APAC Consumer Themes

See important disclosures, including any required research certifications, beginning on page 54

Pan Asia Strategy

3 September 2018

APAC Consumer Themes

Patterns of force: premiumisation, Chinese tourism,

pro-consumption policies, and other drivers

Why now? Asian consumption less exposed to trade wars; election-related pro-consumption policies and exciting new consumer trends

Value and earnings analysis favours China, Hong Kong, and Japan in staples, and Malaysia, Hong Kong, India, and China in discretionary

We present a focus list of equities, linked to presented themes, in both Japan and Asia ex-Japan from 20 Daiwa/alliance partner contributors

Paul M. Kitney, PhD(852) 2848 4947

[email protected]

Olivia Xia(852) 2773 8736

[email protected]

See important disclosures, including any required research certifications, beginning on page 54

Pan Asia Strategy

Asia Pacific (APAC) policy is predominantly pro-consumption in 2018.

Some policy changes are due to elections, such as the SME income tax

and fuel subsidies introduced in Indonesia, ahead of the 2019 elections. In

Malaysia, following the recent elections, the elimination of the GST and

proposed removal of toll charges are also notable. We see policy stimulus

in the lead-up to the February 2019 elections in Thailand, which will likely

be supportive of consumption. Similarly, ahead of the February 2019

elections in the Philippines, income taxes have been cut. In Korea and

Taiwan, minimum wages have been hiked recently. In China, the relaxation

of the one-child policy and the hike in the personal income tax threshold

are notable. In India, agricultural price floors are supportive of rural

incomes. Also, efforts to increase foreign workers in Japan are a tailwind

for consumer sectors.

Asian consumer demand is less correlated with global trade. We have

a strategic interest in looking for good consumer sector ideas in Asia due to

the long-term favourable outlook built upon rising incomes, the burgeoning

middle class, and for large parts of emerging Asia, very favourable

demographics. However, in the near term, we are tactically inclined to

overweight the Asian consumer group, since regional domestic demand,

particularly consumption is not highly correlated with the global trade cycle.

A plethora of Asian consumer themes. Aside from policy, there are other

notable themes in Asia. Chinese tourism in particular is making an

important contribution to Japan, Hong Kong, Korea, Thailand, and

domestically in China. Also, premiumisation is occurring in Chinese

branded goods, Chinese tourism, and generally in India. Other themes

include the increased penetration of modern retail models in ASEAN,

changes in Chinese higher education policy, and the evolution of Vietnam

middle class spending patterns.

More consumer names in Top Picks – DFI and Genting. We add Dairy

Farm International (DFI SP, USD9.27, Buy [1]) and Genting Malaysia

(GENM MK, MYR5.22, BUY) to our Animal Spirits Top Picks, replacing

DBS Group (DBS SP, SGD24.95, Outperform [2]) and City Developments

(CIT SP, SGD9.28, Buy [1]). Our existing consumer names include

Shenzhou International (2313 HK, HKD103, Buy [1], Travelsky (696 HK,

HKD20.1, Buy [1]), China New Higher Education (2001 HK, not rated), and

Havells India (HAVL IN, INR723.85, Buy [1]).

3 September 2018

APAC Consumer Themes

Patterns of force: premiumisation, Chinese tourism,

pro-consumption policies, and other drivers

Why now? Asian consumption less exposed to trade wars; election-related pro-consumption policies and exciting new consumer trends

Value and earnings analysis favours China, Hong Kong, and Japan in staples, and Malaysia, Hong Kong, India, and China in discretionary

We present a focus list of equities, linked to presented themes, in both Japan and Asia ex-Japan from 20 Daiwa/alliance partner contributors

Animal Spirits Top Picks

Company Ticker

AIA Group 1299 HK

Shenzhou International 2313 HK

TravelSky Technology 696 HK

Canvest Environment 1381 HK

China Shenhua Energy 1088 HK

Hang Lung 101 HK

China New Higher Education 2001 HK

Havells India HAVL IN

HDFC Bank HDFCB IN

Axis Bank AXSB IN

Yes Bank YES IN

Larsen & Toubro LT IN

POSCO 005490 KS

Hana Financial 086790 KS

SK Hynix 000660 KS

Daelim Industrial 000210 KS

Genting Malaysia GENM MK

Dairy Farm Int’l DFI SP

Banpu Pcl BANPU TB

PTT Pcl PTT TB

Source: Daiwa Note: newly added stocks in bold

Paul M. Kitney, PhD(852) 2848 4947

[email protected]

Olivia Xia(852) 2773 8736

[email protected]

2

APAC Consumer Themes: 3 September 2018

Table of contents

Asian Consumer Thematic Strategy ....................................................................... 3

Asia Strategy – a concise summary of our views .................................................. 9

Economics – the rise of Asian consumers ........................................................... 13

Asian consumption – strong secular and policy support .................................................... 13

Risks to the consumption growth outlook .......................................................................... 14

Japan ....................................................................................................................... 16

Japanese inbound tourism ................................................................................................. 16

Japanese niche China consumer brands .......................................................................... 17

China/Hong Kong ................................................................................................... 20

Premiumisation in Chinese consumer brands ................................................................... 21

Relaxation of the one-child policy ...................................................................................... 21

Upgrade in Chinese tourism patterns ................................................................................ 22

Chinese higher education policy ........................................................................................ 24

India ......................................................................................................................... 25

Indian policy support for rural incomes .............................................................................. 25

Indian consumer premiumisation ....................................................................................... 26

Korea ....................................................................................................................... 28

Korean minimum wage hike .............................................................................................. 28

“Daigou” and revival of Mainland Chinese tourist growth .................................................. 29

Taiwan ..................................................................................................................... 32

Taiwanese wage policy-led consumption trends ............................................................... 32

ASEAN – Singapore/Philippines ........................................................................... 34

Modern retail penetration in ASEAN .................................................................................. 34

Indonesia ................................................................................................................. 37

Indonesian pre-2019 election pro-consumption policies .................................................... 37

Malaysia................................................................................................................... 39

Post-election, pro-consumer policies ................................................................................. 39

Thailand ................................................................................................................... 41

Recovery in the Thai tourism market ................................................................................. 41

Vietnam.................................................................................................................... 43

Vietnam middle class and youth consumer trends ............................................................ 43

Inbound tourism and domestic travel ................................................................................. 45

3


Asian Consumer Thematic Strategy

Paul M. Kitney (852) 2848 4947 ([email protected])

Olivia Xia (852) 2773 8736 ([email protected])

Patrick Pan (852) 2773 8805 ([email protected])

The secular dynamism of consumption in the Asia-Pacific region is well understood. The

emerging and flourishing middle class in the world’s 2 most populous nations – China and

India – will increasingly shape global consumer patterns, in our view. This report considers

both long- and near-term themes – both policy-driven and behavioural patterns – to

provide a focus list of equity names that are aligned with these themes.

The immediate case for consumption sector equities

So why focus on the Asian consumer now? This is a good question. Animal Spirits is often

looking for good ideas in this space. However, we believe that now is a particularly good

time to be focused on consumer themes. The reasons are twofold. First, the global

economy is facing the prospect of a global trade war (see Animal Spirits, 23 March) and

consumer themes should be less correlated to global trade should hostilities persist

(Animal Spirits, 6 July), in our opinion. Second, there are a number of pro-consumption

policies in Asia – some driven by upcoming local elections, and some not – which provide

short-term impetus to consumer sectors (selected discretionary and staples), set against

the backdrop of the longer-term trends. We summarise our strategic outlook for the Asia-

Pacific from page 7 but focus now on consumer dynamics and where the investment

opportunities may be in this space.

APAC policy focus in 2018 is largely pro-consumption

In the table below, we summarise several policies and events in the APAC region that are

mostly supportive of consumer trends in the short run. In China, the introduction of the

universal second-child policy (or relaxation of the one-child policy) together with the

elevation of the personal income tax threshold are supportive of Chinese consumption

near term. The expansion of the middle-class, along with income levels, is leading to new

spending patterns such as premiumisation, or consumers moving up the value chain. The

visibility and impact of the Chinese consumer is seen well beyond the Asia-Pacific region.

In India, the post-GST and post-demonetisation rebound in domestic demand, together

with extremely positive demographics, provide a backdrop for the pre-2019 election pro-

consumption policies, including price floors introduced to boost rural incomes.

While structural problems such as an ageing population and skyrocketing debt levels loom,

Japan’s booming inbound tourism sector and policies such as those permitting more

foreign workers into Japan should be positive for selected consumer-related businesses.

Consumption-related policies in Asian economies

Country Event/policy Impact

China Raising the threshold of personal income +

China Relaxation of the one child policy and the possible lift in household size limit +

Japan Allowing more foreigners to work in Japan +

South Korea Minimum wage hike +

South Korea New law to limit working hours -

Taiwan Minimum wage and public employee salary hikes +

India Agricultural price floors to boost rural incomes ahead of 2019 elections +

Malaysia Elimination of the goods and services tax, and removal of toll charges +

Malaysia Salary raise for civil servants effective 1 July 2018 +

Indonesia SME income tax and fuel subsidies ahead of the 2019 presidential elections +

Philippines Lower income taxes ahead of Senate and House of Representative election (2019) +

Thailand General election to be held by February 2019 should mean pre-election stimulus +

Source: Daiwa

In Korea, similar to Japan, demographics are a drag on domestic demand; but unlike

Japan, high household debt levels are a constraint on consumption. However, minimum

We like consumer stocks

now, due to a lower

perceived risk in the

event of an extended

trade war, a number of

pro-consumption

policies, and attractive

consumer trends

emerging in Asia

mailto:[email protected]



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4


wage hikes and the recommencement of Chinese package tours to Korea are near-term

drivers of consumption. In Taiwan, domestic consumption is tepid but the labour market is

tightening and policies targeting higher minimum wages and civil servant salary hikes are

positive near-term developments.

In ASEAN, big policy changes are occurring in Malaysia. Under the former administration,

there was an investment focus in public policy. However, recently the switch towards the

consumer has been palpable. Policies such as the removal of the goods and services tax

and toll road charges are clearly targeting the consumer. In Indonesia, ahead of the 2019

presidential elections, the SME income tax cut and fuel subsidies are positive

developments for consumption. Continuing with the election theme, income tax cuts in the

Philippines in advance of the 2019 Senate and House of Representatives elections are

pro-consumption, albeit in an overheating economy, in our opinion. Finally, in Thailand,

though non-descript at present, we expect pro-consumer policies to be announced in the

run-up to the February 2019 elections, again with likely positive ramifications for

consumption.

Regional consumer sectors earnings profile

So what is the investment case like for consumer-related equities in APAC? In the table

below, there is a snapshot of MSCI consumer staples and discretionary sector valuation,

earnings growth, and revisions, versus the country MSCI benchmarks.

Let’s start with earnings. Particularly germane to the consumer discretionary sector is the

impact from the auto sector. Animal Spirits has been clear in previous research that our

stance on this sector is overweight but ex-autos, due to their near-term exposure to

potential trade wars. Two countries with heavy exposure to the auto sector within

consumer discretionary are Japan and Korea, where 2018 estimated earnings growth is

somewhat below their respective country consensus forecasts. However, in China, China

A, Hong Kong, and Malaysia, consumer discretionary earnings are expected to outperform

the MSCI Asia ex-Japan (all sector) benchmark for the same period. In consumer staples,

2018 estimated earnings growth in Japan is almost double the MSCI Japan benchmark. In

Asia ex-Japan consumer staples, the markets where consumer staples earnings growth is

expected to grow by more than the (all sector) benchmark are China, China A-shares, and

India, as shown in the table below.

Country-consumer earnings valuation matrix

Asia Ex JP China China A Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Japan

PE 2018E

All Sector 12.5 12.4 11.6 15.2 20.8 15.3 7.9 16.6 18.4 12.8 14 15 12.7

Consumer Discretionary 16.3 18.5 12.4 18.2 23 14.1 10.3 15.5 38.9 15.9 16.5 28.4 12.1

Consumer Staples 24.3 24.2 22.5 11.9 46.1 24 16.6 27.2 28.9 14.1 26.8 28.1 20.5

EPS Growth 2017

All Sector 24.03% 23.89% 19.03% 12.86% 8.16% 14.46% 50.97% 6.34% 4.35% 6.56% 13.01% 13.86% 40.36%

Consumer Discretionary 4.99% 43.61% 15.87% 31.67% 17.90% 12.43% -23.12% 11.86% 12.92% 35.04% -16.00% 8.83% 46.64%

Consumer Staples 10.91% -4.28% 27.66% 12.62% 9.44% 5.30% 3.54% 7.90% -26.97% 9.55% 98.36% -2.40% 21.07%

EPS Growth 2018E

All Sector 12.97% 17.47% 15.10% 12.82% 14.96% 8.76% 10.95% 2.94% 7.90% 12.90% 7.87% 6.70% 6.20%

Consumer Discretionary 12.09% 21.55% 16.82% 20.97% 11.88% 8.25% 1.72% 23.89% 15.97% 6.23% 0.27% 10.21% -3.19%

Consumer Staples 1.18% 14.02% 25.60% 5.67% 17.00% 9.41% 7.92% -5.29% 0.38% -0.01% -43.20% 4.68% 11.48%

Earnings Revision

All Sector -9.47% -3.08% -5.94% 7.49% -12.85% -36.42% -8.27% -40.89% -23.76% -13.75% -4.87% -18.09% 4.09%

Consumer Discretionary -18.89% -16.55% -12.82% 0.58% -26.38% -29.27% -26.79% 4.43% -19.75% 33.13% -17.96% -32.22% 8.43%

Consumer Staples -14.76% 2.69% -3.21% -25.46% 10.14% -32.19% -19.35% -73.18% -36.55% -72.41% 35.04% -60.32% -11.43%

Source: Factset, Daiwa forecasts Note: Data as of 23 August 2018. Earnings revision = (number of upward revisions – number of downward revisions) / total number of estimates. Weekly data, 75 days capture and smoothed with 3-

month moving average

Earnings revisions are relatively resilient in Japanese consumer discretionary versus the

Japan index and in comparison with both Asia ex-Japan consumer discretionary and the

(all sector) Asia ex-Japan revisions. In consumer staples, Japanese revisions are a tad

weaker than MSCI Japan but comparable with the MSCI Asia ex-Japan (all sector)

benchmark. Within Asia ex-Japan, in consumer discretionary earnings revisions, the

Earnings outperformers

in consumer

discretionary: China,

China A-shares, Hong

Kong and Malaysia; in

consumer staples the

outperformers are China,

China A-shares, India

5


standout countries are Hong Kong, Singapore, and Malaysia, all with positive revisions

against the negative regional backdrop. In staples, India and Taiwan are showing better

resilience with positive earnings revisions, again in comparison with the negative backdrop.

In summary, the earnings picture is a mixed bag but in consumer discretionary, the

countries showing above regional aggregate earnings growth and positive earnings

revisions are Hong Kong and Malaysia. In consumer staples, for both China and India,

2018 earnings growth is above that of the MSCI Asia ex-Japan, and both have positive

earnings revisions.

North Asia: consumer staples earnings revisions North Asia: consumer discretionary earnings revisions

Source: Daiwa CPG, Factset; Note: data as of 23 August 2018 Source: Daiwa CPG, Factset; Note: data as of 23 August 2018

South Asia: consumer staples earnings revisions South Asia: consumer discretionary earnings revisions

Source: Daiwa CPG, Factset; Note: data as of 23 August 2018 Source: Daiwa CPG, Factset; Note: data as of 23 August 2018

APAC consumer sector valuation

As shown in the historical valuation charts below, the consumer discretionary valuation

(PER, 12-months forward) in Asia ex-Japan are slightly above the 10-year average, while

in Japan the valuation is more than 1-standard deviation below its average over the same

time frame. To be sure, Animal Spirits observes that this is, at least in part, due to the poor

performance of auto stocks given trade considerations. In consumer staples, however,

there are premium valuations relative to history across APAC. In particular, Japanese

staples are trading slightly above the 10-year average, while in Asia ex-Japan the 1-year

forward PER is just below 1-standard deviation above the historical average. The premium

here is partly due to investors taking a defensive stance in portfolios and also due to the

standout growth, particularly in China, China A and India.

Consumer staples – like China, China-A, Hong Kong and Japan over India

However, valuations in India have gone to an extreme in consumer staples, in our opinion,

as a PER of 42x (1-year forward) is almost twice the market valuation. We highlight the

fundamentals of stocks such as Hindustan Unilever (HUVR IN, INR, Not Rated) in the India

section of this report, but Animal Spirits cannot bring himself to pay 60x FY19E earnings

(Bloomberg consensus). Similarly in MSCI China consumer staples, the valuation is

roughly twice that of the index; but the absolute valuation (24x, 1-year forward) and solidity

of both earnings growth and revisions are more encouraging in this sector than in India, in

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Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

China Japan Korea Taiwan

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Vietnam India Singapore Malaysia

Thailand Indonesia Philippines

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Vietnam India Singapore Malaysia

Thailand Indonesia Philippines

In consumer staples, we

see better value for

growth in Japan, Hong

Kong, China and China

A, while in India, the

sector valuations are

stretched

6


our opinion. Without repeating the numbers in the table on the previous page, we think the

better value for growth in consumer staples can be found in Japan, Hong Kong, China, and

China A.

Consumer discretionary offers better value for growth in general

In consumer discretionary, the best value for growth we observe is in Malaysia, Hong

Kong, India, China and China-A. On the previous page we can see the jump in consumer

discretionary earnings revisions in Malaysia. Animal Spirits suspects this is part of the post-

election consumer sentiment effect discussed earlier. This is interesting, since the

Malaysian (1-year forward PER of 15.5x) valuation in this sector is at a discount to the

general market (page 4). Yet, sectoral earnings growth (2018E) is the highest in APAC, at

just under 23% YoY. The other standout is China A, where earnings growth has been

around 16% YoY in 2017 and on track to be the same in 2018E, with a PER of 12.4x.

MSCI Asia ex-Japan consumer discretionary 12M forward PER MSCI Asia ex-Japan consumer staples 12M forward PER

Source: Factset, Daiwa CPG Note: Data as of 23 August 2018


MSCI Japan consumer discretionary 12M forward PER MSCI Japan consumer staples 12M forward PER



Asia Pacific consumer themes

In the table below, we summarise some selected themes across APAC, and highlight

particular equities aligned with those themes. These equities are mainly those which Daiwa

or alliance partners cover, and carry Buy or Outperform ratings.1 We have already

discussed government policy drivers, summarised on page 3, so now focus on other

thematic drivers or consumer trends represented in this table. We won’t delve into the

individual equity names here, but save that for the market-by-market sections that follow.

1 There are some names, such as Hindustan Unilever and Brittania, which are not covered by Daiwa or its alliance partners but

are included for illustrative purposes to elucidate the appropriate theme.

6.0x

8.0x

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14.0x

16.0x

18.0x

Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

+ 2 stdev + 1 stdev - 1 stdev

- 2 stdev Average

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

22.0x

24.0x

26.0x

28.0x



- 2 stdev Average

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18


- 2 stdev Average

12.0x

14.0x

16.0x

18.0x

20.0x

22.0x

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26.0x

28.0x



- 2 stdev Average

Consumer discretionary

offers better value for

growth in general (due to

valuation compression

of autos), and Malaysia,

Hong Kong, India, China

and China A-shares look

standouts

7


APAC consumer themes

Theme Country Description Stocks Analyst

Inbound tourism into Japan Japan Japan inbound tourism market has grown substantially, but faces slower growth near term

Japan Airport Terminal, J.Front M. Masumiya, K. Tsuda

Japanese niche China consumer plays Japan High quality Japanese consumer staple plays with strong China growth patterns

Unicharm, Fast Retailing K. Hirozumi, J. Kawahara

Minimum wage hike in Korea Korea Hike in minimum wages boosting consumption but rising CVS costs likely overdone

E-Mart, GS Retail I. Park

China tourism revival in Korea Korea Chinese package tours to Korea recommencing Amorepacific, Hotel Shilla I. Park

Wage pressures - public and private Taiwan Hikes in minimum wages and public servant salaries adding to tightening labor market

Uni-President, President Chain H. Chien

Consumer brand upgrade HK/China Rising disposable income in China leading to a preference for premium and international brands

Anta Sports, Shenzhou Int'l A. Chan, J. Choi

Upgrade in Chinese tourism patterns HK/China Mid-scale, luxury hotels and online tourism Huazhu, Shangri-La, CTRIP, Travelsky Technology

C. Lai, J. Choi, K. Lau

Chinese higher education policy China Nationwide higher education - degree or vocational diploma - target to rise to 50% by 2020

CNHE, CEG, and MEG P. Kitney, P. Pan

Relaxation of the one-child policy China Reversal of the negative effects of the one-child policy positive for infant and toddler products

H&H, Want Want A. Chan

Modern retail penetration in ASEAN ASEAN Modern retail penetration versus the traditional grocery format is low in Philippines, Indonesia

Dairy Farm, Sheng Siong J. Osman

Recovery in the Thai tourism market Thailand Strong rebound in tourist numbers in Thailand Erawan, MINT K. Thongsomaung

Post-election pro-consumer policies Malaysia Removal of the GST, stabilisation of gasoline prices, and planned revocation of highway tolls

Genting Malaysia, Aeon, Hai-o Ng, C.H., S. Sobri

Pre-election 2019 policies Indonesia Policies to stimulate rural incomes, SME tax cut and fuel subsidies to assist consumption

ICBP G. Gary/M. Christina

Vietnam middle class consumer trends Vietnam Spending patterns favor smartphones, home appliances, cars, jewelry and travel

ACV, PNJ, MWG, FRT SSI Consumer Team

Indian policy support for rural incomes India Ahead of the election in 2019, price floors for agricultural products to boost rural economy

Hindustan Unilever NC

Indian consumption premiumisation India Indian consumer staples and discretionary migration up the value curve Britannia, Havells, Crompton NC (Britannia), S. Mehta

Source: Daiwa; note: NC = not covered

In Japan, the 2 consumer-related themes we focus on are inbound tourism and niche

Japanese consumer-related companies which derive a high portion of earnings from the

Chinese market. In 2017, 28.7m tourists visited Japan, an extraordinary number. The rising

trend of Japanese inbound tourism has been influenced by a number of factors such as the

growth in outbound Chinese tourists, but there is a clear relationship between Prime

Minister Shinzo Abe’s economic policies and the concomitant weaker Yen period that has

prevailed since he became prime minister in December 2012. The key beneficiaries are

hotels, airports, retail – especially department stores and speciality retailers, in our opinion.

In China, one of the more important consumer spending patterns is “premiumisation”. That

is, owing to consumers’ rising income and evolving tastes, they are moving up the value

chain to higher price points, aligning with premium products and foreign brands. We

evaluate this theme in the context of consumer branded products and also premiumisation

in Chinese tourism choices – both domestically and internationally. Another theme we

consider is the impact of the relaxation of the one-child policy and the implications for the

demand for infant and toddler-related consumer staples. Finally, we look at the education

sector in China, and in particular focus on the higher education segment, which is enjoying

policy tailwinds.

In Korea, our interest is in 2 drivers. We have already mentioned the minimum wage hikes,

but there is also the return of Chinese tourism into Korea as tensions regarding the THAAD

missile deployment debate have now eased. This is particularly positive for retail and

hotels, but a related theme that is gathering momentum is “Daigou” – overseas shoppers

purchasing goods on behalf of Mainland China domestic customers. In Taiwan, we have

highlighted the pro-consumption policy changes. Also, in India, we have outlined the

policies designed to boost rural incomes, which are positive for consumer goods. The other

thematic of note in India is that premiumisation is taking hold, which has some favourable

implications for particular consumer staples and discretionary-related equities.

Premiumisation has

emerged in China and

India as an important

development in

consumer trends

8


In ASEAN, we have several themes of interest. Thailand is seeing a strong trend in

inbound tourism, which is favourable for hotels, retail, and entertainment-related industries.

Across ASEAN, modern retail penetration versus the traditional grocery format is low

(particularly in the Philippines and Indonesia), and the trend to the modern format is

creating opportunities. In Vietnam, spending patterns favour smartphones, home

appliances, cars, jewellery and travel as the economy develops, creating business

opportunities for related industries. Finally, pro-consumption polices in Malaysia and

Indonesia are having a positive impact on consumer staples and discretionary sectors in

those countries.

In the pages to follow, after a brief summary of our strategic views for APAC, Olivia Xia, our

Asia economist, will provide a general macroeconomic overview of Asian consumption,

followed by our outlook for each country in APAC, with an emphasis on the outlook for

consumption and a particular emphasis on the consumer-related themes summarised on

the preceding pages. In this context, we present Daiwa’s and our affiliated partners’ best

ideas, aligned with these themes, linking to their research.

ASEAN themes include

inbound tourism in

Thailand and the

increased penetration of

modern retail models

9


Asia Strategy – a concise summary of our views

Rising US Treasury-bond yields and trade war fears have negatively impacted equity

markets since late January 2018. However, we do not believe bond yields below 4% are

concerning for equity investors. Nor are we convinced in our base case that there will be a

sufficiently hostile trade war that will threaten the global economic, trade, or commodities

cycles. In the current reflationary paradigm, both yields and PERs can rise. Yet, if prices

rise sufficiently so that non-inflationary growth cannot offset rising bond yields (inflation

phase), then bond yields would undermine equity valuations. The relationship between

bond yields and valuations during economic phases is set out in Animal Spirits, March 14,

2018. Our base case on a prospective trade war (see Animal Spirits 23 March 2018) is that

there will not be a widespread trade war. We will likely see a series of skirmishes, which

precede the November mid-term congressional elections in the US.

So far, during the current correction, we have not detected any evidence of contagion

across risk asset classes, as rising equity volatility is not linked to sharply widening

sovereign or corporate credit spreads. We interpret the current repricing in equities as a

single asset class correction, within an ongoing bull market. We have a positive long-term

view on emerging markets in Asia due to: 1) gradual Fed policy normalisation, which likely

precludes a sharp appreciation in the USD, despite the recent moves, 2) strong commodity

(but currently under some pressure) and trade cycles, and 3) a deep valuation discount.

We continue to emphasise our overweight stance toward Japan in APAC. While globally in

DM, we expect the US to outperform, Japan should provide some ballast in APAC

portfolios as earnings will surely benefit from the stronger USD, and we see meaningful

valuation support. In Asia ex-Japan, Animal Spirits is overweight China, India, Hong Kong,

and Thailand, and underweight Indonesia, Malaysia and the Philippines. Indian earnings

growth remains solid at 17% for 2018 (Bloomberg consensus) and policy remains

accommodative, particularly running into the presidential elections. We are also

encouraged by the domestic demand focus of the Indian growth model, which is less

correlated with the global trade cycle. India is our largest overweight market.

We are overweight regional financials, but particularly in India and also Korea and

Singapore. We like the energy, materials and consumer discretionary sectors (ex-autos),

which are displaying superior earnings momentum than the general market. While we are

neutral, we do like the growth segment of consumer staples and have an overweight in

healthcare. There are a multitude of themes in the consumer segment that are supported

by Asian regional demand and policy, which are relatively less correlated to global trade.

Our dividend strategy favours dividend growth over yield. While it has been held back

recently due to trade fears, global reflation is likely to continue to trend up, which would

favour companies that can grow real yields against the backdrop of rising bond yields.

Bond-proxy equities should continue to be avoided.

We see potential for the current headwinds in EM Asia to persist into the autumn period.

The strong USD, correction in commodities, influenced heavily by the threat of trade wars

may lead into the month or 2 before the mid-term elections in the US, reflecting our base

case that the trade war threat is part of a negotiation with the midterms in mind.

Rising US Treasury

yields and trade fears

have been headwinds

but are not likely to

derail our longer-term

positive view on

equities, particularly in

EM

The rise in the USD and

the correction in the

CRB is a headwind near

term for EM, but we see

these as short-term

challenges

Our Japan overweight

stance in APAC is a foil

for the stronger USD;

our largest overweight is

India due to superior

earnings growth which

is not correlated with

global trade

We overweight selected

reflationary sectors, with

a renewed emphasis on

Asian consumer themes

Dividend strategy

favours dividend growth

over yield, looking to

avoid bond-proxies

Headwinds in EM Asia

could extend into the

autumn ahead of the US

mid-term elections

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d7a1c0aa9ff1b0d3623abcc4a43d16aea464a9e7dEi%2BFANDpYFbOVsAlED5pSD7M%2FFAPS9kYytedSrK1uMxyTvBu91Y10Elm%2BIGjxhbmQMehnJlkDD8rwMOm1rgMp7k0N1otu%2FNMYxyhHOSad4cFzcuz3tkd4rHO6RXbsrAh7T0n3BZSKE9pk2bPTvvdRi8%2FCZE8wp5SPMQZWOcK2GAPHwCnPFWkq3QWsvmvQBepLdPfw3hFy4Km1bgw0u3ng%3D%3D



10


Animal Spirits: Asia ex-Japan market outlook

Valuation Earnings Policy Macro Comments MSCI

Asia xJ

Animal Spirits Weight

Animal Spirits View

CHINA

China-H valuations have compressed to around the regional average while the consensus earnings growth forecast for 2018 remains above that for the MSCI Asia ex-Japan. Earnings revisions remain positive despite trade friction-related fears and above the decline in regional revisions. The recent reduction in the RRR and trade related fears suggest the tight monetary policy adopted by the PBOC focusing on financial sector reform may be loosening slightly. The macro environment has turned sour near term due to trade war fears, impending tariffs and a rising USD. Near term, we expect EM outflows; longer term, macro trends remain strong.

35.00% 38.00%

CHINA A

MSCI China A share valuations are now solidly below H-shares and Asia ex-Japan at a 12.1x PER versus 12.8x and 12.4x, respectively. Earnings growth for 2018 is slightly above the region at 15.8% versus 13.7%, but earnings revisions are down, in line with the region but not showing as much resilience as the H-shares

0.43% 0.00%

HONG KONG

A gradual approach to Fed policy normalisation is positive for Hong Kong, given its property sector leverage. Inbound tourism and retail sales are recovering. Earnings growth and revisions are solid with revisions outpacing nearest Asian peer Singapore. Its valuation is at a premium to Singapore, but both Hong Kong and Singapore have higher exposure to a broad trade war (if it erupts) than the region due to high trade rations. The higher exposure to Chinese consumers in Hong Kong provides some defensive characteristics.

11.24% 12.00%

TAIWAN

Taiwan valuations are cheap relative to the market’s history. Both earnings growth and revisions are below par on an Asia ex-Japan comparison. Export growth remains strong but the weak domestic economy and near deflationary producer prices is a drag on growth. However, the strong USD recently is supportive of the export-oriented nature of the Taiwan economy. Monetary policy remains easy with only one 25bps rise in the policy rate expected by us in 2018. Minimum wages and the rise in public servant wages should be positive for consumption, against the backdrop of a tightening labour market.

13.54% 12.50%

KOREA

Korea’s sluggish domestic economy is in contrast to solid growth in exports. Recently, the Bank of Korea raised its policy rate by 25bps while maintaining an accommodating stance towards monetary policy. Valuations look compelling. Earnings growth is just below the regional average and earnings revisions are softer than MSCI Asia ex-Japan. Chinese tourism is likely to rebound and a hike in the minimum wage should boost consumption. Yet trade fears weigh on the export-oriented economy and the relative weakness of the JPY and CNY are headwinds.

16.26% 16.00%

INDIA

India’s valuation premium has widened again following the correction among peers, particularly China. This premium is due partly to the country’s lower exposure to trade war risk. Bank loan growth is now above 10%, recovering to pre-GST levels. We do not expect the RBI to raise rates sharply as real rates are too high. The recent 25bp hike in rates was not unexpected and there may be one more 25bp hike before year end to support the Rupee. Before the 2019 elections, price floors are being introduced for agricultural products, to boost the rural economy. Earnings are recovering in FY18 with estimated growth of 17.6% but revisions are weak.

10.60% 13.00%

SINGAPORE

Earnings growth is outperforming peers, with revisions more resilient than most peers, led by the financials and consumer discretionary sectors. Valuations appear cheap versus regional comps, Hong Kong. A positive trade cycle is supportive of Singapore export earnings and the domestic economy is recovering. Policy has turned negative with the stepping-up of the measures to cool the property market, which was showing signs of recovery.

3.93% 4.00%

MALAYSIA

Malaysia’s valuation is reasonable within emerging ASEAN but earnings growth remains the weakest among peers and revisions are falling. The country’s fiscal position is improving. Investment-led recovery is under threat as the GST removal and suggested budget cuts may come at the expense of infrastructure spending, while consumption is likely to strengthen in 2018.

2.81% 1.00%

THAILAND

The domestic economic recovery is being led by investment and consumption. Inflation is still below 1% so there is little scope for monetary tightening. But we see ample scope for fiscal stimulus. Thailand offers the best value within emerging ASEAN, in our view, but earnings growth is underperforming the region and revisions are weakening.

2.72% 3.50%

PHILIPPINES

Infrastructure spending will likely reaccelerate the Philippine economy but inflation will potentially be a problem as new stimulus on top of (real estate) asset price reflation is inflationary. Peso weakness YTD, led by the current account deficit is a concern. Valuations look rich. BSP is way behind the curve, in our view, and we see more rate hikes to come.

1.15% 0.00%

INDONESIA

Given its high ROE and reasonable valuation relative to emerging ASEAN, the premium to EM is not a concern. Earnings growth is outpacing ASEAN peers but revisions have weakened sharply. There is little scope for fiscal stimulus. Higher energy prices risk deteriorating the twin deficits and may undermine the Rupiah. Rates may rise sharply in 2018.

2.25% 0.00%

Source: MSCI, Daiwa; Note: Data as of 23 August 2018.

In the following table we outline our Asia ex-Japan sector views, including the inputs that

feature in this analysis.

11


Animal Spirits: Asia ex-Japan sector outlook

Valuation Earnings Growth

Earnings Revisions Macro Comments

MSCI Asia xJ

Animal Spirits Weight

Animal Spirits View

Consumer discretionary

Yield is 2.6% above the 10-year average and PBR is at the 10-year average at 1.9x, while PER has de-rated, it is still above the 10-year average. Earnings growth is well above regional average but revisions are fading more than the region. Pro consumer policies and numerous elections are positive for consumer discretionary, with outstanding secular themes. Avoid trade risk related large sub groups such as autos and consumer electronics in North Asia for now.

8.59% 10.00%

Consumer staples

Despite rising ROEs in 2018E, this is insufficient to offset the sector PBR which is just short of 2SD above the 10-year mean valuation. Earnings growth overall is underperforming at 3.3% in 2018 but is above the regional average in China, Hong Kong, and India, which have strong secular drivers. Macro drivers are the same as consumer discretionary.

4.87% 5.00%

Energy

EV/EBITDA is 5.4x, below 1SD below the 10-year average. Earnings growth in 2018 is around 20%, well above the region, and earnings revisions are strong. OPEC and Russia supply side discipline remains impressive. Strong environment for E&P particularly.

4.83% 6.00%

Financials

Both PBR and PER are more than 1SD below the 10-year average. Strong earnings growth in India and Singapore as yield curves steepen and top line lending recover but growth and revisions are in aggregate in line with the region. Policy headwinds in China are being offset by steepening yield curves in India and Korea. Financials are the cleanest play on the reflation theme.

23.16% 24.00%

Healthcare

Asian healthcare stocks are trading currently at more than 2SD above the 10-year average PER at 31.3x but ROEs have risen too YTD. Sector earnings growth is well above average for 2018E but revisions are easing faster than average. However, policy in China and India is positive for health care on a secular basis, to unlock discretionary spending power.

3.04% 4.50%

Industrials

EV/EBITDA is currently more than 1SD below the 10-year average at 9.4x. Earnings growth is below the region for 2018E but in China A, India, Taiwan and Thailand, industrials earnings growth is outpacing the region. Earnings revisions are slightly more resilient than the region. Infrastructure spending in ASEAN, China and potentially in North Korea, either domestically or via Belt and Road, are drivers.

6.53% 6.00%

Information technology

PER are only slightly above historical 10-year average. Sector earnings outperformance peaked in 2017. The strength of the semiconductor cycle, displays, EV-related drivers and e-commerce are still compelling in specific names. Revisions have been weaker than average. Trade risk near term is a headwind.

31.00% 31.50%

Materials

Inventory adjustments in the resources sector, particularly in bulks and industrial metals, have led to renewed pricing power in the materials sector. Supply-side reforms are a plus. Valuations are fair, earnings growth and revisions remain supportive. Key play on reflation.

4.87% 5.50%

Real estate

The sector PBR is currently around the past 10-year average of 0.9x, but rising bond yields will likely eventually raise cap rates. Earnings growth and revisions are strong. Rising inflation expectations should be positive for real assets. REITs with insufficient DPU growth are bond proxies in a rising inflation paradigm and hence should be avoided. We suggest a selective approach to stock picking in the reflation trade.

6.02% 6.00%

Telecom services

ROE and PBR have fallen but PER remains stable at around the past 10-year average. Earnings are growing well below the regional average at 2.5% for 2018E, but revisions are particularly weak. Telecoms are bond proxies in the current environment as they lack the ability to hike dividends.

3.90% 0.50%

Utilities

Dividend yield (3.6%) is almost 2SD above the 10-year average at 3.0%, but with earnings growth disappointing this year, and although revisions are roughly in line with the region, the utilities sector will likely act as a "bond proxy". Power generation costs have eased since the beginning of 2018.

3.19% 1.00%

Source: MSCI, Daiwa; Note: data as of 23 August 2018 Note: the input (valuation, earnings, policy, macro) is supportive of market or sector evaluation; very supportive; unsupportive; very unsupportive; neutral. The arrows on the output

side or final column represent the strength and direction of market view or sector, based on the inputs: overweight; heavy overweight; underweight; heavy underweight; market weight

In the next table we outline the Animal Spirits top-20 picks in Asia ex-Japan.

12


Animal Spirits Top Picks

Company Ticker Share price Market Industry Analyst Rating Theme

AIA Group 1299 HK HKD67.7 China Insurance Leon Qi Buy (1) Asia reflation – Chinese insurance

Shenzhou International 2313 HK HKD103 China Textiles, Apparel & Luxury Goods

John Choi Buy (1) Consumer premiumisation

TravelSky Technology 696 HK HKD20.1 China IT services Kelvin Lau Buy (1) Asia Reflation - dividend grower

Canvest Environment 1381 HK HKD4.14 China Utilities Dennis Ip Buy (1) China environmental

China Shenhua Energy 1088 HK HKD17.5 China Oil, Gas & Consumable Fuels Dennis Ip Hold (3) Asia reflation – pricing power

Hang Lung 101 HK HKD15.5 China Real Estate Management & Development

Jonas Kan Buy (1) Asia reflation

China New Higher Education 2001 HK HKD5.66 China Consumer Discretionary NA Not rated China consumer discretionary, small cap, growth style

Havells India HAVL IN INR723.85 India Electrical products Saurabh Mehta Buy (1) Consumer premiumisation

HDFC Bank HDFCB IN INR2,062.25 India Banks Punit Srivastava Buy (1) Asia reflation – yield curve shifts

Axis Bank AXSB IN INR649.2 India Banks Punit Srivastava Buy (1) Asia reflation – yield curve shifts

Yes Bank YES IN INR343.4 India Banks Punit Srivastava Buy (1) Asia reflation – yield curve shifts

Larsen & Toubro LT IN INR1,369.1 India Construction & Engineering Saurabh Mehta Buy (1) Infrastructure

POSCO 005490 KS KRW326,500 Korea Metals & Mining NA Not rated Asia reflation – supply-side reform

Hana Financial 086790 KS KRW42,700 Korea Banks Mike Oh Outperform (2) Asia reflation – yield curve shifts

SK Hynix 000660 KS KRW83,000 Korea Semiconductor & Semiconductor Equipment

SK Kim Buy (1) Positive view on memory and other stock specific drivers

Daelim Industrial 000210 KS KRW81,900 Korea Construction Mike Oh Outperform (2) Infrastructure – dividend grower

Genting Malaysia GENM MK MYR5.22 Malaysia Gaming Ng Chi Hoong BUY Post-election pro-consumer policies

Dairy Farm Int’l DFI SP USD9.27 Singapore Consumer Staples Jame Osman Buy (1) Consumer (modern retail

penetration)

Banpu Pcl BANPU TB THB20.10 Thailand Energy Chak Reungsinpinya BUY Asia reflation – supply-side reform

PTT Pcl PTT TB THB52.50 Thailand Energy Chak Reungsinpinya BUY Asia reflation – pricing power

Source: Bloomberg, Daiwa; Notes: newly added stocks in bold; prices as of close on 31 August 2018.

When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.hk.daiwacm.com/research_disclaimer.html or

contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

http://www.hk.daiwacm.com/research_disclaimer.html

13


Economics – the rise of Asian consumers

We believe the rise of Asian consumers is a force to be reckoned with, with a critical mass

of the Asian population now reaching a level of economic affluence. Consumption will likely

be a dominant economic theme in Asia in the next few decades, underlined by population

expansion and rising private incomes. Possible setbacks caused by renewed protectionist

sentiment and global liquidity tightening in the near term are unlikely to derail the uptrend

in Asian consumption, in our view. Favourable domestic policies should add to the

momentum of private consumption expansion in the short and medium term.

Asian consumption – strong secular and policy support

Fundamentally, aggregate consumption is determined by 2 factors: population growth and

individual purchasing power (a reflection of private income growth and the propensity to

consume). Asia now hosts 60% of the world population. On average, the population is

young and still expanding, especially in India and Southeast Asia, despite the rapid ageing

under way in some other economies. A young and growing population constitutes a

respectable base for consumption expansion in the long term.

Meanwhile, individual purchasing power is enhanced as Asia experiences rising economic

power. Asia’s middle class is now a force that will increasingly shape the future of private

consumption. An OECD study estimated that by 2030, Asia will be home to 66% of the

world’s middle class and 59% of the world’s middle-class consumption will happen in the

region.

Catch-up consumption in middle-income Asian economies

From a GDP-per-capita perspective (chart below, left), Asian economies fall into 2 groups:

high-income and middle-income ones. The most exciting consumption story will come from

the latter, in our view, as these countries are still in the process of catching-up (chart below,

right). On the one hand, their consumer base is expanding. At the same time, consumption

premiumisation is happening. Consumption upgrading has emerged in various forms.

Asian countries: GDP per capita Asian countries: private consumption as % of GDP in 2017

Source: CEIC, Daiwa Source: BIS, CEIC, Daiwa Note: using 2016 data for Vietnam

Among these middle-income economies, China and India, due to the sheer size of their

populations, have long been recognised for their consumption growth potential. Although

China is aging rapidly, robust economic growth, a favourable policy environment, and a

new generation of young consumers promise to bolster consumption expansion in the long

term, in our view. India, meanwhile, is young and has a highly educated labour force. As

urban economies continue to expand, private income levels should rise. Urban affluent

mass therefore will become the main pillar for consumption expansion in the future, in our

opinion.

Likewise, Southeast Asia benefits from a fast-growing working-age population and rapid

urbanisation in the region. Rising individual incomes are translating into strong demand for

0

10,000

20,000

30,000

40,000

50,000

60,000

Sin

gapo

re HK

Japa

n

Kor

ea

Tai

wan

Mal

aysi

a

Chi

na

Tha

iland

Indo

nesi

a

Phi

lippi

nes

Vie

tnam

Indi

a

(USD)

0

20

40

60

80

100

120

Sin

gapo

re

Chi

na

Kor

ea

Th

aila

nd

Tai

wan

Mal

aysi

a

Indo

ensi

a

Indi

a

Hon

g K

ong

Vie

tnam

Phi

lippi

nes

Japa

n

(% of GDP)

A growing population

with rising spending

power underlines the

rise of Asian

consumption

14


a wide range of good and services. Pro-consumption polices driven by a busy election

calendar in 2018 and 2019 should also provide a fillip to consumption growth in the short

term. Typically, policymakers dish out sweeteners in pre- and post-election periods to boost

private spending.

Positive near-term factors to increase consumption in high-income countries

Fundamentals in high-income countries are not as favourable for consumption growth. In

these economies, population growth is moderating (contracting in Japan) and the

consumer economy has been maturing. In some countries, such as South Korea, private

consumption also faces constraints posed by heavy household indebtedness. However,

some near-term factors work in favour of private consumption growth. Strong inbound

tourism, especially from China, is most likely to benefit Hong Kong, Japan and Korea.

Government policy stimulus, such as wage rises in Taiwan and Korea, is also likely to

boost private consumption power.

Chinse tourist arrivals to Asian countries (2017)

Source: CEIC, Daiwa

Different consumption patterns across Asia

The rise of consumption takes on different forms in Asian economies, due to vast

variations in demographics and economic developments. In the catch-up group,

consumers are likely to trade up to brands that offer the most incremental value and

quality. Service consumption will likely be rising for both catch-up and high-income groups,

with heavy healthcare spending by ageing consumers and increasing purchases of

communications, transport and experiences by young spenders.

Risks to the consumption growth outlook

Risks to consumption growth still appear to be tilted to the downside, however. An

economic growth slowdown, caused by deterioration in the world trade environment or

faster-than-expected global liquidity tightening, is the biggest threat to private consumption,

in our view. Sitting in the centre of the global supply chain, Asia could suffer significantly

from disruption to the global trade system. This could in turn dampen individual income

growth and dent consumer confidence, leading to reduced private spending.

Meanwhile, private consumption has been benefitting from favourable global liquidity

conditions in recent years. Despite the marginal tightening of monetary policy in some

Asian countries following the US Fed rate hikes, the overall monetary environment is still

accommodative, with policy rates remaining below their long-time averages (chart below,

left) and inflation pressure still benign (except in the Philippines). However, if global

liquidity conditions tighten by more than expected, Asian economies are likely to see

capital outflows, slow economic growth, and rising inflation. Under these circumstances,

households might reduce private purchases. Highly leveraged households, especially in

Korea, Taiwan, Hong Kong and Thailand, will also likely hold back spending as debt

repayment pressure mounts (chart below, right).

0.31.0

1.62.3 2.7

3.24.0 4.2

7.4

9.8

0

2

4

6

8

10

12

14

16

India Philippines Indonesia Malaysia Taiwan Singapore Vietnam Korea Japan Thailand Hong Kong

50

(millions)

44.4

35

20

Downside risks include a

deterioration in the

global trade environment

and faster-than-expected

global liquidity

tightening

15


Policy rates in Asian ex-Japan counties Household debt as % of GDP in 2017

Source: CEIC, Daiwa Note: The dot line is 20-year average policy rate

Source: BIS, CEIC, Daiwa Note: The figures for Taiwan and Vietnam are 2016

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Jul-1

4M

ar-1

5S

ep-1

5O

ct-1

6Ju

n-18

Aug

-15

Jan-

16M

ar-1

6S

ep-1

6A

ug-1

7M

ay-1

8

May

-18

Jul-1

7Ju

l-14

Oct

-14

Jun-

15N

ov-1

7

Jul-1

6

Jul-1

4A

pr-1

5

Sep

-15

Mar

-16

Jul-1

4D

ec-1

6Ju

n-17

Mar

-18

(% p.a.)(% p.a.)

Left-hand side Right-hand side

India

Indonesia

Philippines

Korea

Malaysia

Thailand

Vietnam Taiwan

Hong Kong 0

10

20

30

40

50

60

70

80

90

100

Phi

lippi

nes

Indi

a

Indo

nesi

a

Vie

tnam

Chi

na

Japa

n

Sin

gapo

re

Mal

aysi

a

Tha

iland

Hon

g K

ong

Tai

wan

Kor

ea

(% of GDP)

16


Japan

Economics – Japan consumption outlook

Japanese consumption is very constrained by the country’s demographic conditions,

particularly unfunded pension liabilities. The country’s elderly still have a very high

predisposition towards saving. The Abe administration recently introduced a new visa

policy, allowing more foreigners to work in understaffed sectors in Japan, which we believe

could help increase consumption demand. Meanwhile, as a popular tourist destination,

Japan has also benefited from a growing number of inbound tourists in recent years, and

arrivals look set to spike during the 2020 Tokyo Olympics.

Japan: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 127.1 127.1 126.8 126.5 126.2

GDP (USDbn) 4,854 4,396 4,952 4,874 4,929

GDP per capita (USD) 38,205 34,585 39,014 38,471 39,057

Real GDP growth (%) -0.3 1.4 1.2 1.6 1.3

Private consumption as % of GDP 115.4 111.8 109.9 109.5 109.8

Private consumption growth (%) -2.4 0.7 0.2 0.9 0.6

Inflation (%) 2.7 0.8 -0.1 0.7 0.9

Policy rate (complementary deposit interest rate, %) 0.1 0.1 -0.1 -0.1 -0.1

Household debt (% of GDP) 58.0 57.0 57.2 57.4 57.6

Source: CEIC, BIS, World Bank, Daiwa Research Institute, FocusEconomcis

Japanese inbound tourism

The booming Japan inbound tourism market

Inbound tourism is an eye-catching sector in Japan, with foreign tourist visits and inbound

tourist consumption hitting record numbers of 28.7m and JPY4.4tn, respectively, for 2017.

The robust growth in foreign tourist visits is broadly in line with the government’s goal of

drawing 40m inbound tourists annually by the 2020 Olympics, a target set at a meeting of a

special panel chaired by Prime Minister Abe in March 2016. Inbound tourist consumption is

targeted to reach JPY8tn by then.

Judging from the experience of previous Olympic hosts, Japan’s inbound tourism growth is

likely to further accelerate shortly before the games are held. For example, according to

Mizuho Research Institute (2014), Australia received 20% more foreign visitors in the

“Olympic year” (2000) compared with the trend prior to Sydney’s selection as the host city,

as a result of active measures to attract visitors in the run-up to the event.

Overseas residents’ visits to Japan by month (in ‘000) Spending by foreign tourists (2017)

Source: Japan National Tourism Organization (JNTO), Daiwa Source: JNTO, compiled by Daiwa

As can be seen in the right-hand chart above, compiled by Daiwa Japan retail analyst

Kazunori Tsuda, shopping constituted JPY1.64tn or 37.1% of total spending by foreign

tourists in 2017, followed by accommodation (JPY1.25tn, 28.2%), food & beverage

(JPY0.89tn, 20.1%), and transportation (JPY0.49tn, 11.0%). As such, we believe retailers,

where there are relatively few market players, stand to benefit the most from booming

inbound tourism.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec

2014 2015 2016

2017 2018

Shopping37%

Entertainment3%

Transportation11%

Food and beverage

20%

Accommodation28%

Others1%

Japanese consumption

is highly constrained by

demographics —

unfunded pension

liabilities in particular

Japan has seen growing

numbers of inbound

tourists, and arrivals are

likely to hit an all-time

high in 2020

Shopping constitutes

most spending by

foreign tourists

17


Animal Spirits is very much focused on the long-term trend of inbound tourism into Japan,

but our Japan chief strategist, Tomochika Kitaoka, highlights that momentum in inbound

tourism numbers is dropping and tourism-related shares do tend to move in unison with

this momentum, as illustrated in the chart below. As Kitaoka-san demonstrates, it is the

YoY change in tourist numbers which correlates with tourism-related shares, on his

estimates 3Q and 4Q this year may see further slowing momentum. For more details, see

Foreign Visitor Numbers Plateauing…, 23 May 2018.

Inbound Japanese tourists, projected YoY tourist momentum and relative equity performance

Source: Daiwa, JNTO Note: Data as of 31 July 2018. The relative performance is based on a basket of equities that are highly correlated with YoY tourist numbers.

Seasonally-adjusted figures calculated by Daiwa. Forecasts from August 2018 assume that seasonally-adjusted figures will remain flat MoM.

Thematic picks – Japanese inbound tourism

We highlight 2 names aligned with the inbound tourism theme – Japan Airport Terminal

(9706 JP, JPY4,975, Outperform [2]) and J. Front Retailing (3086 JP, JPY1,580, Buy [1]).

Japan Airport Terminal is engaged in the management and operation of passenger

terminal buildings and operates through facilities management, merchandise sales, and

food and beverage sales. In its FY17 ended 31 March 2018, Japan Airport Terminal

reported operating revenue growth of 10.2% YoY to JPY225.9bn. Among its 3 business

segments, merchandise sales recorded significant growth of 12.7% YoY to JPY147.7bn,

driven by airport duty-free stores (DFS) and urban DFS sales, which exceeded the

company’s forecasts. Daiwa expects Japan Airport Terminal’s merchandise sales segment

to maintain high revenue growth in the run-up to the 2020 Olympics, with increasing

inbound visitor arrivals by air. In the meantime, we see the short-term drivers being

terminal expansion and upgrade projects at Haneda Airport to increase traffic capacity.

Meanwhile, J. Front Retailing, covered by Kazunori Tsuda-san, operates department

stores/fashion boutiques across Japan, and looks poised to benefit from increasing

inbound visitor arrivals. It has among the highest earnings dependency on inbound tourist

numbers in Japanese retail, according to Tsuda-san. In line with Kitaoka-san’s point about

slowing momentum, July sales to foreign visitors at the Daimaru Matsuzakaya chain rose

by 13% YoY vs. 46% YoY in June (see Major Retailers Department Stores, 2 August 2018).

The shares have pulled back since the northern Osaka earthquake on 18 June, but Tsuda-

san sees this having a minimal impact on earnings. The valuation has compressed to a

PBR of 1.03x (FY19E) currently, which we believe has priced in most of the negatives.

Japanese niche China consumer brands

Japanese fashion and fast-moving consumer goods (FMCG) companies are popular

among Chinese consumers, consistent with the trend of consumption upgrades and

premiumisation in the China market. Facing increasing work-life pressure, young

consumers in China are gradually embracing a simpler lifestyle, a design aesthetic led by

Japan fashion brands such as UNIQLO and MUJI. Consumers now seem to care more

about the comfort and materials of clothes, rather than just the apparel design.

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CY2012 end =100YoY

Inbound visitors YoY (LHS) YoY scenario (LHS) Inbound-related stock share price vs TOPIX (RHS）

Japan Airport Terminal

and J. Front Retailing

are set to benefit from

inbound tourism to

Japan

Japanese brands are

popular among Chinese

consumers, consistent

with consumer upgrades

and premiumisation in

China

https://asiaresearch.hk.daiwacm.com/daiwa_research/Foreign%20Visitor%20Numbers%20Plateauing_18May23.pdf

https://asiaresearch.hk.daiwacm.com/daiwa_research/Major%20Retailers_Department%20Stores_18Aug02.pdf

18


Baby diapers market in China (2009-20E) China baby diaper market share by brand, 2016

Source: CNHPIA, Euromonitor International, Daiwa forecasts Source: Nonwovens-industry, Chyxx.com, Daiwa estimates

For personal care products including baby diapers and sanitary products, the emerging

middle-class in China prefers international brands, which are seen as having an edge in

quality control. Besides, frustrated by the contaminated baby milk scandal and, more

recently, the vaccine scandal, Chinese parents seem to be more willing to purchase foreign

brands or imported goods for children, especially milk and baby diapers. The Chinese baby

diaper market is dominated by foreign brands, where Japanese players (including

Unicharm’s “Moony”, Kao’s “Meries” and Daio Paper’s “GOO.N”) constitute more than 20%

of the market, according to Daiwa research. We are seeing more opportunities in China for

companies involved in the baby diaper industry because of the universal second-child

policy, implemented in 2016, to boost the fertility rate.

Thematic picks – Japan niche China consumer brands

We like Unicharm (8113 JP, JPY3,632, Outperform [2]), covered by Katsuro Hirozumi, as

a leading manufacturer of sanitary products, disposable diapers, and pet-care items.

According to FactSet, Mainland China is the company’s second-largest market after Japan,

contributing 24.7% of total revenue in 2017. Moreover, Unicharm is making forays into Asia

and the Middle East markets. It recorded revenue growth of 7.8% YoY to JPY325.7bn, and

core operating-profit growth of 21.4% to JPY47.27bn, for 1H18, beating management

projections, according to Hirozumi-san. Cross-border e-commerce sales to China nearly

doubled, while purchases by parallel importers halved YoY to JPY3.0bn in 1H18, based on

company estimates. In China, its sales of baby care products remained lacklustre in 1H18

because of increasing competition, but were offset by a strong performance for feminine

care products. Still, the company’s operations in emerging markets such as Indonesia and

Thailand remained strong, and Unicharm retains its initial full-year targets due to larger-

than-anticipated swings in raw-material prices. Short-term catalysts include growth in

cross-border e-commerce and emerging markets, in our view. For further details, see

Hirozumi-san’s recent note, 1H results solid; China baby care products still an issue, 7

August 2018).

In the apparel sector, we like Fast Retailing (9983 JP, JPY51,810, Outperform [2]) covered

by Jun Kawahara. Japan was the largest market for Fast Retailing by revenue contribution

(56.6%) in 2017, followed by Mainland China (14.0%) and the US (13.9%), according to

FactSet. In China, UNIQLO was one of the most popular fashion brands, ranking 1st and

2nd

in the women’s and men’s apparel categories, respectively, during the 2017 Alibaba

Single’s Day shopping festival. The company targets revenue of JPY1tn in Greater China

by 2022, and intends to open 100 stores there annually.

0

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10

15

20

25

30

35

2009 2010 2011 2012 2013 2014 2015 2020E

CNY billionbillion pieces

Volume (LHS) Value (RHS)

Huggies (Kimberly-Clark)

19%

MamyPoko (Unicharm)

12%

Pampers (P&G)26%

Merries (Kao)10%

Anerie (Hengan)

8%

GOO.N (GOO.N)

4%

Others21%

https://asiaresearch.hk.daiwacm.com/daiwa_research/Unicharm_18Aug07.pdf

19


2017 Tmall (Alibaba) Single’s Day shopping festival brand ranking by sales (apparel group)

Men apparel Women apparel Sportswear

Ranking Brand Ranking Brand Ranking Brand

1 HLA/海瀾之家 1 UNIQLO 1 Nike

2 UNIQLO 2 VERO MODA 2 Adidas

3 GXG 3 ONLY 3 ANTA /安踏

4 Peacebird/太平鳥 4 Eifini /伊芙麗 4 NEW BALANCE

5 Jack & Jones 5 HSTYLE /韓都衣舍 5 Li Ning /李寧

Source: 21Jingji, SINA, Daiwa summary Note: Data as of 24:00 HKT 11 November 2017

As noted in Kawahara-san’s flash, “3Q results overshot; UNIQLO Japan, international did

well”, 12 July 2018, Fast Retailing’s 1-3Q FY18 results left a positive impression, with

revenue and operating profit up by 15.3% and 32.3% YoY, respectively. For UNIQLO

International, the gross margin widened due to improved accuracy of sales targets, and

headway was made in terms of reducing costs. Same store sales growth (SSSG) in 3Q

rose by double digits in China, Southeast Asia & Oceania, and Russia. According to

Kawahara-san, the company is aiming for growth through globalisation and digitalisation.

He believes the key performance drivers for Fast Retailing include: 1) UNIQLO

International, 2) growing the e-commerce business, and 3) Uniqlo’s sub-brand “GU”

performance.

Fast Retailing’s 1-3Q

FY18 results were

positive with revenue

and operating profit up

by 15.3% and 32.3% YoY,

respectively

https://asiaresearch.hk.daiwacm.com/daiwa_research/Fast%20Retailing_18Jul12.pdf

https://asiaresearch.hk.daiwacm.com/daiwa_research/Fast%20Retailing_18Jul12.pdf

20


China/Hong Kong

Economics – China/Hong Kong consumption outlook

As the Chinese economy transitions away from an investment- and export-led growth

model, policymakers have been trying to increase the share of consumption in GDP

growth. The recent economic slowdown and tightening regulations in the property market,

against the backdrop of the trade war with the US appear to have hit private consumption.

But these setbacks won’t defy the overall uptrend of consumption, in our view, unless there

is a sharp macro deterioration.

China: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 1,368 1,375 1,383 1,390 1,397

GDP (USDbn) 10,480 10,925 11,204 12,241 14,067


Real GDP growth (%) 7.3 6.9 6.7 6.9 6.5


Private consumption growth (%) 7.9 7.2 7.8 7.7 7.5

Inflation (%) 2.0 1.4 2.0 1.6 2.0

Policy rate (1-year lending rate, %) 5.60 4.35 4.35 4.35 4.35


Source: CEIC, BIS, World Bank, FocusEconomics, Daiwa forecasts

A new generation of prime middle-class consumers, born after the mid-1980s, is at the

centre of China’s consumption story. These consumers’ aspirations for premium goods and

services will reshape the consumption landscape for the next few decades, in our view.

Meanwhile, policymakers have announced several supportive policies recently, including

an increase in the personal income tax threshold, relaxation of the one-child policy, and the

possible lifting of the household size limit.

However, if there is a marked economic slowdown, China runs the risk of going back to the

old growth model, relying on heavy investment and debt-driven expansion. Household debt

has been rising rapidly since 2008. With this much debt (mostly mortgages), in a situation

of an economic slowdown and rising interest rates, household consumption could feel a

tangible negative spillover, in our opinion.

Hong Kong: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 7.3 7.3 7.4 7.4 7.5

GDP (USDbn) 292 309 321 341 359


Real GDP growth (%) 2.8 2.4 2.2 3.8 3.5



Inflation (%) 4.4 3.0 2.4 1.5 2.2

Policy rate (base rate, %) 0.50 0.75 1.00 1.75 2.5



Consumption growth in Hong Kong is typically affected by Chinese tourism, domestic

demand, and government policy. The economy has been in a steady recovery since 4Q16,

with private consumption benefitting from a record-low unemployment rate, higher wages,

and a booming property market, as well as strong inbound tourism. This growth momentum

seems set to continue in the near term, as these factors continue to play out. However, the

tightening of global liquidity and a marked slowdown in the Chinese economy could have

ramifications for the sustained expansion of private consumption.

Policymakers in China

are trying to increase the

share of consumption

and services in the

economy

Policymakers have

announced several

consumer-supportive

policies

Consumption growth in

Hong Kong is typically

affected by Chinese

tourism, domestic

demand dynamics, and

government policy

21


Premiumisation in Chinese consumer brands

Rising disposable incomes leading to a preference for premium brands

The continued rise in disposable incomes in China is leading to a preference for premium

and international brands. Indeed, the move up the value chain is a key feature of Chinese

consumer patterns. As an example, the chart below, courtesy of Daiwa consumer analyst

Adrian Chan, shows the rising market-share trend of premium foreign brands in China’s

sportswear market.

Sportswear market share: foreign vs domestic brands

Source: Euromonitor International, Daiwa

Thematic picks – premiumisation in Chinese consumer brands

We highlight Anta Sports (2020 HK, HKD42.75, Buy [1]) as Adrian’s top pick in the China

sportswear sector. Growth is driven here by the fitness bug and continuing trends in

athleisure, which help characterise the premiumisation now at play. Anta’s market share

rose from 9% in 2014 to 10.6% in 2017, driven by growth in both its FILA and Anta-brand

sportswear. Anta reported robust 1H18 revenue and earnings growth of 44% and 34% YoY,

respectively, with FILA retail sales rising by over 85% YoY.

Meanwhile, Shenzhou International (2313 HK, HKD103, Buy [1]) is one of Daiwa’s

regional head of small/mid-cap research John Choi’s picks, and can be seen as a play on

premiumisation in China. The company supplies big-name international brands such as

Nike, Puma, Adidas, and Uniqlo, which together account for 90% of its sales. It is also the

top supplier of knitted products for Uniqlo, which alone accounts for 30% of revenue.

Vertical integration ensures solid gross margins, and earnings visibility, at around 12

months, is among the highest in the sector.

Relaxation of the one-child policy

Positive for infant and toddler products

Since 2015, when the one-child policy in China was moderated, there has been a notable

increase in first and second child fertility rates.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

International Domestic Others

Rising disposable

incomes are behind the

preference for premium

and international brands

22


China fertility rate (%)

Source: CEIC, Daiwa

While movement up the value chain in infant-related consumer staples has been a clear

trend, the potential for volumes as well as value to move higher appears meaningful, given

the positive implications for the Chinese infant and toddler consumer market of the

changes made to the one-child policy.

Thematic picks – Chinese one-child policy relaxation

We feature 2 stocks covered by Daiwa’s Anson Chan which are geared to the relaxation of

the one-child policy. The first is Health and Happiness International (H&H) (1112 HK,

HKD49.75, Buy [1]). A recent report on China’s dairy sector by Daiwa consumer analysts

Anson Chan and Jonathon Ho (Top Players tapping into growing consumer awareness of

brand value, 11 July 2018) emphasises the accelerating growth of the infant milk formula

market in China. According to Nielsen, the infant milk formula market in revenue terms

expanded by 11% YoY in 2017, after falling by 1.1% YoY the previous year. Daiwa

forecasts the market to grow by c.20% in 2018E, driven by: 1) the recovery in the birth rate

following the relaxation of the one-child policy, 2) the enhanced pricing power of the major

infant milk formula brands as the market consolidates, and 3) the rapid growth of the high-

end segments (premiumisation). Anson expects H&H’s net profit CAGR to recover from

11% in 2011-16 to 30% over the 2018-20E period based on the positive developments in

the infant milk formula market, as well as the growth in the vitamin and health supplement

market in China.

Another name in this space is Want Want (151 HK, HKD6.41, Buy [1]). The company is a

household brand for snacks, whose gross margin Anson expects to recover through price

hikes, which have been visible since April 2018. He also sees scope for further share

buybacks driven by strong free cash flow. Anson estimates new products to contribute

c.5% to FY19E revenue, and projects capex to rise to CNY600m in FY19E, from

CNY323m in FY18 due to production automation and new facilities. Want Want intends to

expand in China’s southeastern region in the next 3-5 years.

Upgrade in Chinese tourism patterns

Notable shift to mid-scale hotels

The Chinese tourist is also shifting up market. There has been a marked shift towards the

midscale hotel market from the economy segment over the past 5 years, albeit both market

groups are growing. The other development is the inevitable shift towards the luxury end,

which is still underdeveloped in comparison with the US. Both the midscale and luxury

segments in China have yet to develop significant scale in branded hotel chains, as shown

in the right-hand figure below, taken from a recent report by Daiwa small/mid-cap analyst

Carlton Lai (China Hotels – Initiation: RevPAR poised for multi-year upswing, 25 May 2018.

Nevertheless, the boom in the midscale market is evident in the surge in the number of

hotel rooms (below left).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

First-baby: fertile women Second-baby: fertile women

The Chinese tourist is

moving up-market, with

a notable shift towards

the midscale and luxury

end

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=122e2fbf61017a33e0cd00af6a8c3d7edfe3e658cp6%2FCO2Pfbb1qaanOWrdBcBzEDENxgolfFihAnL%2BcnlOmJYP4Via%2Fh2JCOlPNc2p40eMKf3Y3X8ztJOr%2BhIB0s44nH9Y4LN8bIJ1QqXTpkBL27Xx9JFBdQu%2BKU%2FtRzbXni%2BkJJpI2HfSRvEEkpcDc075QhLJdwPWnF4nUHNThguwa8V7pfS4G4bxMDuq0Jork3VeFByQEOTslJ4UQBsCzlw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=122e2fbf61017a33e0cd00af6a8c3d7edfe3e658cp6%2FCO2Pfbb1qaanOWrdBcBzEDENxgolfFihAnL%2BcnlOmJYP4Via%2Fh2JCOlPNc2p40eMKf3Y3X8ztJOr%2BhIB0s44nH9Y4LN8bIJ1QqXTpkBL27Xx9JFBdQu%2BKU%2FtRzbXni%2BkJJpI2HfSRvEEkpcDc075QhLJdwPWnF4nUHNThguwa8V7pfS4G4bxMDuq0Jork3VeFByQEOTslJ4UQBsCzlw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1308d1b2a826396693eb02594c4b8b62fdc659efc6v6WFsVaU%2B376u6pBfyQhXK5s%2FYuDD0BGrQVzpR3MaEOPLKjjJ50Kq0utz4P6VcuqPgxlDsZXinlWu%2BfHkuWcMRPoID%2FvKiKQYPMW1fzCLR1VxkmhCTrnXlIozCgcyizMsZvDHuFdDiqJ%2FSMVClHfW2KPsF5SALZCKoP3rbBrqy31mBOw9AoB3TXDQDKE5CTk0i7RAKRABiJzba1UR1pdg%3D%3D

23


China: number of hotel rooms for mid-scale hotel chains China vs. US: hotel breakdown by class and chain/independent

Source: China Hospitality Association, Daiwa Source: China Lodging Group, Inntie, STR, Daiwa

Thematic picks – upgrade in Chinese tourism patterns

We have noted weaker investor sentiment toward the hotel stocks amid the recent

macro/trade related concerns, and as a result the sector appears oversold, in our opinion

(see China Hotels – Looks oversold, 8 August, 2018). We highlight Carlton Lai’s top picks

in the sector: Huazhu Group (HTHT US, USD34.42, Buy [1]) and Shangri-La Asia (69

HK, HKD12.1, Buy [1]).

According to Carlton, Huazhu has the highest revenue visibility and will likely continue to

outperform its peers across key metrics such as ADR and occupancy. Although the

company is still trading at a substantial PER premium to its peers (which we believe is

warranted), it is trading on a par with the average of its historical EV/EBITDA trading

multiple since 2017.

Meanwhile, in Shangri-La’s recently reported 1H18 results (1H18 review: improvements

across all metrics, 23 August 2018), the company posted group RevPAR growth of 13.7%

YoY, much stronger than Carlton’s estimate of 10.7% and representing the company’s

fastest growth in 6 years. The profitability of its China hotels business continued to

rebound, supported by China RevPAR growth of 13% YoY. Carlton believes Shangri-La’s

asset-heavy business model make it a key beneficiary of the ongoing RevPAR upcycle in

China. The company has signed agreements to purchase 4 new hotels in 2018 YTD, and

18 are currently in the pipeline.

In the broader Chinese tourism space, we flag Ctrip (CTRP US, USD39.15, Buy[1]) and

Travelsky Technology (696 HK, HKD 20.1, Buy [1]), covered respectively by John Choi

and Kelvin Lau.

As pointed out in his recent report on Ctrip (Upgrading: buy ahead of 2H18 recovery, 26

June 2018), John Choi sees upside to management’s 2H18 revenue guidance for 12-17%

YoY growth as the comps are favourable, and given the long-term structural consumption

upgrade growth story in China towards international travel, with SkyScanner and Trip.com

leading that growth in online flight bookings and hotels.

Related to our domestic Chinese tourism theme, we also feature Travelsky Technology,

whose domestic travel bookings remain strong, at 11.9% and 11.6% YoY for April and May

2018, respectively. Also, while international booking revenue is dwarfed by its domestic

business, there has been a notable acceleration in bookings on Chinese commercial

airlines this year. In January and February, growth was 0.5% and 7.8% YoY, respectively;

but for April and May was 13.8% and 14.2%, respectively, according to Kevin Lau in his

report, Travelsky Technology – May operating data, 27 June 2018.

0

100,000

200,000

300,000

400,000

500,000

2013 2014 2015 2016 2017

We highlight Daiwa

analyst Carlton Lai’s top

picks in the sector:

Huazhu Group and

Shangri-La Asia

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=119f1388497963f3e469780573b3fee45cf714b3cPxGq8HY%2BKOuAil7kF3MTkre5R%2BKzE6WIiWvwCT9ezXwuByvx1Pmeyhad2k3Wk%2BmmQYhRPYzcmWZb2oXb8no2w%2BffgSvxrf40Pc89qUGkTLBrbPwG2XrVYCXlMSqVFSrj1KkURqdUNI2s2EAea9d7XOEcnMoRIaPkxn0uxluBPcTh2IDANVgLxTIsxiNh2ksn3T4b6kjdd3NJx6QpNods8Q%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d76c6fe46a69dc6fa826db2174c4f68dbdac48d4OqxgvMtdACdOzBAh%2Fn8xyXXgUo1EG8TNBM%2FNY%2Bynk2l9rVjr87NUGS9%2FYKMjXjZKrHDxzOQmRtQvRuXkSHplmnMc3JP%2FQ%2BX8pA3RP%2BpOJTRdr9q2t6CGWYLwafkPdi9XofTA%2F4BnPuYDRIpVbRZil29FEZxJu8uPtBrf2%2FTE%2FEFhhzesukENRHgqtWa1R9RXEC7eTYFtsPeeKIZR6eCiEw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d76c6fe46a69dc6fa826db2174c4f68dbdac48d4OqxgvMtdACdOzBAh%2Fn8xyXXgUo1EG8TNBM%2FNY%2Bynk2l9rVjr87NUGS9%2FYKMjXjZKrHDxzOQmRtQvRuXkSHplmnMc3JP%2FQ%2BX8pA3RP%2BpOJTRdr9q2t6CGWYLwafkPdi9XofTA%2F4BnPuYDRIpVbRZil29FEZxJu8uPtBrf2%2FTE%2FEFhhzesukENRHgqtWa1R9RXEC7eTYFtsPeeKIZR6eCiEw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=133ff38038498ddd109025638e64fe28666ca74a90kl0YmKKA3OhpxbLgPVighTmidjgVN98dIOnbJeEe%2F8MIw6Gz0FcH6srDHhREi4hjboWsiy%2FxGzLdwVtki0K01iJIMSNyeChDa4nmXwHaJA2dy%2BNBe8bWH1p1RvjRrcMF6EhRuR3UGF%2FcisNyAtMxctpuoUWfpoot0Azv3eewsiwGL289qK%2BnUgbTGfooVO0TPtsCGEY8kLainBGv4%2Fang%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=109f038ad8a75a97e63bdebcccb82b12ec14839376QyST%2Fzdrnag8SaxuI3H%2BnKSqk6p%2Fmbg8F0A6EtEIPkLXVDYLz2V8GFTRXtMc%2F8U2yr3YgAqz5v0PPtXbSlfbMaTDSkY5sOqxA4B%2Fp253WCTui0lVxert5nMEQKHHdfqh19z7epafZytKE1QI%2F7frTV%2BSpVvcpqsv%2BO4OjJ8iHiUPLVnyvi6KHGcmGbs%2FJEdc6G6AmqPn9RFAJOBt0TWDA%3D%3D

24


Chinese higher education policy

Insufficient public-sector capacity to meet 13th FYP target by 2020

The universal second-child policy, implemented in early 2016, is boosting second-child

fertility in China, adding 2-3m children in the 0-14 year range annually, which is starting to

reverse declining K12 (pre-K through 12th grade) student numbers and should filter into

higher education numbers in a few years’ time. In 2016, higher education enrolments stood

at 42.7%; based on China’s 13th Five-Year Plan, the figure is projected to reach 50% by

2020. In the absence of sufficient public-sector capacity, private-sector education firms look

well placed to benefit from the Chinese government’s policy agenda.

The gradual phasing-out of “independent colleges” is reducing competition for the private

firms. China’s higher education development is severely imbalanced. From a higher

education demand viewpoint, Henan, Shandong and Sichuan have the largest National

College Entrance Examination (NCEE) candidate population bases in China, yet university

admission rates in these areas were 42.4%, 41.0%, and 30.1%, respectively, in 2017 —

below the national average of 42.7% and the government’s target of 50%. Private firms are

focused on these regions.

On 10 August, the Ministry of Justice of the PRC published the Implementation Regulation

of Private Education Promotion Law of the PRC (Revised Draft) (Examination Version) (中

華人民共和國民辦教育促進法實施條例（修訂草案）（送審稿）), which raised some

concerns among investors. The relevant modification of Article 12 under the policy restricts

M&A involving “not-for-profit” schools by private firms. In our view, the new policy will not

pose a significant threat to the M&A activities of higher education companies, because

most higher education companies are inclined to operate under “for-profit”. In addition, a

change in Article 7 prohibits public schools from obtaining benefits from brand export,

which is expected to accelerate the splitting out of independent colleges from public

universities and provide more M&A targets for higher education companies.

Number of gaokao candidates and university admission rate by geography

China higher education: number of students and private school market share (in ‘000)

Source: Daiwa, MOE Note: Red line refers to national average level. Student number denominated in 10 thousands

Source: Daiwa, Ministry of Education Note: Student number in thousands

Thematic pick – Chinese private higher education policy shifts

The private higher education companies feature prominently in our EBIT margin screen of

the China education sector, with China New Higher Education (2001 HK, Not rated)

topping the list at 69.18% for 2018E, based on Bloomberg-consensus data. Management’s

strategy is to target regions with low university admission rates and large population bases.

The management team appears to be well placed to navigate the regulatory environment

and recently hired an ex-Ministry of Education alumnus. The crucial selling point is

graduate employment. According to China New Higher Education, 98.1% of its graduates

find jobs, which is the highest percentage among competitors, bolstered by its strong

relationships with companies such as JD.com, Alibaba, and Ernst & Young, participating in

a robust student internship programme. See Animal Spirits – Micro Theme – China’s

growing private education firms, 15 May 2018 for details.

0%

20%

40%

60%

0

50

100

Yun

nan

Gui

zhou

Hub

ei

Hei

long

jiang

Gan

su

Xin

jiang

Hen

an

Jian

gxi

Gua

ngdo

ng

Cho

ngqi

ng

Inne

r M

ongo

lia

Gaokao candidates Undergraduate enrolment

Key University enrolment Undergraduate admission rate (RHS)

0%

10%

20%

30%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Number of students in schools Private school share of student No.

Private school share of school No.

China’s 13th Five-Year

Plan targeted a higher

education enrolment rate

of 50% by 2020, from

42.7% in 2016

The gradual phasing-out

of “independent

colleges” is reducing

competition

The new policy won’t

pose a significant threat

to the M&A activities of

private higher education

firms operating under

“for-profit” models

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d0dcaedf98d5a8e1876774d5408a633f58f2f102JgqxGDLYx8UvMr4HLfPr0%2BChnwVchdlrWnOYaGmR1w41f3cjckBeZKugbN16pWbTppuippXrjDX%2Bn5nliZcnhwG9h4pc4KJUUyc33xydWMD4MLhnLk4yFzgTWuXOcF2ahg4F%2BB2mvycE1YopwF5P%2Bp%2FIIUdROe8riJOpNRqCy3ibNGilUItfS7r7WjKzKZ5qn36bAIeAfa7nRv20JKVseg%3D%3D


25


India

Economics – India consumption outlook

Consumption in India benefits from the expansion of its urban population and its rising

income levels. India has a very young population, with an average age of 29, compared

with 37 in China and 48 in Japan. A growing youth population with high education levels

ought to be supportive of sustained growth in domestic purchasing power. Ahead of the

general election in 2019, there are also a number of pro-consumption policies which will

boost private spending in the short term, in our opinion.

India: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 1,266 1,283 1,300 1,317 1,334

GDP (USDbn) 2,044 2,094 2,275 2,607 2,831


Real GDP growth (%) 7.4 8.2 7.1 6.7 7.3



Inflation (%) 6.0 4.9 4.5 3.6 4.9

Policy rate (RBI repurchase rate, %) 7.50 6.75 6.25 6.00 6.25


Source: CEIC, BIS, World Bank, FocusEconomics, Daiwa forecasts Note: Fiscal year for India

On the downside, creating enough jobs for a large number of young people is a significant

challenge. This will be the most important factor deciding the trend of India’s consumption

growth in the long term, in our view.

Indian policy support for rural incomes

Policies to boost rural economy ahead of the 2019 election

GDP data released by India’s Central Statistics Office in May showed an increase of 7.7%

on an annualised basis for 1Q FY19, supported by the agricultural sector, with better-than-

expected GDP growth of 4.5% for the quarter. With two-thirds of India’s 1.3bn people living

in rural areas, the focus for Indian economic policies and the key to winning the 2019

general elections is boosting the rural economy.

India rural FMCG market size (USDbn) Smartphone penetration rate in India (%)

Source: Statista, IBEF, AC Nielsen, Daiwa estimates Source: Statista; note: Statista estimates for 2018-19

Eyeing an election next year, India’s government announced in a Union annual budget

released in February massive spending for rural areas to help farmers and boost the rural

economy. According to Reuters, spending in fiscal 2018/19 is projected to increase by

13.2% from the current fiscal year ending in March, with about 60% allocated to better

infrastructure in the countryside. In addition, the Indian government has set a price floor for

agricultural products and introduced a Minimum Support Price (MSP) mechanism where

the government will purchase food grains at the MSP when the market price falls below the

minimum level. This MSP policy guarantees minimum returns for farmers, shielding them

0

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2009 2010 2011 2012 2013 2014 2015 2016 2025E

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2014 2015 2016 2017 2018 2019

Consumption in India

benefits from youthful

demographics and

expansion of the urban

population, both in size

and income

GDP expanded by 7.7%

on an annualised basis

in 1Q FY19, supported

by the agricultural sector

Agricultural price

support is central to pro-

consumption policies

ahead of the elections

26


from adverse agricultural product price fluctuations. We believe the rural economic policies

ahead of elections will support farmer income growth, encouraging consumption of FMCG.

Thematic pick – Indian policy support for rural incomes

Hindustan Unilever (HINDUNILVR IN, Not rated) is the largest FMCG company in India,

with an operating history of over 80 years. The company distributes more than 35 brands

spanning 20 categories such as detergents, shampoos, skin care, cosmetics, tea and

packaged foods. It reported domestic consumer growth (adjusted for the GST impact) of

16% YoY for the quarter ending June, with underlying volume growth of 12% YoY. The

company delivered double-digit volume growth across all 3 divisions (home care, beauty &

personal care, and foods & refreshments). According to Sanjiv Mehta, chairman and

managing director, a gradual improvement in demand is expected in the near term and the

company plans to continue to focus on innovations and market development.

Indian consumer premiumisation

Indian consumer goods migrating up the value curve

Indian consumer patterns are demonstrating premiumisation across many consumer

segments, including groceries, consumer electricals and mobile phones. With rapid

urbanisation and a sharply expanding middle class, premiumisation is the buzzword both

for consumer staples and durables. Indian consumers now want large televisions, high-

capacity refrigerators, and front-loading washing machines. LED constituted more than

50% of the lighting market in terms of value in 2017, while the share was only 8% in 2011.

In telecommunications equipment, the average selling price (ASP) of smartphones in India

increased by 16% YoY to USD157 during 2017, according to International Data

Corporation (IDC) India.

India: lighting industry segmentation (value-wise) India mobile phone average selling price (USD ASP)

Source: ELCOMA Source: Statista, IDC, the Altas, Daiwa summary

Thematic picks – Indian consumer premiumisation

Britannia Industries (BRITANNIA IN, Not rated) is one of India’s leading food companies,

with a product portfolio spanning biscuits, bread, cakes, infant rusks, and dairy products.

The company distributes its products under brands including Good Day, Tiger, NutriChoice,

Milk Bikis and Marie Gold, which are household names in India. Over 70% of Indian

households consume Britannia products, according to the company, and the figure rises to

80% in urban India and 90%-plus in metro areas. India is the third-largest biscuit producer

(after the US and China) in the world, and the market size of the India biscuit sector is

expected to reach INR400bn by 2023 according to BusinessWire. Britannia believes it will

benefit from the increasing income levels of consumers, a shift to premium biscuits, and

growing awareness of health matters.

In consumer electricals, we feature Crompton Greaves (CROMPTON IN, INR250.85,

Outperform [2]) and Havells India (HAVL IN, INR723.85, Buy [1]), under the coverage of

Saurabh Mehta, Daiwa’s consumer electricals/industrials analyst in India. Both companies

are leading electrical appliances players in India, with similar product categories covering

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41 42 42 41 38

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6 8 11 14 21

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54

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80

100

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Lamps (excl. LED) Luminaries (excl. LED) Accessories LED

(%)

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50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 2017

Smartphone Feature phone

The spread of

premiumisation is

manifest across many

consumer products,

including groceries,

consumer electricals

and mobile phones

27


fans and lighting equipment. According to Saurabh, they each stand to be a major

beneficiary of the trend towards premiumisation in the Indian consumer discretionary

segment.

Havells India is Saurabh’s top sector pick. The company reported total revenue growth

(including subsidiary Lloyd) of 40% YoY (or 22% YoY excluding Lloyd), to INR25.9bn (or

INR18.9bn excluding Lloyd) for 1Q FY19, beating the consensus estimate. Revenue

growth was robust across all segments on a low base last year, impacted by the GST

transition and channel destocking. Electrical consumer durables registered revenue growth

of 43% YoY (adjusted for excise, same below) for 1Q FY19, mainly driven by new product

launches, such as purifiers, grooming products, and a focused improvement in the

distribution channel. Its switchgear segment revenue increased by 26% YoY, followed by

lighting and fixtures segment growth of 25% YoY. Havells’ industrial and consumer

electricals businesses, especially the newly integrated consumer durable business of

Lloyd, benefited from booming infrastructure project investment and penetration of small

household appliances and white goods in 2017. Also, we expect the addition of Internet of

Things (IoT) technology to Havells’ products, backed by its increasing R&D investment. For

details, refer to Saurabh’s note, Havells India - 1Q FY19 results - Strong beat, 23 July

2018.

Saurabh also likes Crompton Greaves. According to his recent report (1Q FY19 results:

working on its distribution network, 27 July 2018) Crompton’s adjusted revenue grew by

20% YoY for 1Q FY19, mainly aided by product innovation and its go-to-market strategy.

Crompton’s successful launch of the “Air 360” fan, mini crest pumps, and new air coolers

reflect its enhanced focus on increasing innovative products in existing categories. “Air

360” registered revenue growth of 31% YoY and contributed 11% to fan segment overall

revenue in the same period.

We highlight Havells

India as Daiwa analyst

Saurabh Mehta’s top

pick

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1944e8801eb237601f858fb490ae4e1554c50943fRAdr1a%2BNm0vjYM7N12g5DTmv5wD%2BltQZuhhA160Ns3kf8kwlV6aorI1lVmGHahOUZhVuwKEISzkLX4gf38vgIaGyj9hLBwxdIEdoIwUqW3HAuQqiQq03k3%2BxiL%2BHFRYH28nXPt%2FjbelyEqTJpaKHlLWHUYx1D%2FPHGr%2BDS3oARbkPI6nlgK0vvuLfu3e0X8F5vQ9BqioUtcACElyjf9UIGQ%3D%3D

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28


Korea

Economics – Korea consumption outlook

Private consumption has long been suppressed by an aging population and high

household debt levels in South Korea. Short- and medium-term improvement should

mainly come from supportive government policies and the resumption of Chinese tourism.

The Moon Administration has been pushing for income-led growth by raising the minimum

wage. Recently, parliament also approved a supplementary budget of USD3.6bn, which is

aimed at boosting business subsidies to help cut high youth unemployment. Both

measures are expected to increase personal income, supporting more consumption in the

short to medium term.

South Korea: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 50.7 51.0 51.2 51.5 51.7

GDP (USDbn) 1,412 1,382 1,415 1,531 1,681


Real GDP growth (%) 3.3 2.8 2.9 3.1 2.9



Inflation (%) 1.3 0.7 1.0 1.9 1.4

Policy rate (BOK base rate, %) 2.00 1.50 1.25 1.50 1.75



Heavy household debt and recent regulations to tame rising housing prices, however,

weigh on consumption growth prospects. A new law limiting the maximum working hours in

a week, effective in July, could restrict income growth. These are factors likely holding back

household spending power in the longer term, however.

Korean minimum wage hike

Minimum wage hikes boost consumption but rising CVS costs overdone

In July 2017, the minimum wage in South Korea for 2018 was slated to jump by 16.4% to

KRW7,530 per hour, the biggest rise since 2001. In July this year, the minimum wage for

2019 was reset to KRW8,350, a rise of 10.9% YoY. Minimum wage hikes are expected to

benefit 12% of workers in Korea who are receiving the minimum wage or less, according to

Korea Labor Institute estimates in 2015, boosting their consumption demand. We see this

trend giving rise to new opportunities for FMCG producers and retailers. However, the

minimum wage hike could possibly harm small businesses in Korea, including convenience

stores (CVS), where labour costs constitute a large portion of the overall cost structure.

South Korea minimum hourly wages CVS: number of store additions by franchise

Source: Trading Economics, Daiwa Source: Companies, Daiwa

A higher minimum wage is also likely to result in extra delivery charges for food delivery

and increased menu prices in restaurants because of higher labour costs, prompting a

greater number of consumers to purchase ready home meal replacements or raw food

materials from supermarkets to cook at home.

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

(KRW)

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600

1Q17 2Q17 3Q17 4Q17 1Q18

(stores)

GS BGF Seven Eleven Ministop Emart24

A medium-term recovery

in South Korea

consumption looks

likely, owing to

supportive government

policy and the

resumption of Chinese

tourism

The minimum wage hike

is expected to benefit

12% of workers in Korea

29


Thematic picks – beneficiaries of rise in Korea’s minimum wage

GS Retail (007070 KS, KRW37,200, Buy [1]) engages in the operation and management

of supermarkets and franchise stores under its GS25 (CVS), GS Supermarket, Watsons

and Parnas Hotel brands. According to an 8 May 2018 report (More emphasis on non-

CVS) by Daiwa’s Korea retail analyst, Iris Park, GS Retail saw its super-supermarkets

(SSM) return to profit thanks to its cost-cutting efforts in 2017, when GS Retail closed down

unprofitable stores while maintaining its size by franchising the business. The company

intends to pursue this strategy over the rest of 2018, with more than 20 stores to be closed

and around 30 to be opened. In addition, the Parnas Hotel and office rental business

growth offset the negative impact from the CVS business. Going forward, a better earnings

contribution from non-CVS business, including hotels and real estate, should bode well for

the share price, benefiting from the resumption of Mainland Chinese tourist arrivals in

Korea. For the CVS business, Iris believes that further negatives from the minimum wage

hike will be limited (see (CVS business likely to strengthen despite headwinds, 29 August

2018); instead, the minimum wage hike is allowing price hikes of CVS retail products,

resulting in a ticket price increase. In addition, the government is considering plans to limit

new CVS openings where a store exists within a 80m radius, which will elevate industry

entry thresholds.

We also like E-Mart (139480 KS, KRW214,500, Buy [1]), the largest retailer in South

Korea. According to Iris, E-mart recorded net sales of KRW3.9tn (+8.5% YoY) for 2Q18

while hypermarket segment sales were down 2.1% YoY, largely due to decreasing revenue

from seasonal categories. According to Iris’s 9 August 2018 report, Better-than-expected

earnings on the cards for 2H18, the company expects the decreasing sales trend to be

arrested in 2H18, given a strong sales recovery since mid-late July, as well as the

company’s accelerated measures to reduce labour costs. E-mart plans to open more

specialty stores in 2H18. Management expects expansion of its specialty stores to

eventually increase E-mart’s competitiveness based on its new distribution formats.

Besides, the online business is targeted to increase its daily orders by 29% YoY to 80,000

in 2H18.

“Daigou” and revival of Mainland Chinese tourist growth

The rise of daigou supports DFS and cosmetics growth

Daigou (代購) is an emerging shopping trend, which refers to overseas shoppers

purchasing goods on behalf of Mainland Chinese domestic customers. Overseas shoppers

arbitrage the product price difference between the country of origin and Mainland China for

commissions, while domestic consumers receive “authentic” goods at a discounted price

with no more intermediary charges and taxes (such as tariffs, VAT and consumption tax).

According to Iris’s report, The rise of daigou as a new buying force, 28 June 2018, the

daigou segment has become an important source of revenue (estimated sales of

KRW6.9tn) for Korea’s DFS and cosmetics players.

Mainland Chinese package tours to Korea recommencing

Although Mainland Chinese visitor arrivals to Korea are at historical low levels, there has

been a mild recovery since early this year. With the low base from mid-March 2017, when

political relations between China and Korea were particularly strained, the growth in

Mainland Chinese visitor numbers has been strong (40-60% YoY) since March 2018.

However, as Iris points out, the key to more sustained growth in the number of Mainland

China visitors will be the full-fledged return of tourists travelling on group tours.

The daigou segment has

become an important

source of revenue for

Korea’s DFS and

cosmetics players

The key to sustained

growth in the number of

Mainland China visitors

will be the full-fledged

return of tourists

travelling on group tours

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=12df221c54a4dec07ae89f1a86237834fc842db1aG5Fb5WujqYv8mP%2FoyTs21Twmojdg7ocArJLObXgLDvVXeHgvonxi%2FytAyxmifv%2FgkfdSDSJGClcBj4H8Xxz%2B2yjiRV%2BpRBFwSYKwfOX67eKYkiUVT2ox%2FYzb3DsOT4k%2B3kO%2FwUA6N1W76r87iYauoRMK9GoaK00TEZ51HgUy3cldGDT5wIb%2BljQ3fcrRqcxG1Gq2bYBSPqGWJrrjOWNUaA%3D%3D

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https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=16ab7ce970da511bd9dd630f254cd873af698328a%2FAH3WF2snbKa3C70ljHVzZIOJQ1SueriNqH%2F%2FpdV49XXS7BqSrR3oTlxMRa2TwZmvyinR1Pd9nOV0Ps3akSTHBl0EDiDJhHuS207HztchWkM6YNKGpZB5%2Bz99w8qtSwWQAIdCVFxAnp%2B58TkzHnyZUjgO8eyhXraQj4soqDCLPbqvfRV2pYlu9u6gKaDsEghc8SPPTpGCO9kUhAjpVajEg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=16ab7ce970da511bd9dd630f254cd873af698328a%2FAH3WF2snbKa3C70ljHVzZIOJQ1SueriNqH%2F%2FpdV49XXS7BqSrR3oTlxMRa2TwZmvyinR1Pd9nOV0Ps3akSTHBl0EDiDJhHuS207HztchWkM6YNKGpZB5%2Bz99w8qtSwWQAIdCVFxAnp%2B58TkzHnyZUjgO8eyhXraQj4soqDCLPbqvfRV2pYlu9u6gKaDsEghc8SPPTpGCO9kUhAjpVajEg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=189be11dd77e9bda57c1378583ad9384409f2c7a4h1MpC62uvVxWLmK5fSuqKx5XXg%2BY%2BTW%2BBQiZndsV6IFSfOfIk4%2BTjj8f3EQjoLrdKZuPNblpqc4nAMbTR6NVhjD4psxAZaS5fWcAFlxQ4AYLLGwbOkA0gkG%2Bh3LtufH9O5A%2Fm5UxZgCnMWXbT9lNOanor%2BXmXOMRaEJ3SjaEwZG02OOefj1VrXy8zlO5NQZpXJXLwcD3HMHsaHPI5EjjfA%3D%3D

30


Mainland Chinese visitor arrivals to Korea

Source: Korea tourism organization, Daiwa

The authorities in Beijing, Shandong, Wuhan and Chongqing now permit local travel

companies to sell Korea-related products. Given Daiwa’s view that group package tours

from China are set to expand further in the coming months, we see this as a tailwind for

Korea’s cosmetics and DFS segments.

Thematic picks – daigou and Mainland Chinese tours into Korea

Here we highlight Amorepacific (090430 KS, KRW263,000, Buy [1]) and Hotel Shilla

(008770 KS, KRW108,000, Buy [1]).

Amorepacific engages in the R&D and marketing of cosmetics, personal care and

healthcare products, under the brands Hera, Sulwhasoo, Laneige, Innisfree, among others.

Iris expects the company to benefit the most among peers from daigou because it has the

highest exposure to DFS revenue (nearly 50% in 2017) and to Chinese tourists. According

to Iris, Amorepacific reported an 11.5% YoY increase on revenue for 2Q18, with robust

revenue growth seen by the DFS business (+29.3% YoY) and China online retail (>40%

YoY). Although 2Q18 earnings were weaker than expected due to one-off expenses, Iris

believes Amorepacific’s earnings growth is bottoming out as the company becomes more

flexible in its strategy, namely with: 1) the DFS purchase limit lowered to increase the ticket

price, 2) higher online penetration in China, and 3) new products to accelerate top-line

growth. For more details, please see 2Q18 review: earnings likely to have bottomed, 26

July 2018.

Amorepacific: China revenue trend Korea: DFS market size

Source: Company, Daiwa forecasts Source: KDFA, Daiwa forecasts

Hotel Shilla operates hotel and leisure businesses and is the 2nd

largest DFS player in

Korea. Hotel Shilla’s margins have been deteriorating for the past 3 years, as competition

has intensified in Seoul where the company opened its downtown flagship store in early

2016. However, the competition looks to have eased since Lotte DFS recorded its first-ever

operating loss in 2Q17. Major DFS companies are now paying lower commission rates to

lure traffic, a trend which should allow Hotel Shilla to record resilient earnings growth

throughout 2018. For 2Q18, Shilla’s DFS business recorded strong growth of 53% YoY,

0

5,000

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300,000

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Jan-

17

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2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

(%)(USDbn)

Sales (LHS) YoY (RHS)

Group package tours

from China to Korea

seem set to expand

further in the coming

months

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1b9837ec34a6a61a574ccc967e130f8b4a37c305eemIskRiiyqSgD3JKi14XjC3i6fVXAVYwRUt621XLTi5OiH%2FLCn4PU%2FhoTllDmDYyTrLC%2Bzp574MUjZvfXQQosHUtPcPjClEv6BPwvIACU%2Fy3zK73zIz5pqP1Wj7g3TlrpbK7Kq3bOqqpPmxvmFWKYETLeuEMePdV10VcthAWXzpoGEMwVnndWe9ALiLOnDIQVCt2ed4b74DFiQTTJ5zyDA%3D%3D

31


due mainly to its downtown DFS (+54% YoY) with its double-digit margins. Shilla now also

operates DFS concessions for cosmetics and perfume at Asia’s top-3 airports: Incheon,

Singapore and Hong Kong (newly opened in early 2018). Iris believes such business scale

will give Shilla bargaining power over its suppliers, and lead to its DFS operating margin

returning to 5% in 2018E and expanding to 6.3% in 2020E, from 1.9% in 2017. Shilla’s low-

margin hotel business should also see occupancy rates and margins rise with the

likelihood of a return of Mainland Chinese visitors from 2H18E.

Iris believes the potential amendment of DFS licence renewals and new licence criteria are

not imminent issues and changes permitting existing players to extend their licence periods

from 5 years to 10 years is a positive for Amorepacific and Hotel Shilla. See 2Q18 review:

positive earnings should reduce concerns, 27 July, and The rise of Daigou as a new

buying force, 28 June, for more details.

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1db6bf41b60cf348990b9ed6fa8b34259ef894c4b3y1usORnZdRAWjQJWmvO6Z%2Fa0TBhYkbX32Ck%2FVuODfNMTeHAuK6NwsojARsfmyf4NosOPiNAWWjdoOp4dknLX1WarHemc14TE4KA07JeEhb9HzKGEHxrGnKG1t59fLIaEpdmwlOgwV42DSPbQhmSdVboABb91cCvHHW%2BnAazJ3aZl6F8RHZRXFdqj6KJNYXxbg9t5YsOVvOM%2BKO3QSd0vA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1db6bf41b60cf348990b9ed6fa8b34259ef894c4b3y1usORnZdRAWjQJWmvO6Z%2Fa0TBhYkbX32Ck%2FVuODfNMTeHAuK6NwsojARsfmyf4NosOPiNAWWjdoOp4dknLX1WarHemc14TE4KA07JeEhb9HzKGEHxrGnKG1t59fLIaEpdmwlOgwV42DSPbQhmSdVboABb91cCvHHW%2BnAazJ3aZl6F8RHZRXFdqj6KJNYXxbg9t5YsOVvOM%2BKO3QSd0vA%3D%3D



32


Taiwan

Economics – Taiwan consumption outlook

In the current trade-led economic recovery which commenced in 4Q16, private

consumption picked up belatedly, and has shown signs of weakening recently. A tight

labour market and rising wages should provide support for consumption, but other short-

term catalysts are lacking. The minimum wage increases at the beginning of the year

appear unlikely to have had a meaningful impact on consumption. The main driver is likely

to come from average wage rises in the private sector.

Taiwan: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 23.4 23.5 23.5 23.6 23.6

GDP (USDbn) 532 530 533 575 616


Real GDP growth (%) 4.0 0.8 1.4 2.9 2.6



Inflation (%) 1.2 -0.3 1.4 0.6 1.4

Policy rate (CB discount rate, %) 1.88 1.63 1.38 1.38 1.63



Taiwanese wage policy-led consumption trends

Minimum wage and public employee salary hikes boost consumption

In August 2017, Taiwan’s Ministry of Labour’s annual minimum wage review committee

announced a 4.72% increase in the monthly minimum wage, which is estimated to impact

2.07m workers. In January 2018, Taiwan’s Legislature passed the government budget,

which included a 3% salary increase for public employees. In our view, the tight labour

market, minimum wage hike and public employee salary increases are constructive for

consumption growth. Specifically, we expect the minimum wage hike to boost “grass-roots”

employee spending on FMCG, such as food and beverage products.

Taiwan: monthly minimum wage Taiwan: employment rate (%)

Source: Trading economics, Daiwa summary Source: CEIC, Daiwa Note: Data as of May 2018

Thematic picks – Taiwan wage policy-led consumer plays

We like Uni-President Enterprises (1216 TT, TWD77.6, Hold [3]) and President Chain

Store Corporation (2912 TT, TWD335, Hold [3]), the 2 leading players in Taiwan’s FMCG

manufacturing and retailing industries, under the coverage of Daiwa analyst Helen Chien.

Uni-President engages in food manufacturing, retail, distribution and logistics (through

President Chain Store), business distribution and trade, and investment. Food, chain

stores and circulation are the 3 biggest segments within Uni-President, contributing about

80% of group total revenue in 2017. According to Helen’s note, 2Q18 results beat, 8

August 2018, Uni-President realised EPS of TWD0.97 (+17.1% YoY) and a gross margin of

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

TWD/month

95.6

95.7

95.8

95.9

96.0

96.1

96.2

96.3

96.4

96.5

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

Nov

-17

Jan-

18

Mar

-18

May

-18

Jul-1

8

A tight labour market,

minimum wage hike and

public employee salary

increases are

constructive for

consumption growth in

Taiwan

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=125a28bdf9c19c29cd08953e6a36cd77f61b5bdeaHq6Uw0xUBRawDksigxJaJfPCUhFjuNa3JE851a1dMVlZWcByj2zyk9BvFYncw8cZz6gaddARESmwi7I1i41rwhCI%2BEF9tyuihjOX6%2FuVYXJ2CKA7ZFX2ekOdrs%2FmZXnQjpz6uaaUMifhoHRL7%2F61mCo%2FTIKxOrJTBP7BTPwhcokvgJ%2FIilVTA8xfspUYd69BDVJj5SkmeADCeRXQUeB0yQ%3D%3D

33


34.2% for 2Q18, beating the Bloomberg consensus by 16.5% and 0.3pp, respectively, and

indicating an improvement in profitability and operating performance. We expect

economies of scale within Uni-President’s business due to expansion and

internationalisation.

President Chain Store is the retail and distribution and logistics subsidiary of UPEC. In

addition to being the sole operator of over 5,000 7-Eleven stores in Taiwan as of end-2017,

President Chain Store operates over 2,000 7-Eleven stores in the Philippines, 7-Eleven

stores in China’s Zhejiang province, and Starbucks and Book.com stores in Taiwan,

according to the company. The company has a well-established quality management

system to the trace the source of its raw materials and is accelerating take-away food and

mobile business opportunities.

According to Helen in her report, 2018 YTD review: so far so good, 6 August 2018,

although President Chain Store’s 2Q18 EPS was 5% lower than consensus, the

company’s valuation is fair based on its foreseeable earnings visibility. President Chain

Store is targeting SSSG of 2-3% YoY in 2018 for the Taiwan retail business. It recorded

upbeat SSSG in 1H18 with solid in-store revenue growth of 60% YoY, thanks to sales

contributions from its online clients, Shopee and PChome.

Driven by President Chain Store’s leading position in the Philippines market, management

plans to increase its 7-Eleven stores from 2,285 in 2017 to 2,600 in 2018. We believe

President Chain Store will benefit from the trend of retail channel modernisation in the

Philippines and other ASEAN countries. We discuss the modern retail trend in detail in the

ASEAN – Singapore/Philippines section on page 34.

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1aebaa2de55f25a9b05ecefef19edf019f39b0f2c68TS%2FAmfEZCh1YpmroBfBsY5oKi%2FSIOkrvjzWnihtIkS8iqevsBB6dPl2acoV%2FD0HdhGtwTC1ykGg6K%2F3SeYo52Mh4skQSaSPglxftY9mu8v4qW7aGx3QHq9fHCgQ5cbEFFJBBdkOysbmoVYkfCHoi5Be3QGtg4%2BJFCJJybO%2FUE7VgEjqmM0Uqq2i6U%2BfLlt3ZAPdr2VipNYx9JL%2FMoPrA%3D%3D

34


ASEAN – Singapore/Philippines

Economics – Singapore consumption outlook

Singapore’s private consumption has benefitted from a trade-led economic recovery since

4Q16, which has enhanced domestic demand. Given that the labour market continues to

improve and wages are rising, we expect private consumption to continue to be positive in

the near term. The main risk comes from the external sector, due to Singapore’s exposure

to the global supply chain. A full-fledged trade war could cause collateral damage to its

export-reliant economy, and thus negatively impact private consumption and consumer

confidence.

Singapore: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 5.5 5.5 5.6 5.6 5.7

GDP (USDbn) 312 304 309 323 353


Real GDP growth (%) 3.9 2.2 2.4 3.6 3.2



Inflation (%) 1.0 -0.5 -0.5 0.6 0.8



Economics – Philippines consumption outlook

The Philippines has a domestic-oriented economy with private consumption making up

73.5% of 2017 GDP. A strong economic performance and continued inflow of remittances

have supported private consumption recently. However, rising inflation is eroding private

purchasing power, limiting real wage growth and suppressing consumer confidence. The

Bangko Sentral ng Pilipinas’ latest consumer expectation survey revealed a less upbeat

consumer outlook in 2Q18 and in the next 12 months compared to 2017.

Philippines: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 99.9 101.6 103.2 105.3 107.4

GDP (USDbn) 285 293 305 314 334


Real GDP growth (%) 6.1 6.1 6.9 6.7 6.7



Inflation (%) 3.6 0.7 1.3 2.9 4.3

Policy rate (Reserve repo rate, %) 4.00 4.00 3.00 3.00 4.25



The new tax system, effective from 1 January 2018, has had a mixed impact on private

consumption. On the one hand, higher taxes on fuel and sugary beverages have pushed

up inflation and dampened private purchasing power. On the other hand, lower income tax

rates have increased workers’ disposable incomes and encouraged private spending.

Overall, we expect private consumption to remain in robust expansion mode in 2018, and

accelerate in 2019, due mainly to election-related (Senate and House of Representatives)

spending.

Modern retail penetration in ASEAN

Modern retail penetration is low in the Philippines and Indonesia

In 2015, middle class consumers constituted 25% or 150m of the total population in

ASEAN countries. By 2020, the middle class population is expected to constitute 55% or

400m of the total ASEAN population, according to ACNielsen estimates. The rise of middle

class consumers, together with brand consciousness, should boost demand for modern

retail channels, including modern chain hyper/supermarkets, shopping malls, convenience

stores and online shopping platforms. GNI per capita in Indonesia (USD4,003), the

Philippines (USD3,479) and Vietnam (USD1,741) remains low for the ASEAN region,

Private consumption has

benefited from a trade-

led domestic growth

recovery

Rising inflation has

started to erode private

purchasing power

Nielsen forecasts

ASEAN middle class

consumers to account

for 55%, or 400m, of the

ASEAN population by

2020

35


where FMCG, such as personal care products and food and beverages, are likely to see

increased demand with rising personal incomes in these countries.

GNI per capita in selected ASEAN countries, 2017 (in USD) Retail value growth rate in ASEAN countries, 2015-20E

Cumulative (%) CAGR (%)

Store-based retail

Indonesia 13.3 2.5

Malaysia 5 1

Philippines 22.8 4.2

Thailand 16.8 3.2

Vietnam 24.7 4.5

Internet Retail

Indonesia 400 38

Malaysia 68.5 11

Philippines 43.4 4.5

Thailand 93.4 14.1

Vietnam 210.2 25.4

Source: World Bank, CEIC, Daiwa Note: Data for Thailand is as of year 2016

Source: Euromonitor International, HKTDC Research, Daiwa Note: Internet retail includes mobile Internet retail

Although modern physical retail stores face challenges from e-commerce players such as

Lazada, Zalora and Amazon, supermarkets and hypermarkets are still the dominant

channel in grocery retail as consumers prefer to select live and fresh produce in person.

According to the Institute of Grocery Distribution (IGD), online grocery shopping accounted

for only 1.2% of Singapore’s total grocery market in 2016, and the market share is likely to

be even less for other ASEAN countries with lower Internet penetration. We like emerging

opportunities in the Philippines and Indonesia where the number of modern retail stores is

far from sufficient to service all the consumers. According to the IGD, Asian local retailers

are expected to lead grocery retail expansion, outperforming foreign companies such as

Tesco and Auchan, due to their extensive distribution networks.

Thematic picks – ASEAN modern retail penetration

In the retail sector, we like Dairy Farm International (DFI SP, USD9.27, Buy [1]) and

Sheng Siong (SSG SP, SGD1.17, Hold [3]), under the coverage of Daiwa’s Jame Osman.

Dairy Farm is a leading pan-Asian retailer. The group operated over 7,100 outlets as of

end-2017, covering supermarkets, hypermarkets, convenience stores, health and beauty

stores and home furnishings stores in Greater China and ASEAN. In the Philippines, Dairy

Farm operates Rose Pharmacy, one of largest local pharmacy chains and pioneered the

hypermarket concept with its brand, “Shopwise”.

Dairy Farm International: product portfolio

Business Brand China Hong Kong Macau Taiwan Singapore Malaysia Indonesia Philippines Vietnam Cambodia

Supermarkets & Hypermarkets

Wellcome

Yonghui

Cold Storage

MarketPlace & Jasons

Giant

Hero

Mercato

Oliver's

3hreesixty

Sanmiu

Lucky

Rustan’s

Shopwise

CVS 7-Eleven

Health & Beauty

Mannings

Guardian

Rose Pharmacy

GNC

Home Furnishings IKEA

Restaurants Maxim's Group

Source: Company website, Daiwa summary

0 10,000 20,000 30,000 40,000 50,000 60,000

Cambodia

Laos

Vietnam

Philippines

Indonesia

Thailand

Malaysia

Brunei

Singapore

Modern physical retail

stores are still the

dominant channel for

grocery retail in ASEAN

countries

36


According to the company, group subsidiary sales increased by 6% YoY for 1H18 to

USD5.9bn. Although the supermarket/hypermarket segment suffered from declining

profitability due to increased competitive pressures from local operators as well as higher

rental expenses, the health & beauty segment reported operating profit growth of 73.8%.

According to Jame in his report, Transformational initiatives to drive sustainable gains, 27

July, investment themes for Dairy Farm include: 1) a sustainable margin improvement with

store rationalisation largely completed, 2) the rebuilding of its store base through selective

expansion and growth of the home furnishings segment, and 3) growth in nascent markets

with low modern retail penetration.

Meanwhile Sheng Siong, unlike regional player Dairy Farm, is one of the largest grocery

retailers in Singapore, providing customers with both “wet and dry” live, fresh and chilled

produce and general household products. Sheng Siong faces challenges from online retail

platforms. However, in Key takeaways from investor luncheon, 31 July, Jame notes that

management believes the impact from online grocers has been muted due to consumer

preference for selecting their own fresh produce. Also, Sheng Siong is offering online

groceries via its “allforyou.sg” platform and plans to adapt its physical stores to

complement its online offering. Jame likes Sheng Siong for its solid operational execution

and expects acceleration in new stores openings to offset the closure of its 2 largest stores

in 2017. However, there remains the risk of an escalation in near-term price competition as

online grocery players (RedMart, Amazon et al) seek to gain market share.

Singapore supermarkets: comparison of online grocery delivery services

NTUC Giant Sheng Siong RedMart Amazon

Delivery charge

Free for orders above SGD51

SGD7 for orders less than SGD52

SGD7 for orders above SGD60 SGD12 for orders less than SGD60





Free for orders above SGD40 SGD6 for orders less than SGD40 (Prime Now membership fee currently waived)

Delivery time

Next working day delivery in 2hr timeslots between 10am-10pm

Same day for orders received before 11am

Limited to selected areas of Singapore

Next working day delivery between 9am-10pm

Next working day delivery in 2hr timeslots between 7am-10pm

2-hour delivery between 10am-10pm

Source: Company websites, Daiwa compiled

We highlight Sheng

Siong, one of the largest

grocery retailers in

Singapore

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=13d62aa25e16f7461f4f45c37e247f5d869c165abwi0n4L%2FgVK6LUU8iKXtnjHu1dsxQ5Io8tFp7fQzSU9mPFeOE8WnWPU0AbwyjKo7td%2BiTjQus7%2F7fyDAUIgvDWoZ0Saf320G4CPaYCxnjXq26kwidsbdCBoyRdZYcF6uYBXlX6SsBorGj%2Frdy3KAb%2BaknZ60XlmvkB4CpR0haAV%2B05216L8xXjGOZC3edLKMofd5gy46661z%2BhYsMKRO%2Bjg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1de454ad0f93b174a0f7caa51b1b45c02c91e2dc7DnRQIDoy0J77ywLvG7om1szcb5RVemjlaZADUe2tTK27Rs1K2Yul6E6TMPnY1DsksOZmmGdkpUKi1tfvV48%2FzCPsIcup2%2B09BblMasFxnJrwcCJoCBc66XubM8yG0IplBNiJPBr4ecCKzlRBF%2BkV2PUJ0u3NoLL9whQNengiLPyT16g%2Ba%2FnhJwReXxkwspLk1tuLHn3fuj0QESJzY0Vozw%3D%3D

37


Indonesia

Economics – Indonesia consumption outlook

As one of the largest consumer markets in ASEAN, Indonesia’s consumption growth

benefits from the country’s growing and young population, sustained economic growth and

low household debt levels. In the near term, government policies will play a notable role in

encouraging private spending. In its FY18 budget, the government significantly raised

budgetary spending for the Family Hope Programme (in Indonesian: “Program Keluarga

Harapan”, or PKH), a cash transfer programme for the country’s poor families, from

IDR1.7tn in FY17 to IDR20.8tn in FY18. It is expected to increase the income of 10m poor

Indonesian families. This is also likely to be a strategic move by the government ahead of

regional elections in 2018 and legislative and presidential elections in 2019.

Indonesia: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 252 255 259 262 265

GDP (USDbn) 891 861 933 1,015 1,073


Real GDP growth (%) 5.0 4.9 5.0 5.1 5.3



Inflation (%) 6.4 6.4 3.5 3.8 3.6

Policy rate (BI 7-day reverse repo rate, %) 7.75 7.50 4.75 4.25 4.75



Indonesian pre-2019 election pro-consumption policies

Rural income stimulation, SME tax cut and fuel subsidies

Pre-2019 election policies by the incumbent government are supportive of an Indonesian

consumption recovery, in our view. By targeting voters, these economic stimulus policies

aim to increase SME and resident income via an SME income tax cut and fuel subsidies.

In fact, the FTSE consumer goods index for Indonesia (see below left) during the 2004,

2009 and 2014 legislative and presidential elections, speaks for itself. We expect pre-

election, pro-consumption policy to be supportive ahead of the 2019 election.

Indonesia: FTSE consumer goods index Urban and rural poverty in Indonesia (%)

Source: Factset, Daiwa Source: Indonesia-Investments, Statistics Indonesia (BPS), Daiwa summary Note: The urban poverty rate is the percentage of the urban population living below the national

urban poverty line, same for rural poverty rate.

SME tax reform will benefit middle-income earners who are SMEs owners, according to

Bahana analysts Gregorius Gary and Mega Christina, Daiwa’s Indonesia alliance partner.

An SME income tax rate cut from 1% to 0.5% has already been in effect since 1 July 2018.

SMEs accounted for 90% of the workforce and contributed around 60% of GDP growth in

2012, according to APEC. We believe the tax cut could substantially increase the

profitability of SME owners and encourage employment at SMEs.

0

4,000

8,000

12,000

16,000

20,000

Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17 Jul-18

2004 election

2009 election

2014 election

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rural poverty Urban poverty

Indonesian consumption

growth should benefit

from its growing and

young population,

sustained economic

growth, and low

household debt levels

Pre-2019 election

policies by the

incumbent government

are supportive of an

Indonesian consumption

recovery

38


Indonesia has made great strides in the eradication of poverty. The central statistics

agency (known as Badan Pusat Statistik or BPS) announced earlier in 2018 that only

10.12% of Indonesian residents lived below the national poverty line in 2017, down from

the figures for 2015 and 2016 which were 11.13% and 10.70%, respectively. Indonesia’s

National Development Planning Ministry has further targeted the rate to be between 8.5%

and 9.5% for 2019. The urban poverty rate reached a historical low level in 2016 while the

rural poverty rate has remained high. Hence, we expect accelerating poverty eradication in

rural areas through government projects such as its “village funds” programme, which

could in turn boost low-income family FMCG consumption.

Indonesia total market, 55 categories

Source: Nielsen, PT. Bahana, Daiwa Note: Data as of June 2018

The FMCG industry is on a recovering trend in Indonesia. According to a Nielsen survey,

Indonesia FMCG value in 1H18 grew by 1.4% YoY while volume dropped by 1.3% YoY.

Despite the tepid growth, the figures for 2Q18 were still an improvement on those for 1Q18

(value and volume trend of -0.7% and -3.6% YoY, respectively).

Thematic picks – Indonesian pre-2019 election pro-consumption policies

We like Indofood CBP Sukses (ICBP IJ, IDR8,675, BUY) in the Indonesian FMCG market

given its strong instant-noodle performance and continued increase in market share. The

company reported a 1H18 net profit of IDR2.3tn (+10% YoY) which was in line with the

consensus forecast. In his recent report, Indonesia Consumer: A real turnaround in 2H18?,

16 April 2018, Michael W Setjoadi forecasts consumer staples (including FMCG) to recover

in 2H18 post the disbursement of village funds. Meanwhile, ICBP stands to benefit from

plans to reduce rural poverty, as it has high exposure to low-income markets.

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Volume change (LHS) Value change (RHS)

We expect accelerating

poverty eradication in

rural areas through

government projects

such as its “village

funds” programme,

which could boost low-

income family

consumption of FMCG

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1315b00b1dfa1acd8d7055c7fcc3fd8d8dd6491a4aIdPfKYPT3BKsVhDWE%2FjpjdOHm6Lan2rmHh6kmzmvPmTu9B3Ibm%2FhnbNDKW1QmZyKRBDdV40hHAfQmqpKa0F7cCWrDh5oQlAdRWjg%2FiI0JHWK4ry%2FwcaxikmsPNQ8P7RuygqktTNyy0w3JPK9acJwgMAa9UPBeKDQYfqoMxuyZkqLXLfD9SerO8%2BuBtdK1lUNQX9tPern3m8dgtDdqXDyw%3D%3D

39


Malaysia

In the long term, we expect Malaysia to continue to benefit from strong demographics (an

expanding young population) and solid economic fundamentals. In the near term, we see

policy stimulus being supportive of private consumption. The elimination of the goods and

services tax (GST), effective 1 June 2018, is likely to boost consumer spending before the

Sales and Services Tax (SST) is introduced on 1 September.

Malaysia: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 30.7 31.2 31.6 32.1 32.5

GDP (USDbn) 340 299 298 314 369


Real GDP growth (%) 6.0 5.1 4.2 5.9 5.3



Inflation (%) 3.1 2.1 2.1 3.8 2.3

Policy rate (Overnight policy rate, %) 3.25 3.25 3.00 3.00 3.25



Post-election, pro-consumer policies

GST removal, gasoline price stabilisation and highway tolls revocation

Malaysia’s Pakatan Harapan made 10 promises in its GE14 Manifesto. The promises

placed special emphasis on improving household welfare, including the abolishment of the

GST, the reintroduction of fuel subsidies for targeted groups and the gradual removal of toll

charges nationwide. The GST abolishment has been in effect since 1 June 2018, shortly

after Dr Mahathir Mohamad took office. Consumers previously paid 6% in GST. Before the

removal of the GST, consumers took a “wait-and-see” approach and delayed spending on

big-ticket items such as vehicles. When the GST was finally abolished, the consumer

sentiment index saw explosive growth from 91.0 (March) to 132.9 (June), driven by strong

wage and employment growth (see chart on below left).

Malaysia: consumer sentiment index Malaysia: retail growth forecast

Source: CEIC, MIER Source: RGM, Affin Hwang, Daiwa

Stabilising oil prices is another key government policy. The government has allocated

MYR3bn (about USD760m) to subsidise pump prices until the end of 2018, keeping

RON95 (lower-grade gasoline, usually for small-displacement vehicles) gasoline and diesel

at fixed prices (MYR2.20/litre), despite a rising global oil price trend. The longer-term

promise of the revocation of expressway tolls is also advancing with toll collection ceasing

at the Kuala Lumpur-Seremban Expressway and Salak Expressway from 1 June. This is

estimated to benefit nearly 130,000 vehicles passing through the toll plaza daily, according

to the Malaysian Highway Authority (LLM). These 2 policies are expected to reduce the

burden on vehicle users, boosting demand for consumer goods, especially discretionary

goods.

0

20

40

60

80

100

120

140

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Consumer sentiment index soared up with GST removal

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E

Retail growth forecast Previous projection

Malaysian consumption

benefits from strong

demographics and solid

fundamentals but near

term, policy stimulus is

likely to be additionally

supportive

Pent-up consumption

demand was released

when the GST was

removed, leading to a

surge in consumer

sentiment

40


Thematic picks – Malaysian post-election policy plays

Hai-O Enterprise (HAIO MK, MYR4.37, BUY) and Aeon Co. f(AEON MK, MYR1.92,

BUY) are our alliance partner Affin Hwang’s consumer analyst Syazwan Sobri’s top-2

picks.

Aeon, a pioneer of modern retailing in Malaysia since 1984, runs a leading chain of

general merchandise stores (GMS) and supermarkets. The company’s business also

involves specialty store operations, shopping centre development and operations, and

credit card services. In a recent report, Associates a drag, but core business intact (30

August 2018), Syazwan notes that although 1H18 earnings lagged due to associates’

losses and impairments, Aeon’s core business prospects remain solid with retail spending

recovery supporting retail segment revenue and margins. While the property management

segment looks challenging due to the oversupply of retail spaces, the strong brand name

of AEON malls should sustain market-beating occupancy rates (2017: 90.9%).

Syazwan also likes Hai-O Enterprise. Established in 1975, Hai-O has built an extensive

and efficient distribution network. This includes wholesale and retail, multi-level marketing

(MLM), pharmaceutical manufacturing and Chinese medicinal clinics. According to

Syazwan’s recent note, A blip in 4Q18 due to general election, 26 June 2018, Hai-O

reported 25.8% YoY growth in net earnings for FY18 on the back of 14.2% YoY growth in

revenue. Key earnings drivers were the MLM (up 14.1% YoY) and wholesale divisions (up

20.9% YoY), attributed to the introduction of new products for its 25th anniversary grand

sales promotion and increasing sales of premium Chinese medicated tonics and Chinese

tea, respectively. Syazwan also highlighted in his latest corporate update Normalising

growth, undemanding valuations (8 August 2018), that despite a slowdown in

distributorship growth in FY18, revenue per distributor in the MLM segment showed a

marked improvement which was driven by attractive new product launches and a higher

quality distributor base. Syazwan also believes valuations for Hai-O are undemanding

(trading currently at c.14x 12-month forward earnings) compared to its closest peer,

Amway, which is trading closer to a 20x PER based on the Bloomberg-consensus 2019E

EPS.

Genting Malaysia (GENM MK, MYR5.22, BUY), covered by Affin Hwang’s Ng Chi Hoong,

is also a stock to highlight for its potential to benefit from growing spending power and

increasing inbound tourists. The removal of the GST is not expected to boost consumption

in gaming directly because the GST (replaced by the SST) was collected on revenue of

operators rather than consumers. However, increasing disposable income released by the

abolition of the GST, fuel subsidies and the removal of toll charges should encourage

discretionary consumption, including leisure and entertainment spending. Chi Hoong

maintains his overweight call on the gaming sector as he expects the share price

performance to be dictated by the outcome of several upcoming events, such as details on

the opening date of the 20th Century Fox Theme Park at Genting Highlands. He expects

these events to have a positive long-term effect on sector earnings growth. For more

details, please see Tax holiday ending soon, 20 July 2018.

Hai-O Enterprise and

Aeon are our alliance

partner Affin Hwang’s

top-2 consumer picks

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=129150e6a3bb6b04c9f298582c0caabe08f7661ddrR0pUd%2FLCKgSTDfShaJFB%2BqEtiVU%2Buw7P1fjwQLf1mMJ6vaP73MdQ7EVGeVHBW4SbQn3HmhrJ5u0euQNx7aHQLeqstubgGUwDUXgraZPkDKmHdffW1OiSqpmMzbY3nL3KGtoZ8%2FZ4bh5uusDz9him4WI2jzLqY0yNMTjVTAV72uJq6HIr%2B9vxidt26d3HFfQTGv9IIf2POzaHSU3fN8M%2FQ%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1ba4e5493bea6e4e7c139ec7ce20d7b7dc38a83c7PT652BuaFmLTyXQQrdPqdB9V5ZvgK9iwNuR4zA5OeQAg6gwMPBl%2BG1RGx3fyySmnPZO2ju3aAelLIK0dCm8IXR18d7mZKyRXEd48CY%2BiPK%2FkSRfULLSgOiv549%2BvXDwwQ%2FYX5ICl73nwzn%2FV5hPqpFSS%2BjTkqWIya2SPGRE8JsDBunWcRjudi07IhhcXWBadVst5zsaQ8dQxi2%2B6ZUubgA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e692c9772ab48cb9025dbbe42224713f26b916f1T3HggaDJZixASFzB1Wa2rj7hxwyGQEELOzfsisZqN7UxPjlzRRwCOfEvcwrHuGYWmfSQy99uoXNRtY0vNVCZeOBCQyBsv%2BzhrYTHdy6zZIG7H7AzaVM1qO13TQNAMFLeA%2Fzcs30L1sxm5kc%2FaJjAU3wrKbQ9ZBlcESHLKeJVhATXCdFC9cW3wFWyzcOOrXTkDYSqv5J3axE5GvYLkNurHA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e692c9772ab48cb9025dbbe42224713f26b916f1T3HggaDJZixASFzB1Wa2rj7hxwyGQEELOzfsisZqN7UxPjlzRRwCOfEvcwrHuGYWmfSQy99uoXNRtY0vNVCZeOBCQyBsv%2BzhrYTHdy6zZIG7H7AzaVM1qO13TQNAMFLeA%2Fzcs30L1sxm5kc%2FaJjAU3wrKbQ9ZBlcESHLKeJVhATXCdFC9cW3wFWyzcOOrXTkDYSqv5J3axE5GvYLkNurHA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1a4002b51c0aceed27b36d4bfd4bbfe6023cf77eeNgbcAXqPYN%2BhLJqhIsSppjOr639alVo45yFVNVIb7%2FVoBV9P0ZK60zsCzrhewRuRM5EuK3tTK0ST8CRpeJwdArWqho129bLS06FXPVGcNFakjmOyXA%2BZbDNnc%2BgHgKKd%2Fkcdijzsoixf%2B1rCVi2e7Y%2B39oWVTUggM4PeaFFeu2%2BBPuDlGSjhDx3hdwjw7ndesJHcysT6M0BOuxgV9PH%2BCA%3D%3D

41


Thailand

Economics – Thailand consumption outlook

A growing young Thai population portends a solid consumption base for Thailand in the

long term. In the near term, rising inbound tourism, especially from China, bodes well for

consumption expansion. The election, to be held no later than February 2019, is also likely

to prompt favourable policies for private spending in 2H18.

Thailand: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 68.7 68.8 69.0 69.1 69.2

GDP (USDbn) 408 401 412 455 511


Real GDP growth (%) 1.0 3.0 3.3 3.9 4.2



Inflation (%) 1.9 -0.9 0.2 0.7 1.3

Policy rate (1-day repo rate, %) 2.00 1.50 1.50 1.50 1.75



The constraint on consumption growth has mainly come from Thailand’s high debt levels,

which were due partly to previous policies that incentivised credit growth, such as the first

car loan programme. These policies have been discontinued, and the Bank of Thailand has

also imposed limits on personal loans and credit card debt. As a result, household debt has

declined as debts have been paid off. However, consumption is unlikely to see significant

growth until the debt leverage in the household sector comes down to a reasonable level,

in our view.

Recovery in the Thai tourism market

Strong rebound in tourist numbers in Thailand

Tourism is essential to the Thai economy, accounting for 15.5% of total employment and

contributing 21.2% of GDP in 2017, according to World Travel & Tourism Council (WTCC).

Total GDP contribution by tourism is forecast by WTCC to expand at a CAGR of 5.6%

during the next decade and reach USD175.2bn, 28.2% of GDP in 2028.

Thailand tourism contribution to GDP (%) Top 25 arrivals by nationalities (reclassified by region)

Source: World Travel & Tourism Council (WTTC), Daiwa Source: Ministry of Tourism (MoT), Daiwa

Thailand’s tourism industry remains healthy as the growth mix is from various countries

and not from a particular region. International tourist arrivals to Thailand hit a record high in

1Q18 at 10.68m visitors, up 15% YoY. In line with booming tourist arrivals, hotel

accommodation saw decent growth. According to CEIC, accommodation occupancy rates

in 1Q18 were 78.68% (January), 76.68% (February) and 75.53% (March), notably higher

than the respective rates of 75.89%, 73.96% and 70.08% during the same period last year.

We are bullish on the Thai hotel sector and believe the number of tourists arriving in

Thailand remains a key catalyst for the sector’s growth.

0

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70

80

90

100

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

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2017

Tourism GDP (USD bn) Tourism contribution as share of GDP

0%

20%

40%

60%

80%

100%

2018H1 2017 2016 2015 2014

P.R.C ASEAN East Asia ex P.R.C

North America Europe India

Australia

The previous constraint

on consumption growth

in Thailand, from high

debt levels, has

diminished

International tourist

arrivals to Thailand hit a

record high in 1Q18 at

10.68m visitors, up by

15% YoY

42


Inbound tourists to Thailand (m)

Source: MOT, Department of Tourism, Thailand, Daiwa

Thematic picks – beneficiaries of a recovery in Thai tourism

Among Thailand hotel sector plays, The Erawan Group (ERW TB, THB8.10, BUY) is the

top pick of Kalvalee Thongsomaung, food, media, and hotel sector analyst at Thanachart

Securities, Daiwa’s alliance partner. According to the company, ERW currently owns 55

hotels with 7,674 rooms in Thailand and the Philippines (only 2 budget hotels). ERW is a

key beneficiary of the thriving Thai tourism sector. In her report, The Erawan Group Pcl:

Strong catalysts, published on 4 May 2018, Kalvalee noted 4 strong earnings catalysts for

ERW throughout the year, including: 1) robust growth in tourist arrivals to Thailand, 2) a

boost to its performance after its first-phase renovation at the JW Marriott Bangkok Hotel

was completed in 4Q17, 3) solid RevPAR growth from the non-luxury segment of 15% YoY

and 5% YoY growth from the luxury segment, and 4) an improved balance of hotel demand

and supply, particularly at upcountry hotels in Thailand. Given the company’s high

operating leverage, ERW’s operating profit margin and ROE are forecast to further

increase to 18% and 11% in 2018E (from 12% and 4% in 2015) due to an asset

enhancement programme and strategic move into the high-growth non-luxury segment, on

the back of the resilient tourism industry.

Kalvalee also likes Minor International Pcl (MINT TB, THB39.50, BUY), a multi-national

player in hospitality and leisure services based in Thailand. The company owns, operates

and invests in more than 160 hotels and resorts, 2,000 restaurants and 400 retail trading

outlets in more than 40 markets. As of 21 August 2018, MINT had acquired a 44% stake in

NH Hotel Group (NH), the sixth-largest hotel chain in Europe in the upscale segment, with

a transaction value of EUR1,087m. The acquisition of NH Hotel Group is proceeding as

planned and the next step, a tender offer process, is scheduled to be completed by

October 2018. MINT targets a 51-55% shareholding in NH. Kalvalee believes the

acquisition will help MINT further penetrate the European market following its earlier

expansion into Portugal and Brazil. With a diversified product portfolio, MINT’s expansion

into high-growth tourism destinations, as a part of the company strategy, should facilitate

growth for all of its businesses, not just its hotels. Please also see A major acquisition, 6

June 2018 and Solid growth drivers in place, 18 September 2017 for more details.

0

2

4

6

8

10

12

2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1

We highlight The Erawan

Group, a key beneficiary

of the thriving Thai

tourism sector

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d690f34d5449597cbebfe6b251b3a3268642b85eJDS1i4De6tzxgQejp%2FXPfD9dZbkkWIZsYKO1426n16oODEHeWzUuQKvEK7R1m9Me3hg9hXWZh9yN1XSGu2vwP4d1a8lmFIVroSWCyJw4jRH6gtcATL%2BjNKBn78bbYsDRWl%2BBUEzUrGIUEjXyToQcOcVtxKJgd47uh3INiVVkLNxt1e1J45e6sQB0FVo9%2Ba875dkX2xAFzY5EOq9MbYeaCw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d690f34d5449597cbebfe6b251b3a3268642b85eJDS1i4De6tzxgQejp%2FXPfD9dZbkkWIZsYKO1426n16oODEHeWzUuQKvEK7R1m9Me3hg9hXWZh9yN1XSGu2vwP4d1a8lmFIVroSWCyJw4jRH6gtcATL%2BjNKBn78bbYsDRWl%2BBUEzUrGIUEjXyToQcOcVtxKJgd47uh3INiVVkLNxt1e1J45e6sQB0FVo9%2Ba875dkX2xAFzY5EOq9MbYeaCw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e144070b13b7224d023f7f7ee1b9d6669f4941a0IY8CQWIxVQewNhvnUf%2FL5ch5b2Ek3UFFegvtthw7TlwvxNyX8NIm3%2Bi2v%2FShSGC4E20k5dFF%2BvqbmLFymSK7ATxZ5OJB7vG8ZGKi%2BAehlhh%2BB%2F3uRhnYGUCYuGja4VQFMwTKYzIOE0EjTITJeIIt65CUiOU33pH%2BR%2BZo3vGa4Uko5aFUb7g3oLIedQ1jOgcX4ASQHYTcB0uD1LSdr%2FZBfQ%3D%3D

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20170918th_ThailandHotelSector.pdf#page=1

43


Vietnam

Economics – Vietnam consumption outlook

Vietnam’s economic expansion since 2017 continues to support job creation and real wage

growth, leading to broad-based welfare gains and poverty reduction. Household

consumption continues to be propped up by rising household incomes and swift expansion

in private credit in the near term. But the recent uptrend in inflation has started to eat into

consumers’ purchasing power. External risks including global market volatility and a rise in

trade protectionism are likely to dampen private spending as a result of an overall

economic growth slowdown and weak consumer sentiment.

Vietnam: consumption indicators at a glance

2014 2015 2016 2017 2018E

Population (m) 90.7 91.7 92.7 93.6 94.6

GDP (USDbn) 184 186 196 221 243


Real GDP growth (%) 6.0 6.7 6.2 6.8 6.6



Inflation (%) 4.1 0.6 2.7 3.5 3.9

Policy rate (refinancing rate, %) 6.50 6.50 6.50 6.25 6.25

Household debt (% of GDP) 34 40 47 45 47

Source: CEIC, BIS, World Bank, FocusEconomics, Daiwa forecasts, Le, Ngo & others (https://www.seacen.org/publications/RStudies/2018/.../8-VietnamHouseholddebt.pdf)

Vietnam middle class and youth consumer trends

Middle/affluent class, young consumers leading to consumption upgrade

Increasing disposable income and the rise of young consumers are 2 drivers of Vietnam

consumption. The monthly minimum wage in Vietnam reached VND1,390,000 (about

USD60) in 2018, almost double from VND730,000 (about USD31) in 2010. Also, the

country has the fastest-growing middle and affluent class in the ASEAN region, earning

more than USD700 per month. According to BCG estimates, the number of Vietnamese

middle and affluent class consumers is expected to reach 33m by 2020. With rising

incomes and a saturated FMCG market, Vietnam consumers are willing to spend more on

discretionary consumer goods to enhance their quality of life.

General minimum wage per month, Vietnam Population age pyramid, Vietnam, 2017

Source: Ministry of Labor, CEIC, Daiwa summary Source: Populationpyramid.net, Daiwa

Young consumer tastes are also reshaping Vietnam’s consumer market, with the 1990s

generation, now aged between 20 and 29, constituting the largest population group in

Vietnam as shown in the above right chart. According to Daiwa’s alliance partner, SSI, the

trends young consumers follow differ significantly from those followed by their parents, who

considered savings essential. Young consumers spend more on travelling and big-ticket

items such as consumer electronics, Information and communication technologies (ICT)

and jewellery. In addition, their demand for better shopping experiences has boosted the

rapid development of modern trade platforms, such as shopping malls, convenience stores

(CVS), minimarts, and e-commerce shopping platforms.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

5,000 4,000 3,000 2,000 1,000 0 1,000 2,000 3,000 4,000 5,000

Age 0-4

Age 10-14

Age 20-24

Age 30-34

Age 40-44

Age 50-54

Age 60-64

Age 70-74

Age 80-84

Age 90-94

Age over 100

Male Female

Household consumption

should continue to be

enhanced by rising

household incomes and

swift expansion in

private credit

Increased disposable

incomes and the rise of

young consumers are 2

drivers of Vietnam

consumer growth

https://www.seacen.org/publications/RStudies/2018/.../8-VietnamHouseholddebt.pdf

https://www.seacen.org/publications/RStudies/2018/.../8-VietnamHouseholddebt.pdf

44


Vietnam: annual jewellery demand (tonnes) Vietnam: number of smartphone users (m)

Source: WGC, SSI Source: Statista

Thematic picks – Vietnam middle class and youth consumer trend plays

Due to the burgeoning middle class, branded jewellery is featured as an area of increased

consumption, according to SSI. A name to watch is Phu Nhuan Jewelry JSC (PNJ VN,

not rated). PNJ is a leading jewellery player, specialising in jewellery manufacturing and

marketing. As of end-2Q18, the company had established an extensive distribution network

in Vietnam with 298 stores, among which 124 are located within Ho Chi Minh City. Net

sales saw decent growth of 34.5% YoY for 1H18, with 23% SSSG for its gold stores.

The urban retailing landscape is shifting from general trade to modern trade, especially for

big-ticket consumer retail goods. SSI analyst Ny Nguyen likes FPT Retail (FRT VN,

VND76,000), which is rated BUY by SSI analyst Trang Tran but is not part of the Daiwa-

SSI co-branded coverage universe, and Mobile World Investment Group (MWG VN,

VND123,000, BUY) — included in the Daiwa-SSI coverage universe — in this space.

As a subsidiary of FPT Corporation (FPT VN, VND44,200, BUY) and one of the 2 biggest

ICT retailers in Vietnam, FPT Retail operates 516 stores across the country as of 1H18.

Through cooperation with telecommunication operators and by focusing on a handset

subsidy campaign, FPT Retail generated strong revenue growth in 1H18, with net sales

increasing by 17.7% YoY to VND7.48tn. Ny expects the company’s 2H18 sales outperform

its 1H18 sales due to retail business seasonality and continuing strong revenue growth

through its active and diversified operating strategies. Ny looks for a rise in FPT Retail’s

pharmacy segment revenue in the longer term, and thus believes the stock warrants a

higher-than-peer 12-month forward PER as the company transitions towards becoming

more of an integrated retailer over the long term, rather than a simple information and

communications technology (ICT) retailer.

Meanwhile, Mobile World Investment Group is an integrated retailer with a nationwide

distribution network and 4 business lines: mobile phone retail chain, consumer electronics

retail chain, grocery retail chain and an e-commerce platform. The company recorded

robust net revenue growth of 42.7% YoY for 1H18, mainly from its consumer electronics

chain (56%) and mobile phone chain (40.5%). Online revenue saw faster growth of 117%

YoY to VND5.54tn. In Ny’s recent report, Raised Outlook on Upbeat 5M18 Results, 27

June 2018, she believes MWG still has room to expand its business through M&A in the

consumer electronics segment, as well through the rollout of new stores in its grocery and

pharmaceutical segments.

Considering the increased consumption demand for consumer electronics products, MWG

acquiring market share from mom and pops shops and its strategy of converting some

mobile phone retail stores to consumer electronics mini stores to maximise profit, the

consumer electronics segment will likely remain the key driver for MWG’s overall

performance. Moreover, Ny expects its grocery chain, Bachhoaxanh, to reach EBITDA

break-even point per store at the end of 2018 and start to generate a net profit from 2019.

6

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18

2012 2013 2014 2015 2016 2017

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10

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20

25

30

35

40

45

2015 2016 2017 2018E 2019E 2020E 2021E 2022E

We flag Phu Nhuan

Jewelry, a leading

jewellery player in

Vietnam

We also like FPT Retail

and Mobile World

Investment Group

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e20f9ea0c1e98e0d3120d8380675f7a8210c7d975zxh4BD53jtkFFeKiwRJADwpXzuvcCrAt1hUpsXrlA3RH39rPWGkpivPlPan9cd%2BCXuu0GopqjRR3Dqo1JtUT%2F9wRHuPcVRM1CYRhpKURZotFC%2BbHJsztvqumK%2B1xCOe1bjsThbd9TtQWts4yb5%2B9usMeNTjRYtlzG1rbBAQdYfQA3RsSgqJpMuKp%2FQW%2BpMR8bCqsiVXZthKtnqGLU%2F0Uw%3D%3D

45


Inbound tourism and domestic travel

Vietnam is an S-shaped country with a 3,400km long coastline, presenting challenges for

travellers making the journey from North to South. The direct distance between the capital,

Hanoi, and commercial centre, Ho Chi Minh City, is about 1150km, and a train ride

between the 2 major cities can take as long as 33 hours (1,726km). With a rising middle

class and young consumers who spend more on travel, we believe anticipate growing

demand for domestic air traffic in the future. The booming inbound tourism market should

also boost air travel growth. In 2017, Vietnam welcomed more than 12.9m international

visitors, and international visitor arrivals by air increased by 32.1% YoY. We expect

increased investment in Vietnam airport infrastructure to accommodate the growth of

domestic and international passenger numbers.

Map of Vietnam Vietnam: international visitor arrivals by air

Source: Google maps, Daiwa Source: General Statistics Office, CEIC, Daiwa Note: Data as of July 2018

Thematic picks – Vietnam inbound tourism and domestic travel trends

We highlight Airport Corporation of Vietnam (ACV VN, VND83,200, BUY), covered by

SSI’s Kim Nguyen, as a beneficiary of rising inbound tourism and domestic air travel

demand, as it is the monopoly airport operator in the country. ACV operates under a parent

company-subsidiary model and manages 22 airports nationwide, including 9 international

airports and 13 domestic airports. According to Kim (see Robust net profit growth of 55%

YoY in 1Q18, published on 7 May), ACV is undertaking an airport upgrade plan to expand

capacity as current traffic volume has already approached or exceeded designed capacity

at major airports such as Tan Son Nhat International Airport (Ho Chi Minh City), Danang

International Airport, and Cam Ranh International Airport (Nha Trang). ACV expects to

enjoy positive growth in the next few years as the upgrade projects are completed. Kim

Nguyen also likes ACV based on following 2 short-term catalysts: 1) ACV potentially

moving to the HOSE Exchange from the UPCOM platform, and 2) the Ministry of

Transport’s plans to reduce its ownership in ACV from 95.4% to 65% by 2020, which would

improve its corporate governance, in our opinion.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18

Apr

-18

Jul-1

8

With a rise in the middle

and affluent class and

young consumers who

spend more on travel

and booming inbound

tourism, we see growing

demand for air traffic

1140 KM

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e86c0d69af83d69ac41c2e23238a77b7131a81896251jBGN1D0H5bsd7QRLkJ9AWYCRnpxRHtQ%2FNstXIJ9Q5Xk7ieZzx4LAXEzX6i6O%2BA%2F%2FQXq7s1gVqkPB7mUR8B1pVNV9g2i2cWfA%2FxGyNeDnp%2BgHfR3eVshCfJ3%2Bjnn09vC%2Bb4mYlpMYNJXpChWhTo2%2F7B%2FZ8EKPIKbl4ViKAIlNtOz2F5JLCEkdt9n5ZQacsWBFopkFF9znIDQZPqu0cg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1e86c0d69af83d69ac41c2e23238a77b7131a81896251jBGN1D0H5bsd7QRLkJ9AWYCRnpxRHtQ%2FNstXIJ9Q5Xk7ieZzx4LAXEzX6i6O%2BA%2F%2FQXq7s1gVqkPB7mUR8B1pVNV9g2i2cWfA%2FxGyNeDnp%2BgHfR3eVshCfJ3%2Bjnn09vC%2Bb4mYlpMYNJXpChWhTo2%2F7B%2FZ8EKPIKbl4ViKAIlNtOz2F5JLCEkdt9n5ZQacsWBFopkFF9znIDQZPqu0cg%3D%3D

46


47


Recent Animal Spirits reports

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Trade War or Skirmish - Impact on Asia? 23-Mar-18

Explaining valuation and bond yields during reflation 14-Mar-18

Stock picks in the Asian reflation trade – buy inflation sensitivity, dividend growers; avoid bond proxies 26-Feb-18

Dollar dazzlers – weak dollar ups the ante on Asian EM 02-Feb-18

The Asian inflation trade revival 02-Feb-18

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Santa Edition – top 8 surprises for 2018 01-Dec-17

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Risk On 31-Oct-17

Source: Daiwa

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=13e563abb63bc3fcb592583757436b20e6dcfeb9f2xrfCt5lHRxzPatFipl1594yjvYFaSn41BnVEPdXoCFINQkCVgF143dTPKS%2BzuUmAJyRdI3nb1%2BwAQDrIPiDlB6u%2BA4rtszk0CVGTKE9qYr9gVtphsZmnXq7DbsNPu5%2FuoZ1QhLKrowzCRLhTfBqdTAZSFeais%2BMQtDGBCtO1q%2Bh%2BNoM6tZiXPjMcah0iOAxbeUAaLu9EzETHlnt0v%2B9KA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1453649fbed33aa0118d746de68d02a8793a9dd70pp0rh%2FS9HHM7mPkP%2FkbuBWRl8mWlquc7P2zpxSJT13rkWkFamBZEsvC64R8k0Jl5w6NgWiNEwd%2BBsDdte13cHHdyg%2FdIn5rXUPi%2B3z4kQuKCkW3oHk1zUWdPFJXrcnCvKEBRsjnp76c9nPPrzwdIR6nC4op8kjQbZzDQTskFg1DNAzJB4cKjokvd913Zxm9KkIbJrktVsljlE3U21GPKPA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1b59f3e44fbc2d5928ca0fc1cbc1f041a22aa06d4nwEw%2B5njJ0D9jAQf63ExRx4iA2tpANCwHVSzvwh81i%2Bi0f9CFMtELWQbA9YKSQgghhJsSNfK60EFmw3VswGWeX7bGLNL7SEfnazuLxkxpd8iZbuF9I%2BGK2Dv8Dz%2BVTs7z0qXxueSWVxh9itd5UHO%2BHDq%2FkQ5I48LhTvZdu02cR78iA7Zzx8B3TkgG3Di7YW0dnkf8VM3Ce6TnTw8vhzIwg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1f36ce55e4fafe61d36a957bc3c4134b28e57d7cee7Ppi47fDCJj7P6fDwrdlCTT4HsthCEdIfJmjmBmxlk1Bjtn2jN8i2guWQYWHwtWcefM6UVgc6pV6psG47nzMWPEBNGEzXAhQxsSzjJuFvl7dvpG8oclSeGEoBNZUGyaQJAl6dL6KChcwbzk2QBkbnMApKlL%2B2t3PW%2Bt431mn8KsqQwYDhjWY2lRO67qE7OoUjZ79N2aWNtePUGAtJsVcg%3D%3D


https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1690e5b090a630f8142267d097735f39a83f0e94bRN0hPwRO2q6XOeVMpdETGiRyvtXVRe1Kb2Vz8P%2BbKFnwZ2QMygcQoQSlvMg%2FXO7D%2Bo1JRBCjIAwFV87jfJImTFFRztATmTbDdASo2Uek7fAumvCD8RQeHK%2FUMiSIsTWMOmRIhv3RYlNZsfN1XT3794xIGfA4UQGAemLAYksbHcj3i97RS6g%2FrGHavy%2F5xcpLEdIXt5lytk89%2BgcdNdKbmA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=13b9ca3b91c53648cb2ee12c57be021e0135540e6LiI0siKSv%2FIY2r3RHpuiFqyA2e55Q0EG%2Fx%2BM3zxK3NuoYP%2BqjyJdBmvwrwEV1De1%2BmTFGHdV1Jl4TSmObBoT%2FaXvCzrtpOTYt%2B6dy%2BjZ2h6Bf2%2BwZ9%2F4tIsOZSrP8U%2FwDRJMeivo6jJz2wvasZbRaQk0rOa6z9anXQ0YtzGphMEo912N%2FrtV02Mv3RIJB1RQ5DP00NWakQxAZG8%2BANVzLw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=15194c7b67aeabbc3442f292bda4e89895855ec1frSKvMjpKk1Vdsy2nTBs5pf9s0rHFUX5Mg%2BwDXtaxlMH54NQMkyuh%2Bj4grjJDHMRwA5oAHCrt0OR3pH9RG5n5uC%2F2UuqF%2FlYM0op27jdKWNQAnhlUcD3zEYeMNpY1aI08foDOQIYgcb00bAflubWK270K6KFvQ2c4zxnQkZbwk5MMNZaS4tapWX702bcbsu6kbNAxbwkmMby9Xe9KSJ8y4A%3D%3D#_blank

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=189340dbb4214ad6da1a2f19244fc1bf01507654a7g3HXyCHCbHgO2Z7igMOCMaUJ92GfqZrRQh6gb0Es84XcyW%2FVOAKVZWYMsYbkUcXsY5NUMGtdV%2BnYCGMZoy2Fe9yKZ8urux%2FJUDIZEWOvlqJqfQdbeBaDAJuCEePB9XNErZhS5VG%2F6eDDdw5doUrO%2BkYPF%2FoWK9WqUiVj3TydrPS2Vnf9IHTGP53psnTovChCobPndOixUKLowpESx3mUw%3D%3D



https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=11393ffbff915cff5766cc452f9c81cf5bf4d5baalVKzQzQ81xmBPPl8oNQehVT1t44WMq5ZWfJxPsFbXOfK8xUfvSlRlEhabY3ILghmpnLaYLk5iEIMyMAmLTgO64LLAlXSK7RLidKRGk99saNPzbWW3gRtCS5oim0Rq8prAFBNFe%2F0eNtCUt4bLrnQkmD3T08INPBNTUvMMrXaJ3qe6dV%2F%2FDTotjJ0DfAuvzuhN1%2Bf%2BU4Wi6%2Bd3ks%2BC564Uw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=10c8ef6dd6bf7bf9c50e14893922f8af7bea91e25gk7HHM%2BPh5bdKW1JBCjXhvcqTd0Ohikd1qJFKmBARDUaJASgUrxKm%2F%2FUMT%2BYk3APYMPOSFzAFdSVk61skhO73mLwdWtIOT%2F3LTw7GCsZegAJ0qRsqOPTnD5iA0x8T4yjGJNKRZTZIySao2EE%2FutmMzRlt3ihAlhGACLBvSU3Fw0rHKTNfd0gDHu0xd4VLyj6SbH3eFyks7m4piI0szjriw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1956e7ceb4ed16546f63d80adb99e3259d4df1832s919fWLJMg8QRMLxg8RMWRp%2Fh1UbnbAFZAUDCWTiimB%2BR0V1UB84lFkM5gFRwX6Y1jU%2B%2B0PeNUdQ4B5NRTZfzIDzUXvkEwYs69SnMYXwKNw7urMepqKeQ2tYJLoplJYoiRNDaCmon%2Ftj7ulFuzs1xFJkrrPn4WFTvrRMGWsfDiahyDWJUeJUWTzp%2BuHMvcjMl6NY5pS%2BIvZevk0uLQodLw%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=169f5a6a63a15dea268b5e1f726ba4b80465365b6%2FFFCuJyOleeOpe5NBc%2BKERfQBt%2F5wbN6n7KuDkMJety10k62%2B%2BcRhj6f2RA9asxcLedhyWn6%2BTrBwHpRPOf2KcCL99hOT4MVfEc1XPu9IXJDQMd45Jzx6j8i1WPghB2pvps53C1qN8m78GCNsN%2Be6EtLyzbi%2BdNRyAziCzWX%2BAIuEbD1iz8%2BAd1JNCTzy3Em%2FKOL7LgT6jaIyBhp6Cb15A%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1b00281e77e14494c7ce9b8ddc1708029eba66c1bxlXqo4S9sPiOj9nA9RA0aXn8KyJHmEm3Vje06mUmTNTcKgSbSxKbUtCV%2B0pBqDvEetfyEhXSsShOvFZlKJN%2FUVm9CvBkN%2FfZ90quVZ8qXafJR8xNnYp%2B7k6c%2FT3%2FV7%2BjEu1M5mgmd2VO4gWZT9Ps8LOryQoWzRFgyHMPtJRoPCZuAxCqmvwIwj%2BuAn3UfKWA3ntLfkzHP%2B8WwScCG%2BZREg%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=16a9515b1f47482b5898736709a4d895434d265e4o9neoVb3%2FVGemzMLbNSLguH9cemxoo%2FMArsxQ6cZYzB7wrwe0ricLCLhpfb5YxJldHzUn5lz35CmMHhzE6C2PBEI3VWPTPhrf0QrZqxeTs5qiF3cSgfzEB0Dy9fYGGkztI0bOY1EuCP%2Bg6P0ysUw9TeQ7SWnj1WrGScTHyxVezQrI8OwisCs11jtdlSfsk6DkkIURUoDosSP54p7f3FbFQ%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=16a9515b1f47482b5898736709a4d895434d265e4o9neoVb3%2FVGemzMLbNSLguH9cemxoo%2FMArsxQ6cZYzB7wrwe0ricLCLhpfb5YxJldHzUn5lz35CmMHhzE6C2PBEI3VWPTPhrf0QrZqxeTs5qiF3cSgfzEB0Dy9fYGGkztI0bOY1EuCP%2Bg6P0ysUw9TeQ7SWnj1WrGScTHyxVezQrI8OwisCs11jtdlSfsk6DkkIURUoDosSP54p7f3FbFQ%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1ffdcdba402cf563051edd826d9decb7df6518e6dQkQAS59xmMqaE%2BWonZgkZ0EmiI%2BCaGoZk%2FHOwHlmX4tcJ9iaUIEwqCQy9s%2FKkXsGfMQBHvO0VzCjTgMyrnPU%2BoKC3UbRWRYeao4Brq5OLFKW7MZ4gKU5gKRrHShTp1G3HTFz9ru03HA%2BgAW%2Bx%2BWj%2FKXKlC7CSrxlGwYKrNTDwzyxX%2FMK1D4qoWrYe0g8YBttQ0jOVRn9CPh1mhNP2y6BCA%3D%3D

https://asiaresearch.hk.daiwacm.com/DAIWA/external/download?q=1d01318d7a956037e43d440f1b8e697bb64410d98wzxQtFzzmfSItDCdTouDQIdBFcgu8ADVC0yl9Wme4PRxh2z%2FXwcIhB7lN4q3nxS1oas92Ro9wtQ0q1p5haiVLeHO7y%2FDDgzBFVTH1d84vNvLFnfJcaMuT5kQaGgvgl66bwlbiSFtD7bgPsV6gxvEuDfBnSPWsoUpigVJg9zjwOQ7c3CoQTRLq%2B8YRXhsqvpb40tVduNGFzlKq2OiVb8x8g%3D%3D

48


Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Jiro IOKIBE (852) 2773 8702 [email protected]

Co-head of Asia Pacific Research

John HETHERINGTON (852) 2773 8787 [email protected]

Co-head of Asia Pacific Research

Craig CORK (852) 2848 4463 [email protected]

Regional Head of Asia Pacific Product Management

Paul M. KITNEY (852) 2848 4947 [email protected]

Chief Strategist for Asia Pacific; Strategy (Regional)

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Olivia XIA (852) 2773 8736 [email protected]

Macro Economics (Regional/China)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Fiona LIANG (852) 2532 4341 [email protected]

Industrial (Hong Kong/China)

Jay LU (852) 2848 4970 [email protected]

Automobiles and Components (Hong Kong/China)

Leon QI (852) 2532 4381 [email protected]

Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Adrian CHAN (852) 2848 4427 [email protected]

Consumer (Hong Kong/China)

Andrew CHUNG (852) 2773 8529 [email protected]

Head of Gaming (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Carlton LAI (852) 2532 4349 [email protected]

Small/Mid Cap (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China)

Don LAU (852) 2848 4469 [email protected]

Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong)

Anna LU (852) 2848 4465 [email protected]

Power, Utilities, Renewable and Environment (PURE) – Nuclear (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Bryan CHIK (852) 2773 8741 [email protected]

Custom Products Group

Selwyn CHENG (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Renzo CANDANO (63) 2 737 3022 [email protected]

Consumer

Micaela ABAQUITA (63) 2 737 3021 [email protected]

Property

Gregg ILAG (63) 2 737 3023 [email protected]

Utilities; Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Machinery

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Defence); Utilities; Steel

Josh RHEE (82) 2 787 9124 [email protected]

Chemicals

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Henny JUNG (82) 2 787 9182 henny.jung @kr.daiwacm.com

IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap)

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Nora HOU (886) 2 8758 6249 [email protected]

Banking; Diversified financials; Insurance

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (Automation & PC Hardware)

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6228 6742 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

David LUM (65) 6228 6740 [email protected]

Banking; Property and REITs

Royston TAN (65) 6228 6745 [email protected]

Oil and Gas; Capital Goods

Jame OSMAN (65) 6228 6744 [email protected]

Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected]

Strategy (Regional)

49


Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, Singapore 018936, Republic of Singapore

(65) 6387 8888 (65) 6282 8030

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District，

Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th

Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

50


E-MART: share price and Daiwa recommendation trend

Source: Daiwa

Note: where appropriate, historical target prices have been adjusted to reflect the current share count

GS Retail: share price and Daiwa recommendation trend

Source: Daiwa


Date Target Price Rating Date Target price Rating Date Target price Rating

13/07/17 280,000 Buy 09/11/17 280,000 Buy 04/04/18 343,000 Buy

11/08/17 290,000 Buy 08/02/18 330,000 Buy

220,000

280,000290,000

280,000

330,000343,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000

280,000

300,000

320,000

340,000

360,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Target price (KRW) Closing Price (KRW)


13/04/16 49,500 Hold 03/08/17 46,000 Underperform 30/01/18 47,000 Buy

28/10/16 62,000 Buy 07/11/17 44,000 Buy

12/05/17 62,000 Outperform 15/12/17 48,500 Buy

26,700

49,500

62,000

46,00044,000

48,50047,000

50,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18


51


Amorepacific: share price and Daiwa recommendation trend

Source: Daiwa


Hotel Shilla: share price and Daiwa recommendation trend

Source: Daiwa



07/07/16 515,000 Buy 26/07/17 298,000 Hold 28/06/18 440,000 Buy

14/02/17 415,000 Buy 30/10/17 350,000 Outperform 26/07/18 410,000 Buy

24/04/17 354,000 Buy 09/05/18 430,000 Buy

500,000

460,000

515,000

415,000

354,000

298,000

350,000

430,000440,000

410,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18


Date Target Price Rating Date Target price Rating

28/06/18 165,000 Buy 27/07/18 175,000 Buy

165,000

175,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18


52


Hana Financial Group: share price and Daiwa recommendation trend

Source: Daiwa


SK Hynix: share price and Daiwa recommendation trend

Source: Daiwa



23/02/16 23,000 Hold 23/06/17 49,000 Outperform 13/02/18 56,000 Outperform


16/02/17 41,000 Outperform 17/01/18 60,000 Outperform

33,00031,000

23,000

30,000

41,000

49,000

53,000

60,000

56,000

53,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18



16/10/15 43,000 Buy 31/01/17 64,000 Buy 25/01/18 122,000 Buy

18/01/16 40,000 Buy 25/04/17 68,000 Buy 27/03/18 125,000 Buy

06/04/16 39,000 Buy 04/07/17 77,000 Buy 24/04/18 127,000 Buy

05/09/16 46,000 Buy 25/07/17 87,000 Buy 16/07/18 130,000 Buy

10/10/16 50,000 Buy 09/10/17 100,000 Buy

03/01/17 54,000 Buy 24/11/17 118,000 Buy

43,00040,000 39,000

46,00050,000

54,000

64,00068,000

77,000

87,000

100,000

118,000122,000

125,000127,000130,000135,000

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18


53


Daelim Industrial: share price and Daiwa recommendation trend

Source: Daiwa




13/06/16 86,000 Hold 27/07/17 100,000 Outperform

68,000

98,000

86,000

91,000

100,000

90,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

100,000

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18


54


Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures. Ownership of Securities

For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship

For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Portions of this publication are prepared by Affin Hwang Investment Bank Berhad (“Affin Hwang”) and reviewed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates (collectively, “Daiwa”), and is distributed and/or originated from outside Malaysia by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. The role of Daiwa Securities Group Inc. and/or its non-U.S. affiliates in connection with this publication is solely limited to the review and distribution of this publication ; and Daiwa Securities Group Inc. and/or its non-U.S. affiliates are not involved in the preparation of this publication in any other way. This research is for Daiwa clients only and the publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Other than disclosures relating to Daiwa, this research is based on current public information that Affin Hwang and Daiwa consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The analysts named in this report may have from time to time discussed with clients, including Daiwa’s salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction where such an offer or solicitation would be illegal nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents in relation to such investments. Portions of this publication are prepared by PT. Bahana Sekuritas and reviewed by Daiwa Securities Group Inc. and/or its affiliates, and distributed outside Indonesia by Daiwa Securities Group Inc. and/or its affiliates, except to the extent expressly provided herein. Certain copies of this publication may be distributed inside and outside of Indonesia by PT. Bahana Sekuritas in accordance with relevant laws and regulations. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Any review does not constitute a full verification of the publication and merely provides a minimum check. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Daiwa Securities Group Inc. and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Neither Daiwa Securities Group Inc. nor any of its affiliates is licensed to undertake any business within the Republic of Indonesia. Any display of any trade name or logo of the Daiwa Securities Group Inc. on this publication shall not be deemed to be an undertaking of any business within the Republic of Indonesia. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time may have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Portions of this publication are prepared by Thanachart Securities Public Company Limited and distributed outside Thailand by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Thanachart Securities Public Company Limited (“Thanachart Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Thanachart Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. All research reports are disseminated and available to our clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Daiwa responsible for the redistribution of our research by third party aggregators. Portions of this publication are prepared by Saigon Securities Inc. and distributed outside Vietnam by Daiwa Securities Group Inc. and/or its non-U.S. affiliates except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Saigon Securities Inc. (“Saigon Securities”), Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication constitutes the views of the analyst(s) named herein and does not necessarily reflect those of Saigon Securities, Daiwa Securities Group Inc. and/or their respective affiliates nor any of their respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates, or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Saigon Securities, Daiwa Securities Group Inc., their respective subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist.

https://daiwa3.bluematrix.com/sellside/Disclosures.action


55


IMPORTANT This report is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Content herein is based on information available at the time the report was prepared and may be amended or otherwise changed in the future without notice. We make no representations as to the accuracy or completeness. Daiwa Securities Co. Ltd. retains all rights related to the content of this report, which may not be redistributed or otherwise transmitted without prior consent.

Ratings Issues are rated 1, 2, 3, 4, or 5 as follows: 1: Outperform TOPIX/benchmark index by more than 15% over the next 12 months. 2: Outperform TOPIX/benchmark index by 5-15% over the next 12 months. 3: Out/underperform TOPIX/benchmark index by less than 5% over the next 12 months. 4: Underperform TOPIX/benchmark index by 5-15% over the next 12 months. 5: Underperform TOPIX/benchmark index by more than 15% over the next 12 months. Benchmark index: TOPIX for Japan, S&P 500 for US, STOXX Europe 600 for Europe, HSI for Hong Kong, STI for SG, KOSPI for Korea, TWII for Taiwan, and S&P/ASX 200 for Australia. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.

Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Cromwell European REIT (CERT_SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa

Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Disclosure of Interest of Saigon Securities Inc. Investment Banking Relationship Within the preceding 12 months, Saigon Securities Inc. has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: No Va Land Investment Group Corporation (NVL_VN); Vietnam National Petroleum Group (Petrolimex)(PLX_VN), Dong Hai Ben Tre JSC (DHC_VN), Khang Dien Trading and Investment House JSC (KDH_VN); Pan Group JSC (PAN_VN); Vinhomes JSC (VHM_VN); DHG Pharmaceutical JSC (DHG_VN). Disclosure of Interest of Affin Hwang Investment Bank

Investment Banking Relationship

Within the preceding 12 months, Affin Hwang Investment Bank has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: SP Setia Bhd Group (SPSB MK), Tenaga Nasional Berhad (TNB MK), Mi Equipment Holdings Bhd (MI_MK).

Disclosure of Interest of Bahana Sekuritas Investment Banking Relationship Within the preceding 12 months, Bahana Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: PT Garuda Maintenance Facility Aero Asia Tbk (GMFI IJ), PT Wijaya Karya Bangunan Gedung Tbk (WEGE IJ), PT PP Presisi Tbk (PPRE IJ), PT Panca Budi Idaman Tbk (PBID IJ), PT Bank BRIsyariah Tbk (BRIS IJ). Disclosure of Interest of Thanachart Securities Investment Banking Relationship Within the preceding 12 months, Thanachart Securities has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Thonburi Healthcare Group (THG TB), TOA Paint Thailand PCL (TOA TB). Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures

Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Iris Park; Mike Oh; SK Kim / Henny Jung

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

56


“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated. Additional information may be available upon request.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited. Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively. Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 United States

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Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.


http://www.sec.gov.ph/

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http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory



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Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 70.4%

Hold** 21.1%

Sell*** 8.5%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. For stocks in Vietnam covered by Saigon Securities, the following rating system is in effect: On a 12-month horizon, Saigon Securities rates stocks BUY, HOLD or SELL, as determined by the stock’s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%. A HOLD rating implies returns between -9% and 18%. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +10% over a 12-month period HOLD: Total return is expected to be between -5% and +10% over a 12-month period SELL: Total return is expected to be below -5% over a 12-month period NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation Sectors: OVERWEIGHT: Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months For stocks and sectors in Indonesia covered by Bahana Sekuritas, the following rating system is in effect: Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more. "Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%. "Reduce": the price of the security is expected to decline by 5% or more. Sector ratings are based on fundamentals for the sector as a whole. Hence, a sector may be rated “Overweight” even though its constituent stocks are all rated “Reduce”; and a sector may be rated “Underweight” even though its constituent stocks are all rated “Buy”. “Overweight”: positive fundamentals for the sector. “Neutral”: neither positive nor negative fundamentals for the sector. “Underweight”: negative fundamentals for the sector. For stocks in Thailand covered by Thanachart Securities, the following rating system is in effect: Ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the rating is BUY. If the downside is 10% or more, the rating is SELL. For stocks where the upside or downside is less than 10%, the rating is HOLD. Unless otherwise specified, these ratings are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. For the sector, an “Overweight” sector weighting is used when Thanachart has BUYs on majority of the stocks under its coverage by market cap. “Underweight” is used when Thanachart has SELLs on majority of the stocks it covers by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs]. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.





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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

APAC Consumer Themes

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