Ping An Insurance (Outperform)11 Home Product Center (Outperform)12 Indonesia Strategy13 Malaysia Construction14 Robinson Public Company (Neutral)15 Singapore Residential Property16 Top Glove (Neutral)17 Larsen & Toubro (Outperform)18 Zee Entertainment (Outperform)19 2Please refer to page 12 for important disclosures and analyst certification, or on our websitemacquarie/research/disclosures.17 July 2018 GlobalEQUITIES700 HK OutperformPrice (at 08:50, 17 Jul 2018 GMT) HK$381.40Valuation HK$560.00 - Sum of Parts12-month target HK$560.0012-month TSR %+47.1Volatility Index LowGICS sector Software & ServicesMarket cap HK$bn3,625Market cap US$m461,87330-day avg turnover US$m931.7Number shares on issue m9,505Investment fundamentalsYear end 31 Dec2017A 2018E 2019E 2020ERevenue bn 237.8 337.4 449.5 542.0EBIT bn 90.3 106.3 122.4 142.1Reported profit bn 71.5 81.0 94.6 110.7EPS adj Rmb 6.83 8.55 10.73 12.54ROA % 19.0 17.5 17.0 16.6ROE % 28.1 26.0 26.1 24.7EV/EBITDA x 26.8 23.6 21.1 18.7700 HK rel HSI performance, & rec history Note: Recommendation timeline - if not a continuous line, then there was noMacquarie coverage at the time or there was an embargo period.Source: FactSet, Macquarie Research, July 2018 (all figures in Rmb unless noted, TP in HKD)Recent research: Tencent - A defensive player amid market volatility Spotify Technology - Topping the ChartsAnalysts Macquarie Capital Limited Wendy Huang, CFA+852 3922 3378wendy.huang@macquarieEllie Jiang +852 3922 4110ellie.jiang@macquarieMarcus Yang +86 21 2412 9087marcus.yang@macquarieFrank Chen +852 3922 1433frank.chen@macquarie Macquarie Capital (USA) Inc.Amy Yong +1 212 231 2624amy.yong@macquarieTencentElephant can dance with the “MUSIC”Key points Tencent music is the most profitable music streaming company in the world. Tencent owns a 7.5% stake in Spotify, in return, Spotify takes 9% in TME.Positive for Tencent sentiment, unlock the value in music business.Event Tencent filed to spin off its music business for US listing. This should helpTencent Music Entertainment (TME) to stay financially competitive for contentbidding, further widen the gap with NetEase Music, Alibaba Music and Baidumusic and pave the way for global expansion in the long term. Impact No.1 music carved out of No.1 social network.As said by Smule’s founder,Music was the original social network before Instagram and Facebook. Backedup by the No.1 Chinese social network platform Tencent, TME becomes aclear leader in China’s music streaming market with access to 90% musiccontent. With the three most popular music apps in China, namely QQ Music,Kugou (酷狗音乐), and Kuwo (酷我音乐), its aggregate MAU was 930m andDAU was 207m in June on our calculation. Besides the traffic and contentsynergies, we believe TME is an important piece in Tencent’s media matrixand creates chemistry with Tencent video and literature. We also view musicas an important tool to help Tencent extend its entertainment coverage fromPC/mobile to other smart devices and vehicles. Higher growth and more profitable, yet lower paying conversion rate.TME generates revenue through membership, live-streaming, sub-licensing,advertisements and game. We estimate its revenue to grow 86% in 2018,compared to 36% for Spotify. It is also more profitable with a 20% net marginin 2017, vs a 30% loss margin for Spotify. On the other hand, TME lags behindSpotify in terms of the paying conversion rate (3% vs 60%) and revenue scale(US$1.4bn vs US$4.1bn in FY17). We don’t see Spotify’s 5% low churn rateas achievable for TME given lower user loyalty in China. However, there isroom for average user time spent per month to improve given where it standsnow compared to Spotify, 4hr vs 25hr. Valuation: TME = Spotify = NetEase. Notably, the potential valuation of TMEis US$29-31bn, close to global music streaming leader Spotify’s US$34bn andits Chinese peer NetEase Music’s parent company’s total market cap ofUS$35bn. We believe TME’s valuation is well supported by its dominantmarket share, leading profitability, and ample room for the paying conversionrate and revenue expansion if we benchmark it against global peers.Earnings and target price revision We estimate the music business to contribute 5% revenue and 4% earnings in2018. A 54% stake in TME will translate into HK$14 per share value forTencent.Price catalyst 12-month price target: HK$560.00 based on a Sum of Parts methodology. Catalyst: TME listing, 2Q18 results on Aug 15.Action and recommendationReiterate OP.317 July 2018 GlobalCOMMODITIESInsideDemand at Risk 3 US Production Showing Up, Showing Out 5 Crude Loadings: A Heavy-loaded LateSummer 8 AnalystsMacquarie Capital (USA) Inc. Vikas Dwivedi +1 713 275 6352 vikas.dwivedi@macquarieWalt Chancellor +1 713 275 6230 walt.chancellor@macquarieJay Tobin +1 713 275 6123 jay.tobin@macquarieXiaolong Liang, CFA+1 713 275 8998 xiaolong.liang@macquarieOil Price Risks Still Skewing NegativelyDon’t Bet Against the House. Definitely Don’tBet Against TwoKey pointsWe believe a structural oil price rally will be tough through YE18. Odds of an additional pullback of $5 to $10 are growing. U.S. and Saudi Arabia are likely aligned to lower oil price through YE18.The major implication is a slow implementation of Iranian sanctions. Other concerns include slowing demand growth, rising US exports, and the return of Russian and OPEC supply to market. We are pivoting from our bullish stance on crude oil to cautious.In addition tofundamentals, we believe the U.S. and therefore KSA want lower oil prices in the ST. At the least, we expect a structural rally is unlikely through YE18 and at the worstBrent prices fall an additional $5 to $10 on softening balances.In addition to politicalmotivation to reduce oil prices, key fundamentals we are considering are: moderatingdemand growth, returning Russia + OPEC (ROPEC) volumes, & U.S. export growth. U.S. and KSA are Politically Incentivized to Lower Oil Price in the STWe believe politics have aligned the Trump Administration and KSA to lower oil pricesuntil the U.S. November mid-term elections.Today’s Treasury announcement thatwaivers may be granted to Iranian crude buyers is another data point that the USwould like to minimize Iranian sanctions for now.Moderating Demand the biggest ConcernDespite high global refinery runs, we are seeing signs of global demand growthcooling-off from the red hot range of 1.8 to 2.0 million BPD to a still strong but notunusual range of 1.5 to 1.6 million BPD.Moderating demand is a concern because inour experience, above trend demand growth is the most structural of bullish drivers.ROPEC is coming back while US is on track for 1.5 MM BPD of growthWe expect large loadings increases beginning in August as ROPEC brings backapproximately 800 K BPD and U.S. production growth continues to increase exportstowards 3 MM BPD on a consistent basis. The US has been delivering the equivalenta cargo per week to Europe, primarily to Rotterdam, the UK, and Spain; US arrivalshave significantly softened the physical Brent market in our opinion.Soft Dashboard Indicators: Weak grades, soft margins, weak structureOur bullish view has been anchored by a very high, 2.5 MM BPD YOY increase inrefining runs and low YOY loadings growth of 0.9 MM BPD this summer. Unfortunately, high runs and low loadings have not prevented:(1) softer globalrefining margins, (2) weak WAF & N. Sea grades resulting from 20 to 30 unsoldcargoes, and (3) recent degradation of time spreads.The weakness across theseindicators is surprising given high global refining runs in June and July. 4 Vikas Dwivedi invests from time to time in oil and gas commodities and / or related derivative and futures products consistent with published views. 。。。。。。