Executive summary ... · 2017-12-12 · Executive summary Microstrategy 6 September 2017...

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Microstrategy

2 [email protected] 6 September 2017

Contents

Executive summary .......................................................................... 3

Investment thesis ............................................................................. 4

Genesis of a multibagger .................................................................13

A multibagger framework ................................................................19

Price of sustainable growth .............................................................51

Multibagger case studies .................................................................57

Appendix: Multibagger strategy .......................................................79

All prices quoted herein are as at close of business 1 September 2017, unless otherwise stated

Past performers

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

For important disclosures please refer to page 84.

Desh Peramunetilleke [email protected] +852 2600 8293

Mahesh Kedia, CFA +852 2600 8291

Shrikant Kale +852 2600 8489

Our microstrategy view on individual stocks may differ from our fundamental recommendations


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https://www.clsa.com/member/report/602742855



Executive summary Microstrategy

6 September 2017 [email protected] 3

Future hall of fame Picking Asian multibaggers has always been a rewarding strategy for the long-term investor with the underlying economies delivering spectacular growth along with favourable demographics. However, in a world increasingly dominated by passive flows, high-frequency trading and central-bank influences, identifying future candidates remains a challenge fraught with risk. In this report, we provide a quantitative framework to identify multibaggers. We blend the traditional quant signals with some of the fundamental sources of secular earnings growth, such as R&D, SG&A and overseas expansion, to understand what differentiates a multibagger from its peers.

Underlying growth in the economy remains a key cornerstone of stock-market returns over the longer term. Since the 1997 Asian financial crisis, emerging Asia has witnessed spectacular economic growth, moving from 5.8% of global GDP to 21.4%. The region weathered the global financial crisis (GFC) much better than developed markets (DM) and its future also looks bright, given that population growth is still 1.0% per annum, compared to just 0.5% in developed nations. In sync with the higher economic growth, the MSCI EM Asia index has been up 450% over the past 15 years (versus 250% for the MSCI DM) and has created many multibaggers.

Some 14.6% of Asian companies have been multibaggers, delivering returns of more than 200%, over any five-year period since 2000. While the multibaggers have now become concentrated in a few markets and sectors, Asia’s ability to deliver multibaggers remains strong. Indeed, despite the rising market penetration in most businesses, 10.2% of companies have been multibaggers over the past five years. India, China and emerging Asean have had the highest multibagger hit rate since 2000 but India stands out for its consistency. Also, given the commodity and investment cycle in the early part of 2000, cyclicals such as energy, materials and industrials have had a high hit rate. However, healthcare, consumer and tech sectors are now in focus.

Our backtests and characteristics analysis shows that companies that operate in growth markets/sectors with leading products (including brands) and good management are most likely to become multibaggers. This forms the core of our stock-selection strategy. Indeed, we have considered both industry-specific drivers such as R&D/SG&A spend and overseas exposure; and generic drivers such as growth track record, profitability and size. Using these factors, we can boost the multibagger hit rate from 14.6% to 22.1%. This is a significant increase considering that multibaggers outperform by an average 256% over the next five years, implying that the expected excess return from multibaggers rises from 37.4% to 56.6%. Our strategy shows even better results post-GFC, with the hit rate doubling from 10.3% to 21.8%.

In addition to providing a multibagger framework, we present a few case studies such as how to deal with inaccurate forecasts for the high-growth stocks. We also find that small-cap multibaggers rerate by almost 50% when they become large-caps. Lastly, we focus on the fate of past multibaggers such as Tencent and Alibaba when their market cap crossed US$300bn. We found that globally, only three out of 19 companies ever witnessed a doubling of the share price, while five had negative returns after reaching the threshold. Also, for Tencent and Alibaba, current high stock valuations are a function of their high future growth but it will become increasingly difficult to grow earnings at a similarly fast pace given the larger base.

Strong economic growth in the region underpins

the potential for creating multibaggers

Historically, 14.6% of the universe has delivered

200%+ returns over any five-year period

India has the best consistency; healthcare,

consumer and tech sectors are in focus

Our strategy increases the multibagger hit rate

from 14.6% to 22.1%

Results are even better post-GFC with the hit rate

doubling from 10.3% to 21.8%

Existing multibaggers face the challenge of

growing earnings from a large base

Asian multibaggers - a rewarding opportunity


Investment thesis Microstrategy


Multibagger framework Below we present a framework to identify multibagger characteristics. Our backtests and characteristics analysis show companies that operate in growth markets/sectors with leading products (including brands) and good management are most likely to be multibaggers.

Microstrategy: Multibagger framework - influencing drivers

Source: CLSA

Below, we bring together the drivers to calculate the increase in the probability of identifying multibaggers through a quantitative framework. Our analysis shows that on average, some 14.6% of companies turn into multibaggers over the next five years. However, using the factors highlighted above, we can boost the hit rate to 22.1%. Our multibagger picks based on this methodology have strong momentum behind them.

Multibagger strategy: Average hit rate (since 2000) Microstrategy multibagger picks: Historical returns

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming over the next 5 years. ‘Higher’ implies above median factor values. Source: CLSA, Factset

Multi-baggers

Market

Sector(product)

Product superiority (R&D vs capex)

Branding & channel building (SG&A)

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Step 1 Step 2 Step 3 Step 4 Step 5 Finalresult

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Asian potential multibaggers

MSCI APxJ

Cumulative index (FF adj mcap-wtd, US$ TR, x)

38.9% Cagr

8.9% Cagr

A quantitative framework to capture

qualitative characteristics

Our strategy increases the

multibagger hit rate from 14.6% to 22.1%




Key Asian potential multibaggers Asian potential multibaggers (sorted by last three-years EPS Cagr) Code Name Cty Sector Mkt cap FY1-FY2 L3Y EPS R&D/ SG&A/ Foreign 12MF FY1-FY2 NDE TR (US$m) ROE Cagr sales sales sls exp PE EPS Cagr (latest, (L12M,

(avg, %) (%) (FY0, %) (%) (x) (%) %) %) China & HK 1302 HK LifeTech Sci CN Healthcare 950 21.1 81.7 16.3 37.7 19.6 35.8 68.3 (51.3) 16.2 1548 HK Genscript Biotech CN Pharma 932 16.4 44.2 8.3 36.2 81.1 28.5 15.5 (76.8) 181.3 2869 HK Greentown Service CN Comm svcs 1,608 23.4 42.4 na 7.6 0.0 23.0 22.3 (126.9) 64.0 1558 HK YiChang HEC CN Pharma 1,109 18.0 35.4 6.8 26.5 0.0 12.7 28.1 (45.7) 11.5 6068 HK Wisdom Education CN Cons svcs 763 17.0 30.3 na 15.3 0.0 15.2 29.1 (26.1) 89.5 520 HK Xiabuxiabu Catering CN Cons svcs 1,101 22.4 26.5 na 40.8 0.0 15.7 15.2 (87.2) 117.3 1316 HK Nexteer HK Autos 4,188 27.7 26.0 3.2 3.4 100.0 11.2 14.0 1.3 23.5 425 HK Minth CN Autos 4,897 18.6 19.5 4.2 11.3 38.0 13.8 21.0 (14.1) 29.5 India MNDA IN Minda IN Autos 954 22.6 187.3 1.7 13.2 20.2 25.3 29.0 7.3 206.8 VKI IN Vakrangee IN Software 3,707 28.8 69.9 na 1.1 0.0 33.4 20.2 (23.0) 139.7 CANF IN Can Fin Homes IN Banks 1,159 23.9 37.4 nm nm nm 22.0 27.9 nm 87.6 WHIRL IN Whirlpool IN Cons dur 2,353 23.1 36.2 0.9 24.6 7.9 35.1 24.8 nm 28.0 EDEL IN Edelweiss Fin svcs IN Div fin 3,231 18.1 34.4 nm nm nm 21.7 37.7 nm 116.2 TELX IN Tata Elxsi IN Software 798 32.9 33.8 1.4 53.8 84.8 22.1 21.8 (45.0) 2.3 VGRD IN V-Guard IN Cap gds 1,180 25.1 28.3 0.4 18.3 0.0 38.6 21.8 (16.0) 48.0 ABB IN ABB India IN Cap gds 4,467 15.3 28.0 3.5 8.7 14.5 48.0 31.1 (29.4) 16.9 NFIL IN Navin Fluorine IN Materials 512 17.1 27.9 1.9 20.2 na 22.5 21.8 (7.1) 45.1 PVRL IN PVR IN Media 934 16.0 17.7 na 41.1 0.0 33.5 46.7 72.5 6.0 Korea 147760 KS Microfriend KR Semis 111 22.7 64.1 4.2 6.6 0.0 9.6 40.4 (47.0) 84.9 145020 KS Hugel KR Pharma 1,569 19.4 56.8 3.3 20.4 0.0 24.9 34.2 (46.3) 23.1 041830 KS InBody KR Healthcare 355 20.0 40.0 6.7 36.8 76.7 17.5 21.1 (46.4) (16.0) 083310 KS LOT Vacuum KR Semis 181 24.4 39.0 5.1 18.3 0.0 8.3 74.6 1.3 13.8 089590 KS Jeju Air KR Transport 896 25.5 31.6 na 11.7 0.0 11.0 35.1 (113.3) 27.7 098460 KS Koh Young Tech KR Semis 726 20.0 28.7 10.8 31.2 91.9 21.5 17.1 (45.5) 41.0 048260 KS Osstem Implant KR Healthcare 852 23.6 27.4 2.4 46.3 0.0 26.9 40.2 63.3 19.7 089600 KS Nasmedia KR Media 386 20.8 24.9 1.7 74.3 0.0 17.1 48.3 (24.3) 23.1 Taiwan 4968 TT Richwave Tech TW Semis 204 25.5 101.2 10.6 12.5 56.2 21.2 51.2 (49.9) 98.1 5269 TT Asmedia Tech TW Semis 599 36.8 58.2 20.7 6.1 43.2 21.1 66.4 (76.1) 61.5 2723 TT Gourmet Master TW Cons svcs 1,973 23.4 44.7 0.1 47.2 81.6 25.3 20.1 (62.2) 35.9 8436 TT TCI TW HPC 507 21.2 40.3 5.1 16.3 65.5 19.8 26.9 (41.3) 46.8 5274 TT ASPEED Tech TW Semis 789 34.1 36.0 10.6 6.7 61.1 29.8 38.7 (60.2) 81.8 4919 TT Nuvoton Tech TW Semis 365 24.1 33.3 26.6 7.1 96.9 12.0 28.4 (53.3) 47.0 1536 TT Hota Industrial TW Autos 1,156 29.7 30.6 2.5 10.4 95.4 21.0 21.1 31.6 (13.5) 4551 TT Global PMX TW Autos 450 21.8 28.6 2.0 7.1 97.8 18.8 26.2 11.2 26.1 5306 TT KMC TW Cons dur 544 23.9 24.5 0.7 14.7 97.4 14.7 16.4 22.7 26.5 2421 TT Sunonwealth TW Cap gds 456 22.3 23.2 5.7 10.3 100.0 13.5 39.9 (12.4) 120.3 3152 TT Advanced Ceramic TW Tech HW 849 29.6 19.4 5.1 5.8 81.7 24.3 18.4 (88.4) 130.3 3665 TT Bizlink TW Cap gds 876 22.2 10.8 2.5 16.0 96.4 18.1 30.7 (21.2) 30.2 Asean markets PPRO IJ PP Properti ID Property 970 na 61.9 na 2.4 0.0 27.2 16.4 30.4 2.6 SRIL IJ Sritex ID Cons dur 490 17.0 61.0 na 4.9 52.5 5.9 17.0 137.3 32.0 MYEG MK My E.G. Services MY Software 1,758 41.0 58.7 na 21.7 0.0 26.9 36.9 (10.9) 51.2 BEAUTY TB Beauty Community TH Retail 1,236 72.7 46.5 na 35.6 0.0 36.0 37.0 (77.8) 50.7 MTLS TB Muangthai Leasing TH Div fin 2,071 30.9 44.0 nm nm nm 23.7 48.0 nm 76.3 LINK IJ PT Link Net Tbk ID Telecom 1,152 22.7 31.7 na 20.2 0.0 14.2 19.8 (9.0) 8.5 JMT TB JMT Network Svcs TH Comm svcs 338 17.3 17.7 na 37.4 0.0 28.3 69.9 nm 106.6 SCC PM Semirara Mining PH Energy 3,518 37.1 17.0 na 12.9 0.0 11.1 17.6 31.6 60.6 8002 HK IGG SG Software 2,132 57.3 10.1 11.2 32.2 100.0 10.7 72.6 (93.9) 218.0 Australia & New Zealand BWX AU BWX AU HPC 400 21.1 467.2 1.2 28.0 20.0 21.6 48.7 51.3 17.9 ATM NZ a2 Milk NZ FBT 2,628 47.7 75.2 0.8 17.5 20.0 29.1 47.3 (62.2) 170.8 ALU AU Altium AU Software 888 27.0 25.6 13.6 49.1 100.0 25.3 23.8 (27.6) (0.8) Note: For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Total return is based on local currency. Source: Factset, CLSA




Understanding the multibagger picks Below we highlight the business description of the top multibagger picks, especially the qualitative statements that support the continued presence of important multibagger characteristics such as focus on R&D/SG&A spend, rising overseas exposure or high market growth. We also highlight the EPS trend for the past-five and next-three years (where the relevant history and forecasts are available). Most of our picks have steadily rising earnings growth, which has been a hallmark of multibaggers in the past.

Asian potential multibaggers: Main growth theme, supporting drivers and EPS trends

Note: EPS trend is based on non-GAAP adjusted earnings per share. Source: CLSA, Factset

Code Name Description R&D SG&A Overseas EPS trendexposure (11A-19F)

China & HK

1302 HK LifeTech Sci¹ Strong R&D spender in the cardiovascular-diseases-related products. Products getting approval across the world, which could lead to growing exports.

1548 HK Genscript Biotech

Originally based in New Jeresy, its main focus is biological research services (DNA sequencing, etc) but it is also increasing its footprint in cancer cures. Higher R&D and advertising spending, plus rising sales in China could drive future growth.

2869 HK Greentown ServiceTop-rated property-management services, property-consulting and community-services company in China benefitting from rising demand for premium residential services.

1558 HK YiChang HECA rising player in the China drug manufacturing market with 33 pharma products. One of its product, Kewei (oseltamivir phosphate), has been the No.1 selling influenza drug in China from 2013 to 2016.

6068 HK Wisdom EducationLargest provider of private education in South China operating premium primary and secondary schools (high margin), as measured by student enrolment as of 1 Sep 2015, according to the Frost & Sullivan Report.

520 HK Xiabuxiabu CateringRestaurant company with chains in 30-plus cities in China that is upgrading and expanding its network as well as entering several new concept areas in the dining business.

1316 HK NexteerSteering and driveline-systems company with a global footprint. Customers include BMW, FCA, Ford, GM, PSA, Toyota, VW and automakers in India and China. It is also one of the beneficiaries of autonomous driving theme.

425 HK Minth China’s leading auto-bodyparts supplier with growing export sales (with higher margin) due to substantially lower cost base compared to its Japanese peers.

Korea

147760 KS Microfriend Top MEMS (Micro Electro Mechanical System) specialist company with strong FCF.

145020 KS HugelBotox manufacturer controlling 30% of the botox market, a lucrative industry in Korea due to rising domestic demand for dermatology and cosmetic surgery as well as the increasing popularity of cosmetic-surgery tourism.

041830 KS InBodyAccounts for 90% of domestic and 60% of global body-composition analysis market with a well-diversified overseas exposure. It is launching new products (such as InBody watch) and targeting the IoT-based healthcare market.

083310 KS LOT Vacuum Provision of dry vaccum pumps for semiconductor manufacturing with strong R&D growth.

089590 KS Jeju Air

Biggest LCC by market share in Korea. Benefitted from the lifestyle changes as more Koreans are preferring to travel overseas using lower cost airlines. Low exposure to THAAD issue as only a small percentage of revenue is from Chinese charter flights.

098460 KS Koh Young Tech A global leader in 3D measurement technology for electronics assembly with a stable growth profile and increasing sales exposure to the US and Europe.

048260 KS Osstem ImplantOne of the key players in the global dental implant and prosthetic market. According to the report by Market Research Future, the market is expected to post a 4.6% Cagr from 2015-22 with Apac being the fastest-growing region.

089600 KS NasmediaTop digital media rep agency in Korea with 20% market share. High exposure to the fast-growing online mobile advertising with 71% of total revenue coming from the segment.

Our multibagger picks have steadily

rising EPS




Asian potential multibaggers: Main growth theme, supporting drivers and EPS trends (continued)

Source: CLSA, Factset

Code Name Description R&D SG&A Overseas EPS trend

exposure (11A-19F)

India

MNDA IN MindaTier-1 electrical-autoparts supplier to OEM with global presence. International clients include Toyota, BMW, Honda, Volkswogen, Ford, Piaggio along with all major domestic Indian autos companies.

VKI IN VakrangeeE-governance/digital is a growing business segment in India and the company has a vast network of retail acces points to deliver financial and other G2C services to unserved rural, semi-urban and urban markets.

CANF IN Can Fin Homes

Small but rising player in the fast-growing housing-finance market in India with loan book enjoying a 32% Cagr since 2014. 75% of loan book coming from Salaried & Professional segment with low overall gross NPA ratio at 0.38%.

WHIRL IN Whirlpool Leading manufacturers and marketers of major home appliances in India with a strong brand focus.

EDEL IN Edelweiss Fin svcsLeading diversified financial services (capital markets) in India with growing market share as evidenced by rising profits even during the volatile equity market periods of 2012-14.

TELX IN Tata ElxsiEngaged in product design and engineering; and system integration and support services for enterprise customers. It has also ventured into emerging tech such as IoT, Virtual Reality, Big data, Cloud, AI etc.

VGRD IN V-Guard Electronic and electro mechanical product company with a strong brand presence in India and it is further boosting its marketing and R&D expenses.

ABB IN ABB IndiaPart of the ABB group, it manufactures and distributes products for power systems, generation and automation in India. It's a play on improving quality of Indian power grids and networks.

NFIL IN Navin FluorineIndia's largest integrated specialty fluorochemical company. Fluorochemicals is a high-growth industry mostly due to focus on underpenetrated products such as air conditioning, refrigration, autos, pharma etc.

PVRL IN PVRPVR, the largest movie multiplex company in India, has a strong brand image, right locations and leadership in key markets/box-office circuits. Strong industry outlook led by an under-screened market and growing consolidation.

Asean markets

PPRO IJ PP Properti

Property subsidiary of PT PP (60% ownership) and is newly listed in 2015. Large increase in bookings this year due to new projects. Landbank increase to 280ha versus 70ha last year, which should translate into more new projects.

SRIL IJ SritexAsean's largest vertically-integrated textile and garment manufacturer. The garments OEM segment is lucrative supported by military uniform orders from UAE, EU and NATO; global fashion lines such as Guess, H&M, Disney and Lee.

MYEG MK My E.G. ServicesMalaysia's sole provider of government e-services. Its broad strategy focuses on going into services where there is a renewal requirement on a regular basis, leading to recurring cashflow.

BEAUTY TB Beauty CommunityCosmetics company with a focus on beauty, personal care, skincare and makeup. Thailand's personal-care market is growing at 6-7% but the company's topline is growing by more than 30%.

MTLS TB Muangthai LeasingVast potential in micro-lending should support growth. The farming sector accounts for 40% of Muangthai's loan book, and it could benefit from rising government support for the agri sector.

LINK IJ PT Link Net TbkCable TV and internet broadband provider operating in several major cities including Jakarta. Low broadband penetration in Indonesia could remain supportive of growth.

JMT TB JMT Network SvcsThailand's biggest bad-debt collection company and beneficiary of the rising NPLs in the sytem. It can expand into neighbouring countries using partners who do not have such services.

SCC PM Semirara MiningLargest coal producer in the Philippines. The company has ventured into power generation primarily to take advantage of the cost and operational synergies between the two businesses.

8002 HKIGG

(Singapore stock)

A play on the global gaming market with geographically well-diversifed revenue, and two big hit games titled Lords Mobile and Castle Clash. It has >380m registered users with about 17m monthly active users across over 200 countries.




Asian potential multibaggers: Main growth theme, supporting drivers and EPS trends (continued)



Taiwan

4968 TT Richwave TechIC development and design with focus on WiFi and is foraying into IoT, smarthome, automotives etc. It benefits from rising WiFi demand and its growing R&D budget should keep the product pipeline strong.

5269 TT Asmedia Tech A USB play with first SuperSpeed USB 3.1 (10Gbps) technology. Very high R&D budget, could be industry leader.

2723 TT Gourmet MasterSince its establishment in 2004, Gourmet Master's 85C café brand has grown to become the largest coffee house/bakery in Taiwan. It also aggresively expanding its coffee brand in China and the USA.

8436 TT TCI

Bioscience company with dietary suppliements, function drinks and skincare products. Strong R&D focus to help with new product development and it has a high China exposure (including a China plant) along with exports to 41 countries.

5274 TT ASPEED Tech Fabless IC-design company and with an increased focus on Cloud business and strong R&D budget.

4919 TT Nuvoton TechCompany engaging in R&D and sales of IC products and provision of wafer foundry services with lot of new product successes. It has also launched an IoT solution.

1536 TT Hota Industrial

Leading automotive-transmission-system partsmaker in Taiwan and sole supplier of gearboxes to Tesla. Its inhouse equipment supports high precision and flexibility, and has helped secure orders from BorgWarner, Tesla and Eaton.

4551 TT Global PMX

High-precision mechanical autoparts maker in Taiwan, focusing on engine parts and ABS/ESC parts. With GDI parts, it rides the structural trend of better fuel economy and lower gas emissions, boasting a strong overseas customer base.

5306 TT KMCKMC is the largest bicycle-chain manufacturer globally, with a market share of 70-80%. It has a close relationships with its brand customers and is the only supplier offering a wide range of products from low- to high-speed chain.

2421 TT Sunonwealth

Strong R&D focus in core motor technology with numerous patents and industry-leading products such as the first magnetic levitation motor fan (Maglev), smallest /thinnest fan (Mighty Mini) in the world, thermal modules for LED panels, etc.

3152 TT Advanced CeramicIntegrated device manufacturer (IDM) that designs & manufactures LTCC components/filters used in all connectivity devices. Benefits from rising connectivity and RF content increases in 4G+/5G smartphones and WiFi MIMO.

3665 TT BizlinkWiring-harness and cable-assemblies manufacturer and the sole supplier of wiring harnesses for Tesla’s battery-management systems, Superchargers, Powerwall and Powerpack. It is expanding its automotive business in Europe.

Australia & New Zealand

BWX AU BWX

A natural skincare products and distribution company with strong export growth in the UK, China and Canada. It owns a successful brand (Sukin) in its home market and just bought "Mineral Fusion", the No.1 natural cosmetics brand in USA.

ATM NZ a2 MilkThe pioneer producer of milk with natural A2 protein with rising sales in AU/NZ and China. It is the leading premium fresh milk brand in Australian supermarkets, with a grocery value market share of approximately 9.3%.

ALU AU AltiumDesign and engineering software company with strong R&D spending and well-distributed global earnings with growth across USA and EM (especially China). One of the peers (Cadence) has a market cap of US$10bn.




Asia has produced a lot of multibaggers over the past 15 years

Contribution to global GDP by EM Asia since 1995 Global regions/markets - GDP growth vs return (L15Y)

Source: Factset, IMF, CLSA

Hit rate of stocks becoming multibaggers (since 2000) Multibagger strategy: Average hit rate (since 2000)

Note: Only includes companies with at least US$100m market cap at the time of each rebalancing and the analysis does not have survivorship bias. Source: CLSA, Factset

APxJ markets: Latest contribution to 5Y triple-baggers APxJ sectors: Latest contribution to 5Y triple-baggers

Note: Only includes companies with at least US$100m market cap at the start of the period. Source: CLSA, Factset

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EM Asia's contribution to global GDP has increased from 5.8% in 1995 to 21.4% in 2016

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Double-baggers Triple-baggers Multibaggers

Quarterly average hit rate (since 2000)

Latest hit rate

Hit rate of stocks becoming multibaggers (%)

Key multibagger indicator

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Hig

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India33%

China11%

Korea11%

Taiwan11%

Aust10%

HK7%

Thai5%

Indo3%

Malay3%

Others6%

Latest contribution of 5-year triple-baggers in APxJ region (%)

Cons disc18%Cons

stap9%

Energy1%

Financials13%

H'care13%

Industrials12%

Info tech16%

Materials10%

Property5%

Telecom1%

Utilities2%


Strong economic growth resulted in good market performance, creating many multibaggers

Some 14.6% of companies deliver 200%+ return in five years; our strategy increases the hit rate to 22.1%

India, China, Korea, and consumer and tech sectors contributed the most to multibaggers over past 5-years




Industry specific drivers - R&D, SG&A and overseas exposure

MSCI regions (ex-fin): R&D as a % of sales APxJ: R&D spend of multibaggers relative to industry

Note: Regional ratios are bottom-up aggregated with freefloat adjustment based on current MSCI universe. R&D spending data based on industry median within broader APxJ universe with market cap of more than US$100m. Source: CLSA, Factset

MSCI regions (ex-fin): SG&A (ex-R&D) as a % of sales APxJ: SG&A (ex-R&D) spend of multibaggers vs ind

Note: Regional ratios are bottom-up aggregated with freefloat adjustment based on current MSCI universe. SG&A spending data based on industry median within broader APxJ universe with market cap of more than US$100m. Source: CLSA, Factset

MSCI regions: Regional sales geographical breakdown APxJ mkts (ex-fin): GDP gr vs foreign sales exp (L5Y)

Source: CLSA, Factset, IMF

3.0

2.7

2.3

1.9

0.5

1.0

1.5

2.0

2.5

3.0

3.5

00A

01A

02A

03A

04A

05A

06A

07A

08A

09A

10A

11A

12A

13A

14A

15A

16A

USA Japan

Europe AsiaxJ

R&D as a % of sales

0

2

4

6

8

10

12

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Sof

twar

e

Tech

hw

Inte

rnet

Pers

pro

d

Sem

is

Aer

o&de

f

H'c

are

E&S

Elec

I&

C

Bio

tech

Phar

ma

Com

m e

quip

Mac

hine

ry

Aut

o pa

rts

H'h

old

dur

Elec

equ

ip

Multibaggers rel to industry (avg 2000-12)Current - FY0 R&D to sales (RHS)

(x) (%)

Multibaggers have much higher R&D spending in most relevant

industries

17

15.1

15.7

14.4

10.0

8

9

10

11

12

13

14

15

16

17

18

00A

01A

02A

03A

04A

05A

06A

07A

08A

09A

10A

11A

12A

13A

14A

15A

16A

USA Japan

Europe AsiaxJ

SG&A (ex-R&D) as a % of sales

51015202530354045

1.0

1.1

1.2

1.3

1.4

1.5

Com

m e

quip

Div

con

s sv

cEl

ec e

quip

Air

lines

Pape

rSof

twar

eEn

ergy

E&

SC

emen

tM

ulti-

reta

ilU

nive

rse

Med

iaFo

od p

rod

Aut

o pa

rts

IT S

ervi

ces

Tex/

app/

lux

Bio

tech

Toba

cco

H'h

old

dur

Dev

elop

ers

Hot

els

Mac

hine

ryAut

osBld

g pr

od

Multibaggers rel to industry (avg 2000-12)Current FY0 SG&A (ex-R&D) to sales (RHS)

(x) (%)

Multibaggers have much higher SG&A spending in many relevant industries

1.73

80.4

11.5 14.3 15.4 23.4

9.7

68.2

17.2 20.9

38.1

57.5 10.2

7.213.0

8.4

52.8

20.9

5.0 8.5 7.5

0

10

20

30

40

50

60

70

80

90

100

AxJ USA Japan Europe World

AxJ USA Japan Europe OtherSales geographical breakdown (%)

Philippines

Malaysia

Singapore

China

Taiwan

IndiaKorea

Indonesia

Thailand

Australia

APxJxHK

0

10

20

30

40

50

60

2 4 6 8 10 12 14

Foreign revenue as % of sales (L5Y avg)

Nominal GDP growth in lcl ccy (L5Y Cagr, %)

y = -3.9x + 50.7; R2 = 0.41

Asian R&D spend has doubled since 2008; multibaggers had higher R&D spend for most relevant industries

Asia’s SG&A spend still below USA; multibaggers had higher SG&A spend in 26 out of 46 industries

Companies can grow not only by capturing market share, but also by opening up new markets




Fundamentals relevant across industries - growth, size, profitability

Characteristics analysis - since 2000 Characteristics analysis - since 2010

Note: Broader APxJ universe with market cap of more than US$100m. Source: CLSA, Factset

APxJ: Hit rate of high growth multibaggers APxJ: Hit rate of high profitability multibaggers

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming the relevant market returns in 5 years. Source: CLSA, Factset

APxJ: Hit rate of becoming multibaggers by mkt cap Multibaggers relative PE premium within mcap ranges


0.8

0.9

1.0

1.1

1.2

EPSg

(L3Y

)

Gea

ring

Sus

tg

EPSg

(L5Y

)

EPSg

(N2Y

)

RO

E (L

3Y)

RO

E (N

2Y)

RO

IC

Mgn

(Avg

L3Y)

Mgn

(FY

0)

PB (

trl)

SLS

g (L

3Y)

SLS

g (N

2Y)

PE (

fwd)

Cas

h/TA

Siz

e

Quarterly median (since 2000)

Exposure of multibaggers relative to broader universe (x)

0.60.70.80.91.01.11.21.3

RO

IC

EPSg

(L3Y

)

Sus

tg

RO

E (L

3Y)

RO

E (N

2Y)

PB (

trl)

EPSg

(L5Y

)

EPSg

(N2Y

)

SLS

g (L

3Y)

Mgn

(Avg

L3Y)

SLS

g (N

2Y)

Mgn

(FY

0)

PE (

fwd)

Cas

h/TA

Gea

ring

Siz

e

Quarterly median (since 2010)Exposure of multibaggers relative to broader universe (x)

14.6

16.2 16.3

18.1

10.210.7 11.2

11.7

8

10

12

14

16

18

EPS Cagr (N2Y) Sustg EPS Cagr (L3Y)

All multibaggers Above median

Quarterly average hit rate (since 2000)Latest hit rate (+200% since 2012)


14.6

15.8 15.9

10.2

11.9 11.9

89

1011121314151617

All multibaggers All multibaggers(ex-fin, ROIC >

median)

All multibaggers(N2Y ROE > median)



14.6 15.5 13.9

9.0

10.2 11.9

7.9

4.2 02468

1012141618

All multi-baggers

Small-cap<US$1bn

Mid-capUS$1-5bn

Large-cap>US$5bn

Market capitalisation


Latest hit rate (+200% since 2012)

Hit rate of stocksbecoming multibaggers (%)

0.90

1.22

1.35

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

<US$1bn US$1-5bn >=US$5bn

Market cap ranges

MultibaggersMedian relative PE versus MSCI APxJ (x)

34.6% valuation premium


Growth, profitability and size are main factors that have mattered over the long term

Above-median three-year earnings Cagr increases the multibagger hit rate from 14.6%to 18.1%

Large-caps have low multibagger probability. Small cap multibaggers rerate when they become large-caps




What happens to large-cap multibaggers?

Market cap trend: Tencent versus Facebook Market cap trend: Alibaba versus Amazon


US$ TR after surpassing US$300 Mcap threshold EPS gr (N5Y vs L5Y) after reaching US$300bn Mcap


Tencent: fwd PE and 1Y forward growth Alibaba: fwd PE and 1Y forward growth


397

491

0

50

100

150

200

250

300

350

400

450

500

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Tencent

Facebook

(US$bn)

443

474

0

50

100

150

200

250

300

350

400

450

500

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Alibaba

Amazon

(US$bn)

265 256

163

82 55 39 35 35 29 24 23 8 4 3

(5)(30)

(55)(79)

(89)(150)(100)(50)

050

100150200250300

App

le

Mic

roso

ft

Exxo

n

Alp

habe

t

Wal

-Mar

t

Ber

kshi

re BP

J&J

ICBC

Pfiz

er GE

JPM

orga

n

Vod

afon

e

Inte

l

Chi

na M

obile

Cis

co

Petr

oChi

na

Gaz

prom

Eric

sson

US$ total returns after surpassing US$300bn Mcap(%)

Jan-

11 Oct

13

Sep

00Nov

98

Mar

00

Oct

13

Dec

98

Jun

00

Oct

07

Sep

14

Sep

99

May

14

Dec

99

Nov

07

Sep

07

Dec

99

Sep

07Jan

00

Mar

00

Yellow box represents the month during which the stock surpassed the US$300bn mark

13.8

15.8

19.0

8.9

(10.

5)

23.3

(5.1

) 12.7

(2.0

) 8.2

10.1

8.2 14

.5

20.5

12.6

2.1

25.7

(20)

0

20

40

60

80

100

Gaz

prom

App

le

Cis

co

Mic

roso

ft

Eric

sson

ICBC

Petr

oChi

na

Alp

habe

t

Inte

l

Chi

na M

obile

Ber

kshi

re GE

Wal

-Mar

t

Exxo

n

Pfiz

er J&J

BP

Previous 5YEPS Cagr

(%) After surpassing US$300bn Mcap mark, 14 of the 17 stocks have witnessed growth slowdown with average growth decelerating from 26.6% over the previous five years to 10.5% over the next five

15

20

25

30

35

40

45

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

1yr fwd growth

12MF PE (x)

PE and growth (x, %)

Correlation = 0.40

Tencent derated from 36x to 17x

15

20

25

30

35

40

45

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

12MF PE (x)

1yr fwd growth


Alibaba derated from 40x to 20x

Correlation = 0.59

Large-caps tied to ecommerce/internet themes have seen a market cap surge beyond US$400bn

After surpassing US$300bn mark, only 3/19 became double-bagger while five delivered negative returns

Alibaba & Tencent: High correlation between PE and future growth forecast


Section 1: Genesis of a multibagger Microstrategy


Genesis of a multibagger The Asian financial crisis (AFC) of 1997 severely impacted the potential of the tiger economies. Crumbling currencies and a defunct banking system led many investors to question the region’s future. Fast-forward 20 years and emerging Asia has witnessed spectacular economic growth, moving from 5.8% of global GDP to 21.4%. Indeed, with domestic demand underpinning growth, Asia weathered the global financial crisis (GFC) much better than developed markets. Its future also looks bright when you consider that population growth is still 1.0% per annum, compared to just 0.5% in developed nations, while there is also a favourable middle-young (MY) ratio in most emerging-Asia countries.

Figure 1 Figure 2

Contribution to global GDP by EM Asia since 1995 Population Cagr (next 2-years) for global major markets

Source: IMF, CLSA Source: IMF, CLSA

MSCI EM Asia - total return of 450% over the past 15 years Asian markets have benefitted immensely from the steep rise in economic growth over the past 15 years. This is especially true for markets such as China, emerging Asean and India. Despite different drivers, they have all witnessed significant economic growth. While emerging Asean and India have relied on consumption-led growth, China has relied heavily on investment-led growth. These markets have delivered total returns of 550-750% during this period, outperforming the rest of Asia and global developed markets. In the process, they have been instrumental in creating multibaggers.

Figure 3 Figure 4

Performance of MSCI EM Asia markets vs DM since 2003 Global regions/markets - GDP growth vs return (L15Y)

Nominal GDP growth based on change in US-dollar GDP data. Source: Factset, IMF, CLSA

5.8

21.4

0

5

10

15

20

25

95A

96A

97A

98A

99A

00A

01A

02A

03A

04A

05A

06A

07A

08A

09A

10A

11A

12A

13A

14A

15A

16F

17F

18F

Contribution to global nominal GDP (%)

EM Asia's contribution to global GDP has increased from 5.8% in 1995 to 21.4% in 2016

1.0

0.5

(0.5)

0.0

0.5

1.0

1.5

2.0

Phil

Mal

ay

Aus

t

Indi

a

Indo

Sin

g

EM A

sia

HK

USA

UK

Chi

na DM

Fran

ce

Kor

ea

Ger

man

y

Taiw

an

Thai

Ital

y

Japa

n

Population Cagr (17-18F, %)

EM Asia's populationgrowth far higher than DM

0100200300400500600700800900

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

China EM Asean IndiaDM EM Asia

Index(US$ TR)

DM up only 250%

Total return of 550-750% for China, India and EM Asean

Australia

China

HK

India

Indonesia

Korea

Malaysia

Philippines

SingaporeTaiwan

Thailand

Japan

USA

Latin America

DM Europe

EM Asia

3

5

7

9

11

13

15

17

19

0 2 4 6 8 10 12 14 16

Nominal GDP growth (L15Y Cagr, %)

Total return US$ (L15Y Cagr, %)

y = 0.69x + 7.20; R2 = 0.55

Emerging Asia has risen to 21.4% of global GDP,

from just 5.8% during the Asian financial crisis

Strong economic growth resulted in good market

performance, creating many multibaggers




Asia still producing a lot of multibaggers... Our analysis of returns over the past 15 years suggests that 21.2% of the broader Asia-Pacific ex-Japan companies with a market cap of more than US$100m have delivered returns of over 500%, while outperforming the relevant market index. A similar exercise for different time periods shows that Asia is still producing multibaggers. For example, over the past five years, 10.2% of companies have tripled and 22.6% have doubled while outperforming the relevant market returns. Even on a three-year basis, 4.2% of companies have tripled while 10.7% companies have doubled. While it is true that these multibaggers have now become concentrated in a few markets and sectors, Asia’s ability to deliver multibaggers remains strong.

Figure 5

APxJ: Hit rate of stocks becoming multibaggers (since 2000, quarterly rebalance)


. . . but the hit rate will come down given the market peak The ability to identify multibaggers is greater at a market bottom as a rising tide lifts all boats. In that respect, the current Asian market peak makes it harder to find future multibaggers. Investors will need to be more selective and focus on sustainable long-term structural stories rather than mean-reversion plays to identify multibaggers in the current market context.

Figure 6

APxJ: Negative correl between future multibagger hit rate and past market return


17.6

25.1

7.9

14.6 13.9

19.9

10.7

22.6

4.2

10.2

7.0

21.2

0

5

10

15

20

25

30

+100%in 3 yrs

+100%in 5 yrs

+200%in 3 yrs

+200%in 5 yrs

+500%in 10 yrs

+500%in 15 yrs

Double-baggers Triple-baggers Multibaggers

Quarterly average hit rate (since 2000)Latest hit rate


Key multibagger indicator

5

10

15

20

25

30

(60)

(30)

0

30

60

90

120

150

180

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Dec

12

Dec

13

Dec

14

Dec

15

Dec

16

Last 5-years return (US$ TR)Hit rate of stocks becoming triple-baggers in 5 years (RHS)

Hit rate (%)(%)

Correl: (0.66)

Markets up over the past fiveyears , multibaggers will be hard

to find over next five years

>200%

Some 21.2% of companies have delivered more than a 500% return

over the past 15 years

Inverse relation between future hit rate of

multibaggers and historical market return

In the past five years, 10.2% have tripled and

22.6% have doubled

Strong market returns over the past five years

will make it more difficult to find multibaggers




Domestic demand-driven markets have a higher multibagger hit rate Markets with strong economic growth are naturally the best hunting grounds for multibaggers, since they have a significant advantage in terms of a growing market pie. However, companies residing outside these markets can also benefit from developing economies’ higher growth if they have the right product and strategy to expand overseas. Below we highlight the latest contribution of five-year triple-baggers from different markets in Asia-Pacific ex-Japan and also highlight the hit rate of finding these multibaggers across different markets.

Figure 7 Figure 8

APxJ markets: Hit rate of stocks becoming triple-bagger APxJ markets: Latest contribution to 5Y triple-baggers


India stands out in its consistency of generating multibaggers A study of the historical trends in generating multibaggers suggests that India has the most consistent track record along with the highest hit rate. Emerging Asean and China have also been a strong source of multibaggers but they have lagged in terms of their hit rate over the past five years. Among the historically low hit-rate markets, Taiwan and Australia are keeping pace with their historical averages, but Singapore, Hong Kong and Malaysia have witnessed a drop. Indeed, with Asian markets up significantly over the past five years, the hit rate of finding multibaggers could be even lower over the next five years.

Figure 9

APxJ markets - Hit rate of stocks becoming triple-baggers (+200%) in five years


0

5

10

15

20

25

30

IN ID PH CN TH KR APxJ MY HK SG AU TW



Hit rate of stocks becoming triple-baggers in 5 years (%)

India33%

China11%

Korea11%

Taiwan11%

Aust10%

HK7%

Thai5%

Indo3%

Malay3%

Others6%


0

10

20

30

40

50

60

Dec

99

Jun

00

Dec

00

Jun

01

Dec

01

Jun

02

Dec

02

Jun

03

Dec

03

Jun

04

Dec

04

Jun

05

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

India China EM Asean


India, emerging Asean and China have had the highest multibagger hit

rate since 2000

India’s hit rate of generating multibaggers

has been consistently strong

Both China and EM Asean have witnessed a drop in multibagger hit rate over

the past five years




Cyclicals dominated pre-GFC, consumer thereafter The strong pre-GFC commodity cycle produced a number of multibaggers in the energy and materials sectors. However, the current economic conditions are very different given the volatile commodity prices. On the other hand, consumer and healthcare sectors have dominated since the GFC. Indeed, Asian healthcare has been the most consistent sector, given its current and long-term average hit rate of more than 20%. Also, consumer staples and discretionary sectors’ hit rates are higher than the market despite dropping against their long-term averages. Furthermore, the tech (infotech) sector is starting to deliver more multibaggers than its long-term average, especially given the emergence of Chinese internet stocks.

Figure 10 Figure 11

APxJ sectors: Hit rate of stocks becoming triple-baggers APxJ sectors: Latest contribution to 5Y triple-baggers


Healthcare a stand out, but infotech is in focus The healthcare sector has one of the highest hit rates of generating multibaggers, along with good consistency. However, the tech sector is enjoying a big increase in the hit rate. Looking forward, technology will remain a key focus area with artificial intelligence (AI) and robotics being prime growth prospects. Later in the report, we highlight some of the key ideas in this space from our fundamental analysts and thematic research.

Figure 12

APxJ sectors - Hit rate of stocks becoming triple-baggers in five years


0

5

10

15

20

25

Ener

gy

Con

s st

ap

Hea

lthca

re

Mat

eria

ls

Indu

stri

als

Con

s di

sc

APx

J

Fina

ncia

ls

Util

ities

Tele

com

Prop

erty

Info

tec

hQuarterly average hit rate (since 2000)Latest hit rate (+200% since 2012)


Cons disc18%Cons

stap9%

Energy1%

Financials13%

H'care13%

Industrials12%

Info tech16%

Materials10%

Property5%

Telecom1%

Utilities2%


0

2

4

6

8

10

12

14

16

18

20

5

10

15

20

25

30

Dec

99

Jun

00D

ec 0

0Ju

n 01

Dec

01

Jun

02D

ec 0

2Ju

n 03

Dec

03

Jun

04D

ec 0

4Ju

n 05

Dec

05

Jun

06D

ec 0

6Ju

n 07

Dec

07

Jun

08D

ec 0

8Ju

n 09

Dec

09

Jun

10D

ec 1

0Ju

n 11

Dec

11

Healthcare

Info tech (RHS)


Avg for Healthcare: 20.5%

Avg for Info tech: 7.3%

Healthcare best place to find multibaggers, along

with consumer

Healthcare has consistently delivered

multibaggers

Tech sectors’ multibagger ability boosted by

smartphones proliferation and the internet sector




Multibaggers over the past 15 years - large-caps In this screen, we highlight the large-cap stocks (market cap over US$5bn) with the highest returns over the past 15 years within Asian markets.

Figure 13

APxJ large-cap stocks with highest returns over the past 15 years (sorted by the return within each market) Code Name Cty Sector Mkt cap Return 12MF Trl 12MF L3Y FY1-FY2 FY1-FY2 NDE (US$m) (L15Y, PE PB div yld EPS Cagr EPS Cagr ROE (latest, %) (x) (x) (%) (%) (%) (avg, %) %) Australia FMG AU Fortescue AU Materials 14,446 93,142 12.1 1.5 4.6 (8.7) (24.6) 12.1 42.9 REA AU REA AU Media 7,058 58,513 30.0 10.7 1.7 15.1 22.3 31.6 16.7 CTX AU Caltex AU Energy 6,748 2,708 14.5 2.8 3.5 7.9 (0.4) 17.4 16.2 RHC AU Ramsay Healthcare AU Healthcare 12,027 2,545 25.1 6.8 2.1 17.1 10.7 25.5 140.5 CSL AU CSL AU Pharma 45,589 2,010 28.0 13.8 1.6 2.0 17.3 41.5 98.8 China NTES US NetEase CN Software 36,062 44,241 16.7 5.3 1.5 37.0 15.2 29.2 (82.1) 1177 HK Sino Biopharm CN Pharma 6,167 9,220 20.8 4.8 0.9 22.6 12.2 22.1 (53.5) SINA US Sina CN Software 7,087 6,238 28.3 2.4 0.0 8.4 63.0 7.0 (59.8) 688 HK Coli CN Property 35,704 5,156 7.4 1.2 3.6 16.2 (0.5) 15.0 8.1 257 HK Everbright Intl CN Comm svcs 6,038 4,861 11.9 2.4 2.8 24.0 23.0 18.9 80.9 Hong Kong 27 HK Galaxy HK Cons svcs 25,821 11,012 22.8 4.1 1.3 (15.6) 21.0 16.7 (29.8) 316 HK OOIL HK Transport 5,758 5,770 27.2 1.2 1.0 nm nm 4.4 45.9 388 HK HK Exchanges HK Div fin 32,669 3,438 33.7 7.6 2.7 6.4 16.4 22.1 nm 1031 HK Kingston Financial HK Div fin 6,591 2,406 nm nm na 10.3 na na nm JS SP Jardine Strategic HK Cap gds 25,071 2,009 14.8 1.0 0.8 (2.6) 10.8 6.0 20.4 India BAF IN Bajaj Finance IN Div fin 14,430 51,688 32.6 8.2 0.3 32.8 36.1 25.0 nm EIM IN Eicher Motors IN Cap gds 13,383 50,161 35.1 14.5 0.5 61.5 28.8 36.9 (16.2) SRCM IN Shree Cement IN Materials 9,308 42,315 30.7 7.2 0.3 10.0 31.0 21.5 7.3 MSS IN Motherson Sumi IN Autos 10,513 39,742 26.7 7.6 1.1 27.9 30.9 26.6 73.8 HZ IN Hindustan Zinc IN Materials 19,182 22,520 12.4 3.7 2.5 6.1 12.4 27.0 (78.7) Indonesia UNTR IJ United Tractors ID Energy 8,075 15,254 13.9 2.5 2.9 1.1 26.8 16.7 (41.3) KLBF IJ Kalbe Farma ID Pharma 6,180 5,510 30.1 6.4 1.6 6.2 11.0 18.9 (26.1) BBCA IJ BCA ID Banks 34,719 5,178 18.7 3.8 1.3 13.0 11.8 18.7 nm HMSP IJ HM Sampoerna ID FBT 31,278 4,794 30.2 11.9 3.0 3.9 5.3 38.3 (35.2) ASII IJ Astra Intl ID Autos 23,880 4,607 14.9 2.6 3.0 (8.0) 21.1 16.9 39.3 Korea 010130 KS Korea Zinc KR Materials 7,775 3,035 12.6 1.6 1.9 9.8 10.4 12.0 (31.2) 051900 KS LG H&H KR HPC 14,154 2,800 22.6 5.5 0.9 16.7 14.3 22.2 16.6 018880 KS Hanon Systems KR Autos 5,390 2,013 17.7 3.3 2.6 (0.5) 12.0 17.3 10.0 011170 KS Lotte Chemical KR Materials 11,813 1,725 6.4 1.3 1.0 85.4 5.5 19.0 10.3 002790 KS Amorepacific Group KR HPC 9,142 1,516 33.2 2.7 0.4 29.5 (1.6) 10.9 (47.3) Malaysia HAP MK Hap Seng Cons MY Cap gds 5,244 3,294 nm nm na 13.9 na na 48.9 DIGI MK Digi MY Telecom 8,778 2,984 24.2 70.1 4.1 (1.4) (2.4) 286.4 405.4 PETD MK Petronas Dagangan MY Energy 5,562 1,680 24.4 4.3 3.1 5.2 2.0 17.1 (42.2) PEP MK PPB MY FBT 4,607 1,359 18.0 0.9 1.6 1.7 3.5 5.1 (3.5) PBK MK Public Bank MY Banks 18,537 1,040 14.7 2.2 3.0 6.2 2.9 14.6 nm Philippines URC PM URC PH FBT 6,422 7,121 25.6 nm 2.0 14.7 na 15.9 41.9 JGS PM JG Summit PH Cap gds 9,724 5,514 16.5 2.0 0.3 29.0 1.0 11.5 57.2 AEV PM AEV PH Cap gds 8,011 5,314 16.1 3.0 2.4 1.8 8.7 17.2 136.1 MER PM Meralco PH Utilities 6,073 1,576 16.4 4.2 5.5 4.3 (1.4) 25.6 (17.0) TEL PM PLDT PH Telecom 7,269 1,296 17.1 3.3 3.6 (10.4) (12.3) 19.1 106.3 Singapore SGX SP SGX SG Div fin 5,873 1,404 21.4 7.7 4.1 (0.2) 3.2 34.5 nm GENS SP Genting Singapore SG Cons svcs 10,471 595 22.5 1.7 2.6 (22.9) 58.1 7.9 (47.6) KEP SP Keppel Corp SG Cap gds 8,335 530 12.6 0.9 3.6 (18.1) 9.5 7.1 58.9 CT SP CapitaMall Trust SG Property 5,523 471 18.4 1.1 5.3 4.2 1.3 6.0 40.5 CAPL SP CapitaLand SG Property 11,642 425 17.7 0.9 2.8 16.5 6.6 5.8 54.4 Taiwan 3008 TT Largan TW Tech HW 24,622 6,221 20.2 8.3 1.7 33.4 34.3 35.1 (85.1) 2474 TT Catcher Tech TW Tech HW 9,440 3,498 10.8 2.1 3.1 16.4 13.9 18.4 (48.0) 2207 TT Hotai Motor TW Retail 6,143 2,366 nm 4.2 na 12.0 na na 198.1 1216 TT Uni-President TW FBT 11,189 1,336 20.8 3.2 3.8 4.3 7.1 13.8 36.5 2395 TT Advantech TW Tech HW 5,101 1,003 23.0 5.8 3.0 10.8 11.5 24.4 (34.8) Thailand BDMS TB Bangkok Dusit TH Healthcare 9,266 8,016 34.7 5.3 1.5 10.8 3.6 15.0 60.2 MINT TB Minor International TH Cons svcs 5,137 4,203 27.2 4.1 1.1 16.3 (0.1) 14.3 132.8 CPN TB CPN TH Property 9,106 3,310 25.9 5.4 1.5 13.2 16.2 18.9 32.0 BJC TB Berli Jucker TH Cap gds 5,399 1,812 27.3 1.7 1.6 3.6 6.6 6.0 145.6 PTT TB PTT TH Energy 33,741 1,757 10.3 1.3 4.2 (0.4) 8.3 12.5 26.0

Note: Universe is broader Asia Pacific ex-Japan companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Total return is based on local currency. Source: Factset, CLSA




Multibaggers over the past five years - large-caps Similar to the previous screen, we highlight large-cap stocks (market cap over US$5bn) with the highest returns over the past five years within Asian markets.

Figure 14

APxJ large-cap stocks with highest returns over the past five years (sorted by the return within each market) Code Name Cty Sector Mkt cap Return 12MF Trl 12MF L3Y FY1-FY2 FY1-FY2 NDE (US$m) (L5Y, PE PB div yld EPS Cagr EPS Cagr ROE (latest, %) (x) (x) (%) (%) (%) (avg, %) %) Australia ALL AU Aristocrat AU Cons svcs 10,724 833 21.6 10.5 2.1 60.0 16.1 44.0 66.5 BSL AU BlueScope AU Materials 5,026 437 10.2 1.2 1.2 78.0 (3.5) 10.2 10.8 QAN AU Qantas AU Transport 8,339 419 10.1 2.8 2.9 nm 9.8 25.7 88.9 REA AU REA AU Media 7,058 359 30.0 10.7 1.7 15.1 22.3 31.6 16.7 MQG AU Macquarie AU Div fin 22,301 338 13.0 1.9 5.6 11.0 4.2 14.5 nm China 2382 HK Sunny Optical CN Tech HW 14,944 3,249 31.4 15.7 0.8 38.6 65.3 41.7 (16.2) XRS US TAL Edu CN Cons svcs 8,689 2,107 69.2 21.4 0.0 14.9 58.3 31.4 (102.5) 285 HK BYD Electronic CN Tech HW 6,047 1,171 17.5 3.1 0.8 23.8 40.1 16.9 (27.3) HTHT US China Lodging CN Cons svcs 7,770 714 34.8 8.6 0.4 36.3 44.6 21.6 (37.3) 2020 HK Anta Sports CN Cons dur 10,409 676 20.5 5.6 3.5 21.9 18.1 26.3 (77.6) Hong Kong 607 HK Fullshare HK Property 7,967 567 28.3 nm 0.0 nm na na (5.0) 1031 HK Kingston Financial HK Div fin 6,591 357 nm nm na 10.3 na na nm 669 HK Techtronic HK Cons dur 8,974 266 17.0 3.4 1.8 17.7 17.0 18.7 7.3 1910 HK Samsonite HK Cons dur 5,481 141 18.5 3.5 2.2 13.1 10.7 17.8 102.7 1299 HK AIA HK Insurance 89,171 136 17.2 2.4 1.9 16.7 14.5 13.4 nm India BAF IN Bajaj Finance IN Div fin 14,430 1,630 32.6 8.2 0.3 32.8 36.1 25.0 nm EIM IN Eicher Motors IN Cap gds 13,383 1,345 35.1 14.5 0.5 61.5 28.8 36.9 (16.2) ARBP IN Aurobindo Pharma IN Pharma 6,355 1,246 14.9 3.9 0.5 25.1 12.0 23.0 19.3 IHFL IN Indiabulls HFC IN Banks 7,935 811 13.0 4.0 3.7 12.7 22.6 28.2 nm BRIT IN Britannia Industries IN FBT 7,932 806 45.6 17.1 0.7 30.7 18.3 33.9 (6.7) Indonesia TLKM IJ Telkom ID Telecom 35,394 198 18.4 5.2 3.6 10.0 17.2 26.2 16.8 ICBP IJ ICBP ID FBT 7,578 177 24.5 5.4 1.9 17.4 8.7 21.1 (35.6) BBCA IJ BCA ID Banks 34,719 157 18.7 3.8 1.3 13.0 11.8 18.7 nm BBRI IJ BRI ID Banks 27,972 138 12.1 2.4 2.8 7.4 11.0 18.4 nm KLBF IJ Kalbe Farma ID Pharma 6,180 134 30.1 6.4 1.6 6.2 11.0 18.9 (26.1) Korea 000660 KS SK Hynix KR Semis 41,659 224 4.8 1.6 1.7 1.1 83.0 31.0 (1.5) 002790 KS Amorepacific Group KR HPC 9,142 216 33.2 2.7 0.4 29.5 (1.6) 10.9 (47.3) 021240 KS Coway KR Cons dur 6,197 207 18.7 5.9 3.8 (0.1) 27.9 30.3 51.0 018880 KS Hanon Systems KR Autos 5,390 183 17.7 3.3 2.6 (0.5) 12.0 17.3 10.0 090430 KS Amorepacific KR HPC 16,959 168 28.2 4.5 0.7 33.6 7.8 13.8 (20.9) Malaysia HAP MK Hap Seng Cons MY Cap gds 5,244 615 nm nm na 13.9 na na 48.9 TNB MK Tenaga MY Utilities 18,771 138 10.9 1.4 3.7 18.3 (2.3) 12.8 47.6 GENM MK Genting Malaysia MY Cons svcs 8,352 100 18.5 1.7 1.7 (1.9) 11.5 8.7 (0.2) IHH MK IHH MY Healthcare 11,579 96 43.5 2.2 0.7 9.5 19.1 4.8 19.7 MISC MK MISC MY Transport 7,455 85 14.8 0.8 3.8 7.4 (8.0) 5.5 16.2 Philippines URC PM URC PH FBT 6,422 176 25.6 nm 2.0 14.7 na 15.9 41.9 SMPH PM SM Prime PH Property 19,326 164 33.1 4.0 0.9 9.9 14.5 11.7 62.2 BDO PM BDO PH Banks 11,046 144 17.3 2.0 1.0 6.1 6.1 11.4 nm GLO PM Globe Telecom PH Telecom 5,288 134 18.0 4.2 4.3 11.3 (2.1) 23.1 174.9 SM PM SM Investments PH Cap gds 19,372 130 25.7 3.2 1.3 3.7 14.2 11.7 90.0 Singapore AVGO US Broadcom SG Semis 101,347 668 14.8 4.8 2.2 58.2 22.3 28.4 46.9 FLEX US Flextronics SG Tech HW 8,272 138 12.7 2.9 0.0 9.5 9.7 20.6 50.4 DBS SP DBS SG Banks 38,483 66 10.4 1.1 3.3 3.3 11.0 10.5 nm GLP SP GLP SG Property 11,150 54 32.1 1.3 2.1 4.3 17.2 4.8 54.9 AREIT SP Ascendas SG Property 5,699 53 15.8 1.3 6.1 3.7 3.0 7.7 52.7 Taiwan 3008 TT Largan TW Tech HW 24,622 949 20.2 8.3 1.7 33.4 34.3 35.1 (85.1) 2408 TT Nanya Technology TW Semis 5,701 313 9.0 1.8 4.2 37.9 (8.9) 18.9 11.3 4938 TT Pegatron TW Tech HW 7,762 222 9.7 1.5 6.2 25.7 15.1 15.0 (58.1) 2330 TT TSMC TW Semis 180,895 208 14.9 3.7 3.7 21.1 7.0 23.3 (31.9) 2395 TT Advantech TW Tech HW 5,101 203 23.0 5.8 3.0 10.8 11.5 24.4 (34.8) Thailand AOT TB Airports of Thailand TH Transport 22,007 772 30.0 5.5 1.6 6.2 12.3 17.4 (29.2) THBEV SP ThaiBev TH FBT 16,884 224 19.3 nm 3.3 (0.4) na 22.2 31.2 MINT TB Minor International TH Cons svcs 5,137 192 27.2 4.1 1.1 16.3 (0.1) 14.3 132.8 CPN TB CPN TH Property 9,106 176 25.9 5.4 1.5 13.2 16.2 18.9 32.0 BDMS TB Bangkok Dusit TH Healthcare 9,266 112 34.7 5.3 1.5 10.8 3.6 15.0 60.2

Note: Universe is broader Asia Pacific ex-Japan companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Total return is based on local currency. Source: Factset, CLSA


Section 2: A multibagger framework Microstrategy


A multibagger framework Below we present a framework to identify multibagger characteristics. Our backtests and characteristics analysis show that companies that operate in growth markets/sectors with leading products (including brands) and good management are most likely to be multibaggers. This forms the core of our strategy to pick multibaggers. Apart from the historical track record, we rely on the consensus earnings forecast after passing them through our quantitative framework to ensure that we are focusing on companies in the right markets and sectors. Since identifying futuristic products is beyond the scope of quantitative studies, we utilise the work done by our fundamental analysts in the thematic space to capture some tech-driven product ideas as summarised on page 65.

Figure 15

Microstrategy: Multibagger framework - influencing drivers

Source: CLSA

In terms of product superiority, R&D spending for companies in the tech and healthcare sectors, branding spend in the case of consumer products and channel building in B2B industries is increasingly becoming the most relevant factor, along with the ability to expand overseas. We further examine these issues in our characteristics study of Asian multibaggers.

Also, while earnings growth is the ultimate driver of long-term returns, good stocks can remain depressed due to corporate-governance issues. Hence, management quality and track record are also important for investors to judge whether a company can deliver earnings growth on a sustained basis rather than being just a temporary success. This is particularly true in the context of Asia, where corporate governance has been a big concern and short-sellers have been targeting companies in markets such as Hong Kong. Hence, we have utilised our risk scores, including Benford scores (a test of fraudulent accounts) to assess the risk of potential multibaggers turning out to be disappointments through our Red flags framework.

Multi-baggers

Market

Sector(product)

Product superiority (R&D vs capex)

Branding & channel building (SG&A)

Overseas expansion

Manage-ment

quality

A quantitative framework to capture qualitative

characteristics

R&D and SG&A spending becoming increasingly

important


https://www.clsa.com/member/reports/567713282.pdf





R&D: A key differentiator in knowledge driven industries Research and development (R&D) expenditure has a direct impact on profitability because it cannot be capitalised. However, it remains a key source of long-term competitive advantage for companies in the knowledge-driven industries. Asia’s obsession with capex in the past has been well documented but we are witnessing a significant change in attitude towards R&D spending with the R&D-to-capex ratio rising consistently since 2008. While Asian R&D spend still has to catch up with global norms, it doubled from 0.9% of sales in 2008 to around 1.9% by the end of 2016. After being led by Japan for many years, the USA has become the global R&D leader (3.0%), improving consistently since the trough in 2005. Europe’s ratio has been steady with a range of 1.5-2.5%. However, Asia is on the brink of breaking through the 2% mark at the index level.

Figure 16 Figure 17

MSCI regions (ex-fin): R&D as a percentage of sales MSCI AsiaxJ (ex-fin): R&D versus capex

Note: Ratios are bottom-up aggregated with freefloat adjustment based on current MSCI universe. Source: CLSA, Factset

Rise of R&D has been broadbased The rise of R&D spending is not limited to just the large-cap index companies. Data for the broader sphere of Asia Pacific ex-Japan firms show that the median R&D-to-sales ratio has been on a steady rise since 2008, growing from 0.8% to close to 2% in 2016, based on data for over 1,800 companies.

Figure 18

Broader APxJ (ex-fin): Median FY0 R&D to sales ratio

Note: Broader APxJ companies with market cap of more than US$100m. Source: CLSA, Factset

3.0

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Broader APxJ universe (median FY0 R&D to sales ratio)(%)

Median R&D to sales ratio has moved close to 2%

Data for over 1,800 companies with market

cap more than US$100m

Asian R&D as a percentage of sales has

doubled since the trough in 2008




R&D spend rising for most knowledge-driven industries R&D spending has been on the rise for most knowledge-driven industries. Indeed, our analysis shows that out of the top-10 industries based on R&D spend as a percentage of sales, the ratio is at a 15-year peak for seven of them. We believe that these R&D-driven sectors will remain a rich source of multibaggers, given their focus on product superiority and their ability to deliver products that will provide sustainable competitive advantage. It is particularly interesting to note that for several industries the R&D spend as a percentage of sales has more than doubled. In the case of pharma, the ratio has increased by 4.4x, highlighting that Asia is increasingly investing in developing inhouse competitive advantages.

Figure 19

Median FY0 R&D to sales ratio for major APxJ industries


R&D growth still strong in a number of sectors Given the low-growth environment last year, Asian companies did dial back their R&D spending. Yet some R&D-heavy industries witnessed strong growth, led by internet, biotech, healthcare equipment/services and pharma. Also, a few other industries such as defence, personal/leisure products, autos and autoparts also saw strong R&D growth.

Figure 20

Median FY0 R&D growth for relevant APxJ industries


Biotech Software Internet Healthcare Equip & svcs

Communica-tions equip

Semis Pharma Tech hardware Electronic instruments

Auto componenets

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R&D spending at peak levels for majority of the

top-10 industries

While R&D growth was dialed back to 5% last

year, capex growth was negative

R&D to sales ratio for pharma sector has

increased from 0.9% to 3.9%

Biotech, personal product, defence, internet and

healthcare leading R&D growth




Multibaggers have higher R&D spend To further understand the impact of R&D spend policy on returns, we selected the top-15 industries based on the highest R&D-to-sales ratio and compared the R&D-to-sales ratio of the multibaggers to that of the overall industry. In the majority of cases, the multibaggers basket had a higher median R&D-to-sales ratio than the overall industry. The difference in R&D spending of multibaggers versus the rest is most clear in the case of various tech-related industries. Among nontech industries, personal products, defence and healthcare sectors are the standouts.

Figure 21

Broader APxJ (ex-fin): FY0 R&D spend of multibaggers relative to industry

Note: Broader APxJ companies with market cap of more than US$100m. R&D spending data based on industry median. Source: CLSA, Factset

R&D spend higher for multibaggers in most industries Figure 22

Broader APxJ industries: FY0 R&D spend of multibaggers relative to industry versus the industry

Note: Broader APxJ companies with market cap of more than US$100m. The bubble size represents the count of companies with FY0 R&D to sales data. Source: CLSA, Factset

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(x) (%)

Multibaggers have much higher R&D spending in most relevant industries

17

Tech hw

Pers prodSemis

Aero&def

Oil&Gas

H'care E&SElec I&CPharma

Comm equip

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Multibaggers rel to industry (avg 2000-12, %)

Biotech (16.9, 1.2, 51)

Software (11.8, 1.7, 49)

Internet (7.9, 1.5, 30)

Multibaggers had higher R&D spend for majority of

the top-15 industries

R&D spend has been a key differentiating factor

for the tech sector




Asian small-/midcaps with high and rising R&D intensity Our analysis has shown that multibaggers in various industries feature significantly higher R&D intensity. R&D spending will continue to be a key differentiator, given the advent of new technologies such as robotics and AI. Keeping this in mind, we highlight a list of Asian small- to midcap companies (market cap between US$100m to US$5bn) that have the highest R&D intensity along with robust R&D growth:

Figure 23

Asian small-/midcap companies with high R&D-to-sales ratio and strong R&D growth (sorted by R&D to sales ratio) Code Name Cty Sector Mkt cap R&D to sales (%) R&D growth (%) FY1-FY2 EPS 12M fwd

(US$m) FY-2 FY-1 FY0 FY-1 FY0 L5Y Cagr Cagr (%) PE (x) SPADV IN Sun Pharma Adv IN Pharma 1,501 122.5 139.2 168.4 17.6 35.8 na na nm 3529 TT eMemory Tech TW Semis 1,015 31.1 31.2 34.6 9.2 23.2 13.2 31.0 37.6 2379 TT Realtek TW Semis 1,849 25.1 28.0 27.5 13.3 20.1 19.7 12.9 15.2 777 HK Netdragon CN Software 1,505 25.9 35.1 27.2 79.0 70.3 36.7 nm nm 6462 TT Egis Tech TW Tech HW 618 329.4 50.2 23.2 79.2 44.9 36.6 280.4 14.1 XRO NZ Xero NZ Software 2,689 25.2 22.5 20.0 48.9 27.2 na nm nm 4947 TT On-Bright Elec CN Semis 373 16.3 18.2 18.0 18.8 14.1 27.8 6.7 13.2 SIMO US Silicon Motion TW Semis 1,467 21.1 19.7 16.6 16.8 29.9 17.9 (1.9) 12.9 1302 HK LifeTech Sci CN Healthcare 950 11.8 15.2 16.3 41.8 21.8 20.4 68.3 35.8 4966 TT Parade Tech TW Semis 1,131 11.8 14.3 15.7 40.8 38.9 34.9 21.1 17.6 6510 TT Chunghwa Precision TW Tech HW 1,330 10.1 10.8 14.2 73.5 96.9 na 43.0 35.7 NAN AU Nanosonics AU Healthcare 558 22.1 17.1 14.1 48.9 30.0 24.8 53.0 29.6 5490 TT XAC Automation TW Tech HW 189 14.7 10.4 14.0 18.5 15.1 13.2 na nm 3454 TT Vivotek Inc TW Tech HW 257 13.1 13.4 13.3 15.2 15.3 16.1 na nm 205100 KS EXEM KR Software 132 na 8.5 11.8 na 85.5 na na nm 877 HK O-Net CN Tech HW 464 12.7 11.9 11.8 27.5 39.0 31.1 51.5 13.1 8002 HK IGG SG Software 2,132 8.4 13.3 11.2 56.6 33.5 46.6 72.6 10.7 098460 KS Koh Young Tech KR Semis 726 7.0 9.5 10.8 39.1 34.2 26.0 17.1 21.5 4968 TT Richwave Tech TW Semis 204 11.1 11.0 10.6 23.2 21.3 3.6 51.2 21.2 5274 TT ASPEED Tech TW Semis 789 13.0 12.1 10.6 7.6 18.8 18.8 38.7 29.8

Note: Universe is broader Asia Pacific ex-Japan companies with market cap between US$100m to US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Asian large-cap companies leading the R&D effort While the broader Asian list contains a number of small-cap companies, we also provide a list of top-10 R&D leaders in Asia based on their actual dollar spending last year. While large-cap companies have a natural disadvantage in terms of their size when it comes to becoming multibaggers, these R&D leaders will remain strong performers, given their investment in developing competitive advantage through R&D spend.

Figure 24

Top 10 Asian companies with the highest R&D dollar-amount (sorted by R&D dollar amount) Code Name Cty Sector Mkt cap R&D amount (US$m) R&D/sales R&D gr FY1-FY2 EPS 12M fwd

(US$m) FY-2 FY-1 FY0 (FY0, %) (FY0, %) Cagr (%) PE (x) 005930 KS Samsung Electronics KR Tech HW 283,600 12,845 12,238 12,601 7.0 3.0 43.7 7.5 AVGO US Broadcom SG Semis 101,347 695 1,049 2,674 20.2 154.9 22.3 14.8 BABA US Alibaba CN Software 428,095 1,607 2,079 2,572 10.8 23.7 35.2 30.6 2330 TT TSMC TW Semis 180,895 1,884 2,173 2,361 7.5 8.6 7.0 14.9 2454 TT MediaTek TW Semis 14,120 1,437 1,642 1,846 20.2 12.4 1.7 19.2 700 HK Tencent CN Software 394,835 1,047 1,255 1,786 7.8 42.4 39.5 35.8 763 HK ZTE CN Tech HW 13,681 1,247 1,707 1,776 11.6 4.0 nm 14.7 2317 TT Hon Hai TW Tech HW 65,724 1,620 1,740 1,696 1.2 (2.6) 10.3 11.6 390 HK China Railway CN Cap gds 27,113 1,464 1,550 1,571 1.6 1.3 13.6 7.8 BIDU US Baidu CN Software 61,015 1,053 1,534 1,530 14.4 (0.2) 24.5 27.0

Note: Universe is broader Asia Pacific ex-Japan companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Companies with high R&D to sales and

robust R&D growth

R&D leaders in Asia based on actual dollar spending




Branding & channel building: Asia lags developed markets While Asia might be catching up on its R&D effort, it still lags significantly when it comes to brand and sales-related spending. In the top-100 global brands by interbrand.com only five belong to the Asia Pacific ex-Japan region. In a similar study by WPP/BrandZ (http://www.brandz.com), only 15 are from this region, including China financials. Given the lack of explicit reporting of the brand and channel-building expenses, we use SG&A (selling, general and administrative) expense as a proxy. Indeed, Asia ex-Japan’s SG&A spend (ex-R&D) as a percentage of sales was just 10.0% last year, much lower than the 15.1% by the USA and well behind other developed markets. On a more positive note, SG&A spending growth has been strong, with the SG&A-to-sales ratio rising consistently since 2011 and a significant increase in the SG&A spending growth last year.

Figure 25 Figure 26

MSCI regions (ex-fin): SG&A (ex-R&D) as a % of sales MSCI AsiaxJ (ex-fin): SG&A (ex-R&D) growth


Asian companies starting to focus on brand and channel building Asian companies are slowly but surely realising the power of building strong brands and sales networks as highlighted by the broadbased increase in the SG&A-to-sales ratio. Data for the broader Asia Pacific ex-Japan universe show that the median SG&A-to-sales ratio has been on a steady rise since 2012, reaching over 13% in 2016, based on data for over 4,200 companies.

Figure 27

Broader APxJ (ex-fin): Median FY0 SG&A (ex-R&D) to sales ratio


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Broader APxJ universe (median FY0 SG&A (ex-R&D) to sales ratio)(%)

Median SG&A to sales ratio has moved

beyond 13%



Asia’s SG&A to sales ratio is far below the developed

markets such as USA


http://www.brandz.com/



SG&A spend rising for a number of industries SG&A spending has been on the rise for many Asian industries. While the increase is not consistent as in the R&D space, it is still high for a number of important industries such as software and consumer-discretionary sectors. We believe that industries with high SG&A spending will remain a rich source of multibaggers, given their focus on product superiority and sustainable competitive advantage through brand or channel building. It is particular interesting to note that for several industries, the SG&A (ex-R&D) spend as a percentage of sales has increased by more than 40%. For example, in the case of software, the ratio has risen from around 20% to almost 45%, highlighting the increased investment in brand building.

Figure 28

APxJ industries with high SG&A spend: Median FY0 SG&A (ex-R&D) to sales ratio


SG&A growth strong in a number of sectors Despite the weak capex growth, SG&A growth has been robust in a number of Asian industries. For example, the high SG&A growth in the ecommerce and personal-products spaces highlights the focus on capturing consumer mind-share. Other sectors with high SG&A growth include biotech, professional services, internet and healthcare.

Figure 29

Broader APxJ industries with the highest median FY0 SG&A growth

Note: Broader APxJ companies with market cap of more than US$100m. SG&A data including R&D. Source: CLSA, Factset

Professional services Software Biotech Internet

softwareDiv consumer

services

Leisure products Multi-line retail Speciality retail Personal

products Beverages

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New-economy and consumer-related sectors

witnessed the highest growth in SG&A spend

SG&A spend ratio on an uptrend for seven out of

the top-10 industries with high SG&A spend

Ecommerce, personal products and internet

witnessed growth of more than 15% last year




Multibaggers have higher SG&A spend in a number of industries To further understand the impact of SG&A spending on returns, we selected all the industries with SG&A-to-sales higher than 8% and compared the SG&A-to-sales ratio of the multibaggers to that of the overall industry. In 26 out of 46 industries, the multibaggers basket had a higher median ratio than the overall industry. Data show that SG&A spending matters not only in the consumer-driven industries but also in many of the industries that also had higher R&D spending. The fact that SG&A is only a proxy for brand and channel-building spend may have brought some irrelevant industries into the fray. However, overall spending under the SG&A head still seems to be an important factor when it comes to identifying multibaggers.

Figure 30

Broader APxJ (ex-fin): FY0 SG&A (ex-R&D) spend of multibaggers vs industry


SG&A spend higher for multibaggers in most industries Figure 31

Broader APxJ industries: FY0 SG&A spend of multibaggers relative to industry versus the industry

Note: Broader APxJ companies with market cap of more than US$100m. The bubble size represents the count of companies with FY0 SG&A (ex-R&D) to sales data. Source: CLSA, Factset

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Multibaggers rel to industry (avg 2000-12)Current FY0 SG&A (ex-R&D) to sales (RHS)

(x) (%)

Multibaggers have much higher SG&A spending in many relevant industries

1.73

Elec equip

AirlinesPaper

Energy E&S CementMulti-retailTech hw

Media

Food prod

Auto partsIT Services

Elec I&C

Tex/app/lux

TobaccoH'hold dur

DevelopersHotels

MachineryAutos

Bldg prodComm svc Wireless tel Pharma Spec retail

Pers prodH'care prov

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Fd/stp ret e-commInd conglos

Cont & pkg Div telecomRoad/rail AirFt&Log

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Median SG&A (ex-R&D)/sales (FY0, %)

Multi-baggers rel to industry (avg 2000-12, %)Aero&def

(8.2, 1.6, 15)

Internet (36.3, 0.7, 51)Leis prod (27.2, 0.5, 16)

Div cons svc (35.6, 1.4, 34)Software (44.5, 1.3, 86)

Comm equip (11.3, 1.7, 52)

Biotech (43.2, 1.1, 54)

Prof svc (52.6, 0.9, 16)

TradingCos (7.2, 0.6, 46)

Multibaggers had higher SG&A spend in 26 out of

46 industries

SG&A spend encompasses expenses beyond just

those related to advertisement spend




Asian small/midcaps with high and rising SG&A intensity Our analysis has shown that multibaggers in various industries feature a significantly higher SG&A-to-sales ratio. SG&A spending is on the rise in Asia and will continue to be a key differentiator, given the focus on consumption-led growth. Keeping this in mind, we highlight a list of broader Asian small-to-midcap companies that have the highest SG&A-to-sales ratio, along with robust SG&A growth.

Figure 32

Asian Small/mid-caps with high SG&A (ex-R&D)-to-sales ratio and strong SG&A growth (sorted by SG&A/sales) Code Name Cty Sector Mkt cap

(US$m) SG&A (ex-R&D)

to sales (%) SG&A (ex-R&D) growth

(%) FY1-FY2

EPS Cagr 12M fwd

PE (x)

FY-2 FY-1 FY0 FY-1 FY0 L5Y Cagr (%) 194510 KS Pati Games KR Software 112 73.9 96.5 97.1 23.3 34.4 na na nm 039130 KS Hana Tour KR Cons svcs 808 87.5 88.1 93.5 20.0 37.6 18.8 141.5 23.1 EHE AU Estia Health AU Healthcare 549 77.4 80.3 83.5 61.3 23.2 na 2.8 17.6 MMYT US MakeMyTrip IN Retail 3,096 46.9 64.9 83.2 54.9 70.8 37.0 nm nm JHC AU Japara Healthcare AU Healthcare 406 83.5 82.8 83.0 470.1 17.3 na 6.0 16.2 8158 HK Regenerative Medicine HK Pharma 481 3,640 742 81.9 100.9 41.8 39.7 na nm MTCL IN MindTree IN Software 1,210 68.0 70.3 75.3 35.6 20.1 21.3 15.9 15.2 060280 KS CUREXO KR Healthcare 284 47.2 69.1 74.6 54.4 17.9 22.1 na nm 089600 KS Nasmedia KR Media 386 69.9 71.3 74.3 55.4 60.2 31.0 48.3 17.1 PSYS IN Persistent Systems IN Software 780 74.5 77.2 74.0 26.7 19.2 23.3 11.2 14.1 PRG AU Programmed Maintenance AU Comm svcs 613 61.2 68.0 73.1 71.2 30.9 16.9 8.0 16.7 016170 KS Loen Entertainment KR Media 1,839 73.0 73.1 71.2 10.8 22.8 20.8 25.3 22.5 CTD AU Corporate Travel AU Cons svcs 1,825 75.9 74.6 70.5 29.6 17.5 36.6 19.0 28.3 192080 KS DoubleUGames KR Software 750 56.8 69.5 65.5 110.4 19.8 na 57.4 9.0 060240 KS LONGTU KOREA KR Cons svcs 141 95.5 91.5 64.1 13.7 225.7 16.0 na nm 1707 TT Grape King TW HPC 809 61.7 61.7 60.6 15.4 24.4 18.3 17.1 14.8 IPH AU IPH AU Comm svcs 690 52.4 57.0 59.1 89.6 22.2 na 10.8 15.0 RFMD SP Raffles Medical SG Healthcare 1,457 50.9 52.3 54.0 12.5 19.3 12.8 0.0 28.0 WEB AU Webjet AU Retail 908 49.6 51.6 52.5 27.6 32.0 33.2 30.9 20.2 078340 KS Com2us KR Software 1,232 43.4 51.0 52.2 117.3 20.9 80.3 8.8 8.3 Note: Universe is broader Asia Pacific ex-Japan companies with market cap between US$100m to US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Asian large-cap companies leading the SG&A effort While the broader Asian list contains a number of small-cap companies, we also provide a list of the top-10 SG&A-leaders in Asia based on their actual dollar spending last year. While large-cap companies have a natural disadvantage in terms of their size when it comes to becoming multibaggers, these brand or channel leaders will remain strong performers, given their investment in developing a competitive advantage through brand building.

Figure 33

Top 10 Asian companies with the highest SG&A (ex-R&D) dollar-amount (sorted by SG&A dollar amount) Code Name Cty Sector Mkt cap SG&A (ex-R&D) SG&A (ex- SG&A (ex- FY1-FY2 12M (US$m) amount (US$m) R&D) to sales R&D) gr (EPS fwd PE

FY-2 FY-1 FY0 (FY0, %) (FY0, %) Cagr, %) (x) 005930 KS Samsung Electronics KR Tech HW 283,600 33,437 32,219 33,249 18.4 3.2 43.7 7.5 TTMT IN Tata Motors IN Autos 19,986 10,651 12,733 12,221 29.0 (4.0) 53.0 10.6 WES AU Wesfarmers AU Fd & drug 38,354 9,424 10,565 11,028 20.3 4.4 2.4 16.7 WOW AU Woolworths AU Fd & drug 27,473 9,947 10,615 11,008 24.9 3.7 10.0 20.5 TCS IN Tata Consultancy IN Software 75,279 9,039 9,768 10,798 58.5 10.5 5.3 18.0 066570 KS LG Electronics KR Cons dur 11,985 9,925 9,646 10,356 20.9 7.4 371.1 7.9 005380 KS Hyundai Motor KR Autos 34,913 9,632 9,796 10,248 12.3 4.6 5.0 7.0 023530 KS Lotte Shopping KR Retail 6,643 6,025 6,373 6,673 25.3 4.7 53.7 23.3 3396 HK Legend CN Tech HW 5,706 5,129 6,406 6,250 14.1 (2.4) 7.3 7.0 JM SP Jardine Matheson HK Cap gds 47,478 5,973 5,941 6,030 16.3 1.5 10.4 14.9 Note: Universe is broader Asia Pacific ex-Japan companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Companies with high SG&A to sales and robust

SG&A growth

SG&A leaders in Asia based on actual dollar spending




Asian small-/midcaps with high and rising advertising expense Asian companies have often been accused of focusing on capex rather than brand building. A strong brand can lead to a sustainable competitive advantage but requires investment in terms of advertisement expense. Not many companies explicitly provide this data as it forms part of SG&A spending. Indeed, companies providing this data can be assumed to have a high enough advertising budget that necessitates separate reporting. Below we highlight a list of broader Asian small-to-midcap companies with high and rising advertising expense.

Figure 34

Asian small-/midcaps with high advertising exp-to-sales ratio and strong adv exp (sorted by adv exp/sales ratio) Code Name Cty Sector Mkt cap Adv exp to sales (%) Adv exp growth (%) FY1-FY2 EPS 12M fwd

(US$m) FY-2 FY-1 FY0 FY-1 FY0 L5Y Cagr Cagr (%) PE (x) MMYT US MakeMyTrip IN Retail 3,096 14.3 32.4 50.1 155.0 106.0 67.6 nm nm 1513 HK Livzon Pharma CN Pharma 3,838 36.1 35.0 36.6 15.7 20.8 27.4 17.5 18.9 057050 KS HDHS KR Retail 1,401 33.4 36.7 36.0 13.4 6.2 12.5 15.0 11.9 NETM IN Network18 Media IN Media 812 26.4 30.8 34.6 (42.9) 9.6 (4.1) na nm BKL AU Blackmores AU HPC 1,237 17.1 17.7 16.6 40.4 42.6 39.0 21.4 19.2 SOHU US Sohu CN Software 2,131 18.6 10.2 16.4 (36.6) 37.2 26.4 nm nm BLOOM PM Bloomberry PH Cons svcs 2,102 9.6 12.6 13.9 36.6 33.0 na 75.6 15.5 973 HK L'Occitane HK Retail 3,339 11.1 12.5 12.9 23.4 6.3 13.1 7.5 20.0 SKB IN GSK Consumer IN FBT 3,526 16.6 13.2 12.9 (24.1) (5.4) 3.3 10.5 30.1 000080 KS Jinro KR FBT 1,575 10.6 10.0 10.3 (4.1) 1.6 8.4 38.4 28.5 001800 KS Orion KR FBT 440 9.8 9.0 9.3 (0.3) 3.0 3.3 (9.0) 3.0 TGBL IN Tata Global Bev IN FBT 1,927 16.6 8.7 8.6 (56.4) 1.2 (11.9) 17.9 24.3 005300 KS Lotte Chilsung KR FBT 1,815 8.8 8.1 7.9 (3.4) 1.4 5.9 0.8 31.7 AGI PM Alliance Global PH Cap gds 2,681 9.9 8.1 7.9 (8.0) (1.4) 42.5 9.6 8.2 069960 KS HDS KR Retail 1,884 6.2 6.6 6.8 14.8 14.2 1.6 2.4 7.5 005990 KS Maeil Dairy KR FBT 123 5.0 5.1 5.7 8.7 19.9 11.9 13.7 3.1 009240 KS Hanssem KR Cons dur 2,639 5.9 5.2 5.3 14.3 15.9 27.2 7.8 22.0 004370 KS Nongshim KR FBT 1,693 3.5 3.9 4.9 18.5 25.9 6.9 (26.4) 18.5 004990 KS Lotte Confectionery KR FBT 2,403 4.1 4.2 4.5 4.1 6.1 7.5 21.1 27.7 001040 KS CJ Corp KR Cap gds 4,324 3.5 3.5 3.3 9.0 6.6 5.4 24.7 14.9

Note: Universe is broader Asia Pacific ex-Japan companies with market cap between US$100m to US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Asian large-cap companies leading the advertising effort Below we also provide a list of the top-10 advertising-leaders in Asia based on their actual dollar spending last year.

Figure 35

Top-10 companies with the highest advertising expense dollar-amount (sorted by advertising exp dollar amount) Code Name Cty Sector Mkt cap Adv exp amount (US$m) Adv exp Adv exp FY1-FY2 EPS 12M fwd

(US$m) FY-2 FY-1 FY0 to sales growth Cagr (%) PE (x) (FY0, %) (FY0, %) 005930 KS Samsung Electronics KR Tech HW 283,600 10,299 9,782 10,280 5.7 5.1 43.7 7.5 000270 KS Kia Motors KR Autos 12,568 1,630 1,892 2,031 4.3 7.4 (3.8) 6.0 005380 KS Hyundai Motor KR Autos 34,913 1,833 1,850 1,994 2.4 7.8 5.0 7.0 880 HK SJM HK Cons svcs 4,909 4,319 2,359 1,920 35.9 (18.6) (16.7) 22.9 030200 KS KT KR Telecom 6,905 2,483 1,816 1,923 9.5 5.9 8.7 9.6 066570 KS LG Electronics KR Cons dur 11,985 1,774 1,596 1,861 3.8 16.6 371.1 7.9 TTMT IN Tata Motors IN Autos 19,986 1,330 1,372 1,361 3.2 (0.8) 53.0 10.6 BABA US Alibaba CN Software 428,095 198 833 1,327 5.6 59.3 35.2 30.6 BIDU US Baidu CN Software 61,015 743 1,478 1,167 11.0 (21.0) 24.5 27.0 BHARTI IN Bharti Airtel IN Telecom 26,123 na 1,290 1,117 7.5 (13.4) (6.4) 49.9

Note: Universe is broader Asia Pacific ex-Japan companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Companies with high advertising expense to

sales along with a rising advertisement budget

Top-10 advertising leaders in Asia based on

actual dollar spending




Overseas expansion: New sources of growth While capturing market share is an important step towards becoming a leader, multibaggers also benefit from the growing market pie. In that sense, most Asian companies benefitted from the sharp pickup in economic growth in their home markets. In the case of semi-developed markets such as Korea and Taiwan, exports have become the key source of topline growth. Indeed, Asia’s intra-region revenue (80%) is still the highest, outstripping the slower-growing developed markets of the USA, Europe and Japan. This implies that most Asian markets, irrespective of their economic growth had the opportunity to benefit from the rise of China, India and emerging Asean.

Figure 36

Regional sales geographical breakdown (based on current MSCI World universe)

Note: Export data without specific breakdown is distributed among rest of the regions in proportion to the 2016 nominal GDP (US$). Source: CLSA, Factset

Developed markets have the highest overseas exposure in Asia In Figure 37, we plot the average overseas exposure of the broader Asian universe with market cap more than US$100m. While the trend is volatile, it has an upward bias. Furthermore, the market-wise figures show that developed and semi-developed markets such as Singapore and Taiwan (ex-financials) are most exposed to outside markets, followed by Australia, Malaysia and Korea. On the other hand, emerging Asean and China’s listed universe is more inwardly focused.

Figure 37 Figure 38

Broader APxJ (ex-fin): Foreign revenue as % of sales Broader APxJ markets (ex-fin): Foreign sales exposure

Note: Broader APxJ (ex-finance) companies with market cap more than US$100m. Market aggregate based on simple average of underlying stocks. We do not include HK in these calculations as it is hard to ascertain whether the companies belong to HK or China. Source: CLSA, Factset

80.4

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Some 80% of Asia ex-Japan revenue is derived domestically from higher

growth markets

Companies can grow not only by capturing market

share, but also by opening up new markets

Emerging Asean and China have the lowest

overseas revenue exposure




Foreign exposure favoured by lower domestic growth markets Markets with slower domestic growth are more likely to look outside their home markets to expand topline. This is certainly true for Asian markets, where we find a negative correlation with the historical GDP growth and foreign sales exposure. This idea also seems to hold from a forward-looking perspective since the higher-growth emerging-Asean markets and China have much lower foreign exposure. On the other hand, the lower-domestic-growth markets of Singapore, Taiwan and Australia have much higher exposure. India is an outlier with high foreign exposure, despite high growth.

Figure 39 Figure 40

APxJ mkts (ex-fin): GDP gr vs foreign sales exp (L5Y) APxJ mkts (ex-fin): N2Y GDP growth vs foreign sales

Note: Broader APxJ (ex-HK) companies, excluding financials with market cap > US$100m. We do not include HK in these calculations as it is hard to ascertain whether the companies belong to HK or China Source: CLSA, Factset, IMF

Tech and energy have the highest overseas exposure Tech companies have the highest foreign exposure with an average 49% of sales coming from outside the domestic market, which is higher than the 28% exposure witnessed by the overall region. Energy and materials sectors are the other two major contributors to overseas sales. On the other hand, telecom and utilities have the lowest overseas exposure, along with staples and property.

Figure 41

Broader APxJ sectors (ex-fin): Average foreign sales exposure

Note: Broader APxJ companies, excluding financials with market cap > US$100m. Sector aggregate based on simple average of underlying stocks. We do not include HK in these calculations as it is hard to ascertain whether the companies belong to HK or China Source: CLSA, Factset

Philippines

Malaysia

Singapore

China

Taiwan

IndiaKorea

Indonesia

Thailand

Australia

APxJxHK

0

10

20

30

40

50

60

2 4 6 8 10 12 14

Foreign revenue as % of sales (L5Y avg)

Nominal GDP growth in lcl ccy (L5Y Cagr, %)

y = -3.9x + 50.7; R2 = 0.41

PhilippinesMalaysia

Singapore

China

Taiwan

IndiaKorea

Indonesia

Thailand

AustraliaAPxJxHK

0

10

20

30

40

50

60

2 4 6 8 10 12 14

Foreign revenue as % of sales (current)

Avg nominalGDP growth lcl

ccy (17-18F, %)

y = -4.26x + 56.7; R2 = 0.53

0

10

20

30

40

50

Info

Tech

Ener

gy

APx

JxH

K

Mat

eria

ls

Indu

strial

s

Con

s di

sc

Hea

lthca

re

Con

s st

pl

Prop

erty

Util

ities

Tele

com

Current L5Y average (since 2012)(%)

GDP growth is negatively correlated with foreign

sales exposure

On average, tech-sector companies derive some

49% of their revenue from overseas . . .

. . . while telecom, utilities, property and

staples are focused locally




Low-growth market multibaggers have higher overseas exposure After establishing that companies from low-growth markets are more likely to expand outside, we searched for further evidence to determine whether such a move boosts returns. Our analysis shows that for a number of sectors from low-growth markets, the multibaggers have a higher foreign-sales exposure than the peers. On the other hand, for a number of sectors within the higher-growth markets, multibaggers have a much lower foreign-sales exposure than their peers. This suggests that for companies facing slow domestic economic growth, overseas exposure is a key differentiator. We believe that the slower economic-growth conditions are likely to persist in most developed and semi-developed markets such as Australia, Korea, Taiwan, Hong Kong and Singapore. Hence, for such markets, higher sales exposure is likely to be a key consideration when searching for multibaggers.

Figure 42 Figure 43

Dev Asia: Multibaggers with higher overseas exposure EM Asia: Multibaggers with lower overseas exposure

Note: Broader APxJ (ex-HK) companies, excluding financials with market cap > US$100m. Sectors are based on GICS Level I classifications. We do not include HK in these calculations as it is hard to ascertain whether the companies belong to HK or China. Source: CLSA, Factset

Relative foreign exposure for multibaggers Below we highlight a more detailed data set of the multibagger overseas exposure relative to peers for various market-sector groups. It shows that investors need to be selective even within low-growth markets.

Figure 44

Broader APxJ (ex-fin): Foreign sales exposure of multibaggers relative to peers (2010-11)

Note: Broader APxJ (ex-HK) companies, excluding financials with market cap > US$100m. Sectors are based on GICS Level I classifications. We do not include HK in these calculations as it is hard to ascertain whether the companies belong to HK or China. Source: CLSA, Factset

0

20

40

60

80

1.01.11.21.31.41.51.61.7

KR

,Con

s st

pl

TW,C

ons

disc

KR

,Ind

ustr

ials

AU

,Mat

eria

ls

TW,M

ater

ials

TW,I

nfoT

ech

KR

,Con

s di

sc

AU

,H'c

are

SG

,Ind

ustr

ials

TW,C

ons

stpl

Multibaggers rel to industry (2010-11)Current - Foreign sales exposure (RHS)

(x) (%)

0

5

10

15

20

25

30

35

40

0.2

0.3

0.4

0.5

0.6

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1.0

IN,C

ons

disc

TH,M

ater

ials

IN,I

ndus

tria

ls

CN

,Inf

oTec

h

MY,

Ener

gy

CN

,Con

s di

sc

MY,

Indu

stri

als

MY,

Con

s di

sc

TH,I

ndus

tria

ls

ID,M

ater

ials

Multibaggers rel to industry (2010-11)Current - Foreign sales exp (RHS)

(x) (%)

Cons disc Cons stpl Energy Healthcare Industrials InfoTech Materials

Australia 0.88 na na 1.11 0.82 0.68 1.49

China 0.62 na 1.44 0.49 1.04 0.69 na

India 0.91 0.99 na 1.09 0.84 1.04 0.58

Indonesia na 1.46 na na 0.27 na 0.36

Korea 1.32 1.69 na 0.25 1.56 0.64 0.93

Malaysia 0.60 0.88 0.68 1.18 0.61 na 0.56

Singapore na 0.79 na na 1.10 0.99 na

Taiwan 1.57 1.09 na 1.02 0.84 1.39 1.41

Thailand 1.98 na na na 0.37 0.96 0.89

Overseas focus needs to be selective even within the low-growth markets

Higher growth market multibaggers have lower

overseas exposure




Asian companies with high or rising overseas exposure Our analysis has shown that multibaggers from markets with low economic growth are more likely to have higher overseas exposure. This overseas exposure, especially to higher-growth markets, allows them to increase their potential market size. Below, we highlight two screens from low-growth markets, one for large-cap companies with high overseas exposure and another for small- to midcap companies with rising foreign exposure.

Figure 45

Large-cap companies (ex-fin & commodities) with high overseas exposure (sorted by the foreign sales exposure) Code Name Cty Sector Mkt cap Foreign sales 12MF 18F Sales FY1-FY2 FY1-FY2 FCF conv NDE (US$m) exposure (%) PE growth EPS Cagr ROE (FY0, (latest, FY0 FY-1 (x) (%) (%) (avg, %) %) %) Australia WFD AU Westfield AU Property 12,475 100.0 100.0 17.4 8.9 6.5 6.7 (71.4) 66.7 COH AU Cochlear AU Healthcare 7,080 99.0 99.0 34.9 8.8 13.1 42.4 82.0 23.8 BXB AU Brambles AU Comm svcs 12,146 92.5 93.2 18.4 12.3 6.6 21.1 10.4 87.2 CSL AU CSL AU Pharma 45,589 90.3 91.3 28.0 12.9 17.3 41.5 28.9 98.8 Korea 000660 KS SK Hynix KR Semis 41,659 93.6 93.6 4.8 7.7 83.0 31.0 (31.7) (1.5) 034220 KS LG Display KR Tech HW 9,771 93.1 92.2 6.5 (1.2) 28.1 12.5 (54.5) 17.8 005930 KS Samsung Electronics KR Tech HW 283,600 90.0 89.6 7.5 8.7 43.7 19.5 98.7 (27.8) 161390 KS Hankook Tire KR Autos 6,601 82.3 81.4 8.8 7.2 1.4 12.6 53.8 29.3 Malaysia IHH MK IHH MY Healthcare 11,579 81.5 80.2 43.5 14.1 19.1 4.8 (24.0) 19.7 SIME MK Sime Darby MY Cap gds 14,690 70.5 67.9 23.7 4.0 0.3 6.7 60.5 28.3 AXIATA MK Axiata MY Telecom 10,152 69.4 64.1 28.3 5.1 3.5 6.4 51.3 54.5 GENT MK Genting Bhd MY Cons svcs 8,452 62.9 62.4 14.8 8.1 7.0 6.2 99.2 (24.9) Singapore STE SP ST Engineering SG Cap gds 8,156 98.7 98.6 20.4 3.9 5.8 23.8 90.9 10.3 CAPL SP CapitaLand SG Property 11,642 67.8 67.3 17.7 (2.3) 6.6 5.8 276.4 54.4 ST SP Singtel SG Telecom 44,773 52.6 54.8 14.4 2.3 3.6 14.2 72.4 37.5 CIT SP City Developments SG Property 7,564 51.5 50.4 16.8 3.1 0.7 6.2 176.4 21.9 Taiwan 3008 TT Largan TW Tech HW 24,622 100.0 100.0 20.2 30.6 34.3 35.1 87.7 (85.1) 2382 TT Quanta TW Tech HW 8,849 100.0 100.0 13.2 5.5 20.0 14.2 277.2 (21.5) 2317 TT Hon Hai TW Tech HW 65,724 99.3 99.0 11.6 7.5 10.3 13.8 81.3 (33.4) 2474 TT Catcher Tech TW Tech HW 9,440 96.7 95.1 10.8 18.9 13.9 18.4 81.6 (48.0)

Note: Universe is broader Asia Pacific ex-Japan (ex-financials and commodities) companies with market cap over US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Figure 46

Small-/midcap companies (ex-fin & commodities) with rising overseas exposure (sorted by increase in foreign exp) Code Name Cty Sector Mkt cap Foreign sales 12MF 18F Sales FY1-FY2 FY1-FY2 FCF conv NDE (US$m) exposure (%) PE growth EPS Cagr ROE (FY0, (latest, FY0 FY-1 Diff (x) (%) (%) (avg, %) %) %) Australia AAC AU Australian Agricultural AU FBT 681 78.5 68.4 10.1 15.0 7.7 39.4 2.8 nm 31.8 BKL AU Blackmores AU HPC 1,237 27.7 21.0 6.7 19.2 10.3 21.4 39.5 69.7 48.2 IEL AU IDP Education AU Cons svcs 1,024 83.0 76.4 6.6 24.7 14.1 19.9 51.7 86.9 (26.7) ACX AU Aconex Ltd AU Software 723 67.0 61.7 5.3 74.4 16.6 47.5 10.1 25.7 (37.8) WEB AU Webjet AU Retail 908 36.4 34.1 2.3 20.2 33.6 30.9 18.8 167.6 (18.1) Korea 090460 KS BH KR Tech HW 627 30.6 13.9 16.8 11.5 43.1 nm 37.0 nm 147.7 079160 KS CJ CGV KR Media 1,152 31.9 20.5 11.5 26.2 12.3 124.0 11.9 (28.6) 267.9 081660 KS Fila KR Cons dur 751 65.1 54.0 11.1 10.7 5.0 39.0 8.6 (212.3) 156.0 000990 KS Dongbu HiTek KR Semis 625 49.0 41.3 7.8 5.6 5.7 24.2 27.5 154.4 63.5 041510 KS SM Entertainment KR Media 529 55.0 48.1 6.9 26.2 62.0 184.9 6.0 41.3 (37.0) Malaysia FNH MK Fraser & Neave (MY) MY FBT 2,112 46.5 41.6 4.9 20.3 6.0 8.1 18.9 87.4 (1.2) GAM MK Gamuda MY Cap gds 3,074 18.8 14.4 4.4 16.9 19.0 11.8 10.3 (8.7) 52.3 PEP MK PPB MY FBT 4,607 25.1 22.1 3.0 18.0 4.2 3.5 5.1 22.5 (3.5) YTL MK YTL MY Utilities 3,440 71.6 68.7 2.8 16.1 6.4 16.4 5.8 104.2 176.3 Singapore CDREIT SP CDL Hosp Trust SG Property 1,234 50.6 43.8 6.9 16.9 10.6 19.8 6.1 201.4 61.0 WINGT SP Wing Tai SG Property 1,183 28.5 22.8 5.7 29.3 12.8 174.9 1.6 (395.2) 6.7 Taiwan 8341 TT Sunny Friend Envir TW Comm svcs 634 82.4 20.8 61.6 23.7 27.4 18.1 24.8 136.8 (44.1) HIMX US Himax Technologies TW Semis 1,440 75.1 63.2 11.9 30.2 23.1 1.7 9.4 148.4 (18.4) 3081 TT LandMark TW Semis 1,124 68.0 57.5 10.5 31.5 39.7 19.8 26.1 125.8 (56.5) 8436 TT TCI TW HPC 507 65.5 55.2 10.3 19.8 25.4 26.9 21.2 122.3 (41.3) 4105 TT TTY Biopharm TW Pharma 749 27.4 20.1 7.3 16.8 6.2 8.3 23.5 51.9 (28.6)

Note: Universe is broader Asia Pacific ex-Japan (ex-financials and commodities) companies with market cap between US$100m to US$5bn and 3M ADTO over US$1m. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Low-growth market companies benefit most from overseas exposure




Capex not a major differentiator of multibaggers Overinvestment has been a key concern for Asian companies. The 2000-07 period was particularly characterised by high capital intensity (capex/sales) along with contracting margins. In their quest to boost revenue, companies overspent on capex while cutting back on more value-added expenses such as R&D and brand building. However, over the past five years, there has been a marked decrease in capex growth. While Asian capital intensity remains the highest across regions, companies are increasingly focused on R&D and SG&A spend. Indeed, capex is of greatest use when the market is growing fast. But with most markets now witnessing slower nominal GDP growth, product superiority will be more important for companies to establish a sustainable competitive advantage.

Figure 47 Figure 48

MSCI regions (ex-fin): Capital intensity (capex/sales) MSCI AsiaxJ (ex-fin): Capex growth


For the broader universe, capital intensity started falling after 2008 Data for the broader Asia Pacific ex-Japan companies show the median capital intensity has been on a steady decline after peaking in 2008, dropping to just over 4.5% in 2016, based on data for over 3,700 companies. Hence, while large-cap companies have already been witnessing slower capital intensity since 2005, this trend became broadbased only after the end of 2008. Figure 49

Broader APxJ (ex-fin): Median FY0 capital intensity


6.6

6.9

7.7

8.6

5

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11A

12A

13A

14A

15A

16A

USA Japan

Europe AsiaxJ

Capital intensity (capex/sales, %)

(15)

(10)

(5)

0

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02A

03A

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(%)38.2 40.2

4.5

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Broader APxJ universe (median FY0 capital intensity)(%)



Asian capital intensity is high but capex growth

has slowed down significantly

Median capital intensity has fallen to 4.5%




Higher capital intensity no longer a powerful signal In an environment of strong topline growth, a company with high levels of capital intensity is better enabled to service demand, which would translate into higher future sales and earnings. However, given overcapacity and slowing topline growth, the effectiveness of higher capital intensity has diminished significantly over time. In Figure 50 we highlight the trend in median-capital-intensity ratio of the multibaggers versus the relevant industry, averaged across all the industries. The last data point is 1.05, which suggests that on average; the multibaggers over the past five years only had 5% higher capex than the industry median.

Figure 50

Broader APxJ (ex-fin): Average FY0 capex spend of multibaggers vs industry


Multibaggers in many industries had lower capex Figure 51

Broader APxJ industries: FY0 Capex spend of multibaggers relative to industry versus the industry

Note: Broader APxJ companies with market cap of more than US$100m. The bubble size represents the count of companies with FY0 Capex to sales data. Source: CLSA, Factset

1.05

0.9

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Average across industries (median capital intensity ofmultibaggers vs the industry)

Effectiveness of capex fading over time

AirlinesAero&def

Gas utilH'care prov

Comm svc

MediaPharma

Marine

Trans infra

Cont & pkg

Met & min

Autos

Multi-retailPers prod Ind conglos

BeveragesOil&Gas

Food prod

Hotels

Energy E&S

Bldg prodElec I&C

H'hold prodDiv cons svc

Autoparts CementChemicalsAirFt&Log

Road/rail

SemisElec util

Tobacco

Leis prod

Tex/app/lux

Elec equip

H'hold dur

Software

Internet

Fd/stp ret

Machinery

IT Services

Developers

Spec retail

Comm equip

Const & engg

Tech hw

Distributors

TradingCos

0.60

0.70

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1.40

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0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5 11.5

Median capital intensity (FY0, %)

Multibaggers rel to industry (avg 2000-12, %)

Wireless tel (20.7, 1.3, 23)

Paper (5.6, 2, 32)

Biotech (24.6, 0.6, 53)IPPs (25.5, 0.6, 41)

H'care E&S (9.6, 1.9, 48)

Div telecom (21.1, 1.1, 36)

Multibaggers over the past five years, only had a

5% higher capex versus their industry

Higher capital intensity is a good signal when

topline growth is strong




Quantitative signals through fundamental factors Earlier we used industry-specific indicators to understand the genesis of multibaggers. In this section, we explore the fundamental factors relevant across industries to identify potential multibaggers. Some of the important considerations include past and future earnings growth (including drivers), profitability, size and balance-sheet quality. A characteristics study shows that past earnings growth has been useful in identifying multibaggers with future multibaggers witnessing higher earnings growth over the past three years compared to the overall universe. It also shows that consensus growth forecasts have been relatively less helpful. Profitability was another key indicator with ROE a better metric than ROIC over the long term. However, ROIC has become quite important post-GFC. Lastly, size is an important factor with small-caps more likely to turn into multibaggers.

Figure 52

Characteristics analysis - (median since 2000, quarterly rebalance)


Characteristics changed post-GFC but historical growth still important There has been a significant change in the characteristics of multibaggers post-GFC. ROIC has become significantly more important, along with ROEs. Also, given the higher quality of companies that become multibaggers, they tend to be more expensive. Lastly, it has become even harder for large-cap companies to become multibaggers since 2010.

Figure 53 Figure 54

Characteristics analysis - before 2010 Characteristics analysis - since 2010


1.17 1.16 1.16

1.09 1.08 1.07 1.06

1.03

0.96 0.94 0.93 0.93 0.92 0.89 0.88

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trl)

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0.60.70.80.91.01.11.21.3

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Quarterly median (since 2010)Exposure of multibaggers relative to broader universe (x)

Growth, profitability and size are main factors that

have mattered over the long term

ROIC and quality factors have become quite

important post-GFC

Focusing on factors that matter across industries




Multibaggers versus rest of the universe: Factor trends Below we highlight the trends in median-factor values for stocks that went on to become multibaggers over the next five years and compare it to the median-factor values of the overall universe. The charts highlight that quality factors have become increasingly important and that potential multibaggers no longer trade at a discount to the market.

Figure 55 Figure 56

APxJ: Multibaggers versus universe - ROIC (FY0) APxJ: Multibaggers versus universe - ROE (N2Y)


Figure 57 Figure 58

APxJ: Multibaggers vs universe - EPS growth (L3Y) APxJ: Multibaggers vs universe - EPS growth (N2Y)


Figure 59 Figure 60

APxJ: Multibaggers vs universe - Sales growth (L3Y) APxJ: Multibaggers vs universe - 12-month trailing PB


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Multi-bagger UniverseMedian ROIC (FY0,%)

1011121314151617181920

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Multi-bagger UniverseMedian ROE (N2Y,%)

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Multi-bagger UniverseMedian Slsg (L3Y,%)

0.50.70.91.11.31.51.71.92.12.32.5

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Multi-bagger UniverseMedian PB (trl,%)

ROE has been consistently important since 2004




Historical earnings growth increases the multibagger hit rate Our characteristics analysis has identified historical earnings track record over the past three years to be an important factor in identifying potential multibaggers, even more so than the next two-year consensus forecast. To further understand the impact of earnings growth on long-term returns we calculated the multibagger hit rate of companies with above-median growth numbers. Data show that the hit rate of identifying multibaggers increases from 14.6% to around 16.2% for companies with above-median next-two-year growth forecasts or above-median sustainable growth. However, using the past-three-year earnings growth data, the hit rate is even higher at 18.1%. This suggests that multibaggers are more likely to be companies that are already witnessing strong earnings momentum.

Figure 61

Broader APxJ: Hit rate of high growth stocks becoming multibaggers


Look for companies with more than 10% historical earnings Cagr A further breakdown of the multibagger hit rate for different growth ranges based on historical and forward growth shows that companies with historical growth of more than 10% have a higher likelihood of success. However, when using forward-growth data, 10-30% is the sweetspot with the hit rate dropping sharply for growth forecasts of more than 30%.

Figure 62 Figure 63

Hit rate of multibaggers in different EPSg (L3Y) ranges Hit rate of multibaggers in different EPSg (N2Y) ranges


14.6

16.2 16.3

18.1

10.2 10.7 11.2 11.7

8

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EPS Cagr (N2Y) Sustg EPS Cagr (L3Y)

All multibaggers Above median



14.6 15.6 15.4

19.5 17.0

18.3

10.3 9.1

12.5 13.7 14.2

11.0

68

101214161820

All multi-baggers

<0% 0-10% 10-20% 20-30% >30%

EPSg (L3Y)



Percentage of multibaggers (%)

14.6 13.4 14.2

17.2 17.0 14.9

10.3

7.5

10.0

12.1 13.1

9.5

6

9

12

15

18

All multi-baggers

<0% 0-10% 10-20% 20-30% >30%

EPSg (N2Y)




Measuring the hit rate of identifying multibaggers

for different growth factors

Above median three-year earnings Cagr increases the multibagger hit rate

to 18.1% from 14.6%

When using forward growth, 10-30% is the sweetspot




Historical growth important for most markets and sectors Further analysis at the market and sector level for companies with above-median past three-year earnings Cagrs suggests that the likelihood of identifying multibaggers increases across most markets and sectors. The largest increases in the multibagger hit rate were in the Hong Kong, Malaysian and Philippine markets; and in healthcare, financials and commodities, among sectors. The factor has been relatively less important for only the Singapore and Taiwan market; and for the property sector.

Figure 64 Figure 65

APxJ mkts: Hit rate of high growth (L3Y) multibaggers APxJ sctrs: Hit rate of high growth (L3Y) multibaggers

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming the relevant market returns in 5 years. ‘High growth’ implies above median past 3-year earnings Cagr. Source: CLSA, Factset

Profitability has become an important factor The early part of the previous decade was dominated by multibaggers from commodities players with lower profitability levels. However, since the GFC, quality has become an important factor, led by both ROE and ROIC. We have already shown earlier during the characteristics analysis of multibaggers that ROE has been a more consistent factor than ROIC. A further examination of the multibagger hit rate of companies with above-median ROE (next two-year average) and ROIC (last reported full-year data) shows that ROE also has a marginally better hit rate. With ROIC nonapplicable to the financial sector, we decided to focus on ROE as the main profitability indicator. The latest set of multibaggers with high ROE mostly comes from India, Australia and China.

Figure 66 Figure 67

APxJ: Hit rate of high profitability multibaggers APxJ: Latest contribution to high ROE multibaggers

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming the relevant market returns in 5 years. ‘High ROE’ implies above median next 2-year average ROE. Source: CLSA, Factset

5

10

15

20

25

30

IN ID PH CN KR TH APxJ HK MY AU SG TW

Above median L3Y EPS Cagr

All stocks

Hit rate of stocks becoming multibaggers (avg since 2000, %)

5

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25

30

Ener

gy

Hea

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J

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Above median L3Y EPS Cagr

All stocks


14.6

15.8 15.9

10.2

11.9 11.9

89

1011121314151617

All multibaggers All multibaggers(ex-fin, ROIC >

median)

All multibaggers(N2Y ROE > median)



India49%

Aust13%

China12%

Korea7%

Taiwan7%

Thai5%

Indo4%

HK1%

Malay1%

Sing1%

Latest contributionof multibaggers in APxJ region (%)

The factor was less relevant for only the

Singapore and Taiwan; and the property sector

ROE has been a more consistent factor ROIC,

and its hit rate is also marginally better




ROE and ROIC cutoffs have increased post-GFC A study of the historical trends since 2000 suggests that companies with ROE of more than 10% have a higher multibagger hit rate than the broader universe. Similarly, over the longer term, 5-20% was the sweetspot for ROIC. However, post-GFC, quality has become an even more important factor with multibagger cutoff rising for both ROE and ROIC. For example, the multibagger hit rate of all the ranges for ROE above 10% have been similar since 2000. However, since 2010, the multibagger hit rate for ROE less than 15% is below the overall universe, while that of ROE of more than 20% is significantly higher than that of the 15-20% range. Similarly, the ROIC sweetspot has moved from 5-15% when using data since 2000 to more than 10% when considering the period since 2010.

Figure 68 Figure 69

Hit rate of multibaggers in different ROE ranges Hit rate of multibaggers in different ROIC ranges


ROE has been important within industries than within markets A similar analysis at the market and sector level shows that profitability adds more value on an intra-sector basis than within markets. For example, the multibagger hit rate is lower for the above-median ROE basket in Korea, Malaysia and Singapore. However, within sectors, the hit rate is higher for the above-median ROE basket in nine out of the 11 sectors, and is almost similar for the remaining two sectors (consumer staples and industrials).

Figure 70 Figure 71

APxJ (ex-fin) mkts: Hit rate of high ROE multibaggers APxJ (ex-fin) sctrs: Hit rate of high ROE multibaggers

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming the relevant market returns in 5 years.. ‘High ROE’ implies above median next 2-year average ROE. Source: CLSA, Factset

14.6

12.1

13.9 15.6 15.6 15.7

10.3

5.8 6.7

8.7

11.5

14.2

4

8

12

16

All multi-baggers

<5% 5-10% 10-15% 15-20% >20%

ROE (N2Y)

Quarterly average hit rate (since 2000)Quarterly average hit rate (since 2010)


14.8

12.3

17.0 18.4 15.6

14.3

10.3

5.9

9.6

13.6 12.2 12.7

4

8

12

16

20

All multi-baggers(Ex-fin)

<5% 5-10% 10-15% 15-20% >20%

ROIC (FY0)




5

10

15

20

25

30

ID IN PH TH CN APxJ KR HK AU MY TW SG

Above median N2Y average ROE

All stocks


0

5

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25

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Above median N2Y average ROE

All stocks


Multibagger hit rate higher for above-median

ROE in 9 out of 11 sectors

Post-GFC, ROE more than 15% and ROIC more than

10% leads to higher multibagger hit rate




Small-caps multibaggers have delivered the highest median returns Small-cap risk premium has been a well-researched factor and the main thesis has been that the expected returns from small-caps have to be higher than the large-caps to compensate investors for the additional risks. This notion has been in question given the recent outperformance of large-caps and arguments have been put forth challenging the entire small-cap premium concept, most notably by Aswath Damodaran in a 2015 blog. Our data on Asian stocks with a market cap of more than US$100m also shows that small-cap returns are not inherently higher over a three-to-five -year period on a median basis. However, when it comes to multibaggers, small-cap returns are definitely higher than the midcap and large-caps. Indeed, on a five-year basis, small-cap multibaggers outperformed the relevant market benchmark by 276%, while midcaps and large-caps outperformed by 212 and 195%.

Figure 72 Figure 73

APxJ: Performance of multibaggers by mkt cap APxJ: Outperformance of multibaggers by mkt cap


Multibagger hit rate lowest for the large caps Large-caps also have a natural disadvantage to becoming multibaggers. Analysis across different market-cap ranges shows that large-caps only have 9% multibagger hit rate as compared to the overall average of 14.6%. Midcaps also scored less than the overall average, suggesting that small-caps have the highest multibagger hit rate. This is further supported by the fact that 78% of the latest set of multibaggers were small-caps.

Figure 74 Figure 75

APxJ: Hit rate of becoming multibaggers by mkt cap APxJ: Latest contribution to multibaggers by mkt cap


28 27 31 26 52 51 57 47

169 177 155 155

346 363

307 300

050

100150200250300350400

All-

cap

<U

S$1

bn

US$1

-5bn

>U

S$5

bn

All-

cap

<U

S$1

bn

US$1

-5bn

>U

S$5

bn

Next 3-year return Next 5-year return

All stocks

Multibaggers

Avg median lcl ccy TR (%, since 2000)

120 129 101 92

256 276

212 195

0

50

100

150

200

250

300

All-

cap

<U

S$1

bn

US$1

-5bn

>U

S$5

bn

All-

cap

<U

S$1

bn

US$1

-5bn

>U

S$5

bn

Next 3-year OPF Next 5-year OPF

Multibaggers

Avg median lcl ccy OPF (%, since 2000)

14.6 15.5 13.9

9.0

10.2 11.9

7.9

4.2 02468

1012141618

All multi-baggers

Small-cap<US$1bn

Mid-capUS$1-5bn

Large-cap>US$5bn

Market capitalisation



Hit rate of stocksbecoming multibaggers (%)

Small-cap78%

Mid-cap18%

Large-cap4%

Latest contributionof multibaggers in APxJ region (%)

Multibagger hit rate of both large caps and mid-caps is smaller than the

overall average

Median return of all small-caps is similar to

the large-caps . . .

. . . but those of multibagger small-caps is

much higher than large-caps


http://aswathdamodaran.blogspot.hk/2015/04/the-small-cap-premium-fact-fiction-and.html



Small-cap multibagger hit rate higher for most markets and sectors With small-caps forming 70-80% of the overall universe it is naturally harder for their hit rate to be very different from the overall universe. However, the small-cap hit rate is still marginally higher than the overall data for most markets and sectors. Size has been most effective in markets such as India, the Philippines and Australia, while being the least effective in Thailand. Among sectors, the size effect is the highest for utilities and financials.

Figure 76 Figure 77

APxJ markets - Hit rate of small-cap multibaggers APxJ sectors - Hit rate of small-cap multibaggers


China used to be dominated by large-cap multibaggers Below we highlight multibaggers’ median outperformance, hit rate and contribution data for different markets and sectors. In China, the large-cap multibagger hit rate has been higher than for small-caps because of the large SOE listings during 2000-05, which had strong returns until 2009-10.

Figure 78

Broader APxJ: Performance, contribution and hit rate of stocks becoming multibaggers (+200% since 2012)


5

10

15

20

25

30

IN ID PH CN KR TH APxJ MY SG HK AU TW

Small caps (market cap less than US$1bn)

All stocks


5

10

15

20

25

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Small caps (market cap less than US$1bn)

All stocks


<US$1bn US$1-5bn >US$5bn <US$1bn US$1-5bn >US$5bn <US$1bn US$1-5bn >US$5bn <US$1bn US$1-5bn >US$5bn <US$1bn US$1-5bn >US$5bnAPxJ 129.1 101.4 92.1 275.6 212.4 195.5 15.5 13.9 9.0 78.1 17.6 4.3 11.9 7.9 4.2

Australia 125.2 110.5 86.2 286.0 215.9 193.1 11.6 7.1 5.3 69.4 22.2 8.3 14.0 7.1 7.0China 165.4 143.4 180.1 324.6 258.2 331.8 19.6 17.1 23.4 55.8 37.2 7.0 8.1 9.9 3.9Hong Kong 143.6 101.7 74.1 276.7 253.0 139.4 12.0 18.0 4.7 84.0 12.0 4.0 8.9 6.0 2.2India 145.3 98.7 88.4 310.7 216.5 225.5 30.7 24.8 17.7 74.2 21.0 4.8 30.9 22.0 12.0Indonesia 189.7 86.8 83.2 436.5 164.2 179.3 27.3 27.7 26.6 66.7 25.0 8.3 11.1 5.6 5.9Korea 131.2 139.9 76.6 291.0 257.8 198.9 18.3 17.6 9.5 97.7 2.3 0.0 9.2 1.1 0.0Malaysia 104.0 98.4 81.6 243.6 227.4 190.7 13.4 12.2 3.8 91.7 8.3 0.0 9.6 2.5 0.0Philippines 167.2 83.6 112.9 287.0 178.6 70.7 23.8 14.8 1.8 100.0 0.0 0.0 8.0 0.0 0.0Singapore 133.9 121.9 106.2 263.3 263.7 337.2 12.0 10.1 1.6 75.0 0.0 25.0 2.4 0.0 4.0Taiwan 130.7 124.6 67.3 267.2 250.8 216.9 8.1 5.1 5.0 95.1 4.9 0.0 7.7 2.2 0.0Thailand 103.8 106.3 91.7 226.7 257.3 166.3 17.5 24.1 18.4 70.6 23.5 5.9 11.3 13.3 5.9

Cons disc 128.3 98.3 97.2 283.1 228.2 216.1 15.4 13.7 10.2 78.8 19.7 1.5 13.0 9.6 2.7Cons stap 117.9 107.0 70.0 258.7 224.9 188.6 22.8 25.2 8.7 66.7 30.3 3.0 13.7 15.9 2.9Energy 143.3 116.1 92.9 355.3 246.0 214.3 23.0 27.1 28.2 40.0 40.0 20.0 2.0 5.1 3.1Financials 134.4 71.8 104.3 249.9 172.3 148.9 16.8 12.2 5.4 81.3 14.6 4.2 26.9 6.7 2.7Healthcare 111.4 92.5 125.5 260.8 230.1 261.3 21.2 15.0 20.4 83.3 14.6 2.1 24.1 19.4 14.3Industrials 148.1 137.4 81.6 307.7 264.1 186.9 17.3 14.5 3.3 75.0 22.7 2.3 8.6 6.8 1.9Info tech 128.4 130.8 152.8 278.5 268.9 289.2 7.3 6.4 10.6 83.1 10.2 6.8 9.9 9.7 12.1Materials 139.9 122.2 106.1 289.5 242.6 186.9 18.1 19.3 15.8 85.0 10.0 5.0 10.2 3.7 5.3Property 131.6 112.5 183.5 255.4 212.6 327.3 12.3 9.5 13.4 68.4 21.1 10.5 6.5 5.4 6.3Telecom 153.1 133.7 91.4 358.3 241.5 167.5 13.6 14.1 6.1 60.0 20.0 20.0 13.0 4.8 4.8Utilities 124.1 133.4 46.8 228.9 209.4 89.3 16.8 11.8 0.8 71.4 28.6 0.0 11.4 5.0 0.0

Market

Sector

Median N3Y multi-bagger OPF (lcl ccy, avg since 2000, %)

Median N5Y multi-bagger OPF (lcl ccy, avg since 2000, %)

Average hit rate of multi-baggers (%, since 2000)

Latest contrib to multi-baggers (%, +200% since 2012)

Latest multi-bagger hit rate (%, +200% since 2012)

Market cap Market cap Market cap Market cap Market cap

Size has been most effective in markets such as India, the Philippines

and Australia

India and Indonesia have the highest median

outperformance for small cap multibaggers




Microstrategy: Quantitative multibagger strategy So far in the report, we have analysed various multibagger drivers in isolation. We have considered both industry-specific drivers such as R&D spend, SG&A spend and overseas exposure; and generic drivers such as growth track record, profitability and size. The later set of drivers also allows us to focus on the right sectors by highlighting the profitable growth areas in the market. In this part, we put together all of these drivers to calculate the increase in the probability of identifying multibaggers through a quantitative framework. Our analysis shows that on average, some 14.6% of companies turn into multibaggers over the next five years. However, including the factors that we discussed earlier, we can boost the hit rate to 22.1%. This is a significant increase considering multibaggers outperform by an average 256% over the next five years, implying that the expected excess return from multibaggers rises from 37.4% to 56.6%.

Figure 79

Microstrategy multibagger strategy: Average hit rate (since 2000)

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming over 5 years. ‘Higher’ implies above median values. Source: CLSA, Factset

The strategy has been more effective post-GFC Our strategy shows even better results post-GFC (since 2010), with the hit rate increasing from 10.3% to 21.8%. The post-GFC hit rate is in line with the long-term average, implying that despite the drop in overall multibagger hit rate post-GFC, we do not see a similar drop when using our strategy.

Figure 80 Figure 81

Multibagger strategy: Average hit rate (pre-GFC) Multibagger strategy: Average hit rate (post-GFC)

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming over the next 5 years. ‘Higher’ implies above median factor values. Source: CLSA, Factset

22.1

14.6 1.2

1.7 1.4

1.4 1.6

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Hig

her

prof

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lity

(N2Y

avg

RO

E)

Hig

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grow

th

(L3Y

EPS

Cag

r)

Hig

her

R&

D, SG

&A a

nd

over

seas

exp

osur

e

Avo

id la

rge

caps

(Mar

ket

cap

< U

S$5

bn)

Avo

id m

id c

aps

(Mar

ket

cap

< U

S$1

bn)

22.2

14.61.2

1.71.4

1.41.6

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Quarterly average hit rate of multibaggers (%, pre-2010)

Hig

her

prof

itab

ility

(N

2Y a

vg R

OE)

Hig

her

grow

th

(L3Y

EPS

Cag

r)

Hig

her

R&

D, SG

&A a

ndov

erse

as e

xpos

ure

Avo

id la

rge

caps

(Mar

ket

cap

< U

S$5

bn)

Avo

id m

id c

aps

(Mar

ket

cap

< U

S$1

bn)

21.8

10.3

2.8 1.1

2.1 2.2

3.3

0

4

8

12

16

20

All multi-baggers



Hig

her

prof

itab

ility

(N

2Y a

vg R

OE)

Hig

her

grow

th

(L3Y

EPS

Cag

r)

Hig

her

R&

D, SG

&A a

ndov

erse

as e

xpos

ure

Avo

id la

rge

caps

(Mar

ket

cap

< U

S$5

bn)

Avo

id m

id c

aps

(Mar

ket

cap

< U

S$1

bn)

Post-GFC, our strategy boosts the hit rate from

10.3% to 21.8%

Our strategy increases the multibagger hit rate

from 14.6% to 22.1%

Strategy works across most markets and sectors

(see Appendix 1)

We combine the industry-specific and generic

drivers to formulate our multibagger strategy




Asian potential multi-baggers Our research suggests that small-to-mid cap companies with a tangible earnings growth record and higher profitability are more likely to turn into multibaggers. Larger R&D budgets, higher SG&A (including advertisement) spending and focus on overseas markets are the additional signals of strong growth potential for specific industries and markets. We also apply our EQRS/BQRS scores to eliminate companies with earnings-quality and balance-sheet-quality risk; and use our Benford scores to remove companies with potentially manipulated financial statements.

These quantitative checks yield a list of almost 280 Asian stocks with US$100m-US$5bn market cap and a daily turnover of more than US$1m. However, given that finding multibaggers is not just a quantitative exercise, we apply our discretion to identify certain stocks that may have been missed out due to borderline factor values. We also use discretion to remove stocks where the factors are impacted by one-off numbers and where the price action suggests deeper issues that are not captured in the reported financial statements. This exercise leaves us roughly 150 candidates to choose from. We then do a very high-level thematic check and deeper data checks to identify the top-50 candidates for our multibaggers portfolio.

The broad quantitative criteria are summarised below but there are a few exceptions to these rules:

Universe: Broader Asia Pacific ex-Japan companies with US$100m-US$5bn market cap and average daily turnover of more than US$1m.

Strong growth: Last three-year EPS Cagr and next two-year EPS Cagr of more than 15%.

Robust profitability: Next two-year average ROE more than 15%.

Industry/market specific drivers: R&D & SG&A spend higher than relevant industries and high overseas exposure for relevant markets.

Balance sheet and quality checks: Net gearing less than 75% and does not fail our EQRS/BQRS/Benford checks.

Below we highlight the price performance and the relevant characteristics of these stocks compared to the overall Asian universe. The universe has strong price and earnings momentum, along with good profitability, free cashflow and solid balance sheets.

Figure 82 Figure 83

Microstrategy multibagger picks: Historical returns Multibagger picks: Characteristics analysis

Note: Performance is US$ total return using freefloat adjusted market cap weights and monthly rebalancing. Characteristics analysis data is based on median values. Source: Factset, CLSA

90

140

190

240

290

340

390

440

490

540

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

Jun

15

Dec

15

Jun

16

Dec

16

Jun

17

Asian potential multibaggers

MSCI APxJ

Cumulative index (FF adj mcap-wtd, US$ TR, x)

38.9% Cagr

8.9% Cagr

0.5

1.0

1.5

2.0

2.5

3.0

EPSg

(L3Y

)R

&D

/sal

esEP

S r

evL1

Y re

turn

PB (

trl)

RO

ICEP

Sg

(N2Y

)C

ash/

TASus

tgR

OE

(N2Y

)SG

&A/

sale

sPE

(fw

d)Fo

r'n

sale

sEa

rns

cert

FCF

conv

Bet

aSiz

ePE

GPS

GG

eari

ng

Asian potential multibaggers vs MSCI APxJ(x)

Factor checks to identify potential candidates

Going beyond just the quantitative checks to

narrow down to 50 picks

Specific criteria used to identify multi-baggers -

focus on growth, profitability and quality

Strong momentum and characteristics for our

chosen picks




Key Asian potential multi-baggers Figure 84

Asian potential multibaggers (sorted by last three-years EPS Cagr) Code Name Cty Sector Mkt cap FY1-FY2 L3Y EPS R&D/ SG&A/ Foreign 12MF FY1-FY2 NDE TR (US$m) ROE Cagr sales sales sls exp PE EPS Cagr (latest, (L12M,

(avg, %) (%) (FY0, %) (%) (x) (%) %) %) China & HK 1302 HK LifeTech Sci CN Healthcare 950 21.1 81.7 16.3 37.7 19.6 35.8 68.3 (51.3) 16.2 1548 HK Genscript Biotech CN Pharma 932 16.4 44.2 8.3 36.2 81.1 28.5 15.5 (76.8) 181.3 2869 HK Greentown Service CN Comm svcs 1,608 23.4 42.4 na 7.6 0.0 23.0 22.3 (126.9) 64.0 1558 HK YiChang HEC CN Pharma 1,109 18.0 35.4 6.8 26.5 0.0 12.7 28.1 (45.7) 11.5 6068 HK Wisdom Education CN Cons svcs 763 17.0 30.3 na 15.3 0.0 15.2 29.1 (26.1) 89.5 520 HK Xiabuxiabu Catering CN Cons svcs 1,101 22.4 26.5 na 40.8 0.0 15.7 15.2 (87.2) 117.3 1316 HK Nexteer HK Autos 4,188 27.7 26.0 3.2 3.4 100.0 11.2 14.0 1.3 23.5 425 HK Minth CN Autos 4,897 18.6 19.5 4.2 11.3 38.0 13.8 21.0 (14.1) 29.5 India MNDA IN Minda IN Autos 954 22.6 187.3 1.7 13.2 20.2 25.3 29.0 7.3 206.8 VKI IN Vakrangee IN Software 3,707 28.8 69.9 na 1.1 0.0 33.4 20.2 (23.0) 139.7 CANF IN Can Fin Homes IN Banks 1,159 23.9 37.4 nm nm nm 22.0 27.9 nm 87.6 WHIRL IN Whirlpool IN Cons dur 2,353 23.1 36.2 0.9 24.6 7.9 35.1 24.8 nm 28.0 EDEL IN Edelweiss Fin svcs IN Div fin 3,231 18.1 34.4 nm nm nm 21.7 37.7 nm 116.2 TELX IN Tata Elxsi IN Software 798 32.9 33.8 1.4 53.8 84.8 22.1 21.8 (45.0) 2.3 VGRD IN V-Guard IN Cap gds 1,180 25.1 28.3 0.4 18.3 0.0 38.6 21.8 (16.0) 48.0 ABB IN ABB India IN Cap gds 4,467 15.3 28.0 3.5 8.7 14.5 48.0 31.1 (29.4) 16.9 NFIL IN Navin Fluorine IN Materials 512 17.1 27.9 1.9 20.2 na 22.5 21.8 (7.1) 45.1 PVRL IN PVR IN Media 934 16.0 17.7 na 41.1 0.0 33.5 46.7 72.5 6.0 Korea 147760 KS Microfriend KR Semis 111 22.7 64.1 4.2 6.6 0.0 9.6 40.4 (47.0) 84.9 145020 KS Hugel KR Pharma 1,569 19.4 56.8 3.3 20.4 0.0 24.9 34.2 (46.3) 23.1 041830 KS InBody KR Healthcare 355 20.0 40.0 6.7 36.8 76.7 17.5 21.1 (46.4) (16.0) 083310 KS LOT Vacuum KR Semis 181 24.4 39.0 5.1 18.3 0.0 8.3 74.6 1.3 13.8 089590 KS Jeju Air KR Transport 896 25.5 31.6 na 11.7 0.0 11.0 35.1 (113.3) 27.7 098460 KS Koh Young Tech KR Semis 726 20.0 28.7 10.8 31.2 91.9 21.5 17.1 (45.5) 41.0 048260 KS Osstem Implant KR Healthcare 852 23.6 27.4 2.4 46.3 0.0 26.9 40.2 63.3 19.7 089600 KS Nasmedia KR Media 386 20.8 24.9 1.7 74.3 0.0 17.1 48.3 (24.3) 23.1 Taiwan 4968 TT Richwave Tech TW Semis 204 25.5 101.2 10.6 12.5 56.2 21.2 51.2 (49.9) 98.1 5269 TT Asmedia Tech TW Semis 599 36.8 58.2 20.7 6.1 43.2 21.1 66.4 (76.1) 61.5 2723 TT Gourmet Master TW Cons svcs 1,973 23.4 44.7 0.1 47.2 81.6 25.3 20.1 (62.2) 35.9 8436 TT TCI TW HPC 507 21.2 40.3 5.1 16.3 65.5 19.8 26.9 (41.3) 46.8 5274 TT ASPEED Tech TW Semis 789 34.1 36.0 10.6 6.7 61.1 29.8 38.7 (60.2) 81.8 4919 TT Nuvoton Tech TW Semis 365 24.1 33.3 26.6 7.1 96.9 12.0 28.4 (53.3) 47.0 1536 TT Hota Industrial TW Autos 1,156 29.7 30.6 2.5 10.4 95.4 21.0 21.1 31.6 (13.5) 4551 TT Global PMX TW Autos 450 21.8 28.6 2.0 7.1 97.8 18.8 26.2 11.2 26.1 5306 TT KMC TW Cons dur 544 23.9 24.5 0.7 14.7 97.4 14.7 16.4 22.7 26.5 2421 TT Sunonwealth TW Cap gds 456 22.3 23.2 5.7 10.3 100.0 13.5 39.9 (12.4) 120.3 3152 TT Advanced Ceramic TW Tech HW 849 29.6 19.4 5.1 5.8 81.7 24.3 18.4 (88.4) 130.3 3665 TT Bizlink TW Cap gds 876 22.2 10.8 2.5 16.0 96.4 18.1 30.7 (21.2) 30.2 Asean markets PPRO IJ PP Properti ID Property 970 na 61.9 na 2.4 0.0 27.2 16.4 30.4 2.6 SRIL IJ Sritex ID Cons dur 490 17.0 61.0 na 4.9 52.5 5.9 17.0 137.3 32.0 MYEG MK My E.G. Services MY Software 1,758 41.0 58.7 na 21.7 0.0 26.9 36.9 (10.9) 51.2 BEAUTY TB Beauty Community TH Retail 1,236 72.7 46.5 na 35.6 0.0 36.0 37.0 (77.8) 50.7 MTLS TB Muangthai Leasing TH Div fin 2,071 30.9 44.0 nm nm nm 23.7 48.0 nm 76.3 LINK IJ PT Link Net Tbk ID Telecom 1,152 22.7 31.7 na 20.2 0.0 14.2 19.8 (9.0) 8.5 JMT TB JMT Network Svcs TH Comm svcs 338 17.3 17.7 na 37.4 0.0 28.3 69.9 nm 106.6 SCC PM Semirara Mining PH Energy 3,518 37.1 17.0 na 12.9 0.0 11.1 17.6 31.6 60.6 8002 HK IGG SG Software 2,132 57.3 10.1 11.2 32.2 100.0 10.7 72.6 (93.9) 218.0 Australia & New Zealand BWX AU BWX AU HPC 400 21.1 467.2 1.2 28.0 20.0 21.6 48.7 51.3 17.9 ATM NZ a2 Milk NZ FBT 2,628 47.7 75.2 0.8 17.5 20.0 29.1 47.3 (62.2) 170.8 ALU AU Altium AU Software 888 27.0 25.6 13.6 49.1 100.0 25.3 23.8 (27.6) (0.8) Note: For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Total return is based on local currency. Source: Factset, CLSA




Understanding the multibagger picks Below we highlight the business description of the top multibagger picks, especially the qualitative statements that support the continued presence of important multibagger characteristics such as focus on R&D/SG&A spend, rising overseas exposure or high market growth. We also highlight the EPS trend for the past five and the next three years (where the relevant history and forecasts are available). Most of our picks have steadily rising earnings growth, which has been a hallmark of multibaggers in the past.

Figure 85

Asian potential multi-baggers: Main growth theme, supporting drivers and EPS trends

Note: EPS trend is based on non-GAAP adjusted earnings per share. Source: CLSA, Factset


China & HK

1302 HK LifeTech Sci¹ Strong R&D spender in the cardiovascular-diseases-related products. Products getting approval across the world, which could lead to growing exports.

1548 HK Genscript Biotech

Originally based in New Jeresy, its main focus is biological research services (DNA sequencing, etc) but it is also increasing its footprint in cancer cures. Higher R&D and advertising spending, plus rising sales in China could drive future growth.

2869 HK Greentown ServiceTop-rated property-management services, property-consulting and community-services company in China benefitting from rising demand for premium residential services.

1558 HK YiChang HECA rising player in the China drug manufacturing market with 33 pharma products. One of its product, Kewei (oseltamivir phosphate), has been the No.1 selling influenza drug in China from 2013 to 2016.

6068 HK Wisdom EducationLargest provider of private education in South China operating premium primary and secondary schools (high margin), as measured by student enrolment as of 1 Sep 2015, according to the Frost & Sullivan Report.

520 HK Xiabuxiabu CateringRestaurant company with chains in 30-plus cities in China that is upgrading and expanding its network as well as entering several new concept areas in the dining business.

1316 HK NexteerSteering and driveline-systems company with a global footprint. Customers include BMW, FCA, Ford, GM, PSA, Toyota, VW and automakers in India and China. It is also one of the beneficiaries of autonomous driving theme.

425 HK Minth China’s leading auto-bodyparts supplier with growing export sales (with higher margin) due to substantially lower cost base compared to its Japanese peers.

Korea

147760 KS Microfriend Top MEMS (Micro Electro Mechanical System) specialist company with strong FCF.

145020 KS HugelBotox manufacturer controlling 30% of the botox market, a lucrative industry in Korea due to rising domestic demand for dermatology and cosmetic surgery as well as the increasing popularity of cosmetic-surgery tourism.

041830 KS InBodyAccounts for 90% of domestic and 60% of global body-composition analysis market with a well-diversified overseas exposure. It is launching new products (such as InBody watch) and targeting the IoT-based healthcare market.

083310 KS LOT Vacuum Provision of dry vaccum pumps for semiconductor manufacturing with strong R&D growth.

089590 KS Jeju Air

Biggest LCC by market share in Korea. Benefitted from the lifestyle changes as more Koreans are preferring to travel overseas using lower cost airlines. Low exposure to THAAD issue as only a small percentage of revenue is from Chinese charter flights.

098460 KS Koh Young Tech A global leader in 3D measurement technology for electronics assembly with a stable growth profile and increasing sales exposure to the US and Europe.

048260 KS Osstem ImplantOne of the key players in the global dental implant and prosthetic market. According to the report by Market Research Future, the market is expected to post a 4.6% Cagr from 2015-22 with Apac being the fastest-growing region.

089600 KS NasmediaTop digital media rep agency in Korea with 20% market share. High exposure to the fast-growing online mobile advertising with 71% of total revenue coming from the segment.

Our multibagger picks have steadily rising EPS




Figure 86

Asian potential multi-baggers: Main growth theme, supporting drivers and EPS trends (continued)



India

MNDA IN MindaTier-1 electrical-autoparts supplier to OEM with global presence. International clients include Toyota, BMW, Honda, Volkswogen, Ford, Piaggio along with all major domestic Indian autos companies.

VKI IN VakrangeeE-governance/digital is a growing business segment in India and the company has a vast network of retail acces points to deliver financial and other G2C services to unserved rural, semi-urban and urban markets.

CANF IN Can Fin Homes

Small but rising player in the fast-growing housing-finance market in India with loan book enjoying a 32% Cagr since 2014. 75% of loan book coming from Salaried & Professional segment with low overall gross NPA ratio at 0.38%.

WHIRL IN Whirlpool Leading manufacturers and marketers of major home appliances in India with a strong brand focus.

EDEL IN Edelweiss Fin svcsLeading diversified financial services (capital markets) in India with growing market share as evidenced by rising profits even during the volatile equity market periods of 2012-14.

TELX IN Tata ElxsiEngaged in product design and engineering; and system integration and support services for enterprise customers. It has also ventured into emerging tech such as IoT, Virtual Reality, Big data, Cloud, AI etc.

VGRD IN V-Guard Electronic and electro mechanical product company with a strong brand presence in India and it is further boosting its marketing and R&D expenses.

ABB IN ABB IndiaPart of the ABB group, it manufactures and distributes products for power systems, generation and automation in India. It's a play on improving quality of Indian power grids and networks.

NFIL IN Navin FluorineIndia's largest integrated specialty fluorochemical company. Fluorochemicals is a high-growth industry mostly due to focus on underpenetrated products such as air conditioning, refrigration, autos, pharma etc.

PVRL IN PVRPVR, the largest movie multiplex company in India, has a strong brand image, right locations and leadership in key markets/box-office circuits. Strong industry outlook led by an under-screened market and growing consolidation.

Asean markets

PPRO IJ PP Properti

Property subsidiary of PT PP (60% ownership) and is newly listed in 2015. Large increase in bookings this year due to new projects. Landbank increase to 280ha versus 70ha last year, which should translate into more new projects.

SRIL IJ SritexAsean's largest vertically-integrated textile and garment manufacturer. The garments OEM segment is lucrative supported by military uniform orders from UAE, EU and NATO; global fashion lines such as Guess, H&M, Disney and Lee.

MYEG MK My E.G. ServicesMalaysia's sole provider of government e-services. Its broad strategy focuses on going into services where there is a renewal requirement on a regular basis, leading to recurring cashflow.

BEAUTY TB Beauty CommunityCosmetics company with a focus on beauty, personal care, skincare and makeup. Thailand's personal-care market is growing at 6-7% but the company's topline is growing by more than 30%.

MTLS TB Muangthai LeasingVast potential in micro-lending should support growth. The farming sector accounts for 40% of Muangthai's loan book, and it could benefit from rising government support for the agri sector.

LINK IJ PT Link Net TbkCable TV and internet broadband provider operating in several major cities including Jakarta. Low broadband penetration in Indonesia could remain supportive of growth.

JMT TB JMT Network SvcsThailand's biggest bad-debt collection company and beneficiary of the rising NPLs in the sytem. It can expand into neighbouring countries using partners who do not have such services.

SCC PM Semirara MiningLargest coal producer in the Philippines. The company has ventured into power generation primarily to take advantage of the cost and operational synergies between the two businesses.

8002 HKIGG

(Singapore stock)

A play on the global gaming market with geographically well-diversifed revenue, and two big hit games titled Lords Mobile and Castle Clash. It has >380m registered users with about 17m monthly active users across over 200 countries.




Figure 87

Asian potential multi-baggers: Main growth theme, supporting drivers and EPS trends (continued)



Taiwan

4968 TT Richwave TechIC development and design with focus on WiFi and is foraying into IoT, smarthome, automotives etc. It benefits from rising WiFi demand and its growing R&D budget should keep the product pipeline strong.

5269 TT Asmedia Tech A USB play with first SuperSpeed USB 3.1 (10Gbps) technology. Very high R&D budget, could be industry leader.

2723 TT Gourmet MasterSince its establishment in 2004, Gourmet Master's 85C café brand has grown to become the largest coffee house/bakery in Taiwan. It also aggresively expanding its coffee brand in China and the USA.

8436 TT TCI

Bioscience company with dietary suppliements, function drinks and skincare products. Strong R&D focus to help with new product development and it has a high China exposure (including a China plant) along with exports to 41 countries.

5274 TT ASPEED Tech Fabless IC-design company and with an increased focus on Cloud business and strong R&D budget.

4919 TT Nuvoton TechCompany engaging in R&D and sales of IC products and provision of wafer foundry services with lot of new product successes. It has also launched an IoT solution.

1536 TT Hota Industrial

Leading automotive-transmission-system partsmaker in Taiwan and sole supplier of gearboxes to Tesla. Its inhouse equipment supports high precision and flexibility, and has helped secure orders from BorgWarner, Tesla and Eaton.

4551 TT Global PMX

High-precision mechanical autoparts maker in Taiwan, focusing on engine parts and ABS/ESC parts. With GDI parts, it rides the structural trend of better fuel economy and lower gas emissions, boasting a strong overseas customer base.

5306 TT KMCKMC is the largest bicycle-chain manufacturer globally, with a market share of 70-80%. It has a close relationships with its brand customers and is the only supplier offering a wide range of products from low- to high-speed chain.

2421 TT Sunonwealth

Strong R&D focus in core motor technology with numerous patents and industry-leading products such as the first magnetic levitation motor fan (Maglev), smallest /thinnest fan (Mighty Mini) in the world, thermal modules for LED panels, etc.

3152 TT Advanced CeramicIntegrated device manufacturer (IDM) that designs & manufactures LTCC components/filters used in all connectivity devices. Benefits from rising connectivity and RF content increases in 4G+/5G smartphones and WiFi MIMO.

3665 TT BizlinkWiring-harness and cable-assemblies manufacturer and the sole supplier of wiring harnesses for Tesla’s battery-management systems, Superchargers, Powerwall and Powerpack. It is expanding its automotive business in Europe.


BWX AU BWX

A natural skincare products and distribution company with strong export growth in the UK, China and Canada. It owns a successful brand (Sukin) in its home market and just bought "Mineral Fusion", the No.1 natural cosmetics brand in USA.

ATM NZ a2 MilkThe pioneer producer of milk with natural A2 protein with rising sales in AU/NZ and China. It is the leading premium fresh milk brand in Australian supermarkets, with a grocery value market share of approximately 9.3%.

ALU AU AltiumDesign and engineering software company with strong R&D spending and well-distributed global earnings with growth across USA and EM (especially China). One of the peers (Cadence) has a market cap of US$10bn.




Earnings quality (EQRS) check for multibagger picks Our earnings-quality-risk scores (EQRS) focuses on five fundamental issues that determine the earnings quality of stocks. A score of 4/5 or 5/5 suggests higher risk. However, none of our multibagger picks have such a high-risk score.

Figure 88

Asian potential multi-baggers based on earnings-quality risk score (EQRS) Code Name Cty Sector Mkt cap Rising Burning cash Capex Rising Poor cash EQRS (US$m) working (Op CF or indiscipline noncore/ conversion score capital FCF level) intangibles China & HK 1302 HK LifeTech Sci CN Healthcare 950 1 0 0 0 0 1/5 1548 HK Genscript Biotech CN Pharma 932 1 0 0 1 1 3/5 2869 HK Greentown Service CN Comm svcs 1,608 0 0 1 0 1 2/5 1558 HK YiChang HEC CN Pharma 1,109 0 0 1 1 0 2/5 6068 HK Wisdom Education CN Cons svcs 763 0 0 0 0 0 0/5 520 HK Xiabuxiabu Catering CN Cons svcs 1,101 0 0 0 0 0 0/5 1316 HK Nexteer HK Autos 4,188 0 0 1 1 0 2/5 425 HK Minth CN Autos 4,897 1 0 0 0 0 1/5 India MNDA IN Minda IN Autos 954 0 0 0 0 0 0/5 VKI IN Vakrangee IN Software 3,707 1 0 0 0 0 1/5 WHIRL IN Whirlpool IN Cons dur 2,353 1 0 0 1 0 2/5 TELX IN Tata Elxsi IN Software 798 1 0 0 0 1 2/5 VGRD IN V-Guard IN Cap gds 1,180 0 0 1 0 0 1/5 ABB IN ABB India IN Cap gds 4,467 0 0 0 1 0 1/5 NFIL IN Navin Fluorine IN Materials 512 0 0 1 0 0 1/5 PVRL IN PVR IN Media 934 1 0 1 1 0 3/5 Korea 147760 KS Microfriend KR Semis 111 1 0 1 0 0 2/5 145020 KS Hugel KR Pharma 1,569 1 0 0 0 0 1/5 041830 KS InBody KR Healthcare 355 1 0 1 0 0 2/5 083310 KS LOT Vacuum KR Semis 181 0 1 1 0 0 2/5 089590 KS Jeju Air KR Transport 896 0 0 1 1 0 2/5 098460 KS Koh Young Tech KR Semis 726 1 0 1 0 0 2/5 048260 KS Osstem Implant KR Healthcare 852 0 0 1 1 1 3/5 089600 KS Nasmedia KR Media 386 0 0 0 1 0 1/5 Taiwan 4968 TT Richwave Tech TW Semis 204 0 0 1 0 0 1/5 5269 TT Asmedia Tech TW Semis 599 1 0 0 0 1 2/5 2723 TT Gourmet Master TW Cons svcs 1,973 1 0 1 0 0 2/5 8436 TT TCI TW HPC 507 0 0 1 0 0 1/5 5274 TT ASPEED Tech TW Semis 789 1 0 1 1 0 3/5 4919 TT Nuvoton Tech TW Semis 365 0 0 1 0 1 2/5 1536 TT Hota Industrial TW Autos 1,156 0 0 1 0 0 1/5 4551 TT Global PMX TW Autos 450 0 0 1 0 0 1/5 5306 TT KMC TW Cons dur 544 1 0 1 0 0 2/5 2421 TT Sunonwealth TW Cap gds 456 1 0 1 0 1 3/5 3152 TT Advanced Ceramic TW Tech HW 849 0 0 0 0 0 0/5 3665 TT Bizlink TW Cap gds 876 0 0 1 0 0 1/5 Asean markets PPRO IJ PP Properti ID Property 970 1 1 0 0 1 3/5 SRIL IJ Sritex ID Cons dur 490 0 1 0 0 0 1/5 MYEG MK My E.G. Services MY Software 1,758 0 0 1 0 1 2/5 BEAUTY TB Beauty Community TH Retail 1,236 0 0 0 0 1 1/5 LINK IJ PT Link Net Tbk ID Telecom 1,152 1 0 0 0 0 1/5 SCC PM Semirara Mining PH Energy 3,518 0 0 0 1 0 1/5 8002 HK IGG SG Software 2,132 0 0 1 0 0 1/5 Australia & New Zealand BWX AU BWX AU HPC 400 1 0 0 0 0 1/5 ATM NZ a2 Milk NZ FBT 2,628 0 0 1 0 1 2/5 ALU AU Altium AU Software 888 1 0 1 0 1 3/5 Source: Factset, CLSA

None of the multibaggers have poor earnings

quality based on EQRS




Balance sheet quality (BQRS) check for multibagger picks Our balance-sheet-quality risk scores (BQRS) focus on five fundamental issues that determine the balance-sheet quality of stocks. A score of 4/5 or 5/5 suggests a higher risk. However, none of our multibagger picks have such a high-risk score.

Figure 89

Asian potential multibaggers based on balance-sheet-quality-risk score Code Name Cty Sector Mkt cap Liquidity Frequent Excessive Burning cash Operational BQRS (US$m) concerns fundraising leverage (Op CF or FCF level) stress score China & HK 1302 HK LifeTech Sci CN Healthcare 950 0 0 0 0 0 0/5 1548 HK Genscript Biotech CN Pharma 932 0 0 0 0 0 0/5 2869 HK Greentown Service CN Comm svcs 1,608 0 0 0 0 0 0/5 1558 HK YiChang HEC CN Pharma 1,109 0 0 0 0 0 0/5 6068 HK Wisdom Education CN Cons svcs 763 0 0 0 0 0 0/5 520 HK Xiabuxiabu Catering CN Cons svcs 1,101 0 0 0 0 0 0/5 1316 HK Nexteer HK Autos 4,188 0 0 0 0 0 0/5 425 HK Minth CN Autos 4,897 0 0 0 0 1 1/5 India MNDA IN Minda IN Autos 954 0 0 0 0 0 0/5 VKI IN Vakrangee IN Software 3,707 0 0 0 0 0 0/5 WHIRL IN Whirlpool IN Cons dur 2,353 0 0 0 0 1 1/5 TELX IN Tata Elxsi IN Software 798 0 0 0 0 1 1/5 VGRD IN V-Guard IN Cap gds 1,180 0 0 0 0 0 0/5 ABB IN ABB India IN Cap gds 4,467 0 0 0 0 0 0/5 NFIL IN Navin Fluorine IN Materials 512 0 0 0 0 1 1/5 PVRL IN PVR IN Media 934 0 0 0 0 1 1/5 Korea 147760 KS Microfriend KR Semis 111 0 0 0 0 1 1/5 145020 KS Hugel KR Pharma 1,569 0 0 0 0 1 1/5 041830 KS InBody KR Healthcare 355 0 0 0 0 1 1/5 083310 KS LOT Vacuum KR Semis 181 1 0 0 1 0 2/5 089590 KS Jeju Air KR Transport 896 0 0 0 0 0 0/5 098460 KS Koh Young Tech KR Semis 726 0 0 0 0 0 0/5 048260 KS Osstem Implant KR Healthcare 852 0 0 1 0 0 1/5 089600 KS Nasmedia KR Media 386 1 0 1 0 0 2/5 Taiwan 4968 TT Richwave Tech TW Semis 204 0 0 0 0 0 0/5 5269 TT Asmedia Tech TW Semis 599 0 0 0 0 1 1/5 2723 TT Gourmet Master TW Cons svcs 1,973 0 0 0 0 1 1/5 8436 TT TCI TW HPC 507 0 0 0 0 0 0/5 5274 TT ASPEED Tech TW Semis 789 0 0 0 0 1 1/5 4919 TT Nuvoton Tech TW Semis 365 0 0 0 0 0 0/5 1536 TT Hota Industrial TW Autos 1,156 0 0 1 0 0 1/5 4551 TT Global PMX TW Autos 450 0 0 0 0 0 0/5 5306 TT KMC TW Cons dur 544 1 0 1 0 0 2/5 2421 TT Sunonwealth TW Cap gds 456 0 0 1 0 0 1/5 3152 TT Advanced Ceramic TW Tech HW 849 0 0 0 0 0 0/5 3665 TT Bizlink TW Cap gds 876 0 0 0 0 0 0/5 Asean markets PPRO IJ PP Properti ID Property 970 0 0 1 1 0 2/5 SRIL IJ Sritex ID Cons dur 490 0 0 1 1 1 3/5 MYEG MK My E.G. Services MY Software 1,758 0 0 0 0 0 0/5 BEAUTY TB Beauty Community TH Retail 1,236 0 0 0 0 0 0/5 LINK IJ PT Link Net Tbk ID Telecom 1,152 0 0 0 0 1 1/5 JMT TB JMT Network Svcs TH Comm svcs 338 0 0 0 1 1 2/5 SCC PM Semirara Mining PH Energy 3,518 0 0 0 0 0 0/5 8002 HK IGG SG Software 2,132 0 0 0 0 0 0/5 Australia & New Zealand BWX AU BWX AU HPC 400 0 0 1 0 1 2/5 ATM NZ a2 Milk NZ FBT 2,628 0 0 0 0 0 0/5 ALU AU Altium AU Software 888 0 0 0 0 0 0/5 Source: Factset, CLSA

None of the multibaggers have poor balance sheet

quality based on BQRS




Benford (fraud detection) check for multibagger picks Benford analysis follows the law of first digit and is violated when numbers are manipulated or forced to deviate from their natural results. None of our stocks fail the Benford test, where a goodness-of-fit p-value below 0.05 for the financials statements’ first digit distribution suggests nonconformity.

Figure 90

Asian potential multi-baggers: First digit distribution conformity to Benford’s Law Code Name Cty Sector Mkt Cap

(US$m) Fiscal

year Goodness-of-fit test

p-value

Data pts

Absolute deviation from Benford's distribution 1

(%) 2

(%) 3

(%) 4

(%) 5

(%) 6

(%) 7

(%) 8

(%) 9

(%) China & HK

1302 HK LifeTech Sci CN Healthcare 950 06/17 0.66 88 1.7 2.8 3.4 0.5 1.2 2.4 0.1 4.0 1.1

1548 HK Genscript Biotech CN Pharma 932 12/16 0.36 103 10.7 6.0 0.1 2.9 3.1 2.0 0.9 0.7 0.7

2869 HK Greentown Service CN Comm svcs 1,608 06/17 0.12 90 7.7 2.1 4.7 0.8 1.3 1.1 2.5 6.0 1.2

1316 HK Nexteer HK Autos 4,188 06/17 0.36 103 8.7 0.1 1.1 0.0 0.8 2.0 2.0 4.6 1.7

425 HK Minth CN Autos 4,897 06/17 0.15 95 10.1 1.3 3.3 1.9 1.6 1.7 4.7 2.3 2.8 India

MNDA IN Minda IN Autos 954 03/17 0.45 81 3.2 6.5 1.4 2.3 2.0 0.5 0.4 1.1 4.1

ABB IN ABB India IN Cap gds 4,467 06/17 0.15 90 5.7 4.6 7.5 3.6 3.5 1.1 1.4 1.8 2.4

Korea

147760 KS Microfriend KR Semis 111 06/17 0.84 192 0.1 4.8 2.6 2.9 0.9 0.4 1.5 0.6 2.0

145020 KS Hugel KR Pharma 1,569 06/17 0.72 249 1.6 1.9 0.0 3.2 0.9 2.9 2.2 1.3 2.6

041830 KS InBody KR Healthcare 355 06/17 0.67 229 7.9 4.5 0.6 1.8 1.3 1.0 3.2 0.1 0.7

083310 KS LOT Vacuum KR Semis 181 06/17 0.30 250 2.7 3.6 3.3 1.5 3.1 1.7 1.4 5.3 0.2

089590 KS Jeju Air KR Transport 896 06/17 0.16 229 3.9 7.7 3.3 2.3 0.1 2.8 1.9 4.5 2.0

098460 KS Koh Young Tech KR Semis 726 06/17 0.82 253 1.2 1.4 0.5 4.1 2.8 1.2 2.6 0.8 0.2

048260 KS Osstem Implant KR Healthcare 852 06/17 0.07 276 0.4 2.8 2.3 4.4 4.7 2.0 0.4 6.5 0.9

089600 KS Nasmedia KR Media 386 06/17 0.89 191 4.5 1.4 1.0 1.8 1.0 2.0 1.0 2.0 2.0

Taiwan

4968 TT Richwave Tech TW Semis 204 06/17 0.14 194 4.8 6.3 2.7 5.8 3.4 3.1 0.6 3.1 1.0

5269 TT Asmedia Tech TW Semis 599 06/17 0.93 201 1.2 0.3 1.9 0.7 0.5 2.3 2.8 1.6 0.1

2723 TT Gourmet Master TW Cons svcs 1,973 06/17 0.15 265 10.1 5.0 0.4 2.1 1.9 2.7 2.1 4.7 0.0

8436 TT TCI TW HPC 507 06/17 0.87 254 5.3 2.5 3.0 1.8 0.7 0.4 0.7 2.4 1.0

5274 TT ASPEED Tech TW Semis 789 06/17 0.72 201 7.2 1.8 3.9 1.2 0.0 0.8 0.8 0.1 2.9

4919 TT Nuvoton Tech TW Semis 365 06/17 0.94 214 0.2 3.4 2.0 0.3 1.0 1.1 1.6 2.3 0.8

1536 TT Hota Industrial TW Autos 1,156 06/17 0.84 235 2.2 1.0 1.1 3.7 1.5 0.1 1.1 3.0 1.0

4551 TT Global PMX TW Autos 450 06/17 0.21 214 3.9 4.1 0.1 2.9 1.9 5.9 3.9 0.0 1.0

5306 TT KMC TW Cons dur 544 06/17 0.36 245 3.0 7.8 1.1 0.9 0.6 4.7 0.9 0.6 2.4

2421 TT Sunonwealth TW Cap gds 456 06/17 0.98 232 2.5 2.2 1.3 0.6 0.6 2.4 0.6 1.7 0.2

3152 TT Advanced Ceramic TW Tech HW 849 06/17 0.29 172 4.2 1.6 5.5 0.4 0.2 4.4 4.1 1.0 1.7

3665 TT Bizlink TW Cap gds 876 06/17 0.71 264 0.6 2.5 1.1 0.2 5.7 0.3 1.6 0.6 1.2

Asean markets

PPRO IJ PP Properti ID Property 970 06/17 0.97 167 3.4 2.0 0.1 0.1 1.7 1.9 0.4 0.9 1.6

SRIL IJ Sritex ID Cons dur 490 06/17 0.91 164 0.4 1.1 1.5 0.7 4.3 0.6 0.3 1.6 0.9

MYEG MK My E.G. Services MY Software 1,758 06/17 0.16 168 0.3 6.3 4.2 7.6 0.4 0.7 0.4 3.2 0.8

BEAUTY TB BeautyCommunity TH Retail 1,236 06/17 0.87 189 2.1 2.0 0.3 1.4 1.6 2.8 1.0 2.5 1.2

LINK IJ PT Link Net Tbk ID Telecom 1,152 06/17 0.32 169 2.9 4.6 0.5 5.7 3.3 0.8 1.3 0.8 3.4

JMT TB JMT Network Svcs TH Comm svcs 338 06/17 0.73 181 5.3 2.8 0.3 2.0 1.8 4.5 0.3 0.4 0.4

SCC PM Semirara Mining PH Energy 3,518 06/17 0.34 183 1.0 8.3 1.7 2.6 2.5 3.7 1.9 1.3 1.4


ATM NZ a2 Milk NZ FBT 2,628 06/17 0.79 85 0.7 0.0 4.0 0.9 0.3 0.4 0.1 3.9 1.0

ALU AU Altium AU Software 888 06/17 0.65 90 3.4 3.5 2.0 0.8 1.0 1.1 4.7 1.6 0.1

Note: The first-digit distribution is calculated using a combination of standardised accounting items from P&L, balance sheet, and cashflow statement of the last four quarters (or the last two semi-annuals). Absolute deviation of 5% or more from Benford’s Law for any digit is highlighted in bold. We have excluded stocks with less than 80 data points to avoid noise in the p-value. Source: CLSA, Factset

Our multibagger picks pass the Benford test


Section 3: Price of sustainable growth Microstrategy


Price of sustainable growth Our main multibagger strategy uses historical earnings growth to identify companies in growing businesses. We have also shown that consensus-growth forecasts are not as reliable. We believe this is largely due to two factors. Firstly, consensus numbers often prove inaccurate both at the company and aggregate level. Secondly, markets may already overprice the high-growth stocks. In this section, we focus on overcoming the overpricing and inaccuracy-related issues of high-growth-forecast stocks.

Stocks with high-growth potential trade at a premium . . . It is no surprise that high-growth stocks demand higher valuations. Companies with strong earnings growth (Q1 and Q2) have, on average, traded at 4.2% and 8.0% premiums to the region, while companies with low growth (Q4 and Q5) have traded at 4.5% and 5.3% discounts.

Figure 91

Broader Asia ex-Japan: Valuation of baskets based on earnings growth


. . . however, are attractively valued after adjusting for future growth Given their high valuations, such companies are generally avoided by value managers, which could then lead to missing quality investments that have attractive future growth profiles.

Figure 92

Asia ex-Japan: 12M fwd and 36M fwd PE of future growth quintiles


4.2

8.0

1.7

(4.5)(5.3)

(40)

(30)

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(10)

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(10)(8)(6)(4)(2)02468

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Quintiles based on next 2-year EPS growth

Avg valuation prem/disc (rel to region)

Average next 2-year EPS growth (RHS)

(%) (%)

High growth (Q1 & Q2) stocks are generally missed by value investors

given their premium valuations

61

(49.8)

(9.2)

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55.7

(6)

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(2)

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Pre/Disc based on 36M fwd PEPre/Disc based on 12M fwd PE (RHS)

(%) (%)

High growth stocks looks attractive afterfactoring in future growth

While the ones with low growth trade at discount

High growth stocks trade at premium to the region

However, after adjusting for future growth, high-

growth stocks look attractive on valuations

Expensive valuations and overoptimism two major challenges for the high-growth-forecast stocks




Delivery of growth is important, chances of disappointment are high Looking beyond the traditional valuation methodology to identify stocks with strong long-term growth potential, will help identify compelling investment opportunities. However, we recommend investors exercise caution while analysing these companies with high growth potential. Generally for such firms, consensus expectations are far too optimistic relative to their real growth potential. Our analysis in Figure 93 highlights that there is a clear disconnect between consensus growth expectations and the actual growth delivered by the company over that period. For instance, the baskets of companies that have been expected to deliver more than 25% annualised earnings growth have a median growth expectation of 38.7%. However, the basket actually delivered just a 23.9% earnings Cagr over the next three years. That translates into a 14.8ppt disappointment. Unsurprisingly, the degree of disappointment falls as the growth exceptions recede. Indeed, companies with negative growth expectations have a tendency to surprise positively.

Figure 93 Figure 94

APxJ: Median growth in each growth estimate bucket APxJ: Hit rate of meeting the expectations


Base effect reduces efficacy of history in predicting growth Against this backdrop, it is essential to identify factors that will help ascertain the growth potential with more conviction. Our analysis highlights that historical earnings growth has been a poor indicator of future growth due to the base effect. However, sustainable growth potential has been a far better signal to judge a company’s growth prospects.

Figure 95 Figure 96

APxJ: Median N3Y EPS growth for L3Y EPS gr ranges APxJ: Median N3Y EPS growth for sustainable gr ranges


(7.7)

5.7

12.4

17.4

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21.3

(4.0)

2.7

7.3 10.7

14.3

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(10)(5)05

10152025303540

<=0 0-10 10-15 15-20 20-25 >25 >10

Next 2-year EPS growth estimate range

Estimate (N2Y Cagr)

Actual delivered growth (N3Y Cagr)

EPS Cagr (median, %) 58.1

53.6

51.0

48.3

45

47

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>10% >15% >20% >25%

Next 2-year EPS growth expectation of more than

Hit-rate of delivering promised growth(%)

58.1% of the companies met the expectations of delivering more than 10% growth over the next three years

13.9

6.3 6.7

8.8

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6

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Q1 (lowest) Q2 Q3 Q4 Q5 (highest)

Quintiles based on last-3-year EPS Cagr

Actual next-3-year EPS Cagr (median, %)

9.0

6.6 7.0

7.6

10.3

5

6

7

8

9

10

11


Quintiles based on sustainable growth


Sustainable growth provides a good signal to

judge growth prospects

Avoid high growth stocks that have high probability

of disappointment




Topline growth has been a better predictor than margins Differentiating between topline versus margins also provides a good signal regarding a company’s growth potential. Our analysis highlights that firms that have managed to deliver strong topline growth have better potential to deliver high earnings growth. On the other hand, companies that have witnessed stable margins over the previous five years have delivered low earnings growth over the next three years versus ones with far more volatile margin profiles. Both factors demonstrate a clear trend in terms of their relationship with earnings-growth potential. We believe the robust topline growth delivered by a company (generally at the expense of margins) helps it garner additional market share, which then facilitates commanding wider margins in the future, leading to strong earnings growth. Margins on the other hand, are cyclical and mean reverting; and thus a poor indicator of a company’s growth potential.

Figure 97 Figure 98

APxJ: Median N3Y EPS growth for L3Y sales gr ranges APxJ: Median N3Y EPS gr for last 5Y margin cert ranges


Earnings momentum and incremental ROIC too work well Additionally factors such as positive earnings momentum and incremental ROIC have been good signals to gauge growth potential. Our analysis highlights that companies that have witnessed strong earnings-positive momentum over the previous 12 months have delivered the strongest earnings growth over the next three years. Likewise, incremental ROIC too, helps in improving the future delivery of growth.

Figure 99 Figure 100

APxJ: Median N3Y EPS growth for 12M EPS rev ranges APxJ: Median N3Y EPS growth for wIROIC chg ranges


6.0 5.6

7.4 7.7

11.5

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5

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7

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9

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12


Quintiles based on last 3-year sales Cagr

Actual next-3-year EPS Cagr (median, %)10.6

8.4

7.2 7.9

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Quintiles based on margin certainty (L5Y)


2.6

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Quintiles based on last 12M EPS revision


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Positive wIROIC change Negative wIROIC change


Strong topline growth presages high future

earnings growth

Strong earnings momentum and positive

wIROIC momentum helps in identifying winners




Asia Pacific ex-Japan - Attractively valued high growth stocks Our analysis suggests that stocks with high growth potential are a good investment if they are attractively valued after adjusting for future growth. Furthermore, it is crucial to make sure the future growth that is being used to discount the valuations is not subject to large-scale disappointment. Our characteristics analysis helps identify the factors to ascertain this. In the screen below, we highlight the stocks and screening criteria is as follows:

Strong earnings growth: FY1-FY2 EPS Cagr > 10%

Valuations: 12-month forward PE > 20x and 36-month forward PE < 16x

Strong topline growth: Last three-year sales Cagr > 10%

Positive 12-month EPS revision and sustainable growth > 5%

Figure 101

Asia Pacific ex-Japan companies with high growth and attractive valuations (sorted by forward PE, 3 years later) Code Name Cty Sector Mkt cap 12MF FY1-FY2 EPS Fwd PE 12M EPS rev Sustg L3Y Sales (US$m) PE (x) Cagr (%) 3Y later (x) (FY1, %) (%) Cagr (%) 1478 HK Q Technology CN Cons dur 2,092 23.6 81.3 6.1 126.8 17.0 52.4 MOMO US Momo Inc CN Software 6,952 22.6 59.1 7.1 138.0 25.9 461.2 SAWAD TB1 Srisawad Corp TH Div fin 1,569 16.6 29.5 7.8 16.8 26.9 nm DBEL IN Dalmia Bharat IN Materials 3,588 28.5 70.5 8.9 11.4 9.7 34.9 MTLS TB Muangthai Leasing TH Div fin 2,071 23.7 48.0 9.1 42.6 18.7 nm 2382 HK Sunny Optical CN Tech HW 14,944 31.4 65.3 9.2 67.2 24.7 36.0 1317 HK1 Maple Leaf Edu CN Cons svcs 1,123 15.9 23.5 9.5 13.2 10.4 20.8 SINA US Sina CN Software 7,087 28.3 63.0 10.1 49.7 5.9 15.7 LTFH IN L&T Finance IN Div fin 4,878 20.9 36.5 10.1 4.6 11.2 nm 1590 TT Airtac TW Cap gds 2,355 21.1 37.6 10.1 24.6 10.2 13.3 2018 HK AAC CN Tech HW 18,393 20.0 27.2 10.4 17.1 19.4 24.2 068270 KS Celltrion KR Pharma 11,841 31.2 60.3 10.7 6.5 13.6 43.7 WB US Weibo CN Software 9,991 41.0 75.2 10.8 48.5 23.5 51.6 ATM NZ a2 Milk NZ FBT 2,628 29.1 47.3 10.8 34.9 23.8 55.2 CANF IN Can Fin Homes IN Banks 1,159 22.0 27.9 11.2 15.4 19.7 nm 2313 HK1 Shenzhou Intl CN Cons dur 10,522 18.3 19.4 11.5 10.6 11.4 14.5 1448 HK Fu Shou Yuan CN Cons svcs 1,429 20.0 23.6 11.8 5.3 10.5 27.5 TLKM IJ1 Telkom ID Telecom 35,394 18.4 17.2 12.3 8.0 8.5 11.9 027410 KS1 BGF Retail KR Fd & drug 3,859 18.9 14.6 12.6 1.7 16.0 17.3 IIFL IN India Infoline IN Div fin 2,866 20.8 18.8 12.8 11.0 15.1 nm ATHM US Autohome CN Software 7,573 24.4 22.5 13.3 36.8 23.4 71.7 BABA US Alibaba CN Software 428,095 30.6 35.2 13.4 16.2 25.2 44.5 BBCA IJ1 BCA ID Banks 34,719 18.7 11.8 13.4 5.6 15.3 nm EXID IN Exide IN Autos 2,671 20.0 15.6 13.4 2.6 11.8 10.5 AC PM1 Ayala Corp PH Div fin 10,861 18.9 12.6 13.5 3.2 10.4 nm BJFIN IN Bajaj Finserv IN Insurance 12,946 25.5 27.4 13.5 8.8 16.2 nm MOFS IN Motilal Oswal IN Div fin 2,614 27.8 38.5 13.5 48.8 7.1 nm 2020 HK Anta Sports CN Cons dur 10,409 20.5 18.1 13.6 5.7 8.5 22.4 1910 HK1 Samsonite HK Cons dur 5,481 18.5 10.7 13.6 3.3 10.4 11.3 ALL AU Aristocrat AU Cons svcs 10,724 21.6 16.1 13.8 30.8 18.1 42.5 BIDU US Baidu CN Software 61,015 27.0 24.5 14.1 12.0 23.4 30.2 700 HK Tencent CN Software 394,835 35.8 39.5 14.6 9.4 25.6 36.0 BAF IN Bajaj Finance IN Div fin 14,430 32.6 36.1 14.8 16.1 19.3 nm 2723 TT Gourmet Master TW Cons svcs 1,973 25.3 20.1 15.5 0.3 12.8 13.4 RRHI PM Robinsons Retail PH Fd & drug 2,392 21.2 11.6 15.7 1.1 8.8 16.1 EDU US2 New Oriental Edu CN Cons svcs 12,934 31.9 30.1 16.2 7.4 16.2 16.5 ALI PM2 Ayala Land PH Property 12,285 23.7 14.9 16.3 2.4 10.0 15.2 CTD AU2 Corporate Travel AU Cons svcs 1,825 28.3 19.0 18.4 15.3 8.5 43.4 1 12MFPE criteria relaxed. 2 Forward PE for 3-year later criteria relaxed. Note: For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Stocks are attractively valued after adjusting for

future growth




Valuation upside for stocks moving from small-to-midcap Earlier in the report we highlighted that the small-cap multibaggers outperform their large-cap peers. Indeed, one of the advantages of focusing on small-cap multibaggers is that they also benefit from a valuation rerating once they transition from the small-cap to the midcap universe. A median PE analysis of the broader Asian universe suggests that the small-caps (market cap less than US$1bn) trade at a 26% discount to midcap peers (market cap between US$1-5bn). This is understandable given the increased focus from institutional investors and sellside analysts, and the index-inclusion effect following the transition from the small-cap to midcap universe. In this section, we quantify the valuation rerating impact on the small-caps as their market cap increases to over US$1bn and then to over US$5bn.


Relative PE of APxJ stocks within different mcap ranges Small caps with suppressed relative valuation over time

Note: Broader Asia Pacific ex-JP companies with market cap more than US$100m. Stocks with negative PE are excluded. Source: CLSA, Factset

PE rerating potential across markets and sectors Below we highlight the potential PE rerating of small-caps transitioning to midcaps for different markets and sectors. Hong Kong and Philippine small-caps have the highest potential, along with the staples and healthcare sectors.

Figure 104

Mid-cap versus small-cap relative PE premium since 2002 (past-15 years)

Note: Broader Asia Pacific ex-JP companies with market cap more than US$100m. Stocks with negative PE are excluded. Source: CLSA, Factset

0.87

1.09 1.13

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1.2

Small cap(<=US$1B)

Mid cap(US$1-5bn)

Large cap(>US$5bn)

Quarterly average since 2002

(Median relative PE versus MSCI APxJ, x)

26% valuation premium

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Small cap (<=US$1bn)Mid cap (US$1bn to $5bn)Large cap (>US$5bn)

(Median relative PE versus MSCI APxJ, x)

Cons disc

Cons stap Energy Finan-

cials H'care Indust-rials

Info tech

Mater-ials

Prop-erty

Tele-com

Utili-ties Market

Australia 25.5 15.0 9.1 3.0 15.6 37.6 35.1 35.8 17.8 26.2 (18.0) 19.5

China 31.2 67.9 24.3 (22.1) 58.3 21.8 47.1 31.2 42.8 na 1.9 23.3

Hong Kong 58.3 na na na na 40.5 71.0 na 77.7 13.1 na 43.8

India 40.9 77.4 18.3 18.8 52.2 35.7 34.8 27.0 39.0 na 0.9 30.5

Indonesia 25.3 17.5 6.0 32.6 117.6 72.8 na 17.0 58.2 na na 22.6

Korea 23.0 46.5 na 23.4 60.1 32.4 85.3 10.9 na na 21.2 23.8

Malaysia 19.3 23.3 39.8 3.7 79.7 43.7 na 74.0 93.8 na 22.9 33.7

New Zealand 40.8 na (5.4) na 48.1 43.9 na na na na na 27.8

Philippines 68.7 78.3 na 41.0 na na na 72.8 69.5 na na 41.0

Singapore 61.0 21.8 na na 4.3 54.8 71.2 na 16.3 na na 33.6

Taiwan 19.7 44.6 na na na 33.7 7.9 13.9 16.4 na na 14.1

Thailand 43.4 42.5 2.6 (1.2) 35.2 45.4 24.9 52.9 69.5 (23.0) (11.7) 20.5

Sector 32.8 42.5 12.8 13.7 41.3 30.0 26.4 28.8 32.3 (3.1) 19.4 25.5

Healthcare and staples witnessed the most

rerating among sectors

A 26% rerating when a stock moves from small-

cap transitions to midcap

Among markets, Hong Kong and Philippines

witnessed the most rerating




Small-cap multibagger rerating is even more pronounced A further analysis of the valuation changes for multibaggers that have transitioned from small-caps to large-caps highlights that the rerating is even more pronounced. On a median basis, these small-cap multibaggers initially traded at a 10% discount to the MSCI Asia Pacific ex-Japan benchmark. Once they reached the midcap stage, they were trading at a 22% premium to the benchmark and after becoming large-caps they are now trading at a 35% premium. Korea Zinc (010130 KR) is a typical example of this phenomenon with its relative PE rising along with the market cap. The stock traded at a 0.3x to 0.7x relative PE range when its market cap was below US$1bn but is now trading at the same PE as the market.


Multibaggers relative PE premium within mcap ranges Korea Zinc relative PE and mcap since 2002

Note: Only includes broader Asia Pacific ex-JP small cap multibaggers that have grown into large caps as of 30 Jun 2017. Stocks with negative PE are excluded. Source: CLSA, Factset

Small-cap multibagger rerating across markets and sectors A similar analysis for the Asian market and sectors highlights that valuation rerating is most prominent in small-cap multibaggers from the Philippines and Indonesia; and the healthcare and staples sectors. Rerating was the smallest in Singapore, Taiwan and Thailand; and the property sector.

Figure 107

Relative PE premium of small cap multibaggers that became large caps (since 04)

Note: Only includes broader Asia Pacific ex-JP small cap multibaggers that have grown into large caps as of 30 Jun 2017. Stocks with negative PE are excluded. Source: CLSA, Factset

0.90

1.22

1.35

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<US$1bn US$1-5bn >=US$5bn

Market cap ranges

MultibaggersMedian relative PE versus MSCI APxJ (x)



0123456789

0.30.40.50.60.70.80.91.01.11.2

Dec

01

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02

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ec 0

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Relative PE Mcap (RHS) (US$B)(x)

Median rel PE: 0.48x



Cons disc

Cons staps Energy Finan-

cials H'care Indust-rials

Info tech

Mater-ials

Real estate

Tele-com

Utilit-ies Market

Australia 40.1 na 88.9 (6.5) 12.0 349.5 na 7.5 na na 106.2 20.0

China 74.9 51.0 (25.1) (47.3) 100.7 (4.4) 145.1 29.7 1.6 na 32.4 37.9

Hong Kong 114.2 na na na na 119.3 15.5 na na na na 76.3

India 26.8 132.7 (17.7) 94.6 89.9 122.9 na 15.8 na na na 58.5

Indonesia 360.5 90.5 421.2 432.9 287.4 na na 58.6 na na na 113.4

Korea 166.7 154.7 na na na 474.0 59.8 58.0 na na na 34.6

Malaysia na 66.3 173.7 na na na na na na 28.2 na 59.8

New Zealand na na na na na 57.0 na na na na na 57.0

Philippines na 357.5 na 40.6 na 127.2 na na na na 138.0 120.7

Singapore na 28.3 na 29.4 na na na na 19.6 na na 14.7

Taiwan 38.5 na na na na na (18.7) na na na na 14.8

Thailand 125.9 124.1 na 74.2 125.0 293.2 na (34.2) 125.2 143.5 na 14.4

Sector 40.5 84.9 37.1 67.3 105.7 64.2 62.6 30.7 13.1 19.0 42.5 49.6

Philippines and Indonesia have the highest rerating

Property and telecom have the smallest rerating

Almost a 50% rerating for small-cap multibaggers

that have become large-caps


Section 4: Multibagger case studies Microstrategy


Multibagger case studies Our analysis of the past multibagger stocks highlights that there are several factors responsible for fuelling the rise of companies over the long term. Indeed, attaining the multibagger status necessitates delivery of stable growth over the course of years/decades on a consistent basis. History is replete with examples of such companies. Below we examine a few sectors/companies that have become multibaggers over the long term and analyse the underlying reasons that differentiate them from the rest.

1. Household and personal products (HPC): The HPC sector has been a breeding ground for multibaggers in Asia. The sector itself has been a 26-bagger since 1995, the second-best performer after software. Regardless of its defensive characteristics, investors have been richly rewarded, given the sector’s strong/stable growth profile, and more importantly, exposure to high-growth markets such as China, India and Indonesia. The key question however is, will the sector continue to remain a bright spot? Our analysis suggests that in markets with strong economic growth and favourable demographics, the HPC sector will remain the core investment holding over the long term.

Figure 108

MSCI Asia Pac ex-JP sectors: Total returns since 1995

Note: Semis and software performance since 1998. Source: CLSA, Factset


MSCI Asia Pac ex-JP: HPC versus the benchmark MSCI Asia Pac ex-JP HPC sector: YoY OPF since 1996

Source: CLSA, Factset Source: CLSA, Factset

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Total returns since 1995 (%, local currency)

HPC sector has been a 26-bagger since 1995, second-best to software

26.8x

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MSCI Asia Pac ex-JP HPC

MSCI Asia Pac ex-JP

Index since 199526.8x returns

4.2x retuns

(20)

(10)

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MSCI Asia Pac ex-JP HPC79.2 46.6

-30.9

YoY OPF (%)

Outperformance in 14 of the 23 years

Hit-rate has been the lowest for China,

Japan and Taiwan

HPC sector has been a breeding ground for

multibaggers

Consistent performer

Analysis of multibaggers in detail




Breakdown of five-baggers by markets Within Asian markets, Indonesia, Singapore and Australia have only one HPC company (well-traded) and each has been at least a five-bagger over the long term. More notably, eight out of 11 Indian HPC companies have been at least five-baggers, while the hit rate has been lowest for China and Japan.

Figure 111

Broader Asia Pac markets: Percentage of five-baggers in each market


India dominates the 10-bagger list Unilever Indonesia has delivered 369x returns since 1996 - the best-performing Asian HPC stock over the past 22 years. From the trough in October 1998, the stock price has increased by more than 500x. Of the 22 Asian HPC stocks that have at least become 10-baggers since 1996, seven are from India, delivering on average 116x returns with the likes of Godrej Consumer returning 238x, Emami 230x and Marico 141x. From Japan and Korea, there are five each, while from China, surprisingly, there has been only one 10-bagger - Hengan, delivering 41x returns. From both Korea and Japan, cosmetics companies (Amorepacific, LG H&G and Kose) have been at the forefront and have benefitted immensely from their China exposure. From Australia, only Blackmores made it to the list with 92x returns.

Figure 112

Asian HPC sectors: 10-baggers since 1996


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Asian 10-baggers since 1996Total returns since 1996 (%, local currency)

Unilever Indo, Godrej, Emami, Amorepacific and Marico have been more than 100-baggers since 1996

Eight out of 11 Indian HPC companies have been

more than five-baggers

Hit rate has been the lowest for China, Japan

and Taiwan

Unilever Indo has been more than 500-bagger

since October 1998

Seven Indian HPC Stocks have been more than

10-baggers since 1996




Does exposure to high-growth economies matter? We have already seen that HPC companies within India and Indonesia have delivered the best returns over the long term, given their exposure to the strong domestic growth component. It is surprising that despite delivering the highest GDP growth over the past few years, China has only one HPC stock (Hengan) in the 10-bagger list, achieving close to a 41x return. However, companies within low-growth markets such as Japan and Korea have been handsomely rewarded for their strong and growing exposure to the China market. Overall in Japan, there are around 21 HPC stocks, of which only five (23% hit-rate) have managed to attain the 10-bagger status, thanks to their exposure to fast-growing Asian markets. The hit-rate is slightly better for Korea with eight out of 20 HPC stocks becoming 10-baggers, though this is still low compared to the high-growth market peers.

Figure 113

Broader Asia Pac markets: Real GDP Cagr since 2003 and 1995

Source: CLSA, IMF

Focus on future growth markets The IMF forecasts that Indian real GDP growth will accelerate to 9.1% over the next five years, followed by China and Indonesia. If these forecasts hold true, HPC companies exposed to these markets have the highest potential to become future multibaggers.

Figure 114

Broader Asia Pac markets: Real GDP Cagr over the next five years (2016-21F)

Source: CLSA, IMF

9.2

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Real GDP cagr (2016-21F, %)(%)

Per IMF, India will be fastest-growing Asian

market in Asia over the next five years

HPC companies within India, Indonesia have

delivered the best returns over the long term . . .

. . . given their exposure to the strong domestic

growth component

China delivered the highest GDP growth over

the past several years . . .

. . . however, only a HPC company (Hengan) made

it to the 10-bagger list . . .

. . . although exposure to China helped Korean and Japanese HPC companies

HPC companies exposed to India/China/Indo have

the potential to become the future multibaggers




Exposure to growth-markets has also been the key As highlighted earlier, the HPC sector is the direct beneficiary of strong domestic growth. As a result India/Indonesia-focused HPC companies have delivered consistent performance over the past few years. However, companies exposed to mature markets such as Japan and Korea, where the domestic-growth component is weak, have delivered subdued returns compared to their Asian peers. To compensate for the lack of domestic growth, however, some companies such as Amorepacific/LG H&H from Korea, and Kao/Unicharm from Japan have expanded overseas, to tap the nascent growth potential of markets such as China. These efforts have indeed been rewarded in the form of incremental revenue streams originating out of China and thereby boosting the topline growth of these companies. In the case of Amorepacific, the revenue contribution from China has increased from 7.4% in 2011 to close to 20% last year. While for Unicharm, the contribution rose to 21% in 2014 from 12% in FY3/11 and narrowed slightly to 15% last year.


Amorepacific: Revenue exposure to China Unicharm: Revenue exposure to China


Market cap is a crucial factor to detect future multibagger Within the HPC space, micro/small-caps have the highest potential to become future multibaggers, while large-caps have lost half their value.

Figure 117

Performance of HPC stocks broken down by market-cap


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Median performance over the next 22 years(%)

Small-caps have the highest potential to become the

future multibagger

Revenue exposure of some of Japanese/Korean companies to high-growth markets has been the key

Small-cap companies have most potential to become multibaggers

While large-caps have lost half their value




Unilever Indonesia: 286-bagger since 1990 Indonesian behemoth and the only major HPC company in the market, Unilever Indonesia, has been an extremely rewarding stock for long-term investors. Since listing in the 1990s, the stock has delivered negative returns in only four of the past 26 years and not once in the past 12 years back to 2005. Although focus on quality since the start of the GFC has led to a strong stock rerating from the beginning of 2009, over the long term, the company has managed to grow earnings by 127x and sales by 71x, with a strong improvement in operating margins across these years. Its market cap has surged from around US$100m in 1990 to close to US$37bn now. Although the stock will continue to remain a core holding in Asian portfolios, given the expectation of strong domestic growth over the next few years, the steep valuations and large market cap could limit the degree of future returns.


Unilever Indonesia: Price vs sales vs earnings Unilever Indonesia: Ebit margin


Godrej Consumer: The best within India HPC Similarly, within India’s HPC space, Godrej Consumer has been the most rewarding stock with 105x returns, underpinned by 30x growth in earnings and 18x improvement in revenue. Compared to peers, Godrej Consumer has delivered the second-best earnings improvement with Dabur being the best. Going forward though, premium valuations could limit upside.


Godrej Consumer: Price vs sales vs earnings trend India consumer: Earnings growth since FY961

Source: CLSA, Factset ¹For companies with listing later than 1995, the reporting year has

been used as the starting point. Source: CLSA, Factset

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Unilever Indonesia has delivered 286x

returns . . .

. . . underpinned by strong earnings and

revenue growth

Godrej has been the best consumer story within

India over the past 16 years




2. Riding the ecommerce wave While consumption growth has been one of the key catalysts fuelling the rise of multibaggers in the past, the ongoing wave of consumerism is being led by the ecommerce sector. Indeed, companies exposed to this theme have strong potential to become multibaggers as the industry continues to record strong growth and enhance market share at the expense of the traditional brick-and-mortar retailers. In her $trillion opportunity report, our Head of Asia Telecom & Internet Research, Elinor Leung, highlights that the global online grocery market (eGrocery) will hit a growth inflection in 2017, with China leading the way. China’s grocery market, already the world’s largest, will increase by 30% to US$1.4tn by 2021.

The current listed global ecommerce space is primarily dominated by the US and Chinese markets. Within the listed universe, the USA and China account for 62% and 32% by market cap and 65% and 27% by revenue. Thus, the ecommerce theme in the other global markets is still in its infancy and has a strong potential to grow. While most Chinese ecommerce plays such as Alibaba and JD.com have been recently listed, the USA has a longer track record with companies such as Amazon, Ebay and Priceline being listed since 1997. Overall, the global ecommerce basket has delivered strong returns both on a weighted and median basis since 1995 (driven by Amazon).


Global ecommerce-related stocks: Mcap breakdown Global ecommerce-related stocks: Revenue breakdown

Note: Analysis based on 32 global ecommerce related stocks (mainly the stocks with GICS level-4 industry classification as Internet & Direct Marketing Retail. Also includes few stocks such as Alibaba and eBay that are classified as internet). Source: CLSA, Factset


Global ecommerce: Fcap-weighted index (US$ TR) Global ecom: Index based on median perf (US$ TR)

Note: Index performance is calculated based on custom global ecommerce universe of 32 stocks (stocks with GICS level-4 industry classification as Internet & Direct Marketing Retail, also includes few stocks such as Alibaba and eBay that are classified as internet). Source: CLSA, Factset

USA62%

China34%

Japan2%

Germany1%

Others1%

USA65%

China27%

Japan4%

Korea2%

Germany1%

Others1%

66,146

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Ongoing wave of consumerism is being led

by ecommerce sector

Ecommerce theme outside USA and Chia is still

in its infancy





Around 14 ecommerce stocks have been five-baggers since 2009 As highlighted, the ecommerce sector has been a long-term multibagger both on a weighted (661x) and median basis (24x). The strong returns on a weighted basis are primarily a reflection of Amazon’s performance (658x), which has currently around a 50% weight in the index, followed by Alibaba with 11%. Given most ecommerce stocks were unlisted before the GFC, we highlight performance since 2009. Around 10 stocks have been at least 10-baggers, while 14 have been at least five-baggers. Netflix has been the best performer with 34x returns, followed by Vipshop, Priceline and Start Today, which all have been more than 20-baggers. China’s large-caps ecommerce plays, Alibaba and JD.com, have been listed over the past three years and both have delivered around 50% returns since their IPOs, while Ctrip, which was listed in 2003, has been around an eight-bagger since 2009.

Figure 126

Global ecommerce plays: US$ total returns since 2009


Both Amazon and Priceline have been on a tear since GFC Amazon is the world biggest ecommerce play by market cap, followed by Alibaba. The stock has delivered more than 10x returns since 2008, with market cap soaring from US$45bn to as high as US$476bn recently. Given the large increase in market cap, the hurdle rate to deliver similar future returns is extremely high.


Amazon: Market cap versus sales since 1998 Priceline: Market cap versus sales since 1998


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listing in 2014

Amazon’s market cap increased by 10-times

from US$45bn in 2008 to US$476 currently




Global ecommerce plays While ecommerce is an outstanding theme to play the next leg of consumerism, it must be noted that although the large-cap players such as Amazon and Alibaba will continue to grow, the potential to deliver another 5x return is significantly limited. The hurdle rate has increased significantly as the companies have grown. To identify the next multibagger within the ecommerce space, investors should focus on small-caps from the below list, which have strong prospects of scaling-up in the future. Companies such as Infomart, Webjet and F@N Communication continue to remain below the US$1bn mark, despite being 10-baggers since 2009.

Figure 129

Global ecommerce companies (sorted by market cap) Code Name Cty Sector Mkt cap TR since FY1-FY2 FY1-FY2 Sustg 12MF Fwd PE PE/G NDE

(US$m) 2009 (%)1 ROE EPS Cagr (%) PE Reilly (x) (latest,

(avg, %) (%)

(x) (10Y, %)

%)

AMZN US Amazon US Retailing 457,176 1,757 16.3 29.1 13.0 141.8 100.0 4.9 (59.3)

BABA US Alibaba CN Software 442,639 86 21.9 35.7 25.2 31.2 55.6 0.9 (19.8)

PCLN US Priceline US Retailing 89,063 2,365 29.6 14.9 27.9 22.0 75.3 1.5 18.3

NFLX US Netflix US Retailing 72,590 3,837 21.3 116.8 14.1 96.5 96.7 0.8 85.8

JD US JD.com CN Retailing 50,196 101 9.7 180.4 (4.5) 57.2 0.0 0.3 (21.6)

EBAY US eBay US Software 37,391 494 18.1 8.8 34.0 16.2 49.8 1.9 21.5

CTRP US Ctrip CN Retailing 27,675 788 5.9 nm 4.6 33.0 22.3 nm 15.1

EXPE US Expedia US Retailing 22,753 2,001 16.9 21.8 11.4 24.5 86.6 1.1 (13.3)

4755 JP Rakuten JP Retailing 16,317 132 11.3 51.3 8.0 21.8 29.3 0.4 92.8

ZAL GR Zalando GE Retailing 11,680 86 11.6 21.7 10.6 53.3 18.2 2.5 (69.4)

QVCA US Liberty Interac US Retailing 11,658 820 36.6 20.0 24.0 16.6 55.0 0.8 113.4

MELI US MercadoLibre US Software 10,758 1,430 33.4 30.0 27.2 53.5 42.9 1.8 (57.5)

3092 JP Start Today JP Retailing 9,959 3,249 59.1 27.8 36.5 43.3 100.0 1.6 (55.7)

TRIP US TripAdvisor US Retailing 6,010 58 8.6 (6.5) 10.2 36.2 64.6 nm (47.0)

VIPS US Vipshop CN Retailing 4,669 1,573 34.8 11.7 41.4 11.0 0.0 0.9 0.9

002640 CH Global Top CN Retailing 4,238 725 18.2 73.4 12.0 25.8 16.7 0.4 7.1

MMYT US MakeMyTrip IN Retailing 3,142 16 nm nm 0.0 nm na nm (29.3)

BTOW3 BZ B2W Companhia BR Retailing 2,748 (7) nm nm 0.0 nm na nm 56.2

600640 CH Besttone CN Retailing 2,252 165 7.3 na 0.5 nm na nm (61.9)

2678 JP ASKUL Corp JP Retailing 1,545 102 8.5 135.8 2.7 52.9 90.9 0.4 (52.7)

057050 KS Hyundai Home KR Retailing 1,435 14 9.3 15.0 7.6 12.1 90.9 0.8 (56.4)

TME NZ Trade Me NZ Retailing 1,295 95 13.5 7.7 2.1 17.7 34.3 2.3 13.8

028150 KS GS Home KR Retailing 1,206 491 10.8 7.3 6.3 12.1 88.2 1.7 (77.6)

035760 KS CJ O KR Retailing 1,149 227 15.5 177.6 7.9 10.8 42.0 0.1 39.4

WEB AU Webjet AU Retailing 884 1,555 18.8 30.9 10.0 19.7 58.8 0.6 (18.1)

400 HK Cogobuy CN Retailing 875 15 16.5 29.1 17.4 7.3 1.0 0.3 41.3

002315 CH Focus Tech CN Software 858 (23) 9.8 41.8 2.8 27.5 25.2 0.7 (29.8)

2492 JP Infomart JP Software 813 1,845 16.0 45.5 6.6 48.1 71.1 1.1 (44.6)

2461 JP F@n Comm JP Software 758 1,487 23.1 12.5 16.9 17.2 34.0 1.4 (93.7)

6191 JP Evolable Asia JP Retailing 385 194 26.5 66.5 37.4 42.0 na 0.6 (71.9)

108790 KS Interpark KR Retailing 269 (47) 10.3 193.4 3.6 16.0 5.3 0.1 (19.5)

3688 JP Voyage Gr JP Software 201 (43) 17.6 38.8 17.3 15.6 34.0 0.4 (51.1)

¹ For companies that were listed after 2009, performance is since the IPO. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Identifying next ecommerce multibagger




3. Capturing technological evolution Throughout history, the advent of any new technology with a potential to disrupt the status quo and introduce new growth opportunities has been an ideal source of future multibaggers. Identifying such breakthrough technologies in their nascent form has always been the key. Some prime examples of this over the past decade have been companies exposed to themes such as ecommerce, the internet and social networking. As highlighted earlier, sectors such as consumer staples, which is essentially tied to the economic growth prospects of any given country, could continue to provide strong long-term multibagger opportunities. However, the list is strictly limited to high-growth markets. On the other hand, the benefits of technological disruption could snowball beyond the providers of technology and multiple sectors could witness productivity/efficiency improvement.

Our global head of thematic research Shaun Cochran, in his report The AI Era, published in May 2017, introduces in detail, similar technological disruption that could unfold with the advancement in AI. This technological evolution has repercussions beyond just the tech sector. Shaun reckons AI will fundamentally reshape diverse and unrelated industries. Below we highlight some excerpts from this report and also the potential implications on various global sectors.

Intelligent machines are inevitable and ultimately the source of future global growth. We are fast approaching a world in which humans and artificial intelligence (AI) are bound together in a constant exchange of information and goals - where people and software will not be much use without the other. And while we opine that AI will restore global productivity, the first five to 10 years will see a challenging transition and turmoil in job markets. Diverse and unrelated industries will be fundamentally reshaped. We profile six sectors where the impact is already profound and highlight winning Asian AI innovator stocks.

We are convinced that a truly capable AI ecosystem - one that is as integral to the global economy of tomorrow as the internet is today - will prove to be the most important development in all of human history. If you are unsure what AI is, how it relates to investing or what the key questions and starting assumptions should be, read The AI Era.

Leaders have worried about technology taking jobs for centuries. But logic, economic theory and the long arc of history tell us to ignore the luddites’ fallacy (that technology and automation destroy jobs). If we had listened to it, we would all still be farming. AI will create more jobs than it replaces, but the transition will be painful.

We focus on six industries in which our sector heads see material changes that investors must track, and where we can provide value-added analysis. Areas in order of estimated impact are: autos, healthcare, robotics, financial services, consumer and technology.

Governments will be called upon to ease the pain. Universal basic income will gain support, but we prefer negative income taxes. Bonds will benefit in this disruptive but disinflationary world. It’s probably also dollar-bullish. For other asset classes, the implications are less clear. Tech and robotics will see sustained growth while autos and oil will see massive disruption. We profile 10 Asian stocks that can provide meaningful bottom-up insight into how AI is

Birth of new technology is a source of rewarding

opportunities

AI will create more jobs than it destroys, but the transition will

be painful

We profile six sectors where AI’s impact is

already profound

Sovereign bonds are the winning asset

class; TSMC, SEC and Fanuc are our large-

cap favourites

Shaun Cochran Global Head of Thematic Research [email protected] +82 2 397 8427







being implemented in the real world. Our large-cap profiles include TSMC, SEC, Fanuc, Baidu, Nissan, TCS and Hikvision. Midcap beneficiaries are Xero, Domino’s and Koh Young.

Reshaping industries We focus on six industries where AI is already having an impact, or is likely to do so meaningfully in the foreseeable future. While we won’t pretend this is an exhaustive list, we are confident it will serve as a useful starting point whatever your area of specialisation, be it autos, healthcare, robotics, financial services, consumer or technology.

The core conclusion is: AI is already more advanced in many industries than one might imagine. We were surprised at the breadth of case studies we were able to uncover. We chose to focus on six sectors, partly because they are the areas where we see the greatest potential impact and partly because the related analysts could point to specific developments within their coverage.

Below is a guestimate as to how significant that impact may be in changing the fundamental business models within a sector and how immediate the impact is. This is a structural change that has only just begun, we are happy to discuss with investors where and why they might disagree with these guesses. We have tried to order the discussion as a function of the potential disruption. Our conclusions are that the autos industry will see the biggest change, possibly eliminating dominant players and completely shifting the business model from car sales to mobility services. Healthcare is ideally suited to digitisation, virtualisation and expansive disruption via AI. Robotics, technology, media and telecommunications (TMT), consumer and financial services are all aggressive adopters of AI but will primarily use it to accelerate their current course of development.

Figure 130

Six sectors where AI’s impact is already profound

Source: CLSA

1. Auto: Progressing . . . possibly faster than Autocalypse Our January 2016 Autocalypse report suggested that consumers purchasing true self-driving cars were probably still a 2025+ timeframe, not 2020. Meanwhile, in our August 2016 Choosing lanes report, we wrote: ‘While driverless cars are a hot topic with the media, mass-market adoption of fully autonomous vehicles is at least a decade away, despite some commercialised

TMT Consumer

Financial services

Robotics

Auto

Healthcare

Industryimpact

Timing

Shiftsbusinessmodel

Impactsbusiness

lines

Imminent Later

Six sectors where AI impact is profound

Order driven by timing and magnitude

of expected change

Auto and healthcare will see the most profound change

Geoff Boyd Regional Head of Autos & Steel Research [email protected] +65 6416 7853





city-taxi services starting sooner. In the interim, increasing Adas (advanced driver assistance system) content is a growth opportunity and we expect a 38% global-revenue Cagr for the segment from 2015 to 2020. Our numbers are ahead of industry forecasts with consensus in the 20-30% range, but regulation and OEM branding are dual drivers that will help Adas technology become the standard package earlier than many of our peers predict.’

Figure 131

Levels of autonomous vehicles

Level 1 - Function specific automation: Automation of specific control functions, such as cruise control, lane guidance and automated parallel parking. Drivers are fully engaged and responsible for overall vehicle control (hands on the steering wheel and foot on the pedal at all times).

Level 2 - Combined function automation: Automation of multiple and integrated control functions, such as adaptive cruise control with lane centring. Drivers are responsible for monitoring the roadway and are expected to be available for control at all times, but under certain conditions can be disengaged from vehicle operation (hands off the steering wheel and foot off the pedal simultaneously).

Level 3 - Limited self-driving automation: Drivers can cede all safety critical functions under certain conditions and rely on the vehicle to monitor for changes in those conditions that will require transition back to driver control. Drivers are not expected to constantly monitor the roadway.

Level 4 - Full self-driving automation: Vehicles can perform all driving functions and monitor roadway conditions for an entire trip, and so may operate with occupants who cannot drive and without human occupants.

Source: CLSA, NHTSA (Aas shown in Litman, Todd, Victoria Transport Policy Institute. “Autonomous Vehicle Implementation Predictions.” 24 August 2015).

2. Healthcare: Digital doctors The healthcare industry is uniquely positioned to benefit from the rise of AI. Ideal starting sector conditions are: supply-constrained, data-rich environments with a high dependence of cognitive processes. Technologies that can speed, and or lower, the cost of decisions are likely to increase demand in these industries rather than shrink revenue. This absolutely describes healthcare. The additional upside is that improvements in qualitative healthcare outcomes can have a quantitative impact in the rest of the economy. We would argue that the broad gamut of solutions already seeking commercialisation in the market validates our view.

Figure 132

The broader spectrum of potential commercialisation with time

Source: CLSA, IBM Watson, Wikimedia commons, GRAIL, HealthTap, Skin cancer foundation

IBM Watson using machine learning to find an application for Parkinson’s disease for an already proven drug

IBM Watson for Oncology, an actual product used in hospitals including Jupiter Medical Centre in Florida and University of Tokyo

AI can better predict heart attacks than humans (built by University of Nottingham researchers)

Narrow application

AI can diagnose skin cancer better than dermatologists (built by Stanford University researchers)

Mobile app triaging like a real doctor –holds potential to become the future general practitioner

GRAIL combining liquid biopsy with machine learning to truly cure cancer

General application

Broader application

IBM Watson Health

David Stanton Head of Regional Healthcare Research [email protected] +61 2 8571 4247




3. Robotics: Learning machines Big data and machine learning are extending the potential, impact and capability of industrial-automation solutions. We have seen first-hand how the internet of things (IoT) is taking centre stage at all industrial trade shows, and how machine learning and connected services enhance manufacturers’ productivity, efficiency and quality. With payback periods often below two years and quantifiable results, we expect rapid industry adoption. Companies with global scale have a significant advantage worth embracing, and those selling sensors and machine vision will benefit as IoT requires a higher level of data collection. Fanuc and Keyence are our top thematic picks.

The aggregate value of new connected services in factory automation will increase from less than US$2bn today to US$25bn by 2023, enjoying a 44% Cagr. Manufacturers’ insatiable appetite for higher productivity and lower cost of ownership will drive growth. In factory automation, the most important new IoT services will be predictive maintenance; efficiency optimisation; visualisation and advanced monitoring; and self-programming.

4. Financial services: Smart robo-banks (New robber banks) Intuitively, financial services, banking, insurance and asset management sit right at the epicentre of the looming tsunami of AI disruption. We would concede financial services are particularly prone to bouts of speculation about technology-driven Armageddon - remember Y2K, ATM/internet banking displacement of branches and more recently blockchain! However, having done the work, we conclude the risks and opportunities are real. Traditional business models are driven by high volumes of low-value transactions that generate material amounts of data and drive product offerings and customer-service processes. There are also severe consequences for inconsistent decisions (ie, bank earnings often falter, but they also plunge and banks do fail) and there are direct linkages between regulatory capital intensity and earnings volatility.

5. Consumer: Intelligent shopping The motivations for shopping clearly vary significantly from person to person. The penniless student has a different thought process to the CEO on holiday. Retail has always sought to provide different options to different buyers; changing the offerings in different stores to provide the right one. However, the big difference in ecommerce and physical retailing is mostly in the amount of data that the consumer is sharing and the ability of the retailer to capture, analyse and act on it. Brands are equally keen to discover more about the most effective use of their marketing budget, and build the best products. In this section we look at how AI is already starting to influence the consumer sector as follows, and give one example or more, in each case.

1. Helping brands build the best product (Unicharm)

2. Optimising inventory (Fast Retailing/Coupang)

3. Improving the offer to consumers (Ebates/Rakuten/Naver)

4. Highlighting the offer to consumers at the right time (Askul/Korean Department stores)

5. Making it easier to find what people want (NTT)

6. Delivering it more efficiently (Yamato/LINE)

Morten Paulsen Head of Japan Research [email protected] +81 3 4578 8052

Brian Johnson [email protected] +61 2 8571 4252

Oliver Matthew Head of Asia Consumer Research [email protected] +81 3 4578 8041




6a. Tech: AI’s impact on the server market The server market bifurcated into a stagnant (or slightly declining) Wintel segment for traditional enterprises and a booming Linux-Tel segment adopted by internet hyperscale firms starting in 2008-10. The internet segment is now adopting new processors that are better suited to some types of workloads - deep learning is the common threat to this new segment. We believe this ongoing evolution will benefit two types of firms: the Chinese server vendors such as Huawei and the Taiwanese customised server designers, Inventec, Quanta and Wistron.

6b. Tech: AI’s impact on semiconductors With AI, machine learning and cognitive computing gaining critical mass, a seachange in IT architecture is taking place as new types of processors are developed to carry out massive, complex computations. This will benefit the semicon ecosystem on several fronts: from foundry, outsourced assembly and testing (OSAT), to intellectual-property and electronic-design automation tools. Leaders in each segment with the capability to design and manufacture these advanced chips will be winners.

Playing the AI theme AI offers new growth for tech, supporting our bullish view on TSMC and SEC. Our preferred component plays are Hikvision and Koh Young. Autos manufacturers will see profits contract; we profile Nissan to highlight the Asian implications. Autonomous cars are negative for oil prices and all companies where earnings are a direct function of that. The robotics industry is not ex-growth and will see intelligence-related solutions commercialising from this year. Fanuc is key play on the theme.

Figure 133

10 focus stocks on AI (sorted by market cap) Code Name Market Mkt cap 3M ADTO 17F 18F

(US$m) (US$m) PE (x) PE (x)

005930 KS Samsung Electronics Korea 283,600 456.6 7.9 7.0

2330 TT TSMC Taiwan 180,895 183.0 16.5 14.9

TCS IN Tata Consultancy India 75,279 44.1 18.4 17.1

BIDU US Baidu China 61,015 575.9 31.5 24.1

7201 JP Nissan Motor Japan 41,749 117.2 7.0 6.9

002415 CH Hikvision China 41,723 226.5 31.1 24.0

6954 JP Fanuc Japan 37,276 152.4 28.4 26.1

DMP AU Domino's Pizza Australia 3,147 19.8 29.4 24.0

XRO AU Xero Australia 2,651 1.2 nm 235.9

098460 KS Koh Young Tech Korea 726 2.5 25.4 19.9

Source: Factset, CLSA

Sebastian Hou, CLST Taiwan, Technology [email protected] +886 2 2326 8165

Nicolas Baratte Head of Technology Research [email protected] +852 2600 8325





Global stocks to play robotics and automation theme While application of AI will have potentially widespread implications across diverse sectors, the growing adoption of automation will certainly have a direct impact on the companies providing these services. Below we identify some of the robotics and automation firms across the world by going through the business description of each company. For some, automation/robotics could be a small part of the overall business currently, however, as global corporations start to embrace the automation theme, the growing demand could lead it to become the dominant revenue driver in the near future.

Figure 134

Global companies to play robotics and automation theme (sorted by market cap) Code Name Cty Sector Mkt cap FY1-FY2 ROIC FY1-FY2 Sustg 12MF Fwd PE PE/G NDE

(US$m) ROE (FY0, %) EPS Cagr (%) PE Reilly (x) (latest,

(avg, %) (%) (x) (10Y, %) %)

SIE GR Siemens GE Cap gds 112,032 16.8 7.4 11.9 7.8 13.9 74.1 1.2 47.1

HON US Honeywell Intl US Cap gds 103,848 28.5 15.9 8.5 16.8 18.1 99.0 2.1 32.7

6861 JP Keyence JP Tech HW 63,036 14.2 97.0 30.5 11.4 35.9 95.0 1.2 (53.7)

ABBN VX ABB CH Cap gds 49,315 19.5 11.2 3.4 4.2 17.5 67.5 5.2 14.1

SU FP Schneider Electric FR Cap gds 47,232 11.0 8.2 7.1 3.4 16.1 84.2 2.3 24.7

6954 JP Fanuc Corp JP Cap gds 37,276 10.8 21.0 11.5 4.3 26.6 29.0 2.3 (55.5)

EMR US Emerson Electric US Cap gds 37,131 22.5 13.0 (1.2) 7.6 20.1 78.0 nm 25.4

6503 JP Mitsubishi Electric JP Cap gds 32,078 11.5 13.5 11.6 8.5 14.0 14.5 1.2 (17.5)

ETN US Eaton Corp US Cap gds 31,421 13.6 8.2 10.0 6.3 14.3 55.7 1.4 49.9

6273 JP SMC Corp JP Cap gds 23,010 11.3 20.2 7.5 9.1 19.8 9.3 2.6 (46.1)

267250 KS Hyundai Robotics KR Semis 23,000 16.7 na na 16.6 5.7 na nm nm

ROK US Rockwell Automation US Cap gds 20,561 43.7 25.8 10.9 21.0 22.1 72.7 2.0 (35.5)

AME US AMETEK US Cap gds 14,427 16.6 10.7 10.4 14.2 23.1 96.0 2.2 52.5

2308 TT Delta Electronics TW Tech HW 13,904 16.2 17.6 11.1 5.1 19.1 72.8 1.7 (36.9)

6645 JP OMRON Corp JP Tech HW 10,694 11.9 13.0 17.1 7.7 19.7 15.0 1.2 (26.6)

CDNS US Cadence Design US Software 10,418 34.4 22.3 11.9 26.7 25.2 20.7 2.1 (1.6)

SKFB SS SKF AB SE Cap gds 8,999 18.4 8.5 19.3 7.5 13.1 53.2 0.7 45.7

6506 JP Yaskawa Electric JP Tech HW 7,889 16.1 10.1 22.3 10.5 23.5 36.4 1.1 (0.2)

9962 JP Misumi Group JP Cap gds 7,210 15.2 17.3 23.8 10.3 29.9 51.9 1.3 (34.1)

4684 JP OBIC JP Software 5,523 13.2 64.5 7.2 9.0 23.4 83.7 3.3 (53.5)

KU2 GR KUKA GE Cap gds 5,470 14.6 11.3 11.5 10.5 33.8 29.5 2.9 11.5

300024 CH SIASUN CN Cap gds 5,032 8.7 6.1 20.0 7.9 60.1 51.4 3.0 (4.4)

7012 JP Kawasaki Heavy JP Cap gds 4,980 8.9 4.0 31.0 5.6 13.5 6.9 0.4 82.0

FLS US Flowserve Corp US Cap gds 4,955 12.1 6.8 (4.0) 5.8 20.9 73.9 nm 63.7

6268 JP Nabtesco Corp JP Cap gds 4,333 13.8 13.8 14.6 7.4 20.6 43.1 1.4 (11.1)

6481 JP THK JP Cap gds 4,213 8.7 8.7 27.6 4.9 18.2 10.1 0.7 (20.3)

COB LN Cobham UK Cap gds 4,112 12.2 (37.9) (13.7) (16.7) 23.7 100.0 nm 46.4

6841 JP Yokogawa Electric JP Tech HW 4,056 10.2 12.3 6.6 8.2 15.8 6.0 2.4 (15.0)

1590 TT Airtac Intl TW Cap gds 2,407 24.7 11.2 37.6 10.3 21.5 75.0 0.6 77.1

2049 TT HIWIN Tech TW Cap gds 2,388 16.2 4.4 48.3 9.2 26.7 91.7 0.6 73.3

1504 TT Teco Electric TW Cap gds 1,858 7.4 9.4 10.1 3.5 14.0 76.1 1.4 (9.0)

012450 KS Hanwha Techwin KR Cap gds 1,800 5.3 5.4 (35.1) 4.7 15.3 31.0 nm 37.4

Note: For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: CLSA, Factset

Stocks to play robotics and automation theme




4. Capturing market share vs margins leaders The decision between growing market share versus defending margins is the crucial differentiator between companies over the long term. Typically companies focused on growth by expanding market share could do it at the expense of margins. The Asian margin/profitability decline during the pre-GFC period, despite improvement in asset turnover, is a classic example of this. At the company level, such behaviour is typically observed during the early-growth phase of the business cycle, when the company has the highest potential to evolve into a multibagger. However, reckless investment decisions could lead to chronic margin destruction, which is indeed counterproductive for future earnings growth. On the other hand, margin leaders are typically established companies which consistently strive to defend margins, but may or may not focus on growth.

The capturing-market-share basket has delivered strong topline growth over the past three years and also delivered impressive YoY outperformance over the same period. However, margin leaders have come back strongly over the past two years. Against the backdrop of peaking margins, defending current margins will be crucial and therefore in the medium term, margin leaders could remain in favour. Nonetheless, for investors looking for multibaggers, the capturing-market-share basket, which essentially consists of companies with strong track records of delivering growth and the promise to deliver more in the future, is an ideal investment strategy from an Asian perspective.


Performance - Margin leaders vs capturing market share YoY OPF - Margin leaders vs capturing market share

Note: Performance is calculated based on freefloat adjusted market cap. Source: Factset, CLSA


MSCI USA vs Asia ex-JP: Ebitda margin MSCI AsiaxJ (ex-fin): DuPont® breakdown of ROEs

Note: Ratios are bottom-up aggregated with freefloat adjustment based on current universe. Source: Factset, CLSA

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Capturing markets-share basket refers to firms

with strong promise to deliver growth . . .

. . . while margin leaders are the one who can

defend their margins successfully

Capturing market share basket consist of

potential multibaggers




Asian margin leaders Competitive advantage is hard to maintain but some stocks have managed to keep a strong margin profile over the long term and with lower variability. Indeed, better variability is a key criterion when looking for margin leaders, along with rising trends.

The screening criteria for our margin-leaders list are as follows:

Broader ex-finance universe with market cap more than US$2bn

Ebitda margin forecast (FY1-FY2 average) > past 10Y average

Low margin variability with coefficient of variation (10-year CoV) of Ebitda margins less than 50%

Positive slope of margins over the past 10 years

Figure 139

Asian margin leaders (sorted by market cap) Code Name Cty Sector Mkt cap Ebitda margin (%) ROE 12M trl PB (x)

(US$m) FY1-FY2 L10Y L10Y CoV FY1-FY2 (x) 10Y Reilly avg avg slope (x) avg, %) (%) BABA US Alibaba CN Software 428,095 46.5 32.6 4.12 0.40 21.9 8.9 82.4

005930 KS Samsung Electronics KR Tech HW 283,600 31.9 19.8 1.08 0.19 19.5 1.6 62.6

2330 TT TSMC TW Semis 180,895 66.2 60.7 0.87 0.05 23.3 3.7 72.1

AVGO US Broadcom SG Semis 101,347 52.7 26.8 2.14 0.32 28.4 4.8 28.0

ITC IN ITC IN FBT 53,476 36.6 35.2 0.50 0.05 27.0 7.4 29.9

CSL AU CSL AU Pharma 45,589 32.9 31.3 0.24 0.08 41.5 13.8 81.8

000660 KS SK Hynix KR Semis 41,659 61.8 39.1 2.42 0.30 31.0 1.6 51.0

HUVR IN Hindustan Unilever IN HPC 40,276 20.4 14.9 0.55 0.12 93.0 38.8 100.0

1928 HK Sands China HK Cons svcs 36,154 32.3 26.7 1.59 0.21 37.0 7.8 67.0

HCLT IN HCL Tech IN Software 19,426 21.8 20.9 0.28 0.12 24.1 nm na

914 HK Conch CN Materials 18,813 31.1 29.0 0.30 0.15 14.1 1.6 6.5

PWGR IN Power Grid IN Utilities 17,951 88.7 84.0 0.78 0.03 17.1 2.2 40.8

SCC TB Siam Cement TH Materials 17,602 18.8 13.7 0.16 0.26 19.4 2.2 39.3

CPALL TB CP All TH Fd & drug 16,538 8.1 7.4 0.39 0.28 33.3 9.1 48.8

ADVANC TB AIS TH Telecom 16,175 44.0 37.1 1.97 0.18 62.5 11.6 50.5

288 HK WH Group CN FBT 14,866 10.4 7.7 0.37 0.38 16.6 2.2 96.0

AMC AU Amcor AU Materials 14,706 16.3 11.0 0.79 0.24 72.2 16.4 98.7

YUMC US Yum China CN Cons svcs 14,382 17.6 13.7 0.79 0.10 21.2 5.3 na

051900 KS LG H&H KR HPC 14,154 17.4 13.8 0.50 0.15 22.2 5.5 14.7

2308 TT Delta TW Tech HW 13,708 14.2 13.8 0.22 0.11 16.2 3.2 44.4

RHC AU Ramsay Healthcare AU Healthcare 12,027 15.4 13.4 0.23 0.07 25.5 6.8 77.4

1099 HK Sinopharm CN Healthcare 11,404 4.3 4.0 0.13 0.11 14.7 2.1 20.1

1216 TT Uni-President TW FBT 11,189 10.8 8.5 0.19 0.10 13.8 3.2 70.5

2196 HK Fosun Pharma CN Pharma 10,914 18.1 14.9 1.30 0.14 14.2 2.4 50.2

2313 HK Shenzhou Intl CN Cons dur 10,522 28.7 25.3 0.74 0.16 21.9 4.2 86.6

669 HK Techtronic HK Cons dur 8,974 12.5 9.5 0.47 0.15 18.7 3.4 79.1

151 HK Want Want CN FBT 8,883 25.8 23.9 0.46 0.10 25.1 4.4 9.9

1169 HK Haier Electronics CN Cons dur 7,604 5.9 4.5 0.11 0.19 16.6 2.6 24.4

CDH IN Cadila Healthcare IN Pharma 7,553 24.8 19.8 0.34 0.12 26.4 6.4 62.8

161390 KS Hankook Tire KR Autos 6,601 22.0 21.9 1.05 0.08 12.6 1.2 17.4

PIDI IN Pidilite IN Materials 6,501 21.4 16.5 0.50 0.16 24.4 11.3 74.6

1910 HK Samsonite HK Cons dur 5,481 17.6 13.3 1.06 0.34 17.8 3.5 73.6

DMP AU Domino's AU Cons svcs 3,147 22.9 13.9 1.13 0.26 53.0 10.1 50.0

Note: CoV = 100*standard deviation/average. For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA

Strong margin profile with low variability




Asian companies capturing market share Companies with solid free-cashflow-generating ability are ready to exploit value-accretive opportunities, regardless of their stage in the business lifecycle, while those with weaker cashflows struggle for survival. Such companies outperformed during the last downturn and came out even stronger. In the figure below, we highlight stocks that have grown their topline, even during the GFC, while generating positive FCF. These companies withstood the strong test presented by the GFC and have managed to thrive since the crisis. Even over the next two years, they are expected to deliver strong earnings growth. The screening criteria are as follows:

Positive YoY sales growth during GFC (2008/09)

Positive free cashflows: FY0 and last 5-year average

Double-digit YoY sales growth forecast for 17F and 18F

EPS Cagr (FY1-FY2) greater than 10%

Net gearing less than 50%

Figure 140

Asia Pacific ex-Japan (ex-finance): Growing while generating free cashflow (sorted by 18F sales growth) Code Name Cty Sector Mkt cap Sales growth (%) FCF conv (%) EPS Cagr Net gearing

(US$m) 08A 09A 16A 17F 18F FY0 L5Y avg (FY1-2, %) (latest, %) XRS US TAL Edu CN Cons svcs 8,689 319.2 86.1 68.3 59.5 47.7 234.2 167.3 58.3 (102.5) MYEG MK My E.G. Services MY Software 1,758 72.0 19.8 99.1 30.0 40.1 7.9 67.0 36.9 (10.9) 700 HK Tencent CN Software 394,835 87.2 73.9 47.7 51.7 32.8 118.8 122.6 39.5 (6.8) 175 HK Geely CN Autos 21,123 3,107 228 78.3 63.7 27.4 107.5 85.6 51.1 (66.9) 1530 HK 3SBio CN Pharma 3,162 35.5 30.3 67.2 28.1 26.4 81.9 106.0 28.7 31.0 CTD AU Corporate Travel AU Cons svcs 1,825 50.1 15.8 32.0 23.0 25.1 150.1 88.3 19.0 (18.0) EDU US New Oriental Edu CN Cons svcs 12,934 45.6 32.0 21.7 24.5 24.6 204.6 162.7 30.1 nm SRCM IN Shree Cement IN Materials 9,308 28.5 34.0 52.9 20.0 24.2 68.5 67.6 31.0 7.3 NTES US NetEase CN Software 36,062 39.4 21.8 67.4 41.3 24.0 123.6 112.6 15.2 (82.1) JBH AU1 JB Hi-Fi AU Retail 2,320 42.7 27.3 8.3 42.3 20.7 75.5 90.7 8.2 56.9 2020 HK Anta Sports CN Cons dur 10,409 54.8 27.0 20.0 19.6 18.2 77.1 86.3 18.1 (77.6) WHIRL IN Whirlpool IN Cons dur 2,353 9.9 28.8 14.6 19.9 17.9 111.4 86.7 24.8 nm TTAN IN Titan IN Cons dur 8,511 27.9 22.0 15.1 19.1 17.7 187.7 43.8 25.6 nm 1093 HK CSPC Pharma CN Pharma 9,408 37.0 3.0 8.6 16.3 16.1 81.7 66.0 26.6 (20.7) MSIL IN Maruti Suzuki IN Autos 35,400 12.5 46.3 18.2 18.9 16.1 91.2 74.9 16.9 (4.7) APNT IN Asian Paints IN Materials 16,986 24.0 22.3 7.1 17.5 15.8 43.5 65.4 15.1 (26.3) VGRD IN V-Guard IN Cap gds 1,180 13.9 43.3 15.5 13.3 15.6 49.7 69.5 21.8 (16.0) 867 HK CMS CN Pharma 4,196 28.2 30.6 37.9 20.5 15.4 71.9 45.7 18.1 18.2 SUNTV IN Sun TV IN Media 4,422 19.5 39.8 7.0 12.4 15.2 104.6 72.6 16.1 (33.1) 570 HK China TCM CN Pharma 2,464 14.1 49.2 76.1 16.4 15.2 21.9 34.2 18.4 13.0 1109 HK CR Land CN Property 20,372 64.9 77.8 5.2 13.3 14.3 69.7 109.0 17.0 29.7 3339 HK Lonking CN Cap gds 1,340 15.8 12.3 6.6 27.1 13.8 319.9 200.0 20.2 7.4 036570 KS NCsoft KR Software 7,044 5.2 83.0 17.3 74.6 13.8 33.9 81.4 42.2 (35.7) TNE AU Technology One AU Software 1,284 40.6 11.1 13.9 14.3 13.4 94.0 104.4 18.4 (46.1) 1999 HK Man Wah HK Cons dur 3,589 27.3 49.3 6.2 23.8 13.3 67.6 53.9 17.6 (21.9) EXID IN Exide IN Autos 2,671 14.3 16.9 17.7 13.2 12.9 69.3 76.4 15.6 (34.1) JFC PM Jollibee PH Cons svcs 4,943 13.4 9.3 13.0 13.3 12.2 130.5 97.4 13.4 (9.5) UNVR IJ Unilever Indo ID HPC 27,618 24.2 17.1 9.8 11.1 11.7 76.4 85.5 14.2 1.0 KLBF IJ Kalbe Farma ID Pharma 6,180 12.5 15.4 8.3 9.8 10.8 47.0 45.4 11.0 (26.1) 2383 TT Elite Material TW Tech HW 1,731 3.3 10.8 5.7 13.5 10.4 75.1 78.3 18.1 (37.5) WNS US WNS IN Software 1,892 18.9 11.8 7.2 22.8 10.1 131.8 145.9 12.9 (17.6) TLKM IJ Telkom ID Telecom 35,394 8.0 5.5 13.5 11.4 10.0 98.7 105.2 17.2 16.8 1 Net gearing criteria relaxed. Note: For Australia and New Zealand companies, FY1 refers to 18F and for others FY1 refers to 17F. Source: Factset, CLSA Source: CLSA, Factset

We look for stocks that flourish during downturns

while others worry about survival

Screening for positive FCF companies that grew

sales during GFC and are set to grow in 2017-18




5. Ecommerce/internet - Analysing the potential threats As highlighted in the previous case studies, ecommerce and the internet are the most prominent themes to play the next leg of consumerism. However, investors must note that for large-cap companies such as Alibaba and Tencent, the potential to deliver another 3x returns are significantly limited. The hurdle rate has increased significantly as the companies have grown bigger. Moreover, if companies fail to sustain growth momentum, their premium valuations could come off. We analyse the potential risks faced by these two stocks by comparing them against previous megacaps and their experience of growth slowdown, and the implications on valuations and price.

Tencent and Alibaba: Time to take profit? Global large-caps tied to ecommerce and internet themes have already witnessed a market-cap surge beyond US$400bn (Tencent is close). Especially, the acceleration has been extremely steep in recent few years.


Market cap trend: Tencent versus Facebook Market cap trend: Alibaba versus Amazon


Tencent has been a 350-bagger since 2004 Tencent has been a classic multibagger delivering 350x returns since 2004, during which, its sales and profit multiplied by 202x and 140x.

Figure 143

Tencent: Price vs sales vs net profits since 2004


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Tencent has been 351-bagger since 2004

For Alibaba and Tencent, the potential to deliver another 3x returns are

significantly limited

Large-caps tied to ecommerce/internet themes have seen a

market cap surge beyond US$400bn

Tencent has been a classic multibagger

delivering 350x returns since 2004

Over the same period, its sales and profit have

increased by 202x and 140x




What are the potential obstacles? While there are always several threats any company/industry inherently is exposed to, in the case of Tecent and Alibaba, the biggest existential concerns are their size and rich valuations which are reliant on their ability to maintain high levels of growth. Any catalyst, be it regulatory or company-specific, threatening the sustainability of future growth, could prove to be catastrophic for their future price action. We analyse previous episodes.

1. Size is the biggest hindrance In order to understand the implications of size on future price action, we analysed all the large-caps that have surpassed the US$300bn market-cap barrier. In the figure below, we highlight 19 such examples and their price performance since crossing the threshold. Only three out of 19 have become double-baggers, while five have delivered negative returns.

Figure 144

US$ total returns after surpassing US$300bn Mcap threshold


2. Premium valuations are not sustainable if the growth slows down Both Tencent and Alibaba are trading at valuations that are not only expensive relative to the underlying market valuations but also relative to their own history. Tencent at c.35x and Alibaba at 32x are both above +1sd levels and have witnessed 37% and 25% reratings this year alone.


Tencent: 12-month forward PE bands since 2010 Alibaba: 12-month forward PE bands since 2010


265 256

163

82 55 39 35 35 29 24 23 8 4 3

(5)(30)

(55)(79) (89)

(150)(100)(50)

050

100150200250300

App

le

Mic

roso

ft

Exxo

n

Alp

habe

t

Wal

-Mar

t

Ber

kshi

re BP

J&J

ICBC

Pfiz

er GE

JPM

orga

n

Vod

afon

e

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obile

Cis

co

Petr

oChi

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Gaz

prom

Eric

sson

US$ total returns after surpassing US$300bn Mcap(%)

Jan-

11 Oct

13

Sep

00Nov

98

Mar

00

Oct

13

Dec

98

Jun

00

Oct

07

Sep

14

Sep

99

May

14

Dec

99

Nov

07

Sep

07

Dec

99

Sep

07

Jan

00

Mar

00

Yellow box represents the month during which the stock surpassed the US$300bn mark

Avg, 28.5

+1SD, 33.3

-1SD, 23.7

+2SD, 38.1

-2SD, 18.9

15

20

25

30

35

40

45

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

12M fwd PE (x)


Avg, 27.1

+1SD, 31.7

-1SD, 22.5

+2SD, 36.3

-2SD, 17.915

20

25

30

35

40

45

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

12M fwd PE (x)


Analysing the potential threats

After surpassing US$300bn Mcap mark,

only three out of 19 could become double bagger. . .

. . . while five delivered negative returns

Tencent and Alibaba trading above +1sd

valuation level




Valuations have tracked growth strongly Both Tencent and Alibaba are trading at expensive valuations, but the rerating has come on the back of a strong acceleration in earnings-growth momentum over the past few years. Indeed, if growth momentum continues, the companies will remain attractive investments. At the same time, any slowdown in growth momentum historically has come in conjunction with a valuation derating. Tencent derated from 36x to 17x during 2010-12, when growth decelerated from 40% to 20%. Similarly, Alibaba derated from 40x to 20x during 2014-15, when growth marginally slowed. Therefore, if these companies are exposed to a growth slowdown from current 35% expectations, both are vulnerable to a valuation-derating-driven price correction in the near term.


Tencent: fwd PE and 1Y forward growth Alibaba: fwd PE and 1Y forward growth


Is 35% earnings growth sustainable? In order to understand the implications of size on the growth environment, we took the same set of large-cap companies that managed to surpass the US$300bn mark and analysed their growth track record. The analysis highlights that after surpassing the US$300bn market-cap mark, 14 of the 17 stocks witnessed a growth slowdown, with average growth decelerating from 26.6% over the previous five years to 10.5% over the next five.

Figure 149

EPS growth (next 5Y vs previous 5Y) of companies after reaching US$300bn Mcap


15

20

25

30

35

40

45

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

171yr fwd growth

12MF PE (x)


Correlation = 0.40


15

20

25

30

35

40

45

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

12MF PE (x)

1yr fwd growth



correlation = 0.59

13.8

15.8

19.0

8.9

(10.

5)

23.3

(5.1

) 12.7

(2.0

)

8.2

10.1

8.2 14

.5

20.5

12.6

2.1

25.7

(20)

0

20

40

60

80

100

Gaz

prom

App

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Cis

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ICBC

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BP

Previous 5Y EPS Cagr

Next 5Y EPS Cagr

(%) After surpassing US$300bn Mcap mark, 14 of the 17 stocks have witnessed growth slowdown with average growth decelerating from 26.6% over the previous five years to 10.5% over the next five

Historically slowdown in growth momentum has

come in conjunction with valuations derating

After surpassing US$300bn mark, 14 of the 17 stocks have witnessed

growth slowdown . . .

. . . with average growth falling from 26.6% over

the previous five years to 10.5% over the next five




Margin deterioration is an ominous sign for Tencent Both Tencent and Alibaba are well known for their ability to deliver strong growth on a consistent basis. For instance, Tencent’s sales growth has remained in excess of 30% since 2006. Delivering such a high level of growth on a consistent basis is indeed a phenomenal feat. This trend was matched by another internet company - Baidu, which delivered sales growth in excess of 30% on a consistent basis during 2003-15, but witnessed a steep fall in growth to 6% in 2016. Preceding the topline growth decline, Baidu has also witnessed an operating-margin decline since 2014. During this period, the stock price corrected and failed to recover to the previous peak. This is important from Tencent’s perspective as well, because despite delivering strong growth, it has witnessed margin contraction over the past 12 months. The operating margins have fallen from 35.5% in June 2016 to around 30.5% based on the latest financials. On the other hand, Alibaba has witnessed a strong margin recovery from 27% two years ago to 32% now.


Baidu: Price versus operating margin Tencent and Alibaba: Operating margin trend


A structural story, but beware of growth slowdown Alibaba is already the dominant ecommerce player in China, where the online retail share is still rising. However, a key risk is that the sector could face headwinds similar to the telecom stocks, whose prices peaked despite low and rising mobile penetration. For example, Bharti Airtel’s share price peaked in 2007 while mobile penetration in India was still only 20%. While the mobile penetration has increased to 88%, the stock never reached previous highs.


Internet (as a % of retail sales) Mobile phone penetration versus stock price

Source: CLSA, Factset Source: IDC, statista, ITU, GSMA, FactSet, CLSA

10

15

20

25

30

35

40

140150160170180190200210220230240

Dec

13

Mar

14

Jun

14

Sep

14

Dec

14

Mar

15

Jun

15

Sep

15

Dec

15

Mar

16

Jun

16

Sep

16

Dec

16

Mar

17

Jun

17

Price Operating margin (RHS) (%)

35.5

30.5

26.8

32.2

25

27

29

31

33

35

37

39

41

43

45Ju

n 11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

Jun

15

Dec

15

Jun

16

Dec

16

Jun

17

Tencent AlibabaOperating margin (%)

10.4

17.1

0

2

4

6

8

10

12

14

16

18

20

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

USA

China

Internet (% of retail sales)

Internet sales already a significant portion of overall sales in China

19.8

88.2 2461

2107

0

500

1000

1500

2000

2500

3000

0102030405060708090

100

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

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07

Dec

08

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09

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10

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11

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12

Dec

13

Dec

14

Dec

15

Dec

16

Mobile phone penetration (India)

Bharti Airtel (RHS)

(%) (Price index)

Bharti Airtel stockprice peaked in Oct'07 when mobile phone penetration in India was just 20%

Tencent has been witnessing operating

margin decline over the past 12 months

Historically margins decline did not bode well

for Baidu price action

Telecom stocks peaked in 2007, despite strong

increase in subscribers /data usage since then




What if growth slows down? Taking into consideration past cases, it is important for investors to be mindful of the implications of a growth slowdown on valuations and prices. Below is a simple scenario analysis on both Tencent’s and Alibaba’s price action over the next three years, calculated based on current valuations using 12-month forward consensus EPS forecasts.

Tencent: Price implications if growth slows Over the next 12 months, Tencent is expected to deliver 35% earnings growth and is trading close to 35x. Historically, the relationship between the two variables has been tight. Below we highlight that from current levels, if Tencent earnings growth decelerates to a 20% Cagr over the next three years and trades at in-line valuations of 20x PE, the stock would deliver -4% returns. A slightly higher 20% return, if it trades at 25x valuations.

Figure 154

Tencent price up/downside1 scenario analysis based on growth and valuations

1Based on 25 Aug 2017 closing price and 12MF EPS forecast of 7.74 CNY. Source: CLSA, Factset

Alibaba: Price implications if growth slows down A similar analysis for Alibaba highlights 16% returns over the next three years, if growth slows to 20% and PE derates to 20x.

Figure 155

Alibaba price up/downside1 scenario analysis based on growth and valuations

1Based on 25 Aug 2017 closing price and 12M forward EPS forecast of 38.29 CNY. Source: CLSA, Factset

5 10 15 20 25 30 35 40

5 (84) (82) (79) (76) (73) (70) (66) (62)

10 (68) (63) (58) (52) (46) (39) (32) (24)

15 (52) (45) (37) (28) (19) (9) 2 14

20 (36) (26) (16) (4) 8 22 36 52

25 (20) (8) 5 20 35 52 70 90

30 (4) 11 26 44 62 83 104 128

35 12 29 47 68 89 113 139 166

40 28 47 68 91 116 143 173 204

45 44 66 90 115 143 174 207 242

50 60 84 111 139 170 204 241 280

Next 3-year EPS cagr (%)

12

MF

PE

(x)

Price up /downside (%)

5 10 15 20 25 30 35 40

5 (81) (78) (75) (71) (67) (63) (59) (54)

10 (61) (55) (49) (42) (35) (26) (18) (8)

15 (42) (33) (24) (13) (2) 10 24 38

20 (22) (11) 2 16 31 47 65 84

25 (3) 12 27 45 64 84 106 130

30 16 34 53 74 96 121 147 176

35 36 56 78 103 129 158 189 222

40 55 78 104 132 162 194 230 268

45 75 101 129 161 195 231 271 314

50 94 123 155 190 227 268 312 360

Price up /downside (%)

Next 3-year EPS cagr (%)

12

MF

PE

(x)

Scenario analysis to understand implications

of growth slowdown on prices

Negative returns if the growth slows down to

20% Cagr over the next years and PE derates 20x

Some 20% returns over the next three years if growth slows down to

20% and PE at 25x

Relatively better returns profile for Alibaba

To achieve 16% returns over the next three years, if growth falls to 20% and

PE derates to 20x


Appendix Microstrategy


Appendix: Multibagger strategy Below we highlight the multibagger strategy results for different markets and sectors.


Multibagger strategy (mkt): Avg hit rate (since 2000) Multibagger strategy (sctr): Avg hit rate (since 2000)

Note: Broader APxJ universe with market cap of more than US$100m. Multibaggers are stocks that have tripled while outperforming over the next 5 years. Source: CLSA, Factset


Multibagger strategy (mkt): Avg hit rate (before 2010) Multibagger strategy (sctr): Avg hit rate (before 2010)



Multibagger strategy (mkt): Avg hit rate (since 2010) Multibagger strategy (sctr): Avg hit rate (since 2010)


29

19

15

12

18

10

16

7

38

26

23

20 2018 18

5

0

5

10

15

20

25

30

35

40

India China AsiaxJ HK Korea Aust Asean Taiwan

All multibaggers

Final result


20

14 13

24

1816 15

23

11

7

12

3330 30

24 2423 23 22

17

14

7

0

5

10

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20

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30

35

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ities

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ap

Prop

erty

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tec

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com

All multibaggers

Final result


30

22

14

17

20 17

10 8

39

31

23 2322

17 17

3

0

5

10

15

20

25

30

35

40

India China HK AsiaxJ Korea Asean Aust Taiwan

All multibaggers

Final result

Quarterly average hit rate of multibaggers (%, before 2010)

26

7

1013

7 8 9

16 17

3

6

34

29 2827

22 2119

15

5 5

1

0

5

10

15

20

25

30

35

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re

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ities

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tec

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Tele

com

Ener

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Prop

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All multibaggers

Final result

Quarterly average hit rate of multibaggers (%, before 2010)

22

910

1110

6 6 7

34

2221

20

12 12

7 6

0

5

10

15

20

25

30

35

India Aust AsiaxJ Asean Korea Taiwan China HK

All multibaggers

Final result


19

15

29

15

21

24

18

1315

7

10

3331 30 30

25 2423 22 21

12

8

0

5

10

15

20

25

30

35

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Con

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tec

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Tele

com

All multibaggers

Final result



Important disclosures Microstrategy


Companies mentioned 3SBio (1530 HK - HK$11.26 - BUY)¹ a2 Milk (N-R) AAC (2018 HK - HK$142.10 - SELL)¹ ABB India (N-R) ABB Ltd (N-R) Aconex Ltd (N-R) Advanced Ceramic X (3152 TT - NT$416.5 - BUY)² Advantech (2395 TT - NT$221.0 - SELL)² AEM (N-R) AEV (N-R) AIA (1299 HK - HK$60.50 - BUY)¹ Airports of Thailand (AOT TB - BT55.0 - U-PF)¹ Airtac (1590 TT - NT$412.5 - BUY)² AIS (ADVANC TB - BT190.5 - U-PF)¹ Alibaba (BABA US - US$171.04 - BUY)¹ Alliance Global (N-R) Altium (N-R) Amazon (N-R) Amcor (AMC AU - A$16.17 - O-PF)¹ Ametek (N-R) Amorepacific (090430 KS - ₩289,000 - O-PF)¹ Amorepacific Group (002790 KS - ₩133,500 - U-PF)¹ Anta Sports (2020 HK - HK$30.95 - O-PF)¹ Aristocrat (ALL AU - A$21.11 - O-PF)¹ Ascendas (AREIT SP - S$2.66 - O-PF)¹ Asian Paints Ltd. (N-R) Asian Seafoods (N-R) Askul (N-R) Asmedia Technology Inc. (N-R) ASPEED Technology Inc. (N-R) Astra (ASII IJ - RP7,875 - O-PF)¹ Aurobindo Pharma (ARBP IB - RS758.0 - O-PF)¹ Australian Agri (N-R) Autohome (ATHM US - US$65.33 - O-PF)¹ Axiata (AXIATA MK - RM4.93 - O-PF)¹ Ayala (AC PM - P920.00 - BUY)¹ Ayala Land (ALI PM - P42.00 - O-PF)¹ B2W Companhia (N-R) Baidu (BIDU US - US$232.64 - BUY)¹ Bajaj Finance (N-R) Bajaj Finserv Limited (N-R) Bangkok Dusit (BDMS TB - BT20.7 - BUY)¹ Bank Central Asia (BBCA IJ - RP18,950 - O-PF)¹ Bank Rakyat (BBRI IJ - RP15,125 - U-PF)¹ BDO Unibank (BDO PM - P127.10 - O-PF)¹ Beauty Community PCL (N-R) Bellamy's (BAL AU - A$7.72 - SELL)¹ Best World (BEST SP - S$1.18 - SELL)¹ Besttone (N-R) BGF Retail (027410 KS - ₩87,600 - O-PF)¹ BH Co., Ltd. (N-R) Bharti Airtel Limited (N-R) Bizlink (3665 TT - NT$264.0 - BUY)²

BJC (BJC TB - BT48.3 - SELL)¹ Blackmores (BKL AU - A$111.20 - SELL)¹ Bloomberry (N-R) BlueScope (BSL AU - A$10.78 - BUY)¹ Brambles (N-R) Britannia Industries (N-R) Broadcom (N-R) Bubs Australia Ltd. (N-R) BWX (BWX AU - A$5.69 - U-PF)¹ BYD Electronic (N-R) Cadence Design (N-R) Cadila Healthcare (CDH IB - RS507.7 - BUY)¹ Caltex (N-R) Can Fin Homes Ltd. (India) (N-R) CapitaLand (CAPL SP - S$3.78 - BUY)¹ CapitaLand Mall (CT SP - S$2.17 - O-PF)¹ Caplin Point Laboratories Limited (N-R) Catcher Tech (2474 TT - NT$383.5 - U-PF)¹ CDL Hosp Trust (N-R) Celltrion, Inc. (N-R) Central Pattana (CPN TB - BT71.3 - O-PF)¹ China Cord Blood (N-R) China Lodging (N-R) China Overseas Land (688 HK - HK$27.05 - BUY)¹ China Railway (390 HK - HK$6.40 - O-PF)¹ China Regenerative (N-R) China TCM (N-R) CHP Test Tech (N-R) Cirtek Holdings Philippines Corporation (N-R) City Developments (CIT SP - S$11.71 - BUY)¹ Cityneon (N-R) CJ CGV (N-R) CJ Corporation (N-R) CJ O Shopping (N-R) CMS (867 HK - HK$14.30 - BUY)¹ Cobham (N-R) Cochlear (COH AU - A$156.65 - U-PF)¹ Cogobuy (N-R) Com2us (078340 KS - ₩113,900 - BUY)¹ Conch (914 HK - HK$29.45 - O-PF)¹ Concraft Holding Co., Ltd. (N-R) Corporate Travel (N-R) CO-TECH DEVELOPMENT CORP. (N-R) Coway (021240 KS - ₩96,200 - O-PF)¹ CP All (CPALL TB - BT61.8 - O-PF)¹ CR Land (1109 HK - HK$24.50 - BUY)¹ CSL (CSL AU - A$130.99 - O-PF)¹ CSPC Pharma (1093 HK - HK$12.52 - O-PF)¹ Ctrip (CTRP US - US$50.63 - O-PF)¹ CUREXO Inc. (N-R) Dagang Nexchange (N-R) Dalmia Bharat Ltd. (N-R) DBS (DBS SP - S$20.62 - BUY)¹ Delta Dunia (N-R)




Delta Electronics (2308 TT - NT$164.0 - O-PF)² Digi (DIGI MK - RM4.84 - U-PF)¹ Domino's Pizza (DMP AU - A$42.47 - BUY)¹ Dongbu HiTek (N-R) DoubleUGames (N-R) Dwarikesh Sugar Industries Limited (N-R) Eaton (N-R) eBay (N-R) Edelweiss Financial Services Limited (N-R) EEI (N-R) Egis Technology (6462 TT - NT$305.0 - BUY)² Eicher Motors Limited (N-R) Ekovest (N-R) Elite Material (N-R) eMemory Technology, Inc. (N-R) Emerson (N-R) Estia Health (EHE AU - A$3.15 - O-PF)¹ Everbright (257 HK - HK$10.36 - BUY)¹ Evergrande (3333 HK - HK$23.00 - SELL)¹ Evolable Asia (N-R) EXEM Co., Ltd. (N-R) Exide Industries (EXID IB - RS204.2 - SELL)¹ Expedia (N-R) F@N Communications (2461 JP - ¥1,161 - SELL)¹ Fanuc (6954 JP - ¥21,345 - BUY)¹ FDG Kinetic (N-R) Fila (N-R) Filinvest Land (FLI PM - P1.91 - BUY)¹ Flextronics (N-R) Flowserve (N-R) Focus Tech (N-R) Fortescue (FMG AU - A$5.95 - U-PF)¹ Fosun Pharma (2196 HK - HK$29.20 - BUY)¹ Fraser & Neave (MY) (N-R) Fu Shou Yuan (N-R) Fullshare (N-R) Galaxy Entertainment (27 HK - HK$51.00 - O-PF)¹ Galaxy Resources Limited (N-R) Gamuda (GAM MK - RM5.34 - U-PF)¹ GD Nanzi (N-R) Geely (N-R) Genscript (N-R) Genting (GENT MK - RM9.71 - O-PF)¹ Genting Malaysia (GENM MK - RM5.87 - U-PF)¹ Genting Singapore (N-R) Global PMX (4551 TT - NT$172.5 - BUY)² Global Top (N-R) Globe Telecom (GLO PM - P2,000.00 - O-PF)¹ GLP (GLP SP - S$3.24 - O-PF)¹ Gourmet Master (2723 TT - NT$360.0 - BUY)² Grape King (N-R) Greentown Service Group Co. Ltd. (N-R) GS Home Shopping Inc. (N-R) GSK Consumer (SKB IS - RS5,334.9 - BUY)¹ Haier Electronics (1169 HK - HK$20.85 - BUY)¹

Haitian Antenna (N-R) Hana Tour (039130 KS - ₩83,200 - BUY)¹ Hankook Tire (161390 KS - ₩58,700 - O-PF)¹ Hanon Systems (N-R) Hanssem (009240 KS - ₩168,000 - BUY)¹ Hanwha Techwin (012450 KS - ₩38,650 - O-PF)¹ Hap Seng Cons (N-R) HCL Tech (HCLT IB - RS865.2 - BUY)¹ HDHS (N-R) HDS (069960 KS - ₩95,300 - U-PF)¹ Heveaboard Bhd. (N-R) Hikvision (002415 CH - RMB32.94 - BUY)¹ Himax Technologies (N-R) Hindustan Unilever (HUVR IB - RS1,215.7 - O-PF)¹ Hindustan Zinc (N-R) Hiwin (2049 TT - NT$270.0 - BUY)² HK Exchanges (388 HK - HK$215.00 - SELL)¹ Hon Hai (2317 TT - NT$117.5 - SELL)¹ Honeywell (N-R) Hota Industrial (1536 TT - NT$139.0 - BUY)² Hotai Motor (N-R) HS Industries (N-R) Hugel (N-R) Hyundai Motor (005380 KS - ₩143,000 - U-PF)¹ Hyundai Robotics (267250 KS - ₩440,500 - BUY)¹ IDP Education (N-R) IGG, Inc. (N-R) IHH (IHH MK - RM5.99 - U-PF)¹ IIFL (N-R) InBody (N-R) Indiabulls Housing Finance Ltd. (N-R) Indika Energy (N-R) Indofood CBP (ICBP IJ - RP8,725 - U-PF)¹ Infomart (N-R) Interpark (N-R) Inti Kapuas Arowana (N-R) IPH (N-R) ITC (ITC IB - RS283.6 - U-PF)¹ Japara Healthcare (JHC AU - A$1.70 - U-PF)¹ Jardine Matheson (JM SP - US$65.71 - O-PF)¹ Jardine Strategic (JS SP - US$43.85 - O-PF)¹ JB Hi-Fi (JBH AU - A$22.80 - O-PF)¹ JD.com (JD US - US$41.99 - BUY)¹ Jeju Air Co., Ltd. (N-R) JG Summit (N-R) Jinro (N-R) JMT Network Services Co., Ltd. (N-R) Jollibee (JFC PM - P238.20 - O-PF)¹ Kalbe Farma (KLBF IJ - RP1,710 - BUY)¹ KEI Industries (N-R) Keppel Corp (KEP SP - S$6.31 - BUY)¹ Keyence (6861 JP - ¥57,390 - O-PF)¹ KHI (7012 JP - ¥340 - O-PF)¹ Kia Motors (000270 KS - ₩35,550 - U-PF)¹ Kingpak (N-R)




Kingston Financial (N-R) KMC (5306 TT - NT$140.0 - BUY)² Koh Young Technology Inc. (N-R) Korea Zinc (010130 KS - ₩510,000 - BUY)¹ KT (030200 KS - ₩31,150 - BUY)¹ KUKA (N-R) L&T Finance Holdings Limited (N-R) LandMark (3081 TT - NT$397.0 - BUY)² Largan (3008 TT - NT$5,870.0 - SELL)¹ Legend (N-R) Leyou Technologies Holdings Limited (N-R) LG Display (034220 KS - ₩30,750 - U-PF)¹ LG Electronics (066570 KS - ₩83,600 - SELL)¹ LG H&H (051900 KS - ₩953,000 - O-PF)¹ Liberty Interac (N-R) Liberty Interactive (N-R) LifeTech Scientific Corporation (N-R) Livzon Pharma (1513 HK - HK$42.80 - BUY)¹ L'Occitane (973 HK - HK$18.48 - O-PF)¹ Loen Entertainment Inc. (N-R) LONGTU KOREA Inc. (N-R) Lonking (3339 HK - HK$3.07 - BUY)¹ LOT Vacuum Co., Ltd. (N-R) Lotte Chemical (011170 KS - ₩403,000 - U-PF)¹ Lotte Chilsung Beverage Co., Ltd (N-R) Lotte Confectionery (N-R) Lotte Shopping (023530 KS - ₩243,500 - SELL)¹ Macquarie (MQG AU - A$86.81 - BUY)¹ MAEIL HOLDINGS CO. LTD. (N-R) Man Wah (1999 HK - HK$7.30 - BUY)¹ Manila Electric (MER PM - P271.00 - O-PF)¹ Maple Leaf Edu (1317 HK - HK$6.79 - BUY)¹ Maruti Suzuki (MSIL IB - RS7,812.7 - BUY)¹ MediaTek (2454 TT - NT$272.0 - SELL)¹ Meere Company Incorporated (N-R) Mega Expo Holdings Ltd. (N-R) Megawide (MWIDE PM - P17.50 - BUY)¹ MercadoLibre (N-R) Microfriend, Inc. (N-R) Minda Industries Limited (N-R) MindTree (N-R) Minor (MINT TB - BT39.8 - O-PF)¹ Minth (425 HK - HK$37.35 - BUY)¹ MISC (N-R) MISUMI (N-R) Mitsubishi Electric (6503 JP - ¥1,680 - BUY)¹ Mobile Internet (China) Holdings Limited (N-R) Momo (MOMO US - US$38.20 - O-PF)¹ Motherson Sumi Systems Limited (N-R) Motilal Oswal Financial Services Limited (N-R) Moya Holdings Asia Ltd. (N-R) Muangthai Leasing (N-R) MYEG (MYEG MK - RM2.12 - BUY)¹ Nabtesco (6268 JP - ¥3,890 - O-PF)¹ Nanya Technology (N-R)

Nasmedia (089600 KS - ₩49,600 - BUY)¹ Navin Fluorine International Limited (N-R) NCsoft (036570 KS - ₩396,000 - SELL)¹ Netdragon (N-R) NetEase (NTES US - US$269.89 - U-PF)¹ Netflix (N-R) Network18 Media & Investments Ltd. (N-R) New Oriental Edu (EDU US - US$84.12 - O-PF)¹ Nexteer (N-R) Nissan Motor (7201 JP - ¥1,096 - BUY)¹ Nongshim (N-R) Nuvoton Technology Corporation (N-R) Obic (N-R) Omron (N-R) On-Bright Electronics Co. Ltd. (N-R) O-Net (N-R) OOIL (N-R) Orion (N-R) Osstem Implant (N-R) Parade Technologies, Ltd. (N-R) Pati Games Corp. (N-R) Pegatron (4938 TT - NT$94.3 - U-PF)¹ Persistent Systems Limited (N-R) Petronas Dagangan (N-R) Pidilite Industries Limited (N-R) Pilbara Minerals Limited (N-R) PLDT (TEL PM - P1,730.00 - BUY)¹ Power Grid (PWGR IB - RS216.6 - BUY)¹ PPB (N-R) Priceline (N-R) Programmed Maintenance Services Limited (N-R) PT Link Net Tbk (N-R) PT PP Properti Tbk (N-R) PT Sitara Propertindo Tbk (N-R) PTG Energy Public Co. Ltd. (N-R) PTT (PTT TB - BT400.0 - BUY)¹ Public Bank (PBK MK - RM20.60 - U-PF)¹ PVR Limited (N-R) Q Technology (1478 HK - HK$19.60 - BUY)¹ Qantas (N-R) Quanta (2382 TT - NT$68.7 - BUY)¹ Raffles Medical (RFMD SP - S$1.10 - SELL)¹ Rakuten (4755 JP - ¥1,304 - O-PF)¹ Ramelius Res (N-R) Ramsay Health Care (RHC AU - A$67.06 - BUY)¹ REA (N-R) Realord Group Holdings Limited (N-R) Realtek (2379 TT - NT$115.0 - BUY)² Richwave (N-R) RM Group Holdings Ltd. (N-R) Robinsons Retail (RRHI PM - P90.75 - O-PF)¹ Rockwell (N-R) S.M. Entertainment Co., Ltd. (N-R) Sampoerna (HMSP IJ - RP3,640 - U-PF)¹ Samsonite (1910 HK - HK$32.55 - BUY)¹




Samsung Electronics (005930 KS - ₩2,324,000 - BUY)¹ Sands China (1928 HK - HK$36.50 - O-PF)¹ Schneider Electric (N-R) Semirara (SCC PM - P173.60 - BUY)¹ Shenzhou (2313 HK - HK$63.40 - BUY)¹ Shree Cement (SRCM IB - RS17,780.0 - U-PF)¹ Siam Cement (SCC TB - BT496.0 - O-PF)¹ Siasun Robot (N-R) Siemens AG (N-R) Silicon Motion (N-R) Sime Darby (SIME MK - RM9.00 - BUY)¹ Sina (SINA US - US$106.66 - O-PF)¹ Singapore Exchange (SGX SP - S$7.50 - O-PF)¹ Singtel (ST SP - S$3.70 - O-PF)¹ Sino Biopharm (1177 HK - HK$7.14 - BUY)¹ Sinopharm (1099 HK - HK$36.20 - BUY)¹ SJM (880 HK - HK$7.12 - SELL)¹ SK Hynix (000660 KS - ₩68,700 - BUY)¹ SKF AB (N-R) SM Investments (N-R) SM Prime (SMPH PM - P33.40 - SELL)¹ SMC (N-R) Sohu (N-R) Srisawad (N-R) Sritex (N-R) ST Engineering (STE SP - S$3.65 - O-PF)¹ Start Today (N-R) Sun Pharma Adv (N-R) Sun TV (SUNTV IB - RS768.0 - BUY)¹ Sunny Friend (N-R) Sunny Optical (2382 HK - HK$114.60 - O-PF)¹ Sunonwealth (N-R) Synnex (Thailand) Public Co., Ltd. (N-R) TAL Education Group Sponsored ADR Class A (N-R) Tapaco Public Co., Ltd. (N-R) Tata Consultancy (TCS IB - RS2,463.2 - BUY)¹ Tata Elxsi (N-R) Tata Global Beverages Limited (N-R) Tata Motors (TTMT IB - RS390.7 - SELL)¹ TCI Co. Ltd. (N-R) TechnologyOne (N-R) Techtronic (N-R) Teco (N-R) Telkom (TLKM IJ - RP4,690 - BUY)¹ Tenaga (TNB MK - RM14.28 - SELL)¹ Tencent (700 HK - HK$326.20 - BUY)¹ ThaiBev (THBEV SP - S$0.93 - BUY)¹ Thirumalai Chemicals Limited (N-R)

THK (6481 JP - ¥3,695 - O-PF)¹ Tianneng Power (N-R) Titan (TTAN IB - RS613.0 - BUY)¹ Trade Me Group Limited (N-R) Tripadvisor (N-R) TSMC (2330 TT - NT$216.5 - BUY)² TTY Biopharm (N-R) UMS (N-R) Unilever Indo (UNVR IJ - RP50,550 - O-PF)¹ Union Semiconductor Equipment Co., Ltd. (N-R) Uni-President (1216 TT - NT$63.8 - BUY)² Unisem M (N-R) United Tractors (UNTR IJ - RP30,300 - BUY)¹ Universal Robina (URC PM - P146.10 - BUY)¹ Vakrangee (N-R) V-Guard Industries Limited (N-R) Vipshop (VIPS US - US$9.12 - BUY)¹ Vitarich (N-R) Vivotek Inc (N-R) Voyage Gr (N-R) VS Industry (N-R) Want Want (151 HK - HK$5.25 - U-PF)¹ Webjet (N-R) Weibo (WB US - US$104.72 - BUY)¹ Wesfarmers (WES AU - A$42.44 - BUY)¹ Westfield (WFD AU - A$7.58 - O-PF)¹ WH (288 HK - HK$8.41 - BUY)¹ Whirlpool Of India Limited (N-R) Wing Tai (N-R) Wisdom Edu (6068 HK - HK$3.30 - BUY)¹ WNS (Holdings) Limited Sponsored ADR (N-R) Woolworths (WOW AU - A$25.79 - SELL)¹ Workpoint (N-R) Xero (XRO AU - A$23.60 - BUY)¹ Xero Limited (N-R) Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (N-R) Yaskawa Electric (6506 JP - ¥3,335 - O-PF)¹ YFC-BonEagle Electric Co., Ltd. (N-R) YiChang HEC ChangJiang Pharmaceutical Co. Ltd. Class H (N-R) YMC Co., Ltd. (Korea) (N-R) Yokogawa Electric (N-R) YTL (N-R) Yuan Feng (N-R) Yum China (N-R) Zalando (N-R) ZTE (N-R)

¹ Covered by CLSA; ² Covered by CLST The above shows our fundamental ratings on these stocks.




Analyst certification The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures The policy of CLSA (which for the purpose of this

disclosure includes its subsidiary CLSA B.V.) and CL Securities Taiwan Co., Ltd. (“CLST”) is to only publish research that is impartial, independent, clear, fair, and not misleading. Analysts may not receive compensation from the companies they cover. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to a research report as below. This research disclosure should be read in conjunction with the research disclaimer as set out at www.clsa.com/disclaimer.html and the applicable regulation of the concerned market where the analyst is stationed and hence subject to. This research disclosure is for your information only and does not constitute any recommendation, representation or warranty. Absence of a discloseable position should not be taken as endorsement on the validity or quality of the research report or recommendation.

To maintain the independence and integrity of CLSA’s

research, our Corporate Finance, Sales Trading and Research business lines are distinct from one another. This means that CLSA’s Research department is not part of and does not report to CLSA Corporate Finance (or “investment banking”) department or CLSA’s Sales and Trading business. Accordingly, neither the Corporate Finance nor the Sales and Trading department supervises or controls the activities of CLSA’s research analysts. CLSA’s research analysts report to the management of the Research department, who in turn report to CLSA’s senior management.

CLSA has put in place a number of internal controls

designed to manage conflicts of interest that may arise as a result of CLSA engaging in Corporate Finance, Sales and Trading and Research activities. Some examples of these controls include: the use of information barriers and other information controls designed to ensure that confidential information is only shared on a “need to know” basis and in compliance with CLSA’s Chinese Wall policies and procedures; measures designed to ensure that interactions that may occur among CLSA’s Research personnel, Corporate Finance and Sales and Trading personnel, CLSA’s financial product issuers and CLSA’s research analysts do not compromise the integrity and independence of CLSA’s research.

Neither analysts nor their household members/associates/may have a financial interest in, or be an officer, director or advisory board member of companies covered by the analyst unless disclosed herein. In circumstances where an analyst has a pre-existing holding in any securities under coverage, those holdings are grandfathered and the analyst is prohibited from trading such securities.

Unless specified otherwise, CLSA/CLST did not receive

investment banking/non-investment banking income from, and did not manage/co-manage a public offering for, the listed company during the past 12 months, and it does not expect to receive investment banking compensation from the listed company within the coming three months. Unless mentioned otherwise, CLSA/CLST does not own a material discloseable position, and does not make a market, in the securities.

As analyst(s) of this report, I/we hereby certify that

the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this report or to any investment banking relationship with the subject company covered in this report (for the past one year) or otherwise any other relationship with such company which leads to receipt of fees from the company except in ordinary course of business of the company. The analyst/s also state/s and confirm/s that he/she/they has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling this research report. In addition, the analysts included herein attest that they were not in possession of any material, nonpublic information regarding the subject company at the time of publication of the report. Save from the disclosure below (if any), the analyst(s) is/are not aware of any material conflict of interest.

Key to CLSA/CLST investment rankings: BUY: Total

stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total return expected to be negative. For relative performance, we benchmark the 12-month total forecast return (including




dividends) for the stock against the 12-month forecast return (including dividends) for the market on which the stock trades.

We define as “Double Baggers” stocks we expect to

yield 100% or more (including dividends) within three years at the time the stocks are introduced to our “Double Bagger” list. "High Conviction" Ideas are not necessarily stocks with the most upside/downside, but those where the Research Head/Strategist believes there is the highest likelihood of positive/negative returns. The list for each market is monitored weekly.

Overall rating distribution for CLSA/CLST only

Universe: Overall rating distribution: BUY / Outperform - CLSA:

64.52%; CLST only: 67.61%, Underperform / SELL - CLSA: 35.48%; CLST only: 32.39%, Restricted - CLSA: 0.00%; CLST only: 0.00%. Data as of 30 June 2017.

Investment banking clients as a % of rating category:

BUY / Outperform - CLSA: 4.77%; CLST only: 0.00%, Underperform / SELL - CLSA: 2.98%; CLST only: 0.00%, Restricted - CLSA: 0.00%; CLST only: 0.00%. Data for 12-month period ending 30 June 2017.

There are no numbers for Hold/Neutral as CLSA/CLST

do not have such investment rankings. For a history of the recommendations and price

targets for companies mentioned in this report, as well as company specific disclosures, please write to: (a) CLSA, Group Compliance, 18/F, One Pacific Place, 88 Queensway, Hong Kong and/or; (b) CLST Compliance (27/F, 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone (886) 2 2326 8188). © 2017 CLSA Limited and/or CLST.

© 2017 CLSA Limited, and/or CL Securities Taiwan Co., Ltd. (“CLST”)

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This publication/communication may not be distributed or redistributed to retail investors. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CLSA and/or CLST to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of CLSA and/or CLST at the date of this publication/communication and are subject to change at any time without notice. Where any part of the information, opinions or estimates contained herein reflects the views and opinions of a sales person or a non-analyst, such views and opinions may not correspond to the published view of CLSA and/or CLST. This is not a solicitation or any offer to buy or sell. This publication/communication is for information purposes only and does not constitute any recommendation, representation, warranty or guarantee of performance. Any price target given in the report may be projected from one or more valuation models and hence any price target may be subject to the inherent risk of the selected model as well as other external risk factors. This is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice, including tax advice. CLSA and/or CLST do/does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. To the extent permitted by applicable securities laws and regulations, CLSA and/or CLST accept(s) no liability whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents. Where the publication does not contain ratings, the material should not be construed as research but is offered as factual commentary. It is not intended to, nor should it be used to form an investment opinion about the non-rated companies.

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the securities mentioned or related securities, or may currently or in future have or have had a business or financial relationship with, or may provide or have provided investment banking, capital markets and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. As a result, investors should be aware that CLSA, CLST and/or their respective affiliates or companies or such individuals may have one or more conflicts of interest. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research reports. Details of the discloseable interest can be found in certain reports as required by the relevant rules and regulation and the full details are available at http://www.clsa.com/member/research_disclosures/. Disclosures therein include the position of CLSA and CLST only. Unless specified otherwise, CLSA did not receive any compensation or other benefits from the subject company covered in this publication/communication, or from any third party in connection with this report. If investors have any difficulty accessing this website, please contact [email protected] on +852 2600 8111. If you require disclosure information on previous dates, please contact [email protected].

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on behalf of CLSA Limited (for research compiled by non-US and non-Taiwan analyst(s)), and/or CLST (for research compiled by Taiwan analyst(s)) in Australia by CLSA Australia Pty Ltd; in Hong Kong by CLSA Limited; in India by CLSA India Private Limited, (Address: 8/F, Dalamal House, Nariman Point, Mumbai 400021. Tel No: +91-22-66505050. Fax No: +91-22-22840271; CIN: U67120MH1994PLC083118; SEBI Registration No: INZ000001735; in Indonesia by PT CLSA Sekuritas Indonesia; in Japan by CLSA Securities Japan Co., Ltd; in Korea by CLSA Securities Korea Ltd; in Malaysia by CLSA Securities Malaysia Sdn Bhd; in the Philippines by CLSA Philippines Inc (a member of Philippine Stock Exchange and Securities Investors Protection Fund); in Thailand by CLSA Securities (Thailand) Limited; in Taiwan by CLST and in the United Kingdom by CLSA (UK).

India: CLSA India Private Limited, incorporated in

November 1994 provides equity brokerage services (SEBI Registration No: INZ000001735), research services (SEBI Registration No: INH000001113) and merchant banking services (SEBI Registration No.INM000010619) to global institutional investors, pension funds and corporates. CLSA and its associates may have debt holdings in the subject company. Further, CLSA and its associates, in the past 12 months, may have received compensation for non-investment banking securities and/or non-securities related services from the

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compiled by non-US analyst(s), it is distributed into the United States by CLSA solely to persons who qualify as "Major US Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934 and who deal with CLSA Americas. However, the delivery of this research report to any person in the United States shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting CLSA Americas.

Canada: The delivery of this research report to any

person in Canada shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. Any recipient of this research in Canada wishing to effect a transaction in any security mentioned herein should do so by contacting CLSA Americas.

United Kingdom: In the United Kingdom, this research

is a marketing communication. It has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The research is disseminated in the EU by CLSA (UK), which is authorised and regulated by the Financial Conduct Authority. This document is directed at persons having professional experience in matters relating to investments as defined in Article 19 of the FSMA 2000 (Financial Promotion) Order 2005. Any investment activity to which it relates is only available to such persons. If you do not have professional experience in matters relating to investments you should not rely on this document. Where the research material is compiled by the UK analyst(s), it is produced and disseminated by CLSA (UK). For the purposes of the Financial Conduct Rules this research is prepared and intended as substantive research material.

Singapore: In Singapore, research is issued and/or

distributed by CLSA Singapore Pte Ltd (Company Registration No.: 198703750W), a Capital Markets Services licence holder to deal in securities and an exempt financial adviser, solely to persons who qualify as an institutional investor, accredited investor or expert investor, as defined in s.4A(1) of the Securities and Futures Act. Pursuant to Paragraphs 33, 34, 35 and 36 of




the Financial Advisers (Amendment) Regulations 2005 of the Financial Advisers Act (Cap 110) with regards to an institutional investor, accredited investor, expert investor or Overseas Investor, sections 25, 27 and 36 of the Financial Adviser Act (Cap 110) shall not apply to CLSA Singapore Pte Ltd. Please contact CLSA Singapore Pte Ltd (telephone No.: +65 6416 7888) in connection with queries on the report. MCI (P) 033/11/2016

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publication/communication may be employed by any relevant CLSA entity, CLST or a subsidiary of CITIC Securities Company Limited which is different from the entity that distributes the publication/communication in the respective jurisdictions.

MSCI-sourced information is the exclusive property of

Morgan Stanley Capital International Inc (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information

is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by CLSA.

EVA® is a registered trademark of Stern, Stewart &

Co. "CL" in charts and tables stands for CLSA and “CT” stands for CLST estimates unless otherwise noted in the source.


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Taiwan CL Securities Taiwan Company Limited* 27/F, 95, Section 2 Dun Hua South Road Taipei 10682 Tel: +886 2 2326 8188 Fax: +886 2 2326 8166

Australia - Sydney CLSA Australia Pty Ltd Level 35 Grosvenor Place 225 George Street Sydney NSW 2000 Tel: +61 2 8571 4200 Fax: +61 2 9221 1188

India CLSA India Private Limited 8/F, Dalamal House Nariman Point Mumbai 400021 Tel: +91 22 6650 5050 Fax: +91 22 2284 0271

Malaysia CLSA Securities Malaysia Sdn Bhd Suite 20-01, Level 20 Menara Dion 27 Jalan Sultan Ismail 50250 Kuala Lumpur Tel: +60 3 2056 7888 Fax: +60 3 2056 7988

Thailand CLSA Securities (Thailand) Ltd 16/F, M. Thai Tower All Seasons Place 87 Wireless Road, Pathumwan, Bangkok 10330 Tel: +66 2 257 4600 Fax: +66 2 253 0532

China - Beijing CLSA Limited - Beijing Rep Office Unit 10-12, Level 25 China World Trade Center Tower 2 1 Jian Guo Men Wai Ave Beijing 100004 Tel: +86 10 5965 2188 Fax: +86 10 6505 2209

Indonesia PT CLSA Sekuritas Indonesia WISMA GKBI Suite 901 Jl Jendral Sudirman No.28 Jakarta 10210 Tel: +62 21 2554 8888 Fax: +62 21 574 6920

Philippines CLSA Philippines, Inc 19/F, Tower 2 The Enterprise Center 6766 Ayala corner Paseo de Roxas Makati City Tel: +63 2 860 4000 Fax: +63 2 860 4051

United Kingdom CLSA (UK) 12/F, Moor House 120 London Wall London EC2Y 5ET Tel: +44 20 7614 7000 Fax: +44 20 7614 7070

China - Shanghai CLSA Limited - Shanghai Rep Office Room 910, 9/F 100 Century Avenue Pudong New Area Shanghai 200120 Tel: +86 21 2020 5888 Fax: +86 21 2020 5777

Japan CLSA Securities Japan Co. Ltd. 16/F, Shiodome Sumitomo Building 1-9-2, Higashi-Shimbashi Minato-ku, Tokyo 105-0021 Tel: +81 3 4578 8000 Fax: +81 3 4578 8080

Singapore CLSA Singapore Pte Ltd 80 Raffles Place, No.18-01 UOB Plaza 1 Singapore 048624 Tel: +65 6416 7888 Fax: +65 6533 8922

USA - New York CLSA Americas, LLC 1301 Avenue of The Americas 15th Floor, New York 10019 Tel: +1 212 408 5888 Fax: +1 212 261 2502

China - Shenzhen CLSA Limited - Shenzhen Rep Office Room 3111, Shun Hing Square Di Wang Commercial Centre 5002 Shennan Road East Shenzhen 518008 Tel: +86 755 8246 1755 Fax: +86 755 8246 1754

* CLST is an exclusive Taiwan research provider to CLSA

CLSA Sales Trading Team Australia +61 2 8571 4201 China (Shanghai) +86 21 2020 5810 Hong Kong +852 2600 7003 India +91 22 6622 5000 Indonesia +62 21 573 9460 Japan +81 3 4580 5169 Korea +82 2 397 8512

Malaysia +60 3 2056 7852 Philippines +63 2 860 4030 Singapore +65 6416 7878 Taiwan* +886 2 2326 8124 Thailand +66 2 257 4611 UK +44 207 614 7260 US +1 212 408 5800

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© 2017 CLSA Limited (“CLSA”) and/or CL Securities Taiwan Co. Ltd (“CLST”). Key to CLSA/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative. For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month forecast return (including dividends) for the market on which the stock trades. • We define as “Double Baggers” stocks we expect to yield 100% or more (including dividends) within three years at the time the stocks are introduced to our “Double Bagger” list. "High Conviction" Ideas are not necessarily stocks with the most upside/downside but those where the Research Head/Strategist believes there is the highest likelihood of positive/negative returns. The list for each market is monitored weekly. 06/07/2017

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Executive summary ... · 2017-12-12 · Executive summary Microstrategy 6 September 2017...

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