JARDINE_MATHESON(JM.SP)：DOWNGRADE_TO_N：SLOWING_GROWTH_CAPS_UPSIDE-2013-01-25.ppt

68.00 63.50 2.0 9.1 pe 1.4 1.3 1.3 1.2 x 2.0 2.0 2.1 2.4 % company report industrials conglomerates equity singapore abc global research jardine matheson (jm sp) neutral target price (usd) share price (usd) forecast dividend yield (%) potential return (%) note: potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield dec 2011 a 2012 e 2013 e hsbc eps 4.13 4.02 4.37 downgrade to n: slowing growth caps upside growth slowing due to demand softening at astra, weaker idr and hactls loss of key customer cathay pacific hsbc forecasts lowered and now 6-9% below consensus downgrade to neutral although target raised to usd68 (from usd58); fully valued after recent outperformance hsbc pe performance 15.4 1m 15.8 3m 14.5 12m absolute (%) relative (%) 2.8 1.5 3.3 -2.1 22.1 4.7 growth slowing. we estimate jardine mathesons (jm) recurring profit doubled in the five years to 2012e. this track record was one of the key reasons why jm was our preferred conglomerate for most of this period. however, half of jms growth was driven by astra 25 january 2013 mark webb* regional head of conglomerate and transport research the hongkong and shanghai banking corporation limited +852 2996 6574 .hk stephen wan* analyst the hongkong and shanghai banking corporation limited +852 2996 6566 .hk rohit kadni* associate bangalore view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: the hongkong and shanghai banking and risks are now rising. we expect auto sales to slow in 1h13 due to softer demand and the impact of new down payment rules for islamic financing. in addition, we estimate 30% of our fair value (primarily astra) is denominated in idr so the recent depreciation of this currency exacerbates these trends. finally, jardine motors is suffering from a weak performance in a difficult mainland market and jardine pacifics main profit driver, hactl, will lose over 40% of business in 2013e as cathay switches to its own terminal. earnings lowered; hsbc forecasts below consensus. as a result of a cut in our forecast contributions to jm from astra, jardine motors and jardine pacific, we lower our 2012- 14e recurring net profit by 3-6%. we are 6% and 9% below consensus for 2012e and 2013e, respectively, and forecast 2011-14e recurring profit will rise at a 7% cagr. downgrade to neutral. we increase our appraised valuation to usd91 from usd82 to reflect, primarily, recent share and target price increases at hk land and dairy farm. we set a new target price of usd68 based on a 25% discount to appraised valuation (down from 30%). this is lower than the 30% average discount since 2010 to reflect the re-rating of this stock over the period and brings the discount for jm in line with swire pacific and wharf. jm has risen 25% over the last year and has outperformed the msci aej index by 9%. we argue the stock is now fully valued and downgrade to neutral. key financial summary corporation limitedye decebit net profit hsbc npeps hsbc epspbdiv yield fcf yield disclaimer n; tp idr7,700) auto risks rising jm has a 29% effective stake in astra international (astra) through its interest in jardine cycle n; tp usd12.7) jm has a 63% effective interest in dairy farm (df). df makes up 23% of 2013e recurring profit and 33% of our appraised equity valuation. outlook remains robust we expect a strong performance across business segments in 2013e led by an economic recovery abc hactl 14% jardine matheson (jm sp) conglomerates 25 january 2013 in asia. we expect retail sales in dairy farms main markets to be strong in 2013e. hsbc forecasts hong kong, indonesia and mainland china retail sales will grow over 15% y-o-y. we expect the other main profit growth drivers will be accelerated store openings, the full impact from acquisitions in cambodia and philippines, a turnaround in convenience store operations in china and continued growth in health and beauty. we expect idr depreciation will largely offset the positive impact of the appreciation of asian currencies. we raise our 2013-14e forecasts by jardine pacific outlook mixed jardine pacific is a wholly-owned subsidiary of jm, and makes up 12% of 2012e recurring profit and 6% of our appraised equity valuation. 2. jardine pacific 2012e net profit breakdown others 7% restaur 28% schindler 18% abc 1% mainly due to the net positive currency impact and we now expect hsbc net profit will grow 18% y-o-y in 2013e. our forecast assumes a 1% gammon 14% jec 19% positive impact on 2013e net profit from currency movements. we are 1-3% above consensus for 2013-14e. trading at top end of pe trading range dfs shares have risen 14% y-t-d, outperforming the index by 13%. df is currently trading at a 27x 2013e consensus pe which is above its long-term average of 21x and just below the five-year peak of 28x. while we believe dfs market leading position and pan-asia focus provide valuation support, we see limited upside from current levels. hongkong land hkl sp; ow current share price usd7.6 jm has a 40% effective interest in hongkong land (hkl). hkl makes up 19% of 2012e recurring profit and 22% of our appraised equity valuation. in its interim statement, jm noted that hkls commercial properties saw generally positive rental reversions in the period to early november and that the contributions from residential developments sales were better than anticipated at the start of the year. source: hsbc estimates jardine pacific is a mini-conglomerate with main profit contributors being hactl (hong kong international airports largest cargo handler), jardine engineering corporation (jec), jardine schindler (lift installation and maintenance), construction company gammon and its restaurant business. these businesses tend to be relatively more cyclical and there is often little visibility to earnings. in particular gammon books profits based on the timing of the completion of projects and this is difficult to predict. after slightly disappointing 1h12 results, jms interim statement indicated a continued mix performance for the businesses within jardine pacific. we believe risks to earnings will continue in 2013e. cathay pacific group represents about 40% of the volumes at hactl and the airline has recently opened its own air cargo terminal at hk international airport. while this new terminal will take about six months to ramp up, by 4q13 all of cathays business will probably have been transferred over to its own terminal. we estimate this loss of earnings will offset growth elsewhere within jardine pacific and as a result there will be no net profit growth in 2013e. 5 usdm % jardine matheson (jm sp) conglomerates 25 january 2013 3. changes to hsbc recurring net profit forecasts abc _ new _ 2012e 2013e 2014e _ old _ 2012e 2013e 2014e _ change_ 2012e 2013e 2014e jardine pacific jardine motors jlt hk land dairy farm moh jardine c ow; cp usd1.70; tp: usd1.90 jm has a 60% economic interest in mandarin oriental (moh), a luxury chain with approximately 7,300 rooms and an additional 3,000+ rooms planned. moh makes up 3% of jms 2012e recurring profit and 3% of our appraised equity valuation. as we anticipated, the hotel market has slowed in 2h12. we make no changes to our forecasts, and assume mohs revpar to grow at 5% in 2012e and pick up to 8% in 2013e from improvements in revpar across the board as asian growth gradually recovers. 4. hsbc jardine matheson appraised valuation other businesses jardine motors weak sales in china jardine motors (motors) is a wholly-owned subsidiary and makes up 1% of jms 2012e recurring profit and 3% of our appraised equity valuation. sales of mercedes benz in china grew 4% in 2012, although the situation deteriorated in 4q12 with sales falling 9% y-o-y. we do expect the situation will improve gradually in 2013e as jardine motors captures market share from the opening of outlets, but overall cut our 2012e and 2013e forecasts by 5% and 8% respectively to reflect the difficult market. we forecast 2012e recurring profits will fall 83% y-o-y and then rebound 102% (off a very low base) in 2013e. we also cut our valuation by 7% as a result of the weaker earnings. businessusdm per sharecommentsprevious% change jardine pacific* jardine motors jlt dairy farm hkl moh astra/other other equity value 2,050 1,061 1,233 10,885 7,150 1,146 8,448 1,000 32,973 5.7 2.9 3.4 30.1 19.8 3.2 23.3 2.8 91 6% 3% 4% 33% 22% 3% 26% 3% 100% 12x 2013e pe based on hang seng index fair value consensus ev / sales of 0.35x, and apply a 25% discount pe trading range hsbc target price of usd12.7 share price usd7.6 hsbc target price of usd1.9 hsbc target price of astra idr 7,700/share investments at hsbc estimate of market value 2,150 1,138 1,193 9,342 5,739 1,146 8,101 1,000 29,809 -5% -7% 3% 17% 25% 0% 4% 0% 11% shares out362362 fair value per share discount target 91 25% 68 82 30% 58 11% 19% *note: hactl valued at 10x 2013e pe source: hsbc estimates 6 -40% -50% -60% 50% 40% 30% 20% 10% 0% jardine matheson (jm sp) conglomerates 25 january 2013 jlt greater stake boosts contribution jm has a 42% in jlt and it makes up 5% of jms 2013e recurring profit and 4% of our appraised equity valuation. we make no changes to our believe jm is now fully valued and we downgrade our rating to neutral from overweight. 6. at the top end of its range: jms discount to nav abc operating assumptions, and forecasts a conservative 6% revenue growth in 2012e and 5% in 2013e. however, we forecast 2012e earnings contributions to jm to increase 38% primarily due to an increase in jlt ownership by jm, followed by an 8% growth in 2013e. we increase our valuation of jlt 0% -10% -20% -30% discount to nav marginally by 3% from rolling forward the earnings base used for valuation to 2014e. -70% -80% jan-00 jan-03jan-06jan-09jan-12 5. conglomerate discount to appraised valuation source: company and hsbc estimates disc to nav we raised our appraised valuation of jm to usd91 from usd82 per share due to the recent increase in our target price of dairy farm and the share price of hongkong land. we set our target price for jm at a 25% discount to appraised valuation (from 30%), giving us new target price astra int hwljmsw irewharffirstof usd68. pac apacific we are lowering our discount to appraised source: hsbc estimates recurring net profit forecasts changes as a result of cuts to our forecast contributions to jm from astra, jardine motors and jardine pacific, we have lowered our 2012-14e recurring net profit forecasts by 3-6%. our revised forecasts are 6% below consensus on a recurring basis in 2012e and 9% and 8% below for 2013e and 2014e, respectively. valuation and risks downgrade to neutral, target increased to usd68 from usd58 over the past year, jm shares have generated a total return of 25% and have outperformed the msci asia ex-japan index by 9%. therefore, despite an increase in our appraised valuation, we valuation applied to the holding company to reflect the consistently strong performance of the group and our greater confidence in the outlook for markets generally. at 25%, its discount to appraised valuation is at the same level as swire pacific and wharf. under our equity research model, the neutral rating band for non-volatile stocks equals the local hurdle rate (average cost of equity) set by our equity strategy team, plus or minus 5ppt. the hurdle rate of 9% for singapore translates into a one-year potential return of 4-14%. our target price plus 2012e dps of usd1.26 implies a 9% potential return, which sits within this band; we therefore downgrade our rating to neutral from overweight. the key risks to our rating and estimates for jardine matheson consist of the risks to astra international and dairy farm detailed below. 7 jardine matheson (jm sp) conglomerates 25 january 2013 astra international asii.jk; n; cp: idr7,750; tp: idr7,700 we value astra based on our view of the most appropriate methodology for each of its businesses. where subsidiaries are separately listed and under our coverage we use hsbc target prices (united tractors (untr ij, n, tp idr20,000) and astra agro lestari (aali ij, uw, tp idr22,000). we use the current market value for listed companies not under our coverage such as astra otoparts (auto ij, idr3,550, not rated) and the information technology business, astra graphia (asgr ij, idr1,350, not rated). we recently raised our appraised valuation of astra to idr8,127 per share from idr7,840 per share as we rolled over our valuation by six months. our main valuation assumptions are: consolidated auto business: we value this business at a 16x 2014e ev/ebit, which is based on a 5% premium to the long-term average multiple (2005-11) of its closest peers. a premium is given for its strong market share in the industry and higher industry growth rate. astra honda motors: we value it through a dividend discount model (ddm) as more than 90% of its earnings are distributed. we assume a wacc of 10.7% and a long-term dividend growth rate of 6.5%. other automotive associates: we value this business at a 19x 2014e pe, which is based on a 5% premium to the long-term average pe multiple (2005-11) of its closest peers. financial services: we value astras financial services business at a 3.4x fy14e price-to- book (pb) based on its roe and growth outlook. we value astras stake in bank permata at the current market value. this gives us a combined fair value of idr40.2trn for astras stake. 8 other businesses: we value astras infrastructure business at an 11x 2014e pe based on the average one-year forward pe of chinese toll road operators. we value the other businesses at a 12x 2014e pe based on the long-term average one-year forward pe of the jakarta composite index. we set our target price at an unchanged 5% discount to our appraised valuation of astra, towards the midpoint of the 2005-08 range. a 5% discount to our appraised valuation gives a target price of idr7,700 compared with our previous target price of idr7,450. under our research model, the neutral rating band for non-volatile stocks equals the local hurdle rate (average cost of equity) set by our equity strategy team (10% for indonesia), plus or minus 5ppt. at the time we set our target price, it implied a potential return (including forecast dividend yield) within this band; therefore, we rate the shares neutral. potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. risks to our rating and forecasts. astra shares are positively correlated with commodity prices (mainly coal and palm oil) and the volume of auto unit sales. therefore, any sharp decline in indonesias automobile market unit sales due or drop in commodity prices, especially coal and palm oil, are key downside risks to our earnings estimates and valuation. conversely, better-than- expected two-wheeler sales or a pick-up in commodity prices are an upside risk. abc other 15% sgd 8% jardine matheson (jm sp) conglomerates 25 january 2013 7. appraised valuation mix of asset by currency risks to our view. the dairy farm share price is positively correlated to asias retail sales ex japan. substantial usd weakness against asian abc twd 6% myr 5% idr 30% hkd 36% currencies, a well-priced acquisition or further turnaround of its mainland 7-eleven franchise are potential positive share price drivers. any sudden downturn in retail sales in asian markets and further weakening of asian currencies would be negative for dairy farm shares. . source: hsbc estimates dairy farm dfi sp; n; usd12.39; tp usd12.7 valuation methodology. we value dairy farm using its pe trading range, its nearest listed peers at hsbc target prices, and a rep valuation. we recently raised our target price to usd12.7 from usd10.9 as we rolled forward our valuation by six months. our target price was set at the midpoint of the range suggested by all three valuation methods, implying a potential return, including the 2012e dividend, within the neutral rating band under our equity research model. although we believe dairy farms track record is excellent, the stock has outperformed the strait times index y-t-d and is priced above its long- term trading range. at our target price, df would trade at a 24x 2014e pe, which is near the midpoint of its recent trading range. 9 jardine matheson (jm sp) conglomerates 25 january 2013 financial model forecast income statement abc year ending 31 dec (usdm) jardine pacific jardine motors hk land dairy farm moh jardine cycle and (2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0- to 3-month horizon and which may differ from our long-term investment rating. hsbc has assigned ratings for its long-term investment opportunities as described below. this report addresses only the long-term investment opportunities of the companies referred to in the report. as and when hsbc publishes a short-term trading idea the stocks to which these relate are identified on the website at /research. details of these short-term investment opportunities can be found under the reports section of this website. hsbc believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors existing holdings and other considerations. different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. investors should carefully read the definitions of the ratings used in each research report. i