Deutsche Bank

Markets Research
Global

Periodical

DB Today Global/Macro
Greg Poole

Tuesday 21st January 2014

Amy Wei

Equity Focus
Research Analyst
(+1) 212 250-9902 (+1) 212 250-5574
greg.poole@db.com amy.tan@db.com

GLOBAL MARKET WRAP

MACRO HIGHLIGHTS
Asia Strategy China Economics - Jun Ma
Q4 GDP growth came in at 7.7%yoy, marginally higher than Bloomberg
consensus forecast of 7.6% although slightly lower than our estimate of 7.8%.
For 2013 as a whole, China's GDP growth was 7.7%, above the government's
target of 7.5%. In its press release, the National Bureau of Statistics stated that
"national economy performance shows good momentum". Details on Page 07

INDEX

FX Strategy - FX Daily - Taisuke Tanaka

The BoJ is holding a Monetary Policy Meeting on 21-22nd January. Many
market participants expect the Bank to maintain its policy at this meeting and
move to ease further in Apr-Jun. The view is that the BoJ is likely to ease
further to stimulate the economy following the consumption tax hike in April or
to further heighten inflation expectations as it reviews the year of QQE. Details
on Page 09
Japan Strategy Japan FI Morning Memo Makoto Yamashita
Trading activity by investor type in December suggests that regional financial
institutions are rebuilding JGB holdings. The city banks sold close to a net
JPY2trn JGBs, the ninth straight month of net sales, but we cannot confirm
positions because of sales at direct auctions and to the BoJ. The dip-buying by
regional financial institutions caught our attention. Regional financial
institutions bought a net JPY1.5trn JGBs. The regional banks rebuilt holdings in
Oct-Dec after reducing the balance of holdings in Jul-Sep, with net purchases
of JPY861.9bn long-term JGBs and JPY264.4bn intermediate JGBs. Buying
was focused in the intermediate sector through to November, but the longterm
sector was bought on weakness in December as yields rose. Details on Page
10

Contd on next page

1D
%Chg

YTD
%Chg

S&P 500

1838.70

-0.4

-0.5

NASDAQ
DOW

4197.58
16458.56

-0.5
0.3

0.5
-0.7

3165.66
6843.92

0.4
0.1

1.8
1.4

HANG SENG INDEX 23033.12

MSCI Asia ex Japan 538.269

0.5
-0.3

-1.2
-2.4

DJ STOXX 50
FTSE 100 INDEX

BRAZIL BOVESPA

Credit Strategy Early Morning Reid Jim Reid

Though European markets felt fairly directionless yesterday, there has been
plenty of debate on Chinas growth numbers after the release of Q4 GDP data
yesterday. The prevailing sentiment is a bit firmer this morning thanks to the
Peoples Bank of Chinas actions today and yesterday to shore up liquidity into
the domestic banking system. According to Reuters, the PBoC has conducted
a total of CNY180bn in 21- day reverse repos and another CNY75bn in 7-day
reverse repos to provide short term funds to banks today. Details on Page 08

Close

48708.41

-1.0

-5.4

1215.15

-0.2

-2.7

RTS-2 INDEX

COMMODITY PRICES
COMMODITIES

Close

West Texas
Brent
CRB

94.37

1D
YTD
%Chg
%Chg
0.4
-4.1

108.39
278.41

1.0
0.0

-2.2
-0.6

332.25
1249.18

-0.7
-0.4

-2.2
3.6

Alum. (LME)

1806.50

-0.8

0.3

Baltic Dry

1428.00

0.5

N.A.

Copper
Gold (Spot)

FOREIGN EXCHANGE PRICES

FOREX (vs US$)

Close

HK$
EUR

7.76
1.35

1D
%Chg
0.0
-0.1

YTD
%Chg
0.0
-1.5

JPY

104.68

-0.5

0.6

GBP

1.64

0.0

-0.8

Current
Value
SPX 3M Mat ATM-Strike Imp Vol
12.11
SPX 3M Mat 90%-110% IV Skew
8.27

%-ile
Rank
7.6
66.0

Source: Bloomberg

DERIVATIVES

SPX 3m Mat Realized Vol

8.89

0.4

YTD
%Chg
4.9
1.8
-0.5

Source: Bloomberg

CREDIT
Credit

65.41

1D
%Chg
0.2

ITRX.Europe
CDX.NA.HY

71.50
107.90

0.7
0.0

ITRAX.XOVER

279.83

0.4

-2.4

55.79

12.3

-12.3

CDX.NA.IG

SOVX.WE

Close

________________________________________________________________________________________________________________
Deutsche Bank Securities Inc.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

21 January 2014
DB Today - Global/Macro

MACRO HIGHLIGHTS
US Economics US Daily Economic Notes Joseph LaVorgna
The data docket this week is light ahead of the January 28-29 FOMC meeting. The main releases all come Thursday
with initial jobless claims, existing home sales and the index of leading economic indicators. Jobless claims will be the
primary focus as they correspond to the survey period for January payrolls. If the recent trend in claims continues, we
expect a substantial recovery in the pace of hiring following the weather impacted disappointment in December
payrolls (+74k). Jobless claims have fallen three out of the last four weeks following a significant back up in early
December that was most likely due to the same weather that afflicted payrolls. Details on Page 11

KEY COMPANY RESEARCH

ASIA
China Cement - Johnson
Wan

Genting Hong Kong Aun-Ling Chia

Quantitative Strategy
Quantfucius - Khoi Le
Binh

GD cement trip takeaways; reiterating Buy on CRC, raising TP to HKD7.65. We hosted a cement
trip to GD, post DBs Access China conference. Our visit confirms the strong start to 2014
highlighted by cement companies at our conference. Due to good weather conditions in Jan,
inventory levels are low and prices have been maintained for most producers compared to Dec
13. In South and East China, where we see more balanced supply-demand, there is a strong
willingness among producers to keep prices steady, as they plan to maximize profits in those
areas. Details on Page 12
Deep value and plenty of cash what's next?. At a 37% discount to market SOTP, Genting Hong
Kong remains a deep value stock with nearly US$1.0bn gross cash after paring down its stake in
NCLH. The Lim family raised its stake to 58.1%, or 75.9% including that held by Genting
Malaysia. We see dividends, M&A and fleet rejuvenation as ways to deploy cash. We trim our
TP to US$0.545/sh given our earnings cut but maintain Buy. Details on Page 13
Quantifying markets. Even though investor sentiment appears to be low (but improving) across
Asian markets, liquidity has returned, liquidity risk has normalized and investors have been
pricing risk adequately. Since the opportunity set for stock pickers is at the highest, we believe
that Asian equity investors should focus on stock selection. Details on Page 14
(Originally published on 17 January 2014)

EUROPE
MTU - Benjamin Fidler

SAFRAN - Milene Kerner

Q4 performance unlikely to generate much excitement. MTU will report FY13 results on 18 Feb.
We expect little surprise around Q4 trading, with spares growth likely to have been flat YoY. All
eyes will be on 2014 guidance, where although the main moving pieces have already been
provided, no hard EBIT or FCF numbers have yet been given. The key issue for MTU remains
returning to better earnings growth and improved FCF. With the shares trading in line with our
E65 TP, we maintain our Hold rating. Details on Page 15
Aftermarket performance in Q4 and guidance will be the area of focus. Safran reports FY13
results on 20 February. As always the primary focus of results will be civil engine aftermarket
growth, where we see potential for some upside surprise, driven by the strength in the civil
engine aftermarket at the nine-month stage (+25.5%) and recent Q4 results from GE. In usual
fashion, we expect the 2014 initial guidance to be conservative and it would not surprise us if
this comes in below our current forecasts. With appealing valuation in the context of its nearand mid-term growth, we maintain our Buy. Details on Page 16

Thales SA - Milene
Kerner

Good EBIT growth expected for 2013 with confident outlook. Thales reports FY13 results on 19
February. Overall we expect good growth to emerge in 2013 with EBIT growth of 7.5% driven by
the performance plan benefit. We expect management to be upbeat over prospects for 2014 led
by E100m additional savings. This, together with a number of problem contracts which will
reach completion in 2014 and better hedge rate, means 2014 EPS should be up low teens. Of
key importance will be any comments over margin progress beyond 2014. Details on Page 17
Contd on next page
Page 2

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

KEY COMPANY RESEARCH

EUROPE
UCB - Richard Parkes

UK WATER - James
Brand

Early redemption of UCB's convertible bond is weighing on performance. UCBs shares have
fallen 5% since the beginning of 2014 (vs an average +5% for our EU pharma coverage). We
believe this reflects anticipation of a decision to trigger early redemption of its 430m in
convertible bonds. If fully converted this could lead to issue of 11.1m shares and continued
weakness as some bondholders are likely to sell/short the equity. A similar situation for mid-cap
peer Shire weighed on its shares in 4Q13 but we note these have rebounded by c.10% since the
hedging period expired. We view weakness as an attractive entry point and reiterate our Buy
rating and 61 TP. Details on Page 18
Announcement on key financial parameters should improve visibility. OFWAT will announce on
27 January its view on key financial parameters for the 2014 price review including the allowed
return, financial incentives and the financial flexibility companies have when setting prices. We
expect the headline allowed return to be quite tough and a negative shock can't be ruled out.
However, it should allow visibility to start to improve and may mark the peak of uncertainty for
the sector. We see United Utilities' (Buy, 800p TP) shares as the most compelling investment
opportunity in the space. Details on Page 19

NORTH AMERICA
Hilton Worldwide
(HLT.N),USD22.25 Buy
Price Target USD27

Initiating Coverage with a Buy Rating and $27 Price Target. While we anticipate many will
clamor that the bull case for meaningful upside in HLT from current levels is the optionality from
asset monetization, something we detail later in this report, we find: 1) the industry bull case,
especially given HLTs domestic owned exposure and leverage to accelerating ADRs at current
chain scale occupancy levels, also something we detail later, 2) its international unit pipeline
growth, and 3) the de-leveraging and therefore differentiated aspect of the story, to be most
appealing. As such, we are launching coverage with a Buy rating and $27 price target. Details
on Page 20

Deutsche Bank Securities Inc.

Page 3

21 January 2014
DB Today - Global/Macro

TODAYS HEADLINES
Markets: Equities generally a touch weaker in Europe on the back of weaker financials, US market closed for holiday.
European bond yields generally nudge lower. Asian bourses generally firmer Tuesday, including China as the PBoC
injects liquidity ahead of LNY holiday, NZD lifted as Q4 headline CPI rises more than expected.
DEU: PPI rises 0.1%mom in December, down 0.5%yoy, slightly above mkt.
ITA: Industrial orders up 2.3%mom/3.0%yoy in November, above mkt.
BEL: Consumer confidence index up 1pt to -4 in January.
CHN: GDP rises 7.7% over the year in Q4, above mkt.
CHN: Industrial production rises 9.7%yoy in December, a tad below mkt.
CHN: Retail sales up 13.6%yoy in December, at mkt.
CHN: Fixed assets ex rural rises 19.6%yoy YTD in December, below mkt.
CHN: Business climate index down 2pts to 119.5 in Q4.
N ZL: CPI rises 0.1% qoq in Q1, above mkt, 10% trimmed mean rises 0.2% qoq

THE DAY AHEAD.

CAN: Manufacturing Sales (Nov), Wholesale Trade Sales (Nov)
EMU: ECB's Nowotny to speak, ZEW Survey (Jan)
GBR: CBI Business Survey (Jan)
DEU: ZEW Survey (Jan)
CHE: Money Supply M3 (Dec)
JPN: BoJ to hold two-day monetary policy meeting, Tokyo Condominium Sales (Dec),
Supermarket Sales (Dec)
NZL: CPI (Q4), Fonterra Globaldairytrade auction
Source: Excerpts from DB Daily published on 21stJanuary, 2014

Page 4

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

Forecast
G7 Quarterly GDP growth
% qoq saar/annual: % yoy

Q1 13

Q2 13

Q3 13

Q4 13F

Q1 14F

Q2 14F

Q3 14F

Q4 14F

2013F

2014F

US

1.1

2.5

4.1

4.0

3.1

3.2

3.5

3.7

2.0

3.5

2015F
3.8

Japan

4.5

3.6

1.1

1.1

2.5

-5.7

4.3

1.3

1.5

0.7

1.3

Euroland

-0.9

1.3

0.5

0.8

1.0

1.3

1.3

1.5

-0.4

1.0

1.4

Germany

0.0

2.9

1.3

1.5

1.5

1.5

1.5

1.6

0.5

1.5

1.4
1.6

France

-0.2

2.3

-0.5

0.5

0.8

1.1

1.6

1.6

0.2

0.9

Italy

-2.3

-1.2

-0.1

0.4

0.8

1.4

1.1

0.7

-1.8

0.6

0.7

UK

2.0

3.2

3.1

3.4

2.7

2.3

2.0

2.0

1.5

2.7

2.0

Canada

2.3

1.6

2.7

2.1

3.9

2.4

3.1

2.5

1.8

2.9

2.8

aG7

1.3

2.4

2.6

2.6

2.5

1.2

3.0

2.6

1.4

2.5

2.7

a) Euroland forecasts as at the last forecast round on 11/12/13. Bold figures signal upward revisions, bold, underlined figures signal downward revisions. (b)
GDP figures refer to working day adjusted data, except Germany. (c) HICP figures for euro-zone countries and the UK (d) Current account figures for Euro area countries include intra regional transactions.
Sources: National authorities, Deutsche Bank Research

Commodities
USD

Q1 13

Q2 13

Q3 13

Q4 13

2013

2014

2015

2016

WTI (bbl)

94.36

94.17

106.07

105.00

99.88

98.75

95.00

85.00

112.64

103.35

109.74

110.00

109.00

106.25

105.00

100.00

3.48

4.02

3.56

4.00

3.76

4.25

4.50

4.75

1632

1417

1330

1350

1432

1338

1325

1400

30

23

21

22

24

23

24

24

Brent (bbl)
US Natural Gas (mmBtu)
Gold
Silver
Aluminium
USc/lb

92.6

84.9

83.2

79.4

85.0

81.7

88.5

99.8

USD/t

2041

1871

1829

1750

1874

1800

1950

2200

USc/lb

361.1

326.2

321.0

322.1

332.6

319.9

308.5

331.2

USD/t

7958

7190

7087

7100

7331

7050

6800

7300

Copper

Source: Deutsche Bank, Figures are period averages

CENTRAL BANK POLICY (%)

Current

2014

2015

2016

0 - 0.25

0 - 0.25

1.75

3.75

0.25

0.25

0.75

1.75

0-0.1

0-0.1

0-0.1

0-0.1

UK

0.50

0.50

0.75

1.75

China

3.00

3.25

3.25

3.25

India

7.75

7.00

7.50

7.5

US
Eurozone
Japan

* House View published on 09 January 2014

Deutsche Bank Securities Inc.

Page 5

21 January 2014
DB Today - Global/Macro

FORECAST
FOREIGN EXCHANGE RATES
Countries
US

Spot Rate

3M

6M

12M

DB US$ Index

70

71

72

76

(Fwd. Rates)

EUR/USD

1.38

1.35

1.32

1.25

(Fwd. Rates)

1.38

1.38

1.38

USD/JPY

103

106

109

115

(Fwd. Rates)

103

103

103

GBP/USD

1.64

1.63

1.61

1.56

(Fwd. Rates)

1.64

1.64

1.63

USD/CHF

0.89

0.91

0.95

1.02

(Fwd. Rates)

0.89

0.89

0.88

USD/CNY

6.07

6.10

6.05

6.00

6.08

6.07

6.07

Euro
Japan
UK
Switzerland
China
(Fwd.
Rates)

Source: Datastream, Reuters, Bloomberg Finance LP, Deutsche Bank Research

GOVERNMENT RATES
Current
2.8
2.1

US 10Y yield
EUR 10Y yield

Q4-13
2.50
2.20

Q1-14
2.75
2.30

Q3-14
3.00
2.50

Source: Deutsche Bank

INDEX FORECASTS
Current
310
6554
8623
13000
1782

DJ Stoxx 600
FTSE 100
Dax
MSCI HK
S&P 500

2013
315
6575
8400
NA

Source: Deutsche Bank

UPCOMING CONFERENCES/TRIPS
Date
January 22 24, 2014
January 22 24, 2014
February 5 6, 2014
March 4, 2014
March 5, 2014
March 10 12, 2014
April 2 3, 2014
May 7 9, 2014
May 12 13, 2014
May 15, 2014

Conferences
16th Annual dbAccess Retail Store Tour @ Berkshire
dbAccess CEEMEA Conference @ London
dbAccess MENA Conference @ Dubai
Gaming One-on-One Corporate Day @ Boston
Consumer Conference @ Boston
22nd Annual Media, Internet and Telecom Conference @ Palm Beach, FL
dbAccess Pan European Small & Mid Cap 14th Annual Conference @ London
dbAccess 4th Annual Chile Conference @ London
Clean Tech, Utilities and Power Conference @ New York
dbAccess Italy Conference @ London

Source: Deutsche Bank For more details log on to www.conferences.db.com

TODAYs CONFERENCE CALL

Date & Time (ET)

Description

Tuesday, January 21, 2014

04:15 EST

Research Presentation

Page 6

Dial-in Details
-

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

China Economics

China: Q4 GDP growth slightly higher than consensus

Q4 GDP growth came in at 7.7%yoy, marginally higher than Bloomberg consensus forecast of 7.6% although slightly
lower than our estimate of 7.8%. For 2013 as a whole, China's GDP growth was 7.7%, above the government's target
of 7.5%. In its press release, the National Bureau of Statistics stated that "national economy performance shows
good momentum".
We maintain our view that economic growth will likely accelerate in 2014 on stronger external demand (according to
our estimate, China's qoq saar export growth has already accelerated to 20% in Q4 last year), benefits from
deregulation, and improving fiscal performance in the second half of 2013. For Q1 2014, yoy GDP growth could be
further boosted by a favorable base effect (as Q1 2013's qoq growth was 0.4ppts weaker than the annual average) to
a level above 8%.
As for other data releases by the NBS today, December retail sales growth was in line with consensus (13.6%yoy)
while IP and nominal FAI growth were marginally weaker than expectations.
Specifically, IP growth decelerated to 9.7%yoy in December from 10.0%yoy in November, slightly lower than market
consensus of 9.8%yoy. At the sector level, power production growth normalized to 8.3%yoy in December from
6.8%yoy in November, suggesting that demand for heavy manufacturing has been improving. For example,
acceleration of production growth was seen in sectors such as pig iron (by 5.3ppts), crude steel (2.3ppts), cement
(0.8ppts) and crude oil processing (0.8ppts) compared with those in November. Nominal FAI growth slowed by
0.3ppts to 19.9%yoy in Jan-Dec from Jan-Nov, but real FAI growth (stripping out inflation) remained steady. FAI in
sectors like railway equipment manufacturing, railway transportation, education, and social services witnessed
accelerating growth in 2014, indicating that investment is shifting towards sectors with under-capacity. Funds
available for real estate developers grew 26.5% in 2013, accelerating from 12.7% in 2012, indicating a more
favorable financing environment for real estate investment. This is leading indicator should suggest a positive
momentum for real estate investment growth in 2014. Retail sales growth was 13.6%yoy in December, vs. 13.7% in
November and consensus of 13.6%. By product, the sales of furniture (20.1%yoy), communication appliances
(21.8%yoy) and construction materials (24.9%) showed stronger growth in December.
In the past days, many investors were concerned about the restructuring of a trust product issued by China Credit
Trust and its potential ripple effect on the financial system. We believe that its spillover effect will be very limited but
its long term implication is very positive, as permitting some WPM defaults is an important step towards reducing
systemic risks. It is because these defaults, although very small in terms of scale and impact on the real economy,
will significantly enhance the ability of the market to price risks (i.e. increasing the risk premiums for risky products),
reduce the incentive for financial institutions (including banks) to sell risky products, and contain the ability of risky
issuers to borrow excessively from the market, and allocate risks to investors with the right risk appetite.
Jun Ma
(+852) 2203 8308
jun.ma@db.com

Deutsche Bank Securities Inc.

Page 7

21 January 2014
DB Today - Global/Macro

Early Morning Reid

Macro Strategy

Well done for surviving 'Blue Monday' yesterday - a day which many say is the most depressing day of the year.
Apparently by now New Year's resolutions are failing, with the cold reality of what lies ahead truly setting in against a
soundtrack of still dark mornings and nights. Nice! For me its compounded by having played only one round of golf
in the last month due to first skiing and now flooding. Its also not helped by half the radiators in our house being
turned off at the moment and having no stairs due to building work. So with that I'm packing my bags and heading
off to Asia and Australia for 2 weeks seeing clients. Hopefully by the time I'm back I can put the Arc back in the
garage and I can climb to higher ground on a beautiful new staircase. As for the EMR, although one would think that
this would be an easier time zone in which to contribute, the reality is that I have a full schedule of meetings so I'll be
relying on Anthony even more than ever. Indeed Anthony will take over this morning's EMR after this para to allow
me to prepare for the flight etc. My first stop is Japan where I haven't been since Abenomics started so I'm intrigued
to see how things have changed. I hope the love of Karaoke remains! Anyway I'll leave you with Anthony for now.
Though European markets felt fairly directionless yesterday, there has been plenty of debate on Chinas growth
numbers after the release of Q4 GDP data yesterday. The prevailing sentiment is a bit firmer this morning thanks to
the Peoples Bank of Chinas actions today and yesterday to shore up liquidity into the domestic banking system.
According to Reuters, the PBoC has conducted a total of CNY180bn in 21- day reverse repos and another CNY75bn in
7-day reverse repos to provide short term funds to banks today. This comes after the PBoC announced that it had
provided liquidity to larger banks through its Standing Lending Facility yesterday, but the total amount provided was
not disclosed. In addition to that, the PBoC is expanding the facility to small-medium sized banks in 10 regions for a
trial period of 14 days (concluding after Lunar New Year). As part of the trial, smaller banks can seek funding before
the month-end Lunar New Year holiday via the SLF when the overnight, 7-day and 14-day repo rate exceed 5%, 7%
and 8% respectively. Approximately US$20bn has been set aside for the trial.
The PBoCs actions have provided a boost to Asian equities this morning. S&P500 futures are up 0.4% and Asian
bourses are up between 0.5 and 1 percent. Chinas 14-day repo rate has declined by more than 300bp and this has
helped Chinese Ashares stem recent losses (Shanghai Comp +0.7%). Nonetheless, the Shanghai Composite (-5.2%
YTD) remains one of the worst performing equity indices in the Asia region (and indeed the world), exceeding even
the poor YTD performance of Brazils Bovespa (-4.7%) in USD terms. Outside of equities there has been a flow of
investors looking to buy credit protection via the Australian sovereign 5yr CDS and China sovereign 5yr CDS, which
have widened by as much as 4-5bp apiece in the last 24 hours, but the PBoCs injection has provided some relief
today. In Japan, a 0.5% move higher in USDJPY is underpinning the bid for Japanese equities (Nikkei +1.4%) though
flows remain on the subdued side.
Jim Reid
(+44) 20 754-72943
jim.reid@db.com

Page 8

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

FX Daily

If the BoJ takes no additional easing

Market crossroads would be the yen to depreciate when BoJ does not ease further, strengthen when it does.
The BoJ is holding a Monetary Policy Meeting on 21-22nd January. Many market participants expect the Bank to
maintain its policy at this meeting and move to ease further in Apr-Jun. The view is that the BoJ is likely to ease
further to stimulate the economy following the consumption tax hike in April or to further heighten inflation
expectations as it reviews the year of QQE.
The market seems to see that, factoring in additional easing by the BoJ, the 10y JGB yield can stay low at 0.6% and
overseas investors sold the yen and bought Japanese stocks. They simply conclude that the yen could appreciate,
stocks fall, and yields rise due to an unwinding of such positions if the BoJ does not ease further.
Will this really happen? The BoJ has been conducting extreme easing labeled "a new dimension of easing". The Bank
would likely save further easing for unexpected future developments when the US economy (especially employment),
which is the key driver of yen depreciation, continues to firm and the USD/JPY rises in 105-110.
We see no issue with the basic view that simultaneous progress of the Fed's QE3 taper and the BoJ's QQE would
bring yen depreciation. However, smooth progress in tapering QE in the US assumes a firm US economy. This would
naturally encourage the yen to weaken and stocks to rise, likely diminishing the need for the BoJ to ease further.
Conversely, the USD/JPY and stocks would likely fall and the BoJ would be forced to ease further if the US economy
deteriorates. However, even if the Bank eases further, the yen will not depreciate against the dollar and Japanese
stocks will inevitably correct if the US economy is weak.
Some position adjustments may be seen over the coming months depending on the degree to which additional
easing by the BoJ is factored in. However, further easing by the BoJ is in itself largely reactive to US-led exchange
rates and share prices. We see the US economy as unequivocally more important for the yen than marginal changes
of BoJ policy under the zero interest rate condition.
Taisuke Tanaka
(+81) 3 5156-6714
taisuke.tanaka@db.com

Deutsche Bank Securities Inc.

Page 9

21 January 2014
DB Today - Global/Macro

Japan FI Morning Memo

Investor demand for JGBs still strong

Investor demand for JGBs still strong

Trading activity by investor type in December suggests that regional financial institutions are rebuilding JGB
holdings. The city banks sold close to a net JPY2trn JGBs, the ninth straight month of net sales, but we cannot
confirm positions because of sales at direct auctions and to the BoJ. The dip-buying by regional financial institutions
caught our attention. Regional financial institutions bought a net JPY1.5trn JGBs. The regional banks rebuilt holdings
in Oct-Dec after reducing the balance of holdings in Jul-Sep, with net purchases of JPY861.9bn long-term JGBs and
JPY264.4bn intermediate JGBs. Buying was focused in the intermediate sector through to November, but the
longterm sector was bought on weakness in December as yields rose. Trust banks and insurers bought a net
JPY1.02trn superlong JGBs, balancing a slowdown in Oct-Nov with purchases in December.
Investor trading activity shows that regional financial institutions and absolute buyers such as life insurers made
purchases in December when yields rose modestly. This indicates to us that potential demand for JGBs remains
strong. We think evidence that deflation has been overcome is needed for domestic investors to raise their dipbuying target level in earnest or decide to shift funds from JGBs to other assets. Investors are likely unwilling to
make plans to build JGB risk given the government and the BoJ's commitment to inflation. However, even if the
balance of holdings is reduced, we see no other assets that funds can be shifted into. We expect investors to
become increasingly impatient if yields do not look likely to rise even by the start of FY14.
Makoto Yamashita
(+81) 3 5156-6622
makoto.yamashita@db.com

Page 10

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

US Daily Economic
Notes

A light smattering of data ahead of the January

FOMC meeting

Commentary for Today: The data docket this week is light ahead of the January 28-29 FOMC meeting. The main
releases all come Thursday with initial jobless claims, existing home sales and the index of leading economic
indicators. Jobless claims will be the primary focus as they correspond to the survey period for January payrolls. If
the recent trend in claims continues, we expect a substantial recovery in the pace of hiring following the weather
impacted disappointment in December payrolls (+74k). Jobless claims have fallen three out of the last four weeks
following a significant back up in early December that was most likely due to the same weather that afflicted
payrolls. As we have repeatedly noted, the recent volatility in claims is not unusual around this time of the year. The
Labor Department acknowledged as much in early December when claims jumped to 380k, which was a meaningful
deviation from the prior readings. Since then, claims have steadily declined to 326k as of the latest data point for the
week of January 11. Assuming claims remain at their current level this week, the four-week moving average will
decline to 331kapproximately 8k below where it was for the November survey period. Recall that the November
payroll gain was an initially reported +203k and was subsequently revised up to +241k. Thus, barring any meaningful
aberration in claims this week, we would expect a solid +200k nonfarm payroll gain in January. Additionally, given
the weather impact on payrolls last month, which we estimate depressed hiring by approximately +100k, we
anticipate at least a +40k upward revision to the December data.
Aside from December nonfarm payrolls, the bulk of the economic data over the past month have reinforced our view
that growth remains well above trend; this should be reflected in the December LEI (+0.3% forecast vs. +0.8%
previously). Thus far in the current quarter, consumer confidence remains stable, the regional manufacturing surveys
point toward steady factory sector output, and the private sector consumption data showed signs of acceleration in
Q4. In fact, our preferred measure of underlying domestic demandfinal sales to private domestic purchasersis
expected to rise over 4.0% in Q4the best performance since Q1 2012. At the same time, the fiscal drag from tax
increases and spending cuts will be significantly less this year as state and local spending should turn positive.
Remember, too, that household net wealth has likely increased by about $8 trillion over the past year which should
be highly supportive of further consumption gains.
Against this backdrop, we anticipate the housing sector to continue to improve. To be sure, December existing home
sales (4.95M vs. 4.9M) could see a minor weather impact similar to last weeks housing starts and permits data.
Thus, we would not get overly concerned if the transactions data disappoint, especially given that homebuilder
confidence remains elevated and rising home prices should buoy commercial bank lending for mortgages. In fact,
household mortgage debt in Q3 increased for the first time in over five years. On the margin, rising mortgage
liabilities should ease lingering concerns among some dovish policymakers that tapering of MBS purchases will
restrain the housing recovery.
Joseph LaVorgna
(+1) 212 250-7329
joseph.lavorgna@db.com

Deutsche Bank Securities Inc.

Page 11

21 January 2014
DB Today - Global/Macro

China Cement

Cement trip takeaways: a banner year for South China

GD cement trip takeaways; reiterating Buy on CRC, raising TP to HKD7.65

We hosted a cement trip to GD, post DBs Access China conference. Our visit confirms the strong start to 2014
highlighted by cement companies at our conference. Due to good weather conditions in Jan, inventory levels are
low and prices have been maintained for most producers compared to Dec 13. In South and East China, where we
see more balanced supply-demand, there is a strong willingness among producers to keep prices steady, as they
plan to maximize profits in those areas. We believe the seasonal decline in ASPs will be less during CNY, allowing
producers to enter the 2Q peak with a high base. We see upside risks to earnings for most companies under our
coverage.
1Q14 production halts for Guangdong support higher pricing for 2014
Leading producers are heading into CNY with low inventory levels, therefore the pressure to destock during the
weak season is minimized. Both Conch and CRC have inventories of only 40% and 30% of storage capacity
respectively, some c.20ppts lower than last year. In GD, Conch is proposing 15 days of production halts during CNY
in 2014, showing its determination to keep prices stable. Conch has clearly opted for a different strategy in 2014 for
regions where supply-demand is better, prioritizing profitability over volume. Therefore, the steep price declines for
GD seen in 1H over the last two years should not be repeated this year. We believe pricing in 2014 will be similar to
what we saw in 2009-2011, with prices only seeing a mild decline in 1Q14. We see significant upside risks to
consensus earnings and have raised CRCs FY14/15e earnings by 14.6% and 15.9% respectively.
Further declines in coal prices in 1Q14 to boost margins for cement producers
Coal traders believe the 4Q13 rebound in coal prices was not supported by real demand, instead it was because coal
producers wanted to boost the price for contract negotiations with power companies by year-end. As a result,
Shenhua has already announced two price cuts greater than RMB50/t in 2014, and a rebound in prices is not in sight
till at least 2Q14. Further, coal traders believe the coal inventories in the QHD port may spike to 8mt from 6mt
currently. Demand continues to be weak with less than 40 ships at the QHD port vs. 160 ships during its peak in
2012-13. While we expect cement prices to decline in 1Q14, this would be partially offset by lower coal prices too.
Preferred regions for 2014: South and East China
In 2014, we believe South and East China are the two regions where we will see a structural improvement in supplydemand leading to a continuous uptrend in profitability. However, regions such as Guizhou, Yunnan and Gansu
should come under pressure in 2014, as Conch will be rolling out new lines and Conch intends to undertake M&A
there. For South China, we expect c.4% gross supply growth in 2014 excluding removals, while demand will likely
grow c.10% (c.14% in 2013), as demand from infrastructure projects continues to be strong. We believe a shortage
of cement may appear if supply is not relaxed by 2015. We value CRC based on 10.5x FY14e PER, equivalent to its
5- year mid-cycle average. We believe this is justified, given the solid earnings growth profile of the company where
we see an earnings CAGR of 27.0% for FY14-16. Risks: lower-than-expected demand due to tight credit, higherthanexpected coal prices.
Johnson Wan
(+852) 2203 6163
johnson.wan@db.com

Page 12

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

Genting Hong Kong

Buy
Reuters: GENH.SI

Exchange: HSI

Ticker: GENH

Lower earnings and price target; still a value play

Price (USD)
Price target (USD)
52-week range (USD)
Market cap (USDm)
Shares outstanding (m)
Net debt/equity (%)
Book value/share (USD)
Price/book (x)
FYE 12/31
Sales (USDm)
Net Profit
(USDm)
DB EPS (USD)
PER (x)
Yield (net) (%)

0.42
0.54
0.52 - 0.38
3,334
7,892.7
-10.4
0.38
1.1

2012A
520

2013E
555

2014E
650

198.4

751.4

261.8

0.02
14.8
0.0

0.01
43.6
0.0

0.03
13.1
0.0

Deep value and plenty of cash what's next?

At a 37% discount to market SOTP, Genting Hong Kong remains a deep value stock
with nearly US$1.0bn gross cash after paring down its stake in NCLH. The Lim
family raised its stake to 58.1%, or 75.9% including that held by Genting Malaysia.
We see dividends, M&A and fleet rejuvenation as ways to deploy cash. We trim our
TP to US$0.545/sh given our earnings cut but maintain Buy.
Cash up significantly; Lim family raises stake
GENHK raked in close to US$738m in 2013 by paring down its stake in NCLH to
31.4% (from 50%). Given its projected near US$1.0bn gross cash, GENHK has
various options including, but not limited to, (1) a fleet renewal program given the
average fleet age of 21 years; (2) M&A; and/or (3) pay a dividend. It is interesting to
note that major shareholder Tan Sri KT Lim & Family has raised its stake to 58.1%,
from 55.6% previously (ex GENMs 17.8% stake).
Asian cruise earnings affected by lower holds; earnings trimmed
We understand from our recent meeting with GENHK that 2013 gaming operations
in Asian cruise remained robust but profitability was affected by lower VIP holds
and a tough comparison given above-theoretical hold in FY12. Coupled with lower
associate contributions following the NCLH placements, we have lowered our FY1315E core NP by 54%, 22% and 18% respectively. Lower gaming accounted for most
of the FY13E cut while NCLH made up 40- 50% of the reduction in FY14-15E
earnings. RWM, which also suffered low hold in 2013, may see a disappointing
FY13 given the typhoon effect in Q4.
Trades at 37% discount to market SOTP of US$0.66/share
Following our cut in Asian cruise earnings (c.11% SOTP), we lower our DB SOTP to
US$0.64, from US$0.67. Our SOTP values NCLH at DB TP of US$34, Travellers on
11.7x FY14E EV/EBITDA (or DCF), Asian cruise on 5x EV/EBITDA. We peg our 12-TP
at a 15% discount to DB SOTP, which implies a fully diluted PER of 17.2x (vs a
historical average of 15.3x). Risks: economic downturn in Asia or globally; slowerthan-projected Philippines gaming market growth.
Aun-Ling Chia
(+60) 3 2053 6768
aun-ling.chia@db.com

Deutsche Bank Securities Inc.

Page 13

21 January 2014
DB Today - Global/Macro

Quantitative Strategy - Quantfucius

Welcoming the Year of the Horse

Galloping away from macro-uncertainty to stock selection

We expect stock selection to (finally) matter this year
Quantifying markets
Even though investor sentiment appears to be low (but improving) across Asian markets, liquidity has returned,
liquidity risk has normalized and investors have been pricing risk adequately. Since the opportunity set for stock
pickers is at the highest, we believe that Asian equity investors should focus on stock selection.
Whats cheap, whats expensive?
According to our value decomposition model, country valuation premia have compressed. In Japan, investors are
now clearly favoring stocks with higher ROEs supported by higher margin and turnover, whilst dumping stocks
with higher dividend payout. In Asia ex-Japan, tactically, there could be opportunities in Korean stocks and stocks
with higher analyst revisions.
Country calls and stock selection
Our country recommendation model currently favors the US, China, but also the Philippines and Japan, whilst
shying away from Indonesia, the only Asia country in its short basket. We still advocate a balanced approach to
stock selection. Screens from our multi-factor, technicals composite and NLASR models are available in the last
section of the report.
(Originally published on 17 January 2014)
Khoi Le Binh
(+852) 2203 6990
khoi.lebinh@db.com

Page 14

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

MTU

Hold
Reuters: MTXGn.DE Exchange: GER

Ticker: MTXGn

FY13 results preview

Price (EUR)
Price target
52-week range
Market cap (EUR)
Shares outstanding (m)
Volume (20 Jan 2014)
DJ (.STOXXE)
FYE 12/31
FY EPS (EUR)
Revenue
(EURm)
DB PBT (EURm)
P/E (x)
Stated PBT
(EURm)
DPS (EUR)

67.60
65.00
79.25 - 65.76
3,427.3
50.7
44,022
320.93

2012A
4.01

2013E
4.07

2014E
4.09

3,379

3,732

3,898

299
15.1

303
16.6

305
16.5

272

289

304

1.35

1.38

1.41

Q4 performance unlikely to generate much excitement

MTU will report FY13 results on 18 Feb. We expect little surprise around Q4 trading,
with spares growth likely to have been flat YoY. All eyes will be on 2014 guidance,
where although the main moving pieces have already been provided, no hard EBIT
or FCF numbers have yet been given. The key issue for MTU remains returning to
better earnings growth and improved FCF. With the shares trading in line with our
E65 TP, we maintain our Hold rating.
Q4 performance unlikely to generate much surprise
We forecast Q4 EBIT of E109m, up 13% YoY, with a broadly similar pace of growth
expected at both OEM and MRO divisions. We expect OEM spares growth to be flat
organically in Q4 YoY, (reported spares +5% post IAE upshare). V2500 spares
should have continued to grow c.15%, albeit PW2000 is likely to be still well down
(led by PW2000 military spares at c. -50%). Despite the still sluggish overall rate of
spares growth in Q4, we expect OEM margins to see a material sequential
improvement in Q4 (up 150bps to 13.5%) due to lower OE engine sales than Q3.
Following the good FCF in Q3 we expect minimal FCF in Q4.
2014 guidance will be key focus
Although MTU already provided the key moving pieces behind 2014 guidance at its
Nov 2013 Investor Day, FY13 results should see the company commit to a specific
guidance range for FY14 EBIT and FCF. We expect this will provide little excitement,
with the top end of any EBIT guidance range unlikely to be above our current FY14
E384m forecast. FCF for FY14 is likely to be minimal in our view and we remain
content with our E20m FCF forecast.
Hold maintained TP E65
Although we see the longer-term growth potential at MTU as V2500 aftermarket
growth continues and as over time new OE engine programs transition into their
richer aftermarket phase (GEnx, GP7000 and longer-term the GTF), the near-term
pace of EBIT growth will continue to be held back by rising OE deliveries and the
drag from the moderate decline we see ongoing in spares for older engine
programs. Our SoP derived TP remains E65 (at a 1.35 $:E spot rate). Key risks on
both upside and downside spares growth, FX rate, new program execution.
Benjamin Fidler
(+44) 20 754-56727
ben.fidler@db.com

Deutsche Bank Securities Inc.

Page 15

21 January 2014
DB Today - Global/Macro

SAFRAN

Buy
Reuters: SAF.PA

Exchange: PAR

Ticker: SAF

FY13 results preview

Price (EUR)
Price target
52-week range
Market cap (EUR)
Shares outstanding (m)
Volume (20 Jan 2014)
DJ (.STOXXE)
FYE 12/31
FY EPS (EUR)
Revenue
(EURm)
DB PBT (EURm)
P/E (x)
Stated PBT
(EURm)
DPS (EUR)

2012A
1.87

53.45
55.00
53.61 - 33.25
22,243.3
416.2
395,171
320.93
2013E
1.99

2014E
2.54

13,560 14,820 15,818

892
14.8

1,107
26.9

1,453
21.0

1,319

1,679

2,033

0.96

1.27

1.34

Aftermarket performance in Q4 and guidance will be the area of focus

Safran reports FY13 results on 20 February. As always the primary focus of results
will be civil engine aftermarket growth, where we see potential for some upside
surprise, driven by the strength in the civil engine aftermarket at the nine-month
stage (+25.5%) and recent Q4 results from GE. In usual fashion, we expect the 2014
initial guidance to be conservative and it would not surprise us if this comes in
below our current forecasts. With appealing valuation in the context of its near- and
mid-term growth, we maintain our Buy.
Safran likely to beat management guidance in 2013
Overall, we expect Safran to report E1.86bn (guidance: E1.77bn/consensus:
E1.79bn). Although at the nine-month stage, management alluded to some
downside potential over FCF from uncertainty on collecting cash from the French
MoD, we believe Safran will deliver in line with its FCF conversion guidance of
around 40% of EBIT. After interim dividend payment and the acquisition of RollsRoyces 50% share in the RTM322 helicopter engine programme, we expect Safran
to end 2013 with net debt of E1.1bn.
All eyes on the civil engine aftermarket growth for Q4 and 2014 guidance
We forecast the civil engine aftermarket to be up 14.4% in FY13, with a forecast of
low double-digit decline in Q4 (around minus 12-13%) due to the high comp base.
Based on the strong commercial aerospace spares growth reported by GE, we see
more upside than downside surprise risk to our Q4 aftermarket growth forecast.
Should the civil engine aftermarket turn out to be zero instead of low teens decline,
this could imply potentially 3.5% upgrade to our forecast which are some 5.5%
ahead of guidance. It will be interesting to see if this emerges. The market will also
be looking closely at managements confidence for civil engine aftermarket growth
for 2014 especially over ongoing strong growth in CFM56 second generation engine
(which represents an estimated 43% of civil engine aftermarket revenue) and GE90
(an estimated 12% of civil engine aftermarket revenue).
Safran offers appeals of CFM56 and GE90 spares growth; Buy, E55 target price
Fundamentals for Safrans aftermarket activities remain robust, driven by fleet
maturation in the sizeable 737 and A320 narrowbody fleet (powered by CFM) and
the successful B777 widebody fleet (powered by GE90). This should allow Safran to
materially outgrow the market again in 2014: we expect Safrans civil engine
aftermarket to grow organically by c.12% versus 5-7% for the European commercial
aftermarket stocks. These should continue to drive further progress in the shares
and we maintain our Buy rating and SOTP/through-cycle EPS-based target price of
E55. Key risks: USD weakening; a weaker-thanexpected aftermarket recovery;
overpayment for larger acquisitions.
Milene Kerner
(+33) 1 4495-6585
milene.kerner@db.com

Page 16

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

Thales SA

Buy
Reuters: TCFP.PA

Exchange: PAR

Ticker: TCFP

FY13 results preview

Price (EUR)
Price target
52-week range
Market cap (EUR)
Shares outstanding (m)
Volume (20 Jan 2014)
DJ (.STOXXE)
FYE 12/31
FY EPS (EUR)
Revenue
(EURm)
DB PBT (EURm)
P/E (x)
Stated PBT
(EURm)
DPS (EUR)

2012A
3.15

48.93
52.00
48.95 - 26.52
9,780.2
199.9
160,250
320.93
2013E
3.35

2014E
3.91

14,158 14,155 14,215

865
8.4

955
14.6

1,115
12.5

606

747

900

0.88

0.97

1.12

Good EBIT growth expected for 2013 with confident outlook

Thales reports FY13 results on 19 February. Overall we expect good growth to
emerge in 2013 with EBIT growth of 7.5% driven by the performance plan benefit.
We expect management to be upbeat over prospects for 2014 led by E100m
additional savings. This, together with a number of problem contracts which will
reach completion in 2014 and better hedge rate, means 2014 EPS should be up low
teens. Of key importance will be any comments over margin progress beyond 2014.
Continuing improvement in Thales profitability remains the key underpin to our
ongoing positive stance on the stock and for this reason we maintain our Buy rating
and E52 target price.
FY13 results expectations
Despite the 0.5% organic revenue decline expected at Defence and Security, good
growth at Aerospace and DCNS should see overall group revenue moderately up
organically (our est. +2.2% to E14.16bn). Good progress on cost reduction should
see margins rise 50bps in the year with EBIT rising 7.5% YoY to E996m (consensus
E1bn). We expect 2013 will likely see Thales beat its guidance in terms of cashflow.
Our FCF of E528m is well ahead of management guidance (guidance <E400m),
although, following the strong order intake in Q4 and bearing in mind that in each of
the past three years Thales has beaten its FCF guidance, we believe the risk on FCF
should be on the upside.
Outlook comments should highlight ongoing growth can be delivered
We have confidence that Thales management will confirm E100m savings to be
delivered in 2014. Reflecting this, we expect Thales management to be reasonably
optimistic over outlook with management likely to target ongoing EBITA growth
(10% to 15%) despite defence top-line pressures. Consistent with recent
communication from the company, we expect the tone to be optimistic over top-line
prospect in emerging countries and to flag the scope for further cost savings
beyond 2014. However we do not expect management to be more specific on 201517 drivers, which will be discussed for the first time at the 10 April investor day.
Appealing valuation and positive catalyst in April Buy, E52 target price
Little credit is still given to Thales within current valuation over its ability to reach
8% margin in 2014 and sustain or grow margins beyond 2014. Relative valuation is
appealing with the shares trading on a 2015E EV/EBIT 7.2x while offering a 9% FCF
yield. We retain our SOTP-derived E52 target price and maintain our Buy. Key
downside risk: a greater-than-expected cut to defence budgets and restructuring
plan execution failure.
Milene Kerner
(+33) 1 4495-6585
milene.kerner@db.com

Deutsche Bank Securities Inc.

Page 17

21 January 2014
DB Today - Global/Macro

UCB

Buy
Reuters: UCB.BR

Exchange: BRU

Ticker: UCB

Weakness on early bond redemption represents entry opportunity

Price (EUR)
Price target (EUR)
52-week range (EUR)
Market cap (EUR)(m)
Shares outstanding (m)
DJ (.STOXXE)
FYE 12/31
Revenue (EUR)
DB PBT (EUR)
Stated PBT
(EUR)
DB EPS (EUR)
DPS (EUR)
P/E (DB EPS) (x)

51.32
61.00
54.93 - 38.45
9,201.7
179
320.9

2012A
3,462
242

2013E
3,407
280

2014E
3,601
417

242

280

417

2.13
1.02
18.0

1.94
1.07
26.5

2.26
1.12
22.7

Early redemption of UCB's convertible bond is weighing on performance

UCBs shares have fallen 5% since the beginning of 2014 (vs an average +5% for
our EU pharma coverage). We believe this reflects anticipation of a decision to
trigger early redemption of its 430m in convertible bonds. If fully converted this
could lead to issue of 11.1m shares and continued weakness as some bondholders
are likely to sell/short the equity. A similar situation for mid-cap peer Shire weighed
on its shares in 4Q13 but we note these have rebounded by c.10% since the
hedging period expired. We view weakness as an attractive entry point and reiterate
our Buy rating and 61 TP.
Reducing Core EPS estimates by 2-3%; maintain DCF based TP of 61/share
Given the shares current premium to the bonds conversion price of 38.7, we
expect the majority of bondholders to opt for conversion. As a result, we have
reduced our 2014E-2017E Core EPS estimates by 2-3% based on a 6% dilution in
share count, offset by reduced interest costs of c.20m/annum. We expect UCB to
further lower its cost of debt and deleverage its balance sheet over 2014-2017
helped by our expectations for a considerable improvement in operating cash-flow
generation.
2014 outlook should reassure on growth prospects
Our forecasts assume that a 27% yoy growth in CVN sales along with a declining
drag from Keppra generic erosion help drive 6% yoy revenue growth in 2014. With
operating costs likely to be broadly flat, we expect a 139bp EBITDA margin
improvement and 17% growth in Core EPS. While UCB may guide conservatively,
we expect new label expansions gained for Cimzia in 2013 and an expected US
approval of Vimpat for monotherapy epilepsy (mid- 14), along with a recent strong
generic Concerta launch to give management sufficient comfort to guide to >10%
Core EPS growth.
20% 13E-17E EPS CAGR and pipeline optionality justifies upside; risks
Our DCF based price target of 61/share implies the shares should trade at 22x
2015E Core EPS and is essentially unchanged (WACC 8.6%; beta 1.1; ERP 5.5%;
TGR 2%). We see this as justified based on above peer group growth (2013E-17E
EPS CAGR 20%) and expect it to be achieved as investors gain comfort on CVN
growth and begin to anticipate potential upside from pipeline data due in late 2014
and through 2015 (worth an additional 14/share to NPV in a best case). Risks relate
to commercial execution on CVN, pipeline failure, competition for Cimzia and
generic challenges to Vimpat patents.
Richard Parkes
(+44) 20 754-50470
richard.parkes@db.com

Page 18

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

UK Water
Companies Mentioned
United Utilities (UU.L),GBP690.00 Buy
Price Target GBP800.00
Pennon Group (PNN.L),GBP687.50 Hold
Price Target GBP650.00
Severn Trent (SVT.L),GBP1,651.00 Hold
Price Target GBP1,550.00

Returns visibility approaching

Announcement on key financial parameters should improve visibility
OFWAT will announce on 27 January its view on key financial parameters for the
2014 price review including the allowed return, financial incentives and the
financial flexibility companies have when setting prices. We expect the headline
allowed return to be quite tough and a negative shock can't be ruled out.
However, it should allow visibility to start to improve and may mark the peak of
uncertainty for the sector. We see United Utilities' (Buy, 800p TP) shares as the
most compelling investment opportunity in the space.
Allowed return cut should be manageable for listed water stocks
In our view a credible outcome for the allowed vanilla return ranges from 3.7% to
4.1% real, with the difference between a positive and negative outcome worth
c.10% on average equity values. We forecast a 120bp cut to 3.9%; a worse
outcome than this is likely to be seen as a disappointment by the market. Although
we model a significant cut in allowed returns we believe that the listed water
stocks will offer a reasonable investment proposition. Based on our projections we
think an investment in United Utilities shares should allow for a double digit return
at the current share price, with high single digit returns for investors in Pennon
and Severn Trent, before factoring in any operating outperformance.
Several levers to pull for dividend sustainability
Although it is too early in the review process to rule out dividend cuts: Pennons
dividend looks the most secure; United Utilities is not overdistributing in our view;
and although Severn Trents dividend looks more stretched, the potential for fast
money (more cash up front), outperformance, hybrids or scrip dividends provide
several options for management. If companies can avoid dividend cuts, RPI linked
dividend yields look fairly attractive. United Utilities should end the 2010-15
regulatory period with the highest yield (5.7%) followed by Severn Trent (5.3%)
and Pennon (4.9%).
No change to price targets or ratings United Utilities is still our top pick
We value the sector based on a 15% premium to RAB, determined via a DCF, with
a number of company specific adjustments. We assume a 120bp cut in allowed
returns at the 2014 review and do not incorporate outperformance into our
forecasts or valuations. United Utilities (Buy, 800p TP), trades on a 7% premium to
RAB and offers standout value, while Pennon (Hold, 650p TP) and Severn Trent
(Hold, 1550p TP) trade on 18% and 19% premium respectively. Key risks relate to
regulation; bond yields & inflation; and the potential for renewed bid interest in the
sector as regulatory uncertainty starts to clear.
James Brand
(+44) 20 754-74705
james.brand@db.com

Deutsche Bank Securities Inc.

Page 19

21 January 2014
DB Today - Global/Macro

Hilton Worldwide

Buy
Reuters: HLT.N

Exchange: NYS

Ticker: HLT

Initiate with Buy, tgt $27. Owned Assets, Industry Tailwinds, & Pipeline;
Price (USD)
Price target
52-week range
Market Cap (USD)
Shares outstanding (m)
Volume (17 Jan 2014)
S&P 500 INDEX
FYE 12/31
1Q EPS
2Q EPS
3Q EPS
4Q EPS
FY EPS (USD)
P/E (x)

2012A

22.25
27.00
22.28 - 21.50
21,907.7
984.6
610,162
1,838.70
2013E
0.03A
0.16A
0.20A
0.16
0.56
39.8

2014E
0.07
0.18
0.17
0.20
0.62
36.1

Initiating Coverage with a Buy Rating and $27 Price Target

While we anticipate many will clamor that the bull case for meaningful upside in
HLT from current levels is the optionality from asset monetization, something we
detail later in this report, we find: 1) the industry bull case, especially given HLTs
domestic owned exposure and leverage to accelerating ADRs at current chain scale
occupancy levels, also something we detail later, 2) its international unit pipeline
growth, and 3) the de-leveraging and therefore differentiated aspect of the story, to
be most appealing. As such, we are launching coverage with a Buy rating and $27
price target.
Our Price Target Analysis
Our price target is $27 and is based on a sum-of-the-parts analysis. Our target
multiples for the Owned (16.1x / 13.5x), M&F (13.5x), and Timeshare (9.0x)
segments are appropriate given our view of the current positioning within the
lodging cycle, HLTs better than peer growth profile in the M&F segment, and peer
valuations. As evidenced in Figure 52, we split our owned portfolio into two buckets
and divide our 2015 EBITDA forecast evenly to account for the Big 8 assets, which
we believe garner a meaningfully higher NAV valuation. Our per key value for this
segment of the owned portfolio is $650K per key, which equates to an implied 16.1x
multiple of estimates 2015 EBITDA. We then apply a 13.5x multiple to the balance
of the owned portfolio, which implies a per key value of ~$150K. Our sum-of-theparts approach generates a firm value of ~$35.66 bn, from which we extract $9.17
bn of year end 2015 net debt and $318 mm of joint venture related debt, to arrive at
an equity value of $26.17 bn, or $27 per share.
Valuation and Risks
When HLTs re-IPO priced at $20 per share on December 11, 2013, we had the
company trading at 12.5x and 11.0x our 2014 and 2015 EBITDA estimates,
respectively. At present, we calculate current EV/EBITDA trading multiples of 13.5x
our 2014 EBITDA estimate and 11.9x our 2015 EBITDA estimate. On 2014, this
represents a 110 bps premium to H, an 80 bps discount to MAR, and relative parity
with HOT. On a free cash flow basis, HLT trades at a 4.2% yield on our 2014 gross
free cash flow estimate and a 5.1% yield on our 2015 gross free cash flow estimate.
Risks include: 1) elevated leverage relative to peers should macro issues emerge, 2)
the potential for share pressure as Blackstone sells down its ownership stake, 3) the
potential for disruptions to the international pipeline, & 4) generic macroeconomic
or event risks.
Carlo Santarelli
(+1) 212 250-5815
carlo.santarelli@db.com

Page 20

Deutsche Bank Securities Inc.

21 January 2014
DB Today - Global/Macro

Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification
This report covers more than one security and was contributed to by more than one analyst. The views expressed in
this report accurately reflect the views of each contributor to this compendium report. In addition, each contributor has
not and will not receive any compensation for providing a specific recommendation or view in this compendium report.

Equity rating key

Buy: Based on a current 12- month view of total
share-holder return (TSR = percentage change in
share price from current price to projected target price
plus pro-jected dividend yield ) , we recommend that
investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not
recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and
target prices always supersede previously published
research.
2. Ratings definitions prior to 27 January, 2007 were:

Equity rating dispersion and banking relationships

1600
1400
1200
1000
800
600
400
200
0

48 %

45 %

40 %

33 %
6%

Buy

Hold

Companies Covered

22 %

Sell

Cos. w/ Banking Relationship

Global Universe

Buy: Expected total return (including dividends)

of 10% or more over a 12-month period
Hold:
Expected
total
return
(including
dividends) between -10% and 10% over a 12month period
Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period

Deutsche Bank Securities Inc.

Page 21

21 January 2014
DB Today - Global/Macro

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Page 22

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David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Guy Ashton
Global Chief Operating Officer
Research
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Asia Pacific Research

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FICC Research & Global Macro Economics

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Regional Head
Deutsche Bank Research, Germany

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