Dbsv - Asian Consumer Digest

“In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.”

www.dbsvickers.com Refer to important disclosures at the end of this report sa: TW

STI : 3,002.62 HSI : 21,587.06 KLCI : 1,340.07 SET : 764.34 JCI : 2,944.71 KOSPI : 1752.20

*H-shares mkt cap Source: DBS Vickers

SUB-SECTOR PICKS Mkt Price Mkt Cap Tgt Price Upside

LCY US$m LCY Rating %

Auto Kia Motors KR 26,400 9,295 33,000 Buy 25% Dongfeng Motor* HK 11.76 4,326 14.9 Buy 27%

Retailers Gome Elec Appliances

HK 2.69 5,218 3.66 Buy 36%

Beijing Jingkelong* HK 9.16 487 10.34 Buy 13%

Household/Pers Gds Hengan HK 55.80 8,764 72.00 Buy 29% HTL International SG 0.845 256 1.09 Buy 29%

F&B China Foods HK 6.23 2,241 7.90 Buy 27%

Up/Midstream Food

Wilmar International SG 6.90 32,127 8.33 Buy 21%

Healthcare Faber Group MK 2.31 262 3.55 Buy 54% Media Pico Far East HK 1.58 244 2.00 Buy 27%

DBS Group Research . Equity 29 April 2010

Regional Industry Focus

Asian Consumer Digest

Cyclical Plays & Currency Winners• In our inaugural Asian Consumer Digest, we scan

through and feature 7 sub-sectors ranging from consumer goods (food, autos, personal/ household) to services (media, healthcare, retail).

• Asian consumers will have stronger purchasing power as currencies appreciate. We also look for stocks that will outperform on company specific or event driven catalysts.

• Top picks – Kia Motors, Dongfeng, Gome, Beijing Jingkelong, Hengan, HTL Int’l, China Foods, Wilmar, Faber Grp, Pico.

Cyclical Plays. In our inaugural issue of the Asian Consumer Digest, we survey the landscape and highlight the sub-sectors which will benefit from improved consumer sentiment on the back of robust Asian economic growth.

Currency winners? Strong Asia currencies will benefit some companies more than the rest. Winners tend to be those companies that have high domestic revenue content, source its materials in foreign currencies (such as USD), and/or with reporting currency in USD. Our top Buys on this theme are Wilmar and Hengan.

Picks across universe. Within auto, we expect Kia Motor and Dongfeng to benefit from heightened demand and to outperform peers. HTL In’tl is in turnaround mode and is less vulnerable to USD currency strength than commonly assumed. Our media pick is Pico Far East which will benefit from the Shanghai World Expo, and increased brand building activities in the longer term. We like Beijing Jingkelong as a food retail play and Gome as it is projected to benefit from increased demand in home appliances in China. In the F&B space, we expect beverage players such as China Food to be in key focus with the summer peak season coming. Faber Group is our pick in the Healthcare space, with catalysts from GLC restructuring in Malaysia.



Andy SIM +65 6398 7969

[email protected]

Ben SANTOSO +65 6398 7976 [email protected]

Mavis HUI +852 2863 8879

[email protected] Jay KIM +852 2971 1921

[email protected]

Patricia YEUNG +852 2863 8908 [email protected]

Titus WU +852 2820 4611

[email protected]

“Recipients of this report, received from DBS Vickers Research(Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”

Table of Contents Stock Picks Key Data 3 Investment Summary 4 Sector performance review 6

Theme #1: Currency Winners 8 Theme #2: Cyclical Plays 11

Regional Indices 14 Rolling Fwd PE and Standard deviations 15 Rolling forward PB trading band 16 Sub-sector Automobiles & Parts 17 Food & Beverages 25 Healthcare 33 Media 39 Personal HouseholdGoods 46 Retailers 51 Up/Midstream Food Producers 65 Company Profiles Auto Kia Motors 72 Dongfeng Motor 76 F&B China Foods 80 Want Want 84 Healthcare Faber Group 88 Household Goods Hengan 92 HTL International 96 Retailers Gome Electric 100 Beijing Jingkelong 104 Media Pico 108 Upstream Food Wilmar 112 Prices as of 22 Apr 2010 MICA (P) 043/10/2009



STOCK PICKS Key Data

Company Exch Sub-Sector Price (LCY)

22 Apr 2010

Target Price (LCY)

Upside (%)

Mkt Cap (US$m)

6mths Avg Daily T/O

US$m

PE (x)

10F

P/B (x)

10F

Div Yield (%) 10F

Kia Motors KR Auto 26,400 33,000 25 9,295 83.1 6.1 1.1 0.9

Dongfeng Motor* HK Auto 11.76 14.90 27 4,326 37.0 12.6 2.7 0.8

Gome Elec Appliances HK Retailers 2.69 3.66 36 5,218 27.2 22.1 2.6 1.1

Beijing Jingkelong* HK Retailers 9.16 10.34 13 487 0.6 18.7 2.7 2.2

Hengan HK Household/Pers Gds 55.80 72.00 29 8,764 16.4 28.4 6.8 2.3

HTL International SP Household/Pers Gds 0.845 1.09 29 256 0.7 6.2 1.3 4.8

China Foods HK F&B 6.23 7.90 27 2,242 3.6 22.6 2.8 1.6

Wilmar International SP Up/Midstream Food Producers

6.90 8.30 20 32,127 31.1 16.1 2.6 1.2

Faber Group MK Healthcare 2.31 3.55 54 262 0.9 9.7 1.8 2.0

Pico Far East HK Media 1.58 2.00 27 244 0.3 10.6 1.8 4.7

* H-shares mkt cap Source: DBS Vickers



Investment Summary Asian consumer companies to benefit from currency appreciation. We see consumer companies benefiting as purchasing power of the Asian consumers improves along with local currency appreciation. Who are the winners… Winners tend to be those companies that have high domestic revenue content, source its materials in foreign currencies (such as USD), and/or with reporting currency in USD. Examples are Hengan, Wilmar, China Foods, Tingyi, SPH, etc. Our top Buys on this are Wilmar and Hengan. …and losers? The reverse is true for losers. They are the net exporters, whose cost base are in local currencies, such as autos, plantation and manufactured goods exporters tend to lose more. Examples are Kia Motor, Hyundai Motor, Yue Yuen, etc. Firm economic recovery bodes well for Airlines, Healthcare, Personal Goods and Autos. As the economic recovery in the region continues to firm, we saw focus shift towards late cyclical consumer sectors. The sub-sector outperformance in the last 3 months came from airlines, healthcare services, and household/personal goods, beating DBSV consumer coverage benchmark return by 10.8% 8.8% and 8.0%. GDP growth translates into better consumer sentiment, lower unemployment. We are seeing strong GDP growth coming out from regional economies. Countries are revising up their 2010 forecasts. Singapore, for instance, revised up its official forecasts to 7%-9%, from 4.5%-6.5% previously, after a very strong 1Q10 growth of 13.1%. Consumer sentiment, especially for those countries affected more by the downturn, is trending up. Unemployment, on the other hand, is trending down. Focus on selected companies riding on stronger economies, and China. We like companies that will continue to benefit from continued spending and those that will outperform peers operationally. We see Kia Motor [000270 KS] benefiting from heightened demand, outperforming peers. YTD utilization is at a high of 96% (vs 82% in 2007-08). The recession has also shifted consumer preference to economy cars. In the PRC, Dongfeng Motor [489 HK] will continue to ride on the positive stimulus policy by government to promote auto consumption in the country.

For direct consumption picks, our focus is on China-related plays. Amongst retailers, Gome [493 HK] is projected to benefit from increased demand in home appliances. Beijing Jingkelong [814 HK] stand poised to post growth and narrow its valuation gap against its major peers. HTL International [HWA SP] is one of our pick as a proxy for improved demand in the US and Europe. With the summer peak season coming, we see China Food [506 HK] being the main beneficiary as a key beverage player. Want Want [151 HK] is also our preferred pick as it has successfully expanded its presence in the beverage segment as a niche player. Also focus on RMB revaluation candidates. As highlighted above, RMB revaluation, when it happens, will be positive for Hengan and Wilmar. Hengan [1044 HK], a leading player for personal hygiene products in the PRC, will benefit as its costs are in US$ while revenue in RMB. Wilmar [WIL SP] should also benefit, as its processing margins would expand further from RMB strengthening, on top of cheaper imported feedstock prices. Wilmar, as a processor, is also expected to see margins expand arising from the disparity between international and China-domestic soybean prices. Key highlights for the various sub-sectors: Autos. We expect regional growth of auto demand to slow from 2Q from last year’s high base, returning to more rational but still solid growth rates of 11-16% for the full year. We believe earnings growth trend for automakers will start to diverge. While we expect 1H earnings to shape future share price performances for the sector, we seek out attractive value plays with near term earnings heading beyond pre-crisis levels. Our picks are Kia Motors and Dongfeng Motor. F&B. We focus on China in the F&B space as the summer peak season draws near; and soaring beverage sales will be growth propellers for the sector. Intense competition is expected to help enlarge the total beverage market size. We continue to favour China Foods for its Coke beverage business. Leveraging on its leading share and extensive market presence, it would be a key beneficiary of the soaring demand in China. Retail. This year, a macro recovery and improving purchasing power should hold up overall consumption in the region. Department stores and discretionary retailers have already recorded strong year-to-date performance in same-store sales (SSS). Severe promotion that was seen in 1H09 has also gradually normalizes to a more reasonable level. Outlook for the sector should stay positive in 2010. Gome is our pick for department stores and discretionary retailers. For food retailers,



we like Beijing Jingkelong for its undemanding valuation vs peers, addition growth through M&A and potential for earnings upside surprise as margins expand on rising inflation for food items. Up/Midstream Food Producers. Our key pick is Wilmar. This year, declining soybean price trends would create temporary gains for processors such as Wilmar, as lower feedstock prices would have lagged impact on end product prices. The domestic price situation is more resilient in China, as domestic soybean prices are already priced higher than imported ones. Rising global soybean supplies mean rising disparity between domestic and imported bean prices. Personal and Household Goods. We believe domestic household / personal goods manufacturers will continue to benefit from supportive government policy in boosting domestic consumption as well as accelerating urbanization. This, coupled with robust domestic economic growth, will enhance overall living standards, leading to stronger demand on household / personal goods. Hengan is our key pick for household / personal goods sector which is a market leader in personal care products (including sanitary napkins, diapers and tissue). We also like HTL International as it rides on recovery in global spending. Media. Media is expected to trend up with growth in GDP. We expect media spending to pick up steam in the different countries in ensuing quarters. For Singapore, it is backed by a stronger GDP, as well as more media-worthy activities such as opening of the second integrated resort (Marina Bay Sands), Great Singapore Sale, Youth Olympics, additional retail space, property launches etc. Adspend in Hong Kong is also expected to post a solid rebound, growing by double-digit y-o-y rate in 1H10 along with economic recovery on a low base. Pico Far East is our preferred pick as it benefits from events such Shanghai World Expo, new integrated resort facilities in Singapore and other mega events.

Healthcare. Healthcare performed well YTD on Fortis Healthcare taking a substantial stake in Parkway Holdings at a 14% premium to the prior closing price, which spur interest in the healthcare sector in Singapore. Coupled with a strong set of operating results in 4Q09, this garnered interest for this sub-sector. On the other hand, Bumrungrad Hospital took some beating in the past few weeks with the political unrest in Thailand, as over 50% of its patients are from overseas. Our key pick is Faber Group, which is an underappreciated, well-managed GLC. It trades at CY11F PE of 7.6x (ex-cash) on the back of 10.6% 3-year EPS CAGR in spite of a regulated concession business, 1.3x FY11F BV, with ROEs of c.19-20% and strong balance sheet (net cash 34.5 sen per share).



Sector performance review

As the economic recovery in the region continues to firm, we saw focus shift towards late cyclical consumer sectors. The sub-sector outperformance in the last 3 months came from airlines, healthcare services and household & personal goods beating DBSV consumer coverage benchmark return by 10.8%, 8.8% and 8.0%. Airlines was the star. Airlines have generally done well, outperforming our Consumer coverage by 10.8%, as demand across the board have showed solid signs of recovery, and carriers reported higher carriage, better load factors as well as stronger yields. Hence, earnings have also turned around and many airlines have reported moving back firmly into the black. As a late cyclical, airlines should continue benefitting as the economic recovery continues. Healthcare services (outperformed by 8.8% in the last 3 months) thanks to Parkway, which saw Fortis Healthcare taking a substantial stake in the former at a 14% premium to the

prior closing price. This spurred interest in the healthcare sector in Singapore and coupled with a strong set of operating results in 4Q09 for Raffles Medical, it garnered interest for this sub-sector. Household & Personal Goods fared well. The strong performance largely came from Li & Fung which signed an agreement to supply clothing and other consumer goods to Walmart. Autos outperformed by 7.1% as sales were robust being closely correlated with the economic cycle. Within this, Kia Motors was the significant outperformer due to its high utilization rate of 95% (vs 82% during 2007-08). Gaming the biggest loser. Gaming performance was down -10% on an absolute 3-month performance, largely coming from Genting Singapore and Genting Berhad as the opening of Resorts World Sentosa did not meet expectations, coupled with stricter than expectation junket rules in Singapore.

Sub-sectors YTD performance (since 1 Jan 2010)

Source: Bloomberg, DBS Vickers

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Airlines Automonbiles & Parts Farming & F ishingFood & Beverages Healthcare Household/Personal GoodsMedia Retailers



Sub-sector performance

*Note: Excess returns measures the out/underperformance of individual sub-sectors vs DBSV consumer coverage Sub-sector Valuations

Amongst the subsectors under our coverage, Autos offer the lowest PE and EV/EBITDA multiples at 9.1x and 4.1x. DBSV Sub-sector target return (%)

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Source: DBSVickers

# of Market Target Return

Companies Cap Weight 1M 3M 6M 12M 1M 3M 6M 12M BETA % Change

Automobiles & Parts 12 68,975 19.4 6.2 18.3 15.6 94.1 2.7 7.1 2.0 21.3 1.0 19.3

Food Beverages 14 49,182 13.9 3.7 11.1 26.4 99.3 0.2 -0.1 12.8 26.6 0.7 3.6 Healthcare Equipment & Svs 4 4,202 1.2 -2.6 20.0 28.7 122.8 -6.1 8.8 15.1 50.0 1.1 (1.3) Household / Personal Goods 11 40,146 11.3 3.8 19.2 17.8 88.1 0.2 8.0 4.1 15.4 1.0 28.4 Media 9 12,420 3.5 4.8 12.5 11.4 44.5 1.3 1.3 -2.3 -28.2 0.9 9.4

Airlines 9 35,332 10.0 3.8 22.1 24.3 65.7 0.3 10.8 10.7 -7.1 1.1 (4.4) Gambling 4 22,503 6.3 -2.3 -10.0 -11.8 27.8 -5.8 -21.3 -25.5 -44.9 1.0 28.1 Retail 21 43,790 12.3 1.2 11.0 15.7 70.7 -2.3 -0.2 2.1 -2.0 0.8 6.1

Up/ Midstream Food Producers 13 78,419 22.1 4.1 4.6 6.6 60.4 0.6 -6.6 -7.0 -12.3 1.2 12.0

Consumers 97 354,969 100.0 3.5 11.2 13.6 72.7 0.9 12.5

Return Excess Return

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Automobiles & Parts 9.1 7.8 12.2 15.4 1.4 1.2 16.1 16.0 4.1 3.4 1.1 1.3Food Beverages 21.9 18.4 20.4 19.1 4.3 3.8 21.1 21.9 11.8 9.8 2.2 2.6Healthcare Equipment & Svs 20.1 14.7 21.0 37.1 2.5 2.2 12.9 15.9 12.7 9.7 2.5 3.5Household / Personal Goods 21.3 17.1 20.6 24.7 4.0 3.6 19.7 22.1 14.8 11.9 2.8 3.6Media 15.7 16.3 19.8 -3.3 3.2 3.1 20.9 19.4 8.9 9.0 4.9 5.0Airlines 28.3 14.6 47.1 93.2 1.6 1.5 5.9 10.7 7.4 7.0 0.9 1.7Gambling 22.3 16.7 12.7 33.3 1.9 1.7 8.9 10.7 8.8 6.9 1.1 1.3Retail 19.3 16.3 16.7 18.4 3.9 3.5 21.6 22.9 9.2 7.5 3.6 4.1

Up/ Midstream Food Producers 17.2 15.6 23.1 10.2 2.5 2.3 15.7 15.2 11.5 10.2 1.9 1.9

Consumers 16.3 13.5 18.4 20.6 2.3 2.0 15.1 16.1 8.2 7.1 2.0 2.4

PE EPS Growth ROEP/B

(x) (%) (x) (%) (%)

Dividend Yield

(x)

EV/EBITDA



Theme #1: Currency Winners Asian currency appreciation: Winners vs Losers Asia consumer to benefit from stronger purchasing power Stronger currencies augurs well for the purchasing power of the Asian consumer. Asian currencies are widely expected to continue strengthening. This is largely the consensus view, though the view on magnitude and timeframe varies. We see consumer companies benefiting from this trend as purchasing power of the Asian consumers improves along with local currency appreciation. How to position on this long term trend? We look to sectors that have high domestic revenue content and source its materials in foreign currencies (such as USD). Net exporters, whose cost base are in local currencies, such as autos, plantation and manufactured goods exporters tend to lose more. Our picks are Wilmar and Hengan. Winners – F&B, Retailers, Media; Losers – Autos, Plantation. Broadly, the sub-sector beneficiaries are food and beverages producers, retailers, media (to a certain extend), while losers tend to be net exporters like autos, plantation companies. Winners benefit from low raw material costs and translation impact. For F&B producers such as Tingyi and Want Want, the positives are two-folds. First, such F&B manufacturers are likely to benefit from lower raw material prices which are usually priced in USD (such as palm oil, milk powder, PET and other packaging materials), while revenues are recognized in RMB. Secondly, as profits are translated into reporting currencies such as USD or HKD, the appreciation of RMB against those currencies will flow through. Traditional media companies like SPH will also benefit partly from lower newsprint, which is priced in USD. Newsprint charge-out in local currency term will decline along currency appreciation against USD, assuming prices stay constant. We estimate that every 5% depreciation in USD against SGD improve SPH’s bottomline by 1%, all else remain constant. Losers are export oriented companies such Autos and household manufacturers. Exports at Korean car manufacturers, like Hyunda Motor and Kia Motor, account for 75%-80% of global unit sales. As such, appreciation of KRW will affect the exporters’ bottomline arising from changes in export ASPS, and income. On the

other hand, Chinese and Malaysian auto players are relatively less affected as exports are relatively insignificant. Companies with high revenue content for export will stand to lose, such as Yue Yuen and Ming Fai, given its production are largely based in China, while goods are exported. …and upstream food producers (plantation) counters. Planters are losers if local currencies (i.e. Malaysian Ringgit and Indonesian Rupiah) strengthen against the USD, as their ASP in local currency terms and revenues would be booked lower. Focus on RMB appreciation and interest rate hikes. Our China economist, Chris Leung, indicates that expectation of rate hikes and currency appreciation will continue to remain despite growth in sequential terms will trend lower. He expects a mild rate hike in the magnitude of 27bps in each quarter (2Q, 3Q and 4Q). As our bank’s currency strategist, Philip Wee wrote, in 2Q10 Economics Market Strategy (11 Mar 2010), the key question on China letting CNY appreciate is “not if, but when”. Our house view is that we “do not discount a move in 2Q10, though we think the odds are higher for appreciation in 3Q10”. We are forecasting a gradual appreciation of CNY against USD to reach CNY6.68/USD by 4Q10.

USD/CNY forecast

USD/CNY forecast, eop

Close 6.83

2Q10f 6.81

3Q10f 6.74

4Q10f 6.68

1Q11f 6.60

Source: DBS (Economics Market Strategy 2Q10, 11 Mar 2010) Hengan is one of our top picks for its strong sales growth (>25%), ability to protect margins, and its strong balance sheet. At end-FY09, Hengan had over HK$2bn net cash, the bulk in RMB. It will benefit from an interest rate hike and RMB appreciation as its revenue stream is in RMB but purchases are in US$. Wilmar We like it for its unique business model with high entry barriers. Inclusion of rice and flourmills and lower prospective international soybean prices should boost Wilmar’s earnings prospects. A potential RMB revaluation would expand processing margins even further.



Sub-sectors Winners & Losers from local currency appreciation Sub-sector Positive/ Neutral/

Negative Comments

Automobiles and Parts Mixed The Korean car makers are exporters par excellence - at Hyundai and Kia, exports make up C.75-80% of global unit sales, respectively. Currency swings affect car exporters' bottom lines by changing export ASPs and equity-method income. Forex counts as much here as

anywhere. Meanwhile Chinese and Malaysian auto manufacturers are better positioned as their general exposure to export is relatively insignificant. In fact, many Chinese and

Malaysian auto companies are JPY dependent.

Up/Midstream Food Producers Negative Planters (upstream food producers) are losers if local currencies (i.e. Malaysian Ringgit and Indonesian Rupiah) strengthen against the USD, as their ASP in local currency terms and

revenues would be booked lower.

Food & Beverage (Downstream Food Producers)

Positive Though most of the sales of F&B companies are from Chinese market, appreciated RMB would reduce a certain part of their costs of material imported from overseas market;

meanwhile there would be an elevation of their net profit denominated in currencies other than RMB

Gaming Neutral Revenue and cost substantially in local currency, so minimal impact from USD depreciation.

Healthcare Neutral Depreciation in USD will make Asian healthcare more costly to US patients seeking treatment in Asia and may impact medical tourism. At this point, the difference is treatment

cost is still very huge, hence depreciation of USD impact is negligible.

Household and Personal Goods Mixed Impact of this sector is mixed, depending on where the products are made and sold. Those that target at domestic market with RMB revenue stream will win but exports oriented

companies usually will loss on higher procurement costs. Impact is also more substantial on thin margin operations, such as trading business.

Media Neutral - Mildly positive

The impact on media industry should be negligible as cost and revenue are in similar currencies. Publishing houses such as SPH should see slight positive impact since newsprint

are priced in USD .

Retailers Positive All China-based companies that are listed outside of China (e.g. in Hong Kong) could see a positive impact on valuation terms,

as the gradual appreciation in RMB would translate into a stronger EPS on non-RMB currency basis. Besides, retailers with

certain profitable operations in China could also be beneficiaries as positive earnings impacts could be seen along with the rise in RMB.

Source: DBS Vickers



Earnings sensitivity from currency appreciation vs USD (ceterus paribus) For Individual Companies Assuming a 10% appreciation in LCY vs USD over the next 3 years, applied to FY11F earnings as a baseline

Company Positive/ (Negative) as % of net profit

(FY11F) Comments

SPH 2.50% Newsprint cost will become cheaper for SPH as it is priced in USD, assuming price do not rise in tandem with fall in USD

Pico Far East 3.0% Over 30% revenue from China, and will likely benefit as profits gets translated back into HKD, and if it remains pegged to USD.

China Foods 2% in RMB earnings + 10% in reported HK$ earnings=12%

Some of the raw materials like cocoa, grape juice, orange juice are purchased from overseas suppliers

Want Want 1% in RMB earnings + 10% in reported US$ earnings=11%

Want Want purchase a certain amount of milk power and packaging materials from overseas market

Tingyi 3% in RMB earnings + 10% in reported US$ earnings=13%

Benefit from the lower prices of PET and palm oil denominated in RMB

Yurun 10% in reported HK$ earnings Most of sales and material sourcing are in China

Hyundai Motor Co. -9.2% Assuming 20% appreciation of LCY against USD, in our estimates, for every KRW1% change in KRW/USD rate, this will shave off Hyundai's FY11F earnings

by 0.9% Kia Motors -13.8% Assuming 20% appreciation of LCY against USD, in our estimates, for every

KRW1% change in KRW/USD rate, this will shave off Kia's FY11F earnings by 1.4%

Geeley Auto nm Geely's exports accounted for about 6% of total sales last year, hit by the global financial crisis. We project it will rise to 15% of total sales by FY11 and

maximum impact on net earnings is 3%. The focus is more on JPY fluctuations.

Beijing Jingkelong 10% in reported HK$ earnings 100% earnings from China

Lianhua 10% in reported HK$ earnings 100% earnings from China

Wumart 10% in reported HK$ earnings 100% earnings from China

Parkson (3368.HK) 10% in reported HK$ earnings 100% earnings from China

Parkson Holdings (PKS.MK)

8% in reported RM earnings c.80% earnings from China

Golden Eagle 10% in reported HK$ earnings 100% earnings from China

New World Dept Store 10% in reported HK$ earnings 100% earnings from China

Gome 10% in reported HK$ earnings 100% earnings from China

Glorious Sun 6.0% Estimated to capture c.60% earnings from China.

Yue Yuen -8.9% c.70% revenue from exports. Higher revenue from China offset negative impact from higher production cost in China from stronger RMB

Hengan 17.1% Gain from lower raw materials costs and FX

Ming Fai -6.0% Higher revenue from China offset negative impact from higher production cost

Pelikan International -17.0% 95% of Pelikan's revenue and costs are denominated/quoted in USD and EURO as its manufacuring facilities are based in Germany and EU countries. The effect

is largely unrealised translation losses at Group level.

Source: DBS Vickers



Theme #2: Asian Cyclical Plays Strong GDP reinforces consumer confidence and consumption within Asia GDP forecasts

GDP growth, % YOY

2008 2009 2010F 2011F 1Q10F 2Q10F 3Q10F 4Q10F

US 0.4 -2.4 3.3 2.8 2.8 3.7 3.9 3.1 Eurozone 0.5 -4.0 1.1 1.5 0.7 1.2 1.1 1.4

Indonesia 6.0 4.5 5.5 5.5 5.8 5.9 5.5 5.0 Malaysia 4.6 -1.7 5.7 5.5 9.2 6.7 4.6 2.4 Singapore 1.4 -2.0 9.0 5.5 13.1 8.1 6.2 8.7 Thailand 2.5 -2.3 6.0 4.9 7.9 6.6 6.0 3.8 China 9.6 8.7 9.5 9.0 11.9 9.5 8.8 8.5 Hong Kong 2.1 -2.7 5.5 4.5 6.5 6.0 5.0 4.5

Source: DBS GDP growth strong. We are seeing strong GDP growth coming out from regional economies. Singapore reported an above expectations 1Q10 GDP growth of 13.1%, while China 1Q10 numbers advanced 11.9% YoY in 1Q10, slightly higher than consensus estimate of 11.7%. Of course, this was a result of a low base effect last year at the height of the financial crisis. But, it speaks volumes that recovery is indeed strong. Translating into better consumer sentiment. Consumer sentiment in China has sustained at a sound level throughout the financial crisis amid strong economic stimuli and favourable government policies. This probably explains why China’s domestic demand continued to be strong. For more matured economies like HK and Malaysia, consumer confidence is normalizing from the trough. Consumer confidence index – China, HK, Malaysia Source: CEIC

Retail sales growth is picking up. As can be seen in the chart below, retail sales across the region rebounded in early 2010. For an open economy like Singapore, retail sales registered 4.8% in Feb. We believe this suggest that consumer are on the mend, especially for the matured markets which were more affected by the financial crisis. Retail sales growth

Source: CEIC, DBSVickers China domestic consumption has been strong. Our economist estimates that China has put in US$180 bn of domestic demand over the past 4 quarters, twice more than US$91bn from the US (David Carbon, “China: Two growth myths with one stone”, 14 April 2010). In addition, China’s trade surplus has fallen by 90% over the past year, and with an estimated GDP growth of 11.5% over four quarters, he highlights the fact that China’s growth is driven by domestic demand.

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China domestic demand vs US

Source: DBS

China – exports and imports

Source: DBS

Unemployment rate declining. The Chinese employment market stayed resilient throughout the global financial crisis, seeing unemployment rate sustaining at c.4% throughout. Other Asian markets saw rising unemployment rate right after the crisis in 4Q08, while Malaysia started to see improvement in 2Q09, and Hong Kong and Singapore saw improving employment since 4Q09.

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US$b/month, sa

Exports

Imports

China – exports and importsSurplus vanishes

due to China's strong domestic

demand and weak demand in the G7



Amongst the sub-sectors, our focus is on (i) those with potential operational outpeformance or surge in earnings; (ii) names which will continue to benefit from China’s domestic consumption; (iii) along with beneficiary of commodity price movements. 1) Go for beneficiaries of stronger economy, sentiment. Against the backdrop that the regional economy has bounced back up (except for China which was largely unscathed), we advocate counters that can ride on stronger economy and sentiment. Amongst this, we like Kia Motors. The recession has caused consumers to increasingly prefer value-focused Korean car brands. Kia’s YTD utilization rate of 96% (vs. 82% in 2007-08) indicates that demand for its cars has reached unprecedented heights. We recommend investors to accumulate Kia shares as we believe its 1H earnings will beat consensus estimate by a considerable amount. Dongfeng will continue to ride on the positive stimulus policy by government to promote auto consumption in the country. We like Gome for its solid recovery from the trough as well as direct benefits from government subsidy programs. These include (i) “go rural” policy, which has recently increased price caps for various product categories (from 25% to a double), as well as (ii) “exchange old for new” program that has been launched in Aug09 and will contribute to a full-year impact in 2010. Additionally, with c.70% of properties sold in China during 2H09 to be delivered by 2H10, their demand for home appliances should likely see a strong support throughout this year. 2) Continue to ride China consumption. This year, a macro recovery and improving purchasing power should hold up overall consumption in the region. Chinese operators could see even better prospects amid sustainable household income growth, as the government’s economic stimulus packages support employment, while an upward adjustment of 10% or more in minimum wage for various provinces will be seen this year. Leverage on summer peak season in China. We would still go for staple consumer companies with focus in China. We believe China’s promising beverage market should remain the focus of most investors, and with the summer peak season drawing near, the expect beverage sales to soar, which will benefit counters like China Foods (506 HK). Beijing Jingkelong (814 HK) is also expected to benefit through expansion of margins arising from food inflation.

…and demand for personal goods. We believe domestic household / personal goods manufacturers will continue to benefit from supportive government policy in boosting domestic consumption as well as accelerating urbanization. This, coupled with robust domestic economic growth, will enhance overall living standards, leading to stronger demand on household / personal goods. Such view is echoed with the continuous uptrend in retail sales of daily use goods. In fact, retail sales growth of daily use goods has always been stronger than the overall retail sales growth in China. Hengan is our key pick for household / personal goods sector which is a market leader in personal care products (including sanitary napkins, diapers and tissue). 3) Beneficiaries of commodity price movements Wilmar to benefit from lower soybean price. This year, we expect that declining soybean price trends would create temporary gains for processors such as Wilmar, as lower feedstock prices would have lagged impact on end product prices. The domestic price situation is expected to be more resilient in China, as domestic soybean prices are already priced higher than imported ones. Rising global soybean supplies will mean even greater disparity between domestic and imported bean prices.

Impact from potentially stronger RMB. In the event of RMB revaluation, Wilmar should benefit even more. Any efforts by the Chinese government to protect its soybean farmers mean that domestically produced soybean prices would remain steady. On the other hand, cheaper imported feedstock prices should expand Wilmar’s processing margins. Already highly efficient with large economies of scale, this would make Wilmar more competitive in the Chinese vegetable oil market.



Regional IndicesSingapore Hong Kong Malaysia Source: Bloomberg, DBS Vickers

Thailand Indonesia

South Korea


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Rolling Fwd PE and Standard deviations Airlines

Automobiles & Parts

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Auto

SUB SECTOR - AUTO


Auto

AUTOS Jay Kim, [email protected] Rachel Mui, [email protected] Malaysia Research Team

• We expect regional growth of auto demand to slow from 2Q, returning to more rational but still solid growth rates of 11-16% for the full year.

• As industry demand enters into a slower but more rational growth stage, we believe earnings growth trends for automakers will start to diverge. 1H10 earnings results (particularly on 2Q10) would be the first informant on how each company’s earnings will be affected and differentiated from each other in subsequent periods.

• While we expect 1H earnings to shape future share price performances for the sector, we seek out attractive value plays with near term earnings heading beyond pre-crisis levels.

• Our top picks: Kia Motors & Dongfeng Motor

Performance review: The share prices of Chinese, Korean, and Malaysian auto stocks under our coverage, on weighted average basis, have outperformed their respective indices (Hang Seng, KOSPI, and KLCI Index) by 15%, 3%, and 10%, respectively, in 1Q. We believe the outperformance was largely due to the industry’s intrinsic characteristic that correlates closely with economic cycle. Across the region, we saw either the expiry or reduction of government incentives for car buyers. Despite less support from stimulus packages, regional auto demand remained robust. For Asian Pacific region ex Japan & Australia, we estimate total quarterly car sales at 5.9 m units in 1Q10, up 63% from last year. We believe this strong growth resulted from a combined effect of 1) low comparative base from last year, 2) particularly aggressive new model releases, and 3) continued motorization growth. Industry outlook: Like 2009, we believe emerging markets, especially the Asia Pacific region, will remain the main growth engine for the global auto industry. The low levels of car ownership, rising household disposable income and growing middle class population should continue to provide a rapid growth platform for carmakers. In fact, auto stocks under our coverage have either sole or the largest sales exposure to the region. Accordingly, we believe these companies are predominantly well positioned to benefit from the region’s continued motorization process and relatively higher rates of economic growth for this year. We expect Asia-pacific

region to maintain double-digit growth of 14% for 2010, implying total sales of 20.5m vehicles. Going into 2Q, we believe sales volume growth to start trending down as momentum eases from the last year’s high base effect. Also, we note that the strong growth in the first three months of this year was in part due to spillover effect from orders made late last year. And a tighter monetary policy will drive up lending rates and restrain growth to some extent. Meanwhile, on a q-o-q basis, we expect the absolute demand for the region to edge up 9%, and this is mainly due to strong seasonal demand coupled with continued recovery in consumer spending. Against the backdrop of slower growth from 2Q and expectation of a more rational growth of 11 – 16% for the full year, we advocate a more selective investment approach for the sector. History indicates that some competitive car manufacturers had successfully taken advantage of previous economic downturns to strengthen their business framework (i.e. improve market share, successful introduction of cost control measures, and effective adjustment of product offerings to meet new consumer demands) and eventually reaped superior returns when the economy recovers. With the comeback of rational growth stage, we believe earnings growth trends for automakers will start to diverge and a few real winners from the last recession will differently be awarded. We believe 1H10 earnings results (particularly on 2Q10) would be the first informant on how each company’s earnings will be affected and differentiated from each other as the regional industry demand comes to a slower but more rational growth stage. While we expect 1H earnings results to shape future share price performances for the sector, we seek out attractive value plays with near term earnings heading beyond pre-crisis levels.


Auto

Action/ Key Pick: Kia Motors Kia’s y-t-d global utilization rate of 96% (vs. 82% during 2007-08) indicates that demand for its cars has reached unprecedented heights. In fact, we expect Kia’s consolidated sales volume growth to expand by 26% y-o-y to 1.9 m cars for this year, much higher than our projected growth of 14% for the region. The growing demand for Kia cars is due to a paradigm shift of consumer preference towards cost effective Korean car brands as a result of the recession. Consumers’ growing demand for models that are low-cost and fuel-efficient leading them towards brands associated with practicality. We believe this trend has helped Kia Motors to remarkably widen scope of market penetration.

On the back of a stronger won, it appears that the market still has ongoing concerns over the carmakers’ earnings prospects for this year. However, we believe the rise in demand is the most decisive factor in determining the carmakers’ earnings prospects and intrinsic value. On the earnings front, alongside with continued cost saving measures, we expect Kia’s FY10 net profit to grow by a strong 15% y-o-y to a record high KRW1.7tn this year. (More details is discussed in stock profile section). We expect Kia Motors to be re-rated upward, in view of its (1) solid earnings prospects ahead, (2) improving balance sheet, (3) fast turnaround at its Georgia plant and (4) attractive valuations. Catalyst: Strong 1H earnings growth As discussed earlier, we expect 1H earnings release to shape share price performance for the sector. Accordingly, we strongly recommend investors to accumulate Kia shares as we believe Kia’s 1H10 earnings are on track to surge 86% vs. a year earlier and to beat consensus estimates by a considerable amount. While we believe that the market will gradually realize that demand growth is a more decisive factor in determining the carmaker’s earnings than any potential impact from the appreciation of the local currency, we think the full impact of the rise in demand has not been fully reflected in the share price. In fact, our forecast net profit of KRW826bn in 1H10 is 12% higher than consensus of KRW738 for now. We expect consensus estimates to move higher over the coming periods, a key positive stimulus for its share price.

Action/ Key Pick: Dong Feng Motor Dongfeng Motor is our top pick in the Chinese auto market. The company will continue to ride on the positive stimulus policy by government to promote auto consumption in the country. Due to a low vehicle penetration rate in China, the mid-term prospect is positive, hence benefitting strong vehicle manufacturers like Dongfeng Motor. The company has three foreign joint ventures with a wide product range and launched its own brand, Fengshen recently to capture the growing interest for Chinese brand automobiles. The consistent release of new models is an important strategy for the Chinese auto industry as consumers have a growing appetite for new cars in the market. Since Dongfeng Motor’s products spread across a wide spectrum of displacements, the company will benefit from the mass market and high-end demand, underpinned by rising disposal income trend. Catalyst: New model releases to capture sales The 1Q strong orders should be positive on 1H earnings performance, despite normalization of sales momentum in 2Q, while 1Q has a low base effect. The company has 10 new models in the pipeline for this year new launches, all under its three foreign JVs. The turnaround of its Dongfeng Peugeot-Citroen JV is another plus factor, as this company was slow in the past to bring new models into the market. A change in strategy has improved its performance last year. For FY10, net profit is estimated to grow by 13%, after a high base effect in FY09. In terms of PE valuation, Dongfeng Motor shares are trading in line with the HK listed auto companies’ average at around 13x FY10 EPS. However, being one of the top three auto groups in China, we believe DFG should command a premium to its pees (as it was the case in the past). We priced DFG at 16x forward PE, translating into TP of HK$14.9. We maintain BUY rating on the counter.


Auto

Earnings Valuation

Source: DBS Vickers

Market Cap (US$m): 68,975

Operating OP Chng Pre-tax Net Profit EPS ChngSales YoY Profit YoY (1Q) Profit YoY Bef EI EPS YoY (1Q)

(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 64,796 - 2,535 - - 3,883 - 2,695 0.04 - -2007A 68,793 6.2 3,265 28.8 - 4,296 10.6 2,887 0.04 7.1 -2008A 73,211 6.4 4,538 39.0 - 3,883 -9.6 3,387 0.05 17.3 -2009E 80,073 9.4 6,225 37.2 - 8,846 127.8 6,787 0.10 100.4 -2010F 87,442 9.2 7,006 12.6 -7.9 10,872 22.9 7,617 0.11 12.2 0.42011F 94,337 7.9 7,860 12.2 -6.7 12,398 14.0 8,794 0.13 15.4 -1.7

OP Interest Net Debt / DividendEBITDA Margin ROE Cover Equity FCF BPS Yield PE P/B EV/EBITDA

(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)2006A 6,530 3.9 - -237.8 -0.1 130 1.2 1.16 25.6 2.3 10.32007A 7,034 4.7 9.1 -74.9 0.0 1,557 1.3 0.96 23.9 2.1 9.62008A 7,682 6.2 9.6 -305.6 0.0 2,765 1.4 0.94 20.4 1.9 8.82009E 12,978 7.8 16.7 57.1 -0.2 10,106 1.7 1.01 10.2 1.6 4.72010F 13,684 8.0 16.1 211.9 -0.3 8,766 2.0 1.09 9.1 1.4 4.12011F 15,224 8.3 16.0 -115.1 -0.3 8,034 2.3 1.25 7.8 1.2 3.4

Stock PerformanceMarket

Cap Weight 1M 3M 6M 12M 1M 3M 6M 12M BETA(US$)

Auto PartsAPM Automotive 281 0.4 12.9 42.5 93.1 154.9 6.7 24.2 77.5 60.8 0.7

Denway Motors 4,272 6.2 7.4 0.7 17.5 43.3 1.2 -17.7 1.9 -50.8 1.0Hyundai Mobis 14,494 21.0 9.0 17.4 3.4 78.5 2.8 -1.0 -12.3 -15.6 0.8UMW Hldgs 2,282 3.3 1.9 1.9 1.9 15.7 -4.3 -16.4 -13.7 -78.4 0.8TiresHankook Tire 3,090 4.5 4.0 13.8 -6.6 57.4 -2.2 -4.5 -22.2 -36.7 0.9AutomobilesBrilliance China 1,609 2.3 6.7 12.7 114.3 281.0 0.4 -5.7 98.7 186.9 1.1

Dongfeng Motor Group - H 4,327 6.3 -13.2 13.3 11.5 106.3 -19.4 -5.0 -4.1 12.3 1.2Geely Automobile 3,336 4.8 -12.7 2.0 29.2 272.9 -18.9 -16.3 13.6 178.8 1.1Hyundai Motor 24,947 36.2 13.4 21.2 15.4 97.2 7.1 2.9 -0.3 3.1 1.0Kia Motors 9,295 13.5 4.6 41.7 41.3 157.1 -1.7 23.3 25.7 63.0 1.2MBM Resources 217 0.3 4.1 4.9 13.3 19.6 -2.2 -13.5 -2.3 -74.5 0.6Proton 825 1.2 6.0 21.8 18.2 56.9 -0.3 3.5 2.6 -37.2 1.3

Automobiles & Parts 68,975 100.0 6.2 18.3 15.6 94.1 1.0

Return Excess Return

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Auto PartsAPM Automotive 11.3 10.7 15.9 6.0 1.3 1.2 11.8 11.5 4.6 4.1 2.3 2.3Denway Motors 12.5 11.3 10.4 10.5 1.8 1.6 15.2 14.8 9.7 8.2 1.3 1.3Hyundai Mobis 8.8 7.7 12.2 14.2 1.8 1.4 21.6 20.6 5.9 5.2 0.7 0.8UMW Hldgs 16.3 14.3 10.2 13.9 1.8 1.7 11.5 12.4 6.0 5.4 3.5 3.5TiresHankook Tire 10.6 9.4 -1.8 12.9 1.6 1.4 15.3 15.8 5.4 4.6 0.6 0.6AutomobilesBrilliance China 15.4 12.8 -32.7 20.5 1.9 1.7 13.2 13.9 6.8 5.9 0.0 0.0Dongfeng Motor Group - H 12.6 11.1 13.3 13.4 2.7 2.2 23.3 21.6 5.0 4.2 0.8 0.9Geely Automobile 14.9 13.0 23.3 14.4 3.1 2.6 23.1 21.9 9.0 8.0 1.4 1.6Hyundai Motor 8.6 7.5 10.7 13.9 1.1 0.9 13.5 13.3 3.2 2.5 0.9 1.2Kia Motors 6.1 5.6 14.6 9.7 1.1 0.9 20.3 18.3 4.2 4.4 0.9 0.9MBM Resources 8.7 8.0 19.8 10.0 0.7 0.7 8.5 8.7 5.2 4.7 2.7 0.0Proton 11.6 9.7 nm 19.5 0.5 0.5 4.3 5.0 2.7 2.2 1.0 1.0

Automobiles & Parts 9.1 7.8 12.2 15.4 1.4 1.2 16.1 16.0 4.1 3.4 1.1 1.3

P/B EV/EBITDA Dividend YieldPE EPS Growth ROE

(x)(x) (%) (x) (%) (%)


Auto

Section B

Chart 1: Region – SAAR monthly vehicle sales

SAAR Auto S ales

0

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3-month Moving avg. Seas onally Adjus ted

1Q10 sales volume for the region, at one point, was headed to reach

nearly over 2.5 m cars, on a seasonally adjusted annual rate (SAAR).

We believe it is important to remember that the first quarter of this

year was largely influenced by the spillover effect from orders made

late last year. Thus, it’s been different from the other traditionally slow

first quarters.

We expect regional growth of auto demand to slow from 2Q

returning to more rational but still solid growth rate of 11-16% for

the full year.

Chart 2: China - monthly vehicle sales in (PV & CV)

0

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'000 units

From Jan to Mar09, total vehicle sales reached c.4.61m units, up from

c.2.67m units in 1Q09, an increase of c.73% y-o-y. The dip in Feb10

was due to the Chinese New Year effect. Total car sales accounted for

3.52m units, up c.77% from previous quarter. The main driver came

from small capacity vehicles, which are enjoying lower purchase tax

benefits.

Last year, China achieved 13.6 m units of vehicle sales under a

favorable tax environment (cut from 10% to 5%) and the government

has extended that policy to this year, albeit at a slightly higher tax rate

of 7.5%.

We forecast vehicle sales to reach 15.2 m units (up 12% y-o-y) this

year, which we believe is achievable with the y-t-d vehicle sales at

4.61m units.

Chart 3: China - Sedan sales by country mix

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S elfbrand Japanes e BrandsGerman Brands American BrandsKorean Brands French Brands

'000 units

The policies to encourage small-capacity vehicle sales are benefiting

domestic auto manufacturers. The home-grown brands are usually

low-priced small capacity vehicles which target the broad consumer

market.

In 2010, self-developed brands will continue to lead sales volume,

despite the reduction of government incentives.


Auto

Chart 4: China – domestic made PV’s sales breakdown by displace’m

0%

20%

40%

60%

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100%

2005 2006 2007 2008 2009 2M10

<=1L 1<-<=1.6L 1.6<-<=2L 2<-<=2.5L

2.5<-<=3L 3<-<=4L >4L

Small capacity cars of 1.6L and below have continued to be the

mainstream vehicles for China market. The segment used to account

for about 60% of total PV sales volume, but had surged to 71% in

2009. Coming into 2010, it climbed further up to 73%.

Chart 5: China - domestic made automobile price index

6065707580859095

100105

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PV MiniSmall Medium clas sHigh clas s Luxury

Jan 2004 = 100

The mass-market cars, mainly the small and mid-size capacity are very

affordable as competition in this market is more intense. Hence,

automobile manufacturers are keeping prices low to maintain their

market shares.

However, in the luxury segment, the price index has been trending

upward as this segment faces less competitions and automakers have

more flexibility for premium price strategy.


Auto

Chart 6: Korean brands – global utilization rates

70

75

80

85

90

95

100

1H07 2H07 1H08 2H08 1H09 2H09 1Q

HMC Kia

%

Korean car brands’ y-t-d global utilization rate of +90% indicated that

demand for its cars has reached unprecedented heights. In our view,

the growing demand for Korean cars is due to a paradigm shift of

consumer preference towards cost efficient brands as a result of the

recession. Consumers’ growing tendency is now for models that are

low-cost and fuel-efficient leading them towards brands associated

with practicality. We believe this trend has helped Korean automakers

to remarkably widen scope of market penetration. And this has been

translated into record high utilization rates.

Chart 7: Korea – unit export price

Korea's unit export price

5,0006,0007,0008,0009,000

10,00011,00012,00013,00014,00015,00016,000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

US$

Unit export price

S KAMA

Despite a stronger won, Korean auto export prices in the US$ terms

have continued to climb well since the 5-year low in 2009. We believe

Korean brands’ aggressive product launch has been the key factor in

driving their export prices. Indeed, we estimate over 65% of the

export ASP hike (forex unadjusted) came from price hikes associated

with the launch of new or redesigned models. In addition, the

recovery of SUV demand also led to a better product mix.

Chart 8: Korea – SAAR monthly vehicle sales

SAAR Auto S ales

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

07 08 09 10


Total domestic car sales rose 39% y-o-y to 357K units in 1Q10.

Despite the expiry of government incentives for car buyers, we see

domestic demand remaining strong for Korea. Other than the spillover

effect from orders made late last year, industry sales also benefited

from new model effects. In fact, during 1Q10, new model sales

accounted for 33% and 28% for HMC and Kia Motors, respectively.

Considering that new launches accounted for nearly one third of total

sales volume for both companies, this indicates the new model effect

is much stronger than what market has previously anticipated.

Also, replacement demand in Korea appears to be kicking in and

should grow through this year. Although government had actively

provided incentives to scrap old cars in 2009, we notice the number of

cars that are at least 10 years old has increased by 6% y-o-y or 4,769

K units.


Auto

Chart 9: Kia Motors – global utilization rates vs. OP

0

20

40

60

80

100

120

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

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2Q09

3Q09

4Q09

(200)

(100)

0

100

200

300

400

500

Utilization(LHS )Operating income(RHS)

Bn KRW%

On the back of a stronger won, investors are still concerned over

Korean car exporters’ earnings prospects for this year. While

uncertainties persist, we believe that market will gradually realize the

growth in demand is a more decisive factor in determining Kia’s

earnings, than any potential impact from the appreciation of the local

currency.

As seen from the chart, tracking Kia’s OP on a quarterly basis against

the utilization rates, it is clear that the two rise and fall almost hand in

hand. In fact, the weakening KRW has been a primary gauge of Kia’s

earnings over the years, a driver of auto stock prices in South Korea.

Chart 10: Malaysia – SAAR monthly vehicle sales

SAAR Auto S ales

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jan-

05

J an-

06

J an-

07

J an-

08

J an-

09

J an-

10


DBS bank is projecting 5% GDP growth for Malaysia in 2010 vs. 2.8%

contraction in 2009. This augurs well for consumer spending, and

Malaysian auto companies are likely beneficiaries.

However, TIV (total industry vehicle) had already rebounded since

2Q09, and had set a higher base in 2009, for 2010. After the strong

sales volume growth of more than C.15% in 1Q10, we expect growth

to slow from 2Q10. For the full year, we estimate a conservative TIV

growth of 2.4%, bringing total vehicle sales to 533K.


Food & Beverage

SUB SECTOR - FOOD & BEVERAGE


Food & Beverage

FOOD & BEVERAGE Titus Wu, [email protected] Alice Hui, [email protected] Nalyne Viriyasathien, [email protected] • As the peak season draws near, we expect soaring

beverage sales to be growth propellers for the F&B sector

• Intense competition helps to expand the market size for beverages

• We like market leaders and niche-players in China • Top picks: China Foods (506 HK, TP HK$7.9); Want

Want (151 HK, TP HK$6.5). Peformance review: Look out for peak season beverage sales in Q2 In the latest result season, most F&B companies posted decent FY09 performances for both topline growth and margin improvements. However, share price performances were relatively lackluster in recent months as valuations were thought to be rich. Nevertheless, as the peak season for beverage sales in Q2 draws near, the booming beverage market, especially the China market, would be in focus. Meanwhile, the beverage businesses are already sustainable key growth drivers for certain leading F&B players like Tingyi (322 HK), China Foods (506 HK) and Want Want (151 HK). Industry outlook-Competition helps enlarge the pie We expect the beverage players to deliver strong topline growth in 1H10 given swelling market demand as well as relatively low base in 1H09. Meanwhile, competition is intensifying stemming from rising budgets on advertising & promotions and distribution network expansion of major players for market share in Asia. Additionally, it’s noticed that more F&B players are expanding their product lines, and competing more extensively across various sub-segments of the beverage market. For example, Coke launched the “Pulpy Super Milky” products, targeting the prosperous dairy juice market in China, currently dominated by Wahaha. Huiyuan (1886 HK) also launched a hybrid sparkling juice product in an effort to expand its market share in China’s juice drink market. More players and products help to accelerate market size expansion, which should benefit all players.

In terms of concerns on material prices, we do not expect substantial cost pressures in 2010. Given sufficient supply from Brazil, concerns on sugar price increase should ease. As prices of PET and aluminum are likely to stay stable, increase in packaging material costs would also be limited. Hence, we think that the possibility of margin squeeze from higher material costs should be low for most F&B players in 1H10. Top picks: China Foods (506 HK) and Want Want (151 HK) We believe China’s promising beverage market should remain the focus of most investors. Our preference is for the leaders or niche-players among beverage operators. We continue to favour China Foods for its Coke beverage business. Leveraging on its leading share and extensive market presence, it would be a key beneficiary of soaring demand in China. Its established capacity and brand awareness would also provide stronger bargaining power with suppliers and customers, which should help to maintain margins. We like Want Want for its smart niche-positioning in the beverage market and expect its distinctive pocket-sized drinks products to further drive market share. More importantly, Want Want should continue to enjoy a higher profitability against peers attributable to its more effective marketing spending (c.3% A&P/sales compared to c.10-15% of others). Hence, our top picks are China Foods and Want Want, with BUY ratings and target prices of HK$7.90 and HK$6.50 respectively. Catalyst: Drought in China might help beverage sales With a lower exposure in terms of manufacturing facilities in Southwestern China, the production of major F&B players should seldom be affected by the drought in that region. On the other hand, the worsening drought affecting 60m people there could possibly drive market demand for beverages, hence providing more room for growth among F&B players. Despite sympathy for the disaster, the beverage market could be a beneficiary in Q2 2010.

Asian Consumer Report

Food & Beverage

Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 16,251 - 1,101 - - 1,200 - 823 0.02 - -2007A 20,130 23.9 1,426 29.5 - 1,449 20.7 1,032 0.02 25.4 -2008A 25,163 25.0 1,485 4.1 - 1,448 -0.1 1,000 0.02 -3.1 -2009E 27,397 8.9 2,580 73.8 - 2,636 82.1 1,862 0.04 86.1 -2010F 31,695 15.7 3,101 20.2 -2.9 3,128 18.7 2,241 0.05 20.4 -2.02011F 36,530 15.3 3,710 19.6 -3.1 3,789 21.1 2,670 0.06 19.1 9.2

OP Interest Net Debt / DividendEBITDA Margin ROE Cover Equity FCF BPS Yield PE P/B EV/EBITDA(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)

2006A 1,815 6.8 - 10.5 0.3 -35 0.1 1.00 59.8 7.4 28.32007A 2,205 7.1 15.0 12.2 0.2 249 0.1 3.40 47.7 6.9 23.02008A 2,319 5.9 13.3 10.1 0.2 540 0.2 1.65 49.2 6.2 22.02009E 3,510 9.4 20.9 19.2 0.0 2,093 0.2 1.95 26.4 5.0 14.02010F 4,115 9.8 21.1 24.6 -0.1 1,497 0.2 2.16 21.9 4.3 11.82011F 4,780 10.2 21.9 44.0 -0.2 2,792 0.3 2.64 18.4 3.8 9.8


Cap Weight 1M 3M 6M 12M 1M 3M 6M 12M BETA

BrewersKingway Brewery 375 0.8 6.9 8.9 30.5 83.9 3.1 -2.2 4.1 -15.4 0.7Tsingtao Brewery - H 3,435 7.0 4.1 10.6 30.4 124.2 0.3 -0.5 4.0 24.9 0.7Food ProductsCharoen Pokphand Foods 3,447 7.0 2.0 28.0 65.9 363.2 -1.7 16.8 39.5 263.9 0.7China Food 2,242 4.6 -10.4 -9.3 5.0 65.6 -14.2 -20.4 -21.4 -33.7 0.8China Green 1,139 2.3 7.1 7.7 48.9 64.4 3.4 -3.4 22.4 -34.9 0.7China Yurun 5,088 10.3 1.5 12.5 53.0 142.5 -2.3 1.4 26.6 43.2 0.7Minor International 957 5.4 -12.4 -12.4 -14.0 41.5 -16.1 -23.5 -40.4 -57.8 1.1Petra Foods 415 0.8 -19.7 1.9 19.1 112.0 -23.4 -9.2 -7.3 12.7 0.6Thai Union Frozen Products 1,039 2.1 7.0 15.0 31.9 91.3 3.3 3.9 5.5 -8.0 0.6Thai Vegetable Oil 367 0.7 -4.6 -2.4 2.5 40.7 -8.3 -13.5 -24.0 -58.6 1.0Tingyi Holding 14,152 28.8 4.3 10.6 12.7 114.1 0.6 -0.5 -13.8 14.8 0.6Want Want China 10,111 20.6 9.0 14.4 37.3 60.1 5.3 3.3 10.9 -39.2 0.5Soft DrinksChina Mengniu 5,607 11.4 8.5 13.2 24.2 87.4 4.7 2.0 -2.3 -11.9 0.9Vitasoy 808 1.6 -1.4 15.5 28.6 75.1 -5.2 4.3 2.1 -24.2 0.6

Food Beverages 49,182 100.0 3.7 11.1 26.4 99.3 0.7

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

BrewersKingway Brewery 42.0 30.5 124.2 37.7 0.9 0.9 2.3 3.1 9.0 7.5 0.0 0.0Tsingtao Brewery - H 33.6 30.0 11.7 12.3 5.1 4.5 16.3 15.9 7.3 6.2 0.5 0.6Food ProductsCharoen Pokphand Foods 10.5 9.6 11.2 9.0 1.9 1.7 19.3 18.8 7.4 6.5 5.2 5.7China Food 22.6 15.8 35.4 43.3 2.8 2.5 13.2 16.8 12.4 8.7 1.6 2.4China Green 14.5 12.2 18.1 18.8 2.6 2.3 19.4 19.9 9.2 7.4 1.8 2.1China Yurun 20.6 16.9 9.7 22.1 4.0 3.4 21.1 22.0 15.2 12.1 1.3 1.6Minor International 15.3 13.3 43.7 15.2 2.2 1.9 16.2 15.5 8.7 8.2 2.0 2.3Petra Foods 17.0 15.1 13.9 12.3 2.0 1.9 12.2 12.9 8.8 7.8 3.2 3.2Thai Union Frozen Products 8.6 7.8 29.6 10.6 1.6 1.4 20.5 19.1 6.6 5.5 5.7 6.4Thai Vegetable Oil 7.2 5.9 78.1 22.3 2.1 1.8 31.4 33.4 5.4 4.4 7.3 8.9Tingyi Holding 31.1 26.4 18.8 18.0 8.2 7.0 28.5 28.5 14.1 11.9 1.6 1.9Want Want China 26.0 20.7 24.2 26.0 8.6 7.6 35.8 38.9 19.1 14.9 3.2 4.1Soft DrinksChina Mengniu 23.5 19.6 22.3 19.8 3.7 3.2 17.1 17.7 12.2 9.8 0.8 1.0Vitasoy 22.4 19.9 28.7 12.6 4.7 4.4 21.3 22.9 11.9 10.6 4.0 4.2

Food Beverages 21.9 18.4 20.4 19.1 4.3 3.8 21.1 21.9 11.8 9.8 2.2 2.6

Return

P/B EV/EBITDA

Excess Return

Dividend YieldPE EPS Growth ROE

(x)(x) (%) (x) (%) (%)


Food & Beverage

Section B: Macro radar

Chart 01: F&B Sales Above Designated Size Enterprise* in China

0

10,00020,000

30,000

40,000

50,000

60,000

70,000

80,000

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

RMB mn

-20%

-10%0%

10%

20%

30%

40%

50%

60%

F&B y-o-y Growth

Yoy growth

Source: National Bureau of Statistics of China *Note: Refers to enterprises with sales revenue of >RMB5m.

Positive expectations on sales growth in 1H10. Growth for F&B

retail sales grew solidly by 18.4% in Q110 in China. We expect a

decent sales y-o-y growth in 1H10 partly due to the lower base in

1H09.

Chart 02: Beverage sales Above Designated Size Enterprise in China

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Feb-

07

May

-07

Aug

-07

Nov

-07

Feb-

08

May

-08

Aug

-08

Nov

-08

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

RMB mn

-20%-10%0%10%20%30%40%50%60%70%

Beverage y-o-y Growth

Yoy growth

Source: National Bureau of Statistics of China

Growth momentum intact. Beverage sales growth remained

strong in FY09, and expected to be sustainable in coming years.

Chart 03: CPI of Food Items in China

0

20

40

60

80

100

120

140

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Index

Source: National Bureau of Statistics of China

5.1% increase in 1Q10. CPI for food continued to post higher y-

o-y growth than the other categories in 1Q10, partly driven by

abnormal weather this year.


Food & Beverage

Chart 04: Food Items sales in HK

0

500

1,000

1,500

2,000

2,500

3,000

Feb-

07

May

-07

Aug

-07

Nov

-07

Feb-

08

May

-08

Aug

-08

Nov

-08

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

HKD mn

-20%

-10%

0%

10%

20%

30%

40%

50%

Food, Alcoholic Drinks and Tobaccoy-o-y Growth

Yoy

Source: Census & Statistics Dept, HKSAR

16% surge in Jan-Feb10. Food retail sales increased by 16% y-o-y

in Jan-Feb10, which could be a positive indication of improving

consumer sentiment in Hong Kong

Chart 05: Soda beverage sales in Thailand

0

50

100

150

200

250

Feb-

07A

pr-0

7Ju

n-07

Aug

-07

Oct

-07

Dec

-07

Feb-

08A

pr-0

8Ju

n-08

Aug

-08

Oct

-08

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Feb-

10

m liter

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Sales volume growth

y-o-y growth

Source: Ministry of Commerce and Department of Internal Trade of Thailand

Stagnant sales trend. Soda beverage sales in Thailand were

relatively flat YTD.

Chart 06: Food & Beverage sales index in Singapore

02040

6080

100120140

160180200

Feb-

06M

ay-0

6

Aug

-06

Nov

-06

Feb-

07M

ay-0

7

Aug

-07

Nov

-07

Feb-

08M

ay-0

8

Aug

-08

Nov

-08

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

Index

Source: CEIC

Decline in Jan due to high base from Chinese New Year in 2009.

F&B sales index in Singapore declined by 33% yoy in Jan. This

occurred as Chinese New Year fell in mid-Feb in 2010. We believe

F&B sales index should deliver a strong yoy surge like back in

2007 in subsequent months, which was proven by the 72% surge

in Feb10. Looking forward, we expect to see growth resulting

from better economic outlook, higher tourist arrivals and a low

base last year.


Food & Beverage

Section C: Raw Materials prices

Chart 07: Sugar (ZCE)

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Nov

-06

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep-

07N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9Ja

n-10

Mar

-10

RMB/ton

Source: CEIC

10% drop since its peak. Sugar price dropped by over 10% from

its peak in Feb10 due to increasing production in Brazil. Thus the

impact of drought in Southwestern China should be offset by

sufficient global supply. Going forward, we expect limited upside

for sugar prices.

Chart 08: Crude Palm oil ( KLCE )

600

1,200

1,800

2,400

3,000

3,600

4,200

4,800

Nov

-06

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep-

07N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9Ja

n-10

Mar

-10

MYR/ton

Source: CEIC

Remained stable. The price of crude palm oil remained largely

stable since 1H09. Give still sufficient supply, we expect the price

to stay around 2400 MYR/ton in FY10, which would benefit

instant noodle players like Tingyi.

Chart09: Orange Juice ( NYCE )

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

USD/ton

Source: CEIC

Still tight supply. Price of orange juice had more than doubled

since the beginning of FY09, due to the decreased production in

US and Brazil. Given still tight supply this year, the price of

orange juice might continue to climb up in FY10, affecting juice

producers like Huiyuan, Tingyi and China Foods.


Food & Beverage

Chart 10: Consumer-pack Rice in China

4.0

4.2

4.4

4.6

4.8

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep-

07N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9Ja

n-10

Mar

-10

RMB/KG

Source: CEIC

Mild incline trend. Price of rice has been climbing up mildly in the

past several years. Given a relatively stable and sufficient domestic

supply, the uptrend is largely due to Government’s intention to raise

the income of farmers, and is anticipated to continue to rise in the

coming years, affecting some snack players like Want Want.

However, as the absolute leader in rice cracker market, Want Want

is expected to be able to pass on the cost to consumers.

Chart 11: Wheat in China ( ZCE)

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Sep-

05D

ec-0

5M

ar-0

6Ju

n-06

Sep-

06D

ec-0

6M

ar-0

7Ju

n-07

Sep-

07D

ec-0

7M

ar-0

8Ju

n-08

Sep-

08D

ec-0

8M

ar-0

9Ju

n-09

Sep-

09D

ec-0

9M

ar-1

0

RMB/ton

Source: CEIC

Similar uptrend to that of rice. We believe it is almost the same case

for wheat prices to that of rice in China and we expect the mild

uptrend to sustain in coming years and affecting bakery producers

like Tingyi. However, given the small portion of bakery to its

business portfolio (3%), we believe the impact on Tingyi would be

minimal.

Chart 12: Pork in China

5

10

15

20

25

30

Feb-

07A

pr-0

7Ju

n-07

Aug

-07

Oct

-07

Dec

-07

Feb-

08A

pr-0

8Ju

n-08

Aug

-08

Oct

-08

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Feb-

10A

pr-1

0

RMB/KG

Source: Ministry of Commerce of China

Relatively stable pork price. The pork price in China remained largely

stable since mid-09. Given healthy livestock levels nationwide, we

do not expect a substantial surge in pork prices in FY10. In fact, the

pork price declined by more than 15% since the beginning of this

year, and the government has just decided to purchase 50k tons of

frozen pork from the market to help stabilize the pork price. Thus,

the relative stable to lower price of pork this year should be positive

for meat processors like Yurun (1068 HK).


Food & Beverage

Chart 13: PET & Crude Oil

50556065707580859095

100

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

1020

40

60

80

100

120

140

160US/B

PET & Intermediates DOM SBM DEL C/LBCrude Oil-Brent Cur. Month FOB U$/BBL

US cents/LB

Source: CEIC

PET prices remained stable. PET prices move largely in tandem with

the trend of crude oil. As we expect crude oil price to stay around 80

US$/barrel in FY10, PET prices would remain largely stable this year.

Section D: Regional Comparisons

Chart 14:: F&B sales growth in China, HK, and Singapore

-40%

-20%

0%

20%

40%

60%

80%

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

China HK Singapore

Strong growth momentum for all markets. China, HK, and

Singapore all posted strong growth of F&B sales in Jan-Feb10.

However, the trend clearly shows that growth in China has

superseded more mature markets like Singapore and HK in the past

several years.

Chart 15:: CPI of food in China, HK, Thailand and Singapore

90

95

100

105

110

115

120

125

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

HK SingaporeThailand China

Source: CEIC

Soaring CPI in China. Since mid-09, CPI of food in China posted the

strongest growth amongst major markets in Asia partly due to

extremely abnormal weather conditions during that period. For

Singapore, the CPI should creep up to follow the other countries

given that it imports most of its food items. CPI of food in Thailand

is rising led by the meat products price hike due to supply cut and

recovering consumption.


Healthcare

SUB SECTOR - HEALTHCARE


Healthcare

HEALTHCARE Andy Sim, [email protected] Juliana Ramli, [email protected] Nalyne Viriyasathien, [email protected]

• Singapore counters outperformed on Fortis Healthcare’s premium valuation paid for 23.8% stake in Parkway

• Operations should continue to pick up on rising visitor arrivals, economic recovery

• Positives priced in with Singapore counters trading near or above average valuations

• Key pick – Faber Group (TP: RM$3.55)

Performance review: Boosted by new substantial shareholder paying premium valuations for Parkway. Singapore Healthcare players posted strong share price gains, with Fortis Healthcare’s (FHG) acquisition of Texas Pacific Group’s (TPG) 23.8% stake in Parkway at S$3.56/share or 14% premium to last closing price before the announcement. This lifted optimism on other healthcare players, such as Raffles Medical, which together with its strong 4Q09 results rose c.25% in Mar. We had upgraded Raffles Medical to Buy with a TP of S$1.75 on 2 Mar. Share price of Bumrungrad Hospital, on the hand, stayed relatively flat versus its Singapore peers due to political concerns arising from rally by the “red shirts”.

Industry outlook: Admissions expected to trend up, but within estimates. Private hospital admissions in Singapore saw a strong surge in Jan with a 10.7% yoy growth, which seems to be backed by the recovering economy as well as a low base effect in Jan’09. Lunar New Year occurred in Jan last year. Traditionally, locals shun hospitals during the festive season. Operationally, we expect to see continued uptick in hospital admissions along with firmer signs of the economic recovery.

Earnings growth in 2Q but do not expect significant upward earnings forecast revision, if any. We expect to see earnings growth for Parkway Holdings and Raffles Medical, especially in 1Q10 results. But, we believe it should fall within our expectations. We expect newsflow on strong sales of Parkway’s Novena medical suites, but we believe this has been largely priced in. 1Q10 patient volume in Thailand remains strong, but 2Q10 should weaken. Patient volume has been improving during Jan-Mar10 due to recovering economy and easing political uncertainties at the beginning of the year have

drawn foreign patients back. We expect strong earning growth from Bumrungrad in 1Q10 as patient volumes is expected to grow 5% y-o-y, while revenue per head increased 6% y-o-y in 1Q10, led by higher intensity treatments (+4%) and an increase in average price (+2%) since the beginning of the year. However, we expect 2Q10 to contract due to rising political uncertainties in Thailand, but the degree would depend on how long the demonstration lasts. Action/ Key Pick: Faber Group is our key pick. Faber is an underappreciated, well-managed GLC which is 34%-owned by Khazanah Nasional. It trades at CY11F PE of 7.6x (ex-cash) on the back of 10.6% 3-year EPS CAGR in spite of a regulated concession business, 1.3x FY11F BV, with ROEs of c.19-20% and strong balance sheet (net cash 34.5 sen per share). It is also a proxy to the resilient healthcare industry where the renewal of its concession in Oct 2011 will give another 15 years of solid earnings visibility, in our view. Meanwhile, its strong franchise locally has enabled it to export its expertise overseas to two key markets – Middle East and India.

Maintain FV on Parkway on premium valuations. Valuation gap has widened on optimism of Singapore counters with FHG’s investment in Parkway. On the other hand, political concerns in Thailand continue to cap gains for Thai players. We believe valuations for Parkway have priced in its positives, along with strong response to the sale of its medical suites. We maintain our Fully Valued call and TP at S$2.. FHG has increased its stake in Parkway to 24.8%, from 23.8%, from open market purchase. We believed this could be the support for Parkway’s share price in recent weeks. At this point, a move towards a general offer looks remote in our view.

Catalyst: In 2Q, we should see lots of market talk on the strong take up of Parkway’s medical suites and the expected launch of subsequent phases. We have assumed an ASP of S$4,000 psf for the whole project. The market is generally expecting a price of about S$3,800 psf, which we believe has been priced in. However, if this exceeds expectations by a wide margin (ie north of S$4,000 psf), we will be proven wrong and will be a positive catalyst to the share price.

Rising political tension in Thailand remains the key risk for Bumrungrad Hospital as over 50% of its top line contribution is from foreign patients. Local patients volume is also impacted, as the red shirts demonstration in central of Bangkok is where the Bumrungrad hospital is located, causing local patients to seek treatment at other hospitals. Entering Apr10, patient volume is starting to soften with a slight negative y-o-y growth.


Healthcare

Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 1,162 - 197 - - 173 - 119 0.03 - -2007A 1,233 6.1 208 5.6 - 375 116.8 170 0.04 43.4 -2008A 1,298 5.3 202 -3.1 - 173 -53.9 150 0.04 -11.7 -2009E 1,415 9.0 225 11.7 - 243 40.7 173 0.04 14.8 -2010F 1,584 12.0 272 20.6 16.8 280 15.3 209 0.05 21.0 -8.32011F 1,880 18.6 369 35.8 -11.2 378 34.8 286 0.07 37.1 -14.1

OP Interest Net Debt / DividendEBITDA Margin ROE Cover Equity FCF BPS Yield PE P/B EV/EBITDA(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)

2006A 269 17.0 - 10.8 0.5 108 0.2 2.97 35.4 7.3 16.62007A 304 16.9 24.7 11.3 0.1 456 0.3 3.99 24.7 5.3 14.02008A 274 15.5 14.0 18.0 0.4 -849 0.5 1.22 27.9 3.1 17.12009E 312 15.9 11.9 44.4 0.3 169 0.6 1.10 24.3 2.7 14.72010F 360 17.1 12.9 52.9 0.2 68 0.6 2.47 20.1 2.5 12.72011F 462 19.6 15.9 73.0 0.2 181 0.7 3.50 14.7 2.2 9.7



Bumrungrad Hospital 677 16.1 -3.2 3.4 7.1 24.5 -0.6 -16.5 -21.6 -98.3 0.8Faber Group 262 6.2 0.4 42.3 125.2 139.2 3.0 22.3 96.5 16.4 1.7Parkway 2,636 62.7 -3.5 21.9 31.0 195.6 -0.9 1.9 2.3 72.8 1.2Raffles Medical 627 14.9 0.6 25.2 24.3 83.7 3.2 5.2 -4.4 -39.1 0.6

Healthcare Equipment & Svs 4,202 100.0 -2.6 20.0 28.7 122.8 1.1

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Bumrungrad Hospital 15.6 15.0 17.2 4.0 3.5 3.1 23.9 22.1 8.7 8.2 3.3 3.5Faber Group 9.7 8.8 14.2 9.9 1.8 1.6 20.3 19.0 4.3 3.6 2.0 2.2Parkway 25.1 15.4 24.9 62.5 2.3 2.1 9.4 14.0 17.3 11.8 2.3 3.7Raffles Medical 18.9 15.5 20.0 21.9 3.1 2.7 17.2 18.6 12.3 9.6 2.0 2.3

Healthcare Equipment & Svs 20.1 14.7 21.0 37.1 2.5 2.2 12.9 15.9 12.7 9.7 2.5 3.5

(x) (%)(x) (%) (x) (%)

PE EPS Growth ROE Dividend Yield

Return

P/B EV/EBITDA

Excess Return


Healthcare

Section B: Charts

Chart 1: Share price performance YTD Faber the star, up >40% YTD. The market has started to realize

Faber's potential following its sterling 4Q09 results, which was driven

by the overseas business. This had led in share price to jump by 41%

YTD. However, we think it is still early days. It still trades at

compelling CY11F PE of 7.3x (ex-cash) and 1.3x FY11F BV. The

announcement of Fortis Healthcare Group as a new substantial

shareholder at S$3.55/share on 12 Mar provided catalyst for the

Parkway and Singapore healthcare players. Bumrungrad has under-

performed, in part due to political uncertainty, which is expected to

affect foreign patient admissions. Recently, we noticed more interest

in smaller hospital players such as Raffles Medical given its robust

growth profile, and as investors look for alternatives to Parkway due

to its high valuations.

Chart 2: Singapore Private Hospital Admission & yoy growth (%) 10.7% growth in Jan on low base. Private hospital admissions in

Singapore surged by 10.7% in Jan on recovering outlook, coupled

with a low-base effect last year. The Lunar New Year fell in Jan in

2009, but was in Feb in 2010. Traditionally, locals avoid hospital

admissions during the festive season. Going forward, we expect to see

some moderation in Feb, but upside trend is expected to continue. In

recent discussions with local healthcare operators, they continue to

remain optimistic and believed the worst is over .

Chart 3: Singapore & Thailand Visitor Arrivals Strong growth in Jan, but could see moderation in Thailand in 1Q’10.

Visitor arrivals are picking up from the low achieved in May’09. Based

on Jan’10 figures, visitor arrivals continued its uptrend. We believe the

strong surge in Singapore’s visitor arrivals resulted partly from the

opening of the Resorts World Sentosa (RWS). In Thailand, visitor

arrivals started to turnaround since Sep 09 along with pick up in travel

demand amid economic recovery and also resulting from a low base

effect in 4Q08 where there were yellow shirts rally and forced airport

closure. Feb10 visitor arrivals continued to improve, jumping 41% y-o-

y to 1.6m. But, with the red shirts rally now ongoing again, we expect

a moderation of visitor arrivals into Thailand at least in Apr-May10,

which may impact international patient admissions in 2Q10.

6

7

8

9

10

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10-15%

-10%

-5%

0%

5%

10%

15%

Pte Sector Hospital Adm (000's)

Pte Hos Adm yoy gth (%) [RHS]Source: Singstats

Adm (000's) yoy gth (%)Singapore Private Hospital Admission & yoy growth (%)

0

200400

600

800

1,000

1,2001,400

1,600

1,800

Jan-0

6

May

-06

Sep-

06

Jan-0

7

May

-07

Sep-

07

Jan-0

8

May

-08

Sep-

08

Jan-0

9

May

-09

Sep-

09

Jan-1

0

-30%

-20%-10%

0%

10%

20%

30%40%

50%

60%

SGP visitor arrivals (000's) TH v isitor arrivals (000's)

SGP v isitor arrivals yoy gth (%) TH visitor arrivals yoy gth (%)

Source: CEIC, Bank of Thailand, STB, DBSVickers

V isitor arrivals (000s) yoy gth (%)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jan-10 Feb-10 Mar-10 Apr-10

Parkway Raffles Medical Bumrungrad Faber

Source: Bloomberg


Healthcare

Chart 4: Quarterly revenue growth Revenue growth picking up on sequential basis. We are witnessing

yoy revenue growth for the companies picking up speed since 4Q09,

as a result of further signs of economic recovery and due to low base

effect in 4Q08 (during the onset of the financial crisis). Noteworthy is

the pick up in revenue growth by Raffles Medical and Bumrungrad,

which registered a 4Q growth of above 10%, as a result of a pick up

in their respective domestic markets. Parkway’s revenue also grew by

c.9% in 4Q, led by its international operations and Singapore

healthcare division.

Chart 5: PBIT trends, 4qtrs moving average Margins show stable or upward trend, with Raffles Medical

outperforming others. The moving average operating margins trend

shows divergence in margin trend, particularly between Parkway and

Raffles Medical. Raffles Medical continued their upward moving

average trend in 4Q09 as operations grew and the Group registered a

robust 4Q topline growth of 13%. Parkway’s margins, on the other

hand, dipped slightly with stronger contributions from its international

hospital and Singapore healthcare operations, which have lower

margins vis-à-vis its Singapore hospital operations.

Chart 6: Parkway Revenue per Adjusted Patient Day Parkway’s PAPD relatively stable yoy. In 4Q09, Parkway’s revenue per

adjusted patient day (PAPD) in Singapore dipped marginally by 5% on

a qoq basis to S$1,811, but registered a marginal increment of 0.6%

on a yoy basis. The qoq drop probably reflects the seasonality where

doctors scale back on higher revenue intensity surgeries during the

year-end holiday season. Going forward, we believed PAPD should

show some upward trend as the economy recovers.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

Raffles Medical Parkway Bumrungrad Hospital

Gth yoy (%) Revenue growth yoy (%)

Source: Companies, DBSV ickers

0.0

5.0

10.0

15.0

20.0

25.0

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

Raffles Medical Parkway Bumrungrad Hospital

PBIT margin (%) PBIT margin (%) Moving Average (4qtrs)

Source: Companies, DBSVickers

0

500

1,000

1,500

2,000

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

SGP Net Revenue PAPD (S$)SEA Net Revenue PAPD (S$)South Asia Net Revenue PAPD (S$)

Source: Company, DBSVickers

Net revenue PAPD (S$)

PAPD = Per Adjusted Patient Day


Healthcare

Chart 7: Parkway SGP Admissions, Day cases, Avg Occupancy Inpatient admissions offset partially by day cases. Occupancy for

Parkway’s Singapore hospitals reached c.58% in 4Q09. This arose

from seasonality, as doctors, and patients alike, scaled back on non-

urgent surgeries in view of the holiday season. This was however

partially offset by higher day surgeries performed.

Chart 8: Bumrungrad Hospital Inpatient & Outpatient Admissions

Higher international patient volume. International patient volumes

had been falling y-o-y since the start of 2009 amid the global

downturn and political tension in Thailand. But it grew y-o-y for the

first time in 4Q09 following six consecutive quarters of declines.

Foreign outpatient volume jumped 10% y-o-y and 5% q-o-q to

101,820 patients, while inpatient volume jumped 13% and 12% q-

o-q to 3,346 patients, in 4Q09. This was attributed to easing

political tension in Thailand, while the global economic recovery also

triggered a recovery in the number of patients. However, Thai

patient volume remained flat in 4Q09. But we expect volume of Thai

patients to improve gradually following BH’s ongoing marketing

campaign and exhibitions, and the success of its ‘Healthy Living

Club’ customer loyalty program.

Chart 9: Bumrungrad Hospital Revenue per patient head

Growing revenue per patient. Revenue per head at Bumrungrad

grew 8% y-o-y for Outpatient and 9% for Inpatient in 4Q09, led by

higher intensity treatments (+6%) and an increase in average price

(+2%) since the beginning of the year (Medical service fee is set to

increase 2% p.a.).

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

52%

54%

56%

58%

60%

62%

64%

66%

68%

Parkway SGP admissions No. of day casesAvg Occupancy (%) [RHS]

Cases Occupancy (%)

Source: Company, DBSV ickers

020,00040,00060,00080,000

100,000120,000140,000

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

05001,0001,5002,0002,5003,0003,5004,000

OPD IPD (RHS)

'000 patients '000

34,000

36,000

38,000

40,000

42,000

44,000

46,000

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

4,200

4,400

4,600

4,800

5,000

5,200

5,400

Inpatient Outpatient (RHS)

'000 patients '000


Media

SUB SECTOR - MEDIA


Media

MEDIA Andy Sim, [email protected] Mavis Hu, [email protected] Chirasit Vuttigrai, [email protected]

• General expectation is for advertising revenue to pick up further during the year on the back of economic recovery

• Events such as the World Cup, World Expo and Integrated Resort opening in Singapore should fuel spending

• Escalation of political tension in Thailand could weigh down on consumer sentiment there

• Pico Far East is our top pick for its earnings rebound and potential re-rating

Performance review: Astro outperformed on privatization offer. Share price of the regional media counters under coverage were generally flat YTD. The significant outperformance was from Astro, which received a privatization offer at RM4.30/share from its major shareholders and parties acting-in-concert. Industry outlook. In Singapore, we expect media spending to pick up steam in ensuing quarters. This is on the back of further recovery in the economy, coupled with more media-worthy activities ahead. In particular, we have the opening of the second integrated resort (Marina Bay Sands), Great Singapore Sale, Youth Olympics, additional retail space, property launches etc. The upward revision of Singapore Ministry of Trade & Industry’s (MTI) official GDP forecast to 7%-9%, following a strong 1Q10 growth, should spur consumer sentiment and further add to media spend. Following the economic recovery, Thailand’s overall monthly ad spending growth has turned positive since Aug 2009. The y-o-y growth accelerated in 4Q09 due to a low base effect. The momentum remained strong with ad spending growth of 9% in 2M10. This is pretty much in line with our forecast of 8-10% in 2010, after a contraction of 1.9% in 2008 and 0.7% in 2009. In our view, the market focus is now on companies which are likely to report strong 1Q10F results. MCOT’s 1Q10F earnings should be outstanding.

Adspend in Hong Kong is expected to post a solid rebound, growing double-digit y-o-y in 1H10 along with economic recovery from a low base. However, operating environment for the print sector could stay competitive, amid more players from free newspaper operations since a few years back as well as the rise of successful free dailies such as "Headline Daily" operated by Sing Tao [1105 HK]. China has seen relatively more resilient performance in the media sector, with adspend rising c.13.5% y-o-y in 2009 and continues to grow at a double-digit rate YTD, amid government stimulus packages to sustain domestic consumption, thus prompting advertisements. Action/ Key Pick: Our top pick is Pico Far East on the back of its earnings rebound and potential re-rating opportunity. We believe the market has yet to fully price in its strong earnings growth. We expect to see a 44% jump in earnings in FY10F after a 27% decline in FY09. The impending World Expo in Shanghai, new integrated resort facilities in Singapore and numerous mega events should spur growth. Over the years, Pico’s share price has peaked at >20x forward rolling PE and c.4x P/B. Currently, the stock is trading at c.11x PE and offers a 5% yield underpinned by its c.HK$500m net cash position, and see ample room for re-rating of our TP of HK$1.97. Catalyst: Tension in Thailand, World Expo in Shanghai The political tension in Thailand could weigh as a negative catalyst. A prolonged tension in the current episode could weigh down further on sentiment, and in turn, affect media spend in 2Q, which is traditionally a high season. Impending Expo event in China, which last for 6 full months from May to Oct 2010, should drive adspend growth in Shanghai and peripheral areas this year. On the other hand, the situation was a replicate of 2008 Beijing Olympics, whereby selective outdoor media such as billboard and LED advertisements have been cleared and banned from operations as the government cleans up the streets of clutter in Shanghai.


Media

Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 3,124 - 816 - - 907 - 695 0.06 - -2007A 3,385 8.3 913 11.9 - 994 9.6 823 0.07 18.4 -2008A 3,739 10.5 985 7.9 - 907 -8.7 810 0.07 -1.5 -2009E 3,744 0.1 944 -4.2 - 650 -28.3 659 0.05 -18.7 -2010F 4,000 6.8 1,077 14.1 13.9 1,033 59.0 790 0.06 19.8 0.02011F 4,165 4.1 1,068 -0.8 11.7 994 -3.8 764 0.06 -3.3 11.7


(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)2006A 1,015 26.1 - -16.1 -0.2 646 0.3 5.49 17.9 3.3 11.52007A 1,132 27.0 21.1 -8.0 -0.3 802 0.4 5.39 15.1 3.1 9.92008A 1,224 26.3 20.3 -22.3 -0.2 728 0.3 5.57 15.3 3.1 9.52009E 1,206 25.2 17.3 16.4 -0.1 460 0.3 4.66 18.9 3.4 10.02010F 1,377 26.9 20.9 231.9 -0.1 618 0.3 4.92 15.7 3.2 8.92011F 1,357 25.6 19.4 43.2 -0.1 799 0.4 5.04 16.3 3.1 9.0

Stock Perform anceM arket

Cap W eight 1M 3M 6M 12M 1M 3M 6M 12M BETA

(US$)Broadcasting & Enterta inm entAstro 2,592 20.9 -0.2 30.9 24.0 61.8 -5.1 18.4 12.6 17.3 1.1TVB 2,176 17.5 3.3 5.3 1.6 31.7 -1.6 -7.2 -9.7 -12.8 0.6

BEC W orld 1,418 11.4 -2.5 -1.3 10.3 24.3 -7.3 -13.8 -1.0 -20.2 0.9M COT 487 3.9 -1.7 -2.6 0.4 64.0 -6.6 -15.1 -10.9 19.5 1.0M ajor C ineplex 234 1.9 -5.0 -7.1 12.6 33.9 -9.9 -19.6 1.2 -10.7 1.1

M edia A genciesPico Far East 244 2.0 13.4 -1.2 5.2 93.0 8.6 -13.7 -6.1 48.5 1.1W orkpoint Entertainm ent 41 0.3 -2.2 -2.2 0.8 33.0 -7.0 -14.7 -10.6 -11.5 0.8

Publish ingNext M edia 435 3.5 34.8 39.8 46.6 39.8 29.9 27.3 35.2 -4.7 0.9SPH 4,793 38.6 9.7 13.8 9.5 46.5 4.8 1.3 -1.9 2.0 0.6

M edia 12,420 100.0 4.8 12.5 11.4 44.5 0.9

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Broadcasting & Enterta inm entAstro 29.3 32.3 78.0 -9.2 9.3 8.9 33.3 28.1 11.1 11.8 2.4 2.6TVB 16.8 14.8 11.8 13.1 2.7 2.5 16.8 17.7 8.8 7.8 3.7 4.2

BEC W orld 14.9 13.4 11.6 11.3 6.5 6.3 43.2 47.8 6.7 6.2 5.9 7.3M COT 11.1 10.4 8.0 6.3 2.0 2.0 18.6 19.2 5.0 4.5 9.3 8.1M ajor C ineplex 16.5 11.6 94.9 41.5 1.4 1.4 8.7 12.2 5.4 4.6 5.5 7.8

M edia A genciesPico Far East 10.6 8.6 44.4 23.1 1.8 1.6 17.8 19.9 4.7 3.6 4.8 5.9W orkpoint Entertainm ent 11.5 10.5 58.1 9.3 1.3 1.2 11.5 12.0 4.0 3.4 5.8 6.4

Publish ingNext M edia 12.5 11.9 4.7 5.3 1.0 0.9 8.3 8.0 6.3 5.0 0.0 0.0SPH 13.4 16.2 15.6 -17.3 3.1 3.1 23.2 18.9 10.4 12.5 6.5 6.0

M edia 15.7 16.3 19.8 -3.3 3.2 3.1 20.9 19.4 8.9 9.0 4.9 5.0

Return

P/B EV/EBITD A

Excess Return

PE EPS Grow th ROE D ividend Y ie ld

(x) (% ) (x) (% ) (x) (% )


Media

Section B: Charts

Chart 1: GDP yoy growth Positive GDP growth a key proxy for media spending. After

registering negative yoy growth for most part of 2009, all the

countries shown are expected to revert back to positive growth. This

reflects an improving economy and growing consumer sentiment.

We expect the media industry to benefit from this trend as

companies will look to increase their marketing budget in line with

the growing optimism. Going forward, we expect confirmation of

the sustainability of the recovery to further fuel media spending.

Chart 2: SGP - Newspaper Ad Spend chg (%) & GDP chg (%) Expect further rises in newspaper ad spend. With the strong GDP

growth in 1Q10 and the government’s full year revision on growth,

we expect newspaper ad revenue to pick up further from 1Q and

register a high-teen yoy growth in 2Q before normalizing back

nearer in 4Q.

Chart 3: SGP - Ad Spend by media types Total Ad spend in Singapore should pick up. While total ad spend on

all media types seems to be in state of decline after crossing S$200m

mark in Nov’09, this is largely due to seasonality effects – companies

tend to pace their marketing spend during the earlier parts of the

calendar year. As expected, total ad spend grew by 17% yoy in Mar.

0

50

100

150

200

250

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Newspapers TV Radio MagazinesPosters Bus/Taxi Cinema Internet

S$m

Source: Nielsen Media Research, DBSV ickers

(30)

(20)

(10)

0

10

20

30

1Q93

1Q94

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

f

Adex yoy growth (%) GDP yoy growth

y-o-y chg (%)

Adex

GDP

Source: Singstats, Nielsen Media Research, DBS, DBSV ickers

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Mar

-08

Jun-

08

Sep-

08

Dec-0

8

Mar

-09

Jun-

09

Sep-

09

Dec-0

9

Mar

-10

Jun-

10

Sep-

10

Dec-1

0

CN HK ID MY SG TH

Source: DBS

CN

ID

MY

CN

SG

HKTH


Media

Chart 4: SGP - Nielsen Media Display & Classified AdEx (excl. Today)

Display classifieds AdEx continue to register growth, in line with

GDP. Singapore’s newspaper ad expenditure (AdEx) for display and

classifieds for SPH papers in Mar'10 amounted to S$65m, a 23%

increase yoy. The dip in Feb after the strong 26% yoy growth in Jan,

was due to the Chinese New Year seasonality. Traditionally, ads do

taper off during the CNY week. CNY fell on 14 Feb this year, while it

occurred on 26 Jan in 2009. YTD (Sep-Mar period), AdEx registered

a 8.9% growth. Seasonality aside, we expect to see sequential

growth in AdEx in the ensuing months on the back of media

activities (IR), Youth Olympic Games, property launches, and pick up

in employment.

Chart 5: SPH and FOEX newsprint costs

Newsprint creeping up towards US$600/mt. Newsprint spot price is

rising from the low under US$500/mt towards US$580/mt due to

rise in pulp price. This is, however, nowhere near the US$800/mt

levels we saw back in late 2008. Newsprint accounts for c.16% of

SPH’s total cost. Based on our model, a US$50 change in newsprint

costs (all other assumptions constant) will impact SPH's bottomline

in FY10F/11F by c.1.6%. We have assumed newsprint price of

US$580/mt for FY10F and US$600/mt for FY11F. Note that SPH

does 3-6 month forward purchase for its newsprint.

Chart 6: HK - Share of Ad Spend by Media types Steady ad spend growth in HK in 2010. Total adspend in Hong Kong

went up 5.9% y-o-y to US$26.5bn in 2009. HK4As forecasted that

media agencies would slowly increase their rate cards in 2010 and

give less discounts after this year’s economic bounce. The

association believes that 1H10 could see a double-digit adspend

increase on a low base, while a steady growth could be seen for the

full year of 2010.

Outdoor11%

Radio5%

Television35%

Newspapers30%

Magazine15%

Digital4%

Source: Association of Accredited Advertising Agencies (HK4As)

30

35

40

45

50

55

60

65

70

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

Month

AdE

x (S

$m) .

FY99 FY09 FY10

FY09

FY10

FY99 (Trough)

23% yoy growth for Mar

Source: Nielsen Media Research, DBSVickers

300

400

500

600

700

800

900

1000

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

300

400

500

600

700

800

900

1000

SPH newsprint charge out rate (US$/mt)FOEX Newsprint Spot Index (US$/mt)

US$/mt

Source: Bloomberg, Company


Media

Chart 7: HK - 2009 Ad revenue growth by media types Outdoor adspend registered strong 32% growth due to lower cost

(in absolute terms) of advertising. In 2009, outdoor and radio

adspend saw the best growth, up 32.4% and 27.0% respectively,

followed by television (up 7%) and digital (up 7%). All figures

include discounts offered by media agencies. The growth in outdoor

and radio adspend was mainly attributable to budget cuts of

marketers due to the high cost of other media including television.

Chart 8: Thailand Consumer Confidence Index Thailand’s Consumer Confidence Index (CCI) dropped from 79.3 in

Jan 2010 to 78.4 in Feb, and further to 77.3 in Mar due to a

concern on (i) political tension, (ii) high oil price and (iii) perceived

high cost of living.

In our view, the consumer confidence should soften further in Apr

due to the escalated political tension.

Chart 9: Thailand Monthly Ad Spending Thailand’s overall monthly ad spending continued to rise in Jan 2010

(5.7%) and Feb (10.7%). The overall ad spending growth of 9% in

2M10 is pretty much in line with our forecast of 8-10% in 2010.

Although the ad spending would soften in Apr 2010 due to the

escalated political tension, following the demonstration, we believe

the growth y-o-y would remain in positive territory due to the low

base effect.

5

6

7

8

9

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

-10

-5

0

5

10

15Ad spendingGrowth y-o-y (RHS)

Btbn %


405060708090

100110120

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

CCI of Overall economyCCI of future employmentCCI of future income

-10-505

101520253035

Outdoo

r

Radio

Televis

ionDigita

l

Newsp

aper

s

Magazin

e

%y-o-y

Source: Association of Accredited Advertising Agencies (HK4As)


Media

Chart 10: Thailand Ad spend market share by Channels In line with the audience market share figures, the ad spending

market share of BEC’s Ch3 improved in Jan and Feb 2010, while Ch7’s

ad spending share softened during the same period. Also in line with

the audience share numbers, ad spending market share of MCOT’s

Ch9 softened slightly in Jan and Feb 2010.

Chart 11: Thailand Audience Market Share by Channels BEC’s Ch3 gained audience market share in Jan and Feb to 32.2%

and 30.0%, respectively. This was at the expense of Ch 7. Audience

market share of MCOT’s Ch9 slightly softened in Jan (9.9%) and Feb

(9.8%) 2010.

0%

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Personal/Household Goods

SUB SECTOR – PERSONAL/ HOUSEHOLD GOODS



PERSONAL/ HOUSEHOLD GOODS Patricia Yeung, [email protected] Alice Hui, [email protected] Patrick Xu, [email protected] • Urbanization and rising living standards will boost

demand for high quality products with strong brand names

• Market leaders should be able to sustain margins on better cost control measures and bargaining power

• Prefer stocks with high cash levels in RMB and RMB revenue streams to benefit from interest rate hikes and RMB appreciation

• Action: BUY Hengan for its leading market position, strong balance sheet and sustainable profitability; HTL is another key pick.

Performance review: Share price performance of household / personal goods companies under our universe was a mixed bag in the past quarter. Most of the counters were driven by results, such as Li & Fung (up 18.4%), Li Ning (+27% from the trough) and Yue Yuen (up 20%). Texwinca also performed well with 18.2% gain on expectation of strong upcoming results after stronger-than-expected results from Giordano. On the other hand, worse-than-expected results from China Hongxing and China Sports International triggered selling pressure, pushing down their share prices by 43.7% and 45.8% respectively from recent peaks. Industry outlook. We believe domestic household / personal goods manufacturers will continue to benefit from supportive government policy in boosting domestic consumption as well as accelerating rate of urbanization. These, coupled with robust domestic economic growth, will enhance overall living standards, leading to stronger demand for household / personal goods. This view is enforced through the continuous uptrend in retail sales of daily use goods. In fact, retail sales growth of daily use goods has always been stronger than the overall retail sales growth in China. While rising raw material prices and labour costs are possible concerns, we believe market leaders with stronger bargaining power are in a better position to adjust selling prices. For sportswear brands in China, the market’s focus will likely be on the pace in which inventory within the distribution channels are cleared. This build up in inventory was the key problem for the slower growth by brand owners last year. After aggressive discounts, Nike is understood to have solved most of this problem, but Adidas is apparently still sitting on relatively high inventory. As for local players, market attention has now shifted from network expansion

to improvement in store performance. More effort is expected to be put in building brand equity, market positioning / differentiation and distribution network management. Business outlook for the broader export oriented household / personal goods manufacturers will hinge on various factors, including consumer sentiment in the US, economic recovery in the EU, raw material prices and appreciation of RMB. Action/ Key Pick: Our key pick for household / personal goods sector is Hengan, a market leader in personal care products (including sanitary napkins, diapers and tissues). Despite over 40% jump in wood pulp prices in the past year, Hengan was able to capitalize on its strong balance sheet and has stockpiled low cost inventory for production for at least 5 months. To further alleviate margin pressure from hike in raw material prices, sales promotion and discount activities will be reduced. In the light of rising living standards and disposable incomes in China, Hengan is launching more high end products to enrich its product portfolio and enhance its earnings quality. We also like HTL International for its exposure to the global recovery of consumer spending, especially in Europe and the US. With high correlation to housing starts, we expect sofa sales in Europe and the US to have bottomed out and are now on an upward trend, underpinning the company's earnings growth going forward. We appreciate the management's rich experience in the business, as evidenced by their nimble restructuring during the downturn, where less efficient operations were timely disposed of and business segments were vertically integrated. The counter is trading at 6x current P/E, whilst offering a decent yield of 5%. Catalysts: In 2Q, we expect market attention will shift to interest rate hikes in China and RMB appreciation. Investors may look for cash rich companies with upside from the RMB appreciation. Hengan is certainly on this list. It had net cash of over HK$2bn, a large part in RMB as at end-FY09. In addition, procurement of wood pulp is settled in US$. Hence, Hengan is a beneficiary of RMB appreciation. Hengan has underperformed the market by 10.2% in the past quarter. We believe it will catch up in 2Q given its solid fundamentals.



Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 15,679 - 1,042 - - 1,086 - 963 0.06 - -2007A 20,134 28.4 1,346 29.2 - 1,352 24.6 1,135 0.08 17.8 -2008A 24,332 20.9 1,470 9.2 - 1,497 10.7 1,227 0.08 8.1 -2009E 24,028 -1.2 1,753 19.3 - 1,725 15.2 1,560 0.10 27.1 -2010F 28,790 19.8 2,159 23.1 -0.8 2,144 24.3 1,881 0.12 20.6 5.02011F 34,299 19.1 2,701 25.1 -5.6 2,708 26.3 2,347 0.16 24.7 5.6


(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)2006A 1,367 6.6 - 18.6 0.1 -76 0.2 1.38 41.7 8.4 29.72007A 1,659 6.7 20.3 13.7 0.1 -204 0.2 1.75 35.4 6.3 24.62008A 1,906 6.0 17.6 12.2 0.1 -184 0.2 1.80 32.7 5.3 21.62009E 2,253 7.3 18.7 19.2 0.0 1,754 0.2 2.22 25.7 4.4 17.72010F 2,686 7.5 19.7 19.6 -0.1 1,180 0.3 2.80 21.3 4.0 14.82011F 3,281 7.9 22.1 25.4 -0.1 1,720 0.3 3.56 17.1 3.6 11.9



Clothing & AccessoriesLi & Fung 18,578 46.3 4.8 25.4 14.7 94.8 1.1 6.2 -3.0 6.6 0.8

Texwinca 1,467 3.7 1.9 29.3 17.3 87.8 -1.8 10.1 -0.4 -0.3 0.7Durable Household Products

HTL International 256 0.6 -0.6 90.9 100.0 441.9 -4.4 71.7 82.2 353.8 1.0Neo-Neon 657 1.6 -2.9 -11.2 6.2 197.8 -6.7 -30.4 -11.6 109.6 1.2Footwear

China Hongxing 316 0.8 0.0 -28.2 -30.0 3.7 -3.8 -47.4 -47.8 -84.4 1.5China Sports International 89 0.2 3.7 -24.3 -22.2 45.8 -0.1 -43.6 -40.0 -42.3 1.3Li Ning 3,911 9.7 8.0 29.0 37.8 97.7 4.2 9.8 20.1 9.5 0.9

Yue Yuen 5,694 14.2 0.9 8.0 25.5 58.5 -2.9 -11.2 7.8 -29.6 0.6Non-durable Household ProductsHengan 8,764 21.8 2.0 14.0 14.1 90.1 -1.8 -5.3 -3.7 1.9 0.6

Ming Fai 209 0.5 62.9 103.4 150.4 209.2 59.1 84.1 132.7 121.0 0.8Pelikan International 205 0.5 -1.5 2.3 4.2 51.8 -5.3 -16.9 -13.6 -36.3 1.7

Household / Personal Goods 40,146 100.0 3.8 19.2 17.8 88.1 1.0

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Clothing & AccessoriesLi & Fung 28.5 20.5 45.6 38.9 7.5 6.6 27.3 34.3 23.3 17.3 2.8 3.8

Texwinca 11.7 10.2 13.5 14.1 2.5 2.2 22.4 23.1 7.3 6.3 5.7 6.5Durable Household ProductsHTL International 6.2 5.4 14.9 15.3 1.3 1.1 21.9 22.0 4.5 3.9 4.9 5.7

Neo-Neon 25.5 14.4 43.0 77.1 1.5 1.4 6.0 10.0 13.0 9.2 1.0 1.8Footwear

China Hongxing 18.2 13.3 -9.4 36.4 0.5 0.5 2.8 3.7 -3.9 -3.1 1.8 2.5China Sports International 4.5 4.1 10.0 8.9 0.5 0.5 12.7 11.7 -0.6 -0.9 0.0 0.0Li Ning 23.2 18.9 21.7 22.6 7.3 5.8 35.3 34.2 13.9 11.2 1.6 2.0

Yue Yuen 11.7 10.8 2.0 8.6 1.7 1.6 15.3 15.1 8.0 7.1 3.8 4.2Non-durable Household ProductsHengan 28.4 23.1 11.2 22.7 6.8 6.0 25.2 27.6 19.5 15.6 2.2 2.7

Ming Fai 16.5 12.9 16.1 28.0 1.9 1.8 12.0 14.3 8.3 6.5 2.1 2.7Pelikan International 9.2 7.3 104.6 25.3 0.8 0.7 10.3 10.4 7.5 6.3 1.8 2.2

Household / Personal Goods 21.3 17.1 20.6 24.7 4.0 3.6 19.7 22.1 14.8 11.9 2.8 3.6

Return

P/B EV/EBITDA

Excess Return

(x) (%)


(x) (%) (x) (%)



Section B: Charts Chart 1: China retail sales for enterprises above designated size* - Daily Use Goods

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

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Yoy growth

*Note: Refers to enterprises with sales revenue of >RMB5m.

Sales growth of daily use goods remained strong at 36.7% in

Feb10, compared with overall retail sales growth of just 22.1%.

To eliminate the impact from CNY, retail sales of daily use goods

of Jan-Feb registered a decent growth of 20%. We expect the

sales uptrend to continue going forward.

Chart 2: China retail sales of footwear (top 200 enterprises)

0500

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Retails sales of footwear in China dropped 12.2% in Jan 10 due

to a high base last year and distortion from CNY sales. We expect

a stronger growth in Feb sales figure. Going forward, World Cup

in this summer may also stimulate footwear sales, particularly

athletic shoes.

Chart 3: China retail sales of sports and recreation articles (top 200 enterprises)

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China Retail Sales: Sports and Recreation Articles (LHS)

Yoy growth (RHS)

RMB m %

The retail sales trend of sports and recreational articles is not as

apparent as that of daily use goods. We reckon that it is more

sensitive to economic growth as it showed a slight slowdown

during 2008. We believe sales trend should look positive in 2010

amid strong GDP growth in China and Asian Games in

Guangzhou.



Chart 4: Sportswear brand order book growth

0%

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Q209 Q309 Q409 Q110 Q210

Li Ning Anta Dongxiang Xtep

Decent growth has been recorded for most major sports brands in

China during the Q2/10 trade fair, indicating the worst should be

over for the industry. As the base effect wanes, further

acceleration in order book growth is likely in 2H10. In fact, initial

indications for the Q3/10 order book for major players have

appeared to confirm our view.

Chart 5: Wood pulp prices

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After hitting the bottom in Q12009, wood pulp prices rebounded

substantially along with the economic recovery. The earthquake in

Chile also pushed up prices further. Despite this, tissue paper

manufacturers, such as Hengan and Vinda, have accumulated

some inventory when prices were low. This should help these

manufacturers to partly alleviate margin pressure.


Retailers

SUB SECTOR – RETAILERS


Retailers

FOOD RETAILERS Mavis Hui, [email protected]

• An inflationary environment strengthens pricing power

for potential margin enhancement. • The worsening drought in China could provide further

room for retailers to justify price hikes. • Major players also likely to boost growth via

acquisitions as industry consolidates further. • We like Beijing Jingkelong (814.HK) for its attractive

valuation vs peers Performance review: China plays outperformed Share prices of grocery retailers saw a good rally in 1Q10 along with an upward pricing trend across various food items. Broadly speaking, major retailers in China outperformed the region amid their swift recovery and strong outlook, with share prices of Wumart (8277.HK), Beijing Jingkelong (814.HK) and Lianhua Supermarket (980.HK) rising by 30-40% for the quarter. Selective operators in other regions also saw decent share price performance, which included CP ALL (CPALL.TB, up 14%) and Big C Supercenter (BIGC.TB, up 18%). Regional players like Dairy Farm (DFI.SP) saw a mild performance, rising 11% in 1Q10. Overall, share prices of major food retailers in the region outperformed the 2.6% average increase across regional indices for Hong Kong, Singapore, Malaysia, Thailand and Vietnam.

Industry outlook: better growth momentum for 2Q10 We remain positive on the food retail industry as regional economic recovery continues to phase in. Recent results have already revealed solid pick-up of various operators since 4Q09, with management guiding for a broadly optimistic outlook for 2010. The uptrend in food prices should also prompt operators to stock up for sale at higher prices later on, potentially locking in better margins for the rest of the year. Specifically, favourable government policies to drive consumption and a relatively lower penetration rate of leading food retailers in China should underpin growth momentum of major Chinese operators. We currently expect their same-store sales growth to reach 5-10% in 2010, partly driven by higher food prices. Coupled with

solid plans for sales network expansion, leading Chinese food retailers should see good earnings this year. Their earlier efforts on store renovation and supply chain enhancement should also start paying off, allowing further room to lift overall operating efficiency. Key Pick: Beijing Jingkelong for value and growth Despite the recent share price rally across the region, we continue to like the food retail sector for its strong growth catalysts. We prefer Beijing Jingkelong for its valuation discount versus close peers. Given the significant portion of revenue coming from its wholesale operations, we believe the company is in a better position versus pure retailers to take advantage of rising food prices by stocking up for sale at higher prices later on. Catalyst: potentially repeating 1H08’s sound growth We continue to see ample room for food retailers to grow in China underpinned by robust domestic consumption and low market penetration of food retailers. In 2Q10, we expect food retailers to report a good set of 1Q results due to an improving operating environment and strengthening pricing power. Rising food prices in coming months should help to boost top-line growth and profitability, as food retailers & wholesalers operating on cost-plus strategies could largely pass on additional costs to end-customers. This happened during 1H08 and the situation could repeat itself, although not as severe, as price increase for certain items such as oil and pork have been relatively gradual vis-à-vis the surge experienced in early 2008. The upcoming Expo in Shanghai in May will last six full months up to Oct 2010. Official estimates have projected the event to boost overall tourist spending in Shanghai by c.50% this year. The expected boom in consumption in the city could potentially trigger investors’ focus on Shanghai based operators. From this perspective, Lianhua Supermarket could likely see positive share price performance in near-term. Industry consolidation could continue to accelerate, as modern chain store operators become increasingly competitive, thus gradually phasing out smaller players. Leading food retailers in China have also placed merger & acquisitions as high priorities to boost growth. These might trigger some positive inflexion points should favourable terms on acquisitions be realized.


Retailers

DEPARTMENT STORES & DISCRETIONARY RETAILERS Mavis Hui, [email protected] Kok Chiew Sia, [email protected]

• Regional economic recovery should support a gradual

pick-up in overall consumer sentiment. • In China, rising affordability and events such as

Shanghai Expo 2010 should stimulate tourist spending and further support discretionary consumption.

• Government subsidy programs for selective product categories will stimulate growth.

• We like Gome for its positive growth prospects from favourable policies & strong demand in the sector.

Performance review: performance upswing from low-base Overall, share prices of selective discretionary retailers have outperformed in 1Q10, as demand for the respective merchandise continues to pick up from a low base. Automobile retailers such as Dah Chong Hong (1828.HK) and SMC Motors (SMC.TB) saw their share prices surging 59% and 71%, respectively. Recent IPOs and valuation laggards in the wearing apparel sector also performed well, with share prices up 86% for Trinity (891.HK), 42% for Peak Sports (1968.HK), 42% for Bossini (592.HK), and 37% for Giordano (709.HK). Furniture retailers such as Home Product Centre (HMPRO.TB) saw a 31% price surge. Tourist plays and watch / jewellery retailers also saw decent share price performance, including Sa Sa (178.HK, up 20%), Hengdeli (3389.HK, up 18%), Oriental Watch (398.HK, up 17%), Hour Glass (HG.SP, up 18%) and Jubilee (JUBILE.TB, up 21%). Industry outlook: macro recovery drives growth This year, macro recovery and improving purchasing power should hold up overall consumption in the region. Department stores and discretionary retailers have already recorded strong year-to-date performance in same-store sales (SSS). Severe price discounting that was seen in 1H09 is also gradually normalizing to a more reasonable level. Outlook for the sector should stay positive in 2010. Chinese operators could see even better prospects amid sustainable household income growth, as the government’s economic stimulus packages to support

employment, where an upward adjustment of 10% or more in minimum wages in various provinces will be seen this year. Mega events in China, including the Shanghai Expo & Guangzhou Asian Games, should also help to boost consumption. Additionally, industry specific subsidy programs will continue to drive consumer spending. In 2010, total retail sales in China is well poised for a 17.5% expansion this year. Major department stores and discretionary retail players should achieve 10-20% y-o-y SSS growth on average, benefiting from their first-mover advantage to lock up prime locations allowing a better grip on rising domestic consumption and tourist spending. Key Pick: Gome as a direct policy beneficiary We like Gome for its strong recovery and as a direct beneficiary from the government subsidy programs. These include (i) “go rural” policy, which has recently increased price caps for various electrical applicances (from 25% to double that of the previous price caps), as well as (ii) “exchange old for new” program that was launched in Aug09, and will contribute a full-year impact in 2010. Given that c.70% of properties sold in China during 2H09 will be delivered by 2H10, demand for home appliances should be strong throughout this year. In addition, the low penetration of home appliances in China versus more developed countries should also mean ample growth potential for dominant retailers in the sector over the medium-term. Catalyst: Prospects in China to stay rosy in Q2 Traditionally, Q2 is a low season for most Asian markets, except for China, which should do better in view of its Labour Day Holiday in May. This year is especially so given that the World Expo will be launched in Shanghai this May. As tourist spending mounts, discretionary retailers, department stores and tourist plays should continue to be in the spotlight. In view of the satisfactory year-to-date performances of most operators in the sector, we expect the sector to deliver strong results during 2Q10, which should help to sustain interest. While valuation for the sector remains fairly reasonable given the sound pick-up in business operations, players with strong fundamentals could be re-rated further in the coming months. We remain broadly positive on the sector.


Retailers

Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 20,365 - 1,551 - - 1,651 - 1,172 0.03 - -2007A 25,816 26.8 2,174 40.1 - 2,262 37.0 1,667 0.04 42.2 -2008A 29,664 14.9 2,712 24.8 - 2,855 26.2 2,030 0.05 21.8 -2009E 29,789 0.4 2,698 -0.5 - 2,847 -0.3 1,949 0.05 -4.0 -2010F 33,380 12.1 3,159 17.1 3.2 3,312 16.3 2,274 0.05 16.7 -2.82011F 36,483 9.3 3,732 18.1 3.4 3,945 19.1 2,693 0.06 18.4 -1.4


(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)2006A 2,096 7.6 - -52.6 -0.5 900 0.2 2.26 37.3 8.0 10.02007A 2,832 8.4 25.9 -66.9 -0.5 1,975 0.2 2.87 26.3 5.9 14.12008A 3,431 9.1 25.1 -85.9 -0.4 1,971 0.2 3.56 21.6 5.0 11.72009E 3,514 9.1 20.8 -189.9 -0.5 1,945 0.2 3.26 22.5 4.4 11.12010F 4,087 9.5 21.6 -83.9 -0.6 2,602 0.3 3.59 19.3 3.9 9.22011F 4,774 10.2 22.9 -48.8 -0.7 3,181 0.3 4.06 16.3 3.5 7.5


Retailers

Earnings Valuation

Source: DBS Vickers



Department StoresAeon Stores 422 1.0 -4.9 -5.6 -7.0 24.6 -6.1 -16.6 -22.8 -46.1 0.6Esprit Holdings 10,066 23.0 -3.7 12.4 10.6 31.7 -4.9 1.4 -5.1 -39.0 0.8Lifestyle 3,100 7.1 5.0 12.6 15.6 94.1 3.8 1.6 -0.2 23.4 1.1New World Dept Stores 1,477 3.4 -7.3 -2.0 -3.2 52.1 -8.5 -13.0 -19.0 -18.6 1.1Parkson 4,718 10.8 -4.1 -1.5 3.0 35.8 -5.4 -12.5 -12.7 -34.9 1.0Parkson Holdings 1,877 4.3 -0.7 3.1 10.5 29.2 -1.9 -7.9 -5.2 -41.5 1.1Ajisen China 1,167 2.7 10.4 20.0 25.1 111.8 9.2 9.0 9.4 41.0 0.8Discretionary RetailersGiordano 669 1.5 28.8 60.2 78.3 126.3 27.6 49.2 62.6 55.5 0.8

Glorious Sun 420 1.0 17.8 16.1 28.0 59.3 16.5 5.1 12.2 -11.4 0.6Golden Eagle 3,793 8.7 5.7 14.0 11.0 148.1 4.5 3.0 -4.8 77.4 0.8Oriental Watch 92 0.2 -0.5 17.0 22.2 79.9 -1.7 6.0 6.4 9.2 1.0Sa Sa 1,113 2.5 6.4 30.5 72.2 157.3 5.2 19.5 56.5 86.6 1.0Food Retailers & WholesalersBeijing Jingkelong - H 215 0.5 13.6 30.6 49.7 157.4 12.3 19.6 34.0 86.7 0.9Big C Supercenter 1,135 2.6 -9.5 6.4 8.3 11.0 -10.7 -4.6 -7.4 -59.7 0.7Café de Coral 1,343 3.1 -0.6 9.6 6.7 24.2 -1.8 -1.4 -9.1 -46.5 0.5CP ALL 3,896 8.9 4.6 20.8 55.7 139.5 3.4 9.8 40.0 68.8 0.8Lianhua Supermarket - H 777 1.8 13.9 35.9 81.2 228.6 12.7 24.9 65.5 157.9 0.7Little Sheep 556 1.3 -3.7 8.5 -4.1 35.9 -4.9 -2.5 -19.8 -34.8 0.6Wumart - H 1,067 2.4 15.6 32.5 24.7 179.9 14.4 21.5 8.9 109.2 0.7Home Products Center 666 1.5 6.4 36.7 33.0 148.1 5.2 25.7 17.2 77.4 0.7Home Improvement RetailersGome Elec Appliances 5,218 11.9 3.8 2.3 11.1 168.8 2.6 -8.7 -4.7 98.1 0.9

General Retailers 43,790 100.0 1.2 11.0 15.7 70.7 0.8

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

Department StoresAeon Stores 15.6 na 10.6 na 2.9 na 20.0 na 2.4 na 2.8 naEsprit Holdings 15.6 13.5 5.6 15.2 4.9 4.4 33.1 34.3 10.1 8.6 4.8 5.6Lifestyle 21.2 18.4 17.8 15.5 3.5 3.1 17.5 18.1 12.9 10.2 1.8 2.1New World Dept Stores 19.7 16.0 15.8 23.2 2.3 2.1 12.5 13.8 8.9 6.7 1.5 1.9Parkson 28.4 22.0 24.5 29.2 7.1 6.0 26.8 29.6 16.4 12.4 1.6 2.1Parkson Holdings 19.7 16.0 15.0 22.7 3.1 2.7 16.4 18.0 5.8 4.2 2.1 2.5Ajisen China 24.0 18.2 20.0 31.6 3.4 3.1 14.9 17.7 11.3 8.4 1.9 2.5Discretionary RetailersGiordano 15.9 14.5 13.1 10.3 2.4 2.3 15.4 16.3 8.6 7.5 4.9 5.4Glorious Sun 11.2 10.0 12.2 12.0 1.5 1.4 13.7 14.6 3.7 3.3 5.8 6.5Golden Eagle 27.6 21.5 31.6 28.5 7.2 5.7 28.7 29.6 16.8 12.9 1.0 1.3Oriental Watch 7.4 5.6 -2.8 31.1 0.5 0.5 7.6 9.2 6.9 6.0 2.2 2.9Sa Sa 23.0 19.2 18.7 20.3 7.4 7.2 32.9 38.1 15.6 13.1 3.8 4.6Food Retailers & WholesalersBeijing Jingkelong - H 18.7 19.2 20.0 -2.2 2.7 2.5 12.7 13.5 9.0 9.2 2.2 2.6

Big C Supercenter 11.2 10.3 13.7 8.6 1.8 1.6 16.5 16.4 4.6 4.1 4.5 4.9Café de Coral 20.6 17.7 14.3 16.5 4.0 3.8 20.4 22.0 12.0 10.3 3.9 4.5CP ALL 20.1 17.8 24.9 13.0 5.9 5.2 31.1 31.1 8.9 7.7 3.5 4.0Lianhua Supermarket - H 25.4 21.3 23.9 19.1 5.5 4.7 23.5 24.0 0.1 -1.3 1.3 1.6Little Sheep 18.1 13.6 34.9 33.3 3.2 2.8 19.0 22.0 10.0 7.2 2.2 2.9Wumart - H 33.1 26.2 22.0 26.3 5.2 4.6 19.0 18.6 5.6 3.9 1.2 1.5Home Products Center 16.8 14.9 11.9 12.5 3.5 3.3 22.6 22.7 7.8 7.0 4.1 4.7Home Improvement RetailersGome Elec Appliances 22.1 17.0 30.3 29.8 2.6 2.3 15.5 17.5 7.6 5.0 1.2 1.5

General Retailers 19.3 16.3 16.7 18.4 3.9 3.5 21.6 22.9 9.2 7.5 3.6 4.1

(x) (%) (x) (%)


Return

P/B EV/EBITDA

Excess Return

(x) (%)


Retailers

Macro radar

Retail Sales Growth for Jan-Mar 10

05

10152025303540

Chi

na

Hon

gK

ong*

Sing

apor

e*

Mal

aysia

**

Vie

tnam

%

* Jan-Feb 10 yoy growth ** 4Q09 yoy growth (latest available)

Retail sales growth across the region rebounded in early 2010. Less

matured markets such as China and Vietnam saw y-o-y growth rates

of 18% and 36% respectively during 1Q10, while more matured

markets like Hong Kong, Singapore and Malaysia saw a recovery from

a low base.

Consumer Confidence / Sentiment Index

0

20

40

60

80

100

120

140

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Jan-

10

Feb-

10

China - Consumer confidenceHong Kong - Consumer confidenceMalaysia - Consumer sentiment

Consumer confidence in China was resilient throughout the global

financial crisis amid strong economic stimuli and favourable

government policies to support domestic consumption. Smaller

markets such as Hong Kong and Malaysia also saw their consumer

confidence normalizing from the trough.

CPI for Feb-10

0123456789

10

Chi

na*

Hon

gK

ong

Sin

gapo

re

Mal

aysi

a

Vie

tnam

*

%

*Mar-10 figure

An Inflationary environment started to kick-in again in the region. In

Feb10, most markets saw a mild CPI inflation in the range of 1-3%

(this also applied to China for Mar10), while Vietnam’s inflation

problem had been much more severe, seeing CPI up significantly by

9.5% in Mar10.


Retailers

Household Income Growth for Dec-09

(6)

(4)

(2)

0

2

4

6

8

10

12

China* Hong Kong Singapore

%

* Mar-10 figure

Unlike most parts of the world where household income was affected

by the global financial crisis, income growth in China sustained a solid

y-o-y expansion of >10% up to Mar10 amid massive economic stimuli

launched by the government to indirectly support overall income

growth. Plans for a 10% or higher increase in minimum wage levels

across various provinces of China this year should sustain household

income growth further in 2010.

Unemployment Rate

0

1

2

3

4

5

6

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

China Hong KongSingapore Malaysia

%

The Chinese employment market stayed resilient throughout the

global financial crisis, seeing unemployment rate sustaining at c.4%

throughout. Other Asian markets saw rising unemployment rate right

after the crisis in 4Q08, while Malaysia started to see improvement in

2Q09, and Hong Kong and Singapore saw employment improving

from 4Q09.


Retailers

Sector performance - China i) Food retailers

China Retail Sales – Food & Beverage

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

F&B y-o-y Growth

Yoy growth

Growth for F&B retail sales accelerated from 15.1% y-o-y growth in

Jan-Feb10 to 19.3% growth in Mar10.

China Retail Sales - Daily Use Goods

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

0%

5%

10%

15%

20%

25%

30%

35%

40%

Daily Us e Goods y-o-y Growth

Yoy growth

Sales growth of daily use goods accelerated from 20.1% y-o-y growth

in Jan-Feb10 to 32.8% growth in Mar10.

China CPI for food

80

90

100

110

120

130

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Index

Food prices, which accounts for about a third of the CPI in China,

gained 5.1% y-o-y in Mar10 and is expected to post an upward trend.


Retailers

ii) Department stores & discretionary retailers

China Retail Sales – Clothing

0

10,000

20,000

30,000

40,000

50,000

60,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Clothing y-o-y Growth

Yoy growth

Retail sales growth for clothing reached 27.4% y-o-y in Jan-Feb10 and

25.8% in Mar10.

China Retail Sales – Cosmetics

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

0%

5%

10%

15%

20%

25%

30%

35%

40%

Cos metics y-o-y Growth

Yoy growth

Cosmetics sales grew by 20.7% y-o-y in Jan-Feb10, and accelerated to

23.7% in Mar10.

China Retail Sales – Gold, Silver and Jewellery

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

0%

10%

20%

30%

40%

50%

60%

70%

80%

Gold, S ilver and Jewelry y-o-y Growth

Yoy growth

Sales growth of luxury items such as jewellery skyrocketed by 43.4%

y-o-y in Jan-Feb10 and picked up even stronger by 55.2% in Mar10,

indicating sustained recovery in the overall consumer sentiment of

China.


Retailers

China Retail Sales – Electric Appliance

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

RMB mn

-20%

-10%

0%

10%

20%

30%

40%

50%

Electric Appliance y-o-y Growth

Yoy growth

Sales of electric appliances grew 28% y-o-y in Jan-Feb10 and 19.2%

in Mar10, maintaining a decent momentum given benefits from

supportive government policies for the segment.

China CPI by Category for Mar 10

(1.2)(1.0)(0.8)(0.6)(0.4)(0.2)0.00.20.4

Recr

eatio

nal

and

educ

atio

nal

Tran

spor

tatio

nan

dco

mm

unic

atio

n

Cos

met

ics

Hou

seho

ldfa

cilit

y

Clo

thin

g

Yoy, %

In Mar10, CPI for cosmetics edged up slightly while other discretionary

items such as clothing continued to see a mild decline in prices.

According to the historic trend, it is expected that discretionary broad-

base items should likely see a more moderate increase in their prices

versus other products, such as food items.

Prime retail rental

600

800

1,000

1,200

1,400

1,600

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

RMB psm

Beijing Shanghai

Retail rentals in first-tier cities such as Beijing and Shanghai remained

largely stable in 4Q09, but stayed at relatively high levels.


Retailers

Sector performance – Hong Kong

Hong Kong Retail Sales Growth by Segment

0%5%

10%15%20%25%30%35%40%45%50%

Con

sum

erD

urab

leG

oods

Clo

thin

g,Fo

otw

ear

and

Allie

dPr

oduc

ts

Oth

erC

onsu

mer

Goo

ds

Food

,A

lcoh

olic

Drin

ksan

d

Feb10 y-o-y growth

Sales growth of all consumer goods rebounded strongly to the positive

territory in Feb10, mainly attributable to the seasonality impact from

Chinese New Year holidays.

Hong Kong Rental Index

80

90

100

110

120

Oct

-00

May

-01

Dec

-01

Jul-0

2

Feb

-03

Sep

-03

Apr

-04

Nov

-04

Jun-

05Ja

n-06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9

Feb

-10

Property Rental Index of Retail Premis e

Retail rentals continued to surge in Feb10, boosted by the strong

property market of Hong Kong.

Hong Kong Tourist Arrivals

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Feb

-07

Apr

-07

Jun-

07A

ug-0

7O

ct-0

7D

ec-0

7F

eb-0

8A

pr-0

8Ju

n-08

Aug

-08

Oct

-08

Dec

-08

Feb

-09

Apr

-09

Jun-

09A

ug-0

9O

ct-0

9D

ec-0

9F

eb-1

0

Pers ons

-20%

-10%

0%

10%

20%

30%

40%

Vis itor Arrivals : Inc V ia MacauVis itor Arrivals Growth

Yoy growth

Tourist arrivals grew strongly by >30% y-o-y in Feb10, mainly due to

seasonality impact from the “Spring Move” of Mainland tourists.


Retailers

Sector performance – Singapore

Singapore Retail Sales Growth by Segment for Feb-10

0

10

20

30

40

50

60

70

80

Food

&Be

vera

ges

Wea

ring

App

arel

&Fo

otw

ear

Dep

t St

ores

Supe

rmar

kets

Wat

ches

&Je

wel

lery

Yoy, %

Retail sales across various categories of merchandise picked up

healthily in Feb10 amid the New Year holiday and a low base.

Nonetheless, this could also be a sign of consumption pick-up in

Singapore.

Singapore Property Rental Index – Shop

70

80

90

100

110

120

130

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

4Q98=100

Average shop rentals in Singapore peaked in 2Q08 and fell sharply

thereafter amid negative impacts from the global financial crisis. In

recent months, shop rentals picked up gradually but still remained far

below the peak level in 2008. (Note that latest rental data for 2010 is

yet to be available.)

Singapore Tourist Arrivals

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep-

08O

ct-0

8N

ov-0

8D

ec-0

8Ja

n-09

Feb-

09M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9Se

p-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

(20)(15)(10)(5)051015202530

Visitor arrivals (LHS) Yoy growth (RHS)

m persons %

Tourist arrivals in Singapore surged substantially by c.25% y-o-y in

Feb10 amid seasonality impact from the Chinese New Year and a

gradual economic recovery in the region. This could also partly be

buoyed by the opening of Resorts World Sentosa (RWS). The

Singapore Tourism Board has projected tourist arrivals in Singapore for

2010 could be between 11.5m-12.5m. A further boost in the arrival

numbers could also be expected following the opening of Marina Bay

Sands in late Apr this year.


Retailers

Sector performance – Malaysia

Malaysia Retail Sales – Non-Specialised Stores

0.01.02.03.04.05.06.07.08.09.0

Mar

-06

Jun-

06Se

p-06

Dec

-06

Mar

-07

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

0%

20%

40%

60%

80%

100%

120%

Retail Sales: Non-Specialised Stores % chg yoy

RM bn Yoy

Sales of non-specialised stores, which included department stores,

supermarkets, provision shops and others stayed resilient, with

quarterly sales growth maintained at a high-double digit rate in 2009.

Sales in 1Q10 are expected to show a healthy growth trend led by

holidays and festivities. Going forward, we expect lower double-digit

growth rate on the back of a growing consumption base.

Malaysia CPI

80.0

100.0

120.0

140.0

160.0

180.0

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

CPI: Clothing and FootwearCPI: FH: Household AppliancesCPI: MG: Personal Effects nec

Index

Prices for personal effect products (e.g. jewelleries and watches) was

the only category that showed an uptrend since 2007 among three

CPI indices in the chart, whereas prices of clothing & footwear and

household appliances were relatively more stable. The rising CPI index

of personal effect products may suggest growing wealth of the

population and hence demand for higher value discretionary goods.

This should poise well for middle to higher end retailers such as

Parkson, Metro Jaya, Robinson, Isetan, and Debenham in Malaysia.

Malaysia Tourist Arrivals

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

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

Tourist Arrival % chg yoy

in billion

Visitor arrivals in Malaysia had been quite stable with average monthly

visitor numbers of 1m people. However, visitor flow tends to be higher

in conjunction with the ‘Visit Malaysia Programme’ organised by the

Ministry of Culture, Arts and Tourism. For example, total visitor arrivals

surged 19.5% y-o-y to 21m people in 2007 due to the Visit Malaysia

Year 2007. The Malaysian government is targeting 24m visitor arrivals

in 2010, implying 1.7% y-o-y growth. However, the slower growth in

visitor arrivals should not pose significant impact on retailers in

Malaysia as sales have mainly been dominated by domestic

consumption.


Retailers

Sector performance – Vietnam

Vietnam Retail Sales – Domestic Sector: Private & Household

0

20

40

60

80

100

120

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

0%5%10%15%20%25%30%35%40%45%

Retail sales: Domestic: Private & Household% chg yoy

VND trillion

Demand for private labels and household products were on the rise,

buoyed by improved sentiment on economic outlook since 4Q09.

Sales growth in Feb10 surged to 41.8%, partly due to a low base

effect. If excluding the seasonality effect, sales would have grown by

c.33%. Sales growth in Mar10 remained buoyant at 30.5%. The Feb

sustainable growth trend showed that demand is on recovery towards

the pre-crisis level. Going forward, such momentum is expected to

hold up well.

Vietnam CPI

80.0

90.0

100.0

110.0

120.0

130.0

140.0

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

CPI: Garment, Hats and Footwear

CPI: Household Equipments and Appliances

Index

Inflation indices for consumer discretionary products continue to trend

upwards on a gradual basis. This suggests sustainability of prices and

should support well for demand going forward.

Vietnam Tourist Arrivals

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

-60%

-40%

-20%

0%

20%

40%

60%

80%

Visitor Arrival % chg yoy

million

The number of visitors going into Vietnam dropped 11.3% y-o-y in

2009. However, the number marched up strongly in 1Q10 (+36.2% y-

o-y). More visitors are expected to drop by this year, both for vacation

and business trips as more people are exploring opportunities in the

country which is still under-developed.



SUB SECTOR – UP/MIDSTREAM FOOD PRODUCERS



UP/MIDSTREAM FOOD PRODUCERS Ben Santoso , [email protected]

• 1QCY10 planters’ earnings to seasonally weaken, as 11-13% stronger prices is offset by c.6-50% volume drops

• CPO prices forecast to hover US$750-850 (FOB Malaysia) over the long run

• Stronger MYR, IDR to negatively impact planters’ earnings. Potentially stronger RMB may benefit Wilmar

• We prefer China processors and volume plays: Wilmar, First R, IndoAgri, and Sampoerna A.

Performance review In the quarter ending 31 March 2010, CPO prices (FOB Malaysia) averaged US$760/MT – up by 12.7% q-o-q and 43.3% y-o-y (low-base effect). We expect Malaysian planters to book weaker 1QCY10 earnings as higher prices would not be enough to offset c.20% q-o-q volume drop nationwide. Indonesian planters should book even lower earnings q-o-q, given expectations of c.28-50%% q-o-q volume drop. Industry outlook Price expectations. Rather than a near-term drop, we expect palm oil prices to trade sideways for the remainder of the year on lower global inventory y-o-y. Recent trade spat between China and Argentina over soybean oil imports may temporarily boost China’s soybean crushing and palm oil demand, until domestic soybean inventory levels recede. Longer term, we expect palm oil prices (FOB Malaysia) to remain range-bound between US$750-850/MT on relatively flat stock/usage ratios. Impact from declining soybean prices. This year, declining soybean price trends would create temporary gains for processors such as Wilmar, as lower feedstock prices would have lagged impact on end product prices. We view the domestic price situation is more resilient in China, as domestic soybean prices are already priced higher than imported ones. Rising global soybean supplies mean rising disparity between domestic and imported bean prices. Impact from potentially stronger RMB. In the event of RMB revaluation, Wilmar should benefit even more. Any efforts by the Chinese government to protect its soybean farmers mean that domestically produced soybean prices would remain steady. On the other hand, cheaper imported feedstock prices should expand Wilmar’s

processing margins. Already highly efficient with large economies of scale, this would make Wilmar more competitive in the Chinese vegetable oil market. Focus on volume growths of upstream planters. Over the next few years, we expect a relatively flatter rise in palm oil prices compared to previous forecasts. Our key selection criterion for upstream planters remains their ability to grow volumes faster than peers (i.e. own FFB volume CAGR over the next 5 years, derived from plantable reserves and aggressive planting targets). Our recommended list 1. First Resources: Lowest cost producer and simple

upstream business model. Aggressive planting relative to its size and large plantable reserve should fuel 15.8% earnings CAGR between 2009 and 2014F.

2. IndoAgri: Sugar prices in Indonesia have skyrocketed and are expected to remain elevated going forward. This, and jump in rubber prices have not yet been factored in current share prices.

3. Sampoerna Agro: Strong yield recovery story and aggressive planting make this stock an undervalued small-cap upstream player. Ability to produce high yield seeds and large plantable reserves are a plus in an industry running out of land suitable for planting.

4. Wilmar International: Unique business model with high entry barrier. Inclusion of rice and flour mills and lower prospective international soybean prices should boost Wilmar’s earnings prospects. A potential RMB revaluation would expand processing margins even further.

Catalyst We should see earnings pick up in 2QCY10 onwards, as prices should continue to trade sideways; while volumes seasonally pick up. Our key selection criterion for upstream planters remains their ability to grow volumes faster than peers (i.e. own FFB volume CAGR over the next 5 years, derived from plantable reserves and aggressive planting targets). We prefer processors such as Wilmar over upstream planters. If exposure to upstream planters is a must, we recommend volume plays such as First Resources, Sampoerna Agro and IndoAgri. Our top pick is Wilmar.



Earnings Valuation

Source: DBS Vickers



(US$ m) (%) (US$ m) (%) (%) (US$ m) (%) (US$ m) (US$) (%) (%)2006A 15,300 - 1,418 - - 1,370 - 946 0.01 - -2007A 36,548 138.9 3,852 171.7 - 3,672 168.1 2,475 0.03 161.5 -2008A 56,752 55.3 6,208 61.1 - 1,370 -62.7 4,379 0.06 76.9 -2009E 50,143 -11.6 5,284 -14.9 - 5,138 275.1 3,709 0.05 -15.3 -2010F 58,643 17.0 6,202 17.4 28.0 6,096 18.6 4,564 0.06 23.1 -2.02011F 66,041 12.6 6,964 12.3 27.9 6,658 9.2 5,030 0.06 10.2 9.2


(US$ m) (%) (%) (x) (x) (US$ m) (US$) (%) (x) (x) (x)2006A 1,833 9.3 - 6.0 0.4 -457 0.2 0.47 82.9 12.8 44.32007A 4,635 10.5 18.5 9.2 0.3 -6,531 0.6 1.02 31.7 3.8 18.32008A 7,091 10.9 19.3 10.7 0.2 2,697 0.8 2.32 17.9 3.2 11.82009E 6,189 10.5 14.3 11.7 0.3 -994 0.9 1.52 21.1 2.9 14.12010F 7,338 10.6 15.7 16.6 0.2 3,470 1.0 1.86 17.2 2.5 11.52011F 8,211 10.5 15.2 13.5 0.1 2,565 1.1 1.91 15.6 2.3 10.2



China Fishery Group 1,405 1.8 10.1 19.8 71.7 217.6 6.0 15.1 65.0 157.2 1.3First Resources 1,198 1.5 1.8 8.4 23.4 139.2 -2.3 3.8 16.8 78.7 1.4Genting Plantations 1,641 2.1 -4.0 8.4 6.7 36.0 -8.1 3.8 0.1 -24.4 1.4IJM Plantation 637 0.8 -0.8 3.7 -7.1 6.5 -4.9 -0.9 -13.7 -53.9 1.2Indofood Agri 2,489 3.2 14.7 25.8 39.9 164.9 10.7 21.1 33.3 104.5 1.4IOI Corporation 11,445 14.6 1.5 1.1 3.2 28.1 -2.6 -3.5 -3.4 -32.3 1.5Kencana Agri 236 0.3 13.8 20.0 17.9 32.0 9.7 15.4 11.2 -28.4 1.0KL Kepong 5,638 7.2 3.4 1.9 11.2 46.8 -0.7 -2.7 4.6 -13.7 -Olam International 3,795 4.8 1.5 11.3 -4.6 63.8 -2.6 6.6 -11.3 3.4 1.1Pacific Andes 817 1.0 14.5 19.7 49.1 164.4 10.4 15.1 42.4 104.0 1.1Sime Darby 16,733 21.3 1.4 0.1 -2.8 32.3 -2.7 -4.5 -9.4 -28.1 1.0TSH Resources 258 0.3 -1.5 -5.2 7.0 18.5 -5.6 -9.9 0.4 -42.0 1.3Wilmar 32,127 41.0 6.4 5.6 9.2 91.8 2.3 0.9 2.6 31.4 1.0

Up/ Midstream Food Producers 78,419 100.0 4.1 4.6 6.6 60.4 1.2

Financial Ratios

2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F 2010F 2011F

China Fishery Group 9.0 8.3 65.0 9.4 2.6 2.1 32.5 28.0 6.0 5.7 3.0 3.3First Resources 10.8 9.6 -14.4 12.7 1.7 1.5 17.2 16.6 6.5 5.8 2.0 2.4Genting Plantations 19.3 19.1 16.5 1.0 1.9 1.8 10.2 9.6 13.2 12.8 1.2 1.2IJM Plantation 24.4 18.3 -32.6 33.7 1.7 1.5 8.2 8.8 12.8 10.6 1.2 1.1Indofood Agri 17.0 14.2 -13.5 19.3 2.1 1.8 13.1 13.6 8.3 6.9 0.0 0.0IOI Corporation 19.2 17.5 93.2 9.8 3.4 3.1 20.0 18.5 12.5 11.4 2.7 2.3Kencana Agri 19.6 12.0 -27.7 62.6 1.5 1.4 8.1 12.0 11.1 8.3 0.0 0.0KL Kepong 20.6 19.2 30.6 7.7 3.0 2.8 14.9 15.1 12.5 11.6 2.5 2.7Olam International 23.3 18.2 29.9 28.0 3.0 2.7 16.1 15.6 15.9 12.9 1.8 1.3Pacific Andes 6.1 5.4 42.5 11.9 0.9 0.8 16.5 16.0 2.8 2.7 2.1 2.4Sime Darby 19.8 17.5 17.9 13.0 2.3 2.2 12.1 12.8 11.2 10.1 2.5 2.9TSH Resources 12.1 11.0 20.9 10.1 1.1 1.0 9.0 9.2 10.1 9.6 1.8 1.7Wilmar 16.1 15.1 16.3 6.9 2.6 2.3 17.0 15.9 12.6 10.9 1.2 1.3

Up/ Midstream Food Producers 17.2 15.6 23.1 10.2 2.5 2.3 15.7 15.2 11.5 10.2 1.9 1.9

Return

P/B EV/EBITDA

Excess Return


(x) (%) (x) (%) (x) (%)



Section B: Charts

Chart 1: CPO price and stock/usage ratio forecasts Palm oil prices to remain resilient. Drop in yields in the first two

months of this year had prompted us to cut our Malaysian production

forecast by 250k MT to 17.7m MT. On top of lower yields, in

Indonesia we also adjusted our oil extraction rate (OER) slightly to

20.2% from 20.3% to account for dilution from newly matured trees.

These changes reduced combined production forecast from Indonesia

and Malaysia to 39.7m MT from 40.0m MT.

We expect both countries to account for 84.5% of global supply this

year, as production from Thailand, Colombia and Nigeria are expected

to increase by 0.18m MT (Oil World). Rather than a significant near-

term drop in palm oil prices, we now expect palm oil prices continue

to trade sideways (with some negative drag from soybean prices) for

the remainder of CY10F

Chart 2: Soybean price and stock/usage ratio forecasts Soybean prices still have more downside. In their recent reports, Oil

World and USDA expect global soybean supply to reach 255 – 257m

MT in current season, as harvests coming from all three main

producing countries (US, Brazil and Argentina) have jumped since last

season. Soybean demand, according to Oil World and USDA, are now

forecast to reach between 234m MT and 236m MT. In turn, Oil World

now expect global soybean inventory to jump to 68m MT by end of

09/10F season. We currently expect global soybean supply to reach

256m MT in CY10F and to 248m MT in CY11F. Consumption is

forecast at 235m MT for CY10F and 245m MT for CY11F.

Chart 3: Malaysian palm oil stock/usage ratio Seasonally increasing supply. Earlier this year dry spell from the El

Nino has caused yields in Malaysia to drop in Jan-Feb10, prompting

renewed supply concerns. Both National Oceanic and Atmospheric

Administration (NOAA) and Australian Bureau of Meteorology

(BOM) recently indicated that transition to neutral conditions should

happen by May-July 2010. While Sabah “dry” season should take

place during May-Sep, we understand occasional rains are still

expected during this period. The stock/usage ratio for Malaysian

palm oil on the left shows rising trend for the remainder of this year,

in line with seasonal trend.

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

Janu

ary

Febr

uary

Mar

ch

Apr

il

May

June July

Aug

ust

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

2009

2006

2010

2007

2008

0

100

200

300

400

500

600

700

800

900

1,000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Stock/usage ratio (RHS)

CPO price (LHS)

US$/MT (CIF)

Source: Oil World, DBS Vickers estimates

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

-

50

100

150

200

250

300

350

400

450

500US$/MT (FOB)

Stock/usage ratio (LHS)

Soybean price (RHS)

Source: Oil World, USDA, DBSV estimates



Chart 4: Soybean oil price vs. palm olein (cooking oil) price Palm oil discount has narrowed. Palm oil and soybean oil prices have

historically moved parallel to each other, as they are mostly

substitutable. While palm oil is now the world’s largest vegetable oil, it

is traded at a discount to soybean oil, because palm oil is substitute for

native oils in China (soybean oil), India (soybean oil) and Europe

(rapeseed oil). The difference in price between palm oil and soybean

oil also relates to palm’s cheaper cost of production; but mostly

importantly, due to their substitution, the differential is principally

explained by stock/usage ratio between the two competing oils.

Historically, palm oil prices may be priced at a premium to soybean oil,

but these instances are normally short-lived (i.e. unsustainable) due to

substitution.

Chart 5: Spot soybean crushing and palm oil processing margins Spot processing margins still trending down. Our estimates based on

daily spot prices showed that soybean crushing margins in the quarter

ending 31 March 2010 have come down to US$39/MT from

US$52/MT and palm oil refining margin to US$19/MT from

US$21/MT. Given seasonally lower palm oil production and steady

soybean volumes q-o-q, we expect Wilmar’s Merchandising and

Processing (M&P) pretax profit to come down q-o-q.

Chart 6: Global palm and soybean oil supplies forecasts Palm oil is increasingly dominant. Over the years, palm oil has grown

exponentially, thanks to lower borrowing costs (it normally takes three

years for oil palm trees to start to bear fruit from planting) as well as

improvements in research and infrastructure to boost yields. This trend

will continue and we expect palm oil price discount to soybean oil

would remain narrow in the foreseeable future due to palm oil’s

increasing share in world’s vegetable oil supplies and consumption.

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Palm olein price (US$/MT)

Soybean oi l price (US$/MT)

Source: Bloomberg

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Palm oil spot processing margin

Soybean spot crushing margin

Spot processing margins, 3-month moving average

US$/MT

Source: Bloomberg, DBSV estimates

-

10,000

20,000

30,000

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60,000

70,000

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90,000

1980

1982

1984

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1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

'000 MT

Implied soybean oil supply (all crushed)

Global palm oil supply

Source: Oil World, USDA, DBSV estimates



This page is left intentionally blank


STOCK PROFILES

“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”


Kia Motors

www.dbsvickers.com Refer to important disclosures at the end of this report ed-GC / sa- AH GL

Bloomberg: 000270 KS | Reuters: 000270.KS

BUY KRW26,400 KOSPI : 1,740 Price Target : 12-Month KRW 33,000 Potential Catalyst: (i) strong earnings growth despite stronger won, (ii)expanding market share in key markets of Korea, China, US and (iii)improvement of balance sheet. Analyst Jay Kim +852 2971 1921 [email protected]

Price Relative

5,265

10,265

15,265

20,265

25,265

2006 2007 2008 2009 2010

KRW

31

51

71

91

111

131

151

171

191

211

Relative Index

Kia Motors (LHS) Relative KOSPI INDEX (RHS) Forecasts and Valuation FY Dec (KRW bn) 2009A 2010F 2011F 2012F

Turnover 18,416 20,300 21,827 23,035EBITDA 1,827 2,002 2,104 2,339Pre-tax Profit 1,700 2,078 2,385 2,650Net Profit 1,450 1,662 1,824 2,027Net Pft (Pre Ex.) 1,450 1,662 1,824 2,027Diluted EPS (KRW) 3,578 4,102 4,501 5,001EPS Gth (%) 990.4 14.6 9.7 11.1DPS (KRW) 250 250 250 250BV Per Share (KRW) 18,200 22,291 26,881 31,771PE (X) 7.4 6.1 5.6 5.0P/Cash Flow (X) 4.3 6.0 7.4 6.7EV/EBITDA (X) 4.4 4.2 4.4 4.4Net Div Yield (%) 0.9 0.9 0.9 0.9P/Book Value (X) 1.5 1.1 0.9 0.8Net debt (2,632) (1,717) (1,007) 38ROAE (%) 22.1 20.3 18.3 17.1

Earnings Rev (%) Nil Nil NilConsensus EPS (KRW) 3,606 3,971 4,184

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Auto manufacturing

Source of all data: Company, DBSV, Bloomberg, HKEX

Revving up growth

• The recession has caused consumers to increasingly prefer value-focused Korean car brands

• Expect stronger earnings for Kia given unprecedented rise in demand

• Maintain Buy; KRW33,000 TP offers 28% upside potential

Investment points. Kia’s YTD utilization rate of 96% (vs. 82% in 2007-08) indicates that demand for its cars has reached unprecedented heights. Despite market concerns about a strong won, we believe the rising demand is more crucial in determining the carmaker’s earnings prospects. Given persistent uncertainty about Korean car exporters’ earnings, we expect 1H results to shape share price performance in the sector. We recommend investors to accumulate Kia shares as we believe its 1H earnings will beat consensus estimate by a considerable amount. We forecast 1H FY10 net profit of KRW826bn (vs. Bloomberg consensus estimate of KRW738bn).

Expect record high KRW1.7tn net profit this year. We expect Kia to register strong earnings growth this year, led by (i) volume expansion; (ii) higher ASP and cost savings associated with higher sales contribution from new model launches; (iii) lower marketing costs; and (iv) stronger equity income.

Re-rating ahead. We recently raised net profit by 36% to KRW1,662bn for FY10F, and by 35% to KRW1,824bn for FY11F, after imputing higher sales volume and blended ASP assumptions on the back of improving product mix; and faster than expected turnaround at Kia’s Georgia plant. Consequently, we raised target price to KRW33,000. Looking ahead, we expect positive news flow regarding its growth prospects with the release of 1HFY10 result, and continued re-rating led by the aforementioned factors and its attractive valuation.

At A Glance Issued Capital (m shrs) 390 Mkt. Cap (KRWm/US$m) 10,306,753 / 9,295

Major Shareholders Hyundai Motor (%) 34.4

Free Float (%) 100.0 Avg. Daily Vol.(‘000) 4,483


Kia Motors

Company Background

Having claimed 26% of the domestic market in the past five years, Kia is the second largest carmaker in Korea with an annual global capacity of xx m units, and is a major part of the Hyundai Automotive Group. It is known for its global competence in the small capacity, affordable passenger vehicle market, and it has been a leading SUV manufacturer in the domestic market.

Earnings Drivers & Risks

Bolstered by heightened demand, we expect Kia’s FY10 net profit to grow by a strong 15% y-o-y to a record high KRW1.7tn this year. Growth would be led by (i) 13% volume expansion (parent); (ii) higher ASP and cost savings associated with higher sales contribution from new model launches; (iii) lower marketing costs; and (iv) stronger equity income.

Among its four main earnings drivers, the one that bodes particularly well for Kia, compared to regional peers under our coverage, is its cost saving ability. Kia sees potential for substantial cost cutting measures in the near term with further integration of its manufacturing platforms, which should offer higher degree of modularization and lower component count. This means new models will not only help to lift ASP, but also help to keep costs in check.

With a more integrated platforms, Kia has made significant progress in this area. This has helped to cap input costs as sales per platform rise, and more vehicles use common components. In other words, not only will higher unit shipment per platform generate cost savings from lower fixed costs (i.e. spreading R&D and re-tooling costs over a larger sales base), but further cost innovations should accrue from enhanced component commonality between platforms.

Outlook

Its Georgia plant may offer a positive surprise. We believe this year’s earnings for the plant could beat market expectations, and the facility might reach break-even as early as end-2010. Although Hyundai Motor’s previous facility in Alabama, US, took 6 operational quarters to meet breakeven, we believe Kia’s Georgia plant may diverge from Hyundai’s precedent.

Unlike Hyundai’s first set up, the Georgia plant has not had major problems securing key suppliers for its production as the plant uses many in-house suppliers from Hyundai’s US

Sales Trend

0

5,000

10,000

15,000

20,000

25,000

2008A 2009A 2010F 2011F 2012F

02468101214

Revenue (LHS) Revenue growth (RHS)

Yoy ,%(KRW bn)

Asset Trend

02,000

4,0006,0008,000

10,000

12,00014,000

2008A 2009A 2010F 2011F 2012F

Net F ixed Assets (Tangible) Total Current Assets

KRWbn

Profitability Trend

0

500

1,000

1,500

2,000

2,500

3,000

2008A 2009A 2010F 2011F 2012F

EBIT Pre tax profit Net Profit

KRWbn

Margin Trends (%)

02468

1012

2008

A

2009

A

2010

F

2011

F

2012

F

EBITDA margin EBIT marginNet income margin

%


Kia Motors

base, and is also using most of its external suppliers. In fact, Kia’s initial production ramp-up for the Sorento R (mid-size SUV) was better than Hyundai’s Alabama experience. Production went smoothly without any supply bottleneck. Also, unlike Hyundai’s Alabama plant, Kia’s Georgia facility does not produce car engines, which reduces the plant’s break even revenue and utilization levels compared to Hyundai’s.

In addition, the first product launched by the Georgia plant was one of the most highly priced models based on the company’s portfolio. With Sorrento R’s ASP in the market being 30% higher than Kia’s average export ASP, it estimates sales of 130K vehicles will enable it to breakeven.

In fact, sales of Sorrento R in the US market have been impressive enough to draw strong attention from the media. Sales of its redesigned SUV vehicle reached 24.8K units, far exceeding Kia’s monthly sales target of 6,000. Assuming Sorento R continues to rack up robust sales this year, we believe Kia’s goal for its US production unit to breakeven in the first year of full operation is within reach. And if this happens, it could accelerate its balance sheet restructuring.

Financials and Valuation

We recently raised net profit by 36% to KRW1,662bn for FY10F, and by 35% to KRW1,824bn for FY11F, after imputing higher sales volume and blended ASP assumptions on the back of improving product mix; and faster than expected turnaround at Kia’s Georgia plant. Accordingly, we raised target price from KRW21,000 to KRW33,000, based on 8x FY10F P/E (average of 2000-05 high P/E mutiples during its normal earnings cycle).

The counter is currently traidng at 6.1x FY10F and 5.6x FY11F P/E, which are discounts of 62% and 50% to global peers’ averages, and 41% and 42% to Korean companies in the KOSPI200. We believe the counter is substantially undervalued given that its fundamentals are turning around and its solid earnings growth prospects. Looking ahead, we expect positive newsflow regarding its growth prospects with the release of 1HFY10 result, and continued re-rating led by the aforementioned factors and its attractive valuation.

Leverage & Asset Turnover (x)

0

5,000

10,000

15,000

20,000

25,000

2008A 2009A 2010F 2011F 2012F

1.10

1.12

1.14

1.16

1.18

1.20

Total Assets (LHS) Total Equity (LHS)Asset Turnover (RHS)

KRW bn x

ROE (%)

0

5

10

15

20

25

2008

A

2009

A

2010

F

2011

F

2012

F

%

PE (x)

5.0

55.0

105.0

155.0

205.0

255.0

2006 2007 2008 2009

P/Book Value (x)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

2006 2007 2008 2009


Kia Motors

Income Statement (KRW bn) Balance Sheet (KRW bn)

FY Dec 2009A 2010F 2011F 2012F

Turnover 18,416 20,300 21,827 23,035Cost of Goods Sold (13,824) (15,374) (16,555) (17,369)Gross Profit 4,591 4,926 5,273 5,666Other Opg (Exp)/ Inc (3,447) (3,625) (3,908) (4,102)Operating Profit 1,144 1,301 1,364 1,563Other Non Opg (Exp)/Inc (46) 99 115 69Associates & JV Inc 813 805 988 1,086Net Interest (Exp)/Inc (212) (127) (83) (69)Exceptional Gain/(Loss) 0 0 0 0Pre-tax Profit 1,700 2,078 2,385 2,650Tax (249) (416) (560) (623)Minority Interest 0 0 0 0Preference Dividend 0 0 0 0Net Profit 1,450 1,662 1,824 2,027Net Profit before Except. 1,450 1,662 1,824 2,027

EBITDA 1,827 2,002 2,104 2,339Sales Gth (%) 12.4 10.2 7.5 5.5EBITDA Gth (%) 78.7 9.6 5.1 11.2Opg Profit Gth (%) 270.9 13.7 4.9 14.6Effective Tax Rate (%) 14.7 20.0 23.5 23.5

FY Dec 2009A 2010F 2011F 2012F

Total Fixed Assets 12,633 12,641 13,107 13,734Invts 4,948 4,871 5,255 5,931Other LT Assets 7,685 7,770 7,852 7,803Cash & ST Invts 1,912 2,294 2,684 2,980Other Current Assets 2,397 2,684 3,308 3,940Total Assets 16,942 17,620 19,099 20,654

ST Debt 1,816 1,420 1,350 900Other Current Liab 4,030 3,758 3,766 3,764LT Debt 2,728 2,592 2,342 2,042Other LT Liabilities 991 953 1,016 1,071Shareholder's Equity 7,376 9,034 10,895 12,877Minority Interests - - - - Total Cap. & Liab. 16,942 17,757 19,368 20,653

Chg. in Wkg. Cap 925 (245) (679) (689)Net Debt (2,632) (1,717) (1,007) 38

Cash Flow Statement (KRW bn) Rates & Ratios

FY Dec 2009A 2010F 2011F 2012F

Pre-Tax Profit 1,700 2,078 2,385 2,650Dep. & Amort. 682 701 740 776Tax Paid (249) (416) (560) (623)Assoc. & JV Inc (813) (805) (988) (1,086)Chg. in Wkg. Cap 925 (245) (679) (689)Other Operating CF 254 465 484 499Net Operating CF 2,499 1,778 1,381 1,527Capital Exp. (net) (313) (345) (345) (345)Investments (269) 77 (384) (676)Other Investing CF (647) (503) (436) (351)Net Investing CF (1,229) (771) (1,165) (1,372)Div Paid - (97) (97) (97) Chg in Gross Debt (1,009) (533) (320) (750) Capital Issues 250 - - - Other Financing CF 19 (0) - - Net Financing CF (740) (630) (417) (847) Net Cashflow 530 378 (201) (692) Beginning cash 809 1,340 1,717 1,516 End Cash 1,340 1,717 1,516 824

FY Dec 2009A 2010F 2011F 2012F

Gross Margin (%) 24.9 24.3 24.2 24.6Opg Profit Margin (%) 6.2 6.4 6.3 6.8Net Profit Margin (%) 7.9 8.2 8.4 8.8ROAE (%) 22.1 20.3 18.3 17.1ROA (%) 9.0 9.6 9.9 10.2ROCE (%) 7.7 7.7 7.1 7.4Div Payout Ratio (%) 0.0 0.0 0.0 0.0Interest Cover (x) 5.4 10.2 16.4 22.6Asset Turnover (x) 1.1 1.2 1.2 1.2Debtors Turn (days) 23.6 23.2 24.7 28.3Creditors Turn (days) 76.0 75.9 70.9 66.9Inventory Turn (days) 24.1 20.7 21.9 24.5Current Ratio (x) 0.7 1.0 1.2 1.5Quick Ratio (x) 0.6 0.8 1.0 1.2Net Debt/Equity (X) 0.4 0.2 0.1 CashCapex to Debt (%) (0.1) (0.1) (0.1) (0.1)

Opg CFPS (KRW) 6,166 4,387 3,407 3,767Free CFPS (KRW) 5,393 3,536 2,556 2,916

Source: Company, DBS Vickers


Dongfeng Motor

www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- DC

Bloomberg: 489 HK | Reuters: 0489.HK

BUY HK$11.76 HSI : 21,455 Price Target : 12-month HK$ 14.90 Potential Catalyst: Positive sales volume growth with new model launches Analyst Rachel Miu +852 2863 8843 [email protected]

Price Relative

1.20

3.20

5.20

7.20

9.20

11.20

13.20

2006 2007 2008 2009 2010

HK$

46

96

146

196

246

296

Relative Index

Dongfeng Motor (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (RMB m) 2008A 2009A 2010F 2011F

Turnover 70,569 91,758 108,179 120,516 EBITDA 7,477 12,470 12,583 14,220 Pre-tax Profit 4,807 8,409 9,642 11,216 Net Profit 3,955 6,250 7,084 8,032 Net Pft (Pre Ex.) 3,955 6,250 7,084 8,032 EPS (RMB) 0.46 0.73 0.82 0.93 EPS (HK$) 0.52 0.82 0.93 1.06 EPS Gth (%) 4.9 58.0 13.3 13.4 Diluted EPS (HK$) 0.52 0.82 0.93 1.06 DPS (HK$) 0.05 0.10 0.09 0.11 BV Per Share (HK$) 2.91 3.60 4.43 5.40 PE (X) 22.5 14.3 12.6 11.1 P/Cash Flow (X) 14.5 9.0 9.5 8.7 EV/EBITDA (X) 11.6 5.6 5.0 4.2 Net Div Yield (%) 0.4 0.9 0.8 0.9 P/Book Value (X) 4.0 3.3 2.7 2.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 19.9 25.3 23.3 21.6 Earnings Rev (%): - - Consensus EPS (HK$): 0.97 1.08

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A leading automaker with strong foreign partnerships in the passenger and commercial vehicle segment Source of all data: Company, DBSV, Bloomberg, HKEX

Sustainable growth ahead • Launching new models to sustain business growth.

Self-brand to complement existing brand portfolio

• Solutions to industry challenges in place: prudent capacity expansion, inventory monitoring and better cost control to mitigate rising material costs

• Maintain BUY, TP of HK$14.9

Staying competitive to maintain market position. Dongfeng Motor Group (DFG) is staying competitive by leveraging on its operating efficiency with a flexible product mix strategy. DFG will focus on launching more products under its own and the foreign joint ventures’ brands. DFG plans to have 8 new PV and 2 CV models this year, including enhancing its Fengshen self-brand product range. Last year, its overall market share in China was 10.5%.

Prudent approach to ensure steady growth. DFG is monitoring three key issues closely; capacity expansion, inventory levels and steel prices. Given its roadmap on new models in the coming years, DFG will raise capacity by 19.5% to 1.7m units by end Dec10. DFG has always adopted a prudent approach to expand capacity. Currently, its inventory level at the distribution channels is within the healthy range of 1-1.5 months. The higher steel prices will impact 2H more as DFG is still consuming some low price steel inventory. During the previous metal price peak cycle in 2007-08, DFG managed to keep a stable GP margin of 17%.

Consistent strong performance, our top pick. DFG’s strong management quality and proactive business strategy are key to its consistent strong performance. DFG is trading on FY10PE of 13x. Being a strong market player, we believe DFG’s earnings prospect will remain robust this year. In our opinion, the market has factored in the concerns and there is upside in valuation. Maintain BUY rating.

At A Glance Issued Capital - H shares (m shs) 2,856 - Non H shrs (m shs) 5,760 H shs as a % of Total 33 H Mkt. Cap (HK$m/US$m) 33,583 / 4,326 Major Shareholders

Dongfeng Motor Corp. (%) 66.9 Major H Shareholders (%)

JPMorgan Chase & Co. (%) 6.0 UBS AG (%) 5.1

H Shares-Free Float (%) 88.9 Avg. Daily Vol.(‘000) 23,867


Dongfeng Motor

Company Background

Dongfeng Motor Group (DFG) assembles passenger and commercial vehicles in China. It has three foreign ventures with Nissan, Honda and Peugeot-Citroen. The group is based in Wuhan, Hubei Province. Currently, DFG has about 1.42m units of production capacity spread across Hubei, Guangxi, Guangdong and Henan for its vehicle assembly operation. DFG plans to raise capacity to 1.7m units by end Dec10 to meet future growth

Industry Overview, Earnings Drivers & Risks

The auto industry posted record level of vehicle sales of 13.6m units, rising 45% y-o-y, under a favourable purchase tax policy to stimulate demand. The government continued this policy on 1.6L and below displacement vehicles to encourage more domestic consumption. We have projected total vehicle sales to grow 12% to 15.2m this year. For 1Q10, total vehicle sales were 4.6m units, about 30% of our full year forecast.

DFG launched its own brand, Fengshen recently to capture the growing interest for Chinese brand automobiles. The consistent release of new models is an important strategy for the Chinese auto industry as consumers have a growing appetite for new cars. Since Dongfeng Motor has a wide range of products, the company benefits from the mass market and high-end demand, underpinned by rising disposal incomes.

DFG sold 1.43m vehicles last year, c.35% increase from 2008. DFG is targeting to sell about 1.7m units of vehicles this year, a growth of 19%, supported by 8 new PV and 2 CV model launches.

There are three areas of emphasis for DFG; prudent capacity expansion, close monitoring of inventory, and tight cost control in view of rising steel prices.

The company is adopting a prudent approach in expanding its production capacity to ensure high utilisation rate. It plans to raise capacity by about 20% to meet the new model launches.

Auto makers enjoyed rather stable margins last year due to low raw material and component costs. This year, it is anticipated there could be some increase in costs, but management is confident of keeping GP margins steady.

Sales Trend

0

20,000

40,000

60,000

80,000

100,000

120,000

2007A 2008A 2009A 2010F 2011F

RMB m

10.8%

15.8%

20.8%

25.8%

30.8%

Total Revenue Revenue Growth (%) (YoY)

Asset Trend

20,000

40,000

60,000

80,000

100,000

2007A 2008A 2009A 2010F 2011F

RMB m

Net Fixed Assets (Tangible) Total Current Assets

Profitability Trend

3,770

4,770

5,770

6,770

7,770

8,770

9,770

10,770

2007A 2008A 2009A 2010F 2011F

RMB m

Operating EBIT Pre tax Profit Net Profit

Margin Trends (%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2007A 2008A 2009A 2010F 2011F

EBITDA Margin % EBIT Margin % Net Income Margin %


Dongfeng Motor

The potential earnings risks are a sharp retraction in vehicle demand and sharp increases in cost of materials and components.

Outlook

The sales target for FY10 is about 1.7m units, up 19% yoy. DFG sold about 472K units of vehicles in 1Q10, 28% of the full year forecast. Revenue is expected to increase c.18% to c.RMB108.2bn. However, due to a change in product mix, GP margin is projected to hold around the 19% range. For FY10, net profit is estimated to grow by 13%, after a high base effect in FY09.

The turnaround of its Dongfeng Peugeot-Citroen JV is another plus factor, as this company was slow in the past to bring new models into the market. A change in strategy has improved its performance last year.


DFG is our top pick in the Chinese auto market. The company will continue to ride on the positive stimulus policy by government to promote auto consumption in the country. Due to a low vehicle penetration rate in China, the medium term prospects are positive, hence benefitting strong vehicle manufacturers like DFG. The strong management team and solid business strategy are factors we consider very favorable.

DFG is trading on 13x FY10 earnings. Being one of the top three auto groups in China, we believe DFG should command a premium to its peers listed in HK.

We priced DFG at 16x forward PE, translating into TP of HK$14.9. We maintain BUY rating on the counter.


0.0

0.1

0.2

0.3

0.4

0.5

2007A 2008A 2009A 2010F 2011F

1.1

1.1

1.1

1.2

1.2

1.2

1.2

1.2

1.3

1.3

1.3

Financial Leverage (LHS) Asset Turnover (RHS)

ROE (%)

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2006 2007 2008 2009

P/Book Value (x)

0.4

0.9

1.4

1.9

2.4

2.9

3.4

2006 2007 2008 2009


Dongfeng Motor

Income Statement (RMB m) Balance Sheet (RMB m)

FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Turnover 70,569 91,758 108,179 120,516 Net Fixed Assets 18,390 18,703 21,951 27,695 Cost of Goods Sold (58,688) (74,274) (88,054) (97,501) Invts in Assocs & JVs 787 896 1,130 1,411 Gross Profit 11,881 17,484 20,126 23,015 Other LT Assets 4,972 5,845 5,563 5,281 Other Opg (Exp)/Inc (6,776) (9,025) (10,311) (11,614) Cash & ST Invts 14,134 33,911 41,489 46,056 Operating Profit 5,105 8,459 9,815 11,401 Inventory 9,356 8,741 9,615 10,577 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 12,389 17,001 17,771 20,907 Associates & JV Inc 95 195 234 281 Other Current Assets 421 592 592 592 Net Interest (Exp)/Inc (393) (245) (407) (466) Total Assets 60,449 85,689 98,112 112,518 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 4,807 8,409 9,642 11,216 ST Debt 6,919 7,217 7,217 7,217 Tax (647) (1,671) (2,025) (2,580) Other Current Liab 26,538 43,219 48,801 55,279 Minority Interest (205) (488) (533) (605) LT Debt 1,781 4,424 4,424 4,424 Preference Dividend 0 0 0 0 Other LT Liabilities 319 274 274 274 Net Profit 3,955 6,250 7,084 8,032 Shareholder’s Equity 22,055 27,284 33,592 40,915 Net profit before Except. 3,955 6,250 7,084 8,032 Minority Interests 2,837 3,271 3,804 4,409 Total Cap. & Liab. 60,449 85,689 98,112 112,518 EBITDA 7,477 12,470 12,583 14,220 Sales Gth (%) 19.0 30.0 17.9 11.4 Non-Cash Wkg. Cap (4,372) (16,885) (20,822) (23,204) EBITDA Gth (%) 20.1 66.8 0.9 13.0 Net Cash/(Debt) 5,434 22,270 29,848 34,415 Opg Profit Gth (%) 23.6 65.7 16.0 16.2 Effective Tax Rate (%) 13.5 19.9 21.0 23.0 Cash Flow Statement (RMB m) Rates & Ratios

FY Dec 2008A 2009E 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Pre-Tax Profit 4,807 8,409 9,642 11,216 Gross Margin (%) 16.8 19.1 18.6 19.1 Dep. & Amort. 2,277 2,409 2,534 2,538 Opg Profit Margin (%) 7.2 9.2 9.1 9.5 Tax Paid (693) (647) (1,671) (2,025) Net Profit Margin (%) 5.6 6.8 6.5 6.7 (Pft)/ Loss on disposal of FAs 92 (109) (33) (89) ROAE (%) 19.9 25.3 23.3 21.6 Assoc. & JV Inc/(loss) (95) (195) (234) (281) ROA (%) 7.0 8.6 7.7 7.6 Non-Cash Wkg.Cap. 1,546 11,608 3,584 1,826 ROCE (%) 14.1 17.7 16.9 16.5 Other Operating CF 219 0 0 0 Div Payout Ratio (%) 9.8 12.4 10.0 10.0 Net Operating CF 8,153 21,475 13,821 13,186 Interest Cover (x) 13.0 34.5 24.1 24.5 Capital Exp.(net) (4,364) (5,000) (5,500) (8,000) Asset Turnover (x) 1.3 1.3 1.2 1.1 Other Invts.(net) (9) 0 0 0 Debtors Turn (days) 65.5 58.5 58.7 58.6 Invts in Assoc. & JV 14 (797) 0 0 Creditors Turn (days) 151.5 168.5 182.7 186.0 Div from Assoc & JV 0 0 0 0 Inventory Turn (days) 54.8 46.9 39.2 38.8 Other Investing CF (3,421) 354 441 554 Current Ratio (x) 1.1 1.2 1.2 1.3 Net Investing CF (7,780) (5,443) (5,059) (7,446) Quick Ratio (x) 0.8 1.0 1.1 1.1 Div Paid (485) (388) (776) (708) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt 570 0 0 0 Capex to Debt (%) 50.2 43.0 47.2 68.7 Capital Issues 0 0 0 0 Z-Score (X) 2.2 2.2 3.3 3.3 Other Financing CF 2,431 1,304 (407) (466) N.Cash/(Debt)PS (RMB) 0.7 2.9 3.9 4.5 Net Financing CF 2,516 916 (1,183) (1,174) Opg CFPS (RMB) 0.87 1.30 1.35 1.50 Net Cashflow 2,889 16,948 7,578 4,566

Free CFPS (RMB) 0.50 2.17 1.10 0.68 Interim Income Statement (RMB m) Segmental Breakdown (RMB m) / Key Assumptions

FY Dec 1H2008 2H2008 1H2009 2H2009 FY Dec 2008A 2009A 2010F 2011F

Turnover 37,896 32,673 39,046 52,712 Revenues Cost of Goods Sold (31,357) (27,331) (32,071) (42,203) Commercial vehicles 20,980 21,982 24,331 26,506 Gross Profit 6,539 5,342 6,975 10,509 Passenger vehicles 48,660 68,864 82,845 92,906 Other Oper. (Exp)/Inc (3,361) (3,415) (3,451) (5,574) Corporate and others 929 912 1,003 1,104 Operating Profit 3,178 1,927 3,524 4,935 Total 70,569 91,758 108,179 120,516 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 33 62 77 118 Net Interest (Exp)/Inc (210) (183) (143) (102) Key Assumptions Exceptional Gain/(Loss) 0 0 0 0 Vol sales - CV (units) 330,530 371,900 427,685 453,346 Pre-tax Profit 3,001 1,806 3,458 4,951 Vol sales - PV (units) 727,392 1,058,800 1,270,560 1,410,322 Tax (363) (284) (643) (1,028) GP margin - CV (%) 11.5 14.2 11.5 11.5 Minority Interest (166) (39) (209) (279) GP margin - PV (%) 18.2 20.7 19.0 18.5 Net Profit 2,472 1,483 2,606 3,644 Net profit bef Except. 2,472 1,483 2,606 3,644 EBITDA 3,211 1,989 3,601 5,053 Sales Gth (%) 31.5 7.1 3.0 61.3 EBITDA Gth (%) 38.8 5.5 12.1 154.0 Opg Profit Gth 39.6 3.9 10.9 156.1 Net Profit Gth (%) 27.1 (18.7) 5.4 145.7

Gross Margins (%) 17.3 16.3 17.9 19.9 Opg Profit Margins (%) 8.4 5.9 9.0 9.4 Net Profit Margins (%) 6.5 4.5 6.7 6.9 Source: Company, DBS Vickers


China Foods

www.dbsvickers.com Refer to important disclosures at the end of this report ed-GC / sa- DC


BUY HK$6.23 HSI : 21,455 Price Target : 12 months HK$ 7.90 Potential Catalyst: M&A and asset injections Analyst Titus Wu +852 2820 4611 [email protected] Alice Hui CFA, +852 2971 1960 [email protected]

Price Relative

1.40

2.40

3.40

4.40

5.40

6.40

7.40

8.40

2006 2007 2008 2009 2010

HK$

59

79

99

119

139

159

179

199

219

Relative Index

China Foods (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (HK$ m) 2008A 2009A 2010F 2011F

Turnover 14,240 16,823 20,379 25,462 EBITDA 858 1,222 1,465 2,065 Pre-tax Profit 756 950 1,242 1,808 Net Profit 483 568 769 1,102 EPS (HK$) 0.17 0.20 0.28 0.39 EPS Gth (%) (38.9) 17.5 35.4 43.3 Diluted EPS (HK$) 0.17 0.20 0.28 0.39 DPS (HK$) 0.06 0.07 0.10 0.15 BV Per Share (HK$) 1.82 1.96 2.20 2.50 PE (X) 36.0 30.6 22.6 15.8 P/Cash Flow (X) 30.5 21.6 17.6 12.8 EV/EBITDA (X) 20.2 14.4 12.4 8.7 Net Div Yield (%) 1.0 1.2 1.6 2.4 P/Book Value (X) 3.4 3.2 2.8 2.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 10.0 10.7 13.2 16.8 Earnings Rev (%): -10% -2% Consensus EPS (HK$): 0.27 0.34

ICB Industry: Consumer Goods ICB Sector: Food Producers Principal Business: F&B branch of COFCO Group


BUY for potential • We like China Foods for the potential of its

branded F&B products

• Beverage and wine segments continue to act as the key growth engines

• Positive, in our view, to dispose the volatile edible oil business

• Maintain BUY, TP HK$7.90

Beverages the star performer. We expect China Foods to continue to enjoy the fruits of a booming beverage market in China, especially still beverages. The 44% volume growth of “Minute Maid” juice in FY09 further strengthens our confidence on its beverage business in FY10.Coupled with further capacity expansion, sales growth should remain robust at 28% CAGR in FY09-11, underpinned by brand leadership and more intense marketing efforts of Coca-Cola.

Quality-focus wine to win. China Foods’ branded “Greatwall” wine adopts a quality-focused strategy by utilizing high quality vineyards in West China, and overseas like Chile. We believe this is a more solid cornerstone for the equity of a wine brand compared with Changyu’s emphasis on its brand history as Chinese wine market is on the way to turning mature.

BUY for potential. We still like China Foods as we believe its wine, beverage and confectionery businesses are among the segments that hold the most potential in the F&B market. We maintain BUY rating and target price of HK$7.90 (22% upside to current counter), translating into 0.5X PEG11F, towards the lower end among HK listed peers. Our valuation points to a 20X PE11F, still at around 20% discount to leading players like Tingyi (322 HK).

At A Glance Issued Capital (m shrs) 2,792 Mkt. Cap (HK$m/US$m) 17,397 / 2,241 Major Shareholders

COFCO Corporation (%) 74.3 Free Float (%) 25.8 Avg. Daily Vol.(‘000) 3,787


China Foods

Company Background

A basket of leading F&B brands. We still like China Foods for its basket of leading F&B brands in four high growth potential divisions - wine, beverage, kitchen food and confectionery, most of which are still in early expansion or fast growing stage in China.


Catfish effect in wine market. The rising popularity of imported wines would continue to threaten domestic wineries, but also help to accelerate the growth of the market and ultimately benefit all players. We believe the wine market in China is stepping into the take-off stage. Rising income levels will underpin consumers’ affordability and generate interest in wines. Their increasingly enriched knowledge and improving palate for wines should boost the popularity of high quality wines.

Booming beverage market. As one of the top 10 bottlers of Coca-Cola globally, China Foods will continue to enjoy the fruit of the booming soft drink market in China. While demand for sparkling beverage is still expected to grow steadily, still beverages should be the key growth engine ahead.

Outlook

Quality-focused Greatwall wines. China Foods’ branded “Greatwall” wine has been making considerable progress recently with a more refined product portfolio and a more integrated distribution platform. More importantly, Greatwall adopts a quality-focused strategy by utilizing high quality vineyards in West China, and overseas like Chile. We believe this is a more solid cornerstone for the equity of a wine brand compared with Changyu’s emphasis on its brand history as Chinese wine market is on the way to turning mature.

Capacity expansion + Backup from Coca-Cola. The beverage business will be driven by on-going capacity expansion for sparkling beverages. Meanwhile, the expected commencement of still beverage production should improve China Foods’ margins led by cost savings in logistics. Additionally, the brand leadership of Coca-Cola as well as greater marketing efforts expected should drive growth further.

Sales Trend

0

5,000

10,000

15,000

20,000

25,000

2007A 2008A 2009A 2010F 2011F

HK$ m

17.2%

22.2%

27.2%

32.2%

37.2%

42.2%

47.2%

52.2%


Asset Trend

2,000

4,000

6,000

8,000

10,000

12,000

2007A 2008A 2009A 2010F 2011F

HK$ m


Profitability Trend

483

683

883

1,083

1,283

1,483

1,683

2007A 2008A 2009A 2010F 2011F

HK$ m


Margin Trends (%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2007A 2008A 2009A 2010F 2011F



China Foods

Strong turnaround in Confectionery. The management team had been making efforts in product innovation, brand marketing, inventory management, as well as a restructuring of its distribution strategy, and generated 43% sales growth in FY09. However, we do not expect the business to be profitable until 2H10-1H11, given that material prices, A&P spending, as well as competition from foreign brands remain high.

Positive to dispose oil business. The disposal of edible oil business seems to be up on the cards especially considering the comments from CEO of China Agri (606 HK)-the sister company of China Foods. Despite the high sales contribution (36% in FY09), the oil business is quite volatile and is even loss making in certain years. Hence we believe it is positive for China Foods to dispose this segment and focus more on discretionary F&B products which hold higher potential.

Asset injection. If the disposal of oil business comes true, we believe more F&B assets could be injected into China Foods, which is the only listed platform for branded F&B products of COFCO. The potential candidates are”Wugudaochang” instant noodle as well as “Lohas” juice, which may take place in one or two years


Investing for the future. Though there are rising concerns on increasing material prices for F&B companies, we don’t expect too much pressure on China Foods’ gross margin, as most of its products are discretionary products with leading market presence, hence, less-price sensitive. Meanwhile its relatively low EBITDA margin (7.3% in FY09) was largely due to heavy marketing and distribution spending, which we believe was necessary for the company to gain more market share in the fast-growing wine and beverage market.

More confidence on beverages. The 44% volume growth of “Minute Maid” juice in FY09 further strengthens our confidence on its beverage business in FY10. In early10, the company also started a vineyard expansion plan of 30k mu (2k h.a.) in Xinjiang, as a part of COFCO’s “Complete Industrial Chain” strategy. We firmly believe this strategy would drive China Foods into a highly-competitive top F&B player in future.

BUY for potential. We still like China Foods as we believe its wine, beverage and confectionery businesses are among the segments that hold the most potential in the F&B market. We maintain BUY rating and target price of HK$7.90 (22% upside to current counter), translating into 0.5X PEG11F, towards the lower end among HK listed peers. Our target price points to a 20X PE11F, still at around 20% discount to Tingyi (322 HK).


0.0

0.1

0.1

0.2

0.2

0.3

2007A 2008A 2009A 2010F 2011F

0.6

0.8

1.0

1.2

1.4

1.6

1.8


ROE (%)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

8.0

13.0

18.0

23.0

28.0

33.0

38.0

2006 2007 2008 2009

P/Book Value (x)

0.6

1.1

1.6

2.1

2.6

3.1

3.6

4.1

2006 2007 2008 2009


China Foods

Income Statement (HK$ m) Balance Sheet (HK$ m)


Turnover 14,240 16,823 20,379 25,462 Net Fixed Assets 2,434 3,101 3,193 3,379 Cost of Goods Sold (10,742) (12,122) (14,585) (18,129) Invts in Assocs & JVs 412 447 447 447 Gross Profit 3,498 4,701 5,794 7,333 Other LT Assets 2,035 2,357 2,149 2,149 Other Opg (Exp)/Inc (2,852) (3,775) (4,607) (5,585) Cash & ST Invts 1,559 1,989 1,573 1,691 Operating Profit 646 926 1,187 1,748 Inventory 2,629 2,846 3,397 4,073 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 1,364 1,727 2,216 2,594 Associates & JV Inc 125 60 60 65 Other Current Assets 15 28 28 28 Net Interest (Exp)/Inc (15) (37) (5) (5) Total Assets 10,448 12,496 13,002 14,361 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 756 950 1,242 1,808 ST Debt 248 303 450 450 Tax (136) (229) (273) (416) Other Current Liab 3,763 4,626 4,364 4,897 Minority Interest (137) (152) (199) (290) LT Debt 0 500 500 500 Preference Dividend 0 0 0 0 Other LT Liabilities 112 182 130 130 Net Profit 483 568 769 1,102 Shareholder’s Equity 5,092 5,483 6,156 6,981 Minority Interests 1,233 1,402 1,402 1,402 Total Cap. & Liab. 10,448 12,496 13,002 14,361 EBITDA 858 1,222 1,465 2,065 Sales Gth (%) 46.2 18.1 21.1 24.9 Non-Cash Wkg. Cap 245 (24) 1,276 1,797 EBITDA Gth (%) (16.3) 42.3 19.9 41.0 Net Cash/(Debt) 1,311 1,186 623 741 Opg Profit Gth (%) (26.0) 43.3 28.2 47.3 Effective Tax Rate (%) 18.0 24.2 22.0 23.0 Cash Flow Statement (HK$ m) Rates & Ratios


Pre-Tax Profit 756 950 1,242 1,808 Gross Margin (%) 24.6 27.9 28.4 28.8 Dep. & Amort. 212 296 278 317 Opg Profit Margin (%) 4.5 5.5 5.8 6.9 Tax Paid (168) (136) (229) (273) Net Profit Margin (%) 3.4 3.4 3.8 4.3 (Pft)/ Loss on disposal of FAs 0 0 0 1 ROAE (%) 10.0 10.7 13.2 16.8 Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 5.0 5.0 6.0 8.1 Non-Cash Wkg.Cap. (371) (222) (1,344) (664) ROCE (%) 8.3 9.6 11.2 14.9 Other Operating CF 446 172 0 (1) Div Payout Ratio (%) 36.0 36.0 36.0 38.0 Net Operating CF 876 1,060 (54) 1,188 Interest Cover (x) 43.6 25.3 237.3 349.6 Capital Exp.(net) (459) (874) (367) (500) Asset Turnover (x) 1.5 1.5 1.6 1.9 Other Invts.(net) (47) (430) 254 (3) Debtors Turn (days) 24.1 21.3 22.2 22.5 Invts in Assoc. & JV (188) 513 (50) 0 Creditors Turn (days) 57.0 53.5 52.9 56.1 Div from Assoc & JV 97 0 0 0 Inventory Turn (days) 78.1 82.4 78.1 75.2 Other Investing CF 40 19 0 0 Current Ratio (x) 1.4 1.3 1.5 1.6 Net Investing CF (557) (772) (163) (503) Quick Ratio (x) 0.7 0.8 0.8 0.8 Div Paid (230) (368) (295) (567) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (172) 555 147 0 Capex to Debt (%) 185.2 108.8 38.6 52.6 Capital Issues 0 38 0 0 Z-Score (X) CASH CASH CASH CASH Other Financing CF 234 (118) (52) 0 N.Cash/(Debt)PS (HK$) 0.5 0.4 0.2 0.3 Net Financing CF (168) 108 (200) (567) Opg CFPS (HK$) 0.45 0.46 0.46 0.66 Net Cashflow 150 396 (417) 119

Free CFPS (HK$) 0.15 0.07 (0.15) 0.25 Interim Income Statement (HK$ m) Segmental Breakdown (HK$ m)


Turnover 8,156 6,085 8,191 8,632 Revenues Cost of Goods Sold (6,479) (4,262) (5,853) (6,269) Kitchen food 6,512 6,008 7,062 8,606 Gross Profit 1,676 1,822 2,338 2,363 Wine 2,790 3,197 3,750 4,480 Other Oper. (Exp)/Inc (1,322) (1,530) (1,862) (1,914) Confectionery 365 520 624 748 Operating Profit 354 292 476 450 Beverages 4,574 7,098 8,944 11,627 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 62 63 67 (6) Total 14,240 16,823 20,379 25,462 Net Interest (Exp)/Inc (7) (8) (38) 1 Gross Profit Exceptional Gain/(Loss) 0 0 0 0 Kitchen food 514 583 791 1,033 Pre-tax Profit 408 348 505 445 Wine 1,599 1,854 2,194 2,643 Tax (83) (53) (111) (119) Confectionery 139 254 305 367 Minority Interest (84) (53) (93) (59) Beverages 1,247 2,010 2,504 3,291 Net Profit 242 242 301 267 Total 3,498 4,701 5,794 7,333 EBITDA 463 395 608 609 Gross Profit Margins Kitchen food 7.9 9.7 11.2 12.0 Sales Gth (%) 89.9 11.7 0.4 41.9 Wine 57.3 58.0 58.5 59.0 EBITDA Gth (%) 6.6 (41.4) 31.4 54.1 Confectionery 38.0 48.9 48.9 49.0 Opg Profit Gth 25.1 (50.5) 34.6 53.8 Beverages 27.3 28.3 28.0 28.3 Net Profit Gth (%) (36.0) (41.6) 24.5 10.5

Gross Margins (%) 20.6 29.9 28.5 27.4 Total 24.6 27.9 28.4 28.8 Opg Profit Margins (%) 4.3 4.8 5.8 5.2 Net Profit Margins (%) 3.0 4.0 3.7 3.1 Source: Company, DBS Vickers


Want Want China

www.dbsvickers.com Refer to important disclosures at the end of this report ed-GC / sa- AH GL


BUY HK$5.94 HSI : 21,455

Price Target : 12 months HK$ 6.5 (Prev HK$6.0) Potential Catalyst: Better-than-expected growth of rice crackers Analyst Titus Wu +852 2820 4611 [email protected] Alice Hui CFA, +852 2971 1960 [email protected]

Price Relative

2.30

2.80

3.30

3.80

4.30

4.80

5.30

5.80

6.30

Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

HK$

19

69

119

169

219

Relative Index

Want Want China (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation

FY Dec (US$ m) 2008A 2009A 2010F 2011F

Turnover 1,554 1,711 2,282 2,975 EBITDA 352 408 512 654 Pre-tax Profit 310 360 460 598 Net Profit 263 313 388 489 EPS (US$) 0.02 0.02 0.03 0.04 EPS (HK$) 0.16 0.18 0.23 0.29 EPS Gth (%) 45.5 18.3 24.3 26.0 Diluted EPS (HK$) 0.16 0.18 0.23 0.29 DPS (HK$) 0.15 0.16 0.19 0.24 BV Per Share (HK$) 0.55 0.58 0.69 0.79 PE (X) 38.3 32.3 26.0 20.6 P/Cash Flow (X) 32.7 27.8 22.9 18.4 EV/EBITDA (X) 28.2 23.9 19.1 14.9 Net Div Yield (%) 2.6 2.7 3.3 4.1 P/Book Value (X) 10.9 10.2 8.6 7.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 32.4 32.6 35.8 38.9 Earnings Rev (%): - 2% Consensus EPS (HK$): 0.23 0.27

ICB Industry: Consumer Goods ICB Sector: Food Producers Principal Business: Major snack food company in China


Play niche • “Big year” for rice crackers.

• Successful niche play in beverage market.

• Improving supply chain management.

• Better earnings outlook; Maintain BUY, TP raised to HK$6.5.

“Big year” for rice crackers. We expect Rice crackers to resume growth in FY10, on the back of its dominant market position, restructured and more efficient distribution network, strong track record in launching successful products and effective marketing strategy. With well-diversified product portfolio, Want Want would continue to explore new market opportunities and outperform in the F&B market.

Beverage as key growth engine. Want Want has successfully expanded its presence in the beverage segment as a niche player. Its pocket drink has been gaining popularity since its launch in 2009, and has already contributed 8.1% of its total beverage sales in 2009. We believe Want Want would continue to gain share in the beverage share given its effective and innovative production and strong brand awareness.

Maintain BUY. Cash position remained strong (US$348m net cash) with sustainable payout at a high 89% in FY09. We expect its robust beverage sales to further drive growth ahead. With improving outlook and projected FY09-11 core earnings CAGR of 30%, we expect the valuation gap with F&B leaders like Tingyi to narrow. Premised on 21x FY11 PE, or c.0.9x PEG, we raised TP to HK$6.5. Maintain BUY.

At A Glance Issued Capital (m shrs) 13,211 Mkt. Cap (HK$m/US$m) 78,492 / 10,111

Major Shareholders Tsai Eng-Meng (%) 48.8



Want Want China

Company Background

Market leader in the rice crackers, flavored milk and soft candies segments. This puts Want Want well ahead of its competitors, especially in rice crackers. Its strong brand and competitive advantages provide a natural entry barrier amid heightened food safety concerns in China.

Successful product rollout, innovative marketing. Strong brand reputation aside, we believe Want Want’s success was attributed to its strong product offerings, both in terms of varieties and in terms of innovation, as well as its effective marketing strategy. The company has over the years developed a well-diversified product portfolio, with revenue spread evenly across rice crackers, beverages and snack food.


Stable growth for rice crackers and snacks. We expect rice crackers and snack food market to sustain solid growth. It was noted that the company’s sales have been leaning increasingly towards core brands and gift packs, indicating a shift to higher-margin product categories in the past several years. We expect the consumption upgrade to continue to drive rice crackers market ahead.

Booming beverage market. While the bulk of Want Want’s beverage revenue comes from flavored milk, contributions from other beverages have been increasing over the past few years. On the back of rising non-dairy beverage sales, Want Want achieved solid beverage sales CAGR of 43% in FY04-FY09.

Outlook

Beverage as key engine. Want Want has successfully expanded its presence into the beverage as a niche player, making it the key growth engine. Its pocket drink has been gaining popularity since its launch in 2009, and has already contributed 8.1% of total beverage sales in 2009. We believe Want Want would continue to gain market share in beverage sales through its effective and innovative production and strong brand awareness.

“Big year” for Rice cracker. Following the disappointing performance in FY09, we expect rice crackers to resume growth in FY10 as inventory normalizes and restructuring in

Sales Trend

0

500

1,000

1,500

2,000

2,500

3,000

2007A 2008A 2009A 2010F 2011F

US$ m

9.6%

14.6%

19.6%

24.6%

29.6%

34.6%

39.6%

44.6%


Asset Trend

500

1,000

1,500

2,000

2007A 2008A 2009A 2010F 2011F

US$ m


Profitability Trend

176

226

276

326

376

426

476

526

576

2007A 2008A 2009A 2010F 2011F

US$ m


Margin Trends (%)

10%

15%

20%

25%

30%

2007A 2008A 2009A 2010F 2011F



Want Want China

distribution channel starts to take effect. Seasonality should also be more favourable this year with the CNY falling in February (instead of January in FY09 where sales were pushed forward to previous year hence creating higher base). All-in, we expect rice crackers to resume a strong double-digit growth in FY10 (vs 18% expected decline in FY09).

Expansion into noodle – limited impact. Want Want plans to expand into rice-based instant noodle market this year. While it is too early to gauge the impact, we believe risk should be limited considering its relatively small initial investment (c.US$20m).


Limited pressures from materials. We don’t expect too much pressure from price increase of raw materials for Want Want as its business is more discretionary. Leveraging on its strong market position, the company is anticipated to increase its ASP in 1H10 to pass on the cost hike of certain materials like rice and sugar.

Effective A&P spending. Want Want is arguably the most effective in its A&P efforts among all F&B players, with its A&P of sales being relatively stable around 3% in the past five years. Looking forward, the company would inch up that ratio to 3.2-3.3% as competition in beverage market intensifies. Again, beverage sales are expected to remain strong for Want Want and higher sales from newer products should benefit margins as a whole.

Improving supply chain management. Following the rice crackers hiccup in 2008-2009, the company has restructured its distribution network to enhance the efficiencies and control on channels. The incorporation of SAP system would also help improve the supply chain management. Hence we expect the improvement on cash conversion cycle to sustain in the coming years (92 days in FY08 to 85 days in FY09).

Valuations. Cash position remained strong (US$348m net cash) with payout maintained at a high 89% in FY09, which should be sustainable in the future. We expect its robust beverage sales to further drive growth ahead. With improving outlook and projected FY09-11 core earnings CAGR of 30%, we expect the valuation gap with F&B leaders like Tingyi to narrow. Premised on 23x FY11 PE, or c.0.9x PEG, we raised TP to HK$6.5. Maintain BUY.


0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

2007A 2008A 2009A 2010F 2011F

1.0

1.1

1.2

1.3

1.4

1.5

1.6


ROE (%)

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0


P/Book Value (x)

4.5

5.5

6.5

7.5

8.5

9.5



Want Want China

Income Statement (US$ m) Balance Sheet (US$ m)


Turnover 1,554 1,711 2,282 2,975 Net Fixed Assets 555 624 670 727 Cost of Goods Sold (957) (1,019) (1,368) (1,790) Invts in Assocs & JVs 2 3 3 3 Gross Profit 597 692 915 1,185 Other LT Assets 50 56 57 60 Other Opg (Exp)/Inc (290) (336) (456) (591) Cash & ST Invts 284 705 562 515 Operating Profit 307 356 459 594 Inventory 346 223 397 519 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 181 147 186 234 Associates & JV Inc 1 0 0 0 Other Current Assets 7 1 1 1 Net Interest (Exp)/Inc 2 4 2 4 Total Assets 1,425 1,758 1,876 2,057 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 310 360 460 598 ST Debt 2 217 30 20 Tax (47) (47) (71) (108) Other Current Liab 323 408 462 543 Minority Interest 0 (1) (1) (1) LT Debt 165 140 200 150 Preference Dividend 0 0 0 0 Other LT Liabilities 0 0 0 0 Net Profit 263 313 388 489 Shareholder’s Equity 931 988 1,179 1,338 Minority Interests 4 5 5 6 Total Cap. & Liab. 1,425 1,758 1,876 2,057 EBITDA 352 408 512 654 Sales Gth (%) 42.0 10.1 33.4 30.4 Non-Cash Wkg. Cap 211 (38) 122 210 EBITDA Gth (%) 26.1 15.9 25.5 27.8 Net Cash/(Debt) 118 348 332 345 Opg Profit Gth (%) 34.7 16.1 28.8 29.5 Effective Tax Rate (%) 15.1 13.0 15.5 18.0 Cash Flow Statement (US$ m) Rates & Ratios


Pre-Tax Profit 310 360 460 598 Gross Margin (%) 38.4 40.5 40.1 39.8 Dep. & Amort. 45 52 54 61 Opg Profit Margin (%) 19.7 20.8 20.1 20.0 Tax Paid (39) (47) (47) (71) Net Profit Margin (%) 16.9 18.3 17.0 16.4 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROAE (%) 32.4 32.6 35.8 38.9 Assoc. & JV Inc/(loss) (1) 0 0 0 ROA (%) 20.5 19.6 21.4 24.9 Non-Cash Wkg.Cap. (131) 236 (176) (124) ROCE (%) 26.3 25.3 28.0 33.3 Other Operating CF (2) 0 0 0 Div Payout Ratio (%) 98.7 88.7 85.0 85.0 Net Operating CF 182 600 291 462 Interest Cover (x) N/A N/A N/A N/A Capital Exp.(net) (71) (127) (98) (116) Asset Turnover (x) 1.2 1.1 1.3 1.5 Other Invts.(net) (20) (2) (2) (4) Debtors Turn (days) 19.5 18.3 13.6 13.8 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (days) 31.8 35.2 34.0 34.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (days) 104.9 101.9 82.7 93.4 Other Investing CF 0 17 (8) 0 Current Ratio (x) 2.5 1.7 2.3 2.3 Net Investing CF (91) (111) (109) (120) Quick Ratio (x) 1.4 1.4 1.5 1.3 Div Paid (200) (259) (198) (330) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (18) 190 (127) (60) Capex to Debt (%) 42.4 35.6 42.8 68.1 Capital Issues 131 39 0 0 Z-Score (X) 9.0 9.0 10.4 12.1 Other Financing CF 9 (38) 0 0 N.Cash/(Debt)PS (US$) 0.1 0.2 0.2 0.2 Net Financing CF (77) (68) (325) (390) Opg CFPS (US$) 0.19 0.21 0.27 0.35 Net Cashflow 14 421 (143) (47)

Free CFPS (US$) 0.07 0.28 0.11 0.20 Interim Income Statement (US$ m) Segmental Breakdown (US$ m)


Turnover 594 709 844 798 Revenues Cost of Goods Sold (353) (445) (512) (490) Rice crackers 561 468 566 663 Gross Profit 241 264 333 308 536 798 1,140 1,554 Other Oper. (Exp)/Inc (109) (114) (176) (170)

Dairy products and beverages

Operating Profit 132 150 157 138 Snack foods 448 435 557 683 Other Non Opg (Exp)/Inc 0 0 0 0 Others 9 10 20 76 Associates & JV Inc 0 0 1 0 Net Interest (Exp)/Inc 0 (1) 3 1 Total 1,554 1,711 2,282 2,975 Exceptional Gain/(Loss) (16) 0 0 0 Gross Profit Pre-tax Profit 116 149 161 139 Rice crackers 223 206 250 292 Tax (14) (20) (27) (18) 177 287 415 566 Minority Interest (1) 0 0 0


Net Profit 101 129 134 121 Snack foods 195 198 247 306 Others 2 1 3 21 EBITDA 160 176 176 163 Total 597 692 915 1,185 Sales Gth (%) N/A 41.8 42.1 12.5 Gross Profit Margins EBITDA Gth (%) N/A 47.7 10.0 (7.6) Rice crackers 39.7 44.1 44.1 44.1 Opg Profit Gth N/A 57.2 18.5 (8.0) 33.0 36.0 36.4 36.4 Net Profit Gth (%) N/A 71.2 31.8 (6.4)


Gross Margins (%) 40.6 37.2 39.4 38.6 Snack foods 43.6 45.5 44.4 44.8 Opg Profit Margins (%) 22.3 21.1 18.6 17.3 Others 17.7 5.8 15.0 28.0 Net Profit Margins (%) 17.1 18.2 15.8 15.1

Total 38.4 40.5 40.1 39.8 Source: Company, DBS Vickers


Faber Group

www.dbsvickers.com Refer to important disclosures at the end of this report sa: WMT

Bloomberg: FAB MK EQUITY | Reuters: FBMS.KL

BUY RM2.31 KLCI : 1,337.01 Price Target : 12-Month RM 3.55 Potential Catalyst: More contracts secured from overseas, upward revision of concession rates Analyst Chong Tjen-san, CFA +603 2711 2222 [email protected] Juliana Ramli +603 2711 2222 [email protected]

Price Relative

0.40

0.90

1.40

1.90

2.40

2006 2007 2008 2009 2010

RM

90

140

190

240

290

340

390

440

Relative Index

Faber Group (LHS) Relative KLCI INDEX (RHS) Forecasts and Valuation FY Dec (RM m) 2009A 2010F 2011F 2012F

Turnover 805 890 952 1,002 EBITDA 163 173 189 202 Pre-tax Profit 141 148 162 174 Net Profit 83 86 95 102 Net Pft (Pre Ex.) 75 86 95 102 EPS (sen) 22.8 23.7 26.1 28.0 EPS Pre Ex. (sen) 20.8 23.7 26.1 28.0 EPS Gth Pre Ex (%) 24 14 10 7 Diluted EPS (sen) 22.8 23.7 26.1 28.0 Net DPS (sen) 4.5 4.7 5.2 5.5 BV Per Share (sen) 107.2 126.5 147.9 170.7 PE (X) 10.1 9.7 8.8 8.3 PE Pre Ex. (X) 11.1 9.7 8.8 8.3 P/Cash Flow (X) 8.1 7.6 6.9 6.4 EV/EBITDA (X) 4.8 4.3 3.6 3.0 Net Div Yield (%) 1.9 2.0 2.2 2.4 P/Book Value (X) 2.2 1.8 1.6 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.4 20.3 19.0 17.6 Earnings Rev (%): - - - Consensus EPS (sen): 27.2 28.8 28.0 ICB Industry : Health Care ICB Sector: Health Care Equipment & Servic Principal Business: An integrated facilities management service provider and a property developer

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 363 Mkt. Cap (RMm/US$m) 839 / 262 Major Shareholders Khazanah Nasional (%) 34.3 Universal Trustee (Malay) (%) 23.4 Free Float (%) 42.3 Avg. Daily Vol.(‘000) 1,429

Underappreciated GLC

• Underappreciated, well-managed GLC trading at CY11F PE of 7.6x (ex-cash) with a cash-rich balance sheet. Also an excellent play on our anchor market theme – relistingof GLCs

• Proxy to resilient healthcare industry where local facilities management (FM) concession is cash cow

• Overseas expansion and potential JVs with other GLC developers will provide incremental growth

• Reiterate Buy and RM3.55 SOP-derived TP.

Faber is an underappreciated, well-managed GLC which is 34%-owned by Khazanah Nasional. It’s core business is providing FM services to the local healthcare industry. It trades at CY11F PE of 7.6x (ex-cash) on the back of 10.6% 3-year EPS CAGR in spite of a regulated concession business, 1.3x FY11F BV, with ROEs of c.19-20% and has a cash-rich balance sheet (net cash 34.5 sen per share). It is also a proxy to the resilient healthcare industry where the renewal of its concession in Oct 2011 will give another 15 years of solid earnings visibility, in our view. Kicker will be a potential tariff increase which will be margin and ROE accretive, where a 10% increase in the total concession revenue will raise our DCF valuation by 5% and SOP by 15 sen.

Overseas expansion to drive growth. Faber’s strong franchise locally (consistently ranked no. 1) has enabled it to export its expertise overseas to two key markets – Middle East and India. It has c.RM216m p.a. (25% of FY10F revenue) and c.RM20m p.a. contracts in the Middle East and India respectively. Size of the FM industry in UAE is estimated to be worth US$704bn while pre-tax margins are higher at c.24%. We estimate every RM50m increase in contract value p.a. from UAE will lift FY10F-11F EPS by 7-8%.

Reiterate Buy call and RM3.55 SOP-derived TP, implying 13.6x CY11F EPS and 2.4x CY11F BV. We believe the stock is grossly undervalued considering its good earnings visibility from the long-term cash-generating FM concession, potential growth coming from the overseas expansion particularly UAE, and strong balance sheet. Faber is an excellent play on our anchor market theme – relisting of GLCs. In our view, Khazanah will use Faber as the listed vehicle to monetise the embedded value of Pantai's concession whilst also giving the listed entity immediate enlargement in market capitalisation, scale and market penetration.


Faber Group

Company Background

A key player in Facilities Management. Faber Group was incorporated in May 1963, when Merlin Hotels Malaysia was first incorporated. It merged with Faber Union Sdn Bhd to form Faber Merlin Malaysia Bhd and then changed its name to Faber Group Bhd in Nov 1990 with core businesses in hospitality and property. Faber then expanded its portfolio after being awarded a 15-year concession in Oct 1996 for hospital support services to government hospitals in the northern states of Peninsular Malaysia and in East Malaysia. Faber had undergone a series of restructuring exercises since 2000 after it was hit by the Asian Financial Crisis in 1997-98. It was then re-listed on the Main Board of Bursa Malaysia in Nov 2004 and exited the hotel sector in 2008. It is currently 34.3%-owned by Khazanah via UEM Group. Outlook, Earnings Drivers & Risks Renewal of the concession is a given. The current 15-year hospital support service concession is due to expire in Oct 2011. We believe that the renewal of the concession is not an issue considering Faber is a GLC and has the largest market share of 50%. Faber is also ranked no.1 by the Ministry of Health for overall service performance compared to the other two concessionaires, Pantai Medivest Sdn Bhd and Radicare (M) Sdn Bhd. Kicker will be a potential tariff increase, in which a 10% increase in the concession revenue will raise our TP by 15 sen. The concession alone contributed c.64% to group revenue and c.53% to PBT in FY09. Growth from overseas expansion. Faber’s strong franchise locally has enabled it to export its expertise overseas i.e. the Middle East and India. It has c.RM216m p.a. (25% of FY10F revenue) and c.RM20m p.a. contracts in the Middle East and India respectively. We expect FY10F-12F earnings growth to be mainly driven by the overseas FM business in UAE. The FM industry is growing rapidly in the Middle East as the number of completed buildings increases following the construction boom over past few years. FM industry in UAE alone is estimated to be worth US$704bn over 25 years. We project revenue from UAE to grow by 60% in FY10F and 17% in FY11F assuming 91% and 86% of the total contracts secured are recognized respectively. We have also assumed additional new c.RM50m p.a. contract in FY11 and expect a portion of this to be recognized during the year. Committed to expand property business. Faber remains committed to expanding its property business (15% of FY10F

Sales Trend

0

200

400

600

800

1,000

2008A 2009A 2010F 2011F 2012F

RM m

-0.2%

4.8%

9.8%

14.8%

19.8%


Asset Trend

200

400

600

800

1,000

2008A 2009A 2010F 2011F 2012F

RM m


Profitability Trend

82

102

122

142

162

182

202

2008A 2009A 2010F 2011F 2012F

RM m


Margin Trends (%)

0%

5%

10%

15%

20%

25%

30%

2008A 2009A 2010F 2011F 2012F




Faber Group

revenue and 21% of FY10F pre-tax profit) with land bank of just 43 acres, where its strong cash in its kitty will enable it to acquire more land bank. We also do not discount potential JVs with other Khazanah-owned developers. At the moment, we expect that the property business to perform better this year with total GDV of RM495m for the projects to be launched. An excellent play on one of our anchor market theme – relisting of GLCs. The wildcard for Faber is potential M&As where the most obvious candidate is another FM concessionaire, Pantai Medivest Sdn Bhd (Pantai Holding’s subsidiary), given the common shareholding in Khazanah. While we acknowledge management’s view that more players are healthy for competition, the appeared willingness of Pantai’s shareholders to exit the business (believed to be in its effort to focus on growing its hospital business) may prove to be an ideal fit for Faber. In our view, Khazanah will use Faber as the listed vehicle to monetise the embedded value of Pantai's concession whilst also giving the listed entity immediate enlargement in market capitalisation, scale and market penetration to other states. Key risks to our forecasts and views include failure to renew concession, which we believe is highly unlikely, and changes in concession rates. Slower progress billings and failure to renew contracts in UAE could also affect earnings. Financials and Valuation Overseas business to drive growth. We project earnings to grow by 14% to RM86.2m in FY10F and 10% to RM94.8m in FY11F, driven by overseas business particularly in UAE. We expect FM overseas share of pre-tax contribution to expand to 34-36% in FY10F-11F (from 25% in FY09) as more contracts are recognized going forward. Nonetheless, FM concession will still remain the key contributor to earnings. We have a Buy call and RM3.55 SOP-derived TP, implying 13.6x FY11F EPS and 2.4x FY11F BV. We believe the stock is grossly undervalued considering its long-term cash-rich FM concession and potential growth from the overseas expansion. The stock is only trading (ex-cash) at 7.6x FY11F EPS and 1.3x FY11F BV. We value the FM business based on DCF method (WACC: 11.6%; terminal growth: 1.0%) given the long-term earnings visibility. Meanwhile, the property segment is valued based in 10x CY11F EPS, consistent with the average small-mid cap property peers’ valuation.


0.0

0.1

0.2

0.3

0.4

0.5

0.6

2008A 2009A 2010F 2011F 2012F

0.8

0.8

0.8

0.9

0.9

0.9

0.9

0.9

1.0

1.0

1.0


ROE (%)

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2008A 2009A 2010F 2011F 2012F

PE (x)

1.0

3.0

5.0

7.0

9.0

11.0

2006 2007 2008 2009 2010

P/Book Value (x)

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2006 2007 2008 2009 2010



Faber Group

Income Statement (RM m) Balance Sheet (RM m) FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F Turnover 805 890 952 1,002 Net Fixed Assets 146 172 195 215 Cost of Goods Sold (561) (625) (661) (689) Invts in Associates & JVs 0 0 0 0 Gross Profit 245 265 291 313 Other LT Assets 44 43 41 40 Other Opng (Exp)/Inc (102) (117) (129) (141) Cash & ST Invts 305 381 469 378 Operating Profit 142 149 162 172 Inventory 4 5 5 5 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 354 391 418 440 Associates & JV Inc 0 0 0 0 Other Current Assets 38 38 38 38 Net Interest (Exp)/Inc (1) (1) 0 2 Total Assets 891 1,029 1,167 1,115 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 141 148 162 174 ST Debt 2 2 2 2 Tax (35) (37) (41) (43) Other Current Liab 249 276 292 304 Minority Interest (23) (24) (27) (29) LT Debt 178 184 191 5 Preference Dividend 0 0 0 0 Other LT Liabilities 6 16 26 37 Net Profit 83 86 95 102 Shareholder’s Equity 389 459 537 620 Net Profit before Except. 75 86 95 102 Minority Interests 67 92 119 147 EBITDA 163 173 189 202 Total Cap. & Liab. 891 1,029 1,167 1,115 Sales Gth (%) 20.5 10.5 7.0 5.2 Non-Cash Wkg. Capital 117 128 140 150 EBITDA Gth (%) 25.8 5.6 9.5 7.0 Net Cash/(Debt) 125 195 276 370 Opg Profit Gth (%) 33.7 4.4 9.0 6.3 Net Profit Gth (%) (46.9) 4.3 9.9 7.2 Effective Tax Rate (%) 24.7 25.0 25.0 25.0 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Pre-Tax Profit 141 148 162 174 Gross Margins (%) 30.4 29.8 30.6 31.2 Dep. & Amort. 21 24 27 30 Opg Profit Margin (%) 17.7 16.7 17.0 17.2 Tax Paid (35) (37) (41) (43) Net Profit Margin (%) 10.3 9.7 10.0 10.1 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 23.4 20.3 19.0 17.6 Chg in Wkg.Cap. (71) (10) (12) (10) ROA (%) 10.0 9.0 8.6 8.9 Other Operating CF 9 7 7 7 ROCE (%) 17.6 16.0 14.9 15.3 Net Operating CF 64 131 144 158 Div Payout Ratio (%) 19.8 19.8 19.8 19.8 Capital Exp.(net) (36) (50) (50) (50) Net Interest Cover (x) 124.9 142.4 NM NM Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.0 0.9 0.9 0.9 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 127.1 152.6 155.0 156.3 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 141.2 154.4 158.7 160.3 Other Investing CF 5 5 5 5 Inventory Turn (avg days) 6.8 2.7 2.8 2.8 Net Investing CF (30) (45) (45) (45) Current Ratio (x) 2.8 2.9 3.2 2.8 Div Paid (29) (16) (17) (19) Quick Ratio (x) 2.6 2.8 3.0 2.7 Chg in Gross Debt (10) 7 7 (186) Net Debt/Equity (X) CASH CASH CASH CASH Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) (0.3) (0.4) (0.5) (0.6) Other Financing CF (2) 0 0 0 Capex to Debt (%) 19.9 26.9 25.9 676.8 Net Financing CF (41) (10) (10) (204) Z-Score (X) NA NA NA NA Net Cashflow (7) 76 88 (92) N. Cash/(Debt)PS (sen) 34.5 53.7 76.1 102.0

Opg CFPS (sen) 37.2 38.9 42.9 46.2 Free CFPS (sen) 7.7 22.3 25.8 29.7 Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 1Q2009 2Q2009 3Q2009 4Q2009 FY Dec 2009A 2010F 2011F 2012F

Turnover 141 170 198 304 Revenues (RM m) Cost of Goods Sold (101) (119) (138) (208) Facilities Mgmt 667 755 804 839 Gross Profit 40 52 60 96 Properties 122 135 148 163 Other Oper. (Exp)/Inc (25) (24) (24) (29) Others 16 0 0 0 Operating Profit 16 28 36 68 Total 805 890 952 1,002 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 0 0 0 Pre-tax profit (RM m) Net Interest (Exp)/Inc (2) (2) (2) (2) Facilities Mgmt 114 131 141 148 Exceptional Gain/(Loss) 0 0 0 1 Properties 28 31 34 37 Pre-tax Profit 14 26 34 66 Others (2) (14) (13) (12) Tax (5) (8) (9) (13) Total 141 148 162 174 Minority Interest (2) (4) (6) (10) Net Profit 7 14 19 43 Pre-tax profit Margins (%) Net profit bef Except. 7 14 19 42 Facilities Mgmt 17.2 17.3 17.6 17.7 EBITDA 21 33 41 73 Properties 22.9 23.0 23.0 23.0 Others (10.0) N/A N/A N/A Sales Gth (%) (6.2) 21.0 16.0 53.7 Total 17.5 16.6 17.0 17.4 EBITDA Gth (%) (43.1) 58.6 25.0 78.1 Opg Profit Gth (%) (48.9) 79.4 27.6 89.1 Key Assumptions Net Profit Gth (%) (59.3) 90.6 37.2 124.1 FM-concession revenue 0.0 3.0 3.0 3.0 Gross Margins (%) 28.6 30.2 30.3 31.7 % of UAE contracts 57.0 91.1 86.5 93.4 Opg Profit Margins (%) 11.1 16.5 18.1 22.3 Property operating margin 22.9 23.0 23.0 23.0 Net Profit Margins (%) 5.2 8.1 9.6 14.0 Source: Company, DBS Vickers


Hengan International

www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- DC


BUY HK$55.80 HSI : 21,455 Price Target : 12m HK$ 72.00 Potential Catalyst: Lower raw material prices Analyst Patricia Yeung +(852) 2863 8908 [email protected]

Price Relative

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82

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232

282

332

382

Relative Index

Hengan International (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (HK$ m) 2008A 2009A 2010F 2011F

Turnover 8,002 10,834 13,238 16,462 EBITDA 1,817 2,943 3,428 4,246 Pre-tax Profit 1,511 2,583 2,965 3,682 Net Profit 1,341 2,118 2,399 2,944 Net Pft (Pre Ex.) 1,341 2,118 2,399 2,944 EPS (HK$) 1.17 1.77 1.97 2.41 EPS (HK$) 1.17 1.77 1.97 2.41 EPS Gth (%) 27.1 51.0 11.2 22.7 Diluted EPS (HK$) 1.17 1.77 1.97 2.41 DPS (HK$) 0.72 1.10 1.28 1.57 BV Per Share (HK$) 5.64 7.40 8.25 9.27 PE (X) 47.6 31.5 28.4 23.1 P/Cash Flow (X) 39.2 27.1 23.9 19.4 EV/EBITDA (X) 35.4 22.2 19.6 15.7 Net Div Yield (%) 1.3 2.0 2.3 2.8 P/Book Value (X) 9.9 7.5 6.8 6.0 Net Debt/Equity (X) 0.0 CASH CASH CASH ROAE (%) 20.7 27.3 25.2 27.6 Earnings Rev (%): - - Consensus EPS (HK$): 2.07 2.48

ICB Industry: Consumer Goods ICB Sector: Personal Goods Principal Business: Manufacturer of sanitary napkins, disposable diapers and tissue Source of all data: Company, DBSV, Bloomberg, HKEX

Sustainable profitability • Inventory cost of wood pulp at below market

price will alleviate margin pressure

• Strong product development in high-end sanitary napkins and diapers segments will sustain margins and sales growth

• Strong balance sheet will enable Hengan to benefit from interest rate hike and RMB appreciation

• Maintain Buy and HK$72.00 TP

Stock of low cost inventory. Although wood pulp prices have risen by over 40% from the trough, Hengan has accumulated 193,000 tons of wood pulp at more than 20% discount to current market prices. The inventory would be sufficient for production until August this year. Margin pressure may be further alleviated by cutting marketing expenses and promotional activities. Enhanced product mix. Positive market response to its super absorbent series of baby diapers is a reflection of Hengan’s success in product development. It plans to introduce more high-end disposable diapers and sanitary napkins in FY10. We expect these new products to help Hengan to achieve 25-30% sales growth, as well as offset the negative impact of climbing costs of petrochemical-related raw materials. Maintain Buy, HK$72 target price. With the bulk of its revenue generated in China and given high cash level of over HK$2bn (mostly RMB), Hengan will benefit from a stronger RMB or interest rate hike. Despite weaker gross margin (due to a rebound in wood pulp prices), it is expected to register decent net profit growth of 13% in FY10F, followed by over 20% in FY11F. Our HK$72 target price is based on 30x FY11F PE for its leading market position, comprehensive product portfolio, and high earnings quality.


Major Shareholders Sze Man Bok (%) 19.8 Hui Lin Chit (%) 19.7




Company Background

Fast moving consumer goods manufacturer with strong brands. Hengan mainly manufactures, distributes, and sells personal hygiene products in the PRC. Its three main product lines are tissue, sanitary napkins, and disposable diapers (for both babies and adults). Its brands, including “Anerle”, “Anle” and “Hearttex”, are either China Top Brands or China Renowned Brands. In late 2008, it stepped into the fast moving consumer goods segment by acquiring 51% stake in Qin Qin Group, a reputable confectionery manufacturer in China with its own brands, “QinQin” and “Xianggeli”. Both brands are recognized as Famous Chinese Food.


Tissue market – rising demand. According to data from China Paper Association, sales of household paper amounted to 5m tons in 2008 (up 5.7% from last year). We estimate that tissue sales volume reached 4.3m tons in 2008, up 9.3% from last year. Such up trend has been very consistent with China’s strong GDP growth. With increasing living standard, volume growth momentum in tissue production is expected to continue. China National Household Paper Industry Association (CNHPIA) estimated that top 15 players in the household paper market accounted for 35.7% of market share by volume and 44.8% by revenue, up 5.8ppt from last year. Ranked the first by revenue with about 9% market share, Hengan is also gaining market share.

Sanitary napkin market – relatively mature. With sales volume of 77bn pieces in 2008, the annual growth rate of the sanitary napkins and panty liners market was 10.3% in the year. But given the relatively mature market, volume growth is expected to slow to high single digit. However, higher living standards have given rise to stronger demand for higher quality products. The sanitary napkins and panty liners market is less fragmented than the tissue market, as the top 15 players account for over 60% market share, according to CNHPIA. Again, Hengan is ranked 1st by revenue with an estimated market share of 11%.

Baby diapers market – low penetration rate. About 10.3bn pieces of baby diapers were sold in 2008, a growth of 23.7% y-o-y. Penetration rate has also climbed to 21.1% from 17.3% in 2007. However, this is still low compared to 44% globally and 96% in the US in 2004. The rising penetration rate is expected to be a major growth driver for the market. With an estimated market share of 23.4%, Hengan was

Sales Trend

0

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4,000

6,000

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ranked 2nd by revenue in 2008.

Outlook

High inventory level to preserve margin. Following the over 40% rebound in wood pulp prices, there is growing concern about gross margins of the tissue division. Hengan’s 193,000 tons of wood pulp inventory that was secured at relatively low costs (estimates at 20-25% discount to current market prices) is sufficient for production until Aug10, which should partly alleviate margin pressure for the tissue segment this year. In addition, it will cut promotional activities and sales discounts. We believe the ratio of marketing, advertising and promotion expenses to sales will drop by 0.3-0.5ppt.

More new products. Prices of petrochemical-related and other raw materials only climbed by single digits from 2009. Hence, gross margins for sanitary napkins and disposal diapers may be easily maintained through enhanced product mix and new product development. In particular, following the success of its super absorbent series, a new high-end disposable diaper product will be introduced to boost sales growth to 25%. We expect sanitary napkin sales growth to stay strong at 31% amid the market consolidation and enhanced product mix.

Expanding tissue capacity. For tissue products, 120,000 tons and 60,000 tons of new capacity will be added in FY10F and FY11F, respectively, bringing total capacity to 540,000 tons. With the bulk of its tissue sales being high end products (such as box tissue and packet handkerchief), we estimate these new capacities will keep tissue sales growth at 23-26% for these two years.


Solid balance sheet. At end-FY09, Hengan had over HK$2bn net cash, the bulk in RMB. It will benefit from an interest rate hike and RMB appreciation as its revenue stream is in RMB but purchases are in US$.

Maintain Buy, HK$72 target price. We have conservatively assumed a 4ppt drop in gross margin for the tissue division for FY10F. Despite this, overall gross margin is expected to drop only 1.4ppt and earnings growth will remain decent at 13.3%, and accelerate to 22.7% in FY11F as margins normalize. Our HK$72 target price is based on 30x FY11F PE. We like the counter for its leading market position, comprehensive product portfolio. and good earnings quality. Maintain BUY.


0.0

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2007A 2008A 2009A 2010F 2011F

PE (x)

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32.0

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2006 2007 2008 2009

P/Book Value (x)

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3.7

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8.2

2006 2007 2008 2009





Turnover 8,002 10,834 13,238 16,462 Net Fixed Assets 3,320 3,933 4,410 4,766 Cost of Goods Sold (4,799) (5,853) (7,338) (9,170) Invts in Assocs & JVs 0 0 0 0 Gross Profit 3,203 4,981 5,900 7,292 Other LT Assets 1,984 2,412 2,390 2,369 Other Opg (Exp)/Inc (1,672) (2,380) (2,917) (3,611) Cash & ST Invts 1,611 4,450 3,971 3,297 Operating Profit 1,531 2,601 2,983 3,681 Inventory 2,128 2,175 3,045 3,786 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 989 1,153 1,476 1,835 Associates & JV Inc 0 0 0 0 Other Current Assets 17 25 31 38 Net Interest (Exp)/Inc (20) (18) (18) 0 Total Assets 10,049 14,148 15,323 16,092 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 1,511 2,583 2,965 3,682 ST Debt 297 2,175 1,675 875 Tax (166) (416) (507) (666) Other Current Liab 1,461 2,000 2,144 2,627 Minority Interest (4) (50) (59) (71) LT Debt 1,511 555 983 755 Preference Dividend 0 0 0 0 Other LT Liabilities 65 121 121 121 Net Profit 1,341 2,118 2,399 2,944 Shareholder’s Equity 6,484 9,017 10,061 11,304 Net profit before Except. 1,341 2,118 2,399 2,944 Minority Interests 232 280 339 411 Total Cap. & Liab. 10,049 14,148 15,323 16,092 EBITDA 1,817 2,943 3,428 4,246 Sales Gth (%) 40.7 35.4 22.2 24.4 Non-Cash Wkg. Cap 1,673 1,353 2,408 3,033 EBITDA Gth (%) 24.2 62.0 16.5 23.9 Net Cash/(Debt) (197) 1,720 1,313 1,667 Opg Profit Gth (%) 21.9 69.9 14.7 23.4 Effective Tax Rate (%) 11.0 16.1 17.1 18.1 Cash Flow Statement (HK$ m) Rates & Ratios

FY Dec 2008A 2009E 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Pre-Tax Profit 1,511 2,583 2,965 3,682 Gross Margin (%) 40.0 46.0 44.6 44.3 Dep. & Amort. 286 343 424 543 Opg Profit Margin (%) 19.1 24.0 22.5 22.4 Tax Paid (167) (295) (507) (666) Net Profit Margin (%) 16.8 19.5 18.1 17.9 (Pft)/ Loss on disposal of FAs 2 6 0 0 ROAE (%) 20.7 27.3 25.2 27.6 Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 13.3 17.5 16.3 18.7 Non-Cash Wkg.Cap. (348) (137) (1,055) (625) ROCE (%) 15.9 21.0 19.5 22.6 Other Operating CF 41 17 39 21 Div Payout Ratio (%) 61.6 63.3 65.0 65.0 Net Operating CF 1,324 2,516 1,867 2,954 Interest Cover (x) 75.0 146.1 167.3 N/A Capital Exp.(net) (1,490) (951) (900) (900) Asset Turnover (x) 0.8 0.9 0.9 1.0 Other Invts.(net) 0 0 0 0 Debtors Turn (days) 45.1 36.1 36.2 36.7 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (days) 111.5 106.5 101.1 94.3 Div from Assoc & JV 0 0 0 0 Inventory Turn (days) 172.1 142.5 138.2 144.9 Other Investing CF 321 (367) 0 0 Current Ratio (x) 2.7 1.9 2.2 2.6 Net Investing CF (1,169) (1,318) (900) (900) Quick Ratio (x) 1.5 1.3 1.4 1.5 Div Paid (732) (1,096) (1,355) (1,701) Net Debt/Equity (X) 0.0 CASH CASH CASH Chg in Gross Debt (12) 2,387 (72) (1,028) Capex to Debt (%) 82.4 34.8 33.9 55.2 Capital Issues 0 0 0 0 Z-Score (X) 7.5 7.5 18.4 16.8 Other Financing CF 39 350 (18) 0 N.Cash/(Debt)PS (HK$) (0.2) 1.4 1.1 1.4 Net Financing CF (705) 1,641 (1,445) (2,729) Opg CFPS (HK$) 1.46 2.22 2.40 2.94 Net Cashflow (549) 2,839 (478) (675)

Free CFPS (HK$) (0.15) 1.31 0.79 1.68 Interim Income Statement (HK$ m) Segmental Breakdown (HK$ m) / Key Assumptions


Turnover 3,756 4,246 5,113 5,721 Revenues Cost of Goods Sold (2,284) (2,515) (2,811) (3,043) Tissue 3,875 4,456 5,506 6,946 Gross Profit 1,472 1,731 2,302 2,679 Sanitary napkins 2,016 2,546 3,350 4,127 Other Oper. (Exp)/Inc (736) (935) (1,090) (1,290) Disposable diapers 1,874 2,160 2,700 3,629 Operating Profit 735 796 1,212 1,389 Food & snack 63 863 1,036 1,243 Other Non Opg (Exp)/Inc 0 0 0 0 Others 174 808 646 517 Associates & JV Inc 0 0 0 0 Total 8,002 10,834 13,238 16,462 Net Interest (Exp)/Inc (18) (3) (28) 10 Segment profit Exceptional Gain/(Loss) 0 0 0 0 Tissue 404 951 922 1,150 Pre-tax Profit 718 793 1,184 1,399 Sanitary napkins 683 921 1,236 1,531 Tax (89) (78) (191) (225) Disposable diapers 298 421 556 769 Minority Interest (2) (2) (27) (23) Food & snack 81 192 172 138 Net Profit 628 713 967 1,151 Others N/A N/A N/A N/A Net profit bef Except. 628 713 967 1,151 Total 1,466 2,486 2,887 3,588 EBITDA 875 942 1,383 1,560 Segment profit Margins Tissue 10.4 21.4 16.8 16.6 Sales Gth (%) 36.9 44.3 36.1 34.8 Sanitary napkins 33.9 36.2 36.9 37.1 EBITDA Gth (%) 22.5 25.7 58.1 65.6 Disposable diapers 15.9 19.5 20.6 21.2 Opg Profit Gth 18.5 25.3 64.8 74.5 Food & snack 129.0 22.3 16.6 11.1 Net Profit Gth (%) 33.4 33.2 54.1 61.3

Others 0.0 0.0 0.0 0.0 Gross Margins (%) 39.2 40.8 45.0 46.8 Total 18.3 22.9 21.8 21.8 Opg Profit Margins (%) 19.6 18.7 23.7 24.3 Net Profit Margins (%) 16.7 16.8 18.9 20.1 Source: Company, DBS Vickers


HTL International

www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: JC

Bloomberg: HWA SP | Reuters: HTLH.SI

BUY S$0.845 STI : 2,980.69 Price Target : 12-Month S$ 1.09 Potential Catalyst: Demand growth Analyst Patrick XU +65 6398 7957 [email protected]

Price Relative

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R e l a t i v e I n d e x

H T L In t e r n a t io n a l ( L H S ) R e la t i v e S T I IN D E X ( R H S ) Forecasts and Valuation FY Dec (S$ m) 2008A 2009A 2010F 2011F

Turnover 646 605 672 751 EBITDA 4 74 86 97 Pre-tax Profit (16) 57 67 77 Net Profit (20) 48 56 65 Net Pft (Pre Ex.) (20) 48 56 65 EPS (S cts) (4.9) 11.8 13.6 15.6 EPS Pre Ex. (S cts) (4.9) 11.8 13.6 15.6 EPS Gth Pre Ex (%) (299) (343) 15 15 Diluted EPS (S cts) (4.9) 11.5 13.5 15.5 Net DPS (S cts) 0.0 6.0 4.1 4.7 BV Per Share (S cts) 51.3 59.4 65.3 76.9 PE (X) nm 7.2 6.2 5.4 PE Pre Ex. (X) nm 7.2 6.2 5.4 P/Cash Flow (X) nm 5.7 5.0 4.4 EV/EBITDA (X) 110.0 5.1 4.5 3.8 Net Div Yield (%) 0.0 7.1 4.8 5.6 P/Book Value (X) 1.6 1.4 1.3 1.1 Net Debt/Equity (X) 0.2 0.1 0.1 0.1 ROAE (%) (9.2) 21.1 21.9 22.0 Earnings Rev (%): - - Consensus EPS (S cts): 8.2 9.4 ICB Industry : Consumer Goods ICB Sector: Household Goods Principal Business: Leading Original Design sofa-upholstery manufacturer and leather tanner in Asia.

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 417 Mkt. Cap (S$m/US$m) 352 / 256 Major Shareholders Bem Holdings (%) 46.6 Fidelity Management (%) 7.1 Brandes Inv Partner (%) 4.8 Free Float (%) 41.5 Avg. Daily Vol.(‘000) 2,365

Gaining market share

• HTL has restructured and refocused its business to capture growth

• Earnings to grow by c. 15% p.a. over FY09-FY12, driven by market share gains and demand rebound

• BUY, TP S$1.09

Firm turnaround in 2009, aided by restructuring. After slipping into losses in FY08, HTL has rebounded strongly into the black with net profit of S$48m for FY09. This turnaround was achieved through the closing down of inefficient or non-performing units and a refocus on customers and higher margin business.

Earnings prospects bright and projected to grow further. We project revenue to grow by 11% in FY10 and by 12% in FY11, driven by market share gains initially and a rebound in demand from Europe and the US later on. With the home furnishings business looking to at least break-even this year and with improving operating leverage, we also project net margins to improve, driving earnings to grow by 16% in FY10 and 15% in FY11.

Capacity expansion to capture growth. Capacity utilization averaged c. 83% in 2009, with utilization hitting above 90% during the peak season. To prepare for an upturn in demand, HTL has secured new land & buildings for a new plant in China, with preferential terms granted by local government, such as waiver of rental & income tax for the initial period.

Currency risks well managed. The company hedges up to 80% of its foreign currency sales and purchases to its operating currency – USD on a twelve months rolling basis, thus minimizing foreign exchange risks. Additionally, a significant percentage of its COGS and Opex are denominated in USD and Euro.

BUY, TP S$1.09 (7x FY11 PER), which is based on its historical normalized current PE trading range. The stock could further re-rate towards 9x-10x PE as HTL delivers on earnings and sentiment on the export sector improves.


HTL International

Company Background

Founded in 1976 and listed on SGX since 1993, HTL Int’l is engaged in manufacture of upholstered furniture, leather tanning and finishing, and provision of home furnishing and design solutions. With its production facilities located in the Yangtze River Delta (YRD) in east China, its products are marketed to over 40 countries, through distributors and retailers. Core business –sofas

Capacity. HTL has sofa manufacturing plants in Kunshan and Changshu, in east China’s YRD, with total production capacity of c. 2,000 containers per month currently. Each container is loaded with c. 18 sets of sofas on average, and each set usually consists of 6 seats. Most of the sofas produced are exported to Europe, North America, Australia & New Zealand, and other countries in Asia. Capacity utilization averaged c. 83% in 2009, with utilization hitting above 90% during the peak season. To prepare for an upturn in demand, HTL has secured new land & buildings for a new plant in Huai’an, with preferential terms granted by local government, such as waiver of rental & income tax for the initial period. Main costs & expenses. Raw leather hide is the primary raw material in sofa, accounting for >50% of the costs, which is mostly imported from Australia, the US and Brazil. Freight rates have substantial impact on the company’s distribution expenses when it sells on CIF, DDU or CFR terms, as HTL relies on shipping companies to ship its products from its plants in China to its customers around the globe. Home Furnishing Business Unit

This BU, which was acquired in 2005, is primarily engaged in the global franchising of the luxury home furniture brand – Domicil. In Germany, Domicil sells home furniture in the form of creative and customized solutions to furnishings and indoor décor, a similar business model as IKEA. Outside Germany, Domicil franchisees sell HTL’s upholstered furniture in more than 200 retail points of shop-in-shop stores in Europe, Asia and Australia, as of end 2009. HTL well poised for growth

HTL poised to ride on the recovering demand. As Europe, North America and Asia (excl Greater China) together account for >85% of the company’s sales revenue, we expect HTL’s top line to return to growth in 2010 after reporting

Sales Trend

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Asset Trend

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EBITD A M argin % EBIT M argin % Net Incom e M argin %



HTL International

declines since 2007, benefiting from the recovering demand in the key markets. Winning over market share. As some competitors, for instance those in south China, went bust or substantially cut their capacity during the crisis, HTL emerged as a reliable supplier and successfully took over the market share lost by its competitors, especially in Europe. This is evidenced by the resilience in its sales to Europe, which dipped by only 1.5% in 2008 yet rebounded by 2% to a new high of S$348m in 2009, while the whole industry was still in a downtrend. Expanding customer base. HTL has >1,500 customers in Europe and is also seeking to expand its customer base in the US after the crisis. The stable increase in its customer bases in the key markets during the downturn should lay a solid foundation for HTL’s revenue growth in FY10 and more sustainable revenue growth in FY11 and beyond from organic increases in same-customer sales. Capacity expansion underway. HTL is setting up another sofa plant in Huai An, in east China’s YRD as well, which would expand the company’s total capacity to 2,600 containers per month by mid 2010. The production capacity of the company’s leather tanneries precisely matches its capacity of the sofa plants, i.e. can support the production of maximum 2,600 containers of sofas per month, and hence should be able to fully satisfy HTL’s demand for leather hides. 80% currency exposure hedged. The company hedges up to 80% of foreign currency sales and purchase to its operating currency – USD by forex forwards on a twelve months rolling basis, thus minimizing its foreign exchange risk. About 55% of COGS and 77% of opex expenses are denominated in USD, whilst 25% of COGS is in Euro. FY09-12 earnings CAGR of 15%, driven by growing external demand and internal synergies. We are expecting 11% and 12% growth of revenue in FY10 and FY11 respectively, underpinned by revival of sales to the US as well as recovery in other markets. Higher synergies between leather tannery and sofa plants are expected to improve HTL’s net margin % from 8.0% in FY09 to 8.3% in FY10 and eventually to 8.6% in FY11. Valuation & Recommendation

Buy, TP at S$1.09, based on 7x FY11 earnings, in line with the counter’s historical trading average. Valuations are still attractive, with 15% FY09-12 earnings CAGR and backed by 5% yield.


0.0

0.1

0.2

0.3

0.4

0.5

0.6

2007A 2008A 2009A 2010F 2011F

1.2

1.3

1.4

1.5

1.6

1.7


ROE (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

-4513.0

-3513.0

-2513.0

-1513.0

-513.0

487.0

1487.0

2487.0

2006 2007 2008 2009

P/Book Value (x)

0.1

0.6

1.1

1.6

2.1

2.6

2006 2007 2008 2009



HTL International

Income Statement (S$ m) Balance Sheet (S$ m) FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Turnover 646 605 672 751 Net Fixed Assets 76 66 67 66 Cost of Goods Sold (442) (382) (404) (449) Invts in Associates & JVs 0 0 0 0 Gross Profit 204 224 269 302 Other LT Assets 28 29 26 23 Other Opng (Exp)/Inc (213) (162) (196) (220) Cash & ST Invts 75 94 95 106 Operating Profit (9) 62 73 83 Inventory 198 196 208 231 Other Non Opg (Exp)/Inc (1) 0 0 0 Debtors 59 87 96 108 Associates & JV Inc 0 0 0 0 Other Current Assets 12 15 15 15 Net Interest (Exp)/Inc (7) (5) (6) (6) Total Assets 447 487 506 547 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit (16) 57 67 77 ST Debt 113 95 95 95 Tax (4) (9) (11) (12) Other Current Liab 112 115 107 100 Minority Interest 0 0 0 0 LT Debt 9 34 34 34 Preference Dividend 0 0 0 0 Other LT Liabilities 0 0 0 0 Net Profit (20) 48 56 65 Shareholder’s Equity 214 243 271 318 Net Profit before Except. (20) 48 56 65 Minority Interests 0 0 0 0 EBITDA 4 74 86 97 Total Cap. & Liab. 447 487 506 547 Sales Gth (%) (7.0) (6.3) 11.0 11.7 Non-Cash Wkg. Capital 156 183 211 253 EBITDA Gth (%) (88.5) 1,954.5 15.6 12.8 Net Cash/(Debt) (46) (35) (34) (23) Opg Profit Gth (%) (141.0) (823.9) 17.3 14.1 Net Profit Gth (%) (298.6) (338.4) 16.2 15.3 Effective Tax Rate (%) N/A 15.2 16.0 16.0 Cash Flow Statement (S$ m) Rates & Ratio FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F

Pre-Tax Profit (16) 57 67 77 Gross Margins (%) 31.6 37.0 40.0 40.3 Dep. & Amort. 13 13 13 14 Opg Profit Margin (%) (1.3) 10.2 10.8 11.0 Tax Paid (4) (9) (5) (11) Net Profit Margin (%) (3.1) 8.0 8.3 8.6 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) (9.2) 21.1 21.9 22.0 Chg in Wkg.Cap. (5) (22) (34) (43) ROA (%) (4.6) 10.3 11.3 12.3 Other Operating CF 22 (15) 0 0 ROCE (%) (2.7) 14.9 15.8 16.4 Net Operating CF 10 25 41 37 Div Payout Ratio (%) N/A 51.1 30.0 30.0 Capital Exp.(net) (9) (3) (11) (10) Net Interest Cover (x) (1.2) 13.6 12.5 14.3 Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.5 1.3 1.4 1.4 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 39.8 43.9 49.6 49.5 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 87.6 95.1 87.5 69.2 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 167.2 195.0 188.9 184.2 Net Investing CF (9) (3) (11) (10) Current Ratio (x) 1.5 1.9 2.1 2.4 Div Paid 0 (8) (25) (17) Quick Ratio (x) 0.6 0.9 0.9 1.1 Chg in Gross Debt 38 8 0 0 Net Debt/Equity (X) 0.2 0.1 0.1 0.1 Capital Issues 0 (3) (4) 0 Net Debt/Equity ex MI (X) 0.2 0.1 0.1 0.1 Other Financing CF 0 0 0 0 Capex to Debt (%) 7.2 2.1 8.5 7.8 Net Financing CF 38 (3) (29) (17) Z-Score (X) 2.5 2.5 3.0 0.0 Net Cashflow 39 19 1 11 N. Cash/(Debt)PS (S cts) (11.1) (8.5) (8.1) (5.6)

Opg CFPS (S cts) 3.4 11.4 18.2 19.4 Free CFPS (S cts) 0.2 5.3 7.2 6.6 Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Assumptions FY Dec 1Q2009 2Q2009 3Q2009 4Q2009 FY Dec 2008A 2009A 2010F 2011F

Turnover 126 160 149 170 Revenues (S$ m) Cost of Goods Sold (84) (105) (92) (101) Sofa 550 531 571 629 Gross Profit 42 55 57 70 Leather 39 14 0 0 Other Oper. (Exp)/Inc (25) (47) (44) (46) Cut n Sew 0 0 0 0 Operating Profit 17 8 13 24 Home Furnishing 57 60 102 122 Other Non Opg (Exp)/Inc 0 0 0 0 Others N/A N/A N/A N/A Associates & JV Inc 0 0 0 0 Total 646 605 672 751 Net Interest (Exp)/Inc (1) (2) (2) (1) EBIT (S$ m) Exceptional Gain/(Loss) 0 0 0 0 Sofa (14) 42 77 85 Pre-tax Profit 16 7 11 23 Leather 9 26 0 0 Tax (1) (2) (2) (3) Cut n Sew 0 0 0 0 Minority Interest 0 0 0 0 Home Furnishing (3) (1) 1 4 Net Profit 15 5 8 21 Others (1) (5) (5) (6) Net profit bef Except. 15 5 8 21 Total (9) 62 73 83 EBITDA 20 12 16 27 EBIT Margins (%) Sofa (2.6) 7.9 13.5 13.5 Sales Gth (%) (23.4) 26.8 (6.8) 14.4 Leather 24.5 181.6 N/A N/A EBITDA Gth (%) (315.0) (41.5) 35.2 72.6 Cut n Sew N/A N/A N/A N/A Opg Profit Gth (%) (233.3) (49.6) 47.6 92.4 Home Furnishing (5.7) (2.0) 1.0 3.0 Net Profit Gth (%) (193.9) (68.6) 73.6 155.4 Others N/A N/A N/A N/A Gross Margins (%) 33.2 34.5 38.2 41.0 Total (1.3) 10.2 10.8 11.0 Opg Profit Margins (%) 13.3 5.3 8.4 14.1 Key Assumptions Net Profit Margins (%) 11.8 2.9 5.4 12.1 Rev growth - Asia ex G.C. (0.1) 0.0 0.1 0.1 Rev growth - Greater China 0.1 (0.3) 0.1 0.1 Rev growth - Europe 0.0 0.0 0.1 0.1 Rev growth - US (0.3) (0.3) 0.3 0.2 Rev growth - ANZ 0.0 0.0 0.0 0.1 Source: Company, DBS Vickers


Gome Elec Appliances



BUY HK$2.69 HSI : 21,455 Price Target : 12-Month HK$ 3.66 Potential Catalyst: Full-year benefits from “exchange old for new program” of the government and potential M&As. Analyst Mavis Hui +852 2863 8879 [email protected]

Price Relative

0.90

1.40

1.90

2.40

2.90

3.40

3.90

4.40

4.90

2006 2007 2008 2009 2010

HK$

44

64

84

104

124

144

164

184

204

Relative Index

Gome Elec Appliances (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (RMB m) 2008A 2009A 2010F 2011F

Turnover 45,889 42,668 47,461 54,082 EBITDA 2,250 2,282 2,749 3,392 Pre-tax Profit 1,534 1,833 2,554 3,310 Net Profit 1,048 1,409 1,968 2,554 Net Pft (Pre Ex.) 1,687 1,496 1,968 2,554 EPS (RMB) 0.08 0.10 0.13 0.17 EPS (HK$) 0.09 0.12 0.15 0.20 EPS Gth (%) (7.3) 25.5 30.3 29.8 Diluted EPS (HK$) 0.09 0.09 0.12 0.16 DPS (HK$) 0.03 0.00 0.03 0.04 BV Per Share (HK$) 0.76 0.91 1.05 1.21 Fully Diluted PE (X) 31.3 30.9 22.1 17.0 P/Cash Flow (X) 22.4 18.4 15.2 12.0 EV/EBITDA (X) 11.7 10.2 7.6 5.0 Net Div Yield (%) 1.1 0.0 1.1 1.5 P/Book Value (X) 3.5 2.9 2.6 2.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.1 13.8 15.5 17.5 Earnings Rev (%): - - Consensus EPS (HK$): 0.13 0.17

ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: Among the leading home appliance retailers in China. Source of all data: Company, DBSV, Bloomberg, HKEX

Multiple growth drivers • Robust sales momentum for 1Q10 on a lower base.

• Government’s subsidy programs, strong property deliveries, a low penetration of home appliances and gradual macro recovery should all fuel growth.

• Trading at 0.7x PEG and 27% discount to our target price of HK$3.66, maintain BUY.

Sound recovery trend. Following gradual macro recovery from the trough in 2H08 and Gome’s successful streamlining of its retail network, the company rides on satisfactory sales momentum in 1Q10, recording double-digit same-store sales growth from a low base. It also stays well on track to sustain a healthy expansion and decent margin enhancement. Gome plans to add 80 stores this year, with special focus on network expansion in high-growth 2nd-tier cities.

Favourable growth drivers. China’s various subsidy programs to prompt sales of the home appliance sector, including the “go rural” policy and “exchange old for new” program should continue to support Gome’s performance. Sales of home appliances could continue to see further support as c.70% of properties sold in 2H09 are expected to deliver by 2H10. Rising disposable income and stronger demand for better quality of living should also propel overall consumer spending for home appliances.

Better times ahead. Management stays confident for a better performance in FY10F. More efforts on optimizing its network structure and suppliers’ relationship should help to lift overall profitability. Trading at 22.1x prospective PE, 0.7x PEG and 27% discount to our target price of HK$3.66, we maintain BUY.


Major Shareholders Mr. Wong Kwong Yu (%) 35.6 Bain Capital Investors, LLC (%) 10.8 JPMorgan Chase & Co. (%) 9.0 Morgan Stanley (%) 7.0




Company Background

Among the leaders in China. Gome is among the leading home appliance retailers in China. As of Dec09, it runs a total of 726 stores across 198 cities, including 76 flagship stores, 625 standard stores and 25 specialized stores. For FY09, its revenue breakdown include 14% from Shanghai, 11% from Beijing, 10% from Guangzhou and Shenzhen respectively, 6% from Tianjin and Chengdu respectively, 4% from Fuzhou, and the remaining from other cities.


Decent macro trend. During 2002-08, sales CAGR of household appliances for urban and rural areas reached 17% and 28%, respectively. Rising disposable income, strengthening Renminbi, stronger demand for better quality of living and recovering consumer sentiment in China should all lure consumers to spend, especially on the home appliance merchandise given it lower penetration rate in China versus more developed countries.

Supportive industry policies. Since 2007, China has introduced in a roll the “go rural” policy and “exchange old for new” program, aiming to boost consumption in the home appliance sector. Both programs have already channelled sales that contributed >10% of Gome’s FY09 revenue. These favourable programs should likely continue to fuel decent growth in the medium-term.

Further room for margin enhancement. Gome plans to enhance growth and profitability through expanding and refining its product offerings, upgrading shop environment of existing stores, strengthening overall operational efficiency and reinforcing suppliers’ relationship. Besides, Government subsidies derived from sales that channel through both “go rural” policy and “exchange old for new” program should also help to lift overall margins.

Risks and concerns. The home appliance retail sector of China remains fragmented and competitive. Potential execution risks could also be incurred upon Gome’s expansion into 2nd and 3rd-tier cities that it has yet to commence operations.

Sales Trend

0

10,000

20,000

30,000

40,000

50,000

2007A 2008A 2009A 2010F 2011F

RMB m

-7.7%

2.3%

12.3%

22.3%

32.3%

42.3%

52.3%

62.3%

72.3%


Asset Trend

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2007A 2008A 2009A 2010F 2011F

RMB m


Profitability Trend

1,048

1,548

2,048

2,548

3,048

2007A 2008A 2009A 2010F 2011F

RMB m


Margin Trends (%)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2007A 2008A 2009A 2010F 2011F




Outlook

Positive business prospects. Gome currently targets to lift overall profitability by improving individual store efficiency and implementation of new ERP system this year. Favourable government policies, including the extended “exchange old for new” program to cover more cities starting from May 10 should also help to drive its growth over the medium-term.

Looking ahead, Gome will focus more on network expansion, especially in high-growth 2nd-tier cities including Greater Shanghai, Shandong, Tianjin, Greater Sichuan and Guangdong. Its gross margin should also sustain an improving trend amid rising economies of scale and positive impact from refined suppliers’ contracts.

All in all, the company’s five-year blueprint include i) establishing regional dominance, ii) improving overall operating efficiency, iii) improving consumer & vendor relationships, iv) strengthening infrastructure, and v) developing new business including its e-commence platform. Management stays confident on the overall business outlook of Gome.


Gome’s operating cashflow for FY09 turned into a small negative number of RMB0.2m (FY08: RMB3.6bn inflow). Apart from its inventory stock-up towards the end of 2009 in the lead to strong sales momentum for 2M10, the company raised its pledged deposit ratio by usage of guaranteed letter of credit as a method of bill payables to deploy excess off-shore cash in Hong Kong. Should impact from the latter be excluded, operating cashflow would be a positive inflow of RMB62m for FY09. Given its improving business prospects, we expect operating cashflow to stay at a healthy level ahead

The counter is currently trading at merely 0.7x PEG and 22% discount to our target price of HK$3.66. We maintain BUY.


0.0

0.1

0.2

0.3

0.4

0.5

2007A 2008A 2009A 2010F 2011F

1.2

1.3

1.4

1.5

1.6

1.7


ROE (%)

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2006 2007 2008 2009

P/Book Value (x)

1.2

2.2

3.2

4.2

5.2

6.2

2006 2007 2008 2009





Turnover 45,889 42,668 47,461 54,082 Net Fixed Assets 3,720 3,392 3,645 3,629 Cost of Goods Sold (41,381) (38,408) (42,604) (48,453) Invts in Assocs & JVs 0 0 0 0 Gross Profit 4,508 4,260 4,857 5,629 Other LT Assets 5,293 9,099 8,893 8,893 Other Opg (Exp)/Inc (2,564) (2,332) (2,432) (2,577) Cash & ST Invts 7,892 14,827 19,524 23,423 Operating Profit 1,944 1,927 2,425 3,052 Inventory 5,473 6,532 7,246 8,241 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 0 0 0 0 Associates & JV Inc 0 0 0 0 Other Current Assets 5,117 1,913 202 196 Net Interest (Exp)/Inc 229 (8) 129 258 Total Assets 27,495 35,763 39,510 44,382 Exceptional Gain/(Loss) (639) (87) 0 0 Pre-tax Profit 1,534 1,833 2,554 3,310 ST Debt 170 2,530 2,530 2,530 Tax (435) (406) (566) (734) Other Current Liab 14,977 18,152 20,137 22,902 Minority Interest (51) (17) (19) (22) LT Debt 3,570 3,175 3,175 3,175 Preference Dividend 0 0 0 0 Other LT Liabilities 78 103 114 125 Net Profit 1,048 1,409 1,968 2,554 Shareholder’s Equity 8,560 11,802 13,554 15,649 Net profit before Except. 1,687 1,496 1,968 2,554 Minority Interests 140 0 0 0 Total Cap. & Liab. 27,495 35,763 39,510 44,382 EBITDA 2,250 2,282 2,749 3,392 Sales Gth (%) 8.0 (7.0) 11.2 14.0 Non-Cash Wkg. Cap (4,386) (9,706) (12,689) (14,465) EBITDA Gth (%) 8.8 1.4 20.5 23.4 Net Cash/(Debt) 4,152 9,122 13,819 17,717 Opg Profit Gth (%) 7.8 (0.8) 25.8 25.9 Effective Tax Rate (%) 28.4 22.2 22.2 22.2 Cash Flow Statement (RMB m) Rates & Ratios


Pre-Tax Profit 1,534 1,833 2,554 3,310 Gross Margin (%) 9.8 10.0 10.2 10.4 Dep. & Amort. 314 346 324 340 Opg Profit Margin (%) 4.2 4.5 5.1 5.6 Tax Paid (263) (244) (272) (309) Net Profit Margin (%) 2.3 3.3 4.1 4.7 (Pft)/ Loss on disposal of FAs 87 29 0 0 ROAE (%) 11.1 13.8 15.5 17.5 Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 3.7 4.5 5.2 6.1 Non-Cash Wkg.Cap. 154 1,811 2,910 1,684 ROCE (%) 10.5 10.0 10.2 11.6 Other Operating CF 1,784 (3,607) (1,006) (1,487) Div Payout Ratio (%) 32.9 0.0 20.0 20.0 Net Operating CF 3,610 167 4,510 3,537 Interest Cover (x) N/A 248.4 N/A N/A Capital Exp.(net) (1,165) (200) (355) (325) Asset Turnover (x) 1.6 1.3 1.3 1.3 Other Invts.(net) (661) 0 0 0 Debtors Turn (days) N/A N/A N/A N/A Invts in Assoc. & JV 0 0 0 0 Creditors Turn (days) 117.6 137.8 144.0 142.2 Div from Assoc & JV 0 0 0 0 Inventory Turn (days) 48.2 57.6 59.5 58.7 Other Investing CF (2,689) 0 0 0 Current Ratio (x) 1.2 1.1 1.2 1.3 Net Investing CF (4,515) (200) (355) (325) Quick Ratio (x) 0.5 0.7 0.9 0.9 Div Paid 0 0 (394) (511) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (130) 4,388 0 0 Capex to Debt (%) 31.1 3.5 6.2 5.7 Capital Issues 0 1,670 0 0 Z-Score (X) 2.8 2.8 3.3 3.5 Other Financing CF (2,185) (3,047) (26) (142) N.Cash/(Debt)PS (RMB) 0.4 0.7 1.1 1.4 Net Financing CF (2,315) 3,011 (419) (653) Opg CFPS (RMB) 0.31 (0.14) 0.12 0.14 Net Cashflow (3,219) 2,978 3,736 2,559

Free CFPS (RMB) 0.22 0.00 0.32 0.25 Interim Income Statement (RMB m) Segmental Breakdown (RMB m)


Turnover 24,874 21,016 20,463 22,204 Revenues Cost of Goods Sold (22,499) (18,882) (18,456) (19,952) Traditional Stores 45,316 42,134 42,560 48,299 Gross Profit 2,375 2,133 2,008 2,252 Mega Stores 135 96 7 9 Other Oper. (Exp)/Inc (1,030) (1,534) (1,235) (1,097) Digital Stores 438 437 4,894 5,773 Operating Profit 1,345 599 772 1,155 China Paradise 0 0 0 0 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 0 0 0 Total 45,889 42,668 47,461 54,082 Net Interest (Exp)/Inc 160 69 56 (63) Exceptional Gain/(Loss) (84) (554) (78) (9) Pre-tax Profit 1,420 113 750 1,082 Tax (233) (202) (165) (241) Minority Interest (37) (13) (5) (12) Net Profit 1,150 (102) 580 829 Net profit bef Except. 1,234 453 658 838 Sales Gth (%) N/A N/A (17.7) 5.7 Opg Profit Gth N/A N/A (42.6) 92.8 Net Profit Gth (%) N/A N/A (49.5) (916.0)

Gross Margins (%) 9.5 10.2 9.8 10.1 Opg Profit Margins (%) 5.4 2.9 3.8 5.2 Net Profit Margins (%) 4.6 (0.5) 2.8 3.7 Source: Company, DBS Vickers


Beijing Jingkelong



BUY HK$9.16 HSI : 21,455 Price Target : 12-Month HK$10.34 (Prev HK$8.84) Potential Catalyst: Accelerated expansion & potential M&As Analyst Mavis Hui +852 2863 8879 [email protected]

Price Relative

1.50

2.50

3.50

4.50

5.50

6.50

7.50

8.50

9.50

2006 2007 2008 2009

HK$

19

69

119

169

219

Relative Index

Beijing Jingkelong (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Dec (RMB m) 2008A 2009A 2010F 2011F

Turnover 6,684 6,691 7,715 8,874 EBITDA 474 453 529 600 Pre-tax Profit 280 254 316 367 Net Profit 157 148 190 224 Net Pft (Pre Ex.) 157 161 190 224 EPS (RMB) 0.38 0.36 0.43 0.42 EPS Gth (%) 19.3 (5.7) 20.0 (2.2) Diluted EPS (HK$)* 0.43 0.41 0.49 0.48 DPS (HK$) 0.24 0.20 0.20 0.24 BV Per Share (HK$) 3.66 3.83 3.43 3.66 PE (X) 21.2 22.5 18.7 19.2 P/Cash Flow (X) 11.8 11.5 10.2 10.7 EV/EBITDA (X) 9.1 10.1 9.0 9.2 Net Div Yield (%) 2.6 2.2 2.2 2.6 P/Book Value (X) 2.5 2.4 2.7 2.5 Net Debt/Equity (X) 0.5 0.7 0.6 0.6 ROAE (%) 12.2 10.9 12.7 13.5 Earnings Rev (%): - - Consensus EPS (HK$): 0.28 0.57

(* Assume successful A-share listing by 2011.)

ICB Industry: Consumer Services ICB Sector: Food & Drug Retailers Principal Business: One of the leading retailer and distributor of daily consumer products in the Greater Beijing Region, operating a chain of supermarkets, hypermarkets and convenience stores. Source of all data: Company, DBSV, Bloomberg, HKEX

Still a bargain • Beijing Jingkelong (BJKL) continues to ride on an

inflationary environment for decent growth ahead.

• We estimate its potential acquisition of Shoulian to boost sales by another c.10%.

• Target price upgraded to HK$10.34 to close valuation gap versus peers. At 18.7x prospective PE, maintain BUY.

Decent growth momentum. BJKL remains on track to achieve c.5% increase in same-store sales (SSS) for 2010. Rising inflation should boost SSS growth slightly further this year. The company also stays well in line to achieve c.20% sales increase for its wholesale division given sound recovery in 2010.

Potential acceleration in expansion. Apart from a sound organic expansion, BJKL continues to seek suitable acquisition opportunities to potentially boost growth further. This would include its possible acquisition of Shoulian retail chain by end-2010. The company will also seek shareholders' approval for its A-share listing proposal (i.e. to issue <120m A shares) on 4 May 10, and potentially submit its application to relevant authorities by Jun 2010. We currently expect BJKL to target at raising RMB800-RMB1bn from its proposed A-share listing to accelerate expansion in China.

Upgrade target to HK$10.34. We currently expect BJKL to post an 18% CAGR on recurring earnings for 2009-11. FY10F earnings might also surprise on the upside should rising inflation on food items pick up a faster pace ahead, amid further room for margin enhancement. Following a good run of the Chinese food retail sector, its major peers including Lianhua (980.HK) and Wumart (8277.HK) now trade at an average of 1.2x PEG. We upgrade our target price to HK$10.34 for BJKL, based on 21x FY11 fully-diluted PE* (previous: 18x PE) to close the valuation gap by normalizing its PEG versus peers. Trading at 18.7x prospective PE, maintain BUY.

At A Glance Issued Capital - H shares (m shs) 182 - Non H shrs (m shs) 230 H shs as a % of Total 44 Total Mkt. Cap (HK$m/US$m) 3,777 / 487 Major Shareholders

Chaoyang Auxillary (%) 40.6 Other domestic shareholders (%) 15.2

Major H Shareholders (%) JPMorgan Chase & Co. (%) 15.2 Value Partners Limited (%) 11.3 Genesis Asset Managers (%) 7.0

H Shares-Free Float (%) 66.6 Avg. Daily Vol.(‘000) 585


Beijing Jingkelong

Company Background

A strong regional play. BJKL, a state-owned enterprise, is one of the leading retailers and distributors of daily consumer products in the Greater Beijing Area. The company operates the second largest supermarket chain in Beijing and ranks 36th amongst top retail-chain operators in China. As of December 2009, BJKL operates a total of 246 outlets in Beijing, including two department stores, nine hypermarkets, 72 supermarkets and 163 convenience stores, the majority of which are located in Beijing’s central business district.

Solid track record. BJKL has delivered a healthy performance in the past few years. Revenue and core earnings recorded 13% and 27% CAGR respectively in 2003-09. Core margins also improved significantly, as seen in the 1.1ppt improvement in recurring net margin, from 1.3% in 2003 to 2.4% in 2009. On the back of a positive macro outlook and its solid expansion plans, BJKL should post a healthy growth ahead.


Ample room to expand. Retail sales in China grew 18% y-o-y in 1Q10. We believe swift income growth in both urban & rural areas should continue to support overall domestic consumption in China. Specifically, the on-going establishment of new residential districts in the Greater Beijing Area along with improving living standards should also translate into rising demand for modern retail chains, providing ample room for major food retailers to expand sales network in the region.

Sound organic growth. BJKL is on track to open 20 self-operated stores and 22 franchised stores in each of 2010 and 2011. As the company leverages on its well-equiped logistic facilities to accelerate retail expansion, we believe it will continue to stay among the best regional players to grow at the expense of smaller, traditional operators to strengthen its market share.

M&A potentials. BJKL currently stays on schedule to potentially acquire 100% stake of Shoulian retail chain by the end of 2010, with a minimal cash outlay. Management also remains open-minded to seek suitable M&A opportunities to boost expansion further.

Potential risks. Growing competition in the Chinese retail industry could lay pressure on BJKL’s operating costs. Its long-term leases (mostly >15 years) for directly-operated stores could help mitigate potential costs impact. Other concerns include execution risks for longer-term expansion outside of Greater Beijing Area.

Sales Trend

0

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25.1%


Asset Trend

1,000

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RMB m


Profitability Trend

124

174

224

274

324

374

424

2007A 2008A 2009A 2010F 2011F

RMB m


Margin Trends (%)

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4%

5%

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7%

8%

9%

10%

2007A 2008A 2009A 2010F 2011F



Beijing Jingkelong

Outlook

Unique business structure. BJKL is unique among its retail competitors in having both sizeable wholesale and retail operations. These two divisions complement each other by ensuring stable product supplies, extensive product selection, competitive pricing, and a lower stock-out likelihood, which are all crucial for a smooth on-going performance and better brand image. Additionally, as a state-owned enterprise, BJKL is well positioned to secure strategic locations in Beijing on potentially more favourable terms.

Exceptionally strong regional market. Beijing is among the major cities of China with highest growth in both retail sales and annual disposable incomes. Last year, retail sales in Beijing sustained sound y-o-y grow of 16%. Together with sizeable infrastructural projects including the Beijing-Shanghai High-speed Railway to further stimulate economic growth, consumption in Beijing is expected to remain robust. BJKL’s strong presence in Chaoyang District of Beijing, the most affluent district in the city, also places the company in a good position to benefit from the rosy consumer environment in Beijing. Financials and Valuation

Still a bargain versus peers. Chinese chain store food retailers have broadly been attracting better valuations in recent months, given their advantage to benefit from an inflationary environment in China. Recent droughts and abnormal weather in the region also exert potential pressure on further price hikes for food items. Following a good run of the sector, its major peers including Lianhua (980.HK) and Wumart (8277.HK) currently trades at an average of 1.2x PEG. We upgrade target price of BJKL to HK$10.34 on 21x FY11 fully-diluted PE to run in line with its close peers. Trading at 18.7x prospective PE, it is a BUY.


0.0

0.2

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1.0

2007A 2008A 2009A 2010F 2011F1.4

1.5

1.5

1.6

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1.7


ROE (%)

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

2007A 2008A 2009A 2010F 2011F

PE (x)

3.0

8.0

13.0

18.0

23.0

28.0

33.0

2006 2007 2008 2009

P/Book Value (x)

0.4

0.9

1.4

1.9

2.4

2.9

2006 2007 2008 2009


Beijing Jingkelong



Turnover 6,684 6,691 7,715 8,874 Net Fixed Assets 1,536 1,674 1,821 1,946 Cost of Goods Sold (5,760) (5,759) (6,633) (7,627) Invts in Assocs & JVs 0 0 0 0 Gross Profit 924 932 1,082 1,247 Other LT Assets 152 164 172 176 Other Opg (Exp)/Inc (576) (619) (711) (824) Cash & ST Invts 623 466 571 517 Operating Profit 348 312 371 423 Inventory 710 785 843 948 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 970 1,198 1,218 1,401 Associates & JV Inc 0 0 0 0 Other Current Assets 323 480 455 516 Net Interest (Exp)/Inc (68) (59) (54) (56) Total Assets 4,314 4,769 5,081 5,505 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 280 254 316 367 ST Debt 1,379 1,576 1,576 1,576 Tax (77) (65) (81) (94) Other Current Liab 1,370 1,627 1,708 2,003 Minority Interest (47) (41) (45) (49) LT Debt 56 6 6 6 Preference Dividend 0 0 0 0 Other LT Liabilities 22 23 25 26 Net Profit 157 148 190 224 Shareholder’s Equity 1,325 1,388 1,603 1,715 Minority Interests 164 148 163 180 Total Cap. & Liab. 4,314 4,769 5,081 5,505 EBITDA 474 453 529 600 Sales Gth (%) 18.5 0.1 15.3 15.0 Non-Cash Wkg. Cap 633 837 809 863 EBITDA Gth (%) 36.2 (4.4) 16.8 13.4 Net Cash/(Debt) (811) (1,116) (1,011) (1,065) Opg Profit Gth (%) 27.6 (10.4) 18.6 14.2 Effective Tax Rate (%) 27.3 25.7 25.7 25.7 Cash Flow Statement (RMB m) Rates & Ratios


Pre-Tax Profit 280 254 316 367 Gross Margin (%) 13.8 13.9 14.0 14.0 Dep. & Amort. 126 141 159 177 Opg Profit Margin (%) 5.2 4.7 4.8 4.8 Tax Paid (65) (55) (69) (80) Net Profit Margin (%) 2.3 2.2 2.5 2.5 (Pft)/ Loss on disposal of FAs 0 0 0 0 ROAE (%) 12.2 10.9 12.7 13.5 Assoc. & JV Inc/(loss) 0 0 0 0 ROA (%) 3.9 3.3 3.9 4.2 Non-Cash Wkg.Cap. (363) (176) 23 (60) ROCE (%) 9.4 7.6 8.5 9.2 Other Operating CF (6) (7) 0 0 Div Payout Ratio (%) 55.2 50.2 50.2 50.2 Net Operating CF (28) 155 430 404 Interest Cover (x) 5.1 5.3 6.8 7.6 Capital Exp.(net) (356) (280) (300) (300) Asset Turnover (x) 1.7 1.5 1.6 1.7 Other Invts.(net) (11) 0 0 0 Debtors Turn (days) 46.8 59.1 57.2 53.9 Invts in Assoc. & JV 0 0 0 0 Creditors Turn (days) 52.3 59.4 58.8 56.5 Div from Assoc & JV 0 0 0 0 Inventory Turn (days) 42.4 48.6 45.9 43.9 Other Investing CF 120 26 34 36 Current Ratio (x) 1.0 0.9 0.9 0.9 Net Investing CF (247) (254) (266) (264) Quick Ratio (x) 0.6 0.5 0.5 0.5 Div Paid (99) (104) (129) (149) Net Debt/Equity (X) 0.5 0.7 0.6 0.6 Chg in Gross Debt 387 73 70 (46) Capex to Debt (%) 24.8 17.7 19.0 19.0 Capital Issues 0 0 0 0 Z-Score (X) 2.5 2.5 2.5 2.6 Other Financing CF 29 0 0 0 N.Cash/(Debt)PS (RMB) (2.2) (3.1) (2.2) (2.3) Net Financing CF 316 (31) (59) (194) Opg CFPS (RMB) 0.93 0.91 1.04 0.99 Net Cashflow 41 (129) 105 (54)

Free CFPS (RMB) (1.06) (0.34) 0.33 0.22 Interim Income Statement (RMB m) Segmental Breakdown (RMB m)


Turnover 3,357 3,327 3,249 3,442 Revenues Cost of Goods Sold (2,889) (2,871) (2,797) (2,963) Retail - Hypermarket 1,004 1,000 1,123 1,480 Gross Profit 468 456 453 479 Retail - Supermarket 1,813 1,837 2,046 2,351 Other Oper. (Exp)/Inc (284) (269) (289) (291) Retail - Convenience 249 250 278 319 Operating Profit 184 187 164 188 Retail - Dept Store 18 23 213 266 Other Non Opg (Exp)/Inc 0 0 0 0 Others 3,600 3,581 4,055 4,457 Associates & JV Inc 0 0 0 0 Total 6,684 6,691 7,715 8,874 Net Interest (Exp)/Inc (44) (47) (44) (41) Exceptional Gain/(Loss) 0 0 0 (13) Pre-tax Profit 141 140 120 134 Tax (42) (34) (32) (33) Minority Interest (22) (25) (18) (23) Net Profit 76 80 70 77 Sales Gth (%) 30.5 8.4 (3.2) 3.4 Opg Profit Gth 53.9 14.8 (11.3) 0.5 Net Profit Gth (%) 34.4 18.6 (7.9) (3.7)



Pico Far East



BUY HK$1.58 HSI : 21,455 Price Target : 12-Month HK$2.00 (Previous: HK$1.97) Potential Catalyst: Economic recovery, growing demand for exhibition and brand building, mega events in Asia. Analyst Mavis Hui +852 2863 8879 [email protected]

Price Relative

0.30

0.80

1.30

1.80

2.30

2.80

2006 2007 2008 2009 2010

HK$

18

68

118

168

218

Relative Index

Pico Far East (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation

FY Oct (HK$ m) 2008A 2009A 2010F 2011F

Turnover 2,631 2,226 2,590 2,942 EBITDA 261 207 279 335 Pre-tax Profit 231 168 239 293 Net Profit 170 124 179 220 Net Pft (Pre Ex.) 170 124 179 220 EPS (HK$) 0.14 0.10 0.15 0.18 EPS (HK$) 0.14 0.10 0.15 0.18 EPS Gth (%) 16.4 (27.0) 44.4 23.1 Diluted EPS (HK$) 0.14 0.10 0.15 0.18 DPS (HK$) 0.07 0.04 0.07 0.09 BV Per Share (HK$) 0.73 0.80 0.88 0.97 PE (X) 11.1 15.3 10.6 8.6 P/Cash Flow (X) 9.8 11.5 8.6 7.1 EV/EBITDA (X) 5.5 6.7 4.7 3.6 Net Div Yield (%) 4.4 2.8 4.7 5.8 P/Book Value (X) 2.2 2.0 1.8 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.6 13.5 17.8 19.9 Earnings Rev (%): - - Consensus EPS (HK$): - -

ICB Industry: Consumer Services ICB Sector: Media Principal Business: A leading event marketing company in Asia engaging in exhibition, sign advertising and commercial interior solutions. Source of all data: Company, DBSV, Bloomberg, HKEX

Incredible growth in FY10F

• Pico continues to stay well poised for a substantial earnings rebound this year. We estimate its net profit to rise 44% in FY10F.

• The impending World Expo in Shanghai as well as sizeable volume of forthcoming events will boost growth and reinforce its leading position in Asia.

• Trading at merely 8x ex-cash FY10F PE, Pico sees an ample room for re-rating. Reiterate BUY.

Operations bottomed out. Pico continues to see a stabilizing operating environment in recent months. Coupled with its dominant market share in Asia, the company’s operations should be well positioned for a strong performance as the region’s economy continues to recover. Specifically, Pico’s core exhibition division has leveraged on economic booms to achieve stellar performance in the past. Its operations should resume a robust momentum as key markets prosper ahead. Abundant growth drivers. Numerous mega projects for the year, including the World Expo in Shanghai, new integrated-resort facilities in Singapore, the Asian Games in Guangzhou, etc. should all boost growth of Pico. Coupled with rising trade fair space across Asia, increasing demand for brand building, and further expansion into strong markets like China and newer markets like India and Vietnam, Pico should benefit from multiple growth drivers further on. We expect the company to post a strong earnings rebound to see net profit growing 44% in FY10F. Management also targets to double revenue in 5 years. Attractive valuation, BUY. Over the last 10 years, Pico’s share price had peaked at >20x 12-month rolling PE and c.4x rolling PB. Sitting on >HK$500m net cash and currently trading at 10.6x PE, 8x ex-cash PE, 4.7% yield and just 0.2x PEG based on FY10F numbers, we foresee ample room for further re-rating. BUY

At A Glance Issued Capital (m shrs) 1,197 Mkt. Cap (HK$m/US$m) 1,891 / 244

Major Shareholders Pine Asset Management (%) 38.7 DJE Investment S.A. (%) 9.4 Deutsche Bank (%) 5.6



Pico Far East

Company Background

Strong expertise. Founded in 1969, Pico is currently a leading global operator of exhibition-related business. The company has an international network of 33 offices and some 2,400 staff worldwide, with key markets in Greater China, Singapore and Malaysia.

One-stop shop. Over the years, Pico has branched out to event marketing, conference organisation, sign advertising and commercial interior solutions for museums and permanent exhibits. It has a diversified client base comprising leading global names such as Motorola, Disney, McDonalds and Shell.


Natural entry barrier. The global exhibition industry remains fragmented with a low entry barrier. Small operators have been competing aggressively on price at the low-end segment, particularly in China and some third-world countries. Pico differentiates itself well with its excellent track record, long-established brand name, extensive sales network, quality production and strong cash position. These form a natural competitive edge against its rivals. With a 60% market share in Asia in the top 20% exhibition businesses, Pico sustains a dominant position in Asia.

Multiple growth drivers. Riding on the recovering Asian economies, growing trade fair space, and increasing demand for brand awareness, Pico should see successive double-digit revenue growth in the coming 3-5 years. Further penetration into fast growing markets including China and India, and a gradual diversification into strong growth segments (e.g. sign advertising) also support revenue expansion. Together with a series of impending mega events and rising economies of scale, Pico is well poised to achieve better performance ahead, particularly in FY10F.

Risks. Pico’s operations are strongly linked to the economic well-being of its key markets. Yet, by expanding into relatively stable businesses (e.g. exhibition hall management), focusing more on cost-efficient operations, and maintaining a strong liquidity position, Pico has demonstrated better resilience during the latest global financial crisis.

Sales Trend

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Asset Trend

500

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Profitability Trend

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203

223

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283

2007A 2008A 2009A 2010F 2011F

HK$ m


Margin Trends (%)

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2007A 2008A 2009A 2010F 2011F



Pico Far East

Outlook

Improving macros. Pico is focusing on operations in the Greater China, Singapore and Malaysia, which together generate c.80% of its revenue. We believe the impending strong recovery in these countries should allow Pico to emerge stronger and strengthen its foothold in the industry.

Wider channels. Trade fair space in Asia grew at 15% CAGR in 2004-08 to a total area of 14.3m sm. We expect the trend to continue as more Asian MICE facilities are built, including the upcoming Marina Bay project in Singapore. This should provide additional opportunities for Pico to capture more exhibition business ahead.

Large amount of mega events for 2010. Leveraging on abundant experience with the Olympics and other mega events, as well as its wide international sales network with 17 in-house production facilities, Pico is in a good position to secure more projects. Specifically, 2010 will offer a particularly strong volume of major events versus the past years. These include the Singapore Air Show, Shanghai World Expo, South Africa World Cup, “ITMA”+”CITME” textile machinery shows in Shanghai, Singapore F1 Grand Prix, Delhi Commonwealth Games, and Guangzhou Asian Games. All these could help to boost Pico’s growth momentum in FY10F.


Healthy liquidity. Pico currently sits on >HK$500m net cash, equivalent to >HK$0.45 per share. Additionally, it is expected to generate c.HK$200m operating cashflow per year under a normal economic environment, adequately financing its annual capex requirement of c.HK$50m on average.

Attractive valuation. In view of an improving operating environment and a strong outlook for Pico, the stock could re-rate as the market gradually normalises. Trading at 10.6x FY10F PE, 8x ex-cash PE, and 21% discount to our target price of HK$2.00 (based on 12x 12-month rolling PE), we reiterate a Buy.


0.0

0.0

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ROE (%)

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2007A 2008A 2009A 2010F 2011F

PE (x)

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7.0

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22.0

2006 2007 2008 2009 2010

P/Book Value (x)

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

2006 2007 2008 2009 2010


Pico Far East


FY Oct 2008A 2009A 2010F 2011F FY Oct 2008A 2009A 2010F 2011F

Turnover 2,631 2,226 2,590 2,942 Net Fixed Assets 299 331 338 342 Cost of Goods Sold (1,778) (1,487) (1,731) (1,966) Invts in Assocs & JVs 142 145 159 175 Gross Profit 853 739 859 976 Other LT Assets 121 131 134 143 Other Opg (Exp)/Inc (641) (585) (616) (689) Cash & ST Invts 575 624 703 798 Operating Profit 211 153 244 287 Inventory 30 11 12 14 Other Non Opg (Exp)/Inc 1 12 (9) 1 Debtors 673 647 753 856 Associates & JV Inc 12 1 1 1 Other Current Assets 68 61 65 68 Net Interest (Exp)/Inc 6 2 3 4 Total Assets 1,907 1,951 2,165 2,397 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 231 168 239 293 ST Debt 41 56 47 40 Tax (44) (36) (51) (63) Other Current Liab 902 806 938 1,065 Minority Interest (17) (8) (9) (10) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 25 58 55 52 Net Profit 170 124 179 220 Shareholder’s Equity 871 962 1,052 1,162 Net profit before Except. 170 124 179 220 Minority Interests 68 69 74 79 Total Cap. & Liab. 1,907 1,951 2,165 2,397 EBITDA 261 207 279 335 Sales Gth (%) 22.4 (15.4) 16.4 13.6 Non-Cash Wkg. Cap (131) (87) (107) (126) EBITDA Gth (%) 20.3 (20.8) 35.2 20.0 Net Cash/(Debt) 534 569 656 758 Opg Profit Gth (%) 26.4 (27.5) 59.2 17.8 Effective Tax Rate (%) 19.1 21.5 21.5 21.6 Cash Flow Statement (HK$ m) Rates & Ratios

FY Oct 2008A 2009A 2010F 2011F FY Oct 2008A 2009A 2010F 2011F

Pre-Tax Profit 231 168 239 293 Gross Margin (%) 32.4 33.2 33.2 33.2 Dep. & Amort. 39 45 46 48 Opg Profit Margin (%) 8.0 6.9 9.4 9.8 Tax Paid (46) (30) (34) (39) Net Profit Margin (%) 6.4 5.6 6.9 7.5 (Pft)/ Loss on disposal of FAs (3) (13) 0 0 ROAE (%) 20.6 13.5 17.8 19.9 Assoc. & JV Inc/(loss) (12) (1) (1) (1) ROA (%) 9.6 6.4 8.7 9.7 Non-Cash Wkg.Cap. 60 (53) 19 18 ROCE (%) 17.9 11.2 16.1 17.6 Other Operating CF (2) (9) (5) (6) Div Payout Ratio (%) 49.4 43.5 50.0 50.0 Net Operating CF 267 108 263 314 Interest Cover (x) N/A N/A N/A N/A Capital Exp.(net) (74) (64) (50) (50) Asset Turnover (x) 1.5 1.2 1.3 1.3 Other Invts.(net) (7) 10 0 0 Debtors Turn (days) 86.7 108.2 98.7 99.8 Invts in Assoc. & JV (32) (2) 0 0 Creditors Turn (days) 119.4 155.5 138.4 139.7 Div from Assoc & JV 5 15 23 25 Inventory Turn (days) 5.7 5.1 2.5 2.5 Other Investing CF 28 (18) 5 6 Current Ratio (x) 1.4 1.6 1.6 1.6 Net Investing CF (81) (59) (22) (19) Quick Ratio (x) 1.3 1.5 1.5 1.5 Div Paid (100) (59) (95) (116) Net Debt/Equity (X) CASH CASH CASH CASH Chg in Gross Debt (9) 42 (15) (13) Capex to Debt (%) 182.8 115.0 105.8 124.4 Capital Issues 2 0 0 0 Z-Score (X) 2.4 2.4 2.9 3.3 Other Financing CF 10 28 (53) (71) N.Cash/(Debt)PS (HK$) 0.4 0.5 0.5 0.6 Net Financing CF (98) 11 (163) (199) Opg CFPS (HK$) 0.17 0.13 0.20 0.25 Net Cashflow 88 60 79 96

Free CFPS (HK$) 0.16 0.04 0.18 0.22 Interim Income Statement (HK$ m) Segmental Breakdown (HK$ m)

FY Oct 1H2008 2H2008 1H2009 2H2009 FY Oct 2008A 2009A 2010F 2011F

Turnover 1,202 1,429 1,050 1,176 Revenues Cost of Goods Sold (816) (962) (695) (792) Exhibitions & event 2,195 1,828 2,082 2,305 Gross Profit 386 467 354 384 Museums, theme 197 145 185 226 Other Oper. (Exp)/Inc (283) (350) (268) (312) Sign advertising 188 201 261 340 Operating Profit 103 117 86 72 Conferences and 51 51 62 71 Other Non Opg (Exp)/Inc 0 0 0 0 Others 0 0 0 0 Associates & JV Inc 10 3 0 13 Total 2,631 2,226 2,590 2,942 Net Interest (Exp)/Inc (1) (1) (1) (2) Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 112 119 84 84 Tax (20) (24) (15) (21) Minority Interest (11) (6) (9) 1 Net Profit 81 88 60 63 Net profit bef Except. 81 88 60 63 Sales Gth (%) 10.5 34.7 (12.7) (17.7) Opg Profit Gth 4.9 51.7 (16.2) (38.8) Net Profit Gth (%) 1.1 35.6 (25.6) (28.3)



Wilmar International

www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: JC

Bloomberg: WIL SP | Reuters: WLIL.SI

BUYS$6.90 STI : 2,980.69 Price Target : 12 months S$ 8.30 Potential Catalyst: Stronger earnings growth from 2QFY10 Analyst Ben SANTOSO +65 6398 7976 [email protected]

Price Relative

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9 5

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3 4 5

R e l a t i v e I n d e x

W i lm a r I n t e r n a t io n a l ( L H S ) R e l a t i v e S T I IN D E X ( R H S ) Forecasts and Valuation FY Dec (US$ m) 2009A 2010F 2011F 2012F

Turnover 23,885 29,892 34,365 39,715 EBITDA 2,423 2,774 3,162 3,599 Pre-tax Profit 2,294 2,497 2,709 2,994 Net Profit 1,882 1,994 2,132 2,312 Net Pft (Pre Ex.) 1,715 1,994 2,132 2,312 Net Pft (ex. BA gains) N/A N/A N/A N/A EPS (S cts) 40.3 42.7 45.6 49.5 EPS Pre Ex. (S cts) 36.7 42.7 45.6 49.5 EPS Gth Pre Ex (%) 12 16 7 8 Diluted EPS (S cts) 40.3 42.7 45.6 49.5 Net DPS (S cts) 7.9 8.5 9.1 9.9 BV Per Share (S cts) 233.9 268.4 305.3 345.3 PE (X) 17.1 16.1 15.1 13.9 PE Pre Ex. (X) 18.7 16.1 15.1 13.9 P/Cash Flow (X) 15.4 14.3 13.2 12.1 EV/EBITDA (X) 15.2 12.8 11.1 9.7 Net Div Yield (%) 1.1 1.2 1.3 1.4 P/Book Value (X) 2.9 2.6 2.3 2.0 Net Debt/Equity (X) 0.4 0.2 0.2 0.1 ROAE (%) 18.3 17.0 15.9 15.2 Earnings Rev (%): - - - Consensus EPS (S cts): 38.1 42.7 49.1 ICB Industry : Consumer Goods ICB Sector: Food Producers Principal Business: Wilmar is an integrated agribusiness group with one of the largest oil palm plantation land bank in the world, significant share in China’s consumer edible oil market and large merchandising and processing capacities in Asia’s expanding economies. Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 6,392 Mkt. Cap (S$m/US$m) 43,921 / 32,127 Major Shareholders Wilmar Holdings Pte Ltd (%) 29.3 PPB Group Bhd (%) 18.4 Global Cocoa Holding (%) 5.6 Free Float (%) 46.7 Avg. Daily Vol.(‘000) 5,925

Top Agribusiness Pick

• Rice and flour mills now included - more upside to earnings

• RMB revaluation may expand Wilmar’s bottom line and boost competitiveness

• Still 20% more upside to DCF-based TP of S$8.30.

• BUY call reiterated on strong positioning in China

Factoring in rice and flour mills. We recently raised our forecasts to include stronger growth in the group’s rice and flour milling business through 2013F. We believe Wilmar is capable of expanding capacities by 4m MT p.a. (based on 5 plants of 400k MT capacity p.a., each for rice and flour). As at end June 07, its rice and flour milling capacity was 890k MT. The group has US$5b cash hoard and plans to spend roughly half of its US$1b capex in China this year. Combined with consumer distribution, we estimate this division to contribute additional pretax of US$350m by 2013F. Beneficiary of RMB revaluation. Chinese soybeans are priced c.40% higher than US soybeans in international markets (Brazilian and Argentine beans are also similarly priced). Even after taking into account 13% VAT and 3% import tariff, imported soybeans are still cheaper. Hence, if RMB is revalued, end product prices may not drop to protect crushers with domestic feedstock. This would benefit crushers employing imported beans (which would be even cheaper). China cannot ban soybean imports, as it produces only a third of its requirements and the gap is growing. BUY for 20% upside. Our TP is S$8.30 (based on DCF: WACC:9.1%, Rf:3.5%, ERP:7%, B:1.0, TG: 3%) with the imputation of having imputed additional contribution from rice & flour mills (including dilution in oilseeds and grains M&P pretax margins), and changes in ASP, fertilser and FX rates.



Company Background

An integrated agribusiness player. Founded in 1991, Wilmar International is a leading integrated agribusiness group in Asia, with operations capturing the entire value chain of the palm oil, oilseeds, grains, as well as fertiliser, shipping and biodiesel businesses. After the merger with Kuok Group and acquisition of its holding company’s related businesses, Wilmar now has a solid management, strong presence in key producing and consuming countries, enhanced global market intelligence; as well as having four of the top five consumer edible oil brands in China. Merchandising and processing forms the bulk of the group’s earnings. Wilmar’s merchandising and refinery segment is the biggest contributor the Group EBIT, which we expect to account for US$1,646.1m or 68% of group’s FY10F EBIT. Revenue from this segment is derived from sales of palm and laurics refined products, as well as soybean meal, crude soybean oil, rice, flour and other grains. Plantation land bank of 573,401 hectares. We estimate that Wilmar holds land rights to 573,401 hectares of combined oil palm plantation land bank in Indonesia and Malaysia – of which we estimate 255,800 hectares would have been planted by end of 2010 (excluding plasma scheme of 34,800 hectares). Industry Overview, Earnings Drivers & Risks

Higher domestic soybean prices in China. When we compare soybean prices in Dalian and Chicago exchange, we found that current Chinese soybean prices are already 40% higher than US prices. Even with 3% import tariff and 13% VAT, imported soybeans are still cheaper. Hence, a much stronger RMB would render Chinese farmers vulnerable to yet cheaper imports. High domestic soybean prices in China and declining prospective international palm oil and soybean prices (in USD; even more in RMB) should lower Wilmar imported feedstock costs, expand its margins and strengthen its competitiveness against domestic players. Within our universe, the prospects of RMB revaluation would hence tilt the balance towards processors such as Wilmar from upstream players.

Sales Trend

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2 0 0 8 A 2 0 0 9 A 2 0 1 0 F 2 0 1 1 F 2 0 1 2 F

U S $ m

-1 9 .9 %

0 .1 %

2 0 .1 %

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T o t a l R e v e n u e R e v e n u e G r o w t h (% ) (Y o Y )

Asset Trend

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U S $ m

N e t F ixe d A sse ts (T a n g ib le ) T o ta l C u rre n t A sse ts

Profitability Trend

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2 0 0 8 A 2 0 0 9 A 2 0 1 0 F 2 0 1 1 F 2 0 1 2 F

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O p e r a t in g E B IT P r e t a x P r o f it N e t P r o f it

Margin Trends (%)

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2008A 2009A 2010F 2011F 2012F

EBITD A M argin % EBIT M argin % Net Incom e M argin %




Outlook

Strategic growth plans. Wilmar had secured licenses to expand its capacities in the oilseeds crushing divisions, prior to restrictions imposed on foreign ownerships in this space since December 2007. Hence, having completed such expansions last year, we expect the group’s oilseeds and grains M&P volume to grow by 6.2% in CY11F and 4.5% in CY12F (excluding rice and flour milling). The M&P unit should provide Wilmar with a stable earnings stream (contributing 66-68% of EBIT), while the Group’s plantation unit is expected to maintain its EBIT contribution at 19-20% over the next three years. Wilmar’s consumer products, while only contributing to 11% of EBIT this year, could expand to 13% by 2013F with additional contribution from packaged rice and flour. Expanding cooking oil in India. Given India’s huge market and palm oil’s price discount to soybean oil, we expect Wilmar to expand its market share in India. With close to 20% market share, the highest in the consumer-pack cooking oil (Fortune brand), we expect Wilmar to replicate its Chinese business model of integrated complexes in India with its JV partner, Adani Group. Financials and Valuation

Expect lower 1QFY10 earnings Our estimates based on daily spot prices showed that soybean crushing margins in the quarter ending 31 March 2010 have come down q-o-q to US$39.0/MT from US$52.4/MT and palm oil refining margin to US$19.3/MT from US$20.8/MT. Hence, given seasonally lower palm oil production and steady soybean volumes q-o-q, we expect Wilmar’s M&P pretax profit to come down q-o-q. The group’s plantation division should also book c.20% lower volumes q-o-q, partially offset by 13.3% increase in spot palm oil prices. While still growing we do not expect the group’s rice and flour volumes to bear any significant impact in 1QFY10, although we do anticipate consumer volumes to increase q-o-q (in line with Chinese New Year). Our top pick. Wilmar’s leading position is China is our key investment thesis. Second, the group’s large economies of scale and global market intelligence provide a support for low cost origination and processing. Third, continued expansion in Asia (particularly India, Indonesia and Africa) would provide further growth beyond China and current business segments. Finally, a strong management team makes Wilmar’s business model impossible to replicate.


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PE (x)

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Income Statement (US$ m) Balance Sheet (US$ m) FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Turnover 23,885 29,892 34,365 39,715 Net Fixed Assets 3,919 4,472 5,085 5,736 Cost of Goods Sold (20,882) (26,307) (30,230) (34,945) Invts in Associates & JVs 1,082 1,142 1,204 1,271 Gross Profit 3,003 3,585 4,135 4,770 Other LT Assets 5,577 5,622 5,763 5,923 Other Opng (Exp)/Inc (878) (1,182) (1,390) (1,642) Cash & ST Invts 5,440 5,202 5,223 5,269 Operating Profit 2,125 2,404 2,745 3,128 Inventory 3,940 4,036 4,638 5,362 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 3,174 3,286 3,777 4,366 Associates & JV Inc 46 60 62 66 Other Current Assets 317 317 317 317 Net Interest (Exp)/Inc (43) 33 (98) (200) Total Assets 23,449 24,078 26,009 28,243 Exceptional Gain/(Loss) 167 0 0 0 Pre-tax Profit 2,294 2,497 2,709 2,994 ST Debt 8,374 6,699 6,364 6,046 Tax (324) (385) (417) (461) Other Current Liab 1,995 2,542 2,900 3,333 Minority Interest (88) (118) (160) (222) LT Debt 1,206 1,206 1,206 1,206 Preference Dividend 0 0 0 0 Other LT Liabilities 463 486 510 536 Net Profit 1,882 1,994 2,132 2,312 Shareholder’s Equity 10,931 12,546 14,269 16,141 Net Profit before Except. 1,715 1,994 2,132 2,312 Minority Interests 481 599 759 981 Net Pft (ex. BA gains) N/A N/A N/A N/A Total Cap. & Liab. 23,449 24,078 26,009 28,243 EBITDA 2,423 2,774 3,162 3,599 Sales Gth (%) (18.0) 25.1 15.0 15.6 Non-Cash Wkg. Capital 5,436 5,098 5,833 6,712 EBITDA Gth (%) 7.6 14.5 14.0 13.8 Net Cash/(Debt) (4,140) (2,703) (2,347) (1,983) Opg Profit Gth (%) 10.0 13.1 14.2 13.9 Net Profit Gth (%) 22.9 5.9 6.9 8.4 Effective Tax Rate (%) 14.1 15.4 15.4 15.4 Cash Flow Statement (US$ m) Rates & Ratio FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F

Pre-Tax Profit 2,294 2,497 2,709 2,994 Gross Margins (%) 12.6 12.0 12.0 12.0 Dep. & Amort. 252 310 355 405 Opg Profit Margin (%) 8.9 8.0 8.0 7.9 Tax Paid (324) (385) (417) (461) Net Profit Margin (%) 7.9 6.7 6.2 5.8 Assoc. & JV Inc/(loss) (46) (60) (62) (66) ROAE (%) 18.3 17.0 15.9 15.2 Chg in Wkg.Cap. (2,584) 275 (749) (898) ROA (%) 9.1 8.4 8.5 8.5 Other Operating CF (58) 281 10 14 ROCE (%) 9.8 9.5 10.4 11.0 Net Operating CF (465) 2,919 1,845 1,988 Div Payout Ratio (%) 19.5 20.0 20.0 20.0 Capital Exp.(net) (1,073) (983) (1,095) (1,201) Net Interest Cover (x) 48.9 NM 27.9 15.6 Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.2 1.3 1.4 1.5 Invts in Assoc. & JV 122 0 0 0 Debtors Turn (avg days) 40.1 39.4 37.5 37.4 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 32.4 29.0 30.3 30.2 Other Investing CF (359) (24) (25) (26) Inventory Turn (avg days) 56.7 56.0 53.0 52.8 Net Investing CF (1,310) (1,007) (1,120) (1,227) Current Ratio (x) 1.2 1.4 1.5 1.6 Div Paid (328) (379) (409) (439) Quick Ratio (x) 0.8 0.9 1.0 1.0 Chg in Gross Debt 4,296 (1,675) (335) (318) Net Debt/Equity (X) 0.4 0.2 0.2 0.1 Capital Issues 12 0 0 0 Net Debt/Equity ex MI (X) 0.4 0.2 0.2 0.1 Other Financing CF 37 (112) 24 26 Capex to Debt (%) 11.2 12.4 14.5 16.6 Net Financing CF 4,017 (2,165) (719) (732) Z-Score (X) 3.9 3.4 3.7 3.8 Net Cashflow 2,242 (253) 5 29 N. Cash/(Debt)PS (US cts.) (64.8) (42.3) (36.7) (31.0)

Opg CFPS (US cts.) 33.2 41.4 40.6 45.2 Free CFPS (US cts.) (24.1) 30.3 11.7 12.3 Quarterly / Interim Income Statement (US$ m) Segmental Breakdown / Assumptions FY Dec 1Q2009 2Q2009 3Q2009 4Q2009 FY Dec 2009A 2010F 2011F 2012F

Turnover 4,958 5,712 6,299 6,916 Revenues (US$ m) Cost of Goods Sold (4,141) (5,008) (5,576) (6,156) M&P 20,783 26,048 29,411 33,562 Gross Profit 817 704 723 759 Plantations 1,119 1,404 1,532 1,710 Other Oper. (Exp)/Inc N/A N/A N/A N/A Consumer products 3,898 4,559 5,732 7,018 Operating Profit 562 539 688 502 Others 1,434 1,059 1,124 1,194 Other Non Opg (Exp)/Inc N/A N/A N/A N/A Elimination (3,349) (3,178) (3,434) (3,769) Associates & JV Inc 13 2 17 14 Total 23,885 29,892 34,365 39,715 Net Interest (Exp)/Inc (56) (17) 29 1 EBIT (US$ m) Exceptional Gain/(Loss) N/A N/A N/A N/A M&P 1,399 1,646 1,852 2,066 Pre-tax Profit 519 524 735 517 Plantations 395 465 522 611 Tax (110) (85) (76) (53) Consumer products 227 254 332 411 Minority Interest (29) (31) (6) (22) Others 71 74 78 82 Net Profit 380 407 653 442 Unallocated costs (32) (36) (39) (42) Net profit bef Except. 380 407 653 442 Total 2,058 2,404 2,745 3,128 EBITDA 635 602 769 585 EBIT Margins (%) M&P 6.7 6.3 6.3 6.2 Sales Gth (%) (14.9) 15.2 10.3 9.8 Plantations 35.3 33.1 34.1 35.7 EBITDA Gth (%) 39.6 (5.2) 27.8 (23.9) Consumer products 5.8 5.6 5.8 5.9 Opg Profit Gth (%) 55.6 (4.2) 27.8 (27.0) Others 4.9 7.0 6.9 6.9 Net Profit Gth (%) 1.7 7.2 60.4 (32.3) Gross Margins (%) 16.5 12.3 11.5 11.0 Total 8.6 8.0 8.0 7.9 Opg Profit Margins (%) 11.3 9.4 10.9 7.3 Key Assumptions Net Profit Margins (%) 7.7 7.1 10.4 6.4 CPO price (RM/MT) 2,261.3 2,460.0 2,470.0 2,530.0 Oilseeds & grains pretax 38.9 35.6 36.3 37.2 Palm & lauric pretax 36.3 38.6 38.9 39.8 Consumer products vol. 3,191.0 3,615.3 4,720.4 5,860.0 Oil palm planted area (Ha) 235,799 255,799 275,799 295,799 Source: Company, DBS Vickers


Research Team Directory Analyst Sector E-mail Regional Timothy Wong Head, Group Research [email protected] Joanne Goh Regional Equity Strategist [email protected] Paul Yong, CFA Singapore & China Industrial & Transport [email protected] Ben Santoso Regional Plantation [email protected] Sachin Mittal Regional Telecom [email protected] Lim Sue Lin Singapore, Malaysia and Indonesia Banking [email protected] June Ng China and Malaysia Power [email protected] Hong Kong / China Derek Cheung Head of Research, Strategy [email protected] Alice Hui CFA Deputy HOR, Consumer [email protected] Gideon Lo CFA Deputy HOR, Oil & Petrochemicals, [email protected] Pharmaceuticals, Shipping Carol Wu China Property [email protected] Danielle Wang China Property [email protected] Dennis Lam Electronics & Technology [email protected] Jasmine Lai Banking & Finance [email protected] Jeff Yau CFA Hong Kong Property [email protected] Mavis Hui Media & General Retail [email protected] Patricia Yeung Industrials [email protected] Paul Yong Consumer Services, Transportation – Toll Roads [email protected] Rachel Miu Infrastructure, Machinery, Agriculture [email protected] Steven Liu CFA Software & Telecom [email protected] Titus Wu Consumer Services [email protected] Indonesia Research Team Strategy, Conglomerate/Automotive, Cement [email protected] Ariyanto Kurniawan Basic Materials, Oil, Gas & Energy [email protected] Research Team Consumer, Construction Malaysia Wong Ming Tek Head of Research, Strategy [email protected] Goh Yin Foo, CFA Retail/ Technical Product [email protected] June Ng Power, Oil & Gas, Conglomerates, REITs [email protected] Lim Sue Lin Financial Services [email protected] Yee Mei Hui Gaming, Property [email protected] Juliana Ramli Aviation, Transport, Plantation [email protected] Chong Tjen-San, CFA Construction, Infrastructure [email protected] Kok Chiew Sia Consumer [email protected] Lee Wee Keat Oil & Gas, IPO [email protected] Research Team Small-Mid Caps [email protected] Telecommunications, Motor, Steel, Manufacturing Other Financial Services, Building materials Singapore Janice Chua Head of Research, Strategy, Industrials [email protected] Ho Pei Hwa Industrials [email protected] Lock Mun Yee Property, Reits [email protected] Adrian Chua Property [email protected] Derek Tan Reits [email protected] Jeremy Thia Industrials, Property [email protected] Andy Sim, CFA Consumer [email protected] Patrick Xu Consumer [email protected] Tan Ai Teng Electronics [email protected] Suvro Sarkar Electronics, Industrials [email protected] Thailand Chanpen Sirithanarattanakul Head of Research [email protected] Strategy, Property, REITs, Transportation Chirasit Vuttigrai Strategy, Telecom, Media [email protected] Sugittra Kongkhajornkidsuk Banks, Securities [email protected] Nalyne Viriyasathien Construction Materials, Food and Beverage, [email protected] Healthcare, Hotel Research Team Automotive, Commerce, Electronics Research Team Building Materials, Energy, Utilities, Petrochemicals, Chemicals Korea Lee Eun Young Basic Materials, Utilities [email protected] Jung Sung Hoon Consumer [email protected] Jay (Jaehak) Kim Automotive [email protected]

“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”


DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. The assumptions for commodities in this report are for the purpose of forecasting earnings of the companies mentioned herein. They are not to be construed as recommendations to trade in the physical commodities or in futures contracts relating to the commodities mentioned in this report. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 28 Apr 2010 analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 26 Apr 2010

2. DBS Bank Ltd has been appointed as the designated market maker of structured warrant(s) for Genting, Indofood Agri, Wilmar issued by DBS Bank Ltd.

3. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of mentioned company as of 28 Apr 2010


4. Compensation for investment banking services:

(1) DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the Genting, Olam, Petra Food DBSVHK, DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from Beijing Jingkelong (814 HK) mentioned in this document.

(2) DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or

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Company Regn. No. 198600295W


Asian Equities Sales, Sales Trading and Research Contacts

Sales Heads Tel: Email: Regional Lim Kok Ann 65-6398 6900 [email protected] Singapore Chai Szue Yin 65-6398 7319 [email protected] Hong Kong Andrew Au 852-2820 4992 [email protected] London Graham Booth 44-20-7618 1881 [email protected] New York Elaine Yu 1-212-826 3553 [email protected] Indonesia Thailand Tasamol Witayanukusl 662-657 7000 [email protected] Sales Trading Contacts Tel: Email: Singapore Loh Chong Jin 65-6398 7304 [email protected] Hong Kong Franco Law 852-2971 1828 [email protected] London Charles Davies 44 20 7618 1883 [email protected] New York Brenda Wong 1 212 826 3558 [email protected] Research Contacts Tel: Email: Regional Timothy Wong 65-6398 7952 [email protected] Singapore Janice Chua 65-6398 7954 [email protected] Hong Kong Derek Cheung 852-2971 1703 [email protected] Malaysia Wong Ming Tek 603-2711 0956 [email protected] Thailand Chanpen Sirithanarattanakul 662-657 7824 [email protected]

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Dbsv - Asian Consumer Digest

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