Initiation: monetising through margin finance...

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■ Investment case Customer acquisition via brokerage, profit driven by margin finance. We expect Huatai Securities’ (Huatai) rising market share in broking (8% in 4M15), driven largely by its low commission rates, to translate into rising market share in margin loans (5.8% for 4M15). While its low-commission strategy has led to thinner profit margins for traditional brokerage business, margin lending remains lucrative and is likely to be the key to monetising its rising market share in brokerage. Rising brokerage market share with economies of scale. Since the introduction of its online low-cost initiative in 2H13, Huatai’s spiking brokerage volume has brought it both

larger market share and economies of scale. We estimate that Huatai’s break-even point in gross commission rate is now 1.8bp (vs. industry average of 2.8bp). Besides, its large commission rate decline since late-2013 suggests limited further downside. High sensitivity to market turnover. With China A-share ADT hitting CNY1.1tn YTD, we think the market might have underestimated A-share ADT for this year. In our coverage, Huatai offers the second-highest sensitivity to market turnover on our estimates. ■ Catalysts Apart from better market turnover and a higher margin lending balance, Huatai’s growing share in both brokerage and margin loans would be catalysts for the stock. We also expect its lending business to account for a higher proportion of its revenue mix going forward. ■ Valuation Trading currently at a 1.8x 2015E PBR (vs a 12% sustainable ROE), or a 36% discount to its A shares, Huatai’s current valuation looks undemanding to us. We use Gordon Growth Model to arrive at a 12-month target price of HKD32.0, which implies a 2.3x 2015E PBR. We initiate coverage with a Buy (1) rating.

■ Risks As the brokerage segment contributed 64.6% of its total revenue in 2014, we see Huatai’s earnings as highly sensitive to market turnover. Besides, regulatory tightening or operational risk on margin finance is another risk.

Financials / China6886 HK

8 June 2015

Huatai Securities

Initiation: monetising through margin finance

• We expect Huatai’s share of the lucrative margin loan business to catch up with that for its brokerage business (from 5.8% to 8%+)

• We see less downside for its margin on brokerage than for peers’ due to economies of scale and its low-cost online model

• Initiate with a Buy (1) rating and target price of HKD32.0

Source: FactSet, Daiwa forecasts

Financials / China

Huatai Securities6886 HK

Target (HKD): 32.00Upside: 27.0%8 Jun price (HKD): 25.20

Buy (initiation)

OutperformHoldUnderperformSell

1

2

3

4

5

90

94

98

101

105

0

75

150

225

300

Jun-15

Share price performance

Huatai (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 25.20-26.35Market cap (USDbn) 23.443m avg daily turnover (USDm) 266.37Shares outstanding (m) 7,210Major shareholder Jiangsu Guoxin Inv Group (18.3%)

Financial summary (CNY)Year to 31 Dec 15E 16E 17ERevenue (m) 34,493 38,388 41,445Operating profit (m) 13,513 13,997 14,205Net profit (m) 10,522 10,853 10,946Core EPS (fully-diluted) 1.609 1.505 1.518EPS change (%) 100.9 (6.5) 0.9Daiwa vs Cons. EPS (%) n.a. n.a. n.a.PER (x) 12.5 13.4 13.3Dividend yield (%) 2.4 2.2 2.3DPS 0.483 0.452 0.455PBR (x) 1.8 1.6 1.5ROE (%) 17.3 12.9 11.9

Leon Qi, CFA(852) 2532 [email protected]

Steve Xu(852) 2532 [email protected]

Ailsa He(852) 2773 [email protected]

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

Financials / China 6886 HK 8 June 2015

- 2 -

Customer acquisitions in brokerage, profit-driven by margin finance ......................................... 6

Market share in margin finance to catch up with brokerage ..................................................... 6

Reaping profits in margin finance .............................................................................................. 8

Rising brokerage market share with economies of scale .............................................................. 11

Market-share-focused strategy since 2H13 ............................................................................... 11

Loosening of single account restriction accelerates its market-share gains ............................. 13

Economies of scale ..................................................................................................................... 13

Further downside in commission rate more limited than for peers ......................................... 14

High earnings sensitivity to ADT .................................................................................................. 15

Sensitivity to ADT ...................................................................................................................... 15

Other segments at a glance ........................................................................................................... 16

Investment banking ................................................................................................................... 16

Asset management ..................................................................................................................... 18

Investment and trading ............................................................................................................. 18

Valuation ...................................................................................................................................... 20

Methodology ............................................................................................................................. 20

Relative valuation ..................................................................................................................... 20

Risks ........................................................................................................................................... 21

Appendix ....................................................................................................................................... 22

Contents


- 3 -

Growth outlook Huatai: revenue mix (2015E)

We expect Huatai to see a strong 135% YoY net profit growth in 2015, driven by significant expansion of its brokerage and lending-related revenue. Notably, we forecast lending-related revenue to contribute 37% of its total revenue in 2015, up from 22% in 2014, driven by expansion of market balance of margin loans in 2015 and its market-share gains in this business.

Source: Company, Daiwa forecasts

Note: Lending includes interest income and commission fee from margin finance and interest income from stock repo

Valuation China Securities firms: valuation comparison

Chinese securities firms under our coverage are trading currently at a 2.0x 2015E PBR on average and a 14.5x 2015E PER on a market-cap weighted basis. Huatai’s valuation in terms of both PBR and PER is below the sector average. (Refer to the valuation section of this report for more on our valuation methodology and valuation comparisons.)

Company Ticker PBR (x) PER (x) ROE (%) 15E 16E 15E 16E 15E 16E CITICS 6030 HK 2.2 2.0 17.1 18.3 14.2 11.3 HTS 6837 HK 2.2 2.1 13.8 18.3 17.9 11.8 CGS 6881 HK 1.6 1.7 11.2 15.5 18.5 11.1 GFS 1776 HK 2.0 1.9 14.1 15.9 18.0 12.5 Huatai 6886 HK 1.8 1.6 12.5 13.4 17.3 12.9 Sector 2.0 1.9 14.5 16.8 16.7 11.9

Source: Bloomberg, Daiwa

Note: Priced as at 8 June 2015

Earnings revisions Huatai: segmental revenue growth

Due to the stock’s limited trading history, there are no consensus forecasts as yet. However, in terms of growth, we look for Huatai’s revenue growth to be driven by the lending business (including interest income and commission fee from margin finance and interest income from stock repo) in 2015. Due to its rising market share and overall spiking balance of margin lending in the sector, lending-related revenue will grow by 264% YoY on our forecasts, to become the largest revenue contributor. Besides, due to the surging ADT in the A-share market, we forecast the traditional brokerage business to also see 71% YoY growth, becoming the second-largest revenue item.

Source: Bloomberg, Daiwa forecasts

Note: Lending includes interest income and commission fee from margin finance and interest income from stock repo

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

Lending36.7%

Traditional brokerage

34.0%

Investment banking

4.5%

Asset management

3.2%

Trading16.0%

Others5.6%

0

5,000

10,000

15,000

20,000

Lending Traditionalbrokerage

Investmentbanking

Assetmanagement

Trading Others

2014 2015E

(CNYm)

71%

9%

128%

354%

264%

-20%

Buy (initiation)

OutperformHoldUnderperformSell

1

2

3

4

5


- 4 -

Key assumptions

Profit and loss (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EA-share ADT (CNY mn) 227,557 173,922 131,573 200,000 304,000 800,000 750,000 750,000Brokerage mkt share of company (%) 3.7 3.9 5.5 6.1 7.9 8.4 8.8 9.0Commission rate for company (%) 0.114 0.097 0.086 0.074 0.048 0.039 0.035 0.032Mkt annual equity financing (YoY, %) 162.9 (43.9) (37.6) (6.5) 74.8 100.0 50.0 50.0Mkt annual debt financing (YoY, %) 0.9 54.7 28.6 (2.6) 38.0 50.0 20.0 20.0Stock market annual return (%) (14.3) (21.7) 3.2 (6.7) 52.9 40.0 0.0 0.0Bond market annual return (%) 1.0 5.5 4.4 (0.5) 10.3 4.0 4.0 4.0Margin finance bal (mkt) (CNY mn) 12,772 38,201 89,516 346,530 1,025,650 2,129,991 2,195,892 2,294,745Cost-to-income (%) n.a. n.a. 66.7 58.4 49.3 44.6 42.4 41.9

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EGross fee and commission income n.a. n.a. 4,379 5,627 8,127 14,962 14,055 14,136Gross interest income n.a. n.a. 1,584 2,516 4,851 13,652 20,373 23,113Investment income n.a. n.a. 918 781 2,679 5,525 3,571 3,768Other income n.a. n.a. 129 76 322 354 389 428Total Revenue n.a. n.a. 7,011 9,000 15,978 34,493 38,388 41,445Fee and commission expense (-) n.a. n.a. (869) (981) (1,650) (2,120) (1,823) (1,673)Finance costs(-) n.a. n.a. (417) (1,013) (2,466) (5,583) (8,130) (9,858)Business tax(-) n.a. n.a. (300) (429) (660) (1,320) (1,452) (1,598)Other Operating Expenses n.a. n.a. (3,508) (3,848) (5,572) (11,957) (12,985) (14,113)Operating profit n.a. n.a. 1,917 2,729 5,630 13,513 13,997 14,205Profit from Assoc/JV n.a. n.a. 209 219 285 336 352 370Other Inc/Exp/Extord. (+/-) n.a. n.a. 0 0 0 0 0 0Pre-tax profit n.a. n.a. 2,126 2,948 5,915 13,849 14,350 14,575Tax n.a. n.a. (463) (671) (1,375) (3,219) (3,336) (3,388)Min. int./pref. div./others n.a. n.a. (45) (57) (54) (107) (161) (241)Net profit (reported) n.a. n.a. 1,618 2,220 4,486 10,522 10,853 10,946Net profit (adjusted) n.a. n.a. 1,618 2,220 4,486 10,522 10,853 10,946EPS (reported)(CNY) n.a. n.a. 0.289 0.396 0.801 1.609 1.505 1.518EPS (adjusted)(CNY) n.a. n.a. 0.289 0.396 0.801 1.609 1.505 1.518EPS (adjusted fully-diluted)(CNY) n.a. n.a. 0.289 0.396 0.801 1.609 1.505 1.518DPS (CNY) n.a. n.a. 0.150 0.150 0.500 0.483 0.452 0.455

Financial summary


- 5 -

Balance sheet (CNYm)

Key ratios (%)


Company profile

Huatai Securities (Huatai) is a leading brokerage securities firm in China. It was established in Jiangsu in 1991 and was listed on the Shanghai Stock Exchange and Hong Kong Stock Exchange in 2010 and 2015, respectively. Its principal business lines include brokerage, investment banking, asset management, proprietary trading and direct investment.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & short-term investment n.a. n.a. 48,564 50,480 112,565 135,078 162,094 194,512Fee and commission receivables n.a. n.a. 321 1,138 2,057 2,469 2,962 3,555Advances to customers n.a. n.a. 6,402 19,852 64,637 152,175 163,033 177,000Reverse repo & bank placement n.a. n.a. 597 6,088 20,710 55,763 86,262 91,603Financial assets n.a. n.a. 24,862 33,032 65,302 70,774 74,305 78,014Long-term equity investments n.a. n.a. 1,191 1,631 1,874 2,249 2,699 3,239Other assets n.a. n.a. 3,920 3,993 5,081 6,676 7,959 9,542Total assets n.a. n.a. 85,856 116,214 272,226 425,184 499,315 557,465Accounts payable n.a. n.a. 34,498 30,843 70,228 109,468 114,941 137,929Repo and bank placements n.a. n.a. 6,928 10,954 51,168 82,942 99,665 67,008Financial liabilities n.a. n.a. 0 8,003 25,656 30,788 36,945 44,334Bonds payable n.a. n.a. 0 9,980 21,345 46,345 69,518 104,277Other liabilities n.a. n.a. 9,249 19,633 61,883 74,260 89,112 106,934Total liabilities n.a. n.a. 50,675 79,413 230,282 343,802 410,181 460,483Share capital n.a. n.a. 5,600 5,600 5,600 7,210 7,210 7,210Reserves/R.E./others n.a. n.a. 29,125 30,574 35,699 73,397 80,994 88,656Shareholders' equity n.a. n.a. 34,725 36,174 41,299 80,607 88,204 95,866Minority interests n.a. n.a. 456 627 646 775 930 1,116Total equity & liabilities n.a. n.a. 85,856 116,214 272,226 425,184 499,315 557,465BVPS (CNY) n.a. n.a. 6.201 6.460 7.375 11.180 12.234 13.296

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017EGross fee and commission (YoY) n.a. n.a. n.a. 28.5 44.4 84.1 (6.1) 0.6Operating profit (YoY) n.a. n.a. n.a. 42.3 106.3 140.0 3.6 1.5Net profit (YoY) n.a. n.a. n.a. 37.2 102.1 134.5 3.1 0.9EPS (YoY) (FD) n.a. n.a. n.a. 37.2 102.1 100.9 (6.5) 0.9ROAE n.a. n.a. n.a. 6.3 11.6 17.3 12.9 11.9ROAA n.a. n.a. n.a. 2.2 2.3 3.0 2.3 2.1Net dividend payout n.a. n.a. 51.9 37.8 62.4 30.0 30.0 30.0Brokerage commission/Op inc n.a. n.a. 53.2 60.4 49.3 45.3 38.3 34.4Inv banking commission/Op inc n.a. n.a. 9.9 5.1 5.9 3.6 4.8 6.4Assest mgmt inc / Op inc n.a. n.a. 1.1 2.2 1.8 1.2 1.7 2.2Interest inc / Op inc n.a. n.a. 17.7 18.8 17.7 27.9 40.5 42.0Inv inc / Op inc n.a. n.a. 14.0 10.0 19.7 19.0 11.7 11.8Leverage n.a. n.a. 2.4 3.2 6.5 5.2 5.6 5.7Cost-to-income n.a. n.a. 72.7 69.7 64.8 60.8 63.5 65.7Net capital ratio n.a. n.a. 64.6 58.6 53.2 65.3 50.5 39.8

Financial summary continued …


- 6 -

Customer acquisitions in brokerage, profit-driven by margin finance

We expect Huatai’s rising market share in the brokerage business, driven largely by its low commission rates, to translate into rising market share in margin loans as well. While its low-commission strategy has led to thinner profit margins in the traditional brokerage business, the lucrative margin lending business should eventually help it translate those market share gains into net profit growth.

Market share in margin finance to catch up with brokerage

Rising brokerage market share Huatai was one of the first brokers (and the only major one) to actively adopt an online low-cost business model in late-2013. By offering its online trading customers commission rates as low as 3bp, Huatai has been able to gain substantial market share in terms of brokerage volume since 2013. As such, its brokerage market share has gone from 5.4% in 2012, to 6.1% in 2013, to 7.9% for 2014, and hit 8.0% in 4M15.

Huatai: brokerage market share

Source: WIND, Daiwa

Brokerage market share of H-share listed securities firms

Source: WIND, Daiwa

Note: data of CITICS includes CITIC securities, CTICS (Zhejiang) and CITICS (Shandong)

Margin finance market share lagging brokerage Since starting its low-cost brokerage service plan in 2H13, Huatai’s brokerage market share has increased from 6.1% in 2013 to 6.9% in 1H14. For 4M15, its brokerage market share expanded strongly to 8.0%, ranking top among all the China securities firms. Huatai: brokerage market share vs. margin loan market share

Source: CSRC, WIND, Daiwa

Note: margin loan data are end of periods

3.88%

5.44%6.12%

7.92% 8.00%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2011 2012 2013 2014 4M15

5.8

4.55.1

4.0

5.4

6.4

4.85.2

4.0

6.16.5

4.8 5.04.3

7.9

6.4

5.1 5.2 4.9

8.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

CITICS HTS CGS GFS Huatai

2012 2013 2014 4M15

(%)

5.4%

6.1%

6.9%

7.9% 8.0%

7.3%

5.7%

5.2%

6.4%

5.8%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2012 2013 1H14 2014 4M15

brokerage market share margin loan market share


- 7 -

However, its margin loan market share, albeit growing, has been lagging its brokerage market share since 2013, coming in at 5.8% at end-April 2015, up only slightly from 5.7% at end-2013. China securities firms: outstanding margin loan balances (end-Apr 2015)

Source: China Securities Depository and Clearing Co., WIND, Daiwa

Note: CITIC Securities data includes data for CITIC Wantong and CITIC Securities (Zhejiang)

China securities firms: margin loan market share (end-Apr 2015)


Huatai launched its margin finance business in 2010, and has since seen it expand rapidly due to its retail nature. The revenue from margin finance contributed 24.2% of the company’s total revenue for 1Q15, up from 15.3% for 2013 and 17.9% for 2014.

Huatai: revenue contribution from margin finance (as % of total revenue)

Source: Company, Daiwa

Reason? Track record requirement and capital constraints We think there are 2 reasons for Huatai’s lagging margin loan market share compared with its brokerage market share. One is the “track-record period” requirement to open margin finance accounts. The other is the constraints from Huatai’s capital base after the surge in the sector’s (including Huatai’s) margin lending balance over the past 6 months or so. “Track-record period” requirement for opening margin accounts. According to CSRC regulations, individual investors have to have at least 6 months’ stock trading history before they are allowed to open a margin account. In practice, brokers usually require the “6-month track-record period” to be with themselves in order to verify the authenticity. Hence, for a broker that is expanding its brokerage market share rapidly (ie, has many new brokerage customers), it would have a substantial portion of clients who are still in the “track-record period” and hence, not yet eligible to open a margin account. Own capital constraints. As the securities firm with the largest brokerage business in China, Huatai only had a net capital base of CNY19.7bn at end-2014, which was much smaller than other major players: CITICS (6030 HK, HKD31.65, Underperform [4]) CNY44.3bn, Haitong Securities (HTS, 6837 HK, HKD25.20, Outperform [2]) CNY37.1bn, China Galaxy Securities (CGS, 6881 HK, HKD12.56, Hold [3]) CNY25.5bn). And its net capital ratio was only 53.2% at end-2014, which was also lower than major peers’ (CITICS: 56.3%, HTS: 57.1%, CGS: 88.4%) and not far off the 48% warning ratio from the CSRC.

0 50 100 150

GFS

CGS

China Merchants

Huatai

HTS

Guotai Junan

CITICS

Guosen

(CNYbn)

GFS, 7.1%CGS, 6.4%

China Merchants,

6.0%

Huatai, 5.8%

HTS, 5.7%

Guotai Junan, 5.6%

CITICS, 5.5%

Guosen, 5.4%

Others, 52.5%

400

1,378

2,852

1,7875.7%

15.3%17.9%

24.2%

0%

5%

10%

15%

20%

25%

30%

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 1Q15

margin finance and securities lending % of total revenue

(CNYm)


- 8 -

Net capital of H-share listed securities firms (end-2014)

Source: Companies, Daiwa

Reaping profits in margin finance

Brokerage market share is not the ultimate goal, margin finance is We believe Huatai’s ultimate goal is not only gaining a larger brokerage market share, as the profit margins are getting thinner on that front. Instead, it is trying to migrate its large brokerage client base into margin finance, and eventually monetise its efforts through margin lending. As margin lending is a retail-based business, and in general retail customers have same propensity to borrow, we believe ultimately Huatai’s market share in margin loans will become similar to that in brokerage. At the end of March 2015, Huatai had around 212,000 margin finance accounts. On top that, around 164,000 of its customers satisfied the margin account opening criterion from the CSRC (ie, have a balance of over CNY500,000 and have maintained a stock brokerage account with Huatai for no less than 6 months), and hence could be potential margin loan clients. In other words, at the end of March 2015, Huatai had only penetrated 56% of its eligible margin finance clients. Huatai: margin loan balance


We look for Huatai to gain market share in margin loans going forward and have a share of 7.2% by end-2015 and 7.8% by end-2017. In terms of revenue, we expect lending businesses (mostly margin finance) to contribute a significantly higher proportion of 37% of its revenue in 2015 (from 22% in 2014) due to both Huatai’s rising market share and the booming market since late-2014. Huatai: revenue mix (2014)


Huatai: revenue mix (2015E)

Source: Daiwa forecasts

Revenue mix comparison of H-share listed securities firms (2015E)


44

37

25

33

20

0

10

20

30

40

50

60


(CNYbn)

7.3%6.1%

5.7% 5.2%

6.4% 6.4%5.8%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

020406080

100120140160

2012 1H13 2013 1H14 2014 End-Mar2015

End-Apr2015

Margin finance Market share (RHS)

(CNYbn)

Lending21.7%


42.9%

Investment banking

9.0%

Asset management

8.6%

Trading15.2%

Others2.7%

Lending36.7%


34.0%

Investment banking

4.5%

Asset management

3.2%

Trading16.0%

Others5.6%

23%36% 40% 37% 37%

25%

27%37%

26% 34%

0%

20%

40%

60%

80%

100%


Lending Traditional brokerage Investment banking

Asset management Trading Others


- 9 -

Margin finance still lucrative Some investors might be concerned about the profitability of margin finance because of China’s recent (and possibly ongoing) benchmark interest rate cuts. The interest rate on margin lending was previously set according to the PBOC’s 6-month benchmark lending rate plus 300bps. But since 2013, this mechanism has become guidance only, and individual securities firms now have the discretion to use a different interest rate according to their judgement of the business and market liquidity. Margin lending interest rate not falling with benchmark rate cuts. From our discussions with market participants, we understand that the prevailing lending rate on margin finance was lowered from 8.6% to 8.35% in late-November 2014 when China’s first interest rate cut occurred, but stayed unchanged for the subsequent 2 benchmark rate cuts, suggesting the strong pricing power of brokers in the market. At this point, we see a low possibility of a price war breaking out on margin loan interest rates, given the industry-wide capital scarcity in China’s securities sector. The whole China Securities Sector had net capital of CNY679bn at the end of 2014, which fuelled a margin lending balance of CNY1.03tn back then. As of 5 June 2015, total outstanding margin loans recorded CNY2.17tn, which was more than doubled in five months. China stock market: margin loan balance and Shanghai Composite Index


That is why China securities firms are eagerly raising capital through share placements and IPOs in Kong despite the 20-40% valuation discounts to their A-shares, as raising funds in the H-share market is a much quicker process than navigating the complications in an A-share listing or placement. Funding costs moderating. On the other hand, securities firms’ funding costs are easing due to the better market liquidity. In China’s interbank market, the 3-month collateralised bond repurchase rate has moderated to below 3% from the prevailing 3-6% range over the past three years. During April-May 2015, the cost of short-term commercial paper moderated to 4.1% compared with 4.6% a year ago. China interbank market: 3-month collateralised bond repurchase rate

Source: PBOC, WIND, Daiwa

1,000

2,000

3,000

4,000

5,000

6,000

0

500

1,000

1,500

2,000

2,500

Jun-

12

Oct

-12

Feb-

13

Jun-

13

Oct

-13

Feb-

14

Jun-

14

Oct

-14

Feb-

15

Jun-

15

(CNYbn)

Margin loan balance Shanghai Composite Index (RHS)

2

3

4

5

6

7

8

9

3/5/

2012

5/16

/201

2

7/26

/201

2

10/1

0/20

12

12/1

9/20

12

3/5/

2013

5/16

/201

3

7/26

/201

3

10/1

1/20

13

12/1

9/20

13

3/5/

2014

5/16

/201

4

7/28

/201

4

10/1

1/20

14

12/1

9/20

14

3/5/

2015

5/18

/201

5

(%)


- 10 -

Cost of debt of China securities firms (2Q15 vs 2Q14) Date Issuer Type Tenor Amount (CNY bn) Coupon rate (%) On shore/Off shore

28 May 2015 GFS Corporate bond 175 days 4.0 4.24 On-shore 28 May 2015 GFS Corporate bond 240 days 6.0 4.34 On-shore 20 May 2015 GFS Corporate bond 1 year 6.0 4.30 On-shore 14 May 2015 HTS Corporate bond 1 year 8.0 5.00 On-shore 14 May 2015 CITICS Short term commercial paper 91 days 5.0 3.09 On-shore 13 May 2015 GFS Short term commercial paper 90 days 3.0 3.20 On-shore 08 May 2015 CGS Sub debt 2 years 11.0 n.a. On-shore 01 May 2015 GFS Short term commercial paper 90 days 3.0 3.98 On-shore 30 Apr 2015 GFS Sub debt 3 years 9.0 5.40 On-shore 29 Apr 2015 GFS Corporate bond 206 days 4.0 4.95 On-shore 29 Apr 2015 CGS Corporate bond 1 year 2.0 5.20 On-shore 24 Apr 2015 CGS Sub debt 3 years 5.8 n.a. On-shore 22 Apr 2015 Huatai Sub debt 2 years 7.0 5.60 On-shore 22 Apr 2015 Huatai Sub debt 5 years 5.0 5.80 On-shore 22 Apr 2015 CITICS Short term commercial paper 91 days 5.8 4.00 On-shore 11 Apr 2015 Huatai Short term commercial paper 90 days 3.0 4.80 On-shore 10 Apr 2015 HTS Sub debt 5 years 15.0 5.50 On-shore 10 Apr 2015 CGS Sub debt 2 years 4.3 n.a. On-shore 07 Apr 2015 GFS Short term commercial paper 90 days 3.0 4.88 On-shore 03 Apr 2015 CITICS Short term commercial paper 91 days 5.0 5.00 On-shore 18 Jun 2014 GFS Short term commercial paper 90 days 3.0 4.68 On-shore 12 Jun 2014 CITICS Short term commercial paper 91 days 4.0 4.49 On-shore 07 Jun 2014 Huatai Short term commercial paper 90 days 3.0 4.50 On-shore 06 Jun 2014 GFS Short term commercial paper 90 days 3.0 4.48 On-shore 22 May 2014 HTS Short term commercial paper 90 days 3.0 4.70 On-shore 17 May 2014 Huatai Short term commercial paper 90 days 3.0 4.40 On-shore 09 May 2014 CITICS Short term commercial paper 91 days 3.0 4.39 On-shore 28 Apr 2014 CITICS Sub debt 4 years 6.0 5.90 On-shore 23 Apr 2014 Huatai Sub debt 1 year 3.0 5.95 On-shore 23 Apr 2014 Huatai Sub debt 2 years 3.0 6.15 On-shore 16 Apr 2014 GFS Short term commercial paper 90 days 2.5 4.73 On-shore 16 Apr 2014 HTS Short term commercial paper 90 days 3.0 4.77 On-shore 10 Apr 2014 CITICS Short term commercial paper 91 days 5.0 4.90 On-shore 04 Apr 2014 GFS Short term commercial paper 90 days 2.5 4.84 On-shore


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- 12 -

Huatai: snapshot of online brokerage account opening page (smartphone)


Huatai: snapshot of service platform on smartphone


In 2014 and 1Q15, the trading volume of stocks and funds executed via an Internet platform accounted for 93.3% and 93.7% of Huatai’s total trading volume, respectively. Online account opening has become mainstream at Huatai, and has accounted for more than 90% of its total accounts opened since the beginning of 2014. The success of the Internet platform has helped the company reduce its number of client managers and brokerage agents from 6,453 at end-2012 to 4,903 at end-1Q15, which in turn has greatly reduced the

operating costs for its brokerage business. In 1Q15, 96.8% of Huatai’s new accounts were opened online. Huatai had 245 securities branches and 31 futures branches at end-1Q15. Almost 53.9% of its securities branches are “light-touch branches”, which require a minimum number of employees and have low operating costs as they focus on marketing and sales functions. Huatai entered into a strategic cooperation agreement with NetEase (a major Chinese Internet company) in 2014 to share client resources and Internet technology. NetEase will promote Huatai’s services on its website and refer users to open accounts with Huatai. Meanwhile, Huatai is seeing improvements in its customer mix. Its aggregate percentage of affluent clients, high-net-worth clients and institutional clients rose from 3.5% in 2012 to 5.6% in 2014, and further increased to 7.0% in 1Q15. At the end of March 2015, Huatai had 6.8m customers, including 6.4m retail, 0.4m affluent clients, 19,860 high net-worth clients and over 24,000 institutional and corporate clients. Huatai: brokerage client mix ('000) 2012 % 2013 % 2014 % 1Q15 %

Retail clients 5,761 96.5% 5,909 96.2% 6,195 94.4% 6,407 93.0% Affluent clients 184 3.1% 206 3.4% 332 5.1% 435 6.3% High net-worth clients 5 0.1% 7 0.1% 13 0.2% 20 0.3% Institutional and corporate clients 21 0.4% 23 0.4% 24 0.4% 25 0.4%

Total 5,971 100.0% 6,145 100.0% 6,564 100.0% 6,887 100.0%


Market-share gains In 2014, Huatai’s brokerage market share expanded to 7.9% from 6.1% in 2013 and 5.4% in 2012, ranking it No. 1 among all the China securities firms. Its brokerage market share is continuing to increase in 2015, having risen to 8.0% during 4M15. Huatai: brokerage market share

Source: WIND, Daiwa

3.88%

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- 13 -

Brokerage market share of H-share listed securities firms

Source: WIND, Daiwa

Note: data of CITICS includes CITIC securities, CTICS (Zhejiang) and CITICS (Shandong)

Proactively lowering commission rates Huatai’s commission rates were 8.6bps, 7.4bps, 4.8bps and 4.2bps in 2012, 2013, 2014 and 1Q15, respectively, per its own disclosure. On our estimates, Huatai’s commission rates since 2014 have been significantly lower than the industry average level (see chart below). Huatai vs. sector: average commission rate (estimated)

Source: Securities Association of China, WIND, Daiwa estimates

We believe the company’s lower-than-industry commission rates were not a result of competition from peers, but rather a proactive move by Huatai to grow its market share. In other words, we view Huatai not as a follower in commission rate competition, but as a leader in market segmentation. Huatai has been actively targeting price-sensitive and Internet/mobile-savvy retail customers with the aim of gaining market share, which it is currently on track of meeting.

Loosening of single account restriction accelerates its market-share gains

From 13 April 2015, the CSRC has abolished China’s long-standing “single account” rule (namely, that one investor can only open a brokerage account with one broker, and investors have to close their existing accounts if they want to switch to another broker for lower commissions). From then onwards, investors are allowed to have multiple accounts (to a maximum of 20) with different brokers, and they do not have to close their existing account before opening another one. Following the abolishment of this regulation, we have seen the number of new brokerage accounts opened every week surge from 1.4m (the average of the 5 weeks before the deregulation) to 3.0m (the average of the 5 weeks after the deregulation), suggesting a sizeable number of customers opening new accounts with new brokers. China Securities sector: weekly new accounts

Source: China Securities Depository and Cleaning Corporation, Daiwa

We believe this situation will intensify the competition among brokers as it has lowered customers’ switching costs. As the retail brokerage service in China is still highly homogenous, the commission rate is a key factor to attract retail customers.

Economies of scale

We argue that Huatai’s operating expenses are much lower than peers’ due to: 1) its minimal sales agent involvement, and 2) its economies of scale brought about by its large trading volume.

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- 14 -

Minimal sales agent involvement. Huatai has been attracting mass retail brokerage clients via its online trading platform since late-2013. By offering pure online services, Huatai saves most of the commission expenses paid to its sales staff and rentals for premises. Economies of scale brought about by volume. Among all types of operating expenses involved in the brokerage business, most do not have a linear relationship with brokerage volume, such as IT maintenance and amortisation, branch expenses, and headquarter overheads. That is, these expenses benefit from economies of scale. The only item that is proportionately related to brokerage volumes is trading commission fees charged by the stock exchanges, which is 0.896bp of the dollar amount of trading now for A-share stocks. Brokerage expenses paid to stock exchanges

(bp) A-share stocks B-share stocks Mutual funds Transaction fee 0.696 2.6 0.45 Regulation fee 0.2 0.2 0 Total* 0.896 2.8 0.45

Source: Shanghai and Shenzhen Stock Exchange

Note: excluding stamp tax, which is collected by brokers on behalf of the tax authorities

We estimate that at CNY400bn ADT and 8% market share, Huatai’s fixed cost has been reduced to as low as 0.4bp already. While for most China securities firms, at CNY400bn ADT, their fixed cost is 1-3bp. As ADT has surged significantly so far in 2015 and we are assuming CNY800bn for 2015, Huatai’s fixed cost could be further squeezed to a startling 0.2bp in 2015 (vs. industry average of c.1.2bp). As such, for the brokerage business assuming CNY800bn ADT, Huatai’s break-even point in terms of gross commission rate would be much lower at c.1.8bp (vs. industry average of c.2.8bp). Commission rate and fixed cost (bps)

Metric ADT assumption Huatai Industry average

Fixed cost CNY400bn

0.4 2.0 Commission rate break-even point 1.9 4.0 Fixed cost

CNY800bn 0.2 1.2

Commission rate break-even point 1.8 2.8 Source: Daiwa estimates

Further downside in commission rate more limited than for peers

We argue that going forward the whole brokerage industry in China will continue to face significant pressure on commission rates with brokerage services being largely homogeneous and retail investors being allowed to open multiple accounts. However, we

contend that further commission rate downside for Huatai might be smaller than that for its peers, as it has already seeing large commission rate declines, and the “low-cost” portion of business already constitutes most of its brokerage business. We argue that for the mass market retail brokerage business, commission rates for all the brokers are gradually moving towards 2.5bp, which is the lowest in the market now. The difference will only lie in their different client mixes. Huatai, as the leader in taking the pain in order to grow market share, is already in the late stage of this margin decline, while for most brokers, it might only have started. Online trading percentage of H-share listed securities companies (2014)


Average commission rate of H-share listed securities companies (2014)

Source: Companies, Daiwa estimates

Note: the average commission rate of CITICS, HTS and CGS are Daiwa estimate

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- 15 -

High earnings sensitivity to ADT

Huatai offers the second-highest earnings sensitivity to market turnover among all the China brokers under our coverage

Sensitivity to ADT

With China A-share ADT hitting CNY1.1tn YTD and staying above CNY1tn consecutively in the past few weeks, we think the market might have underestimated A-share ADT. Among all five H-share listed China securities firms, Huatai is the second most sensitive to market turnover, on our estimates. We conducted a sensitivity analysis of the impact of ADT on China brokers’ 2015E earnings. We estimate

that for every 10% change in ADT, Huatai’s net profit would change by around 8%, which is the second highest among all the China brokers under our coverage. CGS has the highest sensitivity of around 9% earnings impact for every 10% change in ADT, while HTS is the least sensitive. H-share securities companies: earnings sensitivity on 10% change in ADT


China Securities Sector: stock market ADT


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- 16 -

Other segments at a glance

Besides its changing momentum in brokerage and margin finance, Huatai also has strength in investment banking, particularly in IPO and M&A.

Investment banking

M&A advisory Huatai was the first among the China securities companies to establish an M&A advisory team in 2004 and has since built a strong financial advisory brand through Huatai United Securities. Huatai United was recognised as being the best M&A investment bank by New Fortune in 2015 and its M&A advisory team was named Best Financial Advisory Team in China by Securities Times in 2014. The company reported revenue of CNY435m from financial advisory in 2014, which contributed to 34.5% of total investment banking revenue in 2014. According to its prospectus, Huatai United advised on 31 transactions in 2014 with a transaction value of CNY100bn. From 2012 to 2014, Huatai United was ranked No.1 in terms of number of domestic M&A deals completed, with a stable market share of 12.8% in 2012, 11.0% in 2013 and 12.0% in 2014. China securities companies: number of M&A transactions (2014)

Source: WIND, Daiwa

The financial advisory team selects promising enterprises in emerging industries, such as TMT, environment and new energy, to assist these enterprises in their strategic expansion. For example, Huatai helped Meinian Onehealth Group acquire CiMing Health Checkup Management Group and become the largest company providing health screening in China, which is an important industry integration in the healthcare industry. Also, the company acted as financial advisor for Shenyin & Wanguo Securities in its acquisition of Hong Yuan Securities, which was the largest M&A transaction to date in the China securities industry. As a lot of enterprises go abroad to expand their businesses, Huatai’s management predicts there will be more collaboration between M&A financial advisory and overseas business platforms for cross-border M&A business. We expect M&A advisory services to create synergies with equity and debt underwriting and other segments. Huatai: M&A transactions 2012 2013 2014 1Q15

(CNYm) Number Value Number Value Number Value Number Value

Announcement

8 6,562 24 33,979 31 99,979 9 18,902

CSRC approval 10 11,715 10 7,510 22 73,989 5 25,571

Market share

12.8% 6.8% 11.0% 4.0% 12.0% 20.5% 11.1% 30.1%


Equity underwriting Huatai provides equity underwriting services, including IPOs, private placements, rights issues and other equity underwriting services in its equity underwriting department. Owing to its strong M&A franchise and close relationships with SMEs, Huatai had a good track in sponsoring and underwriting 55 and 19 IPOs on China’s SME Board and ChiNext Board since their inception, respectively. According to Huatai’s prospectus, the total amount of equity securities underwritten by Huatai increased from CNY7.0bn to CNY23.2bn from 2012-14, rising at a CAGR of 81.7%. For 5M15, Huatai underwrote 7 IPOs for a total fund-raising amount of CNY5.1bn. It was ranked No.3 in terms of underwriting amount among all the China securities companies, and No.4 in terms of underwriting fees for that period.

22

13

4

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0

5

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20

25

30

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- 17 -

China Securities Sector: IPO league table in terms of underwriting amount (5M15)

Source: CSRC, Daiwa

China Securities Sector: IPO league table in terms of underwriting fees (5M15)

Source: CSRC, Daiwa

China Securities Sector: IPO league table in terms of number of IPOs (5M15)

Source: CSRC, Daiwa

As of 4 June 2015, Huatai had 14 deals in its IPO pipeline pending approval from the CSRC.

China securities firms: IPO pipeline by status and listing boards (as of 4 June 2015)

Shanghai Stock Exchange

(Mainboard) Shenzhen Stock Exchange

(SME board) Shenzhen Stock Exchange

(ChiNext board) Total

No. of stocks in pipeline

No. of stocks obtained listing

approval



approval



approval



approval CITICS 19 1 5 0 12 1 36 2 GFS 15 1 8 0 13 1 36 2 China Securities 23 1 4 0 5 0 32 1 Guosen 15 1 7 1 8 1 30 3 China Merchants 9 0 9 0 8 1 26 1 Essense Securities 11 1 5 1 5 0 21 2 HTS 12 0 2 0 6 0 20 0 CICC 9 0 3 1 5 0 17 1 Guotai Junan 10 1 2 0 5 0 17 1 Industrial Securities 7 0 1 0 9 0 17 0 Minsheng Securities 6 0 5 1 5 0 16 1 Sinolink 9 0 4 0 2 1 15 1 Huatai 8 0 1 0 5 0 14 0 Oriental Citi 8 1 3 0 1 0 12 1 Hualin 4 1 3 0 4 0 11 1 CGS 4 0 4 0 1 0 9 0 Southwest Securities 3 0 2 0 4 0 9 0 BOCI Securities 6 1 1 1 0 0 7 2 Suzhou Securities 1 0 5 0 1 0 7 0 Guohai Securities 2 0 3 0 2 0 7 0 Note: as of 4 June 2015

Source: CSRC, Daiwa

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- 18 -

Asset management

Huatai’s asset management business comprises securities-firm asset management, private equity fund management and mutual funds management. Its operating profit from asset management increased from CNY55.1m in 2012 to CNY1075.7m in 2014, with its contribution to total operating profit rising from 2.9% in 2012 to 19.1% in 2014. Securities-firm asset management Huatai: asset-management AUM and revenue 2012 2013 2014 1Q15

AUM

(CNYbn) Revenue (CNYm)

AUM (CNYbn)

Revenue (CNYm)

AUM (CNYbn)

Revenue (CNYm)

AUM (CNYbn)

Revenue (CNYm)

CAM 11.3 69.5 21.8 240.3 57.8 615.8 71.3 185.6 TAM 40.3 17.2 110.8 74.1 284.5 142.4 335.4 46.5 SAM - - 0.1 - 3.2 0.4 3.5 - Total 51.6 86.7 132.7 314.4 345.5 758.6 410.2 232.1


Note: CAM represents collective asset management schemes, TAM represents targeted asset management schemes and SAM represents specialized asset management schemes.

Huatai’s collective asset management schemes had a total AUM of CNY71.3bn at end-1Q15. Its collective asset management schemes include Daily Gain and Tou Rong Bao. Daily Gain is a cash management product that provides a higher interest rate than the benchmark deposit rate. When a client sells a stock, he/she can manage their extra capital in their stock account by applying for a Daily Gain in order to earn a higher deposit rate. Daily Gain has become the industry’s largest collective management product utilising client deposits due to its innovative product design and largest client base. Clients can choose from investing for 3 set periods under this product: 1 day, 1 week and 2 weeks, which help the product meet the differing demand from clients. At end-2014, Huatai’s Daily Gain AUM accounted for 35.9% of total clients’ deposits and had become the largest collective management product in the market. In the targeted asset management business, the company helps single institutional clients manage their assets. The AUM of targeted asset management products increased significantly to CNY335.4bn at end-1Q15 from CNY40.3bn in 2012. For specialised asset management, Huatai has 2 schemes including the asset securitization of entry tickets for the Guangzhou Chime-Long Theme Park, and Zi Quan Tong. Zi Quan Tong is a scheme to help

clients earn returns on the securities they hold and expand the securities lending business. Private equity fund management For private equity fund management, income reached CNY129.7m in 2014, up 102.6% YoY from CNY64m in 2013. Huatai: private equity fund management Fund Size (CNYm) Percentage Industry focus Huatai Zijin Equity Investment Fund 2000 45.75% Equity investments on healthcare and

consumer Huatai Ruilin Equity Management 1000 30.00% Equity investments on TMT,

environmental protection and energy

Huatai Ruilian Funds Mergers

1000 30.00% M&A financing in TMT, consumer, healthcare and pharmaceutical, advanced manufacturing

Jiangsu Emerging industry Investment funds

5000 43.60% New energy, new materials, biotechnology, software and service outsourcing, internet


Mutual fund management Huatai has 2 associates, China Southern Asset Management and Huatai-PineBridge. It holds a 45% equity interest in China Southern Asset Management which had a total AUM of CNY292bn at end-1Q15 of which AUM of mutual funds totalled CNY193.5bn. Huatai-PineBridge is a joint venture fund co-founded by Huatai and PineBridge Investment LLC, in which Huatai holds a 49% equity stake. The fund management company is one of the largest to issue ETFs, and issued the first cross-market ETF in China. (One of its products, Huatai-PineBridge Shanghai-Shenzhen 300 ETF, was ranked No.1 in terms of daily trading volume in 2014. Huatai-PineBridge managed total assets of CNY62.7bn at end-1Q15.

Investment and trading

Huatai participates in equity investments, fixed-income securities and other financial products for trading gains. The company realised an average rate of return of 9.59% in 2014 due to the strong performance of the equity markets. According to its prospectus, the average cost of fixed-income investments accounted for 62.3% of Huatai’s total costs in 2014, and the average cost of stocks and funds accounted for 22.9% of its total costs. The company is mainly engaged in fixed-income securities, primarily treasury bonds, financial bonds, PBOC notes, enterprise bonds and other financial products. And Huatai increased its trading in stocks, ETFs and derivatives in 2014.


- 19 -

Huatai: average cost of investments and trading


Note: average cost is calculated by dividing the Company’s aggregate daily costs of open trading positions by the number of days in the relevant period.

China securities firms: trading position comparison Compared to its peers, Huatai has an unhedged investment exposure of 33% of its own equity in equity and derivatives trading. China securities firms: proprietary trading exposure to own equity (end-2014)


Sensitivity analysis – every 10% gain in Shanghai Composite Index According to our estimates, every 10% change in the Shanghai Composite Index would result in about a 9% change in net profit for Huatai. This is the second-highest among the 5 H-share China securities firms under our coverage. Huatai: sensitivity of earnings changes to market performance (2015E) Shanghai Composite Index 3,623 4,076 4529 4,982 5435 Diversion from base case -20% -10% 0% 10% 20% Gross proprietary trading income (CNYm) 3,958 4,742 5,526 6,310 7,094 Gross proprietary trading income change (%) -28% -14% 0% 14% 28% Operating income (CNYm) 31,353 32,924 34,494 36,065 37,636 Operating income change (%) -9% -5% 0% 5% 9% Attributable profit (CNYm) 8,645 9,584 10,523 11,462 12,401 Attributable profit change (%) -18% -9% 0% 9% 18%

Source: Daiwa estimates

Note: ROE calculation above includes non-controlling interests

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100%

2012 2013 2014

Stocks and funds Debt Others

40%31%

11%

34% 33%

82%

40%50%

97%

38%

0%

20%

40%

60%

80%

100%


Stock Bond


- 20 -

Valuation

Gordon Growth Model, historical PBR and relative valuations suggest the stock is undervalued

Methodology

Fair value = PRB of 2.3x We use the Gordon Growth Model to arrive at our target 2015E PBR of 2.3x. We use 2015E BVPS as the basis for our target price because we believe investors pay more attention to the company’s balance-sheet-driven businesses. Our PBR implies a fundamental 12-month target price of HKD32.0. We have assumed a 9.7% cost of equity, a terminal growth rate of 8% (these assumptions are homogeneous across the H-share securities firms under our coverage), and a sustainable ROE of 12.0%, reflecting an ROA of 2.5% and sustainable leverage of 4.8x.

Huatai: sensitivity of target PBR on ADT and market index changes (2015E) ADT (CNYbn)

Market index

640 720 800 880 960 3,623 1.4 1.6 1.8 2.1 2.3 4,076 1.7 1.9 2.1 2.4 2.6 4,529 2.0 2.2 2.3 2.6 2.8 4,982 2.2 2.4 2.6 2.8 3.0 5,435 2.5 2.7 2.9 3.0 3.2


Note: market index refers to Shanghai Composite Index

Relative valuation

Historical trading multiples Huatai is trading currently at a 1.8x 2015E PBR and 12.5x PER. Due to its short H-share listing history, we make reference to its historical A-share valuation. Over the past 5 years, its A-share average 1-year-forward PBR was 1.7x with a low-end of 0.9x and high end of 3.8x. A-H valuation spread Among all the five H-share listed China securities firms under our coverage, four of them are also A-share listed. The H-share prices are currently trading at an average discount of 31% to the A-share prices. Huatai’s H-shares currently have the largest discount of 36%.


- 21 -

Global valuation comparison Global investment banks: valuation comparison

Company Ticker Rating Market

cap Current PBR PER ROE (%) ROA (%) Leverage (x)

(USD bn) price FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

CHINA - H SHARE CITICS 6030 HK Underperform 58 31.65 2.2 2.0 17.1 18.3 14.2 11.3 3.2 2.5 4.5 4.5 HTS 6837 HK Outperform 48 25.20 2.2 2.1 13.8 18.3 17.9 11.8 3.7 2.4 4.8 4.9 CGS 6881 HK Hold 15 12.56 1.6 1.7 11.2 15.5 18.5 11.1 3.4 2.1 5.5 5.2 GFS 1776 HK Hold 34 24.65 2.0 1.9 14.1 15.9 18.0 12.5 3.3 2.4 5.4 5.1 Huatai 6886 HK Buy 33 25.20 1.8 1.6 12.5 13.4 17.3 12.9 3.0 2.3 5.7 5.5 Sector 188 2.0 1.9 14.5 16.8 16.7 11.9 3.3 2.4 5.0 5.0 CHINA - A SHARE CITICS 600030 CH NR 58 33.48 3.1 2.7 23.0 19.0 14.5 15.1 3.3 3.1 4.4 4.8 HTS 600837 CH NR 48 28.34 3.4 3.0 23.6 20.1 14.5 15.1 3.2 3.0 4.5 5.0 Shenwan Hongyuan 000166 CH NR 46 19.15 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a GFS 000776 CH NR 34 29.74 3.3 2.7 21.6 18.8 17.1 15.7 3.3 3.0 5.1 5.2 Huatai 601688 CH NR 33 31.29 3.5 2.9 25.4 21.4 16.0 15.0 2.9 2.9 5.5 5.2 China Merchants Sec 600999 CH NR 32 34.14 4.1 3.6 27.0 23.4 15.1 14.4 3.4 3.5 4.5 4.2 Everbright Securities 601788 CH NR 20 36.44 4.0 3.4 31.0 26.7 12.6 16.1 3.4 3.2 3.8 5.0 Industrial Securities 601377 CH NR 15 17.68 4.6 4.5 35.0 28.8 16.7 17.5 3.3 3.9 5.1 4.5 Changjiang Securities 000783 CH NR 14 18.80 5.5 4.6 29.1 24.9 20.4 21.2 3.7 3.6 5.5 6.0 Sinolink Securities 600109 CH NR 16 33.23 8.3 7.6 61.9 51.5 15.7 16.3 3.2 3.2 4.9 5.1 Sector 315 3.4 2.9 23.6 20.0 13.2 13.4 2.8 2.7 4.0 4.2 REGIONAL Nomura Holdings 8604 JP Neutral 26 844 1.1 1.0 13.9 13.0 7.8 7.9 0.5 0.5 15.8 15.8 Daiwa Securities 8601 JP NR 13 959 1.3 1.2 12.9 12.0 9.6 9.6 0.5 0.6 18.4 16.0 Yuanta Financial 2885 TT NR 6 17.05 1.0 1.0 15.4 14.1 6.8 6.9 1.0 1.0 6.9 7.3 Samsung Securities 016360 KS NR 4 61,400 1.2 1.2 14.4 13.7 8.8 8.5 1.1 1.1 8.0 7.9 Daewoo Securities 006800 KS NR 5 15,500 1.2 1.1 15.6 16.8 7.8 6.4 1.0 0.9 7.8 7.1 Sector 53 1.1 1.1 14.0 13.3 8.2 8.1 0.6 0.7 14.2 13.6 GLOBAL Goldman Sachs GS US Underperform 95 210.45 1.2 1.1 10.9 10.7 11.2 10.6 1.0 1.0 11.3 10.6 UBS UBSN VX NR 83 20.20 1.4 1.4 14.9 12.3 8.6 11.0 0.5 0.6 17.2 18.3 Morgan Stanley MS US Underperform 77 39.29 1.1 1.0 12.7 11.6 8.8 9.2 0.7 0.8 12.3 11.5 Credit Suisse Group CSGN VX NR 45 25.84 0.9 0.9 11.6 9.5 7.5 9.3 0.4 0.5 18.4 17.8 Lazard LAZ US NR 7 56.38 10.7 11.4 15.9 13.9 100.3 92.3 17.5 20.0 5.7 4.6 Sector 307 1.4 1.4 12.7 11.2 11.5 12.1 1.1 1.2 14.1 13.8

Source: Bloomberg, Daiwa Note: Daiwa forecasts for CITIC, Haitong, Galaxy, GF Securities and Huatai Securities H-share; Bloomberg consensus for other stocks. Priced as of 8 June 2015

Risks

As the brokerage segment contributed 64.6% of Huatai’s total revenue in 2014, we see its earnings as highly correlated with market conditions, especially stock market turnover. China securities sector: stock market average daily turnover


Besides, given Chinese regulators’ vigilant stance toward margin finance, regulatory tightening or operational risk on margin finance is another risk.

(100%)

(60%)

(20%)

20%

60%

100%

0200400600800

1,0001,2001,4001,600

Apr 1

1

Jul 1

1

Oct

11

Jan

12

Apr 1

2

Jul 1

2

Oct

12

Jan

13

Apr 1

3

Jul 1

3

Oct

13

Jan

14

Apr 1

4

Jul 1

4

Oct

14

Jan

15

Apr 1

5

(CNYbn)

ADT 5-year avg MoM (RHS)


- 22 -

Appendix Company background Huatai Securities was established in Jiangsu Province on 9 April 1991 and has become a leading integrated securities group. The company has 245 branches and 31 futures branches located in 30 provinces, and 6,458 employees at end-1Q15. Its customers include over 6.5m brokerage customers at end-2014. It was listed on the Shanghai Stock Exchange on 26 February 2010, with 5,600m A shares at a price of CNY20/share. The company raised CNY15.5bn from its A-share IPO. Huatai was listed on the Hong Kong Exchange on 1 June 2015. After the H-share IPO, the substantial holders were Jiangsu Guoxin (17.84%), Jiangsu Communications Holding (5.66%), Govtor Capital Group (4.88%), Jiangsu SOHO Holdings Group (3.84%). Those substantial holders are all controlled by Jiangsu SASAC. Huatai’s principal business lines include brokerage, investment banking, asset management, proprietary trading and overseas business. In addition, the company is qualified to undertake direct investment, margin finance and stock repo trading business. In December 2000, the company subscribed to a 10% equity interest in China Southern Asset Management, one of the largest fund management companies in China at the time. After a series of acquisitions, Huatai now owns a 45% stake in China Southern Asset Management. In 2004 and 2005, Huatai cooperated with AIG to start a mutual fund business. Huatai owns a 49% equity interest in Huatai-PineBridge, which had a total AUM of CNY61.3bn at end-2014. In 2006, the company acquired United Securities and renamed it Huatai United Securities, which has become a platform for the investment banking. Huatai held a 98.6% equity interest in Huatai United Securities at end-2014. In 2014, Huatai was named “Best Investment Bank in China” and “Most Innovative Investment Bank” by New Fortune Magazine. In terms of M&A projects, Huatai ranked No.1 in 2013, 2014, while its collective

asset management schemes were ranked No.2 at end-2014. Huatai has a number of major subsidiaries including:

• Huatai United Securities which was established in

1997 and focuses on investment banking. Huatai United has a strong brand in M&A transactions and was ranked No.1 in 2013 and 2014 in terms of number of transactions completed.

• Huatai Futures was established in 1995 and its

principal business is to provide futures brokerage. Huatai Futures is one of the largest futures companies in China with 31 branches.

• Huatai Zijin Investment, incorporated in 2008, is

an equity investment company. • Huatai Financial Holdings, established in 2006, is

an overseas holding company to expand Huatai’s overseas business.

• Jiangsu Equity Exchange Center was established in

2013 and is an equity trading platform.

• Huatai Innovative Investment was established in 2013 and is the platform for alternative investments.

In 2014, Huatai’s brokerage business commanded a 7.9% share of the total trading volume in China, ranking it No.1 among all Chinese securities companies. In terms of margin finance and stock repo balance, Huatai ranked No.2 among its peers in 2014. Huatai: segment revenue mix (per company disclosure)


Brokerage64.6%

Investment banking

9.0%

Asset management

8.6%

Investment and trading15.2%

Others2.7%


- 23 -

Huatai: industry rankings (2014)

Source: WIND, Daiwa

Senior management Wu Wanshan (Chairman, Executive Director, 52). Mr Wu joined the group in May 1991 and was appointed chairman of the board in December 2007. He has also served as the chairman of China Southern Asset Management since September 2003, and director of Huatai Financial Holdings since its establishment. Zhou Yi (President, Executive Director, 46). Mr Zhou joined the group in August 2006 and was appointed a director and president in December 2007. He also serves as the chairman of Huatai Ruitong Investment Management, Jiangsu Emerging Industry Management, Huatai Zijin Investment, Huatai Ruilian Fund Management, Huatai Junxin Fund Investment Management and Beijing Huatai Tongxin Investment Fund Management. Zhang Haibo (Vice President, 51). Mr Zhang joined the group in November 1998 and was appointed a vice president in December 2007. He has also served as a director of Huatai Financial Holdings and chairman of Huatai Asset Management since October 2014. Ma Zhaoming (Vice President, 51). Mr Ma joined the group in September 1992 and was appointed a vice president in June 2013.

Qi Liang (Vice President, 51). Mr Qi joined the group in December 2000 and was appointed a vice president in December 2007. He has also served as the chairman of Huatai-PineBridge since November 2004. Sun Hanlin (Vice President, 49). Mr Sun joined the group in August 1997 and was appointed a vice president in December 2007. Wu Zufang (Vice President, 51). Mr Wu joined the group in July 1992 and was appointed a vice president in December 2007. He has also served as the director of Huatai Zijing Investment since August 2013. Zhang Tao (Vice President, 42). Mr Zhang joined the group in August 1994 and was appointed a vice president in December 2007. He also serves as the director of China Southern Asset Management and Huatai Financial Holdings, and has been the chairman of Huatai Futures since November 2013. Jiang Jian (Vice President, 48). Mr Jiang joined the group in December 1994 and was appointed a vice president in December 2007. He has also served as the chairman of Jiangsu Equity Exchange since July 2013 and a director of Huatai United, China Southern Asset Management, Bank of Jiangsu, Huatai Zijin Investment and Huatai Ruitong Investment Management since August 2006, September 2010, May 2012, August 2013 and December 2013, respectively. Shu Ben’e (General Manager, 50). Ms Shu joined the group in May 1998 and was appointed General Manager of the planning and finance department in December 2007 and the manager of the financial department since March 2012. She has also acted as the chairman of the supervision department of Huatai United since June 2013. Li Yun (Chief Compliance Officer, 42). Ms Li joined the company in May 2012 and was appointed as the chief risk control officer, chief compliance officer, general counsel and general manager of the compliance and risk management department in August 2014.

56

4

9

3

Revenue

Net profit

Total assetNet capital

No. of branches

Sh H

Sour

Co R

Sour

R

Sour

2

4

6

8

10

(%

0.

0.

1.

1.

2.

2.

3.

3.

(

hareholdin

Huatai: shareho

rce: Company, Daiw

ompany co

Revenue breakd

rce: Companies

ROA (2013 and

rce: Companies

30.5

9.2

15.7

32.8

11.8

0

20

40

60

80

00

CITICS

%)

Brokerage I

2.38

3.02

.00

.50

.00

.50

.00

.50

.00

.50

CITICS

(%)

ng structu

olding structur

wa

omparison

down per discl

2014)

41.2

5.6 8.0

17.1

28.1

HTS

Investment banking

2.73 2.96

HTS2013

ure and ma

e and major su

n charts

losure (2014)

76.6

53.

7.8

11.

1.5

11.

10.8 21.

3.3 2.8

CGS GF

Asset management

2.99 2.70

2.92 2

CGS GF2014

ajor subsid

ubsidiaries and

.8 64.6

.0 9.0 .2 8.6

.1 15.2 8 2.7

S Huatai

Trading Others

2.20

2.80

2.31

FS Huatai

- 24 -

diaries an

d associates

Re

Sourc

RO

Sourc

0

20

40

60

80

100

0

2

4

6

8

10

12

14

16

(%

nd associat

evenue breakd

ce: Daiwa estimates

OE (2013 and 2

ce: Companies

21%

10%

0%

0%

0%

0%

0%

0%

CITICS

LendingAsset managementOthers

6.02

12.18

0

2

4

6

8

0

2

4

6

CITICS

%)

tes

own per busin

2014)

24%

20%

HTS

Traditionat Trading

6.70

9

11.88

HTS

2013

Financ

ess line (2014)

30% 22

47%

32

CGS GF

al brokerage

.69 8.30

13.91 13

CGS GFS

2014

cials / Chi6886 H8 June 2

)

% 22%

%43%

FS Huatai

Investment bankingFinancial leasing

6.30

3.50

11.60

S Huatai

ina HK 2015


- 25 -

Cost-to-income ratios (2013 and 2014) Brokerage market share (4M15)

Source: Companies

Source: CSRC, Wind, Daiwa

Number of IPO deals (5M15) Amount of IPO underwriting fees (5M15)

Source: Shanghai and Shenzhen Stock Exchange, Daiwa

Note: Including IPOs that have received final listing approval and those pending listing. As of 26 May 2015

Source: Shanghai and Shenzhen Stock Exchange, Daiwa

Note: Including IPOs that have received final listing approval and those pending listing. As of 26 May 2015

Unhedged equity and derivative investment exposure (end-2014)

China Securities firms: total lending balance (end-4M15)

Source: Companies

Source: Shanghai and Shenzhen Stock Exchanges, WIND, Daiwa estimates

Note: CITICS data includes data for CITIC Securities (Zhejiang) and CITIC Securities (Shandong)

67.3

58.3

65.7 66.969.7

62.6

56.7

61.6 61.0

64.8

40

45

50

55

60

65

70


(%)

2013 2014

5.86.4 6.5 6.4

4.5 4.8 4.8 5.15.1 5.2 5.0 5.2

4.0 4.0 4.34.9

5.46.1

7.9 8.0

0123456789

2012 2013 2014 4M15CITICS HTS CGS GFS HTSC

(%)

14

109 9 9

7

5 5 5 5

0

2

4

6

8

10

12

14

16

Guo

sen

GFS

HTS

Chi

na M

erch

ants

Sino

link

Hua

tai

CIT

ICS

Qilu

CIC

C

Indu

stria

l

3.4 3.3

2.7 2.6 2.6 2.5 2.42.1

1.8 1.7

0.0

1.0

2.0

3.0

4.0

Ever

brig

htSe

curit

ies

Guo

sen

CIC

C

Hua

tai

GFS

Sino

link

HTS

Chi

naM

erch

ants

UBS

Sec

uriti

es

CIT

ICS

(CNYm)

90.7%

61.2%

13.0%

42.8%

69.2%

0%

20%

40%

60%

80%

100%

0

10,000

20,000

30,000

40,000

50,000

60,000


(CNYm)

Value of equity securities and derivatives (CNYm) as % of net capital (RHS)

102 106 118 131107

58 58 3 1132

0

40

80

120

160

200


Margin lending Stock repo

(CNYbn)


- 26 -

Leverage ratios (end-2014)

Net capital and net-capital ratios (end-2014)


Source: Companies

4.74 4.88

6.14 5.80

6.49

3.79 3.83 3.60 4.08

4.68

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


(x)

Gross leverage Net leverage

56.3% 57.1%

88.4% 86.7%

53.2%

0%

20%

40%

60%

80%

100%

0

10,000

20,000

30,000

40,000

50,000


(CNY m)

Net capital - LHS Net capital / net assets


- 27 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected] Regional Research Head

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

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Becky HAN (852) 2848 4464 [email protected] Small/Mid Cap (Regional)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected] Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


- 28 -

Daiwa’s Offices

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Disclaimer

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

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Neo Solar Power Corp (3576 TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK); GF Securities Co Ltd (1776 HK).

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

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

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

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


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

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

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

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

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

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 61.0% Hold** 26.1% Sell*** 12.9%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2015. * comprised of Daiwa’s Buy and Outperform ratings.


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** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

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

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

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