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Equity research│October 27, 2016

Asia Pacific Daily - 27 October 2016

Equity Research Reports…

▌IDEA OF THE DAY | China Strategy Note - Investor feedback from North America and Europe | P2 The majority of global investors were still cautious on China but sentiment had marginally improved compared to early this year. Leverage, efficiency of capital allocation and demographics were investors’ greatest structural concerns. Investors believed southbound flow would not help H-shares’ fundamentals. IT was a consensus OW while our industrials upgrade call was contrarian. ——————————————————————————————————————————————————————————————————————————————————————— ▌Australia SEEK (ADD, tp:A$16.23▼) - Currency and education adjustment | P3 Telco - Fixed Line (NEUTRAL) - Should I stay or should I go? | P4 ——————————————————————————————————————————————————————————————————————————————————————— ▌China/Hong Kong Bank of China (ADD, tp:HK$4.00) - BOCHK-related asset disposals may continue | P5 Galaxy Entertainment (ADD, tp:HK$41.78▲) - Mass strength | P6 ——————————————————————————————————————————————————————————————————————————————————————— ▌India Axis Bank (HOLD, tp:Rs550.00▼) - Asset quality shocker | P7 Hero Motocorp (ADD, tp:Rs4,009.00▲) - EBIDTA margin continues to scale high | P8 ——————————————————————————————————————————————————————————————————————————————————————— ▌Indonesia Bank Central Asia (ADD, tp:Rp17,100.00▲) - 3Q16 results: robust profit despite hefty… | P9 Telekomunikasi Indonesia (ADD, tp:Rp4,800.00) - 3Q16: Living up to expectations | P10 Unilever Indonesia (HOLD, tp:Rp48,500.00▲) - 3Q16 results: Personal care heats up | P11 Telco - Overall (OVERWEIGHT) - A steep regulatory hill to climb | P12 ——————————————————————————————————————————————————————————————————————————————————————— ▌South Korea GS Engineering & Construction (HOLD, tp:W31,000.00▲) - Overseas losses once again | P13 Hugel Inc (ADD, tp:W703,000.00) - Export outperformance led to margin expansion | P14 Hyundai Heavy Industries (ADD, tp:W200,000.00) - 9.3% VLCC/LPG margin tells the story | P15 LG Display (HOLD, tp:W30,000.00) - Earnings momentum likely to soften | P16 OCI (HOLD, tp:W100,000.00▼) - Soft solar fundamentals led to weak 3Q16 earnings | P17 ——————————————————————————————————————————————————————————————————————————————————————— ▌Malaysia Bermaz Auto Berhad (ADD, tp:RM2.60▼) - Unlocking its Philippines asset value | P18 IGB REIT (HOLD, tp:RM1.62) - The steadfast duo | P19 Kuala Lumpur Kepong (HOLD, tp:RM24.90) - Unsolicited cash offer to takeover M.P. Evans | P20 Nestle (Malaysia) (HOLD, tp:RM77.80) - Overseas appetite still strong | P21 ——————————————————————————————————————————————————————————————————————————————————————— ▌Singapore Cambridge Industrial Trust (HOLD, tp:S$0.59) - 3Q16 results: More margin pressure | P22 Innovalues Ltd (HOLD▼, tp:S$1.03) - Take the full cash offer | P23 Mapletree Commercial Trust (ADD, tp:S$1.62) - Still going strong | P24 Sheng Siong Group (ADD, tp:S$1.14▲) - Gross margins remain high | P25 ——————————————————————————————————————————————————————————————————————————————————————— ▌Sri Lanka Chevron Lubricants Lanka PLC - Quarterly Earnings Review for 3Q CY16 | P26 ——————————————————————————————————————————————————————————————————————————————————————— ▌Taiwan UMC (REDUCE▼, tp:NT$10.20▼) - Downgrade to Reduce on unfavourable margin trend | P27 ——————————————————————————————————————————————————————————————————————————————————————— ▌Thailand Central Pattana (ADD, tp:THB68.00) - 3Q16 preview: All good things likely to continue | P28 Siam Cement (ADD, tp:THB628.00) - One stronger, one weaker | P29

Showcasing CIMB Research Ideas

KRW: Travel & Leisure - Overall 25/10 China plans to reduce low-priced package tours

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TWN: Technology Components 24/10 What has gone wrong with the TFT LCD industry? >PDF

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MAL: Economic Update 23/10 Budget 2017: A tight balancing act >PDF

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MAL: Strategy Note 21/10 2017 Budget – more winners than losers but... >PDF

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HKG: Q Technology (Group) Company Ltd 20/10 Dual engines to drive growth >PDF

Regional Equity Research Contacts

Michael GREENALL, CFP Regional Head of Research T: (60) 3 2261 9088 E: [email protected]

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CIMB Conference / Events |

CIMB 9th Annual Malaysia Corporate Day 05 January 2017 – Malaysia – Kuala Lumpur

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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China│Equity research│October 26, 2016

Strategy Note



China Strategy Investor feedback from North America and Europe

■ The majority of global investors were still cautious on China but sentiment had marginally improved compared to early this year.

■ Leverage, efficiency of capital allocation and demographics were investors’ greatest structural concerns.

■ Investors believed southbound flow would not help H-shares’ fundamentals.

■ IT was a consensus OW while our industrials upgrade call was contrarian.

Still cautious on China overall but sentiment marginally improved We met over 50 China equity market investors in North America and Europe in the past two weeks, mostly global EM investors and a few hedge funds. Most still held a relatively cautious view on China due to growth deceleration and structural overhangs but we felt more investors had turned marginally less negative compared to during our previous trip early this year, thanks to 1) stabilising growth recently, 2) reduced concerns about currency, and 3) relatively attractive valuations vs. many other EM countries.

High corporate leverage remained the no.1 concern Almost all the global investors were concerned about the high and still increasing leverage in China, corporate leverage in particular. Although many investors agreed with our view that the government could still kick the can down the road in the coming years and try to shift some corporate leverage to households, where balance sheets were still very healthy, investors still believed this was the no.1 overhang and that this would cap the valuation of Chinese equities until we gained clarity on potential solutions.

More questions about capital allocation and demographics During the trip, we fielded more questions about China’s efficiency of capital allocation amidst strong government intervention in over-capacity industries. Global investors mostly believed such intervention would lead to deterioration in capital allocation efficiency despite its short-term benefit for growth. Many investors were also curious about the effectiveness of the ‘two children’ policy given the rising dependency ratio.

Southbound inflow will not change fundamentals Investors were quite interested in our analysis of southbound flow, including the rationale (chasing yield and hedge Rmb risks, etc.) and major investor types (insurance etc.). Certain investors said they increased their China exposure in recent months due to the inflow. That said, most global investors believed the liquidity inflow would not change the long-term fundamentals of H-shares, hence they maintained their research and valuation mechanisms.

IT a consensus OW; interest in our industrials upgrade Sector-wise, our OW call on IT saw consensus with little push-back. Investors were skeptical about our industrials upgrade and saw our positive view on construction names as contrarian. We still hold a constructive view on it given 1) its very attractive valuation after a meaningful underperformance YTD and significant A/H premium, 2) it is a good growth hedge amid tightening property policies, and 3) strong PPP project pipeline, underpinning growth despite a lag between contract signing and revenue recognition.

[ X ]

Figure 1: Southbound flow shrinking amid diminishing A/H gap

SOURCES: CIMB RESEARCH, WIND, BLOOMBERG

▎China

Analyst(s)

Ben BEI

T (852) 2532 1116

E [email protected]

Edith QIAN T (852) 2532 1112 E [email protected]

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Southbound - Accumulated fund inflow (Rmb bn)

RHS: Hang Seng AH Premium Index

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Media - Integrated│Australia│Equity research│October 26, 2016

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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SEEK

Currency and education adjustment

We have downgraded our earnings forecasts for SEEK to adjust for unfavourable ■forex moves and lower education sales assumptions since our last forecast.

The downgrades reduce our underlying EPS forecasts by 5.93% in FY17, 2.07% ■in FY18 and 2.02% in FY19.

As a result of the changes, our valuation falls to A$16.28/share (was A$17.39) and ■our price target falls to A$16.23 (from A$17.05).

We retain a positive investment view on SEEK. The company maintains strong ■underlying earnings momentum in most key businesses.

Our Add recommendation is maintained. ■

Currency and education assumptions lowered We have downgraded current and long-term assumptions for forex rates (assuming a higher A$ for longer). We have also reduced volume and price assumptions for SEEK Learning, based on current chaos in the Vocational Education and Training (VET) sector. On the positive side, we have upgraded Zhaopin volume growth assumptions after a strong September quarter. The combined scenario changes reduce our long-run maintainable EPS assumptions by 2-2.5% pa. The changes leave our FY17 statutory earnings forecast of A$192m within management’s guidance range of A$190m-A$195m.

VET assumptions The government’s VET reform program is focusing heavily on over-charging and low completion rates. In our view this will lead to downward pricing pressure and tighter entrance requirements. We have scaled back our forecasts for SEEK Learning’s unit sales volumes and average course value from FY17 onward, leading to a drop in earnings forecasts. However, once appropriate steps are taken, we see no reason why this business should not return to profitability in FY18.

Risks and catalysts Potential near-term risks include: 1) unexpected softening of employment markets in Australia, South East Asia and China; 2) failure of the Premium Talent Search product to gain market penetration as expected; and 3) further adverse outcomes from the re-regulation of vocational education. Potential near-term re-rating catalysts include: 1) stronger-than-expected employment markets in Australia, South East Asia and China; 2) better-than-expected adoption rates for Premium Talent Search; and 3) better outcomes from the current education policy review process.

Investment view SEEK is a world leader in providing online employment and education services, and the company provides investors with leveraged exposure to labour demand. In our view the company’s new suite of value-added products has the potential to deliver strong revenue and earnings growth. While the markets in which SEEK operates are very competitive, the risks posed to the company appear manageable. As the stock trades well below our valuation and peer group multiples, we maintain an Add recommendation.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia

ADD (no change) Current price: A$15.33

Target price: A$16.23

Previous target: A$17.05

Up/downside: 5.8%

Reuters: SEK.AX

Bloomberg: SEK AU

Market cap: US$4,068m

A$5,332m

Average daily turnover: US$11.51m

A$15.14m

Current shares o/s 344.4m

Free float: 74.3%

Key changes in this note

FY17F EPS decreased by 5.93%.



Price performance 1M 3M 12M

Absolute (%) -2.4 -7 18.6

Relative (%) -2.6 -5.4 16.9

Ivor RIES

T (61) 3 9947 4182

E [email protected]

Simon DUMARESQ

T (61) 3 9947 4124

E [email protected]

Financial Summary Jun-15A Jun-16A Jun-17F Jun-18F Jun-19F

Revenue (A$m) 857 950 1,061 1,198 1,323

Operating EBITDA (A$m) 349.3 366.7 391.1 473.2 535.8

Net Profit (A$m) 189.8 343.4 191.9 253.3 308.1

Normalised EPS (A$) 0.58 0.52 0.60 0.77 0.93

Normalised EPS Growth 2.7% (10.6%) 14.6% 29.2% 20.2%

FD Normalised P/E (x) 26.31 29.43 25.68 19.87 16.53

DPS (A$) 0.36 0.40 0.33 0.44 0.54

Dividend Yield 2.35% 2.61% 2.18% 2.88% 3.50%

EV/EBITDA (x) 18.04 17.44 16.03 12.85 10.77

P/FCFE (x) 25.84 NA 26.12 20.14 17.02

Net Gearing 29.7% 28.0% 19.2% 9.2% (4.0%)

P/BV (x) 4.63 4.18 3.74 3.28 2.72

ROE 19.5% 14.9% 15.4% 17.6% 18.0%

% Change In Normalised EPS Estimates (5.93%) (2.07%) (2.02%)

Normalised EPS/consensus EPS (x) 1.01 1.12 1.16

96.0

101.7

107.4

113.1

118.9

124.6

130.3

136.0

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14.00

15.00

16.00

17.00

18.00

Price Close Relative to S&P/ASX 200 (RHS)

Source: Bloomberg

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Telecommunications│Australia│Equity research│October 25, 2016

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Telco - Fixed Line

Should I stay or should I go?

The easy money has been made in tier 2 telcos over the last 10 years as the ■sector has had: 1) structural tailwinds (growing market share and the benefits of moving customers on-net, which generates higher margins) and 2) the benefits of many acquisitions (customers and suppliers), which has turbo charged earnings.

More diverse companies combined with lower interest rates, safety of earnings ■and strong earnings growth resulted in trading multiples virtually doubling from their long-term average of 6x to 12x EV/EBITDA, and this is now unwinding.

Our view is 7-8x EV/EBITDA is a more appropriate number but history suggests ■investment markets tend to over shoot then under shoot.

Telstra – a natural hedge Perversely while Telstra has the most to lose under a National Broadband Network (NBN), it is well hedged due to the A$11bn net present value deal (compensation) it struck with the government back in 2010 (and discounted at 10% pa). TLS has publically said that as a result of the NBN it will lose a net A$2-3bn in EBITDA (after including recurring NBN compensation). At the mid-point that’s a A$2.5bn EBITDA loss or 24% of FY16 EBITDA. TLS’s capex will decline but they need to replace lost earnings by building or buying new earnings streams, or worst case, buying back their own shares, to maintain the dividend.

TPM – has the largest degree of earnings risk Unlike TLS, TPM doesn’t get compensated for NBN losses. We estimate that today’s higher access prices mean, all things being equal, TPM loses 18% of its gross profits. TPM needs to either double their consumer customer numbers, grow corporate market share or reduce costs from iiNet to offset this impact. Most likely they will do all of the aforementioned but it will be a challenge and we think the era of easy wins is over.

VOC – has limited earnings risk but its own operational challenges VOC has immaterial NBN earnings risk as they already pay the higher access prices. However given VOC has undertaken a number of company transforming acquisitions and experienced a number of management changes, we think investors will want to see the businesses integrated and cash flowing before revisiting VOC. We note that the acquired businesses have 2-15 year customer contracts so the core of the business is not at risk, but given the possible distraction organic growth could disappoint.

Sector investment view – challenging sector for now Earnings aside we have seen a multiple re-rating then de-rating impact the sector. We think TPM could de-rate further, VOC has de-rated and now looks interesting but it needs to deliver track record, and TLS never re-rated so it remains relatively safe. TLS has an NBN hedge and despite challenges is more than holding its own with respect to NBN market share. Our preferred pick is SDA (Add recommendation, A$4.51 price target), which is a global satellite reseller. We liken SDA to iiNet 10 years ago when its reputation for high customer service drove impressive organic growth and it undertook numerous acquisitions that created value through economies of scale and cost de-duplication. Given SDA is a global business, it has a much larger addressable market and therefore a substantially longer runway for growth, in our view.

Figure 1: Fixed line telco – trading multiples have been highly volatile

SOURCE: COMPANY DATA, MORGANS FORECASTS

Neutral (no change) Summary of price target changes

We have lowered our price targets on TLS, TPM and VOC as we now set EV/EBITDA valuations based on lower trading multiples. TLS, Hold recommendation; A$5.20 price target VOC, Hold recommendation; A$6.05 price target TPM, Reduce recommendation; A$6.47 price target SDA, Add recommendation; A$4.51 price target

Nick Harris

T +61 7 3334 4557 E [email protected]

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Banks│Hong Kong│Equity research│October 26, 2016

Company Note


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Bank of China BOCHK-related asset disposals may continue

3Q16 NP came in at Rmb41.8bn (+2% yoy). 9M16 NP is 84% of our FY16F. ■ Main positives were lower credit costs, lower effective tax rate and an improved ■capital position. Main negatives were lower headline NIM, weak fee income growth.

Potential disposal of Chiyu Bank (at a book value of HK$6.7bn in 1H16), any sale ■proceeds would be less than its previous NCB disposal (book value of HK$38.2bn).

We reiterate our Add rating with no changes to our earnings estimates and target ■price.

3Q16 net profit broadly in line 3Q16 net profit (NP) was Rmb41.8bn, +2% yoy and -10% qoq, with 9M16 NP at Rmb134.8bn which is 84% of our FY16 estimate (note the presence of a Rmb29bn one-off gain booked in 1H16). This profit growth is consistent with the recent results of the large China banks, with the last seven quarters showing 0-3.5% yoy growth in BOC’s year-to-date earnings.

What we liked about the results (i) 3Q16 credit cost was 0.57%, falling 20bp yoy and 81bp qoq; (ii) effective tax rate was down 3.5% yoy to 17.0%, possibly due to greater investments in tax-free municipal/treasury bonds and (iii) capital ratios improved, with the core tier-1 ratio up 58bp yoy/24bp qoq to 11.29%. The improvement is likely due to a shift in the mix of loans and investments to lower-risk-weighted mortgage and municipal/treasury bonds.

What we disliked about the results (i) 3Q16’s headline NIM fell 10bp qoq to 1.74%. However, we believe this could largely be due to the value-added tax (VAT) replacing the business tax, with certain items that were previously booked under operating expenses instead of being netted off against net interest income. We expect NIM to be relatively stable qoq, if not a slight upward trend going forward and (ii) 3Q16 net fee income growth continued its downward trend since 2Q16 with a 4% yoy fall.

Other points of interest (i) Relatively stable asset quality trends: 3Q16 NPL ratio of 1.48% was up 2bp qoq/5bp yoy. Our estimated NPL formation rate dropped to 0.97% (-10bp yoy/-151bp qoq); 3Q16 NPL coverage ratio was flat qoq at 155.8% while 3Q16 LLR ratio was 2.3% (+3bp qoq/+11bp yoy), (ii) 3Q16 loans grew at 9.3% yoy/1.5% qoq to Rmb9.87tr. Deposits grew at 12.3% yoy/3.4% qoq to Rmb12.97tr and (iii) cost-to-income ratio dropped by 2.7% yoy to 37.7%.

Potential disposal of 66% interest in Chiyu Banking Corporation BOC has announced that it could potentially dispose its 66% indirect interest in Chiyu Bank. This could be its second major disposal in the last two years, following the sale of Nanyang Commercial Bank (NCB) last year. Chiyu Bank is relatively smaller in size (1H16 book value of HK$6.7bn) compared to NCB (1H16 book value of HK$38.2bn).

Reiterate an Add We reiterate our Add rating on BOC, with a stress-test-adjusted GGM-derived target price of HK$4. BOC is trading at 0.7x FY16F P/BV for 12.7% FY16F ROE, with FY16F dividend yield of 5.5%. Key downside risks are worse-than-expected asset quality trends and mortgage competition. Key potential catalyst for the stock is a return of Southbound flow under the Shanghai-Hong Kong Stock Connect programme, with the quantum of these flows traditionally being highly correlated to expectations of Rmb depreciation.

▎Hong Kong

ADD (no change) Consensus ratings*: Buy 25 Hold 4 Sell 2

Current price: HK$3.52

Target price: HK$4.00

Previous target: HK$4.00

Up/downside: 13.6%

CIMB / Consensus: -4.6%

Reuters: 3988.HK

Bloomberg: 3988 HK


HK$1,117,756m


HK$968.8m

Current shares o/s: 294,388m

Free float: 28.4% *Source: Bloomberg


No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -0.3 9.7 -7.6

Relative (%) -0.3 4.3 -8.5

Major shareholders % held Huijin 67.8

SSF 2.7

Analyst(s)

Michael CHANG

T (852) 2539 1323 E [email protected]

Scott HONG T (852) 2539 1329 E [email protected]

SOURCE: COMPANY DATA, CIMB FORECASTS

Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Net Interest Income (Rmbm) 321,102 328,650 308,762 328,477 362,958

Total Non-Interest Income (Rmbm) 133,451 141,860 196,294 178,587 194,320

Operating Revenue (Rmbm) 454,553 470,510 505,057 507,064 557,278

Total Provision Charges (Rmbm) (46,606) (55,872) (109,102) (108,124) (115,358)

Net Profit (Rmbm) 169,595 165,833 159,857 166,428 185,948

Core EPS (Rmb) 0.61 0.56 0.54 0.57 0.63

Core EPS Growth 7.8% (6.8%) (3.8%) 4.1% 11.7%

FD Core P/E (x) 5.15 5.41 5.67 5.44 4.87

DPS (Rmb) 0.19 0.18 0.17 0.18 0.20

Dividend Yield 6.18% 5.69% 5.50% 5.71% 6.36%

BVPS (Rmb) 3.70 4.09 4.49 4.90 5.36

P/BV (x) 0.83 0.75 0.69 0.63 0.57

ROE 17.0% 14.6% 12.7% 12.0% 12.3%

CIMB/consensus EPS (x) 0.95 1.00 1.06

87.0

92.8

98.7

2.70

3.20

3.70

Price Close Relative to HSI (RHS)

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Gaming│Hong Kong│Equity research│October 26, 2016

Company Note


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Galaxy Entertainment Mass strength

■ 3Q16 adjusted EBITDA of HK$2.7bn (+28% yoy, +18% qoq) was stronger than our and consensus expectations. 9M16 adjusted EBITDA at 80% of full year forecast

■ 3Q16 adjusted EBITDA margin a record high due to operational efficiencies coupled with shift to the higher-margin mass gaming segment

■ We increase our target price as we raise our FY16-18F earnings by 10%. GEG remains our top pick in the gaming space. Maintain Add

■ GEG has been the best performing HK gaming stock over the past two months

3Q16 stronger than expected GEG posted 3Q16 EBITDA of HK$2.7bn (+28% yoy, +18% qoq) on HK$12.9bn revenue (+5% yoy, +6% qoq). EBITDA was 13% higher than our and Bloomberg consensus expectations of HK$2.4bn. A favourable luck factor, which added HK$240m to EBITDA, along with operational cost savings lead to the better-than-expected results. GEG’s revenue outgrew the Macau gaming sector revenue growth of 1% yoy and 5% qoq.

Focus on mass drives margins GEG’s mass plus slots revenue increased 10% qoq in 3Q16, outperforming the sector average by 5% pts. As a percentage of total revenue, mass plus slots rose to 42% in 3Q16 (3Q15: 38%), which is an all-time high. VIP accounted for 47% composition of revenue vs. 51% in 3Q15. More importantly, the lower-margin VIP business comprised only 10% of company EBITDA. Stronger growth in the higher-margin mass business will drive future margins -- we estimate margin growth of 3-4% pts in FY16-18F vs. FY15.

New capacity has not lead to excessive discounting GEG’s EBITDA margins improved to 20.7% (+2% pts qoq, +3.7% pts yoy), a record high. Even excluding the positive EBITDA impact from a high hold rate, we estimate that margins would have still grown by 1-3% qoq, helped by operational efficiencies along with greater contribution from the high-margin mass gaming segment. Management noted that while some normal promotional activities are occurring within the market due to new properties, the amount has not been excessive so far.

Future capacity to ward off competition GEG will face additional competition in FY17F due to new capacity and the ramp-up of recently launched properties. However, GEG’s player database and retention rate are also improving, mitigating the loss of players due to competition, in our view. Over the longer term, we believe Galaxy is the only operator that can add significant additional capacity. Galaxy Phase 3 will start land preparation late this year and phase 4 land work will start next year.

Increase in forecasts from higher margins We raise our FY16-18F EPS by 10% due to the 1% pt increase in our operating EBITDA margin forecasts. Our revised target price of HK$41.78 is based on FY16F EV/EBITDA of 16x, 1 s.d. above the stock’s 3-year average, along with HK$10.42 for our valuation for Phase 3/4. Though the EV/EBITDA discount between GEG and average of Wynn/Sands has been narrowing, GEG is still trading at a 15% discount vs. a historical average of 10%. Risks include weaker-than-expected industry revenues.

▎Hong Kong


Current price: HK$32.05

Target price: HK$41.78

Previous target: HK$39.91

Up/downside: 30.4%

CIMB / Consensus: 31.3%

Reuters: 0027.HK

Bloomberg: 27 HK


HK$136,864m


HK$505.6m




FY16-18F core EPS increases by 9.5%/10%/10%

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 12.7 22.1 18.3

Relative (%) 12.7 16.7 17.4

Major shareholders % held City Lion 23.0

Che-Woo Lui 9.0

Capital Group 5.8

Analyst(s)

Michael TING


Jensen POON T (852) 25391350 E [email protected]



Revenue (HK$m) 71,752 50,991 51,080 50,699 53,755

Operating EBITDA (HK$m) 12,124 7,146 8,510 8,495 9,393

Net Profit (HK$m) 10,340 4,161 6,026 5,996 6,306

Core EPS (HK$) 2.43 0.98 1.41 1.41 1.48

Core EPS Growth 2.2% (59.8%) 44.7% (0.5%) 5.2%

FD Core P/E (x) 13.35 33.18 22.93 23.05 21.92

DPS (HK$) 1.15 0.42 0.71 0.70 0.74

Dividend Yield 3.58% 1.31% 2.21% 2.20% 2.31%

EV/EBITDA (x) 10.39 18.00 14.84 14.95 14.32

P/FCFE (x) 34.9 105.7 40.7 22.8 255.2

Net Gearing (24.0%) (16.9%) (20.8%) (18.0%) (2.6%)

P/BV (x) 3.55 3.32 2.99 2.81 2.63

ROE 29.2% 10.5% 13.9% 12.7% 12.5%

% Change In Core EPS Estimates 9.5% 10.3% 10.2%


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Banks│India│Equity research│October 26, 2016

Company Note


Powered by the

EFA Platform

Axis Bank Asset quality shocker

■ Axis Bank’s 2QFY17 results came in much lower than our and consensus expectations - PAT fell 83% yoy, driven by high NPL provisions (Rs36.2bn).

■ Asset quality faltered with slippage of Rs87bn, of which Rs73bn came from the watch list. GNPLs/ NNPLs shot up to 4.2%/2% vs. 2.5%/1.1% in 1QFY17.

■ NIM contracted 15bp qoq to 3.64%. Fee income growth was weak at 7% yoy.

■ 1HFY17 core profit was 23% of our full year forecasts. We cut FY17/18F earnings by 33.7%/13.2% to account for higher credit costs. Hold with lower TP of Rs550.

2QFY17 results hurt by asset quality 2QFY17 results were weaker than expected, largely due to high provisions, driven by significant slippage. PPoP at Rs41bn grew 13% yoy, aided by 11.1% yoy NII growth. Fee growth was weak at 7% yoy. Given the high slippage during the quarter, provisioning charge stood at a substantial Rs36.2bn, leading to PAT of Rs3.2bn, down 83% yoy. Headline asset quality numbers looked very weak, which we believe will lead to higher provisioning charges through to FY18F, suppressing the bank’s profitability.

Asset quality pressures turn out to be much higher than expected Slippage of Rs88bn was higher than expected. The majority of this slippage (Rs73bn) came from the ‘watch list’, which, as a result, now stands truncated by 32% to Rs137bn. Slippage outside of the watch list was high too, at +50% qoq, implying stress on residual asset quality as well. Management now expects the slippage from the watch list to be greater than the 60% guided to earlier. We lift our FY17F credit costs to 275bp as management maintains its ~70% guidance for provisioning coverage.

Loan growth stable; NIM resilient in view of asset quality decline Loan growth remained robust at 18.5% yoy, with corporate loans growing 14% yoy and retail at 25% yoy. Growth in corporate loans is now taking a breather, in our view, and is still driven by re-financing of loans from PSU banks. NIM of 3.64% (-15bp qoq), was resilient considering the almost 10bp negative impact due to interest income reversals. Fee income growth remained weak too, at 7% yoy, but overall other income growth was high at 24.4% yoy, driven by Rs5.4bn in trading gains (Rs1.65bn in 2QFY16).

Bulk of restructured / 5:25 refinance book not a part of watch list As a high proportion of slippage came from the watch list which now looks truncated at Rs137bn or 3.5% of customer assets. However, according to management, almost 90% of the 5:25 refinance book (Rs51bn) is not a part of the watch list, whereas the entire book under SDR (Rs10.6bn) is a part of the list. Management also said that part of the restructured book (Rs67bn total o/s restructured) was still not on the list.

Earnings cut to reflect higher provisions; maintain Hold We downgraded Axis Bank to Hold in Sep 2016 as we saw it had little upside to valuations or corporate asset quality. Indeed, asset quality pressures seem significantly worse than we expected. We cut our earnings estimates by 34%/13% for FY17/18F to reflect higher credit costs, which will also likely drive much lower average ROEs of ~12% through to FY18F. Our TP falls to Rs550, based on 2x FY18F P/BV vs. 2.4x previously. Higher-than-expected stress in corporate asset quality is the key risk.

▎India

HOLD (no change) Consensus ratings*: Buy 29 Hold 18 Sell 10

Current price: Rs529.1

Target price: Rs550.0

Previous target: Rs640.0

Up/downside: 4.0%


Reuters: AXBK.BO

Bloomberg: AXSB IN


Rs1,262,834m


Rs6,313m







Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -5.1 -1.7 0.7

Relative (%) -3.1 -1.7 -1.6

Major shareholders % held LIC of India 14.6

UTI 11.5

Blackrock 2.7

Analyst(s)

Siddharth TELI

T (91) 22 6602 5158 E [email protected]


Financial Summary Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F

Net Interest Income (Rsm) 142,241 168,330 187,913 214,123 247,887

Total Non-Interest Income (Rsm) 83,650 93,715 112,895 119,345 134,812

Operating Revenue (Rsm) 225,892 262,044 300,809 333,467 382,698

Total Provision Charges (Rsm) (23,277) (37,099) (103,104) (70,207) (60,156)

Net Profit (Rsm) 73,578 82,237 55,245 89,067 117,981

Core EPS (Rs) 31.18 34.60 23.13 37.10 48.90

Core EPS Growth 17.6% 11.0% (33.2%) 60.4% 31.8%

FD Core P/E (x) 16.97 15.29 22.88 14.26 10.82

DPS (Rs) 4.60 5.00 5.50 6.00 6.00

Dividend Yield 0.87% 0.95% 1.04% 1.13% 1.13%

BVPS (Rs) 188.5 223.1 239.6 269.4 310.9

P/BV (x) 2.81 2.37 2.21 1.96 1.70

ROE 17.8% 16.8% 10.0% 14.6% 16.9%

% Change In Core EPS Estimates (33.7%) (13.2%) (5.9%)


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Autos│India│Equity research│October 26, 2016

Company Note


Powered by the

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Hero Motocorp EBIDTA margin continues to scale high

■ 2QFY17 EPS rose 28% yoy and 14% qoq to Rs50.3, beating our/Bloomberg consensus by 5%/8%.

■ 1HFY17 EPS at 49.3% of our previous FY17 estimate, ahead of our expectation as we expect 2HFY17 to be marginally stronger.

■ EBIDTA margin near historical peak of 17.6% in 2QFY17, thanks to strong sales and cost benefit.

■ Marginal increase in our EPS and target price.

■ As it remains a preferred rural demand revival play and given the easing competition in motorcycle segment, we reiterate our Add call.

2QFY17 EBIDTA margin near record high Hero Motocorp's 2QFY17 EBITDA margin rose 147bp yoy and 93bp qoq to 17.6%, which is near its historical peak of 18.3% in 2QFY10, thanks to record high quarterly sales and lower costs. The ASP disappointment (-1.1% yoy to Rs42,755) was offset by operating leverage benefit and 60bp qoq dip in raw material cost to net sales ratio. This led to EBITDA rising 24.9% yoy and 11.3% qoq to Rs13.7bn, ahead of estimates (103% of CIMB and 106% of Bloomberg consensus).

Impressive EPS rise of 28% yoy and 14% qoq 2QFY17 normalised PAT rose 27.7% yoy and 13.7% qoq to Rs10,042m, 5% ahead of our estimate and 8% ahead of Bloomberg consensus. The EBITDA beat, coupled with higher-than-expected other income and lower-than-expected tax rate, led to an EPS beat. However, the sharp spike in receivables to 26 days of sales is a concern; we hope that will drop post festival sales realisation.

Management remains confident of future outlook Management guides for double-digit 2-wheeler industry growth in FY17. This is in line with the recent upgrade in our industry growth forecast to 12.7%. While we anticipate cost pressure from higher steel prices and its new Gujarat plant in 2HFY17, we expect Hero Motocorp's strong pricing power to help it sustain EBITDA margin at around 16.8% in 2HFY17F.

Our FY17-19F EPS raised slightly, still ahead of consensus Given 2QFY17's weak export sales volume and ASP, we cut our FY7-19F net sales by 1-2%. We now expect sales volume growth of 7.7% in 2HFY17F vs. 10.8% in 1HFY17. However, the EBITDA margin surprise in 2QFY17 (60bp above our expectation) helped to offset the net sales decline, prompting us to raise our FY17-19F EBIDTA by 1-2%. Building in the lower tax benefit in 2QFY16, we raise our FY17-19F EPS by around 1.5%.

Add rating maintained, with higher TP of Rs4,009 Our DCF-based target price rises to Rs4,009 on the back of our EPS upgrade. Considering Hero Motocorp's strong hold on the motorcycle segment, which is starting on its growth recovery path, the company is well positioned to tap the market with a series of new product launches. With its 1-year forward P/BV valuation at near mean levels extending comfort, we reiterate our Add rating. Key downside risks to our rating are deterioration in sector demand and poor response to its new products.

▎India


Current price: Rs3,419

Target price: Rs4,009

Previous target: Rs3,918

Up/downside: 17.3%


Reuters: HROM.BO

Bloomberg: HMCL IN


Rs682,742m


Rs1,399m

Current shares o/s: 199.7m



FY17F Revenue increased by 2.3%.

FY17-19F EBIT raised by 0.8-1.9%.

FY17-19F EPS increased by 1.4-1.7%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -1.4 6.5 30.5

Relative (%) 0.2 7 28.8

Major shareholders % held Hero Group 34.6

LIC of India 5.5

Aberdeen 2.4

Analyst(s)

Pramod AMTHE




Revenue (Rsm) 275,853 285,993 311,991 362,353 404,220

Operating EBITDA (Rsm) 35,422 44,590 52,938 60,324 66,159

Net Profit (Rsm) 25,407 31,444 38,747 43,479 46,814

Core EPS (Rs) 127.2 157.5 194.0 217.7 234.4

Core EPS Growth 20.5% 23.8% 23.2% 12.2% 7.7%

FD Core P/E (x) 26.87 21.71 17.62 15.70 14.58

DPS (Rs) 60.0 72.0 86.0 104.0 110.0

Dividend Yield 1.75% 2.11% 2.52% 3.04% 3.22%

EV/EBITDA (x) 18.34 14.33 11.85 10.11 8.95

P/FCFE (x) 46.65 40.10 32.39 25.45 21.79

Net Gearing (50.7%) (55.4%) (57.1%) (63.0%) (66.3%)

P/BV (x) 10.44 8.59 7.00 5.89 5.01

ROE 41.9% 43.4% 43.8% 40.7% 37.1%



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8

Banks│Indonesia│Equity research│October 26, 2016

Company Note


Powered by the

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Bank Central Asia 3Q16 results: robust profit despite hefty provision

BBCA’s 9M16 net profit was in line at Rp15tr (+13% yoy/+10% qoq), forming ■79%/77% of our/consensus FY16F forecasts.

PPOP growth was robust (+20% yoy/+9% qoq), although provisioning continued to ■increase in 3Q.

Loan growth remained moderate, driven by consumer loan portfolio. ■ NPL rose to 1.5% in 3Q16 from 1.4% in 2Q16, while SML rose to 2.2% in 3Q16 from ■1.5% in 2Q16. Restructured loans rose slightly to 1.4% in 3Q16 from 1.2% in 2Q16.

We raise our EPS by 4-6% in FY16-18F and roll forward our GGM-based TP to ■FY17F which results in an increase in our TP to Rp17,100. Maintain Add.

Strong 3Q16 results BBCA’s 9M16 net profit was in line at Rp15tr (+13% yoy/+10% qoq), forming 79/77% of our/consensus FY16F forecasts. The strong profit growth was driven by robust PPOP growth (+20% yoy/+9% qoq), offsetting the increase in provisioning expenses (+104% yoy/+11% qoq). Credit costs remained stable at 1.1% in 9M16, unchanged from 1H16 (0.6% in 9M15).

Relatively stable net interest margin Net interest margin was largely stable (NIM), down slightly to 6.9% in 9M16 from 7% in 1H16 (6.6% in 9M15). The drop in NIM was attributed to asset yield contraction to 8.6% in 9M16 from 8.7% in 1H16 (unchanged from 9M15). Cost of funds was relatively flattish at 2% in 9M16 compared to 1H16 (2.4% in 9M15), as the CASA ratio remained stable at 78% in 3Q16, also unchanged from 2Q16. LDR improved slightly to 78% in 3Q16 from 79% in 2Q16 and 3Q15.

Moderate loan growth Loans grew by +6%yoy/flat qoq, driven by consumer growth of +8% yoy/+1%qoq (28% of total loans). Among the consumer loans, auto loans (+10%yoy/+2%qoq – 33% of total consumer) and credit card loans (+9%yoy/+3%qoq – 9% of total consumer) grew the strongest, while mortgage growth (+7%yoy/+1%qoq – 58% of total consumer) was moderate. On the other hand, corporate (+6%yoy/-2%qoq – 35% of total loans) and commercial/SME (+4%yoy/flat qoq – 38% of total loans) growth remained sluggish.

Seasonal deterioration in special mention loan NPL rose to 1.5% in 3Q16 from 1.4% in 2Q16, as commercial/SME NPL rose to 2.3% in 3Q from 2.1% in 2Q. Special mention loans (SML) rose to 2.2% in 3Q from 1.5% in 2Q due to increase in SML in the consumer loan segment (50% of total special mention and mostly <30 days past due). Restructured loans rose to 1.4% of total loans in 3Q from 1.2% in 2Q. As a result, overall loans-at-risks rose to 4.3% in 3Q16 from 3.7% in 3Q15 (2.8% in 3Q15). Overall coverage ratio rose to 201% in 3Q16 from 193% in 2Q16.

Maintain Add Year-to-date, BBCA’s share price has gained by 17% and outperformed the JAKFIN index by 1%. It currently trades at its 10-year average of 3.0x FY17 P/BV. Normalising provision in 4Q and next year underpin our unchanged Add call. We raise our FY16-18F EPS by 4-6% on the back of higher non-interest income, and roll forward our GGM-based TP to FY17F. Key risk will be an unexpected deterioration in asset quality.

▎Indonesia


Current price: Rp15,500

Target price: Rp17,100

Previous target: Rp15,000

Up/downside: 10.3%


Reuters: BBCA.JK

Bloomberg: BBCA IJ


Rp382,152,640m


Rp294,957m




FY16F EPS increased by 5.6%



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 1 8 13.6

Relative (%) 0.1 4.6 -1.5

Major shareholders % held Farindo Investments (Budi Hartono/Bambang Hartono) 47.2

Analyst(s)

Jovent GIOVANNY


Timothy HANDERSON T (62) 21 3006 1724 E [email protected]



Net Interest Income (Rpb) 32,889 36,801 38,887 43,011 47,691

Total Non-Interest Income (Rpb) 8,324 10,897 12,522 13,338 14,798

Operating Revenue (Rpb) 41,213 47,698 51,410 56,348 62,489

Total Provision Charges (Rpb) (2,240) (3,505) (3,513) (3,016) (3,405)

Net Profit (Rpb) 16,486 18,019 20,050 22,310 24,483

Core EPS (Rp) 659.1 730.8 813.2 904.9 993.0

Core EPS Growth 20.2% 10.9% 11.3% 11.3% 9.7%

FD Core P/E (x) 23.52 21.21 19.06 17.13 15.61

DPS (Rp) 125.0 153.0 167.2 186.1 207.1

Dividend Yield 0.81% 0.99% 1.08% 1.20% 1.34%

BVPS (Rp) 3,151 3,625 4,523 5,242 6,028

P/BV (x) 4.92 4.28 3.43 2.96 2.57

ROE 22.9% 21.5% 19.9% 18.5% 17.6%



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Telco - Integrated│Indonesia│Equity research

Company Flash Note



Telekomunikasi Indonesia 3Q16: Living up to expectations

■ 9M16 results in line. Solid mobile revenue growth but fixed revenue saw a decline.

■ The EBITDA margin grew qoq on lower operating and maintenance cost.

■ Maintain Add and DCF-based target price of Rp4,800. Conference call on 1 Nov.

3Q16: Decent results that were in line ● EBITDA soared 10.2% qoq (+15.1% yoy) in 3Q16 on higher revenue and margins.

However, core net profit fell by 10.0% qoq (+19.3% yoy) due to penalties for early Flexi tower termination as well as higher depreciation and tax rate. 9M16 core EPS formed 84%/77% (EBITDA: 75%/75%) of our/consensus FY16 forecasts. This is in line as we expect 4Q16 earnings to be lower due to a one-off asset revaluation tax.

Mobile revenue growth stayed robust ● 3Q16’s mobile revenue climbed 7.8% qoq. Yoy, growth eased due to the earlier

occurrence of Lebaran in 2016 but stayed robust at 11.4% (2Q16: +14.5%). Mobile internet grew 7.8% qoq (+30.8% yoy) and smartphone penetration rose 2.1% pts qoq to 46.7% (3Q15: 37.4%). Data yields fell further by 10.9% qoq but were more than offset by a strong 21.1% qoq increase in traffic.

● Mobile voice revenue jumped 11.7% qoq (+12.1% yoy) due to 10.2% higher RPM. After three quarters of decline, SMS revenue rose 2.7% qoq on higher RPSMS while usage continued to fall.

● Subs grew strongly by 4.0% qoq to 163.7m. Net adds of 6.3m were the highest in 4 years. Blended ARPU gained 5.4% qoq (+2.4% yoy) to Rp47k.

Slower IndiHome subs growth ● Fixed revenue (ex-Telkomsel) declined 10.1% qoq (+7.5% yoy) after two successive

quarters of growth due to seasonality and possibly some reversals after a strong 2Q16.

● IndiHome subs saw modest growth of 1.6% qoq (net adds: 24k) due to higher churn as Telkom reduced price and content promotions to weed out lower quality subs. Telkom’s focus on retaining and growing a higher quality subs base led to ARPU rising 4.3% qoq (+7.2% yoy) to Rp313k.

Continued improvement in EBITDA margins ● The EBITDA margin improved 3.5% pts qoq to 52.4% in 3Q16 as operating and

maintenance costs moderated 13% qoq after climbing fairly substantially in the past two quarters. This was partly offset by higher staff (including Rp362bn for early-retirement programme) and general & administrative costs qoq.

● Despite a high base in 2Q16, Telkomsel’s 3Q16 EBITDA margin inched up a further 0.8% pts qoq (-0.3% pts yoy) to 59.0%. The 9M16 margin of 58.3% is well on track to meet our FY16 forecast of 57.6%.

Maintain Add; DCF-based target price is Rp4,800 ● Telkom’s 3Q16 conference call will fall on 1 November. In the meantime, we maintain

our core EPS forecasts, DCF-based target price (WACC: 10.2%) and Add rating. A key re-rating catalyst is the delivery of strong earnings growth while downside risks to our call are more intense competition and higher-than-expected IndiHome costs. Telkom remains our top ASEAN telco pick.

Figure 1: Results comparison

SOURCES: CIMB, COMPANY REPORTS

FYE Dec (Rp bn) 3Q16 3Q15 yoy % 2Q16 qoq % 3Q16 3Q15 Prev.

chg chg Cum Cum FY16F

Revenue 29,734 26,919 10.5 28,912 2.8 86,188 75,759 115,063

- Mobile 22,543 20,228 11.4 20,910 7.8 63,649 55,627 86,758

- Fixed 7,191 6,691 7.5 8,002 (10.1) 22,539 20,132 28,305

EBITDA 15,583 13,534 15.1 14,140 10.2 44,378 37,092 59,331

EBITDA margin (%) 52.4 50.3 2.1 48.9 3.5 51.5 49.0 51.6

Core net profit 4,841 4,059 19.3 5,381 (10.0) 14,894 11,564 17,786

Core EPS (Rp) 49 41 18.1 55 (10.8) 151 118 181

Key operating indicators

Mobile subs ('000) 163,700 148,561 10.2 157,388 4.0 163,700 148,561

Wireline subs ('000) 10,641 10,033 6.1 10,628 0.1 10,641 10,033

Fx Broadband subs ('000) 4,309 3,733 15.4 4,315 (0.1) 4,309 3,733

ARPU - Mobile (Rp '000) 47 46 2.4 45 5.4 45 42

ARPU - Wireline (Rp '000) 57 62 (8.3) 61 (6.2) 60 66

ARPU - IndiHome (Rp '000) 313 292 7.2 300 4.3 313 287

▎Indonesia

October 26, 2016 - 8:50 AM





Up/downside: 14.3%


Reuters: TLKM.JK

Bloomberg: TLKM IJ


Rp423,360,000m


Rp364,358m

Current shares o/s 100,800m


Key financial forecasts

Source: Bloomberg


Absolute (%) -0.7 0.5 52.2

Relative (%) -0.9 -2.9 36.2

Major shareholders % held Govt of Indonesia 52.5

JPMCB 9.3

Bank of New York 7.4

Analyst(s)

FOONG Choong Chen, CFA


Dec-16F Dec-17F Dec-18F

Net Profit (Rpb) 17,786 21,431 25,434

Core EPS (Rp) 181.2 218.3 255.7

Core EPS Growth 13.7% 20.5% 17.1%

FD Core P/E (x) 23.18 19.24 16.43

Recurring ROE 19.4% 18.8% 20.3%

P/BV (x) 3.80 3.45 3.22

DPS (Rp) 108.7 131.0 151.4

Dividend Yield 2.59% 3.12% 3.61%

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10

Personal Products│Indonesia│Equity research│October 26, 2016

Company Note


Powered by the

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Unilever Indonesia 3Q16 results: Personal care heats up

We deem UNVR’s 9M16 core net profit of Rp4.75tr (US$357.2m, +14% yoy) in line, ■forming 71% of our FY16 forecast and 73% of Bloomberg consensus.

Combined sales in 2Q-3Q16 recorded growth of 11% yoy, which was higher than the ■7% in 3Q16, and present a more accurate basis to compare sales during Eid period.

Maintain Hold, with slightly higher target price of Rp48.5k (previously: Rp48k) as we ■roll over to 45.2x FY18 P/E (0.5 s.d. above the 3-year mean).

UNVR’s current valuation is demanding but sustained earnings growth based on ■more buoyant outlook limits downside risk, in our view.

Tapering topline in 3Q16 likely due to seasonal shift Sales growth tapered from 14.6% yoy in 2Q16 to 7% yoy in 3Q16 likely due to seasonal shift as timing of Eid holiday was 11 days earlier in FY16 than in FY15. Combined 2Q-3Q16 sales growth was 11% yoy, broadly in line with our FY16F sales growth of 12%. HPC sales dominated in 3Q16, rising by 8% yoy to Rp6.6tr (70% of 3Q16 group revenue), at a faster rate than food sales, which increased 4.2% yoy to Rp2.8tr. In 3Q16, there were more launches and relaunches for HPC (10 products) than food (3).

Less pressure from raw material costs as shown by stronger GPM 3Q16 gross profit margin (GPM) rose 58bp qoq and 72bp yoy thanks to larger contribution from higher-yield home and personal care (HPC) products, as well as food GPM recovery of 3.8% pts qoq. Raw material costs as a percentage of manufacturing costs pulled back to 85% in 3Q16 from 87% in 2Q16, likely due to a slight appreciation in the Rp/US$ rate.

Larger revenue base and static opex led to higher profitability 3Q16 operating margin improved by 1.9% pts yoy but declined slightly by 32bp qoq to 21.4%. 3Q16 A&P spending of Rp1.1tr was flat yoy in nominal terms, but recorded a decline yoy as a percentage of revenue due to the larger revenue base. Slower increase in costs incurred relative to topline growth boosted 3Q16 core net profit by 16% yoy to Rp1.5tr (US$112.8m). This implies 15.5% core net margin in 3Q16 (vs. 3Q15 core net margin of 14.3%).

Capex speeds up UNVR’s gross debt increased by Rp550bn to Rp1.25tr at end-9M16 compared to end-1H16, implying debt-to-equity ratio of 0.2x at end-9M16. Capex for 9M16 amounted to Rp1.26tr (US$94.7m, up 43% yoy), the bulk of which went to the HPC unit and new office headquarters. The company’s product launches and relaunches in 9M16 concentrated on HPC (33 launches), rather than food products (11).

Maintain Hold We cut FY16-18F EPS by 0.9-1.4% to account for higher finance charges. Our revised target price of Rp48.5k (up from Rp48k) is based on rollover to 42.5x FY18 P/E (0.5 s.d. above 3-year mean). We expect mid-teen earnings growth to be sustained in FY17-18F. The likely recovery in consumption demand closer to FY17F, based on government’s optimistic FY17F GDP growth target, leads us to expect stronger FY17F topline growth and improved sentiment on UNVR. Upside risk is faster-than-expected sales growth.

▎Indonesia





Up/downside: 9.2%


Reuters: UNVR.JK

Bloomberg: UNVR IJ


Rp338,962,752m


Rp79,956m







Source: Bloomberg


Absolute (%) -2.5 -0.6 15.6

Relative (%) -2.7 -4 -0.4

Major shareholders % held Mabivel BV 85.0

Analyst(s)

Linda LAUWIRA

T (62) 21 3006 1734

E [email protected]

Dian OCTIANA T (62) 21 3006 1738 E [email protected]



Revenue (Rpb) 34,512 36,484 41,045 46,462 52,851

Operating EBITDA (Rpb) 8,157 8,312 9,574 10,835 12,318

Net Profit (Rpb) 5,927 5,852 6,666 7,602 8,705

Core EPS (Rp) 777 767 874 996 1,141

Core EPS Growth 10.7% (1.3%) 13.9% 14.0% 14.5%

FD Core P/E (x) 57.19 57.92 50.85 44.59 38.94

DPS (Rp) 707.0 758.0 748.4 852.5 972.3

Dividend Yield 1.59% 1.71% 1.68% 1.92% 2.19%

EV/EBITDA (x) 41.60 40.91 35.51 31.31 27.48

P/FCFE (x) 56.07 58.93 60.76 53.16 45.35

Net Gearing 8.2% 22.2% 17.3% 4.8% (5.2%)

P/BV (x) 71.41 70.22 58.62 49.27 41.51

ROE 132% 122% 126% 120% 116%

% Change In Core EPS Estimates (0.91%) (1.42%) (1.32%)


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Telecommunications│Indonesia│Equity research

Sector Flash Note



Telco - Overall A steep regulatory hill to climb

IC rate cut may occur in Nov, though possibly with delays if Telkom files legal suit. ■ Spectrum pooling will not be allowed under the proposed PP53 revision. The ■reduced cost savings could limit smaller telcos’ joint network rollouts into ex-Java.

Proposed PP52 revision will enforce backbone network sharing. But setting the ■wholesale fees is a complicated process that may delay implementation, in our view.

Clearing the regulatory fog with BRTI ● We met up with the Indonesian Telecommunication Regulatory Body (BRTI) recently

to get a better understanding of how the regulatory landscape could potentially develop in the coming months. Post-meeting, we believe the situation remains complicated (many state agencies involved) and some of the proposed major regulatory revisions could see protracted delays.

● With market dynamics unlikely to change significantly in the near-term, we maintain our Overweight sector rating, with Telkom Indonesia (Add, TP: Rp4,800) as our top pick. Maintain Add on Indosat (TP: Rp8,100) and Hold on XL Axiata (TP: Rp3,300).

IC rate cut: Implementation in Nov… maybe ● If the interconnection (IC) rate cut issue remains in deadlock, BRTI has the authority

to set the IC rate for Telkom Indonesia by 2 Nov. However, Telkom could still file a legal suit at the Administrative Court and delay implementation until the final verdict.

● Even with an IC rate cut, the financial impact should be minimal as net IC contribution to Telkom’s FY16F EBITDA is only 0.7%. Cutting the Voice IC rate by 18% to Rp204/min will also not make it significantly easier for smaller telcos to compete with Telkomsel in ex-Java, as on-net tariffs are much cheaper (as low as Rp20/min).

Not the form of MOCN-sharing hoped for by smaller telcos ● The proposed revision of Government Regulation No. 53 (PP53) will enable one

operator to use another’s spectrum, but spectrum pooling is not allowed.

● In this form of multi-operator core network sharing (MOCN), telcos would still derive cost savings from sharing radio equipment (20%) but not from improved spectral efficiency (extra 20-30% savings). The reduced potential cost savings could limit the extent of Indosat-XL’s joint network rollout ex-Java.

Backbone sharing regulation may take a while to implement ● The BRTI will enforce backbone network sharing (if there is idle capacity) through the

PP52 revision. However, actual implementation could be delayed as it will need to set wholesale fees that sufficiently compensate Telkom for its backbone investments, a complicated process, in our view. While the Palapa Ring II fibre projects will be completed by 2019, BRTI said these will need to interconnect with Telkom’s network.

BRTI hopes to hold 2.1/2.3GHz spectrum auction before end-2016 ● The delay in the 2.1/2.3GHz spectrum auction is due to a legal suit filed by a local

company, which was previously assigned a 3.3GHz spectrum but now wants a 2.3GHz licence. Despite that, BRTI hopes both auctions can take place by year-end.

● For 2.1GHz, BRTI said the auction will likely be confined to the Big 4 telcos (based on capacity needs), with spectrum cap of 1 block (5MHz) per winner. For 2.3GHz, BRTI could open up the bidding to all parties, with no spectrum caps. BRTI will also restrict 2.1GHz winners from also winning the 2.3GHz spectrum.

Limiting on-/off-net tariff ratio still on the cards ● The BRTI is still planning to limit each operator’s on-net/off-net call tariff ratio to not

more than 3. The main aim is to lower off-net tariffs but also discourage operators from pricing on-net tariffs below cost to disrupt the market. BRTI said free or Rp1/sec on-net campaigns will still be allowed but only for limited time periods.

● Telkomsel’s call traffic ex-Java is largely on-net, hence any cut in off-net tariffs should not have a big impact on its revenue, in our view. At the same time, this limits how aggressive smaller peers can set their voice pricing ex-Java.

Figure 1: Summary of proposed regulatory changes

SOURCES: CIMB RESEARCH, BRTI

Govt Regulation (PP) Pertaining to Proposed regulatory changes

52/2000 IC rate cut by 18% for local calls to Rp204/min

Backbone network sharing to be enforced

53/2000 Spectrum may be transferable, subject to Minister's approval

Active network sharing to be allowed (ex-spectrum pooling)

Telecommunication

Operation & Management

Radio frequency spectrum

usage & satellite orbit

▎Indonesia

October 26, 2016 - 6:14 PM

Overweight (no change)

Highlighted companies

Indosat ADD, TP Rp8,100, Rp6,300 close

We expect Indosat to continue gaining market traction on the back of its new modernised network and enlarged 3G/4G footprint. This should lead to improved financial performance in the coming quarters.

Telekomunikasi Indonesia ADD, TP Rp4,800, Rp4,200 close

Telkomsel’s superior data network puts the company in a strong position to ride on Indonesia’s robust mobile data demand growth. We expect stronger earnings delivery in FY16-17F on better cost management.

XL Axiata HOLD, TP Rp3,300, Rp2,420 close

Although we expect XL to see improved yoy revenue growth in FY17F, it is likely to lag behind Telkomsel and Indosat as XL’s legacy services revenue is declining at a faster rate than for its peers, as its subs are transitioning faster to data.

Summary valuation metrics

Analyst(s)

FOONG Choong Chen, CFA


P/E (x) Dec-16F Dec-17F Dec-18F

Indosat 95.15 21.58 13.91

Telekomunikasi Indonesia 23.13 19.19 16.39

XL Axiata 546.00 43.76 23.53

P/BV (x) Dec-16F Dec-17F Dec-18F

Indosat 2.70 2.54 2.33

Telekomunikasi Indonesia 3.79 3.45 3.21

XL Axiata 1.19 1.16 1.12

Dividend Yield Dec-16F Dec-17F Dec-18F

Indosat 0.53% 2.32% 3.59%

Telekomunikasi Indonesia 2.59% 3.13% 3.61%

XL Axiata 0.05% 0.91% 2.12%

12

Construction│South Korea│Equity research│October 26, 2016

Company Note


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GS Engineering & Constr Overseas losses once again

3Q16 OP was in line with our expectation but 33% below market consensus due to ■cost overrun from overseas low-margin projects.

9M16 NP was below at 60% of our full-year forecast due to F/X losses at the non-■operating level.

Despite incremental housing earnings growth, we remain cautious on GS E&C given ■that earnings uncertainties from overseas could continue until 1H17.

Maintain Hold with a higher target price of W31K as we roll over the P/BV base year, ■now based on 0.6x FY17F P/BV on FY17F ROE of 7% (previously FY16F P/BV).

Disappointing earnings from problematic overseas projects GS E&C’s 3Q16 operating profit of W38bn (US$34m) was 4% above our expectation but 33% below consensus, mainly due to losses from problematic overseas projects. 3Q16 net profit turned to net loss of –W19bn, largely below our and consensus estimates mainly due to W50bn F/X losses from overseas projects. While we raise our FY16 OP estimates by 5% based on stronger housing margins, we cut our FY16 NP forecasts by 10% to factor in higher financial expenses related to its problematic overseas projects.

Overseas risks still remain The GP margin fell to 3.4% in 3Q16 from 4.3% in 2Q16. The main culprit was once again its overseas business as its plant division’s margin slipped into the red (-13% in 3Q16 vs. -5.9% in 2Q16 vs. -4.7% in 1Q16) due to a huge W150bn cost adjustment for the five problematic overseas projects, including UAE Ruwais Refinery (W45bn), Kuwait LPG tank (W35bn) and Saudi Rabigh 2 petrochemical (W30bn). Hence, its overseas gross margin has been exacerbated further (-11% in 3Q16 vs. -3.3% in 2Q16).

Domestic housing earnings strong but margin likely to dwindle Housing division margin remained impressive in 3Q16 at 16% (vs. 15% in 2Q16), lifting domestic gross margin to 13% (vs. 12% in 2Q16). We believe housing margins will stay solid but further increases are unlikely to be sustainable due to sales recognition for lower-margin PF (project finance) projects of W850bn from 1H17. Although robust housing margin improvement is unlikely to continue, we expect overall housing earnings to increase due to a rise in housing sales (W3.2tr in 2016F vs. W4.9tr in 2017F).

Lower overseas orders forecast on delays in order contract GS E&C’s new orders came in at W8.7tr in 9M16, comprising 69% of its annual target of W12.3tr. The bulk of the orders (W6tr) came from domestic housing and LG plant projects, thanks to a strong pick-up in housing activities and captive support. While management stated that it is likely to hit the full-year target on the back of UAE refinery project orders in 4Q16, we expect overseas plant new order wins to be delayed given the current contract phase. As such, we lower revenue forecasts by 4-3% in 2016-18.

Earnings recovery strong in 2017, but mostly priced in We continue to believe that GS E&C’s earnings are on track for a significant recovery in 2017 as the proportion of housing revenue should continue to rise. However, we maintain our Hold rating as we believe that the current valuations fully reflect this potential. We remain concerned that the recovery may take longer as problematic overseas projects could still materially impact earnings due to uncertainties in cost settlements as they near completion in 1H17.

▎South Korea


Current price: W28,750

Target price: W31,000

Previous target: W29,000

Up/downside: 7.8%


Reuters: 006360.KS

Bloomberg: 006360 KS


W2,041,250m


W10,554m




FY16/17/18F Revenue cut by 4/4/3%.

FY16F OP increased by 5%.

FY16F NP decreased by 10%.

Source: Bloomberg


Relative (%) 2.1 4.9 21.2

Major shareholders % held Huh family 29.5

NPS 5.5

Analyst(s)

John PK PARK




Revenue (Wb) 9,488 10,573 10,777 11,167 11,321

Operating EBITDA (Wb) 128.1 205.5 199.5 474.6 520.1

Net Profit (Wb) (41.1) 26.1 39.0 241.8 275.8

Normalised EPS (W) (673) 367 549 3,406 3,885

Normalised EPS Growth (96%) 50% 520% 14%

FD Normalised P/E (x) NA 78.32 52.34 8.44 7.40

DPS (W) 0.0 0.0 0.0 0.0 250.0

Dividend Yield 0.00% 0.00% 0.00% 0.00% 0.87%

EV/EBITDA (x) 29.68 15.10 15.74 6.35 5.41

P/FCFE (x) 7.40 4.08 NA 45.71 14.21

Net Gearing 49.6% 31.4% 32.2% 26.3% 19.2%

P/BV (x) 0.62 0.63 0.62 0.58 0.54

ROE (1.34%) 0.80% 1.20% 7.13% 7.56%

% Change In Normalised EPS Estimates (9.72%) (0.37%) 0.47%


78.0

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Price Close Relative to KOSPI (RHS)

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13

Biotechnology│South Korea│Equity research│October 26, 2016

Company Note


Powered by the

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Hugel Inc Export outperformance led to margin expansion

■ 3Q16 results beat our and consensus estimates, thanks to higher export growth.

■ BoNT growth excelled despite the low season.

■ 3Q16 results reaffirmed our structural margin expansion story.

■ We view that strong fundamentals will likely alleviate market concerns.

■ Buy into weakness. Growth momentum and margin expansion story are intact.

Another record high Hugel posted consolidated revenue of W32.8bn (US$29m, up 81% yoy) and operating profit of W17.9bn (US$15.8m, up 317% yoy). Compared to our estimates, revenue was in line but OP was better than expected (by 10% vs. 8% for Bloomberg consensus). The variance can largely be attributed to the rising contribution from exports (accounting for 55% of total sales compared to 47% in 4Q15).

BoNT exports continued to excel By product, revenue from BoNT (botulinum toxin) grew by 154% yoy and 40% qoq, as highlighted in our note “Record-high BoNT export growth in Sep”. Our view that Hugel is expanding its shares in both domestic and global markets, particularly in Japan, is reaffirmed by the strong BoNT sales in 3Q16. HA (hyaluronic acid) fillers, however, showed moderate growth in 3Q16 (+58% yoy, -25% qoq) due to the low season and limited capacity. We believe HA fillers will regain growth momentum in 4Q16.

Further margin expansion Hugel’s OPM climbed to 55% in 3Q16 from 53% in 2Q16 and 39% in 1Q16. This is largely attributed to speedy export growth: exports soared 219% yoy to W18.0bn (US$15.9m) and its domestic sales rose 22% to W14.8bn (US$13.1m). Higher ASP and lower direct sales costs in export led to a substantial OPM expansion from 2Q16. Structural margin expansion will likely be sustainable with its new opening to export countries, such as Russia, Brazil and more South America countries.

Concerns are overrated Despite strong fundamentals, the share price has been beaten down lately due to uncertainties from local disputes regarding BoNT originality and any regulatory measures from China on Korean imported products. We believe the market has overreacted to this. We still believe strong sales growth prospects are intact and fierce competition has caused the controversial feud among Korean BoNT producers to intensify. Therefore, this is unlikely to significantly impact their fundamentals, in our view.

Excellent growth prospects; stay invested In our view, Hugel still has rapid growth potential, especially for the next two years. We reiterate our Add call and our SOP-based target price of W703,000. The stock is trading at 19x FY17F P/E, which is, we believe, compelling compared to Hugel’s growth profile and margin expansion (over 35% and 50%, respectively, for the next two years). The key risks to our target price are a sudden slowdown in exports and the emergence of new competitors.

▎South Korea





Up/downside: 81.7%


Reuters: 145020.KQ



W1,270,931m


W14,188m




No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -19.9 11.1

Relative (%) -19.1 9.9

Major shareholders % held Tongyang HC and affiliates 24.4

WF Bio Healthcare 10.6

Byung-Gun Kim 8.4

Analyst(s)

Kathy PARK




Revenue (Wb) 40.3 65.1 128.7 188.8 279.3


Net Profit (Wb) 13.15 35.86 50.00 67.64 92.88

Normalised EPS (W) 5,299 12,406 15,226 20,595 28,281

Normalised EPS Growth 70% 134% 23% 35% 37%


DPS (W) 1 0 1,441 2,923 5,352

Dividend Yield 0.00% 0.00% 0.37% 0.76% 1.38%

EV/EBITDA (x) 60.02 54.39 19.03 13.04 9.72

P/FCFE (x) 347 1,220 34 24 21

Net Gearing 24.0% (32.1%) (16.0%) (17.0%) (11.9%)

P/BV (x) 22.64 6.11 5.02 4.08 3.29

ROE 37.8% 28.6% 21.7% 24.0% 26.6%


78

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303

378

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510,000


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14

https://brokingrfs.cimb.com/JWm6Kcf-imhbJPCJzgWZP7NndxJ5l48vjroLFg-af4PvuRV5HaGLY9NmKu3BxKfisX81.pdf

Shipbuilding│South Korea│Equity research│October 26, 2016

Company Note


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Hyundai Heavy Industries 9.3% VLCC/LPG margin tells the story

HHI's 3Q16 OP was broadly in line with our estimate. Its VLCC OPM (9.3%) and ■Engines OPM (24%) were the key surprises that offset the weaker refining margins.

We foresee HHI continuing to optimise its cash cost structure via restructuring, as ■HHI's wage per capita remained c.24% higher than its local peers in FY15.

While orders look set to pick up post-Alliance consolidation by year-end, we also ■see more growth opportunities from new businesses (e.g. LNG fuel retrofits).

3Q16: Decoupling from Oilbank HHI posted W9tr 3Q16 sales (-19% yoy, -10% qoq) and W322bn operating profit (OP, turn black yoy), broadly in line with our (W360bn) and consensus (W327bn). Despite fewer working days (2 weeks of summer holidays, strikes and Korean Thanksgiving), W190bn qoq fall in Oilbank OP (weaker GRM) and one-off provisions set for Hanjin Shipping (c.W100bn), its OPM was supported at 2.1% by shipbuilding (5% OPM) and engines (24% OPM). Samho also posted 9.3% OPM and HMD reported 4.8% OPM.

Key positives: VLCC 9.3% OPM /Engines 24% OPM 9.3% VLCC OPM at Samho was impressive, given: 1) attractive bid terms set upon oligopoly market structure (e.g. HHI/DSME represent 41% of global VLCC order book market share), and 2) ongoing fixed cost reductions through manpower cuts and design upgrades to fight against low yard turnover. As proven by 24% OPM for Engines, we foresee engine/propulsion package upgrades and outfitting costs as margin drivers, not steel prices. HHI guided its shipbuilding OPM to be sustained at this level in FY17.

A more competitive cost structure post-restructuring Apart from the holdco transition agenda, we think HHI is aggressively restructuring its non-core business (e.g. via spin-off and/or disposals) to optimise its labour cost structure to cope with orders volatility (revenue impact). While HHI's non-shipbuilding employees' (61% of workers) payments are tied to those from shipbuilding division, note that HHI's wage per capita in FY15 stood 35% higher than local peers (e.g. Hyosung/LSIS).

Orders to gain stronger pace following Alliance M&A Although YTD orders were sluggish, management noted that it has been recently seeing orders pick up (tankers/military vessels etc.), while enquiries are still firm. HHI expects contracts to pick up meaningfully once the consolidation led by Shipping Alliance (e.g. Maersk) is concluded by year-end, while new regulations from next year (e.g. ballast water treatment system) look set to incur stronger replacement demand. We plan to revisit our FY17-18 order assumptions following HHI's guidance in Dec.

New opportunities from high-end repair/retrofit business We expect HHI to pursue new growth opportunities, such as ship repair business. We expect HHI to create cash cow opportunities in a different form from what ASEAN yards are operating, in terms of LNG-fuel retrofits etc. (mostly for mid-large sized ships designed upon ME engines from 2003) that can potentially warrant high single-digit OPM and offset the order book decline risks ahead.

Maintain Add and W200,000 target price Stay invested. Our SOP-based target price is intact. Growing seaborne trade from oil/gas industry, consolidation, reinforced CO2/SOx/NOx regulations and bottomed commodity price remain as key catalysts. Downside risks to our call are: 1) energy price weakness, 2) financing bottlenecks (RG loan) and 3) possible delays in the execution of IMO regulations.

▎South Korea





Up/downside: 35.1%


Reuters: 009540.KS



W11,248,000m


W33,774m




No changes.

Source: Bloomberg


Relative (%) 10.4 34 54.8

Major shareholders % held Chung, Mong-Joon 10.2

Hyundai Mipo Dockyard 8.0

Analyst(s)

KJ HWANG


Eric KIM T (82) 2 6730 6126 E [email protected]



Revenue (Wb) 52,582 46,232 39,351 36,402 36,906

Operating EBITDA (Wb) -2,231 -472 2,978 3,013 3,219

Net Profit (Wb) -2,796 -1,350 1,559 1,669 1,850

Normalised EPS (W) -36,789 -17,762 20,519 21,954 24,346

Normalised EPS Growth (1103%) (52%) 7% 11%

FD Normalised P/E (x) NA NA 7.21 6.74 6.08

DPS (W) 0 0 0 0 3,000

Dividend Yield 0.00% 0.00% 0.00% 0.00% 2.03%

EV/EBITDA (x) NA NA 9.05 8.32 7.54

P/FCFE (x) 12.3 NA 67.7 34.4 135.2

Net Gearing 91% 104% 85% 66% 56%

P/BV (x) 0.74 0.82 0.75 0.68 0.61

ROE (17.2%) (9.3%) 10.9% 10.6% 10.6%


81

99

117

134

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93,000

113,000

133,000

153,000


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15

Technology Components│South Korea│Equity research│October 26, 2016

Company Note


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LG Display Earnings momentum likely to soften

3Q16 NP missed our estimates by 16% with 9M16 EPS at 24% of our FY16F EPS. ■ Despite upbeat guidance of continuously favourable LCD outlook in 2017F, we are ■concerned sequential earnings momentum is likely to soften after a peak in 4Q16F.

We raise our FY17-18F OP margin estimates by 1-2% pts to 5.4%, reflecting the ■base effect from the recent panel price recovery.

Maintain Hold with 0.8x FY17F P/BV (20% discount to historical mean to account for ■low ROE); improving LCD supply/demand still overshadowed by OLED uncertainty.

3Q16 miss due to higher costs LG Display’s (LGD) 3Q16 revenue (+15% qoq, -6% yoy) was 3% above our estimate due to stronger ASP (+10% qoq, vs. our 7%) from TV panel price recovery. However, OP margin came in at 4.8% vs. our 5.5% forecast, due to higher cost/sqm (+5% qoq vs. our +1% qoq) from a sales mix change. Net profit missed our and Bloomberg consensus by 16%, in line with the OP miss.

Improving LCD supply/demand to persist in 4Q16F Management guidance suggests that LCD panel prices should remain firm in 4Q16F, given seasonal demand and supply disruption from Samsung Electronics (SEC)’s 7-1 line (~3% of global LCD capacity) retirement in Nov. Despite flat shipment growth (vs. our previous estimate of 3% qoq) in 4Q16F, we forecast a strong ASP (+9% qoq) to further improve OP margin to 6.4% (from 4.8% in 3Q16) with W474bn OP (6% above Bloomberg consensus) in 4Q16F. Hence we maintain our FY16F EPS forecast.

Earnings momentum likely to start waning from 1Q17F As the recent panel price rally has been driven by supply disruption (earthquake in Japan and Taiwan, SEC’s fab retirement) and seasonality, we believe the limited supply cutback vs. this year should lead to weakening LCD panel price momentum from 1Q17F when demand should be seasonally slow. We think LGD’s 50k Gen8 capacity cut (~1% of global capacity) in 1Q17F may not have as material an impact as supply disruptions in 2016. We forecast qoq OP declines continuing throughout FY17F after its 4Q16F peak.

OLED visibility yet to improve Given mobile display shift to OLED away from LCD, LGD will try to minimise the loss of its mobile business (27% of revenue in 2Q16) by its plastic OLED production at E5 (from mid-2017F) and E6 (from 2H18F) fab. Our concern is that SEC should have flexible capacity that can support over 300m units of very high-end smartphones or nearly 20% of global smartphone market by 2H17F, leaving not much room for LGD’s new capacity. We also think LGD’s limited track record in small-sized OLED production is another risk.

Hold maintained; negative FCF likely to continue We believe LGD’s share price momentum may remain lacklustre, unless the scope for LGD’s OLED success improves and capacity overhang concerns from China disappear. Risks to our conservative view would be stronger LCD price recovery. Despite 96%/44% upward revision in our FY17-18F EPS from better pricing/margin assumptions, we maintain our target price, given still low ROE and lack of re-rating catalyst.

▎South Korea





Up/downside: 0.2%


Reuters: 034220.KS



W10,716,580m


W31,932m




FY16-18F Revenue increased by 2-11%.

FY17-18F OP margin increased by 1-2% pts.

FY17-18F EPS increased by 44-96%.

Source: Bloomberg


Relative (%) 6.3 3.1 37.5

Major shareholders % held LG Electronics 37.9

National Pension 10.0

Analyst(s)

Dohoon LEE




Revenue (Wb) 26,456 28,384 25,959 26,140 23,574

Net Profit (Wb) 904.3 966.6 457.9 930.8 791.1

Normalised EPS (W) 2,527 2,701 1,280 2,601 2,211

Normalised EPS Growth 627% 7% (53%) 103% (15%)


Price To Sales (x) 0.41 0.38 0.41 0.41 0.45

DPS (W) 500.0 500.0 500.0 500.0 500.0

Dividend Yield 1.67% 1.67% 1.67% 1.67% 1.67%

EV/EBITDA (x) 2.23 2.15 3.18 2.93 2.96

P/FCFE (x) NA NA NA NA 14.72

Net Gearing 15.5% 13.4% 27.7% 38.4% 45.2%

P/BV (x) 0.91 0.84 0.85 0.80 0.76

ROE 8.01% 7.89% 3.61% 7.15% 5.77%

% Change In Normalised EPS Estimates 0.0% 96.4% 44.1%


92.0

113.4

134.9

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29,000


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16

Chemicals - Others│South Korea│Equity research│October 26, 2016

Company Note


Powered by the

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OCI Soft solar fundamentals led to weak 3Q16 earnings

3Q16 results were disappointing, as operating profit (OP) came in 89%/94% below ■our/consensus estimates. 9M16 net profit was just 72% of our FY16 forecast.

We estimate that polysilicon OP margin turned negative in 3Q16 due to qoq decline ■in the ASP and volume, as well as stronger currency.

Rebound in polysilicon prices is likely to be modest in the near term, given the ■uncertainty on solar installation, in our view.

We lower our SOP-based target price to W100,000 to reflect lower polysilicon ■prices. Maintain Hold call, as we see limited upside to current share price level.

3Q16 results far below expectations OCI’s 3Q16 OP of W2bn (US$1.8m, -95% qoq) missed our/Bloomberg consensus estimates by 89%/94% due to softer solar fundamentals. We estimate polysilicon OP turned from +W27bn in 2Q16 to -W11bn in 3Q16 (our forecast: W2bn) due to the strengthening Won/US$ rate, lower ASP and volume. Non-polysilicon OP fell 30% qoq in 3Q16, hurt by stronger currency and lower volume. 3Q16 net loss of W106bn includes W108bn impairment losses from closure of US subsidiary’s (MSE) solar cell production.

Polysilicon division posts first operating loss since 4Q15 We estimate that the polysilicon division posted operating loss of W11bn in 3Q16 versus operating profit of W27bn in 2Q16, mainly due to qoq decline of 4% in ASP and 18% in volume. In addition, OCI stated that the strong won (Won43/US$1 appreciation in 3Q16) hurt margins. The management mentioned that the volume decline in 3Q16 was much higher than expected, as it decided to sacrifice sales volume for higher prices. We estimate costs rose 6% qoq due to higher energy costs and overall market weakness.

Falling chemical earnings offset by higher PV project earnings Meanwhile, OCI’s petrochemical OP declined from W26bn in 2Q16 to W18bn in 3Q16, as revenues declined 10% qoq due to the stronger won and lower shipment of coal chemical products. Separately, we estimate that energy solution (solar power development and cogeneration power plant) OP improved from operating loss of W8bn in 2Q16 to OP of W1bn in 3Q16, thanks to the ramp-up of photovoltaic (PV) projects in China and recognition of instalment sales of PV projects in the US.

Polysilicon prices are likely to rebound moderately in near term OCI stated that since the end of the Golden Week in China on 7 Oct, polysilicon demand has started to pick up and this has led to decent price increases in the spot market. Management also confirmed that low inventory levels throughout the solar value chain are driving up demand. However, the uncertainty in solar demand over the next 12 months leads us to believe polysilicon prices will remain soft and range-bound. Based on our lower polysilicon ASP assumptions, we lower FY16-18F OP forecasts by 7-34%.

Maintain Hold as the share price rally is unlikely to be sustained OCI’s share price has rallied ~25% in the past month, due to: 1) rebounding polysilicon prices, and 2) Hillary Clinton’s campaign pledge for a robust solar policy (raising solar installation from current 20GW to 140GW by 2020). However, the uncertainty in near-term solar demand and longer-term orientation of the campaign pledge leads us to believe that further rally is unlikely in the near term. Maintain Hold, with a lower SOP-based target price of W100,000. Key risk is a rebound/correction in polysilicon prices.

▎South Korea





Up/downside: 4.4%


Reuters: 010060.KS



W2,284,770m


W19,080m




FY16-18F revenue decreased by 3-5%.

FY16-18F OP decreased by 7-34%.

FY16-18F NP decreased by 7-34%.

Source: Bloomberg


Relative (%) 15 2.5 17.1

Major shareholders % held Lee family 31.2

Analyst(s)

Peter K. LEE


John PK PARK T (82) 2 6730 6125 E [email protected]



Revenue (Wb) 2,703 2,302 2,654 2,500 2,566


Net Profit (Wb) (19.9) 100.3 258.2 187.8 193.5

Normalised EPS (W) (2,881) (13,236) 2,660 7,876 8,113

Normalised EPS Growth (79%) 359% 196% 3%

FD Normalised P/E (x) NA NA 36.01 12.16 11.81

DPS (W) 200.0 0.0 200.0 200.0 200.0

Dividend Yield 0.209% 0.000% 0.209% 0.209% 0.209%

EV/EBITDA (x) 9.98 20.90 10.63 7.50 6.77

P/FCFE (x) NA NA 17.03 NA NA

Net Gearing 66.4% 65.4% 62.5% 55.1% 45.0%

P/BV (x) 0.82 0.77 0.72 0.68 0.64

ROE (2.4%) (11.0%) 2.1% 5.7% 5.6%



74

94

114

134

154

54,000

74,000

94,000

114,000

134,000


1

1

2


Vo

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17

Autos│Malaysia│Equity research│October 27, 2016

Shariah Compliant

Company Note


Powered by the

EFA Platform

Bermaz Auto Berhad Unlocking its Philippines asset value

We met BAuto’s management for an update. Key takeaways: 1) it targets higher ■CKD sales beyond FY17, 2) export expansion plans, 3) Philippines IPO by 1QCY17.

Management expects near-term earnings weakness due to sluggish consumer ■sentiment and depreciating RM/JPY. As such, we cut our FY17-19F EPS by 1-8%.

However, BAuto still offers decent upside due to its cheap valuation, supported by ■its healthy net cash position and attractive FY17/18F yields of 6.3%/7.0%.

We maintain Add with a lower target price of RM2.60, based on 12x CY18 P/E. ■

Still negatively affected by weakness in consumer sentiment Bermaz Auto (BAuto) underwent a name change from Berjaya Auto following the management buyout, led by CEO Dato’ Seri Ben Yeoh through Dynamic Milestone in Jul 2016. BAuto, via Mazda, has seen sales come off slightly in 9MCY16 (-2.9% yoy). This is in line with most mass market brands, as well as total industry volume (TIV, refer to Figure 1), on the back of weak consumer sentiment and depreciation of RM.

Higher CKD sales to mitigate the strengthening JPY Management is pushing for higher CKD sales, with a target of 70% of total sales in two years. Its sales mix has been leaning more towards CKD (FY16: 52%, 1QFY17: 64%). This reduces its exposure to JPY, which has appreciated against the RM to 3.84 in 1QFY17 (3.41 in FY16). BAuto has direct exposure to JPY through CBU models, whereas CKD models are bought from Mazda Malaysia (MMSB) in RM. We estimate that every 1% increase in JPY/RM rate would reduce FY18 EPS by 2.5%.

Export expansion plans to lift associate earnings Management targets to gradually increase Mazda production volume from the current 13k units to 25k in the next 3-4 years, possibly with the new Inokom paint shop up and running by end-Dec 2016. This is in line with its plan to raise export volumes. Currently, MMSB only exports CX-5 (CKD) to Thailand. However, management plans to expand this to other ASEAN countries, with the exception of Vietnam. Hence, we expect BAuto to see earnings improvement through MMSB, its 30% associate company.

Bermaz Auto Philippines IPO still on track for 1QCY17 target Management targets to list its 60.4%-owned subsidiary Bermaz Auto Philippines Inc (BAP) by 1QCY17. We expect BAuto to pare down its stake by as much as 9% but remain the largest shareholder, with 51% controlling stake. Assuming the BAP IPO is valued at 15x FY18 P/E (25% disc. to the P/E of PH Stock Exchange of 20x) or RM650m, we estimate the 9% stake sale will allow the group to unlock value and receive cash from the sale of RM58.5m, which translates into about 5 sen/share.

Still offers good upside potential In spite of the challenging domestic environment, BAuto’s share price has continued to trend upwards, posting a 10% increase YTD. We think the stock offers decent upside potential as it trades at 11x CY17 P/E, which is below its historical mean of 12x. Moreover, BAuto’s share price is supported by an attractive CY17 yield of 6.3%.

Maintain Add with a revised target price of RM2.60 Following our earnings revision, we keep our Add call on the stock with a lower target price of RM2.60, based on a lower 12x CY18 P/E (on par with 3-year historical mean) instead of 14x (10% premium over sector average). Successful model launches, higher dividend payout and listing of BAP are potential re-rating catalysts. Key risks to our Add call are a lack of new model launches and prolonged weakness in consumer sentiment.

▎Malaysia


Current price: RM2.22

Target price: RM2.60

Previous target: RM2.69

Up/downside: 17.2%


Reuters: BERA.KL

Bloomberg: BAUTO MK

Market cap: US$611.4m

RM2,543m


RM3.98m




FY17-19F EPS decreased by 1-8%

Source: Bloomberg


Relative (%) -2.5 -3.9 6.6

Major shareholders % held Dynamic Milestone 34.2

Berjaya Group 17.1

Employees Provident Fund 10.1

Analyst(s)

Mohd Shanaz NOOR AZAM



Financial Summary Apr-15A Apr-16A Apr-17F Apr-18F Apr-19F

Revenue (RMm) 1,830 2,095 2,205 2,584 2,880

Operating EBITDA (RMm) 296.7 272.6 258.6 307.4 349.9

Net Profit (RMm) 212.4 197.6 185.2 222.9 255.5

Normalised EPS (RM) 0.19 0.17 0.16 0.20 0.22

Normalised EPS Growth 52.4% (7.5%) (6.3%) 20.4% 14.6%


DPS (RM) 0.14 0.17 0.14 0.16 0.17

Dividend Yield 6.13% 7.61% 6.31% 6.98% 7.66%

EV/EBITDA (x) 7.33 7.70 8.05 6.66 5.72

P/FCFE (x) 13.85 11.08 14.06 11.87 10.42

Net Gearing (57.0%) (65.1%) (64.9%) (64.4%) (64.1%)

P/BV (x) 5.34 4.76 4.57 4.22 3.83

ROE 52.0% 39.3% 34.1% 38.7% 40.5%



93.0

101.6

110.1

118.7

1.80

2.00

2.20

2.40

Price Close Relative to FBMKLCI (RHS)

10

20

30

Oct-15 Jan-16 Apr-16 Aug-16

Vo

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18

REIT│Malaysia│Equity research│October 26, 2016

Company Note


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IGB REIT The steadfast duo

■ IGB REIT’s 9M16 core net profit of RM207.5m came in line with our and consensus estimates, representing 76% and 75% of the full-year numbers, respectively.

■ Organic growth continues to be driven by positive rental reversions by its two crown jewels – MVM and The Gardens.

■ No dividend was declared during the quarter, as expected.

■ Our Hold call is retained as we believe that the positives have been priced in.

■ Key upside risks include yield-accretive asset acquisitions and downside risks include higher-than-expected competition from other retail malls.

9M16 in line with expectations; business as usual IGB REIT’s 3Q16 revenue and core net earnings grew 4.1% and 5.6% yoy to RM125.9m and RM68.8m, respectively. This brought its 9M16 core earnings to RM207.5m (+3.3% yoy), which was mainly driven by positive rental reversions, backed by sustained occupancy rates. The results met our and market expectations, making up 76% and 75% of the full-year estimates, respectively. As expected, no dividend was declared during the quarter, which was in line with its semi-annual dividend distribution policy.

Rental reversion remains healthy in the mid double-digits The group’s revenue growth was mainly driven by higher rental reversion from both Mid Valley Megamall (MVM) and The Gardens Mall (TGM), which saw 28% and 44% of leases up for renewal this year, respectively. We understand that almost all of its tenants have already re-committed to leases, with average upward revisions in the mid double-digits. This further underscores the popularity of its highly-sought-after malls, which have a long waiting list for retail space.

Asset pipeline from sponsor dry for now – inorganic growth limited Given the lack of high quality malls up for grabs in the market, IGB REIT does not see any viable third-party acquisitions transpiring in the near term. Thus, we do not see the group aggressively seeking to inject assets into its portfolio for now in spite of its lower-than-average gearing ratio of 0.24x (vs. industry’s average of 0.34x). Additionally, we believe that the earliest potential timeline for the opening of Mid Valley Southkey Megamall (MSM) is 2021; the group’s acquisition pipeline could stay rather dry for now.

Maintain Hold with unchanged DDM-based target price of RM1.62 We maintain our Hold call on the stock as we believe that investors have already priced in the upside potential for its high quality assets. The group’s organic growth will continue to be supported by healthy rental reversions and sustained occupancy rates for both of its anchor malls. Upside risks include stronger-than-expected consumer spending (c.12-13% of IGB REIT’s total revenue consists of turnover rents) while downside risks include increased competition from other malls.

▎Malaysia





Up/downside: 0.3%


Reuters: IGRE.KL

Bloomberg: IGBREIT MK


RM5,651m


RM3.44m




No change.

Source: Bloomberg


Absolute (%) -3.6 -1.2 22.7

Relative (%) -4 -1.7 24.7

Major shareholders % held IGB Corp Berhad 51.0

Analyst(s)

Kristine WONG




Gross Property Revenue (RMm) 461.8 489.2 518.1 528.8 545.6

Net Property Income (RMm) 323.1 342.8 359.2 384.3 396.5

Net Profit (RMm) 243.1 257.7 272.5 295.9 306.8

Distributable Profit (RMm) 277.8 294.7 310.0 334.6 346.1

Core EPS (RM) 0.046 0.048 0.052 0.058 0.061

Core EPS Growth (23.1%) 5.2% 7.8% 11.7% 4.3%

FD Core P/E (x) 35.30 33.57 31.13 27.87 26.72

DPS (RM) 0.076 0.084 0.088 0.094 0.097

Dividend Yield 4.72% 5.17% 5.45% 5.83% 5.97%

Asset Leverage 25.8% 24.7% 24.7% 24.8% 24.8%

BVPS (RM) 0.98 1.05 1.04 1.03 1.02

P/BV (x) 1.66 1.54 1.56 1.58 1.59

Recurring ROE 4.67% 4.76% 4.98% 5.62% 5.93%

CIMB/consensus DPS (x) 1.04 1.05 1.02

96.0

109.3

122.7

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1.400

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1.800


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10


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19

Agribusiness│Malaysia│Equity research

Shariah Compliant

Company Flash Note



Kuala Lumpur Kepong Unsolicited cash offer to takeover M.P. Evans

KL Kepong makes a cash offer to take over M.P. Evans Group at 640 pence/share ■ We are positive on the bid as we estimate the group will be acquiring the assets at ■an attractive price and the proposed acquisition will enhance its future earnings.

The success of the bid depends on take-up rate from shareholders. Maintain Hold. ■

KL Kepong makes a cash offer to acquire M.P. Evans ● KL Kepong announced its intention to make a cash offer of 640 pence/share to

acquire the entire paid-up capital of M.P. Evans Group Plc, a company listed on AIM (a sub-market of the London Stock Exchange). In addition, M.P. Evans’ shareholders will continue to be entitled to receive the interim dividend of 2.25 pence per share. As such, M.P. Evans’ shareholders will receive in total 642.25 pence per share.

Other details regarding the offer ● The offer value represents a 51% premium to the last closing price of the shares.

The offer consideration values 100% of M.P. Evans at £359.3m (RM1,814m). The formal offer document will be published within 28 days of the announcement and the offer is conditional upon acceptance of holders of more than 50% of M.P. Evans’ shares. It is expected that the completion of the offer will be around end-16/early-17.

Background on M.P. Evans ● MP Evans, though its subsidiary and associated undertakings, operates oil palm and

rubber plantations in Indonesia and conducts property development activities in Malaysia. As at 30 June 2016, the group owned 26,600 planted ha of majority-held oil palm estates, three operational palm oil mills]

● It also owns 21,900 planted ha of minority-held oil palm and rubber plantations in Indonesia (group’s share is 8,100 ha), plus two palm oil mills and a crumb rubber factory, a 70 ha of plantation land in Pen Malaysia with property development premium and a 40% share in a property development company, Betram Properties, with land bank of 330 ha near Penang. The average age of its palms are 7.9 years old.

Board of M.P Evans believes the offer is inadequate ● The board of M.P. Evans confirmed that it had previously received a non-binding

proposal from KLK on the same key terms as the offer. After considering the Indicative proposal together with its financial adviser Rothschild, the M.P. Evans board unanimously rejected the Indicative Proposal on 13 Oct 2016.

● M.P. Evans said it believes the offer is wholly inadequate and very substantially undervalues the company, its unique position, and its future growth potential. The company said it will make further announcements setting out its views on the offer.

Opportunistic acquisition by KL Kepong? ● We are surprised by this news. KL Kepong may have viewed the recent weakness in

the pound as well as the weak plantation earnings as a good opportunity to launch a takeover offer for M.P. Evans.

Positive on this news if bid is successful ● We would be positive on this news if KLK is successful in its bid to acquire a majority

stake in M.P. Evans because we estimate that KLK will be acquiring the estates at an attractive EV/ha of US$10.5k (inclusive of mills and housing) and the acquisition could enhance earnings by 3% for FY9/18F based on consensus forecasts. But it could the raise gearing ratio of KL Kepong to 0.62x, from 0.44x.

Maintain Hold with unchanged SOP-based TP ● The success of this exercise depends on the take-up rate from shareholders.

Pending the outcome, we keep our earnings forecasts and SOP-based TP and Hold call intact due to limited upside to our target price at the current level.

Figure 1: Major shareholders of M.P. Evans

SOURCES: CIMB, COMPANY REPORTS

Direct interests %

Alcatel Bell Pensioenfonds VZW 10.4

JP Morgan Asset Management Holdings 5.1

Montanaro Asset Management 3.6

MM Hadsley-Chaplin 3.4

Indirect interests

Aberdeen Asset Managers Ltd 15.9

FIL Ltd 9.4

▎Malaysia

October 26, 2016 - 7:21 AM





Up/downside: 2.7%


Reuters: KLKK.KL

Bloomberg: KLK MK


RM25,815m


RM33.49m

Current shares o/s 1,068m


Key financial forecasts

Source: Bloomberg


Absolute (%) 0.8 4.4 3.9

Relative (%) 0.4 3.9 5.9

Major shareholders % held Batu Kawan 45.7

Employees Provident Fund 16.1

Lembaga Kemajuan Tanah Persekutuan

4.4

Analyst(s)

Ivy NG Lee Fang, CFA


Sep-16F Sep-17F Sep-18F

Net Profit (RMm) 1,540 1,153 1,269

Core EPS (RM) 0.97 1.08 1.19

Core EPS Growth 18.7% 11.7% 10.0%

FD Core P/E (x) 25.06 22.44 20.40

Recurring ROE 11.0% 12.2% 12.7%

P/BV (x) 2.82 2.67 2.50

DPS (RM) 0.60 0.65 0.65

Dividend Yield 2.47% 2.68% 2.68%

96.0

99.5

103.0

106.5

110.0

21.00

22.00

23.00

24.00

25.00


2

4

6


Vo

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20

Food & Beverages│Malaysia│Equity research│October 26, 2016

Shariah Compliant

Company Note


Powered by the

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Nestle (Malaysia) Overseas appetite still strong

■ 9M16 reported core net profit of RM532.7m (+16.1% yoy) was in line with our estimate but below consensus at 81% and 77% of full-year forecasts, respectively.

■ The better yoy results were driven by stronger domestic demand, improved export sales volume and better cost-saving initiatives.

■ The group also declared a second interim DPS of 70 sen (vs. 3Q15 DPS: 65 sen).

■ We maintain our Hold call and our DCF-based target price of RM77.80.

■ Upside risks include stronger export demand while downside risks are a significant spike in raw material prices and/or US$ vs. RM.

Domestic and export sales continue to chart positive growth Nestle’s 9M16 revenue increased by 4.8% yoy while core net earnings increased by a larger quantum of 8.5% yoy to RM532.7m. The group’s topline was mostly boosted by positive yoy growth for its export business (due to higher sales to its affiliates) as well as solid demand from the domestic market. The implementation of effective cost management, which resulted in lower operating costs throughout the value chain, as well as lower tax rates (-2.6% pts yoy) led to the higher net profit for the year.

Quarterly earnings clipped by higher A&P costs Compared to 3Q15, 3Q16’s topline grew by 3.7% yoy but its bottomline decreased by 10.3% yoy. Revenue growth was mainly fuelled by higher domestic and export sales growth, with many key products registering growth. Nonetheless, core net profit was clipped by higher advertising and promotional (A&P) expenses as the group ploughed back its investments to reinforce its market share. All in, we deem the results as in line as the group’s 3Q typically makes up c.80% of the full-year number.

Earnings from e-commerce will take some time to be meaningful Moving forward, we understand that the group intends to grow its revenue contribution from e-commerce by c.10% of total revenue in the next 5 years and has since tied up with online retailers, such as Lazada and 11street, to push its sales. Since the launch of its e-commerce business last year, we understand that sales have grown rapidly (albeit from a small base). While we are positive on this venture in the longer term, we believe that it will take some time for earnings to be meaningful.

No price increase for Nestle products in the near term The group will not be looking to increase prices in the near term as it continues to focus on achieving economies of scale by concentrating on improving internal and external operating efficiencies to help protect its profitability. Note that Nestle has not increased prices for its products since 2Q15. Additionally, the group will continue to enjoy lower effective tax rates (9M16: 16.8% vs. 9M15: 19.4%), thanks to halal tax credits as well as capital allowances.

Maintain Hold; fairly valued for now Given the in-line results, we maintain our FY16-18F forecasts, DCF-based target price of RM77.80 and Hold call. Even though we continue to like Nestle for its strong brand name, conservative management and overall resilient, strong product mix, we think that the company is fairly valued for now. Estimated dividend yields of 3.5-3.9% should provide some support for its share price. Upside risks include stronger export demand while downside risks are a substantial spike in raw material prices and/or US$ vs. RM.

▎Malaysia





Up/downside: -0.5%


Reuters: NESM.KL

Bloomberg: NESZ MK


RM18,338m


RM4.59m




No change.

Source: Bloomberg


Absolute (%) -1.4 -2 8.5

Relative (%) -1.8 -2.5 10.5

Major shareholders % held Nestle S.A. 72.5

EPF 7.7

Analyst(s)

Kristine WONG




Revenue (RMm) 4,809 4,838 5,160 5,315 5,550

Operating EBITDA (RMm) 836 760 996 1,045 1,119

Net Profit (RMm) 550.4 590.7 659.7 695.4 728.3

Core EPS (RM) 2.35 2.52 2.81 2.97 3.11

Core EPS Growth (2.0%) 7.3% 11.7% 5.4% 4.7%

FD Core P/E (x) 33.32 31.04 27.80 26.37 25.18

DPS (RM) 2.35 2.47 2.76 2.91 3.04

Dividend Yield 3.01% 3.16% 3.53% 3.72% 3.89%

EV/EBITDA (x) 22.13 24.56 18.63 17.76 16.58

P/FCFE (x) 33.43 25.22 23.55 26.08 23.94

Net Gearing 20.4% 47.4% 30.1% 30.0% 29.4%

P/BV (x) 23.60 25.88 25.41 24.93 24.44

ROE 69.1% 79.5% 92.2% 95.4% 98.0%


Over the nex

98.0

105.5

113.0

71.0

76.0

81.0


100

200

300

400


Vol th

21

REIT│Singapore│Equity research│October 26, 2016

Company Note


Powered by the

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Cambridge Industrial Trust 3Q16 results: More margin pressure

3QFY16 DPU of 0.99 Scts was in line with our expectation, -18% yoy due to lower ■income and higher costs. 9MFY16 DPU was 73% of our FY16 forecast.

3QFY16, topline was dragged by property conversions into MTBs and income ■vacuum from asset sale.

Challenging operating conditions to persist, in our view. ■ Balance sheet is healthy with no refinancing due until FY18F. ■ Maintain Hold call with unchanged TP of S$0.59. ■

Results dragged by lower revenue and higher costs CIT reported 3QFY16 DPU of 0.99 Scts, -18% yoy due to lower revenue, higher cost and absence of management fees in units. NPI margin fell by 4.3% pts yoy in 3QFY16 to 72% (3QFY15: 76.3%, 2QFY16: 74.3%) as a result of the additional property costs from more multi-tenanted properties. This was partly moderated by additional revenue from leasing of properties and rent escalations for existing portfolio.

Lower revenue from income vacuum and negative reversions Gross revenue showed a 2.9% yoy decline to S$27.6m in 3QFY16, negatively affected by conversion of single (STBs) to multi-tenancy (MTBs) properties, divestment of a property and a head lease expiry. The group renewed 1.2m sq ft of space for 9MFY16 (568,663 sq ft in 3Q) at 4.5% negative reversion, with average portfolio rents staying flat at S$1.27 per sq ft/month. However, tenant retention rose to 86.7% and portfolio occupancy nudged up to 93.6% in 9MFY16.

Challenging operating environment Looking ahead, we think CIT’s operating performance is likely to reflect the challenging industrial rental market. Around 3.3% of its income is expiring in 4QFY16F. In addition, 24.3% of income is due to be re-contracted in FY17F, of which 7.3% comes from six STBs. No details have been provided on whether these properties will be renewed or converted into MTBs. CIT would also continue to update its portfolio and has announced the sale of 2 Ubi View for S$10.5m, at a premium to book value and purchase price.

Capital management CIT’s gearing stood at 36.9% at end-3QFY16. All-in cost of debt was 3.65% and 88.4% of its interest rate exposure has been hedged. In Sep 16, it refinanced S$72m loans due in FY17F and extended the weighted average debt expiry to 3.4 years. Post-refinancing, 100% of the trust’s assets are unencumbered and it has no debt due until FY18F.

Retain Hold call We maintain our FY16-18 DPU estimates, as well as our DDM-based target price of S$0.59. We keep our Hold call as we expect earnings outlook to remain challenging over the remainder of FY16 and FY17.

▎Singapore


Current price: S$0.56

Target price: S$0.59

Previous target: S$0.59

Up/downside: 6.2%


Reuters: CMIT.SI

Bloomberg: CREIT SP


S$730.5m


S$0.79m




No changes

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 2.8 0 -11.8

Relative (%) 2.9 2.6 -4.8

Major shareholders % held JinQuan Tong 16.4

Credit Suisse Grp AG 5.9

Chan Wai Kheong 5.6

Analyst(s)

YEO Zhi Bin


LOCK Mun Yee T (65) 6210 8606 E [email protected]



Gross Property Revenue (S$m) 99.3 112.2 110.0 109.7 111.2

Net Property Income (S$m) 77.81 86.16 83.59 83.36 85.06

Net Profit (S$m) 45.32 52.52 52.03 51.67 53.22

Distributable Profit (S$m) 63.04 61.81 56.38 56.02 57.57

Core EPS (S$) 0.040 0.042 0.040 0.040 0.041

Core EPS Growth 45.1% 5.7% (5.4%) (0.7%) 3.0%

FD Core P/E (x) 13.76 13.04 13.97 14.07 13.66

DPS (S$) 0.050 0.048 0.043 0.043 0.044

Dividend Yield 8.94% 8.54% 7.76% 7.71% 7.92%

Asset Leverage 34.4% 36.7% 37.1% 37.6% 37.9%

BVPS (S$) 0.69 0.67 0.67 0.67 0.66

P/BV (x) 0.81 0.83 0.84 0.84 0.85

Recurring ROE 5.84% 6.30% 5.98% 5.96% 6.17%

% Change In DPS Estimates 0% 0% 0%


86.0

89.2

92.4

95.6

98.8

102.0

0.400

0.450

0.500

0.550

0.600

0.650

Price Close Relative to FSSTI (RHS)

5

10

15

20


Vol m

22

Tech Manufacturing Services│Singapore│Equity research│October 26, 2016

Company Note


Powered by the

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Innovalues Ltd Take the full cash offer

We deem 9M16 core EPS in line at 71% of our full-year forecast, as we expect a ■stronger 4Q16F.

3Q16 results were impressive, in our view, with both sales growth (up 11.5% yoy, ■4.4% qoq) and gross margin expansion (+1.3% pts qoq, +4.5% pts yoy) to 32.9%.

After trading halt, announcement on proposed acquisition by Northstar (PE firm) and ■Precision Solutions Partners, valuing Innovalues at S$331.4m (13.3x FY16F P/E).

We downgrade to Hold and think shareholders should take offer for: a) S$1.01/share ■in cash, not b) S$0.61 in cash and one HoldCo share (issue price: S$0.40).

Proposed takeover by private equity (PE) fund at S$1.01/share Innovalues announced a proposed acquisition by Precision Solutions Group (“HoldCo” and “Offeror”), a SPV and indirect wholly-owned subsidiary of Northstar Equity Partners, at an offer price of S$1.01 per share. This implies valuation of 14.2x FY15 P/E/13.3x FY16F P/E, and FY15/16F EV/EBITDA of 9.0x/8.1x. Past transactions have fetched P/E multiples of 12-16x and 4.8-10.8x EV/EBITDA, while companies with good customer base, regional footprint and operating leverage may command a premium.

Offer price at 30.5% premium over 12-month VWAP up to 6 Apr 16 The Share Scheme price of S$1.01/share is not only close to our DCF-based target price of S$1.03 (WACC:12.9%), but also represents a 30.5% premium over the twelve-month volume weighted average price (VWAP) up to 6 Apr 16, the date Innovalues first announced a possible transaction, and 18.1% premium over the closing price on 30 Sep 16 (most recent update announcement). We downgrade the stock from Add to Hold due to limited upside, and recommend that investors take up the offer which we view as fair.

Conditions of the scheme The Share Scheme requires approvals from majority of Innovalues shareholders, representing not less than 75%, and has received irrevocable undertaking from key management amounting to approximately 39% of total shares. Innovalues CEO and Executive Director will reinvest c.23.9% and 1.6%, respectively, in the new HoldCo, and continue rendering their services. Once the share scheme becomes effective and binding, Innovalues will delist from the SGX.

Prefer the cash option for clean exit The scheme consideration allows shareholders to elect either: a) S$1.01 in cash, or b) S$0.61 in cash and one HoldCo share at an issue price of S$0.40. We believe option a) offers investors a clean cash exit opportunity, while option b) may be viable for those who see longer-term potential in Innovalues. Should a competing offer arise, the offeror has the right to launch a voluntary conditional cash offer with similar or better terms, and conditional upon acceptance level of just over 50%.

3Q16 results in line; with topline growth and margin expansion Innovalues reported 9M16 topline of S$88.9m, which comprised 70%/71% of our/Bloomberg consensus full-year forecasts. 3Q16 revenue rose 11.5% yoy and 4.4% qoq, driven by growth in both automotive (AU, 12.0% yoy, 2.9% qoq) and office automation (OA, 9.5% yoy, 9.7% qoq) segments. Gross margin also expanded by 1.3% pts qoq to 32.9% in 3Q16 (9M16: 31.9%). Excluding FX gains, 9M16 core net profit improved by 14.6% yoy, also in line at 71% of our FY16 forecast.

▎Singapore

HOLD (previously ADD) Consensus ratings*: Buy 4 Hold 1 Sell 0




Up/downside: 4.8%


Reuters: INNV.SI

Bloomberg: IP SP


S$321.5m


S$1.93m




No changes

Source: Bloomberg


Relative (%) 11.5 5.8 35.1

Major shareholders % held Leng Tse Goh 21.2

Tiak Beng Ong 9.6

Boon Hwee Koh 6.7

Analyst(s)

NGOH Yi Sin


William TNG, CFA T (65) 6210 8676 E [email protected]



Revenue (S$m) 108.5 113.7 127.4 144.8 165.9

Net Profit (S$m) 15.81 23.00 24.89 28.28 31.55

Core EPS (S$) 0.049 0.071 0.076 0.087 0.097

Core EPS Growth 81.0% 45.3% 7.4% 13.6% 11.6%

FD Core P/E (x) 20.10 13.94 12.95 11.40 10.22

Price To Sales (x) 2.92 2.79 2.51 2.21 1.93

DPS (S$) 0.020 0.038 0.040 0.043 0.047

Dividend Yield 2.04% 3.88% 4.08% 4.39% 4.80%

EV/EBITDA (x) 12.78 10.02 8.17 6.82 5.75

P/FCFE (x) 24.67 24.27 14.55 12.08 10.79

Net Gearing (19.7%) (32.6%) (40.4%) (48.3%) (54.9%)

P/BV (x) 4.48 3.86 3.39 2.92 2.52

ROE 24.8% 30.0% 28.1% 27.6% 26.5%

% Change In Core EPS Estimates 0% 0% 0%


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REIT│Singapore│Equity research│October 26, 2016

Company Note


Powered by the

EFA Platform

Mapletree Commercial Trust Still going strong

■ 2Q/1HFY17 DPU at 2.05/4.08 Scts, making up 25%/49% of our FY17 estimates

■ VivoCity continues to deliver positive rental reversion, underpinned by higher tenant sales and shopper traffic

■ Office renewals benefited from higher occupancy and positive rental uplift

■ Manageable office and retail renewals over 2HFY17-18F

■ Maintain Add, with an unchanged target price of S$1.62

Strong growth from organic and acquisition drivers MCT delivered a 23.6% yoy increase in 2QFY17 revenue to S$88.1m (US$63.4m) while distribution income rose 25.4% yoy to S$53.6m (US$38.6m), thanks to better performance across all its assets and maiden contributions from MBC1. However, DPU only inched up a marginal 1.5% yoy to 2.05 Scts due to dilution from new units issued as well as a timing difference between income recognition of MBC1 and issuance of private placement and preference units. Excluding the latter, DPU would have been up 9% yoy.

VivoCity continued to deliver strong showing 1HFY17 rental revenue at VivoCity rose 5% yoy to S$98.2m (2QFY17: S$49.8m), with reversions 13.8% higher over preceding levels (including tenant space renewals) and higher occupancy of 99.3%. Underlying operating conditions remained fairly robust, with tenant sales up 1.5% yoy and shopper traffic up 1.8% yoy (2QFY17: +2.7%/6.6%). Its asset enhancement initiative (AEI), at B2 and L3 to increase space utilisation and F&B kiosks, is completed; we expect ROI in excess of 20% on a stabilised basis.

Office rents benefited from higher occupancy and positive uplift Office rental revenue from MLHF, PSAB and Mapletree Anson rose 7% yoy to S$50.7m in 1HFY17 while MBC1 generated an additional S$12.6m, based on slightly more than a month's recognition. This was due to positive average rental reversions of 14% for office space and higher occupancy of 98.5-100%. MBC1 achieved an 8.5% increase in rents for its renewals.

Manageable office reversions in 2HFY17-18F MCT has 0.8% of retail and 3.8% of office leases to be re-contracted in 2HFY17, and a further 10.9% and 6.1%, respectively, in FY18. We believe VivoCity would be able to continue delivering positive showing for its renewals due to its niche location. Meanwhile, a lack of new business park supply post 2017 would be supportive of business parks rents and would have a positive knock-on impact on MBC1’s renewals, in our view. Post fund-raising gearing is higher but still healthy at 37.3%

Maintain Add We tweak our FY16-18 DPU estimates by -0.3% to 0.4% as we fine-tune the number of new units issued as well as the timing of completing the purchase of MBC1. However, our DDM-based target price remains unchanged at S$1.62. We believe the addition of MBC1 to MCT’s portfolio will strategically enhance the trust’s size and stability. Downside risks include a weaker-than-expected office rental market.

▎Singapore





Up/downside: 4.6%


Reuters: MACT.SI

Bloomberg: MCT SP


S$4,432m


S$8.08m




FY17F DPU increased by 0.4%.

FY18F DPU decreased by 0.3%.

FY19F DPU decreased by 0.3%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -2.8 3 10.8

Relative (%) -2 6.6 19.1

Major shareholders % held Temasek Holdings 38.6

AIA 6.3

Schroders 5.9

Analyst(s)

LOCK Mun Yee


YEO Zhi Bin T (65) 6210 8669 E [email protected]



Gross Property Revenue (S$m) 282.5 287.8 367.9 427.1 436.6

Net Property Income (S$m) 211.7 220.7 282.5 329.9 337.1

Net Profit (S$m) 312.1 303.4 192.8 229.8 236.8

Distributable Profit (S$m) 168.3 172.5 213.6 247.1 254.2

Core EPS (S$) 0.074 0.075 0.082 0.085 0.082

Core EPS Growth 9.15% 1.45% 9.16% 2.86% (2.84%)

FD Core P/E (x) 20.80 20.50 18.78 18.26 18.79

DPS (S$) 0.080 0.081 0.083 0.086 0.088

Dividend Yield 5.18% 5.26% 5.40% 5.56% 5.70%

Asset Leverage 36.3% 35.1% 37.4% 37.2% 37.2%

BVPS (S$) 1.24 1.30 1.49 1.32 1.32

P/BV (x) 1.25 1.19 1.04 1.17 1.17

Recurring ROE 6.18% 5.94% 5.87% 6.04% 6.22%

% Change In DPS Estimates 0.422% (0.346%) (0.338%)


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Retail│Singapore│Equity research│October 26, 2016

Company Note


Powered by the

EFA Platform

Sheng Siong Group Gross margins remain high

3Q16 net profit (S$15.7m, +8% yoy) was in line with our and consensus ■expectations. 3Q/9M formed 25%/74% of our FY16F.

Sales growth (+1.2% yoy) was entirely driven by new stores as same-store-sales ■growth (SSSG) was negative at -1.2%, made worse by the store closure at Loyang.

The positive was the company’s ability to maintain high gross margins (25.9%), ■mostly driven by lower input prices from higher rebates.

Slight delay in China, expected opening in 2Q17F now vs. 4Q16F previously. ■ Maintain Add. We raise our FY18F EPS on better margin assumptions. ■

Sales growth entirely driven by new stores New stores contributed positively (+5.3% yoy) as they continued to mature but were let down by weak SSSG (-1.15%), which management mainly attributed to poor festive sales during the Lunar Seventh month. The temporary Loyang store closure (will reopen in 1Q17F) further dragged down sales by 2.95%.

Weak discretionary spending likely reason for poor SSSG 1Q and 3Q are traditional festive periods (Lunar New Year and Lunar Seventh month) that carry an element of discretionary spending. We think the weak SSSG in both 1Q16 (-0.5%) and 3Q16 (-1.15%) is a reflection of the general pullback in discretionary consumption trends. We believe this is likely to have been an industry-wide phenomenon as a result of the weak macro conditions, and not an idiosyncratic problem.

Gross margins remain high at 25.9% (2Q16: 26.1%; 3Q15: 24.3%) On the bright side, 3Q16’s gross margin (25.9%) remained on the high side. Note that 3Q is typically a seasonally-weak quarter in terms of margins as retailers push for higher volumes during the Lunar Seventh month. However, the high supplier rebates that lifted 2Q16’s GPM to record high levels were still prevalent. These rebates, given for volume, display and bulk handling, were the main drivers for 2Q’s continued high GPM.

Slight delay in China supermarket plans With regards to the planned c.54k sf store in Kunming, the group has not obtained a firm handover date from the landlord and the expectation is now for operations to commence in 2Q17F and not 4Q16F, as previously projected. The delay does not change our forecasts as we had not expected any meaningful contributions from the 60% JV in FY16-17F.

One more new store opened in 3Q16 Yishun J9 (15.5k sf) is the group’s latest store, commencing operations in Sep 16 and adding c.4% to the group’s total retail space. This is a sizeable store and should meaningfully drive new store sales going forward. This brings the group’s total store count to 43 (including the Loyang store under renovation) and closer to its target of 50.

Maintain Add We raise our FY18F EPS on higher margin assumptions and roll forward to CY18F. This lifts our TP to S$1.14 (based on 23.3x CY18 P/E, 3-yr historical mean). In our opinion, the stock’s premium valuations reflect stable earnings and attractive yields in tough times. Re-rating catalysts include upside from China or better-than-expected SSSG. Risks include a drop in margins.

▎Singapore





Up/downside: 6.6%


Reuters: SHEN.SI

Bloomberg: SSG SP


S$1,609m


S$2.81m




FY18F EPS increased by 3.2%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -0.9 11.5 21.6

Relative (%) -0.1 15.1 29.9

Major shareholders % held SS Holdings 29.9

Lim Hock Chee 11.3

Lim Hock Leng 11.3

Analyst(s)

Jonathan SEOW




Revenue (S$m) 726.0 764.4 823.9 887.9 893.1

Operating EBITDA (S$m) 63.1 70.6 88.0 105.9 106.9

Net Profit (S$m) 47.60 56.79 63.67 70.75 73.57

Core EPS (S$) 0.033 0.037 0.042 0.047 0.049

Core EPS Growth 18.9% 11.4% 13.7% 11.1% 4.0%

FD Core P/E (x) 32.45 28.74 25.27 22.74 21.87

DPS (S$) 0.030 0.035 0.038 0.042 0.044

Dividend Yield 2.80% 3.27% 3.56% 3.96% 4.12%

EV/EBITDA (x) 22.08 20.99 17.61 14.41 14.26

P/FCFE (x) NA 36.32 NA 18.29 23.55

Net Gearing (55.2%) (51.6%) (23.4%) (32.2%) (32.1%)

P/BV (x) 6.81 6.59 6.42 6.24 6.07

ROE 24.7% 23.3% 25.7% 27.8% 28.2%



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Sri Lanka Equities

QUARTERLY HIGHLIGHTS

October 2016

John Keells Stock Brokers (Pvt) Ltd.

A JKSB Research Publication

Janaghan Jeyakumar [email protected]

Chevron Lubricants Lanka PLC (LLUB)

This document is published by John Keells Stockbrokers (Pvt.) Limited for the exclusive use of their clients. All information has been compiled from available documentation andJKSB’s own research material. Whilst all reasonable care has been taken to ensure the accuracy of the contents of this issue, neither JKSB nor its employees can accept responsibilityfor any decisions made by investors based on information contained herein.

LLUB 3Q PROFIT 19.9%

LLUB's 3Q earnings increased by 19.9% YoY mainly due to margin expansionDespite the marginal revenue growth of 7.6% YoY, the expansion of the GP margin from 45.9%

to 48.9% resulted in a healthy gross profit growth of 14.5% YoY. Furthermore, the reductions in

distribution expenses (-5.2% YoY) and administrative expenses (-10.9% YoY) augmented the

improvements seen at the GP level causing EBIT margins to expand from 36.4% to 40.6%

which resulted in a sound EBIT growth of 20.2% YoY. Although net finance income declined

by 21.9% YoY, the improved performance at the EBIT level was translated to the bottom line

with the aid of a slight reduction in the effective tax rate from 26.7% to 25.8%. As a result, the

net margin expanded from 27.8% to 31.0% and earnings for the quarter increased by 19.9%

YoY.

Lower base oil prices & improvement in the sales mix continued to drive earningsFor the cumulative period, 9M CY16, LLUB's revenue increased marginally by 6.2% YoY.

However, the GP margin expanded from 44.7% to 48.1% due to the improvement in the

profitability of the sales mix stemming from an increase in the proportion of high-tier (premium)

oils and the cost savings arising from a drop in the price of base oil (raw material). The strong

performance at the GP level caused the EBIT and PBT margins to expand from 36.2% to

39.8% and 37.5% to 41.4% respectively. As a result, LLUB's net margin expanded from 27.6%

to 30.5% and net profits for the cumulative period grew by 17.4% YoY to Rs.2,789 mn.

Slow market growth & intense competition resulted in the erosion of LLUB’s market shareThe Sri Lankan lubricant industry currently consists of 13 licensed operators who collectively

account for a market volume of approximately 58 million litres. Over the last 5 years, volume

growth in the Sri Lankan lubricant industry has flattened due to a combination of factors such

as longer drain intervals in vehicles and the reduction in the proportion of lubricant-intensive

thermal power generation in the national energy mix. In addition to this, intense competition has

resulted in the erosion of LLUB's market share from 49.3% in 2014 to 47.6% in 2015.

We project full-year earnings to reach Rs.3.6 bn in CY16E (PE Ratio = 11.2x)With the market volumes nearing saturation levels in Sri Lanka, LLUB's future earnings

growth will depend heavily on increasing the proportion of premium products in the local sales

mix and achieving strong revenue growth in LLUB's export markets such as Bangladesh and

Maldives. Considering these factors, we project LLUB's full year earnings to reach Rs.3.6 bn in

CY16E which would translate to a CY16E PE ratio of 11.2x at the current trading price of

Rs.168.00. Comparing to our estimates of the FY17E PE ratios of the market (10.7x) and the

manufacturing sector (8.5x), LLUB currently trades at a premium of 5% and 32% respectively.

During the previous year, CY15, LLUB paid 4 interim dividends which collectively amounted

to a pre-split DPS of Rs.23.00 . After adjusting for the 1-into-2 split in June 2016, this translates

to a post-split DPS of Rs.11.50 and a dividend yield of 6.8% at the current trading price.

44,945

54,369

58,554 56,334

53,708 54,265

57,978

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2009

2010

2011

2012

2013

2014

2015

Sri Lankan Lubricant Market:

Total Volume (kL)

The growth in sales volume has been mostly flat over the last 5 years

Source: PUCSL

Source: PUCSL

Chevron 47.6% 49.3%

IOC (Servo) 14.9% 12.6%

Ceypetco (Hyrax) 9.2% 10.5%

Bharat (Mak) 5.1% 4.1%

Laugfs 4.9% 5.3%

ExxonMobil 4.9% 6.8%

Sinopec 2.6% 2.2%

BP (BP, Castrol) 2.6% 2.4%

Toyota 2.6% 1.9%

Shell 2.4% 2.2%

Ashland (Valvoline) 2.2% 2.0%

Total Oil (Total, Elf) 0.8% 0.5%

Motul 0.1% 0.1%

100.0% 100.0%

Market Shares

(By Volume)

Company(Brand)

Market

Share

2015

(%)

Market

Share

2014

(%)

Revenue Gross Profit EBIT PBT Earnings EPS

NBVPS (Rs.) 20.15 (Rs. 'mn) (Rs. 'mn) (Rs. 'mn) (Rs. 'mn) (Rs. 'mn) (Rs.)

Issued Capital ('mn) 240 This Quarter 3Q CY2016 3,225 1,576 1,311 1,348 1,001 4.17

Market Capitalisation (Rs. 'mn) 40,320 Previous 3Q CY2015 2,998 1,376 1,090 1,138 835 3.48

Forecast Earnings CY16E (Rs. 'mn) 3,600 Change (%) 7.6 14.5 20.2 18.5 19.9 19.9

CY 16E EPS (Rs.) 15.00 This 9 months Jan-Sep 16 9,144 4,398 3,635 3,783 2,789 11.62

CY 16E PER (x) 11.2 Previous Jan-Sep 15 8,606 3,850 3,111 3,231 2,375 9.89

Current PBV (x) 8.3 Change (%) 6.2 14.2 16.8 17.1 17.4 17.4

LLUB 3Q CY2016

Volume growth has flattened over the last 5 years

LAST PRICE

Rs.

CONSIDER BUY

Rs.

CONSIDER SELL

Rs.

52 WEEK HIGH

Rs.

52 WEEK LOW

Rs.

168.00 145.00 180.00 190.00 149.00

26

Semiconductor│Taiwan│Equity research│October 27, 2016

Company Note


Powered by the

EFA Platform

UMC Downgrade to Reduce on unfavourable margin trend

3Q16 revenue was up 3.2% qoq and 8.1% yoy but GM/OPM fell to 21.8%/3.9%, ■down 0.6%/2.7% pts over 2Q.

UMC expects 4Q16 revenue to stay flattish but GM will likely hit the low-20% range ■due to challenging pricing environment, according to management.

We expect margins to plummet in 1H17F due to seasonality and the QCOM/MTK ■product end-of-life (EOL) at 28nm.

We cut our FY17-18F EPS by 8-29% to factor in the ramp-up cost for the Xiamen ■fab and the under-utilised 28nm capacity in 1H17F.

Cut target price to NT$10.2 on the back of earnings revision. Downgrade to Reduce. ■

3Q16 earnings missed Street’s expectations 3Q16 EPS was NT$0.24, up from NT$0.21 in 2Q16, on sales of NT$38.2bn (US$1.2bn, +3.2% qoq, +8.1% yoy). Its GM/OPM were 21.8%/3.9%, down 0.6%/2.7% pts over 2Q. OP fell 39% qoq to NT$1.5bn, 86% ahead of our forecast but 45% below consensus. Note that the 8.8% qoq rise in opex was largely due to the initial costs at its Xiamen 12” fab and impairment loss of NT$455m incurred from its solar unit. 9M16’s net profit made up 107% of our full-year forecast; as such, we raise our FY16F EPS by 36%.

4Q16F margin set to decline due to pricing pressure UMC expects a flattish 4Q revenue with a 5% increase in wafer shipment and 5% decline in ASP sequentially. Even UMC’s 8-inch and 28nm lines will remain fully loaded in 4Q16, management has guided for 4Q GM sliding to the low-20% range in the face of a challenging pricing environment. Note that the gross margin guidance includes a c.2% margin contribution from insurance compensation claimed for the Feb earthquake.

We expect 28nm business to slow down in 1H17 We estimate UMC’s 28nm to run at a high 90% loading in 4Q16F thanks to pull-in orders for smartphone SoCs from Qualcomm (QCOM.US, NR) and MTK (2454.TT, Reduce). However, we are worried about the margin downside risk in 1H17F due to the QCOM/MTK product end-of-life (EOL) and slow seasonality. The low 28nm CUR in 1H17 will drag UMC’s operating profit to break-even level as 28nm’s loading penalty is much higher, in our view.

14nm has a long way to go We expect the Xiamen fab to continue dragging down profit in 2017F due to its small scale and high initial cost. Management expects Xiamen to commence mass production in mid-4Q16 with a 6-9k wafer/month capacity. It will start with the 40/55nm process for Chinese communication and consumer customers. Another 10k of 28nm capacity will be added if its 14nm process can be commercialised in Taiwan in 1H17. But as the 14nm SRAM yield is unstable, we view the mass production schedule as aggressive.

Revise TP to NT$10.2 from NT$11.5, downgrade to Reduce We cut our FY17-18F EPS by 8-29% to factor in the ramp-up cost from the Xiamen fab and lower CUR at 28nm in 1H17F. UMC currently trades at 0.67x 2016F P/BV on ROE of 1.9%. We lower our target price from NT$11.5 to NT$10.2, now based on 0.56x 2016F EV/CE (previously 0.69x) as we trim our mid-term ROCE assumption from 4.5% to 3.9%. Downgrade from Hold to Reduce. Upside risks to our call are faster client engagement and rapid yield improvement in 28nm nodes.

▎Taiwan

REDUCE (previously HOLD) Consensus ratings*: Buy 2 Hold 21 Sell 3

Current price: NT$11.55

Target price: NT$10.20

Previous target: NT$11.50

Up/downside: -11.7%


Reuters: 2303.TW

Bloomberg: 2303 TT


NT$145,811m


NT$265.3m




FY16F EPS increased by 36%.

FY17F EPS decreased by 29%.

FY18F EPS decreased by 8%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -0.4 -6.9 -7.2

Relative (%) -2.2 -10.6 -14.3

Major shareholders % held UMC 6.5

Hsun Chieh Investments 3.5

Dimentional Fund 2.6

Analyst(s)

Eric LIN


James CHEN T (886) 2 8729 8382 E [email protected]



Revenue (NT$m) 140,012 144,853 148,019 158,944 165,316

Net Profit (NT$m) 11,480 12,827 4,232 5,857 10,616

Normalised EPS (NT$) 0.97 1.08 0.64 0.48 0.87

Normalised EPS Growth (3.8%) 11.0% (41.0%) (24.7%) 81.3%


Price To Sales (x) 0.97 0.95 0.52 0.89 0.85

DPS (NT$) 0.50 0.55 0.55 0.32 0.24

Dividend Yield 4.33% 4.76% 4.76% 2.81% 2.12%

EV/EBITDA (x) 2.67 2.53 1.76 2.72 2.30

P/FCFE (x) NA 14.45 NA 14.12 20.57

Net Gearing (1.3%) 2.5% 10.7% 7.9% 2.4%

P/BV (x) 0.62 0.60 0.36 0.66 0.63

ROE 5.35% 5.73% 1.93% 2.74% 4.86%

% Change In Normalised EPS Estimates 35.6% (28.6%) (7.7%)


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27

Property Development│Thailand│Equity research│October 26, 2016

Company Note


Powered by the

EFA Platform

Central Pattana 3Q16 preview: All good things likely to continue

CPN is slated to release its 3Q16 results on 7 Nov 16. We forecast that 9M16 net ■profit will represent 76% of our full-year forecast, which we deem in line.

Same-store rental growth for 9M16 was 2.5%, in line with CPN’s FY16F target of 2-■3%.

Average occupancy rate was stable qoq and high at 93.2% in 3Q16. ■ We expect the mourning period for the King to have minimal impact on CPN’s ■operations in 4Q16F. Impact is likely to be seen on rental and hotel businesses.

Retain Add call due to sustainable EPS growth, with CAGR of 18.3% in 2016-18F ■based on our estimates.

Expect a strong set of results in 3Q16 We expect CPN to post 3Q16 net profit of THB2.36bn, up 3% qoq and 30% yoy, due to strong growth in rental income, F&B revenue and other income. We estimate that rental income will rise 4.3% qoq and 16.5% yoy to THB6.48bn in 3Q16, driven by: 1) contribution from three new malls- Central EastVille, Central Nakorn Si Thammarat and Central WestGate, 2) asset enhancement initiatives at Central Pinklao and Central Bangna, and 3) effective rental rate growth of 4.5% yoy to THB1,563/sq m/month.

Same-store rental growth YTD on track to meet CPN’s FY16F target Same-store rental growth improved to 3% yoy in 3Q16 from 2% in 1Q16 and 2.5% in 2Q16, as CPN offered fewer discounts to the tenants of certain malls (previously that affected by sluggish economy) due to improving foot traffic and consumer confidence., Therefore, same-store rental growth was 2.5% in 9M16, on track to meet CPN’s target of 2-3% in 2016. Meanwhile, CPN has successfully raised rental rates for renewed contracts at its malls by 5% per year YTD.

Average occupancy rate remains stable and high The average occupancy rate of CPN’s malls was stable qoq at 93.2% in 3Q16 but improved slightly yoy from 92.4% in 3Q15. Occupancy of Central Nakorn Si Thammarat, which was opened in Jul 16, was 85%, better than management’s expectation (of 80%) and we anticipate it will ramp up to 90% in 2017. Foot traffic at CPN’s malls rose 3% yoy in 9M16 as a result of higher foot traffic at malls located upcountry, especially in tourist destinations (+9% yoy), while foot traffic at Bangkok malls was flat yoy.

Impact of mourning period for King likely to be small We expect the mourning period for the King to have minimal and short-lived impact on CPN’s operations. CPN’s mall opening times are unchanged. The impact on CPN is seen in: 1) the cancellation of entertainment events at common areas in its malls, and 2) some cancellations of room reservations, seminars and New Year parties at its hotels. CPN plans to mitigate the impact by renting common space out for non-entertainment activities. We estimate small impact of c.1% of total revenue in 2016.

Maintain Add with target price of THB68.0 We keep our FY16-18F EPS forecasts. Our target price is unchanged at THB68.0, based on SOP valuation and equivalent to FY17 P/E of 27.8x (0.5 s.d. above historical average forward P/E). We maintain our Add call on CPN due to its sustainable earnings growth outlook, with EPS CAGR of 18.3% in 2016-18F backed by its concrete expansion plan, continually rising rental rates and stable high occupancy. Potential upside could come from development of mixed-use projects and asset monetisation via REIT.

▎Thailand


Current price: THB55.75

Target price: THB68.00

Previous target: THB68.00

Up/downside: 22.0%


Reuters: CPN.BK

Bloomberg: CPN TB


THB250,206m


THB608.5m




No change.

Source: Bloomberg


Relative (%) -5.4 -4 14.1

Major shareholders % held Chirathivat Family 29.0

Central Group 26.0

Foreign funds 31.0

Analyst(s)

Pornthipa RAYABSANGDUAN




Total Net Revenues (THBm) 23,668 25,713 29,505 34,686 41,478

Operating EBITDA (THBm) 12,532 13,487 16,239 19,006 21,832

Net Profit (THBm) 7,307 7,880 9,266 10,991 12,827

Core EPS (THB) 1.61 1.73 2.06 2.45 2.86

Core EPS Growth 17.2% 7.1% 19.6% 18.6% 16.7%

FD Core P/E (x) 34.10 32.30 27.00 22.76 19.51

DPS (THB) 0.65 0.70 0.82 0.98 1.14

Dividend Yield 1.17% 1.26% 1.48% 1.76% 2.05%

EV/EBITDA (x) 21.10 20.10 16.91 14.46 12.52

P/FCFE (x) 96.21 98.29 96.22 75.46 50.44

Net Gearing 32.4% 42.8% 44.0% 38.6% 31.4%

P/BV (x) 6.10 5.45 4.81 4.22 3.69

ROE 18.7% 17.8% 18.9% 19.7% 20.2%

% Change In Core EPS Estimates (0%) (0%) (0%)


95.0

102.0

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130.0

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Cement│Thailand│Equity research│October 26, 2016

Company Note


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Siam Cement One stronger, one weaker

■ 3Q16 net profit of THB14.1bn beat our estimate by 3% and consensus by 15% on stronger chemical earnings. 9M16 core net profit was 1% above our estimate.

■ The weaker earnings from cement and building materials were in line.

■ Packaging unit posted weak earnings due to higher feedstock cost.

■ 4Q16F earnings set to decline due to a 40-day planned chemical plant shutdown.

■ Maintain Add and SOP-based target price. Key catalyst: cement demand recovery.

A chemical quarter 3Q16 net profit was THB14.1bn, up 57% yoy but down 12% qoq, beating Bloomberg consensus by 15% and our estimate by 3%, led by outstanding chemical earnings which more than offset weaker earnings from other units. While earnings from both cement and building material and packaging units declined, by 32% qoq and 34% qoq, respectively, the chemical unit posted solid earnings of THB11.9bn, up 74% yoy and 6% qoq. Excluding THB1.6bn gains from deferred tax, core earnings were THB12.5bn.

Chemical - stronger for longer Driven by wider margins, SCC's chemical unit posted solid earnings across the board - HDPE-naphtha (+4% qoq to US$740/t), PVC-EDC (+1% qoq to US$808/t), BD-naphtha (+17% qoq to US$702/t), and MMA-naphtha (+25% qoq to US$1,323/t), thanks to lower feedstock costs for naphtha and EDC (both -5% qoq) despite flat Brent oil price qoq. Polyolefins sales volume slipped 2% qoq due to inventory build-up ahead of its ROC's 40-day maintenance shutdown in 4Q16. EBITDA margin dipped to 26% (2Q16: 30%).

Cement and building materials– down to earth The cement unit posted poor earnings of THB1.7bn, down 19% yoy and 12% qoq, dragged by weak domestic cement demand (-5% yoy, -4% qoq) due to the rainy season and low demand from non-government sectors. Price-wise, domestic cement price dipped 3% qoq to THB1,700-1,750/t while export cement price sank 18% qoq to US$53/t as a result of the change in product mix given a higher portion of low-margin clinker.

Packaging - still in doldrums The packaging segment reported weak earnings of THB670m, down 34% qoq but up 4% yoy, thanks to the shift in strategy to move production focus from the low-margin Fibrous to high-margin Packaging chain. Sales volume rose to 592kt, up 3% qoq and 7% yoy, driven by higher domestic sales and ASEAN operations. EBITDA margin dipped to 13%, down from 15% in 2Q16 due to higher feedstock cost.

A hiccup before an uptrend While 9M16 core net profit was at 89% of our full-year forecast, our earnings estimate is intact as we expect weak earnings in 4Q16 due to the 40-day planned shutdown of its chemical unit. We expect an earnings growth recovery in 1Q17, driven by 1) cement demand recovery in Thailand due to demand from government projects, and 2) continued solid chemical earnings post maintenance shutdown.

Maintain Add, a material growth for material play We keep our SOP-based target price of THB628 and believe share price is likely to re-rate by 1Q17 to reflect SCC's strong earnings growth momentum on the back of domestic cement demand recovery and rising earnings from overseas cement plants. We recommend accumulating the stock ahead of the projected earnings growth momentum in 2017-18F. Key risk to our Add call is weak cement earnings.

▎Thailand


Current price: THB510.0

Target price: THB628.0

Previous target: THB628.0

Up/downside: 23.1%


Reuters: SCC.BK

Bloomberg: SCC TB


THB612,000m


THB1,452m




No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -1.9 0 7.1

Relative (%) -2.8 0.4 0.7

Major shareholders % held Crown Property Bureau (CPB) 30.0

NVDR 9.5

Crown Property Bureau Equity (CPBE) 1.9

Analyst(s)

Suwat SINSADOK, CFA, FRM




Revenue (THBm) 487,545 439,614 405,706 481,390 498,818

Operating EBITDA (THBm) 51,224 69,212 67,208 72,370 79,234

Net Profit (THBm) 33,615 45,400 49,319 53,693 57,167

Core EPS (THB) 28.01 37.83 41.10 44.74 47.64

Core EPS Growth (8.5%) 35.1% 8.6% 8.9% 6.5%

FD Core P/E (x) 18.21 13.48 12.41 11.40 10.71

DPS (THB) 17.50 19.50 16.00 18.00 20.00

Dividend Yield 3.43% 3.82% 3.14% 3.53% 3.92%

EV/EBITDA (x) 13.74 10.29 10.47 9.96 9.24

P/FCFE (x) 35.65 18.91 16.35 42.98 26.79

Net Gearing 86.8% 69.1% 52.9% 47.7% 41.8%

P/BV (x) 3.78 2.97 2.59 2.27 2.01

ROE 19.8% 24.7% 22.3% 21.2% 19.9%

% Change In Core EPS Estimates 0% 0% 0%


95.0

99.4

103.9

108.3

380

430

480

530

Price Close Relative to SET (RHS)

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Asia Pacific Daily│Equity research│October 27, 2016

REGIONAL HEAD

Michael William GREENALL Regional Head of Research +60 (3) 2261 9088 [email protected]

COUNTRY HEADS OF RESEARCH

Ivy NG, CFA Siew Khee. LIM Erwan TEGUH Kasem PRUNRATANAMALA, CFA Michael KOKALARI, CFA Malaysia Singapore Indonesia Thailand Vietnam +60 (3) 2261 9073 +65 6210 8664 +62 (21) 3006 1720 +66 (2) 657 9221 +84 907 974408 [email protected] [email protected] [email protected] [email protected] [email protected] Bertram LAI Dohoon LEE Eric LIN Pramod AMTHE Joyce Anne, RAMOS Hong Kong/China South Korea Taiwan India Philippines +852 2532 1111 +82 (2) 6730 6121 +886 (2) 8729 8380 +91 (22) 6602-5167 +63 (2) 888 7293 [email protected] [email protected] [email protected] [email protected] [email protected] Coverage via partnership arrangement with Yolan SEIMON SB Equities Sri Lanka +94 (11) 2306273 [email protected] Coverage via partnership arrangement with John Keells Stock Brokers

REGIONAL SECTOR HEADS

KJ KWANG Ivy NG, CFA Raymond YAP, CFA Offshore & Marine Plantations Transportation +82 (2) 6730 6123 +60 (3) 2261 9073 +60 (3) 2261 9072 [email protected] [email protected] [email protected]

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Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result Description: Excellent Very Good Good N/A

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member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015. AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.

Comprises level 1 to 5 as follows: Level 1: Committed Level 2: Declared Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy) Level 4: Certified Level 5: Extended.

CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute

recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute

recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute

recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to

benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to

benchmark.

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