Charting the right course for 2015asiaresearch.daiwacm.com/eg/cgi-bin/files/China... · 2015. 1. 14. · Charting the right course for 2015 • With the government focusing on improving

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14 January 2015

Charting the right course for 2015

• With the government focusing on improving living standards, China’s economic growth looks set to slow further in 2015

• We recommend investors focus on underdeveloped sectors and/or those in which the government will continue to invest

• Shifting target prices and ratings to 12-month basis. Our top Buys, in order, are CSC, CSCI, Zhuzhou CSR; BCIA is rated Sell

China Transportation and Industrial Sector

Industrials / China

China Transportation and Industrial Sector 14 January 2015

Contents

Look for quality, not quantity ..................................................................................................... 6 Logistics: still bullish .................................................................................................................. 12 Railways: investment to continue .............................................................................................. 16 Marine: beneficiary of lower bunker prices and improving transpacific trade ......................... 21 Aviation: low jet-fuel price partly reflected, look for fundamentals ......................................... 25 Expressways: be selective ........................................................................................................... 31 Appendix .................................................................................................................................... 34 Company Section

Logistics China South City ..................................................................................................................... 35 Sinotrans ................................................................................................................................ 38 Kerry Logistics Network ......................................................................................................... 41 Shenzhen International ......................................................................................................... 44 Global Logistic Properties ....................................................................................................... 47 SITC International ................................................................................................................. 50

Railway construction and equipment Zhuzhou CSR Times Electric .................................................................................................. 53 CSR Corp ................................................................................................................................. 56 China Railway Group .............................................................................................................. 59 China Railway Construction .................................................................................................. 62 China Communications Construction .................................................................................... 65

Marine China International Marine Containers ................................................................................ 68 Orient Overseas International ................................................................................................ 71 China Shipping Container Lines ............................................................................................. 74 China Merchants Holding International ................................................................................ 77 COSCO Pacific ........................................................................................................................ 80

Aviation AviChina Industry & Technology ........................................................................................... 83 TravelSky Technology ............................................................................................................ 86 Air China ................................................................................................................................ 89 China Eastern Airlines ........................................................................................................... 92 China Southern Airlines .......................................................................................................... 95 Cathay Pacific Airways ........................................................................................................... 98 Beijing Capital International Airport ................................................................................... 101

Expressways Yuexiu Transport Infrastructure .......................................................................................... 104 Jiangsu Expressway .............................................................................................................. 107 Zhejiang Expressway ............................................................................................................ 110 Shenzhen Expressway ........................................................................................................... 113

Infrastructure Construction China State Construction International ............................................................................... 116


■ What's new

We believe 2015 will be a year of urbanisation and sustainable (slower) economic growth for China. We look for the government to continue supporting industries that promote better living standards and encourage domestic consumption, which is seen as central to the long-term transformation of the economy. In this context, we assess the 2015 outlooks for the logistics, railways, shipping, aviation and expressway segments. ■ What's the impact

In our view, the government will continue investing in sectors that can bring long-term benefits to society (such as railways and affordable housing), and at the same time soften the negative impact on employment of slower GDP growth. And we believe it will support industries that can facilitate domestic consumption and better city planning (such as logistics), as well as emerging industries that can enhance China’s competitiveness in technology (such as general aviation).

We expect oil prices to stay at low levels, allowing transportation companies to improve their profitability in 2015. However, as CNY depreciation appears likely by end-2015, we believe shipping companies will appeal more than airlines, given shipping stocks’ lagged price movements. ■ What we recommend

We like the logistics segment the most, as this is an undeveloped area that is a bottleneck to domestic consumption and e-commerce. Our top pick is China South City (CSC) (1668 HK, HKD3.00, Buy [1]), which we believe stands to benefit from the growing demand for logistics facilities. For bottom-fishing, we recommend China State Construction International (CSCI) (3311 HK, HKD11.16, Buy [1]), which should benefit from strong government support for affordable housing, and whose contract growth from Hong Kong looks set to recover in 2015 on the launch of more projects. We like the railways segment (preferring equipment over construction), which stands to ride on the tide of investment by the government. We see Zhuzhou CSR (3898 HK, HKD44.70, Buy [1]) being the biggest beneficiary of the planned merger of CSR (1766 HK, HKD9.57, Buy [1]) and CNR (6199 HK, Non-Rated).

But we would avoid aviation play Beijing Capital International Airport (BCIA) (694 HK, HKD7.20, Sell [5]), as we think investors are overly optimistic about the new Beijing airport. For trading on oil-price weakness, we recommend shipping play Orient Overseas International (OOIL) (316 HK, HKD49.05, Buy [1]), as it should benefit the most from an upturn in transpacific trade in 2015. The main risks for both sectors: slower-than-expected investment plans and a faster-than-expected recovery in oil prices. ■ How we differ

We are more positive than the market on logistics, as we see continuing benefits from the urbanisation; and we are more negative on the airlines, as share prices have already rallied strongly.

+x

14 January 2015

Charting the right course for 2015

With the government focusing on improving living standards,

China’s economic growth looks set to slow further in 2015

We recommend investors focus on underdeveloped sectors

and/or those in which the government will continue to invest

Shifting target prices and ratings to 12-month basis. Our top

Buys, in order, are CSC, CSCI, Zhuzhou CSR; BCIA is rated Sell

China Transportation and Industrial Sector

Key stock calls

Source: Daiwa forecasts.

Industrials / China

Kelvin Lau

(852) 2848 4467

[email protected]

China Transportation and

Industrial Research Team

New Prev.

China South City (1668 HK)

Rating Buy Buy

Target 5.40 6.30

Upside p 80%

China State Construction International (3311 HK)

Rating Buy Buy

Target 17.40 16.90

Upside p 55.9%

Zhuzhou CSR Times Electric (3898 HK)

Rating Buy Buy

Target 58.00 58.00

Upside p 29.8%

Beijing Capital International Airport (694 HK)

Rating Sell Hold

Target 6.10 5.10

Downside q 15.3%


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Source: Bloomberg, Daiwa forecasts

Sector stocks: key indicators

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

Air China 753 HK 7.08 Hold Buy 7.20 5.30 35.8% 0.226 0.344 (34.2%) 0.589 0.479 23.0%

AviChina Industry & Technology 2357 HK 5.10 Buy Buy 6.40 5.00 28.0% 0.118 0.132 (11.0%) 0.132 0.172 (23.4%)

Beijing Capital International Airport 694 HK 7.20 Sell Hold 6.10 5.10 19.6% 0.325 0.316 2.9% 0.370 0.361 2.6%

Cathay Pacific Airways 293 HK 17.48 Hold Hold 16.90 15.70 7.6% 0.704 0.615 14.4% 1.349 0.973 38.7%

China Communications Construction 1800 HK 9.77 Hold Hold 9.30 9.30 0.0% 0.797 0.797 0.0% 0.874 0.874 0.0%

China Eastern Airlines 670 HK 3.93 Hold Buy 3.80 2.80 35.7% 0.178 0.253 (29.4%) 0.455 0.337 34.9%

China International Marine Containers 2039 HK 17.04 Buy Buy 23.00 22.00 4.5% 0.858 0.858 0.0% 0.971 0.999 (2.8%)

China Merchants Holding International 144 HK 25.95 Buy Buy 32.00 31.00 3.2% 1.774 1.774 0.0% 1.928 1.928 0.0%

China Railway Construction 1186 HK 9.67 Buy Buy 11.70 11.70 0.0% 0.935 0.935 0.0% 0.898 0.898 0.0%

China Railway Group 390 HK 6.19 Buy Buy 7.50 7.50 0.0% 0.519 0.519 0.0% 0.579 0.579 0.0%

China Shipping Container Lines 2866 HK 2.52 Outperform Hold 2.90 2.20 31.8% (0.043) (0.076) n.a. 0.089 0.051 74.1%

China South City 1668 HK 3.00 Buy Buy 5.40 6.30 (14.3%) 0.400 0.433 (7.6%) 0.469 0.604 (22.4%)

China Southern Airlines 1055 HK 4.04 Outperform Outperform 4.20 3.00 40.0% 0.144 0.174 (17.3%) 0.587 0.240 144.4%

China State Construction International 3311 HK 11.16 Buy Buy 17.40 16.90 3.0% 0.904 0.905 (0.0%) 1.231 1.180 4.3%

COSCO Pacific 1199 HK 11.02 Hold Hold 11.40 11.10 2.7% 0.116 0.116 0.0% 0.128 0.128 0.0%

CSR Corp 1766 HK 9.57 Buy Buy 13.30 13.30 0.0% 0.422 0.422 0.0% 0.485 0.485 0.0%

Global Logistic Properties GLP SP 2.480 Outperform Outperform 2.700 3.000 (10.0%) 0.054 0.054 0.0% 0.066 0.066 0.0%

Jiangsu Expressway 177 HK 9.35 Outperform Outperform 10.50 10.00 5.0% 0.622 0.598 4.0% 0.686 0.676 1.5%

Kerry Logistics Network 636 HK 12.18 Outperform Outperform 13.90 13.80 0.7% 0.580 0.580 0.0% 0.684 0.684 0.0%

Orient Overseas International 316 HK 49.05 Buy Buy 64.00 56.00 14.3% 0.722 0.664 8.8% 1.045 0.809 29.1%

Shenzhen Expressway 548 HK 5.73 Hold Hold 5.80 5.20 11.5% 0.506 0.513 (1.3%) 0.506 0.541 (6.4%)

Shenzhen International 152 HK 11.40 Outperform Outperform 13.10 12.90 1.6% 1.201 1.201 0.0% 1.283 1.287 (0.4%)

Sinotrans 598 HK 5.60 Buy Outperform 6.60 6.30 4.8% 0.287 0.287 0.0% 0.339 0.339 0.0%

SITC International 1308 HK 4.21 Buy Buy 5.20 4.40 18.2% 0.047 0.053 (10.7%) 0.056 0.070 (19.8%)

TravelSky Technology 696 HK 8.34 Outperform Outperform 9.00 8.40 7.1% 0.426 0.419 1.6% 0.476 0.473 0.8%

Yuexiu Transport Infrastructure 1052 HK 4.50 Buy Buy 5.90 5.70 3.5% 0.385 0.431 (10.6%) 0.517 0.514 0.7%

Zhejiang Expressway 576 HK 9.43 Hold Hold 9.60 8.20 17.1% 0.526 0.486 8.1% 0.593 0.522 13.6%

Zhuzhou CSR Times Electric 3898 HK 44.70 Buy Buy 58.00 58.00 0.0% 1.975 1.975 0.0% 2.192 2.192 0.0%

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2


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Valuation comparison Top

Bloomberg Share price

1-Yr target PER (x) PBR (x) EV/EBITDA(x) Div yield (%) ROE (%)

pick Name code 12-Jan-15 Rating price 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E

Logistics * China South City 1668 HK 3.00 Buy 5.40 7.5 6.4 0.9 0.9 4.7 5.1 4.7 5.3 14.3 14.1

* Sinotrans Limited 598 HK 5.60 Buy 6.60 15.6 13.2 1.5 1.4 7.1 6.4 1.9 1.9 10.1 10.8

SITC International holdings 1308 HK 4.21 Buy 5.20 11.6 9.6 1.7 1.5 8.8 7.2 6.7 5.5 15.6 17.0

Kerry Logistics 636 HK 12.18 Outperform 13.90 21.0 17.8 1.4 1.3 12.9 10.8 1.0 1.1 7.0 7.6

Shenzhen International 152 HK 11.40 Outperform 13.10 9.5 8.9 1.2 1.1 6.0 7.9 3.7 4.0 13.0 13.0

Global Logistic Properties GLP SP 2.48 Outperform 2.70 34.5 28.1 1.0 0.9 25.0 24.9 1.9 2.0 2.8 3.3

Marine * Orient Overseas International Ltd. 316 HK 49.05 Buy 64.00 8.8 6.1 0.8 0.7 6.3 4.9 3.1 4.1 9.6 12.5

China Shipping Container Lines 2866 HK 2.52 Outperform 2.90 n.a. 22.7 1.0 0.9 12.9 9.5 n.a. n.a. n.a. 4.2

* CIMC 2039 HK 17.04 Buy 23.00 15.9 14.0 1.5 1.3 10.5 9.7 2.0 2.3 10.2 10.1

* China Merchants Holdings International 144 HK 25.95 Buy 32.00 14.6 13.5 1.0 0.9 14.6 13.5 3.2 3.4 7.7 7.1

COSCO Pacific Ltd. 1199 HK 11.02 Hold 11.40 12.3 11.1 0.8 0.8 8.7 8.5 7.6 8.4 6.9 7.3

Aviation Air China Ltd. 753 HK 7.08 Hold 7.20 25.0 9.6 1.3 1.2 7.5 6.0 0.5 1.1 5.1 12.6

China Eastern Airlines Co. 670 HK 3.93 Hold 3.80 17.6 6.9 1.3 1.2 7.9 6.3 n.a. n.a. 7.4 18.1

* China Southern Airlines Co. 1055 HK 4.04 Outperform 4.20 22.5 5.5 0.9 0.8 6.8 4.3 0.4 1.3 4.0 15.6

Cathay Pacific Airways 293 HK 17.48 Hold 16.90 24.8 13.0 1.0 1.0 4.9 3.6 1.6 2.5 4.3 7.8

* Beijing Capital International Airport 694 HK 7.20 Sell 6.10 17.7 15.6 1.5 1.4 7.6 8.1 2.3 2.6 8.5 9.1

Travelsky Technology Ltd. 696 HK 8.34 Outperform 9.00 15.7 14.0 1.9 1.7 8.9 8.5 2.2 2.4 12.8 12.8

* AviChina Industry & Technology 2357 HK 5.10 Buy 6.40 34.7 30.9 2.1 2.0 11.3 11.3 0.5 0.5 6.2 6.5

Expressways Jiangsu Express Co. Ltd. 177 HK 9.35 Outperform 10.50 12.0 10.9 1.8 1.7 7.4 7.7 6.1 6.7 15.6 16.2

Zhejiang Expressway Co. 576 HK 9.43 Hold 9.60 14.4 12.7 1.9 1.8 6.9 5.9 4.8 5.4 13.9 14.7

Shenzhen Expressway Co. 548 HK 5.73 Hold 5.80 9.1 9.1 0.8 0.8 5.9 5.1 3.3 3.3 10.0 9.0

* YuexiuTransport Infrastructure 1052 HK 4.50 Buy 5.90 9.3 7.0 0.7 0.6 7.2 6.7 6.6 8.6 7.6 9.3

Infrastructure Construction * China State Construction International 3311 HK 11.16 Buy 17.40 12.3 9.1 2.2 1.9 10.6 8.0 2.4 3.3 19.6 22.2

Railway construction and equipment * CSR Corp 1766 HK 9.57 Buy 13.30 18.2 15.8 2.6 2.3 3.7 3.3 1.7 1.9 15.0 15.3

* Zhuzhou CSR Times Electric 3898 HK 44.70 Buy 58.00 18.1 16.3 3.8 3.3 6.3 5.3 1.4 1.6 23.3 21.6

CCCC 1800 HK 9.77 Hold 9.30 9.8 8.9 1.2 1.1 5.5 5.7 2.6 2.7 12.9 12.7

CRCC 1186 HK 9.67 Buy 11.70 8.3 8.6 1.1 1.0 5.8 5.7 1.9 1.9 13.4 12.2

CRG 390 HK 6.19 Buy 7.50 9.5 8.6 1.1 1.0 9.1 8.8 1.6 1.8 12.1 12.1


Note:* top picks


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Look for quality, not quantity

We expect China’s economy to continue to slow, but believe sectors that offer long-term benefits to society, or are closely aligned with the transformation of China’s economy, will continue to gain support from the government.

Economic environment set to slow further

GDP to slow further; foreign trade stable

Daiwa’s chief economist, Kevin Lai, expects China’s GDP growth to slow to 6.9% YoY in 2015 from 7.2% YoY in 2014, due mainly to the effect of US tapering, which has led to money outflows from China and has put pressure on the credit situation and thus investment growth in China. The trade outlook is slightly better, with Kevin forecasting export growth to decelerate to 2.3% YoY for 2015 from 5.8% YoY for 2014, due to the concerns about a G3 economic recovery (only the US seems on an upward trend), and the decline in oil prices which will likely adversely affect the economies of countries like Russia and Saudi Arabia. Kevin forecasts import growth to rebound to 3.2% YoY in 2015, from flat YoY growth in 2014, mainly as a result of the low base effect. As such, we expect the economic situation to remain tough in China in 2015, even though the trade outlook may stabilise this year, and we see many companies still facing slower demand growth. However, China’s leaders are no longer targeting strong GDP growth, but are focusing more on sustainable development in the country. Rather than relying on foreign trade, the government seems to be emphasising building up domestic consumption power; and rather than using cheap labour to get orders, the government is trying to build up the ‘Made in China’ brand, offering not only a cost advantage, but with comparable and even better technology (such as that for railway equipment) than global competitors.

China: GDP growth YoY (2000-16E)

Source: CEIC, Daiwa forecasts

China: imports and exports (2010-16E)

Source: CEIC, Daiwa forecasts

Moving towards sustainable economic growth

Investing in sectors that offer long-term benefits to the country

While China’s leaders would likely try to avoid an economic hard landing, we believe they will be very cautious to avoid overinvesting or creating a new bubble in certain areas, especially the property sector. Therefore, we think the government is unlikely to introduce a large economic stimulus package, such as the CNY4tn investment plan in 2009, but would rather selectively invest in sectors that could benefit society in the long term. In our view, sectors like railways and affordable housing would fall into such a category.

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China: GDP composition (2013)

Source: CIA World Factbook

Apart from social benefits, industries such as railway construction and equipment manufacturing should continue to gain support from the government, as the government has said it would like to develop its own ‘Made in China’ brand and export certain industrial products at which China is strong. The high-speed railway (HSR) is a good example, as China currently operates the largest high-speed train network in the world, with the highest operational speed of 350km/h. On the aviation side, the narrow-body C919 aircraft and general aviation products, such as helicopters, should also obtain government support, but as China is still at the early stage of investment in its aviation sector, it would take some time for it to build up its brand in this area. In terms of marine, as we expect the shipping industry to continue to suffer from overcapacity in the next few years, the first priority for the government will likely be to avoid bankruptcy of the shipbuilding industry rather than pushing aggressively to improve shipbuilding technology to compete with peers in Korea and Japan.

Look for names that benefit from city redevelopment

As mentioned in our report “Logistics Property: Scaling new heights” on 28 November, we see China entering the second phase of urbanisation, in which local governments are no longer just focusing on expanding city areas through infrastructure investment, but are starting to consider other issues. According to the Chinese government’s urbanisation plan for 2014-20, it aims to increase the urbanisation rate to 60% by 2020, which implies a slower CAGR of 1% during the period versus a CAGR of 1.3% for 2004-13. Even though the government would achieve a lower CAGR, it should be more difficult to achieve than the previous decade, as it would involve more policy reform and better city planning rather than simply

infrastructure investment (which helped it meet the target for the previous decade). Some measures include Hukou reform, reform on land-use rights, improving efficiency on energy consumption and improving the road and railway system to solve traffic congestion. We believe better city planning will lead to further relocation of old low-value assets to rural areas, such as logistics facilities including warehouses, logistics parks and trade centres, as well as the redevelopment of shanty towns in urban areas. These developments would benefit: 1) existing landlords (such as Sinotrans, GLP and SZI), as they would be able to unlock value, 2) companies that benefit from building new logistics hubs outside urban areas (such as CSC and SZI), and 3) construction companies (such as CSCI). China: urbanisation rate (1990-2020E)

Source: The World Bank Group

Increasing domestic consumption as a definite trend

As a result of continuous urbanisation, disposable incomes have increased and led to stronger domestic consumption power. While the urbanisation trend started a few years back, we believe the investment thesis based on domestic consumption is still attractive to investors. Indications are that the China Government intends to lead the economy to focus on domestic consumption and push for the manufacturing of higher-end industries, including high-speed trains, helicopters and narrow-body commercial aircraft, instead of relying on manufacturing, foreign trade, property investment and infrastructure construction. We see this trend as the next phase of economic development in China, especially given that labour costs in China’s coastal regions are already too high for the manufacture of low-end consumer goods, including toys, furniture, apparel and white goods. At the same time, the previously overheated property sector and the CNY4tn stimulus package in 2009 led to overbuilding in both the property and infrastructure sectors. As such, the government has less room to raise GDP

Household Consumption

36.3%

Government Consumption

13.7%

Investment in Fixed Capital

46.0%

Investment in Inventories

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Net Exports2.9%

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growth from these areas in the future, and seems to deem it essential that China boosts domestic consumption to move toward becoming a developed nation. China: disposal income growth (2006-13)

Source: CEIC

At the same time, the channels for individual consumption have changed with the emergence of e-commerce. This rise of e-commerce has created more challenges for logistics management and greater demand for warehouses, as e-commerce companies usually focus on creating an online platform rather than a logistics platform in the early investment stage. We expect the e-commerce trend to continue in 2015, and as such, logistics demand to keep rising, while investors’ interest in logistics should remain strong in 2015.

Other key trends

Oil prices likely to remain at a low level

Following OPEC’s decision not to cut production, we do not see any strong reason for oil prices to rebound, at least in 1H15, especially given the increasing market share of shale oil from the US, and the weak global economic recovery, which should hinder any oil price rebound in the near term. As such, we expect crude-oil prices to remain low in 2015, and as a consequence forecast jet fuel prices and bunker prices, which are closely correlated, to decline by 34% YoY to USD75/bbl and 29% YoY to USD385/t, respectively, in 2015, and then remain flat in 2016.

Brent and Singapore Jet Kerosene Spot Price and 380 cSt Bunker Fuel Rotterdam Index (2014 – YTD)

Source: Bloomberg

Airline jet fuel sensitivity analysis Jet fuel price change for 1%, impact to 2015E EPS (%)

CX -4.40%

AC -2.91%

CEA -3.87%

CSA -2.69%

Source: Daiwa

Shipping line bunker cost sensitivity analysis Bunker price change for 1%, impact to 2015E EPS (%)

OOIL -0.93%

CSCL -6.92%

SITC -1.20%

Source: Daiwa

Renminbi to resume depreciation in 2015

Daiwa’s Kevin Lai forecasts the Renminbi to depreciate from CNY6.2 per USD at the end of 2014 to CNY6.6 per USD at the end of 2015, due to the outflow of capital from China. We believe a weakening Renminbi would dampen trading sentiment toward airline stocks in 2015, even though our adjusted net profit forecasts for these companies exclude exchange gains or losses. These exchange gains and losses may offset the positive sentiment from weak oil prices. China Big 3 airlines RMB sensitivity analysis Assumes 1 % appreciation in RMB against USD, net profit will increase (%):

CA 7.33%

CEA 53.90%

CSA 23.92%

Source: Daiwa

“One Belt, One Road” boosts only short-term sentiment

Many market observers believe China’s proposed “One Belt, One Road” initiative, designed to connect China with other Asian countries, Africa and Europe by both land and sea transportation, will create many opportunities over the next 10 years. However, we remain cautious on the execution and the incremental impact of this execution on new contract and profitability enhancement.

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According to the Chinese government, better economic ties among countries (as called for under the “One Belt, One Road” initiative) should help promote common standards for logistics and e-commerce, which would help reduce trade barriers and enhance cross-border orders. As a result of the reiteration of such a plan by President Xi jinping on 4 November 2014, share prices in sectors such as railway construction, railway equipment, ports and shipping have rallied significantly. However, we see the “One Belt, One Road” as more of a political statement. Implementing infrastructure construction and trade policies is likely to be complicated and take a long time, as it involves many countries. Also, according to our discussions with related companies, they do not believe such a plan would create new incremental projects, but rather that it may try to speed up some projects in certain countries. This is similar to what occurred when the government announced the CNY4tn economic stimulus package in 2009 in an attempt to stimulate the economy. Under that plan, most of the infrastructure projects were not new; the plan just moved their completions forward to boost the economy at the time. However, as this round of stimuli involves negotiations among a number of different countries, we believe the project completion schedules will be less flexible than if projects were completed locally in China. Therefore, the impact, if any, would be long term, and such a long-term plan, especially not being incremental, may not be sufficient to support share prices in 2015.

“One Belt, One Road” plan

Source: Daiwa

Key recommendation highlights

Logistics remains our most preferred sector, followed by railways

Of the subsectors we cover, we believe logistics, railways, general aviation and construction will continue to attract stronger investor interest in 2015 than the others, as these preferred subsectors are either still under-developed (such as logistics and general aviation) or are subsectors in which the government plans to continue to invest to achieve some long-term benefits for society (such as railways and affordable housing). Looking at valuations and recent share-price movements, we believe logistics is relatively more attractive, as some of the logistics property names are still under-covered and are trading at low valuations. For short-term trading on oil prices, we recommend investors buy shipping companies rather than airlines, as the share prices of the airlines should already partly reflect the positive sentiment from low oil prices, and we see a risk that the weakening Renminbi may dampen sentiment toward the airlines stocks. China Shipping: share prices of OOIL, CSCL and COSCO (2014 YTD)

Source: Bloomberg

China Aviation: share prices of CX, AC, CEA and CSA (2014 YTD)

Source: Bloomberg

Xi

Silk Road Economic Belt

Maritime Silk Road

Xi’an

UrumqiIstanbul

Moscow

Venice

Kuala Lumpur

Nairobi

Fuzhou

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Top Buy ideas

China South City (CSC) As mentioned, we expect China’s continuous urbanisation trend to lead to strong demand to relocate old logistics facilities, including wholesale markets, away from urban areas. This would benefit logistics operator CSC as the demand for its wholesale markets over the next 5 years would rely highly on relocation demand in many top-tier cities. Besides, we see its move towards developing a number of logistics hubs and a Logistics Information Exchange Platform (LIEP) to be long-term positive, especially as these initiatives would create value for trucking companies, enabling them to utilise unused capacity. On the valuation side, CSC is now trading at an undemanding 63% discount to our property-NAV estimate of HKD8.20. Also, CSC is trading at a 6.4x FY16E PER, lower than its asset-heavy logistics peers under our coverage. The main risk is a slower-than-expected implementation of the local governments’ relocation plans. CSC: forward PER (2012-present)


China State Construction International (CSCI) According to the Ministry of Housing and Urban Rural Development (MoHURD), work on the construction of 7.1m affordable housing units will begin in 2015 in China, which is higher than our previous expectation of 6m, and similar to the 2014 level of 7.2m. We believe such a target reiterates the government’s support of the affordable housing subsector, as these affordable housing units could help improve city planning by eliminating old housing areas and redeveloping old housing into more modern, safer buildings and infrastructure. This redevelopment would also be beneficial for the city governments’ tax income and in line with the city governments’ plans for urbanisation.

As such, we contend that construction companies such as China State Construction International (CSCI) (3311 HK, HKD11.16, Buy [1]) would benefit by increasing their market share in the affordable housing market through BT projects in the near term, and prefabrication construction in the longer term. As the credit situation in China is likely to remain tight, local governments would be attracted to the BT projects that CSCI can offer, as they need only pay for such projects two years later, when the project is completed. In the longer term, CSCI’s extensive experience in prefabricated construction should help it gain further market share, on the back of increasing awareness of the better efficiency and lower pollution levels offered by affordable housing construction in China. CSCI stock is trading at a 2015E PER of 9.1x, which is lower than its past-3-year average of 14x. As such, we consider its current valuation to be undemanding. The main risk to our call would be the government’s relocation-housing scheme being slowed down. CSCI: forward PER (2012- present)


China: affordable housing new starts (2011-16E)

Source: Source: Ministry of Housing and Urban-Rural Development, Daiwa forecast

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Zhuzhou CSR In general, we prefer railway equipment companies over construction companies, as we think construction capex may already have reached a peak, while another railway equipment investment cycle has just started. We believe the planned merger between CSR Corp (1766 HK, HKD9.57, Buy [1]) and China CNR Corp (not rated) would benefit Zhuzhou CSR, as it could gain projects from CNR in the long term without paying for the cost of merger, like CSR. We set our 12-month target price for Zhuzhou CSR at HKD58, which represents a 2016E PER of 18.5x. We consider our target PER to be justified as we believe investors would be willing to pay a premium, compared with its historical valuation, due to the positive sentiment surrounding the merger of CSR and CNR, and expectations for strong earnings growth for Zhuzhou CSR after it absorbs CNR’s business, which we expect to be realised from 2016. The main risk is lower-than-expected spending on railway equipment by the government. Zhuzhou CSR: forward PER (2012-present)


Top Sell idea

Beijing Capital International Airport (BCIA) As more news regarding the funding of the third new airport is announced, we expect BCIA’s management to decide whether the company will be involved in the initial investment or just act as a management company. However, in our view, neither way would be positive for BCIA. First, we believe investing in the new airport would lead to high gearing and high dilution for BCIA, as it would likely have to raise capital from the secondary market. Also, the high depreciation and high interest expense associated with the investment could lead to a period of 3-5 years of weak profitability – similar to what occurred during BCIA’s acquisition of Terminal 3 at the existing Beijing Capital airport. Alternatively, if BCIA does not invest but just acts as a managing company, the new airport would divert some of the existing traffic from Beijing Capital Airport, as most airlines would likely try to extend their footage to the new airport. Therefore, BCIA could see a few years of traffic declines or at the most, flat YoY traffic growth from the time the new airport would open in 2019, as all the growth would be focused on the new airport. Therefore, in either case, BCIA would be negatively affected, in our view. We believe the market does not yet fully recognise this point, especially as the stock is now trading at a 2015E PER of 15.6x, which is higher than its past-3-year average multiple of 13x. BCIA: forward PER (2012- present)


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Logistics: still bullish

Sentiment towards the logistics sector should remain strong in 2015. However, investors’ interest is likely to shift to asset-heavy players such as warehouse and trade centre operators. Our top picks are CSC and Sinotrans.

Rating: Positive

Kelvin Lau – (852) 2848 4467 ([email protected])

Carrie Yeung – (852) 2773 8243 ([email protected])

What happened in 2014?

Strong sentiment, fuelled by e-commerce and rising domestic consumption

The share prices of the logistics companies, such as Sinotrans (598 HK, HKD5.60, Buy [1]), rose significantly in 2014, by more than 60%. The strong share-price movement was due to positive investor sentiment on the logistics plays – investors are always looking for underdeveloped sectors and saw that the logistics sector presented a bottleneck in the development of China’s e-commerce sector. Hence, there was strong interest.

Growing interest in 3PL

We saw that investors have started to understand more about the development of the third-party logistics (3PL) sector in China. Given the PRC Government’s policy on encouraging companies to divest their non-core logistics assets and outsource their supply-chain management, we believe investors will remain interested in the 3PL business in 2015, as we think this segment has high entry barriers and better gross-profit margins (6-10%) than the traditional freight-forwarding companies (2-3%).

Share prices of Sinotrans, KLN and SITC (2014 -Present)

Source: Bloomberg

Share prices of CSC and SZI (2014-Present)

Source: Bloomberg

What do we expect in 2015?

Strong investor sentiment should continue

We believe investors will continue to search for sectors showing strong earnings growth. In our view, the logistics sector will remain attractive, as it is still underdeveloped and highly fragmented, and remains a bottleneck in the development of China’s e-commerce. Logistics also are key to enabling manufacturers to cut costs. As mentioned in our report “Logistics property: scaling new heights”, published on 28 November 2014, China’s logistics costs are high accounting for 18% of GDP for 2013. We expect this trend to remain for 2015. Logistics: cost as a % of GDP (2013) Country % of GDP

US 9%

Japan 9%

Korea 9%

China 18%

UK 9%

Germany 9%

Brazil 12%

Global 12%

Source: Armstrong & Associates

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http://asiaresearch.daiwacm.com/eg/cgi-bin/files/China_Logistics_Sector_141128.pdf#page=1


- 13 -

Increasing focus on asset-heavy players

We expect the asset-heavy logistics companies (such as those that own warehouses and trade centres) to become more attractive to investors in 2015, given the ongoing lack of land in top-tier cities on which to locate warehouses, the underdevelopment of logistics facilities in China, strong e-commerce growth and rising domestic consumption. We see the asset-heavy logistics companies as the natural partners of the e-commerce companies as most of them tend to be asset-light with high demand for logistics space. Furthermore, as many cities continue to expand in size in 2015, we expect more old logistics facilities to be relocated away from urban areas, and the land they were built on to be redeveloped. This would be a positive share-price catalyst for stocks such as Shenzhen international (SZI) (152 HK, HKD11.40, Outperform [2]) and Global Logistics Properties (GLP SP, SGD2.48, Outperform [2]), as they have large landbanks and vast land resources in urban areas. However, we prefer CSC as the company is planning to build new trade centres to absorb the relocation demand, which should keep it prosperous at least for the next 5 years. China Logistics Sector: segmentation Different models Companies

Asset-heavy model (platform providers)

CSC, GLP, SZI, CMHI and COSCO Pacific

Asset-heavy model (operators) Sinotrans and KLN

Asset-light model On Time Logistics, ASR Holdings, and SITC (excludes shipping)

Source: Daiwa

Recommendations

Top picks: CSC and Sinotrans

Apart from our top pick, CSC, we also like Sinotrans, the largest 3PL service provider in China, which we see as undervalued. Even though we think near-term earnings-growth drivers could come from the contribution from its joint venture with DHL, and a slowdown in asset injections by its parent company because of the recent fraud investigation of its entrusted asset, we expect Sinotrans to remain attractive to investors looking to capture the growing demand for outsourcing in China. Sinotrans is now trading at a 2015E PER of 13.2x, which is still at a more than 25% discount to its closest peer, Kerry Logistics (KLN) (636 HK, HKD12.18, Outperform [2]). We think the discount is unjustified, and look for Sinotrans’ net-profit CAGR of more than 20% over 2014-16E to outpace that of KLN (at around

10% on our estimates), due to its higher exposure to the China market. Sinotrans: 12-month forward PER (2012 – present)


KLN: 12-month forward PER (2014 – present)


Risks

Lower-than-expected logistics demand

If growth in e-commerce and domestic consumption is worse than we expect it to be for 2015, this could lead to weaker-than-expected demand for logistics services and space. Also, if demand for outsourcing is weaker than expected, this would lead to lower-than-expected demand for 3PL services. Both of these would affect operators such as Sinotrans and KLN, as well as warehouse companies such as GLP.

Slower-than-expected relocation process

Some cities may slow down their urbanisation plans or the relocation of old logistics facilities due to financial constraints, and as such, local governments may find themselves unable to buy back land-use rights for land in urban areas to redevelop themselves. As such, there may be less incentive for them to speed up relocation of old logistics facilities in their areas.

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- 14 -

Asia third party logistics (3PL) peers: valuation comparison

Bloomberg Trading Share price

Market cap

1-Yr target PER (x) Div yield (%) ROE (%) EPS Growth (%)

Name

code currency 12-Jan-15 USD Mn Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

3PL- Global

Kerry Logistics Network Ltd * 636 HK HKD 12.18 2,657 Outperform 13.90 21.0 17.8 1.0 1.1 7.0 7.6 (14.5) 17.9

Deutsche Post Ag-Reg

DPW GY EUR 26.62 38,122 NR NR 15.6 14.7 3.2 3.6 20.8 20.3 13.8 5.9

Kuehne & Nagel Intl Ag-Reg

KNIN US CHF 137.00 16,189 NR NR 25.5 23.2 3.4 3.5 25.7 27.5 7.0 9.6

Uti Worldwide Inc

UTIW US USD 11.85 1,250 NR NR n.a n.a. 0.5 0.2 1.3 n.a (98.2) n.a

Expeditors Intl Wash Inc

EXPD US USD 43.61 8,418 NR NR 23.1 20.8 1.5 1.6 19.1 22.2 8.2 11.1

Other 3PL

Sinotrans Limited-H * 598 HK HKD 5.60 3,327 Buy 6.60 15.6 13.2 1.9 1.9 10.1 10.8 35.7 18.4

Hyundai Glovis Co Ltd

086280 KS KRW 300000.00 10,380 NR NR 19.7 19.1 0.6 0.6 21.6 18.8 10.6 3.1

Cj Korea Express Corp * 000120 KS KRW 190500.00 4,010 Underperform 132000.00 60.0 40.7 n.a n.a 3.1 4.5 n.a 128.5

Toll Holdings Ltd

TOL AU AUD 6.11 3,574 NR NR 15.4 14.8 4.5 4.8 10.4 10.6 1.0 4.3

Qube Holdings Ltd

QUB AU AUD 2.39 2,055 NR NR 25.7 21.7 2.1 2.6 7.5 8.1 17.7 18.3

Dsv A/S

DSV DC DKK 196.00 5,515 NR NR 18.7 16.7 0.9 1.1 26.1 29.7 8.4 11.9

Other Logistic Company-Global

C.H. Robinson Worldwide Inc

CHRW US USD 72.90 10,664 NR NR 24.0 21.4 2.0 2.1 45.0 46.8 11.7 12.4

United Parcel Service-Cl B

UPS US USD 109.64 101,527 NR NR 22.1 19.5 2.4 2.6 63.6 81.7 8.4 13.4

Con-Way Inc

CNW US USD 44.93 2,602 NR NR 19.0 15.9 1.1 1.4 11.9 13.5 42.0 19.5

Panalpina Welttransport -Reg

PWTN SW CHF 136.40 3,190 NR NR 35.3 24.3 1.6 2.1 13.2 17.8 7.9 45.2

Fedex Corp

FDX US USD 172.57 48,891 NR NR 25.8 19.2 0.3 0.5 12.7 15.8 10.6 34.4

Other Logistic Company-Asia

Sitc International Holdings * 1308 HK HKD 4.21 1,406 Buy 5.20 11.6 9.6 6.7 5.5 15.6 17.0 31.8 20.0

Keppel Telecom & Transport

KPTT SP SGD 1.42 590 NR NR 11.8 10.9 2.5 2.7 13.0 13.1 9.1 8.3

Nippon Express Co Ltd

9062 JP JPY 621.00 5,564 Neutral 600.00 24.4 20.2 1.6 1.6 5.1 6.1 25.2 20.7

Yamato Holdings Co Ltd

9064 JP JPY 2392.50 8,789 Neutral 2500.00 28.7 24.6 1.0 1.0 6.5 7.2 (1.2) 16.4

Mitsubishi Logistics Corp

9301 JP JPY 1712.00 2,540 Neutral 1800.00 35.3 36.4 0.7 0.7 3.5 3.5 2.2 (3.2)

Kamigumi Co Ltd

9364 JP JPY 1063.00 2,460 NR NR 17.9 17.5 1.0 1.0 5.5 5.3 10.4 2.0

Others related

China South City Holdings * 1668 HK HKD 3.00 3,100 Buy 5.40 7.5 6.4 4.7 5.3 14.3 14.1 28.5 5.6

Hydoo International Holding

1396 HK HKD 1.80 932 NR NR 3.2 2.6 11.1 13.2 37.0 32.2 33.8 20.9

Haier Electronics Group Co

1169 HK HKD 20.15 6,983 NR NR 17.7 14.7 0.6 0.8 26.9 25.4 15.6 20.3

Shenzhen Intl Holdings * 152 HK HKD 11.40 2,782 Outperform 13.10 9.5 8.9 3.7 4.0 13.0 13.0 7.1 6.8

Global Logistic Properties L * GLP SP SGD 2.48 8,992 Outperform 2.70 34.5 28.1 1.9 2.0 2.8 3.3 (22.7) 3.4

Total

Weighted average

22.6 19.3 2.0 2.2 32.5 39.2 9.0 16.8

High

60.0 40.7 11.1 13.2 63.6 81.7 42.0 128.5

Low

3.2 2.6 0.3 0.2 1.3 3.3 (98.2) (3.2)

Median

20.3 18.5 1.7 1.9 13.0 13.8 9.7 12.9

Source: Bloomberg, *Daiwa forecast


- 15 -

Global logistics peers: valuation comparison


Market cap

NAV/ Share

Price to NAC

(%)

1-Yr target PER (x) PBR (x)

Div yield (%)

ROE (%)

Name code currency 12-Jan-15 USD Mn FY15E FY15E Rating price FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY15E

China Wholesale market developers- HK listed

CHINA SOUTH CITY HOLDINGS * 1668 HK HKD 3.00 3,100 8.1 -63% Buy 5.40 7.5 6.4 4.8 0.9 0.8 0.7 4.7 5.3 14.1

HYDOO INTERNATIONAL HOLDING 1396 HK HKD 1.80 932 n.a. n.a. NR NR 3.2 2.6 2.7 n.a. n.a. n.a. 11.1 13.2 32.2

WUZHOU INTERNATIONAL HOLDING 1369 HK HKD 1.43 859 n.a. n.a. NR NR 7.7 5.2 3.3 n.a. n.a. 0.1 2.9 4.4 17.5

China wholesale market developer- CN Listed

HAINING CHINA LEATHER MAR-A

002344 CH CNY 15.70 2,835 n.a. n.a. NR NR 15.7 12.9 10.8 3.7 3.0 2.4 1.1 1.3 23.3

ZHEJIANG CHINA COMMODITIES-A

600415 CH CNY 11.91 5,226 n.a. n.a. NR NR 85.1 45.8 19.2 n.a. n.a. n.a. n.a n.a 7.3

China developers- HK Listed

AGILE PROPERTY HOLDINGS LTD

3383 HK HKD 4.88 2,466 n.a. n.a. NR NR 3.3 3.4 3.2 0.4 0.4 0.3 7.4 7.5 11.5

CHINA OVERSEAS LAND & INVEST * 688 HK HKD 24.25 25,567 35.7 -32% Buy 26.80 9.0 7.6 6.4 1.6 1.4 1.2 2.2 2.6 19.1

CHINA RESOURCES LAND LTD * 1109 HK HKD 21.23 16,509 32.9 -35% Buy 26.30 11.7 10.3 9.1 1.3 1.2 1.1 2.3 2.5 12.8

COUNTRY GARDEN HOLDINGS CO

2007 HK HKD 3.20 8,400 n.a. n.a. NR NR 5.4 4.5 3.9 0.9 0.8 0.7 6.5 7.8 19.5

EVERGRANDE REAL ESTATE GROUP

3333 HK HKD 3.40 6,398 n.a. n.a. NR NR 3.7 3.2 2.9 0.8 0.6 0.5 9.4 10.8 21.8

FRANSHION PROPERTIES

817 HK HKD 2.38 2,784 n.a. n.a. NR NR 6.5 5.6 5.0 0.6 0.6 0.5 4.3 4.9 10.2

GUANGZHOU R&F PROPERTIES - H * 2777 HK HKD 9.58 3,982 32.9 -71% Buy 12.90 3.8 3.3 2.9 0.7 0.6 0.5 8.4 8.8 18.6

KWG PROPERTY HOLDING LTD

1813 HK HKD 5.40 2,052 n.a. n.a. NR NR 4.4 3.7 3.1 0.6 0.6 0.5 7.0 8.2 16.2

LONGFOR PROPERTIES

960 HK HKD 11.04 8,272 n.a. n.a. NR NR 6.8 6.2 5.3 1.1 1.0 0.8 2.9 3.2 16.4

SHUI ON LAND LTD

272 HK HKD 1.87 1,930 4.8 -61% NR NR 10.7 8.2 5.3 0.3 0.3 0.3 3.2 3.3 3.9

YUEXIU PROPERTY CO LTD

123 HK HKD 1.57 2,511 3.5 -55% NR NR 7.7 5.6 4.5 0.5 0.4 0.4 5.4 7.2 8.1

CHINA OVERSEAS GRAND OCEANS

81 HK HKD 4.27 1,257 19.0 -78% NR NR 4.0 3.4 2.7 0.7 0.6 0.5 2.3 2.6 19.3

SHANGHAI INDUSTRIAL URBAN DE

563 HK HKD 1.30 807 n.a. n.a. NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a.

Overseas developers

TICON INDUSTRIAL CONNECTION ** TICON TB THB 18.20 608 n.a. n.a. Hold 14.70 13.4 10.8 9.5 1.7 1.6 1.7 5.0 5.7 13.1

ROJANA INDUS PARK PUB CO LTD ** ROJNA TB THB 8.20 438 n.a. n.a. Buy 9.80 12.9 13.8 17.8 1.2 0.6 1.3 21.9 3.0 5.4

THAI FACTORY DEVELOPMENT PCL

TFD TB THB 4.90 191 n.a. n.a. NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a.

AMATA CORP PUBLIC CO LTD

AMATA TB THB 16.60 539 n.a. n.a. NR NR 13.9 13.0 11.4 1.9 1.7 1.6 2.9 3.1 13.3

HEMARAJ LAND DEVELOPMENT PCL ** HEMRAJ TB THB 4.36 1,287 n.a. n.a. Buy 4.50 12.9 12.0 11.2 2.8 2.4 2.3 3.5 3.7 21.1

SIAM FUTURE DEVELOPMENT PCL

SF TB THB 6.35 286 n.a. n.a. NR NR 10.8 9.8 7.9 1.3 1.2 1.0 0.7 0.7 9.5

SINO HORIZON HOLDINGS LTD

2923 TT TWD 27.00 1,474 n.a. n.a. NR NR 23.9 n.a. n.a. n.a. n.a. n.a. n.a n.a n.a.

GOODMAN GROUP

GMG AU AUD 5.86 8,340 n.a. n.a. NR NR 16.9 15.8 14.8 1.7 1.6 1.5 3.5 3.8 11.0

Total

Weighted average

12.7 9.4 7.2 1.2 1.0 0.9 3.8 4.2 15.5

High

85.1 45.8 19.2 3.7 3.0 2.4 21.9 13.2 32.2

Low

3.2 2.6 2.7 0.3 0.3 0.1 0.7 0.7 3.9

Median

8.4 6.4 5.3 1.0 0.8 0.7 3.9 4.1 14.1

HK, CN & SG Logistics Companies - HK Listed

KERRY LOGISTICS NETWORK LTD * 636 HK HKD 12.18 2,657 n.a. n.a. Outperform 13.90 21.0 17.8 15.8 1.4 1.3 1.2 1.0 1.1 7.6

SINOTRANS LIMITED-H * 598 HK HKD 5.60 3,327 n.a. n.a. Buy 6.60 15.6 13.2 10.7 1.5 1.4 1.2 1.9 1.9 10.8

SITC INTERNATIONAL HOLDINGS * 1308 HK HKD 4.21 1,406 n.a. n.a. Buy 5.20 11.6 9.6 8.0 1.7 1.5 1.4 6.7 5.5 17.0

HAIER ELECTRONICS GROUP CO

1169 HK HKD 20.15 6,983 n.a. n.a. NR NR 17.7 14.7 12.2 4.1 3.2 2.6 0.6 0.8 25.4

SHENZHEN INTL HOLDINGS * 152 HK HKD 11.40 2,782 n.a. n.a. Outperform 13.10 9.5 8.9 7.4 1.2 1.1 1.0 3.7 4.0 13.0

GLOBAL LOGISTIC PROPERTIES L * GLP SP SGD 2.48 8,992 n.a. n.a. Outperform 2.70 34.5 28.1 24.8 1.0 0.9 0.9 1.9 2.0 3.3

Total Weighted average

22.4 18.5 16.0 2.0 1.7 1.5 1.9 2.0 12.4

High

34.5 28.1 24.8 4.1 3.2 2.6 6.7 5.5 25.4

Low

9.5 8.9 7.4 1.0 0.9 0.9 0.6 0.8 3.3

Median

16.7 14.0 11.5 1.4 1.3 1.2 1.9 1.9 11.9

Source: Bloomberg, *Daiwa forecasts, **Covered by Daiwa alliance partner Thanachart


- 16 -

Railways: investment to continue

Government likely to maintain a high level of investment in railway sector in 2015; and urban transit spending should also remain strong. In the long term, we prefer railway equipment companies to railway construction companies.

Rating: Positive

Brian Lam – (852) 2532 4341 ([email protected])



Strong railway FAI growth

We expect China’s railway FAI to have reached CNY800bn for 2014, up 20% YoY. This strong growth is due to an aggressive push by the government, which is aiming to use the construction of the railways partly to support the country’s economic growth in the near term, and to improve infrastructure between cities, thus creating social benefits in the long run. We do not expect to see a change in government strategy in 2015, as we expect do not expect the macro situation to improve significantly.

Positive sentiment on overseas expansion

Compared to the situation 5 years ago, investors have become more positive on the overseas expansion of both the China railway construction and equipment companies. Looking forward, we see a good opportunity for the railway construction companies to improve their gross-profit margins as overseas projects tend to have better gross margins. However, we see greater risk attached to overseas projects, as many of them are carried out in countries that have unstable political environments and weak financial strength.

Share prices of CRCC, CSR, CNR and CRG (2014 – YTD)

Source: Bloomberg, Daiwa


Railway FAI to remain high

We forecast railway FAI to remain high at CNY830bn for 2015, slightly higher than the CNY800bn for 2014E. We do not expect a large increase over the 2014 level, as CNY800bn is already a record high, and we do not expect any major stimulus measures in 2015 to boost railway FAI growth. On the other hand, we do not expect a YoY decline in railway FAI for 2015, either, as we think railway FAI is still one of the tools for the government to use to avoid a hard landing for China’s economy. Compared with railway construction, we believe that the spending cycle on railway equipment has just begun, as usually capex for equipment is incurred 1-2 years after capex on construction is spent. Therefore, we expect earnings growth for the railway-equipment companies (41-48% YoY) to be stronger than that for the railway construction companies in 2015. China: total railway investments

Source: CRC, Daiwa forecasts

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CRCC (LHS) CSR (LHS) CNR (LHS) CRG (RHS)

Share price rally after announcement of CRCCwon the bidding of Mexican high speed rail project

(HKD) (HKD)

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Total Railway FAI (LHS) YoY Growth (RHS)

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- 17 -

Urban transit spending should remain strong

Among the railway subsectors, we expect the urban-transit railway area to remain active in 2015, as we expect demand from many of the tier 1 and 2 cities to remain strong. So far, only 36 cities (of the hundreds of cities in China) in China are planning to, or have already, built a metro. We expect construction spending on metros to continue growing over 2015-17, which would be an earnings driver for both the railway-construction and railway-equipment companies. China: length in operation of the urban rail transit

Source: statistics for 2001-13 are provided by China Association of Metro; forecasts for 2014-18 are provided by CCID Consulting

Merger of CSR and CNR could lead to higher margins and cost savings

On 31 December 2014, CSR and CNR announced plans to merge, with the aim being to end the cutthroat pricing competition between the 2 when bidding for overseas projects. Apart from lower competition for overseas projects, which would benefit both CSR and CNR and Zhuzhou CSR (as it is a subsidiary of CSR), would be a key beneficiary on the merger, especially it could take over CNR’s business without paying the cost for acquisition. However, we see there is risk for some countries not allowing the merged entity of CSR and CNR to bid due to anti-monopoly policy, as CSR and CNR combined already represent around 30-50% of global market share on various railway equipment manufacturing.

Global market share: high-speed rail MUs (2008-11)

Source: SCIVerkehr, Daiwa

Global market shares of metro equipment makers (2008-11)

Source: SCIVerkehr, Daiwa

Recommendations

Buys: Zhuzhou CSR and CSR

As highlighted, we prefer the railway-equipment companies over the railway-construction companies, as we think construction capex may have already peaked, while the railway-equipment investment cycle has just started. Also, the share prices of the railway-construction companies have rallied significantly since October 2014, driven by the positive news flow on China’s railway FAI. As such, we see more share price upside for the railway-equipment makers than the construction makers in 2015. Our top pick in the China Railway Sector is Zhuzhou CSR. We also recommend CSR, which we believe stands to benefit from its planned merger with CNR as this would end price competition between the 2 for overseas projects and create a monopoly within the China market. Our 12-month target price for CSR is HKD13.30, which is based on a 2016E PER of 15x. Similar to Zhuzhou CSR, we consider our target PER to be justified, as we believe investors would be willing to pay a premium for CSR as they expect the deal to go ahead.

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Length in operation of the Urban Rail Transit in the PRC (LHS)

Growth (YoY, RHS)

CNR24%

CSR28%

Japan16%

Alstom13%

Siemens7%

Bombardier5%

CAF4%

Others3%

CNR16.0%

CSR18.0%

Alstom13.0%Bombardier

12.0%

CAF8.0%

Rotem7.0%

Kawasaki7.0%

Others19.0%


- 18 -

CSR: 12-month forward PER (2012- present)


Outlook for CCC unexciting

We remain positive on the railway-construction makers, especially those active in urban transit railways. However, as we are cautious on road/bridge construction capex growth this year, we are concerned about CCC’s earnings growth outlook for 2015, as the company relies heavily on the construction of this type of infrastructure. CCC’s share price has rallied significantly by 71% since 1 October 2014, on the back of the PBOC’s interest rate cut in November 2014 and growing investor interest in the sector’s overseas expansion. However, we see limited road/bridge construction growth in 2015, and remain cautious on the overseas expansion in the long term due to the associated political risk and potential delay in payment. Even if CCC were to see an increase in overseas projects this year, the earnings contribution may not appear in the near term or offset the slow growth road/bridge construction in China. We see a sedate earnings outlook for CCC in 2015. Our 12-month target price of HKD9.30 is based on a 2016E PER of 8x, in line with the stock’s past-5-year trading average of 8x. We see little likelihood of a rerating for CCC. Also, we do not think the company will benefit much from China’s ongoing investment in railway construction given its low business exposure this area.

CCC: 12-month forward PER (2012- present)


Risks

Lower-than-expected railway spending

The main risk on our Buy calls for both Zhuzhou CSR and CSR would be lower-than-expected spending on railways overall by the government in 2015, which would thus translate into lower spending on both railway construction and equipment. This would negatively affect our earnings growth forecasts for both companies for 2015-16.

Higher-than-expected spending on roads and bridges

The main upside risk to our Hold call on CCC would be if spending on roads and bridges by the government were higher than we expect it to be. This could happen if there is an improvement in the financing capability of the local governments, which would enable them to speed up infrastructure construction/spending in their cities.

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- 19 -

Global construction peers: valuation comparison

Bloomberg Trading Share price*

Market cap*


Name code currency 12-Jan-15 USD Mn Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

China Construction companies - H Shares

CRG * 390 HK HKD 6.19 25,737 Buy 7.50 9.5 8.6 1.1 1.0 9.1 8.8 1.6 1.8 12.1 12.1

CRCC * 1186 HK HKD 9.67 25,819 Buy 11.70 8.3 8.6 1.1 1.0 5.8 5.7 1.9 1.9 13.4 12.2

CCC * 1800 HK HKD 9.77 31,869 Hold 9.30 9.8 8.9 1.2 1.1 5.5 5.7 2.6 2.7 12.9 12.7

CSCI * 3311 HK HKD 11.16 5,776 Buy 17.40 12.3 9.1 2.2 1.9 11.3 8.5 2.4 3.3 19.6 22.2

MCC 1618 HK HKD 2.56 12,495 NR NR 10.0 7.1 0.8 0.7 15.1 12.7 2.0 2.9 9.0 11.0

Sinopec Engineering 2386 HK HKD 5.68 3,244 NR NR 5.2 4.9 0.9 0.8 1.7 1.6 6.3 6.7 17.8 17.1

CMEC 1829 HK HKD 6.73 3,581 NR NR 10.5 8.8 1.7 1.5 1.9 1.6 3.6 4.2 17.1 17.7

Far East Global 830 HK HKD 1.27 353 NR NR 14.1 9.8 2.1 1.8 11.3 6.8 n.a n.a 15.8 19.5

China Construction companies - A Shares

CRG 601390 CH CNY 8.12 25,737 NR NR 16.5 14.9 1.8 1.7 11.3 10.3 0.9 1.0 11.3 11.3

CRCC 601186 CH CNY 14.04 25,819 NR NR 15.5 14.2 1.9 1.7 6.9 6.3 0.9 1.1 12.9 12.5

CCC 601800 CH CNY 13.88 31,869 NR NR 16.4 15.0 2.1 1.9 11.4 10.4 1.6 3.0 13.4 12.9

MCC 601618 CH CNY 4.41 12,495 NR NR 21.0 14.7 1.8 1.6 11.7 10.2 0.9 1.4 8.0 11.0

China Construction Engineering 601668 CH CNY 6.36 30,764 NR NR 7.9 6.9 1.4 1.2 6.9 6.1 2.7 2.9 17.9 17.6

China Railway ErJu 600528 CH CNY 13.73 3,230 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Long Yuan Cons 600491 CH CNY 6.08 929 NR NR 27.0 19.9 n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Shanghai Tunnel Engineering 600820 CH CNY 7.72 3,914 NR NR 13.8 11.6 n.a. n.a. n.a. n.a. n.a n.a 10.8 11.3

Shanghai Construction 600170 CH CNY 7.63 5,624 NR NR 18.0 16.4 n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

China CAMC Engineering 002051 CH CNY 26.23 3,272 NR NR 23.2 18.8 3.7 3.2 9.9 8.2 1.1 1.4 16.1 17.1

Hongrun Construction 002062 CH CNY 5.52 701 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

International Metallurgical Companies

Danieli DAN IM EUR 20.42 1,628 NR NR 9.7 9.9 1.0 1.0 0.4 0.4 1.6 1.6 10.3 9.0

Voestalpine AG VOE AV EUR 30.05 6,128 NR NR 12.1 9.9 1.1 1.1 5.9 5.6 3.3 3.4 9.6 10.6

Asian Construction Companies

Daewoo E&C * 047040 KS KRW 5360.00 2,055 Outperform 7700.00 12.5 7.6 0.8 0.7 9.1 7.6 n.a. n.a. 6.6 9.9

GS E&C * 006360 KS KRW 21200.00 1,389 Hold 27000.00 n.a. 5.5 0.4 0.4 48.2 14.6 n.a. n.a. n.a. 7.8

Hyundai E&C * 000720 KS KRW 39350.00 4,043 Outperform 70000.00 6.9 6.0 0.8 0.7 3.9 3.4 1.3 1.3 12.4 12.8

Daelim Ind * 000210 KS KRW 59300.00 1,904 Outperform 85000.00 10.8 5.8 0.5 0.4 8.5 4.4 0.3 0.3 4.5 7.9

Samsung Eng * 028050 KS KRW 32850.00 1,212 Underperform 66500.00 10.0 6.9 1.3 1.1 11.2 6.5 n.a. n.a. 13.5 16.7

ST Engineering STE SP SGD 3.38 7,887 NR NR 19.4 17.9 4.7 4.4 13.0 12.0 4.2 4.5 24.8 25.4

Shimizu 1803 JP JPY 795.00 5,287 Netural 830.00 57.4 23.0 1.7 1.6 23.5 13.8 0.9 0.9 3.3 7.0

Nishimatsu Construction 1820 JP JPY 485.00 1,137 NR NR 35.9 15.5 1.0 0.9 n.a. 13.5 0.8 1.4 2.5 6.2

Toda Corp. 1860 JP JPY 450.00 1,225 NR NR 14.0 12.5 1.1 0.9 22.2 14.3 1.1 1.1 7.6 7.8

Gamuda GAM MK MYR 5.03 3,305 NR NR 16.2 15.4 2.1 2.0 20.9 20.5 2.6 2.6 14.0 13.5

Kolon E & C 003070 KS KRW 6650.00 101 NR NR n.a. 4.8 0.3 0.3 17.9 11.6 n.a n.a n.a 6.4

Kajma 1812 JP JPY 467.00 4,164 Outperform 570.00 27.7 28.9 1.5 1.3 18.7 15.0 1.1 1.1 5.4 4.6

WCT Engineering WCTHG MK MYR 1.54 464 NR NR 11.8 10.1 0.8 0.7 12.1 10.6 4.5 4.7 6.5 7.3

IJM IJM MK MYR 6.60 2,754 NR NR 16.3 15.7 1.4 1.3 12.4 11.1 2.1 2.2 10.0 8.3

US & Europe Construction Companies

Vinci DG FP EUR 47.64 33,242 NR NR 13.5 13.0 1.8 1.7 7.7 7.7 4.4 3.9 13.9 13.3

ACS ACS SM EUR 28.32 10,539 NR NR 12.5 11.8 2.5 2.2 6.2 5.9 4.1 4.2 20.0 19.3

FCC FCC SM EUR 11.21 3,453 NR NR n.a. 25.5 9.3 7.7 11.7 10.6 n.a n.a n.a 45.3

Boskalis Westminster BOKA NA EUR 40.56 5,897 NR NR 11.4 12.9 1.7 1.6 6.8 7.4 3.4 3.5 14.8 12.3

Hochtief HOT GR EUR 59.22 4,854 NR NR 18.1 14.2 1.6 1.5 4.2 4.0 2.9 3.4 10.4 12.3

Skanska SKAB SS SEK 173.90 9,045 NR NR 20.0 17.1 3.2 3.0 11.5 10.3 3.7 3.9 17.5 18.9

Atlas Copco AB ATCOA SS SEK 220.00 32,605 NR NR 20.9 18.4 5.8 5.1 13.7 12.2 2.7 2.9 29.1 28.8

Sandvik AB SAND SS SEK 73.80 11,467 NR NR 15.5 13.4 2.6 2.5 9.4 8.8 4.8 5.0 17.1 18.3

Chicago Bridge & Iron Co NV CBI US USD 39.56 4,284 NR NR 7.6 6.8 1.5 1.2 5.5 4.8 0.7 0.7 22.5 20.8

McDermott International Inc MDR US USD 2.63 625 NR NR n.a. 47.0 0.4 0.4 20.3 5.4 n.a n.a n.a 0.8

Fluor FLR US USD 56.18 8,776 NR NR 13.4 11.9 2.6 2.2 5.3 4.9 1.4 1.5 18.2 18.9

Indian Construction

IVRCL IVRC IN INR 18.15 90 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Nagarjuna NJCC IN INR 78.55 703 NR NR 77.8 38.6 1.2 1.3 8.6 9.2 0.3 0.2 1.3 3.1

Gammon GISP IN INR 14.65 222 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Jaiprakash JPA IN INR 25.60 1,003 NR NR 50.6 n.a. 0.4 0.5 11.4 11.9 2.2 1.3 0.1 n.a

ABB (India) ABB IN INR 1267.00 4,325 NR NR n.a. n.a. n.a. n.a. n.a. n.a. 0.3 0.4 n.a. n.a.

Larsen & Toubro LT IN INR 1534.20 22,957 NR NR 28.1 31.4 3.8 3.4 19.5 18.4 0.9 1.0 14.0 11.8

Total Weighted average

14.9 13.3 2.1 1.9 9.5 8.5 2.1 2.4 14.1 14.5

High

77.8 47.0 9.3 7.7 48.2 20.5 6.3 6.7 29.1 45.3

Low

5.2 4.8 0.3 0.3 0.4 0.4 0.3 0.2 0.1 0.8

Median

14.0 12.7 1.5 1.3 11.2 8.6 1.9 2.0 12.9 12.3

Source: Bloomberg, *Daiwa forecasts


- 20 -

Global railway equipment


Market cap


Name code currency 12-Jan-15 USD Mn Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

China Railway Equipment - H Shares

CSR * 1766 HK HKD 9.57 21,737 Buy 13.30 18.2 15.8 2.6 2.3 3.7 3.3 1.7 1.9 15.0 15.3

CNR

6199 HK HKD 9.89 20,400 NR NR 16.3 14.2 1.9 1.8 14.4 12.7 1.7 2.1 13.2 13.0

Zhuzhou CSR Times * 3898 HK HKD 44.70 6,777 Buy 58.00 18.1 16.3 3.8 3.3 6.3 5.3 1.4 1.6 23.3 21.6

Automation & Railway Equipment - AeJ

CSR

601766 CH CNY 10.13 21,737 NR NR 24.7 21.4 3.4 3.1 16.3 14.2 1.2 1.4 13.8 14.3

CNR

601299 CH CNY 10.83 20,404 NR NR 22.4 19.1 2.7 2.4 13.9 12.2 1.4 1.7 13.0 13.5

China ITS

1900 HK HKD 0.99 211 NR NR 19.8 8.8 0.5 0.4 13.6 7.0 0.6 0.6 2.2 4.9

China Automation G

569 HK HKD 1.18 156 NR NR 8.8 7.4 0.5 0.5 7.0 6.7 1.7 4.2 5.5 6.1

Midas Hldgs

1021 HK HKD 1.83 287 NR NR 31.1 19.8 0.6 0.6 n.a. n.a. 2.8 3.0 1.2 3.0

Ugl Limited

UGL AU AUD 2.12 288 NR NR 3.2 13.9 0.3 0.4 3.9 9.9 2.4 5.8 8.9 2.7

Downer Edi Ltd

DOW AU AUD 4.55 1,615 NR NR 9.5 9.7 1.0 1.0 3.5 3.6 5.2 5.3 11.2 10.2

Automation & Railway Equipment - Europe & US

General Electric Co

GE US USD 23.98 240,812 NR NR 14.6 13.6 1.9 1.8 9.1 8.6 3.7 3.9 11.9 13.0

Honeywell Intl Inc

EMR US USD 60.17 41,653 NR NR 16.3 15.2 3.9 4.0 9.1 8.8 2.9 3.1 24.2 26.7

Emerson Elec Co

HON US USD 98.45 77,068 NR NR 17.8 16.1 3.9 3.4 10.5 9.6 1.9 2.1 23.7 23.2

Hollysys Automation Technolo

HOLI US USD 25.80 1,485 NR NR 18.2 15.6 2.9 2.5 n.a. n.a. n.a 1.3 17.5 18.0

Siemens Ag

SIE GR EUR 92.20 96,060 NR NR 14.0 13.0 2.6 2.4 9.4 9.0 3.5 3.7 18.4 19.1

Abb Ltd

ABBN VX CHF 20.25 46,158 NR NR 16.4 14.1 2.4 2.3 8.6 7.9 3.8 4.0 14.4 16.1

Schneider Electric

SU FP EUR 59.56 41,172 NR NR 15.7 14.0 1.8 1.7 10.8 9.9 3.2 3.5 12.0 12.7

Alstom

ALO FP EUR 26.98 9,880 NR NR 10.8 17.8 1.5 1.6 7.4 13.6 0.3 1.6 13.6 9.1

Bombardier Inc

BBD/B CN CAD 3.92 5,782 NR NR 7.9 7.5 2.4 2.0 8.0 7.0 3.0 2.9 33.3 32.2

Rockwell Automation Inc

ROK US USD 106.00 14,378 NR NR 17.3 15.8 5.4 5.0 10.1 9.5 2.2 2.4 30.8 32.6

Ansaldo Sts

STS IM EUR 8.20 1,939 NR NR 20.0 19.0 3.0 2.7 10.6 10.0 1.8 1.9 15.4 14.6

Automation & Railway Equipment - Japan

Hitachi

6501 JP JPY 883.70 36,024 Outperform 900.0 17.2 15.0 1.8 1.5 8.7 7.8 1.2 1.4 10.6 9.8

Toshiba Corp

6502 JP JPY 488.60 17,462 Neutural 480.0 19.1 14.7 1.7 1.5 7.5 7.1 1.6 1.7 9.9 10.4

Mitsubishi Hvy Ind

7011 JP JPY 675.20 19,211 Neutural 730.0 15.9 19.1 1.5 1.4 9.9 7.7 1.2 1.5 9.6 7.4

Kawasaki Heavy Ind

7012 JP JPY 559.00 7,882 Outperform 600.0 25.6 18.5 2.6 2.3 12.0 10.6 1.1 1.5 10.3 13.2

Nabtesco Corp

6268 JP JPY 2,917.0 3,156 Neutural 2,800.0 25.3 21.1 3.0 2.6 12.4 11.5 1.3 1.4 12.1 12.7

Toyo Electric Mfg

6505 JP JPY 389.0 160 NR NR 24.4 15.6 1.0 0.9 9.2 7.8 1.5 1.5 4.0 6.0

Nippon Signal Co

6741 JP JPY 1,246.0 718 NR NR 22.8 16.7 1.3 1.2 9.0 7.4 1.2 1.4 5.8 7.3

Kinki Sharyo Co

7122 JP JPY 326.0 190 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Yokogawa Electric

6841 JP JPY 1,285.0 2,911 NR NR 20.8 32.4 1.8 1.7 9.1 8.6 1.0 0.9 9.2 5.7

Weighted average

16.2 14.9 2.5 2.3 9.6 9.0 2.8 3.0 15.4 16.0

High

31.1 32.4 5.4 5.0 16.3 14.2 5.2 5.8 33.3 32.6

Low

3.2 7.4 0.3 0.4 3.5 3.3 0.3 0.6 1.2 2.7

Median

17.8 15.6 1.9 1.8 9.1 8.6 1.7 1.9 12.1 13.0

Source: Bloomberg,* Daiwa forecasts


- 21 -

Marine: beneficiary of lower bunker prices and improving transpacific trade

Marine companies should benefit largely from lower bunker prices in 2015. However, we are concerned about slight overcapacity, even though low fuel cost should offset the overcapacity somewhat.

Rating: Positive




Asia-Europe freight rates improved YoY from a low base in 1H13

1H14 saw a significant improvement in Asia-Europe freight rates, due mainly to a low base in 1H13, and more prudent capacity deployment by the shipping companies at the start of 2014, on the back of concerns among the shipping companies about the weak demand outlook and overcapacity in 2014. Asia-Europe freight rates started to weaken in 2H14, as the low-base effect had diminished.

Transpacific freight rates improved on the back of the US economic recovery

Following the recovery in Asia-Europe freight rates in 1H14, there was also an improvement in freight rates for transpacific routes in 2H14, on the back of the recovering US economy. New US housing starts recovered steadily last year, while the US business confidence index also continued to improve.

New Shanghai Freight Index (SCFI)

Source: Shanghai Shipping Exchange

Note: for US rates: USD/FEU

Major routes in China Containerized Freight Index (CCFI)

Source: Shanghai Shipping Exchange

Note: USWC = US West Coast, US EC = US East Coast

US: new housing starts (2011-14)

Source: Bloomberg

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Europe US EC Overall Index

US WC Mediterranean

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('000 units)


- 22 -

US business confidence (2011-14)

Source: Bloomberg


Slight overcapacity

For 2015, we forecast global container shipping demand to increase by 5.0% YoY, which is slightly lower than the 5.4% YoY growth for 2014E (according to Alphaliner). The moderation in 2015E reflects the question-marks over a G3 economic recovery, as among the G3 economies, so far only the US is seeing improving economic activity. On the capacity side, we forecast global shipping capacity to increase by 6.4% YoY for 2015, following a 5.3% YoY increase for 2014, on our forecasts. This is higher than our demand growth forecast, pointing to slight overcapacity, which we believe will continue to be a concern for the industry in 2015. The overall capacity picture will likely depend on shipping companies’ actual capacity deployments; our industry research reveals that at present most shipping companies remain cautious about deploying new capacity, as they do not expect to see a strong global shipping industry recovery in 2015.

Benefit from declining bunker fuel prices

Similar to the airlines under our coverage, the shipping companies should also benefit from weaker oil prices, as this would lead to a decline in the bunker fuel prices over 2015. Around 20% of the shipping companies’ annual operating expenses are for fuel consumption. Given the shipping companies under our coverage universe still had weak net-profit margins in 9M14, despite a likely YoY improvement last year, we expect to see earnings improvements this year on the back of high fuel cost savings. We assume bunker fuel prices fall by 30% YoY to USD385/t for 2015 and remain flat YoY for 2016. Driven primarily by fuel cost savings resulting from a

lower bunker fuel prices, net profit for both Orient Overseas International (OOIL) (316 HK, HKD49.05, Buy [1]) and China Shipping Container lines (CSCL) (2866 HK, HKD2.52, Outperform [2]) look set to improve by more than 60% YoY for 2015, based on our forecasts. Global container shipping: demand and supply trend (2000-2016E)

Source: Alphaliner, Daiwa forecasts

Bunker fuel IFO 180 price (2014–16E)


Recommendations

Top buy – China International Marine Containers

In the shipping subsector, we recommend buying China International Marine Containers (CIMC) (2039 HK, HKD17.04, Buy [1]), as we expect demand for its container boxes to be supported by shipping companies’ continuous capacity growth. As we look for a further improvement in the shipping subsector’s profitability in 2015, we expect replacement demand for container boxes to recover by slightly more than it has in the past 3 years (1-2%). Overall, we expect container box demand to increase by 7-8% YoY in 2015.

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- 23 -

In addition, we believe demand for CIMC’s trailers will increase following the port congestion experienced in 4Q14, as trucking and logistics companies will likely want to increase their inventories in order to avoid a recurrence of the issues caused by last year’s congestion. The accelerated development of free trade zones in China, particularly the Guangdong Free Trade Zone, should support sentiment on the stock, and we expect more news on CIMC’s development in Qianhai over the course of the year. While weak oil prices may weigh on the growth of the company’s offshore engineering business this year, we expect its existing contracts should allow it to maintain its breakeven position through to 2016.

Buy OOIL

Compared with the airline stocks, which rallied strongly in 4Q14, the share-price performance of the shipping companies has been relatively stable. We therefore recommend that investors seeking to buy beneficiaries of the weak oil-price trend first look at the shipping companies. Among the container shipping companies, we recommend OOIL, as we believe a potential rebound in the transpacific freight rate could be a share-price catalyst. We note that around 30% of OOIL’s revenue comes from transpacific trade, compared with 20% for CSCL. Moreover, we think there is still a risk of CSCL being delisted from the A-share market if the demand outlook or bunker fuel price trend turns unfavourable. OOIL: forward PBR (2012- present)

Source: Company, Daiwa forecasts

Risks

Higher-than-expected bunker fuel price

Our Buy call on OOIL is partly premised on a significant YoY decline in the bunker fuel price in 2015. If the bunker fuel prices were to decline by less than we expect, or rebound significantly in 2015, the share prices of the shipping companies we follow would likely be negatively affected.

Lower-than-expected demand for containers

If shipping companies’ capacity increases by less than we expect, or shipping companies show less business confidence than we expect, this would likely have negative implications for CIMC’s container box business in 2015, as it may see smaller orders than we expect or face weaker-than-expected replacement demand.

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Global shipping peers: valuation comparison


Market cap

1-Yr target PBR (x) EV/EBITDA(x) Div yield (%) ROE (%)

Name

code currency 12-Jan-15 USDm Rating Price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

Hong Kong & China

Orient Overseas Intl Ltd * 316 HK HKD 49.05 3,959 Buy 64.0 0.8 0.7 6.3 4.9 3.1 4.1 9.6 12.5

China Shipping Container-H * 2866 HK HKD 2.52 7,205 Outperform 2.9 1.0 0.9 12.8 9.5 n.a. n.a. n.a. 4.2

China Cosco Holdings-H 1919 HK HKD 4.07 9,899 NR 5.4 1.4 1.2 7.9 6.1 n.a. n.a. 11.4 15.7

Sitc International Holdings * 1308 HK HKD 4.21 1,406 Buy 5.2 1.7 1.5 8.8 7.2 6.7 5.5 15.6 17.0

China Shipping Development-H 1138 HK HKD 5.78 4,028 NR NR 0.7 0.7 23.0 16.5 0.2 1.2 1.3 4.9

Sinotrans Shipping Ltd 368 HK HKD 1.86 958 NR NR 0.4 0.4 1.3 0.9 1.3 3.8 1.7 3.4

Pacific Basin Shipping Ltd 2343 HK HKD 3.16 789 NR NR 0.7 0.6 14.4 7.9 0.2 2.9 n.a 5.3

China Cosco Holdings-A 601919 CH CNY 6.94 9,899 NR NR 3.4 3.2 28.3 17.5 n.a n.a n.a 6.4

China Shipping Container-A 601866 CH CNY 4.68 7,205 NR NR 2.2 2.2 34.6 24.0 n.a 0.1 1.2 3.5

Asia

Neptune Orient Lines Ltd NOL SP SGD 0.91 1,759 NR NR 0.9 0.9 19.5 11.1 n.a 0.4 n.a n.a

Misc Bhd MISC MK MYR 7.45 9,307 NR NR 1.3 1.2 12.1 11.6 1.5 1.8 7.1 7.2

Thoresen Thai Agencies Pcl TTA TB THB 17.70 700 NR NR 0.9 0.9 10.3 9.2 1.4 2.1 4.5 5.6

Precious Shipping Pcl PSL TB THB 14.90 471 NR NR 1.0 1.0 13.6 8.8 2.2 3.3 1.8 5.3

Regional Container Line Pcl RCL TB THB 9.35 236 NR NR 0.7 0.7 6.6 5.9 2.0 3.7 3.9 7.7

Evergreen Marine Corp Ltd 2603 TT TWD 24.10 2,629 NR NR 1.1 n.a. 8.0 n.a. n.a. n.a. 8.8 n.a.

Yang Ming Marine Transport 2609 TT TWD 17.00 1,503 NR NR 1.4 n.a. 5.9 n.a. n.a. n.a. 17.5 n.a.

Wan Hai Lines Ltd 2615 TT TWD 31.50 2,192 NR NR 2.0 1.8 8.6 8.4 2.3 2.1 9.2 8.8

U-Ming Marine Transport Corp 2606 TT TWD 48.65 1,309 NR NR 1.6 1.5 13.2 10.3 4.4 4.9 8.7 8.7

Hyundai Merchant Marine 011200 KS KRW 10250.00 1,601 NR NR 4.4 4.5 48.7 18.5 n.a n.a n.a n.a

Hanjin Shipping Co Ltd 117930 KS KRW 5710.00 1,292 NR NR 1.6 1.7 16.0 11.2 n.a n.a n.a n.a

Mitsui Osk Lines Ltd 9104 JP JPY 371.00 3,774 Outperform 430.0 0.7 0.6 11.1 11.9 1.4 1.6 8.5 5.8

Nippon Yusen 9101 JP JPY 350.00 5,020 Neutral 340.0 0.8 0.8 10.0 9.0 1.2 1.6 4.8 5.7

Kawasaki Kisen Kaisha Ltd 9107 JP JPY 330.00 2,614 Neutral 320.0 0.8 0.8 7.4 6.6 1.0 1.6 4.5 6.2

Global

Ap Moeller-Maersk A/S-B MAERSKB DC DKK 12400.00 42,518 NR NR 1.0 0.9 4.3 4.3 3.0 3.2 11.1 10.7

Shipping related business

China International Marine Container -H 2039 HK HKD 17.04 7,104 Buy 23.0 1.5 1.3 10.8 10.0 2.0 2.3 10.2 10.1

China International Marine Container -A 000039 CH CNY 19.90 7,104 NR NR 2.3 2.1 14.2 11.1 1.3 1.8 10.1 11.5

Singamas Container Holdings 716 HK HKD 1.28 399 NR NR 0.6 0.6 7.9 6.6 1.8 3.6 5.4 6.6

Total Weighted average 1.3 1.2 7.5 5.4 0.8 0.9 2.2 3.7

High 4.4 4.5 48.7 24.0 6.7 5.5 17.5 17.0

Low 0.4 0.4 1.3 0.9 0.2 0.1 1.2 3.4

Median 1.0 0.9 10.7 9.1 1.5 2.1 7.8 6.2


Global port peers: valuation comparison


Market Cap


Name

code currency 12-Jan-15 USDm Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

Hong Kong & China

China Merchants Hldgs Intl * 144 HK HKD 25.95 8,577 Buy 32.00 1.0 0.9 13.7 14.1 3.2 3.4 7.7 7.1

Cosco Pacific Ltd * 1199 HK HKD 11.02 4,179 Hold 11.40 0.8 0.8 8.6 8.5 7.6 8.4 6.9 7.3

Xiamen International Port-H

3378 HK HKD 2.06 724 NR NR 0.9 0.8 9.8 8.2 4.1 4.6 7.5 8.4

Dalian Port (Pda) Co Ltd-H

2880 HK HKD 2.90 3,402 NR NR 0.7 0.7 18.3 17.3 2.1 2.4 4.6 5.1

Tianjin Port Dvlp Hlds Ltd

3382 HK HKD 1.67 1,326 NR NR 0.9 0.8 9.5 8.9 3.1 3.3 6.9 6.6

Shenzhen Yantian Port Hld-A

000088 CH CNY 9.12 2,856 NR NR 3.6 3.4 n.a. n.a. 1.4 1.0 8.4 8.2

Shenzhen Chiwan Wharf Hldg-A

000022 CH CNY 18.71 1,753 NR NR 2.8 2.6 11.9 10.8 2.0 2.1 11.2 11.2

Shenzhen Chiwan Wharf Hldg-B

200022 CH HKD 15.09 1,753 NR NR 1.8 1.7 11.8 10.7 n.a n.a 11.2 11.2

Zhuhai Port Co Ltd-A

000507 CH CNY 8.39 1,068 NR NR 2.6 2.6 n.a. n.a. n.a n.a 2.8 3.8

Rizhao Port Co Ltd -A


Shanghai International Por-A

600018 CH CNY 6.31 23,151 NR NR 2.7 2.4 14.8 14.0 2.4 2.6 12.3 12.2

Tangshan Port Group Co Ltd-A

601000 CH CNY 10.47 3,428 NR NR 2.2 2.5 12.4 10.5 0.5 0.5 13.4 12.8

Jiangsu Lianyungang Port -A


Global

Hutchison Port Holdings Tr-U

HPHT SP USD 0.69 5,967 NR NR 0.7 0.7 12.7 11.6 7.5 7.0 3.3 3.8

Dp World Ltd

DPW DU USD 20.60 17,098 NR NR 1.9 1.8 13.3 11.6 1.2 1.4 7.2 7.9

Hamburger Hafen Und Logistik

HHFA GR EUR 17.98 1,547 NR NR 2.2 2.1 5.7 5.4 2.6 2.9 9.1 10.3

Adani Ports And Special Econ

ADSEZ IN INR 328.45 10,953 NR NR 7.7 6.2 27.0 19.2 0.3 0.4 23.3 23.0

Port Of Tauranga Ltd

POT NZ NZD 17.25 1,823 NR NR 2.9 2.8 19.4 18.4 2.7 3.1 9.6 10.0

Intl Container Term Svcs Inc

ICT PM PHP 114.50 5,197 NR NR 4.1 3.7 13.9 11.9 0.8 0.9 14.0 15.0

Total

Weighted average

2.7 2.4 14.0 12.4 2.2 2.4 10.6 10.8

High

7.7 6.2 27.0 19.2 7.6 8.4 23.3 23.0

Low

0.7 0.7 5.7 5.4 0.3 0.4 2.8 3.8

Median

2.2 2.1 12.7 11.6 2.4 2.6 8.1 8.2



- 25 -

Aviation: low jet-fuel price partly reflected, look for fundamentals

Airlines’ profitability set to improve on the back of lower jet-fuel prices in 2015, but probably already factored into share prices. Instead, we recommend investors look for new emerging subsectors like general aviation in 2015.

Rating: Positive


Brian Lam – (852) 25324341 ([email protected])


Passenger demand not very strong

According to our discussions with the airlines under Daiwa coverage, they are not yet seeing a strong recovery in passenger yields. Indeed, domestic yields for the China airlines look to have been under pressure throughout 2014, reflecting continued overcapacity in the domestic market, in our view. On international routes, meanwhile, premium traffic seems to be picking up well for the China airlines but not for Cathay Pacific (CX) (293 HK, HKD17.48, Hold [3]), according to the management guidance of the airlines. We suspect CX has been losing market share to its Mainland rivals on premium traffic out of China. Apart from US routes on which Air China (AC) has beefed up its capacity in order to meet the demand created by loosening of visa requirements for Mainland citizens travelling to the US, international passenger yields for most China airlines improved slightly YoY in 9M14. For 4Q14, the China airlines expect international passenger yields to be flat YoY. CX, for its part, expects

to see pressure on passenger yields in both premium and economy classes for 4Q14. China Big-3 airlines: domestic monthly air ticket price (premium class)

Source: Ctrip, Daiwa

Note: 2-week forward price; AC = Air China, CEA = China Eastern Airlines, CSA = China Southern Airlines

China Big-3 airlines: domestic monthly air ticket price (economy class)

Source: Ctrip, Daiwa

Note: 2-week forward price; AC = Air China, CEA = China Eastern Airlines, CSA = China Southern Airlines

Cargo boosted by electronic goods

In 3Q14, most of the airlines saw a recovery in the air-freight market. We believe this is largely due to the launch of high-profile smartphone products, which often deliver a short-term boost to the market. For 4Q14, given the US port congestion, we expect the air freight market to see a small boost as some consumer goods will have gone via air freight in order to meet holiday-season deadlines.

Strong rally in 4Q14 due to oil price weakness

Share prices did not perform strongly until late 3Q14, when the sharp fall in the crude oil price resulted in a 37% drop in the jet fuel price (1 September to 31 December). Such a sharp drop in price should pave the way for a recovery in airlines’ profitability in 4Q14 and have positive implications for their earnings in 2015,

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given our view that the oil price is likely remain low this year.


Earnings supported by weak oil price

We forecast an average jet-fuel price of USD75/bbl for 2015, down 34% YoY, and see the price holding steady in 2016. In turn, we forecast the net profits of the airlines we cover to increase by more than 50% YoY this year. However, sentiment towards airline stocks has been positive since the jet-fuel price started falling, with share prices increasing by 26-40% from 1 September to the end of December 2014. We see only limited upside for the airline stocks from current levels. Singapore jet kerosene spot price


Demand to increase, but capacity as well

We forecast traffic to continue to increase in 2015, albeit driven mainly by new capacity. With the further slowdown in the economy in China, travel spending is likely to become more cautious, particularly for business travel. In sum, we believe demand growth may closely match the capacity expansion we expect for 2015. We expect demand in the domestic market to expand by 8-9% YoY this year, and international traffic to increase by 12%. We forecast the passenger load factors for both domestic and international flights to be flat YoY, but the overall passenger yield should decline 1% YoY, due mainly to a lower fuel surcharge YoY. On the cargo side, we expect the Big-3 China airlines and CX to face a tough environment, given an overcapacity of freighters in the market. However, we believe cargo load factors reached a bottom in 2014 and will be flat YoY. Similar to passenger yields, we expect cargo yields to decline by 2% in 2015 as a result of a lower fuel surcharge. In volume terms, we do not foresee a strong pick-up YoY, though an economic

recovery in the US would likely be a major driver. All told, we forecast cargo traffic volumes to increase by 2-3% YoY for 2015 for the Big-3 China airlines and CX.

Disneyland opening to lift sentiment, but has the market gotten carried away?

According to The Walt Disney Company, Shanghai Disney Resort is scheduled to open at the end of 2015. The resort will cover 3.9m sq m (91 acres) and, on some estimates, will attract 30m visitors a year in the long term. We are likely to see a steady stream of news about progress on construction work and the park’s attractions over the course of the year, which should be positive for sentiment on stocks such as China Eastern Airlines (CEA (670 HK, HKD3.93, Hold [3]). However, we believe the market is over-optimistic about the resort’s impact on the airlines. Let’s assume the attraction does bring in 30m visitors a year and 95% of the visitors come by rail or car (air travel accounted for just 1% of total passenger traffic in China in 2012). Now, let’s say CEA wins a 50% share of the visitors travelling by air, and 50% of these passengers are incremental additions (tourists who may be adding an extra day to their trips in order to visit the resort). Taking as a base our estimate that CEA will carry more than 90m passengers in 2015, we find trips to Disney will yield just 375,000 additional passengers in phase 1 of the resort’s development (and 750,000 for the theoretical phase 2). Disney resorts worldwide: attendance figures (2008-13)

(Mn visitors) 2008 2009 2010 2011 2012 2013 Area

(Acres)

Magic Kingdom (Walt Disney World, Florida, US) 17.1 17.2 17.0 17.1 17.5 18.6 105

Tokyo Disneyland 14.3 13.6 14.5 13.7 14.8 17.2 115

Disneyland (California, US) 14.7 15.9 16.0 16.1 16.0 16.2 85

Tokyo Disney Sea 12.5 12.0 12.7 11.9 12.7 14.1 176

EPCOT (Walt Disney World, Florida, US) 10.9 11.0 10.8 10.8 11.1 11.2 300

Disneyland Park (Disneyland Paris) 12.7 12.7 10.5 11.0 11.2 10.4 126

Disney's Animal Kingdom (Walt Disney World, Florida, US) 9.5 9.6 9.7 9.8 10.0 10.2 403

Disney's Hollywood Studios (Walt Disney World, Florida, US) 9.6 9.7 9.6 9.7 9.9 10.1 135

Disney's California Adventure (California, US) 5.5 6.1 6.3 6.3 7.8 8.5 72

Hong Kong Disneyland 4.5 4.6 5.2 5.9 6.7 7.5 68

Walt Disney Studios Park (Disneyland Paris) 2.7 2.7 4.5 4.7 4.8 4.5 62

Shanghai Disney Report First Phase expected to open in late-2015/early-2016; first-year visitor numbers forecast at 7.3m,

rising to 30m long term 91 (1st phase)

Source: TEA/ AECOM, Theme Park Tourist

*Estimation from CNStock

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Clarity on financing of new airport in Beijing

On 15 December, the Civil Aviation Administration of China (CAAC) approved the construction of a new airport in Beijing, the third airport in the capital (the others being Beijing Capital international Airport and Beijing Nanyuan Airport). The new airport, which is designed to handle 72m passengers per year, requires a total investment of nearly CNY80bn, of which the CAAC will contribute CNY18bn and the parent company of Beijing Capital International Airport (BCIA) (694 HK, HKD7.20, Sell [5]) parent will contribute CNY6bn of the capex. The balance is to be provided by the CAAC, Ministry of Finance, and private investors. We expect 2015 to bring further details on how the airport will be financed, as well as clarity on whether BCIA will be involved in the initial stages of construction or simply manage the facility on behalf of its parent. In our view, the less BCIA is involved, the better. Still, the new airport will inevitably draw traffic from the original airport owned by BCIA.

Opening-up of general aviation nearing final stages

According to the CAAC, China targets to open up its low-altitude airspace by the end of 2015. Authority over the low-altitude airspace has already been transferred to the CAAC from the military, and we expect further details to emerge on the operational arrangements in the coming year. Separately, we would not be surprised to hear of more policies encouraging private capital to enter the national defence sector in 2015, and the present cost-plus mechanism may also shift to a more market-driven pricing mechanism. In our view, both developments would be positive for sentiment on the aviation manufacturing sector.

Recommendations

Bottom-fishing on AviChina

We believe AviChina’s share price stands to benefit from policy announcements concerning the general aviation sector in 2015. Hence, while we have less conviction on the stock now than when it was trading at close to HKD4, the recent weakness in the share price should be seen as a bottom-fishing opportunity. Indeed, the stock is trading at a 20% discount to our SOTP valuation, based on current A-share prices, which should limit further downside in the near term.

Take profit on CEA

Notwithstanding our forecast for a strong earnings improvement for CEA in 2015, the share price performed strongly in 4Q14 on the back of positive investors’ sentiment after the oil price started falling in September. As we expect the jet fuel price to hold at USD75/bbl for 2015, this is unlikely to serve as additional catalysts for shares in the airlines to outperform. On the other hand, we see downside risk from a recurrence of Renminbi depreciation against the US dollar. Daiwa’s Chief Economist, Kevin Lai, forecasts a 6% depreciation in the Renminbi against the US dollar in 2015, which has negative implications for trading sentiment on the airline stocks. We recommend taking profit on CEA, which perhaps because of the over-optimism over the Shanghai Disney Resort is now trading at a 2015E PBR of 1.2x, far above its past three-year average multiple of 0.9x. CEA: forward PBR (2012- present)

Source: Company, Daiwa forecasts

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Risks

Downside risk: lower-than-expected traffic demand growth

The main downside risk to our Outperform recommendation on TravelSky would be if the airlines were more cautious than expected on increasing their capacity, which would result in lower-than-expected traffic volume growth.

Upside risk: larger-than-expected fuel-price decline

The main upside risk to our profit-taking recommendation on the airlines, especially CEA, would be a larger-than-expected decline in the jet-fuel price, which would support better-than-expected earnings in 2015 and lift sentiment on the airline stocks.

Global airlines: valuation comparison


Market cap


Name

code currency 12-Jan-15 USD Mn Rating Price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

China

Air China Ltd-H * 753 HK HKD 7.08 16,451 Hold 7.20 1.3 1.2 7.5 6.0 0.5 1.1 5.1 12.6

China Eastern Airlines Co-H * 670 HK HKD 3.93 9,920 Hold 3.80 1.3 1.2 8.0 6.4 n.a. n.a. 7.4 18.1

China Southern Airlines Co-H * 1055 HK HKD 4.04 7,843 Outperform 4.20 0.9 0.8 6.8 4.3 0.4 1.3 4.0 15.6

China Southern Airlines Co-A

600029 CH CNY 5.64 7,843 NR NR 1.6 1.4 10.7 8.0 0.3 0.6 3.9 10.6

China Eastern Airlines Co-A

600115 CH CNY 5.70 9,920 NR NR 2.6 2.3 11.5 8.7 0.1 0.3 6.0 13.7

Air China Ltd-A

601111 CH CNY 8.94 16,451 NR NR 2.0 1.9 11.3 9.0 0.3 0.6 5.3 9.4

Hainan Airlines Co-A

600221 CH CNY 3.49 6,854 NR NR n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Asia

Cathay Pacific Airways * 293 HK HKD 17.48 8,869 Hold 16.90 1.0 1.0 5.0 3.7 1.6 2.5 4.3 7.8

Singapore Airlines Ltd

SIA SP SGD 12.50 10,940 NR NR 1.1 1.1 5.2 5.3 2.1 2.0 3.3 2.9

China Airlines Ltd

2610 TT TWD 15.80 2,577 NR NR 1.1 n.a. 7.6 n.a. n.a. n.a. 13.2 n.a.

Eva Airways Corp

2618 TT TWD 24.20 2,929 NR NR 1.5 n.a. 5.6 n.a. n.a. n.a. 12.0 n.a.

Ana Holdings Inc

9202 JP JPY 301.30 8,936 Neutral 270.00 1.4 1.3 7.6 6.7 1.0 1.3 2.8 5.5

Japan Airlines Co Ltd

9201 JP JPY 3755.00 11,486 Buy 4200.00 2.0 1.7 4.5 4.4 2.1 2.4 24.0 19.7

Qantas Airways Ltd

QAN AU AUD 2.43 4,352 NR NR 1.1 1.7 9.1 4.6 n.a n.a n.a 13.3

Air New Zealand Ltd

AIR NZ NZD 2.60 2,262 NR NR 1.5 1.5 4.2 3.5 3.8 4.5 12.7 16.3

Malaysian Airline System Bhd

MAS MK MYR 0.27 1,266 NR NR 2.0 2.8 n.a. 29.5 n.a n.a n.a n.a

Thai Airways International

THAI TB THB 15.30 1,015 NR NR 0.7 0.7 16.9 7.4 n.a 1.1 n.a n.a

Korean Air Lines Co Ltd

003490 KS KRW 44900.00 2,431 NR NR 1.2 1.1 9.0 7.7 n.a n.a n.a 9.5

Asiana Airlines

020560 KS KRW 7170.00 1,291 NR NR 1.7 1.5 10.2 7.2 n.a 0.0 n.a 11.9

International

Alaska Air Group Inc

ALK US USD 60.61 8,039 NR NR 3.5 3.0 6.2 5.0 1.0 1.0 26.3 28.2

United Continental Holdings

UAL US USD 65.92 24,329 NR NR 5.7 3.2 7.0 4.8 n.a 0.4 52.5 61.7

Delta Air Lines Inc

DAL US USD 46.06 38,550 NR NR 2.9 2.3 6.4 5.1 0.6 0.9 23.6 27.1

Deutsche Lufthansa-Reg

LHA GR EUR 14.31 7,831 NR NR 1.2 1.1 3.6 2.9 2.7 4.2 7.7 18.0

Air France-Klm

AF FP EUR 7.62 2,704 NR NR 1.6 1.4 5.4 3.9 n.a 0.4 n.a 25.1

Latam Airlines Group Sa

LAN CI CLP 6873.50 6,089 NR NR 1.2 1.1 8.7 6.5 0.3 1.1 n.a 8.1

Aeroflot-Russian Airlines

AFLT RM RUB 34.45 607 NR NR 0.3 0.3 2.7 2.6 6.9 8.6 n.a 8.0

LCC

Nok Airlines Pcl

NOK TB THB 13.70 260 NR NR 2.1 1.9 n.a. 7.1 n.a 4.5 n.a 17.3

Airasia Bhd

AIRA MK MYR 2.62 2,041 NR NR 1.3 1.2 10.9 8.8 1.5 2.3 9.8 14.2

Tiger Airways Holdings Ltd

TGR SP SGD 0.27 435 NR NR 1.1 2.4 n.a. n.a. n.a n.a n.a n.a

Easyjet Plc

EZJ LN GBp 16.31 9,824 NR NR 2.9 2.6 8.6 7.7 2.7 3.5 21.5 21.2

Ryanair Holdings Plc

RYA ID EUR 9.65 15,827 NR NR 4.0 3.6 12.7 9.3 0.5 2.8 15.3 23.0

Gol Linhas Aereas Intel-Adr

GOL US USD 5.22 1,478 NR NR 11.3 9.4 n.a. n.a. 0.6 0.4 n.a 29.2

Southwest Airlines Co

LUV US USD 40.25 27,319 NR NR 3.4 2.8 8.1 6.1 0.6 0.7 17.8 22.3

Virgin Australia Holdings Lt

VAH AU AUD 0.44 1,250 NR NR 1.3 1.3 26.2 10.2 n.a n.a n.a n.a

Cebu Air Inc

CEB PM PHP 84.50 1,142 NR NR 2.1 1.9 9.8 8.1 1.4 1.8 14.4 18.2

Total

Weighted average

2.5 2.0 7.6 5.9 0.8 1.2 15.2 20.3

High 11.3 9.4 26.2 29.5 6.9 8.6 52.5 61.7

Low

0.3 0.3 2.7 2.6 0.1 0.0 2.8 2.9

Median

1.5 1.5 7.8 6.5 1.0 1.2 10.9 15.9



- 29 -

Global airports and travel-related companies: valuation comparison



Name

code currency 12-Jan-15 Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

China

Beijing Capital Intl Airpo-H * 694 HK HKD 7.20 Sell 6.10 17.7 15.6 1.5 1.4 7.6 8.1 2.3 2.6 8.5 9.1

Guangzhou Baiyun Internati-A

600004 CH CNY 10.92 NR NR 12.3 11.6 1.5 1.4 5.4 5.0 3.7 3.9 12.5 12.4

Shanghai International Air-A

600009 CH CNY 19.46 NR NR 18.0 16.1 2.0 1.9 10.4 9.3 1.9 2.1 11.6 12.1

Xiamen International Air-A

600897 CH CNY 23.06 NR NR 14.2 12.4 2.4 2.1 7.7 6.8 1.7 1.7 17.9 18.1

Shenzhen Airport Co-A

000089 CH CNY 5.75 NR NR 33.0 23.5 1.2 1.2 10.7 8.5 0.3 0.8 3.2 5.1

Asia

Airports Of Thailand Pcl ** AOT TB THB 291.00 BUY 340.00 34.0 27.6 4.3 3.9 19.1 16.1 1.3 1.4 12.9 14.8

Malaysia Airports Hldgs Bhd

MAHB MK MYR 6.33 NR NR 55.5 38.1 1.6 1.5 14.8 12.6 1.4 1.6 2.7 3.7

Auckland Intl Airport Ltd

AIA NZ NZD 4.25 NR NR 32.2 30.4 2.1 1.7 18.3 17.4 2.1 3.3 7.2 5.7

Japan Airport Terminal Co

9706 JP JPY 4960.00 NR NR 152.8 62.5 4.0 3.9 23.8 20.7 0.2 0.3 2.7 6.2

Europe

Flughafen Wien Ag

FLU AV EUR 77.08 NR NR 18.9 17.0 1.7 1.6 8.4 8.1 2.2 2.8 9.1 9.6

Fraport Ag Frankfurt Airport

FRA GR EUR 49.74 NR NR 19.4 16.5 1.4 1.4 10.5 9.8 2.6 2.8 7.6 8.5

Aeroporto Di Venezia Marco P

SAVE IM EUR 13.30 NR NR 24.9 22.8 3.4 3.4 14.1 12.4 3.7 3.7 11.7 12.3

Adp

ADP FP EUR 103.20 NR NR 26.2 22.6 2.5 2.4 11.7 11.0 2.3 2.6 10.0 10.8

Flughafen Zuerich Ag-Reg

FHZN SW CHF 688.00 NR NR 21.4 19.9 1.9 1.8 10.1 9.8 1.9 2.2 9.3 9.4

Latin America

Grupo Aeroport Del Pacific-B

GAPB MM MXN

Grupo Aeroport Del Sureste-B

ASURB MM MXN 189.92 NR NR 24.4 22.5 3.2 3.1 15.9 14.5 2.6 2.5 13.4 13.7

Grupo Aeroportuario Del Cent

OMAB MM MXN 67.39 NR NR 26.2 23.4 4.3 4.1 15.8 14.1 4.3 3.2 16.6 18.6

Travel-related IT

Travelsky Technology Ltd-H * 696 HK HKD 8.34 Outperform 9.00 15.7 14.0 1.9 1.7 8.9 8.4 2.2 2.4 12.8 12.8

SABRE CORP

SABR US USD 19.53 NR NR 20.7 17.6 35.8 16.8 9.6 8.6 0.9 1.8 155.2 193.1

Sia Engineering Co Ltd

SIE SP SGD 4.18 NR NR 16.9 23.8 3.5 3.6 28.9 34.4 5.3 4.0 20.5 14.6

Ctrip.Com International-Adr

CTRP US USD 46.31 NR NR 80.7 66.2 4.5 4.3 150.3 92.0 n.a n.a 4.0 5.4

Amadeus It Holding Sa-A Shs

AMS SM EUR 33.77 NR NR 22.1 20.4 6.9 6.0 12.8 11.9 2.0 2.3 32.0 29.9

Elong Inc-Sponsored Adr

Long US USD 17.96 NR NR 447.0 99.6 n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

Qunar Cayman Islands Ltd-Adr

QUNR US USD 29.37 NR NR n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a 156.1

Total

Weighted average

33.5 25.0 5.0 3.8 20.8 16.6 1.9 2.1 20.4 27.5

High

447.0 99.6 35.8 16.8 150.3 92.0 5.3 4.0 155.2 193.1

Low

12.3 11.6 1.2 1.2 5.4 5.0 0.2 0.3 2.7 3.7

Median

23.3 22.6 2.4 2.1 11.7 11.0 2.1 2.5 11.6 12.2

Source: Bloomberg, *Daiwa forecasts, **Covered by Daiwa alliance partner Thanachart


- 30 -

Global aviation manufacturing peers: valuation comparison

Bloomberg Trading Share price Market

cap


Name

Code currency 12-Jan-15 USDm Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

PRC

Avichina Industry & Technology * 2357 HK HKD 5.10 3,601 Buy 6.40 34.7 30.9 2.1 2.0 11.3 11.3 0.5 0.5 6.2 6.5

Jiangxi Hongdu Aviation Indust

600316 CH CNY 27.19 3,144 NR NR 240.6 190.1 4.0 4.0 174.6 122.8 0.1 0.1 1.8 1.8

Avic Helicopter Co Ltd

600038 CH CNY 36.16 3,437 NR NR 65.7 50.4 3.5 3.3 31.5 27.5 0.5 0.6 5.3 6.1

China Avic Electronics Co Ltd

600372 CH CNY 27.94 7,925 NR NR 75.9 59.7 8.9 7.8 43.6 35.9 0.2 0.3 14.3 15.9

China Aviation Optical-Electri

002179 CH CNY 24.00 1,793 NR NR 32.7 24.1 3.9 3.4 21.7 17.2 0.6 0.7 12.1 14.5

Avic Aircraft Co Ltd

000768 CH CNY 19.56 8,370 NR NR 117.8 94.0 4.3 4.1 48.9 42.2 0.1 0.1 4.2 5.2

Avic Aviation Engine Corp Plc

600893 CH CNY 30.55 9,599 NR NR 63.3 50.3 3.6 3.4 25.8 19.2 0.4 0.3 11.0 11.2

Avic Heavy Machinery Co Ltd

600765 CH CNY 19.16 2,403 NR NR 76.6 44.6 n.a. n.a. n.a. n.a. n.a n.a n.a. n.a.

China Spacesat Co Ltd

600118 CH CNY 26.54 5,060 NR NR 79.2 64.3 7.3 6.7 60.8 48.8 0.3 0.5 8.8 10.1

Citic Offshore Helicopter Co L

000099 CH CNY 12.99 1,269 NR NR 34.2 26.9 2.7 2.6 17.4 14.4 0.6 0.7 8.3 9.8

Sichuan Haite High-Tech Co Ltd

002023 CH CNY 23.82 1,294 NR NR 45.5 32.9 4.7 4.2 28.5 20.4 0.8 1.0 10.1 12.8

Wisesoft Co Ltd

002253 CH CNY 23.85 535 NR NR 66.3 27.6 3.9 3.5 n.a. n.a. 0.9 0.7 5.7 12.5

Asia

Singapore Technologies Enginee

STE SP SGD 3.38 7,887 NR NR 19.4 17.9 4.7 4.4 13.0 12.0 4.2 4.5 24.8 25.4

Korea Aerospace Industries Ltd * 047810 KS KRW 39,300 3,534 Outperform 45,000 35.5 24.8 3.6 3.2 18.0 14.7 0.5 0.5 10.7 13.8

Europe

Bba Aviation Plc

BBA LN GBp 3.55 2,524 NR NR 17.2 15.6 2.3 2.1 11.0 10.0 2.9 3.2 13.0 15.0

Bae Systems Plc

BA/ LN GBp 4.70 22,481 NR NR 12.6 11.9 4.4 4.2 7.8 7.6 4.3 4.5 32.6 33.4

Qinetiq Group Plc

QQ/ LN GBp 1.87 1,766 NR NR 12.7 13.2 2.4 3.7 5.9 7.4 2.2 2.8 19.5 25.6

Ultra Electronics Holdings Plc

ULE LN GBp 18.41 1,953 NR NR 15.2 14.4 3.6 3.3 10.7 10.0 2.4 2.5 24.5 23.9

Meggitt Plc

MGGT LN GBp 5.19 6,307 NR NR 15.9 14.3 1.9 1.9 10.9 10.0 2.6 2.9 10.5 11.4

Rolls-Royce Holdings Plc

RR/ ln GBp 8.69 24,765 NR NR 13.7 14.0 2.5 2.4 6.5 6.6 2.7 2.8 19.3 17.9

Cobham Plc

COB LN GBp 3.31 5,715 NR NR 17.6 15.8 3.2 3.1 10.4 8.6 3.2 3.4 15.5 16.7

Dassault Aviation Sa

AM FP EUR 1012.00 11,027 NR NR 22.0 21.2 1.9 1.8 15.5 14.5 0.9 0.9 8.4 8.1

Finmeccanica Spa

FNC IM EUR 7.79 5,323 NR NR 19.3 12.4 1.3 1.2 6.7 6.1 0.5 1.6 5.5 8.6

Safran Sa

SAF FP EUR 54.01 26,637 NR NR 18.9 16.4 3.1 2.7 9.3 8.4 2.2 2.5 16.4 16.6

Zodiac Aerospace

ZC FP EUR 28.72 9,796 NR NR 23.2 17.9 3.1 2.7 14.5 11.9 1.1 1.3 14.8 16.3

Mtu Aero Engines Ag

MTX GR EUR 74.74 4,596 NR NR 16.6 15.4 2.7 2.5 9.2 8.7 2.0 2.1 18.7 16.6

Saab Ab

SAABB SS SEK 194.50 2,630 NR NR 17.9 15.0 1.7 1.6 8.5 7.8 2.5 2.8 9.1 10.6

North America

Heico Corp

HEI US USD 57.42 3,311 NR NR 32.7 28.9 4.7 4.1 14.7 13.5 0.8 0.2 15.4 15.3

Boeing Co/The

BA US USD 130.87 93,301 NR NR 15.7 15.3 6.7 6.5 9.9 8.9 2.2 2.6 39.1 41.0

United Technologies Corp

UTX US USD 114.45 104,339 NR NR 16.8 15.8 3.0 2.8 10.2 9.6 2.1 2.2 18.5 18.3

Textron Inc

TXT US USD 42.14 11,633 NR NR 19.6 16.4 2.4 2.1 10.1 9.2 0.2 0.2 13.8 14.6

B/E Aerospace Inc

BEAV US USD 60.32 6,352 NR NR 15.3 16.2 2.7 2.2 11.4 11.0 n.a 0.7 10.8 66.0

Spirit Aerosystems Holdings In

SPR US USD 42.63 6,021 NR NR 12.2 11.8 2.9 2.3 6.9 6.8 n.a n.a 28.0 22.4

Triumph Group Inc

TGI US USD 63.81 3,241 NR NR 13.5 10.9 1.4 1.3 8.1 7.0 0.3 0.3 10.2 13.4

Kaman Corp

KAMN US USD 38.01 1,031 NR NR 16.6 14.0 1.9 1.7 9.3 8.0 1.7 0.8 11.4 12.5

Rockwell Collins Inc

COL US USD 84.15 11,187 NR NR 18.7 16.6 5.6 5.3 11.3 10.3 1.5 1.5 32.5 34.6

Precision Castparts Corp

PCP US USD 225.75 32,177 NR NR 18.9 16.5 3.0 2.6 12.3 11.0 0.1 0.1 16.5 16.2

Northrop Grumman Corp

NOC US USD 151.97 30,698 NR NR 16.0 16.8 3.3 3.4 9.1 9.8 1.8 1.9 19.9 18.6

Lockheed Martin Corp

LMT US USD 194.47 61,438 NR NR 17.4 16.9 12.8 11.1 9.7 9.8 2.8 3.2 74.7 74.5

Bombardier Inc

BBD/B CN CAD 3.92 5,782 NR NR 7.9 7.5 2.4 2.0 8.0 7.0 3.0 2.9 33.3 32.2

Aerovironment Inc

AVAV US USD 25.35 591 NR NR 50.6 1,950.0 n.a. n.a. 17.8 55.0 n.a n.a 2.8 n.a.

Alliant Techsystems Inc

ATK US USD 116.96 3,735 NR NR 11.7 10.2 2.1 1.7 8.4 7.5 0.9 1.1 20.4 17.3

Northrop Grumman Corp

NOC US USD 151.97 30,698 NR NR 16.0 16.8 3.3 3.4 9.1 9.8 1.8 1.9 19.9 18.6

L-3 Communications Holdings In

LLL US USD 126.81 10,796 NR NR 17.0 16.6 1.9 1.8 10.8 10.6 1.9 2.0 11.1 11.0

Transdigm Group Inc

TDG US USD 201.25 10,557 NR NR 26.6 24.2 n.a. n.a. 16.1 14.6 n.a n.a n.a n.a

Booz Allen Hamilton Holding Co

BAH US USD 27.84 4,158 NR NR 17.3 17.2 10.7 18.6 10.3 10.4 5.0 2.8 127.9 129.6

Esterline Technologies Corp

ESL US USD 107.85 3,424 NR NR 19.2 19.2 1.8 1.9 10.5 10.2 n.a n.a 8.8 10.6

Hexcel Corp

HXL US USD 40.38 3,852 NR NR 18.8 16.8 3.4 2.9 11.1 9.9 168.4 182.3 18.0 18.0

Mantech International Corp/Va

MANT US USD 30.67 1,143 NR NR 24.1 20.1 1.0 1.0 8.6 8.5 2.7 2.7 4.2 5.0

Curtiss-Wright Corp

CW US USD 65.93 3,166 NR NR 18.9 16.6 2.1 2.1 9.4 8.8 0.8 0.7 10.8 13.7

Lmi Aerospace Inc

LMIA US USD 14.01 178 NR NR 164.8 30.0 1.2 1.2 10.1 8.6 n.a n.a 2.1 5.7

Raytheon Co

RTN US USD 106.65 32,887 NR NR 15.5 15.3 2.9 2.7 9.3 9.2 2.3 2.5 19.0 18.2

Moog Inc

MOG/A US USD 69.95 2,896 NR NR 18.9 16.6 2.0 2.1 9.7 9.1 n.a n.a 11.6 13.2

Sourth America

Embraer Sa

EMBR3 BZ BRL 22.91 6,373 NR NR 14.3 12.6 1.6 1.5 7.3 6.7 3.5 3.7 11.3 11.9

Weighted average

21.9 21.3 4.5 4.2 12.5 11.3 2.8 3.1 26.1 26.8

High

240.6 1950.0 12.8 18.6 174.6 122.8 168.4 182.3 127.9 129.6

Low

7.9 7.5 1.0 1.0 5.9 6.1 0.1 0.1 1.8 1.8

Median

18.9 16.7 3.0 2.7 10.5 9.9 1.7 1.6 12.6 15.0



- 31 -

Expressways: be selective

We expect more contributions from passenger cars, as we see the trade outlook affecting truck traffic growth in 2015.

Rating: Neutral




Lower commercial vehicle sales, good passenger vehicle growth

We expect passenger traffic growth to have exceeded truck traffic growth in 2014, given the slowdown in commercial vehicle sales during the year (in the year to November 2014, such sales were down 7% YoY, vs. an 8.4% YoY rise in the year to November 2013). We believe last year’s weak commercial vehicle sales should be seen in the context of the slowdown in import growth (7.2% YoY for 2013 but flat for 2014E) and export growth (7.8% YoY for 2013 down to 5.8% for 2014E). Hence, we expect the revenue growth driver for Jiangsu Expressway (JSE) (177 HK, HKD9.35, Outperform [2]), Zhejiang Expressway (ZJE) (576 HK, HKD9.43, Hold [3]) and Yuexiu Transport Infrastructure (YTI) (1052 HK, HKD4.50, Buy [1]) for 2014 to have shifted from trucks to passenger vehicles.

China: passenger vs. commercial vehicle growth (2011- present)

Source: CEIC

Traffic diversions affected major contributors

JSE, ZJE and Shenzhen Expressway (SZE) (548 HK, HKD5.73, Hold [3]) all faced traffic diversions on their major toll roads in 2014. For JSE, the Lima Expressway has weighed on traffic growth for the company’s major toll road (Shanghai-Nanjing Expressway) since it opened in December 2013, while ZJE’s Hangzhou-Ningbo Expressway has been affected by the Qianjing Road (opened in April 2014). Meanwhile, the Qinglian Expressway (owned both SZE and YTI) will be affected by the Guangle Expressway (opened in October 2014).

New toll road policy and government support have given the sector a boost

On 29 June 2014, Guangdong province implemented its toll-by-weight policy. Two of YTI’s toll roads – GNSR and Guangzhou West Second Ring Road – appear to have benefited from the new policy, having recorded revenue growth of 16-18% YoY for July and August 2014 (vs. 11% in the year to June 2014). We expect YTI to continue to benefit from the toll-by-weight policy in 2015. In October 2014, Mr Ma Kai, a vice premier of China’s State Council, called for more private-sector involvement in expressway investment and construction in China. Mr Ma’s comments boosted sentiment on the sector, as investors mulled the prospect of more toll-road injections by parent companies into listed companies or the sale of toll-road assets by indebted local governments to listed companies. In both cases, investors sensed an opportunity for the listed companies to secure high-return projects.

(40)

(30)

(20)

(10)

0

10

20

30

40

50

Jan-

11

Ma

r-11

Ma

y-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Ma

r-12

Ma

y-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Ma

r-13

Ma

y-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Ma

r-14

Ma

y-14

Jul-1

4

Sep

-14

Nov

-14

PV growth Y oY (%) CV growth YoY (%)

YoY (% )


- 32 -


Slower truck traffic growth on weak commercial vehicle sales

We believe toll road traffic growth will continue to depend largely on passenger cars, given a slower economy generally and with the China government prioritising domestic consumption over foreign trade. We therefore expect the ASPs of the expressway companies to decline YoY as a result of their weaker traffic mixes. In turn, we are Neutral on the outlook for the expressways in 2015. Still, we are see only limited downside risk, given we find most of the toll-road companies offering dividend yields of more than 5%, which should provide downside protection.

Traffic diversion impact to ease for some expressways

We expect JSE to be less affected by traffic diversion this year, while the impact on ZJE may extend into 1Q15 before its traffic growth starts to recover thereafter. However, the Qinglian Expressway will likely continue to be affected by traffic diversion in 2015, as the competing toll road only entered operation in October 2014, which would likely put pressure on SZE’s bottom line and be slightly negative for YTI (SZE has a 76% stake in the expressway, with YTI holding the remainder).

More policy support to be announced

On 12 December 2014, drafting of the government’s SOE reform programme entered its final stage. We expect more concrete plans to be unveiled in 2015, including details of how private investors will be able to participate in the investment and construction of expressways, which would allow the market to assess the implications for the listed companies in the sector. Separately, it is possible that China’s long-awaited reforms to pricing regulations will be finalised in 2015. In this context, we expect the government to provide more guidelines on tariff increases, which could help to improve the returns of toll-road owners. Moreover, we think such a move would be logical given the government’s interest in attracting more private capital to the sector.

Recommendations

We prefer JSE among the large-cap expressway stocks; YTI is our top pick in the China expressway sector Among the large-cap expressway stocks, we recommend JSE, as we see the traffic diversions on its major road, the Shanghai-Nanjing Expressway (SNE), coming to an end in 2015. Moreover, from May 2014 to the present day, the stock has been a laggard relative to its closest peers, ZJE and SZE. We recommend JSE for investors seeking exposure to the sector. JSE: forward PER (2012 – present)


Share price performance in 2014-present

Source: Bloomberg

For the China Expressway Sector, we recommend YTI, as we think its newly acquired Suiyuenan Expressway (announced on 17 December 2014) will help it boost its traffic quicker than its peers over 2015. We believe the new road will start contributing to net profit from mid-2015 and we forecast that the bottom line for the YTI could be boosted by 9-22% YoY over 2015-16.

9

10

11

12

13

14

15Ja

n-12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15


(PER)

Avg

+1 SD

-1 SD

-20%

0%

20%

40%

60%

80%

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

ZJE SZE JSE


- 33 -

Furthermore, we expect the Suiyuenan Expressway to offset revenue lost from the Xian Expressway when the latter is returned to the local government in 2017. Therefore, we remain positive on the acquisition. Also, we find the stock the most attractive in the sector in terms of dividend yield and valuation. YTI: forward PER (2012-present)


Hold rating on SZE We expect the traffic diversion from Qinglian Expressway to Guangle Expressway to continue until at least September 2015. We would not be positive if it were to take on more BT projects or developments such as the Guilong project, as we think this would delay improvements to the company’s balance sheet, which has been a concern for investors in the past. As at 12 January 2015 YTD, the share price is up 71% in absolute terms and has outperformed JSE and ZJE. Hence, we see a lack of near-term share-price catalysts for the stock and recommend taking profits on SZE.

SZE: forward PER (2012- present)


Risks

Lower-than-expected traffic growth

The main risk to our Outperform recommendation for JSE and Buy rating for YTI would be weaker-than-expected organic growth and additional traffic diversions.

Expressways peers: valuation comparison


Market cap

1-Yr target PER (x) EV/EBITDA(x) Div yield (%) ROE (%)

Name

code currency 12-Jan-15 USDm Rating price FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

China - H share

Jiangsu Express Co Ltd-H * 177 HK HKD 9.35 5,817 Outperform 10.50 12.0 10.9 7.4 7.7 6.1 6.7 15.6 16.2

Zhejiang Expressway Co-H * 576 HK HKD 9.43 5,283 Hold 9.60 14.4 12.7 6.9 5.9 4.8 5.4 13.9 14.7

Shenzhen Expressway Co-H * 548 HK HKD 5.73 2,482 Hold 5.80 9.1 9.1 5.9 5.1 3.3 3.3 10.0 9.0

Yuexiu Transport Infrastruct * 1052 HK HKD 4.50 971 Buy 5.90 9.3 7.0 7.2 6.7 6.6 8.6 7.6 9.3

Hopewell Highway Infrastruct

737 HK HKD 3.94 1,566 NR NR 17.0 16.8 5.7 5.6 5.7 5.8 7.8 8.6

Anhui Expressway Co Ltd-H

995 HK HKD 5.20 1,470 NR NR 8.5 8.5 5.9 5.9 5.3 5.2 10.9 10.4

Sichuan Expressway Co-H

107 HK HKD 3.21 2,083 NR NR 7.5 6.9 9.8 9.1 3.2 3.4 9.1 8.9

China - A share

Jiangsu Expressway Co Ltd-A

600377 CH CNY 7.06 5,817 NR NR 12.6 12.1 8.6 8.2 5.6 6.0 13.6 13.8

Shenzhen Expressway Co Ltd-A

600548 CH CNY 8.35 2,482 NR NR 10.4 18.4 6.9 8.6 3.0 2.4 18.3 9.0

Sichuan Expressway Co-A

601107 CH CNY 4.91 2,083 NR NR 13.6 12.0 9.4 8.9 1.8 2.0 n.a. n.a.

International

Atlantia Spa

ATL IM EUR 20.60 20,117 NR NR 21.9 19.1 10.1 9.8 3.8 4.1 12.2 12.5

Citra Marga Nusaphala Per Pt

CMNP IJ IDR 2955.00 517 NR NR 12.7 12.1 n.a. n.a. n.a n.a 14.2 n.a.

Jasa Marga (Persero) Tbk Pt

JSMR IJ IDR 6975.00 3,773 NR NR 30.0 26.0 15.1 13.1 1.3 1.5 15.5 16.3

Total

Weighted average

16.9 15.5 9.0 8.6 4.1 4.4 12.5 12.2

High

30.0 26.0 15.1 13.1 6.6 8.6 18.3 16.3

Low

7.5 6.9 5.7 5.1 1.3 1.5 7.6 8.6

Median

12.6 12.1 7.3 8.0 4.3 4.7 12.9 10.4


6

7

8

9

10

11

12

13

14

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15


(PER)

-1 SD

+1 SD

Avg

4

5

6

7

8

9

10

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15


(PER)

-1 SD

+1 SD

Avg


- 34 -

Appendix CSC: SOTP valuation SOTP valuation metric Value per share

Logistics and residential properties apply 60% discount to property NAV 3.29

E-commerce 15x 2016E earnings 0.6

Logistics 15x 2016E earnings 1.5

Total value per share (HKD)

HKD 5.40

Source: Daiwa forecasts

SZI: SOTP valuation SOTP valuation metric Value per share

Shenzhen Expressway 12-mth TP 3.4

Logistics business 12x 2016E earnings 2.8

Shenzhen Airlines 0.7x 2014E PBR 1.4

CSG CNY 8.89 0.7

Land value in Qianhai 10% discount on the land value 4.8


HKD 13.1


COSCO Pacific: SOTP valuation SOTP valuation metric Value per share

Terminal business DCF 9.9

Container leasing DCF 0.0

Others DCF 1.4


HKD 11.4


GLP: SOTP valuation SOTP valuation Value per share

China

1.0

Japan

0.7

Brazil

0.3

Other assets

0.2

Net debt

0.1

Value per share (USD)

2.1

Value per share (SGD)

HKD 2.7


AviChina: SOTP valuation

Company

Market cap

(HKDm) AVC(%)

Attributable to AVC

(HKDm)

Per share value (HKD)

Jiangxi Hongdu Aviation 22,629 43.6 9,873 1.8

Hafei Aviation Industry 29,039 35.1 10,193 1.9

China Avic Avionics 54,317 43.2 23,476 4.3

China Aviation Optical 13,585 41.5 5,647 1.0

Others 100.0 591 0.1

Sub-total 49,780 9.1

Net cash 1.6

Total value per share (HKD) 10.7

Target price at 40% discount (HKD) 6.4


CIMC: SOTP valuation SOTP valuation Value per share

Containers 6.5

Road transport vehicles 2.9

Energy, chemical & liquid food equipment 6.8

Offshore engineering business 0.2

Others 1.6

Land value in Qianhai 5.0



China Merchant: SOTP valuation SOTP valuation metric Value per share

Terminal business DCF 12.3

Logistics business DCF 4.2

Port related DCF 0.1

SIPG Market price 9.1

CIMC Daiwa target price 6.2

Others DCF 0.1




■ What's new

While CSC’s contracted sales for 3Q FY15 were disappointing (down 70% YoY but due mainly to a high comparison base effect following the Hefei project in 3Q FY14), we remain positive on the company as its business model looks well suited to the general direction of urbanisation and city redevelopment in China. ■ What's the impact

Most old wholesale markets in many of China’s cities are situated in urban areas and cause considerable traffic congestion. To address this, and in line with the general urbanisation and redevelopments of many cities, local governments have opted to relocate these old logistics facilities away from urban neighbourhoods and redevelop the land of the original wholesale

market into residential and office buildings. As such, we expect CSC’s recurring income to rise continuously over FY15-17, especially from rent and logistics due to an increase in the GFA it operates. This should help drive a rerating of the stock as investors come to differentiate it from pure property companies in China. In view of weaker-than-expected 3Q FY15 contracted sales, we reduce our contracted sales growth forecasts for FY15 from 32% to 1% and for FY16-17 from 29-33% to 23-24%. This translates into EPS cuts of 8-26% for the period. ■ What we recommend

We revise our SOTP-derived target price for CSC to a 12-month one of HKD5.40 (formerly 6-month one of HKD6.30). We now apply a larger discount of 60% to its property NAV (previously a 45% discount) to reflect our more moderate outlook for contracted sales. Still, CSC remains our top sector pick; we reaffirm our Buy (1) rating and see a good entry opportunity now. The main risk is a slower-than-expected logistics facilities relocation process to the companies’ trade centres.

■ How we differ

Our FY15-17E EPS are 8-21% below consensus as we factor in the weak 3Q FY15 contracted sales.

Financials / China 1668 HK

14 January 2015

China South City

Fits well into city redevelopment

Well placed to capture the opportunity from city redevelopment

in urban areas

Good entry point post recent correction and we expect a rerating

in 2015; gross floor area on an upward trend

Still our top sector pick; reiterating Buy (1) rating with new

target price of HKD5.40, now on a 12-month view


Source: FactSet, Daiwa forecasts

Financials / China

China South City1668 HK

Target (HKD): 6.30 g 5.40

Upside: 80.0%

12 Jan price (HKD): 3.00

Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Mar 15E 16E 17E

Revenue change (12.2) (22.8) (26.5)

Net profit change (7.6) (22.4) (25.5)

Core EPS (FD) change (7.6) (22.4) (25.5)

100

133

165

198

230

2.0

2.7

3.4

4.1

4.8

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Share price performance

CSC (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 2.17-4.73

Market cap (USDbn) 3.10

3m avg daily turnover (USDm) 12.43

Shares outstanding (m) 8,007

Major shareholder Cheng Chung Hing (30.5%)

Financial summary (HKD)Year to 31 Mar 15E 16E 17E

Revenue (m) 15,732 18,242 23,211

Operating profit (m) 6,873 7,900 10,003

Net profit (m) 3,252 3,825 5,081

Core EPS (fully-diluted) 0.400 0.469 0.623

EPS change (%) 5.6 17.3 32.8

Daiwa vs Cons. EPS (%) (7.6) (21.1) (14.8)

PER (x) 7.5 6.4 4.8

Dividend yield (%) 4.7 5.3 7.0

DPS 0.140 0.158 0.209

PBR (x) 0.9 0.8 0.7

EV/EBITDA (x) 4.7 5.1 4.5

ROE (%) 14.3 14.1 16.3

Kelvin Lau

(852) 2848 4467

[email protected]

Carrie Yeung(852) 2773 8243

[email protected]


- 36 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Contracted sales revenue growth n.a. 0.0 0.0 15.6 71.9 1.2 22.8 23.7

E-commerce revenue growth n.a. n.a. n.a. n.a. n.a. 15.5 26.0 26.0

Logistics revenue growth n.a. n.a. n.a. n.a. 175.6 100.0 200.0 200.0

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Property development 1,419 2,046 3,431 7,179 12,813 14,549 16,417 20,311

Property Investment (rental income) 101 133 166 214 305 671 963 1,318

Other Revenue 50 54 73 95 351 513 861 1,582

Total Revenue 1,570 2,234 3,671 7,488 13,468 15,732 18,242 23,211

Other income 1,450 1,474 1,693 1,273 1,301 1,338 1,330 1,397

COGS (588) (901) (1,435) (3,311) (6,921) (8,404) (9,592) (11,959)

SG&A (271) (320) (538) (826) (1,444) (1,793) (2,080) (2,646)

Other op.expenses 0 0 0 0 0 0 0 0

Operating profit 2,161 2,487 3,391 4,624 6,404 6,873 7,900 10,003

Net-interest inc./(exp.) (27) (21) (47) (102) (104) (163) (229) (237)

Assoc/forex/extraord./others (44) (49) (22) (48) (131) (1) (1) (1)

Pre-tax profit 2,091 2,417 3,322 4,473 6,169 6,710 7,671 9,766

Tax (785) (909) (1,258) (1,606) (2,472) (2,689) (3,074) (3,914)

Min. int./pref. div./others 2 8 23 (117) (202) 10 8 8

Net profit (reported) 1,308 1,517 2,088 2,750 3,494 4,031 4,604 5,860

Net profit (adjusted) 411 542 923 1,776 2,678 3,252 3,825 5,081

EPS (reported)(HKD) 0.249 0.254 0.349 0.456 0.557 0.525 0.575 0.732

EPS (adjusted)(HKD) 0.078 0.091 0.154 0.295 0.427 0.424 0.478 0.635

EPS (adjusted fully-diluted)(HKD) 0.078 0.090 0.154 0.295 0.378 0.400 0.469 0.623

DPS (HKD) 0.023 0.025 0.075 0.100 0.140 0.140 0.158 0.209

EBIT 2,161 2,487 3,391 4,624 6,404 6,873 7,900 10,003

EBITDA 2,199 2,523 3,415 4,653 6,473 6,942 7,954 10,275

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 2,091 2,417 3,322 4,473 6,169 6,710 7,671 9,766

Depreciation and amortisation 38 36 24 27 70 69 54 271

Tax paid (47) (105) (160) (238) (838) (807) (1,383) (2,740)

Change in working capital 170 363 (687) (1,078) (1,736) (5,257) (5,231) (4,437)

Other operational CF items (1,366) (1,386) (1,564) (1,071) (962) (910) (1,071) (1,062)

Cash flow from operations 885 1,325 936 2,114 2,703 (196) 39 1,798

Capex (2,208) (1,849) (2,327) (3,083) (3,332) (3,508) (5,330) (5,122)

Net (acquisitions)/disposals 0 (90) 256 49 557 0 0 0

Other investing CF items (15) (23) 21 (278) 46 (948) (950) (950)

Cash flow from investing (2,223) (1,962) (2,050) (3,312) (2,729) (4,455) (6,280) (6,073)

Change in debt 2,829 (146) 583 4,112 3,514 1,158 400 4,000

Net share issues/(repurchases) 2,996 0 0 0 1,497 823 0 0

Dividends paid 0 (120) (150) (454) (903) (967) (1,073) (1,262)

Other financing CF items (1,041) 1,667 (576) 439 1,075 2,326 (277) (286)

Cash flow from financing 4,784 1,402 (142) 4,096 5,182 3,339 (950) 2,452

Forex effect/others 1 62 51 51 (118) 0 0 0

Change in cash 3,448 827 (1,206) 2,949 5,038 (1,312) (7,191) (1,823)

Free cash flow (1,323) (524) (1,391) (969) (629) (3,704) (5,290) (3,325)

Financial summary


- 37 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

CSC is a leading developer and operator of large-scale integrated logistics and trade centres in China, and focuses on small and medium-sized enterprises. The company aims to provide its clients and occupants of its trade centres with a one-stop supply chain solution, which includes a full range of integrated logistics services and facilities.

As at 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 3,703 4,564 3,832 6,778 12,777 11,465 4,274 2,451

Inventory 677 483 7,763 9,381 13,455 16,455 19,455 22,455

Accounts receivable 86 34 867 643 729 817 817 817

Other current assets 454 905 784 1,626 3,081 1,506 3,327 6,063

Total current assets 4,921 5,986 13,245 18,428 30,042 30,243 27,873 31,786

Fixed assets 158 204 196 601 659 592 1,340 1,570

Goodwill & intangibles 20 20 20 0 34 34 34 34

Other non-current assets 11,201 15,174 17,205 23,316 29,226 33,959 36,989 40,411

Total assets 16,300 21,384 30,666 42,345 59,961 64,828 66,235 73,802

Short-term debt 1,558 1,696 2,740 4,418 6,023 6,600 3,000 3,000

Accounts payable 824 1,324 6,530 8,166 13,810 10,061 8,039 7,015

Other current liabilities 471 901 1,624 2,790 4,411 4,411 4,411 4,411

Total current liabilities 2,854 3,921 10,895 15,374 24,243 21,071 15,449 14,426

Long-term debt 2,644 4,446 3,878 7,435 10,668 13,605 17,605 21,605

Other non-current liabilities 1,775 2,399 2,898 3,493 4,906 4,617 4,123 4,123

Total liabilities 7,273 10,766 17,671 26,302 39,817 39,293 37,177 40,153

Share capital 60 60 60 61 4,684 7,022 7,022 7,022

Reserves/R.E./others 8,853 10,481 12,879 15,793 15,285 18,349 21,880 26,477

Shareholders' equity 8,913 10,541 12,939 15,853 19,970 25,371 28,902 33,499

Minority interests 114 77 57 190 175 165 157 149

Total equity & liabilities 16,300 21,384 30,666 42,345 59,961 64,828 66,235 73,802

EV 24,634 25,677 26,865 29,288 28,104 32,923 40,506 46,322

Net debt/(cash) 500 1,578 2,786 5,076 3,913 8,740 16,331 22,154

BVPS (HKD) 1.697 1.762 2.161 2.619 2.891 3.169 3.610 4.184

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 599.7 42.3 64.3 104.0 79.9 16.8 16.0 27.2

EBITDA (YoY) 105.1 14.7 35.4 36.3 39.1 7.2 14.6 29.2

Operating profit (YoY) 109.0 15.1 36.4 36.4 38.5 7.3 14.9 26.6

Net profit (YoY) n.a. 32.1 70.1 92.5 50.7 21.4 17.6 32.8

Core EPS (fully-diluted) (YoY) n.a. 16.3 70.6 91.6 28.5 5.6 17.3 32.8

Gross-profit margin 62.6 59.7 60.9 55.8 48.6 46.6 47.4 48.5

EBITDA margin 140.0 112.9 93.0 62.1 48.1 44.1 43.6 44.3

Operating-profit margin 137.6 111.3 92.4 61.7 47.5 43.7 43.3 43.1

Net profit margin 26.2 24.3 25.1 23.7 19.9 20.7 21.0 21.9

ROAE 6.1 5.6 7.9 12.3 14.9 14.3 14.1 16.3

ROAA 3.2 2.9 3.5 4.9 5.2 5.2 5.8 7.3

ROCE 21.6 16.6 18.6 19.5 19.8 16.6 16.6 18.5

ROIC 16.8 14.3 15.1 16.1 17.0 14.1 11.9 11.8

Net debt to equity 5.6 15.0 21.5 32.0 19.6 34.4 56.5 66.1

Effective tax rate 37.6 37.6 37.9 35.9 40.1 40.1 40.1 40.1

Accounts receivable (days) 17.9 9.8 44.8 36.8 18.6 17.9 16.4 12.9

Current ratio (x) 1.7 1.5 1.2 1.2 1.2 1.4 1.8 2.2

Net interest cover (x) 81.5 121.2 72.3 45.2 61.4 42.2 34.5 42.2

Net dividend payout 9.1 9.9 21.5 21.9 25.1 26.6 27.4 28.6

Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Financial summary continued …


■ What's new

We see more upside than downside potential in Sinotrans’ share price in 2015, as we expect investors to remain bullish on logistics and expect the stock to continue to trade at a large discount to peers such as Kerry Logistics (636 HK, HKD12.18, Outperform [2]). ■ What's the impact

Following Sinotrans’ 15% share price correction in the past 2 ½ months due to concerns over potentially weaker earnings quality and a recent fraud investigation involving subsidiaries under Sinotrans’ parent company, we believe the stock is a good choice for investors now seeking to increase their exposure to logistics. Given the China Government’s ongoing efforts to encourage the outsourcing of logistics supply chain

management by manufacturers, and the entry of more international players into the China market, we expect third-party logistics (3PL) to remain a topical subsector in 2015. Sinotrans looks well placed fundamentally given it has the largest operational network in the country and management expertise in freight-forwarding in China. ■ What we recommend

We upgrade Sinotrans to Buy (1), from Outperform (2). After rolling over our earnings base from 2015 to 2016, we have a 12-month target price of HKD6.60 (formerly a 6-month one of HKD6.30). However, we now apply a lower PER of 13x (formerly 16x), which is 1SD above the stock’s past-3-year average PER, as we believe some investors now appreciate the market potential of 3PL in China and the asset injection process may slow following the recent fraud investigation. Also, we change our exchange rate assumption to CNY6.2 per USD (previously CNY6.6 per USD), which is close to the present exchange rate. The major risk to our call on Sinotrans would be weaker-than-expected 3PL demand. ■ How we differ

Our 2014-16E EPS are 4-10% above those of the Bloomberg consensus,

as we are more upbeat on the development of the 3PL business in China and earnings contributions of newly acquired assets.

Industrials / China 598 HK

14 January 2015

Sin otran s

Worth revisiting

We believe Sinotrans stands to benefit from overall positive

sentiment on logistics in 2015

With the stock now trading at a discount to peers, recent share-

price weakness presents a buying opportunity

We upgrade our rating to Buy (1), from Outperform (2), and

have a 12-month target price of HKD6.60



Industrials / China

Sinotrans598 HK


Upside: 17.9%


Buy (from Outperform)

Outperform

Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 14E 15E 16E

Revenue change - - -

Net profit change - - -

Core EPS (FD) change - - -

80

110

140

170

200

2.5

3.5

4.5

5.5

6.5



Sinotrans (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Sinotrans & CSC Hldg (53.4%)

Financial summary (CNY)Year to 31 Dec 14E 15E 16E

Revenue (m) 44,204 42,716 44,464


Net profit (m) 1,252 1,564 1,922


EPS change (%) 35.7 18.4 22.9

Daiwa vs Cons. EPS (%) 4.3 4.4 10.4

PER (x) 15.6 13.2 10.7


DPS 0.083 0.086 0.104

PBR (x) 1.5 1.4 1.2

EV/EBITDA (x) 7.1 6.4 5.2

ROE (%) 10.1 10.8 12.1

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 39 -

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sea-freight forwarding volume growth

(%)(14.3) 21.1 14.9 3.2 5.2 3.0 3.0 3.0

Air-freight forwarding volume growth

(%)(28.4) 27.2 14.9 5.0 (5.1) 2.0 2.0 2.0

Logistics service volume growth 0.0 0.0 0.0 0.0 0.0 30.0 30.0 25.0

Vessel calls (times) (14.9) (3.0) 1.0 0.2 0.3 1.0 1.0 1.0

Freight rate increase (%) 0.0 0.0 0.0 0.0 (5.0) (8.0) (2.0) (2.0)

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Freight forwarding 22,337 35,588 36,211 39,449 40,382 36,936 38,346 39,929

Shipping agency 556 632 669 1,018 649 655 662 668

Other Revenue 4,742 6,327 6,867 7,015 6,738 6,612 3,708 3,866

Total Revenue 27,635 42,547 43,747 47,482 47,769 44,204 42,716 44,464

Other income 334 249 196 148 161 177 195 214

COGS (22,253) (35,755) (36,414) (39,892) (39,948) (35,599) (34,954) (36,003)

SG&A (4,415) (5,421) (5,780) (6,002) (6,007) (5,623) (4,652) (4,821)

Other op.expenses (801) (843) (883) (1,053) (947) (1,220) (1,233) (1,269)

Operating profit 500 777 866 683 1,028 1,939 2,072 2,585


Assoc/forex/extraord./others 319 363 431 744 655 809 982 1,147

Pre-tax profit 755 1,056 1,180 1,233 1,486 2,565 2,899 3,610

Tax (228) (224) (308) (322) (336) (794) (749) (989)

Min. int./pref. div./others (130) (216) (229) (262) (306) (320) (572) (695)

Net profit (reported) 397 616 643 649 844 1,451 1,578 1,926

Net profit (adjusted) 355 744 676 656 898 1,252 1,564 1,922

EPS (reported)(CNY) 0.093 0.145 0.151 0.153 0.199 0.332 0.343 0.418

EPS (adjusted)(CNY) 0.084 0.175 0.159 0.154 0.211 0.287 0.339 0.417

EPS (adjusted fully-diluted)(CNY) 0.084 0.175 0.159 0.154 0.211 0.287 0.339 0.417

DPS (CNY) 0.020 0.040 0.030 0.030 0.050 0.083 0.086 0.104

EBIT 602 562 800 662 939 2,444 2,062 2,575

EBITDA 894 1,191 1,307 1,158 1,541 2,508 2,687 3,267

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 755 1,056 1,180 1,233 1,486 2,565 2,899 3,610


Tax paid (273) (232) (363) (309) (352) (473) (1,070) (989)

Change in working capital (23) (3) (130) (1,590) (738) (1,693) (1,797) (2,016)

Other operational CF items (88) (297) (29) 554 380 450 1,046 955

Cash flow from operations 782 958 1,118 381 1,313 1,442 1,717 2,266

Capex (473) (992) (1,341) (1,316) (1,387) (1,613) (1,700) (1,700)

Net (acquisitions)/disposals (650) (403) (505) (46) (315) (222) (341) (720)

Other investing CF items 91 508 326 172 483 901 2,141 2,500

Cash flow from investing (1,031) (887) (1,520) (1,190) (1,220) (934) 100 80

Change in debt (1,583) 1,267 2,466 1,473 86 (133) 1,150 900

Net share issues/(repurchases) 0 0 0 0 0 0 0 0

Dividends paid (113) (246) (366) (152) (243) (212) (363) (395)

Other financing CF items 2,390 (53) (1,339) (431) (231) 1,430 (2,283) (2,256)

Cash flow from financing 694 968 761 890 (389) 1,084 (1,496) (1,751)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash 445 1,038 359 81 (296) 1,592 321 595

Free cash flow 309 (34) (223) (935) (75) (171) 17 566

Financial summary


- 40 -

Balance sheet (CNYm)

Key ratios (%)


Company profile

Sinotrans is a leading China-based shipping logistics company which provides integrated logistics services, with the core businesses of sea, air, rail and road freight-forwarding, express services and shipping agency services. The company also provides the support services of storage and terminal services, trucking and marine transportation services.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 31 36 83 53 60 60 60 60

Accounts receivable 5,489 6,421 6,708 8,019 7,866 7,658 7,034 7,321

Other current assets 832 1,103 1,841 1,271 1,334 1,334 1,334 1,334


Fixed assets 4,364 4,752 5,622 6,367 7,107 7,555 8,830 10,054

Goodwill & intangibles 1,733 2,087 2,251 2,450 2,557 2,615 2,611 2,607


Total assets 21,719 25,095 26,802 29,288 29,895 31,775 32,732 34,825

Short-term debt 436 3,110 4,465 2,832 1,402 2,151 1,901 600

Accounts payable 5,192 5,596 6,126 7,619 7,855 6,306 6,068 6,254

Other current liabilities 1,924 2,777 3,277 2,862 2,424 2,973 3,232 3,323


Long-term debt 2,552 1,144 748 2,845 4,345 3,202 2,602 3,502

Other non-current liabilities 394 426 202 402 451 451 451 451


Share capital 4,249 4,249 4,249 4,249 4,249 4,606 4,606 4,606



Minority interests 2,058 2,281 2,200 2,365 2,493 2,813 3,385 4,080


EV 18,349 18,912 19,332 19,162 19,490 17,834 17,246 16,955

Net debt/(cash) (1,725) (1,267) (727) (497) (339) (2,315) (3,476) (4,462)

BVPS (CNY) 2.157 2.297 2.303 2.439 2.571 3.013 3.277 3.607

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (21.2) 54.0 2.8 8.5 0.6 (7.5) (3.4) 4.1

EBITDA (YoY) (17.2) 33.2 9.7 (11.4) 33.2 62.7 7.1 21.6

Operating profit (YoY) (36.5) (6.7) 42.4 (17.2) 41.8 160.2 (15.6) 24.9

Net profit (YoY) (23.3) 109.8 (9.2) (2.9) 36.8 39.5 24.9 22.9

Core EPS (fully-diluted) (YoY) (23.4) 109.8 (9.2) (2.9) 36.8 35.7 18.4 22.9


EBITDA margin 3.2 2.8 3.0 2.4 3.2 5.7 6.3 7.3



ROAE 4.1 7.9 6.9 6.5 8.4 10.1 10.8 12.1

ROAA 1.7 3.2 2.6 2.3 3.0 4.1 4.8 5.7

ROCE 4.6 3.7 4.8 3.7 5.0 11.9 9.2 10.8

ROIC 4.2 6.0 5.8 4.3 6.3 9.7 10.5 12.0

Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.



Current ratio (x) 1.5 1.1 1.1 1.2 1.3 1.5 1.5 1.7



Free cash flow yield 1.5 n.a. n.a. n.a. n.a. n.a. 0.1 2.7



■ What's new

We believe KLN’s third-party logistics (3PL) business will remain attractive in 2015 in terms of earnings growth, while we see its potential entry into China’s courier market as an important step in its drive to become a major logistics conglomerate in China. ■ What's the impact

In our view, 3PL development in China will remain an attractive theme in 2015, as the government continues to encourage more manufacturers, especially SOEs, to outsource more of their logistics supply chain management. In addition, the recent approval for KLN to operate a courier service in China via a JV is an important step toward it becoming a logistics conglomerate like DHL.

While China’s courier service market is highly competitive, with KLN’s brand name and management expertise, we believe it will be able find a major local player and form a competitive JV in China. This JV would help it capture the strong e-commerce growth in China. In addition, the JV could help it further extend its services to offering a C2C courier service, which would allow it to become a more comprehensive logistics conglomerate. ■ What we recommend

We are raising our 12-month SOTP-based target price to HKD13.90 (from a SOTP-based 6-month target price of HKD13.80 previously) after rolling over our DCF valuation to 2016. Near-term share-price catalysts include the announcement of a JV partner in China and M&A activities. We expect the company to engage in more M&A activities in 2015, albeit on a small scale. Comparatively, we prefer Sinotrans (598 HK, HKD5.6, Buy [1]) for its more attractive valuation and potential for higher earnings growth from increased 3PL demand in 2014-16E. Key risk: weaker-than-expected 3PL demand in China. ■ How we differ

Our 2014E EPS is 7% below consensus as we are more

conservative on asset acquisitions by KLN.

Industrials / Hong Kong 636 HK

14 January 2015

Kerry Logistics Network

Turning into a logistics conglomerate

KLN’s entry into the courier service in China would be positive

for the company in the long term

On the other hand, its 3PL business should continue to attract

investor interest in 2015

Outperform (2) rating reiterated, with new 12-month target

price of HKD13.90



Industrials / Hong Kong

Kerry Logistics Network636 HK

Target (HKD): 13.80 g 13.90

Upside: 14.1%


Buy

Outperform (unchanged)

Hold

Underperform

Sell

1

2

3

4

5





85

91

98

104

110

11.0

11.9

12.8

13.6

14.5

Jan-14 Apr-14 Jul-14 Oct-14


Kerry Logi (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 11.20-14.16




Major shareholder Kerry Group Limited (66.4%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16E

Revenue (m) 21,557 23,655 25,785


Net profit (m) 985 1,162 1,314


EPS change (%) (14.5) 17.9 13.1

Daiwa vs Cons. EPS (%) (6.6) 1.2 3.2

PER (x) 21.0 17.8 15.8


DPS 0.116 0.137 0.155

PBR (x) 1.4 1.3 1.2

EV/EBITDA (x) 12.9 10.8 9.4

ROE (%) 7.0 7.6 7.8

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 42 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Logistics operations growth (YoY%) n.a. n.a. 47.5 16.1 15.1 10.3 13.3 14.8

HK warehouse growth (YoY %) n.a. n.a. 4.1 (4.6) 1.3 3.0 0.0 0.0

International freight forwarding growth

(YoY %)n.a. n.a. 50.7 24.6 (3.9) 6.3 7.2 4.4

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Integrated Logistics n.a. 4,811 6,890 7,898 9,022 9,917 11,175 12,752

International freight forwarding n.a. 6,069 9,144 11,397 10,947 11,640 12,480 13,033

Other Revenue n.a. 0 0 0 0 0 0 0

Total Revenue n.a. 10,880 16,034 19,295 19,969 21,557 23,655 25,785

Other income n.a. 21 7 28 397 30 30 30

COGS n.a. (9,230) (13,602) (16,601) (17,091) (18,633) (20,295) (22,041)

SG&A n.a. (855) (1,286) (1,403) (1,469) (1,623) (1,782) (1,934)

Other op.expenses n.a. 0 0 0 0 (0) 0 0

Operating profit n.a. 816 1,153 1,318 1,806 1,331 1,609 1,840

Net-interest inc./(exp.) n.a. (23) (55) (63) (94) (99) (129) (147)

Assoc/forex/extraord./others n.a. 385 279 402 729 575 579 583

Pre-tax profit n.a. 1,178 1,376 1,657 2,441 1,807 2,059 2,276

Tax n.a. (200) (254) (305) (305) (162) (195) (223)

Min. int./pref. div./others n.a. (145) (251) (282) (302) (225) (268) (305)

Net profit (reported) n.a. 833 872 1,069 1,835 1,420 1,596 1,748

Net profit (adjusted) n.a. 657 741 816 886 985 1,162 1,314

EPS (reported)(HKD) n.a. 0.643 0.673 0.826 1.404 0.836 0.939 1.029

EPS (adjusted)(HKD) n.a. 0.508 0.572 0.630 0.678 0.580 0.684 0.773

EPS (adjusted fully-diluted)(HKD) n.a. 0.508 0.572 0.630 0.678 0.580 0.684 0.773

DPS (HKD) n.a. 0.000 0.000 0.000 0.139 0.116 0.137 0.155

EBIT n.a. 816 1,153 1,318 1,806 1,331 1,609 1,840

EBITDA n.a. 1,027 1,449 1,686 2,256 1,811 2,220 2,581

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax n.a. 1,178 1,376 1,657 2,441 1,807 2,059 2,276

Depreciation and amortisation n.a. 210 296 367 450 481 611 741

Tax paid n.a. (140) (298) (250) (246) (162) (195) (223)

Change in working capital n.a. (272) (85) (557) (209) (12) (103) 0

Other operational CF items n.a. (369) (270) (346) (1,078) (675) (708) (731)

Cash flow from operations n.a. 607 1,019 871 1,358 1,438 1,663 2,063

Capex n.a. (604) (853) (1,468) (1,113) (1,800) (1,800) (1,800)

Net (acquisitions)/disposals n.a. 68 (187) (491) (333) 0 0 0

Other investing CF items n.a. 148 16 294 3 14 14 14

Cash flow from investing n.a. (388) (1,024) (1,665) (1,443) (1,786) (1,786) (1,786)

Change in debt n.a. 158 424 835 2,223 (305) 0 0

Net share issues/(repurchases) n.a. 0 0 0 2,079 0 0 0

Dividends paid n.a. (6) (66) 0 (124) (182) (197) (232)

Other financing CF items n.a. 258 322 (52) (2,816) 0 0 0

Cash flow from financing n.a. 410 681 783 1,363 (488) (197) (232)

Forex effect/others n.a. 0 0 0 0 0 0 0

Change in cash n.a. 629 676 (12) 1,278 (835) (320) 0

Free cash flow n.a. 3 167 (597) 245 (362) (137) 263

Financial summary


- 43 -


Key ratios (%)


Company profile

Kerry Logistics Network is the leading logistics service provider in Asia in terms of revenue and GFA of warehouses managed, with extensive operations across Greater China and other countries in Asia. It is also the largest Hong Kong-based international third-party logistics service provider.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment n.a. 2,226 2,908 2,940 4,228 3,393 3,073 3,118

Inventory n.a. 131 110 110 164 164 164 164

Accounts receivable n.a. 2,510 3,359 4,325 4,661 5,031 5,521 5,521

Other current assets n.a. 5 15 14 17 17 17 17

Total current assets n.a. 4,871 6,392 7,389 9,070 8,606 8,776 8,820

Fixed assets n.a. 4,503 4,989 5,999 6,532 7,910 9,157 10,271

Goodwill & intangibles n.a. 835 1,186 1,774 1,969 1,910 1,853 1,798

Other non-current assets n.a. 6,276 6,774 7,307 8,102 8,692 9,386 10,103

Total assets n.a. 16,486 19,341 22,468 25,674 27,118 29,172 30,992

Short-term debt n.a. 3,908 4,585 4,782 1,305 1,000 1,000 1,000

Accounts payable n.a. 2,313 3,353 3,923 3,973 4,332 4,718 4,718

Other current liabilities n.a. 230 200 212 185 185 185 185

Total current liabilities n.a. 6,451 8,137 8,917 5,464 5,517 5,903 5,903

Long-term debt n.a. 320 536 1,587 3,100 3,100 3,100 3,100

Other non-current liabilities n.a. 777 763 838 894 823 823 823

Total liabilities n.a. 7,548 9,437 11,342 9,458 9,440 9,827 9,827

Share capital n.a. 1 1 1 829 829 829 829

Reserves/R.E./others n.a. 6,541 7,398 8,358 12,598 13,835 15,234 16,749

Shareholders' equity n.a. 6,542 7,398 8,358 13,426 14,664 16,063 17,578

Minority interests n.a. 2,395 2,506 2,768 2,789 3,014 3,282 3,588

Total equity & liabilities n.a. 16,486 19,341 22,468 25,674 27,118 29,172 30,992

EV n.a. 24,271 24,408 25,950 22,536 23,291 23,879 24,139

Net debt/(cash) n.a. 2,002 2,213 3,429 177 707 1,027 982

BVPS (HKD) n.a. 5.051 5.713 6.454 10.273 8.632 9.455 10.347

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) n.a. n.a. 47.4 20.3 3.5 8.0 9.7 9.0

EBITDA (YoY) n.a. n.a. 41.1 16.3 33.8 (19.7) 22.5 16.3

Operating profit (YoY) n.a. n.a. 41.2 14.4 37.0 (26.3) 20.9 14.4

Net profit (YoY) n.a. n.a. 12.8 10.0 8.7 11.2 17.9 13.1

Core EPS (fully-diluted) (YoY) n.a. n.a. 12.8 10.0 7.7 (14.5) 17.9 13.1

Gross-profit margin n.a. 15.2 15.2 14.0 14.4 13.6 14.2 14.5

EBITDA margin n.a. 9.4 9.0 8.7 11.3 8.4 9.4 10.0

Operating-profit margin n.a. 7.5 7.2 6.8 9.0 6.2 6.8 7.1

Net profit margin n.a. 6.0 4.6 4.2 4.4 4.6 4.9 5.1

ROAE n.a. 20.1 10.6 10.4 8.1 7.0 7.6 7.8

ROAA n.a. 8.0 4.1 3.9 3.7 3.7 4.1 4.4

ROCE n.a. 12.4 8.2 8.1 9.5 6.3 7.1 7.6

ROIC n.a. 6.2 8.2 8.1 10.2 7.0 7.5 7.8

Net debt to equity n.a. 30.6 29.9 41.0 1.3 4.8 6.4 5.6

Effective tax rate n.a. 17.0 18.5 18.4 12.5 9.0 9.5 9.8

Accounts receivable (days) n.a. 42.1 66.8 72.7 82.1 82.1 81.4 78.2

Current ratio (x) n.a. 0.8 0.8 0.8 1.7 1.6 1.5 1.5

Net interest cover (x) n.a. 35.4 20.8 20.9 19.3 13.4 12.5 12.5

Net dividend payout n.a. 0.0 0.0 0.0 9.9 13.9 14.6 15.0

Free cash flow yield n.a. 0.0 0.8 n.a. 1.2 n.a. n.a. 1.3



■ What's new

We believe investors will remain interested in the development of Shenzhen International’s (SZI) logistics hub in 2015, while a potential recovery in earnings for the airline business due to the falling oil price should offset the decline in traffic on the Qinglian Expressway. ■ What's the impact

We remain positive on the prospects of SZI’s integrated logistics hub and believe investors will turn more positive on its development when the first project in Shenyang is opened by end-2015. The hub aims to increase the utilisation of the truck drivers that use its service (ie, providing information on available return trips), which we believe will increase investor interest in such platforms – its main competitor China South City (CSC) (1668 HK,

HKD3.00, Buy [1]) also provides such a service. While we expect traffic diversions from the Qinglian Expressway to the Guangle Expressway to last for 9 months in 2015, we believe a potential strong earnings boost from the airlines business due to the low jet-fuel prices will offset the negative impact of the traffic diversions. We are making minor adjustments to our 2015-16E EPS after incorporating the traffic diversion impact, which we expect to be offset by lower fuel costs for its airline business. ■ What we recommend

We are revising our SOTP-based 6-month target price of HKD12.90 to a SOTP-based 12-month target price of HKD13.10, as we roll over our valuation base to 2016 (previously 2015). We reiterate our Outperform (2) rating. The main risk to our call would be weaker-than-expected traffic growth for the company’s toll road, logistics and airline businesses. ■ How we differ

We are 12-21% above consensus on 2015-16E EPS, as we are more optimistic about a recovery for the airlines business in 2015-16E as a

result of the prevailing low jet-fuel prices.


14 January 2015

Shenzhen Internation al

Logistics hub to still attract interest in 2015

We believe investors will remain interested in SZI’s logistics hub

development

However, net-profit growth in 2015 should be supported by the

recovery of the airlines business

Reiterate Outperform (2) rating with new 12-month target price

of HKD13.10



Industrials / China

Shenzhen International152 HK

Target (HKD): 12.90 g 13.10

Upside: 14.9%


Buy


Hold

Underperform

Sell

1

2

3

4

5


Revenue change - (1.4) (0.7)

Net profit change - (0.4) 1.1

Core EPS (FD) change - (0.4) 1.1

80

90

100

110

120

8.0

9.1

10.3

11.4

12.5



Shenzhen I (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Shenzhen Investment Hldg (43.9%)


Revenue (m) 6,575 6,740 7,278


Net profit (m) 2,075 2,434 2,905


EPS change (%) 7.1 6.8 19.3

Daiwa vs Cons. EPS (%) 1.6 12.2 20.6

PER (x) 9.5 8.9 7.4


DPS 0.422 0.451 0.538

PBR (x) 1.2 1.1 1.0

EV/EBITDA (x) 6.0 7.9 6.9

ROE (%) 13.0 13.0 14.1

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 45 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll road revenue growth (34.4) 23.9 3.4 0.9 2.4 9.4 0.3 6.8

Logistics parks revenue growth 45.8 40.3 51.7 8.0 4.8 20.0 15.0 15.0

Logistics services revenue growth 14.4 16.9 53.7 23.7 17.5 5.0 5.0 5.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll road revenue 3,725 4,617 4,774 4,817 4,934 5,397 5,416 5,785

Logistics business revenue 355 495 807 922 1,029 1,177 1,324 1,493

Other Revenue 0 0 0 0 0 0 0 0

Total Revenue 4,080 5,112 5,581 5,740 5,963 6,575 6,740 7,278

Other income 467 573 484 80 42 1,938 0 0

COGS (2,636) (2,994) (2,839) (3,102) (3,025) (3,086) (3,080) (3,075)

SG&A (23) (27) (35) (43) (64) (71) (74) (78)

Other op.expenses (202) (244) (330) (337) (331) (347) (354) (361)



Assoc/forex/extraord./others 297 358 586 1,291 792 831 1,164 1,397

Pre-tax profit 1,443 2,145 2,803 2,820 2,776 5,282 3,810 4,546

Tax (267) (453) (540) (479) (531) (1,131) (767) (915)

Min. int./pref. div./others (307) (491) (518) (417) (465) (1,407) (609) (726)

Net profit (reported) 870 1,201 1,745 1,923 1,780 2,745 2,434 2,905

Net profit (adjusted) 840 1,190 1,176 1,513 1,858 2,075 2,434 2,905

EPS (reported)(HKD) 0.614 0.856 1.066 1.175 1.080 1.596 1.288 1.537

EPS (adjusted)(HKD) 0.593 0.848 0.718 0.924 1.127 1.207 1.288 1.537


DPS (HKD) 0.217 0.350 0.330 0.374 0.376 0.422 0.451 0.538

EBIT 1,687 2,419 2,861 2,339 2,584 5,009 3,232 3,764

EBITDA 2,249 3,374 3,930 3,496 3,960 6,454 4,681 5,219

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 562 955 1,069 1,157 1,376 1,445 1,450 1,455

Tax paid (374) (442) (590) (642) (493) (1,131) (767) (915)

Change in working capital (129) (121) (299) (131) (280) (99) (41) (124)

Other operational CF items (199) (480) (1,129) (1,275) (1,043) (1,249) (1,325) (1,566)

Cash flow from operations 1,303 2,056 1,853 1,929 2,336 4,248 3,127 3,395

Capex (2,078) (1,806) (1,578) (1,318) (1,319) (2,400) (2,000) (2,000)

Net (acquisitions)/disposals (2,342) 24 (484) 36 362 1,026 (1,840) 466

Other investing CF items 529 198 257 136 596 668 676 684

Cash flow from investing (3,891) (1,585) (1,806) (1,147) (361) (706) (3,164) (850)

Change in debt 6,475 4,755 7,893 2,467 (1,229) (1,297) (1,500) (1,500)

Net share issues/(repurchases) 32 4 0 0 84 1,896 0 0

Dividends paid (374) (479) (723) (782) (776) (620) (726) (852)

Other financing CF items (4,319) (4,152) (5,230) (1,326) 93 0 2,865 0

Cash flow from financing 1,813 129 1,939 360 (1,828) (21) 639 (2,352)

Forex effect/others (0) 4 7 0 2 (132) 0 0

Change in cash (775) 603 1,994 1,143 148 3,389 602 193

Free cash flow (775) 250 275 611 1,016 1,848 1,127 1,395

Financial summary


- 46 -


Key ratios (%)


Company profile

Shenzhen International Holdings Limited (SZI) is a conglomerate engaged in the investment, construction, and operation of logistics infrastructure facilities in China, and provides logistics services. The company also owns 51% of the toll-road operator Shenzhen Expressway, 49% of Shenzhen Airlines, and a 380,000 sq km landbank in the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 0 0 8 9 447 447 447 447

Accounts receivable 412 623 917 1,165 1,340 1,477 1,514 1,635

Other current assets 2,326 3,451 1,501 1,647 1,271 2,762 1,737 1,271


Fixed assets 2,281 3,226 4,025 3,829 4,404 6,098 7,141 8,098



Total assets 32,448 36,796 39,901 42,383 43,223 48,070 48,073 49,348

Short-term debt 3,863 2,141 1,413 3,898 2,297 2,500 2,500 2,500


Other current liabilities 175 328 751 516 340 340 340 340


Long-term debt 11,031 11,809 15,321 14,072 15,025 13,525 12,025 10,525



Share capital 2,974 4,920 4,937 4,952 5,100 6,996 6,996 6,996





EV 40,451 39,596 41,481 41,990 41,829 38,557 37,064 36,097

Net debt/(cash) 13,210 11,871 13,001 13,101 12,365 7,686 5,584 3,891

BVPS (HKD) 4.960 7.725 6.850 7.724 8.442 9.459 10.363 11.449

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (31.4) 25.3 9.2 2.8 3.9 10.3 2.5 8.0

EBITDA (YoY) 30.4 50.0 16.5 (11.0) 13.3 63.0 (27.5) 11.5

Operating profit (YoY) 28.4 43.4 18.3 (18.2) 10.5 93.8 (35.5) 16.5

Net profit (YoY) 57.7 41.7 (1.2) 28.7 22.8 11.7 17.3 19.3

Core EPS (fully-diluted) (YoY) 57.6 42.9 (15.3) 28.7 21.4 7.1 6.8 19.3


EBITDA margin 55.1 66.0 70.4 60.9 66.4 98.2 69.5 71.7



ROAE 14.1 13.3 10.7 12.7 14.0 13.0 13.0 14.1

ROAA 2.8 3.4 3.1 3.7 4.3 4.5 5.1 6.0

ROCE 6.8 8.3 8.7 6.4 6.7 12.1 7.4 8.4

ROIC 6.0 7.0 7.7 6.0 6.2 11.4 7.4 8.4




Current ratio (x) 0.7 1.3 1.4 1.2 1.8 2.7 2.6 2.6



Free cash flow yield n.a. 1.2 1.3 2.8 4.7 8.6 5.2 6.5



■ What's new

We see GLP benefiting from the continuous growth of e-commerce in China in 2015, as it generates more than 60% of its annual revenue from e-commerce and third-party logistics players (3PL) in China. In addition, we are positive on its US expansion, but have growing concerns about the weaker sentiment toward Japan and Brazil, to which GLP has high exposure. ■ What's the impact

As a result of strong e-commerce growth and urbanisation, GLP’s warehouses are likely to remain in high demand in 2015. In addition, we see more cities in China relocating old logistics facilities from urban areas to rural areas; and redeveloping this vacated urban land would provide an opportunity

for GLP to unlock the value of its landbank. With respect to overseas expansion, we are positive on the company’s strategy to enter the US, as it could benefit from US manufacturers returning to the US, which we expect to be a growing trend in 2015. However, we are not so positive on its Japan and Brazil portfolios due to potential weakening of these countries’ currencies and economic growth. ■ What we recommend

We are adjusting our SOTP-based 6-month target price of SGD3.00 to a SOTP-based 12-month target price of SGD2.70, as we now apply a 10% discount to the NAV of its Japan and Brazil portfolios as a result of our concern about sentiment towards these 2 markets in 2015. However, we include the NAV contribution from the US in our NAV calculation, even though this contribution is small. The main risk to our call is weaker-than-expected demand for GLP’s warehouses. ■ How we differ

Our FY15-16E EPS are 3-5% higher and FY17E EPS 4% lower than the consensus, as we are more optimistic about GLP’s warehouse expansion, while expecting its earnings growth to moderate in

FY17E, on the back of China’s slowing economy.

Financials / Singapore GLP SP

14 January 2015

Global L ogistic P ropert ies

Beneficiary of e-commerce boom in 2015

The growth of e-commerce in China should keep GLP’s

warehouses in high demand

We are positive on its China and US expansion, but cautious on

the outlook for Japan and Brazil

SOTP-based target price lowered to SGD2.70, now based on 12-

month view; reiterate Outperform (2) rating



Financials / Singapore

Global Logistic PropertiesGLP SP

Target (SGD): 3.000 g 2.700

Upside: 8.9%

12 Jan price (SGD): 2.480

Buy


Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Mar 15E 16E 17E




75

83

90

98

105

2.4

2.5

2.7

2.8

3.0



Global Log (LHS) Relative to FSSTI (RHS)

(SGD) (%)

12-month range 2.410-2.950




Major shareholder GIC (35.8%)

Financial summary (USD)Year to 31 Mar 15E 16E 17E

Revenue (m) 728 826 948

Operating profit (m) 434 502 564

Net profit (m) 258 320 364


EPS change (%) 3.4 23.0 13.4

Daiwa vs Cons. EPS (%) 5.4 3.3 (3.9)

PER (x) 34.5 28.1 24.8


DPS 0.036 0.037 0.042

PBR (x) 1.0 0.9 0.9

EV/EBITDA (x) 25.0 24.9 25.7

ROE (%) 2.8 3.3 3.6

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 48 -

Key assumptions

Profit and loss (USDm)

Cash flow (USDm)


Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

China - construction starts (sqm m) 0.00 1.22 1.66 2.08 2.51 3.30 3.70 4.20

China - completions (sqm m) 0.00 0.56 1.04 1.20 2.02 2.30 2.91 3.50

China - land acquired (sqm m) 0.00 1.14 1.33 4.16 4.06 4.50 5.00 5.00

China - rents (CNY/sqm/day) 0.00 0.97 1.02 1.05 1.09 1.10 1.12 1.17

Japan - rents (JPY/sqm/mth) 0 1,079 1,075 1,097 1,143 1,154 1,165 1,177

PATMI ex-revaluations (USDm) 179 279 314 350 250 202 320 364

PATMI-ex reval per share (USD) 0.102 0.093 0.068 0.075 0.053 0.042 0.066 0.075

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

China 61 88 160 252 359 485 602 723

Japan 352 386 406 388 232 236 216 216


Total Revenue 413 474 566 642 598 728 826 948

Other income 5 9 8 7 8 4 4 4

COGS (97) (87) (92) (105) (105) (146) (160) (201)

SG&A (1) (15) (35) (49) (61) (74) (85) (97)


Operating profit 269 350 398 434 370 434 502 564


Assoc/forex/extraord./others (337) 513 304 485 544 608 547 619

Pre-tax profit (128) 807 638 842 842 892 935 1,017

Tax (22) (85) (83) (126) (132) (132) (111) (117)


Net profit (reported) (177) 706 541 684 685 624 610 663

Net profit (adjusted) 169 264 281 314 245 258 320 364

EPS (reported)(USD) (0.101) 0.234 0.118 0.147 0.144 0.130 0.126 0.137

EPS (adjusted)(USD) 0.097 0.088 0.061 0.067 0.052 0.054 0.066 0.075

EPS (adjusted fully-diluted)(USD) 0.097 0.088 0.061 0.067 0.052 0.054 0.066 0.075

DPS (USD) 0.000 0.000 0.024 0.032 0.036 0.036 0.037 0.042

EBIT 269 350 398 434 370 434 502 564

EBITDA 274 359 399 441 378 442 511 574

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax (128) 807 638 842 842 892 935 1,017


Tax paid (9) (11) (14) (36) (12) (11) (15) (16)

Change in working capital (48) (48) (48) 8 (107) 19 21 23

Other operational CF items 434 (395) (164) (398) (468) (415) (392) (411)

Cash flow from operations 254 361 418 422 263 495 558 622

Capex (113) (204) (504) (818) (943) (1,427) (1,879) (2,290)

Net (acquisitions)/disposals (54) (201) (264) 2,263 669 (670) 0 0

Other investing CF items 8 2 (346) (469) (1) 87 184 244

Cash flow from investing (159) (402) (1,115) 976 (275) (2,010) (1,695) (2,047)

Change in debt 111 (364) 272 (1,118) (177) (143) 1,000 2,200

Net share issues/(repurchases) (31) 1,726 0 331 n.a. n.a. n.a. n.a.

Dividends paid (17) (135) (2) (108) (150) (170) (174) (177)

Other financing CF items (60) (76) 465 (110) (108) 2,214 (155) (207)

Cash flow from financing 3 1,151 734 (1,005) (435) 2,059 671 1,815

Forex effect/others 10 38 19 (40) (24) 0 0 0

Change in cash 108 1,148 56 352 (471) 544 (466) 391

Free cash flow 141 157 (87) (396) (680) (933) (1,320) (1,668)

Financial summary


- 49 -

Balance sheet (USDm)

Key ratios (%)


Company profile

Global Logistic Properties is one of the world's largest providers of modern logistics facilities. The company owns, manages, and leases out 27m sq m of logistics-property space (as at 30 June 2014) to a network of almost 800 customers in 76 cities in China, Japan, and Brazil, where it maintains market-leading positions. GLP is a logistics-facilities owner and developer. The company was listed in Singapore on 18 October 2010.

As at 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 412 1,560 1,616 1,957 1,486 2,036 1,579 1,980

Inventory 0 0 0 0 0 0 0 0


Other current assets 0 0 87 57 3 3 3 3

Total current assets 515 1,687 1,923 2,318 1,872 2,460 2,045 2,492

Fixed assets 0 5 8 14 58 58 60 62



Total assets 7,397 11,656 13,580 13,248 13,947 17,077 18,873 21,951

Short-term debt 716 937 1,006 95 143 0 0 0

Accounts payable 1,380 503 463 529 576 634 697 767


Total current liabilities 2,114 1,458 1,485 677 740 655 720 790

Long-term debt 2,665 2,755 3,169 2,787 2,449 2,449 3,449 5,649

Other non-current liabilities 277 466 618 737 825 936 1,017 1,101


Share capital 0 5,942 5,943 6,275 6,279 6,438 6,438 6,438

Reserves/R.E./others 1,566 677 1,845 2,123 2,479 2,933 3,369 3,855


Minority interests 776 358 520 648 1,175 3,666 3,880 4,117


EV 12,412 11,101 11,271 9,355 9,936 11,064 12,735 14,771

Net debt/(cash) 2,969 2,132 2,559 925 1,106 413 1,870 3,670

BVPS (USD) 0.898 1.440 1.694 1.765 1.840 1.937 2.026 2.125

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. 14.6 19.4 13.5 (6.8) 21.6 13.5 14.7

EBITDA (YoY) n.a. 30.7 11.4 10.3 (14.2) 17.1 15.5 12.3

Operating profit (YoY) n.a. 30.0 13.6 9.1 (14.9) 17.4 15.8 12.4

Net profit (YoY) n.a. 56.7 6.3 11.8 (21.8) 5.2 24.0 13.7

Core EPS (fully-diluted) (YoY) n.a. (9.3) (30.3) 10.2 (22.7) 3.4 23.0 13.4


EBITDA margin 66.4 75.7 70.6 68.6 63.2 60.8 61.9 60.5



ROAE n.a. 6.5 3.9 3.9 2.9 2.8 3.3 3.6

ROAA n.a. 2.8 2.2 2.3 1.8 1.7 1.8 1.8

ROCE n.a. 4.3 3.4 3.6 3.0 3.1 3.1 3.0

ROIC n.a. 4.3 3.5 3.5 3.0 3.0 3.1 3.0



Accounts receivable (days) n.a. 88.6 111.8 148.9 209.4 201.3 195.1 187.1

Current ratio (x) 0.2 1.2 1.3 3.4 2.5 3.8 2.8 3.2



Free cash flow yield 1.6 1.8 n.a. n.a. n.a. n.a. n.a. n.a.



■ What's new

In our view, lower bunker costs will yield big cost savings for SITC, given they accounted for 21% of its operating cost in 2014E. Although Yen depreciation and weakening foreign trade in China would likely weigh on sentiment towards SITC shares, the positive effects of lower bunker costs should more than offset these factors, in our view. Moreover, we believe the stock’s attractive valuation and dividend yield will provide downside support. We reiterate our Buy (1) call. ■ What's the impact

Economic stimulus measures look set to continue in Japan, creating the potential for a further weakening of the Yen in the near term. Although SITC hedges most of its Yen exposure, as we have seen in the past, a weaker Yen would likely lead

to a decline in intra-Asia freight rates, which could result in weaker trading sentiment toward SITC. However, we believe declining bunker prices should provide support for the shares. Also, SITC’s low valuation compared with other logistics companies, and its dividend yield of 6.7% for 2014E, should continue to appeal. We are cutting our 2014-16E EPS by 11-25% after taking into account a less favourable outlook for 2H14 due to a lack of recovery in intra-Asia shipping rates and a slow recovery of the logistics volume handled by SITC. A slowdown in foreign trade in China would affect SITC more than other logistics players, as SITC focuses only on the freight forwarding business. ■ What we recommend

We are revising our SOTP-based 6-month target price of HKD4.40 to a SOTP-based 12-month target price of HKD5.20, as we roll over our valuation to 2016E (2015E previously). The main risk to our unchanged Buy (1) call would be smaller-than-expected increases in trade volume and freight rates. ■ How we differ

Our 2014-16 EPS forecasts are 4-11% lower than those of the Bloomberg consensus, as we factor in weaker

freight rates as a result of Yen depreciation.


14 January 2015

SITC International

Valuation still attractive

SITC’s shipping business should benefit from lower fuel costs in

2015-16E

Potential for further Yen depreciation may affect sentiment on

the stock, but valuation and dividend remain attractive

Reiterating Buy (1) rating, with a new 12-month target price of

HKD5.20



Industrials / China

SITC International1308 HK


Upside: 23.5%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5


Revenue change (2.9) (7.0) (7.6)



85

96

108

119

130

3.0

3.4

3.8

4.2

4.6



SITC Int (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Resourceful Link (55.1%)

Financial summary (USD)Year to 31 Dec 14E 15E 16E

Revenue (m) 1,333 1,374 1,471


Net profit (m) 122 146 175


EPS change (%) 31.8 20.0 19.7

Daiwa vs Cons. EPS (%) (4.1) (10.5) (10.0)

PER (x) 11.6 9.6 8.0


DPS 0.036 0.030 0.034

PBR (x) 1.7 1.5 1.4

EV/EBITDA (x) 8.8 7.2 5.9

ROE (%) 15.6 17.0 18.3

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 51 -

Key assumptions


Cash flow (USDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Avg freight rate (USD/TEU) 450.0 506.0 543.0 539.0 486.0 499.6 479.6 489.2

Lifting volume ('000 TEU) 1,186.8 1,373.2 1,546.3 1,774.1 1,981.6 2,070.7 2,174.3 2,283.0

Bunker price (USD/ton) 386.0 495.0 669.0 664.0 612.3 549.0 385.0 385.0

Avg freight rate growth (%) (16.2) 12.4 7.3 (0.7) (9.8) 2.8 (4.0) 2.0

Lifting volume growth (%) 9.9 15.7 12.6 14.7 11.7 4.5 5.0 5.0

Bunker price growth (%) (26.6) 24.3 39.5 2.2 (7.8) (10.3) (29.9) 0.0

Vessel capacity growth (%) 5.3 22.5 8.2 13.0 1.9 8.0 8.0 5.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sea freight logistics Revenues 430 434 407 496 558 600 604 647

Land based logistics Revenues 264 458 653 716 709 733 770 824


Total Revenue 694 892 1,060 1,212 1,267 1,333 1,374 1,471

Other income 4 3 34 14 38 17 25 17

COGS (616) (711) (945) (1,059) (1,104) (1,129) (1,135) (1,194)

SG&A (37) (52) (52) (61) (65) (70) (76) (81)



Net-interest inc./(exp.) (1) (0) 9 4 0 (1) (1) (1)

Assoc/forex/extraord./others (1) (1) (5) 0 (0) 2 3 4

Pre-tax profit 34 115 96 81 115 124 157 182

Tax (1) (3) (2) (2) (2) (3) (3) (4)

Min. int./pref. div./others (0) (0) (1) 5 (1) (1) (1) (1)

Net profit (reported) 32 112 94 84 112 121 153 177


EPS (reported)(USD) 0.012 0.043 0.036 0.032 0.043 0.047 0.059 0.068

EPS (adjusted)(USD) 0.011 0.043 0.029 0.039 0.036 0.047 0.056 0.068


DPS (USD) 0.000 0.015 0.015 0.015 0.032 0.036 0.030 0.034

EBIT 36 117 93 77 115 124 156 179

EBITDA 44 126 93 88 136 150 187 215

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 34 115 96 81 115 124 157 182


Tax paid (2) (2) (2) (3) (3) (3) (3) (4)

Change in working capital 3 31 (14) 9 (7) (6) (17) (7)

Other operational CF items 2 2 2 3 3 3 4 6


Capex (14) (39) (95) (245) (105) (150) (150) (77)

Net (acquisitions)/disposals 0 1 1 (2) (10) 0 0 0

Other investing CF items 6 (0) 2 (30) (273) 6 6 6

Cash flow from investing (8) (38) (91) (277) (388) (144) (144) (70)

Change in debt (21) (18) (42) 133 135 144 150 150

Net share issues/(repurchases) 0 401 (2) (1) 0 0 0 0

Dividends paid 0 (40) (40) (40) (74) (50) (61) (77)

Other financing CF items (1) (15) 0 (9) 0 0 0 0

Cash flow from financing (23) 327 (84) 82 61 94 89 73

Forex effect/others (0) 4 14 22 282 1 1 1

Change in cash 15 449 (68) (66) 93 103 128 226

Free cash flow 32 118 (1) (138) 32 2 31 145

Financial summary


- 52 -


Key ratios (%)


Company profile

SITC International Holdings (SITC) is a leading China-based shipping logistics company with an operating capacity of 63,814 TEUs as at the end of 2013. It is the third-largest overall and the largest non-state-owned China-based container shipping company in terms of shipping capacity. SITC focuses extensively on the intra-Asia market.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 66 504 437 381 433 534 663 887

Inventory 8 12 16 19 19 21 23 24



Total current assets 175 581 559 513 572 681 814 1,048

Fixed assets 167 189 264 522 617 732 842 874


Other non-current assets 5 17 28 46 81 81 81 81

Total assets 346 787 852 1,081 1,269 1,494 1,738 2,003

Short-term debt 17 13 31 24 56 50 50 50

Accounts payable 72 86 141 138 145 149 151 159


Total current liabilities 170 125 192 222 259 262 262 278

Long-term debt 73 66 6 166 265 415 565 715


Total liabilities 247 191 198 388 524 677 827 993

Share capital 0 34 33 33 33 33 33 33

Reserves/R.E./others 98 560 617 662 710 781 874 972

Shareholders' equity 98 594 650 696 743 814 907 1,005

Minority interests 2 3 3 (2) 2 3 4 5

Total equity & liabilities 346 787 852 1,081 1,269 1,494 1,738 2,003

EV 1,428 978 999 1,200 1,284 1,327 1,349 1,277

Net debt/(cash) 24 (426) (400) (192) (112) (70) (48) (122)

BVPS (USD) 0.038 0.228 0.250 0.269 0.288 0.315 0.351 0.389

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) n.a. 28.4 18.9 14.4 4.5 5.2 3.1 7.0

EBITDA (YoY) n.a. 186.2 (25.8) (5.3) 53.8 10.6 24.9 14.9

Operating profit (YoY) n.a. 227.1 (20.6) (16.9) 50.0 7.3 25.7 14.9

Net profit (YoY) n.a. 282.9 (32.4) 33.0 (7.6) 31.9 20.0 19.7

Core EPS (fully-diluted) (YoY) n.a. 282.9 (32.1) 33.6 (7.7) 31.8 20.0 19.7


EBITDA margin 6.3 14.1 8.8 7.3 10.7 11.3 13.6 14.6



ROAE 59.2 32.1 12.1 14.9 12.8 15.6 17.0 18.3

ROAA 16.7 19.6 9.2 10.3 7.9 8.8 9.0 9.3

ROCE 37.4 26.9 13.6 9.8 11.8 10.6 11.1 10.8

ROIC 54.9 77.3 42.7 19.8 19.9 17.6 18.9 20.0

Net debt to equity 24.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a.



Current ratio (x) 1.0 4.7 2.9 2.3 2.2 2.6 3.1 3.8

Net interest cover (x) 35.6 600.8 n.a. n.a. n.a. 82.6 103.9 119.3


Free cash flow yield 2.2 8.4 n.a. n.a. 2.3 0.2 2.2 10.3



■ What's new

We believe ZZCSR stands to benefit the most from the planned merger of CSR (1766 HK, HKD9.57, Buy [1]) and CNR (not rated). Having not provided CNR with train components in the past, ZZCSR should gain substantial market share in CNR post-merger by becoming a train components provider for it, in our view. Also, we see ZZCSR as a beneficiary of a likely rise in China’s railway equipment FAI target for 2015 via its parent CSR’s concentrated delivery schedule for MUs and other locomotive products. We forecast ZZCSR to deliver 253 MU units in 2015 and 291 units in 2016 (up 15% YoY for both years). We believe ZZCSR will also prosper from parent CSR’s potential market-share gains overseas after the CSR/CNR merger.

ZZCSR’s trial production of insulated gate bipolar transistors (IGBTs) is progressing well, and longer term, ZZCSR estimates revenue from IGBTs will reach CNY2bn per year. We expect mass production to start in 2017. ■ What's the impact

Potentially strong 2014 results (due in March) and an increase we expect China to announce in 1Q15 to its railway FAI target for 2015 are near-term share price catalysts, in our view. Further, details of China’s 13th Five Year Plan (FYP), due to be released in 3Q15, could augur well for investor sentiment towards ZZCSR as a railway player. ■ What we recommend

We reaffirm our Buy (1) rating. Our 12-month target price is HKD58 (unchanged), based on a 2016E PER of 18.5x, +1SD above ZZCSR’s past-5-year trading average PER of 15x. Our model has yet to factor in the potentially positive impact of the CSR/CNR merger, and we estimate ZZSCR’s 2016E EPS could rise by about 30% vs. our current forecast upon successful integration of CSR and CNR. Our target price implies a 2015E PER of 21.1x.

■ How we differ

Key risks to our view are: 1) a slower-than-expected product

delivery schedule, 2) slower-than-expected margin improvements, and 3) unexpected changes in regulatory policies and political risks.


14 January 2015

Zhuzhou CSR Time s Electric

A key beneficiary of CSR/CNR merger

Type your title here

Stands to benefit the most from merger of CSR and CNR by

gaining market share without paying any price

Bullet 1

As a key rolling-stock component provider for parent CSR,

ZZCSR should benefit from CSR’s high backlog coverage

Bullet 2

12-month target price of HKD58 based on 18.5x PER for 2016E.

ZZCSR is our top pick in our China Railway universe

Bullet 3



Industrials / China

Zhuzhou CSR Times Electric3898 HK

Target (HKD): 58.00 g 58.00

Upside: 29.8%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5





80

109

138

166

195

20

29

38

46

55



Zzhou CSR (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 21.30-52.20



Shares outstanding (m) 547

Major shareholder CSRG (52.6%)


Revenue (m) 12,679 14,151 16,778


Net profit (m) 2,322 2,577 2,939


EPS change (%) 48.3 11.0 14.0

Daiwa vs Cons. EPS (%) 17.9 16.6 19.1

PER (x) 18.1 16.3 14.3


DPS 0.511 0.567 0.647

PBR (x) 3.8 3.3 2.8

EV/EBITDA (x) 6.3 5.3 4.4

ROE (%) 23.3 21.6 20.9

Brian Lam

(852) 2532 4341

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 54 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Total railway FAI (CNY m) 701,321 842,652 590,609 633,967 665,745 800,000 830,000 860,000

Total railway FAI (YoY %) 68 20 (30) 7 5 20 4 4

Train purchase investment (CNY m) 78,076.0 106,650.0 104,949.0 90,000.0 103,800.0 143,000.0 170,000.0 170,000.0

Train purchase investment (YoY) 37.9 36.6 (1.6) (14.2) 15.3 37.8 18.9 0.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Locomotive products 1,024 2,351 2,214 1,584 2,906 3,808 3,651 3,651

EMU train products 711 1,472 2,538 2,229 2,315 4,630 5,093 5,883

Other Revenue 1,590 2,009 2,327 3,341 3,559 4,241 5,406 7,244

Total Revenue 3,326 5,831 7,079 7,154 8,781 12,679 14,151 16,778

Other income 62 (81) 43 110 82 76 85 101

COGS (2,118) (3,679) (4,599) (4,781) (5,695) (8,101) (9,043) (10,837)

SG&A (667) (1,101) (1,165) (1,190) (1,504) (2,114) (2,360) (2,798)


Operating profit 602 970 1,358 1,293 1,664 2,539 2,833 3,243

Net-interest inc./(exp.) 8 (3) (27) 9 27 24 25 33

Assoc/forex/extraord./others 14 26 50 99 12 120 120 120

Pre-tax profit 624 992 1,381 1,401 1,704 2,683 2,978 3,396

Tax (90) (138) (194) (178) (237) (362) (402) (458)

Min. int./pref. div./others (4) (2) (3) (1) 1 1 1 2

Net profit (reported) 531 852 1,184 1,221 1,467 2,322 2,577 2,939

Net profit (adjusted) 531 852 1,184 1,221 1,467 2,322 2,577 2,939

EPS (reported)(CNY) 0.490 0.786 1.092 1.126 1.332 1.975 2.192 2.500

EPS (adjusted)(CNY) 0.490 0.786 1.092 1.126 1.332 1.975 2.192 2.500


DPS (CNY) 0.195 0.305 0.340 0.350 0.323 0.511 0.567 0.647

EBIT 602 970 1,358 1,293 1,664 2,539 2,833 3,243

EBITDA 691 1,108 1,493 1,439 1,825 2,761 3,106 3,567

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 624 992 1,381 1,401 1,704 2,683 2,978 3,396


Tax paid (96) (159) (194) (178) (237) (362) (402) (458)

Change in working capital (170) (347) (297) (217) (683) (1,107) (442) (764)

Other operational CF items 5 130 217 95 (217) (120) (120) (120)

Cash flow from operations 452 754 1,242 1,247 726 1,315 2,287 2,378

Capex (468) (369) (352) (403) (298) (721) (721) (721)

Net (acquisitions)/disposals 1 6 28 21 5 0 0 0

Other investing CF items 393 (115) (294) 398 (1,034) 0 0 0

Cash flow from investing (73) (479) (618) 16 (1,327) (721) (721) (721)

Change in debt 95 (122) 194 (632) 29 0 0 0

Net share issues/(repurchases) 0 0 0 0 1,776 0 0 0

Dividends paid (168) (211) (358) (397) (382) (379) (601) (667)

Other financing CF items 36 489 128 (72) (4) (0) (0) (0)

Cash flow from financing (37) 156 (35) (1,101) 1,418 (380) (601) (667)


Change in cash 342 431 588 161 817 214 965 990

Free cash flow (16) 385 889 843 428 594 1,566 1,656

Financial summary


- 55 -


Key ratios (%)


Company profile

Zhuzhou CSR Times Electric sells and manufactures train-borne electrical systems and electrical components. The company also engages in application research and engineering research of electric traction technology, and industrial and civilian converter technology. It designs and manufactures electrical control equipment for locomotives, rapid transit vehicles, passenger cars and railway maintenance machinery, as well as power electronics devices, sensors, vacuum sewage collectors, general inverters and intelligent traffic.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 889 1,590 1,669 1,110 1,428 2,025 2,261 2,709


Other current assets 239 318 541 147 1,341 1,410 1,437 1,483


Fixed assets 1,313 1,378 1,503 1,701 1,830 2,154 2,448 2,712


Other non-current assets 138 255 315 429 448 568 688 808

Total assets 5,401 7,012 8,654 9,650 13,398 16,965 19,569 23,016

Short-term debt 284 697 1,088 714 960 1,353 1,506 1,799

Accounts payable 718 1,013 907 1,274 1,750 2,489 2,779 3,330

Other current liabilities 469 659 925 1,044 1,111 1,604 1,790 2,122


Long-term debt 3 2 57 28 52 52 52 52



Share capital 3,569 4,075 5,317 6,178 9,016 9,016 9,016 9,016

Reserves/R.E./others 211 331 0 0 0 1,943 3,919 6,191




EV 18,720 18,649 18,496 17,893 17,368 17,425 16,493 15,674

Net debt/(cash) (852) (870) (1,013) (1,577) (2,124) (1,945) (2,756) (3,453)

BVPS (CNY) 3.487 4.064 4.904 5.698 7.670 9.323 11.004 12.937

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 56.9 75.3 21.4 1.1 22.7 44.4 11.6 18.6

EBITDA (YoY) 28.5 60.2 34.8 (3.6) 26.8 51.3 12.5 14.9

Operating profit (YoY) 27.4 61.0 40.1 (4.8) 28.7 52.6 11.5 14.5

Net profit (YoY) 25.7 60.5 39.0 3.1 20.1 58.3 11.0 14.0

Core EPS (fully-diluted) (YoY) 25.7 60.5 39.0 3.1 18.3 48.3 11.0 14.0


EBITDA margin 20.8 19.0 21.1 20.1 20.8 21.8 21.9 21.3



ROAE 14.8 20.8 24.4 21.2 19.3 23.3 21.6 20.9

ROAA 11.1 13.7 15.1 13.3 12.7 15.3 14.1 13.8

ROCE 15.7 20.7 23.0 19.0 19.3 22.4 20.9 20.4

ROIC 18.0 25.1 29.0 24.6 24.4 27.2 25.2 25.3

Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash



Current ratio (x) 2.5 2.2 2.2 2.4 2.8 2.5 2.6 2.6

Net interest cover (x) n.a. 279.3 49.7 n.a. n.a. n.a. n.a. n.a.





■ What's new

Following its planned merger with CNR, CSR will have a monopoly in China’s railway equipment market. We believe the move will strengthen CSR’s pricing power domestically and overseas, and bring market share-gains overseas, where CSR will no longer compete directly with CNR. ■ What's the impact

We expect China’s 13th 5-Year Plan to support continuous long-term railway equipment FAI growth, backed by new demand for multiple-unit trains (MU) on completion of new HSR mileage and robust passenger throughput growth on the existing HSR. This bodes well for CSR’s revenue from its railway products (56% of its 1H14 revenue), given its close correlation with railway FAI. CSR’s strong order

backlog should also support business growth in 2015E. We also see a long-term business growth driver in the urban transit market, for which CCID Consulting forecasts a mileage CAGR of 20% for 2014-18E. CSR had a CNY42.3bn backlog of rapid transit vehicle (RTV) products at end-1H14, and we forecast a 30% CAGR for its RTV-related revenue for 2014-16. We see near-term share price catalysts in potentially strong 2014 results (due in March) and an increase we expect China to announce (in 1Q15) in its railway FAI target for 2015. Details of the 13th FYP, expected to be announced in 3Q15, could also lift sentiment. ■ What we recommend

We reaffirm our Buy (1) rating and 12-month target price of HKD13.30, based on a 15x PER (the past-5-year forward average) applied to our appraised post-merger 2016E EPS of CNY0.71. This assumes savings of 3% in SG&A and 5% in R&D expenses, and 1pp gross margin expansion in 2016. The key risks: 1) slower-than-expected product deliveries, 2) slower-than-expected margin improvements, and 3) regulatory and political risks.

■ How we differ

We are 3-8% above the consensus on 2015-16E EPS, as we are more optimistic on CSR’s order delivery.


14 January 2015

CSR Corp

Transforming into rolling-stock giant


CSR will have a monopoly on China’s railway equipment market

and enjoy stronger pricing power post its merger with CNR

Bullet 1

Should benefit from further growth in China’s train purchase

FAI, on new HSR mileage and robust passenger throughput

Bullet 2

Reiterating Buy (1) rating and 12-month target price of

HKD13.30, based on a 15x PER on our appraised 2016E EPS

Bullet 3



Industrials / China

CSR Corp1766 HK

Target (HKD): 13.30 g 13.30

Upside: 39.0%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5





80

110

140

170

200

5

7

9

11

13



CSR Corp (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CSR Group (56.5%)


Revenue (m) 122,034 134,133 150,163


Net profit (m) 5,823 6,694 7,628


EPS change (%) 40.7 15.0 14.0


PER (x) 18.2 15.8 13.9


DPS 0.127 0.146 0.166

PBR (x) 2.6 2.3 2.0

EV/EBITDA (x) 3.7 3.3 3.0

ROE (%) 15.0 15.3 15.6

Brian Lam

(852) 2532 4341

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 57 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Total railway FAI (CNYm) 701,321 842,652 590,609 633,967 665,745 800,000 830,000 860,000

Train purchase investment(CNYm) 78,076 106,650 104,949 90,000 103,800 143,000 170,000 170,000

Locomotives volume growth (%) 111.8 31.2 (4.0) (42.4) 16.5 15.0 8.0 5.0

Pax carriage volume growth (%) 113.6 (19.4) 60.5 (8.2) (37.6) (5.0) (5.0) 0.0

Freight wagon volume growth (%) (33.6) 18.0 32.7 3.5 (9.1) (15.0) (15.0) 0.0

MUs volume growth (%) 28.9 89.8 21.5 6.2 (8.3) 100.0 10.0 10.0

RTV volume growth (%) 56.2 58.5 (5.9) 3.8 7.9 50.0 30.0 30.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Multiple units 7,932 14,628 20,981 21,524 19,189 39,528 45,769 53,869

Locomotives 14,102 18,019 17,803 14,396 19,846 22,723 24,585 25,934

Other Revenue 23,586 31,266 40,732 53,100 57,490 59,783 63,779 70,360

Total Revenue 45,621 63,912 79,517 89,019 96,525 122,034 134,133 150,163

Other income 491 144 501 665 888 488 537 601

COGS (38,454) (52,945) (64,647) (73,264) (79,896) (98,858) (108,388) (121,178)

SG&A (5,396) (7,766) (9,752) (10,840) (11,647) (15,254) (16,632) (18,620)





Pre-tax profit 2,401 3,665 5,442 5,593 5,933 8,346 9,594 10,933

Tax (285) (415) (699) (740) (859) (1,209) (1,389) (1,583)

Min. int./pref. div./others (438) (719) (879) (843) (934) (1,314) (1,511) (1,721)


Net profit (adjusted) 1,471 2,596 3,864 4,009 4,140 5,823 6,694 7,628

EPS (reported)(CNY) 0.142 0.214 0.326 0.299 0.300 0.422 0.485 0.553

EPS (adjusted)(CNY) 0.124 0.219 0.326 0.299 0.300 0.422 0.485 0.553


DPS (CNY) 0.040 0.040 0.210 0.090 0.090 0.127 0.146 0.166

EBIT 2,262 3,345 5,619 5,580 5,870 8,410 9,649 10,965

EBITDA 3,275 4,627 7,157 7,363 7,811 10,721 12,178 13,712

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 1,013 1,282 1,538 1,783 1,941 2,311 2,529 2,746

Tax paid (269) (369) (568) (855) (968) (1,209) (1,389) (1,583)

Change in working capital 1,111 (1,000) 130 (4,764) (2,034) (5,385) (2,686) (1,885)

Other operational CF items 390 (113) 360 638 457 96 193 193


Capex (4,779) (5,937) (6,197) (3,872) (4,580) (4,600) (4,600) (4,600)

Net (acquisitions)/disposals 35 (182) 105 (1,328) (1,595) 0 0 0

Other investing CF items 203 490 (387) 954 (1,070) (4) 0 0


Change in debt (1,066) 2,120 4,305 (13,165) (9,653) (1,000) 0 0

Net share issues/(repurchases) 0 0 0 8,699 0 0 0 0

Dividends paid (379) 0 (474) (2,485) (1,242) (1,242) (1,747) (2,009)

Other financing CF items 1,549 2,541 5,066 1,278 12,368 (1,102) (1,114) (1,164)

Cash flow from financing 104 4,661 8,898 (5,672) 1,473 (3,344) (2,862) (3,172)


Change in cash 208 2,498 9,322 (7,524) (444) (3,790) 779 2,631

Free cash flow (134) (2,472) 706 (1,478) 749 (442) 3,640 5,803

Financial summary


- 58 -


Key ratios (%)


Company profile

Established on 28 December 2007, CSR is one of China’s 2 manufacturers of rolling stock (alongside CNR, with which it proposes to merge in 2015) producing railway equipment and non-rail products. CSR’s key railway products include locomotives, passenger carriages, freight wagons and multiple-unit trains (MU). Its non-rail related products include rapid transit vehicles] (RTV) and wind-power equipment, electric buses, etc. CSR was listed on the stock exchanges of Shanghai and Hong Kong in August 2008.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 11,415 17,733 17,842 18,770 17,721 21,927 24,041 26,878




Fixed assets 13,509 17,066 21,374 22,971 25,201 26,961 28,548 29,961



Total assets 55,238 73,566 92,786 105,217 121,129 139,983 153,072 169,411

Short-term debt 8,169 12,691 24,716 21,544 21,181 23,403 25,022 27,195




Long-term debt 2,172 4,204 2,325 727 3,569 3,569 3,569 3,569



Share capital 16,857 18,771 20,077 31,513 35,318 35,318 35,318 35,318

Reserves/R.E./others 474 474 2,485 1,242 1,242 5,823 10,770 16,389




EV 16,718 22,110 24,022 27,500 32,881 39,327 40,757 41,049

Net debt/(cash) (933) 3,124 5,065 7,819 10,741 16,752 17,593 17,135

BVPS (CNY) 1.464 1.625 1.906 2.373 2.649 2.981 3.339 3.746

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 30.0 40.1 24.4 12.0 8.4 26.4 9.9 12.0

EBITDA (YoY) 12.6 41.3 54.7 2.9 6.1 37.3 13.6 12.6

Operating profit (YoY) 6.9 47.9 68.0 (0.7) 5.2 43.3 14.7 13.6

Net profit (YoY) 21.3 76.5 48.9 3.8 3.3 40.7 15.0 14.0

Core EPS (fully-diluted) (YoY) 21.3 76.5 48.9 (8.3) 0.2 40.7 15.0 14.0


EBITDA margin 7.2 7.2 9.0 8.3 8.1 8.8 9.1 9.1



ROAE 8.8 14.2 18.5 14.5 11.9 15.0 15.3 15.6

ROAA 2.9 4.0 4.6 4.0 3.7 4.5 4.6 4.7

ROCE 8.0 9.4 11.7 9.5 8.8 11.3 11.7 12.1

ROIC 11.6 12.8 16.3 12.0 9.6 11.5 11.5 12.0




Current ratio (x) 1.2 1.2 1.1 1.2 1.2 1.2 1.3 1.3



Free cash flow yield n.a. n.a. 4.6 n.a. 4.8 n.a. 23.5 37.4



■ What's new

We believe CRG stands to benefit from China’s railway FAI boom. We forecast China’s total railway FAI to grow by 4% YoY for 2015 and 2016 to CNY830m and CNY860m, respectively. CRG is one half of the duopoly in China’s railway construction market, with a 40-45% market share, and typically derives around 40% of its construction revenue from railway construction.

The NDRC had approved 64 new railways construction projects as at end-November 2014, which we believe will provide a sufficient order backlog for railway constructors. We forecast the value of new contracts for CRG to grow by 9% and 8% YoY in 2015 and 2016, respectively, backed by growing investment in HSR/urban rail transit. We believe its existing new contracts/backlog coverage are

sufficient to support its earnings growth through 2015-16.

We are also positive on China’s urban rail transit market because of ongoing urbanisation; our forecasts call for 24% and 13% YoY growth in urban rail transit investment in 2015 and 2016, respectively. CRG has expertise in constructing subways, which we believe could be a long-term earnings driver. We estimate the cost of HSR construction in China is about two-thirds of the average cost in other countries. Given China’s policy to support the export of HSR products, we expect investor sentiment to remain strong this year.

■ What's the impact

Strong full-year 2014 results (due in March 2015) and a formal announcement of China’s railway FAI target for 2015 could serve as near-term catalysts for the shares. We believe details of China’s 13th

FYP would likewise boost the stock.

■ What we recommend

We reaffirm our Buy rating (1) and 12-month target price of HKD7.50, based on a 9.5x 2016E PER, in line with the stock’s past-5-year average multiple. Our target price implies a 2015E PER of 10.4x.

■ How we differ

Key risks to our view: 1) changes in the government’s railway policy; 2)

political risks; and 3) lower-than-than expected margins on overseas business.


14 January 2015

China Railway G roup

Riding the wave of China’s railway FAI upcycle


Deriving some 40% of its revenue from railway construction,

CRG is an immediate beneficiary of China’s railway FAI boom

Bullet 1

The company is set to benefit from higher FAI in urban rail

transit, driven by urbanisation, overseas market exposure

Bullet 2

We rate CRG a Buy (1) with a 12-month TP of HKD7.50, based

on a 9.5x 2016E PER, in line with its past-5-year average

Bullet 3



Industrials / China

China Railway Group390 HK


Upside: 21.2%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5





80

105

130

155

180

3.0

4.0

5.0

6.0

7.0



Ch Rail Gp (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder China Railway Engineering Group (56.1%)


Revenue (m) 611,027 674,948 744,573


Net profit (m) 11,056 12,323 13,509


EPS change (%) 32.3 11.5 9.6


PER (x) 9.5 8.6 7.8


DPS 0.078 0.087 0.095

PBR (x) 1.1 1.0 0.9

EV/EBITDA (x) 9.1 8.8 8.4

ROE (%) 12.1 12.1 12.0

Brian Lam

(852) 2532 4341

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 60 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

China railway infra FAI (CNY m) 600,564 707,459 461,084 518,506 532,770 620,000 640,000 650,000

China railway infra FAI % 78.1 17.8 (34.8) 12.5 2.8 16.4 3.2 1.6

New contracts (CNY m) 601,800 735,480 570,800 731,000 929,650 1,033,846 1,122,564 1,215,929

New contracts % 40.5 22.2 (22.4) 28.1 27.2 11.2 8.6 8.3

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Construction 309,279 411,716 385,202 390,037 445,952 516,274 588,558 658,104

Survey, Design and Consultancy 6,798 8,330 8,357 8,447 8,560 9,244 9,799 10,387

Other Revenue 19,282 38,862 52,213 70,310 87,643 85,509 76,591 76,081

Total Revenue 335,359 458,908 445,772 468,794 542,154 611,027 674,948 744,573

Other income 0 0 0 0 0 0 0 0

COGS (314,547) (431,204) (412,033) (431,754) (501,843) (563,365) (623,078) (688,279)

SG&A (12,506) (17,208) (21,758) (23,708) (25,322) (27,115) (29,951) (33,041)



Net-interest inc./(exp.) (1,648) (1,756) (3,130) (4,484) (4,638) (4,852) (4,526) (4,150)

Assoc/forex/extraord./others 1,987 1,683 750 1,743 3,161 188 300 300

Pre-tax profit 8,645 10,423 9,600 10,591 13,511 15,883 17,693 19,403

Tax (1,236) (2,213) (2,361) (2,557) (3,435) (4,039) (4,499) (4,934)




EPS (reported)(CNY) 0.323 0.347 0.314 0.345 0.440 0.519 0.579 0.634

EPS (adjusted)(CNY) 0.285 0.334 0.336 0.322 0.392 0.519 0.579 0.634


DPS (CNY) 0.063 0.055 0.048 0.052 0.066 0.078 0.087 0.095

EBIT 8,305 10,496 11,981 13,332 14,989 20,547 21,918 23,253

EBITDA 12,831 15,601 18,340 19,511 21,701 27,649 29,736 31,974

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (1,236) (2,213) (2,361) (2,557) (3,435) (4,039) (4,499) (4,934)

Change in working capital 6,801 (13,389) (30,495) (22,089) (12,694) (9,954) (8,945) (10,196)

Other operational CF items 1,222 1,051 3,336 3,664 3,827 (1,515) (2,131) (2,168)

Cash flow from operations 19,957 977 (13,560) (4,213) 7,920 7,477 9,936 10,827

Capex (16,345) (14,788) (10,418) (9,636) (9,969) (12,600) (12,000) (11,500)

Net (acquisitions)/disposals 2,005 1,424 1,093 1,082 943 0 0 0

Other investing CF items (2,224) (3,051) (2,387) (3,421) (3,138) 1,015 879 709


Change in debt 2,886 27,382 37,914 34,014 25,059 (3,577) 10,787 860


Dividends paid 0 (1,342) (1,173) (1,022) (1,108) (1,406) (1,658) (1,848)

Other financing CF items (3,680) (5,122) (6,143) (9,319) (11,788) (5,979) (5,328) (4,784)

Cash flow from financing (794) 20,918 30,598 23,672 12,164 (10,962) 3,801 (5,773)


Change in cash 2,600 5,481 5,327 7,484 7,921 (15,070) 2,615 (5,737)

Free cash flow 3,612 (13,811) (23,978) (13,849) (2,049) (5,123) (2,064) (673)

Financial summary


- 61 -


Key ratios (%)


Company profile

China Railway Group is one part of the duopoly in China’s railway construction market, with a domestic market share of 40-45%. The company also engages in design, survey and construction work for other infrastructure assets, such as roads, the urban rapid transit system, water conservancy, and hydropower facilities construction, and has manufacturing, property development, toll road operation, and mining businesses.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 25,273 31,704 36,329 41,906 46,581 53,118 59,188 65,335




Fixed assets 28,552 34,101 37,267 41,311 44,084 49,144 52,911 55,299



Total assets 312,573 391,770 468,732 550,728 628,201 679,063 742,196 797,997

Short-term debt 31,639 45,104 70,392 94,244 107,100 87,711 87,711 87,711




Long-term debt 27,151 44,394 73,606 87,899 102,399 117,399 127,399 127,399



Share capital 21,300 21,300 21,300 21,300 21,300 21,300 21,300 21,300





EV 112,355 139,065 191,554 222,248 240,372 252,423 261,171 268,386

Net debt/(cash) 9,343 34,571 83,744 114,405 133,840 144,521 151,906 157,643

BVPS (CNY) 2.880 3.153 3.381 3.679 4.067 4.520 5.021 5.568

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 47.6 36.8 (2.9) 5.2 15.6 12.7 10.5 10.3

EBITDA (YoY) 32.4 21.6 17.6 6.4 11.2 27.4 7.5 7.5


Net profit (YoY) 43.9 17.3 0.6 (4.1) 21.7 32.3 11.5 9.6

Core EPS (fully-diluted) (YoY) 43.9 17.3 0.6 (4.1) 21.7 32.3 11.5 9.6


EBITDA margin 3.8 3.4 4.1 4.2 4.0 4.5 4.4 4.3



ROAE 10.3 11.1 10.3 9.1 10.1 12.1 12.1 12.0

ROAA 2.2 2.0 1.7 1.3 1.4 1.7 1.7 1.8

ROCE 6.8 7.3 6.2 5.4 5.2 6.6 6.8 6.8

ROIC 9.6 8.9 6.6 5.5 5.2 6.3 6.2 6.2




Current ratio (x) 1.1 1.1 1.2 1.2 1.2 1.2 1.2 1.2



Free cash flow yield 3.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a.



■ What's new

We see CRCC as an immediate beneficiary of China’s railway FAI boom. As one part of the duopoly in China’s railway construction market, CRCC has a 40-45% market share. Historically, it has derived around 40% of its construction revenue from railway construction. We forecast total railway FAI to rise by 20% YoY to CNY800bn for 2014; from this high base, we see total railway FAI growth of 4% YoY for both 2015 (to CNY830bn) and 2016 (to CNY860bn). ■ What's the impact

We forecast the value of new contracts for CRCC to expand by an average of 5% YoY in 2015-16, backed by HSR and urban rail transit construction. Reflecting our positive view of China’s urban rail transit market amid ongoing

urbanisation, we look for urban rail transit investment to rise by 24% YoY in 2015 and 13% YoY in 2016. In terms of geographic mix, overseas revenues should reach 10% of total by 2016E (vs. 4.5% in 2014E) driven by supportive government policies. CRCC has announced the non-public issuance of A shares, with proceeds used to fund 4 BT/BOT projects and repay loans. Our model assumes the placement raises CNY9.9bn (ca. 9% EPS dilution in 2015E), which could lead to some share-price weakness. We highlight strong 2014 results (March 2015) and announcement of the railway FAI target for 2015 as potential near-term share-price catalysts. Details of China’s 13th Five-Year Plan (likely announced in 3Q15), could also lift sentiment. ■ What we recommend

We reaffirm our Buy (1) call on CRCC, with a 12-month TP of HKD11.70 (unchanged), based on a 2016E PER of 9.5x (past-5-year average multiple). Our target price implies a 2015E PER of 10.5x. Key risks: 1) regulatory and political risks, and 2) lower-than-than-expected margins overseas business. ■ How we differ

Our 2015-16 EPS forecasts are 8-10% below the Bloomberg

consensus, which we attribute to the market having not yet factored in the A-share placement.


14 January 2015

China Railway Const ruction

The other half of a powerful duopoly


As one half of the China railway construction duopoly, CRCC

stands to benefit from the boom in China’s railway FAI

Bullet 1

It should also benefit from higher FAI on urban rail transit,

though recent share placement means near-term dilution

Bullet 2

We reaffirm our Buy (1) rating, with a 12-month target price of

HKD11.70 based on 9.5x 2016E PER

Bullet 3



Industrials / China

China Railway Construction1186 HK

Target (HKD): 11.70 g 11.70

Upside: 21.0%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5





80

98

115

133

150

5.5

6.8

8.0

9.3

10.5



Ch Rail Co (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CRC Group (61.3%)


Revenue (m) 622,405 671,921 706,560


Net profit (m) 11,536 12,319 13,576


EPS change (%) 11.5 (4.0) 10.2

Daiwa vs Cons. EPS (%) 0.3 (10.4) (8.4)

PER (x) 8.3 8.6 7.8


DPS 0.150 0.144 0.158

PBR (x) 1.1 1.0 0.9

EV/EBITDA (x) 5.8 5.7 5.5

ROE (%) 13.4 12.2 11.6

Brian Lam

(852) 2532 4341

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 63 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

China railway infra FAI (CNYm) 600,564.0 707,459.0 461,084.0 518,506.0 532,770.0 620,000.0 640,000.0 650,000.0

China railway infra FAI % 77.9 17.8 (34.8) 12.5 2.8 16.4 3.2 1.6

New contracts (CNYm) 601,327.1 747,198.3 681,179.0 789,337.0 853,483.5 897,147.4 938,089.9 980,899.0

New contracts % 42.1 24.3 (8.8) 15.9 8.1 5.1 4.6 4.6

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Construction 324,837 428,497 407,541 407,601 468,015 515,759 567,715 602,218

Survey, Design and Consultancy 7,638 8,333 7,464 7,287 7,761 8,538 8,964 9,413

Other Revenue 12,501 19,357 28,315 54,984 94,186 98,108 95,242 94,929

Total Revenue 344,976 456,187 443,319 469,872 569,962 622,405 671,921 706,560

Other income 0 0 0 0 0 0 0 0

COGS (322,428) (428,647) (409,327) (432,889) (527,248) (577,290) (624,210) (656,978)

SG&A (13,990) (21,191) (22,158) (22,827) (26,433) (25,148) (25,792) (25,482)



Net-interest inc./(exp.) (675) (755) (2,093) (3,307) (3,790) (5,253) (6,244) (6,816)


Pre-tax profit 8,307 6,089 10,056 10,896 13,040 14,863 15,875 17,484

Tax (1,576) (1,772) (2,174) (2,375) (2,600) (3,196) (3,413) (3,759)




EPS (reported)(CNY) 0.535 0.344 0.637 0.687 0.838 0.935 0.898 0.990

EPS (adjusted)(CNY) 0.496 0.564 0.630 0.687 0.838 0.935 0.898 0.990


DPS (CNY) 0.160 0.100 0.100 0.110 0.130 0.150 0.144 0.158

EBIT 8,558 6,349 11,834 14,156 16,282 19,966 21,919 24,101

EBITDA 14,933 14,155 21,221 23,845 26,188 30,619 33,972 37,719

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (1,576) (1,772) (2,174) (2,375) (2,600) (3,196) (3,413) (3,759)

Change in working capital 4,375 (6,805) (32,180) (15,818) (5,209) (18,048) (20,941) (13,514)

Other operational CF items 355 702 2,109 3,173 (24,739) (741) 819 2,337

Cash flow from operations 17,837 6,019 (12,801) 5,565 (9,602) 3,532 4,393 16,166

Capex (12,998) (17,014) (12,054) (10,500) (17,645) (17,273) (18,273) (20,219)

Net (acquisitions)/disposals 2,212 1,287 1,238 1,657 1,606 0 0 0

Other investing CF items (2,843) 202 213 534 (3,957) 79 (273) (26)


Change in debt 3,981 13,930 46,307 17,318 35,906 11,580 (2,554) 197

Net share issues/(repurchases) 0 0 0 0 0 0 9,936 0

Dividends paid (1,224) (1,974) (1,234) (1,357) (1,604) (1,604) (1,846) (1,972)


Cash flow from financing 1,407 10,359 41,649 10,923 29,600 2,884 (1,933) (9,148)


Change in cash 5,615 853 18,244 8,179 1 (10,778) (16,085) (13,228)

Free cash flow 4,839 (10,995) (24,855) (4,935) (27,248) (13,741) (13,879) (4,054)

Financial summary


- 64 -


Key ratios (%)


Company profile

China Railway Construction is one of the duopolies in China’s railway construction market, enjoying about a 40-45% market share in China. The company also engages in design, survey and construction of other infrastructure assets, such as roads, urban rapid transit systems, water conservancy, and hydropower facilities construction. Moreover, it has manufacturing, property development and toll road operation businesses and a mining business.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 19,138 26,615 30,095 33,187 40,799 46,845 50,903 54,212




Fixed assets 30,441 37,364 40,572 40,271 43,164 47,401 51,238 55,457



Total assets 282,990 350,265 422,983 480,661 553,019 629,283 680,912 719,267

Short-term debt 12,586 17,428 55,626 72,820 68,813 60,500 57,664 57,664




Long-term debt 13,565 22,415 30,611 31,390 71,685 91,685 91,685 91,685



Share capital 12,338 12,338 12,338 12,338 12,338 12,338 13,718 13,718



Minority interests 814 828 970 1,366 2,838 4,347 5,867 7,393


EV 64,198 76,021 104,061 113,070 153,343 177,367 192,136 206,891

Net debt/(cash) (28,919) (16,080) 12,070 21,864 60,715 83,179 96,428 109,657

BVPS (CNY) 4.317 4.653 5.248 5.833 6.564 7.369 8.116 8.962

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 57.2 32.2 (2.8) 6.0 21.3 9.2 8.0 5.2

EBITDA (YoY) 50.2 (5.2) 49.9 12.4 9.8 16.9 10.9 11.0

Operating profit (YoY) 48.8 (25.8) 86.4 19.6 15.0 22.6 9.8 10.0

Net profit (YoY) 30.8 13.7 11.7 9.1 22.0 11.5 6.8 10.2

Core EPS (fully-diluted) (YoY) 30.8 13.7 11.7 9.1 22.0 11.5 (4.0) 10.2


EBITDA margin 4.3 3.1 4.8 5.1 4.6 4.9 5.1 5.3



ROAE 12.1 12.6 12.7 12.4 13.5 13.4 12.2 11.6

ROAA 2.4 2.2 2.0 1.9 2.0 2.0 1.9 1.9

ROCE 11.4 7.1 9.5 8.6 8.1 8.5 8.5 8.8

ROIC 30.2 13.4 15.5 12.8 10.9 9.7 8.8 8.3

Net debt to equity n.a. n.a. 18.6 30.4 75.0 91.5 86.6 89.2



Current ratio (x) 1.2 1.1 1.1 1.1 1.2 1.2 1.3 1.3



Free cash flow yield 5.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a.



■ What's new

As a leading player in the construction of local government-funded ports and roads in China, we believe CCC is well placed to benefit from China’s proposed “One Belt One Road” initiative (construction of infrastructure projects overseas), but expect this to materialise only long-term. Meanwhile, we see funding pressure in the near term for the domestic construction projects CCC is engaged in given local governments’ high debt levels. ■ What’s the impact

For 9M14, CCC registered 6.6% YoY new contract growth, driven mainly by overseas construction projects (due to a recovery in the overseas construction market), but offset by slowdowns in government investments in road and bridge construction, the company’s build-transfer (BT) and build-operate-

transfer (BOT) projects and its dredging works. Due to CCC’s continuing investments in BT and build-BOT projects, we forecast its capex to rise by 50% YoY to CNY38bn for 2014 and remain high at CNY33.5bn for 2015 and CNY32.7bn for 2016. ■ What we recommend

We maintain our Hold (3) rating on CCC with a 12-month target price of HKD9.30, based on a target 8x PER (past-5-year average) applied to our core 2016E EPS. We see few fundamental near-term stock catalysts. An interest-rate cut in China could provide upside potential to our target price and earnings forecasts for CCC as the company could see interest expense savings given its high net gearing of 128% forecast by us at end-2014. Key risks to our view are local government funding issues, lower or higher profit margins and lower or higher interest expenses vs. our expectations. ■ How we differ

Our core 2014-16E EPS are 4-6% below the Bloomberg consensus forecasts as we assume slower growth in CCC’s local government-funded projects and rising interest costs.


14 January 2015

China Communicat ion s Construction

Positives priced in for now

Stands to benefit from “One Belt One Road”, albeit this could

take several years to materialise and looks priced in for now

We foresee slower growth in the China infrastructure projects

that CCC is engaged in given local government funding issues

Maintaining Hold (3) rating, with 12-month target price of

HKD9.30



Industrials / China

China Communications Construction1800 HK


Downside: 4.8%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5





80

103

125

148

170

4

6

7

9

10



Ch Com Con (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CCCG (63.8%)


Revenue (m) 358,556 391,662 387,170


Net profit (m) 12,899 14,144 15,067


EPS change (%) 4.1 9.7 6.5

Daiwa vs Cons. EPS (%) (4.7) (3.5) (6.1)

PER (x) 9.8 8.9 8.4


DPS 0.207 0.211 0.225

PBR (x) 1.2 1.1 1.0

EV/EBITDA (x) 5.5 5.7 5.8

ROE (%) 12.9 12.7 12.3

Brian Lam

(852) 2532 4341

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 66 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

New contracts (CNYm) 360,363 411,738 457,848 514,920 543,261 614,431 683,068 728,159

New contracts % 27.3 14.3 11.2 12.5 5.5 13.1 11.2 6.6

Backlog (CNYm) 426,027 512,103 601,912 700,525 738,055 980,930 1,259,336 1,587,326

Backlog % 27.4 20.2 17.5 16.4 5.4 32.9 28.4 26.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Construction 165,563 212,962 227,068 229,401 264,146 293,211 324,151 315,237

Port Machinery 27,070 17,221 20,166 19,317 24,171 26,174 28,325 30,669

Other Revenue 34,287 42,551 47,047 46,603 43,481 39,171 39,186 41,263

Total Revenue 226,920 272,734 294,281 295,321 331,798 358,556 391,662 387,170

Other income 843 1,145 1,638 1,271 1,927 1,558 1,669 1,709

COGS (205,215) (249,261) (266,374) (262,723) (297,860) (320,996) (349,647) (343,005)

SG&A (10,164) (10,685) (13,557) (14,644) (16,290) (16,747) (17,795) (17,784)




Assoc/forex/extraord./others 243 308 1,333 110 222 1,556 300 300

Pre-tax profit 10,314 12,453 15,029 15,551 15,852 17,900 18,250 19,441

Tax (2,310) (2,552) (3,046) (3,790) (3,580) (4,027) (4,106) (4,374)

Min. int./pref. div./others (804) (38) (216) 516 296 0 0 0



EPS (reported)(CNY) 0.486 0.665 0.794 0.771 0.777 0.858 0.874 0.932

EPS (adjusted)(CNY) 0.470 0.605 0.722 0.766 0.766 0.797 0.874 0.932


DPS (CNY) 0.116 0.160 0.196 0.188 0.188 0.207 0.211 0.225

EBIT 12,384 13,933 15,988 19,225 19,575 22,371 25,889 28,090

EBITDA 16,928 19,384 22,480 26,212 27,617 31,333 35,899 39,122

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (2,417) (2,289) (2,604) (3,219) (3,677) (4,027) (4,106) (4,374)

Change in working capital 2,479 61 (16,771) (9,705) (16,275) (18,431) (15,297) (15,168)

Other operational CF items (313) (3,147) (608) 3,726 2,817 5,289 (7,409) (2,088)


Capex (18,184) (14,403) (16,108) (19,286) (25,134) (38,000) (33,500) (32,743)

Net (acquisitions)/disposals 568 (485) 785 (61) (2,207) (1,000) 0 0

Other investing CF items 726 (488) 937 (157) (745) 2,123 1,931 2,491


Change in debt 11,360 9,590 21,489 26,951 37,167 40,165 20,205 9,953

Net share issues/(repurchases) 60 111 165 5,008 474 0 0 0

Dividends paid (1,453) (1,720) (2,372) (2,902) (2,988) (3,035) (3,350) (3,416)

Other financing CF items (145) (125) (139) (95) (91) 958 831 772

Cash flow from financing 9,822 7,856 19,143 28,962 34,562 38,088 17,685 7,309


Change in cash 7,539 5,009 6,295 22,798 13,235 10,903 (12,436) (14,100)

Free cash flow (3,577) (1,874) (14,570) (5,946) (18,375) (28,308) (32,052) (23,900)

Financial summary


- 67 -


Key ratios (%)


Company profile

Listed on the stock exchanges of Hong Kong in 2006 and Shanghai in 2012, CCC is a state owned enterprise under the SASAC. It is principally engaged in the construction and design of transportation infrastructure, dredging and port machinery manufacturing. CCC is the largest port construction company and the largest dredging company in China, and is the third-largest dredging company worldwide. One of its subsidiaries, Zhenhua Heavy Machinery, is the world’s largest manufacturer of container cranes. CCC’s parent company is China Communications Construction Group, with a 63.8% shareholding.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 18,835 21,473 22,603 27,113 32,850 44,873 48,764 58,412


Other current assets 814 834 1,033 7,167 8,764 9,471 10,345 10,227


Fixed assets 47,351 52,438 55,148 56,812 55,619 56,283 54,577 54,256



Total assets 264,058 307,794 358,780 434,277 517,445 594,438 646,632 676,305

Short-term debt 36,043 42,760 54,289 69,187 87,818 107,818 107,818 107,818




Long-term debt 34,694 38,569 51,756 75,058 99,157 119,157 139,157 149,157



Share capital 52,894 57,770 67,304 83,671 91,826 91,826 91,826 91,826





EV 79,764 84,395 102,207 115,970 142,555 171,310 204,277 228,849

Net debt/(cash) 36,920 42,503 60,924 76,742 105,737 134,834 167,270 191,370

BVPS (CNY) 3.684 4.057 4.736 5.358 5.865 6.535 7.202 7.922

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 26.8 20.2 7.9 0.4 12.4 8.1 9.2 (1.1)

EBITDA (YoY) 10.9 14.5 16.0 16.6 5.4 13.5 14.6 9.0


Net profit (YoY) 54.9 28.9 19.2 13.9 1.7 4.1 9.7 6.5



EBITDA margin 7.5 7.1 7.6 8.9 8.3 8.7 9.2 10.1



ROAE 14.5 15.6 16.4 15.5 13.7 12.9 12.7 12.3

ROAA 2.9 3.1 3.2 3.1 2.6 2.3 2.3 2.3

ROCE 10.0 9.6 9.4 9.0 7.4 7.0 7.2 7.3

ROIC 10.3 10.2 10.0 9.2 7.9 7.5 7.3 6.9




Current ratio (x) 1.1 1.0 1.0 1.1 1.0 1.1 1.1 1.1






■ What's new

Management is now guiding for better YoY growth in CIMC’s container sales volume compared with its earlier 2015 forecast while maintaining its assumed ASP for container manufacturing this year. We now forecast lower sales of energy/petrochemical equipment in 2015 in the face of relatively weak demand for LNG and related equipment. As a result, we are cutting our core 2015-16 earnings forecasts by 3%. We reaffirm our Buy (1) rating on CIMC. However, we believe the momentum at its container manufacturing business will offset potential earnings weakness at 70%-owned CIMC Enric (3899HK, HKD6.18, Buy [1]), which accounts for about 50% of the net profit of CIMC’s energy, chemical and liquid food business.


For 2015, we forecast 9% YoY growth in CIMC’s dry container sales (up from our prior forecast of 5% YoY) but cut our assumed container sales ASP to flat YoY (previously up 2% YoY). Net net, we now look for CIMC to see 8% YoY growth (previously 5% YoY) in its overall container sales volume. We also revise our 2015 revenue forecast for the company’s energy chemical and food-equipment business to 10% YoY growth for 2015 (previously 16% YoY) on the back of weaker demand for LNG equipment. ■ What we recommend

We now have a 12-month SOTP-based target price of HKD23.0 (previously a 6-month TP of HKD22.0). Our revised assumptions incorporate higher-than-previously-assumed segment contribution (gross profit) from the container manufacturing business, which we expect to remain strong in 2016E. The main risk to our unchanged Buy (1) call on CIMC would be weaker-than-expected revenue and earnings for the container, trailer and energy equipment businesses. ■ How we differ

We are 13-14% below the Bloomberg consensus on 2015-16E EPS, likely because we factor in smaller revenue

contributions from the energy, chemical and food equipment.


14 January 2015

China Internat iona l Marine Conta iners

Better container sales expected

Revising our forecasts for 2015: revising up our dry-container

sales volume growth assumption, cutting our ASP assumption

We also fine-tune our assumptions on energy and petrol-

chemical equipment sales for this year

We reaffirm our Buy (1) rating, with a new 12-month target price

of HKD23.0



Industrials / China

China International Marine Containers2039 HK

Target (HKD): 22.00 g 23.00

Upside: 35.0%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5


Revenue change - (0.3) (0.3)

Net profit change - (2.8) (3.0)

Core EPS (FD) change - (2.8) (3.0)

75

85

95

105

115

13

15

17

18

20



China Inte (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 13.76-19.70




Major shareholder China Merchants Hldg Intl (25.5%)


Revenue (m) 64,489 73,301 83,716


Net profit (m) 2,283 2,584 2,861


EPS change (%) 40.4 13.2 10.7

Daiwa vs Cons. EPS (%) 0.5 (12.6) (13.8)

PER (x) 15.9 14.0 12.7


DPS 0.274 0.311 0.345

PBR (x) 1.5 1.3 1.2

EV/EBITDA (x) 10.8 10.0 9.4

ROE (%) 10.2 10.1 9.9

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 69 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container sales volume growth (56.2) 113.1 15.5 (23.4) (0.4) 5.7 7.7 5.3

Container ASP growth 30.8 (31.5) 52.0 (8.2) (14.2) 2.0 0.3 1.9

Transportation equipment volume

growth 7.6 4.4 49.9 (35.2) 6.1 10.0 5.0 5.0

Transportation equipment ASP

growth 21.6 44.6 (31.0) 26.7 (11.0) 2.0 2.0 2.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container manufacturing revenue 5,574 25,440 35,072 24,840 21,307 22,203 24,306 26,056

Transportation equipment revenue 11,013 16,632 17,199 14,130 13,335 14,962 16,024 17,161

Other Revenue 3,889 9,697 11,855 15,363 23,232 27,324 32,971 40,498

Total Revenue 20,476 51,768 64,125 54,334 57,874 64,489 73,301 83,716

Other income 1,464 (64) 65 (21) 563 0 0 0

COGS (17,402) (43,598) (52,225) (44,601) (48,242) (53,201) (60,600) (69,443)

SG&A (2,704) (3,985) (5,635) (5,486) (5,874) (6,546) (7,440) (8,497)





Pre-tax profit 1,465 3,675 5,023 2,907 3,563 3,610 4,101 4,554

Tax (385) (824) (1,364) (977) (928) (941) (1,069) (1,186)

Min. int./pref. div./others (122) 151 32 9 (454) (460) (523) (580)



EPS (reported)(CNY) 0.360 1.127 1.386 0.728 0.819 0.830 0.943 1.047

EPS (adjusted)(CNY) 0.032 1.131 1.460 0.789 0.611 0.858 0.971 1.074


DPS (CNY) 0.120 0.350 0.460 0.230 0.270 0.274 0.311 0.345

EBIT 1,348 4,005 5,475 3,241 3,864 4,077 4,518 4,941

EBITDA 2,194 5,390 6,571 4,351 5,066 5,504 5,905 6,331

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 846 1,385 1,096 1,110 1,201 1,427 1,387 1,390

Tax paid (385) (824) (1,364) (977) (928) (941) (1,069) (1,186)

Change in working capital (1,353) (3,027) (2,910) (1,335) (1,272) (2,212) (2,799) (3,290)


Cash flow from operations 970 1,483 2,254 2,243 2,703 1,985 1,721 1,567

Capex (1,370) (2,117) (2,998) (2,087) (6,930) (2,500) (3,000) (3,500)

Net (acquisitions)/disposals (2,248) (615) (2,003) (1,457) (837) 0 0 0



Change in debt 16,946 39,338 52,160 36,613 36,162 19,704 16,008 16,959


Dividends paid 0 0 0 0 0 0 0 0

Other financing CF items 662 1,055 1,860 3,567 4,497 719 729 828

Cash flow from financing 17,608 40,393 54,020 40,180 40,659 20,422 16,737 17,787

Forex effect/others 81 171 (420) 40 (94) 0 0 0

Change in cash 15,130 39,379 51,074 39,198 35,766 19,908 15,458 15,854

Free cash flow (401) (634) (744) 156 (4,226) (515) (1,279) (1,933)

Financial summary


- 70 -


Key ratios (%)


Company profile

China International Marine Containers is mainly focused on manufacturing container, road transportation vehicles, energy, Chemical and food equipment, offshore engineering equipment and airport facilities equipment.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 6,754 13,424 15,468 18,035 15,961 17,785 20,215 23,087




Fixed assets 7,695 10,006 10,885 11,609 13,508 14,820 16,656 18,976



Total assets 37,358 54,131 64,362 62,992 72,606 76,334 81,724 88,627

Short-term debt 5,839 13,692 13,886 7,690 10,877 8,753 8,933 10,148




Long-term debt 5,622 3,912 10,561 14,104 14,212 14,294 12,926 11,509

Other non-current liabilities 867 1,040 951 1,231 1,322 2,345 4,174 5,905


Share capital 2,662 2,662 2,662 2,662 2,662 2,662 2,662 2,662





EV 42,609 51,115 54,407 53,994 59,501 59,337 59,067 59,584

Net debt/(cash) 6,192 12,949 16,659 16,573 20,318 18,753 17,960 17,897

BVPS (CNY) 5.333 6.093 6.999 7.329 7.765 9.075 10.214 11.479

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (56.7) 152.8 23.9 (15.3) 6.5 11.4 13.7 14.2

EBITDA (YoY) (15.5) 145.7 21.9 (33.8) 16.4 8.6 7.3 7.2

Operating profit (YoY) (29.1) 197.2 36.7 (40.8) 19.2 5.5 10.8 9.4

Net profit (YoY) (95.0) 3,469.4 29.1 (46.0) (22.6) 40.4 13.2 10.7

Core EPS (fully-diluted) (YoY) (95.0) 3,469.4 29.1 (46.0) (22.6) 40.4 13.2 10.7


EBITDA margin 10.7 10.4 10.2 8.0 8.8 8.5 8.1 7.6



ROAE 0.6 19.8 22.3 11.0 8.1 10.2 10.1 9.9

ROAA 0.2 6.6 6.6 3.3 2.4 3.1 3.3 3.4

ROCE 5.2 12.5 13.2 7.2 8.3 8.1 8.6 8.9

ROIC 4.5 11.5 11.3 5.6 6.8 6.6 6.9 7.0




Current ratio (x) 1.4 1.1 1.3 1.5 1.3 1.4 1.5 1.5



Free cash flow yield n.a. n.a. n.a. 0.4 n.a. n.a. n.a. n.a.



■ What's new

In contrast to the airlines and its peers, OOIL’s share price has not reacted positively to declining bunker prices so far. However, we believe low bunker prices will help OOIL improve its profitability, and thus attract investors to trade on the weakening bunker price trend. ■ What's the impact

We are cutting our 2014-16 bunker price assumptions, from USD591/tonne to USD549/tonne for 2014, and from USD591/tonne to USD385/tonne for both 2015/2016. As a result, we raise our 2014-16E EPS forecasts for OOIL by 9-29% . We look for demand to grow by 5.0% YoY for 2015, albeit slower than the 5.4% YoY recorded for 2014. Transpacific and transatlantic trade should be strong in 2015 on the back

of strong US economic growth, while other routes (eg, Asia-Europe) remain sluggish. We forecast global capacity growth of 6.4% YoY for 2015, which implies slight overcapacity in 2015. With the decline in the bunker adjustment factor, we now expect freight rates to be flat YoY in 2015 (previous: up 2% YoY). ■ What we recommend

We are adjusting our 6-month target price of HKD56 to a 12-month target price of HKD64, on the back of the higher cost savings we expect for 2015-16, which should offset the lower container revenue over the same period. Our target PBR is still 0.86x, now based on our 2016E BVPS (previously 2015E). Our target PBR incorporates a 10% premium to the stock’s past-3-year average, which we see as appropriate, as we expect OOIL’s profitability to improve, especially as it has the most exposure to transpacific and transatlantic routes (a combined 46% of total revenue) compared with peers. OOIL is our preferred pick in the container shipping sector. The major risk is higher-than-expected bunker prices and weaker-than-expected freight rate increases. ■ How we differ

Our revised 2015-16E EPS are 55-105% higher than consensus, as our

bunker cost assumptions are much lower as we are more bearish about a rebound in oil prices.


14 January 2015

Orient Ove rse as Inte rnational

Preferred pick on lower fuel costs

OOIL is our preferred pick on the declining oil-price theme, as it

has been a share-price laggard relative to the airline companies

Should benefit the most within our container shipping sector

from an upturn in transpacific trade in 2015

Reaffirming Buy (1) rating, with 12-month target price of

HKD64




Orient Overseas International316 HK

Target (HKD): 56.00 g 64.00

Upside: 30.5%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5



Net profit change 8.8 29.1 21.1

Core EPS (FD) change 8.8 29.1 21.1

90

100

110

120

130

32

36

41

45

50



Orient Ov (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 32.40-49.25



Shares outstanding (m) 626

Major shareholder Tung Group (68.7%)


Revenue (m) 6,476 6,621 6,919


Net profit (m) 452 654 726


EPS change (%) 860.7 44.7 11.0

Daiwa vs Cons. EPS (%) 57.0 104.5 55.2

PER (x) 8.8 6.1 5.5


DPS 0.198 0.262 0.291

PBR (x) 0.8 0.7 0.7

EV/EBITDA (x) 6.3 4.9 4.2

ROE (%) 9.6 12.5 12.6

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 72 -

Key assumptions


Cash flow (USDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Avg freight rate (USD/TEU) 924.0 1,178.0 1,098.6 1,130.6 1,059.5 1,052.4 1,055.0 1,076.1



Avg freight rate growth (%) (24.7) 27.5 (6.7) 2.9 (6.3) (0.7) 0.2 2.0

Lifting volume growth (%) (14.0) 14.6 5.6 3.7 1.5 3.7 1.7 3.0


Vessel capacity growth (%) (16.1) 22.6 8.3 8.8 7.8 (11.0) 6.9 3.2

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container transportation and logistics

Revenues4,326 6,009 5,987 6,433 6,205 6,448 6,593 6,891

Rental income and others 24 25 25 26 26 28 28 28


Total Revenue 4,350 6,033 6,012 6,459 6,232 6,476 6,621 6,919

Other income 9 45 64 118 56 107 66 66

COGS (4,060) (4,405) (5,228) (5,560) (5,460) (5,283) (5,164) (5,331)

SG&A (405) (485) (402) (441) (425) (415) (456) (479)


Operating profit (332) 919 175 328 90 538 712 798



Pre-tax profit (362) 899 162 310 67 517 686 761

Tax (14) (29) (23) (14) (20) (23) (31) (34)

Min. int./pref. div./others (26) 997 42 (1) (0) (1) (1) (2)

Net profit (reported) (402) 1,867 182 295 47 493 654 726

Net profit (adjusted) (378) 862 139 295 47 452 654 726

EPS (reported)(USD) (0.643) 2.983 0.290 0.472 0.075 0.788 1.045 1.160

EPS (adjusted)(USD) (0.604) 1.378 0.222 0.472 0.075 0.722 1.045 1.160

EPS (adjusted fully-diluted)(USD) (0.604) 1.378 0.222 0.472 0.075 0.722 1.045 1.160

DPS (USD) 0.000 2.838 0.070 0.118 0.019 0.198 0.262 0.291

EBIT (332) 919 175 328 90 538 712 798

EBITDA (127) 1,166 409 551 387 864 1,046 1,154

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax (362) 899 162 310 67 517 686 761


Tax paid (8) (8) (33) (18) (25) (24) (32) (35)

Change in working capital (205) (2) (195) (149) 37 (147) (127) (126)


Cash flow from operations (352) 1,175 246 408 413 713 907 1,012

Capex (376) (218) (744) (737) (574) (762) (612) (612)

Net (acquisitions)/disposals (50) 2,108 72 (30) (5) 27 27 27

Other investing CF items 97 (2,587) 2,614 (90) 101 142 101 101

Cash flow from investing (329) (698) 1,942 (858) (479) (594) (484) (484)

Change in debt 525 584 282 627 895 895 895 895


Dividends paid (29) (325) (1,500) (30) (45) (12) (124) (164)

Other financing CF items (249) (612) (274) (459) (659) (268) (11) (12)

Cash flow from financing 247 (353) (1,492) 138 191 614 760 718


Change in cash (435) 124 695 (312) 125 734 1,182 1,246

Free cash flow (728) 956 (498) (330) (161) (49) 295 400

Financial summary


- 73 -


Key ratios (%)


Company profile

OOIL is a Hong Kong-based container-shipping company with a capacity of 496,106 TEUs as at the end of 2013. In the past decade, the company entered the China property market, but announced on 18 January 2010 that it would exit the property-development business by disposing of this business.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 84 96 150 154 150 135 143 148


Other current assets 1,422 250 235 324 343 343 343 343


Fixed assets 3,798 3,860 4,205 4,665 5,320 5,584 5,739 5,872


Other non-current assets 473 612 649 762 783 962 1,078 1,195

Total assets 7,330 9,075 7,733 8,231 8,990 10,103 11,513 12,969

Short-term debt 432 248 439 556 268 11 12 13



Total current liabilities 1,192 1,027 1,164 1,352 1,185 920 916 927

Long-term debt 2,136 2,416 2,233 2,326 3,266 4,149 5,032 5,914



Share capital 63 63 63 63 63 63 63 63





EV 5,262 2,706 4,457 4,865 5,443 5,402 5,170 4,873

Net debt/(cash) 1,343 (1,188) 573 1,020 1,622 1,579 1,346 1,047

BVPS (USD) 6.303 8.866 6.793 7.162 7.144 7.932 8.780 9.677

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (33.4) 38.7 (0.4) 7.4 (3.5) 3.9 2.2 4.5

EBITDA (YoY) n.a. n.a. (64.9) 34.6 (29.8) 123.5 21.0 10.3

Operating profit (YoY) n.a. n.a. (81.0) 87.8 (72.5) 496.2 32.2 12.1

Net profit (YoY) n.a. n.a. (83.9) 113.1 (84.1) 860.7 44.7 11.0

Core EPS (fully-diluted) (YoY) n.a. n.a. (83.9) 113.1 (84.1) 860.7 44.7 11.0


EBITDA margin n.a. 19.3 6.8 8.5 6.2 13.3 15.8 16.7


Net profit margin (8.7) 14.3 2.3 4.6 0.8 7.0 9.9 10.5

ROAE n.a. 18.2 2.8 6.8 1.1 9.6 12.5 12.6

ROAA n.a. 10.5 1.6 3.7 0.5 4.7 6.0 5.9

ROCE n.a. 12.5 2.3 4.6 1.2 6.3 7.2 7.1

ROIC (6.5) 18.4 3.3 6.1 1.1 8.1 10.2 10.9

Net debt to equity 34.0 n.a. 13.5 22.8 36.3 31.8 24.5 17.3



Current ratio (x) 2.5 4.4 2.4 2.0 2.4 3.8 5.1 6.3



Free cash flow yield n.a. 24.2 n.a. n.a. n.a. n.a. 7.4 10.1



■ What's new

The weakening bunker fuel price trend should help CSCL to stage a strong earnings turnaround in 2015 and improve its profitability in 2016, in our view. Thus, we are now less concerned about a potential delisting of its A shares in the event of a third consecutive year of losses in 2015E, and upgrade our rating to Outperform (2), from Hold (3). ■ What's the impact

We are lowering our bunker price assumptions to USD549/tonne (from USD604/tonne) for 2014 and USD385/tonne (from USD603/tonne) for both 2015 and 2016 (based on a Brent crude oil price of USD60/bbl). As such, we now forecast CSCL’s adjusted net loss to narrow to CNY508m for 2014 (previously CNY889m) and raise our 2015 net profit forecast by 74% (with

the magnitude accentuated by a low base) to HKD1,038m. We reduce our 2016E net profit and EPS slightly by 2% as we envisage a slower global economic recovery than previously, especially for the EU area. Still, comparatively we see a better outlook for transpacific trade in 2015 due to the stronger economic recovery in the US versus other parts of the world. Asia-Europe and transpacific trade should account for 27% and 31%, respectively, of CSCL’s 2015 revenue on our forecasts. ■ What we recommend

We revise our target price to a 12-month one of HKD2.90 (formerly HKD2.20 on a 6-month view), as a result of our more bullish earnings outlook on the back of the prevailing low bunker prices. Our target price is based on a target PBR of 1.0x (previously 0.9x), which we derive by assigning a 10% premium (previously no premium) to its past-5-year PBR of 0.9x. We believe a premium is now appropriate given the low bunker cost is creating more positive sentiment towards the China Transportation Sector, something we have not seen for much of the past 5 years. Key risks to our positive stock call are higher-than-expected bunker costs and lower-than-expected cargo volume and freight rate increases.

■ How we differ

Our 2015-16E EPS are 22-41% higher than the consensus, as we factor in lower bunker prices.


14 January 2015

China Sh ipping Containe r Line s

Less concern of possible delisting

Low bunker prices should allay investor concerns about a

potential delisting from the A-share market

Should see a significant earnings recovery as a result of lower

bunker prices, which should also offset overcapacity concerns

Upgrading to Outperform (2); raising target price to HKD2.90,

now based on 12-month view




China Shipping Container Lines2866 HK


Upside: 15.1%


Buy

Outperform (from Hold)

Hold

Underperform

Sell

1

2

3

4

5



Net profit change n.a. 74.1 (2.1)

Core EPS (FD) change n.a. 74.1 (2.1)

90

100

110

120

130

1.7

1.9

2.2

2.4

2.6



Ch Ship CL (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder China Shipping (Group) (47.5%)


Revenue (m) 36,061 37,483 38,990

Operating profit (m) 892 1,612 2,440

Net profit (m) (508) 1,038 1,800

Core EPS (fully-diluted) (0.043) 0.089 0.154

EPS change (%) n.a. n.a. 73.4

Daiwa vs Cons. EPS (%) n.m. 41.1 22.3

PER (x) n.a. 22.7 13.1


DPS 0.000 0.000 0.000

PBR (x) 1.0 0.9 0.9

EV/EBITDA (x) 12.8 9.5 7.0

ROE (%) n.a. 4.2 6.8

Kelvin Lau

(852) 2848 4467

[email protected]


[email protected]


- 75 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Avg freight rate (CNY/TEU) 2,892.8 4,786.1 3,797.6 4,054.4 3,720.2 3,746.5 3,770.6 3,810.2



Avg freight rate growth (%) (41.5) 65.5 (20.7) 6.8 (8.2) 0.7 0.6 1.1

Lifting volume growth (%) (3.7) 6.9 3.2 8.0 2.0 1.8 1.6 2.0


Vessel capacity growth (%) (0.6) 3.3 19.2 (1.3) 2.6 15.7 5.2 0.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container shipping & related business

Revenues19,503 34,499 27,909 32,559 30,473 31,238 31,937 32,931

Container terminal & related business

Revenues238 310 338 439 3,445 4,823 5,546 6,059


Total Revenue 19,740 34,809 28,246 32,998 33,917 36,061 37,483 38,990

Other income 201 291 305 1,792 585 1,652 523 523

COGS (23,928) (28,412) (28,913) (31,974) (34,537) (34,192) (33,598) (34,143)

SG&A (688) (840) (689) (893) (916) (1,029) (1,117) (1,196)

Other op.expenses (1,558) (1,381) (1,458) (1,487) (1,467) (1,599) (1,679) (1,733)

Operating profit (6,232) 4,466 (2,509) 436 (2,418) 892 1,612 2,440


Assoc/forex/extraord./others (64) (17) (33) (139) (83) (132) (103) (103)

Pre-tax profit (6,449) 4,320 (2,626) (26) (2,828) 503 1,206 1,992

Tax (22) (86) (74) 461 (36) (13) (32) (54)

Min. int./pref. div./others (17) (30) (43) 91 255 (20) (22) (25)

Net profit (reported) (6,489) 4,203 (2,743) 525 (2,610) 470 1,152 1,913

Net profit (adjusted) (6,489) 4,203 (2,743) (475) (2,891) (508) 1,038 1,800

EPS (reported)(CNY) (0.555) 0.360 (0.235) 0.045 (0.223) 0.040 0.099 0.164

EPS (adjusted)(CNY) (0.555) 0.360 (0.235) (0.041) (0.247) (0.043) 0.089 0.154

EPS (adjusted fully-diluted)(CNY) (0.555) 0.360 (0.235) (0.041) (0.247) (0.043) 0.089 0.154

DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

EBIT (6,232) 4,466 (2,509) 436 (2,418) 892 1,612 2,440

EBITDA (4,674) 5,848 (1,051) 1,923 (951) 2,491 3,291 4,173

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax (6,449) 4,320 (2,626) (26) (2,828) 503 1,206 1,992


Tax paid 0 0 0 0 0 0 0 0

Change in working capital 1,230 (93) (956) (624) (221) (403) (245) (45)

Other operational CF items (73) (170) (270) (749) 355 (1,010) 131 152

Cash flow from operations (3,735) 5,438 (2,394) 136 (1,144) 688 2,770 3,832

Capex (1,414) (2,115) (5,386) (2,115) (2,640) (2,347) (1,200) (1,200)

Net (acquisitions)/disposals (51) 45 (161) 3,370 581 371 420 420


Cash flow from investing (1,311) (1,999) (5,388) 1,392 (1,858) (1,721) (556) (556)

Change in debt 7,135 4,379 7,736 11,010 19,589 10,000 10,000 10,000


Dividends paid (5) (4) (6) (5) (20) (20) (20) (20)


Cash flow from financing 296 409 4,347 (1,025) 3,937 572 555 513


Change in cash (4,749) 3,848 (3,435) 503 935 (461) 2,769 3,790

Free cash flow (5,148) 3,323 (7,780) (1,979) (3,784) (1,658) 1,570 2,632

Financial summary


- 76 -


Key ratios (%)


Company profile

China Shipping Container Lines (CSCL) operates container-liner services and other related services. As at the end of 2013, CSCL operated 148 vessels with a total capacity of 611,000 TEUs. China Shipping (Group) is the company's major shareholder, with a 47.5% stake currently.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 874 883 1,206 1,238 1,545 1,769 1,855 1,855


Other current assets 128 194 237 590 375 1,281 964 580


Fixed assets 33,234 33,705 37,049 35,677 32,290 33,634 33,465 33,241


Other non-current assets 1,519 1,768 2,022 2,575 925 792 722 717

Total assets 44,292 49,016 49,412 51,205 50,819 52,855 55,257 58,545

Short-term debt 2,433 3,225 5,049 1,528 8,020 8,020 8,020 8,020


Other current liabilities 1,105 1,089 922 938 1,793 1,793 1,793 1,793


Long-term debt 8,352 8,276 10,809 15,364 10,917 12,897 14,877 16,857

Other non-current liabilities 2,354 2,124 1,911 2,017 1,978 1,568 872 175


Share capital 11,683 11,683 11,683 11,683 11,683 11,683 11,683 11,683





EV 26,938 23,913 31,684 30,956 29,424 31,882 31,110 29,322

Net debt/(cash) 3,848 853 8,785 8,060 5,751 8,192 7,403 5,593

BVPS (CNY) 2.159 2.498 2.227 2.271 2.035 2.075 2.174 2.338

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (43.4) 76.3 (18.9) 16.8 2.8 6.3 3.9 4.0

EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. n.a. 32.1 26.8

Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. 80.7 51.4

Net profit (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. 73.4

Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. n.a. n.a. 73.4

Gross-profit margin n.a. 18.4 n.a. 3.1 n.a. 5.2 10.4 12.4

EBITDA margin n.a. 16.8 n.a. 5.8 n.a. 6.9 8.8 10.7

Operating-profit margin n.a. 12.8 n.a. 1.3 n.a. 2.5 4.3 6.3

Net profit margin (32.9) 12.1 (9.7) (1.4) (8.5) (1.4) 2.8 4.6

ROAE n.a. 15.4 n.a. n.a. n.a. n.a. 4.2 6.8

ROAA n.a. 9.0 n.a. n.a. n.a. n.a. 1.9 3.2

ROCE n.a. 11.4 n.a. 1.0 n.a. 2.0 3.4 4.8

ROIC (21.1) 14.4 (7.5) 1.2 (7.4) 2.8 4.7 7.1


Effective tax rate n.a. 2.0 n.a. n.a. n.a. 2.5 2.6 2.7


Current ratio (x) 1.3 1.6 1.1 2.0 1.3 1.3 1.5 1.8

Net interest cover (x) n.a. 34.4 n.a. 1.3 n.a. 3.5 5.3 7.1

Net dividend payout n.a. 0.0 n.a. 0.0 n.a. 0.0 0.0 0.0

Free cash flow yield n.a. 14.1 n.a. n.a. n.a. n.a. 6.7 11.2



■ What's new

We are upbeat on throughput growth at CMH’s overseas associate ports for the next 2 years and believe associate Shanghai Port (Not rated) will continue to be a steady earnings contributor over the period. These drivers underpin our EPS growth forecasts for CMHI of 9% YoY for 2015 and 10% YoY for 2016. ■ What's the impact

We believe CMHI’s associate port, Terminal Link (TL) (in which CMHI acquired a 49% stake in 2013), will maintain high throughput growth of 10% YoY in 2015 and 2016. Also, we expect its 29%-owned associate port, Lagos Port (Lago), to maintain positive utilisation rates in 2015-16. For Shanghai Port (in which CMHI has a 24.5% stake), we look for steady revenue growth and earnings

contributions over 2015-16 on the back of stable throughput and ASP growth. We maintain our forecasts for 3% YoY throughput growth for both 2015 and 2016, on the back of a US trade recovery. Management expects Shanghai Port’s ASP to continue to increase, by about 5-10% YoY for 2015-16. As such, we still forecast net profit contributions from Shanghai Port of 41% for 2015 and 40% for 2016. ■ What we recommend

We raise our SOTP-derived 12-month target price for CMHI to HKD32 (from HKD31 on a 6-month horizon previously) as we incorporate a higher NAV for Shanghai Port based on the Bloomberg consensus recent increase in 2016E earnings, and also a higher NAV for 36%-owned associate China International Marine Container (2039 HK, HKD17.04, Buy [1]) based on Daiwa’s forecast. We reiterate our Buy (1) rating on CMHI. The stock trades at a PER of 12.3x for 2016E, below its past-5-year average of 16x, which we consider attractive given the solid EPS growth outlook. The key is lower throughput and ASP growth vs. our current expectations. ■ How we differ

We are more positive than the Bloomberg consensus on the

contributions from overseas and Shanghai ports, and hence our 2015-16E EPS are 4-5% higher.


14 January 2015

China Merchants Holding International

Should see good throughput growth overseas

CMHI’s overseas investments look set to enhance its profit

growth over 2015-16E

Shanghai Port affiliate should continue to be a substantial

earnings contributor for the next 2 years

Raising target price to HKD32, reiterating Buy (1) rating



Industrials / China

China Merchants Holding International144 HK

Target (HKD): 31.00 g 32.00

Upside: 23.3%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5





80

88

95

103

110

22

24

25

27

29



China Merc (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 22.75-28.30




Major shareholder China Merchant Group (54.7%)


Revenue (m) 7,508 7,892 8,371


Net profit (m) 4,483 4,871 5,339


EPS change (%) 13.1 8.7 9.6


PER (x) 14.6 13.5 12.3


DPS 0.821 0.892 0.978

PBR (x) 1.0 0.9 0.9

EV/EBITDA (x) 13.7 14.1 14.3

ROE (%) 7.7 7.1 7.4

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 78 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container throughput ('000 TEU) 43,868.0 52,198.0 56,907.0 60,209.0 71,318.0 78,193.3 81,961.6 85,841.3

Throughput growth (%) (13.1) 19.0 9.0 5.8 18.5 9.6 4.8 4.7

ASP growth (%) 10.0 21.0 15.5 0.8 6.8 3.0 3.0 3.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Port services and related business

revenue3,427 5,008 6,394 6,653 7,016 6,674 6,939 7,282

Logistic services revenue 129 645 1,414 1,830 702 793 912 1,049

Other Revenue 32 158 1,662 2,539 40 40 40 40

Total Revenue 3,588 5,811 9,470 11,022 7,758 7,508 7,892 8,371

Other income 396 2,114 2,057 2,037 614 199 199 199

COGS (1,218) (2,007) (4,006) (5,403) (3,298) (3,471) (3,627) (3,790)

SG&A (388) (690) (1,177) (1,241) (860) (903) (948) (996)

Other op.expenses (837) (1,039) (1,459) (1,345) (1,224) (1,365) (1,459) (1,552)


Net-interest inc./(exp.) (652) (641) (874) (1,166) (1,018) (849) (989) (1,017)

Assoc/forex/extraord./others 2,354 3,690 3,675 2,967 3,809 4,630 5,114 5,578

Pre-tax profit 3,243 7,238 7,686 6,871 5,781 5,748 6,182 6,793

Tax (278) (558) (995) (1,163) (842) (477) (456) (519)

Min. int./pref. div./others 273 (804) (1,102) (1,890) (726) (775) (842) (922)



EPS (reported)(HKD) 1.331 2.391 2.259 1.533 1.667 1.779 1.933 2.118

EPS (adjusted)(HKD) 0.936 1.714 1.667 1.354 1.568 1.774 1.928 2.113


DPS (HKD) 0.570 1.029 0.980 0.700 0.770 0.821 0.892 0.978

EBIT 1,541 4,189 4,885 5,070 2,990 1,967 2,057 2,232

EBITDA 2,378 5,207 6,297 6,354 4,214 3,332 3,515 3,784

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (55) (290) (554) (686) (411) (477) (456) (519)

Change in working capital 381 (2,289) (1,626) (21) 982 1,425 1,344 1,275

Other operational CF items (1,647) (2,759) (2,247) (1,115) (2,380) (3,304) (3,669) (4,042)


Capex (1,432) (1,696) (2,745) (8,709) (9,339) (3,418) (2,418) (2,418)

Net (acquisitions)/disposals 587 551 (714) (4,503) (5,746) (310) (310) (309)

Other investing CF items 18 114 (104) (911) 1,450 1,450 1,450 1,450

Cash flow from investing (827) (1,031) (3,563) (14,123) (13,635) (2,278) (1,278) (1,277)

Change in debt 136 1,679 2,356 3,207 7,784 (4,110) (6,693) (3,693)


Dividends paid (1,585) (1,277) (3,242) (2,670) (1,525) (2,460) (2,596) (2,775)

Other financing CF items (675) 120 (1,077) (1,241) (3,342) 14,330 (1,146) (1,107)

Cash flow from financing (2,124) 522 (1,963) (704) 2,917 7,760 (10,434) (7,575)


Change in cash (192) 2,409 (855) (8,494) (5,522) 10,239 (6,853) (3,794)

Free cash flow 1,327 1,222 1,926 (2,376) (4,143) 1,339 2,441 2,640

Financial summary


- 79 -


Key ratios (%)


Company profile

CMHI owns a portfolio of ports in China, stretching from Tianjin in northern China to Zhanjiang, at the south-western tip of Guangdong Province in the south. Its key assets include a 24.5% interest in Shanghai-listed Shanghai International Port Group and an 85.4% interest in Mega SCT in the Shenzhen western port region. Overseas, the group also owns stakes of 49% in Terminal Link, 29% in Lagos Port, and 23.5% in Djibouti Port.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 40 159 240 89 94 94 94 94

Accounts receivable 886 4,484 2,776 1,400 1,627 1,598 1,642 1,698

Other current assets 2,553 2,623 5,345 371 876 876 876 876


Fixed assets 10,990 16,835 18,269 16,863 19,034 20,876 21,624 22,279

Goodwill & intangibles 2,513 91 1,253 4,796 5,274 5,274 5,274 5,274


Total assets 52,468 78,351 87,086 77,466 89,191 103,139 104,271 108,739

Short-term debt 5,161 6,603 7,510 7,021 2,417 7,000 4,000 4,000




Long-term debt 9,298 15,669 17,216 11,801 24,541 14,492 14,492 14,492

Other non-current liabilities 736 2,038 3,353 3,182 3,472 3,472 3,472 3,472


Share capital 243 246 247 249 253 253 253 253





EV 60,098 68,124 67,452 59,878 60,943 45,527 49,737 53,968

Net debt/(cash) 11,253 15,920 17,915 14,630 23,753 7,563 10,931 14,240

BVPS (HKD) 13.798 15.901 17.562 18.284 19.232 26.552 27.810 29.168

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (13.2) 62.0 63.0 16.4 (29.6) (3.2) 5.1 6.1

EBITDA (YoY) (12.2) 119.0 20.9 0.9 (33.7) (20.9) 5.5 7.6

Operating profit (YoY) (20.4) 171.8 16.6 3.8 (41.0) (34.2) 4.6 8.5

Net profit (YoY) (22.7) 84.9 (2.1) (18.2) 17.5 13.1 8.7 9.6



EBITDA margin 66.3 89.6 66.5 57.6 54.3 44.4 44.5 45.2



ROAE 7.1 11.6 10.0 7.6 8.4 7.7 7.1 7.4

ROAA 4.4 6.4 5.0 4.1 4.8 4.7 4.7 5.0

ROCE 3.2 6.9 6.5 6.7 3.8 2.2 2.1 2.2

ROIC 3.1 6.9 6.2 6.0 3.4 2.2 2.2 2.2




Current ratio (x) 1.0 1.2 1.3 0.7 1.2 1.7 1.5 1.0



Free cash flow yield 2.0 1.9 2.9 n.a. n.a. 2.0 3.7 4.0



■ What's new

We believe CP’s Shanghai Pudong International Container Terminal (Pudong) and Yantian Port (Yantian) will benefit more than its other ports from the ongoing recovery in US trade and increased transhipments between China and the US. We are also positive on the wholly-owned Piraeus port in Greece, whose throughput growth we think has the potential to outpace that of CP’s other overseas ports. However, we remain negative on the industry-wide low container leasing rates, which are still dragging down the net profit of CP’s container leasing business.


For Pudong, we forecast throughput growth of 5% YoY for both 2015-16E, and 3-5% YoY for Yantian, both driven by the recovery in US trade.

We still look for high throughput growth for the Piraeus port in 2015. CP is adding a new 400,000 TEU berth, scheduled to open in 1H15, at Pier 3 in Greece which should boost throughput. By end-2015, the total capacity for the Piraeus port will be 3.7 m TEUs, per management. Accordingly, we forecast revenue growth of 11-12% YoY for CP’s terminal business for 2015-16E.

We remain negative on CP’s China container-leasing business, as weak industry container-leasing rates are still dragging down its leasing net profit. The company expects leasing rates to remain soft in the near term, on the back of weak shipping demand and because the liners seem hesitant to increase the number of containers.

■ What we recommend

The stock is trading at a 2016E PER of 10x, lower than its past-5-year average of 11.2x. We maintain our Hold (3) rating as we do not see any near-term share-price catalysts. We are raising our SOTP-based 12-month target price to HKD11.4 (from HKD11.1, previously 6-month), now with a lower WACC of 9.0% (previously 9.9%), as we have a lower beta of 0.9x (previously 1x). Risks: higher-/lower-than-expected throughput growth in 2015.

■ How we differ

We are slightly more positive on CP’s throughput growth in 2015-16E.


14 January 2015

COSCO Pacific

Terminal port business the only near-term positive

Recovery in US trade should benefit Cosco Pacific’s (CP) Pudong

and Yantain port throughput for 2015

We are also positive on its overseas expansion, but remain

negative on its container-leasing business

Maintain Hold (3) rating; now have a 12-month target price of

HKD11.40



Industrials / China

COSCO Pacific1199 HK

Target (HKD): 11.10 g 11.40

Upside: 3.4%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5





94

98

102

106

110

9.0

9.8

10.5

11.3

12.0



COSCO Paci (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder China COSCO (43.2%)


Revenue (m) 888 965 1,045


Net profit (m) 326 359 397


EPS change (%) 12.0 10.2 10.4


PER (x) 12.3 11.1 10.1


DPS 0.109 0.120 0.132

PBR (x) 0.8 0.8 0.8

EV/EBITDA (x) 8.6 8.5 8.0

ROE (%) 6.9 7.3 7.9

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 81 -

Key assumptions


Cash flow (USDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Container throughput ('000 TEU) 43,540.5 44,041.7 50,695.9 55,685.2 61,284.9 68,047.9 73,021.5 77,323.2

Throughput growth (%) (5.1) 19.4 15.1 9.8 10.1 11.0 7.3 5.9

Container leasing volume growth (%) (2.4) 3.1 8.9 4.4 1.8 1.4 2.3 2.4

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Terminal income 115 191 320 398 452 506 566 629

Operating lease rental 200 209 249 282 292 326 342 359

Other Revenue 34 46 30 55 54 56 56 57

Total Revenue 349 446 599 736 799 888 965 1,045

Other income 32 23 22 15 32 20 20 20

COGS (102) (168) (198) (252) (290) (320) (335) (350)

SG&A (63) (60) (89) (92) (90) (95) (99) (104)





Pre-tax profit 164 297 426 320 334 354 390 432

Tax (13) (16) (29) (28) (33) (37) (41) (47)

Min. int./pref. div./others 22 80 (9) 50 402 (6) (7) (8)

Net profit (reported) 173 361 389 342 703 310 342 377


EPS (reported)(USD) 0.077 0.142 0.143 0.125 0.250 0.110 0.121 0.134

EPS (adjusted)(USD) 0.067 0.114 0.141 0.108 0.103 0.116 0.128 0.141


DPS (USD) 0.031 0.062 0.057 0.051 0.100 0.109 0.120 0.132

EBIT 100 113 179 227 247 236 254 281

EBITDA 198 225 322 395 437 475 532 592

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 164 297 426 320 334 354 390 432


Tax paid (7) (6) (11) (18) (21) (37) (41) (47)

Change in working capital (113) (238) (237) (61) (465) (31) (64) (87)



Capex (365) (375) (667) (710) (532) (850) (750) (550)

Net (acquisitions)/disposals 18 (237) 260 (15) 1,220 1 1 1


Cash flow from investing (222) (518) (231) (507) 759 (778) (678) (479)

Change in debt 185 (63) 182 486 (633) 28 24 25


Dividends paid (59) (123) (168) (45) (113) (133) (309) (340)

Other financing CF items (26) (37) (58) (96) (95) (59) (56) (53)

Cash flow from financing 100 379 (44) 346 (839) (161) (338) (365)


Change in cash 53 117 57 266 397 (377) (412) (189)

Free cash flow (190) (120) (335) (283) (55) (288) (146) 105

Financial summary


- 82 -


Key ratios (%)


Company profile

Supported by shipping conglomerate COSCO Group, Cosco Pacific operates one of the world's largest container fleets for leasing. The company also owns a portfolio of container terminals across China, and is operating container terminals in Mediterranean, Europe and Africa.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 406 524 581 849 1,238 853 432 235

Inventory 10 14 9 13 19 19 19 19



Total current assets 878 776 850 1,092 1,481 1,259 930 833

Fixed assets 1,834 2,127 3,156 3,718 4,168 4,781 5,255 5,498



Total assets 4,635 5,252 6,472 7,364 7,551 7,916 8,061 8,209

Short-term debt 194 169 618 799 276 279 279 280



Total current liabilities 346 336 800 1,141 830 873 900 925

Long-term debt 1,411 1,390 1,743 1,948 1,820 1,825 1,829 1,832



Share capital 29 35 35 36 37 37 37 37





EV 3,963 3,102 3,919 3,958 3,661 4,087 4,519 4,727

Net debt/(cash) 1,199 1,034 1,781 1,898 859 1,251 1,676 1,877

BVPS (USD) 1.217 1.313 1.338 1.446 1.614 1.725 1.763 1.802

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 3.4 27.8 34.2 22.8 8.6 11.2 8.6 8.3

EBITDA (YoY) (23.3) 13.5 42.9 22.9 10.6 8.6 12.0 11.3

Operating profit (YoY) (39.8) 13.4 58.4 26.7 8.5 (4.5) 7.7 10.8

Net profit (YoY) (37.2) 91.0 32.4 (23.2) (1.1) 12.0 10.2 10.4

Core EPS (fully-diluted) (YoY) (37.4) 68.7 24.5 (23.8) (3.9) 12.0 10.2 10.4


EBITDA margin 56.7 50.4 53.7 53.7 54.8 53.5 55.1 56.6



ROAE 5.7 9.5 11.0 7.8 6.9 6.9 7.3 7.9

ROAA 3.4 5.9 6.5 4.3 3.9 4.2 4.5 4.9

ROCE 2.3 2.4 3.2 3.4 3.6 3.3 3.5 3.8

ROIC 2.4 2.5 3.3 3.5 3.8 3.5 3.4 3.5




Current ratio (x) 2.5 2.3 1.1 1.0 1.8 1.4 1.0 0.9



Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2.6



■ What's new

We expect investors’ sentiment on AviChina to remain positive in 2015, given the likelihood of supportive government policy moves as well as the possibility of asset injections. ■ What's the impact

China plans to open up its low-altitude airspace by end-2015. Responsibility for such airspace has been transferred from the military to the Civil Aviation Administration of China (CAAC); we expect the CAAC to announce detailed procedures, as well as its plan to promote the general aviation market, during 2015. Separately, we expect further developments in the efforts of the research institute under AVIC Avionics System to become a separate registered entity in 2015. We see progress on this front as a step forward for AVIC Avionics to acquire AVIC Avionics System and the research institute from AVIC Group (AviChina’s parent).

We believe the high valuation of AviChina’s A-share subsidiaries should support AviChina’s valuation. AviChina now trades a 46% discount to the aggregate value of its A-share subsidiaries. We expect this discount to narrow in 2015 as we think AviChina could be included in the Hang Seng Composite MidCap Index. We reduce our 2014-16E order-book growth for AviChina by 2-5% on the back of its guidance. We reduce our 2014-16E EPS by 11-29%, as we now expect AviChina’s performance in 2014 to fall short of expectations and exclude net profit contributions from Sichuan Chengfei Integration Technology (CITC) for 2015-16E. But we expect CITC’s asset-injection plans to be resubmitted to the National Development and Reform Commission in 2015, which could be a share-price catalyst for AviChina. ■ What we recommend

We now have an SOTP-based 12-month target price of HKD6.40 (formerly 6-month target price of HKD5), as we roll over our valuation basis to 2016E (formerly 2015E). We reaffirm our Buy (1) rating. Alongside our forecast for 12-13% YoY growth in 2015-16E EPS, we expect positive news flow to support the share price. The main risk would be weaker-than-expected order-book growth.

■ How we differ

Our 2014-16E EPS are 14-22% below consensus, likely as we exclude disposal gains and CITC’s earnings.


14 January 2015

AviChina Indust ry & Technology

2015 likely to be a year of good news

We expect more news on the opening up of the general aviation

market, which should be positive for AviChina’s valuation

Potential asset injections into subsidiaries and associates should

also lift sentiment on the shares

Large discount to A-share subsidiaries should cushion

downside; reaffirming Buy (1) with 12-month TP of HKD6.40



Industrials / China

AviChina Industry & Technology2357 HK


Upside: 25.5%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5


Revenue change (6.1) (9.2) (12.4)



85

96

108

119

130

4.0

4.6

5.3

5.9

6.5



Avichina (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder AVIC (56.7%)


Revenue (m) 24,558 27,562 30,960


Net profit (m) 643 723 816


EPS change (%) 1.4 12.4 12.9

Daiwa vs Cons. EPS (%) (14.2) (15.9) (21.5)

PER (x) 34.7 30.9 27.4


DPS 0.020 0.022 0.025

PBR (x) 2.1 2.0 1.8

EV/EBITDA (x) 11.3 11.3 10.0

ROE (%) 6.2 6.5 6.9

Kelvin Lau

(852) 2848 4467

[email protected]


- 84 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Revenue growth from helicopters (%) (5.4) 8.3 22.0 160.6 30.0 12.8 15.0 15.0

Revenue growth from trainers (%) (0.6) 8.5 6.3 (51.7) (35.8) 10.0 10.0 10.0

Revenue growth from aviation parts

and components (%)0.0 117.2 17.7 50.3 18.8 10.7 10.1 10.2

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Aircraft revenue 3,028 5,268 6,555 8,273 10,198 11,275 12,936 14,842Aviation components and other

revenue2,627 5,705 5,518 10,095 11,995 13,283 14,626 16,118

Other Revenue 238 949 1,199 0 0 0 0 0

Total Revenue 5,893 11,922 13,271 18,368 22,193 24,558 27,562 30,960

Other income 118 136 132 159 251 195 194 194

COGS (4,285) (8,097) (10,160) (13,803) (17,150) (19,095) (21,386) (23,809)

SG&A (786) (1,498) (1,806) (2,533) (2,801) (3,081) (3,559) (4,110)

Other op.expenses (182) (390) (459) (641) (735) (839) (918) (1,129)

Operating profit 757 2,074 979 1,549 1,758 1,739 1,894 2,106



Pre-tax profit 722 2,053 1,052 1,540 1,761 1,690 1,868 2,067

Tax (61) (145) (143) (235) (250) (236) (259) (284)


Net profit (reported) 476 1,834 499 664 713 700 780 874


EPS (reported)(CNY) 0.102 0.375 0.101 0.124 0.130 0.128 0.142 0.160

EPS (adjusted)(CNY) 0.050 0.100 0.085 0.117 0.116 0.118 0.132 0.149


DPS (CNY) 0.000 0.010 0.011 0.020 0.020 0.020 0.022 0.025

EBIT 757 2,074 979 1,549 1,758 1,739 1,894 2,106

EBITDA 939 2,464 1,438 2,190 2,493 2,578 2,812 3,235

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 182 390 459 641 735 839 918 1,129

Tax paid (66) (126) (178) (233) (222) (236) (259) (284)

Change in working capital 571 1,211 (960) (2,606) (1,436) (249) (498) (599)

Other operational CF items (98) (103) (126) (40) (245) (197) (216) (246)

Cash flow from operations 1,310 3,424 248 (698) 593 1,847 1,813 2,067

Capex (250) (941) (699) (1,067) (2,687) (1,000) (2,700) (1,000)

Net (acquisitions)/disposals 90 217 198 (132) (742) (742) (742) (742)

Other investing CF items (1,108) (1,830) (81) (1,534) 20 177 177 177

Cash flow from investing (1,268) (2,555) (582) (2,733) (3,409) (1,565) (3,265) (1,565)

Change in debt 2,061 1,712 2,365 4,011 6,237 3,500 3,500 3,500


Dividends paid (102) (96) (192) (109) (223) (219) (215) (240)

Other financing CF items (1,909) 493 (2,355) (2,680) (2,038) (4,207) (3,255) (3,255)

Cash flow from financing 50 3,004 (182) 2,191 3,976 (926) 30 5


Change in cash 93 3,873 (516) (1,240) 1,160 (644) (1,423) 507

Free cash flow 1,061 2,483 (452) (1,765) (2,094) 847 (887) 1,067

Financial summary


- 85 -


Key ratios (%)


Company profile

AviChina Industry & Technology is mainly engaged in the development, manufacture, sale, and upgrading of aviation equipment and related products. The major shareholder of the company's H shares is Aviation Industry Corporation of China, with a 56.7% stake.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 3,414 5,679 8,197 11,757 14,780 16,356 18,356 20,619




Fixed assets 2,166 4,004 4,483 7,134 9,243 9,440 11,258 11,164



Total assets 22,071 34,035 30,973 41,665 50,928 53,977 58,603 63,733

Short-term debt 1,458 2,073 1,887 3,825 4,207 3,255 3,255 3,255




Long-term debt 1,152 957 1,171 772 1,911 2,156 2,401 2,645



Share capital 4,644 4,949 4,949 5,474 5,474 5,474 5,474 5,474

Reserves/R.E./others 720 3,467 2,596 4,682 4,648 5,239 5,912 6,665




EV 24,725 23,350 21,853 25,461 28,531 29,222 31,718 32,365

Net debt/(cash) (1,028) (6,080) (5,593) (4,403) (3,986) (4,049) (2,382) (2,644)

BVPS (CNY) 1.155 1.721 1.525 1.890 1.849 1.957 2.080 2.218

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 18.3 102.3 11.3 38.4 20.8 10.7 12.2 12.3

EBITDA (YoY) 88.3 162.4 (41.6) 52.3 13.8 3.4 9.1 15.1

Operating profit (YoY) 108.1 174.0 (52.8) 58.2 13.5 (1.1) 8.9 11.2

Net profit (YoY) 77.7 110.9 (13.8) 49.6 0.8 1.4 12.4 12.9

Core EPS (fully-diluted) (YoY) 77.7 100.2 (14.3) 37.0 (1.0) 1.4 12.4 12.9


EBITDA margin 15.9 20.7 10.8 11.9 11.2 10.5 10.2 10.4



ROAE 5.8 7.1 5.3 7.1 6.3 6.2 6.5 6.9

ROAA 1.0 1.7 1.3 1.7 1.4 1.2 1.3 1.3

ROCE 6.1 13.0 5.3 7.6 6.8 6.2 6.4 6.7

ROIC 7.9 20.0 8.8 11.3 9.2 8.1 7.9 7.9




Current ratio (x) 1.7 1.7 1.6 1.4 1.4 1.4 1.4 1.4



Free cash flow yield 4.8 11.3 n.a. n.a. n.a. 3.9 n.a. 4.9



■ What's new

We expect investors’ sentiment towards TST to improve in 2015 given the prospect of stabilising profit margins, and see an additional potential share-price catalyst if the company can form a strategic partnership to boost the development and monetisation of its mobile app, Umetrip. ■ What's the impact

We expect investors’ concerns about TST’s declining margin trend seen since 2012 to ease this year; we forecast its margins to stabilise YoY for 2015 due primarily to a slower pace of recruiting new staff to develop its new-generation booking system, with most of the staff recruitment for this system (since 2013) now been done. TST launched trial runs for some of the modules in 4Q14. As such, we expect growth in its staff costs to moderate this year. We see an additional share-price catalyst if TST can secure strategic

investors to cooperate with the development of its mobile app, Umetrip, which would enable it to better monetise Umetrip, in our view. TST sees a limited impact on its business from the China Government allowing foreign airlines to use foreign global distribution systems (GDS) in China since 2012. We believe this should help limit its downside earnings risk for 2015. Our slight 2014-16E EPS increases factor in the company’s latest booking growth numbers. ■ What we recommend

We raise our DCF-based target price to a 12-month one of HKD9.00 (formerly 6-month target price of HKD8.40), reflecting mainly the rollover of our valuation components to 2016E (from 2015E). We reiterate our Outperform (2) rating. TST trades at a 2015E PER of 14x, which is at an 18% discount to the average 2015E PER of 17x for its global peers Sabre and Amadeus (on Bloomberg consensus EPS), and which we believe remains attractive for global investors. Weaker-than-expected booking growth is the main risk to our view. ■ How we differ

As one of 5 brokers covering TST, we are more positive on a rising long-

term profit contribution from its ancillary IT services.

Information Technology / China 696 HK

14 January 2015

TravelSky Technology

Margins should stabilise in 2015

We expect TST’s profit margins to stabilise YoY in 2015, due

primarily to lower growth in staff costs

Potential addition of strategic investors for its Umetrip mobile

app would be a share-price catalyst

New target price of HKD9.00, reaffirm Outperform (2); still

trades at an attractive 18% PER discount to global peers



Information Technology / China

TravelSky Technology696 HK


Upside: 7.9%


Buy


Hold

Underperform

Sell

1

2

3

4

5


Revenue change 0.5 0.2 -



75

86

98

109

120

5.5

6.5

7.5

8.5

9.5



Travelsky (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder China TravelSky Hldg Co (29.3%)


Revenue (m) 5,241 5,916 6,686


Net profit (m) 1,247 1,394 1,639


EPS change (%) 10.6 11.8 17.6

Daiwa vs Cons. EPS (%) (0.2) (0.7) 1.8

PER (x) 15.7 14.0 11.9


DPS 0.145 0.162 0.190

PBR (x) 1.9 1.7 1.6

EV/EBITDA (x) 8.9 8.5 7.6

ROE (%) 12.8 12.8 13.8

Kelvin Lau

(852) 2848 4467

[email protected]


- 87 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EOverall passenger booking growth

(%)17.9 17.2 9.2 8.9 11.1 10.5 10.6 10.6

Domestic passenger booking growth

(%)21.9 15.5 8.6 7.8 10.3 9.4 10.0 10.0

Int'l passenger booking growth (%) (3.2) 28.4 12.8 15.3 15.6 15.6 13.5 13.6

Foreign airlines passenger booking

growth (%)2.1 29.6 15.5 27.5 19.3 9.9 10.0 10.0

PRC airlines' int'l passenger booking

growth (%)(4.9) 27.9 11.8 10.8 14.0 18.2 15.0 15.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Aviation information technology

services 1,808 2,083 2,259 2,436 2,582 2,795 3,030 3,285

Accounting, settlement and clearing 250 296 380 430 431 489 527 569

Other Revenue 469 566 899 1,091 1,465 1,957 2,360 2,832

Total Revenue 2,527 2,945 3,538 3,956 4,479 5,241 5,916 6,686

Other income 0 0 0 0 0 0 0 0

COGS (1,115) (1,160) (1,497) (1,916) (2,403) (3,023) (3,495) (3,934)

SG&A (273) (393) (452) (491) (461) (509) (563) (623)


Operating profit 798 988 1,182 1,218 1,234 1,298 1,439 1,704

Net-interest inc./(exp.) 81 39 64 49 64 118 130 143


Pre-tax profit 904 1,047 1,283 1,304 1,312 1,935 1,590 1,869

Tax (109) (130) (208) (142) (73) (194) (159) (187)




EPS (reported)(CNY) 0.269 0.306 0.358 0.387 0.412 0.580 0.476 0.560

EPS (adjusted)(CNY) 0.269 0.306 0.358 0.387 0.385 0.426 0.476 0.560


DPS (CNY) 0.089 0.105 0.120 0.133 0.140 0.145 0.162 0.190

EBIT 798 988 1,182 1,218 1,234 1,298 1,439 1,704

EBITDA 1,212 1,446 1,686 1,549 1,614 1,708 1,858 2,129

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (110) (143) (135) (249) (84) (194) (159) (187)

Change in working capital (384) 54 (169) (570) 218 211 146 116


Cash flow from operations 711 1,303 1,319 697 1,744 2,227 1,847 2,059

Capex (259) (2,345) (212) (363) (979) (1,028) (2,050) (2,050)

Net (acquisitions)/disposals 15 565 (354) 1,058 (100) 0 0 0

Other investing CF items 87 66 (444) (181) 335 123 136 150

Cash flow from investing (157) (1,715) (1,010) 514 (745) (905) (1,914) (1,900)

Change in debt 0 0 0 0 0 0 0 0


Dividends paid (313) (243) (316) (358) (398) (418) (433) (483)

Other financing CF items 0 0 0 0 7 0 0 0

Cash flow from financing (313) (243) (316) (358) (391) (418) (433) (483)

Forex effect/others (1) (2,522) (1,742) (2,461) (1,087) (1,132) (1,132) (1,132)

Change in cash 240 (3,177) (1,748) (1,608) (479) (229) (1,633) (1,456)

Free cash flow 452 (1,041) 1,107 334 764 1,198 (203) 9

Financial summary


- 88 -


Key ratios (%)


Company profile

TravelSky Technology is the dominant service provider of aviation information technology in China. For 2013, the total number of bookings processed by the company was 386m. The China TravelSky Holding Company has a 29.3% stake in the company.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 8 8 4 29 9 9 9 9


Other current assets 379 265 763 1,228 915 915 915 915


Fixed assets 933 1,098 950 897 1,458 1,835 3,394 4,946


Other non-current assets 286 2,219 2,196 2,350 2,434 2,698 2,793 2,888

Total assets 7,109 7,960 9,007 9,881 11,142 12,813 14,080 15,534

Short-term debt 0 0 0 0 0 0 0 0

Accounts payable 861 1,033 1,321 1,408 1,771 2,111 2,371 2,616


Total current liabilities 868 1,073 1,362 1,432 1,823 2,163 2,423 2,668

Long-term debt 0 0 0 0 0 0 0 0


Total liabilities 888 1,093 1,380 1,449 1,841 2,180 2,441 2,686

Share capital 1,951 1,951 2,926 2,926 2,926 2,926 2,926 2,926





EV 15,655 16,884 16,536 16,763 16,113 15,254 15,791 16,157

Net debt/(cash) (3,859) (2,638) (2,983) (2,771) (3,481) (4,384) (3,884) (3,561)

BVPS (CNY) 2.088 2.304 2.557 2.824 3.102 3.542 3.874 4.272

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 15.4 16.5 20.1 11.8 13.2 17.0 12.9 13.0

EBITDA (YoY) 18.4 19.3 16.6 (8.1) 4.2 5.8 8.8 14.6


Net profit (YoY) 21.5 15.3 17.1 8.2 (0.5) 10.6 11.8 17.6

Core EPS (fully-diluted) (YoY) 12.3 13.5 17.1 8.2 (0.5) 10.6 11.8 17.6


EBITDA margin 48.0 49.1 47.7 39.2 36.0 32.6 31.4 31.8



ROAE 13.4 13.9 14.7 14.4 13.0 12.8 12.8 13.8

ROAA 11.6 11.9 12.3 12.0 10.7 10.4 10.4 11.1

ROCE 13.6 15.1 16.3 15.2 13.9 13.0 12.9 13.9

ROIC 33.0 26.2 22.3 21.1 20.3 19.4 18.5 18.0




Current ratio (x) 6.7 4.2 4.3 4.6 3.9 3.7 3.2 2.8

Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 2.3 n.a. 5.7 1.7 3.9 6.1 n.a. 0.0



■ What's new

We believe investors’ sentiment on airlines will remain strong in 1Q15. But, following AC’s 44% share-price rise since 1 October, we believe there is limited scope for further upside in the shares and hence downgrade our rating to Hold (3) from Buy (1). ■ What's the impact

We believe positive sentiment resulting from oil-price weakness is largely reflected in AC’s share price, and we see a risk of the Renminbi depreciating against the US dollar again in 2015. Fundamentally speaking, we still expect overall demand and yields to continue recovering in 2015. We revise down core EPS for 2014E by 34%, as we believe the recovery in passenger yields in 2H14 was weaker than we had expected. But for 2015E and 2016E, we revise up EPS by 15-23%

after incorporating a lower jet-fuel price assumption of USD75/bbl for both years (previously USD118/bbl). As for revenue, we lower our forecasts for 2015-16 as we expect AC’s overall yield to decline by around 2% YoY (previously expecting a 1% YoY increase) due to lower fuel surcharges. ■ What we recommend

We now have a 12-month target price of HKD7.20 (formerly a 6-month target of HKD5.30), as we roll over our BVPS base to 2016E (previously 2015E) and use a target PBR of 1.3x (formerly 1.0x), in line with AC’s past-5 -year average. We believe our target PBR is warranted given the improvement in sentiment on the sector due to the lower jet-fuel price outlook, along with our expectation for a gradual industry recovery this year. But, with implied upside of just 2% to our target price, the fuel-price outlook seems largely priced in and we now rate the stock a Hold (3). The main risks: smaller- or larger-than-expected declines in the jet-fuel price and smaller- or larger-than-expected depreciation of the Renminbi against the US dollar. ■ How we differ

We are 17% below the Bloomberg consensus on 2014E EPS, likely because the passenger yield recovery in 2H14 looks to have fallen short of

our expectation. We are 38-43% above on 2015-16E EPS, likely as we factor in a lower jet-fuel price assumption than the market.


14 January 2015

Air China

Modest upside, less conviction

Scope for some share-price upside, given bullish sentiment and

likelihood of positive earnings revisions for airlines in near term

But at this stage we do not foresee a strong rerating for AC, as

we expect only a gradual recovery for the industry this year

We downgrade our rating on AC to Hold (3) on reduced

conviction following the stock’s share-price rally



Industrials / China

Air China753 HK


Upside: 1.7%


Buy

Outperform

Hold (from Buy)

Underperform

Sell

1

2

3

4

5



Net profit change (34.2) 23.0 15.2

Core EPS (FD) change (34.2) 23.0 15.2

80

93

105

118

130

4.0

4.9

5.8

6.6

7.5



Air China (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CNAHC (53.4%)


Revenue (m) 105,042 111,829 121,052


Net profit (m) 2,781 7,247 8,620


EPS change (%) 53.8 160.5 19.0

Daiwa vs Cons. EPS (%) (16.8) 38.4 43.4

PER (x) 25.0 9.6 8.1


DPS 0.027 0.061 0.070

PBR (x) 1.3 1.2 1.1

EV/EBITDA (x) 7.5 6.0 5.8

ROE (%) 5.1 12.6 13.8

Kelvin Lau

(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]


- 90 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Overall RPK growth (%) 9.8 40.0 16.8 5.1 9.4 9.0 8.5 8.5

Overall RFTK growth (%) (2.3) 37.2 0.1 3.3 0.2 12.1 8.0 8.0

Overall ASK growth (%) 7.4 33.9 14.8 6.5 8.9 10.2 8.5 8.5

Overall AFTK growth (%) 2.4 20.7 4.1 3.6 2.3 16.4 8.0 8.0

Overall PLF (%) 76.5 80.0 81.5 80.4 80.8 79.9 79.9 79.9

Overall CLF (%) 54.2 61.6 59.3 59.1 57.9 55.8 55.8 55.8

Overall passenger yield growth (%) (10.3) 14.0 4.9 (1.0) (8.8) (2.1) (1.8) (0.1)

Cargo Yield growth (%) (23.1) 21.0 (3.2) (6.1) (6.5) (2.0) (2.0) 0.0

Int'l jet-fuel price (USD/bbl) 70.1 90.1 126.0 126.9 123.0 113.0 75.0 75.0

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Passenger revenue 42,695 68,138 83,510 86,899 86,727 92,581 98,647 106,904

Cargo revenue 5,396 10,072 9,833 8,421 7,876 8,653 9,158 9,891

Other Revenue 2,435 4,119 4,813 4,153 3,578 3,808 4,023 4,258

Total Revenue 50,527 82,329 98,157 99,473 98,181 105,042 111,829 121,052

Other income (4,101) (6,241) (7,742) (6,320) (6,982) (7,571) (8,110) (8,695)

COGS (37,243) (56,291) (72,078) (74,418) (76,144) (81,163) (81,499) (88,912)

SG&A 0 0 0 0 0 0 0 0




Assoc/forex/extraord./others 4,109 4,995 1,933 513 2,765 323 (828) 1,930

Pre-tax profit 5,066 14,834 9,355 6,909 4,518 2,848 6,663 9,428

Tax (263) (2,498) (2,292) (1,607) (903) (424) (1,104) (1,429)

Min. int./pref. div./others 51 (331) 20 (486) (351) (236) (540) (617)



EPS (reported)(CNY) 0.410 1.031 0.582 0.397 0.265 0.178 0.408 0.600

EPS (adjusted)(CNY) 0.190 0.927 0.521 0.389 0.147 0.226 0.589 0.701


DPS (CNY) 0.000 0.118 0.118 0.059 0.045 0.027 0.061 0.070

EBIT 2,131 11,227 8,775 8,409 4,118 5,003 9,939 10,071

EBITDA 11,979 23,997 22,937 22,897 19,976 21,639 27,925 29,558

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid 28 (503) (3,466) (2,656) (565) (424) (1,104) (1,429)

Change in working capital (644) 678 6,798 (3,443) 2,138 402 306 332

Other operational CF items (6,037) (5,213) (2,577) (1,446) (2,419) (560) 613 (2,174)


Capex (7,916) (17,246) (22,750) (15,223) (22,480) (21,000) (21,000) (21,000)

Net (acquisitions)/disposals (165) 1,928 3,914 332 670 676 676 676

Other investing CF items (4,585) 1,260 (2,833) 117 1,171 378 356 385


Change in debt 6,813 1,042 92 (1,353) (84) (3,362) 2,613 2,613

Net share issues/(repurchases) 0 6,421 0 0 1,044 0 0 0

Dividends paid 0 0 (1,524) (1,523) (890) (593) (328) (753)

Other financing CF items 136 0 0 4,500 9,200 0 0 0

Cash flow from financing 6,948 7,463 (1,432) 1,624 9,271 (3,954) 2,285 1,860

Forex effect/others (20) (71) (161) (58) (267) 0 0 0

Change in cash (273) 11,700 (3,593) (3,518) 2,974 (10,328) 1,075 1,453

Free cash flow (2,451) 1,120 (3,080) (5,534) (7,871) (7,428) (2,241) (1,469)

Financial summary


- 91 -


Key ratios (%)


Company profile

As at the end of December 2013, Air China was the largest commercial airline in China, based on market capitalisation, and operated 497 aircraft. CNAHC has a 51.5% stake in Air China.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 1,385 1,609 1,810 1,105 1,045 1,045 1,045 1,045




Fixed assets 75,045 96,153 112,399 123,480 132,806 139,500 145,563 150,533

Goodwill & intangibles 396 1,699 1,348 1,159 1,154 1,154 1,154 1,154


Total assets 107,919 158,770 175,850 185,283 205,083 210,864 220,950 230,319

Short-term debt 20,615 27,706 30,825 31,688 43,362 37,387 37,387 37,387




Long-term debt 42,688 58,221 58,590 67,731 68,239 73,852 79,466 85,079



Share capital 12,251 12,892 12,892 12,892 13,085 13,085 13,085 13,085



Minority interests 39 (67) 2,210 3,368 3,789 4,024 4,565 5,182


EV 122,576 131,399 136,900 150,309 158,898 162,539 167,617 172,394

Net debt/(cash) 60,595 71,525 73,958 87,631 96,839 100,244 104,782 108,942

BVPS (CNY) 1.952 3.214 3.577 3.874 4.108 4.230 4.589 4.969

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (4.4) 62.9 19.2 1.3 (1.3) 7.0 6.5 8.2

EBITDA (YoY) 64.6 100.3 (4.4) (0.2) (12.8) 8.3 29.0 5.8

Operating profit (YoY) n.a. 426.9 (21.8) (4.2) (51.0) 21.5 98.7 1.3

Net profit (YoY) n.a. 380.7 (41.3) (25.5) (61.7) 53.8 160.5 19.0

Core EPS (fully-diluted) (YoY) n.a. 388.7 (43.8) (25.3) (62.2) 53.8 160.5 19.0


EBITDA margin 23.7 29.1 23.4 23.0 20.3 20.6 25.0 24.4



ROAE 10.2 33.0 14.5 9.8 3.5 5.1 12.6 13.8

ROAA 2.2 8.1 3.8 2.6 0.9 1.3 3.4 3.8

ROCE 2.6 10.5 6.6 5.8 2.6 2.9 5.6 5.4

ROIC 2.6 9.5 5.6 4.9 2.2 2.7 5.0 4.9




Current ratio (x) 0.2 0.4 0.4 0.4 0.4 0.3 0.4 0.4



Free cash flow yield n.a. 1.5 n.a. n.a. n.a. n.a. n.a. n.a.



■ What's new

We believe China Eastern’s (CEA) share price already reflects the currently low oil price and positive investor sentiment surrounding Shanghai Disney Resort, phase 1 of which is due to open at end-2015. However, our analysis suggests that investors may ultimately be disappointed in the resort’s impact on CEA’s passenger yield, and we are downgrading our rating on the stock to Hold (3) from Buy (1). ■ What's the impact

We believe the share price has factored in positive sentiment on the oil price remaining low throughout 2015. At the same time, we think the market is being overly optimistic about the incremental impact on CEA from the opening of Shanghai Disney Resort by year-end. Our analysis shows that the park would

yield only an extra 375,000 passengers/year for CEA in the long term, which is minimal compared with our forecast of a total of 90m passengers for the airline in 2015. Also, we think continued depreciation of the CNY stands as a downside risk for CEA this year. We are cutting our 2014E EPS by 29% as the recovery in the passenger yield in 2H14 looks to have been weaker than we had expected. But we raise our 2015-16E EPS by 35-62%, on our lower jet-fuel price assumption, at USD75/bbl for both 2015 and 2016 (previously: USD118/bbl). We cut our 2015-16E revenue as we expect the overall yield to decline by 3% YoY (previously: up 1% YoY) in 2015E due to the lower fuel surcharge. ■ What we recommend

We have a 12-month target price of HKD3.80 (previously 6-month TP of HKD2.80), based on a target PBR of 1.1x (previously 1.0x) on our 2016E BVPS (previously 2015E), in line with its past-5-year average. We believe the higher PBR (1.1x) is justified on the low jet-fuel price, while the opening of the Disney resort should boost sentiment despite having a limited financial impact. The main upside and downside risks to our Hold (3) call: higher or lower-than-expected declines in the price of jet fuel.

■ How we differ

Our 2014-16E EPS are 11-77% higher than the consensus, likely as we factor in a lower jet-fuel price.


14 January 2015

China Eastern Airlines

Disney magic unlikely to provide enough of a spark

Opening of Shanghai Disney Resort unlikely to boost passenger

numbers enough to lead to a rerating of the stock

Positive sentiment from low oil price in 2015 looks priced in

Downgrading to Hold (3) from Buy (1); new 12-month target

price of HKD3.80



Industrials / China

China Eastern Airlines670 HK


Downside: 3.3%


Buy

Outperform

Hold (from Buy)

Underperform

Sell

1

2

3

4

5


Revenue change (4.6) (10.4) (12.2)



80

96

113

129

145

2.2

2.7

3.2

3.6

4.1



China East (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CEA Holding (64.4%)


Revenue (m) 92,886 95,648 102,246


Net profit (m) 2,012 5,134 6,840


EPS change (%) n.a. 155.2 33.2

Daiwa vs Cons. EPS (%) 10.8 71.8 76.8

PER (x) 17.6 6.9 5.2


DPS 0.000 0.000 0.000

PBR (x) 1.3 1.2 1.1

EV/EBITDA (x) 7.9 6.3 6.3

ROE (%) 7.4 18.1 22.9

Kelvin Lau

(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]


- 93 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Overall RFTK growth (%) 2.2 74.1 2.6 6.3 3.3 (2.0) 2.0 2.8



Overall PLF (%) 72.2 78.0 78.9 79.8 79.2 79.2 79.2 79.6

Overall CLF (%) 50.4 60.4 61.8 63.4 60.5 60.5 60.5 59.0

Overall passenger yield growth (%) (13.6) 17.6 7.9 (4.2) (7.5) (0.4) (3.1) (0.0)

Cargo Yield growth (%) (24.43) 16.77 (6.15) (6.44) (8.31) 2.50 (5.00) 0.00


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Cargo revenue 4,124 8,423 8,080 8,025 7,603 7,659 7,425 7,634

Other Revenue 2,065 6,413 5,889 5,809 7,714 7,935 8,004 8,076

Total Revenue 38,990 73,804 82,403 85,253 88,245 92,886 95,648 102,246

Other income 0 0 0 0 0 0 0 0

COGS (31,189) (50,524) (59,182) (71,449) (77,029) (78,687) (76,313) (81,747)

SG&A (5,730) (11,911) (12,593) (3,727) (4,139) (4,373) (4,685) (5,055)


Operating profit (3,132) 4,610 3,663 2,520 (1,149) 1,178 4,516 3,824


Assoc/forex/extraord./others 5,026 2,229 2,489 2,139 4,785 1,394 (1,618) 2,965

Pre-tax profit 249 5,418 4,841 3,161 2,235 1,084 1,200 4,941

Tax (53) (133) (264) (207) (124) (58) (65) (140)

Min. int./pref. div./others (28) (326) (1) 160 220 (107) (118) (248)

Net profit (reported) 169 4,958 4,576 3,114 2,331 919 1,017 4,554

Net profit (adjusted) (4,095) 3,691 3,318 2,711 112 2,012 5,134 6,840

EPS (reported)(CNY) 0.026 0.445 0.406 0.276 0.193 0.081 0.090 0.404

EPS (adjusted)(CNY) (0.636) 0.331 0.294 0.240 0.009 0.178 0.455 0.607

EPS (adjusted fully-diluted)(CNY) (0.636) 0.331 0.294 0.240 0.009 0.178 0.455 0.607

DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

EBIT (3,132) 4,610 3,663 2,520 (1,149) 1,178 4,516 3,824

EBITDA 4,996 15,945 15,248 15,124 12,362 15,374 20,753 21,853

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (78) (99) (158) (205) (314) (58) (65) (140)

Change in working capital 310 (2,845) 30 (1,071) (367) 692 288 1,301

Other operational CF items (4,415) (236) 256 3,200 1,046 808 4,129 (205)


Capex (7,613) (9,985) (13,548) (13,477) (19,083) (22,000) (22,000) (22,000)

Net (acquisitions)/disposals 243 1,692 344 1,359 2,001 0 0 0

Other investing CF items 134 (340) (1,734) 328 55 209 178 162


Change in debt (10,356) 515 1,880 (1,779) 1,822 9,734 5,466 4,498

Net share issues/(repurchases) 14,056 519 1,005 0 3,572 0 0 0

Dividends paid (44) (42) (157) (179) (68) 0 0 0

Other financing CF items 590 0 1,109 (217) 404 406 406 406

Cash flow from financing 4,247 992 3,837 (2,174) 5,730 10,140 5,872 4,904

Forex effect/others 5 (13) (37) (3) (25) (25) (25) (25)

Change in cash (1,716) 1,343 783 (1,324) (498) (503) (289) 559

Free cash flow (6,344) (988) (1,627) (834) (8,258) (10,827) (6,314) (4,482)

Financial summary


- 94 -


Key ratios (%)


Company profile

As at the end of 2013, China Eastern Airlines (CEA) was the largest Shanghai-based airline in China, with 478 planes. China Eastern Air Holding Company has a 60% stake in CEA.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 0 0 0 n.a. n.a. 0 0 0




Fixed assets 56,704 68,822 73,758 82,519 92,783 106,226 118,182 128,652



Total assets 71,851 103,334 114,739 123,889 140,068 155,684 166,685 176,368

Short-term debt 14,456 17,348 20,630 25,245 26,266 25,534 25,502 22,374


Other current liabilities 1,637 526 599 952 1,673 1,673 1,673 1,673


Long-term debt 30,250 40,425 41,405 42,349 47,470 61,936 71,434 80,060



Share capital 9,582 11,277 11,277 11,277 12,674 12,674 12,674 12,674

Reserves/R.E./others (8,347) 3,995 8,849 8,931 14,228 15,147 16,164 18,289


Minority interests 442 1,291 1,679 1,528 1,680 1,787 1,905 2,153


EV 77,777 90,234 91,160 99,094 107,001 121,729 131,602 136,789

Net debt/(cash) 42,970 54,696 55,280 63,356 71,358 85,978 95,733 100,672

BVPS (CNY) 0.129 1.354 1.785 1.792 2.386 2.467 2.557 2.746

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (5.1) 89.3 11.7 3.5 3.5 5.3 3.0 6.9

EBITDA (YoY) 231.3 219.2 (4.4) (0.8) (18.3) 24.4 35.0 5.3

Operating profit (YoY) n.a. n.a. (20.6) (31.2) n.a. n.a. 283.2 (15.3)

Net profit (YoY) n.a. n.a. (10.1) (18.3) (95.9) 1,696.1 155.2 33.2

Core EPS (fully-diluted) (YoY) n.a. n.a. (11.1) (18.3) (96.1) 1,826.0 155.2 33.2


EBITDA margin 12.8 21.6 18.5 17.7 14.0 16.6 21.7 21.4

Operating-profit margin n.a. 6.2 4.4 3.0 n.a. 1.3 4.7 3.7


ROAE n.a. 44.7 18.7 13.4 0.5 7.4 18.1 22.9

ROAA n.a. 4.2 3.0 2.3 0.1 1.4 3.2 4.0

ROCE n.a. 7.6 4.6 2.9 n.a. 1.1 3.7 2.9

ROIC (5.9) 7.8 4.7 2.9 (1.2) 1.0 3.5 2.9

Net debt to equity 3,480.6 358.2 274.7 313.5 265.2 309.0 332.0 325.1



Current ratio (x) 0.2 0.3 0.3 0.3 0.2 0.2 0.2 0.3

Net interest cover (x) n.a. 3.2 2.8 1.7 n.a. 0.8 2.7 2.1





■ What's new

Although China Southern Airlines’ (CSA) share price has rallied by 57% since October 2014, driven by the falling price of jet fuel, we see further upside, as the stock is trading at a discount to its past-5-year average PBR and sentiment on an aviation industry recovery should remain positive. We continue to rate CSA an Outperform (2). ■ What's the impact

We believe the currently low oil price is already factored into CSA’s share price. Yet we see potential for further share-price upside, with the shares now trading at a 10% discount to their past-5-year average PBR of 0.9x (on 2015E PBR). Also, we expect the main operating metrics to recover in 2015, as we think the Big 3 China airlines remain

quite cautious on capacity deployment. We are cutting 2014E EPS by 17% as the recovery in CSA’s passenger yield in 2H14 looks weaker than we had expected. But we are raising 2015-16E EPS by 81-144% on our jet-fuel price assumption of USD75/bbl for both years (previously: USD118/bbl). The large percentage swings are due to thin net-profit margins that we see for the period. We are cutting 2015-16E revenue as we expect CSA’s passenger yield to decline by 2% YoY for both years (previous forecast: flat YoY), due mainly to a lower fuel surcharge. ■ What we recommend

We now have a 12-month target price of HKD4.20 (6-month TP of HKD3.00 previously), based on a target PBR of 0.8x (previously 0.7x) on our 2016E BVPS (previously 2015E), which is a 10% discount (unchanged) to its past-5-year average PBR of 0.9x. In our view, the stock should command a higher PBR if, as we expect, investor sentiment on the sector remains positive. The main risks to our call: a smaller-than-expected decline in the price of jet fuel, and higher-than-expected depreciation of the CNY against the USD in 2015.

■ How we differ

Our 2015-16E EPS are 55-106% higher than consensus, as we factor in a lower jet-fuel price than the market.

+


14 January 2015

China Southern Airline s

Potential for further upside

We expect a gradual industry recovery in 2015, given disciplined

capacity deployment by China’s Big 3

CSA’s share price likely factors in the currently low jet fuel price,

but should continue to be supported by positive sentiment

Outperform (2) rating reiterated, with new 12-month target

price of HKD4.20



Industrials / China

China Southern Airlines1055 HK


Upside: 4.0%


Buy


Hold

Underperform

Sell

1

2

3

4

5





70

88

105

123

140

2.2

2.7

3.2

3.7

4.2



Ch South (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder CSA Holding (53.1%)


Revenue (m) 107,029 111,326 117,428


Net profit (m) 1,410 5,761 5,372


EPS change (%) 112.2 308.6 (6.8)

Daiwa vs Cons. EPS (%) (2.3) 105.9 55.4

PER (x) 22.5 5.5 5.9


DPS 0.013 0.042 0.055

PBR (x) 0.9 0.8 0.8

EV/EBITDA (x) 6.8 4.3 4.1

ROE (%) 4.0 15.6 13.5

Kelvin Lau

(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]


- 96 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Overall RFTK growth (%) (0.0) 79.4 12.2 15.0 4.9 16.6 7.7 5.0



Overall PLF (%) 0.8 79.2 81.0 79.9 79.5 78.8 78.1 78.1

Overall CLF (%) 0.4 49.2 50.1 53.0 54.5 54.0 53.9 53.9

Overall passenger yield growth (%) 0.0 (11.2) 14.7 7.9 (0.8) (10.7) (1.8) (3.5)

Cargo Yield growth (%) (0.2) 4.1 (5.3) (1.3) (6.9) (5.0) (7.0) (3.0)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Cargo revenue 2,908 5,436 5,760 6,556 6,413 7,094 7,104 7,104

Other Revenue 1,835 2,355 3,143 3,414 3,863 4,045 4,292 4,559

Total Revenue 54,802 76,495 90,395 99,514 98,547 107,029 111,326 117,428

Other income 0 0 0 0 0 0 0 0

COGS (43,340) (55,591) (69,415) (78,054) (78,173) (83,773) (78,829) (84,380)

SG&A (6,014) (7,821) (9,375) (9,559) (10,224) (10,781) (11,584) (12,452)


Operating profit (523) 6,018 3,916 3,637 803 2,029 9,819 8,856

Net-interest inc./(exp.) (1,429) (1,172) (888) (1,141) (1,319) (1,592) (1,743) (1,681)

Assoc/forex/extraord./others 2,384 3,243 3,902 2,242 4,536 990 (3,002) (453)

Pre-tax profit 432 8,089 6,930 4,738 4,020 1,427 5,075 6,723

Tax 95 (1,677) (840) (954) (734) (201) (1,152) (1,555)

Min. int./pref. div./others (197) (620) (980) (1,165) (764) (371) (1,188) (1,565)

Net profit (reported) 330 5,792 5,110 2,619 2,522 854 2,734 3,602

Net profit (adjusted) (1,091) 3,739 3,074 2,350 665 1,410 5,761 5,372

EPS (reported)(CNY) 0.047 0.697 0.520 0.267 0.257 0.087 0.278 0.367

EPS (adjusted)(CNY) (0.154) 0.450 0.313 0.239 0.068 0.144 0.587 0.547

EPS (adjusted fully-diluted)(CNY) (0.154) 0.450 0.313 0.239 0.068 0.144 0.587 0.547

DPS (CNY) 0.000 0.000 0.200 0.050 0.040 0.013 0.042 0.055

EBIT (523) 6,018 3,916 3,637 803 2,029 9,819 8,856

EBITDA 10,571 18,381 16,259 16,798 14,917 17,328 26,065 25,749

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (210) (193) (2,571) (1,237) (525) (201) (1,152) (1,555)

Change in working capital 3,895 (604) 3,843 1,181 89 1,343 (82) 1,119

Other operational CF items (1,129) (2,915) (3,334) (1,242) (2,692) 663 4,805 2,421


Capex (15,007) (13,469) (20,038) (15,733) (12,308) (15,000) (15,000) (15,000)

Net (acquisitions)/disposals 452 1,971 1,531 527 205 205 205 205

Other investing CF items 77 (70) (3,450) 3,053 (102) 133 133 133


Change in debt 2,000 (4,381) 7,552 2,429 4,186 2,122 (615) (3,615)

Net share issues/(repurchases) 2,980 10,572 0 0 0 0 0 0

Dividends paid (10) (6) (121) (1,976) (578) (393) (128) (410)

Other financing CF items 243 2 1,428 215 560 560 560 560

Cash flow from financing 5,213 6,187 8,859 668 4,168 2,289 (183) (3,465)


Change in cash (306) 6,061 (541) 219 2,202 1,305 4,894 2,321

Free cash flow (6,048) (2,027) (7,481) (4,029) (2,069) (1,322) 4,739 5,448

Financial summary


- 97 -


Key ratios (%)


Company profile

As at the end of December 2013, China Southern Airlines was the largest commercial airline in China, based on fleet size, and operated 561 aircraft. China Southern Air Holding has a 53% stake in China Southern Airlines.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 1,229 1,256 1,355 1,618 1,708 1,647 1,647 1,647


Other current assets 1,318 813 1,132 1,095 1,073 1,134 1,134 1,134


Fixed assets 81,732 90,283 103,651 118,729 137,236 140,127 142,371 143,967



Total assets 94,750 111,335 129,412 142,454 165,207 169,982 177,364 181,628

Short-term debt 18,883 10,978 20,573 24,393 23,878 22,615 23,615 23,615




Long-term debt 39,762 44,652 43,090 49,567 68,619 70,332 67,045 61,757



Share capital 8,003 9,818 9,818 9,818 9,818 9,818 9,818 9,818





EV 87,966 79,291 89,409 100,375 117,667 117,086 111,094 105,050

Net debt/(cash) 54,302 45,226 53,800 63,878 80,309 79,358 72,177 64,568

BVPS (CNY) 1.293 2.731 3.277 3.345 3.497 3.634 3.899 4.224

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (0.9) 39.6 18.2 10.1 (1.0) 8.6 4.0 5.5

EBITDA (YoY) 86.2 73.9 (11.5) 3.3 (11.2) 16.2 50.4 (1.2)

Operating profit (YoY) n.a. n.a. (34.9) (7.1) (77.9) 152.7 383.9 (9.8)

Net profit (YoY) n.a. n.a. (17.8) (23.6) (71.7) 112.2 308.6 (6.8)

Core EPS (fully-diluted) (YoY) n.a. n.a. (30.4) (23.5) (71.7) 112.2 308.6 (6.8)


EBITDA margin 19.3 24.0 18.0 16.9 15.1 16.2 23.4 21.9



ROAE n.a. 20.1 10.4 7.2 2.0 4.0 15.6 13.5

ROAA n.a. 3.6 2.6 1.7 0.4 0.8 3.3 3.0

ROCE n.a. 7.6 4.2 3.4 0.6 1.5 7.1 6.4

ROIC (0.8) 6.7 4.1 3.0 0.6 1.4 6.2 5.7




Current ratio (x) 0.3 0.5 0.4 0.3 0.4 0.4 0.5 0.5



Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 14.9 17.2



■ What's new

Cathay Pacific’s (CX) share price has rallied significantly since October 2014, driven by the declining price of jet fuel. However, we see limited upside going forward as the company’s fundamentals are likely to remain weak in the near term. ■ What's the impact

We think the market has factored the low jet-fuel price into CX’s current valuation. As there is a 3-month lag between Air China’s (an associate of CX) booking earnings and CX recognising them, the positive impact of the low jet-fuel price should be reflected in CX in 2015. However, according to our recent talks with CX management, the passenger yields for both premium and economy classes remain under pressure. In addition, we expect the air-freight market to

remain weak due to a slower-than-expected recovery in global trade. Therefore, the outlook for 2015 remains challenging and we are unlikely to see much good news on this front any time soon. We are raising our 2014-16E EPS by 7-39% due to our lower jet-fuel price assumption, at USD75/bbl, for both 2015 and 2016 (previously USD118/bbl for both). But we are cutting our 2014-16E revenue as we expect CX’s passenger yield to decline by 3-4% YoY (previously: 1% YoY increase) due mainly to the lower fuel surcharge. ■ What we recommend

We now have a 12-month target price of HKD16.90 (previously 6-month TP of HKD15.70), based on an unchanged target PBR of 0.9x on our 2016E BVPS (previously 2015E), which is 10% discount (unchanged) to its past-3-year average PBR of 1.0x. We do not expect its valuation to return to the past-5-year average (1.1x) this year, as we have a cautious stance on the outlook for both the passenger and cargo markets. Main risks: a lower- (or higher-) than-expected decline in the jet-fuel price. ■ How we differ

Our 2015-16E EPS are 5-26% below consensus as we are more

pessimistic on the likely recovery of CX’s passenger and cargo market in 2015.


14 January 2015

Cathay Pacific Airway s

Fundamentals uninspiring, despite low jet fuel price

CX should benefit from the low jet-fuel price in 2015, but strong

rerating of the stock unlikely given the weak passenger yield

Also, we do not expect to see a meaningful pick up in the air-

freight market in 2015, which does not bode well for CX

Maintain Hold (3) rating; new 12-month target price of

HKD16.90; limited positive catalysts in sight




Cathay Pacific Airways293 HK

Target (HKD): 15.70 g 16.90

Downside: 3.3%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5





75

83

90

98

105

13.5

14.6

15.8

16.9

18.0



Cathay Pac (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 13.70-17.68




Major shareholder Swire Pacific (44.0%)


Revenue (m) 105,620 107,071 112,152


Net profit (m) 2,771 5,306 5,153


EPS change (%) 4.2 91.5 (2.9)

Daiwa vs Cons. EPS (%) (19.6) (4.5) (26.1)

PER (x) 24.8 13.0 13.3


DPS 0.277 0.446 0.433

PBR (x) 1.0 1.0 0.9

EV/EBITDA (x) 4.9 3.6 3.4

ROE (%) 4.3 7.8 7.1

Kelvin Lau

(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]


- 99 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Overall RPK growth (%) (1.7) 8.0 5.1 2.3 0.7 7.4 5.0 5.0

Overall RFTK growth (%) (6.6) 23.2 (5.2) (7.3) (2.1) 14.8 10.0 5.0

Overall ASK growth (%) (3.7) 4.1 9.2 2.6 (1.8) 5.9 5.0 5.0

Overall AFTK growth (%) (13.1) 15.2 6.9 (3.1) 1.7 10.7 10.0 5.0

Overall PLF (%) 80.5 83.4 80.4 80.1 82.2 83.4 83.4 83.4

Overall CLF (%) 70.8 75.7 67.2 64.2 61.8 64.1 64.1 64.1

Overall passenger yield growth (%) (19.7) 19.8 8.7 1.2 1.8 (3.0) (4.0) 0.0

Cargo Yield growth (%) (26.8) 25.3 3.9 0.0 (4.1) (6.5) (7.0) (1.0)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Passenger Revenues 45,920 59,354 67,778 70,133 71,826 74,854 75,453 79,225

Cargo Revenues 17,255 25,901 25,980 24,555 23,663 25,399 25,984 27,010

Other Revenue 3,803 4,269 4,648 4,688 4,995 5,367 5,635 5,917

Total Revenue 66,978 89,524 98,406 99,376 100,484 105,620 107,071 112,152

Other income 0 0 0 0 0 0 0 0

COGS (56,062) (66,810) (84,064) (86,651) (85,466) (89,131) (86,909) (91,945)

SG&A (571) (736) (791) (777) (775) (821) (862) (905)



Net-interest inc./(exp.) (847) (978) (744) (884) (1,019) (1,105) (1,062) (932)

Assoc/forex/extraord./others 4,398 5,873 3,538 931 1,771 1,432 1,187 1,389

Pre-tax profit 5,147 15,695 6,473 1,483 3,579 4,411 7,102 6,834

Tax (283) (1,462) (803) (409) (675) (752) (1,220) (1,123)


Net profit (reported) 4,694 14,048 5,501 862 2,620 3,301 5,306 5,153

Net profit (adjusted) 799 11,309 4,119 980 2,660 2,771 5,306 5,153

EPS (reported)(HKD) 1.193 3.571 1.398 0.219 0.666 0.839 1.349 1.310

EPS (adjusted)(HKD) 0.203 2.875 1.047 0.249 0.676 0.704 1.349 1.310


DPS (HKD) 0.100 1.110 0.520 0.080 0.220 0.277 0.446 0.433

EBIT 1,596 10,800 3,679 1,436 2,827 4,084 6,976 6,377

EBITDA 10,677 20,195 13,081 11,747 14,290 16,138 20,148 20,072

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (1,743) (810) (1,461) (1,356) (891) (752) (1,220) (1,123)

Change in working capital (3,472) 1,054 6,472 685 3,723 5,953 3,684 3,684

Other operational CF items (2,501) (1,758) (4,089) (303) (1,310) (2,025) (1,424) (1,626)


Capex (6,776) (8,299) (17,610) (20,975) (20,534) (11,000) (11,000) (11,000)

Net (acquisitions)/disposals 1,907 2,130 (2,737) (95) 246 0 0 0

Other investing CF items 3,820 (8,394) 7,286 784 (1,582) 2,030 2,030 2,030


Change in debt 2,392 (2,987) 4,780 17,654 9,629 (218) 157 157


Dividends paid (143) (1,868) (3,966) (1,565) (829) 0 (1,090) (1,753)


Cash flow from financing 2,140 (4,914) 758 16,052 8,761 (218) (934) (1,596)

Forex effect/others 97 156 80 (20) (6) 0 0 0

Change in cash 4,303 1,211 1,340 2,994 (662) 6,367 6,856 6,421

Free cash flow (3,661) 12,233 (4,047) (13,727) (8,081) 4,555 5,760 5,987

Financial summary


- 100 -


Key ratios (%)


Company profile

Cathay Pacific Airways is an international airline based in Hong Kong. As at 31 December 2013, together with Dragonair and Air Hong Kong, the company operate 192 aircraft. The Company offers scheduled cargo and passenger services to more than 110 destinations around the world, it also provides related services, including airline catering, aircraft handling, and engineering.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 0 0 0 0 0 0 0 0




Fixed assets 65,495 66,112 73,498 84,278 94,935 98,176 100,768 102,760



Total assets 113,324 128,053 137,133 154,688 171,575 181,751 191,264 199,742

Short-term debt 7,828 8,704 8,562 8,157 10,218 9,843 9,843 9,843


Other current liabilities 943 1,541 1,368 687 1,116 6,122 10,687 15,050


Long-term debt 34,814 30,925 34,773 51,389 56,834 56,991 57,147 57,304



Share capital 787 787 787 787 787 787 787 787



Minority interests 147 155 135 117 125 483 1,058 1,617


EV 85,042 70,403 73,588 84,529 86,380 79,877 73,478 67,497

Net debt/(cash) 25,173 14,410 22,583 34,170 37,805 30,945 23,970 17,430

BVPS (HKD) 10.737 13.797 14.187 14.241 15.986 16.826 17.897 18.762

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (22.6) 33.7 9.9 1.0 1.1 5.1 1.4 4.7

EBITDA (YoY) 23.4 89.1 (35.2) (10.2) 21.6 12.9 24.9 (0.4)

Operating profit (YoY) 318.9 576.7 (65.9) (61.0) 96.9 44.5 70.8 (8.6)

Net profit (YoY) n.a. 1,315.7 (63.6) (76.2) 171.4 4.2 91.5 (2.9)

Core EPS (fully-diluted) (YoY) n.a. 1,315.8 (63.6) (76.2) 171.4 4.2 91.5 (2.9)


EBITDA margin 15.9 22.6 13.3 11.8 14.2 15.3 18.8 17.9



ROAE 2.0 23.4 7.5 1.8 4.5 4.3 7.8 7.1

ROAA 0.7 9.4 3.1 0.7 1.6 1.6 2.8 2.6

ROCE 2.0 12.1 3.8 1.3 2.3 3.1 5.1 4.5

ROIC 2.3 14.4 4.4 1.2 2.4 3.4 6.0 5.7




Current ratio (x) 0.9 1.0 0.8 1.0 1.0 1.0 1.0 1.1



Free cash flow yield n.a. 17.8 n.a. n.a. n.a. 6.6 8.4 8.7



■ What's new

We view construction of the new airport as more negative news than positive for Beijing Capital International Airport (BCIA). In addition, we see a lack of share-price catalysts for the company in 2015. As such, we downgrade our rating to Sell (5) from Hold (3). ■ What's the impact

On 15 December, the NDRC approved the construction of a new airport in Beijing with a total investment of CNY80bn. The project is scheduled to be completed by 2019. The total designed capacity is 72m passengers per year, similar to the current airport operated by BCIA. While BCIA’s management is still considering to what extent they will be involved, we believe the new project will be more negative than positive for BCIA.

First, if BCIA plans to invest and own the asset, it would likely need to raise capital from the equity market which would lead to high share dilution, or high interest expenses if it used debt financing. Also, depreciation expenses would be substantial when operations started. Second, if BCIA just managed the new airport on behalf of its parent, the new airport would likely divert some traffic away from the existing airport initially and capture most of the future traffic growth in the long term. The only reason we would turn positive on the deal would be if the new airport could prove itself to be a higher-return investment than BCIA’s existing asset, which we assume is not the case, based on previous management guidance. ■ What we recommend

We are raising our DCF-based target price to HKD6.10, now based on a 12-month view (from a 6-month DCF-based target price of HKD5.10 previously), after rolling over our DCF valuation to 2016. We are also raising our forecasts slightly on our slightly higher traffic assumptions. The main risks to our call are higher-than-expected passenger throughput and aircraft movement growth. ■ How we differ

Our 2016E EPS is 18% lower than consensus as we are more

pessimistic on BCIA’s future traffic growth, especially given that it operates an already mature airport.


14 January 2015

Beijing Capital Inte rnational Airport

New airport is more a concern than good news

Construction of the new airport in Beijing likely to be more

negative than positive for BCIA

We see a lack of near-term catalysts for BCIA and believe its

traffic will be diverted to the new airport in the long term

DCF-based 12-month target price raised to HKD6.10 due to the

rolling over of our valuation, but rating downgraded to Sell (5)



Industrials / China

Beijing Capital International Airport694 HK


Downside: 15.3%


Buy

Outperform

Hold

Underperform

Sell (from Hold)

1

2

3

4

5


Revenue change 0.7 0.7 0.7



75

86

98

109

120

5.0

5.6

6.3

6.9

7.5



B'Jing Cap (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Capital Airport Holding Co (56.6%)


Revenue (m) 7,529 7,693 7,957


Net profit (m) 1,407 1,603 1,733


EPS change (%) 10.7 13.9 8.1

Daiwa vs Cons. EPS (%) 0.9 0.6 (18.2)

PER (x) 17.7 15.6 14.4


DPS 0.130 0.148 0.160

PBR (x) 1.5 1.4 1.3

EV/EBITDA (x) 7.6 8.1 7.3

ROE (%) 8.5 9.1 9.2

Kelvin Lau

(852) 2848 4467

[email protected]

Brian Lam(852) 2532 4341

[email protected]


- 102 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Passenger throughput (Int'l) growth

(%) 5.9 22.2 2.1 8.8 3.5 3.0 1.5 2.0

Passenger throughput (Domestic)

growth (%) 20.8 10.6 7.7 2.8 1.8 3.5 1.5 2.0

Total pax throughput growth (%) 17.3 13.1 6.4 4.1 2.2 3.4 1.5 2.0

Aircraft movement (Int'l) growth (%) (2.2) 11.5 6.9 6.4 1.7 1.0 1.5 1.5

Aircraft movement (Domestic) growth

(%) 17.7 4.6 2.0 4.0 2.0 2.0 1.5 1.5

Total aircraft movement growth (%) 13.2 6.0 3.0 4.5 1.9 1.8 1.5 1.5

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Aeronautical revenue 3,029 3,454 3,676 3,893 4,194 4,347 4,413 4,493

Non-aeronautical revenue 1,721 2,086 2,539 2,730 2,937 3,182 3,281 3,464

Other Revenue 0 0 0 0 0 0 0 (0)

Total Revenue 4,749 5,540 6,215 6,623 7,131 7,529 7,693 7,957

Other income 0 0 0 0 0 0 0 0

COGS (2,479) (2,608) (2,649) (3,014) (3,309) (3,550) (3,335) (3,401)

SG&A 0 0 0 0 0 0 0 0


Operating profit 709 1,422 2,060 2,093 2,283 2,490 2,770 2,967



Pre-tax profit 397 793 1,486 1,533 1,775 1,880 2,141 2,315

Tax (101) (198) (372) (384) (446) (473) (538) (582)

Min. int./pref. div./others 0 0 0 0 0 0 0 0



EPS (reported)(CNY) 0.068 0.137 0.257 0.265 0.307 0.325 0.370 0.400

EPS (adjusted)(CNY) 0.065 0.123 0.233 0.254 0.293 0.325 0.370 0.400


DPS (CNY) 0.034 0.000 0.077 0.108 0.123 0.130 0.148 0.160

EBIT 709 1,422 2,060 2,093 2,283 2,490 2,770 2,967

EBITDA 2,336 3,030 3,668 3,706 4,051 4,376 4,475 4,672

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 397 793 1,486 1,533 1,775 1,880 2,141 2,315


Tax paid (79) (92) (413) (363) (432) (473) (538) (582)

Change in working capital (895) 847 (320) 18 (184) (66) (27) (43)

Other operational CF items 54 141 (93) 648 595 24 24 24


Capex (899) (322) (347) (241) (480) (700) (3,500) (500)

Net (acquisitions)/disposals 10 (5) (59) 177 100 (3) (3) (2)


Cash flow from investing (882) (320) (395) (44) (362) (683) (3,483) (482)

Change in debt 0 (2,736) (1,577) (1,358) (1,656) (1,310) (199) (2,300)


Dividends paid 0 (147) (77) (430) (498) (533) (424) (646)

Other financing CF items 0 253 0 (600) (458) 0 0 0

Cash flow from financing 0 (2,630) (1,654) (2,388) (2,611) (1,843) (622) (2,946)

Forex effect/others (0) (1) (4) (0) (0) 0 0 0

Change in cash 107 199 66 870 273 282 (963) (172)

Free cash flow 90 2,828 1,773 3,061 2,766 2,108 (357) 2,756

Financial summary


- 103 -


Key ratios (%)


Company profile

Beijing Capital International Airport (BCIA) is engaged mainly in aeronautical and non-aeronautical businesses at Beijing Airport. For 2013, aircraft movements and passenger throughput at Beijing Airport were 567,759 and 84m, respectively. The Capital Airport Holding Company has a 56.6% stake in BCIA.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 684 882 949 1,818 2,052 2,374 1,411 1,239

Inventory 58 104 130 125 115 115 115 115




Fixed assets 33,260 31,911 30,660 29,490 28,493 27,750 29,708 28,665

Goodwill & intangibles 106 84 61 41 38 11 (16) (44)

Other non-current assets 815 907 825 806 830 927 1,063 1,198

Total assets 36,731 34,981 33,899 33,423 32,697 32,411 33,542 32,479

Short-term debt 14,867 143 139 7,655 3,160 2,150 4,150 2,150


Other current liabilities 183 389 327 311 378 2,277 378 378


Long-term debt 6,606 18,515 16,813 7,937 10,699 8,651 8,501 8,351



Share capital 4,331 4,331 4,331 4,331 4,331 4,331 4,331 4,331





EV 45,741 42,727 40,955 38,724 36,759 33,379 36,191 34,213

Net debt/(cash) 20,789 17,775 16,003 13,773 11,807 8,427 11,240 9,262

BVPS (CNY) 2.940 3.102 3.332 3.515 3.743 3.945 4.218 4.468

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 7.5 16.6 12.2 6.6 7.7 5.6 2.2 3.4

EBITDA (YoY) 15.7 29.7 21.1 1.1 9.3 8.0 2.3 4.4


Net profit (YoY) 691.6 89.4 88.9 9.3 15.4 10.7 13.9 8.1



EBITDA margin 49.2 54.7 59.0 56.0 56.8 58.1 58.2 58.7



ROAE 2.2 4.1 7.2 7.4 8.1 8.5 9.1 9.2

ROAA 0.8 1.5 2.9 3.3 3.8 4.3 4.9 5.2

ROCE 2.6 4.3 6.5 6.7 7.5 8.6 9.4 9.8

ROIC 2.0 3.3 5.0 5.3 6.0 7.0 7.5 7.6




Current ratio (x) 0.1 0.7 0.9 0.3 0.6 0.6 0.4 0.6



Free cash flow yield 0.4 11.3 7.1 12.3 11.1 8.4 n.a. 11.0



■ What's new

We have turned more positive on YTI after discussing with management its acquisition of Suiyuenan Expressway (SE), announced on 17 December 2014 (see our Memo, Acquisition of Suiyuenan Expressway is positive in the long term for details), and think it will benefit the company’s bottom line starting in mid-2015. However, we are cutting our 2015-16 toll road revenue forecasts by 5-7% based on YTD November data and management guidance. This note marks the transfer of analyst coverage. ■ What's the impact

We look for the SE to contribute 1% of YTI’s net profit for 2015 and 2% for 2016. Also, we believe the new toll road will help to partially offset the loss from the Xi’an Expressway

in the long run, when it is returned to the government in 2017. YTI’s management has stated that 2 of its major toll roads, namely the Guangzhou North Second Ring Road (GNSR) and the Guangzhou West Second Ring Road (GWSR), were affected by repair work on the Julong Bridge in Guangzhou and the implementation of traffic controls on the bridge between the GNSR and GWSR from 1-27 September 2014. As a result, we have factored in 6-7% YoY less toll revenue from the GNSR and GWSR in 2014. ■ What we recommend

We reiterate our Buy (1) rating on YTI, with a new DCF-based target price of HKD5.9, now based on a 12-month view (from a 6-month DCF-based target price of HKD5.7 previously). The stock is trading currently at a 2016E PER of 5.6x, below its past-5-year average of 9.8x. Our 2015-16E EPS are raised by 1-12% YoY based on the new contributions from the SE, and we see strong organic growth as a share-price catalyst. The key risk to our call is slower-than-expected traffic growth on its toll roads. ■ How we differ

We are one of only 4 brokers covering YTI currently. Our 2015-16E EPS are 25-40% higher than consensus as we are the only broker

to factor in revenue growth from the SE.


14 January 2015

Yuexiu Tran sport Infrast ructure

New toll road helps boost organic growth

Recent acquisition will be beneficial in the long term

Our other toll revenue and traffic forecasts are revised down

following management guidance

Reiterate Buy (1) rating, with target price raised to HKD5.9, now

based on a 12-month view



Industrials / China

Yuexiu Transport Infrastructure1052 HK


Upside: 31.1%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5


Revenue change (4.9) 1.2 9.5



90

100

110

120

130

3.6

4.1

4.6

5.0

5.5



Yuexiu Trn (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Yuexiu Enterprises (Hldg) Ltd. (60.7%)


Revenue (m) 1,918 2,344 2,801


Net profit (m) 645 866 1,079


EPS change (%) 18.7 34.3 24.6

Daiwa vs Cons. EPS (%) 2.7 24.7 40.1

PER (x) 9.3 7.0 5.6


DPS 0.239 0.310 0.387

PBR (x) 0.7 0.6 0.6

EV/EBITDA (x) 7.2 6.7 5.3

ROE (%) 7.6 9.3 10.5

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 105 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average daily traffic growth (%) (1.5) 21.6 1.6 8.5 16.3 9.9 11.9 9.4

Average daily toll revenue growth (%) 10.7 25.8 8.3 1.4 14.8 10.9 19.5 8.7

Average daily traffic (vehicles/day) 432,081.0 525,379.4 533,823.5 579,082.0 673,314.0 739,835.3 827,575.6 905,003.3

Average daily toll revenue ('000/day) 8,378.4 10,537.3 11,416.6 11,577.4 13,289.3 14,732.3 17,612.3 19,136.7

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll revenue Revenues 1,001 1,253 1,322 1,485 1,753 1,905 2,345 2,815

Construction revenue Revenues 19 95 311 65 97 70 70 70

Other Revenue (34) (42) (46) (51) (59) (58) (71) (85)

Total Revenue 986 1,306 1,587 1,499 1,791 1,918 2,344 2,801

Other income 0 0 0 0 0 0 0 0

COGS (243) (395) (552) (356) (429) (425) (458) (491)

SG&A (36) (36) (59) (76) (70) (74) (77) (81)


Operating profit 506 633 726 788 968 1,066 1,410 1,793



Pre-tax profit 582 848 859 806 954 1,113 1,460 1,838

Tax (83) (146) (134) (249) (261) (280) (378) (490)


Net profit (reported) 382 535 558 427 554 655 866 1,079

Net profit (adjusted) 457 516 481 362 543 645 866 1,079

EPS (reported)(CNY) 0.229 0.319 0.334 0.255 0.331 0.392 0.517 0.645

EPS (adjusted)(CNY) 0.273 0.308 0.287 0.216 0.325 0.385 0.517 0.645


DPS (CNY) 0.141 0.187 0.197 0.163 0.206 0.239 0.310 0.387

EBIT 506 633 726 788 968 1,066 1,410 1,793

EBITDA 707 874 977 1,067 1,292 1,419 1,809 2,229

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 582 848 859 806 954 1,113 1,460 1,838


Tax paid (62) (114) (156) (200) (211) (280) (378) (490)

Change in working capital 22 (33) 24 (49) 1 0 0 0

Other operational CF items (186) (303) (220) (411) (255) (415) (1,283) (714)

Cash flow from operations 557 639 758 425 812 771 199 1,070

Capex (32) (107) (778) (142) (86) (166) (120) (120)

Net (acquisitions)/disposals (41) (81) (835) (52) 180 0 0 0

Other investing CF items (244) 307 (108) (646) 725 164 (1,273) 160

Cash flow from investing (317) 119 (1,721) (840) 818 (1) (1,393) 40

Change in debt (113) (160) 453 508 (583) 341 1,685 341


Dividends paid (257) (451) (481) (356) (504) (411) (460) (583)

Other financing CF items 0 0 179 22 4 0 0 0

Cash flow from financing (370) (611) 152 173 (1,083) (71) 1,225 (243)


Change in cash (130) 148 (812) (242) 547 699 31 867

Free cash flow 525 532 (21) 283 725 605 79 950

Financial summary


- 106 -


Key ratios (%)


Company profile

Formerly GZI Transportation, Yuexiu Transport Infrastructure (YTI) is engaged in the investment, operation and management of expressways, national highways and bridges in China, mainly in Guangdong Province.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 17 20 21 33 32 34 42 50

Accounts receivable 95 1,154 818 702 200 214 1,049 1,253

Other current assets 255 25 0 202 0 256 3,036 3,497


Fixed assets 7,275 7,829 11,441 14,210 13,963 14,009 14,010 13,974



Total assets 12,152 13,842 16,147 18,710 18,226 19,244 22,898 24,403

Short-term debt 313 583 598 615 706 706 706 706



Total current liabilities 523 1,583 1,249 1,285 1,327 1,339 1,879 1,911

Long-term debt 1,226 1,472 3,766 5,812 5,096 5,481 7,209 7,594

Other non-current liabilities 943 1,101 1,174 1,529 1,525 1,525 1,525 1,525


Share capital 147 147 147 147 147 147 147 147





EV 5,394 5,759 9,151 11,440 10,311 10,164 12,077 11,864

Net debt/(cash) (415) (57) 3,065 5,370 4,197 3,883 5,580 5,097

BVPS (CNY) 4.554 4.670 4.742 4.838 4.946 5.218 5.917 6.406

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 12.4 32.5 21.6 (5.6) 19.5 7.1 22.2 19.5

EBITDA (YoY) 10.7 23.7 11.8 9.2 21.1 9.9 27.5 23.2


Net profit (YoY) (11.4) 12.8 (6.7) (24.7) 50.0 18.7 34.3 24.6



EBITDA margin 71.7 66.9 61.6 71.2 72.1 74.0 77.2 79.6



ROAE 6.1 6.7 6.1 4.5 6.6 7.6 9.3 10.5

ROAA 4.0 4.0 3.2 2.1 2.9 3.4 4.1 4.6

ROCE 4.8 5.6 5.6 5.1 5.9 6.4 7.6 8.6

ROIC 5.2 5.6 5.4 3.8 4.7 5.5 6.4 7.2

Net debt to equity n.a. n.a. 38.6 66.3 50.7 44.5 56.4 47.6



Current ratio (x) 4.4 2.1 1.7 1.6 1.4 2.1 3.4 4.2



Free cash flow yield 8.7 8.8 n.a. 4.7 12.0 10.0 1.3 15.8



■ What's new

We forecast 5 newly acquired toll roads will boost JSE’s revenue for 2015-16 by 1-2%, and we expect only a modest impact from traffic diversion (from the Shanghai-Nanjing Expressway [SNE] to the Lima Expressway) for 2015E. We reaffirm our Outperform (2) rating. ■ What's the impact

On 5 January, JSE acquired 5 toll roads from its parent, Jiangsu Communications Holdings, for a cash consideration of CNY 1.2bn. The roads are in Jiangsu Province and cover a total of 262km. We believe the acquisition price of CNY4.6m/km is reasonable considering the cost of building a new road is around CNY100m/km. In addition, the parent has guaranteed JSE an EBIT

contribution of CNY230-269m (per annum) over 2015-17E. JSE’s management stated most of the new roads had met its breakeven targets in terms of traffic flow in November and December, and we look for them to start contributing to earnings from March 2015. As for SNE, we forecast revenue growth of 4-6% YoY in 2015-16E, as we believe the negative impact of traffic diversions has now largely played out. As a result of the acquisitions, we revise our core EPS forecasts for 2015-16E by 1.5% and -0.4%, respectively. ■ What we recommend

We have a 12-month DCF-based target price of HKD10.5 (formerly a 6-month target of HKD10), after raising our WACC to 10.8% (from 8.98%), and incorporating a risk-free rate of 4.5% (from 3.5%) and China market risk premium of 9.21% (from 8.0%). The stock is trading at 10x PER for 2016E, below its past-5-year average multiple of 12.9x. The main risk to our view would be lower-than-expected traffic growth. ■ How we differ

Compared with the market, we are more positive on JSE’s toll-road

organic growth, as well as revenue contributions from its associate toll-road companies over 2015-16E.


14 January 2015

Jiangsu Expre ssway

Toll-road acquisitions: slight boost to 2015E outlook

Recent acquisition of 5 toll roads enhances earnings-growth

prospects

We expect the negative impact of traffic diversions will be

modest in 2015

Outperform (2) rating reaffirmed, with new 12-month target

price of HKD10.5



Industrials / China

Jiangsu Expressway177 HK

Target (HKD): 10.00 g 10.50

Upside: 12.3%


Buy


Hold

Underperform

Sell

1

2

3

4

5


Revenue change - 2.1 2.4

Net profit change 4.0 1.5 (0.4)

Core EPS (FD) change 4.0 1.5 (0.4)

85

93

100

108

115

8.0

8.5

9.0

9.5

10.0



Jiangsu Ex (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Jiangsu Comm Holdg (54.4%)


Revenue (m) 8,156 8,671 9,221


Net profit (m) 3,132 3,457 3,784


EPS change (%) 19.5 10.4 9.5

Daiwa vs Cons. EPS (%) 12.6 17.1 19.0

PER (x) 12.0 10.9 10.0


DPS 0.454 0.501 0.548

PBR (x) 1.8 1.7 1.6

EV/EBITDA (x) 7.4 7.7 7.1

ROE (%) 15.6 16.2 16.6

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 108 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Average daily toll revenue growth (%) 7.8 16.0 3.5 (1.8) 5.3 3.6 6.2 6.2



Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll revenue 4,307 4,999 5,170 5,092 5,345 5,535 5,854 6,245

Ancillary services revenues 1,212 1,657 2,172 2,357 2,150 2,253 2,550 2,719

Other Revenue 69 (78) (128) 137 (83) 368 267 257

Total Revenue 5,587 6,578 7,215 7,587 7,412 8,156 8,671 9,221

Other income 0 0 0 0 0 0 0 0

COGS (1,626) (2,040) (2,639) (3,077) (2,730) (2,972) (2,926) (2,980)

SG&A (136) (164) (192) (186) (186) (190) (193) (197)

Other op.expenses (825) (919) (997) (977) (964) (1,002) (1,264) (1,395)




Pre-tax profit 2,818 3,332 3,263 3,146 3,627 4,196 4,630 5,069

Tax (650) (793) (784) (764) (852) (995) (1,099) (1,203)




EPS (reported)(CNY) 0.420 0.493 0.482 0.463 0.537 0.622 0.686 0.751

EPS (adjusted)(CNY) 0.420 0.493 0.482 0.463 0.520 0.622 0.686 0.751


DPS (CNY) 0.310 0.360 0.360 0.360 0.380 0.454 0.501 0.548

EBIT 3,000 3,455 3,387 3,346 3,532 3,992 4,287 4,649

EBITDA 3,825 4,374 4,383 4,323 4,496 4,995 5,551 6,044

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 825 919 997 977 964 1,002 1,264 1,395

Tax paid (695) (793) (784) (764) (852) (995) (1,099) (1,203)

Change in working capital (1,304) (257) (328) (48) (554) 906 1,860 90

Other operational CF items (284) 190 687 (121) (102) (423) (577) (800)


Capex (260) (119) (175) (1,706) (241) (1,160) (1,000) (900)

Net (acquisitions)/disposals 4 60 1,760 3,377 85 0 (1,164) 0

Other investing CF items 116 98 (2,216) (2,981) (809) 0 0 0

Cash flow from investing (140) 39 (630) (1,310) (965) (1,160) (2,164) (900)

Change in debt 224 (1,528) (734) 173 (212) 0 (400) (500)


Dividends paid (1,385) (1,940) (2,132) (2,165) (2,162) (2,287) (2,524) (2,763)


Cash flow from financing (1,163) (3,474) (2,874) (1,999) (2,397) (2,287) (2,924) (3,263)


Change in cash 57 (43) 331 (120) (278) 1,239 991 387

Free cash flow 1,100 3,273 3,661 1,483 2,843 3,526 5,079 3,650

Financial summary


- 109 -


Key ratios (%)


Company profile

Jiangsu Expressway (JSE) is engaged in investment, construction, operation and management of the Jiangsu Section of Shanghai-Nanjing Expressway and other toll highways within Jiangsu Province.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 570 535 825 705 429 1,668 2,659 3,046

Inventory 14 0 0 0 0 0 0 0

Accounts receivable 1,343 740 49 1,174 1,248 371 394 419

Other current assets 140 951 2,530 2,361 3,076 4,255 14,827 17,227


Fixed assets 19,019 20,614 19,755 17,797 16,949 16,067 14,802 13,407



Total assets 24,204 24,897 25,375 25,849 26,834 27,491 38,976 40,394

Short-term debt 3,278 3,189 3,067 3,752 3,222 2,002 8,927 8,427

Accounts payable 338 103 101 291 660 710 2,605 2,719

Other current liabilities 156 503 1,135 1,702 1,591 1,506 1,494 1,494


Long-term debt 4,514 3,078 2,465 950 1,262 2,261 3,061 3,761



Share capital 5,038 5,038 5,038 5,038 5,038 5,038 5,908 5,908





EV 43,472 41,873 40,696 38,688 38,486 37,094 42,739 42,634

Net debt/(cash) 7,222 5,732 4,706 3,997 4,054 2,595 9,328 9,141

BVPS (CNY) 3.070 3.486 3.602 3.710 3.890 4.058 4.415 4.618

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 8.8 17.7 9.7 5.2 (2.3) 10.0 6.3 6.3

EBITDA (YoY) 10.7 14.4 0.2 (1.4) 4.0 11.1 11.1 8.9

Operating profit (YoY) 16.4 15.2 (2.0) (1.2) 5.6 13.0 7.4 8.5

Net profit (YoY) 27.8 17.3 (2.2) (4.0) 12.4 19.5 10.4 9.5

Core EPS (fully-diluted) (YoY) 27.8 17.3 (2.2) (4.0) 12.4 19.5 10.4 9.5


EBITDA margin 68.5 66.5 60.8 57.0 60.7 61.2 64.0 65.5



ROAE 14.1 15.0 13.6 12.7 13.7 15.6 16.2 16.6

ROAA 8.9 10.1 9.7 9.1 10.0 11.5 10.4 9.5

ROCE 12.9 14.4 14.0 13.9 14.6 16.0 14.3 13.1

ROIC 10.2 11.2 10.9 10.9 11.4 12.8 11.7 10.9




Current ratio (x) 0.5 0.6 0.8 0.7 0.9 1.5 1.4 1.6



Free cash flow yield 2.9 8.7 9.7 3.9 7.5 9.3 13.5 9.7



■ What's new

We expect ZJE’s securities business (22% of revenue) to benefit from the launch of the Shanghai-Hong Kong Stock Connect (SH-HK), and expect the company’s overall earnings to benefit as a result. Hence, we are raising our 2015-16E EPS by 14% for both years as a result. We also raise our target price to HKD9.60 from HKD8.20. But, even though the company is keen to list the securities business in 2015 (it previously expected the IPO to take place in early 2015, but is still waiting for final approval from the China Securities Regulatory Commission), we still do not see any near-term catalysts. Thus, we maintain our Hold (3) rating. ■ What's the impact

Due to keen competition in the market, we do not expect ZJE’s

securities-trading commission to rise in 2015; instead we expect this dual-listed stock to benefit from an increase in stock trade volume, due to the launch of the SH-HK. Thus, we also raise our 2015-16E securities earnings by 30-31%, based on its YTD September 2014 operating results. Meanwhile, we expect the traffic diversions on the Shanghai-Hangzhou-Ningbo Expressway (SHN) (to Qianjiang Road) to continue until April 2015, knocking 1% YoY off traffic for the year. The company also expects construction work on ZJE’s Hangzhou Airport road to carry on until April 2016, and guides for a 2.5% YoY decline in traffic caused by this construction work. ■ What we recommend

We have factored in higher securities business revenue, based on the 9M14 results, and are raising our overall 2015-16E earnings by 14% YoY for both years. We are raising our DCF-derived 12-month target price to HKD9.6 (from HKD8.2, previously 6-month). Risks include lower-than-expected securities business earnings for 2015, and higher-than-expected traffic growth on ZJE’s toll roads.

■ How we differ

We are more positive on ZJE’s security business for 2015-16E driven by a rise in trading volume.


14 January 2015

Zhejiang Expre ssw ay

Better securities business likely to be offset by traffic diversions

We forecast better securities revenue on the back of an increase

in trading volume

Raising our 2015-16 securities earnings forecasts due to Stock

Connect, but ZJE’s main toll road still hit by traffic diversions

Maintain Hold rating on lack of short-term catalysts; now have

12-month target price of HKD9.6



Industrials / China

Zhejiang Expressway576 HK


Upside: 1.8%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5





90

101

113

124

135

6.0

7.0

8.0

9.0

10.0



Zjiang Exp (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder ZJ Comm. Investment Group (67.0%)


Revenue (m) 8,727 9,427 9,954


Net profit (m) 2,283 2,575 2,770


EPS change (%) 19.7 12.8 7.6

Daiwa vs Cons. EPS (%) 8.2 14.5 17.4

PER (x) 14.4 12.7 11.8


DPS 0.359 0.405 0.436

PBR (x) 1.9 1.8 1.7

EV/EBITDA (x) 6.9 5.9 5.2

ROE (%) 13.9 14.7 15.0

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 111 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Average daily toll revenue growth (%) (10.0) 11.8 1.5 8.4 12.7 6.3 6.0 6.0



Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll Revenues 3,211 3,590 3,644 3,902 4,158 4,426 4,695 4,980

Securities business Revenues 1,753 1,658 1,401 1,181 1,742 2,188 2,516 2,642

Other Revenue 1,072 1,521 1,736 1,844 1,951 2,112 2,216 2,333

Total Revenue 6,036 6,769 6,781 6,927 7,851 8,727 9,427 9,954

Other income 0 0 0 0 0 0 0 0

COGS (2,299) (2,916) (3,216) (3,569) (3,933) (4,076) (4,264) (4,433)

SG&A (70) (83) (84) (86) (85) (87) (94) (100)

Other op.expenses (814) (841) (862) (1,005) (1,023) (1,164) (1,203) (1,243)


Net-interest inc./(exp.) (32) (65) 61 42 1 1 1 1


Pre-tax profit 3,117 3,115 2,784 2,461 2,972 3,567 4,023 4,327

Tax (840) (799) (718) (635) (757) (916) (1,033) (1,111)




EPS (reported)(CNY) 0.421 0.432 0.416 0.380 0.439 0.526 0.593 0.638

EPS (adjusted)(CNY) 0.421 0.432 0.416 0.380 0.439 0.526 0.593 0.638


DPS (CNY) 0.310 0.310 0.310 0.310 0.300 0.359 0.405 0.436

EBIT 2,854 2,929 2,620 2,267 2,811 3,399 3,866 4,178

EBITDA 3,668 3,770 3,481 3,272 3,833 4,563 5,069 5,422

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Depreciation and amortisation 814 841 862 1,005 1,023 1,164 1,203 1,243

Tax paid (786) (860) (710) (924) (713) (916) (1,033) (1,111)

Change in working capital 90 (259) (505) (943) (2,097) (269) (218) (149)


Cash flow from operations 3,028 2,554 2,286 1,328 980 3,438 3,867 4,203

Capex (672) (258) (449) (379) (270) (487) (500) (500)

Net (acquisitions)/disposals 531 (130) (2,151) 657 250 0 0 0

Other investing CF items (87) (513) (373) 615 137 705 105 105

Cash flow from investing (228) (902) (2,973) 892 116 218 (395) (395)

Change in debt 13 200 (359) (513) 500 (540) 460 460


Dividends paid (1,467) (1,455) (1,515) (1,455) (1,413) (1,303) (1,559) (1,759)

Other financing CF items 0 239 0 0 (1,768) 0 0 0

Cash flow from financing (1,455) (1,016) (1,875) (1,968) (2,681) (1,843) (1,099) (1,299)


Change in cash 1,345 637 (2,562) 252 (1,585) 1,813 2,373 2,509

Free cash flow 2,356 2,296 1,837 949 710 2,951 3,367 3,703

Financial summary


- 112 -


Key ratios (%)


Company profile

ZJE is an infrastructure company principally engaged in investing in, developing and operating toll roads, such as the Shanghai-Hangzhou-Ningbo Expressway. Through its subsidiary, the company also has a securities-trading business, Zheshang Securities.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 17 18 26 27 74 74 74 74

Accounts receivable 502 1,004 892 789 3,048 3,388 3,660 3,865



Fixed assets 13,791 13,192 12,659 14,356 13,673 13,017 12,335 11,612


Other non-current assets 466 545 1,222 1,178 1,522 1,520 1,517 1,515

Total assets 32,403 33,652 29,133 31,485 32,089 34,512 37,898 40,421

Short-term debt 478 822 463 660 1,540 540 540 540




Long-term debt 1,144 1,000 1,000 680 300 760 1,220 1,680



Share capital 4,343 4,343 4,343 4,343 4,343 4,343 4,343 4,343





EV 31,012 30,232 30,322 30,565 33,448 31,463 29,965 28,363

Net debt/(cash) (4,229) (5,061) (5,446) (5,157) (2,134) (4,487) (6,400) (8,449)

BVPS (CNY) 3.266 3.390 3.495 3.694 3.678 3.903 4.137 4.370

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (4.5) 12.1 0.2 2.2 13.3 11.2 8.0 5.6

EBITDA (YoY) (6.2) 2.8 (7.7) (6.0) 17.1 19.0 11.1 7.0

Operating profit (YoY) (8.7) 2.6 (10.6) (13.5) 24.0 20.9 13.7 8.1

Net profit (YoY) (3.7) 2.6 (3.7) (8.6) 15.6 19.7 12.8 7.6



EBITDA margin 60.8 55.7 51.3 47.2 48.8 52.3 53.8 54.5



ROAE 13.1 13.0 12.1 10.6 11.9 13.9 14.7 15.0

ROAA 6.3 5.7 5.8 5.4 6.0 6.9 7.1 7.1

ROCE 15.6 15.3 13.2 11.1 13.2 15.5 16.6 16.6

ROIC 15.8 17.1 15.1 12.2 13.1 14.8 17.6 19.7




Current ratio (x) 1.3 1.3 1.6 1.4 1.4 1.6 1.7 1.9

Net interest cover (x) 89.2 45.4 n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 7.2 7.0 5.6 2.9 2.2 9.0 10.3 11.3



■ What's new

We expect the traffic diversion from the Qinglian Expressway (QE) to the Guangle Expressway (GE) to last for 9 more months. However, we believe the partially toll-free (13.8km of 19.2km) Meiguan Expressway (ME) will attract more traffic to the connecting Jihe East (JE) and Jihe West (JW) expressways. Overall, we now forecast SZE to post 10% YoY growth in traffic but 5% YoY growth in toll revenue for each of 2015 and 2016. ■ What's the impact

For 2015, we now forecast QE’s traffic growth to decelerate to 8% YoY (previously 15% YoY) and its revenue to decline by 22% YoY (previously 20% YoY growth). However, we expect revenue to rise with the additional revenue from the

connecting roads of the ME, JE and JW for 4M15, which would be positive for the company. As such, we are raising our traffic growth forecasts for 2015-16 to 10% YoY for both years (from 5% YoY), and lowering our toll revenue growth forecasts to 5% YoY (from 8% YoY). We have fine-tuned our 2015-16 traffic and revenue growth forecasts based on the traffic data for 2014 to end-November. As a result, our 2015-16E EPS are reduced by 5-6%. ■ What we recommend

We now have a 12-month DCF-based target price for SZE of HKD5.80 (formerly 6-month target price of HKD5.20), with a lower WACC assumption of 9.3% (from 10%), based on a beta of 0.66x (previously 0.78x). We do not factor in the special dividend payment from the sale of ME, as management has stated it would use the proceeds to pay tax (about CNY0.6bn) and other costs incurred from the disposal. SZE is trading at a 2016E PER of 7.9x, vs. its past-5-year average of 6.7x. We maintain our Hold (3) rating as we do not foresee near-term catalysts. The key risk is higher- or lower-than-expected traffic growth.

■ How we differ

Our 2015-16E EPS are 11% higher than the consensus, as we are more positive on a traffic recovery for QE.


14 January 2015

Shenzhen Expressway

Loss of traffic on the Qinglian Expressway a concern

The traffic diversion from the Qinglian Expressway is

unfavourable for SZE

The partially toll-free Meiguan Expressway should increase

traffic on the Jihe East and Jihe West expressways

Maintaining Hold (3) rating, with new 12-month target price of

HKD5.80; near-term catalysts seem lacking



Industrials / China

Shenzhen Expressway548 HK


Upside: 1.2%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5


Revenue change 1.7 (0.1) 1.4



90

110

130

150

170

3.0

3.9

4.8

5.6

6.5



Szhen Exp (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Shenzhen International (50.9%)


Revenue (m) 3,439 3,458 3,774


Net profit (m) 1,104 1,104 1,263


EPS change (%) 28.7 0.0 14.4

Daiwa vs Cons. EPS (%) (38.7) 10.8 11.1

PER (x) 9.1 9.1 7.9


DPS 0.152 0.152 0.174

PBR (x) 0.8 0.8 0.7

EV/EBITDA (x) 5.9 5.1 3.9

ROE (%) 10.0 9.0 9.8

Carrie Yeung

(852) 2773 8243

[email protected]

Kelvin Lau(852) 2848 4467

[email protected]


- 114 -

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Average daily traffic growth (%) 11.7 24.2 5.6 6.6 12.8 10.9 10.0 9.6

Average daily toll revenue growth (%) 14.9 22.2 5.2 1.2 9.6 5.8 5.1 5.1

Average daily traffic (vehicles/day) 669,363 831,316 877,781 935,522 1,055,179 1,170,284 1,287,033 1,411,074

Average daily toll revenue ('000/day) 3,659 7,166 7,440 7,469 7,940 8,127 8,452 9,206

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Toll revenues 1,335 2,615 2,716 2,726 2,898 2,966 3,085 3,360

Construction revenue 1,034 0 0 0 0 0 0 0

Other Revenue 58 58 131 295 265 473 373 414

Total Revenue 2,428 2,673 2,846 3,022 3,163 3,439 3,458 3,774

Other income 0 0 0 0 0 0 0 0

COGS (1,412) (678) (467) (694) (562) (573) (557) (569)

SG&A (68) (62) (88) (80) (88) (91) (91) (91)

Other op.expenses (329) (638) (715) (817) (964) (918) (976) (1,082)



Assoc/forex/extraord./others 337 213 167 122 (53) 1,690 213 228

Pre-tax profit 570 989 1,157 936 914 3,040 1,551 1,773

Tax (45) (183) (237) (210) (163) (388) (388) (443)

Min. int./pref. div./others 15 (60) (44) (42) (31) (59) (59) (67)

Net profit (reported) 540 746 875 685 720 2,594 1,104 1,263

Net profit (adjusted) 622 898 720 710 858 1,104 1,104 1,263

EPS (reported)(CNY) 0.248 0.342 0.401 0.314 0.330 1.189 0.506 0.579

EPS (adjusted)(CNY) 0.285 0.412 0.330 0.326 0.393 0.506 0.506 0.579


DPS (CNY) 0.120 0.160 0.160 0.130 0.160 0.152 0.152 0.174

EBIT 620 1,294 1,576 1,431 1,549 1,857 1,833 2,032

EBITDA 948 1,933 2,291 2,248 2,514 2,775 2,810 3,114

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 570 989 1,157 936 914 3,040 1,551 1,773


Tax paid (127) (183) (237) (210) (397) (388) (388) (443)

Change in working capital (163) 69 (236) (449) (1,353) (31) 110 (729)

Other operational CF items (511) (88) (494) (253) 791 (2,570) (1,131) (1,230)


Capex (1,029) (963) (873) (545) (611) (568) (24) (38)

Net (acquisitions)/disposals (798) (39) 12 38 101 800 800 1,100

Other investing CF items (24) 115 120 79 4 30 30 30

Cash flow from investing (1,850) (888) (741) (428) (505) 262 806 1,092

Change in debt 2,045 (240) 1,675 (395) (1,175) (271) (250) (250)


Dividends paid (262) (722) (964) (1,055) (944) (349) (778) (331)

Other financing CF items (333) 29 117 134 (3) 0 0 0

Cash flow from financing 1,450 (933) 828 (1,316) (2,121) (620) (1,028) (582)

Forex effect/others (3) 0 (5) (0) 1 0 0 0

Change in cash (57) 67 1,591 (214) (865) 1,462 1,783 1,935

Free cash flow (683) 924 635 985 1,151 1,252 1,981 1,387

Financial summary


- 115 -


Key ratios (%)


Company profile

SZE is engaged in the investment, construction, operation and management of toll highways and roads in the Pearl River Delta region, in other economically-developed regions of Guangdong province, and in other provinces in China.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 479 874 2,176 1,956 1,095 2,565 4,348 6,283

Inventory 3 3 4 3 345 345 345 345


Other current assets 490 51 212 360 303 1,448 673 674


Fixed assets 18,810 20,097 20,194 19,750 18,884 17,693 16,731 15,691



Total assets 22,254 23,050 24,609 24,209 22,840 24,875 25,090 25,925

Short-term debt 1,793 930 950 2,540 1,071 1,050 1,050 1,050




Long-term debt 8,333 8,565 10,254 8,299 8,346 8,095 7,845 7,595



Share capital 2,181 2,181 2,181 2,181 2,181 2,181 2,181 2,181



Minority interests 690 1,325 1,293 1,336 1,265 1,324 1,383 1,450


EV 18,161 18,331 18,705 18,565 17,981 16,298 14,324 12,206

Net debt/(cash) 9,647 8,621 9,029 8,883 8,322 6,580 4,547 2,362

BVPS (CNY) 3.769 3.966 4.221 4.373 4.574 5.578 5.712 6.124

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (42.3) 10.1 6.5 6.2 4.7 8.7 0.6 9.1

EBITDA (YoY) 29.7 103.8 18.6 (1.9) 11.8 10.4 1.3 10.8

Operating profit (YoY) 17.6 108.9 21.8 (9.2) 8.3 19.9 (1.3) 10.8

Net profit (YoY) 9.8 44.4 (19.8) (1.3) 20.8 28.7 0.0 14.4

Core EPS (fully-diluted) (YoY) 9.8 44.4 (19.8) (1.3) 20.8 28.7 0.0 14.4


EBITDA margin 39.1 72.3 80.5 74.4 79.5 80.7 81.2 82.5



ROAE 8.1 10.6 8.1 7.6 8.8 10.0 9.0 9.8

ROAA 3.1 4.0 3.0 2.9 3.6 4.6 4.4 5.0

ROCE 3.6 6.7 7.7 6.6 7.3 8.6 8.1 8.8

ROIC 3.4 5.7 6.6 5.7 6.5 8.2 7.2 8.6




Current ratio (x) 0.3 0.5 1.1 0.7 1.0 2.2 2.5 3.2






■ What's new

CSCI is confident about the overall outlook for 2015 due to strong demand growth from the affordable housing market. With the share price having corrected by more than 20% over the past 12 months, on the back of declining Hong Kong new contract value awarded, we see a good time to accumulate the shares. ■ What's the impact

Management has a new contract value target of HKD68bn for 2015, up 13% YoY, which we see a good chance of CSCI exceeding, as it has in past years. As such, our total new contract value forecast for CSCI is higher, at HKD71bn for 2015. Even though new contracts in Macau will start to decline in 2015 as the peak of casino construction passes, CSCI believes contract growth from Hong Kong will offset the decline in Macau. Projects from the Shatin-Central MTR link, Hopewell Centre phase 2, Kai Tak

redevelopment and public housing projects for the HOS should provide potential support for CSCI’s new contract growth in 2015. In terms of affordable housing, we forecast new contract value to increase by 33% YoY to HKD36bn for 2015. An additional share-price catalyst would be more cities using prefabricated buildings for social housing. CSCI expects more supportive policies promoting affordable housing to be announced by mid-2015. Furthermore, CSCI targets a number of asset injections in 2015 from either its parent’s overseas construction companies or construction companies with existing contracts running in China. ■ What we recommend

We are adjusting our 6-month target price of HKD16.90 to a 12-month target price of HKD17.40 now based on a PER of 11x (previously 14x) on our 2016E EPS (previously 2015E). Our target PER is based on a 25% discount (previously no discount) to its past-3-year average PER. We apply a lower PER to reflect the prevailing weak sentiment toward the stock due to concerns about its contract growth in Hong Kong, which may take a while to recover. The main risk is the government’s housing-relocation scheme being slowed down.

■ How we differ

We are more optimistic about CSCI’s contract growth in Hong Kong and China over the next few years.


14 January 2015

China St ate Con struction International

Time to bottom-fish

Affordable housing likely to remain one of the key sectors to

obtain government support in 2015

A recovery in Hong Kong contracts and an asset injection could

be additional share-price catalysts for CSCI in 2015

Recent share-price weakness provides a good bottom-fishing

opportunity for long-term investors; reiterate Buy (1) rating



Industrials / China

China State Construction International3311 HK

Target (HKD): 16.90 g 17.40

Upside: 55.9%


Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5



Net profit change - 4.3 9.4

Core EPS (FD) change - 4.3 9.4

75

84

93

101

110

10.5

11.6

12.8

13.9

15.0



Ch S Cons (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 10.62-14.70




Major shareholder China Overseas Holdings (57.1%)


Revenue (m) 33,904 43,248 53,572


Net profit (m) 3,515 4,786 6,297


EPS change (%) 26.8 36.1 31.6

Daiwa vs Cons. EPS (%) 1.2 10.0 16.5

PER (x) 12.3 9.1 6.9


DPS 0.271 0.369 0.486

PBR (x) 2.2 1.9 1.5

EV/EBITDA (x) 10.6 8.0 6.3

ROE (%) 19.6 22.2 24.4

Kelvin Lau

(852) 2848 4467

[email protected]


- 117 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

New order growth (YoY %) 20.7 45.7 21.5 21.5 23.7 32.3 17.4 15.6

Order book growth (YoY %) 16.8 43.8 37.9 17.9 32.6 34.0 26.4 21.4

Gross margin – HK (%) 5.1 6.3 7.3 7.1 7.3 6.3 6.3 6.3

Gross margin – China (%) 17.1 19.1 16.0 20.1 20.1 20.0 20.0 20.0

New contracts (HKDbn) 17.1 24.9 30.3 36.8 45.5 60.2 70.7 81.7

Year-end order backlog (HKDbn) 24.7 35.5 48.9 57.7 76.5 102.5 129.6 157.3

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Hong Kong 6,188 6,237 8,708 11,089 11,134 10,023 10,938 12,562

PRC overall 2,134 4,825 7,547 8,810 13,864 20,237 27,922 36,772

Other Revenue 1,383 921 124 2,012 2,193 3,644 4,388 4,238

Total Revenue 9,706 11,983 16,379 21,911 27,192 33,904 43,248 53,572

Other income 131 189 422 371 431 451 457 488

COGS (8,957) (10,667) (14,581) (19,192) (23,457) (29,076) (36,784) (45,251)

SG&A (366) (472) (554) (740) (1,017) (1,027) (1,068) (1,086)

Other op.expenses (22) (26) (23) 0 0 0 0 0




Pre-tax profit 801 1,333 1,844 2,541 3,193 4,096 5,626 7,441

Tax (72) (213) (334) (405) (499) (641) (880) (1,164)

Min. int./pref. div./others (54) (84) (3) (5) 79 60 40 20



EPS (reported)(HKD) 0.219 0.327 0.442 0.573 0.713 0.904 1.231 1.620

EPS (adjusted)(HKD) 0.219 0.327 0.442 0.573 0.713 0.904 1.231 1.620


DPS (HKD) 0.071 0.110 0.130 0.160 0.207 0.271 0.369 0.486

EBIT 404 926 1,463 2,237 3,030 4,123 5,716 7,573

EBITDA 493 1,007 1,643 2,349 3,150 4,251 5,853 7,723

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E



Tax paid (38) (56) (61) (131) (120) (641) (880) (1,164)

Change in working capital (617) (850) (2,418) (5,426) (6,297) (2,167) (4,357) (5,643)

Other operational CF items 0 0 0 (504) (327) (44) 21 71

Cash flow from operations 234 509 (455) (3,246) (3,259) 1,546 719 1,027

Capex (133) (365) (522) (402) (378) (450) (550) (600)

Net (acquisitions)/disposals (40) (840) (135) (28) (42) (1,500) 0 0

Other investing CF items 249 (220) 493 (73) 520 0 0 0

Cash flow from investing 76 (1,425) (164) (504) 100 (1,950) (550) (600)

Change in debt 2,512 1,393 731 3,681 5,734 3,761 1,262 2,998

Net share issues/(repurchases) 0 0 3,584 2,271 0 0 0 0

Dividends paid (187) (252) (430) (523) (703) (933) (1,176) (1,696)

Other financing CF items 0 0 (991) (407) (738) (524) (615) (691)

Cash flow from financing 2,325 1,141 2,894 5,022 4,294 2,304 (528) 611

Forex effect/others 0 0 0 (5) 36 0 0 0

Change in cash 2,635 225 2,275 1,267 1,171 1,900 (359) 1,038

Free cash flow 101 144 (977) (3,648) (3,637) 1,096 169 427

Financial summary


- 118 -


Key ratios (%)


Company profile

China State Construction International Holdings Limited (CSCI) is an integrated construction company, engaged in construction, civil-engineering operations, and other peripheral operations. It is the largest construction contractor in Hong Kong. The company has extensive international contracting experience, and is actively engaged in the infrastructure market in Mainland China.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E


Inventory 44 118 150 185 163 203 256 315


Other current assets 1,098 908 4,035 6,986 10,921 12,457 12,457 12,457


Fixed assets 1,123 1,454 1,870 2,191 2,342 2,491 2,731 3,008



Total assets 15,313 18,679 26,733 37,835 50,837 65,221 75,877 90,129

Short-term debt 249 0 1,298 50 238 3,737 1,001 1,001




Long-term debt 3,640 5,351 4,961 10,001 12,404 12,668 16,666 19,665

Other non-current liabilities 274 473 698 883 1,034 1,034 1,034 1,034


Share capital 74 74 90 97 97 97 97 97





EV 39,547 42,620 41,544 44,223 45,949 45,027 46,609 48,550

Net debt/(cash) (1,969) 1,623 778 3,168 4,516 6,342 7,964 9,925

BVPS (HKD) 1.142 1.459 2.784 3.476 4.163 5.067 6.027 7.278

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) (11.9) 23.5 36.7 33.8 24.1 24.7 27.6 23.9

EBITDA (YoY) (13.9) 104.3 63.2 43.0 34.1 35.0 37.7 32.0

Operating profit (YoY) (13.0) 128.9 58.1 52.9 35.4 36.1 38.6 32.5

Net profit (YoY) 37.8 53.7 45.5 41.4 30.1 26.8 36.1 31.6



EBITDA margin 5.1 8.4 10.0 10.7 11.6 12.5 13.5 14.4



ROAE 22.3 25.5 21.4 18.5 18.7 19.6 22.2 24.4

ROAA 5.5 6.1 6.6 6.6 6.3 6.1 6.8 7.6

ROCE 7.3 10.6 11.4 11.3 11.4 12.6 14.7 16.8

ROIC 26.7 21.3 16.3 14.5 14.0 15.2 17.1 18.6




Current ratio (x) 1.3 1.1 1.2 1.6 1.3 1.2 1.2 1.1



Free cash flow yield 0.2 0.3 n.a. n.a. n.a. 2.5 0.4 1.0



- 119 -


- 120 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected]

Regional Research Head

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

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected]

Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected]

Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 [email protected]

IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

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

Joey CHEN (852) 2848 4483 [email protected]

Steel (China)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected]

Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Carrie YEUNG (852) 2773 8243 [email protected]

Transportation – Transportation Infrastructure (Hong Kong/China)

Jibo MA (852) 2848 4489 [email protected]

Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

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

Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 [email protected]

Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected]

Property and REITs

Evon TAN (65) 6499 6546 [email protected]

Property and REITs

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


- 121 -

Daiwa’s Offices

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Disclaimer

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

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong

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

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand

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

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


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

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

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

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

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

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

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

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

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.


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For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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