Switch focus to the small wonders Rating (151 HK) Buy ...asiaresearch.daiwacm.com/eg/cgi-bin/files/China... · China Consumer Staples What's new: We are cutting 2016-17E EPS for 9

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China Consumer Staples

What's new: We are cutting 2016-17E EPS for 9 of the 12 China

Consumer Staples companies by 2-33%. On our new numbers, the stocks

under Daiwa coverage are trading at PER discounts to international peers

(16x 2016E PER vs. 21x), despite the peers having slower EPS growth

(9% vs. 16% for packaged food companies, per Bloomberg). We believe

this disparity indicates the risk of an EPS growth slowdown for the China

players is priced in. In 2016E, we expect: 1) the revenue of most staples

players to slow further YoY from a relatively high base, and 2) gross-margin

expansion to slow as cost tailwinds ease. We remain Neutral on the sector.

What's the impact: Shift from big to small, old to new. We cut 2015-

17E revenue for 11 of the 12 companies by 1-14%, due mainly to: 1) shifts

in market share and channels, which often favour small players with new hit

products and foreign brands, and 2) a high consumption base for items like

beer and noodles, which means that market-share leaders can no longer

rely on their strengths (traditional distribution networks, dominant shares in

key categories), whereas small players are well placed because of their

flexibility in product launches. For example, we forecast Vinda to see a

revenue CAGR of 23% over 2015-17 due to its increasing exposure to

online channels, as well as acquisitions, vs. a flat (0%) CAGR for Hengan.

Cost tailwinds to subside: We still expect slight gross-margin expansion

for most of the staples downstream companies in 2016E (up <1pp YoY),

driven mainly by product-mix changes. Our growth forecasts are much

weaker than the surge seen in 2015E (2-4pp), as we believe some

commodity costs will rebound from a low base. At the same time, the weak

CNY:USD will likely weigh on companies with large proportions of USD

debt and/or imported raw materials. Hengan and Vinda have the most USD

exposure in terms of their COGS (30-60%).

What we recommend: We like relatively small companies with the potential

for revenue growth on market-share gains and/or product-mix

improvements. Hence, we upgrade Uni-President China (UPCH) (220 HK,

HKD5.20) to Buy (1), from Underperform (4); we also like Vinda (3331 HK,

HKD13.0, Outperform [2]). Want Want (151 HK, HKD4.96, Buy [1]) is our

sole Buy (1) among the large-cap staples companies (strong cash flow,

share buyback support). Meanwhile, we downgrade Hengan (1044 HK,

HKD67.75), Tingyi (322 HK, HKD9.07) and Fufeng (546 HK, HKD2.61) to

Hold (3) on price competition and potentially slow volume growth.

How we differ: Our 2016-17E revenue and EPS are 1-9% and 2-39%,

respectively, lower than consensus, reflecting our concern about market-

share losses among the big players, and our bearish CNY assumptions.

26 January 2016

China Consumer Staples Sector

Switch focus to the small wonders

With cost tailwinds likely to ease in 2016, we recommend focusing on fast-growing categories and premium products

We prefer small companies with revenue upside (“Davids”) over giants that can’t respond quickly to changing market dynamics (“Goliaths”)

Buy selectively: we like Vinda and upgrade UPCH to Buy (1); we downgrade Hengan, Tingyi and Fufeng to Hold (3)

Key stock calls

Source: Daiwa forecasts

Daiwa’s China Staples Sector coverage

Recommendation

The Davids

Vinda Outperform (2)

Modern Dairy Buy (1)

Huishan Sell (5)

Uni-President China Buy (1)

The Goliaths

Hengan Hold (3)

Mengniu Hold (3)

Tingyi Hold (3)

Tsingtao Underperform (4)

China Resources Beer Hold (3)

Fufeng Hold (3)

The Somewhere in betweens

Want Want Buy (1)

WH Group Outperform (2)

Source: Daiwa

Anson Chan, CFA(852) 2532 4350

[email protected]

New Prev.

Uni-President China (220 HK)Rating Buy Underperform

Target 6.20 7.00

Upside p 19.2%

Vinda International (3331 HK)Rating Outperform Outperform

Target 14.30 17.40

Upside p 10%

Want Want China (151 HK)Rating Buy Buy

Target 7.30 8.50

Upside p 47.2%

Hengan International Group (1044 HK)Rating Hold Outperform

Target 66.00 87.00

Downside q 2.6%

Tingyi Cayman Islands (322 HK)Rating Hold Outperform

Target 9.60 12.90

Upside p 5.8%

2

China Consumer Staples Sector: 26 January 2016

Sector stocks: key indicators

Source: Bloomberg, Daiwa forecasts

Daiwa’s China Staples Sector coverage: the Davids, the Goliaths, and the somewhere in-betweens

Recommendation Product Revenue YoY% Gross profit margin %

2015E 2016E 2017E 2015E 2016E 2017E

The Davids

Vinda Outperform (2) Tissue paper and personal hygiene products 18.0% 31.0% 16.2% 31.5% 32.1% 32.1%

Modern Dairy Buy (1) Raw milk and dairy products -0.9% 8.5% 7.8% 34.4% 35.5% 40.6%

Huishan # Sell (5) Raw milk and dairy products 13.9% 24.3% 13.8% 57.5% 55.9% 56.5%

Uni-President China Buy (1) Instant noodles and bottled drinks 5.1% 8.0% 4.9% 35.4% 36.2% 36.1%

The Goliaths

Hengan Hold (3) Tissue paper and personal hygiene products 2.0% -0.8% 1.1% 48.8% 49.5% 49.3%

Mengniu Hold (3) Dairy products -1.9% 3.7% 2.5% 32.2% 31.2% 31.5%

Tingyi Hold (3) Instant noodles and bottled drinks -9.4% 0.6% 2.5% 32.5% 32.3% 32.8%

Tsingtao Underperform (4) Beer -3.3% -4.2% 1.4% 31.4% 32.0% 32.7%

China Resources Beer Hold (3) Beer n.a. 3.8% 4.5% 34.6% 35.8% 36.4%

Fufeng Hold (3) MSG 4.1% 9.4% 1.0% 16.2% 14.7% 15.5%

The Somewhere in betweens

Want Want Buy (1) Snacks, dairy products -6.5% 6.1% 6.9% 43.6% 43.9% 43.8%

WH Group Outperform (2) Fresh and processed pork -1.0% 6.1% 5.4% 15.9% 15.6% 15.6%

Source: Daiwa forecasts Note: #FY16-18E numbers for Huishan as the company’s year-end is on 31 March

China Consumer Staples Sector: contribution of commodities to 2016E COGS (downstream) and revenue (upstream) (%)

Industry Snacks/

Soft drinks and noodles Dairy products Brewery Personal-care products Packaged meat dairy beverage

Company Want Want Tingyi UPC Mengniu Huishan Modern Dairy Tsingtao/CRB Hengan Vinda WH Group

Locally sourced /sourced in non-USD currencies

Palm oil <2 7 7

Flour <3 8 8

Sugar 5 5 5 3-5%

PET chips <5 30 30 <10 <5%

Pork

China: 70-80% of COGS

Raw Milk <3

30-40 ~30% of revenue

~80% of revenue

Corn

Feed: 70% of upstream operation

Sourced overseas

Milk powder 15%

10%

Wood pulp – short fibre

~10-15% 50-60%

Wood pulp – long fibre

Source: Daiwa estimates

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

China Huishan Dairy Holdings 6863 HK 2.95 Sell Sell 1.87 1.60 16.9% 0.055 0.056 (1.9%) 0.073 0.088 (17.9%)

China Mengniu Dairy 2319 HK 11.08 Hold Hold 11.70 14.50 (19.3%) 0.663 0.695 (4.5%) 0.636 0.752 (15.4%)

China Modern Dairy Holdings 1117 HK 1.45 Buy Buy 3.00 3.30 (9.1%) 0.126 0.156 (19.5%) 0.172 0.214 (19.6%)

China Resources Beer 291 HK 12.30 Hold Hold 12.40 13.40 (7.5%) 0.361 0.399 (9.6%) 0.530 0.517 2.5%

Fufeng Group 546 HK 2.61 Hold Buy 2.55 5.00 (49.0%) 0.241 0.254 (5.0%) 0.260 0.348 (25.1%)

Hengan International Group 1044 HK 67.75 Hold Outperform 66.00 87.00 (24.1%) 3.487 3.742 (6.8%) 3.675 4.195 (12.4%)

Tingyi Cayman Islands 322 HK 9.07 Hold Outperform 9.60 12.90 (25.6%) 0.067 0.069 (3.9%) 0.069 0.079 (12.4%)

Tsingtao Brewery 168 HK 28.80 Underperform Underperform 26.80 32.00 (16.3%) 1.211 1.305 (7.2%) 1.191 1.330 (10.4%)

Uni-President China 220 HK 5.20 Buy Underperform 6.20 7.00 (11.4%) 0.195 0.197 (0.9%) 0.232 0.219 6.2%

Vinda International 3331 HK 13.00 Outperform Outperform 14.30 17.40 (17.8%) 0.479 0.641 (25.3%) 0.570 0.851 (33.1%)

Want Want China 151 HK 4.96 Buy Buy 7.30 8.50 (14.1%) 0.042 0.046 (9.7%) 0.050 0.054 (7.8%)

WH Group 288 HK 4.40 Outperform Outperform 4.80 5.50 (12.7%) 0.042 0.041 1.8% 0.056 0.054 2.6%

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2

3


Table of contents

2016: the year when strengths become weaknesses ............................................ 4

Big players are likely to underperform this year..................................................................4

Prefer the Davids to the Goliaths ..................................................................................... 10

Cost tailwinds to subside .......................................................................................13

Cost trends turned neutral on gross margins ................................................................... 13

Impact of CNY depreciation – mainly on the debt side ..................................................... 18

Valuations and recommendations .........................................................................20

Rerating opportunity for selected stocks .......................................................................... 20

The Davids ...................................................................................................................... 22

The Goliaths .................................................................................................................... 24

The somewhere in-betweens ........................................................................................... 27

Risk ..................................................................................................................................... 28

Commodity prices – main risks, upside or downside ........................................................ 28

Downside ........................................................................................................................ 28

Company Section

Uni-President China ......................................................................................................... 29

Vinda International ........................................................................................................... 33

Want Want China ............................................................................................................. 37

China Modern Dairy Holdings .......................................................................................... 41

WH Group ........................................................................................................................ 46

China Resources Beer ..................................................................................................... 50

Hengan International Group ............................................................................................. 54

Tingyi Cayman Islands ..................................................................................................... 58

China Mengniu Dairy ....................................................................................................... 62

Fufeng Group .................................................................................................................. 66

Tsingtao Brewery ............................................................................................................. 70

China Huishan Dairy Holdings ......................................................................................... 74

4


2016: the year when strengths become weaknesses

We believe a combination of consumers’ changing preferences and macro headwinds led

to a slowdown in revenue growth (and in some cases declines in revenue) for the big

China staples players in 2015, and we see this situation persisting into 2016.

Amid cost normalisation, we think promotions in commodity-like segments such as UHT

milk and bottled water will weigh on companies’ gross margins in 2016E. Hence, we prefer

the small players, which we see as more nimble and quicker to adapt to changes in the

macro picture through product premiumisation and new business initiatives (eg, M&A and

from a low revenue base). By contrast, we believe the big players will struggle to expand

their top lines from a high base.

For example, we expect Modern Dairy’s gross margin to expand significantly over 2015-

17E despite its exposure to pricing risks, as we forecast an increasing revenue and profit

contribution from its downstream operation.

We show below our coverage universe split into 3 groups: the big players (the Goliaths),

the small players (the Davids), and then those in between. For the purposes of this report,

‘big’ means a company with a dominant or near-dominant market share and/or a national

presence with its distribution network. Among the Goliaths, we note that, since 2014,

revenue growth has turned negative or at best has been flat.

However, among the Davids, we see potential for even faster revenue growth and ASP

hikes (vs. the Goliaths) on the back of improving penetration and expanding production/

distribution scale. We think the Davids have also shown more flexible sales and marketing

strategies than the Goliaths, as evidenced by their accelerated revenue growth in 2015.

Our third group, those companies “somewhere in between”, are involved in a few sub-

segments (some fast-growing, others slow-growing) or are the leading players in

fragmented industries with low per-capita consumption.

Daiwa’s China Staples Sector coverage: the Davids, Goliaths, and somewhere in-betweens

Recommendation Product Revenue YoY% Gross-profit margin %

2015E 2016E 2017E 2015E 2016E 2017E

The Davids

Vinda Outperform (2) Tissue paper and personal hygiene products 18.0% 31.0% 16.2% 31.5% 32.1% 32.1%

Modern Dairy Buy (1) Raw milk and dairy products -0.9% 8.5% 7.8% 34.4% 35.5% 40.6%

Huishan # Sell (5) Raw milk and dairy products 13.9% 24.3% 13.8% 57.5% 55.9% 56.5%

Uni-President China Buy (1) Instant noodles and bottled drinks 5.1% 8.0% 4.9% 35.4% 36.2% 36.1%

The Goliaths

Hengan Hold (3) Tissue paper and personal hygiene products 2.0% -0.8% 1.1% 48.8% 49.5% 49.3%

Mengniu Hold (3) Dairy products -1.9% 3.7% 2.5% 32.2% 31.2% 31.5%

Tingyi Hold (3) Instant noodles and bottled drinks -9.4% 0.6% 2.5% 32.5% 32.3% 32.8%

Tsingtao Underperform (4) Beer -3.3% -4.2% 1.4% 31.4% 32.0% 32.7%

China Resources Beer Hold (3) Beer n.a. 3.8% 4.5% 34.6% 35.8% 36.4%

Fufeng Hold (3) MSG 4.1% 9.4% 1.0% 16.2% 14.7% 15.5%

The somewhere in betweens

Want Want Buy (1) Snacks, dairy products -6.5% 6.1% 6.9% 43.6% 43.9% 43.8%

WH Group Outperform (2) Fresh and processed pork -1.0% 6.1% 5.4% 15.9% 15.6% 15.6%

Source: Daiwa Note: #FY16-18E numbers for Huishan as the company’s year-end is on 31 March

Big players are likely to underperform this year

Challenging conditions for big players to realise revenue growth

In a fast-growing economy and consumer market like China, it is natural for the revenue

growth of large companies with significant market shares (say, 25-50%) to track the

revenue growth of the broader sector. At the same time, given the high bases for

comparison, it becomes ever more difficult for giant companies to expand their revenue

Most staples categories

in China have seen flat

revenue, if not YoY

declines, since 2014

5


bases. As we see it, the sector is now at a point where revenue momentum can no longer

be driven by market-share gains or growth in per-capita consumption. Price cuts or

promotions cannot contribute significant growth for most segments, in our view, due to the

high base in 2015 the big companies are up against.

As illustrated in the exhibits below, China’s per capita consumption of items such as beer

and noodles already exceeds the global average. Moreover, sales volumes in both

categories have declined in each of the past 2 years. For other categories, including wine,

China’s per-capita consumption is still less than half of the global average. Indeed, even in

the developed US market, wine consumption saw a 20% CAGR over 2013-15E.

Per capita consumption: China vs. global average China: industry sales growth by segment (2012-15)

China Global average Japan US

Wine (litre) 1.2 3.4 2.7 10.3

Beer (litre) 35.3 28.0 43.0 77.0

Noodles (packs) 31.7 14.7 43.3 13.3

Dairy (kg) 28.9 110.7 58.0 100.0

Snacks (USD) 40.4 54.5 n.a. 242.9

Tissue paper (kg) 4.7 4.5 15.0 22.0

Source: Daiwa estimates, Bureau of Statistics, World Instant Noodles Association, AC Nielsen

Source: Beer: Bureaus of Statistics, Others: AC Nielsen

Note: *1H15 data for Juice/tea, 9M15 data for beer and noodles

In our view, the big players used to be able to leverage their scale to grow their revenue

and profits rapidly. But now that consumption growth in key categories has slowed, and

because consumer tastes in terms of products and purchase methods are changing, the

Goliaths face an uphill struggle to realise the kind of revenue momentum they have seen in

the past 5 years.

Below we highlight several changes that we believe will favour smaller or niche players,

given their smaller revenue bases and greater flexibility to adapt to new market dynamics.

Changing battlefield

Distribution channels

According to China’s National Bureau of Statistics, online retail sales were up 35% YoY for

the period January-November 2015, vs. a rise of 10.6% YoY for total retail sales. For the

same period, sales of fast-moving consumer goods (FCMG), which we consider to

comprise largely staples, grew slowly by below 5% YoY, on our estimates, albeit from a

lower base.

According to a report by Bain & Co and Kanta Worldpanel, international consultancies with

a focus on the consumer industry, overall FMCG revenue in China in 2014 was up 5.4%

YoY and the rise was mainly price-driven. By contrast, online sales expanded by 38% YoY

in the same year, which suggests that some consumers have shifted their buying from

physical stores to online channels. Further, Bain forecasts the online segment to contribute

25% of FMCG sales in China by 2025E, which implies that online sales will grow 20%

faster than offline sales on an annualised basis.

Although the offline segment looks set to remain the major retail channel for FMCG in the

future (in developed economies like the UK and Korea, offline retail accounts for around

90% of FMCG revenue), online retail has become an important growth engine. In turn,

FMCG products and staples companies are likely to continue increasing the resources and

focus they devote to the online channel. By extension, we believe that companies’ existing

(10)

(5)

0

5

10

15

20

2012 2013 2014 9M/1H15*

Beer Noodles Juice-drinks Bottled tea Liquid milk

YoY%

Revenue growth looks

difficult for the big

players given a high

base

6


strengths in the traditional channel will be less effective in driving revenue growth and

defending their market share going forward.

Staples items now sold online in China include infant formula (>15% of total sales in China

by channel) and nappies/diapers (>30%), relatively high-value products (per item) for

which international brands tend to be the most popular. But we are also seeing rapid

growth in online revenue for daily-use items such as tissue paper (less than 5% YoY

growth by volume in hypermarket channels in 2015, vs. 20%-plus growth online, on our

estimates).

We believe the disparity in sales growth between online and offline channels will continue,

underlining the need for staples brands to expand their presence online. On our estimates,

most of the staples companies under our coverage currently derive less than 3% of their

revenue from online platforms. The one exception is Vinda, which derived 10% of its

revenue from online retail channels in 1H15.

In 2016E, we believe revenue growth from online platforms for personal hygiene products

will outpace that for other staples segments, since consumers seem to have adapted

quickly to buying such products online.

FMCG: online market share by country China FMCG: market share by channel

Source: Kanta Worldpanel Source: Kanta Worldpanel

Demographics

Consumers are still price-sensitive, but many are now starting to consider food quality,

safety and taste when purchasing FMCGs. As shown below, the income levels of urban

citizens increased by a 13% CAGR between 2004 and 2014 (10% on an inflation-adjusted

base), showing real consumption power increased. Moreover, the dependency ratio also

declined to 36% in 2014 from 41% in 2004 according to government statistics, meaning

that the new consumption class (from students to working class) has more money than

their parents did to spend on themselves.

China: income levels – 10 years ago vs now, adjusted for CPI Chine: no. of households by monthly income (CNY 000)

Source: : Bureau of Statistics, Daiwa estimate Source: Boston Consulting Group report

1.6 2.2

15

0

5

10

15

20

25

30

35

2012 2014 2025E

China France Korea UK

0%

20%

40%

60%

80%

100%

2012 2013 2014

Other Convenience store

Grocery stores Hypermarket

Supermarkets and minimarts E-commerce

0

10

20

30

40

50

0

10,000

20,000

30,000

40,000

50,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Annual salary of urban employee (inflation-adjusted)

Dependency ratio (RHS)

CNY %

6 2160

0

100

200

300

400

500

2014 2020E 2030E

Affluent (>23) Upper middle ( 12- 23)Middle ( 8 - 12) Emerging Middle ( 5 -8 )Aspirant (2.8 - 5) Poor <2.8

Chinese consumption

power is still growing

7


During 2H15, we met the managements of a number of consumer companies across

different segments – packaged food, beverages, sportswear distribution, personal care

products, etc. Many of them said they had developed a product mix and marketing

strategies to target the top 20-30% of the household/income class. We note that Tingyi and

UPCH launched new products in high-end categories in 2Q-4Q15 (at retail ASPs at least

20% above their mass-market products). Their new products have also focused on the

value of nutrients and health (eg, MSG free instant noodles, sugar-free tea, nectars, etc).

Faster category shift and shorter product life cycle

However, the life cycles for new products are becoming shorter, a trend that is particularly

obvious for beverage products. Over the past 5 years, we have seen revenue growth for

pear juice accelerate and then slow down (up 50% YoY in 2012, then flat/declining over

2013-15), the market size for milk tea almost double (revenue rising by 82% YoY for 2012,

falling to 9% YoY in 2013), and revenue growth for room temperature yoghurt drinks rise by

more than 100% pa over 2011-13, then slow to 35% in 2014. In other words, these new

beverage categories experienced fast revenue growth within the first 2-3 years of launch,

but most saw revenue growth slow significantly, or even reverse to a decline, thereafter.

For new beverage categories, it’s easier for newcomers and small players to compete

against the big players as new and niche markets are fast-growing and have few historical

price-reference points. We observe that, in the past 5 years, it has not usually been the

No.1 player in the market that has launched a new niche product that has seen fast

revenue growth. For example, milk tea and room-temperature yoghurt drinks were

launched by 2nd

or lower ranked players, like UPCH and Bright Dairy (600597 CH, not

rated), with less than 20% nationwide market share.

We believe big players are less keen to launch new flavours for fear of them causing

product cannibalisation (ie, leading to a sales shift among different divisions rather than

gaining market share from competitors. For example, Mengniu’s sales growth for its

premium UHT milk and room temperature yoghurt in 1H15 was largely offset by the sales

decline for milk beverages as well as mass market UHT milk). Even if a big player

launches a new product successfully and posts fast revenue growth initially, the impact on

the company’s revenue and profit is likely to be lower than that for a small player due to the

bigger company’s higher revenue base.

China: beverage consumption breakdown 2010 vs. 2012 vs. 2014

China: growth rates of various “start products” (2011-15)

Source: AC Nielsen, Tingyi Source: Companies, Daiwa estimates Note: Juice-drinks – estimated from Tingyi financials; Milk tea/Laotan noodles: from UPCH, Hot-

kid milk – Want Want. Room-temperature yoghurt: Bright Dairy numbers

Price promotions not effective in driving bottom lines

Due to the distribution and production scale advantages of the Goliaths, they usually enjoy

lower production costs (as a result of economies of scale, bulk purchases of raw materials,

etc.) and are more keen on price cuts to promote sales volumes (reference Hengan’s

reduction of its tissue paper prices in 2014; Tsingtao’s expansion in the mass-market

segment since 2013 by selling more mid-to-low end sub-brand products). However, since

19.1 16.9 15.5

30.9 31.2 33.1

28.523.6 22.1

1817.8 15.4

3.5 10.5 13.9

0%

20%

40%

60%

80%

100%

2010 2012 2014

RTD tea Bottled water

carbonated drinks Juice

Sportsdrink, herbal tea and others

(50%)

0%

50%

100%

150%

200%

2011 2012 2013 2014 2015E

Juice-drinks Hot-kid milk

Milk tea Room-temperature yogurt

Laotan noodles

New products can attract

new customers but also

lead to cannibalisation

Price cuts offset volume

growth and lead to

gross-margin pressure

8


the beginning of 2015, price competition does not seem to have been such an effective

tool for gaining market share, as evidenced by Hengan and Tsingtao’s YoY revenue

declines in 1H15.

We believe that health consciousness, variety and image are now important factors

determining consumer purchases, as affordability of FMCG items increases (supported by

increasing income levels). Consumers seem willing to pay a premium if the products can

provide value such as quality, safety (eg, personal hygiene products) or are purchased at

high-profile locations (eg, entertainment clubs or high-end restaurants). Moreover, in some

categories like the dairy segment, the number of brands available to Chinese consumers

has expanded rapidly over the past 5 years due to dairy farms moving into downstream

production, and foreign companies aggressively promoting their products in China (in

particular through e-commerce). As a result, existing domestic players have not been able

to grow their sales volumes by cutting prices because many competitors have followed the

same strategy.

To follow are some trends we see in a variety of markets:

Rice crackers: in 1H15, Want Want’s rice cracker sales rose by 10% YoY, driven mainly

by gift packs (up 41% YoY) and core brands (up 8% YoY); while revenue for the sub-

brands, which are at least 30% cheaper than the core brands, was up only 5% YoY. We

believe consumers continue to favour Want Want’s core brand products due to their better

quality and brand image, in particular if they are purchased as gift items.

Dairy: for both Yili and Mengniu, their premium UHT milk products and star product sales

exceeded their total revenue growth in 1H15. Those products’ ASPs are at least 50%

above mass-market product prices, but they are perceived to have better nutrient value.

According to Frost and Sullivan, high-end UHT milk retail sales in China will reach

CNY89bn by 2017E, representing a 3-year CAGR of 21% (vs. 5% for mass-market

products) and the revenue contribution of high-end UHT milk to the total UHT market will

reach 45% in 2017E, from 31% at present.

Want Want: rice cracker sales YoY – sub-brands vs. core brands (1H15)

China: premium UHT milk sales vs. mass-market sales

Source: Want Want Source: Frost and Sullivan

Bottled water: We believe Tingyi’s loss of bottled water market share since 1Q15 is

evidence of consumers’ increasing awareness of brand image and the difficulty of

companies remaining competitive on price alone. According to AC Nielsen, Tingyi’s bottled

water market share slid by 2pp YoY in 1Q15, when it raised its bottled water retail ASP by

about 20% (from CNY1 for a 500ml bottle, the cheapest national brand we found in the

market, to CNY1.2, in line with most peers, based on our estimates). Although Tingyi at the

same time has increased the weight of its bottle to make it look more high-quality, and

rebranded the product “Youyue” (meaning excellent and joy, in English), we believe Tingyi

has long been regarded as a cheap brand in the eyes of consumers due to its below-peer

pricing since launching its bottled-water product in 2004. In our view, it will take more effort

on the part of the company to step up its advertising and marketing to build brand loyalty.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Core brands Gift brands Sub-brands

YoY

64.9 71.3 76.1 78.9 92 97 103 109.7 116 121.7 126.9 131.112.2 16.1 17.9 20.829 34.6 41.7

50.661.2

73.889

107.2

0

50

100

150

200

250

300

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

Mass market Premium

CNY bn

Brand loyalty has

become a more

important factor in

beverage purchasing

decisions

9


Tingyi: market share (%) and revenue (USDm) of bottled water segment

Source: Company

International brands more attractive than local brands, mainly in personal-care products

According to Kantar Worldpanel, most domestic players gained market share in major F&B

categories in China in 2014. We believe that since 2014 domestic players have been, and

are still, responding more quickly than international players to adapt to changes in local

preferences and to accommodate the appetite of Chinese consumers. Exceptions include

beer (which we believe is due to ABInBev’s successful penetration of the high-end market

segment in China), instant noodles (from a low base) and chocolate (more imported goods

available).

Foreign players though have gained market share in personal-care products, particularly

facial and toilet tissue. Foreign brands also gained share in the baby diaper market in

2014, according to Euromonitor, while Hengan (the biggest domestic player) lost market

share. The Japanese players seemed to take market share in sanitary napkins in 2014

(around 7%) albeit at a gradual pace – Unicharm’s market share was up 0.8pp YoY to

5.7% in volume terms, slightly faster than market leader Hengan.

We attribute the better performance of foreign brands in personal care products than in

F&B items to: 1) their production technology and raw-material quality (Japanese brands in

particular) being perceived as better than domestic peers’; consumers are more concerned

about quality (convenience and hygiene) than prices in those products, and 2) lower

logistical costs (smaller size and lower weight of diapers and sanitary napkins vs. F&B)

which makes personal care products high-margin and frequently purchased products for e-

commerce retail platforms. For staples companies to ride on that trend they would need to

cooperate with strategic investors/JVs to introduce foreign products in China, in particular

personal hygiene products.

We believe Vinda has been aggressively promoting its premium foreign brand, Tempo,

after obtaining its licensing and distribution rights in China in 2013, while Hengan has not

sought any international partnership yet. While both Davids and Goliaths can seek co-

operation with international partners, there have been successful cases for Goliaths in the

past 2 years (eg, both Tingyi and Tsingtao ended their co-operation with Japanese partners

in 2015).

20%22% 22%

19%18% 18%

19%

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

Revenue Market share

USD m

10


International brands: market-share changes (2014)

Foreign brands are

gaining market share in

beer, chocolate and

instant noodles, as well

as personal care

products

Source: Kanta Worldpanel

Prefer the Davids over the Goliaths

In consideration of the above demographic and consumption pattern changes, we prefer

the Davids (small players) to the Goliaths (big players) in most staples sub-segments, as

we believe it is easier for the Davids to grow revenue (volume) from a low base compared

with the Goliaths. In our view, it is difficult for Goliaths to leverage on their past strengths

(eg, strong traditional channels, cost advantage, etc.) to grow revenue or expand gross

margins, as many are already operating amid optimal conditions (in terms of utilization

rates, cost reduction through bulk-purchases, etc.). We discuss below what Goliaths and

Davids are doing.

The Goliaths’ strategy – co-operation with foreign players

In our opinion, the Goliaths need to think about how to tap their existing assets (consumer

bases, brands and networks) by finding new revenue sources, such as new product

categories (through partnerships with foreign brands or in-house development), upgrading

their existing products (for higher ASPs and gross margins) or engaging in more R&D in

order to reduce costs. Some examples are shown below.

Tingyi formed JVs with a number of foreign players (Calibee, Wakado and Prima) in 2013

to launch snacks and other new products. Tingyi eyed the product development and brand

recognition of those partners overseas and wanted to distribute such new products by

leveraging on its own distribution network in China. However, all those JVs still contribute

less than 2% of the company’s revenue at present based on our estimates, and Tingyi

terminated one of the co-operation agreements (with Calibee) in 4Q15, as it had remained

unprofitable for years and Calibee wanted to seek other opportunities to grow in China.

Tsingtao formed a JV with Suntory in 2013 to expand in eastern China. Suntory is

responsible for production and Tsingtao for distribution and marketing. However, Suntory

sold its stake in the JV to Tsingtao in 4Q15 after years of loss-making, leaving Tsingtao

with the losses to deal with.

Mengniu formed a JV with strategic investor Danone in 2014 to develop yoghurt and other

cold-chain products in China. We estimate Danone’s yoghurt products gained 1pp market

share for Mengniu in 2015E and helped upgrade Mengniu’s production technology and

brand recognition. In December 2015, Yashili (1230 HK, not rated), Mengniu’s infant

formula subsidiary, also announced that it planned to acquire Danone’s infant formula

business in China for HKD1.2bn. However, we are cautious on Mengniu’s co-operation

with Danone in the infant formula business, as it is not an exclusive partnership. Danone is

developing an imported and premium infant formula brand, Nutricia, on its own in China,

and because of the non-exclusive nature of its partnership, Mengniu will not benefit from

the fast growth of this high-end infant formula segment.

2.1 1.8 1.6 1.6 1.3 1.2 1.20.2

-0.1 -0.2 -0.3 -0.6 -0.6 -0.9 -1 -1.1 -1.1 -1.4 -1.7 -1.8-2.4 -2.8 -3.1

-3.8 -3.8-4.8(6)

(5)(4)(3)(2)(1)

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Market share changes (%)

11


Want Want co-operated with Morinaga to launch pudding products in 1H15. We estimate

the products contribute only about 0.5% of the company’s revenue at present, but this

figure should expand further in 2016E.

The Davids’ strategy – niche products, new distribution channels

Davids – based on our observations, the Davids are more flexible and quicker in terms of

decision-making and responding to changes in the market. For example, in provinces or

cities where there are no direct distributors of their products, the Davids can make use of

the e-commerce channel without cannibalising the benefits of distributors, while big players

with national distributors may find it difficult to provide incentives for new (online)

distributors to promote products without jeopardising existing distributors. The risk of

cannibalization between old and new products is also lower for Davids due to their

relatively smaller product portfolios.

Vinda has been the No.1 household paper brand on the e-commerce platform in China

since mid-June 2015 (No. 3 in the total market). It has developed different packaging for its

online platform to differentiate these items from its offline items. E-commerce transactions

accounted for about 10% of its revenue in 1H15 (vs. <5% for its closest competitor,

Hengan) and were profitable. Moreover, competitor Hengan has low exposure to e-

commerce (3% of revenue in 2015E). With the acquisition impact, we expect Vinda’s

revenue growth to rise at a 23% CAGR over 2015-17E, on our forecasts, due to its

increasing exposure to online channels and acquisitions, vs. a flat (0%) CAGR for Hengan

over the same period.

Modern Dairy was a late-comer to the China dairy downstream market, launching its own-

branded products only in 2010 (pasteurized milk) on a small scale, followed by its first UHT

product in 2013. To differentiate itself from market leaders like Mengniu and Yili, Modern

Dairy focuses on premium products and selected regions only. The company also seldom

uses TV commercials for advertising and promotions. Modern Dairy has around an 8%

market share in the premium UHT milk market in China (AC Nielsen data in 3Q15), and its

downstream net margin (of 12%) is higher than the large players’ (6-10%), thanks to its

vertically-integrated model.

Vinda: revenue breakdown by channel Modern Dairy: revenue contribution from downstream

Source: Company, Daiwa estimates Source: Company, Daiwa forecasts

Uni-President China (UPCH) regained market share in instant noodles in China (from

around 11% in 2011 to ~18% in 2015E, according to AC Nielsen) through introducing new

flavours and categories (eg, Laotan pickled vegetable noodles, Soup Daren brand, etc.)

and had successfully turned the business around in 2H14. The company also launched a

number of new beverages in 2014-15 targeting the high-end market and consumers in top-

tier Chinese cities.

Want Want has a strong record of product diversification (>600 SKUs of snack items,

based on our estimates) and product development capability, such that it resembles a

group of Davids rather than a big Goliath. We are confident that WW’s snack business can

1.6% 3.6% 5.1% 8.6% 9.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1H13 2H13 1H14 2H14 1H15

Traditonal KA Corporate clients E-Commerce

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015F 2016E 2017E

Downstream revenue as a ratio of total

CNY m

The Davids and Goliaths

have to adopt different

strategies — and we

believe the Davids stand

a better chance of

growth

12


still grow in volume terms as the market is still fragmented. According to Frost and Sullivan,

the top-10 players only accounted for 30% of the market in 2014, while WW stood out at

No. 1 with a 5% share. The market is divided up amongst the big and small Davids, each

with its niche (eg, WW’s rice cracker is No.1 with a c70% market share).

UPCH: products launched in the past 24 months

Beverage No. of flavours Suggested retail price Launch date What's special about the product?

Xiaoming classmate tea 4 CNY 5 Mar-15 Special bottle design and cold-brewed

Haizhiyen 3 CNY 5 Apr-14 Sea-salted low-sugar fruit juice

Chinese mixed fruit drinks 2 CNY 5 May-15 Mixed Chinese fruit juice for health

Nectars 3 n.a. Soon Nutritious and Western-style

Asamu in little bottles 2 CNY 6 3Q15 Using chilled milk instead of milk powder

Xiaoye milk tea 3 CNY 3 1H15 Targets primary and secondary students

Noodles No. of flavours Suggested retail price Launch date What's special about the product?

Champion 2 CNY 10-12 Nov-14

Soup Dairen 4 (2 more to come) CNY 8 Re-launched with new flavours 2 years ago

Vege-light Noodles 3 CNY 5 Oct-15

Gemien 2 CNY 5 4Q14

Noodles No. of flavours Suggested retail price Launch date What's special about the product?

Champion 2 CNY 10-12 Nov-14

Soup Dairen 4 (2 more to come) CNY 8 Re-launched with new flavours 2 years ago

Vege-light Noodles 3 CNY 5 Oct-15

Source: Company, Daiwa

13


Cost tailwinds to subside

Cost trends turned neutral on gross margins

Most of the downstream staples companies that we cover are likely to see significant gross

margin expansion over 2014-15E, on the back of lower raw-material costs. However, this

trend could reverse in 2016E as the prices of some raw materials rebounded in 4Q15, and

those of many others turned steady in 2H15. Furthermore, CNY depreciation against the

USD is also likely to have a negative impact on the cost of imported raw materials (eg,

wood pulp).

As shown in the following chart, we expect the gross margins of the downstream staples

companies to have expanded by 1.3-3.4pp YoY for 2015E. For the upstream dairy farm

and grain processing companies, we forecast their gross margins to have declined for the

same period due to lower ASPs. For 2016E, we expect the gross margins for the upstream

companies to change by only 1pp (plus or minus), mainly due to price promotions or

product mix upgrades, rather than changing raw material costs. For the upstream

companies, we expect a slight improvement in their gross margins due to a slight increase

in ASP.

China Consumer Staples Sector: gross margins

Gross-margin expansion

could slow in 2016E

Source: Company, Daiwa forecasts

Outlook for raw-material costs

The following table shows the contribution to COGS of various raw materials for the

consumer staples companies for 2015E. Most of the necessary raw materials can be

sourced locally in China or the rest of Asia (not denominated in USDs and hence, are

cushioned from the rising USD). The personal-care product companies have the highest

exposure to imported raw materials.

China Consumer Staples Sector: contribution of commodities to 2016E COGS (downstream) and the revenue (upstream) (%)

Industry Snacks/

Soft drinks and noodles Dairy products Brewery Personal-care products Packaged meat dairy beverage

Company Want Want Tingyi UPC Mengniu Huishan Modern Dairy Tsingtao/CRB Hengan Vinda WH Group

Locally sourced /sourced in non-USD currencies

Palm oil <2 7 7

Flour <3 8 8

Sugar 5 5 5 3-5%

PET chips <5 30 30 <10 <5%

Pork

China: 70-80% of COGS

Raw Milk <3

30-40 ~30% of revenue

~80% of revenue

Corn

Feed: 70% of upstream operation

Sourced overseas

Milk powder 15%

10%

Wood pulp – short fibre

~10-15% 50-60%

Wood pulp – long fibre


35.4%

43.6%

32.6%

16.2%

34.9%30.9% 32.2%

48.8%

31.5%

58.6%

32.3%

16.9%

10%

20%

30%

40%

50%

60%

UPCH Want Want Tingyi WH Group CRB Tsingtao Mengniu Hengan Vinda Huishan ModernDairy

Fufeng

2014 2015 2016E 2017E

14


Milk powder

We believe the price of milk powder imported into China will bottom out in 1Q16 and

gradually pick up throughout 2016E. In December 2015, Fonterra, the operator of the

largest dairy-product trading platform globally and the key co-operative for dairy farms in

New Zealand, maintained its milk payout rate to its suppliers until May 2016 (at

NZD4.6/kg). Fonterra expects the price of milk powder to rise in 2016 as the global glut

dissipates and the China manufacturers (food processing companies and dairy beverage

producers) start to purchase more after the milk powder inventory has normalised.

The milk powder spot price on the international market has risen by 42% from its trough of

USD1,560/tonne in August 2015, while China’s powder import price (the actual cost for

producers in China) declined by an average of 17% in 2015. As the import price at China

customs typically lags the international spot price by 4-6 months due to transportation

factors, we expect the powder price in China to be relatively low in 1H16 before trending

up in 2H16.

Raw milk (China)

According to the Ministry of Agriculture, the price of raw milk price increased by 3%QoQ for

4Q15 vs. September 2015. However, we now turn more cautious on the raw milk price

outlook for 2016E, due to the declining feed cost, some of the large raw milk suppliers

could lower their ASPs to expand their sales volume, implying pricing pressure in the

industry. Moreover, despite the recent rebound in milk powder prices globally, the cost of

milk powder is still near its past-5-year low globally. This means imported milk powder

remains a cheap substitute for raw milk in 2016E. We assume a flat YoY raw milk ASP for

Modern Dairy and Huishan Dairy in 2016E.

Milk powder prices: imported prices (at China Customs) and the international spot price

China: raw milk price

Source: Global Dairy Trade, China Custom Source: Companies, Ministry of Agriculture

Palm oil and wheat/flour

Ong Keng Wee, a plantation analyst at Daiwa’s alliance partner in Malaysia, Affin Hwang,

forecasts an ASP for palm oil (in Malaysia) of MYR2,400/tonne for 2016E (+12% YoY),

supported by a decline in inventory and possible lower production in 2016E. We believe

the noodle players in China will be the key victims of the rising palm oil price in 2016E, as

we estimate that palm oil accounts for about 15% of their COGS.

Wheat is another major cost item for the instant-noodle makers (~15% of COGS), and we

expect the price of wheat to remain steady or increase slightly in 2016E, as the price the

government pays is likely to remain stable, which should give farmers the incentive to

produce wheat. Hence the noodle-makers are unlikely to make any cost saving when it

comes to the wheat input cost for noodles, in our view.

0

1,000

2,000

3,000

4,000

5,000

6,000

Apr-09 Feb-10 Dec-10 Oct-11 Aug-12 Jun-13 Apr-14 Feb-15 Dec-15

Import price Auction price

(USD/tonne)

3.0

3.5

4.0

4.5

5.0

5.5

Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15

National average CMD Huishan

CNY/kg

Downstream dairy

players likely to see cost

of milk rebound in 2016E

15


Palm oil prices: imported price of China (Tianjin port, LHS) China: wheat price

Source: Bloomberg Source: Bloomberg

Sugar

We expect the price of sugar to increase by 5-10% YoY in 2016 in China due to the tighter

supply. In December 2015, the Guangxi Provincial Government increased its guidance

price for sugar cane, from CNY400/tonne for the 2014/15 harvest to CNY440/tonne for the

2015/16 harvest due to a decrease in acreage, implying lower production costs for cane

sugar in China. On the international market, the price of sugar rose by 23% in 2H15 in

Brazil, the largest exporter of sugar in the world. According to a USDA report released in

November 2015, global sugar production for 2015/16 was forecast to decline by 3m

tonnes, at 172m, with declines in Brazil, India, the EU, and Ukraine more than offsetting

gains in Australia, Russia, and Turkey. The report projects consumption to reach a record

173m tonnes, pulling down the global inventory level by 4m tonnes to 40m tonnes in

November 2016E.

PET chips

According to data from Wind, the price of PET chips declined by 4% YoY in 4Q15 and 21%

YoY for 2015 on average due to the weak price of crude oil, which should be positive for

the gross margins of the beverage producers. However, as the PET chip price has almost

reached its past-10-year trough of some CNY5,800 (in 2008; currently: CNY6,000/tonne),

and given the strong USD, we don’t believe PET chip costs will decline by much in 2016E

in China (in CNY terms). This, together with rising sugar costs, implies to us that there is

limited room for the gross margins of the bottled-drink producers Tingyi and UPCH to

expand this year.

China: PET-chip prices (vs. oil price) China: global sugar price

Source: Wind Source: Bloomberg

0

200

400

600

800

1000

1200

1400

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

M-09 M-10 J-11 N-11 A-12 J-13 A-14 F-15 N-15

"Malaysia" "Tianjin"

CNY/m tonnes USD/m tonnes

1,000

1,500

2,000

2,500

3,000

3,500

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Aug

-14

Dec

-14

Apr

-15

Aug

-15

Dec

-15

Flour Wheat

CNY/m tonnes

0

20

40

60

80

100

120

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

PET (CNY/mt, LHS) Brent oil (USD/barrel, RHS)

CNY/m tonnes USD/Barrel

0

1

2

3

4

5

6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15

Nanning Brazil

CNY/m tonnes USD/lb

In 2016E, we expect the

price of sugar to reverse

its downtrend since 2013

16


Wood pulp – (short and long-fibre)

Mercer Int. (Not rated), a global pulp supplier of wood pulp, and Hawkins Wright, a global

research firm on forest, pulp and paper industry, offer the following insight into the global

supply outlook:

Softwood (northern bleached softwood kraft pulp [NBSK]): global capacity is expected

to grow by 0.7m tpa in 2016E (<4% of total demand, based on our estimates), and

according to Mercer, such growth is consistent with growth in demand. Wright forecasts

softwood pulp demand to increase by 0.127m tpa over 2014-18, versus 0.19m tpa rises

per year in capacity.

Hardwood (bleached hardwood kraft pulp [BHKP]): global capacity growth should be

fast for 2016, at c. 3% on our estimates, but should match demand growth. Hawkins Wright

forecasts hardwood pulp capacity to rise by 1.5m tpa over 2016E, versus demand growth

of 1.38m tpa in 2015E.

Based on Bloomberg data, BHKP and NBSK pulp averaged USD803/tonne and

USD832/tonne for 2H15, up 5% and down 5% YoY, respectively. We estimate normal wood

pulp inventory for tissue producers is currently at about 4-6 months (including raw

materials being shipped to China); and over 60% of the pulp used for tissue paper is

NBSK. Hence, we expect pulp costs in 1H16 to be flat or decline slightly for wood pulp

users in USD terms. However, if we take CNY depreciation into consideration (-4.5%

against USD in 2015 per Bloomberg), wood pulp costs would remain flat YoY in terms of

CNY in 1H16E, and risk rising in 2H16E.

Wood pulp prices

Source: Bloomberg

Rice, corn and other grains (sourced in China)

We believe prices of domestically sourced grains (corn, wheat, rice) will stop increasing or

reverse their uptrends seen over the past 6 years as a result of changes to policies that

used to support grain prices through government purchasing. For grains that are

domestically produced and sourced in China (ie, corn, rice), prices have gone up slowly

since 2009, supported by favourable policies. We believe the prices of major crops in

China are supported by government incentives encouraging farmers to produce more. The

China government has already cut its guaranteed purchase price for corn for the 2015/16

harvest period by c.11% YoY due to the high reserves level in the country. The government

has also stated, that while it will continue to purchase wheat and rice in 2016, it hasn’t

decided whether to continue to purchase corn or not.

Government purchase price of major grains in China (CNY/50kg

2015 2014 2013 2012 2011 2010

Corn 100 111-113 111-113 105-107 n.a.

Wheat 118 118 112 102 93 86

Early rice 135 135 132 120 102 93

Later rice 138 138 135 125 107 97

Hard rice 155 155 150 140 126 103

Source: Ministry of Agriculture

300

400

500

600

700

800

900

1,000

1,100

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

NBSK BHKP

USD/tonne

Lower USD pulp costs

offset by CNY

depreciation vs. USD

17


We estimate that grain prices in China are about 20% higher than international prices at

present (except soybean, whose imports accounted for over 60% of the consumption in the

past 5 years) due to supportive government policies. We expect this gap to continue to

trigger imports of grains into China or a reduction in domestic grain prices, in particular for

corn. As shown below, international corn and wheat prices trended up in 4Q15, by 1% and

13% QoQ on average, based on Bloomberg data, respectively.

Corn price in the US spot market Corn price in China price

Source: Bloomberg Source: Bloomberg

Hogs and pork

Hog inventory as of November 2015 was 388m heads in China, according to the Ministry

of Agriculture (down 1% MoM, but down 10% YoY). The number of reproductive sows in

China declined to 38.3m heads in November 2015 (-12% YoY), implying that supply is

continuing to tighten. We expect pork prices to rise by less than 5% YoY on average in

2016E, due to the low base in 1H15 followed by a slight tightening of supply in 2H15-2016.

However, as of December 2015, the hog-corn cost ratio was already 8.6x, per the Ministry

of Agriculture, near the high-end of the guidance range for hog raisers (6x-9x) as indicated

by the government. If such a ratio rose above 9x the government may have to sell pork

reserves to stabilise prices. Moreover, with the recent decline in corn costs (a major feed

for hogs), we see limited upside for hog costs in 2016E. Hence we see limited upside to

our hog and pork price forecast for in 2016.

China: pork and hog prices Hog-corn cost ratio

Source: Wind, Bloomberg Source: CEIC

0

100

200

300

400

500

600

700

800

900

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

USD/5000 bushel

1,000

1,500

2,000

2,500

3,000

Jan-

09

May

-09

Oct

-09

Mar

-10

Aug

-10

Jan-

11

Jun-

11

Nov

-11

Mar

-12

Aug

-12

Jan-

13

Jun-

13

Nov

-13

Apr

-14

Sep

-14

Jan-

15

Jun-

15

Nov

-15

Heilongjiang Jilin Shandong

(CNY/m tonnes)

5

10

15

20

25

30

J-08 J-08 D-08 J-09 D-09 J-10 D-10 J-11 D-11 J-12 D-12 J-13 D-13 J-14 N-14M-15N-15

Pork wholesale price Hog cost

CNY/kg

2013 Ave.6.22

2014Ave, 5.50

2015Ave, 6.55

4

5

6

7

8

9

10

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14

Jan-

15

May

-15

Sep

-15

(x)

We expect grain prices

to stay flat or decline in

China in 2016E due to

policy changes

Any increase in the cost

of hogs and pork in

2016E will be lower than

we previously expected

18


Impact of CNY depreciation – mainly on the debt side

Debt and financial costs – the key factor. Before 2014, most staples companies enjoyed

low interest rates and the benefits of CNY appreciation against foreign currencies by using

foreign debt (mainly USD or HKD). However, with the CNY starting to depreciate against

the USD in 1H15, most companies reported forex losses for that period. Most of them did

not use derivatives to hedge against currency rate changes. To lessen the impact of CNY

depreciation, some companies have already started replacing USD/HKD-debt with CNY-

debt wherever possible:

In this report, we are revising down our 2016-17 EPS forecasts for 6 of the 12 companies

we cover in the staples sector as a result of FX losses. We see companies with higher net

gearing being slower to cut their USD/HKD debt to reduce FX losses, since they may not

have sufficient resources to pay down their USD-debt quickly.

(1) Companies with net cash: Want Want and Hengan have the highest exposure to

USD/HKD denominated debt (99-100%) among our coverage universe. They are in a

net cash position, which enables them to pay down debt quickly if necessary.

(2) Companies with net debt may have to raise CNY debt locally before settling their

USD debt. Among the big caps, we expect Mengniu to work on replacing its non-CNY

debt previously raised for acquisitions by leveraging on its relationship with COFCO

Group (as an SOE) to secure more local debt in CNY and reduce its exposure to CNY.

Also, for Tingyi, the debt borrowers (bond issuers) are Hong Kong entities (functional

currency is HKD), so there is no mark-to-market loss for USD debt incurred by its

Hong Kong entity. Translation losses on balance sheet items are debited to equity

reserves, instead of the P&L. For Tingyi, we believe the FX loss in 2015 was due

mainly to its EUR-denominated debt (for the purchase of machines), which is non-

recurring in 2016E. Hence for both, we believe the impact of CNY depreciation in

2016-17E will not be higher than it likely was in 2015E. Vinda faces the biggest impact

from further CNY depreciation due to its high gearing. However, we believe this factor

has been priced in its recent share-price correction.

(3) Some companies like Modern Dairy and Fufeng reported slight positive FX gains in

1H15, which we believe was due to non-CNY cash and other assets they have (eg,

receivables). Going forward, we expect the impact of FX to be even smaller as they

raise CNY-debt and reduce USD-denominated loans.

Exposure and impact of FX exchange rate changes on net profit

USD/HKD debt as %

of total

USD/HKD debt as %

of book equity

HKD/USD cash as % of equity

net HKD/USD debt as % of equity

Report. currency

FX loss (m reporting

currency)

as % of pre-FX

net profit COGS %

contribution in USD

2014 2014 2014 2014

1H15 2015E 2016E 1H15 2015E 2016E

Tsingtao Brewery c.0% n.a. n.a. n.a. CNY 3.0 negligible -0.3 negligible <10%

Fufeng 40% 26% 2% 24% CNY 5.5 negligible 1.1 negligible <10%

UPCH 41% 19% 3% 17% CNY 1.7 negligible 0.2 negligible <10%

Modern Dairy 41% 36% 5% 31% CNY 2.9 negligible 0.6 negligible <20%

Mengniu 85% 39% 7% 32% CNY -22.0 -50 -50 -1.6 -1.9 -1.9 <10%

Tingyi 87% 84% 4% 80% USD -49.2* -49 -50 -11* -12 -11 <10%

Vinda 91% 82% 2% 80% HKD -30.0 -280 -300 -8 -37 -32 c.50%

WH Group 97% 75% n.a. n.a. USD n.a. n.a. n.a. n.a. n.a. n.a. <50%.

Want Want 99% 68% 2% 66% USD -0.9 -2 -5 -0.3 -0.3 -0.7 <20%

Hengan 100% 85% 11% 74% HKD -139.0 -270 -240 -7 -6 -5 >30%

Huishan Dairy 12% 7% 5% 2% CNY -124.6 negligible -13.8 negligible <10%

Source: Company, Daiwa estimates for 2015-16E Note: * for nine months ended Sep-15; # including impact from FX change in non USD/HKD currency exchange rate against CNY, 1due to its US operation

Revenue: CNY depreciation mainly weighs on companies that report in USD or HKD. Of

the 6 companies we cover that report in USD or HKD, WH Group should be least

impacted, as we estimate that over 50% of its revenue came from the US in 2015. We also

estimate that about 25% of Vinda’s revenue comes from outside China (Hong Kong and

ASEAN countries) after its acquisition of SCA’s pan-Asian hygiene products business in

1Q16.

CNY depreciation

against USD weighed

more on financial costs

than raw materials

19


Cost of production: Except wood pulp, soybean and milk powder, most raw materials

used by staples companies in China are locally sourced. As such, a depreciating CNY is

negative for the gross margins of users. But as discussed before, wood pulp prices have

been trending down since 4Q15 on an abundant global supply, which we believe could

help offset the pressure of a depreciating CNY. For milk powder, we also believe a

weakening NZD against USD could help mitigate the pressure of increasing milk powder

costs, as New Zealand accounts for more than 50% of the milk powder imported into China

(in fact, the NZD has depreciated from NZD1:CNY4.8 a year ago to NZD1:CNY4.2 in

January 2016).

20


Valuations and recommendations

Rerating opportunity for selected stocks

The China Consumer Staples sector has been derated since 2013 on the back of slowing

revenue and earnings momentum. In 2015, the MSCI China Staples Index fell by 17.1%,

vs. declines of 14.6% in the MSCI China and 8.2% in the HSI. Our coverage universe of

downstream staples companies is trading currently at a 16x 2016E PER on a market-cap

weighted average, based on our forecasts, and most are trading below their past-5-year

12-month-forward PER bands.

MSCI China Staples and MSCI China Indices (2015)

The staples stocks have

underperformed the

MSCI China for the past 2

years

Source: Bloomberg

China players already trading at discounts to international peers

The China Consumer Staples stocks are currently trading at PER discounts to their

international downstream peers. Based on the Bloomberg consensus forecasts, the China

Consumer Staples stocks under our coverage are trading at 16x 2016E PER on average,

vs. 21x for the main US and Europe F&B players. As a result of our now less favourable

outlook for net-profit growth in 2016 in China due to a high base, macro headwinds, and

CNY depreciation, we see little potential for a PER rerating of the Chinese players towards

international peers’ valuations at this juncture. But at the same time, given that growth in

nominal GDP and personal income in China eclipses the growth rates for most developed

countries, as evidenced by the China players’ prospect of faster EPS growth in 2016E vs.

their international peers, we also see limited room for a further derating.

Davids’ premium to Goliaths justified, in our view

The Davids we highlighted in this report (Vinda, UPCH, etc) are trading at premiums to

their peers (Hengan, Tingyi) in terms of PER. We believe these premiums are justified by

the Davids’ higher prospective EPS growth in 2016-17E, on our forecasts, and their long-

term revenue growth potential. The key rerating catalysts we see are: 1) M&A within the

same industry/segment or strategic investments in new businesses, 2) successful new

product launches, and 3) share buybacks or debt reductions.

The only exception is Modern Dairy, which is trading currently at a 7.1x 2016E PER, a

significant discount to its peers Mengniu (15x) and Huishan (FY17E PER of 34x, March

year end). We believe this discount is due to investors’ concerns about flat raw milk ASPs

in 2016E. Nevertheless, we expect Modern Dairy shares to be rerated on the back of an

increasing revenue and earnings contribution from its downstream operation, and gross-

margin improvement from lower feed costs.

50

55

60

65

70

75

80

85

90

800

900

1,000

1,100

1,200

1,300

1,400

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

MSCI China Staples MSCI China

MSCI China Staples MSCI China

21


China Staples Sector: valuation comparison (as of 25 Jan 2016)

Market cap

Share price

(HKD)

PER (X) EPS growth YoY (%) EV/EBITDA Sales growth YoY

(%) EBIT margin

(%) ROE

Company Ticker Rating (USDm) 2014 2015E 2016E 2017E 2014 15E 16E 17E 15E 16E 2014 15E 16E 2014 15E 16E 15E

Food and beverage players

Want Want China 151 HK Buy 8,174 4.96 13.7 15.4 12.7 11.5 -10 -11 21 10 9.1 7.4 -1 -6 6 20.6 20.9 23.5 27.1

Tingyi 322 HK Hold 6,512 9.07 16.4 17.6 16.9 15.4 1 -7 4 10 7.5 6.7 -6 -9 1 7.2 8.1 8.7 12.0

WH Group 288 HK Outperform 8,247 4.40 8.5 13.6 10.2 9.1 48 -37 34 12 6.6 5.7 98 -1 6 8.1 6.4 6.9 11.3

Mengniu Dairy 2319 HK Hold 5,516 11.08 14.8 13.5 14.7 13.2 32 9 -8 11 8.8 9.1 15 -2 4 5.1 6.4 5.7 11.5

Tsingtao Brewery 168 HK Underperform 4,988 28.80 15.5 19.3 20.4 19.2 13 -20 -6 6 8.5 8.9 3 -3 -4 6.6 6.3 6.0 10.3

China Resources Beer 291 HK Hold 3,818 12.30 n.a. 34.1 23.2 18.5 -chg +chg 47 25 5.8 12.8 16 -79 4 1.1 7.9 8.6 2.7

Uni-President China 220 HK Buy 2,880 5.20 129.1 21.6 18.9 17.0 -74 499 14 11 8.0 7.1 -3 5 8 0.9 4.4 5.2 7.5

Market cap. Weighted average

20.4 17.8 15.6 13.9 9 24 15 12 7.8 7.9 23 -11 4 8.7 9.6 10.3 13.4

Dairy farm operators

Modern Dairy 1117 HK Buy 985 1.45 7.2 9.4 7.1 5.0 108 -23 31 41 5.5 6.4 53 -1 8 27.2 27.5 25.8 8.3

Huishan Dairy # 6863 HK Sell 5,095 2.95 43.0 43.5 34.4 29.6 -43 1 31 16 28.0 24.3 11 14 24 32.0 29.4 27.1 5.8


37.2 38.0 29.9 25.6 -19 -3 31 20 24.3 21.4 18 12 21 31.2 29.1 26.9 6.2

Personal healthcare

Hengan Int 1044 HK Hold 10,621 67.75 21.2 19.4 18.4 18.2 8 9 5 1 11.7 11.3 12 2 -1 24.1 25.1 25.7 23.5

Vinda Int 3331 HK Outperform 1,664 13.00 21.9 27.2 22.8 15.0 9 -19 19 52 11.9 10.9 17 18 31 10.5 10.5 10.1 8.9


21.3 20.5 19.0 17.7 8 5 7 8 11.8 11.2 13 4 4 22.3 23.2 23.6 21.5

Others

Fufeng 546 HK Hold 707 2.61 6.9 8.7 8.4 7.8 15 -21 4 8 4.6 4.4 -1 4 9 9.9 7.6 6.4 9.0

Source: Bloomberg, Daiwa forecasts Note: #FY15-18E numbers for Huishan are used as the company year-end is on 31 March;

International Staples Sector: valuation comparison (as of 22 January 2016)

Bloomberg Mkt.Cap. Price PER (x) EPS Growth EV/EBITDA x Revenue YoY % EBIT margin

Name Code LCY USDm

14 15E 16E 17E 14 15E 16E 17E 15E 16E 2014 15E 16E 15E 16E 16E

US major F&B players

Kraft-Heinz KHC US USD 90,269 74.39 55.5 34.2 25.1 20.6 n.a. 62 36 22 18.3 16.3 n.a. -6 -1 15.1 19.9 23.7

Coca Cola KO US USD 182,918 42.06 26.0 21.1 20.5 19.1 -16 23 3 7 17.0 16.5 -2 -4 0 21.1 23.0 23.6

Pepsi PEP US USD 139,639 95.85 22.2 21.0 19.9 18.5 -1 6 5 8 12.9 12.5 0 -5 1 14.4 15.9 16.2

General Mills GIS US USD 32,830 55.33 27.4 19.3 18.1 17.0 -30 42 7 7 12.2 11.9 -2 -5 1 11.8 16.6 17.0

Mondelez MDLz US USD 66,109 41.6 32.2 23.4 20.8 18.7 -1 38 13 11 16.3 15.2 -3 -17 0 9.5 15.9 15.0

Kellogg K US USD 25,378 71.61 40.7 20.5 19.5 18.3 -65 99 5 6 13.6 13.2 -1 -7 -1 7.0 14.1 14.7

Nestle NSRGY US USD 226,472 71.03 n.a. 21.1 20.0 18.8 45 n.a. 5 7 n.a. n.a. -1 -1 3 11.9 15.8 16.3

Market cap. weighted average

22.2 22.7 20.7 18.9 6 22 9 9 11.0 10.4 -1 -5 1 14.5 18.0 18.8

Global Dairy companies

Fonterra FCG NZ NZD 7,641 5.86 n.a. 13.6 12.2 11.3 190 n.a. 12 8 9.2 8.5 -15 6 13 4.3 7.1 n.a.

Danone BN FP EUR 55,794 59.61 31.7 20.6 19.3 17.7 -22 54 7 9 12.4 11.8 -1 6 3 10.2 12.7 13.3

Mead Johnson MJN US USD 13,831 70.16 19.8 20.7 20.0 18.6 5 -5 5 8 13.5 13.5 5 -8 -2 22.4 23.7 23.9

ABBOTT ABT US USD 59,714 40.03 26.7 18.6 17.2 15.3 -11 44 10 11 12.3 11.5 3 1 5 12.8 18.4 19.6


26.5 19.4 18.1 16.4 -3 40 8 10 12.3 11.6 1 3 4 12.2 16.0 16.4

International hog processors

TYSON FOODS-A TSN US USD 20,276 51.22 17.0 14.3 13.0 11.6 21 19 10 11 8.3 7.9 10 -4 2 5.2 6.2 6.5

SANDERSON FARMS SAFM US USD 1,750 77.54 8.1 14.4 13.3 15.9 -12 -43 8 -16 5.6 5.4 1 -3 9 12.0 7.2 5.2

PILGRIM'S PRIDE PPC US USD 5,526 21.66 7.9 7.9 10.8 12.3 30 1 -27 -12 4.8 6.3 2 -5 -1 14.0 13.7 9.9

HORMEL FOODS CRP HRL US USD 20,076 75.98 29.2 26.0 24.3 22.3 14 12 7 9 15.1 14.2 -1 4 4 11.5 12.3 12.8

INDUS BACHOC-B BACHOCOB MM MXN 2,164 66.55 10.2 9.4 12.1 11.5 93 9 -22 5 4.6 5.7 5 10 3 12.8 12.1 9.5

JBS JBSS3 BZ BRL 7,425 10.64 15.1 5.6 6.7 5.7 119 170 -15 17 5.2 4.2 30 37 26 6.5 6.4 6.2


19.6 16.5 15.9 14.8 35 33 1 8 9.7 9.3 8 5 6 9.0 9.3 9.1

Japanese player

ITOHAM FOODS INC 2284 JP JPY 1,304 625 11.5 20.9 19.7 17.6 143 -45 6 9 14.1 11.0 4 31 17 0.8 n.a. n.a.

NH FOODS LTD 2282 JP JPY 3,719 2,163 14.2 15.5 14.5 13.4 25 -8 5 8 8.5 8.0 8 4 2 4.0 3.5 3.8


13.5 16.9 15.9 14.5 57 -18 6 8 10.0 8.8 7 11 6 3.1 2.6 2.8

International personal hygiene products

9

PROCTER & GAMBLE PG US USD 210,464 77.36 30.9 20.6 18.3 16.8 -22 50 13 12 13.3 12.7 -5 -13 3 15.5 21.5 22.3

KIMBERLY-CLARK KMB US USD 45,999 126.72 31.1 22.0 20.6 19.1 -22 42 7 9 13.4 12.8 1 -6 2 12.8 17.3 17.9

Sven ska Cellulosa AB SCAB SS SEK 20,083 244.4 26.0 19.9 18.3 17.2 19 30 9 24 11.3 10.3 12 11 4 9.9 11.2 11.6

KAO CORP 4452 JP JPY 24,610 5,793 37.0 30.5 24.8 22.7 24 21 23 8 11.8 11.0 7 5 4 9.5 10.8 11.9

UNICHARM CORP 8113 JP JPY 11,285 2,156.50 33.6 35.6 27.2 24.2 -18 -5 29 8 12.7 11.5 21 25 9 11.2 10.3 10.8


31.2 22.1 19.5 17.9 -15 43 13 9 13.1 12.4 -1 -8 3 14.1 19 19.8

Source: Bloomberg

22


The Davids

Uni-President China (220 HK, HKD5.20): New products shine - upgrading to Buy (1)

In this report, we are upgrading our rating for UPCH to Buy (1), from Underperform (4), as

we expect its revenue growth to resume (5-8% YoY in 2015-17E, after a 4% decline in

2014) on likely market-share gains in the noodle segment and an increasing revenue

contribution from high-end beverage products. We believe UPCH can realise revenue

growth more easily than its biggest competitor, Tingyi, by improving its market-penetration

rate and focusing on high-value items. As a result of doing so, we expect its operating

margin to expand by 0.7pp and 0.3pp in 2016-17E to 5.2% and 5.5%, respectively, on our

forecasts, after a jump of 3.4pp in 2015E. UPCH’s share price is down by 27% from its 52-

week peak and is now trading at 19x 2016E PER, below its past-3-year average 12-month-

forward PER of 26x, which see as a good entry point. We have a new 12-month target

price of HKD6.20 (from HKD7.00), which is based on a 2016E PER of 22.6x (UPCH’s

average forward PER since its IPO in 2007).

UPCH: financial summary UPCH: share price and past-7-year PER band chart

2013 2014 2015E 2016E 2017E

Revenue (CNY m)

23,329 22,488 23,642 25,524 26,783

YoY (%)

9 -4 5 8 5

Our forecast vs. consensus (%) n.a. n.a. 5 5 8

Net profit (CNY m)

446 127 844 1,004 1,114

Net profit growth (%)

-48 -72 566 19 11

EPS (CNY)

0.12 0.03 0.20 0.23 0.26

EPS growth YoY (%)

-48 -74 511 19 11

Operating margin

2.0% 0.9% 4.4% 5.2% 5.5%

ROE

5.6% 1.3% 7.5% 8.3% 8.6%

Source: Company, Daiwa forecasts Source: Bloomberg

Vinda (3331 HK, HKD13.0): An emerging Asian play - reiterating Outperform (2)

We reiterate our Outperform (2) rating on Vinda. We argue that the stock should be rerated

on: 1) its transformation from a pure China tissue-paper manufacturer to a regional

personal care product company following its acquisition of assets from its parent company,

and 2) a solid revenue-growth outlook in China through ongoing market-share gains in the

tissue-paper and incontinence-product segments. We believe the recent share-price

correction was a result of foreign-exchange losses on the CNY depreciation. In this report

we cut our 2015-17E EPS by 13-33%, due mainly to the forex losses. Our target price is

now based on a 2016E PER of 25x (previously 20.4x), where we peg Vinda’s valuation to

international peers’ (average: 20x 2016E PER) after its acquisition of the SCA Group’s

hygiene operation, which we see turning it into a Pan-Asia business, and then apply a 25%

premium due to our stronger EPS-growth forecast for Vinda vs. peers (including/excluding

FX losses). We have a new 12-month target price of HKD14.30 (previously HKD17.40).

Vinda: financial summary Vinda: share price and past-5-year PER band chart

2013 2014 2015E 2016E 2017E

Revenue (HKD m) 6,798 7,985 9,421 12,341 14,340

YoY (%) 13% 17% 18% 31% 16%

Our forecast vs. consensus (%) n.a. n..a -4 5 6

Net profit (HKD m) 543 593 478 609 979

Net profit growth (%) 1% 9% -19 27 61

EPS (HKD) 0.5434 0.5944 0.4787 0.5698 0.8670

Recurring EPS growth (%) 1% 9% -19% 19% 52%

Operating margin 9.6 10.5 10.5 10.1 11.2

ROE 12.4 12.2 8.9 8.7 11.1


2

4

6

8

10

Jan-09 Mar-10 May-11 Jul-12 Sep-13 Nov-14 Jan-16

220 HK 16 20

24 28 32

(HKD)

0

5

10

15

20

25

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

3331 HK 12x 15x

18x 21x 24x

HKD

We upgrade UPCH to

Buy (1)

23


China Modern Dairy (1117 HK, HKD1.45): Downstream expansion- reiterate Buy (1)

We reiterate our Buy (1) call on Modern Dairy, with a new 12-month DCF-based target

price of HKD3.00 (formerly HKD3.30). We expect Modern Dairy’s earnings growth to

recover in 2016-17E after a 17% YoY decline in 2015E on the stabilisation of raw-milk

prices in China and rising imports of milk powder. The stock is trading currently at a 7x

2016E PER and a 0.7x 2016E PBR, on our forecasts, putting it at around a 54% discount

to downstream peer Mengniu. Modern Dairy is on track to expand its downstream

business, which is targeted to contribute 50% of the company’s revenue by 2020 (currently

25%), and progress on this front should support a rerating of the stock as a consumer

brand company in our view. Moreover, we continue to favour Modern Dairy as a beneficiary

of the long-term structural shortage of quality raw milk in China.

Modern Dairy: financial summary Modern Dairy: share price and past-5-year PER band chart

Year end Dec 2013 2014 2015E 2016E 2017E

Revenue (CNY m) 3,289 5,027 4,980 5,402 5,821

YoY (%) 62% 53% -1% 8% 8%

Our forecast vs. consensus (%) n.a. n.a. 0% -4% -7%

Net profit (CNY m) 373 735 632 912 1,287

YoY (%) -28% 97% -14% 44% 41%

Reported EPS 0.077 0.160 0.126 0.172 0.243

YoY (%) -29% 108% -21% 37% 41%

Operating margin 21.3% 27.2% 27.5% 25.8% 30.4%

ROE (%) 6.8% 12.7% 8.3% 10.0% 12.7%


Huishan (6863 HK, HKD2.95): More competition for downstream - reiterating Sell (5)

We reiterate our Sell (5) rating on Huishan on valuation grounds. However, our SOTP-

based 12-month target price rises to HKD1.87 from HKD1.60, due to a reduction in the

number of shares outstanding after a share buyback in 2H15. The stock is now trading far

above its peers’ average PER range of 3-7x (upstream) and 14-27x (downstream). We

believe management’s share buybacks are the main reason for the stock’s increased PER

multiple and we do not think that the company’s currently weak fundamentals justify such a

hike. Nor do we consider the company’s share repurchases to be positive for its business

development or balance sheet. We expect the downstream dairy industry in China to

continue to see significant price competition and discounts across all segments (from

premium-to-mass market), particularly for room-temperature products.

Huishan: financial summary Huishan: share price and PER band since listing

(Year-end Mar) FY14 FY15 FY16E FY17E FY18E

Revenue (CNY m) 3,530 3,923 4,470 5,558 6,327

YoY growth (%) 38% 11% 14% 24% 14%

vs consensus n.a. n.a. -2% -2% -5%

Reported net profit (CNY m) 1,249 790 768 977 1,133

YoY growth (%) 32% -37% -3% 27% 16%

Reported EPS (CNY) 0.096 0.055 0.055 0.073 0.084

YoY growth (%) 17% -43% 1% 31% 16%

ROE 13.1% 5.9% 5.8% 7.5% 8.1%

Operating margin (%) 42.2% 32.0% 29.4% 27.1% 28.6%


0

1

2

3

4

5

6

7

8

9

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Sep

12

Dec

12

Mar

13

Jun

13

Sep

13

Dec

13

Mar

14

Jun

14

Sep

14

Dec

14

Mar

15

Jun

15

Sep

15

Dec

15

1117 HK 11x 15x

19x 23x 27x

0

1

2

3

4

5

6

Sep

13

Nov

13

Jan

14

Mar

14

May

14

Jul 1

4

Sep

14

Nov

14

Jan

15

Mar

15

May

15

Jul 1

5

Sep

15

Nov

15

6863 HK 12x 16x

20x 24x 28x

We prefer Modern Dairy

over Huishan Dairy

among the upstream

dairy companies

24


The Goliaths

Tingyi (322 HK, HKD9.07): Too big to move- downgrading to Hold (3)

In this report, we are downgrading our rating for Tingyi to Hold (3) from Outperform (2), as

we see a risk of the company losing market share in the noodle and bottled water

segments. We also expect revenue growth in its beverage business to remain slow at

1%/3% YoY in 2016/17E as the integration with Pepsi’s distribution system in China is

progressing more slowly than we had expected. Hence, we forecast revenue growth for the

beverage business to remain slow, at a 3% CAGR over 2016-17E.

We also expect net-profit growth to be slow, at a 6% CAGR in 2016-17E, on a flat gross-

margin of 32-33%. We argue that, unlike UPCH, Tingyi will find it difficult to expand its

gross margin via product-mix changes due to its large revenue base and previous mass-

market focus. In sum, we cut our 2015-17E EPS by 4-16% and our 12-month target price

from HKD12.90 to HKD9.60. We lower our target 2016E PER to 18x (from 21x),

maintaining a 20% discount to Tingyi’s past-5-year average of 20%, on the back of the

subdued earnings growth that we expect in the current year.

Tingyi: financial summary Tingyi: share price and past-5-year PER band chart

2013 2014 2015E 2016E 2017E

Revenue (USD m) 10,941 10,238 9,272 9,326 9,561

YoY % 19 -6 -9 1 3

vs. consensus (%) n.a. n.a. -1 -3 -5

Recurring net profit (USD m) 394 400 373 386 422

Profit growth YoY(%) 7 2 -7 3 9

EPS (USD) 0.070 0.072 0.067 0.069 0.075

EPS growth YoY (%) 7 2 -7 3 9


ROE 14.5% 13.5% 12.0% 11.7% 12.0%


Hengan (1044 HK, HKD67.75): Revenue expectations set too high, cutting to Hold (3)

While we believe Hengan can maintain its No.1 position in the sanitary napkin market in

China (it currently has about a 21-22% market share, on our estimates), we see its

revenue growth being increasingly challenged by international brands, due to their growing

penetration in lower-tier cities in China. As such, we downgrade Hengan to Hold (3) from

Outperform (2) and cut our 12-month target price to HKD66 (from HKD87), based on a

2016E PER of 18x. We cut our 2015-17E EPS by 7-17% due to forex losses from CNY

depreciation against the USD, as well as a potential decline in revenue.

Hengan: financial summary Hengan: share price and past-8-year PER band chart

2013 2014 2015E 2016E 2017E

Revenue (HKD m) 21,186 23,831 24,304 24,118 24,386

YoY (%) 14% 12% 2% -1% 1%

Our forecast vs. consensus (%) n.a. n.a. -2% -10% -16%

Net profit (HKD m) 3,627 3,918 4,281 4,493 4,559

Recurring net profit growth (%) 3% 8% 9% 5% 1%

EPS (HKD) 2.9473 3.1900 3.4873 3.6750 3.7287

Recurring EPS growth (%) 3% 8% 9% 5% 1%


ROE 23.7% 22.9% 23.5% 22.8% 21.3%


10

15

20

25

30D

ec-1

0

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Mar

-14

Jul-1

4

Nov

-14

Mar

-15

Jul-1

5

Nov

-15

322.HK 18 21

24 27 30

(HKD)

15

35

55

75

95

Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15

1044 HK 18x 21x

24x 27x 30x

(HKD)

We downgrade Tingyi

and Hengan to Hold (3)

on a slowdown in

revenue momentum

25


Mengniu (2319 HK, HKD11.08): Competition remains stiff - maintaining Hold (3)

We maintain our Hold (3) rating and remain cautious on Mengniu’s revenue-growth

prospects over 2016-17E given the risks of: 1) market-share contraction in the premium

milk segment, and 2) product cannibalisation On our revised-down revenue forecasts, as

well as our concern that marketing expenses will increase, we cut our EPS forecasts by 5-

15% over 2015-17E. In turn, our 12-month target price falls to HKD11.70 (from HKD14.50),

based on 2016E PER of 15.2x (was 16x). We now apply a bigger discount (from 15% to

20%) to the stock’s past-3-year average 12-month forward PER prior to 2013 (19x) to

derive our target PER, as we see an increasing risk of market-share loss in the premium

milk segment.

Mengniu: financial summary Mengniu: share price and past-5-year PER band chart

2013 2014 2015E 2016E 2017E

Revenue (CNY m) 43,357 50,049 49,103 50,942 52,203

YoY (%) 20% 15% -2% 4% 2%

vs consensus (%) n.a. n.a. (3) (6) (11)

Net profit (CNY m) 1,607 2,233 2,577 2,471 2,745

YoY (%) 16% 39% 15% -4% 11%

EPS (CNY) 0.450 0.595 0.663 0.636 0.707

YoY (%) 14% 32% 12% -4% 11%


ROE (%) 11.6% 12.1% 11.5% 10.1% 10.4%


China Resources Beer (291 HK, HKD12.30, Hold [3]): Best-case scenario priced in

CRB’s share price rose by 15% in 4Q15, which we believe fully prices in the earnings

upside from the company’s planned acquisition of a 49% stake in the CR-Snow JV (subject

to various conditions, eg, anti-trust approval by the China government for SABMiller’s

merger with AB-InBev). In this report, we raise our 2016-17E EPS by 3-19%, assuming

that CRB will acquire a minority stake in CR-Snow via bank financing in 2016.

We maintain our Hold (3) rating but lower our 12-month target price to HKD12.40 (from

HKD13.40). We now value CRB at 23x 2016E PER (previously 26x 2016E), which marks a

ca.15% premium to its closest peers’ (Tsingtao and Yanjing) average (20.2x), given our

forecast for CRE to see faster EPS growth than its peers and its further potential earnings

upside (via co-operation with an international peer, including strategic investment).

China Resources Beer: financial summary

Key Financials 2013 2014 2015E 2016E 2017E

Revenue (HKD m) 146,254 169,678 34,823 36,141 37,770

YoY 15.9% 16.0% -79.5% 3.8% 4.5%

vs consensus n.a. n.a. n.a. -7.0% -8.7%

Net profit (HKD m) 1,642 -794 874 1,282 1,606

YoY (%) n.a. n.a. n.a. 47% 25%

EPS (HKD) 0.68 -0.33 0.36 0.53 0.66

YoY (%) n.a. n.a. n.a. 46.7% 25.2%

ROE (%) 3.9% n.a. 2.7% 8.1% 9.6%


Source: Company, Daiwa forecasts; note: 2013-14 financials include CRB’s non-beer business, which was disposed of in September 2015

5

10

15

20

25

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Mengniu 13 17

21 25 29

(HKD)

We believe increasing

selling expenses won’t

lead to rapid revenue

growth for Mengniu

26


Tsingtao Brewery (168 HK, HKD28.80, Underperform [4]): Still a market-share loser

We are concerned: 1) that Tsingtao’s market-share gains look to have come to an end in

2015E, while the other top-2 players gained market share during the period, and 2) about

continuously declining industry sales (-5.7% in 9M15). Hence, we cut our revenue

forecasts by 1-9% over 2015-17E. Feeding in our lower EPS forecasts, we pare our 12-

month TP to HKD26.80 (from HKD32.0). Our target PER of 19x (lowered from 20x) still

marks a 10% discount to the stock’s past-3-year average 12-month forward PER, as

Tsingtao’s EPS CAGR has declined from 8% for 2010-14 to almost 0% over 2015-17E (on

our forecasts). Accordingly, we reaffirm our Underperform (4) rating.

Tsingtao: financial summary Tsingtao Brewery: share price and [past-5-year] PER band

chart

Key Financials 2013 2014 FY15E 2016E 2017E

Revenue (CNY m) 28,291 29,049 28,092 26,912 27,286

YoY 9.7% 2.7% -3.3% -4.2% 1.4%

vs consensus n.a. n..a 2.1% -5.0% -7.0%

Reported net profit (CNY m) 1,971 1,994 1,636 1,610 1,714

YoY 12.1% 1.1% -17.9% -1.6% 6.5%

EPS (CNY) 1.30 1.48 1.21 1.19 1.27

YoY 0.2% 13.2% -17.9% -1.6% 6.5%

Operating margin % 7.4 6.6 6.3% 6.0% 6.5%

ROE% 13.3 13.6 10.3% 9.4% 9.4%


Fufeng (546 HK, HKD2.61): Price headwinds strengthening - downgrading to Hold (3)

Given the product ASP declines, we are cutting: 1) Fufeng’s EPS forecasts over 2015-17E

by 5-25%, and 2) our target PER from 12x to 9x (from the stock’s high end to the past-5-

year average). Our new 12-month target price of HKD2.55 (previously HKD5.0) suggests

limited upside; we have cut our target PER multiple from 12x to 9x as the product ASP

uptrend looks to have come to an end and we believe Fufeng should now trade at its

historical average PER (vs high-end when we had previously expected a product price

upcycle). Hence, we downgrade our rating from Buy (1) to Hold (3). Shares are trading

currently at a 8.5x 2016E PER. We believe the ASP and operating-profit margin decline for

the xanthan gum business (10% of 2016E operating profit) has been priced in, while the

shares will likely be supported by EPS growth at 8%/8% YoY over 2016/17E, respectively.

Fufeng: financial summary Fufeng: share price and past-5-year PER band

Valuation 2013 2014 2015E 2016E 2017E

Revenue (CNY m) 11,367 11,298 11,761 12,869 12,992

YoY 2 -1 4 9 1

Our forecast vs. consensus (%) n..a n..a -1 -2 -6

Net profit (CNY m) 506 626 510 550 596

YoY 19 24 -19 8 8

EPS (CNY) 0.26 0.30 0.31 0.26 0.28

Recurring EPS growth (%) 5 16 -20 8 8

Operating margin (%) 8.1% 9.9% 7.6% 6.4% 6.8%

ROE (%) 11.8% 12.3% 9.0% 9.0% 9.2%


20

30

40

50

60

70

80

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

168 HK 18 21

24 27 30

HKD

0

2

4

6

8

10

Nov

-07

Apr

-08

Sep

-08

Feb

-09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep

-13

Feb

-14

Jul-1

4

Dec

-14

May

-15

Oct

-15

564.HK 3x 4.5x

6x 7.5x 9x

(HKD)

Huishan and Tsingtao

remain our least

preferred stocks

27


The somewhere in-betweens

Want Want (151 HK, HKD4.96, Buy [1])- Sales and earnings growth recovery in sight

We reiterate our Buy (1) rating on Want Want, but lower our 12-month target price to

HKD7.30 (set at 18.5x 2016E PER) from HKD8.50 (formerly 20x PER) after incorporating

downward revisions to our earnings of 8-10% over 2015-17E. Our target PER marks a

20% discount to the stock’s past-5-year average 12-month forward PER, as we expect

earnings growth to decelerate over 2015-17E vs the previous five years (15%). We

forecast Want Want’s earnings growth to recover in 2016-17E as we expect revenue from

its food business to see a 5% CAGR over 2015-17E, driven by new products and revenue

growth in the snack segment. We prefer Want Want over the other large-cap China staples

companies due to its stronger balance sheet and cash flow-supporting dividends and share

buybacks (USD288m spent in 2015).

Want Want: financial summary Want Want: share price and past-5-year PER band

2013 2014 2015E 2016E 2017E

Revenue (USD m) 3,818 3,775 3,532 3,748 4,008

YoY (%) 14% -1% -6% 6% 7%

Our forecast vs. consensus (%) n.a. n.a. -5.5% -3.0% -1.1%

Net profit (USD m) 686 619 547 643 709

Recurring net profit growth (%) 24% -10% -12% 18% 10%

EPS (USD) 0.0519 0.0468 0.0416 0.0501 0.0552

Recurring EPS growth (%) 24% -10% -11% 20% 10%


ROE 38.8% 31.0% 27.1% 29.5% 27.6%


Source: Bloomberg

WH Group (288 HK, HKD4.40, Outperform [2]): Benefits from having a US brand

On our forecasts, WH Group is trading at a 10x 2016E PER and we expect the company to

deliver net-profit growth of 33% YoY for 2016. Its market cap now is almost equivalent to

the market value of its 73% stake in Henan Shuanghui (000895 SZ, Not Rated). Hence,

holders of the stock are effectively getting WH Group’s business outside China “for free”.

On our revised EPS forecasts and lower peer valuation benchmarks, we cut our 12-month

target price to HKD4.80 from HKD5.50, based on a 2016E PER of 11x (previously 13.4x).

Our target PER comprises 11.8x for the China operation (kept at a 20% discount to the

peer average on slower prospective EPS growth) and a 10.2x PER for the US operation (in

line with its US peers’ average).

WH Group: financial summary WH Group: share price and past-5-year PER band

2013 2014 2015E 2016E 2017E

Revenue (USD m) 11,253 22,243 22,017 23,362 24,623

YoY (%) 80% 98% -1% 6% 5%

Our forecast vs. consensus (%) n.a. n.a. 1% 1% 2%

Net profit (USD m) -263 766 611 814 908

Reported net profit growth (%) 38% 66% -28% 33% 12%

EPS (USD) 0.0452 0.0666 0.0417 0.0557 0.0621

Recurring EPS growth (%) 38% 48% -37% 33% 12%

Operating margin (%) 9.3 8.1 6.4 6.9 7.0

ROE(%) 25.0 22.8 11.3 13.5 13.4


2

4

6

8

10

12

14

Jan-11 Jul-11 Feb-12 Aug-12 Mar-13 Sep-13 Apr-14 Nov-14 May-15 Dec-15

151.HK 15x 18x

21x 24x 27x

(HKD)

3

4

5

6

7

8

9

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

288.HK 7x 8.5x

10x 11.5x 13x

(HKD)

Want Want is our only

Buy-rated stock among

the big-cap staples

names

28


Risks

Commodity prices – main risks, upside or downside

As raw materials (including many types of agricultural products and packaging) account for

over 80% of the COGS of the China staples companies in general, our profit-margin

assumptions for the companies that we cover factor in commodity-price risks. Many of the

raw materials they use, such as juice concentrates and palm oil, are imported to China,

and, hence, the companies are exposed to fluctuations in the global supply of these

commodities.

We expect the gross margins of many of the staples companies we cover to expand

slightly in 2016. Worse-than-expected depreciation of the CNY against USD, stronger

global economy, or large rebound in the oil price could create unexpected cost pressures

for the companies under our coverage. On the other hand, abundant supply of raw

materials (ie, good harvest of grains) may lead to lower production costs and, hence, better

gross margins for staple companies we covered.

Downside

Product safety

Food-safety hazards or negative talk in the market about the companies’ products could

have an adverse effect on their sales volumes, causing the latter to fall below our current

forecasts. Reports of food-safety issues, regardless of whether the China packaged food

and beverage companies are responsible, could undermine their brand value and sales

volumes.

Extreme weather changes

A cooler-than-expected winter could be a slight positive for selected items (ie, noodles,

meat). Also, a cooler-than-expected summer could dampen demand for bottled drinks.

Heavy rainfall could curb outdoor activities, which in turn could weigh on demand and thus

consumption of bottled drinks and packaged food.

Changes in regulations and price intervention

Direct price interventions by the China Government could put pressure on ASPs and

subsequently on the revenue of the packaged food and beverage companies. We believe

the risk of this is greater for the instant-noodle players than for the other packaged-food

segments, as instant noodles are a basic food item and any price hikes could create more

public concern than a price increase for non-essential items such as snacks.



What's new: After the recent pullback in the share price (-20% in 4Q15),

we upgrade UPCH to Buy (1) from Underperform (4). During our recent

retailer visits, we noted the increasing presence of UPCH’s new products,

in particular beverages. We expect the company’s earnings and revenue

growth to outperform its peers in 2016E, as a result of its increasing

contribution from new products, which carry high gross margins.

What's the impact: Adopting a diverse and differentiated approach to

increase market share. UPCH was able to consistently gain market share

over 2012-15E (+1.7/2.9pp for noodles/juice drinks, to 18%/20%,

respectively) in those segments through product diversification. We expect

such a trend to continue to drive revenue growth over 2016-17E, despite

the sluggish industry outlook for beverages (as highlighted in our industry

section), and this view was reaffirmed by our recent market research which

saw increasing presence of UPCH’s products in hypermarkets and

convenience stores, including, small-bottles of milk tea (fresh-milk brewed

to justify the higher ASPs), “vege-light” bow noodles, and sugar-free tea.

EPS growth of 19-11% YoY for 2016-17E. We raise our EPS for 2016-17E by

6-18% after revising up our gross margin assumptions. We also lift our revenue

forecasts for the beverage segment by 2%, as we believe UPCH will be able to

regain market share in both the juice and bottled-tea segments (+0.5pp-1pp

per year over 2016-17E). For noodles, we are cutting our revenue forecasts by

1% as the market is still shrinking. But we expect UPCH’s gross margin to

reach 36% in 2016, and remain flat for 2017E, as the contribution of high-

margin products rises while that for old products falls (vs. our previous forecast

of a slight decline). As UPCH’s operating margin is thin (at 5.2% in 2016E, vs.

8.7% for Tingyi), a 0.1pp improvement in the 2016 operating margin (led by

gross margin expansion) would lift its reported net profit by 1.8% (and vice

versa), on our estimates. As evidenced by the 1H15 results, such gross-margin

expansion was enough to offset the rise in selling expenses (for marketing new

products).

What we recommend: We cut our 12-month TP to HKD6.20 (from

HKD7.00) on a lower valuation benchmark, now based on a 22.6x 2016E

PER (previously 26.5x for 2016E), in line with the company’s average since

its IPO in 2007. Upgrade to Buy (1). Risk to our call: lower-than-expected

new product revenue contribution.

How we differ: Our 2016-17 revenue forecasts are 2-8% above consensus

as we are more optimistic on the revenue contribution from new products.

Our 2015-17E EPS are below due to our lower expectations for the

earnings contribution from the non-core business (Jinmailong JV).

26 January 2016

Uni-Presi dent Chi na

Upgrading to Buy; new beverage products shine

New beverage products to boost gross margins and market share

Recent share price pull-back provides buying opportunity

Upgrade to Buy (1) on market-share gains; TP now HKD6.20


Source: FactSet, Daiwa forecasts

Uni-President China (220 HK)

Target price: HKD6.20 (from HKD7.00)

Share price (25 Jan): HKD5.20 | Up/downside: +19.2%


[email protected]

Forecast revisions (%)

Year to 31 Dec 15E 16E 17E

Revenue change (0.4) (0.1) 0.1

Net profit change (0.9) 6.2 17.6

Core EPS (FD) change (0.9) 6.2 17.6

70

86

103

119

135

4.5

5.5

6.5

7.5

8.5

Jan-15 Apr-15 Jul-15 Oct-15

Share price performance

Uni-Pres C (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 4.98-8.13

Market cap (USDbn) 2.88

3m avg daily turnover (USDm) 3.27

Shares outstanding (m) 4,319

Major shareholder Uni-President Enterprise (1216.TT) (70.3%)

Financial summary (CNY)


Revenue (m) 23,642 25,524 26,783

Operating profit (m) 1,042 1,334 1,465

Net profit (m) 844 1,004 1,114

Core EPS (fully-diluted) 0.195 0.232 0.258

EPS change (%) 510.7 18.9 11.0

Daiwa vs Cons. EPS (%) (2.8) (2.0) (7.6)

PER (x) 22.5 18.9 17.0

Dividend yield (%) 0.9 1.1 1.2

DPS 0.039 0.046 0.052

PBR (x) 1.6 1.5 1.4

EV/EBITDA (x) 8.3 7.1 6.4

ROE (%) 7.5 8.3 8.6

30

Uni-President China (220 HK): 26 January 2016

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook UPCH: reported and recurring net profit, YoY %

We forecast UPCH’s net profit to rebound strongly by

566% YoY for 2015E (January-September 2015: +162%

YoY) mainly on gross margin expansion, driven by lower

raw-material costs (non-recurring in 2016-17E) and a

product mix upgrade (long-term catalyst). We continue to

see gross margin expansion as the key earnings catalyst

driving net profit to increase by 19% YoY for 2016E and

11% YoY for 2017E.


Valuation UPCH: 12-month forward PER bands since 2008

Over the past 5 years, UPCH has traded in a wide 12-

month forward PER range of 16-35x. Successful new

products were an important earnings and PER rerating

catalyst in 2012-13. Our new target PER of 22.6x for

2016E is based on the company’s average valuation since

2007 (vs. its past-5-year average of 26.5x that we used

previously), which we believe is more in line with the trough

valuation we saw in 2008-09. It also represents a premium

to the Chinese staples companies’ average (16x), as

UPCH is one of the few staple stocks able to offer mid-

teens EPS growth in 2016-17E, based on our estimates.

Source: Bloomberg

Earnings revisions UPCH: Bloomberg consensus EPS forecasts

UPCH’s 2016E consensus estimates trended up slightly in

2H15, due we believe to the launch of more new products

and it successfully gaining greater product penetration,

such as its Haizhiyen and Xiaoming classmates. We would

revisit our EPS forecasts if gross margin expansion from

new products launched was better than expected.

Source: Bloomberg

-40%

174%

-48% -72%

566%

19% 11%

(200%)

(100%)

0%

100%

200%

300%

400%

500%

600%

0

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015E 2016E 2017E

Reported net profit Recurring net profit

Reported net profit YoY %

2

4

6

8

10

Jan-09 Mar-10 May-11 Jul-12 Sep-13 Nov-14 Jan-16

220 HK 16 20

24 28 32

(HKD)

0.100

0.150

0.200

0.250

0.300

J-15 F-15 M-15 A-15 M-15 J-15 J-15 A-15 S-15 O-15 N-15 D-15

2015E 2016E

HKD

31


Financial summary

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales growth YoY - Instant noodles 67.4 67.3 22.5 7.7 1.7 (2.4) 1.0 1.0

Sales growth YoY - Beverage 27.0 21.5 30.2 8.9 (7.6) 9.6 11.8 6.9

Gross margin % - instant noodles 28.1 29.3 33.2 29.2 28.7 31.9 31.5 30.8

Gross margin % - beverage 34.1 29.8 35.6 35.8 35.3 38.3 39.5 39.4

Sellling and distribution expense ratio

(%)26.1 25.4 28.2 29.3 28.0 27.0 26.9 26.5

Advertising and promotion expense 11.3 10.0 13.0 12.3 10.5 10.5 10.2 10.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Instant noodles 3,549 5,936 7,270 7,826 7,960 7,773 7,851 7,929

Tea beverage 5,005 4,992 5,597 6,143 5,526 5,293 5,561 5,728

Other Revenue 4,037 6,047 8,539 9,328 9,002 10,575 12,112 13,125

Total Revenue 12,591 16,975 21,406 23,297 22,488 23,642 25,524 26,783

Other income 131 159 246 343 167 167 167 167

COGS (8,548) (12,032) (14,004) (15,518) (15,179) (15,281) (16,277) (17,113)

SG&A (3,616) (4,841) (6,766) (7,665) (7,263) (7,486) (8,079) (8,371)

Other op.expenses 0 0 0 0 0 0 0 0

Operating profit 558 261 882 458 213 1,042 1,334 1,465

Net-interest inc./(exp.) 55 95 64 99 (42) 40 10 22

Assoc/forex/extraord./others 69 63 146 563 244 75 50 60

Pre-tax profit 682 419 1,091 1,120 415 1,157 1,394 1,547

Tax (163) (84) (221) (200) (129) (312) (390) (433)

Min. int./pref. div./others 0 0 0 0 0 0 0 0

Net profit (reported) 519 335 870 920 286 844 1,004 1,114

Net profit (adjusted) 519 312 856 446 127 844 1,004 1,114

EPS (reported)(CNY) 0.144 0.093 0.242 0.256 0.072 0.195 0.232 0.258

EPS (adjusted)(CNY) 0.144 0.087 0.238 0.124 0.032 0.195 0.232 0.258

EPS (adjusted fully-diluted)(CNY) 0.144 0.087 0.238 0.124 0.032 0.195 0.232 0.258

DPS (CNY) 0.043 0.026 0.048 0.051 0.013 0.039 0.046 0.052

EBIT 558 261 882 458 213 1,042 1,334 1,465

EBITDA 930 800 1,693 1,522 1,568 2,531 2,923 3,154

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 682 419 1,091 1,120 415 1,157 1,394 1,547

Depreciation and amortisation 372 538 811 1,064 1,355 1,489 1,589 1,689

Tax paid (157) 37 (202) (259) (210) (312) (390) (433)

Change in working capital 197 503 646 (572) (142) (177) (41) (27)

Other operational CF items (124) (135) (195) (188) (43) (115) (60) (82)

Cash flow from operations 971 1,363 2,151 1,165 1,375 2,041 2,492 2,694

Capex (1,412) (4,162) (3,578) (4,746) (3,346) (2,000) (2,000) (2,000)

Net (acquisitions)/disposals 0 0 0 950 520 0 0 0

Other investing CF items 0 0 0 0 0 0 0 0

Cash flow from investing (1,412) (4,162) (3,578) (3,796) (2,826) (2,000) (2,000) (2,000)

Change in debt 166 2,930 875 2,033 (168) 444 (780) (1,000)

Net share issues/(repurchases) 0 0 0 0 2,665 0 0 0

Dividends paid (352) (156) (97) (171) (183) (57) (169) (201)

Other financing CF items (354) (37) 470 55 (102) (70) (106) (73)

Cash flow from financing (540) 2,738 1,247 1,917 2,212 316 (1,055) (1,274)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash (981) (61) (180) (714) 762 358 (562) (580)

Free cash flow (441) (2,799) (1,427) (3,581) (1,970) 41 492 694

32


Financial summary continued …

Balance sheet (CNYm)

Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 2,432 2,387 2,295 1,420 2,128 2,666 2,263 1,833

Inventory 1,139 1,274 1,285 1,514 1,129 1,256 1,338 1,407

Accounts receivable 401 513 513 548 487 512 553 581

Other current assets 429 443 824 1,026 1,343 1,343 1,343 1,343

Total current assets 4,402 4,617 4,917 4,508 5,088 5,778 5,498 5,164

Fixed assets 3,121 5,579 7,912 10,186 11,642 12,158 12,574 12,890

Goodwill & intangibles 11 8 7 17 29 29 29 29

Other non-current assets 2,047 3,533 3,704 4,258 4,506 4,506 4,506 4,506

Total assets 9,581 13,737 16,540 18,968 21,264 22,470 22,606 22,588

Short-term debt 166 1,584 409 902 1,556 2,000 2,000 2,000

Accounts payable 1,020 1,196 1,442 1,410 1,054 1,256 1,338 1,407

Other current liabilities 1,718 2,307 3,098 3,024 3,110 2,883 2,883 2,883

Total current liabilities 2,904 5,087 4,948 5,336 5,721 6,139 6,221 6,290

Long-term debt 0 1,512 3,562 5,102 4,280 4,280 3,500 2,500

Other non-current liabilities 17 328 358 388 427 427 427 427

Total liabilities 2,921 6,926 8,869 10,826 10,428 10,846 10,148 9,216

Share capital 34 34 34 34 40 40 40 40

Reserves/R.E./others 6,625 6,777 7,637 8,108 10,797 11,584 12,419 13,332

Shareholders' equity 6,660 6,811 7,671 8,142 10,837 11,624 12,459 13,372

Minority interests 0 0 0 0 0 0 0 0

Total equity & liabilities 9,581 13,737 16,540 18,968 21,264 22,470 22,606 22,588

EV 15,880 18,502 19,321 22,059 21,137 21,043 20,666 20,096

Net debt/(cash) (2,266) 709 1,675 4,584 3,708 3,614 3,237 2,667

BVPS (CNY) 1.850 1.892 2.131 2.262 2.509 2.691 2.884 3.096

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 38.2 34.8 26.1 8.8 (3.5) 5.1 8.0 4.9

EBITDA (YoY) (14.6) (14.0) 111.7 (10.1) 3.1 61.3 15.5 7.9

Operating profit (YoY) (27.2) (53.2) 237.4 (48.0) (53.5) 388.9 28.1 9.8

Net profit (YoY) (26.4) (39.9) 174.4 (47.9) (71.6) 566.2 18.9 11.0

Core EPS (fully-diluted) (YoY) (19.0) (39.9) 174.4 (47.9) (74.2) 510.7 18.9 11.0

Gross-profit margin 32.1 29.1 34.6 33.4 32.5 35.4 36.2 36.1

EBITDA margin 7.4 4.7 7.9 6.5 7.0 10.7 11.5 11.8

Operating-profit margin 4.4 1.5 4.1 2.0 0.9 4.4 5.2 5.5

Net profit margin 4.1 1.8 4.0 1.9 0.6 3.6 3.9 4.2

ROAE 7.9 4.6 11.8 5.6 1.3 7.5 8.3 8.6

ROAA 5.9 2.7 5.7 2.5 0.6 3.9 4.5 4.9

ROCE 8.4 3.1 8.2 3.6 1.4 6.0 7.4 8.2

ROIC 11.4 3.5 8.3 3.4 1.1 5.1 6.2 6.6

Net debt to equity n.a. 10.4 21.8 56.3 34.2 31.1 26.0 19.9

Effective tax rate 23.9 20.1 20.3 17.8 31.1 27.0 28.0 28.0

Accounts receivable (days) 9.8 9.8 8.7 8.3 8.4 7.7 7.6 7.7

Current ratio (x) 1.5 0.9 1.0 0.8 0.9 0.9 0.9 0.8

Net interest cover (x) n.a. n.a. n.a. n.a. 5.1 n.a. n.a. n.a.

Net dividend payout 30.0 27.9 19.7 19.9 18.3 20.0 20.0 20.0

Free cash flow yield n.a. n.a. n.a. n.a. n.a. 0.2 2.6 3.7

Company profile

Listed in Hong Kong in 2007, Uni-President China (UPCH) is the second-largest instant-noodle

manufacturer in China, with a 17.9% market share (2014), according to AC Nielsen. In addition, it

was the second-largest ready-to-drink tea brand (c.29% market share) and the largest milk tea

brand (c.62%) in the domestic market in 2014.


Hong Kong Consumer Staples

What's new: We remain positive on Vinda’s earnings growth prospects in

view of its increasing sales of personal care products and expansion

outside China. We estimate the pan-Asian business being acquired will

contribute c.10% of Vinda’s revenue in 2016E (9 months’ contribution) and

see the operating margin for this unit improving gradually as scale builds.

We reiterate our Outperform (2) rating given: 1) the recent share-price

weakness, which we think has priced in the impact of CNY depreciation

against the USD, and 2) strong EPS growth in 2016-17E despite our cuts.

What's the impact: Emerging as an Asian play. Vinda is due to complete

the acquisition of its parent’s personal care product businesses in Malaysia,

Singapore, Taiwan and Korea (“acquired business”) by March 2016. Thus,

we are raising our 2016-17E revenue by 9-14% (see our Memo, Acquisition

of Pan-Asia business, 28 December 2015 for details). Due to a lack of

economies of scale, the acquired business’s operating margin was 5.7% in

9M15, vs. 9.7% for Vinda. As such, we expect Vinda’s reported operating

margin to be dragged down to 10% in 2016E (2014-15E: 10.5%). However,

we look for: 1) the operating margin for the China operations to still trend

up slightly in 2016E (by 0.4pp YoY to 11%) on an increase in personal care

product sales, and 2) the acquired business’s operating margin to improve

gradually as products sourced from China lead to lower production costs.

Earnings cut due to CNY depreciation. We are revising down our 2015E

revenue after a slight slowdown in tissue market revenue growth in China

in 2H15E. However, we are cutting our 2016-17E EPS by 13-33%, as we

assume a: 1) FX loss of HKD200-300m over 2015-17E (17-36% of

recurring net profit) due to CNY weakness (using Daiwa’s USD/CNY rate of

7.5 by end-2016E), and 2) 13% EPS dilution from the new share issue for

the acquisition. While Vinda is the most negatively impacted by CNY

weakness in our coverage universe due to its USD debt exposure (>90% in

2015E), we believe its underlying growth remains robust, and hence

forecast EPS growth of 19%/52% YoY for 2016-17E, or 20%/30% YoY on

an ex-FX impact basis.

What we recommend: We reaffirm our Outperform (2) rating, but cut our

12-month TP to HKD14.30 from HKD17.40, now based on a 25x 2016E

PER (vs. 20.4x before). After the acquisition of its parent’s Asian business,

we now peg Vinda’s valuation to international peers’ (average 20x 2016E

PER), and apply a 25% premium for its better EPS-growth profile (2016E:

19% vs. 9% for peers). Key risk: a surge in pulp or selling expenses.

How we differ: Our 2016-17E EPS are 11-29% below consensus, which

we attribute to Daiwa’s more bearish view on the CNY/USD exchange rate.

26 January 2016

Vinda International

Look beyond CNY issues; emerging Asian play

EPS and TP cut after building in higher FX loss assumptions

Asia business acquisition likely to complete in 1Q16 and drive revenue

Reiterate Outperform on valuation and stronger-than-peer EPS growth



Vinda International (3331 HK)




[email protected]



Revenue change (4.2) 9.0 13.6

Net profit change (25.3) (28.3) (2.1)

Core EPS (FD) change (25.3) (33.1) (13.4)

100

118

135

153

170

11

13

15

17

20



Vinda Intl (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 11.80-19.32



Shares outstanding (m) 998

Major shareholder SCA (51.4%)

Financial summary (HKD)


Revenue (m) 9,421 12,341 14,340

Operating profit (m) 990 1,242 1,605

Net profit (m) 478 609 979


EPS change (%) (19.5) 19.0 52.2

Daiwa vs Cons. EPS (%) (22.9) (29.1) (10.9)

PER (x) 27.2 22.8 15.0


DPS 0.190 0.201 0.261

PBR (x) 2.3 1.7 1.6

EV/EBITDA (x) 11.9 10.9 8.7

ROE (%) 8.9 8.7 11.1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20151228_VindaInternational_Acquisition.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20151228_VindaInternational_Acquisition.pdf#page=1

34

Vinda International (3331 HK): 26 January 2016



Growth outlook Vinda: net profit and net-profit growth

We forecast Vinda’s net profit to decline by 19.5% YoY for

2015E as we assume a HKD280m FX loss on the CNY’s

depreciation vs. the HKD. We look for EPS growth of 19%

YoY for 2016E against net profit growth of 27.5% YoY, due

to new share issue dilution as a result of its acquisition. Net

profit growth will accelerate to 61% YoY for 2017E, on our

forecasts, due to: 1) a reduction in FX losses, and 2) 16%

YoY organic revenue growth on the back of increasing

tissue sales and slight operating margin expansion. Our

sensitivity analysis shows that a 1% depreciation in the

CNY:USD exchange rate would lead to a 4% decline in the

company’s reported net profit for 2016E.


Valuation Vinda: 12-month forward PER bands

Vinda was rerated between September 2013 and

September 2015 after Sweden’s SCA became its major

shareholder through Vinda acquiring SCA’s personal care

product business in China. We believe the recent share-

price drop already factors in the negative impact of CNY

depreciation. We look for Vinda to be rerated over 2016-

17E as synergies with the acquired pan-Asia business kick

in, and penetration of Vinda/SCA’s personal care products

improves in China. We believe our target 2016E PER of

25x is undemanding given we forecast the company’s EPS

to grow at 35% CAGR over 2015-17, including 19% YoY in

2016. Our target price also implies a 2017E PER of 16.5x,

which is at a slight discount to the peers’ average of 18x.

Source: Bloomberg

Earnings revisions Vinda: Bloomberg consensus EPS (2015-16E)

We see downside to the Bloomberg consensus 2015-16

EPS forecasts due to our higher FX loss assumptions from

CNY depreciation (2015E: HKD280m; 2016E: HKD300m;

2017E: HKD200m). However, on an ex-FX loss basis, our

forecasts call for earnings growth of 24%/20%/30% YoY

over 2015-17E driven by its acquisition of the Asian

business and expansion of its tissue sales volume growth

in China.

Source: Bloomberg

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

70%

(400)

(200)

0

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015E 2016E 2017E

Reported pro fit FX loss YoY

(HKDm)

0

5

10

15

20

25

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

3331 HK 12x 15x

18x 21x 24x

(HKD)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Jan-

15

Feb

-15

Ma

r-15

Apr

-15

Ma

y-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

2015E 2016E

(HKD)

35


Financial summary

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Volume YoY % 26 19 27 14 15 15 8 8

ASP YoY % 2.2 10.9 (0.2) (0.7) 0.4 0.2 2.5 2.2

Selling cost ratio % 12.4 12.1 12.8 13.9 14.9 15.3 16.2 16.0

Wood pulp cost change YoY % 34 (2) (12) 8 (2) (1) (2) 0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Toilet roll 2,201 2,926 3,669 3,970 4,293 4,568 4,568 4,796

Other tissue papers 1,401 1,839 2,355 2,828 3,577 4,503 5,478 6,290

Other Revenue 0 0 0 0 115 350 2,295 3,254

Total Revenue 3,602 4,765 6,024 6,798 7,985 9,421 12,341 14,340

Other income 22 18 55 40 91 60 60 60

COGS (2,540) (3,469) (4,169) (4,826) (5,577) (6,458) (8,384) (9,739)

SG&A (626) (814) (1,138) (1,317) (1,661) (2,034) (2,775) (3,057)


Operating profit 458 501 772 694 839 990 1,242 1,605

Net-interest inc./(exp.) (3) 19 (41) (57) (79) (116) (171) (165)

Assoc/forex/extraord./others 6 2 (12) 35 (23) (280) (300) (200)

Pre-tax profit 460 522 719 672 737 594 771 1,239

Tax (91) (116) (182) (130) (144) (116) (162) (260)


Net profit (reported) 369 406 537 543 593 478 609 979

Net profit (adjusted) 369 406 537 543 593 478 609 979

EPS (reported)(HKD) 0.394 0.432 0.537 0.543 0.594 0.479 0.570 0.867

EPS (adjusted)(HKD) 0.394 0.432 0.537 0.543 0.594 0.479 0.570 0.867

EPS (adjusted fully-diluted)(HKD) 0.394 0.432 0.537 0.543 0.594 0.479 0.570 0.867

DPS (HKD) 0.118 0.120 0.156 0.156 0.160 0.190 0.201 0.261

EBIT 458 501 772 694 839 990 1,242 1,605

EBITDA 588 664 972 968 1,218 1,436 1,754 2,184

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 460 522 719 672 737 594 771 1,239

Depreciation and amortisation 130 163 200 274 379 446 512 579

Tax paid (101) (140) (217) (205) (44) (116) (162) (260)

Change in working capital (339) (150) (15) (1) (53) (363) (488) (332)

Other operational CF items (3) (21) 53 81 82 115 171 165

Cash flow from operations 147 373 740 821 1,100 676 804 1,391

Capex (473) (833) (1,264) (1,386) (1,009) (1,000) (1,000) (1,000)

Net (acquisitions)/disposals 1 7 36 (21) (1,366) 0 (3,776) 0


Cash flow from investing (472) (826) (1,228) (1,407) (2,375) (1,000) (4,776) (1,000)

Change in debt 224 882 114 653 1,727 144 2,002 0

Net share issues/(repurchases) 33 5 531 (9) 0 (9) 2,077 0

Dividends paid (112) (112) (130) (161) (148) (189) (227) (295)

Other financing CF items 212 (77) (17) 34 (299) (43) (47) (96)

Cash flow from financing 357 697 498 517 1,281 (97) 3,805 (391)

Forex effect/others (6) (4) (4) (62) 18 280 300 200

Change in cash 27 241 5 (131) 24 (141) 133 200

Free cash flow (326) (460) (525) (565) 91 (324) (196) 391

36



Balance sheet (HKDm)

Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 390 716 760 693 722 486 472 581

Inventory 1,322 1,372 1,447 1,643 2,029 2,350 3,051 3,544

Accounts receivable 647 939 1,116 1,286 1,524 1,888 2,472 2,873

Other current assets 1 43 42 41 62 90 90 90


Fixed assets 2,273 3,022 3,987 5,102 5,902 6,478 9,795 10,238

Goodwill & intangibles 11 10 13 21 1,400 1,400 1,400 1,400

Other non-current assets 248 360 458 586 565 565 1,535 1,535

Total assets 4,891 6,464 7,823 9,373 12,203 13,257 18,815 20,260

Short-term debt 557 801 1,219 1,032 1,556 1,700 2,000 2,000

Accounts payable 980 1,210 1,423 1,820 2,309 2,674 3,472 4,033

Other current liabilities 64 69 91 58 154 139 139 139


Long-term debt 530 1,169 865 1,705 2,909 2,909 4,611 4,611



Share capital 94 94 100 100 100 100 100 100





EV 13,677 14,173 14,207 14,932 16,722 17,102 19,117 19,009

Net debt/(cash) 698 1,254 1,325 2,044 3,743 4,123 6,139 6,030

BVPS (HKD) 2.870 3.345 4.121 4.654 5.089 5.650 7.438 8.221

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 29.8 32.3 26.4 12.8 17.5 18.0 31.0 16.2

EBITDA (YoY) (8.6) 13.0 46.3 (0.4) 25.8 17.9 22.2 24.5

Operating profit (YoY) (12.2) 9.5 53.9 (10.1) 20.9 18.0 25.4 29.2

Net profit (YoY) (7.3) 10.0 32.3 1.1 9.3 (19.5) 27.5 60.7

Core EPS (fully-diluted) (YoY) (10.5) 9.8 24.2 1.2 9.4 (19.5) 19.0 52.2


EBITDA margin 16.3 13.9 16.1 14.2 15.3 15.2 14.2 15.2



ROAE 15.5 13.9 14.8 12.4 12.2 8.9 8.7 11.1

ROAA 8.6 7.1 7.5 6.3 5.5 3.8 3.8 5.0

ROCE 13.6 11.3 13.6 10.2 9.9 10.0 9.8 10.4

ROIC 12.3 10.0 11.7 9.2 8.7 8.6 8.1 8.5

Net debt to equity 26.0 40.0 32.2 44.0 73.7 73.1 73.1 65.0



Current ratio (x) 1.5 1.5 1.2 1.3 1.1 1.1 1.1 1.1

Net interest cover (x) 139.2 n.a. 19.0 12.2 10.6 8.5 7.3 9.7


Free cash flow yield n.a. n.a. n.a. n.a. 0.7 n.a. n.a. 3.0

Company profile

Vinda is the 3rd-largest tissue paper brand in China, with a market share of approximately 13% in

2014, according to AC Nielsen. Its major products include toilet rolls, box tissues, handkerchiefs,

and soft-pack tissues.



What's new: Unlike other dairy processors, Want Want’s milk-powder cost

trend should remain favourable in 1H16 as it uses up its reserves of low-

cost inventory, whose unit cost we estimate is still c.20% below the current

milk powder spot price on the international market. Moreover, we expect

the ASP of Want Want’s rice crackers to continue to rise due to product-mix

adjustments (with the company planning more seasonal products/festive

items), and we see Want Want maintaining its strategy of avoiding price

competition to protect its brand and pricing power. Reiterate Buy (1) rating.

What's the impact: Gross margin poised to improve. We are cutting our

2015-17E EPS by 8-10%: 1) as we expect FX losses over 2015-17 due to

CNY depreciation against the USD, and 2) after revising down our 2015-

17E revenue by 4-5% on rising competition in the dairy industry. That said,

we look for Want Want’s revenue growth to resume in 2016-17E at 6-7%

YoY (vs. a 1-6% YoY decline in 2014 and 2015) on the new products

launched in 2014-15E continuing to gain market share, and a recovery in

revenue growth for snacks in 2016E. This, coupled with lower raw-material

costs, should see the gross margin improve slightly by 0.3pp to around

44% for 2016E, after a 3.4pp YoY jump in 2015E.

Still our top pick. We still prefer Want Want over the other big-cap staple

companies due to: 1) our expectation that its EPS growth will resume in

2016-17E, and 2) its stronger balance sheet and cash flow, and 3) our

preference for the snacks segment over other key food & beverage

categories due to its potentially relatively faster segment revenue growth.

What we recommend: We trim our 12-month target price to HKD7.30

(from HKD8.50), which is now based on an 18.5x 2016E PER (from 20x)

post our EPS revisions. Our target PER is based on a 20% discount to the

stock’s past-5-year average 12-month forward PER (now 23.2x vs. 25x

previously with the same 20% discount), as we expect a slowdown in dairy

market growth over 2015-17E vs. the previous 5 years. However, we see

continuous share buybacks, armed with its FCF of USD550m/year over

2016-17E (it spent c.USD288m in 2015) as a potential catalyst. With EPS

growth heading back towards positive territory in 2016-17E, we reaffirm our

Buy (1) call. The key risk: a surge in promotion costs.

How we differ: Our 2015E EPS is 11% below consensus due to our lower

dairy revenue assumptions. We are more optimistic on Want Want’s dry

food business (rice crackers, snacks) in 2016-17E and beyond, given the

low per-capita consumption base in China, as evidenced by our above-

consensus 2016-17 EPS forecasts.

26 January 2016

Want Want Chi na

Revenue and earnings growth recovery in sight

Remains our only Buy among big-caps due to strong balance sheet

Focus on snacks segment to support pricing power

EPS growth to resume in 2016-17E; reiterate Buy (1) rating



Want Want China (151 HK)




[email protected]



Revenue change (5.5) (4.5) (4.4)



65

75

85

95

105

4.5

5.8

7.0

8.3

9.5



Want Want (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Eng-meng Tsai (48.0%)

Financial summary (USD)


Revenue (m) 3,532 3,748 4,008

Operating profit (m) 739 880 974

Net profit (m) 547 643 709


EPS change (%) (11.1) 20.2 10.3

Daiwa vs Cons. EPS (%) (9.5) 2.2 8.2

PER (x) 15.3 12.7 11.5


DPS 0.019 0.025 0.028

PBR (x) 4.1 3.4 3.0

EV/EBITDA (x) 9.1 7.4 6.4

ROE (%) 27.1 29.5 27.6

38

Want Want China (151 HK): 26 January 2016



Growth outlook Want Want: net profit net-profit growth

We forecast Want Want’s net profit to recover to 18% YoY

and 10% YoY in 2016-17E, after 2 consecutive years of

decline. The key drivers would be: 1) a recovery in revenue

to a 6% CAGR over 2015-17E (-7% in 2015E) supported

by snacks segment growth, and 2) slight operating margin

expansion from a higher contribution from high-margin new

products and streamlining of the sales team (completed in

2H15).


Valuation Want Want: 12-month forward PER bands

Want Want is trading near the low-end of its past 5-year

12M forward PER band (15-28x). It has the strongest free

cash flow and balance sheet among the staples companies

we cover, which could support share buybacks (it spent

USD288m in 2015 on buying shares back). We expect

Want Want to rerate towards its past-5-year average PER

of 23x as earnings growth gradually resumes from 2016E.

Source: Bloomberg

Earnings revisions Want Want: 2015-16E Bloomberg EPS consensus

The Bloomberg-consensus 2015-16 EPS forecasts for

Want Want trended down in 2015 on a slowdown in

revenue momentum, in particular for dairy beverages.

However, we expect earnings growth to recover on

improving snacks revenue growth as a result of the new

products launched in 2014-15. Our 2016E EPS is 2%

above the Bloomberg-consensus forecasts.

Source: Bloomberg

17%

32%

24%

-10% -12%

18%

10%

(20%)

(10%)

0%

10%

20%

30%

40%

0

100

200

300

400

500

600

700

800

2011 2012 2013 2014E 2015E 2016E 2017E

Net profit (LHS) YoY (RHS)

(USDm)

2

4

6

8

10

12

14

Jan-11 Jul-11 Feb-12 Aug-12 Mar-13 Sep-13 Apr-14 Nov-14 May-15 Dec-15

151.HK 15x 18x

21x 24x 27x

(HKD)

0.04

0.05

0.05

0.06

0.06

0.07

0.07

0.08

Jan

15

Feb

15

Mar

15

Apr

15

May

15

Jun

15

Jul 1

5

Aug

15

Sep

15

Oct

15

Nov

15

Dec

15

2015E 2016E

(USD)

39


Financial summary

Key assumptions

Profit and loss (USDm)

Cash flow (USDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales growth YoY - rice crackers 34.3 30.0 (0.6) 12.0 (10.8) 8.2 6.6 7.5

Sales growth YoY - beverages 33.8 30.6 22.6 17.0 (0.3) (14.1) 2.5 3.4

Sales growth YoY - snacks 22.0 36.1 14.8 8.4 7.0 (3.6) 12.4 12.5

Gross margin % - rice crackers 40.8 37.6 39.0 40.8 39.9 41.9 42.6 43.3

Gross margin % - beverages 34.6 33.4 39.5 41.3 38.4 43.7 44.1 43.5

Gross margin % - snacks 40.7 34.5 40.4 43.0 44.9 45.2 44.8 44.9

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Rice crackers 629 817 812 910 812 879 937 1,007

Beverages 1,067 1,394 1,709 1,999 1,993 1,712 1,755 1,815

Other Revenue 548 736 838 909 970 941 1,056 1,186

Total Revenue 2,244 2,947 3,359 3,818 3,775 3,532 3,748 4,008

Other income 41 61 46 78 73 73 73 73

COGS (1,400) (1,922) (2,031) (2,232) (2,256) (1,991) (2,104) (2,251)

SG&A (447) (564) (664) (781) (816) (875) (837) (856)


Operating profit 439 522 711 883 777 739 880 974

Net-interest inc./(exp.) 4 16 38 49 53 45 21 26

Assoc/forex/extraord./others 0 0 1 2 (1) (1) (1) (1)

Pre-tax profit 443 538 749 934 830 782 900 1,000

Tax (84) (119) (195) (247) (210) (235) (257) (290)

Min. int./pref. div./others 0 0 0 (1) (1) (1) (1) (1)



EPS (reported)(USD) 0.027 0.032 0.042 0.052 0.047 0.042 0.050 0.055

EPS (adjusted)(USD) 0.027 0.032 0.042 0.052 0.047 0.042 0.050 0.055

EPS (adjusted fully-diluted)(USD) 0.027 0.032 0.042 0.052 0.047 0.042 0.050 0.055

DPS (USD) 0.023 0.020 0.029 0.035 0.024 0.019 0.025 0.028

EBIT 439 522 711 883 777 739 880 974

EBITDA 500 596 798 988 899 876 1,029 1,133

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E



Tax paid (72) (82) (186) (222) (210) (235) (257) (290)

Change in working capital (16) 54 (14) 191 (418) 181 (24) 6


Cash flow from operations 412 568 598 958 271 822 749 849

Capex (171) (224) (243) (273) (354) (250) (200) (200)



Cash flow from investing (171) (224) (243) (273) (354) (250) (200) (200)

Change in debt 287 381 (22) 255 158 (272) 0 0

Net share issues/(repurchases) (8) 0 0 (5) (38) (290) (14) 0

Dividends paid (317) (259) (299) (419) (460) (295) (272) (333)

Other financing CF items (4) 67 26 49 12 15 37 28

Cash flow from financing (41) 189 (294) (121) (327) (843) (249) (305)


Change in cash 200 533 61 564 (410) (271) 300 344

Free cash flow 241 345 355 685 (83) 572 549 649

40



Balance sheet (USDm)

Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 906 1,437 1,499 2,060 1,650 1,381 1,686 2,035

Inventory 339 410 461 534 667 436 490 524




Fixed assets 758 891 1,046 1,236 1,448 1,564 1,620 1,665


Other non-current assets 77 128 146 201 246 246 246 246

Total assets 2,290 3,123 3,461 4,348 4,284 3,892 4,313 4,751

Short-term debt 294 775 350 410 518 246 246 246

Accounts payable 184 211 231 281 197 200 211 226


Total current liabilities 864 1,517 1,181 1,515 1,293 962 1,000 1,049

Long-term debt 350 250 653 847 898 898 898 898



Share capital 264 264 265 265 264 264 264 264

Reserves/R.E./others 809 1,065 1,331 1,679 1,786 1,725 2,109 2,498




EV 7,924 7,774 7,693 7,384 7,952 7,949 7,644 7,295

Net debt/(cash) (262) (413) (496) (802) (234) (237) (542) (891)

BVPS (USD) 0.081 0.101 0.121 0.147 0.155 0.155 0.185 0.215

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 31.2 31.3 14.0 13.7 (1.1) (6.5) 6.1 6.9

EBITDA (YoY) 22.7 19.3 33.9 23.8 (9.1) (2.6) 17.5 10.1

Operating profit (YoY) 23.4 19.0 36.0 24.3 (12.0) (4.9) 19.2 10.7

Net profit (YoY) 14.5 16.9 32.0 23.8 (9.8) (11.6) 17.6 10.3

Core EPS (fully-diluted) (YoY) 14.5 16.9 31.9 23.7 (9.7) (11.1) 20.2 10.3


EBITDA margin 22.3 20.2 23.8 25.9 23.8 24.8 27.4 28.3



ROAE 34.8 34.9 37.9 38.8 31.0 27.1 29.5 27.6

ROAA 17.7 15.5 16.8 17.6 14.3 13.4 15.7 15.6

ROCE 28.6 25.6 28.6 30.4 23.2 22.3 26.4 26.2

ROIC 48.8 47.0 51.9 57.5 39.0 28.8 35.0 37.2

Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.



Current ratio (x) 1.7 1.4 1.9 1.9 2.0 2.2 2.4 2.7

Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 2.9 4.2 4.3 8.4 n.a. 7.0 6.7 7.9

Company profile

Want Want China is the leading producer of rice crackers and flavoured milk drinks in China, with

market shares of about 70% and 40%, respectively, in terms of revenue for 2013, based on our

estimates. The company also makes dairy products and savoury and sweet snack foods.



What's new: We are now more conservative on the outlook for raw-milk

prices in 2016, but see CMD as a beneficiary of a long-term structural

shortage of high-quality raw milk in China. Also, the company stands to

benefit significantly from a rise in downstream revenue. Reiterate Buy (1).

What's the impact: Downstream: ambitious but feasible target.

Management targets downstream revenue to contribute 50% to total

revenue by 2020, vs. 25% in 2015E. We believe this goal is achievable and

would be highly profitable given it focuses on premium products. CMD’s

market share in the premium UHT milk segment in China already rose to

8% in 3Q15 (+2.9pp YoY). By adding new products and focusing on brand

building (highlighting its high quality and 100% in-house raw-milk source),

we believe a 24% revenue CAGR is achievable over 2015-17E.

Lower feed costs could largely offset raw-milk-price pressure. With

declining feed costs, some large competitors may lower their ASPs to boost

sales volume, driving pricing pressure in the industry. Moreover, despite the

recent rebound in milk-powder prices globally (+42% YoY in the 1st week of

December, from a trough of USD1,560/tonne in August 2015, as per

Fonterra, the dominant producer/exporter of milk powder in New Zealand),

milk-powder prices are still near a 5-year low globally. This implies imported

milk powder could remain a cheap substitute for liquid raw milk in 2016E.

But lower feed (mainly corn) costs, could see CMD’s gross margin improve

by 1.1pp YoY in 2016E, despite our revised forecast for flat raw-milk prices

(previously a 3% YoY rise per year) over 2016-17E.

What we recommend: We cut our 2015E EPS by 20% due to a higher-

than-expected loss from the revaluation of biological assets announced in

the profit warning issued in December 2015. We also cut our 2016-17E

EPS by 20% each after lowering our raw-milk-price assumptions to flat

(from 3-4% rises previously). (See Takeaways from conference call on

2015 profit warning, 21 December 2015.) We lower our 12-month SOTP-

based target price to HKD3.0 (from HKD 3.30). We now value the upstream

business (dairy farms) at HKD2.30 (previously HKD2.60) using a DCF

model, and the downstream business at HKD0.70, based on a 15x 2016E

PER (unchanged and in line with the average of its China peers). We

reiterate our Buy (1) rating. Key risks: an unexpected outbreak of bovine

disease and/or a surge in feed costs.

How we differ: Our 2015-16E EPS are 5-18% below consensus due to our

higher revaluation-loss forecasts from biological asset revaluation. Our

2017E EPS is 20% above consensus as we are more optimistic than the

market on CMD’s downstream expansion.

26 January 2016

China M odern Dair y H ol dings

Downstream expansion to offset upstream weakness

EPS forecasts lowered after profit warning in December 2015

But expect a long-term rerating as downstream contribution rises

Reiterate Buy (1); target price cut to HKD3.0



China Modern Dairy Holdings (1117 HK)




[email protected]



Revenue change (2.2) (12.6) (13.9)



70

84

98

111

125

1.2

1.7

2.3

2.8

3.3



CMDH (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Mengniu (28.0%)



Revenue (m) 4,980 5,402 5,821


Net profit (m) 632 912 1,287


EPS change (%) (21.3) 37.0 41.1

Daiwa vs Cons. EPS (%) (18.4) (5.4) 19.7

PER (x) 9.7 7.1 5.0


DPS 0.010 0.010 0.010

PBR (x) 0.7 0.7 0.6

EV/EBITDA (x) 5.7 6.4 5.0

ROE (%) 8.3 10.0 12.7

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20151221_ChinaModernDairy_Takeaways.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20151221_ChinaModernDairy_Takeaways.pdf#page=1

42

China Modern Dairy Holdings (1117 HK): 26 January 2016



Growth outlook Modern Dairy: net profit and cash earnings and YoY%

We forecast CMD’s net profit to decline by 19% YoY for

2015 due to a CNY400m loss from the revaluation of

biological assets (2014: CNY330m). On fewer revaluation

losses and an increasing revenue contribution from its

downstream operation, we look for reported net-profit

growth to recover to 44% YoY and 41% YoY for 2016E and

2017E, respectively.

Source: Company, Daiwa forecast

Valuation Modern Dairy: 12-month-forward PER

Modern Dairy stock is trading currently at a PER of 7.1x for

2016E, compared to its closet peer, China Huishan’s 34x

FY17E (fiscal year ending March 2017) (both on our EPS

forecasts). Yet, we believe Modern Dairy’s execution risk

for expansion is lower than Huishan’s. We believe the

recent sell-off of Modern Dairy shares has already priced

our flat raw-milk-price outlook and we believe Modern

Dairy deserves a rerating if its downstream business

successfully expands in revenue and maintains a high

gross margin (>22%).

Source: Bloomberg

Earnings revisions Modern Dairy: Bloomberg consensus EPS (2015-16E)

We see downside risk to the street’s 2015E EPS as some

analysts may have not factored in the profit warning

announced recently. The Bloomberg-consensus 2015-16E

EPS forecasts trended down in 2015 on increasing losses

from the revaluation of biological assets.

Source: Bloomberg

34%

-28%

108%

-19%

44% 41%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1,000

1,200

1,400

2012 2013 2014 2015E 2016E 2017E

Reported net profit (LHS) Reported profit YoY (RHS, %)

((CNYm))

0

2

4

6

8

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Sep

12

Dec

12

Mar

13

Jun

13

Sep

13

Dec

13

Mar

14

Jun

14

Sep

14

Dec

14

Mar

15

Jun

15

Sep

15

Dec

15

1117 HK 11x 15x

19x 23x 27x

(HKD)

0.10

0.15

0.20

0.25

0.30

0.35

Dec

14

Feb

15

Apr

15

Jun

15

Aug

15

Oct

15

Dec

15

2015E 2016E

(HKD)

43


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Milk Yield (tonne/cow/year) 7.8 7.8 8.0 8.4 8.9 9.1 8.9 8.7

Sales volume of raw milk (tonnes) 201,958 366,656 496,979 679,722 931,334 930,284 1,007,953 1,052,848

Raw milk ASP (CNY/kg) 3.9 3.8 4.1 4.6 5.0 4.4 4.2 4.2

Number of cows 87,496 128,759 176,264 186,838 201,507 210,537 213,296 219,329

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Raw milk 782 1,384 1,971 2,968 4,194 3,327 3,319 3,325

Self-own brand 0 7 64 321 833 1,620 2,045 2,454

Other Revenue 0 0 0 0 0 33 38 42

Total Revenue 782 1,392 2,035 3,289 5,027 4,980 5,402 5,821

Other income 56 127 124 70 40 55 55 55

COGS (587) (1,065) (1,531) (2,412) (3,161) (3,268) (3,486) (3,460)

SG&A (53) (45) (94) (246) (541) (398) (580) (645)


Operating profit 198 409 533 701 1,365 1,368 1,392 1,771

Net-interest inc./(exp.) (47) (60) (101) (208) (266) (293) (302) (296)

Assoc/forex/extraord./others 62 50 105 (83) (329) (390) (100) (100)

Pre-tax profit 214 399 537 410 770 685 990 1,375

Tax (0) 0 (3) (11) (7) (25) (50) (60)

Min. int./pref. div./others (50) (10) (14) (26) (28) (28) (28) (28)

Net profit (reported) 163 389 520 373 735 632 912 1,287

Net profit (adjusted) 163 389 520 373 778 632 912 1,287

EPS (reported)(CNY) 0.040 0.080 0.107 0.077 0.151 0.126 0.172 0.243

EPS (adjusted)(CNY) 0.040 0.080 0.107 0.077 0.160 0.126 0.172 0.243


DPS (CNY) 0.000 0.000 0.000 0.000 0.010 0.010 0.010 0.010

EBIT 198 409 533 701 1,365 1,368 1,392 1,771

EBITDA 202 428 573 997 2,096 2,014 1,756 2,153

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E



Tax paid (0) (0) (8) (11) (7) (25) (50) (60)

Change in working capital (3) 253 177 (441) (309) 148 196 280

Other operational CF items (8) (45) 131 291 594 683 402 396

Cash flow from operations 269 701 972 419 1,274 1,737 1,802 2,274

Capex (1,498) (2,258) (2,271) (1,960) (1,785) (1,341) (1,193) (1,346)

Net (acquisitions)/disposals 0 (14) 0 (78) 0 (1,583) 0 0



Change in debt (212) 680 1,104 1,641 839 212 0 (400)

Net share issues/(repurchases) 2,876 0 0 0 0 1,583 0 0

Dividends paid 0 0 0 0 0 (48) (48) (48)

Other financing CF items (953) (137) (44) 201 42 (732) (432) (426)

Cash flow from financing 1,711 544 1,061 1,842 881 1,016 (480) (874)


Change in cash 482 (1,027) (238) 222 370 (172) 130 54

Free cash flow (1,229) (1,557) (1,299) (1,542) (511) 396 609 927

44




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 2,069 1,017 470 800 1,170 1,008 1,138 1,192

Inventory 319 338 440 691 641 606 639 642

Accounts receivable 132 211 283 545 827 909 1,000 1,100



Fixed assets 1,924 2,660 3,583 4,033 4,458 5,040 4,925 4,793



Total assets 7,011 7,916 10,159 12,494 14,211 16,788 17,982 19,215

Short-term debt 559 510 1,666 2,989 2,958 2,800 2,800 2,400

Accounts payable 206 354 716 813 842 926 1,112 1,334



Long-term debt 1,176 1,693 1,641 1,960 2,829 3,200 3,200 3,200



Share capital 415 413 415 415 415 415 415 415





EV 6,212 7,724 9,393 10,664 11,046 11,429 11,310 10,866

Net debt/(cash) (333) 1,186 2,837 4,149 4,618 4,992 4,862 4,408

BVPS (CNY) 0.940 1.006 1.091 1.191 1.351 1.638 1.801 2.035

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. 78.0 46.2 61.7 52.8 (0.9) 8.5 7.8

EBITDA (YoY) n.a. 111.9 34.0 73.9 110.4 (3.9) (12.8) 22.6

Operating profit (YoY) n.a. 106.8 30.4 31.5 94.6 0.2 1.7 27.3

Net profit (YoY) n.a. 138.0 33.6 (28.2) 108.4 (18.7) 44.2 41.1

Core EPS (fully-diluted) (YoY) n.a. 102.9 33.6 (28.5) 108.4 (21.3) 37.0 41.1


EBITDA margin 25.8 30.7 28.2 30.3 41.7 40.4 32.5 37.0



ROAE 7.2 8.3 10.3 6.8 12.7 8.3 10.0 12.7

ROAA 4.7 5.2 5.8 3.3 5.8 4.1 5.2 6.9

ROCE 6.3 6.1 6.8 7.2 11.7 10.0 9.1 11.0

ROIC 4.7 7.9 7.4 7.5 12.7 10.5 9.3 11.3




Current ratio (x) 2.3 1.2 0.4 0.5 0.6 0.6 0.6 0.6

Net interest cover (x) 4.2 6.8 5.3 3.4 5.1 4.7 4.6 6.0


Free cash flow yield n.a. n.a. n.a. n.a. n.a. 6.1 9.4 14.3

Company profile

China Modern Dairy (CMD) is the largest dairy-farm operator in China and the first in the country to

operate large-scale dairy farms (herd size: 10,000 heads). More than 70% of its raw milk is sold to

Mengniu, while the remainder is sold to regional milk-powder producers, and as fresh milk under

CMD’s own brand. A group of individual shareholders (including management) and Mengniu own

31% and 28% of CMD, respectively.

45


CMD: DCF sensitivity Key assumption for our DCF calculation

Equity Value

Discount NPV of Enterprise Equity Per Share

Rate FCF (CNY m) Value (CNY m) Value (CNY m) (HKD)

5.6% 26,923 29,990 25,372 5.70

6.6% 22,380 25,448 20,830 4.68

7.6% 19,079 22,147 17,529 3.94

8.6% 16,580 19,648 15,030 3.38

9.6% 14,681 17,749 13,131 3.00

10.6% 13,063 16,131 11,513 2.59

11.6% 11,784 14,852 10,234 2.30

12.6% 10,720 13,788 9,170 2.06

13.6% 9,823 12,891 8,273 1.86

Assumptions (%)

Equity Beta (X) Terminal growth rate 0

Equity risk premium Cost of debt 7.8

Risk free rate Debt-weighting 40

Cost of equity WACC* 9.6

Source: Daiwa estimates Source: Daiwa estimates

CMD: DCF valuation of upstream business

2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F 2030F >FY2031E

Milk volume (000 tons) 930 1,066 1,176 1,209 1,230 1,245 1,264 1,284 1,306 1,313 1,320 1,328 1,335 1,343 1,350 1,357

ASP (CNY/kg) 4.40 4.20 4.28 4.33 4.37 4.41 4.46 4.50 4.55 4.59 4.64 4.69 4.73 4.78 4.83 4.88

Sales of milk (CNY mil) 4,947 4,476 5,036 5,231 5,376 5,497 5,633 5,783 5,938 6,031 6,125 6,221 6,318 6,417 6,518 6,614

EBIT (CNY mil) 1,368 1,392 1,771 1,591 1,613 1,654 1,701 1,754 1,777 1,801 1,825 1,850 1,874 1,899 1,925 1,948

EBITDA (CNY mil) 1,614 1,656 2,053 1,890 1,931 1,988 2,053 2,123 2,165 2,206 2,248 2,289 2,332 2,374 2,417 2,458 Terminal Value

Interest and tax expenses -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318 -318

Capex (CNY mil) -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350 -350

Cashflow (CNY mil) 946 988 1,385 1,222 1,262 1,320 1,385 1,455 1,497 1,538 1,579 1,621 1,663 1,706 1,749 1,790 18,602

Discount factor 1.096 1.202 1.317 1.444 1.583 1.735 1.902 2.085 2.286 2.506 2.747 3.011 3.300 3.618 3.966 4.347 4.766

Discounted FCF 862.5 822.4 1051.4 846.4 797.5 760.8 728.2 697.9 654.8 613.9 575.1 538.5 504.0 471.5 441.0 411.6 3903.4

Total discounted FCF (from 2015F onward) 14,681

NAV/share (CNY) 1.90

Net cash as of 2014

-4,618

Total value 10,063 NAV/share (HK$) 2.30




What's new: We are positive on WH Group starting operations of its new

American-style packaged-meat factory in Zhengzhou in December 2015,

producing American and Smithfield branded cold-chain products that carry

a higher ASP vs. its Chinese products. This product-mix upgrade should

bode well for the company. Reiterate Outperform (2) rating.

What's the impact: Commodity cost trends look favourable in China,

but mixed in the US: as we highlighted in the sector portion of this report,

we see limited upside to hog costs in 2016E due to lower corn (feed) costs

in China. But for the US, the upstream segment’s margins may remain

volatile due to commodity cost changes (grain and hog prices), and

Smithfield plans to diversify the risk by increasing its export business, in

particular to China (+40% YoY for 9M15).

Get the US operation for free: Shuanghui, WH Group’s major operating

subsidiary in China, is now trading at a 10x 2016E PER (Bloomberg

consensus), implying that WH Group’s 73% stake translates into HKD3.7

per WH Group share. This means Smithfield, WH Group’s US operation

expected to contribute c.50% of its 2015E operating profit, accounts for

only about USD873m in WH Group’s current market cap (vs. the USD4.5bn

WH Group paid for it in 2013).

Sluggish demand in 2H15 is likely temporary: For 2015-17E, we are

cutting revenue by 4-5%, as we lower our packaged-meat sales volume

assumption by 6-10% for both China and the US, due to the sluggish

demand we saw in 2H15E. But we now expect a slight increase in its

packaged-meat ASP (+5% YoY in China and 2% in the US in 2016E, vs.

flat previously) on the product mix improvement. Hence, we are revising up

our EPS for the company by 1-3% for the same period.

What we recommend: We cut our 12-month TP to HKD4.80 from

HKD5.50, now based on a 2016E PER of 11x (was 13.4x), to bring it in line

with its peers. Our target PER comprises 11.8x for the China operation

(kept at a 20% discount to peers’ average on its lower operating margin vs

other staple companies) and 10.2x PER for the US operation (in line with

its US peers’ average). The key risk: unexpected hedging losses for the US

operation.

How we differ: Our 2015-17E EPS are 6-21% below consensus as we

assume the absence of gains from the revaluation of its biological assets.

26 January 2016

WH Group

Benefits from having a US brand

Raising core 2016-17E EPS on higher ASP but lower sales volume

Smithfield operation trading at 3.1x 2016E PER at current share price

Reaffirm Outperform (2) rating; 33% YoY EPS growth for 2016E



Valuation of WH Group’s business

USD m

Market cap of Shuanghui (000895.SS) (25 Jan 16) 9,206

WH's stake (%) 73.3

WH's stake worth 6,744

WH Group's market cap 8,284

Smithfield's valuation (USD m) 1,549

Implied 2016E PER for Smithfield (x) 3.1

Source: Bloomberg, Daiwa estimates

WH Group (288 HK)




[email protected]




Net profit change 1.8 2.6 1.2

Core EPS (FD) change 1.8 2.6 1.2

90

100

110

120

130

3.5

4.3

5.0

5.8

6.5



WH Group (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Management (34.0%)



Revenue (m) 22,017 23,362 24,623


Net profit (m) 611 814 908


EPS change (%) (37.4) 33.4 11.6

Daiwa vs Cons. EPS (%) (21.3) (5.7) (7.3)

PER (x) 13.5 10.2 9.1


DPS 0.016 0.021 0.023

PBR (x) 1.5 1.3 1.2

EV/EBITDA (x) 6.6 5.7 5.0

ROE (%) 11.3 13.5 13.4

47

WH Group (288 HK): 26 January 2016



Growth outlook WH Group: Net profit (USD m) and YoY (%)

We forecast WH Group’s net profit to decline by 28% YoY

in 2015E due to an absence of gains from the revaluation

of its agriculture produce at its US hog-raising operation

(2014: about USD 300m). We expect net profit growth to

resume in 2016-17E, on a recovery in the company’s sales

volume growth in both China and the US through its

improved packaged-meat product mix.


Valuation WH Group: 12-month forward PER bands since listing

The stock is now trading at 2016E PER of 10x, which looks

attractive to us compared with the other major China

staples companies (trading at an average 2016E PER of

18x on our forecasts). In our view, WH Group’s discount to

its peers has priced in the risks of: 1) volatile hedging gains

or losses in its agriculture product future contracts for its

US hog production business, and 2) potential share sales

by some financial investors after their lock-ups expire (6-12

months after the August 2014 IPO).

Source: Bloomberg

Earnings revisions WH Group: Bloomberg 2015 and 2016 consensus EPS (USD)

The Bloomberg consensus 2015-16E EPS forecasts for

WH Group have trended down since 2015 due to rising

pork prices. While our 2015-17 forecasts are below the

consensus, due to the likely absence of revaluation gains,

we would see an upside risk to our EPS numbers if pork

costs in China were to rise by less than we expect due to

lower feed costs.

Source: Bloomberg

38%

66%

-28%

33%

12%

-30%

-10%

10%

30%

50%

70%

90%

(300)

(100)

100

300

500

700

900

1,100

1,300

1,500

2011 2012 2013 2014 2015E 2016E 2017E

Reported net p rof it (LHS) Recurring net profit (LHS)

Reported net prof it YoY %

(USDm) (% )

3

4

5

6

7

8

9

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Ma

r-15

Apr

-15

Ma

y-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

288.HK 7x 8.5x

10x 11.5x 13x

(HKD)

0.050

0.055

0.060

0.065

0.070

0.075

Jan

15

Ma

r 15

Ma

y 15

Jul 1

5

Sep

15

Nov

15

2015E 2016E

(USD)

48


Financial summary

Key assumptions


Cash flow (USDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Packaged meat revenue YoY - China

(%) n.a. n.a. 16.3 12.0 (0.9) (8.5) 11.9 12.2

Packaged meat revenue YoY - U.S. (%) n.a. n.a. n.a. n.a. 14.3 (2.2) 4.0 3.0

Fresh meat revenue YoY - China (%) n.a. n.a. 15.5 24.4 5.4 8.5 12.4 10.2

Fresh meat revenue YoY - U.S. (%) n.a. n.a. n.a. n.a. 20.5 5.0 1.0 1.0

Operating margin - China (%) n.a. 5.8 9.8 10.6 11.8 10.9 10.8 10.8

Operating margin - U.S. (%) n.a. n.a. n.a. 2.4 6.0 5.9 5.5 5.5

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Hog production 0 14 13 191 252 435 478 461

Fresh pork 0 2,095 2,419 4,543 9,368 9,861 10,413 10,939

Other Revenue 0 3,346 3,811 6,519 12,623 11,721 12,471 13,223

Total Revenue 0 5,455 6,243 11,253 22,243 22,017 23,362 24,623

Other income n.a. 132 105 167 843 88 168 178

COGS n.a. (4,902) (5,272) (9,480) (18,979) (18,525) (19,719) (20,782)

SG&A n.a. (356) (454) (874) (2,269) (2,120) (2,140) (2,238)

Other op.expenses n.a. (15) (8) (787) (110) (48) (48) (48)

Operating profit 0 314 614 279 1,728 1,412 1,623 1,733

Net-interest inc./(exp.) 0 (57) (15) (120) (371) (216) (171) (139)

Assoc/forex/extraord./others n.a. 2 3 3 63 12 0 0

Pre-tax profit 0 259 602 162 1,420 1,208 1,452 1,593

Tax n.a. (71) (134) (229) (448) (406) (429) (456)

Min. int./pref. div./others n.a. (59) (143) (196) (206) (191) (210) (230)

Net profit (reported) 0 129 325 (263) 766 611 814 908


EPS (reported)(USD) n.a. 0.011 0.029 (0.023) 0.060 0.042 0.056 0.062

EPS (adjusted)(USD) n.a. 0.011 0.033 0.045 0.067 0.042 0.056 0.062

EPS (adjusted fully-diluted)(USD) n.a. 0.011 0.033 0.045 0.067 0.042 0.056 0.062

DPS (USD) n.a. 0.000 0.000 0.000 0.000 0.016 0.021 0.023

EBIT 0 314 656 1,050 1,806 1,412 1,623 1,733

EBITDA 0 402 769 1,223 2,165 1,795 2,031 2,160

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 0 259 602 162 1,420 1,208 1,452 1,593

Depreciation and amortisation n.a. 88 113 173 359 383 408 428

Tax paid n.a. (101) (126) (250) (476) (406) (429) (456)

Change in working capital n.a. 5 57 (48) 327 (147) (253) (276)

Other operational CF items n.a. 55 20 53 (419) 204 111 79

Cash flow from operations 0 306 666 90 1,211 1,242 1,289 1,368

Capex n.a. (309) (151) (295) (699) (500) (500) (300)

Net (acquisitions)/disposals n.a. (40) (16) (4,678) (10) (10) (10) (10)

Other investing CF items n.a. 0 0 0 0 0 0 0

Cash flow from investing 0 (349) (167) (4,973) (709) (510) (510) (310)

Change in debt n.a. 864 (670) 7,238 (2,762) (1,000) (700) (500)

Net share issues/(repurchases) n.a. 0 0 0 2,284 0 0 0

Dividends paid n.a. (38) (105) (90) 0 (235) (300) (333)

Other financing CF items n.a. 59 312 (2,636) (127) (215) (196) (169)

Cash flow from financing 0 885 (463) 4,512 (605) (1,450) (1,196) (1,003)


Change in cash 0 842 36 (371) (103) (718) (417) 56

Free cash flow 0 (3) 515 (205) 512 742 789 1,068

49




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 0 1,032 796 1,083 1,209 965 764 1,053

Inventory n.a. 529 328 1,808 1,900 2,090 2,299 2,529

Accounts receivable n.a. 38 50 870 845 887 932 978

Other current assets n.a. 104 96 1,406 1,420 1,420 1,420 1,420

Total current assets 0 1,703 1,270 5,167 5,374 5,362 5,415 5,980

Fixed assets n.a. 1,387 1,411 4,132 4,582 4,699 4,791 4,663

Goodwill & intangibles n.a. 565 566 3,615 3,561 3,561 3,561 3,561

Other non-current assets n.a. 227 250 1,242 1,203 871 881 891

Total assets 0 3,882 3,497 14,156 14,720 14,493 14,648 15,095

Short-term debt n.a. 855 164 760 719 719 719 719

Accounts payable n.a. 300 225 851 850 935 935 935

Other current liabilities n.a. 464 399 1,211 1,553 1,553 1,553 1,553

Total current liabilities 0 1,619 788 2,822 3,122 3,207 3,207 3,207

Long-term debt n.a. 9 30 6,672 3,951 2,951 2,251 1,751

Other non-current liabilities n.a. 121 129 1,524 1,597 1,597 1,597 1,597

Total liabilities 0 1,749 947 11,018 8,670 7,755 7,055 6,555

Share capital 0 1 1 1 1 1 1 1

Reserves/R.E./others n.a. 1,547 1,788 2,269 5,129 5,676 6,376 7,154

Shareholders' equity 0 1,548 1,789 2,270 5,130 5,677 6,377 7,155

Minority interests n.a. 585 761 868 920 1,061 1,216 1,386

Total equity & liabilities 0 3,882 3,497 14,156 14,720 14,493 14,648 15,096

EV n.a. 8,644 8,386 14,941 12,102 11,829 11,485 10,866

Net debt/(cash) n.a. (168) (602) 6,349 3,461 2,705 2,206 1,417

BVPS (USD) n.a. 0.138 0.159 0.202 0.350 0.388 0.436 0.489

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. n.a. 14.4 80.2 97.7 (1.0) 6.1 5.4

EBITDA (YoY) n.a. n.a. 91.3 59.0 77.0 (17.1) 13.2 6.4

Operating profit (YoY) n.a. n.a. 108.9 60.1 72.0 (21.8) 15.0 6.7

Net profit (YoY) n.a. n.a. 184.5 38.4 66.1 (27.6) 33.1 11.6

Core EPS (fully-diluted) (YoY) n.a. n.a. 184.5 38.4 47.6 (37.4) 33.4 11.6

Gross-profit margin n.a. 10.1 15.6 15.8 14.7 15.9 15.6 15.6

EBITDA margin n.a. 7.4 12.3 10.9 9.7 8.2 8.7 8.8

Operating-profit margin n.a. 5.8 10.5 9.3 8.1 6.4 6.9 7.0

Net profit margin n.a. 2.4 5.9 4.5 3.8 2.8 3.5 3.7

ROAE n.a. 16.7 22.0 25.0 22.8 11.3 13.5 13.4

ROAA n.a. 6.6 9.9 5.8 5.8 4.2 5.6 6.1

ROCE n.a. 21.0 22.9 15.8 17.0 13.4 15.5 16.1

ROIC n.a. 23.2 24.4 (2.0) 12.5 9.9 11.9 12.5

Net debt to equity n.a. n.a. n.a. 279.7 67.5 47.6 34.6 19.8

Effective tax rate n.a. 27.4 22.3 141.4 31.5 33.6 29.5 28.6

Accounts receivable (days) n.a. 1.3 2.6 14.9 14.1 14.4 14.2 14.2

Current ratio (x) n.a. 1.1 1.6 1.8 1.7 1.7 1.7 1.9

Net interest cover (x) n.a. 5.5 43.7 8.8 4.9 6.5 9.5 12.4

Net dividend payout n.a. 0.0 0.0 n.a. 0.0 38.4 36.9 36.7

Free cash flow yield 0.0 n.a. 6.2 n.a. 6.2 9.0 9.6 12.9

Company profile

WH Group is the largest pork-processing company in the world, and has the largest market share in

pork processing in China and the US, which together account for 60% of global pork consumption.

It is also a leader in key markets in Europe. The company raises and slaughters hogs, and

produces fresh pork and packaged-meat products. It also owns the largest cold-chain logistics

network in China. Its brands include Shuanghui, Smithfield, Farmland, Eckrich, and Armour.



What's new: Acquisition already priced in? According to a Hong Kong

Economic Journal report in December 2015, China Resources Beer (CRB)

(the former China Resources Enterprise) is seeking an investment bank to

act as a financial advisor to assist in the acquisition of the remaining 49%

stake in the CR-Snow JV, a venture between CRB and UK-based

SABMiller. Assuming SABMiller merges with Anheuser-Busch InBev, it is

likely SABMiller would sell its 49% holding in the CR-Snow JV (CRB has a

51% stake already) (also see What if AB-InBev merges with SABMiller, 17

September 2015). We would see this scenario playing out in mid-2016. We

keep our Hold (3) rating on CRB as we believe its valuation is fair.

What's the impact: Key assumptions for a stake acquisition. We are

revising up our 2016-17E EPS by 3-19% assuming: 1) the acquisition is

done at a c.22x 2016E PER (our target PER for CRB) and is fully funded by

bank financing at an interest rate of 4% per year, and 2) CRB maintains its

ASP and market-share gains over 2016-17E without the support of

SABMiller (we see this as a likely scenario, as CRB has accumulated a lot

of technology and production experience from SABMiller over the past 20

years, while its sales team has been run independently). Arguably the only

negative would be the subsequent increase in net gearing (which we

estimate would reach 239% by end-2016, vs. 65% if the acquisition does

not go ahead).

Another scenario: 1) If CRB does not go ahead with the stake acquisition,

we estimate its net profit would still grow by 16% YoY for 2016, driven by

market-share gains. We expect the beer market to continue to shrink in

2016 (-5.7% in volume in 11M15), but believe CRB will still report flat sales

volume. 2) After acquiring the stake from SABMiller, we would not rule out

the possibility of CRB seeking co-operation with another international brand

to expand its share of China’s high-end beer market.

What we recommend: We maintain our Hold (3) rating and lower our 12-

month TP to HKD12.4 (from HKD13.4). We now value CRB at a 23x 2016E

PER (previously 26x for 2016E). We continue to set our target PER at a

c.15% premium to the 20x average of its closest peers, due to CRB’s faster

EPS growth and potential for further earnings upside. Nevertheless, we are

cutting 2015-17E revenue and 2015E EPS due to the likelihood of a further

slowdown in industry volume. The key upside and downside risks to our

call: better or worse-than-expected product-mix upgrades.

How we differ: Our 2016-17E EPS are 18-29% above the Bloomberg

consensus as we factor in the earnings enhancement from an acquisition of

the CR-Snow JV minority stake and higher operating-margin assumptions.

26 January 2016

China R esources Beer

Best-case scenario looks priced in

Forecasts raised on prospect of CRB acquiring stake in CR-Snow JV

CRB continues to gain market share

Maintain Hold (3) as acquisition seems to have been priced in



China Resources Beer (291 HK)




[email protected]




Net profit change (9.6) 2.5 18.9

Core EPS (FD) change (9.6) 2.5 18.9

70

93

115

138

160

12

16

19

23

26



China Reso (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 12.30-25.80




Major shareholder CRNC (51.9%)



Revenue (m) 34,823 36,141 37,770


Net profit (m) 874 1,282 1,606


EPS change (%) n.a. 46.7 25.2

Daiwa vs Cons. EPS (%) (10.0) 17.9 29.0

PER (x) 34.1 23.2 18.5


DPS 12.300 0.054 0.116

PBR (x) 1.9 1.8 1.7

EV/EBITDA (x) 5.8 12.8 11.3

ROE (%) 2.7 8.1 9.6

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20150917_ChinaResources_What.pdf#page=1

51

China Resources Beer (291 HK): 26 January 2016



Growth outlook CRB: net profit and net-profit growth

We now forecast CRB’s net profit to increase by 47% YoY

for 2016 and 25% YoY for 2017, assuming its acquisition of

the remaining stake in CR-Snow JV goes ahead. The

acquisition would almost double CRB’s profit-after tax (as

its stake in the JV would increase from 51% to 100%, and

the JV owns all CRB’s beer business in China). Even if the

acquisition does not proceed, we forecast CRB’s net profit

to increase by 16% YoY for 2016 and 15% YoY for 2017,

driven by product-mix upgrades that would drive up the

operating margin by 0.7pp and 1.4pp, respectively.


Valuation CRB: 12-month forward PER band

CRB’s valuation has been rerated since April 2015 after the

former China Resources Enterprise announced plans to

dispose of its non-beer businesses pay a special dividend

and rename the company China Resources Beer (all

completed in September 2015). Going forward, we believe

CRB should trade at a premium to its pre-restructuring

valuation due to its now higher earnings visibility through

focusing on the beer business only.

Our target valuation is now based on a 15% premium to

peers’ average, based on CRB’s expected operating-

margin expansion over 2016-17 and No.1 position in

China’s competitive beer market.

Source: Bloomberg

Earnings revisions CRB: Bloomberg consensus 2015-16E EPS

Our 2016-17E EPS are far above those of the Bloomberg

consensus as we have factored in the impact of the

prospective acquisition. We expect the consensus to revise

up its EPS forecast for the company if the acquisition takes

place. But we do believe the street’s EPS forecasts already

factor in a potential rise in ASPs over 2016-17 due to the

company’s ongoing product-mix upgrades.

Source: Bloomberg

-19%

15%

47%

25%

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2013 2014 2015E 2016E 2017E


(HKDm)

0

10

20

30

40

50

Jan

11

Apr

11

Jul 1

1

Oct

11

Jan

12

Apr

12

Jul 1

2

Oct

12

Jan

13

Apr

13

Jul 1

3

Oct

13

Jan

14

Apr

14

Jul 1

4

Oct

14

Jan

15

Apr

15

Jul 1

5

Oct

15

Jan

16

291.HK 15x 20x

25x 30x 35x

(HKD)

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

May

15

May

15

Jun

15

Jun

15

Jul 1

5

Jul 1

5

Aug

15

Aug

15

Sep

15

Sep

15

Oct

15

Oct

15

Oct

15

Nov

15

Nov

15

Dec

15

Dec

15

Jan

16

2015E 2016E

(HKD)

52


Financial summary

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Beer sales volume YoY (%) 10.9 10.3 3.9 10.2 1.0 (1.8) 0.0 0.0

Beer ASP (YoY %) 2.9 12.4 1.2 6.2 4.0 2.8 3.8 4.5

Beer EBITDA margin (%) 14.59 13.10 13.63 13.45 12.62 12.82 13.93 14.51

Sales volume contribution fromhigh-end

products20.8 25.0 28.4 36.0 40.3 43.5 47.9 53.2

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Retail 55,140 70,088 83,506 95,174 109,500 n.a. n.a. n.a.

Beer 21,535 26,689 28,064 32,835 34,482 34,823 36,141 37,770

Other Revenue 10,053 13,387 14,666 18,245 25,696 n.a. n.a. n.a.

Total Revenue 86,728 110,164 126,236 146,254 169,678 34,823 36,141 37,770

Other income 1,976 1,683 2,041 2,381 2,836 436 643 959

COGS (64,404) (82,807) (95,835) (108,881) (127,233) (22,763) (23,188) (24,016)

SG&A (19,919) (24,524) (27,894) (34,697) (43,483) (9,750) (10,481) (10,953)


Operating profit 4,381 4,516 4,548 5,057 1,798 2,746 3,116 3,760

Net-interest inc./(exp.) (175) (224) (361) (304) (526) (294) (335) (1,530)

Assoc/forex/extraord./others 806 1,134 2,466 293 569 (4,400) 0 0

Pre-tax profit 5,012 5,426 6,653 5,046 1,841 (1,948) 2,780 2,230

Tax (1,395) (1,375) (1,631) (1,894) (1,550) (736) (751) (624)

Min. int./pref. div./others (965) (1,038) (1,077) (1,244) (452) (843) (747) 0

Net profit (reported) 2,652 3,013 3,945 1,908 (161) (3,526) 1,282 1,606

Net profit (adjusted) 1,873 1,889 1,527 1,642 (794) 874 1,282 1,606

EPS (reported)(HKD) 1.106 1.256 1.644 0.794 (0.067) (1.456) 0.530 0.663

EPS (adjusted)(HKD) 0.781 0.787 0.636 0.683 (0.331) 0.361 0.530 0.663

EPS (adjusted fully-diluted)(HKD) 0.781 0.787 0.636 0.683 (0.331) 0.361 0.530 0.663

DPS (HKD) 0.520 0.470 0.300 0.270 0.270 12.300 0.054 0.116

EBIT 4,381 4,516 4,548 5,057 1,798 2,746 3,116 3,760

EBITDA 6,946 7,393 7,840 8,946 6,681 9,366 5,336 5,980

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 5,012 5,426 6,653 5,046 1,841 (1,948) 2,780 2,230

Depreciation and amortisation 2,565 2,877 3,292 3,889 4,883 2,220 2,220 2,220

Tax paid (991) (1,680) (1,683) (2,047) (1,636) (736) (751) (624)

Change in working capital 1,575 2,233 3,775 4,850 4,147 (600) (407) (432)

Other operational CF items (1,182) (829) (3,098) (958) (8,091) 294 335 1,530

Cash flow from operations 6,979 8,027 8,939 10,780 1,144 (770) 4,178 4,923

Capex (4,037) (7,097) (9,505) (7,204) (7,900) (2,438) (2,168) (2,077)

Net (acquisitions)/disposals 3,747 (1,541) 990 (4,308) 109 30,000 (29,000) 0

Other investing CF items 360 401 (2,386) 1,671 1,199 0 0 0

Cash flow from investing 70 (8,237) (10,901) (9,841) (6,592) 27,562 (31,168) (2,077)

Change in debt 86 3,049 1,363 4,685 6,194 n.a. n.a. n.a.

Net share issues/(repurchases) 26 11 21 18 0 0 0 0

Dividends paid (1,175) (1,271) (1,128) (673) (649) (29,520) (175) (256)

Other financing CF items (392) 2,909 (522) (39) (650) (3,556) (1,490) (1,854)

Cash flow from financing (1,455) 4,698 (266) 3,991 4,895 (33,076) (1,665) (2,110)

Forex effect/others (51) (303) (23) 265 0 0 0 0

Change in cash 5,543 4,185 (2,251) 5,195 (553) (6,283) (28,655) 736

Free cash flow 2,942 930 (566) 3,576 (6,756) (3,207) 2,010 2,846

53




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 15,626 20,715 21,242 25,021 27,690 9,170 9,341 9,675

Accounts receivable 6,843 11,534 13,744 16,428 16,555 1,952 2,187 2,286



Fixed assets 41,443 50,240 56,971 69,117 88,060 26,739 26,687 26,544

Goodwill & intangibles 9,873 11,065 15,243 19,990 23,364 10,708 24,664 24,664


Total assets 89,402 113,649 127,488 155,289 181,364 70,228 82,883 83,908

Short-term debt 4,151 7,092 4,374 3,357 9,025 4,050 4,050 4,050


Other current liabilities 871 618 706 1,155 1,069 190 190 190


Long-term debt 8,158 8,442 13,352 19,346 19,872 10,000 37,000 37,000

Other non-current liabilities 1,148 1,538 2,168 2,642 5,515 1,158 1,158 1,158


Share capital 2,396 2,399 2,399 2,399 2,399 2,402 2,402 2,402



Minority interests 10,475 12,633 13,042 15,538 20,876 15,044 0 0


EV 37,886 39,004 43,766 46,100 57,340 54,773 68,384 67,649

Net debt/(cash) (1,996) (2,980) 1,330 1,167 8,063 9,946 38,601 37,866

BVPS (HKD) 13.366 15.770 16.969 18.348 20.294 6.391 6.680 7.103

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 35.2 27.0 14.6 15.9 16.0 (79.5) 3.8 4.5

EBITDA (YoY) 28.8 6.4 6.0 14.1 (25.3) 40.2 (43.0) 12.1

Operating profit (YoY) 49.6 3.1 0.7 11.2 (64.4) 52.7 13.5 20.7

Net profit (YoY) 47.2 0.9 (19.2) 7.5 n.a. n.a. 46.7 25.2

Core EPS (fully-diluted) (YoY) 46.8 0.8 (19.2) 7.4 n.a. n.a. 46.7 25.2


EBITDA margin 8.0 6.7 6.2 6.1 3.9 26.9 14.8 15.8


Net profit margin 2.2 1.7 1.2 1.1 (0.5) 2.5 3.5 4.3

ROAE 6.5 5.4 3.9 3.9 n.a. 2.7 8.1 9.6

ROAA 2.3 1.9 1.3 1.2 n.a. 0.7 1.7 1.9

ROCE 8.5 7.5 6.6 6.6 2.0 3.8 6.1 6.5

ROIC 8.1 7.7 6.7 5.5 0.4 4.6 4.8 4.9

Net debt to equity n.a. n.a. 3.3 2.6 16.5 64.3 238.7 220.2

Effective tax rate 27.8 25.3 24.5 37.5 84.2 n.a. 27.0 28.0


Current ratio (x) 1.0 1.0 0.9 0.9 0.8 0.5 0.5 0.5


Net dividend payout 47.0 37.4 18.3 34.0 n.a. n.a. 10.2 17.5

Free cash flow yield 9.9 3.1 n.a. 12.0 n.a. n.a. 6.7 9.6

Company profile

China Resources Beer is a subsidiary of China Resources National Corporation (CRNC), a state-

owned enterprise. The company’s 51%-owned joint venture with SABMiller, CRE-Snow, is the

largest beer maker in China with a 23% market share by volume for 2014.



What's new: As highlighted in our industry section: 1) foreign brands

continue to gain share in China’s personal hygiene product market, and 2)

revenue from the e-commerce channel has been growing quicker than that

from traditional channels. We believe Hengan will be a victim of such

trends. However, as the stock is already trading near its trough valuation

since 2008, we see limited downside to its share price at the current level.

Downgrade to Hold (3) from Outperform (2).

What's the impact: Personal care products. While we believe Hengan will

maintain its No.1 position in China’s sanitary napkin market (21-22% market

share, on our estimates), we see its growth prospects being increasingly

challenged as international brands deepen their market presence in lower-tier

cities. Hengan has become less competitive on price relative to Japan brands

given import tariff reductions and increased cross-border purchases. At the

same time, we believe its modest presence in online channels (c3% of total

revenue for 2014) will weigh on its revenue-growth prospects. As such, we cut

2015-17E revenue for diapers and sanitary napkins by 11-15% and now

assume no volume growth in these segments.

Tissue paper: In 1H15, Hengan reported a 2% YoY decline in revenue in

the tissue paper segment. Going forward, we expect increasing headwinds

and price competition. Hengan has little exposure to the e-commerce

channel, where tissue paper sales are expanding rapidly (20%-plus YoY in

2015E for Hengan’s closest domestic competitor, Vinda (3331 HK,

HKD13.00, Outperform [2]). Also, since most players are aggressively

cutting prices and going for market share, we think Hengan is unlikely to

raise product ASPs in 2015-17E. Our revised forecasts call for only 1% per

year growth in sales volume for Hengan in this segment over 2016-17E.

What we recommend: We cut 2015-17E EPS by 7-17% after factoring in:

1) lower revenue forecasts assuming Hengan fails to gain further market

share, and 2) higher financial costs associated with its HKD debt due to

CNY depreciation. In turn, we lower our TP to HKD66, from HKD87, based

on a target PER of 18x (previously 20x) applied to our revised 2016E EPS.

Our target PER marks a slight discount to international peers’ average

(20x) given Hengan’s slower EPS growth prospects for 2016E (5% vs. 13%

([Bloomberg consensus for peers]). We downgrade our rating to Hold (3),

from Outperform (2). The main upside risk to our call: product-mix

upgrades. The main downside risk: a further surge in raw-material costs.

How we differ: Our 2016-17E EPS estimates are 3-11% below the

Bloomberg consensus, likely as we are more bearish on Hengan’s revenue

outlook in the sanitary napkin segment.

26 January 2016

Heng an Inter national Gr oup

Revenue expectations set too high

Increasingly challenged in disposable diapers, sanitary napkin markets

Cutting 2015-17E EPS by 7-17% on lower sales, forex losses

Downgrading rating and TP; share-price downside looks limited



Hengan International Group (1044 HK)


Share price (25 Jan): HKD67.75 | Up/downside: -2.5%


[email protected]



Revenue change (2.1) (7.5) (11.1)



90

96

103

109

115

65

75

85

95

105



Hengan (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 65.05-100.10




Major shareholder Sze Man Bok (18.6%)



Revenue (m) 24,304 24,118 24,386


Net profit (m) 4,281 4,493 4,559


EPS change (%) 9.3 5.4 1.5

Daiwa vs Cons. EPS (%) 2.2 (2.5) (10.7)

PER (x) 19.4 18.4 18.2


DPS 2.042 2.148 2.214

PBR (x) 4.4 4.0 3.7

EV/EBITDA (x) 11.7 11.3 10.9

ROE (%) 23.5 22.8 21.3

55

Hengan International Group (1044 HK): 26 January 2016



Growth outlook Hengan: net profit and net-profit growth

We forecast Hengan’s net profit growth to slow significantly

from 9% YoY in 2015E to 5% YoY in 2016E and 2% YoY in

2017E, on revenue growth of -1% and 1% YoY in 2016-

17E, with tissue paper likely to be the only segment to

record growth. Also, we assume forex losses of HKD150m

and HKD120m, respectively, as part of its financial costs, in

2015-16E due to the CNY’s depreciation against HKD.

Favourable petrochem costs should support a slight rise in

Hengan’s gross margin in 2016E, but the impact is likely to

be tempered by the increased revenue contribution of

tissue paper, on which the operating margin is relatively

low.


Valuation Hengan: 12-month forward PER band

The stock is trading currently at an 18x 2016E PER on our

EPS forecast, near the bottom of its PER band since 2008.

We see the risk of a further derating in the long term, since

we expect EPS growth to decelerate again in 2017E

However, that risk may not eventuate in 2016 following the

recent sell-off and as the potential disposal of non-core

businesses could boost investors’ confidence in

management. Hence, we see limited valuation downside in

2016E.

Source: Bloomberg

Earnings revisions Hengan: Bloomberg consensus EPS (2015-16E)

The Bloomberg-consensus 2015E and 2016E EPS

forecasts for Hengan have trended down slowly since

2015, and we see further downside to the market’s

forecasts on the back of lower-than-expected revenue

growth.

Our 2016E EPS is 3% below that of the consensus.

Source: Bloomberg

0%

5%

10%

15%

20%

25%

30%

35%

40%

(1,000)

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 2015E 2016E 2017E

Net profit (HKD m) Forex gain / loss YoY %

(HKDm)

15

35

55

75

95

Aug 08 Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14 Aug 15

1044 HK 18x 21x

24x 27x 30x

(HKD)

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

Jan-

15

Jan-

15

Feb

-15

Ma

r-15

Ma

r-15

Apr

-15

Ma

y-15

Ma

y-15

Jun-

15

Jul-1

5

Aug

-15

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

2015E 2016E

(HKD)

56


Financial summary

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sanitary napkin volume YoY 10 64 16 12 18 0 0 0

Diapers volume YoY 13 10 (4) 3 (4) (3) (1) (1)

Tissue paper volume YoY 33 26 25 12 8 0 (1) 0

Sanitary napkin ASP YoY 0.0 1.5 3.1 7.1 6.6 3.0 0.0 0.0

Diapers ASP YoY 0.0 1.5 3.1 5.8 9.5 2.0 2.0 0.0

Tissue paper ASP change YoY 3.2 4.1 (8.7) (0.0) (1.9) 0.0 2.0 2.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sanitary napkins 3,170 4,114 4,915 5,898 7,428 7,651 7,651 7,651

Diposable diapers 2,447 2,723 2,685 2,938 3,095 3,062 3,092 3,061

Other Revenue 7,815 10,213 10,923 12,350 13,308 13,592 13,375 13,675

Total Revenue 13,432 17,051 18,524 21,186 23,831 24,304 24,118 24,386

Other income 249 456 565 776 1,164 880 859 834

COGS (7,487) (10,250) (10,209) (11,627) (12,843) (12,443) (12,186) (12,363)

SG&A (3,194) (3,963) (4,139) (5,248) (6,402) (6,630) (6,589) (6,648)



Net-interest inc./(exp.) 39 (38) (202) (72) (407) (483) (277) (98)

Assoc/forex/extraord./others 0 0 0 185 (130) (150) (120) 0

Pre-tax profit 3,038 3,255 4,539 5,201 5,213 5,478 5,805 6,112

Tax (552) (570) (1,001) (1,245) (1,369) (1,407) (1,481) (1,528)


Net profit (reported) 2,438 2,649 3,519 3,906 3,785 4,011 4,253 4,509

Net profit (adjusted) 2,370 2,605 3,531 3,627 3,918 4,281 4,493 4,559

EPS (reported)(HKD) 2.000 2.156 2.861 3.174 3.082 3.267 3.479 3.688

EPS (adjusted)(HKD) 1.944 2.120 2.871 2.947 3.190 3.487 3.675 3.729

EPS (adjusted fully-diluted)(HKD) 1.944 2.120 2.871 2.947 3.190 3.487 3.675 3.729

DPS (HKD) 1.305 1.350 1.700 1.850 1.994 2.042 2.148 2.214

EBIT 3,000 3,294 4,741 5,088 5,750 6,111 6,202 6,210

EBITDA 3,384 3,727 5,291 5,791 6,505 6,969 7,153 7,254

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 3,038 3,255 4,539 5,201 5,213 5,478 5,805 6,112

Depreciation and amortisation 385 433 550 703 755 858 951 1,044

Tax paid (552) (570) (1,001) (1,245) (1,369) (1,407) (1,481) (1,528)

Change in working capital (1,099) 221 (1,046) (809) 488 48 107 19

Other operational CF items (39) 38 202 72 407 483 277 98

Cash flow from operations 1,733 3,378 3,244 3,922 5,494 5,460 5,659 5,745

Capex (1,117) (2,428) (2,469) (1,407) (1,696) (1,400) (1,400) (1,400)




Change in debt 2,582 1,906 4,009 8,192 1,135 0 (5,000) (5,000)

Net share issues/(repurchases) 123 120 0 103 (546) (471) (52) 0

Dividends paid (1,466) (1,594) (1,844) (2,216) (4,368) (2,571) (2,548) (2,657)

Other financing CF items (72) (148) (240) (364) (640) (648) (452) (315)

Cash flow from financing 1,167 284 1,926 5,714 (4,418) (3,690) (8,052) (7,971)

Forex effect/others (68) (44) 12 (279) 132 270 240 50

Change in cash 1,716 1,190 2,713 7,962 (230) 640 (3,553) (3,576)

Free cash flow 617 950 775 2,515 3,798 4,060 4,259 4,345

57




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 2,760 2,934 3,831 4,386 3,695 3,580 3,506 3,557

Accounts receivable 1,396 1,893 1,870 2,184 2,455 2,504 2,485 2,512

Other current assets 546 590 883 1,127 1,220 1,281 1,345 1,412


Fixed assets 5,184 7,257 9,117 9,832 10,245 10,729 11,120 11,417



Total assets 18,577 23,319 29,205 40,190 42,577 43,814 40,588 37,558

Short-term debt 3,815 6,815 7,441 13,233 15,164 15,164 10,164 5,164


Other current liabilities 943 1,316 1,578 1,585 1,522 1,637 1,761 1,894


Long-term debt 1,497 404 3,787 6,187 5,390 5,390 5,390 5,390



Share capital 122 123 123 123 122 118 117 117





EV 82,429 82,112 84,794 83,024 82,487 81,828 80,515 79,088

Net debt/(cash) (736) (1,108) 1,621 (204) (782) (1,441) (2,754) (4,180)

BVPS (HKD) 8.614 10.042 11.455 13.427 14.350 15.400 16.801 18.277

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 24.0 26.9 8.6 14.4 12.5 2.0 (0.8) 1.1

EBITDA (YoY) 15.0 10.1 42.0 9.4 12.3 7.1 2.6 1.4

Operating profit (YoY) 15.3 9.8 43.9 7.3 13.0 6.3 1.5 0.1

Net profit (YoY) 11.5 9.9 35.6 2.7 8.0 9.3 5.0 1.5

Core EPS (fully-diluted) (YoY) 5.2 9.1 35.4 2.7 8.2 9.3 5.4 1.5


EBITDA margin 25.2 21.9 28.6 27.3 27.3 28.7 29.7 29.7



ROAE 24.3 22.8 26.7 23.7 22.9 23.5 22.8 21.3

ROAA 14.5 12.4 13.4 10.5 9.5 9.9 10.6 11.7

ROCE 21.3 18.3 20.8 16.4 15.3 15.6 16.3 17.8

ROIC 27.8 25.0 26.7 23.6 24.9 25.9 25.7 25.3

Net debt to equity n.a. n.a. 11.5 n.a. n.a. n.a. n.a. n.a.



Current ratio (x) 1.8 1.4 1.5 1.6 1.5 1.5 1.8 2.4

Net interest cover (x) n.a. 85.8 23.5 70.3 14.1 12.6 22.4 63.7


Free cash flow yield 0.7 1.1 0.9 3.0 4.6 4.9 5.1 5.2

Company profile

Hengan International Group (Hengan) is the largest supplier of sanitary napkins and household

tissue paper in China in terms of sales, with market shares of around 10.9% and 11.4%,

respectively, in 2013 according to Euromonitor. Hengan also produces diapers (for babies and

adults) and snack products.



What's new: Given our concerns on Tingyi’s product mix changes since

October 2015 and the likely negative impact on both its market share and

long-term revenue outlook as a local Goliath, we downgrade the stock to

Hold (3) from Outperform (2). For 2016, we do not see much potential

downside for its share price, and would advise investors to sit on the stock

for now.

What's the impact: Risk of noodle market-share loss: In Oct 2015, Tingyi

adjusted its product mix (content upgrade + ASP hike) for noodles. Unlike other

price hikes over the past 5 years, none of its major competitors has followed

suit. Hence, Tingyi may lose market share among price sensitive consumers

and in the traditional channels. We expect its noodle business revenue to fall

by 11%/2% YoY in 2015/16E (previously: 10%/+3%), with a 1pp decline in the

gross margin over 2015-17E on growing raw-material costs and a lower-than-

expected utilisation rate (previously: 2pp gross-margin expansion).

New beverage products: Assuming a revenue decline in the bottled-water

business but increasing revenue contribution from functional drinks (ie,

vitamin drinks), we cut our revenue-growth forecast to 3% per year over

2016-17E (from 4%), after a 9% YoY decline in 2015E. We expect: 1)

negative impact from termination benefits due to layoffs at the Pepsi unit

lingering into 2016E as Tingyi will need to restructure this division further to

drive long-term revenue, and 2) sugar costs to rebound in 2016E,

impacting COGS. Accordingly, we expect Tingyi’s gross margin to be flat

over 2016-17E despite product-mix upgrades.

Cutting 2015-17E EPS by 4-16%, on: 1) a 1-5% cut in our revenue forecasts

on our concern of market-share loss in the noodles segment, 2) FX losses of

USD50m in 2016E (accounting for 13% of 2016E net profit) due to the CNY

depreciation vs. the USD, and 3) gross-margin erosion from rising palm oil

prices and a falling utilisation rate for the noodles segment.

What we recommend: We cut our 12-month TP to HKD9.60 from

HKD12.9 on our 2016 EPS revisions. We also lower our 2016E target PER

to 18x from 21x, as we now assign a slight discount to Tingyi’s target

valuation vs. the average of its international peers, on the back of its likely

lower earnings growth. Key upside risk: new product revenue contribution

exceeding our expectations; key downside risks: food safety issues.

How we differ: Our 2016-17E EPS are 11-12% below consensus as we

expect Tingyi’s revenue to miss market expectations due to market-share

loss in the noodles segment.

26 January 2016

Tingyi Cayman Isl ands

Too big to move; downgrading to Hold

Noodle sales volume under pressure in the near term due to price hike

Beverage segment to resume earnings growth on new products

Downgrading to Hold (3); cut TP to HKD9.6; 2015-17E EPS lowered



Tingyi Cayman Islands (322 HK)




[email protected]






60

73

85

98

110

8

11

14

17

20



Tingyi Hdg (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Wei Ing-chou (33.8%)



Revenue (m) 9,272 9,326 9,561


Net profit (m) 373 386 422


EPS change (%) (6.8) 3.4 9.5

Daiwa vs Cons. EPS (%) (0.5) (11.7) (11.2)

PER (x) 17.5 16.9 15.4


DPS 0.033 0.034 0.038

PBR (x) 2.0 1.9 1.8

EV/EBITDA (x) 7.4 6.7 6.2

ROE (%) 12.0 11.7 12.0

59

Tingyi Cayman Islands (322 HK): 26 January 2016



Growth outlook Tingyi: net profit (USDm) and YoY (%)

We expect Tingyi’s net profit only grow by 3% and 10%

YoY over 2016-17E, mainly driven by operating-margin

expansion in the beverage unit from cost savings (absence

of termination-benefit expenses and operating leverage in

the Pepsi unit). For the noodles business (about 70% of

net profit over 2015-17E), we expect a 13% YoY net-profit

decline in 2015E, then forecast it to remain flat over 2016-

17 on market-share losses. We believe the beverage

segment’s gross margin will be largely steady YoY in

2016E as product-mix upgrades could offset the increase

in sugar costs. We expect the ASP hike in the noodle

segment to offset the increased flour and palm oil costs as

well as the lower utilisation rate due to falling sales volume.


Valuation Tingyi: 12-month forward PER bands since 2008

The stock is currently trading at 17x 2016E PER. We see

the risk of a major derating of the stock in the long run as

we expect Tingyi’s EPS growth to be structurally lower

compared to the past. But this risk may have already been

factored in by the market after the recent sell-off. Thus, we

see limited downside to the share price from current levels,

as: 1) we expect EPS growth to recover to 6% CAGR over

2016-17E after declining in 2015E, and 2) the stock is

already trading near its trough valuation, seen in 2008.

Source: Bloomberg

Earnings revisions Tingyi: Bloomberg consensus EPS forecast (2015-16E)

Although the Bloomberg consensus EPS estimates for

2015-16 have continued to trend down over the past 12

months due the results for the past 3 quarters missing

consensus expectations, we still see downside risk to

consensus revenue estimates for 2016-17. We would

consider making further revenue cuts if new products in the

beverage segment failed to drive revenue growth.

Source: Bloomberg

-2.9%

6.7%

1.6%

-6.8%

3.4%

9.5%

(10%)

(5%)

0%

5%

10%

15%

(100)

0

100

200

300

400

500

2012 2013 2014 2015E 2016E 2017E

Noodles Beverage Others Recurring profit g rowth YoY %

(USDm)

5

10

15

20

25

Jan-

08

Ma

y-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Ma

r-14

Jul-1

4

Nov

-14

Ma

r-15

Jul-1

5

Nov

-15

322.HK 18 21

24 27 30

(HKD)

0.04

0.05

0.06

0.07

0.08

0.09

0.10

0.11

0.12

Jan-

15

Jan-

15

Feb

-15

Ma

r-15

Apr

-15

Apr

-15

Ma

y-15

Jun-

15

Jun-

15

Jul-1

5

Aug

-15

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

Dec

-15

2015E 2016E

(USD)

60


Financial summary

Key assumptions


Cash flow (USDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales growth YoY - instant noodles 27.0 22.5 10.2 9.4 (4.5) (10.7) (2.2) 1.4

Sales growth YoY - beverages 38.9 13.2 23.3 27.1 (7.5) (8.7) 2.7 3.1

Gross margin % - instant noodles 28.8 27.2 30.0 29.2 28.3 29.9 29.3 28.9

Gross margin % - beverages 28.5 25.7 29.6 30.8 31.9 34.0 33.9 35.1


(%)16.8 16.8 20.3 21.1 20.9 20.1 20.2 20.6

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Instant noodles 2,932 3,592 3,960 4,332 4,138 3,697 3,614 3,666

Beverage 3,532 3,999 4,931 6,268 5,800 5,294 5,435 5,605

Other Revenue 218 266 321 341 300 281 276 289

Total Revenue 6,681 7,857 9,212 10,941 10,238 9,272 9,326 9,561

Other income 46 131 255 201 209 160 180 180

COGS (4,782) (5,770) (6,457) (7,631) (7,120) (6,257) (6,316) (6,424)

SG&A (1,247) (1,512) (2,164) (2,663) (2,438) (2,206) (2,213) (2,296)

Other op.expenses (92) (73) (75) (118) (156) (220) (170) (170)

Operating profit 606 633 771 730 733 750 807 851



Pre-tax profit 747 663 832 723 694 686 726 801

Tax (134) (163) (228) (229) (209) (213) (211) (224)




EPS (reported)(USD) 0.085 0.075 0.082 0.073 0.072 0.067 0.069 0.075

EPS (adjusted)(USD) 0.061 0.068 0.066 0.070 0.072 0.067 0.069 0.075

EPS (adjusted fully-diluted)(USD) 0.061 0.068 0.066 0.070 0.072 0.067 0.069 0.075

DPS (USD) 0.043 0.038 0.032 0.035 0.036 0.033 0.034 0.038

EBIT 606 633 771 730 733 750 807 851

EBITDA 810 911 1,092 1,118 1,186 1,213 1,313 1,385

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 747 663 832 723 694 686 726 801


Tax paid (96) (130) (138) 386 (223) (232) (194) (191)

Change in working capital 215 464 (158) 273 284 (354) (185) 18

Other operational CF items (1,050) 4 25 18 38 63 81 50

Cash flow from operations 19 1,279 882 1,788 1,245 626 935 1,212

Capex (966) (1,349) (882) (896) (1,100) (600) (550) (550)

Net (acquisitions)/disposals 0 0 0 0 (380) 0 0 0


Cash flow from investing (966) (1,349) (882) (896) (1,480) (600) (550) (550)

Change in debt 299 616 234 192 952 (382) (447) 0


Dividends paid (192) (239) (210) (180) (197) (200) (187) (193)

Other financing CF items 93 (38) (85) 57 47 (113) (142) (121)

Cash flow from financing 201 339 (61) 69 802 (696) (776) (314)


Change in cash (746) 269 (60) 961 568 (669) (391) 348

Free cash flow (947) (70) 1 892 145 26 385 662

61




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 893 600 838 1,250 1,183 765 608 979

Inventory 310 313 478 481 387 340 343 349




Fixed assets 2,923 4,030 5,002 5,485 5,860 6,382 6,406 6,403


Other non-current assets 281 343 474 501 976 557 557 557

Total assets 4,891 5,809 7,473 8,424 9,206 8,817 8,685 9,061

Short-term debt 457 701 500 1,017 1,382 1,000 800 800

Accounts payable 1,084 974 1,043 1,252 896 787 795 809

Other current liabilities 687 753 1,252 1,357 1,358 1,209 1,219 1,238


Long-term debt 177 549 985 660 1,247 1,247 1,000 1,000



Share capital 27 28 28 28 28 28 28 28



Minority interests 548 587 946 1,046 1,062 1,122 1,200 1,293


EV 6,811 7,759 8,031 7,886 8,924 9,020 8,809 8,530

Net debt/(cash) (259) 650 647 426 1,446 1,482 1,192 821

BVPS (USD) 0.326 0.376 0.457 0.515 0.542 0.573 0.608 0.649

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 31.5 17.6 17.2 18.8 (6.4) (9.4) 0.6 2.5

EBITDA (YoY) (2.8) 12.5 19.9 2.3 6.1 2.3 8.3 5.5

Operating profit (YoY) (3.5) 4.4 21.8 (5.3) 0.5 2.2 7.7 5.4

Net profit (YoY) (11.3) 11.9 (2.9) 6.7 1.6 (6.8) 3.4 9.5

Core EPS (fully-diluted) (YoY) (11.3) 11.9 (2.9) 6.6 1.5 (6.8) 3.4 9.5


EBITDA margin 12.1 11.6 11.9 10.2 11.6 13.1 14.1 14.5



ROAE 20.7 19.4 15.9 14.5 13.5 12.0 11.7 12.0

ROAA 8.2 7.1 5.6 5.0 4.5 4.1 4.4 4.8

ROCE 23.1 18.2 17.3 13.8 11.9 11.3 12.4 13.0

ROIC 26.0 17.5 15.0 11.7 10.4 9.1 9.9 10.6




Current ratio (x) 0.8 0.6 0.7 0.7 0.6 0.6 0.6 0.7



Free cash flow yield n.a. n.a. 0.0 13.7 2.2 0.4 5.9 10.1

Company profile

Tingyi Cayman Islands (Tingyi) is the world’s largest producer of largest instant noodles, and has a

leading 56% market share in China (in terms of revenue for 2014). The company’s beverage unit,

owned jointly with Pepsi and Asahi Group, has shares of 55%, 27% and 21% of the China markets

for ready-to-drink (RTD) tea, juice drinks and bottled water, respectively, by revenue, for 2014.



What's new: We recently visited the food retailers and learned that

Mengniu’s dominant position in the premium UHT milk market is now being

challenged by the small players that can differentiate themselves from

Mengniu in terms of the origins of the milk that they sell (100% in-house

made raw milk or sourced overseas). We maintain our Hold (3) as

competition remains fierce in the dairy downstream market.

What's the impact: Key concerns: 1) Internal product cannibalisation.

We are concerned that the rapidly growing demand for Mengniu’s yogurt

products (+74% YoY revenue growth for 1H15) will continue to take sales

volume away from its premium milk business, due to the substitution effect.

And, we now expect more new rivals in the UHT segments (imported

substitutes and UHT yogurt in particular). Accordingly, for 2015E, we

estimate that Mengniu’s share of the premium milk market was 50% (vs.

our estimate of 55% for 2014) and that the revenue growth of its Milk

Deluxe (premium UHT milk) is likely to have decelerated by 5-10% YoY for

2015E (vs. c.20% for 2014). 2) Infant formula: Mengniu recently injected

its Oushi Mengniu infant formula business into its subsidiary, Yashili. And

subject to shareholder approval, we expect it to acquire Danone’s infant

formula brand in China, Dumex, in 1H16E. But we are concerned that

Yashili’s weak online distribution will not improve after the acquisition, and

that the brand will continue to lose market share to foreign brands and face

increasing selling costs in 2016E.

Cutting 2015-17E EPS by 5-15%. 1) Due to the loss of market share in the

premium milk segment, we are cutting our 2015-17E revenue by 1-2%. We

still expect selling costs, as a percentage of revenue, to remain high, at 21-

21.5% over 2016-17E (previous forecast: 20%) due to the lower revenue

base and price promotions for new products, 2) on ASP pressure, we

expect Mengniu’s gross margin to decline by 1pp for 2016E, to 31.2%.

What we recommend: Given our lower EPS forecasts, we are cutting our

12-month TP to HKD11.70 from HKD14.50, based on a 2016E PER of

15.2x (previously 16x). We now assign a bigger discount (20%, from 15%)

to the stock’s 2011-13 average 12-month forward PER (19x; excluding the

impact of M&A, as we see an increasing risk of further market-share losses

in the premium milk market. Our Hold (3) rating stands. The key upside

risk: further reduction in selling costs; the key downside risk: rebound in the

milk cost.

How we differ: Unlike the market, we prefer the upstream dairy-farm

operators to the downstream players like Mengniu, due to the structural

shortage of quality and safe raw milk in China.

26 January 2016

China M eng niu D air y

Competition remains stiff

Cutting 2015-17E EPS by 5-15% on higher selling cost, slower revenue

Limited share price downside as trading near 2011-15 low PER

Hence, we maintain Hold (3) on valuation grounds



China Mengniu Dairy (2319 HK)




[email protected]






75

88

100

113

125

10

13

17

20

23



CMD (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 10.80-22.60




Major shareholder COFCO (16.3%)



Revenue (m) 49,103 50,942 52,203


Net profit (m) 2,577 2,471 2,745


EPS change (%) 11.6 (4.1) 11.1

Daiwa vs Cons. EPS (%) 2.9 (9.9) (14.1)

PER (x) 14.1 14.7 13.2


DPS 0.128 0.121 0.135

PBR (x) 1.6 1.4 1.3

EV/EBITDA (x) 9.1 9.2 8.3

ROE (%) 11.5 10.1 10.4

63

China Mengniu Dairy (2319 HK): 26 January 2016



Growth outlook Mengniu: net profit and YoY growth

Reflecting the structural slowdown in China’s dairy market

and the more intense competition, we expect Mengniu’s

revenue growth to recover only slightly, to 4% and 3% for

2016-17E, respectively, versus a decline of 2% for 2015E.

But this will likely come at the expense of rising selling

expenses and price promotions. Hence, we expect the

EBITDA margin to decline to 8.8% for 2016E, from 9.3%

for 2015E. We forecast EPS to decline by 4% YoY for

2016E, before rebounding to 11% YoY growth for 2017E on

a slight improvement in operating leverage.


Valuation Mengniu: past-5-year 12-month forward PER bands

The stock is trading currently at a 2016E PER of 15x. This

is in line with the average of its major China food and

beverage peers, on our forecasts. We believe the stock is

fairly valued given what we see as its lacklustre revenue

outlook. We would need to see successful M&A activity in

its infant formula business and a successful product-mix

upgrade in order for the stock to be rerated. However, as

the stock is already trading near the low-end of its past-5-

year 12-month forward PER (13x), we see limited potential

share-price downside.

Source: Bloomberg

Earnings revisions Mengniu: Bloomberg 2015-16E EPS forecasts

Our 2015 EPS forecast is in line with that of the Bloomberg

consensus but our 2016 and 2017 EPS forecasts are 10%

and 14% below, as we have built in the intensifying

competition and slower domestic dairy market revenue

growth. We would also see downside to our and the

street’s EPS forecasts if Mengniu’s infant formula business

were to turn loss-making in 2016-17E, after acquiring

Dumex.

Source:: Bloomberg

28%

-13%

16%

39%

15%

-4%

11%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

500

1,000

1,500

2,000

2,500

3,000

2011 2012 2013 2014E 2015E 2016E 2017E


(CNYm)

5

10

15

20

25

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Mengniu 13 17

21 25 29

(HKD)

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan

15

Feb

15

Mar

15

Apr

15

May

15

Jun

15

Jul 1

5

Aug

15

Sep

15

Oct

15

Nov

15

Dec

15

Jan

16

2015E 2016E

(HKD)

64


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales growth YoY % - Liquid Milk n.a. 25 (4) 17 14 (1) 3 3

Sales growth YoY %- Infant formula n.a. n.a. n.a. 6 82 (11) 11 2

ASP hike % n.a. 3.2 2.0 4.5 9.5 (2.0) (1.8) (1.2)

SG&A cost ratio % n.a. 20.9 20.5 22.5 25.0 25.6 25.1 25.1

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Liquid Milk 26,872 33,701 32,336 37,903 43,036 42,800 44,250 45,369

Ice-cream 3,112 3,259 3,171 3,023 2,716 2,444 2,444 2,493

Other Revenue 282 428 572 2,431 4,297 3,859 4,248 4,341

Total Revenue 30,265 37,388 36,079 43,357 50,049 49,103 50,942 52,203

Other income 193 296 249 289 449 347 217 217

COGS (22,479) (27,796) (27,050) (31,660) (34,616) (33,303) (35,034) (35,782)

SG&A (6,465) (7,805) (7,398) (9,774) (12,505) (12,570) (12,787) (13,103)

Other op.expenses n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Net-interest inc./(exp.) 43 112 179 199 208 75 121 132

Assoc/forex/extraord./others 40 52 (53) 154 160 162 247 385

Pre-tax profit 1,538 2,061 1,813 2,205 3,032 3,359 3,276 3,622

Tax (182) (276) (245) (367) (459) (605) (590) (652)




EPS (reported)(CNY) 0.356 0.454 0.395 0.450 0.595 0.663 0.636 0.707

EPS (adjusted)(CNY) 0.356 0.454 0.395 0.450 0.595 0.663 0.636 0.707


DPS (CNY) 0.080 0.099 0.080 0.101 0.141 0.128 0.121 0.135

EBIT 1,455 1,896 1,687 1,852 2,547 3,122 2,908 3,105

EBITDA 2,168 2,760 2,728 3,069 3,956 4,552 4,463 4,784

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 713 864 1,041 1,218 1,291 1,430 1,555 1,680

Tax paid (49) (218) (285) (307) (351) (605) (590) (652)

Change in working capital 193 300 (133) (1,106) (910) (551) (225) (35)



Capex (1,426) (2,696) (2,267) (3,101) (2,906) (2,500) (2,500) (2,500)

Net (acquisitions)/disposals 0 0 0 (9,495) (372) (2,506) 0 0



Change in debt 60 (184) (58) 11,191 (1,847) (1,986) (497) (487)

Net share issues/(repurchases) 0 0 0 0 4,089 0 0 0

Dividends paid (245) (278) (350) (283) (367) (548) (497) (471)

Other financing CF items (282) 317 (127) 1,466 (4,198) 995 (230) (225)

Cash flow from financing (467) (145) (535) 12,374 (2,323) (1,539) (1,224) (1,183)


Change in cash 419 1 (492) 1,434 (3,023) (3,149) (76) 415

Free cash flow 886 146 43 (1,445) (329) 896 1,148 1,598

65




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 1,176 1,685 1,420 2,577 4,342 4,178 4,395 4,489

Accounts receivable 575 836 801 754 1,148 1,915 2,185 2,240

Other current assets 1,112 1,064 1,310 5,327 9,940 9,940 9,940 9,940


Fixed assets 5,915 7,694 8,489 10,522 11,697 12,810 13,798 14,661


Other non-current assets 568 829 1,225 5,140 6,542 6,684 6,911 7,276

Total assets 17,306 20,202 20,991 40,339 47,081 46,989 48,615 50,406

Short-term debt 691 657 599 8,554 4,479 3,000 3,000 3,000




Long-term debt 150 0 0 3,236 5,464 4,957 4,460 3,972

Other non-current liabilities 700 927 938 1,029 2,773 2,773 2,773 2,773


Share capital 357 362 362 724 392 392 392 392



Minority interests 459 578 629 2,650 3,003 2,912 2,918 2,926


EV 30,735 30,629 31,269 40,283 40,553 41,483 40,840 39,581

Net debt/(cash) (5,959) (6,145) (5,631) 4,126 5,041 6,204 5,783 4,880

BVPS (CNY) 2.809 3.245 3.520 4.219 5.534 6.032 6.510 7.065

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 17.7 23.5 (3.5) 20.2 15.4 (1.9) 3.7 2.5

EBITDA (YoY) 9.6 27.3 (1.1) 12.5 28.9 15.1 (2.0) 7.2

Operating profit (YoY) 131.8 30.3 (11.0) 9.8 37.5 22.6 (6.9) 6.8

Net profit (YoY) 180.9 28.4 (13.0) 16.3 39.0 15.4 (4.1) 11.1

Core EPS (fully-diluted) (YoY) 164.7 27.5 (13.0) 13.9 32.3 11.6 (4.1) 11.1


EBITDA margin 7.2 7.4 7.6 7.1 7.9 9.3 8.8 9.2



ROAE 13.5 15.0 11.6 11.6 12.1 11.5 10.1 10.4

ROAA 7.9 8.5 6.7 5.2 5.1 5.5 5.2 5.5

ROCE 14.0 16.0 12.8 8.5 7.9 9.1 8.3 8.5

ROIC 33.9 32.3 21.9 10.4 8.8 8.2 7.2 7.4

Net debt to equity n.a. n.a. n.a. 26.9 23.5 26.5 22.9 17.8



Current ratio (x) 1.5 1.4 1.4 0.9 1.4 1.4 1.4 1.4

Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 2.4 0.4 0.1 n.a. n.a. 2.5 3.2 4.4

Company profile

Established in Inner Mongolia in 1999, China Mengniu Dairy (Mengniu) is controlled by COFCO

group, a state-owned food conglomerate. Mengniu focuses on the production of UHT milk, milk

beverages and ice cream. It is China’s largest maker of liquid milk products by revenue, with about

a 28% market share in 2013, according to AC Nielsen.


Hong Kong Materials

What's new: On the back of the decline in input costs in 2H15, the price of

Fufeng’s MSG fell by 8% HoH for 2H15 and we expect a further fall of 10%

for 2016E. Weak oil prices are also likely to weigh on Fufeng’s ASPs.

What's the impact: Pricing pressure intensifying: 1) for September-

October 2015, Fufeng’s MSG price fell by c.10%. We believe the big

players like Fufeng have cut their ASPs due to the lower corn cost, with the

aim of pushing competitors out of the market. We are cutting cut our MSG

ASP assumptions by 2% for 2015E and 8% for 2016-17E. We now forecast

the unit gross profit of its MSG to stay at c.CNY800/tonne (last trough was

in 2013), as we think Fufeng has a scale advantage (previous forecast: a

rise of c.CNY 220/tonne for 2016E). We expect the MSG price to fall in line

with corn costs in 2016E, driven by policy changes (see the sector portion

of this report), 2) the price of the company’s xanthan gum (XG) fell by 30%

YoY for 2H15, on weakening demand from oil drilling (XG is used as a mud

additive). Accordingly, we estimate Fufeng’s XG price would be

CNY13,000/tonne for 2016E, down 14% YoY. But potential XG price

downside looks limited as: 1) demand from the food-processing segment

(accounting for c.40 -45% of total revenue) is steady, and 2) we believe the

current price is close to the cash cost level of its domestic peers.

Earnings CAGR of 8% for 2015-17E (previously: 22%): We cut our

2015-17E core EPS for Fufeng by 5-25%, due to the falling prices for XG

and MSG. But we raise our MSG sales volume forecasts by an average of

13% for 2016-17E, as Fufeng plans to enhance its production lines in Inner

Mongolia and northeast China, with new technology improving the yield

and leading to cost reductions. We also expect financial cost savings of

CNY118m for 2016E on lower debt and because it replaced some bank

loans with domestic bonds issued in November 2015.

What we recommend: Given our revised EPS forecasts, we are cutting

our 12-month TP to HKD2.55 (from HKD5.0). We also cut our target PER to

9x, from 12x, on the falling ASP trend, and believe the shares should trade

at their past-5-year average PER of 9x (vs. high end of the range when we

thought the product price upcycle was ongoing). However, we still forecast

Fufeng’s recurring EPS to grow by 8% YoY for each of 2016-17E, on sales

volume growth and lower financial costs, and the shares are trading at 0.7x

2016E PBR, which we see as attractive. We downgrade our rating to Hold

(3), from Buy (1). The main upside/downside risks: rising/falling ASPs for its

key products, in particular MSG.

How we differ: Our 2015-17E EPS are 22-39% below the Bloomberg

consensus on our lower ASP assumptions.

26 January 2016

Fufeng Group

Price headwinds strengthening

Weak oil and commodity prices putting pressure on ASP

Hence, we cut our 2015-17E EPS; but limited share price downside

Downgrading to Hold (3); cutting EPS by 5-25%, TP to HKD2.55



Fufeng Group (546 HK)




[email protected]






80

99

118

136

155

2.5

3.6

4.8

5.9

7.0



Fufeng Gp (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Li Xue Chun (46.2%)



Revenue (m) 11,761 12,869 12,992


Net profit (m) 510 550 596


EPS change (%) (19.5) 7.9 8.4

Daiwa vs Cons. EPS (%) (22.2) (36.5) (38.7)

PER (x) 9.1 8.5 7.8


DPS 0.084 0.072 0.078

PBR (x) 0.8 0.7 0.7

EV/EBITDA (x) 4.7 4.4 3.7

ROE (%) 9.0 9.0 9.2

67

Fufeng Group (546 HK): 26 January 2016



Growth outlook Fufeng: net profit and recurring profit (CNYm) and YoY %

We forecast a core EPS CAGR of 8% over 2015-17E on

the back of lower financial costs as well as growth in MSG

sales. In our model, we have factored in a 10% decline in

the price of MSG and a 13% decline in the price of its XG

in 2016E. MSG and its by-products should together

account for more than 80% of Fufeng’s operating profit in

2016-17E, and our sensitivity analysis shows that a

CNY100 increase in the price of the company’s MSG

would lead to a 14% increase in its net profit.


Valuation Fufeng: 12-month forward PER bands

In 2015, the stock was derated from a 12x 12-month

forward PER to 9x amid falling product ASPs. It is

currently trading at 9x 2016E PER, on our estimates,

which is close to the middle of its past-5-year 12-month

forward PER range of 6-12x. We believe this reflects the

product pricing pressure that we anticipate for 2016E, as

well as the more favourable corn cost outlook. Hence, we

recommend waiting for product ASPs to recover (ie, after

2017E) before revisiting the stock.

Source: Bloomberg

Earnings revisions Fufeng: Bloomberg consensus EPS (HKD)

The 2015-16 Bloomberg consensus EPS forecasts for

Fufeng have trended down since the company missed the

consensus expectations for 1H15. We see further

downside to the 2016-17E consensus EPS forecasts, as

we are cautious on the company’s MSG and XG prices.

Source: Bloomberg

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015E 2016E 2017E

Reported net profit (CNY m) Recurring profit (CNY m)

Recurring profit YoY%

0

2

4

6

8

10

Nov

-07

Apr

-08

Sep

-08

Feb

-09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep

-13

Feb

-14

Jul-1

4

Dec

-14

May

-15

Oct

-15

564.HK 6x 7.5x

9x 10.5x 12x

(HKD)

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

Jan-

15

Jan-

15

Feb

-15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

Dec

-15

2015E 2016E

(HKD)

68


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

MSG price (CNY/tonne) 7,903 7,984 7,134 6,307 6,495 6,650 6,000 6,000

Xanthan gum price (CNY/tonne) 19,579 18,222 20,392 25,254 20,607 15,000 13,000 13,000

Corn price (CNY/tonne) 1,741 1,978 2,015 1,798 1,875 1,819 1,637 1,605

Sales volume - MSG (000 tonnes) 493 616 945 1,003 926 927 1,077 1,077

Sales volume - Xanthan gum (000

tonnes)35 46 52 58 65 58 55 55

GPM - MSG segment (%) 22.7 16.1 11.4 12.6 14.6 14.6 13.8 14.6

GPM - Xanthan gum (%) 38.8 36.2 46.0 58.3 52.7 36.1 30.8 31.6

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

MSG segment 5,350 7,024 9,539 9,114 8,605 9,481 10,376 10,499

Xanthan gum segment 682 836 1,066 1,454 1,348 870 715 715

Other Revenue 385 539 507 798 1,344 1,410 1,778 1,778

Total Revenue 6,416 8,399 11,112 11,367 11,298 11,761 12,869 12,992

Other income 111 118 145 153 193 215 223 228

COGS (4,851) (6,880) (9,474) (9,267) (9,131) (9,853) (10,975) (10,979)

SG&A (550) (795) (1,011) (1,252) (1,165) (1,157) (1,217) (1,261)


Operating profit 1,104 778 735 925 1,120 892 818 889



Pre-tax profit 1,071 716 490 635 774 789 671 722

Tax (105) (112) (64) (129) (148) (142) (121) (126)




EPS (reported)(CNY) 0.582 0.352 0.248 0.259 0.300 0.308 0.262 0.284

EPS (adjusted)(CNY) 0.582 0.352 0.248 0.259 0.300 0.243 0.262 0.284


DPS (CNY) 0.227 0.106 0.000 0.047 0.059 0.084 0.072 0.078

EBIT 1,104 778 735 925 1,120 892 818 889

EBITDA 1,358 1,146 1,268 1,623 1,840 1,693 1,664 1,770

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 1,071 716 490 635 774 789 671 722


Tax paid (125) (96) (71) (129) (148) (142) (121) (126)

Change in working capital 427 (576) (170) (240) 500 (565) 383 (39)

Other operational CF items 32 62 245 290 346 265 147 167

Cash flow from operations 1,659 474 1,028 1,255 2,192 1,148 1,926 1,605

Capex (1,912) (2,419) (1,800) (1,180) (2,363) (900) (900) (500)



Cash flow from investing (1,912) (2,419) (1,800) (1,180) (1,749) (601) (900) (500)

Change in debt 938 2,012 904 24 39 (300) (724) (913)


Dividends paid (379) (358) (42) (33) (116) (137) (220) (152)

Other financing CF items (32) (62) (245) (290) (346) (265) (147) (167)

Cash flow from financing 527 1,592 618 194 (423) (625) (1,091) (1,232)


Change in cash 274 (353) (154) 269 19 (79) (65) (127)

Free cash flow (253) (1,945) (772) 75 (171) 248 1,026 1,105

69




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 915 614 550 862 962 883 818 691

Inventory 711 1,180 1,415 1,517 1,946 2,705 2,574 2,598

Accounts receivable 817 1,739 2,340 2,069 1,452 1,511 1,654 1,669



Fixed assets 4,088 6,032 7,259 7,576 7,470 7,283 7,349 6,980


Other non-current assets 190 294 407 595 1,865 1,853 1,840 1,828

Total assets 6,720 9,859 11,971 12,619 13,694 14,235 14,235 13,767

Short-term debt 555 704 2,408 1,168 813 813 813 500




Long-term debt 981 2,844 2,045 3,309 3,702 3,402 2,679 2,079



Share capital 174 174 176 204 205 205 205 205





EV 5,280 7,593 8,561 8,274 8,213 7,991 7,332 6,546

Net debt/(cash) 621 2,934 3,902 3,615 3,554 3,333 2,674 1,887

BVPS (CNY) 1.895 1.982 2.180 2.306 2.570 2.819 2.976 3.186

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 38.5 30.9 32.3 2.3 (0.6) 4.1 9.4 1.0

EBITDA (YoY) 9.3 (15.6) 10.6 28.0 13.3 (8.0) (1.7) 6.4

Operating profit (YoY) 5.2 (29.5) (5.5) 25.8 21.1 (20.4) (8.4) 8.7

Net profit (YoY) 4.1 (37.5) (29.4) 18.7 23.8 (18.6) 7.9 8.4

Core EPS (fully-diluted) (YoY) 4.1 (39.6) (29.4) 4.5 15.6 (19.5) 7.9 8.4


EBITDA margin 21.2 13.6 11.4 14.3 16.3 14.4 12.9 13.6



ROAE 34.9 18.4 11.8 11.8 12.3 9.0 9.0 9.2

ROAA 17.6 7.3 3.9 4.1 4.8 3.7 3.9 4.3

ROCE 28.8 13.4 9.7 10.5 11.7 8.9 8.2 9.3

ROIC 31.2 13.0 9.1 9.1 10.4 8.0 7.3 8.3




Current ratio (x) 1.0 1.0 0.7 1.1 1.1 1.2 1.1 1.1



Free cash flow yield n.a. n.a. n.a. 1.6 n.a. 5.3 22.0 23.7

Company profile

Fufeng is the largest producer of MSG and xanthan gum in China, with an approx. 45% share of

the former market and over 50% of the latter for 2014. Corn is the company’s major raw material,

accounting for about 60% of its COGS for 2014. Its production plants are located in Inner Mongolia,

Xinjiang and Shaanxi.



What's new: We believe Tsingtao will remain a victim of market-share

losses to international brands in the premium beer segment in China in

2016E. Similar to other Goliaths, Tsingtao is finding it hard to grow its

revenue from a high per capita base of beer consumption in China. Hence,

we reiterate our Underperform (4) rating.

What's the impact: Risks losing further market share amid weak

industry outlook. We see rising competition for Tsingtao beer from other

alcoholic drinks, such as wine (imported volume +42% YoY in China in

2015E) and Chinese liquor (+7% YoY in sales volume for 9M15). Beer

industry sales in China also face pressure given a high base, with per

capita consumption in China currently at c. 37 litres a year, in line with the

global average and accounting for c. 80% of alcohol consumption in China.

In 2016E, we expect continued weak demand for beer (for 11M15, industry

output volume declined by 5.7% YoY). We are concerned that Tsingtao’s

market share stopped growing for 9M15 (flat YoY at 19.6%, still the second-

largest player in China), while the other top-3 players gained market share.

Tsingtao lost ground in the high-end segment in 2015E to its main

competitor, AB-InBev, and we think this loss could widen in 2016E as we

see a lack of product differentiation and marketing strategy.

Sitting on its cash. We estimate Tsingtao was sitting on net cash of

CNY6.2bn as at end-December 2015 (vs. CNY6bn as at end-December

2014), and we forecast its ROE to slide from 13.6% in 2014 to 10.3%/9.4%

for 2015/16E, respectively. We believe Tsingtao is finding it hard to identify

meaningful acquisition targets at a reasonable price or those that could

boost EPS, as the other A-share and H-share-listed beer companies are

trading at PERs of 25-29x for 2016E, based on the Bloomberg consensus,

vs Tsingtao’s 20x.

What we recommend: We reiterate our Underperform (4) rating, and cut

our 2015-17E revenue by 1-9% as we expect its sales volume to decline.

And to reflect its higher selling expenses needed to keep up with its

competitors, we are also cutting our 2015-17E EPS by 5-10%. Accordingly,

we cut our 12-month TP to HKD26.80 from HKD32, based on a 2016E

PER of 19x (formerly 20x). Our target PER is still at a 10% discount to the

stock’s past-3-year average 12-month forward PER, as Tsingtao’s EPS

CAGR has declined from 8% for 2010-14 to 2% over 2015-17E. The main

risks to our rating: price hikes and EPS-accretive M&A.

How we differ: Our revised 2016-17 revenue forecasts are 4 -7% below

the Bloomberg consensus as we assume lower ASPs than other analysts.

Hence our 2016-17E EPS estimates are 6-7% below the consensus.

26 January 2016

Tsingtao Brewer y

Still a market-share loser

Revenue to continue to contract in 2016E on industry decline

ROE continuing to decline on inefficient use of net cash

Reiterate Underperform (4); cutting TP on lower EPS forecasts



Tsingtao Brewery (168 HK)




[email protected]






65

74

83

91

100

25

34

43

51

60



Tsingtao B (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 28.80-56.75




Major shareholder Tsingtao Brewery Grp (30.5%)



Revenue (m) 28,092 26,912 27,286


Net profit (m) 1,636 1,610 1,714


EPS change (%) (17.9) (1.6) 6.5

Daiwa vs Cons. EPS (%) (1.3) (7.2) (6.4)

PER (x) 20.1 20.4 19.2


DPS 0.386 0.357 0.381

PBR (x) 2.0 1.9 1.7

EV/EBITDA (x) 8.9 9.0 8.1

ROE (%) 10.3 9.4 9.4

71

Tsingtao Brewery (168 HK): 26 January 2016



Growth outlook Tsingtao: reported net profit and change YoY (%)

We forecast Tsingtao’s recurring net profit to decline by

18% and 2% YoY for 2015-16E, respectively, on a decline

in sales volume, at a CAGR of 6%, and less non-operating

financing income over the same period. We expect a slight

rebound in 2017E net profit (+6% YoY) on a higher ASP

due to product mix upgrades and flat sales volume.


Valuation Tsingtao: 12-month forward PER bands

We believe Tsingtao’s previously strong valuation was

supported by its frequent M&A activity and continuous ASP

hikes, both of which have ground to a halt. Our target price

is based on a 2016E PER of 19x, a 10% discount to

Tsingtao’s past-5-year average. This discount is the same

as the discount seen in 2012, when its operating-profit

margin also came under pressure due to competition.

Source: Bloomberg

Earnings revisions Tsingtao: Bloomberg-consensus EPS-forecast revisions

The Bloomberg-consensus EPS forecasts for 2015-16

have trended down since the beginning of 2015 as industry

sales volume growth has been slowing QoQ. Our EPS

forecasts are marginally lower than the consensus for

2015E, 7% lower for 2016E, and 6% lower for 2017E, as

we are less optimistic on Tsingtao’s sales-volume growth

outlook due to it still losing market share in the premium

segment.

Source: Bloomberg

2%0%

13%

-18%

-2%

6%

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015E 2016E 2017E

Recurring net profit one-off gain YoY

CNY m

20

30

40

50

60

70

80

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

168 HK 18 21

24 27 30

HKD

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

2015E 2016E

HKD

72


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales volume growth YoY - Principal

brand 22.9 18.0 14.7 7.5 4.9 0.0 (4.0) (5.0)

Sales volume growth YoY - Other

brands (1.8) 0.0 (1.2) 15.8 14.0 15.0 6.0 4.0

Average selling price (CNY / tonne) 3,005.2 3,088.8 3,187.5 3,204.8 3,191.6 3,164.4 3,212.4 3,271.6

Gross margin % 35.2 33.3 31.6 32.0 30.9 31.4 32.0 32.7


(%)19.7 19.1 19.1 19.8 19.6 19.7 20.5 20.8

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Beer 19,614 22,790 25,318 27,767 28,599 27,642 26,462 26,836

others 284 368 463 524 450 450 450 450

Other Revenue 0 0 0 0 0 0 0 0

Total Revenue 19,898 23,158 25,782 28,291 29,049 28,092 26,912 27,286

Other income 0 0 0 0 0 0 0 0

COGS (12,898) (15,441) (17,635) (19,236) (20,082) (19,283) (18,294) (18,373)

SG&A (4,997) (5,599) (6,200) (7,183) (7,045) (6,951) (6,991) (7,152)

Other op.expenses (72) (17) (1) (2) 4 (100) 0 0


Net-interest inc./(exp.) (5) 36 178 251 335 176 171 180


Pre-tax profit 2,051 2,438 2,483 2,665 2,687 2,257 2,217 2,359

Tax (539) (657) (639) (692) (663) (601) (588) (625)




EPS (reported)(CNY) 1.072 1.274 1.301 1.459 1.476 1.211 1.191 1.269

EPS (adjusted)(CNY) 1.072 1.274 1.301 1.304 1.476 1.211 1.191 1.269


DPS (CNY) 0.180 0.260 0.400 0.450 0.442 0.386 0.357 0.381

EBIT 1,931 2,101 1,945 2,080 1,926 1,758 1,628 1,761

EBITDA 2,612 2,816 2,790 2,757 2,859 2,799 2,768 3,001

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Depreciation and amortisation 681 715 845 887 933 1,040 1,140 1,240

Tax paid (586) (485) (981) (930) (780) (601) (588) (625)

Change in working capital 1,098 (5) 643 1,311 (641) 75 14 (6)



Capex (1,103) (2,442) (2,382) (2,036) (1,943) (2,000) (2,000) (2,000)

Net (acquisitions)/disposals (340) (1,769) 0 0 (350) 0 0 0



Change in debt 91 480 61 (109) (1,466) (3) 0 0


Dividends paid (216) (244) (351) (540) (608) (597) (521) (483)

Other financing CF items 687 (6) 930 604 384 275 421 371

Cash flow from financing 562 230 639 (45) (1,690) (325) (100) (112)


Change in cash 2,357 (1,358) 1,054 1,590 (2,143) 255 498 661

Free cash flow 2,135 180 415 1,635 (103) 580 598 773

73




Key ratios (%)


As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E


Inventory 1,942 2,718 2,360 2,535 2,487 2,598 2,463 2,474




Fixed assets 5,794 7,829 9,032 9,252 10,189 11,148 12,008 12,767


Other non-current assets 647 761 859 2,225 2,376 2,376 2,376 2,376

Total assets 17,777 21,634 23,661 27,365 27,004 28,309 29,304 30,547

Short-term debt 196 163 150 1,898 435 435 435 435




Long-term debt 1,275 1,789 1,862 5 3 0 0 0

Other non-current liabilities 766 1,412 1,680 2,372 2,486 2,486 2,486 2,486


Share capital 1,351 1,351 1,351 1,351 1,351 1,351 1,351 1,351



Minority interests 117 166 315 (147) (100) (100) (50) (50)


EV 26,707 28,728 27,908 24,815 25,282 25,028 24,785 24,320

Net debt/(cash) (6,126) (4,156) (5,106) (6,629) (5,951) (6,206) (6,499) (6,964)

BVPS (CNY) 7.108 8.224 9.229 10.378 11.390 12.233 13.039 13.950

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 10.4 16.4 11.3 9.7 2.7 (3.3) (4.2) 1.4

EBITDA (YoY) 15.6 7.8 (0.9) (1.2) 3.7 (2.1) (1.1) 8.4

Operating profit (YoY) 17.5 8.8 (7.4) 6.9 (7.4) (8.7) (7.4) 8.2

Net profit (YoY) 22.5 18.8 2.1 0.2 13.2 (17.9) (1.6) 6.5

Core EPS (fully-diluted) (YoY) 25.7 18.8 2.1 0.2 13.2 (17.9) (1.6) 6.5


EBITDA margin 13.1 12.2 10.8 9.7 9.8 10.0 10.3 11.0



ROAE 16.1 16.6 14.9 13.3 13.6 10.3 9.4 9.4

ROAA 8.9 8.7 7.8 6.9 7.3 5.9 5.6 5.7

ROCE 18.3 17.2 13.9 13.6 12.2 10.8 9.3 9.5

ROIC 34.8 28.6 19.5 18.6 17.5 13.2 11.2 11.3

Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.



Current ratio (x) 1.6 1.3 1.4 1.1 1.1 1.1 1.2 1.2

Net interest cover (x) 396.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Free cash flow yield 6.5 0.5 1.3 5.0 n.a. 1.8 1.8 2.4

Company profile

Listed in 1993, Tsingtao Brewery (Tsingtao) is the second-largest beer maker in China, with a

18.6% market share for 2014. The company dates back to 1903, when the Qingdao Joint-stock

Company of the German Beer Company was established. It has more than 60 plants at present.

Tsingtao Brewery Group, a state-owned company, owns about 31% of the company. Tsingtao sells

products under the Tsingtao, Yinmai, Laoshan, Sanshui, and Hans brands.



What's new: As Huishan is still a small player in the liquid milk market of

China (~2% in 1H15, on our estimates), we expect increasing marketing

expenses and discounts in 2016E as it attempts to gain market share. We

are also bearish on Huishan’s ambitions in the infant formula business

through a JV with FrieslandCampania, which targets to launch new infant

formula products in 2H16E. As discussed in our sector note, we foresee

increasing competition from foreign competitors that are much stronger

than Huishan in e-commerce channels and the mass-market segment. On

stretched valuation, we reiterate Sell [5].

What's the impact: Due to more promotional discounts among peers in

the UHT milk industry at retail channels, we cut our FY16-18E revenue

estimates by 1-3%. We also expect Huishan’s cost advantage over other

major dairy farms due to in-house feed production to diminish due to: 1) a

falling corn price in China (the feed costs of peers should fall), and 2)

Huishan’s move to expand in Eastern China in 2H16E, where land costs

are higher than in its home turf of Liaoning province. We expect Huishan’s

free cashflow to remain negative over FY16-17E and net gearing to go up

to 61-67% (also includes the impact of the aggressive share buybacks in

2015). Factoring in the cuts to our revenue forecasts, increasing financial

costs, and valuation losses from biological assets (crops and cows), we

revise down our FY16-18E EPS by 2-18%.

What we recommend: We raise our valuation for the upstream business

to HKD1.77 from HKD1.50 (DCF-based) by using new WACC assumptions

based on the latest data. We value the downstream business at HKD0.1

per share (unchanged), based on 12x FY16E PER. We also raise our

SOTP-based 12-month TP from HKD1.60 to HKD1.87, due to the reduced

number of shares outstanding after share buyback in 2H15. The stock is

now trading far above its peers’ PER range of 3-7x (upstream) and 14-27x

(downstream), and we don’t think the company’s currently weak

fundamentals justify the prevailing valuation (45x FY16E and 34x FY17E

PER on 1%/31% YoY EPS growth). Hence, we reiterate our Sell (5) rating

on Huishan. The key risk to our call: a strong rebound in raw milk prices.

How we differ: Our FY16-18E EPS forecasts are 6-17% below the

Bloomberg consensus due to Huishan’s increasing marketing expenses

and higher feed costs as it expands into Eastern China.

26 January 2016

China H uishan D airy Hol dings

More competition for downstream

Cost advantage diminishing on expansion outside home turf

Pricing pressure leading to our FY16-18E EPS cuts of 2-18%

Reiterating Sell (5) on high net gearing, stretched valuation



China Huishan Dairy Holdings (6863 HK)




[email protected]


Year to 31 Mar 16E 17E 18E




50

113

175

238

300

1.2

1.7

2.1

2.6

3.1



CHDH (LHS) Relative to HSI (RHS)

(HKD) (%)





Major shareholder Yang Kai (70.7%)


Year to 31 Mar 16E 17E 18E

Revenue (m) 4,470 5,558 6,327


Net profit (m) 768 977 1,133


EPS change (%) 0.8 31.2 15.9

Daiwa vs Cons. EPS (%) (12.3) (16.6) (5.5)

PER (x) 45.1 34.4 29.6


DPS 0.013 0.015 0.017

PBR (x) 2.7 2.5 2.3

EV/EBITDA (x) 28.8 24.3 20.7

ROE (%) 5.8 7.5 8.1

75

China Huishan Dairy Holdings (6863 HK): 26 January 2016



Growth outlook Huishan: Net profit and YoY growth

We forecast EPS growth for Huishan of 1% YoY for FY16E,

31% YoY for FY17E and 16% YoY for FY18E. Although we

expect sales volume to see a 21% CAGR over FY15-18E,

on an increasing number of milkable cows, we believe

sales volume growth will be offset by a decline in the raw

milk price (-10% YoY in FY16E, flat over FY17-18E) and

increased marketing and feed costs as Huishan expands in

Eastern China.

Source: Company, Daiwa forecast

Valuation Huishan: 12M forward PER band since listing

Huishan is trading currently at a PER of 34x for FY17E

based on our EPS forecasts), which we believe has only

been boosted by the share repurchase undertaken in

2H15. The stock is trading at a significant premium to its

downstream peers, such as China Mengniu Dairy. We see

long-term derating potential for Huishan due to an increase

in marketing expenses to drive market-share gains, and a

diminishing cost advantage when the company expands

outside its home turf (Northeastern China) in 2H16.

Source: Bloomberg

Earnings revisions Huishan: Bloomberg consensus FY16-17E EPS forecast

We believe the recent slight upward revisions to the

consensus FY17E EPS estimate, which is likely due to

anticipation of an increasing downstream revenue

contribution through expansion, is not justified.

Our FY16-18E EPS is 6-17% below the consensus due to

our concerns over Huishan’s increasing marketing

expenses.

Source: Bloomberg

111%

32%

-37%

-3%

27%16%

(60%)

(40%)

(20%)

0%

20%

40%

60%

80%

100%

120%

0

200

400

600

800

1,000

1,200

1,400

FY13 FY14 FY15 FY16E FY17E FY18E

Net profit (LHS) Net profit YoY (RHS)

(CNYm)

0

1

2

3

4

5

6

Sep

13

Nov

13

Jan

14

Mar

14

May

14

Jul 1

4

Sep

14

Nov

14

Jan

15

Mar

15

May

15

Jul 1

5

Sep

15

Nov

15

6863 HK 12x 16x

20x 24x 28x

(HKD)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15

FY16 FY17

(HKD)

76


Financial summary

Key assumptions


Cash flow (CNYm)


Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Milk Yield (tonne/cow/year) 8.70 8.60 9.10 9.00 9.10 8.52 8.72 8.74

Sales volume of Milk (tonnes) 57,381 213,920 352,411 482,428 577,071 742,574 947,801 1,071,201

ASP of raw milk (CNY/kg) 4.30 4.45 4.51 5.04 4.87 4.40 4.40 4.40

Number of cows (heads) 55,570 90,254 112,778 144,191 180,331 194,920 219,447 242,825

Upstream gross margin (%) 42.7 48.5 58.7 62.0 56.1 51.7 53.5 55.1

Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Raw Milk 244 672 681 989 1,028 1,006 1,057 1,109

Processed milk 15 564 1,707 2,288 2,422 2,847 3,269 3,986

Other Revenue 115 97 165 254 473 617 1,233 1,231

Total Revenue 374 1,333 2,552 3,530 3,923 4,470 5,558 6,327

Other income 0 0 0 0 0 0 0 0

COGS (231) (732) (1,105) (1,162) (1,440) (1,898) (2,452) (2,752)

SG&A (33) (54) (197) (562) (935) (1,078) (1,358) (1,488)


Operating profit 87 495 1,181 1,491 1,255 1,314 1,508 1,807


Assoc/forex/extraord./others 297 67 (28) 9 (83) 123 103 90

Pre-tax profit 327 459 1,012 1,294 850 814 1,046 1,276

Tax 0 (11) (67) (45) (60) (46) (69) (113)

Min. int./pref. div./others 0 0 0 0 0 0 0 (30)

Net profit (reported) 327 448 945 1,249 790 768 977 1,133

Net profit (adjusted) 327 448 945 1,249 790 768 977 1,133

EPS (reported)(CNY) 0.028 0.039 0.082 0.096 0.055 0.055 0.073 0.084

EPS (adjusted)(CNY) 0.028 0.039 0.082 0.096 0.055 0.055 0.073 0.084


DPS (CNY) 0.000 0.000 0.000 0.022 0.015 0.013 0.015 0.017

EBIT 87 495 1,181 1,491 1,255 1,314 1,508 1,807

EBITDA 406 611 1,181 1,654 1,361 1,435 1,748 2,086

Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Profit before tax 327 459 1,012 1,294 850 814 1,046 1,276


Tax paid 0 (9) (96) (45) (60) (46) (69) (113)

Change in working capital (64) (128) 191 (710) (237) 27 (139) 421

Other operational CF items 52 101 139 204 322 643 575 631

Cash flow from operations 340 460 1,315 906 1,097 1,618 1,653 2,494

Capex (1,921) (1,744) (1,541) (5,503) (5,491) (3,304) (2,170) (2,350)




Change in debt 0 137 732 3,309 1,687 2,000 600 600

Net share issues/(repurchases) 243 0 907 5,816 (141) (1,673) 0 0

Dividends paid 0 0 0 0 (311) (219) (169) (197)

Other financing CF items (122) 1,801 (1,383) (85) 481 (60) (565) (621)

Cash flow from financing 121 1,938 257 9,040 1,716 48 (135) (218)


Change in cash (1,435) 661 87 4,466 (2,676) (925) (629) (36)

Free cash flow (1,581) (1,284) (227) (4,597) (4,394) (1,686) (517) 144

77




Key ratios (%)


As at 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Cash & short-term investment 48 513 826 5,363 3,138 2,272 1,643 1,607

Inventory 203 413 447 915 1,582 1,776 2,002 1,955


Other current assets 1,585 582 696 784 2,817 1,012 1,012 1,012


Fixed assets 1,844 2,840 3,637 5,337 7,322 8,730 9,278 9,786

Goodwill & intangibles 384 418 1,453 3,975 3,824 3,836 3,848 3,860


Total assets 5,507 7,190 10,511 21,020 24,334 25,016 26,585 28,612

Short-term debt 182 362 909 1,641 2,867 3,367 3,967 4,567

Accounts payable 470 524 910 738 1,401 1,682 1,838 2,290

Other current liabilities 2,313 3,280 473 540 986 579 574 574


Long-term debt 1,961 1,917 2,103 4,679 5,140 6,640 6,640 6,640



Share capital 0 0 0 1,143 1,143 1,143 1,143 1,143

Reserves/R.E./others 388 882 5,883 12,053 12,544 11,499 12,317 13,262

Shareholders' equity 388 882 5,883 13,195 13,686 12,642 13,459 14,405

Minority interests 0 0 0 0 (1) (1) (1) 29


EV 35,671 35,342 35,762 34,534 38,444 41,310 42,539 43,205

Net debt/(cash) 2,095 1,766 2,186 958 4,869 7,735 8,964 9,600

BVPS (CNY) 0.034 0.077 0.512 0.916 0.956 0.938 0.999 1.069

Year to 31 Mar 2011 2012 2013 2014 2015 2016E 2017E 2018E

Sales (YoY) n.a. 256.3 91.5 38.3 11.1 13.9 24.3 13.8

EBITDA (YoY) n.a. 50.5 93.5 40.0 (17.7) 5.5 21.8 19.4

Operating profit (YoY) n.a. 470.3 138.5 26.2 (15.8) 4.7 14.8 19.8

Net profit (YoY) n.a. 36.9 110.8 32.2 (36.8) (2.7) 27.2 15.9

Core EPS (fully-diluted) (YoY) n.a. 36.9 110.8 17.1 (43.1) 0.8 31.2 15.9


EBITDA margin 108.5 45.8 46.3 46.8 34.7 32.1 31.4 33.0



ROAE 168.7 70.6 27.9 13.1 5.9 5.8 7.5 8.1

ROAA 11.9 7.1 10.7 7.9 3.5 3.1 3.8 4.1

ROCE 6.9 17.4 19.6 10.5 6.1 5.9 6.5 7.3

ROIC 3.5 18.8 20.6 13.0 7.1 6.4 6.6 7.1




Current ratio (x) 0.7 0.4 0.9 2.5 1.5 1.0 0.8 0.7



Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.4

Company profile

China Huishan Dairy (Huishan) is the second-largest dairy-farm operator in China and is based in

Liaoning Province, northeastern China. The company supplies raw milk to third-party dairy

processors, as well as produces fresh milk and UHT dairy products under its own brand, Huishan.

78


Valuation

Huishan: valuation sensitivity to discount rate Huishan: key DCF assumptions

Equity Value

Discount NPV of Enterprise Equity Per Share

Rate FCF (CNY m) Value (CNY m) Value (CNY m) (HKD)

4.0% 55,132 56,384 51,515 4.59

5.0% 42,948 44,200 39,330 3.50

6.0% 34,856 36,108 31,239 2.78

7.0% 29,099 30,351 25,481 2.27

8.0% 24,797 26,049 21,180 1.89

9.0% 21,465 22,717 17,848 1.59

10.0% 18,811 20,063 15,193 1.35

11.0% 16,648 17,900 13,031 1.16

12.0% 14,855 16,107 11,237 1.00

Beta (X) 0.522 Terminal growth rate 0

Equity risk premium 12.96 Cost of debt 6

Risk free rate 2.94 Debt-weighting 44.9

Cost of equity 9.7 WACC* 8.0



Huishan: DCF valuation of upstream business

FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F

EBIT (CNY m) 471 797 2,511 3,030 3,182 3,211 3,177 3,152 3,152 3,170

Depreciation(CNY m) 150 210 250 270 290 303 315 328 341 354

EBITDA (CNY m) 621 1,007 2,761 3,300 3,472 3,514 3,492 3,480 3,493 3,523

Capex (CNY m) -1,266 -800 -800 -808 -500 -505 -510 -515 -520 -526

Cashflow (CNY m) -1,040 -222 1,507 2,129 2,609 2,646 2,619 2,601 2,609 2,635

Discount factor 1.080 1.166 1.260 1.360 1.469 1.587 1.714 1.851 1.999 2.159

Discounted FCF -962.5 -190.0 1196.6 1564.8 1775.5 1667.3 1528.2 1405.4 1305.3 1220.4

FY26F FY27F FY28F FY29F FY30F FY31F FY32F FY33F FY34F >FY35E

EBIT (CNY m) 3,192 3,209 3,222 3,231 3,238 3,243 3,245 3,245 3,243

Depreciation(CNY m) 367 380 394 407 421 435 157 160 163 Terminal

EBITDA (CNY m) 3,559 3,589 3,616 3,639 3,659 3,677 3,402 3,405 3,406 Value

Capex (CNY m) -531 -536 -541 -547 -552 -558 -563 -569 -575

Cashflow (CNY m) 2,665 2,690 2,711 2,729 2,743 2,756 2,476 2,473 2,468 30,855

Discount factor 2.332 2.518 2.720 2.937 3.172 3.426 3.700 3.996 4.316 4.661

Discounted FCF 1142.8 1068.3 996.9 929.0 864.9 804.6 669.1 618.9 572.0 6619.9

Total discounted FCF (from FY16E onward) 24,797 NAV/share (CNY) 1.48

Net cash as of FY15 -4,869 Total value 19,9289

NAV/share (HK$) 1.77


79


Daiwa’s Asia Pacific Research Directory

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Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

Kevin JIN (82) 2 787 9168 [email protected]

Small/Mid Cap

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Christie CHIEN (886) 2 8758 6257 [email protected]

Banking; Insurance (Taiwan); Macro Economics (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected]

Banking; Property and REITs

Shane GOH (65) 64996546 [email protected]

Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

80


Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District，

Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,

Lumpini, Pathumwan, Bangkok 10330, Thailand (66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

81


Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Ownership of Securities

For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationship

For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan

Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.

Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.

Investment Banking Relationship

Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa

Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures

Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK)

DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore

This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia

This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India

This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan

This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom

This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

https://daiwa3.bluematrix.com/sellside/Disclosures.action


http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf%20and%20http:/www.pse.com.ph/

82


Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany

This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States

This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities

For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships

For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making

For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts

For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification

For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 63.9%

Hold** 21.3%

Sell*** 14.8%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory






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