Jewelry Sector. YTD HK market stronger-than-expected; FY18 results could beat. Equity Research Consumer Discretionary. Mar 12, 2018.

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1 Equity Research Consumer Discretionary Jewelry Sector YTD HK market stronger-than-expected; FY18 results could beat Albert Yip, CFA SFC CE No. ADT GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Chow Tai Fook and Luk Fook FY18 results could beat We expect both companies to post high single-digit SSSG in HK in 4QFY18, above our previous estimates for low singledigit growth. We also raise our estimate for their new stores in China in FY19 as we estimate both companies will follow expansion pace of their domestic peers in second and third-tier cities. We revise up our estimates and upgrade CTF from Hold to Buy and LF from Sell to Hold. Catalysts: 1) release of 4QFY18 data in April; 2) release of FY18 results in June. HK jewelry sales have turned strong in 2018 HK jewelry retail sales growth improved to 1 in Jan 2018 from high single-digit growth in 4Q17, despite the later CNY holiday falling in mid-feb. News reports stated that CTF saw double-digit sales growth during the CNY holiday. Our channel checks find that this momentum has continued after the CNY holiday. We estimate CTF and LF could post high single-digit SSSG in HK in 4QFY18, better than our previous estimates for low single-digit SSSG. Strong renminbi a positive factor Mainland tourist arrivals growth accelerated to about 14% YoY during the CNY holiday, from +7% in Dec 2017, attributable to appreciation of the Rmb against the HKD, in our view. The Rmb has risen 3% against the HKD YTD, but has dropped 3%/1% against the JPY and THB. The Rmb is currently 1 stronger against the HKD than it was this time last year, vs 1-2% stronger than the JPY, KRW and SGD, making purchasing power among mainland tourists in HK better than those travelling to these other countries. Historically, Rmb appreciation has been positive for HK retail sales growth (Figure 3). It is widely expected that the HKD will remain weak in 2018 given the expanding interest rate spread between HK and the US. Relatively fast store expansion expected in FY19 Compared to the store numbers of Lao Feng Xiang ( CH) and Chow Tai Seng ( CH), we think CTF and LF still have room to penetrate second and third-tier cities (Figure 6), where the retail networks of LFX and CTS are concentrated. In FY17, CTS added 268 stores (vs CTF s/lf s 186/109 in 1-3QFY18). Our A-share consumer analyst estimates /200+ new stores for LFX /CTS, respectively, in To keep up with domestic peers expansion pace, we assume CTF and LF will have relatively fast store expansion in FY19 to further penetrate second and third-tier cities, led by franchised stores, although the number of net openings might not be as much as in FY18. Upgrade CTF from Hold to Buy We revise up FY18/19 net profit estimates by 21%/ as we 1) raise our FY18/19 HK & Macau SSSG assumptions from 4%/ to 8%/3.5%; 2) increase our FY18/19 China net store openings forecast from 120/100 to 190/130; 3) assume HK$250m in exchange gains in FY18 to reflect Rmb appreciation. We forecast FY18 net profit will jump by 46% to HK$4,488m, 12% above Bloomberg consensus (8% above excluding exchange gains). We forecast 7%/6% revenue growth and 9%/1 EPS growth in FY19/20. We raise our TP from HK$8.50 to HK$10.30, based on 21x FY19E P/E (vs 23x FY18 P/E previously). The stock is trading at 17.9x FY19E P/E, below its historical average of 19.5x, which we think is unjustified given its earnings uptrend. Stock performance CTF LF CSS HSI Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: Bloomberg, GF Securities (Hong Kong) Upgrade LF from Sell to Hold We raise our FY18/19 net profit estimates by 2%/3% as we 1) raise our FY18/19 HK & Macau SSSG assumptions from 5.5%/0.6% to 7.5%/1.4% and 2) increase our FY19 China net store openings forecast from 50 to 75. We forecast FY18 net profit will rise 21% to HK$1,226m, 5% above Bloomberg consensus. We forecast 6%/7% revenue growth and 9%/1 EPS growth in FY19/20. The company s shares have dropped 15% since we downgraded the stock on Jan 18, We think its valuation is now fair after this correction. We adjust our TP from HK$29.00 to HK$29.70, still based on 13x FY19 P/E (+1sd). Sector valuation Price TP P/E (x) EPS growth (%) Yield (%) P/B (x) ROE (%) Jewellery Ticker Rating (Mar ) (HK$) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY17E FY18E FY17E FY18E Chow Tai Fook # 1929 HK Buy Luk Fook # 590 HK Hold Chow Sang Sang 116 HK Hold na na HK listed names average Lao Feng Xiang CH 45.8 RMB Chow Tai Seng CH RMB Guangdong CHJ CH RMB Ming Jewellery CH 7.01 RMB (28) Richemont # CFR SW CHF Tiffany ^ TIF US US$ Int'l names average Sources: Bloomberg estimates, GF Securities (Hong Kong) estimates ^ Company year ends in Jan. FY17-19 data in the table represents the company s FY18-20 estimates # Company year ends in March. FY17-19 data in the table represents the company s FY18-20 estimates

2 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 Sep-17 Jan-18 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Sector report Figure 1: Retail sales growth of jewelry, watches and valuable gifts (YoY) Figure 2: Rmb against other Asian currencies since Jan 2, (%) HKD JPY USD KRW SGD THB Sources: Hong Kong Census & Statistics Department, Bloomberg, GF Securities (Hong Kong) Figure 3: Rmb appreciation against the HKD has historically been positive for HK retail sales growth Figure 4: Monthly closing price of Rmb against the HKD RMB monthly closing price YoY change (%) HK retail sales growth (%) Sources: Hong Kong Census & Statistics Department, Bloomberg, GF Securities (Hong Kong) Figure 5: Market share by brand in mainland China in 2015 Figure 6: Store number comparison in mainland China % Chow Tai Fook 5.8% Lao Feng Xiang 4.3% 3.1% Chow Yuyuan Tai Seng 2.3% 2.2% 2.1% Chow Sang Sang Luk Fook 0.9% 3D-GoldMing Pai Cuihua 0.5% 0.4% CHJ Jewelry POS in Mainland China Tier 1 Tier 2 Tier 3 Date CTF (1929.HK) 2, , Sep-17 LF (590.HK) 1, Sep-17 CSS (116.HK) 384 na na na 30-Jun-17 Lao Feng Xiang 3,049 na na na 30-Jun-17 Chow Tai Seng 2,724 na na na 31-Dec-17 Sources: 水贝 中国珠宝指数网, Companies, GF Securities (Hong Kong) 2

3 Figure 7: SSS trend for jewelry companies Calendar Year 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Avg gold price (US$) 1,105 1,181 1,259 1,335 1,217 1,218 1,259 1,279 1,277 Avg gold price YoY (%) -8% -3% 5% 19% 1 3% -4% 5% SSS trend Chow Tai Fook (1929 HK) -15% -26% na na na na na China -6% -25% -17% -22% 4% 12% 11% 9% 5% HK and Macau -23% -27% % 4% 5% 13% 5% Luk Fook (590 HK) -25% -27% -24% -37% -1 2% 5% 17% 1% China -1-19% -24% -23% 5% 11% 23% 11% -4% HK and Macau -26% -28% -24% -39% -11% 1% 3% 18% 1% Chow Sang Sang (116 HK) China -11% ve 5% ve low to mid-teen mid to high sd high sd high sd mid sd flat HK and Macau -ve high-teen ve 26% ve 34% ve 7% -ve 2-3% -ve 2-3% high sd -ve lsd RSV trend Chow Tai Fook (1929 HK) China -6% -25% -13% -17% 7% 16% 17% 15% 12% HK and Macau - -26% -22% -33% -6% 1% 7% 12% SSS trend by category Chow Tai Fook (1929 HK) Gold products -14% -27% na na na na na na na China -3% -29% -22% -27% 7% 17% 16% 15% 8% HK and Macau -24% -25% -12% -36% 8% 19% 9% 21% -1% Gem-set jewellery -12% -23% na na na na na na na China -7% -24% -12% -17% -4% 5% 3% -1% -1% HK and Macau -16% -22% -27% -23% -17% -17% -4% 7% 22% Luk Fook (590 HK) Gold and platinum products -25% -28% -26% -47% -11% -1% 5% 21% -3% China -14% -27% -29% -3 2% 16% 32% 19% -2% HK and Macau -26% -28% -25% -49% -12% -5% 21% -4% Gem-set jewellery -26% -25% -19% -14% -4% 11% 9% 16% 1 China 2% 4% -8% -3% 6% 1-2% -7% HK and Macau -27% -27% - -14% -5% 12% 9% 18% 11% Chow Sang Sang (116 HK) Gold and platinum products China ve 13% ve 32% lsd 6-7% low-teens high sd flat HK and Macau -49% -ve msd +ve -ve low-teens -ve hsd Gem-set jewellery China % low-teens mid-teens +ve lsd -ve mid sd -ve lsd HK and Macau better than LF -ve low-teens -ve hsd -ve dd -ve mid sd +ve dd Source: Company data, GF Securities (Hong Kong) estimates Note: Chow Sang Sang figures are our estimates. Figure 8: Quarterly SSS trend of CTF Figure 9: SSS growth of CTF % -6% -11%-5% 67% 26% China HK & Macau 13% 14% 12% 11% 13% 31% 6% 4% 5% 11% -12% -9% -7% -6% 7% 9% -15% -17% 4% 5% 5% -28% -25% -22% -2% -9% -13% -21% -29% -26% -24% -23% - -27% % 16% 32% 15% 48% 32% -3% 17% -4% -16% -1-22% -5% -12% 7% 8% 4% 4% 4% 2% -6 3QFY13 4QFY13 1QFY14 2QFY14 3QFY13 4QFY14-5 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY % FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E China HK & Macau Sources: Company data, GF Securities (Hong Kong) 3

4 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Sector report Figure 10: Store number trend of CTF 3,000 2,500 2,000 1,500 1, ,836 22% 2,569 2,702 2,257 2,319 2,381 15% 2,077 1,836 1,627 1,358 1,179 13% 13% 9% 8% 5% 5% 3% 3% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Total stores Growth (%) 25% 15% 1 5% Figure 11: Key assumptions of CTF (HK$m) FY16 FY17 FY18E FY19E FY20E Total revenue 56,591 51,246 57,308 61,523 65,117 growth % % 11.8% 7.4% 5.8% - HK, Macau and other Asian markets 22,921 20,226 22,501 23,801 24,768 growth % -14.9% -11.8% 11.2% 5.8% 4.1% store growth (%) 5.3% -3.6% -1.5% 2.3% 2.9% SSS (%) -21.7% -12.4% % 0. - China market 33,670 31,019 34,806 37,722 40,349 growth % % 12.2% 8.4% 7. store growth (%) 2.6% 3.1% 8.5% 5.3% 5.1% SSS (%) -10.3% -5.2% 6.5% 3.5% 3.5% Gross profit 15,641 14,963 16,496 17,775 18,974 Gross margin (%) 27.6% 29.2% 28.8% 28.9% 29.1% Sales mix (%) gold 55.8% 57.4% 58.8% 58.3% 57.8% gem-set 26.8% 25.3% 24.2% 24.7% 25.2% platinum and karat gold 12.4% 11.5% watches % SG&A expenses ratio (%) 20.5% 20.1% 18.6% 18.1% 17.8% Operating profit 4,028 4,649 6,414 7,015 7,769 growth % -41.6% 15.4% % 10.7% OP margin (%) 7.1% 9.1% 11.2% 11.4% 11.9% Net profit 2,941 3,055 4,488 4,896 5,399 growth % -46.1% 3.9% 46.9% 9.1% 10.3% Net profit margin (%) 5.2% % % Payout ratio (%) 272% 167% Figure 12: P/E band of CTF (HK$) x 23x 19x 15x 11x 2 Sources: Bloomberg, GF Securities (Hong Kong) estimates 4

5 Figure 13: Financial statements for CTF Income Statement Balance Sheet Year-end Mar 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E Year-end Mar 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E Revenue 56,591 51,246 57,308 61,523 65,117 Fixed assets Cost of sales (40,950) (36,283) (40,812) (43,748) (46,143) PPE 4,750 4,666 5,159 5,334 5,491 Gross profit 15,641 14,963 16,496 17,775 18,974 Prepaid lease payments Investment properties Other income Deposit paid for acquisition of PPE SG&A expenses (11,623) (10,307) (10,643) (11,107) (11,573) Investment in JV/associate Other gains and losses (245) (286) Amount due from an associate Other expenses (51) (51) (51) (51) (51) Loan receivables Operating profit 4,028 4,649 6,414 7,015 7,769 Goodwill Other intangible assets Net finance cost (88) (97) (96) (139) (145) Jewelery collectibles ,520 1,520 1,520 Others 0 (164) Deferred tax assets Share of profit/(loss) of JV (4) (10) ,670 7,133 8,110 8,215 8,303 Profit before tax 3,936 4,378 6,318 6,876 7,623 Income tax expense (957) (1,227) (1,706) (1,843) (2,074) Current assets Non-controlling interests (38) (96) (125) (137) (151) Inventories 31,377 29,259 32,582 34,927 36,839 Net profit 2,941 3,055 4,488 4,896 5,399 A/C and other receivables 4,605 5,057 5,656 6,072 6,426 EPS (HK$) Loan receivables Others Growth rates (%) Pledged deposit Revenue (12) (9) Term deposit Net profit (46) Cash and cash equivalents 13,001 7,943 8,448 9,595 10,525 EPS (46) ,005 42,269 46,695 50,602 53,800 Margin & ratios (%) Total assets 55,675 49,402 54,805 58,817 62,103 Gross profit margin OP margin Current liabilities Net profit margin A/C and other payables 4,336 5,693 6,959 7,965 8,963 Effective tax rate Amount due to non-controlling shareholders of subsidiaries Payout ratio Tax liabilities Bank borrowing 7,320 6,193 6,100 6,100 5,100 Cash Flow Statement Gold loans 6,513 3,216 4,787 5,078 5,314 Year-end Mar 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E 18,764 15,788 18,704 20,063 20,400 Profit before tax 3,936 4,378 6,318 6,876 7,623 Net finance cost Non-current liabilities Share of (profit)/loss of JV Bank borrowing ,100 2,100 2,100 Others Deferred tax liabilities Depreciation and amortization Retirement benefit obligations Impairment losses ,162 1,112 2,621 2,631 2,641 Change of working capital 8,946 1,460 (2,656) (1,754) (1,269) Tax paid (870) (920) (1,467) (1,774) (1,958) Equity Operating cash flow 13,897 6,252 3,127 4,341 5,412 Shareholders' equity 34,904 31,799 32,652 35,159 37,947 Non-controlling interests ,115 Capex (1,046) (862) (1,300) (1,000) (1,000) 35,750 32,502 33,480 36,123 39,062 Interest received Disposals Total liabilities & equity 55,675 49,402 54,805 58,817 62,103 Acquisitions Change in term deposits Financial Ratios Change in pledged deposits Year-end Mar 31 FY16 FY17 FY18E FY19E FY20E Others (131) (414) (533) 0 0 Current ratio Investing cash flow (1,045) (1,147) (1,743) (892) (869) Quick ratio Change of bank borrowings 1,192 (1,112) 1,408 0 (1,000) Inventory turnover days Change of gold loans (2,161) (3,023) 1, Dividend paid (6,582) (5,148) (3,672) (2,346) (2,574) Asset turnover Interest paid (257) (251) (186) (247) (276) Total assets/total equity Others (200) (238) Net gearing (%) Financing cash flow (8,008) (9,771) (879) (2,302) (3,613) ROE (%) Net change of cash flow 4,845 (4,667) 505 1, ROA (%) Forex changes (321) (392)

6 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 3QFY13 4QFY13 1QFY14 2QFY14 3QFY13 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Sector report Figure 14: Quarterly SSS trend of LF Figure 15: SSS growth of LF % 29% -2% 14% 117% 83% % 6% 1% -12% -7% -52% -11% -22% -19% -3-54% -6% - 23% -5% 2% 5% 11% 11% -4% -1-19%-24%-23% 18% -26%-28% -24% -39% 1% 3% -11% 1% % 41% 25% 22% 7% 8% 1% 4% 7% -8% -5% 8% 1% 2% -28% FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E China HK & Macau China HK & Macau Figure 16: Total store number of LF 2,000 1,800 1,600 1,400 1,200 1, ,797 26% 1,718 24% 1,640 22% 1,383 1,437 1,505 23% 1,268 1,072 18% % 9% 5% 4% 5% 5% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Total stores Growth (%) 3 25% 15% 1 5% Figure 17: P/E band of LF (HK$) x x x 7x x 0 Sources: Bloomberg, GF Securities (Hong Kong) estimates 6

7 Figure 18: Key assumptions for LF (HK$ m) FY16 FY17 FY18E FY19E FY20E Total revenue 14,031 12,807 14,076 14,920 16,028 growth % -11.9% -8.7% 9.9% % - Retail revenue - HK, Macau and overseas markets 9,629 7,959 8,621 8,888 9,315 growth % % 8.3% 3.1% 4.8% store growth (%) % 6.1% 4.3% 5.5% SSS (%) % 7.5% 1.4% 1.9% - Retail revenue - China market 1,312 1,659 2,129 2,534 3,038 growth % 7.4% 26.5% 28.3% % store growth (%) 44.3% 24.6% 21.8% 14.5% 12.6% SSS (%) % 7.5% 1.1% 3.5% - Wholesale revenue 2,563 2,672 2,723 2,850 2,985 growth % -8.3% 4.3% 1.9% 4.7% 4.7% - Licensing revenue growth % -8.6% -2.2% 16.7% 7.4% 6.9% Gross profit 3,254 3,277 3,604 3,817 4,115 Gross margin (%) 23.2% 25.6% 25.6% 25.6% 25.7% Product mix (%) gold & platinum 60.9% 57.1% % 56.5% gem-set 39.1% 42.9% % 43.5% Selling expenses ratio (%) 14.1% 15.6% 14.8% 14.7% 14.6% Administrative expenses ratio (%) 1.1% 1.2% 1.2% 1.2% 1.2% Operating profit 1,233 1,286 1,518 1,634 1,790 growth % -37.3% 4.4% % 9.6% OP margin (%) 8.8% % 10.9% 11.2% Core profit 979 1,014 1,226 1,342 1,481 growth % % 20.9% 9.5% 10.4% Core profit margin (%) % 8.7% % Payout ratio (%) 68% 64% 53% 48% 44% 7

8 Figure 19: Financial statements of LF Income Statement Balance Sheet Year-end March 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E Year-end March 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E Revenue 14,031 12,807 14,076 14,920 16,028 Fixed assets Cost of sales (10,777) (9,530) (10,472) (11,102) (11,914) PPE Gross profit 3,254 3,277 3,604 3,817 4,115 Land use rights Investment properties Other income Investment in associates Selling & distribution expenses (1,982) (1,994) (2,088) (2,191) (2,338) Shareholders loans to an associate Administration expenses (149) (155) (162) (174) (184) CB Other gains/(losses), net (30) (17) (7) 0 0 Others Operating profit 1,233 1,286 1,518 1,634 1,790 Deferred tax assets ,300 1,248 1,754 1,645 1,601 Net finance costs Non-recurring gains (21) Current assets Share of profit/(loss) of associates (79) (54) (44) (20) (5) Inventories 6,345 6,973 7,368 7,817 8,396 Profit before tax 1,161 1,250 1,487 1,627 1,803 A/C receivables Income tax expense (200) (223) (253) (275) (309) Deposits and prepayments Non-controlling interests (3) (10) (9) (10) (12) Shareholders loans to an associate Net profit 959 1,017 1,226 1,342 1,481 Others Core profit 979 1,014 1,226 1,342 1,481 CB Core EPS (HK$) ST deposits Cash and cash equivalents 2,362 1,529 1,379 1,789 2,279 Growth rates (%) 9,330 9,431 9,730 10,674 11,741 Revenue (12) (9) Core profit (39) Total assets 10,629 10,679 11,484 12,319 13,342 Core EPS (39) Current liabilities Margin & ratios (%) A/C payables Gross profit margin Other payables OP margin Bank borrowings Net profit margin Gold loans Effective tax rate Others Payout ratio Tax liabilities ,757 1,594 1,778 1,907 2,076 Cash Flow Statement Year-end March 31 (HK$ m) FY16 FY17E FY18E FY19E FY20E Non-current liabilities Profit before tax 1,161 1,250 1,487 1,627 1,803 Employee benefit obligations Share of (profit)/loss of associates and JVs Deferred tax liabilities Net finance costs (28) (15) (13) (14) (18) Depreciation and amortization Others Equity Change in amount due to an associate (25) Shareholders' equity 8,674 8,873 9,483 10,177 11,017 Change of working capital 898 (534) (332) (399) (517) Non-controlling interests Tax paid (195) (215) (238) (264) (292) 8,769 8,980 9,599 10,302 11,155 Operating cash flow 2, ,087 1,111 1,120 Total liabilities & equity 10,629 10,679 11,484 12,319 13,342 Capex (113) (168) (683) (100) (100) Disposals Financial Ratios Interest received Year-end March 31 (HK$ m) FY16 FY17 FY18E FY19E FY20E Purchase of financial assets (4) Current ratio Purchase of associate Quick ratio Shareholder loan to associate Change in term deposits 644 (262) A/C receivable turnover days Others A/C payable turnover days Investing cash flow 614 (408) (658) (72) (9) Inventory turnover days Change of borrowings (1,071) (400) Asset turnover Change of gold loans 94 (77) Total assets/total equity Share repurchase (29) Net cash 1,721 1,425 1,196 1,575 2,024 Contributions from non-controlling interests Dividend paid (648) (646) (646) (646) (646) ROE (%) Interest paid (14) (9) (12) (14) (16) ROA (%) Financing cash flow (1,668) (1,131) (579) (629) (622) Net change of cash flow 1,009 (819) (150) Forex changes (22) (13)

9 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1 Neutral Expected sector relative performance ranges between -1 and 1 Cautious Sector expected to underperform benchmark by more than 1 Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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