Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword or section
Like this
8Activity
P. 1
China Slowdown: Where to Strike when Hunting for Extraordinary Value

China Slowdown: Where to Strike when Hunting for Extraordinary Value

Ratings: (0)|Views: 343 |Likes:
Published by shawn2207
Working through the slowdown we review where investors would consider making purchases, gaining economic ties to the world's super-economy: China
Working through the slowdown we review where investors would consider making purchases, gaining economic ties to the world's super-economy: China

More info:

Published by: shawn2207 on Jun 20, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

05/24/2012

pdf

text

original

 
 
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOROTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683.
 U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision.20 June 2011Asia Pacific/China
Equity Research
Macro
China Market Strategy
STRATEGIC ANALYSIS
Debt threats: Sector and stock level impact
■ 
Rising risks to asset quality:
Our analysis shows China's credit-to-GDPhas risen to alarming levels in the past two years due to massive off-balance-sheet financing. Market has only focused on banking system loanswhich do not capture this. This raises a red flag for future asset qualityproblems in banks. Further, based on a bottom-up approach, interestcoverage of some 1,000 non-financial companies in 1Q11 declined nearly to2008-crisis levels.
■ 
Possible scenarios.
Whether it is a ‘soft landing’, ‘hard landing’ or ‘sluggishlanding’ scenario depends on the interaction of a number of forces: (1) howthe LGFV debt problems are settled; (2) the extent of the property marketcorrection; (3) the CPI inflation outlook; and (4) the global economic outlook.We believe a ‘sluggish landing’ is the most likely scenario.
■ 
Market implications.
We cut our rating on Banks from Overweight toUNDERWEIGHT, on ABC from Outperform to UNDERPERFORM and onBOC from Outperform to NEUTRAL. We have also adjusted earnings, targetprices and ratings for other sectors including property, capital goods,infrastructure and shipping. (For a full list of our estimate and target pricerevisions please see page 6.)
Research AnalystsStrategyVincent Chan
852 2101 6568vincent.chan@credit-suisse.com
Peggy Chan, CFA
852 2101 6305peggy.chan@credit-suisse.com
BanksSanjay Jain
65 6212 3017sanjay.jain@credit-suisse.com
Daisy Wu
852 2101 7167daisy.wu@credit-suisse.com
PropertyJinsong Du
852 2101 6589 jinsong.du@credit-suisse.com
Wenhan Chen
852 2101 6407wenhan.chen@credit-suisse.com
Duo Chen
852 2101 7350duo.chen@credit-suisse.com
Wind EquipmentYang Y. Song
852 2101 6550yang.y.song@credit-suisse.com
InfrastructureIngrid Wei
86 21 3856 0379ingrid.wei@credit-suisse.com
Dry Bulk ShippingSam Lee
852 2101 7186sam.lee@credit-suisse.com
Basic MaterialsTrina Chen852 2101 7031
trina.chen@credit-suisse.com
TelecomsColin McCallum, CA
852 2101 6514colin.mccallum@credit-suisse.com
InsureanceArjan van Veen
852 2101 7508arjan.vanveen@credit-suisse.com
 
Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai
 
 
20 June 2011
 
China Market Strategy
 
2
Focus charts
Figure 1:China – credit and bank loan (x government bond)Figure 2:Credit-to-GDP gap from long-term trend
6080100120140160180Mar 93Mar 96Mar 99Mar 02Mar 05Mar 08Mar 11(% of GDP)Credit-to-GDPLoan-to-GDPWidenedgap
 
-30-20-100102030Mar 00Sep 01Mar 03Sep 04Mar 06Sep 07Mar 09Sep 10(% points)USChinaJapanSpainCritical level - 10% points
* Credit includes bank loan, corporate bond and other off-balance sheet financing. Source: PBOC, CEIC, BIS, Credit Suisse estimates Source: PBOC, IMF, CEIC, BIS, Credit Suisse estimates 
Figure 3:Declining operating cash flowFigure 4:New supply of system funding
050100150200250300350400450500
    M   a   r    0    7    J   u   n    0    7    S   e   p    0    7    D   e   c    0    7    M   a   r    0    8    J   u   n    0    8    S   e   p    0    8    D   e   c    0    8    M   a   r    0    9    J   u   n    0    9    S   e   p    0    9    D   e   c    0    9    M   a   r    1    0    J   u   n    1    0    S   e   p    1    0    D   e   c    1    0    M   a   r    1    1
Rmb bn (seasonally adjusted)
 
16.022.115.013.315.214.715.830.921.015.72.00.52.04.42.74.69.66.81.83.83.04.52.12.22.20.21.92.21.60.91.00.60.80.8010203040502002200320042005200620072008200920102011ELoansOff-balance sheet loansCorp BondEquity & Insurance(% of GDP)
 
* Based on 1,536 A-share companies, seasonally adjusted Source: Wind Database, Credit Suisse estimates Source: CEIC 
Figure 5:High leverage
⇒ 
high investment ratioFigure 6:Upside/downside to 12-month index targets
102030405019901995200020052010(% of GDP)ChinaIndiaIndonesiaKoreaBrazilJapan
 
-80-60-40-20020406080"Soft Landing""Hard Landing""Sluggish Landing"MSCI ChinaHSCEIShanghai A(% upside/downside)
 
Source: CEIC Source: Datastream, Credit Suisse estimates 
Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai
 
 
20 June 2011
 
China Market Strategy
 
3
Figure 7:Chinese economy – scenarios 
Scenarios Soft landing Hard landing Sluggish landing
Chance 35% 10% 55%LGFV loans settlement Quick decision in the next 6-9months on how to settle the costamong different partiesNo decision on settlement; localgovernments unable to repay by2013Compromised decisions made aftertough negotiations; some problemsremoved from the banking system,but not allProperty market Limited or no correction; salesrebound in 2012Sharp correction (30%+); marketdoesn't recover in the next 3-5 yearsModest correction (15-20%); marketsluggish with only a mild increase inthe next 2-3 yearsNominal GDP growth 14-15% (9%+ real growth, 4-5%inflation)Below 8% (7% or lower real growth,no inflation or deflation)11-12% (7.5-8.5% real growth, 4-5%inflation)Listed corporate earningsgrowth15%+ Negative or loss making Around 10%Bank NPL ratio Stable Sharp rise to 5-10% Gradual rise to more sustained level,e.g. 2%Financial system creditgrowthRemains strong; credit-to-GDP ratioremains highSharp slowdown; credit-to-GDP ratiorapidly drops to below long-termtrend
 
Slows to lower-than-nominal GDPgrowth level; credit-to-GDP ratiogradually back to long-term trend
Source: Credit Suisse estimates 
Figure 8:China indices under different scenarios
 
Index Pot. up/do EPS growth (%) Implied P/E (x)target (12-mth) (%) 2011E 2012E 2013E Medium-Term 2011E 2012E 2013E
Soft landing scenario (35%) 
MSCI China 985415.7 15.5 13.8 8.0 16.5 14.3 12.6HSCEI 20,0006418.1 16.2 14.8 8.0 15.2 13.1 11.4Shanghai A 4,4005823.0 19.1 18.4 8.0 18.8 15.8 13.3
Hard landing scenario (10%) 
MSCI China 34-4710.0 -30.0 -25.0 6.0 6.0 8.6 11.5HSCEI 7,000-4210.0 -30.0 -25.0 6.0 5.7 8.2 10.9Shanghai A 1,300-5310.0 -30.0 -25.0 6.0 6.2 8.9 11.8
Sluggish landing scenario (55%) 
MSCI China
7619
10.0 10.0 8.0 6.5 13.5 12.3 11.4HSCEI
15,00023
10.0 10.0 8.0 6.5 12.2 11.1 10.3Shanghai A
3,0007
10.0 10.0 8.0 6.5 14.3 13.0 12.1
Source: DataStream, Credit Suisse estimates 
Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai

Activity (8)

You've already reviewed this. Edit your review.
1 thousand reads
1 hundred reads
Raghu Nayak liked this
FloridaHoss liked this
GMAP Center liked this
john ferrari liked this
john ferrari liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->