Retailing / Thailand 18 May 2011

CP All PCL
CPALL TB

Target price: Bt31.00 Up/downside: -29.5% Share price (13 May): Bt44.00

Initiation: playing devil's advocate

Market appears too sanguine about risk of store-number saturation in Bangkok It also seems too bullish on prospects outside the capital We initiate with a Sell rating on valuation grounds

How do we justify our view?

Pyari Menon

(SEJ) with CPALLs stock suggests to us that, a frothy run-up aside, the latter is likely to see a significant derating even as earnings rise over the next six months. The share price has risen by 800%, from its five-year low (March 2007), 246% over the past two years, and 56% over the past year. We therefore believe most of the positives are priced in. CPALLs scale, supply-chain management, use of technology, store locations, and merchandising are difficult for its competitors to replicate. This is widely acknowledged and factored into the share price, in our view, but some of the issues we have highlighted do not appear to be. The stock is trading currently at a premium to our discounted FCF valuation, historical valuation multiples, and relative to its peers. We initiate coverage with a Sell (5) rating and six-month target price of Bt31.
How we differ

(65) 6499 6566 pyari.menon@sg.daiwacm.com

We think the market expects CPALLs market capitalisation to increase on the back of rising store numbers: we disagree with this. As profitability growth per store drops, we believe the share price will too.
Share price performance

What's new

We believe CP All PCLs (CPALL) business is close to saturation point in Bangkok and the suburbs. Therefore we expect the benefits of increased network density in those areas to be offset by cannibalisation.
What's the impact

12-month share-price performance Relative to Stock Exchange of Thai Index

Rising margins, strong same-storesales (SSS) growth, a high rate of new-store openings and a general euphoria over convenience-store chains across Asia has been a key driver of the share price over the past two years. A slowdown or reversal in any one of these areas would be enough for a significant fall in the share price, in our opinion. We expect the profitability growth per store to slow over the next three years, suggesting a slowdown in the network multiplier effect.
What we recommend

12-month range Market cap (US$bn) Average daily turnover (US$m) Shares outstanding (m) Major shareholder

26.25-45.75 6.53 13.62

4,493 Charoen Pokphand Group (44.0%)

Financial summary (Bt)

Year to 31 Dec Revenue (m) Operating profit (m) Net profit (m) Core EPS EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) ROE (%) 11E 155,195 10,577 7,970 1.774 19.5 (2.4) 24.8 2.8 1.242 9.5 41.4 12E 175,914 12,269 9,207 2.049 15.5 (4.9) 21.5 3.3 1.434 8.4 41.6 13E 198,293 14,106 10,549 2.348 14.6 (10.3) 18.7 3.7 1.644 7.4 42.1

A comparative analysis of the past performance of Seven-Eleven Japan

Ours is one of the first Sell ratings for the stock. Our 2011, 2012, and 2013 net-profit forecasts are respectively 2.4%, 4.9%, and 10.3% below those of the consensus.

Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Retailing / Thailand
CPALL TB
18 May 2011

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook
We expect earnings-growth rates to slow in 2012 and 2013 given that Bangkok and the suburbs are close to saturation in terms of the number of stores. We expect per-store profitability to decline, leading to a derating of the stock. With a dividend-payout ratio of about 70%, the franchisee model is instrumental in funding CPALLs business growth. A slowdown in willing franchisees is a long-term risk to earnings growth. We note, however, that CPALL has been a great growth story. SSS growth, the rise in the number of stores, and margins have typically surprised on the upside. Improved merchandising, the IT systems, and poor execution by competitors have been the primary drivers.

Earnings growth per store

35% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011E 2012E 2013E

Operating income growth per store

Source: Company, Daiwa forecasts

Valuation
We have a six-month target price of Bt31. This is derived from an average of our discounted FCF methodology (fair-value estimate of Bt34) and the average PER since January 2006 (fair-value estimate of Bt29). Based on average trading multiples since 2006, the stock is trading currently at a 50% premium on PER basis and at a 120% premium on a PBR basis. Meanwhile, the stock is trading at a significant premium to average industry PER, PBR, and market cap/store based on the Bloomberg 2011 forecasts. Some of the higher valuation metrics can be partly explained by better returns and growth profile.

Rolling forward PER and PBR

(x) 30 25 20 15 10 5 0 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 (x) 12 10 8 6 4 2 0 May-11

Rolling PER (LHS)

Source: Bloomberg, Company, Daiwa forecasts

Rolling PBR (RHS)

Earnings revisions
We forecast a 2010-13 earnings CAGR of 17%. Our earnings forecasts for 2011, 2012, and 2013 are respectively 2%, 5%, and 10% lower than those of the Bloomberg consensus. Over the past two years, the consensus earnings forecasts for 2011 have been revised up slowly. However, we expect them to be revised down over the next year. The company has indicated that it plans to enter overseas markets, which might lead to less efficient capital allocation over the medium-to-long term. While this could help sustain earnings growth, it highlights our concern of a slowdown in the earnings-growth rate in Thailand.

Changes in consensus earnings forecasts for 2011

(Bt) 2.0 1.6 1.2 0.8 0.4 0.0 Apr-10 Mar-10 Aug-10 Sep-10 Nov-10 Dec-10 May-10 Mar-11 Feb-10 Oct-10 Feb-11 Jan-10 Jun-10 Jan-11 Apr-11 Jul-10

Best Standard EPS Adjusted+ 2011* A

Source: Bloomberg

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Retailing / Thailand
CPALL TB
18 May 2011

Financial summary

Key assumptions
Year to 31 Dec Same store sales (SSS) change (%) Number of stores (Multiline retail) Number of stores - dept Number of stores - disct 2006 5.5 3,784 3,279 505 2007 5.9 4,279 3,665 614 2008 10.5 4,778 4,065 713 2009 9.7 5,270 4,462 808 2010 9.9 5,790 4,920 870 2011E 6.0 6,311 5,378 933 2012E 5.0 6,838 5,841 997 2013E 5.0 7,366 6,304 1,062

Profit and loss (Bt m)

Year to 31 Dec Convenience Stores Eliminations Others Total revenue Other income COGS SG&A Other op. expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (Bt) EPS (adjusted) (Bt) EPS (adjusted fully-diluted) (Bt) DPS (Bt) EBIT EBITDA 2006 69,812 (4,599) 34,039 99,252 3,827 (77,761) (22,762) (2,844) (288) (114) 0 (402) (865) 2,599 1,332 1,332 0.300 0.300 0.300 0.299 (288) 2,510 2007 77,458 (4,565) 37,875 110,768 4,334 (86,157) (26,102) (2,997) (155) (378) 0 (533) (829) 2,822 1,460 1,460 0.327 0.327 0.327 0.249 (155) 2,833 2008 92,959 (5,923) 37,290 124,326 4,856 (94,354) (27,875) (3,226) 3,727 (232) 0 3,495 (1,205) 1,012 3,301 3,301 0.735 0.735 0.735 0.349 3,727 6,744 2009 109,105 (7,231) 10,503 112,377 5,087 (82,718) (25,147) (3,106) 6,493 294 0 6,787 (1,774) (21) 4,992 4,992 1.111 1.111 1.111 0.600 6,493 9,351 2010 138,565 (16,245) 12,634 134,954 5,791 (98,837) (30,014) (3,075) 8,818 339 0 9,157 (2,487) 0 6,670 6,670 1.484 1.484 1.484 1.200 8,818 11,526 2011E 159,347 (18,681) 14,529 155,195 5,891 (113,090) (34,343) (3,075) 10,577 341 0 10,918 (2,948) 0 7,970 7,970 1.774 1.774 1.774 1.242 10,577 13,382 2012E 180,621 (21,176) 16,468 175,914 5,996 (127,682) (38,774) (3,183) 12,269 343 0 12,613 (3,405) 0 9,207 9,207 2.049 2.049 2.049 1.434 12,269 15,172 2013E 203,599 (23,869) 18,563 198,293 6,106 (143,441) (43,559) (3,292) 14,106 345 0 14,451 (3,902) 0 10,549 10,549 2.348 2.348 2.348 1.644 14,106 17,108

Cash flow (Bt m)

Year to 31 Dec Profit before tax Depreciation and amortisation Tax paid Change in working capital Other operational CF items Cash flow from operations Capex Net (acquisitions)/disposals Other investing CF items Cash flow from investing Change in debt Net share issues/(repurchases) Dividends paid Other financing CF items Cash flow from financing Forex effect/others Change in cash Free cash flow
Source: Company, Daiwa forecasts

2006 (402) 2,798 (819) 3,740 775 6,092 (4,936) (226) (1,614) (6,776) 3,800 98 (1,330) (289) 2,279 (223) 1,372 1,156

2007 (533) 2,988 (877) 3,246 1,203 6,027 (4,636) 485 292 (3,859) 1,519 159 (1,114) (580) (16) (22) 2,130 1,391

2008 3,495 3,017 (1,090) 3,365 624 9,410 (3,839) (1,497) (537) (5,873) (1,883) 157 (1,569) (514) (3,808) 85 (186) 5,571

2009 6,787 2,859 (1,492) 882 (30) 9,005 (3,552) (1,717) (70) (5,339) (158) 0 (2,696) (3) (2,857) (24) 786 5,454

2010 9,157 3,093 (2,083) 2,077 96 12,340 (3,869) (26) 22 (3,873) (10) 0 (5,392) 0 (5,402) (32) 3,033 8,471

2011E 10,918 3,190 (2,948) 2,225 (84) 13,302 (4,548) (50) 38 (4,560) 0 0 (5,579) (3) (5,582) 0 3,159 8,754

2012E 12,613 3,288 (3,405) 2,336 (84) 14,748 (5,078) (50) 60 (5,068) 0 0 (6,445) (6) (6,451) 0 3,229 9,670

2013E 14,451 3,387 (3,902) 2,447 (83) 16,300 (5,483) (50) 82 (5,451) 0 0 (7,384) (9) (7,393) 0 3,456 10,817

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Retailing / Thailand
CPALL TB
18 May 2011

Financial summary continued

Balance sheet (Bt m)

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities Net debt/(cash) BVPS (Bt) 2006 10,654 7,672 2,210 1,264 21,801 17,867 1,180 2,123 42,971 6,752 22,011 4,883 33,646 380 909 34,934 4,447 4,261 8,708 (672) 42,970 (3,522) 1.958 2007 12,510 7,699 1,720 1,290 23,219 18,899 1,297 1,806 45,220 7,859 24,888 5,006 37,753 772 1,064 39,589 4,470 4,693 9,164 (3,532) 45,220 (3,879) 2.050 2008 12,647 5,444 1,073 1,743 20,907 12,660 730 5,862 40,159 168 17,733 3,774 21,676 0 1,583 23,259 4,493 12,246 16,739 161 40,159 (12,479) 3.726 2009 13,878 5,900 925 2,422 23,125 13,491 780 7,045 44,441 10 19,189 4,371 23,570 0 1,935 25,505 4,493 14,247 18,740 196 44,441 (13,868) 4.171 2010 20,151 6,518 1,226 2,818 30,713 14,525 783 1,883 47,904 0 21,613 5,757 27,369 0 2,577 29,946 4,493 13,263 17,756 203 47,904 (20,151) 3.952 2011E 23,361 7,411 1,475 2,532 34,778 16,318 783 1,911 53,790 50 24,261 5,885 30,196 0 2,663 32,859 4,493 16,235 20,729 203 53,790 (23,311) 4.614 2012E 26,639 8,372 1,726 1,742 38,479 18,543 783 1,940 59,745 100 27,185 6,015 33,300 0 2,751 36,052 4,493 18,998 23,491 203 59,745 (26,539) 5.228 2013E 30,145 9,402 1,980 1,032 42,560 21,074 783 1,969 66,385 150 30,389 6,147 36,685 0 2,841 39,527 4,493 22,162 26,655 203 66,385 (29,995) 5.933

Key ratios (%)

Year to 31 Dec Sales (YoY) EBITDA (YoY) Operating profit (YoY) Net profit (YoY) EPS (YoY) Gross-profit margin EBITDA margin Operating-profit margin ROAE ROAA ROCE ROIC Net debt to equity Effective tax rate Accounts receivable (days) Payables (days) Net interest cover (x) Net dividend payout
Source: Company, Daiwa forecasts

2006 0.0 0.0 0.0 0.0 0.0 21.7 2.5 n.a. 15.3 3.1 n.a. n.a. net cash n.a. 8.1 80.9 n.a. 99.8

2007 11.6 12.9 n.a. 9.6 9.0 22.2 2.6 n.a. 16.3 3.3 n.a. n.a. net cash n.a. 6.5 77.3 n.a. 76.3

2008 12.2 138.0 n.a. 126.1 124.9 24.1 5.4 3.0 25.5 7.7 23.8 79.1 net cash 34.5 4.1 62.6 16.1 47.5

2009 (9.6) 38.7 74.2 51.2 51.2 26.4 8.3 5.8 28.1 11.8 36.1 101.1 net cash 26.1 3.2 60.0 n.a. 54.0

2010 20.1 23.3 35.8 33.6 33.6 26.8 8.5 6.5 36.6 14.4 47.8 446.8 net cash 27.2 2.9 55.2 n.a. 80.8

2011E 15.0 16.1 19.9 19.5 19.5 27.1 8.6 6.8 41.4 15.7 54.3 n.a. net cash 27.0 3.2 53.9 n.a. 70.0

2012E 13.4 13.4 16.0 15.5 15.5 27.4 8.6 7.0 41.6 16.2 54.8 n.a. net cash 27.0 3.3 53.4 n.a. 70.0

2013E 12.7 12.8 15.0 14.6 14.6 27.7 8.6 7.1 42.1 16.7 55.5 n.a. net cash 27.0 3.4 53.0 n.a. 70.0

Company profile
CP All PCL was founded in 1988 to operate convenience stores as its core business under the 7-Eleven brand in Thailand. The company is also active in running related businesses, such as a bill-payment collection service, the manufacture and sale of frozen foods and bakery items, and the sale and maintenance of retail equipment.

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Retailing / Thailand
CPALL TB
18 May 2011

Growth in profitability per store

Opening new stores has benefitted CPALL in two ways. First, the new stores have added to profit driven by their own profitability. Second, the expanded network improved the efficiency of the old stores. With almost 6,000 stores already opened and Bangkok close to saturation, we expect profitability growth per store to decline. This is because the benefits of further network expansion should be limited, and new stores are likely to be less profitable given that finding better locations than those of existing stores is unlikely.
Profitability growth per store
35% 30% 25% 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011E 2012E 2013E

Summary of our thesis

We believe CPALLs share price is on the cusp of a correction. This will be driven primarily by a slowdown in earnings growth per store, a slowdown in the increase in the number of stores in Bangkok, disappointing expansion outside of the capital, especially if agricultural commodities see price weakness, and future downward revisions to the consensus earnings forecasts for 2012 and 2013. The performance of CPALLs share price between 2003 and 2011 is very similar to that for SEJ between 1993 and 2001. We note that SEJs share price saw a strong correction following a strong run-up in 1999 and 2000, very similar to the one CPALL had from 2009-11. On a per-store basis, we expect profitability growth to decline over the next three years. In our view, this will reduce valuations on a per-store basis, particularly as CPALLs per-store valuations are among the highest in the industry. Our earnings forecasts for 2011, 2012, and 2013 are respectively 2%, 5%, and 10% lower than those of the Bloomberg consensus. Upward revisions to the 2011 consensus earnings forecasts in 2009 and 2010 helped the stock undergo a rerating. We expect the stock to be derated as the consensus revises down its earnings forecasts closer to ours. We believe that the number of stores in Bangkok is close to saturation point. This can be seen from the increase in the number of Bangkok stores slowing to 6% YoY for 2010. The number of new stores being added fell from 250 in 2007 to 183 in 2010, even though the Thai economy was strong during the period. We believe the consensus is too aggressive in its forecasts for long term store expansion in the countrys provincial areas. If the price strength seen in agricultural commodities over the last two years reverses, we expect a significant slowdown in the store expansion plans outside of Bangkok. The low population density will also limit the benefits of store concentration, which is a key driver of store profitability for convenience stores (CVS).

Net income growth per store (based on consensus estimates)

Source: Company, Daiwa

The slowdown in profitability per store is likely to make it more difficult to find franchisees for stores over the long term. In our view, franchising is critical for CPALL, given that it is committed to a high dividend payout. Our 2011, 2012 and 2013 net-profit forecasts are respectively 2.4%, 4.9%, and 10.3% below those of the consensus. The performance of the share price has closely tracked earnings revisions. We believe that as the 2011 consensus earnings forecast is revised down, the stock will be derated.
Earnings revisions versus share price
(Bt) 50 40 30 20 10 0 Sep-08 Sep-09 Sep-10 Jan-09 Jan-10 May-08 May-09 May-10 Jan-11 May-11 (Bt) 2.0 1.5 1.0 0.5 0.0

Price (LHS)
Source: Bloomberg

Best Standard EPS Adjusted+ 2011* A (RHS)

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Retailing / Thailand
CPALL TB
18 May 2011

Similarities between CPALL and SEJ

In terms of store expansion, profit growth, the gross margin, and ROI, SEJ has been the most successful convenience-store operator in the world, while CPALL is perhaps the second-best performing convenience store operator. The following chart shows the extent of the share-price fall that SEJ saw in 2000 following a run-up similar to that of CPALL recently.
Comparative performance of CPALL (since 2003) and SEJ
() 18,000 15,000 12,000 9,000 6,000 3,000 0 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 (Bt) 50 40 30 20 10 0

SEJs share price fell even as earnings rose

While we would agree that CPALLs share price does not have to follow the same pattern as that of SEJ, we believe the risk remains that, given the recent run-up, it could fall even though earnings continue to rise.
SEJ: share-price performance vs. earnings
() 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2010 (bn) 120 100 80 60 40 20 0

Share price (LHS)

Source: Bloomberg, Company

Net income (RHS)

7/11 Japan (LHS)

Source: Bloomberg

CPALL (RHS)

Market seems to exaggerate penetration potential and upcountry theme

The current strong expansion outside of Bangkok (65% of new stores) is being driven by high agricultural prices, which have increased the income levels in the provinces. Any reversal in the latter trend would pose risks to the expansion plans in these areas, in our view.
Rate of increase in the number of stores
25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 Provincial 2009

It could be argued that SEJ and CPALL have very different fundamentals and the market environments in which they operate are different. It could also be argued that the bursting of the Dot.com bubble led to the collapse of SEJs share price. We think these arguments are valid. However, in our view, once store expansion reaches critical mass, the valuation per store increases as the benefits of network density, information feedback from the network, and sheer scale improve operational efficiencies significantly. That said, as store expansion begins to reach saturation point, as we believe it has in Bangkok and the suburbs on a per store basis, the stocks valuations will not rise as the risk of cannibalism, less-efficient franchisees, and less-attractive locations will slow SSS growth, operational efficiency, and ultimately the ROI. It is difficult to predict when the market will start to discount this, but as the comparison chart between SEJ and CPALL shows, at the current levels the risks to the downside are more than those to the upside, in our view.

BKK and Suburbs

Source: Company

Several reports from competitors and the company itself have suggested that as the penetration rate of CVS in Thailand is less than half of those of mature markets such as Japan and Taiwan, and there is 2-3x upside for expansion in the country. We believe this analysis ignores the importance of relative per-capita spending power and population density. On a purchasing-potential-per-store basis, Thailand lags behind Japan and Taiwan significantly. In addition, population density is critical for successfully expanding a CVS network to different areas, in our view. -6-

Retailing / Thailand
CPALL TB
18 May 2011

While the economy outside of Bangkok is expanding, the relatively low population density will be an issue with regards to how many profitable stores the provinces can accommodate. The success of CVS networks depend to a large extent on store-network density as well as population density.
Population support is overplayed
Population/store Potential purchasing power per store (US$m) Relative population density (x) Japan 2,300 98 2.8 Taiwan 2,500 45 5.8 Thailand 6,400 26 1.0

CVS stocks have performed well over the past year

There has been a general euphoria in the Asia markets about convenience-store companies that have had good SSS growth and have been looking to increase the number of new stores.
CVS stocks: share-price performance over the past 12 months
250 200 150 100 50 0 4/1/10 6/1/10 8/1/10 10/1/10 12/1/10 2/1/11 4/1/11

Source: CIA World Factbook, Wikipedia, compiled by Daiwa

Competition has been limited but a few companies are reaching critical mass
CPALL has used its IT system to improve its delivery and merchandising strategy. While the company continues to gain market share in Thailand some of its competitors appear to have reached critical mass in terms of the number of stores (500), which might allow them to invest in similar IT distribution systems. A significant gap is likely to remain in terms of capabilities, but we expect competition to increase gradually over the next few years. The situation was similar in Japan, where SEJ was regarded to have the best supply-chain management techniques, but over time it was copied and matched by its competitors. CPALL has a solid distribution network, and given its network density it is likely to continue to have a competitive advantage for the foreseeable future. However , we believe the benefits from the companys scale in Bangkok and its suburbs have peaked and additional leverage is limited and that increasing its competitive advantage will be difficult to achieve.

7/11 Taiwan Familymart Taiwan

Source: Bloomberg, compiled by Daiwa Note: rebased to 100

Casey CPALL

In some cases the store concentrations achieved in Taiwan, in particular, suggest that significant opportunities exist in China. This has led to strong share-price performances by President Chain Store (7/11 Taiwan) and Taiwan Family Mart, and CPALLs share-price performance has been helped in part by this. However, President Chain store, Seven & I Holdings and Taiwan Family Mart may be better-positioned to exploit the business growth opportunities in China than CPALL as they already have a presence there.

Looking overseas
The company has indicated that it has plans to expand into Cambodia and China. While this might result in its earnings rising, valuation multiples are likely to be derated as CPALL would not have the advantages it has in Thailand. The transfer of technology and distribution systems might be much less successful than it is in Thailand due to geographic differences and differences in consumer trends. In addition, we believe that the move highlights that the earnings-growth opportunities in Thailand are declining, especially in the Bangkok region.

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Retailing / Thailand
CPALL TB
18 May 2011

The Thai consumer is a leader in RTE meal consumption

According to Nielsen surveys Thai consumers lead the world in RTE meal consumption, and CPALLs ability refresh stocks at stores ensures needed freshness. CPALLs food-service portfolio of RTE/RTD products has been instrumental in driving gross margins as well as traffic at its 7-Eleven stores. Gross margins for food service are higher than for processed/frozen foods and beverages. The company also has improved non-food gross margins, by improving its merchandising mix.

Risks to our rating

Strong store rollouts, steady SSS growth, product innovation, and solid execution
CPALL has a very good track record in rolling out stores. SSS growth continues to surprise on the upside with impressive growth in store traffic.
SSS growth and number of new stores
(# stores) 530 520 510 500 490 480 470 460 450 440 2006 2007 2008 2009 SSS Growth (RHS) 2010 Stores Expansion (LHS)
Source: Company

The use of IT systems and technology

12% 10% 8% 6% 4% 2% 0%

CPALL has technology and systems that help it and its store managers to understand shoppers purchasing patterns at an individual level, so as to allow for a varied range of RTE meals. The retail information systems of the company provide the infrastructure for a highly-integrated, highly-distributed demand-chain environment. CPALLs operational excellence in terms of merchandising, location, ability to attract quality franchisees, cost control, use of technology, customer data-mining, and capital efficiency remains a strong and sustainable competitive advantage.

Store foot traffic

1,400 1,200 1,000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 979 977 956 1,032 1,156 1,155 1,195 1,253 1,221

Dominant market share

As at the end of 2010, CPALL had about 8x the sales of its nearest competitor in Thailand, 108 Shop (Not listed), and a national market share of 65%. Despite its size it expanded its number of stores at a faster rate than its competitors over the past five years, thereby increasing its lead further.
Thailand: market shares of convenience-store operators (2010)
Freshmart 5% Lotus Express 3%

No. of customers per Store per Day

Source: Company

Others 13% Family Mart 6%

CPALLs scale, supply-chain management, store locations, and merchandising are difficult for its competitors to replicate. This is a sustainable competitive edge over the other convenience-store operators, in our opinion. Product innovation improves the gross-profit margin and boosts SSS. Over the past few years, CPALL has increased ready-to-eat (RTE) and ready-to-drink (RTD) products that it sells in its stores.

7-11 65%

108 Shop 8%

Source: AC Nielsen

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Retailing / Thailand
CPALL TB
18 May 2011

The company pays out almost 70% of earnings as dividends and still manages to fund its more-than-20% sales growth entirely through internal cash flow, which is a testament to the free cash flow it generates through its negative-working-capital business model. The other advantage that size offers the company is the ability to spend on technology. Technologies that boost supply-chain sensitivity and capabilities are costly and the small chains cannot afford to spend as freely as CPALL can in this area.

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Retailing / Thailand
CPALL TB
18 May 2011

CPALL: target-price calculation

Value based on FCF (Bt) Value based on past-five-year PER average (Bt) Average (Bt) Multiple n.a. 16.3 Value 34 29 31

Valuations
We have used an FCF-derived methodology to value CPALL, based on the average of our discounted FCF methodology and average past-five-year PER. We have used an FCF methodology over a dividend-discount methodology, as while the company pays out significant dividends it also generates significant free cash flow from its operations.
CPALL: FCF assumptions (Bt m)
Earnings Capex-depreciation Change in WC FCF to equity Present value Terminal growth rate FCF in terminal year Cost of equity Value at the end of growth phase Present value of explicit forecast (2011-13) Present value of transition phase (2014-16) Present value of terminal value Total value of equity Value per share (Bt)
Source: Daiwa

Source: Daiwa

FCF-based valuation
On an FCF basis, we value CPALL at Bt34. Our base assumptions are laid out in the following table.

2011 7,970 (1,600) 1,440 7,809 7,067 3% 14874 10.5% 198,321 21,772 24,109 108,451 154,332 34.3

2012 9,207 (2,032) 1,655 8,830 7,232

2013 10,549 (2,338) 1,872 10,083 7,473

2014 12,061 (1,912) 3,619 13,768 9,207

2015 13,106 (2,078) 2,502 13,530 8,176

2016 13,500 (2,140) 941 12,300 6,726

Terminal year 13,905

969 14,874

Comments 2011-13 is our explicit forecast period; for 2014-16, earnings growth falls gradually to 3% YoY. For the terminal year (2017), we assume that capex and depreciation are of similar amounts. The company has negative working capital hence we add back working capital

Based on 5.5% risk-free rate, 5% equity-risk premium

Sensitivity analysis to COE and terminal growth rate

FCF valuations are very sensitive to terminal-growth rate and discount-rate assumptions. We have laid out the fair values for our different growth rates and costof-equity assumptions in the following table.
CPALL: FCF valuation sensitivity analysis
COE/growth rate 7.00% 8.00% 9.00% 10.00% 11.00% 12.00%
Source: Daiwa

Valuation based on a past-fiveyear PER

We value CPALL at Bt29, based on its past-five-year PER for the stock. The stock is trading currently at premiums of 50% and 120% on PER and PBR bases, respectively, to its pastfive-year trading ranges.
PBR and PER trading range (January 2006-current)
Max Min Average
Source: Bloomberg, Company

1% 43.02 36.89 32.29 28.70 25.83 23.47

2% 51.58 43.00 36.86 32.25 28.66 25.78

3% 64.43 51.55 42.95 36.81 32.20 28.60

4% 85.84 64.38 51.49 42.90 36.75 32.13

5% 128.69 85.77 64.31 51.42 42.82 36.67

PBR (x) 9.84 1.87 4.31

PER (x) 25.6 7.3 16.4

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Retailing / Thailand
CPALL TB
18 May 2011

CPALL: 12-month-rolling-forward PER (x)

30 25 20 15 10 5 0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 May-06 May-07 May-08 May-09 May-10 Jan-11 May-11

Valuations on a per-store basis

Based on our sample of convenience stores, on a perstore basis, CPALLs per store operational metrics are slightly lower than the global industry averages, but on a market cap/store basis, the stock is trading at a slight premium to the industry average.
CPALL per store metrics vs. industry average
Store performance metrics Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store
Source: Company, Bloomberg, compiled by Daiwa Note: number of stores as at the end of 2011

CPALL Industry average 0.83 1.11 0.04 0.045 0.98 0.70 10% 13%

Source: Bloomberg, Daiwa forecast

CPALL: 12-month-rolling-forward PBR (x)

12 10 8 6 4 2 0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 May-06 May-07 May-08 May-09 May-10 Jan-11 May-11

The following table gives the per store details for all the companies in our sample. CPALLs operating performance per store is strong and just behind those of Casey's General Store Inc, President Chain store (7Eleven Taiwan), and Seven & I Holdings.

Source: Bloomberg, Daiwa forecast

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Retailing / Thailand
CPALL TB
18 May 2011

Operating and valuation metrics on a per store basis

Store chain 7-Eleven Thailand (CPALL TB) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store *Alfamart (AMRT IJ) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store Seven & I Holdings (3382 JP) (Convenience Stores only) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store Family Mart Japan (8028 JP) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store *Family Mart Taiwan (5903 TT) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store President Chain Store (2912 TT) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store *Casey's General Store Inc (CASY US) Sales/store (US$m) Earnings/store (US$m) Market cap/store (US$m) Earnings growth/store Value/store 0.83 0.043 0.98 10% 0.39 0.01 0.19 32% 1.27 0.12 1.14 3% 0.23 0.01 0.21 11% 0.57 0.01 0.35 33% 0.8720 0.0479 1.1086 10% 3.5841 0.0692 0.9392 -9% Comments Below the industry average, but only because Casey and Seven & I Holdings have high sales/store metrics. Higher net margins and domination of the Thailand market have helped to boost profitability. However, lower per store sales keep per store profitability just in line with the industry average. Higher market cap than the industry average is due to higher SSS and strong store count growth. A key risk is if the government implements price controls. Despite bigger stores with a wider variety of merchandizing poor per capita in Indonesia affects per store sales negatively Lower net margins than CPALL because of hypermarket-like merchandising and pricing. Low per store profitability, slow sub-franchising partly offset by high store count growth. Driven mainly by new store growth and the increased profitability of stores added in 2010. High per capita income drives high per store sales. High net margins driven by ready to eat (RTE) products and high franchise revenue. Driven by higher profitability per store. Maturity of Japan's CVS industry has led to slower growth expectations vis--vis SSS and store count growth.

Lower per store profitability than CPALL and industry average reduces market cap per store.

Better than those of CPALL despite having a higher concentration of stores. This is driven by higher per capita income. Better than those of CPALL, driven by higher per capita income and network density. Driven by higher earnings as well as the market's expectations of its potential in China.

Higher per capita income drives per store sales. Higher earnings per store than its counterparts in Asia are driven by higher store sales than those of its counterparts in Asia.

Source: Companies, compiled by Daiwa, Bloomberg Note: *Sales, earnings and earnings growth/store based on Bloomberg consensus. Number of stores as at the end of 2011

Relative valuations
CPALL trades at a premium on all multiples compared with its convenience-store peers in Thailand. We
Regional convenience-store operators: relative valuations
Bloomberg code CPALL TB Equity AMRT IJ Equity 3382 JP Equity 5903 TT Equity 8028 JP Equity 2912 TT Equity CASY US Equity 2651 JP Equity MGNT LI Equity DLTR US Equity 3337 JP Equity Rating Sell (5) NR Hold (3) NR Outperform (2) Buy (1) NR Hold (3) Hold (3) NR Hold (3)

believe the companys higher returns justify its higher multiples, particularly on a PBR basis.

*CP ALL PCL SUMBER ALFARIA TRIJAYA TBK SEVEN & I HOLDINGS CO LTD TAIWAN FAMILYMART CO LTD FAMILYMART CO LTD PRESIDENT CHAIN STORE CORP CASEY'S GENERAL STORES INC LAWSON INC MAGNIT OJSC-SPON GDR REGS DOLLAR TREE INC CIRCLE K SUNKUS CO LTD Average

Closing share price (local currency) 16-May-11 44 3,000 2,028 135.5 2,905 155 39.55 3,975 27.50 60.28 1,209

Market cap (US$m) 6,544 1,200 22,285 1,050 3,531 5,600 1,501 4,945 12,234 7,357 1,292

PER (x) (FY11E) 25 25 15 27 15 22 16 15 28 19 14 22

EV/EBITDA (x) (FY11E) 13.0 9.8 4.7 2.3 3.9 17.5 5.5 4.3 14.3 8.7 1.3 6.7

PBR (x) (FY11E) 9.5 7.5 1.0 n.a 1.3 7.3 n.a 1.9 5.7 5.1 0.7 4.8

2011 EPS ROE (FY11E) change (%) (%) 19 41.4 58 33.0 n.a. 6.5 18 6.3 20 8.8 23 35.1 10 20.7 2 12.8 (74) 8.2 31 27.3 29 5.3 25 22

Source: Daiwa forecasts for rated stocks, Bloomberg for others *Note: Share price as at the close on 13 May for CPALL

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Retailing / Thailand
CPALL TB
18 May 2011

Industry structure and competitive positioning

CPALL dominates Thailands convenience-store sector, with about 65% share of the market.
Thailands convenience-store sector: market-share breakdown
Freshmart 5% Lotus Express 3%

related exposure, ensuring the food it provides is fresh is important. This requires a very responsive IT system. Although these are usually costly to implement, CPALL is able to afford this, and other very responsive technology, given its large network.

Distribution system
The company has distribution centres (DC) serving several store areas, which enables it to deliver fresh and quality products with less lead time, as well as helping it to reduce inventory and logistics costs. The company has an IT system that links up its stores to its head office and to the distribution centre (DC), which enables it to deliver goods to its stores quickly from both the DC and suppliers.

Others 13% Family Mart 6%

Store-network growth
With a bigger network, the company has been able to introduce more new products and services. For example, the high density network means it costs less to distribute RTE food items. Additionally, it enables the company to accept more bill payments, as utility providers, ATMs and phone companies are unlikely to use them without a large enough network. This is because by dealing with just one entity (CPALL), the utilities get access to a big network of payment counters for their customers. The cost of linking up the utilities and the stores on a per outlet basis is also less as it just needs to link with the one CPALL server.

7-11 65%

108 Shop 8%

Source: AC Nielsen, Daiwa

Competitive positioning
CPALLs scale, supply-chain management, store locations, and merchandising are difficult for competitors to replicate, in our view. This should enable CPALL to sustain its competitive edge. CPALLs annual sales are about 8x those of its nearest competitor in Thailand, and despite its size (in terms of sales) relative to its competitors, the company is expanding at a faster rate than its competitors, which should thus increase its market lead further. CPAlls operational excellence in terms of merchandising, location, ability to attract quality franchisees, cost control, use of technology, customer data mining and capital efficiency are the primary drivers of its competitive advantage.

Clustering
The companys strategy of having divided store clusters based on location (eg, residential areas, markets, schools, offices, gas stations, factories, tourist spots, and transport-interchange areas) allows it to plan product and service management strategies to better meet the needs of its customers.

Standardising technology
The company strives to manage each store to meet 7Elevens standard by applying a standardised system to its stores. This has made it easier for the company to expand in terms of the number of stores and sales. The IT system draws on data that can be used to make relevant management and strategy decisions. Additionally, given the companys significant food- 13 -

Retailing / Thailand
CPALL TB
18 May 2011

Operations
CPALL operates its chain of convenience stores in Thailand through the 7-Eleven trademark. It generates revenue through three types of ownership format: 1) corporate stores, 2) franchise stores, and 3) sub-area licence stores.
CPALL: franchise business model breakdown (number of stores)
3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 Corporate
Source: Company

Franchisees account for about 50% of the companys annual gross profit. CPALL invests in the retailing equipment, store decoration and inventory. The company also gives its franchisees a lot of help in managing stores. Most of the other costs incurred to run these outlets are borne by the franchisee. These costs include rentals, staff pay and utility charges.

Sub-area licence stores

In exchange for a licence fee, CPALL offers sub-area license agreements, whereby third parties are allowed to manage 7-Eleven stores within their own designated non-overlapping areas. Currently, the company has four sub-area licence agreements, covering Yala, Phuket, Chiang Mai, and Ubon Ratchathani. Sub-area franchises accounts for about 7% of the companys total store count.

Store count growth plans

The company is focussing strongly on expanding its franchise scheme, as it requires it to invest less capital, while still building up the network. It plans to expand by opening about 500 stores every year, and targets 7,000 outlets by 2013.
2008 Franchise 2009 Sub-area 2010

The company had 5,790 stores as at 31 December 2010. About 15% of the companys convenience stores are located in PTT gas stations.

To support its expansion plan, the company is building two new regional distribution centres. The regional distribution centre in the north-eastern region commenced operations in early 2011, and the one in the northern region will open in 2012. Management has indicated that it will continue to increase focus on expanding in the provincial areas rather than in Bangkok and the suburbs.
CPALL: provincial versus Bangkok (number of stores)
3,500 3,000 2,500 2,000 1,500 1,000 500 0 2006 2007 2008 Provincial 2009 2010 Bangkok & Suburban
Source: Company

Corporate stores
The company invests in retailing equipment, store decorations and inventory using its own equity, and hence the stores are wholly owned and controlled independently by the company. The income generated from this form of ownership comes solely from the net sales at its 7-Eleven stores, while the major part of costs incurred usually come from employee-related and fixed expenses.

Franchise stores
CPALL gives anyone, including its employees, the opportunity to manage their own 7-Eleven stores under a franchise system. Franchisees are charged a franchise sign-up fee, and a deposit guarantee that is refunded if the contract is terminated.

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Retailing / Thailand
CPALL TB
18 May 2011

The company operates a network of 5,790 stores, while its portfolio of stores is expanding at a rate of more than 500 new stores a year.

Company background
CPALL was founded in 1988 by Charoen Pokphand Group (Not listed), a Thailand-based conglomerate. It has the exclusive right to operate convenience-store chains in Thailand under the 7-Eleven trademark.
CPALL and subsidiaries

The company also operates supporting companies that supply its network of company-owned and franchised stores with bill-payment services, manufacturing and the sale of frozen foods and bakery items, IT services including smart cards, logistics services, and staff training.

Source: Company

Key management
Mr. Dhanin Chearavanot is the chairman of CPALL. He also serves as the chairman and CEO of Charoen Pokphand Group. Mr. Piyawat Titasattavorakul is CPALLs managing director. He served as the vice-president of operations from 1996-98. Mr. Taweesak Kaewrathtanapattama is CPALLs senior vice-president of accounting and finance.

Key shareholder
The Charoen Pokphand Group holds a 44% stake in CPALL.

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Daiwas Asia Pacific Research Directory

Hong Kong Regional Research Head; Pan Asia Research Regional Research Co-head Head of Product Management Product Management Head of China Research; Chief Economist (Greater China) Macro Economy (Hong Kong, China) Regional Chief Strategist; Strategy (Regional) Strategy (Regional) Head of Hong Kong Research; Regional Property Coordinator; Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Automobiles and Components (China) Head of Greater China FIG; Banking (Hong Kong, China) Banking (Hong Kong, China) Banking (Hong Kong, China) Insurance Capital Goods Electronics Equipments and Machinery; IT/Electronics Tech Hardware (Hong Kong, China) Consumer/Retail (Hong Kong, China) Consumer/Retail (China) Head of HK and China Gaming and Leisure; Hotels, Restaurants and Leisure Casinos and Gaming (Hong Kong); Capital Goods Conglomerate (Hong Kong) Regional Head of IT/Electronics; IT/Electronics Semiconductor and Solar (Regional, Taiwan, Singapore, Hong Kong and China) Nagahisa MIYABE Christopher LOBELLO John HETHERINGTON Tathagata Guha ROY Mingchun SUN Kevin LAI Colin BRADBURY Mun Hon THAM Jonas KAN Jeff CHUNG Grace WU Sophia HUO Queenie POON Jennifer LAW Joseph HO Peter CHU Nicolas WANG Gavin HO Pranab Kumar SARMAH (852) 2848 4971 (852) 2848 4916 (852) 2773 8787 (852) 2773 8731 (852) 2773 8751 (852) 2848 4926 (852) 2848 4983 (852) 2848 4426 (852) 2848 4439 (852) 2773 8783 (852) 2532 4383 (852) 2532 4380 (852) 2532 4381 (852) 2773 8745 (852) 2848 4443 (852) 2848 4430 (852) 2848 4963 (852) 2532 4384 (852) 2848 4441 (852) 2773 8702 (852) 2773 8782 (852) 2848 4431 (852) 2848 4463 (852) 2532 4341 (852) 2848 4460 (852) 2532 4159 (852) 2773 8715 (852) 2773 8735 (852) 2773 8729 (852) 2773 8730 (852) 2848 4465 (852) 2848 4024 (852) 2848 4467 (852) 2532 4349 (852) 2848 4068 (852) 2773 8741 (852) 2773 8714 (852) 2848 4489 nagahisa.miyabe@hk.daiwacm.com christopher.lobello@hk.daiwacm.com john.hetherington@hk.daiwacm.com tathagata.guharoy@hk.daiwacm.com mingchun.sun@hk.daiwacm.com kevin.lai@hk.daiwacm.com colin.bradbury@hk.daiwacm.com munhon.tham@hk.daiwacm.com jonas.kan@hk.daiwacm.com jeff.chung@hk.daiwacm.com grace.wu@hk.daiwacm.com sophia.huo@hk.daiwacm.com queenie.poon@hk.daiwacm.com jennifer.law@hk.daiwacm.com joseph.ho@hk.daiwacm.com peter.chu@hk.daiwacm.com nicolas.wang@hk.daiwacm.com gavin.ho@hk.daiwacm.com pranab.sarmah@hk.daiwacm.com eric.chen@hk.daiwacm.com calvin.huang@hk.daiwacm.com ashley.chung@hk.daiwacm.com alexander.latzer@hk.daiwacm.com felix.lam@hk.daiwacm.com hongxia.zhu@hk.daiwacm.com kenji.serizawa@hk.daiwacm.com danny.bao@hk.daiwacm.com yannis.kuo@hk.daiwacm.com mark.chang@hk.daiwacm.com john.choi@hk.daiwacm.com marvin.lo@hk.daiwacm.com jimmy.lam@hk.daiwacm.com kelvin.lau@hk.daiwacm.com edwin.lee@hk.daiwacm.com dave.dai@hk.daiwacm.com justin.lau@hk.daiwacm.com philip.lo@hk.daiwacm.com jibo.ma@hk.daiwacm.com

Co-head of Regional IT/Electronics; IT/Electronics Semiconductor/IC Design (Regional) Eric CHEN IT/Technology Hardware PC Hardware (Taiwan) IT/Electronics - Semiconductor/IC Design (Taiwan) Regional Head of Materials; Materials/Energy (Regional) Materials (China) Pan Asia Research, Consumer, Pharmaceuticals and Healthcare (China) Pan Asia Research Head of Hong Kong and China Property; Property Developers (Hong Kong, China) Property (Hong Kong, China) Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Small/Medium Cap (Regional) Regional Head of Telecommunications; Telecommunications (Regional, Greater China); Internet (China) Transportation Marine and Transportation Infrastructure (Regional) Transportation Aviation, Land and Transportation Infrastructure (Regional) Transportation Transportation Infrastructure; Capital Goods Construction and Engineering (China) Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Head of Custom Products Group; Custom Products Group Custom Products Group Custom Products Group Calvin HUANG Ashley CHUNG Alexander LATZER Felix LAM Hongxia ZHU Kenji SERIZAWA Danny BAO Yannis KUO Mark CHANG John CHOI Marvin LO Jimmy LAM Kelvin LAU Edwin LEE Dave DAI Justin LAU Philip LO Jibo MA

South Korea Head of Research; Strategy; Banking/Finance Automobiles; Shipbuilding; Steel Banking/Finance Capital Goods (Construction and Machinery) Consumer/Retail IT/Electronics (Tech Hardware and Memory Chips) IT Electronics (Tech Hardware) Materials (Chemicals); Oil and Gas Pan Asia Research; Small/Medium Caps Telecommunications; Software (Internet/Online Games) Chang H LEE Sung Yop CHUNG Anderson CHA Mike OH Sang Hee PARK Jae H LEE Steve OH Daniel LEE Yumi KIM Thomas Y KWON (82) 2 787 9177 (82) 2 787 9157 (82) 2 787 9185 (82) 2 787 9179 (82) 2 787 9165 (82) 2 787 9173 (82) 2 787 9195 (82) 2 787 9121 (82) 2 787 9838 (82) 2 787 9181 chlee@kr.daiwacm.com sychung@kr.daiwacm.com anderson.cha@kr.daiwacm.com mike.oh@kr.daiwacm.com sanghee.park@kr.daiwacm.com jhlee@kr.daiwacm.com steve.oh@kr.daiwacm.com daniel.lee@kr.daiwacm.com yumi.kim@kr.daiwacm.com yskwon@kr.daiwacm.com

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Taiwan Head of Taiwan Research; Pan Asia Research Co-head of Research; Strategy Banking/Diversified Financials Consumer/Retail IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps IT/Technology Hardware (Handsets and Components) IT/Technology Hardware (PC Hardware - Panels) IT/Technology Hardware (PC Components) Materials; Conglomerates Hirokazu Mitsuda Alex YANG Ling TANG Yoshihiko KAWASHIMA Christine WANG Alex CHANG Chris LIN Jenny SHIH Albert HSU (886) 2 2758 8754 (886) 2 2345 3660 (886) 2 8789 5158 (886) 2 8780 5987 (886) 2 8788 1531 (886) 2 8788 1584 (886) 2 8788 1614 (886) 2 8780 1326 (886) 2 8786 2212 h.mitsuda@daiwacm-cathay.com.tw alex.yang@daiwacm-cathay.com.tw ling.tang@daiwacm-cathay.com.tw y.kawashima@daiwacm-cathay.com.tw christine.wang@daiwacm-cathay.com.tw alex.chang@daiwacm-cathay.com.tw chris.lin@daiwacm-cathay.com.tw jenny.shih@daiwacm-cathay.com.tw albert.hsu@daiwacm-cathay.com.tw

India Head of India Equities Strategy Deputy Head of Research; Strategy; Banking/Finance All Industries; Pan Asia Research Automobiles Capital Goods; Utilities Materials Oil & Gas; Construction; Small/Medium Caps Pharmaceuticals and Healthcare; Consumer Real Estate Jaideep GOSWAMI Punit SRIVASTAVA Fumio YOKOMICHI Ambrish MISHRA Jonas BHUTTA Vishal CHANDAK Atul RASTOGI Kartik A. MEHTA Amit AGARWAL (91) 22 6622 1010 (91) 22 6622 1013 (91) 22 6622 1003 (91) 22 6622 1060 (91) 22 6622 1008 (91) 22 6622 1006 (91) 22 6622 1020 (91) 22 6622 1012 (91) 22 6622 1063 jaideep.goswami@in.daiwacm.com punit.srivastava@in.daiwacm.com fumio.yokomichi@in.daiwacm.com ambrish.mishra@in.daiwacm.com jonas.bhutta@in.daiwacm.com vishal.chandak@in.daiwacm.com atul.rastogi@in.daiwacm.com kartik.mehta@in.daiwacm.com amit.agarwal@in.daiwacm.com

Singapore Head of Research; Pan Asia Research Chief Economist, Asia Ex-JP; Macro Economy (Regional) Global Director of Quantitative Research; Quantitative Research Quantitative Research Quantitative Research Regional Head of Banking/Finance; Banking; Property and REITs Banking (ASEAN) Consumer; Food and Beverage; Small/Medium Cap (ASEAN) Head of ASEAN Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Tatsuya TORIKOSHI Prasenjit K BASU Deep KAPUR Josh CHERIAN Suzanne HO David LUM Srikanth VADLAMANI Pyari MENON Adrian LOH Ramakrishna MARUVADA (65) 6321 3050 (65) 6321 3069 (65) 6321 3079 (65) 6499 6549 (65) 6499 6545 (65) 6329 2102 (65) 6499 6570 (65) 6499 6566 (65) 6499 6548 (65) 6499 6543 tatsuya.torikoshi@sg.daiwacm.com p-k.basu@sg.daiwacm.com deep.kapur@sg.daiwacm.com josh.cherian@sg.daiwacm.com suzanne.ho@sg.daiwacm.com david.lum@sg.daiwacm.com srikanth.vadlamani@sg.daiwacm.com pyari.menon@sg.daiwacm.com adrian.loh@sg.daiwacm.com ramakrishna.maruvada@sg.daiwacm.com

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Japan Industrials (Regional); Pan Asia Research Industrials (Regional); Pan Asia Research Taiki KAJI Daijiro HATA (81) 3 5555 7174 (81) 3 5555 7178 taiki.kaji@jp.daiwacm.com daijiro.hata@jp.daiwacm.com

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Daiwas Office
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United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (FSA) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. 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Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at www2.us.daiwacm.com/report_disclosure.html. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Dubai This document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority. 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The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Capital Markets Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association

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