Macro risks have faded, and the economy should remain ...pg.jrj.com.cn/acc/Res/CN_RES/INVEST/2017/11/28/cf...Nov 28, 2017 · Suisse does and seeks to do business with companies covered

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST

CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Tuesday, 28 November 2017

Asian Daily (Asia Edition)

EPS, TP and Rating changes EPS TP

(% change) T+1 T+2 Chg Up/Dn Rating

Treasury Wine (0.3) (0.4) 0 (11) U (N) China Gas Holdings 3 1 5 32 O (O) China Mengniu Dairy (10.4) 0 0 25 O (O) Qudian Inc. 4 (26) (55) 23 O (O) Tuniu Corporation n.m n.m 9 37 O (O) Eris Lifesciences Ltd Initiation 18 O (NA) XL Axiata Tbk 0 0 0 20 O (N) Sysmex 2 7 45 19 O (N) Terumo 1,108 - 25 19 O (N) Fauji Fertilizer Company 7 8 6 (15) U (U) Airports of Thailand (0.2) (3.3) 27 20 O (N)

Connecting clients to corporates

Corporate Days / Conferences

7th Annual Macro Conference Date 05 January, Singapore

Great China Technology and Internet Conference Date 10-12 January, Hong Kong

Analyst Thomas Chong / Manish Nigam

9th Annual ASEAN Conference Date 11-12 January, Singapore

Asia Frontier Markets Conference Date 20 February, London

Analyst Farhan Rizvi

21st Annual Asian Investment Conference Date 19-23 March, Hong Kong

Hong Kong / China (Non-deal roadshow)

MOMO Inc (MOMO.OQ) Post Result Date 30 November, Hong Kong

Analyst Thomas Chong

China Life Insurance (2628 HK) Date 01 December, Hong Kong

Analyst Charles Zhou

Singapore (Non-deal roadshow)

Kotak Mahindra Bank Limited (KTKM.NS) Date 01 December, Singapore

Analyst Ashish Gupta

US (Non-deal roadshow)

Inari Amertron (INAR.KL) Date 29 November, New York

Analyst Randy Abrams

Tarena International (TEDU.OQ) Date 29-November - 05-December, New York,

Boston, Chicago, San Francisco

Analyst Thomas Chong

Sembcorp Industries Ltd (SCIL.SI) Date 30 November, Toronto

Analyst Gerald Wong

Europe (Non-deal roadshow)

Shui On Land Limited (0272.HK) Date 29-November - 01-December, Europe

Analyst Kelvin Tam

Others (Non-deal roadshow)

PT PP (PERSERO) TBK (PTPP.JK) Date 06 December, Kuala Lumpur

Analyst Ariyanto Jahja

Contact [email protected] or your usual sales representative.

Top of the pack ...

Airports of Thailand (AOT.BK) – Upgrade to O Thaniya Kevalee (3) Analyst meeting: Plenty of good news ahead

Malaysia Economics Michael Wan (4) Reading between the lines—text mining the central bank

Sime Darby (SIME.KL) – Maintain O Joanna Cheah, CFA (5) New report: Back to basics

XL Axiata Tbk (EXCL.JK) – Upgrade to O Colin McCallum, CA (6) A key beneficiary if data prices rise in FY18

China Mengniu Dairy (2319.HK) – Maintain O Charlie Chen (7) Correction overdone

CS pic of the day

Vietnam Market Strategy: Highest consensus EPS growth forecast in region for next year

Vietnam has long been a frustrating market, with a strong economy but low investability. That is now changing.

Total trading volume is now 27% above that of the Philippines, new listings have added to stock selection and

foreign ownership limits are less of an obstacle. Credit Suisse economist Deepali Bhargava has raised her 2018

GDP forecast from 6.4% to 6.7% on strong exports, improving rural incomes and surprising growth in tourism.

Macro risks have faded, and the economy should remain highly supportive of earnings next year.

Source: IBES Thomson Reuters for Vietnam's top 32 stocks, the BLOOMBERG PROFESSIONALTM service for other countries

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VN TH MY ID PH JP SG KR HK

... and the whole pack

Regional

Asia Pacific Strategy Kin Nang Chik (8) Credit Suisse GEM valuation snapshot

Asia Pacific Strategy Kin Nang Chik (9) Credit Suisse valuation snapshot

Australia

Treasury Wine (TWE.AX) – Downgrade to U Larry Gandler (10) Is 19 Crimes a Cupcake?

China

China Cement Sector Yang Luo (11) New report: Embracing six-year high profitability

China Gas Holdings Ltd (0384.HK) – Maintain O Dave Dai, CFA (12) 1H18 earnings beat; guidance revised up for both volume and rural connections

China Mengniu Dairy (2319.HK) – Maintain O Charlie Chen (7) Correction overdone

Qudian Inc. (QD.N) – Maintain O Charles Zhou, CFA (13) Multiple headwinds, reduce TP to US$15

Tuniu Corporation (TOUR.OQ) – Maintain O Ivy Ji (14) 3Q17 non-GAAP breakeven; on track to achieve full-year profitability


Asian Daily

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Asian indices - performance (% change) Closing 1D 1W 3M YTD

ASX300 5,943 0.1 0.7 5.7 5.8 CSEALL 6,417 0.1 (0.9) 0.3 3.0 Hang Seng 29,686 (0.6) 1.5 6.9 34.9 H-SHARE 11,772 (1.1) 2.0 4.2 25.3 JCI 6,065 (0.0) 0.2 3.0 14.5 KLSE 1,720 0.2 0.1 (2.3) 4.8 KOSPI 2,508 (1.4) (0.8) 6.1 23.8 KSE100 40,032 (0.5) (0.7) (2.9) (16.3) NIFTY 10,400 0.1 1.0 6.2 27.0 NIKKEI 22,496 (0.2) 1.1 16.2 17.7 TOPIX 1,777 (0.2) 1.0 11.2 17.0 PCOMP 8,362 (0.0) 0.5 5.2 22.2 RED CHIP 4,340 (0.9) 1.0 1.2 21.0 SET 1,696 (0.0) (1.1) 5.1 9.9 STI 3,436 (0.2) 1.5 5.8 19.3 TWSE 10,751 (1.0) 0.8 2.4 16.2 VNINDEX 939 0.3 3.9 21.3 41.2

Thomson Reuters Asian currencies (vs US$) (% change) Closing 1D 1W 3M YTD

A$ 0.760 (0.2) 0.7 (4.3) 5.4 Bt 32.7 0.1 (0.4) (1.5) (8.8) D 22,718 0.0 0.1 (0.0) (0.2) HK$ 7.80 (0.1) (0.1) (0.3) 0.6 JPY 111.4 0.0 (1.1) 1.5 (4.7) NT$ 29.98 0.0 (0.3) (0.7) (7.6) P 50.59 (0.0) (0.4) (1.2) 2.1 PRs 105.5 0.4 0.3 0.3 1.1 RM 4.11 (0.1) (0.8) (3.6) (8.3) Rmb 6.60 0.0 (0.5) 0.1 (4.9) Rp 13,515 0.1 (0.1) 1.3 0.3 Rs 64.73 0.1 (0.6) 1.1 (4.7) S$ 1.35 (0.0) (0.8) (0.7) (7.1) W 1,088 0.4 (0.8) (3.2) (9.8)

Thomson Reuters

Global indices (% change) Closing 1D 1W 3M YTD

DJIA 23,588 0.1 0.7 7.9 19.4

S&P 500 2,603 0.0 0.8 6.4 16.2

NASDAQ 6,889 0.3 1.6 10.0 28.0

SOX 1,342 0.9 2.7 24.2 48.0

EU-STOX 3,155 (0.5) (0.2) 5.1 4.8

FTSE 7,384 (0.3) (0.1) 0.6 3.4

DAX 13,000 (0.5) (0.4) 8.8 13.2

CAC-40 5,360 (0.6) 0.4 6.5 10.2

10 YR LB 2.329 (0.6) (1.7) 9.4 (4.9)

2 YR LB 1.753 (0.5) (0.1) 32.7 46.3

US$:E 1.192 (0.1) 1.6 (0.4) 13.4

US$:Y 111.4 0.0 (1.1) 1.5 (4.7)

GOLD 1,288 (0.2) (0.5) (0.2) 11.8

VIX 9.9 2.2 (7.2) (15.6) (29.6) Thomson Reuters

MSCI Asian indices – valuation & perf. EPS grth. P/E (x) Performance

MSCI Index 17E 18E 17E 18E 1D 1M YTD

Asia F X Japan 20 11 15.6 14.1 0.2 4.6 39.6 Asia Pac F X J. 20 9 15.8 14.5 0.2 3.8 33.3 Australia 16 7 19.8 17.0 (0.1) 0.2 10.7 China 17 14 17.0 14.9 0.4 6.5 54.8 Hong Kong 9 7 18.5 17.3 0.5 4.5 31.4 India 14 19 20.5 17.2 0.3 1.5 32.0 Indonesia 17 14 18.0 15.8 0.2 2.7 16.4 Japan 16 12 18.1 16.1 (0.0) 3.5 20.8 Korea 43 7 10.8 10.1 0.2 6.3 48.3 Malaysia 2 7 16.3 15.3 (0.5) 1.6 13.9 Pakistan 5 15 8.6 7.5 (0.2) (5.2) (27.9) Philippines 4 11 20.4 18.4 (0.0) 2.1 18.3 Singapore 7 7 15.6 14.5 0.7 5.0 30.2 Sri Lanka 11 8 15.1 14.0 (0.3) (4.2) 0.7 Taiwan 7 9 16.2 14.9 (0.1) 1.7 27.3 Thailand 10 13 10.5 9.3 (0.6) 2.4 24.3

Thomson Reuters; All data as of the most recent market close.

India

India Market Strategy Neelkanth Mishra (15) Oct headline GST collections disappointing; but do additional disclosures point to a lower revenue neutral threshold?

Eris Lifesciences Ltd (ERIS.BO) – Initiating Coverage with O Anubhav Aggarwal (16) New report: Scalable model with strong FCF generation

Indonesia

Indonesia Telecoms Sector – Maintain OW Colin McCallum, CA (17) Price points static for now, but we expect an improvement in FY18

XL Axiata Tbk (EXCL.JK) – Upgrade to O Colin McCallum, CA (6) A key beneficiary if data prices rise in FY18

Japan

Sysmex (6869.T) – Upgrade to O Fumiyoshi Sakai (18) Update estimates: FY3/18 recovery priced in; still scope for upside based on FY3/19 earnings

Terumo (4543.T) – Upgrade to O Fumiyoshi Sakai (19) Update estimates: Acquisitions, stronger organisation fruitful

For more Japan equity reports, please see Japan Daily (First Edition) – 28 November 2017

Malaysia

Malaysia Economics Michael Wan (4) Reading between the lines—text mining the central bank

Asia FX Strategy Trang Thuy Le (20) MYR: Further room to run

Malaysia Market Strategy Danny Goh (21) Winners and losers of a stronger RM

Malaysia Banks Sector – Maintain OW Danny Goh (22) Higher possibility of rate hike: Who are the key beneficiaries?

RHB Bank Berhad (RHBC.KL) – Maintain O Danny Goh (23) 3Q17 results in line with street, key investor concerns mostly addressed

IHH Healthcare Berhad (IHHH.KL) – Maintain O Ari Jahja (24) Decent 9M17 growth, new hospitals ramp up continues

Sime Darby (SIME.KL) – Maintain O Joanna Cheah, CFA (5) New report: Back to basics

Pakistan

Fauji Fertilizer Company Limited (FAUF.KA) – Maintain U Fahd Niaz, CFA (25) Expensive valuations fail to capture declining earnings outlook

South Korea

Samsung Heavy Industries (010140.KS) – Maintain O Hoonsik Min (26) Noise at end of ESOP lock-in provides buying opportunity

Taiwan

Taiwan Components Sector Pauline Chen (27) New report: Key findings from 9M17 financial reports

Thailand

Airports of Thailand (AOT.BK) – Upgrade to O Thaniya Kevalee (3) Analyst meeting: Plenty of good news ahead

O=Outperform N=Neutral U=Underperform R=Restricted OW= Overweight MW=Market Weight UW=Underweight

Research mailing options To make any changes to your existing research mailing details, please e-mail us directly at [email protected]

Sales Contact Hong Kong 852 2101 7211 Singapore 65 6212 3052 London 44 20 7888 4367 New York 1 212 325 5955 Boston 1 617 556 5634


Asian Daily

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Top of the pack ...

Airports of Thailand ------------------------------------------------------ Upgrade to OUTPERFORM Analyst meeting: Plenty of good news ahead EPS: ▼ TP: ▲ Thaniya Kevalee / Research Analyst / 66 2 614 6219 / [email protected] Siriporn Sothikul, CFA / Research Analyst / 662 614 6217 / [email protected]

● Feedback from a group analyst meeting is very positive. We raise our DCF-based target price to Bt70 (from Bt55) to reflect lower risk free rate (2.5% versus 3% previously) and expected incremental revenue sharing from commercial concessions and upgrade AOT to OUTPERFORM (from Neutral).

● Apart from high likelihood of high revenue sharing post renewal of concessions, we believe potential upside could come from: 1) high possibility that AOT will take transfer of ownership of 15 provincial airports from the government and; 2) development of commercial land at Suvarnabhumi airport. Both are not reflected in our TP.

● International volume growth remains intact and does not surprise. However, its ability to sell off-peak hours slot to Chinese airlines implies much lower concern on capacity constraints. We cut our FY18-19E profit by 3% to reflect additional rental under ROA approach, but we are still 4-5% ahead of Bloomberg consensus.

● AOT has performed largely in line with the broad market in the last few months. Given more positive news ahead, we believe another round of re-rating is coming.

Click here for detailed financials

Potential to take transfer of 15 provincial airports

Management sees a high possibility that AOT most likely will take transfer of ownership of 15 provincial airports from the Department of Airports (Thailand), which owns and operates 28 airports in aggregate. This is part of the government’s plan to promote new tourist attractions throughout Thailand. AOT does not have to pay DOA for the ownership of these airports, but would have to pay should any renovation costs come up. AOT said that out of 15 airports, it plans to select only few airports and upgrade them into regional hubs with international standards, and with the capability to handle direct international flights. This would allow AOT to minimise renovation costs estimated at around Bt2-3 bn. The 15 airports combined produced a net profit of Bt1 bn; i.e. around 5% of FY17E profit. But AOT is convinced that under its management,

there should be an upside to the profit over the long term. The conclusion should be reached by 1Q18.

Commercial development of vacant land at Suvarnabhumi airport

As AOT has already settled additional land rental agreement (under ROA approach) with the Treasury Department (TD), the latter should soon unlock the restriction on land usage, allowing AOT to initiate commercial plan for the 900 rais of empty land inside Suvarnabhumi airport. AOT believes it can provide details and execute the bid (it will not develop the land by itself but will likely award concessions to the private sector) within 1H18. AOT also has another plot of land (700 rais)—this land belongs to AOT itself and does not need approval from TD–which it plans to commercially develop too. However, developing this plot may take a longer time because there is no infrastructure around this plot currently.

Lower concerns on potential capacity constraints

International passenger volume growth reached nearly 26% YoY during the first three weeks of November. This was in line with our expectation. Nonetheless, management sees this as a very positive sign because strong volume growth has allowed AOT to sell several off-peak hour slots, particularly to Chinese airlines; these airlines gave up good slots last year due to impact from crackdown on illegal tours and these slots were taken up by Indian and Russian airlines. The fact that Chinese airlines have agreed to buy off-peak hour slots reflects the strong demand from Chinese arrivals. Management said that growth from China was mainly driven by Free Independent Travellers (FIT) rather than group tours and thus quality is much better, in our view.

Figure 1: Chinese arrivals (YoY) – driven largely by FIT

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Zero dollar tour crackdown hastaken place

Source: MOTS, Credit Suisse

Raising target price to Bt70

Our new target reflects; 1) lower risk free rate assumption to 2.5% from 3% and 2) inclusion of expected increase in revenue sharing under commercial concessions at Suvarnabhumi airport. We now assume 25% revenue sharing compared with 15-20% under existing concession. Management is convinced that the bidding could take place within 1Q18. Key risks include lower-than-expected international passenger volume growth, lower-than-expected revenue sharing from commercial concessions and higher-than-expected opex and capex.

Bbg/RIC AOT TB / AOT.BK Rating (prev. rating) O (N) 52-wk range (Bt) 61.0 - 38.3 Mkt cap (Bt/US$ bn) 835.7/ 25.6 ADTO-6M (US$ mn) 57.2 Free float (%) 30.0 Major shareholders Ministry of Finance

(70%)

Price (27 Nov 17 , Bt) 58.50 TP (prev. TP Bt) 70.00 (55.00) Est. pot. % chg. to TP 20 Blue sky scenario (Bt) 81.00 Grey sky scenario (Bt) 54.00

Performance 1M 3M 12M

Absolute (%) — 7.8 52.7 Relative (%) 1.3 2.9 39.8

Year 09/15A 09/16A 09/17E 09/18E 09/19E

Revenue (Bt mn) 43,969 50,962 54,672 62,040 68,082 EBITDA (Bt mn) 26,618 30,759 32,669 37,485 41,715 Net profit (Bt mn) 15,779 19,395 21,705 25,596 28,815 EPS (CS adj. Bt) 1.10 1.36 1.52 1.79 2.02 - Change from prev. EPS (%) n.a. n.a. (0.2) (3.3) (3.4) - Consensus EPS (Bt) n.a. n.a. 1.51 1.73 1.90 EPS growth (%) 28.9 22.9 11.9 17.9 12.6 P/E (x) 53.0 43.1 38.5 32.6 29.0 Dividend yield (%) 0.9 1.2 1.3 1.5 1.7 EV/EBITDA (x) 30.8 26.2 24.6 21.5 19.5 P/B (x) 7.7 6.9 6.3 5.6 5.1 ROE (%) 15.3 16.9 17.1 18.2 18.5 Net debt(cash)/equity (%) (14.8) (23.4) (23.9) (21.0) (12.6)

Note 1: ORD/ADR=10.00. Note 2: Airports of Thailand Public Company Limited is a Thailand-based company engaged in the operation of airports across Thailand. Its airports include Thailand's main airport of Suvarnabhumi, the former main airport of Don Mueang, Chiang Mai, Hat Yai, Phuket.


Asian Daily

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Malaysia Economics ------------------------------------------------------------------------------------------- Reading between the lines—text mining the central bank Michael Wan / Economist / 65 6212 3418 / [email protected]

● We expect the Malaysian central bank to hike its policy rate in 1Q2018, bringing its key rate to 3.25% from 3%.

● Using novel text mining algorithms, we quantify the evolution of the central bank’s monetary policy statements. We highlight that sentiment changes in BNM’s statements have led policy rate changes by around six months. More importantly, our sentiment indicator provides additional and timely information to help us predict rate changes on top of available macroeconomic data.

● We also raise our 2018 growth forecast to 5.8% from 5.2% previously. The upgrade incorporates the recent rise in oil prices, which should feed positively into investment and consumption, together with recent Budget measures.

● We have also raised our current account forecast for 2017. Our FX strategy team sees the Ringgit appreciating further to 4.00 in 3M and 3.80 in 12M. (see Malaysia: Reading between the lines – text mining the central bank)

Figure 1: BNM sentiment index has led policy rate changes by around six months

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Bank Negara net sentiment index versus policy rate

BNM Net Sentiment Index (6 months lead)

BNM policy rate (RHS)

more positive words

more negative and uncertainty words

Source: BNM, CEIC, Credit Suisse estimates.

We now expect Bank Negara Malaysia (BNM) to hike its policy rate in Q12018, bringing its key rate to 3.25% from the current 3%. This is expected to happen at the 25 January monetary policy meeting.

Using novel text mining methods, we quantify the evolution of BNM’s monetary policy statements.

We highlight that sentiment changes in the central bank’s statements have led policy rate changes by around six months, and as such have been a good indicator of the central bank’s policy. More importantly, this indicator provides additional and timely information beyond what we already know from latest macroeconomic data.

We raise our 2018 forecasts for Malaysia’s GDP, inflation, and current account, incorporating the recent rise in oil prices. We maintain our positive view on growth and domestic demand, moving into 2018.

Our FX strategy team has also lowered its USDMYR forecasts further to 4.00 in 3M and 3.80 in 12M, from 4.1 and 4.0 previously (see MYR further room to run).

Figure 2: We analysed the text of Bank Negara’s monetary policy statements

Source: BNM, Credit Suisse estimates.

Figure 3: Malaysia macroeconomic forecast changes

CS new CS new CS old CS old consensus consensus

2017 2018 2017 2018 2017 2018

GDP Growth 6.0 5.8 5.6 5.2 5.4 5.0

Private

Consumption

7.0 6.7 6.9 6.5 6.7 6.1

Fixed investment 6.7 7.5 6.7 6.5 5.7 4.4

Inflation 3.9 3.0 3.7 2.6 3.8 2.5

Current Account

(USD bn)

9.9 11.5 8.4 8.1 7.7 7.5

Source: Consensus Economics, Credit Suisse estimates.

Figure 4: FX conversion from exports have improved

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Source: BNM, Credit Suisse estimates.


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Sime Darby --------------------------------------------------------------------- Maintain OUTPERFORM New report: Back to basics EPS: ◄► TP: ◄► Joanna Cheah, CFA / Research Analyst / 6 03 2723 2081 / [email protected] Ella Nusantoro / Research Analyst / 62 21 2553 7917 / [email protected] Danny Chan / Research Analyst / 60 3 2723 2082 / [email protected]

● The listing reference prices for Sime entities have been set. Sime Plantation & Sime Property will be listed on 30 November.

● Sime Plantation (RM5.59, market cap – RM38 bn): This values the entity at 28.7x FY18 P/E, which is higher than peers’ average of 24x. The premium looks fair, in our view, given its position as the world’s largest palm oil planter and as a leader in sustainability, as well as strong growth in the future.

● Sime Berhad (RM1.85, market cap – RM13 bn): This implies 0.84x PB (RM12.6 bn vs RM15.0 bn)—(1) a sharp contrast vs its historical average of 1.8x PBV and (2) its 17 sen DPS (entitlement date of 6th Dec and payment date of 20th Dec) implies a whopping 9.2% yield.

● Sime Property (RM1.50, market cap – RM10 bn): Our estimated value (adjusted RNAV) is RM20 bn, implying a 50% potential upside. We believe discount should narrow as management aggressively unlocks value through asset disposals. In addition to its 21k acres of land bank worth RM19 bn, the non-core hospitality assets up for disposal are worth RM1.2 bn (~11% of market cap). Full report.


The listing reference prices for Sime entities have been set. Shares of Sime Plantation and Sime Property will be credited to shareholders on 29 November, with the stocks slated to be listed on 30 November.

Figure 1: Summary of reference prices for SIME entities

% allocation Ref price (RM) Market cap (RMbn)

Sime Plantation 62.5% 5.59 38,012

Sime Bhd 20.7% 1.85 12,580

Sime Property 16.8% 1.50 10,200

Source: Bursa

Sime Plantation

At the reference price of RM5.59/share, Sime Plantation is valued at RM38 bn (US$9.2 bn), or equates to 28.7x P/E FY17 (based on adjusted net EPS of 19.48 sen), on 6.8 bn shares issued, which appears to be on the higher side of the valuation as compared to the

other planters (peer average of 24x). However, we believe Sime Plantation deserves to trade at a premium to peer, justified by a premium valuation to peers based on the following attributes: (1) it is the world’s largest oil palm plantation company with its estate in Malaysia, Indonesia, PNG and Liberia, (2) it is the leader in sustainability with its estates all RSPO certified and (3) strong growth in the future, driven by accelerated replanting that it has conducted over the last two years using high-yielding materials that could lead to an improvement in the current FFB yield of 19 MT/Ha (21.3% OER) to 25 MT/Ha by 2025 (on 25% OER).

Sime Bhd: Diamond in the rough

The implied market cap for Sime Darby Berhad, post-demerger, which is at RM12.6 bn, is below its latest book value of RM15.0 bn (as at end Sep-17)—an interesting scenario considering Sime Darby Berhad has always traded at an average of 1.8x book value vs the implied PBV of 0.84x. More importantly, our valuation for Sime Darby Berhad in our base case scenario is at RM2.95, implying a 59% potential upside from the reference price. Share price outperformance will be driven by improvement in its industrial and motor divisions, underpinned by the mining sector boom and BMW’s product upcycle. It is also worth noting that shareholders who hold the shares until 6th December (entitlement date) will be entitled to a 17 cents DPS on 20th December (implies a bumper dividend yield of 9.2%).

Sime Property: Grossly undervalued

The implied market cap of Sime Property based on its reference price is RM10 bn. Our estimated fair value for Sime Property (upon applying a 40% discount rate to RNAV) points towards RM20 bn, which implies a 50% potential upside. In our view, this discount should narrow as the value unlocking of its land bank materialises quicker than expected. Regular asset disposal is a key strategy that management intends to embark on, which could boost returns. Sime Property has a massive 21k acres of land bank with appraised value of RM19 bn vs book value of RM6 bn, which would give rise to large gains if it gets disposed. In addition, the group intends to dispose its non-core hospitality assets worth at least RM1.2 bn (~11% of the implied market cap).

Bbg/RIC SIME MK / SIME.KL Rating (prev. rating) O (O) 52-wk range (RM) 9.62 - 7.96 Mkt cap (RM/US$ bn) 60.8/ 14.8 ADTO-6M (US$ mn) 16.1 Free float (%) 39.1 Major shareholders PNB (47.5%)

Price (24 Nov 17 , RM) 8.94 TP (prev. TP RM) 11.10 (11.10) Est. pot. % chg. to TP 24 Blue sky scenario (RM) 15.00 Grey sky scenario (RM) 6.40


Absolute (%) (2.5) (0.7) 10.4 Relative (%) (0.9) 1.8 4.8

Year 06/16A 06/17A 06/18E 06/19E 06/20E

EBITDA (RM mn) 4,238 3,015 4,103 5,103 — Net profit (RM mn) 2,879 3,090 2,325 2,205 — EPS (CS adj. RM) 0.47 0.45 0.34 0.32 Core EPS (RM) 0.47 0.45 0.34 0.32 - Change from prev. EPS (%) n.a. n.a. 0 0 - Consensus EPS (RM) n.a. n.a. 0.39 0.41 0.48 EPS growth (%) 26.2 (3.3) (24.8) (5.1) n.a. P/E (x) 19.0 19.7 26.2 27.6 — Core P/E (x) 19.0 19.7 26.2 27.6 — Dividend yield (%) 3.0 3.8 2.7 2.5 EV/EBITDA (x) 17.3 20.5 15.1 12.1 — P/B (x) 1.7 1.6 1.5 1.5 — ROE (%) 9.2 8.9 6.0 5.5 — Net debt(cash)/equity (%) 34.5 2.8 2.6 2.6 —

Note 1: Sime Darby Berhad is a Malaysia-based investment holding company. Its core businesses are industrial, motors and healthcare. It also owns many other assets, which will be disposed over time.


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XL Axiata Tbk --------------------------------------------------------------- Upgrade to OUTPERFORM A key beneficiary if data prices rise in FY18 EPS: ◄► TP: ◄► Colin McCallum, CA / Research Analyst / 852 2101 6514 / [email protected] Billy Lee / Research Analyst / 852 2101 6529 / [email protected]

● The sharp correction in XL's share price over the last three months is understandable, given that Telkomsel has reacted to XL's aggression in some geographical clusters by offering attractive starter pack pricing. XL has an extremely low net margin and ROIC, and is therefore poorly placed if a 'price war' ensues.

● However, XL's high operational gearing can also work in its favour if the competitive environment improves in 1H18 as we expect. For example, a 10.0% increase in data pricing would, other things being equal, increase total revenue by circa 6.0%, and this would drop through to a 120% increase in FY18 net profit.

● Given that Indosat is only likely to catch up on 4G rollout across December 2017 to March 2018, it makes sense that XL, with ample 4G capacity in place, should want to continue to regain lost market share, and we do not expect pricing to improve in 4Q17.

● However, we do continue to expect XL to shift back towards data bonus reductions/price increases in 1H18; with the highest operational gearing, we therefore upgrade to OUTPERFORM.


Don't expect data price hikes in 4Q17…

The sharp correction in XL's share price over the last three months is understandable given that Telkomsel has reacted to XL's aggression in some geographical clusters by offering attractive starter pack pricing (Rp25,000 for 1GB of data, 2GB of Videomax, and 2GB of Facebook). Given XL's high 'fixed' depreciation and interest costs, and extremely low net margin and ROIC, XL is poorly positioned under the scenario that a downward spiral 'price war' ensues.

However, XL's high operational gearing can also work in its favour if the competitive environment improves in 1H18 as we expect. In the meantime, XL's improving operational momentum—particularly in comparison with Indosat—is likely to continue to deliver revenue share gains into 4Q17. As a reminder, XL had 15,711 4G BTS in place as at September 2017, behind Telkomsel's 21,447 4G BTS but, crucially, well ahead of Indosat's 6,110 4G BTS. We understand that Indosat is

currently shipping new equipment, which it expects to deploy across December 2017 to March 2018, but until it is installed Indosat is clearly capacity-constrained. Given this, it makes sense that XL, with ample 4G capacity in place, should want to regain market share lost to Indosat across FY15-16 (as a reminder XL's market share dropped sharply from 19.3% of 'big 3' revenues in 4Q14 to a low of 14.5% in 4Q16). XL grew net cellular revenue by 12.2% YoY into 3Q17 (albeit from a low base), while Indosat's revenue declined by 2.4% YoY. Thus, XL regained 1.1 pp of market share YoY in 3Q17, recovering to 15.8% market share of 'big 3' revenues—momentum that XL would very much like to continue into 4Q17.

It is for this reason that the reduction in 4G data bonuses implemented by all of the 'big 3' players in 4Q16-1Q17 have not been followed up with further price increases, and that starter pack competition has intensified, as mentioned, in certain areas in 2Q17 and 3Q17.

While there has been no further intensification of competition thus far during 4Q17, pricing has not improved either, and with the XL-Indosat capacity imbalance continuing into the quarter, we do not expect XL to change its strategy as yet. This in turn means that Telkomsel, whose premium on data pricing narrowed to 37.8% in 3Q17 (Rp15.2/MB versus XL's Rp11.1/MB) is unlikely to further reduce data bonuses in 4Q17.

…but we continue to expect improving dynamics in 1H18

On the other hand, we do continue to expect XL's strategy to shift back towards data bonus reductions/price increases in 1H18. This will benefit all three players—we expect both Telkomsel and Indosat to swiftly follow XL upwards on pricing—but it should be particularly positive for XL, given that, as previously mentioned, it has the highest fixed cost base, lowest scale and lowest ROIC of the 'big 3' operators.

To offer some simple numbers around this, given that circa 60.0% of XL's revenue is now generated from data, a 10.0% increase in data pricing would, other things being equal, increase total revenue by 6.0%, and this would drop through to 120% increase in FY18 net profit. We believe that XL management understands this arithmetic very well, and that, after taking advantage of Indosat's delayed 4G rollout, the logic of higher data prices will prevail in 1H18—particularly after Indosat's capacity constraints ease with its long awaited 4G catch-up.

No step-change in capex levels in FY18

Similarly, we believe management is aware of XL's low profitability and therefore remains cautious on capex. This year's market share recovery is, therefore, unlikely to trigger a dramatic increase in capital expenditure. We continue to forecast Rp6.8 tn in capex in FY18, similar to the FY17 guidance level of Rp7.0 tn. The mid-to-high single digit revenue growth expected in FY18 (we currently forecast 8.1% growth) would not be enough to justify a step-change in capex levels, and should instead give further impetus towards management reverting to the reduction of data bonuses to drive top line and bottom line growth.

Bbg/RIC EXCL IJ / EXCL.JK Rating (prev. rating) O (N) 52-wk range (Rp) 4020.0 - 2040.0 Mkt cap (Rp/US$ bn) 32,170.8/ 2.4 ADTO-6M (US$ mn) 1.8 Free float (%) 20.1 Major shareholders Axiata (66.6%)

Price (24 Nov 17, Rp) 3,010.00 TP (prev. TP Rp) 3,600 (3,600) Est. pot. % chg. to TP 20 Blue sky scenario (Rp) 4,812 Grey sky scenario (Rp) 2,386


Absolute (%) (10.9) (17.1) 40.7 Relative (%) (12.5) (20.1) 22.2

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (Rp bn) 22,218 20,575 22,462 24,274 25,895 EBITDA (Rp bn) 8,392 8,056 8,635 9,409 10,109 Net profit (Rp bn) (26) 375 408 909 1,017 EPS (CS adj. Rp) (3.1) 38.3 38.2 85.2 95.3 - Change from prev. EPS (%) n.a. n.a. 0 0 0 - Consensus EPS (Rp) n.a. n.a. 41 109 174 EPS growth (%) n.m. n.m. (0.4) 123.1 11.9 P/E (x) n.m. 78.5 78.8 35.3 31.6 Dividend yield (%) 0 0 0.4 2.3 2.8 EV/EBITDA (x) 6.8 5.9 5.4 4.8 4.2 P/B (x) 1.8 1.4 1.5 1.5 1.5 ROE (%) (0.2) 2.1 1.9 4.2 4.7 Net debt (cash)/equity (%) 175.0 73.7 66.3 58.8 48.5

Note 1: ORD/ADR=20.00. Note 2: XL Axiata is involved in the provision of telephony services in Indonesia.


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China Mengniu Dairy -------------------------------------------------------- Maintain OUTPERFORM Correction overdone EPS: ▼ TP: ◄► Charlie Chen / Research Analyst / 852 2101 6165 / [email protected] Michael Shen / Research Analyst / 852 2101 6711 / [email protected] Daisy Dai, FRM / Research Analyst / 852 2101 6591 / [email protected]

● Although the recent market sentiment was negatively affected by news related to imported foreign milk formula, we reiterate our OUTPERFORM rating on Mengniu considering the industry's recovery and its sustainable market share gain. We cut our 2017E earnings by 10% to factor in higher CMD loss and FX loss while we maintain our 2018E/19E earnings unchanged.

● We believe top line remains solid in 2H17 with 9% YoY growth, slightly better than 8% YoY in 1H17. However, we cut 2017 earnings by 10% to Rmb2,267 mn to factor in additional (1) Rmb100 mn loss for CMD and (2) Rmb100 mn forex loss.

● We retain our 2018/19E earnings unchanged and thus forecast sales/earnings to witness 8%/31% CAGR over 2017-19E. With (1) a lower base in 2017 on one-off items, (2) further product mix optimisation and (3) continued efficiency improvement, we believe its earnings will likely take off in 2018.

● Mengniu is currently trading below its historical average. Our unchanged target price of HK$25.0 is based on 25x 2018E P/E.

●


2H17 sales growth set to accelerate while earnings negatively affected by some one-off items

We believe Mengniu’s top line remains solid in 2H17, with sales growth of 9% YoY, slightly accelerating from 8% YoY in 1H17. This is mainly attributable to (1) sustainable overall industry recovery - we estimate 5.7% industry sales growth in 2017 (vs 3.3% in 2016), and (2) continued focus on new/high-end product with stronger momentum. However, we revise down our 2017E earnings by 10% to Rmb2,267 mn assuming additional (1) Rmb100 mn loss for CMD and (2) Rmb100 mn FX loss from RMB-denominated debt hold by listed company (with function currency of HKD) on the backdrop of RMB appreciation.

Stronger growth in 2018

We retain our 2018/19E earnings estimate unchanged and estimate sales/earnings to witness 8%/31% CAGR over 2017-19E. Considering (1) a lower base for 2017 on one-off items, (2) further product mix optimisation on Mengniu’s sold innovation capability and (3) continued efficiency improvement following the reform launched by new management, we believe Mengniu's earnings will likely take off in 2018E (44% YoY growth by CSe).

Correction overdone; reiterate OUTPERFORM rating

Mengniu's share price was under pressure recently as market sentiment was negatively affected by government announcements, which might be positive for imported infant milk formula brands: (1) extended selling period - CFDA agreed to make the foreign products, which have been approved for entry before Jan 1, 2018 but not been registered yet, to be sold until the expiry date; (2) import tariff cut for foreign infant milk formula announced by the Ministry of Finance. We believe the share price correction was overdone as these events would have limited fundamental impact on Mengniu’s liquid milk business and believe its milk powder should benefit from the new IMF regulation when it comes to be fully effective after this transition period.

Therefore, we reiterate our OUTPERFORM rating considering (1) a visible industry demand recovery and (2) Mengniu’s sustainable market share gain and margin expansion. Current valuation is not demanding as Mengniu is trading at 20x 2018E P/E, which is below its historical average. Our unchanged target price of HK$25.0 is based on 25x 2018E P/E. We believe it should deserve a valuation rerating given its market share gain, improved execution and visible earnings recovery.

Figure 1: Income statement

2015 2016 2017E 2018E 2019E

Sales 49,027 53,779 58,383 63,054 67,837

YoY growth -2.0% 9.7% 8.6% 8.0% 7.6%

Liquid Milk 0.7% 11.0% 7.3% 7.9% 7.6%

Ice cream -21.2% 1.8% 16.0% 10.0% 5.0%

Dairy products -17.2% -1.7% 21.4% 7.7% 9.1%

Sales mix 100% 100% 100% 100% 100%

Liquid Milk 88% 89% 88% 88% 88%

Ice cream 4% 4% 4% 4% 4%

Dairy products 7% 7% 7% 7% 7%

Gross profit 15,375 17,635 20,284 22,493 24,703

- YoY -0.4% 14.7% 15.0% 10.9% 9.8%

GP margin 31.4% 32.8% 34.7% 35.7% 36.4%

SG&A/sales -27.0% -34.9% -30.4% -30.0% -30.0%

- Selling exp -22.4% -25.0% -24.5% -24.2% -24.2%

- G&A exp -3.8% -4.6% -3.8% -3.8% -3.8%

- Other exp -0.8% -5.3% -2.1% -2.0% -2.0%

OP 2,648 (420) 3,134 4,203 4,935

- EBIT YoY -0.6% -115.9% -846.2% 34.1% 17.4%

- EBIT margin 5.4% -0.8% 5.4% 6.7% 7.3%

- Effective tax rate -16.8% N.M -20.0% -20.0% -20.0%

Net profit 2,367 (751) 2,267 3,267 3,875

- Net profit YoY 0.7% -131.7% -401.8% 44.1% 18.6%

- Net margin 5% -1% 4% 5% 6%

Source: Company data, Credit Suisse estimates.

Bbg/RIC 2319 HK / 2319.HK Rating (prev. rating) O (O) 52-wk range (HK$) 22.6 - 14.0 Mkt cap (HK$/US$ bn) 78.5/ 10.1 ADTO-6M (US$ mn) 27.7 Free float (%) 68.0 Major shareholders COFCO(16.3%)

Price (27 Nov 17 , HK$) 20.00 TP (prev. TP HK$) 25.00 (25.00) Est. pot. % chg. to TP 25 Blue sky scenario (HK$) 27.00 Grey sky scenario (HK$) 23.00


Absolute (%) (5.9) 17.5 22.5 Relative (%) (11.8) 6.3 (26.5)

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (Rmb bn) 49.0 53.8 58.4 63.1 67.8 EBITDA (Rmb bn) 4.1 1.2 4.6 5.6 6.4 Net profit (Rmb bn) 2.4 (0.8) 2.3 3.3 3.9 EPS (CS adj. Rmb) 0.61 (0.19) 0.58 0.84 0.99 - Change from prev. EPS (%) n.a. n.a. (10.4) 0 0 - Consensus EPS (Rmb) n.a. n.a. 0.62 0.84 0.99 EPS growth (%) 0.7 n.m. n.m. 44.1 18.6 P/E (x) 27.9 n.m. 29.1 20.2 17.0 Dividend yield (%) 1.7 1.7 1.4 2.0 2.4 EV/EBITDA (x) 17.0 58.6 15.5 12.3 10.6 P/B (x) 3.0 3.2 3.0 2.7 2.5 ROE (%) 10.9 (3.5) 10.5 14.1 15.3 Net debt(cash)/equity (%) 11.9 10.1 15.7 10.5 6.1

Note 1: ORD/ADR=10.00. Note 2: China Mengniu Dairy Co Ltd and its subsidiaries manufacture and distribute quality dairy products in China. It is one of the leading dairy product manufacturers in China, with MENGNIU as the core brand. The group boasts a diverse product range in milk.


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Regional

Asia Pacific Strategy ------------------------------------------------------------------------------------------- Credit Suisse GEM valuation snapshot Kin Nang Chik / Research Analyst / 852 2101 7482 / [email protected]

Figure 1: Historical valuations

24 Nov 17 12M P/E (x) Trailing P/B (x) Trailing DY (%)

Current 5-yr avg. Current 5-yr avg. Current 5-yr avg.

Brazil 12.2 11.0 1.8 1.4 2.6 3.9 Chile 18.3 15.5 1.8 1.8 2.4 2.7 China 14.2 10.3 2.2 1.6 1.6 2.8 Colombia 13.1 14.0 1.3 1.4 2.6 3.1 Czech Republic 15.0 12.9 1.4 1.4 7.1 7.2 Egypt 10.7 9.9 3.1 2.2 1.8 2.0 Greece 13.2 14.6 0.5 0.9 1.9 1.7 Hungary 10.8 10.4 1.8 1.2 1.9 2.7 India 18.5 16.3 3.2 3.0 1.3 1.4 Indonesia 16.2 14.7 3.1 3.2 2.2 2.4 Korea 9.1 9.4 1.3 1.0 1.4 1.4 Malaysia 15.4 15.4 1.6 1.9 2.9 3.0 Mexico 16.1 17.7 2.6 2.8 2.3 1.6 Pakistan 8.3 8.5 1.3 2.0 6.6 6.0 Peru 14.4 12.7 2.5 2.2 1.5 2.0 Philippines 18.9 18.4 2.5 2.9 1.3 1.7 Poland 12.3 12.5 1.5 1.3 2.0 3.9 Qatar 9.8 n/a 1.3 1.9 4.6 4.1 Russia 6.6 5.1 0.8 0.7 4.7 4.4 South Africa 16.7 14.6 2.5 2.5 2.6 2.9 Taiwan 14.0 13.3 2.0 1.8 3.6 3.4 Thailand 15.1 13.2 2.2 2.1 2.8 3.0 Turkey 7.6 9.3 1.4 1.5 3.1 2.6 UAE 10.2 n/a 1.5 1.6 4.1 3.2 Con Discretionary 17.2 13.0 2.3 2.1 1.2 1.5 Con Staples 22.9 21.2 4.0 3.8 2.0 1.9 Energy 9.4 7.7 0.9 0.8 3.1 3.7 Financials 9.6 9.0 1.3 1.3 3.1 3.3 Health Care 24.6 21.8 4.2 4.0 1.0 1.0 Industrials 13.4 13.8 1.5 1.5 1.7 1.8 Info Technology 15.2 12.8 3.6 2.2 1.2 1.8 Materials 12.2 12.5 1.5 1.3 2.8 3.1 Real Estate 10.8 9.8 1.5 1.3 3.0 3.3 Telecoms 15.5 14.2 2.0 2.2 3.5 3.8 Utilities 10.6 10.4 1.1 1.1 3.4 3.5 EM 12.9 11.3 1.9 1.5 2.2 2.7 EM Asia 13.2 11.5 1.9 1.6 1.9 2.4 EM Europe 8.1 6.9 1.0 0.9 3.7 3.8 EM Latin America 13.9 13.0 2.0 1.7 2.4 3.0

Figure 2: Forecast valuations (IBES estimates)

24 Nov 17 EPS growth (%) 3M chg. in est. (%) P/E (x)

2016 2017 2018 2017 2018 2016 2017 2018

Brazil 92.1 23.1 11.3 -1.8 2.2 16.6 13.4 12.1 Chile 2.5 2.3 14.1 -3.9 -0.8 21.1 20.6 18.1 China 0.3 22.4 14.5 3.5 3.5 19.5 16.0 14.0 Colombia 25.7 -13.1 20.7 -2.7 -5.0 13.5 15.6 12.9 Czech Republic -7.3 -3.1 -13.5 4.4 -0.3 12.8 13.2 15.2 Egypt 70.0 22.9 14.5 3.6 1.3 14.8 12.1 10.5 Greece 11.4 -7.1 20.7 -3.9 -3.6 14.7 15.9 13.1 Hungary 65.3 14.3 1.1 11.7 7.2 12.5 10.9 10.8 India 4.9 9.7 21.8 0.2 0.8 23.3 21.3 17.4 Indonesia 3.0 15.6 13.4 -0.5 -1.2 21.1 18.2 16.1 Korea 7.2 53.3 11.7 1.9 5.5 15.4 10.1 9.0 Malaysia -0.1 0.1 7.0 -2.1 -1.3 17.5 16.4 15.3 Mexico 29.8 26.1 2.9 3.6 -1.2 20.8 16.5 16.0 Pakistan -6.9 -18.3 34.3 -26.3 -4.0 9.1 11.1 8.2 Peru 22.1 19.6 15.7 -1.1 0.4 36.8 30.8 26.6 Philippines 8.5 3.1 11.9 -0.7 -0.6 21.6 20.9 18.7 Poland 3.4 19.4 4.1 3.8 4.3 15.3 12.8 12.3 Qatar -11.0 5.3 9.1 -1.7 -4.3 11.3 10.6 9.7

Figure 2 (continued): Forecast valuations (IBES estimates)

EPS growth (%) 3M chg. in est. (%) P/E (x)

2016 2017 2018 2017 2018 2016 2017 2018

Russia 9.6 4.2 9.7 2.7 -0.6 12.0 11.5 10.5 South Africa 1.0 14.2 20.7 -2.7 -1.4 23.3 19.9 16.5 Taiwan -0.1 10.1 10.6 -0.8 2.1 16.9 15.4 13.9 Thailand 16.4 6.6 8.3 0.9 0.3 17.3 16.3 15.0 Turkey 10.1 40.5 9.3 5.7 2.7 11.7 8.3 7.6 UAE 2.2 2.1 9.4 0.5 -1.3 11.3 11.1 10.1 Cons. Discretionary -1.5 10.0 24.5 -5.5 -2.5 23.4 20.8 16.7 Consumer Staples 0.1 12.5 13.1 -1.1 -1.4 28.8 25.7 22.7 Energy -8.1 25.1 9.4 3.9 2.7 12.7 10.2 9.3 Financials 1.1 11.8 9.4 1.6 1.5 11.7 10.4 9.5 Health Care 6.0 9.2 25.7 -1.9 -0.9 32.8 30.1 23.9 Industrials -3.4 39.9 4.6 8.6 1.6 19.6 14.0 13.3 Info.Technology 12.5 51.0 18.1 1.4 6.1 26.8 17.7 15.0 Materials 307.8 24.4 5.1 3.0 6.2 15.9 12.8 12.2 Real Estate 12.0 18.8 16.7 9.0 5.9 14.1 12.4 10.7 Telecoms -9.8 16.8 8.3 0.1 -0.8 19.5 16.7 15.4 Utilities -6.7 -13.0 15.6 -5.5 -4.1 10.6 12.1 10.5 EM 7.7 22.4 12.7 1.5 2.5 17.6 14.4 12.8 EM Asia 2.9 25.4 13.3 1.7 3.3 18.5 14.7 13.0 EM Europe 10.1 11.3 8.1 3.7 1.0 9.7 8.7 8.0 EM Latin America 57.6 20.3 10.0 -0.8 0.9 18.3 15.2 13.8 Figure 3: Index—absolute performance in US$ (%) 24 Nov 17 1W 1M 3M YTD 12M

Brazil 2.4 -1.8 1.0 21.6 23.2 Chile -6.7 -8.7 -1.6 24.6 25.7 China 2.0 6.7 11.9 54.8 50.1 Colombia 1.6 -1.4 -2.9 7.6 18.0 Czech Republic 2.0 2.5 4.7 25.0 28.5 Egypt 0.1 -1.8 -3.2 1.1 7.3 Greece 3.1 -2.9 -21.3 4.6 8.6 Hungary 3.1 -0.3 1.0 35.5 44.2 India 1.7 2.5 4.9 32.0 37.2 Indonesia 1.1 3.6 1.3 16.4 23.1 Korea 1.4 6.2 13.8 48.3 50.2 Malaysia 0.9 1.8 0.8 13.9 13.5 Mexico 2.7 -1.3 -10.7 16.5 18.9 Pakistan -0.9 -4.4 -10.0 -27.9 -19.2 Peru 2.7 1.8 6.1 34.7 38.9 Philippines 0.8 2.0 4.2 18.3 18.4 Poland 3.4 4.4 4.4 51.3 61.9 Qatar -2.0 -5.3 -14.0 -24.7 -19.0 Russia 3.2 5.2 13.4 1.2 13.3 South Africa 1.1 5.3 2.1 19.9 26.7 Taiwan 1.5 1.9 4.2 27.3 26.7 Thailand 0.1 2.4 10.5 24.3 28.8 Turkey -3.2 -7.2 -16.1 18.3 21.7

UAE -0.7 -6.1 -5.5 -0.4 6.2 Consumer Discretionary 0.1 4.1 6.1 36.6 38.4 Consumer Staples 1.1 2.8 1.0 17.4 17.7 Energy 2.3 1.8 10.2 15.2 21.1 Financials 1.7 2.9 2.6 25.1 27.3 Health Care 0.8 4.0 15.2 25.7 24.9 Industrials 1.1 0.1 2.3 21.3 20.4 Information Technology 2.0 8.3 15.1 68.0 68.7 Materials 2.4 0.9 2.7 25.2 26.7 Real Estate 1.1 -3.8 4.6 39.4 n/a Telecommunication Services 0.9 -1.5 -4.4 9.2 11.6 Utilities 1.2 -0.8 0.4 13.0 12.8 EM 1.6 3.7 6.6 33.9 35.5

Note: Sectors are EMF sectors. Source for all figures: MSCI, IBES Aggregates


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Asia Pacific Strategy ------------------------------------------------------------------------------------------- Credit Suisse valuation snapshot Kin Nang Chik / Research Analyst / 852 2101 7482 / [email protected]

Figure 1: Country—DDM-based valuations 24 Nov 17 Implied discount rate (IDR) (%) Equity risk premium (ERP) (%)

Current 5Y avg. Std Dev. Current 5Y avg. Std Dev.

Australia 9.8 11.7 0.4 7.3 7.5 0.4 China 7.5 8.7 0.6 3.5 5.1 0.8 Hong Kong 7.6 8.0 0.3 5.8 6.3 0.4 India 11.1 11.8 0.5 4.1 4.1 0.6 Indonesia 10.8 12.3 0.9 4.2 4.7 1.1 Korea 11.2 11.5 0.7 8.7 9.0 1.2 Malaysia 10.1 10.5 0.3 6.2 6.6 0.4 Philippines 9.1 9.5 0.2 3.6 5.2 0.6

Singapore 9.5 10.2 0.3 7.4 8.0 0.4 Taiwan 11.1 11.1 0.4 10.0 9.8 0.6 Thailand 10.8 12.0 0.8 8.4 9.0 0.4 Asia ex Japan 10.4 11.4 0.4 8.0 8.7 1.0

Figure 2: Sector—DDM-based valuations 24 Nov 17 Market implied growth rate (MIGR) (%)

Current 5-year average Std Dev.

Cons. Discretionary 4.9 0.8 2.0 Consumer Staples 5.3 0.8 2.0 Energy -1.8 -4.1 1.8 Financials 0.8 -0.4 1.5 Health Care 7.7 4.6 1.6 Industrials 4.1 3.2 1.5 Information Tech 10.9 7.5 1.8 Materials 4.2 2.8 1.7 Telecom Services 5.3 4.7 1.4 Utilities -0.5 -1.6 1.8

Figure 3: Historical valuations 24 Nov 17 12M forward

P/E (x) Trailing P/B (x)

Trailing dividend yield (%)

Current 5-yr avg. Current 5-yr avg. Current 5-yr avg.

Australia 16.1 15.1 2.0 1.9 4.3 4.5 China 14.2 10.3 2.2 1.6 1.6 2.8 Hong Kong 16.5 15.0 1.4 1.3 2.6 2.8 India 18.5 16.3 3.2 3.0 1.3 1.4 Indonesia 16.2 14.6 3.1 3.2 2.2 2.4 Japan 14.6 14.0 1.5 1.3 1.9 1.9 Korea 9.1 9.4 1.3 1.0 1.4 1.4 Malaysia 15.4 15.4 1.6 1.9 2.9 3.0 Philippines 18.9 18.4 2.5 2.9 1.3 1.7 Singapore 14.3 13.2 1.4 1.3 3.3 3.6 Taiwan 14.0 13.3 2.0 1.8 3.6 3.4 Thailand 15.1 13.2 2.2 2.1 2.8 3.0 Cons. Discretionary 16.0 12.1 2.1 1.8 1.6 1.9 Consumer Staples 21.5 19.7 3.3 2.9 2.4 2.6 Energy 12.8 12.1 1.3 1.2 2.8 3.5 Financials 11.2 10.6 1.5 1.3 3.5 3.8 Health Care 27.3 22.9 5.5 5.0 1.1 1.3 Industrials 14.2 14.3 1.4 1.4 2.2 2.4 Information Tech 15.3 12.8 3.6 2.2 1.2 1.8 Materials 13.7 13.7 1.6 1.5 3.1 3.1 Real Estate 13.5 12.5 1.0 0.9 3.2 3.6 Telecom Services 15.2 15.2 1.9 2.2 3.9 3.9 Utilities 13.6 12.8 1.4 1.5 3.4 3.1 Asia Pacific 14.3 13.1 1.7 1.5 2.2 2.5 Asia ex Japan 13.5 11.9 1.8 1.5 2.0 2.5 Asia Pac ex Japan 13.9 12.5 1.9 1.6 2.5 3.0

Figure 4: Forecast valuations (IBES estimates) 24 Nov 17 3-mth chg. in

EPS growth (%) EPS est. (%) P/E (x)

2016 2017 2018 2017 2018 2016 2017 2018

Australia -16.2 14.4 5.8 -0.3 -0.4 19.9 17.3 16.4 China 0.3 22.4 14.5 3.5 3.5 19.5 16.0 14.0 Hong Kong 3.4 15.0 7.1 2.3 1.9 20.3 17.7 16.5 India 4.9 9.7 21.8 0.2 0.8 23.3 21.3 17.4 Indonesia 3.0 15.6 13.4 -0.5 -1.2 21.1 18.2 16.1 Japan -3.5 15.2 21.7 5.1 2.8 21.0 18.2 15.0

Korea 7.2 53.3 11.7 1.9 5.5 15.4 10.1 9.0 Malaysia -0.1 0.1 7.0 -2.1 -1.3 17.5 16.4 15.3 Philippines 8.5 3.1 11.9 -0.7 -0.6 21.6 20.9 18.7 Singapore -8.4 7.9 9.0 -0.4 1.3 16.8 15.5 14.3 Taiwan -0.1 10.1 10.6 -0.8 2.1 16.9 15.4 13.9 Thailand 16.4 6.6 8.3 0.9 0.3 17.3 16.3 15.0 Cons. Discretionary -2.7 9.6 22.1 -5.5 -2.1 20.9 19.1 15.6 Consumer Staples 1.2 8.7 7.2 0.5 -0.8 25.0 23.1 21.5 Energy 0.3 43.7 8.9 10.8 7.5 19.8 13.8 12.6 Financials -4.4 10.4 7.6 0.9 1.4 13.3 12.0 11.2 Health Care 3.1 8.2 21.0 -2.4 -1.7 35.7 33.0 27.2 Industrials -3.5 26.7 4.0 7.3 1.4 18.7 14.8 14.2 Information Tech 12.4 51.3 18.1 1.4 6.2 26.9 17.7 15.0 Materials 0.0 57.2 3.3 4.2 5.4 21.9 13.9 13.5 Real Estate 8.8 13.9 11.2 0.7 2.7 16.8 15.0 13.5 Telecom Services -5.4 4.4 5.9 -0.5 -1.8 16.7 16.0 15.1 Utilities -22.4 -9.9 16.5 -6.1 -2.6 14.7 15.7 13.5 Asia Pacific 4.9 22.4 8.0 3.1 2.7 18.7 15.3 14.2 Asia ex Japan 2.3 23.5 12.5 1.7 3.1 18.6 15.0 13.4 Asia Pac ex Japan -0.5 22.7 11.2 1.6 2.6 18.8 15.3 13.8 Note: PE and EPS growth numbers for Australia and Japan corresponds to Jun 16-18 and Mar 16-18; and EPS change numbers correspond to Jun 17-18 and Mar 18-19, respectively. Figure 5: Index—absolute performance in US$ (%) (24 Nov 17) US$ – price index 1W 1M 3M YTD 12M

MSCI Australia 1.4 -0.6 0.2 10.7 12.0 MSCI China 2.0 6.7 11.9 54.8 50.1 MSCI Hong Kong 2.0 4.5 6.6 31.4 24.3 MSCI India 1.7 2.5 4.9 32.0 37.2 MSCI Indonesia 1.1 3.6 1.3 16.4 23.1 MSCI Japan 1.4 3.4 9.8 20.8 21.9 MSCI Korea 1.4 6.2 13.8 48.3 50.2 MSCI Malaysia 0.9 1.8 0.8 13.9 13.5 MSCI Philippines 0.8 2.0 4.2 18.3 18.4 MSCI Singapore 2.7 5.7 8.1 30.2 30.5

MSCI Taiwan 1.5 1.9 4.2 27.3 26.7 MSCI Thailand 0.1 2.4 10.5 24.3 28.8 Cons. Discretionary 0.4 3.5 7.5 33.9 32.5 Consumer Staples 1.3 3.8 5.2 20.0 20.1 Energy 2.4 3.0 9.0 23.5 24.8 Financials 1.8 3.1 4.6 23.8 23.7 Health Care 1.9 4.1 13.2 33.2 30.4 Industrials 1.0 0.3 2.3 19.4 16.8 Information Tech 2.0 8.3 15.2 68.4 69.3 Materials 2.1 0.9 1.9 22.7 21.3 Real Estate 1.7 0.0 5.0 31.8 30.2 Telecom Services 1.2 0.1 -4.1 4.8 3.3 Utilities 0.8 -0.3 0.9 14.0 12.5 MSCI AC Asia Pacific 1.6 3.7 8.2 28.2 28.3 MSCI AC Asia ex JP 1.7 4.8 9.0 39.6 38.4 MSCI AC Asia Pacific ex JP 1.7 3.8 7.2 33.3 32.6

Note: All sectoral data refers to Asia Pacific ex Japan. Source for all figures: MSCI, Factset, Thomson Financial Datastream, Credit Suisse


Asian Daily

- 10 of 33 -

Australia

Treasury Wine ----------------------------------------------------- Downgrade to UNDERPERFORM Is 19 Crimes a Cupcake? EPS: ▼ TP: ◄► Larry Gandler / Research Analyst / 61 3 9280 1855 / [email protected] Justin Heath / Research Analyst / 61 3 9280 1766 / [email protected]

● The latest US wine retail scan data holds information for both the TWE bulls and bears. Bears: TWE total retail sales have not yet ignited after initiating a strategy to resuscitate the national accounts channel about eight months ago. Bulls: 19 Crimes – which is supporting company revenue – has "escaped" to a new higher volume level. Full report

● We compare 19 Crimes to Cupcake, fairly recent wine phenomenon launched by the Wine Group circa 2008 which now exceeds 3 mn cases. Although 19 Crimes has not attained Cupcakes' volume over the same time since launch, it does seem to have further runway.

● Our rating falls from Neutral to UNDERPERFORM. No change to target price. TWE's recent share price rally has pushed the company's PEx and EBITDAx ahead of peer ratings.

● Rolling our valuation forward to FY21 would imply an increase in our target price of 60c. Also, investors anticipate TWE will make an acquisition which may be EPS and NPV accretive. TWE has about A$1.0bn of balance sheet capacity.


The latest US wine retail scan data holds information for both the TWE bulls and bears

Bears: TWE total retail sales have not yet ignited after initiating a strategy to resuscitate the national accounts channel about eight months ago. Bulls: 19 Crimes – which is supporting company revenue – has "escaped" to a new higher volume level – perhaps the brand is on a 1mn case run-rate in the US.

How big can 19 Crimes become? We compare 19 Crimes to Cupcake, fairly recent wine phenomenon launched by the Wine Group circa 2008 which now exceeds 3 mn cases. Although 19 Crimes has not attained Cupcakes' volume over the same time since launch, it does seem to have further runway.

Our rating falls from Neutral to UNDERPERFORM

No change to target price. TWE's recent share price rally has pushed the company's PEx and EBITDAx ahead of peer ratings. While we believe TWE affords investors above market growth, it appears to be priced in for the time being.

Our target price continues to be determined by applying 23x to EPS two-years forward (FY20)

Rolling our valuation forward to FY21 would imply an increase in our target price of 60c. Also, investors anticipate TWE will make an acquisition which may be EPS and NPV accretive. TWE has about A$1.0bn of balance sheet capacity.

Figure 1: 19 Crimes vs. Cupcake Retail Volume 50 4-week Periods Since Launch

Figure 1: 19 Crimes vs. Cupcake Retail Volume 50 4-week Periods Since Launch

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Source: Nielsen

Cupcake became a much larger brand than 19 Crimes in its first 49 months since launch. We first track Cupcake volume from January 2009 when it was a nascent brand. We track 19 Crimes from March 2014 when it also was selling very few cases.

Although Cupcake reached greater heights than 19 Crimes after about 50 months in the marketplace, 19 Crimes is still growing its monthly volume strongly. (Cupcake did not permanently plateau in 2012 – four years after launch. It resumed modest growth to reach 120,000 cases/month). The latest, November 2017 retail scan reading shows 19 Crimes surpassing 40,000 cases per month. Considering that retail scan data measures about 40%–50% of commercial/masstige brand volume in the USA, 19 Crimes may be on a run-rate to surpass 1.0mn cases. TWE's North America volume is about 15mn cases.

(This is an extract from Larry Gandler’s report, ‘Is 19 Crimes a Cupcake?’ published on 27 November 2017. For details, please see the CS Plus website.)

Bbg/RIC TWE AU / TWE.AX Rating (prev. rating) U (N) 52-wk range (A$) 16.0 - 10.2 Mkt cap (A$/US$ mn) 11,546.4/ 8,793.8 ADTO-6M (US$ mn) 35.9 Free float (%) 98.2 Major shareholders

Price (22 Nov 17 , A$) 15.89 TP (prev. TP A$) 14.15 (14.15) Est. pot. % chg. to TP (11) Blue sky scenario (A$) n.a. Grey sky scenario (A$) n.a.


Absolute (%) 5.89 13.40 47.94 Relative (%) 4.58 9.24 38.87

Year 06/16A 06/17A 06/18E 06/19E 06/20E

Revenue (A$ mn) 2,233 2,402 2,454 2,637 2,747 EBITDA (A$ mn) 441.7 563 617 722 787 Net profit (A$ mn) 221.3 295 333 397 444 EPS (CS adj. A$) 0.31 39.64 45.45 54.75 61.15 - Change from prev. EPS (%) n.a. n.a. (0.3) (0.4) (0.4) - Consensus EPS (A$) n.a. 41.60 46.50 57.90 67.40 EPS growth (%) 43.0 29.1 14.7 20.5 11.7 P/E (x) 51.8 40.1 35.0 29.0 26.0 Dividend yield (%) 1.0 1.6 1.9 2.3 2.5 EV/EBITDA (x) 27.0 21.1 19.7 16.6 15.2 P/B (x) 3.3 3.3 3.3 3.1 3.0 ROE (%) 6.7 8.2 9.5 11.2 11.9 Net debt(cash)/equity (%) 10.7 9.9 17.5 13.7 12.3

Note 1: ORD/ADR=1.00. Note 2: Treasury Wine Estates Ltd. is engaged in the international wine business with a portfolio of wines. Its business is structured into four regions: Australia and New Zealand (ANZ); Americas; Europe, Middle East and Africa (EMEA); and Asia Pacific.


Asian Daily

- 11 of 33 -

China

China Cement Sector ------------------------------------------------------------------------------------------ New report: Embracing six-year high profitability Yang Luo / Research Analyst / 852 2101 6328 / [email protected] Peter Li / Research Analyst / 852 2101 6320 / [email protected]

● We expect cement price to remain strong over the coming 6–12 months, on the back of resilient demand and constrained supply. As we forecast a 6% YoY drop in coal price to Rmb600/t in 2018E, the profitability of the China cement sector is expected to continue to hover at a high level, in our view. We have OUTPERFORM ratings on Anhui Conch (A&H) and BBMG (H).

● Average cement price went up 2.4% WoW to Rmb366/t last week (+15% for 2017 YTD). We attribute this to: (1) stable demand and (2) production disruption. We spotted five major rounds (total of ~Rmb120-130/t) of price hikes in East China in the last three months.

● China’s average cement inventory level (measured by clinker inventory as % of total capacity of clinker silo) edged 0.6 pp lower to 54% as of 24 Nov 2017.

● Conch is our top pick within the cement sector due to its cost leadership and strong balance sheet. We have a NEUTRAL rating on CR Cement, given the potential supply shock (3.6% newly added clinker capacity). Full report.

Figure 1: China’s cement price vs inventory (RHS)

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China avg. cement price (Rmb/t)China avg. cement inventory (% RHS)

Source: Digital Cement, Credit Suisse estimates

Cement prices hike amid subdued coal price. We expect cement price to remain strong over the coming 6–12 months, on the back of resilient demand and constrained supply. As we forecast a 6% YoY drop in coal price to Rmb600/t in 2018E, profitability of the China cement sector is expected to continue to hover at a high level, in our view. We derived the current gross profit per tonne (GP/t) of Rmb68/t for the whole sector, which is at about six-year high level since end-2011. We have OUTPERFORM ratings on Anhui Conch (A&H) and BBMG (H).

Production curb is the major drive for accelerating cement price rally. The average price went up 2.4% WoW to Rmb366/t as of 24 Nov (+15% for 2017 YTD). We attribute this mainly to: (1) stable demand and (2) production disruption. We have spotted five major

rounds of price hikes (with an aggregate Rmb120-130/t) in East China within the last three months.

Inventory level is at five-year low. China’s average cement inventory level (measured by clinker inventory as % of total capacity of clinker silo) edged 0.6 pp lower to 54%. For 2017 YTD, cement price in Guangdong and Guangxi provinces only increased by 0.7% vs +18.8% hike for Yangtze River Delta area (Jiangsu, Shanghai and Zhejiang provinces).

Anhui Conch is set to be the most beneficiary; OUTPERFORM. Anhui Conch is our top pick within the sector due to its cost leadership and strong balance sheet. We forecast its current GP/t to reach six-year high at about Rmb100/t. Maintain OUTPERFORM on Anhui Conch (A&H). We have a NEUTRAL rating on CR Cement, given the potential supply shock (3.6% newly added in clinker capacity for Guangdong and Guangxi provinces).

Figure 2: Conch’s stock vs cement-to-coal price gap

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Cement-coal for Yangzi River Delta (Rmb/t) (RHS) Source: Digital Cement, The BLOOMBERG PROFESSIONAL™ service, CCTD, CS

Figure 3: Cement P/E vs cement-to-coal price gap

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Cement sector 12-month fwd P/E (RHS) Source: Digital Cement, CCTD, Company data, Credit Suisse

Valuation metrics Company Ticker Rating Price Target TP

Chg Up/dn to TP

Year EPS Chg (%)

EPS EPS grth (%) P/E (x) DY (%)

P/B (x)

Scenario

(prev.) Local price (prev.) (%) (%) T T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1 Blue sky Grey sky

Conch (H) 0914.HK O 35.20 42.00 0 19 12/16 0 0 2.40 2.57 48 7 12.4 11.6 2.6 1.8 48.30 18.00 BBMG (H) 2009.HK O 3.63 5.00 0 38 12/16 0 0 0.35 0.44 39 27 8.8 6.9 1.1 0.7 9.00 3.00 CRC 1313.HK N 5.00 5.40 0 8 12/16 0 0 0.50 0.53 140 5 10.0 9.5 3.0 1.1 8.00 3.00 CNBM 3323.HK U 6.81 5.40 0 (21) 12/16 0 0 0.39 0.34 99 (12) 14.8 16.7 1.5 0.6 9.00 2.50

Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates


Asian Daily

- 12 of 33 -

China Gas Holdings Ltd --------------------------------------------------- Maintain OUTPERFORM 1H18 earnings beat; guidance revised up for both volume and rural connections EPS: ▲ TP: ▲ Dave Dai, CFA / Research Analyst / 852 2101 7358 / [email protected] Gloria Yan / Research Analyst / 852 2101 7369 / [email protected] Gary Zhou, CFA / Research Analyst / 852 2101 6648 / [email protected]

● CGH's 1H18 net profit grew by 101%, ahead of earlier profit alert of >90%, thanks to stronger-than-expected gas volume and connections. Recurring earnings of HK$3.3 bn achieved 56% of full-year consensus estimate, higher than the historical run-rate of 51%.

● Retail gas volume grew 40% YoY with large increases across major groups. Full-year guidance is revised up from +30% to +35% YoY given the sales momentum. Piped gas dollar margin eased slightly to Rmb0.65/cm from Rmb0.678/cm (FY17), similar to peers.

● New connections in 1H18 were 2.14 mn households with 0.71 mn from rural market. Given quicker-than-expected rural connections, FY18 guidance is revised up to 3.8 mn (with 1.1 mn in rural). CGH does not expect risks of connection subsidies. Value-added services also expanded by 163% in operating profit.

● We revise up our FY18-20E EPS by 1-3% to reflect better sales momentum and higher FY18E connection outlook. Our DCF-based TP is revised up to HK$30.5 from HK$29. 15x FY19E looks inexpensive considering 24% FY18-20E EPS CAGR.


1H18 results ahead of profit alert. After market close on 27 Nov, China Gas Holdings (CGH) reported 1H18 (March year-end) net profit of HK$3,395 mn (+101% YoY), ahead of previous profit alert of >90% growth. 1H18 recurring profit also grew by 73% YoY to HK$3,307 mn, achieving 56% of Bloomberg consensus estimate for FY18 (higher than historical run-rate of 51%). The strong results were mainly due to better-than-expected gas sales volume and new connections helped by rural gas business. Total retail gas volume grew by 40% YoY (residential [incl. rural] +65%, industrial +41%, commercial +41%, vehicle +3%). Average gas dollar margin in 1H18 (Rmb0.65/c.m.) was largely stable compared to FY17 (Rmb0.678/c.m.). Gross margin for retail gas sales dropped only marginally to 18.2% in 1H18 from 18.5% in FY17. New connections in 1H18 increased significantly by 88% YoY to 2.14 mn households, mainly driven by 0.71 mn from the newly

developed rural market. Gross margin for new connection was stable YoY at 68.5% in 1H18 (vs. 68.0% in 1H17). Value-added services also recorded 163% growth in operating profit (HK$289 mn in 1H18). SG&A expenses increased mildly by 14% YoY in 1H18. Net gearing ratio dropped from 77% in FY17 to 67% in 1H18.

Figure 1: Key guidance (raised)

Actual Old guidance New guidance

1H17 2H17 1H18 FY18E FY18E

City-gas volume (YoY) 11.1% 19.6% 40.1% +30% +35%

New connections (mn) 1.14 1.42 2.14 3.5 3.8

LPG sales (mn ton) 1.72 1.58 1.94 4.3 4.3

Value added OP (HK$mn) 110 186 289 n.a. n.a.

Source: Company data

Volume and connection guidance raised. At the analyst meeting, management updated key guidance for FY18-19E: (1) Total retail sales volume is expected to further accelerate to >35% YoY in FY18E, higher than previous guidance of >30%. The management continued to see strong demand from coal-to-gas conversion in rural areas. (2) New connection is now expected to grow by 48% YoY in FY18E to 3.8mn households, higher than previous guidance of 3.5mn, mainly due to quick-than-expected rural new connections. The company has already completed 0.7mn rural connections in 1H18 (2.4mn contracts signed by end-Sep 2017) and expects 1.1mn for the full-year FY18. The management see strong policy/subsidy supports on rural gas and do not expect risks of connection subsidies. (3) The company acquired 12 new city concessions in 1H18, increasing total number of projects to 342. (4) LPG sales volume guidance is unchanged at 4.3m tons in FY18E (1.9m tons in 1H18) and 4.8m tons in FY19E (vs. 3.7m tons in FY17), according to the management. (5) Management is optimistic on the growth of its value-added services (asset-light business), including gas heaters and kitchen appliances sales under the brand of Gasbo, as well as other home appliance sales, etc. The operating profit of value-added services grew by 163% and its operating margin was stable at 41.4% in 1H18 (vs. 41.1% in 1H17).

Valuation. We revise up our FY18-20E EPS by 1-3% to reflect better sales momentum and higher FY18E connection outlook. As a result, our DCF-based TP is revised up to HK$30.5. We believe its current valuation (15x FY19E) is inexpensive considering 24% FY18-20E EPS CAGR. CGH and ENN Energy are our top picks for city gas sector.

Figure 2: Valuation comparison

Company Ticker Rat. TP P/E P/B ROE EPS

CAGR (%)

17E 18E 19E 17E 18E 19E 17E 18E 19E 17-19E

CGH 0384.HK O 30.5 18.1 14.7 11.8 4.6 3.8 3.1 27.8 28.0 28.6 23.8

CRG 1193.HK O 33.0 14.5 12.0 10.1 3.0 2.5 2.2 21.9 22.8 23.2 19.5

ENN 2688.HK O 67.0 14.2 11.7 9.7 3.0 2.5 2.1 22.8 23.1 23.5 20.8

Source: Bloomberg, Credit Suisse estimates.

Bbg/RIC 384 HK / 0384.HK Rating (prev. rating) O (O) 52-wk range (HK$) 24.9 - 10.2 Mkt cap (HK$/US$ bn) 114.5/ 14.7 ADTO-6M (US$ mn) 15.3 Free float (%) 31.5 Major shareholders Beijing Enterprises

Holdings 23%

Price (27 Nov 17 , HK$) 23.05 TP (prev. TP HK$) 30.50 (29.00) Est. pot. % chg. to TP 32 Blue sky scenario (HK$) 37.50 Grey sky scenario (HK$) 23.50


Absolute (%) (2.3) 22.0 113.8 Relative (%) (8.3) 10.7 64.8

Year 03/16A 03/17A 03/18E 03/19E 03/20E

Revenue (HK$ mn) 29,497 31,993 42,833 51,668 62,146 EBITDA (HK$ mn) 5,965 6,878 9,807 12,001 14,761 Net profit (HK$ mn) 2,273 4,148 6,321 7,779 9,683 EPS (CS adj. HK$) 0.46 0.85 1.27 1.57 1.95 - Change from prev. EPS (%) n.a. n.a. 3.1 1.0 1.2 - Consensus EPS (HK$) n.a. n.a. 1.18 1.41 1.65 EPS growth (%) (32.0) 84.6 50.5 23.1 24.5 P/E (x) 50.3 27.3 18.1 14.7 11.8 Dividend yield (%) 0.8 1.1 1.6 2.0 2.5 EV/EBITDA (x) 22.0 19.3 13.4 10.9 8.6 P/B (x) 6.4 5.5 4.6 3.8 3.1 ROE (%) 12.5 21.6 27.8 28.0 28.6 Net debt(cash)/equity (%) 79.0 76.8 58.8 44.1 28.7

Note 1: ORD/ADR=25.00. Note 2: China Gas Holdings Limited (China Gas) is an investment holding company. The company is a natural gas services operator, principally engaged in the investment, construction and management of city gas pipeline infrastructure and distribution of natural gas


Asian Daily

- 13 of 33 -

Qudian Inc. --------------------------------------------------------------------- Maintain OUTPERFORM Multiple headwinds, reduce TP to US$15 EPS: ▼ TP: ▼ Charles Zhou, CFA / Research Analyst / 852 2101 6177 / [email protected] Thomas Chong / Research Analyst / 852 2101 6164 / [email protected] Alice Li / Research Analyst / 852 2101 6068 / [email protected] Doris Pan / Research Analyst / 852 2101 6191 / [email protected]

● Ant Financial will cap the all-in annualised rate charged by third-party credit service providers in Alipay interface at 24%, effective 30 November 2017. QD will therefore lower the rate it charges in the Alipay interface and try to direct the borrowers it acquired through Alipay channels to its own app, where it can still charge a rate up to 36%, the regulatory ceiling.

● We expect QD’s borrower engagement to be affected. While QD plans to mitigate the impact by offering auto finance products in the Alipay channel, it is too early to judge the outcome given its target customer profile and business model appear to be different from QD’s current small credit products.

● Approval for new online micro-credit companies has been halted recently, which in fact benefits incumbents such as QD, although existing licences and funding sources might be reviewed.

● We cut 2018E net income by 26% (mainly on lower transaction amount) and so the target price to US$15 (from US$33), which implies 11x 2018E P/E. QD is tracing at 9x P/E 2018.


Borrower engagement affected by Alipay adjustment

Effective 30 November 2017, Ant Financial will cap the all-in annualised rate (including interest, fees and all other charges) charged by third-party credit service providers in the Alipay consumer interface at 24%. This follows Alipay’s recent adjustment to personalise each user’s front page and remove QD’s “Laifenqi” icon from front pages of users unqualified for Jiebei (mainly those with Zhima Credit Score of < 600). To comply with this new policy, QD has to lower the rate it charges borrowers from Alipay channels (both the third-party paid channel and the public service window free channel) and try to direct these borrowers to its own app, where it can still charge a rate up to 36%, the regulatory ceiling.

We believe QD’s borrower engagement will be affected as a majority of its borrowers come from Alipay channels and full transfer (100%) from these channels to its own app is unlikely. However, the company has been strategically shifting towards merchandise credit products, which promoted its own mobile app and helps to alleviate the impact. Besides, stricter restrictions on rate could push it to focus on high-quality customers and maintain good asset quality.

Auto finance: a different model and too early to judge

To diversify its product offerings and mitigate regulatory risks, QD has started to offer auto finance under the “laifenqi” icon on Alipay’s front-page since late November. This indeed could help it to differentiate itself from Jiebei (Ant Financial’s consumer credit products) and better comply with Alipay’s new policy as the rate charged on auto is lower than 20%. Also, it broadens QD’s customer reach to borrowers demanding larger tick-size and longer-duration credits.

While QD has massive registered users of over 56 mn, it is hard to estimate to what extent they are interested in this product, given that the target customer profile and business model of auto finance appear different from QD’s current small credit products. That said, QD’s past transformation from campus loan to consumer finance shows its nimble strategy and good execution capabilities.

A prime beneficiary of tightened rule on online micro-credit

Approval for new online micro-credit companies has been halted recently, according to the Financial Times on 22 November 2017. This would lift industry entry barrier and benefit incumbents such as QD, which has already obtained two online micro-credit licences in 2016.

According to the China Securities Journal on 23 November 2017, existing licences would be reviewed and those with weak shareholder background and/or misconduct might be revoked. For QD, the risk is relatively small given it has already fully complied with current regulations by capping the APR at 36% and employing user-friendly collection methods. Besides, its partnership with Ant Financial and position as a public company helps deal with regulatory challenges.

On the regulatory front, our major concern is that QD’s funding channel will be under pressure due to tightened regulations on partnerships with micro-loan companies and traditional financial institutions. As of 3Q17, 77% of the loan balance was funded by external funding sources and constraints on funding channels could limit QD’s scale expansion.

QD is trading at 9x P/E 2018; Reduce TP to US$15

We reduce 2018E net income by 26% to Rmb3 bn to reflect a lower loan facilitation volume and financing income take rate, and higher provision ratio. We have not built in the auto finance business given limited operating history and low visibility. We revise down our TP to US$15 (from US$33), implying 11x 2018E P/E. QD is trading at 9x 2018E P/E and we maintain OUTPERFORM rating.

Bbg/RIC QD US / QD.N Rating (prev. rating) O (O) [V] 52-wk range (US$) 34.9 - 12.2 Mkt cap (US$ mn) 4,030.9 ADTO-6M (US$ mn) 54.2 Free float (%) 13.1 Major shareholders Qufenqi Holding

Limited

Price (24 Nov 17 , US$) 12.22 TP (prev. TP US$) 15.00 (33.00) Est. pot. % chg. to TP 23 Blue sky scenario (US$) 19.40 Grey sky scenario (US$) 11.10


Absolute (%) (47.5) — — Relative (%) (54.4) — —

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Pre-prov Op profit (Rmb mn) (186.0) 845.3 3,176.6 4,245.0 5,188.5 Net profit (Rmb mn) (233) 577 2,376 3,034 3,630 EPS (CS adj. Rmb) (2.9) 7.3 7.4 8.9 10.7 - Change from prev. EPS (%) n.a. n.a. 4 (26) (40) - Consensus EPS (Rmb) n.a. n.a. 7.4 10.5 14.5 EPS growth (%) n.m. n.m. 1.6 21.0 19.6 P/E (x) n.m. 11.1 10.9 9.0 7.5 Dividend yield (%) 0 0 0 0 0 BVPS (CS adj. Rmb) (82.9) (43.3) 31.6 38.9 49.6 P/B (x) (0.97) (1.86) 2.55 2.07 1.63 ROE (%) — (11.5) 70.6 26.0 24.2 ROA (%) — 11.8 18.7 15.4 15.6 Tier 1 ratio (%) — — — — —

Note 1: Qudian Inc. is a leading provider of online small consumer credit in China. It uses big data-enabled technologies, such as artificial intelligence and machine learning, to transform the consumer finance experience in China.


Asian Daily

- 14 of 33 -

Tuniu Corporation ----------------------------------------------------------- Maintain OUTPERFORM 3Q17 non-GAAP breakeven; on track to achieve full-year profitability EPS: ▲ TP: ▲ Ivy Ji / Research Analyst / 852 2101 7951 / [email protected] Kenneth Fong / Research Analyst / 852 2101 6395 / [email protected]

● Tuniu reported 3Q17 adj. net profit of Rmb37 mn on net revenue of Rmb806 mn, +53% YoY, in line with preliminary result range of Rmb35-40 mn and Rmb800-810 mn, respectively.

● The strong result was driven by: (1) decent GMV growth at >30% YoY; (2) continued take rate expansion to ~9% (3Q16: 7.4%); (3) better-than-expected cost control (opex -39% YoY and -4% QoQ); and (4) positive operating leverage (GP margin +6% YoY to 55%).

● We believe the encouraging 3Q17 result shows that Tuniu’s two core strategies—building offline presence and direct procurement initiatives—are bearing fruits. It should also help boost confidence in management execution and in achieving the target of full-year non-GAAP breakeven in 2018e.

● Tuniu is now trading at 3.4x/2.3x 2017/18e P/S, at a deep discount to Ctrip’s at 6.1x/5.1x. With net cash at 60% of market cap and early sign of turnaround, we see attractive risk-reward from the stock. We fine tune 2017-19e forecast by 7% and raise DCF-based TP to US$12. Maintain OUTPERFORM.


Non-GAAP break-even in 3Q17

Tuniu reported 3Q17 non-GAAP attributable net income of Rmb37 mn (3Q16: net loss of Rmb522 mn) on the back of net revenue of Rmb806 mn, +53% YoY, both in line with preliminary announcement of Rmb35-40 mn and Rmb800-810 mn, respectively. The strong result was achieved through: (1) a decent top-line growth; (2) continued efforts in cost saving; and (3) a positive operating leverage in the peak summer travel season.

Net revenue growth remained robust at 53% YoY and ahead of consensus/CS estimates by 4%/3%, thanks to: (1) healthy GMV growth of over 30% YoY and (2) continued take rate expansion underpinned by direct procurement initiatives and stronger pricing power in the high season. Take rate for packaged tours improved to ~9% in 3Q17, from 7.4% in 3Q16 and ~8.5% in 2Q17. Direct procurement was 40% of GMV in 3Q17.

The decent revenue growth, in our view, reaffirms our thesis that through an extensive network of offline service centres and retail stores, Tuniu has built entry barriers to protect its market share and therefore the cut in branding costs does not pose any imminent threat to its growth. Tuniu remains committed to the offline strategy and the number of offline stores is expected to reach 220 by end 2017.

Gross margin improved 6% YoY and 2% QoQ to 55% in 3Q17, thanks to positive operating leverage. Meanwhile, cost-control also progressed better than expected. Total non-GAAP operating expense of Rmb448 mn was -39% YoY and -4% QoQ despite seasonality, mainly driven by lower-than-expected research and development expenses, thanks to efficiency-enhancement measures such as automation.

Figure 1: Tuniu 3Q17 result summary (in Rmb mn)

Year ended on 31 Dec 3Q16 4Q16 1Q17 2Q17 3Q17

Net revenue 525 322 456 460 806

YoY % chg 53% 52% 53%

Cost of sales (271) (153) (204) (219) (365)

Non-GAAP gross profit 254 169 252 242 441

Non-GAAP GP margin 48.4% 52.4% 55.2% 52.3% 54.7%

Adjusted operating exp.

Research and development (166) (168) (157) (144) (122)

Sales and marketing (465) (366) (219) (187) (190)

G&A (148) (181) (127) (145) (137)

Non-GAAP operating income (522) (536) (247) (230) 1

Non-GAAP net profit/(loss) (493) (508) (227) (212) 37

Source: Company data

On track to achieve full-year non-GAAP break-even in 2018e

As company generated its first quarterly non-GAAP profit since its listing in 2014, we believe the encouraging 3Q17 result serves as a testament that the company’s two core strategies, i.e., building offline presence and direct procurement initiatives, are bearing fruits. It also should help boost confidence in management’s execution. Therefore, in our view, this represents a firm step toward achieving the target of full-year non-GAAP break-even in 2018e. Moreover, we believe that the potential lift of ban on group-tour travel to South Korea (imposed in 2Q17) should also bring tailwind for growth in the coming year.

That said, we continue to expect a net loss in 4Q17, mainly due to weaker seasonality. We currently estimate a net revenue growth of 45% YoY in 4Q17 (guidance range: 40-45%) and a net loss of Rmb174 mn (4Q16: Rmb508 mn; 2Q17: Rmb212 mn).

Maintain OUTPERFORM

The stock is now trading at 3.4x/2.3x 2017/18e P/S, at a deep discount to Ctrip’s at 6.1x/5.1x. With net cash at 60% of market cap, we think the downside here is quite limited. With improving profitability outlook and early sign of a turnaround, we continue to see attractive risk-reward from the stock. Maintain OUTPERFORM rating and raise DCF-based TP to US$12 to reflect the better-than-expected result.

Bbg/RIC TOUR US / TOUR.OQ Rating (prev. rating) O (O) 52-wk range (US$) 9.47 - 6.83 Mkt cap (US$ mn) 860.2 ADTO-6M (US$ mn) 0.7 Free float (%) 39.2 Major shareholders HNA Group

Price (24 Nov 17 , US$) 8.78 TP (prev. TP US$) 12.00 (11.00) Est. pot. % chg. to TP 37 Blue sky scenario (US$) 15.00 Grey sky scenario (US$) 10.20


Absolute (%) 24.7 21.6 (3.5) Relative (%) 18.8 10.4 (52.5)

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (Rmb mn) 7,645 10,548 2,191 3,042 4,067 EBITDA (Rmb mn) (1369) (2339) (729) (95) 114 Net profit (Rmb mn) (1338) (2229) (573) 5 213 EPS (CS adj. Rmb) (16.2) (17.9) (4.6) 0.0 1.7 - Change from prev. EPS (%) n.a. n.a. n.m n.m 6.6 - Consensus EPS (Rmb) n.a. n.a. (5.05) (0.24) 1.48 EPS growth (%) n.m. n.m. n.m. n.m. 4,178.7 P/E (x) n.m. n.m. n.m. 1,449.6 33.9 Dividend yield (%) 0 0 0 0 0 EV/EBITDA (x) (2.4) (1.9) (5.5) (41.9) 32.9 P/B (x) 1.7 1.6 1.9 2.0 1.9 ROE (%) (56.6) (57.0) (13.9) 0.1 5.8 Net debt (cash)/equity (%) (73.1) (26.4) (43.1) (45.5) (50.0)

Note 1: Tuniu is a leading online travel agency in China with a focus on leisure travel products. It is now the No.1 player in the online package tour market.


Asian Daily

- 15 of 33 -

India

India Market Strategy ------------------------------------------------------------------------------------------ Oct headline GST collections disappointing; but do additional disclosures point to a lower revenue neutral threshold? Neelkanth Mishra / Research Analyst / 91 22 6777 3716 / [email protected] Prateek Singh / Research Analyst / 91 22 6777 3894 / [email protected]

● Reported Oct GST collections fell much short of our estimate of the seasonally adjusted revenue neutral threshold (Fig 1). But additional disclosures suggest it may be early to panic about fiscal health. The number of filings was higher than at this stage in prior months, but 15% smaller than the 5.9mn Jul/Aug ended at (Fig 2).

● It is also not yet clear how much higher eventual Jul-Sep revenues were than first disclosed. Further, as nearly all states budgeted for less than 14% growth in their tax revenues in FY18, their receipts including compensation should indicate their revenue neutral threshold (Fig 3): this comes to be Rs 1 tn less than our estimate.

● Compensation cess collections are running higher than that paid (~Rs310 bn collected Jul-Oct, vs. Rs245 bn paid). CGST is less than SGST: the release mentions high transition credit usage for CGST. Large unallocated IGST (Fig 4) to act as a buffer in FY18.

● This release is likely to add to the fog on macroeconomic parameters in India. We acknowledge the uncertainty but remain comfortable with the aggregate collections of GST. At this stage the allocation of centre-state allocation issues are less important.

Figure 1: Oct GST much lower than seasonally adj. revenue neutral rate

0.0

0.2

0.4

0.6

0.8

1.0

Jul-17 Aug-17 Sep-17 Oct-17

GST Collections

Rs tn

Seasonally adjusted Revenue Neutral Rate Rs943bn

Source: PIB, Credit Suisse estimates.

Disappointing headline GST collection in October

Reported October GST collections fell much short of our estimate of the seasonally adjusted revenue neutral threshold (Fig 1). But additional disclosures suggest it may be early to panic about fiscal health. The number of filings, while higher than at this stage in prior months, was 15% smaller than the 5.9 mn Jul/Aug ended at.

Figure 2: More filers than earlier months at this time, but upside remains

30%

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55%

60%

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Jul-17 Aug-17 Sep-17 Oct-17

First Reported Till 27-Nov-17

mn

GSTR 3B Filers


States' compensation suggests low revenue neutral rate

It is also not yet clear how much higher eventual Jul-Sep revenues were there than first disclosed. Further, as nearly all states budgeted for less than 14% growth in their tax revenues in FY18, their receipts including compensation should indicate their revenue neutral threshold (Fig 3): this comes to be Rs 1 tn lower than our estimate.

Figure 3: States' revenues incl. compensation suggest low RNR

SGST23%

IGST Transfer to States

13%

Compensation7%

CGST16%

IGST Transfer to Centre

7%

Unallocated IGST32%

Unallocated Comp. Cess

2%

Split of Rs3.6tn GST in Aug-Nov'17

States

Centre


Compensation cess collections have been running higher than the compensation paid (~Rs310 bn collected Jul-Oct, vs. Rs245 bn paid). Central collections are much lower than states': the release mentions high transition credit usage for CGST. As eventually CGST and SGST would be equal, this should not be a problem in future years. For this year the large unallocated IGST (Fig 4) would act as a buffer.

Figure 4: A large part of IGST remains unallocated

0

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800

1200

1600

2000

Rs bn

Source: PIB, Credit Suisse estimates

This release is likely to add to the fog on macroeconomic parameters in India. If the government is indeed collecting less than it should, is the economy so weak despite the implied fiscal easing? At this stage the allocation of centre-state allocation issues are less important. .


Asian Daily

- 16 of 33 -

Eris Lifesciences Ltd ---------------------------------- Initiating Coverage with OUTPERFORM New report: Scalable model with strong FCF generation Anubhav Aggarwal / Research Analyst / 91 22 6777 3808 / [email protected] Chunky Shah / Research Analyst / 91 22 6777 3872 / [email protected]

● We initiate on Eris with an OUTPERFORM rating and our Rs770 TP suggests 18% upside potential. Eris is a pure play in India pharma market, with presence in fast-growing cardiac and diabetes drugs. Its business model is scalable as it has generated high FCF of Rs3 bn and has demonstrated appetite to use this FCF to accelerate growth.

● We present case studies on how Sun and Lupin grew >4x in India in ten years when they were comparable to Eris' size and had similar constraints. Sun, Lupin used India FCF to boost export presence but Eris is using FCF for India scale-up. Our analysis shows existing business should grow at 15% CAGR and entry into new areas (CNS, gynae, pain) should boost growth.

● In our view, turnaround of recent four loss-making acquisitions could re-rate the stock. As synergies are realised, market should be more convinced on Eris’ ability to accelerate growth inorganically.

● Eris has the best return profile (RoCE: 100%) and growth (24% CAGR over FY17-FY20E) in the sector. Our TP of Rs770 is based on 22x FY20E PE. Risks: implementation of ‘one company, one brand’ policy, mandatory prescription by generic names.


Pure play in India

Eris is a pure play in the India pharma market with presence in fast-growing and high-entry-barrier cardiac and diabetes drugs. Eris has delivered strong performance (20% sales CAGR over FY12-17) with strong product selection (73% of portfolio in growth phase) and its marketing is focused on super-specialists and specialists.

Scalable model focused on cardiac and diabetes

Eris’ performance is strong (20% sales CAGR over five years). It has proven that its business model is scalable, with (1) ability to create large brands (top two brands are Rs1+ bn and top ten brands are 70% of sales) (2) double-digit prescription share from cardiologists and diabetologists (top five in represented market), (3) good risk-appetite in using its high FCF for asset acquisition to accelerate growth.

Best return profile and growth trajectory in the sector

Eris' profit CAGR of 24% (over FY17-20E) is the highest in our coverage. Existing portfolio’s earnings should grow at 18% CAGR and the delta driven by margin normalisation at recent acquisitions. Eris has a strong balance sheet, with RoCE (ex-cash) at ~100% and high FCF conversion at 60% of EBITDA.

Figure 1: High growth is due to (1) Eris' high exposure to fast-growing cardiac and diabetes…

Cardiac33%

Diabetes30%

Vitamins14%

Gastro9%

Gynae3% Others

11%


Figure 2: … and (2) highest mix of faster-growing molecules vs. peers

0% 20% 40% 60% 80% 100%

IPM

Eris

SunUSVGNPIntas

LupinTorrent

Addressable mkt growth <5% 5%< Growth <15% 15%< Growth <30% Growth >30%

Sales split by growth of addressable market

Sales split


Figure 3: Sun/Lupin have become 4x in 10 years; Eris could follow similar trajectory

0

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60

FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18

Rs

bn

Lupin Sun (ex-Rbxy) Eris (shifted by 10 yrs)

Lupin: 17% CAGR

Sun: 20% CAGR (10 yrs)

Eris today at similar level toSun/Lupin ~10 yrs back


Figure 4: Highest ROCE and EPS CAGR in sector

Torrent (20.1x)

Sun (22.4x)

Lupin (18.0x)

Ciipla (24.2x) Eris (23.4x)

Cadila (18.5x)DRL (20.8x)

Alkem (22.7x)

10%

12%

14%

16%

18%

20%

22%

24%

5% 15% 25% 35%

ROCE

Mid

-term

E

PS

CA

GR

RoCE - 105%


Bbg/RIC ERIS IN / ERIS.BO Rating (prev. rating) O (NA) [V] 52-wk range (Rs) 682.5 - 525.8 Mkt cap (Rs/US$ mn) 89,409.4/ 1,381.4 ADTO-6M (US$ mn) 3.6 Free float (%) 44.1 Major shareholders Promoter

Price (27 Nov 17 , Rs) 650.25 TP (prev. TP Rs) 770.00 (NA) Est. pot. % chg. to TP 18 Blue sky scenario (Rs) 900.00 Grey sky scenario (Rs) 450.00


Absolute (%) 14.1 8.5 — Relative (%) 12.4 1.1 —

Year 03/16A 03/17A 03/18E 03/19E 03/20E

Revenue (Rs mn) 5,970 7,250 9,160 12,380 14,279 EBITDA (Rs mn) 1,715 2,679 3,372 4,489 5,550 Net profit (Rs mn) 1,336 2,412 3,119 3,735 4,746 EPS (CS adj. Rs) 9.7 17.5 22.7 27.2 34.5 - Change from prev. EPS (%) n.a. n.a. - Consensus EPS (Rs) n.a. n.a. 23.7 31.4 39.5 EPS growth (%) 49.7 80.6 29.3 19.8 27.1 P/E (x) 66.9 37.1 28.7 23.9 18.8 Dividend yield (%) 0 0 0 0 0 EV/EBITDA (x) 51.3 32.4 26.5 19.2 14.7 P/B (x) 29.8 16.7 10.5 7.3 5.3 ROE (%) 47.2 57.7 45.1 36.1 32.5 Net debt(cash)/equity (%) (44.1) (47.2) (1.2) (28.1) (47.4)

Note 1: Eris is a pure play on the Indian pharma market with a focus on chronic therapies.


Asian Daily

- 17 of 33 -

Indonesia

Indonesia Telecoms Sector ------------------------------------------------ Maintain OVERWEIGHT Price points static for now, but we expect an improvement in FY18 Colin McCallum, CA / Research Analyst / 852 2101 6514 / [email protected] Billy Lee / Research Analyst / 852 2101 6529 / [email protected]

● Share prices of all of the 'big 3' cellular operators corrected sharply in the run-up to the release of 3Q17 earnings, as fears grew over competitive intensity as well as OTT cannibalisation.

● Channel checks on our recent visit revealed that pricing has not worsened so far in 4Q17, but, equally, it has not improved. Given the ongoing mismatch in capacity between XL, which has low 4G utilisation, and Indosat, which is capacity constrained, we are not surprised that pricing has not increased; XL is understandably keen to retain momentum and regain revenue market share lost to Indosat across FY15-FY16.

● On the other hand, we expect XL's strategy to shift back towards data bonus reductions/price increases in 1H18. This will benefit all three players – we expect both Telkomsel and Indosat to swiftly follow XL upwards on pricing – but it should be particularly positive for XL, given that it has the highest fixed cost base, lowest scale, and lowest ROIC of the 'big 3' operators.

● We remain OVERWEIGHT the Indonesian telecom sector.

Figure 1: Indonesian telco sector—comparative multiples

Close Target Upside PE EV/EBITDA FCF yield

Price Price (%) 17E 18E 17E 18E 17E 18E

Indosat 5,275 8,600 63.0% 14.2 12.9 3.5 3.3 15.1% 13.0%

XL 3,010 3,600 19.6% 78.8 35.3 5.4 4.8 1.8% 4.1%

PT Telkom 4,320 5,100 18.1% 17.6 16.0 9.2 8.3 3.7% 5.4%

NJA - integrated 20.6 18.0 6.2 6.0 7.4% 8.2%

NJA - Mobile 20.0 16.8 5.5 5.2 4.8% 6.4%


Competitive intensity 'stable' at present….

The share prices of all of the 'big 3' cellular operators in Indonesia corrected sharply in the run-up to the release of 3Q17 earnings, as fears grew over competitive intensity as well as cannibalisation of legacy voice and SMS services by Over the Top (OTT) services such as Whatsapp. Sure enough, Indonesian cellular service revenue grew by just 4.3% YoY in 3Q17, in a meaningful slowdown versus the 11.8% growth recorded in 2Q17. The slowdown was exacerbated by seasonal factors (Lebaran, which is the high season, fell in 2Q17, while it had fallen in third quarter last year) but OTT impacts were indeed evident; sector voice revenues declined by 10.4% YoY in 3Q17, versus 7.6% YoY growth in 2Q17. Sector data revenue growth also slowed to 36.0% YoY in 3Q17, versus 42.4% in 2Q17, as price competition intensified in some geographical 'clusters'.

Channel checks on our recent visit revealed that pricing has not worsened so far in 4Q17, but, equally, it has not improved; within certain geographical clusters Telkomsel continues to offer the attractive starter pack pricing launched in August 2017 (Rp25,000 for 1GB of data, 2GB of Videomax, and 2GB of Facebook).

…as XL looks to recapture share from Indosat

We view the root cause of the uptick in competitive intensity to be a capacity mismatch between XL and Indosat. XL had 15,711 4G BTS in place as at September 2017, behind Telkomsel's 21,447 4G BTS, but well ahead of Indosat's 6,110 4G BTS. We understand that Indosat is currently shipping new 4G equipment, which it expects to deploy across December 2017 to March 2018, but until the equipment is installed Indosat clearly looks to be capacity-constrained.

Given this mismatch, it has made sense that XL, with ample 4G capacity in place, should want to regain market share lost to Indosat across FY15-16. As a reminder XL's market share dropped sharply from 19.3% of 'big 3' revenues in 4Q14 to a low of 14.5% in 4Q16. XL grew net cellular revenue by 12.2% YoY into 3Q17 (albeit from a low base), while Indosat's revenue declined by 2.4% YoY. Thus, XL regained 1.1 pp of market share YoY in 3Q17, recovering to 15.8% market share of 'big 3' revenues. This is momentum which XL would very much like to continue into 4Q17.

It is for this reason that the reduction in 4G data bonuses implemented by all of the 'big 3' players in 4Q16-1Q17 have not been followed up with further price increases, and that starter pack competition intensified in certain areas during 2Q17-3Q17.

…but we expect improving competitive dynamics in 1H18

On the other hand, we do continue to expect XL's strategy to shift back towards data bonus reductions/price increases in 1H18. This will benefit all three players – we expect both Telkomsel and Indosat to swiftly follow XL upwards on pricing – but it should be particularly positive for XL, given that it has the highest fixed cost base, lowest scale, and lowest ROIC of the 'big 3' operators.

To offer some simple numbers around this, given that circa 60.0% of XL's revenue is now generated from data, a 10.0% increase in data pricing would, other things being equal, increase total revenue by 6.0%, and this would drop through to a 120% increase in FY18 net profit. We believe that XL management understands this arithmetic very well, and that, after taking advantage of Indosat's delayed 4G rollout, the logic of higher data prices will prevail in 1H18 – particularly after Indosat's capacity constraints ease with its long awaited 4G catch-up.

PT Telkom offers growth, yield and liquidity

In expectation of improving competitive dynamics in FY18, we have upgraded XL back to OUTPERFORM following its recent share price correction, and so we rate all of the 'big 3' cellular operators OUTPERFORM (see link). Indosat offers the most potential upside to our DCF-based target price at present, and looks very cheap on comparative multiples – the market has already severely punished the 4G rollout delays and market share regression - but its average daily trading volume is very low at US$0.3 mn/day.

PT Telkom's trading volume is materially better, at US$37 mn/day, and the stock now trades at a discount to regional telecom peers on P/E and dividend yield, despite our expectation of better-than-sector growth. We forecast that Telkomsel's top-line growth can recover to 8.0% in FY18 from 4.4% in 3Q17. In addition, thanks to 32.3% expected growth in fixed broadband revenues in FY18, combined with lower costs due to the departure of 1,500 employees who have recently reached mandatory retirement age, double-digit consolidated earnings growth for PT Telkom, and a 4.4% dividend yield, look achievable for FY18.


Asian Daily

- 18 of 33 -

Japan

Sysmex ----------------------------------------------------------------------- Upgrade to OUTPERFORM Update estimates: FY3/18 recovery priced in; still scope for upside based on FY3/19 earnings EPS: ▲ TP: ▲ Fumiyoshi Sakai / Research Analyst / 81 3 4550 9737 / [email protected]

● We update our forecasts for Sysmex, raise our target price from ¥6,900 to ¥10,000 and upgrade the stock from Neutral to OUTPERFORM. The shares look to price in a FY3/18 recovery, but we still see scope for upside based on our FY3/19 forecasts.

● The share price has risen, now pricing in decreased risk to FY3/18 earnings from China, but we still see scope for upside based on our FY3/19 forecasts. We expect FY3/19 earnings to grow based on factors including the waning negative impact of excess inventory in China and sales expansion of new products in hematology and urine analyser products.

● The focus in 2018 should be on US and China urinalysis sales. Sysmex is a hardcore hematology business, but the company needs a second, independent core business in our view. One risk is pressure on fees in major markets like the US.

● We update our base valuation year from FY3/18 to FY3/19. We derive our ¥10,000 target price by applying a P/E of 44x to our FY3/19E EPS of ¥228.3. Full report


Action

We update our forecasts for Sysmex, raise our target price from ¥6,900 to ¥10,000 (potential return 19%) and upgrade the stock from Neutral to OUTPERFORM. The shares look to price in a FY3/18 recovery, but we still see scope for upside based on our FY3/19 forecasts.

Investment overview

The share price has risen, now pricing in decreased risk to FY3/18 earnings from China, but we still see scope for upside based on our FY3/19 forecasts. We expect FY3/19 earnings to grow based on factors including the waning negative impact of excess inventory in China and sales expansion of new products in hematology and urine analyser products. The US clinical lab testing market is under strong pricing pressure, but Sysmex has an unparalleled reputation in hematology for reliability, automation and maintenance of benefit to users.

Catalysts/risks

The focus in 2018 should be on US and China urinalysis sales. Sysmex is a hardcore hematology business, but the company needs a second, independent core business in our view. Clinical testing does not gain traction without insurance coverage, so market size is defined by national reimbursement systems and broader application. One risk is pressure on fees in major markets like the US. China inventory levels still warrant vigilance.

Valuation

We update our base valuation year from FY3/18 to FY3/19. We derive our ¥10,000 target price by applying a P/E of 44x (based on an average 12-month forward P/E of 37x for the period when profits and share price were rising and adding the 20% premium that we awarded historically for the same period) to our FY3/19E EPS of ¥228.3. We

previously used our FY3/18E EPS of ¥199.5 and an average 12-month forward P/E of 35x.

The share price has risen, now pricing in decreased risk to FY3/18 earnings from China, but we still see scope for upside based on our FY3/19 forecast. We expect FY3/19 earnings to move from recovery to growth based on the factors as follows: (1) Strong sales of new hematology and new urine analyser products in China, where the negative impact of excess inventory is waning. (2) Growth in hematology reagents and services in the US, where new XN series model launch preparations are going well and a new urine analyser will be introduced in 2018. (3) Less of an impact in the US than first feared from the Centers for Medicare and Medicaid Services (CMS) proposed reductions in lab testing fees under the 2018 Clinical Lab Fee Schedule under the Protecting Access to Medicare Act (PAMA).

Figure 1: 12-month forward P/E trend

Figure 1: 12-month forward P/E trend

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Forward 12M P/E

PER (x)

Avg P/E = 37x

Source: the BLOOMBERG PROFESSIONALTM service

(This is an extract from Fumiyoshi Sakai’s report, ‘Update estimates: FY3/18 recovery priced in; still scope for upside based on FY3/19 earnings,’ published on 27 November 2017. For details, please see the CS Plus website.)

Bbg/RIC 6869 JP / 6869.T Rating (prev. rating) O (N) 52-wk range (¥) 8410.0 - 6100.0 Mkt cap (¥/US$ bn) 1,752/ 15.7 ADTO-6M (US$ mn) 34.4 Free float (%) 60 Major shareholders

Price (24 Nov 17 , ¥) 8,410.00 TP (prev. TP ¥) 10,000 (6,900) Est. pot. % chg. to TP 19 Blue sky scenario (¥) n.a. Grey sky scenario (¥) n.a.


Absolute (%) 8.8 29.0 19.8 Relative (%) 7.1 17.5 (2.2)

Year 03/16A 03/17A 03/18E 03/19E 03/20E

Revenue (¥ bn) 253.2 249.9 281.0 311.0 350.0 EBITDA (¥ bn) 71.1 64.1 72.5 77.0 84.0 Net profit (¥ bn) 36.2 40.6 41.5 44.5 46.0 EPS (CS adj. ¥) 174 195.3 204.3 228.3 249.9 - Change from prev. EPS (%) n.a. n.a. 2.40 6.73 13.02 - Consensus EPS (¥) n.a. n.a. 201.0 224.5 252.3 EPS growth (%) 35.7 12.0 4.6 11.8 9.5 P/E (x) 48.2 34.6 41.2 36.8 33.6 Dividend yield (%) 0.6 0.9 0.7 0.7 0.8 EV/EBITDA (x) 23.8 21.1 22.9 20.9 19.2 P/B (x) 9.3 8.4 7.4 6.5 5.8 ROE (%) 20.3 20.4 18.9 18.5 17.7 Net debt(cash)/equity (%) (29.6) Net cash Net cash Net cash Net cash

Note 1: ORD/ADR=0.5. Note 2: Sysmex Corp manufactures & sells laboratory testing instruments & reagents for clinical laboratories worldwide. It provides various diagnostics products, such as hematology, hemostasis, immunochemistry, clinical chemistry, urinalysis etc


Asian Daily

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Terumo ----------------------------------------------------------------------- Upgrade to OUTPERFORM Update estimates: Acquisitions, stronger organisation fruitful EPS: ▲ TP: ▲ Fumiyoshi Sakai / Research Analyst / 81 3 4550 9737 / [email protected]

● We update our forecasts for Terumo, raise our target price from ¥4,800 to ¥6,000 and upgrade the stock from Neutral to OUTPERFORM. The shares recently topped our previous ¥4,800 target price and now appear to price in outperformance in FY3/18 earnings. We raise our target price based on our FY3/19 forecasts for earnings growth. Full report.

● We think earnings have embarked on a virtuous circle of growth due to: (1) progressive integration of three US acquisitions since 2016; (2) a good performance by vascular intervention; (3) improvement in general hospital business margins; (4) stabilization of blood management company margins in the US.

● A Puerto Rican plant that makes the aforementioned Angio-Seal and other hemostatic devices was hit by hurricane damage. Terumo maintains FY3/18 guidance is achievable, but there could be risk of impairment losses and loss of sales to attack by rival products.

● We update our base valuation year from FY3/18 to FY3/19. We derive our ¥6,000 TP by applying the 12-month forward P/E of 29x to our FY3/19E EPS of ¥204.6 (FY3/18E of ¥152.0).


Factors behind rating and forecast upgrades

We increase our forecasts based on the 2Q FY3/18 results. The core cardiovascular product franchises drove earnings in 1H, but ¥2.0bn of the ¥5.4bn improvement in gross profit was due to gains on acquisitions. This mainly reflected the purchase of vascular closure product lines from Abbott Laboratories and St. Jude Medical for around $1.12bn (roughly ¥125bn), with the operations being consolidated from January 2017. We estimate annual sales for the main product lines acquired including Angio-Seal, at over ¥25bn; the business has been a net profit contributor in its first year.

In Terumo’s existing operations, interventional systems and peripheral vascular solutions have both been performing well in the US. We saw good evidence for strong growth potential in the North American business on our visit to the Southern California operations of US subsidiary MicroVention in October.

Investment overview: We think earnings have embarked on a virtuous circle of growth due to: (1) progressive integration of three US acquisitions since 2016 (Sequent Medical, Bolton Medical and hemostatic device business), of which the hemostatic device business acquired from Abbott Laboratories and St Jude Medical is a potentially strong contributor to earnings, including Angio-Seal which has annual sales we estimate at ¥25bn and; (2) a good performance by vascular intervention, a core source of existing cardiac & vascular company earnings; (3) improvement in general hospital business margins as a result of narrower transactions and cost containment, and (4) stabilization of blood management company margins in the US, where pricing negotiations have reached settlement. Terumo’s medical devices are not immune to growing pressure on healthcare costs and product pricing both at home and abroad, but we think the company will be able to compensate with top-line growth.

This is an extract from Fumiyoshi Sakai's report on Terumo published on 27 November 2017.

Figure 1: Earnings summary


Bbg/RIC 4543 JP / 4543.T Rating (prev. rating) O (N) 52-wk range (¥) 5080.0 - 3855.0 Mkt cap (¥/US$ bn) 1,788.1/ 16.1 ADTO-6M (US$ mn) 42.7 Free float (%) 5.5 Major shareholders

Price (24 Nov 17 , ¥) 5,040.00 TP (prev. TP ¥) 6,000 (4,800) Est. pot. % chg. to TP 19 Blue sky scenario (¥) n.a. Grey sky scenario (¥) n.a.


Absolute (%) 7.9 20.1 22.3 Relative (%) 7.5 8.9 0.9

Year 03/16A 03/17A 03/18E 03/19E 03/20E

Revenue (¥ bn) 525.0 514.2 580.0 600.0 620.0 EBITDA (¥ bn) 126.4 122.0 152.5 167.0 178.5 Net profit (¥ bn) 50.7 54.2 60.5 72.0 81.0 EPS (CS adj. ¥) 135 150 172 205 230 - Change from prev. EPS (%) n.a. n.a. 1108 - - - Consensus EPS (¥) n.a. n.a. 163 181 199 EPS growth (%) 33.4 11.1 14.5 19.0 12.5 P/E (x) 37.6 33.8 29.6 24.8 22.1 Dividend yield (%) 0.8 0.8 0.9 0.9 0.9 EV/EBITDA (x) 14.7 16.6 12.9 11.4 10.3 P/B (x) 3.8 3.9 3.6 3.3 2.9 ROE (%) 9.3 10.8 11.8 12.8 13.0 Net debt(cash)/equity (%) 13.7 47.7 34.7 20.4 7.0

Note 1: ORD/ADR=1.00. Note 2: TERUMO CORPORATION is a Japan-based manufacturer that operates in four business segment: General Hospital Products ; Cardiac and Vascular Products ; Blood Transfusion-related Products ; and Healthcare Products.


Asian Daily

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Malaysia

Asia FX Strategy ------------------------------------------------------------------------------------------------- MYR: Further room to run Trang Thuy Le / Fixed Income Research Analyst / 852 2101 7426 / [email protected] Ray Farris / Fixed Income Research Analyst / 65 6212 3412 / [email protected]

● We have lowered our USDMYR forecast to 4.0 in 3 months and 3.80 in 12 months from 4.10 and 4.0, respectively.

● The ringgit has been our core bullish view in Asia FX this year, and we see room for it to appreciate further, driven by: (1) Strong export growth and trade balance recovery; (2) Improving economic growth attracting equity inflows; and (3) Currency valuation that remains very competitive.

● The central bank (BNM) is encouraging this rally and has raised the stake for a near-term hike. We now expect BNM to raise its policy rate by 25 bp in 1Q 2018.

● The passage of US tax package is a near-term risk to our view as it could lead to a knee-jerk rise in the USD. However, we do not think USD strength will be sustained considering the still weak US inflation, dovish Fed, and economic recovery elsewhere, including Malaysia. Domestically, a relaxation in the government's restrictions on domestic fund outflows and the upcoming general elections are the key risks to our forecast.

Figure 1: Valuation remains very attractive versus oil prices

83

88

93

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103

108

Jan-06 Mar-09 May-12 Jul-15 Sep-18

MYR REER CS forecastRegression against oil +/-2 stdev

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, CEIC. Regression of REER on const, Brent

Currency valuation is still compelling

Despite the recent ringgit rally, we estimate that the real effective exchange rate (REER) has risen only 3% from its all-time low in December 2016, and is still 7% cheap to Brent at $63/bbl. Valuation is rarely a reason to buy a currency on its own, but in Malaysia’s case we believe currency cheapness is now clearly boosting exports and Malaysia’s current account surplus.

Exports are likely to remain strong, improving the current account surplus. A consequence of MYR cheapness has been a powerful recovery in Malaysia’s exports, especially electronic exports. Looking forward, we expect this export outperformance to continue. One reason is that in addition to continuing competitiveness, foreign investment in manufacturing is rising. Major commitments by US electronics producers for production and global distribution hubs in Malaysia are likely to boost export supply over the next year.

The recent rise in oil prices should also increase Malaysia’s oil and gas exports, albeit with a four to five month lag. Combined, the above leads our economists to forecast that Malaysia’s current account surplus will widen to $11.5 bn in 2018 from $9.9 bn this year, increasing it to 3% of GDP from 2.4% in 2016.

Positioning in ringgit assets seems modest and should improve. We believe that foreign equity investors are still significantly underweight. Foreign investors net sold US$69 mn in Malaysian equity month-to date and have sold US$123 mn quarter to date versus inflows in other markets such as Korea, India, and Taiwan. However, we expect improving economic growth to support a recovery of foreign flows over the next year. Recent inflows into local bonds picked up in November, but we estimate that this raised foreign fixed income investors' position in Malaysia to benchmark-weight from underweight.

In FX, restrictions in offshore trading mean participation from FX investors remain low. Overall, we judge that investors are small net long MYR, but positioning is by no means stretched.

Ringgit rally encouraged by the central bank (BNM). BNM has both raised market expectation of a near-term rate hike, and seems to prefer a stronger currency. Although FX reserves data suggest the BNM has been buying USD and reducing its short USD forward positions, we assess the pace to be very gradual and still allowing for further ringgit gains. If anything, we think the incentive from the government and the BNM is to run ringgit on the strong side into next year's elections, as the currency is seen as a confidence barometer in Malaysia.

What are the risks to our bullish view

The passage of US tax reforms could lead to a knee-jerk rise in the USD, pushing up USDMYR. We doubt this would sustain, both because USD fundamentals remain weak even in a tax cut scenario and given Malaysia’s improving fundamentals. Our G10 team continues to forecast USD-G10 to fall over the next year with EURUSD rising to 1.20 and 1.25 in three and twelve months.

Domestically, a revival in domestic outflows is a risk, as the government may ease its restrictions on domestic funds' outward investment following ringgit stability. However, we think this will be a slow and gradual process and the government will try not to upset the still recovering ringgit sentiment.

Finally, the General elections, due by August 2018, but likely in 1Q, is also a risk. However, historical evidence argues against elections being a negative driver for ringgit. MYR has tended to outperform roughly one month into past elections.


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Malaysia Market Strategy ------------------------------------------------------------------------------------- Winners and losers of a stronger RM Danny Goh / Research Analyst / 60 3 2723 2083 / [email protected]

● CS' FX strategy team has raised USDMYR forecast to 4.0 in three months and 3.80 in 12 months (from 4.10 and 4.0 previously). RM has appreciated 8% vs the USD YTD and is currently at the strongest level so far this year.

● In our view, companies most materially affected would be (1) those with mismatch in USD-denominated revenue and cost, (2) companies with majority of profits derived from offshore operations, (3) companies with sizeable foreign currency denominated debt.

● Key beneficiaries of a stronger RM in our view are TNB, Air Asia and Astro. Meanwhile, our screen seems to suggest that there is a longer list of potential losers which include: telecommunication companies (Axiata, TM, TimeDotCom), rubber, petrochemical companies, Inari, IHH and plantation companies.

● The adverse impact of a stronger RM on corporate earnings could be among the key factors suppressing street's corporate earnings estimates (Malaysia is the only market in Asia with no 2017E EPS growth) despite the improving economic growth outlook.

Figure 1: USD/MYR exchange rate

3.90

4.00

4.10

4.20

4.30

4.40

4.50

4.60

6/1/2016 8/1/2016 10/1/2016 12/1/2016 2/1/2017 4/1/2017 6/1/2017 8/1/2017 10/1/2017

Source: Bloomberg.

We take a look at the possible winners and losers of a stronger RM vs USD. Winners ● TNB - Tenaga’s USD-denominated debt as at 31 August 2017

amounted to RM6 bn (16% of total borrowings). Our rough estimates show that a 10% strengthening in MYR against USD should have an approximate 12% impact on earnings, all else constant. Nevertheless, we understand that TNB has hedged at least 50% of its foreign currency exposure up to 12 months, hence possibly reducing the quantum of the earnings impact.

● Air Asia - AirAsia has a significant portion of borrowings which is USD-denominated (RM8.4 bn or 86%) as at 30 June 2017. Bulk of its operating cost (fuel and maintenance) is also dominated in USD; although AirAsia has hedged 50% of its USD opex up to December 2017, the unhedged portion coupled with the expiry of these hedges beyond 2017 would have a positive impact on earnings. Assuming foreign-denominated cost is not hedged, a 5% appreciation in RM would lead to a 5% boost in net profit.

● Astro - The stronger RM is positive for Astro as its content cost is denominated in USD. We estimate that Astro’s bottom line in FY19E and FY20E will improve by 3.1% and 6.5%, respectively should the ringgit improve to RM3.80 (less impact in FY19E as Astro has hedged 80% of its annual USD exposure today).

Losers ● MY telcos - mobile: The stronger RM is unlikely to impact MY

telco’s IDD business anymore, given that they are now pricing their services using the ‘cost plus’ method to avoid the pitfalls in 2016 (it became a loss-making business). That said, the scenario will likely be negative for Axiata, given that ~70% of its FY18E EBITDA is denominated in foreign currency. We estimate that if RM trades at RM3.80 vs USD, it would have an approximate 5%/15% impact on Axiata’s FY18E EBITDA/net profit, all else equal; earnings exposure to foreign business will be partially offset by some modest interest savings due to Axiata's sizeable USD debt. However, management could take pre-emptive steps (such as re-negotiate interconnect fees, reduce traffic in impacted areas) to mitigate the impact.

● MY telcos – fixed line: Within the fixed line space, both TM and Time Dotcom’s submarine cable business will be impacted if RM strengthens, given that the contracts are generally priced in USD. However, the impact is modest, based on our estimates given that if RM trades at RM3.80 vs USD, only 7-10% of TM and Time’s revenue will be impacted (~3% of EBITDA).

● Rubber companies such as Top Glove and Karex whose revenue is USD-denominated would be negatively impacted by a stronger MYR. We estimate a 10% strengthening in MYR will have a 25% earnings impact on Karex, ceteris paribus. Meanwhile, the same sensitivity on Top Glove will impact earnings by approximately 7%. Nevertheless, we highlight that the exporters typically adjust selling prices to reflect any adverse forex movements, albeit with a slight 1-2 months’ time lag.

● Petrochemical companies tend to lose out in a strong RM environment as revenue is denominated in USD (product prices linked to international prices). Though majority of its costs are in USD (feedstock, energy costs, etc), some portions of its costs are in RM. We estimate 8% and 12% negative earnings impact for every 5% appreciation in RM for PCHEM and LCT, respectively.

● Plantation – Plantation companies tend to be adversely affected as stronger RM would lead to lower revenues (palm oil traded in USD) while the bulk of cost is denominated in RM.

● Inari: A stronger RM is negative for Inari as it bills its client in USD. We estimate that there could be 8-10% downside to our net profit estimates in FY19-20E assuming USD-RM at RM3.80.

● IHH - IHH Healthcare’s growth would be negatively impacted in the scenario of stronger RM as it generates >80% of total core revenues outside of Malaysia. If the currency appreciated to RM3.80 relative to USD in FY18, revenue and EBITDA could be affected by ~4%-5%, everything else equal.


Asian Daily

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Malaysia Banks Sector ------------------------------------------------------ Maintain OVERWEIGHT Higher possibility of rate hike: Who are the key beneficiaries? Danny Goh / Research Analyst / 60 3 2723 2083 / [email protected]

● Credit Suisse’s economics team is now forecasting a possible 25 bp rate hike to 3.25% (vs no change previously) that could take place as soon as 1Q 2018. Bank Negara's next two monetary policy meetings are scheduled for 25 Jan 2018 and 7 Mar 2018, respectively.

● The impact of rate cuts on the banks depends on: (1) net interbank position, (2) response of banks on deposit rates and percentage of low-cost deposits and (3) mix of variable rate loans.

● Based on our analysis, banks' NIM tends to expand when there is a policy rate hike as assets re-price faster than liabilities. Banks with the following qualities tend to benefit more: (1) net interbank lenders, (2) high exposure to variable rate loans and (3) higher CASA.

● Our analysis shows that among our coverage, Alliance, RHB, CIMB and Maybank could be among the biggest beneficiaries of any uptrend in interest rates. Our top picks within the sector are CIMB and RHB (both trade at the most attractive valuations).

Figure 1: MY banks’ LDR comparison

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95

HL Bank CIMB MY* Alliance MAY MY* Public Bank RHB

%

Source: Company data. *Domestic LDR

Credit Suisse’s economics team is now forecasting a possible 25 bp rate hike to 3.25% (vs no change previously), which could take place as soon as 1Q 2018. Bank Negara's next two monetary policy meetings are scheduled for 25 Jan 2018 and 7 Mar 2018, respectively.

The impact of any rate hike on the banks depends on the following factors. ● Net interbank position of the banks. Should there be a rate

hike, banks with lower loan-to-deposit ratios should be in a position to benefit more. HLB (LDR = 82%), CIMB (LDR = 86%) and Alliance (LDR = 88%) have the lowest domestic loan-to-deposit ratios (LDR).

● Response of banks on deposit rates. Banks with higher portions of low-cost deposits (e.g., Maybank, Alliance and CIMB) will likely face less upward pressure on funding costs as policy rates rise. While the intensity of deposit competition has eased somewhat since last year, we still expect banks to make adjustments to time deposit rates to capture a significant percentage of the rate hike.

Figure 2: CASA ratios

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34 35

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HL Bank Public RHB CIMB MY* Alliance MAY MY*

%

Source: Company data, * Domestic CASA ratio

● Lending and deposit rate adjustments. We expect the banks to raise the prime lending rates in response to any policy rate hike, so as to re-price the current variable-rate loans. Banks with higher portions of variable-rate loans should comparatively benefit more from adjustments in rates. Alliance has the highest portion of variable-rate loans (90% of total), followed by CIMB (88%) and RHB (83% of total).

Figure 3: Percentage of RM-denominated variable rate loans

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MAY MY* HL Bank Public Bank RHB CIMB MY* Alliance

%

Source: Company data, * Domestic variable rate loans as % of domestic loans

● Interest-rate sensitivity. In our sensitivity analysis, key assumptions in our interest-rate sensitivity analysis for the impact of a 25 bp rate hike are: (1) no lag assumed, (2) no adjustment to CASA rates, (3) time deposit rates +20 bp, (4) variable rate loans +25 bp and (5) impact on investment and dealing securities not factored in. Our analysis shows that among the banks under our coverage, Alliance, RHB, CIMB and Maybank could experience comparatively more earnings improvement.

Figure 4: Estimated % impact on net profit arising from 25 bp rate hike

Source: Company data, Credit Suisse estimates


Asian Daily

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RHB Bank Berhad ------------------------------------------------------------ Maintain OUTPERFORM 3Q17 results in line with street, key investor concerns mostly addressed EPS: ◄► TP: ◄► Danny Goh / Research Analyst / 60 3 2723 2083 / [email protected]

● RHB’s 9M17 net profit of RM1.49 bn (73% of street's, 69% of CS' FY estimate) was higher by 5 % YoY as LLP dipped 20% YoY while PPOP (-1.6% YoY) was a toucher weaker. Revenue was flat YoY on lower NOII (-10.9% YoY) while net interest income grew +4.9% YoY.

● On a QoQ basis, 3Q17 NP -2.4% QoQ as LLP increased by 4.0% while PPOP was flat (-0.5%). 9M17 annualised ROE of 8.9% (vs CS' 9.6%, street's 9.0%) is just below management's target of 9-10%.

● Positives: (1) better-than-expected NIM, (2) robust CASA growth, (3) managing cost well, (4) healthy capital position, (5) improving loan growth, (6) stable asset quality. Negatives: (1) weak NOII.

● We reiterate our OUTPERFORM rating. It continues to trade at a steep 32% P/E discount to peers (2018E P/E of 8.0x vs local peer average of 11.8x, 0.8x P/B) despite improvements in NIM, CASA market share, CIR, asset quality and capital position. Further operational improvements to convince investors that the group can deliver double-digit ROE could re-rate the stock.


Annualised loan growth +3.1% in 9M17, below management's 5% target. Domestic loans grew 4.5% annualised (slightly ahead of the system loan growth of 3.5%) but overseas loans contracted 8.5%. Management has succeeded in growing loans in the higher-yielding segments (retail +6.6%, SME +4.3%, and corporate -1.7%). The fastest-growing loan segments are residential housing (+12.3%), non-residential (+13.0%), and personal use (+9.0%). Management expects loan growth to pick up in 4Q17. Retail and SME loans collectively

account for 63% of loans (vs 55% in 2014). Management aims to focus on SME and mortgage loans to drive loan growth.

Deposits grew marginally (+2.3%) in 9M17 (vs system’s +4.4%). On a positive note, CASA growth of 9.9% in 9M17 was ahead of system's -1.2% and management's guidance of +8%. CASA ratio improved to 27.1% in 3Q17 (from 25.6% in 4Q16). The group's CASA market share increased to 10.2% as of end-Sept 2017 compared to 9.4% as of end-2016. Non-CASA deposits shrank -0.3% in 9M17 due to deliberate efforts by management to scale back on expensive deposits. LDR rose marginally to 93.8% (93.3% as of end-2016).

NIM -4 bp QoQ to 2.13% in 3Q17 (2.17% in 2Q17, 2.03% in 1Q17, 2.10% in 4Q16, 2.06% average in 2016), due mainly to lower average interest yields (-8 bp). 9M17 NIM average of 2.10% is 4 bp above 2016 average and ahead of management's guidance of possible high single-digit bp compression.

Non-interest income (NOII) fell 11% YoY. 9M17 NOII ratio of 26.7% is below 2016’s average of 28.5%. Improvement in wealth management fee income (+27% YoY) and brokerage income (+12% YoY) was offset by lower net forex gain (-34%) and investment banking fee income (-33%). NOII should improve in 4Q17 and 2018 as management indicated that the IB deal pipeline looks stronger.

Costs increased by merely 2% YoY in 9M17 as management continued to focus on cost efficiency. CIR improved to 49.6% (50.0% in 2016) and is ahead of management's target of <50%. The key driver was increased personnel cost of +3.7% and general expenses (+5.1%), which offset the lower establishment cost (-3.9%).

GIL stable QoQ at 2.31% at the end of 3Q17 (2.29% in 2Q17, 2.39% in 1Q17, 2.43% in 4Q16). Total provision is lower by 20% YoY at RM424 mn in 9M17 (last year's provision included Swiber bond impairment). Excluding bond impairment, loan loss charge was 27 bp (vs 40 bp last year). Overall credit cost averaged 36 bp (vs management's guidance of 35 bp). During 9M17, management topped up the regulatory reserve by RM477 mn (transfer from shareholders' funds) to RM1.15 bn as at September 2017 as a pre-emptive step ahead of FRS 9. The impaired loan coverage (with regulatory reserve) increased to 93.6% at end-3Q17 vs 74.7% in end-2016. Management intends to raise impaired loan coverage to 100% by end-2017. O&G exposure is currently at RM5.4 bn (upstream = RM3.5 bn, downstream =RM1.9 bn, or 3.4% of loans) vs RM5.7 bn at end last quarter. GIL for O&G has improved slightly to 19% (from 20% last quarter).

Fully-loaded CET 1 ratio stood at 13.6% as of Sep 2017, the highest among Malaysian banks. Should management decide to raise impaired loan coverage to 100% (assuming the regulatory reserve can be used) upon FRS9 adoption, we estimate a 0.2 pp dilution in CET 1 ratio.

Figure 1: Summary of results Year-end Dec 31 (RM mn) 9M2017 9M2016 YoY% % CS FY17E % Street FY17 3Q2017 2Q2017 QoQ% 3Q2016 YoY%

Net interest income 3,459.0 3,298.2 4.9 74.7 n.a. 1,169.5 1,182.2 (1.1) 1,082.8 8.0 Non-interest income 1,260.1 1,413.5 (10.9) 66.2 n.a. 414.9 397.1 4.5 496.3 (16.4) Revenue 4,719.1 4,711.7 0.2 72.2 73.2 1,584.4 1,579.2 0.3 1,579.1 0.3 Op expense (2,339.1) (2,292.9) 2.0 74.0 n.a. (793.6) (784.3) 1.2 (776.5) 2.2 PPOP 2,380.0 2,418.8 (1.6) 70.5 111.4 790.8 794.9 (0.5) 802.6 (1.5) Loan-loss provisions (424.0) (531.8) (20.3) 85.2 n.a. (146.8) (141.1) 4.0 (140.1) 4.8 PBT 1,956.3 1,887.4 3.6 67.9 72.7 644.1 653.9 (1.5) 662.6 (2.8) Net profit 1,490.1 1,420.4 4.9 69.0 73.3 488.8 501.0 (2.4) 505.3 (3.3)

Source: Company data, Credit Suisse estimates, IBES estimate.

Bbg/RIC RHBBANK MK / RHBC.KL Rating (prev. rating) O (O) 52-wk range (RM) 5.54 - 4.64 Mkt cap (RM/US$ mn) 19,649.2/ 4,777.3 ADTO-6M (US$ mn) 1.6 Free float (%) 27.0 Major shareholders EPF (48%); ADCB

Holdings (25%)



Absolute (%) (3.2) (3.0) 4.3 Relative (%) (1.7) (0.6) (1.4)

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Pre-prov Op profit (RM mn) 2,545.0 3,094.5 3,376.9 3,886.0 4,380.9 Net profit (RM mn) 1,665 1,682 2,159 2,537 2,874 EPS (CS adj. RM) 0.48 0.42 0.54 0.63 0.72 - Change from prev. EPS (%) n.a. n.a. 0 0 0 - Consensus EPS (RM) n.a. n.a. 0.50 0.54 0.60 EPS growth (%) (5.3) (12.8) 28.4 17.5 13.3 P/E (x) 10.2 11.7 9.1 7.7 6.8 Dividend yield (%) 3.6 4.0 3.3 4.5 5.1 BVPS (CS adj. RM) 5.11 5.42 5.80 6.21 6.68 P/B (x) 0.96 0.90 0.84 0.79 0.73 ROE (%) 9.9 8.5 9.6 10.5 11.1 ROA (%) 0.7 0.7 0.9 1.0 1.0 Tier 1 ratio (%) 13.7 16.8 16.9 16.5 16.1

Note 1: RHB Bank Berhad is a Malaysian-based investment holding company. Its subsidiaries provide commercial and merchant banking, and related financial services.


Asian Daily

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IHH Healthcare Berhad ----------------------------------------------------- Maintain OUTPERFORM Decent 9M17 growth, new hospitals ramp up continues EPS: ◄► TP: ◄► Ari Jahja / Research Analyst / 62 21 2553 7976 / [email protected] Endo Takashi / Research Analyst / 62 21 2553 7911 / [email protected]

● IHH posted 9M17 revenue (+12% YoY), EBITDA (-3%), and PATMI (+33%) that reached 73%/71%/113% of our FY17 estimates, respectively. While core results were broadly in line, it reflects an improvement vs the +10%/-6%/+63% growth in 1H17. New hospitals ramp up appears to be progressing quite well.

● Continued ramp up of Gleneagles Hong Kong. Management stated that volume has risen by >40% MoM and revenue intensity is just slightly below PPL-Singapore (RM29.9K) due to complex cases. Insurance coverage uptick could be a positive catalyst.

● Robust base business supporting our thesis. Revenue and EBITDA for IHH's existing hospitals rose by 10% and 7% YoY, respectively, on the back of healthy inpatient admissions and revenue intensity growth across most home markets.

● Acibadem's (Turkey) improvement was supported by Altunizade ramp up. Its constant currency top-line and EBITDA growth came in at 29% and 18%, respectively. Moreover, net D/E declined to 0.05x (from 0.14x) post the RM2.1 bn perpetual securities issuance. This underscores M&A optionality to augment growth.


Robust base business growth continues Pertaining to core business, Malaysia and Singapore (combined 51% of core sales) delivered top-line growth of 13% and 8%, respectively, largely driven by revenue intensity. Interestingly, revenue growth from Indonesian patients in Singapore jumped by ~25% YoY, contributing to the ~12% revenue intensity growth in 3Q17. Overall, 3Q17 revenue growth was offset by depreciation of the Turkish Lira, but boosted by SGD appreciation.

New hospitals ramp up should drive long-term EBITDA growth Modest YoY decline on EBITDA still came from new hospitals' start-up costs, although relatively in-line with expectations. As a frame of reference, the new North Asia segment's (Hong Kong and Mainland China) 3Q17 EBITDA loss was flattish QoQ at -RM72 mn, while revenue grew by 69% to RM24.3 mn. Additional key launches in Chengdu (350-bed) and Shanghai (450-bed) are anticipated to play out in 2H18 and late 2019, respectively.

Figure 1: In-line 9M17 vs our forecasts; slight EBITDA miss vs cons. Slower net profit growth affected by higher operating and finance costs

MIKA.JK 9M16 9M17 YoY% 3Q17 YoY% QoQ% % CS

2017E

% Cons

2017E

Core revenue RM mn 7,390 8,258 11.7% 2,801 14.7% 1.0% 72.8% 72.6%

Singapore RM mn 2,662 2,883 8.3% 964 9.4% 0.7% 70.8%

Malaysia RM mn 1,207 1,364 13.0% 467 11.8% 2.5% 75.4%

India RM mn 410 532 29.8% 197 32.0% 13.4% 72.7%

North Asia RM mn 191 234 22.6% 81 44.6% -6.1% 66.0%

Acibadem RM mn 2,513 2,819 12.2% 951 17.5% -0.3% 73.9%

Other operating income RM mn 226 722 219.0% 59 39.1% -79.8% 100.5%

Op Profit RM mn 1,165 1,447 24.2% 268 -24.1% -47.9% 92.2% 95.2%

Op Margin % 15.8% 17.5% 9.6%

Pre tax RM mn 952 1,062 11.5% 128 -42.4% -68.5% 93.5% 80.6%

Pre tax margin % 12.9% 12.9% 4.6%

Net profit RM mn 655 869 32.7% 82 -52.6% -74.1% 113.3% 108.7%

Net profit margin % 8.9% 10.5% 2.9%

Net profit (ex. EI) RM mn 644 413 -35.8% 125 -42.4% 45.4% 105.1%

Net profit margin % 8.7% 5.0% 4.5%

EBITDA RM mn 1,718 1,664 -3.1% 562 2.9% 5.0% 70.8% 67.5%

EBITDA margin % 23.2% 20.1% 20.1% Source: Company data, Credit Suisse estimates, Bloomberg

Figure 2: EBITDA margins for Singapore, Malaysia improved QoQ; overall +0.7% as key markets more than offset new hospitals ramp up

-120.0%

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60.0%

1Q17 2Q17 3Q17

Singapore Malaysia India North Asia PPL Others Acibadem Holdings Overall

EB

ITD

A m

arg

in (%

)

Source: Company data. PPL Others comprised of mainly Parkway Pantai’s hospital in Brunei, corporate office as well as other investment holding entities within Parkway Pantai

Figure 3: The stock trades at ~20x forward EV/EBITDA, below -1stdev of historical average; potential inflection point on FY18 growth recovery

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EV/EBITDA Average STDEV-1

STDEV+1 STDEV-2 STDEV+2

STDEV+1 = 25.8x

STDEV-1 = 20.5x

Average = 23.2x

Current = 19.6x

STDEV+2 = 28.5x

STDEV-2 = 17.9x

2018 target EV/EBITDA

2018E

Source: RAVE, Credit Suisse estimates.

Bbg/RIC IHH MK / IHHH.KL Rating (prev. rating) O (O) 52-wk range (RM) 6.60 - 5.56 Mkt cap (RM/US$ bn) 46.5/ 11.3 ADTO-6M (US$ mn) 5.8 Free float (%) 19.4 Major shareholders Khazanah Nasional

Berhad (41.08%)



Absolute (%) 0.4 (6.2) (11.7) Relative (%) 2.0 (3.7) (17.3)

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (RM mn) 8,456 10,022 11,338 12,823 15,377 EBITDA (RM mn) 2,142 2,283 2,348 2,745 3,434 Net profit (RM mn) 934 612 766 1,003 1,314 EPS (CS adj. RM) 0.11 0.07 0.09 0.12 0.16 - Change from prev. EPS (%) n.a. n.a. 0 0 0 - Consensus EPS (RM) n.a. n.a. 0.10 0.13 0.16 EPS growth (%) 23.8 (34.7) 25.1 30.8 31.0 P/E (x) 49.5 75.8 60.6 46.3 35.3 Dividend yield (%) 0.5 0.5 0.5 0.5 0.5 EV/EBITDA (x) 23.9 22.6 21.5 18.6 14.6 P/B (x) 2.1 2.1 1.9 1.9 1.8 ROE (%) 4.5 2.8 3.3 4.1 5.2 Net debt(cash)/equity (%) 19.5 21.1 15.5 16.7 13.3

Note 1: IHH Healthcare Berhad is a private healthcare group focused on upmarket health services, and Asia's largest private healthcare group. IHH operates through 5 segments: Parkway Pantai, Acibadem Holdings, IMU Health, PLife REIT, and others segment.


Asian Daily

- 25 of 33 -

Pakistan

Fauji Fertilizer Company Limited ----------------------------------- Maintain UNDERPERFORM Expensive valuations fail to capture declining earnings outlook EPS: ▲ TP: ▲ Fahd Niaz, CFA / Research Analyst / 65 6212 3035 / [email protected] Farhan Rizvi, CFA / Research Analyst / 65 6212 3036 / [email protected]

● FFC’s ability to export urea (at a time when international prices had rallied) drove 3M outperformance. With the deadline for the sector to export surplus now over, this key catalyst has fizzled out.

● While the industry has seen some degree of pricing power return (domestic urea prices up 7-8% in recent weeks), we still prefer low cost producers; a criteria which FFC does not fulfil. Blended feed gas price stands at ~US$4.0/mmbtu (120% above EFERT) and primary profits are subsequently lower by ~40% (to US$68/ton).

● FFC trades at forward P/E of 12.1x (one standard deviation above historical average). Moreover, the stock price reflects an EBITDA multiple of 10x, broadly in-line with global fertilizer manufacturers, but offering sub-par EBITDA margins (17%) relative to peers.

● We have increased our forecasts by 1-8% after adjusting for latest price hikes in urea and also raised our TP to PRs70 (up 6%). Despite this, we are 11% below the street, and downgrades have continued for the third month running (28% cut in total). With two more years of profit erosion ahead, a share price rally looks unlikely.


Short-term excitement on urea exports behind us

We had earlier discussed the positive impact on FFC due to the sharp rally in international urea prices as export opportunities had opened up for the company. Resultantly, export revenue of PRs1.8 bn in 3Q17 (+3.8x QoQ, 6% of net sales) was impressive. However, with the deadline of exporting urea over, this share price driver has fizzled out.

Expensive producer despite better industry dynamics

Although pricing power is improving in the sector (domestic urea prices up 7-8% in recent weeks), FFC’s cost structure is still meaty. Blended feed gas price stands at ~US$4.0/mmbtu (120% above EFERT), which keeps primary profit ~40% lower (at US$68/ton).

Valuations have again reached demanding levels

Post 3M outperformance (20%), FFC trades at forward P/E of 12.1x (one standard deviation above mean). Moreover, the stock price suggests EV/EBITDA of 10.0x, broadly in-line with global fertilizer manufacturers, but offering sub-par EBITDA margins (17%).

Figure 1: At 12.1x P/E, FFC trades at its upper standard deviation band

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P/E (x)

+1 ST Dev

Average

-1 ST Dev

Source: Reuters, Company data, Credit Suisse estimates.

Lifting estimates but still below consensus

We have increased our earnings forecasts by 1-8% after adjusting for latest price hikes in urea and DAP and revised up our SOTP-based TP to PRs70 (up 6%). Despite the upward revision, we note that our estimates are still 11% below consensus for 2018E. The latter has revised down its numbers for the third consecutive month with cumulative declines of 28%. FFC’s PAT is expected to maintain its downtrend till 2019E (effectively marking eight years of declining profits) and we fail to defend current valuations. Maintain UNDERPERFORM.

Figure 2: Consensus has cut estimates by 28% in 3M… more to come

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FFC - 2018E consensus EPS (PRs)

CS estimate is 11% below consensus

Source: IBES, Credit Suisse estimates.

Modest downside risk to dividend

While FFC’s participation in the 330 MW Thar Energy IPP is an attractive proposition, we note the possibility of minor cuts in dividends as FFC is estimated to invest ~US$38 mn in the next two years.

Bbg/RIC FFC PA / FAUF.KA Rating (prev. rating) U (U) 52-wk range (PRs) 119.0 - 70.1 Mkt cap (PRs/US$ bn) 105.0/ 1.0 ADTO-6M (US$ mn) 1.0 Free float (%) 50.0 Major shareholders Fauji Foundation

(44.4%)

Price (24 Nov 17 , PRs) 82.53 TP (prev. TP PRs) 70.00 (66.00) Est. pot. % chg. to TP (15) Blue sky scenario (PRs) 82.00 Grey sky scenario (PRs) 58.00


Absolute (%) (1.7) 17.5 (21.9) Relative (%) 0.3 19.9 (15.5)

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (PRs mn) 84,831 72,877 78,665 82,888 83,694 EBITDA (PRs mn) 24,038 13,022 9,987 13,672 15,870 Net profit (PRs mn) 16,766 11,782 8,937 8,653 8,482 EPS (CS adj. PRs) 13.2 9.3 7.0 6.8 6.7 - Change from prev. EPS (%) n.a. n.a. 6.7 8.3 0.8 - Consensus EPS (PRs) n.a. n.a. 7.17 7.64 8.30 EPS growth (%) (7.7) (29.7) (24.1) (3.2) (2.0) P/E (x) 6.3 8.9 11.7 12.1 12.4 Dividend yield (%) 14.4 9.6 7.3 6.5 6.4 EV/EBITDA (x) 5.9 11.3 14.5 10.0 8.3 P/B (x) 3.8 3.7 3.6 3.4 3.2 ROE (%) 63.3 42.4 31.0 28.5 26.4 Net debt(cash)/equity (%) 130.7 151.5 133.6 99.4 78.6

Note 1: Fauji Fertilizer is a leading manufacturer of urea with a capacity of 2mn tons per annum. The company has associate stakes in Fauji Fertilizer Bin Qasim, Askari Bank and Fauji Cement. The company also has a 100% stake in FFC Energy (50 MW wind IPP).


Asian Daily

- 26 of 33 -

South Korea

Samsung Heavy Industries ----------------------------------------------- Maintain OUTPERFORM Noise at end of ESOP lock-in provides buying opportunity EPS: ◄► TP: ◄► Hoonsik Min / Research Analyst / 82 2 3707 3761 / [email protected]

● ESOP (Employee stock ownership plan) lock-up for new shares issued in November 2016 ended 27 November. Given its sizable volume (8% of total share issued, or 31.8 mn shares) market considered it overhung resulting in share prices tumbling 5.3%.

● However in our view, it was mostly driven by flows and not by fundamentals; considering many employees are keen for cash due to recent salary cuts and compulsory vacations. The correction might be overdone by non-fundamental reasons.

● Oil prices are rising on WTI and Brent. We don't speculate on oil prices, but OPEC’s output decision on 30 November could trigger sentiment for the stock in the near term. LNG shipping activity clearly supports our view for long-term improvement of the sector outlook. We fine-tuned our EPS for 2017/18 due to reported 3Q numbers.

● Given robust sector fundamentals, we believe this is a good buying opportunity to play the oil recovery cycle and LNG shipping story from US/Qatar/Australia to Asia. We reiterate OUTPERFORM with TP of 17k (1.0x 2018E P/B, the average multiple for recovery cycle).


Noise creates buying opportunity

In November 2016, Samsung Heavy Industries (SHI) raised capital with consideration. The number of shares issued was 159 mn, and 31.8 mn shares (20%) were distributed via ESOP (or 8% out of total 390 mn shares issued). ESOP lock-up for new shares issued in November 2016 ended yesterday— 27 November. Given its sizable volume (8% of total shares issued, or 31.8 mn shares), market considered it overhung resulting in share prices falling 5.3%. Also, share prices had rallied since their bottom levels witnessed in September, triggering profit-taking sentiment.

However, we believe it is mostly driven by flows and not fundamentals. Considering many employees are keen for cash due to recent salary cuts and compulsory vacations due to the restructuring plan, the correction might be overdone by non-fundamental reasons. Note that,

out of the 5,000 strong production labour force, 3,000 odd participated in the vacation plan, receiving only 80% of normal salary.

Oil: sector outlook keeps improving

Meanwhile, the sector outlook keeps improving, especially with rising oil prices in both WTI and Brent. We do not speculate about oil prices here, but OPEC’s expected output decision on 30 November could trigger sentiment for the stock in the near term. Given the strong correlation between oil prices and the share price (94% for 2011-current), we believe SHI is one of the best proxy- play for the oil cycle. (Note the 72% correlation between oil prices and Hyundai Heavy Industries.)

Figure 1: SHI share price and Brent price

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10,000

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2011 2012 2013 2014 2015 2016 2017

SHI share price

Brent price (rhs)

(W) (U$/bbl)

2011-2017YTDCorrelation = 94%

Source: the BLOOMBERG PROFESSIONAL™ service

LNG shipping activity supports long-term story

The LNG carrier market in 2017YTD was weak as only 8 new orders for vessels were placed. But the combination of low new orders since 2015 and rising LNG demand from Asia created tightening LNG shipping market dynamics in 2017. Considering the low new vessel prices but rising shipping demand, we remain bullish on LNG carrier new orders. SHI is one of the direct beneficiaries of this theme. We maintain our OUTPERFORM with a Target Price of W17 k.

Figure 2: LNG shipping utilization

Source: Poten, Gaslog

Figure 3: LNG spot fixture by quarter

Source: Poten, Gaslog

Bbg/RIC 010140 KS / 010140.KS Rating (prev. rating) O (O) 52-wk range (W) 13600.0 - 8300.0 Mkt cap (W/US$ bn) 4,543.5/ 4.2 ADTO-6M (US$ mn) 29.2 Free float (%) 75.9 Major shareholders Samsung Elec

(16.9%) and Samsung Life (3.2%)

Price (27 Nov 17 , W) 11,650 TP (prev. TP W) 17,000 (17,000) Est. pot. % chg. to TP 46 Blue sky scenario (W) 20,000 Grey sky scenario (W) 8,000


Absolute (%) (0.4) 4.0 35.9 Relative (%) (0.9) (2.0) 8.9

Year 12/15A 12/16A 12/17E 12/18E 12/19E

Revenue (W bn) 9,714 10,414 8,047 6,633 8,760 EBITDA (W bn) (1198) 170 421 456 730 Net profit (W bn) (1205) (121) 139 142 339 EPS (CS adj. W) (5218) (433) 497 506 1,212 - Change from prev. EPS (%) n.a. n.a. 0.5 0.4 (0.5) - Consensus EPS (W) n.a. n.a. 327 273 505 EPS growth (%) n.m. n.m. n.m. 1.8 139.5 P/E (x) n.m. n.m. 23.4 23.0 9.6 Dividend yield (%) 0 0 0 0 0 EV/EBITDA (x) (5.6) 43.2 14.5 13.7 7.7 P/B (x) 0.6 0.7 0.7 0.7 0.7 ROE (%) (24.7) (2.3) 2.2 2.2 5.1 Net debt(cash)/equity (%) 50.6 44.3 24.2 26.3 15.5

Note 1: Samsung Heavy Industries is one of the largest shipbuilders in the world. The company constructs general ships and offshore structures for shipping and oil E&P companies.


Asian Daily

- 27 of 33 -

Taiwan

Taiwan Components Sector --------------------------------------------------------------------------------- New report: Key findings from 9M17 financial reports Pauline Chen / Research Analyst / 886 2 2715 6323 / [email protected]

● We summarised ten key findings from 9M17 financial reports: (1) Casing saw the strongest top-line growth; (2) Battery pack still declined the most in operating profit; (3) Lens saw the biggest margin improvement; (4) Casing still suffered from the biggest margin contraction in the sector.

● (5) Labour cost increase hurt power supply the most; (6) Sector’s capex accelerated to 23% YoY growth while passive components had the biggest increase; (7) overall depreciation decreased 3% YoY, and non-lens handset is the main contributor.

● (8) Inventory dollar grew 14% QoQ as going into high season; (9) Hinges saw the biggest increase in R&D while battery pack still saw decline; (10) Operating profit for component was 100% of that of EMS, compared to 74% for 2008-16's 3Q average.

● The set of data suggests (1) continued upcycle for lens and passive components; (2) structural headwinds in PC components including power supply; (3) casing's business model change taking some assembly value; and (4) potential reversal in performance between components and EMS in 4Q17.

Valuation metrics Company Ticker Rating Price Target Year P/E (x) P/B

(x)

Local price T T+1 T+2 T+1

Catcher 2474.TW O 336.50 385.00 12/16 12.1 10.5 2.1 FTC 2354.TW N 86.60 100.00 12/16 11.2 10.2 1.0 Casetek 5264.TW N 115.50 130.00 12/16 18.2 14.4 1.4 Largan 3008.TW O 5,330 6,500 12/16 26.5 17.4 8.4 Merry 2439.TW N 221.00 230.00 12/16 18.5 16.8 5.4 TXC 3042.TW N 40.50 45.00 12/15 12.4 11.2 1.2 Delta 2308.TW O 140.50 170.00 12/16 20.2 17.6 3.3 Lite-on Tech 2301.TW N 38.00 48.00 12/16 31.0 9.0 1.4 Chicony 2385.TW O 76.60 88.00 12/16 13.9 11.9 2.6 Kinsus 3189.TW N 74.50 86.00 12/16 24.2 13.2 1.2 Chin Poon 2355.TW O 62.30 72.00 12/16 14.8 12.1 1.6 Tripod 3044.TW N 96.20 112.00 12/16 11.5 11.0 1.8 Unimicron 3037.TW N 15.30 19.00 12/16 103.3 18.9 0.6 NYPCB 8046.TW N 26.20 26.00 12/16 n.m. 27.6 0.5 TOPOINT 8021.TW N 21.30 25.00 12/16 15.0 13.1 0.8 Bizlink 3665.TW O 270.50 300.00 12/16 29.0 22.0 4.8 Sinbon 3023.TW O 88.80 98.00 12/16 16.7 14.9 3.9

Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates

Ten key findings from 9M17 results

We summarise ten key findings from the 76 sample downstream component companies' 9M17 financial reports: (1) revenue: growth accelerated to 6% YoY growth; casing (replacing lens) saw the strongest growth (up 22% YoY), and PC components (replacing battery pack) saw the biggest decline (down 10% YoY); (2) operating profit: the sector saw 5% YoY growth; passive components (replacing lens) saw the strongest growth (up 38% YoY), and battery pack still saw the biggest decline (down 19% YoY); (3) operating margin: the sector saw 7 bp YoY decline; lens still saw the biggest improvement (up 606-bp YoY) and casing still saw the biggest contraction (down 407-bp YoY); (4) EBITDA margin: the sector saw 53 bp YoY decline to 13.9%; lens still saw the biggest improvement (up 446 bp YoY), and casing still saw the biggest contraction (down 572 bp YoY); (5) labour costs: the sector saw 3% YoY increase, hurting power supply the most; (6) capex: accelerated to 23% YoY growth; passive

components (replacing PC components) saw the biggest increase (up 103% YoY), and cooling still saw the biggest decline (down 47% YoY); (7) depreciation: the sector saw 3% YoY decrease, with the major decrease from non-lens handset components; (8) inventory dollar: the sector saw 14% QoQ increase, vs EMS up 34% QoQ; cash conversion cycle for the sector was up five days YoY, mainly from battery pack; (9) R&D expense: the sector increased 7% YoY, hinges still saw the biggest YoY increase (by 30%) and battery pack still saw the biggest YoY decline (by 8%); and (10) operating profits for component sector accounted for 100% of that of EMS in 9M17, vs. 2008-16's 3Q average of 74%. The number of operating loss making suppliers has reduced in lens (Genius turned around from 4Q16) and handset components (Cheng Uei turned around from 3Q17).

Power supply:

We upgraded Chicony, as we see margin improvements driven by diversification towards non-PC and its unique business model in winning over industry leaders. We like Delta’s wider product portfolio in energy-saving and diversified product mix in automotive although the transition is longer than expected. Risks for the sector may include pricing in IT market and structural issue on server power supply.

Handset components:

We see a strengthened leadership for Largan in lens upcycle, given a bigger 3D sensing opportunity and strong position in 6-7-element lens. We downgraded Merry, as uncertainties for profit rises due to complicated holding structure and a slower GM expansion on speaker. Risks for the sector may include end market demand on delayed iPhone and emerging niche players/new technology on the lens side.

Casings:

We shift our stock pick from Casetek to Catcher, and believe Catcher generate better return for shareholders on every dollar they spent. We think Casetek’s main casing win will be capped by dilution of right issue plan and initial project ramp. Risks for the sector may include new iPhone demand and inventory adjustment for iPhone 8/8+.

PCB (printed circuit board):

Unimicron and Kinsus still suffered a little on initial ramp for substrate-like PCB in 3Q17, but both expect to see significant improvement in 4Q17. HDI tightness for Android phones is seen in Tripod’s strength in handsets. We initiated Chin Poon with OUTPERFORM, as it offers stable and better profitability given higher exposure to automotive market. Risks for the sector may include smartphone demand, copper foil price, price erosion for substrate-like PCB as competition increased, Rmb appreciation, and labour cost in China.

Connectors:

We initiated BizLink and Sinbon with OUTPERFORM rating. Both have well diversified end market mix, and are expected to rise on growing car electrification. BizLink is facing margin headwinds from integrating Leoni-Home Appliance business. Risks for the sector may be how fast the automotive story can fully translate into profitability


Asian Daily

- 28 of 33 -

Recently Published Research

Date Title Author(s) Tel. E-mail

Tue 28 Nov China Cement Sector - Embracing six-year high profitability

Yang Luo Peter Li

852 2101 6328 852 2101 6320

[email protected] [email protected]

Tue 28 Nov Eris Lifesciences Ltd - Scalable model with strong FCF generation

Anubhav Aggarwal Chunky Shah

91 22 6777 3808 91 22 6777 3872


Tue 28 Nov Taiwan Components Sector - Ten key findings from 9M17 financial reports

Pauline Chen Angela Pan

886 2 2715 6323 886 2 27156352


Mon 27 Nov India Oil & Gas Sector - A speedbump on the path to zero subsidy

Badrinath Srinivasan 91 22 6777 3698 [email protected]

Mon 27 Nov Sime Darby - Back to basics Joanna Cheah Ella Nusantoro Danny Chan

6 03 2723 2081 62 21 2553 7917 60 3 2723 2082

[email protected] [email protected] [email protected]

Mon 27 Nov Vietnam Market Strategy - Becoming investible Dan Fineman Farhan Rizvi, CFA Hoang Minh Trinh, CFA

66 2 614 6218 65 6212 3036 65 6212 8863

[email protected] [email protected] [email protected]

Fri 24 Nov Asia Pacific Equity Strategy: ASEAN's first big EPS upgrade in November. Catalyst to switch back?

Sakthi Siva Kin Nang Chik

65 6212 3027 852 2101 7482


Fri 24 Nov China Steel Sector - Timing mismatch between slowing demand and production curb

Yang Luo Peter Li

852 2101 6328 852 2101 6320


Fri 24 Nov Korea Market Strategy - 2018 outlook: The year of multiple expansion

Gil Kim Jennifer Yu Keon Han Minseok Sinn Michael Sohn A-Hyung Cho Eric Cha Ray Kim Sang Uk Kim Hoonsik Min Sohyun Lee

82 2 3707 3763 82 2 3707 3738 82 2 3707 3740 82 2 3707 8898 82 2 3707 3739 82 2 3707 3735 82 2 3707 3764 82 2 3707 3776 82 2 3707 3795 82 2 3707 3761 822 3707 3737

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]


Asian Daily

- 29 of 33 -

Companies mentioned

Abbott Laboratories (ABT.N, $56.13) AirAsia Berhad (AIRA.KL, RM3.1) Airports of Thailand (AOT.BK, Bt58.5, OUTPERFORM, TP Bt70.0) Alkem Laboratories Ltd (ALKE.BO, Rs1972.35) Alliance Financial Group BHD (ALFG.KL, RM3.87) Anhui Conch Cement Co. Ltd. (0914.HK, HK$35.2, OUTPERFORM, TP HK$42.0) Anhui Conch Cement Co. Ltd. (600585.SS, Rmb27.59, OUTPERFORM, TP Rmb35.7) Astro Malaysia Holdings Bhd (ASTR.KL, RM2.77) Axiata Group Berhad (AXIA.KL, RM5.31) BBMG Corporation (2009.HK, HK$3.63, OUTPERFORM, TP HK$5.0) BBMG Corporation (601992.SS, Rmb5.9, UNDERPERFORM, TP Rmb4.3) Cadila Healthcare (CADI.BO, Rs444.15) Casetek Holdings Limited (5264.TW, NT$115.5, NEUTRAL, TP NT$130.0) Catcher Technology (2474.TW, NT$336.5, OUTPERFORM, TP NT$385.0) Cheng Uei Precision Industry Co. (2392.TW, NT$50.4) Chicony (2385.TW, NT$76.6, OUTPERFORM, TP NT$88.0) China Gas Holdings Ltd (0384.HK, HK$23.05, OUTPERFORM, TP HK$30.5) China Mengniu Dairy (2319.HK, HK$20.0, OUTPERFORM, TP HK$25.0) China National Building Material Co (3323.HK, HK$6.81, UNDERPERFORM, TP HK$5.4) China Resources Cement Holdings Ltd (1313.HK, HK$5.0, NEUTRAL, TP HK$5.4) China Resources Gas (1193.HK, HK$28.0) Chin-Poon Industrial Co., Ltd. (2355.TW, NT$62.3, OUTPERFORM, TP NT$72.0) CIMB Group Holdings Bhd (CIMB.KL, RM5.97) Cipla Limited (CIPL.BO, Rs615.0) Delta Electronics (2308.TW, NT$140.5, OUTPERFORM, TP NT$170.0) Dr. Reddy's Laboratories Limited (REDY.BO, Rs2297.0) Engro Fertilizers (ENGR.KA, PRs66.71) ENN Energy Holdings Ltd (2688.HK, HK$57.75) Eris Lifesciences Ltd (ERIS.BO, Rs650.25, OUTPERFORM[V], TP Rs770.0) Fauji Fertilizer Company Limited (FAUF.KA, PRs82.53, UNDERPERFORM, TP PRs70.0) Foxconn Technology Corp (2354.TW, NT$86.6, NEUTRAL, TP NT$100.0) Glenmark Pharmaceuticals (GLEN.BO, Rs591.2) GSEO (3406.TW, NT$352.5) Hong Leong Bank (HLBB.KL, RM15.3) Hyundai Heavy Industries (009540.KS, W145,000) IHH Healthcare Berhad (IHHH.KL, RM5.65, OUTPERFORM, TP RM6.8)

Inari Amertron (INAR.KL, RM3.13) Karex Bhd (KARE.KL, RM1.5) Kinsus Interconnect Tech (3189.TW, NT$74.5, NEUTRAL, TP NT$86.0) KSDB (SIME.KL^A08) Largan Precision (3008.TW, NT$5330.0, OUTPERFORM, TP NT$6500.0) Lite-On Technology (2301.TW, NT$38.0, NEUTRAL, TP NT$48.0) Lotte Chemical Titan (LOTT.KL, RM4.97) Lupin Ltd (LUPN.BO, Rs831.25) Malayan Banking (MBBM.KL, RM9.2) Man Zai (4543.TWO, NT$18.95) Merry Electronics Co. Ltd (2439.TW, NT$221.0, NEUTRAL[V], TP NT$230.0) Nan Ya Printed Circuit Board (8046.TW, NT$26.2, NEUTRAL, TP NT$26.0) Petronas Chemicals Group BHD (PCGB.KL, RM7.31) PT Indosat Tbk (ISAT.JK, Rp5,275, OUTPERFORM, TP Rp8,600) PT Sarana Menara Nusantara (TOWR.JK, Rp3,950) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp4,300, OUTPERFORM, TP Rp5,100) Public Bank (PUBM.KL, RM20.3) Qudian Inc. (QD.N, $12.22, OUTPERFORM[V], TP $15.0) RHB Capital Berhad (RHBC.KL, RM4.9, OUTPERFORM, TP RM6.5) Samsung Heavy Industries (010140.KS, W11,650, OUTPERFORM, TP W17,000) Sime Darby (SIME.KL, RM8.94, OUTPERFORM, TP RM11.1) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs550.25) Sysmex (6869.T, ¥8,410, OUTPERFORM, TP ¥10,000) Telekom Malaysia (TLMM.KL, RM5.99) Tenaga (TENA.KL, RM15.0) Terumo (4543.T, ¥5,040, OUTPERFORM, TP ¥6,000) Time Dotcom Berhad (TCOM.KL, RM8.99) Top Glove Corporation Bhd (TPGC.KL, RM6.85) Topoint Technology Co Ltd (8021.TW, NT$21.3, NEUTRAL, TP NT$25.0) Torrent Pharma (TORP.BO, Rs1285.05) Tower Bersama (TBIG.JK, Rp6,275) Treasury Wine (TWE.AX, A$15.89, UNDERPERFORM, TP A$14.15) Tripod Technology (3044.TW, NT$96.2, NEUTRAL, TP NT$112.0) Tuniu Corporation (TOUR.OQ, $8.78, OUTPERFORM, TP $12.0) TXC Corp. (3042.TW, NT$40.5, NEUTRAL, TP NT$45.0) Unimicron Technology Corp (3037.TW, NT$15.3, NEUTRAL, TP NT$19.0) XL Axiata Tbk (EXCL.JK, Rp3,010, OUTPERFORM, TP Rp3,600)

Disclosure Appendix

Analyst Certification

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.


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The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunit ies. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return o f the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

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Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.

Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 45% (65% banking clients)

Neutral/Hold* 40% (60% banking clients)

Underperform/Sell* 13% (54% banking clients)

Restricted 2%

*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other indivi dual factors.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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Macro risks have faded, and the economy should remain ...pg.jrj.com.cn/acc/Res/CN_RES/INVEST/2017/11/28/cf...Nov 28, 2017 · Suisse does and seeks to do business with companies covered