Equity Research | Tech, Media & Telecom

Tongda Group (0698 HK)

Attractive valuation of a Chinese handsetcasing supplier

Major Chinese casing provider for rising domestic handset vendor:Tongda is a major manufacturer of in-mould lamination (IML) plasticcasings in China with exposure in metal casing. Its products are appliedin 3C products handset, notebook and tablets. Its products are alsoused in household appliances. While 3C vendors tend to rely onTaiwanese OEMs / ODMs on quality and cost concern, Tongda is able tocompete for Chinese orders. Customers of Tongda include fast-growingdomestic brands ZTE, Huawei, Lenovo, Coolpad, TCL, Haier, Midea andGree; total sales and profit were HK$3.4b and HK$0.3b 2012A.

Consistent growth with a balanced 3C product portfolio:Tongda has a relative balanced product portfolio, in our view. Between2005A and 2012A, its 7-year CAGR of revenue was 17.3%. Whiledisruption of certain segments was seen during the period, overallgrowth rate was maintained with gross margin between 15% and 25%.We believe such balanced portfolio could reduce negative impact ofindividual industry volatility. As of 1H 2013A, overall revenue growthwas 20.9% YoY with main contribution from handset segment as itcontributed 49% sales with 35.2% YoY segment growth.

Moderate growth story with attractive valuation 6.7x P/E as of 2013E:For the next 3 years, we project revenue and net profit to grow at 10%-15% per year on conservative assumptions of market growth andindividual segment margin. Our DCF model with 1% terminal growthrate and 13.7% WACC suggests target price of HK$0.60, representing8.6 and 7.7x P/E for 2013E and 2014E. We initiate BUY rating onTongda.

HK$m (Yr-end Dec) 2011A 2012A 2013E

Revenue 3,147.1 3,408.1 3,940.4% of growth 34.0% 8.3% 15.6%

Core earnings 250.3 300.0 337.8% of growth 24.6% 19.9% 12.6%

Core EPS (HK$) 0.0530 0.0636 0.0695% of growth 19.6% 20.0% 9.3%

P/E (x) 8.77 7.31 6.69P/B (x) 1.18 1.03 0.93Dividend Yield 3.6% 4.3% 4.5%ROE 13.1% 13.7% 14.0%

Kevin Mak, CFAAnalyst+852 35191299kevin.mak@dfzq.com.hk

Buy (initiating coverage)Target price: HK$0.60Share price: HK$0.465

Bloomberg Ticker: 698 HKReuters: 698.HK

28 Aug 2013

2 / 24

ContentInvestment thesis ................................................................................................................................. 3

Major mainland Chinese handset plastic casing provider ...................................................................3Riding on shipment volume increase of Chinese handset vendors .....................................................3Is metal casing squeezing out plastic casing? Costing difference matters...........................................4Balanced consumer products portfolio through industry cycles .........................................................5Moderate growth story with attractive current valuation 6.7x P/E as of 2013E. ................................5

Technological background and market information ........................................................................... 6Plastic back injection molding and IML technology .............................................................................6Recent development of MID and LDS application ...............................................................................7Global handset shipments with increasing smartphones and Chinese vedors share........................10Dynamic shift among Chinese vendors may not affect overall shipment..........................................10Overall global deceleration of tablets and notebook computers growth..........................................11Electrical appliances market is returning to nil-subsidy phase in China ............................................12

Business analysis and background..................................................................................................... 13Income breakdown and clients overview...........................................................................................13Production base and products showcase...........................................................................................14Quantifying capacity and sales of Tongda ..........................................................................................16Product evolution with LDS, one-piece IML and LMF technology .....................................................16

Financial information ......................................................................................................................... 17Interim results slower-than historical CAGR ......................................................................................17Major assumptions.............................................................................................................................18Expecting medium-term moderate growth of 10%+; P&L illustration...............................................18Strong financial position with below 20% net debt-to-equity; BS illustration...................................19

Valuation............................................................................................................................................. 20DCF valuation at HK$0.60. Initiate BUY rating ...................................................................................20

Appendix............................................................................................................................................. 21Key numbers and financial ratios illustration 2013E to 2017E...........................................................21Valuation caomparison table..............................................................................................................22Shareholders and executive directors ................................................................................................23

3 / 24

Investment Thesis

Major mainland Chinese handset plastic casing provider. Tongda is a majormanufacturer of in-mould lamination (IML) plastic casings in China withexposure in metal casing. Its products are applied in 3C products handset,notebook and tablets. Its products are also used in household appliances.While 3C vendors tend to rely on Taiwanese OEMs / ODMs on quality and costconcern, Tongda is able to compete for Chinese orders. Major customers ofTongda include fast-growing domestic brands such as ZTE (0763 HK), Huawei,Lenovo (0992 HK), Coolpad, TCL (2618 HK), Haier (1169 HK), Midea (000527CH) and Gree. Table 1 shows Tongda and peers business focus. Table 2 showsbasic sales information of Tongda and Ju Teng as of 2012A.Table 1. Major 3C casing producers - plastic and metals

Tongda FIH Mobile BYD Elec. Ju Teng Ka Shui Catcher ChenmingYr-end Dec (0698 HK) (2038 HK) (0285 HK) (3336 HK) (0822 HK) (2474 TT) (3013 TT)Currency HK$m US$m RMB HK$m HK$m TW$m TW$mTotal revenue 2012A 3,408.1 5,240 14,091 9,201.3 1,569.0 11,743 3,081Net margin (ex-invest gain) 8.8% - 2.7% 6.5% 8.0% 10.0% 1.2%

3C plastic casing production Yes Yes Yes Yes - - -3C metal casing production Yes Yes Yes Yes Yes Yes Yes

Table 2. Major plastic casing provider – 2012A sales breakdownTongda Ju Teng

Yr-end Dec HK$m (0698 HK) (3336 HK)Total revenue 3,408.1 9,201.3Handset casing sales 1,556.1 0.0Notebook casing sales 555.0 7,361.1Electrical appliances sales 702.3 0.0Others 594.7 1,840.3Overall net margin 8.8% 6.5%Source: Orient Securities

Riding on shipment volume increase of Chinese handset vendors. Table 3shows global handset shipment volume by ABI Research. Between 2010A and2012A, compound annual growth rate (CAGR) of Chinese vendors ZTE,Huawei, TCL (Alcatel), Lenovo, Coolpad and Xiaomi was at an average of +52%a year. As for 1H this year, the figure dropped to +30%, and there was dynamicchange among Chinese vendors. For instance, Xiaomi sales was 7.2m units in2012A, with 7.0m sales in 1H 2013A and 2013E target of 15m units. Webelieve Tongda is to benefit from an overall out-performance of Chinesevendors going forward.Table 3. Handset shipments of global top vendors (sell-in)Million units 2010A 2011A 2012A CAGR 1H 2013 YoYChinese vendors 95.5 163.2 220.6 52% 125.2 30%Samsung + Apple 327.7 415.6 532.9 28% 295.4 19%Others 937.2 987.7 836.2 -6% 403.9 2%

Global total 1,360.4 1,566.5 1,589.7 8% 824.5 11%Source: Orient Securities, ABI Research

Tongda is a major IML plasticcasing provider targetingChinese domestic brandsincluding ZTE, Huawei,Lenovo, Coolpad, TCL, Haierand Midea

CAGR of Chinese handsetbrand names shipment was 52%over past 3 years; overallgrowth rate is 30% in 1H thisyear with 6 names on the chart

4 / 24

Does metal casing squeeze out plastic casing? Costing difference matters.Traditionally, plastic (polycarbonate, ABS) were used in handset casing. Nokiaand Apple later brought the trend towards aluminium alloy casing, followedby HTC. On the other hand, other high performance options are underresearch, including Kevlar (DuPont), carbon fiber, glass fiber, ceramic material,liquid metal, to name a few. Nevertheless, with improvement in materialstructure, surface processing, 3D molding and injection technique, newmodels such as Samsung Galaxy S4, Nokia Lumia 1020, HTC Desire 500 chosepolycarbonate. Furthermore, cost difference should affect the choice ofmaterial especially for low-to-mid end priced handset, notebook and tablets.For instance, Chinese domestic brand names such as Xiaomi, Huawei, ZTE andCoolpad in general choose polycarbonate casing (plastic) in 2012A.Table 4. Casing material of recent models of leading brand names

Samsung Galaxy Note2 PlasticSamsung Galaxy S4 PlasticApple iPad 4 AluminiumApple iPhone 5 Aluminium

HTC Desire 500 PlasticHTC One Aluminium + PlasticNokia Lumia 1020 PlasticLG Optimus GJ (Nexus 4, G2) PlasticSony Xperia Z Ultra AluminiumBlackberry BlackBerry Q5 PlasticMotorola Droid RAZR (X) Kevlar

Huawei Ascend D2 PlasticZTE Grand Memo PlasticLenovo K900 Steel alloy + PlasticTCL S950 (Idol X) PlasticXiaomi MI2 PlasticCoolpad 9960 Plastic

Table 5. Costing differences illustration among metal and plastic casingLatest average price

Tongda (0698 HK)Plastic handset case set RMB25-30 per setPlastic notebook case set RMB100 set

Reference from Ka Shui (0822 HK) and Catcher (2474 TT)Aluminium handset case set US$10 per setMagnesium notebook case set US$40 per setSource: Orient Securities

With improvement in materialstructure, surface processing,3D molding and injectiontechnique, new high-endhandset models of Samsung,Nokia, HTC and LG are stillwith plastic casing

Indeed, Samsung’s technicalmarketing manager Philip Bernenoted that Galaxy S4 case uses“the same polycarbonatematerial used in Formula 1 carsand helmets.”

Plastic casing is a dominateoption for Chinese handsetvendors except Lenovo K900

Magnesium / aluminiumsolution could cost as much as2x-3x times of plastic choice,according to our check, which isrelatively unattractive to low-to-mid end handsets

5 / 24

Balanced consumer products portfolio through industry cycles. Tongda has arelative balanced product portfolio, in our view. Between 2005A and 2012A,its 7-year CAGR of revenue was 17.3%. While disruption of certain segmentswas seen during the period, overall growth rate was maintained with grossmargin between 15% and 25%. We believe such balanced portfolio couldreduce negative impact of individual industry volatility. For instance: 2005A-2007A handset was the major growth driver 2007A-2008A notebook was the major growth driver 2008A-2010A electrical appliances was the major growth driver 2010A-2011A handset was the major growth driver 2011A-2012A notebook was the major growth driverIn short-term, we believe major growth is contributed by handset segment.Illustration 1. Stable revenue growth from 2005A to 2012A

Source: Orient Securities

Moderate growth story with attractive current valuation 6.7x P/E as of2013E. For the next 3 years, we project revenue and net profit to grow at 10%-15% per year on conservative assumptions of market growth and individualsegment margin. Our DCF model with 1% terminal growth rate and 13.7%WACC suggests target price of HK$0.60, representing 8.6 and 7.7x P/E for2013E and 2014E. We initiate BUY rating on Tongda.Table 6. Valuation matrix at current price and target price

2013E 2014E 2015E

@HK$0.465 (Current)P/E 6.7 6.0 5.2P/B 0.93 0.84 0.75Yield 4.3% 4.5% 5.0%

@HK$0.60 (TP)P/E 8.6 7.7 6.7P/B 1.21 1.08 0.96Yield 3.4% 3.5% 3.9%Source: Orient Securities

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A

Reve

nue

(HK$

m)

Gross margin (RHS) Total revenue HandsetElectrical appliances Notebook computers Others

For every year, while one or twospecific industry might faceheadwind, there was always abalancing force that promotedprofitability and cash flow

Between 2005A and 2012A,total revenue of Tongda was onthe rise each year, ranging from0.6% to 34.0%.

During the period, gross marginwas between 15.6% and 24.0%,while net margin was between4.7% and 15.3%

Our DCF model with 1%terminal growth rate and 13.7%WACC suggests target price ofHK$0.600, representing 8.6xand 7.7x P/E for 2013E and2014E. Initiate BUY

6 / 24

Technological background and market information

Plastic back injection molding and IML technology. Injection molding is amanufacturing technique for making parts from plastic materials inproduction. Molten plastic is injected at high pressure into a mold beforecooling to a specific shape. Handset case, household appliances and notebookcases can be produced by injection molding. In practice, molding process iscombined with decoration process to cut total costs. For instance, IML processeffectively integrates pre-decorated protective layer with target plastic part. Itoffers greater wear resistance and decoration options than spray painting andpad-printing as the latter eventually removes film substrate from targetplastic. Illustration 2 shows a typical process of IML process.Illustration 2. Typical in-mold lamination (IML) process

Source: Adapted from Sino Mould (modified)

IML process encapsulatesdecoration between film layerand injected plastic that offersgreater wear resistance anddecoration options

7 / 24

Development of MID and LDS application. MID is the abbreviation for"Molded Interconnect Device". The goal of MID technology is to uniteelectrical and mechanical functions in a single construction unit. In short, withMID technology, metallic circuit tracks are integrated into plastic housingsubstrate. In effect, with various metallic antennas integrated into the plasticshell, weight, fitting space and interference can be reduced in handset casing.Since 1997, LPKF has developed a patented MID technology as a laser-basedprocedure for the production of MID's called: The LPKF-LDS™ process (laserdirect structuring). The LDS method uses a thermoplastic polymer doped witha laser-activatable metal-polymer additive. When the laser beam hits thispolymer it activates the metal complex and creates a precise track with aroughened up surface. While manufacturing cost could be higher than otherprocesses such as two-shot injection moulding, LDS does not requireproduction of mould, which reduces production lead time and is especiallysuitable for fast changing handset industry.

LPKF patent declared invalid in China in May 2012. Noted that The ChinesePatent Office had declared LPKF LDS patent invalid in May 2012 in China.While the ruling was upheld by a Chinese appellate court, for the time beingproduction and sales of LDS components is legal in China. Nevertheless, withincreasing exports of Chinese brand names, original LDS have to be used dueto unbroken LDS patent outside China. Illustration 3 shows work stepsillustration of LDS process adapted from LPKF (with slight modification).Illustration 3. Laser direct structuring (LDS) work steps illustration

Source: LPKF (modified)

LDS application in handsetcasing effectively reduceweight, fitting space and signalinterference by replacingmultiple metallic antennas (suchas main antenna, blue tooth +Wi-Fi, GPS, and potentiallyNFC in the future)

While China Patent Office haddeclared LPKF LDS patentinvalid in May 2012, withincreasing exports of Chinesebrand names, original LDS haveto be used

8 / 24

Substrate choices for LDS process. According to LPKF, with regards tomaterials, the main prerequisite is that the metal oxide containing the LDSadditive has to be evenly distributed and sufficiently concentrated inthermoplast. Most of the leading plastic manufacturers offer LDS versions oftheir thermoplastics. The spectrum consists of amorphous and partiallycrystalline polymers whose thermal stability ranges from standard to hightemperature thermoplastic. The key material properties to be considered areprocessing and usage temperatures, required flammability rating, mechanicaland electrical properties, mold as well as cost. Illustration 4 comprises themost common substrate materials provided by 3D-MID:Illustration 4. Most common substrate materials for LDS

Source: Research Association Molded Interconnect Devices 3D-MID

In the past, LDS plastics were black because the LDS additives were inherentlyblack, but this has changed recently with SABIC and Mitsubishi EngineeringPlastics offering LDS materials that can be adapted to nearly any customerneed using pigments. Illustration 5 shows the colorful world of LDS usingXantar LDS from Mitsubishi Engineering Plastics.Illustration 5. Laser direct structuring (LDS) work steps illustration

Source: Mitsubishi Engineering Plastics (modified)

While LDS additives wereinherently black in the past,LDS materials of wide range ofcolour are available usingpigments

9 / 24

Apple’s alternative and companies with LDS technology exposure. ResearchIn Motion, HTC, Nokia, Samsung, LG, Sony Mobile and Motorola all had certainmodels with LDS antenna on plastic casing. On the other hand, in 2010A Applereleased iPhone 4 which incorporated an uninsulated stainless steel framethat acts as the device's antenna. While it is an innovative design to reducethickness and support multiple antennas, the design underestimated effect ofhuman body and eventually caused interference leading to significant drop insignal strength. As for iPhone 5, Apple advertised the “diversity” antennasystem, where antenna could be found at various locations such as bottomconnector and top side of the case. On the other hand, handset with LDSantenna has consistent and good performance. Table 7 shows companies withLDS applications / exposure in handset market. For instance, Wistron Neweb(6285 TT) and SH Sunway Comm (300136 CH) in Greater China receivedsizable orders from RIM, HTC and Samsung. As for HK listed companies,Tongda and Ka Shui were reported to have LDS equipment online. As areplacement to multiple metal antennas done by other parties, we expect LDSsolution could add RMB3-5 to Tongda’s plastic casing solutions. LDS solution isexpected to be more common and essential to securing orders, in our view.Table 7. Companies with LDS application / exposure in handset market

Major companies Co origin

Equipment / process vendors LPKF (LPKFF US) Germany旭高電子 China

Pulse Electronic s Corp (PULS US) US

Material vendors Mitsubishi Engineering Plastics JapanLanxess (LXS GR) Germany

BASF (BASF SE) GermanySABIC (SABIC AB) Saudi Arabia

RTP Company USTicona Polymers US

華宏新技 Taiwan

Hand et vendors Research In Motion (BBRY US) CanadaHTC (2498 TT) Taiwan

Nokia (NOK1V FH) FinlandSamsung (005930 KS) Korea

LG (003550 KS) KoreaSony Mobile Japan

Motorola (MOT US) US

Component vendors / OEM Molex (MOLX US) USTyco (TYC US) Swiss / US

Laird (LRD LN) UKHon Hai (2317 TT) Taiwan

Wistron Neweb (6285 TT) TaiwanSH Sunway Comm (300136 CH) China

Huizhou Speed Wireless (300322 CH) ChinaTongda (0698 HK) ChinaKa Shui (0822 HK) HK

Source: Orient Securities

LDS solution is expected to bemore common and essential tosecuring orders, in our view.Slight margin improvementcould be a potential plus

10 / 24

Global handset shipments with increasing smartphones and Chinese share.According to ABI Research, total global handset shipment (feature phones andsmart phones) increased 8% per year to 1,590m units between 2010A and2012A. The largest gainer was Apple iPhone between the 3 years; andSamsung overtook Nokia and ranked number 1 in 2012A. Nevertheless,Chinese vendors (including ZTE, Huawei, TCL, Lenovo, Coolpad and Xiaomi)together showed the fastest growth rate at 52% per year between 2010A and2012A. As for 1H 2013A, while Chinese vendors altogether represented only15% global shipment, they were maintaining relative fast YoY growth at 30%compared to Samsung + Apple at 19% YoY and others at 2% YoY. Table 7 showsglobal handset shipment volume by ABI Research.

Dynamic shift among Chinese vendors may not affect overall shipment. ABIdata refers to top 10-12 global handset vendors. As we have discussed,between 2010A and 2012A, compound annual growth rate (CAGR) of Chinesevendors ZTE, Huawei, TCL (Alcatel), Lenovo, Coolpad and Xiaomi was at anaverage of +52% a year. As for 1H this year, the figure dropped to +30%, andthere was dynamic change among Chinese vendors. For instance, Coolpadshipment reached 20m in 2012A; earlier in Apr this year, it ranked number 2 inChina 3G handset market with 11.5% local market share. On the other hand,Xiaomi sales was reported to be 7.2m units in 2012A, with 7.0m sales in 1H2013A and 2013E target of 15m units. We believe overall market growth ofChinese brand names could be 20%+ at least in short-term.Table 8. Handset shipments of global top vendors (sell-in)Million units 2010A 2011A 2012A CAGR Q1 2013A YoY Q2% smartphoneZTE 36.1 73.7 77.0 46% 32.0 -17% 76.2%Huawei 27.4 51.5 48.4 33% 27.1 27% 86.0%TCL Alcatel 32.0 34.1 42.5 15% 20.6 11% 26.4%Lenovo n.a. 3.7 25.5 n.a. 18.9 108% 100.0%Coolpad (Yulong) n.a. n.a. 20.0 n.a. 19.6 221% 100.0%Xiaomi n.a. 0.2 7.2 n.a. 7.0 141% 100.0%Chinese vendors 95.5 163.2 220.6 52% 125.2 30% 78.2%

Samsung 280.2 322.5 397.1 19% 226.8 21% 65.3%Apple iPhone 47.5 93.1 135.8 69% 68.6 12% 100.0%Samsung + Apple 327.7 415.6 532.9 28% 295.4 19% 54.2%

Nokia 453.0 417.0 335.6 -14% 123.0 -26% 12.1%LG 116.7 90.4 56.6 -30% 32.4 21% 74.7%Sony Mobile 43.1 34.2 32.2 -14% 17.7 20% 100.0%Blackberry 48.0 54.0 33.2 -17% 12.8 -32% 100.0%HTC 24.6 45.1 28.2 7% 11.1 -26% 100.0%Motorola 37.2 42.8 29.5 -11% 7.4 -56% 100.0%Others 214.6 304.2 320.9 22% 199.5 46% 25.4%Others sub-total 937.2 987.7 836.2 -6% 403.9 2% 34.9%

Global total 1,360.4 1,566.5 1,589.7 8% 824.5 11% 54.8%Source: Orient Securities, ABI Research #

# Note: 1) ABI's numbers represent "sell in," which is phone shipments into the retail channel rather thansales to consumers. 2) ABI's ranking only counts phones that carry the manufacturer's brand. As such,phones with only carrier’s logo were not accounted.

Chinese vendors ZTE, Huawei,TCL (Alcatel), Lenovo,Coolpad and Xiaomi recordedsignificant growth rate of 52%CAGR between 2010A and2012A and 30% YoY in 1H2013A, higher than globalmarket growth rate

Lenovo maintained 50m unitssales target for 2013E. Coolpad30m-35m; and Xiaomi 15m

The largest gainer was AppleiPhone between 2010A and2012A; Samsung overtookNokia and ranked number 1 in2012A

Smartphones share rose from22% in 2010A to as much as54.8% in 1H 2013A

11 / 24

Overall global deceleration of tablets and notebook computers growth.According to IDC Research, desktops and laptops are expected to experienceup to 10% decline respectively in 2013E. As for Q1, notebook shipment wasdown 12% YoY, which was generally lower than market expectation. In Q2,Canalys data shows that global market was flat with 42.9% YoY growth intablets offset by 7.4% and 13.9% YoY decline in desktop and notebook. Whilethe general desktop and notebook market were weak, among the topnotebook brand vendors, Lenovo and Dell were the only two seeing on-quarter shipment growth in Q2. Lenovo passed HP as top global PC vendorwith 12.6m quarterly shipment. Samsung suffered a slight drop of 0.3%, butits monthly shipments have already surpassed those of Toshiba and Apple.Considering notebook and tablets as a sub-group, IDC Research neverthelessstill forecasted 10-20% in next 3 years. For Tongda, in 1H 2013A, about 30%shipment / 50% revenue came from aluminium notebook casing, while therest is contributed by plastic casing.Table 9. Global shipments of tablets, laptops and desktop PCs (5-year forecast)Million units 2011A 2012A 2013E 2014E 2015E 2016E 2017ELaptops (m units) 209 201 187 187 194 202 210YoY 4.0% -3.8% -7.0% 0.0% 3.7% 4.1% 4.0%

Tablets (m units) 76 145 229 287 332 375 410Laptops + tablets (m units) 285 346 416 474 526 577 620Laptops + tablets YoY (RHS) 4.0% 21.4% 20.2% 14.0% 11.0% 9.7% 7.5%

Desktop-PCs (m units) 155 148 135 131 129 127 123Desktop-PCs YoY -1.3% -4.5% -8.8% -3.0% -1.5% -1.6% -3.1%

Total (m units) 440.0 494.0 550.9 605.0 655.0 704.0 743.0

Illustration 6. Shipment of tables and notebook 2013E-2017E

Source: Orient Securities, IDC

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

600

700

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Tablets (m units) Laptops (m units) Sub-total YoY (RHS)

Lenovo was with on-quartershipment growth and surpassedHP as the top global PC vendorwith 12.6m quarterly shipmentin Q2

Global notebook shipment isexperiencing negative growth in2013E; together with tabletssegment, IDC forecast 10%-20% annual growth in next 2-3years and 5%-10% afterwards

12 / 24

Electrical appliances market is returning to nil-subsidy phase in China.China’s rural appliance subsidy program was initiated in Dec 2007 and expiredin Jan 2013. China retail sales growth especially home appliances and AV(acoustic and video) equipment segment were slowed in 2012A. For instance,while overall retail sales was up 14.3% YoY in 2012A, home appliances and AVequipment sales growth was slowed to 7.2% in 2012A, down from 40.1% in2010A. It was partly due to subsidy program expired in regions Shangdong,Henan, Sichuan and Qingdao in Nov 2011. Total subsidized sales in 2012A wasdown 18.8% YoY to RMB214.5b from RMB264.1b in 2011A. As for 1H 2013A,while overall retails sales in China was further slowed to 12.7% YoY growth,home appliances + AV equipment experienced some degree of rebound to15.3% YoY in the first 6 months. Table 10 shows home appliances subsidizedsales between 2009A and 2013E. Illustration 7 shows China home appliancesand AV equipment sales during rural subsidy program.Table 10. China home appliances subsidized sales between 2009A and 2013ERMB b 2009A 2010A 2011A 2012A 1H 2013AChina retail sales 12,534.3 15,455.4 18,122.6 20,716.7 11,076.4China retail sales YoY 15.5% 18.4% 17.1% 14.3% 12.7%

Home appliances + AV equipment 315.4 442.0 537.5 593.6 326.9Home appliances + AV equipment YoY 12.3% 40.1% 21.6% 7.2% 15.3%

Home appliances subsidized sales 64.1 173.2 264.1 214.5 -Scheme sales YoY - 170.0% 52.5% -18.8% -

Illustration 7. China home appliances and AV equipment sales during rural subsidy program

Source: Orient Securities

315.4

442.0

537.5

593.6

64.1

173.2

264.1214.5

12.3%

40.1%

21.6%

7.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2009A 2010A 2011A 2012A

Sale

s and

subs

idy

(RM

B b)

Home appliances + AV equipment Home appliances sales in subsidized rural scheme

Home appliances + AV equipment YoY (RHS)

China's rural appliance subsidyprogram was initiated in Dec2007 and expired in Jan 2013

In Nov 2011, subsidy programended in Shangdong, Henan,Sichuan and Qingdao

13 / 24

Business analysis

Income breakdown and clients overview. Table 10 shows Tongda majorrevenue income between 2010A and 2012A and our estimation for 2013E.Total revenue was up 20.5% per annum in the past 3 years. For handsetsegment, Huawei is the largest customer with 50% segment contribution,followed by ZTE, TCL, Lenovo, Coolpad and Nokia. For notebook segment,Lenovo is dominated the segment with 50% segment revenue, followed bymajor Japanese names. As for electrical appliances, Haier, Midea and Gree arethe major clients with ~40%, ~30% and ~20% recently. Table 12 shows majorclients sales contribution as in the 3 segments.Table 11. Income breakdown of Tongda GroupHK$m 2010A 2011A 2012A CAGR 2013E YoYTotal revenue 2,348.3 3,147.1 3,408.1 20.5% 3,940.4 15.6%

Electrical fittings 1,874.7 2,653.5 2,813.4 22.5% 3,340.4 18.7%Handset 950.7 1,420.4 1,556.1 27.9% 2,047.9 31.6%Electrical appliances 602.4 784.0 702.3 8.0% 737.4 5.0%Notebook computers 321.5 449.2 555.0 31.4% 555.0 0.0%

Ironware parts 330.2 376.9 491.6 - 500.0 -Communication facilities, etc 143.4 116.7 103.0 - 100.0 -

Table 12. Contributions of major clientsHK$m As of 2012A % of segment

Total revenue 3,408.1 -

Handset segment 1,556.1 -Huawei - ~50%ZTE - ~10%TCL - 5%-10%Lenovo - 0%-5%Coolpad - 0%-5%Nokia - 0%-5%

Notebook 555.0 -Lenovo - ~50%Toshiba - 5%-10%Sony - 5%-10%NEC - 5%-10%Fujitsu - 5%-10%HP - 0%-5%ASUS - 0%-5%

Electrical appliances 702.3 -Haier - ~40%Midea - ~30%Gree - ~20%Source: Orient Securities

In line with industryperformance, Tongda is tocontinue strong growth inhandset segment, whilenotebook and electricalappliances is expected toexperience slower growth in2013E

Huawei, Lenovo and Haier arethe largest customers forhandset, notebook and electricalappliances segmentsrespectively

14 / 24

Production base and products showcase. Currently, Tongda had majorproduction bases in Shishi, Xiamen, Changshu and Shenzhen. Illustrationsbelow show Tongda handset products, LDS products, tablets products,notebook products as well as electrical appliances.Illustration 8. Production base and major products of Tongda

Illustration 9. Tongda products showcase – Hadnset cases with Huawei, Lenovo and ZTE

Illustration 10. Tongda products showcase – LDS products

Source: Tongda Group (modified)

15 / 24

Illustration 11. Tongda products showcase – Tablets cases with Lenovo and KUNO

Illustration 12. Tongda products showcase – Notebook cases, aluminium (laminated metal film, LMF) and plastic

Illustration 13. Tongda products showcase – electrical appliances with Midea and Haier

Source: Tongda Group (modified)

16 / 24

Quantifying capacity and sales of Tongda – handset segment. For handsets,notebook and electrical appliances casing / labels, production facilities arecalibrated to meet specifications of various models of various brand names.On a per set basis in general, we quantify handset case ASP to be RMB30-35per set, notebook case to be around RMB100 per set, while large-pieceelectrical appliances to be RMB500 per set. Table 13 shows our quantificationfor handset segment with respect to ASP, volume, CAPEX and cash flow. Withintroduction of LDS, we expect handset casing ASP to fall less slowly.Table 13. Quantification of Tongda handset segmentHK$m 2013E 2014E 2015E

Previous EBITDA at % 567.5 687.3 805.4% of EBITDA reinvestment 40% 35% 30%

CAPEX per handset set (HK$) 15.0 15.0 15.0

Theoretical handset capacity increment 15.1 16.0 16.1

Handset ASP (HK$ per set) 32.5 32.4 32.3Handset volume (semi-sets / sets) 63.0 79.0 95.2Source: Orient Securities

Product evolution with LDS, one-piece IML and LMF technology. Plastic andmetal casing undergoes changes in terms of construction material andproduction technique. In response to demand of 4G handsets, leading peersand Tongda provide LDS solutions which are now common among plasticcases. To secure demand of electrical appliances, Tongda offers competitivelarge one-piece plastic casing. As for increasing demand for colourfulaluminium notebook casings, Tongda produces aluminium casings withlaminated metal film. Illustration 14 shows Lenovo Idealpad casingcomponents with coloured aluminium finish. As of 1H 2013A, plastic /aluminium notebook shipment and revenue were 7-3 and 5-5 respectively.Illustration 14. Stapling of aluminium-platic parts for LMF casings for Idealpad of Lenovo

Source: Tongda Group

We quantify handset sales withHK$32.5 ASP, 63m semi-sets /sets sales and HK$15 CAPEXper set for 2013E

Handset case ASP to fall veryslowly with gradual introductionof LDS

Tongda is prepared to respondto change such as change inconstruction material andproduction technique

As of 1H 2013A, plastic /aluminium notebook shipmentand revenue were 7-3 and 5-5respectively

17 / 24

Financial information

Interim results slower-than historical CAGR. Earlier this month, Tongdaannounced interim results. Revenue was up 20.9% YoY to HK$1,689.7m for 1H13A. Gross margin was slightly declined to 21.0% from 22.1% a year ago. Netprofit was up 15.0% YoY to HK$130.3m, including a decline in minority interestto HK$7.9m from HK$16.1m. The minority interest is related to handset sales.Management indicated that since the non-wholly owned subsidiary focus onlower margin work procedure since 1H 2013A, there was a reduction in MI.Table 14. Pro-forma P&L for 2012E and 3-year forecastYear-end Dec (HK$m) 1H 12A 2H 12A 1H 13A YoY

Total revenue 1,397.9 2,010.1 1,689.7 20.9%

Cost of sales (1,089.1) (1,588.4) (1,334.0) -Gross profit 308.9 421.8 355.6 15.1%

Selling and distribution expenses (43.4) (38.5) (39.7) -Administrative expenses (95.9) (114.7) (128.6) -Other net operating expenses (0.5) (8.5) (5.3) -EBIT 169.1 260.1 182.1 7.7%

Depreciation (68.0) (68.0) (77.2) -Amortisation (1.2) (1.2) (1.2) -EBITDA 169.1 398.4 182.1 9.3%

Finance costs (26.5) (22.5) (21.4) -Share of profit of an associate 0.9 2.6 (0.0) -Other income and net gains 12.8 4.4 14.8 -EBT 156.4 244.5 175.4 12.2%

Income tax (26.9) (40.5) (37.2) -Total profit 129.5 204.1 138.2 -Net profit 113.3 186.7 130.3 15.0%Minority interest 16.1 17.4 7.9 -

EPS (HK$) 0.0241 0.040 0.0269 -DPS (HK$) 0.008 0.012 0.009 -

Table 15. Interim revenue breakdownYear-end Dec (HK$m) 1H 12A 2H 12A 1H 13A YoYTotal revenue 1,397.9 2,010.2 1,689.7 20.9%

Handsets 608.9 947.2 823.1 35.2%Electrical appliances 290.7 411.6 309.1 6.3%Notebook computers 247.2 307.9 223.7 -9.5%

Others 251.1 343.6 333.8 32.9%Source: Orient Securities

Revenue and net profit was up20.9% and 15.0% YoYrespectively in 1H 2013A,which was lower than anaverage of 20%-30% bottom-line growth in recent years

Interim revenue was strong forhandset and weak for notebooksegment in, which is largely inline with the particular industry

18 / 24

Major assumptions for financial projection. Our major assumptions for a 10-year projection includes decelerating sales growth from as high as 30% inhandset segment in 2013E towards 2% in 2022E and reducing segment grossmargin over the period. Nevertheless, with change in product mix towardshandset to 68% of revenue in 2022E from 46% in 2012A, there is minimalchange in overall gross margin at around 20%. Net margin projection isbetween 8.4% and 9.4%.

Expecting medium-term moderate growth of 10%+; P&L illustration. Table 16shows track record P&L of 2011A and 2012A, and projections for 2013E,2014E and 2015E. For 2013E, as we have discussed in previous section,revenue is expected to increase by 15.6%, which is apparently lower thaninterim growth rate partly due to conservative estimates for ironware parts,communication facilities and others in 2H. As for gross margin, overall grossmargin was estimated at around 21% for the next 3 years, which reflectedproduct mix shift towards higher-margin handset segment as well as slightmargin squeeze in each of the segments. As for net profit, we project Tongdais to record HK$337.8m and HK$377.6m for 2013E and 2014E respectively,representing 12.6% and 11.8% YoY growth.Table 16. P&L for 2011A - 2012A and 3-year forecastYear-end Dec (HK$m) 2011A 2012A 2013E 2014E 2015EElectrical fittings 2,653.5 2,813.4 3,340.4 3,874.3 4,404.4Ironware parts 376.9 491.6 500.0 500.0 500.0Communication facilities & others 116.7 103.0 100.0 100.0 100.0Total revenue 3,147.1 3,408.1 3,940.4 4,474.3 5,004.4

Cost of sales (2,541.8) (2,677.4) (3,109.9) (3,524.0) (3,937.9)Gross profit 605.3 730.6 830.5 950.2 1,066.5

Selling and distribution expenses (70.4) (81.9) (98.5) (111.9) (125.1)Administrative expenses (172.1) (210.6) (256.1) (290.8) (325.3)Other net operating expenses (14.5) (9.0) (10.0) (10.0) (10.0)EBIT 348.3 429.2 465.8 537.6 606.1

Depreciation (119.9) (136.0) (160.7) (187.5) (214.1)Amortisation (2.2) (2.4) (2.5) (2.7) (2.8)EBITDA 470.4 567.5 629.0 727.7 823.0

Finance costs (53.3) (49.0) (49.6) (53.2) (49.7)Share of profit of an associate 2.1 3.5 0.0 0.0 0.0Other income and net gains 39.8 17.2 14.8 0.0 0.0EBT 336.9 400.9 431.1 484.3 556.5

Income tax (77.4) (67.4) (75.4) (84.8) (97.4)Total profit 259.5 333.5 355.7 399.6 459.1Net profit 250.31 300.01 337.76 377.55 433.01Minority interest 9.2 33.5 17.9 22.0 26.1

EPS (HK$) 0.0530 0.0636 0.070 0.078 0.089DPS (HK$) 0.0170 0.0200 0.021 0.023 0.027Source: Orient Securities

Our major assumptions base onmarket sales growth, decliningindividual gross margin andshift of product mix towardshandset segment

We project Tongda is to recordHK$337.8m and HK$377.6mfor 2013E and 2014Erespectively, representing 12.6%and 11.8% YoY growth.

MI is reduced on shifting majorhandset production stepstowards wholly-ownedsubsidiary

19 / 24

Strong financial position with below 20% net debt-to-equity; BS illustration.Tongda maintained strong financial position. By the end of 2012A, Tongda hadHK$221.5m in cash and HK$564m short-term debt and HK$89m long-termdebt. Net debt-to-equity was 16%. While we expect slight increase in gearingpartly on expanding handset capacity in 2013E/2014E, the ratio would remainhealthy below 20% according to our projection. From 2013E onwards, withlimited visibility, we project slight annual growth of CAPEX and demand forindirect financing is relatively small.Table 17. Balance sheet illustrationYear-end Dec (HK$m) 2011A 2012A 2013E 2014E 2015E

Non-current assets 1,327.2 1,478.1 1,572.9 1,697.9 1,802.4Property, plant and equipment 1,077.6 1,229.7 1,357.0 1,482.0 1,586.5Prepaid land lease payments 34.0 33.7 33.7 33.7 33.7Investment property 51.0 52.0 52.0 52.0 52.0Goodwill 22.8 22.8 22.8 22.8 22.8Available-for-sale-investment 0.0 0.0 0.0 0.0 0.0Prepayments 59.1 62.9 62.9 62.9 62.9Investment in associates 47.0 40.9 40.9 40.9 40.9Long term deposits 32.0 32.5 0.0 0.0 0.0Deferred tax assets 3.7 3.7 3.7 3.7 3.7

Current assets 2,411.5 2,725.8 3,050.0 3,453.9 3,827.7Inventories 672.9 802.0 937.7 1,069.7 1,203.2Trade and bills receivables 1,303.9 1,455.8 1,694.4 1,932.9 2,171.9Prepayments, deposits & other receivables 118.8 151.6 167.5 190.2 212.7Amount due from related companies 4.6 2.5 0.0 0.0 0.0Income tax recoverable 0.1 0.1 0.0 0.0 0.0Pledged deposits 57.4 92.4 101.8 111.1 119.0Restricted bank balance 0.0 0.0 0.0 0.0 0.0Cash and cash equivalents 253.8 221.5 148.6 150.1 121.0

Non-current liabilities 278.4 145.1 149.0 149.0 149.0Interest-bearing bank borrowings 236.9 88.8 100.0 100.0 100.0Loan from MI of sub 7.3 7.3 0.0 0.0 0.0Deferred tax liabilities 34.2 49.0 49.0 49.0 49.0

Current liabilities 1,545.1 1,866.0 2,057.1 2,299.6 2,448.7Trade and bills payables 857.2 1,014.4 1,166.2 1,321.5 1,476.7Accrued liabilities and other payables 122.8 115.2 139.9 158.6 177.2Due to non-controlling shareholders of sub 0.1 0.1 0.0 0.0 0.0Due to a related company 0.0 0.0 0.0 0.0 0.0Tax payable 162.3 172.0 150.9 169.5 194.8Interest-bearing bank and other borrowings 402.6 564.3 600.0 650.0 600.0

Total equity 1,915.1 2,192.9 2,416.8 2,703.2 3,032.4Issued capital 46.8 47.6 48.6 48.6 48.6Reserves 1,811.5 2,054.5 2,259.5 2,523.9 2,827.0MI 56.9 90.8 108.7 130.7 156.8Source: Orient Securities

We expect Tongda to stayfinancially healthy below 20%net debt-to-equity ratio

20 / 24

Valuation

DCF valuation at HK$0.60. Initiate BUY rating. With 13.7% WACC and 1%terminal growth rate, we value Tongda at HK$2,918.8m, or HK$0.60 per share,which represents 7.7x and 6.7x target P/E for 2013E and 2014E. While weexpect Tongda to demonstrate moderate growth of 10%-15% in short-to-medium term, with 30% dividend payout ratio current dividend yield was 4.4%for 2012A and expected to be 4.5% and 5.0% for 2013E and 2014E. We initiateBUY on Tongda with target price at HK$0.60.Table 18. DCF valuation of CITIC Telecom

Valuation point Dec 2013

Pre-tax cost of debt 7.07%Marginal tax rate 17.5%Risk free rate 2.58%Market rate of return 13.5%BETA coefficient 1.257Target E/(D+E) 75.0%Target D/(D+E) 25.0%Cost of equity 16.3%After-tax cost of debt 5.8%WACC 13.7%

Sum of PV of FCFF until 2022E 1,790.8Terminal growth rate 1.0%PV of terminal value 1,679.4

EV 3,470.2Cash 148.6Non-core assets 0.0Total debt 700.0Intrinsic equity value 2,918.8

Common shares outstanding (million) 4,858.9TP 0.60Source: Orient Securities

Our DCF models suggest targetprice of HK$0.60. We expectP/E to be 7.7x and 6.7x for2013E and 2014E at target price

21 / 24

Appendix

Key numbers and financial ratios illustration 2011A to 2015E

Table 19. Key numbers and financial ratios illustration2011A 2012A 2013E 2014E 2015E

Key numbersTotal Revenue 3,147.1 3,408.1 3,940.4 4,474.3 5,004.4EBITDA 470.4 567.5 629.0 727.7 823.0EBIT 348.3 429.2 465.8 537.6 606.1Adjusted Income Tax Rate 23.0% 16.8% 17.5% 17.5% 17.5%EBIAT 268.3 357.0 384.3 443.5 500.1Profit for the Year 250.3 300.0 337.8 377.6 433.1Net Interest Expenses (53.3) (49.0) (49.5) (53.1) (49.6)Total Debt 646.9 660.5 700.0 750.0 700.0Total Equity 1,915.1 2,192.9 2,416.8 2,703.2 3,032.4Invested Capital 2,562.1 2,853.3 3,116.8 3,453.2 3,732.4Invested Capital ex-cash 2,308.3 2,631.9 2,968.2 3,303.1 3,611.4Total Assets 3,738.6 4,204.0 4,622.9 5,151.8 5,630.1Cash Flow from Operating Activities 169.4 337.6 336.2 442.4 529.6Capital Expenditures (177.4) (265.9) (288.0) (312.5) (318.5)Growth IndicatorsTotal Revenue Growth Rate 34% 8% 16% 14% 12%EBITDA Growth Rate 46% 21% 11% 16% 13%Growth Rate of Profit for the Year 25% 20% 13% 12% 15%Profitability IndicatorsEBITDA Margin 15% 17% 16% 16% 16%Net Profit Margin 8% 9% 9% 8% 9%ROE 13.1% 13.7% 14.0% 14.0% 14.3%ROA 6.7% 7.1% 7.3% 7.3% 7.7%ROIC 10.5% 12.5% 12.3% 12.8% 13.4%Return on Invested Capital ex-cash 11.6% 13.6% 12.9% 13.4% 13.8%Solvency IndicatorsCurrent Ratio 1.6 1.5 1.5 1.5 1.6Quick Ratio 1.1 1.0 1.0 1.0 1.1Cash to current liability 0.2 0.1 0.1 0.1 0.0EBITDA Interest Coverage Ratio 8.8 11.6 12.7 13.7 16.6Operating IndicatorsAccounts Receivable Turnover 2.2 2.1 2.1 2.1 2.1Accounts Payable Turnover 2.6 2.4 2.4 2.4 2.4Total Assets Turnover 0.8 0.8 0.9 0.9 0.9Leverage RatiosTotal Debt/Total Equity 33.8% 30.1% 29.0% 27.7% 23.1%Net Debt/Total Equity 34% 16% 19% 18% 15%DuPont AnalysisNet Profit Margin 8.0% 8.8% 8.6% 8.4% 8.7%Total Assets Turnover 0.84 0.81 0.85 0.87 0.89Total Assets/Total Equity 2.0 1.9 1.9 1.9 1.9ROE 13.1% 13.7% 14.0% 14.0% 14.3%Source: Orient Securities

22 / 24

Appendix

Valuation comparison table

Table 20. Peers valuation table

Ticker Fiscal YrMkt Cap(US$m)

HistP/E (x)

1-yr fwP/E (x)

2-yr fwP/E (x)

ROE(%) P/B

Tongda Group 698 HK Equity 12/2012 283.6 6.8 6.1 5.2 15.1 1.0

Plastic and metal casingsFIH Mobile 2038 HK Equity 12/2012 4,462.9 n.a. 66.8 24.0 n.a. 1.3BYD Electronic 285 HK Equity 12/2012 988.6 14.2 10.7 8.4 5.2 0.7Ju Teng International 3336 HK Equity 12/2012 643.3 8.1 6.9 5.5 11.8 0.9Ka Shui International 822 HK Equity 12/2012 301.4 15.2 14.6 10.5 16.4 2.9

Catcher Tech 2474 TT Equity 12/2012 3,577.2 7.5 8.0 9.2 18.6 1.6Chenming Mold 3013 TT Equity 12/2012 136.1 37.6 n.a. n.a. 1.9 2.0

LDS exposureHon Hai 2317 TT Equity 12/2012 31,719.7 9.2 10.1 9.2 15.5 1.4Wistron NeWeb 6285 TT Equity 12/2012 540.8 12.9 12.4 10.7 12.0 1.7

SH Sunway Comunication 300136 CH Equity 12/2012 547.1 n.a. 36.9 32.3 n.a. 5.4Huizhou Speed Wireless 300322 CH Equity 12/2012 458.5 60.9 44.6 33.1 13.1 5.8Source: Bloomberg

23 / 24

Appendix

Shareholder and Executive Directors

Table 21. ShareholdersShareholder % holdingChairman Wang Ya Nan and brothers 58.03%Public and others 41.97%

Total 100%

Table 22. Executive Directors

Wang Ya Nan (Chairman and CEO)- Responsible for the overall strategic planning and business development of the Group. Also

responsible for the development of overseas markets.

Wang Ya Hua (Vice Chairman and the general manager)- Responsible for the overall management with special focus on product development,

preparation and monitoring of annual production plans and operating budget.- Also required to give direction of the day-to-day operations to the operation unit located

at Xiamen, Fujan Province

Wong Ah Yu (Deputy general manager)- Responsible for overseeing the operation unit in Shishi city, Fujian Province

Wong Ah Yeung (Deputy general manager)- Responsible for overseeing the operation unit of the Group in Shenzhen, Guangdong

Province and requires to give direction of the day-to-day operation

Wang Ming Che (Executive Director)- Responsible for overseeing the operation unit and the sales of the Group in Shenzhen

Choi Wai Sang (Executive Director)- Responsible for the development of overseas market and the technical support of the

Group’s product developmentSource: Orient Securities

24 / 24

Analyst CertificationI, Kevin Mak (Mak Tsz Hang), being the person primarily responsible for the content of this research report, in whole or inpart, hereby certify that:(1) all of the views expressed in this report accurately reflect my personal view about the subject company(ies) and its (ortheir) securities;(2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this report, or our Investment Banking Department;(3) I am not, directly or indirectly, supervised by or reporting to our Investment Banking Department;(4) the subject company (ies) do(es) not fall into the restriction of the quiet period as defined in paragraph 16.4(g) of SFCCode of Conduct;(5) I do not serve as officer(s) of the listed company (ies) covered in this report; and(6) I and/or my associates have no financial interests in relation to the listed company (ies) covered in this report.

DisclaimerOrient Securities (Hong Kong) Limited does and seeks to do business with the company or companies covered in this report.As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of thisreport. Investors should consider this report as only a single factor in making their investment decision.

Any information provided in this research report is for information purpose only and have no regards to the investmentobjectives, financial situation or risk tolerance level of any specific recipient and does not constitute any solicitation or anyoffer to buy or sell any securities or any other financial instruments. Before enter into any investment contract, individualshould exercise judgment or seek for professional advice when necessary.

Although the information in this report is obtained or complied from sources that Orient Securities (Hong Kong) Limitedbelieves to be reliable, no representation or warranty, either expressed or implied, is provided in relation to the accuracy,completeness or reliability of the materials contained in this report. All price related information is indicative only, andvalue of the investment(s) referred to in this report and the income from them may fluctuate. Information contained in thisreport may change at any time and Orient Securities (Hong Kong) Limited gives no undertaking to provide notice of anysuch change.

Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital mayoccur. Orient Securities (Hong Kong) Limited and its affiliates, officers, directors, and employees may from time to timehave long or short positions insecurities, warrants, futures, options, derivatives or other financial instruments referred to inthis report.

In no event will Orient Securities (Hong Kong) Limited or any other member of Orient Securities (Hong Kong) Limited beliable or responsible for loss of any kind, whether direct, indirect, consequential or incidental, resulting from the act oromission of any third party occurring in reliance upon the contents of this report.

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of orlocated in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would becontrary to any law, regulation, rule or other registration or licensing requirement.

This report may not be reproduced, distributed or published by any person for any purpose without the prior writtenconsent of Orient Securities (Hong Kong) Limited. All rights are reserved.