stands to see asp upside from the new iphones in 2h16...
TRANSCRIPT
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Taiwan Information Technology
What's new: Largan’s share price has rallied by a strong 40% YTD, which we believe has been driven by the market starting to realise it is well-positioned for the coming spec upgrade trend for the new iPhones, as discussed in 12MP+12MP likely for iPhone 7 Plus, published on 21 January 2016. We believe the rally is not over and see further upside on strong operating-profit growth for 2H16-17E. We view the weak 2Q16 revenue as a good opportunity for investors to accumulate the stock. What's the impact: A major beneficiary of spec upgrades for the new iPhones. As discussed in Eyeing spec upgrade trends, we view the enhanced camera function as a key selling-point for the upcoming new iPhone 7 models and see Largan as a major beneficiary. Our recent market research indicates Apple plans to adopt a 12MP single cam with a 6P lens design (from 5P) for the iPhone 7 (4.7”), which should see Largan enjoy a 10-15% ASP increase, if not more. For the iPhone 7 Plus (5.5”), Apple plans to adopt a 12MP+12MP dual-cam with a 6P+5P lens design, implying that Largan should see a 100% ASP premium over the current model (iPhone 6S Plus). We now expect the dual-cam model to account for 35% of all the new iPhones in 2H16, higher than our earlier estimate of 25%. For the iPhone 7, we expect Largan to no longer provide VCM/OIS assembly service for all models, due to the change in camera structure. We estimate this change would reduce Largan’s revenue by 7-9% for 2016-18E but have only a 1-2% earnings impact, which we have factored into our revised forecasts. Weak 2Q16E should provide window to buy ahead of strong 2H16-17. Due to iPhone 6S ongoing inventory adjustments, we forecast 2Q16 revenue of TWD9.4bn, up 14% QoQ but down 31% YoY. But we look for Largan to deliver strong HoH revenue growth in 2H16E with operating profit resuming 18% YoY growth (vs. a 27% YoY decline in 1H16), on the back of ASP increases and the ramp-up in shipments for new iPhones (page 2) as well as the spec upgrades from Chinese brands. We forecast Largan to deliver strong operating profit growth of 28% YoY for 2017 due to the increasing penetration of dual-cam and ongoing favourable spec upgrades. Moreover, we see a rising possibility that Apple will adopt dual cams for the 4.7” iPhone model in 2H17, which could provide 6-13% upside to our 2017-18 earnings, which we have not yet built into our forecasts. What we recommend: Factoring in the above factors, we trim our 2016E EPS by 2% but raise our 2017-18E EPS by 2-4%. We reaffirm our Buy (1) rating, and lift our 12-month target price to TWD3,200 (from TWD3,050), based on an unchanged target PER of 16x, the mid-point of the stock’s historical range of 8-24x, applied to our revised 1-year-forward EPS. Key risk to our call would be weaker-than-expected smartphone sell-through. How we differ: We are the first foreign firm in Taiwan to highlight the possibility of 12M+12MP adoption for new iPhones to be released in 2H16.
30 May 2016
Benefits from spec upgrades to kick-in from 2H16
Stands to see ASP upside from the new iPhones in 2H16
Operating profit should resume 18-28% YoY growth for 2H16-17E
Reiterate Buy (1) with target price raised to TWD3,200
Source: Daiwa forecasts
Source: FactSet, Daiwa forecasts
Largan Precision (3008 TT)
Target price: TWD3,200 (from TWD3,050)
Share price (30 May): TWD2,755 | Up/downside: +16.1%
Kylie Huang(886) 2 8758 6248
Forecast revisions (%)
Year to 31 Dec 16E 17E 18E
Revenue change (7.1) (7.3) (5.1)
Net profit change (2.2) 1.8 3.5
Core EPS (FD) change (2.2) 1.8 3.5
65
78
90
103
115
1,800
2,288
2,775
3,263
3,750
Jun-15 Sep-15 Dec-15 Mar-16
Share price performance
Largan (LHS)Relative to TWSE Index (RHS)
(TWD) (%)
12-month range 1,830-3,710
Market cap (USDbn) 11.36
3m avg daily turnover (USDm) 76.24
Shares outstanding (m) 134
Major shareholder Ch'en Shih Ch'ing (5.0%)
Financial summary (TWD)
Year to 31 Dec 16E 17E 18E
Revenue (m) 48,890 56,650 64,720
Operating profit (m) 27,144 34,755 40,515
Net profit (m) 22,980 29,493 34,468
Core EPS (fully-diluted) 171.315 219.863 256.952
EPS change (%) (4.9) 28.3 16.9
Daiwa vs Cons. EPS (%) 2.6 0.9 1.3
PER (x) 16.1 12.5 10.7
Dividend yield (%) 2.2 2.8 3.3
DPS 60.0 77.0 89.9
PBR (x) 4.7 3.7 3.0
EV/EBITDA (x) 11.9 8.7 7.0
ROE (%) 32.5 33.3 30.9
2
Largan Precision (3008 TT): 30 May 2016
iPhone: production volume by model
(m units) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16E 3Q16E 4Q16E 2014 2015 2016E
iPhone 4 & 4S 7.5 7.5 5.0 2.0 2.0 0.5 0.0 0.0 0.0 0.0 0.0 0.0 22.0 2.5 0.0
iPhone 5C 6.5 5.0 4.0 3.0 2.5 1.0 0.5 0.0 0.0 0.0 0.0 0.0 18.5 4.0 0.0
iPhone 5S/6 SE 26.5 24.0 13.0 6.0 8.0 4.5 4.0 2.5 4.0 6.0 6.0 6.5 69.5 19.0 22.5
iPhone 6 & 6 Plus 0.0 0.0 17.0 63.0 45.5 47.0 19.5 13.5 7.5 5.0 4.0 4.5 80.0 125.5 21.0
iPhone 6S & 6S Plus 0.0 0.0 0.0 0.0 0.0 0.0 22.0 60.0 35.5 32.0 14.0 8.0 0.0 82.0 89.5
iPhone 7 series 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 23.5 55.5 0.0 0.0 79.0
Total 40.5 36.5 39.0 74.0 58.0 53.0 46.0 76.0 47.0 43.0 47.5 74.5 190.0 233.0 212.0
Source: Daiwa forecasts
Largan: revisions to revenue and earnings forecasts
Revised forecasts Previous forecasts Change
TWDm 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E
Revenues 48,890 56,650 64,720
52,620 61,120 68,200
-7.1% -7.3% -5.1%
Gross profit 31,534 39,315 45,369
31,993 38,836 44,221
-1.4% 1.2% 2.6%
Operating profit 27,144 34,755 40,515
27,626 34,068 39,106
-1.7% 2.0% 3.6%
Net profit 22,980 29,493 34,468
23,503 28,965 33,297
-2.2% 1.8% 3.5%
EPS (TWD) 171 220 257
175 216 248
-2.2% 1.8% 3.5%
Margins (%)
Gross margin 64.5% 69.4% 70.1%
60.8% 63.5% 64.8%
Operating margin 55.5% 61.4% 62.6%
52.5% 55.7% 57.3%
Net margin 47.0% 52.1% 53.3% 44.7% 47.4% 48.8%
Source: Daiwa forecasts
Largan: quarterly and annual P&L statement
2016E 2017E
2016E 2017E 2018E
(TWDm) 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE
Net sales 8,271 9,438 14,204 16,977 10,742 11,441 15,713 18,755 48,890 56,650 64,720
COGS 3,335 3,775 5,255 4,990 3,459 3,488 5,315 5,073 17,356 17,335 19,351
Gross profit 4,936 5,663 8,948 11,987 7,283 7,952 10,397 13,682 31,534 39,315 45,369
Operating costs 751 812 1,282 1,545 912 903 1,231 1,514 4,390 4,560 4,854
Operating profit 4,185 4,851 7,666 10,442 6,371 7,050 9,166 12,168 27,144 34,755 40,515
Pre-tax income 4,219 4,981 7,866 10,688 6,587 7,266 9,382 12,384 27,754 35,619 41,627
Net income 3,623 3,486 6,686 9,185 5,599 5,231 8,069 10,594 22,980 29,493 34,468
Net EPS (TWD) 27.01 25.99 49.85 68.47 41.74 39.00 60.15 78.97 171.31 219.86 256.95
Operating ratios
Gross margin 59.7% 60.0% 63.0% 70.6% 67.8% 69.5% 66.2% 73.0% 64.5% 69.4% 70.1%
Operating margin 50.6% 51.4% 54.0% 61.5% 59.3% 61.6% 58.3% 64.9% 55.5% 61.4% 62.6%
Pre-tax margin 51.0% 52.8% 55.4% 63.0% 61.3% 63.5% 59.7% 66.0% 56.8% 62.9% 64.3%
Net margin 43.8% 36.9% 47.1% 54.1% 52.1% 45.7% 51.4% 56.5% 47.0% 52.1% 53.3%
YoY (%)
Net revenue -22% -31% -12% 10% 30% 21% 11% 10% -12% 16% 14%
Gross profit -18% -29% 1% 30% 48% 40% 16% 14% -2% 25% 15%
Operating income -19% -32% 3% 31% 52% 45% 20% 17% -2% 28% 17%
Pre-tax income -17% -29% -15% 36% 56% 46% 19% 16% -5% 28% 17%
Net income -18% -28% -19% 37% 55% 50% 21% 15% -5% 28% 17%
QoQ (%)
Net revenue -46% 14% 50% 20% -37% 7% 37% 19%
Gross profit -47% 15% 58% 34% -39% 9% 31% 32%
Operating income -47% 16% 58% 36% -39% 11% 30% 33%
Pre-tax income -47% 18% 58% 36% -38% 10% 29% 32%
Net income -46% -4% 92% 37% -39% -7% 54% 31%
Source: Company, Daiwa forecasts
Largan: 1-year-forward PER Largan: 1-year-forward PBR
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
0
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(TWD)
Largan 6x 12x 18x 24x
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(TWD)
Largan 2x 4x 6x 8x
3
Largan Precision (3008 TT): 30 May 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Cash flow (TWDm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E
Mobile phone lens shipment ('000 units) 286,554 344,730 539,156 869,054 998,771 887,579 1,014,939 1,134,011
Blended ASP of handset lens (USD) 1.33 1.34 1.35 1.47 1.47 1.56 1.71 1.77
Gross margin of VCM assembly (%) 6.8 5.3 6.0 7.4 8.4 7.5 7.5 7.5
Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E
Mobile Phone Lens Revenues 11,300 13,647 21,615 38,140 45,970 44,325 55,459 64,349
VCM Aseembly Revenue 3,943 5,543 5,268 7,370 9,781 4,479 1,089 281
Other Revenue 742 882 550 301 118 86 103 89
Total Revenue 15,984 20,072 27,433 45,810 55,869 48,890 56,650 64,720
Other income 0 0 0 0 0 0 0 0
COGS (9,043) (11,710) (14,472) (21,291) (23,812) (17,356) (17,335) (19,351)
SG&A (506) (530) (887) (1,349) (1,817) (1,812) (1,882) (2,003)
Other op.expenses (963) (1,034) (1,293) (2,103) (2,585) (2,578) (2,678) (2,851)
Operating profit 5,472 6,798 10,781 21,067 27,655 27,144 34,755 40,515
Net-interest inc./(exp.) 50 84 122 250 349 455 458 656
Assoc/forex/extraord./others 314 (71) 598 1,646 1,156 155 406 457
Pre-tax profit 5,837 6,811 11,501 22,963 29,160 27,754 35,619 41,627
Tax (638) (1,234) (1,891) (3,525) (5,003) (4,774) (6,126) (7,160)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 5,199 5,578 9,610 19,438 24,157 22,980 29,493 34,468
Net profit (adjusted) 5,199 5,578 9,610 19,438 24,157 22,980 29,493 34,468
EPS (reported)(TWD) 38.755 41.581 71.640 144.909 180.084 171.315 219.863 256.952
EPS (adjusted)(TWD) 38.755 41.581 71.640 144.909 180.084 171.315 219.863 256.952
EPS (adjusted fully-diluted)(TWD) 38.755 41.581 71.640 144.909 180.084 171.315 219.863 256.952
DPS (TWD) 17.000 17.000 28.500 51.000 63.030 59.960 76.952 89.933
EBIT 5,472 6,798 10,781 21,067 27,655 27,144 34,755 40,515
EBITDA 6,372 8,005 12,229 22,728 29,495 27,144 34,755 40,515
Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E
Profit before tax 5,837 6,811 11,501 22,963 29,160 27,754 35,619 41,627
Depreciation and amortisation 900 1,208 1,448 1,661 1,841 2,056 2,529 3,001
Tax paid (638) (1,234) (1,891) (3,525) (5,003) (4,774) (6,126) (7,160)
Change in working capital 1,202 (783) (363) (920) 7,411 (12,007) 315 (1,024)
Other operational CF items 18 (2) 51 (32) 6 (5) (6) (7)
Cash flow from operations 7,318 6,000 10,746 20,147 33,414 13,024 32,330 36,438
Capex (3,149) (2,865) (1,504) (5,568) (8,213) (4,500) (4,500) (4,000)
Net (acquisitions)/disposals (2) (101) 9 194 (0) (10) (10) (10)
Other investing CF items (23) (19) (1,593) (695) 125 266 0 0
Cash flow from investing (3,173) (2,985) (3,088) (6,069) (8,089) (4,244) (4,510) (4,010)
Change in debt 319 (356) 12 108 (32) (80) 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (1,811) (2,280) (2,280) (3,823) (6,841) (8,455) (8,043) (10,322)
Other financing CF items 37 (43) 51 138 (127) 0 0 0
Cash flow from financing (1,456) (2,679) (2,217) (3,577) (7,000) (8,535) (8,043) (10,322)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash 2,690 336 5,440 10,501 18,325 245 19,777 22,106
Free cash flow 4,169 3,136 9,242 14,579 25,201 8,524 27,830 32,438
4
Largan Precision (3008 TT): 30 May 2016
Financial summary continued …
Balance sheet (TWDm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E
Cash & short-term investment 11,268 11,604 17,045 27,546 45,871 46,116 65,893 87,998
Inventory 1,461 2,532 2,693 3,538 3,730 2,799 2,796 3,121
Accounts receivable 3,510 6,581 6,823 13,338 11,537 12,725 14,745 16,845
Other current assets 234 255 248 388 363 349 405 462
Total current assets 16,473 20,973 26,809 44,809 61,500 61,989 83,838 108,427
Fixed assets 8,057 9,731 9,800 13,722 20,115 22,558 24,530 25,528
Goodwill & intangibles 0 0 0 0 0 0 0 0
Other non-current assets 379 485 2,004 2,523 2,372 2,121 2,137 2,154
Total assets 24,909 31,188 38,614 61,054 83,987 86,668 110,504 136,108
Short-term debt 444 93 83 190 157 100 100 100
Accounts payable 1,358 3,555 2,507 4,999 2,864 2,088 4,084 4,559
Other current liabilities 3,243 4,426 5,507 9,594 17,506 6,519 6,909 7,893
Total current liabilities 5,045 8,075 8,097 14,783 20,527 8,706 11,093 12,552
Long-term debt 0 0 0 0 0 0 0 0
Other non-current liabilities 54 49 71 72 73 50 50 50
Total liabilities 5,099 8,124 8,168 14,855 20,600 8,756 11,143 12,602
Share capital 1,341 1,341 1,341 1,341 1,341 1,341 1,341 1,341
Reserves/R.E./others 18,469 21,723 29,104 44,857 62,045 76,570 98,020 122,165
Shareholders' equity 19,810 23,064 30,445 46,198 63,386 77,912 99,361 123,506
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 24,909 31,188 38,614 61,054 83,987 86,668 110,504 136,108
EV 358,732 358,045 352,594 342,200 323,843 323,541 303,764 281,658
Net debt/(cash) (10,824) (11,511) (16,962) (27,356) (45,713) (46,016) (65,793) (87,898)
BVPS (TWD) 147.685 171.943 226.965 344.402 472.538 580.822 740.725 920.725
Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E
Sales (YoY) 29.4 25.6 36.7 67.0 22.0 (12.5) 15.9 14.2
EBITDA (YoY) 18.0 25.6 52.8 85.9 29.8 (8.0) 28.0 16.6
Operating profit (YoY) 17.4 24.2 58.6 95.4 31.3 (1.8) 28.0 16.6
Net profit (YoY) 28.5 7.3 72.3 102.3 24.3 (4.9) 28.3 16.9
Core EPS (fully-diluted) (YoY) 28.5 7.3 72.3 102.3 24.3 (4.9) 28.3 16.9
Gross-profit margin 43.4 41.7 47.2 53.5 57.4 64.5 69.4 70.1
EBITDA margin 39.9 39.9 44.6 49.6 52.8 55.5 61.4 62.6
Operating-profit margin 34.2 33.9 39.3 46.0 49.5 55.5 61.4 62.6
Net profit margin 32.5 27.8 35.0 42.4 43.2 47.0 52.1 53.3
ROAE 28.7 26.0 35.9 50.7 44.1 32.5 33.3 30.9
ROAA 23.7 19.9 27.5 39.0 33.3 26.9 29.9 28.0
ROCE 29.8 31.3 40.2 54.8 50.3 38.4 39.2 36.3
ROIC 57.7 54.2 72.0 110.3 125.5 90.7 87.9 97.0
Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Effective tax rate 10.9 18.1 16.4 15.4 17.2 17.2 17.2 17.2
Accounts receivable (days) 76.4 91.7 89.2 80.3 81.3 90.6 88.5 89.1
Current ratio (x) 3.3 2.6 3.3 3.0 3.0 7.1 7.6 8.6
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 43.9 40.9 39.8 35.2 35.0 35.0 35.0 35.0
Free cash flow yield 1.1 0.8 2.5 3.9 6.8 2.3 7.5 8.8
Company profile
In Asia ex-Japan, Largan Precision is the leading lens manufacturer for mobile handsets. Nokia,
Motorola, Sony Ericsson, Apple, HTC, and Blackberry are the company’s major customers. It
currently has about a 28% share of the global handset-lens market.
5
Largan Precision (3008 TT): 30 May 2016
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Thailand
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Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom
This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at
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Largan Precision (3008 TT): 30 May 2016
http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany
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United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
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Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 66.9%
Hold** 19.7%
Sell*** 13.5%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
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