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Friday, 27 January 2017
SK Hynix Inc. (Outperform) 3
2017 the year of setting a new record Daniel Kim
SK Hynix more than doubled its OP in 4Q16 on QoQ basis to Won1.54tr, 10% above street consensus.We raise our top-of-the street 2017 OP forecast by 9% and raise the target price from Won62,000 toWon66,000.
Singapore Banks 4
Lower provisions to drive further re-rating Ken Ang
Asset quality remains a key concern for investors. We designed a proprietary new framework thatshows credit cost concerns to be overblown (pages 4 and 6).
KT&G (Underperform) 5
iQOS launch in Korea likely in 1H17 Kwang Cho
We argued in our previous report that a launch of heated tobacco products, such as iQOS from PhilipMorris International (PMI), is imminent in Korea, and that this would present a significant competitivethreat to KT&G.
China Oilfield Services (Upgrade to Outperform) 6
View change; underappreciated operating leverage Aditya Suresh
We double upgrade our recommendation on China Oilfield Services (COSL) to Outperform, andincrease our one-year price target from HK$6.00 to HK$12.00. Post COSL and CNOOC's respectivestrategy presentations, the key change we make is to increase our COSL EBITDA margin assumptionby an aggregate 600 basis points to reflect management's – seemingly high – confidence on turningback to black in 2017.
EVA Precision (Outperform) 7
Better order visibility in 2017 Timothy Lam
We remain positive on EVA Precision (EVA) and expect it to see further EBIT margin recovery in 2017,driven by better order outlook from its Japanese customers.
ASE (Outperform) 8
Calbee (Underperform) 9
Chinasoft International (Outperform) 10
Dahua (A-Share) (Neutral) 11
Daio Paper (Outperform) 12
Disco (Downgrade to Neutral) 13
Hyundai E&C (Outperform) 14
Please refer to page 26 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Hyundai Mobis (Neutral) 15
Innocean Worldwide Inc (Outperform) 16
Kia Motors (Neutral) 17
Kotak Mahindra Bank (Neutral) 18
MediaTek (Outperform) 19
NAVER (Outperform) 20
ORIX Corporation (Outperform) 21
PTTEP (Neutral) 22
China Coal sector 23
Japan plant engineering 24
Macquarie Commodities Comment 25
2
Please refer to page 9 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
000660 KS Outperform
Price (at CLOSE#, 26 Jan 2017) Won51,700
Valuation Won 66,000 - Price to Book
12-month target Won 66,000
Upside/Downside % +27.7
12-month TSR % +29.6
Volatility Index Medium
GICS sector Semiconductors & Semiconductor Equipment
Market cap Wonbn 37,638
Market cap US$m 32,282
Free float % 76
30-day avg turnover US$m 116.5
Number shares on issue m 728.0
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 18,798 17,198 24,137 25,631 EBIT bn 5,336 3,277 8,250 9,137 EBIT growth % 4.4 -38.6 151.8 10.7
Reported profit bn 4,324 2,986 6,323 6,921 Adjusted profit bn 4,322 2,980 6,319 6,917 EPS rep Won 5,939 4,101 8,686 9,507 EPS rep growth % 2.0 -30.9 111.8 9.5 EPS adj Won 5,937 4,093 8,680 9,502 EPS adj growth % 2.2 -31.1 112.1 9.5 PER rep x 8.7 12.6 6.0 5.4 PER adj x 8.7 12.6 6.0 5.4 Total DPS Won 500 600 1,000 1,200 Total div yield % 1.0 1.2 1.9 2.3 ROA % 18.9 10.6 23.8 22.8
ROE % 21.9 13.1 23.6 21.2 EV/EBITDA x 4.2 5.1 3.0 2.7
Net debt/equity % -4.5 0.8 -5.1 -14.4 P/BV x 1.8 1.6 1.3 1.1
000660 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) Daniel Kim +82 2 3705 8641 [email protected] Ryan Kim +822 3705 8771 [email protected]
26 January 2017 Macquarie Securities Korea Limited
SK Hynix Inc. 2017 the year of setting a new record Event
SK Hynix more than doubled its OP in 4Q16 on QoQ basis to Won1.54tr, 10%
above street consensus. We raise our top-of-the street 2017 OP forecast by
9% and raise the target price from Won62,000 to Won66,000. Outperform.
Impact
Record-high sales of Won5.36tr in the early phase of memory upturn.
DRAM sales jumped 32% QoQ to Won3.9tr (72% of sales) in 4Q16, driven by
14% bit growth and 13% ASP rise. We calculate DRAM margin to have
expanded to 35% from 23% in the previous quarter. Meanwhile, NAND
margin improved sharply, from 3% in 3Q16 to 12% in 4Q16, on 11% QoQ rise
in sales to Won1.36tr. Hynix announced it would pay a cash dividend of
Won600 per share (versus Won500 in 2015), despite a profit decline for the
full year. This is to keep the promise of 20% payout ratio.
Surging eMCP (multi-chip package) demand from China. Chinese
smartphone vendors have low inventories of eMCP, according to SK Hynix,
belying sceptics’ fears of a supply glut. The company says it is unable to meet
phone vendors’ growing demand for eMCP (DRAM+NAND). We have long
highlighted the structural trend of 4G phone upgrade demand in emerging
markets and hardware spec competition among Chinese smartphone
vendors. eMCP is virtually a duopoly between Samsung and Hynix.
The best is yet to come in DRAM. Hynix expects DRAM demand growth of
20% in 2017, slightly exceeding supply growth in the year, resulting in
prolonged tight supply. In 1Q17, it expects a low-single-digit decline in DRAM
bit shipment, as it depleted inventory in 2016. Its focus this year is on
continued geometry migration to 21nm node (to over 60% by year-end) and
18nm node (mass production from 3Q17). While the ground floor of the M14
fab is nearly full, the remaining clean-room space is for future geometry
migration to 21nm/18nm. The company expects the new DRAM capacity in
Wuxi, China should come on stream in 2019.
Planar to 3D NAND cross-over likely in end-2017. Half of M14 fab’s 2nd
floor should start mass production of 3D NAND in 3Q17, according to
management, along with a shift to 72-layer count. As a result, 3D NAND bit
portion should rise from 10% in 2016-end to over 50% in 2017-end, achieving
cross-over. The other half on the second floor will be clean-room ready by
2017-end. New 3D NAND fab in Cheongju will be also commissioned in 2019.
Earnings and target price revision
We raise our 2017 OP forecast by 9%. TP raised from Won62,000 to
Won66,000, on the same up-cycle multiple of 1.6x to 2017E book-value.
Price catalyst
12-month price target: Won66,000 based on a Price to Book methodology.
Catalyst: Memory semicon prices. Execution in 3D NAND.
Action and recommendation
We believe it’s not too late to add more Hynix to one’s position, considering
the improved visibility in the memory market, favourable competitive
landscape and accelerating earnings momentum. Outperform.
3
Please refer to page 46 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
SINGAPORE
Unsecured low-quality ~5% of exposure
UOB did not disclose its high-quality exposure Source: Macquarie Research, January 2017
Ratings and target prices
Ticker Mkt cap (US$bn) Rating
Target price TSR
P/BV (x)
Div yld
DBS SP 33.6 OP S$21.5 +18% 0.99 3.2% OCBC SP 27.8 OP S$10.0 +10% 1.04 3.8% UOB SP 24.4 N S$20.5 +2% 1.05 3.6%
Source: FactSet, Macquarie Research. Share prices as on 24 January 2017.
Inside
Lower provisions to drive further re-rating 3
Asset quality analysis – DBS most solid 4
Singapore banks: Asset quality stress test10
Base case: Asset quality stress peaked 12
Higher rates in a low growth environment 14
Asset quality trends improving globally,
declining domestically 17
Appendix – Valuation and bank statistics 24
Appendix – Asset quality statistics 27
DBS 31
UOB 36
OCBC 41
Analyst(s) Macquarie Capital Securities (Singapore) Pte. Limited Ken Ang, CFA +65 6601 0836 [email protected] Zhi Rong Phua +65 6601 0893 [email protected] Macquarie Capital Limited Scott Russell, FIAA +852 3922 3567 [email protected]
26 January 2017
Singapore Banks Lower provisions to drive further re-rating Asset quality remains a key concern for investors. We designed a proprietary
new framework that shows credit cost concerns to be overblown (pages 4 and 6).
Our analysis suggests that banks remain inexpensive at 1.0x PBV vs 5-yr
average of 1.21x. We think positive surprises to street estimates of loan loss
provisions will drive further re-rating for the banks. We resume coverage with
Outperform ratings on DBS (top pick and preferred play on this theme) and
OCBC, and Neutral on UOB. We transfer coverage to Ken Ang.
We think consensus is 20% too high on provisions
Our comprehensive bottom-up analysis of individual exposures (i.e. not by
sectors or management guidance) leverages the banks’ Pillar 3 Quantitative
disclosures since 2008, with a primary focus on (i) estimated probability of default
and (ii) collateralised exposure data. Our key finding is that loan loss provisions
(LLP) are likely to come in 20% below consensus estimates for 3 reasons:
(i) Quality of banks’ exposure has improved
High-risk exposures, which are mainly unsecured & low-quality exposure, have
halved to just 5% of total exposure (see chart on the left) since 2009 GFC levels.
High-quality (including mortgage) exposures have increased significantly, from
46% of total exposure during the GFC to 60% currently. Due to the build-up of
high-quality collaterals, the proportion of unsecured exposures has also
decreased. Despite recent asset quality stress, the quality of exposures has
broadly held up well with little credit migration. DBS has shown the most
improvement in portfolio quality since 2009.
(ii) Unlikely that provisioning ratio rises back to GFC levels
Given the improvements in asset quality, we see overall LLP ratios coming in
significantly lower versus GFC levels. For example, while stress levels on high-
risk exposures in 2016 were comparable to the GFC, overall LLP ratios were
only moderately higher due to the improved asset mix. Moreover, we think the
2016 provisioning taken on high-risk exposures was conservative. With the
recent rebound in commodity prices, we think the worst is over, and expect
provisions from existing NPLs to fall from here.
(iii) LLP estimates below consensus even after including a buffer
Our loan loss provision estimates remain up to 20% below consensus, even after
including an additional buffer for new NPL formation. This buffer provides for any
incremental weakness arising from domestic low-quality exposures, such as
SME, manufacturing and general commerce ex-trade finance. We think our total
estimate of provision on risky exposures is conservative at 4% (2x higher than
levels seen post GFC in 2010). Moreover, the risk in the SME segment
specifically will likely be mitigated as ~80% is secured.
Sector positioning – optimistic on quality despite little growth
Based on our asset quality analysis, we resume coverage of the SG banks with
a positive view. We see further share price upsides from asset quality surprising
on improving trends, and rising interest rates driving improvements in global
sentiment and net interest income. DBS is our top pick and preferred play on this
theme for 4 reasons: (i) most improved and best quality exposure among SG
banks; (ii) most likely to surprise street estimates positively on provisions and
earnings; (iii) biggest beneficiary of rising rates; (iv) lowest P/BV multiple
currently, while having the highest sustainable RoE based on our estimates.
4% 6% 6% 5%
securedsecured secured secured
22%27%
31%27%
65%
58%53%
59%
0%
10%
20%
30%
40%
50%
60%
DBS UOB OCBC SG banks
SG banks - Breakdown of exposure
Unsecured low quality Unsecured mid quality
High quality
4
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
033780 KS Underperform
Price (at 09:31, 26 Jan 2017 GMT) Won100,500
Valuation Won 102,578 - DCF (WACC 8.0%, beta 1.0, ERP 6.0%, RFR 2.0%)
12-month target Won 82,000
Upside/Downside % -18.4
12-month TSR % -14.8
Volatility Index Low
GICS sector Food, Beverage & Tobacco
Market cap Wonbn
13,799
Market cap US$m 11,891
30-day avg turnover US$m 23.3
Number shares on issue m 137.3
Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E
Revenue bn 4,503.3 4,406.4 4,274.0 4,270.4 EBIT bn 1,470.1 1,337.8 1,243.3 1,227.1 EBIT growth % 7.6 -9.0 -7.1 -1.3 Reported profit bn 1,230.9 998.4 934.9 927.9 Adjusted profit bn 1,161.0 998.4 934.9 927.9 EPS rep Won 9,759 7,915 7,412 7,356 EPS rep growth % 18.7 -18.9 -6.4 -0.8 EPS adj Won 9,205 7,915 7,412 7,356 EPS adj growth % 12.8 -14.0 -6.4 -0.8 PER rep x 10.3 12.7 13.6 13.7
PER adj x 10.9 12.7 13.6 13.7 Total DPS Won 3,400 3,600 3,600 3,600 Total div yield % 3.4 3.6 3.6 3.6 ROA % 16.4 14.1 12.5 11.8 ROE % 17.5 13.7 12.0 11.2
EV/EBITDA x 7.3 8.0 8.5 8.6 Net debt/equity % -10.9 -17.7 -23.3 -27.4 P/BV x 1.8 1.7 1.6 1.5
033780 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted)
Analyst(s) Kwang Cho +82 2 3705 4953 [email protected] Rose Kim +82 2 3705 9815 [email protected]
26 January 2017 Macquarie Securities Korea Limited
KT&G iQOS launch in Korea likely in 1H17 Conclusion
We argued in our previous report that a launch of heated tobacco products,
such as iQOS from Philip Morris International (PMI), is imminent in Korea, and
that this would present a significant competitive threat to KT&G. Management
said during 4Q16 results presentation last week that it expects a launch of
iQOS in 1H17.
Impact
Quantifying a potential market share loss for KT&G: Although we had
previously highlighted a threat from iQOS, we had not assumed any market
share loss for KT&G because the timing of launch in Korea was uncertain.
However, as we now have more visibility on a launch schedule, we finally cut
our market share forecast. According to PMI, iQOS market share in Japan
grew from 1.6% in April to 4.9% in October 2016, which implies it was gaining
1.7ppt per quarter (Fig 1). We assume the pace of market share gain will be
only at half of Japan’s in Korea. Although the two countries share many
cultural similarities, the main difference is that the sale of liquid-based e-
cigarettes was effectively banned in Japan, while they have been allowed for
years in Korea. Thus, within the e-cigarette market, Koreans have alternatives
other than tobacco leaf-based heated cigarettes, such as iQOS. Thus, we
assume iQOS will gain market share at a pace of 0.8ppt per quarter after
being launched at the end of 2Q17 and grab a 5% share by the end of 2018
(Fig 2). Then, we assume 60% of such gain will come from KT&G, in-line with
its current market share. Such assumptions lead us to project KT&G’s market
share will fall from 59.2% in 2016 to 56.1% in 2018 (Fig 3).
Koreans loved iQOS more than the Japanese in the previous market
study: PMI says it conducted a pre-market study for iQOS in five countries
(Korea, Germany, Japan, Italy and Switzerland) in 2013-15. This study found
36.2% of Koreans converted to iQOS after a four-week observation period,
which was the highest conversion rate among the five countries. Also, once
the participants switched to iQOS, only 3.3% of Koreans reverted to
combustible cigarettes. Thus, we recognise the risk in our assumption that
iQOS will grow only at half the pace in Korea compared to Japan.
Earnings and target price revision
We cut our 2017-18 net profit estimates by 2-4% (Fig 4). Our new earnings
estimate for 2017 is 12% below consensus (Fig 5). We lower our TP from
Won88,000 to Won82,000, by applying the same target PER of 11x (1
standard deviation below the historical mean since 2011) to our 2018 EPS
estimate.
Price catalyst
12-month price target: Won82,000 based on a PER methodology.
Catalyst: Launch of iQOS in Korea
Action and recommendation
We reiterate Underperform.
5
Please refer to page 14 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
HONG KONG
2883 HK Outperform
Price (at 08:50, 26 Jan 2017 GMT) HK$8.29
Valuation HK$ 7.00 - DCF (WACC 8.2%, beta 1.1, ERP 6.8%, RFR 2.0%, TGR 3.0%)
12-month target HK$ 12.00
Upside/Downside % +44.8
12-month TSR % +44.9
Volatility Index High
GICS sector Energy
Market cap HK$m 37,264
Market cap US$m 4,803
Free float % 33
30-day avg turnover US$m 14.6
Number shares on issue m 4,495
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue m 23,417 15,129 18,097 20,409 EBITDA m 5,845 -4605 4,760 5,777 EBITDA growth % -52.1 nmf nmf 21.4 Reported profit m 1,109 -9598 185 1,180 Adjusted profit m 2,098 -2458 185 1,180 EPS adj Rmb 0.44 -0.52 0.04 0.25 Total div yield % 0.9 0.0 0.2 1.0 ROA % 1.8 -10.4 1.0 2.4 ROE % 4.5 -5.9 0.5 3.1 EV/EBITDA x 10.0 -13.3 12.2 10.1 Net debt/equity % 48.5 60.8 59.8 51.8 P/BV x 0.8 1.0 0.9 0.9
Source: FactSet, Macquarie Research, January 2017
(all figures in Rmb unless noted, TP in HKD)
2883 HK rel HSI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Rmb unless noted, TP in HKD)
Analyst(s) Aditya Suresh, CFA +852 3922 1265 [email protected]
26 January 2017 Macquarie Capital Limited
China Oilfield Services View change; underappreciated operating leverage We double upgrade our recommendation on China Oilfield Services
(COSL) to Outperform, and increase our one-year price target from
HK$6.00 to HK$12.00. Post COSL and CNOOC’s respective strategy
presentations, the key change we make is to increase our COSL EBITDA
margin assumption by an aggregate 600 basis points to reflect management’s
– seemingly high – confidence on turning back to black in 2017. This in turn,
translates to an average c.33% increase in our EBITDA estimates and at the
current capital structure implies a more meaningful uplift to COSL’s equity value.
What’s not changed?
(1) COSL’s latest fleet status report merely supported our base case
modelling. We model COSL’s jack-up fleet utilization at 70% in 2017 from 54%
in 2016, and semi-sub utilization at 49% from 37%. (fig 9, 13)
(2) We assume day-rates for both jack-up and semi-subs remain
suppressed and continue to model no up-tick in our forecast horizon. We model
COSL’s jack-up day-rates at US$70K/day for 2017-20e, and semi-sub rates at
US$165K/day. (see Global offshore drilling market facing a slow rebalance and
page 4-5 for global utilization and rate trends)
(3) We continue to apply a bull 15x one-year forward EV-EBITDA (page 7-9), to
reflect the turnaround in CNOOC’s capex profile and the implicit OPEC put on
oil. In our view, this is appropriate as our 2017-18E EBITDA estimate for COSL
is still only effectively half of what the company earned in 2012-14.
Material margin expansion likely with higher fleet utilization
COSL management expects EBIT for all four segments and group net income to
turn positive in 2017. At our Rmb18bn revenue estimate this guidance then
implies that COSL has cut operating expenses by around Rmb8bn from 2014 to
Rmb17bn today. We reflect this cost structure (fig 4-5) and now model EBITDA
margins improving from a low of 18% to 25-35% in 2017-19 (prior 20-25%). We
note that this level of margin is in-sync with that earned by other global offshore
drillers (fig 6).
The three-year buy case with 100+% upside
On a three-year view, our new bull case on COSL is HK$20/share, assuming: (a)
CNOOC capex rises to Rmb100 billion (near peak) and allocates 60% of its
capex offshore China, (b) EBITDA margins rise to 40%, and (c) a mid-cycle
target EV-EBITDA of 10x. See scenarios overleaf.
Significant risks remain
The key risk to our new base case is the sustainability of the cuts to operating
expenses. With COSL’s EBITDA margin ranging between 18% (2016) and 47%
(2010) over the past ten years, we note that every 500 basis point change in
margin assumption makes a significant c.25% impact on EBITDA (fig 3). Other
risks include: sub-$50 oil price and in-turn lower CNOOC capex; lower
negotiated day-rates with CNOOC (to be confirmed in end-March); and lower
day-rates for COSL’s semi-subs working overseas (1H16 boosted by one-off
compensation). Our bear case valuation scenario implies 30% downside.
6
Please refer to page 7 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
HONG KONG
838 HK Outperform
Price (at 08:50, 25 Jan 2017 GMT) HK$1.01
Valuation HK$ 1.38 - DCF (WACC 9.8%, beta 1.0, ERP 10.1%, RFR 3.0%, TGR 1.5%)
12-month target HK$ 1.38
Upside/Downside % +36.6
12-month TSR % +39.1
Volatility Index High
GICS sector Capital Goods
Market cap HK$m 1,880
Market cap US$m 242
Free float % 56
30-day avg turnover US$m 0.4
Number shares on issue m 1,861
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue m 3,533.0 3,118.5 3,403.0 3,987.2 EBIT m 275.2 89.9 194.9 310.0 EBIT growth % -20.3 -67.3 116.8 59.1 Reported profit m 206.0 42.0 144.3 225.3 Adjusted profit m 223.0 42.2 144.3 225.3 EPS rep ¢ 11.1 2.2 7.6 11.9 EPS rep growth % -29.7 -80.0 243.3 56.1 EPS adj ¢ 12.0 2.2 7.6 11.9 EPS adj growth % -24.0 -81.4 241.6 56.1 PER rep x 9.1 45.4 13.2 8.5 PER adj x 8.4 45.2 13.2 8.5 Total DPS ¢ 3.3 0.7 2.3 3.6 Total div yield % 3.3 0.7 2.3 3.5 ROA % 5.3 1.6 3.4 5.2 ROE % 8.6 1.5 5.1 7.7 EV/EBITDA x 3.9 5.8 4.2 3.2 Net debt/equity % 5.7 -7.7 -6.4 -5.1 P/BV x 0.7 0.7 0.7 0.6
838 HK rel HSI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in HKD unless noted)
Analyst(s) Timothy Lam +852 3922 1086 [email protected]
26 January 2017 Macquarie Capital Limited
EVA Precision Better order visibility in 2017 Conclusion
We remain positive on EVA Precision (EVA) and expect it to see further EBIT
margin recovery in 2017, driven by better order outlook from its Japanese
customers. We expect new orders from further integration of printer parts and
higher shipment volume for existing moulds. Maintain OP, as we raise our
DCF-based TP to HK$1.38 (from HK$1.28).
Although 2016 NP faced a sharp YoY decline, affected by lower shipments,
we expect shipments and EBIT margins to normalise in 2017E. We now
forecast NP of HK$144m, +242% YoY, driven by a low base and better
operating margins. We forecast 2017E EPS to reach HK$0.08.
Near-term catalysts are improvements in order volume for its key customers,
orders from the auto division with domestic carmakers, and operating cost
cuts.
Impact
We believe EVA’s order recovery is sustainable in 2017, after inventory
destocking in 2016. We believe EVA will take market share, driven by new
integrated moulds and by consolidation of equipment vendors.
We expect EVA to see ~10% YoY sales growth in 2017, and for the GP
margin to recover 150bps from 24.7% to 26.2% to drive 39% EBITDA YoY
growth.
EVA’s materials are obtained from dedicated vendors, and its product ASPs
are billed on a cost-plus model, thus less affected by spot price fluctuations.
Earnings and target price revision
We are raising our 2017E EPS by 6% to factor in higher sales and slightly
better operating leverage.
Our DCF-based TP of HK$1.38 equates to 18x 2017E PER and 12x 2018E
PER. We expect sector consolidation will help EVA broaden its product mix
and see more sustainable earnings growth metric.
Price catalyst
12-month price target: HK$1.38 based on a DCF methodology.
Catalyst: 1) Earnings result and guidance in end-March; 2) clarity on the order
trend of its key customers for FY17; 3) new orders for its automotive segment.
Action and recommendation
We re-iterate our OP rating on EVA. While the company’s earnings have been
affected sharply by its operating leverage, we believe there is significant
upside potential in the coming 12-24 months, with its current valuation at 0.7x
book and as ROE may return to ~10% as order visibility improves.
Path to 100% Upside We view EVA Precision as an Emerging Leader that can potentially generate a 100% return over three years. See inside for details
Macquarie Governance and Risk Score (MGRS) On our proprietary Governance and Risk Score EVA Precision scores in the third quartile of our current universe coverage.
7
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
TAIWAN
2311 TT Outperform
Price (at 08:50, 26 Jan 2017 GMT) NT$34.30
Valuation NT$ 42.00-43.00
- Price to Book
12-month target NT$ 42.50
Upside/Downside % +23.9
12-month TSR % +29.7
Volatility Index Medium
GICS sector Semiconductors & Semiconductor Equipment
Market cap NT$m 272,513
Market cap US$m 8,698
30-day avg turnover US$m 10.8
Number shares on issue m 7,945
Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E
Revenue bn 274.9 304.4 339.4 380.0 Reported profit bn 21.7 25.1 29.7 34.5 EPS rep NT$ 2.74 3.17 3.74 4.34 EPS rep growth % 12.5 15.5 18.3 16.0 PER rep x 12.5 10.8 9.2 7.9 Total DPS NT$ 1.73 1.99 2.36 2.73 Total div yield % 5.0 5.8 6.9 8.0
ROA % 7.4 8.2 9.0 9.9 ROE % 12.8 14.4 16.1 17.6 EV/EBITDA x 6.1 5.7 5.3 4.9 Net debt/equity % 43.2 47.1 40.2 33.7 P/BV x 1.6 1.5 1.4 1.3
2311 TT rel TAIEX performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in NT$ unless noted, TP in TWD)
Analyst(s) Macquarie Capital Limited, Taiwan Securities Branch Patrick Liao +886 2 2734 7515 [email protected] Lynn Luo +886 2 2734 7534 [email protected] Patrick Liao +886 2 2734 7515 [email protected] Macquarie Capital Limited Allen Chang +852 3922 1136 [email protected]
26 January 2017
ASE Revenue growth to resume in 2017 Event
ASE reported 4Q16 results and issued its 1Q17 outlook on Thursday (Jan
26). 4Q16 earnings beat on better margins and non-op gains. 1Q17 guidance
was in line with seasonality. ASE expects 2017 revenue growth and capex to
be higher than 2016’s and is targeting a continued improvement in profitability.
We reiterate our Outperform rating with a target price of NT$42.5.
Impact
4Q16 beat on better margins and non-op gains: Previously announced
sales of NT$77.1bn (+6% QoQ) were in line with expectations. Gross margin
improved to 19.9% from 19.4% in 3Q16, with both the IC ATM and EMS
segments’ gross margins better than guidance. Operating margin also
increased in 3Q16, to 10.5% from 10.2%. Non-operating gains were mainly
from ECB valuation. Overall, 4Q16 earnings beat our/consensus estimates by
31–41%.
1Q17 in line with seasonality: ASE expects a normal seasonal pattern for
1Q17. For the IC ATM segment, it is guiding for revenue to decline ~11%
QoQ, with the gross margin sliding to ~23.5% (vs 26.8% in 4Q16). For the
EMS segment, the company is guiding for revenue to drop ~17% QoQ, and
the gross margin would be ~9.7% (vs 10.4% in 4Q16). Overall, we model a
13% QoQ decrease in ASE’s 1Q17 revenue, with gross margin at 17.8%.
Revenue growth to resume in 2017, profitability to improve: Although
ASE’s 2016 revenue saw a 3% decline, the company managed to grow
earnings 13%, thanks to the SiP rebalance. For 2017, we expect ASE to
resume top-line growth and to continue improving profitability and technology
capabilities with higher capex. ASE sees stronger demand for bumping, FC,
WLP and Fan-out this year. In particular, the company is planning to increase
Fan-out capacity from 10k WPM currently to 25k WPM by end-2017. ASE is
also targeting completion this year of the SPIL transaction, which is currently
under review by China MOFCOM and the US FTC.
Earnings and target price revision
We have factored in 4Q16 results and are fine-tuning our 2017/18E EPS by
less than 1%. Therefore, we are maintaining our target price of NT$42.5.
Price catalyst
12-month price target: NT$42.50 based on a Price to Book methodology.
Catalyst: Monthly sales, earnings results/outlook, progress of new SiP
products, and market demand.
Action and recommendation
We reiterate our Outperform rating with target price of NT$42.5 (1.9x 2017E
PBV). With more SiP products under development, we believe ASE is
expanding its addressable market. The SiP business rebalancing should help
ASE improve its margin. We expect ASE to continue outgrowing peers, and
we forecast strong earnings growth with decent dividend yields in 2017–19.
8
Please refer to page 5 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
JAPAN
2229 JP Underperform
Price (at 15:09, 25 Jan 2017 GMT) ¥3,485
Valuation ¥ 3,000-3,700
- DCF
12-month target ¥ 3,100
Upside/Downside % -11.0
12-month TSR % -9.9
Volatility Index Medium
GICS sector Food, Beverage & Tobacco
Market cap ¥m 466,327
Market cap US$m 4,116
30-day avg turnover US$m 15.8
Number shares on issue m 133.8
Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E
Revenue bn 246.1 253.5 268.8 284.1 EBIT bn 28.1 29.6 31.3 33.9 EBIT growth % 16.3 5.2 5.7 8.3 Recurring profit bn 26.5 29.7 31.4 34.0 Reported profit bn 16.8 17.7 18.7 20.2 Adjusted profit bn 17.9 18.4 19.4 20.9 EPS rep ¥ 125.9 132.5 140.0 151.2 EPS rep growth % 18.6 5.3 5.6 8.0 EPS adj ¥ 134.2 137.9 145.2 156.5 EPS adj growth % 10.5 2.7 5.3 7.7
PER rep x 27.7 26.3 24.9 23.0 PER adj x 26.0 25.3 24.0 22.3 Total DPS ¥ 35.0 40.0 42.0 45.0 Total div yield % 1.0 1.1 1.2 1.3 ROA % 16.7 16.3 15.9 15.9
ROE % 15.5 14.5 13.8 13.5 EV/EBITDA x 11.4 11.1 10.4 9.7 Net debt/equity % -39.1 -41.7 -44.2 -46.7 P/BV x 3.8 3.5 3.2 2.9
2229 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in JPY unless noted)
Analyst(s) Satsuki Kawasaki +81 3 3512 7879 [email protected]
26 January 2017 Macquarie Capital Securities (Japan) Limited
Calbee Nikkei 3Q preview should be viewed with caution Conclusion
On January 26, the Nikkei reported that Calbee was expected to announce
1Q-3Q operating profit of around ¥23.5bn (+8% YoY; our forecast: ¥22.5bn).
Based on the Nikkei preview, 3Q (Oct-Dec) operating profit came to ¥9.7bn
(+7% YoY) versus our ¥8.8bn (-3%) forecast.
We believe the report could lift the share price in the short term, but also that
factors behind 3Q profit growth need to be examined carefully.
Impact
We believe sales trends for Frugra brand cereal are the main reason for the
difference between our forecasts and the Nikkei preview estimates. We
estimate Frugra sales grew by around 15% YoY through October-November,
but the preview says 1-3Q sales surged more than 50% YoY. If the Nikkei
preview is accurate, 3Q Frugra sales are likely to be up more than 50% YoY.
The preview also said that North America business results failed to improve in
Oct-Dec, but that a real recovery was expected from Jan-Mar onwards. This is
in line with our forecast.
Earnings and target price revision
We maintain our forecasts and ¥3,100 target price.
Price catalyst
12-month price target: ¥3,100 based on a Price to Book methodology.
Catalyst: Results that illustrate the limitations of an earnings structure
dependent on domestic sales growth
Action and recommendation
We maintain our Underperform rating.
9
Please refer to page 7 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
HONG KONG
354 HK Outperform
Price (at 08:50, 26 Jan 2017 GMT) HK$3.71
Valuation HK$ 4.50 - PER
12-month target HK$ 4.50
Upside/Downside % +21.3
12-month TSR % +21.3
Volatility Index High
GICS sector Software & Services
Market cap HK$m 8,869
Market cap US$m 1,143
Free float % 85
30-day avg turnover US$m 3.8
Number shares on issue m 2,391
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue m 5,129.1 6,021.5 7,478.8 9,071.6 EBIT m 522.0 601.3 764.8 966.9 EBIT growth % 30.4 15.2 27.2 26.4 Reported profit m 280.1 412.6 493.4 627.8 Adjusted profit m 280.1 412.6 493.4 627.8 EPS rep Rmb 0.13 0.18 0.21 0.27
EPS rep growth % 25.1 32.3 19.6 27.2 EPS adj Rmb 0.13 0.18 0.21 0.27 EPS adj growth % 25.1 32.3 19.6 27.2 PER rep x 24.7 18.7 15.6 12.3 PER adj x 24.7 18.7 15.6 12.3 Total DPS Rmb 0.00 0.00 0.00 0.00 Total div yield % 0.0 0.0 0.0 0.0 ROA % 8.9 8.7 9.3 10.0 ROE % 9.8 11.9 12.6 14.1
EV/EBITDA x 11.4 10.7 8.3 6.6 Net debt/equity % 9.7 16.0 18.8 15.5 P/BV x 2.0 1.9 1.7 1.5
354 HK rel HSI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Rmb unless noted, TP in HKD)
Analyst(s) Timothy Lam +852 3922 1086 [email protected]
26 January 2017 Macquarie Capital Limited
Chinasoft International Staffing up in Xi’an to Drive Sales Conclusion
We believe Chinasoft (CS) will utilise its employee base in Xi’an, which
accounted for nearly a quarter of its total employees at end-2016, to support
order growth from Huawei and multinational banks. Its lower cost base will
allow CS to compete for solutions-based business, and raise its operating and
ROE metric in FY17E.
We reiterate our Outperform rating. We expect the company to see 24% YoY
sales growth in FY17, with 20% EPS growth to Rmb0.21.
Impact
Chinasoft has been expanding its employee base, reaching 40k employees
(from 30k a year ago), with new staff mainly located at its Xi’an site and in
Shenzhen. As the company expands in the western region, it will allow
Chinasoft to compete for outsourcing projects that are more sensitive to
headcount costs. Its customers will also be able to get better services as CS
builds expertise along its key telco and financial customers.
CS obtained 90% YoY growth with Huawei in 1H16; we expect full-year
growth to be >50%, with a number of solution-based projects in its pipeline for
FY17/18E.
CS has also been generating traction with new financial customers, as it
expands its servicing capability in Southeast Asia.
Earnings and target price revision
We raise our FY17E and FY18E EPS by 2% to reflect stronger sales from
Huawei, and customer base expansion; our TP remains HK$4.50.
Price catalyst
12-month price target: HK$4.50 based on a PER methodology.
Catalyst: 1) Order gains from new customers; 2) rising revenue per employee
metric, to offset the rise in labour costs; and 3) improved profitability from its
JointForce platform.
Action and recommendation
Chinasoft has been one of the top-10 buys (in terms of % holding) via the
Shenzhen-Hong Kong Connect scheme, which started in December 2016. We
expect further interest from mainland China investors, given its strong growth
and its relationship with Huawei Technologies.
We believe the company’s business model is well fitted for the IT services
upgrade expected by telecom and financial vendors. Upside catalysts are 1)
clarity on its new customer growth; 2) improvement in its operating cash flows,
or better working capital management; and, 3) new MNC customers
accounting for a higher percentage of sales.
10
Please refer to page 5 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
CHINA
002236 CH Neutral
Price (at 15:09, 25 Jan 2017 GMT) Rmb13.71
Valuation Rmb 14.50 - PER
12-month target Rmb 14.50
Upside/Downside % +5.8
12-month TSR % +6.5
Volatility Index High
GICS sector Technology Hardware & Equipment
Market cap Rmbm 39,751
Market cap US$m 5,797
Free float % 76
30-day avg turnover US$m 25.4
Number shares on issue m 2,899
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue m 10,078 13,329 15,841 20,195 EBITDA m 1,635 2,063 2,501 3,058 EBITDA growth % 26.7 26.1 21.3 22.3 EBIT m 1,544 1,978 2,375 2,895 EBIT growth % 27.4 28.1 20.1 21.9 Reported profit m 1,372 1,830 2,232 2,746
EPS rep Rmb 1.18 0.60 0.73 0.89 EPS rep growth % 192.1 -49.6 22.0 23.0 PER rep x 11.6 23.0 18.9 15.4 Total DPS Rmb 0.10 0.08 0.10 0.12 Total div yield % 0.7 0.6 0.7 0.9 ROA % 15.8 15.9 16.0 16.3 ROE % 23.5 25.2 25.0 24.9 EV/EBITDA x 24.0 20.1 16.6 13.6 Net debt/equity % -19.1 -27.1 -40.9 -47.7
P/BV x 5.6 4.8 4.0 3.2
002236 CH rel CSI 300 performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Rmb unless noted, TP in CNY)
Analyst(s) Allen Chang +852 3922 1136 [email protected] Verena Jeng +852 3922 3766 [email protected] Chris Yu +86 21 24129024 [email protected]
26 January 2017 Macquarie Capital Limited
Dahua (A-Share) Safe city: rising total solution Conclusion
Safe City in Xinjiang: Dahua announced its new framework agreement with
Xinjiang Shache County government on Safe City on Jan 26. The
announcement said this framework agreement would not significantly impact
2017 revenues and net profit. We are positive on Dahua’s Safe City projects,
given it will raise the total solution portion in the long term, supporting the
company’s gross margin. We remain Neutral on Dahua and prefer Hikvision
(002415 CH, Rmb26.06, OP, TP: Rmb32.00) from a valuation perspective.
Impact
Safe City framework agreement: Dahua signed a framework agreement
with Xinjiang Shache County government on Safe City. The investment
amount has not yet been finalised but is estimated at Rmb4bn (US$562m),
paid by the county government. Given it is still a framework agreement,
management expects no significant impact to 2017 revenues and net profit.
4Q16 preliminary results in line: Dahua released 4Q16 preliminary results
on Jan 16 (report link) and the full results will be released on April 24. 4Q16
preliminary revenue of Rmb5.4bn (+78% QoQ, +26% YoY) was in line with
the street’s estimate of Rmb5.3bn. Net income of Rmb761m (+111% QoQ,
+24% YoY) was also in line with the Street’s estimate of Rmb790m and the
company’s midpoint guidance of Rmb714m.
Surveillance – toward total solution: Dahua will continue to work on total
solutions to drive its surveillance business, especially in China. Management
guides to continue to work closely with local governments on Safe City, Smart
City projects in the coming years. We are positive on the strategy, given the
total solution could better support its GM in the long term.
Robot – leveraging surveillance expertise: Dahua’s first self-designed
service robot, Lechange Social Robot (link, Jul 7) was released in 2H16 with a
selling price of Rmb3,999 (US$598). We are positive on Dahua’s move of
leveraging its existing surveillance strength (facial recognition and
surveillance software) into diversified areas, although the near-term earnings
contribution may be limited. Read-across to our recent Robot initiation.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rmb14.50 based on a PER methodology.
Catalyst: 1Q17 results
Action and recommendation
Maintain Neutral.
11
Please refer to page 13 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
JAPAN
3880 JP Outperform
Price (at 15:09, 25 Jan 2017 GMT) ¥1,289
Valuation ¥ 1,700-2,000
- DCF
12-month target ¥ 1,400
Upside/Downside % +8.6
12-month TSR % +9.5
Volatility Index Medium
GICS sector Materials
Market cap ¥m 192,511
Market cap US$m 1,699
30-day avg turnover US$m 1.9
Number shares on issue m 149.3
Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E
Revenue bn 474.1 475.8 492.9 512.0
EBIT bn 24.3 25.0 26.5 29.5 EBIT growth % 11.6 2.8 6.0 11.3 Recurring profit bn 21.3 21.7 24.7 27.7 Reported profit bn 14.6 13.3 15.5 17.4 Adjusted profit bn 18.6 18.6 20.3 22.2 EPS rep ¥ 94.6 79.6 92.8 104.2 EPS rep growth % 0.6 -15.8 16.5 12.3 EPS adj ¥ 119.7 111.4 121.5 132.9 EPS adj growth % -23.2 -7.0 9.1 9.4 PER rep x 13.6 16.2 13.9 12.4 PER adj x 10.8 11.6 10.6 9.7 Total DPS ¥ 10.5 10.5 11.0 13.0 Total div yield % 0.8 0.8 0.9 1.0
EV/EBITDA x 8.2 7.7 7.5 7.4 Net debt/equity % 156.2 139.5 119.7 102.0
P/BV x 1.2 1.1 1.0 0.9
3880 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in JPY unless noted)
Analyst(s) Satsuki Kawasaki +81 3 3512 7879 [email protected]
26 January 2017 Macquarie Capital Securities (Japan) Limited
Daio Paper Growth scenario unchanged even in a difficult external environment Conclusion
We revise our forecasts in view of input price (raw materials and fuel), forex,
and overseas business trends. Our FY3/17 operating profit forecast is
unchanged at ¥25bn (+2.8% YoY), but we lower our FY3/18 forecast to
¥26.5bn (+6.0% YoY) from ¥28bn.
The FY3/18 downward revision mainly reflects cost increases (including super
absorbent polymer (SAP)) driven by higher oil prices, and increases in
recovered paper and coal prices. The negative impact in FY3/17 is small as
Daio Paper has already procured budgeted SAP and coal volumes.
While the operating environment is somewhat rigorous, we believe Daio
retains its unique growth potential in domestic household paper product and
overseas absorbent product businesses. Also, valuations still look compelling.
The consolidated operating profit weighting of the home and personal care
(H&PC) segment has reached 40%, but the FY3/18E P/E is only 12x. This is
slightly lower than the paper sector average of 13x, but much lower than the
22x average for our consumer products coverage.
Impact
We forecast 3Q (Oct-Dec) operating profit of ¥5.8bn (-¥1.0bn YoY).
We think the paper and paperboard business faces stronger price decline
pressure in 3Q (than in 2Q) and expect worsening of inventory conditions. We
hence project a ¥600mn YoY decline in segment OP to ¥2bn in 3Q.
The H&PC business consolidates Jul-Sep results from overseas operations in
3Q, and we expect continuation of tough forex and volume levels for China.
Sales volume in China was flat YoY in Apr-Jun and we forecast Jul-Sep
volume will also be flat. However, we understand surplus distribution channel
inventory in China has been eliminated and we believe sales momentum is
likely to have recovered in Oct-Dec.
We expect 3Q domestic paper product sales to be solid. The prices of toilet
paper and tissue paper sold under the mainstay Elleair brand remain stable
(Fig 7 and 8).
Earnings and target price revision
We maintain our ¥1,400 target price, based on a theoretical P/B of 1.2x (implied
P/E of 15x). We maintained our price target, despite lowering earnings
forecasts, due to revision of the previous 39% discount to a more suitable 35%
in light of our review of the share-price trend over the past two years.
Price catalyst
12-month price target: ¥1,400 based on a Price to Book methodology.
Catalyst: Quarterly results that reflect improving H&PC growth momentum
Action and recommendation
We maintain our Outperform rating.
12
Please refer to page 8 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
JAPAN
6146 JP Neutral
Price (at CLOSE#, 25 Jan 2017) ¥14,580
Valuation ¥ 14,750 - Price to Book
12-month target ¥ 14,750
Upside/Downside % +1.2
12-month TSR % +3.4
Volatility Index Medium
GICS sector Semiconductors & Semiconductor Equipment
Market cap ¥m 522,693
Market cap US$m 4,553
30-day avg turnover US$m 18.7
Number shares on issue m 35.85
Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E
Revenue bn 127.2 127.4 139.5 150.0 EBIT bn 30.3 27.2 34.4 40.0 EBIT growth % 13.4 -10.3 26.3 16.4 Recurring profit bn 30.7 28.2 35.0 40.6 Reported profit bn 23.2 21.8 26.2 30.5 EPS rep ¥ 648.4 611.0 733.4 852.2 EPS rep growth % 12.8 -5.8 20.0 16.2 PER rep x 22.5 23.9 19.9 17.1 Total DPS ¥ 315.0 296.0 344.0 374.0 Total div yield % 2.2 2.0 2.4 2.6
ROA % 14.8 13.0 15.9 17.2 ROE % 14.5 12.9 14.7 15.7 EV/EBITDA x 12.4 13.6 11.0 9.6 Net debt/equity % -33.9 -32.2 -33.0 -36.0 P/BV x 3.1 3.0 2.8 2.6
6146 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in JPY unless noted)
Analyst(s) Damian Thong, CFA +81 3 3512 7877 [email protected]
26 January 2017 Macquarie Capital Securities (Japan) Limited
Disco Easing off after a strong run Conclusion
Following a strong run-up in the shares since mid-2016 (+42% over 6M,
outperforming TOPIX by 27% and also other SPE stocks, such as TEL), we
are downgrading the shares of Disco to Neutral while raising our TP to
¥14,750 from ¥14,550. While we are bullish on the outlook for the SPE market
(we recently forecast sustained growth in the market to US$50bn by 2020
from US$40bn in 2016, with the China market more than doubling), we have
shifted our preference more towards front-end SPE, for which we see stronger
growth in 2017/18.
We have pared estimates for Disco post its prelim report, reinforcing a
preference for Tokyo Electron (8035 JP, ¥11,340, Outperform, TP: ¥13,300),
which is at a similar P/B (2.7–2.8x FY3/18E) and lower PER (13x for TEL and
20x for Disco), while offering a higher ROE (>20% in FY3/18E vs ~15% for
Disco), stronger profit growth in FY3/18 and a higher dividend yield.
Impact
FY3/17 OP trajectory looks lower than we had forecast: 3Q consolidated
revenue of ¥30.2bn was 5% below our ¥31.8bn estimate, although only a
touch less than the consensus forecast of ¥30.7bn and, thus, unlikely to
disappoint the market. More surprising was the non-consolidated OP figure of
just ¥3.8bn, down 23% YoY. Disco’s commentary indicates that the company
is tracking to its FY guidance, which suggests that our expectation of a beat
(we had ¥29bn OP for the FY vs guidance of ¥25.4bn) was too optimistic.
We are bullish on SPE, but we believe front-end SPE stocks may have
stronger legs in 2017. We have highlighted the acceleration of new fab
construction, the impact of an acceleration of technology transitions (in NAND
flash, planar 3D and within that 48L 64L; in foundry/logic, 16/14nm
10nm 7nm) and the boost provided by aggressive Chinese ambitions (see
Semiconductors Tracker: China driving the SPE bull case, 17 Jan 2017). We
believe this will drive up capex intensity/wafer on the front end, with
proportionately stronger spending on front-end tools vs back-end tools.
Back to sidelines: We see solid long-term prospects for Disco, which has
continued to expand its addressable market reach, building on robust
technological competencies in cutting and grinding – a recent example is the
launch of a tool for CMP of sapphire and SiC wafers. But with valuations
becoming stretched, we are returning to the sidelines ahead of more visibility.
Earnings and target price revision
We are lowering FY3/17, FY3/18 and FY3/19 OP by 6%, 12% and 14%,
respectively. Our new TP of ¥14,750 is based on a ~2.6x P/B FY3/19E (~14.5%
LTROE / ~5.5% CoE), rolling forward from FY3/18E but trimming from 2.75x.
Price catalyst
12-month price target: ¥14,750 based on a Price to Book methodology.
Catalyst: FY3Q results announcement on 6 Feb.
Action and recommendation
We reaffirm our preference for other SPE/FPDE stocks such as Ulvac (6728
JP, ¥4,015, Outperform, TP: ¥4,500) and Tokyo Electron.
13
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
000720 KS Outperform
Price (at 05:50, 26 Jan 2017 GMT) Won39,200
Valuation Won 49,000-59,000
- Average P/BV vs. ROE and EV/backlog
12-month target Won 54,000
Upside/Downside % +37.8
12-month TSR % +39.5
Volatility Index Medium
GICS sector Capital Goods
Market cap Wonbn 4,365
Market cap US$m 3,743
Free float % 65
30-day avg turnover US$m 11.6
Number shares on issue m 111.4
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 19,122 18,744 20,723 20,231 EBIT bn 987 1,053 1,266 1,284 EBIT growth % 2.9 6.7 20.3 1.4 Reported profit bn 368 491 630 645 Adjusted profit bn 440 563 702 716 EPS rep Won 3,298 4,399 5,646 5,778
EPS rep growth % -12.3 33.4 28.3 2.3 EPS adj Won 3,941 5,042 6,289 6,421 EPS adj growth % -4.6 27.9 24.7 2.1 PER rep x 11.9 8.9 6.9 6.8 PER adj x 9.9 7.8 6.2 6.1 Total DPS Won 500 600 700 800 Total div yield % 1.3 1.5 1.8 2.0 ROA % 5.2 5.4 6.5 6.3 ROE % 7.8 9.3 10.8 10.1
EV/EBITDA x 4.0 3.8 3.3 3.3 Net debt/equity % 8.7 -4.3 0.5 -15.6 P/BV x 0.8 0.7 0.6 0.6
000720 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) James Hong +82 2 3705 8661 [email protected]
27 January 2017 Macquarie Securities Korea Limited
Hyundai E&C First Korean contractor w/Won1tr OP Event
Hyundai E&C reported better-than-expected 4Q16 earnings on FX translation
gains and strong domestic housing profitability. Hyundai E&C became the first
Korean contractor with Won1.0tr OP annually.
Impact
4Q16 earnings, OP in line but NP beat. Hyundai E&C reported 4Q16
revenue of Won5.3tr (-6.1% YoY and +18.9% QoQ), OP of Won302bn (OPM
of 5.7%, +60bps YoY and -50bps QoQ) and NP of Won196bn. While its OP
was in line, its NP beat our and market expectations by a large margin of 22%
on large FX translation gains. Strong profitability in domestic housing of 19%
GPM helped Hyundai E&C become first Korean construction company to
generate Won1tr OP in 2016. Total order intake in 2016 reached Won21.2tr,
+7.1% YoY, on strong domestic orders (Won12.7tr) and construction orders
(Won7.3tr, including housing).
Revenue growth to resume from 2017. We expect Hyundai E&C’s revenue
to grow +10.6% YoY in 2017 on strong revenue growth from domestic
housing and construction orders despite the slowdown in overseas revenue.
Furthermore, we expect its OP to grow by +20.3% YoY on 1) increased
revenue contribution from lucrative orders and 2) domestic housing.
Turnaround of global capex cycle should help the company book revenue
from outstanding inactive backlog, such as a refinery order in Russia and a
Gas-to-Liquid project in Uzbekistan.
Management guiding improved order flow in 2017. Hyundai E&C will
participate in the bidding of 52 projects, worth US$23bn, in 2017 vs 29
projects (US$12bn) in 2016. Key products the company focus are refinery and
power transmission in Middle East and port infrastructure and CFPP in Asia.
Hyundai E&C targets new order intake of Won24.3tr in 2017 vs Won18.4tr of
our expectations, thanks to the doubling of Middle East plant order flow
reaching US$70bn.
Earnings and target price revision
We raise our EPS forecasts for 2016/2017/2018 by 15%/10%/7%.
We raise our target price to Won54,000 (from Won51,000), accordingly.
Price catalyst
12-month price target: Won54,000 based on an Average P/BV vs. ROE and
EV/backlog methodology.
Catalyst: FSS accounting review (Dec 2016-March 2017), order intake.
Action and recommendation
Buying opportunity. We think concerns around FSS accounting review are
overblown. Hyundai E&C has significantly lowered its outstanding unclaimed
receivables, which has been the main reason for accounting review, to
Won3.6tr or 19% of its annual revenue, which we consider as a healthy level.
Maintain Outperform.
14
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
012330 KS Neutral
Price (at 08:50, 26 Jan 2017 GMT) Won265,000
Valuation Won 270,000 - PER
12-month target Won 270,000
Upside/Downside % +1.9
12-month TSR % +4.2
Volatility Index Low
GICS sector Automobiles & Components
Market cap Wonbn 25,796
Market cap US$m 22,122
Free float % 67
30-day avg turnover US$m 27.5
Number shares on issue m 97.34
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 36,020 38,261 39,875 41,563 EBIT bn 2,935 2,905 3,226 3,528 EBIT growth % -6.6 -1.0 11.1 9.4 Reported profit bn 3,055 3,038 3,505 3,745 Adjusted profit bn 3,055 3,038 3,505 3,745 EPS rep Won 31,388 31,207 36,002 38,473
EPS rep growth % -10.7 -0.6 15.4 6.9 EPS adj Won 31,388 31,207 36,002 38,473 EPS adj growth % -10.7 -0.6 15.4 6.9 PER rep x 8.4 8.5 7.4 6.9 PER adj x 8.4 8.5 7.4 6.9 Total DPS Won 3,500 5,000 6,000 7,000 Total div yield % 1.3 1.9 2.3 2.6 ROA % 7.6 7.4 7.6 7.7 ROE % 12.5 11.3 11.8 11.5
EV/EBITDA x 4.5 4.3 3.9 3.6 Net debt/equity % -14.0 -13.0 -18.4 -20.5 P/BV x 1.0 0.9 0.8 0.8
012330 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) James Hong +82 2 3705 8661 [email protected]
26 January 2017 Macquarie Securities Korea Limited
Hyundai Mobis Ouch! Event
Hyundai Mobis (Mobis) reported disappointing 4Q16 earnings. OP came in
lower than we expected due to poor automotive business earnings despite a
pick-up in sales volume at HMC/Kia.
Impact
Poor earnings on sudden drop in automotive business profitability.
Mobis reported 4Q16 revenue of Won 10.3tr (+3.0% YoY and +17.2% QoQ),
OP of Won 680bn (OPM of 6.6%, -210bp YoY and -160bp QoQ) and NP of
Won 694bn. OP missed our and the market’s expectations by large margins,
around Won 200bn, due to a poor automotive business despite the highest
A/S parts profitability since 4Q12. Management attributed this sudden drop in
profitability to 1) a ramp-up of costs for newly opened factories, 2) warranty
provisions, 3) CNY depreciation and 4) cost pressure from HMC/Kia.
Cost pressure from HMC/Kia in China the biggest reason. We believe
cost pressure is the main reason for the lowest automotive business
profitability – 3.3% OPM – in the company’s history. Some investors, including
ourselves, believed Mobis’ automotive business profitability was immune to
margin contraction from OEMs (BHMC and DYK) and only driven by
utilization. Thus, the sudden drop in automotive business profitability despite
normalized utilization could make investors unnerved.
Mobis still benefits from structural changes, but large R&D burden
persists. Mobis remains a main supplier of autonomous driving components,
ADAS, and key components for electric vehicles. A rising volume contribution
of ADAS and EV should lead to growth in per unit revenue for the automotive
business. However, the R&D burden will remain high (~Won 700bn in 2017E
vs. Won 623bn in 2016, +12.4% YoY) through 2018E as the company focuses
on autonomous driving and EV.
Earnings and target price revision
We are lowering our 2016/2017/2018 EPS forecasts 5%/2%/1% on lowered
automotive business profitability. We are cutting our target price to
Won270,000 (from Won280,000).
Price catalyst
12-month price target: Won270,000 based on a PER methodology.
Catalyst: volume model refresh, Won depreciation, Mexico plant ramp-up and
order win from non-HMC/Kia
Action and recommendation
Maintain Neutral. We remain Neutral-rated, as the company is being
exposed to cost pressure from HMC/Kia. Furthermore, we find A/S parts
business profitability near its peak. In the Korea auto space we find Hyundai
Motor Company (005380 KS, Won142,000, Outperform, TP: Won170,000)
most attractive (Hyundai Motor Company – Domestic market matters, 25
January 2017).
15
Please refer to page 5 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
214320 KS Outperform
Price (at 08:50, 26 Jan 2017 GMT) Won60,600
Valuation Won 110,000 - PER
12-month target Won 110,000
Upside/Downside % +81.5
12-month TSR % +84.5
Volatility Index Medium
GICS sector Media
Market cap Wonbn
1,212
Market cap US$m 1,039
Free float % 34
30-day avg turnover US$m 2.1
Number shares on issue m 20.00
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 987.9 1,132.7 1,339.9 1,534.5 EBIT bn 93.6 116.9 142.7 168.4 EBIT growth % nmf 24.9 22.1 18.0 Reported profit bn 78.0 99.4 120.2 140.8 Adjusted profit bn 69.7 89.6 110.2 130.7 EPS rep Won 4,107 4,971 6,011 7,038
EPS rep growth % nmf 21.0 20.9 17.1 EPS adj Won 3,643 4,479 5,510 6,536 EPS adj growth % nmf 23.0 23.0 18.6 PER rep x 14.8 12.2 10.1 8.6 PER adj x 16.6 13.5 11.0 9.3 Total DPS Won 900 1,300 1,700 2,000 Total div yield % 1.5 2.1 2.8 3.3 ROA % 6.5 7.6 8.2 8.7 ROE % 11.2 13.6 14.9 15.8
EV/EBITDA x 8.7 7.0 5.8 5.0 Net debt/equity % -38.8 -44.0 -46.4 -47.2 P/BV x 1.9 1.7 1.6 1.4
214320 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) Soyun Shin +82 2 3705 8659 [email protected] Ryan Kim +822 3705 8771 [email protected]
27 January 2017 Macquarie Securities Korea Limited
Innocean Worldwide Inc OP miss on lower exposure to media buying of captive clients Event
Innocean reported disappointing 4Q16 results, with operating profit of
Won31bn, compared with our forecast of Won45bn and the consensus
estimate of Won40bn. This was mainly driven by a smaller-than-expected
contribution from the high-margin media buying business, which is likely to
see a gradual improvement throughout the rest of 2017.
Impact
4Q16 gross profit reached Won109bn, up 12% YoY, missing our estimate by
10%. While GP for the US was up 85% (or up 12% excluding the impact of
Canvas Worldwide) due to the launch of G80 and customer additions, the GP
for Korea and China fell 20% and 41%, respectively, on lower marketing
budgets of captive clients.
Canvas Worldwide, a US subsidiary, turned around, as expected, on the
executed marketing budget for the G80 launch in the US. Genesis accounts
for around 15% of the total marketing budget in the US. However, lower
marketing spending from captive clients in other markets impacted the
revenue mix and led to a larger miss in OP, by 30%. We note that GP for
media buying in Korea and also for overseas markets declined 16% YoY,
while operating expenses for 4Q16 were largely in line with our forecast.
Guiding to sequential recovery in Korea and emerging markets.
Management guided to a sequential improvement in the domestic market and
a turnaround of emerging markets, which should help the company to achieve
approximate 10% YoY GP growth in 2017 for the core business (excluding the
merger impact). This is in line with the view of our HMC analyst (Hyundai
Motor Company – Domestic market matters, James Hong).
In terms of the outlook for each region: 1) Innocean continues to be positive
on growth in the US market due to the upcoming launch of G70; 2) China
should recover along with the upcoming acquisition in this region, which is
likely to finalized in in 1H17; and 3) we are happy to hear that progress on the
addition of the KIA creative business from 2H17 is on track and we believe will
probably take place before the launch of Stinger.
Innocean management announced a year-end dividend of Won950 with a 29%
payout ratio, up from a 25.7% for 2015.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Won110,000 based on a PER methodology.
Catalyst: Sequential earnings recovery.
Action and recommendation
We maintain an Outperform rating. Our earnings forecasts and target price
are under review.
16
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
000270 KS Neutral
Price (at 15:09, 25 Jan 2017 GMT) Won37,500
Valuation Won 40,000 - PER
12-month target Won 40,000
Upside/Downside % +6.7
12-month TSR % +10.7
Volatility Index Low/Medium
GICS sector Automobiles & Components
Market cap Wonbn 15,201
Market cap US$m 13,038
Free float % 62
30-day avg turnover US$m 27.4
Number shares on issue m 405.4
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 49,521 52,713 55,536 57,367 EBIT bn 2,354 2,461 2,331 2,442 EBIT growth % -8.5 4.5 -5.3 4.8 Reported profit bn 2,631 2,755 2,015 2,912 Adjusted profit bn 2,631 2,755 2,015 2,912 EPS rep Won 6,489 6,796 4,970 7,184
EPS rep growth % -12.1 4.7 -26.9 44.6 EPS adj Won 6,489 6,796 4,970 7,184 EPS adj growth % -12.1 4.7 -26.9 44.6 PER rep x 5.8 5.5 7.5 5.2 PER adj x 5.8 5.5 7.5 5.2 Total DPS Won 1,100 1,100 1,500 2,000 Total div yield % 2.9 2.9 4.0 5.3 ROA % 5.4 5.2 4.7 4.7 ROE % 11.3 10.9 7.4 10.0
EV/EBITDA x 2.8 2.5 2.4 2.3 Net debt/equity % -3.0 -8.9 -15.8 -16.6 P/BV x 0.6 0.6 0.5 0.5
000270 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) James Hong +82 2 3705 8661 [email protected]
26 January 2017 Macquarie Securities Korea Limited
Kia Motors Too many uncertainties Conclusion
Kia Motors (Kia) reported a mixed bag of 4Q16 earnings. OP came in lower
than we expected only due to a surge in warranty provisions (non-cash item in
SG&A). However, NP was disappointing on FX loss.
Impact
Resilient OP but disappointing NP. Kia reported 4Q16 revenue of Won
12.9tr (+1.0% YoY and +1.7% QoQ), OP of Won532bn (OPM of 4.1%,
+10bps YoY and flat QoQ) and NP of Won320bn. OP missed ours but met
recently-lowered market expectations, only due to warranty provisions. Cash
margin came in at 8.5% vs our 6.0% expectation. NP failed to meet our and
market expectations due to FX loss, limiting its potential to pay higher
dividend. Full-year dividend in 2016 remains at Won1,100/sh, flattish YoY.
Earnings should see YoY decline in 2017. We expect Kia’s profitability to
deteriorate on 1) muted new model refresh and 2) slowdown in DM. Unlike
HMC, operational leverage to EM turnaround isn’t big enough to offset rising
DM cost for Kia. Furthermore, a ruling on ordinary wage litigation continues to
be delayed (due to political issues in Korea) and is now expected in 2Q17.
This should lead to a one-off charge of Won 914bn, leading NP to 0 for 2Q17.
We expect another year of flattish DPS in 2017 as rising capex requirement
(~10% YoY to Won 2.8tr) vs. poor cash generation (EBITDA).
Mexico uncertainties. While Kia targets to increase retail sales in the US by
7.9% YoY to 699k units in 2017, any trade issues between the US and Mexico
should drag on its sales volume in 2017. Due to these uncertainties, we
expect Kia’s Mexico investment to yield lower return and utilization to remain
at a sub-optimal level.
Earnings and target price revision
We cut our 2016 EPS forecast by -11% on 4Q16 earnings but no change in
2017/18 EPS forecasts.
No change in target price.
Price catalyst
12-month price target: Won40,000 based on a PER methodology.
Catalyst: Model refresh, EM recovery, ordinary wage ruling.
Action and recommendation
Maintain Neutral. We don’t find Kia’s valuation attractive, considering its
similar volume growth to HMC, uncertainties around the Mexico plant, and a
sequential decline in OP. We prefer HMC over Kia (Korea Auto – Shifting
gears, 12 December 2016).
17
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
INDIA
KMB IN Neutral
Price (at 08:50, 25 Jan 2017 GMT) Rs742.85
Valuation Rs 840.00 - Sum of Parts
12-month target Rs 840.00
Upside/Downside % +13.1
12-month TSR % +13.2
Volatility Index Low
GICS sector Banks
Market cap Rsbn 1,366
Market cap US$m 20,045
Free float % 58
30-day avg turnover US$m 19.2
Number shares on issue m 1,839
Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E
Net interest Inc bn 92.8 108.8 126.2 151.4 Non interest Inc bn 76.3 91.1 106.1 124.2 Underlying profit bn 63.6 84.7 102.0 124.5 PBT bn 50.2 71.7 87.5 106.8 PBT growth % 10.4 42.7 22.0 22.1 Recurring profit bn 50.2 71.7 87.5 106.8 Reported profit bn 34.3 48.4 59.0 72.1 Adjusted profit bn 34.3 48.4 59.0 72.1 EPS rep Rs 14.96 26.38 32.19 39.30
EPS rep growth % -23.7 76.3 22.0 22.1 EPS adj Rs 16.84 26.38 32.19 39.30 EPS adj growth % -14.1 56.6 22.0 22.1 PER rep x 49.6 28.2 23.1 18.9 PER adj x 44.1 28.2 23.1 18.9 Total DPS Rs 0.88 1.00 1.00 1.00 Total div yield % 0.1 0.1 0.1 0.1
ROA % 1.8 1.9 2.0 2.0 ROE % 12.4 13.5 14.4 15.2 P/BV x 4.1 3.6 3.1 2.7
KMB IN rel BSE Sensex performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in INR unless noted)
Analyst(s) Suresh Ganapathy, CFA +91 22 6720 4078 [email protected] Sameer Bhise +91 22 6720 4099 [email protected]
26 January 2017 Macquarie Capital Securities India (Pvt) Ltd
Kotak Mahindra Bank Merger synergies flowing but where is the growth? Event
Kotak continues to be circumspect on growth where mid-sized banking peers
have grown at a robust pace in 3QFY17, registering strong market share
gains. While earnings growth was strong with consolidated PAT up 34% YoY
to Rs12.7bn (on a low base) and ahead of our estimates of Rs11.4bn, it was
primarily driven by cost efficiencies.
We raise our earnings estimates by 4-7% for FY17-19E to factor slightly
higher NIMs and better opex ratios. While Kotak remains one of the best
managed banks in the country, we would be willing to pay such premium
multiples only if growth had been higher. Maintain Neutral with revised TP of
Rs840 (Rs810 earlier).
Impact
Loan growth at just 12% YoY: Growth was primarily driven by two
segments – CVs (+40% YoY) and corporate banking (+23% YoY). All other
segments registered low double-digit growth. Business banking dipped 4%
QoQ as the bank witnessed repayments during the quarter. Management
indicated that it will continue its cautious stance for 1-2 quarters more before
accelerating on product segments of choice.
NIMs hold up, fee momentum strong: Consol margins held up well at 4.5%
considering the tough operating environment during the quarter. Kotak’s
margins continue to hold up well and we believe given that average SA deposit
cost is still 5.5% – downside pressures on NIMs could be limited. Hence, we
have slightly raised our NIM estimates for the next couple of years. The top line
was further buoyed by healthy fee growth. Core fees grew 20% YoY aided by
better corporate banking fees through syndication, FX transactions and cross-
sell. On the retail side, credit card and distribution fees did well.
Synergies flowing through: Standalone cost-income ratio dipped to 48%
levels and management expects further gains to come through over the next
few quarters. We expect the cost-income ratio to decline to ~47% over the
next couple of years for the standalone bank.
Earnings and target price revision
We are increasing our EPS estimates for FY17-19E by 4-7%, factoring in
better-than-expected NIMs and slightly better cost synergies. Our revised
target price on the stock is Rs840.
Price catalyst
12-month price target: Rs840.00 based on a Sum of Parts methodology.
Catalyst: slow growth, expensive valuations.
Action and recommendation
Maintain Neutral on expensive valuations especially in light of modest BVPS
growth – 15% BVPS CAGR over FY16-19E.
18
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
TAIWAN
2454 TT Outperform
Price (at 08:50, 26 Jan 2017 GMT) NT$213.50
Valuation NT$ 280.00 - PER
12-month target NT$ 280.00
Upside/Downside % +31.1
12-month TSR % +37.3
Volatility Index Medium
GICS sector Semiconductors & Semiconductor Equipment
Market cap NT$m 337,757
Market cap US$m 10,781
30-day avg turnover US$m 21.9
Number shares on issue m 1,582
Investment fundamentals Year end 31 Dec 2016A 2017E 2018E 2019E
Revenue bn 275.5 289.1 301.7 314.8 Reported profit bn 23.7 29.2 36.5 36.7 EPS rep NT$ 15.16 18.69 23.35 23.44 EPS rep growth % -8.7 23.3 24.9 0.4 PER rep x 14.1 11.4 9.1 9.1 Total DPS NT$ 10.61 13.08 16.34 16.41 Total div yield % 5.0 6.1 7.7 7.7 ROA % 6.5 7.0 8.8 9.2 ROE % 10.0 12.1 14.3 13.6 EV/EBITDA x 7.9 7.3 5.8 5.4
Net debt/equity % -36.3 -35.6 -37.5 -37.6 P/BV x 1.4 1.3 1.3 1.2
2454 TT rel TAIEX performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in NT$ unless noted, TP in TWD)
Analyst(s) Macquarie Capital Limited, Taiwan Securities Branch Patrick Liao +886 2 2734 7515 [email protected] Lynn Luo +886 2 2734 7534 [email protected] Jeffrey Ohlweiler +886 2 2734 7512 [email protected] Macquarie Capital Limited Allen Chang +852 3922 1136 [email protected]
26 January 2017
MediaTek Emerging markets to drive 2017 growth Event
MediaTek reported 4Q16 results and 1Q17 guidance on Thursday (Jan 26),
with a 4Q16 operating profit miss being offset by non-op gains. 1Q17 sales
guidance of down 14–22% QoQ, with a GM midpoint of 34% and an OPM
midpoint of 4.5%, was lower than expected. The company expects 2017
shipment growth will be driven by emerging markets, and we maintain our
view for a GM recovery in 2H17. We reiterate our Outperform rating and TP of
NT$280.
Impact
4Q16 operating profit miss offset by non-op gains: Previously reported
sales of NT$68.7bn (down 12% QoQ) were largely in line. Gross margin of
34.5% and operating margin of 5.8% were lower than our and the consensus
estimates by 0.5ppt and 1.2–1.7ppt, respectively. However, the company
booked a total non-operating gain of NT$1.6bn, including FX gains of
NT$400–500m. Overall, EPS was NT$3.23, which was 3% below our
estimate but 3% above consensus.
1Q17 guidance weaker than expected: MediaTek guided to a 14–22% QoQ
decline in 1Q17 revenue, which is below our and the consensus expectation
of down 10% QoQ. The weaker revenue will be mainly due to normal
seasonality, while the strong USD is also impacting demand in emerging
markets. The gross margin guidance mid-point of 34% and operating margin
guidance mid-point of 4.5% were also lower than expected.
2017 growth from emerging markets; 2H GM recovery intact: MediaTek
expects shipment growth this year will be driven by emerging markets and is
forecasting smartphone unit growth of 14–16% and an increase in the
adoption of 4G from a low base. In particular, the company sees strong 4G
migration demand in India and SE Asia and believes the 4G adoption rate in
India will increase to above-50% this year from around 30% last year. In
addition, MediaTek reiterated its target to improve margins with new product
launches in 2H17. We thus maintain a GM recovery in 2H17 in our model.
Earnings and target price revision
After factoring in 4Q16 results, we are fine-tuning our 2017/18E EPS by less
than 1%. Therefore, we are maintaining our target price of NT$280.
Price catalyst
12-month price target: NT$280.00 based on a PER methodology.
Catalyst: monthly sales, earnings results/outlook, smartphone chip demand,
gross margin trend.
Action and recommendation
We believe MediaTek’s smartphone shipments will continue to grow, thanks
to new product launches and increasing 4G migration demand in emerging
markets. We also expect margins to gradually improve in 2017/18. We
maintain an Outperform rating with a target price of NT$280 (15x 2017E PE).
19
Please refer to page 7 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
KOREA
035420 KS Outperform
Price (at 05:50, 26 Jan 2017 GMT) Won763,000
Valuation Won 652,118 - DCF (WACC 10.0%, beta 1.0, ERP 6.0%, RFR 4.0%, TGR 3.0%)
12-month target Won 980,000
Upside/Downside % +28.4
12-month TSR % +28.6
Volatility Index Low/Medium
GICS sector Software & Services
Market cap Wonbn 25,148
Market cap US$m 21,568
Free float % 82
30-day avg turnover US$m 38.8
Number shares on issue m 32.96
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 3,251.2 4,022.6 4,831.2 5,534.0 EBIT bn 762.2 1,138.3 1,601.0 2,005.4 EBIT growth % -0.8 49.3 40.7 25.3 Reported profit bn 518.7 769.9 985.9 1,258.4 Adjusted profit bn 559.8 806.2 1,077.4 1,331.5 EPS rep Won 17,618 26,423 33,838 43,190
EPS rep growth % 23.5 50.0 28.1 27.6 EPS adj Won 19,017 27,668 36,976 45,697 EPS adj growth % 23.5 45.5 33.6 23.6 PER rep x 43.3 28.9 22.5 17.7 PER adj x 40.1 27.6 20.6 16.7 Total DPS Won 782 1,100 1,100 1,500 Total div yield % 0.1 0.1 0.1 0.2 ROA % 19.6 23.5 27.5 28.6 ROE % 28.6 32.8 33.0 30.7
EV/EBITDA x 24.0 17.4 13.2 10.6 Net debt/equity % -6.4 -14.5 -30.3 -40.9 P/BV x 10.5 7.9 5.9 4.5
035420 KS rel KOSPI performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in Won unless noted, TP in KRW)
Analyst(s) Macquarie Securities Korea Limited Soyun Shin +82 2 3705 8659 [email protected] Ryan Kim +822 3705 8771 [email protected] Macquarie Capital Securities (Japan) Limited David Gibson, CFA +81 3 3512 7880 [email protected]
26 January 2017
NAVER Rising presence in Korea; challenges in Japan Event
NAVER reported consolidated 4Q16 OP of Won290bn, missing our estimate
by 4%. Domestic OP beat our estimate by 6% due to a smaller-than-expected
labour cost, while LINE OP missed by 67% (CPM no growth is a big issue –
David Gibson) on higher operating cost. Accordingly, LINE accounts for only 6%
of 4Q16 OP versus our previous estimate of 18%. We believe that domestic
business-driven earnings growth is likely to continue for 2017.
Impact
Search ad revenue continues to benefit from NAVER’s rising presence
in the e-commerce market. Search ad revenue grew 16% YoY in 4Q16 on
rapid growth in mobile search ad and e-commerce-driven commission
revenue (16.4% of revenue versus our estimate of 15%). We estimate mobile
search ad revenue was up more than 30% YoY due to a boost in the number
of commercial queries/PPC growth in the high season. Overall shopping GMV
rose 56% YoY, following 60% YoY growth in 3Q16, implying NAVER’s rising
presence in the e-commerce market.
Following 18% search ad revenue growth in 2016, we forecast 16% YoY
search ad revenue growth for 2017 as: 1) there should be upside to NAVER
Pay’s current share of 7% in the Korean e-commerce market; and 2) recently-
launched shopping search ads are not yet fully adapted to the platform.
Growth of display ad continues to exceed market growth rate along with
digital content investment. Display ad revenue grew 30% YoY in 4Q16,
thanks to the increase in content-driven ad inventory and also CPM through
the adoption of targeting function. Another double-digit YoY growth for 2017 is
feasible but this should accompany the investment in digital contents across
video, webtoon, webnovel, etc. We forecast the level of commission cost, at
4Q16’s 29%, is likely to continue through 2017.
Disappointing guidance of LINE implies downside risk to LINE forecasts:
1) 1Q17 guidance for mid-teens OPM is well below our estimate of 21%, while
YoY sales growth guidance for 1Q17 to be similar to 4Q16 despite 1Q being
the high season is disappointing; 2) lack of CPM growth, which means YoY
growth forecast of 53% by Dec 2017 looks very hard to achieve; and 3)
marketing and authentication costs look to be an ongoing issue.
Earnings and target price revision
We cut our 2016/2017 OP forecasts by 1.1%/1.9%, respectively. If we an
operating margin of 15% in 2017 vs our current estimate of 22%, there is
roughly 8% downside risk to our 2017 OP forecast.
Price catalyst
12-month price target: Won980,000 based on a Sum of Parts methodology.
Catalyst: A rising share in the e-commerce market
Action and recommendation
We maintain Outperform due to the domestic business driven earnings growth.
Management plans to retrofit the standard of its earnings report from 1Q17 to
more transparently reflect NAVER’s recently-changed business model.
20
Please refer to page 5 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
JAPAN
8591 JP Outperform
Price (at 08:50, 26 Jan 2017 GMT) ¥1,735
Valuation ¥ 1,700-2,200
- Price to Book
12-month target ¥ 2,000
Upside/Downside % +15.3
12-month TSR % +18.4
Volatility Index Medium
GICS sector Diversified Financials
Market cap ¥bn 2,297
Market cap US$m 20,211
Free float % 98
30-day avg turnover US$m 71.6
Foreign ownership % Number shares on issue m 1,324
Investment fundamentals Year end 31 Mar 2016A 2017E 2018E 2019E
Net interest Inc bn 128.1 136.8 151.3 153.6 Non interest Inc bn 2,168.3 2,278.0 2,368.3 2,455.3 Underlying profit bn 287.7 308.5 338.6 355.2 PBT bn 391.3 383.0 440.4 457.0 PBT growth % -28.4 -2.1 15.0 3.8 Recurring profit bn 391.3 383.0 440.4 457.0 Reported profit bn 260.2 254.4 294.1 305.7 EPS rep ¥ 198.4 200.0 231.2 240.3
EPS rep growth % -30.9 0.8 15.6 3.9 PER rep x 8.7 8.7 7.5 7.2 Total DPS ¥ 45.8 51.0 54.0 58.0 Total div yield % 2.6 2.9 3.1 3.3
ROA % 2.3 2.3 2.5 2.6 ROE % 11.7 10.7 11.5 11.0 P/BV x 1.0 0.9 0.8 0.8
8591 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in JPY unless noted)
Analyst(s) Keisuke Moriyama +81 3 3512 7476 [email protected]
26 January 2017 Macquarie Capital Securities (Japan) Limited
ORIX Corporation Focus on the new investment pipeline Conclusion
Orix Corporation announced 3Q FY3/17 results on 26 January. Quarterly NP
rose 39% YoY to ¥74.9bn, and 1-3Q NP was up 0.8% to ¥217.1bn and
reached 85% of our full-year forecast. Key profit contributions in 3Q were
profits from selling a subsidiary in the Americas region, profits from selling
rental properties in the real estate business, and higher insurance profit in the
retail business. Concessions and aircraft financing supported healthy earnings
too.
We think 3Q results confirmed that Orix is achieving balanced growth, and we
maintain our Outperform rating as the core stock in the non-bank sector. We
will be closely monitoring Orix’s pipeline of new investments along with the
outlook for the domestic property market.
Impact
Real estate, investment and operation, and retail as drivers: 1-3Q
segment profits increased for three segments – real estate (+12% YoY),
investment and operation (+47%), and retail (+23%). At the same time, we
think it is necessary to pay attention to declines in managed asset balance in
1) the real estate business because of stricter investment criteria and 2) the
life insurance business due to retaining profits from selling JGBs in cash. We
will focus on trends in Orix’s new investment pipeline over the medium term.
Aircraft financing targets narrow-body planes: Orix’s aircraft financing
business invests in used narrow-body planes (passenger planes with a single
aisle). It is steadily increasing assets as opportunities arise, and we do not
see much impact from recent slowdown in the large aircraft orders in the
airplane market.
Assessment after share buybacks: Orix takes a stance toward share
buybacks of “not ruling it out as a strategic option and aiming for a balance
with growth investments.” Orix’s share price has risen by about 16% in the
three months since the announcement on 26 October. Orix has been unable
to sufficiently buy back shares at this point because of the steep rise in a
share price. While we believe the announcement of buybacks has positively
affected Orix’s share price, possible revision of the scheme is a concern.
Earnings and target price revision
No change.
Price catalyst
12-month price target: ¥2,000 based on a Price to Book methodology.
Catalyst: 4Q results, shareholder return policy (share buyback), outlook for
property market, and concession business
Action and recommendation
We maintain our Outperform rating as the core stock in the non-bank sector.
21
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
THAILAND
PTTEP TB Neutral
Price (at 08:50, 26 Jan 2017 GMT) Bt94.50
Valuation Bt 96.00 - NAV
12-month target Bt 96.00
Upside/Downside % +1.6
12-month TSR % +4.8
Volatility Index High
GICS sector Energy
Market cap Btm 375,164
Market cap US$m 10,646
Free float % 34
30-day avg turnover US$m 24.0
Number shares on issue m 3,970
Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E
Revenue bn 188.4 152.7 166.1 170.2 EBIT bn 40.9 35.9 43.6 46.9 EBIT growth % -56.2 -12.3 21.5 7.5 Reported profit bn -31.6 12.0 22.9 25.0 Adjusted profit bn 13.4 17.8 22.9 25.1 EPS rep Bt -7.96 3.02 5.77 6.31 EPS rep growth % nmf nmf 91.0 9.3 EPS adj Bt 3.39 4.50 5.77 6.31 EPS adj growth % -71.9 32.7 28.3 9.4
PER rep x nmf 31.3 16.4 15.0 PER adj x 27.9 21.0 16.4 15.0 Total DPS Bt 3.00 3.25 3.00 3.00 Total div yield % 3.2 3.4 3.2 3.2 ROA % 5.5 5.2 6.5 6.7 ROE % 3.3 4.4 5.6 5.9 EV/EBITDA x 2.5 3.1 2.9 2.8
Net debt/equity % -2.2 7.0 -9.6 -13.6 P/BV x 0.9 0.9 0.9 0.9
PTTEP TB rel SET performance, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017
(all figures in THB unless noted)
Analyst(s) Duke Suttikulpanich +65 6601 0148 [email protected]
26 January 2017 Macquarie Capital Securities (Singapore) Pte. Limited
PTTEP 4Q16 earnings review Event
PTTEP reported 4Q16 earnings with a net loss of –Bt1.7bn pressured by non-
recurring tax-related expense and an impairment charge.
Impact
Weak 4Q16 driven by one-offs and low gas prices: PTTEP’s 4Q16 NP was
–Bt1.7bn, down from Bt5.4bn in the previous quarter. The net loss was driven
by 1) asset impairment of c.Bt1.7bn related to the reserve and production
profile revisions at Natuna C in Indonesia and Yetagun in Myanmar, and 2) a
higher income tax expense of c.Bt4.1bn related to the weakening of the THB
vs USD. Stripping out the one-offs, net profit in 4Q16 would have been
c.Bt3.3bn vs. Bt4.4bn in 3Q16 on a recurring basis. We attribute the lower
recurring earnings in 4Q16 to the gas price, which averaged US$5.2/mmbtu,
down from US$5.6/mmbtu in 3Q16.
Guidance on gas price trend and cost: The management guided for
average gas selling price at US$5.1/mmbtu in 1Q17, which marks the trough
level, and US$5.3/mmbtu for 2017E. This compares to the average gas price
of US$5.6/mmbtu in 2016. Based on this guidance, we estimate PTTEP’s
ASP at US$39.4/boe in 2017, up from US$35.9/boe in 2016. The company
expects unit costs to be c.US$31/boe in 2017, up slightly from US$30.5/boe in
2016. If the company is successful in controlling costs at the guided level, this
would be taken positively, as we expect a bigger rise in the ASP.
RRR improves but reserve life is still a concern: We estimate PTTEP’s 1P
reserve replacement ratio (RRR) in 2016 at 64%, which was higher than the
five-year average of 57%. In our view, the higher RRR in 2016 is encouraging.
Nonetheless, this still means the reserve is depleting faster than it is being
replaced. Currently 1P reserve life is down to five years, which is low when
compared to regional peers at 8-14 years. Given the declining capex trend,
we are uncertain if the company can further increase the organic RRR going
forward. We have assumed a long-term RRR of 50% in our forecast.
Updating capex and cost assumptions: We update the capex and
production profile per the management guidance last week. We also reflect
the latest reserves and cost guidance in our models. As a result, our NAV
target price increases to Bt96/share, mainly driven by lower capex guidance.
Earnings and target price revision
We increase 2017E EPS by 16.5% to reflect the unit cost guidance.
We raise our target price from Bt85/share to Bt96/share.
Price catalyst
12-month price target: Bt96.00 based on a NAV methodology.
Catalyst: Oil price, M&A activity, resolution of the Bongkot concession
Action and recommendation
We think the share price rally since the OPEC production cut has already
captured the positive factors supporting PTTEP’s outlook in 2017. We remain
cautious on the Bongkot concession issue. Maintain Neutral rating.
22
Please refer to page 29 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
HONG KONG/CHINA
Inside
YoY improvement, near-term downside 2
2017: working-day limit to be relaxed 7
13th FYP: capacity replacement is key 9
Changes to China coal macro 12
Stock implications: re-rating to different
extents 14
Inventory destocking for 2016-18E…
Source: sxcoal, Macquarie Research, Jan 2017
Changes in rating and TPs
Source: Bloomberg, Macquarie Research, Jan 2017
Changes in earnings forecasts
Source: Macquarie Research, Jan 2017
Valuation summary
Source: Bloomberg, Macquarie Research, Jan 2017 (price as of Jan 20 2017)
Analyst(s) Coria Chow +852 3922 1181 [email protected] Eric Zong +852 3922 4749 [email protected]
25 January 2017 Macquarie Capital Limited
China Coal sector Still 276 days? Perhaps not ‘Beijing put’ to support the coal market
What is different from 1H16 now is we have the intervention from the China
government to support coal prices, and we believe this ‘Beijing put’ (ie policy-driven
price support) is going to continue. If we put it as a simple math, we estimate
China would probably need 284-326 working days to balance the market in 2017,
and 290 days by 2020. Both seem to suggest more than 276 working days
specified by the current policy. However, in reality, there are more complications,
such as whether the government welcomes imports, and the execution challenge
for loosening. Our global team believes there can be partial relaxation of working
days for some coal producers, and the 276-day rule should remain for those not
meeting government requirements. We update our earnings and valuations for
Chinese coal producers to reflect the latest industry dynamics, upgrading Yanzhou
Coal from Neutral to Outperform, maintaining our Outperform on China Coal, and
upgrading China Shenhua from Underperform to Neutral.
Operating capacity likely to increase under the 13th FYP
About 700mtpa of coal capacity is legally under construction as of end-2015,
i.e 200mtpa higher than the 500mtpa target for advanced capacity addition by
2020 under the 13th FYP. This suggests China should either delay or suspend
ramp-up of some of this under-construction capacity, or close more of the existing
outdated capacity. We believe the latter scenario is more likely and this suggests
a net operating capacity increase of 268mtpa, according to our global team.
Stable coal price for 2017-18E, short-term downside A partial loosening of working day limits, coupled with a stable demand outlook
(+1%pa for 2017-18E), underpins our upgrades for QHD coal price forecast for
2017E to Rmb538/t and for 2018E to Rmb520/t for 2018E (+22%/ 25% from
previous forecasts). Our analysis shows that the unit cost of the major Chinese
coal producers delivered to port rose 6% from 2015 to Rmb395/t as of 2016.
Including SG&A, interest expense and depreciation, we estimate a breakeven
level of Rmb520/t. While we expect some downside risk from the current spot
price of Rmb597/t near-term with the seasonal slowdown in restocking,
we believe 2017 will still represent a significant coal price recovery YoY and
hence earnings improvement for coal equities. The unlikely repeat of hotter-than-
usual summer as in 2016, could mean a more stable coal price outlook.
Stock implications: Yanzhou Coal is our new top pick
We upgrade Yanzhou Coal from Neutral to OP as we expect the potential
relative stabilization in RMB in 2017 to ease the cost challenges for overseas
operations, and the company’s higher exposure to coking coal (~30% of total
output, vs 10% for China Coal and 0% for Shenhua) suggests greater earnings
upside than for peers. Yanzhou also stands to benefit from the 13th FYP with
25mtpa of potential capacity located in Inner Mongolia, one of the major
production bases desired by the government. We maintain OP on China Coal
as we expect continual earnings improvement in 2017 (after turning profitable in
2016), and benefits from lower transport cost. China Coal also has 32mtpa of
outstanding capacity in the ‘Tri West region’ and we expect this to likely get
approvals for operations under 13th FYP. We upgrade China Shenhua to
Neutral, but note its valuation is already on par with other regional integrated
coal-power producers, and the challenge from lower power tariffs.
300
350
400
450
500
550
600
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2014 2015 2016E 2017E 2018E
(Rmb/t)(mt)
Raw coal output (mt) Coal demand (mt)
Difference (mt) Coal price (Rmb/t)
BBG code Old New Old New Chg (%)
Yanzhou Coal 1171 HK N OP 4.97 8.24 65.8% 40.8%
China Coal 1898 HK OP OP 5.55 5.09 -8.2% 23.5%
China Shenhua 1088 HK UP N 12.70 16.92 33.2% 3.9%
Rating TP (HK$) % upside/
(downsid
BBG code Old New Chg (%) Old New Chg (%)
Yanzhou Coal 1171 HK 0.18 0.87 382.1% 0.14 0.69 406.2%
China Coal 1898 HK 0.13 0.37 188.0% 0.15 0.31 109.2%
China Shenhua 1088 HK 0.89 1.40 57.5% 0.76 1.27 66.1%
2018E EPS2017E EPS
Name BBG ticker Rating 2017E 2018E 2017E 2018EYanzhou Coal 1171 HK OP 6.1 7.7 0.6 0.6China Coal 1898 HK OP 10.0 12.1 0.6 0.5Shenhua 1088 HK N 10.5 11.6 0.9 0.8
Trading P/B (x)Trading P/E (x)
23
Please refer to page 2 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
JAPAN
Code Name Rec. Close
(¥) TP (¥)
U/D
1963 JGC N 2,023 2,100 +3.8% 6366 Chiyoda N 836 860 +2.9%
Source: FactSet, Macquarie Research, January 2017
1963 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
6366 JP vs TOPIX, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2017 (all figures in JPY unless noted)
Analyst(s) Kunio Sakaida +81 3 3512 7873 [email protected] Tomoki Takeshima +81 3 3512 7432 [email protected]
26 January 2017 Macquarie Capital Securities (Japan) Limited
Japan plant engineering Ichthys subcontractor terminates contract Conclusion
CIMIC Group announced on 25 January that ”the UGL-CH2M JV (joint
venture) terminated its contract for construction of combined cycle power
plant (CCPP) at the Ichthys LNG project in Australia.”
We believe this is negative for JGC and Chiyoda, which are handling the LNG
plant construction for the project. We believe it will be important to closely
monitor the possibility of additional costs.
Impact
The JKC JV, which consists of JGC, KBR, and Chiyoda, has a consignment
from Inpex to build the LNG plant and related facilities for the project. The
UGL-CH2M JV was a sub-contractor of the JKC JV in charge of building the
power facilities.
The JKC JV and Inpex concluded a lump-sum turnkey contract, and this
means the JKC JV is responsible for additional costs incurred in building the
power plant.
Power plant construction is currently 89% finished; 300 workers have been
working for UGL-CH2M JV.
We spoke to IR representatives from JGC and Chiyoda who commented that
”we intend to cooperate with other sub-contractors involved in the Ichthys
project to complete the work and do not expect major impacts on our costs or
schedule at this point.”
24
Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
GLOBAL
LME cash price
% change
US$/tonne day on day
Aluminium 1,837 -1.8
Copper 5,922 -0.1
Lead 2,405 -1.3
Nickel 9,640 -1.0
Tin 20,390 0.1
Zinc 2,788 -0.8
Cobalt 36,000 0.0
Molybdenum 14,892 0.0
Other prices
% change
day on day
Gold (US$/oz) 1,195 -1.8
Silver (US$/oz) 16.93 -1.0
Platinum (US$/oz) 979 -1.3
Palladium (US$/oz) 758 -3.9
Oil WTI 52.67 0.0
USD:EUR exchange rate 1.074 -0.2
AUD:USD exchange rate 0.756 -0.4
LME/COMEX stocks
Tonnes Change
Aluminium 2,290,075 5,350
LME copper 271,025 -1,125
Comex copper 89,142 653
Lead 194,500 -475
Nickel 380,154 4,650
Tin 5,055 450
Zinc 406,350 -3,675
Source: LME, Comex, Nymex, SHFE, Metal
Bulletin, Reuters, LBMA, Macquarie Research,
January 2017
Analyst(s) Macquarie Capital Securities (Singapore) Pte. Limited Ian Roper +65 66010698 [email protected] Macquarie Capital Limited Lynn Zhao +86 21 2412 9035 [email protected] Macquarie Capital (Europe) Limited Colin Hamilton +44 20 3037 4061 [email protected] Jim Lennon, Senior Commodities Consultant +44 20 3037 4271 [email protected] Matthew Turner +44 20 3037 4340 [email protected] Vivienne Lloyd +44 20 3037 4530 [email protected]
25 January 2017
Commodities Comment Chinese coal restrictions likely to return, but are imports at risk also? Feature article
As we wrote recently in the commodities compendium, we strongly believe
that a “Beijing put” will underwrite the global coal market in the near and
medium term. If prices continue to slide, we expect that some form of output
restrictions will come back with the “276 days” policy, which in November was
suspended until the end of 1Q, being reapplied to some mines.
Rather than restricting domestic supply, we should also consider a scenario
where Beijing looks to change its openness to coal imports as an alternative
measure to support domestic coal prices, particularly as the goal of the policy
is to provide support to the domestic mining industry.
Latest news
Precious metals had a bad day on Wednesday. In particular palladium, which
has enjoyed an impressive start to 2017, tumbled, at one point trading 6%
down DoD. Gold fell below $1,200/oz, down 1.8%, while platinum fell 1.3%.
There was little in the way of news to explain the movements except a
stronger dollar, with the extent of the falls surely exacerbated by over-
extended positioning.
China’s gold imports surged higher in December, according to our
calculations from Chinese Customs data. We estimate 227t were imported, up
from 117t in November. This seems rather odd given press reports that there
had been limits put on the number of banks allowed to import gold. The sharp
MoM increase is similar to that of last December, when we estimate 270t was
imported. Confirmation of the increase will come on Thursday with the release
of Hong Kong and Swiss export data, the two main suppliers to the mainland.
BHP Billiton reported Q4 operating results for CY2016 on Wednesday in
which misses in met coal, energy coal and copper caught our attention.
Guidance on the latter was cut by 2% to 1.62Mt from 1.66Mt previously on
weaker performance from its Olympic Dam mine due to a power outage last
year. Escondida guidance has been left alone, which we note in light of the
downside risk raised by the largest labour union’s aggressive stance in pay
negotiations recently, plus the fact that H2 FY17 production (H1 CY17) needs
to be 37% higher than the last six months to achieve this, which is calling for a
substantial ore grade improvement. Amongst the coals, thermal was worst hit,
11% below our expectations for the quarter, at 6.65Mt. Meanwhile iron ore
output was in line at 60Mt.
Antofagasta Minerals also reported today, but contrarily showed a strong beat
(against our expectations) in Q4, hitting the bottom of their CY 2016 guidance
range at 710kt of contained copper. Consensus has been <700kt contained
on weaker output in the first 9 months at Los Pelambres amongst others, but
this mine plus Centinela raised production strongly in the final quarter. Closer
analysis of this result showed a jump in grades processed at Centinela in Q4,
leading to surmissions of high-grading in some quarters, with some selling
seen on the stock later in the day after its initial rally.
25
Macquarie Research
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 December 2016
AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)
Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)
Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)
Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.
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Asia Research Head of Equity Research
Peter Redhead (Global – Head) (852) 3922 4836
Jake Lynch (Asia – Head) (852) 3922 3583
David Gibson (Japan – Head) (813) 3512 7880
Conrad Werner (ASEAN – Head) (65) 6601 0182
Automobiles/Auto Parts
Janet Lewis (China, Japan) (813) 3512 7856
Takuo Katayama (Japan) (1 212) 231 1757
James Hong (Korea) (822) 3705 8661
Amit Mishra (India) (9122) 6720 4084
Financials
Scott Russell (Asia) (852) 3922 3567
Dexter Hsu (China, Taiwan) (8862) 2734 7530
Keisuke Moriyama (Japan) (813) 3512 7476
Chan Hwang (Korea) (822) 3705 8643
Suresh Ganapathy (India) (9122) 6720 4078
Sameer Bhise (India) (9122) 6720 4099
Gilbert Lopez (Philippines) (632) 857 0892
Ken Ang (Singapore) (65) 6601 0836
Passakorn Linmaneechote (Thailand) (662) 694 7728
Conglomerates
David Ng (China, Hong Kong) (852) 3922 1291
Conrad Werner (Singapore) (65) 6601 0182
Gilbert Lopez (Philippines) (632) 857 0892
Consumer and Gaming
Linda Huang (Asia, China, Hong Kong) (852) 3922 4068
Zibo Chen (China, Hong Kong) (852) 3922 1130
Terence Chang (China, Hong Kong) (852) 3922 3581
Sunny Chow (China, Hong Kong) (852) 3922 3768
Satsuki Kawasaki (Japan) (813) 3512 7870
Mike Allen (Japan) (813) 3512 7859
Kwang Cho (Korea) (822) 3705 4953
KJ Lee (Korea) (822) 3705 9935
Stella Li (Taiwan) (8862) 2734 7514
Amit Sinha (India) (9122) 6720 4085
Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)
Karisa Magpayo (Philippines) (632) 857 0899
Chalinee Congmuang (Thailand) (662) 694 7993
Emerging Leaders
Jake Lynch (Asia) (852) 3922 3583
Aditya Suresh (Asia) (852) 3922 1265
Timothy Lam (China, Hong Kong) (852) 3922 1086
Mike Allen (Japan) (813) 3512 7859
Kwang Cho (Korea) (822) 3705 4953
Corinne Jian (Taiwan) (8862) 2734 7522
Marcus Yang (Taiwan) (8862) 2734 7532
Conrad Werner (ASEAN) (65) 6601 0182
Industrials
Janet Lewis (Asia) (813) 3512 7856
Patrick Dai (China) (8621) 2412 9082
Kunio Sakaida (Japan) (813) 3512 7873
William Montgomery (Japan) (813) 3512 7864
James Hong (Korea) (822) 3705 8661
Benson Pan (Taiwan) (8862) 2734 7527
Inderjeetsingh Bhatia (India) (9122) 6720 4087
Justin Chiam (Singapore) (65) 6601 0560
Internet, Media and Software
Wendy Huang (Asia, China) (852) 3922 3378
David Gibson (Asia, Japan) (813) 3512 7880
Hillman Chan (China, Hong Kong) (852) 3922 3716
Soyun Shin (Korea) (822) 3705 8659
Abhishek Bhandari (India) (9122) 6720 4088
Oil, Gas and Petrochemicals
Polina Diyachkina (Asia, Japan) (813) 3512 7886
Aditya Suresh (Asia, China, India) (852) 3922 1265
Anna Park (Korea) (822) 3705 8669
Duke Suttikulpanich (ASEAN) (65) 6601 0148
Isaac Chow (Malaysia) (603) 2059 8982
Pharmaceuticals and Healthcare
Abhishek Singhal (India) (9122) 6720 4086
Wei Li (China, Hong Kong) (852) 3922 5494
Property
Tuck Yin Soong (Asia, Singapore) (65) 6601 0838
David Ng (China, Hong Kong) (852) 3922 1291
Raymond Liu (China, Hong Kong) (852) 3922 3629
Wilson Ho (China) (852) 3922 3248
William Montgomery (Japan) (813) 3512 7864
Corinne Jian (Taiwan) (8862) 2734 7522
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Aiman Mohamad (Malaysia) (603) 2059 8986
Kervin Sisayan (Philippines) (632) 857 0893
Patti Tomaitrichitr (Thailand) (662) 694 7727
Resources / Metals and Mining
Polina Diyachkina (Asia, Japan) (813) 3512 7886
Coria Chow (China) (852) 3922 1181
Anna Park (Korea) (822) 3705 8669
Sumangal Nevatia (India) (9122) 6720 4093
Technology
Damian Thong (Asia, Japan) (813) 3512 7877
George Chang (Japan) (813) 3512 7854
Daniel Kim (Korea) (822) 3705 8641
Allen Chang (Greater China) (852) 3922 1136
Jeffrey Ohlweiler (Greater China) (8862) 2734 7512
Patrick Liao (Greater China) (8862) 2734 7515
Louis Cheng (Greater China) (8862) 2734 7526
Kaylin Tsai (Greater China) (8862) 2734 7523
Telecoms
Soyun Shin (Korea) (822) 3705 8659
Prem Jearajasingam (ASEAN) (603) 2059 8989
Kervin Sisayan (Philippines) (632) 857 0893
Transport & Infrastructure
Janet Lewis (Asia) (852) 3922 5417
Corinne Jian (Taiwan) (8862) 2734 7522
Azita Nazrene (ASEAN) (603) 2059 8980
Utilities & Renewables
Patrick Dai (China) (8621) 2412 9082
Candice Chen (China) (8621) 2412 9087
Alan Hon (Hong Kong) (852) 3922 3589
Inderjeetsingh Bhatia (India) (9122) 6720 4087
Prem Jearajasingam (Malaysia) (603) 2059 8989
Karisa Magpayo (Philippines) (632) 857 0899
Commodities
Colin Hamilton (Global) (44 20) 3037 4061
Ian Roper (65) 6601 0698
Jim Lennon (44 20) 3037 4271
Lynn Zhao (8621) 2412 9035
Matthew Turner (44 20) 3037 4340
Economics
Peter Eadon-Clarke (Global) (813) 3512 7850
Larry Hu (China, Hong Kong) (852) 3922 3778
Tanvee Gupta Jain (India) (9122) 6720 4355
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Gurvinder Brar (Global) (44 20) 3037 4036
Woei Chan (Asia) (852) 3922 1421
Danny Deng (Asia) (852) 3922 4646
Per Gullberg (Asia) (852) 3922 1478
Strategy/Country
Viktor Shvets (Asia, Global) (852) 3922 3883
Chetan Seth (Asia) (852) 3922 4769
David Ng (China, Hong Kong) (852) 3922 1291
Peter Eadon-Clarke (Japan) (813) 3512 7850
Chan Hwang (Korea) (822) 3705 8643
Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512
Inderjeetsingh Bhatia (India) (9122) 6720 4087
Jayden Vantarakis (Indonesia) (6221) 2598 8310
Anand Pathmakanthan (Malaysia) (603) 2059 8833
Gilbert Lopez (Philippines) (632) 857 0892
Conrad Werner (Singapore) (65) 6601 0182
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Asia Sales Regional Heads of Sales
Miki Edelman (Global) (1 212) 231 6121
Jeff Evans (Boston) (1 617) 598 2508
Jeffrey Shiu (China, Hong Kong) (852) 3922 2061
Sandeep Bhatia (India) (9122) 6720 4101
Thomas Renz (Geneva) (41 22) 818 7712
Riaz Hyder (Indonesia) (6221) 2598 8486
Nick Cant (Japan) (65) 6601 0210
John Jay Lee (Korea) (822) 3705 9988
Nik Hadi (Malaysia) (603) 2059 8888
Eric Roles (New York) (1 212) 231 2559
Gino C Rojas (Philippines) (632) 857 0861
Regional Heads of Sales cont’d
Paul Colaco (San Francisco) (1 415) 762 5003
Amelia Mehta (Singapore) (65) 6601 0211
Angus Kent (Thailand) (662) 694 7601
Ben Musgrave (UK/Europe) (44 20) 3037 4882
Christina Lee (UK/Europe) (44 20) 3037 4873
Sales Trading
Adam Zaki (Asia) (852) 3922 2002
Stanley Dunda (Indonesia) (6221) 515 1555
Sales Trading cont’d
Suhaida Samsudin (Malaysia) (603) 2059 8888
Michael Santos (Philippines) (632) 857 0813
Chris Reale (New York) (1 212) 231 2555
Marc Rosa (New York) (1 212) 231 2555
Justin Morrison (Singapore) (65) 6601 0288
Daniel Clarke (Taiwan) (8862) 2734 7580
Brendan Rake (Thailand) (662) 694 7707
Mike Keen (UK/Europe) (44 20) 3037 4905
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This publication was disseminated on 26 January 2017 at 18:20 UTC.