Global Equity Research UBS Investment Research Asia...

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UBS Investment Research

HK & China Daily Comment

Global Equity ResearchAsia Pacific Ex. JP

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Initiation of CoverageRebecca Hair Product, 600439.SS Erica Poon Werkun, CFA p.1Initiate coverage: from manufacturing giant to brand leader12-month rating: Prior: Not Rated => Buy, FY11E Rmb0.37, FY12E Rmb0.49, PT- => Rmb11.90/US$1.85, Market cap. Rmb7.47bn/US$1.16bn

Estimate/Price Target RevisionsLianhua, 0980.HK Erica Poon Werkun, CFA p.6In-line results; slowdown on expansion12-month rating: Neutral (Unchanged), FY11E Rmb0.71=>Rmb0.64, FY12ERmb0.78=>Rmb0.72, PT Prior: HK$21.41/US$2.74 => HK$18.00/US$2.31, Marketcap. HK$17.9bn/US$2.30bn

Company UpdateSwire Pacific, 0019.HK Angus Chan p.151H Slight Beat; Rental Outlook Positive12-month rating: Buy (Unchanged), FY10E HK$8.67, FY11E HK$8.55, PTHK$205.10/US$26.28, Market cap. HK$145bn/US$18.4bnMTRCL, 0066.HK Angus Chan p.221H Profits Beat; Property Projects on Track12-month rating: Neutral (Unchanged), FY11E HK$1.56, FY12E HK$1.26, PTHK$30.40/US$38.95, Market cap. HK$141bn/US$17.3bnDongyue, 0189.HK Edwin Chen p.28H1 results should be stronger than guided; look beyond weak Q312-month rating: Buy (Unchanged), FY11E Rmb1.03=>Rmb1.29, FY12ERmb1.34=>Rmb1.48, PT Prior: HK$10.00/US$1.28 => HK$10.50/US$1.35, Marketcap. HK$13.9bn/US$1.78bnSMIC, 0981.HK Jonah Cheng p.37More risks ahead after mgmt turnover12-month rating: Sell (Unchanged), FY11E US$(.00)=>US$(0.01), PT Prior:HK$0.55/US$3.52 => HK$0.35/US$2.24, Market cap. HK$8.83bn/US$1.10bnChampion REIT, 2778.HK Alex Choi, CFA p.44Citibank Plaza likely to struggle in H2 1112-month rating: Neutral (Unchanged), FY11E HK$0.17, FY12E HK$0.18, PTHK$4.65/US$0.60, Market cap. HK$19.1bn/US$2.45bnYangzijiang, YAZG.SI Cheryl Lee, CFA p.52Choppy waters12-month rating: Buy (Unchanged), FY11E Rmb0.89, FY12E Rmb0.87, PTS$1.67/US$1.37, Market cap. S$4.36bn/US$3.57bn

12 August 2011http://www.ubs.com/investmentresearch

This package has been prepared by UBS Securities Asia Limited UBSANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN AT THE END OF THE NOTESUBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

http://www.ubs.com/investmentresearch

Huaneng Power - A, 600011.SS Stephen Oldfield p.57Weak results - in line with our expectation12-month rating: Neutral (Unchanged), FYE -, PT Prior:Rmb6.10/US$0.95 => Rmb5.00/US$0.78, Market cap. Rmb63.1bn/US$9.81bn

Industry UpdateCasinos Grant Chum p.64

Asia Gaming - Alpha PreferencesElectric Utilities Stephen Oldfield p.69

Asian Utilities - Highlighting deep value in oversold KEPCO

HK & China Daily Comment 12 August 2011

UBS

UBS Investment Research Henan Rebecca Hair Products

Initiate coverage: from manufacturing giantto brand leader

Transition to domestic market opens up growth potential The company is transforming from an export-oriented OEM into a domestic branded manufacturer. We believe the ever-increasing gray-hair professionals and fashion pursuers in China will foster a rapid growth market for hair extension withmarket size expected at Rmb8bn in 2015 and industry leaders accounting for over 40% market share. The company’s current end sales in domestic market areRmb150m.

Brand grows together with market We believe the company’s domestic move may bear first fruits this year and mayachieve 70% CAGR in the next three years. The company has successfully made “Rebecca” the No.1 brand with low-cost expansion and has introduced a morepopular sub-brand “Sleek” with yet greater market exposure. With the marketcampaign for “Sleek” underway, we believe the sub-brand’s average sales per storewill increase substantially.

Rejuvenation of export business Although the market is worried about weakness of peripheral economies, webelieve the company may achieve volume and price hikes via product mixadjustment and new market development, and exports may exceed market expectation.

Valuation: initiate coverage with a Buy rating, price target Rmb11.9 We estimate the company’s 2011/12/13E EPS to be Rmb0.37/0.49/0.63respectively. We derive our price target of Rmb11.9 based on DCF method with UBS VCAM tool (assuming WACC of 8.8%). Highlights (Rmbm) 12/09 12/10 12/11E 12/12E 12/13ERevenues 1,607 2,005 2,562 3,197 4,082EBIT (UBS) 199 274 404 540 700Net Income (UBS) 124 178 291 387 495EPS (UBS, Rmb) 0.20 0.23 0.37 0.49 0.63Net DPS (UBS, Rmb) 0.08 0.10 0.07 0.10 0.13 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % - 13.7 15.8 16.9 17.2ROIC (EBIT) % - 14.9 18.5 21.5 24.0EV/EBITDA (core) x - 24.8 17.0 13.0 10.2PE (UBS) x - 50.0 25.7 19.3 15.1Net dividend yield % - 0.9 0.8 1.0 1.3 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rmb9.50 on 11 Aug 2011 18:35 HKT Erica Poon Werkun, CFA Analyst S1460511010017 [email protected] +86-213-866 8865

Linda Zhao Analyst S1460511020005 [email protected] +86-213-866 8903

Global Equity Research China

Household Products, Non-Durable

12-month rating Buy Prior: Not Rated 12m price target Rmb11.90/US$1.85 -

Price Rmb9.50/US$1.48 RIC: 600439.SS BBG: 600439 CH

12 August 2011 Trading data (local/US$) 52-wk range Rmb14.19-9.18/US$2.13-1.43Market cap. Rmb7.47bn/US$1.16bnShares o/s 786m (ORDA )Free float 94%Avg. daily volume ('000) 8,995Avg. daily value (m) Rmb94.0 Balance sheet data 12/11E Shareholders' equity Rmb2.16bnP/BV (UBS) 3.5xNet Cash (debt) (Rmb0.17bn) Forecast returns Forecast price appreciation +25.3%Forecast dividend yield 0.8%Forecast stock return +26.1%Market return assumption 8.9%Forecast excess return +17.2% EPS (UBS, Rmb) 12/11E 12/10 From To Cons. ActualQ1 - 0.06 - 0.06Q2E - 0.11 - 0.07Q3E - 0.09 - 0.08Q4E - 0.11 - 0.0412/11E - 0.37 -12/12E - 0.49 - Performance (Rmb)

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Stock Price (Rmb) (LHS)Rel. Shanghai Composite (.SSEC) (RHS)

Stock Price (Rmb) Rel. Shanghai Composite (.SSEC)

Source: UBS www.ubssecurities.com

This report has been prepared by UBS Securities Co. Limited UBS 1SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

abc

This is a summary of a Chinese research note published by UBS Securities Co Ltd on 12 August 2011.

mailto:[email protected]:[email protected]

Henan Rebecca Hair Products 12 August 2011

UBS 2

UBS 3

Henan Rebecca Hair Products

Income statement (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues - 1,360 1,366 1,607 2,005 2,562 27.8 3,197 24.8 4,082 27.7 Operating expenses (ex depn) - (1,056) (1,046) (1,374) (1,698) (2,114) 24.5 (2,606) 23.2 (3,326) 27.6 EBITDA (UBS) - 304 321 232 307 448 46.0 591 32.0 757 28.0 Depreciation - (16) (18) (33) (33) (44) 31.9 (51) 16.5 (56) 11.1 Operating income (EBIT, UBS) - 289 303 199 274 404 47.6 540 33.7 700 29.6 Other income & associates - 7 (1) 8 6 5 -30.0 4 -20.0 0 - Net interest - (32) (54) (65) (74) (72) -2.5 (90) 24.9 (113) 25.2 Abnormal items (pre-tax) - 0 0 0 0 0 - 0 - 0 - Profit before tax - 263 247 142 206 336 63.3 454 34.8 587 29.4 Tax - (72) (27) (18) (28) (46) 63.3 (67) 44.7 (92) 38.3 Profit after tax - 191 221 124 178 290 63.3 387 33.3 495 27.9 Abnormal items (post-tax) - 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends - 0 0 0 0 0 63.3 0 33.3 0 27.9 Net income (local GAAP) - 191 221 124 178 291 63.3 387 33.3 495 27.9 Net Income (UBS) - 191 221 124 178 291 63.3 387 33.3 495 27.9 Tax rate (%) - 27 11 13 14 14 0.0 15 7.3 16 6.8 Pre-abnormal tax rate (%) - 28 11 13 14 14 0.0 15 7.3 16 6.8 Per share (Rmb) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) - 0.81 0.47 0.20 0.23 0.37 63.3 0.49 33.3 0.63 27.9 EPS (UBS) - 0.81 0.47 0.20 0.23 0.37 63.3 0.49 33.3 0.63 27.9 Net DPS - 0.10 0.07 0.08 0.10 0.07 -26.1 0.10 33.3 0.13 27.9 Cash EPS - 0.87 0.50 0.25 0.27 0.43 58.4 0.56 31.1 0.70 26.0 BVPS - 2.27 2.64 2.79 2.54 2.75 8.1 3.17 15.2 3.70 16.8 Balance sheet (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets - 189 257 313 400 445 11.2 500 12.5 563 12.6 Net intangible fixed assets - 73 103 100 127 130 2.0 131 1.4 133 1.2 Net working capital (incl. other assets) - 621 999 1,207 1,528 1,756 14.9 2,064 17.6 2,443 18.3 Other liabilities - (13) (14) (3) (2) (2) 0.0 (2) 0.0 (2) 0.0 Operating invested capital - 870 1,345 1,617 2,053 2,328 13.4 2,694 15.7 3,137 16.4 Investments - 21 22 25 51 0 - 0 - 0 - Total capital employed - 891 1,367 1,642 2,104 2,328 10.6 2,694 15.7 3,137 16.4 Shareholders' equity - 1,076 1,250 1,323 1,999 2,160 8.1 2,489 15.2 2,907 16.8 Minority interests - 0 0 0 0 0 63.3 0 33.3 0 27.9 Total equity - 1,076 1,250 1,323 1,999 2,160 8.1 2,489 15.2 2,906 16.8 Net debt / (cash) - (185) 117 319 105 168 59.6 205 22.1 231 12.3 Other debt-deemed items - 0 0 0 0 0 - 0 - 0 - Total capital employed - 891 1,367 1,642 2,104 2,328 10.6 2,694 15.7 3,137 16.4 Cash flow (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) - 289 303 199 274 404 47.6 540 33.7 700 29.6 Depreciation - 16 18 33 33 44 31.9 51 16.5 56 11.1 Net change in working capital - (174) (380) (260) (240) (229) -4.7 (310) 35.2 (377) 21.8 Other (operating) - 13 24 35 8 76 848.8 93 22.4 112 20.5 Operating cash flow (pre tax/interest) - 143 (35) 8 75 295 295.5 375 27.0 492 31.3 Net interest received / (paid) - (32) (54) (65) (74) (72) -2.5 (90) 24.9 (113) 25.2 Dividends paid - (24) (33) (49) (79) (58) -26.1 (77) 33.3 (99) 27.9 Tax paid - (72) (27) (18) (28) (46) 63.3 (67) 44.7 (92) 38.3 Capital expenditure - (26) (129) (49) (151) (88) -41.4 (106) 20.4 (121) 13.9 Net (acquisitions) / disposals - 0 0 0 0 0 - 0 - 0 - Other - - 196 596 (13) 186 - 287 54.6 377 31.1 Share issues - 0 0 0 558 0 - 0 - 0 - Cash flow (inc)/dec in net debt - (47) (80) 414 281 211 -24.8 318 50.2 443 39.5 FX / non cash items - - (222) (616) (67) (274) 308.5 (355) 29.4 (468) 32.0 Balance sheet (inc)/dec in net debt - - (302) (202) 214 (63) - (37) -40.7 (25) -32.0 Core EBITDA - 304 321 232 307 448 46.0 591 32.0 757 28.0 Maintenance capital expenditure - (10) (12) (20) (23) (37) 64.4 (44) 18.8 (52) 17.1 Maintenance net working capital - 0 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - 294 309 212 284 411 44.5 547 33.2 705 28.9

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 4


Household Products, Non-Durable

12-month rating Buy 12m price target Rmb11.90

Company profile Henan Rebecca Hair Products is the leader in China's wig andhairpiece industry. The company engages in the research anddevelopment, manufacture, and distribution of hair products. It mainlyproduces fashion hairpieces, chemical fibre hairpieces, women's wigs(human hair and chemical fibre), training heads, and toupees, which itexports to North America, Europe and Africa.

Value (EV/OpFCF & P/E)

12/09 12/10 12/11E 12/12E 12/13E0.0x

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EV/OpFCF (LHS) P/E (RHS)

Profitability

12/09 12/10 12/11(E) 12/12(E) 12/13(E)11.00%

12.00%

13.00%

14.00%

15.00%

16.00%

17.00%

18.00%

5.0%

10.0%

15.0%

20.0%

25.0%

EBIT margin (LHS) ROIC (RHS)

ROE v Price to book value

12/09 12/10 12/11(E) 12/12(E) 12/13(E)6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1.5x

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2.5x

3.0x

3.5x

4.0x

4.5x

ROE (LHS) Price to book value (RHS)

Growth (UBS EPS)

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Revenue (LHS) UBS EPS Growth (RHS)


Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) - 48.8 50.0 25.7 19.3 15.1 P/E (UBS) - 48.8 50.0 25.7 19.3 15.1 P/CEPS - 38.5 42.2 22.3 17.0 13.5 Net dividend yield (%) - 0.8 0.9 0.8 1.0 1.3 P/BV - 3.5 4.5 3.5 3.0 2.6 EV/revenue (core) - 3.0 3.8 3.0 2.4 1.9 EV/EBITDA (core) - 20.9 24.8 17.0 13.0 10.2 EV/EBIT (core) - 24.3 27.8 18.8 14.2 11.0 EV/OpFCF (core) - 22.9 26.8 18.5 14.0 10.9 EV/op. invested capital - 3.3 4.2 3.5 3.1 2.6

Enterprise value (Rmbm) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 4,657 7,458 7,468 7,468 7,468 + minority interests 0 5 5 5 4 + average net debt (cash) 218 212 137 187 218 + pension obligations and other 0 0 0 0 0 - non-core asset value (25) (51) 0 0 0 Core enterprise value 4,851 7,624 7,609 7,659 7,690 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue - 17.6 24.8 27.8 24.8 27.7 EBITDA (UBS) - -27.5 32.1 46.0 32.0 28.0 EBIT (UBS) - -34.1 37.4 47.6 33.7 29.6 EPS (UBS) - -56.7 12.4 63.3 33.3 27.9 Cash EPS - -49.3 5.3 58.4 31.1 26.0 Net DPS - 14.3 25.0 -26.1 33.3 27.9 BVPS - 5.8 -8.8 8.1 15.2 16.8

Margins (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EEBITDA / revenue - 14.5 15.3 17.5 18.5 18.5 EBIT / revenue - 12.4 13.7 15.8 16.9 17.2 Net profit (UBS) / revenue - 7.7 8.9 11.3 12.1 12.1

Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) - 13.5 14.9 18.5 21.5 24.0 ROIC post tax - 11.7 12.9 15.9 18.4 20.3 Net ROE - 9.7 10.7 14.0 16.7 18.4

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest - 3.1 3.7 5.6 6.0 6.2 Dividend cover (UBS EPS) - 2.5 2.3 5.0 5.0 5.0 Div. payout ratio (%, UBS EPS) - 39.7 44.2 20.0 20.0 20.0 Net debt / EBITDA - 1.4 0.3 0.4 0.3 0.3

Efficiency ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Revenue / op. invested capital - 1.1 1.1 1.2 1.3 1.4 Revenue / fixed assets - 4.2 4.3 4.7 5.3 6.1 Revenue / net working capital - 1.5 1.5 1.6 1.7 1.8

Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT - 1.1 1.0 1.0 1.0 1.0 Capex / revenue (%) - 3.0 7.5 3.4 3.3 3.0 Capex / depreciation - 1.5 4.6 2.0 2.1 2.1

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity - 24.1 5.3 7.8 8.3 7.9 Net debt / (net debt + equity) - 19.5 5.0 7.2 7.6 7.4 Net debt (core) / EV - 4.5 2.8 1.8 2.4 2.8

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rmb9.50 on 11 Aug 2011 18:35 HKT Market cap(E) may include forecast share issues/buybacks. Erica Poon Werkun, CFA Analyst S1460511010017 [email protected] +86-213-866 8865

Linda Zhao Analyst S1460511020005 [email protected] +86-213-866 8903

Henan Rebecca Hair Products 12 August 2011

UBS 5


Henan Rebecca Hair Products is the leader in China's wig and hairpiece industry. The company engages in the research and development, manufacture, and distribution of hair products. It mainly produces fashion hairpieces, chemical fibre hairpieces, women's wigs (human hair and chemical fibre), training heads, and toupees, which it exports to North America, Europe and Africa.

Statement of Risk

The downside risks the company faces mainly include:

1) Weak recovery of developed market: if the European and the US debt crisis gets worse and impacts affordability and willingness of consumers, the company’s export orders will be severely challenged.

2) African economic and political risk: The company's exports could be lower than expected due to political unrest or significant depreciation of local currencies.

3) FX risk: export business is the main revenue contributor, which accounts for over 90% of its core revenue currently. If RMB appreciates significantly and at a faster pace, the company's operational results could be negatively affected.

4) Big rise in labor and raw material cost: Profitability of human hair products is uncertain due to volatile price of human hair as raw material. Besides, as the company is in a labor intensive business, higher labor cost could also erode its profit and weaken its competitive edge in global markets.

5) Risk of developing domestic market: it is from scratches that the company will build distribution network and brand name as well as cultivate consumption concept in the domestic market, and all these involve significant fixed investment at the initial stage of market exploration. The company's earnings could be negatively impacted if domestic market grows slower than expected.

UBS Investment Research Lianhua Supermarket Holdings

In-line results; slowdown on expansion In-line H111 earnings; interim DPS to be announced

Pre-ex net profit came in at Rmb389m, up 18% YoY, in line with UBS-e of Rmb397m, and it represents 56% and 53% of UBS-e and consensus earnings estimates for full-year 2011, respectively. Lianhua did not declare an interim DPSuntil the completion of the bonus issue.

Same-store-sales (SSS) growth was greater than revenue growth SSS growth of 7.2% and 5.7% for supermarkets and convenience stores weregreater than their respective YoY sales growth of 1.7% and -0.5%, implying a declining sales volume given inflation of 5-6% in H111. We foresee improvementon sales growth to 7.1% and 0.5% respectively in H211, mainly due to Lianhua’s back-end loaded store rollout and the potential ease on CPI compared to H111.

Sales and margin pressures remain; we cut EPS estimates In H111, Lianhua opened 49 self-run and 157 franchised stores, but it closed 26 and 100 old stores, respectively, mainly due to its retail network restructuring,which should continue throughout 2012E and impact sales, in our view. Coupledwith the high opex pressure, we cut EPS estimates 9%/8%/8% for 2011/12/13.

Valuation: maintain Neutral rating; cut price target of HK$18.0 We revise down our PT 16% to HK$18.0 to reflect our downgrades on revenue andearnings. We derive our price target form a DCF-based methodology and explicitlyforecast long-term valuation drivers using UBS’s VCAM tool. Lianhua’s store restructuring and rising cost pressures lead to uncertainty on its future businessperspective. Therefore, we maintain our Neutral rating on Lianhua.

Highlights (Rmbm) 12/09 12/10 12/11E 12/12E 12/13ERevenues 24,018 25,887 28,189 31,121 34,736EBIT (UBS) 460 584 647 772 908Net Income (UBS) 522 625 717 806 921EPS (UBS, Rmb) 0.47 0.56 0.64 0.72 0.82Net DPS (UBS, Rmb) 0.16 0.18 0.20 0.22 0.25 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % 1.8 2.3 2.3 2.5 2.6ROIC (EBIT) % (21.8) (15.6) (13.8) (16.1) (18.3)EV/EBITDA (core) x 4.2 7.8 6.6 5.5 4.5PE (UBS) x 29.2 25.5 20.5 18.3 16.0Net dividend yield % 1.9 1.3 1.6 1.6 1.9 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$16.00 on 10 Aug 2011 23:38 HKT Erica Poon Werkun, CFA Analyst S1460511010017 [email protected] +86-213-866 8865

David Lau, CFA Analyst [email protected] +852-2971 8605


Retailers, Broadline

12-month rating Neutral Unchanged 12m price target HK$18.00/US$2.31 Prior: HK$21.41/US$2.74

Price HK$16.00/US$2.05 RIC: 0980.HK BBG: 980 HK

11 August 2011 Trading data (local/US$) 52-wk range HK$21.75-15.64/US$2.80-2.00Market cap. HK$17.9bn/US$2.30bnShares o/s 1,120m (ORD)Free float 16%Avg. daily volume ('000) 518Avg. daily value (m) HK$9.1 Balance sheet data 12/11E Shareholders' equity Rmb2.91bnP/BV (UBS) 2.8xNet Cash (debt) Rmb5.57bn Forecast returns Forecast price appreciation +12.5%Forecast dividend yield 2.4%Forecast stock return +14.9%Market return assumption 9.7%Forecast excess return +5.2% EPS (UBS, Rmb) 12/11E 12/10 From To Cons. ActualH1E 0.35 0.35 - 0.29H2E 0.35 0.29 - 0.2612/11E 0.71 0.64 0.7112/12E 0.78 0.72 0.78 Performance (HK$)

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Price Target (HK$) (LHS) Stock Price (HK$) (LHS)Rel. Hang Seng (RHS)

Stock Price (HK$) Rel. Hang Seng

Source: UBS www.ubssecurities.com

This report has been prepared by UBS Securities Co. Limited UBS 6SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

abc


Lianhua Supermarket Holdings 11 August 2011

UBS 7

Results analysis Lianhua reported H1 2011 pre-ex net profit of Rmb389m, up 18% YoY, and in line with our estimate of Rmb397m. Lianhua plans to declare interim dividend upon the completion of its bonus issue.

Revenue

Total revenue came in at Rmb14.0bn, up 8% YoY, and in line with our estimate of Rmb13.9bn. Same-store-sales (SSS) growth was 8.62%, significantly improved from 3.50% in H1 2010. Total number of retail outlets reached 5,233, a net increase of 61 stores in H111.

Hypermarkets. Revenues came in at Rmb8.2bn, up 13% YoY, mainly due to the SSS growth of 9.61% and the three net new stores in H111. In addition, Lianhua boosted sales through “Key Outlets” strategy and saved cost by adopting its own logistics system and optimizing the merchandize structure. As Lianhua plans to continue its focus on expanding the hypermarkets business segment, we forecast 7 and 14 net new stores for 2011 and 2012, respectively.

Supermarkets. Revenues of Rmb4.9bn were up 2% YoY, while SSS growth came in at 7.21% and 40 net new stores were opened in H1 2011. However, Lianhua actually had a net decline of 8 self-operated supermarkets while the remaining 48 were franchised stores. The nearly flat YoY growth of 2% was mainly due to the rationalization of stores and food safety incidents. In addition, sales per store also declined 4%YoY.

Given the net store closure in H1 from its retail network restructuring plan, we lower our full-year 2011 net new self-run supermarkets from 22 to zero, implying that only 8 net new supermarkets would be opened in H211E.

Convenience Stores. Revenues were Rmb845mn, down 0.5% YoY. SSS growth came in at 5.66%, with 18 net new stores (9 self-run and 9 franchised stores) during H111. The slight drop in revenue was mainly due to the intensifying competition and the declining number of tourists in Shanghai after the World Expo in 2010.

For its direct operations, we expect Lianhua to open 11 net new stores for H211E for a total of 20 net new stores for full-year 2011E.

Other income. Other income grew 38% YoY to Rmb133m (excluding interest income), 5% lower than our estimate. The difference was mainly due to the unexpected gain on disposal of subsidiary.

Gross margin

The company gross margin (GM) improved 0.3ppt from 13.5% in H1 2010 to 13.8% in H1 2011, and it was 0.4ppt below our forecast of 14.2%. Gross margin for hypermarkets, supermarkets, and convenience stores were 13.2% (up 0.3ppt YoY), 14.7% (up 0.9ppt YoY), and 15.2% (down 0.5ppt YoY), respectively.

We expect gross margin to be under pressure in H211, mainly due to:

1) In Lianhua’s network restructuring strategy, the company will continue to close down significant number of its self-operated old stores. Meanwhile, Lianhua will not be renewing the licenses with some

Net decline of 8 self-managed stores

SSS growth was greater than YoY sales growth

Gross margin to slow down in H211E


UBS 8

underperforming franchisees or with those that might be in risk on food safety. As a result, the weighing of the newer stores might increase against the overall store count, and it could dampen gross margin given the lower sales efficiency compared to the mature stores.

2) Inflation rate was over 6% in June 2011. We expect it has peaked and should ease in H211E, leading to a slowdown on SSS growth.

Therefore, we expect another 0.2ppt slowdown on gross margin in H211 to 13.6%, and to 13.7% for full-year 2011E.

Operating expense

Opex to sales increased from 20.7% in H1 2010 to 21.1% in H1 2011. The increase was mainly driven by the rising rental and labour costs which represented 5.3% and 8.5% as % of revenue.

Since Lianhua has been opening more stores in H2 in the past, we believe both staff costs and rents to rise to 5.5% and 8.9% as % of total revenue in H211E. As a result, we forecast opex to sales of 21.8% for full-year 2011; and 21.9% for 2012.

Effective tax

The effective income tax rate came in at 25.3% (vs 22.8% in H1 2010), and we expect it to stay flat at 25.5% for 2011-13E.

Table 1: A snapshot of H1 2011 results

(Rmb m) H1 2011 H1 2010 YoY%

Change UBS-e for H1 2011

UBS-e vs H1 2011 actual 2011 E 2012 E

Sales 14,021 13,009 7.8% 13,864 -1.1% 28,189 31,121

EBIT 334 305 9.7% 362 7.8% 647 772

Net profit ( pre-ex) 389 329 18.3% 397 1.4% 717 806

Net profit ( reported) 392 326 20.0% 397 2.0% 719 806

EPS(Rmb) 0.35 0.29 20.0% 0.64 -1.6% 0.64 0.72

Source: UBS estimates


UBS 9

Table 1: New vs old forecasts, 2011-13E

New Old Change(RMB m) 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E Revenue 28,189 31,121 34,736 28,613 31,905 35,241 -1.5% -2.5% -1.4%YoY 9% 10% 12% 11% 12% 10% -1.6%pt -1.1%pt 1.2%pt Revenue breakdown

Hypermarkets 16,497 18,617 21,288 16,940 19,417 21,961 -2.6% -4.1% -3.1% Supermarkets 9,825 10,471 11,270 9,598 10,255 10,896 2.4% 2.1% 3.4% Convenience stores 1,747 1,913 2,057 1,929 2,087 2,237 -9.4% -8.3% -8.0%

Number of self owned stores 1,782 1,856 1,914 1,837 1,911 1,969 -3.0% -2.9% -2.8% Hypermarkets 150 164 176 159 173 185 -5.7% -5.2% -4.9%

Sales per store ('000) 109,978 113,518 120,955 106,540 112,237 118,710 3.2% 1.1% 1.9% Supermarkets 678 698 714 700 720 736 -3.1% -3.1% -3.0%

Sales per store ('000) 14,490 15,001 15,785 13,711 14,242 14,805 5.7% 5.3% 6.6% Convenience stores 954 994 1,024 978 1,018 1,048 -2.5% -2.4% -2.3%

Sales per store ('000) 1,832 1,925 -7.1% -6.1% -5.9% Gross profit 3,862 4,336 4,871 4,020 4,551 5,104 -3.9% -4.7% -4.6%

Hypermarkets 2,157 2,480 2,868 2,244 2,620 3,018 -3.9% -5.3% -5.0% Supermarkets 1,432 1,553 1,677 1,425 1,548 1,672 0.5% 0.3% 0.3% Convenience stores 264 294 318 322 354 385 -17.9% -16.8% -17.5% Other businesses 9 9 9 29 29 30

Gross margin % 13.7% 13.9% 14.0% 14.0% 14.3% 14.5% -0.3%pt -0.3%pt -0.5%pt Hypermarkets 13% 13% 13% 13% 13% 14% -0.2%pt -0.2%pt -0.3%pt Supermarkets 15% 15% 15% 15% 15% 15% -0.3%pt -0.3%pt -0.5%pt Convenience stores 15% 15% 15% 17% 17% 17% -1.6%pt -1.6%pt -1.8%pt Other businesses 7% 7% 7% 20% 20% 20% -12.6%pt -12.6%pt -12.8%pt

Other income and revenues 2,918 3,254 3,664 3,048 3,429 3,820 -4.3% -5.1% -4.1% SG&A (6,133) (6,818) (7,627) (6,338) (7,115) (7,912) -3.2% -4.2% -3.6% Opex to sales % 21.8% 21.9% 22.0% 22.2% 22.3% 22.5% -0.4%pt -0.4%pt -0.5%pt

EBIT 647 772 908 730 865 1,012 -11.3% -10.7% -10.3% EBIT margin % 2.3% 2.5% 2.6% 2.5% 2.7% 2.9% -0.3%pt -0.2%pt -0.3%pt

Net interest income / (expense) 272 271 304 281 264 300 -3.1% 2.7% 1.3% Share of profits of associates 179 190 196 202 213 219 -11.3% -10.7% -10.3%

Profit before tax 1,097 1,234 1,409 1,212 1,342 1,532 -9.4% -8.1% -8.0% Income tax (279) (314) (359) (309) (342) (390) -9.4% -8.1% -8.0% Effective tax rate % 25% 25% 25% 25% 25% 25% 0.0%pt 0.0%pt 0.0%pt Minority interests (101) (113) (130) (111) (123) (141) -9.4% -8.1% -8.0%

Net profit (pre-x) 717 806 921 792 877 1,001 -9.4% -8.1% -8.0% YoY% 50% 12% 14% 66% 11% 14% -15.6%pt 1.7%pt 0.1%pt Net margin (pre-x) 3% 3% 3% 3% 3% 3% -0.2%pt -0.2%pt -0.2%pt Net profit (reported, diluted) 719 806 921 792 877 1,001 -9.1% -8.1% -8.0% Net margin (reported, diluted) 2.6% 2.6% 2.7% 2.8% 2.7% 2.8% -0.2%pt -0.2%pt -0.2%pt EPS (pre-x, in RMB) 0.64 0.72 0.82 0.71 0.78 0.89 -9.1% -8.1% -8.0% YoY% 74% 12% 14% 92% 11% 14% 17.5%pt -1.3%pt -0.1%pt DPS (in RMB) 0.20 0.22 0.25 0.38 0.42 0.48 -46.3% -48.9% -48.9% Payout ratio % 32% 30% 30% 30% 30% 30% -1.9%pt 0.0%pt 0.0%pt



UBS 10

Chart 1: PE Band of Lianhua

0

5

10

15

20

25

30

Jan-04 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11

Stoc

k pr

ice

(HK$

)

Historical 10x 15x 20x 25x 30x 35x


Table 2: UBS-VCAM Valuation Summary for Lianhua [0980.HK]

Relative year +1E +2E +3E +4E +5E +6E +7E +8E +9E +10EFiscal year 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

EBIT 647 772 908 1,010 1,115 907 929 948 963 974 D&A* 468 484 491 490 481 499 538 579 623 670 Capex (467) (691) (661) (625) (584) (653) (704) (758) (816) (877)Chg. in wkg. cap. (659) 845 (612) 845 (602) 76 89 94 100 105 Tax (operating) (165) (197) (231) (257) (284) (231) (237) (242) (246) (248)Other (69) (88) (108) (106) (111) (101) (107) (113) (120) (127)Free Cash Flow (246) 1,125 (213) 1,356 16 496 508 508 505 497

growth NM -119.0% NM -98.8% 3060.6% 2.4% 0.0% -0.7% -1.5%

Valuation Long Term Assumptions WACCPV of explicit cash flow 4,480 Relative year +10E +15E +25E Risk free rate 4.70%PV of terminal value (yr. 15) 4,543 Sales growth 7.5% 6.0% 6.0% ERP 5.0%Enterprise Value 9,023 EBIT margin 1.6% 1.6% 1.1% Beta 0.62

% terminal 50% Capex/sales 1.4% 1.4% 1.4% Debt / equity*** 0.0%Associates & other 2,248 ROIC -8501.3% 78.8% 22.5% Marg. tax rate 23.0% - Minority interests 391 Cost of equity 7.8%Surplus cash** 4,755 Valuation-Implied Metrics Cost of debt 7.4% - Debt*** 0 Fiscal year 2011E 2012E 1-yr Fwd. WACC 7.8%Equity value 15,635 8.1x 7.2x 7.5xShares outstanding [m] 1,119.6 14.0x 11.7x 12.5x Terminal AssumptionsEquity per share (HK$/sh) 16.95 NM 12.5% 6.6% VCH (years) 15Cost of equity 7.79% 21.8x 19.4x 20.3x Impl. FCF gr. 2.4%Dividend yield 1.61% 23.2x 20.6x 21.5x Incr. ROIC 8.0%1-year Price Target (HK$/sh) 18.00

Figures in Rmb m, unless noted otherwise.* Depreciation and non-goodwill amortization** The portion of cash not required to maintain operations*** Assumes market value of equity and includes market value/seasonal adjustments for debt and debt-deemed obligations.

P / E (Target)

EV / EBITDAEV / EBITFCF YieldP / E (PV)

Source: UBS-VCAM


UBS 11

Table 3: Comparables

Reuters Mkt cap CY PE P/S PEG EV/EBITDA ROE Div Yld P/BV Net debt/ NPAT CAGR Code (US$ m) 11E 12E 11E 11E 11E 11E 11E 11E equity 11-13E ASIA Pacific HK Listed Grocery Retailing CRE* 291.HK 9,997 29.6x 23.8x 0.7x 1.2x 10.5x 8.2% 1.5% 2.4x Net cash 23.8% Lianhua 980.HK 2,317 19.0x 16.9x 0.5x 1.5x 5.9x 28.5% 1.6% 5.0x Net cash 12.4% Wumart* 8277.HK 3,160 31.2x 25.7x 1.2x 1.8x 15.6x 20.0% 1.5% 5.9x Net cash 17.3% Average 26.6x 22.2x 0.8x 1.5x 10.7x 18.9% 1.5% 4.4x 17.8% Other Retailing Boshiwa 1698.HK 881 12.1x 7.7x 2.4x 0.2x 5.3x 15.5% 2.3% 1.9x Net cash 49.2% Golden Eagle* 3308.HK 4,214 22.9x 18.0x 8.3x 0.8x 14.4x 30.0% 1.5% 6.1x Net cash 28.8% Gome 0493.HK 6,640 18.6x 15.1x 0.7x 1.0x 9.7x 21.2% 1.6% 3.5x Net cash 18.7% Jingkelong* 814.HK 489 15.1x 12.8x 0.4x 0.8x 7.7x 12.2% 2.8% 1.8x 90.3% 19.2% Lifestyle 1212.HK 4,989 25.5x 22.5x 7.8x 2.3x 16.9x 18.9% 1.3% 4.7x Net cash 11.0% NWD Store* 0825.HK 1,165 14.0x 12.3x 3.5x 1.3x 4.9x 12.6% 2.8% 1.7x Net cash 10.4% Parkson 3368.HK 3,467 19.3x 15.8x 4.4x 0.9x 20.4x 23.7% 1.5% 4.3x 21.1% 20.8% Springland* 1700.HK 2,231 25.0x 19.6x 3.7x 0.9x 14.0x 14.4% 1.4% 3.3x Net cash 28.3% Average 19.1x 15.5x 3.9x 1.0x 11.7x 18.6% 1.9% 3.4x 23.3% Total HK Average 21.1x 17.3x 3.1x 1.2x 11.4x 18.7% 1.8% 3.7x 21.8% China Listed Beijing Hualian SH60036 908 59.2x 34.0x 0.5x 1.3x 14.3x 3.9% 0.0% 1.8x Net cash 45.3% Beijing Wangfujing SH60085 3,014 30.2x 22.3x 1.1x 1.0x 11.3x 16.7% 0.0% 4.2x Net cash 30.1% Renrenle Commercial* SZ00233 1,125 24.6x 19.4x 0.6x 0.9x NA 7.2% NA 1.9x Net cash 28.6% Wuhan Zhongbai SZ00075 1,318 27.1x 22.7x 0.6x 1.4x 12.9x 15.9% 1.3% 4.1x Net cash 18.8% Average 35.3x 24.6x 0.7x 1.2x 12.8x 10.9% 0.4% 3.0x 30.7% US and Europe France Euronext Listed Carrefour CARR.P 16,712 10.9x 9.6x 0.1x 0.8x 5.2x 9.4% 6.2% 0.9x 83.4% 14.2% UK Listed Debenhams DEB.L 1,188 6.5x 6.3x 0.3x 1.5x 4.5x 17.8% 5.3% 1.1x 88.5% 4.2% Home Retail HOME.L 1,712 8.8x 9.6x 0.2x -0.4x 4.9x 5.8% 6.3% 0.7x Net cash -20.3% Marks & Spencer MKS.L 8,322 9.4x 8.9x 0.5x 2.7x 6.2x 23.5% 4.7% 2.4x 93.2% 3.5% Tesco Plc TSCO.L 46,384 9.7x 8.8x 0.5x 1.2x 7.6x 18.1% 3.5% 2.0x 57.5% 8.3% Average 8.6x 8.4x 0.4x 1.2x 5.8x 16.3% 4.9% 1.5x -1.1% US Listed Costco* COST.O 30,818 20.1x 17.5x 0.4x 1.4x 8.1x 13.2% 1.2% 2.5x Net cash 14.3% Wal-Mart* WMT.N 168,107 10.9x 10.0x 0.4x 2.2x 6.5x 21.1% 2.5% 2.4x 46.0% 4.9% Average 15.5x 13.7x 0.4x 1.8x 7.3x 17.1% 1.8% 2.5x 9.6% Total Average 19.5x 15.6x 1.4x 1.2x 9.4x 15.6% 2.3% 2.8x 17.0%

Source: Last price as at Aug 11 close; *Bloomberg consensus; UBS estimates

UBS 12

Lianhua Supermarket Holdings

Income statement (Rmbm) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues 16,443 18,087 23,254 24,018 25,887 28,189 8.9 31,121 10.4 34,736 11.6 Operating expenses (ex depn) (17,581) (19,198) (24,584) (25,501) (27,436) (29,992) 9.3 (33,119) 10.4 (37,001) 11.7 EBITDA (UBS) 763 711 937 960 1,120 1,114 -0.5 1,256 12.7 1,399 11.5 Depreciation (480) (472) (544) (500) (536) (468) -12.8 (484) 3.4 (491) 1.6 Operating income (EBIT, UBS) 282 239 393 460 584 647 10.8 772 19.4 908 17.7 Other income & associates 114 130 149 150 179 179 -0.1 190 6.4 196 3.3 Net interest 25 38 157 202 194 272 40.0 271 -0.1 304 12.1 Abnormal items (pre-tax) 0 0 0 0 0 0 - 0 - 0 - Profit before tax 421 407 700 813 957 1,097 14.7 1,234 12.4 1,409 14.2 Tax (104) (205) (146) (208) (244) (279) 14.7 (314) 12.4 (359) 14.2 Profit after tax 317 202 554 604 713 818 14.7 920 12.4 1,050 14.2 Abnormal items (post-tax) (53) 179 (66) (15) (3) 3 - 0 - 0 - Minorities / pref dividends (22) (112) (76) (83) (88) (101) 14.7 (113) 12.4 (130) 14.2 Net income (local GAAP) 242 268 412 507 623 719 15.6 806 12.0 921 14.2 Net Income (UBS) 294 90 478 522 625 717 14.7 806 12.4 921 14.2 Tax rate (%) 25 50 21 26 25 25 0.0 25 0.0 25 0.0 Pre-abnormal tax rate (%) 34 74 26 31 31 30 -2.9 30 -1.0 30 -1.7 Per share (Rmb) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) 0.22 0.24 0.37 0.45 0.56 0.64 15.6 0.72 12.0 0.82 14.2 EPS (UBS) 0.26 0.08 0.43 0.47 0.56 0.64 14.7 0.72 12.4 0.82 14.2 Net DPS 0.07 0.10 0.14 0.16 0.18 0.20 11.8 0.22 5.4 0.25 14.2 Cash EPS 0.69 0.50 0.91 0.91 1.04 1.06 2.0 1.15 8.9 1.26 9.5 BVPS 1.83 2.00 2.35 2.20 2.32 4.68 101.4 5.28 12.9 6.00 13.6 Balance sheet (Rmbm) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets 2,725 2,583 2,772 3,031 2,883 2,904 0.7 3,130 7.8 3,317 6.0 Net intangible fixed assets 397 478 402 439 427 401 -6.2 377 -5.9 355 -5.7 Net working capital (incl. other assets) (3,530) (5,843) (4,052) (6,021) (8,160) (7,733) -5.2 (8,543) 10.5 (8,462) -1.0 Other liabilities (78) (70) (53) (51) (49) (49) 0.0 (49) 0.0 (49) 0.0 Operating invested capital (486) (2,852) (932) (2,603) (4,900) (4,478) -8.6 (5,086) 13.6 (4,839) -4.9 Investments 338 420 707 1,339 2,248 2,248 0.0 2,248 0.0 2,248 0.0 Total capital employed (148) (2,432) (225) (1,264) (2,652) (2,230) -15.9 (2,838) 27.3 (2,591) -8.7 Shareholders' equity 2,052 2,239 2,632 2,463 2,600 2,909 11.9 3,283 12.9 3,731 13.6 Minority interests 273 352 412 465 329 430 30.7 543 26.4 673 23.9 Total equity 2,325 2,591 3,044 2,928 2,929 3,339 14.0 3,826 14.6 4,404 15.1 Net debt / (cash) (2,473) (5,022) (3,269) (4,192) (5,581) (5,569) -0.2 (6,664) 19.7 (6,995) 5.0 Other debt-deemed items 0 0 0 0 0 0 - 0 - 0 - Total capital employed (148) (2,432) (225) (1,264) (2,652) (2,230) -15.9 (2,838) 27.3 (2,591) -8.7 Cash flow (Rmbm) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) 282 239 393 460 584 647 10.8 772 19.4 908 17.7 Depreciation 480 472 544 500 536 468 -12.8 484 3.4 491 1.6 Net change in working capital (590) 292 375 215 329 (285) - 763 - (161) - Other (operating) 1,666 2,196 627 386 879 (198) - 6 - 6 -2.3 Operating cash flow (pre tax/interest) 1,839 3,199 1,939 1,562 2,328 632 -72.9 2,024 220.3 1,244 -38.6 Net interest received / (paid) (2) (1) 157 202 153 272 77.2 271 -0.1 304 12.1 Dividends paid (117) (82) (137) (168) (193) (205) 6.5 (229) 11.8 (242) 5.4 Tax paid (115) (177) (198) (200) (246) (244) -1.2 (279) 14.7 (314) 12.4 Capital expenditure (810) (464) (502) (508) (565) (467) -17.3 (691) 47.9 (661) -4.3 Net (acquisitions) / disposals 540 71 (3) (57) 0 0 - 0 - 0 - Other 73 5 (2,900) 176 (78) 0 - 0 - 0 - Share issues 0 (1) (5) (5) (10) 0 - 0 - 0 - Cash flow (inc)/dec in net debt 1,408 2,550 (1,650) 1,003 1,389 (12) - 1,095 - 331 -69.8 FX / non cash items 0 0 (104) (80) 0 0 - 0 - 0 - Balance sheet (inc)/dec in net debt 1,408 2,550 (1,753) 923 1,389 (12) - 1,095 - 331 -69.8 Core EBITDA 763 711 937 960 1,120 1,114 -0.5 1,256 12.7 1,399 11.5 Maintenance capital expenditure (467) (452) (522) (476) (518) (446) -13.8 (465) 4.2 (475) 2.1 Maintenance net working capital - - 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - - 415 484 602 668 11.0 791 18.4 925 16.9


UBS 13


Retailers, Broadline

12-month rating Neutral 12m price target HK$18.00

Company profile Lianhua Supermarket Holdings Co Ltd (Lianhua) is a retail chainoperating three types of outlets: hypermarkets, supermarkets, andconvenience stores. The three retail forms trade under the brandnames Century Mart, Lianhua Supermarket, and Lianhua Quik,respectively. As at 31 December 2008, it operated a total of 3,932outlets, including 2,351 franchised stores. Lianhua has refocused itsoperating strategy to target the Yangtze River Delta market and tostrengthen its competitive position in this area.


12/09 12/10 12/11E 12/12E 12/13E0.0x

5.0x

10.0x

15.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x


Profitability

12/09 12/10 12/11(E) 12/12(E) 12/13(E)1.800%

1.929%

2.057%

2.186%

2.314%

2.443%

2.571%

2.700%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%



12/09 12/10 12/11(E) 12/12(E) 12/13(E)19.00%

20.14%

21.29%

22.43%

23.57%

24.71%

25.86%

27.00%

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x


Growth (UBS EPS)

12/09 12/10 12/11(E) 12/12(E) 12/13(E)22000

24000

26000

28000

30000

32000

34000

36000

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%



Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) 20.5 14.3 25.6 20.5 18.3 16.0 P/E (UBS) 29.2 13.9 25.5 20.5 18.3 16.0 P/CEPS 9.2 7.1 13.7 12.4 11.4 10.4 Net dividend yield (%) 1.9 2.4 1.3 1.6 1.6 1.9 P/BV 3.4 2.9 6.1 2.8 2.5 2.2 EV/revenue (core) 0.2 0.1 0.3 0.3 0.2 0.2 EV/EBITDA (core) 4.2 2.7 7.8 6.6 5.5 4.5 EV/EBIT (core) 9.7 5.7 14.9 11.3 8.9 7.0 EV/OpFCF (core) - 5.4 14.5 11.0 8.7 6.8 EV/op. invested capital NM NM NM NM NM NM

Enterprise value (Rmbm) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 7,234 15,522 14,730 14,730 14,730 + minority interests 465 329 430 543 673 + average net debt (cash) (3,731) (4,886) (5,575) (6,116) (6,829) + pension obligations and other 0 0 0 0 0 - non-core asset value (1,339) (2,248) (2,248) (2,248) (2,248) Core enterprise value 2,630 8,716 7,337 6,909 6,325 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue 12.0 3.3 7.8 8.9 10.4 11.6 EBITDA (UBS) 10.1 2.5 16.6 -0.5 12.7 11.5 EBIT (UBS) 19.9 17.0 26.9 10.8 19.4 17.7 EPS (UBS) 20.7 9.1 19.8 14.7 12.4 14.2 Cash EPS 10.6 0.0 13.6 2.0 8.9 9.5 Net DPS 26.2 12.0 17.9 11.8 5.4 14.2 BVPS 6.1 -6.4 5.6 101.4 12.9 13.6

Margins (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EEBITDA / revenue 4.2 4.0 4.3 4.0 4.0 4.0 EBIT / revenue 1.8 1.9 2.3 2.3 2.5 2.6 Net profit (UBS) / revenue 1.8 2.2 2.4 2.5 2.6 2.7

Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) NM NM NM NM NM NM ROIC post tax - NM NM NM NM NM Net ROE 16.8 20.5 24.7 26.0 26.0 26.3

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest - - - - - - Dividend cover (UBS EPS) 2.7 3.0 3.0 3.1 3.3 3.3 Div. payout ratio (%, UBS EPS) 50.2 33.4 32.8 32.0 30.0 30.0 Net debt / EBITDA NM NM NM NM NM NM

Efficiency ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Revenue / op. invested capital NM NM NM NM NM NM Revenue / fixed assets 6.7 7.2 7.6 8.5 9.1 9.7 Revenue / net working capital NM NM NM NM NM NM

Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT - 1.1 1.0 1.0 1.0 1.0 Capex / revenue (%) 2.6 2.1 2.2 1.7 2.2 1.9 Capex / depreciation 1.1 1.0 1.1 1.0 1.4 1.3

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity NM NM NM NM NM NM Net debt / (net debt + equity) NM NM NM NM NM NM Net debt (core) / EV (96.1) NM (56.1) (76.0) (88.5) NM

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$16.00 on 10 Aug 2011 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Erica Poon Werkun, CFA Analyst S1460511010017 [email protected] +86-213-866 8865

David Lau, CFA Analyst [email protected] +852-2971 8605


UBS 14


Lianhua Supermarket Holdings Co Ltd (Lianhua) is a retail chain operating three types of outlets: hypermarkets, supermarkets, and convenience stores. The three retail forms trade under the brand names Century Mart, Lianhua Supermarket, and Lianhua Quik, respectively. As at 31 December 2008, it operated a total of 3,932 outlets, including 2,351 franchised stores. Lianhua has refocused its operating strategy to target the Yangtze River Delta market and to strengthen its competitive position in this area.

Statement of Risk

Rental hikes and rising labour costs are the key operating risks. Lianhua’s concentrated exposure in the eastern region of China expose the company to high geographical risk.

UBS Investment Research Swire Pacific

1H Slight Beat; Rental Outlook Positive Adjusted profits beat by 4% on higher-than-expected Cathay contribution

Adjusted net profit for 1H was HK$4.4bn (EPS HK$2.91) which was 4% aboveUBSe of HK$4.2bn. The beat primarily came from stronger than expected profitcontribution from Cathay of HK$1.2bn, versus UBSe of HK$0.5bn. Adjusted netprofit was down 11% yoy, with strong Property performance dragged by Cathay.The company declared interim dividend of HK$1.15, up 15% yoy.

Solid 1H for Property was masked by weak non-property businesses Gross rental income in HK office/retail was up 4%/8% yoy, reflecting positiverental reversions at Both PP and Island East. The vacancy rate at Swire’s offices was 1% while the malls were fully leased as at June 2011. However, lower Cathaycontributions and weaker profit margins at other non-property business resulted in overall adjusted earnings decline.

2H Outlook In Property, rental income in 2H will be impact by the sale of Festival Walk.Stripping out the effects of Festival Walk, the company expects office and retailrentals to remain strong. The openings of the Taikoo Hui (Guangzhou) andINDIGO (Beijing) developments in 2H in China should add incremental rental income. Non-property divisions are likely to remain under margin pressure due tocost inflation except for Marine Services which the company expects will benefitfrom improving charter rates/utilization and new deliveries.

Valuation We rate Swire Buy, with a SOTP-derived PT of HK$205.1.

Highlights (HK$m) 12/08 12/09 12/10E 12/11E 12/12ERevenues 24,935 25,120 26,614 30,912 34,238EBIT (UBS) 7,233 7,327 8,227 9,056 11,534Net Income (UBS) 3,471 8,205 13,040 12,942 14,985EPS (UBS, HK$) 2.29 5.45 8.67 8.55 9.90Net DPS (UBS, HK$) 2.38 2.80 3.08 3.39 3.73 Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12EEBIT margin % 27.8 29.2 30.9 29.3 33.7ROIC (EBIT) % - 5.1 5.4 5.8 -EV/EBITDA (core) x - 13.7 15.5 13.6 10.3PE (UBS) x 19.4 13.5 11.1 11.2 9.7Net dividend yield % 3.4 3.8 3.2 3.5 3.9 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$96.10 on 10 Aug 2011 23:38 HKT Angus Chan Analyst [email protected] +852-2971 7530

Grant Chum Analyst [email protected] +852-2971 8173

Global Equity Research Hong Kong

Industrial, Diversified

12-month rating Buy Unchanged 12m price target HK$205.10/US$26.28 Unchanged

Price HK$96.10/US$12.24 (ADR) RIC: 0019.HK BBG: 19 HK

11 August 2011 Trading data (local/US$) 52-wk range HK$136.20-92.45/US$17.57-11.81Market cap. HK$145bn/US$18.4bnShares o/s 1,505m (ORD)/1,505m (ADR)ADR ratio 1 ADR:1 ORDFree float 95%Avg. daily volume ('000) 2,069/23Avg. daily value (m) HK$228.7/US$0.3 Balance sheet data 12/10E Shareholders' equity HK$161bnP/BV (UBS) 0.9xNet Cash (debt) (HK$32.1bn) Forecast returns Forecast price appreciation +113.4%Forecast dividend yield 3.2%Forecast stock return +116.6%Market return assumption 7.3%Forecast excess return +109.3% EPS (UBS, HK$) 12/10E 12/09 UBS Cons. ActualH1E 4.16 - 1.74H2E 4.51 - 3.7112/10E 8.67 7.3812/11E 8.55 8.55 Performance (HK$)

07/0

8

10/0

8

01/0

9

04/0

9

07/0

9

10/0

9

01/1

0

04/1

0

07/1

0

10/1

0

01/1

1

04/1

1

07/1

1

0

50

100

150

200

250

0

20

4060

80

100

120

140

160



Source: UBS www.ubs.com/investmentresearch

This report has been prepared by UBS Securities Asia Limited UBS 15SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab


Swire Pacific 11 August 2011

UBS 16

1H Results Review Swire reported 1H11 adjusted net profits of HK$4.4bn (EPS HK$2.91),

down 11% yoy, dragged by Cathay, but was 4% above UBSe of HK$4.2bn on higher-than-expected Cathay results. Please refer to Table 2 for a summary of the financials.

Headline net profit was HK$23.95bn., up 64% yoy driven by a massive fair value gain of investment properties of HK$19.1bn compared with HK$5.2bn last year.

Property

Gross rental income in HK office was up 4% yoy to HK$2.2bn, reflecting positive rental reversions at both PP and Island East. Vacancy at Swire's offices was at 1% as at period end.

Spot rentals in main offices have increased in 1H 2011, although the pace of growth seemed to have slowed compared with 2H 2010. We note that rental growth in Quarry Bay have generally risen faster than Pacific Place during the first half.

Table 1: Spot rentals

HK$/ sq ft Jun 2010 Dec 2010 Jun 2011

One & Two Pacific Place mid 90s 120 120-130

Three Pacific Place mid 70s mid 90s 100-105

Island East low 30s low 30s to low 40s low to mid 40s

Techno-centres 20 low to mid 20s low to mid 20s

One Island East mid 40s high 50s mid to mid 60s

Source: Company data

In HK retail, gross rental income was up 8% yoy to HK$1.6bn, on strong consumer demand. Malls were fully let. Retail sales in Swire's malls were up 17% in 1H.

In China, Sanlitun continued to ramp up strongly with rental income up 14% yoy in 1H. As at June 2011, 90% and 87% of retail space were leased in the Village South and Village North respectively. Taikoo Hui (GFA 3.8m sq ft of mixed-use space) and INDIGO (GFA 1.9m) are on track for completion and opening in 2H 2011. The company expects the office space will be handed over to tenants from 3Q 2011. Pre-lettings are progressing well in Taikoo Hui with mall and office space being 100% and 64% leased respectively. In INDIGO, 63% of the mall is leased.

In residential property development, the company sold 93 of the 126 units at AZURA to date. The project is on track for completion and profit booking in 2012. The company plans to launch 1 additional project this year for pre-sale, and a further 3 over the next 2 years.


UBS 17

Other divisions

Cathay profit contributions in 1H declined from HK$2.1bn to HK$1.2bn due to higher fuel costs. However, the result was ahead of our estimate of HK$0.5bn thanks to higher than expected yield. Swire increased stake in Cathay Pacific by 1% to 43.97% during the period.

Despite good topline growth during 1H, other divisions generally observed profit margin compression due to cost inflation. However, the impact was relatively small to overall group earnings.

Capex In the Property division, the company currently has a capex commitment of

HK10.8bn, of which HK$9.1bn are related to projects in China including the Taikoo Hui, INDIGO, Dazhongli and Daci Temple developments

In Marine Services, the company placed order for 27 new vessels during the first half, to be delivered up to 2015. Related capex amounted to HK$14.7bn which is notably higher than current capex commitment in the Property division.

Table 2: Capex commitment in Property division

HK$m 1H2011 2H2011e 2012e 2013e 2014+e Total

Hong Kong projects 1,180 815 667 72 2 1,556

Mainland China projects 945 3,370 2,044 1,644 2 ,060 9,118

UK hotels 55 6 8 15 - - 83

USA hotel 4 - - - - -

Total 2,184 4,185 2,726 1,716 2 10,757

Source: Company data

Balance Sheet Net debt increased from HK$41.2bn as at Dec2010 to HK$44.8bn in

Jun2010, although net-debt-to-equity ratio improved by 20bps to 19.5% largely due to the revaluation gains of investment properties. We expect the proceeds of HK$18.8bn from the disposal of Festival Walk which was announced after period-end, will reduce net gearing to c13%.

The company announced interim dividend of HK$1.15, up 15% from HK$1.00 last year. With a much stronger balance sheet position after the disposal of Festival Walk, we believe dividend is well supported with room for growth.


UBS 18

Table 3: Swire 1H 2011 results

HK$m 1H10 1H11A YoY

Growth UBSe

1H11A vs

UBSe Comment/assumptions

Turnover

Property 4,178 4,633 10.9% 4,303 8% Positive rental reversions off 2008 peak. Office/retal rental income grew 4%/8% yoy

Aviation 342 2,544 nm 2,436 4% Consolidated of HAECO in June 2010

Beverages 3,995 4,288 7.3% 4,409 -3% Sales volume up 10% yoy overall. China volumes grew 13% yoy

Marine services 1,514 1,581 4.4% 1,643 -4% Capacity expansion by 10% YoY

Trading & Industrial 2,803 4,033 43.9% 3,244 24% Strong revenue growth from Taikoo Motors

Head office and other 4 3 nm 5 nm

Total 12,836 17,082 33.1% 16,040 6%

Segment profits (core)

Property 2,720 3,163 16.3% 3,362 -6%

Aviation 27 319 nm 320 0% Consolidated of HAECO in June 2010

Beverages 297 239 -19.5% 314 -24% Underlying profit margin decline. Also affected by startup losses (HK$26m) from Campbell JV

Marine services 420 309 -26.4% 452 -32% Charter rates dropped 5% yoy while expenses were up 15%, led to margin compression

Trading & Industrial 111 120 8.1% 157 -24%

Head office and other (160) (146) -8.8% (129) 14%

Total 3,415 4,004 17.2% 4,476 -11%

Share of results from Cathay 2,082 1,221 -41.4% 519 135% Profit impacted by high fuel costs, but ahead of our estimates on high yield

Share of results from JCEs and associates 536 671 25.2% 700 -4% Decline due to weaker Cathay and consolidation of HAECO

Change in FV of inv prop 5,205 19,098 nm 6,000 nm

Other gains and losses 4,362 217 -95.0% 144 51% One-off gains last year from sale of HACTL and HAECO FV adjustment

Net Finance Charges (669) (786) 17.5% (709) 11%

Change in FV of JCEs and associates 972 583 -

PBT 15,903 25,008 57.3% 11,131 125%

Income Tax (789) (844) (623)

Minorities (484) (213) (157)

Attri. PAT 14,630 23,951 63.7% 10,350 131%

Exceptionals (9,710) (19,573) (6,144)

Adjusted attri. PAT 4,920 4,378 -11.0% 4,206 4.1%

Headline EPS, HK$/share 9.68 15.92 64.4% 6.88 131%

Adjusted EPS, HK$/share 3.27 2.91 -11.0% 2.80 4%

DPS 1.00 1.15 15.0% 1.00 15%

Source: Company data, UBS estimates

UBS 19

Swire Pacific

Income statement (HK$m) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chRevenues 18,937 19,111 21,553 24,935 25,120 26,614 5.9 30,912 16.1 34,238 10.8 Operating expenses (ex depn) - - - - - - - - - - - EBITDA (UBS) 5,356 5,687 6,685 7,913 8,092 9,038 11.7 9,879 9.3 12,370 25.2 Depreciation (515) (528) (630) (680) (765) (811) 6.0 (823) 1.4 (836) 1.5 Operating income (EBIT, UBS) 4,841 5,159 6,055 7,233 7,327 8,227 12.3 9,056 10.1 11,534 27.4 Other income & associates 2,947 3,003 4,304 (1,947) 2,718 6,679 145.7 6,074 -9.1 6,248 2.9 Net interest (424) (504) (493) (912) (940) (1,011) 7.6 (1,271) 25.7 (1,694) 33.3 Abnormal items (pre-tax) 14,608 18,839 20,524 1,932 0 0 - 0 - 0 - Profit before tax 21,972 26,497 30,390 6,306 9,105 13,895 52.6 13,860 -0.3 16,088 16.1 Tax (2,688) (3,582) (4,004) (47) (3,407) (593) -82.6 (640) 7.9 (809) 26.4 Profit after tax 19,284 22,915 26,386 6,259 5,698 13,302 133.5 13,220 -0.6 15,279 15.6 Abnormal items (post-tax) 0 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends (528) (201) (127) (373) (247) (262) 6.0 (278) 6.0 (294) 6.0 Net income (local GAAP) 18,756 22,714 26,259 5,886 5,451 13,040 139.2 12,942 -0.8 14,985 15.8 Net Income (UBS) 6,311 6,981 9,248 3,471 8,205 13,040 58.9 12,942 -0.8 14,985 15.8 Tax rate (%) 12 14 13 1 37 4 -88.6 5 8.2 5 8.9 Pre-abnormal tax rate (%) 12 10 9 8 10 8 -19.6 8 0.0 8 0.0 Per share (HK$) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chEPS (local GAAP) 12.25 14.84 17.27 3.89 3.62 8.67 139.2 8.55 -1.3 9.90 15.8 EPS (UBS) 4.12 4.56 6.08 2.29 5.45 8.67 58.9 8.55 -1.3 9.90 15.8 Net DPS 2.06 2.83 3.23 2.38 2.80 3.08 10.0 3.39 10.0 3.73 10.0 Cash EPS 4.46 4.90 6.50 2.74 5.96 9.21 54.4 9.09 -1.2 10.45 14.9 BVPS - 75.27 89.10 89.06 101.33 105.29 3.9 110.63 5.1 - - Balance sheet (HK$m) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chNet tangible fixed assets - 115,164 148,080 155,088 172,147 176,156 2.3 180,163 2.3 - - Net intangible fixed assets 0 0 0 0 0 0 - 0 - 0 - Net working capital (incl. other assets) - (18) (382) (375) (345) (261) -24.4 (688) 163.7 (1,288) 87.3 Other liabilities (11,573) (14,558) (17,999) (19,421) (21,115) (21,415) 1.4 (21,717) 1.4 (22,042) 1.5 Operating invested capital - 100,588 129,699 135,292 150,687 154,480 2.5 157,758 2.1 - - Investments 24,517 26,367 29,432 27,996 33,344 39,939 19.8 46,647 16.8 53,700 15.1 Total capital employed - 126,955 159,131 163,288 184,031 194,419 5.6 204,405 5.1 - - Shareholders' equity - 114,481 135,517 134,741 152,503 161,204 5.7 169,373 5.1 - - Minority interests 528 610 1,161 1,447 846 1,108 30.9 1,385 25.1 1,680 21.2 Total equity - 115,091 136,678 136,188 153,349 162,312 5.8 170,758 5.2 - - Net debt / (cash) - 11,886 22,457 27,089 30,666 32,091 4.6 33,631 4.8 33,743 0.3 Other debt-deemed items (56) (22) (4) 11 16 16 0.0 16 0.0 16 0.0 Total capital employed - 126,955 159,131 163,288 184,031 194,419 5.6 204,405 5.1 - - Cash flow (HK$m) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % chOperating income (EBIT, UBS) 4,841 5,159 6,055 7,233 7,327 8,227 12.3 9,056 10.1 11,534 27.4 Depreciation 515 528 630 680 765 811 6.0 823 1.4 836 1.5 Net change in working capital (2,275) (343) 364 (7) (30) (84) 180.5 427 - 600 40.6 Other (operating) 1,977 2,307 2,435 1,880 767 471 -38.6 464 -1.4 458 -1.5 Operating cash flow (pre tax/interest) 5,058 7,651 9,484 9,786 8,829 9,425 6.7 10,771 14.3 13,428 24.7 Net interest received / (paid) (466) (504) (493) (912) (940) (1,011) 7.6 (1,271) 25.7 (1,694) 33.3 Dividends paid (3,093) (3,200) (4,722) (4,896) (3,130) (4,339) 38.6 (4,773) 10.0 (5,251) 10.0 Tax paid (319) (660) (428) (468) (580) (486) -16.1 (525) 7.9 (663) 26.4 Capital expenditure (1,284) (4,295) (14,585) (5,622) (6,935) (4,820) -30.5 (4,830) 0.2 (4,849) 0.4 Net (acquisitions) / disposals 34 (5,910) (2,628) 0 2,093 0 - 0 - 0 - Other - - 649 (2,842) (3,237) (515) -84.1 (1,234) 139.4 (1,406) 13.9 Share issues 0 0 0 0 0 0 - 0 - 0 - Cash flow (inc)/dec in net debt 3,007 (7,292) (12,723) (4,954) (3,900) (1,747) -55.2 (1,862) 6.6 (434) -76.7 FX / non cash items - - 2,153 322 322 322 0.0 322 0.0 322 0.0 Balance sheet (inc)/dec in net debt - - (10,570) (4,632) (3,577) (1,425) -60.2 (1,540) 8.1 (112) -92.7 Core EBITDA 5,356 5,687 6,685 7,913 8,092 9,038 11.7 9,879 9.3 12,370 25.2 Maintenance capital expenditure (947) (956) (1,078) (1,247) (1,256) (1,331) 5.9 (1,546) 16.1 (822) -46.8 Maintenance net working capital - 1 11 11 10 8 -24.4 21 163.7 - - Operating free cash flow, pre-tax - 4,732 5,619 6,678 6,846 7,715 12.7 8,354 8.3 - -


UBS 20


Industrial, Diversified

12-month rating Buy 12m price target HK$205.10

Company profile Swire Pacific is a conglomerate with interests in properties, aviation,marine services, beverages, and trading. The group is dominated bySwire Properties and Swire's 40% stake in Cathay Pacific. In HongKong, the company has an investment portfolio with a total GFA of13m sf. These mainly comprise office and retail premises in primelocations, as well as serviced apartments. Swire also operatescontainer port terminals in Hong Kong and Shenzhen, andmanufactures/distributes Coca-Cola products in Greater China andthe western US.


12/08 12/09 12/10 12/11E 12/12E0.0x

5.0x

10.0x

15.0x

20.0x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x


Profitability

12/08 12/09 12/10(E) 12/11(E) 12/12(E)28.00%

29.00%

30.00%

31.00%

32.00%

33.00%

34.00%

5.000%

5.129%

5.257%

5.386%

5.514%

5.643%

5.771%

5.900%



12/08 12/09 12/10(E) 12/11(E) 12/12(E)1.00%

2.14%

3.29%

4.43%

5.57%

6.71%

7.86%

9.00%

0.7x

0.7x

0.8x

0.8x

0.9x

0.9x

1.0x


Growth (UBS EPS)

12/08 12/09 12/10(E) 12/11(E) 12/12(E)22000

24000

26000

28000

30000

32000

34000

36000

-100%

-50%

0%

50%

100%

150%


Swire Pacific

Valuation (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EP/E (local GAAP) 11.4 20.3 20.3 11.1 11.2 9.7 P/E (UBS) 19.4 34.5 13.5 11.1 11.2 9.7 P/CEPS 17.3 28.8 12.3 10.4 10.6 9.2 Net dividend yield (%) 3.4 3.0 3.8 3.2 3.5 3.9 P/BV - 0.9 0.7 0.9 0.9 - EV/revenue (core) - 4.9 4.4 5.3 4.4 3.7 EV/EBITDA (core) - 15.5 13.7 15.5 13.6 10.3 EV/EBIT (core) - 16.9 15.2 17.0 14.9 11.1 EV/OpFCF (core) - 18.3 16.2 18.1 16.1 - EV/op. invested capital - 0.9 0.8 0.9 0.9 -

Enterprise value (HK$m) 12/08 12/09 12/10E 12/11E 12/12EAverage market cap 120,341 110,906 144,631 144,631 144,631 + minority interests 3,000 3,000 3,000 3,000 3,000 + average net debt (cash) 27,089 30,666 32,091 33,631 33,743 + pension obligations and other 0 0 0 0 0 - non-core asset value (27,996) (33,344) (39,939) (46,647) (53,700) Core enterprise value 122,434 111,228 139,783 134,615 127,673 Growth (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12ERevenue 7.3 15.7 0.7 5.9 16.1 10.8 EBITDA (UBS) 10.9 18.4 2.3 11.7 9.3 25.2 EBIT (UBS) 10.9 19.5 1.3 12.3 10.1 27.4 EPS (UBS) 7.2 -62.3 137.8 58.9 -1.3 15.8 Cash EPS 7.5 -57.8 117.4 54.4 -1.2 14.9 Net DPS 8.0 -26.3 17.6 10.0 10.0 10.0 BVPS - 0.0 13.8 3.9 5.1 -


Return on capital (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EBIT ROIC (UBS) - 5.5 5.1 5.4 5.8 - ROIC post tax - 5.0 4.6 4.9 5.3 - Net ROE - 2.6 5.7 8.3 7.8 8.8

Coverage ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EBIT / net interest 14.4 5.8 10.7 14.7 11.9 10.5 Dividend cover (UBS EPS) 1.7 1.0 1.9 2.8 2.5 2.7 Div. payout ratio (%, UBS EPS) 64.1 103.8 51.3 35.5 39.6 37.6 Net debt / EBITDA - 3.4 3.8 3.6 3.4 2.7

Efficiency ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E Revenue / op. invested capital - 0.2 0.2 0.2 0.2 - Revenue / fixed assets - 0.2 0.2 0.2 0.2 - Revenue / net working capital - NM NM NM NM NM

Investment ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E OpFCF / EBIT - 0.9 0.9 0.9 0.9 - Capex / revenue (%) 29.8 22.5 27.6 18.1 15.6 14.2 Capex / depreciation NM 8.3 9.1 5.9 5.9 5.8

Capital structure (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E Net debt / total equity - 20.1 20.1 19.9 19.9 - Net debt / (net debt + equity) - 16.7 16.7 16.6 16.6 - Net debt (core) / EV - 22.1 27.6 23.0 25.0 26.4

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$96.10 on 10 Aug 2011 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Angus Chan Analyst [email protected] +852-2971 7530



UBS 21

Swire Pacific

Swire Pacific is a conglomerate with interests in properties, aviation, marine services, beverages, and trading. The group is dominated by Swire Properties and Swire's 40% stake in Cathay Pacific. In Hong Kong, the company has an investment portfolio with a total GFA of 13m sf. These mainly comprise office and retail premises in prime locations, as well as serviced apartments. Swire also operates container port terminals in Hong Kong and Shenzhen, and manufactures/distributes Coca-Cola products in Greater China and the western US.

Statement of Risk

Investment risks include: macro-economic conditions in Hong Kong, especially factors which affect corporate hiring and expansion and consumer spending; changes in oil price and their effect on aviation interests; changes in aluminium and sugar prices and their effect on beverages interests. We maintain our predictability level of 1 as Swire's asset quality is high and majority of rental portfolio provides steady income, while the significant balance sheet strength underpins stability of the company.

UBS Investment Research MTR Corporation Limited

1H Profits Beat; Property Projects on Track 1H adjusted net profit was 7% above UBSe

MTR reported 1H2011 adjusted net profit of HK$4.4bn which was 7% aboveUBSe (HK$4.1bn), but down 24% yoy due to weaker property developmentprofits. While performance in railway and rail related businesses were inline withexpectations, the beat was attributable to a combination of higher propertydevelopment profits and contributions from associates (Beijing MTR), and lower interest expense versus our forecast. Please refer to Table 1 for a summary.

Strong performance from HK and overseas railway operations HK railway performance in 1H was lifted by strong patronage growth of 5.4% yoyand average fare growth of 2.4% yoy, driving EBITDA growth of 10% yoy. Inoverseas railway, patronage ramp up at Beijing Line 4 was faster than expected,resulting in net profit contribution of HK$61m during the first half, up from a lossof HK$1m last year.

Property projects on track for tendering/booking The company expects to tender out the Tai Wai station and Tin Shui Wai sites atend-2011 as previously guided. The Tai Wai station site tender is important towatch given its size and profitability. A good response from developers should be apositive catalyst for the stock. The company expects to receive occupation permitfor Phase 3 of Festival City by year end which will enable the profit booking(cHK$2.5bn EBIT) of the whole project (Phase I, II & III) this year.

Valuation: maintain Neutral, PT HK$30.4 We maintain our Neutral rating, with a SOTP-derived PT of HK$30.4

Highlights (HK$m) 12/09 12/10 12/11E 12/12E 12/13ERevenues 18,797 29,518 31,341 33,279 34,994EBIT (UBS) 6,523 7,797 8,782 9,621 10,377Net Income (UBS) 7,303 8,657 9,072 7,411 8,068EPS (UBS, HK$) 1.28 1.51 1.56 1.26 1.36Net DPS (UBS, HK$) 0.52 0.59 0.59 0.59 0.59 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % 30.7 26.4 28.0 28.9 29.7ROIC (EBIT) % 4.5 6.5 6.9 7.0 7.0EV/EBITDA (core) x 17.1 13.9 11.0 10.5 10.1PE (UBS) x 17.0 18.6 15.8 19.5 18.1Net dividend yield % 2.1 2.1 2.4 2.4 2.4 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$24.60 on 11 Aug 2011 22:35 EDT Angus Chan Analyst [email protected] +852-2971 7530



Railroads

12-month rating Neutral Unchanged 12m price target HK$30.40/US$38.95 Unchanged

Price HK$24.60/US$30.26 (ADR) RIC: 0066.HK BBG: 66 HK

11 August 2011 Trading data (local/US$) 52-wk range HK$31.20-23.25/US$40.30-30.26Market cap. HK$141bn/US$17.3bnShares o/s 5,728m (ORD)/573m (ADR)ADR ratio 1 ADR:10 ORDFree float 23%Avg. daily volume ('000) 3,402/0Avg. daily value (m) HK$90.8/US$0.0 Balance sheet data 12/11E Shareholders' equity HK$124bnP/BV (UBS) 1.2xNet Cash (debt) (HK$14.5bn) Forecast returns Forecast price appreciation +23.6%Forecast dividend yield 2.4%Forecast stock return +26.0%Market return assumption 7.3%Forecast excess return +18.7% EPS (UBS, HK$) 12/11E 12/10 UBS Cons. ActualH1E 0.00 - 0.00H2E 0.00 - 0.0012/11E 1.56 1.5612/12E 1.26 1.26 Performance (HK$)

07/08

10/08

01/09

04/09

07/09

10/09

01/10

04/10

07/10

10/10

01/11

04/11

07/11

0.0

5.0

10.0

15.020.0

25.0

30.0

35.0

40.0

0

20

40

60

80

100

120

140



Source: UBS www.ubs.com/investmentresearch

This report has been prepared by UBS Securities Asia Limited UBS 22SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab


MTR Corporation Limited 11 August 2011

UBS 23

Table 1: MTRC 1H 2011 review

HK$m 1H10A 1H11A YoY

change UBSe Delta v

UBSe Comment

Revenue

HK railway 5,933 6,392 8% 6,373 0% Patronage upf 5.4% yoy, average fare up 2.4% yoy

Station commercial activities 1,732 1,930 11% 1,857 4%

HK property rental and management 1,585 1,676 6% 1,677 (0%) Average 15% increase in rental reversion with occupancy rate close to 100%

Overseas railway 4,852 6,171 27% 5,315 16%

Total 14,102 16,169 15% 15,222 6%

Expenses

HK railway (3,085) (3,267) 6% (3,212) 2%

Station commercial activities (442) (500) 13% (483) 4%

HK property rental and management (372) (425) 14% (402) 6%

Overseas railway (4,645) (5,925) 28% (5,086) 16%

Project study and business development (67) (51) (24%) (108) nm

Variable payments - (301) nm (270) 11%

Total (8,611) (10,469) 22% (9,562) 9%

EBITDA

HK railway 2,848 3,125 10% 3,160 (1%) 90bps improvement in EBITDA margin to 48.9%

Station commercial activities 1,290 1,430 11% 1,374 4%

HK property rental and management 1,213 1,251 3% 1,274 (2%)

Overseas railway 207 246 19% 229 8%

Other (67) (352) nm (378) (7%) Increase mainly due to full-period effect of variable payments

Total 5,491 5,700 4% 5,660 1%

Profit on property development 3,705 1,445 (61%) 1,341 8% 1H2011 profits include share of TKO shopping mall (HK$578), guarantee profits from Festival City (HK$462m) and sale of unsold units (HK$405m)

D&A (1,537) (1,611) 5% (1,583) 2%

EBIT 7,659 5,534 (28%) 5,418 2%

Interest and finance charges (656) (459) (30%) (570) (20%)

Change in fair value of investment properties 1,101 4,408 300% 1,133 289%

Share of profits from JCE' and associates 82 155 89% 108 43% Stronger than expected patronage and results at Beijing Line

PBT 8,186 9,638 18% 6,088 58%

Tax (1,482) (1,502) 1% (1,005) 50% Ex-revaluation gain tax is roughly inline with forecast

Minorities (65) (86) 32% (65) 32%

Attributable earnings 6,639 8,050 21% 5,019 60%

Exceptional items (919) (3,681) 301% (946) 289% FV adjustments and other gains and losses

Underlying attributable earnings 5,720 4,369 (24%) 4,073 7%

Underlying EPS - diluted, HK$/share 1.00 0.76 (24%) 0.70 7%

DPS 0.14 0.25 79% 0.14 79%

Source: Company data, UBS estimates


UBS 24

UBS 25

MTR Corporation Limited

Income statement (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues 9,541 10,690 17,628 18,797 29,518 31,341 6.2 33,279 6.2 34,994 5.2 Operating expenses (ex depn) - - - - - - - - - - - EBITDA (UBS) 5,201 5,913 9,325 9,515 10,917 11,898 9.0 12,957 8.9 13,930 7.5 Depreciation (2,674) (2,739) (2,930) (2,992) (3,120) (3,116) -0.1 (3,336) 7.1 (3,552) 6.5 Operating income (EBIT, UBS) 2,527 3,174 6,395 6,523 7,797 8,782 12.6 9,621 9.6 10,377 7.9 Other income & associates 5,862 8,210 4,776 3,702 4,128 3,312 -19.8 1,235 -62.7 1,701 37.7 Net interest (1,398) (1,316) (1,998) (1,504) (1,237) (1,109) -10.4 (1,857) 67.5 (2,288) 23.2 Abnormal items (pre-tax) 0 8,011 (146) 2,798 4,074 1,359 -66.6 1,400 3.0 1,442 3.0 Profit before tax 6,991 18,079 9,027 11,519 14,762 12,345 -16.4 10,400 -15.8 11,232 8.0 Tax (1,030) (3,083) (747) (1,880) (2,590) (2,037) -21.4 (1,716) -15.8 (1,853) 8.0 Profit after tax 5,961 14,996 8,280 9,639 12,172 10,308 -15.3 8,684 -15.8 9,379 8.0 Abnormal items (post-tax) 1,797 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends 1 (2) 4 0 (113) (101) -10.9 (104) 3.0 (107) 3.0 Net income (local GAAP) 7,759 14,994 8,284 9,639 12,059 10,207 -15.4 8,580 -15.9 9,272 8.1 Net Income (UBS) 5,962 8,571 8,185 7,303 8,657 9,072 4.8 7,411 -18.3 8,068 8.9 Tax rate (%) 15 17 8 16 18 17 -6.0 17 0.0 17 0.0 Pre-abnormal tax rate (%) 91 15 11 17 18 17 -7.4 17 1.3 17 0.3 Per share (HK$) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) 1.41 2.69 1.47 1.69 2.10 1.76 -16.2 1.46 -16.8 1.56 7.0 EPS (UBS) 1.08 1.54 1.45 1.28 1.51 1.56 3.7 1.26 -19.1 1.36 7.8 Net DPS 0.42 0.45 0.48 0.52 0.59 0.59 0.0 0.59 0.0 0.59 0.0 Cash EPS 1.57 2.03 1.97 1.81 2.05 2.10 2.4 1.83 -12.7 1.96 7.0 BVPS 15.51 16.22 17.28 18.57 20.45 21.33 4.3 21.98 3.1 22.73 3.4 Balance sheet (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets 106,943 117,748 116,108 118,837 122,590 138,134 12.7 149,597 8.3 159,887 6.9 Net intangible fixed assets 0 15,250 15,463 19,351 21,467 21,467 0.0 21,467 0.0 21,467 0.0 Net working capital (incl. other assets) (1,473) 13,966 18,028 6,907 273 (313) - (333) 6.2 (350) 5.2 Other liabilities (1) (23,259) (22,876) (23,429) (24,603) (26,011) 5.7 (27,437) 5.5 (28,898) 5.3 Operating invested capital 105,469 123,705 126,723 121,666 119,727 133,276 11.3 143,295 7.5 152,107 6.1 Investments 8,807 806 1,595 1,540 5,289 5,289 0.0 5,289 0.0 5,289 0.0 Total capital employed 114,276 124,511 128,318 123,206 125,016 138,565 10.8 148,584 7.2 157,396 5.9 Shareholders' equity 84,218 91,014 97,801 106,387 117,150 123,929 5.8 129,045 4.1 134,818 4.5 Minority interests 19 23 21 66 143 186 29.9 231 24.6 280 21.1 Total equity 84,237 91,037 97,822 106,453 117,293 124,115 5.8 129,276 4.2 135,098 4.5 Net debt / (cash) 28,357 33,474 30,496 16,753 7,723 14,450 87.1 19,308 33.6 22,298 15.5 Other debt-deemed items 1,682 0 0 0 0 0 - 0 - 0 - Total capital employed 114,276 124,511 128,318 123,206 125,016 138,565 10.8 148,584 7.2 157,396 5.9 Cash flow (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) 2,527 3,174 6,395 6,523 7,797 8,782 12.6 9,621 9.6 10,377 7.9 Depreciation 2,674 2,739 2,930 2,992 3,120 3,116 -0.1 3,336 7.1 3,552 6.5 Net change in working capital 121 11 113 (82) 879 197 -77.6 97 -50.8 86 -11.5 Other (operating) 68 52 60 46 122 60 -50.8 60 0.0 60 0.0 Operating cash flow (pre tax/interest) 5,390 5,976 9,498 9,479 11,918 12,155 2.0 13,114 7.9 14,076 7.3 Net interest received / (paid) (1,636) (1,468) (1,445) (1,134) (757) (1,109) 46.5 (1,857) 67.5 (2,288) 23.2 Dividends paid (1,155) (1,168) (1,265) (1,362) (1,872) (2,170) 15.9 (2,191) 1.0 (2,213) 1.0 Tax paid (1) (1) (577) (1,372) (1,011) (1,190) 17.7 (1,296) 8.9 (1,393) 7.5 Capital expenditure (11,852) (2,481) (5,794) (5,298) (12,329) (17,300) 40.3 (13,400) -22.5 (12,400) -7.5 Net (acquisitions) / disposals (88) (11,609) (1,066) (750) (750) (750) 0.0 (750) 0.0 (750) 0.0 Other 9,180 5,597 4,321 14,075 4,367 3,636 -16.7 1,522 -58.1 1,979 30.0 Share issues 36 23 26 16 63 0 - 0 - 0 - Cash flow (inc)/dec in net debt (126) (5,131) 3,698 13,654 (371) (6,727) 1713.3 (4,857) -27.8 (2,990) -38.4 FX / non cash items (19) 14 (720) 89 9,401 0 - 0 - 0 - Balance sheet (inc)/dec in net debt (145) (5,117) 2,978 13,743 9,030 (6,727) - (4,857) -27.8 (2,990) -38.4 Core EBITDA 5,201 5,913 9,325 9,515 10,917 11,898 9.0 12,957 8.9 13,930 7.5 Maintenance capital expenditure (1,635) (944) (1,512) (2,250) (1,953) (2,500) 28.0 (2,500) 0.0 (2,500) 0.0 Maintenance net working capital (1,513) 0 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax 2,053 4,969 7,813 7,265 8,964 9,398 4.8 10,457 11.3 11,430 9.3


UBS 26


Railroads

12-month rating Neutral 12m price target HK$30.40

Company profile MTR Corporation (MTR) began its Hong Kong rail operations in 1979. These now incorporate lines serving urban Hong Kong, Kowloon andthe New Territories, along with the Airport Express Line. MTR alsooperates overseas rail concessions. The company developsproperties around new railway stations along with private developers. Also, MTR rents advertising space, kiosks, and telecommunicationfacilities. Its 57.4%-owned subsidiary, Octopus Cards Ltd, operatesthe Octopus Card system, which is used for transport fare paying andconvenience retailing.


12/09 12/10 12/11E 12/12E 12/13E0.0x

5.0x

10.0x

15.0x

20.0x

0.0x

5.0x

10.0x

15.0x

20.0x


Profitability

12/09 12/10 12/11(E) 12/12(E) 12/13(E)24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

36.0%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%



12/09 12/10 12/11(E) 12/12(E) 12/13(E)5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x


Growth (UBS EPS)

12/09 12/10 12/11(E) 12/12(E) 12/13(E)10000

15000

20000

25000

30000

35000

-20.0%

-10.0%

0.0%

10.0%

20.0%



Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) 13.0 13.8 13.4 14.0 16.8 15.8 P/E (UBS) 17.0 18.2 18.6 15.8 19.5 18.1 P/CEPS 12.3 12.9 13.7 11.7 13.4 12.6 Net dividend yield (%) 2.1 2.2 2.1 2.4 2.4 2.4 P/BV 1.3 1.3 1.4 1.2 1.1 1.1 EV/revenue (core) 8.1 7.3 5.1 4.2 4.1 4.0 EV/EBITDA (core) 17.1 14.4 13.9 11.0 10.5 10.1 EV/EBIT (core) 26.5 21.0 19.4 14.9 14.2 13.5 EV/OpFCF (core) 22.5 18.9 16.9 13.9 13.1 12.3 EV/op. invested capital 1.2 1.1 1.3 1.0 1.0 1.0

Enterprise value (HK$m) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 132,651 160,487 140,905 140,905 140,905 + minority interests 44 105 164 209 256 + average net debt (cash) 23,625 12,238 11,087 16,879 20,803 + pension obligations and other 0 0 0 0 0 - non-core asset value (19,351) (21,467) (21,467) (21,467) (21,467) Core enterprise value 136,968 151,363 130,689 136,525 140,496 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue 32.6 6.6 57.0 6.2 6.2 5.2 EBITDA (UBS) 20.4 2.0 14.7 9.0 8.9 7.5 EBIT (UBS) 32.5 2.0 19.5 12.6 9.6 7.9 EPS (UBS) 8.6 -11.7 17.3 3.7 -19.1 7.8 Cash EPS 6.9 -8.3 13.2 2.4 -12.7 7.0 Net DPS 8.9 8.3 13.5 0.0 0.0 0.0 BVPS 7.2 7.5 10.1 4.3 3.1 3.4


Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) 4.5 5.3 6.5 6.9 7.0 7.0 ROIC post tax - 4.4 5.3 5.8 5.8 5.8 Net ROE 8.2 7.2 7.7 7.5 5.9 6.1

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest 7.4 6.8 9.7 11.4 6.2 5.5 Dividend cover (UBS EPS) 2.8 2.5 2.6 2.6 2.1 2.3 Div. payout ratio (%, UBS EPS) 36.2 40.5 39.2 37.8 46.7 43.4 Net debt / EBITDA 2.9 1.8 0.7 1.2 1.5 1.6

Efficiency ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Revenue / op. invested capital 0.1 0.2 0.2 0.2 0.2 0.2 Revenue / fixed assets 0.1 0.1 0.2 0.2 0.2 0.2 Revenue / net working capital 2.3 1.5 8.2 NM NM NM

Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT 1.2 1.1 1.1 1.1 1.1 1.1 Capex / revenue (%) NM 28.2 NM NM NM NM Capex / depreciation 2.6 1.8 4.0 5.6 4.0 3.5

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity 23.5 15.7 6.6 11.7 15.0 16.5 Net debt / (net debt + equity) 19.0 13.6 6.2 10.4 13.0 14.2 Net debt (core) / EV 18.3 17.2 8.1 8.5 12.4 14.8

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$24.60 on 11 Aug 2011 22:35 EDT Market cap(E) may include forecast share issues/buybacks. Angus Chan Analyst [email protected] +852-2971 7530



UBS 27


MTR Corporation (MTR) began its Hong Kong rail operations in 1979. These now incorporate lines serving urban Hong Kong, Kowloon and the New Territories, along with the Airport Express Line. MTR also operates overseas rail concessions. The company develops properties around new railway stations along with private developers. Also, MTR rents advertising space, kiosks, and telecommunication facilities. Its 57.4%-owned subsidiary, Octopus Cards Ltd, operates the Octopus Card system, which is used for transport fare paying and convenience retailing.

Statement of Risk

We believe the main risks include: execution risk of combining the two operations if merger goes ahead; exposure to Hong Kong property cycle; rising financial gearing.

UBS Investment Research Dongyue Group

H1 results should be stronger than guided; look beyond weak Q3

Event 1: strong H1 results—we forecast around Rmb1.4bn in net profit Dongyue is due to report its H111 results on 15 August 2011. Although it has issued a positive profit alert guiding for H111 net profit of at least 4x of that inH110 (indicating over Rmb1.1bn in H111), we forecast it will earn aroundRmb1.4bn in H111, or growth of over 400% YoY, from strong pricing and margins of its major products.

Event 2: refrigerants’ ASPs declined since July, but should be temporary Refrigerant average selling prices (ASP) have been declining since July due tocheaper raw materials and customer de-stocking. However, we expect this to be temporary in Q311, with prices potentially rebounding in Q411, when the newrefrigerant sales season begins. Given capacity constraints and growing demand,we believe the upward trend in fluorochemical prices have not changed.

Impact and action: strong results provide support; look beyond Q311 We view the recent share price weakness (given concerns over the refrigerant ASPcorrection and weak market sentiment) as overdone, while strong H111 resultsshould provide support. We reiterate our Buy rating and view the recent weakness as a buying opportunity as we think this is a three-stage structural story.

Valuation: 5.2x 2011E PE, 80% EPS CAGR, 5.3% dividend yield We raise our price target to HK$10.50. We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool (10.9% WACC). Dongyue is trading at 5.2x 2011E PE. Weforecast an 80% EPS CAGR in 2010-12 and a 5.3% dividend yield. We raise our2011/12/13 EPS estimates from HK$1.03/1.34/1.66 to HK$1.29/1.48/1.75. Highlights (Rmbm) 12/09 12/10 12/11E 12/12E 12/13ERevenues 3,544 5,964 10,917 12,996 15,323EBIT (UBS) 235 1,167 3,405 3,887 4,573Net Income (UBS) 165

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