tongda - jrjpg.jrj.com.cn/acc/res/hk_res/stock/2017/2/14/0e4a... · 2017e pe vs. a share names at...

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HONG KONG

698 HK Outperform

Price (at 14:52, 13 Feb 2017 GMT) HK$2.39

Valuation HK$ 3.00 - PER

12-month target HK$ 3.00

Upside/Downside % +25.5

12-month TSR % +28.8

Volatility Index Medium

GICS sector Technology Hardware & Equipment

Market cap HK$m 13,839

Market cap US$m 1,784

Free float % 52

30-day avg turnover US$m 4.6

Number shares on issue m 5,790

Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E

Revenue m 6,074 7,781 11,159 14,137

EBITDA m 1,123 1,522 2,260 2,834 EBITDA growth % 29.1 35.5 48.5 25.4 EBIT m 920 1,206 1,896 2,478 EBIT growth % 32.6 31.1 57.2 30.7 Reported profit m 703 977 1,567 2,038 EPS rep ¢ 11.9 15.6 25.0 32.5 EPS rep growth % 27.9 30.9 60.4 30.1 PER rep x 20.1 15.4 9.6 7.4 Total DPS ¢ 3.6 4.7 7.5 9.8 Total div yield % 1.5 2.0 3.2 4.1 ROA % 12.3 13.2 17.8 19.6

ROE % 18.7 22.2 29.6 31.1 EV/EBITDA x 13.1 9.9 6.7 5.3

Net debt/equity % 18.2 26.2 25.6 17.3 P/BV x 3.3 2.9 2.3 1.9

Source: FactSet, Macquarie Research, February 2017

(all figures in HKD unless noted)

Tongda net income trend

Source: Company data, Macquarie Research, February 2017 Analyst(s) Verena Jeng +852 3922 3766 [email protected] Allen Chang +852 3922 1136 [email protected] Chris Yu +86 21 24129024 [email protected]

14 February 2017 Macquarie Capital Limited

Tongda Riding on metal and glass casing Following our Macvisits (SZ-HK Connect, Nov 8), we initiate coverage on

Tongda with an Outperform rating and a HK$3.0 TP. We forecast a 44% EPS

CAGR in 2016-18E driven by: 1) casing – gaining market share in metal casing

and just ventured into 3D glass; and, 2) improving product mix as it shifts focus

on to high-margin businesses such as metal casing and 3D glass. The stock

trades at 10x our 2017E PE, which is attractive on our 44% EPS CAGR. Our

target PE multiple of 12x is in line with Tongda’s peer average.

GM expansion, rare play in smartphone components

Tongda has been transitioning its business to focus on high margins which

helped its GM expand from 19% in 2011 to 25% in 2015 despite a slowing

smartphone market. We expect GM to keep expanding given 1) rising metal

casing contribution – 60% of revenue in 1H16 with room for further growth; and,

2) high-margin new businesses, such as 3D glass and waterproof components,

which should support overall gross margins in the long run.

Shifting from metal casing to 3D glass

A major player in metal casing, Tongda has recently entered 3D glass, enriching

its casing portfolio and reducing the concentration risk. The company’s 3D glass

could be bundled with metal frame, providing one-stop offering for its end-clients.

Tongda’s entry into premium non-metal casing echoes our view of rising glass /

ceramic casing trend due to its product differentiation, wireless charging (report,

Nov 25), and radio frequency transparent features (better supports data

transmission and 5G).

Valuation and downside risks

The stock currently trades at 10x our 2017E PE, which is attractive considering

its 44% EPS CAGR in 2016-19E and compared with its peers’ average PE of

12x, which is also our target PE multiple. Our 2017-18E EPS is 28-43% higher

than consensus on higher revenue estimates (on mainly metal casing and 3D

glass). Downside risks include a slower-than-expected smartphone market and a

slower-than-expected ramp-up of 3D glass.

Tongda in 2017E: towards high-margin business

Source: Company data, Macquarie Research, February 2017

-200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

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Main driver in 2017E; focus on high GM business

http://www.macquarie.com/research/disclosures

https://www.macquarieresearch.com/rp/d/r/p/_MTIwODEzNg?u=MTA3MDM2Mw

https://www.macquarieresearch.com/rp/d/r/p/_MTIxMzgyOQ?u=MTA3MDM2Mw

Macquarie Research Tongda

14 February 2017 2

Inside

Initiate at Outperform with a HK$3.0 TP 3

Casing industry overview 5

Financial analysis 8

Macquarie Quant View 18

Tongda rel CSI 300 performance

Macquarie vs. Bloomberg consensus

Tongda revenue mix in 2016E

Tongda revenue mix by geography

GM expansion on better product mix

Source [all above]: Bloomberg, Company data, Macquarie Research, February 2017

Riding on metal and glass casing Investment thesis

We initiate coverage on Tongda with an Outperform rating, and model for

a 44% EPS CAGR through 2016-18E driven by 1) metal casing – a 48% GP

CAGR in 2016-18E on market share gains and persistently rising penetration

in mid-end smartphone models; 2) 3D glass – ~100% GP CAGR in 2017-19E

given a low base and rising penetration in high-end smartphone models; and,

3) improving product mix – GM should expand to 27% in the coming years

thanks to its transition to high-margin businesses.

Metal casing, gaining market share: Despite a saturated smartphone

market, we expect Tongda’s metal casing to still deliver strong growth given

its exposure to leading China smartphones (Huawei, Xiaomi, OPPO, and

Vivo), market share gains on a wide range of price tiers in the metal casing

portfolio, rising metal casing penetration, and comprehensive casing solutions

(plastic, metal, and upcoming 3D glass). We estimate metal casing revenue

contribution will grow to 80% in 2018E from ~60% in 1H16 and gross margins

will contract gradually owing to metal casing competition.

3D glass, winners play along: Tongda’s foray into 3D glass demonstrates its

flexibility and adaptability to changing market trends, making it a stand-out in

the dynamic tech market. Tongda’s 3D glass could be bundled with its metal

middle frame, providing a one-stop offering to its clients. We estimate 3D

glass revenue contribution will grow to 4% in 2019E from 2% in 2017E and

model for GM at 25-30%, lower than the market leader’s, mainly to reflect its

exposure to the back-end processing only.

GM expansion, rare play in smartphone components: Tongda is a rare

smartphone component play with expanding GM in the slowing smartphone

market. Tongda’s GM expanded from 19% in 2011 to 25% in 2015, and could

reach 27% in 2019E thanks to the gradual shift to high-margin businesses,

including metal casing, 3D glass (new), and waterproof components (new).

SZ-HK Connect, supports valuation: We believe the SZ-HK Connect will

continue to support Tongda’s valuation. Tongda currently trades at 10x our

2017E PE vs. A share names at 20x, with strong EPS growth (44% in 2016-

18E), GM expansion, and a high dividend yield (2-4% in 2016-18E).

Company profile

Tongda is a major metal casing supplier in greater China, mainly to leading

China smartphone brands, such as Huawei, Xiaomi, OPPO, and Vivo. Key

competitors include Catcher, Everwin, FIH, BYDE, and Lens Tech (3D glass).

Tongda was founded in 1988, listed in 2000, and headquartered in Hong Kong.

Fig 1 Tongda’s share price movement

Source: Bloomberg, Macquarie Research, February 2017

0.5

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HKD 2014 results released: strong NI growth driven by metal casing rising penetration rate. Metal casing were 15% of total rev.

Market concerns on slowing China smartphone

2015 results released: strong NI growth with metal casing rev contribution up to 30%.

1H14 results released



3Q16 preliminaryresults: strong rev growth driven by metal casing and managements are optimistic to 4Q16 outlook.

China93%

Southeast Asia4%

Others3%

Metal casing65%

Plastic6%Electrical

appliances8%

NB/Tablet casing

5%

Ironware parts3%

Automotive decorative

parts1%

Communication

facilities and others

12%

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19%

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25%

27%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Tongda GM trend

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HKD

Consensus EPS MQ EPS

MQ vs Cons +28%

MQ vs Cons +43%


14 February 2017 3

Initiate at Outperform with a HK$3.0 TP Recommendation and valuation

We initiate coverage on Tongda with an Outperform rating and a target price of HK$3.0. Our

TP is based on a 12x target PE multiple, which is Tongda’s peer trading average and its

historical average + 1stv. We believe the 12x target PE multiple is justified considering our

expectation of a 44% EPS CAGR in 2016-18E and compared with its peer trading average.

The stock currently trades at 10x our next year EPS, which we believe is attractive

considering its 44% EPS growth in the coming three years driven by casing business (metal

casing and 3D glass) and sustained transition to high-margin businesses. We believe strong

EPS growth will further drive ROE expansion to ~30% in 2017-19E which already rose from

13% in 2011 to 18% in 2015.

We believe the 12x target PE multiple is justified and Tongda will continue to enjoy the re-

rating towards its historical average + 1stv of 12x given 1) the expected strong EPS growth in

the coming years supported by the new high-margin businesses (3D glass, and waterproof

components), 2) SZ-HK Connect, where A-share peers trade at 20x (ex Everwin) on average,

and 3) a high dividend yield of 2-4% in 2016-18E.

Fig 2 Tongda – 12M forward PE ratio Fig 3 Tongda – net income trend

Source: Bloomberg, Macquarie Research, February 2017 Source: Company data, Macquarie Research, February 2017

Fig 4 Tongda – peer comparison

Mkt cap)

3M

ADTO

Price

TP

PE

PB

ROE

EPS Growth

Cagr

Div

yield Company Ticker (US$m) (US$m) (lcy) (lcy) Upside Rec 2017E 2018E 2017E 2018E 2017E 2018E (16-18E) 2017E

Tongda 698 HK 1,709 6 2.29 3.00 31% O 10.2 7.7 2.5 2.1 27% 29% 38% 3.0%

Peers

Lens Tech 300433 CH 8,318 15 26.24 36.00 37% O 20.3 12.7 4.2 3.6 22% 30% 81% 1.1% Catcher 2474 TT 6,622 34 266.00 200.00 -25% N 9.3 8.7 1.4 1.3 16% 16% 10% 3.3% Foxconn Tech 2354 TT 4,233 10 92.60 11.5 11.6 1.2 1.1 11% 10% -1% 3.0% Everwin 300115 CH 3,351 23 25.60 38.00 48% O 20.2 12.1 5.1 4.1 28% 37% 65% 1.1% BYDE 285 HK 2,070 5 7.13 6.10 -14% N 11.1 10.4 1.1 1.0 10% 10% 9% 0.0% Casetek 5264 TT 1,131 5 103.00 10.2 9.9 1.1 1.0 11% 10% 11% 4.4%

Ju Teng 3336 HK 396 0 2.71 4.4 3.9 0.4 0.4 9% 9% 22% 4.3%

Average 12.0 9.4 1.7 1.5 14% 15% 19% 2.7%

Note: Price on Feb 10, 2017. Source: Bloomberg, Macquarie Research, February 2017

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Tongda net income trend

NI Cagr in 2016-18E: 44%, driven by metal casing and improving product mix


14 February 2017 4

Our 2016-18E 44% EPS CAGR is driven mainly by metal casing (48% GP CAGR in 2016-

18E), 3D glass (~100% GP CAGR in 2017-19E), and the company’s transition to high-margin

businesses.

For metal casing, we expect Tongda’s growth to be driven by:

1) Modest growth in metal casing: As we highlighted in May report (casing initiation,

May 25), we recognise a significant material migration from plastic to metal casing is

in its early stage starting 2013-14, and expect it to see modest growth in the coming

years, driven by higher penetration in mid-range smartphone models.

2) End-clients’ market share gains: Tongda’s exposure to leading China smartphone

brands, such as Huawei, Xiaomi, OPPO, and Vivo, will also support its metal casing

business. As we highlighted in Smartphone Tracker (report link, Nov 3), we prefer

component-makers for leading brands in the saturated smartphone market.

3) Comprehensive metal casing solution: Tongda’s metal casing solutions with a

wide price range should support it to penetrate both high-end and mid-end models. It

also provides mechanical and decorative components, such as waterproof O Ring

(new), metal or plastic middle frame, display frame, and laser direct structuring

antenna, providing one-stop solution to branded smartphone-makers.

We see strong growth in 3D glass underpinned by: 1) a low base, 2) rising market penetration

driven by differentiation, wireless charging, and radio frequency transparent features

(supports data transmission and 5G), and 3) one-stop solution of glass casing plus metal

middle frame. We estimate gross margins of this business will be between 25% and 30%,

lower than leading suppliers’, to reflect Tongda’s exposure to the back-end processing only.

For business enhancement, we see Tongda’s GM improving from 19% in 2011 to 25% in

2015 driven by rising contribution from metal casing. Since management is going to focus

more on high-margin businesses in the coming years, we expect gross margins to keep

expanding:

1) Metal casing accounted for 60% of total revenue in 1H16, and we expect

management to gradually exit low-margin businesses, such as PC casing or

communication facilities, to increase its focus on high-margin businesses.

2) New businesses, such as 3D glass and waterproof components, generate high

margins supporting the company’s gross margins in the long term.

Fig 5 Tongda waterfall chart in 2017E Fig 6 Tongda waterfall chart in 2018E

Source: Company data, Macquarie Research, February 2017 Source: Company data, Macquarie Research, February 2017

Downside risks to our Outperform rating include a slower-than-expected smartphone

market and a slower-than-expected ramp-up of new businesses, including 3D glass and

waterproof components. Our 2017-18E EPS assumptions are 28-43% higher than Bloomberg

consensus, mainly on higher revenue estimates.

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https://www.macquarieresearch.com/rp/d/r/p/_MTA5NzI5Mg?u=MTA3MDM2Mw

https://www.macquarieresearch.com/rp/d/r/p/_MTIwNjIxOQ?u=MTA3MDM2Mw


14 February 2017 5

Casing industry overview Material comparison

We expect metal casing to grow modestly in the coming years given a spurt in penetration in

2013-14 and new competition from premium non-metal casing such as glass and ceramic.

We believe metal casing will retain its dominant market position in the coming years given its

higher yield rate, sufficient supply and capacity, and wide range of prices, all supporting it to

penetrate mid-end smartphone models.

Fig 7 Rising premium non-metal casing trend in China smartphones

Brand Huawei Huawei Vivo Xiaomi Gionee Meizu

Model Honor Magic Mate 9 Pro Xplay 6 Mi MIX (White) M2017 M3x Year Dec 2016 Jan 2017 Dec 2016 2017 Dec 2016 Dec 2016 Front cover 3D glass 3D glass 3D glass 2.5D glass 3D glass 2.5D glass Back cover 3D glass Metal Metal 3D ceramic Leather 2.5D glass


We expect premium non-metal casing to grow stronger than metal casing given a low base,

differentiation offered to end-consumers, its support to wireless charging and it being radio

frequency transparent (better supports data transmission and 5G). We also expect faster

growth in glass casing than ceramic casing given the former’s lighter weight, higher yield and

capacity, and lower cost.

Key features of metal, glass and ceramic are:

Metal: usually aluminium and magnesium, offers a premium feel. It is easily pressed into

shape, allowing design flexibility. It can dissipate the heat generated by the processor and

thus keep the internal components cooler. It is also durable. Its major shortcomings are

that it blocks radio waves (needs plastic stript on casing), and is not wireless chargeable.

Glass is durable and provides protection against bumps and scratches. It has a more

premium feel than plastic. It is cheaper, which is one of the main reasons vendors have

chosen it. Its main disadvantage is its fragility. Glass smudges easily, and attracts

fingerprints. This is one of the main complaints of end-users.

Ceramic is a relatively new back cover material. It is harder and more durable than glass,

but also more expensive. Brittle and heavy are the other two key shortcomings.

Fig 8 Smartphone material comparison

Plastic Metal Glass Ceramic

Cost * *** ** *** GM * *** ** *** Weight * * ** *** Hardness * * ** *** Fragility * * ** *** Attract fingerprint * * ** * RF transparent v x v v Wireless chargeable v x v v Heat dissipation * **** ** *** Key suppliers Jabil, Tongda, Juteng Catcher, Casetek, Foxconn

Tech, Everwin, Tongda, Juteng, BYDE, FIH, Janus, Victory

Lens Tech, Bielcrystal, Firstar panel, G Tech

CCTC, Lens Tech, Bielcrystal, Surpaq

Example

Brand Xiaomi Xiaomi Xiaomi Xiaomi Model Mi 4 Mi 5s Mi Note 2 MIX Release Year Aug 2014 Oct 2016 Nov 2016 Nov 2016 ASP (US$) 187 274 403 504 Size 5.0" 5.2" 5.7" 6.4" Weight 149g 145g 166g 209g



14 February 2017 6

Stay with a diversified player

Tongda is our top pick in the metal casing space given:

1) Comprehensive metal casing solutions: Tongda boasts of metal casing solutions

with wider price points, supporting it to penetrate both high-end and mid-end models.

The company also provides mechanical and decorative components, such as

waterproof O Ring (new), metal or plastic middle frame, display frame, and laser

direct structuring antenna, providing one-stop solutions to smartphone-makers.

Fig 9 Tongda: one-stop shop for casing, middle frame & waterproof components


2) Leading client base: As we highlighted in the Smartphone Tracker (report link, Nov

3), we prefer component-makers for leading brands in the saturated smartphone

market. Tongda’s exposure to leading China smartphone brands, such as Huawei,

Xiaomi, OPPO, and Vivo, supports its growth during the smartphone consolidation.

Fig 10 Product portfolio and client base of key metal casing suppliers

Company Ticker Supply casings to ___ (% of rev) Major client

Janus 300083 CH Smartphone (81%) Samsung, Huawei, ZTE, TCL Catcher 2474 TT Smartphone (64%) Apple, HTC, Blackberry Tongda 698 HK Smartphone (60%) Huawei, Xiaomi, OPPO, Vivo Everwin 300115 CH Smartphone (60%) Vivo, OPPO, Xiaomi, Huawei Foxconn Tech 2354 TT Smartphone (56%) Apple, Sony BYDE 285 HK Smartphone (48%) Samsung, Huawei, OPPO, Vivo,

Xiaomi, Coolpad, LG FIH 2038 HK Smartphone (16%) Xiaomi, Huawei, OPPO, Vivo Jabil JBL US Smartphone (10%) Apple, Motorola

Casetek 5264 TT Notebook (35%) and tablet (60%) Apple, Asustek, Lenovo, Samsung, HP, Acer

Juteng 3336 HK Notebook (60%) and tablet (30%) HP, Dell, Samsung, ASUS, Acer, Lenovo

Victory 002426 CH TV, Notebook (20%) Philips, Lenovo, Samsung


3) 3D glass, winners play along: Tongda’s 3D glass foray not only shows potential

synergies with metal middle frame, but also reflects managements’ flexibility and

adaptability to market trends, underpinning its long-term growth in the dynamic tech

market. This new business also fits in managements’ high margin focus strategy,

supporting the company’s GMs in the long run. Metal casing suppliers’ entry into

glass casing area also echoes our view of rising premium non-metal casing trend.

Read across to our Glass (Sep 19) and Wireless charging (Nov 25) reports.

https://www.macquarieresearch.com/rp/d/r/p/_MTIwNjIxOQ?u=MTA3MDM2Mw

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https://www.macquarieresearch.com/rp/d/r/p/_MTIxMzgyOQ?u=MTA3MDM2Mw


14 February 2017 7

4) GM comparison: Tongda’s gross margin in 2015 was 25%, rather high among the

metal casing peers, improving consistently over seven consecutive years from 17%

in 2009. We acknowledge that metal casing has become a relatively mature

manufacturing process after its wider adoption in smartphones over the past 4-5

years, and thus should face more competition. However, we remain positive on

Tongda’s gross margins going forward as:

a) its metal casing accounted for 60% of revenue in 1H16, with room for further

expansion, amid its transition to high-margin businesses; and,

b) 3D glass and waterproof components are high-margin businesses, and thus

should support the company’s overall gross margins in the long run.

We expect Tongda’s GM to improve gradually to 27% in 2019E but factor in a steady

decline in metal casing margins to reflect concerns about competition.

Fig 11 Metal casing suppliers’ GM in 2015 Fig 12 Tongda: GM expanding consistently

Source: Bloomberg, Macquarie Research, February 2017 Source: Bloomberg, Macquarie Research, February 2017

5) Capex comparison: Tongda’s capex was similar to most of its metal casing peers

except the two large-scale players, Catcher and BYDE. Tongda’s capex expanded in

2014-15, supported by strong market demand. Going forward, we expect capex to be

more disciplined, as the metal casing industry is expected to grow modestly and

Tongda could leverage more rental CNCs (Computer Numerical Control) to reduce

its burden and improve ROA.

Fig 13 Metal casing suppliers’ capex in 2015 Fig 14 Tongda: upward trend in 2014-15

Source: Bloomberg, Macquarie Research, February 2017 Source: Bloomberg, Macquarie Research, February 2017

0% 10% 20% 30% 40% 50%

FIH

BYDE

Jabil

Victory

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Foxconn Tech

Juteng

Tongda

Casetek

Everwin

Catcher

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2009 2010 2011 2012 2013 2014 2015

Catcher Everwin Casetek

Tongda Juteng

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Tongda Juteng


14 February 2017 8

Financial analysis Earnings estimates

We model for a 44% CAGR in 2016-18E EPS driven mainly by Tongda’s metal casing

business (with a 48% CAGR in 2016-18E gross profit), 3D glass entry (~100% CAGR in

2017-19E gross profit), and a shift towards high-margin businesses.

Our 2017-18E EPS is 28-43% higher than Bloomberg consensus with the difference arising

mainly from revenues. We model for metal casing revenue contribution to rise from 60% in

1H16 to 77% in 2017 and 81% in 2018, with modest growth in metal casing penetration and

modest share gains in China smartphones. Rising metal casing penetration is driven by its

increasing adoption in mid-end models, supported by its relatively mature manufacturing

process and adequate capacity. Tongda’s share gains are supported by its metal casing

portfolio a wide price range, one-stop shop synergies (casing, middle frame, and waterproof

components), and its end-clients’ market share gains in the consolidating smartphone

industry. Our ASP assumption is in line with the historical range.

We expect Tongda’s gross margin to continue to expand in the coming years, driven by its

focus shift to high-margin businesses, including metal casing, 3D glass (new), and waterproof

components (new). Our GM assumption for metal casing is slightly lower, factoring in

concerns about competition, and that for 3D glass is also slightly lower and below leading

suppliers’ GM, reflecting Tongda’s exposure to the back-end process only. We model for a

gradual downward trend in the opex ratio but within the historical range. Our margin

assumption is in line with Bloomberg consensus.

Fig 15 Tongda GM trend Fig 16 Tongda OPM trend


Fig 17 Tongda semi annual P&L

(HK$m) 1H15 2H15 1H16 2H16E 1H17E 2H17E 2015 2016E 2017E 2018E 2019E

Revenue 2,881 3,193 3,239 4,542 3,935 7,224 6,074 7,781 11,159 14,137 17,938 Gross profit 678 834 790 1,185 971 1,946 1,512 1,975 2,917 3,750 4,775 Operating profit 426 492 473 717 558 1,337 918 1,190 1,896 2,478 3,178 Pretax income 411 461 457 680 519 1,298 872 1,137 1,816 2,393 3,098 Net income 294 409 380 597 420 1,147 703 977 1,567 2,038 2,648 EPS (HKD) 0.05 0.07 0.06 0.10 0.07 0.18 0.12 0.16 0.25 0.32 0.42

Margin

Gross margin 23.5% 26.1% 24.4% 26.1% 24.7% 26.9% 24.9% 25.4% 26.1% 26.5% 26.6% Opex ratio 8.7% 10.7% 9.8% 10.3% 10.5% 8.4% 9.8% 10.1% 9.1% 9.0% 8.9% OP margin 14.8% 15.4% 14.6% 15.8% 14.2% 18.5% 15.1% 15.3% 17.0% 17.5% 17.7% Net margin 10.2% 12.8% 11.7% 13.1% 10.7% 15.9% 11.6% 12.6% 14.0% 14.4% 14.8%

HoH/YoY

Revenue 7.1% 10.8% 1.4% 40.3% -13.4% 83.6% 26.8% 28.1% 43.4% 26.7% 26.9% Gross profit 2.5% 23.2% -5.3% 49.9% -18.1% 100.6% 32.2% 30.6% 47.7% 28.6% 27.3% Operating profit -2.9% 15.4% -3.9% 51.5% -22.1% 139.5% 30.9% 29.5% 59.4% 30.7% 28.3% Net income -12.1% 38.9% -7.0% 57.0% -29.6% 173.1% 40.1% 39.0% 60.4% 30.1% 29.9% EPS -19.7% 38.9% -12.4% 57.0% -29.6% 173.1% 27.9% 30.9% 60.4% 30.1% 29.9%


0%

5%

10%

15%

20%

25%

30%

-

5,000

10,000

15,000

20,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

HKD m

Revenue Gross margin (RHS)

0%

5%

10%

15%

20%

-

5,000

10,000

15,000

20,000

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

HKD m

Revenue Operating margin (RHS)


14 February 2017 9

Fig 18 Tongda revenue mix in 2016E Fig 19 Tongda GP mix in 2016E

Source: Macquarie Research, February 2017 Source: Macquarie Research, February 2017





65%

0%

6%

0%

8%

5%

3%

1%

12%

0% 20% 40% 60% 80%

Metal casing

3D glass

Plastic casing

Waterproof components

Electrical appliances

NB/Tablet casing

Ironware parts

Automotive decorative parts

Communication facilities and others

77%

0%

3%

1%

7%

5%

1%

1%

5%

0% 50% 100%

Metal casing

3D glass

Plastic casing



NB/Tablet casing

Ironware parts



77%

2%

1%

0%

6%

2%

1%

1%

9%

0% 50% 100%

Metal casing

3D glass

Plastic casing



NB/Tablet casing

Ironware parts



86%

2%

1%

1%

4%

2%

1%

1%

3%

0% 50% 100%

Metal casing

3D glass

Plastic casing



NB/Tablet casing

Ironware parts



81%

2%

1%

1%

5%

1%

1%

1%

7%

0% 50% 100%

Metal casing

3D glass

Plastic casing



NB/Tablet casing

Ironware parts



88%

2%

0%

1%

3%

1%

0%

1%

3%

0% 50% 100%

Metal casing

3D glass

Plastic casing



NB/Tablet casing

Ironware parts




14 February 2017 10

Sensitivity analysis on metal casing

We conducted a sensitivity analysis on metal casing as it is the largest gross profit contributor

and expected to a key EPS growth driver in the coming years. Our sensitivity analysis shows

that every 5% revenue change will bring around 7% change to EPS based on the same gross

margin assumption.

Fig 24 Sensitivity analysis – metal casing

Source: Macquarie Research, February 2017


14 February 2017 11

Sensitivity analysis on currency

In terms of currency, Tongda is mostly exposed to the RMB in terms of both revenues and

COGS. The company’s revenues are largely exposed to China with all its five factories

located there. Tongda reported a HK$23m FX loss, or 3% of net income, in 2015, when the

RMB depreciated against the HKD by 4%. We also see FX risk management improving with

the impact from RMB depreciation against the HKD down from 4% of net income in 2012 to

1% in 2015, based on the company’s currency sensitivity analysis.

Fig 25 Tongda’s revenues mainly from China Fig 26 Tongda’s factories are all in China


Fig 27 Tongda net FX to net income ratio Fig 28 Tongda’s FX risk management is improving


China93%

Southeast Asia4%

Others3%

0.75

0.76

0.77

0.78

0.79

0.80

0.81

0.82

0.83

0.84

0.85

-4%

-3%

-2%

-1%

0%

1%

2%

3%

2012 2013 2014 2015

Rmb

Tongda net FX gain to NI ratio Rmb/HKD (RHS)

Rmb depreciated against HKD by 4% in 2015 vs Tongda reported HKD23m FX loss (3% of NI) in 2015. -3.6%

-1.8%

-1.1% -1.0%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

2012 2013 2014 2015

Every 1% RMB depreciation against HKD drags Tongda's NI by ___%


14 February 2017 12

Balance sheet

Asset quality

Tongda’s total assets witnessed a 36% CAGR in 2013-15A (vs. 40% CAGR in net income),

with current assets reporting a 35% CAGR and non-current assets a 38% CAGR. We see the

company’s net income growth strongly driving its asset scale and supporting its investment in

fixed assets. Tongda’s fixed asset-to-total asset ratio improved to 31% in 2015 from 29% in

2013, cash-to-total asset ratio rose to 9% in 2015 from 4% in 2013, while the proportion of

intangible assets remained a low 0-1% in 2013-15. We view Tongda’s asset structure as

healthy, leaving little risk to asset impairment loss.

Fig 29 Tongda total asset trend Fig 30 Tongda key asset elements’ contribution


Accounts receivable

Tongda allows a credit period of 3-6 months to its trade customers, in general, with

receivables within 3 months accounting for 87% of total receivables in 2015. The company’s

receivables days have been around 148 on average in the past five years and over one year

receivables have remained a low 2% in the past five years. We expect Tongda’s receivables

days to improve gradually to 140 in the coming years driven by more components supplies to

strengthen its bargaining power.

Fig 31 Tongda analysis of aged receivables in 2015 Fig 32 Tongda aged receivables remain low


65% 65% 65% 67%

64%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2011 2012 2013 2014 2015

HKD m

Current asset Non-current asset

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014 2015

Cash to total asset

Fixed asset to total asset

Intangible assets to total asset

Within 3 months86.5%

4~6 months10.1%

7~9 months

1.0%

10~12 months

0.4%

Over 1 year2.1%

2.2% 2.1%1.7%

2.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2012 2013 2014 2015

Tongda over 1yr receivables to total receivables


14 February 2017 13

Inventory

Tongda’s inventory days have been around 113 on average in the past five years. Finished

goods accounted for 34% of total inventory in 2015 and the stocking period has been a

healthy ~1 month in the past four years. We expect Tongda’s inventory level to stay at the

similar level of 110-114 days in the coming years.

Fig 33 Tongda inventory mix in 2015 Fig 34 Tongda’s stocking period at healthy level


Liability quality

Tongda’s total assets saw a 47% CAGR in 2013-15A due mainly to the issuance of

convertible bonds in 2015. The convertible bonds were mainly for capex expansion, which

grew by 80% YoY in 2015. The conversion price was HK$1.85 with potential share dilution of

around 8%, which we have factored into our model. Tongda’s debt portion has remained

stable in the past three years, with short-term debt at 24% of total liabilities on average and

long-term debt at 12%.

Fig 35 Tongda total liability trend Fig 36 Tongda key liability elements’ contribution


Net gearing

Tongda’s gearing ratio was stable at 21% on average in 2013-15, with the interest coverage

ratio improving from 9x to 17x thanks to strong EBIT growth and gradually declining interest

rates on debt. We expect Tongda’s gearing ratio to stay at 20% on average in 2016-19E, with

interest coverage ratio staying beyond 10x, supported by rising EBIT.

Raw material

26%

Work in progress

26%Molds14%

Finished goods34%

1.0 1.1 1.1 1.2

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2012 2013 2014 2015

Months

Tongda finished goods days

65% 65% 65% 67%

64%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2011 2012 2013 2014 2015

HKD m

Current asset Non-current asset

Convertible bonds of HKD873m, mainly for capex expansion (HKD986m in 2015).

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2011 2012 2013 2014 2015

ST debt to total liability LT debt to total liability


14 February 2017 14

Fig 37 Tongda net gearing stable at 20% Fig 38 Tongda improving interest coverage ratio


Cash conversion cycle

Tongda’s cash conversion cycle has been 141 days on average in the past five years, with

inventory days at 113 on average, receivables days at 148 on average and payable days at

120 on average. We model for a similar level of 138-142 days of cash conversion cycle in the

coming years.

Current ratio

Tongda’s current ratio has been stable at 2x in the past three years, showing its healthy

ability to payback current liabilities. The company’s equity-to-asset ratio has been around 50-

60% in the past three years, showing its decent discipline in raising debt.

ROE

Tongda’s ROE improved from 13% in 2011 to 18% in 2015 thanks to rising net margins, up

from 8% in 2011 to 12% in 2015. The company’s total asset turnover has been stable at 0.9-

0.8x in the past five years, with its equity multiplier at 1.9x on average. We expect its ROE to

reach ~30% in the coming years driven by expanding net margins.

ROA

Tongda’s ROA expanded from 7% in 2011 to 9% in 2015, demonstrating its improved asset

management. We expect ROA to continue to expand to 15% in the coming years, as the

company supplies more components while leveraging rental CNCs, such as 3D glass back-

end processing or automotive decorative parts.

Fig 39 Tongda ROE trend Fig 40 Tongda ROA trend


0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

Net debt to equity

-

5

10

15

20

2011 2012 2013 2014 2015

x

Interest coverage ratio

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015

Tongda ROE trend

0%

2%

4%

6%

8%

10%

2011 2012 2013 2014 2015

Tongda ROA trend


14 February 2017 15

Cash flow

Capex

Tongda’s capex rose by 136% pa in 2013-15, showing strong market demand and lifting its

revenue growth from 6-8% YoY in 2012-13 to 27-32% YoY in 2014-15. The expansion was

mainly for smartphone metal casing. Going forward, we expect a more disciplined capex, as

the metal casing industry is expected to grow modestly and Tongda could leverage more

rental CNCs to reduce its burden and improve ROA.

Fig 41 Tongda capex expansion in 2014-15 Fig 42 Tongda capex mix in 2015


Dividend yield

Tongda’s payout ratio has been around 30-35% in past five years and we expect it to remain

at the similar level going forward, implying a 2-4% dividend yield. We believe the attractive

dividend yield will support the company’s valuation in the long run.

Free cash flow

Tongda’s free cash flow was negative in 2015 given the heavy capex burden. Going forward,

we expect free cash flows to turn positive thanks to rising EBIT and more disciplined capex.

Fig 43 Tongda dividend yield Fig 44 Tongda FCF trend


-

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015

HKD m

Tongda capex trend

Casing (smartphon

e metal casing, mainly)

96%

Ironware Parts3.5%

Others0.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

Tongda dividend yield trend

-600

-400

-200

-

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E

HKD m

Tongda FCF trend


14 February 2017 16

Fig 45 Tongda P&L

(HK$m) 2014 2015 2016E 2017E 2018E 2019E

Revenues 4,791 6,074 7,781 11,159 14,137 17,938 COGS 3,648 4,562 5,807 8,242 10,387 13,163 Gross profit 1,144 1,512 1,975 2,917 3,750 4,775

Depreciation 176 203 315 364 356 349 Amortization 0 0 0 0 0 0 EBITDA 870 1,123 1,522 2,260 2,834 3,528

SG&A 442 594 785 1,021 1,272 1,596 EBIT 694 920 1,206 1,896 2,478 3,178

Net interest -52 -48 -69 -80 -85 -80 Net investment income -2 -0 1 0 0 0 Other income/(expense) -5 2 16 0 0 0 Pretax profit 642 872 1,137 1,816 2,393 3,098

Income tax 94 134 170 259 365 461 Minority interest 47 35 -10 -10 -10 -10 Net Profit 502 703 977 1,567 2,038 2,648


Fig 46 Tongda balance sheet

(HK$m) 2014 2015 2016E 2017E 2018E 2019E

Cash & equivalents 360 762 257 4 244 489 Receivables 2,166 2,683 3,452 4,910 6,150 7,803 Inventory 1,401 1,606 2,032 2,802 3,532 4,475 Other current assets 338 484 484 484 484 484 Total current assets 4,266 5,535 6,225 8,200 10,409 13,251 Fixed assets 1,757 2,628 3,032 2,969 2,912 2,863 LT investments 3 3 3 3 3 3 Other non-current assets 341 423 423 423 423 423 Total non-current assets 2,101 3,054 3,459 3,395 3,338 3,289

Total assets 6,367 8,589 9,683 11,595 13,747 16,540

Short term debt 629 976 976 976 976 976 Payables 1,329 1,572 1,984 2,802 3,532 4,475 Other current liabilities 373 517 517 517 517 517 Total current liabilities 2,332 3,065 3,477 4,295 5,024 5,968 Long term debt 351 519 519 519 519 519 Other liabilities 48 965 965 965 965 965 Total LT liabilities 399 1,484 1,484 1,484 1,484 1,484

Total liabilities 2,731 4,550 4,962 5,780 6,509 7,453

Common stocks 3,477 4,057 4,739 5,833 7,256 9,105 Minority equity 159 -18 -18 -18 -18 -18

Total equity 3,636 4,039 4,721 5,815 7,239 9,087

Total liabilities and equity 6,367 8,589 9,683 11,595 13,747 16,540



14 February 2017 17

Fig 47 Tongda cash flow

(HK$m) 2014 2015 2016E 2017E 2018E 2019E

Net profit 502 703 977 1,567 2,038 2,648 Depreciation 176 203 315 364 356 349 Amortization 0 0 0 0 0 0 Associate share of (profits)/ loss 2 0 -1 0 0 0 Total gross cash flow 680 906 1,291 1,931 2,394 2,997 Change in net working capital -458 -479 -783 -1,410 -1,240 -1,653

Total operating cash flow 271 532 508 521 1,154 1,344

Capex less disposals -547 -986 -720 -300 -300 -300 (Purchase) Sale of ST investment 0 0 0 0 0 0 (Purchase) Sale of LT investment 38 0 0 0 0 0 Others -228 -296 0 0 0 0

Total investment cash flow -738 -1,282 -720 -300 -300 -300

Increase (decrease) in debt 130 516 0 0 0 0 Cash dividends -131 -164 -212 -295 -473 -615 Change in share capital 6 3 0 0 0 0 Others 645 862 -82 -178 -142 -184

Total financing cash flow 650 1,216 -294 -473 -615 -799

Net cash flow 184 467 -506 -252 240 245 FX change -1 -65 0 0 0 0 Net cash flow after FX change 183 402 -506 -252 240 245


Fig 48 Tongda key financial ratios

(HK$m) 2014 2015 2016E 2017E 2018E 2019E

Revenue 4,791 6,074 7,781 11,159 14,137 17,938 Gross profit 1,144 1,512 1,975 2,917 3,750 4,775 EBIT 694 920 1,206 1,896 2,478 3,178 EBITDA 870 1,123 1,522 2,260 2,834 3,528 Pretax profit 642 872 1,137 1,816 2,393 3,098 Net profit 502 703 977 1,567 2,038 2,648

YoY (%)

Revenue 32% 27% 28% 43% 27% 27% Gross profit 43% 32% 31% 48% 29% 27% Net profit 39% 40% 39% 60% 30% 30%

Per share data (HKD)

Sales per share 0.89 1.03 1.24 1.78 2.25 2.86 EPS 0.09 0.12 0.16 0.25 0.32 0.42 BVPS 0.67 0.68 0.75 0.93 1.15 1.45 DPS 0.03 0.04 0.05 0.08 0.10 0.13 FCF PS -0.04 -0.08 -0.03 0.04 0.15 0.18 Net cash PS -0.11 -0.12 -0.20 -0.24 -0.20 -0.16 Net debt/Equity 17% 18% 26% 26% 17% 11%

Margin (%)

Gross margin 23.9% 24.9% 25.4% 26.1% 26.5% 26.6% EBIT margin 14.5% 15.2% 15.5% 17.0% 17.5% 17.7% EBITDA margin 18.2% 18.5% 19.6% 20.3% 20.0% 19.7% Pretax margin 13.4% 14.4% 14.6% 16.3% 16.9% 17.3% Net margin 10.5% 11.6% 12.6% 14.0% 14.4% 14.8%

Valuation multiples (x)

P/E 25.7 20.1 15.4 9.6 7.4 5.7 P/B 3.5 3.5 3.2 2.6 2.1 1.7 FCF yield -1.8% -3.4% -1.1% 1.9% 6.1% 7.3% ROE (%) 16.2% 18.3% 22.3% 29.7% 31.2% 32.4% Dividend yield 1.3% 1.5% 2.0% 3.2% 4.1% 5.3% Payout ratio 33% 30% 30% 30% 30% 30%



14 February 2017 18

Macquarie Quant View

The quant model currently holds a marginally positive view on Tongda

Group Holdings. The strongest style exposure is Price Momentum,

indicating this stock has had strong medium to long term returns which

often persist into the future. The weakest style exposure is Quality,

indicating this stock is likely to have a weaker and less stable underlying

earnings stream.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Hong Kong) and Global

sector (Technology

Hardware & Equipment)

350/856 Global rank in

Technology Hardware & Equipment

% of BUY recommendations 92% (11/12)

Number of Price Target downgrades 0

Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-1.3

0.0

0.2

0.4

0.5

0.8

0.9

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

China Goldjoy Group

Truly International Holdi…

ZTE Corporation

Tongda Group Holdings

FIH Mobile

BYD Electronic

Yangtze Optical Fibre

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

China Goldjoy Group


ZTE Corporation


FIH Mobile

BYD Electronic


Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

NaN

-0.8

-0.4

0.3

-0.6

-1.2

0.7

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

China Goldjoy Group


ZTE Corporation


FIH Mobile

BYD Electronic


-100% -50% 0% 50% 100%

China Goldjoy Group


ZTE Corporation


FIH Mobile

BYD Electronic


Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-23%

-20%

-19%

-19%

21%

22%

23%

23%

-30% -20% -10% 0% 10% 20% 30%

⇐ Negatives Positives ⇒

3m Recom. Revisions

3M Price Target Revisions…

EBITDA Revisions 3 Month

Momentum 12 Month

Price to Sales NTM

EV/EBITDA LTM

Price to Earnings LTM

IRR Dividend Disc. Model

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.19-0.38

-1.24-0.10

-0.48 0.76

0.01-0.05 0.24

-0.43 0.43

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/856)

0 50 100

Percentile relative

to market(/656)

mailto:[email protected]


14 February 2017 19

Tongda Group Holdings (698 HK, Outperform, Target Price: HK$3.00) Interim Results 1H/16A 2H/16E 1H/17E 2H/17E Profit & Loss 2015A 2016E 2017E 2018E

Revenue m 3,239 4,542 3,935 7,224 Revenue m 6,074 7,781 11,159 14,137 Gross Profit m 790 1,185 971 1,946 Gross Profit m 1,512 1,975 2,917 3,750 Cost of Goods Sold m 2,449 3,358 2,964 5,278 Cost of Goods Sold m 4,562 5,807 8,242 10,387 EBITDA m 647 874 740 1,519 EBITDA m 1,123 1,522 2,260 2,834

Depreciation m 158 158 182 182 Depreciation m 203 315 364 356 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 490 717 558 1,337 EBIT m 920 1,206 1,896 2,478

Net Interest Income m -33 -36 -40 -40 Net Interest Income m -48 -69 -80 -85 Associates m 1 0 0 0 Associates m -0 1 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 2 0 0 0 Forex Gains / Losses m -23 2 0 0 Other Pre-Tax Income m -4 0 0 0 Other Pre-Tax Income m 23 -4 0 0 Pre-Tax Profit m 457 680 519 1,298 Pre-Tax Profit m 872 1,137 1,816 2,393 Tax Expense m -82 -88 -104 -156 Tax Expense m -134 -170 -259 -365 Net Profit m 375 592 415 1,142 Net Profit m 738 967 1,557 2,028 Minority Interests m 5 5 5 5 Minority Interests m -35 10 10 10

Reported Earnings m 380 597 420 1,147 Reported Earnings m 703 977 1,567 2,038 Adjusted Earnings m 380 597 420 1,147 Adjusted Earnings m 703 977 1,567 2,038

EPS (rep) ¢ 6.1 9.5 6.7 18.3 EPS (rep) ¢ 11.9 15.6 25.0 32.5 EPS (adj) ¢ 6.1 9.5 6.7 18.3 EPS (adj) ¢ 11.9 15.6 25.0 32.5 EPS Growth yoy (adj) % 21.7 37.6 10.5 92.2 EPS Growth (adj) % 27.9 30.9 60.4 30.1

PE (rep) x 20.1 15.4 9.6 7.4 PE (adj) x 20.1 15.4 9.6 7.4

EBITDA Margin % 20.0 19.2 18.8 21.0 Total DPS ¢ 3.6 4.7 7.5 9.8 EBIT Margin % 15.1 15.8 14.2 18.5 Total Div Yield % 1.5 2.0 3.2 4.1 Earnings Split % 38.9 61.1 26.8 73.2 Basic Shares Outstanding m 5,579 5,730 5,730 5,730 Revenue Growth % 12.4 42.3 21.5 59.0 Diluted Shares Outstanding m 5,910 6,275 6,275 6,275 EBIT Growth % 12.4 47.8 14.1 86.6

Profit and Loss Ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E

Revenue Growth % 26.8 28.1 43.4 26.7 EBITDA m 1,123 1,522 2,260 2,834 EBITDA Growth % 29.1 35.5 48.5 25.4 Tax Paid m -134 -170 -259 -365 EBIT Growth % 32.6 31.1 57.2 30.7 Chgs in Working Cap m -479 -783 -1,410 -1,240 Gross Profit Margin % 24.9 25.4 26.1 26.5 Net Interest Paid m -48 -69 -80 -85 EBITDA Margin % 18.5 19.6 20.3 20.0 Other m 70 9 10 10 EBIT Margin % 15.2 15.5 17.0 17.5 Operating Cashflow m 532 508 521 1,154 Net Profit Margin % 11.6 12.6 14.0 14.4 Acquisitions m 0 0 0 0 Payout Ratio % 30.2 30.2 30.2 30.2 Capex m -986 -720 -300 -300 EV/EBITDA x 13.1 9.9 6.7 5.3 Asset Sales m 0 0 0 0 EV/EBIT x 15.9 12.4 7.9 6.1 Other m -295 0 0 0

Investing Cashflow m -1,282 -720 -300 -300 Balance Sheet Ratios Dividend (Ordinary) m -164 -212 -295 -473 ROE % 18.7 22.2 29.6 31.1 Equity Raised m 0 0 0 0 ROA % 12.3 13.2 17.8 19.6 Debt Movements m 516 0 0 0 ROIC % 18.3 21.5 27.3 28.7 Other m 865 -82 -178 -142 Net Debt/Equity % 18.2 26.2 25.6 17.3 Financing Cashflow m 1,216 -294 -473 -615 Interest Cover x 19.1 17.5 23.8 29.2

Price/Book x 3.3 2.9 2.3 1.9 Net Chg in Cash/Debt m 402 -506 -252 240 Book Value per Share 0.7 0.8 1.0 1.3

Free Cashflow m -454 -212 221 854

Balance Sheet 2015A 2016E 2017E 2018E Cash m 762 257 4 244 Receivables m 2,683 3,452 4,910 6,150 Inventories m 1,606 2,032 2,802 3,532 Investments m 0 0 0 0 Fixed Assets m 2,628 3,032 2,969 2,912 Intangibles m 0 0 0 0 Other Assets m 910 910 910 910 Total Assets m 8,589 9,683 11,595 13,747 Payables m 1,572 1,984 2,802 3,532 Short Term Debt m 976 976 976 976 Long Term Debt m 519 519 519 519 Provisions m 0 0 0 0 Other Liabilities m 1,482 1,482 1,482 1,482 Total Liabilities m 4,550 4,962 5,780 6,509

Shareholders' Funds m 4,057 4,739 5,833 7,256 Minority Interests m -18 -18 -18 -18 Other m 0 0 0 0 Total S/H Equity m 4,039 4,721 5,815 7,239

Total Liab & S/H Funds m 8,589 9,683 11,595 13,747

All figures in HKD unless noted.



14 February 2017 20

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2016

AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)

Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)

Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)

300433 CH vs CSI 300, & rec history

(all figures in CNY currency unless noted)

2474 TT vs TAIEX, & rec history

(all figures in TWD currency unless noted)

300115 CH vs CSI 300, & rec history

(all figures in CNY currency unless noted)

285 HK vs HSI, & rec history

(all figures in HKD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, February 2017

12-month target price methodology

300433 CH: Rmb36.00 based on a PER methodology

2474 TT: NT$200.00 based on a PER methodology

300115 CH: Rmb38.00 based on a PER methodology

285 HK: HK$6.10 based on a PER methodology

Company-specific disclosures: 698 HK: Macquarie Group Limited together with its affiliates beneficially owns 1% or more of the equity securities of Tongda Group Holdings Ltd. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Target price risk disclosures: 300433 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.



14 February 2017 21

2474 TT: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 300115 CH: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 285 HK: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. 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14 February 2017 22

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Asia Research Head of Equity Research

Peter Redhead (Global – Head) (852) 3922 4836

Jake Lynch (Asia – Head) (852) 3922 3583

David Gibson (Japan – Head) (813) 3512 7880

Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles/Auto Parts

Janet Lewis (China, Japan) (813) 3512 7856

Takuo Katayama (Japan) (1 212) 231 1757

James Hong (Korea) (822) 3705 8661

Amit Mishra (India) (9122) 6720 4084

Financials

Scott Russell (Asia) (852) 3922 3567

Dexter Hsu (China, Taiwan) (8862) 2734 7530

Keisuke Moriyama (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Suresh Ganapathy (India) (9122) 6720 4078

Sameer Bhise (India) (9122) 6720 4099

Gilbert Lopez (Philippines) (632) 857 0892

Ken Ang (Singapore) (65) 6601 0836

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

David Ng (China, Hong Kong) (852) 3922 1291

Conrad Werner (Singapore) (65) 6601 0182


Consumer and Gaming

Linda Huang (Asia, China, Hong Kong) (852) 3922 4068

Zibo Chen (China, Hong Kong) (852) 3922 1130

Terence Chang (China, Hong Kong) (852) 3922 3581

Sunny Chow (China, Hong Kong) (852) 3922 3768

Satsuki Kawasaki (Japan) (813) 3512 7870

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

KJ Lee (Korea) (822) 3705 9935

Stella Li (Taiwan) (8862) 2734 7514

Amit Sinha (India) (9122) 6720 4085

Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)

Karisa Magpayo (Philippines) (632) 857 0899

Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Timothy Lam (China, Hong Kong) (852) 3922 1086

Mike Allen (Japan) (813) 3512 7859

Kwang Cho (Korea) (822) 3705 4953

Corinne Jian (Taiwan) (8862) 2734 7522

Marcus Yang (Taiwan) (8862) 2734 7532

Conrad Werner (ASEAN) (65) 6601 0182

Industrials

Janet Lewis (Asia) (813) 3512 7856

Patrick Dai (China) (8621) 2412 9082

Kunio Sakaida (Japan) (813) 3512 7873

William Montgomery (Japan) (813) 3512 7864

James Hong (Korea) (822) 3705 8661

Benson Pan (Taiwan) (8862) 2734 7527

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Justin Chiam (Singapore) (65) 6601 0560

Internet, Media and Software

Wendy Huang (Asia, China) (852) 3922 3378

David Gibson (Asia, Japan) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Soyun Shin (Korea) (822) 3705 8659

Abhishek Bhandari (India) (9122) 6720 4088

Oil, Gas and Petrochemicals

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Aditya Suresh (Asia, China, India) (852) 3922 1265

Anna Park (Korea) (822) 3705 8669

Duke Suttikulpanich (ASEAN) (65) 6601 0148

Isaac Chow (Malaysia) (603) 2059 8982

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086

Wei Li (China, Hong Kong) (852) 3922 5494

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838


Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

William Montgomery (Japan) (813) 3512 7864


Abhishek Bhandari (India) (9122) 6720 4088

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Coria Chow (China) (852) 3922 1181

Anna Park (Korea) (822) 3705 8669

Sumangal Nevatia (India) (9122) 6720 4093

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Allen Chang (Greater China) (852) 3922 1136

Jeffrey Ohlweiler (Greater China) (8862) 2734 7512

Patrick Liao (Greater China) (8862) 2734 7515

Louis Cheng (Greater China) (8862) 2734 7526

Kaylin Tsai (Greater China) (8862) 2734 7523

Telecoms

Soyun Shin (Korea) (822) 3705 8659

Prem Jearajasingam (ASEAN) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417


Azita Nazrene (ASEAN) (603) 2059 8980

Utilities & Renewables

Patrick Dai (China) (8621) 2412 9082

Candice Chen (China) (8621) 2412 9087

Alan Hon (Hong Kong) (852) 3922 3589


Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (44 20) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (44 20) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (44 20) 3037 4340

Economics

Peter Eadon-Clarke (Global) (813) 3512 7850

Larry Hu (China, Hong Kong) (852) 3922 3778

Tanvee Gupta Jain (India) (9122) 6720 4355

Quantitative / CPG

Gurvinder Brar (Global) (44 20) 3037 4036

Woei Chan (Asia) (852) 3922 1421

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

Strategy/Country

Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769


Peter Eadon-Clarke (Japan) (813) 3512 7850

Chan Hwang (Korea) (822) 3705 8643

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512


Jayden Vantarakis (Indonesia) (6221) 2598 8310

Anand Pathmakanthan (Malaysia) (603) 2059 8833


Conrad Werner (Singapore) (65) 6601 0182

Find our research at Macquarie: www.macquarieresearch.com/ideas/ Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Miki Edelman (Global) (1 212) 231 6121

Jeff Evans (Boston) (1 617) 598 2508

Jeffrey Shiu (China, Hong Kong) (852) 3922 2061

Sandeep Bhatia (India) (9122) 6720 4101

Thomas Renz (Geneva) (41 22) 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Eric Roles (New York) (1 212) 231 2559

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Amelia Mehta (Singapore) (65) 6601 0211

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44 20) 3037 4882

Christina Lee (UK/Europe) (44 20) 3037 4873

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Daniel Clarke (Taiwan) (8862) 2734 7580

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44 20) 3037 4905

This publication was disseminated on 14 February 2017 at 08:30 UTC.

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