See important disclosures, including any required research certifications, beginning on page 20

■ Investment case We initiate coverage on Best Pacific International (Best Pacific) with a Buy (1) rating. Its customers include many of the biggest global lingerie brands. We forecast a revenue CAGR of 21% for 2013-16, while net profit should grow at a CAGR of 32%. We believe Best Pacific is a good pick for investors looking for a niche company within the China textile space as it has the potential to be a multi-bagger in the long run. ■ Catalysts Strong demand for lingerie. We believe Best Pacific is a key beneficiary of the global growth we are seeing in the lingerie industry (revenue is growing at more than twice the pace of general apparel, on our estimates). The company should be able to expand its market share with its one-stop-shop business model as well as its recent entry into

the lace business. Also, we believe its long-standing relationship with leading brands such as Victoria’s Secret and Triumph should allow for cross-selling opportunities for lace and hence should be a key revenue driver over 2014-16. Untapped sportswear market. Best Pacific also specialises in elastic fabrics and has the potential to gain a sizeable foothold in the sportswear market (it has just scratched the surface). We expect the next earnings-growth driver to come from women’s active wear, for which the company is already winning new orders. Gross margin upside. As its lace business has a significantly higher gross margin than its elastic-fabric and webbing businesses, we expect the overall gross margin to reverse from the recent downtrend, as lace production ramps up. We forecast gross margin expansion from 31.4% for 2013 to 32.6% by 2016E. ■ Valuation We have a 6-month target price of HKD4.60, based on a 2015E PER of 13x, derived by applying a 10% discount to the average trading PER of China textile peers (consensus forecasts). Our target multiple is in line with the average 2015E trading

PER of Best Pacific’s closest peer (Pacific Textiles). ■ Risks The key risks to our call would be a slower-than-expected ramp-up of its lace business and worse-than-expected gross margin pressure from rising competition.

Consumer Discretionary / China2111 HK

27 November 2014

Best Pacific International

Initiation: hidden allure

• We forecast a revenue CAGR of 21% for 2013-16, driven by rapid lingerie and sportswear industry growth

• Gross margin should trend up from 2015E as its high-margin lace business ramps up

• Initiating coverage with a Buy rating; good pick for investors looking for a niche company with higher risk-reward profile

Source: FactSet, Daiwa forecasts

Consumer Discretionary / China

Best Pacific International2111 HK

Target (HKD): 4.60Upside: 21.1%27 Nov price (HKD): 3.80

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Share price performance

Best Pacif (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.12-4.06Market cap (USDbn) 0.503m avg daily turnover (USDm) 0.69Shares outstanding (m) 1,019Major shareholder Yuguang Lu (62.6%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16ERevenue (m) 1,881 2,310 2,917Operating profit (m) 308 430 581Net profit (m) 255 364 498Core EPS (fully-diluted) 0.250 0.354 0.477EPS change (%) (12.6) 41.5 34.8Daiwa vs Cons. EPS (%) (5.7) (4.4) 3.7PER (x) 15.2 10.7 8.0Dividend yield (%) 2.0 2.8 3.9DPS 0.075 0.107 0.147PBR (x) 2.6 2.2 1.8EV/EBITDA (x) 9.1 6.6 4.7ROE (%) 21.8 22.1 25.4

John Choi(852) 2773 8730john.choi@hk.daiwacm.com

Carlton Lai(852) 2532 4349carlton.lai@hk.daiwacm.com

How do we justify our view?How do we justify our view?

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Hidden allure .................................................................................................................................. 6

Strategic positioning since the company’s inception ................................................................. 6

Two-pronged industry growth should support top-line growth ................................................ 9

Gross margin should hit trough for 2014 and trend up from 2015 .......................................... 12

Aggressive capacity expansion ................................................................................................... 13

Financials ................................................................................................................................... 14

Valuation and risks .................................................................................................................... 16

Contents

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Growth outlook Best Pacific: revenue and net income

We forecast a total revenue CAGR for Best Pacific of 21% for 2013-16E, driven by new production capacity coming on stream, market-share gains, the ramp-up of the company’s lace business and continuous growth of the global lingerie industry. China’s relatively untapped sportswear market also offers additional revenue growth opportunities for the company, as we estimate that this market is at least 3x larger in terms of revenue than the lingerie market. We expect the global sports brands to make a big push into women’s sportswear over 2014-16, which should translate into an increase in demand for Best Pacific’s elastic fabrics.

Source: Company, Daiwa forecasts

Valuation Best Pacific: 2015 PER comparison (x)

We have a 6-month target price for Best Pacific of HKD4.60, based on a 13x PER applied to our 2015 EPS forecast. We believe our target multiple is undemanding given that Best Pacific’s closest peer, Pacific Textiles (1382 HK, HKD10.50, Outperform [2]) is trading at a 2015E PER of 13x, and has a lower gross margin and weaker revenue growth outlook over the same forecast period. Furthermore, we envisage a rerating of the Best Pacific stock if the company does deliver solid 2014 results.

Source: Bloomberg for L Brands and Cosmo Lady, Daiwa forecasts

Note: * = 2015 target PER

Earnings revisions Best Pacific: Daiwa vs. Bloomberg consensus forecasts

While we are bullish on Best Pacific’s business growth outlook, our 2014-15 revenue and net-profit forecasts are slightly lower than those of the Bloomberg consensus. The difference may be due to our more conservative assumptions for its lace business. We also assume higher pre-IPO option amortisation expenses than the consensus. That said, we are one of the few international brokers to cover the stock.

Daiwa Bloomberg consensus Variance

2014E Revenue (HKDbn) 1.88 1.96 -4%EPS (HKD) 0.25 0.27 -6%2015E Revenue (HKbn) 2.31 2.39 -3%EPS (HKD) 0.35 0.37 -4%2016E Revenue (HKDbn) 2.92 2.72 7%EPS (HKD) 0.48 0.46 4%Source: Bloomberg, Daiwa forecasts

How do we justify our view?

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Pacific Textile Texwinca Shenzhou L Brands Cosmo Lady Best Pacific*

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Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)

Source: FactSet, Daiwa forecasts

Year to 31 Dec n.a. n.a. 2011 2012 2013 2014E 2015E 2016E

Elastic fabric sales volume (million meters)

- - 23.2 22.5 27.5 30.6 37.1 45.9

Elastic fabric ASP (HKD/meter) - - 40.5 41.2 39.1 38.7 39.1 39.5

Elastic webbing sales volume (million meters)

- - 525.8 521.0 608.4 650.3 747.9 909.3

Elastic webbing ASP (HKD/meter) - - 0.9 0.9 0.9 1.0 1.0 1.0Lace sales volume (million meters) - - 0.0 0.0 1.2 4.0 7.6 12.0Lace ASP (HKD/meter) - - 0.0 21.4 16.7 18.4 18.6 18.8

Year to 31 Dec n.a. n.a. 2011 2012 2013 2014E 2015E 2016EElastic fabric - - 938 929 1,076 1,184 1,452 1,811Elastic webbing - - 457 474 566 623 716 880Other Revenue - - 0 1 20 74 141 226Total Revenue - - 1,396 1,404 1,662 1,881 2,310 2,917Other income - - 0 0 0 0 0 0COGS - - (948) (955) (1,139) (1,295) (1,572) (1,965)SG&A - - (141) (154) (166) (196) (233) (292)Other op.expenses - - (21) (37) (45) (83) (74) (79)Operating profit - - 285 259 312 308 430 581Net-interest inc./(exp.) - - (40) (45) (35) (12) (2) 10Assoc/forex/extraord./others - - (1) 26 25 18 20 22Pre-tax profit - - 244 240 301 314 448 613Tax - - (38) (42) (57) (59) (84) (115)Min. int./pref. div./others - - (26) (23) (30) 0 0 0Net profit (reported) - - 180 174 215 255 364 498Net profit (adjusted) - - 180 174 215 255 364 498EPS (reported)(HKD) - - 0.240 0.232 0.286 0.250 0.357 0.489EPS (adjusted)(HKD) - - 0.240 0.232 0.286 0.250 0.357 0.489EPS (adjusted fully-diluted)(HKD) - - 0.240 0.232 0.286 0.250 0.354 0.477DPS (HKD) - - 0.000 0.000 0.080 0.075 0.107 0.147EBIT - - 285 259 312 308 430 581EBITDA - - 346 344 416 422 563 721

Year to 31 Dec n.a. n.a. 2011 2012 2013 2014E 2015E 2016EProfit before tax - - 244 240 301 314 448 613Depreciation and amortisation - - 61 86 105 115 132 140Tax paid - - (19) (64) (42) (59) (84) (115)Change in working capital - - (202) 74 (53) 11 (77) (113)Other operational CF items - - 61 35 35 28 23 2Cash flow from operations - - 144 370 345 408 442 527Capex - - (139) (142) (217) (126) (219) (91)Net (acquisitions)/disposals - - (60) 0 2 72 0 0Other investing CF items - - 118 (83) 193 27 34 52Cash flow from investing - - (80) (225) (22) (27) (185) (39)Change in debt - - 66 59 (120) (168) 69 139Net share issues/(repurchases) - - 0 0 0 578 0 0Dividends paid - - 0 0 (60) (76) (109) (149)Other financing CF items - - (91) (181) (197) (140) (32) (36)Cash flow from financing - - (25) (122) (376) 194 (72) (47)Forex effect/others - - 0 0 0 0 0 0Change in cash - - 39 23 (53) 576 185 442Free cash flow - - 6 228 128 282 223 436

Financial summary

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Balance sheet (HKDm)

Key ratios (%)

Source: FactSet, Daiwa forecasts

Company profile

Founded in 2003, Best Pacific International is a leading global manufacturer of lingerie materials. The company produces elastic fabrics, elastic webbing and lace materials. Its major clients include some of the world's top lingerie brands, such as Victoria's Secret, Calvin Klein, Triumph and Wacoal. The company also supplies fabric for sports brands such as Lululemon Athletica and Under Armour.

As at 31 Dec n.a. n.a. 2011 2012 2013 2014E 2015E 2016ECash & short-term investment - - 126 149 98 674 859 1,302Inventory - - 231 231 318 337 401 490Accounts receivable - - 393 383 454 490 595 743Other current assets - - 238 318 114 83 94 114Total current assets - - 988 1,080 983 1,583 1,949 2,649Fixed assets - - 758 890 1,033 1,041 1,123 1,072Goodwill & intangibles - - 45 45 44 47 52 54Other non-current assets - - 90 88 109 35 42 53Total assets - - 1,882 2,103 2,169 2,707 3,166 3,827Short-term debt - - 733 845 346 221 321 321Accounts payable - - 206 243 310 337 401 490Other current liabilities - - 454 358 198 205 250 313Total current liabilities - - 1,392 1,445 853 764 972 1,125Long-term debt - - 20 16 452 408 377 517Other non-current liabilities - - 51 33 32 26 32 41Total liabilities - - 1,463 1,495 1,337 1,198 1,382 1,682Share capital - - 0 0 0 10 10 10Reserves/R.E./others - - 361 527 725 1,498 1,774 2,135Shareholders' equity - - 361 527 726 1,508 1,784 2,145Minority interests - - 58 80 107 0 0 0Total equity & liabilities - - 1,882 2,103 2,169 2,707 3,166 3,827EV - - 4,556 4,664 4,678 3,827 3,711 3,408Net debt/(cash) - - 627 712 700 (44) (160) (464)BVPS (HKD) - - 0.481 0.703 0.967 1.481 1.751 2.106

Year to 31 Dec n.a. n.a. 2011 2012 2013 2014E 2015E 2016ESales (YoY) - - n.a. 0.6 18.4 13.2 22.8 26.3EBITDA (YoY) - - n.a. (0.4) 20.9 1.4 33.3 28.1Operating profit (YoY) - - n.a. (9.3) 20.6 (1.4) 39.9 35.0Net profit (YoY) - - n.a. (3.2) 23.1 18.7 42.9 36.8Core EPS (fully-diluted) (YoY) - - n.a. (3.2) 23.1 (12.6) 41.5 34.8Gross-profit margin - - 32.1 32.0 31.4 31.2 31.9 32.6EBITDA margin - - 24.8 24.5 25.1 22.4 24.4 24.7Operating-profit margin - - 20.4 18.4 18.8 16.4 18.6 19.9Net profit margin - - 12.9 12.4 12.9 13.5 15.8 17.1ROAE - - n.a. 38.5 34.0 21.8 22.1 25.4ROAA - - n.a. 8.7 10.0 10.4 12.4 14.2ROCE - - n.a. 19.6 20.1 16.3 18.6 21.3ROIC - - 23.0 18.0 17.8 16.7 22.6 28.6Net debt to equity - - 173.7 135.0 96.4 n.a. n.a. n.a.Effective tax rate - - 15.5 17.6 18.8 18.8 18.8 18.8Accounts receivable (days) - - n.a. 100.9 91.8 91.5 85.7 83.7Current ratio (x) - - 0.7 0.7 1.2 2.1 2.0 2.4Net interest cover (x) - - 7.1 5.8 8.8 25.1 199.1 n.a.Net dividend payout - - 0.0 0.0 28.0 30.0 30.0 30.0Free cash flow yield - - 0.1 5.9 3.3 7.3 5.7 11.3

Financial summary continued …

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Hidden allure

In just 10 years, Best Pacific has become the world’s largest manufacturer of lingerie materials. We believe this is a testament of the company’s quality-oriented, one-stop-shop business model. Benefiting from a niche, fast-growing industry, Best Pacific appears well positioned to deliver a revenue CAGR of 21% over 2013-16.

Strategic positioning since the company’s inception

A specialised mid-stream player We believe Best Pacific’s highly specialised and relatively narrow target market has played a key role in the company’s early success. The company specialises in the production of just 3 types of material for lingerie products: elastic fabric, elastic webbing and lace. Its main customers are largely the mid-range to high-end brands, most of which are globally renowned (Victoria’s Secret, Calvin Klein and Triumph are among its largest customers). In addition, Best Pacific is solely a mid-stream (takes the raw materials and makes fabrics out of them for lingerie) player in the lingerie industry, which means it is not involved in the assembly of lingerie garments

(downstream), nor does it produce any of the raw materials (nylon and spandex) used for fabric production (upstream). This has allowed it to focus its efforts on producing high-quality fabrics. Our market research with multiple players along the lingerie value chain shows that Best Pacific is known among its peers, suppliers and customers for its high-quality but often pricier fabrics. We believe there are a number of ways for investors to capture the growth under way in the lingerie industry. Broadly speaking, we favour the mid-stream fabric players, such as Best Pacific and Pacific Textiles, over the other players in the value chain. Compared with the upstream raw-material players (such as Hyosung Corp [not rated]), the gross margins of the mid-stream players like Best Pacific are typically much higher, reflecting the more advanced labour skills required of them. Also, mid-stream players’ margins are generally more stable during commodity price swings and less cyclical in general. The other alternative would be to invest directly in the lingerie brands, such as Victoria’s Secret’s parent company L Brands, Hanesbrands and Wacoal (all not rated). However, we think Best Pacific is a better proxy to capture the global growth of the lingerie industry, given the company’s well-diversified client base of global brands, which provides a strong cushion in case any one of its brands were to fail. We are currently not aware of any publicly listed pure-play lingerie garment producers in Asia. Apart from the fully vertically integrated companies, we believe the mid-stream players like Best Pacific offer the highest risk-reward potential for investors.

Best Pacific: timeline of key customer wins

Source: Company

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Unlike some of Best Pacific’s larger competitors, such as Pacific Textiles, the company has so far catered almost exclusively to the lingerie industry. This is rare for a fabric manufacturer, as most players supply fabrics to multiple apparel subsectors, such as sportswear and casualwear. Importantly, we believe Best Pacific’s singular focus on the lingerie industry thus far has been essential in allowing it to build up its global customer portfolio. A case in point is that Best Pacific counts many of the world’s top lingerie brands as customers including Victoria’s Secret, Calvin Klein, Triumph and Wacoal. These brands are among the company’s largest customers and have developed business relationships with Best Pacific for over 5 years. Lingerie industry is unlike any other apparel business For investors that are already familiar with the apparel industry, it is important to note the various characteristics that differentiate the lingerie industry, largely stemming from differences in end-customers’ purchasing patterns for lingerie. Some of this consumer behaviour has helped Best Pacific come up with its one-stop-shop business model. What drives a lingerie purchase:

• Comfort and quality are major decision factors for end buyers … While these 2 factors are important for any apparel product, they are arguably more so for lingerie items, which are form-fitting and worn every day. This means that most customers do not compromise the quality of the fabric for price. There is also academic research (“A study on brand loyalty towards innerwear.” By Tan, Diyao.; Yam, Wei Pei.; Woo, Andy Kok Leung, http://repository.ntu.edu.sg/handle/10356/33516) that confirms fit and comfort remain the defining factors for the selection of innerwear.

• … but design and aesthetics are just as important. While lingerie items are a subset of innerwear, they are also considered intimate and sensual products. Hence, aesthetics is a key factor in influencing purchase decisions, in particular for high-end brands.

• Greater customer loyalty. Customers generally have a lower tolerance for poor-fitting items when it comes to choosing innerwear. This means that when a customer finds a brand that fits perfectly, the customer will tend to stick with the brand for a long time. A number of industry players we have talked to confirmed this. But we believe this extends beyond brand loyalty among end-users, and also to the key

fabric suppliers, as brands seek to maintain a consistent level of product experience.

• Consumer demand for lingerie is relatively less cyclical. To many, lingerie is considered a necessity, which may make demand more stable across business cycles.

Importance of its one-stop-shop solution should not to be overlooked Best Pacific has structured its business as a one-stop-shop for its customers, a model that we believe has become a key competitive advantage for the company. Also, we believe the importance of offering a one-stop-shop solution should not be overlooked. While the company produces only elastic fabrics, elastic webbing and lace, it is uncommon for one company to be capable of producing all three. In addition, these three materials combined already make up about two-thirds of the materials used in a typical bra. The remaining materials that are not supplied by Best Pacific are the moulded foam cups, which are largely chemical products, and other standardised accessories such as the fasteners and labels. Breakdown of market size for global lingerie materials (2012)

Source: Frost & Sullivan

While the brand owners and OEMs generally have an incentive to source from as many suppliers as possible, we believe this is not the case for the mid-range to high-end lingerie brands. Brands such as Victoria’s Secret and Calvin Klein generally have a very low tolerance for any colour discrepancies across fabrics and, hence, prefer to consolidate its suppliers to a few main companies. Sourcing from fewer suppliers also minimises production lead times and makes the timing of delivery more predictable. Given the importance of aesthetics and design in the lingerie industry, Best Pacific has invested heavily in R&D to provide a one-stop-shop for its customers. The company has a team of around 100 R&D staff who are split into 2 units: one team is dedicated to developing new fabrics, while the other researches and designs

Elastic Fabric29.0%

USD2.2bn

Elastic Webbing21.0%

USD1.6bn

Lace16.0%

USD1.2bn

Molded Foam22.0%

USD1.7bn

Others12.0%

USD0.9bn

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lingerie products. All of the design team’s creations are branded under Nano Design, which is a wholly owned subsidiary of Best Pacific. While Best Pacific does not engage in garment assembly, most of the creations from Nano Design are produced into wearable samples, which are important because Best Pacific pitches its new fabrics, webbing and lace designs to brand owners in the form of an end product (be it bras or panties). We believe this allows its customers to visualise the company’s latest innovations and designs much more effectively. Best Pacific: in-house garment assembly room for lingerie samples and prototypes

Source: Daiwa

Both R&D units have extensive track records as the company generated about 200 new designs in 2013 and has been granted a total of 34 patents to date, including a mix of design patents and new fabric patents. We believe the R&D unit has been a key differentiator for Best Pacific and has allowed the company to increase its market share with core brands. For example, in April 2011, Best Pacific’s R&D team developed a material for bras that was granted a patent, and was ultimately selected by Victoria’s Secret for its Body by Victoria product line. By developing the material, Best Pacific was able to enter into an exclusivity agreement with Victoria’s Secret to supply the material to its designated OEMs from 2012 to 2014. This laid the foundation for more business.

Best Pacific: Nano Design’s R&D studio

Source: Daiwa

In addition to its internal R&D operations, Best Pacific also collaborates closely with the major raw-material suppliers such as Hyosung Corp (Not rated). We believe the ability to collaborate with a leading global nylon/spandex supplier is a testament to the company’s R&D capabilities and raw-material purchasing power. Other indications of Best Pacific’s heavy commitment to R&D include: 1) being granted the status of “High and New Technology Enterprise” by the PRC Government, 2) establishing a design studio in Qingdao City to attract talent, and 3) currently creating a new R&D facility at the company’s newly built eighth production facility (in Dongguan city in Guangdong Province in China).

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Two-pronged industry growth should support top-line growth

Lingerie industry still showing healthy growth As at the end of 1H14, more than 95% of the company’s revenue was derived from sales of lingerie materials. Hence, the fact that the lingerie industry is one of the fastest growing subsectors among apparel is very favourable for the company, in our view. Market size of lingerie materials globally (USDbn)

Source: Frost & Sullivan

According to Frost & Sullivan, the global lingerie market is expected to grow from USD65.7bn in 2012 to USD82.1bn in 2016, implying a CAGR of 6%. We estimate the overall growth of the global apparel industry to be approximately half of that on a yearly basis. In our opinion, one of the engines driving lingerie growth is a widening of the target market, which appears to be getting younger. This is likely to be fuelled by a step-up in marketing dollars by brands over the past decade, which has created new demand and changed consumer preferences. More specifically, Frost & Sullivan expects the global lingerie materials industry to grow to USD9.5bn in terms of revenue by 2016. The lingerie materials industry consists of elastic fabrics, lace, moulded foam cups and other accessories (ie, elastic webbing, bra hooks and eye fasteners). Elastic fabric, elastic webbing and lace (the 3 categories of material that Best Pacific specialises in) made up two-thirds of the lingerie

materials market in 2012. In terms of revenue, Best Pacific was also the largest lingerie materials provider globally with sales of USD174.9m, commanding a market share of 2.3% for 2012. As estimated by Frost & Sullivan, both the elastic-fabric and elastic-webbing markets should register a CAGR of around 6% globally over 2013-16. Apart from the overall increase in demand for lingerie, we believe the growth of the lingerie materials industry will be further catalysed by demand for new innovative product features (such as wicking, anti-static, anti-ultraviolet, anti-bacterial and thermal insulation). In 2012, Best Pacific was the largest elastic-fabrics provider for lingerie globally by revenue, with a 5.3% market share, while its market share for elastic webbing was 3.9%, topped only by the Sri Lanka-based Stretchline, with 5.1% market share. Market sizes of elastic fabric, webbing and lace globally (USDbn)

Source: Frost & Sullivan

Best Pacific’s 5 largest customers accounted for 31% of its total revenue in 2013; specifically, its largest customer, L Brands, accounted for 14%. The other 4 customers each made up roughly 4% of revenue, which in our opinion makes the company’s revenue base very diversified. Interestingly, only one-third of its 2013 revenue was derived from the domestic China brands, while the international brands made up the rest. This leaves good leeway for revenue growth in China, in our view.

Best Pacific and other global lingerie materials makers: market share rankings (2012) Rank Overall lingerie materials Market share Rank Elastic fabrics Market share Rank Elastic webbing Market share Rank Lace Market share

1 Best Pacific 2.3% 1 Best Pacific 5.3% 1 Stretchline 5.1% 1 Tianhai Lace 4.4%2 Sun Hing 2.2% 2 Pacific Textile 4.9% 2 Best Pacific 3.9% 2 Noyon 3.6%3 Regina Miracle 1.9% 3 Sun Hing 2.9% 3 Pioneer Elastic 3.3% 3 Brunet 3.2%4 Pacific Textile 1.4% 4 Ruey Tay 1.9% 4 Weixin Textile 2.3% 4 Sakae 2.6%5 Stretchline 1.2% 5 Guangdong Charming 1.9% 5 Sun Hing 1.8% 5 Sun Hing 1.7%

Source: Frost & Sullivan

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Lace business should be one of the key near-term revenue drivers Frost & Sullivan forecasts the global lingerie lace market to register revenue CAGR of above 7% over 2013-16, slightly higher than the 6% revenue CAGR it projects for each of the elastic fabric and webbing markets. This is driven by an increasing preference among many consumers for lingerie with new and differentiated designs and patterns, which are mostly decorated with lace. Best Pacific: revenue contribution by product (HKDbn)

Source: Company, Daiwa forecasts

Best Pacific’s lace business is still in its infancy. The company entered the lace business in 2H12, so its lace business generated revenue of only HKD20m in 2013 and HKD34m in the 12 months leading to 30 June 2014 (2H13 and 1H14 combined), accounting for 2% of its total revenue. We believe the company’s lace business has significant revenue potential, given that lace represents about 16% of annual revenue of the global lingerie materials market. Still, we expect Best Pacific’s lace business to ramp up at a slower pace than its elastic fabric and elastic webbing businesses have done. This is due to the fact that lace is mostly used for high-end lingerie brands, which usually require a longer lead time and production track record on the part of the manufacturer before customers will commit large orders to the manufacturer. Hence, we expect Best Pacific to see greater annual volatility in its orders for lace than in its orders for its elastic fabrics and webbing. For instance, as of the end of 1H14, Best Pacific had yet to win any lace orders from Victoria’s Secret, its largest client, despite having supplied elastic fabrics and webbing to Victoria’s Secret for over 5 years. But the fact that Victoria’s Secret is one of the world’s largest consumers of lace for lingerie presents good upside potential for Best Pacific’s lace business if it can secure

lace orders from Victoria’s Secret. Up to now, all of Best Pacific’s lace customers have been the China brands, with the largest being Maniform, a brand launched in 1996. Since 2012, Best Pacific’s management has been working on cross-selling the company’s new lace products to the Victoria’s Secret brand, and has expressed confidence that the company should receive its first order for lace from Victoria’s Secret in 2015. Best pacific: inside its lace showroom

Source: Daiwa

We forecast Best Pacific’s lace revenue to rise sharply to HKD74m for 2014 (up from HKD20m in 2013), HKD141m for 2015 and reach HKD226m for 2016. Sportswear industry offers a significant expansion opportunity While we believe the lingerie industry alone still offers good business growth potential for Best Pacific, we also believe another market offers a significant business and revenue growth opportunity for the company: the sportswear market. Given the similarities in the specifications of elastic fabrics and elastic webbing used in both lingerie and sportswear, we believe Best Pacific can easily tap into the global sportswear industry, which is much larger than the global lingerie industry. According to Euromonitor International, the global sportswear market exceeded USD244bn by revenue in 2012, pointing to a market size that is over 3.7x larger than the global lingerie market. In addition, the US sportswear category for the apparel market appears to be growing fast – Euromonitor International notes that this category registered a revenue CAGR of 14% over 2007-13, while the rest of the US apparel market saw a revenue CAGR of just 2.7% over the same period.

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While Best Pacific has yet to make an aggressive push into the sportswear industry, it has already won a few high-profile sportswear brands as customers, which we think is very encouraging for its prospects in this industry. In 2012, the company signed Under Armour, now the second-largest sportswear brand in the US by sales, and in 2013 it obtained as a customer Lululemon Atheltica, one of the world’s largest athletic clothing manufacturers. Best Pacific is also a key fabric supplier for Victoria’s Secret’s 2 sports sub-brands, VSX and Pink, yet another demonstration of the company’s solid relationship with Victoria Secret’s parent company L Brands. We would like to point out that the revenue from VSX and Pink is not included in the 14% revenue share attributable to L Brands in 2013. Women’s active wear should be the next big thing We believe Best Pacific’s expertise in elastic fabrics and webbing is most suitable for female sportswear or active wear products, such as sports bras, yoga outfits and running apparel. Conveniently, this coincides with what we believe will be the driving force for the global sportswear market in the next 2-3 years. Through our research carried out with some of the largest global sportswear manufacturers, which we summarise here, we have found strong evidence to suggest that the women’s sportswear market will be the fastest revenue growth area of the global sportswear industry over the coming years:

• At a recent event to unveil Nike’s 2015 spring/summer women’s collection, Nike CEO Mark Parker announced that the company aims to grow its women’s sportswear sales by around 40%, from about USD5bn currently to USD7bn by FY17. Management said winning Nike orders is not a near-term priority as its margins are slim. However, we do not rule out future cooperation, given Nike’s huge volume sales.

• Our discussion with adidas suggests that this company could unveil a renewed focus on its women’s business, after its current 5-year strategic business plan (known as Route 2015) comes to an end in 2015. Also, the company commented that generally, consumers outside the US, in countries such as China, have long treated its brand as more of a lifestyle brand than a sportswear brand, and are more open to wearing its products outside athletic activities.

• Under Armour CEO Kevin Plank announced in late 2013 that the company is targeting USD1bn in sales from its women’s business by 2016. Only one-

third of the company’s total revenue comes from its women’s business currently. Plank also commented during the company’s analysts conference call for its 3Q13 results that the company’s women’s business has the potential to become larger than its men’s in terms of sales.

• “Athleisure” (where sportswear are worn outside of sports or workouts) trend is thriving. US company Foot Locker’s CEO, Ken Hicks, has acknowledged that women’s active wear sales was a key factor in driving the retailer’s recent sales growth. On the flip side, this has caused sales of jeans to weaken recently as seen from VF Corp (Not rated).

• Gap and Urban Outfitters, both historically casual wear brands, are now penetrating the women’s active wear category with new collections. Since 2009, Gap has had a dedicated women’s active wear brand known as Athleta, mainly to capture market share from Under Armour.

• In October 2014, Topshop of the UK announced that it will be launching an active wear label in a joint venture with Beyoncé Knowles. The company plans to launch its collection in autumn 2015.

Best Pacific’s management has stated the Best Pacific has recently become more proactive in pursuing the sportswear market. Given Best Pacific’s strong R&D capabilities and its extensive experience of producing high-quality elastic fabric and webbing for international lingerie brands, we believe the company will easily be able to acquire new global sports brands as customers in the coming years. In fact, we believe the willingness of some sports brands to work with Best Pacific is evident in the company’s business relationship with Under Armour. Best Pacific was selected as a supplier of cutting-edge materials for Under Armour’s new SpeedForm running shoes (the same materials that Best Pacific has developed for bras are now also being used in running shoes). To draw a parallel, we would compare Under Armour’s SpeedForm to Nike’s Flyknit footwear product, both of which are considered by the market as potential game changers in the footwear industry and as being highly innovative. The fact that Best Pacific beat other much larger and more experienced shoe makers like Yue Yuen to supply the SpeedForm running shoes is a testament to the company’s technological know-how, in our view. While SpeedForm was launched in mid-2013, Best Pacific was still the only supplier of SpeedForm to Under Armour at end-June 2014.

Consumer Discretionary / China 2111 HK

27 November 2014

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Best Pacific’s revenue from sportswear materials grew by a strong 39% YoY in 1H14, though it still contributed less than 5% to the company’s total revenue. Our revenue forecasts for the company’s elastic fabric business of 10% YoY for 2014, 23% for 2015 and 25% for 2016 only take into account modest growth in its elastic fabric revenue derived from the sportswear market. Hence, if Best Pacific can capture the new growth wave in women’s active wear, this could represent a significant upside potential to our revenue and earnings forecasts. Victoria’s Secret’s bullish outlook bodes well for Best Pacific Best Pacific’s relationship with L Brands (the parent company of Victoria’s Secret and La Senza) brings mutual benefits: L Brands contributed about 14% to Best Pacific’s revenue in 2014, while according to Best Pacific it supplies approximately 40-50% of the fabrics used for the Victoria’s Secret brand. While Best Pacific sells its materials to L Brands mostly indirectly (ie, through designated OEMs), it is important to note that the company’s relationship with L Brands (and Victoria’s Secret) is ultimately a direct one. Best Pacific negotiates all of its deals and co-operations with L Brand itself. We believe this is a crucial distinction as brand owners are typically more loyal and less price-sensitive to their key suppliers than OEMs are. L Brands: revenue growth

Source: L Brands, Bloomberg consensus forecasts

We believe the recent success and positive outlook among the Bloomberg consensus for Victoria’s Secret’s business bodes well for Best Pacific. L Brands’ revenue has seen a 7% CAGR for 2010-13, and its operating profit has seen an 11% CAGR. At a briefing with investors in November 2014, L Brands’ management expressed continued optimism of the company’s outlook, guiding for low single-digit SSS growth for 2014. The company also has aggressive plans to boost its international presence, guiding increases in its

international (ie, outside US) store count of 56% for 2014 and a further 44% for 2015. Given Best Pacific’s close relationship with L Brands, we expect Best Pacific to be able to ride on L Brand’s business growth momentum and thus continue to increase its sales with L Brand in the coming years.

Gross margin should hit trough for 2014 and trend up from 2015

Elastic fabric and webbing gross margins likely to contract slightly but stay high For a pure-play fabric producer, Best Pacific has a high overall gross margin that has consistently been above 30% since 2011. We believe its elevated gross margin stands out even more compared with that of its closest peer, Pacific Textiles, whose gross margin has averaged 17-18% p.a. since 2010. While a major reason for Best Pacific’s higher gross margin is the company’s niche industry focus and quality-oriented production, our industry research suggests that the company prices its products about 20% higher than those of its Asian competitors. Best Pacific: annual gross profit margin trend

Source: Company, Daiwa forecasts

While Best Pacific’s overall gross margin was still very strong at 31.4% for 2013, its core elastic fabrics and elastic webbing gross margins contracted by 1pp and 0.3pp YoY, respectively, to 28.4% and 37.7%. We believe this was a result of an increase in depreciation expenses due to the use of additional machinery, as well as an increase in direct labour costs. Though Best Pacific is able to price its elastic fabric and webbing products at a premium to those of its China and ASEAN competitors due to the company’s consistently higher product quality, we believe the company will be unlikely to retain this advantage beyond our forecast horizon. We expect competition to gradually increase from within China and other ASEAN

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Elastic Fabrics GPM Elastic Webbing GPM

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Consumer Discretionary / China 2111 HK

27 November 2014

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countries, which would likely limit the scope for ASP improvements for its elastic fabrics and webbing materials. In addition, rising raw material costs (the cost of colour dyes has doubled between 2013 and 2014, albeit these represent only 10-15% of Best Pacific’s total raw-material costs), and labour cost inflation will likely put pressure on gross margins going forward. That said, we expect the gross margin on elastic fabrics and webbing to see a slight improvements for 2015 and 2016, driven by higher capacity utilisation. We expect Best Pacific’s overall gross margin to contract on a YoY basis only for 2014 then improve from 2015. We expect its lace business to be the primary driver of gross margin expansion for 2015-16, given much higher gross margins for its lace business compared with its elastic fabric and webbing businesses. According to Frost & Sullivan, lace products for the global lingerie market typically have gross margins of 40-60%, compared with 28-38% for elastic fabric and webbing. Best Pacific’s gross margin for its lace business reached 42.6% in 1H14, and management has expressed confidence that its lace business can achieve the upper end of the industry range noted above by Frost & Sullivan, once its lace production is ramped up fully. Best Pacific: segmental gross profit contributions

Source: Company, Daiwa forecasts

We forecast Best Pacific’s overall gross margin to reach a trough level of 31.2% in 2014 (albeit down only slightly from 31.4% for 2013). As the company ramps up its lace production, we believe the high gross margin of this business will be able to more than offset gross margin declines we expect for its elastic fabrics and webbing businesses, thereby leading to overall gross margin expansion to 31.9% for 2015E and 32.6% for 2016E. We forecast its lace business to contribute 14% to its total gross profit by 2016.

Aggressive capacity expansion

All of Best Pacific’s production facilities are located in Dongguan city, in Guangdong Province in China. The company’s production facilities are spread across 2 campuses; the main campus is located in Machong Town, where the R&D centre is housed and where most of the elastic fabric production takes place. The other campus is in Houjie Town and is primarily for the production of elastic webbing and lace. Best Pacific owns 8 production facilities, the eighth of which was completed in 1H14 and is now being outfitted with new machines. We expect Best Pacific to increase its production capacity aggressively going forward, since about 70% of the HKD500m of proceeds raised from the company’s IPO (23 May 2014) is earmarked for capacity expansion. Despite having only recently completed the construction of its eighth production facility, the company is already planning to add a ninth production facility that it expects to increase the aggregate gross floor area owned by the company by about 16%. Management expects total capex for the facility to be around HKD100m. Additionally, based on management’s guidance and the 1H14 run rate of its machine installations, we forecast an 18% YoY increase in the company’s total machine count (elastic fabric, elastic webbing and lace) for each of 2014 and 2015. We expect another 4% increase in the total machine count in 2016, bringing the total number to 1,520 by end-2016. Best Pacific: number of machines by business

Source: Company, Daiwa forecasts

Since the majority of the machines used by Best Pacific are state-of-the-art ones and are imported from Europe (Karl Mayer machines for elastic fabric and lace, Miller machines for lace), we expect machinery purchases to continue to take up the bulk of the Best Pacific’s capex budget. We forecast total capex for the company of HKD126m for 2014, HKD219m for 2015 and HKD91m for 2016.

69% 61% 58% 56% 55% 53% 53%

31%40% 41% 39% 36% 35% 33%

-1%

1% 6% 9% 12% 14%

(20%)

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773 775 801921

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Consumer Discretionary / China 2111 HK

27 November 2014

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Financials

Substantial earnings growth through to 2016E We forecast Best Pacific to see total YoY revenue growth of 13.2% for 2014, 22.8% for 2015, and 26.3% for 2016, driven primarily by our expectations of new capacity growth, market-share gains and expansion in the customer base. While we expect its lace revenue to grow more than 11-fold to HKD226m in 2016, from HKD20m in 2013, we note that the ASP of lace is typically volatile compared with the ASPs of elastic fabric and webbing. Hence, we see the lace ASP as a swing factor for our top-line forecasts. However, we believe Best Pacific will derive the majority of its revenue from elastic fabrics and webbing in the near term. By 2016, we forecast lace to contribute only 7.7% of the company’s total revenue, as we assume strong growth in its revenue from elastic fabrics over the same time frame. We forecast its net profit growth to continue to outpace its revenue growth for 2014-16, as we assume a rebound in its operating margin at the same time given the lack of listing expenses and costs associated with the ramp-up of the high-margin lace business. Moreover, we expect a substantial decline in pre-IPO option amortisation expenses after 2015, which should boost its operating margin in 2016. In sum, we forecast net profit growth of around 40% YoY for 2015 and 2016. Best Pacific: revenue and net profit growth

Source: Company, Daiwa forecasts

In 2013, 60% of Best Pacific’s cost of sales was attributable to raw materials, 28% to manufacturing overhead, and 11% to direct labour costs. Direct labour and manufacturing overhead as a proportion of the cost of sales increased in 2012 and 2013, and we expect this trend to continue through 2016. On our estimates, around 70% of the raw materials that Best Pacific uses are nylon and spandex, and the

company procures most of these materials from Korea-based Hyosung (004800 KS, not rated), Japan-based Asahi Kasei (3407 JP, JPY1,012, Outperform [2]) and Japan-based Toray Industries (3402 JP, JPY919.5, Outperform [2]). Management noted the costs of both fibres have been relatively stable in recent years. But, if prices were to fluctuate, we would not expect such swings to have a big impact on the company’s gross margin, as ASPs are generally set via a cost-plus model. Given the company’s high-quality fabric and long standing customer relationships, we believe it would be able to pass on most cost increases to its customers. Best Pacific: change in cost structure

Source: Company, Daiwa forecasts

In terms of the company’s capital structure, management intends to maintain a gross gearing ratio of 40-60% over our forecast horizon. In reality, we believe the company would maintain a gross gearing ratio closer to the lower end of this range. We believe the company’s FCF yield for 2014-16 should be healthy, at 5-11%. Moreover, we expect the company to remain in a net cash position over the course of 2014-16E. Best Pacific: gross and net gearing ratios

Source: Company, Daiwa forecasts

Over the past 3 years, Best Pacific’s cash conversion cycle has stood at around 90-100 days. We believe the company has worked to better align its receivable terms with its payable terms, as well as managed its

(10%)

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2012 2013 2014E 2015E 2016E

Total revenue growth rate Net profit growth rate

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Consumer Discretionary / China 2111 HK

27 November 2014

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inventory levels well. As a result, we forecast it to have a cash conversion cycle of 92-95 days for 2014-16. Best Pacific: working-capital turnover days

Source: Company, Daiwa forecasts

As for profitability, we forecast Best Pacific’s ROE to fall to 22.8% for 2014, from 29.8% in 2013, following new capital raised from its IPO earlier this year. However, we look for its ROE to trend upward from and reach 25.4% by end-2016, in tandem with earnings growth. Best Pacific: ROE

Source: Company, Daiwa forecasts

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Consumer Discretionary / China 2111 HK

27 November 2014

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Valuation and risks

Based on a PER multiple of 13x applied to our 2015 EPS forecast, we have a 6-month target price for Best Pacific of HKD4.60. Our target multiple marks a circa-10% discount to the average 2015E PER multiple of Best Pacific’s large regional textile peers, such as Pacific Textiles, Texwinca, Shenzhou International and Eclat. While we like the company’s fundamentals and its business outlook, we believe Best Pacific merits a PER discount to its peers for the following reasons:

1) It has a smaller market cap and trading in its shares is less liquid.

2) It has a shorter track record as a public company.

3) It has a lower 2014E dividend yield of 2% (compared with 6-7% for Pacific Textiles and Texwinca, at their current share prices and based on our DPS forecasts) and payout ratio.

Also, our target PER of 13x is in line with the 2015E PER multiple of another major pure-play fabric

manufacturer, Pacific Textiles, which we believe is Best Pacific’s closest competitor. In addition to being based in Guangdong, Pacific Textile’s production is heavily oriented towards synthetic/elastic fabrics, similar to Best Pacific, and has a number of overlapping customers such as Victoria’s Secret and Under Armour. However, we expect Best Pacific to experience a much stronger net income growth of 32% CAGR for 2013-16E, versus Pacific Textiles with 7% CAGR over roughly the same period. Although Best Pacific’s share price is up almost 75% since the company’s IPO in May 2014, the stock is trading at an undemanding-looking 10.5x PER multiple for 2015, which translates to a PEG ratio of only 0.3x. In our opinion, one major reason for Best Pacific’s comparatively modest valuation multiples is its short track record as a public company. If, as we expect it to, Best Pacific reports solid full-year results for 2014 (due in March 2015), the shares are likely to be rerated, in our view, which would prompt us to revisit our own valuation metrics.

Consumer Discretionary / China 2111 HK

27 November 2014

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Best Pacific: industry peers Gross Operating Net

Market cap PER (x) EV/EBITDA (x) Div yield (%) ROE (%) margin (%) margin (%) margin (%) Company Ticker Last price (USDm) 2014E 2015E 2014E 2015E 2014E 2014E LTM* LTM LTMFABRIC PRODUCERS 1 PACIFIC TEXTILE* 1382 HK 10.5 1,966 14.1 12.8 9.6 8.4 7 27 17 15 142 TEXWINCA HLDG* 321 HK 7.1 1,267 11.3 9.2 6.2 4.9 8 14 33 6 7 Average: 12.7 11.0 7.9 6.6 8 20 25 10 11 Median: 12.7 11.0 7.9 6.6 8 20 25 10 11 GARMENT PRODUCERS 1 SHENZHOU INTL GP* 2313 HK 26.3 4,745 15.0 13.2 9.1 7.8 3 18 28 21 182 TEXWINCA HLDG* 321 HK 7.1 1,267 11.3 9.2 6.2 4.9 8 14 33 6 73 ECLAT TEXTILE CO 1476 TT 310.5 2,623 26.9 21.5 20.4 15.8 2 35 26 17 144 MAKALOT* 1477 TT 156.5 967 17.0 15.0 10.8 9.1 5 25 22 10 85 YOUNGONE CORP 111770 KS 54,500.0 2,187 19.0 15.6 10.6 9.0 0 14 26 14 106 HANSAE CO LTD 105630 KS 35,550.0 1,288 20.5 17.2 16.0 13.3 0 23 19 6 5

Average: 18.3 15.3 12.2 10.0 3 22 26 12 10 Median: 18.0 15.3 10.7 9.0 3 20 26 12 9

SPORTS WEAR MANUFACTURERS & RETAILERS 1 LI NING CO LTD 2331 HK 4.0 730 N/A 84.2 N/A 11.0 0 -25 45 -9 -132 ANTA SPORTS PROD 2020 HK 15.9 5,126 19.4 16.1 12.4 10.4 4 21 44 21 193 CHINA DONGXIANG 3818 HK 1.5 1,078 29.2 25.5 14.0 10.5 2 3 47 -13 164 NIKE INC -CL B NKE US 97.8 84,256 27.2 23.7 16.8 14.9 1 28 45 13 105 UNDER ARMOUR-A UA US 71.5 15,275 75.7 59.5 36.2 28.7 0 17 49 11 66 XTEP INTERNATION 1368 HK 3.4 958 10.2 9.5 5.0 4.6 5 12 40 18 137 LULULEMON ATH LULU US 48.3 6,930 27.3 23.9 14.9 13.1 0 21 52 23 158 361 DEGREES 1361 HK 2.4 637 10.8 9.9 2.3 2.1 3 7 40 10 79 PEAK SPORT 1968 HK 2.3 612 12.2 10.2 3.1 2.6 5 7 37 14 10

Average: 26.5 29.2 13.1 10.9 2 10 45 10 9 Median: 23.3 23.7 13.2 10.5 2 12 45 13 10

LINGERIE BRAND OWNERS 1 L BRANDS INC LB US 80.2 23,438 24.0 21.3 11.8 10.9 2 -453 41 17 92 HANESBRANDS INC HBI US 113.6 11,345 20.1 17.6 15.6 13.8 1 34 35 10 73 WACOAL HOLDINGS 3591 JP 1,214.0 1,479 16.8 16.3 9.1 8.5 2 5 53 7 54 COSMO LADY CHINA 2298 HK 4.8 1,178 16.5 13.3 10.7 7.9 2 31 37 13 95 VAN DE VELDE NV VAN BB 37.9 631 15.0 14.8 10.3 8.8 6 15 N/A 22 9

Average: 18.5 16.7 11.5 10.0 3 -74 42 13 8 Median: 16.8 16.3 10.7 8.8 2 15 39 13 9

Best Pacific Int'l 2111 HK 3.8 480 15.2 10.7 9.1 6.6 2 22 31 19 13

Source: Bloomberg, *Daiwa forecasts

LTM = last 12 months (2H13 plus 1H14)

Risks to our call Major risk: slower-than-expected ramp-up of the lace business. Lace is a relatively new business for the company and it has yet to establish a track record in this field. Moreover, ASPs and order flow for lace tend to be more volatile than for elastic fabrics and webbing, as demand for lace is more dependent on trends in fashion and design.

Secondary risk: rising competition. Best Pacific faces competition from textile companies in China and across Southeast Asia. While many players are moving production facilities to low-cost countries such as Vietnam and Cambodia in order to mitigate labour-cost inflation, Best Pacific has made clear it is not seeking to broaden its production base to Southeast Asia in the near term, and hence may face greater price competition in the future.

Consumer Discretionary / China 2111 HK

27 November 2014

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Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 hiroaki.kato@hk.daiwacm.com Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

kosuke.mizuno@hk.daiwacm.com

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 rohan.dalziell@hk.daiwacm.com Regional Head of Product Management

Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 christie.chien@hk.daiwacm.com Macro Economics (Regional)

Junjie TANG (852) 2773 8736 junjie.tang@hk.daiwacm.com Macro Economics (China)

Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com Head of Hong Kong and China Property

Leon QI (852) 2532 4381 leon.qi@hk.daiwacm.com Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 anson.chan@hk.daiwacm.com Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 jamie.soo@hk.daiwacm.com Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 lynn.cheng@hk.daiwacm.com IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 dennis.ip@hk.daiwacm.com Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Joey CHEN (852) 2848 4483 joey.chen@hk.daiwacm.com Steel (China)

Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 brian.lam@hk.daiwacm.com Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Carrie YEUNG (852) 2773 8243 carrie.yeung@hk.daiwacm.com Transportation – Transportation Infrastructure (Hong Kong/China)

Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com Head of Custom Products Group

Thomas HO (852) 2773 8716 thomas.ho@hk.daiwacm.com Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 bianca.solema@dbpdaiwacm.com.ph Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 junyong.bang@kr.daiwacm.com Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 rick.hsu@daiwacm-cathay.com.tw Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 steven.tseng@daiwacm-cathay.com.tw IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 saurabh.mehta@in.daiwacm.com Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 royston.tan@sg.daiwacm.com Oil and Gas (ASEAN/China); Capital Goods (Singapore)

David LUM (65) 6329 2102 david.lum@sg.daiwacm.com Property and REITs

Evon TAN (65) 6499 6546 evon.tan@sg.daiwacm.com Property and REITs

Jame OSMAN (65) 6321 3092 jame.osman@sg.daiwacm.com Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

Consumer Discretionary / China 2111 HK

27 November 2014

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Daiwa’s Offices

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Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 301/302，Kerry Center， 1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

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(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any

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direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

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• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association