regional morning notes wednesday, 15 october...

Wednesday , 15 Oc tober 2014

1 Refer to last page for important disclosures.

R e g i o n a l M o r n i n g N o t e s

PLEASE CLICK ON THE PAGE NUMBER TO MOVE TO THE RELEVANT PAGE.

KEY STORY

CHINA Sector Financial Page 2 Time to revisit key beneficiaries of financial reform.

INDONESIA Initiate Coverage Mitrabahtera Segara Sejati (MBSS IJ/BUY/Rp1,225/Target: Rp1,590) 0 Initiate coverage with a BUY and target price of Rp1,590.

CHINA Sector Financial Page 2 Time to revisit key beneficiaries of financial reform.

Update Tingyi (322 HK/HOLD/HK$18.96/Target: HK$20.00) Page 4 Parent Ting Hsin’s involvement in Taiwan’s tainted oil incident to have short-term negative impact. Downgrade to HOLD.

Xingda International Holdings (1899 HK/HOLD/HK$2.58/Target: HK$3.00) Page 7 Key takeaways from Asian Gems Conference: Industry consolidation on the way; healthy balance sheet and strong cash flow.

INDONESIA Initiate Coverage Mitrabahtera Segara Sejati (MBSS IJ/BUY/Rp1,225/Target: Rp1,590) Page 10 Initiate coverage with a BUY and target price of Rp1,590.

MALAYSIA Results Top Glove (TOPG MK/HOLD/RM4.81/Target: RM5.08) Page 13 4QFY14: Despite weakening latex prices, EBIT margins contract 1.4ppt qoq as the group has yet to fully pass on the recent gas price hike.

SINGAPORE Strategy Assessing Trough Valuations Page 16 We review previous trough valuations to assess where potential opportunities lie and to avoid stocks that may look expensive. Opportunity knocks for selected developers and oil services companies. Stocks we are staying clear of for now include IHH and Tigerair.

Update Singapore Post (SPOST SP/HOLD/S$1.815/Target: S$1.73) Page 18 Stay logged in. Key takeaways from site visit and Asian Gems Conference.

THAILAND Results TMB Bank (TMB TB/HOLD/Bt2.98/Target: Bt2.96) Page 21 3Q14: Net profit up 28% yoy, 27% above our expectations, on lower-than-expected provisions.

Update The Erawan Group (ERW TB/BUY/Bt4.74/Target: Bt5.84) Page 24 Key takeaways from Asian Gems Conference.

KEY INDICES Prev Close 1D % 1W % 1M % YTD % DJIA 16315.2 (0.0) (2.4) (4.0) (1.6) S&P 500 1877.7 0.2 (3.0) (5.4) 1.6 FTSE 100 6392.7 0.4 (1.6) (6.1) (5.3) AS30 5204.0 1.0 (1.7) (5.0) (2.8) CSI 300 2446.6 (0.3) (0.2) 0.4 5.0 FSSTI 3194.4 (0.2) (1.5) (3.6) 0.9 HSCEI 10254.8 (0.3) (2.0) (5.4) (5.2) HSI 23048.0 (0.4) (1.6) (5.4) (1.1) JCI 4922.6 0.2 (2.2) (4.3) 15.2 KLCI 1796.4 (0.0) (2.0) (2.8) (3.8) KOSPI 1929.3 0.1 (2.0) (5.2) (4.1) Nikkei 225 14936.5 (2.4) (6.0) (6.3) (8.3) SET 1546.8 0.3 0.5 (2.0) 19.1 TWSE 8768.4 0.7 (3.6) (4.9) 1.8 BDI 948 (0.6) (6.6) (19.7) (58.4) CPO (RM/mt) 2183 (0.1) 0.3 4.6 (15.2) Nymex Crude (US$/bbl)

82 0.7 (5.6) (11.3) (16.3)

Source: Bloomberg

TOP PICKS Ticker CP (lcy) TP (lcy) Pot. +/-

( )BUY Sunac China 1918 HK 6.38 8.45 32.4 ICBC 1398 HK 4.89 6.15 25.8 Bank Mandiri BMRI IJ 9,450.00 12,500.00 32.3 Gamuda GAM MK 4.80 5.50 14.6 DBS DBS SP 17.96 22.68 26.3 Pacific Radiance PACRA SP 1.14 1.76 55.1 Bangkok Bank BBL TB 197.00 276.00 40.1 Advanced Info ADVANC 226.00 270.00 19.5

SELL UMWH Holdings UMWH MK 11.64 10.00 (14.1)

KEY ASSUMPTIONS GDP (% yoy) 2013 2014 2015F US 1.9 3.0 3.0 Euro Zone -0.4 1.0 1.4 Japan 1.5 2.1 2.0 Singapore 3.9 3.2 4.2 Malaysia 4.7 5.6 5.2 Thailand 2.9 1.5 5.1 Indonesia 5.8 5.5 6.0 Hong Kong 2.9 3.5 3.7 China 7.7 7.2 7.0 2013 2014F 2015F Brent (US$/bbl) 110 105 105 Aluminium (US$/mt) 1,886 1,713 1,650 Copper (US$/mt) 7,349 6,866 6,850 Gold (US$/ounce) 1,411 1,321 1,400 Iron Ore (US$/mt) 135 103 95 CPO (US$/mt) 736 788 848 BDI 1,219 1,500 1,800 Source: Bloomberg, UOB ETR, UOB Kay Hian

CORPORATE EVENTS Venue Begin Close

"Tea Tasting" Session with Chatime Petaling Jaya 17 Oct 17 Oct

TICON Industrial Connection Kuala Lumpur 17 Oct 17 Oct Corporate Roadshow

ASEAN Plantation Sector Taipei 20 Oct 21 Oct Analyst Presentation

股票报告网整理http://www.nxny.com




SECTOR UPDATE

Financial – China Time To Revisit Key Beneficiaries Of Financial Reform Despite the uncertainty over the scale of monetary loosening in the near term, we believe the government will shift its priority to reform after spending much of 2014 focusing on growth, as evidenced by recent local media reports and speeches of China-based economists. We reiterate OVERWEIGHT on brokers as they will be the key beneficiaries of the reform. Maintain MARKET WEIGHT on insurers and banks. Top picks are CGS, CITICS, Ping An and ICBC.

• Speed-up of financial reform. According to recent media reports, the government is likely to accept slightly lower GDP growth. We believe regulators will shift their priority from growth to reform in 4Q14. Premier Li also reiterated the importance of financial reform in recent meetings and during his visit to the Shanghai Free Trade Zone. We expect financial reform to speed up again and now is a good time to revisit the key beneficiaries.

• More concrete policies likely in the near term. We expect the government to continue supporting direct financing, asset securitisation and social capital. We expect more concrete policies, such as implementing a registration-based system for equity and asset-backed securities (ABS) issuance and lowering the capital requirements for brokers. The start of the Shanghai-Hong Kong Stock Connect Programme is a near-term catalyst. Note that both the number of new brokerage accounts and average trading turnover (ADT) peaked in Aug 14.

• Brokers the key beneficiaries. In our view, brokers remain the key beneficiaries due to: a) higher ADT for A-shares, b) increase in equity and ABS issuance, and c) potentially lower capital requirements. We maintain OVERWEIGHT on the securities sector and maintain MARKET WEIGHT on both the insurance and banking sectors. Top picks are China Galaxy Securities (CGS), CITIC Securities (CITICS), Ping An Insurance (Ping An) and ICBC.

For details, please refer to our Blue Top report, “Time To Revisit Key Beneficiaries Of Financial Reform” dated 14 Oct 14.

SECTOR WEIGHTING Sector Weighting Securities OVERWEIGHT Maintained Insurance MARKET WEIGHT Maintained Banking MARKET WEIGHT Maintained

Source: UOB Kay Hian

TOP SECTOR PICKS

Company Rec Target Share Price Price (HK$) (HK$) CGS BUY 7.00 5.51 CITICS BUY 21.00 17.82 ICBC BUY 6.15 4.89 Ping An BUY 82.00 58.35


ANALYSTS Edmond Law +852 2826 4837 [email protected] Terrance Liu +852 2826 1351 [email protected]

VALUATION Price Target Market ---------PE--------- ---------P/B--------- --------ROE------- --------ROA-------- --------Yield-------- Company Ticker Rec. 14 Oct 14 Price Cap 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F (HK$) (HK$) (US$m) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%)

China Banks ICBC 1398 HK BUY 4.89 6.15 205,122 5.0 4.8 0.9 0.8 19.8 18.2 1.4 1.3 6.0 6.3 CCB 939 HK BUY 5.49 6.65 176,506 4.8 4.5 0.9 0.8 19.9 18.2 1.4 1.4 6.2 6.6 ABC 1288 HK HOLD 3.44 3.95 131,739 4.9 4.5 0.9 0.8 20.2 19.0 1.2 1.2 6.1 6.6 BOC 3988 HK HOLD 3.50 4.00 122,815 4.7 4.4 0.8 0.7 15.6 14.9 1.0 1.0 6.4 6.8 BoCom 3328 HK SELL 5.43 5.35 51,488 5.6 5.9 0.8 0.7 13.7 13.2 1.0 0.9 5.4 5.1 CMB 3968 HK BUY 13.32 18.20 42,777 4.8 4.4 0.9 0.8 18.5 16.8 1.2 1.2 6.3 6.7 Minsheng 1988 HK HOLD 7.22 8.20 34,114 4.0 4.3 0.8 0.7 19.3 17.0 1.2 1.2 3.5 3.6 China Brokers CITICS 6030 HK BUY 17.82 21.00 23,560 21.9 20.4 1.7 1.6 7.8 7.9 2.3 2.1 1.4 1.5 HTS 6837 HK HOLD 12.00 12.85 15,576 18.4 16.0 1.4 1.3 7.8 8.3 2.6 2.6 1.4 1.6 CGS 6881 HK BUY 5.51 7.00 5,354 12.5 10.9 1.2 1.1 10.0 10.5 3.0 2.8 1.6 1.8 China Insurers China Life 2628 HK HOLD 21.45 24.00 72,254 15.9 13.7 1.9 1.7 12.7 13.2 1.4 1.5 2.6 2.9 Ping An 2318 HK BUY 58.35 82.00 55,388 10.8 9.2 1.6 1.4 16.7 16.3 0.9 0.9 1.6 1.9 CPIC 2601 HK HOLD 27.30 33.00 29,136 16.9 14.4 1.7 1.6 10.9 11.5 1.5 1.5 2.4 2.8 PICC 2328 HK SELL 14.04 11.15 24,622 11.9 10.9 2.0 1.9 18.9 17.6 3.6 3.5 2.7 3.0 Source: Bloomberg, UOB Kay Hian





NEAR-TERM REFORM MEASURES ------------------------------------------------- Impact --------------------------------------------------- Reform measures Description Banks Insurers Brokers

Asset securitisation Promoting issuance of ABS and MBS to ease banks’ pressure and utilise social capital

Positive Neutral Positive

Reviving the equity market and developing the bond market

a) Relaunch of IPO and potential implementation of registration-based IPO system, b) SHSC, c) further development of bond market

Slightly Negative Positive Positive

SOE reform Promoting mixed ownership by inviting private companies to invest in state-owned companies

Neutral Neutral Neutral

Privately-owned banks Encouraging private companies to set up privately-owned banks that target the MSE segment

Slightly Negative Neutral Neutral

New Guideline for the insurance industry

Potential implementation of tax deferral pension insurance; insurers are encouraged to play a bigger role in the development of society, such as investing in infrastructural projects

Slightly Positive Neutral Neutral

Source: Media reports, UOB Kay Hian

RECOMMENDATIONS Sector Weighting Justification for weighting Catalysts Top sector picks

Brokers OVERWEIGHT • Financial reform likely to speed up post Premier Li’s recent speech on reform and tolerance of lower GDP growth

• Long-term goal to increase proportion of direct financing positive to brokers

• SHSC likely to boost A-share sentiments

• Implementation of registration-based system for IPO and ABS

• Start of SHSC • Easing regulatory policies such as

net capital requirements

• CITIC Securities (6030 HK) • China Galaxy Securities (6881 HK)

Insurers MARKET WEIGHT • More supportive policies likely after publication of New Guideline by State Council

• Increase in GDP per capita likely to boost insurance demand

• Potential increase in investment risk as insurers may increase exposure to infrastructural projects

• Confirmation of tax deferral pension insurance

• Improving A-share sentiments

• Ping An Insurance (2318 HK)

Banks MARKET WEIGHT • Undemanding valuations as the sector continues to trade at 0.8x 2015F P/B and 2015 dividend yield of 6.3%

• Near-term earnings pressure from surging NPLs • Full interest rate liberalisation likely to be

implemented in next two years and further drag banks’ earnings

• More targeted loosening by the government

• PBOC continues to maintain lower costs of funding in inter-bank market

• ICBC (1398 HK)






COMPANY UPDATE HOLD (Downgraded) Share Price HK$18.96 Target Price HK$20.00 Upside +5.5% (Previous TP HK$27.00)

COMPANY DESCRIPTION Headquartered in Tianjin, Tingyi is the largest noodle and beverage maker in China

STOCK DATA GICS sector Consumer Staples Bloomberg ticker: 322 HK Shares issued (m): 5,602.9 Market cap (HK$m): 106,231.8 Market cap (US$m): 13,695.3 3-mth avg daily t'over (US$m): 12.0

Price Performance (%) 52-week high/low HK$23.30/HK$18.96

1mth 3mth 6mth 1yr YTD (11.4) (11.8) (15.7) (3.9) (15.4)

Major Shareholders % Ting Hsin 33.17

Ssanyo Food 33.17

FY14 NAV/Share (US$) 0.56

FY14 Net Debt/Share (US$) 0.13

PRICE CHART

90

100

110

120

130

18

20

22

24

26(%)(lcy)

TINGYI (CAYMAN ISLN) HLDG CO

TINGYI (CAYMAN ISLN) HLDG CO/HSI INDEX

0

10

20

30

Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14

Volume (m)

Source: Bloomberg

ANALYSTS Renee Tai +852 2826 1324 [email protected] Herbert Chan +852 2826 1330 [email protected]

Tingyi (322 HK)

Parent Ting Hsin’s Involvement In Taiwan’s Tainted Oil Incident To Have Short-Term Negative Impact Tingyi’s parent Ting Hsin was found to have used animal feed oil in their production of edible oil. Both the Taiwanese government and consumers have lashed back by boycotting all products under the Ting Hsin group. With widespread media coverage in China, we expect near-term sales of Master Kong products to be negatively impacted. Reduce EPS by 7.8-14% for 2014-16. Downgrade to HOLD. Target price: HK$20.00. Entry price: HK$16.00.

WHAT’S NEW • Ting Hsin found to have used animal feed oils in the production of edible oil. Ting

Hsin International Group, Tingyi’s parent company, was found to have mixed lard meant for animal feed into its cooking oil products. Its chairman, Mr Wei Ying-chung, has resigned and is now being investigated. The incident further tarnishes consumer confidence in Ting Hsin, whose subsidiary Wei Chuan was caught to have added a banned chemical into its cooking oil products in November. Only last month, Wei Chuan was again found to have used Chang Guann recycled oil products in some of its food items.

• Widespread boycott of Ting Hsin’s products in Taiwan. On the back of this incident, the Taiwanese government has banned Ting Hsin products from all schools. Meanwhile, the Consumers’ Foundation Chinese Taipei has also asked consumers to boycott Ting Hsin’s products until they are proven safe for consumption. According to the Department of Economic Development (DOED) of Taipei, more than 70% of all food markets, all night markets and 90% of business communities in the city are now boycotting Ting Hsin products, while the DOED itself is also asking the public not to buy from these places to support the boycott. With the boycott campaign in effect, Ting Hsin sales at supermarket chain RT-Mart have already dropped by 10-20%.

• Negative impact spreading to China. In China, CCTV reported Ting Hsin’s tainted oil incident in detail for 6 minutes on Sunday, stating clearly that Tingyi is a subsidiary of Ting Hsin. With this and rallying calls on social networking sites including Sina Weibo, and other Chinese media that started to widely report the incident after CCTV, public awareness of the incident is growing in China. In response to this, Tingyi has stated clearly that they do not import oil products from Taiwan and function independently.

KEY FINANCIALS Year to 31 Dec (US$m) 2012 2013 2014F 2015F 2016F Net turnover 9,212 10,941 11,559 12,394 13,523 EBITDA 1,242 1,189 1,395 1,706 2,013 Operating profit 861 744 934 1,206 1,472 Net profit (rep./act.) 459 409 495 636 757 Net profit (adj.) 459 409 495 636 757 EPS (US$ cent) 8.2 7.3 8.8 11.3 13.4 PE (x) 29.9 33.6 27.7 21.6 18.2 P/B (x) 5.4 4.8 4.3 3.9 3.4 EV/EBITDA (x) 12.6 13.1 11.2 9.1 7.7 Dividend yield (%) 1.3 1.5 1.8 2.3 2.7 Net margin (%) 5.0 3.7 4.3 5.1 5.6 Net debt/(cash) to equity (%) 33.5 4.4 22.8 16.7 5.5 Interest cover (x) 38.0 31.8 41.8 51.1 60.3 ROE (%) 19.7 15.0 16.4 18.9 21.1 Consensus net profit - - 509 627 727 UOBKH/Consensus (x) - - 0.97 1.01 1.04 Source: Tingyi (Cayman Islands) Holding Corp., Bloomberg, UOB Kay Hian





STOCK IMPACT • Expect short-term hit to sales. Management issued a clarification statement last night

stating that it is independent of Taiwan Wei Chuan Foods Corporation, Ting Hsin Oil and Fat Industrial Co., Ltd. and Cheng I Food Co., Ltd. No oil products from Taiwan were used in the company’s products. It also re-iterated that it has not imported any relevant oil raw materials from Taiwan. Master Kong brand instant noodles are made and sold in Taiwan under licence to Wei Chuan, Ting Hsin’s subsidiary. Meanwhile instant noodles sold in China are made domestically. That said, we caution that the Master Kong brand will be affected given the media coverage in China and increasing concerns over food safety.

EARNINGS REVISION/RISK

• Cut net profit by 7.8-14.0%. Given that 4Q is normally a stronger season for instant noodle sales as we head into the winter months, we think that sales will be impacted given consumers’ increasing awareness for food safety. While none of Tingyi’s products in China have been found to be tainted, consumer confident is dented. We also expect the scandal to hinder the roll-out of new products. We thus reduce our instant noodle sales forecasts by 8.5-17.3% over 2014-16. We have also scaled back our growth assumptions for beverage and instant food sales as we expect holiday related sales to be affected. Consequently, our net profit forecasts are lowered by 7.8-14% in 2014-16.

ASSUMPTION CHANGES Year to 31 Dec ----------- 2014 ----------- ---------- 2015 ---------- ---------- 2016 ---------- (US$m) New Old chg New Old chg New Old chg Instant noodles sales 4,053 4,430 -8.5 4,296 4,951 -13.2 4,556 5507.99 -17.3 Beverage sales 1,548 1,548 0.0 1,638 1,682 -2.7 1,786 1953.96 -8.6 Instant food sales 1,573 1,573 0.0 1,740 1,967 -11.5 2,021 2582.73 -21.7 Total sales 11,559 12,051 -4.1 12,394 13,646 -9.2 13,523 15768 -14.2 Gross profit 3,571 3,748 -4.7 3,951 4,328 -8.7 4,336 5005.91 -13.4 Operating expenses 2,849 2,966 -3.9 2,939 3,223 -8.8 3,077 3566.28 -13.7 Net profit 495 537 -7.8 636 699 -9.0 756 879.274 -14.0


• Key risk to our forecasts is a faster-than-expected recovery in sales.

VALUATION/RECOMMENDATION • Downgrade to HOLD. We were previously expecting Tingyi’s earnings growth

momentum to recover starting 2H14 as competition should moderate while new products should further stimulate sales. In view of the scandal in Taiwan, we fear that near-term consumer confidence will be dampened, and not only hinder sales but also the roll-out of new products. That said we do not think that it will have long-term impact given that none of Tingyi’s products are implicated in this scandal. Meanwhile its dominant market share and scale of its distribution network are difficult to be replicated by peers. Given higher risks, we are now pegging our target price to 23x 2015 PE (vs 28x previously) at par with the average it traded at when price controls were imposed on instant noodles in 2008. Together with our earnings cut, our target price is lowered from HK$27.00 to HK$20.00. Key catalysts include any performance update on the back of the scandal in Taiwan and quarterly results in November.





PROFIT & LOSS

BALANCE SHEET Year to 31 Dec (US$m) 2013 2014F 2015F 2016F Year to 31 Dec (US$m) 2013 2014F 2015F 2016F Net turnover 10,941.0 11,559.4 12,394.0 13,522.6 Fixed assets 5,485.1 5,949.1 6,440.9 6,846.4 EBITDA 1,188.6 1,394.6 1,706.1 2,012.6 Other LT assets 529.1 529.1 529.1 529.1 Deprec. & amort. 444.3 460.7 499.7 541.0 Cash/ST investment 1,234.4 638.8 766.6 1,140.1 EBIT 744.3 933.8 1,206.3 1,471.6 Other current assets 1,175.7 1,223.0 1,302.1 1,417.2 Total other non-operating income 0.0 0.0 0.0 1.0 Total assets 8,424.3 8,340.0 9,038.8 9,932.9 Associate contributions 16.0 17.7 19.4 21.4 ST debt 700.7 700.7 700.7 700.7 Net interest income/(expense) (37.4) (33.4) (33.4) (33.4) Other current liabilities 2,924.8 2,417.3 2,548.0 2,761.8 Pre-tax profit 723.0 918.1 1,192.4 1,460.6 LT debt 659.6 659.6 659.6 659.6 Tax (228.7) (290.1) (376.8) (461.2) Other LT liabilities 212.8 212.8 212.8 212.8 Minorities (85.8) (132.9) (179.5) (242.3) Shareholders' equity 2,880.3 3,170.5 3,559.1 3,997.1 Net profit 408.5 495.1 636.1 757.1 Minority interest 1,046.1 1,179.0 1,358.5 1,600.8 Net profit (adj.) 408.5 495.1 636.1 757.1 Total liabilities & equity 8,424.3 8,340.0 9,038.8 9,932.9

CASH FLOW KEY METRICS Year to 31 Dec (US$m) 2013 2014F 2015F 2016F Year to 31 Dec (%) 2013 2014F 2015F 2016F Operating 1,214.4 895.4 1,366.9 1,638.1 Profitability Pre-tax profit 723.0 918.1 1,192.4 1,459.6 EBITDA margin 10.9 12.1 13.8 14.9 Tax (228.7) (290.1) (376.8) (461.2) Pre-tax margin 6.6 7.9 9.6 10.8 Deprec. & amort. 444.3 460.7 499.7 541.0 Net margin 3.7 4.3 5.1 5.6 Associates 0.0 0.0 0.0 1.0 ROA 5.1 5.9 7.3 8.3 Working capital changes 265.2 (193.3) 51.6 98.7 ROE 15.0 16.4 18.9 21.1 Non-cash items 0.0 0.0 0.0 1.0 Other operating cashflows 10.6 0.0 0.0 (2.0) Growth Investing (791.1) (924.8) (991.5) (946.6) Turnover 18.8 5.7 7.2 9.1 Capex (growth) (852.0) (924.8) (991.5) (946.6) EBITDA (4.3) 17.3 22.3 18.0 Capex (maintenance) 0.0 0.0 0.0 0.0 Pre-tax profit (13.2) 27.0 29.9 22.5 Investments 0.0 0.0 0.0 0.0 Net profit (10.9) 21.2 28.5 19.0 Proceeds from sale of assets 0.0 0.0 0.0 0.0 Net profit (adj.) (10.9) 21.2 28.5 19.0 Others 61.0 0.0 0.0 0.0 EPS (10.9) 21.0 28.3 18.9 Financing (34.4) (566.3) (253.1) (318.1) Dividend payments (180.1) (204.8) (247.5) (318.1) Leverage Issue of shares 0.0 0.0 0.0 0.0 Debt to total capital 25.7 23.8 21.7 19.6 Proceeds from borrowings 0.0 0.0 0.0 0.0 Debt to equity 47.2 42.9 38.2 34.0 Loan repayment 0.0 0.0 0.0 0.0 Net debt/(cash) to equity 4.4 22.8 16.7 5.5 Others/interest paid 145.7 (361.5) (5.6) 0.0 Interest cover (x) 31.8 41.8 51.1 60.3 Net cash inflow (outflow) 388.9 (595.6) 122.3 373.5 Beginning cash & cash equivalent 830.2 1,234.4 638.8 766.6 Changes due to forex impact 15.3 0.0 5.6 0.0 Ending cash & cash equivalent 1,234.4 638.8 766.6 1,140.1





COMPANY UPDATE HOLD

(Maintained)

Share Price HK$2.58Target Price HK$3.00Upside +16.3%

COMPANY DESCRIPTION Xingda produces radial tyre steel cords and bead wires for trucks and passenger cars. It is also involved in the R&D and production of sawing wire for solar wafers.

STOCK DATA GICS sector Consumer DiscretionaryBloomberg ticker: 1899 HKShares issued (m): 1,524.8Market cap (HK$m): 3,933.9Market cap (US$m): 507.13-mth avg daily t'over (US$m): 0.7

Price Performance (%) 52-week high/low HK$4.94/HK$2.58

1mth 3mth 6mth 1yr YTD(8.8) (23.0) (31.2) (38.7) (44.3)

Major Shareholders %Mr. Liu Jinlan and key management 39.5

FY14 NAV/Share (RMB) 3.43

FY14 Net Cash/Share (RMB) 0.25

PRICE CHART

50

60

70

80

90

100

110

120

130

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50(%)(lcy) XINGDA INT'L HOLDINGS XINGDA INT'L HOLDINGS/HSI INDEX

0

5

10

15


Volume (m)

Source: Bloomberg

ANALYSTS Kevin Zhao Yong Tao +8621 5404 7225 ext 805 [email protected] Yuan Bei Lun +8621-5404 7225 ext 820 [email protected]

Xingda International Holdings (1899 HK)

Key Takeaways From Asian Gems Conference: Industry Consolidation On The Way; Healthy Balance Sheet And Strong Cash Flow We brought the company to a dozen investors recently. Management discussed recent industry developments and changes in a competitive landscape. ASP cuts have made many tier-2/3 producers miserable and will likely result in the exit of some small producers soon. We believe the industry will begin to see much better dynamics and ASP outlook starting mid-15. Maintain HOLD. Target price: HK$3.00. Entry price: HK$2.40.

WHAT’S NEW • Aggressive pricing strategy by the leading player continues. As mentioned in our

last update, the world’s largest steel cord maker Bekaert (BEKB.BB) began a round of ASP cuts this May. This was mainly intended to regain some market share that the company lost to some tier-2/3 companies in 2013. Recall that in 2013, the downstream demand was quite strong and many tier-2/3 producers started very active sales campaigns, which resulted in increased sales orders placed to them. Although there is no official statistics on the market shares of key players, based on our channel checks, we estmate Bekaert’s market share dropped from 28% in 2012 to 25% in 2013. As the largest steel cord producer in the world with a market share of 25%, Bekeart has a strong resolution to maintain its market share in China, which is actually the most profitable market under its global business structure.

• As for the specifics of the ASP cuts, we saw quite different extent of cuts for different types of steel cords. Tough days for the small players indeed. We understand there are more than 200 types of steel cords. The complex product offerings are mainly to meet the needs of different types of tyres. For the China market, two-thirds of the steel cords go to truck tyres. There are certain types of “mainstream” truck tyres that are most popular. Production of most of the tier-2/3 producers is centred on steel cords for such tyres. To regain the lost market share and also to speed up the industry consoldiation, Bekaert initated heavy ASP cuts on these types of steel cords, with some cuts even striking 10%. The intention of such ASP cuts is quite apparent: it is to force the small and high-cost steel cord producers out of the industry and form a better and clearer competitive landscape. Most of the small players have poor economies of scale, high gearing ratios and quite concentrated client bases.

KEY FINANCIALS Year to 31 Dec (Rmbm) 2012 2013 2014F 2015F 2016FNet turnover 5,246.9 5,585.2 5,740.4 6,345.9 6,821.7EBITDA 918.0 1,230.9 1,205.3 1,329.4 1,423.8Operating profit 499.2 787.7 741.8 848.7 924.6Net profit (rep./act.) 182.8 412.6 387.2 437.9 478.7Net profit (adj.) 182.8 412.6 386.2 435.9 476.7EPS (fen) 12.0 27.1 25.3 28.6 31.3PE (x) 17.0 7.5 8.0 7.1 6.5P/B (x) 0.6 0.6 0.6 0.6 0.5EV/EBITDA (x) 4.9 3.7 3.7 3.4 3.2Dividend yield (%) 6.0 6.2 6.4 7.4 8.0Net margin (%) 3.5 7.4 6.7 6.9 7.0Net debt/(cash) to equity (%) 13.9 12.0 (7.2) (19.0) (34.6)Interest cover (x) 8.2 19.2 20.7 19.8 19.9ROE (%) 3.8 8.4 7.6 8.2 8.8Consensus net profit - - 431 502 570UOBKH/Consensus (x) - - 0.90 0.87 0.84Source: Xingda, Bloomberg, UOB Kay Hian





• At current selling prices, almost all the players are making accounting losses. For some, their cash costs are higher than the selling prices. If the ASP is kept at current levels for another six months, most producers will find it difficult to survive without external help.

• Cash is king. Players with poor cash flow will be the biggest losers. Amid this round of industry consolidation, survivors will be those with good cash flows, low gearing and balanced client bases. Of the three factors, cash is the most important. If you take a look at the financial statements of mainstream steel cord producers, debtors’ turnover cycle is about 120 days while creditors’ turnover cycle is about 80 days. Basically, this means steel cord producers need to provide longer credit period to their clients than what they get from their suppliers. Falling ASPs will greatly squeeze their margins and to make things worse, the need to provide longer credit period will further exacerbate their tight operating cash flow.

• The current competitive landscape and the benefits of industry consolidation. Xingda is China’s largest steel cord producer with a market share of about 30%. Bekaert is the second-largest with a 25% share, followed by Shougang Concord Century (103 HK) with a market share of around 7%. The remaining 38% is shared by about 20 small players. Normally, we include Xingda and Bekaert in the tier-1 category; Shougang Concord Century and two other local producers Hennan Hengxing (002132 CH) and Hubei Fuxing (002132 CH) in the tier-2 category, and even smaller producers in the tier-3 category. Tier-1 players have been quite rational with good capacity expansion discipline and sensible pricing strategies. However, some tier-2/3 producers used to behave quite irrationally, sometimes initiating large-scale capacity expansion in the absence of a strong orderbook outlook. Other characteristics of such players are their gearing ratios tend to be quite high and that they like to enter hot industries such as the property sector to chase the trend. If there is anything that can become the last straw for such names, it will likely be the breakdown of their capital chain. If this round of ASP cuts can effectively force such producers out, we have good reasons to expect much better industry disciplines and stronger ASP outlook.

STOCK IMPACT • Xingda follows suit on the price cuts. As disclosed by anagement, Xingda is following

Bekaert in the ASP cuts and shares the view that such aggressive ASP cuts may result in painful short-term earnings impact, but will definitely be beneficial to the long term development of the industry. Note that historically, Xingda followed Bekaert in terms of pricing strategy.

• How long will the industry consolidation take? Still hard to say. While it is quite clear that the operating environment for tier-2/3 producers is rapidly worsening, it is still difficult to forecast the timing of their exit as most of such players enjoy some support from the local governments who care most about employment in the local areas. This has actually been the major reason for their continued existence in the past three years.

• However, banks are reducing their exposure to small players, which will probably be quite detrimental to them. With their high gearing (net debt to equity normally higher than 200%), shrinking support from the banks will be devastating.

EARNINGS REVISION/RISK • None. VALUATION/RECOMMENDATION • Maintain HOLD. Our target price is HK$3.00, based on 8x 2015F PE, the lower limit of its

historical PE range, to reflect the structural difficulties it is now facing. Entry price is HK$2.40.

• Xingda’s low gearing (only 8.6%) and healthy cash flow will ensure good financial position. Valuation has dropped to undemanding levels with decent support from the attractive dividend yield. Any exit of small players may trigger a re-rating, in our view.

SHARE PRICE CATALYST • Exit of small players, strong sales orders in 4Q14 and stable ASP.

NATURAL RUBBER PRICES

05,00010,00015,00020,00025,000

2013

‐10‐08

2013

‐10‐29

2013

‐11‐20

2013

‐12‐12

2014

‐01‐06

2014

‐02‐11

2014

‐03‐10

2014

‐04‐01

2014

‐04‐25

2014

‐05‐20

2014

‐06‐12

2014

‐07‐04

2014

‐07‐28

2014

‐08‐19

2014

‐09‐11

2014

‐10‐13

Source: WIND REVENUE OF CHINA’S TYRE INDUSTRY

‐10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

Rmbb

Source: WIND

(Rmb/tonne)





PROFIT & LOSS Year to 31 Dec (Rmbm) 2013 2014F 2015F 2016FNet turnover 5,585 5,740 6,346 6,822EBITDA 1,231 1,205 1,329 1,424Deprec. & amort. 443 463 481 499EBIT 788 742 849 925Net interest income/(expense) (64) (58) (67) (72)Pre-tax profit 723 684 782 853Tax (150) (143) (166) (180)Minorities (161) (154) (178) (194)Net profit 413 387 438 479Net profit (adj.) 413 386 436 477

BALANCE SHEET Year to 31 Dec (Rmbm) 2013 2014F 2015F 2016FFixed assets 3,714 3,550 3,369 3,170Other LT assets 701 650 642 634Cash/ST investment 414 1,876 2,636 3,578Other current assets 4,959 4,588 4,766 4,678Total assets 9,788 10,664 11,414 12,060ST debt 1,016 1,500 1,600 1,600Other current liabilities 2,023 2,105 2,311 2,477LT debt 0 0 0 0Other LT liabilities 51 52 57 63Shareholders' equity 5,025 5,229 5,459 5,709Minority interest 1,673 1,779 1,987 2,212Total liabilities & equity 9,788 10,664 11,414 12,060

CASH FLOW Year to 31 Dec (Rmbm) 2013 2014F 2015F 2016FOperating 650 1,549 1,248 1,555Pre-tax profit 726 692 802 874Tax (124) (143) (166) (180)Deprec. & amort. 443 463 481 499Associates (2) 0 0 0Working capital changes (449) 446 29 254Non-cash items 20 0 0 0Other operating cashflows 36 91 101 109Investing (519) (315) (291) (293)Capex (growth) (368) (329) (300) (300)Capex (maintenance) 0 8 9 7Investments 0 (11) 0 0Proceeds from sale of assets 2 0 0 0Others (152) 18 0 0Financing (239) 228 (195) (321)Dividend payments (185) (198) (229) (250)Issue of shares 0 0 1 0Proceeds from borrowings 1,956 0 0 0Loan repayment (1,946) 484 100 0Others/interest paid (64) (58) (67) (72)Net cash inflow (outflow) (107) 1,461 761 941Beginning cash & cash equivalent 521 414 1,876 2,636Changes due to forex impact 0 0 0 0Ending cash & cash equivalent 414 1,876 2,636 3,578

KEY METRICS Year to 31 Dec (%) 2013 2014F 2015F 2016FProfitability EBITDA margin 22.0 21.0 20.9 20.9Pre-tax margin 13.0 11.9 12.3 12.5Net margin 7.4 6.7 6.9 7.0ROA 4.3 3.8 4.0 4.2ROE 8.4 7.6 8.2 8.8

Growth Turnover 6.4 2.8 10.5 7.5EBITDA 34.1 (2.1) 10.3 7.1Pre-tax profit 86.5 (5.5) 14.3 9.1Net profit 125.7 (6.2) 13.1 9.3Net profit (adj.) 125.7 (6.4) 12.9 9.4EPS 125.7 (6.4) 12.9 9.4

Leverage Debt to total capital 13.2 17.6 17.7 16.8Debt to equity 20.2 28.7 29.3 28.0Net debt/(cash) to equity 12.0 (7.2) (19.0) (34.6)Interest cover (x) 19.2 20.7 19.8 19.9





INITIATE COVERAGE BUY

(Inititate Coverage)

Share Price Rp1,225Target Price Rp1,590Upside +29.8%

COMPANY DESCRIPTION Mitrabahtera Segara Sejati is one of Indonesia's leading integrated service providers of sea logistics and transshipment, focusing on natural resources and bulk materials..

STOCK DATA GICS sector IndustrialsBloomberg ticker: MBSS IJShares issued (m): 1,750.0Market cap (Rpb): 2,143.0Market cap (US$m): 175.63-mth avg daily t'over (US$m): 0.4

Price Performance (%) 52-week high/low Rp1,470/Rp930

1mth 3mth 6mth 1yr YTD3.8 8.7 33.7 41.3 26.4

Major Shareholders %

Indika Group 51.0Patin Resources 25.7Public 23.3

FY14 NAV/Share (US$) 1.53

FY14 Net Debt/Share (US$) 0.01

PRICE CHART

80

90

100

110

120

130

140

150

160

800

900

1000

1100

1200

1300

1400

1500(%)(lcy)

MITRABAHTERA SEGARA SEJATI T

MITRABAHTERA SEGARA SEJATI T/JCI INDEX

05

10

15

20


Volume (m)

Source: Bloomberg

ANALYST Villya Christin Purba +6221 2993 3979 [email protected]

Mitrabahtera Segara Sejati (MBSS IJ)

Deep Valuation Discount We initiate coverage with a BUY and target price of Rp1,590 (or a 29% upside). Thecompany is a beneficiary of maritime toll and cabotage laws, enjoys economies ofscale in fleet capacity, boasts low net gearing that results in attractive net margins and has sustainable long-term contracts. We conservatively expect MBSS to achieveEBITDA CAGR of 13% in 2014-19. MBSS offers stable earnings and attractivevaluation at 5.7x 2015F PE.

WHAT’S NEW • Beneficiary of maritime toll and cabotage law implementation. Jokowi’s cabinet aims

to accelerate infrastructure development in Indonesia. In his presidential programmes, he stressed the importance of maritime tolls in improving logistics efficiency so as to increaseinter-island connectivity, reduce logistics costs and boost economic growth in easternIndonesia. In the mining sector, the main problem of sea transport lies in the deficiency of draught facilities and inefficiency of infrastructure, such as unsuitable ports and highlogistic costs. Thus, Mitrabahtera Segara Sejahtera (MBSS) can benefit frominfrastructure development in the coal transport sector. We believe with the rapid development of sea logistics infrastructure, MBSS can transport more diversified cargos. Its penetration into dry bulk materials transport other than coal will appeal to investors.

• Revenue sustainability and stability secured by long-term backlog contracts. MBSS has medium- and long-term sea logistics services contracts with large and reputableIndonesian coal producers, such as Berau, Kideco, Adaro, Borneo and Kaltim Prima Coal.The long-term contracts secure MBSS’s revenue, income and cash flow sustainability as well as limited the risk of idle capacity. As of end-1H14, MBSS had a contract backlog ofUS$293.4m, comprising US$157.6m of barging backlog and US$135.8m of floating cranecontracts.

STOCK IMPACT • We like MBSS for its robust growth potential, given the optimistic outlook for sea logistics

and more stable coal demand in the years to come. MBSS’s business is highly exposedto coal, thus low coal prices are a risk. This has forced MBSS and peers to cut theiraverage tariff rates to maintain fleet utilisation and market share, leading to narrowingmargins. However, volumes should compensate for this to drive a 26.5% yoy EBITDAgrowth in 2015 and 5-year CAGR net income growth of 13.0% in 2014-19.

KEY FINANCIALS Year to 31 Dec (US$m) 2012 2013 2014F 2015F 2016F Net turnover 141 151 151 183 189 EBITDA 64 72 64 80 84 Operating profit 45 48 40 51 53 Net profit (rep./act.) 36 39 30 41 43 Net profit (adj.) 36 39 30 41 43 EPS (cent) 20.8 21.9 16.5 23.7 24.6 PE (x) 5.5 4.1 6.6 5.7 6.2 P/B (x) 0.9 0.8 0.8 1.0 0.9 EV/EBITDA (x) 2.9 2.6 3.0 2.9 3.2 Dividend yield (%) 5.1. 5.7 3.5 4.4 4.4 Net margin (%) 25.8 26.1 19.1 22.7 22.7 Net debt/(cash) to equity (%) 47.5 22.8 2.1 (3.6) (12.8) Interest cover (x) 9.8 12.7 13.4 13.5 14.2 ROE (%) 17.7 17.9 13.4 14.8 13.4 Consensus net profit - - - - - UOBKH/Consensus (x) - - - - - Source: MBSS, Bloomberg, UOB Kay Hian





• Positive outlook for sea logistics business with implementation of maritime toll law. Infrastructure is key to future growth as it supports coal logistics transport. With its complex geographical structure, Indonesia has to be supported by a more sophisticated infrastructure system. Indonesia is facing challenges in exporting its coal efficiently due to infrastructure problems, such as unsuitable ports and high logistic costs. This warrants urgent development of transshipment terminals to deal with offshore ship-to-ship handling processes in the coal industry efficiently. As infrastructure will now be the main issue during Jokowi’s reign, the national maritime toll project will be highly visible in the near term. This plan is expected to cut freight costs by up to 50%.

• Stability in earnings and cash flow with 95% of revenue generated from long-term contracts. The spot market contributes only 5% to total revenue. A barging contract has an average contract period of 3-4 years, while a floating crane (FC) contract is normally valid for five years. Most of MBSS’s customers are recurring customers and are top-tier coal producers in Indonesia, such as Adaro, Kideco and Kaltim Prima Coal. Those coal producers have been MBSS’s loyal customers for the last 15 years. Track record and reputation are essential in the coal shipment business, especially to top-tier coal producers. MBSS’s achievements over the past 15 years have proven its strong ability to excel at fulfilling customer demand. About 70% of revenue comes from loyal customers, which enables MBSS to expand its market share.

• Outstanding margins among peers. MBSS continues to enjoy an attractive operating margin of above 30% from barging and FC services. Besides having a competitive advantage in the form of economies of scale, MBSS has also carried out strategic initiatives to improve operating efficiency through: a) more effective fuel usage, b) centralised operational area, c) financial cost efficiency through refinancing at a lower costs, and d) optimisation of fleet utilisation. Hence, MBSS is able to offer more competitive prices and increasingly better services as well as expand its market as a provider of coal logistics services. Indonesia’s shipping companies are also liable for a final tax rate of 1.2%, thus most shipping companies book an effective corporate tax rate of around 5% compared with the general corporate tax rate of 28%. But although the sea logistics sector enjoys tax incentives, among its direct competitors, MBSS books the highest margins.

EARNINGS REVISION/RISK • Widening gross margin from FC. In terms of gross margin, FC offers higher profitability

with strong margins of 45-52% on average, as the segment incurs lower fuel costs than tugs and barges which gross margins are in the range of 36-38%.

• EBITDA CAGR of 13.0% in 2014-19. We forecast EBITDA CAGR of 13% over the next five years to US$109m in 2019 in the wake of MBSS’s future business expansion, with EBITDA margin expected to increase gradually to 44.5% from 42% in 2014.

• Strong operating cash flow to support capex. The company consistently booked positive operating cash flows of US$57.2m-55.2m in 2011-13. We expect MBSS to generate US$63.5m-84.3m in yearly operating cash flow in 2014-16. We forecast capex of US$10m for 2014 and US$52m-67m in 2015-17.

VALUATION/RECOMMENDATION • BUY for its strong earnings outlook. Our target price of Rp1,590 offers a 17.8%

upside, given MBSS’s sustainable business growth and attractive valuation. We use WACC of 9.6% and terminal growth of 5% in the DCF calculation. Our target price is equivalent to 5.7x 2015F PE, nearly half of regional peers’ average 2015F PE of 10.9x.





PROFIT & LOSS Year to 31 Dec (US$m) 2013 2014F 2015F 2016F

Net turnover 151.1 151.4 182.7 189.3

EBITDA 71.5 63.5 80.4 84.3

Deprec. & amort. 23.5 23.2 29.1 31.3

EBIT 48.0 40.4 51.2 53.0

Total other non-operating income (1.1) (0.0) (0.3) (0.5)

Net interest income/(expense) (5.6) (4.7) (6.0) (5.9)

Pre-tax profit 41.3 35.6 45.0 46.6

Tax (1.8) (1.8) (2.2) (2.3)

Net profit 39.5 33.8 42.8 44.4

Net profit (adj.) 39.5 33.8 42.8 44.4

BALANCE SHEET Year to 31 Dec (US$m) 2013 2014F 2015F 2016F

Fixed assets 271.3 258.1 281.0 289.7

Other LT assets 1.2 3.1 2.1 2.6

Cash/ST investment 43.9 97.7 119.5 152.9

Other current assets 36.4 37.0 44.4 45.7

Total assets 352.8 396.0 447.1 490.9

ST debt 25.1 22.2 34.7 44.1

Other current liabilities 12.1 16.9 20.0 20.9

LT debt 72.6 81.2 73.6 63.7

Other LT liabilities 1.2 1.3 1.5 1.6

Shareholders' equity 235.7 268.3 309.8 352.9

Minority interest 6.1 6.1 7.4 7.6

Total liabilities & equity 352.8 396.0 447.1 490.9

CASH FLOW Year to 31 Dec (US$m) 2013 2014F 2015F 2016F

Operating 55.2 60.3 66.0 73.7

Pre-tax profit 39.5 33.8 42.8 44.4

Tax (1.8) (1.8) (2.2) (2.3)

Deprec. & amort. 23.6 23.5 29.1 31.3

Working capital changes (7.0) 4.0 (4.7) (0.7)

Other operating cashflows 0.9 0.9 0.9 1.0

Investing (3.7) (12.2) (51.0) (40.5)

Capex (growth) (8.1) (10.3) (52.0) (40.0)

Investments 0.6 0.0 0.0 0.0

Others 3.9 (1.9) 1.0 (0.5)

Financing (25.3) 5.7 6.7 0.1

Dividend payments 0.0 0.0 0.0 0.0

Issue of shares (9.0) (0.1) 0.0 0.0

Proceeds from borrowings 1.0 8.6 (7.6) (10.0)

Loan repayment (18.5) (2.8) 13.0 9.8

Others/interest paid 1.2 0.0 1.3 0.3

Net cash inflow (outflow) 26.2 53.8 21.6 33.3

Beginning cash & cash equivalent 17.7 43.9 97.7 119.5

Changes due to forex impact 0.0 0.0 0.0 0.0

Ending cash & cash equivalent 43.9 97.7 119.4 152.8

KEY METRICS Year to 31 Dec (%) 2013 2014F 2015F 2016F

Profitability

EBITDA margin 47.3 42.0 44.0 44.5

Pre-tax margin 27.3 23.5 24.6 24.6

Net margin 26.1 22.3 23.4 23.4

ROA 11.3 9.0 10.1 9.5

ROE 17.9 13.4 14.8 13.4

Growth

Turnover 6.8 0.2 20.7 3.6

EBITDA 11.4 (11.2) 26.5 4.9

Pre-tax profit 8.1 (13.7) 26.2 3.7

Net profit 8.2 (14.3) 26.5 3.7

Net profit (adj.) 8.2 (14.3) 26.5 3.7

EPS 8.2 (14.3) 26.5 3.7

Leverage

Debt to total capital 28.8 27.4 25.5 23.0

Debt to equity 41.5 38.5 35.0 30.6

Net debt/(cash) to equity 22.8 2.1 (3.6) (12.8)

Interest cover (x) 12.7 13.4 13.5 14.2





COMPANY RESULTS HOLD

(Maintained)

Share Price RM4.81Target Price RM5.08Upside +5.7%(Previous TP RM5.08)

COMPANY DESCRIPTION Latex glove manufacturer

STOCK DATA GICS sector Health CareBloomberg ticker: TOPG MKShares issued (m): 620.7Market cap (RMm): 2,985.5Market cap (US$m): 913.73-mth avg daily t'over (US$m): 0.9

Price Performance (%) 52-week high/low RM6.03/RM4.50

1mth 3mth 6mth 1yr YTD(3.8) 2.1 0.6 (19.2) (14.6)

Major Shareholders %Tan Sri Lim Wee Chai 29.0Kumpulan Wang Persaraan 6.3Matthews International 5.2

FY15 NAV/Share (RM) 2.41

FY15 Net Cash/Share (RM) 0.06

PRICE CHART

70

80

90

100

110

4.00

4.50

5.00

5.50

6.00

6.50(%)(lcy)

TOP GLOVE CORP BHD

TOP GLOVE CORP BHD/FBMKLCI INDEX

0

10

20

30


Volume (m)

Source: Bloomberg

ANALYST Lester Chin Kent Lake +603 2147 1970 [email protected]

Top Glove (TOPG MK)

4QFY14: Threatened By Further Gas Price Hikes Despite weakening latex prices, 4QFY14 EBIT margins contracted 1.4ppt qoq as Top Glove has yet to fully pass on the recent gas price hike due to intensifying competition within the premium glove segment. Nevertheless, its China division has turned around and should no longer remain a drag on the group’s performance. Maintain HOLD. Target price: RM5.08. Entry price: RM4.60.

4QFY14 RESULTS Year to 31 Aug 3QFY14 4QFY14 qoq yoy % FY14 yoy (RMm) % chg chg % chg Turnover 574.0 580.2 1.1 1.1 2,276.5 (1.6) COGS (526.4) (544.2) 3.4 5.5 (2,089.2) (0.7) EBITDA 78.4 70.0 (10.7) (19.0) 308.5 (9.8) EBIT 54.4 46.9 (13.8) (23.8) 213.5 (18.4) Pre-tax profit 55.1 47.7 (13.5) (22.9) 214.7 (16.8) Tax (12.1) (1.5) (87.8) (85.0) (31.4) (14.6) Core net profit 42.4 45.9 8.3 (8.7) 180.1 (16.3)

qoq ppt

chg yoy ppt

chg yoy ppt

chg EBITDA margin (%) 13.7 12.1 (1.6) (3.0) 13.6 (1.2) EBIT margin (%) 9.5 8.1 (1.4) (2.6) 9.4 (1.9) Net margin (%) 7.4 7.9 0.5 (0.8) 7.9 (1.4)

Source: Top Glove, UOB Kay Hian

RESULTS • Within expectation. 4QFY14 net profit of RM45.9m (-8.7% yoy; +8.3% qoq) was within

our expectation, with full-year net profit of RM180.1m accounting for 100% and 96% of our and consensus full-year estimates respectively.

• Subdued improvement in sales volume. As expected, sales volume rose by a subdued 3% qoq in 4QFY14 (3QFY14: 6.2% qoq) as customers opted to run down inventory in lieu of the softening latex prices (-4.5% qoq). This was further offset by a weaker exchange rate of RM3.19/US$ (3QFY14: RM3.26) and softer nitrile gloves ASPs (-3.8% qoq), thus resulting in flattish sequential top-line growth of 1.1% qoq.

• 4QFY14 EBIT margins impacted by higher gas prices... 4QFY14 EBIT margins contracted a significant 1.4ppt qoq as the company has yet to fully pass on the higher gas costs for its premium glove segment. Rising price competition within the premium glove segment also prompted the group to lower its nitrile glove ASPs to US$25/1,000 pieces (3QFY14: US$26/1,000 pieces) to remain competitive although nitrile raw material prices had remained unchanged at US$1,090/tonne qoq

KEY FINANCIALS Year to 31 Aug (RMm) 2013 2014 2015F 2016F 2017FNet turnover 2,313 2,276 2,604 2,817 2,967EBITDA 323 305 361 407 436Operating profit 242 213 252 279 290Net profit (rep./act.) 209 180 203 225 234Net profit (adj.) 215 180 203 225 234EPS (sen) 34.7 29.1 32.7 36.3 37.8PE (x) 13.9 16.6 14.7 13.3 12.7P/B (x) 2.3 2.1 2.0 1.9 1.7EV/EBITDA (x) 9.1 9.6 8.1 7.2 6.7Dividend yield (%) 3.3 3.3 3.4 3.8 3.9Net margin (%) 9.0 7.9 7.8 8.0 7.9Net debt/(cash) to equity (%) (4.9) (4.4) (2.5) (3.7) (6.5)Interest cover (x) 442.4 154.4 2,195.4 2,470.8 2,647.2ROE (%) 16.2 13.3 14.0 14.5 14.1Consensus net profit - - 199 220 202UOBKH/Consensus (x) - - 1.02 1.02 1.16Source: Top Glove, Bloomberg, UOB Kay Hian





• …although this was partially cushioned by the lower average latex price of RM4.44/kg (3QFY14: RM4.65/kg). This, together with a significantly lower effective tax rate of 3.1% (3QFY14: 20%) led to an 8.3% qoq increase in net profit.

• Turnaround in China operations. Top Glove’s China operations turned in a pre-tax profit of RM1.4m in 4QFY14 (3QFY14: pre-tax loss of RM0.6m). This marks the completion of the group’s restructuring efforts for its vinyl glove division and the successful turnaround of its loss-making operations. Moving forward, this division is expected to remain profitable and should no longer drag the group’s performance.

STOCK IMPACT • Budget 2015: Further subsidy rationalisation ahead which would likely result in gradual

increases in natural gas prices and electricity costs (that collectively make up 5-6% of Top Glove’s operating costs). We note that the last tariff revision for electricity and industrial gas supply had effectively raised Top Glove’s operating costs by RM2m/month (or US$0.45/1,000 pieces), which management has yet to fully pass on the full cost for its nitrile and powder free gloves due to the challenging operating environment within the premium gloves segment. As such, we foresee some downside risks to Top Glove’s earnings should another round of natural gas and electricity tariff hikes take place sooner than expected. Our sensitivity analysis suggests that a RM3/mmbtu hike in gas tariffs could reduce Top Glove’s FY15-16 earnings by 7% assuming the additional costs are not passed through.

• Treading cautiously with prudent capacity expansion plans. Phase 2 of Plant 27 (F27) has commenced commercial production with two lines in early-Sep 14 with the remaining lines slated to come on stream progressively over the next three months. This will increase Top Glove’s annual production capacity to 42.6b pieces (from 42b pieces currently) by end-Dec 14. However, management is sticking to its prudent expansion plan of adding only 2b pieces to its nitrile glove production capacity (via the progressive commissioning of 14 new production lines in F29 starting Dec 14 due to the perceived uncertainty in the industry’s supply-demand dynamics.

• Small steps taken to improve efficiency. On a brighter note, we gather management has achieved considerable progress in improving efficiency in its nitrile glove production with the planned installation of higher-speed production lines (35,000 pieces/hour vs the previously planned 30,000 pieces/hour) in Plant 29. Beyond that, we gather the group is planning to adopt 40,000-pieces/hour lines for its planned Factory 30, which is targeted for commissioning in 2016. The adoption of more efficient lines should help Top Glove reduce the gap with leading nitrile glove producer, Hartalega (whose most efficient lines are running at 45,000 pieces/hour), and theoretically help to improve the absorption of fixed overheads (which would lead to a lower fixed cost per unit) over the longer term.

• Latex prices have declined further to below the RM4.00/kg mark at about RM3.69/kg currently, its lowest level since Jan 09. This could translate into more competitive latex glove ASPs and thus result in the conversion of some nitrile glove purchases back to latex glove purchases. We gather that improving latex glove orders have lifted Top Glove’s sales lead time to 50 days currently (from 30 days in 2013). On the contrary, the lead time for its nitrile gloves has moderated to about 50 days currently (from 85 days in 2013). While this offers some near-term respite for the latex glove segment, industry players reckon that demand for nitrile gloves would continue to outpace latex gloves over the next four quarters. We note that gross margins for Top Glove’s nitrile gloves are still relatively attractive at 18-20% (despite a 5-6ppt compression from a year ago) as compared to 16-17% for its powder-free latex gloves.

EARNINGS REVISION/RISK • No change to our FY15-16 earnings forecasts. We also introduce our FY17 numbers. VALUATION/RECOMMENDATION • Maintain HOLD and target price of RM5.08, based on 15x 2015F PE. While Top Glove’s

stands to benefit most from the current environment of softening latex prices, we remain concerned over the company’s ability in carrying out an effective cost past through on the higher gas prices for its premium gloves segment. Its slower-than-expected expansion in nitrile gloves production capacity also means the company would not be able to reap the full benefits of the industry’s current supply-demand dynamics, which still favour nitrile gloves. Entry price is RM4.60.

SOFTENING LATEX PRICES Source: Bloomberg

RM/US$

2.9

3.0

3.1

3.2

3.3

3.4

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Nov

12

Jan

13

Mar

13

May

13

Jul 1

3

Sep

13

Nov

13

Jan

14

Mar

14

May

14

Jul 1

4

Sep

14

(MYR/USD)

Source: Bloomberg CAPACITY EXPANSION PLANS

Factory LocationProduction Line (unit) Product mix

Capacity p.a (bil pcs)

Targeted Completion

Current capacity 478 42Expansion Plan (FY14)Factory 27, Phase 2 Lukut 8 Nitrile 0.6 Aug-14Factory 29 Klang 14 Nitrile 2.0 Dec-14Total capacity by end-2014 520 44.6 Source: Top Glove OPERATING MARGINS Source: Bloomberg, UOB Kay Hian PAYING OUT AT LEAST 16 SEN/SHARE

02468

101214161820

FY02FY03

FY04FY05

FY06FY07

FY08FY09

FY10FY11

FY12FY13

FY14

FY15F

FY16F

FY17F

(sen)

0.01.02.03.0

4.05.06.07.0

(%)DPS (LHS) Dividend Yield (RHS)

Source: Bloomberg, UOB Kay Hian KEY ASSUMPTIONS

FY15F FY16F FY17FSales volume growth (%) 4% 6% 5%Utilisation rate 73% 75% 76%ASP (US$/ 000' pcs) 25.00 25.50 25.50Latex price (RM/kg) 5.50 5.70 5.70Exchange rate (RM/USD) 3.25 3.25 3.25 Source: UOB Kay Hian

0

2

4

6

8

10

12

Oct

00

Apr 0

1O

ct 0

1Ap

r 02

Oct

02

Apr 0

3O

ct 0

3Ap

r 04

Oct

04

Apr 0

5O

ct 0

5Ap

r 06

Oct

06

Apr 0

7O

ct 0

7Ap

r 08

Oct

08

Apr 0

9O

ct 0

9Ap

r 10

Oct

10

Apr 1

1O

ct 1

1Ap

r 12

Oct

12

Apr 1

3O

ct 1

3Ap

r 14

(RM/kg) RM10.90/kg

6

8

10

12

14

16

FY01FY02

FY03FY04

FY05FY06

FY07FY08

FY09FY10

FY11FY12

FY13FY14

FFY15

FFY16F

FY17F

EBIT Margin (%)

Average: 11.4%

6.5%





PROFIT & LOSS Year to 31 Aug (RMm) 2014 2015F 2016F 2017FNet turnover 2,276 2,604 2,817 2,967EBITDA 305 361 407 436Deprec. & amort. 92 110 128 146EBIT 213 252 279 290Total other non-operating income n.a. n.a. n.a. n.a.Associate contributions 3 1 1 1Net interest income/(expense) (2) 0 0 0Pre-tax profit 215 253 280 291Tax (31) (45) (50) (52)Minorities (3) (5) (5) (5)Net profit 180 203 225 234Net profit (adj.) 180 203 225 234

BALANCE SHEET Year to 31 Aug (RMm) 2014 2015F 2016F 2017FFixed assets 994 1,084 1,156 1,210Other LT assets 94 85 85 85Cash/ST investment 242 40 63 115Other current assets 597 617 658 688Total assets 1,927 1,826 1,962 2,098ST debt 178 0 0 0Other current liabilities 307 278 297 311LT debt 3 3 3 3Other LT liabilities 42 42 42 42Shareholders' equity 1,393 1,494 1,607 1,724Minority interest 4 9 13 18Total liabilities & equity 1,927 1,826 1,962 2,098

CASH FLOW Year to 31 Aug (RMm) 2014 2015F 2016F 2017FOperating 331 267 334 368Pre-tax profit 215 253 280 291Tax (31) (45) (50) (52)Deprec. & amort. 92 110 128 146Associates 0 0 0 0Working capital changes 57 (49) (22) (16)Other operating cashflows (1) (1) (1) (1)Investing (200) (200) (200) (200)Capex (growth) (200) (200) (200) (200)Investments 0 0 0 0Proceeds from sale of assets 0 0 0 0Others 0 0 0 0Financing (72) (269) (112) (116)Dividend payments (99) (101) (112) (117)Issue of shares 0 0 0 0Proceeds from borrowings 0 0 0 0Loan repayment 0 0 0 0Others/interest paid 27 (168) 1 1Net cash inflow (outflow) 59 (202) 23 52Beginning cash & cash equivalent 123 242 40 63Changes due to forex impact 60 0 0 0Ending cash & cash equivalent 242 40 63 115

KEY METRICS Year to 31 Aug (%) 2014 2015F 2016F 2017FProfitability EBITDA margin 13.4 13.9 14.4 14.7Pre-tax margin 9.4 9.7 9.9 9.8Net margin 7.9 7.8 8.0 7.9ROA 9.8 10.8 11.9 11.5ROE 13.3 14.0 14.5 14.1

Growth Turnover (1.6) 14.4 8.2 5.3EBITDA (5.3) 18.4 12.5 7.1Pre-tax profit (14.7) 17.6 10.8 3.9Net profit (13.6) 12.4 11.1 4.0Net profit (adj.) (16.3) 12.4 11.1 4.0EPS (16.3) 12.4 11.1 4.0

Leverage Debt to total capital 11.5 0.2 0.2 0.2Debt to equity 13.0 0.2 0.2 0.2Net debt/(cash) to equity (4.4) (2.5) (3.7) (6.5)Interest cover (x) 154.4 2,195.4 2,470.8 2,647.2





STRATEGY – SINGAPORE

Assessing Trough Valuations We review previous trough valuations to assess where potential opportunities lie and to avoid stocks that may look expensive. Opportunity knocks for selected developers and oil services companies. Stocks we are staying clear of for now include IHH and Tigerair.

WHAT’S NEW • Regional stock markets have pulled back by 3-9% from their recent high on concerns over

slowing growth in Europe and China. This prompts us to assess historical P/B trough valuations. The uncertainties have also resulted in a sharp rise in the VIX.

ACTION • Mid-cycle valuations. While the broader market is trading at a 23% discount to its long-

term mean P/B, a discount may be warranted owing to limited earnings visibility and broadly lower projected market ROE of 9.9% in 2015 (vs long-term average of 11.4%).

• Rise in fear factor and funds flow could see heightened volatility. Despite what appears to be mid-cycle and undemanding valuations, we believe the sharp rise in the VIX and potential funds outflow could see heightened volatility. Combined with the expected end of quantitative easing by the Fed, we think an analysis of trough valuations may be in order. Excluding the outlier period during the global financial crisis (GFC) in 2008, the Asian financial crisis (AFC) in 1998 and SARS in 2003, the FSSTI’s trough P/B valuation was 1.2x. Simplistically using this as a reference would suggest a valuation of 2,876 for the FSSTI. Should the Ebola outbreak intensify and spread to Asia, investors may take a more cautious view. Imputing the P/B low of 1.08x during SARS would imply 2,588 for the FSSTI but this is clearly not our base-case scenario.

• Slicing and dicing the sectors’ trough valuations. Refining our analysis further into sector specifics, we believe sectors such as oil services and property developer look compelling. Oil services remain interesting on a bottom-up basis as stocks such as Triyards and Pacific Radiance are attractively rated. Sectors that could appear frothy include healthcare which is trading at a 57% premium to its long-term P/B. We would avoid IHH Holdings and reiterate SELL on expensive valuations.

SECTOR LONG-TERM P/B VALUATION

Sector Current P/B (x)

LT P/B Mean* (x)

+1SD* P/B (x)

-1SD* P/B (x)

Trough P/B (Excl 2H08-

1H09)

Upside to LT P/B

Mean (%) Aviation 1.72 1.80 2.10 1.50 1.17 5.0 Finance 1.34 1.53 1.81 1.25 0.93 14.3 Healthcare 4.21 2.68 3.64 1.72 1.02 (36.4) Land Transport 2.43 2.35 2.78 1.93 1.31 (3.1) Media 1.89 3.06 4.11 2.00 1.56 62.0 Oil Services 1.45 1.84 2.75 0.93 0.63 26.8 Plantation 0.86 1.25 1.84 0.65 0.31 45.6 Property 0.76 1.07 1.47 0.67 0.49 40.2 REITs 0.98 0.94 1.10 0.77 0.62 (4.0) Shipping 0.86 1.09 1.40 0.79 0.45 26.9 Shipyard 1.64 2.22 3.17 1.28 0.98 35.1 Supply Chain 1.23 1.88 2.70 1.06 0.64 52.3 Technology 1.13 2.51 4.48 0.54 0.88 121.7 Telecoms 2.47 2.39 3.19 1.59 1.27 (2.9) UOBKH Overall 1.30 1.62 1.94 1.30 1.08 24.5 FSSTI ** 1.34 1.69 2.05 1.32 1.20 26.1

* Since year 2000 **Since year 1993 Source: UOB Kay Hian

UOB KAY HIAN KEY STOCKS

Price Target Upside Company 14 Oct 14 Price to TP (S$) (S$) (%) Top BUYs - Big Cap CapitaComm 1.60 1.88 17.5 CapitaLand 3.02 4.08 35.1 DBS 17.96 22.68 26.3 Ezion 1.585 2.62 37.7 Keppel Land 3.24 4.30 32.6 M1 3.44 4.05 17.7 O C B C 9.60 12.05 25.5 - Mid Cap Pacific Radiance 1.135 1.76 55.1 Riverstone 0.98 1.14 16.3 Silverlake 1.275 1.45 13.7 Triyards 0.71 1.10 54.9 Top SELLs IHH 1.865 1.60 (14.2) Tigerair 0.355 0.23 (35.2)


FSSTI’s P/B

0.50

1.00

1.50

2.00

2.50

3.00

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

(x )

Mean+1SD+2SD

-1SD-2SD

Source: Bloomberg, UOB Kay Hian

VIX

101214161820222426

Jan-14

Feb-14

Mar-14

Apr-14

May -14

Jun-14

Jul-14

Aug-14

Sep-14

Oct-14


ANALYSTS Andrew Chow, CFA +65 6590 6633 [email protected] Singapore Research Team +65 6535 6868 [email protected]





• Stocks on our P/B radar. Screening value on a trough P/B basis, we see potential opportunities in SIA, OUE and Venture. These stocks are trading at a premium of 4-28% to its trough valuations since 2000 (ex GFC). Comparatively, stocks under our coverage are trading at an average 131% premium from trough P/B valuations.

• Corporate earnings in Singapore have not impressed ytd. Unfortunately, Singapore’s corporate earnings have not been a catalyst as we have noted generally downward revisions in 2014 and 2015 earnings forecasts. We forecast 2014 and 2015 market EPS growth of 5.4% and 9.1% respectively but see potential downside risk in 2015 in light of recent global growth downgrades by the IMF (from 4.0% to 3.8%), tight foreign labour in Singapore as well as elevated costs (including rising office rentals). Also, top-line growth could remain under pressure, particularly for sectors such as property developer, plantations (if CPO prices are weaker than our estimate of RM2,800/tonne in 2015) and retail (impacted by e-commerce).

• Beneficiaries of rising rates. Despite broad concerns over the impending rise in interest rates, we highlight the potential beneficiaries, including banks (our preferred pick is DBS) and cash-rich companies. Within our sector coverage, stocks with high cash (measured by net cash/market cap) include SIA, Genting HK, Sembcorp Marine, SIA Engineering and Genting SP. Conversely, stocks with the highest gearing (net debt/equity) in descending order are NOL, Olam, Cosco, GuocoLand and Swiber.

• Action list. We believe investors should have a balanced portfolio consisting of undemanding big caps with yield and earnings visibility. Mid caps that have been aggressively sold down could also present selected opportunities. Stocks we favour in the big-cap list are DBS, CapitaLand, CCT, Keppel Land, M1, Ezion and OCBC. In the mid-cap space, we like Triyards, Pacific Radiance, Silverlake and Riverstone.

• Key risks include sharper-than-expected global growth, particularly from Europe and China, as well as geo-political risks.

.

WINNERS AND LOSER OF RISING RATES Winners (cash-rich companies) Net Cash to Company Ticker Mkt Cap (%) S I A SIA SP 36.9 Genting HK US$ GENHK SP 15.1 Sembcorp Marine SMM SP 11.5 SIA Engg SIE SP 11.5 Genting SP GENS SP 10.0 Losers (high-gearing companies)

Net Debt to Company Ticker Equity (%) N O L NOL SP 221.9 Olam OLAM SP 195.6 COSCO Corp COS SP 193.8 GuocoLand GUOL SP 166.0 Swiber SWIB SP 154.1


STOCKS UNDER P/B RADAR Company Current Trough % from P/B P/B Trough P/B Swiber 0.43 0.43 0.0 S I A 0.89 0.86 3.5 IndoAgri 0.75 0.71 6.0 Wheelock 0.68 0.58 17.4 OUE 0.67 0.57 19.3 S P H 1.89 1.56 20.6 O C B C 1.26 1.03 22.0 Venture 1.13 0.88 28.4


VALUATIONS OF UOB KAY HIAN KEY PICKS Price Target Last ------------ PE ------------ Yield ROE Net Gearing Market Price/ Company Ticker Rec 14 Oct 14 Price Year 2013 2014F 2015F 2015F 2015F 2015F Cap. NTA ps Big caps (S$) (S$) End (x) (x) (x) (%) (%) (%) (S$m) (x) CapitaComm CCT SP BUY 1.60 1.88 12/13 21.1 20.6 19.7 5.5 4.3 31.8 4,701.9 0.9 CapitaLand CAPL SP BUY 3.02 4.08 12/13 15.1 18.7 16.5 2.6 4.6 25.9 12,902.7 0.8 DBS DBS SP BUY 17.96 22.68 12/13 12.0 11.3 10.4 3.2 11.0 n.a. 44,524.5 1.5 Ezion EZI SP BUY 1.585 2.62 12/13 9.3 9.2 7.6 0.0 20.3 63.0 2,502.4 2.1 Keppel Land KPLD SP BUY 3.24 4.30 12/13 5.7 11.5 10.0 4.3 6.6 37.3 5,008.8 0.7 M1 M1 SP BUY 3.44 4.05 12/13 19.8 19.1 17.9 4.5 34.0 15.1 3,202.0 11.3 O C B C OCBC SP BUY 9.60 12.05 12/13 12.7 10.2 10.6 3.8 11.4 n.a. 37,803.3 1.5 Mid Caps Pacific Radiance PACRA SP BUY 1.135 1.76 12/13 9.2 7.5 7.0 1.8 18.3 36.5 823.7 1.6 Riverstone RSTON SP BUY 0.98 1.14 12/13 15.4 14.1 11.9 3.8 20.7 (18.3) 363.8 2.8 Silverlake SILV SP BUY 1.275 1.45 6/14 34.3 29.6 25.4 3.5 45.9 (54.5) 2,865.6 12.0 Triyards ETL SP BUY 0.71 1.10 8/13 4.9 5.9 5.2 0.0 17.3 38.3 230.4 1.1 Top SELLs IHH IHH SP SELL 1.865 1.60 12/13 60.4 51.9 40.2 0.5 5.1 4.3 15,253.0 5.7 Tigerair TGR SP SELL 0.355 0.23 3/14 n.a. n.a. n.a. 0.0 (10.2) 96.6 350.6 n.a.






COMPANY UPDATE HOLD

(Maintained)

Share Price S$1.815Target Price S$1.73Upside -4.7%

COMPANY DESCRIPTION Singapore Post is the national postal service provider in Singapore. The company provides domestic and international postal and courier services including end-to-end integrated mail solutions covering data printing, letter-shopping, delivery and mailroom management, and others. Singapore Post also offers end-to-end e-commerce logisticssolutions.

STOCK DATA GICS sector IndustrialsBloomberg ticker: SPOST SPShares issued (m): 2,121.6Market cap (S$m): 3,871.9Market cap (US$m): 3,038.73-mth avg daily t'over (US$m): 7.0

Price Performance (%) 52-week high/low S$1.87/S$1.27

1mth 3mth 6mth 1yr YTD4.3 5.5 34.2 44.3 37.7

Major Shareholders %Temasek Holdings Private Ltd 23.3Alibaba Investment Ltd 10.4

FY15 NAV/Share (cents) 31.65

FY15 Net Cash/Share (S$) 0.23

PRICE CHART

80

90

100

110

120

130

140

150

160

1.00

1.20

1.40

1.60

1.80

2.00(%)(lcy) SINGAPORE POST LTD SINGAPORE POST LTD/FSSTI INDEX

0

2040

60

80


Volume (m)

Source: Bloomberg

ANALYST Andrea Isabel Co, CFA +65 6590 6624 [email protected]

Singapore Post (SPOST SP)

Stay Logged In We remain excited as we think the region is on the cusp of an e-commerce phenomenon. SingPost continues to build steadily and we anticipate more developments. Maintain HOLD. Target price: S$1.73. Entry price: S$1.50.

WHAT’S NEW • Management of Singapore Post (SingPost) hosted a tour of its e-commerce logistics

facilities. We also recently hosted the company at our Asian Gems Conference. This note highlights the key takeaways.

STOCK IMPACT • An e-commerce enabler in Asia. SP eCommerce is SingPost’s answer to brands and

retailers who wish to leapfrog to Asia through e-commerce. Industry research shows the majority of US brands (64%) maintain e-commerce sites as a way to reach the Asia-Pacific market, without need for a physical retail store. Nonetheless, they face challenges on costs, currencies, fulfilment and online infrastructure. SP eCommerce addresses these with its regional end-to-end solutions, which is now on its third year of operations. It now runs the e-commerce operations of Adidas, Levi’s, Canon, Philips, Toshiba and JRunway, to name a few, in Asia-Pacific.

• Revenue model includes fixed, variable and recurring fees. Fixed fees are applied to set up the initial e-commerce platform. Recurring fees are generated from maintenance, while variable fees are derived from delivery, warehousing, and in some cases, revenue sharing. Management believes SingPost’s 3-year contracts provide clients an efficient and cost-effective long-term solution. It can develop an online site in three months, regional ramp-up is faster with SingPost’s wide presence, and customer support is provided. Riding on the postal network, local distribution centres and warehouses, clients can also expect lower shipping fees.

• Strong focus to grow top-line with bigger volumes... With the strong growth from e-commerce, utilisation at its warehouse space is already at a maximum. SingPost announced that it will develop a 553,000sf regional eCommerce Logistics Hub in Tampines LogisPark that will be fully operational in 2H16. The hub will be able to handle up to 100,000 parcels/day and will cost S$182m, including land lease, construction and equipment costs. This will be fully funded from the group’s cash holdings of S$447m as at end-Jun 14.

KEY FINANCIALS Year to 31 Mar (S$m) 2013 2014 2015F 2016F 2017FNet turnover 659 821 895 999 1,107EBITDA 157 172 185 207 229Operating profit 126 136 144 161 182Net profit (rep./act.) 122 128 137 152 170Net profit (adj.) 122 128 137 152 170EPS (cent) 6.4 6.7 6.4 7.2 8.0PE (x) 28.4 27.1 28.3 25.5 22.8P/B (x) 10.8 10.0 5.8 5.6 5.4EV/EBITDA (x) 23.6 21.6 20.0 17.9 16.2Dividend yield (%) 3.4 3.4 3.4 3.4 3.6Net margin (%) 18.5 15.6 15.3 15.2 15.4Net debt/(cash) to equity (%) (13.7) (24.6) (47.0) (48.5) (53.4)Interest cover (x) 11.3 25.7 26.4 29.4 32.6ROE (%) 18.3 18.8 16.0 14.8 16.2Consensus net profit - - 155 173 191UOBKH/Consensus (x) - - 0.88 0.88 0.89Source: SingPost, Bloomberg, UOB Kay Hian





• …and market reach. SingPost also continues to deliver on its regionalisation strategy. It now runs the entire e-commerce operation for Adidas across Southeast Asia. It is working with its brand customers on launching online sites in other countries and leveraging on strategic alliances with strong local logistics operators. So far, monobrand sites have been launched in Singapore, Malaysia, Philippines, Thailand, Indonesia, Australia, New Zealand, Korea and Hong Kong.

• Automation another gear for efficiency. Management has been very active in finding innovative solutions to address space and labour constraints. It is evaluating a computer-controlled vertical storage system that would reduce space usage, travel time and manpower costs. Self-service outlets such as the POPStation are also expected to generate additional revenue with its monthly fees while providing an enhanced service to businesses and consumers alike. As of mid-Sep 14, 67 POPStations have been rolled out in Singapore with 58 operational. Management targets to deploy two stations each week until it hits 100 by end-14. A mobile app will be launched too, a first in the world, that will enable customers to track their parcels and unlock their locker via Bluetooth technology.

EARNINGS REVISION/RISK • No change to our earnings forecasts. We project a 3-year net profit CAGR of 9%. We

see more upside from a JV with Alibaba and M&As.

VALUATION/RECOMMENDATION • Maintain HOLD and target price of S$1.73, based on our 3-stage DCF model. The

implied FY15F PE is 27x. While we see a compelling medium-term story for SingPost, we await more details and developments on its e-commerce-related investments. Our suggested entry price is S$1.50.

SHARE PRICE CATALYST • Faster than expected growth in e-commerce-related businesses.

• Potential JV with Alibaba.

• Strategic investments and M&As.

E-COMMERCE LOGISTICS

Source: SingPost, UOB Kay Hian

SAM AND POPSTATION

Source: SingPost, UOB Kay Hian





PROFIT & LOSS

BALANCE SHEET Year to 31 Mar (S$m) 2014 2015F 2016F 2017F Year to 31 Mar (S$m) 2014 2015F 2016F 2017F Net turnover 821.1 895.3 999.4 1,106.6 Fixed assets 465.4 497.9 516.4 503.5 EBITDA 171.7 185.3 206.9 229.1 Other LT assets 301.0 314.7 319.3 325.6 Deprec. & amort. 35.5 41.5 45.6 47.0 Cash/ST investment 404.4 713.7 737.8 805.8 EBIT 136.2 143.9 161.2 182.1 Other current assets 151.1 163.6 180.5 197.8 Total other non-operating income 44.8 45.7 46.6 47.5 Total assets 1,321.9 1,689.9 1,754.1 1,832.7 Associate contributions 4.4 4.9 5.5 6.2 ST debt 14.0 14.0 14.0 14.0 Net interest income/(expense) (6.7) (7.0) (7.0) (7.0) Other current liabilities 337.5 374.4 412.9 452.5 Pre-tax profit 178.8 187.4 206.3 228.8 LT debt 220.1 220.1 220.1 220.1 Tax (34.0) (33.7) (37.1) (41.2) Other LT liabilities 54.4 57.8 62.1 66.5 Minorities (1.7) (1.9) (2.1) (2.3) Shareholders' equity 693.7 1,019.5 1,038.9 1,071.2 Preferred dividends (14.9) (14.9) (14.9) (14.9) Minority interest 2.2 4.0 6.1 8.3 Net profit 128.2 136.9 152.2 170.5 Total liabilities & equity 1,321.9 1,689.9 1,754.1 1,832.7 Net profit (adj.) 128.2 136.9 152.2 170.5 CASH FLOW KEY METRICS Year to 31 Mar (S$m) 2014 2015F 2016F 2017F Year to 31 Mar (%) 2014 2015F 2016F 2017F Operating 241.8 222.8 241.4 261.3 Profitability Pre-tax profit 178.8 187.4 206.3 228.8 EBITDA margin 20.9 20.7 20.7 20.7 Tax (29.2) (33.7) (37.1) (41.2) Pre-tax margin 21.8 20.9 20.6 20.7 Deprec. & amort. 35.5 41.5 45.6 47.0 Net margin 15.6 15.3 15.2 15.4 Associates (4.4) (4.9) (5.5) (6.2) ROA 8.9 9.1 8.8 9.5 Working capital changes 55.6 25.5 25.1 25.9 ROE 18.8 16.0 14.8 16.2 Non-cash items 1.7 0.0 0.0 0.0 Other operating cashflows 3.9 7.0 7.0 7.0 Growth Investing (37.6) (80.6) (62.5) (33.2) Turnover 24.6 9.0 11.6 10.7 Capex (growth) (38.8) (66.4) (62.5) (33.2) EBITDA 9.3 7.9 11.6 10.7 Investments (1.9) (14.2) 0.0 0.0 Pre-tax profit 7.1 4.8 10.1 10.9 Proceeds from sale of assets 1.4 0.0 0.0 0.0 Net profit 5.4 6.8 11.2 12.0 Others 1.8 0.0 0.0 0.0 Net profit (adj.) 5.4 6.8 11.2 12.0 Financing (428.2) 167.0 (154.7) (160.1) EPS 4.6 (4.2) 11.2 12.0 Dividend payments (133.6) (134.0) (147.7) (153.0) Issue of shares 7.2 266.0 0.0 0.0 Leverage Proceeds from borrowings (297.5) 0.0 0.0 0.0 Debt to total capital 25.2 18.6 18.3 17.8 Others/interest paid (4.3) 35.0 (7.0) (7.0) Debt to equity 33.8 23.0 22.5 21.9 Net cash inflow (outflow) (223.9) 309.2 24.2 68.0 Net debt/(cash) to equity (24.6) (47.0) (48.5) (53.4) Beginning cash & cash equivalent 628.3 404.4 713.7 737.8 Interest cover (x) 25.7 26.4 29.4 32.6 Ending cash & cash equivalent 404.4 713.7 737.8 805.8





COMPANY RESULTS HOLD

(Maintained)

Share Price Bt2.98Target Price Bt2.96Upside -0.7%(Previous TP Bt2.80)

COMPANY DESCRIPTION The sixth-largest bank in Thailand. ING Group is the major shareholder with a 25% stake.

STOCK DATA GICS sector FinancialsBloomberg ticker: TMB TBShares issued (m): 43,678.8Market cap (Btm): 130,162.7Market cap (US$m): 4,010.73-mth avg daily t'over (US$m): 27.3

Price Performance (%) 52-week high/low Bt3.14/Bt1.92

1mth 3mth 6mth 1yr YTD(2.0) 19.2 20.2 6.4 44.7

Major Shareholders %MOF 26.1ING Bank 25.2DBS Bank 3.3

FY14 NAV/Share (Bt) 1.57

FY14 CAR Tier-1 (%) 11.03

PRICE CHART

50

60

70

80

90

100

110

120

1.50

2.00

2.50

3.00

3.50(%)(lcy) TMB BANK PCL TMB BANK PCL/SET INDEX

0

5001000

1500

2000


Volume (m)

Source: Bloomberg

ANALYST Thananchai Jittanoon +662 659 8303 [email protected]

TMB Bank (TMB TB)

3Q14: Strong Revenue Growth And Falling Provisions Earnings came in above expectations on lower-than-expected credit costs. TMB’s core business performed in line with forecast with strong loan growth, wider NIM and fee income as key positives. Maintain HOLD. Target price: Bt2.96. Entry price: Bt2.60.

3Q14 RESULTS Year to 31 Dec (Btm)

3Q13 2Q14 3Q14 yoy % chg

qoq % chg

Remarks

Net interest income 5,187 5,225 5,537 6.7 6.0 Loan growth healthy at 3% qoq, driven by both corporate and SME loans

Non-interest income 1,891 2,034 2,153 13.8 5.8 Fees grew 19% yoy Total income 7,078 7,259 7,690 8.6 5.9 SG&A (3,577) (3,727) (3,864) 8.0 3.7 Pre-provision profit 3,501 3,532 3,825 9.3 8.3 Provisions (1,195) (309) (825) (31.0) 166.9 Credit costs down to 63bp Net profit 1,870 2,576 2,387 27.7 (7.3) EPS (Bt) 0.0 0.1 0.1 27.7 (7.3) Ratios (%) yoy bp

chg qoq bp

chg Avg. earnings yields 5.22 4.87 4.99 (23) 12 Avg. funding costs (2.34) (2.21) (2.15) (19) (7) NIM 3.10 2.85 3.04 (6) 19 Driven by rising LDR and falling funding

costs ROA 1.03 1.31 1.22 ROE 12.70 16.14 14.58 Source: TMB, UOB Kay Hian

RESULTS • Results above expectations. TMB reported net profit Bt2.4b in 3Q14, up 28% yoy,

driven by healthy revenue growth and falling provisions. Earnings were 27% above our forecast as provisions came in below our expectations.

STOCK IMPACT • Healthy top-line. Net interest income grew 7% yoy. Loan growth was strong, up 3% qoq,

driven by both corporate and SME loans. Net interest margin improved 19bp qoq to 3.04% on falling funding costs and rising loan-deposit ratio (LDR). Thanks to stronger loan growth, LDR rose slightly qoq to 93%, providing some support to NIM improvement.

KEY FINANCIALS Year to 31 Dec (Btm) 2012 2013 2014F 2015F 2016FNet interest income 17,065 20,822 20,827 23,415 25,567Non-interest income 7,641 8,385 7,862 8,825 9,918Net profit (rep./act.) 1,263 5,738 8,519 9,931 11,355Net profit (adj.) 1,263 5,738 8,519 9,931 11,355EPS (Bt) 0.0 0.1 0.2 0.2 0.3PE (x) 102.7 22.6 15.2 13.1 11.4P/B (x) 2.3 2.1 1.9 1.7 1.5Dividend yield (%) 1.1 1.3 2.0 2.3 2.6Net int margin (%) 2.6 3.1 2.9 3.0 3.1Cost/income (%) 57.8 49.8 52.6 49.4 47.6Loan loss cover (%) 112.8 140.4 143.1 149.5 157.0Consensus net profit - - 8,068 9,259 11,060UOBKH/Consensus (x) - - 1.06 1.07 1.03Source: TMB, Bloomberg, UOB Kay Hian





• Stronger fee performance. Non-interest income expanded 14% yoy, driven by stronger fee growth of 19% yoy, underpinned by higher loan-related fees and cross-selling fees (bancassurance and mutual funds).

• Opex was well controlled, rising 8% yoy while cost/income ratio eased to 53%.

• Benign asset quality. Asset quality remained relatively stable with NPLs ratio at 3.4% and coverage ratio at 139%. Credit costs fell sharply yoy to 63bp (3Q13: 101bp), lower than our forecast of 90bp. This is the key variance to our earnings forecast.

EARNINGS REVISION/RISK • To reflect the lower-than-anticipated credit costs in 3Q14, we reduce our credit cost

assumptions for 2014-16 from 80-85bp to 60-70bp.

EARNINGS REVISION (Btm) 2014F 2015F 2016F Old 7,667 9,176 10,512 New 8,519 9,931 11,355 % chg 11 8 8


VALUATION/RECOMMENDATION • Re-iterate HOLD. While we are pleased with the steady improvement in the bank’s

operations, current valuations at 13x 2015F PE and 1.7x 2015F P/B seem to have priced in most positives. Re-iterate HOLD with a higher target price of Bt2.96, or 1.7x 2015F P/B. Entry price is Bt2.60.

SHARE PRICE CATALYST • The stronger-than-expected 3Q14 results and M&A speculative appeal could serve as

near-term catalysts.





PROFIT & LOSS Year to 31 Dec (Btm) 2013 2014F 2015F 2016FInterest income 34,826 35,731 40,103 45,423Interest expense (14,004) (14,903) (16,688) (19,856)Net interest income 20,822 20,827 23,415 25,567Fees & commissions 5,579 5,114 5,882 6,764Other income 2,807 2,747 2,943 3,154Non-interest income 8,385 7,862 8,825 9,918Income from islamic banking 0 0 0 0Total income 29,207 28,689 32,240 35,486Staff costs (7,595) (7,746) (8,056) (8,459)Other operating expense (6,955) (7,353) (7,878) (8,435)Pre-provision profit 14,657 13,590 16,305 18,591Loan loss provision (7,613) (3,223) (4,268) (4,781)Other provisions 0 0 0 0Associated companies 0 0 0 0Other non-operating income 0 0 0 0Pre-tax profit 7,045 10,367 12,036 13,811Tax (1,297) (1,837) (2,094) (2,444)Minorities (10) (11) (11) (11)Net profit 5,738 8,519 9,931 11,355Net profit (adj.) 5,738 8,519 9,931 11,355

BALANCE SHEET Year to 31 Dec (Btm) 2013 2014F 2015F 2016FCash with central bank 16,576 16,908 17,246 17,591Govt treasury bills & securities 82,621 78,490 74,566 70,837Interbank loans 96,437 106,081 95,473 85,926Customer loans 469,010 511,824 574,018 643,555Investment securities 20,655 19,623 18,641 17,709Derivative receivables 0 0 0 0Associates & JVs 0 0 0 0Fixed assets (incl. prop.) 11,412 11,640 11,873 12,111Other assets 69,019 66,662 93,625 110,849Total assets 765,732 811,228 885,442 958,578Interbank deposits 66,038 58,113 51,140 45,003Customer deposits 529,606 573,081 641,850 718,872Derivative payables 0 0 0 0Debt equivalents 38,173 44,162 45,316 46,528Other liabilities 70,082 67,257 71,142 63,801Total liabilities 703,899 742,613 809,448 874,204Shareholders' funds 61,757 68,535 75,910 84,286Minority interest - accumulated 76 80 84 88Total equity & liabilities 765,732 811,228 885,442 958,578

OPERATING RATIOS Year to 31 Dec (%) 2013 2014F 2015F 2016FCapital Adequacy Tier-1 CAR 10.6 11.0 11.1 11.3Total CAR 15.9 13.9 13.7 13.7Total assets/equity (x) 12.4 11.8 11.7 11.4Tangible assets/tangible common equity (x)

12.4 11.8 11.7 11.4

Asset Quality NPL ratio 3.9 4.3 4.1 3.8Loan loss coverage 140.4 143.1 149.5 157.0Loan loss reserve/gross loans (6.3) (6.2) (6.1) (6.0)Increase in NPLs 1.4 5.0 5.0 5.0Credit cost (bp) (152.4) (59.2) (70.0) (70.0)

Liquidity Loan/deposit ratio 88.6 89.3 89.4 89.5Liquid assets/short-term liabilities 32.8 31.9 27.0 22.8Liquid assets/total assets 25.5 24.8 21.2 18.2

KEY METRICS Year to 31 Dec (%) 2013 2014F 2015F 2016FGrowth Net interest income, yoy chg 22.0 0.0 12.4 9.2Fees & commissions, yoy chg 19.0 (8.3) 15.0 15.0Pre-provision profit, yoy chg 40.7 (7.3) 20.0 14.0Net profit, yoy chg 354.4 48.5 16.6 14.3Net profit (adj.), yoy chg 354.4 48.5 16.6 14.3Customer loans, yoy chg 9.4 9.1 12.2 12.1Customer deposits, yoy chg 6.7 8.2 12.0 12.0Profitability Net interest margin 3.1 2.9 3.0 3.1Cost/income ratio 49.8 52.6 49.4 47.6Adjusted ROA 0.8 1.1 1.2 1.2Reported ROE 9.6 13.1 13.8 14.2Adjusted ROE 9.6 13.1 13.8 14.2Valuation P/BV (x) 2.1 1.9 1.7 1.5P/NTA (x) 2.1 1.9 1.7 1.5Adjusted P/E (x) 22.6 15.2 13.1 11.4Dividend Yield 1.3 2.0 2.3 2.6Payout ratio 30.3 30.0 30.0 30.0





COMPANY UPDATE BUY (Maintained) Share Price Bt4.74 Target Price Bt5.84 Upside +23.2%

COMPANY DESCRIPTION The Erawan Group is a leading hotel investment company in Thailand. Its hotel portfolio ranges from luxury to mid-scale and economy across Thailand’s major tourist destinations.

STOCK DATA GICS sector Consumer Discretionary Bloomberg ticker: ERW TB Shares issued (m): 2,477.1 Market cap (Btm): 11,642.3 Market cap (US$m): 358.4 3-mth avg daily t'over (US$m): 1.9

Price Performance (%) 52-week high/low Bt5.40/Bt3.08

1mth 3mth 6mth 1yr YTD (9.6) 0.9 20.5 (9.6) 43.3

Major Shareholders % Wattanavekin family 30.0

Vongkusolkit family 29.8

FY14 NAV/Share (Bt) 1.85

FY14 Net Debt/Share (Bt) 3.04

PRICE CHART

50

60

70

80

90

100

110

120

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00(%)(lcy)

ERAWAN GROUP PCL/THE

ERAWAN GROUP PCL/THE/SET INDEX

020

40

60

80


Volume (m)

Source: Bloomberg

ANALYST Pornthipa Rayabsangduan +662 659 8302 [email protected]

The Erawan Group (ERW TB)

Key Takeaways From Asian Gems Conference We hosted the Erawan Group at UOBKH Asian Gems Conference in Singapore. We believe the market has already priced in the expected net loss for 2014. Investors are interested in the turnaround story of ERW in 2015 on the back of a recovery in Thai tourism and hotel operations. Maintain BUY on a recovery story, more diversified revenue in terms of segments and locations, as well as potential gains from the sale of hotel properties to a REIT. Target price: Bt5.84.

WHAT’S NEW

• Hotel operations in Bangkok showed signs of recovery in 3Q14. We expect The Erawan Group (ERW) to report a net loss of Bt87.5m in 3Q14. The company will record a one-off gain of Bt8m from the sale of three shophouses in Mukdahan province. Excluding the one-off gain, ERW is likely to post a normalised loss of Bt95.5m in 3Q14, smaller than the normalised loss of Bt132.9m in 2Q14 due to the recovery of its hotel operations in Bangkok after the political situation has stabilised. RevPar of its Bangkok hotels fell 9.2% yoy in 3Q14, a big improvement from the -40.9% in 1Q14 and -26.4% in 2Q14. Meanwhile, RevPar of ERW’s system-wide hotels declined 17.4% yoy to Bt1,458 in 3Q14 owing to a drop in occupancy to 62% and the addition of six Hop Inn hotels. Excluding Hop Inn hotels, RevPar of its system-wide hotels would have declined 10.9% yoy to Bt1,572. ERW’s bottom line is likely to return to the black in 4Q14, driven by the high season and stable political situation.

• Six new hotels slated to open in 4Q14. Management said the opening of new hotels in 2H14 is on track. In 3Q14, ERW opened Holiday Inn Extension Pattaya on 1 Aug 14 and two Hop Inn hotels at Nakhonratchasima and Ubonratchatani provinces. Six new hotels are slated to open in 4Q14, including Ibis Krabi in Nov 14, Mercure Pattaya in Dec 14, and four Hop Inn hotels at Tak, Sakaeo, Lampang, and Khonkaen provinces. By end-14, ERW will have 28 hotels with a total inventory of 5,289 rooms. For 2015, the company targets to open 15 Hop Inn hotels in Thailand. We estimate the contribution from Hop Inn hotels at 2.7% of total hotel revenue in 2015. So far, the average occupancy of newly-opened Hop Inn hotels was a low 20%. ERW is doing marketing campaigns, ie coordinating with credit card companies, rental car operators and big corporates, promoting Hop Inn hotels at travel fairs, advertising through brochures and social media, as well as giving free vouchers to increase brand awareness and ramp up the performance of Hop Inn hotels. The company expects occupancy of Hop Inn hotels opened this year to rise to 70% in 2015.

KEY FINANCIALS Year to 31 Dec (Btm) 2012 2013 2014F 2015F 2016F Net turnover 4,302 4,702 4,333 5,820 6,501 EBITDA 1,202 1,239 921 1,571 1,894 Operating profit 561 574 230 803 1,047 Net profit (rep./act.) 58 937 (93) 327 496 Net profit (adj.) 58 132 (143) 327 496 EPS (Bt) 0.0 0.1 (0.1) 0.1 0.2 PE (x) 183.3 84.0 n.m. 36.0 23.8 P/B (x) 3.0 2.3 2.5 2.4 2.2 EV/EBITDA (x) 16.1 15.6 21.0 12.3 10.2 Dividend yield (%) 0.4 3.2 (0.3) 1.0 1.6 Net margin (%) 1.3 19.9 (2.1) 5.6 7.6 Net debt/(cash) to equity (%) 213.8 123.3 164.6 167.2 167.8 Interest cover (x) 3.1 3.4 2.4 3.9 4.3 ROE (%) 1.6 22.0 (1.9) 6.6 9.6 Consensus net profit - - (31) 314 502 UOBKH/Consensus (x) - - 4.66 1.04 0.99 Source: ERW, Bloomberg, UOB Kay Hian





HOTEL OPERATING STATISTICS Occupancy rate (%) 3Q13 3Q14 ppt yoy 9M13 9M14 ppt yoy Luxury Bangkok 70 66 -4.3 73 54 -18.9 Luxury Resorts 66 59 -6.3 67 65 -1.7 Midscale 84 69 -15.5 82 62 -19.9 Economy 78 64 -13.9 82 69 -13.8 Budget - 20 n.a. - 17 n.a. Total 77 62 -15.4 80 62 -17.8 Total (excluding Budget) 77 66 -11.8 80 64 -15.8 ARR (Bt) % yoy % yoy Luxury Bangkok 4,702 4,770 1.5 4,840 4,798 -0.9 Luxury Resorts 6,215 6,212 0.0 6,800 7,433 9.3 Midscale 2,478 2,489 0.4 2,558 2,665 4.2 Economy 1,080 1,121 3.8 1,186 1,289 8.7 Budget - 536 n.a. - 538 n.a. Total 2,280 2,351 3.1 2,385 2,430 1.9 Total (excluding Budget) 2,280 2,398 5.2 2,385 2,452 2.8 RevPar (Bt) Luxury Bangkok 3,311 3,155 -4.7 3,541 2,605 -26.4 Luxury Resorts 4,077 3,685 -9.6 4,535 4,830 6.5 Midscale 2,089 1,713 -18.0 2,089 1,647 -21.2 Economy 843 719 -14.7 978 885 -9.5 Budget - 108 n.a. - 89 n.a. Total 1,765 1,458 -17.4 1,902 1,505 -20.9 Total (excluding Budget) 1,765 1,572 -10.9 1,902 1,568 -17.6

Source: ERW, UOB Kay Hian

STOCK IMPACT • Contribution from non-luxury segment to rise to 50.5% of total hotel revenue by

2015. We estimate ERW’s revenue from the non-luxury segment to grow at a stronger 25.7% CAGR in 2014-15, compared with 13% for the luxury segment. The key drivers should be the opening of new hotels, solid market fundamentals and a favourable demand-supply balance. Contribution from the non-luxury segment, including mid-range hotels, economy hotels under the Ibis brand, and budget hotels under the Hop Inn brand, is expected to increase to 50.5% of total hotel revenue in 2015 from 40.0% in 2013.

EARNINGS REVISION/RISK • Net profit forecasts for 2014-15 unchanged. Key risks are a global economic

slowdown, deterioration of Thailand’s economic outlook and political disturbances, which would affect demand in the tourism sector.

VALUATION/RECOMMENDATION • Maintain BUY on turnaround story for 2015. ERW’s hotel operations should gradually

improve in 3Q14 and normalise in 4Q14 and 2015. We expect it to turn around with a net profit of Bt326.9m in 2015 on the back of a recovery in Thai tourism with the stabilising political situation. In addition, revenue is likely to be more diversified in terms of hotel segments and locations, given ERW’s expansion strategy to develop new hotels in the non-luxury segment across Thailand and ASEAN countries. Our target price is Bt5.84, pegged at 14.0x 2015F EV/EBITDA, in line with its historical average EV/EBITDA since 2006, and equivalent to about a 20% discount to our RNAV/share.

SHARE PRICE CATALYST • The sale of hotel properties to a REIT in 2015.

• Faster-than-expected turnaround at its Naka Island Resort in Phuket.

• The lifting of martial law.

OCCUPANCY, ARR AND REVPAR

2,640

1,593 1,400

1,622 1,808

1,939 1,724 1,815 1,771

59.0% 58.3% 58.4%

69.7%75.1%

79.2%

67.5%

78.3% 79.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

(Bt)

ARR RevPar Occupancy rate Source: ERW, UOB Kay Hian REVENUE CONTRIBUTION BY DESTINATION

58%70% 70%

42%30% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q14 2Q14 3Q14

Bangkok Non Bangkok Source: ERW REVENUE CONTRIBUTION BY SEGMENT

100.0% 99.0%

65.0% 58.0% 55.0% 49.5%

1.0%

35.0% 42.0% 45.0% 50.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2007 2012 2013 2014F 2015F

Luxury Non Luxury Source: ERW, UOB Kay Hian EV/EBITDA BAND

-1.5SD : 10.1x-1SD : 11.4x

Mean : 14.1x+0.5SD : 15.4x

+1SD : 16.8x+1.5SD : 18.1x

+2SD : 19.5x

5.0

7.5

10.0

12.5

15.0

17.5

20.0

Jan-06 Sep-07 May-09 Jan-11 Sep-12 May-14

EV/EBITDA (x)






PROFIT & LOSS

BALANCE SHEET Year to 31 Dec (Btm) 2013 2014F 2015F 2016F Year to 31 Dec (Btm) 2013 2014F 2015F 2016F Net turnover 4,702 4,333 5,820 6,501 Fixed assets 12,141 13,022 14,299 15,503 EBITDA 1,239 921 1,571 1,894 Other LT assets 347 400 415 425 Deprec. & amort. 665 690 768 846 Cash/ST investment 827 328 326 260 EBIT 574 230 803 1,047 Other current assets 400 376 493 544 Total other non-operating income 31 32 37 42 Total assets 13,715 14,127 15,533 16,732 Associate contributions 16 18 18 18 ST debt 1,004 1,345 1,345 1,345 Net interest income/(expense) (368) (386) (402) (435) Other current liabilities 1,112 1,157 1,424 1,518 Pre-tax profit 252 (106) 455 672 LT debt 6,030 6,500 7,225 7,866 Tax (91) (26) (87) (131) Other LT liabilities 340 352 365 379 Minorities (30) (11) (41) (46) Shareholders' equity 5,035 4,568 4,929 5,334 Net profit 937 (93) 327 496 Minority interest 194 204 245 291 Net profit (adj.) 132 (143) 327 496 Total liabilities & equity 13,715 14,127 15,533 16,732 CASH FLOW KEY METRICS Year to 31 Dec (Btm) 2013 2014F 2015F 2016F Year to 31 Dec (%) 2013 2014F 2015F 2016F Operating 993 610 1,269 1,412 Profitability Pre-tax profit 252 (106) 455 672 EBITDA margin 26.4 21.3 27.0 29.1 Tax (91) (26) (87) (131) Pre-tax margin 5.4 (2.4) 7.8 10.3 Deprec. & amort. 665 690 768 846 Net margin 19.9 (2.1) 5.6 7.6 Associates (16) (18) (18) (18) ROA 7.1 (0.7) 2.2 3.3 Working capital changes 183 69 150 43 ROE 22.0 (1.9) 6.6 9.6 Other operating cashflows 0.0 0.0 0.0 0.0 Investing (306) (1,545) (2,030) (2,028) Growth Capex (growth) (223) (1,574) (2,060) (2,060) Turnover 9.3 (7.8) 34.3 11.7 Investments (147) 18 18 18 EBITDA 3.1 (25.7) 70.6 20.5 Others 64 12 13 14 Pre-tax profit 9.8 (142.1) n.a. 47.7 Financing (270) 437 759 550 Net profit 1,522.3 (109.9) n.a. 51.6 Dividend payments (73) (375) 34 (121) Net profit (adj.) 128.1 (208.5) n.a. 51.6 Issue of shares 646 0.7 0.0 30 EPS 118.3 (201.8) n.a. 51.6 Proceeds from borrowings (845) 811 725 641 Others/interest paid 0.9 0.0 0.0 0.0 Leverage Net cash inflow (outflow) 417 (499) (2.0) (66) Debt to total capital 57.4 62.2 62.4 62.1 Beginning cash & cash equivalent 410 827 328 326 Debt to equity 139.7 171.7 173.9 172.7

Ending cash & cash equivalent 827 328 326 260 Net debt/(cash) to equity 123.3 164.6 167.2 167.8

Interest cover (x) 3.4 2.4 3.9 4.3





Disclosures/Disclaimers This report is prepared and/or distributed by UOB Kay Hian Pte Ltd (“UOBKH”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. Advice should be sought from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. This report is confidential. This report may not be published, circulated, reproduced or distributed in whole or in part by any recipient of this report to any other person without the prior written consent of UOBKH. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside Singapore or any other jurisdiction as UOBKH may determine in its absolute discretion, where the distribution, publication or use of this report would be contrary to applicable law or would subject UOBKH and its connected persons (as defined in the Financial Advisers Act, Chapter 110 of Singapore) to any registration, licensing or other requirements within such jurisdiction. The information or views in the report (“Information”) has been obtained or derived from sources believed by UOBKH to be reliable. However, UOBKH makes no representation as to the accuracy or completeness of such sources or the Information and UOBKH accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. UOBKH and its connected persons may have issued other reports expressing views different from the Information and all views expressed in all reports of UOBKH and its connected persons are subject to change without notice. UOBKH reserves the right to act upon or use the Information at any time, including before its publication herein. Except as otherwise indicated below, (1) UOBKH, its connected persons and its officers, employees and representatives may, to the extent permitted by law, transact with, perform or provide broking, underwriting, corporate finance-related or other services for or solicit business from, the subject corporation(s) referred to in this report; (2) UOBKH, its connected persons and its officers, employees and representatives may also, to the extent permitted by law, transact with, perform or provide broking or other services for or solicit business from, other persons in respect of dealings in the securities referred to in this report or other investments related thereto; (3) the officers, employees and representatives of UOBKH may also serve on the board of directors or in trustee positions with the subject corporation(s) referred to in this report. (All of the foregoing is hereafter referred to as the “Subject Business”); and (4) UOBKH may otherwise have an interest (including a proprietary interest) in the subject corporation(s) referred to in this report. As of the date of this report, no analyst responsible for any of the content in this report has any proprietary position or material interest in the securities of the corporation(s) which are referred to in the content they respectively author or are otherwise responsible for. Each research analyst of UOBKH who produced this report hereby certifies that (1) the views expressed in this report in any event accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKH or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKH’s total revenues, a portion of which are generated from UOBKH’s business of dealing in securities. IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSES Where the report is distributed in Singapore and contains research analyses or reports from a foreign research house, please note: (i) recipients of the analyses or reports are to contact UOBKH (and not the relevant foreign research house) in Singapore in respect of any matters arising from, or in connection with, the analysis or report; and (ii) to the extent that the analyses or reports are delivered to and intended to be received by any person in Singapore who is not an accredited investor, expert investor or institutional investor, UOBKH accepts legal responsibility for the contents of the analyses or reports IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by UOBKH, a company authorized, as noted above, to engage in securities activities in Singapore. UOBKH is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution by UOBKH (whether directly or through its US registered broker dealer affiliate named below) to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). All US persons that





receive this document by way of distribution from or which they regard as being from UOBKH by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through UOB Kay Hian (U.S.) Inc (“UOBKHUS”), a registered broker-dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through UOBKH. UOBKHUS accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to and intended to be received by a U.S. person other than a major U.S. institutional investor. The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of UOBKHUS and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Analyst Certification/Regulation AC As noted above, each research analyst of UOBKH who produced this report hereby certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject corporation(s) and securities in this report; (2) the report was produced independently by him/her; (3) he/she does not carry out, whether for himself/herself or on behalf of UOBKH or any other person, any of the Subject Business involving any of the subject corporation(s) or securities referred to in this report; and (4) he/she has not received and will not receive any compensation that is directly or indirectly related or linked to the recommendations or views expressed in this report or to any sales, trading, dealing or corporate finance advisory services or transaction in respect of the securities in this report. However, the compensation received by each such research analyst is based upon various factors, including UOBKH’s total revenues, a portion of which are generated from UOBKH’s business of dealing in securities. Copyright 2014, UOB Kay Hian Pte Ltd. All rights reserved. http://research.uobkayhian.com MCI (P) 116/03/2014 RCB Regn. No. 198700235E


regional morning notes wednesday, 15 october...

Documents