hong kong buy tcl multimedia · 7/6/2012 · tv channel. tclm continues to see improvement in the...

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Hong KongInitiating Coverage 6 July 2012

TCL Multimedia Three-Pronged Growth Initiate coverage with BUY and a target price of HKD5.24. We like TCL Multimedia (TCLM) for three reasons: 1) a strong global presence; 2) product mix optimisation; and 3) a unique position in the TV industry value chain. Our target price for TCLM is HKD5.24, pegged at 8x FY12F PER, offering 27% upside. The shares have retreated by 15% from the recent peak, yet we see a good opportunity to accumulate the leading global TV manufacturer at current levels.

Strong global presence. TCLM’s shipment growth has outpaced that of the industry in 2012, thanks to its strong brand reputation and short product development cycle. TCLM saw its global market share in terms of sales volume further enlarged from 4.9% in 2011 to 5.6% in 1Q12, ranking it No.5 in the world. In view of TCLM’s robust YTD sales, the company has raised its LCD TV shipment target for FY12F from 13.8m to 15.2m units, implying 40% YoY growth.

Product mix optimisation. TCLM is prompt in responding to the LCD TV development trend in the TV industry since 2011 and has continued to show impressive improvements in its product mix. As a result, the proportion of its LED TV sales increased to 65% in May 2012, catching up closely to that of other leading players. While the market focus for 2012 is 3D TV, TCLM will concentrate on the development of premium 3D TV products which offer better margins than the group’s current average.

Unique position in the TV industry value chain. TCLM is striving to enhance its core competitiveness by developing vertically. After securing panel supplies and LCD modules – the two most important components in the manufacturing process - through CSOT cooperation and TOT acquisition respectively, TCLM has laid a solid foundation in the TV supply chain. We expect this to create synergies which can improve TCLM’s cost structure and profitability. We believe that the company is currently the most completed vertically integrated TV manufacturer in China.

TCL Multimedia – Summary Earnings Table FYE Dec (HKDm) 2010A 2011A 2012F 2013FRevenue 26,948.6 32,932.4 38,174.6 42,535.3 EBITDA (352.2) 857.5 1,725.1 2,209.8 Recurring Net Profit (983.2) 220.6 834.3 1,083.3 Recurring Basic EPS (HKD) (0.92) 0.20 0.66 0.85 EPS growth (%) N/A N/A 222.0 29.9 DPS (HKD) 0.00 0.16 0.23 0.26

PER (x) N/A 20.2 6.3 4.8 EV/EBITDA (x) (23.9) 5.0 2.6 1.8 Div Yield (%) 0.0 3.9 5.6 6.2 P/BV(x) 1.4 1.2 1.2 1.0

Net Gearing (%) 92.2 N/A N/A N/AROE (%) N/A 13.1 24.5 23.0 ROA (%) N/A 2.1 3.8 3.7 Consensus Net Profit (HKDm) N/A N/A 732 786Source: Company data, Kim Eng Securities

BUY

Share price: HKD4.11 Target price: HKD5.24

Alex YEUNG [email protected] (852) 2268 0636

Stock Information

Description: TCL Multimedia (TCLM) is one of the largest global TV manufacturers and distributors and its products are sold all over the world. Ticker: 1070 HK Shares Issued (m): 1,320 Market Cap (USDm): 696 3-mth Avg Daily Turnover (USDm): 1.7 HSI: 19,809 Free Float (%): 35.2 Major Shareholders: % TCL Corporation 61.9 Key Indicators

ROE – annualised (%) 24.5 Net cash (HKDm): 1,012 NTA/shr (HKD): 3.4 Interest cover (x): 4.2 Historical Chart

Performance: 52-week High/Low HKD4.84/HKD1.65 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) (5.3) 1.7 56.7 29.0 64.9 Relative (%) (13.8) 5.5 51.4 41.9 57.5

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PRICE PRICE REL. TO HANG SENG INDEX

Source: Bloomberg

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TCL Multimedia Technology Holdings Ltd

Investment thesis

A multinational TV manufacturer based in China. TCL Multimedia (TCLM) is one of the leading TV manufacturers across the world, with business exposures in China and overseas markets. The company successfully turned around its business in 2011, after suffering from massive inventory clearance of old TV models in 2010. Looking ahead in 2012, we are optimistic about its TV business and expect the company to present another set of impressive FY12F results with core net profit growth of 116% YoY to HKD834m. Thus, we see good investment value in the company at the current share price level.

It is common to own an LED TV now. TCLM is poised to benefit from the CRT TV replacement cycle, especially in the product mix upgrade to LED TVs. The demand for LED TVs is on the rise, thanks to its environmentally friendly nature, better display quality as well as compact size. It is expected that LED TV shipments will grow at a 30% CAGR over 2011-2015, and account for 94% of total TV shipments by 2015. The supportive government subsidy policy, announced in May, will also lend support to sales of the energy-saving LED TVs in 2H12. We are confident that TCLM can continue to outperform the growth of the overall TV market in upcoming years.

3D TV is ready. Leveraging on its strong execution in R&D, the company is dedicated to the development of 3D TV. TCLM’s brand image has been enhanced, as the company has become the exclusive partner of CCTV’s first 3D TV channel. TCLM continues to see improvement in the 3D TV penetration rate, which has risen from 3% in Dec 2011 to 21% in May 2012. On the back of the boost from 3D broadcasting of the London Olympics in July 2012, and the increasing number of 3D TV channels in China in future, we believe that high-margin 3D TVs will command a larger share of TCLM’s product mix, thereby supporting its gross margin.

Ambitious sales target. While the top brands are conservative and have lowered their sales targets for 2012 due to the sluggish global economy, TCLM has been aggressive and has overtaken Sharp and Panasonic in 1Q12 to become the fifth-largest LCD TV maker in the world (from seventh-largest previously). Underpinned by an impressive LCD volume growth of 72% to 5.6m units YTD, TCLM has raised its 2012 LCD TV sales target lately from 13.8m to 15.2m units, implying 40% growth over 2011. That said, the current achievement ratio of 37.1% suggests that TCLM is more bullish about its TV business in 2H12.

Promising profitability improvement. TCLM has taken steps to become more vertically integrated. Since early 2012, the company has been able to source LCD panels through CSOT and is able to produce LCD modules on its own. TCLM is expected to benefit from the improving cost structure of its vertically integrated business model. We project that its gross margin will expand from 16.1% in FY11 to 18% in FY12F.

Risks: 1) Keen competition in the TV market; 2) Inventory is a risk; 3) Panel price volatility; 4) Transfer pricing concerns; 5) Weaker than expected 3D TV and smart TV demand; and 6) New subsidy policy is ineffective.

Initiate with BUY and a target price of HKD5.24. Along with improving profitability, TCLM should see its net profit achieve another year of impressive growth in 2012, and should outperform its peers. TCLM is currently trading at 6.3x FY12F PER, while the industry average is 7.7x currently. Owing to its unique vertically integrated business model, we believe that the market still underestimates its earnings growth prospects and the counter deserves to trade at a premium compared with the others. Our target price of HKD5.24, is based on 8x FY12F PER, implying 27% upside potential.

6 July 2012 of 23


Company background

Leading global TV maker. TCLM is principally engaged in the manufacturing and sales of TVs, audio-visuals (AVs) and other consumer electronics products. It is one of the largest TV manufacturers in the world with products distributed to all major markets in the world. Headquartered in Shenzhen, TCLM has seven production facilities (China: Huizhou, Wuxi, Chengdu and Inner Mongolia; Overseas: Poland, Mexico and Vietnam) and R&D centres in all major continents. The company was established more than 30 years ago; it was listed on the HKEx in 1999. The ultimate holding company of TCLM is the A-share listed TCL Corporation.

China driving growth. TCLM’s TV segment is its largest revenue generator, contributing 86.1% to total sales in FY11 and 87.9% in 1Q12. China is TCLM’s largest TV market by far, accounting for 57% of the company’s total sales over the past three years on average. TCLM achieved a major breakthrough in TV sales volume in 2011: it raised its annual LCD TV shipment target for 2011 by twice and ultimately sold 10.86m units of LCD TV during the period. TCLM not only exceeded its annual sales target of 10.2m units, but also became the first Chinese TV manufacturer to surpass 10m units in the global LCD TV market.

Strong brand portfolio. TCLM uses a multi-brand strategy to operate its business around the world. Its “TCL”, “ROWA” and “THOMSON” brands, cater to market that range from the low- to the high-end, thus, TCLM is able to target different consumer groups. In order to capitalize on the popularisation of the LCD TV cycle, TCLM will increase its focus on the promotion of its “TCL” brand. Moreover, it will further strengthen its marketing of the brands to create more synergies among them.

Figure 1: TCLM’s multi-brand portfolio

Established since 1981 as a leading electronics brand in PRC

Received numerous awards, including “CES”; The Global Innovative Flat Panel TV Award” in 2008, “The German Red Dot Design Awards” in 2007, “Janus Industrial Design Award” and “Best International Quality Award” in 2006.

Total estimated brand value of CNY40.1b and ranked the “3rd Most Valuable Brand” in China according to China Top Brand Survey in 2007.

Targeted consumers: Mid to high-end.

Established in 1982 with a focus on rural customers in PRC.

Won numerous awards, including “Top 10 Brands of Consumer Satisfaction in China” by China People’s Daily in 2005 and “Guangzhou Famous Brand” in 2000.

Targeted consumers: Low to mid-end.

Founded in 1893.

TV assets merged with TCL in July 2004.

TCL is the exclusive licensee in Europe and central Asia.

Target consumers: Low to high-end.

Source: Company data, Kim Eng Securities

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Business overview

A) TV business in China

Bright prospects ahead. TCLM learnt an invaluable lesson in 2010: it failed to react promptly to the transition of products from CRT TVs to LCD TVs. As a result, it had to offer steep product discounts and rebates to its distributors to clear its inventory of old TV models. In 2011, TCLM responded proactively to the product transition in China by adjusting its product mix and promoting LCD TVs, which boosted sales volume growth significantly. With its strong focus on rural areas which should be the key growth areas in the upcoming years, the China TV division should continue to be a key contributor to TCLM’s earnings in the long-run.

B) TV business overseas

A turnaround year. The overseas business dragged down TCLM’s performance in FY10 and FY11 as the company recorded operating losses of HKD345m and HKD72m respectively. The worst seems to be over, with the overseas operation showing signs of recovery; despite the challenging macro environment, the overseas division generated operating profits of HKD11m and HKD45m in 4Q11 and 1Q12 respectively, thanks to cost savings from restructuring plans in Europe and North America, as well as robust growth in emerging countries. We expect TCLM’s overseas division to sustain this trend ahead and turnaround into the black in FY12.

Fast-growing emerging markets. Emerging markets have been the key areas of focus for TCLM’s overseas business strategy. They are also the second most important driving force of TCLM’s TV business, after the China division. To capture the opportunities of product migration from CRT TVs to LCD TVs in emerging markets, TCLM has devoted increased resources to expand its LCD TV market share, which has led to robust sales volume growth thus far, especially in Brazil, Central America and Africa. Therefore, we believe that the emerging market will become a major revenue contributor of TCLM’s overseas division in the long-term.

C) AV and other business

Stable and profitable. Apart from its core TV business, TCLM is also engaged in the production of AV products (DVD players and blue ray DVD players) as well as other small home appliance products (white goods and air-conditioners). TCLM has been aggressively expanding its customer base while strengthening its partnerships with major customers, thus, the AV segment has delivered stable profits over the past years. Sales volume of AV products rose by 25.8% YoY to 20m units from 15.9m units in FY11 and revenue increased by 15.1% YoY as a result.

Enriches product portfolio. The non-core AV business can strengthen TCLM’s product portfolio and enhance its brand image. In order to maintain product competitiveness, TCLM will increase its investment in the R&D areas including ongoing software and electro-acoustic research, as well as the development of its own-branded products such as satellite boxes.

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Figure 2: Sales breakdown by product (FY11) Figure 3: Segment profit breakdown by product (FY11)

Source: Company data, Kim Eng Securities Source: Company data, Kim Eng Securities

Figure 4: TCLM’s global production facilities


Figure 5: TCLM’s global distribution network


China TV59.6%Overseas TV

26.5%

AV12.5%

Others1.4%

China TV81.6%

AV17.6%

Others0.8%

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Investment highlights I: Not just a pure Chinese play

Ranked No.5 in the world. Despite a challenging operating environment around the world, TCLM is strived to promote new products to cope with market demand and actively engaged in efforts to maintain product competitiveness and achieved a significant breakthrough in global market share in 2012. According to DisplaySearch, TCLM’s global LCD TV market share increased from 4.9% in 2011 to 5.6% in 1Q12, boosting its rank up to No.5 from No.7 in 2011. It is the first time a Chinese TV enterprise entered the top five in terms of the global LCD TV market share. Based on TCLM’s shipment target of 15.2m units and global LCD TV shipment of 254m units for 2012, we expect TCLM’s global market share to further climb up to 5.9% by the end of 2012.

Japanese TV makers losing market share. TCLM’s global market share expansion could be attributed to the losing shine of Japanese players. Owing to excessive inventories in early 2011 and weakening consumer demand for TV products, Japan-based TV manufacturers (Sony, Panasonic and Toshiba) performed badly in the TV market. They have only decided to restructure their TV division recently. Nonetheless, the market shares for Japanese makers, especially in the low- to mid-end markets, are expected to decline over time. Chinese players such as TCLM will likely assume the mantle from Japan, particularly in the low- to mid-end markets and outperformed others due to better operating efficiency.

Outpacing industry’s growth in China. TCLM continues to consolidate its leading position in China. According to DisplaySearch, its domestic LCD TV market share rose significantly from 14.9% in 2011 to 17.5% in 1Q12. It is ranked No.2, on the heels of the top-ranked Hisense. TCLM sold 2.9m units of LCD TVs in China for 5M12; this YoY increase of 32.3% exceeded the sales growth of industry. In view of its robust sales performance YTD, TCLM decided to raise its LCD TV shipment target for 2012 from 13.8m units to 15.2m units, representing YoY growth of 40%, compared to an estimated growth of 15% for the industry, TCLM is confident that it can gain market shares from foreign and domestic players this year.

Wide-reaching distribution network. We attribute TCLM’s fast growth in China to the increasing number of points of sales (POS) in its network so as to meet the surging demand that stems from the replacements of old TV models in the third- and fourth-tier cities as well as rural markets. TCLM has been expanding its POS network aggressively over the past few years, it established 5,000 new POS in 2011 to reach a total of 26,000 POS. TCLM plans to add another 4,000 POS, which will produce a total of 30,000 POS by end 2012. We believe that there is a tremendous room for expansion for TCLM in the lower-tier cities.

Figure 6: Global LCD TV market share by brand (1Q12) Figure 7: China LCD TV market share by brand (1Q12)

Source: DisplaySearch, Kim Eng Securities Source: DisplaySearch, Kim Eng Securities

Samsung20.1%

LG13.5%

Sony8.5%

Toshiba6.2%

TCL5.6%

Sharp5.1%

Panasonic5.0%

Hisense4.9%

Philips3.5%

Skyworth3.4%

Others24.2%

Hisense18.5%

TCL17.5%

Skyworth14.6%

Konka10.7%

Changhong9.7%

Haier6.6%

Sharp4.4%

Sony4.1%

Samsung3.3%

Pansonic2.1%

Others8.5%

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Figure 8: Global TV shipment by product

Source: DisplaySearch, Kim Eng Securities

Figure 9: China TV shipment by product

Source: DisplaySearch, Kim Eng Securities

Figure 10: TCLM’s domestic distribution network


38.3 26.2 15.4 5.7 4.8 1.6

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Investment highlights II: Rising high-end TV products

Replacement demand continues. China has become the largest market for LCD TVs in the world. With reference to DisplaySearch, the Chinese market represented 21.4% of the global market in shipments in 2011. As China has been undergoing a TV replacement cycle, there is a huge demand for consumers who are switching from CRT TVs to LCD TVs. DisplaySearch estimates that LCD TV shipments for China would increase by 15% YoY to 40.5m units in 2012, well-above the worldwide industry growth of 9.2%.

Demand in lower-tier cities growing fast. In addition to the replacement TV demand, sales of LCD TVs have also been underpinned by: (1) their increasing affordability due to weak panel prices; and (2) the rising affluence of China’s population. Moreover, we believe that demand in lower-tier cities will exceed that of larger cities, as the replacement demand for LCD TVs has just started to gain momentum in the lower-tier cities.

Rising popularity of 3D TV. TV products with 3D capabilities have become one of the standard features in TVs nowadays in China. Their growing popularity is reflected in the rising 3D TV penetration rates (defined as the percentage of 3D TVs sold among all TVs sold). While 3D TVs are the major focus currently and offer better gross margins than their traditional counterparts, profitability is supported by increasing 3D TV penetration rate over the long run.

A boost to gross margin profile. TCLM’s 3D TV penetration in China was only 3.3% in Dec 2011. However, the company has improved the mix significantly in 2012 by 19.5ppts to 20.8% in May 2012, thus narrowing the gap from its direct competitor Skyworth (30%). We expect TCLM to reach 30% by the end of 2012. As 3D TVs are expected to offer a GPM of 28% for FY12F, the continuous development of high-end 3D TV will support TCLM’s gross margin.

Ramping up 3D TV sales. We believe that the key growth drivers of TCLM’s 3D TV penetration in China are: 1) 3D channel in an exclusive partnership with CCTV; 2) 3D TV broadcasting of London Olympics; and (3) launch of new energy-saving subsidy programme. The official launch of the 3D channel in an exclusive partnership with CCTV will help TCLM to promote brand awareness in China. On the other hand, the broadcasting of the London Olympics will help to ramp up 3D TV sales, due to the Game’s popularity and unique feature.

Favourable government policy. The State Council announced a new CNY26.5b energy-saving home appliance subsidy programme in May to boost domestic demand for environmentally friendly home appliances, which also offer better margins to TV manufacturers. The programme should drive the industry consolidation with large players benefit the most. TCLM is one of the best placed under the programme due to: 1) the high number of energy-efficient LED TVs in its sales mix: its LED TV penetration rate is 65% in China; and 2) all LED TVs launched this year are eligible for the programme. With the help of financial subsidies, we expect demand for high-end energy-efficient TV products (such as 3D TVs and smart TVs) to increase, which will boost TCLM’s profitability.

Figure 11: Shortlisted TV manufacturers (Top five)

Name No. of eligible LCD TV models Haier 339 TCL 223 Konka 156 Hisense 145 Skyworth 110 Source: Ministry of Finance, Kim Eng Securities

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Figure 12: Domestic LED TV and 3D TV shipments


Figure 13: LCD TV shipments in China ('000 units) Figure 14: LCD TV shipments in overseas ('000 units)

Source: Company data, Kim Eng Securities Source: Company data, Kim Eng Securities

Figure 15: Signing contract with CCTV Figure 16: Exclusive partner of CCTV 3D Channel

Source: Kim Eng Securities Source: Kim Eng Securities

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Investment highlights III: Unique vertically-integrated capabilities

The most comprehensive vertically-integrated domestic TV manufacturer. TCLM has stepped upwards to strengthen its core competitiveness through vertical integration. The company has made the following moves that include sourcing panels from China Star Optoelectronics Technology (CSOT), acquiring TCL Optoelectronics Technology (TOT) from its parent and constructing a vertically integrated LCD TV production plant in Inner Mongolia.

Cooperation with CSOT. TCLM is in a stronger position than its competitors, thanks to the launch of the 8.5 generation LCD panel production line operated by CSOT, a manufacturing JV established by the TCL Corporation (55%), the Shenzhen Municipal Government (30%), and Samsung (15%). It is the fourth enterprise to own an 8.5 generation line that is also one of the most advanced manufacturing panel lines outside of Japan and South Korea. The other three fabs located in China are operated by BOE, Samsung and LG.

Secure domestic panel supply. Panels constitute the most important component of the manufacturing process, as panel costs represent 50% of the total COGS. In our opinion, TCLM can secure its panel supply through CSOT, thus reducing the duration of the product development cycle. On a separate note, it is expected that more TV manufacturers will obtain more of their panels from domestic sources, following the 5% hike in tariffs early this year. With the full support from CSOT, TCLM should have no difficulties in sourcing its panels domestically.

Improving cost structure. CSOT has started to supply LCD panels to TCLM at the market price. The majority of the panels was 32” in size in 1H12. Based on the improving yield rate of panel production, it is likely that CSOT will be able to offer TCLM larger-sized panels (such as 46” to 55”) in 2H12. Management revealed that the yield rate of panel production was above 90% in May, due to CSOT’s strong execution ability and R&D capabilities. The cooperation with CSOT means that TCLM is now the only Chinese TV manufacturer which to have its own integrated upstream panel production capabilities.

TOT acquisition. TCLM acquired TOT from its parent at a consideration of CNY656m in January 2012. Founded by TCL Corporation in December 2007, TOT is mainly engaged in the manufacturing of LCD modules (26” to 46”). It has six LCD module production lines with an annual production capacity of 6m units. With the establishment of a designated supply chain for self-developed LCD module, TOT can reduce production costs and stablise raw materials supply for TCLM, as modules typically account for 20% of COGS in the manufacturing process. Separately, along with its surging sales demand, TCLM has begun to build a vertically-integrated LCD TV production plant with an annual production capacity of 3m units in Inner Mongolia.

Short product development cycle. The TV product life cycle has been shortened and retail prices of TV products are trending down in the past few years. We believe that companies with well-established positions in operational efficiencies are able to stand out and outperform the others. With well-established panels sourcing platform and capability to produce own modules, TCLM is able to reduce the product development cycle and to launch the latest products to the market promptly.

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Figure 17: LCD TV industry supply chain

* Huizhou Bri-King Optronics (the Group’s JV with AUO) Source: Company data, Kim Eng Securities

Figure 18: TCLM’s unique business model


Joint venture among TCL Corporation, the ultimate holding company of the company, the Shenzhen Municipal Government and Samsung (South Korea)

Mass production in Q4 2011

Entering a new phase of the Group’s integration vertically along the industry chain to deliver strategic support for a stable supply of raw materials and cost control

+Shenzhen Huaxing

Photoelectrics Technology Co. Ltd. 8.5 Generation LCD Panel

Production Line

TCL Optoelectronics Technology

(LCD Module Business) LED Backlight Modules

Production Line +

The first large-panel LCD module production plant with the PRC’s most advanced LCD module production line, built by PRC enterprise with local investment

Create new revenue streams by improving production capabilities through strategic cooperation with Shenzhen Huaxing Photoelectrics Technology Co. Ltd.

TCL Optoelectronics + TCL Coretronic + Huizhou Bri-King Optronics

TCL has become the only PRC TV manufacturer and distributor with a fully integrated supply chain and sales capabilities

6 July 2012 of 23


Energy-saving subsidy programme

New subsidies. The State Council has announced a new energy-saving home appliance subsidy programme on 16 May, in which CNY26.5b in subsidies will be allocated to promote the purchase of energy-saving home appliances for a tentative period of one year. Product categories including air-conditioner, flat panel TV (in particular LCD TV), refrigerator, washing machine and water heater could benefit from this new policy.

Details in TV segment. The subsidy amounts of each unit will be within the CNY100-400 range. According to the manufacturers, they expect to claim the subsidy from the State Council on a monthly basis after passing the subsidy to the consumers at purchase. Products qualified for the previous rural subsidy will not be eligible for the new energy-saving subsidy. Additionally, manufacturers need to achieve minimum annual sales of 0.5m units of highly energy-efficient flat panel TV requirement in order to qualify for the latest financial subsidy. Along with the Energy Efficiency Index (EEI) and shipment requirements, only 15 TV makers are able to participate in the subsidy.

Figure 19: 15 TV makers participate in the subsidy programme

Company name Company name Company name 1 Changhong 6 Pioneer 11 Skyworth 2 Haier 7 Rowa 12 Sony 3 Hisense 8 Samsung 13 TCL 4 Konka 9 Sanyo 14 Tongfang 5 LG Electronics 10 Sharp 15 Toshiba

Source: Ministry of Finance, Kim Eng Securities

Figure 20: Energy-saving financial subsidy for TVs (CNY per unit) LCD TV Plasma TV TV size (inch) EEI ≥ 1.7 EEI ≥ 1.9 EEI ≥ 1.4 EEI ≥ 1.719" ≤ size < 32" 100 150 - -32" ≤ size < 42" 250 300 250 300≥ 42" 350 400 350 400Source: Ministry of Finance, Kim Eng Securities

What we expect. The energy-saving subsidy programme reinforces government’s support towards product mix migration to energy-efficient products across the home appliance sector. That said, we believe the subsidy programme will not exert significant sales increment as compared to previous subsidy programmes; however, we expect to see more consumers to replace older CRT TVs with large-sized LED TVs with lower energy consumption.

What we observe. Owing to the short notice from the State Council (the subsidy was announced in May and launched in June), we expect the popularity on product mix change will not be seen until 4Q12. Our discussions with major home appliance manufacturers and retailers suggest that, mild stimulus have been created so far, owing to 1) manufacturers are clearing the inventory of non energy-saving products; and 2) manufacturers are waiting for more details of the procedure on granting the subsidy. Overall, we expect the outlook will be clear in 4Q12 though the trend should go for product mix upgrade in 2H12.

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Financials

Sustainable net profit. With its FY11 net profit of HKD453m, TCLM has succeeded in turning around its business into the black, after making a net loss of HKD983m (due to inventory clearance of old TV models) in FY10. Looking ahead, we expect TCLM’s core net profit (excluding one-off events such as the property disposal of HKD232m in 3Q11 and the TOT acquisition for HKD144m in 1Q12) to increase by 278%/30% to HKD834m/HKD1,083m in FY12F and FY13F respectively.

Sales. We project that TCLM’s sales will grow by 16%/11% YoY to reach HKD38.2b/HKD42.5b in FY12F and FY13F respectively, on the back of a strong surge in TV sales volume, both in the domestic and overseas markets.

1) Sales volume: We expect TCLM to deliver a total of 17.8m TV units (LCD TVs and CRT TVs) in FY12F with a projected YoY growth of 17.4%. For FY13F, due to the high base effect, we expect the growth rate to slow to 12.8%, with a projected TV shipment of 20.1m.

2) ASP: We project the blended ASP to decline slightly by 0.5%/1% to HKD1,859/HKD1,841 for each TV set in FY12F and FY13F respectively, owing to TCLM’s increasing sales of small to mid-sized TVs in the overseas market which offer lower ASP relatively. This negative impact is insignificant as it will be offset by the increasing large-sized 3D TV sales in China.

Figure 21: Key assumptions FY09 FY10 FY11 FY12F FY13FTV sales volume (‘000 units) 14,238.4 13,012.5 15,172.4 17,816.7 20,101.2 YoY (%) (0.9) (8.6) 16.6 17.4 12.8TV ASP (HKD per unit) 1,846.4 1,742.1 1,869.1 1,859.0 1,841.3 YoY (%) 18.7 (5.6) 7.3 (0.5) (1.0)Source: Company data, Kim Eng Securities estimates

Gross margin. TCLM’s gross margin rose by 2.1ppts to 16.1% in FY11 from a low base of 14% in FY10. The ratio further increased to 18% in 1Q12, on the back of product mix optimisation and improving costs structure. Going forward, the company aims to maintain the gross margin level at 18% for FY12F. Furthermore, TCLM will sell more large-sized TVs in 2H12 given that CSOT will be able to offer more large-sized panels soon. Since large-sized TVs offer better margins, we are comfortable with our gross margin assumption.

Operating expense. The SG&A expense ratio showed a solid improvement, dropping by 2.4ppts to 15% in FY11. We expect the SG&A expense ratio to decline further to 14.7% in FY12F, on the back of a larger sales base and benefits from economies of scale.

CAPEX and net gearing. TCLM will invest HKD300-400m for FY12-13F, mainly in module capacity expansion and a new warehouse for storage purposes. On the other hand, the company has moved into a net cash position with an estimated net cash supply of HKD1,012m. Considering the abundance of its net cash on hand, we expect TCLM to fund its CAPEX mainly with internal cash. Separately, we expect the dividend payout ratio to stay at 30% in the long run.

Working capital management. The cash conversion cycle has improved significantly, with the number of days falling from 38 days in FY10 to 10 days in FY11 owing to improved cost control and operational efficiencies. We expect it to remain steady at 10 days in the future.

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Figure 22: Revenue trend (HKDm) Figure 23: Core net profit trend (HKDm)

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

Figure 24: SG&A expense ratio trend

Source: Company data, Kim Eng Securities estimates

Figure 25: Gross margin trend Figure 26: Net margin trend

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

30,343 26,949

32,932

38,175 42,535

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY09 FY10 FY11 FY12F FY13F

397

(983)

221

834 1,083

(1,500)

(1,000)

(500)

0

500

1,000

1,500


-14.4%

-17.4%

-15.0%-14.7% -14.6%

-18%

-18%

-17%

-17%

-16%

-16%

-15%

-15%

-14%


16.2%

14.0%

16.1%

18.0%

18.2%

13%

14%

15%

16%

17%

18%

19%


1.3%

-3.6%

1.4%

2.6% 2.5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%


6 July 2012 of 23


Investment risks

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

Keen competition in the TV market. TV manufacturers are operating in a highly fragmented and competitive environment, with significant jockeying for market shares among domestic and foreign players. While domestic players may initiate price wars to capture market shares, foreign players seek to leverage on their strong brand reputation and innovative product design to attract customers.

Inventory is a risk. The TV industry has a shorter product cycle than other home appliance industries. As a result, product model upgrades are more frequent and rapid. There was a replacement demand from CRT TV to LCD TV and the trend should continue, followed by 3D TV and smart TV. Due to the short product cycle, companies will have to manage their inventories carefully in order to prevent the accumulation of excessive outdated inventories.

Panel price volatility. Accounting for more than 50% of COGS, LCD panels are the most crucial cost component in TCLM’s TV production process. A sharp increase or decrease in panel prices will hurt TCLM’s gross margin as the company is not willing to pass on rising costs to consumers or push down product prices to initiate price wars.

Transfer pricing issue concern. TCLM sources panels from its parent through CSOT at the market price. As CSOT is operating at a loss, the market is concerned about TCLM’s likelihood of sourcing panels from its parent at a low cost in the long-run. Should there is an increase in panel sourcing prices, TCLM’s gross margin will be affected.

Weaker-than-expected demand for 3D TVs. If the launch of 3D TV channels in China and the development of 3D TVs fail to stimulate higher demand for 3D TVs, which have higher gross margins than 2D LCD TVs, there would be a downside risk to our earnings forecasts for the upcoming years.

New subsidy policy may not be as effective as previous rounds. The implementation of various subsidy policies by the Chinese government since 2009 has played an important role in boosting the demand for home appliance products. It is possible that most consumers have already enjoyed the benefit in purchasing home appliance goods in previous policies such that the impact of the new subsidy policy this year may be weaker than expected. Thus, the policy may not generate significant new demand for home appliance products.

6 July 2012 of 23


Valuation and recommendation

Worth the premium. We believe that the PER valuation is the appropriate methodology to capture TCLM’s growing potential in the upcoming two years and the cyclicality of the TV industry. TCLM is currently trading at 6.3x FY12F PER, while other HK-listed and A-share listed home appliance players are trading in the respective range of 4.2-10.6x and 9.1-36.4x. Considering TCLM’s unique vertically integrated business model and its TV shipment growth that is outpacing the industry, we believe that the counter deserves to be trading at a premium to its peers.

More re-rating to come. Our FY12F earnings forecast of HKD834m is at the high-end of market consensus (HKD732m) as we believe the market is still too conservative on TCLM and underestimates the margin improvement from the vertically integrated supply chain as well as the economies of scale arising from TCLM’s large production size. On the back of its low base figures in 1H11, TCLM is one of the possible candidates for positive profit alert in 1H12. We believe that its continuous on-track monthly TV shipments and its upcoming solid quarter results (2Q12) should trigger further re-rating from the market on its earnings projection for FY12F.

BUY with 27% upside. We initiate the coverage on TCLM with a BUY recommendation and a target price of HKD5.24, offering 27% upside from the current share price. Our target price is based on 8x FY12F PER, on the back of a two-year EPS CAGR of 105%.

Figure 27: Peers valuation comparison (Share price as of 4 July 2012)

Latest price Mkt cap PER (x) PBR (x) Div yield (%) EPS growth (%) ROE

Company name Ticker (Lcl ccy) (USDm) FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 (%)

HK-listed Welling Holding 382 HK 1.24 451.2 5.2 4.4 N/A N/A N/A N/A 0.0 16.7 N/AChigo Holding 449 HK 0.18 194.7 4.2 2.7 0.4 0.4 7.5 8.9 183.8 57.1 4.0Gome Electrical 493 HK 1.04 2,263.0 9.4 7.3 0.9 0.8 2.6 3.8 -37.1 28.1 8.9Skyworth Digital 751 HK 3.64 1,265.1 7.6 6.6 1.2 1.0 4.8 4.8 33.4 15.9 16.1TCL Multimedia 1070 HK 4.21 716.6 7.9 7.2 1.3 1.2 4.2 4.7 48.9 8.5 18.8Haier Electronics 1169 HK 9.16 2,816.9 10.6 8.9 3.2 3.0 1.0 1.2 25.3 19.7 35.8Huiyin Household 1280 HK 0.45 60.8 9.2 6.1 0.3 0.3 N/A N/A 33.3 50.0 5.0

Average 7.7 6.2 1.2 1.1 4.0 4.6 41.1 28.0 14.8

A-share listed Konka Group 000016 CH 3.64 580.1 36.4 33.1 N/A N/A N/A N/A 900.0 10.0 N/AWuxi Little Swan 000418 CH 8.5 784.7 10.2 8.8 1.4 1.2 2.4 2.4 -10.4 15.6 12.8 GS Midea 000527 CH 11.16 5949.1 9.1 7.6 1.6 1.3 0.7 0.7 12.0 19.2 17.9 Gree Electric 000651 CH 21.4 10138.8 9.7 8.2 2.5 2.0 2.3 2.7 16.9 19.1 26.7 Suning Applicance 002024 CH 8.56 9433.0 12.0 10.2 2.2 1.8 1.2 1.4 2.5 16.9 18.9 Hisense Electric 600060 CH 16.93 3475.5 12.1 10.8 2.6 2.2 N/A N/A 28.4 11.9 21.0 Qingdao Haier 600690 CH 11.84 5007.6 10.3 9.2 2.5 2.0 2.0 2.2 11.1 12.1 26.0 Changhong 600839 CH 2.1 1526.9 24.7 19.1 N/A N/A N/A N/A 0.0 29.4 N/A

Average 15.6 13.4 2.1 1.8 1.7 1.9 120.1 16.8 20.6

Source: Bloomberg, Kim Eng Securities

6 July 2012 of 23


Appendix I: Shareholding structure

Figure 28: TCLM’s shareholding structure

Source: HKEx, Shenzhen Stock Exchange, Kim Eng Securities

Appendix II: Development milestones

Figure 29: TCLM’s historical developments


6 July 2012 of 23


Appendix III: Management profile

Figure 30: Key management team

Name Age Title Current / Previous experience Education Mr. Li Dongsheng

54 Chairman and Executive Director

Founder of the Company, with over 25 years of experience in the industry

Graduated from South China University of Technology with a Bachelor’s degree in Radio Technology

Mr. Bo Lianming

49 Executive Director Has over 11 years of experience in the consumer electronics products industry

Graduated from Xi’an Jiaotong University with a Doctorate degree in Business Administration

Mr. Zhao Zhangyao

49 CEO and Executive Director

Has 20 years of experience in sales and marketing and management of consumer electronics business

Graduated from Massachusetts Institute of Technology with a Master's degree in Business Administration

Mr Yu Guanghui

43 Executive Director Has rich management experience in materials procurement, manufacturing, product management, business development and cooperation with world-class companies

Graduated from the Shanxi Normal University with a Master’s degree in Physics

Ms. Xu Fang 49 Executive Director Joined TCL in 2004 Graduated from New York Institute of Technology with a Master's degree in Business Administration

Mr. Albert Thomas Da Rosa, Junior

58 Non-executive Director

Partner of Messers. Cheung Tong & Rosa Solicitors, Hong Kong

Graduated from the University of Hong with a Bachelor's and Master's degree in Law

Mr. Huang Xubin

46 Non-executive Director

Joined TCL in 2001 Graduated from Hunan College of Finance and Economics

Mr. Tang Guliang

49 Independent Non-executive Director

A professor at University of International Business and Economics, School of Business

No information

Mr. Robert Maarten Westerhof


Has over 30 years of experience in the electronics industry

Graduated from Erasmus University of Rotterdam with a Master's degree in Business Administration

Mr. Wu Shihong


Has extensive experience in the information technology industry

No information

Dr. Tseng Shieng Chang Certer


Has over 30 years of experience in the high-tech industry

Graduated from National Taiwan University with a Master's and Doctoral degrees in Computer Science and Electronics Engineering

Mr. Cheng Fong Ting, Edmond

50 Chief Financial Officer

Has extensive experience in audit and financial management

Graduated from University of Hawaii with a Bachelor's degree in Business Administration

Mr. Hao Yi 38 Chief Sales Officer and General Manager

Has extensive experiences in international business

Graduated from York University with a Bachelor's degree in Economics

Mr. Zhang Shanshui

46 Executive Vice President and General Manager

Has extensive experience in industrial management

Graduated from National University of Defense Technology with a Bachelor degree in Automatism Testing Instrument

Mr. Chen Kuang Lang Wolf

48 Chief Technology Officer

An expert in the field of video singal processing and flat-panel display technologies

Graduated from Taiwan University with an EMBA degree

Mr. Sin Man Lung

38 Financial Controller Has more than 10 years of auditing, finance and accounting experience in multi-national and listed companies

Graduated from the City University of Hong Kong with a Bachelor’s degree in Accountancy


6 July 2012 of 23


INCOME STATEMENT BALANCE SHEET FYE Dec (HKDm) 2010A 2011A 2012F 2013F

FYE Dec (HKDm) 2010A 2011A 2012F 2013F Revenue 26,949 32,932 38,175 42,535 Fixed Assets 1,604 1,430 1,635 1,557 Gross Profit 3,765 2,060 6,872 7,741 Other LT Assets 506 367 367 367 EBITDA (352) 858 1,725 2,210 Cash/ST Investments 2,133 4,452 5,112 6,162 Depreciation & Amortisation (239) (207) (198) (381) Other Current Assets 14,258 17,883 20,377 22,452 Operating Profit (EBIT) (591) 651 1,527 1,829 Total Assets 18,501 24,132 27,491 30,538 Interest (Exp)/Inc (233) (289) (410) (432) Associates (11) 19 23 25 ST Debt 4,864 2,624 3,400 4,100 One-offs 0 232 144 0 Other Current Liabilities 10,103 17,125 19,034 20,622 Pre-Tax Profit (835) 613 1,284 1,422 LT Debt 265 711 700 700 Tax (138) (151) (295) (327) Other LT Liabilities 20 20 20 20 Minority Interest (10) (9) (10) (11) Minority Interest 105 119 119 119 Net Profit (983) 453 978 1,083 Shareholders' Equity 3,144 3,534 4,218 4,977 Recurring Net Profit (983) 221 834 1,083 Total Liabilities-Capital 18,501 24,132 27,491 30,538

Revenue Growth (%) (11.2) 22.2 15.9 11.4 Share Capital (m) 1,068 1,083 1,270 1,270 EBITDA Growth (%) (137.3) (343.5) 101.2 28.1 Gross Debt/(Cash) 5,129 3,335 4,100 4,800 EBIT Growth (%) (184.1) (210.2) 134.6 19.7 Net Debt/(Cash) 2,996 (1,117) (1,012) (1,362) Net Profit Growth (%) (347.9) (146.0) 116.1 10.7 Working Capital 1,424 2,587 3,055 3,892 Recurring Net Profit Growth (%) (347.9) (122.4) 278.2 29.9

Tax Rate % (16.5) 24.7 23.0 23.0

CASH FLOW RATES & RATIOS

FYE Dec (HKDm) 2010A 2011A 2012F 2013F FYE Dec 2010A 2011A 2012F 2013F Profit before taxation (835) 613 1,284 1,422

Gross Profit Margin (%) 14.0 16.1 18.0 18.2 Depreciation & Amortisation 239 207 198 381 EBITDA Margin (%) (1.3) 2.6 4.5 5.2 Net interest receipts/(payments) 191 210 308 309 Op. Profit Margin (%) (2.2) 2.0 4.0 4.3 Working capital change (573) 1,103 (585) (487) Net Profit Margin (%) (3.6) 1.4 2.6 2.5 Cash tax paid (354) (494) (705) (759) ROA (%) N/A 2.1 3.8 3.7 Others (incl'd exceptional items) (70) (322) 0 0 ROE (%) N/A 13.1 24.5 23.0 Cash flow from operations (1,403) 1,317 499 866 Net Margin Ex. El (%) (3.6) 0.7 2.2 2.5 Capex (188) (76) (400) (300) Net Gearing % 92.2 N/A N/A N/A Disposal/(purchase) 137 232 0 0 Asset Turnover (x) 1.5 1.4 1.4 1.4 Others (2,322) 2,333 107 128 Asset/Debt (x) 3.6 7.2 6.7 6.4 Cash flow from investing (2,373) 2,489 (293) (172) Debt/ EBITDA (x) (14.6) 3.9 2.4 2.2 Debt raised/(repaid) 2,919 (1,892) 765 700 Debt/ Market Cap (x) 0.9 0.6 0.7 0.9 Equity raised/(repaid) 535 (33) 700 0 Interest Cover (x) (1.5) 3.0 4.2 5.1 Dividends (paid) (129) 0 (173) (293) Dividend Cover (x) N/A 2.6 3.3 3.3 Interest payments 0 (109) 0 0 Inventory Turn (days) 77.5 56.8 58.1 58.2 Others 444 495 (839) (51) Debtors Turn (days) 43.8 42.1 42.1 42.1 Cash flow from financing 3,769 (1,539) 453 355 Creditors Turn (days) 83.3 88.8 90.9 91.1 Change in cash (7) 2,267 660 1,050 PER SHARE DATA

FYE Dec (HKD) 2010A 2011A 2012F 2013F EPS (0.92) 0.42 0.77 0.85 BVPS 3.04 3.37 3.41 4.01 DPS 0.00 0.16 0.23 0.26 SPS 25.23 30.42 30.06 33.49 EBITDA/share (0.33) 0.79 1.36 1.74 CFPS (1.31) 1.22 0.39 0.68


6 July 2012 of 23


RESEARCH OFFICES REGIONAL

P K BASU Regional Head, Research & Economics (65) 6432 1821 [email protected]

WONG Chew Hann, CA Acting Regional Head of Institutional Research (603) 2297 8686 [email protected]

THAM Mun Hon Regional Strategist (852) 2268 0630 [email protected]

ONG Seng Yeow Regional Products & Planning (852) 2268 0644 [email protected]

ECONOMICS Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 [email protected]

Luz LORENZO Economist Philippines | Indonesia (63) 2 849 8836 [email protected]

MALAYSIA WONG Chew Hann, CA Head of Research (603) 2297 8686 [email protected] Strategy Construction & Infrastructure Desmond CH’NG, ACA (603) 2297 8680 [email protected] Banking - Regional LIAW Thong Jung (603) 2297 8688 [email protected] Oil & Gas Automotive Shipping ONG Chee Ting (603) 2297 8678 [email protected] Plantations Mohshin AZIZ (603) 2297 8692 [email protected] Aviation Petrochem Power YIN Shao Yang, CPA (603) 2297 8916 [email protected] Gaming – Regional Media Power WONG Wei Sum, CFA (603) 2297 8679 [email protected] Property & REITs LEE Yen Ling (603) 2297 8691 [email protected] Building Materials Manufacturing Technology

LEE Cheng Hooi Head of Retail [email protected] Technicals

HONG KONG / CHINA Edward FUNG Head of Research (852) 2268 0632 [email protected] Construction Ivan CHEUNG (852) 2268 0634 [email protected] Property Industrial Ivan LI (852) 2268 0641 [email protected] Banking & Finance Jacqueline KO (852) 2268 0633 [email protected] Consumer Staples Andy POON (852) 2268 0645 [email protected] Telecom & equipment Alex YEUNG (852) 2268 0636 [email protected] Industrial Catherine CHAN (852) 2268 0631 [email protected] Cement Jacky WONG, CFA (852) 2268 0107 [email protected] Special Situations Quants Anita HWANG, CFA (852) 2268 0142 [email protected] Consumer Discretionaries Special Situations

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SINGAPORE Stephanie WONG Head of Research (65) 6432 1451 [email protected] Strategy Small & Mid Caps Gregory YAP (65) 6432 1450 [email protected] Technology & Manufacturing Telcos - Regional Wilson LIEW (65) 6432 1454 [email protected] Hotel & Resort Property & Construction James KOH (65) 6432 1431 [email protected] Logistics Resources Consumer Small & Mid Caps YEAK Chee Keong, CFA (65) 6433 5730 [email protected] Healthcare Offshore & Marine Alison FOK (65) 6433 5745 [email protected] Services S-chips Bernard CHIN (65) 6433 5726 [email protected] Transport (Land, Shipping & Aviation) ONG Kian Lin (65) 6432 1470 [email protected] REITs / Property WeiBin (65) 6432 1455 [email protected] S-chips Small & Mid Caps

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VIETNAM Michael KOKALARI, CFA Head of Research +84 838 38 66 47 [email protected] Strategy Nguyen Thi Ngan Tuyen +84 844 55 58 88 x 8081 [email protected] Food and Beverage Oil and Gas Ngo Bich Van +84 844 55 58 88 x 8084 [email protected] Banking Nguyen Quang Duy +84 844 55 58 88 x 8082 [email protected] Rubber Dang Thi Kim Thoa +84 844 55 58 88 x 8083 [email protected] Consumer Nguyen Trung Hoa +84 844 55 58 88 x 8088 [email protected] Steel Sugar Macro

6 July 2012 of 23


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. 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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: MATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Kim Eng Vietnam Securities Company (“KEVS”) (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 6 July 2012, 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 6 July 2012, 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.

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 Total return is expected to be above 15% in the next 12 months

HOLD Total return is expected to be between -15% to +15% in the next 12 months

SELL Total return is expected to be below -15% in the next 12 months

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

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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

Kim Eng Vietnam Securities Company 1st Floor, 255 Tran Hung Dao St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 838 38 66 36 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 Connie TAN [email protected] Tel: (65) 6333 5775 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

www.maybank-ke.com | www.kimengresearch.com | www.kimeng.com.hk

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