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First Light Asia Equity Insights, It’s all about supply!, IC substrates, GCL Poly What’s Changed, Research Focus, Today’s Events
Ticker Company Rating was Currency Target was EPS '11 EPS '12 Return Price Price At Close Up 688 HK China Overseas Land OW N(V) HKD 18.0 19.7 1.33 1.57 36.0% 13.24 16 Mar
3800 HK GCL Poly UW(V) HKD 2.10 1.90 0.23 0.13 -46.7% 3.94 17 Mar
Down 2409 TT AU Optronics UW(V) TWD 23.0 25.0 - - -5.6% 24.60 16 Mar
3514 TT Gintech UW(V) TWD 48.0 73.0 5.36 7.25 -48.4% 93.0 15 Mar
2882 TT Cathay FHC N TWD 48.8 52.4 1.45 2.12 12.2% 43.7 16 Mar Source: Bloomberg, HSBC estimates
Click on title to open reports Research Focus EI – Equity Insights - How markets behave after catastrophes Garry Evans* It’s too early to make strong calls after the Japan earthquake
But catastrophes usually have only a brief impact on stocks
In Japanese history, earthquakes often heralded big change
It’s all about supply! - Key themes from HSBC’s 5th Shipping Day Azura Shahrim* Trade outlook appears to be relatively good
However, excess supply concerns loom, particularly in dry bulk sector
Ports outlook remain solid, while container manufacturers are in the sweet spot IC substrates - Risks to BT supply approaching crisis Tse-yong Yao* Disruption of BT resin – a critical component for IC packages – sending shares sharply down
Potential impact to handset supply chain significant, with a minimum of one month discontinuity likely
Given lack of concrete details, prefer playing pairs over picking a direction GCL Poly (3800 HK) - UW(V): 2011 shipment guidance too optimistic Shishir Singh* 2H10 results solid on ASP & volume gains but a tripling of shares since mid-2010 prices in continued strength ahead
But, policy changes are nudging sector into oversupply and wafer shipment guidance of 5.5GW appears too optimistic
Reiterate Underweight (V) with TP of HKD2.10 (HKD1.90 earlier)
18 March 2011
Ticker Event Rating Target Price Ticker Event NI Bbg
Jiangsu Expressway 177 HK Y OW 10.00 8.4 NIKE Inc NKE US Q3 88.2 China State Construction 3311 HK Y OW (V) 7.60 7.8
Harbin Power Equipment 1133 HK Y OW 8.70 9.9
Asia Cement China 743 HK Y N 4.40 4.4 China New Yuan Loans (CNYbn) Feb
China Actual FDI Feb
Sri Lanka GDP 4Q 7.4%
Source: Bloomberg, HSBC estimates
Eliot Camplisson* Global Head of Research Marketing +852 2996 6514 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: http://www.research.hsbc.com
Disclaimer & Disclosures This report must be read with the disclosures in the Disclosure appendix, and the Disclaimer, which forms part of it
Disclosures for companies can be accessed via the hyperlinks to the original published research, which can be found in the title
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First Light Asia 18 March 2011
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Regional
Asia Display - Weak panel ASP rebound nothing to be excited about Frank Su* Panel prices set to rebound from 2Q11 but weaker than our original forecasts. Lower EPS forecasts and target prices
Improved pricing power could be offset by cap on output due to component shortage resulting from events in Japan
Maintain bearish view on the LCD sector. A 10-15% share price rebound looks possible but not sustainable China & Hong Kong
Hong Kong - Done it again: Unemployment rate edges down further Donna Kwok Hong Kong's headline unemployment rate has done it again, surprising markets to the positive side in February
At 3.6%, the unemployment rate is now well below its long-term trend level of 4.2%
That said, with robust local and foreign demand continuing to support headcount expansion plans, we think there's room yet for the unemployment rate to inch down further before stabilizing in 2Q
China Overseas Land (688 HK) - Upgrade to OW: Compelling valuation for the bellwether Michelle Kwok* Stronger-than-expected FY10 results were driven by margins
YTD contracted sales is strong growing 74% y-o-y to HKD12bn; Balance sheet strength was a positive surprise
Upgrade from Neutral (V) to OW, with a lower target price of HKD18.0 (from HKD19.7)
PetroChina (857 HK) - N(V): 2010 results in line; windfall profit tax cut unlikely Sonia Song* FY10 results 3% ahead of consensus on oil & gas price recovery and lower tax; price and cost control still lacking
FY11 guidance upbeat with faster E&P output growth and 16% capex increase: we raise 2011-12 estimates by 21-30%
Windfall profit review discussed but unlikely given earnings natural hedge; Maintain N(V) rating and HKD11.5 target price
Korea
Korea Shipbuilding - Adding one more to the mix Paul Choi*
Samsung Engineering (028050) - OW(V): Sailing with a tailwind Brian Cho*
Taiwan
Gintech (3514 TT) - UW(V): 4Q10 margins slump, but likely to get worse in 1Q11 Shishir Singh*
Cathay FHC (2882) - N: Still sluggish life business outlook in 2011 Sarah Hung* ASEAN
Singapore - Non-oil domestic export growth slows in February Leif Eskesen
Bank Danamon (BDMN IJ) - UW: Time to refocus on the fundamentals Kar Weng Loo* India
India - The Gradualist strikes again: RBI hikes rates by 25bps Leif Eskesen
India: RBI review re-emphasizes elevated front-end OIS - Post RBI review update André de Silva
Japan
Japanese earthquake - Two economic scenarios Seiji Shiraishi
Market data Markets HSBC Last 5d % Forecast GDP Int Rate USD vs CCY HSBC Last 5d % Commodities HSBC Last 5d %
HSI 25,500 22,284 -5.63 US 3.4 0-0.25 EUR 1.40 1.40 1.51 Oil 82 101.4 -1.23
SHCOMP 3,000 2,897 -2.02 China 8.9 5.81 CNY 6.54 6.58 -0.04 Gold 1,450 1404 -0.58
TAIEX 11,200 8,283 -4.17 Taiwan 4.7 1.75 TWD 27.0 29.56 -0.25 Coal (Thermal) 90 131 0.42
KOSPI 2,400 1,959 -1.14 Korea 4.9 3.25 KRW 1,070.0 1135 -1.17 Steel (HRC Asia) 713 730 -1.68
TOPIX 850 811 -12.90 Japan 1.1 0.50 JPY 95.0 79.1 4.95 Aluminium 2535.29 2468 -4.32
BSE 30 21,000 18,150 -0.97 India 8.0 7.50 INR 42.0 45.19 0.00 Copper 8708.17 9355 -2.66
Source: Bloomberg
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First Light Asia 18 March 2011
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Research so far this week
Ticker Company Rating was Currency Target was EPS '11 EPS '12 Return Price Price At Close New 8277 HK Wumart Stores UW(V) HKD 13.10 0.48 0.55 -16.2% 15.90 10 Mar
Up 2628 HK China Life ‘H’ OW(V) N(V) HKD 38 38 - - 25.0% 30.50 10 Mar
601601 CH China Pacific ‘A’ OW(V) N(V) RMB 28 26 - - 22.0% 22.90 10 Mar
966 HK China Taiping ‘H’ OW(V) N(V) HKD 28 29 - - 26.0% 22.30 10 Mar
3045 TT Taiwan Mobile Co OW(V) N TWD 76.00 69.00 5.40 5.60 21.8% 67.20 11 Mar
052690 KS KEPCO E&C OW(V) KRW 115000 100000 4962.54 6510.80 27.0% 92800 09 Mar
700 HK Tencent Holdings Ltd OW(V) HKD 262.00 240.00 5.81 7.72 22.4% 214.00 15 Mar
JS SP Jardine Strategic OW USD 32.00 24.00 2.53 2.89 15.0% 28.00 10 Mar
2603 TT Evergreen Marine Corp OW TWD 27.6 17.7 3.16 3.53 15.0% 24.7 10 Mar
316 HK Orient Overseas International OW HKD 82.4 70.2 0.65 0.75 18.0% 71.8 10 Mar
Down 272 HK Shui On Land Ltd N OW (V) HKD 3.80 4.70 0.21 0.33 10.5% 3.56 15 Mar
2318 HK Ping An OW(V) HKD 106.00 109.00 - - 38.0% 76.70 15 Mar
NOL SP Neptune Orient Lines OW SGD 2.3 2.5 0.16 0.19 14.0% 2.1 10 Mar
3231 TT Wistron Corporation OW TWD 60.00 72.00 6.73 8.18 32.9% 47.70 14 Mar
6121 TT Simplo Technology OW TWD 220.00 240.00 15.30 18.69 24.3% 182.00 14 Mar
941 HK China Mobile LTD N HKD 78.00 79.00 6.00 6.19 13.1% 72.25 15 Mar Source: Bloomberg, HSBC estimates
Click on title to open reports Research Focus 17 Mar China Mobile LTD - N: FY2010 results in line, but big capex bump is positive Tucker Grinnan
Tencent Holdings Ltd.(700 HK) - OW(V): Growth likely to continue Tucker Grinnan
Li Ning (2331) - UW(V): 2010 results: First read Christopher K Leung
Japan and Asia - Implications for monetary policy Frederic Neumann
16 Mar Shorts & Squeeze - Oversold? Dodo Cheng
Simplo Technology (6121) - OW: Tablet driving growth; minimal impact from the quake Carrie Liu
Australia’s place in the world - Commodities and China are key Paul Bloxham
15 Mar China insurance - Mixed emotions James E. Garner
Taiwan telecoms - Upgrade TWM on value and yield Neale Anderson
China Mobile (941 HK) - N: Bullish on TD-LTE outlook, but too early to rerate Tucker Grinnan
14 Mar Asian Container Shipping - Rationally exuberant, lacking catalysts Azura Shahrim
Asia Technology - February monthly sales and 1Q11 progress report Steven C. Pelayo Regional 14 Mar Asian FX Focus - Improving outlook for the won; value emerging in the dong Richard Yetsenga
Japan: Interest risk premium still too large André de Silva China & Hong Kong 17 Mar Shui On Land Ltd (272 HK) - Downgrade to N: Results disappoint Michelle Kwok
Ruinian International (2010.HK) - OW(V): Healthy growth and undemanding valuation Robby Gu
Peak Sport (1968) - Aggressive expansion in lower-tier cities Christopher K Leung
16 Mar Ping An (2318.HK) - OW(V): Capital raising fears look to continue Michael Chang
15 Mar China - Premier Wen on inflation, renminbi and property Qu Hongbin
China - Feb new lending below market expectation Qu Hongbin
Wumart Stores (8277) - UW(V): Changing times at the check-out counter Lina Yan
Zhejiang Expressway (576) - N: gross margin pressure on brokerage unit Elaine Lam
14 Mar China - What's PBoC's next move? Qu Hongbin
China - Jan-Feb output beat expectations Qu Hongbin Korea
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First Light Asia 18 March 2011
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17 Mar Korean AMOLED supply chain - Implications of UDC’s 4Q10 results Soyun Shin
16 Mar Neowiz Games (095660) - OW(V): Potential upside surprise from new games Howon Rim
15 Mar Korea LCD TV - Smart TV: A new business to charge USD60 per month Brian Sohn
Korea Engineering/Construction - January domestic stats: Still early to regain conviction Brian Cho
14 Mar Mirae Asset Securities Co (037620) - OW: How do investors view Mirae Asset Securities Kathy Park
KEPCO E&C (052690) - OW(V): Better earnings and broader horizons Paul Choi Taiwan 17 Mar MediaTek (2454) - UW: Ralink acquisition may prove a challenge Yolanda Wang
16 Mar Asia PC hardware - Update on supply constraints after Japan earthquake Jenny Lai
Wistron Corporation (3231) - OW: 2011 a slow start with back-end loaded momentum Carrie Liu
15 Mar Kinsus Interconnect (3189) - OW: Qualcomm inside iPad 2 Tse-yong Yao ASEAN 16 Mar The Philippines - Slower remittances growth in January Sherman Chan
Singapore - Loose purse strings: Retail sales strong in January Leif Eskesen
RBA Observer Update - Minutes show RBA sitting pretty Paul Bloxham
15 Mar RBA Observer Update - Now expect next hike in July or August: 100bp by mid 2012 Paul Bloxham
14 Mar Malaysia - Central bank holds rate for now, but hints at hiking soon Wellian Wiranto
Jardine Strategic - OW: Strong outlook, raise target to USD32 Mark Webb India 17 Mar India Petroleum Insight - Charts for March 2011 Kumar Manish
15 Mar India - Sticky indeed: WPI inflation rose in February Leif Eskesen
India: OIS to underperform bonds - Focus on FII-participation and bond supply André de Silva
India Utilities: Coal challenge - Update following Coal Trans Conference in Delhi Arun Kumar Singh
Crompton Greaves (CRG) - OW: Management update; concerns seem overdone Rahul Garg
Bharti Airtel (BHARTI IN) - N(V): Key takeaways from call with Safaricom management Rajiv Sharma
14 Mar India - Consumers pull up January industrial production Leif Eskesen Japan 17 Mar Japan impact on Asia-Pac rates - Growth replaces inflation as primary concern André de Silva
16 Mar Japanese earthquake - The global economic impact Stephen King
Japan FX special - Beware of the FX lag – BRL & AUD vulnerable David Bloom
15 Mar Bank of Japan expanded the asset purchase fund Seiji Shiraishi
Japanese earthquake - Economic and market implications Seiji Shiraishi
14 Mar Japan Economic Weekly - Production acceleration, oil price surge and March Tankan Seiji Shiraishi Global 17 Mar ‘Dislocation barometer’ for luxury goods - Richemont and Swatch appear the most oversold Antoine Belge
14 Mar Global Rates Weekly – Key trades Steven Major
Climate Investment Update - China: setting the pace on low-carbon growth Nick Robins
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abcGlobal Research
It’s too early to make strong calls after the Japan earthquake
But catastrophes usually have only a brief impact on stocks
In Japanese history, earthquakes often heralded big change We have so far refrained from writing about the impact of Japan’s earthquake. Not only
did we feel it inappropriate, in the light of the massive loss of life, to call which stocks are
winners or losers, but our experience of similar catastrophic events is that hasty judgement
is often wrong. The severe volatility of the Japanese market since 2.45pm last Friday
(Chart 1) suggests that investors would have had to be very nimble to call the turns right.
But, a week on, we feel we need at least to review the situation. There are still too many
uncertainties – not least whether Tokyo Electric Power can succeed in preventing a big
radiation fallout from the Fukushima Nuclear Plant – to make clear market calls. We can,
though, look at history and at the facts. We find, for example, that after previous
catastrophes (major earthquakes, 9/11, Russia’s default etc), the market directly affected
on average fell by 6% and bottomed on Day 11, and that global stocks fell 3% and
bottomed around the same time (Chart 2). Within about two months, markets typically
recovered their pre-catastrophe level. After that, the factors driving the market previously
came to the fore again. This time, Japanese stocks have fallen 16% and the world index
4%. The bigger-than-usual fall may be because other recent events (the Middle East and
oil) have also given investors a reason to reduce risk after the recent big run-up in global
(and Japanese) equities over the past nine months.
In this EI, we look at the aftermath of previous catastrophes. We also ask whether this
could represent a turning-point for Japan (for better or worse), and run some numbers to
see which countries and companies have the biggest exposure to Japan.
EI – Equity Insights
How markets behave after catastrophes
Equity Strategy Global
18 March 2011
Garry Evans* Strategist The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2996 6916 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
1. Intraday Topix since the earthquake 2. Stock markets around major catastrophes
700
750
800
850
900
950
11-Mar 14-Mar 15-Mar 16-Mar 17-Mar
90
100
110
120
130
140
150
0 20 40 60 80 100 120 140 160 180 200 220 240 260
Affected market World
Source: Bloomberg Source: HSBC
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Equity Strategy Global 18 March 2011
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HSBC strategy recommendations Global market calls (benchmark: MSCI AC World Index; countries shown have a minimum weight of 0.5%)
____ Weight (%)_____ Target Market HSBC call (last MSCI AC HSBC Diff Blue-chip index current end-2011 current quarter) level level change
Americas US Over (Neutral) 42.5 45 2.5 S&P 500 1,257 1,430 14%Canada Under (Under) 4.6 3 -1.6 S&P/TSX 13,525 14,500 7%Brazil Over (Neutral) 2.2 3 0.8 Bovespa 66,003 83,000 26%Mexico Neutral (Over) 0.6 0.6 Bolsa 35,655 43,000 21%Europe UK Neutral (Neutral) 8.4 8.4 FTSE 100 5,598 6,650 19%France Under (Neutral) 3.7 3 -0.7 CAC 40 3,697 4,200 14%Germany Neutral (Neutral) 3.2 3.2 DAX 30 6,514 7,750 19%Switzerland Under (Under) 3.2 1.5 -1.7 SMI 6,022 6,900 15%Spain Over (Over) 1.3 2 0.7 IBEX 35 10,093 12,000 19%Italy Under (Under) 1 0.5 -0.5 FTSE MIB 20,837 22,000 6%Netherlands Under (Under) 1 0.5 -0.5 AEX 343 380 11%Sweden Neutral (Neutral) 1.3 1.3 OMX 1,055 1,300 23%Russia Over (Over) 0.9 1.7 0.8 RTS 1,916 2,200 15%Eurozone Under (Under) 11.4 10.4 -1.0 EUROSTOXX 50 2,721 3,100 14%Pan-Europe Under (Under) 26.3 24.5 -1.9 FTSE Eurofirst 300 1,067 1,250 17%Asia Pacific Japan Under (Under) 8.7 7 -1.7 TOPIX 818 850 4%Australia Neutral (Over) 3.4 3.4 S&P/ASX 200 4,558 5,300 16%China Neutral (Neutral) 2.4 2.4 MSCI China 65 72 11%Korea Over (Over) 1.9 3 1.1 KOSPI 1,958 2,400 23%Taiwan Over (Neutral) 1.6 2.5 0.9 TAIEX 8,325 11,200 35%Hong Kong Neutral (Over) 1.1 1.1 Hang Seng 22,701 25,500 12%India Under (Under) 1.1 0.5 -0.6 SENSEX 18,359 21,000 14%Singapore Neutral (Over) 0.7 0.7 STI 2,971 3,800 28%Other South Africa Over (Over) 1.1 1.5 0.4 JSE All-Share 30,612 37,000 21%World (USD terms) Developed world Under (Under) 86.3 82.8 -3.5 MSCI DM 1,260 1,400 11%Emerging world Over (Over) 13.7 17.3 3.6 MSCI EM 1,096 1,350 23%All-countries world 100.0 100 MSCI AC 324 365 13%
Source: HSBC, Thomson Financial Datastream Global sector calls (benchmark: MSCI AC World Index)
Sector ____ HSBC call ____ __________ Weight (%) __________ current (previous) MSCI AC HSBC Difference Industry preference World (%) (%) (% pts)
Energy Over (Over) 11.4 14 2.6 Energy Equipment & Services Materials Neutral (Neutral) 9.2 9.2 Mining Industrials Over (Over) 10.8 14 3.2 Capital Goods Consumer Discretionary Under (Under) 9.9 6 -3.9 Luxury Goods Consumer Staples Under (Under) 9.4 5 -4.4 Beverages Health Care Neutral (Neutral) 8.1 8.1 Heath Care Equipment & Services Financials Neutral (Neutral) 20.8 20.8 Diversified Financials IT Over (Neutral) 11.9 15 3.1 Tech Hardware & Equipment Telecom Services Over (Over) 4.6 5.9 1.3 Mobile Telecoms Utilities Under (Under) 3.9 2 -1.9 Water Utilities
100.0 100.0
Source: HSBC, Thomson Financial Datastream
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HSBC hosted its 5th Shipping Conference on 17 March. Presenters included:
container and dry bulk shipping owners/operators, ship yards, terminal operators
and consultants, as well as HSBC experts from Trade and Supply Chain, Shipping
Services, and Global banking. We highlight the key points from the conference.
Trade outlook appears to be relatively good: HSBC's Trade Confidence Index indicates
that trade finance clients are optimistic and expect moderate y-o-y growth. Intra-Asian
and intra-regional trade are increasingly important. However, high debt levels in the West
are creating some nervousness about 2H11 and beyond. Bank financing market for
shipping is functioning again and credit more fundamentally driven. Funding is available
to high quality ship owners and not focused just on asset value. Ship financing from the
capital markets has increased in recent years; uncertain regulatory requirement e.g. Basel
III has resulted in a higher cost of funding.
Liner operators face a tougher environment with higher fuel costs: Bunker and
trucking costs are rising; rail and port handling charges too, after being held down in
2008-10. Carriers will have to employ larger ships to reduce fuel costs: a 13,000 teu ship
incurs c40% lower costs vs. three 4,500 teu ships. Maersk’s recent order of 18,000 teu
ships has heightened competition: The larger ships’ lower capital cost/teu, greater
economies of scale, engine/fuel efficiency and reduction of C02 emissions on the major
Asia-Europe route will compel competitors to similarly order new, better designed and
much bigger ships for employment in 2013 and cause the route to be dominated by big
players and capacity of smaller vessels (8,000 teu and less) to cascade down to other
routes, including Intra-Asia. Separately, high fuel costs will ensure that carriers will
continue to manage effective capacity (by idling ships should demand fall/sailing ships at
slower speeds) and discourage price wars experienced in 2009. Indeed, more than half of
the liners are yet to recover 2009 losses despite a very strong 2010.
18 March 2011
Azura Shahrim* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6976 [email protected]
Parash Jain* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6717 [email protected]
Mark Webb* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574
[email protected] View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Industrials Marine Equity – Global
Flashnote
It’s all about supply!
Key themes from HSBC’s 5th Shipping Day
Trade outlook appears to be relatively good
However, excess supply concerns loom, particularly in dry bulk sector
Ports outlook remain solid, while container manufacturers are in the sweet spot
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It’s all about supply! Marine 18 March 2011
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Port operators looking to expand in other emerging markets with port growth in China starting to
slowly taper off. Promising geographies include Latin America and Africa, where tariffs (revenue/TEU)
are high. Most Chinese coastal ports (especially in the South) are capable of handling container ships with
8,000 teu capacity and above. Port capacities in general are not fixed and rather depend on the size of
ships handled and the productivity level – for instance, HK port’s capacity can be improved without
additional berths.
Operating conditions remain favourable for box manufacturers: Liner companies may spend more
capital in 2011 on boxes vs. 2010 due to the arrival of new larger ships in addition to replacement of older
boxes. Latest box prices stand at cUSD3,000/teu (vs. HSBC’s estimate of USD2,800/teu and 2,400/teu in
2010) and imply that demand is still higher than supply and that capacity discipline is being maintained
by the container manufacturers.
Dry bulk shipping order book is likely overstated and unrealistic due to over/misreporting.
Substantial deliveries in January 2011 depressed shipping rates (they fell more than 50% from the recent
peak in 4Q10). New deliveries fell significantly in February and non-deliveries could reach c40% in 2011
with the ratio of order book to existing fleet (currently at 47%) expected to fall to 35% by year-end.
Supply growth may be mitigated by increased scrapping of older vessels (especially for handysize where
41% are more than 25 years old), which should increase if rates stay low. Factors such as steel/scrap
prices and availability of scrapping facilities, however, also play a part. Certainly, older ships are more
expensive to maintain, typically fail to pass on fuel costs and often left idle. China’s demand for
commodities (especially iron and coal) is expected to remain strong but its growth is moderating, with its
government restricting high energy consumption/pollution and commodity prices (especially iron ore)
remaining high and volatile, as they are set on monthly spot basis. Meanwhile, the ordering of very large
ore carriers by miners will probably push down demand and rates for Capesize ships. The nature of the
fragmented market, high proportion of fixed cost and slower sailing speed of bulkers does not provide
scope for container-shipping style capacity control.
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BT crisis update. The electronics supply chain has taken a hard hit since Mitsubishi Gas
Chemical (MGC) (4182 JP, JPY543; not rated) and Hitachi Chemical (HC) (4217 JP,
JPY1,574; not rated) announced the cessation of bismaleimide triazine (BT) resin shipments
due to factory shutdowns resulting from last Friday’s earthquake. Combined, MGC and
HC supply 85-90% of the world’s BT resin, a critical component used in organic IC packages.
GE Materials (not listed) is the third supplier of BT resin. BT resin is combined with glass
fibre to produce a laminate sheet that is then used to produce an IC package.
Potential impact. Most directly exposed, in our view, are IC package suppliers such as
Kinsus (3189 TT – TWD80.4; OW, TP: TWD127.5), Unimicron (3037 TT – TWD47.2;
N, TP: TWD62), and Nanya PCB (8046 TT – TWD90.2; N(V), TP: TWD110). More
broadly, though, a supply stoppage of BT resin could bring the entire handset supply
chain to a halt, as all mobile devices rely on ICs that use BT-based packages (a
smartphone such as the iPhone has over a dozen such ICs). We see less potential for
impact to the PC supply chain, as most ICs use either metal leadframes or Ajinomoto build-
up film (ABF)-based packages. DRAM devices used BT-based packages, so the potential
PC-related impact is not negligible.
Potential solutions. MGC and HC continue to assess the impact and damage to their
factories but, in the meantime, incoming questions have focused on alternative solutions
for IC package producers. These potential solutions have focused on (1) alternative suppliers
of BT resin and (2) alternative resins to replace BT in the IC package. Given the complex
physical and electrical requirements of the IC package, we believe the first of the two solutions
is the more likely scenario.
Speaking with other laminate makers, we have come to the understanding that the actual
production of BT is relatively straightforward and that the reason the supply of BT resin is
concentrated at two suppliers is intellectual property (IP)-related. BT resin is a proprietary
formulation of MGC, and competitors are required to pay a licensing fee to MGC to produce
it. Thus, if MGC or HC cannot quickly bring their factories back on line, we would focus our
attention on any licensee announcement from MGC to provide an alternative supply of BT.
17 March 2011
Tse-yong Yao* Analyst HSBC Securities (Taiwan) Corporation Limited +886 2 8725 6021 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities (Taiwan) Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
FIG Electronic Equipment Equity – Taiwan
Flashnote
IC substrates
Risks to BT supply approaching crisis
Disruption of BT resin – a critical component for IC packages – sending shares sharply down
Potential impact to handset supply chain significant, with a minimum of one month discontinuity likely
Given lack of concrete details, prefer playing pairs over picking a direction
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IC substrates Electronic Equipment 17 March 2011
abc
Timeline At the IC packaging level of the supply chain, we believe producers have approximately one month of
inventory on hand. At the IC level (the customers of the IC package suppliers), Qualcomm had 46 days of
inventory at the end of 4Q10 while other key suppliers (such as Skyworks, TriQuint, and Broadcom) had
57-70 days of inventory.
With respect to qualifying alternative solutions (whether alternative suppliers for BT or alternative materials),
we expect the process to take a few months, meaning that no alternatives are likely to be ready before
inventory runs out. Our checks with laminate makers suggest that MGC does not expect production to
resume for another six months, leaving HC as the last remaining hope for avoiding a break in the supply
chain. Ultimately, we now see a one-month disruption as a best case scenario.
What to do with stocks With risk clearly to the downside in the short term, we would not advise buying on dips. Given the lack of
concrete information, we find it unwise to aggressively pick a direction and believe that a pair strategy
(looking at all global suppliers to the handset supply chain) makes the most sense. In the table on the next
page, we summarize the stock performance of key handset component suppliers since last Thursday’s close.
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abcGlobal Research
2H10 results solid but stock price factors in a lot more: GCL’s 2H10 EPS was 32%
ahead of our estimate on 18% higher wafer shipments as well as higher ASP and lower
production costs for polysilicon. Much like its peers, GCL benefited from a heady
140%+YoY growth in solar demand during 2010, which helped it almost quadruple sales
compared to 2009. The demand surge in 2010 also drained generous subsidies globally
and clouded future prospects. However, the current share price assumes a bumper year for
GCL, in which it would strongly outperform the market to grow EPS by 50%+YoY.
Oversupply taking hold; lack of differentiation not factored in: The first signs of
oversupply and heated competition are visible now. News flow of order cancellations and
price declines are accompanied by announcements of land-grabs in the form of contracts.
But, as witnessed in last downcycle (2008-09), contracts in the solar sector are an
unreliable indicator of future sales or customer stickiness. Low brand loyalty and a lack of
product differentiation are likely to turn oversupply into a price-war yet again. Contrary to
consensus, we factor in this scenario and expect a 10%YoY decline in 2011e EPS.
2011e EPS moves up by 13% on lower costs, reiterate UW (V): GCL expects wafer
ASP to fall by 25-30%YoY by 4Q11, which is inline with our expectations. However,
2011 shipment guidance of 5.5GW (HSBCe: 2.8GW) assumes a very aggressive market
share of 40%, up from 9% in 2010. This assumes a complete annihilation of many of its
competitors and rapid consolidation in the sector – a scenario which may be too rosy,
given the robust balance sheets in the sector, particularly those of poly-Si competitors.
Watch the Italian decision for catalysts: Italy has contributed significantly to a surge in
global solar demand over last six months. But, a sudden change in its solar policy reversed
the momentum on 3 March 2011. Lack of clarity about solar incentives beyond May 2011
has led to project cancellations in the last two weeks. Local solar lobbyists want a revival
of incentives, but the government wants to balance its interests with those of consumers,
which foot the bill. The two parties are due to meet today alongside local consumer, SME,
and bank associations. Any outcome that could potentially slow down the Italian demand
to a run-rate of 1-2GW/Yr from 8-12GW/Yr over last six months will be a big negative
for the sector.
Underweight (V) Target price (HKD) 2.10 Share price (HKD) 3.94 Potential return (%) -46.7
Performance 1M 3M 12M
Absolute (%) 4.8 43.8 102.1 Relative^ (%) 9.6 46.6 90.6
Index^ HANG SENG INDEX
RIC 3800.HK Bloomberg 3800 HK Market cap (USDm) 7,821 Market cap (HKDm) 60,983 Enterprise value (HKDm) 73,425 Free float (%) 38
Note: (V) = volatile (please see disclosure appendix)
18 March 2010
Shishir Singh* Analyst The Hongkong and Shanghai Banking Corporation (HK) Limited +852 2822 4292 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
GCL Poly (3800 HK)
UW(V): 2011 shipment guidance too optimistic
2H10 results solid on ASP & volume gains but a tripling of shares since mid-2010 prices in continued strength ahead
But, policy changes are nudging sector into oversupply and wafer shipment guidance of 5.5GW appears too optimistic
Reiterate Underweight (V) with TP of HKD2.10 (HKD1.90 earlier)
Nat Resources & Energy Independent Power Producers Equity – Hong Kong
Flashnote
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2
GCL Poly (3800 HK) Independent Power Producers 18 March 2010
abc
Financials & valuation Financial statements
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (HKDm)
Revenue 4,943 18,377 20,700 22,514EBITDA 1,858 7,441 8,355 7,609Depreciation & amortisation -577 -1,346 -2,433 -3,283Operating profit/EBIT 1,281 6,096 5,922 4,326Net interest -349 -606 -883 -1,298PBT -51 5,500 5,039 3,028HSBC PBT 939 5,500 5,039 3,028Taxation -93 -1,149 -1,046 -621Net profit -193 3,989 3,593 2,046HSBC net profit 797 3,989 3,593 2,046
Cash flow summary (HKDm)
Cash flow from operations 5,679 5,771 5,820 5,493Capex -1,181 -9,008 -14,481 -4,814Cash flow from investment -6,185 -10,006 -14,481 -4,814Dividends 0 0 0 0Change in net debt 104 3,923 8,934 -648FCF equity 4,559 -3,250 -8,672 679
Balance sheet summary (HKDm)
Intangible fixed assets 586 1,130 1,173 1,176Tangible fixed assets 15,562 23,327 36,263 37,864Current assets 8,520 12,464 5,509 6,804Cash & others 5,307 6,413 479 480Total assets 26,159 39,779 45,901 48,805Operating liabilities 5,384 9,052 7,528 8,631Gross debt 8,566 13,595 16,595 15,948Net debt 3,259 7,182 16,116 15,468Shareholders funds 12,209 15,923 20,123 22,207Invested capital 13,976 21,456 34,938 36,732
Ratio, growth and per share analysis
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Y-o-y % change
Revenue 26.7 271.8 12.6 8.8EBITDA 150.8 300.4 12.3 -8.9Operating profit 180.2 375.7 -2.9 -26.9PBT -121.6 -8.4 -39.9HSBC EPS -39.0 166.1 -9.9 -43.1
Ratios (%)
Revenue/IC (x) 0.5 1.0 0.7 0.6ROIC 36.9 27.2 16.6 9.6ROE 10.7 28.4 19.9 9.7ROA 4.9 14.8 11.0 7.3EBITDA margin 37.6 40.5 40.4 33.8Operating profit margin 25.9 33.2 28.6 19.2EBITDA/net interest (x) 5.3 12.3 9.5 5.9Net debt/equity 26.7 41.9 74.0 63.8Net debt/EBITDA (x) 1.8 1.0 1.9 2.0CF from operations/net debt 174.3 80.4 36.1 35.5
Per share data (HKD)
EPS reported (fully diluted) -0.02 0.26 0.23 0.13HSBC EPS (fully diluted) 0.10 0.26 0.23 0.13DPS 0.00 0.00 0.00 0.00NAV 0.79 1.03 1.30 1.44
Key forecast drivers
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Poly-silicon ASP ($/Kg) 69 52 43 34Poly-Si Unit CoGS ($/Kg) 41 29 24 24Wafer ASP (US Cents/W) 83 79 67 56Wafer Unit CoGS (US Cents/W) 81 58 54 47Electricity unit price (RMB/MW 445 479 485 492Steam unit price (RMB/tonne) 172 184 172 175
Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e
EV/sales 14.0 4.0 4.0 3.6EV/EBITDA 37.4 9.9 9.9 10.8EV/IC 5.0 3.4 2.4 2.2PE* 40.7 15.3 17.0 29.8P/NAV 5.0 3.8 3.0 2.7FCF yield (%) 6.9 -4.9 -13.1 1.0Dividend yield (%) 0.0 0.0 0.0 0.0
Note: * = Based on HSBC EPS (fully diluted)
Price relative
0
1
2
3
4
5
6
2009 2010 2011 2012
0
1
2
3
4
5
6
GCL Poly Energy Holdings Rel to HANG SENG INDEX
Source: HSBC Note: price at close of 17 Mar 2011
渐飞研究报告 - http://bg.panlv.net
abcGlobal Research
Panel price rebound likely from 2Q11, but weaker than our original forecasts. Based
on past experience, unexpected supply chain shocks normally enhance panel makers’
bargaining power with customers. We continue to expect panel makers to succeed in their
bid to raise TV panel prices, meeting our expectation that LCD panel prices (both IT and
TV) will start to rebound from 2Q11 to mid-3Q11. However, the recent panel price trend
suggests the magnitude of rebound could be weaker than our previous expectation. We
thus cut our panel ASP assumption by 0.5% for 2011.
Cutting 2011e EPS for LGD, Sharp, AUO; AUO swings to loss in 2011 as we lower
our panel price assumption. Our losses per share of TWD1.12/0.68 for AUO/CMI are
significantly below consensus profit per share of TWD1.69/1.22. We now expect AUO to
make a loss in 2011, and reduce our TP to TWD23 (from TWD25). We reduce the target
multiple for Sharp to trough level (TP now JPY600 from JYP820) as it is also exposed to
risks in its Japanese TV sales, which make up 60% of its LCD TV set revenue.
Too early to assess overall impact on supply chain of events in Japan. While the
earthquake in Japan could boost panel makers’ ability to regain pricing power in the
coming two quarters, raw material shortages for components, such as ACF adhesive for
attaching PCB boards to panels, could put a cap on output.
Risks still on downside, even with undemanding valuation. At book or below book
value, the valuations of panel makers appear undemanding. We nevertheless reiterate our
Underweight ratings on all the panel makers in our coverage as we believe any rally is
unsustainable due to our expectation of limited panel ASP recovery and lack of catalysts.
17 March 2011
Frank Su* Analyst HSBC Securities (Taiwan) Corporation Limited +8862 8725 6025 [email protected]
Jerry Tsai* Analyst HSBC Securities (Taiwan) Corporation Limited +8862 8725 6025 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities (Taiwan) Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Telecoms, Media & Technology Asia Display Equity – Asia
Flashnote
Asia Display
Weak panel ASP rebound nothing to be excited about
Panel prices set to rebound from 2Q11 but weaker than our original forecasts. Lower EPS forecasts and target prices
Improved pricing power could be offset by cap on output due to component shortage resulting from events in Japan
Maintain bearish view on the LCD sector. A 10-15% share price rebound looks possible but not sustainable
Summary of target price and EPS changes
Company RIC Ccy ___Target price ____ ________ 2011e EPS _________ 2011e EPS difference New Old New Old Con Old Con
AUO 2409 TT TWD 23 25 -1.12 0.66 1.69 -270% -166%LGD 034220 KS KRW 32,000 32,000 1,565 2,221 3,465 -30% -55%Sharp 6753 JP JPY 600 820 10.30 16.80 23.09 -39% -55%CMI 3009 TT TWD 29 29 -0.68 -0.68 1.22 0% -156%
Source: HSBC estimates
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Asia Display Asia Display 17 March 2011
abc
HSBC estimates versus consensus HSBC estimates versus consensus, 2011**
RIC Ccy __________ HSBC___________ ___Bloomberg consensus____ _________Difference_________ Rev* Net profit* OPM Rev* Net profit* OPM Rev Net profit OPM
AUO 2409 TT TWD 467,330 -9,912 -1.8% 482,319 14,970 4.1% -3% -166% -5.9% LGD 034220 KS KRW 28,433 1,565 2.6% 26,819 3,465 5.7% 6% -55% -3.1% Sharp 6753 JP JPY 2,840 12 2.2% 2,971 25 2.5% -4% -51% -0.3% CMI 3481 TT TWD 551,556 -5,009 -0.4% 597,623 7,776 2.7% -8% -164% -3.1%
Source: HSBC estimates, Bloomberg consensus * In TWDmn for AUO and CMI, in KRWbn for LGD, and in JPYbn for Sharp, **Refer to FY 12 for Sharp
Quarterly forecasts: TFT-LCD panel makers AUO quarterly earnings model
(TWDmn) 1Q10 2Q10 3Q10 4Q10 1Q11e 2Q11e 3Q11e 4Q11e 2010e 2011e
Revenue 111,564 128,586 124,403 102,605 96,300 110,543 132,612 127,876 467,158 467,330 Gross profit 14,270 20,324 6,241 -4,537 -4,107 670 10,689 9,542 36,298 16,794 Operating profit 8,129 13,215 232 -11,080 -10,270 -5,520 4,323 3,148 10,496 -8,319 EBITDA 30,842 34,614 22,165 10,942 13,464 19,483 29,776 29,051 99,632 91,774 Net income 7,103 10,957 98 -11,538 -10,580 -5,768 3,741 2,695 6,618 -9,912 FD EPS (TWD) 0.80 1.24 0.01 -1.31 -1.20 -0.65 0.42 0.31 0.75 -1.12 BVPS (TWD) 32.03 33.19 33.30 31.98 30.79 30.14 30.56 30.64 31.98 30.64 Margin (%) Gross margin 12.8% 15.8% 5.0% -4.4% -4.3% 0.6% 8.1% 7.5% 7.8% 3.6% Operating margin 7.3% 10.3% 0.2% -10.8% -10.7% 0.0% 0.0% 0.0% 2.2% -1.8% EBITDA margin 27.6% 26.9% 17.8% 10.7% 14.0% 17.6% 22.5% 22.7% 21.3% 19.6% Net margin 6.4% 8.5% 0.1% -11.2% -11.0% -5.2% 2.8% 2.1% 1.4% -2.1%
Source: Company report, HSBC estimates LGD quarterly earnings model
(KRWbn) 1Q10e 2Q10e 3Q10e 4Q10e 1Q11e 2Q11e 3Q11e 4Q11e 2010e 2011e
Sales 5,876 6,454 6,698 6,483 6,129 6,774 7,926 7,603 25,512 28,433 Gross profit 1,237 1,329 771 394 304 603 1,261 1,050 3,731 3,218 Operating profit 789 726 182 -387 -248 -7 587 404 1,310 736 EBITDA 1,421 1,433 986 346 807 1,082 1,707 1,525 4,057 5,121 Net income 649 555 224 -268 -256 -15 513 335 1,235 577 FD EPS (KRW) 1,761 1,506 608 -729 -694 -42 1,392 909 3,352 1,565 BVPS (KRW) 29,403 30,977 31,551 30,913 31,186 31,459 31,732 32,005 30,913 32,005 Margin (%) Gross margin 21.0% 20.6% 11.5% 6.1% 5.0% 8.9% 15.9% 13.8% 14.6% 11.3% Operating margin 13.4% 11.2% 2.7% -6.0% 0.0% 0.0% 0.0% 0.0% 5.1% 2.6% EDITDA margin 24.2% 22.2% 14.7% 5.3% 13.2% 16.0% 21.5% 20.1% 15.9% 18.0% Net margin 11.0% 8.6% 3.3% -4.1% -4.2% -0.2% 6.5% 4.4% 4.8% 2.0%
Source: Company report, HSBC estimates
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Economics - Data Reactions17 March 2011
Donna Kwok | +85229966621 | [email protected]
View HSBC Global Research at:http://www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai BankingCorporation Limited
Hong KongDone it again: Unemployment rate edges down furtherHong Kong's headline unemployment rate has done it again, surprising markets to the positive side in February. At
3.6%, the unemployment rate is now well below its long-term trend level of 4.2%. That said, with robust local and
foreign demand continuing to support headcount expansion plans, we think there's room yet for the unemployment
rate to inch down further before stabilizing in 2Q.
Facts
Hong Kong's unemployment (seasonally adjusted) rate fell to 3.6% for the December 2010 - February 2011 period, beating
both market and our expectations (3.7%).
The labour force shrank by 13.6k to just under 3.7 million, as did total employment which fell by 6.6k to 3.58 million in the
same period. A contraction in Hong Kong's employment levels and the size of the labour force can be attributed to the passing
of the Chinese New Year (first week of February), when business activities and labour demand typically peak.
Both total unemployment and the unemployment rate (sa) still managed to fall however as the contraction in the size of the
labour force outstripped that of total employment.
The improvement in the unemployment rate was concentrated in sectors including insurance, food and beverage service
activities, and retail.
Implications
Although Hong Kong's unemployment rate is now sitting well below its long-term trend of 4.2% (1990-2010), the private
sector is still showing signs of solid improvement, with the latest HSBC PMI sub-index for employment hitting a 38-month
high in February.
Moreover, the continued tightness of productive capacity (backlogs of work built up for the seventh straight month in
February's PMI) suggests that businesses likely remain upbeat.
Japan accounts for 4% and 10% of Hong Kong's total exports and imports respectively. As we believe (1) softer Japanese
consumption in the months to come will be offset by greater government and private reconstruction efforts and (2) fears of a
major disruption to Japanese component production operations and supply lines are premature - there have been no reports of
direct damage to Japanese manufacturing sites (See Japan and Asia: Implications for monetary policy, 16 March 2011)), we
currently do not expect the unfolding crisis in Japan to derail Hong Kong's job market recovery or overall economic condition.
That is, unless the economic recoveries of the US and core European economies are fundamentally derailed for any reason
(e.g. an escalation of global oil price speculation) or if the ongoing radiation leakage crisis cannot be effectively contained in
the coming days/weeks.
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HSBC Global Research
Economics - Data Reactions
17 March 2011
2
For now, the tightness of labour market conditions and wage increases continues to underscore our buoyant outlook for
consumer spending and GDP growth (+5.2%) and for wage inflation to continue stoking inflationary pressures for headline
CPI to average at least 4.4% this year.
Bottom-line: Strong local and foreign demand are keeping businesses hiring, tightening labour market conditions to further
fuel wage inflation. We expect CPI inflation to continue edging up for the rest of this year before peaking out in Q3 or Q4,
averaging 4.4% in 2011.
Donna Kwok - Economist, Greater China
渐飞研究报告 - http://bg.panlv.net
abcGlobal Research
2011 earnings largely secured. As at Feb-11, COLI should have aggregate unbooked
sales of ~HKD50bn, of which HKD38bn is sales brought forward from before 2011 and
HKD12bn is contracted sales achieved during the first two months of this year. With
estimated property development revenue of HKD55bn in 2011, more than 90% of this
year’s revenue has been locked in.
Prudent balance sheet management with gearing level comfortably at 23% as at end-
10 which we think is particularly impressive amid COLI’s efforts to expand the scale of
its property development business off an already high base. While 2010 completion of
5.7mn sqm GFA fell short of the 6mn sq m target slightly by 5%, we believe its strong
balance sheet position is a boon amid the tight credit environment, and remain hopeful
that COLI will be able to achieve its 2011 delivery target of 7mn sqm GFA.
Land acquisitions largely done; financial resources concentrated on construction of
existing landbank. YTD, COLI has spent HKD10.2bn in land bank acquisition. With
HKD23bn new land acquisition in its 2011 budget, it appears that the company would
only spend HKD12.7bn for the balance of the year. Assuming growth of 10%/year in
terms of GFA delivery, COLI’s landbank is sufficient for ~8 years of development.
FY10 results were above both our and consensus estimate, with turnover and core profit
up 19% y-o-y and 51% y-o-y to HKD44.3bn and HKD9.8bn, respectively. The key
discrepancy versus our forecast was attributable to higher than expected property
development margin of 39%, which improved 10ppt y-o-y. The full-year dividend was
HKD0.27, up 35% y-o-y from HKD0.2/share.
Upgrade to OW with new target of HKD18 (from HKD19.7). COLI’s strong execution
(reflected in robust contracted sales), continuous landbank geographical diversification and
balance sheet strength are key differentiation factors that will set it apart from its peers. That
said, we are widening our NAV target discount from par to the historical mean of 20% to
reflect demand-side uncertainties as well as negative external events.
18 March 2011
Michelle Kwok* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6918 [email protected]
Derek Kwong* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6629 [email protected]
Stanley Cheung* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2882 4395 [email protected]
Ganesh Siva* Associate, Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
China Overseas Land (688 HK)
Upgrade to OW: Compelling valuation for the bellwether despite challenging industry outlook
Stronger-than-expected FY10 results were driven by margins
YTD contracted sales is strong growing 74% y-o-y to HKD12bn; Balance sheet strength was a positive surprise
Upgrade from Neutral (V) to OW, with a lower target price of HKD18.0 (from HKD19.7)
FIG Real Estate Equity – China
Flashnote
Overweight Target price (HKD) 18.00 Share price (HKD) 13.24 Potential return (%) 36.00
Performance 1M 3M 12M
Absolute (%) 3.9 -9.2 -21.2 Relative^ (%) 3.4 -10.4 -23.8
Index^ Hang Seng China Enterprises Index
RIC 0688.HK Bloomberg 688 HK Market cap (USDm) 13,877 Market cap (HKDm) 108,204 Enterprise value (HKDm) 115,914 Free float (%) 48
Note: (V) = volatile (please see disclosure appendix)
Summary of changes in EPS and NAV
(HKD/sh) FY10e EPS FY11e EPS 12M fwd NAVe
Old 1.36 1.65 21.5 New 1.33 1.57 22.3 %change -2.8% -4.9% 3.4%
Source: HSBC estimates
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China Overseas Land (688 HK) Real Estate 18 March 2011
abc
COLI results review: FY09 vs FY10
(HKDm) 2010 2009 % change Remarks
Turnover Property Development 42,962 36,383 18% ASP growth drives revenue from property sales Property Investment 294 195 51% BJ China Overseas Property Plaza add 90,000 sqm to IP Others 1,057 744 n/a Total Turnover 44,313 37,322 19% Operating Income Property Development 16,697 10,476 59% Improved GP margin of projects booked Property Investment (net of reval gain) 268 160 67% Others 170 16 n/a Unallocated income/(expenses) 640 1,125 n/a Gross Profit 17,774 11,778 51% Other income 1,031 479 115% Fair value gain on IP 1,989 1,320 51% Rental growth and expanded IP GFA Gain on extra-ordinary activities 1,806 10 n/a Disposals of 4 projects and acquisition of COGO SG&A -1,907 -1,327 44% Stable SG&A to property sales ratio at 4% Share of results of associates & JCE 335 23 1350% Profit in JCE up 15x to HKD317mn Finance cost -461 -228 102% Issuance of 10-yr USD1bn bond at 5.5% in Nov-10 Profit before taxation 20,567 12,054 71% Income tax (ex LAT) -4,024 -3,162 27% LAT -3,874 -1,287 201% Improvement in sales margin leads to higher LAT Less: Minority Interests -296 -135 n/a Net Profit 12,373 7,469 66% Revaluation gain on IP, net of tax -1,096 -955 15% Gain on ex-ordinary activities, net of tax -1,470 0 n/a Core Profit 9,807 6,514 51% Reported EPS (HKD) 1.514 0.916 65% Core EPS (HKD) 1.200 0.799 50% Full year DPS (HKD) 0.27 0.2 35% Weighted number of shares (m) 8,171 8,153 0% Liquidity 2010 2009 Long-term borrowings 34,324 16,702 Short-term borrowings 10,214 6,964 Cash (ex-restricted cash) 32,023 14,203 Net Debt (ex-restricted cash) 12,515 9,463 Shareholder's equity 54,735 42,093 Net gearing (ex-restricted cash) 23% 22% Margins SG&A to property sales ratio 4% 4% Development margin 39% 29% Reported NP margin 28% 20% Core profit margin 22% 17% LAT to Property sales revenue 9% 4%
Source: Company data
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abcGlobal Research
2010 results 3% ahead of consensus. Net profit grew 35% y-o-y to RMB140bn on oil
and gas price recovery (+35%, +18%) and massive sales volume increase (+20-40%).
EBIT margin contracted from 14.1% in 2009 to 13.2% in 2010 due to import gas losses
and cost hike in domestic oil marketing. The slight 3% earnings surprise came from a
lower income tax rate of 20.3% versus 25% assumed.
2011 guidance upbeat; raise 2011-12 estimates by 30/21%. Management expects oil and
gas production to grow 3.3% and 10.4%, respectively. Crude processing was expected to grow
by 8.4%. Capex was increased by 15.9% to RMB320bn (=USD48bn). Our 2010 estimate was
12% below the actual due to higher corporate charge and income tax rate assumptions.
Reflecting the guidance, the high base and the YTD oil price of USD88/bbl versus the base
case of USD82/bbl, we raise our 2011-12 estimates by 30% and 21%, respectively.
Windfall profit tax review discussed. With refining barely breakeven at USD90/bbl oil
price and import gas loss potentially quadrupling, management discussed a potential easing of
the windfall profit tax. If the trigger price is raised from the current USD40/bbl to USD60/bbl,
PetroChina is expected to gain RMB38bn or a 23.4% increase to 2011e net profit.
Tax release unlikely; policy risk will continue to cap earnings upside. A USD10/bbl
move in crude price changes 2011e net profit by 18.5%. At USD100/bbl, PetroChina can
endure refining losses of -USD2-3/bbl without a significant impact on the bottom line. As
for import gas losses, PetroChina has been and will continue to control import volume.
We believe it’s unlikely to see a windfall tax reduction given the earnings natural hedge.
PetroChina 2H 2010 results at a glance (RMBbn)
2010 2009 y-o-y 2H10 1H10 h-o-h
Revenue 1465.4 1019.3 44% 780.6 684.8 14% Operating profit 187.8 143.4 31% 98.9 88.9 11% Net Profit 140.0 103.4 35% 74.7 65.3 14% EPS (RMB) 0.76 0.56 36% 0.40 0.36 11%
Source: Company data, HSBC
Neutral (V) Target price (HKD) 11.50 Share price (HKD) 10.54 Potential return (%) 13.5
Performance 1M 3M 12M
Absolute (%) -0.6 9.3 17.8 Relative^ (%) 1.4 9.2 9.1
Index^ HANG SENG INDEX
RIC 0857.HK Bloomberg 857 HK Market cap (USDm) 526,518 Market cap (HKDm) 4,105,579 Enterprise value (CNYm) 3627063 Free float (%) 11
Note: (V) = volatile (please see disclosure appendix)
18 March 2011
Sonia Song * Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6557 [email protected]
Akash Gupta * Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
PetroChina (857 HK)
N(V): 2010 results in line; windfall profit tax cut unlikely
FY10 results 3% ahead of consensus on oil & gas price recovery and lower tax; price and cost control still lacking
FY11 guidance upbeat with faster E&P output growth and 16% capex increase: we raise 2011-12 estimates by 21-30%
Windfall profit review discussed but unlikely given earnings natural hedge; Maintain N(V) rating and HKD11.5 target price
Nat Resources & Energy Oil & Gas Equity – Hong Kong
Flashnote
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PetroChina (857 HK) Oil & Gas 18 March 2011
abc
PetroChina income statement and operational data (2H10)
Unit 2010 2009 y-o-y 2H10 1H10 h-o-h 2011e 2011/2010
Financials Revenues E & P RMBbn 544.9 405.3 34% 283.1 261.8 8% 620.0 14% R & C RMBbn 664.8 501.3 33% 344.6 320.2 8% 729.7 10% Marketing RMBbn 1134.5 768.3 48% 601.2 533.3 13% 1027.2 -9% Pipeline RMBbn 117.0 77.7 51% 64.1 52.9 21% 142.8 22% Others RMBbn 1.6 1.4 17% 1.2 0.4 202% 1.4 -11% Total revenue RMBbn 2462.8 1,754.0 40% 1294.2 1168.6 11% 2158.7 -12% Total external revenue RMBbn 1465.4 1,019.3 44% 780.6 684.8 14% 1559.6 6% Profit from operations E & P RMBbn 153.7 105.0 46% 80.3 73.4 9% 159.9 4% R & C RMBbn 7.8 17.3 -55% 2.3 5.5 -57% 4.8 -39% Marketing RMBbn 16.0 13.3 20% 8.5 7.5 13% 16.5 4% Pipeline RMBbn 20.4 19.0 7% 9.2 11.2 -18% 43.8 115% Others RMBbn -10.1 -11.2 -9% -1.5 -8.6 -82% -10.2 1% Total operating profit RMBbn 187.8 143.4 31% 98.9 88.9 11% 214.8 14% Net income to Shareholders RMBbn 140.0 103.4 35% 74.7 65.3 14% 162.0 16% Operating statistics E&P Crude Oil Output mm bbl 857.7 843.5 1.7% 433.0 424.7 2% 886.0 3% Marketable Natural Gas bcf 2221.2 2112.2 5.2% 1068.1 1153.1 -7% 2451.6 10% Oil & Gas Output mm boe 1228.0 1195.7 2.7% 611.1 616.9 -1% 1294.6 5% Refining Crude Processed mm bbl 903.9 828.6 9.1% 464.8 439.1 6% 979.7 8% Gasoline 000' T 23,308 22,114 5.4% 12,335 10,973 12% Kerosene 000' T 2,395 2,253 6.3% 1,228 1,167 5% Diesel 000' T 53,745 48,828 10.1% 27,503 26,242 5% Marketing Marketing volume 000' T 120,833 101,253 19.3% 61,313 59,520 3% 156,155 29% Chemicals Ethylene 000' T 3,615 2,989 20.9% 1,806 1,809 0% 3640 1% Synthetic Resin 000' T 5,550 4,480 23.9% 2,788 2,762 1% Synthetic Fibre 000' T 1,985 1,471 34.9% 994 991 0% Synthetic Rubber 000' T 619 420 47.4% 315 304 4% Urea 000' T 3,764 3,973 -5.3% 1,918 1,846 4% Avg Realized PTR Crude Px U$/bbl 72.93 53.9 35.3% 73.45 72.42 1% 80.2 10% Avg Realized PTR Gas Px U$/Mcf 4.00 3.38 18.5% 4.56 3.49 30% 4.70 17% Capital expenditure RMBbn 276.2 266.8 3.5% 188.7 87.5 116% 320.0 16% Lifting cost US$/bbl 9.97 9.12 9.3% 10.72 9.23 16% 10.72 8% USD/RMB 6.76 6.83 -1.0% 6.70 6.82 -2% 6.70 -1% WTI US$/bbl 79.53 62.0 28.3% 80.32 78.25 3% 87.7 10%
Source: Company data, HSBC
Earnings forecast changes
_____________2010e ____________ _____________ 2011e ____________ _____________ 2012e ____________(RMBbn) New Old % revision New Old % revision New Old % revision
EBIT 187.8 182.3 3% 214.8 185.6 16% 240.8 221.5 9% E&P 153.7 150.7 2% 159.9 148.8 7% 173.8 170.2 2% R&C 7.8 11.0 -29% 4.8 5.7 -16% 7.2 10.2 -29% Marketing 16.1 15.0 7% 16.5 15.2 9% 16.9 15.2 11% Gas Pipeline 20.4 21.3 -4% 43.8 32.3 35% 53.0 43.5 22% Headquarter -10.3 -15.6 -34% -10.2 -16.5 -38% -10.2 -17.5 -42% Net income 140.1 124.0 13% 162.0 125.0 30% 181.1 149.8 21%
Source: HSBC estimates
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Japan’s fuel mix change. Operation of Japan’s Onagawa plants 1-3 (2,174MW),
Fukushima plants 1 and 2 (6,428MW) and Tokai plant 2 (1,100MW) has been suspended
(9,700MW in total). Japan’s installed power capacity stood at 64.5GW in 2010, while
peak demand was 52.5GW in 2009. The supply outage accounts for roughly 15% of
Japan’s power capacity and could significantly shift the fuel mix from nuclear to LNG.
Strong LNG spot pricing. Assuming the power plants remain closed, Japan’s LNG imports
are likely to rise by 4-5m tonnes per annum. For example, Japan’s LNG imports increased by
4m tonnes in 2007, when operation of power plants with 8,212MW was suspended. LNG spot
price in Europe has jumped 13% since last Friday as Japanese utilities attempt to secure more
LNG supply. On the back of this, we believe the timing of Financial Investment Decisions
(FID) will be moved forward for offshore LNG projects in Australia in 2011.
LNG vessel recovery? It was not a big surprise to see strong spot rates this week,
however whether this will translate into new order volume in 2011 remains to be seen.
New build LNG vessel orders had been quiet since 2009 with only five new orders in
2010 and five YTD 2011. We do not expect any change in new orders at the moment,
however we cannot rule out the possibility that higher LNG pricing could bring back
stronger demand for LNG carriers in the mid-long term. In this regard, LNG + already
strong offshore and container segments should favour bigger yards going forward.
Steel concerns vs. cost push. HSBC expects heavy plate prices (Far East Asia) to rise by
17% in 2Q11, which could result in a 1-3ppt cut in consensus ROE for 2011e, creating
valuation pressure. However, we think this cost push will translate into higher vessel
prices, especially in the containership (13,000 TEU or above) and drillship segments.
Koreans are strongly positioned in both segments. We believe the long-awaited rebound
in vessel prices could create further volume upside going forward.
HHI remains our top pick in the sector. We reiterate our Overweight (V) rating on HHI
with a SOTP-based TP of KRW600,000. With its better earnings quality and strategy, we
still prefer HHI to peers until we see a cyclical upturn in bulkers and tankers. The stock is
trading at 8.5x EV/EBITDA and 1.8x P/B 2012e.
17 March 2011
Paul Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8758 [email protected]
Jinkyu Ryu* Associate The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8783 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Korea Industrials Equity – Korea
Flashnote
Korea Shipbuilding
Adding one more to the mix
Japan’s fuel mix change should put upward pressure on global LNG pricing
Offshore and container segments still strong + LNG recovery should favour bigger yards
Our top pick in the sector remains HHI in Korea with strong order momentum and its diversified strategy
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2
Korea Shipbuilding Industrials 17 March 2011
abc
UK NBP LNG spot price Japan's natural gas consumption
54.0
56.0
58.0
60.0
62.0
64.0
66.0
68.0
01-Mar-11 06-Mar-11 11-Mar-11 16-Mar-11
(GBP/Therm)
The earthquake hit Fukushima
nuclear pow er plants (11 Mar)
60
70
80
90
100
110
00 01 02 03 04 05 06 07 08 09
2.8%
2.9%
3.0%
3.1%
3.2%Japan's Natural Gas Consumption% of Global Gas Consumption
(Billion Cubic Meter)
Source: Bloomberg Source: BP Stats
Global natural gas production Global natural gas consumption
0
1,000
2,000
3,000
4,000
5,000
2010 2015 2020 2025 2030
North America Latin America Europe & EurasiaMiddle East Africa Asia Pacific
(Million Tonnes oil equiv alent)
0
1,000
2,000
3,000
4,000
5,000
2010 2015 2020 2025 2030
North America S & C America Europe & EurasiaMiddle East Africa Asia Pacific
(Million Tonnes oil equiv alent)
Source: BP Stat Source: BP Stat
Steel plate price trends and forecast Newbuilding price vs. Steel plate price
300400500600700800900
1,0001,100
2006 2007 2008 2009 2010 2011 2012 2013
Far East Domestic China domestic
($/ton)
100
120
140
160
180
200
2006 2007 2008 2009 2010 2011
0
200
400
600
800
1,000
1,200
Steel Plate price(RHS) New building price (LHS)
(Index ) ($/ton)
Source: HSBC Source: Clarkson, HSBC
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Four packages awarded to SE at Shaybah. Saudi ARAMCO noted that Samsung
Engineering (SE) has been awarded contracts to build the Shaybah natural gas liquids
(NGL) project in eastern Saudi Arabia (source: MEED), expected to come onstream in
2014e. SE will carry out the engineering, procurement and construction (EPC) work for
all four construction packages at Shaybah NGL: inlet facilities, NGL recovery trains and
utilities, and four cogeneration units with combined capacity of more than 1 GW.
KRW5.0trn orders secured y-t-d. Including this Shaybah order (USD2.75bn), SE has
now secured cKRW5.0trn orders y-t-d, 36% of 2011e guidance (KRW14trn). This
represents 56% of 2010 orders (KRW9trn) already, and we expect the company to win
over KRW8-9trn orders within 1H11e. A KRW14trn new orders target should be
achievable, in our view, applying last year’s hit ratio of 20% to the bid market size this
year of cUSD67bn (hydrocarbon cUSD47bn). On top of strong overseas momentum, we
also expect ongoing flows from captive group works (company guiding for volume
growth to nearly double in 2011) to provide an additional tailwind on the back of
Samsung group’s aggressive capex agenda (mainly from IT facilities).
Jitters on Middle East unrest set to dissipate. Despite market concerns on potential
overseas work delays and the order flow downturn ahead, we think overseas order
momentum for SE remains intact and the recent sector correction looks overdone.
Potential risks may proliferate if current political jitters spread out to the GCC (Gulf
Cooperation Council) nations and this may present critical downside risk to order bidding
activities – but the chances of this are minimal, in our view. While the Middle East region
comprises c50-91% of Korean E&C players’ overseas backlog, the largest GCC exposure
at the country level includes Saudi Arabia, UAE and Kuwait.
Reiterate OW(V) and maintain target price of KRW247,000 based on SOTP valuation.
We apply 15.5x target EV/EBITDA for 2011e core operations (reflecting fair EV to 2011e
backlog standing at 30%). We add KRW87.4bn worth of non-core assets and KRW1.4trn
net cash to derive our per share NAV of KRW246,769. With 1Q11e backlog standing at
cKRW20.5trn, we find Samsung Engineering is now trading at 30% EV to 1Q11e backlog
(22% EV to 2011e backlog), far below European peers above 50%. Risks include weak
oil prices, higher raw material prices and KRW appreciation that weakens pricing power.
Overweight (V) Target price (KRW) 247,000 Share price (KRW) 187,500 Potential return (%) 32.5
Performance 1M 3M 12M
Absolute (%) -3.6 -5.5 52.2 Relative^ (%) -2.0 -3.0 28.1
Index^ KOSPI INDEX
RIC 028050.KS Bloomberg 028050 KS Market cap (USDm) 6,672 Market cap (KRWb) 7,580 Enterprise value (KRWb) 6,217 Free float (%) 70
Note: (V) = volatile (please see disclosure appendix)
17 March 2011
Brian Cho* Regional Head of Industrials Research The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8750 [email protected]
Keith Hwang* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8763 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Samsung Engineering (028050)
OW(V): Sailing with a tailwind
Saudi ARAMCO awards contracts; Samsung Engineering to carry out EPC works for Shaybah’s entire four packages
KRW5.0trn orders y-t-d (36% of 2011e guidance); market jitters on risk to orders from Middle East unrest to dissipate
Reiterate OW(V) and maintain target price of KRW247,000
Mid Cap Construction & Engineering Equity – Korea
Flashnote
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Samsung Engineering (028050) Construction & Engineering 17 March 2011
abc
Financials & valuation Financial statements
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (KRWb)
Revenue 3,471 4,248 5,804 7,225EBITDA 333 383 539 708Depreciation & amortisation -17 -18 -15 -16Operating profit/EBIT 316 365 523 692Net interest 30 43 51 66PBT 336 487 654 838HSBC PBT 336 487 654 838Taxation -77 -131 -176 -226Net profit 259 355 477 611HSBC net profit 259 355 477 611
Cash flow summary (KRWb)
Cash flow from operations 726 264 515 663Capex -117 -119 -120 -121Cash flow from investment -448 -121 -127 -128Dividends -80 -80 -80 -80Change in net debt -533 -74 -316 -462FCF equity 561 89 335 480
Balance sheet summary (KRWb)
Intangible fixed assets 5 4 5 5Tangible fixed assets 286 388 493 599Current assets 1,966 2,134 2,615 3,212Cash & others 1,045 1,119 1,434 1,896Total assets 2,452 2,788 3,383 4,093Operating liabilities 1,669 1,718 1,916 2,095Gross debt 0 0 0 0Net debt -1,045 -1,119 -1,434 -1,896Shareholders funds 777 1,063 1,460 1,991Invested capital -457 -311 -237 -174
Ratio, growth and per share analysis
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Y-o-y % change
Revenue 31.7 22.4 36.6 24.5EBITDA 126.5 15.2 40.6 31.4Operating profit 143.0 15.7 43.3 32.1PBT 34.3 44.8 34.2 28.2HSBC EPS 37.4 37.3 34.2 28.2
Ratios (%)
Revenue/IC (x) -11.7 -11.1 -21.2 -35.1ROIC -82.8 -69.6 -139.5 -245.5ROE 38.7 38.6 37.8 35.4ROA 12.5 13.6 15.5 16.4EBITDA margin 9.6 9.0 9.3 9.8Operating profit margin 9.1 8.6 9.0 9.6EBITDA/net interest (x) Net debt/equity -134.6 -105.3 -98.3 -95.2Net debt/EBITDA (x) -3.1 -2.9 -2.7 -2.7CF from operations/net debt
Per share data (KRW)
EPS reported (fully diluted) 6472.41 8885.05 11927.21 15286.84HSBC EPS (fully diluted) 6472.41 8885.05 11927.21 15286.84DPS 2000.00 2000.00 2000.00 2000.00NAV 19416.59 26567.26 36494.46 49781.30
Key forecast drivers
Year to 12/2009a 12/2010e 12/2011e 12/2012e
New orders 10,117 11,943 13,986 16,110Petrochem 9,582 10,640 12,236 14,072Industrial 253 581 884 1,043Environment 281 721 866 996
Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e
EV/sales 1.8 1.5 1.0 0.8EV/EBITDA 19.1 16.2 11.0 7.7EV/IC PE* 29.3 21.3 15.9 12.4P/NAV 9.8 7.1 5.2 3.8FCF yield (%) 7.6 1.2 4.6 6.5Dividend yield (%) 1.1 1.1 1.1 1.1
Note: * = Based on HSBC EPS (fully diluted)
Price relative
21250
71250
121250
171250
221250
2009 2010 2011 2012
21250
71250
121250
171250
221250
Samsung Engineering Rel to KOSPI INDEX
Source: HSBC Note: price at close of 16 Mar 2011
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Sales flat-line and margin declines sharply in 4Q10: Gintech announced EPS of TWD2.97
in 4Q10, a 27%QoQ decline in what was arguably the best quarter for the industry ever. The
earnings decline was primarily driven by a sequential 610bp decline in operating margin due to
lower cell ASP triggered by oversupply as well as higher wafer and non-silicon costs. In our
view, this poor performance was not due to seasonal factors. It’s worth noting that company’s
EPS more than double sequentially a year ago in 4Q09.
Earnings collapse coming in 1Q11: Gintech’s monthly revenue trend has remained weak in
January-February and a mild recovery in late-February may be fading rapidly due to a
regulatory change in Italy on 3 March-2011. Moreover, while cell prices have remained weak
due to oversupply, costs have increased due to stable wafer and rising cost of silver paste.
Consequently, we believe the company’s EPS would decline by more than 70%QoQ in 1Q. In
our view, there is significant downside to 2011 consensus EPS of TWD12.60.
Demand & price indicators turning negative again: Both PV insights and Energy Trend
current weekly surveys showed that demand is weakening due to project cancellations in
Europe. As seen earlier in January, cell prices are the ones to get hit first due to greater
oversupply and lack of differentiation. Cell makers are also more vulnerable due to their
reliance on partially integrated module makers that rely on in-house cell capacity in downcycle
and high cost module makers, which are likely to lose market share.
Potential equity dilution & slowdown signals: The board approved a plan to issue up to 50m
shares (16% of outstanding) through a private placement even though the company is virtually
debt free. Not only will an equity issuance result in equity dilution but, more importantly, the
building up of a war chest may be a sign of preparation for the downcycle (like its peers Trina
Solar, Solarfun, E-Ton, LDK and Jinko Solar).
Underweight (V) Target price (TWD) 48.00 Share price (TWD) 93.00 Potential return (%) -48.4
Performance 1M 3M 12M
Absolute (%) 1.6 11.6 4.9 Relative^ (%) 6.4 17.8 -3.0
Index^ TAIWAN WEIGHTED IN
RIC 3514.TW Bloomberg 3514 TT Market cap (USDm) 1,013 Market cap (TWDm) 29,964 Enterprise value (TWDm) 32,135 Free float (%) 100
Note: (V) = volatile (please see disclosure appendix)
17 March 2011
Shishir Singh * Analyst The Hongkong and Shanghai Banking Corporation (HK) Limited +852 2822 4292 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Gintech (3514 TT)
UW(V): 4Q10 margins slump, but likely to get worse in 1Q11
4Q10 earnings decline on oversupply related price pressures
1Q11e will likely be worse; EPS to decline by over 60% in 2011e
Reiterate Underweight (V) with lower TP of TWD48 (TWD73)
Telecoms, Media & Technology Electrical Equipment Equity – Taiwan
Flashnote
Key quarterly estimates
Mar-10 Jun-10 Sep-10 Dec-10e Mar-11e Jun-11e Sep-11e Dec-11e
Cell Capacity (MW) 680 720 810 930 930 1000 1225 1400Utilisation (%) 99.8% 112.2% 110.6% 98.2% 90.0% 77.2% 59.0% 42.2%Cell Shipments (MW) 170 202 224 228 209 193 181 148Cell ASP (USD/W) 1.24 1.26 1.31 1.26 1.15 1.10 0.97 0.95Unit Cell CoGS (USD/W) 1.00 1.09 1.12 1.05 1.05 0.95 0.81 0.76Wafer cost (USD/W) 0.80 0.88 0.92 0.85 0.84 0.74 0.59 0.52Revenue (TWD mn) 5,590 6,955 7,730 7,870 6,224 5,576 4,682 3,800Gross Margin (%) 22.2% 16.9% 21.1% 15.3% 7.5% 12.6% 14.4% 15.3%Operating Margin (%) 19.3% 14.0% 18.1% 12.5% 4.8% 9.9% 11.7% 12.7%EPS (TWD) 3.27 3.13 4.05 3.11 0.82 1.58 1.58 1.38
Source: Company data, HSBC estimates. Note: 4Q10 numbers are HSBC estimates as the company has not disclosed full details of 2010 results yet.
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Gintech (3514 TT) Electrical Equipment 17 March 2011
abc
Financials & valuation Financial statements
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (TWDm)
Revenue 15,711 28,144 20,282 21,291EBITDA 876 5,632 3,251 4,165Depreciation & amortisation -774 -1,197 -1,370 -1,650Operating profit/EBIT 101 4,435 1,882 2,515Net interest -163 -95 -77 -78PBT 36 4,515 1,805 2,437HSBC PBT -62 4,339 1,801 2,434Taxation 34 -189 -90 -122Net profit 70 4,326 1,715 2,315HSBC net profit -28 4,150 1,711 2,312
Cash flow summary (TWDm)
Cash flow from operations 1,052 4,145 4,210 3,676Capex -1,947 -3,184 -4,810 -1,652Cash flow from investment 390 -2,617 -4,810 -1,652Dividends 0 0 0 0Change in net debt -6,557 -2,247 600 -2,024FCF equity -211 962 -597 2,028
Balance sheet summary (TWDm)
Intangible fixed assets 0 0 0 0Tangible fixed assets 8,849 10,090 13,530 13,533Current assets 8,029 8,887 6,971 9,323Cash & others 2,767 2,935 2,335 4,360Total assets 23,150 24,674 26,198 28,553Operating liabilities 2,662 2,141 1,954 1,997Gross debt 7,230 5,151 5,151 5,151Net debt 4,463 2,216 2,816 791Shareholders funds 13,258 17,462 19,173 21,485Invested capital 11,448 13,900 16,212 16,499
Ratio, growth and per share analysis
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Y-o-y % change
Revenue -0.7 79.1 -27.9 5.0EBITDA -67.8 543.2 -42.3 28.1Operating profit -95.5 4271.0 -57.6 33.6PBT -98.1 12335.2 -60.0 35.0HSBC EPS -100.8 -58.8 35.1
Ratios (%)
Revenue/IC (x) 1.2 2.2 1.3 1.3ROIC 1.5 33.5 11.9 14.6ROE -0.3 27.0 9.3 11.4ROA 1.7 18.5 7.1 8.8EBITDA margin 5.6 20.0 16.0 19.6Operating profit margin 0.6 15.8 9.3 11.8EBITDA/net interest (x) 5.4 59.5 42.2 53.2Net debt/equity 33.7 12.7 14.7 3.7Net debt/EBITDA (x) 5.1 0.4 0.9 0.2CF from operations/net debt 23.6 187.1 149.5 464.6
Per share data (TWD)
EPS reported (fully diluted) 0.30 13.56 5.37 7.26HSBC EPS (fully diluted) -0.12 13.01 5.36 7.25DPS 0.00 0.00 0.00 0.00NAV 56.51 54.75 60.10 67.35
Key forecast drivers
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Cell Capacity (MW) 640 930 1,400 1,400Utilisation (%) 58 89 52 65Cell Shipments (MW) 368 824 731 914Cell ASP (USD/W) 1.3 1.1 0.9 0.8Unit cost (USD/W) 1.3 0.9 0.8 0.7Unit Gross Profit Spread (USD/ 0.0 0.2 0.1 0.1
Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e
EV/sales 2.2 1.1 1.6 1.4EV/EBITDA 39.3 5.7 10.1 7.4EV/IC 3.0 2.3 2.0 1.9PE* 7.1 17.3 12.8P/NAV 1.6 1.7 1.5 1.4FCF yield (%) -0.7 3.2 -2.0 6.8Dividend yield (%) 0.0 0.0 0.0 0.0
Note: * = Based on HSBC EPS (fully diluted)
Price relative
15
35
55
75
95
115
2009 2010 2011 2012
15
35
55
75
95
115
Gintech Rel to TAIWAN WEIGHTED INDEX
Source: HSBC Note: price at close of 16 Mar 2011
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Earnings dropped in 4Q due to high hedging cost; life business is likely to stay sluggish in 2011. Cathay FHC reported a weak profit of TWD373m only in 4Q on high
hedging cost (TWD9bn) and net provision costs (TWD800m). The Life unit’s first year
premium (FYP) sales dropped by 22% q-o-q due to decline of interest rate sensitive
policies owing to regulation change; and this will likely to drag FYP growth in 2011 as
well. Investment yield was flattish at 3.5% for FY10 (vs. 3.4% for 9M) as gains from the
stock market were offset by high hedging cost (1.8% vs. 1.2% for 9M). Funding cost, on
the other hand, declined by 1bps only to 4.34% in 4Q.
Stable banking segment will continue to be earnings driver in 2011. The banking unit
was relatively stable with loans growing by 9.2% y-o-y and fees by 24%, while NIM (net
interest margin) widened by 5bps to 1.1% in 4Q. The company’s guidance for 2011 is
positive, expecting loans to grow by 10%; NIM continues to improve by 5-10bps even
without rate hikes. With solid asset quality (NPL is 0.28% and provision coverage reached
277%) we think CUB will continue to be the earnings driver for Cathay FHC in 2011.
TP cut to TWD48.8 (from TWD52.4) on higher risks in life segment; maintain
Neutral. We cut out TP due to (1) lower FY11e earnings estimate by 24.9% on higher
underwriting cost at life unit and (2) lower EV (embedded value) multiples applied to life
unit (from 1x to 0.9x) to reflect high business risk from forex hedging and uncertain
financial market. Our new SOTP-based TP implies 2.13x our estimated FY11 book, close
to the historical average 12M trailing PB of 2.1x from 2009 to date.
Catalysts. (1) stock market up/downside; (2) asset reflation and (3) aggressive rate hikes.
Neutral Target price (TWD) 48.8 Share price (TWD) 43.7 Potential return (%) 12.2
Performance 1M 3M 12M
Absolute (%) -9.4 -6.0 -11.3
Relative^ (%) -5.5 -1.1 -18.0
Index^ TAIWAN WEIGHTED INDEX
RIC 2882.TW Bloomberg 2882.TT Market cap (USDbn) 15.0 Market cap (TWDbn) 443.7 Enterprise value NA Free float (%) 60
Note: (V) = volatile (please see disclosure appendix)
17 March 2011
Sarah Hung*, CFA Analyst HSBC Securities (Taiwan) Corporation Limited +886 2 8725 6026 [email protected]
Todd Dunivant* Head of Banks Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
HSBC Securities (Taiwan) Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
FIG Diversified Financial Services Equity – Taiwan
Cathay FHC (2882)
N: Still sluggish life business outlook in 2011
4Q earnings weaken on high hedging cost and y/e provisions;;FYP growth may slow in 2011 due to regulatory change
Brighter bank outlook with loan demand and NIM continuing to improve and credit cost staying low
Maintain N; cut TP to TWD48.8 (from TWD52.4) on downward earnings revisions and risk concerns on life unit; we expect unstable financial markets to cast risk concerns
Flashnote
Cathay FHC (2882.TW): Earnings summary
PBT (TWDm) PAT (TWDm) RoE (%) EPS (TWD) BVPS (TWD) PE (x) PB (x) Div yield (%)
2009a 16,300 11,051 6.2 1.09 20.9 40.2 2.09 1.1 2010e 5,523 4,601 2.1 0.45 21.5 96.5 2.03 0.5 2011e 17,387 14,724 6.5 1.45 22.9 30.1 1.91 1.7 2012e 25,092 21,559 8.9 2.12 24.8 20.6 1.76 2.4
Source: Company data, HSBC estimates
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5
Cathay FHC (2882) Diversified Financial Services 17 March 2011
abc
Financials & valuation Cathay FHC NeutralFHC: Consolidated P&L
TWD m FY09 FY10e FY11e FY12e
Net interest income 87,929 95,898 108,466 125,219 Net fee income 13,823 12,401 14,800 15,258 Trading income (net) 7,044 (2,286) 8,030 8,336 Insurance income (41,131) (53,643) (64,661) (73,230)Other operating income 3,497 5,428 5,885 7,802 Pre-provision revenue 71,161 57,798 72,520 83,385 Less: bad debt provisions (3) 212 1,179 282 SG&A (54,130) (53,659) (55,199) (57,469)Non-Op income/loss (729) 1,172 (1,113) (1,106)Tax (5,468) (1,064) (2,858) (3,719)Non-recurring items 0 0 0 0 Adjustments 219 143 195 186 Net profit 11,051 4,601 14,724 21,559 Preferred dividends 0 0 0 0 Attributable profit 11,051 4,601 14,724 21,559
FHC: Consolidated Balance Sheet
Cash & receivables 822,701 798,472 781,449 804,186 S-T investments 187,046 347,486 493,653 577,984 L-T investments 1,865,224 1,978,869 2,144,422 2,351,398 Loans 1,328,382 1,407,109 1,544,405 1,690,632 Fixed assets 39,658 40,132 39,485 39,254 Other assets 52,526 92,997 74,717 96,605 TOTAL ASSETS 4,295,536 4,665,065 5,078,130 5,560,058 Operating liabilities 121,935 179,010 168,256 202,744 Deposits 1,288,413 1,428,961 1,548,814 1,683,769 Corporate bond & L-T debts 331,318 279,605 305,461 292,533 Insurance reserves 2,328,637 2,547,117 2,810,025 3,116,434 Other liabilities 9,810 8,523 9,166 8,845 Minority interest 3,228 3,389 3,559 3,737 Total Liabilities 4,083,341 4,446,605 4,845,281 5,308,062 Common equity 212,195 218,461 232,849 251,996 Preferred equity 0 0 0 0 LIABILITY & EQUITY 4,295,536 4,665,065 5,078,130 5,560,058
Per share data (TWD)
Basic EPS 1.09 0.45 1.45 2.12 Fully Diluted EPS 1.04 0.45 1.45 2.12 DPS 0.48 0.23 0.73 1.06 Reported BVPS 20.9 21.5 22.9 24.8 NPL Adjusted BVPS 21.1 21.9 23.4 25.3 Fully adj. BVPS 28.5 32.5 34.0 35.9
Valuation data
P/E basic (x) 40.2 96.5 30.1 20.6 P/BV (x) 2.09 2.03 1.91 1.76 P/fully adjusted BV (x) 1.53 1.34 1.29 1.22 Dividend yield (%) 1.09 0.53 1.67 2.43
FHC: DuPont Analysis
RoE (%) 6.2 2.1 6.5 8.9 RoA(%) 0.3 0.1 0.3 0.4 Double leverage Ratio (%) 101.9 100.3 98.0 97.0
Issuer Information
Share price (TWD) 43.7 Country TaiwanReuters 2882.TW Bloomberg (Equity) 2882.TTMarket cap. (TWDbn) 443.7 Free float (%) 60Shares outstanding (m) 10,154 FINI Holding (%) 23.17
Source: Company, HSBC
Net Profit Breakdown by Subsidiary
FY09 FY10e FY11e FY12e
Cathay Life 2,662 (6,516) 3,575 8,558 CUB 8,688 11,332 11,127 12,788 Others & adjustments (300) (215) 22 213 Net profits 11,051 4,601 14,724 21,559
CUB: Financial Summary
Net interest income 13,698 14,874 16,060 18,848 Net fee income 4,677 6,053 7,052 8,210 Trading income 4,949 3,005 3,007 3,410 Total income 25,144 24,593 26,793 31,154 Bad debt provisions 0 213 1,182 285 SG&A 25,144 24,806 27,974 31,439 Net profit 8,688 11,332 11,127 12,788 Financial instruments 523,841 545,957 577,998 624,867 Loans 804,172 863,281 944,539 1,059,005 Total asset 1,510,292 1,626,092 1,754,389 1,899,218 Customer deposits 1,319,960 1,428,961 1,548,814 1,683,769 Corporate bonds 41,675 41,675 41,675 41,675 Common equity 93,146 94,980 99,284 105,392
CUB: Financial Ratios (%)
Gross loan growth (0.7) 7.3 9.5 12.1 Loan to deposit ratio 61.4 60.8 61.4 63.4 Net interest margin (NIM) 0.99 0.97 0.97 1.05 Fee income growth (6.9) 25.0 15.0 15.0 Cost/income ratio (57.3) (59.0) (56.0) (53.0)RoE (%) 9.9 12.0 11.5 12.5 RoA (%) 0.61 0.72 0.66 0.70
Cathay Life: Financial Ratios (%)
Insurance income (63,474) (79,114) (88,568) (97,920)Investment income 77,428 80,532 101,959 117,684 SG&A (11,323) (11,405) (12,154) (13,065)Net profit 2,662 (6,516) 3,575 8,558 Cash and cash equivalents 336,055 343,023 270,991 323,701 Financial Investments 1,541,011 1,767,890 2,060,114 2,298,279 Loans (net) 506,130 527,728 582,776 615,032 Total Assets 2,742,870 2,985,997 3,268,963 3,601,343 Insurance reserves 2,304,978 2,547,117 2,810,025 3,116,434 Common equity 113,130 113,654 119,229 130,304
Cathay Life: Ratios (%)
Premium growth (excl. unit-linked) 30.2 1.7 6.1 15.0 Investment yield (net of hedging) 3.4 3.2 3.7 3.8 RoE (%) 3.5 (5.7) 3.1 6.9 RoA (%) 0.1 (0.2) 0.1 0.2
Capital Data and Asset Quality
Banking Subsidiary
Tier I Capital (%) 9.11 NPL ratio (%) 0.28
Tier II capital (%) 2.09 Provision coverage ratio (%) 277.2Total CAR (%) 11.2 CAR-FHC (%) 141.7 CAR Data as of 1H10; NPL data as of 4Q10
Share price performance
0
20
40
60
80
100
Aug-07 Apr-08 Jan-09 Oct-09 Jun-10
TWD
0.3
0.5
0.7
0.9
1.1
1.3
1.5(x)
Cathay Cathay /Taiex (RHS)
Source: TEJ & HSBC
渐飞研究报告 - http://bg.panlv.net
Economics - Data Reactions17 March 2011
Leif Eskesen | +6562390840 | [email protected]
View HSBC Global Research at:http://www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai BankingCorporation Limited Singapore Branch
SingaporeNon-oil domestic export growth slows in FebruaryGrowth in non-oil domestic exports eased in February to 7.8% y-o-y (vs. 20.7% in January), led by electronics and
pharmaceuticals. However, sequential growth picked up relative to January. Looking ahead, exports are expected
to grow at a slower pace in 2011 following the post-crisis jump last year, but growth in overall economic activity is
expected to keep pace with potential, calling for policy vigilance to keep inflation at bay.
Facts
Total exports grew in February by 10.4% y-o-y (vs. 17.3 % in January), while non-oil domestic exports (NODX) grew 7.8% y-
o-y (vs. 20.7% y-o-y in January). The growth numbers for NODX were below our forecast (9.5% y-o-y) and that of consensus
(10.5% y-o-y). However, NODX sequential growth picked up (2.9% m-o-m sa vs. 2.1% in January). In real terms, NODX
growth rose to 11.9% y-o-y (vs. 24.0% in January).
By products, NODX growth for electronics exports dropped (-12.8% y-o-y vs. 5.8% in January), with weak readings seen for
most product groups. Non-electronics exports also slowed after the jump during the previous month (19.7% y-o-y vs. 30.3% in
January) as pharmaceutical exports grew at a much slower rate (1.3% y-o-y vs. 38.6% in January). Exports of petrochemicals,
on the other hand, picked up pace (37.5% y-o-y vs. 31.3% in January).
By markets, growth in NODX destined for the EU eased significantly after last months' jumper (14.1% y-o-y vs. 51.5% in
January). Exports to the US grew slightly faster (20.1% y-o-y vs. 19.5% in January), while exports to China grew at a slower
pace (13.6% y-o-y vs. 15.7% in January). NODX to most other markets also experienced slower growth rates.
Implication
Today's export numbers were a bit on the soft side in terms of annual growth, although sequential growth picked up pace and
suggest that the momentum is holding up relatively well.
Going ahead, the annual growth rate for electronics exports is likely to ease further as the inventory cycle matures. While it is
still early days, the tragic events in Japan could also have implications for Singapore's exports over the nearer term. For non-
electronics exports, we will as usual see ups and downs driven by the pharmaceutical sector's erratic production cycles and
changes in product mix. But, exports of pharmaceuticals are also likely to grow at a slower pace on average relative to last year
when new facilities were added and the product mix also boosted output (and thereby exports).
Despite the expected slowdown in export growth, overall GDP growth is still expected to keep pace with potential in 2011.
With GDP already at or above its potential, this means that inflation will be pushed up by rising wages and more pass-through
of higher input costs to end-consumers. Also, international commodity prices add to the inflation pressures. Macroeconomic
policies will, therefore, have to be kept in tightening mode.
Bottom line: NODX growth was a bit softer than expected, but the sequential momentum held up pretty well. While growth is
expected to ease relative to last year, the economy will struggle with tight capacity. It will, therefore, be important maintain a
tight macroeconomic policy stance to contain inflation pressures.
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HSBC Global Research
Economics - Data Reactions
17 March 2011
2
Leif Lybecker Eskesen, Chief Economist for India & ASEAN
Prithviraj Srinivas, Economics Associate
Chart 1. NODX sequential momentum has perked up
Chart 2. Electronics and pharmaceuticals pulled down annual growth in February
Chart 3. NODX annual growth slowed for all major export markets, except the US
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abcGlobal Research
BDMN is not for sale. The Singapore Business Times quoted BDMN's CEO Henry Ho
saying that Temasek is not interested in selling its 68% stake in BDMN. This should quell
at least some of the M&A option premium built into the stock.
The market may be too optimistic on earnings under a business-as-usual scenario.
The stock has done relatively well, rising 12% y-t-d. We believe this was mainly driven
by hopes for an M&A takeout. Without a takeover scenario materializing, the market is
likely to refocus its attention on fundamental performance. BDMN's relatively higher
104% gross loans-to-deposits ratio could constrain either growth or margins. This should
cap RoEs at sub-20% until the bank manages to either lower its funding cost or boost its
leverage quickly. We believe this is not fully reflected in market expectations yet. Our
2012e-2013e earnings forecasts are 7%-16% below consensus.
Still our least preferred Indonesian bank stock. This latest news reinforces our
Underweight stance on BDMN, which trades at 2.7x Dec 11e BV compared to its 10-year
average of 2.2x. Even on a PE basis, the stock trades at 16x 2010e EPS compared to its
10-year average of 13x. Without a takeout scenario materializing, we believe this is
difficult to justify with prospective RoEs of <20% compared to a 10-year average of 22%.
17 March 2011
Kar Weng Loo* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6239 0654 [email protected]
Xiushi Cai* Analyst The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6239 0624 [email protected]
Todd Dunivant* Head of Banks Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2996 6599 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
MICA (P) 142/06/2010 MICA (P) 193/04/2010
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Bank Danamon (BDMN IJ)
UW: Time to refocus on the fundamentals
BDMN is not for sale
Street is too optimistic on earnings
Latest news reinforces our UW stance on BDMN
FIG Commercial Banks Equity – Indonesia
Flashnote
Underweight Target price (IDR) 4700.00 Share price (IDR) 6550.00 Potential return (%) -28.2
Performance 1M 3M 12M Absolute (%) 3.1 13.9 29.7 Relative^ (%) -0.2 15.2 -2.0
Index^ JAKARTA S E COMPOSITE RIC BDMN.JK Bloomberg BDMN IJ Market cap (USDm) 6,221 Market cap (IDRb) 54,587 Free float (%) 100
Note: (V) = volatile (please see disclosure appendix)
BDMN: Key financials and valuations
2010A 2011e 2012e 2013e
Core net profit (IDRbn) 2,883 3,521 4,081 4,617 Core EPS (IDR) 337 412 477 540 DPS (IDR) 172 210 243 275 BVPS (IDR) 2,199 2,409 2,652 2,927 Core ROE (%) 16.8% 18.2% 19.2% 19.7%P/E (x) 19.4x 15.9x 13.7x 12.1xP/B (x) 3.0x 2.7x 2.5x 2.2xDividend yield (%) 2.6% 3.2% 3.7% 4.2%
Source: Company, HSBC
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Bank Danamon (BDMN IJ) Commercial Banks 17 March 2011
abc
Income statement (IDRbn)
Year to 12/09a 12/10e 12/11e 12/12e
Interest income 14,418 17,260 20,006 23,270 Interest expense (4,372) (5,537) (6,517) (7,746)Net interest income 10,046 11,723 13,489 15,525 Net fees & commissions 1,411 1,694 2,032 2,337 Other income 2,527 2,816 3,261 3,751 Operating income 13,984 16,233 18,783 21,612 Operating expense (7,256) (8,221) (9,544) (11,081)Pre-prov op profit (PPOP) 6,728 8,012 9,239 10,531 Provision charges (2,098) (2,539) (2,976) (3,511)Associates & amortization - - - 1 Non-op items (629) (500) (500) (500)Profit before tax 4,002 4,973 5,763 6,521 Core profit before tax 4,002 4,973 5,763 6,521 Taxation (1,018) (1,343) (1,556) (1,760)Minorities + preferences (100) (109) (126) (143)Attributable profit 2,883 3,521 4,081 4,618 Core earnings 2,883 3,521 4,081 4,617
Balance sheet summary (IDRbn)
Ordinary equity 18,450 20,210 22,251 24,559Customer loans (Net) 79,931 95,943 114,605 136,698Investment in securities 8,277 8,184 8,128 8,110Customer deposits 79,643 91,589 105,328 121,127Debt issued 0 0 0 0Interest earning assets 97,804 113,780 134,182 158,428Interest bearing liabilities 94,638 109,862 129,310 152,420Total assets 118,207 135,796 157,956 184,118
Capital (%)
RWA (IDRbn) 96,939 115,427 139,001 156,500Core equity Tier 1 15.1 14.2 13.2 13.2Tier 1 15.1 14.2 13.2 13.2CAR 16.0 15.0 13.9 13.8
Per share data (IDR)
Core EPS 343.66 419.67 486.36 550.26 Core diluted EPS 337.03 411.57 476.98 539.64 DPS 171.83 209.83 243.18 275.13 NTA 2,085.60 2,295.44 2,538.62 2,813.74 BV 2,198.92 2,408.76 2,651.94 2,927.06
Valuations (x)
PE 19.4 15.9 13.7 12.1Pre-provision multiple 8.2 6.9 5.9 5.2P/NTA 3.1 2.9 2.6 2.3P/BV 3.0 2.7 2.5 2.2Dividend yield (%) 2.6 3.2 3.7 4.2
Price relative
938
1938
2938
3938
4938
5938
6938
7938
2009 2010 2011 2012
938
1938
2938
3938
4938
5938
6938
7938
Bank Danamon Indonesia Tb Rel to JAKARTA S E COMPOSITE
Source: HSBC Note: price at close of 16 Mar 2011
Financial ratios and assumptions (%)
Year to 12/09a 12/10e 12/11e 12/12e
Gross yield 15.86 16.31 16.14 15.91Cost of funds 5.04 5.42 5.45 5.50Net interest margin 11.05 11.08 10.88 10.61Non-int inc/operating inc 28.2 27.8 28.2 28.2Gross loans/deposits 103.8 108.3 113.0 117.9Cost/operating income ratio 51.9 50.6 50.8 51.3Cost/average assets 6.7 6.5 6.5 6.5Net provision/ avg net loans 3.0 2.9 2.8 2.8Gross NPLs/loans 3.7 2.5 2.3 2.3Coverage 88.8 130.8 161.4 186.6Effective tax rate 25.4 27.0 27.0 27.0Core ROA 2.66 2.77 2.78 2.70Core ROE 16.8 18.2 19.2 19.7
Growth (Y-o-Y, %)
Earning assets 16.4 16.3 17.9 18.1 Total assets 19.9 14.9 16.3 16.6 Gross loans 30.6 20.0 20.0 20.0 Deposits 18.5 15.0 15.0 15.0 Net interest income 4.6 16.7 15.1 15.1 Non interest income 23.9 14.5 17.4 15.0 Operating income 9.4 16.1 15.7 15.1 Total cost 2.1 13.3 16.1 16.1 Provision charges (9.9) 21.0 17.2 18.0 Pre-provision profit 18.4 19.1 15.3 14.0 Core PBT 39.2 24.3 15.9 13.1 Core net profit 41.6 22.1 15.9 13.1 Core EPS 41.6 22.1 15.9 13.1 DPS 88.2 22.1 15.9 13.1 BVPS 16.7 9.5 10.1 10.4
ROE Decomposition
Net Interest Income 9.27 9.23 9.18 9.08 Non-Interest Income 3.63 3.55 3.60 3.56 Operating Income 12.90 12.78 12.79 12.64 Operating Expenses (6.69) (6.47) (6.50) (6.48)PPoP 6.21 6.31 6.29 6.16 Provisions (1.94) (2.00) (2.03) (2.05)Non-op items (0.58) (0.39) (0.34) (0.29)Op Inc before Tax 3.69 3.92 3.92 3.81 Taxation (0.94) (1.06) (1.06) (1.03)Minorities & pref div (0.09) (0.09) (0.09) (0.08)Attributable profit 2.66 2.77 2.78 2.70 Leverage 6.3x 6.6x 6.9x 7.3xROE 16.8 18.2 19.2 19.7
Issuer information
Share price (IDR) 6,550 No of shares (m) 8,415 HSBC PT (IDR) 4,700 Market cap (IDR bn) 55,119 Rating Underweight Market cap (USD m) 6,285 Free float (%) 32% Bloomberg (Equity) BDMN IJ6M ADV (USDm) 4.4 Reuters (Equity) BDMN.JK FSSTI weight (%) 1.7Source: Company, HSBC Prices as of market close 16 Mar 2011
Financials & valuation: Bank Danamon Indonesia Tbk Underweight
渐飞研究报告 - http://bg.panlv.net
Economics - Data Reactions17 March 2011
Leif Eskesen | +6562390840 | [email protected]
View HSBC Global Research at:http://www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai BankingCorporation Limited Singapore Branch
IndiaThe Gradualist strikes again: RBI hikes rates by 25bpsAs expected, the RBI raised both the repo and reverse repo rates by 25bps. The hawkish statement emphasized the
upside risks to inflation from global commodity prices and demand-led price pressures. However, the statement also
noted emerging risks to growth, suggesting that they will continue with gradual rather than more aggressive tightening.
An additional 75 bps are expected by end-2011, with the next hike to be delivered during the second quarter.
Facts
As expected, the repurchase (repo) rate and reverse repo rates were both raised by 25bps to 6.75% and 5.75%, respectively.
The cash reserve ratio (CRR) was kept unchanged at 6%.
On the global economy, the statement was a bit more cautious compared to March. While highlighting the strong growth in
emerging markets and the pick up in momentum in the US and Europe, the statement noted that "the sharp increase in oil
prices as a result of the turmoil in the Middle East and North Africa is adding uncertainty to the pace of global recovery." It
also noted, in that context, that "the spike in oil prices has engendered inflation concerns."
On Japan, the statement points out that it is "too early to assess the macroeconomic impact of the natural disaster", but
"as normalcy is restored, expenditure on reconstruction may provide a boost to the economy." It further points out that
"substitution of thermal for nuclear energy in Japan may exert further pressures on petroleum prices."
On the Indian economy, the statement remains upbeat in light of strong high-frequency indicators. It takes note of the
"volatile" nature of the industrial production index, but goes on to say that "other indicators, such as the latest PMI, direct and
indirect tax collections, merchandise exports, and bank credit, suggest that the growth momentum persists." Lead indicators
for service sector activity are also seen as "robust." However, the statement notes the weak performance of capital goods
production in recent months and suggests that the "investment momentum may be slowing down."
Turning to inflation, the statement strikes a more concerned tone than last time, suggesting that "underlying inflation pressures
have accentuated" On food inflation, the RBI still points to elevated prices for protein rich foods and note upside risks to
inflation from "high international crude prices, their impact on freely priced petroleum prices, the increase in administered
coal prices, and the pick-up in non-food manufactured product prices." This was also reflected in the upward revision to their
March 2011 WPI forecast from 7% y-o-y last time to now 8%.
Interestingly, the statement also observed that "while the budgeted level of fiscal deficit for 2011-12 gives some comfort on
the demand front, a potential increase in subsidies on petroleum prices....could put pressure on expenditure. This, in turn,
requires "keeping aggregate [spending] under control" and "only by doing this can the fiscal situation contribute to demand-
side inflation management."
Interpretation
This was a widely expected move. The RBI continued the gradualist approach, 25 rather than 50 bps, given (i) growth
considerations, (ii) still tight liquidity in domestic money markets (expected to tighten temporarily later in March with advance
渐飞研究报告 - http://bg.panlv.net
HSBC Global Research
Economics - Data Reactions
17 March 2011
2
tax payments), and (iii) the flexibility afforded by the now twice-quarterly meetings. Also, RBI sounded a hawkish tone, as
part of its more deliberate verbal intervention strategy, to help manage inflation expectations.
The statement was indeed hawkish. The RBI would now appear even more concerned about the inflation outlook. They
are clearly worried that the elevated international commodity prices will both have direct and a second-order impact on
inflation. The statement was also more explicitly worried about core inflation, highlighting the significant uptick in non-food
manufacturing inflation in February and noting the "persistence of demand-side pressures." RBI also believes the liquidity
squeeze will ease in coming months.
Further to this, the RBI is concerned that they are going to fight a lonely battle against inflation. They are basically not
convinced that the FY 2012 budget in the end will do its bit in terms of demand management, adding to the challenge of
containing inflation. The RBI seems to believe, as do we, that the expenditure assumptions for subsidies are too optimistic and
that the budget could end up not being sufficiently tight if additional expenditures on subsidies are not countered by savings
elsewhere.
On balance, the statement points to further tightening. Of course, the statement notes the emergence "risks to growth," related
to the global environment and domestic investments. However, this will only translate into a gradual rather than an aggressive
tightening cycle. At the end of the day, inflation risks clearly remain the dominant concern, especially considering the current
dangerous cocktail of elevated food prices, rising international commodity prices and demand-led inflation pressures. It is
also important to keep in mind that monetary policy still remains highly accommodative, with current policy rates well below
neutral levels. We, consequently, continue to see the repo rate go to 7.5% by end-2011, translating into another 75bps in rate
hikes this year.
Bottom line: The 25bp hike was in line with expectations. This was another gradual move, but factoring also in the
hawkishness of the statement gives a better sense of how concerned RBI is about inflation. We believe another 75bps are
needed and the next hike is expected to come during the second quarter.
Leif Lybecker Eskesen, Chief Economist for India & ASEAN
Prithviraj Srinivas, Economics Associate
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abcGlobal Research
HSBC FI Research reiterates its recommendation to pay 1yr1yr INR OIS in anticipation of
increased rate hike premium and tightening liquidity conditions (India: OIS to underperform
bonds, 14 March). During its mid-quarter policy review on 17 March, the RBI announced a
25bp hike in repo/reverse repo rates, expressing the concern over the fuelling inflation. The
inflation forecasts for the March end were revised upwards from 7% to 8%, indicating the
higher inflation risks and the possibility of further rate hikes. Additionally, in the context of the
Japan crisis, the impact is more likely to be on the inflation side rather than the growth
prospects. Reconstruction activities and the search for alternative energy resources in Japan
could further intensify energy and commodity inflation in the region (Japan and Asia:
Implications for monetary policy, 16 March). HSBC Economics forecasts three more rate
hikes totalling 75bp over next nine months. That said, 1yr1yr OIS is expected to price in the
increased rate hike premium and liquidity tightening expectations (Figure 1).
Liquidity conditions normalised for a brief period in March due to increased government
spending and the absence of Government of India (GOI) bond supply (Figure 2). However,
overnight rates moved higher by around 60bp over past week as re-tightening was caused by
the FY-end tax outflows. Moreover, the commencement of GOI supply and Oil and Natural
Gas Corp. FPO (eINR120bn) in April is likely to keep liquidity in the deficit zone.
17 March 2011
André de Silva, CFA Strategist The Hong Kong and Shanghai Banking Corporation Limited HK +852 2822 2217 [email protected]
Virgil F Esguerra Strategist The Hong Kong and Shanghai Banking Corporation Limited HK +852 2822 4665 [email protected]
Himanshu Malik Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
India: RBI review re-emphasizes elevated front-end OIS
Post RBI review update
Inflation appears more unrelenting post events in Japan
Discontinuation of rate tightening cycle seems unlikely
Overnight fixing to stay high as liquidity remains in deficit
Asia-Pacific Rates Strategy India
Flashnote
Figure 1. Insufficient rate hike premium in 1yr1yr INR OIS
Figure 2. Liquidity re-tightens after a temporary pause
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
%
50
100
150
200
bp
Repo rate (LHS)1yr1yr OIS -repo rate (RHS)
3
4
5
6
7
8
Mar-10 May -10 Jul-10 Sep-10 Nov -10 Jan-11 Mar-11
%
-2,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
INR
bn
Net RBI repos (RHS) 1yr INR OIS (LHS)Call rate (LHS) Repo rate (LHS)
Source: HSBC, Bloomberg Source: HSBC, Bloomberg
渐飞研究报告 - http://bg.panlv.net
Economics17 March 2011
Seiji Shiraishi | +81352033802 | [email protected]
View HSBC Global Research at:http://www.research.hsbc.com
Issuer of report: HSBC Securities (Japan) Limited
Japanese earthquakeTwo economic scenariosIt is obviously very difficult to quantify the impact of the Japanese earthquake on the country's economy at this stage.
Hence we are not making any formal changes to our forecasts. What we would like to do is set out two scenarios for the
rest of the year.
The first looks at the potential impact on the economy from extensive electricity supply disruptions. This is our main scenario
and would lead to a 0.5 percentage point fall in Japanese GDP this year, cutting growth from 1.4 per cent (our estimate before
the earthquake) to 0.9 per cent.
The second, more gloomy scenario, assumes a broader radiation contamination, affecting the Tokyo metropolitan area. This
scenario could cut GDP by 1 percentage point this year, pegging growth back to 0.4 per cent.
The earthquake can affect the Japanese economy in a number of ways, including:
1) Lower production due to damage to factories.
2) Weaker economic growth because of electricity supply shortages
3) Deteriorating consumer and business sentiment leading to slower consumer spending and capital investment.
We will focus on (2) as our main scenario.
Main scenario - 0.9 per cent Japanese growth this year, down 0.5 percentage points from our pre-quake estimate.
This envisages a negative impact on growth from electricity shortages in the second quarter, before an improvement in
electricity supply from Q3 and a positive impact from reconstruction efforts later in the year.
Blackouts have already begun as a result of the electricity disruption caused by the earthquake. According to news reports,
subway lines are running fewer trains, shops are closing early and offices are shutting off non-essential electricity.
Power supply capacity has fallen by a daily total of 16.25m kilowatts - 9.1m KW at the Fukushima nuclear plant and 7.15m
KW at thermal power plants. As a result, Japan has a current daily power supply capacity of about 31m KW, even adding
traded surplus electricity from electricity companies in other areas.
However, it is expected that electricity demand will be roughly 41m KW per day in early spring, meaning there will be 10m
KW shortage. That means demand will exceed supply by around 25 per cent - hence the need for blackouts in the coming
weeks.
The areas supplied by the Tokyo Electricity Company (Tepco) account for about 40 per cent of Japanese GDP. If we assume
that electricity consumption and GDP are closely linked and the 25% demand cut continues until the end of April, the
blackouts and associated disruption to industrial production will cut GDP by 5% in March ( 40%×25%×0.5 month) and by
10% in April (40%×25%×1 month). This will lower annual GDP by about 1.25 percentage points (-15÷12).
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HSBC Global Research
Economics
17 March 2011
2
However, we expect a number of mitigating effects:
1) Tepco believes it can solve the electricity shortage problem by the end of April(*). It is planning to add 4m KW of thermal
power capacity by restoring half of the damaged capacity. Also, it is trying to restart thermal power plants which are now
inactive.
2) Most of Tokyo's 23 wards - where economic activity is concentrated - are not affected by the planned blackouts.
3) Factories in Central and Western Japan can increase production as companies still have overcapacity.
(*The impact on GDP of each incremental month of delay in electricity supply recovery ( of 25% of electricity demand) is
about 0.3%. )
Moreover, while the economy could shrink 0.2% in Q2, when the earthquake impact is felt most, we believe it will return to
growth in July-September as demand from reconstruction investment emerges.
There should also be a boost from external demand, given low interest rates in most developed markets and strong economic
growth in many parts of Asia.
For the record, after the Kobe earthquake on January 17, 1995, production and exports plunged. But production was back to
pre-earthquake levels in February and exports back in March. That is because production was smoothly moved from the quake-
hit area to other regions.
Downside risk scenario - 2011 GDP falls to 0.4%, 1 percentage point down from our earlier forecast
Financial markets were shocked by the news that radiation levels had shot up in Tokyo earlier this week, following the nuclear
accident at the Fukushima nuclear plant. If radiation levels continue to rise in the metropolitan area, it is highly likely that
domestic demand will be hit by slower economic activity and deteriorating sentiment due to falling stock prices. For instance,
if Tokyo, which accounts for 18% of the total GDP, falls by half as a consequence of the disaster for six week, that equates to
a 9% loss of Japanese GDP for six weeks assuming no knock on effects to other regions (a big if)....and if you annualize that,
you end up with a little more than a 1% loss for the year as a whole. Any positive impact from recovery-related projects would
be offset.
Policy response
Further additional easing by the Bank of Japan is possible. At its monetary policy meeting on March 14, the BoJ decided to
expand the funds for asset purchases by 5 trillion yen to 40 trillion. It also announced that it would provide ample funds to
meet demand in financial markets.
The BoJ indicated it was ready to act again if downside risks intensified. An additional expansion of the funds for asset
purchases would be the main option. If share prices plunged, we do not think the BoJ would hesitate to expand the funds for
further asset purchases. The allocation would depend on the economic and market conditions at the time.
Recovery costs
The total cost from damage to buildings and transport from the Kobe earthquake was around JPY9.6 trillion (about 2% of
nominal GDP). The government formed three supplementary budgets and spent JPY3.38 trillion in 1995 and 1996 to assist the
recovery. This time, total damages and the budget for the recovery are likely to be larger.
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First Light Asia 18 March 2011
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Disclosure appendix Important disclosures
Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
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Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
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Rating distribution for long-term investment opportunities
As of 17 March 2011, the distribution of all ratings published is as follows: Overweight (Buy) 50% (23% of these provided with Investment Banking Services)
Neutral (Hold) 36% (21% of these provided with Investment Banking Services)
Underweight (Sell) 14% (20% of these provided with Investment Banking Services)
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