Equity Market Hong Kong Equity Morning Notes. Cyrus Tai (SFC CE:BKJ685) (852) November 2, Market Wrap

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Equity Market Hong Kong Equity Morning Notes Cyrus Tai (SFC CE:BKJ685) (852) 3519 1292 November 2, 218 Market Wrap HSI 1.75% HSCEI 1.39% Turnover HK$118.9 bn 6% (3-day average) SSE Composite.

2 TAKBO GROUP HOLD(8436) 19.5 SHIRBLE DEPARTME(312) 175.6 Securities 4.2 Textiles 2.8 LUMINA GROUP LTD(847) 18.3 KNK HOLDINGS LTD(839) 147.3 Construction 4. Construction 19.

1 Equity Market Hong Kong Equity Morning Notes Cyrus Tai (SFC CE:BKJ685) (852) November 2, 218 Market Wrap HSI 1.75% HSCEI 1.39% Turnover HK$118.9 bn 6% (3-day average) SSE Composite.13% SZSE Component 1.14% Sector tracking Stock tracking 1D % 1Y % 1D % 1Q % Real Estate 4.9 Const & Eng 31.6 SHEEN TAI HOLDIN(1335) 2.6 FURNIWEB HOLDING(848) 53.2 Electrical 4.4 Retail 23.2 TAKBO GROUP HOLD(8436) 19.5 SHIRBLE DEPARTME(312) Securities 4.2 Textiles 2.8 LUMINA GROUP LTD(847) 18.3 KNK HOLDINGS LTD(839) Construction 4. Construction 19.3 GURU ONLINE HOLD(8121) 17.4 CHINA VANADIUM(893) Comm Equip 3.6 Oil & Gas 18.4 LINOCRAFT HOLDIN(8383) 15.4 TAKBO GROUP HOLD(8436) 93.7 Market Highlight Dali Foods (3799 HK): China s Nestlé Founded in Fujian province in 1989, Dali Foods Group started as a biscuit manufacturer and has now developed into the leading branded snack food and beverage company in China with a diversified multi-brand product portfolio. The Group offers products in seven F&B categories under six core brands. The Group has established 18 subsidiaries with 3 food and beverage production bases, one mashed potato production base and packaging and printing company in 16 provinces, including the new plants in ShenYang. The Group sells their products primarily through their vast network of distributors (more than 4,5 distributors), who sell their products to sub-distributors and retailers. This network penetrates the Chinese market from urban downtown areas, townships and villages across all of China s provinces. The Group is also developing two new production plants in GuangXi, GuiYang. Structure of channel strategy and production bases key milestones and core product categories Source: company data,orient Securities (Hong Kong) *Key accounts: primarily leading national and regional hypermarket, supermarket and convenience store operators, such as, Yonghui and CR Vanguard. *Specialty Channel-sales: outlets mainly including gas stations, internet cafes, schools and karaoke *Traditional trade channel-sales: outlets including small grocery stores, non-chained convenience stores, kiosks and other small outlets *Modern retail channel-sales outlets: including hypermarkets, supermarkets and chained convenience stores Source: company data, Orient Securities (Hong Kong) Orient Securities (Hong Kong) 1 November 2, 218

A global comparison: Nestlé Founded in small town of Vevey, Switzerland by Heinrich in 1866, Nestlé has gone from strength to strength and has become the largest F&B Company in the world.

Founded in small town of Vevey, Switzerland by Heinrich in 1866, Nestlé has gone from strength to strength and has become the largest F&B Company in the world.

2 A global comparison: Nestlé Founded in small town of Vevey, Switzerland by Heinrich in 1866, Nestlé has gone from strength to strength and has become the largest F&B Company in the world. Nestlé owns over 2 brands which almost covers every F&B categories and sells in 189 countries. They have 413 factories in 85 countries and employ 323, employees. Founded in small town of Vevey, Switzerland by Heinrich in 1866, Nestlé has gone from strength to strength and has become the largest F&B Company in the world. Nestlé owns over 2 brands which almost covers every F&B categories and sells in 189 countries. They have 413 factories in 85 countries and employ 323, employees. Nestlé is the global leader in the F&B industry and sales were RMB62.5 billion*, 31X more than Dali Group (RMB 19.8 billion) in 217. Nestle enlarges their brands through mergers and acquisitions and now they have more than 2 brands all over the world. Nestlé DNA:❶Standardization: developing standardized products marketed worldwide to enjoy the low cost through economies of scale. ❷Localization: combine with standardization and customization strategies to minimize costs while providing a perfect match to tastes and preference in different nation. Nestlé diversified their product portfolio globally. The United States and China are Nestlé s #1, #2 largest markets, accounted for around 3% and 7% of total sales respectively. Thus, the rest of the world s countries contribute 37% of total sales. Dali Group is mainly focus on Chinese market. Successful marketing strategy: Encircling the Cities from the Rural Areas Dali Foods primarily relies on traditional trade channel which is the primary channel for snack F&B beverage industry in China, especially in lower-tier cities and rural areas to distribute their products. However, Dali Foods has begun to enhance the strength of other channels, especially in modern retail channel which is the major channel for product distribution in top tier cities since 214. The contribution of total sales through modern retail channel has increased by more than 25% for 4 years (in 214, it accounted for 97.3% of total retail sales but dropped to around 7% of total retail sales in 218H1). This highlighted that Dali Foods penetrates to more top-tier cities successfully. Purchase Behavior in top-tier cities: More sophisticated purchasing consideration, both functional and emotional driven. Rise in health conscious lifestyle and willing to pay more for green and organic products. Willing to pay more for higher quality, natural and safe imported products. Localize players VS multinational players in different distribution channel Orient Securities (Hong Kong) 2 November 2, 218

the topical treatment of acne vulgaris in patients A range of hyaluronic acid-based products to improve skin quality Treat acne, rosacea, psoriasis and other steroid-responsive dermatoses,

Milk products and Ice cream Nutrition solutions for each stage of childhood Yogurt and fermented drinks A significant marketer for RTD peanut milk and RTE Instant cereal beverage canned rice porridge

cooking aids A wide range of tasty products like noodles, soups, bouillons, and mixes.

3 Product Length The list below is the main brands owned by Nestle. A global comparison: Nestlé Product Width Powered and Liquid Beverage Leading coffee brand, sell nearly 5,5 cups every second. Leading retail coffee system brand Premium coffee brand Provide a variety of tea products The world's leading chocolate malt beverage A mix for chocolate-flavored milk powder Instant chocolate drinks Nutrition and Health Science Baby formula brand Premium baby formula brand Baby food brand Infant cereals Brand of prenatal multivitamins Range of nutritional supplement RTD beverage and powders Range of protein and vitamin supplement shakes and soups Range of products to support digestive health A gentle skincare brand, is used by millions of people with sensitive skin today Indicated for the topical treatment of acne vulgaris in patients A range of hyaluronic acid-based products to improve skin quality Treat acne, rosacea, psoriasis and other steroid-responsive dermatoses, onychomycosis, pigmentary disorders, skin cancer and skin senescence. Milk products and Ice cream Nutrition solutions for each stage of childhood Yogurt and fermented drinks A significant marketer for RTD peanut milk and RTE Instant cereal beverage canned rice porridge in China Ice cream brand at low price Premium Ice cream brand The concentrated milk The coffee creamer brand Petcare A range of dog and cat products from low to premium price Prepared dishes and cooking aids A wide range of tasty products like noodles, soups, bouillons, and mixes. Frozen prepared food Pre-cooked Frankfurters Offer frozen pizza A healthier alternative to Stouffer's frozen meals Premium culinary sauces Culinary sauces Confectionery chocolate wafer bars Premium chocolate brand Wide range of chocolate and sweets Water Revenue Dustribution in 217 Premium sparkling mineral water Flagship brand for healthy hydration sold across more than 32 countries Bottled water 1% 8% 23% 13% 17% 14% 15% 44% 6% 5% Orient Securities (Hong Kong) 3 November 2, 218

China's bakery market is highly fragmented The baking market in China is fragmented with a wide range of international and local manufacturers, according to Eurominitor.

Launch Quality Breakfast bakery series The Group has successfully launched Quality Breakfast of bakery series with a total of 1 major products, 2 major series and 33 packaging specifications under

Roadmap for quality breakfast The volume of Bakery Industry in China Bakery industry distribution by company Source: ZSJJ( 中商产业研究院 ),Orient Securities (Hong Kong) Bread distribution Source: ZSJJ(

ingredients and diversified flavors. Short shelf-life bread products (3-7days) have less additives and preservatives on bread which is more natural, safer and healthier.

4 Successful product strategy: #1 Brand Refreshing- bakery series Strong products innovation and products portfolio upgrade: In order to in line with the market trends and needs of customers, the group launches new product categories or extending existing brand lines with new products, new flavors or packaging. Two major segments of food and beverage products are launched in 217. China's bakery market is highly fragmented The baking market in China is fragmented with a wide range of international and local manufacturers, according to Eurominitor. Although the group is the largest manufacturer of bread, cakes and pastries in China, it accounted for only 5.1% of total baking industry in China. Launch Quality Breakfast bakery series The Group has successfully launched Quality Breakfast of bakery series with a total of 1 major products, 2 major series and 33 packaging specifications under the Daliyuan brand to provide the quality breakfast of nutrition, quality, convenience and cheap price. Roadmap for quality breakfast The volume of Bakery Industry in China Bakery industry distribution by company Source: ZSJJ( 中商产业研究院 ),Orient Securities (Hong Kong) Bread distribution Source: ZSJJ( 中商产业研究院 ),Orient Securities (Hong Kong) Expand to short shelf-life bread products Along with consumption upgrade, consumers have higher expectation for products in terms of freshness, healthy ingredients and diversified flavors. Short shelf-life bread products (3-7days) have less additives and preservatives on bread which is more natural, safer and healthier. According to statistics, medium shelf-life bread and short shelf-life bread in China generated double digit growth every year and expected to account for more than RMB 1 billion of total market size separately. Therefore, the Group scheduled to launch short shelf-life bread products on November, 218. Successful product strategy:#2 Enters into soymilk market in China Great potential of soymilk market in China (Health concept): According to Euromonitor, China's soymilk sales increased from RMB 5.8 billion (sales volume: 737, tons) in 211 to RMB 9 billion (sales volume: 1.9 million tons) in 217 at a CAGR of about 1%. China has already become the world s largest soymilk market. From our view, soymilk has become a category favored by the new generation group and we expect the demand of soymilk market in China will develop rapidly with the entry of giant food and beverage companies such as Mengniu dairy. In fact, the new entrants in recent years are not uncommon in the soymilk industry because of two main reasons: China enters the era of soymilk and expects RMB 1 billion soymilk market; In addition, China's per capita soymilk consumption was about.8l in 216, which was the lowest compared to the other countries. Thus, we believe that the soymilk market in China has great growth potential in future. The domestic soybean milk industry is in a period of decentralized structure and low industry concentration. No a real enterprise are capable of being an absolutely leading leader. Launched of the soy milk series under Doubendou brand The sales of plant-based and milk beverage increased by 32.9% in 217, driven by the soymilk with pure natural-high-protein and non-additive. The sales of the soymilk reached RMB 1 billion between April and December in 217 (RMB 9 million in 218H1) and on target to RMB 1 billion within 3-5 years. Compared with main rivals, DoubenDou has the highest protein which is essential to good health with fewer ingredients but it sells the most expensive at the mean time. China's per capita soymilk consumption Source: Euromonitor, Orient Securities (Hong Kong) Orient Securities (Hong Kong) 4 November 2, 218

5 Is the Group really huge, steady & safe? We think so. Revenue 3, 2, 2% 15% 1% 5% Top-3 F&B companies in China based on revenue in E 219E 22E % Gross Profit & GPM Net Profit & NPM 15, 5, 6, 4, 2, E 219E 22E 6% 4% 2% % 2% 15% 1% 5% Steady increasing gross profit margin and net profit margin due to launching new products with high margin and effective cost control while variable cost increase E 219E 22E % CAPEX 1,5 1, E 219E 22E Free Cash Flow Net Cash Flow 5, 4, 3, 2, 1, 8, 6, 4, 2, (2,) E 219E 22E IPO Proceed E 219E 22E Strong positive operating cash flow can support growth internally. This means that the Group has ability to seek appropriate strategic acquisition and business cooperation opportunities to dominate the markets. Year-end Cash 15, 5, E 219E 22E Orient Securities (Hong Kong) 5 November 2, 218

6 Analyst Certification I, Cyrus Tai (Tai Wai Ho), being the person primarily responsible for the content of this research report, in whole or in part, hereby certify that: (1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (or their) securities; (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report, or our Investment Banking Department; (3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department; (4) the subject company(ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.5(g) of SFC Code of Conduct; (5) I and my associates do not deal in or trade in the stock(s) covered in this report within 3 calendar days prior to the date of issue of the report; (6) I and my associates do not serve as an officer(s) of the listed company(ies) covered in this report; and (7) I and my associates have no financial interests in relation to the listed company (ies) covered in this report Disclaimer Orient Securities (Hong Kong) Limited does and seeks to do business with the company or companies covered in this report. 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. Orient Securities (Hong Kong) Limited and its affiliates, officers, directors, and employees may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this report. In no event will Orient Securities (Hong Kong) Limited or any other member of Orient Securities (Hong Kong) Limited be liable or responsible for loss of any kind, whether direct, indirect, consequential or incidental, resulting from the act or omission of any third party occurring in reliance upon the contents of this report. Any information provided in this research report is for information purpose only and have no regards to the investment objectives, financial situation or risk tolerance level of any specific recipient and does not constitute any solicitation or any offer to buy or sell any securities or any other financial instruments. Before entering into any investment contract, individual should exercise judgment or seek for professional advice when necessary. Orient Securities (Hong Kong) Limited may not execute transactions for individual(s) in the securities/instruments mentioned. Although the information in this report is obtained or complied from sources that Orient Securities (Hong Kong) Limited believes to be reliable, no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the materials contained in this report. All price-related information is indicative only, and value of the investment(s) referred to in this report and the income from them may fluctuate because of changes in foreign exchange rates, market indexes, relevant operational / financial conditions of the company and other factors. Information contained in this report may change at any time and Orient Securities (Hong Kong) Limited gives no undertaking to provide notice of any such change. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to any law, regulation, rule or other registration or licensing requirement. Investment(s) in securities / financial instructions put through/execute outside Hong Kong are subject to the applicable laws and regulations of the relevant overseas jurisdiction, the entity issuing this research report and the analyst(s) authoring this research report are not subject to all the disclosures and other regulatory requirements in other countries. This report may not be copied, reproduced, distributed, redistribute or published by any person for any purpose without the prior written consent of Orient Securities (Hong Kong) Limited. All rights are reserved. Orient Securities (Hong Kong) 6 November 2, 218

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