major shareholders % held Legend Holdings Ltd 30.6

Sureinvest Holdings Ltd 5.5

Google International 4.7

Analyst(s)

Felix PAN


James TAN T (886) 2 8729 8378 E [email protected]

[ X ]


Financial Summary Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F

Revenue (US$m) 46,296 44,912 44,675 46,143 47,810

Operating EBITDA (US$m) 1,716 840 1,118 1,305 1,381

Net Profit (US$m) 828.7 (128.1) 685.4 838.7 897.5

Core EPS (US$) 0.11 0.05 0.06 0.08 0.08

Core EPS Growth 1.0% (56.7%) 35.1% 22.4% 7.0%

FD Core P/E (x) 6.68 15.44 11.43 9.34 8.73

DPS (US$) 0.026 0.029 0.034 0.027 0.027

Dividend Yield 3.63% 4.17% 4.84% 3.76% 3.76%

EV/EBITDA (x) 4.59 10.76 8.71 6.61 6.74

P/FCFE (x) NA NA NA 5.76 NA

Net Gearing 0.7% 38.7% 56.2% 19.7% 32.4%

P/BV (x) 1.92 2.61 2.37 2.03 1.76

ROE 33.1% 14.3% 21.7% 23.4% 21.6%

% Change In Core EPS Estimates (13.1%) (0.5%) 1.8%

CIMB/consensus EPS (x) 0.87 0.96

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Property Investment│Hong Kong│Equity research│August 18, 2016

Company Note



SOHO China Weak earnings outlook remains

SOHO recorded a core loss of Rmb253m in 1H16 due to a jump in finance costs. ■

We expect SOHO to make a full-year loss this year and turn profitable in FY17. ■

While we agree it helps to unlock value via asset sales, they may not sustain. ■

We believe it would be tough for SOHO to maintain its high yield in medium term. ■

We maintain our Reduce rating with a higher price target of HK$3.15. ■

Disappointing results SOHO’s 1H16 results were disappointing, with a core loss of Rmb253m; stripping out the gain from revaluation of investment properties), on 1) higher-than-expected finance costs, and 2) lower interest income. Revenue (96% from rental income) rose about 85% yoy to Rmb727m due to new projects.

Challenging earnings outlook The big increase in finance costs in 1H16 was due to two key reasons: 1) a 44% increase in interest expenses; and 2) lower interest capitalised ratio, which decreased from 47% in 1H15 to 24% in 1H16 and made its interest expense increase by 120% or Rmb330m. This eroded almost 60% of its gross profit. Given the much higher finance costs as a results of the lower interest capitalised ratio, we expect its earnings will be significantly affected in FY16.

Cut EPS forecast by 30-135% over FY16-18 We cut our FY16-18F EPS by 30-135% on the back lower interest capitalised ratio assumptions (from 45% to 25%). We expect SOHO to record a loss of Rmb136m in FY16, followed by a net profit of Rmb217m in FY17 and Rmb431m in FY18 – tiny compared with the Rmb4bn net profit achieved in FY13.

Will continue to dispose non-core projects SOHO has decided to sell some non-core projects to generate cash to compensate for the cash shortfall due to the lack of property sales since 2014. It recently sold SOHO Century Plaza in Shanghai for Rmb3.3bn. Management indicated that SOHO still has three non-core projects – Tianshan Plaza, Hongkou SOHO and its 50% stake in Sky SOHO.

Dividend depends on asset sales SOHO has discontinued regular dividends since 2015, given its weak operational cash flow since its transformation to a landlord. Instead, it only pays special dividends once it sells a project. For example, it declared a special dividend of Rmb0.19/share from the sale of the SOHO Century Plaza.

Weak fundamentals, Reduce rating maintained We maintain our cautious view given the tough earnings outlook over the next few years. We appreciate its asset sales, which help to unlock value. But given the limited non-core assets available for sale, we believe it would be tough for SOHO to maintain its high yield in the medium term. We maintain Reduce but raise our target price by 17% to HK$3.15 as we now apply a target discount of 30% (vs. 40%) to factor in the non-core asset sales. Key risk to our conservative call is continued asset sales at high prices.

▎Hong Kong

REDUCE (no change) Consensus ratings*: Buy 1 Hold 13 Sell 4




Up/downside: -33.0%


Reuters: 0410.HK

Bloomberg: 410 HK


HK$24,438m


HK$23.26m




FY16F EPS decreased by 135%.



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 21.8 23.4 3.3

Relative (%) 16.2 7.3 5.2

Major shareholders % held Pan Shiyi 64.1

Analyst

Raymond CHENG, CFA


[ X ]



Total Net Revenues (Rmbm) 6,098 995 1,662 1,914 2,269

Operating EBITDA (Rmbm) 2,600 414 997 1,149 1,361

Net Profit (Rmbm) 4,080 (544) (136) 217 431

Core EPS (Rmb) 0.25 (0.10) (0.03) 0.04 0.08

Core EPS Growth (71%) (142%) (75%) 99%

FD Core P/E (x) 16.57 NA NA 97.07 48.74

DPS (Rmb) 0.25 0.70 0.19 0.00 0.00

Dividend Yield 6.2% 17.3% 4.7% 0.0% 0.0%

EV/EBITDA (x) 11.51 75.54 36.72 34.18 30.45

P/FCFE (x) 4.52 NA 26.98 NA NA

Net Gearing 19.3% 24.5% 41.7% 50.1% 57.1%

P/BV (x) 0.53 0.57 0.62 0.64 0.65

ROE 3.35% (1.43%) (0.39%) 0.65% 1.32%

% Change In Core EPS Estimates (135%) (52%) (30%)

CIMB/consensus EPS (x) (0.26) 0.38 0.73

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21

Ind Goods & Services│Hong Kong│Equity research│August 18, 2016

Company Note



Techtronic Industries Co 1H16 results: On the floor but looking up

Techtronic’s share price decline of 8% today seems to be overreaction to essentially ■solid 2Q16 results. 1H16 net profit rose 12% yoy despite being 15% below forecast.

The major negative surprise was the yoy contraction in floor care segment revenue ■due to shedding of non-core products (since ended).

Higher marketing costs resulted in operational deleveraging, likely due to floor care ■that saw a high number of product launches in 1H16. This should dissipate in 2H16.

We expect investors to apply a discount to the stock until floor care earnings ■recovery materialises. Stay Add for strong core power tool earnings but lower TP.

Floor care and SG&A disappoint again in 1H16 1H16 net profit rose 12% yoy but was 15% below our forecast due to weaker-than-expected floor care sales (declined 7% yoy). 1H16 net profit was further dragged by rising marketing cost-to-sales ratio that rose 0.4% pt yoy. However, underlying business remained solid with 1H16 power tools revenue rising 13% yoy (-1% FX impact) and gross margin expanding 0.5% pt. Techtronic continued to gain market share and has a strong pipeline of new products. Interim dividend payout was raised to 26.7%.

Opportunity, not crisis We think floor care earnings reached trough in 1H16. Floor care sales decline yoy in 1H16 was due to discontinuation of OEM and low-margin products (paper shredders), which is almost over. Sales of own-brand floor care products rose yoy in 2H15-1H16. We expect floor care sales to stabilise in 2H16 and estimate 9% FY17 sales growth. FY16 costs are likely front loaded, resulting in operational deleveraging due to new product launches in 1H16. Techtronic sees operational deleveraging throughout FY16.

New HQ and strategy for floor care We note that floor care sales have not risen since Hoover was acquired in 2006. We attribute this to the Global Financial Crisis (2008-09), management’s over-engineering of products (2011-12) and retrenchment of traditional distribution channels (2H14-1H16). The new management has cut ties with its Hoover legacy by relocating to Charlotte, North Carolina and is focusing on cordless (batteries), robots and commercial segments.

Factoring in floor care risks We think investors will apply a discount to Techtronic for lack of future floor care earnings growth until the new management proves its execution capability and the new strategy is successful.

Lower EPS estimates but view today’s pullback as overdone We keep our revenue forecast for FY16 but raise FY17-18F for strong power tools revenue growth (2H16: 11%, FY17: 11%) but slower floor care sales (2H16: 0%, FY17: 9%). Still forecast 0.5% p.a. gross margin expansion in FY16-17F but raise marketing costs and lower operational deleveraging (SG&A 2H16: -0.2%, FY17: -0.2%). We cut FY16-18 EPS by 2-6%. Our lower TP is based on 15.9x FY17 P/E (peer average, down from 16.6x). Stay Add but share price likely range bound until there is floor care earnings growth.

▎Hong Kong





Up/downside: 8.0%


Reuters: 0669.HK

Bloomberg: 669 HK


HK$57,411m


HK$104.6m




FY16F EPS decreased by 6%

FY15F ROE decreased by 0.7% pts

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -5.4 -0.5 12.2

Relative (%) -11 -16.6 14.1

Major shareholders % held Mr Horst Julius Pudwill 24.6

Mr Roy Chi Ping Chung 6.2

Analyst(s)

Ray KWOK




Revenue (US$m) 4,753 5,038 5,477 6,056 6,671

Operating EBITDA (US$m) 427.7 485.3 558.6 657.6 769.2

Net Profit (US$m) 300.3 354.4 410.9 501.9 606.2

Core EPS (US$) 0.16 0.19 0.22 0.27 0.33

Core EPS Growth 6.6% 18.1% 15.9% 21.9% 20.8%

FD Core P/E (x) 24.73 20.97 18.09 14.81 12.26

DPS (US$) 0.04 0.05 0.07 0.09 0.12

Dividend Yield 1.00% 1.25% 1.63% 2.19% 2.90%

EV/EBITDA (x) 17.86 15.92 13.68 11.31 9.35

P/FCFE (x) 43.15 21.40 20.46 17.11 14.03

Net Gearing 13.9% 16.9% 11.4% 2.0% (6.5%)

P/BV (x) 3.76 3.43 3.12 2.76 2.44

ROE 16.2% 17.2% 18.1% 19.9% 21.2%

% Change In Core EPS Estimates (5.77%) (5.67%) (2.00%)


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Construction│Indonesia│Equity research│August 18, 2016

Company Note



Total Bangun Persada Brighter days ahead

■ 1H16 earnings and new contract achievement boosted our conviction that a recovery could be sooner than expected, despite some Rp21bn of provisioning.

■ Arguably a lower-risk proxy for the property sector, the stock performs better in an upcycle, and more buffered against a downcyle.

■ Maintain Add, with a higher target price, now pegged to its 3-year mean P/E of 15.5x, implying some 10% discount to the valuation of state-owned contractors.

Strong 1H16, if not for the provisioning 1H16 revenue of Rp1.3tr (+15% yoy) was in line with our estimate, though core profit of Rp117bn (US$8.6m; +12% yoy) was c.8% behind. Construction service GPM was strong at 19.5% (higher than its 3-year mean of 15.7%), supported by a higher proportion of direct contracts, to c.41%. In 2Q16, construction GPM rose to 21%, highest since FY12, from 18% in 1Q16. An Rp21bn provisioning pulled down 2Q16 core profit to Rp51bn (-20% qoq). We understand TOTL has provisioned for all problem accounts.

A solid new contracts pipeline TOTL booked Rp2.1tr of non-joint operations new contracts in 1H16, significant growth over the Rp600bn achieved in 4M16. This accounts for 71% of our and management's full-year targets, much higher than its 3-year seasonality mean of 55%. TOTL is bidding for Rp6.8tr worth of projects, chiefly apartments and offices. It estimates a 90% win rate for ~40% of the projects, suggesting that FY16 new contracts could hit Rp4tr, though it is keeping its Rp3tr guidance. In turn, this may offer >10% earnings upside.

Upside from property projects As at end-Jun 16, TOTL carried on its book Rp183.5bn worth of properties for sale, consisting of villas, condotels, and three floors of offices, leftovers from its previous property venture. These could offer 20-30% upside to book value. It also has 7,660 sqm at the CBD of BSD, Serpong, bought at Rp143bn which should be fully paid by Sep 16. TOTL may develop 3-4 mixed-use buildings on this plot. It is also conceivable that TOTL may sell the property assets in 2017. We have not accounted for either at the moment.

A better risk-return than pure property stocks TOTL’s solid balance sheet and track record have made it a preferred builder of high-rise buildings. This, in turn, has allowed it to command a good market share, better-than-industry margins, and relatively lower customer risk exposure. Arguably, hence, is that its financial risk is lower compared with even the top tier property developers. Indeed, TOTL has been a good proxy for the property sector, albeit better buffered against a downcyle.

Higher conviction leads to higher TP TOTL outperformed the market and JAKPROP index by 13-14% YTD, but its valuations, at 12x FY16 and 9x FY17 P/E, are attractive vs. its 3-year mean of c.16x. The 50% discount to its SOE peers appears excessive. While we trim our FY16F EPS by up to 9% to be more aligned with management’s base case guidance, we lift our TP to Rp1,340, in line with its 3-year mean P/E, given the high potential earnings upside. Key catalysts are tax amnesty reigniting property investment appetite and better margins.

▎Indonesia


Current price: Rp825.0

Target price: Rp1,340

Previous target: Rp1,080

Up/downside: 62.4%


Reuters: TOTL.JK

Bloomberg: TOTL IJ


Rp2,813,250m


Rp6,384m




FY16F Net profit decreased by 9%

Source: Bloomberg


Absolute (%) -0.6 32 3.1

Relative (%) -5.7 18.5 -14.1

Major shareholders % held Total Inti Persada 56.5

Analyst(s)

Aurelia BARUS

T (62) 21 3006 1721

E [email protected]

[ X ]



Revenue (Rpb) 2,106 2,266 2,520 2,887 3,591

Operating EBITDA (Rpb) 194.0 253.9 304.3 353.0 472.2

Net Profit (Rpb) 165.3 191.4 220.8 293.0 368.7

Core EPS (Rp) 48.5 56.1 64.7 85.9 108.1

Core EPS Growth (14.9%) 15.8% 15.4% 32.7% 25.8%

FD Core P/E (x) 17.02 14.70 12.74 9.60 7.63

DPS (Rp) 30.00 40.00 38.84 51.55 64.86

Dividend Yield 3.64% 4.85% 4.71% 6.25% 7.86%

EV/EBITDA (x) 10.87 7.93 6.73 5.26 3.44

P/FCFE (x) 25.07 12.41 45.74 8.67 6.90

Net Gearing (80.8%) (88.8%) (77.2%) (83.3%) (88.8%)

P/BV (x) 3.53 3.32 3.02 2.57 2.19

ROE 21.4% 23.4% 24.9% 29.0% 31.1%



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Telco - Tower│Indonesia│Equity research│August 18, 2016

Company Note



Tower Bersama Infrastructure Decent tenancy growth & EBITDA margin

■ 2Q16 EBITDA largely in line; core EPS below expectations. Interim DPS of Rp77.

■ Tower tenancy net adds stayed relatively healthy for a second consecutive quarter.

■ EBITDA margin eased slightly qoq but stayed high at 86.7% in 2Q16.

■ FY16-18F core EPS cut by 17-21% to factor in flat tower rental rates on average.

■ Maintain Hold. Target price cut by 12% to Rp6,400.

2Q16 EBITDA in line; core net profit below expectations 2Q16 EBITDA rose 1.3% qoq (+11.2% yoy), driven by higher revenue. 1H16 EBITDA was in line, at 48% our FY16 forecast (consensus: 49%). Core net profit (ex-deferred taxes) rose 14.9% qoq (+6.6% yoy) in 2Q16 due to lower current taxes. At the core net profit level, the results were below expectations, with 1H16 forming only 36% of our FY16 forecast (consensus: 37%). An interim dividend of Rp330bn (Rp77/share) was declared.

Tower tenancy growth stayed relatively healthy Revenue rose 1.7% qoq (+8.5% yoy) in 2Q16 on higher rental revenue from Telkomsel, SmartFren and XL, with rental from other telcos largely flat qoq. Tower tenancies grew 2.8% qoq to 19,972, with the tenancy ratio largely steady at 1.65x in 2Q16 (1Q16: 1.66x). Net tenancy adds stayed healthy at 549 in 2Q16 (1Q16: 627, 2Q15: 580), likely due to the rollout of 4G network and capacity addition by telcos. The average monthly tower rental rate eased slightly by 1.4% qoq to Rp15.5k, but was steady yoy.

EBITDA margin eased slightly qoq EBITDA margin eased 0.3% pts qoq (+2.1% pts yoy) to 86.7% in 2Q16 due to higher opex. However, the two largest cost items, maintenance and salaries, were largely flat qoq. Total staff fell further to 553 (1Q16: 570, 4Q15: 585) on the back of improved efficiencies. Looking at the balance sheet, net debt/last quarter annualised (LQA) EBITDA fell slightly qoq from 5.1x to 5.0x at end-2Q16. This remains lower than its debt covenant of 6.25x.

Earnings cut to factor in flat tower rental rates We cut our FY16-18F EBITDA by 3.4-4.0%, with progressively bigger cuts in the remaining 10-year DCF period. We now assume the average monthly tower rental rate will be flat at Rp15k/tenant vs. 1-2% p.a. increase previously. While the rental rate on existing contracts will continue to rise due to built-in inflation escalators, this should be offset by lower rental rates (back to market levels of Rp15k) on contracts that are renewed. Correspondingly, our FY16-18F core EPS forecasts are cut by 16.6-21.0%.

Maintain Hold, with lower DCF-based target price of Rp6,400 After our earnings cut and rolling forward of the base year to FY17, we lower our DCF-based target price by 12.3% to Rp6,400 (WACC: 10.1%) and maintain our Hold rating. We think TBIG’s FY17F EV/EBITDA of 12.1x (adjusted for net debt at hedged forex rates) is fair vs. its 3-year EBITDA CAGR of 11.2%. Key upside risk is potential tower acquisitions in 2017-18. Key downside risk is bigger-than-expected downward pressure on rental rates. In the Indonesian telco sector, we prefer Telkom Indonesia and Indosat.

▎Indonesia


Current price: Rp5,975

Target price: Rp6,400

Previous target: Rp7,300

Up/downside: 7.1%


Reuters: TBIG.JK

Bloomberg: TBIG IJ


Rp28,659,244m


Rp16,731m

Current shares o/s: 4.80m



FY16F-18F Revenue cut by 5.3-6.5%.

FY16F-18F EBITDA reduced by 3.4-4.0%.

FY16F-18F Core EPS lowered by 16.6-21.0%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -8.8 -11.5 -14

Relative (%) -15.3 -26.9 -35.1

Major shareholders % held PT Wahana Anugerah Sejahtera 24.9

PT Provident Capital Indonesia 23.4

PT Saratoga Infrastruktur 12.8

Analyst(s)

FOONG Choong Chen, CFA


[ X ]



Revenue (Rpb) 3,307 3,421 3,672 4,133 4,621

Operating EBITDA (Rpb) 2,717 2,911 3,154 3,574 4,006

Operating EBITDA Margin 82.2% 85.1% 85.9% 86.5% 86.7%

Net Profit (Rpb) 1,301 1,430 1,848 2,086 2,352

Core EPS (Rp) 195.0 196.2 230.0 293.8 374.6

Core EPS Growth (26.1%) 0.6% 17.2% 27.7% 27.5%

FD Core P/E (x) 30.65 30.46 25.98 20.34 15.95

DPS (Rp) 0.0 55.8 172.5 220.3 281.0

Dividend Yield 0.00% 0.93% 2.89% 3.69% 4.70%

EV/EBITDA (x) 16.12 15.90 14.61 12.81 11.29

P/FCFE (x) 8.20 19.89 10.60 8.30 6.80

Net Gearing 367% 1143% 732% 544% 457%

ROE 23.3% 33.4% 48.7% 37.4% 33.1%



58.0

70.0

82.0

94.0

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118.0

5,300

5,800

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7,300

7,800

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24

Gaming│Malaysia│Equity research│August 18, 2016

Company Note



Magnum Bhd Hit by bad luck

1H16 EPS came in below expectations due to the high prize payout ratio in 2Q16. ■

2Q16 DPS of 3 sen was below expectations. ■

Illegal betting remains a big problem. ■ We cut FY16F EPS by 10% and our TP is lowered slightly on lower dividend ■estimates. Maintain Hold.

Hit by bad luck in 2Q16 Magnum’s 1H16 net profit came in below expectations at 40% of our previous full-year forecast due to the exceptionally high payout ratio in 2Q. (76% vs. 67% of gross NFO sales in 2Q). NFO sales declined 4.2% yoy in 1H16, slightly worse than our estimate of -3%, on lower Jackpot prize pool and lesser draws.

Dividends below expectations Magnum declared a 2Q16 DPS of 3 sen, bringing its 1H16 DPS to 7 sen, below our expectations as we had earlier forecast a full-year DPS of 16 sen. As a consequence, we now lower our full-year DPS estimate to 15 sen.

Structural headwinds persist While it has been one year since GST was implemented, the negative effects of the consumption tax on the NFO sector persist. Illegal operators have been able to offer higher prize payouts, betting discounts, and credit facilities, whereas legal operators have had to contend with the impact of GST on their revenues. With weak enforcement efforts, certain illegal online betting sites are even providing bank account details at major local banks for gaming deposits.

New game variant, 4D Powerball, has lost its lustre Magnum launched a new game variant, 4D Powerball, on 24 Jan 2016. This is a much simpler and more attractive variant compared to Jackpot Gold. We had expected the new game be far more popular. However, sales/draw for both games are now similar, at steady-state levels of about RM100,000 per draw.

Switch to Genting Malaysia for gaming exposure We maintain our Hold rating. Magnum’s share price has done well since the 25bps OPR cut on 13 Jul. We cut our FY16F EPS by 10% on lower payout ratio but raise FY17-18F EPS slightly on normalised payout ratio. Our DDM-based target price is trimmed for the lower DPS, mitigated by a lower risk-free rate (3.6% vs. 3.9% before). Magnum is still attractive for yield-seeking investors, but its capital appreciation outlook remains muted given the weak growth prospects. Switch to Genting Malaysia for gaming exposure.

▎Malaysia


Current price: RM2.47

Target price: RM2.36

Previous target: RM2.42

Up/downside: -4.5%


Reuters: MAGM.KL

Bloomberg: MAG MK


RM3,515m


RM1.06m




FY16F EPS cut by 10%

FY17-18F EPS raised by 4%

Source: Bloomberg


Relative (%) 0.2 2 -10.8

Major shareholders % held Tan Sri Dato' Surin Upatkoon 33.0

Asia 4D Holdings 11.2

Management 1.1

Analyst(s)

Marcus CHAN, CFA


[ X ]



Revenue (RMm) 2,887 2,767 2,650 2,688 2,741

Operating EBITDA (RMm) 434.1 339.1 334.6 368.3 373.7

Net Profit (RMm) 257.3 174.9 206.4 235.3 239.4

Core EPS (RM) 0.18 0.12 0.14 0.16 0.17

Core EPS Growth (21.9%) (32.0%) 18.0% 14.0% 1.8%

FD Core P/E (x) 13.80 20.31 17.21 15.10 14.84

DPS (RM) 0.20 0.16 0.15 0.16 0.16

Dividend Yield 8.10% 6.48% 6.07% 6.48% 6.48%

EV/EBITDA (x) 9.33 12.19 12.41 11.26 11.07

P/FCFE (x) 17.93 34.46 23.75 18.75 18.24

Net Gearing 18.6% 22.0% 22.8% 22.6% 22.1%

P/BV (x) 1.45 1.47 1.47 1.47 1.47

ROE 10.4% 7.2% 8.6% 9.8% 9.9%

% Change In Core EPS Estimates (10.00%) 3.75% 3.76%


79.0

86.1

93.3

100.4

2.10

2.30

2.50

2.70

Price Close Relative to FBMKLCI (RHS)

1

2

3

4


Vol m

25

IPP│Malaysia│Equity research│August 18, 2016

Shariah Compliant

Company Note



Malakoff Corporation Lacking spark

■ 2Q16 earnings were below expectations as its 1H16 core net profit made up only 30% of our full-year forecast and 32% of consensus.

■ The soft earnings were due to higher-than-expected maintenance cost. The 3.5 sen DPS declared was in line with expectations.

■ We cut our FY16-18 EPS by 10-17% to reflect higher cost but keep our Hold call, pending more details on its earnings in its analyst briefing this morning.

■ We raise our SOP-based target price to RM1.63, after reflecting the lower risk-free rate in our valuation. Prefer Tenaga for exposure to the Malaysian utilities sector.

Key highlights Excluding forex losses (-RM2m) and gain from insurance claim (RM58m), Malakoff’s 2Q16 core net profit rose 27% yoy to RM74m (US$18m), thanks to lower tax rate, which fell from 38% in 2Q15 to 10% in 2Q16 due to recognition of capital allowances related to the 1,000MW coal-fired Tanjung Bin Energy (TBE) in 2Q16. However, 2Q16 core net profit was down 23% qoq despite the commencement of TBE's operation on 21 Mar 2016. We suspect this was due to higher maintenance costs and wider associate losses.

Full-quarter contribution from TBE failed to lift earnings The key surprise was the weaker-than-expected profit in 2Q16 compared with 1Q16. Malakoff’s depreciation and interest charges rose 12% and 43% qoq, respectively, due to TBE, which were expected. However, 2Q16 revenue expanded only 14% qoq, or only RM182m higher than in 1Q16. We had expected TBE to generate about RM1.4bn of revenue p.a., translating to about RM350m of revenue per quarter.

Cutting earnings to reflect higher costs We believe Malakoff will report stronger earnings in 2H16 compared with 1H16 as its maintenance costs could be seasonally lower in the later part of the year. However, we are cutting our FY16-18 net profit forecasts by 10-17% to reflect lower-than-expected revenue as well as higher associate losses. We may further review our earnings forecast after Malakoff’s analyst briefing this morning as there is a risk that our projection of TBE's revenue may be overly-optimistic.

Earnings risk emerge in 2017 We continue to believe that Malakoff’s earnings will drop in 2017 due to the expiry of its Segari Energy Ventures (SEV) plant in Jun 2017. Our 2017 net profit forecast is 26% below consensus (or 12% below before the cut in our earnings forecast). We estimate that SEV’s revenue derived from capacity payment will drop by c.RM550m p.a. once its first-term PPA expires. There will be limited savings on depreciation expenses, as the plant is depreciated over 31 years. SEV commenced its operation just 20 years ago.

Maintain Hold The prospect of weaker earnings in 2017 means that Malakoff’s dividend yield could peak this year. Assuming that it pays out all of its net profit as dividend, its yields would amount to 5.9% in 2016 and 4.7% in 2017. While the latter is lower than the yields offered by most of Malakoff’s bonds, it is higher than the yields offered by its peers such as Tenaga and PetGas. Decent dividend yield could support Malakoff’s share price. Key upside/down risk to our Hold call is lower/higher-than-expected maintenance costs.

▎Malaysia





Up/downside: -4.3%


Reuters: MALA.KL

Bloomberg: MLK MK


RM8,500m


RM4.93m




10-17% cut to FY16-18F EPS

Source: Bloomberg


Relative (%) 0.8 2.6 3.4

Major shareholders % held MMC 36.5

EPF 14.3

LTH 10.1

Analyst(s)

SAW Xiao Jun, CFA


[ X ]



Revenue (RMm) 5,594 5,302 6,507 6,436 6,158

Operating EBITDA (RMm) 2,284 2,425 2,840 2,640 2,348

Net Profit (RMm) 341.5 453.2 506.5 405.3 362.6

Core EPS (RM) 0.07 0.09 0.10 0.08 0.07

Core EPS Growth 111% 33% 12% (20%) (11%)

FD Core P/E (x) 24.89 18.75 16.78 20.97 23.44

DPS (RM) 0.040 0.070 0.071 0.057 0.051

Dividend Yield 2.34% 4.12% 4.17% 3.34% 2.99%

EV/EBITDA (x) 9.70 9.08 7.68 7.77 8.19

P/FCFE (x) 5.75 NA NA 17.55 68.52

Net Gearing 351% 241% 230% 204% 180%

P/BV (x) 2.14 1.46 1.43 1.40 1.37

ROE 8.67% 9.28% 8.62% 6.74% 5.91%



80.0

88.8

97.5

106.3

115.0

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1.50

1.70

1.90


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40

60


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26

IPP│Malaysia│Equity research│August 18, 2016

Shariah Compliant

Company Note



Malakoff Corporation Takeaways from results briefing

■ We are positively surprised that Malakoff expects its associate, Kapar Energy Ventures (KEV), to return to profit in the later part of 2016.

■ However, its operating and maintenance (O&M) costs could stay elevated in 2H16 due to ongoing maintenance works in its power plants.

■ We cut our FY16 EPS by 5% to reflect the higher O&M costs but raise our FY17-18 EPS by 1-2% as we expect its O&M costs to normalise next year.

■ Maintain Hold and SOP-based target price. We prefer Tenaga.

2Q16 post-results briefing Malakoff’s Group MD Datuk Wira Azhar Abdul Hamid and the management team hosted an analyst briefing this morning following the release of its 2Q16 results last night. We came out from the briefing feeling neutral about the company’s outlook as the positive surprise of a potential turnaround in KEV was offset by the revelation that its O&M costs could remain high in 2H16 due to ongoing maintenance works in its power plants.

KEV could post small profit in late-2016 In 1H16, Malakoff incurred a RM2m loss related to its associates and joint ventures. KEV was the biggest drag as Malakoff’s share of losses from KEV alone in 1H16 was RM27m. We gather that KEV’s full-year losses could narrow by end-2016, suggesting that KEV may report a small profit in 2H16. The turnaround may come from lower unscheduled outage rates (UORs) in KEV’s generation units as high UORs in the past have prevented KEV from receiving full capacity payments from Tenaga.

2H16 and 2017 earnings outlook The earnings impact of improving profitability in KEV, however, could be offset by high maintenance costs in Malakoff’s existing power plants. Contrary to our previous expectation that 2H16 maintenance costs will be much lower than 1H16’s, we gather that the amount of maintenance works could remain elevated in 2H16 relative to 1H16, before tapering to a lower level in 2017. These led us to cut our FY16 EPS forecast by 5% but raise FY17-18 EPS by 1-2%.

Management’s aspiration During the briefing, Group MD Datuk Wira Azhar shared his vision for the company. We believe Malakoff is moving in the right direction as the management team wants to be more aggressive in scouting for expansion opportunities outside of Malaysia. On top of that, Malakoff may venture into renewable energy (i.e. solar and waste-to-energy) for future earnings growth.

Positive impact on share price if expansion plan materialises These ventures, if materialise, could have a positive impact on Malakoff’s share price as the potential returns of power plant projects outside of Malaysia (especially in emerging economies) and renewable energy projects could be higher than the returns offered by conventional fossil-fuel power plants in Malaysia.

Maintain Hold We maintain our Hold call on the stock due to the limited share price upside. The key upside risk to our call is a major value-accretive expansion or acquisition while the key downside risk is higher-than-expected maintenance cost in 2H16.

▎Malaysia





Up/downside: -3.7%


Reuters: MALA.KL

Bloomberg: MLK MK


RM8,450m


RM5.30m




FY16 EPS cut by 5%

FY17-18 EPS raised by 1-2%

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 5 5 10.5

Relative (%) 3.6 1.4 3.2

Major shareholders % held MMC 36.5

EPF 14.3

LTH 10.1

Analyst(s)

SAW Xiao Jun, CFA


[ X ]



Revenue (RMm) 5,594 5,302 6,448 6,464 6,185

Operating EBITDA (RMm) 2,284 2,425 2,752 2,624 2,331

Net Profit (RMm) 341.5 453.2 483.6 409.5 368.8

Core EPS (RM) 0.068 0.091 0.097 0.082 0.074

Core EPS Growth 111% 33% 7% (15%) (10%)

FD Core P/E (x) 24.74 18.64 17.47 20.64 22.91

DPS (RM) 0.040 0.070 0.077 0.066 0.059

Dividend Yield 2.35% 4.14% 4.58% 3.88% 3.49%

EV/EBITDA (x) 9.68 9.06 7.94 7.85 8.31

P/FCFE (x) 5.71 NA NA 18.73 89.38

Net Gearing 351% 241% 234% 210% 188%

P/BV (x) 2.13 1.46 1.43 1.41 1.40

ROE 8.67% 9.28% 8.26% 6.89% 6.13%

% Change In Core EPS Estimates (4.54%) 1.04% 1.72%


80.0

88.8

97.5

106.3

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27

https://brokingrfs.cimb.com/i-HxIyNPn5dXwkyvEOQe8LbFn72GbCijktcwM60PHE0kkr7vDNlhsLTDZfAzkCO30AKXiY7BYjNX6g2.pdf

Semiconductor│Malaysia│Equity research│August 18, 2016

Company Note



Malaysian Pacific Industries New packages driving growth

■ FY6/16 earnings ahead of expectation at 105% of our forecast due to better sales from higher margin packages and lower tax expenses, but in line with consensus.

■ FY16 core net profit rose 33% yoy, driven by stronger sales from advanced packages, better operating efficiency and lower tax expenses.

■ We raise our FY17-18F EPS by 5.8-8.3% and introduce our FY19 forecasts.

■ We expect MPI to register decent 3-year EPS CAGR of 9.4%, driven by higher sales from newer and advanced packages and better operating efficiency.

■ Maintain Hold with a higher RM8.40 TP. Prefer Inari for better exposure to tech.

4QFY16 revenue impacted by RM appreciation against US$ Revenue fell 2.1% qoq in 4QFY16 to RM345m from RM380m due to the strengthening of the RM against the US$ (+4.4%). In US$ terms, MPI’s revenue rose 2.3% qoq, within management’s guidance of 0-5% growth. In spite of the lower sales, EBITDA margin expanded by 0.8% pts qoq to 28.2% on the back of an active strategy to grow its higher margin packages sales. Overall, core net profit grew by 2.9% to RM37.6m (US$9.4m).

FY16 core net profit surged 33% yoy FY16 revenue rose 5.3% yoy to RM1.46bn (US$365.8m) due to a combination of robust sales of higher-margin products and favourable currency movements (+19% yoy). EBITDA margin also rose 1.2% pts yoy from 26.1% to 27.3% due to better product mix and improving operating efficiency. As a result of higher operating leverage, MPI’s core net profit rose 33% yoy in FY16 to RM149.7m (US$37.4m) vs. RM112.4m in FY15.

Raising FY17-18F EPS by 6-8% Following the stronger earnings performance, we raise our FY17-18 EPS forecasts by 5.8-8.3% to account for stronger sales from newer leaded and leadless packages that offer higher profit margin. We also introduce our forecasts for FY19. Overall, we expect MPI’s earnings to expand with a decent 3-year EPS CAGR of 9.4%.

Focusing on growing automotive and industrial segment We are encouraged by management’s strategy to grow the automotive and industrial (A&I) segment as this will help to reduce its dependency on the smartphone and tablet (S&T) segment. Management targets to grow A&I revenue contribution from 50% in FY16 to c.60% over the next 3-5 years on the back of growing demand for autonomous cars, the adoption of better electronic components and higher safety requirements.

Stronger net cash position with 22% FCF yield in FY16 MPI has a net cash of RM284m as at Jun 16, supported by strong FCF yield of 22%. While it maintained an average payout of 35% in FY15-16, we see potential for higher payout in the future due to its minimal capex requirement and stronger balance sheet.

Maintain Hold, with a higher RM8.40 target price We maintain our Hold call, with a higher RM8.40 target price, based on 11x CY17F P/E, 10% discount to sector mean of 12x, in view of slowing earnings growth due to sluggish demand outlook. We prefer Inari for better exposure to the tech sector. Key downside risk to our call is disappointing S&T sales while upside risks are faster-than-expected earnings growth in the A&I segment and higher dividend payout.

▎Malaysia





Up/downside: 5.1%


Reuters: MPIM.KL

Bloomberg: MPI MK


RM1,589m


RM0.85m

Current shares o/s: 209.9m





Source: Bloomberg


Relative (%) 4.3 6.3 26.3

Major shareholders % held Hong Leong Manufacturing 50.3

ASB 4.0

Analyst(s)

Mohd Shanaz NOOR AZAM


[ X ]



Revenue (RMm) 1,390 1,463 1,539 1,599 1,662

Net Profit (RMm) 108.5 149.7 158.1 167.2 176.3

Core EPS (RM) 0.53 0.71 0.75 0.80 0.84

Core EPS Growth 91.2% 33.4% 5.6% 5.7% 5.4%

FD Core P/E (x) 14.94 11.20 10.60 10.03 9.51

Price To Sales (x) 1.21 1.15 1.09 1.05 1.01

DPS (RM) 0.20 0.23 0.28 0.33 0.35

Dividend Yield 2.50% 2.88% 3.50% 4.13% 4.38%

EV/EBITDA (x) 4.93 3.97 3.57 3.03 2.52

P/FCFE (x) 14.12 8.22 8.53 5.45 5.39

Net Gearing (5.7%) (24.3%) (34.9%) (49.6%) (60.9%)

P/BV (x) 1.95 1.71 1.55 1.42 1.31

ROE 14.1% 16.3% 15.4% 14.8% 14.3%

% Change In Core EPS Estimates 5.80% 8.34%

CIMB/consensus EPS (x) 1.02 1.07

89

116

142

169

5.80

7.80

9.80

11.80


1

2

3

4


Vol m

28

Technology│Taiwan│Equity research│August 18, 2016

Sector Note



Semiconductor Intel licenses ARM tech for 10nm foundry

Intel announced at the Developer Forum that it inked an agreement with ARM to ■license the latter’s technology in order to win more foundry customers.

We think this is Intel admitting its defeat in the mobile and 14nm foundry market. ■The impact on TSMC’s 2017-18 EPS is limited.

We expect the first wave of 7nm foundry customers to go for TSMC instead of ■Samsung in 2017-18 to avoid taking on first-mover risks surrounding EUV.

Intel expects ARM licensing to open up 10nm opportunities Intel has announced it will fabricate chips for LGE and likely Spreadtrum based on ARM architecture using its 10nm process starting in 4Q17. Adding licences for ARM’s technology could open up its foundry business for Qualcomm and Apple AP fabrication, according to Bloomberg. Separately, Intel reiterated that it would not adopt EUV processes in the 10nm and suggested that EUV may not even be ready for 7nm due to efficiency considerations.

An admission of Intel’s defeat in mobile AP and 14nm The end of the ‘SoFIA’ platform suggests that Intel’s strategy to enter the mobile AP market and grow its 14nm foundry business did not work out (see note below). As Intel’s proprietary x86 architecture failed to compete in the mobile market, ARM’s manufacturing licensing will enable Intel to provide foundry services for mobile SoC customers in the 10nm node. However, the business is likely to take off slowly given that the big boys have already engaged with TSMC or Samsung and a new design cycle may take a much longer time to materialise.

The impact on TSMC likely limited As Apple has already engaged with TSMC for 2017 (10nm) and 2018 (7nm) projects while QCOM has landed a 10nm project with SEC and 7nm with TSMC, Intel may have to wait until late-2018 before it gets in the foundry business with the two giants. Moreover, the InFO package that TSMC co-works with Apple is unlikely to be ported to Intel. Intel may have to promote its own wafer level package (Air-Gap) to Apple. We estimate it will take around 18-24 months for a new design cycle to take off.

Intel’s next move in IoT and mobile AP While ARM’s licensing will help Intel to develop IoT devices, it is still too early to tell how Intel will enter the IoT market. Our view is that Intel’s ARM licensing is not only good for manufacturing; if Intel would like to return to the mobile AP market, the licence could enable Intel to develop an ARM-based SOC by integrating the baseband solution, which Intel acquired from Infineon and is now under the Intel Mobile division.

EUV adoption remains uncertain This is not the first time Intel has been coy about EUV. While both Intel and TSMC will not adopt EUV in 7nm, SEC SLSI is aggressively aiming to do just that in late-2017. While EUV may reduce fabrication cost, we think the first wave of 7nm foundry customers may go for TSMC instead of Samsung in 2017-18. Besides the fact that TSMC’s schedule is 2-3 quarters ahead, these leader clients would likely prefer to avoid facing first-mover risks.

Valuation and recommendation We are Overweight on the Taiwan semiconductor sector, with TSMC and SMIC as our top picks. Re-rating sector catalysts are the accelerating process node migration while downside could come from the early-than-expected inventory correction and 12-inch capacity oversupply.

[ X ]

Figure 1: Apple AP mass production road map

SOURCES: CIMB RESEARCH, COMPANY

▎Taiwan

Overweight (no change)

Highlighted companies

TSMC (2330.TT, ADD, PT: NT$190.0)

TSMC’s dominance in the foundry market is likely to strengthen with the launching of its 10nm node in late-2016 and 7nm node in 2017.

UMC (2303.TT, HOLD, PT: NT$11.5)

We expect the rise in 28nm shipment and initial expense from UMC’s Xiamen fab to be a drag on margins over the next four quarters.

SMIC (981.HK, ADD, PT: HK$0.98)

SMIC will be one of the major beneficiaries of China’s big semiconductor dream. It targets aggressive growth of 20%+ per annum over the next 3-5 years and part of the growth will have to come from inorganic sources.

Analyst(s)

Eric LIN


James CHEN T (886) 2 8729 8382 E [email protected]

AP Node Foundry

A8 20nm HKMG TSMC 20nm

A9 14/16nm FinFET TSMC/Samsung 14/16nm

A10 16nm FinFET TSMC 16nm



A13 7nm FinFET TBD 7nm

2H191H15 2H15 1H16 2H16 1H17 2H17 1H18 2H18 1H192H14

29

http://www.macrumors.com/2016/05/06/tsmc-design-a11-chip-early-2017/

Thailand│Equity research│August 18, 2016

Strategy Note



Thailand Strategy 2Q16 earnings turnaround

2Q16 corporate earnings were up 7% yoy and 2% qoq, an improvement from -6% ■yoy in 1Q16.

Positive surprises came from consumer, F&B, energy and agriculture stocks. ■ We advise investors to focus on domestic cyclicals, such as banks, property and ■infrastructure plays, and continue to like high-yield themes.

We reiterate our 1,600 year-end index target, with KBANK, SCB, LH, QH, CK, SCC, ■ADVANC, JAS and JASIF as our top picks.

2Q16 corporate earnings were up 7% yoy and 2% qoq The sectors that posted strong earnings growth in 2Q16 were consumer (on the back of improvement in consumption, especially upcountry) and agriculture (benefited from low 2Q15 base). The sectors that posted weak 2Q16 earnings growth were construction services and healthcare due to weak revenue growth. Post-2Q16 results, we trim our EPS forecast by 1.4% for 2016 but raise EPS by 1.1% for 2017. As such, our core EPS growth forecasts are now 8% for 2016 and 18% for 2017.

More positive surprises in 2Q16 About 19% of the companies under our coverage posted disappointing 2Q16 results,while 34% registered results that trumped expectations. The remaining 47% were in line. The ratios were better than in 1Q16, when 30% of our stock universe fell short, 30% beat expectations and 40% were in line. Positive surprises in 2Q16 came from consumer, F&B, energy and agriculture stocks. The bank and property stocks delivered mixed 2Q16 results. Negative surprises came from contractor and healthcare stocks.

Sector allocation strategy We advise investors to focus on domestic cyclicals (banks, property and infrastructure plays) and continue to like high-yield themes (telco and property sectors). For investors who cannot add more weight to the Thai market, we recommend taking profit on healthcare, tourism, energy and petrochemical stocks. Healthcare, and tourism stocks have done well in over the past few years and valuations are not cheap.

Reiterate 1,600 index target by end-CY16 Given the likely rise in fund flows to the Thai stock market, we believe big caps willoutperform the market in 2016. We reiterate our 1,600 year-end index target, still based on 15x CY17 P/E (slightly below 5-year historical average). Our top picks are KBANK, SCB, LH, QH, CK, SCC, ADVANC, JAS and JASIF.

Risks to be mitigated Given the positive outcome of the 7 Aug referendum, we believe that there is lower political risk now, as the general election timeline is clearer and it appears likely that the current government will remain in power after the elections in Nov 2017. Given the morestable political situation, we believe Thailand’s economic outlook is better and this will lead to more inflows. The recent launch of the East Orange, Pink and Yellow linesprompts us to believe that there is lower risk of further delays in government projects.

[ X ]

Figure 1: Stock Exchange of Thailand (SET) P/E band

SOURCES: CIMB RESEARCH, COMPANY

▎Thailand

Highlighted companies

CH. Karnchang ADD, TP THB40.00, THB32.00 close We believe CK has a decent chance of winning certain East Orange Line underground contracts. This should catalyse its share price. It also plans to team up with BEM to bid for the Pink and Yellow lines.

Kasikornbank ADD, TP THB208.0, THB194.5 close KBANK has seen a lower NPL formation rate and decline in special mention loans in 2Q16. In our view, KBANK will sustain earnings growth next year, with accelerated loan growth and higher non-interest income.

Land And Houses ADD, TP THB11.00, THB9.75 close We like LH because of: 1) its strong earnings growth of 11% CAGR in 2016-17, boosted by high order backlog, and 2) sustainable high dividend yield of 6.5%, as the share of profits from affiliates accounted for one-third of its core net profit.

Timeline for the Thai general election

Analyst(s)

Kasem PRUNRATANAMALA and team T (66) 2 657 9221 E [email protected]

14.86

Avg, 15.71

+2S.D., 19.84

+1S.D., 17.77

‐1S.D., 13.65

‐2S.D., 11.59

10

11

12

13

14

15

16

17

18

19

20

Aug-11 Mar-12 Oct-12 Apr-13 Nov-13 May-14 Dec-14 Jul-15 Jan-16 Aug-16 Feb-17

P/E (x) ‐ Fwd 1 Yr

Event TimelineHold a referendum 07-Aug-16Royal endorsement 21-Sep-16

Draft organic laws 04-Apr-17Organic laws to be passed by National Legislative Assembly 03-Jun-17

Election 10-Dec-17

30

Property Devt & Invt│Vietnam│Equity research│August 18, 2016

Company Note

THIS REPORT IS PREPARED IN ASSOCIATION WITH VNDIRECT SECURITIES CORPORATION. PLEASE SEE DISCLAIMER AND IMPORTANT NOTICES APPEARING AT THE END OF THIS DOCUMENT.IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.


Vingroup JSC Windfall gain offsets retail business losses

■ VIC’s revenues grew 95% yoy in 1H16, while earnings surged 112% yoy, driven by the delivery of ~700 completed housing units and the sale of 6 apartment blocks

■ The revenues of Vingroup’s four rapidly growing retail formats grew 255% yoy, but this acceleration also drove a 140% yoy increase in the losses of the retail business

■ Losses in the retail business were partly offset by a windfall gain generated by the sale of a 5ha project in Hanoi that VIC bought from Ocean Group (OGC:VN) in 2015

■ Retail investor sentiment towards VIC has been damaged for reasons that are unrelated to its core business, so VIC is now trading at a 25% discount-to-NAV

Earnings growth driven by residential real estate development Vingroup’s residential retail development revenues grew 93% in 1H16, and the PBT of that business grew 82% yoy, driven by the hand-over of about 700 completed apartments/houses to the prior purchasers of those housing units; VIC’s presales shot up 183% in FY15, but the revenues and earnings those presales generated cannot be recognized until the completed units are delivered to the buyers. VIC also sold 6 apartment blocks in its 43ha Central Park project (most likely to a broker), which allowed it to recognize earnings of the ~3,000 apartment units in those blocks during H1.

Losses in the retail business surged 140% yoy In H1, the revenues of VIC’s retail business soared 255% yoy to ~$200m, but this stellar growth inflated the losses the retail business generated from VND500b in 1H15 to VND1,200b in 1H16, and helped double Vingroup’s overall SG&A expenses. VIC increased the number of its Vinmart grocery stores from 18 in 1H15 to 50 in 1H16, increased the number of its Vinmart+ convenience stores from 48 to 820, grew the number of its Vinpro home electronics stores from 8 to 18, and the number of its Vinpro+ (a electronics/mobile phone retailing format with smaller stores) from 20 to 119.

Star City sale helped offset retail business losses VIC sold a 5ha project called “Star City” that it bought from Ocean Group (OGC:VN) last year. The divestment generated a VND2,200b PBT windfall gain, and contributed more than ½ of VIC’s VND4,000b 1H16 PBT. Without the sale, Vingroup’s H1 PBT would have only grown by 46% yoy, due to the large losses suffered in the retail business.

Five large projects drive earnings growth; 3 are under construction The main projects that are driving (or will drive) VIC's revenue growth, include (in the chronological order these projects will contribute to VIC’s revenues): 1) Park Hill, a 36ha development of 12,000 apartments that is 20 minutes from Hanoi’s CBD, 2) Central Park, a 43ha & 10k apartments project, 10 minutes from HCMC’s CBD, 3) Golden River, 25ha in HCMC’s CBD, 4) Saigon Port, 30ha, 10 minutes from the CBD and 5) Vinhomes Paradise, 32ha, 30-40 minutes from Hanoi's CBD.

Valuation is reasonable again VIC’s stock fell 15% from its July 2016 peak, due to some concerns of local retail investors that are not related to the company’s core business. Also, both retail and institutional investors are concerned about the large number of newly developed high-end apartments in the HCMC market. We understand the latter concern, but still believe VIC is well positioned – its projects have excellent locations and are priced realistically. VIC’s valuation has fallen to a 25% discount-to-NAV so we maintain our Add rating.

▎Vietnam


Current price: VND47,900

Target price: VND64,000

Previous target: VND64,000

Up/downside: 33.6%


Reuters: VIC.VN

Bloomberg: VIC VN


VND103,139,936m


VND41,449m




FY15F Revenue increased by 5%.


FY15F ROE increased by 5%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -11.3 -0.6 27.5

Relative (%) -9.4 -6.7 13.6

Major shareholders % held Pham Nhat Vuong 27.5

Vietnam Investment Group JSC 11.7

Hong Thai Investment & Dev Ltd 5.3

Analyst(s)

VO Phuc Nguyen


[ X ]



Total Net Revenues (VNDb) 27,724 34,048 42,228 61,681 59,313

Operating EBITDA (VNDb) 9,112 7,044 11,661 18,159 20,031

Net Profit (VNDb) 3,159 1,216 3,525 7,641 9,570

Core EPS (VND) 2,460 651 1,851 3,939 4,933

Core EPS Growth (52%) (74%) 184% 113% 25%

FD Core P/E (x) 19.47 62.31 26.21 12.43 9.91

DPS (VND) - - - - -


EV/EBITDA (x) 9.54 16.14 8.68 5.79 5.10

P/FCFE (x) NA NA 25.97 18.76 32.78

Net Gearing 71.7% 43.8% 5.6% 10.2% 3.0%

P/BV (x) 3.03 3.87 3.65 3.08 2.66

ROE 18.1% 5.6% 14.5% 27.5% 29.4%


96.0

104.0

112.0

120.0

128.0

136.0

34,000

39,000

44,000

49,000

54,000

59,000

Price Close Relative to VNINDEX (RHS)

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Asia Pacific Daily│Equity research│August 19, 2016

REGIONAL HEAD

Michael Greenall Regional Head of Research & HOR Malaysia +60 (3) 2261 9088 [email protected]

COUNTRY HEADS OF RESEARCH

Ivy NG, CFA Bertram LAI Eric LIN Erwan TEGUH Pramod AMTHE Malaysia (Deputy Head) Hong Kong/China Taiwan Indonesia India +60 (3) 2261 9073 +852 2532 1111 +886 (2) 8729 8380 +62 (21) 3006 1720 +91 (22) 6602-5167 [email protected] [email protected] [email protected] [email protected] [email protected] Dohoon LEE Siew Khee. LIM Kasem PRUNRATANAMALA, CFA South Korea Singapore Thailand +82 (2) 6730 6121 +65 6210 8664 +66 (2) 657 9221 [email protected] [email protected] [email protected] Michael KOKALARI, CFA Joyce Anne, RAMOS Yolan SEIMON Vietnam Philippines Sri Lanka +84 907 974408 +63 (2) 888 7293 +94 (11) 2306273 [email protected] [email protected] [email protected] Coverage via partnership arrangement with Coverage via partnership arrangement with SB Equities John Keells Stock Brokers

REGIONAL SECTOR HEADS

KJ KWANG Ivy NG, CFA Raymond YAP, CFA Offshore & Marine Plantations Transportation +82 (2) 6730 6123 +60 (3) 2261 9073 +60 (3) 2261 9072 [email protected] [email protected] [email protected]

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Switzerland: This report has not been prepared in accordance with the recognized self-regulatory minimal standards for research reports of banks issued by the Swiss Bankers’ Association (Directives on the Independence of Financial Research). Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer or a placement within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China. Thailand: This report is issued and distributed by CIMB Securities (Thailand) Company Limited (“CIMBS”) based upon sources believed to be reliable (but their accuracy, completeness or correctness is not guaranteed). The statements or expressions of opinion herein were arrived at after due and careful consideration for use as information for investment. Such opinions are subject to change without notice and CIMBS has no obligation to update its opinion or the information in this research report. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Conduct Authority apply to a recipient, our obligations owed to such recipient are unaffected. CIMB Securities (Thailand) Co., Ltd. may act or acts as Market Maker, and issuer and offerer of Derivative Warrants and Structured Note which may have the following securities as its underlying securities. Investors should carefully read and study the details of the derivative warrants in the prospectus before making investment decisions. AAV, ADVANC, AMATA, ANAN, AOT, AP, BA, BANPU, BBL, BCP, BDMS, BEAUTY, BEC, BEM, BH, BJCHI, BLA, BLAND, BTS, CBG, CENTEL, CHG, CK, CKP, CPALL, CPF, CPN, DELTA, DTAC, EARTH, EGCO, EPG, GL, GLOW, GPSC, GUNKUL, HANA, HMPRO, ICHI, INTUCH, IRPC, ITD, IVL, JAS, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, M, MAJOR, MINT, PLANB, PLAT, PS, PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAMTEL, SAWAD, SCB, SCC, SCCC, SCN, SGP, SIRI, SPALI, SPCG, STEC, STPI, SVI, TASCO, TCAP, THAI, THCOM, TICON, TISCO, TMB, TOP, TPIPL, TRUE, TTA, TTCL, TTW, TU, UNIQ, UV, VGI, VNG, WHA, WORK. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.

Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates. United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London, SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK. Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research. This report is for distribution only to, and is solely directed at, selected persons on the basis that those persons: (a) are eligible counterparties and professional clients of CIMB UK; (b) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), (c) fall within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom subject to relevant regulation in each jurisdiction, or (e) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent “investment research” under the applicable rules of the Financial Conduct Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legal requirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication. United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional

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experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015. AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.

Comprises level 1 to 5 as follows: Level 1: Committed Level 2: Declared Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy) Level 4: Certified Level 5: Extended.

CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute

recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute

recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute

recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to

benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to

benchmark.

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