Asia Pacific Equity Research 21 May 2014
2H Asia Outlook - 2014 Best Equity Ideas: Analyst Focus List In this Best Equity Ideas report, we present our latest country and industry strategy views along with our top buy and sell ideas from across our research teams in Asia ex-Japan. We have surveyed our universe of coverage and refreshed our regional Analyst Focus List (AFL), which contains one top buy and top sell idea from each of the country and industry teams. The weighted average projected return from our teams’ portfolio of buy ratings is 24 to 27% (country teams 24%, industry teams 27%) and of sell ratings is -25 to -2% (country teams -25%, industry teams -2%). We publish our Best Equity Ideas report quarterly and will continue to track the performance of these top ideas in this series.
Director of Asia Pacific Equity Research, Asia Technical Analysis Research Sunil Garg
AC
(852) 2800-8518
[email protected] Bloomberg JPMA GARG
J.P. Morgan Securities (Asia Pacific) Limited
Emerging Market Equity Strategy Adrian Mowat
AC
(852) 2800-8599 [email protected] Bloomberg JPMA MOWAT J.P. Morgan Securities (Asia Pacific) Limited
Asia Pacific Equity Derivatives & Quantitative Strategy Tony SK Lee
AC
(852) 2800-8857 [email protected] Bloomberg JPMA TONYLEE
Analyst Focus List (AFL) China Country China India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Sectors Autos Basic Materials Consumer Emerging Technology Financials Infrastructure and Industrials Oil and Gas Property Technology Telecommunications & Media Transportation Utilities & Power Equipment
J.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) Limited
Overweight
Bloomberg
Underweight
Bloomberg
PetroChina Sesa Sterlite MNC Sky Vision tbk Tenaga Ayala Land Singapore Airlines Hyundai Motor Company ASE KASIKORNBANK
857 HK SSLT IN MSKY IJ TNB MK ALI PM SIA SP 005380 KS 2311 TT KBANK TB
Sun Art Retail Group Limited Bharat Heavy Electricals (BHEL) Bank Danamon Maxis Berhad Globe Telecom Far East Hospitality Trust Hanjin Shipping Co Ltd ASUSTek Computer LPN Development
6808 HK BHEL IN BDMN IJ MAXIS MK GLO PM FEHT SP 117930 KS 2357 TT LPN TB
Mazda Motor (7261) Tata Steel Ltd Matahari Department Store BYD Company Limited Fubon Financial Holdings CSR Corp Ltd. PetroChina Sun Hung Kai Properties TSMC 21Vianet Group Inc. Singapore Airlines China Everbright International
7261 JT TATA IN LPPF IJ 1211 HK 2881 TT 1766 HK 857 HK 16 HK 2330 TT VNET US SIA SP 257 HK
DongFeng Motor Co., Ltd. CSR Limited Esprit Holdings Lite-On Technology Corporation ANZ Banking Group GS Engineering & Construction Sinopec Shanghai Petrochemical Agile Property Holdings Ltd Wintek Maxis Berhad Hanjin Shipping Co Ltd Shanghai Electric Group Company Limited
489 HK CSR AU 330 HK 2301 TT ANZ AU 006360 KS 338 HK 3383 HK 2384 TT MAXIS MK 117930 KS 2727 HK
Source: J.P. Morgan estimates, Bloomberg.
See page 62 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. In the United States, this information is available only to persons who have received the proper option risk disclosure documents. Please contact your J.P. Morgan representative or visit http://www.optionsclearing.com/publications/risks/riskstoc.pdf. www.jpmorganmarkets.com
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Country Team Analyst Focus List (AFL) China Overweight Underweight India Overweight Underweight Indonesia Overweight Underweight Malaysia Overweight Underweight Philippines Overweight Underweight Singapore Overweight Underweight South Korea Overweight Underweight Taiwan Overweight Underweight Thailand Overweight Underweight
CMP
Mkt Cap US$ mn
Price Target
Projected % Return
OW UW
9.28 9.86
219094 12134
11.25 8.6
21.2% -12.8%
SSLT IN BHEL IN
OW UW
245.75 277.8
12435 11604
265 130
MNC Sky Vision tbk Bank Danamon
MSKY IJ BDMN IJ
OW UW
2090 4315
1293 3622
Tenaga Maxis Berhad
TNB MK MAXIS MK
OW UW
12.28 6.93
Ayala Land Globe Telecom
ALI PM GLO PM
OW UW
Singapore Airlines Far East Hospitality Trust
SIA SP FEHT SP
Hyundai Motor Company Hanjin Shipping Co Ltd
ROE FY14E
10.5 24.3
10.2 21.3
10.9% 16.2%
7.8% -53.2%
12.5 16.5
8.1 22.4
8.2% 13.0%
3000 3000
43.5% -30.5%
261.3 12.2
47.6 9.9
3.1% 10.5%
21521 16192
16.5 5.25
34.4% -24.2%
13.0 25.4
13.0 24.5
14.4% 37.0%
32.9 1740
10687 5807
36 1520
9.4% -12.6%
30.3 19.1
24.5 18.3
14.8% 28.0%
OW UW
10.19 0.88
9585 1130
13 0.8
27.6% -9.1%
33.3 17.7
17.2 17.8
2.7% 5.6%
005380 KS 117930 KS
OW UW
230000 6070
49570 743
330000 4000
43.5% -34.1%
6.6 NM
5.9 NM
16.7% -71.1%
ASE ASUSTek Computer
2311 TT 2357 TT
OW UW
36.2 305
9346 7511
40 265
10.5% -13.1%
13.4 11.1
11.8 11.5
15.0% 14.4%
KASIKORNBANK LPN Development
KBANK TB LPN TB
OW UW
191 16.6
14077 754
230 14
20.4% -15.7%
9.7 11.5
8.7 8.9
19.8% 20.7%
Ticker
PetroChina Sun Art Retail Group Limited
857 HK 6808 HK
Sesa Sterlite Bharat Heavy Electricals (BHEL)
Source: J.P. Morgan estimates, Bloomberg; Prices at 20 May 2014
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P/E FY14E
FY15E
Company
Rating
Asia Pacific Equity Research 21 May 2014
Sunil Garg (852) 2800-8518 [email protected]
Sector Team Analyst Focus List (AFL) Autos Overweight Underweight Basic Materials Overweight Underweight Consumer Overweight Underweight Emerging Technology Overweight Underweight Financials Overweight Underweight Infrastructure and Industrials Overweight Underweight Oil & Gas Overweight Underweight Property Overweight Underweight Technology Overweight Underweight Telecommunications & Media Overweight Underweight Transportation Overweight Underweight Utilities & Power Equipment Overweight Underweight
Mkt Cap Price CMP US$ mn Target
Projected % Return
P/E FY14E
FY15E
ROE FY14E
9.3 7.2
7.0 7.2
23.5% 15.1%
32.7% -11.5%
15.0 19.5
8.1 17.4
8.3% 6.7%
18000 11.3
28.6% -1.1%
24.4 198.2
19.5 41.6
46.6% 0.7%
11950 3634
67 40
70.3% -15.2%
66.4 12.7
25.0 11.7
5.1% 9.3%
40.2 32.75
12696 83830
51 34.75
26.9% 6.1%
9.8 12.5
9.0 11.9
12.6% 15.6%
5.67 37850
10096 1889
8.6 27000
51.7% -28.7%
11.2 14.5
9.7 11.2
14.6% 5.7%
9.28 219094 1.87 2605
11.25 1.7
21.2% -9.1%
10.5 15.2
10.2 11.3
10.9% 5.9%
34730 2506
128 6
27.0% 7.5%
12.6 3.8
12.7 3.2
5.5% 11.7%
OW UW
120.5 103587 10.25 628
150 7
24.5% -31.7%
13.1 NM
12.0 NM
23.1% -16.2%
VNET US MAXIS MK
OW UW
25.62 6.93
1512 16192
35 5.25
36.6% -24.2%
33.4 25.4
19.6 24.5
11.9% 37.0%
Singapore Airlines Hanjin Shipping Co Ltd
SIA SP 117930 KS
OW UW
10.19 6070
9585 743
13 4000
27.6% -34.1%
33.3 NM
17.2 NM
2.7% -71.1%
China Everbright International Shanghai Electric Group
257 HK 2727 HK
OW UW
9.42 2.85
5448 4715
13 2.4
38.0% -15.8%
22.5 11.3
16.5 11.1
13.3% 7.8%
Company
Ticker
Rating
Mazda Motor (7261) DongFeng Motor Co., Ltd.
7261 JT 489 HK
OW UW
421 10.18
12398 11314
680 8.5
61.5% -16.5%
Tata Steel Ltd CSR Limited
TATA IN CSR AU
OW UW
467.15 3.39
8083 1600
620 3
Matahari Department Store Esprit Holdings
LPPF IJ 330 HK
OW UW
14000 11.42
3576 1900
BYD Company Limited Lite-On Technology Corp.
1211 HK 2301 TT
OW UW
39.35 47.15
Fubon Financial Holdings ANZ Banking Group
2881 TT ANZ AU
OW UW
CSR Corp Ltd. 1766 HK GS Engineering & Construction 006360 KS
OW UW
PetroChina Sinopec Shanghai Petrochem
857 HK 338 HK
OW UW
Sun Hung Kai Properties Agile Property Holdings Ltd
16 HK 3383 HK
OW UW
100.8 5.58
TSMC Wintek
2330 TT 2384 TT
21Vianet Group Inc. Maxis Berhad
Source: J.P. Morgan estimates, Bloomberg; Prices at 20 May 2014
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Table of Contents Emerging markets and Asia Pacific ex-Japan equity strategy, Adrian Mowat / Rajiv Batra ......................................5 Asia Pacific Equity Derivatives Strategy, Tony Lee ..............6
Country relative performance in US$ (MSCI AC Asia Pacific ex JP)
Countries.................................................................................10 China, Adrian Mowat ..............................................................11 India, Bharat Iyer ....................................................................12 Indonesia, Aditya Srinath ......................................................13 Malaysia, Hoy Kit Mak ............................................................14 Philippines, Jeanette Yutan...................................................15 Singapore, James Sullivan ....................................................16 South Korea, Scott Seo..........................................................17
Source: J.P. Morgan, Bloomberg.
Taiwan, Alvin Kwock ..............................................................18 Thailand, Anne Jirajariyavech ...............................................19 Sectors ....................................................................................20
Sector relative performance in US$ (MSCI AC Asia Pacific ex JP)
Autos, Nick Lai........................................................................21 Basic Materials, Daniel Kang.................................................22 Consumer, Ebru Sener...........................................................23 Emerging Technology, Alvin Kwock.....................................24 Financials, Josh Klaczek .......................................................25 Infrastructure & Industrials, Karen Li ...................................26 Oil and Gas, Scott Darling .....................................................27
Source: J.P. Morgan, Bloomberg.
Property, Cusson Leung ........................................................28 Technology, JJ Park...............................................................29 Telecommunications & Media, James Sullivan ...................30 Transportation, Corrine Png..................................................31 Utilities & Power Equipment, Boris Kan...............................32 Investment Thesis, Valuation and Risks ..............................33 Team List.................................................................................60
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Emerging markets and Asia Pacific ex-Japan equity strategy
Adrian Mowat AC Rajiv Batra AC
Key Messages
Country Recommendations
Five non-consensus calls High return from EM equities in 2014: Reduction in excessive risk premium Margin improvement & top-line surprise Tapering is bullish for EM equities Value outperforms growth Long Global demand (JPHAPGDM ) Cheap domestic growth (JPHAPDGR ) India Domestic cyclicals (JPHINDCY ) China lags but does not prevent EM rally Neutral Thematic growth (JPHCHTGW ) Advantage ASEAN returns
Overweight: India, Taiwan, Korea, Thailand, Indonesia and the Philippines Underweight: China, Hong Kong and Singapore
For more details on asset allocation please see: Perspective and Portfolios: Asian strategy Key Trades and Risk: EM strategy
Key Trades
Risks and volatility
Risks to our strategy Global growth does not accelerate Ukraine Positioning in UW markets Risks to Markets Rapid correction in expensive growth China property market China tail risk Geopolitical risk in Ukraine Unclear Fed communication Inflation threat from higher agricultural prices
EM joins the equity bull market Value outperforms (Korea, Taiwan) Broadening global growth (IT, Korean autos, OW Mexican cyclicals) Lower CAD risk and the hope of change (India, Indonesia) The other ASEAN winners (Thailand, Philippines)
APxJ Heat-map: Key sectors in country recommendations OW: India, Taiwan, Korea, Thailand, Indonesia and the Philippines UW: China, Hong Kong and Singapore Asia Pacific ex-Japan Equity Strategy Heat Map Australia CS Aus. Indus Australia Energy
Korea CD Australia Banks
Australia Others Australia Materials
Australia Fin. Korea Others Ex banks
Korea IT Korea Financials
Korea Mat Taiwan Mat
Taiwan IT
HK Indust. HK CD HK Utilities HK Others
HK Financials
Korea Ind Singapore India Others China CD Financials China Others China CS China IT Taiw. Others China Banks China Indus. India Energy Sing. Indus. China China Fin ex China Tawian India Fin. Sing. Others Energy Banks Telecom Financials India IT Philippines
Malaysia
Indonesia
Thailand
Source: MSCI, Datastream, J.P. Morgan Note: Red Indicates UW, green OW and white Neutral. Area of the sector indicates weight in MSCI APxJ.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Asia Pacific Equity Derivatives Strategy
Tony SK Lee AC
Position for Potential Upside in Korean Equities via KOSPI 200 options APxJ key asset allocation calls OW: India, Korea, Taiwan, Thailand, Indonesia and the Philippines UW: China, Hong Kong and Singapore
Keeping faith in EM and Korea: Korea is our Asia Pacific strategist Adrian Mowat’s top market for 2Q14 because of 1) attractive valuation, 2) leveraged to accelerating global growth, 3) Korean Financials to benefit from rising rates, and 4) growing evidence of potential corporate restructuring, which has the potential to unlock value (for more, please see Samsung's strategic options for ownership restructuring : Heart & Seoul analysis part 1:The start; Samsung's strategic options for ownership restructuring: Heart & Seoul analysis part 2: The financials; Samsung Life increases stake in SAM to 100%, Seo et al). For investors who agree with our strategist’s view and want to position for the potential breakout of Korean equities from the multi-year trading range, KOSPI 200 index call options provide an upside exposure in an efficient way.
Figure 1: KOSPI 200 volatility recorded a new historical low
Figure 2: Global index 3M ATM implied volatility sorted by 10Y%tile
Source: Bloomberg, J.P. Morgan
Source: Bloomberg, J.P. Morgan
Figure 3: USD/KRW and correlation with KOSPI2
Source: Bloomberg, J.P. Morgan * correlation calculated based on 6M weekly returns
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KOSPI 200 index implied volatility appears cheap in both absolute and relative measures. KOSPI 200 3M ATM implied volatility is currently trading at 11.2%, resetting its historical lows (Figure 1). Compared to global equity indices (Figure 2), KOSPI 200 volatility is similar to the levels of other developed markets such as S&P 500, ASX 200 and FTSE 100. The historical low volatility/low option premium of KOSPI 200 leads to lower breakeven points of option strategies, making the KOSPI 200 options attractive for directional investors. Any rise in volatility will also benefit the mark-to-market of the long option position. In addition to outright call options, investors can consider KOSPI 200/KRW contingent option as an alternative. KRW has appreciated over 5% over the past seven weeks, resetting its new post-GFC lows of 1,022. Our FX strategist Daniel Hui says “In retrospect, KRW’s range-bound performance in 1Q was impressive in light of some very negative factors including large portfolio outflows, CNY correlations, and geopolitical risk. But these factors are fading or even reversing to drive more near-term appreciation. This also underscores the significance of large persistent C/A inflows currently running above 6% of GDP, suggesting that ultimately 1050 was not a sustainable floor for the central bank to protect. Intervention going forward will only smooth further appreciation, positioning is not an obstacle and the next firm level of support appears to be 1000.”
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
KOSPI 200/KRW contingent option is a structure where the KOSPI 200 option is valid only if KRW meets the predetermined level at expiry. Due to the negative correlation between KOSPI 200 and USD/KRW (i.e. Korean equities rise with Won appreciating), the pricing works in favor for the contingent options where investors buy the equity-fx correlation. Table 1 shows the indicative pricing of the KOSPI 200 options contingent on different levels of USD/KRW. Investors with a view on KRW can consider using these options which can provide decent saving in the outlay cost versus vanilla options. Table 1: Indicative pricing of KOSPI 200 options contingent on USD/KRW (reference level = 1,024)*
3M 102.5% Vanilla Call Contingent on: KRW >1000 KRW >1010 KRW >1020 KRW >1030 6M 105% Vanilla Call Contingent on: KRW >1000 KRW >1010 KRW >1020 KRW >1030
Indicative Premium 1.55% 1.15% 1.00% 0.80% 0.60% 2.15% 1.35% 1.15% 0.95% 0.75%
Figure 4: KOSPI 200 1M realized and implied volatility
Savings vs Vanilla 0 -26% -35% -48% -61% 0 -37% -47% -56% -65%
Source: Bloomberg, J.P. Morgan. * Observation on USD/KRW occurs only at expiry. ** Contingent option pricing is based on implied equity-fx correlation of -0.30.
Source: J.P. Morgan
Behind the historic low volatility: The heavy structured product issuance combined with the collapse of warrants market led to serious imbalance in volatility supply/demand and those product issuers’ delta hedging activities have contributed to significant lowering of realized volatility in Korean equities. In addition, a lack of market catalysts with the KOSPI spot being stuck in the range of 1800-2050 further suppressed the realized volatility and induced volatility investors to sell short-term implied volatility to play the carry (Figure 4). This vicious cycle resulted in KOSPI 200 short-term realized volatility being among the lowest globally, even lower than those of developed markets (Table 1). With the risk of significant market sell-offs perceived limited in the market, demand for structured products in Korea is likely to remain strong in the foreseeable future. Hence, we would need a breakout in the spot out of the multi-year trading range and a consequent decrease in the short vega position from structured products, in order to see a turnaround in KOSPI 200 volatility. In the meantime, directional investors should take advantage of the current historic low volatility/low premium and use options to implement their views in an efficient manner.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Risk of Common Option Strategies Risks to Strategies: Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of “Characteristics and Risks of Standardized Options.” We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents. Put Sale. Investors who sell put options will own the underlying asset if the asset’s price falls below the strike price of the put option. Investors, therefore, will be exposed to any decline in the underlying asset’s price below the strike potentially to zero, and they will not participate in any price appreciation in the underlying asset if the option expires unexercised. Call Sale. Investors who sell uncovered call options have exposure on the upside that is theoretically unlimited. Call Overwrite or Buywrite. Investors who sell call options against a long position in the underlying asset give up any appreciation in the underlying asset’s price above the strike price of the call option, and they remain exposed to the downside of the underlying asset in the return for the receipt of the option premium. Booster. In a sell-off, the maximum realized downside potential of a double-up booster is the net premium paid. In a rally, option losses are potentially unlimited as the investor is net short a call. When overlaid onto a long position in the underlying asset, upside losses are capped (as for a covered call), but downside losses are not. Collar. Locks in the amount that can be realized at maturity to a range defined by the put and call strike. If the collar is not costless, investors risk losing 100% of the premium paid. Since investors are selling a call option, they give up any price appreciation in the underlying asset above the strike price of the call option. Call Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is below the strike price of the call option. Put Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is above the strike price of the put option. Straddle or Strangle. The seller of a straddle or strangle is exposed to increases in the underlying asset’s price above the call strike and declines in the underlying asset’s price below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the underlying asset would have limited losses should the underlying asset rally. Covered writers are exposed to declines in the underlying asset position as well as any additional exposure should the underlying asset decline below the strike price of the put option. Having sold a covered call option, the investor gives up all appreciation in the underlying asset above the strike price of the call option. Put Spread. The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher-ratio put spread has unlimited downside below the lower strike (down to zero), dependent on the number of lower-struck puts sold. The maximum gain is limited to the spread between the two put strikes, when the underlying is at the lower strike. Investors who own the underlying asset will have downside 8
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
protection between the higher-strike put and the lower-strike put. However, should the underlying asset’s price fall below the strike price of the lower-strike put, investors regain exposure to the underlying asset, and this exposure is multiplied by the number of puts sold. Call Spread. The buyer risks losing 100% of the premium paid. The gain is limited to the spread between the two strike prices. The seller of a call spread risks losing an amount equal to the spread between the two call strikes less the net premium received. By selling a covered call spread, the investor remains exposed to the downside of the underlying asset and gives up the spread between the two call strikes should the underlying asset rally. Butterfly Spread. A butterfly spread consists of two spreads established simultaneously – one a bull spread and the other a bear spread. The resulting position is neutral, that is, the investor will profit if the underlying is stable. Butterfly spreads are established at a net debit. The maximum profit will occur at the middle strike price; the maximum loss is the net debit. Pricing Is Illustrative Only: Prices quoted in the above trade ideas are our estimate of current market levels, and are not indicative trading levels
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Asia Pacific Equity Research 21 May 2014
Countries
Sunil Garg (852) 2800-8518 [email protected]
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
China
Adrian Mowat AC
MSCI China underperformed EM in the past 1M/3M/1Y. Realized volatility is at a five-year low. The CNY, down 3%YTD, is the second weakest EM currency. Macro investors are frustrated by a policy of fine tuning rather than a significant stimulus. The leadership’s message that slower growth is the new normal is adding to macro investors’ frustration. April’s IP, retail sales and FAI were weaker than expected. YTD residential construction starts and residential sales are down 25%oya and 9%oya compared to up 2%oya and up 41%oya in 4M13, respectively. This is the biggest drop in construction starts since data started. HSBC PMI at 48.1, printed its fourth month of contraction. The NBS PMI is 50.4. The most disturbing data for equity investors is 26 months of PPI deflation. Micro investors (stock pickers) prospered in the past two years as thematic growth trended higher. Our group of thematic growth stocks has underperformed by 13% from the end of February. There is no consensus on the new winners. This is proving painful. It is difficult to see how equities break from their low return low volatility funk. With the market impact of the mini-stimulus proving short lived, we have reduced exposure to growth floor winners. For now, we forecast market-disappointing policy fine tuning. The commitment to the 7.5% GDP growth will be tested in 3Q14 when we forecast GDP growth of just 7%oya.
Overweight PetroChina
There is an outside chance this is the catalyst for a more meaningful stimulus. After a two-year period of outperformance, the rotation from thematic growth is in our opinion still at an early stage. This is a function of positioning and valuation rather than questioning the long-term growth case. The beneficiaries may be energy and telcos. Within EM, China remains a funding source. We believe the biggest risk to the economy & the market is that demand for property fails to recover as prices cut. Other concerns include disruption of the interbank market and unwind of the short dollar long renminbi carry trade. Simply, slower growth would hit profit growth for cyclical and near cyclical banks. The risk to our UW is a u-turn in monetary policy, similar to 3Q12. Finally, we are bullish EM. Positioning EM is bearish. Top picks and stocks to avoid Code Rec Top Picks 1766 HK OW 857 HK OW 3311 HK OW 257 HK OW 2319 HK OW Stocks to Avoid 2727 HK UW 303 HK UW 6808 HK UW
Price (HKD)
PT
P/E (x) P/B (x) FY14 FY14
5.6 9.2 13.1 9.4 38.3
8.6 11.25 19.0 13.0 43.0
11.1 10.4 13.0 22.4 25.4
2.9 105.0 9.8
2.4 85.0 8.6
11.3 16.2 24.2
Div. yield 14E (%)
ROE 14E (%)
1.5 1.1 2.7 2.8 2.9
2.7 4.3 2.8 1.5 0.8
14.6 10.9 22.6 13.3 13.1
0.8 5.8 3.8
3.5 0.9 2.2
7.8 31.0 16.2
Source: Bloomberg, J.P. Morgan estimates. Prices updated as of 16th May 2014.
Underweight Scott Darling AC
Ticker: 857 HK, Price: HK$9.23, PT: HK$11.25 Investment thesis: Our positive view on China Integrated Oils (both PetroChina and Sinopec) is based on: (1) Visibility on asset optimisation/portfolio management and capital discipline, (2) Improving refining margins as China moves to tougher gasoline/diesel specs, (3) Chinese refined product demand remaining robust (4% y/y), and (4) Nat gas price hikes and reform progress. Drivers/catalysts: Key catalysts for the stock would be 2Q14 results, marginal asset divestments, announcements of additional natural gas reform policy. Valuation and risks: Our Dec-14 PT of HK$11.25 is based on SOTP – we calculate a DCF based value (WACC 9.8%, terminal g 2%) for each business segment, namely upstream, refining, chemicals and marketing added to give our total NAV. Debt and financial liabilities are deducted at B/V. Risks are a sharp fall in oil prices, recent nat gas price hikes not being passed on to customers and no further rises; a higher import burden and weak chemicals profitability from lower demand and margins.
Sun Art Retail
Shen Li AC
Ticker: 6808 HK, Price: HK$9.83, PT: HK$8.60 Investment thesis: We believe Sun Art benefits from its leading competitive position, strong execution and strong mgmnt team. However, it is trading on elevated earnings multiples relative to global peers. With limited short term catalysts and risk to longer term margins, we believe there is risk of earnings multiple contractions. Drivers/catalysts: (1) Any significant acceleration or deceleration in SSSG rate SSSG; (2) Any change in mgmnt operating margin guidance; (3) Any concerns about the rate of rental income growth for the company Valuation and risks: Jun-15 PT is HK$8.6, based on target P/E of ~18x (in line with avg 1 year forward trading multiple for international food retail names) and Jun-16 earnings forecasts. Upside risks: (1) Any upturn in food/ general merchandise retail environment; (2) Any change in consumer behaviour such that foot traffic for hypermarkets improve; (3) Any weakness in growth of e-commerce in China; (4) Better than expected GM expansion; (5) Improvement in staff productivity.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
India
Bharat Iyer AC
The much awaited national election has concluded with a positive surprise for Indian investors. BJP-led NDA won 336 of 543 seats. Results have boosted investor confidence. With the end of election related uncertainty and the likely boost in corporate and consumer confidence, growth momentum is expected to revive gradually. Aggregate earnings growth for the large cap MSCI India index is expected to increase from 10% in FY14 to 14% oya in FY15. Our economics team expects GDP growth to recover from 4.6% vs. 5.2% oya. On the other hand, inflation outlook is not as conducive for a meaningful revival in growth. CPI at 8.6% remains uncomfortably high. Our house view is that of a 50 bps rate hike over 2H CY. Our portfolio stance is based on:
Global growth recovery is expected to accelerate into 2H 2014. Our global team expects QE tapering to conclude by November 2014. This, however, also implies lower reduced pace of liquidity injection from the US Fed.
Preferred domestic sectors likely to benefit from the local cyclical recovery are: high-quality Financials, Commercial Vehicles and Cement companies.
Metal and Private sector Energy companies should benefit from continued global growth recovery. These companies also rank high on relative value attractiveness. More importantly, we believe any policy reform by the incoming Government to kick start the investment cycle will initially have to start with the Resources sector. Reforms herein will be key to resolving bottlenecks in the Infrastructure sector and subsequently the Credit cycle in the financial sector.
Top picks and stocks to avoid Code Rec Top Picks SSLT IN OW HDFCB IN OW TTMT IN OW Stocks to Avoid BHEL IN UW HMCL IN UW JUBI IN UW
Price (LC)
PT
P/E (x) P/B (x) FY14 FY14
Div. yield ROE 14E (%) 14E (%)
246 816 440
265 800 450
12 23 9
8 18 8
2.3 1.1 0.5
12 22 25
278 2,363 1,156
130 1,920 870
10 22 55
17 23 58
1.2 2.7 0.0
9 39 24
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014.
Overweight Sesa Sterlite
Underweight Pinakin Parekh AC
Ticker: SSLT IN, Price: INR246, PT: INR265 Investment thesis: SSLT is the most levered company in India to any ‘regulatory policy’ improvement given large sunk investment in aluminum and power. We expect operational earning to improve for key segment like iron ore, Zinc India, Power over the next two years. We believe net debt will decline with strong cash generation at subs and limited capex Drivers/catalysts: 1) Completion of the stake sale process in the Zinc India subsidiary; 2) Improving regulatory climate positive for investment in aluminum and power; 3) Visibility on iron ore production in Goa; 4) Improvement in coal availability Valuation and risks: Our Dec14 PT of Rs265 is based on SOTP. We value aluminum at 7x, Zinc India and power at 5.5x, Copper at 6x O&G at 3x and iron ore at 5x FY16 EBITDA. Key risks include sharp decline in zinc or oil prices, delay in start of Goa mining, ramp up in power slower than expected.
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BHEL
Sumit Kishore AC
Ticker: BHEL IN, Price: INR278, PT: INR130 Investment thesis: BHEL caters to an over-served domestic main plant equipment market facing severe price competition. Amid declining demand supply deficit for electricity, fuel constraints, weak SEB health and high IPP leverage levels, developer appetite for Greenfield projects is unlikely to improve in near term. Order backlog is down 40% from peak levels. Earnings decline shall persist for at least two more years. Drivers/catalysts: (1) Award of competitively bid captive coal blocks to IPPs; (2) non-power diversification; (3) accelerated UMPP awards. Valuation and risks: Our Mar-15 DCF based PT of Rs130, implies 44% potential downside. BHEL is trading at 19x FY15E P/E, RoE has eroded from peak 30%+ level to est. 8.5% in the current fiscal. Key upside risks include- (1) order inflow surprise from nuclear, defense, railways; (2) Steep pick up in electricity demand; (3) Quick release of funds stuck in working capital.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Indonesia
Aditya Srinath, CFA AC
J.P. Morgan regional strategy team rates Indonesia overweight relative to EM/Asia exJapan. Indonesia has outperformed APxJ/EM by 2324% YTD.
opinion polls (CSIS, LSI). Political risk and cabinet composition are potential source of volatility. Our top picks are, INTP (playing a cyclical recovery, and improvement in Government spending), MSKY (exposure to the affluent urban consumer), BBRI (gaining deposit share), INDF (the sum better than the parts)
Recent economic data shows that macroeconomic adjustment underway is progressing smoothly. Rupiah has reversed its depreciating trend. 1Q CA was a deficit of $4.2bn (2% of GDP), with the BoP in a surplus of $2.1bn.
Our top avoids are UNVR (valuations & FX) and Telecoms (ISAT) along with BDMN (margins at risk from precarious system liquidity).
Imports have cooled off, and GDP growth slowed in 1Q to 5.2%. The weak external sector and the impact of the ban on mineral exports were a drag.
Top picks and stocks to avoid Code Rec Top Picks MSKY OW INTP OW BBRI OW LPPF OW INDF OW Stocks to Avoid ISAT N UNVR UW BDMN UW
After raising rates by 175bps in 2HFY13, the Central Bank has held the policy since. We think tightening may have run its course, with risks only if prompted by external sector turbulence. M2 growth (10%) is now lower than nominal GDP. After declining through the course of FY13, earnings estimates have stabilized recently. Consensus estimates EPS growth of 10-12% pa over this year and next, which appears reasonable. Indonesia goes to polls to elect a new President on July 9th. Jakarta Governor Jokowi currently leads
Overweight MNC Sky Vision
PT
P/E (x) FY14
P/B (x) Div. yield ROE FY14 14E (%) 14E (%)
2,090 23,000 10,550 14,000 6,775
3,000 27,500 11,000 18,000 8,200
261.3 15.3 10.4 24.4 15.0
7.7 3.2 2.7 9.7 2.3
0.41 2.07 2.89 1.23 2.83
3.1 22.3 28.5 NM 16.0
4,060 29,600 4,315
4,070 20,600 3,000
20.6 38.9 12.2
20.6 38.9 12.2
3.1 1.9 2.5
6.5 123.20 10.5
Source: Bloomberg, J.P. Morgan estimates. Prices and valuations as of May 20th, 2014.
Underweight Princy Singh AC
Ticker: MSKY Price: Rp2,090 PT: Rp3,000 Investment thesis: MSKY is the dominant pay TV operator with 71% market share. Indonesia is one of the least penetrated pay TV markets in Asia, with about 7% household penetration in 2012 (vs. 11%/28%/49%/80% for Philippines, Thailand, China and India). With rising income levels and increasing affordability, MSKY is well positioned to benefit from this trend.
Price (LC)
Drivers/catalysts: Pay TV affordability in Indonesia is currently the lowest among Asian peers, and we see rising incomes to drive higher affordability and penetration. MSKY’s consistency to maintain rapid subscriber addition, reducing churn rate and maintain margins will determine short term trend. Valuation and risks: MSKY currently trades at 10-11x 12M forward consensus EV/EBITDA. Our Jun-15 PT of Rp3,000 (12x 2014 EV/EBITDA) is based on 15% premium to ASEAN media peer group average EV/EBITDA. We believe this premium is justified given strong market positioning (>70% share) and superior long term growth profile. Risk: rising churn rate, intensifying competition and significant $denominated expenses.
Bank Danamon
Harsh W. Modi AC
Ticker: BDMN Price: Rp4,315 PT: Rp3,000 Investment thesis: Bank Danamon has a wholesale funded (47% CASA), high leverage (123% LDR), high yield (14.1%) business model, which we believe is under threat as system liquidity tightens. The bank has started making strategy shifts in favor of building a stronger deposit franchise over the last few quarters but we do not expect these changes to result in the bank generating RoEs above its cost of equity over the next three years.
Drivers/catalysts: We think asset quality will stay resilient due to higher minimum wages, better than estimated household and business balance sheets, and ability of businesses to pass on cost. However, we believe the bank is at risk of further pressure on NIM as time deposit rates stay high and CASA ratio deteriorate further from 42% in 1Q14 (vs. 47% in Dec-13).
Valuation and risks: BDMN currently trades at 1.2x Fwd PB. We use 2 stage DDM to value Bank Danamon with Jun-15 PT of Rp3,000. We use P/B multiple of 0.79x with RFR of 8%, CoE of 15.5% and normalized ROE of 12.2%. Key risks: reduced reliance on wholesale funds which will improve funding cost and asset quality, higher loan growth. 13
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Malaysia
Hoy Kit Mak AC
Our economist forecasts a 5.5% capex-led growth for Malaysia in 2014. Main capex drivers are private investments (+15% in 2014). We see further evidence of capex rollout, led by Petronas’ $88B RAPID project approval, and cabinet approval for the M$25B MRT Line 2. This is further supported by the strong pipeline of unrealized investments under the Economic Transformation Programme (ETP) totaling M$179.7B or 18.3% of 2013 GDP. Although private consumption growth picked up in 1Q14, government fiscal consolidation via subsidy cuts is gaining traction. That will, in our view, be at the expense of consumption. Exports are recovering as expected, rising 10.9% Y/Y in 1Q14, benefitting exporters. In contrast to 2013, 2014 market earnings growth of 12% is 60% driven by the external sectors, 40% driven by domestic sectors. Our sector/stock selection is split between domestic capex/ thematic winners, and exposure to external sector recovery. Our “Best Malaysia Five” picks are Tenaga, SAKP, Gamuda, Genting Plantations
Overweight Tenaga Nasional
Key risks: 1) Sharp rise in bond yields, 2) sharper-thanexpected fall in CPO and LNG prices, and 3) sharperthan expected slowdown in consumption on the back of subsidy cuts. Top picks and stocks to avoid Code Rec Top Picks GAMU OW GENP OW MAHB OW SAKP OW TNB OW Stocks to Avoid ROTH MK UW MAXIS UW UEM N
Price (M$)
PT
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
4.56 11.10 7.40 4.24 12.28
5.50 12.20 10.00 5.70 16.50
12.6 21.5 23.1 16.7 13.0
1.9 2.7 1.9 2.5 1.8
2.2% 0.9% 2.2% 0.0% 2.3%
14.9% 13.1% 9.3% 13.2% 14.4%
61.30 6.93 2.26
54.30 5.25 2.00
20.8 25.4 24.2
32.8 10.3 1.8
4.2% 5.2% 1.6%
161.9% 37.0% 6.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 May 2014.
Underweight Ajay Mirchandani AC
Ticker: TNB MK, Price: M$12.28, PT: M$16.50 Investment thesis: Tenaga remains one of our highestconviction ideas in Malaysia, as we see it as a beneficiary of (i) a benign fuel cost environment; (ii) solid volume growth; (iii) potential tariff reset every 6 months potentially eliminating fuel cost risk; (iv) upside risk to 2014 consensus earnings. Given the 15% tariff increase announced on Dec 2013, effective 1 Jan 2014, we now see fuel cost risk being limited to coal only as gas and LNG costs have been passed on to end consumers, where we are likely to see a fuel cost reset every 6 months. We see a strong likelihood of Tenaga continuing its multiple re-rating and re-rate to the low end of the 8-10x EV/EBITDA multiple (currently 6x EV/EBITDA) for ASEAN utilities. Drivers/catalysts: (i) Higher coal consumption and benign thermal coal environment; (ii) incremental revenues from base tariff increase (iii) lower LNG fuel costs as a result of the pass through mechanism Valuation and risks: Our Aug-14 PT of RM16.50 equates to 17.5x/17.5x FY14E/FY15E P/E and 2.4x/2.2x FY14E/FY15E P/B. Key risk to our PT is a faster-than-expected increase in coal costs without an offsetting increase in tariffs.
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and MAHB. Our top avoids linked to moderating consumption are Maxis, UEM Sunrise and BAT.
Maxis
Princy Singh AC
Ticker: MAXIS MK, Price: M$6.93, PT: M$5.25 Investment thesis: Maxis' change in strategy to focus on revenue growth and market share, a shift away from its margin focused strategy over the past few years is likely to drive sales and marketing expenses higher and comes against a backdrop of slowing industry revenue growth. We note that rising competitive intensity could drive pricing pressure and potentially capex intensity higher, which poses risk to free cash flows and sustainability of dividend payout. Drivers/catalysts: We believe that given the headwinds from competitive pressures and the impending consensus downgrades, valuation multiples are likely to compress from current levels. Post 1Q14 results, management cautioned against extrapolating 40c dividend payments to 2015E, stating that Maxis will not continue to borrow to pay dividends. We believe that dividends in 2015E could potentially get cut by 20% to 32c. Valuation and risks: Our Jun15 PT of M$5.25 is based on 18x 2014E P/E, in-line with the stock’s historical trading range. Key upside risks include higher-than-expected market share gains, better cost management and potential increase in dividend payout.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Philippines
Jeanette Yutan AC
Overall market view. Philippines is rated OW relative to EM & Asia ex-Japan. The country is one of the few countries in EM that has been growing above potential. Domestic demand is robust. External position is healthy. Domestic liquidity is aplenty. Market EPS growth is muted but is resilient and has upside risk. Driver: Banks, in our view, will be the key catalyst for EPS growth upgrade. Core banks outlook is promising. We expect credit demand to pick up strongly amid the steep LDR decline. Consumer loans are expected to underpin the loan expansion. Other important drivers are the economy's ability to sustain above-potential GDP growth and resilience of market EPS versus ASEAN peers. Sector and stock calls: Metropolitan Bank is our preferred banks pick. Apart from banks, we think that property will be a key beneficiary of the consumerled loans growth. We like ALI given its high leverage on the economic growth and widening lead over peers in terms of earnings and return trajectory. We are
Overweight Ayala Land
positive on modern retailers given rising organized retail penetration amid increasing per capita income and expansion of middle income families. We like Puregold among the retailers. Ayala Corp is our preferred country proxy given its cheap valuations and leverage on the economy. We avoid telcos (Globe is our UW stock) given record high valuation, rising capex intensity, and increasing SAC due to postpaid aggression by the players. Risks and key issues. Rapid currency depreciation, sharp rise inflation are key risks to our view. Top picks and stocks to avoid Code Rec Top Picks ALI PM OW AC PM OW PGOLD PM OW MBT PM OW Stocks to Avoid GLO PM UW
Price (LC)
PT
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
32.90 650.0 42.45 89.50
36.00 730.00 58.00 85.00
30.3 23.8 23.7 16.7
4.3 2.7 3.4 1.9
1.7 0.6 1.2 0.9
14.8 11.7 15.3 11.5
1,740
1520
19.0
4.8
4.8
27.9
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014.
Underweight Jeanette Yutan AC
Globe Telecoms
Princy Singh AC
Ticker: ALI PM, Price: Php32.90, PT: Php36.00 Investment thesis: We believe that ALI is the best exposure to the Philippines' robust macro story. ALI is well positioned to benefit from the strong economic growth and favorable credit environment which should underpin the sustained robust growth in real estate demand. We expect ALI to deliver a faster-than-peers 20% EPS CAGR in FY14E-FY15E as the company sustains its aggressive project launches and commercial lease expansion.
Ticker: GLO PM, Price: Php1740, PT: Php1520 Investment thesis: We see margin pressure for Globe driven by rising post-paid subscriber acquisitions driving SACs higher. In addition, we see significant rise in capex intensity going forward driven by higher data usage and thrust on home broadband services – management recently increased its capex guidance implying almost 30% capex to sales ratio for 2014E. We believe capex levels could remain elevated over 201416E, driving incremental returns on capital lower.
Drivers/catalysts: Upward FY14E and FY15E EPS revision by consensus, which are 7-12% lower than our numbers.
Drivers/catalysts: Downward EPS revision by consensus, which are 6-11% higher than our estimates.
Valuation and risks: Our Dec-14 PT of Php36 is based on a 10% discount to our NAV estimate of Php41/share. This reflects the NAV discount that is near the +1 SD above its historical average. We think this is justified given the company's superior return profile, established execution track record, robust long-term structural drivers, and the company's higher growth trajectory. Risks include sharp rise in interest rates, lower-thanexpected residential take-up, meaningful slowdown in economic growth.
Valuation and risks: Our Dec-14 PT of Php1,520 is based on 16x 2015E P/E. Our target multiple of 16x is at a ~20% premium to the average five-year forward P/E, factoring in improved fundamentals for the Philippine wireless industry driven by competition getting less aggressive over the past 18 months and a continued decline in sovereign bond yields (and thereby implying a lower risk-free rate). Key upside risks include betterthan-expected margins from lower competition, especially on the post-paid side, lower than expected capex, and a sustainable reduction in SACs for its postpaid subscriber base.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Singapore
James R. Sullivan, CFA AC
Singapore’s trading environment is changing: Last year, stocks were driven by the increasing realization that we are in the midst of a structural transformation of the economy with significant impact on many sectors. This year, that has been priced in. It’s now all about incremental change relative to expectations, not about the realization of the long term story line. Performance in 2014 will likely continue to be very different than 2013. We highlighted this in the November 2013 edition of Trading Port, where we suggested that the 2013 trade of large cap liquid names rising almost purely off multiple expansion was exhausted and that future performance would take a smaller cap, fundamentally supported path. That has been the case YTD, with a significant reversal of factor returns YoY. Four trades to focus on: (1) The Counter Intuitive Property Trade: Last year property was weak as we priced in the weak long term view. This year, we need to recognize that the Singapore government encourages over builds early, so we focus on unloved segments with little incremental supply. This includes factory oriented Industrial (MINT), residential where we see a worst case
Overweight Singapore Airlines
Top picks and stocks to avoid Code Rec Top Picks CAPL OW HPHT OW JCNC OW SIA OW SIE OW Stocks to Avoid COSC UW FEHT UW IFAR UW
Price (SGD)
PT
P/E (x) P/B (x) Div. yield ROE FY14 FY14 14E (%) 14E (%)
3.11 0.71 44.74 10.19 4.95
3.90 0.75 51.00 13.00 6.00
22.0 20.1 11.8 19.8 19.3
0.8 0.5 2.1 0.9 4.1
2.6% 9.4% 3.2% 4.6% 4.9%
8% 3% 19% 3% 20%
0.72 0.88 1.07
0.65 0.80 0.85
27.6 17.6 12.7
1.2 1.0 0.9
2.8% 6.3% 1.1%
4% 6% 8%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 May 2014..
Underweight Corinne Png AC
Ticker: SIA SP, Price: S$10.19, PT: S$13.00 Investment thesis: SIA is trading close to trough valuations despite the potential for recovery in US/EU routes, better load factors in cargo, and a YoY decline in fuel prices. JPM FY14 EPS is 32% ahead of consensus. Drivers/catalysts: Sector aircraft deliveries are moderating and improving industry supply/demand balance should alleviate fare pressure, while rising premium traffic (45% of revenue) should lift yields. We also forecast a pick up in US/EU travel (42% of passenger revenue), a turnaround in SIA Cargo (14% of revenue). We expect SIA to have greater synergies with 40%-owned Tigerair going forward. Valuation and risks: SIA’s valuations have fallen to 0.9x P/Book, close to historical trough valuations. Net cash is 29% of market cap, we see SIA’s “liquidation value” at SGD13.3 per share. Risks include increased competition from Middle East carriers and rising fuel prices.
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of supply equilibrium vs. market expectations of oversupply, (City Dev). CCT is our top office pick, Retail fundamentals are weaker than 1Q earnings would indicate, we need to be asset specific and only like MCT for Vivo City exposure. (2) The Low Cost Carrier Trade: Buy SIA on overblown fears, buy airline services as number of overall flights ramp, SIE and STE. (3) The Staples Trade: Sell WIL on likely 1Q oilseeds loss and eroding palm refining margin. (4) The “none of us can afford to shop at Jason’s anymore” Trade: Buy Sheng Siong due to mass market exposure and margin upside due to product mix shift.
Far East Hospitality Trust
Joy Wang AC
Ticker: FEHT SP, Price: S$0.88, PT: S$0.80 Investment thesis: FEHT is a pure-play domestic hospitality REIT with 78% of GAV exposure in Singapore hotels. Sector fundamentals remain challenging in our view from flat demand growth and continued supply in the mid/mass hotel segments. Sector-wide occupied room nights in 2013 were also down 3% Y/Y. Drivers/catalysts: Key drivers in our view are on the group’s ability to stabilize declining RevPARs in the Hotels segment, while trying to ramp up proportion of corporate room stays (which have a higher margin). Visibility on demand recovery continues to remain weak due to moderating travel trends, which remains as an overhang on the sector. Valuation and risks: Tenure adjusted RNAV is estimated @ S$581,785 per key. Key upside risks stem from better-than-expected visitor arrivals and therefore better growth in room rates. The high operating leverage means that every 5% change in RevPAR would translate into a 7% change in our DPU estimates.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
South Korea
Scott YH Seo AC
We remain selective buyers of Korean equities, preferring DM growth beneficiaries as well as domestic housing market recovery plays. According to JPM’s economic research team, the Korean economy is expected to recover modestly in 2014 from a subpar growth in 2013 (GDP growth of 3.9% in 2014E vs. 3.0% in 2013). Of note, our economic research team’s base case scenario for the 2014 outlook is based on a combination of: 1) strong export growth from limited segments such as tech, auto, and shipbuilding, and 2) a mild pick-up in domestic consumption without assuming a meaningful housing market recovery. However, our bottom-up analysis for the Korean economy suggests that the risk is on the upside for domestic consumption in 2014. We are more positive on the domestic housing market dynamics in 2014, based on the view that the housing market has been on a gradual recovery trajectory starting in 2H13. A pick-up in housing prices would have positive spill-over effects for domestic consumption and retail investment sentiment of the Korean equity markets. Despite such positive top-down prospects, KOSPI has stayed range-bound YTD. The biggest drag, in our view, has been lowered earnings visibility following poor earnings results. While investment sentiment should improve post 1Q14, downward adjustments to consensus earnings may bring about range-bound share price movements in the ST.
Overweight Hyundai Motor
Given attractive mid-to-LT prospects, we maintain our positive view on Korean equities, highlighting positive catalysts including (1) lower KRW volatility translating into higher earnings visibility, (2) export momentum heading back on track, and (3) property market recovery resulting in earnings expansion for Korea. Top picks and stocks to avoid Code Rec Top Picks 035760 KS OW 069960 KS OW 012630 KS OW 010620 KS OW 005380 KS OW 034220 KS OW 035420 KS OW 036570 KS OW 029780 KS OW 000810 KS OW 055550 KS OW 046890 KQ OW 000660 KS OW Stocks to Avoid 097950 KS UW 005830 KS UW 117930 KS UW 011170 KS UW 028050 KS UW
Price (KRW)
PT
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
369,000 131,000 26,550 148,000 230,000 27,950 756,000 177,500 39,050 264,000 47,150 38,400 42,000
452,000 180,000 39,000 260,000 330,000 35,000 840,000 270,000 45,000 320,000 54,000 48,000 47,000
15.6 8.9 19.1 n.m. 6.6 14.1 40.7 12.3 14.8 13.1 10.3 27.6 7.9
3.4 0.8 0.9 1.0 1.1 0.9 11.1 2.5 0.8 1.4 0.9 3.2 1.7
0.9 0.5 0.4 0.5 1.1 1.8 0.1 0.4 2.1 2.5 1.6 0.0 0.0
23.8 10.6 4.7 -2.6 16.7 6.4 31.6 22.1 4.8 11.1 8.2 12.4 25.2
324,500 55,300 6,070 161,500 84,900
200,000 41,000 4,000 135,000 50,000
21.1 10.5 -2.6 15.7 30.2
1.4 1.3 1.9 0.9 3.4
0.5 2.0 n.a. 0.6 0.4
3.0 10.7 n.a. 5.5 11.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May, 20, 2014.
Underweight Wansun Park AC
Ticker: 005380 KS, Price: W230,000, PT: W330,000 Investment thesis: HMC will be one of the few OEMs to see its product cycle upturn coinciding with global auto demand improvement in 2014. Product cycle and net pricing outlook suggest we are near the earnings inflection point. Drivers/catalysts: Product cycle will turn up from 1H14 and peak in 2H15. Possibility of the second phase of capacity expansion will add a positive spin to sustainable growth beyond 2014, in our view. Improving demand in key markets including Europe is an additional positive earnings driver. Valuation and risks: Our Dec-14 PT is W330,000, based on 10x FY14E EPS. Short-term risk is the pace of KRW appreciation. Long-term risk is rising R&D burden.
Hanjin Shipping
Corrine Png AC
Ticker: 117930 KS, Price: W6,070, PT: W4,000 Investment thesis: Although we expect Hanjin’s results to improve in 2014, we believe it will likely remain loss-making and it will be an uphill task to improve its financial performance and B/S significantly and outperform sector peers. Interest burden is high and the risk of further equity raising to strengthen its B/S and to order/lease new vessels remains. Drivers/catalysts: Industry capacity discipline supports freight rates, cost management, lower than expected industry supply growth, exit of weaker players, industry consolidation. Valuation and risks: Our Jun-15 price target of W4,000 is based on 1.7x P/B, in line with Hanjin Shipping's average historical valuation. Key risks include better than expected volume and freight rates, falling fuel price, exist of weaker industry players.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Taiwan
Alvin Kwock AC
We expect the global economy to improve steadily from 2Q. Taiwan’s export and industrial sectors should benefit from the solid demand in DM. Financial sector should take advantage of the still tight liquidity in greater China area. Credit quality concerns over China’s banking system should have limited spillover effect on Taiwan’s banking sector given still low exposure (<10%). A series of civil disobedience movements including student protests and recall of lawmakers have paused the crossstrait development. For technology, we forecast stronger growth profile for LED/semi/Display but a muted one for mobile/PC. In 2Q14, product transition continues to favour volume plays and has a subdued impact on the big names in the supply chain. In Asia, we believe Taiwan stands out for: 1) Vigorous demand in Foundry/OSAT given strong inventory restocking underway in the supply chain; 2) Data centre growth that comes from rack-level and networking; 4) LED makers/packagers benefit from accelerating adoption of lighting in mainstream; 5) Display makers benefit from upgrades of smartphones & 4K2K TV picking up; 6) Taiwan technology sector has a more diversified customer profile than Korea and Japan.
Overweight ASE
We would avoid FCFC for over capacity and hence lower pricing in the aromatics sector, Asus for cannibalization risk in tablet, and Far EasTone for rising OTT substitution risk and competition in 4G business in the telecom sector. Top picks and stocks to avoid Code Rec Top Picks 2330 TT OW 2311 TT OW 2881 TT OW 2382 TT OW 2393 TT OW Stocks to Avoid 2357 TT UW 1326 TT UW 4904 TT UW
Price (LC)
PT
P/E (x) P/B (x) FY14 FY14
Div. yield 14E (%)
ROE 14E (%)
121.00 150.00 13.14 36.50 40.00 13.55 40.80 51.00 9.97 80.30 100.00 13.65 68.20 92.00 13.03
3.04 2.04 1.20 2.21 1.63
2.48 3.24 3.01 4.56 4.40
23.14 15.05 12.60 17.22 12.84
308.50 265.00 11.26 71.30 60.00 20.69 65.50 62.00 18.40
1.54 1.56 2.96
4.80 3.55 5.82
14.35 7.73 16.00
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014.
Underweight Gokul Hariharan AC
Ticker: 2311 TT, Price: NT$36.50, PT: NT$40 Investment thesis: ASE has a better position in the OSAT sector given its stronger growth profile and opportunities within Apple and SiP. Drivers/catalysts: (1) Potential synergies between inhouse assembly/test and EMS segments for ramping SiP business; (2) a strong pickup in revenue momentum from 2Q14 onward, helped by the 20nm ramp (Apple’s AP fabbed at TSMC); (3) industry migration toward advanced packaging; (4) substantial downside protection for wire-bonder utilizations due to significant IDM exposure; (5) high chance to gain market share within Micron’s DRAM pie. Valuation and risks: Our Dec-14 PT of NT$40 is based on 2.2x FY14E book, with a 2015E ROE of 16%, at the high end of its revised mid-cycle valuation. Our PT translates into a 12m forward P/E of 13x. Key downside risks are a slower ramp-up of advanced packaging and the likelihood of low utilization in the wirebonding and testing business.
18
In our top pick ideas, we have TSMC for its flagship position in global foundry, ASE for the vigorous demand in OSAT sector, Quanta for strong growth in datacenter, Everlight for the accelerating LED adoption, and Fubon for both capturing the tight credit in Greater China area and life insurance investment sentiment.
Asus
Gokul Hariharan AC
Ticker: 2357 TT, Price: NT$308.50, PT: NT$265.00 Investment thesis: We downgraded ASUS to UW given: (1) flagging notebook growth, despite the exit of peers; (2) questionable profitability for the smartphone growth strategy; and (3) an expected pickup in competition in hybrids from 2H14. We expect Office-on-Android to hit the market in 2015, in addition to Office-on-iPad currently, which could create another downside to PC volume once it realizes. Drivers/catalysts: (1) Profitability of smartphones remains questionable, and (2) Competition from hybrid is likely to pick up from 2H14. Valuation and risks: Our Dec-14 PT of NT$265 is 10x one-year forward earnings. Our target multiple of 10x is at the lower end of ASUS’s historical average of 814x, given that we remain cautious on the smartphone outlook, while hybrid competition should also pick up from 2H. Key upside risks include: (1) better-thanexpected share gains from Tier 2 vendors like Samsung and Sony, that are exiting the PC market; and (2) strong pickup from Hybrid/T100-like products.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Thailand
Anne Jirajariyavech AC
Thailand’s SET has outperformed regional peers YTD, driven by positive hope on the political situation. Domestic and foreign fund flows have been decent. Local fund flow is driven by low deposit rate and investors looking for higher yields. Foreign fund flow has turned less negative and was net positive for two consecutive months (Mar/Apr). Thailand remains defensive vs. other EM countries as it has limited overseas funding exposure. Overall Thai corporates have seen declining growth momentum but balance sheets remain in good shape. Household debt situation has been stable and issues remain concentrated in the low-income segment. Middle-upper-income households still have decent spending power but lack confidence. Political resolution should lead to better macro trend. Key risks are prolonged political problems and continuing EPS consensus downgrades. We prefer banks, leading landed property developers, exporters, and tourism-related stocks. We believe growth opportunities exist for banks to expand into SME and housing loan markets. Current mortgage condition is still solid and reflects the strong property market of the past couple of years. Funding competition has eased with state-owned banks being a lot less aggressive. This highlights NIM upside to big banks. Asset quality should be manageable as the employment market remains firm. For property, we believe the condo market will suffer but landed segment should remain firm. LH is the leading
player and has strong profit margin profile given its cheap land cost acquisition in the past. Among exporters, we like CPF and TUF as food exporters that should benefit from global economic recovery. We also like PSL as it has passed the bottom of the cycle and PSL being a conservative shipper with high cost-advantage ships should benefit when the cycle turns. We would recommend investors avoid ADVANC, TCAP, and KK. We believe earnings expectation for these stocks remain too high. Competition in the telco space is high and suggests limited growth opportunities. For auto HP, we have passed the peak cycle and it would take at least 2 years to recover in terms of auto sales in addition to the asset quality issue in the used car market. We should have also seen the bottom in terms of interest rates. Any hike in interest rate is not good for small banks. Top picks and stocks to avoid Code Rec Top Picks KBANK OW SCB OW LH OW PTTGC OW C PALL OW TUF OW PTT N Stocks to Avoid TCAP 33.25 KKP 40.00 ADVANC 236.00
Price (Bt)
PT
P/E (x) P/B (x) Div. yield ROE FY14 FY14 14E (%) 14E (%)
191.00 230.00 163.50 200.00 9.90 11.00 69.25 85.00 43.50 50.00 68.00 72.00 305.00 310.00
9.7 10.0 16.7 9.0 29.4 15.0 8.5
1.8 2.0 2.8 1.2 11.5 2.0 1.2
1.8 3.4 4.5 4.4 2.1 3.3 4.3
19.8 21.1 17.2 14.0 42.4 13.6 14.3
34.00 42.00 200.00
0.8 0.9 22.6
4.5 7.5 5.5
11.2 10.2 128.4
33.25 40.00 236.00
7.7 9.3 18.2
Source: Bloomberg, J.P. Morgan estimates. Note: Prices are as of 20 May, 2014.
Overweight KASIKORNBANK
Underweight Anne Jirajariyavech AC
Ticker: KBANK TB, Price: Bt191, PT: Bt230 Investment thesis: KBANK has a strong footprint in SME, where growth should accelerate as exports improve. It is also expected to be able to sustain ROE momentum on continuing efficiency gain. Stock price has come off due to political problems leading to more attractive valuations. Drivers/catalysts: Exports recovery and improving SME loan growth are good catalysts for KBANK. Lower K-Transformation-related cost pressure should drive further efficiency gains. KBANK is still strong in fee income driven by cross-selling activities and strong distribution network. Valuation and risks: Dec14 PT of Bt230 is based on DDM with 20% ROE, 12.7% COE, and 8% growth. Risks: 1) prolong political unrests lead to weaker growth, quality, and NIM; 2) higher-than-expected NPL formation rate; 3) pressure to grow deposit base hence NIM pressure; and 4) failure to maintain efficient cost/income in periods of challenging revenue outlook.
LPN Development
Anne Jirajariyavech AC
Ticker: LPN TB, Price: Bt16.60, PT: Bt14 Investment thesis: Outlook remains challenging for LPN as a pure condo developer. While 1Q14 revenue was the weakest and there should be sequential improvement into the year, pre-sales and launch targets appear tight. Given weak 1Q pre-sales (12% of FY target), LPN needs to accelerates new project launches to achieve its FY target. Demand conditions are fragile and there is risk of low take up rate. Drivers/catalysts: Take up rate on new launches will be key share price driver. Slow take-up rate (like <60%) will likely lead to disappointment. This is especially after the stock outperformance YTD (3% over SET). It currently trades above 11x PE, more expensive than peers. Valuation and risks: Dec14 PT is Bt14 based on 9.0x FY14E EPS, in-line with LT PE average for LPN. Risks are stronger-than-expected take up rate on new launches, better-than-expected profit margin.
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Asia Pacific Equity Research 21 May 2014
Sectors
Sunil Garg (852) 2800-8518 [email protected]
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Autos
Nick Lai AC
Japan- Focus on Mazda and Suzuki: Regarding Mazda, we note expected growth in US sales of the Mazda3 from April, along with growth in capacity for US models resulting from the leveling off of domestic demand. Regarding Suzuki, we anticipate a recovery in India’s domestic sales market, and expect the stock to also benefit from news flow concerning the termination of Suzuki’s alliance with VW. Korea- Strong shipments continue in April. Hyundai Motor posted strong shipments globallyHMC’s April global shipments came in at 440,194 units (+7.7% yoy, +1.6% mom). Production growth will likely moderate in May with long holidays. However, retail sales should remain strong in May and further strengthen in 2H, driven by new models (Sonata in Korea, Genesis/ Sonata in US, i20 in Europe/India). Kia's strength in China continuesChina shipments grew 11.8% yoy with #3 plant rampup. Growth will likely further strengthen into 2H as the new D1-seg model launch will further push up China UTR from 3Q. China- de-rating likely to continue: Our thesis in 2014 is the sector would see another ~15-20% derating should history repeat itself. In other words, multiple contraction would be the biggest threat to the
Overweight Mazda Motor
sector's performance this year, which brings up another issue - consensus forecasts would be subject to downside risk when underlying sales decelerate. Riskreward now appears attractive for stocks relevant to the two themes that we are bullish on: SUV and luxury car. Brilliance China is now our only OW in China auto sector. India- weak four wheeler industry sales in April: Domestic passenger car sales declined 12% yoy & domestic CVs continued their sharp double digit decline at 24% yoy. However, two-wheeler sales continued to post healthy double digit growth (+12% yoy) driven by scooters. Top picks and stocks to avoid Code Rec Top Picks 1114 HK OW 1211 HK OW 161390 KS OW 005380 KS OW 7261 JT OW Stocks to Avoid 489 HK UW 2238 HK UW 7272 JT UW
Price (LC)
PT
12.3 14.0 39.4 67.0 59,500 78,000 230,000 330,000 421 680 10.2 7.5 1,533
8.5 6.7 1,400
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
11.7 66.4 8.6 6.6 7.0
2.9 2.9 1.9 1.0 1.5
1.0% 0.0% 0.7% 1.1% 0.5%
28% 5% 20% 17% 24%
7.2 10.1 12.4
1.0 1.1 1.3
2.1% 1.7% 1.7%
15% 11% 11%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20 May 2014.
Underweight Akira Kishimoto AC
Ticker: 7261 JT, Price: ¥421, PT: ¥682 Investment thesis: The proportion of cars with SkyActiv technology is likely to rise in 2014 onward, and the Demio in Japan is to join the Mazda3 and Mazda6 as models that have the technology. We expect a rise in the proportion of cars with SkyActiv technology to improve the contribution margin in FY2014. Earnings growth in the North American business from the startup of the new Mexican plant is a positive in terms of bolstering the company's consolidated production structure. Also, with retained earnings looking likely to turn positive, a resumption of dividends in FY2014 could be a catalyst. Drivers/catalysts: 1) Greater earnings growth than volume growth, with a rise in the proportion of vehicles with SkyActiv technology. 2) Profit improvement in North America with the startup of a new Mexican plant. 3) A possible resumption of dividend payments, given the rebound in earnings. Valuation and risks: Our Dec-14 price target of ¥680 is based on a P/B of 2.4x derived from our FY14 ROE estimate of 24% and a cost of capital of 9.4%. Key risks: Intense competition in US car market or delayed improvement in productivity at the new Mexico plant.
Dongfeng Motor
Nick Lai AC
Ticker: 489 HK, Price: HK$10.2, PT: HK$8.5 Investment thesis: Our fundamental bearishness on Dongfeng Motor (DFM) is driven by its inefficient use of capital, in our view, which results in declining ROE, suggesting DFM is not adding shareholder value despite it having the highest level of net cash on the balance sheet among major Chinese auto OEMs. We believe the company is unlikely to raise its dividend payout despite large cash balances. Drivers/catalysts: 1) We believe DFM is a proxy for overall PV market in China while we forecast PV sales will decelerate with increasing base. Thus, investors should focus on specific sub-segments that will deliver superior growth—namely, SUV and premium brand. 2) DFM’s lack of capital management and dividend despite sizeable cash on balance are key reasons for its declining ROE. Valuation and risks: Our Jun-14 PT is based on FY14E P/E of 6x and DCF analysis. This multiple is the mid-range of historical trough valuation of around 5-8x forward P/E. Given our expectation of a re-rating for DFM, we believe that applying an average trough valuation is reasonable. Key upside risk: higher than expected dividend yield.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Basic Materials
Daniel Kang AC
Commodity markets remain volatile, stay selective Commodity markets remain volatile to macro swings but prices have largely stabilized around marginal cost levels. While Chinese macro (particularly housing) data remain disappointing and the initial excitement surrounding China’s mini stimulus has now faded, we have noticed a positive turn in recent releases. China’s steel PMI jumped to its first expansionary print (>50) in eight months while trade data suggest a recovery in demand. Market inventories across most commodities are now broadly in line with historical levels as seasonal demand drew down on stockpiles. In this environment, we recommend selective exposures in low (or declining) cost, positive FCF stocks with upward earnings revisions while stocks vulnerable to negative revisions. Demand slowing but supply forces now hold the key 1Q14 demand was disappointing across the region but 2Q has started on a positive note. Chinese April data suggest a recovery in underlying demand while India steel consumption hit its second highest level in 12 months. While YTD (to April) Chinese demand has slowed from last year’s levels, we believe this is largely factored into market prices. At this juncture, we believe supply forces are now holding the key to the direction of commodity price movements. The spike in nickel prices this year (+37% YTD) as a result of Indonesia’s bans on nickel ore exports is a case in point. Similarly, the recent weakness in iron ore prices (-25% YTD) despite record Chinese imports, indicate improved seaborne supply. Meanwhile, China's leaders remain committed to addressing industry overcapacity, which should help
Overweight Tata Steel
Selectively OW high quality, low cost, growth plays; Trade into the stock cycles. Given the current mixed backdrop, we recommend selective sector exposure in stocks with high quality, low (and declining) cost assets with volume growth:- Tata Steel, Rio Tinto, Fortescue Metals, Jiangxi Copper, and Anhui Conch. We would avoid stocks vulnerable to downward earnings revisions including those with higher cost operations, high debt and/or high expectations, ie. CSR Building Products margins unlikely to reach prior cyclical highs. Top picks and stocks to avoid Code Rec Top Picks TATA IN OW 914 HK OW RIO AU OW 358 HK OW FMG AU OW 004020 KS OW Stocks to Avoid ACEM IN UW CSR AU UW 1898 HK N
Price (LC)
PT
P/E (x) P/B (x) Div. yield ROE FY14 FY14 14E (%) 14E (%)
441.6 27.65 60.26 12.48 4.40 68.0K
620.0 38.0 81.0 17.0 6.50 85K
7.6 8.7 9.9 9.9 4.8 9.3
1.0 1.8 1.9 0.7 2.0 0.5
2.4 2.3 3.7 4.9 3.8 0.8
14.2 22.2 21.1 7.6 39.0 6.1
224.35 3.31 4.27
155 3.0 4.0
30.9 17.0 18.6
3.6 1.5 0.5
2.5 4.4 1.6
11.8 8.2 2.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 19 May 2014 (intraday)
Underweight Pinakin Parekh AC
Ticker: TATA IN, Price: Rs441, PT: Rs620 Investment thesis: Continued re-rating from a) European turnaround, b) vertically integrated domestic operations, c) potential asset divestments. Drivers/catalysts: European asset largely written off by investors but now recovering. We estimate each $10/T rise in European EBITDA equates to Rs40 per share to Tata Steel’s stock price. In India, we expect improved domestic steel demand FY15. Valuation and risks: Our Mar-15 PT is Rs620, based on SOTP and we value the India operations at 5.7x, 5.0x for Asia and 6.0x for European operations FY16E EBITDA. Key risks include higher inputs costs and/or increase in domestic royalties, lower ASP on back of poor mix, and demand in Europe stagnating.
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stabilize key converting industries (steel, cement, aluminium). Within the metals, nickel stands out – we forecast a further strengthening in prices of c30% in 2015. In building materials, we expect supply restraint helping lift cement utilization levels in China, steady demand to keep Indonesia cement utlisation levels elevated but increased competition in Australia to see margins lower than prior cyclical peaks.
CSR Ltd
Jason Steed AC
Ticker: CSR AU, Price: AUD3.31, PT: AUD3.00 Investment thesis: CSR’s Building Products business (c60% of revenue) is currently arguably better than its peers but in our view, diluted by an underperforming glass business and medium term uncertainty over the power contract of its aluminium segment. Drivers/catalysts: Building Products margins will unlikely reach prior peaks given: 1) increased industry capacity across all product categories; 2) more competitors; 3) cost inflation; 4) higher trade exposure. Meanwhile, the aluminium business has yet to resolve its 2017 power contract with Macquarie Generation. Valuation and risks: Our Dec-14 PT of AUD3.00 is based on an equal weighted combination of our FY15 Sum-of-Parts (SoP) and Group DCF valuations.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Consumer Ideas for 2H14: We recommend being positioned in select Korea discretionary (CJO Shopping, HDS), China staples (Mengniu and Hengan), Thailand staples and exporters (BIGC, CPALL and food processors), Indonesian companies that have pricing power and defensible margins (Indofood and Matahari dept stores, and staples in the Philippines (Puregold, Universal Robina and D&L). We find India valuations demanding and highlight only names that have little execution risk. We are OW on Titan, which is delivering better than expected revenue growth In China, we continue to be cautious on discretionary given structural challenges. Nevertheless, for businesses with wholesale models (sportswear, menswear), we are seeing incrementally better trade fair data being reported, which is supporting share prices. We also see some sequential pick up in April macro data for apparel and footwear (though cycling a lower base). Staples are reporting decent volume growth and our preference stays with staples at this point until we see clear signs of recovery in retail. In Thailand, we remain cautious on the near-term demand outlook in the current macro backdrop and stick with staples. In Korea, in recent months, we started to see some positive development in real estate market, supporting our view that some cyclical recovery, albeit very moderate, is on the way. F&B players seem to have
Ebru Sener Kurumlu AC better pricing power. We are turning positive on companies which have not raised prices yet, which includes KT&G. In Indonesia SSSG data from retailers over the past quarter indicates a pick-up, we believe buoyed by election-related spending. Our preference is for players with pricing power and for names that have not overlevered in the previous cycle and have balance sheet strength to drive expansion if demand were to pick up. In Philippines we expect consumption growth to remain strong driven by steadily rising real income growth buoyed by remittances and rising services exports (BPO). Modern retail will continue to see strong growth driven by a structural shift of consumers from traditional retailing to organized retail. Top picks and stocks to avoid Price P/E (x) P/B (x) Code Rec (LC) PT FY14 FY14 Top Picks LPPF IJ OW 14,000.0 18,000.0 24.4 9.7 2319 HK OW 38.9 43.0 25.8 2.9 INDF IJ OW 6,775.0 8,200.0 15.0 2.3 035760 KQ OW 369,000.0 452,000.0 21.1 4.1 CPALL.TB OW 43.5 50.0 29.4 11.5 Stocks to Avoid 330 HK UW 11.4 11.3 nm 1.3 ACES.JK UW 855.0 490.0 27.0 6.2 CLGT IN UW 1,362.1 1,190.0 37.4 37.8
Div. yield ROE 14E (%) 14E (%) 1.2 0.8 2.8 0.7 2.1
46.6 13.1 16.0 21.2 42.4
0.3 0.7 2.4
0.7 25.4 na
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014..
Overweight
Underweight
Matahari Department Store Princy Singh AC
Esprit
Ticker: LPPF IJ, Price: Rp14,000, PT: Rp18,000 Investment thesis: We view LPPF as one of the bestrun retailers in ASEAN. It has strong customer recognition for its private-label brands, operates an asset-light business (negative cash conversion cycle), has strong local sourcing capabilities with tight procurement lead times, and has strong supply chain capabilities. We believe LPPF’s operating capabilities will continue to help generate sustainably strong free cash flows and deliver capital returns ahead of peers. Drivers/catalysts: Strong earnings growth (JPMf 23% CAGR over 2014E-16E, continued market share gains Valuation and risks: Our Dec-14 PT of Rp18,000 is based on a target multiple of 25x 2015E P/E and is supported by our DCF-based valuation methodology. Our target multiple is at a 20% premium to the ASEAN retail peer group average. We see LPPF’s market leadership, high quality of operations, strong capital return profile and 23% earnings CAGR over 2014E16E supporting premium valuations.
Ticker: 330HK, Price: HK$11.4, PT: HK$11.3 Investment thesis: We believe Esprit is losing market share in its core German market. We are concerned about the implementation of the vertical model at the wholesale level even if we give management the benefit of the doubt on a successful overhaul of the supply chain. Our Jun15 PT is at HK$11.30 where we assume weak implementation of vertical strategy at wholesale and c6% EBIT margin by FY18E. Furthermore, any sign of success will be seen only after Mar-15 as it takes time to implement the vertical strategy to the entire company. Drivers/catalysts: Continuing decline in SSSG and increased operating expenses on the back of this. Valuation and risks: Jun15 PT is based on DCF valuation with discount rate of 12% and terminal growth of 1.5%. Key upside risks are a significant recovery in SSSG in the coming quarter coupled with growth in wholesales revenue and lower-than expected spending on operating expenses.
Ebru Sener Kurumlu AC
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Emerging Technology The story of tech over the last several years has been about smartphones/tablets, but we believe we are reaching the late cycle in light of the following signs of saturation: 1) Most high-end smartphone launches since the iPhone 5 have been disappointing; and 2) We have passed the peak of conversion as the China smartphone diffusion rate is more than 80%+ by 2013. The nonChina EM is still in the budding stages of conversion, and that market unit size is 3-4x bigger than China, which would be the last leg of growth.
Alvin Kwock AC sapphire replacements or new SiP vendors coming up – demand growth is quite clear to us; it’s really about whether the vendors can maintain their competitive advantages. We follow new contract wins to gauge the pace of transformation for Nidec. Our top picks are ASE, BYD, Chroma ATE, Sapphire Tech and Nidec. Our top avoids are Lite-On Tech, Asus and Pegatron – all the avoids are expected to see RoE compression due to competitive threats. Top picks and stocks to avoid
The growth profile across PCs, smartphones and TVs is single-digits at best or even negative – this will drive growth deceleration across most companies. Our discovery for high-growth stocks is based on the following framework: (1) high exposure to non-China EM smartphones; (2) new features in high-end smartphones, like fingerprints; and (3) transformation to new high-growth businesses. We track the blended ASP trend for Mediatek and TCLC – given that feature phones are still more than half of shipments, we believe there is still plenty of smartphone conversion to drive ASP uplift. We monitor if there are
Overweight BYD
Price (LC)
PT
P/E (x) P/B (x) Div. yield ROE FY14E FY14E 14E (%) 14E (%)
36.50 40.00 13.55 39.35 67.00 66.39 76.40 105.00 25.35 32,000 53,000 360.45 5,472 7,000 26.76
2.04 2.86 3.54 2.62 2.91
3.24 0.00 2.87 0.00 0.84
15.05 5.05 14.45 0.76 12.08
46.95 40.00 308.50 265.00 53.30 41.00
1.16 1.54 1.24
5.68 4.80 4.13
9.32 14.35 10.12
12.61 11.26 11.80
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014.
Underweight Alvin Kwock AC
Ticker: 1211 HK, Price: HK$39.35, PT: HK$67.00 Investment thesis: BYD is the leader in new energy vehicle (NEV) in China, and NEV is taking off thanks to strong government support with aggressive subsidies and charging post infrastructure build out. We estimate the overall NEV market to grow 1.8x CAGR in 20132020, and BYD to take 30% market share. We expect BYD’s NEV sales to grow 130%/51% in 2015/16E, and act as a further share price driver over the next 1218 months. Drivers/catalysts: (1) capacity doubling for Qin in late 2Q; (2) possible surprise to 2Q profits; and (3) more favorable government policies. Valuation and risks: Our SoTP-based Jun-15 PT of HK$67 is based on 2016 EV-to-sales for NEV business, and 2015 P/B or P/E for battery, traditional auto and electronics businesses. We assign 4x 2016 EV-to-sales for NEV business, at a discount to Tesla’s 4.5x median forward multiple. The other businesses take into account various comps and future growth/ ROE prospects. Risks: 1) missing estimates, 2) product hiccups, and 3) rising competition.
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Code Rec Top Picks 2311 TT OW 1211 HK OW 2360 TT OW 123260 KQ OW 6594 JT OW Stocks to Avoid 2301 TT UW 2357 TT UW 4938 TT UW
Lite-On Tech
William Chen AC
Ticker: 2301 TT, Price: NT$46.95, PT: NT$40.00 Investment thesis: We remain UW on the stock as we believe 70% of LoT’s businesses are likely to stay muted (PC/NB related business and Lite-on Mobile) in terms of revenue and profit contribution, while some promising sectors such as camera module are also facing higher competition from Greater China vendors such as Sunny Optical, O-film and Truly. Drivers/catalysts: 1) Rising competition from Chinese camera module vendors, (2) Legacy PC business remains muted. Valuation and risks: Our Dec-14 PT of NT$40 is based on 10x FY15E EPS, the midpoint of the shares’ 7-13x P/E multiple range over the last five years. This multiple also reflects the company’s large exposure to the PC industry, which has limited growth opportunities in our view. Key upside risks to our view include: (1) another ROE-accretive deal (e.g.,Silitech); (2) new customer breakthroughs (e.g., Apple); (3) better demand for LED lighting; and (4) faster SSD growth to offset ODD weakness.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Financials Micro-level investment case
Asia banks are up +5% YTD, but this ignores significant dispersion within the sector. South Asia banks are up +27% YTD in USD-terms, led by Indonesia (+44%), India (+36%), and Thailand (+20%). While some of the gains are clearly be driven by post-election hopes – particularly India – we’ve also seen a fundamental improvement in the imbalances that threatened the region in the second half of 2013. Since the taper-induced stress of last summer, South Asia has seen a significant improvement in domestic liquidity conditions. Better trade accounts, portfolio inflows, and central policies designed to attract USD have all played a role in this improvement. We think investors will continue to gravitate towards high growth, high return banking systems (PH, TH, ID) as deflation remains the primary risk for global markets, and improving liquidity helps lower funding costs. Resilience of the growth outlook In general, we see loan growth slowing across the region, particularly in markets like Indonesia (+18% Y/Y) and Thailand (+5%) where growth is coming down from much higher levels last year. The key in 2H14 will be continued margin expansion, offsetting slower growth.
Josh Klaczek AC Drivers, trends, and datapoints we are tracking Asset quality will be critical to watch in markets where loan growth is decelerating, particularly if funding costs don’t ease in Indonesia. We’d also watch whether retail demand can improve from some of the lowest levels since 2009, as macro-prudential measures weigh on household credit, from ID/TH to HK/SG. Policy change in India & Indonesia will be a focus, but we think the fiscal/monetary outlook is relatively constrained. Top picks and stocks to avoid Code Rec Top Picks 939 HK OW 055550 KS OW ICICIBC IN OW KBANK TB OW 2318 HK OW 2881TT OW Stocks to Avoid ANZ AU UW 1988 HK UW 5871 TT N
Price (LC)
PT
P/E (x) P/B (x) Div. yield ROE FY14 FY14 14E (%) 14E (%)
5.46 47150 1449.9 191 56.3 40.8
7.00 54,000 1,425.0 230.00 88.00 51.0
4.69 10.19 14.45 9.67 8.91 9.97
0.90 0.90 2.06 1.77 1.68 1.20
7.46 1.61 2.00 1.83 1.25 3.01
20.4 8.0 14.4 19.8 19.7 12.6
32.75 7.70 71.9
34.75 7.50 79.00
12.47 5.45 10.00
1.83 1.07 2.18
5.46 3.69 3.50
15.6 20.9 23.3
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 20, 2014.
Overweight
Underweight
Fubon Financial Holdings Jemmy Huang AC
ANZ Banking Group
Ticker: 2881 TT, Price: NT$40.80, PT: NT$51.00 Investment thesis: We see Fubon as a low-risk absolute return trade. Our earnings are 7%/10% above the Street for FY14/15, and we see little downside to estimates, with the first quarter already accounting for ~31% of total FY estimates. Earnings were up +37% Y/Y, implying a runrate ROE of 16.7%. At the bank, NIMs rose 3bps Q/Q and 7bps Y/Y, loan growth was +11% Y/Y, and fees were up 21% -- which should be an offset to slowing TMU revenues, after the surge in 1Q14. On the life side, recurring yields at Fubon Life rose +17bps Y/Y, to 4.41%, on the back of increased investments in USD corporate bonds. In fact, the increase in investment return assumptions (VIF +6bps, VNB +27bps) helped lift EV +36% Y/Y. We see +24% potential upside, OW. Drivers/catalysts: Stronger offshore expansion, rising NIMs in the bank book, rising asset yields globally – this is one of the financials in Asia most geared to rising rates across the curve. Valuation and risks: Our Dec-14 PT of NT$51 is based on SOTP valuation and based on FY14 EV. We value the life insurance operation based on AV, which is equivalent to FY14E EV+7x VNB. Fubon is trading at 1.2x FY14E P/BV and 0.7x FY14E (company reported basis), lower than its long-term average of 1.4x and 0.8x, respectively.
Ticker: ANZ AU, Price: A$32.75, PT: A$34.75 Investment thesis: Our Underweight recommendation for ANZ questions the real benefit of the bank’s Asian presence. Although it is a ‘strategic’ advantage, we are less bullish on the profitability of this growth channel, noting recent signs of a slowdown in Asia and increased capital intensity adversely impacting ROTEs. Drivers/catalysts: 1) we expect an ongoing drag on NIMs, particularly given mix shift in the Asian portfolio towards shorter duration trade finance and higher quality longer-term corporate exposures. 2) capital demands continue to rise, with CET1 at 8.33% today, vs. a target range of 8.5-9.0%. Higher capital needs will likely lead to reactivation of the DRP. Valuation and risks: Our Dec 2014 PT of A$34.75 reflects the aggregate of the present value of the dividend stream paid to shareholders through to FY15E and the present value of a multiple of forecast FY15E tangible book value – premised on our sum-of-the-parts methodology, which values the earnings profile of the APEA business separately from the rest of the group. The key upside risk is the extent to which margin headwinds relating to the institutional division may improve going forward, assisted at a group level by a declining cost-toincome ratio.
Scott Manning AC
25
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Infrastructure & Industrials Infra capex: In China, the intensity and magnitude of railway capex hikes (+27% against the initial target) since the beginning of 2Q14 was unprecedented, underscoring the government’s determination to speed up rail infra spend, not only as a counter cyclical tool but also in response to the fundamental shifts to railroads from other transport modes. We expect railway reform on the funding part to accelerate, which should lead to more sustainable railway investment over longer term, and a potentially multi-year capex up-cycle into the 13th FYP period. We prefer late-cycle railway equipment names on higher earnings visibility, strong cash generation, and less diversification into non-rail business. Outside China, we are bullish on Malaysian E&C names with Gamuda as our top pick as the MRT Line 2 good news seemed to be overshadowed by water restructuring fears. We also like Japanese hydrocarbon E&C names, but stay cautious on Korea E&C names as we think execution of overseas contracts in ME remains a concern. Machinery: China’s construction machinery sales disappointed in peak season while sales for heavy-duty trucks held up relatively well. The latest data reinforced our view which is negative on construction machinery while cautiously optimistic on heavy trucks. Weichai remains our sector top pick, while we stay cautious on Zoomlion, Lonking, Zhengzhou and SANY. In the region, with the coal price testing 52 week lows in April and Komatsu’s volumes failing to build momentum, we turned less positive on United Tractors after recent rally.
Overweight CSR Corp
Infra operators: (i) Tollroads: We turned less positive on Chinese tollroads following the outperformance in 2013 while traffic growth started moderating in recent months. Our top picks are Zhejiang, Shenzhen and Yuexiu. (ii) Ports: COSCO Pac and Hutch Ports appear oversold to us as valuations look compelling, while fundamentals also benefit from ongoing trade recovery with the DM world. (iii) Airports: We are positive on Asian Airports, driven by the region’s growing economies and rising middleclass incomes. We are bullish on both BCIA and MAHB with the removal of overhang from the Beijing 2nd airport and the successful opening of KLIA2 to serve as major near-term catalysts for the two stocks respectively. Top picks and stocks to avoid Code Rec Top Picks 1766 HK OW 2338 HK OW 694 HK OW GAM MK OW 1199 HK OW Stocks to Avoid 006360 KS UW
Price (LC)
PT
P/E (x) P/B (x) FY14 FY14
Div. yield ROE 14E (%) 14E (%)
5.67 26.85 5.05 4.56 10.4
8.60 38.00 8.60 5.50 13.3
11.2 9.9 10.4 11.0 10.3
1.5 1.4 1.0 1.7 0.8
2.7 1.4 3.8 3.1 3.9
14.6 14.8 10.2 17.2 7.6
37,850 27,000
14.5
0.7
0.0
5.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May.20, 2014.
Underweight Karen Li, CFA AC
Ticker: 1766 HK, Price: HK$5.67, PT: HK$8.60 Investment thesis: CSR will be a major beneficiary from the upcoming rebalancing in the mix of China’s railway spending as we expect a higher proportion of railway capex to be allocated to late-cycle trains & equipment from 2014. We see upside to FY14 estimates with the revised railway capex target and recently announced 1st round of rolling stock procurement which has greatly enhanced CSR's backlog for non-MU segments. Beyond FY14, we see overseas markets, subway trains (RTVs), and after-sale services as new growth drivers. Drivers/catalysts: (1) the opening of 1st round of MU bidding for 2014; (2) further policy clarity on China’s railway reform on the funding part. Valuation and risks: Our DCF-based Dec-2014 PT of HK$8.6 implies a P/E of 17.0x/14.8x and P/B of 2.3x/2.1x on FY14/FY15E. Key downside risks are unexpected changes in government’s investment in railway development and increases in raw material costs.
26
Karen Li AC
GS E&C
Sokje Lee AC
Ticker: 006360 KS, Price: W37,850, PT: W27,000 Investment thesis: Despite massive provisions incurred during 2013 driven by its low priced overseas contracts in the past, a real turnaround is not yet in sight. Continued price competition in overseas markets will likely cap the growth potential as well as margin upside. Drivers/catalysts: The company’s stock issuance scheduled in Jun-14 would result in dilution of equity value, with most stocks to be issued to existing shareholders. While financials should improve, it would be EPS dilutive, which will pressure share price upside, in our view. Valuation and risks: Our Dec-14 PT of W27,000 is based on 2015E EPS of W3,376 and target multiple of 8.0x, in line with KOSPI market to reflect GS E&C’s slower growth momentum.. Key upside risks to our price target are: (1) successful order wins of projects under bidding; (2) progress in unstarted overseas projects in backlog; (3) faster-than-expected recovery of domestic housing market.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Oil and Gas
Scott Darling AC
We have a relative preference for oil services as an indirect way to gain leverage to the essentially flat, yet high oil price environment within our Asia Oils coverage (we forecast Brent at $105/bl this year and $100/bl in 2015). While J.P. Morgan's global oil capex survey shows growth at 4.4% y/y in 2014 largely driven by National Oil Company budgets (up 7% y/y vs International Oil Companies down 1% y/y), there is a divergence between onshore vs offshore capex growth. Some of our Asia oils services coverage may well be insulated from slowing offshore capex growth as some countries remain in pursuit of resources owing to increasing energy import burden. However, high execution risks with offshore projects may well see the industry continue move more onshore particularly via unconventional, which is where indirectly we would prefer to be invested. With valuations having come back to historical average levels and with new awards from an active tendering period in China over the last few months, we recommend Anton Oil (3337 HK, PT HK$6.7, OW), SPT Energy (1251 HK, PT HK$5.0, OW) and Hilong (1623 HK, PT HK$6.30, OW).
Overweight
However, for our Asia Oils equities, we continue to see differentiation within the sector and have a preference for Sinopec (386 HK, PT HK$8.0, OW), PetroChina (857 HK, PT HK$11.25, OW) which are gradually focusing on free cash flow via capital discipline, and/or restructuring which we expect to be rewarded by investors. In contrast, a weak oil and chemicals macro environment recently albeit with some signs of recovery in China, we take a cautious view on Sinopec Shanghai Petrochemical (338 HK, PT HK$1.7, UW). Top picks and stocks to avoid Code Rec Top Picks 0857.HK OW 0386.HK OW 3337.HK OW 1623.HK OW 1251.HK OW Stocks to Avoid PTT.BK N BPT.AX UW 0338.HK UW
Price (LC)
PT
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
9.23 7.03 5.46 4.18 4.37
11.25 8 6.7 6.3 5.0
10.4 8.4 18.7 9.7 15.7
1.1 1.0 3.4 1.7 2.6
4% 5% 2% 3% 2%
10.9% 13% 21% 20.1% 18.4%
305 1.71 1.88
310 1.27 1.7
8.5 8.3 15.2
1.2 1.1 0.9
4% 2% 2%
14.3% 13.1% 5.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 16-May-2014.
Underweight Scott Darling AC
Sinopec Shanghai Petchem Scott Darling AC
Ticker: 857 HK, Price: HK$9.23, PT: HK$11.25 Investment thesis: Our positive view on China Integrated Oils (both PetroChina and Sinopec) is based on: (1) Visibility on asset optimisation/portfolio management and capital discipline, (2) Improving refining margins as China moves to tougher gasoline/diesel specs, (3) Chinese refined product demand remaining robust (4% y/y), and (4) Nat gas price hikes and reform progress. Drivers/catalysts: Key catalysts for the stock in our view would be 2Q14 results (August 2014), marginal asset divestments, announcements of additional natural gas reform policy. Valuation and risks: Our Dec-14 PT of HK$11.25 is based on a sum-of-the-parts methodology, whereby we calculate a DCF based value (WACC 9.8%, terminal g 2%) for each business segment, namely upstream, refining, chemicals and marketing added to give our total NAV. Debt and financial liabilities are deducted at book value. Risks are a sharp fall in oil prices, recent nat gas price hikes not being passed on to customers and no further rises; a higher import burden and weak chemicals profitability from lower demand and margins.
Ticker: 338 HK, Price: HK$1.88, PT: HK$1.70 Investment thesis: Our negative view on Sinopec Shanghai Petrochemical is based on: (1) Continued high capex spend on commodity chemical projects limiting free cashflow and risking ability to pay dividends, (2) Continued weakness in petrochemical prices in 2014 dragging down overall group profitability. Drivers/catalysts: Key downside catalysts for the stock in our view would be further deterioration of commodity chemical prices, upticks in crude costs, and 1H2014 earnings (August 2014 - IFRS basis). Valuation and risks: Our Dec-14 PT of HK$1.7 is based on DCF. We have applied a WACC of 11.2% and perpetual growth rate of 2% in our DCF calculations. Risks to our price target include improving petrochemicals pricing, better than expected improvements in GRMs on the shift to higher spec gasoline/diesel, asset injections from Sinopec, and the A-H Through-train program shrinking the discount of SPC’s H-share listing vs. A-shares.
PetroChina
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Property Back to basics: A common theme across Asian property markets is the lack of additional external liquidity to support investment demand in the local property market. Hence key factors to watch out for are: 1) local demand; 2) availability of local liquidity versus the overall leverage in the system; 3) risk of oversupply. Hong Kong/Singapore (positive): While office outlook is more positive than residential market in both cities, expectations on developers are extremely low as reflected in current valuations. Importantly, price cuts by developers have already happened and yet price decline in both places appear to be manageable. Demand/supply largely balanced in HK/Singapore. Despite diminishing external investment demand in HK and Singapore, local demand driven by household formation is expected to fully absorb the future increase in supply. We believe downside risk of residential prices has largely been priced in against the extremely low expectation in the market. China (avoid): We believe uncertainty surrounding China right now is similar to the one seen in HK market 12 months ago in terms of ascertaining the
Cusson Leung, CFA AC magnitude of price decline while transaction volume keeps on declining. However, the poorer liquidity situation of the smaller Chinese developers could potentially drive price decline to be severe than expected. Unless there is an improvement in clarity, we will continue to avoid the Chinese developers. ASEAN (selective): We are positive on housing development in Indonesia as we believe 3 regulatory changes are likely to emerge in 2015: 1) infrastructure progress; 2) property industry consolidation; 3) mortgage product evolution. Top picks and stocks to avoid Code Rec Top Picks 0016.HK OW 0001.HK OW CATL.SI OW CTRA.JK OW Stocks to Avoid 3383.HK UW 2007.HK N
Price (LC)
PT
100.80 128.0 135.60 154.0 3.12 3.9 1040 1,700 5.58 3.09
6.0 4.9
P/E (x) P/B (x) Div. yield ROE FY14 FY14 14E (%) 14E (%) 12.6 10.1 22.1 11.7
0.69 0.79 0.81 1.38
3.3% 2.6% 2.6% 1.9%
5.5% 7.9% 3.7% 11.8%
4.0 4.2
0.42 0.87
10.6% 8.7%
10.6% 20.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Prices are as of 20 May 2014.
Overweight
Underweight
Sun Hung Kai Prop Cusson Leung, CFA AC
Agile
Ticker: 0016 HK, Price: HK$100.8, PT: HK$128 Investment thesis: Improving clarity in the HK residential market. It is well known to the market that developers are willing to cut prices, but the sell-through rate has been good. In the secondary market, transactions have recovered from a trough in Feb14 albeit from a low base. This is a good sign that demand is reacting to gradual price cutting in secondary market. Drivers/catalysts: 1) continuation of recovery in secondary market transaction volume; 2) potential reorganization of non-property operations like KMB, Smartone, etc… 3) unexpected positive newsflow from court case; 4) launching of large scale projects in 2H14. Valuation and risks: Assuming B/V of SHKP’s noninvestment properties (mostly property development) drops 35%, current market value of the stock implies another 20% drop in the value of its investment properties. Improving outlook for office market is gaining more weight from recent activities and performance of landlords. We believe the chance of a 20% drop in the value of its rental properties is small, unless a crisis occurs.
Ticker: 3383 HK, Price: HK$5.58, PT: HK$6.0 Investment thesis: We believe Agile is undergoing a structural derating, and we are far from seeing an inflection point. Agile’s B/S has deteriorated quickly, which we believe will likely be reflected in higher funding costs soon; landbank is deteriorating with increased exposure to oversupplied areas, which we believe is likely to result in lower sell-through rate and more inventory stacking up. Drivers/catalysts: 1) B/S deterioration, which should be reflected in higher funding costs; 2) Landbank is deteriorating, with increased exposure to oversupplied areas, which should result in lower sell-through rates and more inventory stacking up. Valuation and risks: Dec-14 PT of HK$6.00 per share is based on 4.0x 2014E P/E. The P/E we use is lowest among all mid-cap developers as we believe the risk profile of the company has increased rapidly in the past 6 months. Potential upside risks: 1) better-thanexpected sell-through rate for Agile's projects; 2) govt putting in place supportive policies in low-tier cities; 3) aggressive increases-stake activities by Chen family.
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Ryan Li, CFA AC
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Technology
JJ Park AC
As highlighted in our 2014 Tech outlook report, our two key themes for this year are: "revenge of the laggards" and "components over customers". In the smartphone space, we expect commoditization in the high-end segment to continue along with limited hardware differentiation and intensified price competition. Further, new technologies such as flexible displays are still at the early stages of development. On the PC side, we expect PC to remain relatively strong, with a moderate decline in 2014. Replacement cycle at commercial PC (WinXP expiry) and a resumption of IT spending should help surprise on the upside compared to the low market expectations, in our view. We expect "convergence" devices such as smartwatches (tech+healthcare), xEV (tech+auto), and convertible PCs (tablet+NBPC) to gain increasing traction in the tech space. We believe the smartwatch market (in its present form) is still in its infancy as the value proposition to the customer remains unclear (amid a high price point). However, breakthroughs in hardware tech such as flexible displays and battery tech will spur growth in this market in the coming years.
Overweight TSMC
We continue to hold our positive expectation toward semiconductor; Foundry/OSAT on strong inventory restocking order and DRAM on multi-year cycle upturn on industry consolidation and disciplined supply. For other key components, we continue to view LED industry as a bright spot in 2H14 on accelerated adoption in lighting and surging demand from UHD TV. On the other hand, we remain cautious on brands, OEMs, and touch panel names. For display, we prefer mobile-centric names upon increasing demand for high resolution panels over large area display names while stabilizing TV panel prices likely support near-term share price performance. Top picks and stocks to avoid Code Rec Top Picks 2330 TW OW 000660 KS OW 3034 TW OW Stocks to Avoid 2384 TW UW 2498 TW UW
Price (LC)
P/E (x) FY14
P/B (x) FY14
122.0 150.0 41,300 47,000 144.0 180.0
13.2 7.8 13.2
3.1 1.7 3.2
3% 0% 4%
23.1% 25.2% 23.9%
10.3 163.5
n.m. n.m.
0.9 1.6
0% 0%
-16.2% -1.7%
PT
7.0 105.0
Div. yield ROE 14E (%) 14E (%)
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 19, 2014.
Underweight Gokul Hariharan AC
Ticker: 2330 TW, Price: NT$122, PT: NT$150.0 Investment thesis: TSMC’s strong guidance for 2014 (JPMe: 23% sales growth) indicates a healthy inventory pick-up in 1H14 & strong 20nm share gains in 2H14. GMs are expected to stay high through the year & could exceed 50% if utilizations hit 100% (likely in 3Q14) due to blended ASP increase & cost down efforts. Moreover, TSMC’s early 2015 capex outlook (flat yoy) suggests strong FY15 momentum continued 20nm traction & early 16nm FinFET revenues. Drivers/catalysts: Stronger-than-expected inventory replenishment, strong 20nm demand pickup in 2H14 & a potential gross margin pickup this year despite a rise in depreciation expense, all combined should result in upward revision to consensus estimates. We believe later-than-expected 16nm FF ramp (now in 2H15 vs. 1H15) is not a real negative given that process is ready but customer demand is prolonging 20nm lifetime (with QCOM now also at 20nm for 64bit processors). Valuation and risks: Our Dec-14 PT of NT$150 is based on 15x FY15E EPS, the long-run average P/E, or 3.2x FY15E book at a 22% ROE. Key downside risks include: 1) a slowdown in mobile device growth; & 2) Intel stepping headlong into ARM Foundry.
Wintek
Narci Chang AC
Ticker: 2384 TT, Price: NT$10.3, PT: NT$7.0 Investment thesis: With tough price competition, the touch panel industry now favors cost over value, with the technology trend moving toward low-cost standardized products. Besides, with poor operation (remain at red before 2016) and highly leveraged balance sheet, company needs other sources of capital. Drivers/catalysts: We estimate Xiaomi smartphones contribution has risen to >40% of total revenues in 2014. In addition to Mi3, Wintek has also started to manufacture filmbase touch panels for Xiaomi’s midend model. However, price competition is severe and we do not expect the company to book profits on these orders. Also, potential Xiaomi’s shift from OGS toward film based touch (for upcoming tablet) implies market share loss, in our view. Valuation and risks: Our Dec-14 price target of NT$7 is based on 0.5x 2014E P/B, historical trough. Given the eroding book value and highly-leveraged balance sheet, we believe the current valuation is demanding. Key upside risks include: 1) new order wins from nonApple smartphones, tablets, and touch-NBs; 2) betterthan-expected margins due to yield-rate improvement; and 3) stronger-than-expected touch-NB demand.
29
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Telecommunications & Media Our analysis of JPM forecasts vs. Street targets shows: a) continuation of the content over networks trade, b) Telcos to continue to meet/beat sales expectations but see margin compression and CAPEX worse than Street forecasts; c) Infrastructure operators to see higher CAPEX than expected. The trades today: (1) The “Exhausted Rally” Trade: Thai telcos are the best performing Asian Telcos YTD. This was triggered by stocks trading at the low end of their trading range and improving earnings revisions. Stocks are now back at the high end of their range, and downgrades are poised to begin again off spectrum auctions this fall. We would book profits on ADVANC, DTAC, EXCL, DIGI and IIN. (2) The BTS proliferation Trade: China Mobile will almost double its base station count in 2014E, creating significant incremental OpEx, leading to margin compression and a search for revenue market share triggering rising competition. We remain very cautious on the Chinese and Taiwanese mobile markets. (3) Double or Nothing Trade: APTT is trading at a double digit yield. This means either it might experience some negative cash flow event, or the shares could do quite well. We vote for the latter, with Telstra as our model. No one wanted to touch the shares when they traded at 10%+ yield, they have now doubled. (4) Pay TV Marketing Trade: We
Overweight 21Vianet
held a Neutral recommendation on Astro from re-listing through recently as we felt high marketing costs would keep shares range bound; SK Broadband and CJ Hellovision face similar issues today, sell. 2014 will be a very different trading year for telcos, moving from the large cap liquid multiple expansion trade of 2013 to a search for quality, bottoms up trade. We look to add exposure to HKHT, SKT in the traditional Telco space, VNET and BHIN in the Infrastructure space, and MSKY, ASTRO, and APTT in the Pay TV space. Top picks and stocks to avoid Code Rec Top Picks 215 HK OW 017670 KS OW MSKY IJ OW ASTRO MK OW VNET US OW BHIN IN OW APTT SP OW Stocks to Avoid ADVANC UW Maxis MK UW DIGI MK UW
Price (LC)
PT
2.82 3.5 224,500 250,000 2,100 3,000 3.47 3.85 25.78 35.00 234.95 225.0 0.77 0.90 243 6.94 5.42
200 5.25 4.40
P/E (x) P/B (x) Div. yield ROE Yr1E Yr1E Yr1E (%) Yr1E (%) 14.1 9.9 262.5 31.5 5.4 25.4 12.8
1.2 1.2 7.7 24.8 0.6 2.4 0.8
5.3% 4.2% 0.4% 2.3% NA 2.0% 10.4%
8.8% 7.6% 3.1% 85.3% 11.9% 9.6% 7.1%
18.8 25.7 20.8
15.4 8.7 37.4
5.3% 5.8% 4.8%
83.1% 37.0% 226.0%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 19 May 2014.
Underweight Michelle Wei AC
Ticker: VNET US, Price: US$25.78, PT: US$35.00 Investment thesis: VNET is the largest carrier-neutral IDC service provider in China. The company is well positioned to drive growth across its business segments on the back of the fast-rising data traffic in China. Drivers/catalysts: VNET is set to benefit from the secular trend of IDC service growth. Its partnership with Microsoft and IBM on cloud services will likely be top-line and margin accretive to the company in the coming years. Faster sell-through of new added capacity and the mix shift to Beijing self-built DC would underpin accelerated growth in the hosting business. Valuation and risks: Our Dec-15 PT of US$35 is SOTP-based, comprising two parts, cloud and IDC businesses. Downside risks include slower-thanexpected take-up of cloud services and slower-thanexpected sell-through of new cabinets.
30
James R. Sullivan, CFAAC
Maxis Berhad
Princy Singh AC
Ticker: MAXIS MK, Price: M$6.94, PT: M$5.25 Investment thesis: An increase in pricing competition in Malaysia should drive CAPEX to sales (historically running in the low teens) closer to regional levels of 2535%. We believe that dividends in 2015E could potentially get cut by 20% to 32c, as management highlighted that Maxis will not continue to borrow to pay dividends. Shares remain close to all time high valuations. Drivers/catalysts: Maxis’ CEO has publicly stated a shift from margin maximization to market share gains. The increase in competitive intensity risks the premium multiples that Malaysian Telcos have enjoyed while the rest of ASEAN wireless stocks de-rated. Valuation and risks: Our Jun-15 PT is based on target P/E of 18x which is in line with its average historical trading multiple. Upside risks include: 1) Maxis successfully recoups market share without significant increase in marketing expenses; and 2) Maxis is able to sustain margins through better cost management.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Transportation
Corrine Png AC
Industry demand-supply growth balance is expected to improve. Full service airlines provide more leverage to US and Europe demand recovery than low cost carriers. We believe investors should avoid low cost carriers that have overaggressive capacity expansion, which only benefit the airports and MRO companies; prefer LCCs with more moderate and sustainable growth. Bulk shipping sector has finally bottomed out after 6 years of industry oversupply and we stay with our positive contrarian view and expect average rates in 2014 to surpass 2013 levels. Focus on operators of Handysize vessels. Container shipping should benefit from US and Europe demand recovery but industry supply growth is expected to accelerate, which will require continued capacity discipline to support rate recovery. P3 network and deepened G6 and CKYHE alliances, if approved, could help stabilize freight rates but could crowd out weaker players longer term. Substantial potential upside as investors look for cyclical plays leveraged to DM recovery: Valuations are at a c.26% discount to their historical average levels with bulk shipping stocks providing the biggest potential upside to mid and peak cycle valuations, followed by airlines and container shipping.
Overweight Singapore Airlines
Transportation: Top picks and stocks to avoid Code Rec Top Picks 0753 HK OW 293 HK OW CEB PM OW CTRP OW 010620 KQ OW 2603 TW OW 9020 OW 047810 KQ OW MAHB OW 7003 OW 316 HK OW 2343 HK OW PSL TW OW SIA SP OW SIE OW STE OW Stocks to Avoid COSC UW 2618 TW N 117930 KQ UW 9021 N 2609 TW N
Price (LC)
PT
14E
P/BV 15E
4.44 14.52 54.30 50.32 148,000 17.30 7,496 33,700 7.40 184 39.00 4.95 26.50 10.19 4.95 3.78
6.00 18.30 62.00 57.00 260,000 20.00 8,800 39,000 10.00 300 50.00 6.00 29.00 13.00 6.00 4.50
0.8 0.9 1.5 5.0 1.0 1.0 1.3 3.1 1.9 0.7 0.7 0.9 1.7 0.9 4.2 5.2
0.8 0.8 1.3 4.5 0.9 1.0 1.2 2.8 1.8 0.7 0.7 0.9 1.6 0.9 4.1 4.8
0.72 15.25 6,070 4,167 12.35
0.65 16.00 4,000 3,800 13.00
1.2 1.3 1.3 1.0 1.1
1.2 1.3 1.1 0.9 1.2
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 20th May, 2014. FY15 and FY16 for SIA, SIA Eng, JR East, Mitsui Engg & Shipbdg and JR West as they have March year end.
Underweight Corrine Png AC
Ticker: SIA SP, Price: S$10.19, PT: S$13.00 Investment thesis: SIA’s valuations remain attractive at 0.9x P/B, close to its historical trough valuations. We think this is unwarranted as we expect the industry demand-supply growth to gradually improve, driving the sector and SIA’s earnings recovery. Net cash still amounts to 29% of current market cap. If SIA pays out one-third of its current net cash balance, the yield would be 10%. Alternatively, it could partially divest its stake in SIA Eng via a dividend in specie. Drivers/catalysts: Sector aircraft deliveries are moderating and the improving industry demand-supply growth balance will alleviate fare pressure, rising premium traffic will help lift yields, pick-up in travel demand on US and Europe routes, turnaround of SIA Cargo, greater synergies with 40%-owned Tigerair. Valuation and risks: Our Jun-15 price target of S$13 is based on 1.1x P/BV, in line with SIA's historical average over the past 10 years. This is well supported by SIA’s “liquidation” value of c.S$13.3/shr. Key risks: 1) Further deterioration in the macro environment, 2) rising fuel prices, 3) worse-thanexpected competition from LCCs & Middle Eastern carriers, 4) value-destroying M&A, 5) a weaker SGD.
Hanjin Shipping
Corrine Png AC
Ticker: 117930 KS, Price: W6,070, PT: W4,000 Investment thesis: Although we expect Hanjin’s results to improve in 2014, we believe it is an uphill task to improve its financial performance and balance sheet significantly and outperform sector peers. Interest burden is high and the risk of further equity raising to strengthen its B/S and to order/lease new vessels remains. Drivers/catalysts: The expanded CKYHE alliance is positive for Hanjin Shipping which will surpass G6 on the Asia-Europe trade with c.23.1% combined capacity share vs G6’s c.19.4%. However, CKYHE is still only half of P3 network’s size and capacity share of c.46.7%. This could compel them to invest in newer and larger vessels at a time when Hanjin Shipping can ill afford to. Its CKYHE alliance partners also have fairly leveraged balance sheets Valuation and risks: Our Jun-15 PT of W4,000 is based on 1.7x P/B, in line with Hanjin Shipping's average historical valuation since its profitability and shareholders' equity deteriorated in the past 5 years. Key upside risks include: Better-than-expected volumes and freight rates, lower-than expected capacity growth, falling fuel prices, exit of weaker industry players.
31
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Utilities & Power Equipment
Boris Kan AC
Asia utilities continued to outperform the market YTD amidst continued market volatility and stabilizing UST yields. However, significant divergence has been seen amongst various sub-sectors, where those (1) with positive stories (China treatment operators & IPPs) continued to shine, (2) with LT structural issues (India IPPs) had a reversal in fortune due to optimism on some ST catalysts (India elections), and (3) with new headwinds (China wind operators) suffered sharp correction.
recovery), Tenaga (sustainable weak coal prices & potential tariff reset), and Metro Pacific (steady growth in tollway business + upside from new infrastructure projects). Stocks to avoid are Shanghai Electric (weak domestic coal-fired order outlook + earnings disappointment) and Adani Power (Highest exposure to weakening INR & high gearing + earnings disappointment).
We continue to prefer high quality stocks with emerging positive catalysts, while avoiding those with LT structural issues, despite some near-term boost on shortlived positives. Key catalysts to watch out for are: 1) sustained coal price weakness, 2) sustainable structural growth, and (3) strong cash flows.
Code Rec Top Picks 836 HK OW 658 HK OW 257 HK OW TNB MK OW MPI PM OW Stocks to Avoid 2727 HK UW ADANI IN UW
Our top picks are CR Power (weak coal prices, strong CF + wind power), China Everbright (new waste-toenergy project wins, strong government policy support), China High Speed (sustainable turbine demand / margin
Overweight China Everbright
Price (HK$)
Mkt Cap (US$MM)
P/E (x) FY14
P/B (x) FY14
Div. yield ROE 14E (%) 14E (%)
19.9 4.98 9.41 29.59 0.94
12,291.1 1,050.6 5,442.8 21,546.3 3,154.2
9.1 11.3 22.4 13.1 16.6
7.9 9.2 16.5 13.1 15.1
2.19 0.44 0.42 0.94 0.32
2.52 0.54 0.57 0.94 0.35
2.83 8.04
6,911.6 2,980.5
14.1 NM
13.5 53.1
0.20 -9.54
0.21 1.15
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of May 19 2014.
Underweight Elaine Wu AC
Ticker: 257 HK, Price: HK$9.41, PT: HK$13.0 Investment thesis: Our bullish investment case rests on our expectation of: 1) visible EPS growth of 20-25% in 2014-16E backed by strong order book of RMB11B, 2) potential 16% CAGR growth in China's waste incineration capacity during 2015-20E and 3) potential upside from the Hankore acquisition (announcement is possible by end-May). Drivers/catalysts: New awards of waste-to-energy projects, and potential value-accretive acquisitions. Valuation and risks: Our Jun-15 PT of HK$13.00 for CEI is determined based on a sum-of-the-parts valuation, using DCF (WACC of 8.3%, terminal growth rate of 2.3%) to value each of CEI’s business segments. Our PT implies FY15E PER of 23x. Risks to Rating and Price Target are: 1) Project delays could result in lower construction and operation revenue and net earnings; 2) Higher interest rates would result in lower net earnings. 3) Low utilization rates at projects would result in lower operating earnings; 4) Delay in payments from customers would put a strain on cash flow and potentially increase the need for additional borrowing; 5) Risks of a potential share placement may increase as CEI’s net gearing rises. This may dilute EPS.
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Top picks and stocks to avoid
Shanghai Electric
Boris Kan AC
Ticker: 2727 HK, Price: HK$2.83, PT: HK$2.40 Investment thesis: Our bearish view on Shanghai Electric rests on the expected weak demand for coalfired equipment as China: (1) continues to rely less on coal due to pollution concerns, (2) has slower power demand growth going forward as the nation shifts away from an FAI growth model. Drivers/catalysts: New order flows (and ASP trend), margin on equipment sales (and outlook), nuclear orders, rollout of overseas projects. Valuation and risks: Our Dec-14 price target of HK$2.40 is based on 8.6x the four-year forward through-the-cycle EPS, which is one SD below the five-year historical average one-year forward P/E. Upside risks to our UW rating and PT include: higherthan-expected margins on coal-fired units as management creates more production cost savings through: 1) internal cost control, and 2) lower procurement costs from suppliers.
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Investment Thesis, Valuation and Risks 21Vianet Group Inc. (Overweight; Price Target: $35.00) Investment Thesis VNET is the largest carrier-neutral IDC service provider in China. It has a partnership with Microsoft public cloud service and with IBM private cloud service in China. The company is well positioned to drive growth across its business segments on the back of the fast-rising data traffic in China. Valuation Our Dec-15 PT of US$35 is SOTP-based, comprising two parts, cloud and IDC businesses. We use 13x EV/EBITDA (2015E) for VNET’s IDC business with a 30% EBITDA growth CAGR in 2013-2015E, and 20x EV/EBITDA for cloud computing, based on tremendous growth off a low base. Risks to Rating and Price Target Downside risks to our OW rating and PT include slower-than-expected take-up of cloud services and slower-than-expected sell-through of new cabinets.
Agile Property Holdings Ltd (Underweight; Price Target: HK$6.00) Investment Thesis We believe Agile is undergoing a structural derating, and that we are far from seeing an inflection point. Agile’s balance sheet has deteriorated quickly, which we believe will likely be reflected in higher funding costs soon; landbank is also deteriorating with increased exposure to oversupplied areas, which we believe is likely to result in a lower sell-through rate and more inventory stacking up. All of these factors would likely lead to a vicious circle, which we believe will need a change in strategy to resolve: cut prices heavily for older, poorly selling projects and recap the cash, and then reinvest in land that can generate faster asset turnover, higher margins, hence higher ROE. Valuation We are Underweight with a Dec-2014 price target of HK$6.00 per share, based on 4.0x 2014E P/E. The P/E we use is the lowest among all mid-cap developers as we believe the risk profile of the company has increased rapidly over the past six months. The multiple is lower than that of R&F given Agile’s higher exposure to tier 3 cities, and lower contribution from commercial properties sales. Risks to Rating and Price Target Potential upside risks to our PT include: 1) better-than-expected sell-through rates for Agile's projects; 2) the government putting in place supportive policies in low-tier cities; and 3) aggressive increase-stake activities by the Chen family.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
ANZ Banking Group (Underweight; Price Target: A$34.75) Investment Thesis Our Underweight recommendation for ANZ questions the real benefit of the bank’s Asian presence. Although it is a ‘strategic’ advantage, we are less bullish on the profitability of this growth channel, noting recent signs of a slowdown in Asia and increased capital intensity adversely impacting ROTEs. Valuation Our updated December 2014 price target of A$34.75 (revised to incorporate APRA conglomerate rules) reflects the aggregate of the present value of the dividend stream paid to shareholders through to FY15E and the present value of a multiple of forecast FY15E tangible book value – premised on our sum-of-the-parts methodology, which values the earnings profile of the APEA business separately from the rest of the group. The LR price-to-tangible book multiple of 2.3x is calculated with primary consideration given to the surplus capital generated above a hurdle rate of return. This surplus capital generation was reflected in our estimated sustainable ROTE of 18.0% for ANZ. Risks to Rating and Price Target The key upside risk to our ANZ price target relates to the extent to which margin headwinds relating to the institutional division may improve going forward, assisted at a group level by a declining cost-to-income ratio (in line with management targets).
ASE (Overweight; Price Target: NT$40.00) Investment Thesis We foresee meaningful revenue growth/margin expansion for ASE in 2014, backed by: (1) potential synergies between in-house assembly/test and EMS segments for ramping SiP business; (2) a strong pickup in revenue momentum from 2Q14 onward, helped by 20nm ramp (Apple’s AP fabbed at TSMC); (3) industry migration toward advanced packaging; and (4) substantial downside protection for wire-bonder utilizations due to significant IDM exposure. In addition, ASE appears to be best positioned to drive further consolidation in the OSAT space in the next two years. Moreover, we believe Micron may be considering outsourcing more of its memory back-end operations, especially in commodity and mobile DRAM. We believe ASE has a strong chance of gaining market share within Micron’s DRAM pie. Valuation Our Dec-14 PT of NT$40 is based on 2.2x FY14E book, with a 2015E ROE of 16%, at the high end of its revised mid-cycle valuation. Our PT translates into a 12m forward P/E of 13x. Risks to Rating and Price Target Key downside risks are a slower ramp-up of advanced packaging and the likelihood of low utilization in the wirebonding and testing business.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
ASUSTek Computer (Underweight; Price Target: NT$265.00) Investment Thesis We downgrade ASUS to UW (Dec-14 PT of NT$265, 10x FY15E EPS), given: (1) flagging notebook growth, despite the exit of peers; (2) questionable profitability for the smartphone growth strategy; and (3) an expected pickup in competition in hybrids from 2H14. Valuation Our Dec-14 PT of NT$265 is 10x one-year forward earnings. Our target multiple of 10x is at the lower end of ASUS’s historical average of 8-14x, given that we remain cautious on the smartphone outlook, while hybrid competition should also pick up from 2H. Risks to Rating and Price Target Key upside risks include: (1) better-than-expected share gains from Tier 2 vendors like Samsung and Sony, who are exiting the PC market; and (2) strong pickup from Hybrid/T100-like products.
Ayala Land (Overweight; Price Target: Php36.00) Investment Thesis We believe that ALI is the best exposure to the Philippines' robust macro story. ALI is well positioned to benefit from the strong economic growth and favorable credit environment which should underpin the sustained robust growth in real estate demand. We expect ALI to deliver a faster-than-peers 20% EPS CAGR in FY14EFY15E as the company sustains its aggressive project launches and commercial lease expansion. Valuation Our Dec-14 PT of Php36 is based on a 10% discount to our NAV estimate of Php41/share. This reflects the NAV discount that is near the +1 SD above its historical average. We think this is justified given the company's superior return profile, established execution track record, robust long-term structural drivers, and the company's higher growth trajectory. Risks to Rating and Price Target Sharp rise in interest rates, lower-than-expected residential take-up, meaningful slowdown in economic growth.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Bank Danamon (Underweight; Price Target: Rp3,000) Investment Thesis Bank Danamon has a wholesale funded (47% CASA), high leverage (123% LDR), high yield (14.1%) business model, which we believe is under threat as system liquidity tightens. The bank has started making strategy shifts in favor of building a stronger deposit franchise over the last few quarters but we do not expect these changes to result in the bank generating RoEs above its cost of equity over the next three years. Maintain UW. Valuation We use a 2 staged DDM to value Bank Danamon with Jun-15 PT of Rp3,000. We use P/B multiple of 0.79x with RFR of 8%, CoE of 15.5% and normalized ROE of 12.2%. Risks to Rating and Price Target Key upside risks to our view include reduced reliance on wholesale funds and thereby improving funding costs and better than expected asset quality. Higher than expected loan growth (14.5% in FY14E) also poses a risk to our view
Bharat Heavy Electricals (BHEL) (Underweight; Price Target: Rs130.00) Investment Thesis BHEL is a power plant equipment manufacturer with a capacity by end of FY13 to supply 20GW per annum. BHEL has an order backlog of Rs1.006 trillion (as of Dec13) providing earnings visibility through FY15. During FY93-03, average OPM was 10.7% (our terminal OPM is 11%) and the stock traded well below 8x EPS. FY00 and FY01 were two consecutive years of revenue de-growth which coincided with weak valuations-BHEL faces a similar predicament today but enjoys much higher valuation post the rally over last 6 months. Valuation We increase our DCF based Mar-14 PT to Rs130/share (WACC: 12.2%, terminal growth rate: 3%, terminal year: FY20). Our estimates include a declining post tax EBIT through FY17 on account of margin contraction as well as declining revenue assuming investments in the domestic power sector don’t pickup meaningfully. Our PT implies a multiple of 10.5x/10.8x FY15/16 earnings. We are cautious of upside risk to order opportunities for BHEL and our view due to improved visibility on coal block allocation to the private sector. Risks to Rating and Price Target A return to Rs400bn+ inflow run-rate is a risk to our medium-term growth and margin assumptions. Other upside risks include- fresh private sector coal block allocation, faster clearances and award of projects/UMPPs despite elections, BHEL’s ability to cushion margin fall by reigning in employee costs, order inflow surprise from nuclear/defense/railways.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
BYD Company Limited (Overweight; Price Target: HK$67.00) Investment Thesis We are OW on BYD with a June-15 PT of HK$67, based on a sum-of-the-parts valuation. BYD is the leader in new energy vehicle (NEV) in China, and NEV is taking off thanks to strong government support with aggressive subsidies and charging post infrastructure build out. We estimate the overall NEV market to grow 1.8x CAGR in 2013-2020, and BYD to take 30% market share. We expect BYD’s NEV sales to grow 130%/51% in 2015/16E, respectively, and act as a further share price driver over the next 12-18 months. The key catalysts are 1) big jump in 3Q NEV sales after capacity expansion; 2) profit margin to expand from 2Q onward on better scale/ yield rate; and 3) policy supports including more cities EV bus orders at BYD, tax/ subsidy incentives etc. Valuation Our SoTP-based Jun-15 price target of HK$67 is based on 2016 EV-to-sales for NEV business, and 2015 P/B or P/E for battery, traditional auto and electronics businesses. We assign 4x 2016 EV-to-sales for NEV business, at a discount to Tesla’s 4.5x medium term forward multiple. The other businesses take into account various comps and future growth/ ROE prospects. Our back-testing suggests those are the multiples the market seems to be paying for in the last 2.5 years. Risks to Rating and Price Target Downside risks to our view include: 1) missing estimates – bumpy learning curve for various parties including bus companies/ consumers; 2) product hiccups – BYD running into product recall/ battery warranty issues, as seen in other auto brands, and 3) competition – global auto brands/ battery makers ramping up shipments in China production plants.
China Everbright International (Overweight; Price Target: HK$13.00) Investment Thesis China Everbright Int’l (CEI) is the environmental energy arm of China Everbright Holdings, a state-owned enterprise under the State Council. CEI constructs and operates waste-to-energy (WTE), wastewater treatment and alternative energy (wind, solar, biomass, methane-to-energy) projects. The company also manufactures its own WTE equipment in China. Valuation Our Jun-15 PT of HK$13.00 for CEI is determined based on a sum-of-the-parts valuation, using DCF (WACC of 8.3%, terminal growth rate of 2.3%) to value each of CEI’s business segments. Our PT implies FY15E PER of 23x. Risks to Rating and Price Target 1) Project delays could result in lower construction and operation revenue and net earnings; 2) Higher interest rates would result in lower net earnings. 3) Low utilization rates at projects would result in lower operating earnings; 4) Delay in payments from customers would put a strain on cash flow and potentially increase the need for additional borrowing; 5) Risks of a potential share placement may increase as CEI’s net gearing rises. This may dilute EPS.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
CSR Corp Ltd. (Overweight; Price Target: HK$8.60) Investment Thesis CSR is a major potential beneficiary of the upcoming rebalancing in the mix of China’s railway spending, as we expect a higher proportion of railway capex to be allocated to late-cycle trains & equipment starting from 2014. For the near-term, we see promising growth outlook for CSR in light of 1) CRC's upcoming rolling stock procurement announced recently for 2014 which should greatly strengthen the backlog for CSR non-MU segments; 2) rich backlog for MU product, the delivery of which is mostly scheduled to be completed by 3Q14; 3) solid outlook for China’s MU demand into 2015 driven by the upcoming completion of HSR tracks as well as rising HSR ridership. For the longer-term, we expect overseas market, after-sales services and subway trains (RTVs) to emerge as new growth drivers. Valuation Our Dec-14 PT of HK$8.6 is derived based on DCF valuation methodology. Our PT translates into a target P/E of 17.0x/14.8x and a target P/B of 2.3x/2.1x on FY14/FY15E. Price target and valuation analysis is based on the following assumptions (unchanged): WACC = 10.9%, driven by: Cost of equity = 12.7% (Rf: 5.0%, Equity risk premium: 7.0%, Company beta: 1.1x); Cost of debt = 3.8% (pre-tax cost of debt: 5.0%, tax rate: 25%); Target gearing = 20%, terminal growth rate = 0%
Risks to Rating and Price Target Key risks to our price target/thesis are unexpected changes in the government’s investment in railway development, major fluctuations in raw material costs, and potential capacity constraints.
CSR Limited (Underweight; Price Target: A$3.00) Investment Thesis CSR is an Australian Building products company with exposure to the Aluminium industry through its share of the Tomago smelter. In FY14, the Building Products division and Glass (Viridian) business generated 74% of revenue, with the Aluminium division accounting for the remaining 26%. While CSR’s Building Products business is currently arguably better than its peers, the underperforming glass business and vagaries of the aluminium industry dilutes the investment proposition. In addition, the current attempt to renegotiate the terms of the Tomago electricity contract with Macquarie Generation leaves uncertainty with respect to the cost position of the smelter in the long term. Valuation $3.00 Price Target – Our Dec-14 price target is based on an evenly weighted combination of our FY15 Sum-of-Parts (SoP) and Group DCF valuations, discounted back to Dec-14 at the cost of equity and adjusted for grossed-up dividends where appropriate. We calculate our SoP based on the individual cash flow streams of each of the discrete business segments. In CSR's case for the SoP valuation, we strip out 38
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
capex at the segmental level, not at a group level. We separately value corporate costs, working capital and provisions. We discount the segment cash flows at a group discount rate, or where relevant at a segment specific rate. Our current post-tax WACC applied to our SoP is 9.3%. CSR DCF-based SoP valuation Segment Building Products Viridian Aluminium Property Less: Corporate Enterprise Value Less: Net Debt Provisions Calculation Less: Asbestos Provision Less: Other Provisions Add: Tax Shield on Provisions Less: Net Provisions Estimated equity value
Valuation methodology / Comment DCF-based valuation (ex. Changes in working capital and provisions) DCF-based valuation (ex. Changes in working capital and provisions) DCF-based valuation (ex. Changes in working capital and provisions) DCF-based valuation (ex. Changes in working capital and provisions) DCF-based valuation (incl. Group changes in working capital and provisions) Group net debt as at year-end: 2015A A$ Asbestos Provision: 2015E Group provisions as at year-end: 2015E Tax Shield: 2015E Group SoP valuation
A$m 1,131 228 693 179 -277 1,955 15
A$/share 2.24 0.45 1.37 0.35 -0.55 3.86 0.03
-369 -197 142 -425 1,546
-0.73 -0.39 0.28 -0.84 3.05
Source: J.P. Morgan estimates.
Risks to Rating and Price Target The upside risks to our price target include: an improvement in the aluminium price; declining alumina prices; ingot premiums remaining elevated; a more favourable-than-anticipated outcome of the attempted renegotiation of the Macquarie Generation electricity contract at Tomago; faster-than-expected improvement in Australian construction activity; and weakening of the A$.
DongFeng Motor Co., Ltd. (Underweight; Price Target: HK$8.50) Investment Thesis 1) We believe DFM is a proxy for the overall PV market in China as the company has diversified models across sedan, SUV and commercial vehicles. Nonetheless, we forecast growth in the PV market will decelerate with increasing base. Thus, we believe investors should focus on specific sub-segments that would likely deliver superior growth, namely: SUV and premium brands (hence our preference for Brilliance China). 2) DFM’s lack of capital management and dividend despite sizeable cash on balance are key reasons for its declining ROE. Historically, we find a high correlation between its ROE and share price performance since its listing in 2005. 3) DFM’s investment in PSA could present a potential longer term challenge facing the company, as we are unsure the benefit that DFM shareholders could receive in the long term. And there is further risk down the road if PSA needs more capital in the future. In other words, we believe DFM’s shareholders would be better off if the company simply returns its rich case back to shareholders in the form of cash dividend- in which case, we believe the stock can re-rate. Valuation We retain our UW rating with a PT of HK$8.5 (June-14) based on FY14E P/E of 6x and DCF analysis. This multiple is the mid-range of DFM’s historical trough valuation of around 5-8x forward P/E. Given our expectation that DFM will be undergoing a de-rating (due to competition from entry level luxury brands and weak truck demand and longer term uncertainty presented by PSA investment), we believe that applying an average trough valuation is reasonable. In our DCF analysis, our key assumptions include risk-free rate of 5%, risk premium 6%, WACC of 12% and terminal growth of 2%.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Risks to Rating and Price Target Key upside risks to our UW rating and PT include: (1) better-than-expected sales of Japanese cars in China, including DFM’s Nissan and Honda vehicles, (2) strongerthan-expected margin improvement for its passenger and commercial vehicle businesses, and (3) higher than expected dividend payout and hence higher yield.
Esprit Holdings (Underweight; Price Target: HK$11.30) Investment Thesis We are concerned about the implementation of the vertical model at the wholesale level even if we give management the benefit of the doubt on a successful overhaul of the supply chain. Our Jun-15 PT is at HK$11.3 where we assume weak implementation of vertical strategy at wholesale and c6% EBIT margin by FY18E. Furthermore, any sign of success will be seen only after Mar-15 as it takes time to implement the vertical strategy to the entire company. Valuation Our Jun-15 PT is HK$11.3, based on DCF Valuation with discount rate of 12% and terminal growth of 1.5%. Our discount rate is derived as follows: Country risk free rate Country risk premium Beta Cost of Equity Weight of Equity Cost of Debt Weight of Debt WACC
3.60% 10.8% 0.8 12.2% 97% 2% 3% 12%
Source: J.P. Morgan estimates.
Risks to Rating and Price Target Key upside risks are a significant recovery in SSSG in the coming quarter coupled with growth in wholesales revenue and lower-than expected spending on operating expenses. Key downside risks are a continuing decline in SSSG and increased operating expenses on the back of this.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Far East Hospitality Trust (Underweight; Price Target: S$0.80) Investment Thesis FEHT is a pure-play domestic hospitality REIT with 78% of GAV exposure in Singapore hotels. Sector fundamentals remain challenging in our view from flat demand growth and continued supply in the mid/mass hotel segments. Sector-wide occupied room nights in 2013 were also down 3% Y/Y. Having said that, we note that year-on-year RevPAR declines are expected to stabilize due to low base effects. Valuation Our Jun-14 price target of S$0.80 is based on the average of our DDM and RNAV estimates, with DDM using a 7.9% discount rate and LT growth rate of 1.0%. Tenure adjusted RNAV is estimated @ S$581,785 per key. Risks to Rating and Price Target Key upside risks to our rating and PT stem from better-than-expected visitor arrivals and therefore better growth in room rates. The high operating leverage means that every 5% change in RevPAR would translate into a 7% change in our DPU estimates.
Fubon Financial Holdings (Overweight; Price Target: NT$51.00) Investment Thesis We like Fubon because: (1) Fubon has a stronger platform in greater China banking business among peers. Its recent acquisition of First Sino Bank, along with its Fubon Hong Kong and Taipei Fubon Bank in Taiwan, provides a good footprint in the region. (2) Fubon Life is stable operationally. We expect Fubon to deliver more stable investment returns than Cathay and Shin Kong. (3) We expect less M&A uncertainty following the First Sino Bank deal. Capital is also at a sufficient level. Valuation Fubon is trading at a 1.2x FY14E P/BV and 0.7x FY14E P/EV (company reported basis), lower than its long-term averages of 1.4x and 0.8x, respectively. Our Dec-14 PT of NT$51 is based on a SOTP valuation. We value the life insurance operation based on AV, which is equivalent to FY14E EV + 7x VNB. Our investment return assumption is 3.8% for VIF and 3.5% for VNB, lower than the company’s base-case assumption of 4.6% and 4.5% respectively. We value other businesses based on P/BV by referring to the ROE-g/COE-g fair value methodology, which is 1.3x P/BV for TFB, 0.5x for FBHK, 1.7x for Fubon Insurance and 0.8x for Fubon Securities. We value Fubon Bank China (previous First Sino Bank) at 1.0x based on an average ROE of 8-10% for FY14-15E; Fubon Bank China accounts for 3% of our SOTP valuation, which is subject to a 10% conglomerate discount. Risks to Rating and Price Target Downside risks include: (1) unexpected defaults on large-size syndication to result in higher credit costs; (2) regulators to implement stricter reserve requirements; (3) strong NTD appreciation to drive up hedging costs.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Globe Telecom (Underweight; Price Target: Php1,520.00) Investment Thesis We have a Underweight rating on Globe. Telecom revenue growth in the Philippines is likely to remain strong aided by strong economic growth and stable competition. However, we see margin pressure for Globe driven by rising post-paid subscriber acquisitions driving SAC higher. In addition, we see significant rise in capex intensity going forward driven by higher data usage and thrust on home broadband services – the management recently increased its capex guidance implying almost 30% capex to sales ratio for 2014E. We believe that capex levels could remain elevated over 2014E-16E, driving incremental returns on capital lower. Valuation Our Dec-14 price target of Php1,520 is based on 16x 2015E P/E. Our target multiple of 16x is at a ~20% premium to the average five-year forward P/E, factoring in improved fundamentals for the Philippine wireless industry driven by competition getting less aggressive over the past 18 months and a continued decline in sovereign bond yields (and thereby implying a lower risk-free rate). Our target multiple is also in line with average ASEAN wireless operators’ 2015E P/E multiple. Risks to Rating and Price Target Key upside risks include better-than-expected margins from lower competition, especially on the post-paid side. Lower than expected capex would also be a source of upside to our earnings estimates and price target, though we believe this would be unlikely unless globe were to roll back its home broadband growth agenda. Finally, Globe managing to sustainable reduce SAC for its postpaid subscriber base / potential reduction in handset subsides would be a source of positive surprise.
GS Engineering & Construction (Underweight; Price Target: W27,000) Investment Thesis GS E&C had been one of the leading Korean E&C players, and had successfully expanded its orders in the overseas market since late 2000s. However, due to aggressive biddings and price competition, the company reported a significant loss in 2013, mainly from cost-overruns. We expect the company’s earnings to recover in 2014, however, the earnings upside may be limited given the potential operational risk in its overseas projects. Moreover, we believe it will require more time for the company's fundamental competitiveness in EPC business to show a gradual improvement. Valuation We maintain our Underweight rating and our Dec-14 price target of W27,000. Our target is based on 2015E EPS of W3,376 and target multiple of 8.0x, in line with KOSPI market to reflect GS E&C’s slower growth momentum. Risks to Rating and Price Target Key upside risks to our price target are: (1) successful order wins of projects under bidding; (2) progress in unstarted overseas projects in backlog; (3) faster-thanexpected recovery of domestic housing market.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Hanjin Shipping Co Ltd (Underweight; Price Target: W4,000) Investment Thesis Although we expect Hanjin’s results to improve in 2014, we believe it is an uphill task to improve its financial performance and balance sheet significantly and outperform sector peers. Interest burden is high and the risk of further equity raising to strengthen its B/S and to order/lease new vessels remains The expanded CKYHE alliance is positive which will surpass G6 on the Asia-Europe trade with c.23.4% combined capacity share vs G6’s c.19.8%. However, CKYHE is still only half of P3 network’s size and capacity share of c.46.2%. The Asia-Europe constitutes 31% of HJS’s total volume. Globally, P3 network has a capacity share of c.36.7%, G6 c.18.3%, CKYHE c.16.5%. This could compel other liners to invest in larger vessels when HJS can ill afford to. Its CKYHE alliance partners also have fairly leveraged B/S (China Cosco 2.1x net debt-equity, K-Line 0.9x, Yang Ming 2.3x, Hanjin Shipping 14.4x, Evergreen 0.6x). Valuation Our Jun-15 price target of W4,000 is based on 1.7x P/B, in line with Hanjin Shipping's average historical valuation since its profitability and shareholders' equity deteriorated in the past 5 years. Risks to Rating and Price Target Key downside risks: Global container shipping demand weakens further, freight rates decline, rising fuel prices and limited pass-through, prolonged industry oversupply, potential equity-raising given high financial leverage. Key upside risks: Better-than-expected volumes and freight rates, lower-thanexpected capacity growth, falling fuel prices, exit of weaker industry players.
Hyundai Motor Company (Overweight; Price Target: W330,000) Investment Thesis HMC is our top OEM pick in Korea. We believe HMC will be one of the few OEMs to see its product cycle upturn coinciding with global auto demand’s cyclical improvement in 2014. Product cycle and net pricing outlook suggest we are near the earnings inflection point. HMC’s growth will likely happen at a higher price point, supporting growth accompanied by profit enhancement. In 2014-15, we think global market share will strengthen to reach a record high, which will be a re-rating factor. We think group restructuring, which we believe will be completed by 2015, will also lower uncertainty on succession issues. Valuation HMC trades at 7.0x 2014E PER. This represents a 26% discount to global peers, which is at a widened discount over the past three-year average of 22%. Considering the improving fundamental earnings drivers of HMC and relative declining product momentum of peers, we believe HMC is one of the most mispriced stocks globally. To be fair, sizable multiple expansion is not likely with declining RoE. However, no large-cap or investable global OEMs have rising RoE based on Bloomberg estimates. For HMC, we argue for a breakout from mid-cycle multiples toward the higher end of the trading band, given its strengthening global positioning in 2014. Our price target is based on 10x FY14E EPS. Again, our target multiple is toward the higher end of the historical band (5-12x) to reflect upcoming earnings up-cycle, product momentum, the possibility of the second phase of capacity expansion, and improving auto demand in key markets including Europe. 43
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Risks to Rating and Price Target Short-term risk is the pace of the KRW appreciation. Long-term risks are weaker position in green car technology and rising R&D burden.
KASIKORNBANK (Overweight; Price Target: Bt230.00) Investment Thesis The EM equity sell-off and Thailand's political unrest have brought the stock price down by 27% (SET: -23%) from a peak in May-13, when the EM equity sell-off started; the stock has declined 15% (-13%) since the end of Oct-13, when the antigovernment protests started. Valuation starts to get more attractive at 1.5x P/B and 8x P/E, in our view, or at approximately a 20% discount to the stock’s long-term average multiple. In our view, KBANK is one of the most solid banks in Thailand and should continue to deliver better-than-average results. Despite a cautious business plan, we expect 15% EPS growth and 20% ROE in 2014. Valuation Our Dec-14 price target is based on a DDM methodology. We use an adjusted fair P/B-based multiple of 2.56x with a normalized ROE of 20%. Risks to Rating and Price Target Downside risks include prolonged political unrest, leading to weaker growth, quality and NIM, as well as a failure to control deposit costs, NIM and the operating expense trend when the revenue outlook is more challenging.
Lite-On Technology Corporation (Underweight; Price Target: NT$40.00) Investment Thesis We remain UW on the stock as we believe 70% of LoT’s businesses are likely to stay muted (PC/NB related business and Lite-on Mobile) in terms of revenue and profit contribution, while some promising sectors such as camera module are also facing higher competition from Greater China vendors such as Sunny Optical, O-film and Truly. Valuation Our Dec-14 PT of NT$40 is based on 10x FY15E EPS, the midpoint of the shares’ 713x P/E multiple range over the last five years. This multiple also reflects the company’s large exposure to the PC industry, which has limited growth opportunities, in our view. Risks to Rating and Price Target Key upside risks to our view include: (1) another ROE-accretive deal (e.g.,Silitech); (2) new customer breakthroughs (e.g., Apple); (3) better demand for LED lighting; and (4) faster SSD growth to offset ODD weakness. Key downside risks are (1) further deterioration of PC demand, (2) gaming traction slows down.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
LPN Development (Underweight; Price Target: Bt14.00) Investment Thesis Thai property sector is generally GDP driven. Unless GDP trends recover, we will continue to be negative on the sector regardless of valuation. Weak GDP and demand sentiment will put pressure on pre-sales, which is a key share price driver. This is especially for condos as it is more cyclical in nature compared to landed properties. In our view, Thai property especially the condos segment has entered the cyclical slowdown period. Incoming supply will also limit growth of new launches. While LPN has very strong operations, the stock valuation is much more expensive relative to peers. Also, the stock is not cheap relative to its long-term average. Valuation We value the stock based on PE approach. We use 9x PE as the target as that is the long-term average PE for the stock. Our Dec-14 PT of Bt14 is based on 9.0x FY14E EPS. We use 9x as the target PE which is similar to AP and is at +1 SD over LPN's long-term PE average. Risks to Rating and Price Target Downside risks are 1) prolonged political stalemate; 2) cyclical slowdown in condo demand & upcoming supply of finished units; 3) construction delay. Upside risks are 1) stronger-than-expected take up on new launches; 2) strong balance sheet potentially lead to more project launches; and 3) operationally strong and efficient.
Matahari Department Store (Overweight; Price Target: Rp18,000) Investment Thesis Market size for department store retailing in Indonesia is likely to increase at 13.9% CAGR to Rp71trillion (USD62B) by end of 2018 (source: Euromonitor), driven by growing middle class population and an underserved market. We believe LPPF is well positioned to benefit from this opportunity. It is the largest department store operator in Indonesia, with 36.7%% share of department store sales in 2013. We see LPPF is one of the best run retail operators in Indonesia. Besides the strong brands and a large store network we believe that LPPF has strong merchandizing and supply chain capabilities, backed by robust IT systems and a robust customer loyalty program, all of which help deliver superior capital returns relative to peers. Valuation Our Dec-14 PT of Rp18,000 is based on a target multiple of 25x2015E P/E and is supported by our DCF based valuation methodology. Our target multiple is at 20% premium to ASEAN retail peer group average. We see LPPF’s market leadership, high quality of operations, strong capital return profile and 23% CAGR in earnings over 2014E-16E supporting premium valuations. Risks to Rating and Price Target We see regulatory risk from the recent Ministry of trade decree to limit sales generated from in-house/ private labels brands to 15% and from the proposal to limit 150 department stores per holding company. Also, we see a risk from rising competition in the Indonesian retail market with new foreign entrants. Related party transactions, although conducted at an arms length basis, according to management, also pose a downside risk. Upside risks include lower impact of competition as the overall market grows at a faster pace, faster expansion outside of Java and better SSSG. 45
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Maxis Berhad (Underweight; Price Target: M$5.25) Investment Thesis Our Underweight rating on Maxis is premised on the view that competitive intensity in Malaysia is set to rise, led by Maxis' change in strategy to focus on revenue growth and market share, a shift away from its margin focused strategy over the past few years. Maxis' shift in strategy is likely to drive sales and marketing expenses higher and comes against a backdrop of slowing industry revenue growth, which is now down to 3%-4% levels. Consequently, we expect margins for Malaysian telcos to be under pressure going forward and expect further downward revisions in consensus earnings estimates. We note that rising competitive intensity could drive pricing pressure and potentially capex intensity higher, which poses risk to free cash flows and sustainability of dividend payout. Valuation Over the last five years, Maxis has traded at an average forward 18x P/E and in a range of 14.2x P/E at the bottom and at 23.8xP/E at the top end. Maxis stock is currently trading at 26.7x 2013E P/E and 28x FY14E P/E. It is currently trading at a 27% premium to its historical trading average of 20.5x forward P/E. Our target P/E multiple of 18x is in line with its average historical trading multiple. We believe that given the headwinds from competitive pressures and the impending consensus downgrades, valuation multiples are likely to compress from current levels. Our PT is based on a sum of: 1) potential upside/(downside) to consensus EPS vs. JPM EPS estimates, and 2) our estimated multiple expansion/(contraction) based on peak P/E multiple. Our target P/E multiple is based on the stock’s historical trading range and expected future business changes. Price target and valuation analysis Current consensus P/E (a) JPM target P/E (b)
June 2015E
June 2016E
24.3
22.4
18.0
18.0
-25.8%
-19.6%
JPM vs. consensus EPS (d)
-4.1%
-5.7%
Sum of multiple and EPS upside/(downside) (e+d) JPM Jun -2015 price target (M$/sh)
-30%
-25% 5.25
Upside/ (Downside) to target multiple (b/a-1=e)
Source: J.P. Morgan estimates.
Risks to Rating and Price Target Key upside risks to our rating and price target include Maxis successfully recouping market share without any significant increase in marketing expenses. We expect margins for Maxis to decline going forward on account of higher marketing expenses; in the event Maxis is able to sustain margins through better cost management, that would be a source of upside risk to our earnings estimates and price target.
46
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Mazda Motor (7261) (Overweight; Price Target: ¥680) Investment Thesis Key investment factors include 1) greater earnings growth than volume growth, with a rise in the proportion of vehicles with SkyActiv technology; 2) profit improvement in North America with the startup of a new Mexican plant; and 3) a possible resumption of dividend payments, given the rebound in earnings. The proportion of cars with SkyActiv technology is likely to rise in 2014 onward, and the Demio in Japan is to join the Mazda3 and Mazda6 as models that have the technology. We expect a rise in the proportion of cars with SkyActiv technology to improve the contribution margin in FY2014. Earnings growth in the North American business from the startup of the new Mexican plant is a positive in terms of bolstering the company's consolidated production structure. Also, with retained earnings looking likely to turn positive, a resumption of dividends in FY2014 could be a catalyst. Valuation Our December 2014 price target of ¥680 is based on a P/B of 2.4x derived from our FY2014 ROE estimate of 24% and a cost of capital of 9.4%. Risks to Rating and Price Target Upside Scenario to Target Price/Rating Growth in sales of new Mazda3 with rampup of new Mexican plant Profits on exports to improve further if yen weakens to rate above ¥110/$ Rebound in European car market Downside Scenario to Target Price/Rating Intense competition in US passenger car market from South Korean and US automakers Delayed improvement in productivity at new Mexican plant Deterioration in profits on exports if yen strengthens to rate below ¥90/$
MNC Sky Vision tbk (Overweight; Price Target: Rp3,000) Investment Thesis We have and Overweight rating on MSKY and a Jun-15 price target of IDR3000. MSKY is the dominant pay TV operator in Indonesia with a market share of 71% as at end 2012. Indonesia is one of the least penetrated pay TV markets in Asia, with about 7% household penetration in 2012, compared to11% for Philippines, 28% for Thailand, 49% for China and 80% for India. With rising income levels and increasing affordability, Indonesia is likely arrow the gap with its Asian peers and pay TV subscribers in Indonesia are estimated to grow at 28% CAGR over 20122016E (source: MPA). MSKY, as the dominant Indonesian Pay TV operator, is well positioned to benefit from this trend. MSKY offers 118 channels on its platform, of which 29 are exclusive. It benefits from association with its group company MNCN, which owns a strong content library and has created 18 channels exclusively for MSKY. MNCN is the only DTH operator in Indonesia that has a license for broadcasting using S-Band spectrum. Relative to CBand and Ku-band used by competitors, S-Band offers greater resiliency to heavy rains, implying lower chances of service outages. MSKY sources the majority of its 47
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
customers (70%) through its in-house distribution channels, allowing better control on quality of customers and keeping churn rates under control. Based on our affordability estimates (ARPU as % of nominal per capita GDP) pay TV affordability in Indonesia is currently the lowest amongst Asian peers. We see rising incomes and lower pricing (MSKY’s Top TV and Oke Vision are positioned at lower-mid income segments) to drive higher affordability and penetration. We see this analogous to the multi-year 'rising penetration’ trade of the early-mid 2000s, driven by lower pricing driving penetration higher. Valuation Our Jun-15 price target of Rp3000 for MSKY is based on 12x2015E EV/EBITDA. Our PT is based on: 1) potential upside/downside to consensus EBITDA estimates v/s J.P. Morgan estimates, and 2) our estimated multiple expansion / contraction based on the stock's historical trading range and expected outlook for the business. We value MSKY based on EV/EBITDA multiples. We prefer this over P/E based valuation because at this juncture, net profits for MSKY are depressed owing to high depreciation from rapid set top box deployment and are not fully reflective of the earnings potential of its business. Over its limited trading history, MSKY has traded at a consensus EV/EBITDA range of 10.3x-16.4x with an average of 12.7x. Our target multiple of 12x is near the historical trading multiple and also benchmarked off ASEAN peer group average. Our target multiple is at 15% premium to ASEAN media peer group average EV/EBITDA. We believe that this premium is justified given MSKY's relatively stronger market positioning (71% market share) as well as relatively superior long term earnings growth profile. Risks to Rating and Price Target Key downside risks to our Overweight rating and PT include: MNCN has a significant amount of its content costs, capex and debt denominated in USD, while its revenues are largely IDR denominated. We note that every 5% IDR depreciation v/s USD impacts 2014E-2015E net profits by 11-16%. While MSKY dominates the Indonesian Pay TV market, the market has a large number of players with new players also entering the market. The most recent entrant to Indonesian pay TV market is Big TV, part of the Lippo Group. It launched its services in September 2013 and holds rights for Barclays Premier League (BPL) football rights for Indonesia over the next 3 years starting in the current season. Big TV management are targeting subscriber base of 1 million within the first year of operations (source: Jakarta Globe). We note high sensitivity to MSKY’s earnings to rising churn rates. As per our estimates, a 1% increase in churn rate translates into 13.3% lower net profit for 2014E.
48
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
PetroChina (Overweight; Price Target: HK$11.25) Investment Thesis PetroChina is the largest oil company in China and one of the largest globally. It is integrated with E&P, R&C, Marketing and pipelines (NGP). In 2012, crude production was 2.5 mn BOPD and natural gas 1.16 mn BOEPD, refining throughput was 2.8 mn BOPD, olefin production 7.7 mn tonnes and it operated over 40,000 km of pipelines (crude, products and natural gas). PetroChina has SEC proven reserves of 22.2bn BOE (47% natural gas, 67% of crude is developed). Major profit drivers are crude prices and refining margins in China. Our positive view of the company is based on: Shift in energy portfolio to be rewarded – We expect investor focus to be on the company’s ability to strategically shift its energy portfolio away from lowreturn assets via asset divestments. We think visibility on asset divestments will lead to relative outperformance relative to local peers. Demand for oil products remains solid – We think PetroChina earnings will be driven by robust Chinese oil demand growth (4% y/y) from double-digit gasoline demand growth more than offset by diesel demand growth at 1% y/y. Refining to benefit from improved higher-spec product margins – We expect PetroChina’s refining margins to improve as China moves to tougher gasoline standards. China IV gasoline in 2014 and diesel in 2015 should see uplift in refining margins. Natural gas to benefit from hikes and reforms – We see good natural gas profitability from further price hikes and Chinese natural gas demand at low double-digit growth, which partly offsets a higher import burden. Clarity over natural gas reform progress should also be a catalyst for the shares. Valuation Our Dec-14 PT of HK$11.25 is based on a sum-of-the-parts methodology, whereby we calculate a DCF based value (WACC 9.8%, terminal g 2%) for each business segment, namely upstream, refining, chemicals and marketing added to give our total NAV. Debt and financial liabilities are deducted at book value. Risks to Rating and Price Target Main risks to the earnings outlook are a sharp fall in oil prices, recent natural gas price hikes not being passed through to customers and no further rises, a higher import burden and weak chemicals profitability from lower demand and margins.
49
Asia Pacific Equity Research 21 May 2014
Sunil Garg (852) 2800-8518 [email protected]
Sesa Sterlite (Overweight; Price Target: Rs265.00) Investment Thesis While the stock has moved 60%+ from Aug'13 lows (vs. SENSEX +14% over same period), we think the re-rating is likely to continue over the next year as: a) SSLT delivers consolidated EBITDA of ~$1.2-1.4bn on a quarterly run rate with volume growth in key oil and zinc subs; b) Net debt continues to fall with strong cash generation at subs and limited capex; c) Diversified resource base providing earnings stability; and d) Regulatory environment continues to improve. We expect SSLT to emerge as a key holding across MM/Industrials, given size, cash flow strength and embedded option values from power and ally investments. Valuation Our Dec-14 PT of Rs265 is based on a sum-of-the-parts (SOTP) valuation where we assign EV/EBITDA multiples to underlying FY16E EBITDA. We do not use a DCF approach, given most of businesses are currently not in steady state, and for the key ones such as aluminum and power, it remains difficult to predict when they will achieve steady state. Table 2: SOTP Summary FY16E EBITDA 50,393 10,372
Multiple 5.5 4.0
FY16E 277,161 41,488
BALCO
5,825
7.0
40,777
VAL
25,410
7.0
177,867
Copper Power
16,346 23,321
6.0 5.5
98,077 128,267
Iron ore Oil
8,850 75,935
5.0 3.0 Total EV Net debt Equity Per Share
44,251 227,806 1,035,694 247,831 787,863 265
Zinc-India Zinc Int
Explanation Valued at the lower end of its historical trading range Valued at a 30% discount to India zinc assets given limited mine life Given that LME aluminum is currently below marginal cost, and the investments made by the company are yet to be fully operational, valued at the higher end of historical global aluminum company valuations Given that LME aluminum is currently below marginal cost, and the investments made by the company are yet to be fully operational, valued at the higher end of historical global aluminum company valuations The copper smelter earnings are relatively steady state and less volatile, hence valued at the higher end of commodity company valuations Valued at higher end of earnings range as most of the assets yet to be fully operational Valued at the lower end of its historical trading range, as volume growth outlook remains hazy Valued at the mid range of commodity companies given volume growth prospects
Source: J.P. Morgan estimates.
Risks to Rating and Price Target Key risks include: 1) no start to Goa mining; 2) copper smelter remains shut; and 3) power segment ramp up gets delayed
50
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Shanghai Electric Group Company Limited (Underweight; Price Target: HK$2.40) Investment Thesis Shanghai Electric is one of the largest equipment manufacturing conglomerates in China, with high-efficiency and clean energy as well as new energy equipment, which represents its core business segments. Our bearish view on Shanghai Electric rests on the expected weak demand for coal-fired equipment as China: 1) relies less and less on coal due to pollution concerns, and 2) has slower power demand growth going forward as the nation shifts away from an FAI growth model. Valuation The stock is trading at 11x /11x 2014E/15E P/E, the highest among listed peers, and 0.8x/0.7x 2014E/15E P/BV. Our Dec-14 price target of HK$2.40 is based on 8.6x the four-year forward ‘throughthe-cycle’ EPS in 2013-15E, which is one SD below the five-year historical average one-year forward P/E. Our PT is equivalent to 9x/9x 2014E/15E P/E. Risks to Rating and Price Target Upside risks to our UW rating and PT include: higher-than-expected margins on coal-fired units as management creates more production cost savings through: 1) internal cost control, and 2) lower procurement costs from suppliers.
Singapore Airlines (Overweight; Price Target: S$13.00) Investment Thesis SIA’s valuation remains attractive, in our view, at 0.9x P/B, close to its historical trough valuation. We think level this is unwarranted as we expect the industry demandsupply growth to gradually improve, driving the sector and SIA’s earnings recovery. Net cash (after paying out the final + special DPS) still amounts to 29% of current market cap and SIA’s “liquidation value” is S$13.3/share. If SIA pays out one-third of its current net cash balance, the yield would be 10%. Alternatively, it could partly divest its stake in SIA Eng via a dividend in specie to help facilitate SIA Eng’s acquisition of more third-party airline MRO work. Reducing its 78% stake in SIA Eng to 51% would imply a 13% yield. Stay OW – SIA is one of our top sector picks. Valuation Our Jun-15 price target of S$13 is based on 1.1x P/BV, in line with SIA's historical average valuation over the past 10 years. This is well supported by SIA’s “liquidation” value of cS$13.3/shr. Risks to Rating and Price Target Key downside risks: deterioration in the macro environment, rising fuel prices, worse-than-expected competition from low-cost carriers and Middle Eastern carriers, value-destroying M&A, and a weaker Singapore dollar.
51
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Sinopec Shanghai Petrochemical (Underweight; Price Target: HK$1.70) Investment Thesis Sinopec Shanghai Petrochemical is one of the largest integrated refining and petrochemical companies in China. It is a subsidiary of Sinopec Corp (386 HK). It produces refined oil products, intermediate, petrochemicals, synthetic resins and synthetic fibers. The company recently completed the 6th Phase expansion and upgrading program which increases its effective refining capacity to 16mn ton/yr from 12 mn ton/yr. Shanghai Petrochemical is currently capable of producing gasoline meeting Euro V (similar to China standards), and diesel of Euro IV and Euro V qualities. Key points to our negative view include: Continued high capex spending limiting FCF potential – With the company’s Rmb2.0bn capex plan in 2014 limiting positive FCF, we believe that the company has increasing risks of not being able to support dividend payouts in 2014. Weakness in petrochemicals to continue; limiting refining upside – With petrochemicals pricing weak going into 2014 and limited improvements forecasted, we believe that the commodity chemical segments will remain a drag on SPC’s earnings. Valuation Our Dec-14 PT of HK$1.7 is based on DCF. We have applied a WACC of 11.2% and perpetual growth rate of 2% in our DCF calculations. WACC Perpetual Grow th Rate NPV of Cash Flow NPV of Perpetual Cash flow
11.20% 2% 4,146 18,530
Total Value of the firm
22,677
Net Cash (debt)
(7,589)
Minority Interest Equity Value of the firm Share Value from DCF (RMB) No. of shares outstanding
(259) 14,829 1.37 10,800
RMB/HKD
0.81
Share value from DCF (HKD)
1.70
Source: J.P. Morgan estimates.
Risks to Rating and Price Target Risk to our price target include improving petrochemicals pricing, better than expected improvements in GRM’s on the shift to higher spec gasoline/diesel, asset injections from Sinopec, and the A-H Through-train program shrinking the discount of SPC’s H-share listing vs. A-shares.
52
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Sun Art Retail Group Limited (Underweight; Price Target: HK$8.60) Investment Thesis We believe Sun Art does benefit from its leading competitive position, strong execution and strong management team. However, Sun Art is trading on elevated earnings multiples relative to global peers. With limited short term catalysts and risk to longer term margins, we believe there is risk of earnings multiple contraction. Valuation Our Jun-15 price target is HK$8.6 per share. Our price target is based a target P/E of ~18x and our earnings forecasts for the year ending Jun-16. Our target P/E is in line with the average one-year forward trading multiple for international food retail names (inclusive of trading multiples for South East Asian food retail names). Risks to Rating and Price Target Upside risks to our view include: (1) Any upturn in the food and general merchandise retail environment in China; (2) Any change in consumer behaviour such that foot traffic for hypermarkets improve; (3) Any weakness in the growth of e-commerce in China; (4) Better than expected gross margin expansion; (5) Improvement in staff productivity such that cost increase pressure is mitigated.
Sun Hung Kai Properties (Overweight; Price Target: HK$128.00) Investment Thesis SHKP is one of the leading developers in Hong Kong and should face the same headwinds as other developers. However, the company’s marketing track record has demonstrated its superiority over competitors, and we believe its decentralized shopping malls will face less pressure from the slowdown in marginal tourist spending. SHKP’s China revenue growth is also expected to post an impressive CAGR of 35% in FY13, to HK$2bn. We believe market focus will start shifting to its China expansion potential, going forward. Valuation Our Dec-14 PT is based on a 27% discount to Dec-14 NAV, which is 0.5 SD below the long-term average. We believe SHKP is unlikely to revert to its long-term mean of a 16% discount to NAV until allegations against the three executive directors (including the two Chairmen) are settled. Our target NAV discount factors in the overhang of the hearing.
53
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Dec-14
% of
HK$MM
HK$/sh
GAV
6,500
2.4
1.2%
Lux Residential
53,005
19.6
9.4%
Mass Residential
38,700
14.3
6.9%
Retail
0
0.0
0.0%
Office
1,871
0.7
0.3%
0
0.0
0.0%
93,575
34.6
16.6%
Hong Kong properties Agricultural Land Property under development
Ind/others Property investment Lux Residential
23,749
8.8
4.2%
Office
87,850
32.5
15.6%
Retail
136,124
50.3
24.1%
5,386
2.0
1.0%
Office under development
204
0.1
0.0%
Retail under development
3,545
1.3
0.6%
784
0.3
0.1%
7,068
2.6
1.3%
264,710
97.9
46.9%
Industrial
Ind/others under development Car Park
Hotel HK Properties total
23,746
8.8
4.2%
388,531
143.7
69%
51,710
19.1
9.2%
China properties Development property Property investment Lux Residential
4,909
1.8
0.9%
Office
31,344
11.6
5.6%
Retail
52,290
19.3
9.3%
88,542
32.7
15.7%
Hotel
1,621
0.6
0.3%
141,873
52.5
25%
5,289
2.0
0.9%
5,289
2.0
0.9%
Transport Intl (62 HK)
1,948
0.7
0.3%
SmarTone (315 HK)
5,758
2.1
1.0%
Sunev ision (8008 HK)
8,597
3.2
1.5%
Other financial assets
4,080
1.5
0.7%
801
0.3
0.1%
21,184
7.8
3.8%
7,000
2.6
1.2%
563,878
208.5
100%
(79,416)
(29.4)
(8,700)
(3.2)
475,762
176
China properties total Singapore properties ION Orchard (Retail) Singapore properties total Listed investments
Loan receiv ables Listed investment total Other business (7x P/E blended) Gross Asset Value Net Debt Associated debt NAV Number of shares (MM) NAV per share
2,705 176
Source: J.P. Morgan estimates.
Risks to Rating and Price Target Downside risks to our rating and price target include a further slowdown in home sales, a slowdown of rental growth off a higher base and further aggressive landbanking, which could raise gearing to the mid-20% range.
54
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Tata Steel Ltd (Overweight; Price Target: Rs620.00) Investment Thesis TATA remains our top pick despite the stock being up 30%+ since mid-March vs. the SENSEX up 8% over the same period. In our view, expectations of a potential improvement in European metals demand are positive for TATA’s European operations. We believe an improving Europe over the next two years implies further a re-rating of stock. In addition, we believe domestic demand should remain stable with limited new capacity addition from major players. Potential investment sales to de-lever could provide further upside. Valuation Our Mar15 PT of Rs620 is based on SOTP. We use a target multiple for TATA Europe of 6x EV/EBITDA, given the visibility in Europe steel demand. We estimate TATA is trading at a significant discount to MT on headline FY15E estimates (TATA trades at 5.2x FY15 EV/EBITDA vs. MT at 5.8x (using Bloomberg consensus estimates for MT) and the discount widens if we were to adjust for a) the CWIP sitting on the books relating to Orissa and b) the TATA Motors stake. Adjusted for CWIP, TATA trades at 4.2x FY15E EV/EBITDA. In our view, the discount between TATA and MT should narrow, given TATA is also levered to a European recovery. Europe India Asia Total EV Net Debt CWIP Pension Deficit Derived Equity Value No of Shares (MM) Target Price (Rs/share)
Multiple (x) 6.0 5.7 5.0
FY 16 EBITDA (Rs bn) 57.3 148.8 12.0
EV (Rs bn) 343.9 848.0 60.0 1,252 617 34 43 626 1,013.8 620
Source: Company reports and J.P. Morgan estimates. Note: Adjusted for CWIP.
Risks to Rating and Price Target Key risks (other than macro economic weakness) include a sharp decline in India profitability, weakness in steel price and a decline in European demand.
55
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Tenaga (Overweight; Price Target: M$16.50) Investment Thesis Tenaga remains one of our top picks in the region, as we see it as a beneficiary of: (1) a benign fuel cost environment; (2) solid volume growth; and (3) potential tariff reset every 6 months potentially eliminating fuel cost risk. Valuation Our Aug-14 PT is based on a 10-year DCF assuming a WACC of 7.0%. Our DCF assumes long-term average power demand growth of 4.1% pa (vs. the 10-year historical average of 5.1% pa up to 2010). Our key DCF assumptions appear below: WACC Terminal “g” Discounted value Terminal value Net debt Less: Other liabilities @ 25% NPV Price target (per share)
7.0% 2.00% 30,353 80,516 (12,857) (4,469) 93,543 16.5
Source: J.P. Morgan estimates.
Risks to Rating and Price Target The key downside risk is a faster-than-expected increase in coal costs without an offsetting increase in tariffs, as even though a fuel pass-through formula (reviewed every six months) is in place, the quantum of increase is still subject to Cabinet approval.
TSMC (Overweight; Price Target: NT$150.0) Investment Thesis TSMC’s strong guidance for 2014 (we model 23% revenue growth) indicate healthy inventory pickup in 1H14 and strong 20nm share gains (from Apple) in 2H14. We believe QCOM should pick up the slack from Apple in 20nm from late 4Q14 with its 64bit high-end chipsets ramping up. TSMC’s early 2015 capex outlook (flat yoy) also suggest a strong growth outlook in 2015 with continued 20nm traction and early 16nm FinFET revenues. TSMC indicated that GMs should stay high through the year and could exceed 50% if utilizations hit 100% (likely in 3Q14) due to ASP increase and cost down on variable costs. Even with initial 20nm ramp being a headwind for margins, TSMC remains confident on GM improvement in 2014 – which bodes well for margin stability even in 2015 when competition is likely to pick up. TSMC’s 16nm FinFET revenues will start ramping only in 2H15 (previously 1H15); the underlying reason is not an issue with process readiness, but customers’ strong demand for 20nm. QCOM’s late decision to introduce 20nm 64bit chipsets (in response to Apple A7) is likely the main reason for prolonged 20nm demand and delay in 16nm FinFET ramp. TSMC is still ready with 16 FinFET process with 15 tape-outs in 2014 and 45 tape-outs in 2015. If 20nm node lasts longer, this benefits TSMC since key competitors are mostly skipping 20nm for Foundry.
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Valuation Our Dec-14 PT of NT$150 is based on 15x FY15E EPS, the long-run average P/E, or 3.2 FY15E P/BV for a company generating 22% ROE, at the high end of its historical price-to-book range. Risks to Rating and Price Target Key downside risks to our rating and PT include: (1) a slowdown in mobile device growth; and (2) Intel’s abandoning ATOM and stepping headlong into ARM Foundry.
Wintek (Underweight; Price Target: NT$7.00) Investment Thesis Wintek is facing tough price competition from its peers. The touch panel industry now favors cost over value, with the technology trend moving toward low-cost standardized products. The company's bottom line may not return to the black before 2016, according to our estimates, and the balance sheet is highly leveraged, implying pressing needs for other sources of capital. Valuation Our Dec-14 price target of NT$7is based on 0.5x 2013E P/B, historical trough. Based on our estimates, the company’s bottom line is unlikely to return to the black before 2016. Given the eroding book value and highly-leveraged balance sheet, we believe the current valuation is demanding. Risks to Rating and Price Target Key upside risks include: 1.
New order wins from non-Apple smartphones, tablets, and touch-NBs, including Samsung;
2.
Better-than-expected margins due to yield-rate improvement; and
3.
Stronger-than-expected touch-NB demand.
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Asia Pacific Equity Research 21 May 2014
Hyundai Motor – Rating and price target changes Company Hyundai Motor
Ticker
Date
Rating
Price target (W)
005380 KS
3-Apr-11
OW
250,000
29-Apr-11
OW
300,000
29-Jul-11
OW
300,000
28-Oct-11
OW
280,000
27-Jan-12
OW
280,000
27-Apr-12
OW
310,000
3-Jun-12
OW
310,000
4-Jul-12
OW
310,000
27-Jul-12
OW
310,000
26-Oct-12
OW
310,000
4-Nov-12
OW
290,000
2-Dec-12
OW
290,000
11-Jan-13
OW
290,000
24-Jan-13
OW
290,000
24-Apr-13
OW
250,000
25-Jul-13
OW
280,000
24-Oct-13
OW
330,000
1-Dec-13
OW
330,000
7-Jan-14
OW
330,000
Source: J.P. Morgan; Bloomberg
GS E&C—Rating and price target changes Company GS E&C
Source: J.P. Morgan; Bloomberg
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Ticker
Date
Rating
Price target (W)
006360 KS
10/12/2012
N
80,000
11/8/2012
N
80,000
1/24/2013
N
67,000
2/7/2013
N
67,000
4/10/2013
N
54,000
4/19/2013
UW
29,000
7/25/2013
UW
29,000
10/25/2013
UW
29,000
4/30/2014
UW
27,000
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Hanjin Shipping – Rating and price target changes Company Hanjin Shipping
Ticker 117930 KS
Date 12-Sep-07 27-Feb-08 13-May-08 17-Sep-08 10-May-09 9-Aug-09 15-Nov-09 4-Feb-10 10-May-10 5-Aug-10 4-Nov-10 12-May-11 12-Aug-11 14-Aug-11 6-Nov-11 30-Jan-12 11-May-12 2-Aug-12 5-Nov-12 30-Jan-13 10-May-13 11-Aug-13 14-Oct-13 17-Nov-13 21-Mar-14 16-May-14
Rating Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Underweight Neutral Neutral Neutral Neutral Neutral Neutral Underweight Underweight Underweight
Price target (W) 40,000 25,000 25,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 28,000 28,000 28,000 17,000 10,000 11,800 12,000 14,000 13,000 13,000 13,000 13,000 8,000 5,000 4,100 4,000
Source: J.P. Morgan; Bloomberg
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Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
Team List Name Aditya Srinath, CFA Adrian Mowat Ajay Mirchandani Akira Kishimoto Alvin Kwock Anne Jirajariyavech Bharat Iyer Boris Kan Corrine Png
Phone (62-21) 5291-8573 (852) 2800-8599 (65) 6882-2419 (81-3) 6736-8646 (852) 2800-8533 (66-2) 684-2684 (91-22) 6157-3600 (852) 2800-8573 (65) 6882-1514
Email [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]
Bloomberg Page JPMA SRINATH JPMA MOWAT JPMA MIRCHANDANI JPMA KISHIMOTO JPMA KWOCK JPMA JIRAJARIYAVECH JPMA IYER JPMA KAN JPMA PNG
Cusson Leung Daniel Kang Ebru Sener Kurumlu Elaine Wu Gokul Hariharan Harsh Wardhan Modi Hoy Kit Mak James R. Sullivan, CFA Jason Steed Jeanette Yutan Jemmy S Huang JJ Park Josh Klaczek Joy Wang Karen Li, CFA Michelle Wei, CFA Narci Chang Nick Lai Pinakin Parekh, CFA Princy Singh Rajiv Batra Ryan Li, CFA Scott L Darling Scott Manning Scott YH Seo Shen Li, CFA Sokje Lee Sumit Kishore Tony SK Lee Wan Sun Park William Chen
(852) 2800-8526 (852) 2800 8570 (852) 2800-8521 (852) 2800-8575 (852) 2800-8564 (65) 6882- 2450 (60-3) 2718-0713 (65) 6882-2374 (61-2) 9003-8609 (63-2) 878-1131 (886-2) 2725-9870 (822) 758-5717 (852) 2800-8534 (65) 6882-2312 (852) 2800-8589 (852) 2800-8562 (886-2) 2725-9899 (886-2) 2725-9864 (91-22) 6157-3588 (65) 6882-2746 (91-22) 6157-3568 (852) 2800-8529 (852) 2800 8578 (61-2) 9003-8643 (82-2) 758 5759 (852) 2800 8523 (82-2) 758-5729 (91-22) 6157-3581 (852) 2800-8857 (82-2) 758-5722 (886-2) 2725-9871
[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]
JPMA LEUNG JPMA KANG JPMA KURUMLU JPMA EWU JPMA HARIHARAN JPMA MODI JPMA MAK JPMA SULLIVAN JPMA STEED JPMA YUTAN JPMA JHUANG JPMA PARK JPMA KLACZEK JPMA WANG JPMA KLI JPMA WEI JPMA NCHANG JPMA LAI JPMA PAREKH JPMA SINGH JPMA BATRA JPMA RLI JPMA DARLING JPMA MANNING JPMA SEO JPMA SHLI JPMA SOKJELEE JPMA KISHORE JPMA TONYLEE JPMA WPARK JPMA WCHEN
60
Legal Entity PT J.P. Morgan Securities Indonesia J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities Singapore Private Limited JPMorgan Securities Japan Co., Ltd. J.P. Morgan Securities (Asia Pacific) Limited JPMorgan Securities (Thailand) Limited J.P. Morgan India Private Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited, J.P. Morgan Securities Singapore Private Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities Singapore Private Limited JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X) J.P. Morgan Securities Singapore Private Limited J.P. Morgan Securities Australia Limited J.P. Morgan Securities Philippines, Inc. J.P. Morgan Securities (Taiwan) Limited J.P. Morgan Securities (Far East) Ltd, Seoul Branch J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities Singapore Private Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Taiwan) Limited J.P. Morgan Securities (Taiwan) Limited J.P. Morgan India Private Limited J.P. Morgan Securities Singapore Private Limited J.P. Morgan India Private Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities Australia Limited J.P. Morgan Securities (Far East) Ltd, Seoul Branch J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Far East) Ltd, Seoul Branch J.P. Morgan India Private Limited J.P. Morgan Securities (Asia Pacific) Limited J.P. Morgan Securities (Far East) Ltd, Seoul Branch J.P. Morgan Securities (Taiwan) Limited
Sunil Garg (852) 2800-8518 [email protected]
Asia Pacific Equity Research 21 May 2014
J.P Morgan’s Asia Analyst Focus List (AFL) is a selection of high-conviction stocks collaboratively chosen by each Country and Sector research team across Asia-Pacific. The AFL includes Overweight- and Underweight-rated stocks, Overweight having superior outperformance prospects in a team’s universe over the horizon of rating (6-12 months), and Underweight stocks having among the poorer relative performance prospects over the horizon of rating (6-12 months). The aim is to have one Overweight and one Underweight idea from each Research team in the AFL. Analysts can add or delete recommendations at any time and changes will be published, with the analyst’s rationale, on J.P. Morgan Markets. Please check J.P. Morgan Markets http://www.jpmorganmarkets.com for the most up-todate AFL at any time, or contact your J.P. Morgan representative. The Analyst Focus List is not a model portfolio. Please refer to specific company research for the fundamental investment thesis for each stock included in this list as well as the analysts’ complete views. If a stock is placed under research restriction, J.P. Morgan may remove the stock from the AFL pursuant to applicable law and/or J.P. Morgan policy without any further notice. Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan's website https://mm.jpmorgan.com/disclosures/company. Total returns exclude commissions. Past results are not indicative of future performance. Additional information available upon request. Japanese stocks included in the Asia AFL are chosen according to the Asia AFL methodology above, independent of the Japanese Analyst Focus List (Japan AFL). Japan stocks are not included at the Country Team level, but may appear in Sector Team selections. To view the Japan AFL and its methodology, click here: Japan Analyst Focus List (Japan AFL)
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Asia Pacific Equity Research 21 May 2014
Companies Discussed in This Report (all prices in this report as of market close on 21 May 2014, unless otherwise indicated) 21Vianet Group Inc. (VNET/$25.62[20 May 2014]/Overweight), ASE (2311.TW/NT$36.20/Overweight), ASUSTek Computer (2357.TW/NT$305.00/Underweight), Astro Malaysia Holdings Bhd (ASTR.KL/M$3.38[20 May 2014]/Overweight), BYD Company Limited (1211.HK/HK$39.35[20 May 2014]/Overweight), Beijing Capital International Airport (0694.HK/HK$5.05[20 May 2014]/Overweight), Brilliance China Automotive (1114.HK/HK$12.32[20 May 2014]/Overweight), British American Tobacco (M) Bhd (BATO.KL/M$61.30[20 May 2014]/Underweight), CJ Cheiljedang (097950.KS/W326000/Underweight), CJ Hellovision (037560.KS/W15150/Neutral), CJ O Shopping (035760.KQ/W375000/Overweight), COSCO Pacific (1199.HK/HK$10.38[20 May 2014]/Overweight), CapitaCommercial Trust (CACT.SI/S$1.62[20 May 2014]/Overweight), Changsha Zoomlion Heavy Industry (1157.HK/HK$5.15[20 May 2014]/Neutral), Chroma ATE (2360.TW/NT$75.20/Overweight), Digi (DSOM.KL/M$5.35[20 May 2014]/Underweight), Dongbu Insurance (005830.KS/W55100/Underweight), East Japan Railway (9020) (9020.T/¥7540/Overweight), Far EasTone Telecom (4904.TW/NT$67.10/Underweight), GS Engineering & Construction (006360.KS/W36850/Underweight), Hanjin Shipping Co Ltd (117930.KS/W6090/Underweight), Hankook Tire (161390.KS/W59600/Overweight), Hutchison Port Holdings Trust (HPHT.SI/$0.71[20 May 2014]/Overweight), Hyundai Department Store (069960.KS/W131500/Overweight), Hyundai Development Company (012630.KS/W25800/Overweight), Hyundai Mipo Dockyard (010620.KS/W152000/Overweight), Hyundai Motor Company (005380.KS/W230500/Overweight), Hyundai Steel Company (004020.KS/W67100/Overweight), KT&G Corp (033780.KS/W85600/Neutral), LG Display (034220.KS/W28650/Overweight), Lite-On Technology Corporation (2301.TW/NT$47.15/Underweight), Lonking Holdings Ltd (3339.HK/HK$1.37[20 May 2014]/Neutral), Lotte Chemical Corp (011170.KS/W160500/Underweight), Malaysia Airports Holdings Berhad (MAHB.KL/M$7.40[20 May 2014]/Overweight), Mapletree Commercial Trust (MACT.SI/S$1.33[20 May 2014]/Overweight), Mazda Motor (7261) (7261.T/¥411/Overweight), Mitsui Engineering & Shipbuilding (7003) (7003.T/¥180/Overweight), NCSoft (036570.KS/W178000/Overweight), Naver (035420.KS/W773000/Overweight), Nidec (6594) (6594.T/¥5522/Overweight), PT XL Axiata Tbk (EXCL.JK/Rp5400[20 May 2014]/Underweight), Pegatron Corp (4938.TW/NT$52.00/Underweight), Quanta Computer Inc. (2382.TW/NT$80.50/Overweight), SANY Heavy Equipment International Holdings Company (0631.HK/HK$1.76[20 May 2014]/Neutral), SK Broadband (033630.KS/W3745/Neutral), SK Telecom (017670.KS/W228000/Overweight), SK hynix (000660.KS/W41900/Overweight), Samsung Card (029780.KS/W38850/Overweight), Samsung Engineering (028050.KS/W84700/Underweight), Samsung Fire & Marine Insurance (000810.KS/W260000/Overweight), Sapphire Technology (123260.KQ/W32500/Overweight), Seoul Semiconductor (046890.KQ/W37950/Overweight), Sheng Siong Group (SHEN.SI/S$0.62[20 May 2014]/Overweight), Shinhan Financial Group (055550.KS/W46500/Overweight), Suzuki Motor (7269) (7269.T/¥2823/Overweight), TSMC (2330.TW/NT$120.5/Overweight), Tanger Factory Outlet Centers (SKT/$35.36[20 May 2014]/Neutral), Tenaga (TENA.KL/M$12.28[20 May 2014]/Overweight), Total Access Communication (DTAC.BK/Bt121.50[20 May 2014]/Neutral), United Tractors (UNTR.JK/Rp21175[20 May 2014]/Neutral), Weichai Power (2338.HK/HK$26.85[20 May 2014]/Overweight), West Japan Railway (9021) (9021.T/¥4213/Neutral), Wilmar International Limited (WLIL.SI/S$3.20[20 May 2014]/Underweight), Yamaha Motor (7272) (7272.T/¥1522/Underweight), Zhejiang Expressway (0576.HK/HK$7.21[20 May 2014]/Overweight), Zhengzhou Coal Mining Machinery Group Company (0564.HK/HK$4.39[20 May 2014]/Neutral), iiNet (IIN.AX/A$6.91/Underweight) Disclosures This report is a product of the research department's Global Equity Derivatives and Quantitative Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions. Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per 62
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Asia Pacific Equity Research 21 May 2014
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.
Important Disclosures
Market Maker: JPMS makes a market in the stock of 21Vianet Group Inc..
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for CJ O Shopping, GS Engineering & Construction, Hyundai Motor Company, Shinhan Financial Group, Wilmar International Limited, Malaysia Airports Holdings Berhad within the past 12 months.
Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Hyundai Mipo Dockyard.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: CJ Cheiljedang, CJ O Shopping, Dongbu Insurance, GS Engineering & Construction, Hanjin Shipping Co Ltd, Hankook Tire, Hyundai Mipo Dockyard, Hyundai Motor Company, LG Display, Lotte Chemical Corp, Mazda Motor (7261), Mitsui Engineering & Shipbuilding (7003), Naver, NCSoft, Samsung Card, Samsung Engineering, Samsung Fire & Marine Insurance, Shinhan Financial Group, SK hynix, SK Telecom, Yamaha Motor (7272), Hyundai Steel Company, Tenaga, British American Tobacco (M) Bhd, CapitaCommercial Trust, Wilmar International Limited, Quanta Computer Inc., TSMC, Far EasTone Telecom, Brilliance China Automotive, Suzuki Motor (7269), Nidec (6594), Lite-On Technology Corporation, ASUSTek Computer, Pegatron Corp, ASE, BYD Company Limited, Changsha Zoomlion Heavy Industry, Lonking Holdings Ltd, Zhengzhou Coal Mining Machinery Group Company, United Tractors, COSCO Pacific, Hutchison Port Holdings Trust, Malaysia Airports Holdings Berhad, Total Access Communication, PT XL Axiata Tbk, Digi, Astro Malaysia Holdings Bhd, SK Broadband, CJ Hellovision, 21Vianet Group Inc..
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: CJ O Shopping, GS Engineering & Construction, Hyundai Motor Company, Naver, Shinhan Financial Group, British American Tobacco (M) Bhd, Wilmar International Limited, Quanta Computer Inc., Zhengzhou Coal Mining Machinery Group Company, United Tractors, COSCO Pacific, Malaysia Airports Holdings Berhad, CJ Hellovision.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: CJ Cheiljedang, Dongbu Insurance, Hanjin Shipping Co Ltd, Hankook Tire, Hyundai Mipo Dockyard, Hyundai Motor Company, LG Display, Lotte Chemical Corp, Mitsui Engineering & Shipbuilding (7003), Samsung Engineering, Samsung Fire & Marine Insurance, Shinhan Financial Group, Yamaha Motor (7272), Hyundai Steel Company, Tenaga, British American Tobacco (M) Bhd, Wilmar International Limited, Quanta Computer Inc., TSMC, Suzuki Motor (7269), Nidec (6594), Lite-On Technology Corporation, Pegatron Corp, ASE, Changsha Zoomlion Heavy Industry, United Tractors, PT XL Axiata Tbk.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Hankook Tire, Hyundai Motor Company, Shinhan Financial Group, SK Telecom, Wilmar International Limited, Quanta Computer Inc., TSMC, Suzuki Motor (7269), Nidec (6594), Lite-On Technology Corporation, Pegatron Corp, ASE, Changsha Zoomlion Heavy Industry, United Tractors.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking CJ O Shopping, GS Engineering & Construction, Hyundai Motor Company, Naver, Shinhan Financial Group, British American Tobacco (M) Bhd, Wilmar International Limited, Quanta Computer Inc., Zhengzhou Coal Mining Machinery Group Company, United Tractors, COSCO Pacific, Malaysia Airports Holdings Berhad, CJ Hellovision.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from CJ O Shopping, GS Engineering & Construction, Hyundai Motor Company, Mazda Motor (7261), Naver, Shinhan Financial Group, British American Tobacco (M) Bhd, Wilmar International Limited, Quanta Computer Inc., TSMC, Nidec (6594), Zhengzhou Coal Mining Machinery Group Company, United Tractors, COSCO Pacific, Malaysia Airports Holdings Berhad, CJ Hellovision.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from CJ Cheiljedang, Dongbu Insurance, Hanjin Shipping Co Ltd, Hankook Tire, Hyundai Mipo Dockyard, Hyundai Motor Company, LG Display, Lotte Chemical Corp, Mitsui Engineering & Shipbuilding (7003), Samsung Engineering, Samsung Fire & Marine Insurance, Shinhan Financial Group, Yamaha Motor (7272), Hyundai Steel Company, Tenaga, British American Tobacco (M) Bhd, Wilmar International Limited, Quanta Computer Inc., TSMC, Suzuki Motor (7269), Nidec (6594), Lite-On Technology Corporation, Pegatron Corp, ASE, Changsha Zoomlion Heavy Industry, United Tractors, PT XL Axiata Tbk.
"J.P. Morgan Securities plc and\or its affiliates (“J.P. Morgan”) has been appointed as the placement agent to Malaysia Airports Holdings Berhad (“MAHB”) on its proposed private placement as announced on 23 December 2013. J.P. Morgan will be receiving fees for so acting. J.P. Morgan and its affiliates may perform, or may seek to perform, other financial or advisory services for MAHB or its affiliates and may have other interests in or relationships with MAHB or its affiliates, and receive fees, commissions or other 63
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compensation in such capacities. This research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No representation is made that it is accurate or complete."
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J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*
Overweight (buy) 44% 58% 45% 78%
Neutral (hold) 44% 49% 48% 67%
Underweight (sell) 11% 40% 7% 60%
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected]. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Conflict of Interest This research contains the views, opinions and recommendations of J.P. Morgan research analysts. J.P. Morgan has adopted research conflict of interest policies, including prohibitions on non-research personnel influencing the content of research. Research analysts still may speak to J.P. Morgan trading desk personnel in formulating views, opinions and recommendations. Trading desks may trade, or have traded, as principal on the basis of the research analysts’ views and research. Therefore, this research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your 64
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Asia Pacific Equity Research 21 May 2014
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Asia Pacific Equity Research 21 May 2014
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