hong kong buy shenzhou international · 07/01/2013 · for famous apparel brands include uniqlo,...

SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Hong KongInitiating Coverage 7 January 2013

Shenzhou International Recovery, Re-Rating; Initiate BUY Promising years ahead. We initiate at a BUY and a Street-high HKD23.6 target, offering 31% upside. Shenzhou’s earnings rose steadily amidst the economic downturns, thanks to its vertically-integrated business model. We believe the company is well-set for growth in 2013 and 2014, as the new capacity is coming on-stream and export sales orders are picking up in 4Q12. Our numbers for FY13F/14F are above consensus as we believe the market has yet to fully factor in the contribution from new capacity.

Solid track record. Shenzhou has achieved solid growth in both its sales and net profit since its listing in 2005. Thanks to its vertically-integrated business model that produces in-house fabric for garment products on an OEM basis, Shenzhou has achieved better gross margins than its peers. We believe that Shenzhou can attain efficiency gains, excellent controls in supply chain and economies of scale through its distinctive business model.

Capacity additions drive future growth. Earnings growth in 2012 has been lackluster due to production bottlenecks. Operations are now running at full capacity with the rebound of export sales orders. Moreover, new capacities from Cambodia and Ningbo, which will start to contribute in 2013, should become the key earnings growth drivers for Shenzhou in the upcoming two years. We project Shenzhou’s earnings CAGR will be 21% for the upcoming two years (FY13-14F).

Business immunes from cotton price disparity. We view the current cotton price gap between China and overseas markets as an opportunity for Shenzhou to improve its cost structure. As there is no restriction on importing yarn, Shenzhou can bring in cheaper yarn from overseas which can help the company to stay competitive in the textile industry against its global peers.

Warrants a re-rating. Shenzhou is currently trading at 9.2x/7.6x FY13F/14F PER, one S.D. above its historical trading range since its listing. In light of its strong financial position and earnings growth prospects for FY13F/14F, we think the company deserves a further re-rating. We value the stock at 10x FY14F and set the target price at HKD23.6. We initiate coverage on Shenzhou with a BUY rating.

Shenzhou International – Summary Earnings Table FYE Dec (CNYm) 2011A 2012F 2013F 2014FRevenue 9,043 9,767 11,486 13,869 EBITDA 2,442 2,606 3,118 3,740 Recurring Net Profit 1,704 1,800 2,159 2,615 Recurring Basic EPS (CNY) 1.37 1.35 1.62 1.97 EPS growth (%) 34.0 (1.1) 20.0 21.1 DPS (CNY) 0.41 0.41 0.49 0.59

PER (x) 10.9 11.1 9.2 7.6 EV/EBITDA (x) 8.2 7.1 5.7 4.5 Div Yield (%) 2.7 2.7 3.3 3.9 P/BV (x) 3.0 2.3 2.0 1.6

Net Gearing (%) 3.5 N/A N/A N/AROE (%) 34.0 27.0 26.6 25.4 ROA (%) 24.4 19.6 20.2 20.0 Consensus Net Profit (CNYm) N/A 1,765 2,052 2,422Source: Company data, Maybank Kim Eng

BUY

Share price: HKD17.96 Target price: HKD23.60

Alex YEUNG [email protected] (852) 2268 0636

Stock Information

Description: Shenzhou International is principally engaged in the manufacturing of high-end knitwear on an OEM basis. It is one of the largest vertically integrated knitwear manufacturers in China. Ticker: 2313 HK Shares Issued (m): 1,330 Market Cap (USDm): 3,082 3-mth Avg Daily Turnover (USDm): 1.5 HSI: 23,331 Free Float (%): 28.3 Major Shareholders: % Chairman Ma Jianrong 58.4 Key Indicators

ROE – annualised (%) 27.0 Net cash (CNYm): 1,460 NTA/shr (CNY): 6.4 Interest cover (x): 48.3 Historical Chart

Performance: 52-week High/Low HKD18.10/HKD9.95 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 19.7 35.0 34.0 69.8 2.6 Relative (%) 12.7 23.4 15.7 45.2 (0.3)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13

PRICE PRICE REL. TO HANG SENG INDEXSource: Bloomberg

7 January 2013 of 27

Shenzhou International Group Holdings Ltd

Investment thesis

We initiate coverage on Shenzhou with a BUY recommendation and target price of HKD23.6, based on 10x FY14F PER. We believe that the market has yet to fully factor in Shenzhou’s growth potential for the upcoming years, which will be driven by the contribution of new capacities. Production bottlenecks are expected to ease in 2013 and onwards, as the new facilities in Cambodia and Ningbo will start to contribute to earnings in 2013. Therefore, we expect Shenzhou’s earnings to rebound by 20% and 21% in FY13F and FY14F respectively. Shenzhou is our top pick for the textile sector.

We like Shenzhou for its stable business growth over the years. Since its listing in 2005, Shenzhou has continued to achieve a satisfactory performance, despite the tough operating environment of the textile industry. The company saw its revenue and net profit rise at CAGRs of 24% and 30% over FY05-11, thanks to Shenzhou’s deep and close relationships with key customers such as Uniqlo, Nike and Adidas. Looking ahead to 2013, with overseas orders starting to pick up in 4Q12, we believe that Shenzhou’s business outlook in 2013 will be appealing and promising.

The key driver that supports our positive view in 2013 comes from the release of new capacities from the Cambodia and Ningbo areas, which should ease Shenzhou’s production bottlenecks in 2012. Shenzhou used to operate at full capacity with an orders visibility that exceeded that of its peers. Thus, we believe that the new capacity contributions will enable Shenzhou to grow and take more orders from retailers from 2013 and onwards.

Due to increasing stringent environmental standards, tough financing, and rising labour costs, small players are struggling to survive. Hence, the textile industry is currently undergoing consolidation. It is a long-term theme and large players are expected to stand out against the others. With strong financials to weather the storm and comply with stricter environmental standards, we believe Shenzhou will benefit from the consolidation of the industry.

The key competitive edge of Shenzhou comes from its vertically-integrated business model. In addition to a shorter production period, higher quality in terms of made-to-order specifications is also expected. We believe it is one of the key factors, which has enabled Shenzhou to achieve solid profitability and earnings stability in the past years, far better than its peers.

Shenzhou has been continuously diversifying both its product portfolio and client base. Starting as an OEM casual wear manufacturer to Uniqlo, the company subsequently diversified into OEM sportswear. Along with increasing exposure to the sportswear segment, Shenzhou’s high gross profit margin should be sustainable for the next few years. On top of that, Shenzhou also targets to increase the proportion of cotton yarn sourced from overseas from 20% to 40% in the near-term, which is also positive for its overall cost structure.

The counter is currently trading at 9.2x/7.6x FY13F/14F PER, still at a 20% discount to Texwinca. In view of Shenzhou’s solid financials vis-à-vis those of its peers, high ROEs of above 25% as well as its strong earnings prospects for FY13F/14F, with a two-year EPS CAGR of 21%, we believe that a further re-rating on this name is possible. Our target price of HKD23.6 is based on 10x FY14F PER, offering a 31% upside. We initiate coverage on Shenzhou with a BUY rating.



Business overview

Company background. Shenzhou is one of the largest knitwear manufacturers with vertically-integrated production in China. The company is principally engaged in the manufacturing of high-end knitwear on an OEM basis and provides a one-stop solution to its customers. It also designs and develops new fabric to cater to the needs of its major customers. Most of the fabric used in its knitwear products is also manufactured by the company in-house.

Shenzhou produces sportswear, casual wear, lingerie and other knitting products for famous apparel brands include Uniqlo, Adidas Nike, and Puma. Shenzhou is the No.1 supplier to Uniqlo, Adidas and Nike. Uniqlo was Shenzhou’s biggest customer (24%) in FY11, followed by Adidas (22%), Nike (19%) and Puma (9%); the top four customers accounted for 74% of total sales in FY11.

No longer a pure Uniqlo play. In the past, Shenzhou was classified as an outsourcing arm for Uniqlo brand, as more than 60% of its total sales were generated from the Japanese apparel brand. In order to reduce its overreliance on Uniqlo, Shenzhou made a strong effort to strengthen its relationships with other existing customers, while exploring new business opportunities with potential clients. It has been proactively diversifying its customer base – adding more overseas and local brands to its portfolio, which include VANCL, Calvin Klein and A&F. Thus, Uniqlo’s contribution to Shenzhou’s top-line has been successfully reduced from 58% in FY05 to 24% in FY11.

We learnt that Uniqlo is well-liked by its suppliers for its willingness to work with suppliers for the long-term benefit of both parties. Therefore, Shenzhou is likely to maintain its long-term strategic relationship with Uniqlo despite the decreasing contribution. Nevertheless, management said it will continue to target more high-end products for Uniqlo, rather than low-profit-margin items.

Figure 1: Top five customers

Source: Company data, Maybank Kim Eng

Figure 2: Sales breakdown by product (FY11) Figure 3: Sales breakdown by region (FY11)

Source: Company data, Maybank Kim Eng Source: Company data, Maybank Kim Eng

63.5% 64.0%63.5%

58.0%53.0%

78.0% 78.8% 82.2% 81.0% 79.9%84.2% 83.0% 86.8% 84.0%

79.0%

42.0%35.4% 36.6%

26.0% 23.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Top 5 customers The largest customer: UNIQLO

Sports wear54.7%Casual wear

33.7%

Lingerie8.8%

Other knitting products

2.7% Japan35.7%

Europe21.6%

US5.7%

Other countries

15.8%

China21.3%



Figure 4: Key and prestigious customers

Sports wear customers

Casual wear customers


Optimisation of production bases. Shenzhou has four production bases for its manufacturing business. Its annual production capacity for its knitwear products was 210m pieces as of the end of 2011. The company’s major production base is located at Ningbo in the Zhejiang province, while the other three are located at Quzhou (Zhejiang), Anqing (Anhui) and Cambodia. While the Zhejiang bases offer distinctive advantages in terms of logistics, transport and talented personnel, other areas provide production efficiency gains, in terms of labour costs. We believe that the diversification of production bases can help to ease customers’ concerns about risk exposure that arises from procurement concentration.

Moving into downstream retail market. The first retail store was opened in Ningbo in August 2011. Shenzhou’s retail business operates under the brand name of “Maxwin” with a range of products including knitwear, woven garments and sweaters. According to the management, there are 15 stores running in the Ningbo, Shanghai, Suzhou and Shaoxing areas by the end of 2012. The company will review its whole retail business strategy by 2014.

While Shenzhou will not incur large advertising and promotion expenses for its retail brand due to its low-end positioning, we expect more one-time set-up and administrative expenses to occur in the beginning stages. Shenzhou remains cautious about the retail outlook due to the weakened consumer sentiment of the domestic market this year. The retail division reported losses of CNY20m in 1H12. We believe that it will take time for the impact of its retail business to materialize; thus, we do not think that there are likely to be any positive contributions over the short-term.

ANTA



Figure 5: Maxwin promotion items


Figure 6: In-house designed casual wear Figure 7: The MAXWIN outlet


Figure 8: SWOT analysis Strengths Weaknesses Vertically-integrated operations to shorten the

production cycle and control flexibility Sales heavily dependent on top five

customers

Enjoy economies of scale from operations Textile manufacturing is a labour intensive industry

Well-established relationships with large brand customers

Traditional OEM business is a sunset business with keen competition and low value added Diversified product mix to reduce single-

product risk

Nearly full capacity utilisation ensures production efficiency

Sound financial position

Outstanding supply chain management

Experienced management team with decent track record

Opportunities Threats Capture market share from small players

through industry consolidation Significant increase in cotton and oil prices will

hurt margins and profitability

M&A possibilities to enhance growth Labour costs inflation will erode profits

Domestic market development to drive future business growth

Expansion into retail channels involve uncertainties and capital investment may be more than expected




Investment highlights

Vertically-integrated knitwear maker. Compared with other textile players, Shenzhou uses a vertically-integrated business model to differentiate itself from its peers. As a vertically-integrated knitwear manufacturer, Shenzhou is able to offer greater flexibility to its customers throughout the textile supply chain. From yarn procurement to garment processing, Shenzhou’s business model enables the company to offer a seamless service in the knitwear-manufacturing industry, which reduces lead time and the logistical costs of moving from one production process to another.

Figure 9: Vertically-integrated business model


Along with the above vertical service capabilities, Shenzhou has been able to adapt to the changing needs of its customers. We believe that it is not easy for its competitors to copy Shenzhou’s business model due to the intensive capital requirement as well as large scale of downstream products orders. Thanks to its unique vertically-integrated business model, Shenzhou has been enjoying higher margins than its peers over the past few years. In our comparison of Shenzhou with other HK-listed textile players, we find that Shenzhou surpasses its peers in terms of both gross margin and net margin.

Figure 10: Gross profit margin comparison (%) Figure 11: Net profit margin comparison (%)

2007 2008 2009 2010 2011

Texwinca 33.5 33.0 33.4 33.7 29.6

Fountain Set 17.6 15.3 15.5 16.2 15.3

Pacific Textiles 16.3 14.5 20.8 18.0 17.1

Shenzhou 22.3 23.8 31.7 29.9 28.8

Texhong 13.4 12.3 14.7 23.9 8.1

Weiqiao 14.3 8.7 8.7 16.1 1.8

2007 2008 2009 2010 2011

Texwinca 9.4 8.9 9.9 10.3 5.2

Fountain Set 4.5 (2.3) 0.1 3.9 5.3

Pacific Textiles 8.1 8.6 16.3 15.1 14.9

Shenzhou 14.3 15.3 24.7 23.8 23.5

Texhong 7.3 7.3 9.0 18.9 3.2

Weiqiao 11.5 7.5 12.5 15.0 1.1

Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng



Increasing sportswear exposure drives margin expansion. Shenzhou has secured relatively stable profitability over the past few years, in spite of the challenging environment, thanks to the structural shift in the product mix to sportswear segment. The company has optimised its product mix by increasing its cooperation with renowned international sportswear brands such as Nike and Adidas. The sales contribution of its sportswear segment has increased substantially from less than 10% in FY05 to 54.7% in FY11. As the gross margin of sportswear is estimated to be 3ppts higher than that of casual wear, the continuous improvement in the product mix should support Shenzhou’s gross margin expansion in the long-run.

Two of Shenzhou’s key customers in the sportswear segment, Adidas and Nike, announced their latest earnings and guidance recently. Due to a slow-down in the global economy, both brands are now more cautious about placing orders and expect mid-to-high single digit sales growth for the upcoming financial year. Considering that Shenzhou’s top-line grew at a CAGR of 25% from FY07-FY11, while its major customers’ sales grew at around 7% during the period, we are optimistic that Shenzhou can grow at a faster pace than its key customers’ sales, thanks to the company’s faster delivery speeds, good fabric design and long-term strategic relationships with key customers, which have resulted in order wins and market share gains. Furthermore, we expect Adidas, Shenzhou’s second-largest customer for Shenzhou in FY11, to surpass Uniqlo and become its largest customer in FY12.

Figure 12: Sales mix trend by product

Source: Company data, Maybank Kim Eng estimates

Figure 13: Shenzhou's key customers guidance

Brand Respective

ticker Latest sales guidanceNext earnings

announcement Sales contribution in

Shenzhou in FY11 (%)UNIQLO 9983 JP FY8/13F: JPY1,056b

(+13.7% YoY)10 January 2013

(1QFY8/13) 24

Adidas ADS GR FY12F: EUR14.7b (+10% YoY)

7 March 2013 (FY12) 22

Nike NKE US FY5/13F: mid-single-digit growth

21 March 2013 (3QFY5/13)

19

Puma PUM GR FY12F: mid-single-digit growth

15 Feb 2013 (FY12) 9

Source: Bloomberg, Maybank Kim Eng

31.9%42.3% 42.3% 50.2% 54.7% 56.0% 60.0% 62.0%

61.5%49.7% 46.5% 35.2% 33.7% 31.0% 29.0% 27.0%

4.0% 5.2% 8.6% 11.0% 8.8% 9.0% 8.0% 8.0%2.6% 2.8% 2.6% 3.6% 2.7% 4.0% 3.0% 3.0%

0%10%20%30%40%50%60%70%80%90%

100%

FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F

Sports wear Casual wear Lingerie Other knitting products



Production bottlenecks should ease in 2013. As Shenzhou has not expanded its capacity significantly in FY12, its production volume growth in FY12 has been merely driven by efficiency improvement. Nonetheless, we expect production bottlenecks to be resolved in 2013 as the company is ramping up new capacities, which will become a new growth driver for the company in FY13.

Phase II of its garment factory in Cambodia has commenced its trial run in October (with the first phase in operation since 2005), it should be able to contribute more meaningfully in 2H13. The company is also planning to set up another new garment factory in Anqing, which should be ready for production in late 2013. Therefore, we expect both factories to be functioning at full capacities in 2014.

Apart from the existing cotton-based products, Shenzhou has recently completed the construction of a new textile plant in Ningbo and it will begin trial production in 1H13. It will be used primarily for the upstream production of high-quality non-cotton based fabric along with detailed planning with key clients. We expect a positive contribution in 2H13.

Figure 14: Production bases (% of contribution in terms of sales volume) Location FY11 FY12F FY13FNingbo, Zhejiang province 80 80 75Cambodia 6 8 12Anqing, Anhui province 12 10 12Quzhou, Zhejiang province 2 2 1 100 100 100Source: Company data, Maybank Kim Eng estimates

Rising labour costs are always a concern in a labour-intensive industry like the textile sector. However, this is not the case for Shenzhou. In fact, we expect its staff cost to sales ratio to decrease gradually as the company ramps up its production in Cambodia, where labour costs are only around USD120/month, far lower than the labour cost of CNY2000-3000/month in China. Despite the labour cost advantage in Cambodia, preferential tariffs are also given by garment importing countries such as the European Union countries to garments manufactured in Cambodia.

Figure 15: Workforce and staff costs to sales ratio


35,200 37,436 42,650 48,390 48,600

19.4%19.1% 19.2%

20.8%

19.3%

18%

19%

19%

20%

20%

21%

21%

0

10,000

20,000

30,000

40,000

50,000

60,000

FY07 FY08 FY09 FY10 FY11

No. of employee Employee number Staff costs to sales ratio



Industry dynamics

Global cotton market. The United States Department of Agriculture (USDA) estimates that global cotton supply will decrease by 6% for 2012/13 as the rising prices of competing crops and the declining price of fibre results in the decline of the profitability of cotton cultivation. Nevertheless, cotton production is expected to exceed cotton consumption for the third consecutive year amidst the rebound of the latter by 3% for 2012/13. The USDA expects a rebound in cotton consumption from last season’s eight-year low as the global economy experiences a slow recovery. This season’s projected increase follows two consecutive years of decline as cotton prices reached unprecedented levels.

The above situation, coupled with the high level of production, should raise cotton inventories to record-high levels. According to the USDA, the global cotton’s stock-to-use ratio is estimated to remain at a relatively high level of 52% for 2012/13, versus 29% for 2010/11. Given the high stock-to-use ratio, international cotton prices should remain relatively low over the next 12 months, given the current oversupply situation. Our studies also point out that the international cotton prices and global stock-to-use ratio are negatively correlated.

Figure 16: Global cotton supply & demand more balanced (m bales)

Source: USDA, Maybank Kim Eng

Figure 17: Global cotton stock-to-use ratio

Source: USDA, Maybank Kim Eng

0

20,000

40,000

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2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Global cotton supply Global cotton demand

0

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Dec 90 Oct 92 Aug 94 Jun 96 Apr 98 Feb 00 Dec 01 Oct 03 Aug 05 Jun 07 Apr 09 Feb 11 Dec 12



Price floor for cotton in China. China, the world's biggest cotton producer, consumer and importer will keep the domestic values of the cotton steady, thanks to a government cotton reserve programme that has set a floor price of CNY20,400/t for growers for 2012/13, higher than the CNY19,800/t in 2011/12. The National Development and Reform Commission (NDRC) announced earlier this year that it has decided to raise the purchase price of cotton in order to protect farmers' interests and guarantee market supply. The above mechanism effectively puts a price floor for domestic cotton prices.

As the price of domestic cotton is far higher than that of international cotton, textile enterprises in China had to bear higher production costs than their overseas counterparts. The artificially high cotton prices have affected the competitiveness of China’s textile industry, especially in the upstream yarn segment. Domestic cotton is the primary raw material for manufacturing yarn, as cheaper foreign cotton is restricted by import quotas. Nonetheless, the relative high costs of domestic yarn have still resulted in increased demand for cheaper foreign yarn. Most of the fabric makers have increased the proportion of international yarn sourcing over domestic sourcing to overcome the challenging situation.

The Chinese government announced recently that it would sell some of its reserves at lower prices which means that the government would incur a net loss. The price premium of Chinese cotton has stabilised at around 60% against international prices in the past two months. With the government’s reserve policy implementation in place, the price premium is likely to continue in the near term.

Figure 18: Cotton price differential (China vs. international)

Source: Bloomberg, Maybank Kim Eng

Figure 19: China Cotton Index 328 (CNY per ton) Figure 20: Cotlook A Index (USD cents per pound)

Source: Bloomberg, Maybank Kim Eng Source: Bloomberg, Maybank Kim Eng

-20%

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May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 Nov 11 May 12 Nov 12

Prices (CNY / ton)Cotton price differential China Cotton Index 328 Cotlook A Index

0

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Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 120

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Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12



Figure 21: Chinese government cotton reserve policy review

Reserve Year Reserve period Reserve price (CNY/t)2012 Sep 2012 - Mar 2013 20,4002011 Sep 2011 - Mar 2012 19,8002008 Dec 2008 - Apr 2009 12,6002008 Nov 2008 - Dec 2008 12,6002008 Oct 2008 12,6002007 Aug 2008 13,400-13,6002006 Dec 2006 - Jan 2007 12,7002005 Jan 2006 - Jun 2006 N/A2004 Nov 2004 - Jun 2005 12,0002003 Aug 2004 - Oct 2004 13,100Source: www.cottonchina.org, Maybank Kim Eng

Market consolidation in China is inevitable. As the government tightens environmental protection requirements including waste water discharge treatment, small players that cannot meet the requirements have been phased out. Fabric makers are the main water polluters owing to the dyeing process; hence, they are subjected to higher environmental scrutiny by the authorities than other industries. They are pressured to build facilities that minimise environmental pollution and improve energy efficiency in order to comply with stricter environmental standards. Furthermore, their clients from overseas also place an emphasis on social responsibilities, by sending representatives to check on workers’ living conditions.

In addition, poor demand, volatile cotton prices and a tougher credit environment arising from the financial crisis have also accelerated industry consolidation. All these factors have generated huge cost pressures on companies in the industry, thus eliminating small-and mid-scale enterprises that cannot afford to meet the environmental and overseas clients’ requirements. With all the factors in place, the number of Chinese textile players has finally started to fall after years of rapid expansion. According to the China Statistical Yearbook, the number of textile manufacturers declined from 33,133 in 2008 to 22,945 in 2011.

Figure 22: No of textile enterprises in China

Source: CEIC, Maybank Kim Eng

0

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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011



Export market outlook. Since the second half of 2011, the sluggish recovery of the global economy and sovereign debt crisis in Europe have led to depressed demand for textile products and apparel in overseas market. The growth in the export value of textile products and apparel in China has decelerated rapidly. According to China Customs, the aggregate export amount of textile products for the first 11 months amounted to about USD87b, representing a mere YoY growth rate of 1%, while the export value of the garment sector grew by only 3% YoY to USD144b. Compared to the respective growth rates of 23% and 19% for the textile and apparel products in 2011, it is evident that the rate has decelerated significantly.

However, our channel checks with the textile producers reveal that the worst is now over. The export market has seen an increase in restocking demand recently with an improvement in operating environment, especially with regards to the US market. Although demand in Europe is still lagging behind, we expect the upcoming textile export data to improve accordingly, which is a positive sign for the textile industry in China.

Figure 23: Textile export value in China


Figure 24: Garment export value in China


56,104 65,408 59,993 77,071 94,712 86,411 87,232

16.6%

-8.3%

28.5%

22.9%

1.0%

-15%-10%-5%0%5%10%15%20%25%30%35%

010,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000

2007 2008 2009 2010 2011 2011(Jan-Nov)

2012(Jan-Nov)

USDm Value (USDm) YoY growth

115,102 119,814 107,081 129,468 153,243 139,800 143,650

4.1%

-10.6%

20.9%

18.4%

2.8%

-15%

-10%

-5%

0%

5%

10%

15%

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25%

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

2007 2008 2009 2010 2011 2011(Jan-Nov)

2012(Jan-Nov)

USDm Value (USDm) YoY growth



Peers comparison

Figure 25: Major players in the textile supply chain


Different positions; different values. The value chain of the textile and garment manufacturing industry can be categorised into raw material supply, yarn making, fabric manufacturing, as well as garment production and retailing. Several different HK-listed textile players participate in various positions within the value chain and each level requires specific skills and technique. Here, we compare Shenzhou with other major HK-listed textile players within the supply chain.

Against yarn spinners. Upstream yarn makers are highly affected by cotton price movements and the volatile cotton prices in 2011 have created a challenging business environment for Weiqiao and Texhong, as seen from their relatively lower profit margins during the period. On the other hand, we believe that Shenzhou’s vertically-integrated business model enables the company to be less vulnerable to cotton price movements; its upstream and downstream segments provide a natural hedging opportunity against volatile cotton prices. Furthermore, financial analysis suggests that upstream players are used to operate under heavier capital investment, which results in a higher gearing ratio.

Figure 26: Gross margin comparison Figure 27: Operating margin comparison


22.3 23.8

31.7 29.9 28.8

13.4 12.314.7

23.9

8.1

14.3

8.7 8.7

16.1

1.8

0

5

10

15

20

25

30

35


Shenzhou Texhong Weiqiao

14.3 15.3

24.7 23.8 23.5

7.3 7.39.0

18.9

3.2

11.5

7.5

12.515.0

1.1

0

5

10

15

20

25

30





Figure 28: ROA comparison Figure 29: ROE comparison


Figure 30: Gearing comparison Figure 31: CAPEX comparison


Against fabric markers. The fabric produced by Shenzhou are used internally for its garments products, which is the largest difference between Shenzhou and other leading fabric producers such as Fountain Set and Pacific Textiles, which produce and sell fabric to other garment producers. Indeed, thanks to Shenzhou’s integrated business model, the company’s financials have been very stable amidst the volatile cotton price movements over the past few years.



12.2

17.0

25.7

19.821.3

10.67.3

8.8

20.5

1.2

7.1

2.2 3.35.9

0.9

0

5

10

15

20

25

30



18.0

26.2

37.1

29.3 31.3

24.5

18.621.0

45.5

2.9

14.7

4.5 6.511.0

1.6

0

10

20

30

40

50



20.4 19.6

7.2 16.3

(1.2)

97.0

69.8

41.9

62.2

85.9

31.040.2

32.1 34.645.6

(20)

0

20

40

60

80

100

120



559.9 554.3 609.7 560.3 426.8 489336

129349 460

1278

2571

142

721 599

0

500

1,000

1,500

2,000

2,500

3,000



17.6

15.3 15.5 16.2 15.3 16.3

14.5

20.8 18.017.1

22.3 23.8

31.7 29.9 28.8

0

5

10

15

20

25

30

35


Fountain Set Pacific Textiles Shenzhou

4.5

(2.3) 0.1

3.9 5.3 8.1 8.6

16.3 15.1 14.914.3 15.3

24.7 23.8 23.5

(5)

0

5

10

15

20

25

30









Against vertically-integrated competitors. We believe that Texwinca is the most comparable listed player to Shenzhou among all the names in the HK universe. Texwinca has a well-established business with activities ranging from fabric production to garment retailing (with associate company Megawell in the middle largely as an in-house garment maker). Historical data show that Shenzhou has better margins stability, higher ROAs and ROEs, as well as lower gearing levels.



2.6 (6.3) (0.8)

3.5 3.1

10.58.6

17.8 17.6 16.8

12.2

17.0

25.719.8 21.3

(10)

(5)

0

5

10

15

20

25

30



5.9

(14.9) (2.0)

8.9 7.7

18.312.7

25.2 24.8 23.018.0

26.237.1 29.3 31.3

(20)

(10)

0

10

20

30

40



61.5 65.472.9 81.6

45.4

(11.3)(28.2)

(17.8) (17.1)(41.3)

20.4 19.6 7.2

16.3

(1.2)

(60)

(40)

(20)

0

20

40

60

80

100



348

583

242234

93

411.9

187.1 211.9 150.7 133.5

560 554610

560

427

0

100

200

300

400

500

600

700



33.5 33.0 33.4 33.729.6

22.3 23.8

31.729.9

28.8

0

5

10

15

20

25

30

35

40


Texwinca Shenzhou

9.4 8.9 9.9 10.3

5.2

14.3 15.3

24.7 23.8 23.5

0

5

10

15

20

25

30


Texwinca Shenzhou







14.612.6 13.4

11.0

7.2

12.2

17.0

25.7

19.821.3

0

5

10

15

20

25

30


Texwinca Shenzhou

26.2

21.6 23.1 23.1

17.318.0

26.2

37.1

29.331.3

0

5

10

15

20

25

30

35

40


Texwinca Shenzhou

(1.1)

2.9

19.0

3.3

15.0

20.4 19.6

7.2

16.3

(1.2)(5)

0

5

10

15

20

25


Texwinca Shenzhou

279.2

190.9 153.2 163.3

205.0

559.9 554.3 609.7

560.3

426.8

0

100

200

300

400

500

600

700


Texwinca Shenzhou



Financial analysis

Solid sales underpinned by capacity expansion. We project that Shenzhou’s sales will grow by 8%, 18% and 21% from FY12-14F, backed by volume growth of 8%, 12% and 15%. We expect Shenzhou to increase its capacity at around 5-10% in FY12F and FY13F – our volume growth estimate is higher than the capacity growth rate due to improved efficiency. We also anticipate ASP to rise by 0%, 5% and 5% from FY12-14F, based on the assumption of stabilised cotton prices and an improved product mix.

We project that Shenzhou’s net profit will increase by 6%, 20% and 21% from FY12-14F.

Figure 44: Key assumptions

FY09 FY10 FY11 FY12F FY13F FY14FSales volume (m pieces) 168.0 170.0 208.0 224.6 251.6 284.1 YoY (%) 24.4 1.2 22.4 8.0 12.0 15.0 ASP (CNY per piece) 36.3 39.5 43.5 43.5 45.7 45.9 YoY (%) 1.5 9.0 10.0 0.0 5.0 5.0 Source: Company data, Maybank Kim Eng estimates

Figure 45: Sales volume (m pieces) Figure 46: ASP (CNY per piece)

Source: Company data, Maybank Kim Eng estimates Source: Company data, Maybank Kim Eng estimates

Sustainable and high gross profit margin. Shenzhou’s gross profit margin has improved significantly since its listing in 2005, rising from 23.1% in FY05 to 28.8% in FY11, due to 1) ASP incrases; 2) higher sales contribution from higher-margin sportswear and lingerie products; and 3) increasing economies of scale. We believe that it will be able to maintain its efficiency gains and product mix upgrades for the upcoming years, therefore, we expect gross profit margin to rise to 29.3% in FY12F and 29.5% in FY13F.

Figure 47: Gross profit margin trend


168.0 170.0

208.0 224.6

251.6 284.1

0

50

100

150

200

250

300

FY09 FY10 FY11 FY12F FY13F FY14F

36.3

39.5

43.5 43.5 45.7 45.9

30

35

40

45

50

FY09 FY10 FY11 FY12F FY13F FY14F

23.1%21.4% 22.3%

23.8%

31.7%29.9% 28.8% 29.3% 29.5% 29.6%

0%

5%

10%

15%

20%

25%

30%

35%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F



Higher operating expenses due to retail business. Shenzhou exerted tight control of its operating expenses, its SG&A to sales ratio was just 6.9% in FY11. However, the ratio rose to 8% in 1H12 due to increasing expenditures in running its retail business. Considering that the retail business is still in the early stage of operation, we expect more set-up costs to occur in 2H12. Nonetheless, we project that the blended SG&A expense ratio will be 7.9-8.1% from FY12-14F.

Figure 48: SG&A expense ratio


Very healthy cash conversion cycle. Shenzhou’s cash conversion cycle increased from 78 days in FY07 to 149 days in FY11, mainly due to the increase in the inventory turnover days. The continuous rise in the price of cotton resulted in a surge in the inventory turnover days from 72 to 107 days during that period. However, given that the price of cotton has become less volatile than before, we forecast that the inventory days should stay at this level for the upcoming years. On the other hand, we expect the receivable days to increase slightly, due to an increased number of business relationships with domestic customers. Overall, we estimate that the company’s cash conversion cycle will remain stable, ranging from 155-160 days in FY12-14F.

Figure 49: Working capital cycle


Figure 50: Cash conversion cycle

FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14FInventory days 72 71 84 116 107 107 103 102 Receivable days 34 40 48 58 63 72 70 69 Payable days 28 22 20 24 20 19 18 18

Cash conversion days 78 89 112 150 149 160 155 153 Source: Company data, Maybank Kim Eng estimates

-1.3% -1.2% -1.3% -1.1% -1.1% -1.4% -1.2%-1.9% -1.8% -1.8%

-5.8%-6.2%

-7.0% -7.3%-6.6% -6.3%

-5.7%-6.2% -6.1% -6.1%

-7.1% -7.4%

-8.3% -8.4%-7.7% -7.8%

-6.9%

-8.1% -7.9% -7.9%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F

Selling & distribution exp / revenue Administrative exp / revenueSG&A / revenue

72 71

84

116 107 107 103 102

34 40

48 58 63

72 70 69

28 22 20 24 20 19 18 18

0

20

40

60

80

100

120

140

FY07 FY08 FY09 FY10 FY11 FY12F FY13F FY14F

Inventory days Receivable days Payable days



Strong balance sheet with net cash position. Shenzhou used to fund its CAPEX investment through operating cash flows and bank borrowings. It has been able to keep its net gearing below 25% since 2005. The upcoming CAPEX is now fully funded after the share placement in April 2012, with CNY800m planned for FY12F and CNY700m for FY13F.

The company recently raised CNY1.2b in April 2012, the first time since its listing in 2005. Since the fund raising activity, Shenzhou has turned into a net cash company. To recap, as of FY11, Shenzhou has CNY1.24b in short-term bank borrowings and CNY1.03b in cash on hand, thus implying a net gearing of 3.5%. We expect Shenzhou’s balance sheet to remain strong with a net cash supply of CNY1,460m at the end of 2012.

Figure 51: Historical net gearing ratio


Figure 52: Cash flow changes trend (CNYm)


22.8%20.6%

8.2%

18.9%

3.5%

0%

5%

10%

15%

20%

25%


307.0

755.6

1,147.3

710.9

1,641.4

(634.5) (591.0) (652.1)(902.5)

(581.0)

292.4

(154.6)(355.2)

331.0

(547.5)

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2,000


Operating cash flows Investing cash flows Financing cash flows



Investment risks

Key factors that pose downside risks to our earnings estimates are as follows:

Keen competition. Shenzhou faces competition from a significant number of companies offering similar knitwear products, especially in China, and other Asian countries such as Cambodia and Hong Kong. This is especially the case if Shenzhou loses some or all its competitive strengths, in particular, those arising from its vertically-integrated business model. Intensive competitive pressure could have an impact on the demand for and the pricing of Shenzhou’s products, hence affecting its growth and exerting an adverse impact on Shenzhou’s business.

High sales concentration. Sales to the largest customer and the top five largest customers accounted for 24% and 80% of total sales in FY11 respectively. Shenzhou does not have long-term sales contract with any of its top five customers, which is a common practice in the industry. Therefore, a sudden reduction in sales orders or a termination in the business relationships between the two parties may adversely affect the operations and business of Shenzhou, especially when the company is not able to acquire alternative customers.

Heavy sales to Japan. Japan is Shenzhou’s largest market from a geographical standpoint, accounting for 36% of total sales in FY11. Any social and economic issues impacting Japan may affect Shenzhou’s business and operations. In particular, Japan’s future economic prospects that affect consumer purchasing decisions and apparel demand in Japan may have a material adverse impact on Shenzhou’s business strategy and development.

Commodity price fluctuations. Cotton yarn is the largest cost item, representing 30% of COGS in FY11. Separately, synthetic fibre that is linked to oil price movements accounted for 10% of COGS in FY11. Any significant increases in the costs of cotton and oil in the future may adversely affect gross margin profitability, if Shenzhou is unable to pass on all such cost increases to its customers.

Labour cost inflation. The textile industry is labour-intensive. As with companies in other manufacturing sectors, the textile industry has been experiencing surging labour cost pressures. If the labour cost continues to rise and the company is not able to offset its costs through production efficiency improvements, its gross margin performance will be affected negatively.

Foreign exchange rate volatility. Shenzhou sells most of its products to Japan, Europe and the US, thus, it receives most of its revenues in US dollars. Although the company has adopted a hedging policy and set up forward contracts to offset the exchange rate risk, the company may not be able to fully limit foreign exchange rate risk, hence, its profitability will be impacted.



Valuation and recommendation

Improving valuation on better fundamentals. Shenzhou had been trading at a low valuation with an average PER of 5.4x during the 2005-2009 period. Since 2010, the market has come to recognize its investment value as the company has delivered sustainable earnings growth even during the period of global financial crisis, its valuation improved to an average ratio of 5.9x.

Initiate coverage with BUY. The counter is currently trading at 9.2x/7.6x FY13F/14F PER, at a 20% and 9% discount to its HK peers such as Texwinca (321) and Pacific Textiles (1382), which are less liquid stocks in the HK textile universe. Based on Shenzhou’s leading position in the industry and fundamentals that are better-than those of its peers, we think the company deserves a further re-rating. We believe the PER range of 1-4x during the financial crisis was unusual. We derive a target price of HKD23.6, based on 10x FY14F PER. With a 31% upside potential, we initiate coverage with BUY.

Figure 53: Forward PE chart Figure 54: Forward PB chart

Source: Bloomberg, Maybank Kim Eng estimates Source: Bloomberg, Maybank Kim Eng estimates

Figure 55: PE band chart Figure 56: PB band chart

Source: Bloomberg, Maybank Kim Eng estimates Source: Bloomberg, Maybank Kim Eng estimates

Figure 57: Peers valuation comparison (Share price as of 4 January 2013)

Latest price Mkt cap Fiscal PER (x) PBR (x) Div yield (%) EPS growth (%)Company name Ticker (Lcl ccy) (USDm) Year FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2TEXWINCA HLDG 321 HK 7.47 1,313.9 03/2012 17.0 11.3 1.8 1.7 4.1 5.9 (38.0) 50.5 FOUNTAIN SET HLD 420 HK 0.81 125.7 08/2012 N/A N/A N/A N/A N/A N/A N/A N/AVICTORY CITY INT 539 HK 0.80 163.9 03/2012 N/A N/A N/A N/A N/A N/A N/A N/APACIFIC TEXTILE 1382 HK 7.02 1,303.0 03/2012 10.9 9.8 2.5 2.3 9.3 6.2 3.7 10.9 SHENZHOU INTL GP 2313 HK 17.96 3,081.8 12/2011 10.4 8.9 2.2 1.9 3.0 3.7 1.8 16.6 TEXHONG TEXTILE 2678 HK 4.75 542.2 12/2011 8.7 6.9 1.4 1.2 4.2 5.2 528.6 25.0 WEIQIAO TEXTI-H 2698 HK 3.16 486.9 12/2011 N/A 18.2 0.2 0.2 1.2 1.6 (157.1) 216.7 Average 11.7 11.0 1.6 1.5 4.4 4.5 Source: Bloomberg, Maybank Kim Eng

0

5

10

15

20

25

Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 Nov 12

10.4x

8.1x

5.9x

3.7x

1.4x

Share Price (HKD)

0

5

10

15

20

25


2.3x

1.9x

1.4x

0.9x

0.5x

Share Price (HKD)

0

2

4

6

8

10

12


Avg +1SD -1SDx

-1SD: 3.7x

+1SD: 8.1x

Avg: 5.9x

0

1

1

2

2

3


Avg +1SD -1SDx

-1SD: 0.9x

+1SD: 1.9x

Avg: 1.4x



Appendix I: Shareholding structure

Figure 58: Shareholding structure

Source: HKEx, Maybank Kim Eng

Appendix II: Management profile

Figure 59: Key management team

Name Age Current title Job duties Previous experience/ duties Education Mr. Ma Jianrong

48 Chairman and Executive Director

Responsible for the overall business development strategy and has over 31 years of experience in the textile industry.

Worked for Shaoxing Cotton Mill (紹興棉紡

廠) and Hangzhou Linping Knitting and Garment Plant (杭州臨平針織服裝廠).

No information.

Mr. Huang Guanlin

47 Executive Director and General Manager

Responsible for daily operations such as production, sales and marketing and has over 24 years of experience in the textile industry.

Worked for a silk knitting mill in Yuhang County, Zhejiang Province.

Graduated from Zhejiang University of Technology majoring in chemical industry management and engineering.

Mr. Ma Renhe

52 Executive Director and Deputy General Manager

Responsible for administration, dyeing and finishing affairs and has over 35 years of experience in the textile industry.

Worked for Shaoxing Cotton Mill and Hangzhou Linping Knitting and Garment Plant.

No information.

Ms. Zheng Miaohui

57 Executive Director and Deputy General Manager

Responsible for financial management and has over 27 years of experience in financial management and obtained an accountant qualification certificate.

Served as the manager and an assistant to the general manager of the finance department of Ningbo Weaving.

No information.

Mr. Wang Cunbo

40 Executive Director and Head of the Finance Department

Responsible for finance controls and has over six years of experience as certified accountant.

Was a partner of Ningbo Tianjian Yongde United Accounting Firm, deputy general manager of Ningbo Yongde Corporate Management and Consulting Firm.

Graduated from Zhejiang University of Technology with a master degree in management.

Mr. Chan Tak Hing, Kenji

41 Financial Controller and Company Secretary

He has over 16 years of experience in auditing, financial controlling, company secretary and accounting.

Has been a fellow member of the Association of Chartered Certified Accountants, an associate member of the Hong Kong Institute of Certified Public Accountants, a Certified Tax Adviser in Hong Kong and an associate member of the Institute of Chartered Accountants in England & Wales.

Holds a master degree in business administration and a degree in master of science in china business management.


Shenzhen International (2313 HK)

Chairman Ma Jianrong Others

58.4% 41.6%



INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2011A 2012F 2013F 2014F

FYE Dec (CNYm) 2011A 2012F 2013F 2014F Revenue 9,043 9,767 11,486 13,869 Fixed Assets 3,522 4,021 4,360 4,562 Gross Profit 2,602 2,862 3,388 4,105 Other LT Assets 112 112 112 112 EBITDA 2,442 2,606 3,118 3,740 Cash/ST Investments 1,320 2,949 3,902 5,136 Depreciation & Amortisation (331) (301) (361) (398) Other Current Assets 3,596 3,857 4,478 5,339 Operating Profit (EBIT) 2,111 2,305 2,757 3,342 Total Assets 8,550 10,940 12,852 15,149 Interest (Exp)/Inc (51) (54) (56) (72) Associates 0 0 0 0 ST Debt 1,244 1,200 1,400 1,600 One-offs 0 0 0 0 Other Current Liabilities 1,193 1,232 1,326 1,455 Pre-Tax Profit 2,059 2,251 2,701 3,270 LT Debt 0 0 0 0 Tax (355) (450) (540) (654) Other LT Liabilities 0 0 0 0 Minority Interest (1) (1) (1) (2) Minority Interest 34 34 34 34 Net Profit 1,704 1,800 2,159 2,615 Shareholders' Equity 6,078 8,473 10,093 12,060 Recurring Net Profit 1,704 1,800 2,159 2,615 Total Liabilities-Capital 8,550 10,940 12,852 15,149 Revenue Growth (%) 34.6 8.0 17.6 20.8 Share Capital (m) 1,245 1,330 1,330 1,330 EBITDA Growth (%) 24.4 6.7 19.6 20.0 Gross Debt/(Cash) 1,244 1,200 1,400 1,600 EBIT Growth (%) 27.1 9.2 19.6 21.3 Net Debt/(Cash) 215 (1,459) (2,212) (3,246) Net Profit Growth (%) 34.0 5.6 20.0 21.1 Working Capital 2,478 4,374 5,654 7,419 Recurring Net Profit Growth (%) 34.0 5.6 20.0 21.1

Tax Rate % 17.2 20.0 20.0 20.0

CASH FLOW RATES & RATIOS

FYE Dec (CNYm) 2011A 2012F 2013F 2014F FYE Dec 2011A 2012F 2013F 2014F Profit before taxation 2,059 2,251 2,701 3,270

Gross Profit Margin (%) 28.8 29.3 29.5 29.6 Depreciation & Amortisation 331 301 361 398 EBITDA Margin (%) 27.0 26.7 27.1 27.0 Net interest receipts/(payments) 40 27 20 24 Op. Profit Margin (%) 23.3 23.6 24.0 24.1 Working capital change (419) (222) (528) (731) Net Profit Margin (%) 18.8 18.4 18.8 18.9 Cash tax paid (414) (504) (596) (726) ROA (%) 24.4 19.6 20.2 20.0 Others (incl'd exceptional items) 43 0 0 0 ROE (%) 34.0 27.0 26.6 25.4 Cash flow from operations 1,641 1,853 1,958 2,234 Net Margin Ex. El (%) 18.8 18.4 18.8 18.9 Capex (347) (800) (700) (600) Net Gearing % 3.5 N/A N/A N/A Disposal/(purchase) (77) 0 0 0 Asset Turnover (x) 1.1 0.9 0.9 0.9 Others (158) 27 36 48 Asset/Debt (x) 6.9 9.1 9.2 9.5 Cash flow from investing (581) (773) (664) (552) Debt/ EBITDA (x) 0.5 0.5 0.4 0.4 Debt raised/(repaid) (185) (44) 200 200 Debt/ Market Cap (x) 0.1 0.1 0.1 0.1 Equity raised/(repaid) 0 1,100 0 0 Interest Cover (x) 47.7 48.3 55.7 52.0 Dividends (paid) (382) (510) (540) (648) Dividend Cover (x) 3.3 3.3 3.3 3.3 Interest payments 0 0 0 0 Inventory Turn (days) 106.6 107.4 103.4 102.3 Others 20 5 (1) (2) Debtors Turn (days) 62.6 72.2 69.6 68.8 Cash flow from financing (547) 550 (341) (449) Creditors Turn (days) 19.7 19.1 18.3 18.1 Change in cash 513 1,630 953 1,234 PER SHARE DATA

FYE Dec (CNY) 2011A 2012F 2013F 2014F EPS 1.37 1.35 1.62 1.97 BVPS 4.91 6.40 7.61 9.09 DPS 0.41 0.41 0.49 0.59 SPS 7.26 7.34 8.64 10.43 EBITDA/share 1.96 1.96 2.34 2.81 CFPS 1.32 1.39 1.47 1.68




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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS

This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.

This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events.

MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report.

This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect.

This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.

Malaysia

Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.

Singapore

This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.

Thailand

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.

Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.

US

This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations.

UK

This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.



DISCLOSURES Legal Entities Disclosures

Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 7 January 2013, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 7 January 2013, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder

Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings

Maybank Kim Eng Research uses the following rating system:

BUY Return is expected to be above 10% in the next 12 months (excluding dividends)

HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends)

SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax



Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194

Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136

Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia PT Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738

Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam In association with

Maybank Kim Eng Securities JSC 1st Floor, 255 Tran Hung Dao St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 838 38 66 39

Saudi Arabia In association with

Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading Kevin FOY [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447

North Asia Sales Trading Eddie LAU [email protected] Tel: (852) 2268 0800 US Toll Free: 1 866 598 2267

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