Hong Kong - Credit Suisse | PLUS

30 November 2015 Asia Pacific Equity Research Strategy

Hong Kong Strategy

6

2016-2020 Avg.: 2.2%

4 2 0 -2

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

-4

2008

Eva Wang 852 2101 7365 [email protected]

Forecast

2000-2015 Avg.: 4%

2007

Kelvin Tam, CFA 852 2101 6582 [email protected]

Hong Kong's GDP (%yoy)

8

2006

Dawei Lee 65 6212 3004 [email protected]

10

2005

Sanjay Jain 65 6306 0668 [email protected]

pressure on Hong Kong's potential growth

2004

Anand Swaminathan 65 6212 3012 [email protected]

Figure 1: Slower Chinese growth and rising US interest rates would put

2003

Christopher Siow 65 6212 3062 [email protected]

A long winter: The beginning of a structural downturn

2002

Timothy Ross 65 6212 3337 [email protected]

STRATEGY

2001

Vincent Chan 852 2101 6568 [email protected]

2000

Research Analysts

Source: Company data, Credit Suisse estimates

■ A structural downturn of Hong Kong's economy ahead. Our economist expects Hong Kong's potential growth rate, which was estimated at around 4% over the past 15 years, to shift down towards 2.2% over the medium term. In the external sector, the stagnation in China's global trade flows and demand of services from Hong Kong would restrain the growth in Hong Kong's service exports. In the domestic sector, the property market should face headwinds from rising interest rates and home completions. We are also concerned about Hong Kong's fiscal conditions in the face of weaker trend growth ahead. ■ Structural adjustment continues. The US will likely raise interest rates finally some time during 2016, and this will be a key test to the HK property market after the years of extremely low funding cost which helped drive property prices so high. The slowing Chinese economy plus a lesser amount of Chinese tourists coming to HK will also hurt. From the HK market standpoint, if Macau gaming stocks enjoy an earnings rebound in 2016, it will be a major driver of MSCI HK earnings growth, and vice versa. ■ Casualties in the winter. We believe airlines, banks, property developers and retailers will be negatively impacted. Casualties are Cathy Pacific, BEA, Kerry, Wheelock, Sa Sa and Luk Fook.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do

business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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30 November 2015

Focus table and charts Figure 2: Slower Chinese growth and rising US interest

Figure 3: NPL (%)

rates 16

Fed funds target rate (%, RHS) 14

2.0

7

China's real GDP (% yoy)

6

Forecast

1H14

2H14

1.9

1H15

1.8 1.6

5

12

1.4

4

1.2

10

1.1

1.0

3

0.9

0.8

8

2

6

0.4

0

0.2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

4

0.6

1

Source: NBS, Federal Reserve Bank, CEIC, Credit Suisse estimates

0.8

0.6 0.5

0.5

0.4

0.4

0.3 0.3 0.3

0.0 BOCHK

HSB

BEA

DSB

Source: Company data

Figure 4: Table of potential casualties of the slowdown in this winter Company RIC Rating Rating Price TP TP TP Analyst Previous Current loc Previous Current Change % Remark Cathay Pacific 0293.HK N U 14.22 14.9 12.5 (16.1) We see few reasons to chase CX at current levels, having recently cut our rating to UNDERPERFORM BEA 0023.HK U U 28.45 23 22 (4.3) We trim our EPS estimates by 4-15% on weaker topline growth and higher credit cost assumptions Wheelock 0020.HK O N 34.55 40.14 37.5 (6.6) Higher risk from large exposure in the New Territories, relatively higher gearing to peers and unappealing dividend support Kerry Prop 0683.HK O N 22.45 32.29 22.3 (30.9) Kerry is the worst performing HK developer ytd and now trades at 65% NAV discount, the steepest among HK developers Sa Sa 0178.HK U U 2.77 1.75 1.70 (2.9) We cut future EPS estimates by 1-4% on the negative impact from slower HK economic growth. Luk Fook 0590.HK N N 18.38 20.3 19.0 (6.4) We cut future EPS estimates by 6-8% on the negative impact from lower HK economic growth. Source: Price as of 26th Nov 2015, Company data, Credit Suisse estimates

Figure 5: HK property price—CCL

Figure 6: HK RSV slowdown coincides with the Chinese visitation changes

160

2016E: -15%

140

YoY chg in HK RSV

YoY chg in total Mainland visitation

36 27

120

2017E: -5%

100

-56% (1998 credit crunch)

80 60

18 9 0

40

-9 20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Aggregated CCL

Source: Company data, Credit Suisse estimates

Hong Kong Strategy

-18 09/11

03/12

09/12

03/13

09/13

03/14

09/14

03/15

09/15

Source: CEIC

2

30 November 2015

Hong Kong: A long winter The beginning of a structural downturn Our economist believes a slowing Chinese economy and rising US interest rates will drag the Hong Kong economy into a structural downturn in the years to come. We expect Hong Kong's potential growth rate, which was estimated at around 4% over the past 15 years, to shift down towards 2.2% over the medium term. In the external sector, a stagnation in China's global trade flows and demand of services from Hong Kong would restrain the growth in Hong Kong's service exports. In the domestic sector, we believe the property market will face growing headwinds from rising HKD interest rates, rising new home completions and a weaker labour market, but will remain cushioned by an excessive amount of liquidity in the banking system. Home prices may only slide, but not crash, in the absence of a severe credit crunch. We are also concerned about Hong Kong's fiscal condition in the face of weaker trend growth ahead.

Hong Kong 2016 outlook The US will likely raise interest rates finally some time during 2016, and this will be a key test to the HK property market after years of extremely low funding cost which have helped drive property prices so high. The slowing Chinese economy plus a lesser number of Chinese tourists coming to HK should also hurt. From the HK market standpoint, if Macau gaming stocks enjoy an earnings rebound in 2016, it will be a major driver of MSCI HK earnings growth, and vice versa.

Sector analysis We did analysis on four sectors of the Hong Kong economy. First, 2016 should be a positive year for APAC airlines, but CX faces unique pressure as capacity constraints and lower economic growth will likely impact revenues. Second, Hong Kong banks' top-line growth is likely to face headwinds driven by slowing loan growth and non-interest income, only partly offset by a slight improvement in NIMs. Third, with a weakening economy, rising interest rates, increasing completions and a weaker labour market, we expect the HK residential market to weaken. Last, we believe the structural slowdown in HK economic growth may hit its retail sector badly, especially with the expected declining visitation from China in the next few years.

Company analysis We did analysis on six companies of the Hong Kong market. BEA is our least preferred among HK banks, hence we trim our EPS estimates by 4-15% on weaker top-line growth and higher credit cost assumptions. For Cathy Pacific, we see few reasons to chase the stock at current levels, and cut our rating from Neutral to UNDERPERFORM. We think Kerry has been the worst-performing HK developer YTD and now trades at a 65% NAV discount, the steepest among the HK developers. As for retailers, we cut target price for both Sa Sa and Luk Fook. For Wheelock, given higher risk from its large exposure in the New Territories, relatively high gearing to peers and unappealing dividend support, we cut our TP and downgrade the stock from Outperform to NEUTRAL.

Hong Kong Strategy

3

30 November 2015

Hong Kong valuation summary Figure 7: HK valuation summary Com pany nam e

Ticker

Rec

Price

HSI Mkt cap

(loc)

(%) (US$m n)

Consum er Discretionary

EPS growth (% )

P/E (x)

Yield (%)

2015 2016

2014 2015 2016 2015 2016

P/B (x) ROE (%)

F Y1 EP S

2015

2015

CS

IBES Analyst

2.8

Sands China

1928.HK

O

26.8

0.9

27,851

-38.6

13.2

10.9 17.8 15.7

7.4

8.3

4.7

25

0.19

0.18 Kenneth Fong

Galaxy

0027.HK

O

23.6

0.8

12,968

-54.5

54.0

9.8 21.5 14.0

1.4

2.2

2.4

12

1.10

1.25 Kenneth Fong

Belle

1880.HK

N

7.1

0.6

7,683

8.0

0.0

11.2 10.3 10.3 10.3

5.9

2.0

19

0.56

0.57 Kevin Yin

Consum er Staples

2.5

China Res Beer

0291.HK

NR

15.0

0.2

15.1 -214.0 36.3 32.1 19.0

1.1

2.4

3.9

0.39

0.41 Not rated

Hengan

1044.HK

N

78.9

0.8

12,401

10.3

13.8

24.7 22.4 19.7

2.9

3.3

5.1

23

3.52

3.47 Kevin Yin

Want Want

0151.HK

N

6.2

0.6

10,391

4.7

9.8

17.1 16.3 14.9

4.3

4.7

4.7

30

0.05

0.05 Kevin Yin

Tingyi

0322.HK

N

11.4

0.3

8,256

-10.2

9.8

20.6 23.0 20.9

2.2

2.4

2.5

11

0.06

0.07 Kevin Yin

Mengniu Dairy

2319.HK

O

13.1

0.5

6,612

2.5

5.2

17.9 17.4 16.6

6.9

7.3

1.9

11

0.62

0.66 Kevin Yin

8.1 23.4 19.2

Energy

4,703 -707.1

6.1

PetroChina (H)

0857.HK

N

5.7

1.6

243,178

-65.5

22.0

Sinopec (H)

0386.HK

O

4.9

1.6

93,136

-22.5

43.6

CNOOC

0883.HK

O

8.8

2.0

50,753

-65.6

29.9

China Shenhua (H)

1088.HK

N

12.7

0.6

45,386

Kunlun Energy

0135.HK

N

6.7

0.3

Financials

1.9

2.3

0.8

4

0.20

0.27 Thomas Wong

9.2

3.0

4.3

0.8

6

0.31

0.35 Thomas Wong

5.4 15.7 12.1

5.6

3.3

0.9

6

0.46

0.49 Thomas Wong

-42.0 -10.6

5.4

9.3 10.4

3.8

3.4

0.7

7

1.13

1.24 Trina Chen

6,999

-27.9

13.7

9.7 13.4 11.8

2.1

2.4

1.0

7

0.50

0.50 Kelly Chen

10.2 13.2

58.3

Banks

28.1

ICBC (H)

1398.HK

N

4.8

4.7

249,836

-0.2

-5.4

5.0

5.0

5.3

7.0

6.6

0.8

17

0.78

0.78 Anson Huang

CCB (H)

0939.HK

O

5.4

6.1

176,813

1.0

-4.0

4.9

4.9

5.1

7.2

6.9

0.8

17

0.92

0.92 Anson Huang

BOC (H)

3988.HK

O

3.5

3.7

172,245

-1.9

-4.1

4.8

4.8

5.1

6.8

6.9

0.7

15

0.59

0.59 Anson Huang

BCOM (H)

3328.HK

O

5.6

0.7

65,417

0.4

-5.5

5.2

5.1

5.4

5.8

5.5

0.7

13

0.89

0.88 Anson Huang

Hang Seng Bank

0011.HK

N

141.5

1.5

34,906

-3.6

15.6

16.1 16.7 14.4

4.9

4.0

1.9

12

8.48 11.82 Anand Sw aminathan

BoCHK

2388.HK

N

24.6

1.2

33,559

6.8

9.2

10.7 10.1

9.2

4.6

4.7

1.4

14

2.45

2.48 Anand Sw aminathan

BEA

0023.HK

U

28.7

0.5

9,763

-14.4

13.6

11.0 12.9 11.4

3.7

3.7

0.9

8

2.22

2.38 Anand Sw aminathan

32,747

51.8

-6.1

47.4 31.2 33.2

2.9

2.7

8.2

31

6.73

6.85 Arjan van Veen

Diversified Financials Hong Kong Exchange

3.2 0388.HK

U

210.0

Insurance

3.2 13.5

China Life (H)

2628.HK

O

28.3

2.8

118,966

42.6

19.7

20.4 14.3 12.0

1.1

2.3

2.0

15

1.63

1.61 Arjan van Veen

Ping An (H)

2318.HK

O

44.3

3.1

101,979

38.9

-5.5

15.6 11.2 11.9

1.5

1.7

1.9

18

3.25

3.28 Arjan van Veen

AIA Group

1299.HK

O

47.7

7.6

74,077

-0.7

28.4

21.5 21.6 16.8

1.2

1.5

2.3

11

0.28

0.31 Arjan van Veen

Capital Goods

13.5

CKH

0001.HK

O

103.6

3.7

51,594

-47.2

8.7

6.6 12.4 11.5

2.8

3.1

1.0

8

8.32

8.26 Kenneth Fong

SHKP

0016.HK

O

98.4

2.1

36,717

-11.1

25.1

12.4 13.9 11.1

3.4

3.6

0.6

5

8.84

8.56 Kelvin Tam

China Overseas Land

0688.HK

N

26.3

1.4

33,398

23.6

18.8

6.1

2.4

2.7

1.6

24

3.60

3.12 Jinsong Du

Henderson Land

0012.HK

O

48.8

0.9

20,800

-2.4

0.6

15.7 16.1 16.0

2.2

2.2

0.7

4

3.02

3.06 Kelvin Tam

CR Land

1109.HK

N

21.8

0.8

19,451

4.1

14.5

10.8 10.3

9.0

2.6

3.0

1.2

13

2.11

2.14 Jinsong Du

Wharf

0004.HK

N

45.6

0.8

17,814

47.1

7.3

16.9 11.5 10.7

4.0

4.0

0.4

4

3.97

3.83 Kelvin Tam

Link REIT

0823.HK

U

47.3

1.5

13,733

18.6

-1.7

28.5 24.0 24.4

3.8

4.1

0.9

4

1.93

1.98 Kelvin Tam

Hang Lung Properties

0101.HK

N

19.0

0.6

11,037

-42.4

-7.4

8.5 14.8 15.9

3.9

3.9

0.6

4

1.29

1.36 Kelvin Tam

NWD

0017.HK

N

7.8

0.6

9,090

2.7

8.9

5.4

5.4

0.4

11

0.88

0.81 Kelvin Tam

Sino Land

0083.HK

O

11.8

0.5

9,232

4.4

2.7

14.1 13.5 13.1

4.4

4.6

0.6

5

0.89

0.92 Kelvin Tam

52,324

46.2

-4.1

7,401

39.3

Industrials CITIC

7.3

3.6

2.8 0267.HK

NR

13.9

Transportation Cathay Pacific

-25.3 -59.7

9.0

1.4

8.7

6.6

7.2

2.0

2.0

0.8

12.8

2.14

2.12 Not rated

16.7

14.5 10.4

8.9

4.3

5.0

1.0

10

1.40

1.53 Timothy Ross

1.4 0293.HK

N

14.6

Inform ation Technology

0.2 13.1

Tencent

0700.HK

O

156.4

11.5

189,725

30.3

27.9

49.8 38.2 29.9

0.2

0.2

11.0

33

3.37

3.26 Dick Wei

China Unicom

0762.HK

O

9.8

0.8

30,250

-26.9

29.0

16.6 22.7 17.6

1.1

2.2

0.8

4

0.36

0.50 Colin McCallum

Lenovo Group

0992.HK

O

8.6

0.8

12,384

-1.1

n.m.

14.3 14.5

n.m.

2.3

1.7

2.9

23 -0.03

0.00 Thompson Wu

239,623

-10.5

15.1

13.9 15.5 13.5

2.5

3.2

1.7

11

4.82

5.62 Colin McCallum

Telecom m unication Services China Mobile

7.5 0941.HK

O

90.7

Utilities

7.5 4.9

HKCG

0003.HK

U

15.5

1.5

23,183

4.2

3.9

25.3 24.3 23.3

2.5

2.6

3.2

14

0.64

0.67 Dave Dai

CLP

0002.HK

U

66.0

1.7

21,515

-4.9

2.0

14.9 15.6 15.3

4.2

4.2

1.8

12

4.22

4.36 Dave Dai

PAH

0006.HK

N

70.6

1.4

19,428

-87.0

0.7

2.5 18.9 18.8

3.7

3.8

1.2

6

3.73

3.64 Dave Dai

CR Pow er

0836.HK

U

15.0

0.4

9,316

27.7

-1.1

7.8

5.2

5.6

0.9

16

2.45

2.68 Dave Dai

-2.0

4.9

HANG SENG INDEX

22,498

6.1

6.2

10.5 10.7 10.2

Note: (1) Sector performance are weighted by HSI weighting; (2) MSCI sectors are used for HK and China coverage sector price and valuations; (3) Consensus numbers used for stocks not covered. Source: Company data, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates, MSCI Date of last update: 11/25/2015 at 4:01:24 PM (MSCI indices: 11/24/2015)

Hong Kong Strategy

4

30 November 2015 This section ("A long winter") is an excerpt from Christiaan Tuntono's Economic Research report entitled Hong Kong: A long winter, published 27 November 2015. Please refer to this report for more information and important disclosures.

A long winter We believe the Hong Kong economy is entering a structural downturn. We have revised down our 2016 GDP growth forecast to 2% from 2.2%, and set 2017 growth at 2.2%. We believe Hong Kong's potential growth rate, which has been estimated at around 4% over the past 15 years, will shift down towards 2.2% over the medium term. The downshift in the potential growth rate is likely to have significant implications for labour market and markets and the fiscal position, in our view.

Christiaan Tuntono Non-Japan Asia Economics 852 2101 7409 [email protected]

Figure 8: We expect Hong Kong's potential growth rate to

Figure 9: …which would have significant implications for

fall…

labour and property markets and the fiscal position

10

160

Hong Kong's GDP (%yoy)

8

2000-2015 Avg.: 4%

6

Forecast

140

2016-2020 Avg.: 2.2%

120

Centa City Leading Index (Jul 97=100)

100

4

80

2

60 0

40 -2

20

Source: C&SD, CEIC, Credit Suisse estimates

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0 2003

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-4

Source: Centaline Realty, CEIC, Credit Suisse

Slowing Chinese growth, rising US rates We believe the structural downshift of Hong Kong's potential growth rate will be led by (1) a slowing Chinese economy, and (2) rising US interest rates. On China, we remain cautious about the country's growth momentum over the medium term, expecting GDP growth to moderate further to 6.5% in 2016 from around 7% this year. A faster-than-expected slowdown in industrial activities, helped by excess capacity in manufacturing and lacklustre support from infrastructure projects, is likely to be the main driving factor. Over the upcoming 13th Five Year Plan period (201620), growth is expected to be maintained at around 6.5%, according to the government. This would be a sizeable step down from the 9.7% average growth the economy recorded between 2000 and 2014.

Hong Kong Strategy

5

30 November 2015

Figure 10: China's growth is likely to slow to around 6.5%

Figure 11: The Fed is expected to start normalising US

in the coming years

interest rates

16

3.5

China's real GDP (% yoy)

Fed funds target rate (%) Forecast

14

Forecast

3.0 2.5

12

2.0 10 8

End-16: 1-1.25%

1.5 2000-2014 Avg.: 9.7%

2016-2020 Avg.: 6.5%

6

1.0 0.5

Jul-16

Jul-15

Jan-16

Jul-14

Jan-15

Jul-13

Jan-14

Jul-12

Jan-13

Jul-11

Jan-12

Jul-10

Jan-11

Jul-09

Jan-10

Jul-08

Jan-09

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: NBS, CEIC, Credit Suisse estimates

Jan-08

0.0 4

Source: Federal Reserve Bank, CEIC, Credit Suisse estimates

On US interest rates, we expect the Fed to commence its interest rate normalisation process in December, and anticipate Hong Kong's interest rates will rise in tandem with the USDHKD peg. As we argued in HKD peg to the USD to remain intact, 1 September 2015, we expect the USDHKD peg to stay given that there is no good, riskless alternative to the current arrangement. We do not believe the Chinese and Hong Kong authorities would be keen to create additional pressure on capital outflows by altering a well-established currency board system. This suggests that HKD interest rates will rise over the medium term, while the HKD should appreciate on a trade-weighted basis.

Hong Kong's service exports take the hit Hong Kong's reliance on the Chinese economy has been rising over the past decade. Increasing economic integration with mainland China has contributed to the rapid expansion of Hong Kong's service exports. China's membership of the WTO in 2001 helped turn the country into the 'world's factory', and that has led the robust growth in Hong Kong's trade and transportation (logistic) services. In 2003, the commencement of the Individual Visit Scheme helped bolster Hong Kong's tourism sector, which led to strong growth in Hong Kong's travel service exports. The implementation of the Closer Economic Partnership Arrangement (CEPA) in the same year also created new business opportunities for Hong Kong's service providers in the mainland Chinese market. All these policy measures have helped make China Hong Kong's largest services export market in recent years, surpassing the US.

Hong Kong Strategy

6

30 November 2015

Figure 12: Hong Kong's exports are reliant most on China

Figure 13: Closer economic integration has turned China into Hong Kong's largest service exports market

Hong Kong's export exposure in value-added term (% of GDP) 14 12

US

EU28

Japan

ASEAN5

Hong Kong's net service exports (% of GDP)

5

China

4

China

USA

UK

Japan

3 2

10

1 0

8

-1

6

-2 4

-3

2

-4

0 1995

-5 2000

2005

2008

2009

2010

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2011

Source: CEIC, Credit Suisse

Source: CEIC, Credit Suisse

China's rise in the global trade system and its growing service import demand have been the major drivers of Hong Kong's service exports. In 2014, Hong Kong's service exports amounted to US$139 bn, representing 48% of GDP. The main service export items include trade services (merchanting), travel services (tourism), transportation services (logistics) and financial services. The surplus in net service exports amounted to US$76.8 bn (26.4% of GDP), with the largest portion gained through merchanting and other trade-related services, which amounted to US$34 bn (11.7% of GDP) in 2014. This was followed by travel services (US$16.3 bn, 5.6% of GDP), transportation services (US$13.2 bn, 4.5% of GDP) and financial services (US$12.7 bn, 4.4% of GDP). Figure 14: Merchanting and other trade-related services

Figure 15: Stagnation in global trade will limit Hong

are Hong Kong's largest service export item

Kong's trade and transport service exports

Hong Kong's net service exports (% of GDP) Others

Financial

Insurance

Merchanting

Travel

Global merchandise trade (USD bn)

Transportion

% yoy (RHS)

20

30

18

25

16

20

14

30 20 10

12

15

10

10

0

8

5

-10

6

0

4

-5

2

-20

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: CEIC, Credit Suisse

-30 2000

-

-10

Source: UNCTAD, Credit Suisse

We think the stagnation in China's global trade flows and the slowdown in its demand for services from Hong Kong will limit increases in Hong Kong's service exports on a structural basis. We see several headwinds pressuring the growth of Hong Kong's service exports to China. A stagnation in global trade flows and a slowdown in the growth of China's share of world markets are expected to restrain the growth of Hong Kong's trade and transportation service exports. Hong Kong's travel service exports are expected to slow as well, as the tourism sector faces a structural downtrend led by the loss of Hong Kong's appeal to mainland Chinese tourists and greater competition from surrounding destinations (Hong Kong Tourism: Not a growth engine anymore, 17 March 2015). Financial service exports should be supported by the RMB internationalisation

Hong Kong Strategy

7

30 November 2015

process, but the narrowing of the interest rate gap between the RMB and the USD and the pressure on RMB depreciation are likely to depress demand for USD- and HKDdenominated loans by mainland Chinese companies from Hong Kong banks. Figure 16: A strong HKD is negative for tourism

Figure 17: Hong Kong bank lending slows when Chinese companies unwind their FX debt exposures

110 Index (April 2014 = 100)

Hong Kong: Total loans (% yoy) 35

105

Hong Kong's non-bank China exposure (% yoy, RHS)

30

100

25 CNY appreciation

95

90

20 15 10

USDCNY

5

JPYCNY

0

EURCNY

-5

Source: CEIC, Credit Suisse

Aug-15

Oct-14

Mar-15

May-14

Jul-13

Dec-13

Feb-13

Apr-12

Sep-12

Jun-11

Nov-11

Jan-11

Aug-10

Oct-09

Mar-10

May-09

-10 Jul-08

11/2015

9/2015

10/2015

8/2015

7/2015

6/2015

5/2015

4/2015

3/2015

2/2015

1/2015

12/2014

11/2014

9/2014

10/2014

8/2014

7/2014

6/2014

5/2014

75

Dec-08

80

Feb-08

HKDCNY

Sep-07

85

80 70 60 50 40 30 20 10 0 -10 -20

Source: HKMA, CEIC, Credit Suisse

Persistent pressure over the property sector We think Hong Kong's property market will face three growing headwinds which will exert persistent pressure on transaction volumes and prices: (1) Rising HKD interest rates. We believe the USDHKD peg will very likely remain over the medium term despite rising US interest rates. We expect HKD interest rates to go up in tandem with USD interest rates, and that should affect the property market in two ways: (1) a narrowing yield differential between Hong Kong's rental yield and mortgage rate would taper the attractiveness of real estate as a positive carry trade vehicle; and (2) a rising HKD deposit rate would encourage capital to stay in the banking system rather than being invested in fixed assets such as property. As interest rates rise, we expect the balance between buying and selling property to keep tilting, putting downward pressure on transaction volumes and prices. Figure 18: The differential between mortgage rates and

Figure 19: Time deposit rates are expected to rise

residential yields is likely to narrow Difference (%) Effective mortgage rate (%) Residential yield (%)

7 5

4.0

HSBC's time deposit rate (%)

3.5 3.0 2.5

3 2.0

1

1.5 1.0

-1

Source: Credit Suisse

Hong Kong Strategy

0.0

Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15

-3

Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

0.5

Source: CEIC, Credit Suisse

8

30 November 2015

(2) Rising new home completions. Under the active policy of the Hong Kong government, we expect housing supply to continue to increase in the coming years. Housing completions in Hong Kong fell to a trough of 7,157 units in 2009, due to the government's decision back in late 2002 to temporarily suspend land sales in an effort to stem the correction in home prices. During 2005-14, housing completions averaged only 11,500 units per year, which was substantially lower than the average 28,000 units between 1980 and 2004. Over the medium term, the government targets to raise housing completions to 18,500 units per year, with a ten-year plan raising the target to 19,200 units per year. We believe an increase in housing completions would put more pressure on both the primary and secondary housing markets in the years to come. Figure 20: Housing completions fell sharply after 2005

Figure 21: …but are expected to step up in the future

following government policy measures… Residential property completions (units, 12m roll sum, RHS)

Housing completion (No. of units)

Centa City Leading Index (Jul97=100) 160

140 120

1980-2004 avg.: 28,000 units

40,000

20000

35,000

18000

30,000

16000

25,000

80

20,000

60

15,000

8000

10,000

6000

5,000

4000

0

2000

2005-2014 Avg.: 11,500 units

20

Mar-95 Apr-96 May-97 Jun-98 Jul-99 Aug-00 Sep-01 Oct-02 Nov-03 Dec-04 Jan-06 Feb-07 Mar-08 Apr-09 May-10 Jun-11 Jul-12 Aug-13 Sep-14

0

Source: Rate and Valuation Dept., Centaline Realty, Credit Suisse

Forecast

2005-2014 avg.

14000

100

40

Medium-term target

12000 10000

0 2008

2010

2012

2014

2016E

2018E

Source: Hong Kong Government, Credit Suisse estimates

(3) Prospects of a weaker labour market. With the service sector weakening, we expect Hong Kong's labour market to soften, putting more pressure on wage growth. The latest data show that employment growth in Hong Kong has weakened to almost flat on a YoY basis, dragged down by the contraction in labour demand in tourism-related sectors (retail, accommodation, food service) and professional services (finance, insurance, real estate). In the six months ended March 2015, Hong Kong's real wages contracted 2.3% YoY, while nominal wage growth slowed to 4.1% YoY. With the downward pressure on growth persisting, we expect overall employment conditions to weaken further with wage growth stalling. Such a trend would limit the purchasing power of the general public, weakening support for residential property prices.

Hong Kong Strategy

9

30 November 2015

Source: CEIC, Credit Suisse

Mar-15

Jul-13

May-14

Sep-12

Nov-11

Jan-11

Mar-10

Jul-08

May-09

Sep-07

Jan-06

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

-4

Nov-06

-2

Mar-05

0

Jul-03

2

May-04

4

Sep-02

6

Hong Kong: Real wages (% yoy)

Jan-01

8

Hong Kong: Nominal wages (% yoy) 12 10 8 6 4 2 0 -2 -4 -6 -8 -10

Nov-01

Hong Kong employment (% yoy) Retail, accommodation & food services (% yoy) Financial & Insurance, Real estate, profess services (% yoy)

Figure 23: …putting pressure on wage growth

Mar-00

Figure 22: Service sector employment beginning to contract…

Source: CEI C, Credit Suisse

But despite the headwinds listed above, we expect the property market to remain cushioned by an excessive amount of liquidity in the banking system. Ever since the onset of the global credit crisis in 2008, the HKMA has been intervening on the strong-side of the USDHKD convertibility undertaking (7.75), buying USD and selling HKD to the tune of over HK$950 bn. This has caused Hong Kong's monetary base to balloon by more than 4.8 times from over HK$300 bn in 3Q 2008 to HK$1.58 tn now. Although the issuance of Exchange Fund paper has surged to absorb the excessive amount of interbank liquidity, the Aggregate Balance has still surged from around HK$5 bn before 2008 to HK$424 bn as of now. The excess liquidity has depressed Hong Kong's interbank lending rate (HIBOR) and made bank lending abundant. The excessive amount of liquidity may help prevent a sudden crunch in credit, as was seen in 1997, which triggered a shock in market confidence and a sharp contraction in property transactions and prices. Figure 24: Hong Kong's monetary base has ballooned

Figure 25: The excessive amount of liquidity has never

since 2008

left the banking system Hong Kong's Monetary Base

1,800

Cert. of deposit (HKD bn)

Coins in circulation (HKD bn)

Exchange Fund Papers (HKD bn)

Aggregate Balance (HKD bn)

1,600

8 7

1,400

Aggregate Balance (HKD bn, RHS) 3M HIBOR (%) 3M USD LIBOR (%) Fed fund target rate (%)

6

1,200 5

1,000

400 350 300 250

800

Foreign capital flooded in, but Exchange Fund Paper issuance surged to absorb the excess liqudiity.

600 400

Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

200 0

450

Source: HKMA, Credit Suisse

4 200

3

150

2

100

1

50

0

0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: HKMA, Federal Reserve Bank, Credit Suisse

We think Hong Kong's property prices may only slide, but not crash, in the absence of a severe credit crunch. The sharp fall in Hong Kong's home prices in the aftermath of the Asian financial crisis (1997) was partly attributed to the tightening of mortgage rules by banks after the shock. The fact that domestic home buyers are not as levered now as they were in the 1990s, and that banks have already been tightening mortgage lending criteria as requested by the HKMA, should help reduce the need for banks to sharply cut back lending in a down-cycle. The excessive amount of interbank liquidity should also help prevent a spike in HIBOR in the event that capital starts flowing out of the banking system in times of stress, in our view.

Hong Kong Strategy

10

30 November 2015

Weakening potential growth rate We believe the pressure on service exports and rising costs of funding will continue to weaken Hong Kong's potential growth rate. Based on our calculations, Hong Kong's trend growth rate showed a structural shift at the onset of the Global financial crisis in 2008. Before the crisis, Hong Kong's growth averaged 5.3% p.a. from 2000 to 2007, but after that it has slowed to around 2.8% p.a. from 2011 onwards1. The slowdown happened despite the support from resilient Chinese growth and very easy monetary conditions under the US quantitative easing programme. As these supports dissipate in the future, we expect Hong Kong's trend growth rate to moderate further to around 2.2% over the medium term. We do not exclude the chance of seeing an even softer trend growth rate in the event that liquidity conditions and the property sector face more severe stress than we expect currently. Figure 27: …and is expected to slow further in the future

Figure 26: Trend growth rate has already shown a structural downshift since 2008…

10

HK: Output Gap (log-diff, RHS) HK: Actual GDP (log scale) HK: Potential GDP (HP trend)

13.6

30%

Forecasts

13.4

25%

13.2

20%

13.0

Trend growth: 15% 2.2%

Trend growth: 2.8%

12.8

10%

Trend growth: 5.3%

12.6 12.4

8

Hong Kong's GDP (%yoy) 2000-2015 Avg.: 4%

6

Forecast

2016-2020 Avg.: 2.2%

4 2

5%

0 0%

-2

12.0

-10%

-4

Source: C&SD, CEIC, Credit Suisse

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

-5%

Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

12.2

Source: C&SD, CEIC, Credit Suisse estimates

On employment, we expect an ageing population and the slowdown in service job creation to weaken employment growth from 1.8% before to 1.1% in the coming five years. On capital accumulation, we expect a slowdown in investments in machinery, equipment and computer software to moderate from 4% in the past to 3.5% in the future. Total factor productivity (TFP) gains have seen a step down from 3% to 0.3% since the onset of the global credit crisis, in reflection of a challenging global demand environment. We expect TFP growth to remain sluggish, as we believe Hong Kong's business environment would remain weak over the medium term. Figure 28: [Future potential growth rate would be dragged down] led by the weakness in productivity gain and production factor growth… Average growth rate (% YoY)

2000-07 2011-15E 2016-20F

Real GDP

Employment

Capital

TFP

5.3 2.8 2.2

1.4 1.8 1.1

4.0 4.0 3.5

3.0 0.3 0.3

Source: UN, C&SD, CEIC, Credit Suisse

We expect Hong Kong's services export growth to weaken to 2.2% over the next five years from 2.7% between 2011 and 2015 and over 11% during 2000-07. This is to reflect continued pressure from weakened Chinese demand on Hong Kong's service exports. We 1

We exclude 2008-2010 in our trend growth calculation because of the sharp growth in volatility during the period.

Hong Kong Strategy

11

30 November 2015

expect private consumption growth to weaken to 2.1% from 5% in the past as employment conditions deteriorate. We also expect gross fixed capital formation growth to slow to 1.9% from 3.7% before as construction activities and business investment growth weaken in the future. Figure 29: All GDP components are expected to slow down Average growth rate (% YoY)

2000-2007 2011-2015E 2016F-2020F

GDP

PC

GC

GFCF

GX

SX

GM

SM

5.3 2.8 2.2

3.6 5.0 2.1

2.1 3.0 3.0

3.2 3.7 1.9

9.6 2.0 2.1

11.5 2.7 2.2

9.6 2.6 2.2

6.0 2.7 1.2

Note: PC-Private Consumption, GC-Government Consumption, GFCF-Gross Fixed Capital Formation, GXGoods Exports, SX-Service Exports, GM-Goods Imports, SM-Service Imports Source: C&SD, Credit Suisse

We are concerned about Hong Kong's fiscal conditions in the face of forecast weaker trend growth. Hong Kong's fiscal revenue base remains highly pro-cyclical, with close to three quarters of its revenues derived from cyclical components such as profit and salary taxes, stamp duties, and income from land sales and portfolio investments 2 . A structural downturn of the Hong Kong economy is likely to put negative pressure on future revenue streams that are dependent on the performance of the real economy and global and domestic asset markets. Besides the risk over future revenue streams, Hong Kong's rapidly ageing population is expected to raise government welfare and healthcare expenditures. The pending downshift in Hong Kong's growth momentum will only make a revamp of the territory's fiscal structure more pressing, in our view. Figure 30: Hong Kong's fiscal revenue base remains

Figure 31: Fiscal performance is expected to deteriorate

highly pro-cyclical

as revenue slows and expenditure rises

40 30

50.4% (HKD 2.4trn)

20

Source: Treasury Dept., CEIC, Credit Suisse

2033/34F

2031/32F

2028/29F

2026/27F

2024/25F

2022/23F

2019/20F

2017/18F

2013/14

2015/16F

2011/12

2009/10

2007/08

0

2005/06

Cyclical components

Forecast 2003/04

Stamp duties 9.1%

10 2001/02

Land premium 18.5%

19.8% (HKD 0.9trn)

1999/00

Salary tax 12.2%

1997/98

Investment income 6.6%

2040/41F

Others 27.0%

50

2038/39F

Profit tax 26.5%

Consolidated Fiscal Revenue (% of GDP, Shock case) Consolidated Fiscal Expenditure (% of GDP, Historical enhancement) Consolidated Fiscal Expenditure (% of GDP, 2% enhancement) Consolidated Fiscal Expenditure (% of GDP, 1% enhancement) Consolidated Fiscal Expenditure (% of GDP, No enhancement)

60

2035/36F

FY 2013/14 Consolidated Fiscal Revenue (HKD 455bn)

Source: Treasury Dept., Credit Suisse estimates

2

For details on Hong Kong's long-term fiscal challenge, please see "Hong Kong: No more delay in widening the tax base," published 10 March 2014.

Hong Kong Strategy

12

30 November 2015

Figure 32: Hong Kong—selected economic indicators 2009

2010

2011

2012

2013

2014

2015E

2016F

2017F

Real GDP growth (%)

-2.2

6.8

4.6

1.7

3.1

2.5

2.3

2.0

2.2

Growth in real private consumption (%)

0.2

6.1

8.4

4.1

4.6

3.2

4.6

2.7

2.3

Growth in real fixed investment (%)

-3.5

7.7

10.2

6.8

2.6

-0.2

-0.7

0.8

0.3

Fixed investment (% of GDP)

21.7

21.9

23.1

24.2

24.1

23.5

22.8

22.5

22.1

212.7

227.7

248.0

261.2

274.2

289.2

304.9

312.8

317.2

7.0

7.1

7.1

7.1

7.1

7.2

7.2

7.2

7.3

30,277

32,281

35,010

36,716

38,390

40,324

42,337

43,256

43,689

5.5

4.0

3.2

3.5

3.3

3.3

3.3

3.8

4.0

CPI inflation (%, December over December)

1.3

3.0

5.7

3.7

4.3

4.9

2.0

1.7

1.5

CPI inflation (% change in average index for the year)

0.5

2.4

5.3

4.1

4.3

4.4

3.0

2.9

1.4

Exchange rate (HKD per USD, end-year)

7.76

7.77

7.78

7.76

7.76

7.76

7.75

7.80

7.80

Exchange rate (HKD per USD, average)

7.75

7.77

7.78

7.76

7.76

7.76

7.75

7.78

7.80

REER (% year-on-year change December to December) (1)

-1.9

-4.4

0.6

2.4

3.3

3.4

2.0

1.6

0.1

Nominal wage growth (% year-on-year change, average)

-1.0

2.5

6.0

2.0

3.3

3.9

1.0

0.7

0.5

3-month HIBOR (%, end-year)

0.1

0.3

0.3

0.4

0.4

0.4

0.6

1.0

1.5

General government fiscal balance (% of GDP)

1.6

4.2

3.8

3.2

0.6

3.3

1.5

0.7

0.1

General government primary fiscal balance (% of GDP)

1.6

4.3

3.8

3.2

0.6

3.3

1.6

0.7

0.2

17.6

17.0

18.8

18.5

20.4

17.6

18.5

19.9

20.5

0.7

0.6

0.6

0.5

0.5

0.5

0.5

0.5

0.5

210.3

211.6

219.0

231.8

250.1

256.0

257.0

263.0

272.0

5.3

8.0

12.9

11.1

13.3

7.9

5.8

5.3

5.2

165.1

196.2

207.5

202.8

225.8

237.8

217.9

217.9

220.3

30.3

27.5

15.4

2.5

16.9

11.0

-3.4

2.9

2.8

154.8

192.2

208.8

218.8

231.9

235.0

215.8

217.9

222.3

6.5

33.2

18.6

9.9

11.3

6.9

-3.2

3.9

3.8

Exports (goods and non-factor services, % of GDP)

191.2

219.4

225.5

225.6

227.9

219.6

203.8

201.0

200.1

Imports (goods and non-factor services, % of GDP)

183.4

213.5

221.6

224.4

227.3

219.6

201.9

200.0

198.9

Exports (goods and non-factor services, % increase in $ value)

-11.0

22.8

11.9

5.4

6.1

1.6

-2.2

1.1

1.0

Imports (goods and non-factor services, % increase in $ value)

-10.3

24.7

13.0

6.6

6.4

1.9

-3.1

1.6

0.8

Current account balance ($bn)

21.2

15.9

13.8

4.1

4.1

5.4

10.1

8.7

11.7

National accounts, population and unemployment

Nominal GDP ($bn) Population (mn) GDP per capita ($) Unemployment (% of labor force, end-year) Prices, interest rates and exchange rates

Fiscal data

General government expenditure (% of GDP) Gross general government debt (% of GDP, end-year) (2) Money supply and credit Broad money supply (HKD M2, % of GDP) Broad money supply (HKD M2, % year-on-year change) Domestic credit (% of GDP) Domestic credit (% year-on-year change) Domestic credit to the private sector (% of GDP) Domestic credit to the private sector (% year-on-year change) Balance of payments

Current account (% of GDP)

9.9

7.0

5.6

1.6

1.5

1.9

3.3

2.8

3.7

Net FDI ($bn)

-3.7

-15.6

0.2

-13.2

-6.4

-39.2

-39.0

-39.0

-39.0

Scheduled external debt amortization ($ bn) (3)

10.3

11.4

11.8

11.9

12.0

12.1

12.2

12.3

12.4 375.0

Foreign debt and reserves Foreign debt ($bn, end-year) (4)

79.0

100.7

125.8

146.1

171.0

213.2

260.5

314.4

Public ($bn)

1.7

1.7

1.5

1.9

1.7

1.5

2.0

2.5

3.1

Private ($bn)

77.3

98.9

124.3

144.1

169.4

211.7

258.5

311.9

371.9

37.1

44.2

50.7

55.9

62.4

73.7

85.5

100.5

118.2

Foreign debt (% of GDP, end-year) Foreign debt (% of exports of goods and services)

19.4

20.1

22.5

24.8

27.4

33.6

41.9

50.0

59.1

Central bank gross FX reserves ($bn)

255.8

268.7

285.4

317.3

324.8

342.6

365.5

387.0

411.7

Central bank gross non-gold FX reserves ($bn)

255.8

268.7

285.4

317.3

324.8

342.6

365.5

387.0

411.7

(1) Real effective exchange rate, increase indicates appreciation. (2) Also includes debt issued under the Government Bond Program. Excludes debt guaranteed by the government. (3) Scheduled and estimated amortizations for total medium- and long-term public and private sector debt. (4) Non-bank foreign debt to HK entities. Source: Census and Statistics Department, Hong Kong Monetary Authority, CEIC, Credit Suisse The above section (Pages 5-14) is an excerpt from Christiaan Tuntono's Economic Research report, entitled Hong Kong: A long winter, published 27 November 2015. Please refer to this report for more information and important disclosures.

Hong Kong Strategy

13

30 November 2015

Hong Kong 2016 outlook Structural adjustment continues The US will likely raise interest rates finally some time during 2016, and this will be a key test to the HK property market after years of extremely low funding cost, which has helped drive property prices so high. The slowing Chinese economy plus a lesser number of Chinese tourists coming to HK will also hurt. From the HK market standpoint, if Macau gaming stocks enjoy an earnings rebound in 2016, it will be a major driver of MSCI HK earnings growth, and vice versa.

Vincent Chan 852 2101 6568 [email protected]

Earnings outlook Property prices and retail rents are two most important local factors affecting the earnings outlook of HK in 2016. Declining property prices and a weakening Chinese economy might also hurt the asset quality of banks in HK, but given the low leverage of the HK economy overall, the risk is not particularly high at this stage. Finally, from the HK market standpoint, the key swing factor for MSCI HK earnings might not be the local HK economy, but whether earnings of the Macau gaming sector could rebound as expected.

Property prices, a weakening Chinese economy and earnings of Macau gaming are important factors affecting the HK outlook in 2016

Figure 33: MSCI Hong Kong—2015 and 2016 IBES EPS estimate (HK$)

Source: Thomson Reuters IBES, MSCI

Valuations HK's PB is at a rather low level, similar to PE, which provides a case for some stock market rebound in 2016. Given the large amount of non-HK earnings for MSCI HK stocks, weakening of the HK economy might not have too much impact on market earnings.

Hong Kong Strategy

HK's PB is low

14

30 November 2015

Figure 34: MSCI Hong Kong 12M fwd PE chart

Figure 35: MSCI Hong Kong trailing PB chart

18

1.9

17

1.8

16

1.7 1.6

15

1.5

14

1.4

13

1.3

12

1.2

11

1.1

10 Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

1.0 Dec-10

MSCI HONG KONG - 12MTH FWD P/E RTIO Source: Thomson Reuters IBES, MSCI

Dec-11

Dec-12

Dec-13

Dec-14

MSCI HONG KONG - PRICE/BOOK RATIO Source: Thomson Reuters, MSCI

What could surprise in 2016? US interest rates. Given the HKD peg against the USD and the importance of the property market to the SAR, if the US raises interest rates, it will have a huge impact on the economy. Our current expectation is that the US will have a mild interest rate hike and HK's property sector will face some mild downward pressure. However, if the US rate hike happens sooner and steeper than expected earlier, or if the HK property market either does not react or reacts severely to the rate hike, it could have a meaningful impact on share prices of HK's property stocks one way or the other.

US interest rates and China slowdown are surprises of the HK market in 2016

China slowdown. Over the past few years, there has been a lot of USD borrowing by the Chinese companies in HK. If the economic slowdown is fuelled by RMB depreciation, it could create some headwinds to the HK banks.

Earning downgrades We believe that airlines, banks, property developers and retailers will be negatively impacted. Casualties would be Cathy Pacific, BEA, Kerry, Wheelock, Sa Sa and Luk Fook. Figure 36:Table of potential casualties of the slowdown in this winter

Company

RIC

Cathay Pacific BEA Wheelock Kerry Prop Sa Sa Luk Fook

0293.HK 0023.HK 0020.HK 0683.HK 0178.HK 0590.HK

Rating Previous N U O O U N

Rating Price TP TP TP Analyst Current loc Previous Current Change % Remark U 14.22 14.9 12.5 (16.1) We see few reasons to chase CX at current levels, having recently cut our rating to UNDERPERFORM U 28.45 23 22 (4.3) We trim our EPS estimates by 4-15% on weaker topline growth and higher credit cost assumptions N 34.55 40.14 37.5 (6.6) Higher risk from large exposure in the New Territories, relatively higher gearing to peers and unappealing dividend support N 22.45 32.29 22.3 (30.9) Kerry is the worst performing HK developer ytd and now trades at 65% NAV discount, the steepest among HK developers U 2.77 1.75 1.70 (2.9) We cut future EPS estimates by 1-4% on the negative impact from slower HK economic growth. N 18.38 20.3 19.0 (6.4) We cut future EPS estimates by 6-8% on the negative impact from lower HK economic growth.

Prices as of 26 November 2015; Source: Company data, Credit Suisse estimates

Hong Kong Strategy

15

30 November 2015

Sector analysis

Hong Kong Strategy

16

30 November 2015

Airlines: Cyclical pressures add to secular headwinds While we go into 2016 retaining a positive view on the airline sector's prospects where we see low jet fuel prices continuing to impact cost lines positively (as jet fuel hedges roll off) and as low fares (a function of low fuel prices) drive passenger volumes ahead of trend. But all airlines are rarely created equal.

Timothy Ross 65 6212 3337 [email protected]

While benefitting from lower fuel prices, we see Cathay Pacific (CX) as exposed to pressures unlikely to hamper the performance of most other airlines in the region. Congestion at its primary hub at Chep Lap Kok airport is expected to limit growth to aircraft upgauging by the end of 2016 when all landing slots are expected to be occupied while increasingly the higher-yielding PRC passengers that used to transit HKG on CX are flying long haul flights directly and more regional airports compete for CX' existing transfer traffic. Meanwhile, the economic slowdown that we are projecting in its home market will likely result in weaker origin and destination (O&D) traffic flows that will remove positive pressures on load factor, will negatively affect business mix (given the high yield nature of outbound point to point and its disproportionate premium class component) and will thereby limit any yield recovery as well as impacting demand growth.

But CX faces unique pressure as capacity constraints and lower economic growth likely impact revenues

While CX does not release details of its traffic breakdown, we assume that with 48% of the seats operated at Hong Airport by itself and subsidiary Dragonair (KA), it mirrors the split observable for the airport as a whole. HKG handled close to 61 mn passengers last year, although adjusting for the double counting of transit traffic the actual number of passengers was about 20 mn fewer. Of these 22% originated from Hong Kong and are most at risk to a weaker economic outlook as earrings power and job security diminish.

Hong Kong's airport handles ~40 mn unique passengers a year…

Figure 37: Hong Kong International Airport passenger mix (2014)

…which less than a quarter originate in HKG – we assume the same mix for CX

Resident departures 22% Visitor arrivals 31%

Transit passengers 47%

Source: Hong Kong International Airport, Hong Kong Immigration Department, Credit Suisse estimates

The significant impact that visitor arrival and transit passengers has on CX's volumes accounts for the fact that correlation of its passenger traffic (RPKs) with Hong Kong's GDP growth is a less than perfect 50%. The reason it is so high also probably reflects the fact that neighbouring countries' rates of economic expansion are also correlated with Hong Kong's – especially China from whom many of its transit passengers originate. Additionally, revenues probably correlate more closely than traffic with the territory's economic growth rates given the high proportion of point to point and business class travel that originates in Hong Kong where ~15 of the airline's top 20 clients are financial institutions and heavily geared into the stock market cycle.

Hong Kong Strategy

This accounts for the lessthan-perfect correlation between traffic and economic growth…

17

30 November 2015

Figure 38: Hong GDP vs. Cathay Pacific passenger traffic (YoY % chg.) 15.0%

40.0% 30.0%

10.0%

…although at ~50% it is still robust, with revenue correlation likely higher

20.0%

10.0% 5.0%

0.0% -10.0%

0.0%

-20.0% -30.0%

-5.0%

-40.0% -50.0%

-10.0%

-60.0% 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Hong Kong GDP (2013 prices)

CX RPKs (RHS)

Source: Company data, CEIC

We also point to the relationship between freight volumes and slower growth in both Hong Kong and China (from where about 60% of Hong Kong's freight traffic by value originates). Air cargo has suffered tough comps for most of the back half of 2015 as the beneficial effects of US West Coast port congestion and the launch of the iPhone 6 conspired in the sector's favour last year. The absence of these factors will continue to reverberate through until 1Q16 at least, while excess capacity remains a hallmark of the sector – even if supplied unintentionally in the shape of passenger aircraft belly space. CX has one of the largest exposures to freight in the region, with around 23% of revenues generated directly, but even more of its earnings exposed via its dedicated freight handling terminal in HKG and its investment in Air China Cargo.

Freight volumes are also driven by both HKG's and China's rates of economic activity – both of which are declining

At the same time as CX faces a less certain demand growth environment in 2016 than many of its peers airlines, its flight crews have begun their annual agitation for more compensation. Having agreed to pay them ~4.5% more in 2015 than in 2014 last year, the company now faces demands for closer to a 6% rise in 2015 or risk facing industrial action over the peak holiday periods of Christmas and/or the Lunar New Year. While such posturing by labour is not a new phenomenon, the airline has been forced to make concessions to its unions in the past and – while we do not believe that staff will receive what they want – wage pressures ahead of inflation (which we expect to average 3.3% next year) is another unhelpful pressure on earnings at a time when revenue growth is expected to weaken.

Wage pressures are nothing new for CX, but this year's 6% demand arrives as earnings peak

Our downgrade in earnings, recommendation and target price comes on the heels of an analyst briefing where the company confirmed the dire state of the freight market and the difficulties it faced in stemming passenger yield decline. We tabulate below the impact on 2016 earnings estimates of a range of passenger demand and payroll expense growth scenarios. Every 1% change in RPK growth assumptions for next year hits earnings by 9%.

1% change in RPKs impacts 2016 earnings by 9%

Pay rise

Figure 39: Earnings sensitivity to changes in traffic and payroll estimates (2016E)

2.0% 3.0% 4.0% 5.0% 6.0%

2.0%

3.0%

5,588 5,437 5,286 5,135 4,984

6,157 6,005 5,854 5,703 5,552

Traffic growth 4.0% 6,725 6,574 6,423 6,272 6,121

5.0%

6.0%

7,294 7,143 6,992 6,840 6,689

7,862 7,711 7,560 7,409 7,258

Source: Credit Suisse estimates

Hong Kong Strategy

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30 November 2015

Banks: Surviving a slowdown Hong Kong banks' top-line growth is likely to face headwinds driven by slowing loan growth and non-interest income, only partly offset by a slight improvement in NIMs (in line with the lift-off in the US rate cycle). Asset quality in general should continue to deteriorate gradually but we do not expect a big shock near term, as long as the economic slowdown is gradual and interest rates do not spike.

Sanjay Jain 65 6306 0668 [email protected]

Top-line headwinds: Better NIMs the only silver lining Loan growth: Tracking much below expectations, likely to continue into 2016 A combination of HK and China slowdowns will likely increase downside risks to structural loan growth in Hong Kong. Low to mid-single digit is probably the new normal. Figure 40: Hong Kong system loan growth YoY (%) 65

For use in HK

For use outside HK

Trade fin

Figure 41: Hong Kong system—loan-deposit ratio (%)

Total loans

100

HK$

FC

Overall

Overall ex RMB

Dec-06

Dec-08

Dec-10

90 45 80 70

25

60 5

50 40

-15

30 -35 Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

20 Dec-04

Dec-13

Source: Hong Kong Monetary Authority (HKMA)

Dec-12

Dec-14

Source: Hong Kong Monetary Authority (HKMA)

Non-interest income: Capital market activity continues to slow Slowing capital market activity could crimp one of the key drivers of top-line growth in recent years. Non-interest income contribution is now close to historical high levels. Figure 42: Monthly HK market equity value turnover (US$) 30,000

Figure 43: Non-II as % of revenue 45

41

40

25,000

37 34

35

20,000

30

29

31

33

32

34

36

34 29

25

15,000

20

10,000

14

15 10

5,000

5

0

0 Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

BOCHK

HK stock exchange value traded (US$)

Source: the BLOOMBERG PROFESSIONAL™ service

Hong Kong Strategy

HSB 2007

BEA 2009

DSB

1H15

Source: Company data

19

30 November 2015

NIMs: The only silver lining, but positive impact likely to be muted by drag from China; Hang Seng better placed The imminent lift-off in US short-term interest rates is good news for big bank NIMs, but China rate cuts are likely to be a drag. Hang Seng is better placed than peers. Figure 44: 3M HIBOR vs 3M USD LIBOR (%)

Figure 45: Net interest margins (%) 2.45

0.45

2.25

0.40

2.05

0.35 1.85

0.30 1.65

0.25

1.45

0.20 Jan-15

1.25

Mar-15

May-15

Jul-15

3M HIBOR

Sep-15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15

Nov-15

BOCHK

3M USD LIBOR

Source: the BLOOMBERG PROFESSIONAL™ service

HSB

BEA

Source: Company data

Asset quality: Risks are clearly to the downside Given the very low base, there is only one way for NPLs to go. Given the very low interest rates, our base is still a gradual asset deterioration, but normalisation to historical averages could be a big drag on earnings for all HK banks. Figure 46: NPL ratio (%) 2.0

Figure 47: Average credit cost through cycle (bp of loans) 70

1H14

2H14

Asset quality in general should continue to deteriorate gradually

'04-'09 avg

1.9

1H15

1.8

'10-'1H15 avg 58

60

1.6

50

1.4 1.2 1.0

0.9

0.8

30

0.8

0.6

0.6 0.4

40

1.1

0.5

0.5

0.4

0.4

0.3 0.3 0.3

0.2

20

22

19

12 10

28

25 14

8

0 BOCHK

0.0 BOCHK

Source: Company data

HSB

BEA

HSB

BEA

DSB

DSB

Source: Company data, Credit Suisse estimates

BEA least preferred; Hang Seng relative top pick BEA is our least preferred pick as it is most exposed to China asset quality risk and does not gain as much from an improvement in short-term rates. Hang Seng is our relative top pick—relatively immune to China asset quality risks, key beneficiary of higher US rates and a potential special dividend with FY results.

Hong Kong Strategy

Relative top pick: Hang Seng; least preferred pick: BEA

20

30 November 2015

Property: Residential has peaked Expect housing prices to drop by 15%/5% in 2016/2017 The HK residential property market has seen the turning point, and secondary price (CCL) reached its peak in September after an 11% run since the start of the year. The latest CCL figure of 141.13 is 4% less than the peak of 146.92. Property developers have also turned conservative in setting the pricing of recent launches. Figure 48: HK property prices—CCL

Kelvin Tam, CFA 852 2101 6582 [email protected]

Figure 49: Price premium of primary vs secondary narrowing 50%

160

2016E: -15%

140

40%

120 30%

2017E: -5%

100

20%

-56% (1998 credit crunch)

80 60

10%

40

0% Mar-05 Jan-06 Nov-06 Sep-07

20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12

Jul-13 May-14 Mar-15

-10%

Aggregated CCL

Price premium of primary vs secondary

Source: Company data, Credit Suisse estimates

Source: Midland Research, Credit Suisse estimates

With a weakening economy, rising interest rates, increasing completions and a weaker labour market, we expect the HK residential market to weaken. However, it will not crash in the absence of a severe credit crunch. We forecast housing price will drop by 15% in 2016 and 5% in 2017.

We expect the HK residential market to weaken

Figure 50: Forecasts on residential property prices Old New

2015

2016

2017

-15% 5%

0% -15%

n.a. -5%

Source: Company data, Credit Suisse estimates

Muted NAV impact but those with more New Territories exposure are more vulnerable The impact on NAV is muted with the new property price assumptions. Housing prices YTD 2015 have risen 6.6% compared with our original forecast of a 10% decline set at the beginning of the year. Hence the new assumptions have just offset the ASP increase in FY15 and pushed backward the timing of price correction.

The impact on NAV is muted with the new property price assumptions

Figure 51: NAV change with new residential price assumptions and GAV breakdown by business NAV

CKP SHKP Henderson Wheelock New World Sino Kerry

1113.HK 0016.HK 0012.HK 0020.HK 0017.HK 0083.HK 0683.HK

% of GAV

Old

New

% change

107.6 206.5 86.7 49.8 18.5 22.8 64.6

104.6 205.5 86.6 49.3 18.5 22.5 63.7

-2.7% -0.4% -0.2% -1.1% -0.2% -1.1% -1.4%

HK HK rental residential 19% 45% 21% 47% 18% 42% 16% 8% 25% 39% 17% 74% 19% 20%

China residential 26% 5% 7% 0% 0% 6% 17%

China rental 4% 24% 9% 0% 0% 2% 38%

Others 6% 3% 24% 76% 35% 2% 7%

Source: Company data, Credit Suisse estimates

Hong Kong Strategy

21

30 November 2015

While the overall impact on NAV is minimal, we believe property developers with more exposure in some districts in New Territories, such as Tseung Kwan O, Yuen Long, Tuen Mun, Tai Po where future supply is abundant, are more vulnerable to price corrections. Wheelock has the highest land bank exposure to heavy supply districts. Figure 52: Residential land bank exposure to heavy supply districts (Tseung Kwan O, Yuen Long, Tuen Mun, Tai Po) 80% 70%

68%

65%

60% 50% 40%

35%

34%

30%

21%

20%

19% 14%

10% 0% Wheelock

SHKP

Kerry

CKP

Sino

NWD

Henderson

% of residential landbank at heavy supply district

Source: Company data, Credit Suisse estimates

High gearing unfavourable amid a down-cycle and interest rate hike Developers with strong balance sheets and cash flows are more defensive amid a property downturn. Those with higher leverage are more vulnerable to a weakening housing market, a low sell-through rate and slow cash collection. In addition, interest rate hikes may add to the financial burden on developers with high gearing. Wheelock, NWD and Kerry have the highest gearing among developers.

Developers with strong balance sheets and cash flows are more defensive amid a property downturn

Figure 53: Gearing of various property developers 30%

27%

26%

26%

25% 18%

20% 15%

12% 9%

10% 5% 0% -5%

Wheelock

NWD

Kerry

CKP

Henderson Land

SHKP

Sino

-10% -15% -20%

-18% Net gearing

Source: Company data, Credit Suisse estimates

Hong Kong Strategy

22

30 November 2015

Stock calls We believe Wheelock and Kerry will be hit most among the HK developers by the economic slowdown and the property price correction. While Wheelock has large exposure to New Territories, Kerry is a victim of weakening HK and China economies. Their relatively high gearing will also pose higher risk in the situation of further deterioration. We revise down our NAV assumptions and target prices for HK property developers. We are downgrading Wheelock and Kerry from Outperform to NEUTRAL.

Kerry and Wheelock will be hit most

Figure 54: Summary of changes Rating Developer

RIC

CKP SHKP Henderson Wheelock NWD Sino Kerry

1113.HK 0016.HK 0012.HK 0020.HK 0017.HK 0083.HK 0683.HK

Target Price (HK$)

NAV (HK$)

EPS (HK$) - FY16E

Old

New

Old

New

Old

New

Old

New

% change

O O O O N O O

O O O N N O N

80 152 60.71 40.14 8.3 15.5 32.29

77.6 152.1 60.6 37.5 8.3 15.3 22.3

107.6 206.5 86.7 49.9 18.5 22.8 64.6

104.6 205.5 86.6 49.3 18.5 22.5 63.7

6.73 8.84 3.04 5.34 0.88 0.89 2.88

6.65 8.89 2.88 5.07 0.87 0.89 2.46

-1% 1% -5% -5% -1% 0% -14%

Source: Company data, Credit Suisse estimates

Figure 55: Valuation summary for HK property developers Company

RIC

CKP SHKP Henderson Wheelock NWD Sino Kerry

1113.HK 0016.HK 0012.HK 0020.HK 0017.HK 0083.HK 0683.HK

Rating

O O O N N O N

Share Target Target Price Price disc ($) ($) (%) 52.4 77.6 98.3 152.1 48.6 60.6 34.6 37.5 7.9 8.3 11.9 15.3 22.4 22.3

-26% -26% -30% -24% -55% -32% -65%

Upside Mkt FY15 (Disc)/ +/- cap NAV Prem (%) (US$ bn) ($/sh) (%) 48% 55% 25% 8% 6% 29% 0%

26.1 36.7 20.7 9.1 9.1 9.3 4.2

104.6 205.5 86.6 49.3 18.5 22.5 63.7

-50% -52% -44% -30% -57% -47% -65%

Core PE (x) FY15 FY16 FY17 10 14 16 6 10 14 9

8 11 17 7 9 13 9

8 11 15 8 9 14 8

Yield (%) FY15 4.8% 3.4% 2.2% 3.1% 5.4% 4.4% 3.4%

P/B Net (x) gearing FY15 FY15 0.78 0.61 0.65 0.35 0.39 0.60 0.39

18% 9% 12% 27% 26% -18% 26%

Source: Company data, Credit Suisse estimates

Hong Kong Strategy

23

30 November 2015

Retail: Sinking with the slowdown We believe the structural slowdown in HK economic growth may hit the Hong Kong retail sector badly, especially with the expected declining visitation from China in the next few years. We believe the HK retail sector will face headwinds from: (1) a China economic growth slowdown, which may hurt not only visitors' spending but also local residents' consumption; (2) the Chinese visitation decline on diversion to other tourist areas due to currency and visa access reasons; (3) the mix downgrade of the Chinese visitors which implies less spending power (e.g. the SD-same day investors, which outgrew ONovernight visitors, spent only HK$2,414 per capita while ON visitors spent HK$7,960 per capita in 2014); and (4) the potential conflict between mainland Chinese and locals which may affect the visitors' willingness to spend in HK.

Eva Wang 852 2101 7365 [email protected]

We believe cultural conflict may further damage the consumer sentiment in Hong Kong with the economic growth slowdown, especially among the Chinese visitors, as they start to question their personal safety and whether they can be treated fairly when shopping in Hong Kong. The rising tension may bring the unexpected negative impact to HK retail.

Cultural conflict increase will be another hit

Figure 57: 10YR+ Chinese visitation change (mn person)

Arrival under package tour

50

0

Source: CEIC

Source: CEIC

Figure 58: Visitation mix change with more SD tourists

Figure 59: Tourist spending mix (2013)

43

45

32

32

39

37

33

32

31

23

25

28

2007

2008

2009

Hong Kong Strategy

32

35

28

31

25

22

31

31

Others 35% ON China 46%

41

44

46 SD China 19%

2010

SD China

Source: CEIC

33

9M15

0

2014

10

2013

10

2012

20

2011

20

2010

30

2009

30

2006

40

2003

China package tour 26%

40

2005

China IVS 52%

50

YoY % chg in total Mainland visitation

2004

Asia 13%

(%)

Arrival under IVS

2008

America Others 3% 3%

Europe 3%

2007

Figure 56: Hong Kong visitation mix (2014)

2011

ON China

2012

2013

2014

Others

Source: HKTB

24

30 November 2015

HK retail sales value (RSV) has a high correlation with the mainland Chinese visitation to Hong Kong. As we expect more visitation decline in the next few years due to structural changes, we expect the HK RSV to be under even greater pressure. In addition, the spill-over effect from the prospect of a weaker labour market and the persistent pressure on the property sector implies a further decline on the consumption of local residents in Hong Kong. Therefore, the chance of local spending growth to offset declining visitation consumption is very low in the foreseeable future.

Negative spill-over from potential weakness in labour and property markets

Figure 60: HK RSV slowdown coincides with Chinese visitation change YoY chg in HK RSV

YoY chg in total Mainland visitation

36 27 18 9 0 -9

-18 09/11

03/12

09/12

03/13

09/13

03/14

09/14

03/15

09/15

Source: CEIC

Among the listed retail companies in Hong Kong, most of their revenues generated in Hong Kong are highly reliant on the Chinese visitation. We believe those with heavy exposure to revenue streams in Hong Kong and a lack of expansion or contribution from other regions will suffer most. We least prefer Sa Sa because: (1) it generates 82% of revenue and more than 100% of EBIT from HK/Macau with least diversification, including a lack of exposure to mainland China; (2) tourists can easily be diverted to buy cosmetics in other tourist areas such as Korea and Japan; and (3) many consumers in China now have easy access to fast growing ecommerce cosmetics products which overtook Sa Sa's traditional advantages in product listing and pricing. We believe Sa Sa is likely to be hit the most by the structural issues.

Sa Sa will be hit most: all profits from HK/Macau

Luk Fook is the second unfavourable stock due to: (1) heavy exposure to HK/Macau with 60% of revenue and 66% of EBIT from HK/Macau; (2) least contribution from China among jewellers (25% of its total revenue only) due to the licensee model for 94% of its stores in China; and (3) overhang remains regarding the cultural conflict which may affect the visitors' willingness to spend in HK jewellery stores. We believe Luk Fook remains most vulnerable to the HK economic slowdown among the jewellers.

Luk Fook is the second most vulnerable among jewellers

Figure 61: Revenue exposure breakdown

(%) Chow Tai Fook Lifestyle Luk Fook Chow Sang Sang Sa Sa

Revenue by region Hong Kong/ Mainland Macau China 41.1 78.6 59.7* 58.4 81.8

58.9 21.4 25.1* 40.8 3.9

Revenue from total exposure to Other Chinese as % of Mainland Chinese regions retailing in HK customers 0.0 0.0 15.1* 0.8 14.3

56.4 40.0^ 58.0^ 57.2 71.5

82.1 52.8 59.7 74.2 62.4

Note: * classified by HK, Mainland China, Macau and overseas. ^estimated; as of the last reported full year. Source: Company data, Credit Suisse estimates

Hong Kong Strategy

25

30 November 2015

Company analysis

Hong Kong Strategy

26

30 November 2015

Asia Pacific / Hong Kong Regional Banks

Bank of East Asia (0023.HK / 23 HK) Rating Price (26 Nov 15, HK$) Target price (HK$) Upside/downside (%) Mkt cap (HK$ mn) Number of shares (mn) Free float (%) 52-week price range ADTO - 6M (US$ mn)

UNDERPERFORM* 28.45 (from 23.00) 22.00¹ -22.7 75,134 (US$ 9,695) 2,640.93 52.6 35.6 - 25.2 9.9

*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Anand Swaminathan 65 6212 3012 [email protected] Sanjay Jain 65 6306 0668 [email protected] Dawei Lee 65 6212 3004 [email protected]

DECREASE TARGET PRICE

China asset quality key risk ■ Underwhelming 1H15 results; quick turnaround unlikely. BEA reported 1H15 core net profit of HK$2.7 bn (0.2% HoH, -17.1% YoY), below expectation on broad-based weakness in its earnings drivers, only partly offset by tighter opex control. All top-line drivers are weak: loan growth (-1.0% HoH) was weak, driven by China and trade book; NIMs (-4 bp HoH) remained soft on China and non-II, dragged down by swap funding costs. The earnings weakness should persist in 2H with key trends likely sustaining—tighter lending criteria could mean slower loan growth; China rate cuts are affecting NIMs, and non-interest income could be volatile. ■ China asset quality remains a concern. NPLs have more than tripled YoY, and coverage level is only 30%. While it expects some of the recent government measures to have an impact, it doesn’t believe there is a quick turnaround in sight. Credit costs in China (92 bp in 1H) are likely to remain elevated in 2H. BEA has significantly tightened the lending criteria. China risks will probably have multiple effects: (1) tightening lending criteria in China likely to further bring down already soft loan growth, and (2) China NIMs will continue to be a big drag. ■ Least preferred among HK banks: BEA is our least preferred HK bank: (1) it is most exposed to China asset quality risks (potential risks to both top-line growth and credit costs) and (2) it does not gain as much from an improvement in short-term rates, given its liability profile in HK and a bigger drag from China NIMs. We trim our EPS estimates by 4-15% on weaker topline growth and higher credit cost assumptions. We reduce our target price to HK$22.00 (from HK$23.00) but maintain UNDERPERFORM.

Share price performance Price (LHS)

Rebased Rel (RHS)

40 35 30 25 20 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 110 100 90 80

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M -3.9 -1.1

3M 7.2 3.1

12M -13.5 -6.8

Financial and valuation metrics Year Pre-prov Op profit (HK$ mn) Pre -tax profit (HK$ mn) Net attributable profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) CS adj. BVPS (HK$) P/B (x) ROE (%) ROA (%) Tier 1 ratio (%)

12/14A 8,383.0 8,424.0 6,033.0 2.59 n.a. n.a. 2.9 11.0 3.9 29.6 0.96 9.1 0.78 12.7

12/15E 8,179.6 7,809.1 5,239.2 2.14 -3.7 2.38 -17.6 13.3 3.6 30.5 0.93 7.3 0.64 12.3

12/16E 9,058.5 7,756.4 5,766.0 2.27 -9.9 2.41 6.3 12.5 3.4 31.6 0.90 7.4 0.66 12.1

12/17E 9,964.7 8,302.1 6,197.5 2.41 -14.8 2.60 5.9 11.8 3.6 33.2 0.86 7.5 0.66 12.1

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

27

30 November 2015

Bank of East Asia 0023.HK / 23 HK Price (26 Nov 15): HK$28.45, Rating: UNDERPERFORM, Target Price: HK$22.00, Analyst: Anand Swaminathan Target price scenario Scenario Upside Central Case Downside

Key earnings drivers TP 22.00

Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (HK$ mn) Interest income Interest expense Net interest income Fee and commission income Trading income Insurance income (& premiums) Other income Total non-interest income Total income Personal expense Other expenses Total expenses Pre-provision profit Loan loss provisions Operating profit Associates/JV Other non-operating inc./(exp.) Pre-tax profit Taxes Net profit before minorities Minority interests Preferred dividends Exceptionals/extraordinaries Reported net profit Analyst adjustments Net profit (Credit Suisse) Balance sheet (HK$ mn) Assets Gross customer loans Risk provisions Net customer loans Interbank Loans Investment & Securities Cash & cash equivalents Fixed Assets Intangibles Other assets Total assets Liabilities Interbank deposits Customer deposits Total deposits Other liabilities Total liabilities Shareholders' equity Minority interests Preferred stock Total liabilities & equity

%Up/Dwn Assumptions (22.67) 12/14A 2.9 11.0 0.96 1.02 3.90 12/14A 27,732 15,079 12,653 4,146 892.0 — 541.0 5,579 18,232 5,484 4,365 9,849 8,383 1,001 7,382 645.0 397.0 8,424 1,650 6,774 113.0 330.0 — 6,331 (298.0) 6,033 12/14A

12/15E (17.6) 13.3 0.93 0.99 3.60 12/15E — — 12,214 4,382 290.0 — 734.8 5,407 17,621 5,182 4,259 9,441 8,180 1,526 6,654 520.0 635.0 7,809 1,546 6,263 118.6 330.0 — 5,814 (575.0) 5,239 12/15E

12/16E 6.3 12.5 0.90 0.95 3.38 12/16E — — 12,991 4,733 600.0 — 793.6 6,127 19,117 5,597 4,462 10,059 9,058 1,848 7,210 546.0 — 7,756 1,536 6,221 124.6 330.0 — 5,766 — 5,766 12/16E

12/17E 5.9 11.8 0.86 0.90 3.57 12/17E — — 14,092 5,134 600.0 — 857.1 6,591 20,684 6,045 4,674 10,719 9,965 2,236 7,729 573.3 — 8,302 1,644 6,658 130.8 330.0 — 6,197 — 6,197 12/17E

503,962 1,354 502,608 50,769 99,985 70,358 8,573 3,955 59,643 795,891

513,044 4,034 509,010 53,307 119,125 81,530 9,259 3,955 68,670 844,857

543,024 5,882 537,142 55,973 142,261 75,292 10,000 3,955 78,693 903,316

574,926 8,118 566,808 58,771 170,234 64,940 10,800 3,955 90,432 965,940

33,323 548,184 581,507 145,504 727,011 68,880 — — 795,891

35,322 571,725 607,048 163,125 770,173 74,684 — — 844,857

37,442 606,029 643,470 179,680 823,150 80,165 — — 903,316

39,688 642,390 682,079 198,401 880,480 85,460 — — 965,940

Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$) (HK$) BVPS Tangible BVPS (HK$) DPS (HK$) Key ratios Profitability and margins ROE stated (%) ROE - CS adj. ROA - CS adj. Gearing (x) Asset quality (%) NPL/ gross loans B/S loan loss coverage Loan/ deposit ratio Capital ratios (%) Capital adequacy ratio Tier 1 ratio Equity Tier 1 ratio Growth(%) Revenue Operating expense Pre-provision profit Net profit Deposit

12/14A — — — — — 12/14A 2,325 2.59 29.6 27.9 1.11 12/14A

12/15E — — — — — 12/15E 2,450 2.14 30.5 28.9 1.02 12/15E

12/16E — — — — — 12/16E 2,537 2.27 31.6 30.0 0.96 12/16E

12/17E — — — — — 12/17E 2,574 2.41 33.2 31.7 1.01 12/17E

9.6 9.1 0.78 11.7

8.1 7.3 0.64 11.4

7.4 7.4 0.66 11.3

7.5 7.5 0.66 11.3

0.54 49 91.7

0.60 131 89.0

0.80 135 88.6

1.00 141 88.2

16.9 12.7 12.0

16.1 12.3 11.8

15.6 12.1 11.6

15.4 12.1 11.7

5.67 2.78 9.3 5.8 2.47

(3.35) (4.14) (2.4) (13.2) 4.29

8.49 6.54 10.7 10.1 6.00

8.20 6.57 10.0 7.5 6.00

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 18 16

14 12 10

8 6 4 2 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 1.80 1.60 1.40

1.20 1.00

0.80 0.60

0.40 0.20 0.00 2010

2011

2012

2013

Source: IBES

Hong Kong Strategy

28

30 November 2015

Asia Pacific / Hong Kong Airlines

Cathay Pacific (0293.HK / 293 HK) Rating UNDERPERFORM* Price (26 Nov 15, HK$) 14.22 Target price (HK$) 12.50¹ Upside/downside (%) -12.1 Mkt cap (HK$ mn) 55,939 (US$ 7,218) Enterprise value (HK$ mn) 107,450 Number of shares (mn) 3,933.84 Free float (%) 25.1 52-week price range 20.6 - 13.6 ADTO - 6M (US$ mn) 9.1 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Timothy Ross 65 6212 3337 [email protected]

Cyclical pressures add to secular headwinds ■ Home market demand under threat... We believe reduced economic growth expectations in Cathay Pacific's home market will likely have a negative impact on its passenger demand growth. Close to a quarter of its passengers originate in Hong Kong and account for even more of its passenger revenue given their high yield characteristics. Freight—already under pressure—will also be impacted by slower growth in both Hong Kong and China. ■ …while competition intensifies elsewhere. Along with the probability of waning demand growth, CX is likely to face escalating rivalry from other regional airports for connecting passengers, while many of its higher-yielding Chinese passengers opt for an increasing number of direct services. All of this as HKG approaches 100% utilisation, which of itself will limit CX' growth as the airport's largest user. We have highlighted these secular pressures in our 19 August note, Cathay Pacific, The beginning of the end? ■ Analyst briefing reinforces our negative view… We have lowered our earnings expectations for 2015 and beyond and lie 22% below consensus this year and 11% next. The source of our concern lies in fading freight demand and even weaker pricing in both the passenger and cargo divisions. ■ …with earnings risk lying to the downside. Into 2016, we estimate that every 1% shortfall in RPK growth relative to our estimates would hit earnings by 9%. With cabin crew agitating for 6% higher salaries, home market demand likely to wilt and constraints at its home hub, we see few reasons to chase CX at current levels, and thus downgraded our rating to UNDERPERFORM and our TP to HK$12.50.

Share price performance 22

Price (LHS)

Rebased Rel (RHS)

17 12 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 110 100 90 80

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M 3M 12M -7.5 -0.7 -11.5 -4.7 -4.8 -4.7

— —

Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)

12/14A 105,991.0 12,922.0 4,583.0 3,953.0 1.00 n.a. n.a. 42.1 14.2 2.5 8.4 1.1 6.9 84.9

12/15E 103,420.0 23,558.9 14,537.9 4,695.9 1.19 0 1.53 18.8 11.9 3.8 4.6 1.0 8.9 78.2

12/16E 106,096.5 21,451.2 12,308.0 6,078.9 1.55 0 1.72 29.5 9.2 4.9 4.9 1.0 10.9 69.2

12/17E 108,503.4 15,197.2 5,616.8 3,639.2 0.93 0 1.85 -40.1 15.4 2.9 6.9 0.9 6.2 67.9

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

29

30 November 2015

Cathay Pacific 0293.HK / 293 HK Price (26 Nov 15): HK$14.22, Rating: UNDERPERFORM, Target Price: HK$12.50, Analyst: Timothy Ross Target price scenario Scenario Upside Central Case Downside

TP 22.00 12.50 4.20

Income statement (HK$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (HK$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (HK$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

%Up/Dwn Assumptions 54.71 9.0x adj EV/EBITDAR in early 2011 (12.10) (70.46) 4.0x adj EV/EBITDAR in late 2009 12/14A 105,991 88,881 — 4,188 12,922 8,339 4,583 1,158 655 772 4,852 (803.0) 599 3,450 — 300.0 — 3,150 803.0 3,953 12/14A 4,583 — — 4,501 2,082 11,166 (14,818) (3,652) — — — — — (14,818) — (1,416) (1,956) — (3,372) (7,024) — (7,024) 12/14A 21,098 3,711 5,566 3,092 33,467 98,471 22,918 9,802 7,316 171,974 25,186 9,781 — 10,794 45,761 55,315 — 19,045 120,121 51,722 131.0 171,974

12/15E 103,420 75,372 — 4,490 23,559 9,021 14,538 1,320 (9,065) 1,800 5,953 — 934 5,018 — 322.5 — 4,696 — 4,696 12/15E 14,538 — — — (1,209) 13,329 (14,000) (671) — — — — — (14,000) — (2,111) (1,440) — (3,552) (4,222) — (4,222) 12/15E 21,098 3,711 5,566 3,092 33,467 103,838 24,718 9,802 7,316 179,141 25,186 9,781 — 10,794 45,761 53,875 — 25,067 124,703 54,307 131.0 179,141

12/16E 106,097 79,931 — 4,714 21,451 9,143 12,308 1,270 (5,302) 1,980 7,716 — 1,291 6,426 — 346.7 — 6,079 — 6,079 12/16E 12,308 — — — 2,507 14,815 (15,000) (185) — — — — — (15,000) — (2,733) (2,548) — (5,281) (5,466) — (5,466) 12/16E 21,098 3,711 5,566 3,092 33,467 110,101 26,698 9,802 7,316 187,384 25,186 9,781 — 10,794 45,761 51,326 — 32,513 129,601 57,653 131.0 187,384

12/17E 108,503 88,357 — 4,950 15,197 9,580 5,617 1,070 (2,180) 2,178 4,544 — 532 4,012 — 372.7 — 3,639 — 3,639 12/17E 5,617 — — — 7,176 12,792 (15,000) (2,208) — — — — — (15,000) — (1,636) 572 — (1,065) (3,272) — (3,272) 12/17E 21,098 3,711 5,566 3,092 33,467 115,948 28,876 9,802 7,316 195,409 25,186 9,781 — 10,794 45,761 51,898 — 37,964 135,623 59,656 131.0 195,409

Key earnings drivers Passenger traffic (RPKs) Passenger YoY % chg.yield YoY % chg. cost (C/ATK) YoY % Unit chg. Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$)(HK$) DPS BVPS (HK$) Operating CFPS (HK$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

12/14A 0.07 — — (0.02) (0.03) 12/14A 3,934 1.00 0.36 13.1 2.84 12/14A

12/15E 0.09 — — (0.09) (0.18) 12/15E 3,934 1.19 0.54 13.8 3.39 12/15E

12/16E 0.04 — — (0.01) 0.01 12/16E 3,934 1.55 0.69 14.7 3.77 12/16E

12/17E 0.02 — — — 0.06 12/17E 3,934 0.93 0.42 15.2 3.25 12/17E

5.48 17 42.1 42.1

(2.43) 217 18.8 18.8

2.59 (15) 29.5 29.5

2.27 (54) (40.1) (40.1)

12.2 4.3 4.58 3.73

22.8 14.1 5.76 4.54

20.2 11.6 7.27 5.73

14.0 5.2 4.19 3.35

14.2 1.08 2.53 5.01 1.02 8.39 23.7

11.9 1.03 3.77 4.20 1.04 4.56 7.4

9.2 0.97 4.89 3.78 0.99 4.88 8.5

15.4 0.94 2.92 4.37 0.97 6.89 18.7

6.9 3.9 0.62 1.06 0.85 3.32

8.9 12.7 0.58 0.41 0.84 3.29

10.9 10.5 0.57 0.63 0.83 3.24

6.2 5.0 0.56 0.81 0.88 3.27

84.9 3.40 4.0

78.2 1.81 11.0

69.2 1.87 9.7

67.9 2.67 5.2

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 20 18 16 14 12 10 8 6 4 2 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 1.80 1.60 1.40

1.20 1.00

0.80 0.60

0.40 0.20 0.00 2010

2011

2012

2013

Source: IBES

Hong Kong Strategy

30

30 November 2015

Asia Pacific / Hong Kong Real Estate Management & Development

Kerry Properties Limited (0683.HK / 683 HK) Rating (from Outperform) NEUTRAL Price (26 Nov 15, HK$) 22.45 Target price (HK$) (from 32.29) 22.30¹ Upside/downside (%) -0.67 Mkt cap (HK$ mn) 32,459 (US$ 4,188) Enterprise value (HK$ mn) 57,678 Number of shares (mn) 1,445.86 Free float (%) 41.7 52-week price range 33.9 - 21.0 ADTO - 6M (US$ mn) 6.6 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Kelvin Tam, CFA 852 2101 6582 [email protected]

DOWNGRADE RATING

Cheap but unexciting growth prospects ■ A casualty of the HK and China economic growth slowdown. We believe the moderating economic growth in China poses additional risk to Kerry. 54% of its GAV comes from property development and investment in China. Moreover, logistics contributes to 7% of the GAV, and likely to be impacted by the stagnation in China’s global trade flows. ■ Long-term projects dependent on property sales. The expectation of rising interest rates could put Kerry in a disadvantaged position as gearing stood at 26%, one of the highest among peers. In addition, 40% of Kerry’s property pipeline is earmarked for mixed-use or investment projects in China, the funding of which is heavily dependent on property sales in HK. ■ Not only just property weakness. Kerry has a significant exposure in logistics among the HK developers. Despite the spin-off in 2013, the logistics business still accounts for 7% of its GAV and 35% of FY15E earnings. ■ Downgrade to NEUTRAL with a TP of HK$22.3. Kerry has been the worstperforming HK developer YTD and now trades at a 65% NAV discount, the steepest among HK developers. However, we believe it is well deserved as there is more uncertainty about its future growth. The build-out of its recurring income stream could be slowed by the property correction. Its gearing and capex requirement will also limit the cherry-pick opportunities in HK even if land prices become more attractive. We cut our target price from HK$32.29 to HK$22.30 and downgrade the stock from Outperform to NEUTRAL.

Share price performance Price (LHS)

Rebased Rel (RHS)

40 35 30 25 20 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 100 80 60

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M -3.2 -0.4

3M -3.0 -7.1

12M -19.5 -12.8

Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net attributable profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) ROE (%) Net debt/equity (%) NAV per share (HK$) Disc./(prem.) to NAV (%)

12/14A 14,663.7 6,710.9 6,346.6 4,383.4 3.03 n.a. n.a. -49.8 7.4 4.0 8.2 5.6 23.9 — —

12/15E 11,052.3 5,039.9 4,657.5 3,738.2 2.59 1.2 2.56 -14.7 8.7 3.5 11.4 4.6 25.5 63.7 64.8

12/16E 16,890.0 5,716.3 5,314.7 3,554.4 2.46 -14.4 2.90 -4.9 9.1 3.3 10.2 4.2 25.5 — —

12/17E 21,875.8 6,913.1 6,491.4 4,068.6 2.82 -13.4 3.36 14.5 8.0 3.8 7.8 4.7 20.3 — —

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

31

30 November 2015

Kerry Properties Limited 0683.HK / 683 HK Price (26 Nov 15): HK$22.45, Rating: NEUTRAL, Target Price: HK$22.30, Analyst: Kelvin Tam Target price scenario Scenario Upside Central Case Downside

TP 0 22.30 0

Income statement (HK$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Revaluations Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (HK$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (HK$ mn) Cash & cash equivalents Current receivables Inventories Properties under development Other current assets Current assets Property, plant & equip. Properties under development Investment properties Investment in Associates/JV Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

Hong Kong Strategy

%Up/Dwn (100.00) (0.67) (100.00) 12/14A 14,664 8,317 — (364.3) 6,711 364.3 6,347 626.9 — 1,303 7,023 — 1,577 5,446 (0.22) — 1,062 — 4,383 — 4,383 12/14A 6,347 (899) (2,007) 3,306 (535) 6,212 (5,236) 976 — 1,418 — — (4,469) 290.7 (2,001) (590.0) — (2,300) (557) — (557) 12/14A 11,391 — 3,589 — — 14,980 104,452 — — 19,212 122.5 — 141,257 — 3,092 — 5,196 8,288 31,147 6,062 — 45,497 80,079 15,682 141,257

Key earnings drivers Hong Kong property price Hong growthKong office rental growthKong retail rental Hong growth

Assumptions +1SD 29% discount to NAV (2SD) 12/15E 11,052 6,395 — (382.5) 5,040 382.5 4,657 630.8 — 1,916 5,943 — 933 5,011 (0.16) — 1,272 — 3,738 — 3,738 12/15E 4,657 (1,013) (933) 1,877 2,299 6,888 (7,364) (476) — — — — (7,364) — (1,895) — — (1,895) (2,371) — (2,371) 12/15E 9,020 — 3,589 — — 12,610 110,228 — — 19,212 122.5 — 144,661 — 3,092 — 5,196 8,288 31,147 6,062 — 45,497 82,695 16,181 144,373

12/16E 16,890 11,575 — (401.6) 5,716 401.6 5,315 630.8 — 1,440 6,124 — 1,089 5,035 (0.18) — 1,480 — 3,554 — 3,554 12/16E 5,315 (1,058) (1,089) 3,376 1,841 8,386 (7,382) 1,003 — — — — (7,382) — (1,840) — — (1,840) (836) — (836) 12/16E 8,184 — 3,589 — — 11,773 114,502 — — 19,212 122.5 — 148,100 — 3,092 — 5,196 8,288 31,147 6,062 — 45,497 85,184 16,888 147,569

12/17E 21,876 15,384 — (421.7) 6,913 421.7 6,491 630.8 — 1,200 7,061 — 1,356 5,705 (0.19) — 1,636 — 4,069 — 4,069 12/17E 6,491 (1,005) (1,356) 8,201 1,622 13,953 (7,402) 6,551 — — — — (7,402) — (1,994) — — (1,994) 4,557 — 4,557 12/17E 12,742 — 3,589 — — 16,331 113,951 — — 19,212 122.5 — 152,106 — 3,092 — 5,196 8,288 31,147 6,062 — 45,497 88,032 17,751 151,280

Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$)(HK$) DPS BVPS (HK$) NAV per share (HK$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

12/14A — — — — — 12/14A 1,444 3.03 0.90 55.4 — 12/14A

12/15E — — — — — 12/15E 1,444 2.59 0.78 57.2 63.7 12/15E

12/16E — — — — — 12/16E 1,444 2.46 0.74 59.0 — 12/16E

12/17E — — — — — 12/17E 1,444 2.82 0.85 60.9 — 12/17E

(55.8) (4.2) (49.8) (49.8)

(24.6) (26.6) (14.7) (14.7)

52.8 14.1 (4.9) (4.9)

29.5 22.1 14.5 14.5

45.8 43.3 47.9 29.9

45.6 42.1 53.8 33.8

33.8 31.5 36.3 21.0

31.6 29.7 32.3 18.6

7.4 0.41 4.01 3.77 8.2 8.7

8.7 0.39 3.46 5.22 11.4 12.4

9.1 0.38 3.29 3.46 10.2 11.0

8.0 0.37 3.76 2.47 7.8 8.3

5.63 4.22 0.10 1.11 0.78 1.48

4.59 3.24 0.08 1.28 0.84 1.46

4.23 3.47 0.11 1.15 0.82 1.45

4.70 4.11 0.14 1.09 0.81 1.44

23.9 3.40 10.1

25.5 5.00 7.4

25.5 4.56 8.4

20.3 3.11 10.3

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 14 12 10 8 6 4 2 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 1.20 1.00

0.80 0.60 0.40 0.20 0.00 2010

2011

2012

2013

Source: IBES

32

30 November 2015

Asia Pacific / Hong Kong Luxury Goods

Luk Fook Holdings International (0590.HK / 590 HK) Rating NEUTRAL Price (26 Nov 15, HK$) 18.38 Target price (HK$) (from 20.30) 19.00¹ Upside/downside (%) 3.4 Mkt cap (HK$ mn) 10,828 (US$ 1,397) Enterprise value (HK$ mn) 8,817 Number of shares (mn) 589.11 Free float (%) 56.2 52-week price range 30.6 - 17.8 ADTO - 6M (US$ mn) 3.3 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Eva Wang 852 2101 7365 [email protected]

DECREASE TARGET PRICE

Casualty of the HK economic slowdown ■ High exposure to the Hong Kong business. Luk Fook is under the radar of a Hong Kong economic slowdown and visitation decline due to its overreliance on the Hong Kong market. Revenue generated in Hong Kong, Macau and others accounted for 59.7% of its total revenue, with operating profit contribution even higher: 66% of total, as in FY3/15. ■ Least contribution from China among peers due to the licensee model. Revenue from mainland China contributed only 25% of total in FY3/15, lowest among peers (59% for CTF and 36% for CSS), mainly due to its licensee model. Among the 1,348 stores it had in mainland China (as at end of Sep-15), only 6% are self-operated (versus 100% for CSS and 67% for CTF), implying relatively weak control than peers and less revenue / earnings contribution. ■ Top line under pressure as culture conflicts accelerated. We believe the negative impact from cultural conflicts has lasted longer than we had expected. The conflict may affect visitor's willingness to spend in Hong Kong jewellery stores. Going forward, there is no visibility on how long this will last and how serious it could get in the near future. We believe the accelerating culture conflict and the expectation of further RMB depreciation against the HKD in the next few years may imply more top-line contraction. (link to the note) ■ Valuation. We cut EPS estimates by 6-8% on the negative impact from lower HK economic growth. We expect Luk Fook to report a 5% revenue decline and a 33% YoY net profit decline in FY3/16E. Our new TP of HK$19.0 (from HK$20.3) for Luk Fook is based on 9x CY16E P/E, in line with its historical average. We maintain our NEUTRAL rating on Luk Fook.

Share price performance Price (LHS)

Rebased Rel (RHS)

40 30 20 10 0 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 100 80 60

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M 3M 12M -8.6 -8.6 -20.8 -5.7 -12.6 -14.0

— —

Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)

3/15A 15,922.7 2,079.3 1,921.6 1,614.8 2.74 n.a. n.a. -13.4 6.7 6.0 5.0 1.3 20.0 Net cash

3/16E 15,066.0 1,505.1 1,334.8 1,075.0 1.82 -7.8 2.31 -33.4 10.1 2.7 5.9 1.2 12.2 Net cash

3/17E 16,254.2 1,762.9 1,568.3 1,295.2 2.20 -6.3 2.54 20.5 8.4 4.8 4.6 1.1 13.5 Net cash

3/18E 17,700.2 1,987.6 1,768.6 1,469.8 2.49 -7.8 2.77 13.5 7.4 5.5 3.6 1.0 14.0 Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

33

30 November 2015

Luk Fook Holdings International

0590.HK / 590 HK

Price (26 Nov 15): HK$18.38, Rating: NEUTRAL, Target Price: HK$19.00, Analyst: Eva Wang Target price scenario Scenario Upside Central Case Downside

Key earnings drivers TP 19.00

Income statement (HK$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (HK$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (HK$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

%Up/Dwn Assumptions 3.37 3/15A 15,923 12,091 2,084 (332.1) 2,079 157.7 1,922 (28.4) — (21.8) 1,928 54.6 362.2 1,621 — 5.8 — 1,615 — 1,615 3/15A 1,922 (69.3) (461.8) (1,143) 155.9 404 (255.0) 149 — (245.9) 1.0 — (76.4) (576.4) — (699.9) 902.6 (0.10) 202.7 30 (13.2) 17 3/15A 2,090 200.8 7,395 374.7 10,060 618.0 254.8 1.1 577.1 11,511 902 1,713 — 175.7 2,791 — 85.4 34.0 2,911 8,536 64.1 11,511

3/16E 15,066 11,650 2,232 (321.0) 1,505 170.3 1,335 (28.7) — (35.0) 1,329 — 252.4 1,076 — 1.1 — 1,075 — 1,075 3/16E 1,335 (87.6) (252.4) 1,058 228.5 2,281 (200.0) 2,081 — — 5.0 — 58.1 (136.9) — (509.6) — — (509.6) 1,634 — 1,634 3/16E 3,724 212.0 6,330 360.8 10,627 656.9 219.8 1.1 556.0 12,061 885 1,713 — 175.7 2,774 — 85.4 34.0 2,894 9,102 65.2 12,061

3/17E 16,254 12,480 2,369 (357.2) 1,763 194.7 1,568 (52.3) — (20.0) 1,601 — 304.1 1,296 — 1.3 — 1,295 — 1,295 3/17E 1,568 (111.2) (304.1) (239) 276.4 1,191 (200.0) 991 — — 5.0 — 81.7 (113.3) — (351.7) — — (351.7) 726 — 726 3/17E 4,450 233.3 6,663 380.1 11,726 671.4 199.8 1.1 551.4 13,150 1,029 1,713 — 175.7 2,919 — 85.4 34.0 3,038 10,045 66.5 13,150

3/18E 17,700 13,607 2,501 (395.1) 1,988 219.1 1,769 (68.0) — (20.0) 1,817 — 345.3 1,471 — 1.5 — 1,470 — 1,470 3/18E 1,769 (126.9) (345.3) (120) 316.5 1,493 (200.0) 1,293 — — 5.0 — 97.4 (97.6) — (552.9) — — (552.9) 843 — 843 3/18E 5,294 251.6 6,758 404.5 12,708 661.5 179.8 1.1 548.9 14,099 1,058 1,713 — 175.7 2,947 — 85.4 34.0 3,067 10,963 68.0 14,098

Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$)(HK$) DPS BVPS (HK$) Operating CFPS (HK$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

3/15A — — — — — 3/15A 589.1 2.74 1.10 14.5 0.69 3/15A

3/16E — — — — — 3/16E 589.1 1.82 0.50 15.5 3.87 3/16E

3/17E — — — — — 3/17E 589.1 2.20 0.88 17.1 2.02 3/17E

3/18E — — — — — 3/18E 589.1 2.49 1.00 18.6 2.53 3/18E

(17.1) (14.5) (13.4) (13.4)

(5.4) (30.5) (33.4) (33.4)

7.9 17.5 20.5 20.5

8.9 12.8 13.5 13.5

13.1 12.1 12.1 10.1

10.0 8.9 8.8 7.1

10.8 9.6 9.8 8.0

11.2 10.0 10.3 8.3

6.7 1.27 5.98 26.8 0.66 5.03 5.44

10.1 1.19 2.71 4.7 0.59 5.86 6.61

8.4 1.08 4.80 9.1 0.50 4.59 5.16

7.4 0.99 5.45 7.3 0.41 3.65 4.10

20.0 21.3 1.38 1.00 0.82 1.34

12.2 14.1 1.25 1.00 0.81 1.32

13.5 17.5 1.24 1.02 0.81 1.30

14.0 19.3 1.26 1.03 0.81 1.28

(4.4) (0.18) (67.7)

(21.9) (1.34) (46.5)

(27.1) (1.55) (30.0)

(32.5) (1.80) (26.0)

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 25 20 15 10 5 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 6 5

4 3 2 1 0 2010

2011

2012

2013

Source: IBES

Hong Kong Strategy

34

30 November 2015

Asia Pacific / Hong Kong Specialty Softlines

Sa Sa International Holding (0178.HK / 178 HK) Rating UNDERPERFORM Price (26 Nov 15, HK$) 2.77 Target price (HK$) (from 1.75) 1.70¹ Upside/downside (%) -38.6 Mkt cap (HK$ mn) 7,880 (US$ 1,017) Enterprise value (HK$ mn) 7,626 Number of shares (mn) 2,844.68 Free float (%) 35.2 52-week price range 5.77 - 2.47 ADTO - 6M (US$ mn) 2.0 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Eva Wang 852 2101 7365 [email protected]

DECREASE TARGET PRICE

Haunted by overreliance on HK ■ Hong Kong's structural downturn will hit Sa Sa the most. Sa Sa has the highest exposure to the Hong Kong market among retailers. Hong Kong and Macau accounted for around 82% of its total revenue and over 100% of its EBIT (all other segments/regions incur losses), making it rather sensitive to the economic slowdown and weak consumer sentiment in Hong Kong. ■ Store performance and profitability severely affected by the visitation decline. Total visitation to HK in 9M15 was down by 0.5% YoY to 44 mn (slower than 2014 growth rate of 12% YoY), resulting in less total traffic (-5.7% in 2Q FY3/16). The average ticket size continued to decrease on an unfavourable product mix change and a higher portion of customers from lower-tier cities with less spending power. Operating margins contracted 4.6 pp to 5% in 1H FY3/16, on increasing promotional expenses and the impact of deleverage. ■ The worst is not over yet, with more pressure ahead. We believe the accelerating culture conflict and the expectation of further RMB depreciation against the HKD in the next few years may imply more top-line contraction for Sa Sa. In addition, a lack of diversification, especially in mainland China, remains the biggest problem for the company. Besides, the development of e-commerce (sasa.com) is far from satisfactory, and not even comparable to other online cosmetic players, e.g. JMEI and VIPS. ■ Valuation. We cut EPS estimates by 1-4% on the negative impact from slower HK economic growth. We expect a 2.5 pp gross margin contraction to 42.4% (the lowest level since FY3/07) and a 47% net profit decline in FY3/16E. Our new TP of HK$1.70 (from HK$1.75) is based on 10x CY16E P/E, de-rating from historical average of 16x. Maintain UNDERPERFORM.

Share price performance Price (LHS)

Rebased Rel (RHS)

10 8 6 4 2 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 70 20

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M 3M 12M 8.2 -13.7 -51.9 11.0 -17.8 -45.2

— —

Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)

3/15A 8,992.8 1,153.6 991.0 838.8 0.30 n.a. n.a. -10.1 9.4 8.5 6.4 3.2 35.0 Net cash

3/16E 8,196.9 676.2 530.1 441.3 0.15 -1.1 0.19 -48.2 18.1 6.5 11.3 3.5 18.7 Net cash

3/17E 8,035.8 754.5 598.9 496.7 0.17 -4.1 0.20 12.6 16.1 5.0 10.0 3.6 22.3 Net cash

3/18E 8,295.0 841.5 673.9 558.1 0.19 -4.0 0.22 12.4 14.3 5.7 8.9 3.3 24.4 Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

35

30 November 2015

Sa Sa International Holding

0178.HK / 178 HK

Price (26 Nov 15): HK$2.77, Rating: UNDERPERFORM, Target Price: HK$1.70, Analyst: Eva Wang Target price scenario Scenario Upside Central Case Downside Income statement (HK$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (HK$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (HK$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

TP 1.70

Key earnings drivers Sales volume (mn pieces) ASP (Rmb per piece)

%Up/Dwn Assumptions (38.63) 3/15A 8,993 4,954 3,167 (281.0) 1,154 162.5 991.0 (17.7) 0.75 — 1,009 — 170.7 838.8 — — — 838.8 — 838.8 3/15A 991.0 (18.2) (227.3) 71.3 252.3 1,069 (149.9) 919.3 — — 3.3 — (56.4) (203.0) — (668.5) (80.0) (0.77) (749.2) 116.9 (16.0) 100.9 3/15A 519.7 51.5 1,383 893.0 2,847 351.5 — — 191.6 3,390 496.2 — 36.4 328.2 860.8 — 0.25 54.5 915.6 2,475 — 3,390

3/16E 8,197 4,723 3,066 (269.0) 676 146.1 530.1 (15.5) (0.82) — 545 — 103.5 441.3 — — — 441.3 — 441.3 3/16E 530.1 (15.5) (103.5) (84.3) 160.7 488 (100.0) 387.6 — — — — 15.5 (84.5) — (668.5) — — (668.5) (265.4) — (265.4) 3/16E 254.3 42.9 1,323 871.0 2,491 305.4 — — 191.6 2,988 350.3 — 36.4 299.1 685.8 — 0.25 54.5 740.6 2,247 — 2,988

3/17E 8,036 4,527 3,030 (276.1) 754 155.6 598.9 (14.2) — — 613 — 116.5 496.7 — — — 496.7 — 496.7 3/17E 598.9 (14.2) (116.5) 80.5 169.8 719 (100.0) 618.5 — — — — 14.2 (85.8) — (529.9) — — (529.9) 102.9 — 102.9 3/17E 357.1 49.6 1,345 866.5 2,618 249.9 — — 191.6 3,060 461.0 — 36.4 293.3 790.7 — 0.25 54.5 845.5 2,214 — 3,060

3/18E 8,295 4,662 3,082 (291.0) 842 167.6 673.9 (15.4) — — 689 — 131.2 558.1 — — — 558.1 — 558.1 3/18E 673.9 (15.4) (131.2) (163.7) 182.9 547 (100.0) 446.6 — — — — 15.4 (84.6) — (416.0) — — (416.0) 46.0 — 46.0 3/18E 404.2 45.9 1,428 873.7 2,752 182.3 — — 191.6 3,126 374.5 — 36.4 302.7 713.7 1.00 0.25 54.5 769.5 2,357 — 3,127

Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$)(HK$) DPS BVPS (HK$) Operating CFPS (HK$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

3/15A — — — — — 3/15A 2,838 0.30 0.23 0.87 0.38 3/15A

3/16E — — — — — 3/16E 2,883 0.15 0.18 0.79 0.17 3/16E

3/17E — — — — — 3/17E 2,883 0.17 0.14 0.78 0.25 3/17E

3/18E — — — — — 3/18E 2,883 0.19 0.16 0.83 0.19 3/18E

2.70 (10.4) (10.3) (10.1)

(8.85) (46.5) (47.4) (48.2)

(1.97) 13.0 12.6 12.6

3.23 12.5 12.4 12.4

12.8 11.0 11.2 9.3

8.2 6.5 6.6 5.4

9.4 7.5 7.6 6.2

10.1 8.1 8.3 6.7

9.4 3.18 8.48 7.4 0.82 6.4 7.4

18.1 3.51 6.50 16.4 0.93 11.3 14.4

16.1 3.56 5.02 11.1 0.94 10.0 12.6

14.3 3.34 5.66 14.6 0.90 8.9 11.1

35.0 41.8 2.65 1.02 0.83 1.37

18.7 21.8 2.74 1.03 0.81 1.33

22.3 25.2 2.63 1.02 0.81 1.38

24.4 28.6 2.65 1.02 0.81 1.33

(21.0) (0.45) (56.0)

(11.3) (0.38) (34.3)

(16.1) (0.47) (42.0)

(17.1) (0.48) (43.8)

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 30 25 20 15 10 5 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 12 10

8 6 4 2 0 2010

2011

2012

2013

Source: IBES

Hong Kong Strategy

36

30 November 2015

Asia Pacific / Hong Kong Conglomerates

Wheelock and Company Limited (0020.HK / 20 HK) Rating (from Outperform) NEUTRAL Price (26 Nov 15, HK$) 34.55 Target price (HK$) (from 40.14) 37.50¹ Upside/downside (%) 8.5 Mkt cap (HK$ mn) 70,200 (US$ 9,058) Enterprise value (HK$ mn) 166,809 Number of shares (mn) 2,031.85 Free float (%) 39.3 52-week price range 46.2 - 33.1 ADTO - 6M (US$ mn) 5.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Kelvin Tam, CFA 852 2101 6582 [email protected]

DOWNGRADE RATING

Large exposure to New Territories poses higher risk during a property down-cycle ■ HK residential property accounts for 16% of GAV exposure. Wheelock's core business is HK development property. We believe a slower economic growth expectation and rising interest rates will be negative for HK residential. We believe HK retail, via its holding in Wharf (already contracting), will also be impacted by wage growth pressure. ■ Little pricing power in Tseung Kwan O (TKO). Sales of Wheelock’s island Residence (Shau Kei Wan) in October have been lacklustre, with only 38% of 100 units launched having been sold despite a 10% price discount to peers. Pricing has also turned conservative in its TKO seafront project CAPRI at a 10-20% discount to peers. Pricing power should remain weak for its remaining projects in TKO, which accounts for 60% of the residential land bank. Margins could be under pressure as these were acquired prior to 2014 at circa 10% above the average land cost in the neighbourhood. ■ High risk for companies with higher gearing. Rising interest rate expectations could put Wheelock in a disadvantaged position as gearing stood at 27%, one of the highest among peers. We believe the large exposure to New Territories poses higher risk during a property down-cycle in terms of pricing, sell-through and cash collection. ■ Downgrade to NEUTRAL with a TP of HK$37.50. Wheelock’s recent share price performance may have been supported by its recent sale of a tower of One Harbour Gate with a GFA of 393,000 sq ft at HK14,900/sq ft. Given higher risk from its large exposure to the New Territories, relatively high gearing to peers and unappealing dividend support, we cut our target price from HK$40.14 to HK$37.50 and downgrade the stock from Outperform to NEUTRAL.

Share price performance Price (LHS)

Rebased Rel (RHS)

60 50 40 30 20 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

120 110 100 90 80

The price relative chart measures performance against the HANG SENG INDEX which closed at 22068.32 on 26/11/15 On 26/11/15 the spot exchange rate was HK$7.75/US$1

Performance over Absolute (%) Relative (%)

1M -4.6 -1.7

3M -2.9 -7.0

12M -11.4 -4.7

Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net attributable profit (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) ROE (%) Net debt/equity (%) NAV per share (HK$) Disc./(prem.) to NAV (%)

12/14A 40,953.0 16,567.0 15,039.0 8,103.0 3.99 n.a. n.a. 3.6 8.7 3.1 10.1 4.5 28.4 — —

12/15E 54,425.5 21,044.0 19,516.0 11,232.6 5.53 0 4.90 38.6 6.2 3.1 7.9 5.7 27.2 49.3 29.9

12/16E 64,540.7 19,736.2 18,208.2 10,309.3 5.07 -5.0 5.10 -8.2 6.8 3.1 9.0 5.0 29.3 — —

12/17E 63,692.7 19,251.9 17,723.9 9,151.6 4.50 -10.5 5.46 -11.2 7.7 3.1 9.8 4.3 30.8 — —

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Hong Kong Strategy

37

30 November 2015

Wheelock and Company Limited

0020.HK / 20 HK

Price (26 Nov 15): HK$34.55, Rating: NEUTRAL, Target Price: HK$37.50, Analyst: Kelvin Tam Target price scenario Scenario Upside Central Case Downside

Key earnings drivers TP 0 37.50 0

Income statement (HK$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Revaluations Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (HK$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (HK$ mn) Cash & cash equivalents Current receivables Inventories Properties under development Other current assets Current assets Property, plant & equip. Properties under development Investment properties Investment in Associates/JV Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity

Hong Kong Strategy

%Up/Dwn (100.00) 8.54 (100.00) 12/14A 40,953 25,914 — (1,528) 16,567 1,528 15,039 2,195 (1,068) 3,121 14,897 — 3,472 11,425 — — 3,322 — 8,103 — 8,103 12/14A 15,039 (2,807) — 2,632 (931) 13,933 (8,899) 5,034 (6,020) 1,266 (12.0) — (11,123) — (5,219) 39,237 (44,783) (10,765) (7,955) — (7,955) 12/14A 21,279 6,713 48.0 88,148 287 116,475 25,052 — 316,860 25,648 305.0 316,860 517,567 45,863 10,744 1,658 — 58,265 107,134 10,529 1,723 177,651 191,206 148,710 517,567

Assumptions +1SD 27% discount to NAV (2SD) 12/15E 54,426 34,910 — (1,528) 21,044 1,528 19,516 1,990 — 3,341 20,867 — 3,948 16,919 — — 5,686 — 11,233 — 11,233 12/15E 19,516 (2,712) — (11,293) 925 6,436 (5,000) 1,436 — — — — (5,000) — (2,169) — — (2,169) (733) — (733) 12/15E 21,270 6,713 48.0 93,821 5,907 127,759 25,052 — 320,332 28,989 305.0 320,332 532,319 45,863 10,744 1,658 — 58,265 107,134 10,529 1,723 177,651 200,270 154,396 532,317

12/16E 64,541 46,332 — (1,528) 19,736 1,528 18,208 2,496 — 3,781 19,493 — 3,088 16,405 — — 6,095 — 10,309 — 10,309 12/16E 18,208 (2,712) — (21,744) 1,785 (4,464) (5,000) (9,464) — — — — (5,000) — (2,169) — — (2,169) (11,632) — (11,632) 12/16E 9,893 6,713 48.0 99,970 21,502 138,126 25,052 — 323,804 32,769 305.0 323,804 546,594 45,863 10,744 1,658 — 58,265 107,134 10,529 1,723 177,651 208,410 160,492 546,553

12/17E 63,693 45,969 — (1,528) 19,252 1,528 17,724 3,003 — 2,973 17,694 — 2,641 15,054 — — 5,902 — 9,152 — 9,152 12/17E 17,724 (2,712) — (19,658) 2,232 (2,414) (5,000) (7,414) — — — — (5,000) — (2,169) — — (2,169) (9,583) — (9,583) 12/17E 127 6,713 48.0 105,025 36,105 148,018 25,052 — 327,276 35,743 305.0 327,276 559,586 45,863 10,744 1,658 — 58,265 107,134 10,529 1,723 177,651 215,393 166,394 559,438

Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (HK$)(HK$) DPS BVPS (HK$) NAV per share (HK$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

12/14A — — — — — 12/14A 2,032 3.99 1.07 94 — 12/14A

12/15E — — — — — 12/15E 2,032 5.53 1.07 99 49.3 12/15E

12/16E — — — — — 12/16E 2,032 5.07 1.07 103 — 12/16E

12/17E — — — — — 12/17E 2,032 4.50 1.07 106 — 12/17E

16.8 0.7 3.6 3.6

32.9 29.8 38.6 38.6

18.6 (6.7) (8.2) (8.2)

(1.3) (2.7) (11.2) (11.2)

40.5 36.7 36.4 19.8

38.7 35.9 38.3 20.6

30.6 28.2 30.2 16.0

30.2 27.8 27.8 14.4

8.66 0.37 3.09 4.07 10.1 11.1

6.25 0.35 3.09 3.06 7.9 8.5

6.81 0.34 3.09 2.76 9.0 9.8

7.67 0.33 3.09 2.95 9.8 10.6

4.53 2.74 0.08 0.99 0.77 1.52

5.74 3.56 0.10 1.07 0.81 1.50

5.05 3.30 0.12 1.07 0.84 1.48

4.32 3.09 0.11 1.00 0.85 1.47

28.4 5.83 6.9

27.2 4.59 9.8

29.3 5.47 7.3

30.8 6.12 5.9

Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 14 12 10 8 6 4 2 0 2010

2011

2012

2013

2014

2015

2014

2015

12MF P/B multiple 0.90 0.80 0.70

0.60 0.50

0.40 0.30

0.20 0.10 0.00 2010

2011

2012

2013

Source: IBES

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Companies Mentioned (Price as of 26-Nov-2015) AIA Group (1299.HK, HK$47.75) BOC Hong Kong (Holdings) (2388.HK, HK$24.4) Bank of China Ltd (3988.HK, HK$3.5) Bank of Communications (3328.HK, HK$5.58) Bank of East Asia (0023.HK, HK$28.45, UNDERPERFORM, TP HK$22.0) Belle International Holdings Ltd (1880.HK, HK$7.06) CITIC (0267.HK, HK$13.88) CK Hutchison Holdings Limited (0001.HK, HK$102.9) CLP Holdings Limited (0002.HK, HK$66.05) CNOOC Ltd (0883.HK, HK$8.75) Cathay Pacific (0293.HK, HK$14.22, UNDERPERFORM, TP HK$12.5) Cheung Kong Property Holdings Limited (1113.HK, HK$51.85) China Construction Bank (0939.HK, HK$5.44) China Life (2628.HK, HK$28.3) China Mengniu Dairy (2319.HK, HK$12.76) China Mobile Limited (0941.HK, HK$90.1) China Overseas Land & Investment (0688.HK, HK$26.4) China Petroleum & Chemical Corporation - H (0386.HK, HK$4.97) China Resources Beer (Holdings) Company Limited (0291.HK, HK$14.98) China Resources Land Ltd (1109.HK, HK$21.85) China Resources Power Holdings (0836.HK, HK$15.06) China Shenhua Energy Company Limited (1088.HK, HK$12.72) China Unicom Hong Kong Ltd (0762.HK, HK$9.78) Chow Sang Sang (0116.HK, HK$13.76) Chow Tai Fook Jewellery Group Limited (1929.HK, HK$6.21) Galaxy Entertainment Group (0027.HK, HK$23.55) Hang Lung Properties Limited (0101.HK, HK$18.88) Hang Seng Bank (0011.HK, HK$142.2) Henderson Land Development Company Limited (0012.HK, HK$48.8) Hengan International (1044.HK, HK$79.2) Hong Kong Exchanges and Clearing (0388.HK, HK$209.0) Hong Kong and China Gas (0003.HK, HK$15.58) Industrial & Commercial Bank of China (1398.HK, HK$4.78) Kerry Properties Limited (0683.HK, HK$22.45, NEUTRAL, TP HK$22.3) Kunlun Energy (0135.HK, HK$6.94) Lenovo Group Ltd (0992.HK, HK$8.45) Lifestyle International Holdings Ltd (1212.HK, HK$12.02) Link REIT (0823.HK, HK$46.9) Luk Fook Holdings International (0590.HK, HK$18.38, NEUTRAL, TP HK$19.0) New World Development Company Limited (0017.HK, HK$7.84) PetroChina (0857.HK, HK$5.75) Ping An (2318.HK, HK$44.3) Power Assets Holdings Limited (0006.HK, HK$70.2) Sa Sa International Holding (0178.HK, HK$2.77, UNDERPERFORM, TP HK$1.7) Sands China (1928.HK, HK$26.5) Sino Land (0083.HK, HK$11.84) Sun Hung Kai Properties Limited (0016.HK, HK$98.75) Tencent Holdings (0700.HK, HK$155.7) The Wharf (Holdings) Limited (0004.HK, HK$45.85) Tingyi (0322.HK, HK$11.52) Want Want China Holdings Ltd. (0151.HK, HK$6.27) Wheelock and Company Limited (0020.HK, HK$34.55, NEUTRAL, TP HK$37.5)

Disclosure Appendix Important Global Disclosures Vincent Chan, Timothy Ross, Anand Swaminathan, Kelvin Tam, CFA, Eva Wang and Sanjay Jain each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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3-Year Price and Rating History for Bank of East Asia (0023.HK) 0023.HK Date 02-May-13 31-Jul-13 02-Aug-13 02-Sep-13 18-Feb-14 12-Feb-15 04-Sep-15

Closing Price (HK$) 31.00 29.10 30.00 30.35 31.35 32.35 25.50

Target Price (HK$) 26.20 25.70 27.70 26.90 29.30 28.00 23.00

Rating U

*

* Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM

3-Year Price and Rating History for Cathay Pacific (0293.HK) 0293.HK Date 27-Feb-13 14-Aug-13 17-Oct-13 27-Nov-13 17-Mar-14 23-May-14 24-Nov-14 18-Mar-15 16-Apr-15 19-Aug-15 16-Sep-15

Closing Price (HK$) 14.54 14.26 15.00 16.52 14.92 14.74 15.80 16.94 19.32 15.38 14.44

Target Price (HK$) 16.70 15.10 16.50 17.70 17.60 17.00 17.50 19.50 23.00 14.50 14.90

Rating O

U N

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM U N D ERPERFO RM N EU T RA L

3-Year Price and Rating History for Kerry Properties Limited (0683.HK) 0683.HK Date 06-Feb-13 14-Mar-13 21-Aug-13 03-Dec-13 22-Jan-14 14-Feb-14 18-Mar-14 16-Jun-14 22-Jul-14 22-Aug-14 17-Nov-14 26-Jan-15 21-Aug-15

Closing Price (HK$) 35.72 32.00 28.78 29.60 26.25 26.10 23.50 26.65 27.90 28.10 26.80 27.75 23.85

Target Price (HK$) 42.22 43.76 44.73 28.10 31.36 31.43 31.52 31.78 32.50 34.13 31.63 33.22 32.29

Rating O * N O

O U T PERFO RM N EU T RA L

*

* Asterisk signifies initiation or assumption of coverage.

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3-Year Price and Rating History for Luk Fook Holdings International (0590.HK) 0590.HK Date 29-Nov-12 22-Jan-13 25-Feb-13 15-Apr-13 27-Jun-13 27-Aug-13 17-Oct-13 27-Nov-13 09-Jan-14 14-Feb-14 15-Apr-14 26-Jun-14 22-Aug-14 27-Nov-14 14-Jan-15 04-Mar-15 16-Apr-15 03-Nov-15 23-Nov-15

Closing Price (HK$) 23.15 29.25 26.05 21.70 18.76 24.25 26.65 30.95 33.65 27.35 23.55 23.10 24.85 25.60 29.20 24.30 23.90 20.55 18.04

Target Price (HK$) 25.70 31.50 26.00 22.50 16.70 23.20 29.10 29.70 26.60 27.00 24.60 26.80 27.50 28.50 34.50 26.80 24.40 23.30 20.30

Rating O N * U N

U N

O U T PERFO RM N EU T RA L U N D ERPERFO RM

* O N

* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Sa Sa International Holding (0178.HK) 0178.HK Date 20-Feb-13 06-May-13 18-Jun-13 20-Jun-13 12-Sep-13 10-Oct-13 09-Jan-14 28-Jan-14 12-Feb-14 08-May-14 27-Jun-14 22-Aug-14 19-Nov-14 13-Jan-15 03-Mar-15 17-Mar-15 26-Jun-15 22-Oct-15 24-Nov-15

Closing Price (HK$) 7.88 8.37 7.81 7.45 8.45 7.90 8.73 6.97 6.96 5.52 5.00 5.92 5.54 4.90 4.26 3.71 4.04 2.92 2.93

Target Price (HK$) 7.22 7.71 8.96 10.11 9.34 8.71 7.45 6.68 5.61 5.52 4.69 4.33 3.93 3.54 2.95 2.80 1.80 1.75

Rating N * N O

N

U*

N EU T RA L O U T PERFO RM U N D ERPERFO RM

* Asterisk signifies initiation or assumption of coverage.

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3-Year Price and Rating History for Wheelock and Company Limited (0020.HK) 0020.HK Date 13-Dec-12 15-Mar-13 27-Mar-13 26-Aug-13 29-Aug-13 21-Jan-14 13-Feb-14 31-Mar-14 16-Jun-14 22-Jul-14 12-Aug-14 17-Nov-14 26-Jan-15 17-Mar-15 21-Aug-15

Closing Price (HK$) 38.70 38.10 41.10 40.80 39.25 34.70 32.55 30.30 33.50 35.85 40.80 37.40 42.65 36.30 33.75

Target Price (HK$) 46.84 46.87 48.26 49.66 48.54 41.62 41.55 38.68 38.24 40.50 48.50 46.61 49.60 43.09 40.14

Rating O

*

O U T PERFO RM

*

* Asterisk signifies initiation or assumption of coverage.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Ne utrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canad ian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmar k; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution

Rating

Versus universe (%)

Of which banking clients (%)

Outperform/Buy* 60% (33% banking clients) Neutral/Hold* 27% (33% banking clients) Underperform/Sell* 12% (25% banking clients) Restricted 1% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, N eutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Bank of East Asia (0023.HK) Method: Our HK$22.0 target price for Bank of East Asia is based on Gordon growth model. We use the core ROE for 2015-16E, cost of equity of 10.0% and terminal growth rate of 3%. We value the property revaluation reserve at 0.7x book value. Risk:

Upside risks for our target price of HK$22.0 for Bank of East Asia include: (1) China exposure for BEA is very high and any slowdown in China would affect BEA adversely, (2) Margin pressure intensifying for smaller banks with inferior deposit franchise.

Price Target: (12 months) for Cathay Pacific (0293.HK) Method: Our target price of HK$12.50 for Cathay Pacific is based on a target EV/CFMV multiple of 113%, based on an average 9.7% normalised ROIC and a cost of capital of 8.5% and adjusted for the mark to market of hedge book losses. Our TP is equivalent to a normalised EV/EBITDAR multiple of 3.7x - at the lower end of the industry spectrum given challenges to Cathay's long-term growth and high cost of capital. Key risks to our HK$12.50 target price for Cathay Pacific include: rising fuel prices, competition, uncertain demand and the combined impact on fares, as well as labour unrest and interest rate exposure. Being one of the most prudently geared businesses in the airline industry with highly regarded management, we perceive CX's greatest unique risks lie in declining demand for premium seats and potential for rising wage costs, reflecting its high-cost location in Hong Kong Risk:

Key risks to our HK$12.50 target price for Cathay Pacific include: rising fuel prices, competition, uncertain demand and the combined impact on fares, as well as labour unrest and interest rate exposure. Being one of the most prudently geared businesses in the airline industry with highly regarded management, we perceive CX's greatest unique risks lie in declining demand for premium seats and potential for rising wage costs, reflecting its high-cost location in Hong Kong. Upside risks to our estimates and price target would include further reductions in the price of jet fuel, a recovery in freight demand and pricing, together with a pick-up in business class travel demand.

Price Target: (12 months) for Kerry Properties Limited (0683.HK) Method: Our HK$22.3 target price for Kerry Properties is based on 65% discount to our current NAV (net asset value) estimate as a buffer for future uncertainty. The methodology is in line with other HK developers under our coverage. Risk:

Risks to our HK$22.3 target price for Kerry Properties include operational challenges, as the company is starting to move into new cities in China, and macro policy changes. Both of these risks could lead to completion delays, which would negatively affect our target price.

Price Target: (12 months) for Luk Fook Holdings International (0590.HK) Method: Our 12-month target price of HK$19.0 for Luk Fook Holdings International is based on a price-to-earnings (P/E) multiple of 9.0x CY16E earnings per share (EPS), with reference to its five-year average historical forward P/E multiple of 9x. Risk:

Risks to our HK$19.0 target price for Luk Fook Holdings International include: a dramatic change in the price of gold, significant change of the consumer preference and the sales of gem-set products, the slow down of mainland Chinese tourist arrivals in Hong Kong, or other macro factors which would affect demand for gold and jewelry products.

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Price Target: (12 months) for Sa Sa International Holding (0178.HK) Method: Our 12-month target price of HK$1.70 for Sa Sa International Holding is based on a price-to-earnings (P/E) multiple of 10x CY16E earnings per share (EPS), which is at discount to its historical average forward P/E multiple of 16x. We believe the stock will be de-rated gradually with less growth potential from both HK and non-HK markets in future. Risk:

Risks to our HK$1.70 target price for Sa Sa International Holding include: (1) a slowdown in domestic consumption and weaker-thanexpected SSSG; (2) slowdown in mainland Chinese visitation growth to HK; (3) further deterioration in China's business operations; (4) gross margin contraction; and (5) rental and labor costs increase.

Price Target: (12 months) for Wheelock and Company Limited (0020.HK) Method: Our target price of HK$37.5 for Wheelock is based a blended discount of 24%, based on a 20% holding company discount to Wharf's CS target price, and a 30% discount to its non-listed assets. Risk:

The key risks to our target price of HK$37.5 for Wheelock are a dramatic slowdown in local consumption, a significant fall in the Chinese property market for Wharf, and a potential slowdown in the residential markets in Hong Kong.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names

The subject company (0683.HK, 0023.HK, 0020.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0293.HK, 0683.HK, 0023.HK, 0020.HK) within the next 3 months. Credit Suisse has a material conflict of interest with the subject company (0293.HK) . Jack So, a Senior Advisor of Credit Suisse, is an Independent Non-Executive Director of Cathay Pacific Airways Limited.

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.creditsuisse.com/sites/disclaimers-ib/en/canada-research-policy.html. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ................................................................................................... Vincent Chan ; Kelvin Tam, CFA ; Eva Wang Credit Suisse AG, Singapore Branch ......................................Timothy Ross ; Anand Swaminathan ; Christopher Siow ; Dawei Lee ; Sanjay Jain For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.creditsuisse.com/disclosures or call +1 (877) 291-2683.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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Hong Kong Strategy

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