Retail Market Monitor Wednesday, 31 October 2018

Retail Market Monitor Wednesday, 31 October 2018 www.utrade.com.sg 4 SINGAPORE STOCK IMPACT • Expect robust core net profits in 2018-19.The turnaround...

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PRICE CHART

MARKET NEWS US stocks were higher after the close on Tuesday, as gains in communication services, energy and materials sectors led shares higher. At the close in NYSE, the DJIA rose 1.77%, while the S&P 500 index advanced 1.57%, and the NASDAQ Composite index gained 1.58%. Advancing stocks outnumbered falling ones on the NYSE by 2,102 to 904 and 88 ended unchanged; on the Nasdaq Stock Exchange, 1,030 declined and 2,113 advanced, while 180 ended unchanged. (Source: Nasdaq, CNBC) During the last trading session, the FSSTI index plunged 15.09pt to 2,966.45, taking the ytd performance to -12.83%. Among the top active stocks were Genting Singapore (-1.71%), Yangzijiang Shipbuilding (-1.65%), Thai Beverage (-0.80%), Thomson Medical (unchanged) and Singtel (-0.64%). The FTSE ST Mid Cap Index fell 1.07%, while the FTSE ST Small Cap Index declined 1.04%. The broader market saw 132 gainers and 266 losers with total trading value of S$985.3m. W H AT ’ S I N T H E PA C K

Japfa (JAP SP) – 3Q18: Strong beat from Vietnam swine and Indonesia poultry (JAP SP/BUY/S$0.69/Target: S$0.98)

Japfa’s 3Q18 core net profit beat our street-high 2018 forecast significantly. 9M18 net profit met 95% of our and 105% of consensus 2018 forecasts. Core net profit soared 141% yoy in 3Q18 due to strong performances in three key segments: a) Vietnam swine business under the Animal Protein Other segment, b) Indonesia poultry, and c) dairy. We raise our 2018-20 core net profit forecasts by 6.6-7.1%. Accordingly, we raise our target price by 9% to S$0.98, implying 12.4x 2018F PE, a 16% discount to peers.

Tianjin Zhongxin Pharmaceutical (TIAN SP) – 3Q18: Results in line, investment thesis intact

Japfa Ltd (JAP SP) - Trading BUY The stock price has broken out from the flag pattern and has traded above the cloud on substantial volume. The RSI is rising above its neutrality level in both weekly and daily timeframes while the daily MACD is in the positive territory...

Singapore Exchange (SGX SP) - Trading SELL The stock price has broken out from the descending channel formed since April on substantial volume. The ADX has a reading of above 25 and the DIs are negatively placed. These suggest the bearish momentum. Additionally, there is a bearish MACD crossover on the daily…

(TIAN SP/BUY/US$0.895/Target: US$1.59)

In a typically weak quarter, TJZX's 3Q18 net profit rose 6.6% yoy to Rmb87.4m. Top-line revenue recorded explosive growth of 20.7% yoy to Rmb1.6b. Gross profit rose in tandem (+22.5% yoy), coming in at Rmb614.8m. However, the solid revenue growth was offset by a lower share of associate profits which declined 82.6% yoy. We believe our investment thesis of multi-year growth led by key drug Su Xiao’s ASP hike is intact and we reiterate BUY with a PEbased target price of US$1.59.

KEY INDICES DJIA S&P 500 FTSE 100 AS30 CSI 300 FSSTI HSCEI HSI JCI KLCI KOSPI Nikkei 225 SET TWSE

Prev Close 24874.6 2682.6 7035.9 5887.9 3110.3 2966.5 9999.0 24585.5 5789.1 1685.9 2014.7 21457.3 1638.5 9526.1

1M % (6.0) (7.9) (6.3) (6.9) (9.6) (8.9) (9.2) (11.5) (3.1) (6.0) (14.0) (11.0) (6.7) (13.4)

YTD % 0.6 0.3 (8.5) (4.5) (22.8) (12.8) (14.6) (17.8) (8.9) (6.2) (18.4) (5.7) (6.6) (10.5)

1522 2032 76

(1.2) (2.3) (8.2)

11.4 (15.0) 13.5

BDI CPO (RM/mt) Brent Crude (US$/bbl) Source: Bloomberg

TOP VOLUME Company Genting Singapore Thomson Medical Group Yangzijiang Shipbuilding Thai Beverage CapitaLand Commercial Trust

Price (S$) 0.86 0.08 1.19 0.62 1.72

Chg Volume (%) ('000s) (1.7) 34,589 0.0 22,886 (1.7) 19,918 (0.8) 18,897 (0.6) 17,719

Price (S$) 0.26 0.69 33.28 1.09 0.55

Chg Volume (%) ('000s) 6.1 1,043 3.8 3,689 1.2 367 0.9 348 0.9 78

Price (S$) 0.72 14.65 1.87 0.34 1.06

Chg Volume (%) ('000s) (5.9) 1,804 (4.4) 2,676 (3.1) 2,317 (2.9) 6,755 (2.8) 2,175

TOP GAINERS Company Siic Environment Holdings Japfa Jardine Strategic Hldgs Ascendas India Trust Cromwell European Reit

TOP LOSERS Company Manulife Us Real Estate Inv Venture Corp StarHub Cosco Shipping International Raffles Medical Group

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TRADERS’ CORNER

Japfa (JAP SP) Trading BUY Last price: S$0.69 Target price: S$0.735 Protective stop: S$0.66 The stock price has broken out from the flag pattern and has traded above the cloud on substantial volume. The RSI is rising above its neutrality level in both weekly and daily timeframes while the daily MACD is in the positive territory. The stock price has also moved above the descending channel as shown on the daily chart. We see increasing odds for the stock price to retest its high on 28 Aug 18 (S$0.735). Stops could be placed at S$0.66 (low on 29 Oct), giving a potential reward risk ratio of 1.5. Approximate timeframe on average: 1-2 weeks Source: Nextview

Our institutional research has a fundamental BUY and target price of S$0.98.

Singapore Exchange (SGX SP) Trading SELL Last price: S$6.73 Target price: S$6.38 Protective stop: S$6.97 The stock price has broken out from the descending channel formed since April on substantial volume. The ADX has a reading of above 25 and the DIs are negatively placed. These suggest the bearish momentum. Additionally, there is a bearish MACD crossover on the daily. We see increasing odds for the stock price to test S$6.38 (61.8% FR of 2009 to 2010 price swing). Stops could be placed at S$6.97 (high on 25 Oct), giving a potential reward risk ratio of 1.5. Approximate timeframe on average: 2-4 weeks Source: Nextview

ANALYST Wong Shueh Ting, CFTe, MSTA +65 6590 6616 [email protected]

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FROM THE REGIONAL MORNING NOTES...

Japfa (JAP SP) 3Q18: Strong Beat From Vietnam Swine And Indonesian Poultry Japfa’s 3Q18 core net profit beat our street-high 2018 forecast significantly. 9M18 net profit met 95% of our and 105% of consensus 2018 forecasts. Core net profit soared 141% yoy in 3Q18 due to strong performances in three key segments: a) Vietnam swine business under the Animal Protein Other segment, b) Indonesia poultry, and c) dairy. We raise our 2018-20 core net profit forecasts by 6.6-7.1%. Accordingly, we raise our target price by 9% to S$0.98, implying 12.4x 2018F PE, a 16% discount to peers. 3Q18 RESULTS Year to 31 Dec (US$m) Revenue Operating Profit Operating Margin (%) Net Profit Net Margin (%) Core Net Profit Core Net Margin (%)

3Q18 877.4 82.4 9.4% 33.7 3.8% 29.3 3.3%

3Q17 814.3 56.0 6.9% 15.7 1.9% 12.1 1.5%

yoy % chg 7.8% 47.1% 2.5ppt 114.7 1.9ppt 141.1 1.9ppt

Source: Japfa, UOB Kay Hian

RESULTS • APO: Strong turnaround due to Vietnam swine business. 3Q18 core net profit of the

Animal Protein Other (APO) segment reported a strong turnaround to US$9.9m from US$7.3m loss in 3Q17, mainly due to the Vietnam swine business. To recap, swine prices declined to below cost levels since 4Q16 when China restricted swine imports from Vietnam. After more than a year of demand-supply rebalancing in the Vietnam market, swine prices recovered in 2Q18 to above cost and continued to increase in 3Q18. Export restriction to China remains in place; removal of this restriction could bode well for Japfa. More importantly, Japfa’s farming productivity continues to improve on lower production cost of swine. • Indonesia poultry: Higher poultry ASPs and breeding productivity. 3Q18 core net

profit grew 55% yoy due to strong profit in breeding operations from higher-than-expected day old chick (DOC) ASP on a lack of supply in Indonesia. In addition, commercial farm operations also recorded strong profit due to higher broiler ASP. Key factors underpinning the volume growth of Japfa’s breeding operations are high productivity and quality of its DOC breed. • Dairy and consumer food: Remained relatively stable. The dairy segment reported a

3% yoy growth in operating profit from the continued focus on improving milk yields and volumes in China. On the other hand, core net profit in the consumer food segment remained loss-making although losses have narrowed marginally qoq from US$6.8m in 2Q18 to US$6.2m in 3Q18. KEY FINANCIALS Year to 31 Dec (US$m) Net Turnover EBITDA EBIT Net profit Adjusted net profit Adjusted EPS (cent) Adjusted PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x)

2016 3,032.9 396.4 311.4 118.8 130.2 7.4 6.7 1.1 3.5 1.6 4.3 46.3 5.2 16.4 -

2017 3,189.9 286.6 188.6 22.6 15.7 0.9 55.8 1.2 5.5 0.8 0.5 69.4 2.8 2.3 -

2018F 3,550.4 411.8 305.7 108.1 108.1 5.9 8.7 1.6 4.7 0.7 3.0 83.7 3.3 13.3 92.0 1.18

2019F 3,788.7 440.1 322.2 119.1 119.1 6.5 7.9 1.4 4.4 0.7 3.1 73.9 3.5 12.9 103.3 1.15

2020F 4,039.5 465.7 338.5 130.4 130.4 7.1 7.2 1.2 4.2 0.7 3.2 64.6 3.6 12.5 110.0 1.19

Source: Bloomberg, UOB Kay Hian

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STOCK IMPACT • Expect robust core net profits in 2018-19. The turnaround in the Vietnam swine business should continue due to favourable swine prices in Vietnam. In addition, the Indonesia poultry segment should continue to benefit from more efficient regulations in Indonesia to manage the supply of poultries and more subsidies ahead of the Indonesia elections in early-19. EARNINGS REVISION/RISK • We raise our 2018-20 net profit forecasts by 6.6-7.1% after raising net profit for the Indonesian poultry and APO segments on better-than-expected ASPs and operating margins. • Risks include unfavourable forex rates, demand-supply imbalances for key proteins, price and availability of feed raw materials, competition and animal disease outbreak. VALUATION/RECOMMENDATION • Maintain BUY and SOTP-based target price of S$0.98, which implies 12.2x 2018F PE, a 16% discount to peers’ 14.8x. SHARE PRICE CATALYST • Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine. • Stronger-than-expected turnaround in the Vietnam swine business. • Reversal of rupiah weakness. SOTP VALUATION 2018F core net profit (US$m)

Ascribed PE multiple (x)

PT Japfa

74.8

12.9

964.4

Based on 12.9x 2018F core net profit. This is pegged to PT Japfa’s 8year PE mean; it is at a slight discount to peers’ average of 13.6x.

Dairy

50.0

12.4

619.5

Based on 12.4x 2018F core net profit; this is pegged to the valuation multiple Japfa paid to acquire its remaining minority stake in 2018. This is at a slight discount to China Modern Dairy’s 2018F PE of 14.0x

APO

23.7

12.9

305.6

Similar valuation basis with PT Japfa as both segments operate under the same business model.

(22.8)

0.0

Consumer food Corporate net debt in 2018F Total After 10% conglomerate discount

Value (US$m)

Remarks

Ascribed zero value. (400.0) 1,489.5 1,340.6

Shares outstanding Value per share (US$) US$/SGD conversion rate Value per share (S$)

1,846.7 0.73 1.35 0.90

Source: UOB Kay Hian

PEER COMPARISON Company Japfa Indonesia protein peers PT Japfa Tbk Charoen Pokphand Indo Malindo Feedmill Average Dairy peers Inner Mongolia Yili Ind China Mengniu Dairy China Modern Dairy Average

Rec BUY

Price @ 30 Oct 18 (lcl ccy) 0.69

Market Cap (US$m) 920

------------ PE -----------2019F 2020F 2018F (x) (x) (x) 8.7 7.9 7.2

BUY BUY HOLD

2,000 5,450 1,260

1,540 5,868 185

10.7 20.6 13.1 14.8

9.4 18.6 10.4 12.8

9.3 17.5 10.1 12.3

34.8 27.0 134.2 65.4

7.1 13.5 7.4 9.3

2.2 4.8 1.3 2.8

19.9 24.0 10.8 18.2

19.3 22.6 11.7 17.9

1.1 1.1 0.8 1.0

45 26 98 56

NR BUY NR

21.37 22.15 0.89

18,648 11,087 695

19.7 23.0 5.4 16.0

16.7 18.0 12.6 15.8

13.9 14.7 7.0 11.9

15.8 32.8 45.4 31.3

13.3 13.7 8.8 12.0

3.9 2.8 0.7 2.4

24.4 12.8 4.0 13.7

26.0 14.7 6.2 15.7

3.4 1.0 1.5

(50) (10) 95 12

EV/ 3-yr EPS EBITDA CAGR 2018F (x) 99.5 4.7

P/B 2018F (x) 1.6

---- ROE ---2018 F 2019F (%) (%) 13.3 12.9

Div yield 2018F (%) 0.7

Net gearing 2018F (%) 84

Source: Bloomberg, UOB Kay Hian

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Tianjin Zhongxin Pharmaceutical Group Corporation (TIAN SP) 3Q18: Results In Line, Investment Thesis Intact In a typically weak quarter, TJZX's 3Q18 net profit rose 6.6% yoy to Rmb87.4m. Topline revenue recorded explosive growth of 20.7% yoy to Rmb1.6b. Gross profit rose in tandem (+22.5% yoy), coming in at Rmb614.8m. However, the solid revenue growth was offset by a lower share of associate profits which declined 82.6% yoy. We believe our investment thesis of multi-year growth led by key drug Su Xiao’s ASP hike is intact and we reiterate BUY with a PE-based target price of US$1.59. 3Q18 RESULTS Year to 31 Dec (Rmbm) Revenue Gross profit Gross profit margin Share of profits of associates Profit before tax

3Q18 1,576.6 614.8 39.0

3Q17 1,306.1 501.8 38.4

yoy % chg 20.7 22.5 0.6

3.4 110.0

19.3 97.1

-82.6 13.4

87.4

82.0

6.6

PATMI Source: Tianjin Zhongxin, UOB Kay Hian

RESULTS • 3Q18 attributable net profit of Rmb87.4m (+6.6% yoy), in line with expectations. Tianjin Zhongxin Pharmaceutical Group (TJZX) reported a 3Q18 attributable net profit of Rmb87.4m representing 14.8% of our estimate on a normalised basis. Revenue grew 20.7% yoy to Rmb1.6b. Gross profit rose in tandem with revenue and registered 22.5% growth yoy. While the strong performance supports our investment thesis, a lower share of associates’ profits (-82.6% yoy) eroded much of the solid revenue growth. As a result, net profit margins declined 0.8% to 5.5%. • Building up a cash hoard. The strong earnings performance led to an operating cash inflow of Rmb107.5m in 3Q18 against an outflow of Rmb50.9m in 3Q17. Sequentially, this represents an increase of 2.9x. TJZX’s cash balance was maintained at Rmb1.2b or 21% over the balance as at 31 Dec 17. STOCK IMPACT • TJZX’s multi-year growth story led by Su Xiao. With Su Xiao’s (速效救心丸) price hike

set firmly in motion, management expects a meaningful impact on 2018 profits while the full impact will be seen in 2019. Moreover, with management’s new strategy to grow Su Xiao’s sales volume, we re-iterate our view that TJZX is on the cusp of a multi-year growth story. • Trade friction with US unlikely to hurt TJZX. Management acknowledged the

complicated and volatile external environment which had exerted downward pressure on China’s domestic market but shared that TJZX’s export business is relatively small and foreign tariffs on exports have a minimal impact. KEY FINANCIALS Year to 31 Dec (Rmbm) Net turnover EBITDA EBIT Net profit (rep./act.) Net profit (adj.) EPS (Rmb) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%)

2016 6,243 439 349 422 422 0.55 11.1 1.1 9.3 4.1 6.8 (13.5) 32 10.4

2017 5,689 495 411 476 476 61.9 9.8 1.0 8.4 2.5 8.4 (10.7) 84 11.0

2018F 5,867 661 573 589 589 76.6 7.9 1.0 5.6 5.0 10.0 (19.9) n.a. 12.7

2019F 6,125 794 700 697 697 90.6 6.7 0.9 4.4 6.0 11.4 (22.6) n.a. 13.8

2020F 6,350 866 767 748 748 97.2 6.3 0.8 3.7 6.4 11.8 (25.8) n.a. 13.7

Source: Bloomberg, UOB Kay Hian

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• Increasing competitiveness through mixed-ownership reform. Following TJZX’s

induction into China’s “Double Hundred” SOE reform list (“国企改革<<双百行动>>”), Tianjin Pharmaceutical Group Co. Ltd has proposed to carry out a mixed-ownership reform. While the proposed reform is still in the planning stage, we believe the proposed mixed-ownership reform can have the effect of maximising TJZX’s full profit potential. We read into the announcement by Tianjin Development Holdings Limited (882 HK) and believe any mixed-ownership reform will likely introduce a strategic shareholder that will enhance the commercial productivity of SOEs. EARNINGS REVISION/RISK • No change to earnings estimates. • Risks include a) tougher-than-expected competition, b) foreign currency volatility, and c) regulatory risk arising from negative impact from reforms. VALUATION/ RECOMMENDATION • Maintain BUY with a PE-based target price of US$1.59, pegged to peers’ average of 14.1x 2018F PE. While TJZX is smaller in market capitalisation, its ROE and yield are similar to peers’ average. We think TJZX is poised for a major turnaround as its blockbuster drug experiences a substantial price appreciation in the Chinese market. SHARE PRICE CATALYST • Announcement of positive impact from relevant reforms, ie injection of private ownership,

and the delisting of Singapore-listed shares. • Continued profit growth as its Su Xiao drug price hike takes place.

* For a more detailed corporate note, please contact your trading representative.

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Disclosures/Disclaimers This report is prepared by UOB Kay Hian Private Limited (“UOBKH”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. Advice should be sought from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. This report is confidential. 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