Qingdao Haier Co., Ltd. (LHS)

Transcription

1 China / Hong Kong Company Guide Version 2 Bloomberg: CH Equity Reuters: SS DBS Group Research. Equity 19 February 2016 Refer to important disclosures at the end of this report HOLD (Downgrade from Buy) Last Traded Price: RMB 8.33 (CSI300 Index : 3,052) Price Target: RMB 8.55 (3% upside) (Prev RMB11.75) Potential Catalyst: Better home appliance demand from lagged impacts of rising property pre-sales in 2015; Consumption upgrade Where we differ: Our FY16/17 net profit estimates are 4%/5% below consensus for prudence sake amid tough global environment Analyst Mavis HUI mavis_hui@hk.dbsvickers.com What s New We downgrade QD Haier from BUY to HOLD along with weaker trends in 4Q15 and YTD, in our view Haier Singapore has been consolidated into our FY15-17 numbers for a more complete picture The GE deal might add RMB1.63/share, yet we await approval while integration could also take time. Positive medium-term prospects intact. Price Relative RMB Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 (LHS) Relative Index Relative SHSZ300 Index (RHS) Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017F Turnover 88,775 89,303 87,701 92,216 EBITDA 7,051 6,710 7,255 7,846 Pre-tax Profit 8,047 7,344 7,951 8,584 Net Profit 4,991 4,572 4,950 5,343 Core profit 4,636 4,572 4,950 5,343 Net Profit Gth (Pre-ex) (%) 11.1 (1.4) EPS (RMB) Core EPS (RMB) EPS Gth (%) 19.6 (8.4) Core EPS Gth (%) 11.1 (1.4) Diluted EPS (RMB) DPS (RMB) BV Per Share (RMB) PE (X) Core PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): (6) (5) (2) Consensus EPS (RMB) Other Broker Recs: B: 14 S: 0 H: 5 Source of all data: Company, DBSV, Thomson Reuters, HKEX Challenges ahead Domestic sales continue to be weak We downgrade Qingdao Haier from BUY to HOLD, with target price lowered from RMB11.75 to RMB As mentioned in our previous note, industry volume has been under pressure since 2H14, mainly due to sluggish consumer spending and inventory de-stocking issues, particularly in the air conditioner segment. We understand from industry players that sales volume remained weak in 4Q15 as well as year-to-date, which prompts us to trim our FY15/16/17 EPS by 6%/5%/2%. We believe that sales recovery might only kick-in by 2H16-17, on the back of (1) lagged impact from property pre-sales growth throughout 2015, (2) potential improvement in channel inventory, and (3) on-going consumption upgrade. Landmark deal could be a net positive On 15 th January 2016, Qingdao Haier announced its acquisition of General Electric s (GE) home appliance unit for US$ 5.4 billion (which implies c.8.2x FY15 EV/EBITDA and about 2.9x PB), to gain a stronger foothold in the U.S. market and to become the global home appliances leader. We view the deal positively for medium-term progress, given that (1) it leads to significant increase of Haier's market share in the United States; (2) GE being a complementary match for Haier for a more complete and diversified product offerings; (3) economies of scale through the integration of group purchasing; and (4) leading status in innovation through R&D resource sharing. We are, however, cognizant about the integration risks given the sheer size of this deal, as well as expected margin dilution upon consolidation, which will affect the group's overall profitability in near-term. Valuation: Our new target price is RMB 8.55, based on 10.5x PE (5-yr average) ascribed to FY16 earnings. While the GE deal could potentially add RMB 1.63 to our TP, we have not factored it into our model as the transaction is still subject to regulatory approval and integration between the 2 big players is also believed to take time upon deal success. Key Risks to Our View: Slower consumer sentiment; changing macro environment, fluctuation of raw material prices, and poor M&A execution At A Glance Issued Capital (m shrs) 6,123 Mkt. Cap (RMBm/US$m) 51,006 / 7,828 Major Shareholders Haier Electrical Appliances Intl (%) 20.6 Haier Co Ltd (%) 17.5 Kkr Home Inv S.A R.L. (%) 9.9 Free Float (%) m Avg. Daily Val. (US$m) 57.3 ICB Industry : Consumer Goods / Personal Goods sa- AH

2 WHAT S NEW Acquisitions of General Electric's Home Appliance Unit A landmark deal On 15th January 2016, Qingdao Haier announced its acquisition of General Electric s home appliance unit for US$ 5.4 billion, which implies c.8.2x FY15 EV/EBITDA and about 2.9x PB. This is a major deal as the transaction value is nearly 60% of QD Haier s market cap of c. US$ 9.5b at date of announcement. We view the deal positively as it accelerates Haier s target to gain a stronger foothold in the U.S. market and to become the global home appliances leader. This is Haier s second attempt to bid for GE s unit after the first bid in Under the agreement, Haier will be entitled to the use of GE brand for home appliances for 40 years. The acquisition is conditional upon the approval from antitrust regulators in which GE home appliances subsidiaries operate. Significant financial impacts Besides the headline transaction value, the acquisition will also be pivotal to Qingdao Haier given the significant financial impact, on both its income statement and balance sheet: Income statement: First of all, the deal will be EPS accretive, given the consideration is fully in cash, no new shares issuance involved, and that the interest expense (estimated at annual USD 97.2m p.a. based on 3% interest on a USD 3.24 billion loan, i.e. 60% of USD 5.4 billion) from deal financing would be well covered by the target unit's profit which is on the rise. If the proposed acquisition is approved, once consolidated, QD Haier s sales and earnings base is expected to increase by c. 48% and c.19% respectively, based on our estimates. It is, however, notable that there will be an overall margin dilution given the net margin of GE s home appliance unit (est. 2.7% FY15) is much lower than QD Haier s (est. 5.1% FY15). Balance sheet: The unaudited value of the target unit s book value stands at US$ billion / RMB 12.4 billion, which is c.49% of QD Haier s (RMB 25.2 billion) as of Sept The massive acquisition will, at forex rate of USD/CNY 6.58, cost QD Haier RMB 35.5 billon. According to announcement, the acquisition consideration is fully in cash; this will be expected to be settled via internal funds and bank financing at a split of 40:60. We expect QD Haier to turn into net debt position upon the deal completion. Table 1: Financial Impacts of Acquisition (m RMB) QD Haier FY16E Sales (a) 87,701 FY16E Earnings (b) 4,950 GE Home Appliance unit FY16E Sales# (c) 42,092 FY16E Earnings# (d) 943 Sales Expansion = (c)/(a) 48% Earnings Expansion = (d)/(b) 19% FY16E no. of shares (e) 6,083 GE's EPS accretion = (d)/(e) RMB Potential TP addition^ RMB 1.63 # based on forex rate of USD/CNY 6.58 ^ RMB 1.63 = RMB pegged to 10.5x PE Table 2: GE home appliance unit's key financials (m USD) Income Statement FY13 FY14 FY15E FY16E Sales Operating Profit Est. interest expense* N/A N/A N/A 97.2 Est. tax rate 40% 40% 40% 40% Net Income Sales growth % 2.2% 5.1% 3.0% OP growth % 13.6% 40.0% 20.0% Net Income growth% 13.6% 40.0% -14.7% Operating profit margin 3.0% 3.4% 4.5% 5.3% Net margin 1.8% 2.0% 2.7% 2.2% * Interest arisen from deal financing (USD 97.2m = 3% interest on USD 3.24 billion loan, to be serviced by U.S. business unit upon consolidation) About the acquisition target GE s home appliance unit is one of the oldest and key business units within the group. It is the second largest home appliance brand in the United States, with comprehensive product range (which includes household and commercial kitchen appliances, refrigerator and washing machines and other household improvement products) sold under 6 key brands namely Hotpint, GE Artistry, GE, GE Profile, GE Café, and Monogram. According Page 2

3 to Euromonitor, GE accounts for approximately 20% share in the United States market, as of 3Q15. The unit runs 9 production facilities in the country, and has more than 10,000 employees. It has comprehensive distribution network across the states, with eight distribution centers spanning across the United States. Most importantly, GE brings along its experienced R&D team, which consists of up to 600 professionals, spread across its 4 R&D centers in the United States, China, India and Korea. Our Views / Thoughts Would the acquisition add value? We think so. First of all, GE, being the second largest home appliance player (c.20% market share) in the United States, can help Haier to strengthen its foothold in the country. Haier accounts for only 5.6% of the market as of 2015, as opposed to its market leading position in China with c.30% market share. Secondly, it is noteworthy to understand that GE is a strong player in the kitchen appliance business ( kitchen appliances segment contribute to more than 50% of GE home appliance unit's revenue), and could well complement Haier's current business structure ( which is more focused on big-format appliances such as air conditioner, fridge and washing machine). The acquisition would lead to significant cross-selling opportunities in China market, in which kitchen appliances sales are growing at double-digit. Thirdly, there should be an instant cost synergy between the two big players post consolidation, through integration of group purchasing and lead to economies of scale. Last but not least, we are encouraged by Haier and GE s mutual agreement to cooperate globally and jointly pursue growth projects in focus areas where both companies can increase business competitiveness such as Industrial Internet, healthcare, and advanced manufacturing. We think that more value could be derived from the partnership, leading us to think that this is not just another asset acquisition / business disposal. Did Haier overpay? Qingdao Haier agreed to pay US$ 5.4 billion for the business unit, which implies P/B of c.2.9x, a 22% premium to the average 2.4x for listed global white good players (we took the average of Electrolux, GE itself and Panasonic). However, we think that the premium is justified given (1) the target unit's operating profit has been on healthy uptrend (refer to table 2), with an increase of more than 40% in 2015; and (2) the deal structure - according to management, the group expects total acquisition consideration would translate into an implied deal valuation of 8.2x EV/EBITDA (in line with peers valuation of 8.9x-10.0x). Most importantly, we do think that this is a strategic opportunity for Haier to accelerate its global market share gain and to attain the global leader status. Is the deal likely to go through? GE has been seeking to offload its home appliance unit business, to focus on its industrial businesses such as jet engines and power turbines. Haier made a bid in 2008 before the deal was called off amid global recession. Sweden s Electrolux was in talks to acquire the business at US$ 3.3 billion in 2014 before The U.S. Justice Department blocked that transaction, saying that the combination of the two companies would hurt competition for cooktops and ranges. While the deal is still pending approval from antitrust regulators (in which GE home appliances subsidiaries operate), we think that it will likely go through given Haier s still-small market presence. In terms of shareholder s approval, it will also not be an issue as KKR, QD Haier s largest independent shareholder (which owns 9.9% of outstanding shares), has already voted positively to the deal. The parent group and KKR together own more than 50% of QD Haier. Integration a risk but manageable One of the key concerns is whether Haier can digest such a massive asset. Integration is indeed a big challenge to conclude the deal in success, failing which would lead to own resources and efficiency drag. With regards to the above, we think that Haier will be able to carry out a seamless business integration. This is mainly grounded on Haier s track record on the acquisition of Fisher & Paykel and Sanyo, where the group has demonstrated successful business integration and execution that has led to positive synergies. Also, we draw comfort from the strong support from KKR, its second largest shareholder by offering professional advice on the mega exercise. Valuation While being positive on the deal, we do not price in the transaction as it is yet to be approved by various antitrust regulators, and pending the release of complete financials of the target unit. However, assuming the deal will go through ultimately, that could add RMB 1.63 to our TP (refer to table 1 - EPS of RMB pegged to group target PE of 10.5x). On the other hand, we downgrade our call on QD Haier from BUY to HOLD, trimming our FY15/16/17 EPB by 6%/5%/2%, given the continuing weakness in domestic sales. We understand from the industry players that the operating environment is still challenging and inventory de-stockings could well persist towards 2Q16 or 3Q16, before sales start to pick-up again. Notably, we have factored in the earnings contribution from Haier Singapore (injected in 2H15) to our forecasts, which helps to offset the double-digit decline in the domestic business for FY15. As a result, we expect group sales to stay flattish and core earnings still down by 1-2% in FY15. Our new target price is RMB 8.55, based on 10.5x PE (5-yr average) ascribed to FY16 earnings. Aside from EPS cut, we also lower our target PE from +0.5 standard deviation above average to current average level to account for the volatile market condition. Page 3

4 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Medium-term consumption upgrade and better overall demand. Haier is the largest refrigerator and washing machine brand globally, with market shares of 14.4% and 17% respectively in terms of retail volume. Moving into 2016, industry players generally believe sales recovery could be contributed by (1) on-going consumption upgrade, such as that from non-inverter air conditioner to inverter airconditioner, and the evolvement using traditional 2-door refrigerator to multi-door/french door fridges; and (2) lagged impact from property pre-sales growth throughout 2015 (According to China's National Bureau of Statistics, national contracted sales grew strongly, up 16.6% y-o-y in FY15 to reach RMB7.3 trillion). Revenue breakdown of QD Haier (2014) Integrated channel service 19.6% Refrigerator 22.5% Washing machine 17.2% Air conditioner 27.8% Gross profit breakdown of QD Haier (2014) Kitchen app + water heater 7.3% Electrical components 4.9% Non-core operations 0.6% QD Haier poised to benefit most from smart home theme. Household makers worldwide have shifted to smart strategies at an accelerated pace, and we think that the Haier Group has the first mover advantage in this space given their strong research capabilities. It kick-started development of smart home era products by launching its U+ Smart Life Platform in early It is the only white good manufacturer selected to participate in the intelligent manufacturing pilot project launched by The Ministry of Industry and Information Technology (MITT) in July Integrated channel service 5.0% Refrigerator 24.9% Washing machine 20.7% Air conditioner 32.4% Kitchen app + water heater 11.1% Electrical components 4.4% Non-core operations 1.4% Margin expansion. We notice continued margin expansion driven by the stronger growth of QD Haier s high-end products, on the back of consumption upgrade. It is noteworthy that its growth of 34% in 9M15 has resulted in overall gross margin increase of 2.2ppts to 27.8%. We expect further margin lift going forward in tandem with the smart home appliance growth phenomenon. This could be, however, offset by the integration of GE home appliance unit, which has much lower margin. Page 4

5 Balance Sheet: Working Capital. We notice steady inventory turnover days of days for the past 3 years despite challenges from domestic inventory build-up. This highlights QD Haier s foresight on the industry trend, and its ability to plan production and maintain efficiency. Strong net cash. QD Haier s net cash balance stood at approximately RMB 22.1bn in Sep 2015, representing over a third of its market cap. This underlines the company s strong war chest to fund for M&As, including the recently announced acquisition of GE home appliances unit. With 60% of the deal consideration funded by borrowings, QD Haier is expected to turn into net debt position RM 2, , ,500.0 Leverage & Asset Turnover (x) 2013A 2014A 2015F 2016F 2017F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure Share Price Drivers: Industry volume. Industry volume has been under pressure since 2H14, mainly due to sluggish consumer spending and inventory de-stocking issues, particularly in the air conditioner segment. We understand from industry players that sales volume remained weak in 4Q15 and moving into We believe that sales recovery would only kick-in by 2H16-17, on the back of (1) lagged impact from property pre-sales growth throughout 2015, and (2) on-going consumption upgrade. 1, % 25.0% 20.0% 2013A 2014A 2015F 2016F 2017F Capital Expenditure (-) ROE Share buybacks. QD Haier s management officially announced a share-buyback proposal in mid-sep Management had proposed to utilize RMB500m out of the company coffer to repurchase its own shares at no more than RMB16.78/share. As of 1 Feb 2016, management has spent c.rmb100m to repurchase 10.5m shares (0.17% of total share cap), and intends to complete the exercise in 6 months time from the date of announcement. 15.0% 10.0% 5.0% 0.0% x A 2014A 2015F 2016F 2017F Forward PE Band Key Risks: Slower demand, raw material price fluctuations, weak property market, integration risk Aside from intensifying competition, an unexpected slowdown in the demand for white goods; fluctuation in raw material prices such as steel and plastics; and potentially weakened sales trend in the property market of China that could affect on-going demand for home appliances might all affect QD Haier s fundamental performance. Poor integration of GE home appliance unit could also drag resources and efficiency. Company Background: QD Haier is one of the largest global white goods manufacturers and suppliers based in China. It mainly engages in manufacturing and distributing air conditioner, refrigerator, washing machines, kitchen appliances and water heaters. QD Haier is the parent company of Hong-Kong listed Haier Electronics (1169 HK), with a 45.6% stake SD: 13.5x 15 Avg: 10.5x SD: 7.5x 0 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 PB Band (x) sd: 4.16x sd: 3.59x 3.2 Avg: 3.03x 2.7 1sd: 2.46x 2.2 2sd: 1.89x 1.7 Dec-12 Dec-13 Dec-14 Dec-15 Page 5

6 Segmental Breakdown (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMB m) Refrigerator 17,925 20,012 21,706 21,706 22,792 Air Conditioner 25,330 24,668 23,341 22,174 22,617 Kitchen App & Water Heater 6,018 6,439 7,430 7,653 8,418 Washing Machines 14,346 15,273 16,566 16,566 17,560 Integrated Channel Services 16,264 17,442 15,699 15,699 17,269 Electrical components & Non-core 6,722 4,941 4,561 3,903 3,560 Total 86,606 88,775 89,303 87,701 92,216 Gross profit (RMB m) Refrigerator 5,105 6,076 5,861 6,078 6,496 Air Conditioner 7,586 7,917 6,302 6,209 6,333 Kitchen App & Water Heater 2,503 2,723 2,972 3,138 3,536 Washing Machines 4,714 5,064 5,467 5,467 5,795 Integrated Channel Services 786 1,227 1,099 1,099 1,209 Electrical components & Non-core 1,251 1,424 1,284 1,107 1,025 Total 21,945 24,430 22,984 23,097 24,393 Gross profit Margins (%) Refrigerator Air Conditioner Kitchen App & Water Heater Washing Machines Integrated Channel Services Electrical components & Non-core Total Page 6

7 Income Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 86,606 88,775 89,303 87,701 92,216 Cost of Goods Sold (64,660) (64,345) (66,318) (64,604) (67,823) Gross Profit 21,945 24,430 22,984 23,097 24,393 Other Opng (Exp)/Inc (16,437) (18,162) (17,166) (16,861) (17,707) Operating Profit 5,509 6,268 5,818 6,236 6,686 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Dividend Income Exceptional Gain/(Loss) Pre-tax Profit 6,724 8,047 7,344 7,951 8,584 Tax (1,164) (1,354) (1,248) (1,352) (1,459) Minority Interest (1,386) (1,701) (1,524) (1,650) (1,781) Preference Dividend Net Profit 4,174 4,991 4,572 4,950 5,343 Net Profit before Except. 4,174 4,636 4,572 4,950 5,343 EBITDA 6,201 7,051 6,710 7,255 7,846 Growth Revenue Gth (%) (1.8) 5.1 EBITDA Gth (%) (4.8) Opg Profit Gth (%) (7.2) Net Profit Gth (%) (8.4) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Interim Income Statement (RMB m) FY Dec 1H2013 2H2013 1H2014 2H2014 1H2015 Revenue 43,056 43,550 47,001 41,775 41,920 Cost of Goods Sold (32,376) (39,874) (35,252) (29,093) (30,274) Gross Profit 10,680 3,676 11,749 12,682 11,646 Other Oper. (Exp)/Inc (7,534) (1,313) (7,948) (10,214) (7,885) Operating Profit 3,146 2,363 3,800 2,468 3,761 Other Non Opg (Exp)/Inc (39) (27) Associates & JV Inc Net Interest (Exp)/Inc 140 (94) Exceptional Gain/(Loss) Pre-tax Profit 3,248 3,476 3,966 4,081 3,966 Tax (543) (621) (669) (685) (669) Minority Interest (572) (814) (719) (982) (719) Net Profit 2,133 2,041 2,577 2,414 2,222 Net profit bef Except. 2,133 2,041 2,577 2,059 2,577 Growth Revenue Gth (%) (4.1) (10.8) Opg Profit Gth (%) (1.0) Net Profit Gth (%) (13.8) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Page 7

8 Balance Sheet (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 7,089 8,057 9,056 10,174 11,423 Invts in Associates & JVs 2,321 3,357 5,891 7,145 8,540 Other LT Assets 2,423 4,119 6,004 5,824 5,753 Cash & ST Invts 20,641 28,644 31,954 34,835 42,479 Inventory 6,909 7,558 7,553 6,809 7,920 Debtors 20,321 22,003 21,551 21,699 23,777 Other Current Assets 1,389 1,269 1,269 1,269 1,269 Total Assets 61,093 75,006 83,279 87, ,161 ST Debt 1,198 1,009 1,434 1,500 1,600 Creditors 25,881 27,614 30,528 29,651 37,243 Other Current Liab 10,967 13,005 13,005 13,005 13,005 LT Debt 717 1,801 2,022 2,200 2,400 Other LT Liabilities 2,299 2,458 2,458 2,458 2,458 Shareholder s Equity 14,494 21,840 25,028 28,489 32,221 Minority Interests 5,537 7,280 8,804 10,454 12,235 Total Cap. & Liab. 61,093 75,006 83,279 87, ,161 Non-Cash Wkg. Capital (8,229) (9,789) (13,160) (12,879) (17,282) Net Cash/(Debt) 18,726 25,835 28,498 31,135 38,479 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) Z-Score (X) NA NA NA NA NA Cash Flow Statement (RMB m) FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 6,724 8,047 7,344 7,951 8,584 Dep. & Amort ,019 1,160 Tax Paid (1,164) (1,354) (1,248) (1,352) (1,459) Assoc. & JV Inc/(loss) (580) (639) (735) (845) (972) (Pft)/ Loss on disposal of FAs (320) (53) Chg in Wkg.Cap ,326 (325) 4,357 Other Operating CF 221 (104) Net Operating CF 6,511 7,007 9,782 6,671 11,901 Capital Exp.(net) (1,397) (1,504) (1,806) (2,027) (2,269) Other Invts.(net) 625 (442) (1,113) Invts in Assoc. & JV (610) (1,305) (3,411) (560) (560) Div from Assoc & JV Other Investing CF Net Investing CF (1,382) (3,251) (6,330) (2,376) (2,763) Div Paid (1,285) (1,340) (1,371) (1,485) (1,603) Chg in Gross Debt Capital Issues 381 5, Other Financing CF (105) (217) (169) (169) (183) Net Financing CF (925) 4,359 (1,540) (1,409) (1,486) Currency Adjustments (27) 3 (12) (4) (8) Chg in Cash 4,178 8,118 1,899 2,881 7,644 Opg CFPS (RMB) Free CFPS (RMB) Page 8

9 Target Price & Ratings History RMB S.No. Date Closing Target Rating Price Price 1: 27-Nov-15 RMB9.92 RMB11.75 Buy 2: Feb-15 May-15 Jul-15 Sep-15 Dec-15 Feb-16 Source: DBS Vickers Page 9

10 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited ( DBSVHK ) This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. 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They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 19 February 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 16 Feb Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Page 10

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Distribution of this report is intended only for wholesale investors within the meaning of the CA. This report is being distributed in Hong Kong by DBSVHK which is licensed and regulated by the Hong Kong Securities and Futures Commission. This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia. This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies. Wong Ming Tek, Executive Director, ADBSR Singapore Thailand United Kingdom Dubai United States Other jurisdictions This report is distributed in Singapore by DBS Bank Ltd (Company Regn. 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The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited 18 th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) , Fax: (852) Page 11