Yum Cha 飲茶. September 30, 2013 VS. CHART OF THE DAY HONG KONG THREATENED BY FREE TRADE ZONES?

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1 Yum Cha 飲茶 September 30, 2013 CHART OF THE DAY HONG KONG THREATENED BY FREE TRADE ZONES? INDICIES Closing DoD% Hang Seng Index HSCEI Shanghai COMP 23, ,494.4 (0.4) 2, VS. Shenzhen COMP Gold BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) 1, , ,046.0 (3.2) (1.1) (0.7) PAST 20 YEARS Shanghai Comp +362% Hang Seng + 314% NEXT 20 YEARS? HIBOR, 3-M SHIBOR, 3-M RMB/USD 6.12 (0.0) DIARY NOTES FOR THIS WEEK HSBC Manufacturing PMI (Sept) Sep 30 [previous: 51.2] Manufacturing PMI (Sept) Oct 1 [previous 51.0] Source: Bloomberg XINHUA STATEMENT: The Shanghai pilot free trade zone (FTZ) started operating Sunday, launching a test bed for the Chinese leadership s drive of deepening market-oriented reforms and boosting economic vigor. In advance of the formal launch of the Shanghai FTZ the State Council announced a long list of policies that will be piloted in the zone (see Page 2), and at first glance it would be reasonable to conclude that the intention is to replace Hong Kong as the front door for China to the world. But there are many turns in the road ahead before Shanghai s FTZ is seen as a direct competitor, or even a threat to Hong Kong. No less than Leung Chun-ying, Hong Kong s Chief Executive, and not usually a critic of Beijing policy, asked why Hong Kong is not threatened by the Shanghai FTZ initiative: One of the most important factors is Hong Kong s rule of law. Indeed, and so is the strong resistance, both political and from regulatory agencies, although Premier Li Keqiang over-rode the China Banking Regulatory Commission s (CRBC) objections, and also concerns raised by the China Securities Regulatory Commission (CSRC). Analysts: John Mulcahy, Managing Director and Wong Chi-man, Research Director TALKING POINTS KAISA GROUP [1638.HK] - After a recent visit to three of Kaisa s Shenzhen projects we came away convinced of the company s local execution capability, and we have raised our contracted sales estimates by 6% and 14% in FY13E and FY14E due to increased sell-through rate assumptions. We have also narrowed our target NAV discount from 50% to 40%, and consequently raised our target price (TP) to HK$2.73, or 24% above Friday s HK$2.19. BUY PRINCE FROG [1259.HK; HK$5.41] - We talked with the company on Friday following the strong stock price performance in recent months, and concluded that sales momentum remains strong, and the company s outlook is encouraging, given the demographic outlook (possible relaxation of one-child policy; more discriminating consumers of children s products. We believe the valuation, at ~12X PER 2013E, remains undemanding, subject to validation of numbers. 1

2 Shanghai Free Trade Zone where s the beef? It has always seemed doubtful to us that China s leadership sees competition between Shanghai and Hong Kong as a zero-sum game, i.e. that Shanghai (and Shenzhen, Chongqing, etc.) should win, and Hong Kong should lose. Instead, we believe the FTZ intiatives have been launched out of frustration that wide and deep reforms across China would be difficult, if not impossible to achieve on a reasonable timeframe, and that a pilot project, incorporating some of the reforms but in laboratory conditions, would allow the authorities to roll out those changes nationally when they have been proven in the pilot zones. US and China Treasuries 120bp yield gap Stated long-term goals of financial reform but no clear roadmap. The general framework for the Shanghai FTZ last Friday ( content_ htm, in Chinese) clearly stated the goal to achieve convertibility of the capital account, full convertibility of RMB and full opening of the financial industry. In addition, pilot schemes for interest rate deregulation, foreign exchange management reform and cross-border transactions for RMB will be launched. However, the general framework does not specify the timeframe to achieve full convertibility of RMB and interest rate deregulation. To expand the opening in six services industries. As the first round of measures announced does not include any breakthrough in financial reform, these measures are mainly focusing on further opening of the services industries to foreign investors, including financial services, shipping services, commercial services, professional services, cultural services and social services. The goal is to establish a level playing field for domestic and foreign investors. US$/RMB exchange rate over-valued/undervalued? China GDP outpaces Hong Kong over 10 years No surprise for investors. In the past one to two months, there were some rumours about preferential tax policy, duty-free area, interest rate deregulation and even free access to overseas websites in the FTZ. Yet none of these measures are mentioned in the general framework. In the A-share market, some free trade zone concept plays, such as Waigaoqiao ( CH), Shanghai International Port ( CH) and Shanghai Material Trading ( CH) dropped more than 8% last Friday, clearly showing that the first round of measures has not exceeded investors expectations. In Hong Kong, some Shanghai concept plays like China Eastern Airlines (0670.HK), Shanghai Industrial (0363.HK) and Fosan International (0656.HK) did not have much reaction to the news. Expect to see more concrete measures after Plenary Meeting. The first round of measures is very conservative, in our view, which only allows Chinese banks (not foreign banks) to provide offshore services in the FTZ. Meanwhile, CSRC said it is going to support eligible individuals (QDII2?) and institutions in the FTZ to invest in China and overseas, without giving any details. We believe some controversial measures representing major steps of reform, such as interest rate deregulation and RMB convertibility on the capital account are unlikely to be launched before the Communist Party Plenary Meeting in November. Meanwhile, if there is no further progress in the next six months, the Shanghai FTZ may become another Tianjin Binhai New Area, that gave investors high expectations on financial reforms in 2006/07 but has not delivered much so far. 2

3 Shanghai Free Trade Zone some details Stock implications. Some key measures in the first round of announcement and stock implications are summarized in Figure 1. Figure 1: Selected Measures to be Launched in Shanghai Free Trade Zone Financial Services (a) Banks 1. Allows eligible foreign financial institutions to set up foreign banks; allows domestic private companies to form joint-stock banks with foreign financial institutions. 2. Allows eligible Chinese banks to open offshore services in the free trade zone Stock implications: 11 banks to open branches in the free trade zone in the first batch. Hong Kong-listed banks include ICBC (1398.HK), ABC (1288.HK), CCB (0939.HK), BOC (3988.HK), Bank of Communications (3328.HK). Two foreign banks are Citi and DBS. (b) Insurance Allows foreign companies to set up professional health care insurance companies. Shipping Services To relax the maximum stake owned by foreign shipping companies in Sino-foreign JVs (details to be announced). Commercial Services Allows foreign companies to offer value-added telecom services, provided that they does not threaten the internet safety. Any services which may not in compliant with the Professional Services Proposed opening in legal services, human resources, engineering design, investment management, etc. Cultural Services Allows foreign companies to set up wholly owned places of entertainment ( 歌舞厅娱乐活动 ). Stock implications: New business opportunities for Macau gaming companies? Social Services (1) Allows the opening of Sino-foreign JVs to provide job training and education training services. (2) Allows foreign companies to open wholly owned medical institutions. Sources: State Council, CGIHK Research 3

4 Dec/09 Feb/10 Apr/10 Jun/10 Aug/10 Oct/10 Dec/10 Feb/11 Apr/11 Jun/11 Aug/11 Oct/11 Dec/11 Feb/12 Apr/12 Jun/12 Aug/12 Oct/12 Dec/12 Feb/13 Apr/13 Jun/13 Aug/13 September 30, 2013 Kaisa Group [1638.HK] Contracted sales momentum to pick up We visited three of Kaisa s Shenzhen projects (Kaisa City Plaza, Shenzhen Yuefeng Garden, and Shenzhen Kaisa Global Center) recently and came away convinced of Kaisa s strong local execution. While we have not included projects under the company s urban redevelopment pipeline in our net asset value (NAV) estimates, we expect further NAV accretion from such projects on successful acquisition in Kaisa plans to launch its Shenzhen Yuefeng Garden project in October With a total salable gross floor area (GFA) of approximately 80,000 m 2 and estimated average selling price (ASP) of RMB22,000 per m 2, we expected approximately RMB1-1.5bn of contracted sales proceeds from this single project in October/November. Based on the company s launching schedule, Kaisa should have a total of 180,000 m 2 of salable GFA to be launched in the fourth quarter of 2013, versus no new launches in the third quarter. As such, we believe the company should see contracted sales momentum picking up in the fourth quarter due to higher ASP from projects to be launched in Shenzhen. We lifted our contracted sales estimates by 6% and 14% in FY13E and FY14E due to increased sell-through rate assumptions for Shenzhen projects. Impact on earnings for the two years is minimal as we have not changed our completion estimates. We narrow our target NAV discount from 50% to 40% due to the company s improving fundamentals and our belief of better visibility for the project pipeline in Shenzhen. Net result is a 20% increase in our target price for Kaisa from HK$2.27/share to HK$2.73./share. Our new target price represents 5.1x and 3.6x FY13E and FY14E PER. Key Risk: Macro risks, risks from harsher-than-expected real estate related policies. Kaisa Group BUY Close: HK$2.19 (Sep 27th, 2013) Target Price: HK$2.73 (+24%) Price (LHS, HK$)/volume (RHS, m shares) Market Cap US$1,389m Shares Outstanding 5,525m Auditor PWC Free Float 30.9% 52W range HK$ M average daily T/O US$3.1m Major Shareholding Kwok Family (62.4%) Source: Company data, Bloomberg Key financials FY2011 FY2012 FY2013E FY2014E FY2015E Revenue (RMB m) 10,835 11,955 16,161 21,001 28,121 Revenue growth 40% 10% 35% 30% 34% Core net profit (RMB m) 1,467 1,762 2,367 3,319 4,553 Core net profit growth 7% 17% 38% 40% 37% Fully diluted core EPS (RMB) Price to earning (x) Net gearing 77% 67% 71% 61% 50% EBIT interest coverage (x) Cash interest coverage (x) Source: Company data, CGIHK Research Frank Miao, CFA Senior Analyst (852) Frankmiao@chinastock.com.hk John Mulcahy Head of Research (852) johnmul@chinastock.com.hk 4

5 Financials and ratios: FY FY2015E Profit & loss (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Cash flow statement (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Revenue 10,835 11,955 16,161 21,001 28,121 PBT 2,825 3,269 3,621 6,182 7,466 Property development 10,576 11,598 15,778 20,509 27,458 Adjustments for Property investment Finance Cost Property management services Fank interest income (21) (22) (65) (79) (94) COGS (7,601) (8,070) (10,452) (13,187) (18,056) Fair value gains (433) (501) - (1,178) (435) Gross profit 3,234 3,885 5,709 7,814 10,065 Depreciation Other income and expenses Share of results of associates/jces 1 (242) Selling expenses (405) (578) (853) (1,136) (1,201) Gain on disposal 2 (54) Administrative expenses (565) (818) (1,170) (1,557) (1,647) Share buy back/issuance EBIT 2,307 2,513 3,710 5,145 7,241 Impairment loss Finance expenses (48) (17) (88) (142) (210) Other (exchange (112) (28) Interest income Operating cashflows before movements in WC 2,413 2,602 3,710 5,145 7,241 Interest captilized 1,210 1,603 1,577 1,411 1,329 Increase in inventory of properties (6,577) (9,667) (12,262) (12,482) (9,409) Total borrowing cost (1,280) (1,642) (1,730) (1,632) (1,632) increase in properites for development (Land) (1,089) (693) Revaluation gains from Investment property , increase in properties under development (5,488) (8,973) (12,262) (12,482) (9,409) Other gains (Increase) in receivables and deposites (1,205) (1,873) (245) (1,854) (2,510) Pre-tax profit 2,825 3,269 3,621 6,182 7,466 Increase in presale deposit 2,748 10,002 4,607 6,728 2,192 Tax (926) (1,153) (1,101) (1,823) (2,318) increase in trade and other payables ,393 3,146 4,628 Reported net income 1,899 2,116 2,520 4,358 5,148 Increase in tax payable Attributable to equity holder of 1,901 2,072 2,367 4,203 4,879 Restricted cash (11) (129) Minority interests (2) 44 (153) (156) (269) Increase in other working capitals (34) Deduction of post-tax gains (431) (398) - (884) (326) Cash used in operations (2,211) 1,649 (426) 1,147 2,720 Core earning 1,467 1,762 2,367 3,319 4,553 Corporate Tax paid (743) (906) (1,101) (1,823) (2,318) Interest paid (1,096) (1,468) 119 (37) (124) Basic EPS - core (RMB) Net cash used in operating activities (4,050) (725) (1,409) (713) 278 Diluted EPS - core (RMB) Purchase of PPE (70) (73) (41) (47) (53) DPS Purchase of Land use right Proceeds from Disposal of PPE Balance sheet (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Investments in Associates/JCEs Stocks of inventory 23,502 34,840 47,101 59,583 68,992 Addition to investment properties (473) (531) Completed properties Held for Sale 1,343 3,170 4,433 5,022 4,792 Acquisition of subsidiaries (1,469) (1,017) Properties under development 22,160 31,670 42,668 54,561 64,200 Others (repurchase of notes etcs) (11) - (134) (95) (141) Prepayment, Deposit and other recievable 6,613 9,452 9,696 11,550 14,060 Interest received Income tax recoverable Net cash from investing activities (2,002) (1,157) (110) (63) (100) Restricted deposits Free cash flow after investment (6,052) (1,883) (1,518) (776) 178 Bank deposits and cash 3,945 4,683 6,802 5,805 5,679 Proceeds from issuing shares and expenses Total current assets 34,756 49,836 64,593 78,028 89,964 Disposals Interest paid - - (154) (220) (303) Investment properties 6,375 7,540 7,540 8,718 9,152 Proceeds from borrowing 9,345 5,216 3, PPE Repayments of borrowings (3,634) (3,533) Interest in Subsidiaries Capital contribution fromto minority shareholders 0 (30) Interest in assocates Net cash from financing activities 5,712 2,619 3,637 (220) (303) Defered Taxation Land Use Right Net Increase in cash and cash equivalents (340) 736 2,119 (997) (126) Total non-current assets 6,949 8,117 8,039 9,300 9,912 Cash and cash equivalents at 1 Jan 4,340 3,945 4,683 6,802 5,805 Effect of Forex (54) Short term borrowings 2,067 3,150 3,150 3,150 3,150 Cash and cash equialents at 31 December 3,945 4,683 6,802 5,805 5,679 Presales deposit 7,242 17,244 21,851 28,579 30,771 Trade and other payable 6,797 7,112 10,505 13,650 18,278 Key ratios FY2011 FY2012 FY2013E FY2014E FY2015E Taxation payable 989 1,481 1,851 2,314 2,892 Revenue Growth (YoY) 39.7% 10.3% 35.2% 29.9% 33.9% Amount due to related companies Core net profit growth (YoY) 6.5% 17.0% 37.8% 40.2% 37.2% Total current Liability 17,657 20,397 26,784 29,882 34,419 Gross margin 29.8% 32.5% 35.3% 37.2% 35.8% Source: Company data, CGIHK Research Core net profit margin 13.5% 14.7% 14.6% 15.8% 16.2% Interest-bearing loans 11,577 12,257 16,048 16,048 16,048 PER (x) Other PBR (x) Deferred tax liabilities 1,079 1,143 1,143 1,143 1,143 Dividend yield n.a n.a n.a n.a n.a Total non-current liabilities 12,657 12,657 12,657 12,657 12,657 ROA - core 3.5% 3.0% 3.3% 3.8% 4.6% ROE - core 13.4% 13.1% 14.5% 16.8% 18.6% Equity Share capital Net gearing 76.6% 67.2% 70.5% 61.1% 50.0% Share premium 3,817 3,818 3,815 3,817 3,818 Net debt to total asset 22.0% 17.4% 16.1% 14.6% 12.9% Reserves 7,693 10,100 10,100 10,100 10,100 Total debt to total asset 32.7% 26.6% 26.4% 22.0% 19.2% Retained earnings/(accumulated losses) EBITD interest coverage Attributable Equity 11,942 14,350 16,715 20,919 25,799 Cash interest coverage Minority interests ,013 1,282 ST debt as % of total debt 15% 20% 16% 16% 16% Total equity 11,949 15,054 17,572 21,932 27,081 Overall financing costs 11.9% 11.3% 10.0% 8.5% 8.5% 5

6 Changes in estimates Figure 1: Change in contracted sales estimates Economic Residential FY12A FY13E FY14E FY15E FY12A FY13E FY14E FY15E FY12A FY13E FY14E FY15E Region Development Sales (Rmb m) GFA sold (k sqm) ASP (Rmb/sqm) Northern China 2,965 3,187 5,464 8, ,320 6,395 5,857 6,072 6,291 Central and West 6,936 2,868 6,532 6,177 1, ,879 5,321 7,096 7,694 YRD 2,289 3,971 4,725 5, ,924 9,419 8,607 13,335 PRD 5,150 13,051 14,089 13, , ,431 11,593 14,979 13,355 New Total 17,341 23,076 30,810 33,681 2,576 2,630 3,310 3,561 6,732 8,773 9,308 9,458 (%) YoY 33% 34% 9% 2% 26% 8% 0% 30% 6% 2% Previous Total 17,341 21,843 27,121 34,127 2,576 2,576 3,135 3,532 6,732 8,480 8,651 9,663 (%) YoY 26% 24% 26% 0% 22% 13% 0% 26% 2% 12% (%) Difference 6% 14% -1% 2% 6% 1% 3% 8% -2% Source: Company data, CCGIHK Research Figure 2: Change in earning estimates FY2011A FY2012A FY2013E FY2014E FY2015E Revenue (RMB m) CGIHK-New 10,835 11,955 16,161 21,001 28,121 CGIHK-old 10,835 11,955 16,161 20,925 28,231 % Change 0% 0% 0% 0% 0% BBG 10,835 11,955 16,346 21,500 27,787 Diff 0% 0% -1% -2% 1% Adjusted Net profit (RMB m) CGIHK-New 1,468 1,718 2,367 3,319 4,553 CGIHK-old 1,468 1,718 2,381 3,256 4,461 % Change 0% 0% -1% 2% 2% BBG 1,468 1,718 2,336 3,102 3,803 Diff 0% 0% 1% 7% 20% Adjusted EPS (RMB) CGIHK-New CGIHK-old % Change 0% 0% -1% 2% 2% BBG Diff 0% 0% -9% -11% 10% Source: Company data, CCGIHK Research 6

7 Changes in estimates Figure 3: Change in NAV estimates Summary RMB Economic Residential NAV Value per Value per PRC Investment NAV Value per Value per Region Development Rmb m Share (New ) Share (Old) Change Properties Rmb m Share (New ) Share (Old) Northern China 5, (0.0) Office 4, Northern China Anshan 1, Total 4, Northern China Benxi Northern China Dandong Gross Investment Assets 4, Northern China Huludao Northern China Liaoyang Gross property asset 32, Northern China Panjin Investment at cost Northern China Qingdao (0.0) Gross asset value (Rmb) 32, Northern China Shenyang Northern China Weifang (0.0) Gross asset value (HK$) 40, Northern China Yingkou (0.0) Less Land cost (HK$) Central and West 3, (0.1) Less Net debt (HK$) (14,674) (3.0) (3.2) Central and West Changsha 1, Less MSHI (HK$) (1,067) (0.2) (0.2) Central and West Chengdu (0.0) Net Asset Value 25,095 25,067 Central and West Chongqing Share outstanding (m shares) 5,525 5,525 Central and West Nanchong Net Asset Value per share (HK$) Central and West Wuhan (0.0) Discount to NAV 40% 50% Central and West Zhuzhou (0.0) Target price YRD 5, (0.0) YRD Changzhou YRD Hangzhou 1, (0.0) YRD Jiangyin 1, YRD Shanghai 1, (0.0) YRD Taizhou (3) (0.0) 0.0 (0.0) PRD 14, (0.0) PRD Dongguan 2, (0.0) PRD Foshan PRD Guangzhou 1, (0.1) PRD Huizhou 1, PRD Shenzhen 7, PRD Zhuhai (0.1) RMB Development GAV 28, (0.2) Source: Company data, CCGIHK Research 7

8 COMPANY / INDUSTRY NEWS PRINCE FROG [1259.HK; HK$5.41] LONG-TERM STORY REMAINS ATTRACTIVE Analyst: Vicky Lai PRINCE FROG [1259.HK] We talked to the company last Friday. Recap on interim 1H13: sales momentum for core products remained upbeat. Although children person care products saw strong growth momentum of 43.7% to RMB569.1m, the termination of household product business (1H12: RMB134.9m) reduced overall sales growth to 7.9% to RMB627.9m. Gross profit margin (GPM) increased by 5.5ppt to 47.9% as a result of discontinued business, or a 0.4% improvement excluding the effect. Net profit was down by 28.8% to RMB72.8m owing to 1) increase in selling expenses by 9.2 ppt to 25.3% (i.e. marketing expense ratio jumped from 8.2% to 18% in line with the company s strategy of increased brand promotion); 2) effective tax rate climbed from 12.5% to 25% owing to expiry of tax holiday. We believe the company will continue to register strong sales growth in the future owing to the following factors: Children care industry is expected to experience tremendous growth, due to: 1) rising household income is likely to drive up spending on children owing to the family structure in which three families are spending money on the same child due to the one-child policy; 2) the majority of mothers of children aged 0-12 are of the 1980s and 1990s generation, who emphasize product safety and quality rather than prices when buying children s products, suggesting a potential consumption upgrade for the sector; 3) potential relaxation of the one child policy to a two-children policy eligible for the only-child parents by 2015, which could trigger another baby boom in the coming years. Company is looking for higher penetration at key account (KA) channels with product offering at higher price points. The company is looking to expand its channel coverage, particularly in the modern channels. The number of distributors registered a healthy increase from 183 in 2010 to 212 in 1H13. The company added 2,117 points of sale (POS) in the related supermarkets in 1H13, including 268 key accounts (KA). The company has introduced the KA product line in which average selling price (ASP) is 30% higher than the traditional product line, accounting for 22% of total sales in 1H13. Sales in the KA channel jumped from RMB61m in 2011 and RMB204m in 2012 to RMB150m (24% of sales) in 1H13. The company has a target of achieving 50% for this product line in the future. Net margin on the uptrend driven by GPM improvement while A&P rises. GPM improvement will come from: 1) The KA product line has a higher GPM of 68% compared with 50% for traditional children s care products. As sales of these products increase with improved coverage of KA accounts, we expect to see a significant improvement in GPM; 2) The company s plan to bring original equipment manufacturer (OEM) production in-house (diapers and toothpaste) will also help improve GPM in the longer run as OEM purchases usually have a 5-10% mark-up. Market Cap: US$705m; Free Float: 47.1% RMB FY11 FY12 FY13E FY14E Revenue (m) 1,269 1,572 1,881 2,337 COGS (m) (731) (850) (968) (1,181) Gross profit (m) ,156 Gross margin (%) EBIT (m) Net profit (m) Net margin (%) EPS ROE (%) Source: Bloomberg Dividend yield (%) PER (x) Source: Bloomberg Marketing expense ratio reached 18% in 1H13 and is expected to stay within the range of 15-20%, a higher level than a few years back as the company is looking to accelerate its brand-building across China. Our view. Prince Frog s long-term story appears attractive from the reported numbers and company comments, based on improve channel coverage aimed at gaining market share in the child-care sector. We need to validate these claims on the ground, but near- term catalysts are: 1) 2H13 results should be better than 1H13 (our calculation suggests a growth rate of more than 40%); 2) Season 3 animation will be broadcast on CCTV and 150 local channels, providing free TV advertising time; 3) potential relaxation of the one-child policy as recent news suggest trials in pilot regions may begin next year. The stock is now trading at 12x PER FY14 which we believe is undemanding given its promising growth outlook. 8

9 COMPANY / INDUSTRY NEWS PRINCE FROG [1259.HK, HK$5.41] LONG TERM STORY REMAINS ATTRACTIVE Analyst: Vicky Lai Figure 1: Income Statement (RMB million) FY10 FY11 FY12 1H12 2H12 1H13 Revenues , , Cost of Sales (515.1) (731.5) (850.5) (335.5) (515.0) (327.3) Gross profit Selling and Distribution Cost (130.8) (240.3) (358.0) (93.4) (264.5) (159.4) Administrative Expenses (23.6) (79.4) (76.3) (35.0) (41.3) (38.5) Other Operating Expenses (0.0) (0.3) (0.4) (0.1) (0.4) (1.3) Finance Costs (1.6) (4.4) (0.9) (0.9) 0 - Other Income and Gains Earnings before Taxes Provision for Income Tax (23.4) (34.5) (57.5) (19.7) (37.8) (35.7) Net Income (Loss) YoY Growth % Revenues 34.2% 51.5% 23.9% 5.6% 37.9% 7.9% Gross profit 35.1% 66.5% 34.2% 10.9% 50.6% 21.9% Net Income 57.4% 27.3% 31.1% 46.8% 21.5% -28.7% Margin % GPM 38.5% 42.4% 45.9% 42.4% 48.0% 47.9% NPM 17.2% 14.5% 15.3% 17.6% 14.0% 11.6% Expense ratio % Selling and Distribution Cost 15.6% 18.9% 22.8% 16.1% 26.7% 25.4% Administrative Expenses 2.8% 6.3% 4.9% 6.0% 4.2% 6.1% Figure 2: Revenue breakdown in 1H13 9

10 COMPANY / INDUSTRY NEWS PRINCE FROG [1259.HK, HK$5.41] LONG TERM STORY REMAINS ATTRACTIVE Analyst: Vicky Lai Figure 3: Growth momentum will likely to remain strong for the children care industry Figure 4: With improved channel penetration, the company continues to see market share gain in various fields 10

11 DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analysts who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: CONTACT US John Mulcahy Wong Chi Man, CFA Frank Miao, CFA Wayne Fung, CFA Angela Han Lee Vicky Lai johnmul@chinastock.com.hk cmwong@chinastock.com.hk frankmiao@chinastock.com.hk waynefung@chinastock.com.hk angelahanlee@chinastock.com.hk vickylai@chinastock.com.hk 11