www.jpmorganmarkets.com Asia Pacific Equity Research 21 February 2014 1Q Asia Outlook - 2014 Best Equity Ideas: Analyst Focus List Director of Asia Pacific Equity Research, Asia Technical Analysis Research Sunil Garg AC (852) 2800-8518 [email protected]Bloomberg JPMA GARG <GO> Emerging Market Equity Strategy Adrian Mowat AC (852) 2800-8599 [email protected]Bloomberg JPMA MOWAT <GO> Asia Pacific Equity Derivatives & Quantitative Strategy Tony SK Lee AC (852) 2800-8857 [email protected]Bloomberg JPMA TONYLEE <GO> J.P. Morgan Securities (Asia Pacific) Limited See page 57 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan 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. In the United States, this information is available only to persons who have received the proper option risk disclosure documents. Please contact your J.P. Morgan representative or visit http://www.optionsclearing.com/publications/risks/riskstoc.pdf. In this Best Equity Ideas report, we present our latest country and industry strategy views along with our top buy and sell ideas from across our research teams in Asia ex-Japan. We have surveyed our universe of coverage and refreshed our regional Analyst Focus List (AFL), which contains one top buy and top sell idea from each of the country and industry teams. The weighted average projected return from our teams’ portfolio of buy ratings is 26-36% (industry teams 26%, country teams 36%) and of sell ratings is 15-17% (country teams 15%, industry teams 17%). We publish our Best Equity Ideas report quarterly and will continue to track the performance of these top ideas in this series. Analyst Focus List (AFL) China Overweight Bloomberg Underweight Bloomberg Country China Ping An Insurance Group - H 2318 HK Changsha Zoomlion Heavy Industry 1157 HK India Tata Steel Ltd TATA IN Hero Motocorp Ltd. HMCL IN Indonesia United Tractors UNTR IJ PT Indosat Tbk ISAT IJ Malaysia SapuraKencana Petroleum Bhd SAKP MK Maxis Berhad MAXIS MK Philippines Puregold Price Club PGOLD PM Globe Telecom GLO PM Singapore Singapore Airlines SIA SP Far East Hospitality Trust FEHT SP South Korea Hyundai Motor Company 005380 KS Samsung Engineering 028050 KS Taiwan ASE 2311 TT Far EasTone Telecom 4904 TT Thailand KASIKORNBANK KBANK TB Thanachart Capital TCAP TB Sectors Autos Hyundai Motor Company 005380 KS DongFeng Motor Co., Ltd. 489 HK Consumer Puregold Price Club PGOLD PM CJ Cheiljedang 097950 KS Emerging Technology Synnex 2347 TT Lite-On Technology Corporation 2301 TT Financials Ping An Insurance Group - H 2318 HK IndusInd Bank IIB IN Gaming and Leisure Wynn Macau Ltd 1128 HK Genting Singapore GENS SP Infrastructure CSR Corp Ltd. 1766 HK Changsha Zoomlion Heavy Industry 1157 HK Internet Tencent 700 HK Dangdang DANG US Metals & Mining Tata Steel Ltd TATA IN Ambuja Cements Limited ACEM IN Oil and Gas PetroChina 857 HK Oil Search OSH AU Refining and Chemicals SK Innovation Co Ltd 096770 KS Lotte Chemical Corp 011170 KS SMID-Caps Xinyi Glass 868 HK VTech Holdings 303 HK Technology SK Hynix 000660 KS Innolux Corporation 3481 TT Telecommunications Hutchison Telecom 215 HK Maxis Berhad MAXIS MK Transportation Air China – H 753 HK China Rongsheng Heavy Industries Group 1101 HK Utilities & Power Equipment China Resources Power Holdings 836 HK Shanghai Electric Group Company Limited 2727 HK Source: J.P. Morgan estimates, Bloomberg.
Transcript
www.jpmorganmarkets.com
Asia Pacific Equity Research21 February 2014
1Q Asia Outlook - 2014Best Equity Ideas: Analyst Focus List
Director of Asia Pacific Equity Research, Asia Technical Analysis Research
See page 57 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan 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. In the United States, this information is available only to persons who have received the proper option risk disclosure documents. Please contact your J.P. Morgan representative or visit http://www.optionsclearing.com/publications/risks/riskstoc.pdf.
In this Best Equity Ideas report, we present our latest country and industry strategy views along with our top buy and sell ideas from across our research teams in Asia ex-Japan. We have surveyed our universe of coverage and refreshed our regional Analyst Focus List (AFL), which contains one top buy and top sell idea from each of the country and industry teams. The weighted average projected return from our teams’ portfolio of buy ratings is 26-36% (industry teams 26%, country teams 36%) and of sell ratings is 15-17% (country teams 15%, industry teams 17%). We publish our Best Equity Ideas report quarterly and will continue to track the performance of these top ideas in this series.
Analyst Focus List (AFL)
China Overweight Bloomberg Underweight Bloomberg
Country
China Ping An Insurance Group - H 2318 HK Changsha Zoomlion Heavy Industry 1157 HK
India Tata Steel Ltd TATA IN Hero Motocorp Ltd. HMCL IN
Indonesia United Tractors UNTR IJ PT Indosat Tbk ISAT IJ
Malaysia SapuraKencana Petroleum Bhd SAKP MK Maxis Berhad MAXIS MK
Philippines Puregold Price Club PGOLD PM Globe Telecom GLO PM
Singapore Singapore Airlines SIA SP Far East Hospitality Trust FEHT SP
South Korea Hyundai Motor Company 005380 KS Samsung Engineering 028050 KS
Taiwan ASE 2311 TT Far EasTone Telecom 4904 TT
Thailand KASIKORNBANK KBANK TB Thanachart Capital TCAP TB
Sectors
Autos Hyundai Motor Company 005380 KS DongFeng Motor Co., Ltd. 489 HK
Consumer Puregold Price Club PGOLD PM CJ Cheiljedang 097950 KS
Asia Pacific Equity Derivatives Strategy Tony SK Lee AC
TWSE Upside Option Strategies with Historic Low Volatility
As the market rebounded strongly and recovered most of the January sell-off, equity volatility has come off across the globe. In Asia, Taiwan equity volatility showed up on our radar again as TWSE short-dated volatility approached its historic low briefly observed in December 2013. TWSE 3M 105% implied volatility, for example, is trading at 11.2%, a 0.4% percentile level based on the past 10Y data (Figure 2).
Our Asia Pacific strategist Adrian Mowat highlights in his recent report the accelerating export growth from EMs and re-iterates his preference on DM growth exposure via OW in Korea, Taiwan and India. Particularly in Taiwan, the January manufacturing PMI rose further to 55.5 (vs 55.2 in December), registering at the highest level since April 2011 and the sixth consecutive month above the 50 threshold. With improving DM demand supporting Taiwan economy, our economists forecast 4.5% full-year 2014 GDP growth for Taiwan (vs 2.2% in 2013). Market sentiment seems to be improving in technology with better than expected 4Q earnings so far in Taiwan and recent strength in the semiconductor sector - note the sharp rally in the Philadelphia Semiconductor Index (Figure 1). Also recall favorable seasonality for equities overall in February-April (Figure 3).
Hence we suggest accumulating upside exposure in Taiwan equities via options taking advantage of historic low volatility. Table 1summarizes the indicative cost of TWSE short-dated upside option strategies. To further cheapen the cost, investors can consider worst-of calls on TWSE and KOSPI 200. KOSPI 200 volatility also remains near historical lows (3M 105% volatility at 13.5%, a 1.0% percentile based on the past 10Y data).
Table 1: Indicative pricing of TWSE short-dated upside option strategies
Source: J.P. Morgan. *Worst-of call pricing is based on implied correlation of 0.775.
Figure 2: TWSE short-dated volatility trading near historical lows
Source: J.P. Morgan.
Figure 3: Historically TWSE performed best in Dec followed by Feb, Apr and Mar
Source: J.P. Morgan. *Average monthly price returns based on past 10 year data
Risk of Common Option StrategiesRisks to Strategies: Not all option strategies are suitable for investors; certain strategies may expose investors to significant potential losses. We have summarized the risks of selected derivative strategies. For additional risk information, please call your sales representative for a copy of “Characteristics and Risks of Standardized Options.” We advise investors to consult their tax advisors and legal counsel about the tax implications of these strategies. Please also refer to option risk disclosure documents.
Put Sale. Investors who sell put options will own the underlying asset if the asset’s price falls below the strike price of the put option. Investors, therefore, will be exposed to any decline in the underlying asset’s price below the strike potentially to zero, and they will not participate in any price appreciation in the underlying asset if the option expires unexercised.
Call Sale. Investors who sell uncovered call options have exposure on the upside that is theoretically unlimited.
Call Overwrite or Buywrite. Investors who sell call options against a long position in the underlying asset give up any appreciation in the underlying asset’s price above the strike price of the call option, and they remain exposed to the downside of the underlying asset in the return for the receipt of the option premium.
Booster. In a sell-off, the maximum realized downside potential of a double-up booster is the net premium paid. In a rally, option losses are potentially unlimited as the investor is net short a call. When overlaid onto a long position in the underlying asset, upside losses are capped (as for a covered call), but downside losses are not.
Collar. Locks in the amount that can be realized at maturity to a range defined by the put and call strike. If the collar is not costless, investors risk losing 100% of the premium paid. Since investors are selling a call option, they give up any price appreciation in the underlying asset above the strike price of the call option.
Call Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is below the strike price of the call option.
Put Purchase. Options are a decaying asset, and investors risk losing 100% of the premium paid if the underlying asset’s price is above the strike price of the put option.
Straddle or Strangle. The seller of a straddle or strangle is exposed to increases in the underlying asset’s price above the call strike and declines in the underlying asset’s price below the put strike. Since exposure on the upside is theoretically unlimited, investors who also own the underlying asset would have limited losses should the underlying asset rally. Covered writers are exposed to declines in the underlying asset position as well as any additional exposure should the underlying asset decline below the strike price of the put option. Having sold a covered call option, the investor gives up all appreciation in the underlying asset above the strike price of the call option.
Put Spread. The buyer of a put spread risks losing 100% of the premium paid. The buyer of higher-ratio put spread has unlimited downside below the lower strike (down to zero), dependent on the number of lower-struck puts sold. The maximum gain is limited to the spread between the two put strikes, when the underlying is at the lower strike. Investors who own the underlying asset will have downside protection between the higher-strike put and the lower-strike put. However, should the underlying asset’s price fall below the strike price of the lower-strike put, investors regain exposure to the underlying asset, and this exposure is multiplied by the number of puts sold.
Call Spread. The buyer risks losing 100% of the premium paid. The gain is limited to the spread between the two strike prices. The seller of a call spread risks losing an amount equal to the spread between the two call strikes less the net premium received. By selling a covered call spread, the investor remains exposed to the downside of the underlying asset and gives up the spread between the two call strikes should the underlying asset rally.
Butterfly Spread. A butterfly spread consists of two spreads established simultaneously – one a bull spread and the other a bear spread. The resulting position is neutral, that is, the investor will profit if the underlying is stable. Butterfly spreads are established at a net debit. The maximum profit will occur at the middle strike price; the maximum loss is the net debit.
Pricing Is Illustrative Only: Prices quoted in the above trade ideas are our estimate of current market levels, and are not indicative trading levels
Market outlook: China economic growth momentum has been softening since 4Q13. JPM forecasts China GDP growth of 7.4% in 2014 (versus 7.7% in 2013),based on the assumption of a policy shift from stabilizing growth to structural reform. We look for relatively stable consumption growth and a moderate improvement in exports. The downside is a slowdown in fixed investment attributable to lingering manufacturing overcapacity, tighter local government financing conditions and slowing in the housing market. We expect policy rates to be kept on hold throughout 2014, but credit growth (TSF) to slow from about 18% in 2013 to about 16% in 2014. Volatility in the interbank market will likely continue.
Investment strategy: We see a short-term buying opportunity for China equities, based on seasonality (NBS PMIs have typically been significantly higher in March and April) and all-time low valuations (12m forward P/E of 8x). We expect a 15-20% market rebound (implied 10x of P/E) in the coming spring season, when growth stabilizes and the market’s focus switches to structural reforms during the “two sessions” (NPC and CPPCC) in March.
For short-term investors, we recommend severely corrected stocks (mainly Chinese banks), on the back of tough valuations, high dividend yields and high ROE. For long-term investors, we continue to recommend
thematic stocks, including healthcare/insurance, clean energy, ecommerce/internet, environmental protection, and mid-to-low end consumption, after a 10-15% -correction since the peak.
The biggest risks to China equities in the next one to two months are repeated liquidity tensions and market volatility.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (HKD) PT FY14 FY14 14E (%) 14E (%)Top Picks2318 HK OW 66.6 84.0 11.4 2.0 1.0 17.31177 HK OW 6.8 6.6 25.0 5.6 1.8 23.90916 HK OW 9.4 9.8 14.9 1.7 1.3 12.0VIPS US OW 114.5 88.0 52.8 47.0 0.0 61.8700 HK OW 580.0 580.0 34.3 10.8 0.2 39.1Stocks to Avoid1157 HK UW 5.8 5.3 8.5 0.7 2.5 9.01988 HK UW 8.0 7.5 4.0 0.7 4.9 19.91898 HK N 4.1 4.5 12.3 0.5 2.4 3.9
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 17
February 2014. Price in USD for Vipshop.
Overweight Underweight
Ping An Insurance MW Kim AC
Ticker: 2318 HK, Price: HK$66.6, PT: HK$84
Investment thesis: (1) Key beneficiary of substantial demographic changes in China, (2) Dominant player in the opening of the private health insurance market, (3) Achieved economies of sale: the second-largest life and non-life insurer.
Drivers/catalysts: (1) Attractive valuation (1x P/EV) -minor value attributed to non-life, no value attributed to banking/other operations, (2) Solid NBV growth (>12%): rising demand on the high margin protection-type policy sales backed by strong agency channel, minimum impact on the rising bancassurance competition, (3) Non life: higher earnings/premium growth leverage as the second-largest non-life insurer.
Valuation and risks: Our Dec-14 SOTP-based PT is HK$84. Key downside risks: asset quality concerns at its banking and trust operations, and weaker-than-expected demand for protection-type products
Changsha Zoomlion Karen Li AC
Ticker: 1157 HK, Price: HK$5.8, PT: HK$5.3
Investment thesis: (1) Unfavorable product mix (heavy exposures to cranes and concrete machinery, demand for which has been mainly linked to property FAI), (2) rising risk for receivable collection.
Drivers/catalysts: (1) Past due ratio to further deteriorate in light of the tighter credit and sluggish utilization rates for the existing fleet among its end users, (2) Sales recovery for concrete machinery has lagged other type of construction machinery in 2013, while outlook remains grim in 2014 giving the weakdemand as suggested by the low and falling utilization hours for concrete pumps.
Valuation and risks: Our DCF based Dec-14 PT is HK$5.3. Key upside risks: (1) stronger-than-expected recovery in construction activity, particularly in the housing sector, (2) market share gains in the domestic market, (3) stronger-than-expected export sales.
We expect domestic growth, inflation and fiscal dynamics to remain challenging over 1H 2014. Exports are expected to benefit from global revival and a weak INR. Consumption is likely to benefit marginally from agri sector growth. But the investment cycle may remain constrained. Inflation has eased marginally but still remains elevated. There has been a notable shift in policy focus from WPI to CPI. Our economics team expects further 50 bps hike in the benchmark interest rate over 2H CY14. The dependence on global liquidity and QE tapering linked volatility will likely continue over 1Q CY14. The result of the National Elections in May would play an important role in 2H CY growth revival, particularly for the investment cycle and also for the performance of Indian equities.
Our portfolio stance is based on these key assumptions:
Global growth appears to be on a relatively solid footing. Our global team expects QE tapering to conclude by November 2014. This, however, implies lower liquidity from the US Fed as we go into the year.
Growth in India is expected to remain meaningfully below trend over 1H. Recovery hopes are largely pegged on expectations of a decisive verdict in the National Elections scheduled for May. The political situation, however, remains fluid.
In this backdrop, our portfolio remains biased towards global sectors and the more defensive segments of the local economy. We are keeping sector weightings unchanged this month.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (LC) PT FY14 FY14 14E (%) 14E (%)Top PicksTATA IN OW 380 550 7 0.9 2.8 14HCLT IN OW 1,487 1,500 15 15.0 0.5 31TTMT IN OW 391 450 7 7.3 0.5 25Stocks to AvoidHMCL IN UW 1,979 1,800 19 15 3.2 39APNT IN UW 473 445 38 32 1.2 32BHEL IN UW 150 110 11 11 3.3 10
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
February 17, 2014.
Overweight Underweight
Tata Steel Pinakin Parekh AC
Ticker: TATA IN, Price: INR380, PT: INR550.0
Investment thesis: Improving European metal demand could lead to further stock re-rating. Domestic demand should remain stable with improving profitability driven by recent price hikes. Potential investment sales to de-lever could provide further upside.
Drivers/catalysts: 1) Sharp recovery in domestic demand. 2) Improving European demand allowing TATA to re-start/ramp up capacity. 3) Annual capex to be well supported by FCF. 4) Sale of investments/non-core assets.
Valuation and risks: Our Dec-14 PT of Rs550 is based on SOTP, valuing India operations at 5.7x, Asia at 5.0x and European operations at 6.0x FY15E EV/EBITDA. Key risks include sharp decline in India profitability, adverse impact from Shah Commission report, lower realizations on back of poor mix and demand in Europe stagnating, as against picking up.
Hero Motocorp Aditya Makharia AC
Ticker: HMCL IN, Price: INR1979, PT: INR1,800
Investment thesis: We have an UW rating on Hero Motocorp. While the domestic consumer sentiment remains weak impacting overall two wheeler sales, competitive intensity remains intense as Bajaj has launched its next generation Discover model and Honda continues to expand its distribution network into rural India.
Valuation and risks: Our Sep'14 PT of Rs1,800 based on 12.5x forward PE multiple (a 5% discount to its average historical multiple). Upside risks to our PT include - A recovery in local industry sales, robust growth in exports at Hero – particularly in the African region. Downside risks include - Muted response to new launches, unfavorable currency movement, declining utilization levels as new capacity ramps up.
J.P. Morgan regional strategy team rates Indonesia OW relative to EM/Asia ex-Japan. Indonesia has outperformed APxJ/EM by 13%/12% YTD.
Recent economic data shows that macroeconomic adjustment underway is progressing smoothly. The trade balance recovered in 4Q. BoP was in surplus in 4Q. Rupiah has reversed its depreciating trend.
Imports have cooled off, with GDP growth only slowing modestly to 5.7%. This is more buoyant than previously expected.
After raising rates by 175bps in 2HFY13, the Central Bank has held policy in the last few months. We think tightening may be close to running its course, with risks only if prompted by external sector turbulence.
After declining through the course of FY13E, earnings estimates have stabilized recently. Consensus estimates EPS growth of 10-12% pa over this year and next, which appear reasonable.
Politics is a factor. Indonesia is due to go to the polls in April (Parliament) and July (Presidential).
Candidates and hence outcomes are unclear, and hence a potential source of volatility.
Our top picks are UNTR (earnings troughed in FY13E. replacement needs bear the seeds of a cyclical recovery?), INTP (playing a cyclical recovery, and improvement in Government spending), BRI (gaining deposit share), PGAS (volume growth).
Our top avoids are UNVR (valuations & FX) and Telecoms (ISAT).
Top Picks and Stocks to AvoidP/E (x) D.yld ROE
Code Rec Price PT 14E 15E 14E 14E Top PicksUNTR IJ OW 18,425 23,500 11.0 10.2 3.62 18.3INTP IJ OW 22,450 25,500 13.9 12.4 2.26 23.6BBRI IJ N 8,950 8,500 11.1 10.0 2.70 22.5PGAS IJ OW 4,950 6,300 10.6 10.6 4.72 32.9Stocks to AvoidsISAT IJ UW 4,000 3,820 16.8 11.1 3.0 6.6UNVR IJ UW 28,400 22,000 38.2 38.6 2.1 202
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 17th, 2014.
Overweight Underweight
United Tractors Aditya Srinath AC
Ticker: UNTR Price: Rp18,425, PT: Rp23,500
Investment thesis: Our non consensus OW is predicated on our view that Indonesian equipment volumes are at cyclically low levels, and that replacement demand running well below needs is planting the seeds of the next cyclical recovery in Komatsu volumes. In the interim, a weaker Rupiah should cushion margins and earnings more than we think the Street currently appreciates.
Drivers/catalysts: UNTR’s PE relative to the Indonesian market has been a function of its earnings growth. We think UNTR returns to growth this year, cementing its rerating. Mgmnt guidance is for Komatsu volumes to grow 5-10% y/y this year. We expect volume growth to turn positive y/y by mid year, potentially driving stock performance.
Valuation and risks: UNTR currently trades at 12.7x 12M forward consensus PE, but is cheaper on our better than Street estimates. Our Dec14 PT envisages the stock tracking growth from here. Key risk is coal prices staying uneconomical for miners to replace fleets or expand. Our assessment on weaker sales being compensated by margins due to weak currency may also be at risk if customers force ASP cuts.
Indosat Princy Singh AC
Ticker: ISAT, Price: Rp4000, PT: Rp3820
Investment thesis: Our UW rating is predicated on: 1) M/S losses driven by network quality issues: This has resulted in reduced subscriber m/s, which if sustained, could drive margins lower. 2) Risks to data pricing: We see a higher risk of downside to pricing for ISAT, given its data yields are at historically high levels and as it looks to regain m/s. 3) Risk of rising capex intensity: ISAT currently has 11.8Ksubs per 3G BTS vs 6K for TLKM and 3.8K for XL (on similar frequencies). We see significant upside risk to Street capex assumptions for ISAT
Drivers/catalysts: Consensus EPS estimates for ISAT have continued to trend down over the past 8 quarters and we believe this trend is likely to continue, which will drive stock underperformance.
Valuation and risks: Our Jun-14 PT of Rp3820 is based on 16x 2014, which is at a 25% discount of historic avg trading multiple. Key risks lower competitive intensity driving data pricing higher, potential increase in dividend payout and potential consolidation in the industry led by acquisition of Hutch Indonesia.
Subsidy reduction is a key theme given the government’s need for fiscal prudence and sustaining domestic-led growth. Tenaga is the biggest beneficiary, in our view. Petronas’ M$300B capex is much needed to support government revenues and domestic growth, favourable for oil and gas service providers. M$160B rail-related infrastructure spending is positive for construction over the medium term. Consensus UW on plantations could reverse on the back of successful Indo biofuel mandate execution. Visit Malaysia 2014 supports higher tourist arrivals benefitting airlines and airports (MAHB). We prefer the latter. We expect the glove/exporters to track US/EU/Japan recovery. We are most negative on expensive defensives such as telcos, and cautious on developers/consumer-led banks due to property-demand cooling measures and moderating consumption growth.
Our sector/stock selection is split between domestic capex/ thematic winners, and exposure to external sector recovery. Our “Best Malaysia Five” picks are Tenaga, SAKP, Gamuda, Top Glove and Genting Plantations. Stocks to avoid: Maxis, an expensive defensive with rising competition/capex risk, UEM
Sunrise, on increased competition in Iskandar Malaysia amidst property-demand cooling measures.
Key risks: 1) Sharp rise in bond yields, 2) sharper-than-expected fall in CPO and LNG prices, and 3) sharper-than-expected slowdown in consumption on the back of subsidy cuts.
Top Picks and Stocks to AvoidPrice PT P/E (x) P/B (x) Div. yield ROE
Name Rec (M$) (M$) FY14E FY14E 14E (%) 14E (%)Top PicksGamuda GAM MK OW 4.45 5.50 12.3 1.9 2.2% 14.9%Genting Plantations GENP
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 14
Feb 2014.
Overweight Underweight
SapuraKencana Ajay Mirchandani AC
Ticker: SAKP MK, Price: M$4.45, PT: M$5.70
Investment thesis: SAKP, with its distinctively shaped portfolio of oil services across the supply chain as well as globally, is a key beneficiary of both (i) solid global oil services capex needs (via its Petrobras PLSV contracts, Tender Rig portfolio) as well as (ii) Petronas’ M$300B capex plan where it plans to maintain or even grow production in the country with a thrust on developing marginal fields. We also see potential earnings contribution from the recent acquisition of Newfield's Malaysia Oil and Gas asset, potentially adding to earnings in FY15.
Drivers/catalysts: New contract wins and potential earnings accretion from Newfield’s Malaysia oil and gas assets.
Valuation and risks: Our Jan-16 PT of RM5.7 is based on SOTP of a) Tender Rig business valued at 24x P/E; b) OCSS valued at 24x P/E; c) Fab and HUC valued at 25x P/E; d) EJV values at 18x P/E; and e) Others valued at 15x P/E. f) Newfield assets valued using DCF with NAV of RM862mn.
Maxis Princy Singh AC
Ticker: MAXIS MK, Price: M$6.93, PT: M$5.25
Investment thesis: Maxis' change in strategy to focus on revenue growth and market share, a shift away from its margin focused strategy over the past few years is likely to drive sales and marketing expenses higher and comes against a backdrop of slowing industry revenuegrowth. We note that rising competitive intensity could drive pricing pressure and potentially capex intensity higher, which poses risk to free cash flows and sustainability of dividend payout.
Drivers/catalysts: We believe that given theheadwinds from competitive pressures and the impending consensus downgrades, valuation multiples are likely to compress from current levels.
Valuation and risks: Our Dec-14 PT of M$5.25 isbased on 18.5x 2014E P/E, in-line with the stock’shistorical trading range. Key upside risks include higher-than-expected market share gains, better cost management and potential increase in dividend payout.
Overall market view. Philippines is rated OW relative to EM & Asia ex-Japan. The country is one of the few countries in EM that has been growing above potential. Domestic demand is robust. External position is healthy. Domestic liquidity is aplenty. We believe that market EPS growth will catch up with the robust macro growth.
Driver: Banks, in our view, will be the key catalyst for the EPS growth upgrade. Core banks outlook is promising. We expect credit demand to pick up strongly amid the steep LDR decline. Consumer loans are expected to underpin the loan expansion. Positive earnings surprise by banks could result in further our above consensus market EPS growth of 10% increasing further.
Sector and stock calls: Metropolitan Bank is our preferred banks pick. Apart from banks, we think that property will be a key beneficiary of the consumer-led loans growth. We like ALI given its high leverage on the economic growth and widening lead over peers in terms of earnings and return trajectory. We are
positive on modern retailers given rising organized retail penetration amid increasing per capita income and expansion of middle income families. We like Puregold among the retailers. Ayala Corp is our preferred country proxy given its cheap valuations and leverage on the economy. We will avoid telcos (Globe is our UW stock) given record high valuation, rising capex intensity, and increasing SAC due to postpaid aggression by the players.
Risks and key issues. Rapid currency depreciation, sudden rise in interest rates are key risks to our view.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 18 2014.
Overweight Underweight
Puregold Price Club Jeanette Yutan AC
Ticker: PGOLD PM, Price: Php41.70, PT: Php51
Investment thesis: We are bullish on PGOLD's medium-term growth outlook driven by rising modern retail penetration and the shift in the company’s store geographic mix. Our 20% EPS CAGR in 2014E-2016E is driven by aggressive new store expansion (25 new stores organically + M&A), pick-up in SSSG beginning 2014 (impact of new provincial stores), and margin expansion (due to S&R stores + gradual shift of store geographic mix away from Metro Manila).
Drivers/catalysts: Upward FY14E and FY15E EPS revision by consensus, which are 10%/15% lower than our estimates.
Valuation and risks: Our Dec-2014 PT of Php51 is based on a FWD PER of 26x, which implies a 1.3x PEG on the company's 2015E-2017E EPS CAGR of 20%. Key risks to our PT include execution risk of new store expansion, logistics and distribution risk, sharp drop in SSSG, irrational pricing behavior of competitors, and reputation risk.
Globe Telecoms Princy Singh AC
Ticker: GLO PM, Price: Php1785, PT: Php1520
Investment thesis: Downside earnings risk due to postpaid aggression, rising capex intensity on increasing data usage, and record valuations are key reasons why we think Globe will underperform the market.
Drivers/catalysts: Downward EPS revision by consensus, which are 5-10% higher than our estimates.
Valuation and risks: Our Dec-14 PT of Php1520 is based on 16x 2015E PER. Our target multiple of 16x is at a 20% premium to the average 5-year forward PER, factoring in improved fundamentals for the Philippine wireless industry driven by competition getting less aggressive over the past 18 months and a continued decline in sovereign bond yields (thereby implying a lower risk-free rate). Our target multiple is also in line with average ASEAN wireless operators’ 2015 PER multiple.
Singapore’s introvert/extrovert conundrum: Recent economic “beats” show a clear change in leadership away from domestic demand towards external factors for the first time since 2010. Our “top of street” 2014 GDP forecasts are solely driven by Singapore delivering thesecond best export performance in all of Asia (net contribution change behind only Vietnam; total export growth behind only the Philippines); Consumption and Domestic Investment are forecast to be negative YoY drivers. Consumer weakness is clearly seen in falling retail sales, consumer confidence, Consumer loans, housing loans, as well as the fact that the retail segment saw the sharpest negative EPS revisions in the market in 2013. Inventory weakness is largely a result of slowing inventory restocking.
Base Case: 1) Slowing growth (slowing productivity), 2) Higher core inflation (look beyond housing / transport); Currency risks (an end to 12 years of currency strength). OW Industrials (Buy DMHL, JCNC, KEP, EZI, Avoid COS, JS, SMM); OW Transport (Buy SIA, SIE, NOL, HPHT); N Telcos (Buy M1); N Banks(Buy DBS, SGX); UW Property (Buy CAPL, GLP, CMA; Avoid CDREIT, FEHT, MINT); UW Agri (Buy FR, Avoid IFAR, MII, GGR); UW Consumer (Avoid GENS).
Shorter term, the market is beginning to bounce off of oversold levels and shorting activity for the market is close to all time high reported levels (note that the
exchange only began releasing shorting data in March 2013). This is true for Banks, Capital Goods, and Telcos (although we note that Telcos are not as oversold as either Banks or Capital Goods). Real Estate and F&B short activity is at elevated levels but not as high as the previous sectors. We would be selectively adding exposure to the Singapore market in areas with very heavy outstanding short activity that are very oversold. These include Banks (OW DBS), Industrials (OW KEP, JCNC, STE, SIA), and Telcos (OW M1). Within Real Estate outstanding short activity is significantly higher for Developers relative to REITs, but the relationship between shorting activity and index performance is not as strong, given the rate environment. Top picks within the Developer space include CMA, GLP, CAPL (all OW).
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
17th February 2014.
Overweight Underweight
Singapore Airlines Corinne Png AC
Ticker: SIA SP, Price: S$9.99, PT: S$13.00
Investment thesis: SIA is trading at trough valuations despite the potential for recovery in US/EU routes, better load factors in cargo, and a YoY decline in fuel prices. JPM FY14 EPS is 32% ahead of consensus.
Drivers/catalysts: Sector aircraft deliveries are moderating and improving industry supply/demand balance should alleviate fare pressure, while rising premium traffic (45% of revenue) should lift yields. We also forecast a pick up in US/EU travel (42% of passenger revenue), and a turnaround in SIA Cargo (14% of revenue). Jet fuel is also down 6% YoY.
Valuation and risks: SIA’s valuations have fallen to 0.84x P/Book, close to historical trough valuations and a 19% discount to Cathay Pacific (vs. a 9% discount historically). Net cash is 35% of market cap, we see SIA’s “liquidation value” at SGD13.3 per share. Risks include increased competition from Middle East carriers and rising fuel prices.
Far East Hospitality Trust Joy Wang AC
Ticker: FEHT SP, Price: S$0.71, PT: S$0.80
Investment thesis: FEHT is a pure-play domestic hospitality REIT with 78% of GAV exposure in Singapore hotels. Sector fundamentals remain challenging in our view from flat demand growth and continued supply in the mid/mass hotel segments. Sector-wide occupied room nights in 2013 were also down 3% Y/Y.
Drivers/catalysts: Key drivers, in our view, are on the group’s ability to stabilize declining RevPARs in the Hotels segment, while trying to ramp up proportion of corporate room stays (which have a higher margin). The repricing terms of the outstanding S$300million floating term loan would also have an impact on our DPU estimates, in our view.
Valuation and risks: Tenure adjusted RNAV is estimated @ S$581,785 per key. Key upside risks in our view include better-than-expected visitor arrival trends and therefore better growth in room rate.
We are selective buyers of Korean equities in 2014, preferring DM growth beneficiaries as well as domestic housing market recovery plays. According to JPM’s economic research team, the Korean economy is expected to recover modestly in 2014 from a subpar growth in 2013 (GDP growth of 3.8% in 2014E vs. 2.8% in 2013). Of note, our economic research team’s base case scenario for the 2014outlook is based on acombination of: 1) strong export growth from limited segments such as tech, auto, and shipbuilding, and 2) a mild pick-up in domestic consumption without assuming a meaningful housing market recovery.
However, our bottom-up analysis for the Koreaneconomy suggests that the risk is on the upside for domestic consumption in 2014. We are more positive on the domestic housing market dynamics in 2014, based on the view that the housing market has been on a gradual recovery trajectory starting in 2H13 A pick-up in housing prices would have positive spill-over effects for domestic consumption and retail investment sentiment of the Korean equity markets.
While EPS downward revisions have continued throughout the 4Q13 earnings season, we believe there are positive factors which drive prospects for double-digit earnings growth for Korea Inc. in 2014: First, abottom-up analysis suggests to us that the earnings cycle of Korea financials, materials, energy, utilities and industrials (i.e., the usual suspects for earnings disappointments since GFC) is likely to bottom out or
has already put the worst behind. Second, our top-down view of a modest acceleration in GDP growth bodes well for Korea exporters and financials, giving support Korean Inc. EPS growth, which is currently projected to grow at 15% Y/Y in 2014E off a low base. Finally, recent initiatives by the government to push deregulatorymeasures could add to an increase in earnings visibility of the domestics, in our opinion.
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
February 14, 2014.
Overweight Underweight
Hyundai Motor Wansun Park AC
Ticker: 005380 KS, Price: W232,500, PT: W330,000
Investment thesis: HMC will be one of the few OEMs to see its product cycle upturn coinciding with global auto demand’s cyclical improvement in 2014. Product cycle and net pricing outlook suggest we are near the earnings inflection point.
Drivers/catalysts: Product cycle will turn up from 1H14 and peak in 2H15. Possibility of the second phase of capacity expansion will add a positive spin to sustainable growth beyond 2014. Improving demand in key markets including Europe is an additional positive earnings driver.
Valuation and risks: Our Dec-14 PT is W330,000, based on 10x FY14E EPS. Short-term risk is the pace of KRW appreciation. Long-term risk is rising R&D burden.
Samsung Engineering Sokje Lee AC
Ticker: 028050 KS, Price: W75,200, PT: W50,000
Investment thesis: SENG reported a net loss of W708bn in 2013, mainly caused by massive cost-overruns. We expect further share price upside to be limited, as concerns on its execution ability remain unchanged.
Drivers/catalysts: A gradual earnings turnaround will not likely happen in the near term, but the company's improved local labor sourcing and construction management may cap further downside, in our view.
Valuation and risks: Our PT of W50,000 (Dec-14) is based on 8.4x multiple (2015E KOSPI index) applied to 2015E EPS of W5,975. Key upside risks are successful execution of overseas projects in backlog, improved labor problems including vendor issues.
We expect a continuation of the 2H13 trend into 2014Upstream tech, LED sector, Life Insurers, and selective non-tech names are likely to continue to lead the market. We prefer upstream tech, LED sector, Life Insurers, and selective non-tech names.
Although 1Q14 would be the low season, we see the trend of handset commoditization benefitting component makers/retailers. Apple’s production shift and normalizedinventory should support the semiconductor players.
In downstream tech: 1) volume plays will benefit from the drought of innovation and rise of low-cost smartphones; 2) cheap tablet makers and data centre providers benefit from the cloud-wave proliferation; 3) stick with the market-share gainers in the PC sector rather than those with broad exposures to the end market. LED sector is another bright spot this year, benefited from accelerating adoption of lighting in mainstream.
Among upstream tech, we favor TSMC as a structural winner with strong market share gains (Apple in 2014-15). The global economy is expected to record above-trend growth. Rebound in the global manufacturing sector should support Taiwan’s export and industrial sectors in 1H14.
On the other hand, we are overweight on the life insurance sector, which is the key beneficiary of the rising yields in the region. Legislative review on the cross-strait Trade in Service Agreement is expected by end-1Q14. Brokers and Insurers should benefit the most.
Our top picks are in semiconductors (TSMC and ASE),life insurance (Cathay), LED (Everlight) and tech retailer(Synnex). The stocks we would avoid are Far EasTone, Cheng Shin Rubber and Pegatron.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 17, 2014.
Overweight Underweight
ASE Gokul Hariharan AC
Ticker: 2311 TT, Price: NT$29.50, PT: NT$35.00
Investment thesis: We foresee meaningful revenue growth/margin expansion for ASE in 2014: (1) potential synergies between in-house assembly/test and EMS segments for ramping SiP business; (2) a strong pickup in revenue momentum from 2Q14 onward,helped by 20nm ramp (Apple’s AP fabbed at TSMC); (3) industry migration toward advanced packaging; and (4) substantial downside protection for wire-bonder utilizations due to significant IDM exposure.
Drivers/catalysts: (1) Inventory correction over; (2)SiP momentum expected to remain strong; (3) 20nm market share for Apple; and (4) Memory back-end opportunity opening up at Micron.
Valuation and risks: Dec-14 PT of NT$35 is based on 2x FY14E book, in line with the higher end of its revised mid-cycle valuations. Our PT translates into a 12x 12m forward P/E. Downside risks are a slower ramp-up of advanced packaging and the likelihood of low utilization in the wirebonding and testing business.
Far EasTone Lucy Liu AC
Ticker: 4904 TT, Price: NT$59.20, PT: NT$56.00
Investment thesis: After 4G spectrum bidding, we see earnings downside, particularly to FET, starting in2015, which we believe will pose significant downside risk to dividends. The reasons for investing in Taiwan telcos in the past will no longer hold, in our view.
Drivers/catalysts: FET has the highest mobile exposure and hence the least earnings buffer from otherbusinesses. FET has the weakest balance sheet and FCF, which would carry higher funding needs.
Valuation and risks: Our Dec-14 price target is based on a 10-year DCF valuation. Upside risks includebetter-than-expected market competition and stronger-than-expected ARPU growth.
We believe political risks in Thailand are priced in, and any resolution should lead to outperformance. Thailand is also defensive versus other EM countries as it has limited overseas funding exposure. Also, overall Thai corporates and middle-upper-income households are in good shape. Growth is slowing down after strong consumption growth in past few years. That is the key issue for the market. However, we believe that growth expectation right now is already low.
We prefer banks, leading landed property developers, exporters, and tourism-related stocks. We believe there remain growth opportunities for banks to expand into SME and housing loan markets. Current mortgage condition is still solid and reflects the strong property market of the past couple of years. Funding competition has eased with state-owned banks being a lot less aggressive. This highlights NIM upside to big banks. Asset quality should be manageable as employment market remains firm. For property, we believe the condo market will suffer but the landed segment should remain firm. LH is the leading player and has strong profit margin profile given the cheap land cost acquisition in the past. Among exporters, we like CPF (OW, Bt26) and TUF as food exporters that should benefit from global economic recovery. We also like PSL as it has passed the
bottom of the cycle and PSL being a conservative shipper with high cost-advantage ships should benefit when the cycle turns. We would recommend investors avoid ADVANC, TCAP, and KK. We believe earnings expectation for these stocks remain too high. Competition in the telco space is high and suggests limited growth opportunities. For auto HP, we have passed the peak cycle and it would take at least 2 years to recover in terms of auto sales in addition to the asset quality issue in the used car market. We should have also seen the bottom in terms of interest rates. Any hike in interest rate is not good for small banks.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 19
February, 2014.
Overweight Underweight
KASIKORNBANK Anne Jirajariyavech AC
Ticker: KBANK TB, Price: Bt168, PT: Bt230
Investment thesis: KBANK has a strong footprint in the SME segment, where growth should accelerate as exports improve. Also, the bank is expected to be able to sustain ROE momentum on continuing efficiency gain. The stock price has come off due to political problems leading to more attractive valuations.
Drivers/catalysts: Exports recovery and improving SME loan growth is a good catalyst for KBANK. Lower K-Transformation-related cost pressure should drive further efficiency gains. KBANK is still strong in the fee income segment driven by cross-selling activities and strong distribution network.
Valuation and risks: Our Dec14 PT of Bt230 is based on DDM approach with 20% ROE, 12.7% COE, and 8% growth. Risks are: 1) prolong political unrests lead to weaker growth, quality, and NIM; 2) higher-than-expected NPL formation rate; 3) pressure to grow deposit base hence NIM pressure; and 4) failure to maintain efficient cost/income in the period of challenging revenue outlook.
Thanachart Capital Anne Jirajariyavech AC
Ticker: TCAP TB, Price: Bt31.50, PT: Bt34
Investment thesis: We believe auto sales will remain weak in the next 12 months post strong sales in 2012-13. In addition to the growth issue in the new car segment, we believe asset quality will continue to be weak in the used car market given the availability of cheaper cars launched by OEM. Also, any hike in interest rate is not good for TCAP as deposits reprice much faster than loans.
Drivers/catalysts: Weak loan growth momentum and rising NPL s will likely compress stock valuation. TCAP has high operating leverage. Weaker growth will likely lead to very weak earnings. Balance sheet condition is also weaker relative to peers (coverage ratio of 100% and tight capital base yet low ROE).
Valuation and risks: Our Dec14 PT is Bt34 based on DDM approach with 11.2% ROE, 13% COE, and 7.25% growth. Risks are 1) higher-than-expected NIM as interest rate moves lower; 2) stronger than expected loan growth momentum; and 3) ability to expand non-NII base.
Embrace the tailwinds but mind the headwinds: Asian autos are expected to exhibit a very different performance in 2014, either supported by external tailwinds from developed markets (DM) or dragged by domestic headwinds within Asia. Global players (positive): Japan and Korea obviously
fall under this category given their exposure to DM, including US and Europe, where we are positive and expect 3%/2% sales growth respectively in 2014.
Greater China (cautious): China auto stocks have mostly corrected by 15-25% in the last two months with mounting concerns on six sector specific macro and policy headwinds. Risk-reward now appears attractive for stocks relevant to the two themes that we are bullish on: SUV and luxury car. We gain exposure through Great Wall Motor and Brilliance China.
India (avoid): Indian auto market is expected to remain stagnant in 1H14 due to weak consumer sentiment and political uncertainty before the general elections in May. We would avoid the market; however, own Mahindra & Mahindra for strong position in tractors and broad-based auto portfolio as well as presence across industries (e.g. IT, finance) through its various subsidiaries.
ASEAN (avoid): We are bearish on the two biggest markets here – Indonesia and Thailand. Not only are both facing political uncertainty (i.e. Indonesia has legislative and then presidential election in April/July respectively while Thailand’s growth this year depends on policy response after recent tensions) but domestic auto sales will at best stay flat. We will completely stay away from ASEAN in 1H14 and revisit the market in 2H14.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Name Code Rec (LC) PT FY14 FY14 14E (%) 14E Top PicksHyundai Motor 005380 KS OW 232,500 330,000 5.1 1.0 17% 1.1%Brilliance China
1114 HK OW 12.3 20.0 10.3 2.7 30% 1.0%
Great Wall 2333 HK OW 37.8 46.0 9.8 2.4 27% 4.1%Mahindra & Mahindra
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 14
February 2014.
Overweight Underweight
Hyundai Motor Wan Sun Park AC
Ticker: 005380 KS, Price: W232,500, PT: W330,000
Investment thesis: We believe HMC will be one of the few OEMs whose product cycle upturn will coincide with the global auto demand cyclical improvement in 2014. Product cycle and net pricing outlook suggest we are near the earnings inflection point. HMC’s growth will likely happen at a higher price point, supporting growth accompanied by profit enhancement. In 2014-2015, we expect its global market share will strengthen to reach a record high, which will be a re-rating factor.
Drivers/catalysts: 1) 2014 business guidance likely to be beat. Upbeat guidance on domestic sales after 2 years of decline also bodes well for the likelihood of earnings inflection in 2014. 2) Strong domestic ASP noteworthy.
Valuation and risks: HMC trades at a 30% discount to global peers which is a widened discount over the past 3-yr average of 22%. Considering the improving fundamental earnings drivers of HMC and relative declining product momentum of peers, we believe HMC is one of the most mispriced stocks globally. Our Dec14 PT is based on 10x FY14PE toward the higher end of the historical band (5-12x). Risks: pace of Wonappreciation or weaker position in green car technology.
Dongfeng Motor Nick Lai AC
Ticker: 489 HK, Price: HK$11.14, PT: HK$8.5
Investment thesis: Our fundamental bearishness on Dongfeng Motor (DFM) is driven by its inefficient use of capital, in our view, which results in declining ROE, suggesting DFM is not adding shareholder value despite it having the highest level of net cash on the balance sheet among most Chinese OEMs. We believe the company is unlikely to raise its dividend payout despite large cash balances.
Drivers/catalysts: 1) We believe DFM is a proxy for overall PV market in China while we forecast PV saleswill decelerate with increasing base. Thus, investors should focus on specific sub-segments that will deliver superior growth—namely, SUV and premium brand. 2) DFM’s lack of capital management and dividend despite sizeable cash on balance are key reasons for its declining ROE.
Valuation and risks: Our Jun14 PT is based on FY14E P/E of 6x and DCF analysis. This multiple is the mid-range of historical trough valuation of around 5-8x forward P/E. Given our expectation of a re-rating for DFM, we believe that applying an average trough valuation is reasonable. Upside risk: higher than expected dividend yield.
ROIC framework trumps earnings growth in driving stocks: We see a strong correlation between ROIC generation and EV/IC valuation. Putting the ROIC framework to work and adding our bottom-up analysis for the region, in 1Q14 we recommend being positioned in selected Korea discretionary (CJO Shopping, HDS), China staples (Mengniu), Thailand staples names (CPALL and food processors) and in Indonesia those with pricing power (Indofood) and PureGold in the Philippines. We find India valuations demanding. In China, we continue to be cautious on discretionary given structural challenges. Similarly, in Thailand, we remain cautious on discretionary and believe there could be downside risk to estimates.
Stable growth in the region: Bridging Macro to Micro: Across the region, our economists are projecting a GDP growth of 6.2% for 2014, almost flat on 2013f (6.1%). There is a high convergence between our expectations for consumer earnings acceleration/ deceleration vs. the macro backdrop. For stocks under our coverage across the region, we expect c.14% sales and c.22% earnings growth in 2014, compared to c.12% sales and c.7% earnings growth in 2013E. We are seeing some acceleration in earnings growth in China and Korea as we expect discretionary earnings to improve with margins normalizing in China and SSSG picking up in Korea. We expect earnings to accelerate in Thailand for
exporters and maintain momentum for discretionary. In India, we forecast slightly higher earnings growth in 2014 thanks to pricing but we also would like to highlight that there could be downside risk to this. In the Philippines, we continue to expect solid earnings growth momentum.
Five themes for 2014 and beyond: We highlight our top picks playing across 5 themes as highlighted: 1) The case of the middle-income Asian consumer in 2014. 2) Changes in distribution channels – rethinking ways to reach out to consumers. 3) Rural consumption seeing higher growth than urban. 4) Chinese travelers bolstering spending in the region. 5) Government policies could continue to weigh on consumer companies.
Top Picks and Stocks to AvoidPrice P/E
(x)P/B (x) Div. yld ROE
Code Rec (LC) PT FY14 FY14 14E (%) 14E (%)
Top PicksPGOLD PM OW 41.1 51 21.24 3.25 0.94 16.302319 HK OW 38.5 38.1 26.97 3.50 0.62 13.78INDF IJ OW 7,000 7,500.0 11.11 2.19 2.92 23.93035760 KS OW 380,300 452,000 16.12 3.49 0.90 23.82CPALL.TB OW 38.5 51.0 24.12 9.68 2.34 43.98Stocks to Avoid097950 KS UW 268,000 200,000 17.43 1.15 0.64 2.951880 HK N 8.4 9.0 11.46 1.97 3.46 16.64CLGT IN UW 1,325.8 1,190 36.00 35.36 2.67 100.23
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 14, 2014.
Overweight Underweight
Puregold Price Club Jeanette Yutan AC
Ticker: PGOLD PM, Price: Php41.1, PT: Php51
Investment thesis: We are bullish on PGOLD's medium-term growth outlook driven by rising modern retail penetration and the shift in the company’s geographic store mix. Our 20% EPS CAGR in 2014E-2016E is driven by aggressive new store expansion (25 new stores organically + M&A), pick-up in SSSG beginning 2014 (impact of new provincial stores), and margin expansion (due to S&R stores + gradual shift of geographic mix away from Metro Manila).
Drivers/catalysts: Upward FY14E and FY15E EPS revision by consensus, which are 10%/15% lower than our estimates.
Valuation and risks: Our Dec-14 PT of Php51 is based on a FWD PER of 26x, which implies a 1.3x PEG on the company's 2015E-2017E EPS CAGR of 20%. Key risks include execution risk of new store expansion, logistics and distribution risk, sharp drop in SSSG, irrational pricing behavior of competitors.
CJ Cheiljedang Youna Kim AC
Ticker: 097950 KS, Price: W268,000, PT: W200,000
Investment thesis: We expect bio-division margins to come under pressure in 2014 due to over-supply of lysine in China, hence expect further downwardconsensus earnings revisions
Drivers/catalysts: Slower than expected lysine price rebound is likely to continue to weigh on consensus earnings forecast.
Valuation and risks: Dec14 PT is based on i) EV/EBITDA multiple of 8.0x for core ops (ex. CJ Korea Express) - mean of global lysine manufacturers & Korean packaged food makers ii) Est. value ~W1,249 bln for non-core ops. Upside risks include a larger-than-expected lysine price rebound, and higher food division sales.
The story for tech over the last several years has beenabout smartphones/tablets, but we believe we arereaching late cycle in these subspaces in light of the following signs of saturation: 1) Most high-end smartphone launches since the iPhone 5 have been disappointing; and 2) We have passed the peak ofconversion as the China smartphone diffusion rate is more than 80%+ by 2013. Non-China EMs are still in the early stages of conversion, and that market unit size is 3-4x bigger than China, which would be the last leg of growth.
The growth profile across PCs, smartphones and TVs is single-digits at best or even negative – this will drivegrowth deceleration across most companies. Ourdiscovery for high-growth stocks is based on thefollowing framework: (1) high exposure to non-ChinaEM smartphones; (2) new features in high-end smartphones, like fingerprints; and (3) transformation to new high-growth businesses.
We track the blended ASP trend for Mediatek and TCLComm – given that feature phones are still more than half of shipments, we believe there is still plenty of
smartphone conversion to drive an ASP uplift. Wewill monitor if there are sapphire replacements or new SiP vendors coming up – demand growth is quite clear to us; it’s really about whether the vendors can maintain their competitive advantages. We will follow new contract wins to gauge the pace of transformation for Anxin and Nidec.
Our top picks are ASE, Sapphire Tech and Nidec. Our top avoids are Shinko, Lite-On Tech and Pegatron – the avoids are all expected to see RoE compression due to competitive threats.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 18, 2014; Synnex as of 19 Feb.
Overweight Underweight
Synnex Alvin Kwock AC
Ticker: 2347 TT, Price: NT$51.50, PT: NT$62.00
Investment thesis: We believe the distribution model is still valued and remain positive about the strength of Synnex’s business model: (1) China handsets are on a course of recovery with Synnex eyeing multiple brand wins; (2) Synnex overseas is doing well and we expect the momentum to continue in the coming years; (3) the non-handset business will keep seeing steady growth momentum.
Drivers/catalysts: (1) Cash dividend increase announcement in 2014. (2) Further penetration with Apple products.
Valuation and risks: Our Dec-14 PT of NT$62 is based on 13x FY14/15 P/E, which is in line with its historical average. Our PT reflects the improving growth visibility and roadmap to return earnings to shareholders. Key risks include lengthening of CCC,weakness in EM currencies and rise of e-commerce especially among bigger players.
Lite-On Tech William Chen AC
Ticker: 2301 TT, Price: NT$46.35, PT: NT$40.00
Investment thesis: We expect LoT’s 2014 earnings growth to slow down to 4% from 19% in 2013, with70% of its business focusing on the declining segment (PC-related and sluggish mobile plastic casing) and its LED / camera module exposure still looks immaterialto move the needle.
Drivers/catalysts: 1) Further margin contraction; 2) market loss to competitors.
Valuation and risks: Our Jun-14 PT of NT$40 is based on 10x FY14E EPS, the midpoint of the shares’ 7-13x P/E multiple range over the last five years. This multiple also reflects the company’s large exposure to the PC industry, which has limited growth opportunities. Upside risks include: (1) another ROE-accretive deal (e.g., Silitech); (2) new customer breakthroughs (e.g., Apple); (3) better demand for LED lighting; and (4) faster SSD growth to offset ODD weakness.
We think 2014 will be very much a year of “muddle through,” as tighter system liquidity begins to weigh on growth & pushes up credit costs, but without the kind of acute shock we saw earlier this year. Loans continue to grow at 3-5% above deposits, pushing up LDRs at an accelerated pace going into the end of 2013. While LDRs are now approaching 100% across much of EM Asia, that in itself is not a constraint; indeed, we see mgmt teams allowing leverage to continue to build. This may support modest loan growth (+11% average) and EPS growth (+8% average) for the region, but we think investors will ultimately assign a much lower multiple to those earnings, as we near the end of the re-leveraging cycle post-08.
Resilience of the growth outlook
As mentioned above, we think banks are more confident in their ability to continue to supply credit, despite fears of excessive leverage and/or high LDRs. That said, we’d rather own companies that benefit from ongoing easy liquidity, than companies that provide it, and ultimately hold the credit risk when economic growth decelerates later on. The biggest question is whether continued credit growth next year feeds through to inflation, forcing policy rate hikes.
Drivers, trends, and datapoints we are tracking
The prospect of steepening yield curves is likely to benefit NIM sensitive geographies like Taiwan, HK, Singapore, and to a lesser extent Korea. It also plays to our preference for life insurers, of which Ping An (in China) and Samsung Life (in Korea) are among our key Overweights. At the same time, rising interest rates remains a threat to asset quality in areas where leverage has increased the most in recent years (Indonesia; Thai consumer). In general, we’d have an UW stance on Financials in the region, given the cyclical headwinds.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (LC) PT FY14 FY14 14E (%) 14E (%)Top Picks939 HK OW 5.44 7.60 4.60 0.86 7.60 19.9055550 KS OW 44150 54,000 9.97 0.84 1.70 8.0ICICIBC IN OW 1011 1,200.0 10.22 1.45 2.87 14.3KBANK TB OW 169.5 230.00 8.59 1.59 2.36 20.02318 HK OW 66.2 84.00 11.15 1.97 1.07 17.3Stocks to AvoidIIB IN UW 381.8 375.00 12.14 2.05 1.31 17.7ANZ AU UW 31.58 32.62 12.56 1.82 5.52 15.35871 TT N 74.4 79.00 10.35 2.26 3.39 23.7
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 18, 2014.
Overweight Underweight
Ping An Insurance Group MW Kim AC
Ticker: 2318 HK, Price: HK$66.2, PT: HK$84.0
Investment thesis: For short-term investors, we think Ping An’s reporting of solid 2H13 earnings (due March 13) along with its sector high NBV growth potential, as well as stable bank earnings supported by strong fee-income growth, provides a good risk/reward profile.For long-term investors, its sector leading NBV growth potential (>17% y/y) backed by strong household demand for healthcare insurance should drive consensus forecasts upwards for FY14/15E NBV/ earnings.
Drivers/catalysts: (1) strong NBV growth potential backed by best agency operation. (2): ~5% non-life underwriting margin outlook with >20% top-line growth; (3) better synergy evidence between banking and insurance
Valuation and risks: Our Dec-14 PT of HK$84 is based on 8.7x NBM for life, 1.9x P/BV for non-life, 0.7x P/BV for bank. Key downside risks are asset quality concerns at its banking and trust operations.
IndusInd Bank Seshadri K Sen AC
Ticker: IIB IN, Price: INR381.8, PT: INR375.0
Investment thesis: We are UW on the stock as thevaluations are still very rich at 2x P/BV (FY15E), with ROA pressures building up from both margins and asset quality.
Drivers/catalysts: 1) Given the high exposure in the C.V segment (19% of loan book), asset quality is likely to remain weak in the medium term. Hence we expect current credit costs (51bp-Q314) are not sustainable and expect it to rise in the medium term. 2) We expect margins to remain under pressure given that it will be difficult to pass on higher costs to borrowers as it may cause further asset quality pressures.
Valuation and risks: Our Sept-14 PT is based on 2 stage Gordon growth model implying 2.2x Sept14 book. Our valuations factor in Cost of Equity at 15.7%, Normalised ROE of ~21% and terminal growth of 5%.Key risks include: 1) If the demand for CVs improve, it could have a positive impact on loan growth. 2) If the macro turns around quickly than credit costs are likely to be much lower than our expectations.
Sector View: Focus on stock-specific catalysts. While the strong revenue trend for February so far should alleviate investors’ concerns about the VIP revenue slowdown, this is somewhat reflected in the sector-wide share price rebound. Looking ahead, we believe investors will watch momentum closely over the next few weeks (without the noise of Chinese New Year) to gauge the sector's true underlying momentum into 2014. As such, we believe gaming names will be driven near-term more by stock-specific catalysts (4Q results, final dividends and Cotai project update) than by sector news flow.
Stock pick: Medium term, we like Sands China (1928.HK) for its largest capacity and potential from resource optimization and its 4% FY14E yield also offers good valuation support. We like Wynn Macau (1128.HK) for its improving momentum as well. We also like Melco International (200.HK) and believe that dividend payment from Melco Crown (MPEL.US) will
continue to help narrow valuation discount and drive stronger share price performance. Near term catalysts may also drive SJM’s (880.HK) share price performance from new Cotai casino groundbreaking, upcoming 4Q result, and dividend announcement.
Top Picks and Stocks to AvoidPrice P/E (x) EV/EBITDA
(x)Div.
yield ROECode Rec (LC) PT FY14 FY14 14E (%) 14E (%)Top Picks1928 HK OW 59.50 72.5 19.2 16.4 4.4% 48.0%1128 HK OW 34.50 42.0 19.8 17.6 4.3% 95.7%200 HK OW 28.40 38.5 20.0 nm 1.8% 19.0%GENM MK OW 4.27 4.7 14.9 7.9 1.7% 10.8%Stocks to AvoidGENS SP UW 1.40 1.21 29.0 11.7 0.7% 6.7%27 HK N 72.70 76.0 23.6 19.2 0.0% 33.8%2282 HK N 30.55 38.0 18.9 15.9 3.8% 73.9%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 14
Feb 2014 market close, except GENSP as of 20 February 2014
Overweight Underweight
Wynn Macau Kenneth Fong AC
Ticker: 1128 HK, Price: HK$34.5, PT: HK$42.0
Investment thesis: We believe low market expectations (JPMe 2014 EBITDA is 7% higher than consensus), strong operating trends (continued market share gains that Street has not given credit for), and still under-utilized capacity (tables and newly renovated hotels) will enable Wynn Macau (WM) to outperform. 4% FY14E dividend yield also acts as solid support while longer term Cotai project (Phase I finishing in 2016) offers optionality with significant upside.
Drivers/catalysts: 1) Strong gaming revenue trend that could drive earnings upgrade, 2) New initiatives to gain more market share, 3) Significant table yield improvement and market share gain.
Valuation and risks: Our Dec-14 PT of HK$42.0 for WM is based on the sum of 1) 15.5x FY14E EBITDA and 2) NAV for Wynn’s Cotai project. We value Wynn Cotai using 28% RoIC, 12x 2017 EBITDA multiple and a 10% discount rate. We assume Macau gaming revenue to grow 17% for FY14 and 18% for FY15.Downside risks include: 1) Significant market share loss when VIP market competition intensifies, 2) Policy risks such as travel restrictions that could slow down visitation to Macau, 3) China economic slowdown that could affect discretionary customer spending, 4) Delay of Cotai project completion.
Genting Singapore Kenneth Fong AC
Ticker: GENS SP, Price: S$1.40, PT: S$1.21
Investment thesis: We remain UW on GENS due to sluggish revenue growth and demanding valuation (23x FY14E P/E) compared to regional peers. Also, Japan optionality is still too remote to be priced in.
Drivers/catalysts: 1) Delay in legislative approval for Japan casinos, 2) Slowing growth in the Singapore gaming market.
Valuation and risks: Our Dec-14 PT of S$1.21 is based on SOTP valuation, where Singapore business is valued at 10x FY14E EV/EBITDA, a discount to the 12-19x we use for Macau peers. We expect the Singapore market to grow 11% in 2014 and 4% in 2015. Upside risks include: 1) Stronger-than-expected growth in the Singapore gaming market, 2) Quicker-than-expected market share improvement with the help of Marine Life Park, 3) Positive operating leverage from RWS’s ramp-up, 4) Quicker-than-expected materialization of M&A or overseas ventures.
Infra capex: The long-awaited reforms are clearly rolling out within China’s railway sector, as CRC has kick-started re-valuing the land assets in preparation for conversion into commercial usage, including property development. In addition, CRC announced a 12% tariffhike across all freight rail lines effective from mid-February. These two measures are two major steps forward in resolving the funding constraints for the railway sector, supporting our bullish view on railway capex names, particularly the late-cycle plays. Outside China, we are bullish on Malaysian E&C names with Gamuda as our top pick as we see the recently announced tariff freeze for 2014 a mild positive. We also like Japanese hydrocarbon E&C names (e.g. Chiyoda), but stay cautious on Korea E&C names as we think execution of overseas contracts in ME remains a concern.
Machinery: China’s excavator sales fell 9% Y/Y in Jan-14, turning negative for the first time since Apr-13, potentially marking a turning point. Heavy truck sales in Jan14 on the other hand sustained the recovery, with sales up 19% Y/Y. The latest data continue to supportour view which is negative on construction machinery while cautiously optimistic on heavy trucks. Weichai remains our sector top pick, while we stay cautious on Zoomlion, Lonking, Zhengzhou and SANY. Outside China, we like United Tractors in Indonesia for the
attractive risk-reward trade-off, as well as Japanese capital goods names on benefits from weaker Yen.
Infra operators: (i) Tollroads: We turned less positive on Chinese tollroads following the outperformance in 2013 while traffic growth started moderating in recent months. Our top picks are Zhejiang, Shenzhen and Yuexiu. (ii) Ports: COSCO Pac and Hutch Ports appear oversold to us as valuations look compelling, while fundamentals also benefit from ongoing trade recovery with the DM world. (iii) Airports: We are positive on Asian Airports, driven by the region’s growing economies and rising middle-class incomes. We are bullish on both BCIA and MAHB.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (LC) PT FY14E FY14E 14E (%) 14E (%)Top Picks1766 HK OW 6.07 8.50 11.5 1.4 2.7 15.02338 HK OW 30.60 37.00 10.8 1.5 0.9 14.8694 HK OW 5.82 9.00 11.2 1.1 3.6 10.6HOLI US OW 17.89 23.00 11.9 2.1 0.0 16.2UNTR IJ OW 18,425 23,500 11.0 1.9 3.6 18.3MAHB MK OW 8.20 10.00 22.9 2.1 2.2 9.3Stocks to Avoid1157 HK UW 5.77 5.30 8.4 0.7 2.5 9.03339 HK UW 1.59 1.40 11.3 0.9 1.5 8.1
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb.17, 2014.
Overweight Underweight
CSR Corp Karen Li, CFA AC
Ticker: 1766 HK, Price: HK$5.95, PT: HK$8.50
Investment thesis: CSR will be a major beneficiary from the upcoming rebalancing in the mix of China’s railway spending as we expect a higher proportion of railway capex to be allocated to late-cycle trains & equipment from 2014. We see upside to FY13-14 estimates. Beyond FY14, we see overseas markets and subway trains (RTVs) as new growth drivers.
Drivers/catalysts: The 2014 railway capex target may be revised upwards similar to the last two years. Against the existing target, we also expect rebalancing in the mix, realigned in favor of late-cycle trains & equipment. Near-term positive catalysts include (1) potential earnings beat and positive guidance for the upcoming result; (2) further clarity on railway reform.
Valuation and risks: Our DCF-based Dec-2014 PT of HK$8.5 (WACC 10.9%, t growth 0%) implies a P/E of 16x/15x and P/B of 1.9x/1.7x on FY14/FY15E. Key downside risks are unexpected changes in government’s investment in railway development, increases in raw material costs, and potential capacity constraints.
Changsha Zoomlion Karen Li, CFA AC
Ticker: 1157 HK, Price: HK$5.74, PT: HK$5.30
Investment thesis: In light of easing property FAI growth and continued credit tapering in China, we reiterate ourUW on Zoomlion, given: (1) the company’s unfavorable product mix (heavy exposure to cranes and concrete machinery, demand for which has been mainly linked to property FAI) and (2) rising risk for receivable collection in light of the persistently tight credit conditions.
Drivers/catalysts: Zoomlion’s past due ratio may rise further from 4Q13 in light of the tighter credit and sluggish utilization rates by end users. We expect more losses may arise on provision for uncollected receivables, and weigh further on its profitability.
Valuation and risks: Our DCF-based Dec-14 PT of HK$5.30 (WACC 11%, t growth 0%) corresponds to a target P/E of 8x/9x, and P/B of 0.7x/0.6x on FY14/FY15E. Key upside risks to our PT include: Stronger-than-expected recovery in construction activity in China, particularly in the housing sector and successful foray into other new markets including heavy trucks and agricultural machinery.
China’s Internet sector has undergone an earnings downgrade cycle over the past three years due to investments in future growth drivers, with mobile Internet being a common area. We believe this earnings downgrade cycle has almost come to an end, with early movers (e.g. Tencent and Sina) beginning to harvest returns from the investment. Other names will follow suit over the next 1-2 years, in our view. With regard to mobile monetization, mobile gaming should be the first scalable business model capable of generating sizable revenue in 2014. Mobile ads are likely to gain more traction in 2014 due to growing traffic demand from mobile game developers. Such a trend should benefit game distributors (e.g. Tencent and Qihoo), as well as mobile advertising platforms (e.g. Tencent Guang Dian Tong and Mobile Baidu Union).
Among China’s larger companies, competition in mobile Internet has evolved from traffic acquisition to shaping new mobile eco-systems (e.g. Baidu’s Light App, and
Tencent’s Weixin enterprise account) and user behavior (e.g. Ctrip’s brand ad campaign and competitive pricing) in order to capture new growth opportunities. We believe Tencent has extended its first-mover advantage in mobile user base into these two areas. In addition, we believe Tencent has reached the first return stage of mobile investment through game publishing while continuing to nurture new opportunities.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (US$) PT FY14 FY14 14E (%) 14E (%)Top Picks700 HK OW HK$584.5 580 33 11 7.8% 39%QIHU US OW 106.2 98 51 17 0.0% 38%CTRP US OW 51.1 52 38 4 0.0% 15%SINA US OW 73.4 100 31 3 0.0% 10%YY US OW 70.3 67 29 8 0.0% 38%Stocks to AvoidDANG US UW 10.8 7.5 N/A 8 0.0% -0.8%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 18, 2014.
Overweight Underweight
Tencent Alex Yao AC
Ticker: 700 HK, Price: HK$584.5, PT: HK$580
Investment thesis: We believe Tencent’s solid market leadership in China’s gaming market will remain intact in the next 1-2 years. We expect Tencent to take 48% market share in China’s gaming market in 2014 (RMB8.2b from mobile gaming).
Drivers/catalysts: 1) Mobile social gamesmonetization, 2) margin improvements in the next 12 months, 3) EPS growth acceleration.
Valuation and risks: Overweight on Tencent with a Dec-14 PT of HK$580. PT is based on 2014E/PE of HK$17.96, FY14-16E non-GAPP EPS CAGR of 27% and a PEG of 1.2x. Downside risks include: 1) cannibalization between mobile games and PC games, 2) WeChat overseas marketing spend, 3) video content spend, 4) faster-than-expected PC game aging.
Dangdang Alex Yao AC
Ticker: DANG US, Price: US$10.8, PT: US$7.5
Investment thesis: We suggest that investors gauge Dangdang’s revenue-generation ability by gross profit, the growth of which has decelerated due to decreasing take rate. We are cautious on the balance between promotional efforts and customer loyalty.
Drivers/catalysts: 1) Growth of marketplace business, 2) improvement in profitability.
Valuation and risks: Underweight with a Jun-14 PT of US$7.5. PT is based on 1) a discount rate of 17%, 2) a terminal growth rate of 2%, 3) long-term risk free rate of 4%, 4) an equity risk premium of 7% in China market, and 5) a beta of 1.8. Upside risks include: stronger-than-expected margin improvement, 2) successful expansion into new categories.
Commodity storm passing, focus on costs and growthCommodity markets remain volatile to macro swings but have largely stabilized since mid 2013 lows. Prices remain around marginal cost levels that have triggered a supply response, helping ease oversupply conditions across most markets. While we expect resilient Chinese demand for FY14, the seasonally slow 1Q has been weaker than expected. We expect end user activity to rebound post the NPC meeting in March and into the 2Q peak season. In our view, the worst of the storm is now behind us, but low global growth should still see commodity prices continue to trade around marginal cost levels. In this environment, we prefer companies with low (or declining) costs, high quality growth and positive FCF while high cost, high debt plays should be avoided.
ROW recovery to ease pressure on China’s lead roleDriving c40% of demand in most commodities, China continues to hold the key to the direction of the sector. Resilient Chinese demand has been the main saviour to the recovery in commodity prices in 2013, helping offset anemic growth in the rest of the world (ROW). As China looks to reform and restructure to a more balanced economy, growth momentum will likely slow into 2014. Yet with industry overcapacity likely to be targeted and growth policies likely to remain supportive, this is a favorable backdrop for commodities. In any case, EM growth is forecast to pick up, which should ease the
burden on China. That said, new supply should ensure markets are well supplied and we forecast 2014 average prices to be lower than 2013 levels (but higher than spot). Iron ore and copper are our preferred commodities while we would avoid nickel and aluminium.
Selectively OW high quality, low cost, growth plays; Trade into the stock cycles. We recommend selective sector exposure in stocks with high quality, low (and declining) cost assets with volume growth:- Rio Tinto, Fortescue Metals, Jiangxi Copper, Anhui Conch and Tata Steel. Tactically, we also recommend buying into restocking cycles. On the other hand, we would avoid higher cost, higher debt companies that struggle on negative free cash generation.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Code Rec (LC) PT FY14 FY14 14E (%) 14E (%)Top PicksTATA IN OW 364.8 550.0 6.57 0.80 3.18 12.70914 HK OW 30.4 35.0 11.20 2.04 1.79 19.60RIO AU OW 67.9 83.0 10.38 1.89 2.95 17.00358 HK OW 14.3 19.5 9.95 0.82 3.02 8.51FMG AU OW 5.8 6.85 4.92 1.50 1.94 26.00004020 KS OW 78.3K 100K 10.42 0.62 0.57 6.27Stocks to AvoidACEM IN UW 154.60 145 18.7 2.5 - 16.12600 HK N 2.8 2.8 (9.81) 0.72 - (7.04)1898 HK N 4.0 4.5 10.83 0.47 2.77 4.40
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 14
Feb 2014 (intraday) except for FMG and Ambuja, which is as of 19 Feb.
Overweight Underweight
Tata Steel Pinakin Parekh AC
Ticker: TATA IN, Price: Rs365, PT: Rs550
Investment thesis: Continued re-rating from a) European turnaround, b) vertically integrated domestic operations, c) potential asset divestments.
Drivers/catalysts: European asset largely written off by investors but now recovering. We estimate each$10/T rise in European EBITDA equates to Rs40 per share to Tata Steel’s stock price. In India, we expect improved domestic steel demand FY15.
Valuation and risks: Our Dec-14 PT of Rs550 is based on SOTP, valuing Indian operations at 5.7x, Asia at 5.0x, Europe at 5.5x FY15E EV/EBITDA. Key risks include higher inputs costs and/or increase in domestic royalties, lower ASP on back of poor mix, and demand in Europe stagnating.
Ambuja Cements Pinakin Parekh AC
Ticker: ACEM IN, Price: Rs154.60, PT: Rs145
Investment thesis: Indian cement continues to witness oversupply, with low demand trends and new players’ entry leading to volatile pricing environment. ACEM’s strong BS along with nationwide footprint has helped it retain share in key mkts. Post Holcim transaction, ACEM becomes the quasi holding co. in terms of its ACC stake, which usually warrants a holding co.discount in India.
Drivers/catalysts: Contd weak cement demand near term adding to cement pricing pressure. Combined with elevated costs, this should lead to large cons cuts. ACEM has highest FII ownership and in the context of deteriorating margin and earnings profile is key –ve .
Valuation and risks: Dec-14 PT of Rs145 based on 7.5x CY15E EV/EBITDA, in line with UTCEM’s target multiple. Risks are a sharp recovery in cement demand to help drive higher-than-expected volume growth (and therefore utilization levels) and reduction in operating cost per ton improving margins.
We have a relative preference for oil services and shipyards as an indirect way to gain leverage to the oil market within our Asia Oils coverage. We forecast Brent at $105/bl this year and $100/bl in 2015, still sufficient to incentivise investment despite signs that industry spending growth is slowing. With a declining conventional resource base in China, increasing import dependency, and access to potentially the largest nonconventional gas base globally, the government is actively promoting local oil services. We expect further outperformance of the Chinese oil service sector with the industry becoming differentiated between companies that adopt a US integrated oil service model, which are likely to see margin improvement, and companies providing limited services, which may see margin compression –especially with state-owned enterprise (SOE) drilling segments being restructured and/or separately listed in the medium term. We recommend Anton Oil, SPT Energy (1251 HK, HK$4.75, OW) and Honghua (196 HK, HK$2.20, OW).
However, for our Asia Oils equities, we continue to see differentiation within the sector and have a preference for companies that focus on free cash flow from exploration growth, capital discipline, and/or restructuring which we expect to be rewarded by investors within an oils equities context. We see Sinopec, Woodside, eventually Santos and to a lesser extent PetroChina as adapting to this changing environment.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Name Rec (LC) PT FY14 FY14 14E (%) 14E (%)Top Picks857 HK OW 7.80 11.00 9.0 0.9 5.0% 10.7%386 HK OW 6.03 7.50 7.1 0.9 5.7% 13.0%PTTEP OW 152.50 180.00 8.5 1.4 4.1% 17.4%3337 HK OW 5.27 7.00 16.8 3.2 1.9% 21.6%BPCL OW 355.80 450.00 14.5 1.4 2.1% 10.6%Stocks to AvoidOSH AU UW 8.32 7.23 30.1 2.7 0.5% 9.1%BPT UW 1.54 1.26 8.1 1.0 2.5% 12.5%PTT N 289.00 310 8.0 1.2 4.4% 15.0%
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
February 17 2014..
Overweight Underweight
PetroChina Scott Darling AC
Ticker: 857 HK, Price: HK$7.8, PT: HK$11
Investment thesis: Our positive view on China integrated Oils (both PetroChina and Sinopec) is based on: (1) Visibility on asset optimisation/portfolio management and capital discipline, (2) improving refining margins as China moves to tougher gasoline/diesel specs, (3) Chinese refined product demand remaining robust (4% y/y), and (4) Nat gas price hikes and reform progress.
Drivers/catalysts: Key catalysts for the stock in our view would be FY2013 results (March/April 2014), 1Q2014 results (April 2014), marginal asset divestments, announcements on natural gas reform policy.
Valuation and risks: Our Dec-14 PT of HK$11 is based on a sum-of-the-parts methodology, whereby we calculate a DCF based value (WACC 9.8%, terminal g 2%) for each business segment, namely upstream, refining, chemicals and marketing added to give our total NAV. Debt and financial liabilities are deducted at book value. Risks are a sharp fall in oil prices, recent nat gas price hikes not being passed on to customers and no further rises; a higher import burden and weak chemicals profitability from lower demand and margins.
Oil Search Benjamin Wilson AC
Ticker: OSH AU, Price: A$8.32, PT: A$7.23
Investment thesis: While we view the PNGLNG project and potential expansions positively, and acknowledge the value Taza could hold, we believe OSH offers less upside than peers, and is unlikely to outperform on a sector relative basis.
Drivers/catalysts: (1) PNG Govt is supposedly close to raising the funds to repurchase the bonds held by IPIC and keep the 14.7% of shares (conversion date –March). (2) PNG LNG start up due in 2H14 (meetingthis time frame is positive/Neutral, missing it would be negative). (3) Taza oil field testing in Kurdistan (potentially 250-500mmbbls gross) occurring over 1H14. (4) Potential OSH involvement in Total farm-in to Interoil's Elf-Antelope gas resource in PNG.
Valuation and risks: Our Jun-14 price target of A$7.23 is based upon our SOTP DCF. Our DCF includes full value for PNG LNG T1 & T2 and 75% of Train 3. We also include 50% of a Mananda-5/6 development. We give no explicit value for the exploration position in Gulf of Papua, nor the Taza discovery which has unclear economics. We employ a 10% WACC for OSH in our NPV. Upside risks are weaker AUD/stronger oil price, successful appraisal/commercialization of OSH equity gas for PNGLNG expansions, and demonstrated good economics at the Taza discovery.
Generally we continue to prefer Refining over Petrochemicals given the underperformance of the former in 2013 and our expectations of higher Asian GRMs in 2014 ($6.5/bbl vs. $6.0 in 2013). We believe capacity rationalization in Japan/Australia coupled with potentially less Chinese product exports this year due to implementation of China IV gasoline standards should lead to better margins for the industry. We estimate due to CAPEX constraints, up to 30% of the “teapots” refineries in China will not be able to produce China IV gasoline, which means the state owned refiners such as Sinopec and Petrochina will need to increase utilization rates to fill in the gap, reducing the need to export to keep utilization rates at a relatively high level.
Since China accounts for 50% of global petchem demand growth, we believe the rebound in petchem spreads in 2H13 is likely unsustainable in the face of slowing Chinese economic activity. Recently, we have already seen China PMI falling on a M/M basis. Furthermore, unlike in refining, where new capacity is being pushed
back due to slower than expected demand growth, China continues to build new petchem capacity because it remains a net importer for the foreseeable future. Our call for lower spreads is already playing in 1Q for the most part with the exception of PE-Naphtha spreads. Key products spreads such as PX, PTA, MEG and BD have been disappointing YTD and if the trend continues as we expect, then we believe there will be consensus earnings cuts after 1Q14 results.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
February 17, 2014.
Overweight Underweight
SK Innovation Samuel Lee, CFA AC
Ticker: 096770 KS, Price: W134,000, PT: W160,000
Investment thesis: We believe SK Inno will benefit from forecasted higher GRMs in 2014 and the earnings growth driven by refinery yield enhancement and PX capacity expansion. Furthermore, SK Inno is trading near trough valuations.
Drivers/catalysts: Recently, SK Inno was asked to stop construction at its Incheon site due to improper documentation. As construction resumes and as we get closer to the startup of the new expansion, we believe investors will start focusing on the earnings expansion story due to refinery upgrade and new PX capacity.
Valuations and risks: We value SK Inno at 0.8x 2014e BV as we forecast 2014-15 ROE to be around 8-9%. Downside risks are volatile oil price/FX and lower than expected GRMs due to continued Chinese capacity additions. Lower than expected PX spreads in 2014 will also have a negative impact on earnings.
Lotte Chemical Samuel Lee, CFA AC
Ticker: 011170 KS, Price: W225,000, PT: W155,000
Investment thesis: Being a commodity petchem play, we believe Lotte Chem has the biggest exposure to forecasted lower petchem spreads in 2014 due to Chinese demand slowdown and incremental Chinese capacities.
Drivers/catalysts: Aside from PE-Naphtha spreads, most petchem spreads are lower Q/Q in 1Q14. We believe if this trend continues, there will be consensus earnings cut post 1Q results, which should lead to de-rating of Lotte share price, similar to 1H 2013. Also PTA remains loss making.
Valuation and risks: We value Lotte at 0.8x BV 2014e BV as we forecast 2014-15 ROE to be around 7-8%.We believe current mid-cycle valuation already reflects a more positive outlook for petchems which is likely to disappoint. Upside risks are delays in new Chinese Ethylene capacities and spike in BD and MEG spreads.
Key message: We see a more positive environment for sales growth and margin expansion over the next 12 months than anytime since 2009, driven by a benign inflation environment (PPI is -1.5%) and rising construction starts (2013 up 13.5%).
Drivers/catalysts/events: 1) Improving demand as government maintains stimulus, 2) re-rating of industrials in 2013 as margins improve, 3) market consolidation boosting pricing power.
Key issues / risks: 1) Slower pace of recovery in 2013 compared to 2009, 2) resurgence in inflation could dampen rally.
Top Picks:
Key OW stock calls: Xinyi Glass, a diversified low-cost glass producer; Techtronic Industries, global power tool brand gains market share; China State Construction, a major affordable housing contractor.
Key avoid calls – VTech on challenges to its 40% European business, TCLM on falling margins and Kingboard Laminates on exposure to PC demand.
FY14E PE (x) for SMID Caps
Source: J.P. Morgan estimates.
Top Picks and Stocks to AvoidReuters Price PT P/E (x)
Name Code Rating (HK$) HK$ FY13E FY14E
Top picksTechtronic Ind 0669.HK OW 19.2 32.0 17.8 13.5Xinyi Glass 0868.HK OW 6.6 9.8 11.3 9.6
China State Cons 3311.HK OW 14.1 19.0 18.9 14.0Stocks to Avoids
Source: Bloomberg, J.P. Morgan estimates. Share prices as at 17 Feb 2014.
Overweight Underweight
Xinyi Glass Leon Chik, CFA AC
Ticker: 868 HK, Price: HK$6.6, PT: HK$9.80
Investment thesis: Float glass recovery under way. The company achieved a significant increase in GPM to 18% in 1H13 from 4.3% in 1H12. Typically demand is stronger in the second half of the year and pricing and margins tend to be higher.
Drivers/catalysts: Solar glass holding up well on stronger demand (XYG still holds 31/2% of Xinyi Solar subsidiary). The company also noted smooth operation for the new electronic glass line (started production at the end of May) with the company already capable of making glass as thin as 0.55mm.
Valuation and risks: Our PT (Dec-14, DCF-derived) of HK$9.8 implies a forward P/BV of 2.6 and fwd P/E of 11.1x (FY15E) The key downside risks are falling demand for construction glass that could result from a cooling property market in China, and further weakness in PV glass demand from Europe.
VTech Leon Chik, CFA AC
Ticker: 303 HK, Price: HK$88, PT: HK$85
Investment thesis: Slow sales growth in cordless phones and children’s electronic learning products. The key attraction is the relatively high dividend yield, which becomes less appealing as interest rates rise. Wage cost continues to rise in China with the minimum wage still going up nearly 20% a year.
Drivers/catalysts: Weakness in cordless phones. VTech suffered a 6.2% drop in cordless phone sales in the US and a 5.5% drop in Europe. As cordless phone sales are denominated in US dollars, the drop in sales was in part due to foreign currencies for Europe, but was genuinely weak in the US.
Valuation and risks: Our PT (Dec-14, DCF-derived) of HK$85 implies a fwd P/BV of 4.5x and a fwd P/E of 12.5x (CY15E). The key upside risks to our PT are the successful launch of new products in the ELP division as well as a recovery in demand for cordless phones in the US as the housing market recovers.
As highlighted in our 2014 Tech outlook report, we view two key themes:, "revenge of the laggards" and "components over customers" to run through this year.
In the smartphone space, we see increased commoditization in the high-end segment on limited hardware differentiation and intensified price competition. Further, new technologies such as flexible displays, are still in the early stages of development. We expect PC decline to moderate in 2014. We expect the commercial PC sector to lead a recovery based on the upcoming WinXP expiry and a resumption of IT spending driven by an improving DM macro-economic environment and enterprise replacement cycle. As a result of this and low market expectations, we believe that PCs could surprise on the upside.
We expect "convergence" devices such as smartwatches (tech+healthcare), xEV (tech+auto), and convertible PCs (tablet+NBPC) to gain increasing traction in the tech space. We believe the smartwatch market (in its present form) is still in its infancy as the value proposition to the customer remains unclear (amid a high price point.)
However, breakthroughs in hardware tech such as flexible displays and battery tech will spur the growth of this market in the coming years.
On the semiconductor front, we continue to uphold our expectation of a multi-year DRAM cycle upturn on industry consolidation and disciplined supply-side dynamics. Looking at other key components, we continue to view LED industry as a bright spot in 2014on accelerated adoption in lighting and surging demand from mobile devices. On the other hand, we remain cautious on brands/OEMs and commodity large-size panel makers owing to industry-wide oversupply.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
Feb 17, 2014.
Overweight Underweight
SK Hynix JJ Park AC
Ticker: 000660 KS, Price: W38,700, PT: W45,000
Investment thesis: Given our expectation of a multi-year growth cycle in DRAM market and SK Hynix’s dominant position along with its significantly improving financials, we expect SK Hynix to maintain its upward movement in 2014. We recommend investors accumulate on weakness.
Drivers/catalysts: We expect DRAM industry to enter a multi-year upturn cycle (began in 2013) on industry consolidation, disciplined supply-side dynamics and robust DRAM demand momentum. SK Hynix is DRAM-centric with over 70% sales and 90% OP from DRAM in 2014E. Post the dip in 4Q13 earnings, we believe SK Hynix will continue to deliver robust operational performance in 2014 given the DRAM industry’s stable outlook. We believe this earnings visibility should propel its price higher as it catches up with global peers.
Valuation and risks: Dec-14 PT of W45,000 is based on 1.9x FY14E book and 1.6x FY15E BV, high-end of historical trading range given our expectation of ROE expansion. Risks: lower-than-expected DRAM prices/margins, prolonged uncertainty around end-demand/inventories.
Innolux Narci Chang AC
Ticker: 3481 TT, Price: NT$10.7, PT: NT$10.0
Investment thesis: Our UW hinges on: 1.) M/S loss to locally-produced panels; 2.) New global capacity to outweigh area demand growth; 3.) High net gearing and weak BS; 4.) Limited capex to solidify market position.
Drivers/catalysts: We expect continuous panel price weakness in 1H14 as new capacities in China continue to ramp, implying that Innolux could start recording losses from 4Q13. We expect the share price to trade lower along with the panel price trend. Mgmnt also confirmed an equity raising plan of NT$ 20bn by end-2014 which would imply another 10% equity dilution (assuming new shares to be priced at NT$10). We believe that unless Innolux comes out with an effective differentiating strategy to counter the market shift, investors' interest to participate could wane.
Valuation and risks: Our Dec-14 PT of NT$ 10.0 is based on 0.5x P/BV (down-cycle valuation). Key risks include: 1.) Higher-than-expected panel prices due to strong end-demand outlook 2.) Better cost-reduction due to introduction of niche size and 4K2K TV panels 3.) Meaningful order gains through the help of the Hon Hai group and 4.) Slower industry capacity additions.
Telecommunications & Media James R. Sullivan, CFAAC
2013 was about large cap multiple expansion on negative earnings revisions, Wireless and Integrated sub-segments are now +1.4SD expensive, and we think this is unsustainable. Earnings revisions for every subsector were negative... 2013 returns were driven purely by multiple expansion.
The street is estimating that industry revenue growth for Telcos in Asia will rebound from only 2% in 2013 to 10% in 2014, driven by data. Margin compression is all too obvious now, however...street estimates of 10% top line growth now only translate to 2% EBITDA growth with margins falling 200bps on aggregate...we see further downside relative to expectations in ASEAN markets due to competition. JPM numbers not only show that this 2% is at risk, we continue to believe that the really scary number is CAPEX...which continues to be the most aggressively revised number in Asian Telcos. Street numbers currently imply industry FCF falls 20% in FY14...we feel this is conservative and argue it could fall much more. The perceived "defensiveness" of telecom industry yields is an illusion, in our view.
2014 performance could very likely be driven outside of the core Wireless and Integrated large cap
subsectors. We see interesting opportunities within enabling technologies (data centers such as VNET, satellite, etc) as well as content linked businesses (EM Pay TV principally such as MNC SkyVision and Astro). Within the traditional telco space we favor Developed Market integrated players such as HK (HTHKH, PCCW-HKT), Korea (SKT) and Japan for data price repair and the ensuing positive earnings revision trends. We remain negative on data monetization in emerging markets and EM wireless players in general.
Top Picks and Stocks to AvoidPrice P/E (x) P/B (x) Div. yield ROE
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
17th February 2014.
Overweight Underweight
Hutchison Telecom HK Michelle Wei AC
Ticker: 215 HK, Price: HK$2.85, PT: HK$3.80
Investment thesis: Hong Kong is the last of the Asian Developed Markets to see data unit price repair, these benefits will become obvious in 2014. Recent M&A (PCCW’s acquisition of CSL) could allow lower competitive intensity. We think HTHKH is well placed to benefit given lower than industry average ARPU, smartphone penetration, as well as fixed infrastructure base.
Drivers/catalysts: We expect earnings estimates for HTHKH to bottom post 2H13 results. A bottoming of earnings revisions will make valuations more compelling, in our view, and solidify the street’s acceptance that Hong Kong data pricing is following the same path led by Japan, Singapore, and Korea(rationalization of pricing plans, effective unit price increases).
Valuation and risks: Our Dec-14 PT of HK$3.8 is based on our SOTP valuation comprising HK$2.4 for the mobile operation and HK$1.4 for fixed-line and others. Downside risks include: 1) Regulator disapproves HKT-CSL deal; and 2) iPhone 6 fails to revive business momentum.
Maxis Berhad Princy Singh AC
Ticker: MAXIS MK, Price: M$6.97, PT: M$5.25
Investment thesis: An increase in pricing competition in Malaysia should drive CAPEX to sales (historically running in the low teens) closer to regional levels of 25-35%. This is most decidedly NOT in street numbers, and could trigger significant dividend disappointment. Shares remain close to all time high valuations.
Drivers/catalysts: Maxis’ new CEO has publicly stated a shift from margin maximization to market share gains. The increase in competitive intensity risks the premium multiples that Malaysian Telcos have enjoyed while the rest of ASEAN wireless stocks de-rated.
Valuation and risks: Our Dec-14 TP is based on target P/E of 18.5x which is in line with its average historical trading multiple. Upside risks include: 1) Maxis successfully recoups market share without significant increase in marketing expenses; and 2) Maxis is able to sustain margin through better cost management.
Industry demand-supply growth balance is expected to improve. Full service airlines provide more leverage to US and Europe demand recovery than low cost carriers. We believe investors should avoid low cost carriers that have overaggressive capacity expansion, which only benefit the airports and MRO companies; prefer LCCs with more moderate and sustainable growth. Bulk shipping sector has finally bottomed out after 6 years of industry oversupply and we stay with our positive contrarian view and expect average rates in 2014 to surpass 2013 levels. Focus on operators of Handysize vessels. Container shipping should benefit from US and Europe demand recovery but industry supply growth is expected to accelerate, which will require continued capacity discipline to support rate recovery. P3 network and deepened G6 and CKYH alliances, if approved, could help stabilize freight rates but could crowd out weaker players longer term. Substantial potential upside as investors look for cyclical plays leveraged to DM recovery: Valuations are at a c.27% discount to their historical average levels with bulk shipping stocks providing the biggest potential
upside to mid and peak cycle valuations, followed by airlines and container shipping.
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of
14th Feb, 2014. FY15 and FY16 for SIA, SIA Eng, Mitsui Engg & Shipbdg as they have
March year end.
Overweight Underweight
Air China - H Corrine Png AC
Ticker: 753 HK, Price: HK$5.31, PT: HK$7.0
Investment thesis: We like Air China given its strong organic growth prospects, leverage to the growing West China market and lowest exposure to hi-speed rail competition. Air China has the strongest balance sheet and management among the Big 3 carriers. Valuations are attractive with current P/B at 0.9x, a 45% discount to its historical average valuation with average ROE of 8% and EPS CAGR of 15% from 2013-15.
Drivers/catalysts: We expect better pricing power as demand-supply growth balance improves markedly this year. Further, rising travel penetration in China, yield improvement from increased premium traffic, increased traffic feed from Star Alliance partners and further liberalization of direct China-Taiwan air links will be positive catalysts.
Valuation and risks: Our Dec-14 PT of HK$7.0 is based on 1.3x P/BV, a 25% discount to Air China’s average valuation since listing excluding the M&A speculation period given its lower than historical average profitability. Key risks: 1) China’s growth stalls, resulting in industry oversupply, 2) rising competition from hi-speed rail, 3) volatile fuel prices, 4) weaker than expected profits from Cathay.
China Rongsheng Heavy Sokje Lee AC
Ticker: 1101 HK, Price: HK$1.45, PT: HK$0.70
Investment thesis: We expect delays in ship delivery are not likely to ease in the near future, especially given the massive staff reduction, and Rongsheng might face increased claims and cancellation risks from ship owners. Further earnings loss seems inevitable during the upcoming 2-3 years.
Drivers/catalysts: We believe the company's better-than-expected operational execution and reduced risk in vessel delivery will be a positive sign for its share price. Further announcements on government’s financial support may limit further earnings downside. Also, signs of recovery in newbuilding ship prices, particularly in commercial vessel segments, will be a positive for the company’s earnings as well.
Valuation and risks: Our Jun-14 price target is based on 2014E BPS of HK$1.41 with a 0.5x multiple (company’s historic bottom level). Key upside risks include: 1) newbuilding ship price recovery, 2) successful operational execution, and 3) lowered delivery delay.
Following 2-3 years of strong performance, Asia utilities began to underperform over the past 6 months amidst: (1) tapering concerns, and (2) other sector specific factors (e.g. power tariff cuts & natural gas hikes in China, water tariff cuts in Philippines). While valuation for the entire sector is still close to the historical average, selected sub-sectors (e.g. China gas distributors) have enjoyed significant re-rating and any headwinds will reverse the trend. Also, underperforming sub-sectors (India IPPs / China equipment makers) will not likely recover given their LT structural problems. In this respect, investors should be stock-selective and focus on non-yield stocks that have (1) emerging +ve catalysts, (2) major overhang removed, and (3) growing strong cash flows, and avoid ex-growth yield plays. Key catalysts to watch out for are 1) sustained coal price weakness, 2) consistent growth (organic & M&A) and 3) rising US treasury yields.
Our top picks are CR Power (sustainable weak coal prices & strong cash flow), BJE Water (M&A
opportunities & Govt support), Longyuan (& new solar opportunities + Govt support), Tenaga (sustainable weak coal prices & resilient energy demand growth), and Metro Pacific (steady growth in tollway business + upside from new infrastructure projects). Stocks to avoid are Shanghai Electric (weak domestic coal-fired order outlook + earnings disappointment) and Adani Power (Highest exposure to weakening INR & gearing (~1000%) + earnings disappointment).
Top Picks and Stocks to AvoidPrice Mkt cap P/E (x) EPS (LC) ROE
Code Rtg (LC) (US$MM) 14E 15E 14E 15E 14E (%)Top picks836 HK OW 19.92 11,813 8.1 7.5 2.37 2.56 17.5916 HK OW 9.38 9,821 14.8 12.3 0.64 0.77 12.0TNB MK OW 9.39 20,900 12.9 12.9 2.22 2.22 11.3MPI PM OW 4.79 2,587 13.3 12.3 0.06 0.06 8.9Stocks to avoid2727 HK UW 2.79 7,123 9.6 9.4 0.26 0.26 8.3ADANI IN UW 35.25 1,587 26.3 10.5 0.16 0.41 8.4
Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of 17 Feb 2014.
Overweight Underweight
China Resources Power Boris Kan AC
Ticker: 836 HK, Price: HK$19.0, PT: HK$26.6
Investment thesis: Our bullish investment case rests on our expectation of (1) an expected subdued coal price over the next 1-2 years, (2) solid LT structural growth from the wind power business (15-20% of CRP’s earnings, (3) strong positive FCF thanks to its strong return-based investment discipline.
Drivers/catalysts: Potential tariff cuts (we expect minimal), coal price movements and new wind project rollouts.
Valuation and risks: Our Dec-14 PT of HK$26.6 is based on a 10-year DCF assuming a WACC of 8.4%. Our PT can be broken down into the power business (HK$ 25.0) and coal mine business (HK$1.6). Downside risks to our rating and PT include (1) Spot coal spike up in light of temporary railway transportation disruption; (2) further IPP tariff cuts under the current coal-cost pass through mechanism.
Shanghai Electric Boris Kan AC
Ticker: 2727 HK, Price: HK$2.51, PT: HK$2.20
Investment thesis: Our bearish view on Shanghai Electric rests on the expected weak demand for coal-fired equipment as China (1) continues to rely less on coal due to pollution concerns, (2) has slower power demand growth going forward as the nation shifts away from an FAI growth model.
Drivers/catalysts: New order flows (and ASP trend), margin on equipment sales (and outlook), nuclear orders, rollout of overseas projects.
Valuation and risks: Our June-14 price target of HK$2.2 is based on 8.6x the three-year forward ‘through-cycle’ EPS in 2013-15E (8.6x is based on one SD below 5-year historical average 1-year forward P/E). The stock would trade at 9x 2014E PER and 0.7x 2014E PBR on our PT. Upside risks include better than expected coal-fired equipment delivery and earlier than expected nuclear order rollout.
We like Air China best in the long term given its strong organic growth prospects (driven by rising outbound Chinese traffic, premium/transit pax/cargo market share gains), leverage to growing West China market, and lowest exposure to hi-speed rail competition.
Valuation
Our Dec-14 PT of HK$7.0 is based on 1.3x P/BV, a 25% discount to Air China’s historical average valuation since listing (excluding the M&A speculation period),given its lower-than-historical average profitability.
Risks to Rating and Price Target
Key downside risks: 1) China’s growth stalls, resulting in industry oversupply, 2) rising competition from high-speed rail expansion, 3) volatile fuel prices, 4) weaker-than-expected earnings contribution from Cathay Pacific and other associates.
ASE (Overweight; Price Target: NT$35.00)
Investment Thesis
We foresee meaningful revenue growth/margin expansion for ASE in 2014, backed by: (1) potential synergies between in-house assembly/test and EMS segments for ramping SiP business; (2) a strong pickup in revenue momentum from 2Q14 onward, helped by 20nm ramp (Apple’s AP fabbed at TSMC); (3) industry migration toward advanced packaging; and (4) substantial downside protection for wire-bonder utilizations due to significant IDM exposure. In addition, ASE appears to be best positioned to drive further consolidation in the OSAT space in the next two years.
Moreover, we believe Micron may be considering outsourcing more of its memory back-end operations, especially in commodity and mobile DRAM. We believe ASE has a high chance to gain more market share within Micron’s DRAM pie.
Valuation
We remain OW on ASE with a Dec-14 PT of NT$35. Our PT is based on 2x FY14E book, with an ROE of 15%, in line with the higher end of its revised mid-cycle valuations. Our PT translates into a 12x 12m forward P/E.
Risks to Rating and Price Target
Key downside risks are a slower ramp-up of advanced packaging and the likelihood of low utilization in the wirebonding and testing business.
Changsha Zoomlion Heavy Industry (Underweight; Price Target: HK$5.30)
Investment Thesis
Contrary to market expectation for a recovery in coming years, we expect Zoomlion’s net profit to fall by 11/14% in 2014/2015E, driven by continued margin erosion (on unfavorable sales mix changes) as well as rising impairment loss on uncollected receivables.
Zoomlion’s past due ratio, albeit stabilized, remained high during 2013. We expect that more losses may arise on provision for uncollected receivables, to weigh further on its profitability. Furthermore, sales recovery for concrete machinery - Zoomlion’s key profit contributor – has lagged other types of construction machinery in 2013,
while outlooks remains grim in 2014 given the weak end demand as suggested by the low and falling utilization hours for concrete pumps.
Valuation
Our Dec-14 PT of HK$5.30 is derived based on the DCF valuation while taking into consideration the peer valuation and the company’s own historical valuation. Our DCF valuation uses the following assumptions: a WACC of 12.3%, driven by a cost of equity of 14.1% (risk-free rate of 5%, equity risk premium of 7% and company beta of 1.3x), a cost of debt of 4.8%, a target debt to capital of 20% and terminal growth of 0%. Our PT corresponds to a target P/E of 8x/9x, and P/B of 0.7x/0.6x on FY14/FY15E.
Risks to Rating and Price Target
Key upside risks to our PT include: (1) Stronger-than-expected recovery in construction activity in China, particularly in the housing sector; (2) Further marketshare gains in the domestic market; (3) Stronger-than-expected export sales; (4) Successful foray into other new markets including heavy trucks and agricultural machinery.
China Resources Power Holdings (Overweight; Price Target: HK$26.60)
Investment Thesis
China Resources Power is a flagship subsidiary of China Resources (Holdings) Company Limited, engaged in the investment, development, operation and management of power plants. As at 30 June 2013, the operational attributable installed capacity of CR Power was 26GW. Our bullish view on the company rests on (1) the expected strong cash flow thanks to subdued coal prices, and (2) continued growth from the wind power business.
Valuation
The stock is trading at 8x /7x 2014E /15E P/E. On an EV/EBITDA basis, the stock is at 7x / 6x (2014E/15E).
Our Dec-14 PT of HK$26.6 is based on a 10-year DCF assuming a WACC of 8.4%. Our PT can be broken down into (1) HK$25.0 from the power generation business and (2) HK$1.6 from the coal mine business.
Risks to Rating and Price Target
Downside risks to our OW rating and PT include (1) Spot coal spikes up in light of temporary railway transportation disruption; (2) further IPP tariff cuts under the current coal-cost pass through mechanism.
China Rongsheng Heavy Industries Group Holdings Ltd(Underweight; Price Target: HK$0.70)
Investment Thesis
Key UW stock among Asian shipbuilding universe. We think Rongsheng’s operational risks resulting in ship delays and cancellations, and potential risk of earnings loss will continue, which justifies our UW rating on the stock.
Valuation
We reiterate Underweight on Rongsheng with a Dec-14 price target of HK$0.70. Our price target is based on 2014E BPS of HK$1.41 with a 0.5x multiple as we see the threat of continued losses. Our target multiple of 0.5x, which is the company’s historic bottom level, is applied considering its falling margin trend, followed by further high execution and delivery delay risk.
Key upside risks to our price target include: (1) newbuilding ship price recovery (positive for shipbuilding margins), (2) successful operational execution and lowered delivery delay, (3) further financial support from the government.
CJ Cheiljedang (Underweight; Price Target: W200,000)
Investment Thesis
Despite the exit of small loss-making lysine makers and major competitors’ reduced production volumes, lysine prices dropped further in 4Q13, and we see further downside risks in coming quarters due to ongoing inventory issues. Beyond mid-2014, we expect some rebound. However, we expect any rebound to be moderate, given over-supply in China and additional supply from the new Iowa plant. Despite margin expansion for the food division, we expect earnings to remain weak due to low visibility on the lysine price outlook.
Valuation
Our Dec-14 price target of W200,000 is based on Dec-14E EBITDA of core operations (ex. CJ Korea Express) and a target multiple of 8.0x, the mean EV/EBITDA multiple of global lysine manufacturers and Korean packaged food makers. For non-core assets, we estimate the total non-core asset value to be around W1,249 billion.
Risks to Rating and Price Target
The key upside risk is a larger-than-expected lysine price rebound.
CSR Corp Ltd. (Overweight; Price Target: HK$8.50)
Investment Thesis
CSR is a major beneficiary from the upcoming rebalancing in the mix of China’s railway spending as we expect a higher proportion of railway capex to be allocated to late-cycle trains & equipment starting from 2014. We see upside to both our estimates and consensus estimates, particularly for FY14, in light of the larger-than-expected second batch of MU orders (140% higher vs. market expectation) announced recently, the delivery of which are scheduled to be by 3Q14. Beyond FY14E, we see overseas markets and subway trains (RTVs) as new growth drivers.
Valuation
We retain our DCF-based Dec-2014 PT at HK$8.5. Our new PT translates into a target P/E of 15.8x and a target P/B of 1.9x on FY14E. Price target and valuation analysis is based on the following assumptions (unchanged):
WACC = 10.9%, driven by:
Cost of equity = 12.7% (Rf: 5.0%, Equity risk premium: 7.0%, Company beta: 1.1x);
Cost of debt = 3.8% (pre-tax cost of debt: 5.0%, tax rate: 25%);
Target gearing = 20%, terminal growth rate = 0%
Risks to Rating and Price Target
Key risks to our price target/thesis are unexpected changes in government’s investment in railway development, major fluctuations in raw material costs, and potential capacity constraints.
We expect Dangdang’s margin to continue to improve modestly as the company expands into new categories and marketplace e-commerce model. However, Dangdang may face intense competition from large e-commerce players as it grows its marketplace business. We believe margin improvement is already reflected in its share price.
Valuation
We stay Underweight on Dangdang with a Jun-14 PT of US$7.5.
We adopt DCF as our primary methodology to value Dangdang. Our 10-year DCF is based on a discount rate of 17% and a terminal growth rate of 2%. Key assumptions include 1) a long-term risk free rate of 4%, 2) an equity risk premium of 7% in the China market, and 3) a beta of 1.8.
Risks to Rating and Price Target
Upside risks to our views include: Stronger-than-expected margin improvement Successful expansion into new categories
DongFeng Motor Co., Ltd. (Underweight; Price Target: HK$8.50)
Investment Thesis
1) We believe DFM is a proxy for the overall PV market in China as the company has diversified models across sedan, SUV and commercial vehicles. Nonetheless, we forecast growth in the PV market will decelerate with increasing base. Thus, we believe investors should focus on specific sub-segments that would likely deliver superior growth, namely: SUV and premium brands (hence our preference for Brilliance China). 2) DFM’s lack of capital management and dividend despite sizeable cash on balance are key reasons for its declining ROE. Historically, we find a high correlation between its ROE and share price performance since its listing in 2005. 3) DFM’s investment in PSA could present a potential longer term challenge facing the company, as we are unsure the benefit that DFM shareholders could receive in the long term. And there is further risk down the road if PSA needs more capital in the future. In other words, we believe DFM’s shareholders would be better off if the company simply returns its rich case back to shareholders in the form of cash dividend- in which case, we believe the stock can re-rate.
Valuation
We retain our UW rating with a PT of HK$8.5 (June-14) based on FY14E P/E of 6x and DCF analysis. This multiple is the mid-range of DFM’s historical trough valuation of around 5-8x forward P/E. Given our expectation that DFM will be undergoing a de-rating (due to competition from entry level luxury brands and weak truck demand and longer term uncertainty presented by PSA investment), we believe that applying an average trough valuation is reasonable. In our DCF analysis, our key assumptions include risk-free rate of 5%, risk premium 6%, WACC of 12% and terminal growth of 2%.
Risks to Rating and Price Target
Key upside risks to our UW rating and PT include: (1) better-than-expected sales of Japanese cars in China, including DFM’s Nissan and Honda vehicles, (2) stronger-than-expected margin improvement for its passenger and commercial vehicle businesses, and (3) higher than expected dividend payout and hence higher yield.
Far East Hospitality Trust (Underweight; Price Target: S$0.80)
Investment Thesis
FEHT is a pure-play domestic hospitality REIT with 78% of GAV exposure in Singapore hotels. Sector fundamentals remain challenging in our view from flat demand growth and continued supply in the mid/mass hotel segments. Sector-wide occupied room nights in 2013 were also down 3% Y/Y. Having said that, we note that year-on-year RevPAR declines are expected to stabilize due to low base effects.
Valuation
Our Jun-14 price target of S$0.80 is based on the average of our DDM and RNAV estimates, with DDM using a 7.9% discount rate and LT growth rate of 1.0%. Tenure adjusted RNAV is estimated @ S$581,785 per key.
Risks to Rating and Price Target
Key upside risks to our rating and PT stem from better-than-expected visitor arrivals and therefore better growth in room rates. The high operating leverage means that every 5% change in RevPAR would translate into a 7% change in our DPU estimates.
Far EasTone Telecom (Underweight; Price Target: NT$56.00)
Investment Thesis
FET is the third-largest mobile operator in Taiwan, with 24% market share. It has a small fixed-line operation that contributes 15% of total revenue. The company expects to see earnings tumble in 2014 due to increased D&A arising from a 4G network rollout.
Valuation
Our Dec-14 price target is based on a 10-year DCF valuation that assumes a market risk premium of 6.5% and a risk-free rate of 3%. We also assume a beta of 0.9 and a terminal growth rate of 0.5%, which results in a WACC of 8.3%.
Risks to Rating and Price Target
Upside risks include: (1) FET’s ability to increase data prices for 4G services; and (2) new entrants’ inability to represent meaningful competition.
We remain UW on GENS due to sluggish revenue growth and demanding valuation (24x FY14E P/E) compared to regional peers. Also, Japan optionality is still too remote to be priced in.
ValuationOur Dec-14 PT of S$1.21 is based on a SOTP where its Singapore business is valued at 10x FY14 EV/EBITDA, a discount to the 12x-19x we use for its Macau peers now. We now expect Singapore market to grow by 11% in 2014 and 4% in 2015.
Risks to target priceUpside risks include: 1) stronger-than-expected growth in the Singapore gaming market, 2) quicker-than-expected market share recovery with the help of Marine Life
Divisions Valuation Methodology 2014E NAV Per share
S$m S$
Resorts World at Sentosa 10x 2014E EBITDA 14,238 1.17
Park, 3) positive operating leverage from RWS's ramp-up and, 4) quicker-than-expected materialization of M&As or overseas venture.
Downside risks include: 1) slower-than-expected growth in the Singapore gaming market, 2) delay of materialization of M&As or overseas venture, 3) further policy risks regarding local players’ participation in gaming activities, 4) deterioration of macroeconomic environment in South East Asia and visitation slowdown.
We have a Underweight rating on Globe. Telecom revenue growth in the Philippines is likely to remain strong aided by strong economic growth and stable competition. However, we see margin pressure for Globe driven by rising post-paid subscriber acquisitions driving SAC higher. In addition, we see significant rise in capex intensity going forward driven by higher data usage and thrust on home broadband services – the management recently increased its capex guidance implying almost 30% capex to sales ratio for 2014E. We believe that capex levels could remain elevated over 2014E-16E, driving incremental returns on capital lower.
Valuation
Our Dec-14 price target of Php1,520 is based on 16x 2015E P/E. Our target multiple of 16x is at a ~20% premium to the average five-year forward P/E, factoring in improved fundamentals for the Philippine wireless industry driven by competition getting less aggressive over the past 18 months and a continued decline in sovereign bond yields (and thereby implying a lower risk-free rate). Our target multiple is also in line with average ASEAN wireless operators’ 2015E P/E multiple.
Risks to Rating and Price Target
Key upside risks include better-than-expected margins from lower competition, especially on the post-paid side. Lower than expected capex would also be a source of upside to our earnings estimates and price target, though we believe this would be unlikely unless globe were to roll back its home broadband growth agenda. Finally, Globe managing to sustainable reduce SAC for its postpaid subscriber base / potential reduction in handset subsides would be a source of positive surprise.
We reiterate our UW stance on Hero Motocorp, given that the industry growth outlook remains sedate while competition intensifies, as two-wheeler OEMs get aggressive with product launches.
Valuation
Our Sep-14 PT of Rs1,800 is based on a 12.5x forward P/E multiple (a 5% discount to its average historical multiple).
Risks to Rating and Price Target
Key upside risks: A recovery in local industry sales, robust growth in exports at Hero, particularly in the African region.
Hutchison Telecom Hong Kong Holdings (Overweight; Price Target: HK$3.80)
Investment Thesis
Hong Kong is the last of the Asian Developed Markets to see data unit price repair, these benefits will become obvious in 2014. Recent M&A (PCCW’s acquisition of
CSL) could allow lower competitive intensity. We think HTHKH is well placed to benefit given lower than industry average ARPU, smartphone penetration, as well as fixed infrastructure base.
Valuation
Our Dec-14 PT of HK$3.8 is based on our SOTP valuation comprising HK$2.4 for the mobile operation and HK$1.4 for fixed-line and others. We use the DCF approach for both mobile and fixed-line businesses and combine the two to arrive at our target price.
Risks to Rating and Price Target
Downside risks include: 1) continued weak demand for new handsets; and 2) mobile service revenue fails to turn around in 2014.
Hyundai Motor Company (Overweight; Price Target: W330,000)
Investment Thesis
HMC is our top OEM pick. We believe HMC will be one of the few OEMs to see its product cycle upturn coinciding with global auto demand’s cyclical improvement in 2014. Product cycle and net pricing outlook suggest we are near the earnings inflection point. HMC’s growth will likely happen at a higher price point, supporting growth accompanied by profit enhancement. In 2014-2015, global market share will strengthen to reach a record high, which will be a re-rating factor. We think group restructuring, which we believe will be completed by 2015, will also lower uncertainty on succession issue.
Valuation
HMC trades at 6.5x 2014 PER. This represents a 30% discount to global peerswhich is a widened discount over the past three-year average of 22%. Considering the improving fundamental earnings drivers of HMC and relative declining productmomentum of peers, we believe HMC is one of the most mispriced stocks globally.To be fair, sizable multiple expansion is not likely with declining RoE. However,no large-cap or investable global OEMs have rising RoE based on Bloomberg estimates. For HMC, we argue for a breakout from mid-cycle multiples toward the higher end of the trading band, given its strengthening global positioning in 2014. Our Dec14 price target is based on 10x FY14E EPS. Again, our target multiple is toward the higher end of the historical band (5-12x) to reflect upcoming earnings up-cycle, product momentum, the possibility of the second phase of capacity expansion, and improving auto demand in key markets including Europe.
Risks to Rating and Price Target
Short-term risk is the pace of the Krw appreciation. Long-term risk is weaker position in green car technology and rising R&D burden.
IndusInd Bank (Underweight; Price Target: Rs375.00)
Investment Thesis
1. We remain UW on the stock as:2. Valuations are still very rich, with ROA pressures building up from both
margins and asset quality.3. Our house view is that the CV segment is likely to remain weak in the
medium tern. Given the high exposure in the CV segment asset quality is likely to remain weak in the medium term for the bank.
Our Sept-14 PT for IndusInd of Rs375 is based on 2 stage Gordon growth model implying 2.2x Sept14 book. Our valuations factor in Cost of Equity at 15.7%, Normalised ROE of ~21% and terminal growth of 5%.
Risks to Rating and Price Target
The key risks to our Underweight rating include:1) If the demand for CVs improveswith the positive macro trends then it could have a positive impact on loan growth.2) We are building in substantially higher credit costs in FY14E & FY15E given the weak macro; however if the macro turns around quickly than credit costs are likely to be much lower than our expectations
Our Underweight recommendation hinges on1. Market share loss to locally-produced panels.2. New global capacity to outweigh area demand growth3. High net gearing and weak balance sheet4. Limited capex to solidify its market position
Valuation
We marginally adjust our 2014/2015 estimates and maintain our Dec-14 PT of NT$10, on 0.5x P/BV (down-cycle valuation).
Risks to Rating and Price Target
Key upside risks include: (1) higher-than-expected panel prices due to strong end-demand outlook; (2) better cost reduction due to introduction of niche size and 4K2KTV panels; (3) meaningful order gains through the help of Hon Hai group; (4) Slower industry capacity additions.
KASIKORNBANK (Overweight; Price Target: Bt230.00)
Investment Thesis
The EM equity sell-off and Thailand's political unrest have brought the stock price down by 27% (SET: -23%) from a peak in May-13, when the EM equity sell-off started; the stock has declined 15% (-13%) since the end of Oct-13, when the anti-government protests started. Valuation starts to get more attractive at 1.5x P/B and 8x P/E, in our view, or at approximately a 20% discount to the stock’s long-term average multiple. In our view, KBANK is one of the most solid banks in Thailand and should continue to deliver better-than-average results. Despite a cautious business plan, we expect 15% EPS growth and 20% ROE in 2014.
Valuation
Our Dec-14 price target is based on a DDM methodology. We use an adjusted fair P/B-based multiple of 2.56x with a normalized ROE of 20%.
Risks to Rating and Price Target
Downside risks include prolonged political unrest, leading to weaker growth, quality and NIM, as well as a failure to control deposit costs, NIM and the operating expense trend when the revenue outlook is more challenging.
We remain UW on the stock as we believe 70% of LoT’s businesses are likely to stay muted (PC/NB related biz and Lite-on Mobile) in terms of revenue and profit contribution, while some promising sectors such as camera module is also facing higher competition from Greater China vendors.
Valuation
Our Jun-14 PT of NT$40 is based on 10x FY14E EPS, the midpoint of the shares’ 7-13x P/E multiple range over the last five years. This multiple also reflects the company’s large exposure to the PC industry, which has limited growth opportunities, in our view.
Risks to Rating and Price Target
Key upside risks to our view include: (1) another ROE-accretive deal (e.g.,Silitech); (2) new customer breakthroughs (e.g., Apple); (3) better demand for LED lighting; and (4) faster SSD growth to offset ODD weakness. Key downside risks are (1) further deterioration of PC demand, (2) gaming traction slows down
Lotte Chemical Corp (Underweight; Price Target: W155,000)
Investment Thesis
Lotte Chem is a pure commodity petchem producer with most of its assets in Korea but also in Malaysia, Pakistan and the UK. After plunging in 1H13, Lotte’s share price has rallied significantly in the past seven months on expectations that 2014 will be significantly better (consensus OP is 29% higher than our estimate). However, with its valuation already at mid-cycle of 1.1x BV, we believe any earnings improvements in 2014 is already priced in and we remain concerned on the downside risks to earnings based on current margin trends.
Valuation
Our Dec-14 PT of W155,000, based on 0.8x 2014E BV (vs. 0.7x previously used) as we now forecast Lotte’s 2014-15 ROE to be 7-8%. 0.8x BV is also near the mid-point between the historical average and -1SD valuation (on P/B basis).
Risks to Rating and Price Target
Upside risks to our forecasts are delays in new Chinese Ethylene capacities which would be positive for margins and a spike in BD spreads as Lotte share price also moves with BD spreads.
Maxis Berhad (Underweight; Price Target: M$5.25)
Investment Thesis
Our Underweight rating on Maxis is premised on the view that competitive intensity in Malaysia is set to rise, led by Maxis' change in strategy to focus on revenue growth and market share, a shift away from its margin focused strategy over the past few years. Maxis' shift in strategy is likely to drive sales and marketing expenses higher and comes against a backdrop of slowing industry revenue growth, which is now down to 3%-4% levels. Consequently, we expect margins for Malaysian telcos to be under pressure going forward and expect further downward revisions in consensus earnings estimates. We note that rising competitive intensity could drive pricing pressure and potentially capex intensity higher, which poses risk to free cash flows and sustainability of dividend payout.
Over the last 5 years, Maxis has traded at an average forward 18x P/E and in a range of 14.2x P/E at the bottom and at 23.8xP/E at the top end. Maxis stock is currently trading at 26.1x 2014E P/E and 25x FY15E P/E. It is currently trading at 27% premium to its historic trading average of 20.5x forward P/E. Our target P/E multiple of 18.5x is in line with its average historic trading multiple. We believe that given the headwinds from competitive pressures and the impending consensus downgrades, valuation multiples are likely to compress from current levels.
Our PT is based on a sum of 1) potential upside/ (downside) to consensus EPS vs. JPM EPS estimates and 2) our estimated multiple expansion/(contraction) based on peak P/E multiple. Our target P/E multiple is based on the stock’s historical trading range and expected future business changes.
Price target and valuation analysis 2014E 2015ECurrent consensus P/E (a) 23.4 22.0JPM target P/E (b) 18.5 18.5Upside/ (Downside) to target multiple (b/a-1=e) -20.8% -15.9%JPM vs. consensus EPS (d) -10.3% -9.5%Sum of multiple and EPS upside/(downside) (e+d) -31% -25%JPM Dec -2014 price target (M$/sh) 5.25
Risks to Rating and Price Target
Key upside risk to our rating and price target includes Maxis successfully recouping market share without any significant increase in marketing expenses. We expect margins for Maxis to decline going forward on account of higher marketing expenses; in the event Maxis is able to sustain margins through better cost management, that would be a source of upside risk to our earnings estimates and price target.
Oil Search (Underweight; Price Target: A$7.23)
Investment Thesis
By far the most valuable asset in OSH is PNG LNG. This high quality project should deliver LNG under long-term contracts to solid counterparties at strong pricing slopes. A high condensate ratio enhances the economics.
We also like the PNG LNG T3+ expansion potential. It could be fed by gas from Hides, P’nyang or another proximate field, or the third-party Interoil Elk/Antelope discovery (currently subject to a sale process). The strong brownfield economics should allow it to compete favourably against other projects for customers.
The Taza discovery in Kurdistan potentially holds vast recoverable oil of 250- 500mmbbls or more. However, it is geologically complex and the economics of recovery are unclear. Appraisal will take 2+ years. At this stage, we do not attribute specific value to it. It is, however, a potential risk to our Underweight call in the long term.
The Gulf of Papua exploration farm-out deal with Total represented a degree of validation of its prospectivity – but the results to date have been inconclusive.
We have generously allowed for the chance of PNGLNG T3 becoming a reality in our DCF valuation (75% risking). However, even then the stock offers less upside compared to its LNG-heavy peers STO or WPL based on our valuations. For thisreason, we carry an Underweight recommendation on OSH. We believe OSH will struggle to outperform on a sector relative basis.
Our valuation of OSH is A$8.43/share and our Jun-14 price target is A$7.23.
Our valuations and price targets are based upon our sum-of-the-parts DCF. We apply risk factors to the various growth projects in a company's portfolio based on our confidence in the project. Our DCF valuation includes full value for PNG LNG T1 & T2 and 75% of Train 3. We also include 50% of a Mananda-5/6 development. We currently give nothing explicit for the speculative exploration position in Gulf of Papua, nor the Taza discovery which has unclear economics. We employ a 10% WACC for OSH in our NPV.
We assume a long-term real oil price of US$90/bbl. For our base-case valuations, we use a long-term exchange rate of A$/US$0.80, however, for our price targets we use a more conservative US$0.90 to reflect the market’s apparent view on the FX rate.
Risks to Rating and Price Target
The main upside risks to our price target include: a stronger oil price and/or weaker AUD (both spot and future) successful appraisal and commercialisation of OSH equity gas for PNGLNG
expansion trains demonstrated good economics at the potentially 250-500mmbl+ Taza discovery.
PetroChina (Overweight; Price Target: HK$11.00)
Investment Thesis
PetroChina is the largest oil company in China and one of the largest globally. It is integrated with E&P, R&C, Marketing and pipelines (NGP). In 2012, crude production was 2.5 mn BOPD and natural gas 1.16 mn BOEPD, refining throughput was 2.8 mn BOPD, olefin production 7.7 mn tonnes and it operated over 40,000 km of pipelines (crude, products and natural gas). PetroChina has SEC proven reserves of 22.2bn BOE (47% natural gas, 67% of crude is developed). Major profit drivers are crude prices and refining margins in China. Our positive view of the company is based on:
Shift in energy portfolio to be rewarded – We expect investor focus to be on the company’s ability to strategically shift its energy portfolio away from low-return assets via asset divestments. We think visibility on asset divestments will lead to relative outperformance relative to local peers.
Demand for oil products remains solid – We think PetroChina earnings will be driven by robust Chinese oil demand growth (4% y/y) from double-digit gasoline demand growth more than offset by diesel demand growth at 1% y/y.
Refining to benefit from improved higher-spec product margins – We expect PetroChina’s refining margins to improve as China moves to tougher gasoline standards. China IV gasoline in 2014 and diesel in 2015 should see uplift in refining margins.
Natural gas to benefit from hikes and reforms – We see good natural gas profitability from further price hikes and Chinese natural gas demand at low double-digit growth, which partly offsets a higher import burden. Clarity over natural gas reform progress should also be a catalyst for the shares.
Valuation
Our Dec-14 PT of HK$11 is based on a sum-of-the-parts methodology, whereby we calculate a DCF based value (WACC 9.8%, terminal g 2%) for each business segment, namely upstream, refining, chemicals and marketing added to give our total NAV. Debt and financial liabilities are deducted at book value.
Main risks to the earnings outlook are a sharp fall in oil prices, recent natural gas price hikes not being passed through to customers and no further rises, a higher import burden and weak chemicals profitability from lower demand and margins.
Ping An Insurance Group - H (Overweight; Price Target: HK$84.00)
Investment Thesis
Following the strong opening of the high-margin protection-type insurance market in China, mostly from healthcare insurance, Ping An’s agency-based business model should deliver sector-leading fundamental re-ratings, in our view. We believe the shares do not currently price in the insurance business transition resulting from the full-scale healthcare insurance market’s opening in China.
Valuation
Our Ping An-H Dec-14 PT of HK$84 (SOTP-based) is derived from 8.7x NBM for life, 1.9x P/BV for non-life and 0.7x P/BV for the bank, and applies an appraisal value approach for the life insurance business, a P/BV approach for the non-life insurance and banking businesses, a P/E approach for the securities business, and a 20% discount to holding company capital.
Relying on the same methodology, but applying a 15% discount to reflect the trading gap between A-shares and H-shares, we derive a Ping An-A PT of Rmb58. Our Ping An-H PT implies a FY14E P/E of 15x and P/BV of 2.6x.
Risks to Rating and Price Target
Downside risks include: (1) asset quality concerns at its banking and trust operations;(2) weaker-than-expected household demand for protection-type products, resulting in poor NBV growth; and (3) larger-than-expected deterioration in the non-life underwriting cycle.
Our Underweight rating is predicated on: 1) Market share losses driven by network quality issues: ISAT has been facing issues with its network quality as it undertakes its network transformation. This is resulted in considerable subscriber share losses recently and if this trend sustains, it poses downside risk to margins, given market share is the key driver of net interconnect in Indonesia 2) Risks to data pricing: While competition is driving data yields lower for Indo telecom operators, we see ISAT at higher risk given its data yields at end 2Q13 at 34% premium to TLKM and 113% premium to XL. ISAT’s voice ARPM is also at a 109% premium to XL, at historic high levels, posing downside risk to pricing. We believe that ISAT could potentially use data pricing as a tool in an attempt to recoup its recent market share losses 3) Risk of rising capex intensity: ISAT currently has 11.8Ksubs per 3G BTS v/s 6K for TLKM and 3.8K for XL (on similar frequencies). We see significant upside risk to street capex assumptions for ISAT.
Valuation
Our Jun-14 PT of Rp3820 is based on 16x2014E. Our target P/E multiple is set at a 25% discount of historic average trading multiple – we believe that competitive headwinds and ensuing downward earnings revision will drive multiple compression.
Risks to Rating and Price Target
Key upside risks to our thesis include lower competitive intensity driving data pricing higher, potential increase in dividend payout and potential consolidation in the industry led by acquisitions of players like Hutch Indonesia.
Puregold Price Club (Overweight; Price Target: Php51.00)
Investment Thesis
We are bullish on Puregold’s medium-term growth outlook given that it is well-positioned to benefit from rising modern retail penetration. We expect Puregold's SSSG to arrest its two-year decline and begin a sustainable uptrend in 2014 as the company reaps the benefit of diversifying away from Metro Manila. We also expect margins to expand given the shift of store geographic mix towards more non-Metro Manila stores and the continued growth of S&R. These should underpin our 25/20% EPS growth in 2014E/2015E, which are 5/10% higher than consensus. Maintain OW.
Valuation
Our Dec-14 PT of Php51 is based on a forward P/E of 26x, which implies a 1.3x PEG on the company's 2015E-2017E EPS CAGR of 20%. We believe the company deserves premium valuations due to its structural growth opportunity and growth momentum.
Risks to Rating and Price Target
Key risks to our PT include execution risk of new store expansion, logistics and distribution risk, a sharp drop in SSSG, irrational pricing behavior of competitors, and reputation risk.
Samsung Engineering was established in 1970 as Korea Engineering and was taken over by the Samsung group in 1991. The company provides engineering and construction services in the domestic and international markets. Along with its hydrocarbon plant engineering, the company expanded its business scope to non-hydro business (Industrials & Infrastructure). However, due to cost overrun issues caused mainly by its Middle East projects, the company reported significant losses during 1H13. We believe a de-rating of the Korean E&C sector is inevitable for the upcoming quarters, particularly for peers with large exposure to overseas business.
Valuation
We maintain our Underweight rating and Dec-14 price target of W50,000. Our price target is 8.4x 2015E EPS of W5,975, as we believe normalized profitability can be seen from 2015. Our target multiple of 8.4x comes from the 2015E average of the KOSPI index.
Risks to Rating and Price Target
Key upside risks to our price target include: (1) better-than-expected execution of current projects in backlog, received mainly during 2010-2011; (2) faster margin recovery of the company’s non-hydrocarbon projects; and (3) eased competition among global E&C players, particularly in major hydrocarbon/Middle East overseas projects.
SapuraKencana Petroleum Bhd (Overweight; Price Target: M$5.70)
Investment Thesis
SAKP, with its distinctively shaped portfolio of oil services across the supply chain as well as globally, is a key beneficiary of both (i) solid global oil services capex needs (via its Petrobras PLSV contracts, Tender Rig portfolio) as well as (ii) Petronas’ RM300 bn capex plan where it plans to maintain or even grow production in the country with a thrust on developing marginal fields. We also see potential earnings contribution from the recent acquisition of Newfield's Malaysia Oil and Gas asset, potentially adding 30-45% to our FY15E/16E earnings.
Our Jan-15 price target of RM5.0 is based on SOTP of a) Tender Rig business valued at 18x P/E; b) OCSS valued at 22x P/E; c) Fab and HUC valued at 22x P/E; d) EJV values at 16x P/E; and e) Others valued at 15x P/E.
SOTP Breakdown valuation RM Millions M$ per shareTender Rig Business 13816 2.31 OCSS 11904 1.99 Fab & HUC 8527 1.42 EJV 274 0.05 Others -4855 (0.81)
29666 4.95 Price Target (M$ / share) 5.0Number of Shares 5992Implied P/E ('15E) 21.4Implied P/B ('15E) 2.6RoE - 15E 12.9%
Risks to Rating and Price Target
Key risks to our price target are (a) rising gearing, (b) execution risks, and (c) potential increased international competition.
Shanghai Electric Group Company Limited (Underweight; Price Target: HK$2.20)
Investment Thesis
Shanghai Electric is one of the largest equipment manufacturing conglomerates in China, with high-efficiency and clean energy as well as new energy equipment which represents its core business segments. Our bearish view on Shanghai Electric rests on the expected weak demand on coal-fired equipment as China: (1) continues to rely less on coal due to pollution concerns, and (2) has slower power demand growth going forward as the nation shifts away from an FAI growth model.
Valuation
Our June-14 price target of HK$2.2 is based on 8.6x the four-year forward ‘through-cycle’ EPS in 2013-15E (we use 8.6x as this is one SD below the 5-year historical average 1-year forward P/E). Our PT is equivalent to 9x / 9x 2014E /15E PER.
Risks to Rating and Price Target
Upside risk to our UW rating and PT includes higher than expected margins on coal-fired units as management creates more production cost savings through: (1) internal cost control, and (2) lower procurement costs from suppliers.
We believe a special dividend is likely, given SIA’s large net cash balance and historical track record of special DPS every two years since May 2007. We also think SIA’s risk-reward remains attractive as we expect the industry demand-supply growth balance to improve this year. We believe the market tends to underestimate SIA’s potential return. SIA's peak valuation of 1.47 P/B is c.67% higher than its current 0.84. We estimate that if SIA pays out one-third of its current net cash balance or S$1.09 DPS, the yield would be 11%. Alternatively, it could partially divest its stake in SIA Eng via a dividend in specie. Reducing its 78% stake in SIA Eng to 51% would imply a c.13% dividend yield based on current share prices.
Our Dec-14 price target of S$13 is based on 1.1x P/BV, in line with SIA's historical average over the past 10 years. We think this is well supported by SIA’s“liquidation” value of c.S$13.3/shr.
Risks to Rating and Price Target
Key downside risks: deterioration in the macro environment, rising fuel prices, worse-than-expected competition from low-cost carriers and Middle Eastern carriers, value-destroying M&A, and a weaker Singapore dollar.
SK Hynix (Overweight; Price Target: W45,000)
Investment Thesis
Given our expectation of a multi-year growth cycle in DRAM market and SK Hynix’s dominant position along with its significantly improving financials, we expect SK Hynix to maintain its upward movement in 2014. Hence, we continue to recommend that investors accumulate the stock on weakness.
Valuation
We maintain our Dec-2014 PT of W45,000, based on 1.9x FY14E book and 1.6x FY15E book value, the high-end of its historical trading range given our expectation of ROE expansion.
Risks to Rating and Price Target
Key downside risks to our price target are lower-than-expected DRAM prices and margins and prolonged uncertainty around end-demand/ inventories. Key upside risk is earlier-than-expected recovery in global PC demand.
SK Innovation Co Ltd (Overweight; Price Target: W160,000)
Investment Thesis
We continue to like SK Inno for its significant capacity growth in 2014-15 but also upgrading of its refining yield to produce more higher valued products such as petchem feedstock rather than fuel oil. Trading at trough valuations we believe the market is too pessimistic on SK Inno's ability to deliver the forecasted earnings growth.
Valuation
Dec-14 PT of W160,000. Valuation remains based on 0.8x 2014e BV as we forecast 8-9% ROE for 2014-15 but lower BV is now forecasted on the back of lower 2013-14 earnings estimates.
Risks to Rating and Price Target
Downside risks include volatile oil price/FX and lower than expected GRMs due to continued Chinese capacity additions. Lower PX spreads that our assumed average of $450/ton for 2014 will also be negative for valuations.
Synnex (Overweight; Price Target: NT$62.00)
Investment Thesis
We expect to see a strong performance and turnaround in 2013. We believe the distribution model is still valued and remain positive about the strength of Synnex’s business model.
China handsets are on a course of recovery with Synnex eyeing multiple brand wins. We see strong upside potential if Synnex breaks into Apple’s business in China after working with Apple in India and Taiwan.
Synnex overseas is doing well and we expect the momentum to continue in the coming years. Synnex USA is expected to see strong growth thanks to Hyve solutions and acquisition of IBM call centres.
We believe the non-handset business will keep seeing steady growth momentum. Consumer electronics will remain strong with most upside coming from strong XBox sales.
Valuation
Our Dec-14 TP of NT$62 is based on 13x FY14/15 P/E which is in-line with the historical average. We increase our TP from NT$57 to reflect the improving growth visibility and roadmap to return earnings to shareholders.
Risks to Rating and Price Target
Key risks to the rating and PT include: Lengthening of CCC which would hurt Synnex’s ability to pay a cash dividend Weakness in EM currencies posing another writedown risk Rise of e-commerce especially among bigger players, which could develop
TATA remains our top pick despite the stock being up 50%+ since mid-August vs. the SENSEX up 8% over the same period. In our view, expectations of a potential improvement in European metals demand are positive for TATA’s European operations. We believe an improving Europe over the next two years implies further a re-rating of stock. In addition, we believe domestic demand should remain stable with limited new capacity addition from major players. Potential investment sales to de-lever could provide further upside.
Valuation
Our Dec14 PT of Rs550 is based on FY15 estimates. We use a target multiple for TATA Europe of 6x EV/EBITDA, given the visibility in Europe steel demand. We estimate TATA is trading at a significant discount to MT on headline FY15E estimates (TATA trades at 5.2x FY15 EV/EBITDA vs. MT at 5.8x (using Bloomberg consensus estimates for MT) and the discount widens if we were to adjust for a) the CWIP sitting on the books relating to Orissa and b) the TATA Motors stake. Adjusted for CWIP, TATA trades at 4.2x FY15E EV/EBITDA. In our view, the discount between TATA and MT should narrow, given TATA is also levered to a European recovery.
FY 15 EBITDA (Rs bn) Multiple (x) EV (Rs bn)Europe 6.0 45.7 274India 5.7 136.4 778Asia 5.0 9.2 46Total EV 1,098Net Debt 615CWIP 116Pension Deficit 43Derived Equity Value 556No of Shares (MM) 1,013.8Target Price (Rs/share) 550
Source: Company reports and J.P. Morgan estimates. Note: Adjusted for CWIP.
Risks to Rating and Price Target
Key risks (other than macro economic weakness) include a sharp decline in India profitability, weakness in steel price and a decline in European demand.
We believe Tencent’s solid market leadership in China’s gaming market will remain intact for the next 1-2 years. We expect mobile social platform monetization to generate Rmb3B and Rmb6B in operating profit in 2014 and 2015, respectively, driving revenue growth of 36% in 2014. The growth of the high-margin mobile social gaming business should accelerate earnings growth. We believe Tencent’s efforts to drive the adoption of Weixin ecommerce and payments will shape a new eco-system on mobile, which will result in potential earnings upside to the company from 2014 onwards.
Valuation
We have an Overweight rating on Tencent and a Dec-14 PT of HK$580. Our PT is based on 2014E EPS of HK$17.96, an FY14-16E non-GAAP EPS CAGR of 27%,and a PEG of 1.2x. We leverage PEG as our primary valuation methodology, as it balances valuation multiple and growth prospects.
We cross-check our PT against our DCF valuation, which yields a price of HK$625.Our key assumptions in our DCF model are: 1) a risk-free rate of 4%, 2) an equityrisk premium of 7% in the China market, 3) a beta of 1.2, 4) a discount rate of 12.6%, and 5) a terminal growth rate of 3%.
Our PT implies 32x 2014E P/E and 24x 2015E P/E.
Risks to Rating and Price Target
Downside risks to our view include: potential cannibalization between mobile games and PC games, core PC games aging faster than expected, inability to launch successful mobile game titles continuously, WeChat overseas marketing spend, video content spend.
Thanachart Capital (Underweight; Price Target: Bt34.00)
Investment Thesis
The auto market remains slow after the golden year in 2012, and political problems in Thailand. Toyota Thailand expects car sales to drop 14% this year. This suggests loan growth and asset quality will be weak for TCAP. We still see risk of consensus downgrades and remain UW the stock.
Valuation
Our Dec14 PT is Bt34, based on a DDM approach with 11.2% ROE, 13.0% COE, and 7.25% growth.
Risks to Rating and Price Target
Risks to our rating and price target are higher-than-expected NIM as interest rates move lower, stronger-than-expected loan growth momentum, and an ability to expand the non-NII base.
United Tractors (Overweight; Price Target: Rp23,500)
Investment Thesis
We expect mining capex to grow in FY14E, setting the stage for UNTR to start growing volumes again. Our confidence stems from surveying capex plans of mining contractors who aggregate 40% of Indonesian coal output. After a 45% cut in capex between FY11-13E, they plan to increase spend by 35% y/y next year. UNTR has
traded at a premium to the market when earnings are growing, and we expect FY14E EPS to register growth for the first time in 3 years.
Valuation
We have a Rp23,500 Dec-14 PT based on a 13x 12M forward multiple. Our target multiple is broadly in line with UNTR’s five-year average (12.9x) and three-year (13.5x) 12M forward consensus P/E.
One of the risks to our view is that our DCF valuation of UNTR is above the current stock price - but we think growth needs to return for DCF to be credible as a valuation lodestone.
Risks to Rating and Price Target
1) Customer pressure could make UNTR partially cede margin gains, 2) mining equipment sales are running well below replacement needs.
VTech is the largest maker of cordless phones in the world and one of the largest maker of electronic leaning products. Advances in technology have made the cordless phone less relevant in today’s households. The rapid drop in homecomputer prices as well as advances in portable computing (tablets and smart-phones) have allowed more devices to compete in the provision of education applications to young children, crimping VTech’s once dominant lock in this industry segment.
Valuation
Our price target is based upon DCF methodology. The nature of the industry leads us to apply a terminal growth of 1% (the low end of the 1 to 6 percent growth rate used for SMID Caps), and market risk premium of 6.0% and a risk free rate of 4.2% (the yield on 10-year government notes in China). We assume a beta of 1.0 and a WACC of 10.2%.
Risks to Rating and Price Target
Our PT (Dec-14, DCF-derived) of HK$85 implies a fwd P/BV of 4.5x and implies a fwd P/E of 12.5x (CY15E). The key upside risks to our PT are the successful launch of new products in the ELP division as well as recovery in demand for cordless phones in the US as the housing market recovers.
In a stabilizing competitive environment, Wynn began to take active initiatives on table yield and resources optimization. These actions have helped Wynn regain market share over past few months which the market has not given full credit for, in our view. We believe that Wynn, with low market expectations (JPMe 2014 EBITDA is 5% higher than consensus) and strong operating trends (market share gains) is likely to outperform in 2014. Wynn Macau is our gaming sector top pick.
Valuation
Our Dec-14 PT of HK$42.0 for WM factors in our expectation of a slightly better-than-expected 4Q. Our PT is based on the sum of 1) 15.5x FY14E EBITDA and 2) NAV for Wynn’s Cotai project.
We value Wynn Cotai using 28% RoIC, 12x 2017 EBITDA multiple and a 10% discount rate. We assume Macau gaming revenue to grow 17% for FY14 and 18% for FY15.
Risks to Rating and Price Target
Downside risks include: 1) Significant market share loss when VIP market competition intensifies, 2) Policy risks such as travel restrictions that could slow down visitation to Macau, 3) China economic slowdown that could affect discretionary customer spending, 4) Delay of Cotai project completion.
Xinyi Glass (Overweight; Price Target: HK$9.80)
Investment Thesis
We believe that Xinyi is China's most diversified glass conglomerate. The defensive auto glass aftermarket business and the advanced low emission construction glass business continues to do well in 2013 with stable growth and steady margins. The key driver for growth in the upcoming year is the recovery in margins for the float glass business which was 9% for 2012 and 17% for 2013. In the past we have seen peak margins for float glass hit 40% when the market is in short supply. We could see margins exceed our estimate in the peak season in 2014 (Aug to Nov) as demand should be strong and new supply slows to a trickle in 2014.
Valuation
Our Dec-14 PT is based on a DCF valuation that assumes a market risk premium of 6.0% and a risk free rate of 4.2% (yield on 10-year government notes in China). We have assumed a beta of 1.3 (Bloomberg Beta is 1.3). Accordingly, WACC is assumed at 11.3%. We have estimated free cash flow for XYG until 2015 and assume a terminal growth rate of 3.0%. The terminal growth is based on the annual growth rate expected in 2015 (the final year of the estimate period) subject to a minimum of 3% and a maximum of 6% depending on the nature of the industry and the level of maturity in China.
We also analyzed the DCF price sensitivity to WACC, and the terminal multiple.
The key downside risks to our OW rating and PT are falling demand for construction glass that may result from a cooling property market in China and further weakness in PV glass demand from Europe.
J.P Morgan’s Asia Analyst Focus List (AFL) is a selection of high-conviction stocks collaboratively chosen by each Country and Sectorresearch team across Asia-Pacific. The AFL includes Overweight- and Underweight-rated stocks, Overweight having superioroutperformance prospects in a team’s universe over the horizon of rating (6-12 months), and Underweight stocks having among thepoorer relative performance prospects over the horizon of rating (6-12 months). The aim is to have one Overweight and one Underweightidea from each Research team in the AFL. Analysts can add or delete recommendations at any time and changes will be published, withthe analyst’s rationale, on J.P. Morgan Markets. Please check J.P. Morgan Markets http://www.jpmorganmarkets.com for the most up-to-date AFL at any time, or contact your J.P. Morgan representative.
The Analyst Focus List is not a model portfolio. Please refer to specific company research for the fundamental investment thesis for eachstock included in this list as well as the analysts’ complete views. If a stock is placed under research restriction, J.P. Morgan may removethe stock from the AFL pursuant to applicable law and/or J.P. Morgan policy without any further notice. Important disclosures, includingprice charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan's websitehttps://mm.jpmorgan.com/disclosures/company. Total returns exclude commissions. Past results are not indicative of future performance.
Additional information available upon request.
Japanese stocks included in the Asia AFL are chosen according to the Asia AFL methodology above, independent of the Japanese Analyst Focus List (Japan AFL). Japan stocks are not included at the Country Team level, but may appear in Sector Team selections. To view the Japan AFL and its methodology, click here: Japan Analyst Focus List (Japan AFL)
Companies Discussed in This Report (all prices in this report as of market close on 20 February 2014, unless otherwise indicated)CDL Hospitality Trusts (CDLT.SI/S$1.61[19 February 2014]/Neutral), CHIYODA (6366) (6366.T/¥1506/Overweight), CJ Cheiljedang (097950.KS/W266000/Underweight), CJ O Shopping (035760.KQ/W379400/Overweight), COSCO Corporation (COSC.SI/S$0.71[19 February 2014]/Underweight), CapitaMalls Asia (CMAL.SI/S$1.83[19 February 2014]/Overweight), DBS Group Holdings (DBSM.SI/S$16.56[19 February 2014]/Overweight), Dongbu Insurance (005830.KS/W52500/Underweight), Dyna-Mac Holdings Ltd (DMHL.SI/S$0.39[19 February 2014]/Overweight), Ezion Holdings Ltd (EZHL.SI/S$2.31[19 February 2014]/Overweight), First Resources Limited (FRLD.SI/S$2.23[19 February 2014]/Overweight), Genting Singapore (GENS.SI/S$1.39[19 February 2014]/Underweight), Global Logistic Properties Ltd (GLPL.SI/S$2.91[19 February 2014]/Overweight), Golden Agri-Resources Ltd (GAGR.SI/S$0.55[19 February 2014]/Neutral), Hanjin Shipping Co Ltd (117930.KS/W6940/Underweight), Hankook Tire (161390.KS/W61700/Overweight), Hutchison Port Holdings Trust (HPHT.SI/$0.63/Overweight), Hyundai Department Store (069960.KS/W145000/Overweight), Hyundai Development Company (012630.KS/W30700/Overweight), Hyundai Mipo Dockyard (010620.KS/W163000/Overweight), Hyundai Motor Company (005380.KS/W222000/Overweight), Hyundai Steel Company (004020.KS/W78000/Overweight), Indofood Agri Resources Ltd (IFAR.SI/S$0.84[19 February 2014]/Underweight), Jardine Strategic Holdings Ltd (JSH.SI/$32.97[19 February 2014]/Underweight), KB Financial Group (105560.KS/W37300/Overweight), Keppel Corporation (KPLM.SI/S$10.51[19 February 2014]/Overweight), Korea Aerospace Industries (047810.KS/W30750/Overweight), LG Display (034220.KS/W25600/Overweight), Lotte Chemical Corp (011170.KS/W217000/Underweight), M1 (MONE.SI/S$3.38[19 February 2014]/Overweight), Mapletree Industrial Trust (MAPI.SI/S$1.34[19 February 2014]/Neutral), Mewah International Inc (MEWI.SI/S$0.47[19 February 2014]/Underweight), Mitsui Engineering & Shipbuilding (7003) (7003.T/¥197/Overweight), Naver (035420.KS/W689000/Overweight), Neptune Orient Lines (NOL) (NEPS.SI/S$1.00[19 February 2014]/Overweight), Nidec (6594) (6594.T/¥11930/Overweight), S-Oil Corp (010950.KS/W65900/Neutral), SANY Heavy Equipment International Holdings Company (0631.HK/HK$2.08/Neutral), SK Hynix (000660.KS/W38800/Overweight), SK Innovation Co Ltd (096770.KS/W134500/Overweight), Samsung Card (029780.KS/W33850/Overweight), Samsung Engineering (028050.KS/W75300/Underweight), Samsung Fire & Marine Insurance (000810.KS/W230000/Overweight), Samsung Life Insurance (032830.KS/W101000/Overweight), Sapphire Technology (123260.KQ/W41900/Overweight), Sembcorp Marine (SCMN.SI/S$4.09[19 February 2014]/Neutral), Seoul Semiconductor (046890.KQ/W46050/Overweight), Shinhan Financial Group (055550.KS/W44000/Overweight), Shinko Electric Industries (6967) (6967.T/¥740/Neutral), Singapore Exchange (SGXL.SI/S$6.92[19 February 2014]/Overweight), Zhengzhou Coal Mining Machinery Group Company (0564.HK/HK$4.81/Neutral)
Disclosures
This report is a product of the research department's Global Equity Derivatives and Quantitative Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only forsophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions.
Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for CJ O Shopping, Global Logistic Properties Ltd, Hyundai Motor Company, Neptune Orient Lines (NOL), Shinhan Financial Group within the past 12 months.
Director: A senior employee, executive officer or director of JPMorgan Chase & Co. and/or J.P. Morgan is a director and/or officer of Jardine Strategic Holdings Ltd.
Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Global Logistic Properties Ltd: Adrian Mowat.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: CapitaMalls Asia, CJ Cheiljedang, CJ O Shopping, COSCO Corporation, DBS Group Holdings, Dongbu Insurance, First Resources Limited, Genting Singapore, Global Logistic Properties Ltd, Hanjin Shipping Co Ltd, Hyundai Mipo Dockyard, Hyundai Motor Company, Hyundai Steel Company, Jardine Strategic Holdings Ltd, KB Financial Group, Keppel Corporation, LG Display, Lotte Chemical Corp, Mitsui Engineering & Shipbuilding (7003), Naver, Neptune Orient Lines (NOL), Nidec (6594), Samsung Card, Samsung Engineering, Samsung Fire & Marine Insurance, Samsung Life Insurance, Sembcorp Marine, Shinhan Financial Group, Shinko Electric Industries (6967), Singapore Exchange, SK Hynix, SK Innovation Co Ltd, Hankook Tire, S-Oil Corp, Zhengzhou Coal Mining Machinery Group Company, Hutchison Port Holdings Trust.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: CapitaMalls Asia, CJ O Shopping, DBS Group Holdings, Global Logistic Properties Ltd, Hyundai Motor Company, Jardine Strategic Holdings Ltd, KB Financial Group, Naver, Neptune Orient Lines (NOL), Shinhan Financial Group, Zhengzhou Coal Mining Machinery Group Company.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: CJ Cheiljedang, COSCO Corporation, DBS Group Holdings, Dongbu Insurance, First Resources Limited, Global Logistic Properties Ltd, Hyundai Mipo Dockyard, Hyundai Motor Company, Hyundai Steel Company, Jardine Strategic Holdings Ltd, KB Financial Group, Keppel Corporation, LG Display, Lotte Chemical Corp, Mitsui Engineering & Shipbuilding (7003), Neptune Orient Lines (NOL), Nidec (6594), Samsung Engineering, Samsung Fire & Marine Insurance, Samsung Life Insurance, Sembcorp Marine, Shinhan Financial Group, Shinko Electric Industries (6967), Singapore Exchange, SK Innovation Co Ltd, Hankook Tire, S-Oil Corp.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: DBS Group Holdings, First Resources Limited, Hyundai Motor Company, Jardine Strategic Holdings Ltd, KB Financial Group, Nidec (6594), Samsung Life Insurance, Shinhan Financial Group, SK Innovation Co Ltd, Hankook Tire.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking CapitaMalls Asia, CJ O Shopping, DBS Group Holdings, Global Logistic Properties Ltd, Hyundai Motor Company, Jardine Strategic Holdings Ltd, KB Financial Group, Naver, Neptune Orient Lines (NOL), Shinhan Financial Group, Zhengzhou Coal Mining MachineryGroup Company.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from CapitaMalls Asia, CJ O Shopping, DBS Group Holdings, Global Logistic Properties Ltd, Hyundai Motor Company, Jardine Strategic Holdings Ltd, KB Financial Group, Naver, Neptune Orient Lines (NOL), Nidec (6594), Shinhan Financial Group, Zhengzhou Coal Mining Machinery Group Company.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from CJ Cheiljedang, COSCO Corporation, DBS Group Holdings, Dongbu Insurance, First Resources Limited, Global Logistic Properties Ltd, Hyundai Mipo Dockyard, Hyundai Motor Company, Hyundai Steel Company, Jardine Strategic Holdings Ltd, KB Financial Group, Keppel Corporation, LG Display, Lotte Chemical Corp, Mitsui Engineering & Shipbuilding (7003), Neptune Orient Lines (NOL), Nidec (6594), Samsung Engineering, Samsung Fire & Marine Insurance, Samsung Life Insurance, Sembcorp Marine, Shinhan Financial Group, Shinko Electric Industries (6967), Singapore Exchange, SK Innovation Co Ltd, Hankook Tire, S-Oil Corp.
Broker: J.P. Morgan Securities plc acts as Corporate Broker to Jardine Strategic Holdings Ltd.
MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an 'as is' basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.
J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2014
Overweight(buy)
Neutral(hold)
Underweight(sell)
J.P. Morgan Global Equity Research Coverage 43% 45% 12%IB clients* 57% 49% 36%
*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Conflict of Interest This research contains the views, opinions and recommendations of J.P. Morgan research analysts. J.P. Morgan has adopted research conflict of interest policies, including prohibitions on non-research personnel influencing the content of research. Research analysts still may speak to J.P. Morgan trading desk personnel in formulating views, opinions and recommendations. Trading desks may trade, or have traded, as principal on the basis of the research analysts’ views and research. Therefore, this research may not be independent from the proprietary interests of J.P. Morgan trading desks which may conflict with your interests. As a general matter, J.P. Morgan and/or its affiliates trade as principal in connection with making markets in fixed income securities, commodities and other investment instruments discussed in research reports.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales representative.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf
Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London Branch, is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MIC (P) 049/04/2013 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising andcustody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.
Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc. Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The
information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / [email protected].
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
"Other Disclosures" last revised December 7, 2013.
Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P
![[JP Morgan] Abritrage Pricing of Equity Correlation Swaps](https://static.documents.pub/doc/80x56/577d2ebc1a28ab4e1eafd675/jp-morgan-abritrage-pricing-of-equity-correlation-swaps.jpg)
