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1、92.90-5.43.835,72726Company reportConsumer & RetailDiversified Consumer ServicesEquity TaiwanLung Yen (5530 TT)Initiate at UW: Competition stiffeningabcGlobal ResearchUnderweightTarget price (TWD)84.00 Facing rising competition in premium columbarium marketShare price (TWD)Forecast dividend yield (%
2、)Potential return (%)Note: Potential return equals the percentagedifference between the current share price andthe target price, plus the forecast dividend yieldPerformance 1M 3M 12M Preferences for simpler funeral ceremonies eroding pricingand growth Initiate coverage at UW with a target price of T
3、WD84;consensus estimates yet to reflect weak outlookAbsolute (%)Relative (%)IndexRICBloombergMarket cap (USDm)Market cap (TWDm)2.7 -8.0 7.51.4 -9.8 -1.4TAIWAN WEIGHTED IN5530.TWO5530 TT1,27837,075Columbarium/cemetery business rising competition. A leading life services provider,Lung Yen has historic
4、ally dominated the mid- to high-end segment of the columbarium market,but is facing rising competition. Rival ChinPaoSan is expected to launch a competingcolumbarium in the Greater Taipei area in 2Q13. As a result, we expect Lung Yenscolumbarium and cemetery sales to slow to only 9% in 2013 from 27%
5、 in 2011-12. Moreover,Enterprise value (TWDm)Free float (%)Note: (V) = volatile (please see disclosure appendix)14 January 2013Julie Wang*AnalystHSBC Securities (Taiwan) CorporationLimited+8862 .twJenny Lai*, CFAHead of Research, TaiwanHSBC Securities (Taiwan) CorporationLimited+8862 .twView HSBC Gl
6、obal Research at:http:/*Employed by a non-US affiliate ofHSBC Securities (USA) Inc, and is notregistered/qualified pursuant to FINRAregulationsIssuer of report: HSBC Securities(Taiwan) Corporationabout 30-40% of Lung Yens revenue comes from pre-sold columbarium niches, usually withfive-year instalme
7、nt plans. This revenue is expected to drop in 2013, as pre-sold contracts arerecognised from a weak 2008, when demand was hit by the global financial crisis.Funeral services a simple life. Taiwans funeral service costs are 20%-plus higher thanthose in Western countries, even at a much lower GDP per
8、capita. There is a growingtrend towards simplified funeral ceremony, which favours smaller operators with morecompetitive pricing. Lung Yen continues to leverage its superior service quality for sharegain, but progress is slow. As such, we see its funeral service revenue growth slowing to5-8% in 201
9、3-14 from 13% growth in 2012.Reality gap initiate at UW with a TP of TWD84. We expect Lung Yens overallrevenue to grow 7% in 2013, significantly below the consensus of 17%. In our view, themarket is overlooking the potential weakness in core businesses and is set for adisappointment at the quarterly
10、 results announcement. Our SOTP-based target price ofTWD84, values its columbarium/cemetery business based on a DCF approach with a 10%WACC and funeral services at a 15x 2013e PE, the global peer group average. The keyupside risk is a greater-than-expected gain from the disposal of property investme
11、nts.Lung Yen Financial and valuation summaryLimited2010a2011a2012e2013e2014eDisclaimer &DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of itRevenue (TWDm)Net profit (TWDm)EPS (TWD)Upside (downsi
12、de) to consensus (%)EPS (% y-o-y)Price/earnings (x)Dividend yield (%)ROE (%)Price/book (x)Source: Company data, Bloomberg, HSBC estimates2,9998752.3N/A437.339.41.623.76.64,4551,8614.7N/A99.819.73.327.84.54,8302,0515.1-7.510.217.93.823.84.05,1622,2395.6-15.69.216.44.123.73.75,3092,3325.8-22.04.215.74
13、.322.93.5Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Key charts and tablesLung Yen Revenue growth peakingTWDmn6,0005,0004,0003,0002,0001,0000Slow ing rev enue grow th since 2011abc201020112012e2013e2014eColumbarium and cemetery rev enue - one-time pay ment*Funerals surv ice rev enu
14、eColumbarium and cemetery rev enue - by instalment*OthersSource: Company data, HSBC estimates*Contract sales fulfil 100% payment in current year; *Contract sales in previous years and finish instalment payment in the current yearLung Yen Decelerating columbarium and cemetery newcontract salesLung Ye
15、n Sluggish pre-need contract salesTWDmn3,0002,5002,0001,5001,000500060.0%50.0%40.0%30.0%20.0%10.0%0.0%TWDmn4,0003,0002,0001,000020.0%10.0%0.0%-10.0%-20.0%-30.0%201020112012e2013e2014e2008 2009 2010 2011 2012e2013e 2014eColumbarium and cemetery sales (LHS)*y -o-y (RHS)Source: Company data, HSBC estim
16、ates*Include sales from both a lump sum payment basis and an instalment basisLung Yen Deteriorating ROE, re-rating unlikelyPre-need contract sales (LHS)y -o-y (RHS)Source: Company data, HSBC estimatesLung Yen Improving cash generation on muted profit growth(%)302527.823.823.722.9TWD544.24.22015105-3
17、210.920112012e2013e2014e2012e2013e2014e2Source: Company data, HSBC estimatesROEFCFF per shareSource: Company data, HSBC estimatesLung Yen (5530 TT)Diversified Consumer Services14 January 2013Investment thesis Rising competition in the luxury segment as well as a lower baseof revenue recognition on p
18、re-sold contracts Improving share gain in the funeral services market, while theprogress is slow Initiating coverage with an UW rating and a target price of TWD84;unrealistic market expectationsabcCompany backgroundLung Yen is a leading cemetery developer andfuneral services provider. The company is
19、Taiwans largest columbarium developer bycapacity with projects located in the GreaterTaipei area and Chaiyi County. In 2012, weestimate the columbarium/cemetery segmentaccounted for 64% of its revenue, funeral servicesfor 27%, and rental income from commercialproperties and revenue recognition on pr
20、opertydevelopment for the remaining 9%.In the past, the company used cash received frompre-need funeral contracts to fund columbariumdevelopment and investment in commercialproperties. However, due to a revision in industryregulations in July 2012, the company is now onlypermitted to invest these un
21、earned pre-needcontract revenues into money market securities.Investment thesisThe reality gapThe consensus is projecting revenue growth of 17%for 2013 and 15% for 2014, compared with ourestimate of 3-7% in 2013-14. In our view, theconsensus is overly optimistic for three key reasons: Rising competi
22、tion in the high-endcolumbarium segment. Lung Yens mainfocus in 2013 should continue to be itspremium columbarium, which was launchedtwo years ago. While the market has beenexpecting continued sales growth momentumon this project, we expect growth todecelerate, owing to rising competition. LungYens
23、key competitor ChinPaoSan isexpected to launch a competing columbariumin 2Q13, developed in collaboration withrenowned Taiwanese sculptor Ju Ming. Thisis the first competing high-end columbariumlaunched since 2003. As a result, we expectsales at True Dragon Tower to grow only 5%in 2013 versus 13-18%
24、 in 2011-12. Weak contributions from columbariumrevenue recognition. Lung Yen derives 30-40% of its revenue from the recognition ofpre-sold columbarium contracts. Thesecontracts are typically sold with five-yearinstalment payment terms and revenue isrecognised when the contracts are fully settledand
25、 the associated niches in the columbariumare clamped (i.e., construction of the niches iscompleted). This means revenues from3Lung Yen (5530 TT)Diversified Consumer Services14 January 2013projects launched in 2008 will be recognisedby end-2013. However, 2008 was one of thecompanys most difficult yea
26、rs, withcolumbarium and cemetery contracts down44% during the period, which means therevenue stream from pre-need contractsshould be weak in 2013. We project revenuefrom recognition of pre-sold contract will fall13% in 2013. Growth in funeral services to moderate.Lung Yen offers funeral services, wi
27、thsegment revenue coming from a mixture ofpre-need contracts (contracts, which lock inthe price of the funeral plan) and immediateservices. There is a growing trend towardssimplified funeral ceremony, which favourssmaller operators with more competitivepricing. Lung Yen continues to leverage itssupe
28、rior service quality for share gain, butprogress is slow. We expect Lung Yensfuneral service revenue growth to slow to 8%and 5% in 2013 and 2014, respectively, from13% growth in 2012.Lung Yen SOTP valuationValuation, catalysts and risksWe derive our target price of TWD84 based on asum-of-the-parts (
29、SOTP) approach. We value thecolumbarium and cemetery development businessbased on a NAV with a 10% WACC. We use a15x 2013e PE (in line with the global peer groupaverage) to value the funeral service business. Tobe conservative, we value the property assets atmarket value. As our target price implies
30、 apotential return of -5.4% (including a forecastdividend yield of 3.8%), we initiate coverage onLung Yen with an Underweight rating.Downside catalysts include: A potentialdisappointment in the upcoming quarterly resultsannouncement in March could lead to adowngrading of market expectations about th
31、ecompanys future growth. Note that our 2013-14EPS forecasts of TWD5.6 and TWD5.9,respectively, are 16% and 22% below consensus.Upside risks include: Higher-than-expectedniche ASP expansion and potential gains from thedisposal of property investments.abcLung Yen recognised valueTWDmValue per shareTWD
32、% of totalValuation methodReal EstateRental AssetColumbarium and CemeteryFuneral ServiceEVNet cash (Net debt)3,45413,12214,5853,78834,949-1,3928.732.936.59.587.6(3.5)10%39%43%11%104%-4%Market valueMarket valueNPV 10% WACC15x 2013e PETarget PriceSource: Company data, HSBC estimates484.0Lung Yen (5530
33、 TT)Diversified Consumer Services14 January 2013Financials & valuationFinancial statementsValuation dataabcYear to12/2011a12/2012e12/2013e12/2014eYear to12/2011a12/2012e12/2013e12/2014eProfit & loss summary (TWDm)RevenueEBITDADepreciation & amortisationOperating profit/EBITNet interestPBT4,4551,947-
34、1231,824-152,0344,8302,154-1082,045-192,3785,1622,306-1142,192-182,5185,3092,411-1142,296-192,622EV/salesEV/EBITDAEV/ICPE*P/NAVFCF yield (%)Dividend yield (%)7.817.91.519.74.5-10.03.37.416.61.417.94.00.03.86.915.41.516.43.74.24.16.714.71.515.73.54.04.3HSBC PBTTaxationNet profitHSBC net profit2,034-1
35、481,8611,8612,378-2352,0512,0512,518-1752,2392,2392,622-1832,3322,332Note: * = Based on HSBC EPS (fully diluted)Price relativeCash flow summary (TWDm)Cash flow from operationsCapexCash flow from investmentDividends1,346-4,543-1,909-1,197529-161-832-1,3971,73541-63-1,5171,5870-107-1,59615513511515513
36、5115Change in net debt 3,042FCF equity -3,422Balance sheet summary (TWDm)83417-1551,431-551,38695759575Tangible fixed assets12,07712,12911,97511,8335555Current assetsCash & others16,1332,48215,0251,02814,8911,18214,4291,2372011Lung Yen2012Rel to TAIWAN WEIGHTED INDEX20132014Total assets30,97729,8952
37、9,60629,002Operating liabilitiesGross debtNet debtShareholders fundsInvested capital2,2663,0405588,17523,4621,1842,4201,3929,08824,9431,1792,4201,2389,81024,5051,1992,4201,18310,54623,826Source: HSBCNote: price at close of 10 Jan 2013Ratio, growth and per share analysisYear to12/2011a12/2012e12/2013
38、e12/2014eY-o-y % changeRevenueEBITDAOperating profitPBTHSBC EPS48.5105.0117.862.399.88.410.612.116.910.26.97.17.25.99.22.84.54.74.14.2Ratios (%)Revenue/IC (x)ROICROEROAEBITDA marginOperating profit marginEBITDA/net interest (x)Net debt/equityNet debt/EBITDA (x)CF from operations/net debt0.28.227.87.
39、043.741.0129.56.80.3241.20.27.623.87.144.642.3113.915.30.638.00.28.223.78.044.742.5124.712.60.5140.20.28.822.98.445.443.3129.211.20.5134.2Per share data (TWD)EPS reported (fully diluted)HSBC EPS (fully diluted)DPSNAV4.664.663.0020.485.145.143.5022.775.615.613.8024.585.845.844.0026.435Lung Yen (5530
40、TT)Diversified Consumer Services14 January 2013Columbarium competition rising Lung Yen is facing rising competition in the luxury columbariummarket Recognition of revenues from pre-sold contracts is set to drop in2013 However, Taiwans life service market is naturally stable withdeaths growing at 2%
41、annuallyabcHistorically dominant in themid- to high-end segmentLung Yen has historically dominated the mid- tohigh-end segment of the columbarium market. Thecompany has three cemeteries, two located in thefeng shui location and being the final resting placeof prominent public figures and their relat
42、ives,including former President Teng-hui Lees fatherand the second generation Chiang family.Lung Yen Columbarium and cemetery product portfolioGreater Taipei area the White Sand Bay (BaishaLung Yen portfolioLocationProduct typeWan) Cemetery and Futan Cemetery and onelocated in southern Taiwan the Ch
43、aiyun Cemetery.Lung Yens White Sand Bay Cemetery is a mid- tohigh-end private cemetery noted for having a goodMajor columbarium and cemetery operator in Greater Taipei areaWhite Sand Bay Cemetery Greater Taipei Columbarium/cemeteryFutan Greater Taipei ColumbariumChaiyun Chaiyi Country ColumbariumSou
44、rce: Company dataProduct Total capacity(units)Sellable capacity(units)ASP(TWD)NoteLung Yen1) White Sand Bay CemeteryTrue Dragon TowerColumbarium300,00067,000Mid-end product:0.3-0.5mPremium product:0.6-0.8mNo.6 LandCenturial Cemetery ColumbariumCenturial Cemetery2) FutanCemeteryColumbariumCemetery415
45、150,000380130,000c400150,000380120,0002m-22m+1m50-200m0.15mlaunch in 2012launch in 2015launch in 2015ChinPaoSan1) Chin Pao Tower2) Sunshine Tower3) Ten Thousand Buddha TowerColumbariumColumbariumColumbarium57,00020,000NAc10,000c15,000NA0.3-0.8m+0.5-1.5m+1m+launch in 2003launch in 2Q13Gobo1) Gobo Nor
46、th SeaColumbarium260,00010,0000.1-0.4mSource: Company data, HSBC estimates for Lung Yen6Lung Yen (5530 TT)Diversified Consumer Services14 January 2013At the White Sand Cemetery, Lung Yen hasdeveloped two columbaria, the TrueDragon Tower columbarium and the CenturyCemetery Columbarium.The True Dragon
47、 Tower columbarium has a totalcapacity of 300,000 niches, out of which 67,000units are currently saleable. Launched in 1997, theTrue Dragon Tower was originally positioned as alow-end to mid-range offering, but has beenrepositioned to target the mid- to high-end market.Since 2010, the company has of
48、fered high-endniches at the True Dragon Tower, which it regards asits flagship products, and we expect the premiumsegment to remain the focus of its sales efforts in2013. Selling prices of the True Dragon Towerspremium niches are TWD0.6-0.8m per unit.The Century Cemetery columbarium has a capacityof
49、 150,000 niches, which the company plans tobegin to release in 2015.While the columbaria at the White Sand BayCemetery target the premium market, the FutanCemetery columbarium offers a lower pricedoption, with an ASP of around TWD0.15m. TheFutan Cemetery Columbarium has a total capacityof 130,000 ni
50、ches, of which 120,000 are saleable.Lung Yen Premium niches in True Dragon TowerSource: Company dataPremium market risingcompetitionLaunched in 2010, the True Dragon Towercolumbarium initially recorded strong sales, butgrowth has since decelerated and we expect it tocontinue slowing amidst rising co
51、mpetition.In the Greater Taipei area, two other companiesoffer columbaria: ChinPaoSan Group and Gobo.We believe the Gobo North Sea columbariumposes little competitive threat to Lung Yens TrueDragon Tower it targets the budget marketsegment with an ASP of just TWD0.1-0.4m and isalready 96% sold. Howe
52、ver, in our view, theChinPaoSan Group represents an increasingcompetitive threat to Lung Yen as it competes inthe high-end segment.The ChinPaoSan cemetery and columbaria aremarketed as luxury offerings with excellent fengshui, superior management service and an artcollection. Enhancing the prestige
53、of ChinPaoSancemetery is the fact that Teresa Teng, a nationallycelebrated singer, is buried there. Tengsmemorial at the cemetery remains a populardestination for her fans.ChinPaoSan Groups two existing columbariahave a capacity of c77,000 units, of whichc25,000 units remain unsold; prices range fro
54、mTWD0.5m to TWD1.5m. Combining thecolumbaria inventory at ChinPaoSan and LungYen, we estimate there is enough supply currentlyto meet demand for more than 15 years.In addition, ChinPaoSan is expected to launch itsflagship Ten Thousand Buddha Towercolumbarium in 2Q13. The Ten Thousand BuddhaTower is
55、designed by renowned Taiwanesesculptor Ju Ming, with prices starting fromTWD1m per niche. This will be the first competinghigh-end project launch since 2003. We believe thisrepresents a threat to Lung Yen in the premiummarket. As a result, we expect sales at Lung Yencolumbarium and cemetery sales to
56、 grow only 9%in 2013, down from 27% in 2011-12.abc780%60%40%20%0%Lung Yen (5530 TT)Diversified Consumer Services14 January 2013ChinPaoSan Group The new Ten Thousand Buddha Towercolumbarium at the ChinPaoSan cemeterySource: ChinPaoSanMajor private columbaria in north Taiwan areoperated by large enter
57、prises, with capacities ofusually more than 10,000 units and a generallyhigh level of service. In central and southernTaiwan, most private columbaria tend to beoperated by small companies or temples, withvariable service quality levels. As a result of this,more families have historically preferred t
58、o useprivate columbaria in the Greater Taipei area(55% in 2011) than outside of the Greater Taipeiabcarea (26% in 2011).Lung Yen Columbarium and cemetery salesTWDmn3,0002,5002,0001,5001,00050060.0%50.0%40.0%30.0%20.0%10.0%With ample supply and many people preferringpublic columbaria, we see challeng
59、es and limitedgrowth opportunities for private operators in thelow-end market, particularly smaller companies.Taiwan Supply of columbarium0201020112012e2013e2014e0.0%000 units6,0005,000Columbarium and cemetery sales (LHS)*y -o-y (RHS)Source: Company data, HSBC estimate4,0003,0002,0001,000Budget mark
60、et limited growth01993199619992002200520082011In order to meet growing demand for columbaria,both the government and private operatorsexpanded supply in the last 10 years. However,with public supply growing 67% and private supplygrowing 78%, the market now suffers from a glut.As of 2011, total unuse
61、d columbaria capacityamounts to around 4.8m units, of which 1.4m unitsare located in the Greater Taipei area. We estimatethe total unused supply in the Greater Taipei areais enough for demand in the next 40-50 years.The cost to store urns in private columbaria is muchhigher than in public columbaria
62、. Average prices ofsingle-urn niches in private columbaria are TWD80-500k, TWD50-250k and TWD30-200k in northern,central, and southern Taiwan, respectively, versusjust TWD15-35k in public columbaria.8Unused supply from private towerUnused supply from public towerSource: MOI. HSBC estimatesTaiwan % o
63、f new urns stored in private tower2001 2003 2005 2007 2009 2011% of urm stored in private tower - Greater Taipei area% of urm stored in private tower - other areaSource: MOI, HSBC estimates8791100Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Taiwan ASP of columbarium for a single per
64、sonlimited further upside potential. As a result of this,abcin 000 TWDNorth Taiwan Middle TaiwanSouth Taiwanwe expect growth in cremations to merely trackPrivate TowerPublic Tower80 -500+50-250+15-3530-200+deaths estimated to grow by 2% per year inthe next decade.Source: www.T, HSBCLower revenue rec
65、ognitionColumbarium and cemetery contract salesCremation rate of major countriesJapanTaiw anHong Kongslumped by 44% in 2008 during the financialcrisis. As these are big ticket discretionaryproducts, demand tends to be negatively impactedSw itzerlandCzech republicThailandSingapore82818077when the eco
66、nomy is under uncertainty.At the same time, Lung Yen made a strategic shift,United kingdomChinaUSA364972Cremation rateoffering products with higher ASP and re-branding020406080100(%)itself for the high-end market, where there are fewerpotential customers. Such a repositioning takes timeand cannot be
67、 easily reversed.As a result, revenue recognition from pre-soldSource: Cremation Society of Great Britain, MOI, HSBC estimates*Taiwan is 2011 data, rest of countries are 2008 dataTaiwan Cremation rate and growth rate of deceasedcrematedcontracts is set to drop this year as 2008 sales arereflected in
68、 2013 books. This will only be partlyoffset by clamping of projects in 2013. Weestimate columbarium and cemetery revenue willdecline 13% in 2013.100%90%80%70%60%12%10%8%6%4%Taiwans life service market is anotherwise stable sector50%40%1994199720002003200620092%0%Due to scarcity of land, Taiwans gove
69、rnmentpromotes cremation and controls land supply forcemeteries with inhumation restricted in TaipeiCity. As a result, the cremation rate increasedsignificantly from 47% in 1994 to 91% in 2011.Currently, Taiwan is the country with the secondhighest cremation rate followed by Japan. Thenumber of dead
70、 cremated increased at a 4%CAGR in the last decade versus a CAGR of 2% inthe number of deaths in the same period.The cremation trend has driven growth incolumbarium demand over the past decade.However, we note growth in cremationsdecelerated after 2007, when it reached 85%. In2011, the cremation rat
71、e reached 91%, indicatingCremation rate (LHS)Number of cremated deaths y-o-y (RHS)Source: MOI, HSBC estimatesRevenue forecastsAs highlighted earlier, we believe competitionamong high-end columbaria is set to rise startingin 2Q13. However, Lung Yens managementtargets to increase the number of one-tim
72、eimmediate payment contracts, for which it couldrecognise revenue immediately. We project one-time payment contract as percentage of totalcontract sales will increase from 50% in 2012 to70% in 2013, based on management guidance.Therefore, revenue booked from one-time9Lung Yen (5530 TT)Diversified Co
73、nsumer Services14 January 2013payment contracts sold in the current year willlikely grow at 53% y-o-y.Nevertheless, with weak revenue from instalmentpayment contracts, we expect columbarium andcemetery revenue will grow by just 11% and 2%in 2013 and 2014, respectively.Lung Yen Columbarium and cemete
74、ry revenue recognitionabcTWDmn4,0003,0002,0001,0000Smaller rev enue recognizitionfrom instalment201020112012e2013e2014eInstalment and clampingSource: Company data, HSBC estimates10One-time pay mentCostoffuneral(USD)-Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Funeral services price
75、s falling Funeral service prices are falling as consumers increasingly prefersimpler ceremonies This negatively impacts pre-need contracts Growing revenue contributions from contracts sold on theimmediate services market mainly due to market share gainsabcTrend towards simpler funeralceremonies at l
76、ower pricesHigh funeral cost per capitaTaiwans funeral spending per capita is aroundTWD235k. It is much higher compared withWestern countries because the majority ofUK funeral cost has also risen at a 7% CAGR inthe last seven years. With this convergence inglobal funeral cost, we believe the upsidep
77、otential in Taiwanese funeral serviceconsumption is limited.Funeral cost and GDP per capita comparisonTaiwanese people are Buddhist and Taoist, whohave relatively elaborate funeral ceremonies,involving lengthy rituals. By contrast, Western-20,00015,000Japan(2008)style Christian funerals cost only ar
78、oundUSD5,000-7,000. The funeral spending in Taiwanis 0.39x GDP per capita, significantly greater than10,0005,000Taiw an(2012)US (2009)UK (2012)the 0.14x in the US and 0.13x in the UK, but lessthan the 0.47x in Japan.Funeral costs converging worldwideThe funeral services market is fragmented withc2,5
79、00 firms in Taiwan. Funeral costs havegenerally risen, but in recent years there has beena trend towards simpler funerals and large-scaleoperators offering more transparent pricing andpackaged services. The same levelling off inprices has also happened in Japan, according toJapan External Trade Orga
80、nization. In contrast,10,000 20,000 30,000 40,000 50,000GDP per capita (USD)Source: NFDA, Sun Life Direct, Japan Customers Association, ,IMF, HSBC estimatesLack of growth in near-term pre-needcontractsThe funeral services market can be separated intopre-need contracts and immediate services. Thepric
81、e of immediate services is not much differentfrom pre-need contract prices. According to theUS funeral costs grew at a 3% CAGR in 2000-09.1120%15%10%Taiw an USLung Yen (5530 TT)Diversified Consumer Services14 January 2013MOI (Ministry of the Interior), 30.8% of funeralspending is below TWD0.2m, 39.2
82、% is atTWD0.2-0.3m, and the rest is above TWD0.3m.Near-term business environment challengingThe sale of pre-need contracts requires a license,thus creating an entry barrier for new operators.Currently, there are 26 pre-need contractproviders in Taiwan and Lung Yen dominateswith a 73% market share. A
83、lso, Lung Yens pre-need contract price of TWD230k is the highestamong the companys peers.However, the business environment has becomemore challenging. In addition to simplerceremonies, competition has increased. LungYens pre-need contract sales peaked in 2008 andPre-need contract growth positivelong
84、er termDespite our negative view on pre-need contractdemand in the near term, we see upside potential inthe long term due to: 1) the aging population and 2)low pre-need contract penetration rate. Pre-needcontracts target clients are people above 40 yearsold. According to the CEPD (Council for Econom
85、icPlanning and Development) forecasts, the over 40year old population as a percentage of total willincrease from 47% in 2011 to 68% in 2060.Moreover, the penetration of pre-need contracts inTaiwan is only 3%. The penetration rate is 23% inthe US, suggesting ample room for growth.Pre-need contract pe
86、netration rateabcdeclined by 12% and 13% in 2010 and 2011,respectively, and by 20% in 2012. We projectsales to decline by 12% in 2013.Lung Yen Pre-need contract sales y-o-y25%23%TWDmn4,0003,0002,00020.0%10.0%0.0%-10.0%5%0%3%Pre-need contract penetration rate1,00002008 2009 2010 2011 2012e2013e 2014e
87、Pre-need contract sales (LHS)y -o-y (RHS)Source: Company data, HSBC estimatesMajor funeral services providers-20.0%-30.0%Source: Company dataPre-need contracts market _Total funeral services market* _Market share ASP (TWD) Market share Geographic coverageSales channelLung YenChinPaoSanGoBo73%8%7%230
88、,000180,000178,0005% Taiwan totalN/A Northern TaiwanN/A Taiwan total, but outsourced to localDirect sales, insurance companyDirect sales, insurance companyDirect sales, funeral houses, insurancefuneral houses in middle and southTaiwancompanyWon Ann4%173,0007-8% Taiwan totalHospitalSource: Company da
89、ta, HSBC estimates for Lung YenNote: *Include delivery of pre-need contract and demand for immediate services12TWDmn2,0001,5001,0005000Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Ample suppliers to meet budgetdemand in immediate service marketIn 2012, 30% of Lung Yens funeral servi
90、cerevenue was from immediate funeral services. Wesee intense competition, as more funeral housesare able to deliver low budget services to meetdemand for simpler funeral ceremonies.Fragmented marketThe immediate funeral services market isfragmented with c2,500 players. Entry barriers arelow 3-5 peop
91、le could set up a funeral house.Small funeral houses focus on local markets,while a few players, including Won Ann,ChinPaoSan and Gobo, have wider coverage.Lung Yen and Won Ann are able to provideRevenue projectionsWe estimate around 3.5% of outstanding pre-needcontract holders will deliver the serv
92、ice. We estimatefuneral services revenue will grow 8% and 5% in2013 and 2014, respectively. Also, the contributionfrom immediate funeral services will increase from33% in 2012 to 42% in 2014, in our view.Lung Yen Funeral service revenue recognitiongrow ing rev enue grom immediate serv ice marketabcs
93、ervices nationwide. ChinPaoSan focuses on north201020112012e2013e2014eTaiwan. Gobo offers nationwide services, butoutsources business to local funeral houses incentral and south Taiwan.Deliv ery of pre-need contractSource: Company data, HSBC estimatesFrom immediate seriv ceMarket share expansionLung
94、 Yen has gradually expanded market share inimmediate services, leveraging its existing salesnetwork and reputation in the pre-need contractmarket. We estimate it had a 1% market share inimmediate services in 2012 and we expect LungYen will continue to improve market share. Assuch, we estimate its re
95、venue contribute fromimmediate funeral services will grow 21% in 2013,much faster than the organic market growth of 2%.13Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Long-term strategy Capturing upgrade demand through high-end projects Targeting market share gains in funeral service
96、s Overseas expansion to support long-term growthabcWhile Lung Yen faces tough challenges in 2013,management has developed a solid strategy todrive long-term growth, in our view.Upselling customersMost of the companys unclamped niches werepre-sold at an ASP of TWD50-100k before 2005.In order to maxim
97、ise the value of its land assets,Lung Yen has decided not clamped those nichesall at once, instead encouraging contract holdersto upgrade to higher priced niches at the TrueDragon Tower. According to management, around25% of high-end niche sales are derived fromupgrade demand.The companys next flags
98、hip project is CenturialCemetery, which was designed by renownedJapanese architect Tadao Ando. The designedcapacity of the columbarium at CenturialCemetery is 150,000 units and Lung Yen targetsto sell niches at an ASP of TWD1m per unit. Thecompany also designed an outdoor cemetery withan ASP startin
99、g at TWD2m. Managementestimates the total value of Centurial Cemetery atTWD200bn, of which TWD150bn is from thecolumbarium and TWD50 is from the cemetery.The project is exciting, in our view, and thecompany will start pre-sale in 2015 when itobtained the construction permit.Lung Yen Centurial Cemete
100、rySource: Company dataFuneral services market shareexpansionChanging market regulations favour Lung Yen.According to revised regulations, funeral serviceproviders will be prohibited from selling funeralservices in hospitals after 2016. This is expectedto negatively impact market leader Won Ann (NotL
101、isted), as most of its revenue came from thehospital channel, and potentially enable Lung Yento gain market share from Won Ann.It is also our view that the trend towards simplerceremonies is going to stay. We believe Lung Yencould defend its market share by aligning itselfwith this trend and improvi
102、ng cost efficiency. Wenote that 49% of the cost of funeral services isstaff costs, which the company is unlikely to beable to reduce, but another 30% comes from the1417%Lung Yen (5530 TT)Diversified Consumer Services14 January 2013cost of the urns, coffins, flowers and other itemsof decoration. Offe
103、ring simpler, lower costservices and leveraging its economics of scale,suggests potential upside to margins.Cost breakdown of funeral serviceOtheresOverseas expansionLung Yen is accelerating its overseas expansionefforts. Currently, overseas contributions are limited,although the long-term potential
104、 is promising. Senior care services in China. Lung Yenentered Chinas senior care market through a16% owned joint venture with Excelsior (4104abcUrn andCoffin8%Decorationex pensefor*mortuary22%Rental ofmortuary4%Salary49%TT, Not Rated), called Asia Best Healthcare(ABH). Management believes contributi
105、onswill be limited in the near term, while webelieve long-term growth at ABH is promising,driven by the aging population in China. Life services market in Singapore andMalaysia. Lung Yen also plans to enter theSource: , HSBC estimates*Half of decoration cost is from flowerPotential growth throughins
106、urance channellife services market in Singapore andMalaysia. Management indicated the projectis still in early stage, while it could become along-term growth driver for the company.Recently, Lung Yen and other pre-need contractproviders have looked to increase pre-need contractpenetration through ma
107、rketing it as a “funeralinsurance”. Lung Yen cooperates with Fubon Life(insurance subsidiary of Fubon Financial (2881 TT,TWD36.7, UW, TP TWD30) to leverage Fubonssales network. We see potential growth in pre-needcontract penetration through the insurance channel.However, the cooperation is still in
108、its early stagesand it will take time to roll out. We believe thecooperation will support Lung Yens leadingposition in the long term.15Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Forecasts and valuation Consensus significantly overestimating revenue growth Cash generation ability s
109、trong, but ROE declining on muted netprofit growth Initiate with Underweight rating and target price of TWD89abcRevenueLung Yens revenue can be broken down asfollows: Columbarium and cemetery Pre-sold contracts for columbariumniches and cemetery plots, fully settled(either through a five-year instal
110、ment planor lump sum), after clamping/completionof the project Lump sum purchases of already clampedcolumbarium niches and completedcemetery plots Funeral services Pre-need contracts for which thecompany has received full payment anddelivered services Immediate funeral servicesLung Yen Revenue recog
111、nition policyForecasts for 2013We forecast Long Yens 2013 revenue growth atonly 7% y-o-y, significantly below the marketconsensus of 17% growth.Among the key business segments, we expectcolumbarium/cemetery and funeral services torecord sales growth of 11% and 8%, respectively.The columbarium and ce
112、metery instalment contractsales slumped by 44% in 2008 during the financialcrisis the company should recognise these weakerrevenues in 2013, and this should only be partlyoffset by growing revenue from one-time paymentcontracts. We project columbarium and cemeteryrevenue to grow 11% y-o-y in 2013.La
113、stly, on funeral service, the sectors organicgrowth should remain stable at 2%, according to thegovernments projection of the death population.However, we expect Lung Yens funeral servicerevenue to grow at 8% in 2013 on share gain.Immediate funeral services(1) 100% payment(2) Deliver the servicePre-
114、need contracts(1) 100% payment(2) Until deliver the serviceSource: Company data16Columbarium niches(1) 100% payment(2) ClampingCemetery plots(1) 100% payment(2) Construction completion(TWDm)Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Lung Yen Revenue breakdownTWDmn6,0005,0004,0003,
115、0002,0001,0000Slow ing rev enue grow th since 2011abc201020112012e2013e2014eColumbarium and cemetery rev enue - one-time pay ment*Funerals surv ice rev enueSource: Company data, HSBC estimatesLung Yen P&L summaryColumbarium and cemetery rev enue - by instalment*Others(TWDm, year-end Dec)RevenueGross
116、 profitOperating profitPre-tax profitNet profitEPS (TWD)2010a2,9991,7608381,2538752.32011a4,4553,0911,8242,0341,8614.72012e4,8303,4492,0452,3782,0515.12013e5,1623,7172,1922,5182,2395.62014e5,3093,8102,2962,6222,3325.8Margins (%)Gross marginOperating marginNet margin58.727.929.269.441.041.871.442.342
117、.572.042.543.471.843.343.9Annual growth (%)RevenueGross profitOperating profitNet profit202.8759.9622.9629.648.575.6117.8112.88.411.612.110.26.97.87.29.22.82.54.74.2Revenue breakdown (%)Real EstateRental IncomeColumbarium and CemeteryFuneral ServiceOthers11.14.651.131.51.610.74.058.125.71.52.34.464.
118、126.72.50.04.266.626.92.30.04.166.127.62.2Gross margin (%)Real EstateRental IncomeColumbarium and CemeteryFuneral ServiceOthers14.349.083.934.957.955.535.889.335.761.86.944.489.339.658.4N/M44.687.639.649.4N/M44.687.639.649.4Source: Company data, HSBC estimatesLung Yen Consensus comparison_ 2012e _ _
119、 2013e _ _ 2014e _HSBCe Cons HSBC/ HSBCe Cons HSBC/ HSBCe Cons HSBC/Cons(%)Cons(%)Cons(%)RevenueGross profitOp profitNet income4,8303,4492,0452,0514,8513,5592,3292,2161009788935,1623,7172,1922,2395,6834,2452,7612,652918879845,3093,8102,2962,3326,5394,9153,2612,99181787078Margin (%)Gross marginOp mar
120、ginNet margin71.442.342.573.448.045.772.042.543.474.748.646.771.843.343.975.249.945.7Source: Company data, Bloomberg, HSBC estimates17201510-Lung Yen (5530 TT)Diversified Consumer Services14 January 2013ROELung Yen FCFF per shareabcDue to muted revenue growth, we projectmoderate net profit growth of
121、 9% and 4% in 2013and 2014, respectively. However, managementguides to a flat dividend payout ratio of 65%;therefore, growth of retained earnings should befaster than that of net profit. As such, we expect adownward trend in ROE. We believe a stock re-rating is unlikely to happen.TWD54321-0.92012e4.
122、22013eFCFF per share4.22014eLung Yen ROE gradually declinedSource: Company data, HSBC estimates(%)302527.823.823.722.9ValuationWe derive Lung Yens target price of TWD84 usinga sum-of-the-parts (SOTP) valuation approach:520112012eROE2013e2014e Columbarium and cemeteries: we value thispart based on DC
123、F using a 10% WACC(which assumes an equity market riskpremium of 6.5% and a risk-free rate of 3%)Source: Company data, HSBC estimatesCash generationFCFF in 2012 is estimated to have slumped due toa one-time payment on a note payable relating toits property development business. Exclude this,Lung Yen
124、s FCFF grew steady as the life servicedemand is stable and recurring. We expect LungYen will generate FCFF per share of TWD4.2 peryear. It should translate into decent FCFF yield of4.5-4.6% per year. Funeral services: we apply a 15x 2013e PE,in line with the global peer group averagemultiple. Commer
125、cial property and land bank: to beconservative, we use the market value ofnearby projects.Under our research model, for stocks without avolatility indicator, the Neutral band is 5pptsabove and below the hurdle rate for Taiwan stocksof 9.5%. Our target price implies a potentialreturn of -5.4% (includ
126、ing a forecast dividendyield of 3.8%), below the Neutral band; therefore,we are initiating coverage with an Underweightrating. Potential return equals the percentagedifference between the current share price and thetarget price, including the forecast dividend yieldwhen indicated.181,380Lung Yen (55
127、30 TT)Diversified Consumer Services14 January 2013Upside risks Higher-than-expected ASP forcolumbarium niches. Lung Yen could adjustits ASP to hedge inflation risk. Higher-than-expected ASP could bring upside risk to ourearnings estimates. Potential disposal of property investments.Lung Yen holds 83
128、,000 sqm of commercialproperties, which generate rental revenue ofTWD200m annually. Lung Yen plans todispose of Dan-Shui Student Residence Halland the Pacific Commercial Building. Thepotential disposal gain could be an estimatedTWD1.0-1.5bn.Lung Yen Property assetsabcRental AssetLeased areaBook valu
129、epingsqmTWDmLungyen DunbeiTaipei Financial Tower3,571 11,8021,905 6,2961,9681,827Dan-shui Student Residence Hall 10,738 35,489Daya TowerPacific Commercial BuildingKaoshiungTaoyuanTotalLand Asset2,724 9,0031,698 5,6123,050 10,0801,448 4,78625,134 83,068Land area1,212875322587,642Book valuepingsqmTWDm
130、Nangang StationTotal17271,7275,7085,7082,1612,161Source: Company data, HSBC estimates19Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Lung Yen SOTP valuationabcLung Yen recognisedvalueTWDmValue per shareTWD% of totalValuation methodReal EstateRental AssetColumbarium and CemeteryFunera
131、l ServiceEVNet cash (net debt)3,45413,12214,5853,78834,949-1,3928.732.936.59.587.6(3.5)10%39%43%11%104%-4%Market valueMarket valueNAV 10% WACC15x 2013e PETarget PriceSource: Company data, HSBC estimatesLung Yen PE band84.0Lung Yen PB band(TWD)14025.0x(TWD)14012010080604020022.0x19.0x16.0x13.0x120100
132、806040205.0x4.5x4.0x3.5x3.0xJan-11Jul-11Jan-12Jul-120Jan-11Jul-11Jan-12Jul-12Source: Company data, HSBC estimatesLung Yen Peers comparisonSource: Company data, HSBC estimatesCompanyTicker Share Mkt Cap Rating _ GM (%) _ EPS growth_ ROE (%) _ _ PE_ PB PerformancePrice (USDbn)CY12e CY13e CY12e CY13e C
133、Y12e CY13e CY12e CY13e CY13e 1M3MLung Yen 5530 TTService Corp SCI US92.514.31.33.1UWNR72.025.171.826.510.225.29.28.023.86.523.711.317.918.816.417.23.72.02%-1%-8%6%HillenbrandIvocareHI USIVC AU23.48.81.51.0NRNR34.671.534.571.512.859.015.310.820.030.3N/A31.012.421.810.919.6N/A5.79%0%26%4%DignityDTY LN
134、 1,091.01.0NRN/AN/A0.88.133.029.017.415.96.67%17%StewartSTEI US7.70.7NR23.223.621.712.07.3N/A15.013.42.35%-6%EnterpriseSource: Company data, Bloomberg, HSBC estimatesPrice at close of 10 January 201320Lung Yen (5530 TT)Diversified Consumer Services14 January 2013Shareholder structureLung Yens chairm
135、an and top management hold60% of the companys share. QFII holdingsincreased significantly from 7% when Lung Yenfully consolidated into Dahan in February 2011 to16% currently. A significant part of the rest of thecompanys common shares is held by domesticinstitutions. As such, the companys shareholdi
136、ngstructure is relatively stable compared to theoverall Taiwanese stock market, which isdominated by retail investors.Lung Yen Shareholder structureOthers24%ManagementabcQFII16%Source: Company data, TEJ, HSBC estimatesLung Yen QFII holdings(%)2015105060%Jan-11Jul-11Jan-12Jul-12Jan-13QFII holdings (%
137、)Source: TEJ2140%Lung Yen (5530 TT)Diversified Consumer Services14 January 2013AppendixCremation rate in TaiwanCremation rates vary across Taiwan. The GreaterTaipei area has the highest cremation rate of 95%due to stricter regulations over cemetery space. Inother areas, the cremation rate is slightl
138、y lower, at90%, because there is greater cemetery supply.Cremation rate in the Greater Taipei area and other Taiwanareas in 1997 and 2011In July 2012, however, these regulations tightened,restricting the trust fund from investing only inbank deposits, money market securities andfuneral-related fixed
139、 assets. Therefore, the cashand marketable securities position on Lung Yensbalance sheet is to track unearned revenue frompre-need contracts.Capex for Centurial cemeteryabc100%80%60%70%95%56%90%Lung Yen has designed an outdoor cemetery witha total value of TWD50bn. The total capex isaround TWD1bn. C
140、urrently, the site is in the landpreparation stage. Lung Yen targets to obtain20%0%Greater Taipei area19972011Other areaconstruction permission in 2015 and finish theproject in 2022 after a seven-year constructionperiod. In order to raise capital to fund the project,Lung Yen plans to start pre-sales
141、 after it obtainsconstruction permission in 2015.Source: MOI, HSBC estimatesNew financial rule limitsreturns achievable on cashSince 2002, life service providers have beenrequired to place 75% of pre-need contract salesinto trust funds. Because there were norestrictions on the investment activities,
142、 lifeservice providers could generate a decent returnon cash received from pre-need contracts byinvesting in the commercial property market.22Lung Yen (5530 TT)Diversified Consumer Servicesabc14 January 2013Disclosure appendixAnalyst CertificationThe following analyst(s), economist(s), and/or strate
143、gist(s) who is(are) primarily responsible for this report, certifies(y) that theopinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect theirpersonal view(s) and that no part of their compensation was, is or will be directly or ind
144、irectly related to the specificrecommendation(s) or views contained in this research report: Julie Wang and Jenny LaiImportant disclosuresStock ratings and basis for financial analysisHSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, w
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146、ffect the future earnings or cash flows of companies on a 12 month time horizon;and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long
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149、derations. Different securities firms use a variety of ratings terms as well as different ratingsystems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each researchreport. In addition, because research reports contain more complete informati
150、on concerning the analysts views, investorsshould carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should notbe used or relied on in isolation as investment advice.Rating definitions for long-term investment opportunitiesStock ratingsH
151、SBC assigns ratings to its stocks in this sector on the following basis:For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,regional market established by our strategy team. The price target for a stock represents the value t
152、he analyst expects the stockto reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, thepotential return, which equals the percentage difference between the current share price and the target price, including theforecast dividend yield
153、when indicated, must exceed the required return by at least 5 percentage points over the next 12 months(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must beexpected to underperform its required return by at least 5 percentage po
154、ints over the next 12 months (or 10 percentage pointsfor a stock classified as Volatile*). Stocks between these bands are classified as Neutral.Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of volatilitystatus or change in price
155、target). Notwithstanding this, and although ratings are subject to ongoing management review,expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarilytriggering a rating change.2346%17%1234567891011123Lung Yen (5530 TT)Diversified
156、 Consumer Servicesabc14 January 2013*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,sto
157、cks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the pastmonths average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,however, volatility has to move 2.5 percentage points pa
158、st the 40% benchmark in either direction for a stocks status to change.Rating distribution for long-term investment opportunitiesAs of 11 January 2013, the distribution of all ratings published is as follows:Overweight (Buy)(29% of these provided with Investment Banking Services)Neutral (Hold)Underw
159、eight (Sell)37%(27% of these provided with Investment Banking Services)(21% of these provided with Investment Banking Services)HSBC & Analyst disclosuresNone of the below disclosures applies to any of the stocks featured in this report.HSBC* has managed or co-managed a public offering of securities
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196、on Limited. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/201225abcGlobal Consumer Brands & RetailResearch TeamEuropeConsumer Brands & RetailAntoine BelgeHead of Consumer Brands and Retail Equity Research+33 1 56 52 43 47 AsiaConsumer Brands & RetailErwan RambourgHead of Consumer Br
197、ands and Retail Equity Research+852 2996 6572 .hkSophie DargniesAnalyst+33 1 56 52 43 48Cedric BesnardAnalyst+33 1 56 52 43 Chris ZeeAnalyst+852 2822 2912Christopher LeungAnalyst+852 2996 .hkFlorence DohanAnalyst+44 207 992 4647 Jrme SamuelAnalyst+33 1 56 52 44 23 Emmanuelle VigneronAnalyst+33 1 56
198、52 43 19 Paul RossingtonAnalyst+44 20 7991 6734 LeisureLena ThakkarAnalyst+44 20 7991 3448 CEEMEAConsumer Brands & RetailMichele OlivierLina YanAnalyst+852 2822 4344 .hkCatherine ChaoAnalyst+852 2996 6570 .hkKaren ChoiAnalyst+822 3706 8781 Jena HanAssociate+822 3706 8772 Sean MonaghanAnalyst+65 6658
199、 0610 .sgPermada (Mada) DarmonoAnalyst+65 6658 0613 .sgThilan WickramasingheAnalystAnalyst+65 6658 .sg+27 11 Abel LeeAnalystSpecialist Sales+8862 6631 2866Amit S.twLynn Raphael+44 20 7991 Analyst+91 22 2268 1240amit1sachdevahsbc.co.inDavid HarringtonNorth & Latin America+44 20 7991 Consumer & Retail
200、Francisco J ChevezAnalyst, Latin America & US+1 212 525 Stewart RagarAnalyst+1 212 525 Manisha A ChaudhryAssociate, Latin America & US+1 212 525 BeveragesLauren TorresAnalyst, Global Beverages+1 212 525 James WatsonAnalyst, Global Beverages+1 212 525 Food & Agricultural ProductsPedro HerreraAnalyst,
201、 Global Food & Agricultural Products+1 212 525 Ravi JainAnalyst, Global Food & Agricultural Products+1 212 525 Diego T MaiaAnalyst, Food & Agricultural Products, Brazil+55 11 .brHousehold DurablesFrancisco SuarezAnalyst, Household Durables, Mexico+52 55 5721 .mxBerenice MunozAssociate, Household Durables, Mexico+52 55 5721 5623
