rr_700000275

Deutsche Bank Markets Research

Global

Periodical

DB Today -Global/Macro

Tuesday 21st January 2014

________________________________________________________________________________________________________________

Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Greg Poole

Equity Focus (+1) 212 250-9902 [email protected]

Amy Wei

Research Analyst(+1) 212 [email protected]

MACRO HIGHLIGHTS

Asia Strategy – China Economics - Jun Ma Q4 GDP growth came in at 7.7%yoy, marginally higher than Bloomberg consensus forecast of 7.6% although slightly lower than our estimate of 7.8%. For 2013 as a whole, China's GDP growth was 7.7%, above the government's target of 7.5%. In its press release, the National Bureau of Statistics stated that "national economy performance shows good momentum". Details on Page 07

Credit Strategy – Early Morning Reid – Jim Reid Though European markets felt fairly directionless yesterday, there has been plenty of debate on China’s growth numbers after the release of Q4 GDP data yesterday. The prevailing sentiment is a bit firmer this morning thanks to the Peoples’ Bank of China’s actions today and yesterday to shore up liquidity into the domestic banking system. According to Reuters, the PBoC has conducted a total of CNY180bn in 21- day reverse repos and another CNY75bn in 7-day reverse repos to provide short term funds to banks today. Details on Page 08

FX Strategy - FX Daily - Taisuke Tanaka The BoJ is holding a Monetary Policy Meeting on 21-22nd January. Many market participants expect the Bank to maintain its policy at this meeting and move to ease further in Apr-Jun. The view is that the BoJ is likely to ease further to stimulate the economy following the consumption tax hike in April or to further heighten inflation expectations as it reviews the year of QQE. Details on Page 09

Japan Strategy – Japan FI Morning Memo – Makoto Yamashita Trading activity by investor type in December suggests that regional financial institutions are rebuilding JGB holdings. The city banks sold close to a net JPY2trn JGBs, the ninth straight month of net sales, but we cannot confirm positions because of sales at direct auctions and to the BoJ. The dip-buying by regional financial institutions caught our attention. Regional financial institutions bought a net JPY1.5trn JGBs. The regional banks rebuilt holdings in Oct-Dec after reducing the balance of holdings in Jul-Sep, with net purchases of JPY861.9bn long-term JGBs and JPY264.4bn intermediate JGBs. Buying was focused in the intermediate sector through to November, but the longterm sector was bought on weakness in December as yields rose. Details on 0

Cont’d on next page…

GLOBAL MARKET WRAP

INDEX Close 1D YTD %Chg %Chg

S&P 500 1838.70 -0.4 -0.5

NASDAQ 4197.58 -0.5 0.5

DOW 16458.56 0.3 -0.7

DJ STOXX 50 3165.66 0.4 1.8

FTSE 100 INDEX 6843.92 0.1 1.4

HANG SENG INDEX 23033.12 0.5 -1.2

MSCI Asia ex Japan 538.269 -0.3 -2.4

BRAZIL BOVESPA 48708.41 -1.0 -5.4

RTS-2 INDEX 1215.15 -0.2 -2.7

COMMODITY PRICES

COMMODITIES Close 1D YTD %Chg %Chg

West Texas 94.37 0.4 -4.1

Brent 108.39 1.0 -2.2

CRB 278.41 0.0 -0.6

Copper 332.25 -0.7 -2.2

Gold (Spot) 1249.18 -0.4 3.6

Alum. (LME) 1806.50 -0.8 0.3

Baltic Dry 1428.00 0.5 N.A.

FOREIGN EXCHANGE PRICES

FOREX (vs US$) Close 1D YTD %Chg %Chg

HK$ 7.76 0.0 0.0

EUR 1.35 -0.1 -1.5

JPY 104.68 -0.5 0.6

GBP 1.64 0.0 -0.8 Source: Bloomberg

DERIVATIVES

Current %-ile Value Rank

SPX 3M Mat ATM-Strike Imp Vol 12.11 7.6

SPX 3M Mat 90%-110% IV Skew 8.27 66.0

SPX 3m Mat Realized Vol 8.89 0.4

Source: Bloomberg

CREDIT

Credit Close 1D YTD %Chg %Chg

CDX.NA.IG 65.41 0.2 4.9

ITRX.Europe 71.50 0.7 1.8

CDX.NA.HY 107.90 0.0 -0.5

ITRAX.XOVER 279.83 0.4 -2.4

SOVX.WE 55.79 12.3 -12.3

21 January 2014

DB Today - Global/Macro


MACRO HIGHLIGHTS

US Economics – US Daily Economic Notes – Joseph LaVorgna The data docket this week is light ahead of the January 28-29 FOMC meeting. The main releases all come Thursday with initial jobless claims, existing home sales and the index of leading economic indicators. Jobless claims will be the primary focus as they correspond to the survey period for January payrolls. If the recent trend in claims continues, we expect a substantial recovery in the pace of hiring following the weather impacted disappointment in December payrolls (+74k). Jobless claims have fallen three out of the last four weeks following a significant back up in early December that was most likely due to the same weather that afflicted payrolls. Details on Page 11

KEY COMPANY RESEARCH

ASIA China Cement - Johnson Wan GD cement trip takeaways; reiterating Buy on CRC, raising TP to HKD7.65. We hosted a cement

trip to GD, post DB’s Access China conference. Our visit confirms the strong start to 2014 highlighted by cement companies at our conference. Due to good weather conditions in Jan, inventory levels are low and prices have been maintained for most producers compared to Dec 13. In South and East China, where we see more balanced supply-demand, there is a strong willingness among producers to keep prices steady, as they plan to maximize profits in those areas. Details on Page 12

Genting Hong Kong - Aun-Ling Chia Deep value and plenty of cash – what's next?. At a 37% discount to market SOTP, Genting Hong

Kong remains a deep value stock with nearly US$1.0bn gross cash after paring down its stake in NCLH. The Lim family raised its stake to 58.1%, or 75.9% including that held by Genting Malaysia. We see dividends, M&A and fleet rejuvenation as ways to deploy cash. We trim our TP to US$0.545/sh given our earnings cut but maintain Buy. Details on Page 13

Quantitative Strategy – Quantfucius - Khoi Le Binh

Quantifying markets. Even though investor sentiment appears to be low (but improving) across Asian markets, liquidity has returned, liquidity risk has normalized and investors have been pricing risk adequately. Since the opportunity set for stock pickers is at the highest, we believe that Asian equity investors should focus on stock selection. Details on Page 14

(Originally published on 17 January 2014)

EUROPE MTU - Benjamin Fidler

Q4 performance unlikely to generate much excitement. MTU will report FY13 results on 18 Feb. We expect little surprise around Q4 trading, with spares growth likely to have been flat YoY. All eyes will be on 2014 guidance, where although the main moving pieces have already been provided, no hard EBIT or FCF numbers have yet been given. The key issue for MTU remains returning to better earnings growth and improved FCF. With the shares trading in line with our E65 TP, we maintain our Hold rating. Details on Page 15

SAFRAN - Milene Kerner Aftermarket performance in Q4 and guidance will be the area of focus. Safran reports FY13 results on 20 February. As always the primary focus of results will be civil engine aftermarket growth, where we see potential for some upside surprise, driven by the strength in the civil engine aftermarket at the nine-month stage (+25.5%) and recent Q4 results from GE. In usual fashion, we expect the 2014 initial guidance to be conservative and it would not surprise us if this comes in below our current forecasts. With appealing valuation in the context of its near- and mid-term growth, we maintain our Buy. Details on Page 16

Thales SA - Milene Kerner Good EBIT growth expected for 2013 with confident outlook. Thales reports FY13 results on 19

February. Overall we expect good growth to emerge in 2013 with EBIT growth of 7.5% driven by the performance plan benefit. We expect management to be upbeat over prospects for 2014 led by E100m additional savings. This, together with a number of problem contracts which will reach completion in 2014 and better hedge rate, means 2014 EPS should be up low teens. Of key importance will be any comments over margin progress beyond 2014. Details on Page 17

Cont’d on next page…

21 January 2014



KEY COMPANY RESEARCH

EUROPE UCB - Richard Parkes

Early redemption of UCB's convertible bond is weighing on performance. UCB’s shares have fallen 5% since the beginning of 2014 (vs an average +5% for our EU pharma coverage). We believe this reflects anticipation of a decision to trigger early redemption of its €430m in convertible bonds. If fully converted this could lead to issue of 11.1m shares and continued weakness as some bondholders are likely to sell/short the equity. A similar situation for mid-cap peer Shire weighed on its shares in 4Q13 but we note these have rebounded by c.10% since the hedging period expired. We view weakness as an attractive entry point and reiterate our Buy rating and €61 TP. Details on Page 18

UK WATER - James Brand Announcement on key financial parameters should improve visibility. OFWAT will announce on

27 January its view on key financial parameters for the 2014 price review including the allowed return, financial incentives and the financial flexibility companies have when setting prices. We expect the headline allowed return to be quite tough and a negative shock can't be ruled out. However, it should allow visibility to start to improve and may mark the peak of uncertainty for the sector. We see United Utilities' (Buy, 800p TP) shares as the most compelling investment opportunity in the space. Details on Page 19

NORTH AMERICA Hilton Worldwide (HLT.N),USD22.25 Buy Price Target USD27

Initiating Coverage with a Buy Rating and $27 Price Target. While we anticipate many will clamor that the bull case for meaningful upside in HLT from current levels is the optionality from asset monetization, something we detail later in this report, we find: 1) the industry bull case, especially given HLT’s domestic owned exposure and leverage to accelerating ADR’s at current chain scale occupancy levels, also something we detail later, 2) its international unit pipeline growth, and 3) the de-leveraging and therefore differentiated aspect of the story, to be most appealing. As such, we are launching coverage with a Buy rating and $27 price target. Details on Page 20

21 January 2014



TODAY’S HEADLINES

Markets: Equities generally a touch weaker in Europe on the back of weaker financials, US market closed for holiday. European bond yields generally nudge lower. Asian bourses generally firmer Tuesday, including China as the PBoC injects liquidity ahead of LNY holiday, NZD lifted as Q4 headline CPI rises more than expected.

DEU: PPI rises 0.1%mom in December, down 0.5%yoy, slightly above mkt.

ITA: Industrial orders up 2.3%mom/3.0%yoy in November, above mkt.

BEL: Consumer confidence index up 1pt to -4 in January.

CHN: GDP rises 7.7% over the year in Q4, above mkt.

CHN: Industrial production rises 9.7%yoy in December, a tad below mkt.

CHN: Retail sales up 13.6%yoy in December, at mkt.

CHN: Fixed assets ex rural rises 19.6%yoy YTD in December, below mkt.

CHN: Business climate index down 2pts to 119.5 in Q4.

N ZL: CPI rises 0.1% qoq in Q1, above mkt, 10% trimmed mean rises 0.2% qoq

THE DAY AHEAD….

CAN: Manufacturing Sales (Nov), Wholesale Trade Sales (Nov)

EMU: ECB's Nowotny to speak, ZEW Survey (Jan)

GBR: CBI Business Survey (Jan)

DEU: ZEW Survey (Jan)

CHE: Money Supply M3 (Dec)

JPN: BoJ to hold two-day monetary policy meeting, Tokyo Condominium Sales (Dec),

Supermarket Sales (Dec)

NZL: CPI (Q4), Fonterra Globaldairytrade auction

Source: Excerpts from DB Daily published on 21stJanuary, 2014

21 January 2014



Forecast

G7 Quarterly GDP growth % qoq saar/annual: % yoy Q1 13 Q2 13 Q3 13 Q4 13F Q1 14F Q2 14F Q3 14F Q4 14F 2013F 2014F 2015F

US 1.1 2.5 4.1 4.0 3.1 3.2 3.5 3.7 2.0 3.5 3.8

Japan 4.5 3.6 1.1 1.1 2.5 -5.7 4.3 1.3 1.5 0.7 1.3

Euroland -0.9 1.3 0.5 0.8 1.0 1.3 1.3 1.5 -0.4 1.0 1.4

Germany 0.0 2.9 1.3 1.5 1.5 1.5 1.5 1.6 0.5 1.5 1.4

France -0.2 2.3 -0.5 0.5 0.8 1.1 1.6 1.6 0.2 0.9 1.6

Italy -2.3 -1.2 -0.1 0.4 0.8 1.4 1.1 0.7 -1.8 0.6 0.7

UK 2.0 3.2 3.1 3.4 2.7 2.3 2.0 2.0 1.5 2.7 2.0

Canada 2.3 1.6 2.7 2.1 3.9 2.4 3.1 2.5 1.8 2.9 2.8

aG7 1.3 2.4 2.6 2.6 2.5 1.2 3.0 2.6 1.4 2.5 2.7a) Euroland forecasts as at the last forecast round on 11/12/13. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b) GDP figures refer to working day adjusted data, except Germany. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions. Sources: National authorities, Deutsche Bank Research

Commodities USD Q1 13 Q2 13 Q3 13 Q4 13 2013 2014 2015 2016

WTI (bbl) 94.36 94.17 106.07 105.00 99.88 98.75 95.00 85.00

Brent (bbl) 112.64 103.35 109.74 110.00 109.00 106.25 105.00 100.00

US Natural Gas (mmBtu) 3.48 4.02 3.56 4.00 3.76 4.25 4.50 4.75

Gold 1632 1417 1330 1350 1432 1338 1325 1400

Silver 30 23 21 22 24 23 24 24

Aluminium

USc/lb 92.6 84.9 83.2 79.4 85.0 81.7 88.5 99.8

USD/t 2041 1871 1829 1750 1874 1800 1950 2200

Copper

USc/lb 361.1 326.2 321.0 322.1 332.6 319.9 308.5 331.2

USD/t 7958 7190 7087 7100 7331 7050 6800 7300Source: Deutsche Bank, Figures are period averages

CENTRAL BANK POLICY (%) Current 2014 2015 2016

US 0 - 0.25 0 - 0.25 1.75 3.75

Eurozone 0.25 0.25 0.75 1.75

Japan 0-0.1 0-0.1 0-0.1 0-0.1

UK 0.50 0.50 0.75 1.75

China 3.00 3.25 3.25 3.25

India 7.75 7.00 7.50 7.5* House View published on 09 January 2014

21 January 2014



FORECAST

FOREIGN EXCHANGE RATES Countries Spot Rate 3M 6M 12M

US DB US$ Index 70 71 72 76

(Fwd. Rates) - - - -

Euro EUR/USD 1.38 1.35 1.32 1.25

(Fwd. Rates) - 1.38 1.38 1.38

Japan USD/JPY 103 106 109 115

(Fwd. Rates) - 103 103 103

UK GBP/USD 1.64 1.63 1.61 1.56

(Fwd. Rates) - 1.64 1.64 1.63

Switzerland USD/CHF 0.89 0.91 0.95 1.02

(Fwd. Rates) - 0.89 0.89 0.88

China USD/CNY 6.07 6.10 6.05 6.00

(Fwd. Rates)

- 6.08 6.07 6.07

Source: Datastream, Reuters, Bloomberg Finance LP, Deutsche Bank Research

GOVERNMENT RATES Current Q4-13 Q1-14 Q3-14

US 10Y yield 2.8 2.50 2.75 3.00

EUR 10Y yield 2.1 2.20 2.30 2.50Source: Deutsche Bank

INDEX FORECASTS Current 2013

DJ Stoxx 600 310 315

FTSE 100 6554 6575

Dax 8623 8400

MSCI HK 13000 -

S&P 500 1782 NASource: Deutsche Bank

UPCOMING CONFERENCES/TRIPS

Date Conferences January 22 – 24, 2014 16th Annual dbAccess Retail Store Tour @ Berkshire January 22 – 24, 2014 dbAccess CEEMEA Conference @ London February 5 – 6, 2014 dbAccess MENA Conference @ Dubai

March 4, 2014 Gaming One-on-One Corporate Day @ Boston March 5, 2014 Consumer Conference @ Boston March 10 – 12, 2014 22nd Annual Media, Internet and Telecom Conference @ Palm Beach, FL April 2 – 3, 2014 dbAccess Pan European Small & Mid Cap 14th Annual Conference @ London May 7 – 9, 2014 dbAccess 4th Annual Chile Conference @ London May 12 – 13, 2014 Clean Tech, Utilities and Power Conference @ New York

May 15, 2014 dbAccess Italy Conference @ London Source: Deutsche Bank For more details log on to www.conferences.db.com

TODAY’s CONFERENCE CALL

Date & Time (ET) Description Dial-in Details

Tuesday, January 21, 2014 04:15 EST

Research Presentation -

21 January 2014



China Economics China: Q4 GDP growth slightly higher than consensus

Q4 GDP growth came in at 7.7%yoy, marginally higher than Bloomberg consensus forecast of 7.6% although slightly lower than our estimate of 7.8%. For 2013 as a whole, China's GDP growth was 7.7%, above the government's target of 7.5%. In its press release, the National Bureau of Statistics stated that "national economy performance shows good momentum".

We maintain our view that economic growth will likely accelerate in 2014 on stronger external demand (according to our estimate, China's qoq saar export growth has already accelerated to 20% in Q4 last year), benefits from deregulation, and improving fiscal performance in the second half of 2013. For Q1 2014, yoy GDP growth could be further boosted by a favorable base effect (as Q1 2013's qoq growth was 0.4ppts weaker than the annual average) to a level above 8%.

As for other data releases by the NBS today, December retail sales growth was in line with consensus (13.6%yoy) while IP and nominal FAI growth were marginally weaker than expectations.

Specifically, IP growth decelerated to 9.7%yoy in December from 10.0%yoy in November, slightly lower than market consensus of 9.8%yoy. At the sector level, power production growth normalized to 8.3%yoy in December from 6.8%yoy in November, suggesting that demand for heavy manufacturing has been improving. For example, acceleration of production growth was seen in sectors such as pig iron (by 5.3ppts), crude steel (2.3ppts), cement (0.8ppts) and crude oil processing (0.8ppts) compared with those in November. Nominal FAI growth slowed by 0.3ppts to 19.9%yoy in Jan-Dec from Jan-Nov, but real FAI growth (stripping out inflation) remained steady. FAI in sectors like railway equipment manufacturing, railway transportation, education, and social services witnessed accelerating growth in 2014, indicating that investment is shifting towards sectors with under-capacity. Funds available for real estate developers grew 26.5% in 2013, accelerating from 12.7% in 2012, indicating a more favorable financing environment for real estate investment. This is leading indicator should suggest a positive momentum for real estate investment growth in 2014. Retail sales growth was 13.6%yoy in December, vs. 13.7% in November and consensus of 13.6%. By product, the sales of furniture (20.1%yoy), communication appliances (21.8%yoy) and construction materials (24.9%) showed stronger growth in December.

In the past days, many investors were concerned about the restructuring of a trust product issued by China Credit Trust and its potential ripple effect on the financial system. We believe that its spillover effect will be very limited but its long term implication is very positive, as permitting some WPM defaults is an important step towards reducing systemic risks. It is because these defaults, although very small in terms of scale and impact on the real economy, will significantly enhance the ability of the market to price risks (i.e. increasing the risk premiums for risky products), reduce the incentive for financial institutions (including banks) to sell risky products, and contain the ability of risky issuers to borrow excessively from the market, and allocate risks to investors with the right risk appetite.

Jun Ma (+852) 2203 8308 [email protected]

21 January 2014



Early Morning Reid Macro Strategy

Well done for surviving 'Blue Monday' yesterday - a day which many say is the most depressing day of the year. Apparently by now New Year's resolutions are failing, with the cold reality of what lies ahead truly setting in against a soundtrack of still dark mornings and nights. Nice! For me it’s compounded by having played only one round of golf in the last month due to first skiing and now flooding. It’s also not helped by half the radiators in our house being turned off at the moment and having no stairs due to building work. So with that I'm packing my bags and heading off to Asia and Australia for 2 weeks seeing clients. Hopefully by the time I'm back I can put the Arc back in the garage and I can climb to higher ground on a beautiful new staircase. As for the EMR, although one would think that this would be an easier time zone in which to contribute, the reality is that I have a full schedule of meetings so I'll be relying on Anthony even more than ever. Indeed Anthony will take over this morning's EMR after this para to allow me to prepare for the flight etc. My first stop is Japan where I haven't been since Abenomics started so I'm intrigued to see how things have changed. I hope the love of Karaoke remains! Anyway I'll leave you with Anthony for now.

Though European markets felt fairly directionless yesterday, there has been plenty of debate on China’s growth numbers after the release of Q4 GDP data yesterday. The prevailing sentiment is a bit firmer this morning thanks to the Peoples’ Bank of China’s actions today and yesterday to shore up liquidity into the domestic banking system. According to Reuters, the PBoC has conducted a total of CNY180bn in 21- day reverse repos and another CNY75bn in 7-day reverse repos to provide short term funds to banks today. This comes after the PBoC announced that it had provided liquidity to larger banks through its Standing Lending Facility yesterday, but the total amount provided was not disclosed. In addition to that, the PBoC is expanding the facility to small-medium sized banks in 10 regions for a trial period of 14 days (concluding after Lunar New Year). As part of the trial, smaller banks can seek funding before the month-end Lunar New Year holiday via the SLF when the overnight, 7-day and 14-day repo rate exceed 5%, 7% and 8% respectively. Approximately US$20bn has been set aside for the trial.

The PBoC’s actions have provided a boost to Asian equities this morning. S&P500 futures are up 0.4% and Asian bourses are up between 0.5 and 1 percent. China’s 14-day repo rate has declined by more than 300bp and this has helped Chinese Ashares stem recent losses (Shanghai Comp +0.7%). Nonetheless, the Shanghai Composite (-5.2% YTD) remains one of the worst performing equity indices in the Asia region (and indeed the world), exceeding even the poor YTD performance of Brazil’s Bovespa (-4.7%) in USD terms. Outside of equities there has been a flow of investors looking to buy credit protection via the Australian sovereign 5yr CDS and China sovereign 5yr CDS, which have widened by as much as 4-5bp apiece in the last 24 hours, but the PBoC’s injection has provided some relief today. In Japan, a 0.5% move higher in USDJPY is underpinning the bid for Japanese equities (Nikkei +1.4%) though flows remain on the subdued side.

Jim Reid (+44) 20 754-72943 [email protected]

21 January 2014



FX Daily If the BoJ takes no additional easing

Market crossroads would be the yen to depreciate when BoJ does not ease further, strengthen when it does.

The BoJ is holding a Monetary Policy Meeting on 21-22nd January. Many market participants expect the Bank to maintain its policy at this meeting and move to ease further in Apr-Jun. The view is that the BoJ is likely to ease further to stimulate the economy following the consumption tax hike in April or to further heighten inflation expectations as it reviews the year of QQE.

The market seems to see that, factoring in additional easing by the BoJ, the 10y JGB yield can stay low at 0.6% and overseas investors sold the yen and bought Japanese stocks. They simply conclude that the yen could appreciate, stocks fall, and yields rise due to an unwinding of such positions if the BoJ does not ease further.

Will this really happen? The BoJ has been conducting extreme easing labeled "a new dimension of easing". The Bank would likely save further easing for unexpected future developments when the US economy (especially employment), which is the key driver of yen depreciation, continues to firm and the USD/JPY rises in 105-110.

We see no issue with the basic view that simultaneous progress of the Fed's QE3 taper and the BoJ's QQE would bring yen depreciation. However, smooth progress in tapering QE in the US assumes a firm US economy. This would naturally encourage the yen to weaken and stocks to rise, likely diminishing the need for the BoJ to ease further.

Conversely, the USD/JPY and stocks would likely fall and the BoJ would be forced to ease further if the US economy deteriorates. However, even if the Bank eases further, the yen will not depreciate against the dollar and Japanese stocks will inevitably correct if the US economy is weak.

Some position adjustments may be seen over the coming months depending on the degree to which additional easing by the BoJ is factored in. However, further easing by the BoJ is in itself largely reactive to US-led exchange rates and share prices. We see the US economy as unequivocally more important for the yen than marginal changes of BoJ policy under the zero interest rate condition.

Taisuke Tanaka (+81) 3 5156-6714 [email protected]

21 January 2014



Japan FI Morning Memo Investor demand for JGBs still strong

Investor demand for JGBs still strong

Trading activity by investor type in December suggests that regional financial institutions are rebuilding JGB holdings. The city banks sold close to a net JPY2trn JGBs, the ninth straight month of net sales, but we cannot confirm positions because of sales at direct auctions and to the BoJ. The dip-buying by regional financial institutions caught our attention. Regional financial institutions bought a net JPY1.5trn JGBs. The regional banks rebuilt holdings in Oct-Dec after reducing the balance of holdings in Jul-Sep, with net purchases of JPY861.9bn long-term JGBs and JPY264.4bn intermediate JGBs. Buying was focused in the intermediate sector through to November, but the longterm sector was bought on weakness in December as yields rose. Trust banks and insurers bought a net JPY1.02trn superlong JGBs, balancing a slowdown in Oct-Nov with purchases in December.

Investor trading activity shows that regional financial institutions and absolute buyers such as life insurers made purchases in December when yields rose modestly. This indicates to us that potential demand for JGBs remains strong. We think evidence that deflation has been overcome is needed for domestic investors to raise their dip-buying target level in earnest or decide to shift funds from JGBs to other assets. Investors are likely unwilling to make plans to build JGB risk given the government and the BoJ's commitment to inflation. However, even if the balance of holdings is reduced, we see no other assets that funds can be shifted into. We expect investors to become increasingly impatient if yields do not look likely to rise even by the start of FY14.

Makoto Yamashita (+81) 3 5156-6622 [email protected]

21 January 2014



US Daily Economic Notes

A light smattering of data ahead of the January FOMC meeting

Commentary for Today: The data docket this week is light ahead of the January 28-29 FOMC meeting. The main releases all come Thursday with initial jobless claims, existing home sales and the index of leading economic indicators. Jobless claims will be the primary focus as they correspond to the survey period for January payrolls. If the recent trend in claims continues, we expect a substantial recovery in the pace of hiring following the weather impacted disappointment in December payrolls (+74k). Jobless claims have fallen three out of the last four weeks following a significant back up in early December that was most likely due to the same weather that afflicted payrolls. As we have repeatedly noted, the recent volatility in claims is not unusual around this time of the year. The Labor Department acknowledged as much in early December when claims jumped to 380k, which was a meaningful deviation from the prior readings. Since then, claims have steadily declined to 326k as of the latest data point for the week of January 11. Assuming claims remain at their current level this week, the four-week moving average will decline to 331k—approximately 8k below where it was for the November survey period. Recall that the November payroll gain was an initially reported +203k and was subsequently revised up to +241k. Thus, barring any meaningful aberration in claims this week, we would expect a solid +200k nonfarm payroll gain in January. Additionally, given the weather impact on payrolls last month, which we estimate depressed hiring by approximately +100k, we anticipate at least a +40k upward revision to the December data.

Aside from December nonfarm payrolls, the bulk of the economic data over the past month have reinforced our view that growth remains well above trend; this should be reflected in the December LEI (+0.3% forecast vs. +0.8% previously). Thus far in the current quarter, consumer confidence remains stable, the regional manufacturing surveys point toward steady factory sector output, and the private sector consumption data showed signs of acceleration in Q4. In fact, our preferred measure of underlying domestic demand—final sales to private domestic purchasers—is expected to rise over 4.0% in Q4—the best performance since Q1 2012. At the same time, the fiscal drag from tax increases and spending cuts will be significantly less this year as state and local spending should turn positive. Remember, too, that household net wealth has likely increased by about $8 trillion over the past year which should be highly supportive of further consumption gains.

Against this backdrop, we anticipate the housing sector to continue to improve. To be sure, December existing home sales (4.95M vs. 4.9M) could see a minor weather impact similar to last week’s housing starts and permits data. Thus, we would not get overly concerned if the transactions data disappoint, especially given that homebuilder confidence remains elevated and rising home prices should buoy commercial bank lending for mortgages. In fact, household mortgage debt in Q3 increased for the first time in over five years. On the margin, rising mortgage liabilities should ease lingering concerns among some dovish policymakers that tapering of MBS purchases will restrain the housing recovery.

Joseph LaVorgna (+1) 212 250-7329 [email protected]

21 January 2014



China Cement Cement trip takeaways: a banner year for South China

GD cement trip takeaways; reiterating Buy on CRC, raising TP to HKD7.65 We hosted a cement trip to GD, post DB’s Access China conference. Our visit confirms the strong start to 2014 highlighted by cement companies at our conference. Due to good weather conditions in Jan, inventory levels are low and prices have been maintained for most producers compared to Dec 13. In South and East China, where we see more balanced supply-demand, there is a strong willingness among producers to keep prices steady, as they plan to maximize profits in those areas. We believe the seasonal decline in ASPs will be less during CNY, allowing producers to enter the 2Q peak with a high base. We see upside risks to earnings for most companies under our coverage.

1Q14 production halts for Guangdong support higher pricing for 2014 Leading producers are heading into CNY with low inventory levels, therefore the pressure to destock during the weak season is minimized. Both Conch and CRC have inventories of only 40% and 30% of storage capacity respectively, some c.20ppts lower than last year. In GD, Conch is proposing 15 days of production halts during CNY in 2014, showing its determination to keep prices stable. Conch has clearly opted for a different strategy in 2014 for regions where supply-demand is better, prioritizing profitability over volume. Therefore, the steep price declines for GD seen in 1H over the last two years should not be repeated this year. We believe pricing in 2014 will be similar to what we saw in 2009-2011, with prices only seeing a mild decline in 1Q14. We see significant upside risks to consensus earnings and have raised CRC’s FY14/15e earnings by 14.6% and 15.9% respectively.

Further declines in coal prices in 1Q14 to boost margins for cement producers Coal traders believe the 4Q13 rebound in coal prices was not supported by real demand, instead it was because coal producers wanted to boost the price for contract negotiations with power companies by year-end. As a result, Shenhua has already announced two price cuts greater than RMB50/t in 2014, and a rebound in prices is not in sight till at least 2Q14. Further, coal traders believe the coal inventories in the QHD port may spike to 8mt from 6mt currently. Demand continues to be weak with less than 40 ships at the QHD port vs. 160 ships during its peak in 2012-13. While we expect cement prices to decline in 1Q14, this would be partially offset by lower coal prices too.

Preferred regions for 2014: South and East China In 2014, we believe South and East China are the two regions where we will see a structural improvement in supply-demand leading to a continuous uptrend in profitability. However, regions such as Guizhou, Yunnan and Gansu should come under pressure in 2014, as Conch will be rolling out new lines and Conch intends to undertake M&A there. For South China, we expect c.4% gross supply growth in 2014 excluding removals, while demand will likely grow c.10% (c.14% in 2013), as demand from infrastructure projects continues to be strong. We believe a shortage of cement may appear if supply is not relaxed by 2015. We value CRC based on 10.5x FY14e PER, equivalent to its 5- year mid-cycle average. We believe this is justified, given the solid earnings growth profile of the company where we see an earnings CAGR of 27.0% for FY14-16. Risks: lower-than-expected demand due to tight credit, higher-thanexpected coal prices.

Johnson Wan (+852) 2203 6163 [email protected]

21 January 2014



Genting Hong Kong Buy Reuters: GENH.SI Exchange: HSI Ticker:GENH

Lower earnings and price target; still a value play

Price (USD) 0.42Price target (USD) 0.54

52-week range (USD) 0.52 - 0.38

Market cap (USDm) 3,334

Shares outstanding (m) 7,892.7

Net debt/equity (%) -10.4

Book value/share (USD) 0.38

Price/book (x) 1.1

FYE 12/31 2012A 2013E 2014ESales (USDm) 520 555 650Net Profit (USDm)

198.4 751.4 261.8

DB EPS (USD) 0.02 0.01 0.03

PER (x) 14.8 43.6 13.1

Yield (net) (%) 0.0 0.0 0.0

Deep value and plenty of cash – what's next? At a 37% discount to market SOTP, Genting Hong Kong remains a deep value stock with nearly US$1.0bn gross cash after paring down its stake in NCLH. The Lim family raised its stake to 58.1%, or 75.9% including that held by Genting Malaysia. We see dividends, M&A and fleet rejuvenation as ways to deploy cash. We trim our TP to US$0.545/sh given our earnings cut but maintain Buy.

Cash up significantly; Lim family raises stake GENHK raked in close to US$738m in 2013 by paring down its stake in NCLH to 31.4% (from 50%). Given its projected near US$1.0bn gross cash, GENHK has various options including, but not limited to, (1) a fleet renewal program given the average fleet age of 21 years; (2) M&A; and/or (3) pay a dividend. It is interesting to note that major shareholder Tan Sri KT Lim & Family has raised its stake to 58.1%, from 55.6% previously (ex GENM’s 17.8% stake).

Asian cruise earnings affected by lower holds; earnings trimmed We understand from our recent meeting with GENHK that 2013 gaming operations in Asian cruise remained robust but profitability was affected by lower VIP holds and a tough comparison given above-theoretical hold in FY12. Coupled with lower associate contributions following the NCLH placements, we have lowered our FY13-15E core NP by 54%, 22% and 18% respectively. Lower gaming accounted for most of the FY13E cut while NCLH made up 40- 50% of the reduction in FY14-15E earnings. RWM, which also suffered low hold in 2013, may see a disappointing FY13 given the typhoon effect in Q4.

Trades at 37% discount to market SOTP of US$0.66/share Following our cut in Asian cruise earnings (c.11% SOTP), we lower our DB SOTP to US$0.64, from US$0.67. Our SOTP values NCLH at DB TP of US$34, Travellers on 11.7x FY14E EV/EBITDA (or DCF), Asian cruise on 5x EV/EBITDA. We peg our 12-TP at a 15% discount to DB SOTP, which implies a fully diluted PER of 17.2x (vs a historical average of 15.3x). Risks: economic downturn in Asia or globally; slower-than-projected Philippines gaming market growth.

Aun-Ling Chia (+60) 3 2053 6768 [email protected]

21 January 2014



Quantitative Strategy - Quantfucius Welcoming the Year of the Horse

Galloping away from macro-uncertainty to stock selection We expect stock selection to (finally) matter this year

Quantifying markets Even though investor sentiment appears to be low (but improving) across Asian markets, liquidity has returned, liquidity risk has normalized and investors have been pricing risk adequately. Since the opportunity set for stock pickers is at the highest, we believe that Asian equity investors should focus on stock selection.

What’s cheap, what’s expensive? According to our value decomposition model, country valuation premia have compressed. In Japan, investors are now clearly favoring stocks with higher ROEs supported by higher margin and turnover, whilst “dumping” stocks with higher dividend payout. In Asia ex-Japan, tactically, there could be opportunities in Korean stocks and stocks with higher analyst revisions.

Country calls and stock selection Our country recommendation model currently favors the US, China, but also the Philippines and Japan, whilst shying away from Indonesia, the only Asia country in its “short” basket. We still advocate a balanced approach to stock selection. Screens from our multi-factor, technicals composite and NLASR models are available in the last section of the report.

(Originally published on 17 January 2014)

Khoi Le Binh (+852) 2203 6990 [email protected]

21 January 2014



MTU Hold Reuters: MTXGn.DE Exchange: GER Ticker:MTXGn

FY13 results preview

Price (EUR) 67.60Price target 65.00

52-week range 79.25 - 65.76

Market cap (EUR) 3,427.3

Shares outstanding (m) 50.7

Volume (20 Jan 2014) 44,022

DJ (.STOXXE) 320.93

FYE 12/31 2012A 2013E 2014EFY EPS (EUR) 4.01 4.07 4.09Revenue (EURm)

3,379 3,732 3,898

DB PBT (EURm) 299 303 305

P/E (x) 15.1 16.6 16.5Stated PBT (EURm)

272 289 304

DPS (EUR) 1.35 1.38 1.41

Q4 performance unlikely to generate much excitement MTU will report FY13 results on 18 Feb. We expect little surprise around Q4 trading, with spares growth likely to have been flat YoY. All eyes will be on 2014 guidance, where although the main moving pieces have already been provided, no hard EBIT or FCF numbers have yet been given. The key issue for MTU remains returning to better earnings growth and improved FCF. With the shares trading in line with our E65 TP, we maintain our Hold rating.

Q4 performance unlikely to generate much surprise We forecast Q4 EBIT of E109m, up 13% YoY, with a broadly similar pace of growth expected at both OEM and MRO divisions. We expect OEM spares growth to be flat organically in Q4 YoY, (reported spares +5% post IAE upshare). V2500 spares should have continued to grow c.15%, albeit PW2000 is likely to be still well down (led by PW2000 military spares at c. -50%). Despite the still sluggish overall rate of spares growth in Q4, we expect OEM margins to see a material sequential improvement in Q4 (up 150bps to 13.5%) due to lower OE engine sales than Q3. Following the good FCF in Q3 we expect minimal FCF in Q4.

2014 guidance will be key focus Although MTU already provided the key moving pieces behind 2014 guidance at its Nov 2013 Investor Day, FY13 results should see the company commit to a specific guidance range for FY14 EBIT and FCF. We expect this will provide little excitement, with the top end of any EBIT guidance range unlikely to be above our current FY14 E384m forecast. FCF for FY14 is likely to be minimal in our view and we remain content with our E20m FCF forecast.

Hold maintained TP E65 Although we see the longer-term growth potential at MTU as V2500 aftermarket growth continues and as over time new OE engine programs transition into their richer aftermarket phase (GEnx, GP7000 and longer-term the GTF), the near-term pace of EBIT growth will continue to be held back by rising OE deliveries and the drag from the moderate decline we see ongoing in spares for older engine programs. Our SoP derived TP remains E65 (at a 1.35 $:E spot rate). Key risks on both upside and downside – spares growth, FX rate, new program execution.

Benjamin Fidler (+44) 20 754-56727 [email protected]

21 January 2014



SAFRAN Buy Reuters: SAF.PA Exchange: PAR Ticker:SAF



52-week range 53.61 - 33.25



Volume (20 Jan 2014) 395,171

DJ (.STOXXE) 320.93


13,560 14,820 15,818

DB PBT (EURm) 892 1,107 1,453


1,319 1,679 2,033

DPS (EUR) 0.96 1.27 1.34

Aftermarket performance in Q4 and guidance will be the area of focus Safran reports FY13 results on 20 February. As always the primary focus of results will be civil engine aftermarket growth, where we see potential for some upside surprise, driven by the strength in the civil engine aftermarket at the nine-month stage (+25.5%) and recent Q4 results from GE. In usual fashion, we expect the 2014 initial guidance to be conservative and it would not surprise us if this comes in below our current forecasts. With appealing valuation in the context of its near- and mid-term growth, we maintain our Buy.

Safran likely to beat management guidance in 2013 Overall, we expect Safran to report E1.86bn (guidance: E1.77bn/consensus: E1.79bn). Although at the nine-month stage, management alluded to some downside potential over FCF from uncertainty on collecting cash from the French MoD, we believe Safran will deliver in line with its FCF conversion guidance of around 40% of EBIT. After interim dividend payment and the acquisition of Rolls-Royce’s 50% share in the RTM322 helicopter engine programme, we expect Safran to end 2013 with net debt of E1.1bn.

All eyes on the civil engine aftermarket growth for Q4 and 2014 guidance We forecast the civil engine aftermarket to be up 14.4% in FY13, with a forecast of low double-digit decline in Q4 (around minus 12-13%) due to the high comp base. Based on the strong commercial aerospace spares growth reported by GE, we see more upside than downside surprise risk to our Q4 aftermarket growth forecast. Should the civil engine aftermarket turn out to be zero instead of low teens decline, this could imply potentially 3.5% upgrade to our forecast which are some 5.5% ahead of guidance. It will be interesting to see if this emerges. The market will also be looking closely at management’s confidence for civil engine aftermarket growth for 2014 especially over ongoing strong growth in CFM56 second generation engine (which represents an estimated 43% of civil engine aftermarket revenue) and GE90 (an estimated 12% of civil engine aftermarket revenue).

Safran offers appeals of CFM56 and GE90 spares growth; Buy, E55 target price Fundamentals for Safran’s aftermarket activities remain robust, driven by fleet maturation in the sizeable 737 and A320 narrowbody fleet (powered by CFM) and the successful B777 widebody fleet (powered by GE90). This should allow Safran to materially outgrow the market again in 2014: we expect Safran’s civil engine aftermarket to grow organically by c.12% versus 5-7% for the European commercial aftermarket stocks. These should continue to drive further progress in the shares and we maintain our Buy rating and SOTP/through-cycle EPS-based target price of E55. Key risks: USD weakening; a weaker-thanexpected aftermarket recovery; overpayment for larger acquisitions.

Milene Kerner (+33) 1 4495-6585 [email protected]

21 January 2014



Thales SA Buy Reuters: TCFP.PA Exchange: PAR Ticker:TCFP



52-week range 48.95 - 26.52



Volume (20 Jan 2014) 160,250

DJ (.STOXXE) 320.93


14,158 14,155 14,215

DB PBT (EURm) 865 955 1,115


606 747 900

DPS (EUR) 0.88 0.97 1.12

Good EBIT growth expected for 2013 with confident outlook Thales reports FY13 results on 19 February. Overall we expect good growth to emerge in 2013 with EBIT growth of 7.5% driven by the performance plan benefit. We expect management to be upbeat over prospects for 2014 led by E100m additional savings. This, together with a number of problem contracts which will reach completion in 2014 and better hedge rate, means 2014 EPS should be up low teens. Of key importance will be any comments over margin progress beyond 2014. Continuing improvement in Thales profitability remains the key underpin to our ongoing positive stance on the stock and for this reason we maintain our Buy rating and E52 target price.

FY13 results expectations Despite the 0.5% organic revenue decline expected at Defence and Security, good growth at Aerospace and DCNS should see overall group revenue moderately up organically (our est. +2.2% to E14.16bn). Good progress on cost reduction should see margins rise 50bps in the year with EBIT rising 7.5% YoY to E996m (consensus E1bn). We expect 2013 will likely see Thales beat its guidance in terms of cashflow. Our FCF of E528m is well ahead of management guidance (guidance “<E400m”), although, following the strong order intake in Q4 and bearing in mind that in each of the past three years Thales has beaten its FCF guidance, we believe the risk on FCF should be on the upside.

Outlook comments should highlight ongoing growth can be delivered We have confidence that Thales management will confirm E100m savings to be delivered in 2014. Reflecting this, we expect Thales management to be reasonably optimistic over outlook with management likely to target ongoing EBITA growth (10% to 15%) despite defence top-line pressures. Consistent with recent communication from the company, we expect the tone to be optimistic over top-line prospect in emerging countries and to flag the scope for further cost savings beyond 2014. However we do not expect management to be more specific on 2015-17 drivers, which will be discussed for the first time at the 10 April investor day.

Appealing valuation and positive catalyst in April – Buy, E52 target price Little credit is still given to Thales within current valuation over its ability to reach 8% margin in 2014 and sustain or grow margins beyond 2014. Relative valuation is appealing with the shares trading on a 2015E EV/EBIT 7.2x while offering a 9% FCF yield. We retain our SOTP-derived E52 target price and maintain our Buy. Key downside risk: a greater-than-expected cut to defence budgets and restructuring plan execution failure.

Milene Kerner (+33) 1 4495-6585 [email protected]

21 January 2014



UCB Buy Reuters: UCB.BR Exchange: BRU Ticker:UCB

Weakness on early bond redemption represents entry opportunity

Price (EUR) 51.32Price target (EUR) 61.00

52-week range (EUR) 54.93 - 38.45

Market cap (EUR)(m) 9,201.7

Shares outstanding (m) 179

DJ (.STOXXE) 320.9

FYE 12/31 2012A 2013E 2014ERevenue (EUR) 3,462 3,407 3,601

DB PBT (EUR) 242 280 417Stated PBT (EUR)

242 280 417

DB EPS (EUR) 2.13 1.94 2.26

DPS (EUR) 1.02 1.07 1.12

P/E (DB EPS) (x) 18.0 26.5 22.7

Early redemption of UCB's convertible bond is weighing on performance UCB’s shares have fallen 5% since the beginning of 2014 (vs an average +5% for our EU pharma coverage). We believe this reflects anticipation of a decision to trigger early redemption of its €430m in convertible bonds. If fully converted this could lead to issue of 11.1m shares and continued weakness as some bondholders are likely to sell/short the equity. A similar situation for mid-cap peer Shire weighed on its shares in 4Q13 but we note these have rebounded by c.10% since the hedging period expired. We view weakness as an attractive entry point and reiterate our Buy rating and €61 TP.

Reducing Core EPS estimates by 2-3%; maintain DCF based TP of €61/share Given the shares current premium to the bonds conversion price of €38.7, we expect the majority of bondholders to opt for conversion. As a result, we have reduced our 2014E-2017E Core EPS estimates by 2-3% based on a 6% dilution in share count, offset by reduced interest costs of c.€20m/annum. We expect UCB to further lower its cost of debt and deleverage its balance sheet over 2014-2017 helped by our expectations for a considerable improvement in operating cash-flow generation.

2014 outlook should reassure on growth prospects Our forecasts assume that a 27% yoy growth in CVN sales along with a declining drag from Keppra generic erosion help drive 6% yoy revenue growth in 2014. With operating costs likely to be broadly flat, we expect a 139bp EBITDA margin improvement and 17% growth in Core EPS. While UCB may guide conservatively, we expect new label expansions gained for Cimzia in 2013 and an expected US approval of Vimpat for monotherapy epilepsy (mid- 14), along with a recent strong generic Concerta launch to give management sufficient comfort to guide to >10% Core EPS growth.

20% ‘13E-17E EPS CAGR and pipeline optionality justifies upside; risks Our DCF based price target of €61/share implies the shares should trade at 22x 2015E Core EPS and is essentially unchanged (WACC 8.6%; beta 1.1; ERP 5.5%; TGR 2%). We see this as justified based on above peer group growth (2013E-17E EPS CAGR 20%) and expect it to be achieved as investors gain comfort on CVN growth and begin to anticipate potential upside from pipeline data due in late 2014 and through 2015 (worth an additional €14/share to NPV in a best case). Risks relate to commercial execution on CVN, pipeline failure, competition for Cimzia and generic challenges to Vimpat patents.

Richard Parkes (+44) 20 754-50470 [email protected]

21 January 2014



UK Water Returns visibility approaching

Companies Mentioned

United Utilities (UU.L),GBP690.00 Buy Price Target GBP800.00

Pennon Group (PNN.L),GBP687.50 Hold Price Target GBP650.00

Severn Trent (SVT.L),GBP1,651.00 Hold Price Target GBP1,550.00

Announcement on key financial parameters should improve visibility OFWAT will announce on 27 January its view on key financial parameters for the 2014 price review including the allowed return, financial incentives and the financial flexibility companies have when setting prices. We expect the headline allowed return to be quite tough and a negative shock can't be ruled out. However, it should allow visibility to start to improve and may mark the peak of uncertainty for the sector. We see United Utilities' (Buy, 800p TP) shares as the most compelling investment opportunity in the space.

Allowed return cut should be manageable for listed water stocks In our view a credible outcome for the allowed vanilla return ranges from 3.7% to 4.1% real, with the difference between a positive and negative outcome worth c.10% on average equity values. We forecast a 120bp cut to 3.9%; a worse outcome than this is likely to be seen as a disappointment by the market. Although we model a significant cut in allowed returns we believe that the listed water stocks will offer a reasonable investment proposition. Based on our projections we think an investment in United Utilities’ shares should allow for a double digit return at the current share price, with high single digit returns for investors in Pennon and Severn Trent, before factoring in any operating outperformance.

Several levers to pull for dividend sustainability Although it is too early in the review process to rule out dividend cuts: Pennon’s dividend looks the most secure; United Utilities is not overdistributing in our view; and although Severn Trent’s dividend looks more stretched, the potential for ‘fast money’ (more cash up front), outperformance, hybrids or scrip dividends provide several options for management. If companies can avoid dividend cuts, RPI linked dividend yields look fairly attractive. United Utilities should end the 2010-15 regulatory period with the highest yield (5.7%) followed by Severn Trent (5.3%) and Pennon (4.9%).

No change to price targets or ratings – United Utilities is still our top pick We value the sector based on a 15% premium to RAB, determined via a DCF, with a number of company specific adjustments. We assume a 120bp cut in allowed returns at the 2014 review and do not incorporate outperformance into our forecasts or valuations. United Utilities (Buy, 800p TP), trades on a 7% premium to RAB and offers standout value, while Pennon (Hold, 650p TP) and Severn Trent (Hold, 1550p TP) trade on 18% and 19% premium respectively. Key risks relate to regulation; bond yields & inflation; and the potential for renewed bid interest in the sector as regulatory uncertainty starts to clear.

James Brand (+44) 20 754-74705 [email protected]

21 January 2014



Hilton Worldwide Buy Reuters: HLT.N Exchange: NYS Ticker:HLT

Initiate with Buy, tgt $27. Owned Assets, Industry Tailwinds, & Pipeline;

Price (USD) 22.25Price target 27.00

52-week range 22.28 - 21.50

Market Cap (USD) 21,907.7


Volume (17 Jan 2014) 610,162

S&P 500 INDEX 1,838.70

FYE 12/31 2012A 2013E 2014E1Q EPS – 0.03A 0.07

2Q EPS – 0.16A 0.18

3Q EPS – 0.20A 0.17

4Q EPS – 0.16 0.20

FY EPS (USD) – 0.56 0.62

P/E (x) – 39.8 36.1

Initiating Coverage with a Buy Rating and $27 Price Target While we anticipate many will clamor that the bull case for meaningful upside in HLT from current levels is the optionality from asset monetization, something we detail later in this report, we find: 1) the industry bull case, especially given HLT’s domestic owned exposure and leverage to accelerating ADR’s at current chain scale occupancy levels, also something we detail later, 2) its international unit pipeline growth, and 3) the de-leveraging and therefore differentiated aspect of the story, to be most appealing. As such, we are launching coverage with a Buy rating and $27 price target.

Our Price Target Analysis Our price target is $27 and is based on a sum-of-the-parts analysis. Our target multiples for the Owned (16.1x / 13.5x), M&F (13.5x), and Timeshare (9.0x) segments are appropriate given our view of the current positioning within the lodging cycle, HLT’s better than peer growth profile in the M&F segment, and peer valuations. As evidenced in Figure 52, we split our owned portfolio into two buckets and divide our 2015 EBITDA forecast evenly to account for the Big 8 assets, which we believe garner a meaningfully higher NAV valuation. Our per key value for this segment of the owned portfolio is $650K per key, which equates to an implied 16.1x multiple of estimates 2015 EBITDA. We then apply a 13.5x multiple to the balance of the owned portfolio, which implies a per key value of ~$150K. Our sum-of-the-parts approach generates a firm value of ~$35.66 bn, from which we extract $9.17 bn of year end 2015 net debt and $318 mm of joint venture related debt, to arrive at an equity value of $26.17 bn, or $27 per share.

Valuation and Risks When HLT’s re-IPO priced at $20 per share on December 11, 2013, we had the company trading at 12.5x and 11.0x our 2014 and 2015 EBITDA estimates, respectively. At present, we calculate current EV/EBITDA trading multiples of 13.5x our 2014 EBITDA estimate and 11.9x our 2015 EBITDA estimate. On 2014, this represents a 110 bps premium to H, an 80 bps discount to MAR, and relative parity with HOT. On a free cash flow basis, HLT trades at a 4.2% yield on our 2014 gross free cash flow estimate and a 5.1% yield on our 2015 gross free cash flow estimate. Risks include: 1) elevated leverage relative to peers should macro issues emerge, 2) the potential for share pressure as Blackstone sells down its ownership stake, 3) the potential for disruptions to the international pipeline, & 4) generic macroeconomic or event risks.

Carlo Santarelli (+1) 212 250-5815 [email protected]

21 January 2014



Appendix 1

Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification

This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific recommendation or view in this compendium report.

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

45 % 48 %

6 %

40 % 33 %

22 %0

200

400600

800

10001200

14001600

Buy Hold Sell

Global Universe

Companies Covered Cos. w/ Banking Relationship

21 January 2014



Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

David Folkerts-Landau

Group Chief Economist Member of the Group Executive Committee

Guy Ashton

Global Chief Operating Officer Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard Co-Global Heads Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

Steve Pollard Regional Head

Americas Research

International locations

Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234

Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00

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Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770

Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500

Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.

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