Recent CGS-CIMB Research Ideas Asia Pacific Daily - 6 ... · The key difference against earlier proposal is the decision to raise the price ... Crude Palm Stearin 50 0 25 50 Palm

Asia Pacific Daily - 6 December 2018 Equity Research Reports…

▌REGIONAL / ASEAN / APAC Agribusiness (NEUTRAL) - The finer details on Indonesia's export levy | P2 ——————————————————————————————————————————————————————————————————————————————————————— ▌Economics MAL - Economic Update - Oct 2018 trade | P3 ——————————————————————————————————————————————————————————————————————————————————————— ▌Australia Redhill Education (ADD- Initiation, tp:A$3.20) - Passes the test… initiate with Add | P4 Telstra Corporation (ADD, tp:A$3.50) - Getting geed up for 5G | P5 ——————————————————————————————————————————————————————————————————————————————————————— ▌China/Hong Kong Agricultural Bank of China (ADD, tp:HK$4.90▼) - Safety buffers amidst uncertain times | P6 Agricultural Bank of China-A (ADD, tp:Rmb4.70▼) - Safety buffers amidst uncertain times | P7 Bank of China (ADD, tp:HK$5.10▼) - Benefiting from offshore tailwinds | P8 Bank of China-A (ADD, tp:Rmb5.10▼) - Benefiting from offshore tailwinds | P9 Bank of Communications (HOLD▼, tp:HK$6.30▼) - Hold on vulnerability to corporate credit… | P10 Bank of Communications-A (HOLD▼, tp:Rmb6.20▼) - Hold on vulnerability to corporate…| P11 China CITIC Bank (HOLD▼, tp:HK$4.70▼) - Downgrade to Hold; capital is a concern | P12 China CITIC Bank-A (REDUCE▼, tp:Rmb5.20▼) - Downgrade to Reduce; capital a concern | P13 China Construction Bank (ADD, tp:HK$9.60▼) - Biggest beneficiary of mortgage repricing | P14 China Construction Bank-A (ADD, tp:Rmb9.20▼) - Biggest beneficiary of mortgage repricing | P15 China Merchants Bank (ADD, tp:HK$38.00▼) - ROE recovery to continue | P16 China Merchants Bank-A (ADD, tp:Rmb36.00▲) - ROE recovery to continue | P17 China Minsheng Bank (ADD, tp:HK$6.70▼) - Highly attractive valuations in need of a catalyst | P18 China Minsheng Bank-A (ADD, tp:Rmb7.00▼) - Highly attractive valuations in need of…| P19 Chongqing Rural Comm Bank (ADD, tp:HK$6.40▼) - Overreaction to asset quality concerns | P20 Galaxy Entertainment (ADD, tp:HK$59.62) - NDR feedback | P21 ICBC (ADD, tp:HK$7.30▼) - A rising valuation premium amidst uncertainty | P22 ICBC-A (ADD, tp:Rmb7.00▼) - A rising valuation premium amidst uncertainty | P23 ——————————————————————————————————————————————————————————————————————————————————————— ▌South Korea Samsung Engineering (ADD▲, tp:W23,000.00▲) - More bullish on orders and earnings … | P24 ——————————————————————————————————————————————————————————————————————————————————————— ▌Malaysia Astro Malaysia (ADD▲, tp:RM1.75) - Astronomically cheap | P25 Berjaya Food Berhad (ADD▲, tp:RM1.83▲) - Breathing life into its KRR business | P26 Kossan Rubber Industries (ADD, tp:RM5.16) - Expect the valuation gap with its peers to narrow | P27 MY E.G. Services (ADD, tp:RM1.86) - More about the Indonesia operations | P28 ——————————————————————————————————————————————————————————————————————————————————————— ▌Thailand VGI Global Media PCL (ADD, tp:THB9.00) - Site visit to VGI Malaysia | P29 ——————————————————————————————————————————————————————————————————————————————————————— ▌Vietnam Hoa Phat Group (ADD, tp:VND47,800.00) - Management downplays concerns | P30

Recent CGS-CIMB Research Ideas —————————————————————————————————

CHN: Property - Overall 3/12 A-share property developers: value emerges

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IND: Navigating Indonesia 2019 30/11 Risk vs. Value

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SIN: Navigating Singapore 2019 29/11 Keep calm and trade on

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KRW: IT Services 29/11 Korea’s mobile game industry has peaked

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CHN: Navigating China: Technology - Handsets 28/11 Display panel makers get AMOLED boost

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Regional Equity Research Contact ————————————————————————————————— Bertram LAI Head of Research T: (852) 2532 1111 E: [email protected]

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Upcoming Events

CIMB 11th Annual Malaysia Corporate Day 03 - 04 Jan 2019; Theme: Malaysia LOC: Kuala Lumpur —————————————————————————————————————————

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

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Sector Flash Note Commodities │ ASEAN



Agribusiness

The finer details on Indonesia's export levy ■ Indonesia issues regulation on its revised export levy rates for palm products. ■ The key difference against earlier proposal is the decision to raise the price

thresholds to be in line with the Trade Ministry’s reference price. ■ The move is likely to benefit upstream planters and disadvantage processors.

Regulation on revised export levy rates for palm products out Indonesia has revised the export levies on palm oil and its derivative products following a drop in prices, according to a Finance Ministry regulation on the government website. Under the revised ruling, the government will not collect levies from palm exporters when prices are below a threshold of US$570 per tonne, but will charge US$10-25 a tonne once prices are in a range of US$570-619 per tonne. The levy will rise to US$20-50 when prices hit above US$619 per tonne. Under the previous rules for levies, exporters paid US$20-50 per tonne regardless of palm price levels.

How and why the details differ from earlier proposal in late-Nov The details of the new regulation were different from those announced last week. Indonesia's Coordinating Minister for Economic Affairs Darmin Nasution had earlier said the zero levy would be implemented when prices go below US$500 per tonne (vs. US$570 per tonne in the final regulation) and the export levy will revert to US$20-50 per tonne when CPO prices rise above US$549 per tonne (vs. US$619 per tonne in the new regulation). He explained that the difference in price thresholds was due to the adoption of the Trade Ministry's reference price for the regulation.

Monthly reference price will be used to determine the export levy We are slightly surprised by Indonesia's decision to raise the price threshold by US$70 per tonne vs. previous proposal. This is because the government will use the Trade Ministry’s monthly reference price in deciding the monthly levy, according to the regulation. The monthly reference price is set based on palm prices in Indonesia, Malaysia and Rotterdam. We gather that the higher crude palm oil prices in Rotterdam (typically ranges from US$60-70 per tonne premium to spot prices in Malaysia) means the government has to increase the floor price for exports to be imposed with levies.

Potential impact on CPO prices We maintain our view that the removal of export levy will raise the competitiveness of Indonesian palm oil product exporters as they would have saved between US$20-50 per tonne export tax when CPO price is below US$570 per tonne. The bulk of the savings is likely to flow back to the Indonesian farmers via higher domestic CPO prices. However, should there be an acute excess supply of palm oil in the global market, the benefits may be accrued to importers via lower prices. This should help narrow the selling price gap between Indonesian and Malaysian CPO products, which have expanded to RM420 (US$100) per tonne in 3Q18, back to possibly around US$30-50 per tonne over time.

Positive for Indonesian planters at current low CPO price This news is positive for upstream planters with exposure to Indonesia as the revision in export levy rates could help support CPO prices at current levels. However, it will not have significant impact on our FY19F/20F net profit forecast for planters, which assumes CPO price of RM2,400/RM2,500 per tonne (US$641/US$665 per tonne) at the threshold where the export levy remains status quo. This news is negative for Indonesian downstream processors as at lower CPO prices, the revised levy will erode the margin advantage of downstream players, which is currently the price difference between CPO and processed palm products. Maintain Neutral rating on the sector.

Figure 1: Revision to Indonesia's palm oil export levy structure

SOURCES: CIMB RESEARCH, Ministry of Finance

Products Current Structure

US$/tonne Export Levy < US$570/tonne US$570/tonne - US$619/tonne US$619/tonne

Crude Palm Oil 50 0 25 50Crude Palm Olein 50 0 25 50Crude Palm Stearin 50 0 25 50Palm Fatty Acid Distillate (PFAD) 40 0 20 40RBD Palm Olein and others 30 0 15 30RBD Palm Oil and others 20 0 10 20Biodiesel (with Methyl Ester content > 96.5%) 20 0 10 20

Proposed revision to export levy

CPO price

ASEAN December 5, 2018 - 8:48 PM

Neutral (no change)

Highlighted Companies

First Resources Ltd ADD, TP S$2.08, S$1.62 close

The attraction of First Resources lies in its strong output growth prospects due to its young estates and undemanding valuation of 13x P/E for CY18F.

Genting Plantations ADD, TP RM10.50, RM9.72 close

We like Genting Plantations for its rich land bank and young estates. The group has one of the youngest estates age profiles compared with its big cap peers in Malaysia.

Wilmar International ADD, TP S$4.10, S$3.14 close

We like Wilmar due to its attractive valuations and plans to unlock value via the listing of its China operations by 2H19.

Summary Valuation Metrics

Insert

Analyst(s)

Ivy NG Lee Fang, CFA

T (60) 3 2261 9073 E [email protected]

P/E (x) Dec-18F Dec-19F Dec-20F

First Resources Ltd 15.16 12.69 11.56 Genting Plantations 40.06 33.29 26.19 Wilmar International 13.35 12.01 11.11

P/BV (x) Dec-18F Dec-19F Dec-20F

First Resources Ltd 1.78 1.62 1.47 Genting Plantations 1.73 1.69 1.65 Wilmar International 0.89 0.85 0.81

Dividend Yield Dec-18F Dec-19F Dec-20F

First Resources Ltd 1.98% 2.36% 2.60%Genting Plantations 1.52% 1.83% 2.44%Wilmar International 3.00% 3.33% 3.60%

2

Economics Note Malaysia December 5, 2018



Economics Update Oct 2018 trade ■ Malaysia posts a record trade surplus of RM16.3bn in Oct as gross exports

hit a new high on sturdy O&G and manufactured outward shipments. ■ The US-China trade truce provides a brief respite, but trade outlook remains

uncertain amid slowing global growth and tighter financial conditions.

Record-breaking trade surplus outperforms expectations Oct’s trade performance handily beat expectations, with trade surplus hitting a record high of RM16.3bn (+RM15.2bn in Sep). Gross exports increased 17.7% yoy to RM96.4bn (+6.5% yoy in Sep), while gross import growth rebounded to +11.4% yoy, after a brief 2.8% yoy contraction in Sep as the SST kicked in.

Exports receive boost from commodities… The peaking of oil prices in Oct lifted the export performance of LNG (+38.8% yoy in Oct vs. +1.8% yoy in Sep), refined petroleum products (+37.3% yoy in Oct vs. +20.5% yoy in Sep) and crude petroleum (+32.8% yoy in Oct vs. +54.5% yoy in Sep). LNG export volume in Oct rose for the first time in 5 months (+7.2% yoy vs. -15.6% yoy in Sep). Note that LNG export volume had only recorded positive growth in three months this year (Jan, May and Oct) following disruptions to the Sabah Sarawak Gas Pipeline in Jan. Petronas guided that the production at the pipeline was expected to return to full capacity by Aug 2019 following the expected completion of integrity assurance tests by Jul 2019.

… while manufacturing shipments rebound sharply The better performance of manufactured exports was driven by E&E (+23.3% yoy in Oct vs. +6.5% yoy in Sep), chemical and chemical products (+36.5% yoy vs. +31.7% yoy in Sep), metal products (+29% yoy vs. -2.2% yoy in Sep), and machinery, appliances and parts (+4.2% yoy vs. +1.8% yoy in Sep). Stronger demand for Malaysian exports mainly came from China (+33% yoy vs. -0.6% yoy in Sep), Japan (+10.2% yoy vs. -10.7% yoy in Sep), Taiwan (+63% yoy vs. +52.9% yoy in Sep), ASEAN (+16% yoy vs. +5.8% yoy) and the US (+7.6% yoy vs. +0.1% yoy in Sep).

Resumption in import activity a month after the imposition of SST Purchases of overseas goods resumed in Oct, led by imports of consumption goods (+7.6% yoy vs. -10% yoy in Sep) and intermediate goods (+1% yoy vs. -9.5% yoy in Sep), suggesting that domestic demand remains well-supported even after the tax holiday. The decline in imports of capital goods eased (-1.6% yoy vs. -25.1% yoy in Sep).

Temporary reprieve from 90-day truce between the US and China The improvements in trade activity echo similar trends elsewhere in Asia (South Korea, Taiwan, Singapore, Thailand, and India) on favourable base effects, as well as some signs of regional inventory restocking. The 90-day trade truce between the US and China which includes holding off planned increases in bilateral tariffs from 10% to 25% on 1 Jan next year offers a temporary reprieve after the build-up in trade frictions throughout this year. However, risks have not abated completely, amid slowing global growth next year, tightening financial conditions and the still-cautious sentiment over the dimming trade outlook, as evidenced by the dip in Malaysia’s manufacturing PMI from 49.2 in Oct to 48.2 in Nov.

Figure 1: Malaysia’s key trade statistics

SOURCES: DEPARTMENT OF STATISTICS (DOS), CEIC, CIMB RESEARCH

Malaysia

Trade forecast

Export performance

Insert

Economist(s)

Michelle CHIA

T (60) 3 2261 9097 E [email protected] LIM Yee Ping T (60) 3 2261 9083 E [email protected]

Actual

Oct-18 CIMB Cons.*Exports (%yoy) 17.7 6.9 5.8Imports (%yoy) 11.4 3.0 3.3Trade balance (RM bn) 16.3 13.5 11.6*Bloomberg median consensus

Forecast

-10 0 10 20 30

Indonesia

Taiwan

Thailand

Vietnam

Hong Kong

China

Malaysia

India

Singapore

Korea

%yoy

Oct-18

Sep-18

Aug-18 Sep-18 Oct-18 10M18 Aug-18 Sep-18 Oct-18

RM bn % share % yoy % yoy % yoy % yoy % mom % mom % mom

Total trade 176.4 - 5.1 2.1 14.8 6.5 -1.2 -7.0 17.1Exports 96.4 100.0 -0.3 6.5 17.7 7.5 -5.0 1.4 16.2

Manufactured goods 81.0 84.0 1.8 7.8 19.9 9.9 -6.0 2.5 15.3Imports* 80.1 100.0 11.2 -2.8 11.4 5.4 3.0 -15.6 18.2

Capital goods 9.4 11.8 25.1 -25.1 -1.6 -1.0 21.1 -37.2 29.3Intermediate goods 39.3 49.1 4.3 -9.5 1.0 -4.9 12.8 -20.6 10.1Consumption goods 6.4 8.0 14.2 -10.0 7.6 2.3 7.0 -27.7 24.3

Trade balance (RM bn) 16.3 - 1.6 15.2 16.3 102.0 - - -*Sum of re-exports and capital, intermediate and consumer goods imports

Oct-18

3

Education│Australia│Equity research│December 4, 2018

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

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Redhill Education

Passes the test… initiate with Add

We initiate coverage on RedHill Education (RDH) with an Add and a A$3.20 PT. ■ RDH has leverage to strong industry fundamentals; a reasonable valuation (~18x, ■

>30% discount to peers), offers a c20% 3-year EPS CAGR; a net cash BS position (providing potential acquisition optionality); and a >20% ROE.

RDH has delivered a c30% 3-year EPS CAGR (FY15-18) through its organic ■growth strategy (industry growth; campus expansions; new product offerings). Continuation of this strategy should see strong earnings growth over the medium term, primarily driven by expansion of its Melbourne campus and GMC.

Upside risks to our medium-term forecasts: 1) Brisbane campus launch; 2) ■increased VSL funding; and 3) further expansion in NSW/VIC.

Introducing RedHill Education RedHill Education (RDH) is a provider of education and international student agency services in Australia. RDH provides educational services to 18,000 students across five campuses (Sydney/Melbourne based), offering >50 courses across the ELICOS, Higher Education (HE) and VET sectors. RDH operates a multi-branded strategy, comprising: Greenwich (provides English language courses); Greenwich Management College (provides business-focused certificate/diploma courses); Academy of Information Technology (provides IT/video/gaming/animation HE/diploma courses); and ISCD (provides interior design VET courses). The majority of RDH’s students (c80%) are international students, with Brazil/Latin America and Europe key exposures. Delivered a c28% 3-year EPS CAGR from organic initiatives… Following a challenging period post listing in 2012-2014, RDH has rebased the business and subsequently grown the business through organic initiatives. Strong growth in student volumes (c18k in FY19 vs c5.5k in FY13) has been the result of: 1) geographical expansion (entry into Melbourne); 2) expansion of existing campuses; 3) increased course offering (course offering has tripled since FY13); and 4) exposure to strong industry growth in inbound international student volumes (international enrolments at a 11.5% 3-year CAGR). The private-provider education space remains very fragmented, with RDH having significant room for organic expansion in existing – and new – regions. …we forecast continued strong earnings growth We forecast a 19.2% EPS CAGR over the next three years, primarily driven by the recent expansion of the Melbourne campus (+21 classrooms); continued growth in Greenwich (in particular GMC); and stronger earnings growth in FY20 following one-off expansion costs in FY19. RDH recently provided 1H19 guidance expectations (revenue growth +10% yoy; EBITDA impacted by one-off investment). While RDH’s expansion initiatives may impact the short-term profitability from time-to-time, we highlight that RDH targets a c3-year payback from any expansion initiatives. There is potential upside to our forecasts, in our view, from: 1) launch of a new Brisbane campus (potentially 2H19); 2) stronger-than-expected course development; 3) increased VET/VSL funding resulting from the VET sector review recently announced; and 4) accretive acquisitions. Initiate with an Add rating and a A$3.20 target price RDH has generated strong revenue and earnings growth in recent years – a trend we expect to continue. RDH has a strong balance sheet position, boasts strong ROE metrics (21% FY19F) and provides investors with one of the few exposures to the Australian education industry. We value RDH at A$3.20ps using a blended (DCF, EV/EBITDA) valuation. Key risks: regulatory changes; reduced demand for RDH’s products; accreditation risks; slow-down in international students; and brand damage.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia

ADD Current price: A$2.35 Target price: A$3.20 Previous target: A$ Up/downside: 36.4% Reuters: RDH.AX Bloomberg: RDH AU Market cap: US$53.18m A$72.06m Average daily turnover: US$0.19m A$0.27m Current shares o/s 30.35m Free float: 60.0%

Price performance 1M 3M 12M

Absolute (%) -23.2 -36 19 Relative (%) -21.9 -27.4 22.7

James BARKER

T (61) 7 3334 4893

E [email protected] Josephine LITTLE

T (61) 7 3334 4505

E [email protected]

Analyst(s) own shares in the following stock(s) mentioned in this report: – N/A

Financial Summary Jun-17A Jun-18A Jun-19F Jun-20F Jun-21F

Revenue (A$m) 41.47 54.59 62.60 71.31 80.13Operating EBITDA (A$m) 3.89 6.62 7.48 9.47 11.02Net Profit (A$m) 1.74 3.51 4.05 5.01 5.94Normalised EPS (A$) 0.06 0.11 0.13 0.16 0.19Normalised EPS Growth 424% 100% 15% 24% 19%FD Normalised P/E (x) 41.26 20.60 17.85 14.42 12.16DPS (A$) 0.020 0.040 0.050 0.060 0.070Dividend Yield 0.85% 1.70% 2.13% 2.55% 2.98%EV/EBITDA (x) 16.81 9.42 7.92 5.89 4.61P/FCFE (x) 40.42 14.78 15.96 12.85 10.01Net Gearing (43.6%) (58.5%) (65.6%) (71.9%) (79.8%)P/BV (x) 4.95 4.24 3.64 3.14 2.68ROE 12.8% 22.3% 21.9% 23.4% 23.8%% Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x) 0.88 0.80 0.72

87

111

135

159

183

207

1.70

2.20

2.70

3.20

3.70

4.20Price Close Relative to S&P/ASX 200 (RHS)

Source: Bloomberg

1234

Dec-17 Mar-18 Jun-18 Sep-18

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Telco - Integrated│Australia│Equity research│December 5, 2018

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

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Telstra Corporation

Getting geed up for 5G

TLS hosted an investor day today. Operating conditions sound broadly similar to ■2H18 and FY19 guidance was reiterated. It was noted that FCF will be skewed more heavily to the 2H19 due to ~60% of FY19 capex occurring in 1H19.

The T22 restructure is tracking to plan and the majority of the time was dedicated ■to working though the implications of 5G (which are positive).

We make no forecast or valuation changes. Retain Add and A$3.50 price target. ■

The next generation (5G) seems likely to be a new chapter This was largely an educational session that delved into the technicalities of 5G. Earlier in the year we published a report titled “What you need to know about 5G” so most of today’s details were not new to us. CEO Andy Penn, and a few of our industry contacts, have said that 5G could be the circuit breaker that resets mobile price wars. Today everyone operates a 4G network and while TLS’ is a superior network it’s harder to differentiate on quality of service when everyone is selling a broadly similar service. 5G could reset pricing as from CY19 the different telcos will sell different 5G services. The top three priorities for consumers, when picking a carrier, tend to be reliability aka Quality of Service (QoS), throughput (speed and volume) and price. QoS and throughput tend to be a top priority nearly 60% of the time and this will play to TLS’ strength when consumers start focusing on 5G services.

TLS has already done a lot of the 5G heavy lifting A large portion of 5G capex has been incurred by TLS in FY18 and FY19 so there is not another large capex spend to come. In fact capex, as a percentage of revenue, is expected to drop in a few years. Capex is currently elevated due to A$3bn of “strategic capex” which is partly transformation program and partly 5G spend. Both are about simplification and automation to improve the cost base and this is a critical part of 5G.

Catalysts for a re-rating The TLS share price remains under pressure as investors struggle to understand how the business looks in the medium term. This will take time to unfold and hinges on delivery of the T22 program. That said, there are a number of catalysts which could see the stock re-rate. Foremost, this relates to pricing pressure easing. NBN pricing has stabilised over the last six months but mobile pricing remains under pressure. We expect mobile ARPU pressure to reset in CY19 due to the likely merger of TPG & Vodafone and 5G differentiation. Optically splitting Retail and InfraCo could allow a re-rate as infrastructure earnings are often valued twice as highly as retail (valuations could increase by ~A$1).

Investment view – Add retained Our forecasts, valuation and price remain unchanged at A$3.50. We see TLS as a relative safe haven in volatile equity markets. Upside risk relate to a share price re-rating once the market gains comfort with what sustainable EBITDA is. Downside risks relate to management’s ability more clearly articulate TLS’ sustainable EBITDA and deliver the cost out steps required to get there. There is a risk that the competitive environment worsens but we think CY19 is peak competition and pessimism.

SOURCE: MORGANS, COMPANY REPORTS

▎Australia

ADD (no change) Current price: A$3.01 Target price: A$3.50 Previous target: A$3.50 Up/downside: 16.2% Reuters: TLS.AX Bloomberg: TLS AU Market cap: US$26,430m A$35,799m Average daily turnover: US$85.82m A$119.3m Current shares o/s 11,962m Free float: 100.0%


Absolute (%) -1.6 -1 -14 Relative (%) -0.3 7.3 -10.4

Nick Harris

T +61 7 3334 4557

E [email protected] James BARKER

T (61) 7 3334 4893

E [email protected]

Analyst(s) own shares in the following stock(s) mentioned in this report: – Telstra Corporation

Financial Summary Jun-17A Jun-18A Jun-19F Jun-20F Jun-21F

Revenue (A$m) 28,205 29,042 27,013 26,325 25,301Operating EBITDA (A$m) 10,679 10,282 8,538 8,599 8,482Net Profit (A$m) 3,874 3,417 2,239 2,167 2,352Normalised EPS (A$) 0.32 0.31 0.19 0.18 0.20Normalised EPS Growth 1.9% (4.1%) (39.3%) (3.2%) 8.5%FD Normalised P/E (x) 9.33 9.73 15.98 16.50 15.21DPS (A$) 0.31 0.22 0.17 0.17 0.17Dividend Yield 10.3% 7.3% 5.6% 5.6% 5.6%EV/EBITDA (x) 4.90 5.06 6.15 6.06 5.96P/FCFE (x) 12.09 15.94 16.85 17.61 14.05Net Gearing 112% 109% 112% 108% 96%P/BV (x) 2.48 2.38 2.39 2.37 2.32ROE 25.5% 25.0% 14.9% 14.4% 15.4%Normalised EPS/consensus EPS (x) 0.90 0.84 1.00

65.0

79.3

93.6

2.50

3.00

3.50

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

Source: Bloomberg

50100150200


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Company Note Banks │ Hong Kong │ December 5, 2018



Insert Insert

Agricultural Bank of China Safety buffers amidst uncertain times ■ A cleaner loan book, strong provisioning buffers, a post-IPO record high

CET1 ratio and a strong deposit franchise are key reasons to like ABC. ■ Nevertheless, we lower our net profit estimates due to uncertainties caused

by trade war tensions, with an even higher provisioning buffers forecast. ■ Maintain Add rating. TP is cut to HK$4.90 from HK$5.90.

Impressive reduction in NPL ratio has led to a cleaner loan book ABC’s NPL ratio has fallen the most among peers in recent years, from a peak of 2.40% in 2Q16 to 1.60% in 3Q18, via a greater use of NPL write-offs, which give it a cleaner loan book. In our view, the impressive improvement in ABC’s NPL ratios has helped ease investors’ concerns that it is a materially riskier bank than other big bank peers.

Best provisioned among the big four banks ABC increased its provisioning coverage ratio to 255% in 3Q18, which is the third highest within the sector and the highest among big four banks. Similarly, its loan loss reserve ratio was 4.08%, the highest among big four banks. These stronger provisioning buffers make ABC relatively less vulnerable compared to peers, in our view, as trade war tensions rise and the macroeconomic environment becomes more uncertain.

Record high CET1 ratio significantly assuages investor concerns After the Rmb100bn private placement of ABC’s A-shares in 1H18, ABC has reached a post 2010-IPO record high core equity Tier 1 (CET1) ratio of 11.3% in 3Q18. In our view, this will significantly assuage investors’ concerns about the need for any ordinary equity capital raisings in the near to medium term.

Relatively immune to deposit competition We believe ABC is well positioned versus peers as competition for deposits intensifies, due to its strong deposit franchise. Its demand deposit-to-total deposit ratio was 57.8% in 3Q18, the highest among peers. Importantly, a large portion of its deposits are in county regions (43% in 3Q18), where we believe that the deposit competition is less intense.

Second-highest mortgage mix among peers ABC’s mortgages-to-total loans ratio was 29.7% in 1H18, the second highest among peers. We remain bullish about net interest margin expansion of the mortgage portfolio as the back book of mortgages run off and is replaced by new inflows at higher yields over the FY17-20F period.

Add maintained; TP lowered to HK$4.90 from HK$5.90 We arrive at our lowered target price using a stress-test adjusted GGM. Our lower TP is primarily due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption, as well as a lower Rmb/HK$ (for FY19F of 1.06 vs. 1.18 previously). See pages 3-6 for valuation and risks.

SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS

Hong Kong

ADD (no change)

Consensus ratings*: Buy 26 Hold 5 Sell 0

Current price: HK$3.61 Target price: HK$4.90 Previous target: HK$5.90

Up/downside: 35.7% CGS-CIMB / Consensus: 6.4%

Reuters: 1288.HK Bloomberg: 1288 HK Market cap: US$182,637m HK$1,425,864m Average daily turnover: US$65.03m HK$509.5m Current shares o/s: 324,794m Free float: 59.7% *Source: Bloomberg

Key changes in this note

FY18F EPS decreased by 2.3%. FY19F EPS decreased by 9.3%. FY20F EPS decreased by 16.0%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 1.1 -5 -0.3 Relative (%) -1.8 -2.4 6.2

Major shareholders % held Huijin 40.3 Insert

Analyst(s)

Michael CHANG, CFA

T (852) 2539 1323 E [email protected]

Financial Summary Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Net Interest Income (Rmbm) 398,104 441,930 469,392 485,512 529,300Total Non-Interest Income (Rmbm) 112,024 100,968 120,013 129,761 142,738Operating Revenue (Rmbm) 510,128 542,898 589,405 615,273 672,038Total Provision Charges (Rmbm) (86,446) (98,166) (117,699) (117,857) (132,293)Net Profit (Rmbm) 179,341 188,416 202,855 220,725 242,547Core EPS (Rmb) 0.55 0.58 0.61 0.63 0.69Core EPS Growth 0.65% 5.06% 5.43% 2.44% 9.89%FD Core P/E (x) 5.72 5.45 5.17 5.04 4.59DPS (Rmb) 0.17 0.18 0.18 0.19 0.21Dividend Yield 5.38% 5.64% 5.60% 6.09% 6.69%BVPS (Rmb) 3.81 4.15 4.49 4.94 5.44P/BV (x) 0.83 0.76 0.70 0.64 0.58ROE 15.1% 14.6% 13.9% 13.3% 13.3%% Change In Core EPS Estimates (0.3%) (9.3%) (16.0%)CIMB/consensus EPS (x) 1.01 0.97 0.95

93.0

102.7

112.4

122.2

3.20

3.70

4.20

4.70

Price Close Relative to HSI (RHS)

200400600800


Vol m

6

Company Note Banks │ China │ December 5, 2018



Insert Insert

Agricultural Bank of China-A Safety buffers amidst uncertain times ■ A cleaner loan book, strong provisioning buffers, a post-IPO record high

CET1 ratio and a strong deposit franchise are key reasons to like ABC. ■ Nevertheless, we lower our net profit estimates due to uncertainties caused

by trade war tensions, with an even-larger provisioning buffers forecast. ■ Maintain Add rating. TP is cut to Rmb4.70 from Rmb5.10.

Impressive reduction of NPL ratio has led to a cleaner loan book ABC’s NPL ratio has fallen the most among peers in recent years, from a peak of 2.40% in 2Q16 to 1.60% in 3Q18, via a greater use of NPL write-offs, which give it a cleaner loan book. In our view, the impressive improvement in ABC’s NPL ratios has helped ease investors’ concerns that it is a materially riskier bank than other big bank peers.

Best provisioned among the big four banks ABC increased its provisioning coverage ratio to 255% in 3Q18, which is the third highest within the sector and the highest among big four banks. Similarly, its loan loss reserve ratio was 4.08%, the highest among big four banks. These stronger provisioning buffers make ABC relatively less vulnerable compared to peers, in our view, as trade war tensions rise and the macroeconomic environment becomes more uncertain.

Record high CET1 ratio significantly assuages investor concerns After the Rmb100bn private placement of ABC’s A-shares in 1H18, ABC has reached a post 2010-IPO record high core equity Tier 1 (CET1) ratio of 11.3% in 3Q18. In our view, this will significantly assuage investors’ concerns about the need for any ordinary equity capital raisings in the near to medium term.

Relatively immune to deposit competition We believe ABC is well positioned versus peers as competition for deposits intensifies, due to its strong deposit franchise. Its demand deposit-to-total deposit ratio was 57.8% in 3Q18, the highest among peers. Importantly, a large portion of its deposits are in county regions (43% in 3Q18), where we believe that the deposit competition is less intense.

Second-highest mortgage mix among peers ABC’s mortgages-to-total loans ratio was 29.7% in 1H18, the second highest among peers. We remain bullish about net interest margin expansion of the mortgage portfolio over FY17-20F as we expect higher-yielding new mortgage inflows to replace maturing mortgages that are at lower yields.

Add maintained; TP lowered to Rmb4.70 from Rmb5.10 We arrive at our lowered target price using a stress-test adjusted GGM and the historical A-H share valuation gap averaged since Jan 2011. Our lower TP is primarily due to a lower sustainable ROE assumption arising from more conservative provisioning and a higher ‘true’ corporate NPL ratio assumption. See pages 3-7 for valuation and risks.


China

ADD (no change)


Current price: Rmb3.61 Target price: Rmb4.70 Previous target: Rmb5.10


Reuters: 601288.SS Bloomberg: 601288 CH Market cap: US$182,821m Rmb1,249,672m Average daily turnover: US$119.0m Rmb822.8m Current shares o/s: 324,794m Free float: 59.7% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -6.7 -1.1 -3.5 Relative (%) -6.3 2 16

Major shareholders % held Huijin 40.3 Insert

Analyst(s)

Michael CHANG, CFA




93.0

102.7

112.4

122.2

3.10

3.60

4.10

4.60

Price Close Relative to SHCOMP (RHS)

1122


Vol b

7




Insert Insert

Bank of China Benefiting from offshore tailwinds ■ BOC is a key beneficiary of the rising US rate cycle, solid revenue growth

from One Belt, One Road-related lending, and Rmb liberalisation initiatives. ■ We lower FY18-20F net profit growth estimates by 3-14% to reflect BOC's

more conservative provision policy and the uncertain economic environment. ■ Add rating maintained; TP is revised down to HK$5.10 from HK$6.60.

Tailwinds from across the Pacific Ocean BOC is a clear beneficiary of a rising US rate cycle via rising net interest margin (NIM), as 21.5% of its loans (as at 1H18) are from overseas, primarily HK, where the US$/HK$ currency peg tends to result in US and Hong Kong interest rates moving in line with each other over the medium term. BOC’s NIM in 9M18 was 1.89%, up 4bp yoy, and we expect NIM to continue to gradually improve.

Other factors helping to drive NIM upwards With 1H18 mortgage mix at 29% of total loans, the third highest among the China banks under our coverage, BOC is a major beneficiary of rising mortgage rates, as yields on new mortgage inflows have been steadily rising over the past 22 months. Continuous cuts in reserve requirement ratios (RRR) are also another driver of NIM improvement.

Benefiting from China’s OBOR policy and Rmb liberalisation In our view, BOC is still a major beneficiary of One Belt, One Road (OBOR) projects, given its greater-than-peer offshore presence. Its sizeable Hong Kong presence also makes it better placed than its listed peers to benefit from Rmb liberalisation initiatives.

Adoption of IRB is a key differentiator in return on capital The adoption of internal ratings-based (IRB) models to compute risk-weighted assets (RWA) and hence, capital ratios, allows BOC to enjoy the benefits of capital-efficient loan growth, especially for its consumer loan portfolio.

Earnings recovery to continue to strengthen We cut our net profit estimates for FY18-20F by 3-14%, as we believe BOC will be more conservative in its provisioning policies. We now forecast net profit growth of 6%/ 8%/9% for FY18/19/20F. The likely drivers of this recovery in net profit growth are higher NIM, lower cost-to-income ratios and falling effective tax rates.

Add rating maintained; TP revised down to HK$5.10 from HK$6.60 We arrive at our HK$5.10 TP using a stress-test-adjusted GGM. Our TP declines mainly due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption and a lower Rmb/HK$. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth, and further southbound flows under the Shanghai-Hong Kong Stock Connect.


Hong Kong

ADD (no change)




Reuters: 3988.HK Bloomberg: 3988 HK Market cap: US$150,113m HK$1,171,951m Average daily turnover: US$115.1m HK$901.7m Current shares o/s: 294,388m Free float: 28.4% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0.9 -1.1 -8.6 Relative (%) -2 1.5 -2.1

Major shareholders % held Huijin 67.8 SSF 2.7 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 306,048 338,389 375,004 412,813 456,413Total Non-Interest Income (Rmbm) 179,608 145,372 143,492 153,451 168,797Operating Revenue (Rmbm) 485,656 483,761 518,497 566,264 625,210Total Provision Charges (Rmbm) (89,072) (88,161) (99,773) (116,751) (134,484)Net Profit (Rmbm) 157,860 165,653 175,324 189,144 206,809Core EPS (Rmb) 0.54 0.56 0.60 0.64 0.70Core EPS Growth (5.02%) 4.93% 5.84% 7.88% 9.34%FD Core P/E (x) 5.70 5.43 5.13 4.76 4.35DPS (Rmb) 0.17 0.18 0.19 0.21 0.23Dividend Yield 5.50% 5.76% 6.33% 6.81% 7.43%BVPS (Rmb) 4.46 4.74 5.00 5.46 5.95P/BV (x) 0.69 0.64 0.61 0.56 0.51ROE 12.5% 12.2% 12.2% 12.3% 12.3%% Change In Core EPS Estimates (2.5%) (8.5%) (14.0%)CIMB/consensus EPS (x) 0.99 0.99 1.00

92.0

98.3

104.5

110.8

117.0

3.00

3.50

4.00

4.50

5.00Price Close Relative to HSI (RHS)

1

1

2


Vol b

8




Insert Insert

Bank of China-A Benefiting from offshore tailwinds ■ BOC is a key beneficiary of the rising US rate cycle, solid revenue growth

from One Belt, One Road-related lending, and Rmb liberalisation initiatives. ■ We lower our net profit growth estimates, to reflect BOC's more conservative

provision policy and an uncertain economic environment. ■ Add rating maintained; TP is revised to Rmb5.10 from Rmb5.90.

Tailwinds from across the Pacific Ocean BOC is a clear beneficiary of a rising US rate cycle, via rising net interest margin (NIM), with 21.5% of its loans (as at 1H18) are from overseas, primarily HK, where the US$/HK$ currency peg tends to result in US and Hong Kong interest rates moving in line with each other over the medium term. BOC’s NIM in 9M18 was 1.89%, up 4bp yoy, and we expect NIM to continue to gradually improve.

Other factors helping to drive NIM upwards With 1H18 mortgage mix at 29% of total loans, the third-highest among China banks under our coverage, BOC is a major beneficiary of rising mortgage rates, as yields on new mortgage inflows have been steadily rising over the past 22 months. Continuous cuts in reserve requirement ratios (RRR) are also another driver of NIM improvement.

Benefiting from China’s OBOR policy and Rmb liberalisation In our view, BOC is still a major beneficiary of One Belt, One Road (OBOR) projects, given its greater-than-peer offshore presence. Its sizable HK presence also makes it better placed than its listed peers to benefit from further Rmb liberalisation initiatives.

Adoption of IRB a key differentiator in return on capital The adoption of internal ratings-based (IRB) models to compute risk-weighted assets (RWA) and hence capital ratios allows BOC to enjoy the benefits of capital-efficient loan growth, especially for its consumer loan portfolio.

Earnings recovery to continue to strengthen We cut our net profit estimates for FY18-20F by 3-14%, as we believe BOC will be more conservative in its provisioning policies. We now forecast net profit growth of 6%/ 8%/9% for FY18F/FY19F/FY20F. The likely drivers of this recovery in net profit growth are higher NIM, together with lower cost-to-income ratios and falling effective tax rates.

Add rating maintained; TP is revised to Rmb5.10 from Rmb5.90 We arrive at Rmb5.10 TP using a stress-test-adjusted GGM and the A-H share valuation gap across time. Our TP declines primarily due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption as well as a higher US$/Rmb. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth, and better-than-expected NIM from faster-than-expected rise in US interest rates.

!!Do Not Leave Any 'Remainder Text etc' beyond the last line, they will Appear in the Email.


China

ADD (no change)







Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -1.4 2.2 -6.6 Relative (%) -1 5.3 12.9

Major shareholders % held Huijin 67.8 SSF 2.7 Insert

Analyst(s)

Michael CHANG, CFA




94.0

101.8

109.6

117.4

3.30

3.80

4.30

4.80


200400600800


Vol m

9




DOWNGRADE

Insert Insert

Bank of Communications Hold on vulnerability to corporate credit cycle ■ Our downgrade to Hold is driven by concerns that BOCOM’s greatest-of-peer

corporate loan mix leaves it vulnerable to worsening corporate asset quality. ■ We trim our earnings forecasts, primarily due to higher credit costs more than

offsetting an improving NIM outlook. ■ Our target price is revised down to HK$6.30 from HK$7.70.

Downgrade to Hold from Add BOCOM’s loan mix to corporates (excluding discounted bills) in 1H18 was 64.5% of loans, the highest of the listed China banks under our coverage. We are concerned that this leaves it potentially more vulnerable versus peers to a US-China trade war-driven economic slowdown. This more than offsets, in our view, the improving outlook for net interest margins (NIM), and is the key reason for our downgrade to Hold from Add.

The worst period for NIM has passed We are optimistic on the outlook for BOCOM’s NIM, and believe that 3Q18’s rebound to 1.58% confirms our view that 1Q18’s 1.40% was the trough. Going forward, we are bullish on further NIM improvements due to its fast-growing consumer loans, especially its relatively high-yielding credit card loans. We believe the shift to a looser monetary policy environment benefits BOCOM, due to its greater reliance on wholesale funding versus peers. It should also benefit from rising mortgage rates (20% of loans in 1H18).

Earnings recovery to continue, albeit at a slower pace We lower our earnings forecasts over FY18-20F by 0.2%-5.7%, primarily due to higher credit costs more than offsetting an improving NIM outlook. We now forecast net profit growth of 6%, 8% and 10% in FY18F, FY19F and FY20F, which is an improvement from FY15’s 1%, FY16’s 0%, and FY17’s 2%. This earnings recovery is driven by BOCOM’s improving NIM, slight improvements in its cost-to-income ratio and falling effective tax rates.

Relatively unloved by sell-side analysts The stock is relatively disliked by the street, with only 30% of analysts rating it an Add/Buy according to Bloomberg consensus data on 4 Dec 2018. It currently trades at an FY18F P/BV ratio of 0.65x among the banks in our coverage (versus sector average of 0.81x) and an FY18F P/E ratio of 5.8x (sector average of 6.0x), which makes it attractive to value-focused investors, in our view.

Target price cut to HK$6.30 from HK$7.70 We arrive at our lower target price of HK$6.30 using a stress-test-adjusted GGM. Our lower TP is primarily due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption as well as a lower Rmb/ HK$. See pg. 3-6 for valuation and risks.


Hong Kong

HOLD (previously ADD)



Up/downside: 3.6% CGS-CIMB / Consensus: 1.4% \

Reuters: 3328.HK Bloomberg: 3328 HK Market cap: US$61,454m HK$479,774m Average daily turnover: US$17.20m HK$134.8m Current shares o/s: 74,263m Free float: 73.3% *Source: Bloomberg


FY18F EPS cut by 0.2%. FY19F EPS cut by 1.9%. FY20F EPS cut by 5.7%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 2.5 7 5.4 Relative (%) -0.4 9.6 11.9

Major shareholders % held MOF 26.5 HSBC 19.0 Insert

Analyst(s)

Michael CHANG, CFA




93.0

99.3

105.5

111.8

118.0

5.20

5.70

6.20

6.70


50

100

150


Vol m

10




DOWNGRADE

Insert Insert

Bank of Communications-A Hold on vulnerability to corporate credit cycle ■ Our downgrade to Hold is driven by concerns that BOCOM’s greatest-of-peer

corporate loan mix leaves it vulnerable to worsening corporate asset quality. ■ We cut our earnings forecasts, primarily due to higher credit costs more than

offsetting an improving NIM outlook. ■ Our target price is revised down to Rmb6.20 from Rmb7.00.

Downgrade to Hold from Add BOCOM’s loan mix to corporates (excluding discounted bills) in 1H18 was 64.5% of loans, the highest of the listed China banks in our coverage. We are concerned that this leaves it potentially more vulnerable versus peers to a US-China trade war-driven economic slowdown. This more than offsets, in our view, the improving outlook for net interest margins (NIM), and is the key reason for our downgrade to Hold from Add.

The worst period for NIM has passed We are optimistic on the outlook for BOCOM’s NIM, and believe that 3Q18’s rebound to 1.58% confirms our view that 1Q18’s 1.40% was the trough. Going forward, we are bullish on further NIM improvements due to its fast-growing consumer loans, especially its relatively high-yielding credit card loans. We believe the shift to a looser monetary policy environment benefits BOCOM, due to its greater reliance on wholesale funding versus peers. It also benefits from rising mortgage rates (20% of loans in 1H18).

Earnings recovery to continue, albeit at a slower pace We lower our earnings forecasts over FY18-20F by 0.2%-5.7%, primarily due to higher credit costs more than offsetting an improving NIM outlook. We now forecast net profit growth of 6%, 8% and 10% in FY18F, FY19F and FY20F, an improvement from FY15’s 1%, FY16’s 0%, and FY17’s 2%. This earnings recovery is driven by BOCOM’s improving NIM, slight improvements in its cost-to-income ratio and falling effective tax rates.

Relatively unloved by sell-side analysts The stock is relatively disliked by the street, with only 41% of analysts rating it an Add/Buy according to Bloomberg consensus data on 4 Dec 2018. It currently trades at an FY18F P/BV ratio of 0.68x among the A-share banks in our coverage (versus A-share bank sector average of 0.87x) and an FY18F P/E ratio of 6.1x (A-share bank sector average of 6.5x), which makes it attractive to value-focused investors, in our view.

Target price cut to Rmb6.20 from Rmb7.00 We arrive at our lower target price of Rmb6.20 using a stress-test-adjusted GGM and the historical A-H share valuation gap. Our lower TP is primarily due to a lower sustainable ROE assumption arising from more conservative provisioning and a higher ‘true’ corporate NPL ratio assumption. See pg. 3-7 for valuation and risks.


China





Reuters: 601328.SS Bloomberg: 601328 CH Market cap: US$61,368m Rmb419,478m Average daily turnover: US$49.87m Rmb344.9m Current shares o/s: 74,263m Free float: 73.3% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0 4.4 -5.9 Relative (%) 0.4 7.5 13.6

Major shareholders % held MOF 26.5 HSBC 19.0 Insert

Analyst(s)

Michael CHANG, CFA




91.097.0103.0109.0115.0121.0

5.205.706.206.707.207.70


200400600800


Vol m

11




DOWNGRADE

Insert Insert

China CITIC Bank Downgrade to Hold; capital is a concern ■ Sector-lowest capital ratios in 3Q18 and return on risk-weighted assets may

cause investors to avoid CITIC in an environment of increasing risk aversion. ■ We downgrade CITIC from Add to Hold and cut our EPS estimates by

1%/10%/19% in FY18/19/20F, primarily due to higher provisions. ■ TP cut from HK$6.50 to HK$4.70 for lower sustainable ROE, higher ‘true’

corporate NPL ratio and higher Rmb/HK$ assumptions.

Downgrade to Hold; capital a concern Our downgrade of CITIC from Add to Hold is driven by our concern that CITIC’s sector-lowest core Tier 1 ratio (8.65% in 3Q18 vs. regulatory minimum of 7.5%) and sector-lowest return on risk-weighted assets (0.99% for Oct 2017-Sep 2018 vs. sector average of 1.59%) may lead to investors avoiding the stock in the current environment of heightened risk aversion. This could make it more difficult for its share price to re-rate, especially if China raises the capital requirements for mid-size banks.

Performs the worst under our stress test of higher NPL ratios… Under our stress test of a materially-higher ‘true’ corporate NPL ratio of 9% on 1H18 credit exposures (vs. industry corporate NPL ratio of 2.1%, based on our estimates), CITIC’s asset quality valuation discount is the highest among the stocks under our coverage at 43%. The main reason for its large valuation discount is its valuation dilution due to a forced capital-raising exercise. Under our stress-test-adjusted Gordon Growth model approach to valuation, this large discount weighs down our TP.

… but there are also investment positives We like its net interest margin outlook, with CITIC likely to benefit from the shift to looser monetary policy, given its sector-highest loan-to-deposit ratio (98.1% in 3Q18) and its rapid growth of high-margin non-mortgage consumer loans (second-highest among peers at 16.4% of total loans in 1H18). We also like its improved NPL recognition, with its ratio of NPLs to 90-day overdue loans rising above 100% in 1H18 for the first time since FY12.

Highly attractive valuations CITIC’s FY18F P/BV, P/E and P/PPOP is 0.59x, 5.3x and 2.0x (based on our estimates), the lowest, third-lowest and the lowest, respectively, among the H-share China banks under our coverage. In our view, this makes CITIC attractive to the deep-value investor.

TP cut from HK$6.50 to HK$4.70 Our valuation uses a stress-test-adjusted GGM. The lower TP is due to our lower sustainable ROE assumptions, higher ‘true’ corporate NPL ratio and lower Rmb/HK$ assumptions. and intensifying lending competition (lower NIM and profitability). Downside risks are worsening asset quality (higher credit cost and lower profitability) Upside risks are better credit cost (stronger earnings growth) and higher NIM (rising loan yields).

.

.


Hong Kong




Up/downside: -6.2% CGS-CIMB / Consensus: -21.2%




Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0.6 2.7 -0.2 Relative (%) -2.3 5.3 6.3

Major shareholders % held CITIC Group 64.2 China Tobacco Corporation 4.4 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 106,138 99,645 108,352 119,942 128,886Total Non-Interest Income (Rmbm) 48,029 57,616 61,738 67,275 74,995Operating Revenue (Rmbm) 154,167 157,261 170,090 187,217 203,882Total Provision Charges (Rmbm) (52,288) (55,787) (61,729) (71,042) (78,710)Net Profit (Rmbm) 41,629 41,236 43,814 47,088 51,300Core EPS (Rmb) 0.85 0.84 0.90 0.96 1.05Core EPS Growth (1.08%) (0.94%) 6.25% 7.47% 8.94%FD Core P/E (x) 5.16 5.21 4.90 4.56 4.18DPS (Rmb) 0.22 0.26 0.28 0.30 0.32Dividend Yield 4.90% 5.95% 6.32% 6.79% 7.40%BVPS (Rmb) 7.04 7.45 7.96 8.65 9.40P/BV (x) 0.62 0.59 0.55 0.51 0.47ROE 12.6% 11.6% 11.6% 11.6% 11.6%% Change In Core EPS Estimates (1.1%) (10.0%) (18.8%)CIMB/consensus EPS (x) 1.00 1.00 0.98

90.097.0104.0111.0118.0125.0

4.404.905.405.906.406.90


100200300400


Vol m

12




DOWNGRADE

Insert Insert

China CITIC Bank-A Downgrade to Reduce; capital a concern ■ Sector-lowest capital ratios in 3Q18 and return on risk-weighted assets may

cause investors to avoid CITIC in an environment of increasing risk aversion. ■ We downgrade CITIC-A from Hold to Reduce and cut our EPS estimates by

1%/10%/19% in FY18/19/20F, primarily due to higher provisions. ■ TP cut to Rmb5.20 from Rmb6.60 for a lower sustainable ROE and a higher

‘true’ corporate NPL ratio assumption.

Downgrade to Reduce; capital a concern Our downgrade of CITIC-A from Hold to Reduce is driven by our concern that CITIC’s sector-lowest core Tier 1 ratio (8.65% in 3Q18 vs. regulatory minimum of 7.5%) and sector-lowest return on risk-weighted assets (0.99% for Oct 2017-Sep 2018 vs. sector average of 1.59%) may lead to investors avoiding the stock in the current environment of heightened risk aversion. This could make it more difficult for its share price to re-rate, especially if China raises the capital requirements for mid-size banks.

Performs the worst under our stress test of higher NPL ratios Under our stress test of a materially-higher ‘true’ corporate NPL ratio of 9% on 1H18 credit exposures (vs. industry corporate NPL ratio of 2.1%, based on our estimates), CITIC’s asset quality valuation discount is the highest among the stocks under our coverage at 43%. The main reason for its large valuation discount is its valuation dilution due to a forced capital-raising exercise. Under our stress-test-adjusted Gordon Growth model approach to valuation, this large discount weighs down our TP.

… but there are also investment positives We like its net interest margin outlook, with CITIC likely to benefit from the shift to looser monetary policy, given its sector-highest loan-to-deposit ratio (98.1% in 3Q18) and its rapid growth of high-margin non-mortgage consumer loans (second-highest among peers at 16.4% of total loans in 1H18). We also like its improved NPL recognition, with its ratio of NPLs to 90-day overdue loans rising above 100% in 1H18 for the first time since FY12.

TP cut to Rmb5.20 from Rmb6.60 As CITIC-A’s current share price is now higher than our target price, we downgrade it to a Reduce. We arrive at our lowered target price of Rmb5.20 using a stress-test-adjusted GGM. The reduction in TP is primarily due to our lower sustainable ROE assumptions arising from more conservative provisioning and higher ‘true’ corporate NPL ratio assumptions. Possible de-rating catalysts are worsening asset quality (higher credit cost and lower profitability), intensifying lending competition (lower NIM and profitability), as well as stricter capital regulation. Upside risks are better credit cost (stronger earnings growth) and higher NIM (rising loan yields).


China

REDUCE (previously HOLD)



Up/downside: -9.2% CGS-CIMB / Consensus: -6.9%



FY18F EPS cut by 1.1%. FY19F EPS cut by 10.0%. FY20F EPS cut by 18.8%

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -3.5 -5.1 -11 Relative (%) -3.1 -2 8.5

Major shareholders % held CITIC Group 64.2 China Tobacco Corporation 4.4 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 106,138 99,645 108,352 119,942 128,886Total Non-Interest Income (Rmbm) 48,029 57,616 61,738 67,275 74,995Operating Revenue (Rmbm) 154,167 157,261 170,090 187,217 203,882Total Provision Charges (Rmbm) (52,288) (55,787) (61,729) (71,042) (78,710)Net Profit (Rmbm) 41,629 41,236 43,814 47,088 51,300Core EPS (Rmb) 0.85 0.84 0.90 0.96 1.05Core EPS Growth (1.08%) (0.94%) 6.25% 7.47% 8.94%FD Core P/E (x) 6.74 6.80 6.40 5.95 5.47DPS (Rmb) 0.22 0.26 0.28 0.30 0.32Dividend Yield 3.75% 4.55% 4.84% 5.20% 5.67%BVPS (Rmb) 7.04 7.45 7.96 8.65 9.40P/BV (x) 0.81 0.77 0.72 0.66 0.61ROE 12.6% 11.6% 11.6% 11.6% 11.6%% Change In Core EPS Estimates (1.1%) (10.0%) (18.8%)CIMB/consensus EPS (x) 0.99 0.99 0.97

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China Construction Bank Biggest beneficiary of mortgage repricing ■ CCB is our top pick due to its sector-highest exposure to mortgages. We are

bullish about its NIM and comfortable about its asset quality. ■ We revise down FY18-20F net profit by 3-17% as we assume a more

conservative provision policy for CCB with the rising trade war tensions. ■ Add rating maintained; our TP is revised down to HK$9.60 from HK$11.70.

Benefiting from the increasing mortgage mix and mortgage rates CCB’s mortgages as proportion of total loans continued to rise to 33.7% in 1H18 (33.0% in FY17), still the highest in the sector. Yields on new mortgages have risen for the 22nd consecutive month to 5.71% in Oct 2018. We reiterate our view on the strong and positive correlation between mortgage mix, ROE, ROIC and P/BV, and believe that both increasing mortgage mix and mortgage rates could drive a P/BV re-rating for CCB.

Strong buffers a key asset in this uncertain environment Its sector-highest core tier-1 ratio (13.3% in 3Q18) sees it better positioned with a strong capital buffer against the uncertain economic environment due to possible impact from the trade war. Its solid provisioning buffers (provisioning coverage ratio of 195% and loan loss reserve ratio of 2.86% in 3Q18) are well above the regulatory minimum. Nevertheless, we expect CCB to remain conservative and continue building up its provisioning buffers to reduce the future P&L impact of any worsening asset quality.

Better operating efficiency supports profitability CCB had the second-highest ROA (1.26%) and third-highest ROE (16.1%) among its peers in 9M18. This is partially because CCB’s better operating efficiency in 9M18, as reflected by the decrease in its cost-to-income ratio (24.1% in 9M18 vs. 24.8% in 9M17). We think its operating efficiency is likely to improve due to greater adoption of fintech, leading to reduced headcount and branch footprint, as well as strict cost discipline.

Earnings recovery to continue to strengthen We cut our net profit forecasts by 3.0%/9.7%/16.5% for FY18/19/20F, as we factor in a higher provisioning coverage ratio amid rising economic uncertainty. We still think CCB’s net profit growth will continue to recover gradually to 6.8%/8.5%/10.3% in FY18/19/20F (from 6%/0%/1%/5% in FY14/15/16/17), driven by expanding NIM, lower cost-to-income ratios and falling effective tax rates.

Maintain Add rating; TP revised down to HK$9.60 from $11.70 We arrive at a lower TP of HK$9.60 using a stress test-adjusted GGM. Our lower TP factors in a lower sustainable ROE assumption of 14.0% (16.3% previously), arising from more conservative provisioning, higher ‘true’ corporate NPL ratio of 9% in 1H18 (8% previously) and lower Rmb/HK$ of 1.06 (1.18 previously). Risks: worsening asset quality and greater mortgage competition. Potential catalysts: lower credit costs and more southbound flows under the Shanghai-Hong Kong Stock Connect.


Hong Kong

ADD (no change)




Reuters: 0939.HK Bloomberg: 939 HK Market cap: US$218,896m HK$1,708,940m Average daily turnover: US$237.2m HK$1,858m Current shares o/s: 250,011m Free float: 42.6% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 3.3 -2.4 -0.2 Relative (%) 0.4 0.2 6.3

Major shareholders % held Huijin 57.3 Temasek 5.8 Insert

Analyst(s)

Michael CHANG, CFA




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China Construction Bank-A Biggest beneficiary of mortgage repricing ■ CCB is our top pick due to its sector-highest exposure to mortgages. We are

bullish about its NIM and comfortable about its asset quality. ■ We slightly revised down FY18-20F net profit by 3-17% as we assume a

more conservative provision policy for CCB with the rising trade war tensions. ■ Add rating maintained; our TP is revised down to Rmb9.20 from Rmb10.20.

Benefiting from the increasing mortgage mix and mortgage rates CCB’s mortgages as proportion of total loans continued to rise to 33.7% in 1H18 (33.0% in FY17), still the highest in the sector. Yields on new mortgages have risen for the 22nd consecutive month to 5.71% in Oct 2018. We reiterate our view on the strong and positive correlation between mortgage mix, ROE, ROIC and P/BV, and believe that both increasing mortgage mix and mortgage rates could drive a P/BV re-rating for CCB.

Strong buffers a key asset in this uncertain environment Its sector-highest core tier-1 ratio (13.3% in 3Q18) sees it better positioned with a strong capital buffer against the uncertain economic environment due to possible impact from the trade war. Its solid provisioning buffers (provisioning coverage ratio of 195% and loan loss reserve ratio of 2.86% in 3Q18) are well above the regulatory minimum. Nevertheless, we expect CCB to remain conservative and continue building up its provisioning buffers to reduce the future P&L impact of any worsening asset quality.

Better operating efficiency supports profitability CCB had the second-highest ROA (1.26%) and third-highest ROE (16.1%) among its peers in 9M18. This is partially because CCB’s better operating efficiency in 9M18, reflected by its decreasing cost-to-income ratio (24.1% in 9M18 vs. 24.8% in 9M17). We think its operating efficiency will continue to improve due to greater adoption of fintech leading to reduced headcount and branch footprint, as well as strict cost discipline.

Earnings recovery to continue to strengthen We cut our net profit forecasts by 3.0%/9.7%/16.5% for FY18/19/20F, as we factor in a higher provisioning coverage ratio amidst rising economic uncertainty. We still think CCB’s net profit growth will continue to recover gradually to 6.8%/8.5%/10.3% in FY18/19/20F (from 6%/0%/1%/5% in FY14/15/16/17), driven by expanding NIM, lower cost-to-income ratios and falling effective tax rates.

Maintain an Add rating; TP is revised down to Rmb9.20 from 10.20 Our TP is based on a stress test-adjusted GGM and the A-H share valuation gap historically. Our lower TP factors in a lower sustainable ROE assumption of 11.9% (previously 13.4%) from more conservative provisioning and a higher ‘true’ corporate NPL ratio of 9% in 1H18 (8% previously). Risks: worsening asset quality and greater mortgage competition. Potential catalysts: lower credit costs and easing trade war tensions.


China

ADD (no change)







Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -5.6 -2.3 -3.3 Relative (%) -5.2 0.8 16.2

Major shareholders % held Huijin 57.3 Temasek 5.8 Insert

Analyst(s)

Michael CHANG, CFA




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China Merchants Bank ROE recovery to continue ■ CMB’s ROE turnaround is set to continue; we forecast highest-among-peer

net profit growth of 17% over the 2017-2020F period. ■ We lower our earnings forecasts due to CMB’s more conservative provision

policy and our concerns over uncertainties from the US-China trade war. ■ Add rating maintained; TP revised down to HK$38.00 from HK$41.20.

ROE turnaround set to continue We expect CMB's ROE recovery to continue in FY18-20F, after it finally recorded a ROE turnaround in FY17 following four years of declines over FY12-FY16. The continued rise in ROE will be a key catalyst for its P/BV multiple to re-rate further, in our view.

Strong consumer loan business a key growth driver We are bullish on CMB’s NIM outlook, primarily due to its strong consumer loan business. CMB benefits from rising mortgage rates as it has the highest proportion of mortgages in its mix of loans among mid-size peers (1H18: 24% vs. the mid-size banks’ average of 18%). Moreover, CMB also recorded strong growth in its other consumer loans in 1H18, at 23% yoy, well above the sector average of 7%.

Well supported by highest-of-peer demand deposit mix CMB’s highest-of-peers demand deposit mix of 58.9% in 1H18 was well above the sector average of 51.5%. This is a key advantage, in our view, as CMB is less vulnerable to the time deposit competition vs. peers.

Better provisioning buffer against trade war uncertainties CMB continued to maintain a very conservative provisioning policy in 1H18, with a provisioning coverage ratio of 326%, second-highest among peers, and loan loss reserve ratio of 4.64%, highest among peers. With a more conservative provision policy, we believe CMB is less vulnerable to an uncertain economic environment amid rising US-China trade war tensions.

Strongest-of-peers earnings recovery to continue to strengthen We forecast net profit growth of 15%/17%/19% in FY18F/FY19F/FY20F. Our net profit CAGR forecast of 17% over the 2017-2020F period is the highest among the China banks under our coverage, and is almost double the sector average of 8.6% over this forecast period.

Maintain Add; TP cut to HK$38.00 from HK$41.20 We arrive at a lower TP of HK$38.00 using a stress-test adjusted GGM. Our reduced TP is primarily driven by a lower sustainable ROE assumption (based on FY20F), a higher ‘true’ corporate NPL ratio assumption as well as a lower Rmb/HK$. See pages 3-6 for details of valuation and risks. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth.


Hong Kong

ADD (no change)






FY18F EPS decreased by 5.9%. FY19F EPS decreased by 11.1%. FY20F EPS decreased by 14.7%..

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 3.2 12.5 12.7 Relative (%) 0.3 15.1 19.2

Major shareholders % held China Merchants Group 33.0 Insert

Analyst(s)

Michael CHANG, CFA




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China Merchants Bank-A ROE recovery to continue ■ CMB’s ROE turnaround is set to continue; we forecast highest-among-peer

net profit growth of 17% over the 2017-2020F period. ■ We lower our earnings forecasts due to CMB’s more conservative provision

policy and our concerns over uncertainties from the US-China trade war. ■ Add rating maintained; TP is revised up to Rmb36.00 from Rmb35.00.

ROE turnaround set to continue We expect CMB's ROE recovery to continue in FY18-20F, after it finally recorded a ROE turnaround in FY17 following four years of declines over FY12-FY16. The continued rise in ROE will be a key catalyst for its P/BV multiple to re-rate further in our view.

Strong consumer loan business a key driver of growth We are bullish on CMB’s NIM outlook, primarily due to its strong consumer loan business. CMB benefits from rising mortgage rates as it has the highest proportion of mortgages in its mix of loans among mid-size peers (1H18: 24% vs. the mid-size banks’ average of 18%). Moreover, CMB also recorded strong growth in its other consumer loans in 1H18, at 23% yoy, well above the sector average of 7%.

Well supported by highest-of-peer demand deposit mix CMB’s highest-of-peers demand deposit mix of 58.9% in 1H18 was well above the sector average of 51.5%. This is a key advantage, in our view, as CMB is less vulnerable to the time deposit competition vs. peers.

Better provisioning buffer against trade war uncertainties CMB provisioning policy remains extremely conservative, with 1H18’s 326% provisioning coverage ratio second-highest among peers, and loan loss reserve ratio of 4.64%, highest among peers. With a more conservative provisioning policy, we believe CMB is less vulnerable to an uncertain economic environment amid rising US-China trade war tensions.

Strongest-of-peers earnings recovery to continue to strengthen We forecast net profit growth of 15%/17%/19% in FY18F/FY19F/FY20F, or a CAGR forecast of 17% over the 2017-2020F period. This is the highest among the banks under our coverage and is almost double the sector average of 8.6% over this forecast period.

Maintain Add; TP rises to Rmb36.00 from Rmb35.00 We value CMB-A using a stress-test adjusted GGM and its A-H share valuation gap. Our higher TP is primarily driven by a lower asset quality valuation discount of 11% (17% previously) due its reduction of shadow banking exposure and rapid de-risking of its loan book. See pg. 3-7 for details of valuation and risks. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth, and better-than-expected NIM as mortgage rates continue to rise.


China

ADD (no change)




Reuters: 600036.SS Bloomberg: 600036 CH Market cap: US$109,330m Rmb747,327m Average daily turnover: US$189.9m Rmb1,314m Current shares o/s: 25,220m Free float: 67.0% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -2.5 3.2 3 Relative (%) -2.1 6.3 22.5

Major shareholders % held China Merchants Group 33.0 Insert

Analyst(s)

Michael CHANG, CFA




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China Minsheng Bank Highly attractive valuations in need of a catalyst ■ Trades at among the lowest 2018F P/BV, P/E and P/PPOP ratios of banks

under our coverage, and hence is highly attractive to the deep-value investor. ■ We cut our earnings estimates, primarily to reflect MSB's higher provision

expenses due to economic uncertainties and improved NPL recognition. ■ Add rating maintained; TP revised down to HK$6.70.

Highly attractive valuations, especially to the deep-value investor MSB’s 2018F P/BV of 0.60x, P/E of 4.6x and P/PPOP of 2.3x are the second-lowest among the H-share China banks under our coverage.

Heavily unloved by sell-side analysts Only 32% of sell-side analysts covering MSB rate it as an Add/Buy, according to Bloomberg consensus as at 4 Dec. This is the second-lowest ratio of Add/Buy calls by sell-side analysts among China banks (after BOCOM). We thus see much scope for share price upside as its earnings continue to recover, and uncertainty surrounding its major shareholder, Anbang Insurance Group (17.8% shareholding), gradually reduces.

Gradual recovery of earnings growth We cut our FY18F/FY19F/FY20F net profit by 1%/6%/13% and now forecast net profit growth of 6% for FY18F, 8% for FY19F, and 9% for FY20F. The new forecasts still represent improvement from the growth in recent years (FY14: +5%; FY15: +4%; FY16: +4%; FY17: +3%). We expect MSB's earnings recovery to be mainly driven by lower cost-to-income ratios, recovering NIM, as well as lower effective tax rates.

Strong credit card loans growth to be a key driver MSB’s credit card loan growth has been strong since FY15 and hit an impressive 42% rate in 1H18. We expect credit card loan growth to be a key driver of its consumer loans business and earnings recovery over FY17-20F.

But low capital ratios are a risk MSB’s core Tier 1 capital ratio was 8.8% in 3Q18, the second-lowest of the banks under our coverage, with the regulatory minimum requirement at 7.5%. MSB is still awaiting regulatory approval for a convertible bond issuance. In the meantime, its low capital ratio raises the risk of a cut in its cash dividend payouts.

Add rating maintained; TP cut to HK$6.70 from HK$9.60 We arrive at our HK$6.70 TP using a stress-test adjusted GGM. Our TP declines mainly due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption and a lower Rmb/HK$. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth, and further southbound flows under the Shanghai-Hong Kong Stock Connect programme.


Hong Kong

ADD (no change)






FY18F net profit cut by 1%. FY19F net profit cut by 6%. FY20F net profit cut by 13%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 0 4.2 -10.2 Relative (%) -2.9 6.8 -3.7

Major shareholders % held New Hope Investment Co., Ltd. 4.7 China Life 4.1 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 94,684 86,552 75,266 89,318 101,546Total Non-Interest Income (Rmbm) 59,367 55,395 76,234 82,666 89,812Operating Revenue (Rmbm) 154,051 141,947 151,501 171,984 191,358Total Provision Charges (Rmbm) (41,378) (34,140) (38,461) (48,897) (57,472)Net Profit (Rmbm) 47,843 49,290 52,435 56,374 61,470Core EPS (Rmb) 1.31 1.35 1.31 1.29 1.40Core EPS Growth 0.44% 3.02% (3.29%) (1.45%) 9.04%FD Core P/E (x) 3.95 3.83 3.96 4.02 3.69DPS (Rmb) 0.28 0.15 0.13 0.14 0.16Dividend Yield 5.41% 2.90% 2.57% 2.76% 3.01%BVPS (Rmb) 9.12 10.12 9.34 10.50 11.76P/BV (x) 0.57 0.51 0.55 0.49 0.44ROE 15.1% 14.0% 13.5% 13.0% 12.6%% Change In Core EPS Estimates (9.8%) (21.5%) (27.6%)CIMB/consensus EPS (x) 1.04 1.01 1.02

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China Minsheng Bank-A Highly attractive valuations in need of a catalyst ■ Trades at among the lowest 2018F P/BV, P/E and P/PPOP ratios of banks

under our coverage, and hence is highly attractive to the deep-value investor. ■ We cut our earnings estimates, primarily to reflect MSB-A's higher provision

expenses due to economic uncertainties and improved NPL recognition. ■ Add rating maintained; TP revised down to Rmb7.00 from Rmb9.10.

Highly attractive valuations, especially to the deep-value investor MSB-A’s 2018F P/BV of 0.66x and P/E of 5.2x are the lowest, and its P/PPOP of 2.6x is the second-lowest, among the A-share China banks under our coverage.

Heavily unloved by sell-side analysts Only 48% of sell-side analysts covering MSB-A rate it as an Add/Buy, according to Bloomberg consensus as at 4 Dec. This is the second-lowest ratio of Add/Buy calls by sell-side analysts among China banks (after BOCOM-A and CITIC-A). We thus see much scope for share price upside as its earnings continue to recover, and uncertainty surrounding its major shareholder, Anbang Insurance Group (17.8% shareholding), gradually reduces.

Gradual recovery of earnings growth We cut our FY18F/FY19F/FY20F net profit by 1%/6%/13% and now forecast net profit growth of 6% for FY18F, 8% for FY19F, and 9% for FY20F. The new forecasts still represent improvement from the growth in recent years (FY14: +5%; FY15: +4%; FY16: +4%; FY17: +3%). We expect MSB's earnings recovery to be mainly driven by lower cost-to-income ratios, recovering NIM, as well as lower effective tax rates.

Strong credit card loans growth to be a key driver MSB’s credit card loan growth has been strong since FY15 and hit an impressive 42% rate in 1H18. We expect credit card loan growth to be a key driver of its consumer loans business and earnings recovery over FY17-20F.

But low capital ratios are a risk MSB’s core Tier 1 capital ratio was 8.8% in 3Q18, the second-lowest among banks under our coverage, with the regulatory minimum requirement at 7.5%. MSB is still awaiting regulatory approval for a convertible bond issuance. In the meantime, its low capital ratio raises the risk of a cut in its cash dividend payouts.

Add rating maintained; TP cut to Rmb7.00 from Rmb9.10 We arrive at our Rmb7.00 TP using a stress-test adjusted GGM and MSB’s A-H share valuation gap. Our TP declines mainly due to a lower sustainable ROE estimate from more conservative provisioning, and a higher ‘true’ corporate NPL ratio assumption. Potential re-rating catalysts include better-than-expected credit costs driving stronger earnings growth, and better-than-expected NIM as mortgage rates continue to rise.


a China

ADD (no change)






FY18F net profit cut by 1%. FY19F net profit cut by 6%. FY20F net profit cut by 13%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -3.1 1.8 -16 Relative (%) -2.7 4.9 3.5

Major shareholders % held New Hope Investment Co., Ltd. 4.7 China Life 4.1 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 94,684 86,552 75,266 89,318 101,546Total Non-Interest Income (Rmbm) 59,367 55,395 76,234 82,666 89,812Operating Revenue (Rmbm) 154,051 141,947 151,501 171,984 191,358Total Provision Charges (Rmbm) (41,378) (34,140) (38,461) (48,897) (57,472)Net Profit (Rmbm) 47,843 49,290 52,435 56,374 61,470Core EPS (Rmb) 1.31 1.35 1.31 1.29 1.40Core EPS Growth 0.44% 3.02% (3.29%) (1.45%) 9.04%FD Core P/E (x) 4.72 4.58 4.74 4.81 4.41DPS (Rmb) 0.28 0.15 0.13 0.14 0.16Dividend Yield 4.52% 2.42% 2.15% 2.31% 2.52%BVPS (Rmb) 9.12 10.12 9.34 10.50 11.76P/BV (x) 0.68 0.61 0.66 0.59 0.53ROE 15.1% 14.0% 13.5% 13.0% 12.6%% Change In Core EPS Estimates (9.8%) (21.5%) (27.6%)CIMB/consensus EPS (x) 1.08 1.04 1.03

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Insert Insert

Chongqing Rural Comm Bank Overreaction to asset quality concerns ■ Share price underperformance YTD on asset quality concerns is overdone. A

key driver of its worsening NPL ratio was improving NPL recognition. ■ Its ratio of loans that are over 90 days overdue and proportion of special

mention loans have remained relatively stable over the last 18 months. ■ Maintain Add, but reduce TP to HK$6.40 on reduced earnings estimates

stemming from increased provisioning given economic uncertainty.

Significant share price underperformer in 2018 YTD Its 13% YTD fall in share price as at 4 Dec 2018 is the worst performance among the banks under our coverage, and worse than the 5% YTD fall in the MSCI China banks index. We believe slower net profit growth is a key reason for its share price underperformance, with 1H18’s 5% yoy rise in net profit a marked slowdown from FY17’s 12.5% and FY16’s 10%. Net profit growth has started to recover in 3Q18, up 11% yoy, leading to its 7% share price rise over the last three months, one of the best of peers.

Asset quality concerns look overdone, in our view Slower net profit growth in 1H18 was due to elevated provisioning expenses, as NPL ratios rose from 0.97% in 2Q17 to 1.34% in 3Q18. We are not overly concerned, as this rise was largely due to improved NPL recognition, with the ratio of NPLs to loans that are more than 90 days overdue at 124.1% in 1H18, up significantly from 84.9% in 1H17. Other asset quality indicators such as the ratio of special mention loans and ratio of loans that are over 90 days overdue were stable over 1H17 to 1H18.

Underlying NIM trends have been solid CQRCB has witnessed strong underlying net interest margins (NIM) growth in 2Q18 to 2.74%, up 6bp qoq, once we adjust for the impact of implementing new accounting standards, IFRS 9. We see further room for CQRCB’s NIM to gradually expand, driven by better loan pricing, rising mortgages rates, as well as strong mortgages growth. We believe that this could help offset the adverse effects of lower interbank rates and increased time deposit competition.

Strong provisioning buffers against economic uncertainties While CQRCB’s provisioning coverage ratio fell slightly qoq, its ratio of 333% in 3Q18 is still the highest among the banks under our coverage. Similarly, its loan loss reserve ratio of 4.46% in 3Q18 is the second highest of peers. We thus believe that CQRCB has strong provisioning buffers as asset quality worsens due to the US-China trade war.

Add rating maintained; TP revised down slightly to HK$6.40 We use a stress-test-adjusted GGM to value CQRCB. Our lower TP is primarily due to a lower sustainable ROE assumption arising from more conservative provisioning, a higher ‘true’ corporate NPL ratio assumption and a lower Rmb/HK$. See pages 3-7 for details on valuations and risks. Improved net profit growth in FY18F is a potential catalyst.



Hong Kong

ADD (no change)







Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 3.8 7.4 -15.7 Relative (%) 0.9 10 -9.2

Major shareholders % held Chongqing Yufu Assets Management Group Co. Ltd 6.8 Chongqing City Construction Investment Co. Ltd 6.7 Insert

Analyst(s)

Michael CHANG, CFA



Net Interest Income (Rmbm) 19,405 21,501 21,365 23,400 25,021Total Non-Interest Income (Rmbm) 2,368 2,499 5,573 6,142 6,783Operating Revenue (Rmbm) 21,772 24,000 26,938 29,542 31,803Total Provision Charges (Rmbm) (2,677) (3,711) (5,095) (5,968) (6,273)Net Profit (Rmbm) 7,945 8,936 9,622 10,481 11,628Normalised EPS (Rmb) 0.85 0.94 0.96 1.05 1.16Normalised EPS Growth 10.0% 10.2% 2.2% 8.9% 10.9%FD Normalised P/E (x) 4.75 4.31 4.21 3.87 3.49DPS (Rmb) 0.20 0.19 0.20 0.22 0.25Dividend Yield 4.93% 4.68% 5.04% 5.49% 6.09%BVPS (Rmb) 5.66 6.37 7.08 7.92 8.86P/BV (x) 0.72 0.64 0.57 0.51 0.46ROE 16.0% 15.4% 14.3% 14.0% 13.9%% Change In Normalised EPS Estimates (1.1%) (7.1%) (13.7%)Normalised EPS/consensus EPS (x) 1.00 1.02 1.04

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Company Note Gaming │ Hong Kong │ December 5, 2018



Insert Insert

Galaxy Entertainment NDR feedback ■ We hosted an NDR for GEG on 26-27 Nov in Kuala Lumpur. The majority of

the investors we met with held a cautious view on the sector. ■ Management remains upbeat on the company’s earnings growth drivers and

the longer-term outlook for Macau’s gaming sector. ■ Maintain Add with an unchanged target price of HK$59.62 based on SOP

valuation. A potential catalyst is stronger-than-expected sector GGR.

Investors adopt a cautious view Most of the investors we met with were cautious on the Macau gaming sector, given China’s macroeconomic overhang, but agreed that GEG was well positioned in light of its development pipeline and large scale in both VIP and mass gaming. Overall, we believe that most investors are underweight on the gaming sector but would be buyers if macro sentiment improves, with GEG and Sands as top picks. Some investors did hold Macau gaming stocks and thought that sector valuations already priced in macro weakness.

Investors’ main concern The majority of investor questions focused on the near-term outlook for gaming demand amid the macro slowdown in China and Rmb depreciation. Other questions revolved around issues involving gaming licence expiry. Some investors asked if there would be any near-term impact on gaming demand from the opening of the Hong Kong-Macau bridge. At the company level, most of the questions were related to the development timeline for Phases 3 and 4 of Galaxy Macau.

Management remains upbeat on near-term outlook According to GEG’s premium mass hosts, demand is likely to remain strong until Feb 2019, with limited visibility beyond Feb. Management has not seen negative impact on gaming demand from the recent China macro weakness and attributed recent Macau VIP weakness mainly to tougher regional competition from Cambodia, where VIP commission rates are double that of Macau. Management reiterated that the recent market share loss in GGR was mainly due to bad VIP luck in 3Q18.

Licence renewal is not an issue Management does not expect any clarity on the gaming licence renewal process until the next Macau Chief Executive takes office in 2020. The industry expectation is for all gaming licences to be renewed, with no significant changes in tax rates given that Macau’s gaming tax is already one of the highest in the Asian region.

Maintain Add on GEG Maintain Add, with target price of HK$59.62 based on SOP with 12.5x FY19F EV/EBITDA (historical 10-year average). We estimate equity value for Galaxy Phases 3 and 4 at HK$3.17, assuming 10% ROIC on capex of HK$45bn discounted back 2.5 years at 12% on a 10x EV/EBITDA multiple. Risks are weaker-than-expected sector revenues.


Hong Kong

ADD (no change)






No changes

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 10.4 -9.9 -8.2 Relative (%) 7.5 -7.3 -1.7

Major shareholders % held City Lion 22.5 Che-Woo Lui 9.0 Capital Group 9.0 Insert

Analyst(s)

Michael TING

T (852) 2532 1121 E [email protected] Danny CHEN T (852) 2539 1350 E [email protected]


Revenue (HK$m) 52,826 62,450 77,651 90,025 101,828Operating EBITDA (HK$m) 9,738 13,171 16,733 19,217 22,467Net Profit (HK$m) 6,283 10,504 13,296 15,268 17,941Core EPS (HK$) 1.47 2.46 3.11 3.57 4.20Core EPS Growth 50.6% 66.9% 26.6% 14.8% 17.5%FD Core P/E (x) 36.36 21.79 17.22 14.99 12.76DPS (HK$) 0.33 0.59 0.75 0.86 1.01Dividend Yield 0.62% 1.12% 1.41% 1.62% 1.91%EV/EBITDA (x) 21.69 16.51 12.51 10.41 8.38P/FCFE (x) 1,176 21 18 18 15Net Gearing (29.5%) (13.9%) (24.4%) (32.6%) (40.5%)P/BV (x) 4.88 4.08 3.51 2.96 2.49ROE 14.4% 20.6% 22.2% 21.7% 21.5%% Change In Core EPS Estimates 0% 0% 0%CIMB/consensus EPS (x) 1.01 1.08 1.12

83.0

94.3

105.5

116.8

128.0

37.0

47.0

57.0

67.0


20

40

60


Vol m

21




Insert Insert

ICBC A rising valuation premium amidst uncertainty ■ ICBC’s strong capital ratios are a key asset that we believe investors are

willing to pay a greater valuation premium for, as economic uncertainty rises. ■ Still, we cut FY18-20F net profit estimates as we see ICBC conservatively

raising provisioning buffers amidst rising trade war uncertainties. ■ Add rating maintained; our target price is revised to HK$7.30 from HK$9.30.

Strongly capitalised, with its CET-1 ratio second highest of peers A key reason why we like ICBC is because of its strong capital ratios. We believe that investors are willing to pay a greater valuation premium for banks that are extremely well capitalised in times of elevated economic uncertainty. Its core tier-1 ratio of 12.5% in 3Q18 was the second highest of the Chinese banks under our coverage. This ensures it has strong capital buffers against unexpected downturns in asset quality, in our view, thus minimising capital raising risks as an escalating trade war adversely impacts economic growth.

Still expect NIM to help drive gradual earnings recovery We see higher yields on new mortgages and back book mortgage repricing, coupled with relatively stable deposit costs as the key drivers of higher net interest margins (NIM) yoy over the FY18-20F period. Other earnings drivers are a lower cost-to-income ratio (despite it already being one of the lowest amongst banks globally), and lower effective tax rates, as the investment portfolio shifts towards a higher mix of tax-free bonds.

Well supported by above-average profitability and management ICBC’s cost-to-income ratio, ROA and ROE in 9M18 are still in a leading position among its listed peers. Its 9M18 cost-to-income ratio was the best among the big four banks at 23.8%, below the big four banks’ average of 27.6% and listed peer average of 27.8%. Meanwhile. Its 9M18 ROA was 1.18% (third highest among peers) vs. sector average of 1.10% and big four banks’ average of 1.14%. Its 9M18 ROE of 15.2% slightly outperformed the sector average of 14.8%.

Still expect an earnings recovery We estimate net profit growth of 5.5%, 7.5% and 9.0% in FY18F, FY19F and FY20F, respectively. This is driven by our view of gradually rising NIM, lower cost-to-income ratios, and falling effective tax rates, and is in sharp contrast to the subdued growth rates in recent years (FY14: 5%; FY15: 0%; FY16: 0%; FY17: 3%). The revisions to our net profit estimates are primarily driven by higher credit costs assumptions, as we see ICBC conservatively building provisioning buffers given a more uncertain economic outlook.

Add rating maintained; TP revised down to HK$7.30 from HK$9.30 We use a stress-test-adjusted GGM to derive our lower TP, which is primarily driven by a lower sustainable ROE assumption, a higher ‘true’ corporate NPL ratio assumption as well as a lower Rmb/HK$. See pg. 3-7 for details on valuations & risks.



Hong Kong

ADD (no change)




Reuters: 1398.HK Bloomberg: 1398 HK Market cap: US$277,591m HK$2,167,182m Average daily turnover: US$160.2m HK$1,255m Current shares o/s: 356,407m Free float: 65.3% *Source: Bloomberg



Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 3.6 -0.5 -5.1 Relative (%) 0.7 2.1 1.4

Major shareholders % held Central Huijin 34.7 Insert

Analyst(s)

Michael CHANG, CFA




90.0

98.3

106.7

115.0

4.90

5.90

6.90


500

1000


Vol m

22




Insert Insert

ICBC-A A rising valuation premium amidst uncertainty ■ ICBC’s strong capital ratios are a key asset that we believe investors are

willing to pay a greater valuation premium for, as economic uncertainty rises. ■ Still, we cut FY18-20F net profit estimates as we see ICBC conservatively

raising provisioning buffers amidst rising trade war uncertainties. ■ Add rating maintained; our target price is revised to Rmb7.00 from Rmb8.10.

Strongly capitalised, with its CET-1 ratio second highest of peers A key reason why we like ICBC is because of its strong capital ratios. We believe that investors are willing to pay a greater valuation premium for banks that are extremely well capitalised in times of elevated economic uncertainty. Its core tier-1 ratio of 12.5% in 3Q18 was the second highest of the banks under our coverage. It thus has strong capital buffers against unexpected asset quality downturns, in our view, thus minimising capital raising risks as an escalating US-China trade war adversely impacts economic growth.

Still expect NIM to help drive gradual earnings recovery We see higher yields on new mortgages and back book mortgage repricing, coupled with relatively stable deposit costs as the key driver of higher net interest margins (NIM) yoy over the FY18-20F period. Other earnings drivers are a lower cost-to-income ratio (despite it already being one of the lowest amongst banks globally), and lower effective tax rates, as the investment portfolio shifts towards a higher mix of tax-free bonds.

Well supported by above-average profitability and management ICBC’s cost-to-income ratio, ROA and ROE in 9M18 are still in a leading position among its listed peers. Its 9M18 cost-to-income ratio was the best among the big four banks at 23.8%, below the big four banks’ average of 27.6% and listed peer average of 27.8%. Meanwhile. Its 9M18 ROA was 1.18% (third highest among peers) vs. sector average of 1.10% and big four banks’ average of 1.14%. Its 9M18 ROE of 15.2% slightly outperformed the sector average of 14.8%.

Still expect a recovery of net profit growth We estimate net profit growth of 5.5%, 7.5% and 9.0% in FY18F, FY19F and FY20F, respectively. This is driven by our view of gradually rising NIM, lower cost-to-income ratios, and falling effective tax rates, and is in sharp contrast to the subdued growth rates in recent years (FY14: 5%; FY15: 0%; FY16: 0%; FY17: 3%). The revisions to our net profit estimates are primarily driven by higher credit costs assumptions, as we see ICBC conservatively building provisioning buffers given a more uncertain economic outlook.

Add rating maintained; TP revised down to Rmb7.00 from Rmb8.10 We use a stress-test-adjusted GGM to arrive at our lower TP, which is primarily driven by a lower sustainable ROE assumption arising from more conservative provisioning and a higher ‘true’ corporate NPL ratio assumption. See pg. 3-7 for details on valuations & risks.



China

ADD (no change)






FY18F EPS decreased by 2.8%. FY19F EPS decreased by 10.6%. FY20F EPS decreased by 17.5%

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -3.9 -0.4 -8 Relative (%) -3.5 2.7 11.5

Major shareholders % held Central Huijin 34.7 Insert

Analyst(s)

Michael CHANG, CFA




94.0

104.0

114.0

124.0

4.80

5.80

6.80

7.80


200400600800


Vol m

23

Company Note Construction │ South Korea │ December 5, 2018



Insert Insert

Samsung Engineering More bullish on orders and earnings outlook ■ We believe Samsung Engineering should benefit from Middle East countries’

expansion of refining and chemical downstream products. ■ We turn positive on its plant margin outlook; we expect hydrocarbon gross

margin to increase to 9%/10% in FY19/20F (vs. 5%/7% previously). ■ Upgrade to Add from Reduce with a higher target price of W23k, now based

on 2.1x FY20F P/BV on FY20F ROE of 15%.

Expectations reflected; more re-rating catalysts ahead The stock is up 20% in the past three months due to the W1.2tr Thai Clean Fuel Project order in Oct and expectations for more orders. Middle East countries have recently revealed their expansion plans for refining and chemicals (e.g. Saudi Aramco & SABIC deal and Qatar focusing LNG) in order to diversify their economies from reliance on crude sales. We see more upside for Samsung Engineering, given the improvements in its new orders and overseas profitability amid better market conditions.

Potential new plant orders to support the share price We expect strong plant orders in 1H19F. It is bidding for the following large-scale projects: Algeria refinery (US$2.5bn), US PTT Olefin (US$2bn), Saudi Marjan oil and gas (US$2.7bn) and Indonesia naphtha cracking centre (NCC, US$4bn). We expect Samsung Engineering to continue to participate in overseas bids, as it increases its staff strength (we expect 5.7k in 2020F vs. 5.4k in 2018F). It could see new orders worth W9tr-10tr in FY19-20F if 25% of its combined overseas bids are successful in 2019F.

Gaining momentum with overseas margin recovery Operating profit (OP) beat expectations in 3Q18, thanks to a write-back of W43bn for low-margin jobs. We turn positive on its overseas plant margin as its low-margin overseas project (UAE Carbon Black Delayed Coker, CBDC) is slated to be completed in 4Q18F. Its unbilled receivables fell to W786bn in 3Q18 from W948bn in 2Q18 and its unbilled receivables-to-revenue ratio dropped to 13% in 3Q18 (vs. 27% in 2017), a milestone for the company. We raise our FY19/20F hydrocarbon gross margin forecasts to 9%/10% (vs. 5%/7% previously).

Growing earnings recovery visibility in FY19-20F As we expect only marginal cost adjustments from the completion of CBDC, Samsung Engineering’s earnings growth should be strong given strong orders and revenue recognition. As such, we project OP to increase by 56%/31% in FY19/20F.

Upgrade to Add with a higher target price of W23,000 We upgrade our call to Add in view of its strengthening overseas business and earnings growth potential, with a higher TP of W23,000, now based on 2.1x FY20F P/BV on FY20F ROE of 15% (1.6x FY19F P/BV on FY20F ROE of 13% previously). Key downside risks are delayed margin recovery amid fierce competition, and falling oil prices.


South Korea

ADD (previously REDUCE)


Current price: W19,250 Target price: W23,000 Previous target: W14,000


Reuters: 028050.KS Bloomberg: 028050 KS Market cap: US$3,413m W3,773,000m Average daily turnover: US$21.85m W24,615m Current shares o/s: 196.0m Free float: 67.6% *Source: Bloomberg


FY18F/19F/20F Revenue tweaked by -5/0/1%.

FY18F/19F/20F OP increased by 32/45/27%.

FY18F/19F/20F EPS increased by 38/49/31%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 6.1 18.5 37.5 Relative (%) 5.2 27.2 53

Major shareholders % held Samsung SDI 11.7 National Pension Service 9.3 Samsung C&T 7.0 Insert

Analyst(s)

John PK PARK



Revenue (Wb) 7,009 5,536 5,220 6,629 7,677Operating EBITDA (Wb) 148.6 119.4 264.4 369.7 462.1Net Profit (Wb) 25.8 (45.4) 134.8 230.5 304.1Normalised EPS (W) 218 -231 688 1,176 1,552Normalised EPS Growth (206%) 71% 32%FD Normalised P/E (x) 88.18 NA 27.98 16.37 12.41DPS (W) - - 0.000 0.000 0.000Dividend Yield 0% 0% 0% 0% 0%EV/EBITDA (x) 18.30 36.41 14.16 9.59 6.92P/FCFE (x) NA NA 6.29 19.81 11.07Net Gearing 49.6% 62.4% 1.7% (8.8%) (23.4%)P/BV (x) 3.73 3.68 2.31 2.02 1.74ROE 7.4% (4.5%) 10.1% 13.2% 15.1%% Change In Normalised EPS Estimates 38.1% 49.2% 30.6%Normalised EPS/consensus EPS (x) 1.07 0.97 0.97

77

110

144

10,000

15,000

20,000

Price Close Relative to KOSPI (RHS)

5101520


Vol m

24

Company Note TV - Satellite │ Malaysia │ December 6, 2018



Insert Insert

Astro Malaysia Astronomically cheap ■ 9MFY1/19 results broadly in line at 75%/70% of our/consensus FY19F. ■ We expect Astro to deliver stronger earnings in FY20F driven by margin

expansion from a reduction in content cost despite a weaker ringgit vs. US$. ■ The stock has fallen 32% since the release of its 2QFY19 result on 27 Sep

and it is trading at 5.4x CY19F EV/EBITDA, 2 s.d. below its 3-year mean. ■ Upgrade Astro to an Add in view of the sharp pullback in share prices. Astro

offers an attractive 8.2% CY19F yield. Our DCF-based TP is unchanged. ■ Despite the challenging outlook, we see attractive risk-reward potential for

investors to ride on the privatisation or M&A angle for Astro.

3QFY1/19 earnings lifted by higher TV adex and lower content cost Core net profit surged from RM65m in 2QFY19 to RM160m in 3QFY19 due to stronger TV adex and lower content cost. Nevertheless, group revenue fell by 2.3% qoq due to lower package take-up and sales of the FIFA World Cup in the previous quarter. Astro also declared a 2.5 sen third interim DPS in the quarter bringing the 9MFY19’s to 7.5 sen.

Core net profit in 9MFY19 fell by 29% yoy Revenue in 9MFY19 fell 0.8% yoy, mainly due to lower pay-TV subs (-4.3% yoy). However, this was partially offset by stronger home shopping sales (+34%). Astro was also impacted by higher content cost (+14%) and interest expenses related to new transponders. 9MFY19 EBITDA margin also contracted by 4.8% pts yoy to 29.7%. Overall, the group’s 9MFY19 core net profit plunged 29% yoy from RM566m to RM404m.

Undertaking a cost rationalisation exercise Management highlighted during the post-3QFY19 results call that Astro is undertaking a strategic operations review to drive cost-savings initiatives in response to the challenging operating environment. For example, the group is ceasing the operations of Tribe OTT and live streaming platform Tamago in 4QFY19. We believe these cost-savings initiatives will help to contain margin compression from declining subs revenue.

Attractive risk-reward from potential corporate exercises We are cognisant that consumers are pivoting towards digital media. We see the bundling of Astro’s pay-TV with Maxis’ ONE Home Broadband as an attractive proposition in light of growing competition and price war in the media and telco space. Based on our telco analysts’ estimate, a potential Astro-Maxis merger should be EPS-accretive for Maxis in FY19-21F – even if the offer price is set at a c.30% premium.

Upgrade from Hold to Add with an unchanged RM1.75 TP We expect Astro to deliver stronger earnings in FY20F driven by lower content cost and positive contributions from home shopping. We upgrade Astro to an Add with an unchanged DCF-based RM1.75 target price, which implies a 6.4x CY19F EV/EBITDA. A faster decline in pay-TV subs and depreciating ringgit vs. US$ are key downside risks.

SOURCES: CIMB RESEARCH, COMPANY REPORTS

Malaysia

ADD (previously HOLD)


Current price: RM1.29 Target price: RM1.75 Previous target: RM1.75

Up/downside: 35.6% CGS-CIMB / Consensus: -4.2%

Reuters: ASTR.KL Bloomberg: ASTRO MK Market cap: US$1,619m RM6,726m Average daily turnover: US$2.74m RM11.43m Current shares o/s: 5,202m Free float: 31.9% *Source: Bloomberg


No changes.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -5.8 -29.1 -54.4 Relative (%) -4.6 -23.1 -52.3

Major shareholders % held T.Ananda Krishnan 41.0 Khazanah Nasional 20.7 EPF 6.5 Insert

Analyst(s)

Mohd Shanaz NOOR AZAM

T (60) 3 2261 9078 E [email protected] Kamarul ANWAR T (60) 3 2261 9092 E [email protected]

Financial Summary Jan-17A Jan-18A Jan-19F Jan-20F Jan-21F

Revenue (RMm) 5,613 5,531 5,521 5,506 5,543Operating EBITDA (RMm) 1,817 1,820 1,634 1,748 1,730Net Profit (RMm) 621.5 772.0 539.8 613.6 635.1Core EPS (RM) 0.12 0.13 0.10 0.12 0.12Core EPS Growth (2.2%) 4.8% (20.5%) 13.7% 3.5%FD Core P/E (x) 10.35 9.87 12.42 10.93 10.56DPS (RM) 0.12 0.12 0.10 0.11 0.12Dividend Yield 9.30% 9.66% 8.05% 8.24% 9.47%EV/EBITDA (x) 5.21 5.33 5.91 5.38 5.35P/FCFE (x) 8.00 9.36 11.45 8.57 8.54Net Gearing 437% 460% 457% 390% 370%P/BV (x) 10.75 10.26 10.26 9.38 9.38ROE 106% 106% 83% 90% 89%% Change In Core EPS Estimates 0.039% (0.041%) 0.023%CIMB/consensus EPS (x) 0.94 0.94 0.96

35.0

52.5

70.0

87.5

105.0

0.90

1.40

1.90

2.40

2.90Price Close Relative to FBMKLCI (RHS)

50

100

150


Vol m

25

Company Note Food & Beverages │ Malaysia │ December 5, 2018



Insert Insert

Berjaya Food Berhad Breathing life into its KRR business ■ 1HFY4/19 net profit of RM13.3m was above expectations at 60.7% of our

and 53% of Bloomberg consensus full-year forecasts. ■ The 19% yoy growth in 1HFY19 net profit was due to lower losses from KRR

operations in Indonesia and higher contribution from Malaysian operations. ■ Upgrade to Add, with higher TP of RM1.83 (22x CY20F P/E).

1HFY19 net profit above expectations Berjaya Food (BFood) reported 2QFY19 revenue of RM166.6m and net profit of RM7m This brought 1HFY19 core net profit to RM13.3m (+19% yoy), above expectations at 60.7% of our FY19 forecast. We attribute the stronger-than-expected profitability to decline in tax rates and lower losses from its Kenny Roger Roasters (KRR) business.

1HFY19 net profit rose 19% yoy The 19% yoy growth in 1HFY19 core net profit was driven by: i) higher profit contribution from Starbucks Malaysia, and ii) lower KRR losses. The higher contribution from Starbucks Malaysia was owing to new store openings (nine net new stores) and higher SSSG (2.7% yoy). For its KRR business, Bfood recorded lower losses on a yoy basis thanks to disposal of KRR Indonesia and better cost management for KRR Malaysia.

2QFY19: Stronger results thanks to better overall cost control On a qoq basis, 2QFY19 revenue rose 3.2%, thanks to the opening of six new Starbucks outlets. 2QFY19 EBITDA margin expanded 1.1% pts qoq to 15.8%, owing to better overall cost control including the closure of three loss-making KRR outlets in Malaysia. Accordingly, 2QFY19 net profit rose 12.7% qoq, further aided by lower interest expenses (-29.1% qoq) and a decline in tax rates (-4.5% pts qoq).

FY19-21F EPS raised by 6.6-20.7% As 1HFY19 net profit was above expectations, we raise our FY19-21F EPS by 6.6-20.7%. This is to account for: i) lower KRR losses, ii) decline in interest expenses, and ii) reduction in tax rates. BFood should record a stronger 2HFY19 in tandem with lower losses from its KRR business and better sales recorded for Starbucks.

Key risks to our call Downside risks include significant slowdown in domestic consumption and slower-than-expected turnaround for KRR Malaysia.

Upgrade to Add, TP raised to RM1.83 In tandem with our EPS hike, we upgrade the stock to an Add. As we roll forward our valuation to end-2019F, our TP rises to RM1.83, still pegged to 22x P/E (3-year historical mean). We believe Bfood’s earnings prospects will continue to improve with its efforts to turn around KRR Malaysia and the disposal of KRR Indonesia. Faster-than-expected turnaround of its KRR business is a potential re-rating catalyst.


Malaysia

ADD (previously HOLD)




Reuters: BJFO.KL Bloomberg: BFD MK Market cap: US$116.4m RM482.7m Average daily turnover: US$0.14m RM0.57m Current shares o/s: 375.9m Free float: 48.0% *Source: Bloomberg


FY19-21F EPS raised by 6.6-20.7%.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) -0.8 -6.3 -24.9 Relative (%) 0.4 -0.3 -22.8

Major shareholders % held Berjaya Corp 52.0 PNB 5.6 Insert

Analyst(s)

Walter AW


Financial Summary Apr-17A Apr-18A Apr-19F Apr-20F Apr-21F

Revenue (RMm) 597.5 639.6 699.7 761.3 824.5Operating EBITDA (RMm) 78.9 50.5 92.6 94.9 101.5Net Profit (RMm) 11.44 1.14 26.39 28.24 32.69Core EPS (RM) 0.046 0.051 0.070 0.075 0.087Core EPS Growth (19.7%) 13.1% 36.5% 7.0% 15.8%FD Core P/E (x) 29.22 25.83 18.92 17.68 15.27DPS (RM) 0.035 0.040 0.049 0.053 0.061Dividend Yield 2.63% 3.01% 3.70% 3.96% 4.58%EV/EBITDA (x) 9.01 14.30 7.74 7.43 6.82P/FCFE (x) 22.7 496.1 29.8 19.7 16.7Net Gearing 61.2% 63.7% 61.7% 57.8% 53.6%P/BV (x) 1.27 1.26 1.24 1.21 1.18ROE 4.32% 4.91% 6.60% 6.92% 7.83%% Change In Core EPS Estimates 20.7% 8.6% 6.6%CIMB/consensus EPS (x) 1.02 0.93 0.95

70.0

78.8

87.5

96.3

105.0

1.20

1.40

1.60

1.80


2468


Vol m

26

Company Note Rubber Gloves │ Malaysia │ December 5, 2018 Shariah Compliant



HIGH

CONVICTION

Insert Insert

Kossan Rubber Industries Expect the valuation gap with its peers to narrow ■ We recently met up with Kossan’s management and visited its Plant 16. We

came back positive on the company. ■ Plants 18 and 19 are slated for commercial production by 2Q19 and 4Q19,

respectively, boosting Kossan's total capacity by 20.7%. ■ Maintain Add, with unchanged TP of RM5.16 (22x CY20F P/E).

Results recap: 3Q18 net profit up 18.5% yoy and 24.6% qoq Kossan's 3Q18 revenue and net profit rose qoq, by 15.5% and 24.6% respectively. The stronger 3Q18 performance, due to higher production volume in tandem with full commercialisation of Plant 16 (3bn p.a. capacity) in Aug 2018, brought 9M18 net profit to RM141m (2.6% yoy), within expectations.

Expect stronger quarters ahead with Plants 16 and 17 in place We expect Kossan to record stronger quarters ahead, with full contribution from Plants 16 and 17 (1.5bn p.a. capacity) which were fully commissioned in Aug and Nov, respectively. Kossan’s glove production capacity should further expand to 32bn pieces p.a. (up 20.7%) by end-2019F from 26.5bn at end-2018 through the full commissioning of Plant 18 (2.5bn p.a.) by 2Q19F and Plant 19 (3bn p.a.) by 4Q19F.

Construction works on Bidor land is slated to begin by 2020F Post completion of Plant 19 by end-2019F, Kossan plans to start developing its 824-acre land in Bidor, Perak with a total capex of RM1.5bn. It aims to build an integrated manufacturing hub, which will host 12 glove plants (each: 4bn p.a. capacity) with plans to construct three plants biennially. Also, it plans to construct factories in the area for value-adding strategic suppliers. We understand that all necessary utilities are in place, and the land also has excellent connectivity and sufficient labour from the surrounding areas.

A laggard play; trades at 25% discount to the glove sector We view Kossan as a laggard play, given that it is currently trading at a 21.9x CY19F P/E, near its 5-year historical mean of 22x. However, this is at a 25% discount to the glove sector’s average P/E of 29.4x. Historically, Kossan had traded at a premium of 3% vs. the glove sector (based on 5-year average P/E). In comparison, Hartalega is currently trading at 37x P/E (higher than 1.5 s.d. of its 5-year mean) while Supermax is trading at 16x (above its 5-year historical mean of 15.7x).

Maintain Add, TP unchanged at RM5.16 We make no changes to our EPS estimates, Add call and TP of RM5.16 (22x CY20F P/E, 5-year historical mean). With concerns over delays of its expansion plans allayed, we believe its capacity growth plans and robust earnings growth (3-year EPS CAGR of 16.7% over FY17-20F) provide a strong base for a share price re-rating. Delays in its expansion plans are downside risks to our call.


Malaysia

ADD (no change)




Reuters: KRIB.KL Bloomberg: KRI MK Market cap: US$1,326m RM5,499m Average daily turnover: US$0.90m RM3.74m Current shares o/s: 1,279m Free float: 36.2% *Source: Bloomberg


No change.

Source: Bloomberg


Absolute (%) 4.4 -2.3 11 Relative (%) 5.5 4.2 12.1

Major shareholders % held Kossan Holdings Sdn Bhd 51.1 Employees Provident Fund 11.1 Kumpulan Wang Persaraan 1.6 Insert

Analyst(s)

Walter AW



Revenue (RMm) 1,668 1,957 2,052 2,443 2,806Operating EBITDA (RMm) 288.4 296.7 376.1 433.6 500.2Net Profit (RMm) 167.1 183.9 210.4 249.7 296.1Core EPS (RM) 0.13 0.15 0.16 0.20 0.23Core EPS Growth (17.5%) 11.3% 13.1% 18.7% 18.6%FD Core P/E (x) 32.92 29.57 26.14 22.02 18.57DPS (RM) 0.05 0.07 0.08 0.10 0.12Dividend Yield 1.22% 1.52% 1.91% 2.27% 2.69%EV/EBITDA (x) 19.27 19.24 15.16 13.16 11.33P/FCFE (x) 377.6 33.0 245.4 216.8 63.6Net Gearing 2.7% 15.8% 13.7% 12.4% 8.7%P/BV (x) 5.26 4.76 4.39 3.99 3.60ROE 16.7% 16.9% 17.5% 19.0% 20.4%% Change In Core EPS Estimates 0% 0% 0%CIMB/consensus EPS (x) 1.02 1.03 1.05

72.0

88.7

105.3

122.0

3.00

3.50

4.00

4.50

Price Close Relative to FBMKLCI (RHS)

2

4

6


Vol m

27

Company Note Technology - Others │ Malaysia │ December 5, 2018 Shariah Compliant



Insert Insert

MY E.G. Services More about the Indonesia operations ■ We arranged for 16 fund managers to meet with MyEG MD TS Wong. ■ Indonesia JV business model would focus on growing market share strategy

(similar to Asean’s GRAB). However, it would be loss making. ■ Maintain Add. The share price is trading at an attractive 2019F 14x P/E.

Arranged for funds to meet MyEG Managing Director We arranged for 16 fund managers to meet MYEG MD TS Wong today. Most of the questions were focused on the Indonesia and the Philippines operations.

Growing market share strategy in Indonesia MyEG will invest US$10m in a 40% stake in PT Cartenz Technology Indonesia (CTI) and CTI will set up a special purpose vehicle (SPV) to install the dongles for free to monitor sales on a live basis for tax purposes in Indonesia’s provinces. The business model is focused on growing market share (similar to Asean’s GRAB). However, we think the Indonesia operations could be loss-making.

Two venture capitalists (VCs) are interested in investing in the SPV The SPV is expected to monetise the dongles by providing services such as over the counter (OTC) where customers collect goods ordered online and pay at the outlets, mobile payment services and food delivery. We understand two venture capitalists (VC) in Indonesia have shown interest in investing in the SPV. We understand the potential market is about 1m dongles.

MyEG to trim down stake in SPV MyEG shared with us investors need not worry about the expected losses at the Indonesia operations. Over time, MyEG would trim down its stake to below 20% in the SPV and treat it as an investment in its balance sheet. We believe MyEG’s stake in the SPV should be diluted as most of the new funding from the SPV is expected to come from the VCs.

Philippines JV just started marketing microloans The MyEG Philippines JV has just started marketing microloans (US$1,000 loan value) in collaboration with a local bank there. The JV gets US$25 (RM104) for every microloan approved by the bank. MyEG believes the Philippines’s microloan market could be huge. Our forecasts exclude potential earnings from marketing the microloans.

Remains an Add We maintain our EPS forecasts and target price, based on an unchanged 40% premium over the technology sector’s 2020 15x target P/E, pegging the stock at 21x 2020F P/E. The stock remains an Add. Re-rating catalysts are strong Philippines JV revenue while downside risks include failure to win the local SST monitoring project.


Malaysia

ADD (no change)




Reuters: MYEG.KL Bloomberg: MYEG MK Market cap: US$1,028m RM4,263m Average daily turnover: US$16.71m RM69.53m Current shares o/s: 3,600m Free float: 59.4% *Source: Bloomberg


None.

Source: Bloomberg


Absolute (%) -10.4 -23.9 -42.4 Relative (%) -9.3 -17.4 -41.3

Major shareholders % held Wong Thean Soon 40.6 Insert

Analyst(s)

Nigel FOO


Financial Summary Sep-17A Sep-18A Sep-19F Sep-20F Sep-21F

Revenue (RMm) 371.6 564.6 550.1 566.2 580.5Operating EBITDA (RMm) 233.8 311.2 339.5 351.5 359.5Net Profit (RMm) 200.1 129.0 307.3 316.3 324.3Core EPS (RM) 0.056 0.077 0.085 0.088 0.090Core EPS Growth 40.5% 38.9% 10.5% 2.9% 2.5%FD Core P/E (x) 21.77 15.67 14.18 13.77 13.43DPS (RM) 0.020 0.019 0.023 0.024 0.027Dividend Yield 1.65% 1.57% 1.90% 1.98% 2.23%EV/EBITDA (x) 18.62 14.04 12.25 11.22 10.38P/FCFE (x) 34.30 17.14 15.19 14.58 14.20Net Gearing (0.1%) 3.0% (25.0%) (40.8%) (50.5%)P/BV (x) 7.87 7.67 5.56 4.33 3.53ROE 42.0% 49.6% 45.5% 35.4% 29.0%% Change In Core EPS Estimates 0% 0% 0%CIMB/consensus EPS (x) 1.04 0.92 0.75

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0.40

1.40

2.40


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Company Note Media - Integrated │ Thailand │ December 5, 2018



Insert Insert

VGI Global Media PCL Site visit to VGI Malaysia ■ We visited VGI Malaysia (VGM) during 28-30 Nov, and came back slightly

positive due to VGI’s clearer overseas expansion plans. ■ VGM’s key operating media assets include KLIA airport, buses, cinemas,

retail outlets, MRT SBK line in KL, and MRT North-South line in Jakarta. ■ Due to limited earnings contribution to VGI (VGI holds 25% in VGM), we

retain our earnings forecasts for FY19-21F. Reaffirm Add.

Slightly positive after the site visit We visited VGI Malaysia, VGI’s 25%-owned subsidiary, in Kuala Lumpur, Malaysia during 28-30 Nov. We came back slightly positive from the visit given VGI and MACO’s (30.4% owned by VGI) clear plans to capture the growth opportunities in Southeast Asia via VGM. We believe VGM will focus on Malaysia and Indonesia in the initial stage. Despite an attractive growth story over the next five years from VGM’s expansion, we retain our earnings forecasts for FY19-21F for VGI and MACO.

Malaysia: opportunities amid fragmented media market Outdoor media represents 8% of advertising spend in Malaysia in 2018F, according to Malaysia Advertisers Association (MAA). Management expects this level to sustain in 2019F. Based on our observations, we believe VGM’s core media assets, which include airports, mass transit and buses, should benefit from ad spend growth of 4% yoy in 2019F, based on MAA’s forecasts. However, we have not factored in any contribution from VGM to VGI and MACO’s earnings forecasts due to limited guidance.

Indonesia: in an early investment stage VGM, through its strategic partner PT Avabanindo Perkasa (AVA), is the first mover in MRT Jakarta Phase 1’s (Lebak Bulus-Bundaran Hotel Indonesia) advertising media space. Its 20-year exclusive concession for advertising media spaces in MRT Jakarta Phase 1, which will end in 2039F, could boost MACO’s long-term outlook, in our view. However, given the ridership and demand risks from Indonesia’s maiden MRT project, VGM plans to invest in phases with the first phase lasting three years.

2HFY19F outlook: positive signs still persist We see clearer progress across business platforms, including 1) its strategy to convert Rabbit Card (prepaid card) holders into Rabbit Line Pay (mobile payment platform) users, 2) MACO’s digital screen conversion at mass transit stations in 3QFY19F-2QFY20F, and 3) earnings contribution from Kerry Express TH. Recently, VGI sent out more than 100,000 samples from top consumer companies via its VGI-Kerry partnership.

Reiterate Add and SOP-based target price We project 37% EPS CAGR in FY19-21F. Retain Add and SOP TP of THB9.00. Re-rating catalysts: new projects by VGI-Kerry and potential M&As. Downside risks: slower-than-expected data monetisation and higher billboard taxes - every 10% hike in billboard tax could dilute VGI’s core NP by 0.5% and present 1.1% downside risk to our TP.


Thailand

ADD (no change)


Current price: THB7.85 Target price: THB9.00 Previous target: THB9.00


Reuters: VGI.BK Bloomberg: VGI TB Market cap: US$2,056m THB67,170m Average daily turnover: US$3.37m THB110.1m Current shares o/s: 7,204m Free float: 26.2% *Source: Bloomberg


No change.

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 3.3 4 23.6 Relative (%) 3.9 6.5 25.1

Major shareholders % held BTSC and BTS Group 73.8 Thai NVDR 2.1 State Street Bank Europe Limited 2.1 Insert

Analyst(s)

Piyachanok SOMSUEB


Financial Summary Mar-17A Mar-18A Mar-19F Mar-20F Mar-21F

Revenue (THBm) 3,129 3,986 4,316 4,719 5,105Operating EBITDA (THBm) 1,181 1,705 1,688 1,859 1,982Net Profit (THBm) 826 846 1,201 1,364 1,583Core EPS (THB) 0.09 0.11 0.16 0.18 0.21Core EPS Growth (18.1%) 21.5% 41.4% 14.3% 16.7%FD Core P/E (x) 84.93 69.91 49.42 43.25 37.05DPS (THB) 0.10 0.07 0.08 0.09 0.11Dividend Yield 1.27% 0.94% 1.06% 1.21% 1.40%EV/EBITDA (x) 47.30 32.96 34.06 30.84 28.79P/FCFE (x) NA NA 98.81 81.34 70.93Net Gearing 69.5% 17.0% 14.4% 11.0% 6.6%P/BV (x) 29.04 12.77 11.25 9.90 8.70ROE 31.0% 25.1% 24.2% 24.4% 25.0%CIMB/consensus EPS (x) 1.10 0.99 1.10

85.0

99.3

113.6

127.9

5.40

6.40

7.40

8.40

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Company Flash Note Steel │ Vietnam │ December 5, 2018

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


Insert Insert

Hoa Phat Group Management downplays concerns ■ We recently attended HPG’s analyst meeting. Management said the company

has already met its full-year guidance in 11MFY18. ■ Management guided for higher sales volume of 3.5m-4m tons of long steel in

2019 as compared to 2.3m tons in 2018. Maintain Add.

In the analyst meeting with HPG’s Chairman Tran Dinh Long on 5 Dec 2018, Mr. Long directly fielded most of the questions from investors and analysts. Here are the highlights:

Foreign investors have been selling down their positions ● PENM Partners confirmed they sold part of the HPG shares held by their PENM3 fund

because the fund will mature in Sep 2021. The fund’s representative reaffirmed a long-term commitment to HPG, which stretches back to 2007, through new potential investments for their upcoming fund - PENM5.

11M2018 performance roughly tracking our forecast ● Management estimated 11M18 net profit reached VND8,100bn, making up 91% of our

full-year forecast and fulfilling HPG's full-year guidance. ● 2018 dividend: 30% stock dividend (to be paid in 2019), instead of a cash dividend, in

order to conserve cash for the Dung Quat Steel Complex investment.

2019 guidance is aggressive with a strong export focus ● Management said long steel sales volume in 2019F is expected to touch 3.5m-4m tons

(estimated volume for 2018 is 2.3m tons). ● HPG said it will maintain flexibility in its pricing policy for steel in 2019 to stay competitive

when the new capacity from the Dung Quat Complex starts coming onstream. (The first Blast Oxygen Furnace [BOF] is targeted to be completed in the first half of 2019).

● HPG is planning to further expand its presence in export markets with a target of 10-12% contribution to total revenues. Southeast Asia is the main target export market with Cambodia comprising the largest proportion. Mr. Long disclosed that HPG is still exporting steel to North America despite the 25% US tariff on Vietnamese steel.

● “Market share first with profits to follow,” was how Mr. Long summarised HPG’s current strategy. HPG has not yet finalised its revenue and profit guidance for 2019 due to the significant fluctuations in steel prices recently.

Slight capex overruns on Dung Quat Steel Complex project ● Mr. Long said this project may come onstream later than initially projected (probably

1Q20) with slight capex overruns versus the initial plan. Some reasons for these overruns include: 1) HPG choosing to buy EU instead of Asian machinery (in order to comply with Vietnam’s environmental policies on steel production), and 2) the captive port in Dung Quat, currently under construction, will now be expanded to service ships of up to 200,000 tons, while the initial plan was only to develop a port to accommodate ships up to 100,000 tons.

Threat from Chinese steel limited, as per management ● Mr. Long estimates that the amount of Chinese steel exports to Vietnam is relatively

small because the main type of construction steel imported from China is mostly wire rod and these products have only been used in specific Chinese Overseas Development Assistance-funded projects. China’s construction steel demand has been robust in 2018 and, therefore, most of such steel has been used domestically in China.

● However, the recent significant steel price weakness in China and relaxation of environmental norms for Chinese steel producers are concerns and possible downside risks, in our view.

● We maintain our Add call and VND47,800 target price. Our TP is based on an equal weighting of: 1) 8.7x forward P/E on the average EPS over CY18-19F, and 2) DCF valuation over 5-year period. Re-rating catalysts include a sharp rise in steel prices and decrease in raw material prices.

Vietnam December 5, 2018 - 6:22 PM

ADD (no change) Consensus ratings*: Buy 10 Hold 0 Sell 0

Current price: VND34,600 Target price: VND47,800 Previous target: VND47,800


Reuters: HPG.HM Bloomberg: HPG VN Market cap: US$3,155m VND73,487,184m Average daily turnover: US$8.78m VND204,709m Current shares o/s 2,124m Free float: 67.6% *Source: Bloomberg

Key financial forecasts

Source: Bloomberg


Absolute (%) -13.5 -11.3 15.3 Relative (%) -17.2 -9.5 16.5

Major shareholders % held Tran Dinh Long 25.2 Vu Thi Hien 7.3 VOF Investment Limited 4.7 Insert

Analyst(s)

My TRAN Ha

T (84) 96 681 1636 E [email protected] Hung Xuan NGUYEN T (84) 28 7300 0688 E [email protected]

Dec-18F Dec-19F Dec-20F

Net Profit (VNDb) 8,891 13,428 15,047Core EPS (VND) 3,977 6,006 6,731Core EPS Growth 16.6% 51.0% 12.1%FD Core P/E (x) 8.70 5.76 5.14Recurring ROE 23.0% 27.2% 24.7%P/BV (x) 1.78 1.40 1.16DPS (VND) 0 1,000 2,000Dividend Yield 0.00% 2.89% 5.78%

95.0107.0119.0131.0143.0155.0

26,00031,00036,00041,00046,00051,000

Price Close Relative to VNINDEX (RHS)

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Asia Pacific Daily | Equity Research | December 6, 2018

REGIONAL HEAD

Bertram LAI Regional Head of Research +852 2532 1111 [email protected]

COUNTRY HEADS OF RESEARCH

Ivy NG, CFA Siew Khee. LIM Erwan TEGUH Kasem PRUNRATANAMALA, CFA Raymond CHENG Malaysia Singapore Indonesia Thailand Hong Kong/China +60 (3) 2261-9073 +65 6210-8664 +62 (21) 3006-1720 +66 (2) 657-9221 +852 2539-1324 [email protected] [email protected] [email protected] [email protected] [email protected] Dohoon LEE Satish KUMAR South Korea India +82 (2) 6730-6121 +91 (22) 6602-5185 [email protected] [email protected] Yolan SEIMON Anirban LAHIRI Sri Lanka Vietnam +94 (11) 230-6273 +8428 7300-0688 (ext: 21242) [email protected] [email protected] Coverage via partnership arrangement with John Keells Stock Brokers

Coverage via partnership arrangement with VNDirect Securities Corporation

REGIONAL SECTOR HEADS

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

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Recipients of this report are to contact CGS-CIMB Research Pte Ltd, 50 Raffles Place, #16-02 Singapore Land Tower, Singapore in respect of any matters arising from, or in connection with this report. CGS-CIMBR has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only. If you have not been sent this report by CGS-CIMBR directly, you may not rely, use or disclose to anyone else this report or its contents. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CGS-CIMBR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. 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AAV, ADVANC, AMATA, AOT, AP, BANPU, BBL, BCH, BCP, BCPG, BDMS, BEAUTY, BEM, BGRIM, BJC, BH, BLA, BLAND, BPP, BTS, CBG, CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EA, EGCO, EPG, ERW, ESSO, GGC, GFPT, GLOBAL, GLOW, GPSC, GUNKUL, HANA, HMPRO, INTUCH, IRPC, ITD, IVL, KBANK, KCE, KKP, KTB, KTC, LH, LPN, MAJOR, MEGA, MINT, MTLS, ORI, PRM, PSH, PSL, PTG, PTT, PTTEP, PTTGC, QH, RATCH, ROBINS, RS, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPRC, STA, STEC, SUPER, TASCO, TCAP, THAI, THANI, TISCO, TKN, TMB, TOA, TOP, TPIPL, TPIPP, TRUE, TTW, TU, TVO, UV, WHA, WHAUP, WORK. Corporate Governance Report: The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after that date. CGS-CIMB Thailand does not confirm nor certify the accuracy of such survey result.

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

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Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2018, Anti-Corruption 2018 ADVANC – Excellent, Certified, AEONTS – Good, n/a, AH – Very Good, n/a, AMATA – Excellent, Declared, ANAN – Excellent, Declared, AOT – Excellent, Declared, AP – Excellent, Certified, ASP – Very Good, Certified, BANPU – Excellent, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – Good, Certified, BCP - Excellent, Certified, BCPG – Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, n/a, BEC – Very Good, n/a, , BGRIM – Very Good, Declared, BH - Good, n/a, BJC – Very Good, Declared, BJCHI – Very Good, Certified, BPP – Very Good, Declared, BR - Good, Declared, BTS - Excellent, Certified, CBG – Very Good, n/a, CCET – Good, n/a, CENTEL – Very Good, Certified, CHG – Very Good, Declared, CK – Excellent, n/a, COL – Excellent, Declared, CPALL – Very Good, Certified, CPF – Excellent, Certified, CPN - Excellent, Certified, DELTA - Excellent, n/a, DEMCO – Excellent, Certified, DDD – Very Good, Declared, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Excellent, n/a, ECL – Very Good, Certified, EGCO - Excellent, Certified, EPG – Very Good, n/a, ERW – Very Good, n/a, GFPT - Excellent, Certified, GGC – Excellent, Certified, GLOBAL – Very Good, n/a, GLOW – Very Good, Certified, GPSC – Excellent, Certified, GULF – Very Good, n/a, GUNKUL – Excellent, Certified, HANA - Excellent, Certified, HMPRO - Excellent, Certified, HREIT - Excellent, Certified ICHI – Excellent, Declared, HUMAN – not available, n/a, III – Good, n/a, INTUCH - Excellent, Certified, IRPC – Excellent, Certified, ITD* – Very Good, n/a, IVL - Excellent, Certified, JASIF – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KKP – Excellent, Certified, KSL – Excellent, Certified, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Certified, M – Very Good, Certified, MACO – Very Good, n/a, MAJOR – Very Good, n/a, MAKRO – Excellent, Declared, MALEE – Very Good, Certified, MC – Very Good, Certified, MCOT – Excellent, Certified, MEGA – Very Good, n/a, MINT - Excellent, Certified, MTC – Excellent, Declared, NETBAY – Good, n/a, PLANB – Excellent, Declared, PLAT – Very Good, Certified, PSH – Excellent, Certified, PSTC – Good, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Certified, RATCH – Excellent, Certified, ROBINS – Excellent, Certified, RS – Very Good, n/a, RSP – not available, n/a, SAMART - Excellent, n/a, SAPPE – Very Good, Declared, SAT – Excellent, Certified, SAWAD – Very Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCC – Excellent, Certified, SCN – Very Good, Certified, SF – Good, n/a, SIRI – Very Good, Certified, SPA - Good, n/a, SPALI - Excellent, n/a, SPRC – Excellent, Certified, STA – Very Good, Certified, STEC – Excellent, n/a, SVI – Excellent, Certified, SYNEX – Very Good, Declared, TASCO – Excellent, Certified, TCAP – Excellent, Certified, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TKN – Very Good, Declared, TMB - Excellent, Certified, TNR – Very Good, Declared, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – Good, n/a, TRUE – Excellent, Certified, TU – Excellent, Certified, TVO – Very Good, Declared, UNIQ – Good, n/a, VGI –

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Excellent, Certified, WHA – Excellent, Certified, WHART – not available, n/a, WORK – Good, n/a. Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of August 31, 2018) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC * The company, its director or management had been reportedly accused for breaching proper corporate governance such as violation of the SEC’s regulations or charged with corruption.

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

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

WJV#05

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