Kingsoft (3888 HK) Buy (initiation) Target price: HK$ Mobile monetization and national IT security focus driving growth; initiate at Buy

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1 Equity Research Information Technology Dec 15, 214 Kingsoft (3888 HK) Buy (initiation) Target price: HK$2.5 Ryan Zhu SFC CE No. BDK Joseph Ho, CFA SFC CE No. AFP GF Securities (Hong Kong)Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 5% 4% 3% 2% 1% % -1% -2% -3% -4% Source: Bloomberg Key data Source: Bloomberg Kingsfot HIS.HI HSI Dec 12 close (HK$) 15.8 Shares in issue (m) 1,184.4 Major shareholder Lei Jun 26.83% Market cap (HK$ bn) M avg. vol. (m) W high/low (HK$) 33.5 / Mobile monetization and national IT security focus driving growth; initiate at Buy Initiate with Buy rating We initiate our coverage of Kingsoft with a Buy rating as 1) we expect the downtrend in operating margin in FY14 to be reversed in FY15-16 on a stabilization in investment in its mobile strategy and economies of scale; 2) We see significant growth catalysts from further mobile monetization and the company s WPS business will be a significant beneficiary of the government s focus on national IT security; 3) excluding the value in Cheetah Mobile based on its current market capitalization, we believe the implied valuation for its online gaming, WPS and cloud businesses is undemanding at 1.9x FY15E P/E. Kingsoft is also a constituent stock of the Shanghai- Hong Kong Stock Connect program. We set a target price of HK$2.5, implying 18.7x FY15 P/E. We believe we are at a buying opportunity as the shares have fallen by some 29% YTD. Operating margin to recover in FY15-16 The company s proactive investment in mobile application development and promotion led to a decline in operating margin during the first three quarters of FY14. We believe the downtrend in operating margin will be reversed in FY15-16 given a stabilization in mobile investment and economics of scale led by revenue expansion. We expect operating margin to come in at a low of 13.6% in FY14, expand to 25.8% in FY15 and then further to 32.7% in FY16. Multiple growth catalysts We believe Cheetah Mobile will continue to be the company s key growth driver and expect a strong CAGR of 71% in revenue from this business during FY13-16 driven by robust growth in mobile user traffic globally and an improvement in its ability to monetize the traffic. We are positive on the strategic transition of its online gaming business to the mobile space given proven strong capability in game development and favorable partnerships with Xiaomi and Cheetah Mobile. We see a strong growth outlook for its WPS business given the government s focus on national IT security and continued efforts to bolster the domestic software sector as well as the potential monetization of the high number of WPS personal users. We believe cloud business will see strong revenue growth and more earnings visibility in next 2-3 years given the growing cloud service market and strategic cooperation with Xiaomi. Earnings and SOTP valuation We expect revenue growth of 5%, 47% and 34% YoY in FY14/15/16 respectively. Excluding share-based costs and one-off disposal gains, adjusted net profit should see a slight decline of 3% YoY in FY14 due to rising investment for mobile strategy. We expect adjusted net profit to post strong growth of 55% and 42% YoY in FY15 and FY16 respectively, driven by revenue growth and margin expansion. Its US-listed subsidiary, Cheetah Mobile, is trading at a 24.1x FY15E P/E based on our estimates. Excluding the value of Cheetah Mobile based on its current market capitalization of US$2.16bn, the implied valuation for its online gaming, WPS and cloud businesses is undemanding at a 1.9x FY15E P/E. Our sum-of-the-parts valuation is based on respective 12x, 28x and 25x FY15E P/Es for its online gaming, Cheetah Mobile and WPS office businesses, 5x FY15E P/S for its cloud business, and a cash value of Rmb2,375m excluding net cash from Cheetah mobile. Key risks Slower-than-expected monetization of Cheetah Mobile s mobile user traffic; failure to launch new mobile games as planned; losing market share in its WPS business. Stock valuation Turnover YoY * Net profit YoY *Diluted YoY P/E P/B ROE Payout Net gearing (Rmb m) (%) (Rmb m) (%) EPS (%) (%) ratio(%) (%) 212 1, cash 213 2, cash 214E 3, cash 215E 4, , cash 216E 6, , cash Note: * excluding share-based cost and one-off disposal gains

2 Dec 15, 214 Leading internet software and services provider in China Since launching the first edition of its office software, WPS 1. in 1989, Kingsoft has become a leading provider of online games, internet security services and office software in China. Leveraging on its strong in-house software R&D teams, the company has developed and offered a wide range of well-known products, including the WPS Office Suite, Cheetah Mobile (internet security products and internet services platforms), the JX series of online games, and its cloud IT products. In FY13, its online gaming, Cheetah Mobile and office software & cloud segments contributed respective 5%, 32% and 18% of total revenue and around 72%, 17% and 11% of total non-gaap operating profit based on our estimates for segment profitability. Figure 1: Revenue breakdown by business (FY1-9M14) Figure 2: Non-GAAP operating profit breakdown by business (FY13) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Cheetah Mobile 17% Office software & others 11% Online gaming 72% % FY1 FY11 FY12 FY13 9M14 Online games (%) Cheetah Mobile (%) Office software & others (%) Cheetah Mobile Proven business model Kingsoft began its transformation into an internet company in Nov 21, adopting an advertising-driven revenue model rather than its previous subscription fee-based business model, by offering free versions of its anti-virus products. Since then, the company has developed a diversified portfolio of applications for users and internet platforms for business partners. Its Cheetah Mobile segment has successfully evolved into an internet platform-oriented model, mainly generating income from online marketing, game operation and application distribution on both PC and mobile platforms. This business model has proved successful for Qihoo, the no. 1 ranked internet security products provider in China. It has seen a rapid ramp-up in revenue from internet services, which grew at a CAGR of 154% during FY1-13 since it began offering free antivirus products in 29. Cheetah Mobile is likely to see strong ongoing growth given the robust rise in the global mobile user base and improvements in monetization capability. Figure 3: Cheetah Mobile s business model Free apps for users Internet platforms for partners Monetization models Duba Anti-virus Cheetah Browser Clean Master CM Security Battery Doctor Photo Grid Duba.com personal start page Cheetah personalized recommendation engine Game centers Mobile app stores (including Kingsoft mobile assistant and other in-app application stores) Kingmobi mobile advertising network Online marketing services Web and mobile game operation Application distribution Page 2

3 Dec 15, 214 Figure 4: Rapid growth in Qihoo s revenue from the internet services business (US$ m) Figure 5: Cheetah Mobile s revenue breakdown by service (Rmb m) % 21% % 2% % % FY9 FY1 FY11 FY12 FY13 1H13 1H14 15% 1% 5% % FY11 FY12 FY13 9M13 9M14 Revenue from internet services (US$ m) YoY growth (%) Internet security services and others IVAS Online marketing services Robust growth in mobile user base Cheetah Mobile has seen robust growth momentum in the mobile space. Mobile monthly active users (MAU) has risen rapidly, with average QoQ growth of 4% from 46m in 1Q13 to 341m in 3Q14 on increasing popularity of a series of mobile applications, such as Clean Master, Battery Doctor and CM Security. We expect Cheetah Mobile to further enlarge its user base in the next few quarters, leveraging on strong cross-promotion capabilities from its diverse range of mobile applications, favorable cooperation with distribution channel providers such as Xiaomi and Tencent, and strong overseas presence. Figure 6: MAU breakdown by platform Figure 7: Rapid growth in mobile MAU (1Q13 to 3Q14) Q13 2Q13 3Q13 4Q13 1Q Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q Mobile MAU (m) PC MAU (m) Mobile MAU (m, LHS) QoQ Growth (%, RHS) Improving monetization capability We expect a gradual improvement in monetization capability in terms of revenue per MAU for both PC and mobile. Revenue per PC MAU increased from Rmb.87 in 1Q13 to Rmb1.88 in 1Q14. Revenue per mobile MAU surged from Rmb.5 in 1Q13 to Rmb.24 in 1Q14, and further to Rmb.33 in 3Q14. Around 65% of mobile MAU were in overseas markets in 3Q14. Cheetah Mobile is still at an early stage of monetization of its mobile user traffic it has only operated some of its popular mobile applications for a short time, such as CM Security and the ios version of Clean Master, and has underutilized its overseas user traffic. We expect an ongoing improvement in monetization efficiency, mainly due to strengthening user stickiness for its products, increasing content on its game platforms, and the progressive maturity of its monetization methods for core mobile applications. Page 3

4 Dec 15, 214 Figure 8: Core applications Name Duba Antivirus Cheetah Browser Date of Launch or Acquisition Windows / Nov 2 Android /Aug 212 Windows / June 212 Android / June 213 ios / June 213 Sources: Company data, App Annie MAU in 1Q14(m) Average DAU in 1Q14 (m) Google play rating as end of 1Q14 Number of languages available as 1Q14-end N/A 2 Clean Master Android / Sep ios / Jan 214 CM Security Android/Jan Battery Doctor ios / July 211 Android / Sep Photo Grid Android / May ios / May 213 Figure 9: Improving monetization capability for both PC and mobile platforms Note: The company did not disclose its PC MAU in 2Q14 and 3Q Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Revenue from per PC MAU (Rmb).33 Revenue from per mobile MAU (Rmb) Strong growth outlook Cheetah Mobile revenue rose a substantial 146% YoY to Rmb1,92m in 9M14, driven by strong momentum in both the PC and mobile space, each seeing revenue growth of 14% and 912% YoY respectively. Its mobile business contributed 21% of Cheetah s total revenue in 9M14, compared with 7% in FY13. With robust expansion and accelerating monetization of its mobile user traffic, we believe its mobile business will continue to see strong performance and make a larger contribution to Cheetah s revenue in 4Q14 and FY We also expect sustainable growth in PC revenue mainly driven by ongoing improvements to monetization efficiency in the next two years. In all, we see a strong growth outlook for revenue from Cheetah Mobile in the coming 2-3 years. Figure 1: Revenue forecast for Cheetah Mobile Figure 11: Revenue breakdown for Cheetah Mobile (FY12-16) 4, 3,5 3, 2,5 2, 1,5 1, , , , (2) (4) Revenue from Cheetah segment(rmb m) YoY growth (%) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FY12 FY13 FY14E FY15E FY16E PC revenue (%) Mobile revenue (%) Online games An early mover in the online gaming market Kingsoft commercially launched its first PC standalone game Zhong Guan Cun Revelation in 1996, which was also one of the earliest PC games developed by a domestic developer. Its first online game Jian Xia Qing Yuan Online (JX online I) was developed in 23, and followed by a series of popular JX games including JX Online I, II, III, JX Online World and Legend of Moon. Its flagship game JX Online III (the third installment of JX Online) accounted for 56% of total online game revenue in 9M14. Core game set for continued growth Revenue from its online gaming business grew at a steady CAGR of 2% in FY11-13, and posted 12% YoY growth to Rmb97m in 9M14, primarily due to the popularity of JX Online III, but partly offset by softening performance for other games. JX Online III revenue grew by a strong 58% YoY to Rmb58m in 9M14 following a CAGR of 96% during FY12-13, mainly driven by continued expansion pack launches. A new large expansion pack Cang Xue Page 4

5 Dec 15, 214 Long Cheng for JX Online III was released on Nov 24. We expect JX Online III to see continued growth in 4Q14 and FY15. Figure 12: Breakdown of revenue from online gaming business by game Figure 13: Quarterly APA and ARPPU of online gaming business (1Q13 to 4Q14E) Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Revenue from other games (Rmb m) Revenue from JX online III (Rmb m) Monthly average paying accounts(m, LHS) Monthly ARPPU (Rmb, RHS) Transition to mobile games The company accelerated investment in mobile game development in 214 after a two-year trial with several casual games. At the 214 Chinajoy gaming summit, its most significant game studio Seasun demonstrated 12 high-quality mobile games, indicating the company s significant ambition in the mobile game business. At its 3Q14 results meeting, management stated that 13 mobile games are currently under development and that two games are set to be launched formally in early Jan 215. The company has also established a favorable structure for its mobile distribution channel. The well-known Chinese smartphone provider Xiaomi acquired a 4.7% stake in the Seasun studio in Feb 214 and is expected to become a distribution partner in Kingsoft s mobile game business. The company is also cooperating with its subsidiary Cheetah Mobile to jointly operate self-developed games on Cheetah s PC and mobile platforms. We believe its advantageous position in the mobile internet market could pave the way for a successful transition from the client game to mobile game business given its proven strong development capability, proactive investment, and strong management execution. Expecting stable growth in the gaming business We expect to see ongoing stable growth in gaming revenue in the next 2-3 years, mainly driven by continued expansion pack launches for JX Online III and a successful mobile game strategy. We believe its investment in the mobile game business could help to increase its gamer base although ARPU (average revenue per user) may decline slightly given a lower monetization level for mobile games. Figure 14: APA and ARPPU forecast for its online gaming business (FY11-16) Figure 15: Revenue and growth forecast for its online gaming business (FY11-16) , 1,8 1,6 1,4 1,2 1, ,96 1, , , Monthly average paying accounts(m, LHS) Monthly ARPPU (Rmb, RHS) Revenue (Rmb m, LHS) YoY growth (%, RHS) Page 5

6 Dec 15, 214 WPS segment Strong growth outlook in WPS business We see a strong growth outlook for Kingsoft s WPS business as we believe 1) WPS will be a significant beneficiary of the government s focus on national IT security and continued efforts to bolster the domestic software sector; 2) the office software market has high technical barriers to entry; 2) WPS will gradually gain a competitive edge over Microsoft given its greater cost efficiency, high compatibility with Microsoft Office products and increasing popularity among personal users. Despite a 6% YoY decline in revenue in 3Q14 due to the government procurement cycle, we remain positive on the company s WPS business and expect solid sales growth in 4Q14 and FY15, driven by a recovery in government procurement and increased recognition by corporate clients and personal users. Personal user traffic a potential growth catalyst Kingsoft has seen rapid expansion in its user base with the free personal version of WPS available on both PCs and mobiles. MAU for the WPS personal edition surged by 38% and 127% YoY to 76m and 59m on PCs and mobiles respectively in 3Q14. We believe this is a positive sign as: 1) increased penetration in the personal office market could lead to improved brand awareness of its WPS products and greater recognition among corporate clients; 2) the company began a value-added monetization trial for WPS user traffic in 213. Revenue from WPS value-added services reached Rmb33m in FY13, representing 11.5% of total WPS revenue. The company continued to launch new products such as mobile WPS to enhance its existing product mix. We see its large user traffic as a potential growth catalyst in the next few years, expecting a further expansion in its user base and adoption of more efficient monetization methods. Figure 16: Breakdown of revenue from its WPS office business 12 Figure 17: MAU of the WPS personal edition on PC and mobile platforms Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 Value-added services (Rmb m) Government business (Rmb m) Corporate business (Rmb m) Mobile MAU (m) PC MAU (m) Figure 18: Quarterly revenue from its WPS office business Figure 19: Annual revenue forecast for the WPS office Quarterly revenuue from WPS (Rmb m) Revenue from WPS (Rmb m, LHS) YoY growth (%, RHS) Page 6

7 Dec 15, 214 Increasing investment in its cloud business Following the disposal of Kuaipan personal edition to XunLei in Aug 214, Kingsoft will focus its cloud strategy on corporate clients such as Xiaomi and Xunlei. The company has strived to develop a more diversified product mix, which currently includes cloud-based servers, storage, and a database and content distribution network. Although its investment in the cloud business is not coupled with earnings visibility, we see it as a long-term opportunity for this growing area. We believe cloud business will see strong revenue growth and more earnings visibility in next 2-3 years given the growing cloud service market and strategic cooperation with Xiaomi. Investment in 21Vianet Kingsoft signed a subscription agreement for 12.68% of 21Vianet s (VNET US) issued ordinary shares, representing 22.67% of the voting power. US-listed 21Vianet is a thirdparty internet data center services provider in China, mainly engaged in hosting, managed networks, and cloud infrastructure services. The total consideration of the investment was US$172m, part of its US$1bn investment plan in the cloud IT business. Kingsoft intends to lease at least 5, cabinets from 21Vianet over the next three years, catering for increasing IT resource demand in its cloud business. Benefiting from 21Vianet s strong resources and experience in data centers as well as favorable commercial terms for Kingsoft, we see this investment as a positive move for its cloud business given the lower cost for data centers and resource support for the rapid expansion the business. Figure 2: Forecast of revenue from cloud business FY12 FY13 FY14E FY15E FY16E Revenue from cloud bussiness (Rmb m, LHS) YoY growth (%, RHS) Strategic partnership with Xiaomi Kingsoft has entered into a long term business partnership with Xiaomi, a leading Chinese smartphone maker which has the same chairman as Kingsoft (Lei Jun). Xiaomi is also a strategic shareholder in Kingsoft s three major business, Cheetah Mobile, online gaming (4.7% stake in Westhouse Studio), and Kingsoft cloud (9.87% stake). In early Dec, Kingsoft signed a new cooperation framework agreement with Xiaomi to further strengthen business cooperation. For Kingsoft, this will mainly include the provision of cloud services, obtaining promotion services from Xiaomi, and joint game operation. Benefiting from the sizable and rising number of Xiaomi smartphone users and their strong demand for cloud services, we see the cooperation as a positive catalyst for Kingsoft: 1) it will leverage on Xiaomi s strong smartphone platform as a way of promoting mobile games, mobile WPS and other mobile applications; 2) it will rapidly scale up its cloud business with procurement from Xiaomi. Earnings estimates We expect revenue to grow at a solid 5%, 47% and 34% YoY in FY14/15/16 respectively, based on 3-year CAGRs of 17%,71%,26% and 87% in revenue from online games, Cheetah Mobile and office software and cloud business during FY Page 7

8 Dec 15, 214 Figure 21: Revenue breakdown and growth forecasts 7, 6% 54% 6, 5% 47% % 5, 36 4% 38% % 4, 122 3,46 3% 3, 315 2, % 2, , , 1% 337 1,96 1,228 1,473 1, % FY12 FY13 FY14E FY15E FY16E Cloud business Office software Cheetah Mobile Online gaming Overall growth (%) Figure 22: Overall revenue and gross margin forecasts 7, 88 6, , , 4, , 3, , 82 2, , 81 1,411 1,21 8 1, Revenue (Rmb m) Gross margin (%) We expect gross margin to fall gradually as the contribution from its mobile segment grows. We expect operating profit to drop by 35% YoY to Rmb441m in FY14 given the significant increase in investment in mobile application development and promotion as well as an increase in share-based costs. Operating margin should decline from 31.4% in FY13 to 13.6% in FY14. We expect the downtrend in operating margin to reverse, expanding to 25.8% in FY15 and further to 32.7% in FY16 thanks to a slowdown of mobile investment and economies of scale. Figure 23: OPEX-to-revenue ratio forecast Figure 24: Operating profit and OPM forecasts 2, ,11 2, ,5 1, , Distribution to sales (%) R&D to sales (%) Admin to sales (%) Opex to sales (%) Operating profit (Rmb m, LHS) Operating margin (%, RHS) Excluding share-based costs and one-off disposal gains, adjusted net profit should see a slight decline of 3% YoY to Rmb77m in FY14 on a 12ppts YoY decline in adjusted net margin to 21.7% during the year. We expect strong growth of 55% and 42% YoY in adjusted net profit in FY15/16, based on a gradual expansion of adjusted net margin to 23.% and 24.2% during the years. Figure 25: Net profit and net margin forecasts Figure 26: Adjusted net profit and net margin forecasts 1,6 1,4 1,2 1, , Net profit (Rmb m, LHS) Net margin (%, RHS) , , Adjusted net profit (Rmb m, LHS) Adjusted net margin (%, RHS) Page 8

9 Dec 15, 214 SOTP valuation Its US-listed subsidiary, Cheetah Mobile, is trading at a 24.1x FY15E P/E based on our estimates. Excluding the value in Cheetah Mobile based on its current market capitalization of US$2.16bn, the implied valuation for online gaming, WPS and cloud businesses is undemanding at a 1.9x FY15E P/E. We initiate our coverage of Kingsoft with a Buy rating and target price of HK$2.5, representing 18.7x FY15E P/E. Our sum-of-the-parts valuation is based on respective 12x, 28x and 25x FY15 P/Es for its online gaming, Cheetah Mobile and WPS office businesses, and 5x FY15E P/S for its cloud business, and a cash value of Rmb2,375m excluding net cash from Cheetah mobile as end- 1H14. Figure 27: Sum-of-the-parts valuation table Rmb m Ownership (%) FY15 revenue FY15 adjusted net profit Note: * cash value is based on Kingsoft's net cash position of Rmb4,32 excluding net cash of Rmb1,928m from Cheetah mobile as end-1h14 P/E (x) P/S (x) Valuation Attributable to majority shareholders Percentage (%) Online gaming 76.% 1, ,694 5, Cheetah mobile 48.% 2, ,326 7, WPS office 7.% ,717 2,62 14 Kingsoft cloud 64.% 36 (46) 5 1, Cash value* 2, Total value (Rmb m) 19,159 Shares in issue (m) 1,184 Value per share (HK$) 2.5 Figure 28: Peer comparison Sources: Bloomberg, GF Securities (HK) Research Peer comparison Stock Mkt Cap Price P/E (x) P/B (x) ROE (%) Earnings CAGR (%) PEG code (HK$ m) 12/12/14 FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13-15 FY13-15 Internet sector BAIDU INC-SP ADR BIDU US 624, SINA CORP SINA US 18, LESHI INTERNET-A 314 CH 39, RENREN INC-ADR RENN US 8, NA NA NA QIHOO 36 TE-ADR QIHU US 6, ALIBABA GRP-ADR BABA US 2,54, NA NA CHEETAH MOBI-ADR CMCM US 17, NA NA KINGSOFT CORP 3888 HK 19, TENCENT 7 HK 1,84, WEIBO CORP-ADR WB US 25, NA NA 61.4 NA NA NA NA XUNLEI LTD-ADR XNET US 3, Average Page 9

10 Dec 15, 214 Figure 29: Financial statements Income Statement Balance Sheet Year end Dec (Rmb m) E 215E 216E Year end Dec (Rmb m) E 215E 216E Online game 861 1,96 1,228 1,473 1,772 Cash/ST deposit 62 2,677 3,153 4,314 6,335 Cheetah Mobile ,586 2,554 3,46 Time deposits of over 3 months 1,815 1,824 4,93 4,93 4,93 Office software and others ,184 Account receivables Turnover 1,411 2,174 3,251 4,773 6,416 Inventory YoY (%) Other Current Assets Total current assets 3,65 5,75 7,97 9,19 11,342 Cost of sales ,219 Property, plant &equipment Gross profit 1,224 1,876 2,722 3,914 5,197 Intangible assets Other income and gains Other LT Assets ,42 1,42 1,42 Selling&marketing exp ,219 Total non-current assents ,13 2,78 2,116 Admin exp Total Assets 3,641 5,84 9,92 11,268 13,458 R&D costs ,241-1,347 Other expenses ST Debt Operating profit ,23 2,11 Trade payables Finance income Other Current Liabilities ,18 1,18 1,239 Finance costs Total current liabilities ,84 1,24 1,369 Others Long term debt 1,116 2,88 2,88 2,88 Pre-tax income ,518 2,452 Other non-current liabilities Taxation Total non-current liabilities 34 1,185 2,949 2,949 2,949 MI Total liabilities 966 1,974 4,33 4,153 4,318 Net profit ,452 YoY (%) Minority Interests ,648 Adjusted net profit ,96 1,552 Shareholders' Equity 2,515 3,38 5,34 6,182 7,492 YoY (%) Total Equity & liabilities 3,641 5,84 9,92 11,268 13,458 Adjusted EPS(RMB cents) BPS (RMB) YoY (%) YoY (%) Cash Flow Statement Financial Ratio Year end Dec (Rmb m) E 215E 216E E 215E 216E Margins Pretax profit ,518 2,452 Gross margin (%) Tax Paid EBITDA margin (%) Depr/Amort Operating margin (%) Change in working capital Net margin (%) Others Adjusted net margin (%) Operational cash flow ,119 1,485 2,384 Returns and profitability Capex ROE (%) Assoc, MI, Invsmt -1, ,46 ROA (%) Investment cash flow -1, , Working capital Net Change in Debt ,764 Receivables (days) New Capital ,379 Inventory (days) Dividend Payable (days) Others Financing cash flow 1 1,122 3, Financial health Current ratio (x) FX and others Net gearing (%) cash cash cash cash cash Chg in Cash , ,161 2,22 Beginning cash 1, ,677 3,153 4,314 Others Ending cash 62 2,677 3,153 4,314 6,335 Dividend payout ratio(%) Effective tax ratio(%) Page 1

11 Dec 15, 214 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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