19 august 2014 abc - jrj.com.cnpg.jrj.com.cn/acc/res/cn_res/invest/2014/8/19/9b3... · 8/19/2014...

abcGlobal Research

First Light Asia China Autos | Indian Power | Sunny Optical | China Coal Energy Co[Production: please change headline text colour to WHITE, change headline row height to 1pt exactly before publish] What’s Changed, Research Focus, Today’s Events

Ticker Company Rating was Currency Target was EPS '13a EPS '14e Price Price At Close

Up 2382 HK Sunny Optical OW(V) N(V) HKD 12.60 0.44 0.55 10.62 18 Aug

CIPLA IN Cipla OW N INR 522.00 402.00 16.03(a) 448.60 14 Aug

002380 KS KCC OW KRW 750,000.00 700,000.00 23557.88 24376.56 639,000.00 15 Aug

066570 KS LG Electronics OW KRW 96,000.00 91,000.00 981.68 5,353.26 77,100.00 15 Aug

Down 1898 HK China Coal Energy UW N HKD 3.80 4.15 0.29 0.14 4.82 15 Aug

JSW IN JSW Energy OW(V) INR 97.00 103.00 6.90(a) 75.70 15 Aug

NTPC IN NTPC OW INR 183.00 193.00 13.21(a) 142.10 15 Aug

PGOLD PM Puregold Price Club OW PHP 49.00 54.00 1.43 1.43 36.05 15 Aug Source: Bloomberg, HSBC estimates

Click on title to open reports Research Focus

China Autos - 1H14 earnings preview: Hard to find the beat Carson Ng*

We expect limited positive surprises on upcoming results of OEMs

Impact from anti-trust investigation key question for results briefings

We prefer Brilliance (OW, TP HKD18.3) and GAC (OW(V), TP HKD10.8) in the China auto space

Indian Power - Earnings quality should improve in FY16-17 Arun Kumar Singh*

Earnings are likely strained in FY15; we see rebound over FY16-17

BS repair for some contingent on resolution of regulatory issues and successful closure of asset sale

Our top picks in the sector are NTPC and PTC

Sunny Optical (2382 HK) - Upgrade to OW(V): Attractive risk-reward profile Joyce Chen*

In-line 1H14 results

Solid 2H14 outlook implies better-than-expected yield rate improvement

Upgrade to OW(V) from N(V) with unchanged TP of HKD12.6

China Coal Energy Co (1898 HK) - Downgrade to UW: Poor 1H14 performance and outlook Simon Francis*

Weak 1H14 results in line with profit warning

Lower 2014-15e net income forecasts to factor in 2H14 production cuts and continued weak coal markets

Downgrade to Underweight (from Neutral) with a target price of HKD3.80 (from HKD4.15) based on a 0.44x PB multiple

19 August 2014

Ticker Event Rating Target Price Ticker Event NI Bbg

Bank of China 3988 HK Q2 OW (V) 4.70 3.7 Home Depot HD US Q2 83.1 Ping An Insurance 2318 HK Q2 OW (V) 90.00 66.3 Medtronic Inc MDT US Q1 63.5 Galaxy Entertainment Group 27 HK S1 OW 72.00 59.9 TJX Cos Inc/The TJX US Q2 53.3 China Resources Land 1109 HK S1 N 15.90 17.7 Urban Outfitters URBN US Q2 36.4

Source: Bloomberg, HSBC estimates

Colin Davis* Head of Research Marketing Asia +852 2996 6635 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: http://www.research.hsbc.com

Disclaimer & Disclosures This report must be read with the disclosures in the Disclosure appendix, and the Disclaimer, which forms part of it

Disclosures for companies can be accessed via the hyperlinks to the original published research, which can be found in the title

http://www.research.hsbc.com/

https://www.research.hsbc.com/R/20/uz9wFQJ

https://www.research.hsbc.com/R/20/WgFC6hx

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=tt0zwIWB0z&n=427272.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=DiAJhGNR7n&n=427153.PDF

First Light Asia 19 August 2014

abc

Regional

Asia Healthcare - Ebola treatments/vaccines and diagnostics Nam Park*

The Flying Dutchman - Still overweight on China, raising Korea to neutral Herald van der Linde*

New Zealand Digest - Milk story may be turning sour Paul Bloxham

China & Hong Kong

Hang Seng Index Q3 Review - Two significant index rule changes announced Tacky Cheng*

The Great Mall of China - The good, the bad and the ugly so far Erwan Rambourg*

Chongqing Rural CB (3618 HK) - OW(V): Capital risk emerging – growth consumes more tier-1 by Doc 127; credit costs spike with higher NPLs Michael Chu*

Sinopec Engineering (2386 HK) - OW(V): 1H14 decline is in line; multiple catalysts ahead Tingting Si*

China Everbright Intl (257 HK) - OW: Surprise waste-to-energy project win in Hangzhou Thomas Zhu*

CLP Holdings Ltd (2 HK) - OW: Hong Kong NDR feedback Jenny Cosgrove*

Galaxy Securities (6881 HK) - OW: Solid 1H14 result should mitigate market concerns York Pun*

China Resources Power (836 HK) - N: Powering on but fairly valued, coal mines impaired Jenny Cosgrove*

Tingyi (322 HK) - N: Strong margins offset weakness in top line Christopher K Leung* Korea

Korea rates: Still early for higher yields - Maintain long position in 10yr KTB André de Silva

KCC (002380 KS) - OW: On-going beneficiary of property market recovery Yeon Lee*

LG Electronics (066570 KS) - OW: Another earnings surprise ahead Brian Sohn*

Taiwan

Greater China IC design - Will a government subsidy work this time? Yolanda Wang* ASEAN

Media Prima Berhad (MPR MK) - N: Murphy’s Law partly at work Rajesh Raman*

Singapore - July NODX: Still not out of the woods yet Joseph Incalcaterra

Thailand - Technical recession avoided Nalin Chutchotitham

Puregold Price Club (PGOLD PM) - OW: Over-reaction by the market Permada Darmono* India

Cipla (CIPLA IN) - Upgrade to OW: Sequential margin recovery in 1Q FY15 Girish Bakhru*

Lanco Infratech (LANCI IN) - UW(V): Asset sale positive, problems still persist Arun Kumar Singh*

Market data Markets HSBC Last 5d % Forecast GDP (%Yr) Int Rate USD vs CCY HSBC Last 5d % Commodities HSBC Last 5d %

HSI 25,000 24,955 1.26 US 1.7 0-0.25 EUR 1.28 1.34 -0.16 Oil 100.0 96.4 -1.70

SHCOMP 2,400 2,239 0.67 China 7.5 6.00 CNY 6.14 6.14 0.17 Gold 1,292 1299 -0.76

TAIEX 9,900 9,141 -0.34 Taiw an 3.0 1.880 TWD 29.8 30.01 0.04 Coal (Thermal) 85 69 0.51

KOSPI 2,060 2,053 1.08 Korea 3.4 3.00 KRW 1,000.0 1018 1.27 Steel (HRC China) 483 465 -0.59

TOPIX 1,230 1,271 1.50 Japan 1.4 0-0.10 JPY 101.0 102.6 -0.37 Aluminium 1,875 1980 -1.86

BSE 30 27,300 26,391 4.19 India 5.3 8.25 INR 60.5 60.77 0.76 Copper 7,100 6853 -2.39

Source: Bloomberg

https://www.research.hsbc.com/R/20/5uyjcyM

https://www.research.hsbc.com/R/20/ERIgYQR

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=sKE7zm9bHg&n=427207.PDF

https://www.research.hsbc.com/R/20/fdBVuBY

https://www.research.hsbc.com/R/20/19Fw9xm

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=wigEhycyd1&n=427146.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=wigEhycyd1&n=427146.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=hN5gX5Vu7V&n=427260.PDF

https://www.research.hsbc.com/R/20/Shlr0E4

https://www.research.hsbc.com/R/20/SiImMV7

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=i8Jkjxv04m&n=427173.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=UyTFHD00fk&n=427251.PDF

https://www.research.hsbc.com/R/20/e0gAljz

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=LIUsCtDRer&n=427082.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FcVlHCLCnB&n=427167.PDF

https://www.research.hsbc.com/R/20/clUhVDu

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https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=N0UMr2lGC3&n=427169.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=2ZpRVEt0vT&n=427174.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=WcNs0JyMHv&n=427170.PDF

abcGlobal Research

We expect limited positive surprises on

upcoming results of OEMs

Impact from anti-trust investigation key question for results briefings

We prefer Brilliance (OW, TP HKD18.3) and GAC (OW(V), TP HKD10.8) in the China auto space

Limited positive surprises. Great Wall already reported its

preliminary earnings earlier on 23 July and BMW’s

quarterly results on 5 August disclosed the earnings

contribution from BMW Brilliance JV. We see limited

positive earnings surprise for GAC, Geely and Dongfeng as

we think consensus has already factored in the volume

growth and profitability for Dongfeng and GAC, while it has

yet to fully account for the profitability pressure of Geely

from volume decline.

Seeking more clarity on anti-trust investigations. We

think one of the key questions during the results briefing for

the auto OEMs was the impact from anti-trust investigations

and/or that from lowering the spare parts price. We think

more comments from the companies could remove the

uncertainties arising from the anti-trust probes.

Key questions in analysts’ briefings

Brilliance: Timing of R&D expenses and other costs

allocation, impact from competitors’ strong product cycle,

schedule of Brilliance’s own product launches

GAC: Profitability trend of Trumpchi’s brand, inventory

pressure of Guangqi Honda, update on Jeep production

Dongfeng: Estimated time span for inventory reduction for

DF Nissan, DPCA’s profitability trend, update on Volvo JV,

DF Honda’s new product launch schedule

Geely: Progress on dealership network restructuring, export

market outlook, management comment on pressure faced by

domestic brands

Great Wall: Launch schedule of H6/H2 auto transmission;

high end product launch schedule; export market outlook,

management strategy on domestic brands, margin trend for

new products, capacity expansion plan

Industrials Equity – China Autos

China Autos

1H14 earnings preview: Hard to find the beat

Valuation and TP summary

Stock code Company Mkt Price

(HKD) Rating TP (HKD) Potential

return*

1114 HK Brilliance 13.96 OW 18.3 32%2238 HK GAC 8.66 OW(V) 10.8 27%489 HK Dongfeng 13.70 N 15.4 14%175 HK Geely 3.09 N 3.0 -2%2333 HK Great Wall 31.90 N(V) 33.2 7%

Source: Bloomberg, HSBC estimates. Note: Price as of 18 August 2014. *Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yieldRatings: OW – Overweight, N – Neutral, UW – Underweight, V – Volatile

Results schedule and HSBC 1H14 earnings forecast

Brilliance Geely Great Wall GAC Dongfeng

Result date 19-Aug 20-Aug 22-Aug 26-Aug 29-AugBriefing date 19-Aug 20-Aug 23-Aug 27-Aug 1-Sep 1H14e (RMB m) 3,471* 1,021 3,960* 1,813 6,021YoY% 71.0% -27.0% -3.1% 48.7% 8.7% 2014e (RMB m) HSBC 4,916 2,331 8,639 3,927 12,118Bloomberg 4,532 2,443 8,976 4,196 12,018Var % 8.5% -4.6% -3.8% -6.4% 0.8%

Note: Brilliance 1H14e estimated from BMW announcement of 1H14 earnings of BMW Brilliance JV; Great Wall 1H14e represents the preliminary figure announced by the company Source: Bloomberg, Company data, HSBC estimates

19 August 2014 Carson Ng* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6625 [email protected]

Mike Yip* Associate

View HSBC Global Research at: http://www.research.hsbc.com


Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it


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cPeers comp of China Autos

Name Ticker Rec Mkt Price YTD chg TP Potential Mkt Cap __________ PE ___________ __________ PB ___________ _______ ROE (%) _________ ________ Yield (%) ________ (HKD) (%) (HKD) return* (%) (USD m) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

HK-listed Auto manufacturers Brilliance China 1114 HK OW 13.96 10.4 18.3 32.1 9,051 16.7 11.5 9.9 4.3 3.3 2.6 29.4 32.5 29.2 0.7 1.0 1.2 BYD 1211 HK NR 52.45 38.0 - - 19,268 86.3 55.5 41.9 4.0 3.7 3.4 5.1 6.9 8.8 0.1 0.1 0.2 Dongfeng 489 HK N 13.70 12.9 15.4 14.3 15,228 10.7 7.8 6.6 1.5 1.3 1.1 13.9 16.5 16.7 1.6 1.9 2.3 Geely Auto 175 HK N 3.09 -17.6 3.0 -1.5 3,509 8.2 9.3 7.5 1.4 1.2 1.0 18.4 13.6 14.9 1.5 1.4 1.7 Great Wall 2333 HK N(V) 31.90 -25.5 33.2 7.4 14,394 9.5 9.0 8.3 2.8 2.3 1.9 33.2 28.0 25.2 3.2 3.3 3.6 GAC 2238 HK OW(V) 8.66 2.1 10.8 27.4 8,152 16.8 11.4 8.6 1.3 1.2 1.1 8.0 10.8 12.8 2.3 2.6 3.5 Mkt cap weighted average 15.0 12.0 10.2 2.8 2.4 2.1 17.0 17.5 17.3 1.5 1.7 1.9

Note: Price as of 18 August 2014. *Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield Source: Bloomberg, Company data, HSBC estimates

abcGlobal Research

Earnings are likely strained in FY15; we see rebound over FY16-17

BS repair for some contingent on resolution of regulatory issues and successful closure of asset sale

Our top picks in the sector are NTPC and PTC

Earnings are likely to be strained in FY15 but we expect

improvement in FY16-17. Only JPVL missed our

operational earnings forecast in Q1FY15 and we have

lowered earnings for two companies (NTPC and JPVL). We

however increase estimates for three companies. We further

believe that some of the business and balance sheet related

factors are mostly legacy issues and expect most of these to

be resolved before the end of FY15 and hence are much

more optimistic on earnings in FY16-17. We are projecting a

ROE (return on equity) of 5-15% in FY15 and expect this to

go up to 8-18% in FY17; we expect the sharpest

improvement in ROE at Adani, CESC and JPVL.

Resolution of regulatory impasse and closure of asset

sales likely key triggers. We believe some of the regulatory

orders, which have been challenged in higher courts, will be

resolved to the advantage of the companies by the end of

FY15. However some may result in lower than expected

benefit to companies, but associated uncertainty is likely to

go away. Further since high leverage and interest cost is

hurting many companies we expect some of this to be

addressed through asset sales and improved cash flow as

well as better demand conditions as the macro environment

improves.

Amendments to Electricity act by end of FY15 another

main trigger. We expect the amendment to Electricity act to

be a major stock trigger as it will introduce competition in

the distribution segment. We also expect demand conditions

to improve by end FY15.

Our top picks are NTPC and PTC; Tata Power, JSW

Energy are our other OWs in the sector. No changes to

our ratings, we cut our earnings estimates for NTPC, JSW

Energy and JPVL and accordingly cut TPs. We raise our TP

for CESC.

Natural Resources & Energy India Power

Indian Power

Earnings quality should improve in FY16-17

Indian power stocks – summary of changes to target price

Name BBG ticker

Rating#

Old TP (INR)

New TP (INR)

CMP* (INR)

Potential rtn** (%)

Implied PB on TP

NTPC NTPC IN OW 195 183 142.1 28.8% 1.5Tata Power TPWR IN OW 125 125 90.6 40.2% 1.6JSW Energy JSW IN OW (V) 103 97 75.7 28.2% 1.9PTC PTCIN IN OW (V) 120 120 82.8 47.7% 1.0Power Grid PWGR IN N 150 150 133.2 12.6% 1.8NHPC NHPC IN N 25.0 25.0 21.3 17.4% 0.9CESC CESC IN N 675 744 697.0 8.2% 1.3Jaiprakash Power

JPVL IN N (V) 21.5 18.2 16.2 12.7% 0.7

Adani Power ADANI IN N (V) 58 58.0 53.6 8.3% 2.0Lanco Infra LANCI IN UW (V) 8.4 8.4 9.0 -6.1% nm

*At close of 15 August 2014. **Potential return equals the percentage difference between the current share price and the target price including dividend yield except for NTPC, JSW Energy, NHPC, Adani Power and Power Grid. #No change in ratings

Source: HSBC estimates

19 August 2014 Arun Kumar Singh* Senior Analyst, India Power Utilities HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1778 [email protected]

Jenny Cosgrove*, CFA Regional Head of Utilities Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6619 [email protected]

Murtuza Zakiuddin* Associate Bangalore



Issuer of report: HSBC Securities and Capital Markets (India) Private Limited



2

Natural Resources & Energy India Power 19 August 2014

abc

Indian Power - summary of estimate changes

________ Revenue% ______ ________ EBITDA % ________ _________ EPS % ________ Reasons Name FY15e FY16e FY17e FY15e FY16e FY17e FY15e FY16e FY17e

NTPC 0% 0% 0% -3% -3% -2% -5% -5% -5% Assume lower efficiency gains and no savings in fuel cost in FY15 post the analyst meet

JSW Energy 0% 0% 0% -2% -3% -3% -5% -5% -5% Higher landed fuel cost due to rupee depreciationJPVL -1% -2% 0% -1% -2% 0% -3% -8% 0% Lower utilisation at its new plants in initial year


Indian Power - summary of TP changes

Old TP (INR) New TP (INR) % change Comments

NTPC 195 183 -6% Lower estimates by 5% as explained above JSW Energy 103 97 -6% Lower estimates by 5% as explained aboveCESC 675 744 10% Roll over, no negative value to retail and higher value of Firstsource JPVL 21.5 18.2 -15% Ascribing 25% discount to Nigrie project and lower market value of treasury shares


Indian power companies – valuation summary

Company Ticker CMP TP Potential Rating Mkt cap ____ PE (x) ______ EPS CAGR ____ PB (x) _____ ____ ROE % _____ _ DY % __ INR INR return* (%) (USDm) FY15e FY16e FY17e FY16-17e FY15e FY16e FY17e FY15e FY16e FY17e FY14a FY15e

NTPC NTPC IN 142.05 183 28.8% OW 19,255 11.6 10.6 9.6 10% 1.3 1.2 1.1 11% 12% 12% 4.0% 4.0%Tata Power TPWR IN 90.60 125 40.2% OW 4,028 14.6 12.4 11.7 12% 1.3 1.2 1.1 10% 10% 10% 1.4% 2.2%JSW Energy JSW IN 75.65 97 28.2%OW (V) 2,040 11.9 11.3 10.9 4% 1.7 1.6 1.5 15% 15% 14% 2.6% 2.9%PTC PTCIN IN 82.75 120 47.7%OW (V) 403 8.7 7.4 6.4 17% 0.8 0.7 0.7 9% 10% 11% 2.4% 2.7%Power Grid PWGR IN 133.20 150 12.6% N 11,456 13.2 11.8 11.0 10% 1.8 1.7 1.5 15% 15% 14% 1.9% 2.3%NHPC NHPC IN 21.30 25 17.4% N 4,307 9.6 9.3 9.0 4% 0.8 0.8 0.7 8% 8% 8% 3.3% 3.5%CESC CESC IN 696.95 744 8.2% N 1,431 15.1 8.8 8.2 36% 1.4 1.3 1.1 9% 15% 14% 1.1% 1.4%JPVL JPVL IN 16.15 18.2 12.7% N (V) 780 11.8 6.3 5.3 50% 0.7 0.6 0.6 6% 11% 11% 0.0% 0.0%Adani Power ADANI IN 53.55 58 8.3% N (V) 2,528 50.1 14.7 10.1 123% 2.3 2.0 1.7 5% 15% 18% 0.0% 0.0%Lanco Infra LANCI IN 8.95 8.4 -6.1%UW (V) 354 nm nm nm -60% 9.4 nm nm nm nm 39% 0.0% 0.0%Power sector avg - weighted

14.2 11.0 9.9 16% 1.5 1.3 1.2 11% 12% 13% 2.7% 2.9%

*Potential return equals the percentage difference between the current share price and the target price including dividend yield except for NTPC, JSW Energy, NHPC, Adani Power and Power Grid Source: HSBC estimates, Price as at close of 15 Aug 2014

Indian power stocks – HSBC vs consensus forecasts

___________ HSBC ____________ ________ Consensus __________ ___________ Diff % ____________ Net profit (INRm) FY15e FY16e FY15e FY16e FY15e FY16e

NTPC 100,771 110,294 97,786 106,384 3% 4%Tata Power 16,751 19,798 16,040 19,141 4% 3%JSW Energy 10,441 10,948 11,663 11,724 -10% -7%PTC 2,809 3,326 2,761 3,644 2% -9%Power Grid 52,688 59,031 52,411 61,629 1% -4%NHPC 24,508 25,373 23,651 25,450 4% 0%CESC 5,759 9,936 5,803 8,716 -1% 14%JPVL 4,014 7,509 3,855 6,953 4% 8%Adani Power 3,067 10,463 811 6,444 nm nmLanco Infra (12,305) (5,345) (12,494) (6,172) -2% -13%Power Sector – HSBC coverage 208,502 251,333 202,287 243,913 3% 3%

Note: PTC consensus is skewed with only two other broker reporting consolidated numbers Source: HSBC estimates, Bloomberg for consensus as at 18 August 2014

abcGlobal Research

In-line 1H14 results with gross margin miss. 1H14 net income was CNY257mn (EPS:

CNY 0.24, up 5% HoH and 30% YoY) on sales of CNY3.8bn (up 27% HoH and 38%

YoY). This is in line with our estimates and recently lowered consensus estimates.

Lower-than-expected gross margin was offset by well-controlled expenses and higher

interest income. 1H14 gross margin was down 2.8pts HoH to 14.6% (versus

HSBCe/consensus of 15.4%/16.7%) mainly due to the aggressive pricing strategy in the

handset camera module business (HCM, down 2.2pts HoH to 10.9%).

Solid 2H14 outlook. Management indicates 8MP and above HCM shipments should

account for 45% of the company’s total shipments in 2H14 (c41% in 1H14), with 10MP

and above accounting for 15-20% of shipments (c13% in 1H14). In addition, the company

expects 8MP and above handset camera lenses (HCL) to account for 30% of Sunny

Optical’s shipments in 2H14 (versus c24% in 1H14), with 10MP and above accounting

for 5-10% of total shipments (from c2% in 1H14.) The 10MP and above HCM/HCL

shipments guidance is much stronger than our estimate of 10-15%/0-5%, implying

continuous spec migration of smartphone cameras in China and better-than-expected yield

rate improvement, in our view. With the product mix improvement in 2H14, we expect

overall corporate gross margin will grow 1.1pts HoH to 15.7% in 2H14.

Valuation and risks. Our target price to HKD12.6 is based on 13x (unchanged) 2015e

EPS, which is the mid-cycle average for the handset camera and lens industry. The

company’s stock price has underperformed the HSI by 11% since late July. The stock is

currently trading at 15x/11x 2014e/2015e EPS vs the 18x/13x average for greater China

handset component manufacturers. The risk-reward profile looks to be appealing, in our

view. We upgrade our rating to OW(V) from N(V).

Sunny Optical (2382 HK)

Upgrade to OW(V): Attractive risk-reward profile

In-line 1H14 results

Solid 2H14 outlook implies better-than-expected yield rate improvement

Upgrade to OW(V) from N(V) with unchanged TP of HKD12.6

Telecoms, Media & Technology Electrical Equipment Equity – Hong Kong

Company report

Index^ HANG SENG INDEXIndex level 24,955RIC 2382.HKBloomberg 2382 HK

Source: HSBC

Overweight (V) Target price (HKD) 12.60 Share price (HKD) 10.62 Forecast dividend yield (%) 1.8 Potential return (%) 20.4

Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield

Dec 2013 a 2014 e 2015 e

HSBC EPS 0.44 0.55 0.77 HSBC PE 19.0 15.3 11.0

Performance 1M 3M 12M

Absolute (%) -0.4 21.4 22.2 Relative^ (%) -6.4 10.5 10.3

Note: (V) = volatile (please see disclosure appendix)

Enterprise value (CNYm) 8022Free float (%) 55Market cap (USDm) 1,503Market cap (HKDm) 11,650

Source: HSBC

19 August 2014

Joyce Chen* Analyst HSBC Securities (Taiwan) Corporation Limited +8862 6631 2862 [email protected]

Yolanda Wang* Analyst HSBC Securities (Taiwan) Corporation Limited +8862 6631 2867 [email protected]



Issuer of report: HSBC Securities (Taiwan) Corporation Limited


Sunny Optical: Financials and valuation

Revenue(CNYm)

Cons revenue (CNYm)

EPS (CNY)

Con EPS (CNY)

P/E (x)

ROE(%)

Div yield(%)

2013a 5,813 NA 0.44 NA 19.0 18.4 1.42014e 8,471 8,392 0.55 0.55 15.3 19.3 1.82015e 10,558 10,307 0.77 0.72 11.0 22.6 2.5

Source: Company data, Bloomberg (consensus), HSBC estimates


2

Sunny Optical (2382 HK) Electrical Equipment 19 August 2014

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Financials & valuation Financial statements

Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (CNYm)

Revenue 5,813 8,471 10,558 13,699EBITDA 630 924 1,217 1,464Depreciation & amortisation -148 -207 -237 -267Operating profit/EBIT 482 717 980 1,197Net interest 7 -7 0 0PBT 504 701 980 1,197HSBC PBT 504 701 980 1,197Taxation -64 -109 -152 -186Net profit 440 595 828 1,011HSBC net profit 440 595 828 1,011

Cash flow summary (CNYm)

Cash flow from operations 668 827 1,074 763Capex -217 -588 -300 -300Cash flow from investment -1,039 -677 -300 -300Dividends -105 -131 -163 -226Change in net debt -679 -19 -611 -237FCF equity 394 123 621 277

Balance sheet summary (CNYm)

Tangible fixed assets 785 1,166 1,229 1,262Current assets 3,766 4,600 4,992 6,983Cash & others 1,692 1,711 2,323 2,560Total assets 9,217 11,725 12,637 16,694Operating liabilities 1,316 2,156 1,946 3,185Net debt -1,203 -1,222 -1,834 -2,071Shareholders funds 2,860 3,324 3,989 4,775Invested capital 1,543 1,899 1,953 2,501

Ratio, growth and per share analysis

Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue 45.9 45.7 24.6 29.8EBITDA 28.1 46.6 31.7 20.3Operating profit 26.1 48.7 36.7 22.2PBT 27.0 39.0 39.7 22.2HSBC EPS 23.1 24.3 39.0 22.2

Ratios (%)

Revenue/IC (x) 4.1 4.9 5.5 6.2ROIC 29.5 35.2 43.0 45.4ROE 18.4 19.3 22.6 23.1ROA 5.8 5.7 6.8 6.9EBITDA margin 10.8 10.9 11.5 10.7Operating profit margin 8.3 8.5 9.3 8.7Net debt/equity -42.1 -36.8 -46.0 -43.4Net debt/EBITDA (x) -1.9 -1.3 -1.5 -1.4

Per share data (CNY)

EPS reported (fully diluted) 0.44 0.55 0.77 0.94HSBC EPS (fully diluted) 0.44 0.55 0.77 0.94DPS 0.12 0.15 0.21 0.26Book value 2.88 3.08 3.69 4.42

Key forecast drivers

Year to 12/2013a 12/2014e 12/2015e 12/2016e

Handset related products 4,212 6,944 8,654 11,670Digital camera lens 639 513 389 286Vehicle lens sets 291 552 935 1,162Optical Instruments 233 262 262 262Other products 438 201 319 319Total sales 5,813 8,471 10,558 13,699

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e

EV/sales 1.4 0.9 0.7 0.5EV/EBITDA 12.8 8.7 6.1 4.9EV/IC 5.2 4.2 3.8 2.9PE* 19.0 15.3 11.0 9.0P/Book value 2.9 2.7 2.3 1.9FCF yield (%) 4.3 1.3 6.7 3.0Dividend yield (%) 1.4 1.8 2.5 3.0

Note: * = Based on HSBC EPS (fully diluted)

Price relative

Source: HSBC Note: price at close of 18 Aug 2014

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2012 2013 2014 2015Sunny Optical Rel to HANG SENG INDEX

abcGlobal Research

Weak 1H14 results in line with profit warning. China Coal’s 1H14 net profit (IFRS) of

RMB780m fell 76% y-o-y on lower coal prices and a sharp rise in interest costs. Average

selling prices fell 12% y-o-y – a fall of RMB54/t that was only marginally offset by a

RMB4/t decrease in unit costs – and 7% h-o-h. Net income dropped from RMB699m in

1Q14 to RMB82m in 2Q14. Having been in a ‘build mode’ for the past decade, we think

China Coal has been slow to respond to the weak coal market.

Sharp cuts to our earnings forecasts. China Coal has said it will cut raw coal output by

5% this year from 157mt in 2013 to c149mt in 2014. Output reached 81mt in 1H14 (up

4% y-o-y), suggesting aggressive cuts – c14% y-o-y and c17% h-o-h – to come in 2H14.

Factoring in weak 1H14 results, production cuts and weaker coal prices, we cut our 2014-

15e net income forecasts by 61% and 51%, respectively. Our 2014e net income of

RMB1.8bn implies 2H14e net profit of RMB1.0bn. This includes some benefit from

improved realisations and lowered costs from planned coal production cuts. While

production cuts could potentially improve average price realisations and lower costs,

management is yet to provide any clarity on what level of improvements may be achieved.

Recognising that production cuts are needed is positive, but execution remains key.

Chinese coal majors, including China Coal and Shenhua Group, have announced output

cuts for 2H14. This recognition that supply-side discipline is needed is positive, yet we

question whether output will be sufficiently cut in 2H14e (China Coal’s commercial coal

output was down less than 1% y-o-y in July) to tighten the market and whether there will

be the same appetite to cut output as the market picks up into the 4Q peak season.

Downgrade to UW (from N) and lower target price to HKD3.80 (from HKD4.15). We

expect China Coal to continue to post ‘trough’ earnings and ROEs of just 2-3% over the next

few years, making near-term earnings multiples less useful. We move to a PB-based target

multiple of 0.44x, based on a 25% discount to the two-year average of 0.58x, and in line with

previous trough levels. Key upside risks include better-than-expected coal prices, delivery of

current future projects ahead of schedule and/or under budget, higher profitability of future

projects than our current estimates and further cost cuts.

China Coal Energy Co (1898 HK)

Downgrade to UW: Poor 1H14 performance and outlook

Weak 1H14 results in line with profit warning

Lower 2014-15e net income forecasts to factor in 2H14 production cuts and continued weak coal markets

Downgrade to Underweight (from Neutral) with a target price of HKD3.80 (from HKD4.15) based on a 0.44x PB multiple

Nat Resources & Energy Metals & Mining Equity – China

Company report

Index^ HSCEIIndex level 11,104RIC 1898.HKBloomberg 1898 HK

Source: HSBC

Underweight Target price (HKD) 3.80 Share price (HKD) 4.82 Forecast dividend yield (%) 2.1 Potential return (%) -19.1


Dec 2012 a 2013 e 2014 e

HSBC EPS 0.67 0.29 0.14 HSBC PE 5.7 13.3 27.8


Absolute (%) 16.4 12.4 -1.2 Relative^ (%) 9.8 0.7 -9.1


Enterprise value (RMBm) 101,237Free float (%) 43Market cap (USDm) 8,245Market cap (HKDm) 63,907

Source: HSBC

18 August 2014

Simon Francis* Head of Metals & Mining Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6620 [email protected]

Kirtan Mehta*, CFA Analyst HSBC Bank plc +91 80 3001 3779 [email protected]



Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited



2

China Coal Energy Co (1898 HK) Metals & Mining 18 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (RMBm)

Revenue 82,316 72,492 80,100 85,467EBITDA 12,261 11,563 13,431 14,866Depreciation & amortisation -5,230 -6,885 -7,361 -7,868Operating profit/EBIT 7,031 4,678 6,070 6,998Net interest -630 -1,634 -1,912 -2,306PBT 6,401 3,044 4,158 4,692HSBC PBT 6,401 3,044 4,158 4,692Taxation -1,781 -761 -1,039 -1,173Net profit 3,805 1,827 2,495 2,815HSBC net profit 3,805 1,827 2,495 2,815

Cash flow summary (RMBm)

Cash flow from operations 14,292 7,198 12,135 10,044Capex -30,333 -26,217 -22,000 -16,000Cash flow from investment -37,716 -25,731 -22,000 -16,000Dividends -2,785 -1,073 -548 -748Change in net debt 26,601 20,218 8,744 5,505FCF equity -15,226 -18,563 -9,241 -5,253

Balance sheet summary (RMBm)

Intangible fixed assets 36,732 37,905 39,038 39,141Tangible fixed assets 110,015 128,174 141,679 149,708Current assets 47,728 45,677 45,436 46,776Cash & others 19,437 17,036 18,823 20,085Total assets 216,520 233,315 247,713 257,185Operating liabilities 34,470 32,359 33,270 33,246Gross debt 69,963 87,780 98,312 105,078Net debt 50,526 70,744 79,488 84,993Shareholders’ funds 87,811 88,565 90,512 92,578Invested capital 140,567 162,361 174,060 182,295


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue -5.7 -11.9 10.5 6.7EBITDA -31.0 -5.7 16.2 10.7Operating profit -46.1 -33.5 29.8 15.3PBT -49.9 -52.4 36.6 12.8HSBC EPS -57.0 -52.0 36.6 12.8

Ratios (%)

Revenue/IC (x) 0.6 0.5 0.5 0.5ROIC 3.9 2.3 2.7 2.9ROE 4.4 2.1 2.8 3.1ROA 2.7 1.7 2.0 2.1EBITDA margin 14.9 16.0 16.8 17.4Operating profit margin 8.5 6.5 7.6 8.2EBITDA/net interest (x) 19.5 7.1 7.0 6.4Net debt/equity 49.0 67.4 73.7 76.9Net debt/EBITDA (x) 4.1 6.1 5.9 5.7CF from operations/net debt 28.3 10.2 15.3 11.8

Per share data (RMB)



Year to 12/2013a 12/2014e 12/2015e 12/2016e

Saleable coal production (mt) 119 110 117 120Self-produced coal ASP (RMB/t) 422 391 400 409Unit cost (RMB/t) 342 330 331 339Coal trading volume (mt) 41 38 40 40Coal trading gross margin (%) 1.7 2.0 1.5 1.5RMB:USD 6.15 6.21 6.11 6.10

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e

EV/sales 1.2 1.7 1.6 1.6EV/EBITDA 8.3 10.5 9.7 9.1EV/IC 0.7 0.7 0.7 0.7PE* 13.3 27.8 20.3 18.0P/Book value 0.6 0.6 0.6 0.5FCF yield (%) -30.0 -36.6 -18.2 -10.4Dividend yield (%) 2.1 1.1 1.5 1.7


Price relative


We introduce 12/2016e estimates in this report.

23456789101112

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101112

2012 2013 2014 2015China Coal Energy Co Rel to HSCEI

abcGlobal Research

Reported Ebola cases and deaths vastly

underestimate the magnitude of the outbreak, according to the WHO

WHO panel determines whether it is ethical to use experimental drugs; several drugs and vaccines are in development

We list companies involved in diagnosis /treatment globally, including in Asia

This report contains information about listed companies

that we do not rate from public third-party sources. We are

not commenting on the investment merit of these

companies’ securities.

Outbreak status. According to the WHO (World Health

Organization) there were 2,127 suspected/confirmed cases

and 1,145 deaths from Ebola as at 15 August. WHO stated

that there is evidence that “the numbers of reported cases and

deaths vastly underestimate the magnitude of the outbreak”

and the outbreak could continue for “some time”. However,

the WHO is coordinating a massive up-scaling of an

international response.

Ebola drug development. An expert panel convened by the

WHO determined that it is ethical to use experimental drugs

to treat Ebola. Firms/organisations developing treatments or

vaccines include Mapp Bio (Unlisted) and Tekmira Pharma

(TKMR US, CP:USD18.08, Not Rated). Assuming fast track

approval, it is possible that the first of these treatments/

vaccines could be approved by 2016. In the meantime,

“compassionate use” could mean that some of them could

reach patients before trials are conducted or completed.

Firms with Ebola-related businesses in Asia. Jin Won Life

Science (011000 KS, CP:KRW1,320, Not Rated) and

Bioneer (064550 KS, CP:KRW9,800, Not Rated) shares

have rallied in recent weeks, although we are uncertain of

the extent or the value of their involvement in tackling the

latest outbreak. Bioneer supplies Ebola virus diagnostic kits

to Nigeria. Jin Won Life Science’s major shareholder is

Inovio Pharma (INO US, CP:USD9.37, Not Rated), whose

SynCon DNA vaccine for Ebola completed preclinical trials

in May 2013; plans for further trials are currently unknown.

Healthcare - Equity Asia

Asia Healthcare

Ebola treatments/vaccines and diagnostics

19 August 2014 Nam Park* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6591 [email protected]

Carolyn Poon* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6586 [email protected]






2

Healthcare - Equity Asia 19 August 2014

abc

Outbreak status

Ebola (Ebola virus disease, EVD) has a 2-21 days

incubation period; there is no evidence of

transmission during this incubation period. Death

rate statistics vary considerably from nation to

nation (c25-74%)1. Ebola is not airborne –

according to the WHO, person-to-person

transmission arises from direct contact with

infected persons or their body fluids/secretions.

According to the WHO there were 2,127 suspected

and confirmed cases and 1,145 deaths from Ebola as

at 15 August and that there is evidence that “the

numbers of reported cases and deaths vastly

underestimate the magnitude of the outbreak”2. The

organisation expects the outbreak to continue for

“some time” (except in Nigeria, where no new cases

have been detected). The WHO is coordinating a

massive up-scaling of an international response.

Low risk of transmission through global travel

The WHO considers risk of transmission of Ebola

during air travel low; it recommended no ban on

international travel3 on 14 August. Earlier the same

day Korean Air announced a temporary suspension

of flights to and from Nairobi, Kenya starting

20 August to prevent the spread of the virus. This

move by the airline probably resulted from an earlier

1 According to WHO statistics, this appears higher than other outbreaks of severe diseases. For example, MERS-CoV (Middle East Respiratory Syndrome Coronavirus) has a death rate of c30%, while SARS-associated coronavirus (SARS-Cov) has a death rate of c10%. 2 Global Alert and Response (GAR), WHO Ebola news 14 August 2014; http://www.who.int/csr/disease/ebola/overview-20140814/en/ 3 WHO: Air travel is low-risk for Ebola transmission; http://www.who.int/mediacentre/news/notes/2014/ebola-travel/en/

WHO classification of Kenya as a high risk country4

citing its position as a regional transport hub.

Use/development of treatments/vaccines

The WHO announced on 12 August that an

expert panel it convened had determined that it is

ethical to use experimental drugs (i.e. those drugs

with no safety or efficacy data in humans) under

certain conditions.

Whilst ZMapp, developed by Mapp has gained

the most exposure as a drug to treat Ebola, there

are several firms/organisations developing

treatments or vaccines. TKM-Ebola, developed by

Tekmira Pharmaceuticals, appears to be the Ebola

treatment that is closest to market, as it is

currently in P1 trials. A vaccine – VRC – is to

enter P1 trials next month.

Assuming fast track approval, it is possible that

the first of these treatments/vaccines could be

approved by 2016. In the meantime,

“compassionate use” could mean that some of

them could reach patients before trials are

conducted or completed. Still, use of experimental

drugs would only be permissible under informed

consent and would require results of the

administration to be collected and disseminated,

as per WHO guidelines.

4 Reported in BBC World News, 13 August 2014

Ebola statistics as at 15 August 2014

Cases Deaths

Guinea 519 380 Sierra Leone 810 348 Liberia 786 413 Nigeria 12 4 Total 2,127 1,145

Source: The World Health Organization (WHO). Cases = suspected and confirmed cases

abcGlobal Research

Given what we view as attractive

valuations, we maintain our tactical OW on China

We raise Korea to N (from UW) as earnings risk declines and monetary policy is more supportive

We lower Malaysia to UW (from N) due to increased earnings risk and risk of rate increases; we remain OW ID and TH

Back from holidays, we take a fresh look at our country

ratings across Asia. As a result, we have decided to raise our

weightings for Korea to neutral and cut Malaysia from

neutral to underweight. In the process, we aim to answer the

following questions:

Is it still wise to overweight China? Valuations are still

supportive of Chinese equities. This year’s uptick in PMIs

might continue for longer than in previous years given there

has been a very gradual return to accommodative monetary

and fiscal policies. SOE reform a positive catalyst.

Is it time to overweight India? We don’t think the time is

right yet for us to change our neutral weighting. Valuations

still look high and mutual funds are still very overweight the

Indian stock market, in our view. Also, there remains a risk of

higher, not lower, interest rates. A positive is that some

reforms have been put in place, but the impact on corporate

earnings remains uncertain in terms of magnitude and timing.

Is ASEAN too expensive now?

Given the high ROEs, we feel Indonesian valuations are not

stretched. But Thailand does offer a recovery in earnings in

2H and lower valuations at the time. We cut Malaysia to

underweight on the back of rising earnings risk, high

valuations and the risk of rising rates.

How do Taiwan and Korea compare now?

We downgraded Taiwan to neutral in early July (see ‘Asia

Equity Insights Quarterly’, 8 July 2014). The earnings

upgrade cycle has been a key driver of Taiwan equities this

year, but the cycle is weakening. In Korea, earnings

expectations have declined, at last. Monetary policy has

become more supportive to local equities. As such, we move

Korea to neutral (from underweight).

Equity Strategy Asia

The Flying Dutchman

Still overweight on China, raising Korea to neutral

19 August 2014 Herald van der Linde* Head of Equity Strategy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6575 [email protected]

Devendra Joshi* Strategist, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6592 [email protected]






https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cnzf9zKxdu&n=421699.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cnzf9zKxdu&n=421699.PDF

2

Equity Strategy Asia 19 August 2014

abc

A new look

In this note, we take a fresh look at our country

ratings and address the four frequent questions we

have encountered since we returned from our

holidays (on the Dutch shores).

We cut Malaysia to underweight (from neutral)

because of 1) rising earnings risk, (2) risks of

rising interest rates and 3) high valuations. We

move Korea to neutral (from underweight)

because of (1) more visibility in earnings

forecasts, (2) a more supportive monetary policy

environment and (3) valuations.

The four questions are:

Is it still wise to overweight China?

Is it time to overweight India after its recent

underperformance?

Is Indonesia too expensive now?

How do Taiwan and Korea compare?

1. Still time to overweight China?

At the beginning of 2Q14, we moved China to

overweight (‘Asia Equity Insights Quarterly’,

3 April 2014). We also called it a trading call as

we believe that China continues to trade in a

narrow trading band.

In short, we argued that the Chinese market would

be propelled higher by a combination of lowing

valuations accompanied by accommodative

monetary and fiscal policies and SOE reform.

But this has now largely panned out –

markets have rallied and monetary policies have

been accommodative.

The question now is if China can continue to

outperform after a c20% run in the past few months.

China 12-mth fwd PE: Chinese equities still offer value

Source: MSCI, Thomson Reuters Datastream, HSBC

The answer is that there is probably a bit more to go.

First of all, valuations are still supportive. At 9.5x

earnings, we argue that there is still value in

Chinese equities. We base this on our research

into ROE trends across the region. Assuming

5x

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A refreshed look

We continue our tactical OW on China; upgrade Korea from UW

to N as earnings risk declines

Remain N on Taiwan, as its earnings upgrade cycle is slowing

Still OW Indonesia, Thailand; ASEAN valuations are not

stretched, in our view

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=njs0sUC0qF&n=411271.PDF

abcGlobal Research

Dairy prices fell sharply in the past six months (-40%), largely reflecting an apparent ramp-up in Chinese milk powder inventories last year, which is now being run down

Although we expect the inventory downswing has a bit further to run, we expect prices to stabilise in coming quarters, supported by strong medium-term dairy demand

Falling dairy prices are likely to be a drag on New Zealand’s income growth, although we still expect strong construction and immigration to support above-trend GDP growth in 2014

Dairy price decline to drag on income growth

Dairy prices have fallen sharply in recent months, taking some of the shine off New

Zealand’s strong growth story. According to the GlobalDairyTrade Index, dairy prices are

40% below their February peak and are now a touch below their post-2000 average. The

dairy price fall has been dramatic and is a timely reminder of the volatile forces that large

commodity producers can face and need to manage.

Nonetheless, we remain optimistic about New Zealand’s overall growth prospects, as

dairy is only one part of the strong growth story. Growth is still expected to be supported

by the substantial and on-going post-earthquake rebuild in Canterbury, a strong upswing

in residential construction in Auckland, and rapid net inward migration. Consumer and

business confidence remain at levels consistent with above-trend growth in 2014.

Although the data are limited, it appears that the fall in dairy prices largely reflects a cycle

in Chinese dairy inventories. Available trade data suggest there was a substantial rise in

Chinese dairy imports in late 2013, which has largely retraced in recent months. Imports

had ramped up well ahead of previous trends, suggesting that significant inventories are

likely to have been accumulated, which are now being run down.

At the same time, however, near-term supply is set to continue to be supported by better

weather in New Zealand and Europe. In 2015, the removal of European milk quotas could

also see an increase in the supply of traded dairy products. We see the price cycle over the

past year as a result of temporary demand and supply imbalances and an inventory cycle.

We expect medium-term demand for dairy products to remain strong as Asia’s middle

class incomes rise and their diets change. Dairy prices should stabilise in coming quarters,

although they seem unlikely to return to their recent peaks in the near term.

19 August 2014

Paul Bloxham Chief Economist, Australia and New Zealand HSBC Bank Australia Limited +61 2 9255 2635 [email protected] Daniel Smith Economist, Australia and New Zealand HSBC Bank Australia Limited +61 2 9006 5729 [email protected]


Issuer of report: HSBC Bank Australia Limited


New Zealand Digest

Milk story may be turning sour

Macro New Zealand Economics

Flashnote



2

Macro New Zealand Economics 19 August 2014

abc

Dairy prices have fallen sharply

Dairy prices rose solidly in early 2013, as severe drought in New Zealand created concerns over supply

limitations. As the weather improved and New Zealand headed into a strong production season in late

2013, prices fell back slightly but remained at high levels by historical standards. Since then, prices have

fallen significantly, with the GlobalDairyTrade Index currently down by around -40% from the recent

peak in February to below the post-2000 average (Chart 1).

As a result of the dairy price fall, New Zealand’s major dairy cooperative recently revised down its

forecast for the 2014-15 farm-gate milk price to NZD6.00 per kg of milk solids (kgMS). If the payout

does occur in line with the current forecast, this would be a -30% fall from the 2013-14 season’s payout

of NZD8.40 per kgMS. This could be a significant drag on New Zealand’s income growth, as we discuss

further below, although much depends on whether the lower dairy prices are sustained.

Fall appears to reflect a Chinese dairy inventory cycle

Both demand and supply factors have played a part in the decline in dairy prices. The strong 2013-14 New

Zealand production season coincided with a significant surge in Chinese milk powder imports (Chart 2).

We estimate that China imported around 800,000 tonnes of milk powder from November 2013 to April

2014, which is a 140% rise from a year earlier. This is well above the previous trend annual growth in

imports of around 50% a year from 2008 to 2013 and suggests a significant build-up of inventories.

Assuming a fairly conservative underlying increase of 30% in 2014 to meet on-going current demand would

imply annual imports of 1.1m tonnes (the US Department of Agriculture is currently forecasting 1.33m

tonnes). Given the volume of imports over 1H 2014 and assuming some accumulated surplus from 2013,

would leave around 300,000 tonnes still to be imported over 2H 2014 – an average of 50,000 a month. With

imports having already fallen to 70,000 tonnes in June from around 150,000 tonnes a month in 1Q 2014,

there is likely to be some further downside in the short run, but we expect imports to stabilise soon.

Of course, there are significant uncertainties here. Most notable is the assumption around total annual

imports. We assume strong continued growth in demand for imported dairy, given growth in Chinese

incomes, the likely support for demand that will come from lower dairy prices and the impact of tighter

1. Dairy prices have fallen sharply in recent months 2. Chinese imports surged during the New Zealand season

Source: GlobalDairyTrade Source: CEIC Data (milk powder figures only available from January 2014)

abcGlobal Research

As a result, we highlight Link REIT as a potential addition to

replace Cosco Pacific at the December index review

Hang Seng Indexes announces index rule enhancements

On Friday, Hang Seng Indexes announced index rule enhancements, in particular:

Change in index weighting methodology: the weighting cap of an individual stock

will be lowered from 15% to 10%. This will be implemented over 5 consecutive

quarters, reducing the cap by 1% per quarter, starting at the September 2014 review and

expected to be completed in 3Q 2015.

REITs (Real Estate Investment Trusts) are now to become eligible constituents of the

Hang Seng Indexes, starting from the next index review in December 2014.

September Hang Seng Index review: only free float and weighting cap changes

No index constituent changes announced for the September 2014 review.

SHK Properties saw its FAF decrease by 5% to 45%, as detailed in the table below.

Table 1: Free float change impact at the HSI September 2014 review

Name Ticker Current FAF

New FAF

Change in FAF

Current weight

Potential new weight

Change in wgt

EDT

SHK Properties 16 HK 50% 45% -5% 1.94% 1.76% -0.18% -0.3

Source: Hang Seng Indexes, HSBC, Bloomberg. FAF is Free Float Adjusted Factor, EDT (equivalent days to trade) based on an estimated HKD111bn of passive index tracking funds. Data as of 15-August-2014.

The new free-float factor and the individual stock weighting cap of 14% will be

implemented at the market close on 5 September 2014.

19 August 2014 Equity Quantitative Analysis Index Analysis – Hong Kong

Tacky Cheng* Analyst The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2822 4393 [email protected]

Joaquim de Lima* Analyst

HSBC Bank plc +44 20 7991 6836 [email protected]

Freddie Siu* Analyst The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2996 6558 [email protected]

Vijay Sumon* Analyst HSBC Bank plc +44 20 7991 6839 [email protected]





Hang Seng Index Q3 Review

Two significant index rule changes announced

Hang Seng Indexes will gradually lower the weighting cap of an individual stock from 15% to 10%; this will be implemented over 5 quarters, reducing the cap by 1% per quarter

REITs become eligible constituents of the Hang Seng Index for the first time, starting from the next index review


2

Equity Quantitative Analysis Index Analysis – Hong Kong 19 August 2014

abc

Simulated Hang Seng Index weightings following Sept changes

In the table below we simulate the stock weightings following the implementation of the free-float

factor and individual stock weighting cap changes

Table 2: HSI – Simulated weightings following the September 2014 changes

Change implemented

Name

Ticker

Current wgt

Potential new wgt

Change in wgt

Current FAF

New FAF

Pot'l flow HKDm

Shares to trade m

EDT

HK & China Gas 3 HK 1.35% 1.36% 0.01% 60% 60% 10.5 0.6 0.1 CLP Holdings 2 HK 1.52% 1.53% 0.01% 75% 75% 12.1 0.2 0.1 Bank of East Asia 23 HK 0.57% 0.57% 0.00% 60% 60% 4.3 0.1 0.1 ------- ------- 1.24% 1.25% 0.01% 40% 40% 10.2 0.1 0.1 MTR Corporation 66 HK 0.55% 0.55% 0.00% 25% 25% 4.4 0.1 0.1 Swire Pacific 'A' 19 HK 0.77% 0.78% 0.01% 70% 70% 6.2 0.1 0.1 Power Assets 6 HK 1.24% 1.24% 0.01% 65% 65% 9.4 0.1 0.1 Hengan Int'l 1044 HK 0.84% 0.85% 0.01% 65% 65% 6.1 0.1 0.1 AIA 1299 HK 6.36% 6.41% 0.04% 100% 100% 49.8 1.2 0.1 Hang Lung Properties 101 HK 0.64% 0.65% 0.00% 50% 50% 5.2 0.2 0.1 China Resources 291 HK 0.35% 0.36% 0.00% 50% 50% 2.8 0.1 0.1 Tingyi 322 HK 0.55% 0.56% 0.00% 35% 35% 4.4 0.2 0.1 COSCO Pacific 1199 HK 0.25% 0.25% 0.00% 60% 60% 1.9 0.2 0.1 Want Want China 151 HK 0.98% 0.98% 0.01% 55% 55% 7.7 0.7 0.0 Sino Land 83 HK 0.50% 0.51% 0.00% 50% 50% 4.0 0.3 0.0 CCB 939 HK 6.12% 6.16% 0.04% 35% 35% 47.9 8.1 0.0 China Res Power 836 HK 0.53% 0.53% 0.00% 40% 40% 4.2 0.2 0.0 BOC Hong Kong 2388 HK 1.14% 1.14% 0.01% 35% 35% 8.7 0.3 0.0 Cheung Kong 1 HK 2.47% 2.49% 0.02% 60% 60% 19.9 0.1 0.0 Cathay Pac Air 293 HK 0.21% 0.22% 0.00% 30% 30% 1.6 0.1 0.0 CNOOC 883 HK 3.23% 3.25% 0.02% 40% 40% 25.3 1.7 0.0 China Mobile 941 HK 6.97% 7.02% 0.05% 30% 30% 54.4 0.6 0.0 Hutchison 13 HK 2.74% 2.76% 0.02% 50% 50% 21.9 0.2 0.0 Li & Fung 494 HK 0.73% 0.73% 0.01% 70% 70% 5.7 0.6 0.0 ------- ------- 0.64% 0.64% 0.00% 35% 35% 4.9 0.1 0.0 ICBC 1398 HK 4.77% 4.81% 0.03% 85% 85% 37.4 7.1 0.0 Mengniu Dairy 2319 HK 0.65% 0.66% 0.00% 70% 70% 5.1 0.1 0.0 Sinopec Corp 386 HK 2.39% 2.41% 0.02% 100% 100% 18.7 2.5 0.0 Wharf (Holdings) 4 HK 1.10% 1.11% 0.01% 50% 50% 8.6 0.1 0.0 Tencent 700 HK 8.96% 9.03% 0.06% 60% 60% 70.2 0.5 0.0 Bank of China 3988 HK 3.61% 3.63% 0.03% 95% 95% 28.2 7.6 0.0 Belle Int'l 1880 HK 0.56% 0.56% 0.00% 55% 55% 4.4 0.4 0.0 China Mer Holdings 144 HK 0.36% 0.37% 0.00% 45% 45% 2.8 0.1 0.0 New World Development 17 HK 0.62% 0.62% 0.00% 60% 60% 4.9 0.5 0.0 PetroChina 857 HK 2.79% 2.81% 0.02% 100% 100% 21.8 2.0 0.0 Bankcomm 3328 HK 0.63% 0.63% 0.00% 25% 25% 4.9 0.8 0.0 China Shenhua 1088 HK 0.98% 0.99% 0.01% 100% 100% 7.8 0.3 0.0 Galaxy Entertainment 27 HK 1.72% 1.73% 0.01% 55% 55% 13.6 0.2 0.0 China Life 2628 HK 2.10% 2.12% 0.01% 100% 100% 16.4 0.7 0.0 Lenovo Group 992 HK 0.81% 0.82% 0.01% 55% 55% 6.4 0.6 0.0 China Unicom 762 HK 0.94% 0.95% 0.01% 25% 25% 7.3 0.6 0.0 Kunlun Energy 135 HK 0.52% 0.53% 0.00% 40% 40% 4.1 0.3 0.0 Sands China 1928 HK 1.58% 1.60% 0.01% 30% 30% 12.2 0.2 0.0 HKEx 388 HK 2.49% 2.50% 0.02% 95% 95% 20.0 0.1 0.0 China Overseas 688 HK 1.15% 1.16% 0.01% 50% 50% 8.9 0.4 0.0 Ping An 2318 HK 1.66% 1.67% 0.01% 65% 65% 12.7 0.2 0.0 China Res Land 1109 HK 0.43% 0.43% 0.00% 35% 35% 3.4 0.2 0.0 CITIC Pacific 267 HK 0.33% 0.33% 0.00% 45% 45% 2.5 0.2 0.014% Weighting cap ------- ------- 14.41% 14.00% -0.41% 100% 100% -454.3 -5.4 -0.3FAF change SHK Properties 16 HK 1.94% 1.76% -0.18% 50% 45% -201.4 -1.7 -0.3

Note: Potential flow, EDT (equivalent days to trade) and Shares to trade based on an estimated HKD111bn of passive index tracking funds. Data as of 15-August-2014. FAF is Free Float Adjusted Factor. Table sorted by EDT. Source: HSBC, Hang Seng Indexes, Bloomberg.

abcGlobal Research

The Great Mall of ChinaThe good, the bad and the ugly so far What’s on our mind

Chinese consumer: woods bigger than expected. The HK/China results season has started and what we have seen so far are

still fairly uninspiring. Although one might think the worst could be over given sequential improvement in economic activity,

we actually have not seen signs of a pick-up, and guidance from reported companies so far are still fairly lackluster. Of the 13

companies reported under our coverage, we have seen 54% misses and 23% beats. Macau gaming operators missed earnings

expectations most, mainly due to wage cost and poor luck, but we believe the market is still cautious on the mass slowdown.

Supermarket operators including Sun Art and Wumart came below expectations on softer top-line growth. Apparel company

China Lilang also came below expectation, but was mainly due to higher tax rate.

Sportswear was the only exception, with Anta beating our earnings expectations by 14% while Li Ning also posted in-line

results after the profit warning issued earlier. We are only halfway through the results season, and we will keep you posted.

The HK/China Consumer Team

What’s headline news (see p.2 for other news)

China CPI: July CPI came in line with expectation, rising 2.3% y-o-y, mainly driven by food inflation at 3.6% y-o-y.

Sequentially, CPI grew 0.1% over the month according to official seasonally adjusted series, up from -0.1% in June.

Our latest views (see p.3 for other research)

Prada SPA (1913 HK, UW, TP: HKD52.00) – Poor Results And Downgrades Ahead 13 Aug

The Prada brand seems to have lost its edge, while the brand, channel and product mixes all point to greater margin pressure

than we had anticipated. Meanwhile, the stock continues to trade at an unjustifiably high premium to its peers. Downgrade

to UW from N on a 15% cut to EBIT estimates and higher WACC; TP lowered to HKD52 (from HKD68).

Target price and rating changes

Date Ticker Company Old/Last TP New TP Old/Last Rating New Rating

15-Aug 0551.HK Yue Yuen 23.40 20.00 N UW14-Aug 6808.HK Sun Art 13.00 12.20 OW Unchanged13-Aug 0220.HK Uni-President China 4.05 4.40 UW Unchanged13-Aug 1913.HK Prada 68.00 52.00 N UW12-Aug 0829.HK Shenguan 3.50 3.30 N Unchanged11-Aug 1025.HK Wumart 8.90 8.50 N OW (V)7-Aug 2020.HK Anta 14.30 15.80 OW (V) OW31-Jul 0891.HK Trinity 2.80 1.20 N (V) UW (V)30-Jul 0468.HK Greatview N/A 6.90 N/A OW


Erwan Rambourg* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996-6572 [email protected]

Cathy Chao* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996-6570 [email protected]

Christopher Leung* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996-6531 [email protected]

Chris Zee* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822-2912 [email protected]

Lina Yan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822-4344 [email protected]

Alice Chan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996-6535 [email protected]

Charlene Liu* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822-4398 [email protected]

Scott Chan* Associate The Hongkong and Shanghai Banking Corporation Limited +852 3941-7005 [email protected]

Gaurav Banthia* Associate Bangalore


Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: http://www.research.hsbc.com


Disclosures for companies can be accessed via the hyperlinks to the original published research, which can be found in the title

19 August 2014


https://www.research.hsbc.com/R/20/rhfRrGVso9hz

2

The Great Mall of China 19 August 2014

abc

Upcoming events AUG 2014

Monday Tuesday Wednesday Thursday Friday

18 19 20 21 22

US: CPI Biostime: 1H14 results Daphne: 1H14 results Hengdeli: 1H14 results Galaxy Ent.: 1H14 results

China: HSBC China Mfg PMI Intime: 1H14 results Trinity: 1H14 results

HK: CPI CRE: 1H14 results Li & Fung: 1H14 results Xtep: 1H14 results

US: Unemployement rate Jigkelong: 1H14 results Tenwow.: 1H14 results

25 26 27 28 29

Modern Dairy: 1H14 results Golden Eagle: 1H14 results Gome: 1H14 results

Chow Sang Sang: 1H14 results

Haier: 1H14 results Want Want: 1H14 results Yashili: 1H14 results

Hengan: 1H14 results Mengniu Dairy: 1H14 results Samsonite: 1H14 results Shenzhou: 1H14 results

HK: Retail sales US: GDP Lianhua: 1H14 results

Bawang: 1H14 results

Source: Bloomberg, company data

Other consumer news

Suning to add 4-5 stores in HK this year 18 Aug

HKEJ: Suning plans to add 4-5 stores this year in Hong Kong as the company expects more rooms to grow in electronic

appliances retailing. The company expects only minimal impact even if there is a change in the Individual Visitor Scheme.

Chow Tai Fook teamed up with G-Dragon 15 Aug

Appledaily: Chow Tai Fook collaborated with G-Dragon to release the Chow Tai Fook x G-Dragon jewellery series which

is designed by the Korean pop star. Price starts from HKD680.

Global Brands Expands its Disney business 15 Aug

AsiaToday: Global Brands Group extended its Disney-licensed children’s sleepwear business for a two-year period

commencing on January 1, 2015. The agreements will cover the Disney, Marvel and Star Wars brands and include

distribution to retailers in the US as well as major US retailers that have a footprint in Canada.

Giordano 1H14 declined 48%yoy 14 Aug

HKEx: Giordano’s profit decreased by 49%yoy due to weak gross profits and operating expenses that reduced by only 2%yoy.

Cost controls were offset by rental increases in HK and increases in operating costs for net 59 shops opened in South East Asia.

Peak Sport profit increased 35% yoy 14 Aug

HKEx: Peak Sport saw profit up 35%yoy in 1H14 on the back of a 10% rise in revenue mainly driven by growth in

overseas sales. Management declared a dividend of HKD4 cents per share, representing a 55% payout ratio.

Stella profit up 5% in 1H14 14 Aug

HKEx: Stella reported a 5% yoy increase in 1H14 profit to reach USD52.6m. Revenue was up 4% yoy. An interim dividend

of HKD30 cents was declared, same amount as distributed in 1H13.

Hengdeli CFO moved to Home Inns Group 14 Aug

WSJ: Home Inns & Hotels Management Inc. announced the appointment of Ms. Cathy Xiangrong Li as the CFO, who was

previously the CFO of Hengdeli. However, no announcement has yet been made by Hengdeli on the departure of the CFO.

Yanjing profit up 10%yoy, developing E-commerce 11 Aug

SZSE: Yanjing’s profit during 1H14 was up 10% coupled with a 5% growth in sales. Beer volume sold was up 4%, mainly

driven by its own brand. The company said they are developing and online platform to accommodate personalised needs.

abcGlobal Research

Profit growth in line at 12% y-o-y. Capital risk is a medium- term concern if aggressive use of trust rights / NSCAs continues, as tier-1 fell by 2ppt h-o-h to 9.8% (required: 8.5%)

Chongqing is starting to feel the spreading credit pain: NPLs rose 17% h-o-h, mainly on long-term loans to county manufacturers (likely SME); 2Q credit costs surged to 120bp

Remain OW(V) on cheap valuation with HKD5.90 TP but challenges from capital, asset quality, and further regulatory risks on trust rights, could weigh on the shares near-term

1H14 profit of RMB3.6bn in line with our forecast and consensus, up 12% y-o-y.

What we liked: (1) 1H fee income growth was strong at 31% y-o-y, driven by strength

across most fee categories. (2) Improving cost efficiency with expenses growing by only

16% y-o-y (3ppt slower than revenue), leading to a near-100bp fall in the cost-income

ratio. (3) Liquidity is still strong with 18% loan growth well-funded by deposits. The loan-

deposit ratio is still low at 57% due to the extensive county network.

What we disliked: (1) The Tier-1 ratio fell by 2ppt h-o-h as the Doc 127 impact kicked in

on trust rights and NSCA’s previously classified as interbank assets. The Tier-1 ratio at

9.8% is only 1.3ppt away from the required level, hence capital concerns could emerge in

the medium-term as internal capital generation seems insufficient to support >20%

balance sheet growth. (2) NPLs rose by 17% h-o-h and the ratio by 5bp to 0.85%. The

majority of new NPLs were medium-to-long term loans to manufacturers in the

Chongqing county region. This may indicate some credit risk spreading from the coastal

region to inner China. Credit costs in 2Q rose to 120bp, double the level of previously-

reported quarters. Yet the loan loss reserve remains strong at 3.6% – this should be able to

buffer even accelerated NPL formation.

Other points of interest: (1) The NIM contracted by 5bp h-o-h on time deposit

migration, which raised overall funding costs. (2) Trust rights and investments in WMP

balance were unchanged at cRMB100bn, equivalent to 17% of total assets.

Maintain OW(V) and HKD5.90 TP: We have not changed our forecasts or target price.

We remain OW(V) due to valuation (0.71x 2014e PB/4.4x PE is the lowest valuation

among H-share banks). However, challenges from capital, asset quality and further

regulatory risks on trust rights could weigh on the shares in the near term.

Chongqing Rural CB (3618 HK)

OW(V): Capital risk emerging – growth consumes more tier-1 by Doc 127; credit costs spike with higher NPLs

Overweight (V) Target price (HKD) 5.90 Share price (HKD) 4.00 Potential return (%) 48

Note: Potential return equals the percentage difference between the current share price and the target price


Absolute (%) 14.0 17.0 14.4 Relative^ (%) 7.7 5.6 5.2

Index^ HSCEI

RIC 3618.HK Bloomberg 3618 HK Market cap (USDbn) 4.8 Market cap (HKDbn) 37.2 Free float (%) 24


FIG Commercial Banks Equity – China

17 August 2014

Michael Chu*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6926 [email protected]

Michael Chang*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6555 [email protected]

Todd Dunivant* Head of Banks Research, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 [email protected]





Flashnote


2

Chongqing Rural CB (3618 HK) Commercial Banks 17 August 2014

abc

Interim and quarterly metrics

P&L summary (RMBm) 2H13 1H14 1H14 y-o-y (%)

1H14 h-o-h (%)

1H14 % FY14e

4Q13 1Q14 2Q14 2Q14 y-o-y(%)

2Q14 q-o-q(%)

Net interest income 8,111 8,851 17 9 49 4,121 4,258 4,593 16 8Net fees & commissions 377 398 31 6 53 178 156 242 56 55Other non-interest income -145 232 243 -260 465 -40 69 164 533 139Operating income 8,342 9,481 19 14 50 4,259 4,482 4,998 21 12Operating expense -3,947 -3,789 16 -4 45 -2,160 -1,790 -1,998 17 12PPOP 4,395 5,692 21 30 54 2,098 2,692 3,000 23 11Impairment on loans -510 -920 98 81 61 -283 -265 -655 109 147Impairment on other assets -208 1 n.m. n.a. -1 -208 0 1 n.m. n.a.Profit before tax 3,678 4,773 13 30 54 1,608 2,427 2,346 11 -3Taxation -882 -1,171 15 33 55 -356 -583 -588 14 1Attributable profit 2,774 3,592 12 29 53 1,243 1,834 1,758 10 -4Balance sheet items (RMBbn) Total assets 502 594 22 18 502 550 594 22 8Customer loans 205 227 18 10 205 215 227 18 5Customer deposits 348 395 17 14 348 384 395 17 3Total equity 36 38 14 5 36 38 38 14 0Ratios (%) Net interest margin 3.43 3.38 -0.01 -0.05 3.44 3.39 3.37 -0.10 -0.02Loans / Deposits ratio 59 57 1 -2 59 56 57 1 1Cost / income ratio 47 40 -1 -7 51 40 40 -1 0NPL ratio 0.80 0.85 0.12 0.05 0.80 0.69 0.85 0.12 0.16Coverage ratio 431 419 -46 -12 431 500 419 -46 -82Credit costs 0.51 0.85 0.35 0.34 0.56 0.50 1.19 0.52 0.68Loan loss reserve 3.46 3.56 0.17 0.10 3.46 3.45 3.56 0.17 0.11Tier-1 ratio 11.85 9.80 -1.12 -2.05 11.85 10.96 9.80 -1.12 -1.16CAR 13.64 12.68 -0.03 -0.96 13.64 12.60 12.68 -0.03 0.08ROAE 15.9 19.3 -0.3 3.4 13.9 19.7 18.4 -0.7 -1.3ROAA 1.12 1.31 -0.09 0.19 1.00 1.39 1.23 -0.09 -0.17Effective Tax 23.99 24.54 0.49 0.55 22.17 24.03 25.07 0.64 1.04EPS (RMB) 0.29 0.39 0.04 0.10 0.13 0.20 0.19 0.01 -0.01

Source: Company data, HSBC estimates

Valuation methods: We used a discounted Gordon growth model to value CQRCB. We first derive a

target PB multiple of 1.38x, assuming COE= 13.8%, g = 5%, and a sustainable ROE proxied by the

average of FY14-16e ROE of 17.2%. We apply this target PB multiple to the 1H15e book value per share

of RMB4.74 and then also apply a combined valuation discount of -32% to reflect CQRCB’ positioning

with respect to upcoming challenges facing the sector. We thus arrive at our target price of HKD5.90,

assuming a forward RMB/HKD exchange rate of 1.32. This target price does not include the dividend

yields. The key downside risk is worse-than-expected asset quality due to a slowdown in growth in

Chongqing’s economy.

abcGlobal Research

1H14 review: 1H14 net profit declined 15% y-o-y to RMB1.88bn mainly because of a

GPM decline that caused by an lower proportion of the most profitable engineering and

licensing jobs and higher proportion of thin-margin Kazakhstan project.

Management guides a better 2H14e. This supports our 2014 estimates (net profit

RMB4.2bn, EPS RMB0.94). We calculate that the company would need to post

RMB28bn in revenue and RMB2.3bn in net profit in 2H14e to meet our FY14 estimate.

We expect a y-o-y EBIT margin expansion in 2H14, well supported by 3-4 domestic coal-

based methanol-to-olefins projects to be delivered in the 2H14e, and coal chemical

projects normally carry a higher margin than other projects.

Multiple catalysts are in sight. 1) Short- to mid-term margins should improve as current

backlog has the highest proportion of high-margin coal chemical and domestic projects

since 2010; 2) SEG is actively promoting and moving forward a management incentive

plan; 3) we assume that a mega coal-to-gas project by Sinopec Group in Mongolia will be

awarded to SEG once it gets going; 4) the announcement of the long-waited new coal

chemical industry guidance and traditional refinery/petrochemical industry guidance from

National Reform and Development Commission (NDRC).

Maintain OW(V) and TP of HKD13.5. We value the shares using blended multiples of

15 global peers with market caps above USD2.5bn (13.5xPE, 2xPB, and 4.5x

EV/EBITDA). Our target price implies 11.4x 2014e PE and the shares are currently

trading at 7.4x. Our 2014-16e earnings are in-line with consensus, while target price is

24% above. Downside risks include downstream capex cuts by major customers such as

Sinopec; value-eroding M&A. Potential catalysts: NDRC support for domestic new coal

chemical and traditional refinery/petrochemical industry; early-than-expected signing of

EPC contract for Sinopec’s 8bcm coal-to-gas project in Xinjiang; go-ahead of the coal-to-

gas project by Mongolia and Sinopec Group.

Sinopec Engineering (2386 HK)

OW(V): 1H14 decline is in line; multiple catalysts ahead

1H14 net income of RMB1.88bn, down 15% y-o-y, is in line with our estimates; the decline is caused by a suboptimal project mix

Margin should improve in 2H14e, as some coal-chemical projects are entering key construction period

Maintain OW(V) rating and TP of HKD13.5; we anticipate a few share price drivers to materialize in 2H14e

Nat Resources & Energy Energy Equipment Equity – China

Company report


Source: HSBC

Overweight (V) Target price (HKD) 13.50 Share price (HKD) 8.70 Forecast dividend yield (%) 4.1 Potential return (%) 59.3


Dec 2013 a 2014 e 2015 e

HSBC EPS 0.93 0.94 1.06 HSBC PE 7.4 7.3 6.5


Absolute (%) 0.0 -0.6 -12.7 Relative^ (%) -6.0 -9.5 -21.3


Enterprise value (CNYm) 23562Free float (%) 33Market cap (USDm) 5,096Market cap (HKDm) 39,503

Source: HSBC

18 August 2014

Tingting Si* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6590 [email protected]

Thomas C. Hilboldt*, CFA Head of Oil, Gas and Petrochemical Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 2922 [email protected]

Meredith Hu* Associate






2

Sinopec Engineering (2386 HK) Energy Equipment 18 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (CNYm)

Revenue 43,572 50,070 56,752 63,780EBITDA 5,000 5,802 6,453 7,125Depreciation & amortisation -587 -734 -774 -832Operating profit/EBIT 4,413 5,068 5,679 6,293Net interest 324 334 384 435PBT 4,751 5,411 6,075 6,739HSBC PBT 4,751 5,411 6,075 6,739Taxation -1,094 -1,245 -1,367 -1,516Net profit 3,657 4,167 4,708 5,223HSBC net profit 3,657 4,167 4,708 5,223

Cash flow summary (CNYm)

Cash flow from operations -86 4,622 5,196 5,754Capex -361 -1,040 -1,181 -1,332Cash flow from investment -6,963 -1,040 -1,181 -1,332Dividends -957 -1,435 -1,250 -1,413Change in net debt -849 -2,148 -2,765 -3,009FCF equity 3,869 3,851 4,289 4,712

Balance sheet summary (CNYm)

Intangible fixed assets 444 371 325 300Tangible fixed assets 7,600 7,978 8,432 8,957Current assets 39,199 45,560 52,658 60,224Cash & others 5,514 7,662 10,427 13,436Total assets 47,365 54,032 61,537 69,604Operating liabilities 23,621 27,143 30,766 34,576Gross debt 0 0 0 0Net debt -5,514 -7,662 -10,427 -13,436Shareholders funds 20,980 23,712 27,171 30,981Invested capital 18,107 19,104 20,221 21,468


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue 13.1 14.9 13.3 12.4EBITDA 10.4 16.0 11.2 10.4Operating profit 15.2 14.8 12.1 10.8PBT 11.7 13.9 12.3 10.9HSBC EPS -12.6 0.7 13.0 10.9

Ratios (%)

Revenue/IC (x) 3.7 2.7 2.9 3.1ROIC 28.7 21.0 22.4 23.4ROE 26.1 18.6 18.5 18.0ROA 8.8 8.4 8.3 8.1EBITDA margin 11.5 11.6 11.4 11.2Operating profit margin 10.1 10.1 10.0 9.9EBITDA/net interest (x) Net debt/equity -26.3 -32.3 -38.4 -43.4Net debt/EBITDA (x) -1.1 -1.3 -1.6 -1.9CF from operations/net debt

Per share data (CNY)



Year to 12/2013a 12/2014e 12/2015e 12/2016e

Revenue Growth % 13.1 14.9 13.3 12.4Gross margin % 14.7 14.7 14.6 14.5EBIT margin % 10.1 10.1 10.0 9.9

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


7

8

9

10

11

12

13

14

7

8

9

10

11

12

13

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2012 2013 2014 2015Sinopec Engineering (Grou Rel to HANG SENG INDEX

abcGlobal Research

China Everbright Intl announced a 3,000tpd waste-to-energy project win in Hangzhou, Zhejiang province

We believe the project win is a positive surprise both in terms of location and size

Reiterate OW, we believe the Street under-estimates EPS growth; TP HKD12.60 unchanged

Project win in Hangzhou…: China Everbright Intl (CEI) announced after market close on

18 Aug that it has signed letter of intent to establish a project company for a waste-to-energy

(WTE) project in Yuhang district of Hangzhou city (Zhejiang). CEI will hold 70% in the

project company. The Yuhang project will have designed capacity of 3,000tpd.

…a positive surprise: We believe the project win is a positive surprise for the market in terms

of both location and size. Hangzhou is the home base for one of CEI’s major competitors,

which already has a WTE plant using circulating fluidized bed (CFB) in the Yuhang district.

Also, the project size is massive, making it one of China’s largest WTE plants.

We calculate that adding the Yuhang project to CEI’s ytd WTE project announcements would

bring these to 13,000tpd year-to-date (including Phase IIs), higher than the company’s project

announcements of 11,300tpd in 2012 and 2,900tpd in 2013. Despite our near-term cautious

view on the construction progress, we continue to be positive about CEI’s WTE project wins

over the next few years, as China will have no choice but to push forward WTE after more and

more landfill sites are filled out. Reading the interim results releases of Capital Environment

(3989 HK, not rated) and Dynagreen Environmental (1330 HK, not rated), it appears to us that

their management also shared our long-term optimism.

OW rating: We reiterate our Overweight rating and HKD12.60 DCF-based TP (no terminal

value, WACC 6.2% with key assumptions of 3%, equity risk premium of 6.5% and equity beta

of 0.85). We believe the market is underestimating earnings growth from 1) hazardous waste

treatment; 2) re-acceleration of sewage expansion; 3) WTE, especially in suburban and rural

areas and 4) synergy with HanKore (HANKORE SP, not rated).

Our earnings forecasts are 6-19% above consensus in 2014-15e and we see further upside risk

of up to 15% in 2015e from hazardous waste treatment. Everbright Intl’s HWT business

should benefit from Action Plan on Prevention and Control of Soil Pollution, revised

Environmental Protection Law and Supreme Court’s push.

Potential catalysts: major HWT/WTE project wins, completion of HanKore deal, further

government policies/reiteration on environmental protection. Downside risks: a worsening

of local government financial conditions, slower-than-expected capacity expansion and

value-destructive M&A.

Overweight Target price (HKD) 12.60 Share price (HKD) 10.48 Potential return (%) 20.2




Index^ HSCEI

RIC 0257.HK Bloomberg 257 HK Market cap (USDm) 6,062 Market cap (HKDm) 46,989 Enterprise value (HKDm) 49525 Free float (%) 56


China Everbright Intl (257 HK)

OW: Surprise waste-to-energy project win in Hangzhou

Industrials Commercial Services Equity – China

19 August 2014

Thomas Zhu*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4325 [email protected]

Anderson Chow* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6669 [email protected]





Flashnote


2

China Everbright Intl (257 HK) Commercial Services 19 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (HKDm)

Revenue 5,320 6,675 10,568 12,670EBITDA 2,218 2,892 4,483 5,758Depreciation & amortisation -66 -71 -71 -70Operating profit/EBIT 2,152 2,821 4,412 5,687Net interest -288 -353 -457 -657PBT 1,812 2,529 3,795 4,845HSBC PBT 1,812 2,529 3,795 4,845Taxation -447 -607 -949 -1,211Net profit 1,325 1,864 2,761 3,525HSBC net profit 1,325 1,864 2,761 3,525

Cash flow summary (HKDm)

Cash flow from operations -364 588 -1,960 -2,164Capex -302 -120 -110 -100Cash flow from investment -950 -120 -110 -100Dividends -263 -466 -690 -881Change in net debt -2,101 1,429 3,873 4,620FCF equity -1,244 -384 -3,022 -3,553

Balance sheet summary (HKDm)

Intangible fixed assets 1,117 1,112 1,109 1,107Tangible fixed assets 13,646 16,660 22,600 29,492Current assets 8,244 7,673 8,179 8,493Cash & others 5,815 4,964 4,091 3,471Total assets 23,471 25,695 32,139 39,341Operating liabilities 1,792 2,160 3,448 3,898Gross debt 6,921 7,500 10,500 14,500Net debt 1,107 2,536 6,409 11,029Shareholders funds 13,374 14,772 16,843 19,487Invested capital 16,172 18,358 24,302 31,566


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change


Ratios (%)

Revenue/IC (x) 0.4 0.4 0.5 0.5ROIC 9.1 10.8 12.9 12.6ROE 12.2 13.2 17.5 19.4ROA 8.0 9.0 11.1 11.6EBITDA margin 41.7 43.3 42.4 45.4Operating profit margin 40.4 42.3 41.8 44.9EBITDA/net interest (x) 7.7 8.2 9.8 8.8Net debt/equity 8.0 16.6 36.9 54.8Net debt/EBITDA (x) 0.5 0.9 1.4 1.9CF from operations/net debt 23.2

Per share data (HKD)



Year to 12/2013a 12/2014e 12/2015e 12/2016e

WTE waste processed (kt) 4,423 5,158 7,213 9,451Waste processing fees (RMB/t) 73 77 81 82On-grid electricity (GWh) 1,052 1,240 1,733 2,270WTE tariff (RMB/kWh) 0.65 0.65 0.65 0.65Waste water treated (m m3) 544 619 649 712WWT fee (RMB/m3) 1.2 1.2 1.3 1.3

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


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2012 2013 2014 2015China Everbright Intl Rel to HSCEI

abcGlobal Research

Free cash flow stronger and gearing has peaked

After dividend and Scheme of Control capex, CLP expects to have cHKD4bn pa of discretionary capex

Reiterate our OW rating and TP of HKD74 Gearing has peaked and discretionary capex is cHKD4bn pa: At 30 June 2014, net

debt/total capital was 39% following the CAPCO acquisition funded with debt and hybrid

securities. With the current structure of the business, the company believes gearing has

peaked. Free cash flow (FCF) has improved (due to operational improvements and lower

interest expense from refinancing debt). If 1H14 FCF of HKD5.7bn is sustained, annual

FCF would be HKD12bn pa. This is allocated cHKD6.5bn pa to dividend payments and

cHKD3.5bn pa for equity funding of SoC capex (cHKD7bn pa). This leaves HKD2bn pa

for equity funding of discretionary capex (which could be leveraged 1:1). The company

targets an IRR of 12-14% and believe their strengths are in greenfield or expansion

projects and securing fuel supplies.

Earnings growth is expected from steady growth in Hong Kong from developments on

in Kowloon/New Territories including data centres and new infrastructure (2.7% growth

in local power sales in 1H14); cost reductions in Australia in 2015 (majority of targeted

cHKD700m savings is from shifting to one billing system); completion of new projects

now under development including Fangchenggang power station expansion and wind

farms in India and China and deployment of discretionary capex.

Potential positive catalysts include: 1) refinancing to reduce the cost of debt in India; 2)

AGL shutting down the Liddell power station in Australia, so reducing the extent of

excess power supply in NSW; 3) revisions that make Australia’s Renewable Energy

Target less onerous; 4) policy initiatives improving prospects in the Indian power market

(CLP are cautiously optimistic); 5) new gas-fired generation being approved in Hong

Kong (this summer, the demand peak is already 4% higher than previous peak in 2011 and

this may be surpassed as the traditional peak is around the return to school in September).

CLP believe new gas generation is required before the end of the decade.

We maintain our target price of HKD74 based on a SOTP, applying DCF for Hong

Kong-based assets (CLP Power and CAPCO) and 2014e PE multiples for all other

geographies. Our net earnings forecasts are 2% below, 3% above and 5% above consensus

for FY14e, FY15e and FY16e, respectively. Downside risks to our view: Rising bond

yields and regulation post 2018 in Hong Kong.

Overweight Target price (HKD) 74.00 Share price (HKD) 65.45 Forecast dividend yield (%) 4.0 Potential return (%) 17.1



Absolute (%) 2.7 4.5 2.0 Relative^ (%) -3.4 -4.9 -7.3

Index^ HANG SENG INDEX


CLP Holdings Ltd (2 HK)

OW: Hong Kong NDR feedback

Nat Resources & Energy Electric Utilities Equity – Hong Kong

19 August 2014

Jenny Cosgrove*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6619 [email protected]

Gloria Ho*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited +852 29966941 [email protected]





Flashnote


2

CLP Holdings Ltd (2 HK) Electric Utilities 19 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e


Revenue 104,530 99,095 102,636 107,337EBITDA 15,747 21,855 23,267 24,217Depreciation & amortisation -7,592 -7,344 -7,439 -7,570Operating profit/EBIT 8,155 14,512 15,828 16,647Net interest -6,349 -4,548 -3,610 -3,703PBT 5,840 12,131 14,038 14,803HSBC PBT 5,840 12,411 14,038 14,803Taxation 232 -1,615 -2,071 -2,246Net profit 6,060 9,902 10,982 11,562HSBC net profit 9,307 9,902 10,982 11,562


Cash flow from operations 21,021 23,857 19,096 22,813Capex -9,584 -17,224 -12,235 -11,165Cash flow from investment -6,431 -29,511 -10,708 -9,607Dividends -6,497 -6,514 -6,695 -7,074Change in net debt -2,354 18,046 2,361 -1,975FCF equity -756 1,736 1,419 6,504




Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue -0.3 -5.2 3.6 4.6EBITDA -21.7 38.8 6.5 4.1Operating profit -37.8 77.9 9.1 5.2PBT -41.5 107.7 15.7 5.4HSBC EPS -5.6 6.4 10.9 5.3

Ratios (%)




Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e

EV/sales 1.9 2.2 2.2 2.1EV/EBITDA 12.3 10.2 9.7 9.3EV/IC 1.7 1.4 1.3 1.3PE* 17.8 16.7 15.1 14.3P/Book value 1.9 1.6 1.5 1.4FCF yield (%) -0.5 1.1 0.9 4.2Dividend yield (%) 3.9 4.0 4.2 4.4


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2012 2013 2014 2015CLP Holdings Ltd Rel to HANG SENG INDEX

abcGlobal Research

Galaxy reported net profit grew 39% y-o-y in 1H14, driven by growth in financing and investment banking businesses

This shows Galaxy is capable to offset the lower commission rate, which declined from 8.1bp in 2013 to 7.2bp in 1H14

Reiterate OW rating with a HKD6.8 target price; we continue to believe the stock is under-rated

Profit grew 39% in 1H14 on financing and IBD. Galaxy reported RMB1.35bn net profit in

1H14, up 39% y-o-y and c52% of our FY14 profit forecast. Its profit growth exceeded the

32% industry growth during the same period, mainly driven by the 51% increase in interest

income and 174% increase in underwriting fee which, respectively, reflected the greater

contribution from financing business and a sharp recovery in enterprise bond issuance. In

addition, the company has seen its impairment expenses decline 85% y-o-y, perhaps due to

non-repetition of pre-IPO investment write-down.

Measured decline in brokerage commission. Securities brokerage fee was down 9% y-

o-y in 1H14, and its percentage revenue share declined from around 50% in 2013 to 35%

in 1H14. Based on the turnover data provided by Wind, we calculated Galaxy’s brokerage

commission rate has fallen from 8.1bp in 2013 to 7.2bp in 1H14. This is in line with the

industry average and is consistent with our expectations. We believe the measured pace of

decline is supportive to our view that renewed online competition should have a rather

limited negative impact to pricing (see our China brokers report titled Riding the trend

from shadow banking to capital markets, published on 2 July 2014, for details) and also

help the stock to overcome investors’ concerns (about a more dramatic decline).

Reiterate OW with HKD6.8 target price. Our forecasts are unchanged and our target price

of HKD6.8, which is derived from a residual income valuation approach and implies 1.3x

2015e PB, stays the same. Although the company’s share price was already up nearly 20%

since the end of June, we believe its current valuation hasn’t fully factored in its growth

prospect and industry-leading ROE. Reiterate Overweight. We note Galaxy has recently

obtained regulatory approval to issue RMB5bn corporate bonds, which could help to

accelerate its leveraging process ahead and drive faster growth in the financing business.

Key downside risks. Fiercer competition could lead to greater pricing pressure and a lower

commission rate; an unexpected deterioration in capital market conditions and regulations

could hurt its brokerage business; lack of success in obtaining external borrowing and

increasing leverage could constrain growth in its financing business; M&A is another

potential risk.

Galaxy Securities (6881 HK)

OW: Solid 1H14 result should mitigate market concerns

FIG Brokers Equity – China

18 August 2014

York Pun*, CFA Analyst The Hong Kong and Shanghai Banking Corporation Limited +852 2822 4396 [email protected]

Todd Dunivant* Head of Banks Research, Asia Pacific The Hong Kong and Shanghai Banking Corporation Limited +852 2996 6599 [email protected]

Alice Li* Associate The Hong Kong and Shanghai Banking Corporation Limited +852 2822 2981 [email protected]



Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited


Flashnote

Overweight Target price (HKD) 6.80 Share price (HKD) 6.00 Forecast dividend yield (%) 1.8 Potential return (%) 15.2 Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield



Index^ Hang Seng Index

RIC 6881.HK Bloomberg 6881 HK Market cap (USDm) 5,798 Market cap (HKDm) 45,224 Free float (%) 22%



https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=jXJ2SK0k5c&n=420538.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=jXJ2SK0k5c&n=420538.PDF

2

Galaxy Securities (6881 HK) Brokers 18 August 2014

abc

Financials & valuation CGS P&L summary (RMB m)

2013a 2014e 2015e 2016e

Fee and commission income 5,039 5,373 5,594 5,903 Interest income 2,666 3,600 4,906 6,269 Investment income 697 847 952 1,037 Gross revenues 8,403 9,820 11,451 13,209 Other income 23 24 25 26 Gross revenues and other income 8,426 9,844 11,477 13,235 Fee and Commission expense (171) (172) (179) (189)Finance cost (685) (949) (1,420) (2,029)Staff Cost (2,490) (2,953) (3,328) (3,706)Impairments (192) (77) (81) (85)Other operating expenses (1,994) (2,245) (2,483) (2,702)Operating profit 2,893 3,448 3,986 4,525 Associates and JV (0) (0) (0) (0)PBT 2,893 3,447 3,986 4,524 Income tax (738) (827) (957) (1,086)Profit after tax 2,155 2,620 3,029 3,439 Minority interests (20) (29) (36) (41)Reported net profit 2,135 2,589 2,993 3,397 Exceptional 0 0 0 0 Recurring net profit 2,135 2,589 2,993 3,397

ROAA Deconstruction

Gross revenues 11.79 11.35 11.05 10.92 Other income 0.03 0.03 0.02 0.02 Gross revenues and Other income 11.82 11.38 11.07 10.94 Fee and Commission expense (0.24) (0.20) (0.17) (0.16)Finance cost (0.96) (1.10) (1.37) (1.68)Staff costs (3.49) (3.41) (3.21) (3.06)Impairment (0.27) (0.09) (0.08) (0.07)Other operating expenses (2.80) (2.60) (2.40) (2.23)Operating profit 4.06 3.99 3.85 3.74 Associate and JV (0.00) (0.00) (0.00) (0.00)PBT 4.06 3.98 3.85 3.74 Income tax (1.04) (0.96) (0.92) (0.90)Profits after tax 3.02 3.03 2.92 2.84 Minority interest (0.03) (0.03) (0.04) (0.03)Recurring profit to equity holders 3.00 3.00 2.89 2.81 Exceptional 0.00 0.00 0.00 0.00 Reported net profit 3.00 3.00 2.89 2.81

Per share data (RMB)

EPS 0.31 0.34 0.40 0.45 DPS 0.13 0.09 0.10 0.11 NTA 3.54 3.55 3.89 4.26 BVPS 3.63 3.63 3.96 4.34

Valuation multiple

P/E 16.5 13.6 11.8 10.4P/B 1.4 1.3 1.2 1.1Dividend Yield 2.7% 1.8% 2.1% 2.4%

Overweight

Balance sheet summary (RMBm)

2013a 2014e 2015e 2016e

AFS investments 9,790 11,420 12,562 13,567 Trading assets 5,970 6,707 7,378 7,968 Lending assets 19,585 33,320 48,139 63,085 Brokerage client deposits 29,744 28,909 28,128 27,092 Total assets 78,284 94,742 112,573 129,424 Accounts payable 36,451 36,845 36,858 36,695 Borrowings and bonds 4,593 13,800 23,500 31,775 Other liabilities 11,819 16,470 22,036 27,887 Total liabilities 52,863 67,115 82,394 96,358 Paid-in-capital and others 12,284 12,284 12,284 12,284 Retained earnings 12,891 15,066 17,582 20,428 Total shareholder's equity 25,175 27,351 29,866 32,713 Minority interest 247 276 312 353 Growth rates (y-o-y %)

Fee and Commission income 31.6 6.6 4.1 5.5 Interest income 57.0 35.0 36.3 27.8 Investment income 76.6 21.5 12.3 9.0 Gross revenues and Other income 41.3 16.8 16.6 15.3 Fee and Commission expense 59.1 0.4 4.1 5.5 Finance cost 145.3 38.6 49.6 42.9 Staff Cost 33.1 18.6 12.7 11.3 Other operating expenses 11.4 12.6 10.6 8.8 Operating profits 53.4 19.2 15.6 13.5 Net profits 50.4 21.4 15.5 13.5 Recurring net profits 50.4 21.4 15.5 13.5 Total assets 21.8 21.0 18.8 15.0 Accounts payable (8.3) 1.1 0.0 (0.4)Net assets value 44.4 8.6 9.2 9.5 Key ratios/business drivers (%)

ADT (stocks and funds, RMBbn) 202 209 222 235Brokerage market share 5.1 5.2 5.2 5.3 Stocks/funds commission rate (gross, bp) 8.1 7.3 6.6 6.1 IB commission rate 0.6 0.9 0.9 0.8Investment return 5.0 5.0 5.0 5.0Cost-to-income 63.4 64.2 64.6 65.2 ROAA 3.0 3.0 2.9 2.8 Financial leverage (x) 3.3 3.3 3.6 3.9 ROAE 10.0 9.9 10.5 10.9 Adjusted leverage 1.6 1.9 2.3 2.7

Source: HSBC

Issuer information

Share price (HKD) 6.00Target price (HKD) 6.80Total number of shares 7,537Market cap (HKDm) 45,224Market cap (RMBm) 35,331Free float 22%Exchange rate assumption 1.28Analyst York Pun, CFAContact +852 2822 4396

Source: Bloomberg, HSBC estimates Priced as of 15 August 2014

abcGlobal Research

1H14 normalised net profit of HKD7.1bn, up 30% yoy on the lower coal cost, 58%/60% of HSBC/consensus FY14e

Stock fairly valued at FY15e PE 8.4x and PB 1.3x

Reiterate Neutral with a target price of HKD23.80 based on average of DCF and RoE implied PB

Investment thesis: We continue to like the sector and we believe a structurally low coal

price will benefit CRP’s power business in the long term. We believe that the premium to

historical multiples for CRP is no longer justified given that the company’s returns are

now in line with sector peers. We think the stock looks fairly valued, trading in line with

historical multiples on a FY15e PE 8.4x and PB 1.3x compared with 3.5 year historical

average forward PE of 8.3x and forward PB 1.3x.

1H14 results: 1H14 reported net profit on HKD6bn, up 13.8% yoy. 1H14 normalised net

profit was HKD7.1bn after excluding HKD1.1bn non-recurring items (includes HKD2bn

impairment charges on coal mines related to CR Shanxi Liansheng), up 30.2% yoy, is

58%/60% of FY14e HSBC/consensus. Target FY14 utilisation hours of 5,600, in line

with an reported 5,680 hours in FY13a. Revised down FY14 unit fuel cost to a decline

8% from a decline of 3-4% yoy, in line with our assumption of 9% decline yoy in FY14e;

Coal mines posted a normalised operating profit of HKD190m, down 72% yoy,

contribution only 1.8% to 1H14 total operating profit; targets FY14 production output of

14mt which is in line with our forecasts. No update on tariff cuts: we assume a FY14

tariff cut of 6.7% (including a new cut of 4% or RMB0.0149/KWh from September 2014

and the last cut of 2.7% in September 2013). Unchanged new-builds of 4.4GW (3.6GW

coal power and 0.8GW wind power) in FY15 as announced by the end of FY13a.

Reiterate Neutral with a target price of HKD23.80 based on average of DCF and RoE

implied PB. DCF valuation of HKD23.56 at a WACC of 6% using a risk-free rate of 3.0%,

equity risk premium of 6.5% and equity beta of 0.6; and a RoE-implied PB of HKD29.35

with the PB unchanged at 2.0x. The multiple of 2.0x is derived from FY14/15 average RoE

of 16% divided by cost of equity at 7.8%. Downside risks: rising coal prices and lower-

than-expected generation output. Upside risks: power tariff linkage is achieved.

Neutral Target price (HKD) 23.80 Share price (HKD) 22.20 Potential return (%) 7.2




Index^ HSCEI



China Resources Power (836 HK)

N: Powering on but fairly valued, coal mines impaired

Nat Resources & Energy Independent Power Producers Equity – China

18 August 2014

Jenny Cosgrove* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6619 [email protected]

Summer Huang* Analyst The Hongkong and Shanghai Banking Corporation Limited +85229966976 [email protected]





Flashnote


2

China Resources Power (836 HK) Independent Power Producers 18 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e


Revenue 69,582 72,041 79,428 84,117EBITDA 22,166 26,408 27,881 29,714Depreciation & amortisation -7,371 -8,164 -9,013 -9,585Operating profit/EBIT 14,795 18,244 18,868 20,128Net interest -1,480 -2,171 -2,120 -1,604PBT 16,137 17,480 18,151 20,030HSBC PBT 16,137 17,480 18,151 20,030Taxation -3,552 -3,671 -3,812 -4,206Net profit 11,016 12,200 12,699 14,098HSBC net profit 10,344 12,200 12,699 14,098


Cash flow from operations 23,188 16,908 25,512 26,243Capex -23,200 -18,572 -17,939 -6,827Cash flow from investment -14,072 -16,170 -15,471 -4,034Dividends -5,673 -3,594 -3,939 -4,100Change in net debt 5,848 7,152 -1,788 -14,038FCF equity -8,583 -8,088 1,058 13,021




Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change


Ratios (%)




Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e

EV/sales 2.6 2.6 2.3 2.0EV/EBITDA 8.1 7.0 6.6 5.7EV/IC 1.2 1.2 1.1 1.0PE* 10.2 8.7 8.4 7.5P/Book value 1.6 1.4 1.3 1.1FCF yield (%) -8.8 -8.3 1.1 13.4Dividend yield (%) 3.4 3.7 3.9 4.3


Price relative


10121416182022242628

10121416182022242628

2012 2013 2014 2015China Resources Power Rel to HSCEI

abcGlobal Research

What’s new? Despite lowering our 2014-16 sales estimates by 8-12%, we are raising our

2014-16 earnings forecast by 4-9% to mainly reflect stronger than expected beverage margin.

Tingyi’s 2Q14 recurring net profit was up 13% yoy to USD104m, but sales were down 2%

yoy, mainly due to weakened consumption and slower industry growth. Management also

indicated sales in July-2014 were still lacklustre and there are limited signs of a meaningful

pick-up in August-2014. Despite the sluggish sales trend, the operating margin for the

beverage business was strong in 2Q14 (which was up 3.1ppt yoy) although there was a one-off

charge related to the dismissal of around 2,200 Pepsi bottling employees. We believe progress

on the integration process is largely on track, and we think its beverage margin should see

further improvement next year on the back of scale benefits and efficiency gains.

Cutting back free sausage promotions in selected cities. Tingyi is planning to gradually cut

back free sausage promotions in the coming quarters; however, the magnitude of the reduction

is still contingent to market share trend. Management indicated their market share split

between Tingyi and UPC (0220.HK, TP: HKD4.4, UW) in selected cities for the “Laotan

pickled cabbage noodle” product have already surpassed the 70:30 target, and therefore, the

cutback in free sausage promotion will only be for those cities with dominant market share, not

on a nationwide basis. We estimate the free sausage promotion cost for Tingyi was around

RMB120m in 2013, representing less than 1% of noodle COGS. For UPC, we estimate its free

sausage promotion cost was RMB230m in 2013, representing around 4% noodle COGS.

Valuation and risks. We maintain our Neutral rating on Tingyi as we think the current

valuation at 26x 2015e PE is already largely reflecting the upside from the beverage margin

improvement in the long run. We are looking for 22% earnings CAGR over 2014-16, and our

new earnings estimates for 2014-16 are in line with consensus. Key upside risks include

higher-than-expected sales volume and a fast turnaround in the Pepsi business. Key downside

risks include higher-than-expected A&P spending and a sharp increase in input costs.

Tingyi (322 HK)

N: Strong margins offset weakness in top line

While sales in Q214 were sluggish, margins were stronger than expected, thanks to lower input costs and operating expenses

Tingyi plans to gradually cut back free sausage promotions in the coming quarters, but the magnitude of the reduction is still contingent to market share development

Remain Neutral, increase TP to HKD25.50 from HKD21.50 on higher earnings estimates and DCF rollover

Consumer & Retail Food Products Equity – China

Company report


Source: HSBC

Neutral Target price (HKD) 25.50 Share price (HKD) 22.90 Potential return (%) 11.4


Dec 2013 a 2014 e 2015 e

HSBC EPS 0.07 0.09 0.11 HSBC PE 40.6 31.9 26.0


Absolute (%) 6.8 4.8 16.7 Relative^ (%) 0.3 -4.6 5.3


Enterprise value (USDm) 17725Free float (%) 33Market cap (USDm) 16,546Market cap (HKDm) 128,252

Source: HSBC

19 August 2014

Christopher K Leung* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6531 [email protected]

Alice Chan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6535 [email protected]

Erwan Rambourg* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6572 [email protected]






2

Tingyi (322 HK) Food Products 19 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (USDm)

Revenue 10,941 11,248 12,506 13,708EBITDA 1,197 1,463 1,678 1,839Depreciation & amortisation -452 -485 -503 -520Operating profit/EBIT 744 978 1,174 1,319Net interest -37 -40 -40 -40PBT 723 964 1,175 1,344HSBC PBT 723 964 1,175 1,344Taxation -229 -275 -329 -363Net profit 409 525 644 748HSBC net profit 409 525 644 748

Cash flow summary (USDm)

Cash flow from operations 1,282 1,310 1,418 1,575Capex -852 -700 -700 -700Cash flow from investment -843 -699 -699 -699Dividends -207 -263 -322 -374Change in net debt -220 -348 -397 -502FCF equity 381 585 678 810

Balance sheet summary (USDm)

Intangible fixed assets 420 420 420 420Tangible fixed assets 5,485 5,700 5,897 6,077Current assets 2,410 2,750 3,227 3,810Cash & others 1,250 1,598 1,995 2,497Total assets 8,424 8,979 9,653 10,416Operating liabilities 2,637 2,765 2,916 3,071Gross debt 1,676 1,676 1,676 1,676Net debt 426 78 -319 -820Shareholders funds 2,880 3,143 3,465 3,839Invested capital 4,428 4,506 4,634 4,741


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue 18.8 2.8 11.2 9.6EBITDA -4.2 22.3 14.7 9.6Operating profit -13.6 31.4 20.0 12.3PBT -13.2 33.3 21.9 14.4HSBC EPS 12.4 27.2 22.7 16.1

Ratios (%)

Revenue/IC (x) 2.5 2.5 2.7 2.9ROIC 11.8 15.7 18.5 20.5ROE 15.1 17.4 19.5 20.5ROA 6.5 8.2 9.4 10.1EBITDA margin 10.9 13.0 13.4 13.4Operating profit margin 6.8 8.7 9.4 9.6EBITDA/net interest (x) 32.0 36.4 41.7 45.7Net debt/equity 10.9 1.8 -6.5 -15.0Net debt/EBITDA (x) 0.4 0.1 -0.2 -0.4CF from operations/net debt 300.7 1672.2

Per share data (USD)


Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


15171921232527293133

15171921232527293133

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14Tingyi Rel to HANG SENG INDEX

abcGlobal Research

BoK’s 25bp rate cut to have a limited impact on GDP growth

KTB volatility may fall as the key policy rate is likely to be maintained at 2.25% for a prolonged period of time

Reduced funding costs should be favourable for carry trades Despite some profit taking activity post the 25bp rate cut decision by the Bank of Korea

(BoK) on 14 August as the following policy statement was largely neutral rather than

dovish, the upward intraday movement in bond yields was limited. The 10yr Korea

Treasury bond (KTB) yield remained unchanged from the previous trading day at 3.07%.

This could be largely explained by the market participant’s expectation of a limited

impact of the rate cut on economic growth. The BoK governor Lee mentioned at the press

conference from the latest MPC meeting that a 25bp rate cut would only contribute

0.05%-0.1% growth in GDP this year. This is less than the benefit of 0.2% growth which

the central bank had forecasted from the 25bp rate cut in May 2013. Bond yields are likely

to stay low as investors’ prospect for low growth is maintained, inflation remains below

the BoK’s target and US Treasury yields continue to be pinned down. HSBC FI Research

retains its overweight stance in Korean government bonds.

The volatility which had increased since the possibility of a rate cut emerged following the

MPC meeting in June may fall given the likelihood of prolonged period of rates on hold

(Figure 1). Moreover, the 3-month Certificate of Deposit (CD) rate has fallen by 19bp to 2.46%

since the week ending on 8 August. The spread between the funding rate and the bond yields

has increased by more than 20bp across the curve (Figure 2). An environment of reduced

funding costs and low volatility should make carry trades more attractive. Therefore investors

are likely to extend duration of their bond holdings and we maintain our preference for the

benchmark 10yr KTB with a revised target of 2.9% (3.0% previously).

18 August 2014

André de Silva, CFA Head of Global EM Rates Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 2217 [email protected]

Dayeon Hong Strategist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6569 [email protected]




Korea rates: Still early for higher yields

Maintain long position in 10yr KTB

Asia-Pacific Rates Strategy Korea

Flashnote

Figure 1. Volatility likely to fall back with an expectation of prolonged rate-hold period

Figure 2. Increased spread between 3m CD rate and KTB yields points to attractive carry

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

2.8

3

3.2

3.4

3.6

3.8

5

10

15

20

25

30

Aug13 Oct13 Dec13 Feb14 Apr14 Jun14 Aug14

%bp

10yr KTB 30D Vol (LHS) 10yr KTB yield (RHS)

June MPC meeting

-20

0

20

40

60

80

100

3yr 5yr 10yr 20yr 30yr

bp

8-Aug 14-Aug


abcGlobal Research

Building materials was the key driver of 2Q earnings growth

We remain positive on 2H; building materials should continue to benefit from better property market conditions, paint should show gradual improvement with recovering orders

Raise TP to KRW750,000 from KRW700,000; remain OW KCC reported 2Q14 earnings in line with market expectations. Sales were up 3% y-o-y and

OP up 14% y-o-y. Building materials continued to be the key driver of the earnings growth.

Building materials: The building material segment’s sales came in at KRW332bn (up 13% y-

o-y) and OP at KRW45bn (up 78% y-o-y). The OPM rose to 13.6% from 8.7% in 2Q13 and

the segment’s utilization rate rose to 90% from 84%.The on-going solid earnings growth was

driven by recovering demand due to improving property market conditions. We expect this

uptrend to continue in 2H14. Along with completion of apartment new-builds, MOLIT expects

apartment move-ins to grow by 86.4% in 3Q14, implying further growth for building materials

demand. Apartment transactions are active as well, up 13% h-o-h, helped by the government’s

boosting measures. Construction starts have also been increasing after bottoming in 2008; thus

we expect building materials demand to remain solid through to 2015.

Paint: Paint sales came in at KRW396bn (down 4% y-o-y) and OP at KRW54bn (down 19%

y-o-y). We think the segment continued to be impacted by slow orders as well as the relatively

low-margin orders on the shipbuilding side. However, we expect paint division earnings will

show gradual recovery throughout 2H14 and into 2015. This is because shipbuilder’s orders

began to pick up in 2H13and there is typically around a 1-year lag before such orders are

reflected in paint orders. We expect margins to be sustainable in the 12% range, supported by

stable automobile paint demand.

Raise TP to KRW750,000; remain OW. We are raising our OP by 3% and 6% for 2014-15e

as we factor in the better-than-expected margins in the building materials segment. The

building materials business should be able to show sustainable growth supported by growing

new apartment supplies as well as remodelling demand. We also raise our TP, to

KRW750,000 from KRW700,000, as we roll our valuation basis forward to 2015. To derive

our TP, we apply an unchanged target EV/EBITDA multiple of 8.7x to our 2015e EBITDA,

add KRW3.2trn of value for the non-core assets (including KRW1.4trn for Samsung Everland)

and deduct net debt of KRW110bn. The shares are currently trading close to their historical

high valuation, at 26x PE and 1.3x PB for 2014e. However, we see the shares as continuing to

be supported by earnings normalization at the core business as well as by the value of the 17%

stake in Samsung Everland (which is expected to be listed at end-2014).

KCC (002380 KS)

OW: On-going beneficiary of property market recovery

Industrials Building Products Equity – Korea

18 August 2014

Yeon Lee*

Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8778 [email protected]

Brian Cho* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8750 [email protected]



Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch


Flashnote

Overweight Target price (KRW) 750,000 Share price (KRW) 639,000 Forecast dividend yield (%) 1.3 Potential return (%) 18.7




Index^ KOSPI INDEX

RIC 002380.KS Bloomberg 002380 KS Market cap (USDm) 6,590 Market cap (KRWb) 6,722 Enterprise value (KRWb) 4799 Free float (%) 100



2

KCC (002380 KS) Building Products 18 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (KRWb)

Revenue 3,233 3,567 3,776 3,929EBITDA 389 504 544 572Depreciation & amortisation -157 -177 -182 -189Operating profit/EBIT 232 328 362 383Net interest -13 -10 -9 -6PBT 342 354 386 419HSBC PBT 342 354 386 419Taxation -93 -97 -105 -114Net profit 248 256 279 303HSBC net profit 248 256 279 303

Cash flow summary (KRWb)

Cash flow from operations 319 328 405 428Capex -102 -180 -191 -203Cash flow from investment 104 -172 -201 -188Dividends -84 -84 -84 -84Change in net debt -166 -59 -109 -148FCF equity 119 103 157 188

Balance sheet summary (KRWb)

Intangible fixed assets 33 33 33 32Tangible fixed assets 2,627 2,631 2,640 2,654Current assets 2,016 2,195 2,383 2,591Cash & others 713 787 893 1,040Total assets 7,052 7,237 7,436 7,660Operating liabilities 462 477 499 520Gross debt 991 1,006 1,002 1,002Net debt 278 219 110 -39Shareholders funds 5,061 5,239 5,440 5,665Invested capital 3,501 3,595 3,663 3,717


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue -0.4 10.3 5.9 4.0EBITDA 7.3 29.6 7.9 5.2Operating profit 16.5 41.3 10.4 5.9PBT -45.4 3.5 8.9 8.5HSBC EPS -44.3 3.5 8.9 8.5

Ratios (%)

Revenue/IC (x) 0.9 1.0 1.0 1.1ROIC 4.8 6.7 7.3 7.6ROE 5.0 5.0 5.2 5.5ROA 3.5 3.4 3.6 3.8EBITDA margin 12.0 14.1 14.4 14.6Operating profit margin 7.2 9.2 9.6 9.7EBITDA/net interest (x) 30.5 48.5 62.9 96.5Net debt/equity 5.5 4.1 2.0 -0.7Net debt/EBITDA (x) 0.7 0.4 0.2 -0.1CF from operations/net debt 114.8 150.2 368.8

Per share data (KRW)


Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


203250

303250

403250

503250

603250

703250

203250

303250

403250

503250

603250

703250

2012 2013 2014 2015KCC Rel to KOSPI INDEX

abcGlobal Research

3Q14 earnings expected to beat consensus on the back of better handset margin

Improved product mix and cost structure mean margin should be sustained through 4Q14e

Reiterate OW and raise TP to KRW96,000 (from KRW91,000) as we roll over our valuation base to the 2014-15e average

Expect 3Q14e to be another earnings surprise: We expect the company to report better-

than-expected 3Q14e earnings on the back of an improved handset margin. Our 3Q14e

operating profit estimate is KRW536bn (including LG Innotek (011070 KS, KRW140,500,

OW) of KRW104bn), which is 15% above consensus, with the difference mainly coming

from the handset margin assumption. We believe that the handset margin will improve on

a sequential basis in 3Q14e on the back of stronger G3 shipments into the US. We expect

the company to sell more than 3m units in 3Q14e versus less than 1m units in 2Q14.

4Q14e could be slightly weaker: We expect the handset margin to fall slightly in 4Q14e as

the company defends its market share in the US (currently 12%) against the expected iPhone

launch by raising its marketing spend. However, we expect the impact on the handset

margin to be limited, given the company is not a direct competitor to Apple. Moreover, we

expect the company to introduce a new smartphone model with a flexible display

(potentially the LG G Flex 2) in 4Q14e, which could help maintain its growth momentum in

the premium smartphone market, following the recent launch of the LG G3 model.

Drivers of a better handset margin: We think there is still scepticism among investors

that the current handset margin is sustainable amid intensifying competition from Chinese

smartphone makers. However, we argue that a low- to mid-single digit improvement in

the margin is sustainable on the back of: 1) a product mix improvement with the launch of

the premium G series smartphone line, and 2) an improved cost structure. The percentage

contribution to smartphone unit sales from the G series has increased to 26% in 2Q14

from 9% in 2Q13, and we expect it can grow by more than 30% in 3Q14e on stronger G3

shipments to the US. At the same time, the smartphone bill of material (BOM) has

declined and the production yield has improved.

Reiterate OW and raise TP to KRW96,000. While our SOTP methodology is unchanged,

we raise our TP to KRW96,000 (from KRW91,000), as we roll-over our valuation base to the

2014-15e average (from 2014e) and reflect the increased value of its investment holdings.

Our target price implies a 1.3x 2014e PB and a 17.9x 2014e PE. The stock is trading at a 1.1x

PB and a 14.4 PE. Key downside risks: the delayed launch of flagship smartphone and TV

models, and a slower-than-expected recovery in the demand for consumer electronics.

LG Electronics (066570 KS)

OW: Another earnings surprise ahead

Telecoms, Media & Technology Electronic Equipment Equity – Korea

19 August 2014

Brian Sohn* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8765 [email protected]

Kenneth Shim* Associate The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8779 [email protected]



Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch


Flashnote

Overweight Target price (KRW) 96,000 Share price (KRW) 77,100 Forecast dividend yield (%) 0.3 Potential return (%) 24.8



Absolute (%) 1.7 12.6 3.6 Relative^ (%) -0.4 9.8 -3.6

Index^ KOSPI INDEX

RIC 066570.KS Bloomberg 066570 KS Market cap (USDm) 12,370 Market cap (KRWbn) 12,617 Enterprise value (KRWbn) 14,341 Free float (%) 55



2

LG Electronics (066570 KS) Electronic Equipment 19 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (KRWbn)

Revenue 58,140 63,712 68,347 72,312EBITDA 3,213 3,987 4,252 4,790Depreciation & amortisation -1,928 -1,948 -1,937 -2,081Operating profit/EBIT 1,285 2,039 2,315 2,709Net interest -737 -740 -744 -746PBT 577 1,575 2,042 2,344HSBC PBT 577 1,575 2,042 2,344Taxation -354 -441 -511 -586Net profit 177 964 1,348 1,547HSBC net profit 177 964 1,348 1,547

Cash flow summary (KRWbn)

Cash flow from operations 1,913 4,481 4,437 4,822Capex -2,117 -3,300 -3,400 -3,500Cash flow from investment -2,391 -4,197 -4,325 -4,463Dividends -36 -36 -54 -54Change in net debt 133 256 428 200FCF equity -1,726 -165 -503 -129

Balance sheet summary (KRWbn)

Intangible fixed assets 1,364 1,364 1,364 1,364Tangible fixed assets 13,186 13,677 15,362 17,003Current assets 16,325 17,224 17,875 18,599Cash & others 2,645 2,389 1,961 1,761Total assets 35,528 37,383 40,231 43,158Operating liabilities 13,599 14,357 15,728 16,953Gross debt 9,232 9,232 9,232 9,232Net debt 6,586 6,842 7,271 7,471Shareholders’ funds 11,739 12,836 14,313 16,016Invested capital 14,630 15,518 16,912 18,251


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change


Ratios (%)


Per share data (KRW)

EPS reported (fully diluted) 981.68 5,353.26 7,485.22 8,590.50HSBC EPS (fully diluted) 981.68 5,353.26 7,485.22 8,590.50DPS 200.00 200.00 300.00 300.00Book value 65,193.90 71,287.08 79,488.25 88,945.41

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


50902559026090265902709027590280902859029090295902

50902559026090265902709027590280902859029090295902

2012 2013 2014 2015LG Electronics Rel to KOSPI INDEX

abcGlobal Research

Privatization of Nasdaq-listed China IC design companies

30% of funds for IC design, but efficiency remains to be seen

Smaller companies benefit, but gap in mobile AP is still wide

Nasdaq delisting of China-based IC design companies for possible relisting in Asia.

Following the delisting of China-based fabless companies Spreadtrum (SPRD US – not

rated) in December 2013 and RDA Microelectronics (RDA US – not rated) in July 2014

from Nasdaq, Montage (MONT US – not rated) filed to receive an acquisition offer, and

Actions (ACT US – not rated) made an announcement to seek strategic partners. Montage

and Actions are IC design companies based in China. Spreadtrum and RDA were both

acquired by Hsinghua Unigroup in China, which is looking to relist the combined entity

there. We believe this is part of China’s efforts to grow and establish its own ecosystem.

30% of RMB120bn fund goes to IC design. This is not the Chinese government’s first

effort to subsidize the IC industry, but the government has involved investment companies

this time to monitor efficiency. A total fund of RMB120bn has been allocated, with 25%

coming from the Finance Ministry, 38% from social security funds and the remaining from

investment companies. Based on the statistics of PRC customs, c70% of IC demand is

imported. The combined revenue of IC design companies in China grew 29%, to USD14bn,

in calendar 2013, which is only 17% of global semiconductor production in US dollars,

according to the China Semiconductor Association.

China buying foreign companies while Taiwan seeing consolidation. Unlike Taiwan

(see our note of 29 April, Taiwan IC Design: Industry consolidation continues), the industry

remains fragmented in China. We are also seeing acquisitions of overseas companies by

Chinese investment companies. On 14 August, Omnivision (OVTI US – not rated) announced

the receipt of an acquisition proposal from a group of investors including Shanghai Pudong

Science and Technology Investment, which once made offers to buy RDA and Montage.

Tech gap is wide in mobile application processors (AP); small companies stand to benefit.

The State Council of the PRC released its “National IC industry development outline” on

24 June; the near-term focus of China includes mobile devices, digital TV, networking, and

operating systems. Applications include smart grid, industrial control, automotive and medical.

We believe products with relatively low barriers to entry, such as smart cards and banking

cards, will be the first to be replaced by local companies, followed by LED drivers. The

technology gap in mobile AP between Spreadtrum/RDA/Rockchip/Allwinner (Rockchip

and Allwinner are not listed) and MediaTek (2454 TT – TWD500; Neutral, TP: TWD520)

is relatively wide. It may take another 2-3 years for Spreadtrum/RDA/Rockchip/Allwinner

to catch up with global leaders.

18 August 2014

Yolanda Wang* Analyst HSBC Securities (Taiwan) Corporation Limited +8862 6631 2867 [email protected]

Joyce Chen* Analyst HSBC Securities (Taiwan) Corporation Limited + 8862 6631 2862 [email protected]



Issuer of report: HSBC Securities (Taiwan) Corporation Limited


Telecoms, Media & Technology Semiconductors Equity – Taiwan

Flashnote

Greater China IC design

Will a government subsidy work this time?


https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=XiT3su0tDi&n=414013.PDF

2

Greater China IC design Semiconductors 18 August 2014

abc

Valuation and risks

MediaTek

2454 TT – TWD500; Neutral, TP: TWD520

Our target price of TWD520 is based on 12-month forward earnings for 3Q14-2Q15 (TWD28.91) and the

stock’s mid-cycle average multiple of18x. Under our research model, the Neutral band for non-volatile

Taiwan equities runs from 5ppt below to 5ppt above an 9% Taiwan hurdle rate. Our target price implies a

potential return within the Neutral band; we therefore rate the stock Neutral.

Upside risks to our rating and forecasts include better-than-expected handset demand and faster-than-expected

product development. Downside risks to our view include a worse-than-expected competitive landscape and

weaker-than-expected demand overseas.

abcGlobal Research

1H profit worst in recent years. Media Prima (MPR) reported 2Q14 net profit of

MYR35.8m, down 40.4% y-o-y. 1H14 net profit contributed c29% and 30% of our estimate

and consensus, respectively, and was the lowest 1H profit (MYR62.8m) in the last five years.

The drop was mostly on account of significant declines in both its staple media businesses:

Print was down 17.1% y-o-y and TV was down 19.7% y-o-y. This led to a 16% y-o-y drop in

2Q14 revenue. OP margin at 13.1% for 2Q14 (-530 bp y-o-y) was also impacted by stable

overheads (mostly staff expenses). MPR declared an interim DPS of 3 sen.

Murphy’s Law partly at work. Recent subsidy cuts have affected domestic consumption

patterns, which compelled FMCG advertisers to cut their budgets. FMCG, telcos and

banks/FIs form the bulk of adex among large advertisers. The second impact was from

Malaysia Airlines, which led to cutbacks in adex spend from advertisers as well as the

company. The last part was non-traditional advertisers (SMEs and government agencies)

which are lower margin businesses contributing c10-15% of total adex but did not grow as

expected. All three factors impacted the recovery from a weak 1Q14.

Competitive intensity continues to be a long-term concern. Competitive factors are a long-

term issue; however, the prime-time adex rates differential remains c5-6x between free-to-air

and pay TV. The former’s discounting level is at c70%, while for the latter it is at c90%-plus.

Super prime-time (8pm-9pm) contributes c40% of TV revenues. Discounting is usually a

function of inventory levels. However, we believe 2Q14 gross industry adex growth of 11%

y-o-y (free-to-air: 4.6% y-o-y) is not reflective of underlying discounting trends. Also,

audience fragmentation dangers exist with increased pay TV options and the interne; that

said, viewership shares for Media Prima have remained stable at 42% for the quarter.

30% cut in 2014e profit estimate; Neutral with a lower TP to MYR2.50. After the

results, we lower our 2014e revenues and earnings estimates by 11% and 30%, respectively.

This leads to a cut in our target price to MYR2.50 (from MYR2.80) with a Neutral rating.

We value Media Prima based on a dividend discount model (DDM) methodology, given its

lower growth profile. Even if Media Prima’s payout is retained, the cut in earnings leads to a

40% cut in our DPS estimate from 14 sen to 10 sen for 2014e, which translates into a 4-5%

yield for 2014-15e. Our sensitivity analysis suggests that every 1 sen increase in DPS payout

forecast assumptions leads to a c4% increase in our target price. Key downside risks include

a sharper-than-expected drop in adex, higher costs and a cut in payout. Key upside risks

include a better-than-expected consumption and adex recovery, lower competitive intensity

from pay TV and a higher-than-expected payout.

Neutral Target price (MYR) 2.50 Share price (MYR) 2.33 Potential return (%) 7.3



Absolute (%) -4.1 -4.1 -13.4 Relative^ (%) -3.1 -3.1 -16.9

Index^ KLSE COMPOSITE IDX

RIC MPRM.KL Bloomberg MPR MK Market cap (USDm) 817 Market cap (MYRm) 2,577 Enterprise value (MYRm) 2,151 Free float (%) 28


Media Prima Berhad (MPR MK)

N: Murphy’s Law partly at work

2Q14 profits down 40%, driven by declines in TV and print

Macro factors and one-off events hurt adex spend

Maintain Neutral rating and lower target price to MYR2.50 from (MYR2.80); 2014e profit estimate cut by 30%

Telecoms, Media & Technology Media Equity – Malaysia

19 August 2014 Rajesh Raman* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0608 [email protected]

Luis Hilado* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0607 [email protected]

Tucker Grinnan* Head of Telecoms and Media Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4686 [email protected]



Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch

MICA (P) 157/06/2014 MICA (P) 171/04/2014 MICA (P) 077/01/2014 Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Flashnote


2

Media Prima Berhad (MPR MK) Media 19 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (MYRm)

Revenue 1,723 1,576 1,634 1,675EBITDA 408 330 372 389Depreciation & amortisation -101 -103 -101 -100Operating profit/EBIT 307 228 271 289Net interest -26 -25 -20 -20PBT 290 213 261 279HSBC PBT 290 213 261 279Taxation -74 -53 -65 -70Net profit 214 158 194 207HSBC net profit 214 158 194 207

Cash flow summary (MYRm)

Cash flow from operations 255 251 253 269Capex -103 -104 -115 -123Cash flow from investment -74 -104 -115 -123Dividends -144 -110 -136 -145Change in net debt -119 -63 -31 -30FCF equity 280 174 166 175

Balance sheet summary (MYRm)

Intangible fixed assets 384 343 347 354Tangible fixed assets 844 886 896 912Current assets 1,146 1,078 1,138 1,184Cash & others 618 583 623 653Total assets 2,604 2,549 2,633 2,711Operating liabilities 365 359 373 386Gross debt 499 400 410 410Net debt -119 -182 -213 -243Shareholders’ funds 1,656 1,704 1,762 1,824Invested capital 1,390 1,366 1,385 1,410


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change

Revenue 1.5 -8.5 3.7 2.5EBITDA 0.8 -19.1 12.5 4.7Operating profit 1.5 -25.9 19.1 6.6PBT 2.5 -26.5 22.5 6.9HSBC EPS 4.7 -26.2 23.1 7.1

Ratios (%)

Revenue/IC (x) 1.2 1.1 1.2 1.2ROIC 16.4 12.4 14.8 15.5ROE 13.4 9.4 11.2 11.5ROA 9.0 6.9 8.1 8.4EBITDA margin 23.7 21.0 22.7 23.2Operating profit margin 17.8 14.4 16.6 17.3EBITDA/net interest (x) 15.5 13.0 18.6 19.4Net debt/equity -7.1 -10.6 -11.9 -13.1Net debt/EBITDA (x) -0.3 -0.6 -0.6 -0.6CF from operations/net debt - - - -

Per share data (MYR)



Year to 12/2013a 12/2014e 12/2015e 12/2016e

Adex as % of GDP (%) 1 1 1 1TV adex market share (%) 60 60 61 61Print ad revenue growth (%) -2 -18 7 5EBITDA margins (%) 24 21 23 23Capex/sales (%) 6 7 7 7Dividend Payout (%) 71 70 70 70

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


1

1.5

2

2.5

3

3.5

4

4.5

1

1.5

2

2.5

3

3.5

4

4.5

2012 2013 2014 2015Media Prima Berhad Rel to KLSE COMPOSITE INDEX

Singapore July NODX: Still not out of the woods yetSingapore’s July NODX (non-oil domestic exports) did not decline by as much as expected in July, down for a third month by 3.3% y-o-y. The retreat was broad-based, with non-electronics shipments decreasing alongside the 24th consecutive fall in electronics. On a sequential basis, however, NODX increased for a second month, by a stronger-than-expected 2.5% m-o-m sa (Bbg: 0.9%, Prior 1.5%). While this is still no yet enough to change the sideways trend in NODX seen since early 2013, it marks a fairly decent start to 3Q14 on the back of increased shipments to key export markets. We expect less drag from external conditions in 2H14.

Facts- July NODX declined by 3.3% y-o-y (Bbg: 4.0%, Prior: -4.6%), as shipments of both electronics and non-electronics products weakened. The July print led to a worsening of the 3-month moving average to -3.6% y-o-y , compared to -3.4% previously.

- On a sequential basis, however, NODX continued last month’s upward momentum, increasing 2.5% m-o-m sa (Bbg: 0.9%, Prior: 1.5%). This was largely due to the strong sequential pick up of 7.6% m-o-m sa in electronics, according to our calculations.

- The electronics sector, which accounts for approximately a third of total NODX, contracted by 7.9% y-o-y, significantly less than the -15.9% expected and June’s reading of -17.4%. The smaller decline came on the back of an improvement in all electronics components, with the exception of ‘disk media products’. PCs and parts of integrated circuits both registered positive growth on the year, of 12.7% and 4.8% respectively. See Table 1 for more details.

- Non-electronics products reverted back into contraction, declining by 1.1% y-o-y (Prior: +1.3%). This was driven by a strong fall in exports of ‘structures of ships and boats’ (-40.7%), aircraft parts (-48.0%) and civil engineering equipment parts (-25.4%). The volatile pharmaceuticals component, encompassing approximately 11% of NODX, contracted by 5.7%, compared to growth of 24.3% in June.

- Geographically, NODX increased to the world’s three largest economic blocks of EU28, US and China. This signals that a modest improvement in external conditions is starting to feed through to NODX. With the exception of Taiwan, NODX to all other key export markets declined (Table 2).

ImplicationsToday’s better than expected July NODX print suggests Singapore is starting to benefit from the modest improvement in external conditions, especially in the US and China. Electronics exports to the latter jumped to 4.2% on the year, following a previous contraction of 10.0%. This could see Singapore’s electronics capacity realize higher levels of utilization, if there is a sustained improvement in Chinese growth indicators. Meanwhile in the US it was mainly non-electronics

Economics - Data Reactions

18 August 2014

JosephIncalcaterra

EconomistThe Hongkong and ShanghaiBanking Corporation Limited+852 2822 [email protected]

View HSBC Global Research at:http://www.research.hsbc.com

Issuer of reportThe Hongkong and ShanghaiBanking Corporation Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analystcertifications in the Disclosureappendix, and with the Disclaimer,which forms part of it

http://www.research.hsbc.com

demand that drove the rise in NODX. Shipments to EU28 also rebounded quite sharply to 24.8% y-o-y, mostly on the back of non-electronic products, although it is worth noting that the y-o-y contraction in electronics export was also much smaller than compared to June, at just -0.5.% y-o-y.

That said, while the external cycle is gradually improving, it will likely still be some months before NODX can return to - and exceed - the levels seen a year ago. The high base effect from electronics will continue for a few more months, and Singapore’s exporters will likely feel increasing pressure from tight labour market conditions, a result of ongoing measures to structurally rebalance the economy. In a bid to transform Singapore into a higher-productivity and knowledge-based economy, there have been curbs on employment of foreign workers. This has pushed up labour costs. Meanwhile, government-backed productivity enhancement initiatives will take time to be felt. In fact, recent data showed that labour productivity in the second quarter actually declined by 1.3% compared to the prior year.

Against this backdrop, International Enterprise Singapore last week revised its trade projections for 2014, saying NODX would decline by between -1% and -2%. This compares to earlier projections for a rise of 1% to 3%. Given that NODX contracted by 2.3% y-o-y in 1H, however, its projections still imply a narrower decline in 2H14.

Figure 1: NODX by product

Source: IE Singapore, HSBC

Figure 2: NODX by geography

Source: IE Singapore, HSBC

Figure 3. July NODX

Source: IE Singapore, CEIC, HSBC

Economics - Data ReactionsSingapore18 August 2014

2

ThailandTechnical recession avoidedThe Thai economy avoided a technical recession but is unlikely to return to a more robust growth soon. In 2Q14, the economy grew 0.4% y-o-y and 0.9% q-o-q sa. Both numbers were slightly better than market expectations. In annual terms, net exports continued to contribute to growth but mainly due to the contraction of imports. Meanwhile, private consumption rebounded, in line with the improvement in consumer confidence, but gross fixed capital investment still contracted. A key drag was inventories, subtracting 3.6ppt from growth. Due to ongoing challenges facing exports and tourism, the NESDB today revised down its 2014 growth forecast from 1.5-2.5% to 1.5-2.0%.

GDP grew

0.4%y-o-y in 2Q

FactsGDP grew 0.4% y-o-y (HSBC: 0.7%; Bbg: 0.0%; Prior: -0.6%). On a seasonally-adjusted basis, GDP grew 0.9% q-o-q (HSBC: 1.2%; Bbg: 0.6%; Prior: -2.1%), avoiding a technical recession. For the first half of the year, GDP contracted by 0.06% y-o-y.

Based on the y-o-y measure, domestic demand subtracted 1.4ppt from GDP growth while net exports contributed 5.2ppt to growth. The change in inventories subtracted a large 3.6ppt from growth, reflecting weak domestic demand and slow recovery in exports, but possibly setting up the economy for an inventory-driven bounce in 3Q.

Domestic demand fell by 1.5% y-o-y, after recording an even bigger contraction in the previous quarter. The improvement was led by private consumption growth (0.2% y-o-y), and a slower pace of contraction in gross fixed capital formation (-6.9% y-o-y).

On a q-o-q sa basis, the improvement in domestic demand was actually quite significant. Private consumption rose 2.2%, in line with the recovery of consumer confidence after political uncertainties eased, as well as the disbursement of delayed payments to rice farmers. Meanwhile, gross fixed capital formation also picked up 2.6%, after recording three quarters of declines.

Although net exports contributed positively to growth, this was mainly due to the contraction of total imports (-9.2% y-o-y). In fact, total exports contracted for the second straight quarter, mainly reflecting the sharp contraction of tourism income, while exports of goods showed a modest gain of 1.5% y-o-y.

From the supply-side, the agriculture sector (8% of GDP in 2013) improved and expanded by 2.2% y-o-y. The National Economics and Social Development Board (NESDB) cited increases in the production of off-season paddy, maize, oil palm, and livestock, while it also said that the production of white shrimp continued to contract but at a slower pace.

Economics - Data Reactions

18 August 2014

NalinChutchotitham

EconomistThe Hongkong and ShanghaiBanking Corporation Limited,Bangkok Branch+662 614 [email protected]

View HSBC Global Research at:http://www.research.hsbc.com

Issuer of reportThe Hongkong and ShanghaiBanking Corporation Limited,Bangkok Branch

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analystcertifications in the Disclosureappendix, and with the Disclaimer,which forms part of it

http://www.research.hsbc.com

On the other hand, the non-agriculture sector only grew by 0.2% y-o-y, as manufacturing (38% of GDP in 2013) and tourism-related industries stayed weak. The manufacturing sector recorded its fifth quarter contraction, as vehicle production remained weak from a high base last year and the slowdown in domestic demand. The hotel and restaurants sector contracted more sharply in Q2 (4.2% y-o-y vs. 3.1% in Q1), as many countries maintained advisories against visiting Thailand.

The NESDB now expects the economy to grow 1.5-2.0% this year, lower than its 1.5-2.5% forecast issued in May. One of the key factors to its downward revision was a weaker forecast for export growth from 3.7% to 2.0%, which the NESDB attributed to slower-than-expected global economic growth. Other factors include the slower pace of tourism and private investment.

For the year 2015, the NESDB projects 3.5-4.5% growth, below estimates of the Bank of Thailand and HSBC at 5.5% and 5.0%, respectively.

ImplicationsGDP data today provided some relief: Thailand at least avoided an outright recession. Over the past few months, worries that the economy would contract over two consecutive quarters had come up several times in local media reports, highlighting wobbly confidence in the recovery among the public at large. Today’s reading should thus offer reassurance to consumers and businesses alike.

Nevertheless, there is little reason to celebrate. The NESDB’s forecast revision highlights that the recovery remains fragile. In particular, the NESDB underlined risks to exports and tourism (something also mentioned in the August 6 Monetary Policy Committee statement).

Although many public investments plans are already under way, including the NCPO’s approval of the double-tracking of railway lines and the general scope of the THB2.4 trn infrastructure plan, more needs to be done. The government may need to speed up public investment approvals to ensure adequate growth support, especially while private investment remains weak, partly reflecting low capacity utilisation and weak export growth.

In fact, the value of private sector applications for investment promotion is well below last year’s (-69% y-o-y in Q2), although the number of applications climbed in recent months amid political stabilization. In fact, the NESDB now expects private investment to contract by 2.9%, instead of 0.2% as forecast earlier earlier. Nevertheless, the NESDB believes that the impact will be partly offset by stronger growth of public investment, which is now projected at 1.0% instead of -5.0%.

Overall, today’s data points to a recovery, albeit at a slow pace. This further affirms our view that the Bank of Thailand will keep its policy rate at 2.0% possibly through Q1 next year. Despite the fact that today’s data were weaker than our expectations, we think that our forecast of 1.4% GDP growth this year remains achievable, subject to the economy overcoming some of the challenges mentioned above. There are positive signs of domestic demand recovery, which could lead to a substantial build-up of inventories, after the sharp draw-down in the first half of the year. Meanwhile, continued growth in the global economy should help to support exports recover.

Nalin Chutchotitham

Economist, Thailand

Economics - Data ReactionsThailand18 August 2014

2

abcGlobal Research

Market over-reaction. PGOLD reported NPAT decline of 7% y-o-y to PHP1,656m in

1H14, 36% below our estimate, as its gross margin contracted by 100bp to 16.5% h-o-h.

The contraction was attributed to the major drop in cigarette sales (-50% y-o-y) and

margin contraction due to the government’s sin tax as well as general price cuts across a

number of product categories amidst intense competition and high food price inflation.

Net sales, as a result, grew slower than expected at 17% y-o-y to PHP38,549m, 4% below

our estimate and 3% behind the company’s full-year guidance. On the back of the

announcement, PGOLD’s share price fell by 14% from cPHP42 to cPHP36. We think the

market has overreacted to the news and therefore this presents a buying opportunity.

Growth potential remains solid. We believe our investment thesis that Puregold offers

strong growth potential in the underpenetrated Philippine modern retail sector remains

intact. In our 2 July 2014 report, we stated that PGOLD had overtaken SM as Universal

Robina’s single largest retailer by sales value and that it was bound to surprise on the

upside regarding its expansion. This is in line with what Euromonitor has said in its June

2014 Philippine retailing report in that in 2013, Puregold Price Club was the most

dynamic and the fastest-growing player in terms of sales value. Up to 30 June 2014, it has

opened 15 new Puregold stores out of a full-year target of 25, and it recently announced a

joint-venture with Lawson to open 500 convenience stores by 2020. We think PGOLD’s

margin contraction is temporary as it cut prices to maintain volume growth and defend

market share. Once food price inflation eases, we forecast PGOLD’s gross margin will

rebound. We believe the intensifying competition quoted by PGOLD and the major

publicly traded retailers is mostly confined to Metro Manila.

Reiterate OW but reduce our DCF-based TP to PHP49 from PHP54. We trim our EBIT

estimates for 2014-16e by 17%, 8% and 8%, respectively, to reflect our lower growth

expectation for 2014e as well as 60bp lower gross margin expectation in 2014e, before

rebounding in 2015-16e. We also trim our EPS estimates by a similar magnitude to our EBIT.

Our new EPS estimates are 14% below consensus for 2014e and in line with consensus for

2015-16e. As a result of our forecast changes, we reduce our DCF-based target price to PHP49

from PHP54. With the recent sell-off, the stock is trading at a 25x 2014e PE. On a forward

basis, PGOLD trades only at a 19x 2015e PE, a 21% discount to the sector average of 24x.

Puregold Price Club (PGOLD PM)

OW: Over-reaction by the market

NPAT fell by 7% y-o-y in 1H14 due to temporary margin pressure as a result of initiatives to maintain market share

Growth potential and investment thesis intact

Reiterate OW but reduce DCF-based TP to PH49 from PHP54

Consumer & Retail Multiline Retail Equity – Philippines

18 August 2014

Permada Darmono* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0613 [email protected]

Ananita Kusumaningsih* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0610 [email protected]

Erwan Rambourg* Global Co-Head of Consumer and Retail Research The Hongkong and Shanghai Banking Corporation Limited +852 2996 6572 [email protected]



Issuer of report:

The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch

MICA (P) 157/06/2014 MICA (P) 171/04/2014 MICA (P) 077/01/2014 Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Flashnote

Overweight Target price (PHP) 49.00 Share price (PHP) 36.05 Potential return (%) 35.9


Performance 1M 3M 12M Absolute (%) -14.3 -17.9 -8.0 Relative^ (%) -14.3 -18.8 -12.9

Index^ PHISIX RIC PGOLD.PS Bloomberg PGOLD PM Market cap (USDm) 2,283 Market cap (PHPm) 99,729 Enterprise value (PHPm) 99,229 Free float (%) 33


https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=HIq03X1Wlw&ao=29&n=421305.PDF

2

Puregold Price Club (PGOLD PM) Multiline Retail 18 August 2014

abc


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Profit & loss summary (PHPm)

Revenue 73,177 86,349 103,619 124,343EBITDA 6,418 6,779 8,823 10,587Depreciation & amortisation -964 -1,138 -1,366 -1,639Operating profit/EBIT 5,454 5,641 7,457 8,949Net interest 129 -2 98 137PBT 5,576 5,659 7,575 9,105HSBC PBT 5,576 5,659 7,575 9,105Taxation -1,617 -1,698 -2,272 -2,732Net profit 3,959 3,961 5,302 6,374HSBC net profit 3,959 3,961 5,302 6,374

Cash flow summary (PHPm)

Cash flow from operations 4,936 5,079 6,648 7,992Capex -5,176 -3,000 -3,347 -3,822Cash flow from investment -5,354 -3,154 -3,504 -3,980Dividends 0 -830 -990 -1,326Change in net debt 2,703 464 -1,548 -2,059FCF equity 584 2,079 3,301 4,170

Balance sheet summary (PHPm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 32,121 32,902 34,884 37,068Current assets 15,957 15,870 19,625 24,332Cash & others 5,299 4,837 6,385 8,444Total assets 49,626 50,074 55,811 62,702Operating liabilities 14,704 12,180 13,939 16,050Gross debt 4,335 4,337 4,337 4,337Net debt -964 -500 -2,048 -4,107Shareholders funds 30,586 33,557 37,534 42,314Invested capital 28,075 31,755 34,184 36,905


Year to 12/2013a 12/2014e 12/2015e 12/2016e

Y-o-y % change


Ratios (%)

Revenue/IC (x) 2.9 2.9 3.1 3.5ROIC 15.2 13.2 15.8 17.6ROE 13.6 12.4 14.9 16.0ROA 8.4 8.0 10.0 10.8EBITDA margin 8.8 7.9 8.5 8.5Operating profit margin 7.5 6.5 7.2 7.2EBITDA/net interest (x) 3662.9 Net debt/equity -3.2 -1.5 -5.5 -9.7Net debt/EBITDA (x) -0.2 -0.1 -0.2 -0.4CF from operations/net debt

Per share data (PHP)


Key forecast drivers (Revenue, PHPm)

Year to 12/2013a 12/2014e 12/2015e 12/2016e

Puregold 62,197 71,670 86,004 103,204S&R Price Club 10,980 14,679 17,615 21,138Total revenue 73,177 86,349 103,619 124,343

DCF analysis

HSBC assumptions DCF, comprising

Risk free rate (%) 3.5 FCF CAGR 2015-23e (%)

15.8

Equity premium (%) 5.5 WACC (%) 8.9 Terminal growth (%) 5.0

Sensitivity and target price range (PHP)

Cost of capital vs terminal growth 4.0% 5.0% 6.0%

8.0% 48 61 888.5% 44 54 728.9% 41 49 639.5% 38 44 5410.0% 35 41 49

Valuation data

Year to 12/2013a 12/2014e 12/2015e 12/2016e



Price relative


23

28

33

38

43

48

53

23

28

33

38

43

48

53

Aug-12 Feb-13 Aug-13 Feb-14 Aug-14Puregold Price Club Rel to PHISIX

abcGlobal Research

Strong margin recovery in 1Q FY15. Cipla reported strong EBITDA margin improvement

(excluding other operating income) for the quarter. At 17.7%, margins were up c458bp q-o-q

and c40bp above HSBCe, driven primarily by better product mix and better rationalization

of manufacturing and procurement expenses. Reported 1Q FY15 net profit was INR2.9bn

(down 39.3% y-o-y), and net sales came in at INR26.5bn (up 13.6% y-o-y) in line with

HSBCe. The quarter benefited from milestone income related to Dymista, so did not compare

perfectly with1Q FY15. Other income included a forex gain of INR250m in 1Q.

Sales in line, tender sales set to increase. India formulations grew strongly, at 17% y-o-y,

to INR13bn, versus overall market growth of c10% driven by growth in respiratory, cardiac

and anti-infective therapies. Export formulation sales grew 12.7% y-o-y, to INR12.2bn,

with a significant contribution from the Cipla Medpro business. Export growth is essentially

on the back of higher anti-asthma, anti-allergy and anti-retroviral (ARV) sales. During the

quarter, Cipla had won tenders worth ZAR300m in South Africa in new therapies such as

respiratory, mental health, cardiac and women’s health – a shift change from traditional

tenders in anti-retrovirals. Tender sales now form less than 10% of export sales.

Upgrade to OW, gradual margin recovery likely to hold valuations. We believe margin

improvement on continued cost rationalization, better growth in India formulations, and

higher margin sales in tenders are likely, as per guidance. Major potential share price catalysts

also include approval or launch of combination inhalers in some EU markets. Our model

builds in the c21% FY15 margin guidance and an c180bp improvement over that in FY16

(as against a flat FY16e margin earlier). Our net EPS forecast change post-revision is c1%

in FY15e and c18% in FY16e. We value Cipla at 22x (earlier 20x, close to the current trading

multiple) to arrive at our new target price of INR522. We upgrade to Overweight from

Neutral. Key downside risks to our rating and forecasts include lower-than-expected sales

growth in India and high-margin products in exports resulting in slow or delayed EBITDA

margin improvement.

Cipla (CIPLA IN)

Upgrade to OW: Sequential margin recovery in 1Q FY15

Better product mix and operating cost rationalization helped in c458bp q-o-q margin recovery despite in-line sales

Strong India and export formulations growth in 1Q; new tender win for better margin products in South Africa

Combination inhalers approval/launch in EU is key catalyst. Upgrade to Overweight from Neutral, raise PE-based target price to INR522 from INR402

Healthcare Pharmaceuticals Equity – India

Company report

^Index SensexIndex level 26,103RIC CIPL.BOBloomberg CIPLA IN

Source: HSBC

Overweight Target price (INR) 522.00 Share price (INR) 448.60 Forecast dividend yield (%) 0.6 Potential return (%) 17


Mar 2014a 2015e 2016e

HSBC EPS 16.03 17.32 23.74 HSBC PE 28.0 25.9 18.9


Absolute (%) 3.8 15.5 8.2 Relative^ (%) 1.6 6.8 -22.9

Enterprise value (INRm) 364,020Free float (%) 63Market cap (USDm) 5,921Market cap (INRm) 360,191

Source: HSBC

18 August 2014

Girish Bakhru* Analyst HSBC Securities & Capital Markets (India) Private Limited +91 22 22681638 [email protected]



Issuer of report:

HSBC Securities and Capital Markets (India) Private Limited



2

Cipla (CIPLA IN) Pharmaceuticals 18 August 2014

abc


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Profit & loss summary (INRm)

Revenue 101,004 117,330 139,237 163,980EBITDA 21,331 24,138 30,870 35,473Depreciation & amortisation -3,726 -5,017 -5,280 -5,507Operating profit/EBIT 17,604 19,121 25,591 29,965Net interest -1,286 -1,200 -1,000 -1,100PBT 18,800 19,721 26,591 30,865HSBC PBT 18,800 19,721 26,591 30,865Taxation -4,634 -4,733 -6,382 -7,716Net profit 13,884 13,908 19,059 21,949HSBC net profit 12,868 13,908 19,059 21,949

Cash flow summary (INRm)

Cash flow from operations 15,719 8,137 13,385 20,289Capex -33,232 -5,000 -4,000 -4,000Cash flow from investment -14,445 -6,080 -5,150 -5,200Dividends -1,879 -2,441 -3,345 -3,852Change in net debt 20,582 384 -4,890 -11,237FCF equity -19,995 1,337 7,385 14,289

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 69,383 69,366 68,086 66,579Current assets 64,621 77,620 97,406 121,305Cash & others 8,837 8,454 13,344 24,581Total assets 134,004 146,986 165,492 187,884Operating liabilities 14,208 16,706 18,593 22,381Gross debt 12,283 12,283 12,283 12,283Net debt 3,446 3,830 -1,060 -12,297Shareholders’ funds 100,504 111,971 127,685 145,782Invested capital 107,535 119,386 130,210 137,070


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Y-o-y % change

Revenue 22.0 16.2 18.7 17.8EBITDA -2.9 13.2 27.9 14.9Operating profit -5.7 8.6 33.8 17.1PBT -10.3 4.9 34.8 16.1HSBC EPS -16.7 8.1 37.0 15.2

Ratios (%)

Revenue/IC (x) 1.1 1.0 1.1 1.2ROIC 15.0 13.2 15.9 17.1ROE 13.5 13.1 15.9 16.1ROA 12.2 11.3 13.4 13.6EBITDA margin 21.1 20.6 22.2 21.6Operating profit margin 17.4 16.3 18.4 18.3EBITDA/net interest (x) 16.6 20.1 30.9 32.2Net debt/equity 3.4 3.4 -0.8 -8.5Net debt/EBITDA (x) 0.2 0.2 0.0 -0.3CF from operations/net debt 456.1 212.5 – –

Per share data (INR)

EPS reported (diluted) 17.29 17.32 23.74 27.34HSBC EPS (diluted) 16.03 17.32 23.74 27.34DPS 2.00 2.60 3.56 4.10Book value 125.18 139.46 159.03 181.57

Valuation data

Year to 03/2014a 03/2015e 03/2016e 03/2017e

EV/sales 3.6 3.1 2.6 2.1EV/EBITDA 17.0 15.1 11.6 9.8EV/IC 3.4 3.0 2.8 2.5PE* 28.0 25.9 18.9 16.4P/Book value 3.6 3.2 2.8 2.5FCF yield (%) -5.6 0.4 2.1 4.0Dividend yield (%) 0.4 0.6 0.8 0.9

*Based on HSBC EPS (diluted)

Price relative

Source: HSBC Note: Priced at close of 14 August 2014

211

261

311

361

411

461

211

261

311

361

411

461

2012 2013 2014 2015Cipla Rel to BOMBAY SE SENSITIVE INDEX

abcGlobal Research

Losses continued, although marginally lower than we expected: Lanco reported a loss

of INR3.0bn, which was 15% below last year’s adjusted losses mainly due to an

improvement in utilisation at its power plants. The losses were 5% better than we expected

and much better than the consensus estimate of a INR4bn loss. This was largely due to

positive EBITDA in its coal business, although losses at the PAT level continued. On the

operating level, EBITDA was up 9% y-o-y to INR6.9bn, 7% above our estimate, while

interest cost was 5% higher than we expected.

1.2GW asset sale to help reduce INR400bn outstanding debt: Lanco plans to sell 100% of

its 1.2GW Udupi project for INR60bn, of which INR20bn would be in cash and INR40bn

would be in the form of a take-over of long-term debt by the prospective acquirer Adani Power

(ADANI IN, INR53.55, N(V)). The INR18bn net price is slightly higher than the INR17bn

estimate of our equity value assigned to the project. However, on earnings, the transaction is

likely to result in an incremental loss of cINR500m, given that the project was expected to earn

INR3bn of PAT in FY15-17e (PAT of INR1.2bn in FY14), while interest savings could be

around INR2.5bn per annum, assuming debt is repaid from the entire cash proceeds.

Problems persist: After the sale of 2.8GW of operational capacity, the remaining capacity

(Kondapalli, Amarkantak, etc.) is lossmaking. The EPC and coal business are also

generating losses. In addition, almost half of the company’s debt (cINR181bn) relates to

projects that are under construction (c5GW) and are unlikely to be operational in the next

two years. To make matters worse, the company has long outstanding dues of INR30bn

from various power distribution companies (discoms), most of which are in dispute. Lanco

has already restructured part of its loans at the parent level and seeks to sell more assets.

Estimate changes: We raise our loss estimates by INR200-530m for FY15-17e (2-38%

for FY15-17e) to factor in the sale of Udupi and expect Lanco to continue to report losses,

given high debt and interest cost. Additionally, existing assets are currently unprofitable.

Reiterate UW(V) with a TP of INR8.4 (from INR 8.0): We value Lanco by SOTP (see

table 3) and raise our target price to INR8.4 (from INR 8) to reflect the Udupi asset sale.

Lanco Infratech (LANCI IN)

UW(V): Asset sale positive, problems still persist

1Q FY15 saw a 10th straight quarter of losses, but results were better than we and consensus expected, as losses were pared

1.2GW power plant sale for INR60bn (INR20bn in cash and INR40bn of debt taken over) is positive for de-leveraging

Reiterate UW(V); the higher-than-expected price of Udupi plant raises our TP to INR8.4 (from INR8) but also our loss estimates

Nat Resources & Energy Electric Utilities Equity – India

Company report

Index^ BOMBAY SE IDXIndex level 26,103RIC LAIN.BOBloomberg LANCI IN

Source: HSBC

Underweight (V) Target price (INR) 8.40 Share price (INR) 8.95 Potential return (%) -6.1


Mar 2014 a 2015 e 2016 e

HSBC EPS -7.02 -5.14 -2.23 HSBC PE




Enterprise value (INRm) 316,548Free float (%) 29Market cap (USDm) 354Market cap (INRm) 21,550

Source: HSBC

18 August 2014

Arun Kumar Singh* Senior Analyst HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1778 [email protected]

Jenny Cosgrove*, CFA Head of Utilities and Alternative Energy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6619 [email protected]

Murtuza Zakiuddin* Associate Bangalore



Issuer of report: HSBC Securities and Capital Markets (India) Private Limited



2

Lanco Infratech (LANCI IN) Electric Utilities 18 August 2014

abc


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Profit & loss summary (INRm)

Revenue 104,299 111,427 125,439 145,770EBITDA 18,746 24,314 27,450 31,964Depreciation & amortisation -11,719 -10,986 -10,795 -11,547Operating profit/EBIT 7,027 13,328 16,655 20,417Net interest -27,621 -26,237 -23,201 -23,848PBT -25,190 -11,274 -5,016 -1,873HSBC PBT -19,255 -11,274 -5,016 -1,873Taxation 1,294 -1,578 -627 -234Net profit -22,739 -12,305 -5,345 -1,926HSBC net profit -16,805 -12,305 -5,345 -1,926

Cash flow summary (INRm)

Cash flow from operations -11,562 2,743 5,960 5,201Capex -22,065 55,000 -5,000 -10,000Cash flow from investment -22,065 55,000 -5,000 -10,000Dividends 0 0 0 0Change in net debt 34,935 -57,748 -961 4,799FCF equity -35,305 56,109 -569 -6,356

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 357,893 291,907 286,113 284,566Current assets 120,069 108,754 103,327 101,214Cash & others 5,793 6,353 7,314 2,515Total assets 508,023 430,722 419,500 415,840Operating liabilities 91,123 83,859 78,279 76,726Gross debt 380,769 323,581 323,581 323,581Net debt 374,975 317,227 316,267 321,066Shareholders’ funds 14,575 2,270 -3,075 -5,001Invested capital 381,045 310,449 303,846 306,538


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Y-o-y % change

Revenue -24.0 6.8 12.6 16.2EBITDA -26.8 29.7 12.9 16.4Operating profit -51.0 89.7 25.0 22.6PBT - - - -HSBC EPS - - - -

Ratios (%)

Revenue/IC (x) 0.3 0.3 0.4 0.5ROIC 1.8 4.4 6.1 7.5ROE -65.5 -146.1 1329.0 47.7ROA 0.5 3.6 4.8 5.9EBITDA margin 18.0 21.8 21.9 21.9Operating profit margin 6.7 12.0 13.3 14.0EBITDA/net interest (x) 0.7 0.9 1.2 1.3Net debt/equity 1633.9 3140.2 0.0 0.0Net debt/EBITDA (x) 20.0 13.0 11.5 10.0CF from operations/net debt - 0.9 1.9 1.6

Per share data (INR)

EPS reported (fully diluted) -9.50 -5.14 -2.23 -0.81HSBC EPS (fully diluted) -7.02 -5.14 -2.23 -0.81DPS 0.00 0.00 0.00 0.00Book value 6.09 0.95 -1.29 -2.09


Year to 03/2014a 03/2015e 03/2016e 03/2017e

Installed Capacity (MW) 3,957 3,957 3,333 3,333Units Sold (MU) 19,570 18,943 16,983 17,975EPC - EBIT Margins % -29.1 4.0 6.5 7.0

Valuation data

Year to 03/2014a 03/2015e 03/2016e 03/2017e

EV/sales 3.6 2.8 2.5 2.2EV/EBITDA 20.0 13.0 11.5 10.0EV/IC 1.0 1.0 1.0 1.0PE* NM NM NM NMP/Book value 1.5 9.4 NM NMFCF yield (%) 25912.7 -8261.0 58.3 549.2Dividend yield (%) 0.0 0.0 0.0 0.0


Price relative


1

6

11

16

21

26

1

6

11

16

21

26

2012 2013 2014 2015Lanco Infratech Rel to BOMBAY SE SENSITIVE INDEX


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Research So Far This Week

Ticker Company Rating was Currency Target was EPS '13e EPS '14e Price Price At Close

New 031390 KS Green Cross Cell OW(V) KRW 35,300.00 -658.45 -7.47 28,400.00 13 Aug

2186 HK Luye Pharma OW(V) HKD 8.60 0.09RMB 0.17RMB 7.11 13 Aug

4162 TT PharmaEngine OW(V) TWD 272.00 -1.17 1.07 228.00 13 Aug

Up BPI PM BPI OW UW PHP 118.50 95.14 5.19 4.65 96.70 13 Aug

MBT PM MBT OW UW PHP 107.80 64.62 4.65 5.21 86.15 13 Aug

BDO PM Banco De Oro N UW PHP 98.10 55.55 6.30 6.15 91.00 13 Aug

69 HK Shangri-La Asia N HKD 13.00 12.8 0.02 0.03 11.94 13 Aug

Down UBP PM UBP N OW PHP 129.40 175.00 14.07 9.92 119.00 13 Aug

SECB PM SECB OW PHP 183.60 211.57 9.98 9.69 127.00 13 Aug

551 HK Yue Yuen UW HKD 20.0 20.2 0.25 0.26 24.80 15 Aug Source: Bloomberg, HSBC estimates

Click on title to open reportsResearch Focus 18 Aug Sustained Dose - Asian firms are entering advanced cancer treatments Nam Park

Philippine Banks - Profitability returning to highs Xiushi Cai* Anhui Conch (914 HK) - OW: Forecasting 86% y-o-y increase in 1H NPAT Wei Sim* India Autos - Deep-dive into the Indian tractor industry Yogesh Aggarwal*

China & Hong Kong 18 Aug Hong Kong GDP (Q2 2014) - Drop in consumption hits growth John Zhu

July China power consumption - Weakest growth at 3% y-o-y in 2014 YTD Jenny Cosgrove* China Cement - July production growth shows rebound vs. June Wei Sim* Greater China handsets - Implications of handset subsidy cut in China Yolanda Wang* China Solar - Scope of poly import duties widened, positive for domestic poly makers Gloria Ho* CNBM (3323 HK) - OW: Forecast 1H NPAT to increase 7% y-o-y Wei Sim* Swire Pacific (19 HK) - OW: Strong interim supports robust outlook Mark Webb* Honghua Group (196 HK) - N(V): New shipbuilding deal – no near-term contribution Thomas C. Hilboldt* Shangri-La Asia (69 HK) - N: 1H14 preview – expect a muted first half Stephen Wan* Shanghai Electric (2727 HK) - UW(V): 1H14 profit down 8% yoy as expected by consensus Jenny Cosgrove* Zoomlion Heavy Industry (1157 HK) - UW(V): Entering the agricultural machinery industry Anderson Chow* Yanlord Land Group (YLLG SP) - UW: Speeding up asset turn is the only option Derek Kwong* Yue Yuen (551 HK) - UW: Lagging behind the pack Catherine Chao*

Korea 18 Aug Korea’s neutral rate - Set to rise Ronald Man

Taiwan 18 Aug Mega FHC (2886 TT) - N: Give and take - yield versus fund-raising Bruce Warden*

ASEAN 18 Aug Malaysia - 2Q14 growth surges on consumption, weak imports Su Sian Lim

Thailand Economics Comment - The next political phase Nalin Chutchotitham Indonesian Autos - Feedback from MPM roadshow; read-across for Indomobil Tarun Bhatnagar*

India 18 Aug SpiceJet Ltd (SJET IN) - UW(V): Capacity cuts sensible but not enough Rajani Khetan*

Global 18 Aug HSBC Steel Weekly - Surprisingly clean Thorsten Zimmermann*

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z7A1L11L8P&n=426202.PDF

https://www.research.hsbc.com/R/20/c50SwtN

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https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=seRtYTsmQD&n=427076.PDF

https://www.research.hsbc.com/R/20/4Q8di0S

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Disclosure appendix Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.


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Rating distribution for long-term investment opportunities

As of 18 August 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (29% of these provided with Investment Banking Services)

Neutral (Hold) 37% (29% of these provided with Investment Banking Services)

Underweight (Sell) 19% (23% of these provided with Investment Banking Services)

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 19 August 2014. 2 All market data included in this report are dated as at close 18 August 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.


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Disclaimer * Legal entities as at 30 May 2014 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

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Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. 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