Fu Shou Yuan International

Transcription

1 Fu Shou Yuan International Lowering PT to HK$6 - Slowdown in plot sales hurt sentiment Overweight 1448.HK, 1448 HK Price: HK$5.21 Price Target: HK$6.00 Previous: HK$6.80 FSY is the largest provider of burial and funeral care services in the PRC in terms of revenue, with branches in nine provinces. FSY reported 1H16 sales growth of 9%, which was 12% below our estimate, due mainly to a tough comparable period in 1H15 as well as a conservative plot disposal strategy. We remain OW with a lower Dec-17 PT of HK$6. Slowdown hurts sentiment. FSY reported 1H16 sales growth of 9%, to Rmb642mn, which was 12% below our estimate. Sales growth was slower in most regions, but especially poor (a sales decline) in Henan and Chongqing, as these two cemeteries had an exceptionally strong 1H15. Overall, NP growth of 12% was 15% below our estimate. The key to an improvement in sales in the future is an acceleration of new acquisitions (currently one each quarter), and any deregulation that makes it easier for people to buy plots without current strict restrictions (in-need conditions before cemeteries can be purchased) would also lift sales revenues. However, neither of these factors is easy to predict or likely in the near future. Lowering sales and net profit estimates. Given the declining pace of cemetery plot sales seen in 1H16 results, we lower our FY16 and FY17 sales growth expectations by 11% and 12%, respectively. Our margin expectations remain unchanged, and NP is revised down 10% for FY16 and 12% for FY17. Our new EPS estimates are 5% and 8% below consensus, respectively. We lower our Dec-17 PT to HK$6 (from HK$6.80) due to the earnings revisions. China Consumer Services Leon Chik, CFA AC Bloomberg JPMA CHIK <GO> Christine Wang (852) christine.wang@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Price Performance HK$ Aug-15 Nov-15 Feb-16 May-16 Aug HK share price (HK$) HSCEI (rebased) YTD 1m 3m 12m Abs -13.6% -3.3% -6.5% 5.5% Rel -14.1% -10.6% -23.3% 16.9% Price, valuation and risks. Our DCF-based Dec-17 price target of HK$6 implies a CY18E P/E of 21.1x. The key risks to our rating and PT include implementation risk for the company s aggressive M&A strategy and new low barriers to entry, allowing new entrants to lower prices. Fu Shou Yuan International (Reuters: 1448.HK, Bloomberg: 1448 HK) Rmb in mn, year-end Dec FY13A FY14A FY15A FY16E FY17E Revenue (Rmb mn) ,108 1,225 1,525 Net Profit (Rmb mn) EPS (Rmb) DPS (Rmb) Revenue growth (%) 27.5% 30.0% 39.4% 10.6% 24.4% EPS growth (%) - 1.3% 20.6% 15.4% 20.5% ROCE 19.2% 12.8% 14.2% 14.6% 16.7% ROE 18.4% 13.0% 13.5% 14.0% 15.4% P/E (x) P/BV (x) EV/EBITDA (x) Dividend Yield 0.0% 0.7% 1.1% 1.3% 1.5% Source: Company data, Bloomberg, J.P. Morgan estimates. Company Data Shares O/S (mn) 2,075 Market Cap (Rmb mn) 9,250 Market Cap ($ mn) 1,394 Price (HK$) 5.21 Date Of Price 15 Aug 16 Free Float(%) - 3M - Avg daily vol (mn) M - Avg daily val (HK$ mn) M - Avg daily val ($ mn) 1.4 HSCEI Exchange Rate 7.76 Price Target End Date 31-Dec-17 See page 11 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: Strong demand for burial and funeral services as incomes rise Tremendous value in unsold plots of existing cemeteries High stable margins with strong pricing power. Leading brand and market consolidation New asset-light expansion potential in franchised or managed cemeteries Better-than-expected macro economy to drive demand Lower-than-expected land cost Competitive fragmented markets with many strong incumbents Negative impact on demand in an uncertain macro environment Execution risks on new cemeteries in new cities with strong existing players Rising costs of land used for cemeteries Key financial metrics FY15 FY16E FY17E FY18E Valuation and price target basis Revenues (LC mn) 1,108 1,225 1,525 1,942 Our price target is based on DCF methodology with a Revenue growth (%) 39.4% 10.6% 24.4% 27.4% WACC of 11.4%. The nature of the industry leads us to EBITDA (LC mn) apply a terminal growth of 3.0%, the midpoint of the 3.0- EBITDA margin (%) 41.5% 43.3% 42.8% 44.2% 6.0% growth rate used for SMID-caps. Tax rate (%) 21% 22% 22% 22% Net profit (LC mn) EPS (LC) EPS growth (%) 23% 16% 20% 30% EBITDA margin trend and sales growth DPS (LC) % BVPS (LC) Operating cash flow (LC mn) % Free cash flow (LC mn) (23) (177) (115) 36 Interest cover (X) % Net margin (%) 25.7% 26.9% 26.0% 26.5% 20.0% Sales/assets (X) Debt/equity (%) 34.5% 32.9% 32.4% 32.5% 10.0% Net debt/equity (%) NC NC NC NC ROE (%) 13% 14% 15% 18% 0.0% Key model assumptions FY15E FY16E FY17E FY18E E 2 Burial services (% of EBITDA margin Sales growth sales) 86.2% 86.6% 87.0% 87.4% Funeral services (% of Source: Company, J.P. Morgan estimates. sales) 12.6% 12.1% 11.7% 11.3% Auxiliary services (% of sales) 1.1% 1.3% 1.4% 1.3% EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity analysis FY16E FY17E FY16E FY17E EPS (LC) non-gaap FY16E FY17E Sensitivity to JPMe old % chg. in plot ASP 1.3% 1.3% 2.1% 2.1% JPMe new % chg. in plot volume sales 1.0% 0.9% 1.6% 1.6% % chg % -12.2% 1% increase in wage costs 0.1% 0.1% 0.2% 0.2% Consensus Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates. Mcap Company Name Code Price (US$M) (US$M) chg. P/E (x) P/E (x) ROE (%) P/B (x) Yield (%) CAR INC 699 HK 7.5 2, (5.2) CHINA TRAVEL 308 HK 2.4 1, FU SHOU YUAN 1448 HK 5.2 1, (6.0) EHi CAR SERVICES EHIC US na IMAX CHINA HOLDI 1970 HK , TRAVELSKY TECH-H 696 HK , SHANGRI-LA ASIA 69 HK 8.8 4, (0.3) LOCALIZA RENT3 BZ , Average Source: Company data, J.P. Morgan estimates. Share prices as of the close. Vol 3M 16E 17E 2

3 Highlights from analyst briefing Sales growth slower in 1H16. Sales declines in two provinces in particular dragged down overall results: (1) Henan last year, FSY worked with the local government for a tomb relocation program that generated one-time revenue of Rmb25mn that did not recur in 2016; and (2) Chongqing the local government recently invested in its own funeral parlor, making competition in the local market more intense and leading to the bad operating results. M&A according to plan and our estimates. FSY is continuing to work on potential acquisitions, some of which are partnerships with local governments. FSY is planning to acquire two to three projects in 2H16 (we expect two more for 2H16). FSY is also helping the Beijing/Jiangxi government with some employee training programs and that could lead to more partnerships or possible M&A in the future. New crematoria being developed. FSY is planning to promote new hightech cremation machines nationwide in 2H16. New environmental regulations will be in force next January, and FSY believes most, if not all, current machines used in the market are all below the standard. FSY s newly developed machines (which have passed gas emission tests) might be another new business driver in a two- to three-year timeframe. 1H16 results show slowdown in sales FSY reported 1H16 sales growth of 9%, to Rmb642mn, which was 12% below our estimate. There is no reliable 1H16 consensus, but our FY16 sales estimate is 3% below consensus. Sales growth was slower in 1H16 (up 9% YY) than in 1H15 (up 43%YY) in most regions, but especially poor (sales decline) in Henan and Chongqing, as these two cemeteries had an exceptionally strong 1H15. 1H16 GPM improved slightly, to 78.9%, and EBIT margin improved 3%, to 42.7%, on strong control over selling expenses. Overall, NP growth of 12% was 15% below our estimate due mainly to weak sales. There is no reliable 1H16 EPS estimate, but our FY16E EPS of Rmb0.17 is in line with consensus. Table 1: FSY 1H16 results Rmb in millions 1H15 1H16 Y/Y 1H16E Var Turnover % % Gross profit % % Gross margins 78.1% 78.9% 77.3% EBIT % % EBIT margins 39.5% 42.7% 41.8% Net profit % % Net margins 27.0% 12.0% 32.0% EPS % % Source: Company data, J.P. Morgan estimates. 3

4 Lowering sales and net profit estimates Given the declining pace of cemetery plot sales seen in 1H16 results, we have lowered our FY16 and FY17 sales growth expectations. Our margin expectations remain unchanged, and NP is revised down 10% for FY16 and 12% for FY17, respectively. Our new EPS estimates are 5% and 8% below consensus, respectively, but consensus probably has not factored in the 1H16 results. The key to an improvement in sales is an acceleration of new acquisitions (currently one each quarter), which would require more cash outflow and should prompt management to accelerate plot sales. Any deregulation that makes it easier for people to buy plots without current strict restrictions (inneed conditions before cemeteries can be purchased) would also lift sales revenues. However, neither of these factors is easy to predict or likely in the near future. We lower our Dec-17 PT to HK$6 (from HK$6.80) due to the lower earnings. Table 2: Estimate changes New Old Chg. Rmb in millions FY16E FY17E FY16E FY17E FY16E FY17E Turnover 1,225 1,525 1,379 1, % -12.5% Gross profit 940 1,152 1,058 1, % -12.8% EBIT % -13.0% Net profit % -12.2% EPS (Rmb) % -12.2% Assumptions Gross margin 76.7% 75.6% 76.8% 75.8% -0.1% -0.2% Source: J.P. Morgan estimates. Valuation analysis DCF valuation Our Dec-17 PT is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk-free rate of 4.2% (the yield on 10-year government notes in China). We assume a beta of 1.2. Accordingly, WACC is assumed at 11.4%. We estimate free cash flow for FSY until 2020 and assume a terminal growth rate of 3%. The terminal growth is based on the annual growth rate expected in 2020 (the final year of the estimate period) subject to a minimum of 1.5% and a maximum of 4.5%, depending on the nature of the industry and the level of maturity in China. We also analyze the DCF price sensitivity to WACC, and the terminal multiple. 4

5 Table 3: FSY Base-case DCF analysis HK$ in millions, year-end Dec E 2016E 2017E 2018E 2019E Terminal Cash flow estimates Sales ,108 1,225 1,525 1,942 2,475 3,153 EBIT ,061 1,411 NOPAT ,106 Capex, net (75) (534) (648) (648) (662) (677) (692) (171) Depreciation Change in working capital (73) 49 (38) (8) (20) (28) (50) (28) Free operating CF (FoCF) 143 (243) (293) (222) (156) (15) DCF Parameters Assumptions Liabilities as a % of EV 0% Terminal growth 4.0% WACC 11.4% Risk-free rate 4.2% Market risk 6.0% Enterprise NPV (10-16E) 10,221 Beta Net cash (debt), 14E 804 Cost of debt 4.0% - Minorities (Market value) (138) +/- Other items 0 Implied exit P/E multiple (x) 15x = Equity value 10,887 / Number of shares 2,134 = Equity value per share (HK$) 6.0 Source: Company data, J.P. Morgan estimates. Table 4: FSY Sensitivity analysis based on WACC and perpetual terminal growth rate WACC Source: J.P. Morgan estimates. Terminal growth rate % 3% 3.5% 4.0% 4.5% 5.0% 5.5% 9.9% % % % % % %

6 Table 5: FSY P&L statement Rmb in millions E 2017E 2018E Total Revenues ,108 1,225 1,525 1,942 YoY change (%) 27.5% 30.0% 39.4% 10.6% 24.4% 27.4% Cost of Goods Sold (120) (159) (248) (285) (373) (470) YoY change (%) 28.3% 32.5% 55.8% 15.1% 30.5% 26.0% Gross Profit ,152 1,473 YoY change (%) 27.3% 29.3% 35.2% 9.3% 22.6% 27.9% Gross Margin 80.4% 80.0% 77.6% 76.7% 75.6% 75.8% SGA (229) (349) (456) (468) (561) (679) YoY change (%) 14.9% 52.5% 30.5% 2.6% 19.9% 21.0% Operating profit EBITDA EBITDA margin 47.5% 40.1% 41.5% 43.3% 42.8% 44.2% Depreciation & Amortization (28) (32) (56) (58) (61) (64) YoY change (%) 39.6% 17.1% 71.6% 4.3% 4.7% 4.7% EBIT EBIT margin 42.9% 36.1% 36.5% 38.5% 38.8% 40.9% Net Interest Expense Exceptional item Associates Gains/losses Net Income Before Taxes YoY change (%) 20.3% 30.6% 35.0% 18.0% 20.4% 30.1% Tax (70) (56) (94) (117) (141) (183) Effective Tax rate 27.0% 16.5% 20.6% 21.6% 21.6% 21.6% Minority Interests (23) (55) (81) (95) (115) (149) Net Income Source: Company data, J.P. Morgan estimates Table 6: FSY Cash flow statement Rmb in millions E 2017E 2018E EBIT Depreciation and Amortization Working Capital Changes (73) 49 (38) (8) (20) (28) Net Interest Tax Paid (56) (70) (56) (94) (117) (141) Cash Flow From Operations Capital expenditures (75) (77) (48) (120) (124) (127) Investments and others 69 (456) (600) (528) (539) (550) Cash Flow from Investing (5) (534) (420) (648) (662) (677) Free Cash Flow 157 (185) (23) (177) (115) 36 Payment of Cash Dividends (32) (192) (73) (110) (131) (164) Increase in Common Equity 1, Issuance of Debt (16) (4) Other Financing Charges, Net (68) (41) (34) Cash Flow from financing 1,101 (62) 3 (92) (112) (145) Change in cash 1,258 (247) (20) (269) (227) (109) Cash beginning 287 1,544 1,297 1,277 1, Foreign exchange changes (1) Cash at end 1,544 1,297 1,277 1, Source: Company data, J.P. Morgan estimates 6

7 Table 7: FSY Balance sheet Rmb in millions E 2017E 2018E Cash and Cash Equivalents 1,544 1,297 1,277 1, Inventories Accounts receivable Other Current Assets Total Current Assets 1,748 1,533 1,651 1,423 1,294 1,314 Property and Equipment ,430 1,493 1,557 1,622 Other Assets ,011 1,550 2,099 Non-Current assets 720 1,403 1,912 2,504 3,106 3,721 Total Assets 2,468 2,935 3,564 3,926 4,401 5,035 Trade payables, accruals & other payables Other Current income tax payable Bank and other loans Total Current Liabilities Long-term Debt Other Noncurrent Liability 0 (0) Noncurrent liabilities Total Liabilities ,078 1,234 Share capital Retained earnings 1,459 1,858 2,109 2,320 2,573 2,902 Total Shareholders' Equity 1,580 1,983 2,236 2,446 2,699 3,029 Minority Interest Total Shareholders' Equity 1,745 2,212 2,650 2,955 3,323 3,801 Total Liabilities and Equity 2,468 2,935 3,564 3,926 4,401 5,035 Source: Company data, J.P. Morgan estimates 7

8 Investment Thesis, Valuation and Risks Fu Shou Yuan International (Overweight; Price Target: HK$6.00) Investment Thesis FSY is the largest provider of death care services in the PRC in terms of revenue and geographical coverage, and has two main businesses, burial and funeral services. Demand is rising as incomes rise in China. FSY has strong organic growth with stable healthy margins. Additional growth can come from M&A activities, as FSY is using its brand and strong balance sheet to consolidate a fragmented market. Valuation Our Dec-17 PT is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk-free rate of 4.2% (the yield on 10-year government notes in China). We assume a beta of 1.2. Accordingly, WACC is assumed at 11.4%. We estimate free cash flow for FSY until 2020 and assume a terminal growth rate of 3%. The terminal growth is based on the annual growth rate expected in 2020 (the final year of the estimate period) subject to a minimum of 1.5% and a maximum of 4.5%, depending on the nature of the industry and the level of maturity in China. Risks to Rating and Price Target Key risks to our rating and PT include the rising cost of buying land for cemeteries in China and low barriers to entry, with potential new entrants lowering prices and putting pressure on FSY s margins. 8

9 Fu Shou Yuan International: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Revenues 795 1,108 1,225 1,525 1,942 EBIT % change Y/Y 30.0% 39.4% 10.6% 24.4% 27.4% Depr. & amortization Gross Profit Change in working capital 49 (38) (8) (20) (28) % change Y/Y Taxes EBITDA Cash flow from operations % change Y/Y 2.2% 44.3% 15.3% 23.0% 31.5% EBIT Capex (77) (48) (120) (124) (127) % change Y/Y 9.1% 41.0% 16.8% 25.2% 34.3% Net Interest EBIT Margin 36.1% 36.5% 38.5% 38.8% 40.9% Other (456) (372) (528) (539) (550) Net Interest Free cash flow (185) (23) (177) (115) 36 Earnings before tax % change Y/Y 30.9% 34.7% 18.0% 20.4% 30.1% Tax (56) (94) (117) (141) (183) Equity raised/(repaid) as % of EBT 16.5% 20.5% 21.5% 21.5% 21.5% Debt raised/(repaid) (17) Net income (reported) Other (28) % change Y/Y 38.1% 23.0% 15.4% 20.5% 30.2% Dividends paid (192) (73) (110) (131) (164) Shares outstanding Beginning cash 1,544 1,297 1,277 1, EPS (reported) Ending cash 1,243 1,277 1, % change Y/Y 1.3% 20.6% 15.4% 20.5% 30.2% DPS Balance sheet Ratio Analysis Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Cash and cash equivalents 1,297 1,277 1, Gross margin Accounts receivable EBITDA margin 40.2% 41.7% 43.4% 42.9% 44.3% Inventories Operating margin 36.1% 36.5% 38.5% 38.8% 40.9% Others Net margin 29.1% 25.7% 26.8% 25.9% 26.5% Current assets 1,533 1,651 1,423 1,294 1,314 Sales per share growth (4.7%) 36.7% 10.6% 24.4% 27.4% LT investments ,011 1,550 2,099 Sales growth 30.0% 39.4% 10.6% 24.4% 27.4% Net fixed assets 913 1,430 1,493 1,557 1,622 Net profit growth 38.1% 23.0% 15.4% 20.5% 30.2% Total Assets 2,935 3,564 3,926 4,401 5,035 EPS growth 1.3% 20.6% 15.4% 20.5% 30.2% Liabilities Interest coverage (x) NM NM NM NM NM Short-term loans Payables Net debt to equity (54.3%) (40.4%) (27.2%) (17.4%) (12.4%) Others Working Capital to Sales Total current liabilities Sales/assets Long-term debt Assets/equity Other liabilities ROE 13.0% 13.5% 14.0% 15.4% 18.0% Total Liabilities ,078 1,234 ROCE 12.8% 14.2% 14.6% 16.7% 20.3% Shareholders' equity 1,983 2,236 2,446 2,699 3,029 BVPS Source: Company reports and J.P. Morgan estimates. 9

10 JPM Q-Profile Fu Shou Yuan International Group Ltd. (CHINA / Consumer Discretionary) As Of: 04-Aug-2016 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: Apr/02 Jan/03 Oct/03 Jul/04 Apr/05 Jan/06 Oct/06 Apr/08 Jan/09 Oct/09 Jul/10 Apr/11 Jan/12 Oct/12 Apr/14 Jan/15 Oct/15 Jul/ Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/16 PE (1Yr Forward) Current: 24.0x P/E Relative to China Index Current: x x x x x x x x Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/ Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/16 Earnings Yield (& Local Bond Yield) Current: 4.16% Dividend Yield (Trailing) Current: % 12Mth fwd EY China BY Proxy % 1.0 4% 0.8 3% 0.6 2% 0.4 1% 0.2 0% Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/ Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/16 ROE (Trailing) Current: Price/Book (Value) Current: 4.3x x P/B Trailing P/B Forward x x 3.0x 2.0x 1.0x 0.00 Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Summary Fu Shou Yuan International Group Ltd As Of: 04-Aug-16 CHINA TICKER 1448 HK Equity Local Price: 5.35 Consumer Discretionary Diversified Consumer Services EPS: 0.19 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 24.02x P/BV (Trailing) 4.27x % 19% -5% -7% Dividend Yield (Trailing) % 35% -1% -32% ROE (Trailing) % 271% 36% 120% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/16 0.0x Mar/02 Nov/02 Jul/03 Mar/04 Nov/04 Jul/05 Mar/06 Nov/06 Mar/08 Nov/08 Jul/09 Mar/10 Nov/10 Jul/11 Mar/12 Nov/12 Mar/14 Nov/14 Jul/15 Mar/16 10

11 Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in securities issued by Fu Shou Yuan International. Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Fu Shou Yuan International. Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for compendium reports and all J.P. Morgan covered companies by visiting calling , or ing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call or research.disclosure.inquiries@jpmorgan.com. Fu Shou Yuan International (1448.HK, 1448 HK) Price Chart OW HK$7.6 Price(HK$) OW HK$7 OW HK$6.8 Date Rating Share Price (HK$) 08-Jun-15 OW Aug-15 OW Jul-16 OW Price Target (HK$) 1 0 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 08, The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear 11

12 in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, Coverage Universe: Chik, Leon: CAR Inc. (0699.HK), CP Pokphand Co., Ltd (0043.HK), China Lesso (2128.HK), China Lodging Group Limited (HTHT), China Maple Leaf Educational Systems Limited (1317.HK), China State Construction (3311.HK), China Travel International Investments HK Ltd (0308.HK), Fu Shou Yuan International (1448.HK), Fufeng Group (0546.HK), Genscript Biotech Corporation (1548.HK), Haitian International Holdings (1882.HK), Jiangnan Group Ltd (1366.HK), Johnson Electric Holdings (0179.HK), Kingboard Chemical (0148.HK), Kingboard Laminates (1888.HK), Lee & Man Paper Manufacturing (2314.HK), New Oriental Education (EDU), Nine Dragons Paper Holdings Ltd (2689.HK), Nord Anglia Education (NORD), PAX Global Technology Ltd (0327.HK), Regina Miracle International Holdings Ltd (2199.HK), Shenzhou International (2313.HK), Skyworth Digital Holdings (0751.HK), TAL Education Group (XRS), TCL Multimedia (1070.HK), Techtronic Industries (0669.HK), Texhong Textile (2678.HK), VTech Holdings (0303.HK), Wasion Group Holdings Ltd (3393.HK), Xinyi Glass (0868.HK), Xinyi Solar (0968.HK), ehi Car Services Ltd (EHIC) J.P. Morgan Equity Research Ratings Distribution, as of July 1, 2016 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 43% 45% 12% IB clients* 52% 49% 37% JPMS Equity Research Coverage 42% 50% 8% IB clients* 68% 65% 51% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at contact the primary analyst or your J.P. Morgan representative, or research.disclosure.inquiries@jpmorgan.com. 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