singapore market focus small mid cap monthly katrina could outperform three key themes for 2017....

ed: TH / sa: JC, PY

FSST Small Cap: 383.99 FSST - Mid Cap : 696.15 STI : 3012.77

Analyst Paul YONG CFA +65 6682 3712 [email protected]

Singapore Research Team [email protected]

Key Indices

Current % ChngSTI Index 3,012.77 0.0% FS Small Cap Index 383.99 -0.1% USD/SGD Curncy 1.41 -0.4% Daily Volume (m) 1,927 Daily Turnover (S$m) 748 Daily Turnover (US$m) 531

Source: Bloomberg Finance L.P.

SMC Top Picks

Prices as at 17 Jan 2017 Source: DBS Bank Source: Bloomberg Finance L.P.

DBS Group Research. Equity 18 Jan 2017

Singapore Market Focus

Small Mid Cap MonthlyIssue No. 13 Refer to important disclosures at the end of this report

Focus on growth in the new year December picks outperform, gaining 3.2% on

average against the market’s +0.5%

Conviction ideas for January – Cityneon, CNMCGoldmine, Ezion, Japfa and mm2, based on threekey themes:

(1) Strong growth/earnings turnaround

(2) Beneficiaries of a US recovery and strong USdollar

(3) Strong cashflow and yields

In a rising interest rate environment, non-REITyield plays such as Venture, Sheng Siong andKatrina could outperform

Three key themes for 2017. Entering into an equally uncertain 2017 (versus 2016), we focus on three key themes: (1) companies with strong earnings growth/turnaround, (2) potential beneficiaries of a US recovery and strong US dollar, and (3) companies with strong cashflows and yields, which tend to be more resilient amidst uncertainty.

Picks for December outperform; begin 2017 with five conviction ideas – Cityneon, CNMC Goldmine, Ezion, Japfa and mm2 Asia. Our top picks outperformed, gaining 3.2% on average since our last issue, against the market’s +0.5%.

For January, we stick with Cityneon and mm2 Asia for their strong earnings growth outlook, and CNMC Goldmine as a potential beneficiary if the US dollar stabilises at a higher level against the ringgit. We also add Japfa, for its earnings growth prospects and cheap valuations, and Ezion as a proxy to ride the recovery in oil.

With the reality of interest rate hikes pushing nearer, we prefer non-REIT yield plays. With the Fed set to further increase rates this year, we screen for non-REIT yield stocks that are better insulated from higher interest rates, based on the following criteria: (1) Stable dividends, with >4% yield in FY17F, and (2) Net gearing of under 0.3x for FY17F.

Of which, we prefer Venture (BUY, TP S$10.90), Sheng Siong (BUY, TP S$1.19) and Katrina (BUY, TP S$0.43) for their strong earnings growth outlook and decent yields of 4.8%-6.1%. While UMS Holdings (HOLD, TP S$0.61) is currently trading close to our fair value, we recommend holding on for its attractive 8.1% yield until further clarity on the progress of its contract renewal and a more sustainable uptick in demand.

Previous

China Aviation 1.540 945 1.70 8.1 144.4 BUY

Cityneon Holdings 0.920 160 1.26 (1.1) 234.5 BUYCNMC Goldmine 0.430 124 0.65 4.9 135.0 BUYmm2 Asia 0.465 339 0.56 12.0 154.8 BUYSingapore O & G 1.195 202 1.50 4.4 69.5 BUY

Price Mkt Cap 12-mth Target Price Performance (%)

S$ US$m S$ 1 mth 12 mth Rating

Current

Cityneon Holdings 0.920 160 1.26 (1.1) 234.5 BUY

CNMC Goldmine 0.430 124 0.65 4.9 135.0 BUYEzion Holdings 0.410 603 0.56 9.3 (8.4) BUYJapfa Ltd 0.92 1,151 1.18 (2.1) 106.7 BUY mm2 Asia 0.465 339 0.56 12.0 154.8 BUY

Market Focus

Small Mid Cap Monthly

Key themes for small-mid caps in 2017

Our picks outperform in December. For December, our outperformance was mainly led by the run-up in mm2 Asia and China Aviation Oil, which were up 13.4% and 10.4% respectively since our last issue. Despite declines of 11.0% for Cityneon and CNMC’s flat performance, our picks grew 3.2% on average to outperform the market’s +0.5%.

Desc. 1M Price Performance* Dec Conviction Picks +3.2% China Aviation Oil +10.4% Cityneon Holdings -11.0% CNMC Goldmine 0.0% mm2 Asia +13.4% Singapore O&G +3.0% Indices (STI, FSTS and FSTM) +0.5% FTSE STI +1.8% FSTS Index -0.7% FSTM Index +0.5%

*Refers to change in last price between 8th Dec and 17th Jan Source: DBS Bank, Bloomberg Finance L.P.

Focus on these three key themes to help weather uncertainty in the new year. Despite a volatile 2016, there were many strong stock performances. In an equally uncertain 2017, we believe that selective stock picking can still provide significant share price outperformance. We see a few key themes for 2017:- 1) Strong earnings growth or turnaround in 2017; 2) Beneficiaries of an US recovery and strong US dollar; and 3) Companies with strong cash flow and yields that are more insulated from higher interest rates (such as companies with little or no debt); and Furthermore, with valuations still below the historical mean, we are likely to see more privatisation or take-over offers in 2017 (as seen in 2016).

Begin 2017 with five conviction picks – Cityneon, mm2 Asia, Japfa, Ezion and CNMC Goldmine. For January, we centre our picks on names that fall under either of the above themes: Riding on its recent VHE acquisition that transforms it into a creator of innovative and interative exhibitions, Cityneon is poised to deliver strong earnings growth of 133% in FY17F, while mm2 Asia – underpinned by growth in productions, expansion into the China market and contributions from cinema operations and entertainment company, UnUsUal Group, is projected to deliver an EPS CAGR of 50% from FY16-FY19F. At current prices, we believe that Japfa – whose EBITDA is expected to expand by 16% in FY17F driven by growth in all

segments, is undervalued relative to its presence in Asia’s largest population, relative to peers and for its secular growth prospects. Backed by good assets, positive operating cash flow and decent cash balances, we see Ezion as one of the best proxies to ride the oil recovery given its earnings resiliency and growth potential. With gold predominantly priced in US dollars, and operational costs mainly incurred in ringgit, CNMC Goldmine is a strong beneficiary of a higher, stabilised US dollar. However, as its net cash balance of c.US$33m (as at 3Q16) is kept in the ringgit, volatile forex movements could give rise to unrealised translation losses.

No. Security Desc. Sector Rating Last Price

(17-Jan)

12-mth

Target Price

Upside/

(Downside)

Catalyst

1 Cityneon Holdings Consumer

Services

BUY 0.920 1.26 37% 1) Securing of third IP

2) Entry of strategic investor

2 CNMC Goldmine

Mining BUY 0.430 0.65 51% 1) Higher gold produciton

2) Higher gold price

3 Ezion Holdings

Oil & Gas BUY 0.410 0.56 37% 1) Oil price recovery

2) Vessel delivery

4 Japfa Ltd Consumer

Goods

BUY 0.920 1.18 28% 1) Resilence despite typically weaker

4Q earnings

2) Continued growth in all segments

5 mm2 Asia Consumer

Services

BUY 0.465 0.56 20% 1) Earnings-accretive acquisitions

2) UnUsual listing

Source: DBS Bank, Bloomberg Finance L.P.

Market Focus

Small Mid Cap Monthly

Non-REIT yield plays could outperform in a rising interest rate environment Positive start to 2017 but economic growth remains uncertain. The year 2016 proved to be erratic, with the UK voting to leave the European Union and Trump’s surprise win (among others) sending shock waves into global markets. While the Singapore equity market has had a generally positive start to 2017 (indices +2.8% YTD on average), we remain watchful over several potential external headwinds. These include uncertainty over Trump’s policies, the threat of anti-globalisation, rise in populism and possible liquidity outflows, which could lead to increased volatility ahead. With the reality of interest rate hikes pushing nearer, we prefer non-REIT yield plays. With the global market environment still looking fairly uncertain, we see yield stocks as attractive relative to their non-dividend paying peers, given that the former has 1) historically been better able to fend off volatility during periods of weakness, and 2) often offers the potential for higher risk-adjusted returns. DBS economists are forecasting the Fed to increase rates by 25 basis points every quarter (consensus expectations are for three rate hikes) in 2017. Should our house view come to fruition, we believe the performance of S-REITs (which tend to offer the highest yields among dividend-paying counters) will likely be capped. With the hikes in mind, we screen for small-mid cap (US$50m – US$2bn market cap) companies within our coverage that fulfil the following criteria:

(i) Record of stable dividends, with prospective yield of >4% for CY17F

(ii) Little or no borrowings (net gearing of under 0.3x for CY17F)

Positive start to 2017: Indices +2.8% YTD on average


YTD 2017

YTD 2017

YTD 2017

Market Focus

Small Mid Cap

No. Security Desc. Sector Rating Last Price

(17-Jan) 12-mth TP

Upside/ (Downside)

FY17F EPS Growth

Div. Yield (FY1F)

Net Gearing (FY17F)

1 Venture Corp Technology BUY 9.700 10.90 12% 8% 5.2% Net Cash

2 Sheng Siong Group Consumer Services BUY 0.925 1.19 29% 11% 4.8% Net Cash

3 UMS Holdings Industrials HOLD 0.615 0.61 (1%) 18% 8.1% Net Cash

4 CSE Global Technology HOLD 0.465 0.41 (11%) (5%) 6.0% Net Cash

5 Katrina Group Consumer Services BUY 0.235 0.43 83% 13% 6.1% Net Cash

Source: DBS Bank, Bloomberg Finance L.P. We prefer Venture, Sheng Siong and Katrina for their strong earnings outlook. Apart from fulfilling the above criteria, these companies also stood out for their strong earnings outlook and are set to deliver bottom-line growth of c.8% to 13% in FY17F:

Sec. Desc. EPS Growth (FY17F)

Prospective Yield (FY17F)

Venture 7.5% 5.2% Sheng Siong 10.9% 4.8% Katrina Group 12.8% 6.1%

Source: DBS Bank, Bloomberg Finance L.P. Venture Corp (BUY, TP S$10.90) A fixed dividend commitment of 50 Scts (or prospective yield of 5.2%), coupled with high single-digit earnings growth prospects of 7.5% in FY17F, is attractive. With 55% of exports to the US, Venture will also benefit from both a recovery in the US and the strengthening US dollar. Costs are in ringgit while almost all of sales are in US dollars. A well-managed company with fragmented ownership, it is also an attractive takeover target. Sheng Siong Group (BUY, TP S$1.19) We like Sheng Siong for its earnings growth traction, efficient operations, strong ROE, defensive earnings qualities, dividend yield and net cash balance sheet. Even as store closures are expected for FY17F, we believe a combination of company-driven initiatives (such as direct sourcing from suppliers in Malaysia, higher sales of house brands, and more bulk handling with the expansion of warehouse space at its Mandai distribution centre) and higher fresh mix from the displacement of wet markets in Singapore, should help drive continued margin expansion and ultimately, earnings growth. At current prices, the stock also offers a prospective yield of 4.8%.

Katrina Group (BUY, TP S$0.43) Driven by margin expansion from a growing online business, more store openings (to 60 stores by 2019, from 34 as at 1H16), improving annual sales per store and regional expansion plans, we project Katrina to deliver double-digit earnings growth through to FY18F. Currently trading at undemanding valuations of <11x FY17F PE, Katrina appears attractive both for its strong upside potential of nearly 70% and prospective 6.1% yield. Hold on for yield until clearer signal of a sustainable uptick in demand. UMS Holdings (HOLD, TP S$0.61) Favourable industry trends, coupled with Applied Materials’ strong order book, augurs well for UMS Holdings’ core business from end-2017 but the extent to which UMS benefits from the former’s strong growth prospects ahead is mostly hinged upon the renewal of the Endura contract, which is due to expire at end-January 2017. Given their longstanding partnership, we believe that the risk of non-renewal is relatively low but expect to see adjustments to existing contractual terms. Until we receive further clarity on the contract renewal and see a more sustainable uptick in demand, we recommend holding on to UMS for its attractive 5-Sct dividend (or prospective yield of 8.1%).

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Appendices

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Market Focus

Small Mid Cap

APPENDIX (1) Review of December 2016 Picks #

No. Security Desc. Sector Rating (8-Dec)

Beg. Price (8-Dec)

Last Price (17-Jan)

% Price Change (1M*)

Absolute Return (%)

1 China Aviation Oil Oil & Gas BUY 1.395 1.540 + 10.4% + 10.4%

2 Cityneon Holdings Support Services BUY 1.050 0.920 - 11.0% - 11.0%

3 CNMC Goldmine Mining BUY 0.430 0.430 - -

4 mm2 Asia Consumer Services BUY 0.410 0.465 + 13.4% + 13.4%

5 Singapore O&G Health Care BUY 1.160 1.195 + 3.0% + 3.0%

*Refers to change in last price between 8th December and 17th January

Source: DBS Bank, Bloomberg Finance L.P. Indices gained 0.5% on average since last issue (8 Dec – 17 Jan): FTSE STI: 2958.86 to 3012.77 // +1.8% FSTS Index: 386.73 to 384.00 // - 0.7% FSTM Index: 692.80 to 696.20 // +0.5% Our picks outperformed, gaining 3.2% on average, which was mainly led by Cityneon and China Aviation Oil’s strong performance. For December, our outperformance was mainly led by the run-up in mm2 Asia and China Aviation Oil as they delivered double-digit growth of were up 13.4% and 10.4% respectively, but partly negated by Cityneon’s 11.0% decline and CNMC’s flat performance. Since our last issue, we have also trimmed Cityneon’s earnings for FY17F by 8% to factor in the delay in the launch for Transformers in Las Vegas, which resulted in a lower TP of S$1.26, from S$1.37 previously. Despite this, we continue to expect Cityneon to register an explosive FY16-FY19F EPS CAGR of c.150%.

Since our last update, CNMC also issued a profit warning as it expected to report a net loss for 4Q16 on (1) net unrealised foreign exchange losses resulting from a depreciation of the Ringgit against the USD, and (2) decline in revenue from lower ore grades. Beyond this blip, we remain optimistic in the earnings outlook for the group and note that while gold price retreated below US$1150/oz in Dec, it has since rebounded to above US$1200/oz currently.

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Market Focus

Small Mid Cap

APPENDIX (2) Company Profiles for January 2017 Conviction Picks

No. Security Desc. Sector Rating Last Price (17-Jan)

Target Price Upside/ (Downside)

Catalyst

1 Cityneon Holdings Consumer Services

BUY 0.920 1.26 37% 1) Securing of third IP 2) Entry of strategic investor

2 CNMC Goldmine

Mining BUY 0.430 0.65 51% 1) Higher gold produciton

2) Higher gold price

3 Ezion Holdings

Oil & Gas BUY 0.410 0.56 37% 1) Oil price recovery 2) Vessel delivery

4 Japfa Ltd Consumer

Goods BUY 0.920 1.18 28% 1) Resilence despite typically

weaker 4Q earnings 2) Continued growth in all

segments

5 mm2 Asia Consumer Services

BUY 0.465 0.56 20% 1) Earnings-accretive acquisitions 2) UnUsUal listing

Source: DBS Bank, Bloomberg Finance L.P. Theme 1: Strong earnings growth or turnaround in 2017 1) Cityneon Holdings [CITN SP, TP S$1.26]

Cityneon is riding on its recent VHE acquisition that transforms it into a creator of innovative and interactive exhibitions. The group’s earnings are directly correlated with the number of exhibits it has, and is set to register an explosive FY16-FY19F EPS CAGR growth of c.150%. An expanding project pipeline, plans to add a third Intellectual property rights (IP), and potential tie-ups with strategic investors like CMC Holdings are catalysts. Our TP of S$1.26 is based on peer average PE valuation of 17x FY17F earnings, which implies upside of c.37%.

2) Ezion Holdings [EZI SP, TP S$0.56]

We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. Its balance sheet has also been strengthened by rights issues of US$100m, which were completed in July 2016. With a positive operating cash flow and lower gearing, Ezion is among the stronger players with good assets, decent cash balances and successful diversification of its customer base (windfarm contracts) to win new charter contracts. Our TP of

S$0.56 for Ezion is based on 0.6x FY16 P/BV, which represents a prospective 37% upside. 3) Japfa Ltd [JAP SP, TP S$1.18]

Japfa’s EBITDA is projected to expanded by 16% to c.US$465m, driven by lower borrowing costs and continued growth in all segments: 1) Expect resilient demand in Indonesian live broiler and DOCs over the next 12 months, 2) new product launches for the consumer food products segment, and 3) better productivity/raw milk in the dairy segment. At current prices, we believe that the stock is undervalued relative to its presence in Asia’s largest population, relative to peers, and for its secular growth prospects. Our SOP-based TP (pegged to forward EV/EBITDA) of S$1.18 implies upside of nearly 28%.

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Market Focus

Small Mid Cap

4) mm2 Asia [mm2 SP, TP S$0.56]

Underpinned by growth in productions, expansion into the China market and contributions from cinema operations and entertainment company, UnUsUal Group, mm2 Asia is projected to deliver an EPS CAGR of 50% from FY16-FY19F. Upside to earnings could come from earnings-accretive acquisitions and from more projects (especially in China where budgets are much higher). Separately, the successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value. Our TP of S$0.56 is pegged to FYEMar18F earnings and peers’ average of 24x, which offers 20% upside to current prices. Theme 2: Beneficiaries of a US recovery and strong US dollar 1) CNMC Goldmine [CNMC SP, TP S$0.65]

Supported by well-run operations, steady cash flow generation and competitive cash costs, Kelantan-based gold miner CNMC Goldmine is attractive as a less-risky gold proxy with yield.

With gold dores being priced and sold in US dollars, and CNMC's gold mining operations fully based in Kelantan (Malaysia), it is a potential beneficiary if the US dollar stabilises at a higher level against the ringgit. However, as CNMC reports in US dollars but keeps cash in ringgit for operating needs, it is exposed to fluctuations in the US dollar against the ringgit over the short term, which could result in unrealised forex losses. Higher gold production and/or gold price could catalyse earnings while the proposed acquisition of a 51% stake in Pulai Mining (also Kelantan-based) could provide further upside. Our 12-month TP of S$0.65, which is based on a blend of DCF (WACC of 10.7% terminal growth of 1%) and 14x FY17F PE, offers potential upside of c.51%.

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Market Focus

Small Mid Cap

APPENDIX (3) Historical Performance of Previous Conviction Picks

Conviction Picks - Jan 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY -3.0% 2 Japfa Ltd BUY -3.1% 3 mm2 Asia BUY -12.2% 4 Riverstone Holdings BUY -11.7% 5 Sheng Siong Group BUY 0.6% 4-Feb-16 Replaced with new conviction idea

Simple Average: -5.9% vs STI: -6.3%

Conviction Picks - Feb 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 3.8% 2 Japfa Ltd BUY 10.5% 3 mm2 Asia BUY 42.9% 8-Mar-16 Re-rated near TP 4 OSIM International BUY 23.7% 8-Mar-16 Re-rated near TP and downgraded to

HOLD on 8-Mar-16 5 Riverstone Holdings BUY -10.8%

Simple Average: 14.0% vs STI: +9.5%

Conviction Picks - Mar 2016# No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY -1.2% 2 Japfa Ltd BUY 11.4% 3 Innovalues Ltd BUY 19.3% 4 Riverstone Holdings BUY 2.6%

Simple Average: 3.6% vs STI: -0.4%

#Shown are 4 out of our 5 top picks. For full list, please refer to March issue: Sifting Out M&A Plays

Conviction Picks - Apr 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 0.6% 2 Courts Asia BUY -1.5% 5-May-16 Replaced with new conviction idea 3 Innovalues Ltd BUY 4.1% 5-May-16 Downgraded to HOLD on 4-May-16 4 Japfa Ltd BUY 20.5% 5 mm2 Asia BUY 8.9% 6 Riverstone Holdings BUY 0.5% 5-May-16 Replaced with new conviction idea


Source: DBS Bank

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Market Focus

Small Mid Cap

Conviction Picks – May 2016

No. Sec. Desc. Rcmd Absolute Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 23.6% 14-Jun-16 Replaced with new conviction idea 2 Japfa Ltd BUY 10.6% 3 mm2 Asia BUY 22.7% 4 UMS Holdings BUY -4.8% 11-May-16 Downgraded to HOLD on 11-May-16 5 Nam Cheong FULLY

VALUED 5.5% 14-Jun-16 Replaced with new conviction idea


Conviction Picks – Jun 2016#


Date Removed

Comments

1 Cityneon Holdings BUY 11.5% 2 Japfa Ltd BUY 12.2% 3 Jumbo Group BUY 10.3% 15-Jul-16 Replaced with new conviction idea 4 mm2 Asia BUY 0.7%

Simple Average: 6.4% vs STI: 4.4%

#Shown are 4 out of our 5 top picks. For full list, please refer to June issue: The Hunt for GARP

Conviction Picks – Jul 2016#


Date Removed

Comments

1 China Aviation Oil BUY 6.2% 2 Cityneon Holdings BUY 12.5% 3 Japfa Ltd BUY -2.9% 26-Jul-16 Downgraded to HOLD on 26-Jul-16 4 mm2 Asia BUY 2.9%


#Shown are 4 out of our 5 top picks. For full list, please refer to July issue: Ambitions for Growth

Conviction Picks – Aug 2016#


Date Removed

Comments

1 China Aviation Oil BUY -10.7% 2 Cityneon Holdings BUY -4.8% 3 mm2 Asia BUY +12.1% Replaced with new conviction idea 4 Singapore O&G BUY -2.5%

Simple Average: -1.1% vs STI: +0.6%

#Shown are 4 out of our 5 top picks. For full list, please refer to August issue: Seeking Resilience Amidst Uncertainty

Source: DBS Bank

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Market Focus

Small Mid Cap

Conviction Picks – Sep 2016#


Date Removed

Comments

1 China Aviation Oil BUY +0.0% 2 Cityneon Holdings BUY - 3.0% 3 Katrina Group BUY +0.0% 4 Singapore O&G BUY +2.2%


#Shown are 4 out of our 5 top picks. For full list, please refer to September issue: Safety First as Dark Clouds Gather

Conviction Picks – Oct 2016#


Date Removed

Comments

1 China Aviation Oil BUY -3.3% 2 Cityneon Holdings BUY +15.7% 3 Katrina Group BUY -25.4% 4 Singapore O&G BUY -1.3%


#Shown are 4 out of our 5 top picks. For full list, please refer to October issue: Eye$ on the money

Conviction Picks – Nov 2016


Date Removed

Comments

1 China Aviation Oil BUY +4.9% 2 Cityneon Holdings BUY -5.0% 3 CNMC Goldmine BUY -9.5% 4 Katrina Group BUY -6.4% 5 Singapore O&G BUY -0.0%

Simple Average: -3.2% vs STI: +5.2%

Conviction Picks – Dec 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Aviation Oil BUY +10.4% 18-Jan-17 Replaced with new conviction idea 2 Cityneon Holdings BUY -11.0% TP lowered from S$1.37 to S$1.26 on 29

Dec 2016 3 CNMC Goldmine BUY - 4 mm2 Asia BUY +13.4% 5 Singapore O&G BUY +3.0% 18-Jan-17 Replaced with new conviction idea

Simple Average: +3.2% vs STI: +1.8%

Source: DBS Bank

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Market Focus

Small Mid Cap

APPENDIX (4) FSTS & FSTM Indices in December 2016

Top 5 Performing Sectors - FSTM Top 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents

Net Market

Cap % Chg

ICB Sector No. of

Constituents

Net Market

Cap % Chg

(S$ m) (1m) (S$ m) (1m)

General Industrials 1 1,511 6.9

Oil Equipment, Services & Distribution

7 1,041 11.2

Travel & Leisure

3 1,743 3.2 Chemicals

1 228 10.9

Electronic & Electrical Equipment

1 2,462 1.8

Gas, Waster & Multiutilities

1 275 7.3

Financial Services 1 850 1.2 Oil & Gas

Producers 1 58 5.7

Food Producers

3 3,927 0.5 Industrial Engineering

4 952 1.2

Bottom 5 Performing Sectors – FSTM Bottom 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents

Net Market

Cap % Chg

ICB Sector No. of

Constituents

Net Market

Cap % Chg

(S$ m) (1m) (S$ m) (1m)

Software & Computer Services

1 424 (10.9) Media 1 79 (22.7)

Health Care Equipment & Services

1 1,249 (2.4) Software & Computer Services

1 24 (9.1)

Gas, Waster & Multiutilities

3 1,710 (2.3) Food & Drug Retailers

1 294 (8.7)

Real Estate Investment Trusts

16 24,163 (1.9) Technology Hardware & Equipment

1 185 (8.1)

Construction & Materials

1 1,182 (1.5) Travel & Leisure

1 676 (6.0)

Source: DBS Bank, FTSE

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Market Focus

Small Mid Cap

APPENDIX (5)

SMC Screener: Ranked by Investment Metrics* (as at 12 January 2017)

Source: DBS Bank

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Market Focus

Small Mid Cap

APPENDIX (6) DBS SMC Universe (as at 12 January 2017) Breakdown by Sector Breakdown by Rating

Source: DBS Bank

SMC Universe (US$50m to US$2bn Market Cap)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(12 Jan-17)

Target Price

(12 month)

Upside /

Downside

P/E

FY17

P/E

FY18

P/B

FY17

EPS Growth

(%, FY17)

1 Venture Corporation BUY 2,770.3 9.940 10.90 10% 14.5 14.2 1.4 7.5

2 Mapletree Greater China Commercial Trust

BUY 2,675.2 0.960 1.11 16% 17.3 17.1 0.8 1.3

3 Mapletree Logistics Trust BUY 2,637.5 1.055 1.15 9% 14.5 14.0 1.0 5.5

4 Raffles Medical HOLD 2,595.8 1.485 1.43 -4% 33.0 30.6 3.8 5.9 5 SPH REIT HOLD 2,487.1 0.975 1.00 2% 19.3 19.1 1.1 0.5

6 Noble Group HOLD 2,292.1 0.175 0.20 14% 10.9 7.6 0.3 nm

7 Ascott Residence BUY 1,934.6 1.170 1.32 13% 19.1 18.5 0.9 -0.1

8 M1 FV 1,934.4 2.08 1.97 -5% 13.2 14.0 4.3 -4.318

9 Keppel Infrastructure Trust BUY 1,890.0 0.490 0.56 14% 47.5 59.4 1.6 11.5

10 Frasers Centrepoint Trust BUY 1,825.7 1.985 2.29 15% 19.1 17.1 1.0 0.2

11 YTL Starhilll Global REIT BUY 1,668.6 0.765 0.87 14% 14.3 13.7 0.8 36.2

12 Japfa Ltd BUY 1,632.3 0.925 1.18 28% 7.0 7.2 1.2 8.3

13 Parkway Reit BUY 1,439.9 2.380 2.75 16% 19.2 19.1 1.4 0.7

14 Super Group ACCEPT THE OFFER

1,431.8 1.285 1.30 1% 29.5 27.5 2.5 0.2

15 Sheng Siong Group BUY 1,413.3 0.940 1.19 26% 19.8 19.4 5.6 10.9

16 Bumitama Agri BUY 1,395.4 0.795 0.95 19% 14.2 10.9 1.9 13.0

17 CDL Hospitality Trust BUY 1,393.4 1.405 1.59 13% 16.4 15.7 0.9 -5.1

18 Delfi Ltd HOLD 1,362.9 2.230 2.16 -3% 26.8 23.5 4.6 20.1

19 Frasers Logistics & I d t i l T t

BUY 1,355.9 0.950 1.10 16% 15.5 15.0 1.0 1045.1

20 Keppel DC Reit BUY 1,350.3 1.200 1.33 11% 16.8 16.7 1.2 -5.2

21 Perennial Real Estate H ldi

BUY 1,324.4 0.800 1.32 65% 2.7 4.7 0.5 2757.3

22 China Aviation Oil BUY 1,301.6 1.505 1.70 13% 10.7 10.1 1.3 8.7

23 CapitaLand Retail China Trust

BUY 1,226.2 1.410 1.60 14% 14.4 14.8 0.9 6.6

24 Frasers Hospitality Trust BUY 1,212.0 0.660 0.88 34% 15.5 15.4 0.8 0.9

25 OUE Hospitality Trust BUY 1,208.5 0.675 0.72 6% 17.9 17.6 0.9 -2.5

26 Far East Hospitality Trust HOLD 1,071.8 0.595 0.62 4% 17.1 15.9 0.6 -4.7

27 Frasers Commercial Trust BUY 1,010.3 1.265 1.49 18% 14.5 13.9 0.8 1.8

28 Yoma Strategic Holdings BUY 1,007.9 0.580 0.80 38% 37.3 39.4 1.4 181.0

29 Ascendas India Trust BUY 957.8 1.030 1.13 10% 16.6 17.1 1.6 7.5

30 OUE Commercial REIT HOLD 902.0 0.695 0.738 6% 20.2 19.5 0.7 4.9843

Page 14

Market Focus

Small Mid Cap

SMC Universe (US$50m to US$2bn Market Cap)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(12 Jan-17)

Target Price

(12 month)

Upside /

Downside

P/E

FY17

P/E

FY18

P/B

FY17

EPS Growth

(%, FY17)

31 Ezion Holdings BUY 860.6 0.415 0.56 36% 16.4 10.2 0.5 63.5

32 Ascendas Hospitality Trust BUY 803.0 0.715 0.84 17% 24.3 22.3 0.8 -3.9

33 Manulife US REIT BUY 752.7 1.199 0.93 -22% 17.5 16.0 1.0 12.1

34 Indofood Agri BUY 746.8 0.535 0.58 8% 13.9 8.9 0.7 39.1

35 Cache Logistics Trust HOLD 727.2 0.810 0.93 15% 12.5 12.0 0.9 -5.0

36 RHT Health Trust HOLD 725.7 0.900 0.95 6% 14.0 12.8 1.0 8.1

37 Cambridge Industrials HOLD 710.9 0.545 0.54 -1% 13.3 13.4 0.8 1.3

38 Soilbuild Business Space REIT

BUY 693.0 0.665 0.75 12% 12.4 12.1 0.8 1.2

39 Del Monte Pacific HOLD 660.7 0.340 0.37 9% 9.4 8.8 1.3 33.3

40 Riverstone Holdings HOLD 644.7 0.870 0.97 11% 15.1 14.0 3.1 12.1

41 Croesus Retail Trust BUY 640.2 0.845 0.99 17% 13.6 13.8 0.9 -2.215

42 Cosco Corporation HOLD 627.0 0.280 0.27 -2% nm nm 1.1 nm

43 PACC Offshore Services H ldi

BUY 607.0 0.335 0.41 21% nm nm 0.4 nm

44 MM2 Asia BUY 509.3 0.495 0.56 13% 20.9 17.3 5.3 34.9

45 Jumbo Group BUY 461.8 0.72 0.769 7% 21.5 19.0 6.1 19.317

46 IREIT Global HOLD 451.8 0.730 0.75 3% 13.3 12.6 1.2 -4.9

47 Midas Holdings BUY 377.9 0.225 0.38 69% 12.7 11.1 0.5 82.4

48 Pan-United Corp HOLD 369.5 0.66 0.585 -11% 16.0 15.0 1.3 42.434

49 Vard Holdings HOLD 289.1 0.245 0.18 -28% nm nm 0.5 nm

50 Singapore O & G BUY 282.5 1.185 1.50 27% 26.4 22.9 7.2 14.8

51 UMS Holdings HOLD 261.8 0.610 0.61 0% 10.7 9.9 1.3 17.7

52 Mermaid Maritime BUY 261.5 0.185 0.24 30% 104.7

41.5 0.5 -88.4

53 CSE Global HOLD 240.0 0.465 0.41 -12% 12.8 12.1 1.0 -5.3

54 Courts Asia BUY 226.5 0.440 0.50 13% 8.8 8.2 0.7 1.5

55 iFAST Corporation BUY 222.9 0.850 1.20 41% 32.0 28.7 2.7 16.3

56 Cityneon Holdings BUY 215.3 0.880 1.26 43% 11.9 8.7 2.2 133.0

57 Tat Hong Holdings HOLD 213.4 0.340 0.56 65% nm nm 0.4 nm

58 CNMC Goldmine Holdings BUY 183.3 0.450 0.65 43% 9.9 8.7 2.5 8.1

59 Ezra Holdings FV 144.0 0.049 0.06 22% nm 11.2 0.2 nm

60 Nam Cheong FV 125.8 0.060 0.04 -33% nm nm 0.3 nm

61 Procurri Corporation Limited BUY 121.8 0.435 0.56 29% 8.8 7.4 1.4 56.3

62 Pacific Radiance Ltd HOLD 104.2 0.146 0.16 10% nm nm 0.3 nm

63 Trendlines Group HOLD 78.4 0.154 0.24 56% 13.4 11.5 0.6 2.4

64 Katrina Group BUY 62.5 0.270 0.43 58% 11.4 9.8 3.7 12.8


Page 15

Market Focus

Small Mid Cap

COMPANY GUIDES

Page 16

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: YM, PY

BUY Last Traded Price ( 28 Dec 2016): S$0.925 (STI : 2,898.30) Price Target 12-mth: S$1.26 (36% upside) (Prev S$1.37) Potential Catalyst: Securing of third IP; entry of strategic investor Where we differ: Assume more sets of exhibits Analyst Lee Keng LING +65 6682 3703 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 96.5 101 123 149 EBITDA 2.63 15.1 32.6 43.3 Pre-tax Profit 0.79 9.68 22.9 31.7 Net Profit 0.87 7.64 17.8 24.4 Net Pft (Pre Ex.) 0.87 7.64 17.8 24.4 Net Pft Gth (Pre-ex) (%) (62.9) 777.4 133.0 36.9 EPS (S cts) 0.39 3.17 7.39 10.1 EPS Pre Ex. (S cts) 0.39 3.17 7.39 10.1 EPS Gth Pre Ex (%) (85) 705 133 37 Diluted EPS (S cts) 0.39 3.17 7.39 10.1 Net DPS (S cts) 0.40 0.0 0.0 0.0 BV Per Share (S cts) 22.4 32.9 40.3 50.4 PE (X) 234.5 29.1 12.5 9.1 PE Pre Ex. (X) 234.5 29.1 12.5 9.1 P/Cash Flow (X) 70.7 nm 9.9 7.1 EV/EBITDA (X) 73.0 14.2 6.5 4.4 Net Div Yield (%) 0.4 0.0 0.0 0.0 P/Book Value (X) 4.1 2.8 2.3 1.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 2.3 11.9 20.2 22.3 Earnings Rev (%): 3 (8) - Consensus EPS (S cts): 3.2 7.5 9.9 Other Broker Recs: B: 3 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Attractive growth profile

Continue to expect explosive earnings growth. We have trimmed earnings for FY17F by 8% to factor in the delay in the launch for Transformers in Las Vegas. Despite this, we continue to expect Cityneon to register explosive FY16-FY19F EPS CAGR growth of c.150%. Cityneon is attractive to investors seeking growth and unique ideas in the entertainment industry. An expanding project pipeline, plans to add a third Intellectual property rights (IP), and potential tie-ups with strategic investors like CMC Holdings are catalysts. Scalable business model with low execution risk. Cityneon’s earnings are directly correlated with the number of exhibits it has. The group has announced its forthcoming openings in Taipei, Taiwan (June 2017) and Sydney, Australia (December 2017). We believe that more sets would be needed to fulfil the overwhelming demand. We expect a total of seven sets by end-2017, and eight sets by 2018. Potential for third IP. There is a huge pool of franchises that meet management’s criteria of box office of >US$1bn and with sequels in the pipeline. Some attractive options include Star Wars, Jurassic Park, Batman and Spiderman. We expect the Victory Hill Exhibitions (VHE) team to leverage their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP. Valuation:

Maintain BUY with lower TP of S$1.26. Maintain BUY with a lower TP of S$1.26, after incorporating the delay in the launch for Transformers in Las Vegas. The cost of the new set has also been shifted to FY17F instead of FY16F. Our TP is based on peer average PE valuation of 17x FY17F earnings. Key Risks to Our View:

VHE’s limited track record. VHE was formed in 2012 and the first exhibition was in New York in 2014. Earnings dependent on number of visitors, especially for the permanent sets in Las Vegas. At A Glance Issued Capital (m shrs) 245 Mkt. Cap (S$m/US$m) 226 / 156 Major Shareholders (%) Star Publications 52.5 Tan Aik Ti 16.4

Free Float (%) 31.1 3m Avg. Daily Val (US$m) 0.60 ICB Industry : Consumer Services / Media

DBS Group Research . Equity 29 Dec 2016

Singapore Company Guide

Cityneon Holdings Version 4 | Bloomberg: CITN SP | Reuters: CNHL.SI Refer to important disclosures at the end of this report

74

174

274

374

474

574

674

0.1

0.3

0.5

0.7

0.9

1.1

1.3

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Relative IndexS$

Cityneon Holdings (LHS) Relative STI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

Cityneon Holdings

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Scalable business model. The first set had cost around US$8-9m to build but subsequent sets cost only about one-third of the original cost per set. Thus, Cityneon is able to achieve operational leverage with every subsequent set built. Upcoming locations announced include Taipei, Taiwan (June 2017) and Sydney, Australia (December 2017). We believe that more sets would be needed to fulfil the overwhelming demand. We expect a total of seven sets by end-2017, and eight sets by 2018. With the increasing demand, Cityneon has expanded its creative team with two senior-level hires and is now equipped with both breadth and depth to produce and create innovative concepts to capture visitors’ interest. The 7-8 exhibition sets would enable Cityneon to hold exhibitions in various parts of the world. Only the Las Vegas sets in the US are permanent ones; while the rest are travelling sets, and will be moved from one location to another after the exhibition ends, which usually lasts for a few months. For every location or project, Cityneon would be able to book revenues that include licensing fees, minimum guarantees from operator and also from merchandise sales. Assuming that an exhibition lasts for about 3-4 months, theoretically, a set can be used 2-3 times per year based on a back-to-back schedule. Manageable execution risk. Furthermore, execution risk is minimal for the travelling exhibits as the bulk of the risk is borne by the operator. Only the two permanent sets in Las Vegas need to assume operating risks. Project pipeline till 2017 We assume Transformers in Las Vegas and China to be launched in 2Q17. Besides these two locations, VHE also intends to venture into Middle East, rest of Asia and others parts of China. There are no limits on locations for its IP rights. VHE can venture into any part of the world with the two existing franchises. Though it makes more business sense to target the larger cities first, VHE has vast opportunities as there are >30 cities globally with populations of >10m. Strong pipeline of Avengers/Transformers movies bodes well for attracting visitors Marvel has a strong movie pipeline stretching to 2020. The pipeline includes Guardians of the Galaxy 2, Thor and Spiderman in 2017; Avengers Infinity War part 1, Black Panther and Ant-man in 2018; Avengers Infinity War part 2, Captain Marvel and Inhumans in 2019, and yet-to-be-named movies in 2019/2020. For Transformers, there are four more films in the next ten years, with Transformers 5 slated to be released in June 2017.

The Las Vegas permanent attraction

Earnings contribution breakdown

Project launched in 2016 and pipeline assumption for 2017 Country Announced / Assumed Exhibition Las Vegas * Announced – exhibition started in

May 2016 Avengers

Las Vegas * Announced – assume launch in 2Q17

Transformers

Paris Announced – exhibition from April 2016 to September 2016

Avengers

Australia Announced – exhibition expected to start in December 2017

Avengers

Singapore Announced – exhibition from October 2016 to February 2017

Avengers

China Announced – assume launch in 2Q17

Transformers

Taiwan Announced – exhibition expected to be opened no later than 15 June 2017

Avengers

China Assumed Avengers Sweden Assumed Avengers Middle East Assumed Transformers Europe Assumed Transformers

*permanent set

Historical box office takings – Avengers and Transformers

Source: Company, DBS Bank

Name of movieRelease Date

#Rank by gross takings for that year

Gross takings (US$m)

Grossing of the average movie

that yearTransformers Jul-07 3 319 15.4Iron Man May-08 2 318 16.0The Incredible Hulk Jun-08 17 135 16.0Transformers: Revenge of the Fallen

Jun-09 2 402 20.8

Iron Man 2 May-10 3 312 19.1Thor May-11 10 181 16.8Captain America: The First Avenger

Jul-11 12 177 16.8

Transformers: Dark of the Moon

Jun-11 2 352 16.8

The Avengers May-12 1 623 16.4Iron Man 3 May-13 2 409 15.9Thor: The Dark World Nov-13 12 206 15.9Transformers: Age of Extinction

Jun-14 7 245 14.9

Captain America: The Winter Soldier

Apr-14 4 260 14.9

Avengers: Age of Ultron May-15 3 459 15.9Ant-Man Jul-15 14 180 15.9

Total: 4,580


Company Guide

Cityneon Holdings

Balance Sheet:

Expansion should increase debt levels, but group still in net cash position. We believe the group will take on incremental debt of ~S$10m in the near term to fund the building of new exhibits, but the group is expected to remain in a net cash position, barring other unexpected capex outlays. Share Price Drivers:

Potential for third IP There is a huge pool of franchises that meet the management’s criteria of box office of >US$1bn and with sequels in the pipeline. Some attractive options include Star Wars, Jurassic Park, Batman and Spiderman. We expect the VHE team to leverage on their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP. Entry of strategic investor paves way for growth China remains an important market for the group, in addition to its current focus in Las Vegas, US. We would not rule out further collaboration with CMC Holdings or other strategic investors as the business is still in the growth phase. In May 2016, Cityneon entered into a placement agreement with CMC, a media and entertainment investment with an operating platform in China. Key Risks:

Limited track record for VHE VHE was formed in 2012 and the first exhibition was in New York in 2014. Earnings dependent on number of visitors The permanent sets in Las Vegas are dependent on the number of visitors. For the travelling sets, though Cityneon will usually receive upfront payment fees from operators to use its exhibits, a higher number of visitors would enable the group to generate higher royalties in excess of the minimum guarantees on royalties. Furthermore, ancillary sales like merchandise, photos, food & beverage are also dependent on the number of visitors. Low free float of c.30% Shares in Cityneon are tightly held, with a free float of about 30%. Star Media still holds about 52.6% after the placement in May 2016 while CEO Ron Tan holds 16.4%. Company Background

With the acquisition of Victory Hill Exhibitions (VHE) in September 2015, Cityneon has evolved to become a creator of innovative and interactive exhibitions, focusing on creating captivating cutting-edge content, and delivering engaging and interactive exhibitions to audiences. To date, it has secured two IP rights – with Marvel Entertainment to use Avengers S.T.A.T.I.O.N. till 2024 and with HASBRO Studios for the Transformers franchise till year 2023.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Victory Hill Exhibitions – two distinct models


0.9

1.0

1.1

1.2

1.3

1.4

1.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

S$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Las Vegas (permanent sets)

Ticket sales (incl. processing charges)

Merchandise sales / Photo ops

Sponsorship revenue

Naming rights

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

Rental expense

SG&A/ other opex

Royalties to Marvel/Hasbro (10% of net ticket sales)

Travelling sets (operated by partners)

20% cut of ticket sales

Upfront license fee from partner for usage of set

Merchandise (sales to partner + cut of final sales to customer)

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

SG&A/ other opex(minimal)

Royalties to Marvel/Hasbro (10% of ticket sales)

Half of the 20%

goes to Marvel or H

asbro

Risk‐reward profile:No execution risk; partner runs the operations

High margins (DBS estimate 25‐35% net margin) but lower nominal take

Risk‐reward profile:Cityneon takes on execution risk.

Lower margin (DBS estimate of 25% net margin) but higher nominal take

Minimum guarantees reduce risk

of non‐performance


Company Guide

Cityneon Holdings

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Old Business 78.0 96.5 79.5 70.0 77.0 Victory Hill Exhibitions 0.0 0.0 21.0 57.3 72.0 Total 78.0 96.5 101 123 149 Net Profit (S$m) Old Business 2.35 0.87 1.10 1.07 0.73 Victory Hill Exhibitions n.a. n.a. 5.6 16.7 23.4 Total 2.35 0.87 7.64 17.8 24.0

Net Profit Margins (%)

Old Business 3.0 0.9 1.4 1.5 0.9 Victory Hill Exhibitions n.a. n.a. 31.1 31.6 32.5 Total 3.0 0.9 7.6 14.5 16.1

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 78.0 96.5 101 123 149 Cost of Goods Sold (55.9) (73.2) (63.7) (63.6) (73.1) Gross Profit 22.1 23.3 36.8 59.3 76.0 Other Opng (Exp)/Inc (19.3) (22.2) (27.0) (36.4) (44.2) Operating Profit 2.78 1.15 9.78 22.9 31.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.02 0.02 0.02 0.02 Net Interest (Exp)/Inc (0.3) (0.4) (0.1) (0.1) (0.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2.51 0.79 9.68 22.9 31.7 Tax (0.2) 0.04 (2.0) (5.0) (7.2) Minority Interest 0.03 0.04 (0.1) (0.1) (0.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2.35 0.87 7.64 17.8 24.4 Net Profit before Except. 2.35 0.87 7.64 17.8 24.4 EBITDA 4.02 2.63 15.1 32.6 43.3 Growth Revenue Gth (%) 15.1 23.7 4.2 22.3 21.2 EBITDA Gth (%) 65.8 (34.4) 475.0 115.5 32.8 Opg Profit Gth (%) 142.3 (58.8) 754.4 134.5 38.5 Net Profit Gth (Pre-ex) (%) 162.2 (62.9) 777.4 133.0 36.9 Margins & Ratio Gross Margins (%) 28.3 24.1 36.6 48.2 51.0 Opg Profit Margin (%) 3.6 1.2 9.7 18.7 21.3 Net Profit Margin (%) 3.0 0.9 7.6 14.5 16.4 ROAE (%) 10.0 2.3 11.9 20.2 22.3 ROA (%) 4.5 1.2 7.6 13.9 15.4 ROCE (%) 5.6 1.0 9.7 16.7 18.3 Div Payout Ratio (%) 0.0 101.6 0.0 0.0 0.0 Net Interest Cover (x) 10.4 3.1 81.7 324.0 289.3


Includes contribution from the Avengers set in Paris and Las Vegas, as well as partial upfront licence fee to be recognised in FY16 for the 2-year agreement in China


Company Guide

Cityneon Holdings

Quarterly / Interim Income Statement (S$m)

FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016 Revenue 30 48 41 56 46 Cost of Goods Sold (20) (36) (31) (42) (28) Gross Profit 10 12 10 14 18 Other Oper. (Exp)/Inc (10) (10) (10) (12) (12) Operating Profit 0 3 (1) 2 6 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 0 2 (1) 2 6 Tax 0 0 0 0 (1) Minority Interest 0 0 0 0 0 Net Profit 0 2 (1) 2 5 Net profit bef Except. 0 2 (1) 2 5 EBITDA 1 4 0 3 8 Growth Revenue Gth (%) (31.5) 57.3 (14.7) 37.1 (17.0) EBITDA Gth (%) (77.4) 472.7 nm nm 171.8 Opg Profit Gth (%) (91.7) 949.2 nm nm 260.7 Net Profit Gth (Pre-ex) (%) (95.6) 1,722.1 nm nm 196.6 Margins Gross Margins (%) 32.7 25.5 23.5 24.6 38.8 Opg Profit Margins (%) 0.8 5.3 (1.4) 3.1 13.4 Net Profit Margins (%) 0.4 4.7 (1.8) 2.8 10.1

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 2.26 16.0 29.9 43.0 40.5 Invts in Associates & JVs 0.0 0.38 0.39 0.41 0.42 Other LT Assets 1.21 10.7 16.3 14.8 13.4 Cash & ST Invts 23.9 24.3 20.4 31.6 55.5 Inventory 0.32 0.19 0.36 0.36 0.41 Debtors 18.6 26.0 35.8 43.8 53.1 Other Current Assets 9.88 9.95 9.95 9.95 9.95 Total Assets 56.2 87.6 113 144 173 ST Debt 13.4 11.7 11.7 11.7 11.7 Creditor 14.8 23.8 17.6 17.6 20.2 Other Current Liab 2.18 0.97 2.93 5.98 8.20 LT Debt 0.0 0.0 0.0 10.0 10.0 Other LT Liabilities 0.22 1.10 1.10 1.10 1.10 Shareholder’s Equity 25.1 49.6 79.2 97.0 121 Minority Interests 0.49 0.45 0.51 0.57 0.62 Total Cap. & Liab. 56.2 87.6 113 144 173 Non-Cash Wkg. Capital 11.8 11.4 25.6 30.5 35.1 Net Cash/(Debt) 10.5 12.6 8.67 9.90 33.8 Debtors Turn (avg days) 93.8 84.4 112.2 118.1 118.6 Creditors Turn (avg days) 88.2 98.2 129.3 118.9 111.9 Inventory Turn (avg days) 1.9 1.3 1.7 2.4 2.3 Asset Turnover (x) 1.5 1.3 1.0 1.0 0.9 Current Ratio (x) 1.7 1.7 2.1 2.4 3.0 Quick Ratio (x) 1.4 1.4 1.7 2.1 2.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 7.5 38.8 151.8 98.3 34.6 Z-Score (X) 4.2 5.6 5.5 5.9 5.6



Company Guide

Cityneon Holdings

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 2.51 0.79 9.68 22.9 31.7 Dep. & Amort. 1.24 1.47 5.34 9.66 11.5 Tax Paid 0.03 (0.2) 0.0 (2.0) (5.0) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 5.85 0.80 (16.1) (8.0) (6.7) Other Operating CF (0.1) 0.07 0.0 0.0 0.0 Net Operating CF 9.55 2.89 (1.1) 22.6 31.4 Capital Exp.(net) (1.0) (4.5) (17.8) (21.3) (7.5) Other Invts.(net) 0.0 (1.1) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (0.4) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.08 (10.0) (7.0) 0.0 0.0 Net Investing CF (0.9) (16.0) (24.8) (21.3) (7.5) Div Paid 0.0 (0.9) 0.0 0.0 0.0 Chg in Gross Debt 0.73 (3.1) 0.0 10.0 0.0 Capital Issues 0.0 15.7 22.0 0.0 0.0 Other Financing CF 0.0 0.87 0.0 0.0 0.0 Net Financing CF 0.69 12.6 22.0 10.0 0.0 Currency Adjustments 0.39 0.85 0.0 0.0 0.0 Chg in Cash 9.71 0.39 (3.9) 11.2 23.9 Opg CFPS (S cts) 4.18 0.95 6.22 12.7 15.8 Free CFPS (S cts) 9.65 (0.7) (7.8) 0.51 9.93


Target Price & Ratings History

Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 30 May 16 0.79 1.03 BUY

2: 03 Jun 16 0.85 1.03 BUY

3: 14 Jun 16 0.81 1.05 BUY

4: 29 Jun 16 0.91 1.20 BUY

5: 05 Jul 16 0.95 1.20 BUY

6: 12 Aug 16 1.01 1.37 BUY

7: 15 Aug 16 1.02 1.37 BUY

8: 10 Oct 16 0.93 1.37 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

78

0.23

0.43

0.63

0.83

1.03

1.23

Dec-15 Apr-16 Aug-16 Dec-16

S$

Assume 7 sets by end-2017 and 8 sets for 2018

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:AS, PY

BUY

Last Traded Price ( 1 Dec 2016): S$0.41 (STI : 2,928.58) Price Target 12-mth: S$0.65 (57% upside) Potential Catalyst: Higher gold production and/or gold price Where we differ: Our earnings estimates are lower than consensus Analyst Paul YONG CFA +65 6682 3712 [email protected]

Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016F 2017F 2018F Revenue 36.5 38.9 43.5 49.6 EBITDA 18.0 20.2 21.6 26.1 Pre-tax Profit 14.4 16.2 17.6 22.3 Net Profit 10.7 12.0 13.0 14.7 Net Pft (Pre Ex.) 10.7 12.0 13.0 14.7 Net Pft Gth (Pre-ex) (%) (12.9) 12.7 8.1 13.3 EPS (S cts) 3.73 4.21 4.54 5.15 EPS Pre Ex. (S cts) 3.73 4.21 4.54 5.15 EPS Gth Pre Ex (%) (13) 13 8 13 Diluted EPS (S cts) 3.73 4.21 4.54 5.15 Net DPS (S cts) 1.35 1.26 1.36 1.54 BV Per Share (S cts) 11.7 14.7 17.8 21.4 PE (X) 10.9 9.7 9.0 7.9 PE Pre Ex. (X) 10.9 9.7 9.0 7.9 P/Cash Flow (X) 5.8 5.4 5.4 4.4 EV/EBITDA (X) 5.5 4.6 4.1 3.0 Net Div Yield (%) 3.3 3.1 3.3 3.8 P/Book Value (X) 3.5 2.8 2.3 1.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 36.4 31.9 28.0 26.2 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 5.70 6.90 7.50 Other Broker Recs: B: 4 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Au-gmenting growth via M&A

Competitive low-cost miner attractive as a less-risky leveraged gold play. Principally engaged in the exploration and mining of gold and the processing of mined ores into gold dores, CNMC is projected to grow its gold production at a 7% CAGR, from 31,206 ounces in FY15 to 38,728 ounces in FY18F. Supported by well-run operations, steady cash flow generation and competitive cash costs, CNMC is our preferred leveraged play on gold.

Acquisition of 51% stake in Pulai Mining could propel earnings growth. CNMC recently announced plans to acquire a 51% stake in Kelantan-based gold miner, Pulai Mining. Given the group’s success in Sokor, we think that CNMC will be well able to expound on its familiarity and expertise to accelerate the exploration process and production. If successful, the potential monetisation of in-ground resources at Pulai could propel earnings outlook for the group.

Growing net cash of US$33.4m as at 3Q16 can be readily deployed to finance other acquisitions. Beyond the Pulai concession, we believe that CNMC could still be on the lookout for acquisitions to accelerate growth opportunities for the group. Supported by strong cash generation, this could be readily funded using CNMC’s strong net cash position – which had nearly tripled from US$12.1m at end-FY14 to US$33.4m in 3Q16.

Valuation:

Our 12-month TP of S$0.65 is based on a blend of DCF (WACC of 10.7%, terminal growth of 1%) and 14x FY17F PE. Given the volatile nature of gold prices and its potential impact on near-term earnings, we base our TP on a blend of DCF (which assumes WACC of 10.7% and terminal growth of 1%) and PE (at larger peers’ average of 14x FY17F PE) metrics, which we believe better reflect CNMC’s superior cash flow generation, already competitive cash costs and steadily growing gold production.

Assuming a 30% payout, a prospective yield of 3.2% is also on offer.

Key Risks to Our View:

Susceptibility to volatility in gold prices and mining conditions. As price takers, gold miners are generally susceptible to volatility in gold prices. Their output may also be hampered in the event of unfavourable weather conditions. Each US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%.

At A Glance Issued Capital (m shrs) 407 Mkt. Cap (S$m/US$m) 167 / 116 Major Shareholders (%) Innovation China Limited 26.3 Messiah Limited 13.0 Ng Eng Tiong 9.8

Free Float (%) 50.9 3m Avg. Daily Val (US$m) 2.4 ICB Industry : Basic Materials / Mining

DBS Group Research. Equity 2 Dec 2016


CNMC Goldmine Holdings Version1 | Bloomberg: CNMC SP | Reuters: CNMC.SI Refer to important disclosures at the end of this report

52

72

92

112

132

152

172

192

212

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

0.7

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexS$

CNMC Goldmine Holdings (LHS) Relative STI (RHS)


Company Guide

CNMC Goldmine Holdings


Earnings Drivers:

Key competitive advantage lies in its low gold production cost. On a global scale, having substantially reduced its all-in costs from US$1,092/oz in 2Q13 to a low of US$487/oz in 1Q16, CNMC ranks among the lowest-cost producers of gold.

We believe its success in delivering all-in cost improvements thus far can be largely attributed to:

(i) Economies of scale from higher gold production levels (ii) Low diesel prices (iii) Weaker Ringgit, in which the bulk of CNMC’s costs

are denominated, and (iv) Superior style of mineralisation at Sokor, which affects

both production rates and leaching costs

Expect steady growth in production volumes. Following the record FY15 – which was partly helped by good weather, we expect a slight dip in production volume for FY16F, mainly as we do not expect similar favourable weather conditions and as the one-off 7-day Stop Work Order received in August 2016 hampered gold production and sale.

Beyond FY16F, given higher production capacity (of 1.2m p.a. as of April 2016 vs 1m p.a. previously), a larger talent pool and dedicated efforts towards exploratory work, we believe that the volume of fine gold produced will likely grow 10.9% and 13% y-o-y for FY17F and FY18F respectively, given the increase in capacity.

Positive on medium-term gold prices. For 9M16, CNMC had an implied average gold price of c.US$1,262/oz. While near-term pressure on gold prices (on the back of the strengthening dollar and expectations of a US rate hike in December) has since sent gold prices lower to about US$1,180/oz levels currently, we have assumed that average prices will nudge back up slightly to US$1,270/oz in FY17F and US$1,280/oz in FY18F on higher investment demand, and higher inflationary pressure.

Separately, our sensitivity analysis suggests that each US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%.

Gold Prices (US$/oz)

1250 1260 1270 1280 1290

FY17F Net

Profit (US$ m)

12.6 12.8 13.0 13.2 13.4

% Chg -3.4% -1.7% 1.8% 3.5%

Gold Prices (US$/oz)

1250 1260 1270 1280 1290

12-month TP

(S$)

$0.63 $0.64 $0.65 $0.65 $0.66

% Chg -1.9% -0.9% 1.0% 1.9%

Source: DBS Bank

Low-hanging fruits at main project Sokor. Nearly ten years into the Sokor project, as production gradually approaches steady-state, some low-hanging fruits CNMC can pick to drive inorganic growth at Sokor over the near term include:

(i) Acceleration of exploratory works, which could uncover new discoveries and mineralisation

(ii) Further increases to leaching capacity from 1.2m tonnes of ore p.a. currently

(iii) Enhancements to the gold recovery process could improve the recovery rate of minerals

Gold Resources (Ounces)

Fine Gold Production (Ounces)

Implied Average Gold Price (US$)

Royalty Fees as % of Sales

Capacity Expenditure (US$ m)


506000

618000

729000

824000

906000

0.0

130722.9

261445.7

392168.6

522891.4

653614.3

784337.1

2014A 2015A 2016F 2017F 2018F

26122

31206 30900

34263

38728

0.0

7900.5

15801.0

23701.5

31602.0

39502.6

2014A 2015A 2016F 2017F 2018F

1271

11691260 1270 1280

0.00

261.12

522.24

783.36

1044.48

1305.60

2014A 2015A 2016F 2017F 2018F

7.65 7.46

9.67

14 14

0.0

2.8

5.7

8.5

11.3

14.1

2014A 2015A 2016F 2017F 2018F

2.06

1.25

4

9

7

0.0

1.8

3.6

5.5

7.3

9.1

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Strong balance sheet. Already cash-generative, CNMC’s strong balance sheet, backed by net cash of US$33.4m (or approximately 20% of current market cap) as at 3Q16, provides a buffer against near-term volatility in commodity prices, and can be readily deployed to finance the acquisition and/or development of mines, should suitable opportunities arise. Share Price Drivers:

Success in Pulai could propel earnings growth. Further down the road, should CNMC be successful in discovering new gold veins, and if the concentration of newfound gold proves to be commercially viable for extraction, contributions from Pulai could then propel the group’s earnings growth.

We have yet to incorporate potential contributions from Pulai in our forecasts. Potential for further acquisitions. Armed with net cash of US$33.4m (as at 3Q16), CNMC remains on the lookout for suitable mining opportunities in Malaysia, other parts of Southeast Asia and Australasia. Given management’s familiarity with the operating landscape in Malaysia, we think CNMC will likely continue to give priority to brownfield (in which some exploratory work has been conducted by previous concession owners) opportunities in Malaysia, which could then allow the group to grow quickly. Key Risks:

Susceptibility to volatility in gold prices and mining conditions. As price takers, gold miners are generally susceptible to volatility in gold prices. Their output may also be hampered by unfavourable weather conditions. Each US$10/oz decrease in gold prices could lower FY17F earnings by 1.7%. No guarantees of commercially viable concentrations of gold at Pulai. Even if CNMC proceeds with the acquisition as planned, there are no guarantees that the group will be successful in uncovering gold deposits that are commercially viable for extraction and sale. As such, we have not factored in upside from Pulai in our forecasts and valuations. Company Background

CNMC Goldmine Holdings Limited (CNMC SP), together with its subsidiaries, is principally engaged in the business of exploration, mining of gold and the processing of mined ores into gold dores. It is currently focused on the development of its flagship Sokor Gold Field Project, but has recently proposed the acquisition of a 51% stake in Pulai Mining Sdn. Bhd.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2014A 2015A 2016F 2017F 2018F


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

US$m

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2014A 2015A 2016F 2017F 2018F

Avg: 10.6x

+1sd: 19.5x

+2sd: 28.3x

‐1sd: 1.8x

-6.3

3.7

13.7

23.7

33.7

43.7

53.7

Dec-12 Dec-13 Dec-14 Dec-15

(x)

Avg: 4.54x

+1sd: 7.09x

+2sd: 9.65x

‐1sd: 1.98x

-0.5

1.5

3.5

5.5

7.5

9.5

11.5

13.5

Dec-12 Dec-13 Dec-14 Dec-15

(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Gold Resources (Ounces) 506,000 618,000 729,000 824,000 906,000 Fine Gold Production (Ounces) 26,122 31,206 30,900 34,263 38,728 Implied Average Gold Price (US$) 1,271 1,169 1,260 1,270 1,280 Royalty Fees as % of Sales 7.65 7.46 9.67 14.0 14.0 Capacity Expenditure (US$ m) 2.06 1.25 4.00 9.00 7.00

Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 33.2 36.5 38.9 43.5 49.6 Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 Gross Profit 33.2 36.5 38.9 43.5 49.6 Other Opng (Exp)/Inc (18.4) (22.5) (23.5) (27.1) (28.8) Operating Profit 14.8 14.0 15.4 16.4 20.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.04 0.46 0.81 1.15 1.48 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 14.8 14.4 16.2 17.6 22.3 Tax 0.49 (1.0) (1.1) (1.2) (3.3) Minority Interest (3.1) (2.8) (3.1) (3.3) (4.2) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 12.2 10.7 12.0 13.0 14.7 Net Profit before Except. 12.2 10.7 12.0 13.0 14.7 EBITDA 17.9 18.0 20.2 21.6 26.1 Growth Revenue Gth (%) 99.8 9.8 6.8 11.8 13.9 EBITDA Gth (%) 154.1 0.6 12.5 6.7 20.9 Opg Profit Gth (%) 183.5 (5.5) 10.4 6.3 26.9 Net Profit Gth (Pre-ex) (%) 356.9 (12.9) 12.7 8.1 13.3 Margins & Ratio Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margin (%) 44.5 38.3 39.6 37.7 42.0 Net Profit Margin (%) 36.9 29.2 30.9 29.9 29.7 ROAE (%) 62.2 36.4 31.9 28.0 26.2 ROA (%) 45.2 27.9 23.9 20.5 18.8 ROCE (%) 55.0 32.7 28.4 24.7 22.9 Div Payout Ratio (%) 22.5 36.1 30.0 30.0 30.0 Net Interest Cover (x) NM NM NM NM NM


Following the recent approval to the extension of its mining licence from 2018 to 2034, CNMC’s royalty fees were increased from 5% to 10% (as stipulated in Malaysia’s Minerals Act 2014) of total minerals produced at Sokor. We have also assumed that the group will pay higher tribute fees of 4% (from 3% currently) ahead.


Company Guide


Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 9.95 9.30 8.40 12.6 8.45 Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 Gross Profit 9.95 9.30 8.40 12.6 8.45 Other Oper. (Exp)/Inc (7.6) (4.7) (2.7) (6.9) (6.2) Operating Profit 2.33 4.60 5.66 5.71 2.24 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.12 0.14 0.19 0.26 0.31 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2.45 4.74 5.85 5.97 2.54 Tax (0.1) (0.7) (0.3) (0.1) (0.3) Minority Interest (0.6) (0.8) (1.1) (1.2) (0.5) Net Profit 1.83 3.27 4.55 4.70 1.76 Net profit bef Except. 1.83 3.27 4.55 4.70 1.76 EBITDA 2.33 4.60 5.66 5.71 2.24 Growth Revenue Gth (%) 6.1 (6.5) (9.6) 50.2 (33.0) EBITDA Gth (%) (47.5) 97.3 23.3 0.9 (60.9) Opg Profit Gth (%) (47.5) 97.3 23.3 0.9 (60.9) Net Profit Gth (Pre-ex) (%) (49.1) 78.5 39.4 3.3 (62.5) Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 23.4 49.4 67.4 45.3 26.5 Net Profit Margins (%) 18.4 35.1 54.2 37.3 20.9

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 14.1 17.8 21.8 25.7 27.4 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 4.99 2.08 2.08 2.08 2.08 Cash & ST Invts 12.3 22.1 31.3 40.1 55.0 Inventory 0.80 0.87 1.00 1.08 1.10 Debtors 0.61 0.83 0.77 0.86 0.98 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 32.8 43.7 57.0 69.8 86.6 ST Debt 0.07 0.04 0.04 0.04 0.04 Creditor 3.16 3.00 3.69 3.98 4.05 Other Current Liab 1.07 1.26 2.38 2.47 4.59 LT Debt 0.18 0.10 0.10 0.10 0.10 Other LT Liabilities 0.54 1.25 1.25 1.25 1.25 Shareholder’s Equity 25.2 33.5 41.9 51.0 61.3 Minority Interests 2.65 4.55 7.64 11.0 15.2 Total Cap. & Liab. 32.8 43.7 57.0 69.8 86.6 Non-Cash Wkg. Capital (2.8) (2.6) (4.3) (4.5) (6.6) Net Cash/(Debt) 12.1 22.0 31.2 40.0 54.8 Debtors Turn (avg days) 10.2 7.2 7.5 6.8 6.8 Creditors Turn (avg days) (393.7) (281.8) (255.6) (271.4) (279.3) Inventory Turn (avg days) (113.3) (76.5) (71.5) (73.7) (75.8) Asset Turnover (x) 1.2 1.0 0.8 0.7 0.6 Current Ratio (x) 3.2 5.5 5.4 6.5 6.6 Quick Ratio (x) 3.0 5.3 5.3 6.3 6.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 830.0 875.9 2,796.4 6,291.9 4,893.7 Z-Score (X) 18.5 16.5 13.1 12.5 10.1


Slightly weaker 3Q16 mostly due to stop-work order, which resulted in one less gold pour during the quarter.


Company Guide


Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 14.8 14.4 16.2 17.6 22.3 Dep. & Amort. 3.05 3.99 4.77 5.15 5.25 Tax Paid (0.3) (0.3) 0.0 (1.1) (1.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (0.5) (0.9) 0.62 0.12 (0.1) Other Operating CF 0.82 3.00 0.0 0.0 0.0 Net Operating CF 18.0 20.2 21.6 21.7 26.3 Capital Exp.(net) (2.1) (1.3) (4.0) (9.0) (7.0) Other Invts.(net) (2.8) (2.9) (4.8) 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (4.9) (4.2) (8.8) (9.0) (7.0) Div Paid (1.6) (2.9) (3.6) (3.9) (4.4) Chg in Gross Debt (0.3) 0.0 0.0 0.0 0.0 Capital Issues 0.0 (0.1) 0.0 0.0 0.0 Other Financing CF (0.1) (0.1) 0.0 0.0 0.0 Net Financing CF (2.1) (3.1) (3.6) (3.9) (4.4) Currency Adjustments (0.9) (3.2) 0.0 0.0 0.0 Chg in Cash 10.1 9.79 9.21 8.80 14.8 Opg CFPS (S cts) 6.44 7.39 7.34 7.55 9.21 Free CFPS (S cts) 5.56 6.64 6.16 4.44 6.73


Strong cash flow generation supports dividend and future expansion plans.


Company Guide


Discounted Cash Flow Valuation Implies Equity Value of S$0.67

Period 0 1 2 3 4 5 Terminal

FYE Dec (S$m) FY16F FY17F FY18F FY19F FY20F FY21F Value

Operating profit 15.4 16.4 20.8 23.3 23.4 22.6

Add Depreciation and Amortisation 4.8 5.2 5.2 5.6 6.1 6.9

Less Tax Provision (1.1) (1.2) (3.3) (6.1) (6.2) (6.2)

Less Capex (4.0) (9.0) (7.0) (7.0) (7.0) (7.0)

Add changes in Working Capital 0.6 0.1 (0.1) 0.1 0.3 0.4

Total FCF to the Firm 15.7 11.5 15.7 15.9 16.6 16.8 175.4

Discounted Cash Flow 15.7 10.3 12.8 11.7 11.1 10.1 Terminal Growth (assumed)

1%

Sum of PV of FCF 64.8

PV of Terminal Value 105.7

Enterprise Value 170.6 1% 1% 1%

Add : Net Cash (Debt) 22.0 as at FY15

Equity Value (S$m) 192.6

No of shares (diluted) 407.693

Equity Value Per Share (US$) 0.47

Equity Value Per Share (S$) 0.67

Source: DBS Bank


Source: DBS Bank

Analyst: Paul YONG CFA

Singapore Research Team

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 16 Nov 16 0.45 0.65 BUY


1

0.16

0.21

0.26

0.31

0.36

0.41

0.46

0.51

0.56

0.61


S$


Company Guide


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 2 Dec 2016 08:03:36 (SGT)

Dissemination Date: 18 Jan 2017 11:45:25 (SGT)

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in the past twelve months and does not engage in market-making.


Company Guide


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Company Guide


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e-mail: [email protected] Company Regn. No. 196800306E

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: AS, PY

BUY Last Traded Price ( 28 Dec 2016): S$0.395 (STI : 2,898.30) Price Target 12-mth : S$0.56 (43% upside) (Prev S$0.56) Potential Catalyst: Oil price recovery, vessel delivery Where we differ: More conservative on revenue and margins Analyst Pei Hwa HO +65 6682 3714 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 387 351 328 378 EBITDA 309 267 213 239 Pre-tax Profit 226 38 48 46 Net Profit 224 37 45 44 Net Pft (Pre-Ex, Aft Pref Div)* 179 95 22 37 EPS (S cts) 20.5 3.4 3.2 3.1 EPS Pre Ex, Aft Pref Div (S cts) 16.5 8.8 1.6 2.6 EPS Gth (%) 26 (84) (6) (3) EPS Gth Pre Ex, Aft pref div 21 (47) (82) 63 Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 99.0 101.0 85.5 88.0 PE (X) 1.9 11.7 12.4 12.8 PE Pre Ex, Aft Pref Div (X) 2.4 4.5 25.2 15.4 P/Cash Flow (X) 2.0 2.1 3.9 3.5 EV/EBITDA (X) 5.8 7.3 9.2 8.2 Net Div Yield (%) 0.3 0.0 0.0 0.0 P/Book Value (X) 0.4 0.4 0.5 0.4 Net Debt/Equity (X) 0.9 1.1 0.9 0.9 ROAE (%) 24.5 2.1 3.2 3.0 Earnings Rev (%): 0 0 Consensus EPS (S cts): 2.8 4.1 Other Broker Recs: B: 8 S: 2 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Fortified balance sheet

BUY Ezion as one of the best proxies to ride oil recovery; TP S$0.56, based on 0.6x FY16 P/BV. We believe core earnings are near bottom and comforted by Ezion’s positive OCF and lower gearing which are much needed in this environment. Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balances. Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017, and successful diversification of its customer base to win new charter contracts.

3Q16 earnings disappointed on lower revenue and margins. Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm. Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16).

Windfarm venture shaping up. China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed an MOU with one of the top five IPPs in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for China windfarm is expected to commence in 1Q17.

Valuation:

We value Ezion based on 0.6x FY16 P/BV, arriving at a target price of S$0.56. This implies 43% upside potential.

Key Risks to Our View:

Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to low-base effect. We have prudently assumed that rates will reduce by 15%/10% p.a. in FY16/17. Five service rigs are due for charter renewals in FY17. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance Issued Capital (m shrs) 2,074 Mkt. Cap (S$m/US$m) 819 / 565 Major Shareholders (%) Thiam Keng Chew 13.4 Prudential Plc 9.1 Macarios Pte Ltd 6.9

Free Float (%) 70.6 3m Avg. Daily Val (US$m) 7.7 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Ezion Holdings Version 10 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

21

71

121

171

221

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


Relative IndexS$

Ezion Holdings (LHS) Relative STI (RHS)


Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in January 2010, Ezion has expanded its fleet rapidly to 26 service rigs (excluding unit #10 that was taken out for conversion into MOPU). Based on the existing schedule, management expects another 2/7/2 units to come on stream in 2016/17/18. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers. Rate reduction and uncertainty. While we expect sequential improvement from the maiden contribution of the ten new service rigs to be delivered the next three years and resumption of the ten vessels currently under repair/upgrade/conversion at the yards, the pace of earnings growth is dependent on the magnitude of rate reduction. With oil price hovering at current levels, rate renegotiation is inevitable. Against this backdrop, we have factored in a rate reduction of 15/10% p.a. in 2016-2017. Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises ten tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months. We estimate overhead costs to be around US$15-20m a year, taking into account depreciation, crew costs and interest expenses. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers in the current climate. Contract wins from windfarm expansion to fuel growth. During the peak of its contract wins, Ezion won 12/9/7 new charter contracts in 2012/13/14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates. We believe demand will continue to grow in this region as liftboats/service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth. In addition, its recent venture into offshore windfarm could be a medium-term growth engine as well.

Total fleet

Operating fleet


18

21

2628

29

0.0

4.2

8.4

12.6

16.7

20.9

25.1

29.3

2013A 2014A 2015A 2016F 2017F

18 18 18

0.0

3.7

7.3

11.0

14.7

18.4

2013A 2014A 2015A


Company Guide

Ezion Holdings

Balance Sheet: Net gearing improved to 0.93x post right issues in July. Ezion completed the rights issue (which saw subscription of 2.06x for each rights issued) in July 2016, raising c.US$100m worth of equity in this capitalisation exercise. In 3Q16, Ezion reported a net repayment of debt of c.US$39.9m which also contributed to the slight improvement in gearing.

Relatively better financial health in current climate. Net debt/EBITDA is expected to hover around 6x in 2016. The current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.1.5x net interest coverage ratio. Share Price Drivers:

Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.

Vessel deliveries. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/1/8 vessels in 2016/17/18, driving recovery into 2017. Management could potentially dispose of four newbuild liftboats in early construction stages. Key downside risk is a rate reduction greater than the 10-15% p.a. factored into our model.

New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company. Key Risks:

Rising interest rates. About 50% of its debts have been are either on fixed rates or swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bp increase in interest rates could reduce Ezion's net profit by approximately 8%.

Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing a liquidity crunch because of the oil price collapse.

Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region. Company Background

Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 17 service rigs in operation as of September 2016. The fleet is expected to grow to 28 vessels by end-2016, 29 by end-2017 and 33-37 by end-2018.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015A 2016F 2017F


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 13.9x

+1sd: 18x

+2sd: 22.1x

‐1sd: 9.8x

‐2sd: 5.8x5.1

10.1

15.1

20.1

25.1


(x)

Avg: 1.56x

+1sd: 2.52x

+2sd: 3.48x

‐1sd: 0.6x

-0.3

0.2

0.7

1.2

1.7

2.2

2.7

3.2

3.7


(x)


Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Total fleet 18.0 21.0 26.0 28.0 29.0 Operating fleet 18.0 18.0 18.0 N/A N/A

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F Revenues (US$ m) Production and 376 312 273 298 Exploration and 10 38 54 79 Others 0 0 1 1 Total 387 351 328 378 Operating profit (US$ m) Production and 195 26 23 36 Exploration and (8) 0 11 10 Others (8) 83 10 10 Total 179 109 45 57 Operating profit Margins Production and 51.8 8.4 8.5 12.0 Exploration and (78.6) 0.1 20.4 13.2 Others 99.7 100.0 100.0 100.0 Total 46.2 31.1 13.7 15.0

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 282 387 351 328 378 Cost of Goods Sold (149) (191) (233) (254) (304) Gross Profit 133 196 118 74 73 Other Opng (Exp)/Inc (14) (17) (9) (29) (16) Operating Profit 119 179 109 45 57 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 31 28 23 19 24 Net Interest (Exp)/Inc (7) (17) (22) (30) (35) Exceptional Gain/(Loss) 20 36 (72) 15 0 Pre-tax Profit 163 226 38 48 46 Tax (3) (2) (2) (2) (2) Minority Interest 0 0 0 0 0 Net Profit 160 224 37 45 44 Net Profit before Except. 141 188 109 31 44 Preference Dividend (8) (9) (14) (8) (8) Net Pft Pre-Ex, Aft Pref Div 133 179 95 22 37 EBITDA 195 309 267 213 239 Growth Revenue Gth (%) 77.7 37.1 (9.1) (6.7) 15.3 EBITDA Gth (%) 115.7 58.3 (13.6) (20.3) 12.1 Opg Profit Gth (%) 108.5 49.9 (38.9) (59.0) 26.9 Net Profit Gth (%) 103.4 39.4 (83.6) 23.7 (2.8) Net Pft Pre-Ex Aft Perf Div Gth (%) 103.1 34.8 (46.7) (76.4) 63.5

Margins & Ratio Gross Margins (%) 47.2 50.7 33.6 22.6 19.4 Opg Profit Margin (%) 42.3 46.2 31.1 13.7 15.0 Net Profit Margin (%) 56.9 57.9 10.5 13.9 11.7 ROAE (%) 27.2 24.5 2.1 3.2 3.0 ROA (%) 9.4 8.6 0.8 1.2 1.2 ROCE (%) 7.8 7.5 3.7 1.5 1.9 Div Payout Ratio (%) 0.6 0.5 0.0 0.0 0.0 Net Interest Cover (x) 17.5 10.7 5.0 1.5 1.6



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 86 85 82 84 80 Cost of Goods Sold (61) (65) (61) (66) (66) Gross Profit 25 20 21 18 14 Other Oper. (Exp)/Inc 3 (2) (19) (6) (2) Operating Profit 28 18 2 12 12 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 9 9 8 3 5 Net Interest (Exp)/Inc (6) (6) (8) (7) (7) Exceptional Gain/(Loss) 0 (84) 13 1 0 Pre-tax Profit 31 (63) 16 9 10 Tax 0 0 0 (1) (1) Minority Interest 0 0 0 0 0 Net Profit 30 (64) 15 8 9 Net profit bef Except. 30 21 2 7 9 Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 30 21 2 7 9

EBITDA 73 62 46 51 56 Growth Revenue Gth (%) (4.3) (1.7) (3.1) 2.0 (4.7) EBITDA Gth (%) 6.9 (15.1) (26.6) 11.8 9.1 Opg Profit Gth (%) 6.7 (35.6) (89.8) 541.6 5.5 Net Profit Gth (%) 4.8 nm nm (47.5) 15.3 Margins Gross Margins (%) 29.0 23.8 25.2 21.3 17.5 Opg Profit Margins (%) 32.1 21.0 2.2 13.9 15.3 Net Profit Margins (%) 35.2 (74.9) 18.9 9.7 11.8

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,464 2,136 2,284 2,238 2,243 Invts in Associates & JVs 194 173 204 211 235 Other LT Assets 5 14 12 12 12 Cash & ST Invts 166 372 230 264 108 Inventory 0 0 0 0 0 Debtors 107 160 193 234 252 Other Current Assets 107 128 186 186 186 Total Assets 2,043 2,981 3,108 3,144 3,035 ST Debt 223 288 375 375 375 Creditor 69 70 116 130 133 Other Current Liab 84 69 109 105 105 LT Debt 863 1,208 1,230 1,135 986 Other LT Liabilities 4 33 36 36 36 Shareholder’s Equity 800 1,313 1,241 1,364 1,400 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 2,043 2,981 3,108 3,144 3,035 Non-Cash Wkg. Capital 60 148 153 185 200 Net Cash/(Debt) (920) (1,125) (1,375) (1,245) (1,253) Debtors Turn (avg days) 106.5 125.9 183.4 238.0 234.7 Creditors Turn (avg days) 181.0 288.9 345.8 432.7 327.4 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.1 0.1 Current Ratio (x) 1.0 1.5 1.0 1.1 0.9 Quick Ratio (x) 0.7 1.2 0.7 0.8 0.6 Net Debt/Equity (X) 1.1 0.9 1.1 0.9 0.9 Net Debt/Equity ex MI (X) 1.1 0.9 1.1 0.9 0.9 Capex to Debt (%) 67.3 34.9 23.8 6.9 12.0 Z-Score (X) 0.8 0.8 0.6 0.7 0.7



Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 163 226 38 48 46 Dep. & Amort. 45 103 135 150 158 Tax Paid (2) (2) (4) (7) (2) Assoc. & JV Inc/(loss) (31) (28) (23) (19) (24) Chg in Wkg.Cap. (5) (62) (32) (27) (14) Other Operating CF (15) (23) 94 0 0 Net Operating CF 155 214 209 145 163 Capital Exp.(net) (731) (522) (382) (104) (164) Other Invts.(net) 22 (19) (4) 0 0 Invts in Assoc. & JV (19) 15 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (5) 6 8 0 0 Net Investing CF (733) (520) (378) (104) (164) Div Paid (1) (1) (1) 0 0 Chg in Gross Debt 532 290 180 (95) (149) Capital Issues 97 272 (87) 97 0 Other Financing CF (14) (30) (38) (8) (8) Net Financing CF 614 530 54 (7) (156) Currency Adjustments (6) (18) (27) 0 0 Chg in Cash 31 206 (142) 35 (157) Opg CFPS (S cts) 11.3 17.5 15.2 8.3 8.5 Free CFPS (S cts) (40.5) (19.5) (10.9) 2.0 0.0



Source: DBS Bank

Analyst: Pei Hwa HO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 11 Jan 16 0.52 0.91 BUY

2: 14 Jan 16 0.49 0.90 BUY

3: 18 Jan 16 0.45 0.90 BUY

4: 25 Jan 16 0.46 0.90 BUY

5: 01 Feb 16 0.45 0.90 BUY

6: 10 Feb 16 0.45 0.90 BUY

7: 15 Feb 16 0.46 0.90 BUY

8: 22 Feb 16 0.47 0.90 BUY

9: 23 Feb 16 0.45 0.77 BUY

10: 02 Mar 16 0.47 0.77 BUY

11: 15 Mar 16 0.55 0.77 BUY12: 03 May 16 0.49 0.77 BUY13: 13 May 16 0.44 0.77 BUY14: 11 Aug 16 0.29 0.58 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 05 Sep 16 0.25 0.58 BUY16: 29 Sep 16 0.29 0.58 BUY17: 03 Oct 16 0.28 0.58 BUY18: 10 Oct 16 0.37 0.58 BUY19: 25 Nov 16 0.37 0.56 BUY20: 28 Nov 16 0.35 0.56 BUY21: 01 Dec 16 0.36 0.56 BUY

1

2

3

4

5

6

7

8

9

1011 12

13

14

15

16

17

18

19

2021

0.19

0.24

0.29

0.34

0.39

0.44

0.49

0.54

0.59


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: DT, PY

BUY

Last Traded Price ( 27 Oct 2016): S$0.81 (STI : 2,828.94) Price Target 12-mth: S$1.18 (47% upside) (Prev S$0.97) Potential Catalyst: Resilience despite typically weaker 4Q earnings Analyst Ben SANTOSO +65 6682 3707 [email protected]

What’s New 3Q16 core earnings of US$42m was well ahead of

our expectations

Results were boosted by contribution from Japfa Comfeed (on gains from sale of Australian cattle, firm DOC/broiler ASP and stronger Rupiah)

FY16F/17F earnings raised 40%/32%; TP lifted to S$1.18

BUY call reiterated for 47% upside

Price Relative

Forecasts and Valuation FY Dec (US$m) 2015A 2016F 2017F 2018F Revenue 2,787 3,189 3,415 3,597 EBITDA 292 400 465 494 Pre-tax Profit 112 276 307 343 Net Profit 64.7 151 164 160 Net Pft (ex. BA gains) 64.0 151 164 183 Net Pft (Pre Ex.) 70.3 151 164 160 Net Pft Gth (Pre-ex) (%) (1.5) 114.8 8.3 (2.1) EPS (S cts) 5.10 11.9 12.9 12.6 EPS Pre Ex. (S cts) 5.54 11.9 12.9 12.6 EPS Gth Pre Ex (%) (2) 115 8 (2) Diluted EPS (S cts) 5.10 11.9 12.9 12.6 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 52.9 64.8 77.7 90.3 PE (X) 15.8 6.8 6.2 6.4 PE Pre Ex. (X) 14.5 6.8 6.2 6.4 P/Cash Flow (X) 4.0 8.4 4.3 3.5 EV/EBITDA (X) 7.0 5.4 4.9 4.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.5 1.2 1.0 0.9 Net Debt/Equity (X) 0.7 0.5 0.4 0.3 ROAE (%) 9.7 20.2 18.1 15.0 Earnings Rev (%): 40 32 11 Consensus EPS (S cts): 8.3 9.5 11.2 Other Broker Recs: B: 1 S: 0 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Firing on all cylinders

Delivering growth. Japfa Ltd (JAP)’s FY15-18F EBITDA CAGR of 19% justifies our implied 6.3x forward EV/EBITDA multiple. The stock trades at a significant discount to its Indonesian-listed subsidiary Japfa Comfeed Indonesia (JPFA) despite delivering decent earnings growth from China, Vietnam and Myanmar, where per capita demand for dairy, animal protein and branded consumer foods is still rising.

Strong 3Q16 led to FY16F/17F earnings revisions of 40%/32%. Reported 3Q16 earnings came in at US$48.0m (6-fold increase y-o-y; +8% q-o-q). Excluding the impact of changes in fair value of biological assets and translation FX gains (losses), 3Q16 core earnings came in at US$42.0m (+51% y-o-y; -13% q-o-q) – far ahead of our expectations on annualised basis – given strong contribution from subsidiary Japfa Comfeed Indonesia (JPFA). Taking this into account, we raised our ASP assumptions for Indonesian Feed, day-old-chick (DOC), and live broilers, and adjusted margins in cattle feedlot and consumer food higher. Our forecast on Dairy, which delivered 44% y-o-y growth in EBIT (-25% q-o-q due to seasonality) was unchanged

BUY rating reiterated for 47% upside. Based on our revised forecasts, JAP’s EBITDA is projected to expand by 16% to US$464.8m next year (from US$399.8m this year) – driven by continued growth in all segments. Over the next twelve months we expect resilient demand in Indonesian live broiler and DOCs, further improvements in Consumer Food products through new product launches, better productivity/raw milk price in Dairy segment, as well as lower borrowing costs – as we impute refinancing through new bonds. We recommend investors to take advantage of the attractive valuations. Valuation: Our SOP-based TP (pegged to forward EV/EBITDA) is raised to S$1.18 following our earnings revisions. While JPFA remains the largest contributor, the group’s Dairy and Animal Protein segments outside Indonesia are expected to deliver respectable double-digit growth annually. Key Risks to Our View: JAP’s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and the USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost JAP’s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 1,421 / 1,021 Major Shareholders (%) Rangi Management Limited 52.6 Morze International Limited 16.0 Tasburgh Limited 7.2

Free Float (%) 24.2 3m Avg. Daily Val (US$m) 1.4 ICB Industry : Consumer Goods / Food Producers

DBS Group Research . Equity 28 Oct 2016


Japfa Ltd Version 8 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Japfa Ltd

WHAT’S NEW

Firing on all cylinders

Highlights

3Q16 earnings well ahead of expectations Reported 3Q16 earnings came in at US$48.0m (up from US$44.6m in 2Q16 and US$8.0m in 3Q15). This brought 9M16 reported earnings to US$116m, representing 107% of our initial FY16F earnings. Excluding the impact of changes in fair value of biological assets and translation FX gains (losses) – the group posted 3Q16 core earnings of US$42.0m (+51%y-o-y; -13% q-o-q) – well ahead of our expectations on annualised basis.

As in 2Q16, the strong performance was driven by higher EBITDA contribution from Japfa Comfeed Indonesia (JPFA) of US$94.7m (+44% y-o-y; +7% q-o-q). EBITDA contribution from Animal Protein outside Indonesia and Dairy continued to expand by a decent 38% and 45% y-o-y to US$13.5m and US$16.4m, respectively. For the quarter, contribution from Japfa Comfeed had included US$13m gain from sale of its cattle in Australia as the ranches were sold.

Japfa Comfeed (JPFA)’s contribution remained strong 3Q16 EBITDA contribution from JPFA was stronger than expected (i.e. post Lebaran) due to better DOC/live broiler prices as well as lower realised feed raw material costs than expected. These high prices (due to rebalanced supply/ demand) – rather than volume – bolstered profitability in both Feed and DOC segments. For this reason, we expect margins to ease next year.

Decent growth in Animal Protein outside Indonesia Animal Protein outside Indonesia contributed 3Q16 EBITDA of US$13.5m (+38% y-o-y; -28% q-o-q). The group attributed the improved performance to 18%/29% y-o-y higher swine feed and swine fattening volumes as well as better swine fattening margins in Vietnam – which contributed more than 80% of operating profit from this segment.

Dairy milking yield continued to rise In 3Q16, raw milk production in China rose 19% y-o-y (+1% q-o-q) to 87.4m kg from 86.4m kg in 2Q16 and just 73.4m kg in 3Q15 – backed by higher number of milkable cows. Daily milking yields seasonally eased to 35.3kg/day vs. 36.9kg/day in 2Q16 and 34.7kg/day in 3Q15. The Dairy segment’s revenue inched up 3% y-o-y (+1% q-o-q) to US$66.8m as lower prices offset higher volume. 3Q16 Dairy EBITDA consequently declined 24% q-o-q (+45% y-o-y) to US$16.4m – delivering EBITDA margin of 24.6% - down from 32.8% in 2Q16. The group expects raw milk prices to remain sluggish in the near term, mitigated by operational efficiency and better yields.

Volume driven improvement in Consumer Food The Consumer Food segment’s EBITDA contribution was exceptionally strong at US$4.9m (+172% y-o-y; +158% q-o-q) – primarily due to higher sales volumes. However, start-up

losses in Vietnam continued to weigh on profit contribution from Indonesia.

Lower net gearing ratio As at end-September 2016, the group had total borrowings of US$732m – down from US$846m at end June 2016. This translated to net debt to total equity ratio of 43% (declining from 64% at end-June 2016). The lower net gearing ratio reflects debt repayments undertaken by JPFA following cash injection from recently completed placement to KKR. No additional USD bond repurchase was undertaken in 3Q16. JPFA has recently announced plans to issue re-tap bonds for maximum amount of Rp3tr – of which Rp1tr we assumed would be launched by end of this year to repay Rp1.5tr IDR bonds due February/March 2017.

Outlook

FY16F/17F earnings raised by 40%/32% Adjusting for the strong JPFA results in 9M16, we made changes to JPFA’s earnings, particularly in Feed, DOC and broiler ASP as well as Feed raw material costs: 1. We tweaked FY16F/17F DOC ASP to Rp4,900/Rp5,100

per chick – from Rp4,700/Rp4,900 previously 2. We adjusted FY16F/17F broiler ASP to

Rp17,200/Rp17,600 per kg live – from Rp17,000/Rp17,500 previously

3. We adjusted poultry feed ASP to Rp6,300/Rp6,400 –Rp6,100/Rp6,400 previously

We adjusted USD/IDR rate next year (in favour of stronger Rupiah) and benchmarked corn/soybean meal prices based on our latest in-house forecasts

Accounting for its 51% stake in JPFA, JAP’s FY16F/17F earnings were revised by +40%/+32%. Likewise, FY16F/17F EBITDA were revised by +18%/+20%. In line with seasonal trend, we anticipate sequentially lower 4Q16 earnings contribution from JPFA, offset by higher China Dairy (on seasonal recovery in milk yields). Post revisions, JAP’s interest coverage ratio is expected to average 4.9x this year – up from 3.2x last year – thanks to both reduced debt and better profitability.

Valuation

TP adjusted to 1.18; BUY rating reiterated Based on our revised forecasts, JAP’s EBITDA is due to expand 16% next year – driven by steady double-digit growth in Animal Protein outside Indonesia and Dairy EBITDA.

We employed SOP valuation based on forward EV/EBITDA multiples on each segment. Based on our forecast revisions, our TP is lifted to S$1.18 – mainly to account for higher contribution from JPFA and significantly lower net debt. We reiterate our BUY rating for 47% upside to our revised TP. We believe the stock is significantly undervalued relative its presence in Asia’s largest population, relative to peers, and for its secular growth prospects.


Company Guide

Japfa Ltd


FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq

Revenue 695 782 788 13.3 0.8

Cost of Goods Sold (557) (591) (601) 7.8 1.6

Gross Profit 138 191 187 35.4 (1.8)

Other Oper. (Exp)/Inc (72.5) (82.8) (81.9) 12.9 (1.1)

Operating Profit 65.8 108 105 60.1 (2.3)

Other Non Opg (Exp)/Inc (21.2) (1.2) 5.95 nm nm

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (17.2) (15.1) (13.9) 19.2 8.0

Exceptional Gain/(Loss) (9.3) (10.8) 5.75 nm nm

Pre-tax Profit 18.1 80.8 103 468.9 27.8

Tax (7.7) (11.2) (24.2) 213.1 116.6

Minority Interest (2.4) (25.0) (31.0) nm 24.2

Net Profit 7.99 44.6 48.0 501.2 7.6

EBITDA 92.0 132 131 42.3 (1.0)

Margins (%)

Gross Margins 19.9 24.4 23.8

Opg Profit Margins 9.5 13.8 13.4

Net Profit Margins 1.1 5.7 6.1

Source of all data: Company, DBS Bank

Quarterly EBITDA (US$m)


EBITDA 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16Japfa Comfeed 31.6 33.6 20.3 29.0 65.9 64.8 43.5 88.7 94.7 q-o-q growth -49% 6% -40% 43% 127% -2% -33% 104% 7% y-o-y growth 226% -12% -53% 109% 93% 114% 206% 44%Animal Protein - others 13.0 14.7 10.8 13.4 9.8 8.6 11.7 18.8 13.5 q-o-q growth 400% 13% -27% 24% -27% -12% 36% 61% -28% y-o-y growth 67% -4% 415% -25% -41% 8% 40% 38%Dairy 13.7 11.0 16.4 15.4 11.3 17.6 18.1 21.7 16.4 q-o-q growth -53% -20% 49% -6% -27% 56% 3% 20% -24% y-o-y growth 39% -1% -47% -18% 60% 10% 41% 45%Consumer food 3.8 1.9 2.0 3.6 1.8 1.4 2.1 1.9 4.9 q-o-q growth 138% -50% 5% 80% -50% -22% 50% -10% 158% y-o-y growth NM 11% 125% -53% -26% 5% -47% 172%Others (3.0) 0.0 0.8 1.1 1.0 2.8 1.8 1.1 1.2EBITDA 59.1 61.2 50.3 62.5 89.8 95.2 77.2 132.2 130.7 q-o-q growth -37% 4% -18% 24% 44% 6% -19% 71% -1% y-o-y growth 106% 0% -33% 52% 56% 53% 112% 46%

EBITDA margin 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16Japfa Comfeed 5.8% 7.2% 4.4% 6.1% 14.3% 14.0% 9.1% 16.7% 17.8%Animal Protein - others 9.8% 10.5% 8.5% 10.2% 7.3% 6.1% 8.6% 13.4% 9.3%Dairy 22.8% 18.2% 27.2% 23.8% 17.5% 25.2% 26.0% 32.8% 24.6%Consumer food 6.5% 3.9% 4.7% 7.4% 3.7% 3.0% 4.6% 3.6% 9.4%


Company Guide

Japfa Ltd

SOP Valuation

Source: DBS Bank estimates

CY17F Target Holdco CY17F CY17F CY17F Proport ion Stake Equit yEBITDA CY17F discount Net Net EV Net debt of net debt value (US$ m) EV/EBITDA EV/EBITDA (US$ m) (US$ m) (US$ m)

Dairy 93.5 9.0 0% 9.0 841.5 77.3 12% 61.9% 473.0Animal Protein (JPFA) 295.0 6.5 20% 5.2 1,533.9 472.8 51.0% 541.2Animal Protein (ex JPFA) 66.8 7.0 0% 7.0 467.5 33.1 100.0% 434.4Consumer Foods 10.3 10.0 0% 10.0 102.9 51.7 8% 100.0% 51.2Aggregate value 465.6 6.3 2,945.8 635.0 100% 1,499.8

(+) Cash 254.4(-) Borrowings 889.3Net debt 635.0

Number of shares (m) 1,765Equity value/share (US$) 0.85Equit y value/share (S$) 1.18FY17F earnings (US$ m) 163.6Implied FY17F PER based on TP 9.2Implied FY17F EV/EBITDA based on TP 6.3FY15-18F earnings CAGR 42%PEG 0.22

80%


Company Guide

Japfa Ltd


Earnings Drivers:

DOC capacity expansion in Indonesia. Hampered by oversupply in FY14-15, JAP’s DOC production in Indonesia is expected to remain flat in FY16F as a result of the government-mandated cull of c.640k Parent Stock (JAP’s estimated share of 3m culled between Oct15 and Dec15).

Feedmill capacity expansion on hold in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regard to importation of raw materials) and exchange rates may adversely affect profitability, if JAP is unable to pass on the cost pressures.

Expansion of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve in FY16 on the back of improved genetics. The group’s Myanmar operations expanded poultry operations into Mandalay in FY15, and we expect improved earnings following the purchase of the remaining 15% minority interest. JAP’s operation in India is small, with some increase in feedmill capacity there.

More dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province was completed in FY15. A second five-farm hub was initially planned for construction between FY14 and FY18 in Inner Mongolia. However, so far only Farm 6 has started milking at end of FY15 and full milking is expected by end of this year. We understand construction of Farm 7 has been delayed due to weaker-than-expected raw milk prices. JAP is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads (completed at end FY15).

Expansion of beef cattle feedlot. Japfa has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input into the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas.

Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Raw & fresh milk output (k MT)

Broiler sales (mn birds)

Consumer foods volume (k MT)

China raw milk price (CNY/kg)

Average USD/IDR rate



Company Guide

Japfa Ltd

Balance Sheet: JAP’s net debt-to-total equity ratio came in at 43% as at end of September 2016 and is conservatively forecast to settle at 57% by end- FY16F. We expect the group to refinance the outstanding Rp1.5tr notes (due 2017) and repay the USD notes (due 2018) to reduce its USD debt exposure by issuing IDR bonds.

Share Price Drivers: DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% of the market. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have an instant impact on JAP’s profitability even with cuts in parent stock (PS) numbers. Hence, we believe resumption of nationwide PS culling would send a positive signal for further DOC price upside.

Rupiah movements. JAP’s USD bonds have created translation FX losses in Japfa’s subsidiary, JPFA, together with the Rupiah’s depreciation YTD. Hence, Rupiah movements would impact reported earnings.

Key Risks: Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status.

Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected price growth

Movements in raw material costs and currencies. JAP is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power led to delays in passing on raw material costs.

Changes in regulations. Changes in government regulations/ licensing/price or volume controls may adversely affect JAP’s profitability.

Vulnerable to liquidity and credit risks

Company Background Japfa Ltd (JAP) is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China. The group is the second largest poultry feed and DOC (day-old-chicks) breeder The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Raw & fresh milk output 224 316 436 533 555 Broiler sales (mn birds) 351 352 351 396 421 Consumer foods volume 77.4 82.4 87.9 93.9 101 China raw milk price 4.90 4.00 3.75 3.90 3.94 Average USD/IDR rate 11,879 13,392 13,190 13,608 14,325

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (US$m)

Dairy 226 257 315 388 411 Animal protein 2,513 2,361 2,674 2,816 2,965 Consumer foods 209 169 200 212 221 Total 2,947 2,787 3,189 3,415 3,597 EBITDA (US$m)

Dairy 70.4 60.7 66.8 93.5 110 Animal protein 192 222 324 362 374 Consumer foods 9.10 8.80 9.86 10.3 10.7 Total 271 291 401 466 495 EBITDA Margins (%)

Dairy 31.2 23.6 21.2 24.1 26.8 Animal protein 7.6 9.4 12.1 12.8 12.6 Consumer foods 4.3 5.2 4.9 4.9 4.8 Total 9.2 10.5 12.6 13.6 13.8

Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 2,947 2,787 3,189 3,415 3,597 Cost of Goods Sold (2,441) (2,267) (2,525) (2,669) (2,804) Gross Profit 506 520 663 746 792 Other Opng (Exp)/Inc (315) (304) (336) (356) (376) Operating Profit 191 217 327 390 417 Other Non Opg (Exp)/Inc 1.62 (31.9) 15.9 (19.7) (14.8) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (79.2) (67.2) (66.8) (63.5) (58.9) Exceptional Gain/(Loss) (40.2) (5.6) 0.0 0.0 0.0 Pre-tax Profit 73.7 112 276 307 343 Tax (14.5) (20.2) (55.2) (61.3) (68.6) Minority Interest (28.0) (27.1) (69.5) (81.7) (114) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 31.2 64.7 151 164 160 Net Profit before Except. 71.4 70.3 151 164 160 Net Pft (ex. BA gains) 51.8 64.0 151 164 183 EBITDA 271 292 400 465 494 EBITDA (ex. BA gains) 271 292 400 465 494 Growth

Revenue Gth (%) 9.3 (5.4) 14.4 7.1 5.3 EBITDA Gth (%) 4.7 7.9 36.9 16.3 6.3 Opg Profit Gth (%) (5.1) 13.2 50.8 19.3 6.9 Net Profit Gth (Pre-ex) (%) 101.1 (1.5) 114.8 8.3 (2.1) Margins & Ratio

Gross Margins (%) 17.2 18.7 20.8 21.9 22.0 Opg Profit Margin (%) 6.5 7.8 10.2 11.4 11.6 Net Profit Margin (%) 1.1 2.3 4.7 4.8 4.5 ROAE (%) 5.8 9.7 20.2 18.1 15.0 ROA (%) 1.5 2.9 6.4 6.1 5.5 ROCE (%) 8.2 8.9 12.4 12.9 12.7 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 2.4 3.2 4.9 6.1 7.1



Company Guide

Japfa Ltd


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016

Revenue 695 712 718 782 788 Cost of Goods Sold (557) (559) (571) (591) (601) Gross Profit 138 153 146 191 187 Other Oper. (Exp)/Inc (72.5) (77.5) (91.0) (82.8) (81.9) Operating Profit 65.8 75.3 55.1 108 105 Other Non Opg (Exp)/Inc (21.2) 7.87 9.89 (1.2) 5.95 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (17.2) (15.2) (15.4) (15.1) (13.9) Exceptional Gain/(Loss) (9.3) 13.8 (1.6) (10.8) 5.75 Pre-tax Profit 18.1 81.7 48.0 80.8 103 Tax (7.7) (6.8) (10.9) (11.2) (24.2) Minority Interest (2.4) (28.2) (13.7) (25.0) (31.0) Net Profit 7.99 46.7 23.4 44.6 48.0 Net profit bef Except. 17.3 33.0 25.0 55.4 42.3 EBITDA 92.0 95.1 76.6 132 131

Growth

Revenue Gth (%) (1.3) 2.4 0.8 9.0 0.8 EBITDA Gth (%) 45.3 3.4 (19.5) 72.9 (1.0) Opg Profit Gth (%) 49.3 14.3 (26.8) 95.6 (2.3) Net Profit Gth (Pre-ex) (%) (15.6) 91.1 (24.2) 121.7 (23.7) Margins

Gross Margins (%) 19.9 21.5 20.4 24.4 23.8 Opg Profit Margins (%) 9.5 10.6 7.7 13.8 13.4 Net Profit Margins (%) 1.1 6.6 3.3 5.7 6.1

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 834 835 854 940 1,019 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 310 331 488 570 652 Cash & ST Invts 287 148 230 254 147 Inventory 598 609 590 624 655 Debtors 151 132 154 165 174 Other Current Assets 148 157 223 279 328 Total Assets 2,327 2,213 2,540 2,832 2,975

ST Debt 476 330 483 556 346 Creditor 233 260 222 234 246 Other Current Liab 25.0 20.3 37.4 40.9 45.1 LT Debt 507 510 406 365 429 Other LT Liabilities 91.4 83.2 81.4 79.8 78.3 Shareholder’s Equity 662 671 822 985 1,145 Minority Interests 332 338 489 571 685 Total Cap. & Liab. 2,327 2,213 2,540 2,832 2,975

Non-Cash Wkg. Capital 639 618 709 793 866 Net Cash/(Debt) (697) (693) (658) (667) (628) Debtors Turn (avg days) 17.7 18.5 16.4 17.1 17.2 Creditors Turn (avg days) 32.9 41.0 35.8 32.1 32.1 Inventory Turn (avg days) 87.5 100.4 89.3 85.4 85.6 Asset Turnover (x) 1.4 1.2 1.3 1.3 1.2 Current Ratio (x) 1.6 1.7 1.6 1.6 2.0 Quick Ratio (x) 0.6 0.5 0.5 0.5 0.5 Net Debt/Equity (X) 0.7 0.7 0.5 0.4 0.3 Net Debt/Equity ex MI (X) 1.1 1.0 0.8 0.7 0.5 Capex to Debt (%) 29.8 21.7 18.4 26.1 32.1 Z-Score (X) 2.4 2.6 2.6 2.6 2.8



Company Guide

Japfa Ltd

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 73.7 112 276 307 343 Dep. & Amort. 62.2 71.9 74.0 75.8 78.4 Tax Paid (37.8) (20.2) (55.2) (61.3) (68.6) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (88.4) 11.8 (195) (112) (94.5) Other Operating CF 0.12 0.08 0.02 0.03 0.03 Net Operating CF 125 254 121 237 292 Capital Exp.(net) (293) (182) (163) (241) (248) Other Invts.(net) 0.01 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (5.9) (3.6) (2.9) (2.9) (3.0) Net Investing CF (299) (186) (166) (244) (251) Div Paid (3.7) 0.0 0.0 0.0 0.0 Chg in Gross Debt 68.1 (132) 48.1 32.7 (147) Capital Issues 198 0.0 0.0 0.0 0.0 Other Financing CF (27.3) (75.3) 79.7 (2.0) (1.9) Net Financing CF 235 (207) 128 30.7 (149) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 61.6 (139) 82.5 23.9 (108) Opg CFPS (S cts) 16.8 19.1 24.9 27.5 30.5 Free CFPS (S cts) (13.2) 5.68 (3.3) (0.3) 3.46



Source: DBS Bank

Analyst: Ben SANTOSO

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY Last Traded Price ( 28 Dec 2016): S$0.45 (STI : 2,898.30) Price Target 12-mth: S$0.56 (24% upside) Potential Catalyst: Earnings-accretive acquisitions Analyst Lee Keng LING +65 6682 3703 [email protected]

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2016A 2017F 2018F 2019F Revenue 38.3 99.2 143 174 EBITDA 19.4 31.6 41.7 47.9 Pre-tax Profit 9.99 22.2 29.9 36.2 Net Profit 8.90 18.4 24.9 30.0 Net Pft (Pre Ex.) 8.90 18.4 24.9 30.0 Net Pft Gth (Pre-ex) (%) 73.4 107.1 34.9 20.8 EPS (S cts) 0.98 1.76 2.37 2.86 EPS Pre Ex. (S cts) 0.98 1.76 2.37 2.86 EPS Gth Pre Ex (%) 59 79 35 21 Diluted EPS (S cts) 0.98 1.76 2.37 2.86 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 4.00 6.93 9.31 12.2 PE (X) 45.7 25.6 19.0 15.7 PE Pre Ex. (X) 45.7 25.6 19.0 15.7 P/Cash Flow (X) nm 30.1 20.1 14.4 EV/EBITDA (X) 21.0 14.4 11.4 9.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 11.2 6.5 4.8 3.7 Net Debt/Equity (X) CASH CASH 0.1 CASH ROAE (%) 32.1 33.8 29.2 26.7 Earnings Rev (%): - - - Consensus EPS (S cts): 1.40 2.20 2.50 Other Broker Recs: B: 2 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Growth intact

Growth supported by core business; cinemas to build recurring income. We project mm2 to grow at an EPS CAGR of 50% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contributions from cinema operations and entertainment company, UnUsUal Group. Contribution from the newly proposed acquisition of 13 cinemas in Malaysia, which would propel mm2 Asia to become a top four player in Malaysia, is expected to be from FY18F onwards. In terms of its core production business, we expect North Asia, including China, Hong Kong and Taiwan, to contribute >70% of core revenue from FY17F, up from 23% in FY16. Upside to earnings could come from more projects, especially in China where budgets are much higher. 1H17 earnings doubled. mm2 reported a net profit of S$8.9m (+97% y-o-y) for 1H17. We expect a stronger 2H, mainly from the full impact from UnUsUal and the Mega cinemas acquired. UnUsUal listing. The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value, and allow UnUsUal to tap on public funds for expansion. Valuation:

Maintain BUY and TP of S$0.56. We maintain our earnings forecasts for FY17F and FY18F but we have removed the revenue from the Distribution segment, to be in line with the group’s reporting format. We have also added forecasts for FY19F. Maintain BUY. Our TP of S$0.56 is pegged to FY18F earnings and peers’ average of 24x. Key Risks to Our View:

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders. At A Glance Issued Capital (m shrs) 1,029 Mkt. Cap (S$m/US$m) 463 / 319 Major Shareholders (%) Wee Chye Ang 45.9 Yeo Khee Seng 9.2 Starhbu Ltd 8.6

Free Float (%) 36.4 3m Avg. Daily Val (US$m) 1.1 ICB Industry : Consumer Services / Media



mm2 Asia Version 8 | Bloomberg: MM2 SP | Reuters: MM2A.SI Refer to important disclosures at the end of this report

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Relative IndexS$

mm2 Asia (LHS) Relative STI (RHS)


Company Guide

mm2 Asia


Earnings Drivers:

Acquisitions to strengthen competitive edge and build income base mm2 has made several acquisitions to maintain its competitive advantage. The latest is the acquisition of 13 cinemas in Malaysia. Upon completion likely in February next year, mm2 will own a total of 18 cinemas with a market share of about 14% in terms of number of screens, propelling the company to become a top four player in Malaysia. The ownership of cinemas will provide a source of recurring income to the group and cost savings in the longer term, as mm2 usually has to pay about 50% of its gross intake for rental of cinemas. Cinema operation is a profitable business, and could be profitable even with less than 50% of the seats occupied. Other than cinemas, mm2 has recently entered into an MOU to acquire up to 30% stake in RINGS.TV, a leading interactive live streaming broadcast platform for S$4.5m in a bid to beef up its OTT (over-the-top) platform. In February 2016, mm2 acquired a 51% stake in UnUsUal Group, one of Asia’s largest promoters and organisers of shows and entertainment acts, for S$26m. Consolidating its position in local market; tapping on StarHub’s strong brand name As the industry leader, mm2 is poised for more opportunities ahead. With the entry of StarHub with a 9.05% stake, mm2 can tap on the former's strong brand name and this could raise its profile and pave the way for bigger opportunities ahead. mm2 could also leverage on StarHub to attract more sponsorship for its productions. StarHub can choose to tap on mm2’s cineplex business to showcase its content, as well as gain access to top-rated concerts and artistes through UnUsUal, in which mm2 owns a 51% stake. Going for niche markets in North Asia; adaptation of successful movies. In terms of strategy in China, instead of competing directly with the local big boys, mm2’s strategy is to go for small, niche markets and replicate its proven business model that it has in Singapore. For example, remaking successful titles like “The Journey” or Jack Neo’s “I not Stupid” movie in a specific province like Sichuan, which has a population of about 80m, which is >10x bigger than Singapore. mm2 can adapt the movie to the local setting, which would be more appealing to the locals there. Besides production of movies, mm2 can also produce variety shows, either on its own or via tie-ups with one of its shareholders, Hesheng Media, which is one of the largest integrated media companies in China. Distribution of movies, another core competency of mm2 apart from production and advertising, is also another channel that can broaden mm2’s income in China.

Business Model – The Film Budget

Business Model – Gross Receipts (Box Office)

Revenue Breakdown by Segment

FY16 Revenue Breakdown by Country

Profitability Trend


S$29.8m

S$61.9m

S$66.7m S$82.7m

S$4.9m

S$14.0m

S$36.0m S$43.2m

S$18.3m S$35.8m S$42.9m

S$3.6m S$5.0m S$5.0m S$5.0m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

16 17F 18F 19F

Vividthree

UnUsUal

Cinema

Core business

Singapore59%Malaysia

19%

China15%

Taiwan4%

Hong Kong3%

0

5

10

15

20

25

30

35

40

45

2014A 2015A 2016A 2017F 2018F 2019F

EBIT Pre tax Profit Net Profit

S$m

Net profit CAGR: 58%

Equals

less

less

less

less

Producer’s Fee

Script Rights

Director’s Fee

Production Team / Crew Fees

Production Cost

Post - Production Cost

Prints & Advertising Cost

Income to mm2

Box Office Receipts

Exhibitors’ Cost

Distribution Commission

Marketing Costs

Producer Bonus *

Net Receipts

Income to mm2

Return to Stakeholders (mm2 may also be a stakeholder)

* only when return is higher than stakeholders’ ROI


Company Guide

mm2 Asia

Balance Sheet:

Net cash position. mm2 was in a net cash position as at September 2016. Though we do not rule out the possibility of the group taking on more debt, as it is constantly on the lookout for acquisitions that can complement its existing business and also to build its recurring income base, the full impact from its recent acquisitions should lead to stronger earnings and equity base. Asset-light business model. More than half of its assets are current assets, comprising mainly cash and receivables, even with the acquisition of cinemas and UnUsUal. Share Price Drivers:

UnUsUal listing. The successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value, and allow UnUsUal to tap on public funds for expansion. Growing production and distribution income. Its core business, which includes production, distribution and sponsorship, is expected to account for at least 70% of total revenue going forward. In terms of production project pipeline, we expect more than half of the production to come from North Asia. In China, we are expecting the group to also produce dramas, which will have a much bigger production budget than movies. Even for movies in China, their production budgets and margins are also better than local productions. mm2 has also entered into an agreement to acquire the exclusive licensed rights to produce and broadcast The Voice for the Singapore/Malaysia version. The Voice is a popular format show currently being watched by more than 500m viewers. mm2, together with Clover Films, has also clinched the distribution rights for 19 movies in Singapore and Malaysia. Though distribution margins are much lower than production, at about 3% vs ~40%, it is very scalable. Key Risks:

No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Availability of good scripts. Lack of good scripts for production may lead to less support from stakeholders. Unable to predict the commercial success of movies produced. The commercial success of its productions is primarily determined by inherently unpredictable audience reactions. Company Background mm2 Asia is a leading producer of films and TV/online content in Asia. As a producer, mm2 provides services over the entire film-making process – from financing and production to marketing and distribution, and thus has diversified revenue streams. mm2 also owns entertainment company, UnUsUal Group, and cinemas in Malaysia.

Number of Titles (Production & Distribution)

Year Number of Titles

(Production) Number of Titles

(Distribution) FY Mar 2012 3 2 FY Mar 2013 6 8 FY Mar 2014 6 18 FY Mar 2015 9 26 FY Mar 2016 14 24

Apr 16 to Sep 17* 35 * projection

Details of cinemas acquired

Cinema Place Capacity

Cathay Cineplex City Square Johor Bahru 14 screens, 2,826 seats

Cathay Cineplex Damansara Damansara 16 screens, 2,472 seats

Mega Cineplex Prai Penang 6 screens, 1,420 seats

Mega Cineplex Langkawi Langkawi 3 screens 536 seats

Mega Cineplex Bertam Bertam 4 screens 756 seats

LFS 1 Plaza, Kuala Selangor Selangor 5 screens, 733 seats

LFS Seri Iskandar Perak 7 screens, 1,349 seats

LFS 1 Segamat Johor 8 screens, 1,703 seats

LFS Prangin Mall Penang 8 screens, 1,490 seats

LFS Bahau Negeri Sembilan

6 screens, 1,036 seats

LFS Shaw Centre, Point Klang

Selangor 4 screens, 875 seats

LFS Riverside, Kuching Sarawak 4 screens, 585 seats

LFS IOI Kulai Johor 6 screens, 920 seats

LFS Kerian Sentral Mall Perak 8 screens, 1,183 seats

LFS Summer Mall Sarawak 12 screens, 2,038 seats

LFS Mahkota Parade Malacca 4 screens, 645 seats

LFS Bukit Jambul Penang 6 screens, 1,167 seats

LFS Kampar Perak 6 screens, 846 seats

Forward PE Band (x)

PB Band (x)


Avg: 13.1x

+1sd: 18x

+2sd: 22.8x

‐1sd: 8.3x

‐2sd: 3.4x3.1

8.1

13.1

18.1

23.1


(x)

Avg: 5.43x

+1sd: 7.13x

+2sd: 8.84x

‐1sd: 3.72x

‐2sd: 2.01x1.8

2.8

3.8

4.8

5.8

6.8

7.8

8.8

9.8


(x)


Company Guide

mm2 Asia

Segmental Breakdown

FY Mar 2015A 2016A 2017F 2018F 2019F Revenues (S$m) Core Business 24.3 29.8 61.9 66.7 82.7 Production 51.9 56.7 72.7 TV Content 10.0 10.0 10.0 Cinema 4.9 14.0 36.0 43.2 UnUsUal 18.3 35.8 42.9 Vividthree 3.6 5.0 5.0 5.0 Total 24.3 38.3 99.2 143.4 173.8 Gross profit (S$m)

Core Business 9.6 13.1 22.3 24.2 30.6 Production 20.8 22.7 29.1 TV Content 1.5 1.5 1.5 Cinema 2.8 7.7 19.8 23.8 UnUsUal 6.8 13.2 15.9 Vividthree 2.5 3.5 3.5 3.5 Total 9.6 18.4 40.2 60.7 73.7 Gross profit Margins (%)

Core Business 39% 44% 36% 36% 37% Production 40% 40% 40% TV Content 15% 15% 15% Cinema 57% 55% 55% 55% UnUsUal 37% 37% 37% Vividthree 69% 70% 70% 70%

Total 39% 48% 41% 42% 42% Income Statement (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 24.3 38.3 99.2 143 174 Cost of Goods Sold (14.7) (20.0) (59.0) (82.7) (100) Gross Profit 9.58 18.4 40.2 60.7 73.7 Other Opng (Exp)/Inc (3.0) (8.0) (17.7) (28.0) (34.8) Operating Profit 6.62 10.4 22.6 32.7 38.9 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.00 (0.4) (0.4) (2.8) (2.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 6.58 9.99 22.2 29.9 36.2 Tax (1.5) (1.1) (3.8) (5.1) (6.1) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 5.08 8.90 18.4 24.9 30.0 Net Profit before Except. 5.13 8.90 18.4 24.9 30.0 EBITDA 9.92 19.4 31.6 41.7 47.9 Growth Revenue Gth (%) 50.7 57.9 158.8 44.5 21.2 EBITDA Gth (%) 38.5 95.2 63.0 32.2 14.9 Opg Profit Gth (%) 78.3 56.7 117.6 44.9 19.0 Net Profit Gth (Pre-ex) (%) 68.1 73.4 107.1 34.9 20.8 Margins & Ratio Gross Margins (%) 39.5 48.0 40.6 42.3 42.4 Opg Profit Margin (%) 27.3 27.1 22.8 22.8 22.4 Net Profit Margin (%) 20.9 23.2 18.6 17.3 17.3 ROAE (%) 44.5 32.1 33.8 29.2 26.7 ROA (%) 18.5 16.7 17.0 13.3 12.0 ROCE (%) 37.7 27.3 28.4 19.5 17.5 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM 26.8 58.3 11.7 14.0


Partial contributions from UnUsUal

Includes contribution from latest acquisition of Lotus cinemas


Company Guide

mm2 Asia

Quarterly / Interim Income Statement (S$m)

FY Mar 1H15 2H15 1H16 2H16 1H17 Revenue 9.7 14.6 12.7 25.6 35.0 Cost of Goods Sold (4.0) (10.7) (4.3) (15.6) (15.3) Gross Profit 5.7 3.9 8.4 10.0 19.8 Other Oper. (Exp)/Inc (1.2) (1.8) (3.0) (5.4) (8.9) Operating Profit 4.5 2.1 5.4 4.6 10.9 Other Non Opg (Exp)/Inc 0.0 (0.0) 0.0 (0.0) (0.0) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 4.5 2.0 5.4 4.6 10.9 Tax (0.9) (0.6) (0.9) (0.2) (2.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 3.6 1.5 4.5 4.4 8.9 Net profit bef Except. 3.6 1.5 4.5 4.4 8.9 EBITDA 5.3 4.6 6.7 4.6 13.5 Growth Revenue Gth (%) 51 (13) 102 37 EBITDA Gth (%) (13) 45 (31) 193 Opg Profit Gth (%) (54) 161 (15) 137 Net Profit Gth (Pre-ex) (%) (60) 208 (2) 101 Margins Gross Margins (%) 58.7 26.7 66.1 39.0 56.4 Opg Profit Margins (%) 46.7 14.1 42.4 17.9 31.1 Net Profit Margins (%) 37.4 10.0 35.5 17.1 25.3

Balance Sheet (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 0.10 3.65 4.84 18.3 23.8 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 6.36 26.1 33.2 57.3 62.9 Cash & ST Invts 5.76 4.74 29.6 36.5 49.1 Inventory 4.77 9.83 21.6 30.3 36.6 Debtors 20.6 24.4 58.2 84.2 102 Other Current Assets 0.0 0.26 0.26 0.26 0.26 Total Assets 37.6 69.0 148 227 275 ST Debt 0.22 0.20 0.20 0.20 0.20 Creditor 14.7 23.8 56.9 79.8 96.6 Other Current Liab 1.46 4.21 4.93 6.25 7.31 LT Debt 0.09 2.85 11.2 41.2 41.2 Other LT Liabilities 1.92 0.75 0.75 0.75 0.75 Shareholder’s Equity 19.2 36.2 72.6 97.5 128 Minority Interests 0.0 0.98 0.98 0.98 0.98 Total Cap. & Liab. 37.6 69.0 148 227 275 Non-Cash Wkg. Capital 9.19 6.49 18.2 28.6 35.0 Net Cash/(Debt) 5.45 1.69 18.2 (5.0) 7.64 Debtors Turn (avg days) 240.0 214.2 152.0 181.2 195.5 Creditors Turn (avg days) 417.3 640.7 294.6 338.5 353.4 Inventory Turn (avg days) 100.2 243.0 114.7 128.4 134.0 Asset Turnover (x) 0.9 0.7 0.9 0.8 0.7 Current Ratio (x) 1.9 1.4 1.8 1.8 1.8 Quick Ratio (x) 1.6 1.0 1.4 1.4 1.5 Net Debt/Equity (X) CASH CASH CASH 0.1 CASH Net Debt/Equity ex MI (X) CASH CASH CASH 0.1 CASH Capex to Debt (%) 645.4 279.3 150.7 112.4 48.3 Z-Score (X) 14.0 9.2 5.7 4.0 3.8


Volatile margins mainly due to different stages of revenue recognition


Company Guide

mm2 Asia

Cash Flow Statement (S$m)

FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 6.58 9.99 22.2 29.9 36.2 Dep. & Amort. 3.29 8.98 8.98 8.98 8.98 Tax Paid (1.5) (1.1) (3.1) (3.8) (5.1) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (12.0) (22.6) (12.5) (11.7) (7.4) Other Operating CF 1.00 0.0 0.0 0.0 0.0 Net Operating CF (2.6) (4.7) 15.7 23.4 32.6 Capital Exp.(net) (2.0) (8.5) (17.3) (46.6) (20.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (2.0) (8.5) (17.3) (46.6) (20.0) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 2.94 2.35 8.40 30.0 0.0 Capital Issues 7.75 9.10 18.0 0.0 0.0 Other Financing CF (1.6) (0.7) 0.0 0.0 0.0 Net Financing CF 9.05 10.7 26.4 30.0 0.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 4.44 (2.5) 24.9 6.86 12.6 Opg CFPS (S cts) 1.13 1.98 2.68 3.35 3.82 Free CFPS (S cts) (0.6) (1.5) (0.2) (2.2) 1.21



Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 05 Jan 16 0.19 0.26 BUY

2: 04 Feb 16 0.18 0.26 BUY

3: 23 Mar 16 0.27 0.26 BUY

4: 24 Mar 16 0.26 0.31 BUY

5: 25 May 16 0.31 0.37 BUY

6: 10 Jun 16 0.35 0.37 BUY

7: 01 Jul 16 0.34 0.41 BUY

8: 13 Sep 16 0.39 0.47 BUY

9: 09 Nov 16 0.47 0.56 BUY

10: 15 Nov 16 0.47 0.56 BUY


1

2

3

4 5

6

7

89

10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50


S$

Issue of shares to finance recent acquisitions

Assume partial debt financing for the acquisition of cinemas

FY17 and FY18 - Acquisition of cinemas and RINGS.TV

Market Focus

Small Mid Cap

Page 17

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 18 Jan 2017 13:10:40 (SGT) Dissemination Date: 18 Jan 2017 18:51:06 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelvep months and does not engage in market-making.

Market Focus

Small Mid Cap

Page 18

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 18 Jan 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have proprietary

positions in Ascendas Hospitality Trust, Ascott Residence Trust, Cache Logistics Trust, Cambridge Industrial Trust,CapitaLand Retail China Trust, CDL Hospitality Trusts, Cosco Corporation, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Far East Hospitality Trust, Frasers Centrepoint Trust, Frasers Commercial Trust, Frasers Hospitality Trust, Frasers Logistics & Industrial Trust, Indofood Agri Resources, Keppel DC REIT, Keppel Infrastructure Trust, M1, Manulife US REIT, Mapletree Greater China Commercial Trust, Mapletree Logistics Trust, Midas Holdings, Noble Group, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, RHT Health Trust, Sheng Siong Group,, Soilbuild Business Space Reit, SPH REIT, YTL Starhill Global REIT, Venture Corporation recommended in this report as of 30 Dec 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Ascott Residence Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, Croesus Retail Trust, Frasers Commercial Trust, Frasers Hospitality Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT, M1, Manulife US REIT, Mapletree Greater China Commercial Trust, Mapletree Logistics Trust, RHT Health Trust, Soilbuild Business Space Reit, YTL Starhill Global REIT recommended in this report as of 30 Dec 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust, CDL Hospitality Trusts, Croesus Retail Trust, Frasers Commercial Trust, Frasers Hospitality Trust, , Frasers Logistics & Industrial Trust, Keppel DC REIT, M1, Manulife US REIT, Mapletree Greater China Commercial Trust, Soilbuild Business Space Reit, YTL Starhill Global REIT as of 30 Dec 2016.

5. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity securities of Croesus Retail Trust as of 30 Dec 2016.

Compensation for investment banking services: 6. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12

months for investment banking services from Ascendas Hospitality Trust, Ascott Residence Trust, Courts Asia, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Frasers Commercial Trust, Frasers Hospitality Trust, Frasers Logistics & Industrial Trust, Japfa Ltd, Keppel DC REIT, Manulife US REIT, Mapletree Greater China Commercial Trust, Mapletree Logistics Trust, Midas Holdings, Nam Cheong, Noble Group, OUE Commercial REIT, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, Perennial Real Estate Holdings, Procurri Corporation, RHT Health Trust, Soilbuild Business Space Reit, YTL Starhill Global REIT as of 30 Dec 20176

7. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ascendas Hospitality Trust, Ascott Residence Trust, Courts Asia, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Frasers Commercial Trust, Frasers Hospitality Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT, Manulife US REIT, Mapletree Logistics Trust, Midas Holdings, Nam Cheong, Noble Group, OUE Hospitality Trust, Parkway Life Real Estate Investment Trust, Perennnial Real Estate Holdings, Procurri Corporation, RHT Health Trust, Soilbuild Business Space Reit, YTL Starhill Global REIT in the past 12 months, as of 30 Dec 2016.

Market Focus

Small Mid Cap

Page 19

8. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Directorship/trustee interests

9. Tan Su Shan, a member of DBS Group Executive Committee, is an Independent Non-Executive Director of Mapletree GreaterChina as of 1 January 2017

10.

Disclosure of previous investment recommendation produced

DBS Bank Ltd, DBS Vickers Sec urities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have publishedother investment recommendations in respect of the same securities / instruments recommended in this research report duringthe preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investmentrecommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/orother affiliates in the preceding 12 months.

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Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

/Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.)

For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

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Market Focus

Small Mid Cap

Page 20

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