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STRATEGIC ANALYSIS
Rising risks to asset quality: Our analysis shows China's credit-to-GDP has risen to alarming levels in the past two years due to massive offbalance-sheet financing. Market has only focused on banking system loans which do not capture this. This raises a red flag for future asset quality problems in banks. Further, based on a bottom-up approach, interest coverage of some 1,000 non-financial companies in 1Q11 declined nearly to 2008-crisis levels. Possible scenarios. Whether it is a soft landing, hard landing or sluggish landing scenario depends on the interaction of a number of forces: (1) how the LGFV debt problems are settled; (2) the extent of the property market correction; (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 to UNDERWEIGHT, on ABC from Outperform to UNDERPERFORM and on BOC from Outperform to NEUTRAL. We have also adjusted earnings, target prices and ratings for other sectors including property, capital goods, infrastructure and shipping. (For a full list of our estimate and target price revisions please see page 6.)
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER 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. Investors should consider this report as only a single factor in making their investment decision. 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
Focus charts
Figure 1: China credit and bank loan (x government bond)
(% of GDP) 180 160 140 120 100 80 60 M ar 93 Mar 96 Mar 99 M ar 02 M ar 05 Mar 08 Mar 11 Wid ened gap
C redit-to-GDP
Loan-to-GDP
* Credit includes bank loan, corporate bond and other off-balance sheet financing. Source: PBOC, CEIC, BIS, Credit Suisse estimates
30.9 21.0
15.0
* Based on 1,536 A-share companies, seasonally adjusted Source: Wind Database, Credit Suisse estimates
Source: CEIC
Source: CEIC
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
2010
20 June 2011
Property market
Nominal GDP growth Listed corporate earnings growth Bank NPL ratio Financial system credit growth
Gradual rise to more sustained level, e.g. 2% Sharp slowdown; credit-to-GDP ratio Slows to lower-than-nominal GDP rapidly drops to below long-term growth level; credit-to-GDP ratio trend gradually back to long-term trend
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
Market implications
We cut our EPS growth forecast for the MSCI China, the HSCEI and Shanghai A share to 10% for 2011 and 2012, and our new index targets are 76, 15,000 and 3,000, respectively, which still represent 7-23% potential upside. However, we expect the market to remain very difficult and volatile in the next few months. We have made changes to our model portfolio. Most importantly, we are now UNDERWEIGHT (UW) banks from Overweight (OW) previously. In contrast, we have increased our OVERWEIGHT on insurance and consumer, while changing utilities from Market Weight (MW) to OVERWEIGHT. On the flip side, we have increased our UNDERWEIGHT position on the energy and capital goods sectors. We cut HSCEI target from 17,500 to 15,000
OVERWEIGHT insurance and consumer and UNDERWEIGHT banks (marginally) and cyclicals
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
Table of contents
Earnings estimates and target price revisions .....................................................................6 Sector impact .......................................................................................................................7 China Banks Sector .............................................................................................................8 Agricultural Bank of China ...........................................................................................10 Bank of China Ltd ........................................................................................................12 China Property: Maintain UNDERWEIGHT .......................................................................14 Guangzhou R&F Properties Co Ltd ...............................................................................17 Greentown China Holdings Ltd......................................................................................19 Kaisa Group .................................................................................................................21 KWG Property Holding Limited......................................................................................23 Poly (Hong Kong) Investments Ltd ................................................................................25 Shimao Property Holdings Ltd .......................................................................................27 Sino-Ocean Land Holdings Ltd......................................................................................29 Wind Equipment Sector .....................................................................................................31 Xinjiang Goldwind Science & Technology .....................................................................34 China High Speed Transmission Equipment .................................................................36 China Ming Yang Wind Power Group Ltd......................................................................38 Infrastructure Sector...........................................................................................................40 China Communications Construction Co Ltd.................................................................43 China Railway Construction Corporation.......................................................................45 China Railway Group Ltd...............................................................................................47 Dry Bulk Shipping Sector ...................................................................................................49 China COSCO Holdings ..............................................................................................51 China Basic Materials Sector .............................................................................................53 Telecoms: structural positives ............................................................................................55 Insurance Sector ................................................................................................................60
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
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates
* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011. Source: Company data, 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
Sector impact
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
ICBC Outperform CCB Outperform BOC Neutral ABC Underperform BCOM Neutral CMB Neutral CNCB Neutral CMBC Underperform CRCB Underperform
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
investment binge led by mis-pricing of cost of capital). China itself has seen 200 bp levels in the earlier part of the last decade (based on our checks and estimates, since banks did not start getting listed until 2005). Of course, some observers will worry about evergreening by banks and that such NPLs may never show up. If the GDP downturn is short lived then banks may be able to gloss over it but a protracted slowdown, especially with stricter CBRC (not to forget a new administration taking over in 2012), may lead to better transparency.
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
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 17/06/11 On 17/06/11 the spot exchange rate was HK$7.8/US$1
1M -10.7 -6.0
3M -0.5 -0.1
12M
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
Financial and valuation metrics Year Pre-prov Op profit (Rmb mn) Pre -tax profit (Rmb mn) Net attributable profit (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) CS adj. BVPS (Rmb) P/B (x) ROE ROA (%) Tier 1 Ratio (%)
10
20 June 2011
Key ratios and valuation ROE stated - return on ROE - CS adj.return on ROA - credit suisse adj. Gearing (x) Asset quality (%) NPL to gross loans ratio Reserves to NPL ratio Capital ratios (%) Eqt Tier 1 Ratio (12/11E, Tier 1 ratio (12/11E, %) Capital adequacy ratio Growth and balance Revenue growth Operating expense growth Pre-provisional op. profit Net profit growth Deposit growth Loan-deposit ratio
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Balance sheet 12/10A 12/11E 12/12E 12/13E Assets Gross customer loans 4,956,741.0 5,716,510.8 6,533,720.0 7,424,614.3 Risk provisions 168,733.0 206,079.9 279,769.6 367,151.8 Net customer loans 4,788,008.0 5,510,431.0 6,253,950.4 7,057,462.4 Interbank Loans 698,599.0 838,318.8 1,005,982.6 1,207,179.1 Investment & Securities Cash and cash equivalents 2,082,332.0 2,118,355.6 2,002,364.5 1,846,809.3 Fixed Assets 121,391.0 127,460.6 133,833.6 140,525.3 Intangible assets & goodwill (Rmb 1.0 Other assets 119,645.0 176,495.5 189,069.5 202,656.2 Total assets 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0 Liabilities Interbank deposits 701,131.0 620,449.0 620,450.5 620,452.1 Customer deposits 7,497,618.0 8,887,905.0 10,225,420.0 11,551,872.0 Total deposits 9,508,354.0 10,845,870.5 12,172,324.1 13,672,895.0 Other liabilities 224,472.0 246,311.4 270,051.5 296,122.5 Total liabilities 9,795,170.0 11,154,525.9 12,504,719.6 14,031,361.5 Shareholders' equity 542,071.0 649,287.7 719,816.6 790,507.6 Minority interest 165.0 165.0 165.0 165.0 Preferred stock Total liabilities and shareholders' 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0
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
11
20 June 2011
Research Analysts Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com
1M -9.0 -4.4
3M -6.1 -3.7
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
Financial and valuation metrics Year Pre-prov Op profit (Rmb mn) Pre -tax profit (Rmb mn) Net attributable profit (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) CS adj. BVPS (Rmb) P/B (x) ROE ROA (%) Tier 1 Ratio (%)
12
20 June 2011
Balance sheet 12/10A 12/11E 12/12E 12/13E Assets Gross customer loans 5,660,621.0 6,439,663.5 7,180,956.8 7,996,422.9 Risk provisions 149,679.2 162,714.0 186,402.2 Net customer loans 5,537,765.0 6,287,243.7 6,979,255.0 7,738,566.7 Interbank Loans 1,787,638.0 2,085,322.2 2,203,494.1 2,372,303.7 Investment & Securities Cash and cash equivalents 722,344.0 754,364.8 951,986.6 1,148,330.2 Fixed Assets 123,568.0 129,746.4 136,233.7 143,045.4 Intangible assets & goodwill (Rmb 2,342.0 2,342.0 2,342.0 2,342.0 Other assets 230,884.0 246,776.1 264,162.7 283,188.5 Total assets 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7 Liabilities Interbank deposits 1,152,424.0 1,580,030.0 1,659,031.5 1,692,212.1 Customer deposits 6,620,552.0 7,483,254.0 8,605,742.1 9,724,488.6 Total deposits 9,063,284.0 10,264,773.6 11,416,700.7 12,714,728.5 Other liabilities 588,544.0 625,523.3 661,166.2 700,007.7 Total liabilities 9,783,715.0 11,022,183.9 12,209,753.9 13,546,623.1 Shareholders' equity 644,165.0 709,284.2 775,960.4 834,217.6 Minority interest 31,985.0 35,183.5 38,701.9 42,572.0 Preferred stock Total liabilities and shareholders' 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7
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
13
20 June 2011
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates
Sales turning non-cash; widespread price cuts should soon lead to further de-rating
With banks delaying the approval and release of mortgage loans, developers cash collection on property pre-sales has declined significantly. Moreover, due to the banks tighter loan quota, several high-end projects have started allowing home buyers to pay on an installment basis. Therefore, the cash collection for high-end players may deteriorate much more significantly than the sector average. Given a more bearish macro outlook and potentially worse-than-expected financial conditions of property developers, we expect the property price cuts in 2H11 to be more significant. When widespread property price cuts happen, volumes would dry up instead of increasing home buyers would wait for the bottoming of prices instead of rushing to buy, in our view. The deteriorating financial condition of developers, property prices and volume drop in 2H11E should lead to a further derating of the China property sector, in our view.
Figure 17: Key drivers
FY11E Major markets housing price YoY change (%) Before
Major markets primary housing transaction volumes, YoY change (%)
Before Developers financing cost (direction) Before Source: 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
14
20 June 2011
T T+1 T+2
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
15
20 June 2011
reduce our target price for high-end developer Shimao, but maintain our NEUTRAL rating as its share price has already significantly underperformed.
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
16
20 June 2011
1M -3.5 1.4
3M -4.3 -1.8
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 24,641.8 8,313.6 7,969.1 3,665.6 1.14 n.a. n.a. 45.4 7.1 6.2 5.4 1.3 20.0 93.4
12/11E 31,148.3 9,340.9 8,962.0 4,510.0 1.40 -4.0 1.38 23.0 5.7 7.0 5.5 1.1 21.1 107.7
12/12E 34,612.6 9,038.6 8,621.8 4,509.5 1.40 -6.6 1.55 -0.0 5.7 7.0 6.5 1.0 18.5 124.7
12/13E 36,190.2 9,430.8 8,972.3 4,617.7 1.43 -8.2 1.72 2.4 5.6 7.1 7.1 0.9 17.0 137.6
17
20 June 2011
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 24,642 15,348.6 1,547.2 -223.1 8,314 344.5 7,969.1 940.8 -67.8 6,960.5 3,189.2 3,771.4 685.0 105.8 4,350.6 -685.0 3,666 12/10A 7,969 1,392.1 -4,049.8 -1,869.8 657.4 334.8 322.6 -334.8 998.9 -998.9 -676.3 12/10A 9,168.1 7,229.4 40,694.0 52,052.1 4,119.1 875.1 20,370.6 77,416.9 7,845.4 1,496.2 25,252.1 34,593.7 15,169.4 7,654.5 57,417.7 19,787.7 211.5 77,416.9
12/11E 31,148 20,134.9 2,308.0 -256.6 9,341 378.9 8,962.0 484.9 1.7 8,478.8 3,815.5 4,663.3 153.4 4,510.0 4,510 12/11E 8,962 1,695.8 -10,330.4 -1,746.8 -4,811.0 384.2 -5,195.2 -384.2 1,288.9 -1,288.9 -6,484.1 12/11E 10,085.0 7,751.4 48,755.4 60,544.5 4,505.3 875.1 23,981.3 89,906.2 8,629.9 1,870.2 28,550.4 39,050.6 21,058.6 6,423.4 66,532.6 23,008.7 364.9 89,906.2
2007
2008
2009
2010
Price (LHS)
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
18
20 June 2011
Research Analysts
1M -11.0 -6.6
3M -2.3 0.2
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 11,161.3 1,816.6 1,816.6 1,531.8 0.93 n.a. n.a. 84.3 6.5 5.0 17.9 0.97 15.5 133.7
12/11E 20,117.2 5,130.6 5,130.6 1,896.9 1.16 1.9 1.29 24.0 5.2 7.7 7.8 0.87 17.6 158.1
12/12E 27,444.2 7,102.6 7,102.6 3,039.3 1.85 -2.2 1.95 60.2 3.3 12.3 4.8 0.75 24.8 129.5
12/13E 31,933.3 5,561.8 5,561.8 3,334.8 2.03 -14.6 2.48 9.7 3.0 13.5 6.4 0.65 23.5 121.3
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20 June 2011
3900.HK / 3900 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 1,644.1 0.93 n.a. 0.30 6.65 12/10A
27.9 50.7 91.2 84.3 16.3 16.3 26.9 13.7 6.5 0.97 2.9 17.9 17.9 15.5 3.4 0.09 1.7 0.64 8.7 133.7 10.6 -13.3
Price (16 Jun 11): HK$7.25, Rating: UNDERPERFORM [V], Target Price: HK$6.90, Analyst: Wenhan Chen
12/11E 1,641.9 1.16 1.29 0.46 2.20 12/11E
80.2 182.4 23.8 24.0 25.5 25.5 25.2 9.4 5.2 0.87 2.0 7.8 7.8 17.6 6.4 0.14 1.0 0.51 9.1 158.1 5.0 5.3
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 11,161 7,759.9 1,658.1 -73.3 1,817 1,816.6 -137.1 481.7 565.0 3,000.3 1,084.8 1,915.5 383.8 1,531.8 1,532 12/10A 1,817 1,084.8 11,344.0 -1,134.8 10,941.0 333.2 10,607.8 -333.2 584.5 5,430.4 3,884.2 3,299.7 13,907.5 12/10A 14,972.9 4,196.0 2,034.2 94,803.2 116,006.2 2,448.3 6,904.5 125,359.0
8,928.0 11,993.9 66,519.4 87,441.3 21,621.4 1,843.5 110,906.3 10,199.5 4,253.2 125,359.0
12/11E 20,117 12,783.9 2,276.0 -73.3 5,131 5,130.6 964.9 893.9 5,059.7 2,457.2 2,602.5 705.5 1,896.9 1,897 12/11E 5,131 2,457.2 4,000.7 -3,063.5 3,610.7 349.9 3,260.8 -349.9 496.5 5,000.0 636.8 140.3 3,401.1 12/11E 13,865.8 4,196.0 2,034.2 105,001.4 125,097.3 2,448.3 18,760.6 146,306.2
8,928.0 14,392.7 80,835.6 104,156.3 24,654.6 1,411.6 130,222.4 11,337.7 4,746.0 146,306.2
12/12E 27,444 18,145.4 2,269.4 -73.3 7,103 7,102.6 1,046.5 1,104.2 7,160.3 3,082.1 4,078.2 1,038.9 3,039.3 3,039 12/12E 7,103 -7,102.6 12/12E 15,069.4 4,196.0 2,034.2 112,578.7 133,878.2 2,448.3 23,991.8 160,318.3
8,928.0 17,271.2 92,222.5 118,421.7 21,776.1 1,411.6 141,609.3 13,161.3 5,547.7 160,318.3
12/13E 31,933 23,959.1 2,485.7 -73.3 5,562 5,561.8 1,046.5 995.7 5,511.0 1,431.0 4,080.0 745.1 3,334.8 3,335 12/13E 5,562 -5,561.8 5,425.7 12/13E 13,620.4 4,196.0 2,034.2 125,860.2 145,710.8 2,448.3 24,720.9 172,880.0
8,928.0 20,725.5 102,315.5 131,969.0 18,321.8 1,411.6 151,702.4 15,162.2 6,015.4 172,880.0
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
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
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20 June 2011
Kaisa Group
(1638.HK / 1638 HK)
Rating (from Outperform) NEUTRAL* [V] Price (16 Jun 11, HK$) 2.80 Target price (HK$) (from 3.50) 3.14 Chg to TP (%) 12.1 Market cap. (HK$ mn) 13,733.1 Enterprise value (Rmb mn) 14,468 Number of shares (mn) 4,904.67 Free float (%) 22.0 52-week price range 3.39 - 1.51
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Fairly priced
We downgrade Kaisa from Outperform to NEUTRAL: Although Kaisa contracted sales in May picked up to Rmb1.28 bn, up 125% MoM and 106% YoY, the companys first five months sales of Rmb3.2 bn accounted for just 21% of its full-year target of Rmb15 bn. Its YTD sales progress is among the slowest under our coverage. We expect the companys sales progress to continue to be hindered from the austerity measures and trim our 2011 contracted sales forecast to Rmb13 bn. Reducing NAV with new sector assumptions: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we revise down our forward NAV estimate for Kaisa to HK$5.7 from HK$6.4 and target price to HK$3.14 from HK$3.50. Valuation: Kaisa is trading at a 51% discount to 12-month NAV and 1.2x P/B. Given the current sector downturn and uncertainties ahead of its contracted sales, we downgrade Kaisa from Outperform to NEUTRAL.
Research Analysts
Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 16/06/11 On 16/06/11 the spot exchange rate was HK$7.8/US$1
1M 0.7 5.8
3M 8.1 10.9
Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101 (206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 7,755.9 2,450.4 2,422.4 1,409.5 0.29 n.a. n.a. 173.6 8.1 1.2 6.3 1.1 16.9 40.3
12/11E 9,310.0 2,512.1 2,479.8 1,564.3 0.30 -2.1 0.29 4.4 7.8 1.9 5.8 1.3 15.5 30.0
12/12E 12,407.5 3,072.7 3,035.6 1,788.5 0.32 -6.5 0.40 7.9 7.2 2.1 5.1 1.2 17.2 41.6
12/13E 16,302.2 3,587.2 3,544.6 2,011.4 0.36 24.0 0.61 12.5 6.4 17.9 3.7 1.0 17.4 16.3
21
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (HK$) Operating cash flow per 12/12E 12,408 8,273.6 1,112.1 -13.8 3,073 37.1 3,035.6 48.1 2,987.5 1,199.1 1,788.5 1,788.5 1,788 12/12E 3,036 471.7 -1,945.7 -996.0 -377.7 29.3 -407.0 520.3 -393.0 -942.6 -1,320.4 12/12E 7,752.9 7,690.4 1,231.5 19,238.9 35,913.6 94.0 5,894.6 41,902.2
1,858.4 18,231.9 20,090.3 4,475.4 6,779.2 31,345.0 10,551.7 5.4 41,902.2
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 7,756 4,745.0 594.5 -6.0 2,450 28.0 2,422.4 45.8 2,376.5 967.0 1,409.5 1,409.5 1,410 12/10A 2,422 476.2 -1,383.0 -573.3 -10.2 26.5 -36.7 704.7 -123.7 -855.0 -865.2 12/10A 4,869.7 2,482.3 603.3 12,484.2 20,439.4 106.1 5,877.0 26,422.5
1,751.7 7,530.5 9,282.2 6,175.7 1,199.9 16,429.1 9,988.5 4.9 26,422.5
12/11E 9,310 6,111.4 740.3 -21.6 2,512 32.2 2,479.8 31.7 2,448.1 883.8 1,564.3 1,564.3 1,564 12/11E 2,480 385.7 -465.1 -742.2 886.8 27.9 858.9 596.4 -273.4 -897.7 -10.9 12/11E 6,034.1 4,652.3 965.9 15,468.2 27,120.5 101.8 5,885.4 33,107.7
1,804.3 12,816.7 14,621.0 1,490.4 6,779.2 22,890.7 10,211.8 5.2 33,107.7
12/13E 16,302 10,890.7 1,883.6 -16.7 3,587 42.6 3,544.6 44.0 3,500.6 1,489.2 2,011.4 2,011.4 2,011 12/13E 3,545 530.5 1,080.9 -1,065.6 3,029.4 30.7 2,998.7 558.4 -400.6 -989.8 2,039.7 12/13E 10,678.8 11,943.6 1,847.2 23,915.7 48,385.3 82.1 5,904.7 54,372.1
1,914.1 28,067.2 29,981.3 5,309.0 6,479.2 41,769.6 12,596.8 5.7 54,372.1
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
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
22
20 June 2011
Research Analysts Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
1M -7.0 -2.3
3M -5.0 -2.6
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
23
20 June 2011
1813.HK / 1813 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 2,893.8 0.44 n.a. 0.08 0.14 12/11E 2,893.8 0.67 0.62 0.13 -1.50 12/12E 2,893.8 0.65 0.80 0.12 -1.02 12/13E 2,893.8 0.70 0.98 0.13 -0.49
Price (16 Jun 11): HK$4.90, Rating: NEUTRAL [V], Target Price: HK$5.40, Analyst: Jinsong Du
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 7,466 4,368.3 656.6 -49.3 2,501 11.2 2,490.3 -13.5 2,503.8 1,223.0 1,280.8 0.0 1,280.8 1,281 12/10A 2,490 909.4 -646.5 -529.9 404.4 318.3 110.6 86.1 4.5 -212.2 144.7 -540.7 -685.4 -493.1 12/10A 6,803.6 47.7 2,553.8 15,515.1 24,920.1 1,343.9 13,770.3 40,034.3
10,416.2 2,281.7 2,733.8 15,431.6 10,050.0 2,258.5 27,740.1 12,284.3 10.0
12/11E 9,764 5,980.7 933.0 -451.0 3,314 12.3 3,301.4 -15.6 3,317.0 1,386.2 1,930.7 1,930.7 1,931 12/11E 3,301 1,370.9 -5,113.2 -1,154.5 -4,337.2 286.5 103.1 -4,623.7 3.8 -187.2 240.1 1,451.8 1,211.7 -3,312.7 12/11E 8,011.5 54.8 4,451.5 17,089.8 29,607.7 1,618.1 11,385.2 42,611.0
8,658.2 2,327.3 1,522.0 12,507.5 14,524.9 2,371.4 29,403.8 13,196.7 10.5
12/12E 10,471 6,792.8 875.6 -511.1 3,328 13.6 3,314.0 5.6 3,308.4 1,435.3 1,873.1 1,873.1 1,873 12/12E 3,314 1,330.0 -3,329.5 -1,597.0 -2,942.4 308.0 106.9 -3,250.4 4.1 -205.3 1.0 361.9 747.4 386.5 -2,761.2 12/12E 14,510.3 63.1 6,569.8 19,206.7 40,350.0 1,912.6 12,536.2 54,798.8
6,281.4 2,373.9 5,195.2 13,850.5 23,738.4 2,490.0 40,078.8 14,708.9 11.0
12/13E 12,322 7,248.7 1,154.6 -127.8 4,061 14.9 4,046.5 55.0 103.3 3,991.5 1,952.9 2,038.5 2,038.5 2,039 12/13E 4,047 1,447.4 -2,427.6 -1,589.2 -1,417.8 304.3 105.0 -1,722.1 3.9 -203.3 2.0 351.1 1,099.6 750.5 -870.5 12/13E 17,227.5 72.5 7,981.8 21,592.7 46,874.6 2,202.0 13,838.5 62,915.0
8,284.9 2,421.3 5,905.7 16,612.0 27,278.6 2,614.5 46,505.0 16,398.4 11.6
Key earnings driver ASP (Rmb per sqm) GFA (000 sqm) Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/10A 12/11E 12/12E 12/13E 11,475.6 12,032.1 12,530.7 1,001.74 1,054.21 1,453.78 1,706.44 12/10A
75.0 99.1 75.6 65.9 33.5 33.4 33.5 17.2 9.2 0.96 2.3 6.9 7.0 11.0 7.1 0.19 1.0 0.51 3.3 45.0 2.2 -184.3
12/11E
30.8 32.6 50.7 50.7 33.9 33.8 34.0 19.8 6.1 0.89 2.1 6.2 6.3 15.2 8.7 0.23 1.0 0.58 3.2 66.9 2.7 -211.6
12/12E
7.2 0.4 -3.0 -3.0 31.8 31.6 31.6 17.9 6.3 0.80 2.2 7.0 7.1 13.4 7.1 0.19 1.0 0.57 3.7 78.8 3.5 590.3
12/13E
17.7 22.1 8.8 8.8 33.0 32.8 32.4 16.5 5.8 0.72 2.0 6.0 6.0 13.1 7.2 0.20 1.0 0.51 3.8 76.0 73.5
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
40,034.3
42,611.0
54,798.8
62,915.0
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
24
20 June 2011
Research Analysts Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
1M -18.6 -14.5
3M -24.2 -22.2
Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net income (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
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
12/10A 8,514.1 2,802.8 2,802.8 1,209.6 0.37 n.a. n.a. 22.4 12.9 3.3 11.1 0.78 6.6 58.5
12/11E 13,049.1 3,622.6 3,622.6 1,808.1 0.50 -13.3 0.53 36.4 9.4 1.6 9.9 0.73 8.0 73.7
12/12E 19,536.4 4,810.3 4,810.3 2,322.8 0.64 -20.0 0.77 28.5 7.3 15.7 7.1 0.67 9.6 62.2
12/13E 24,440.2 6,231.0 6,231.0 3,221.9 0.89 -19.9 1.09 38.7 5.3 40.6 5.1 0.66 12.6 50.7
25
20 June 2011
0119.HK / 119 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (HK$) DPS (HK$) Operating cash flow per 12/10A 3,292.6 0.37 n.a. 0.2 -0.11 12/10A
18.3 189.5 82.7 22.4 32.9 32.9 30.0 14.2 12.9 0.78 3.6 11.1 11.1 6.6 4.4 0.12 0.91 0.59 3.1 58.5 5.0 10.9
Price (16 Jun 11): HK$4.73, Rating: NEUTRAL [V], Target Price: HK$6.10, Analyst: Wenhan Chen
12/11E 3,608.4 0.50 0.53 0.1 -1.13 12/11E
53.3 29.3 49.5 36.4 27.8 27.8 25.6 13.9 9.4 0.73 2.7 9.9 9.9 8.0 5.0 0.16 0.92 0.61 3.3 73.7 5.1 10.8
Income statement (HK$ mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (HK$ mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (HK$ mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 8,514 5,030.4 1,070.8 -389.8 2,803 2,802.8 257.3 11.6 2,557.1 1,049.4 1,507.7 298.1 1,209.6 1,210 12/10A 2,803 577.7 1,381.8 -3,973.3 -366.5 -366.5 131.3 -131.3 -497.8 12/10A 16,054.7 1,215.0 45,025.0 62,294.7 1,751.5 9,758.0 73,804.2
1,967.2 9,522.6 16,936.3 28,426.2 20,300.6 1,305.1 50,031.9 22,010.2 1,819.3
12/11E 13,049 8,280.1 1,362.4 -216.1 3,623 3,622.6 336.2 53.9 3,340.3 1,297.6 2,042.7 234.7 1,808.1 1,808 12/11E 3,623 680.9 -1,152.6 -5,864.1 -4,075.0 -4,075.0 559.3 -559.3 -4,634.4 12/11E 11,438.5 1,336.5 57,027.9 69,803.0 1,751.5 12,379.7 83,934.2
2,164.0 10,474.9 24,630.1 37,269.0 19,411.6 1,940.6 58,621.2 23,258.9 2,054.0
12/12E 19,536 13,241.7 1,787.4 -302.9 4,810 4,810.3 337.1 29.5 4,502.7 1,823.3 2,679.4 356.6 2,322.8 2,323 12/12E 4,810 893.1 4,899.8 -7,057.5 1,759.4 1,759.4 271.2 -271.2 1,488.2 12/12E 12,946.7 1,470.2 72,510.6 86,927.5 1,751.5 14,684.4 103,363.4
2,380.4 11,522.4 40,407.9 54,310.6 18,440.0 2,891.6 75,642.3 25,310.5 2,410.6
12/13E 24,440 16,198.3 2,270.4 -259.5 6,231 6,231.0 338.1 7.2 5,900.1 2,349.9 3,550.2 328.3 3,221.9 3,222 12/13E 6,231 1,183.4 8,941.0 -8,485.0 5,503.6 5,503.6 2,671.2 -2,671.2 2,832.3 12/13E 15,801.1 1,617.2 92,504.7 109,923.0 1,751.5 16,756.2 128,430.8
2,618.4 12,674.6 63,077.8 78,370.8 17,378.9 4,081.0 99,830.7 25,861.2 2,738.9
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
73,861.4
83,934.2
103,363.4
128,430.8
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
26
20 June 2011
Research Analysts Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
1M -12.2 -7.8
3M -10.5 -8.2
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 21,789.0 9,574.6 9,289.5 3,563.6 1.01 n.a. n.a. 25.1 7.4 4.7 5.1 0.99 14.2 67.9
12/11E 26,300.0 7,753.3 7,753.3 4,086.9 1.15 -2.3 1.20 14.7 6.5 4.3 6.7 0.97 15.1 72.7
12/12E 31,919.4 8,342.3 8,342.3 4,322.0 1.22 -9.9 1.43 5.8 6.1 4.5 5.8 0.89 15.2 65.6
12/13E 40,730.3 10,347.1 10,347.1 5,437.7 1.53 -10.1 1.73 25.8 4.8 5.8 4.8 0.85 18.0 65.7
27
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 31,919 21,176.5 2,400.6 8,342 8,342.3 451.3 381.7 8,272.6 3,349.0 4,923.6 601.6 4,322.0 4,322 12/12E 8,342 1,820.0 5,298.9 -2,312.9 9,508.3 9,508.3 1,348.7 -1,348.7 8,159.6 12/12E 11,852.9 5,124.3 37,186.4 54,163.6 6,553.6 2,280.5 48,600.4 111,598.0
17,813.9 9,376.7 23,212.5 50,403.0 24,695.5 2,613.2 77,711.7 29,594.6 4,291.7 111,598.0
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 21,789 13,812.1 1,647.0 -2,959.7 9,575 285.1 9,289.5 671.6 -48.1 8,569.9 3,079.4 5,490.5 819.4 4,671.1 -1,107.5 3,564 12/10A 9,290 2,007.6 -1,557.4 -1,083.2 4,641.3 4,641.3 1,346.4 8,100.9 6,754.6 11,395.9 12/10A 13,728.6 5,124.3 35,942.2 54,795.1 6,553.6 2,280.5 32,040.1 95,669.3
11,512.9 9,376.7 17,760.0 38,649.6 24,695.5 2,370.2 65,715.3 26,698.8 3,255.2 95,669.3
12/11E 26,300 16,316.9 2,229.8 7,753 7,753.3 466.0 117.8 7,405.1 2,883.2 4,521.9 435.0 4,086.9 4,087 12/11E 7,753 1,629.1 2,640.8 -2,161.0 6,604.0 6,604.0 1,417.7 -1,417.7 5,186.3 12/11E 11,522.6 5,124.3 35,240.0 51,886.9 6,553.6 2,280.5 43,939.4 104,660.4
15,745.4 9,376.7 21,348.7 46,470.8 24,695.5 2,488.7 73,655.0 27,315.2 3,690.2 104,660.4
12/13E 40,730 27,856.0 2,527.2 10,347 10,347.1 450.3 743.6 10,640.4 4,413.3 6,227.1 788.7 5,438.4 -0.7 5,438 12/13E 10,347 2,447.3 -11,265.7 -2,499.0 -5,864.9 -5,864.9 1,426.3 -1,426.3 -7,291.2 12/13E 10,426.6 5,124.3 1.0 55,541.3 71,093.1 6,553.6 2,280.5 51,713.3 131,640.5
34,838.6 9,376.7 23,999.9 68,215.2 24,695.5 2,743.8 95,654.5 30,904.6 5,080.4 131,639.5
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
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
28
20 June 2011
Beijing risk remains high; financial condition worsening despite the perpetual bond
Reducing 2011E ESP due to the recently issued perpetual bond: We expect Sino Oceans recently issued perpetual bond to add Rmb155 mn financial cost in 2011E and Rmb267 mn from 2012E onwards; this translates into HK$0.03 and HK$0.06 per share. Reducing NAV with new sector assumptions: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we reduce our forward NAV estimate from HK$9.45 to HK$7.1. Also, the combined impact from the perpetual bond and the more bearish sector outlook result in 13%, 17% and 17% reduction in our 2011, 2012 and 2013 EPS estimates, respectively. Actual financial condition may deteriorate: Sino Oceans Beijing projects are affected significantly by the severe tightening measures there. From January to May, Sino Ocean recorded Rmb9.2 bn of contracted sales, representing 31% of its full-year guidance. We expect Sino Oceans sales to remain relatively weak in the coming months, increasing the likelihood of reducing its FY11E contracted sales guidance. Although net gearing appears improved on the perpetual securities issuance, but in fact its financial condition is deteriorating due to the cash outflow for its increasing number of commercial property projects. Valuation: Sino Ocean is trading at a 50% discount to 12-month NAV. Given the current sector downturn, Sino Ocean's exposure in major cities such as Beijing, as well as its potentially deteriorating financial condition, we maintain our NEUTRAL rating despite its recent share price weakness.
12/10A 13,720.7 3,385.5 3,385.5 1,663.1 0.30 n.a. n.a. 51.6 9.9 4.4 9.1 0.65 6.8 42.8 12/11E 20,107.9 5,231.9 5,231.9 2,504.2 0.44 -13.0 0.49 50.6 6.6 4.9 6.5 0.60 9.5 45.5 12/12E 23,868.8 5,075.1 5,075.1 2,539.6 0.45 -16.8 0.57 1.4 6.5 5.4 7.0 0.54 8.8 46.3 12/13E 30,638.8 5,755.4 5,754.4 3,132.5 0.56 -16.7 0.66 23.3 5.3 5.9 6.5 0.50 9.8 46.7
Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
1M -14.4 -10.0
3M -20.7 -18.7
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
Research Analysts
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
29
20 June 2011
3377.HK / 3377 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 5,636.6 0.30 n.a. 0.13 -1.11 12/11E 5,636.6 0.44 0.49 0.14 0.53 12/12E 5,636.6 0.45 0.57 0.16 0.37 12/13E 5,636.6 0.56 0.66 0.17 0.77
Price (16 Jun 11): HK$3.52, Rating: NEUTRAL, Target Price: HK$3.90, Analyst: Jinsong Du
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 13,721 9,596.0 898.3 -159.1 3,385 3,385.5 287.4 3,098.1 1,225.8 1,872.3 566.5 5.3 2,433.6 -770.5 1,663 12/10A 3,385 1,136.2 -6,913.4 -1,581.8 -6,245.9 29.8 342.4 -6,275.7 -574.7 5,814.0 628.0 1,500.0 -1,485.9 5,200.2 -1,620.4 12/10A 15,034.6 2,101.9 97.1 48,271.0 62,634.8 369.0 971.5 14,880.1 78,855.4
6,625.9 9,920.1 8,769.8 25,315.8 16,676.2 3,737.7 45,729.6 31,070.7 2,055.1 78,855.4
12/11E 20,108 13,644.4 1,453.4 -221.8 5,232 5,231.9 269.5 4,962.4 1,768.9 3,193.6 56.3 3,137.3 -633.1 2,504 12/11E 5,232 1,481.4 2,000.0 -2,739.7 3,010.8 31.3 448.7 2,979.6 -514.3 2,522.0 955.7 1,500.0 -1,796.8 1,269.5 3,766.0 12/11E 13,349.8 2,417.2 106.8 54,144.9 66,718.5 405.9 1,117.2 20,665.2 88,906.9
7,619.8 9,920.1 11,112.7 28,652.6 18,176.2 3,965.2 50,794.0 35,852.3 2,260.6 88,906.9
12/12E 23,869 17,424.7 1,725.2 -356.2 5,075 5,075.1 283.0 4,792.1 1,452.1 3,340.0 56.3 3,283.7 -744.1 2,540 12/12E 5,075 1,549.4 1,026.1 -2,476.2 2,075.7 395.6 2,075.7 395.6 14.5 1,500.0 1,485.5 1.0 3,957.7 12/12E 12,938.1 2,779.7 117.4 60,724.4 72,764.4 446.5 1,284.8 23,839.4 98,335.2
8,762.8 9,920.1 14,129.7 32,812.6 19,676.2 4,238.2 56,727.0 39,121.5 2,486.7 98,335.2
12/13E 30,639 23,127.3 2,214.5 -458.5 5,755 1.0 5,754.4 296.5 5,457.9 1,525.0 3,932.9 56.3 3,876.6 -744.1 3,133 12/13E 5,754 1,824.9 2,885.8 -2,447.8 4,367.5 395.6 4,367.5 395.6 1,177.8 1,500.0 322.2 2.0 5,087.3 12/13E 12,869.9 3,196.7 129.2 68,112.4 79,943.8 491.2 1,477.5 26,403.7 108,316.2
10,077.2 9,920.1 18,020.2 38,017.5 21,176.2 4,565.9 63,759.5 41,821.3 2,735.3 108,316.2
Key earnings driver ASP (Rmb per sqm) GFA (sqm) Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/10A 12/11E 12/12E 12/13E 12,950.0 14,218.9 14,212.1 14,489.5 1,660,22 1,774,33 2,153,77 2,572,65 12/10A
55.5 55.5 51.6 51.6 24.7 24.7 22.6 12.1 9.9 0.65 2.2 9.1 9.1 6.8 4.3 0.17 0.92 0.60 2.4 42.8 4.2 11.8
12/11E
46.6 54.5 50.6 50.6 26.0 26.0 24.7 12.5 6.6 0.60 1.7 6.5 6.5 9.5 6.1 0.23 0.95 0.64 2.3 45.5 3.3 19.4
12/12E
18.7 -3.0 1.4 1.4 21.3 21.3 20.1 10.6 6.5 0.54 1.5 7.0 7.0 8.8 5.8 0.24 0.94 0.70 2.4 46.3 3.8 17.9
12/13E
28.4 13.4 23.3 23.3 18.8 18.8 17.8 10.2 5.3 0.50 1.2 6.5 6.5 9.8 6.3 0.28 0.95 0.72 2.4 46.7 19.4
Price (LHS)
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
30
20 June 2011
* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011. Source: Company data, 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
31
20 June 2011
We discuss factors contributing to slower wind power growth below: Government approvals become more stringent
According to the China Daily, China's National Energy Bureau (NEB) is drafting new regulations to standardise the approval on wind farms. Currently, China's local governments have the power to approve wind farm projects of less than 50 MW in installed capacity. Wind farm projects larger than 50 MW are approved by the NDRC. To get their projects approved by local governments, an easier and faster route than the approval by the central government, wind operators often divide their wind farm projects into multiple stages, each being smaller than 50 MW. As a result, numerous wind farms across the country are 49.5 MW in size. The new regulation would require local governments to first gain approval from the NEB before they can offer licences for wind projects. We believe this move is the central governments bid to curb over-enthusiasm in wind development at the provincial level and reshape wind development so that it is more coordinated with the regional transmission development. Difficulty in access to capital could also play a role in limiting wind capacity growth
Chinese authorities have been combatting inflation through monetary tightening, including reducing lending quota and increasing reserve requirement and the interest rate. As wind farms are typically financed by over 70% debt, there is concern that monetary tightening could affect growth in wind power capacity. We believe the SOEs with a good relationship with Chinese banks will see less impact while private developers or regional entities could be more affected. Anecdotally, we hear from small wind developers that access to capital is becoming increasingly difficult. Wind power integration constraints limit capacity growth beyond 2011/12
WTG industry is facing significant over capacity. We estimate capacity utilisation declines materially to 54% in 2011 from 73% in 2010, creating enormous pressure on WTGs average selling prices. We forecast the realised ASP for 2011 sales to be Rmb780/kW lower than 2010s, and decline by a further Rmb390/kW in 2012, guided by recent WTG tender pricing points in addition to the supply/ demand curve we constructed. As demand softens and ASP continues to decline, we see significant risk to earnings that is not yet acknowledged by the Street. In Figure 22, we show our estimates for these companies (Goldwind, CHST and Mingyang), and found our estimates are 20-40% below Street. We find the consensus is discounting unrealistically bullish assumptions in terms of sales volume, ASP and gross margin for the three companies and believe there is significant downward earning revision ahead.
We see significant wind power integration issues that are difficult to resolve within the medium term and, in our view, will cap the wind capacity growth beyond the immediate future. We believe the integration bottleneck is caused because of: (1) highly concentrated wind farm distribution in wind-rich areas as China pursues the 10+ GW wind base strategy; (2) lack of regulation capacity to ramp up/ down to accommodate intermittency of wind generation; and (3) lack of T&D infrastructure to transmit wind power to load centres. All above-mentioned issues may take years to be resolved hence our bearish view on the growth potential of wind generation in China beyond 2011/12.
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
32
20 June 2011
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
33
20 June 2011
The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6417.61 on 17/06/11 On 17/06/11 the spot exchange rate was HK$7.8/US$1
1M -21.0 -14.3
3M -40.8 -39.2
12M -4.3
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
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
34
20 June 2011
2208.HK / 2208 HK
12/10A 2,315.8 0.99 n.a. 0.40 0.09 12/10A
63.8 49.7 31.2 -20.7 19.2 18.2 16.0 13.1 7.2 1.3 -0.18 -0.9 -1.0 26.3 52.1 0.62 0.88 0.85 2.2 -49.1 -2.0 27.3
Price (17 Jun 11): HK$8.54, Rating: UNDERPERFORM [V], Target Price: HK$7.20, Analyst: Yang Song
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 16,319 13,235.7 833.1 244.8 -583.9 2,590 488.9 2,100.8 153.8 -254.2 1,692.8 251.5 1,441.4 57.0 1,384.3 1,384 12/12E 2,101 -251.5 -402.1 177.7 1,625.0 -1,000.0 625.0 -153.8 -1,153.8 -637.3 45.7 -591.6 -120.4 12/12E 10,209.4 3,786.3 4,371.4 1,131.5 19,498.6 6,353.8 501.3 1,176.7 27,530.4
5,848.8 296.7 2,756.3 8,901.8 2,670.2 807.2 12,379.2 14,158.6 438.7 27,530.4
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 17,475 13,453.8 1,248.4 98.4 -681.5 3,356 167.2 3,188.9 117.0 -272.2 2,799.7 415.9 2,383.8 94.3 2,289.5 2,290 12/10A 3,189 -415.9 -1,895.4 -675.5 202.1 -1,454.9 -1,252.8 -1,040.5 -2,495.4 7,038.8 -165.8 342.8 63.0 7,278.8 4,985.6 12/10A 9,658.2 7,583.1 4,390.7 1,204.0 22,836.1 3,782.8 610.1 1,168.7 28,397.6
8,130.2 1,501.5 2,824.5 12,456.2 1,465.3 845.2 14,766.7 12,372.8 341.9 28,397.6
12/11E 16,663 13,271.5 1,051.0 249.9 -560.1 2,651 298.8 2,352.1 144.9 -259.6 1,947.6 289.3 1,658.3 65.6 1,592.7 1,593 12/11E 2,352 -289.3 1,941.1 -26.3 3,977.6 -2,250.0 1,727.6 -144.9 -2,394.9 -916.2 13.1 -903.1 679.6 12/11E 10,333.8 5,007.4 2,755.4 1,155.4 19,252.0 5,788.3 555.7 1,172.7 26,768.7
5,864.7 296.7 2,771.4 8,932.8 2,670.2 818.5 12,421.5 13,328.2 381.7 26,768.7
12/13E 16,556 13,474.9 730.0 248.3 -558.4 2,661 611.1 2,049.6 153.8 -257.9 1,637.9 243.3 1,394.6 55.2 1,339.4 1,339 12/13E 2,050 -243.3 1,570.0 298.1 3,674.4 -800.0 2,874.4 -153.8 -953.8 -553.9 62.9 -491.0 2,229.6 12/13E 12,435.0 3,841.1 2,884.2 1,147.9 20,308.2 6,597.1 446.9 1,180.7 28,532.8
5,954.5 296.7 2,804.6 9,055.8 2,670.2 815.0 12,540.9 14,962.0 493.9 28,532.8
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates
Price (LHS)
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
35
20 June 2011
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months.
1M -22.2 -15.5
3M -34.7 -33.1
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
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
36
20 June 2011
Per share data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/13E 7,728 5,676.8 781.1 52.8 -638.8 1,856 536.2 40.2 1,360.3 137.5 43.8 1,266.7 196.9 1,069.7 7.5 1,062.2 1,062 12/13E 1,360 -196.9 488.4 1,651.8 -400.0 1,251.8 -137.5 -537.5 -239.3 -500.0 7.5 -731.7 382.6 12/13E 3,013.4 3,983.7 1,401.6 18.7 8,417.4 5,095.4 75.9 961.0 893.5 15,443.2
2,911.6 1,357.8 183.2 4,452.6 1,142.2 30.0 5,624.8 9,674.8 143.5 15,443.2
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 7,393 5,093.8 747.2 50.5 -512.3 2,013 409.6 40.2 1,644.1 146.8 111.3 41.5 1,650.0 256.5 1,393.5 9.8 1,383.6 1,384 12/10A 1,644 -256.5 -76.3 470.9 1,782.1 -1,354.3 427.9 -712.3 -2,066.6 1,969.7 -327.4 534.4 70.8 2,247.5 1,963.0 12/10A 3,037.4 3,810.8 1,257.7 17.9 8,123.8 4,869.8 196.6 829.6 893.5 14,913.1
2,612.6 2,428.6 184.7 5,225.9 2,043.1 148.2 7,417.2 7,392.7 121.6 14,931.5
12/11E 12/12E 7,286 7,728 5,256.1 5,676.8 736.4 781.1 49.7 52.8 -574.8 -610.0 1,819 1,828 472.2 507.4 40.2 40.2 1,386.7 1,360.3 219.1 198.5 - 142,108,547, 43.8 43.8 1,211.5 1,205.7 188.4 187.5 1,023.1 1,018.2 7.2 7.2 1,015.9 1,011.0 1,016 1,011 12/11E 1,387 -188.4 104.8 424.7 1,727.9 -600.0 1,127.9 -219.1 -819.1 -327.4 -471.6 -111.0 -910.1 -1.2 12/11E 3,036.2 3,755.9 1,297.7 17.6 8,107.4 5,078.0 156.3 873.4 893.5 15,108.7
2,695.9 2,172.4 172.7 5,041.0 1,827.6 30.0 6,898.6 8,081.2 128.8 15,108.7
12/12E 1,360 -187.5 -106.5 460.0 1,526.3 -500.0 1,026.3 -198.5 -698.5 -240.4 -1,000.0 7.2 -1,233.2 -405.4 12/12E 2,630.8 3,983.7 1,401.6 18.7 8,034.8 5,151.1 116.1 917.2 893.5 15,112.7
2,911.6 1,629.3 183.2 4,724.2 1,370.7 30.0 6,124.8 8,851.8 136.0 15,112.7
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
Price (LHS)
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
37
20 June 2011
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6491.91 on 16/06/11. On 16/06/11 the spot exchange rate was US$1./US$1
1M -32.9 -26.3
3M -49.0 -47.4
12M -4.3
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 5,517.8 828.9 790.5 730.1 5.84 n.a. n.a. n.m 5.9 0 2.7 1.2 36.5 net cash
12/11E 6,516.2 772.6 695.7 652.6 5.22 0 7.37 -10.6 6.6 0 4.4 1.0 17.2 net cash
12/12E 6,933.3 855.7 688.9 608.0 4.86 0 7.82 -6.8 7.0 0 3.4 0.9 13.8 net cash
12/13E 6,731.7 931.1 770.6 693.1 5.54 0 7.07 14.0 6.2 0 2.3 0.8 13.7 net cash
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
38
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per Key ratios and valuation Growth (%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 12/11E 12/12E 12/13E 5,518 6,516 6,933 6,732 4,392.1 5,300.7 5,606.0 5,342.9 271.9 383.2 407.8 395.9 43.1 63.6 67.7 65.7 -18.2 -3.9 -3.9 -3.9 828.9 772.6 855.7 931.1 47.2 85.7 175.7 169.3 8.8 8.8 8.8 8.8 790.5 695.7 688.9 770.6 35.1 -80.8 -34.4 -54.1 - 44,408,920,9 44,408,920,9 44,408,920,9 2.6 2.1 2.1 2.1 758.1 778.6 725.4 826.9 20.9 120.7 112.4 128.2 737.2 657.9 612.9 698.7 7.1 5.3 4.9 5.6 730.1 652.6 608.0 693.1 730.1 652.6 608.0 693.1 12/10A 790.5 -381.4 -170.2 238.9 -570.0 -331.1 -122.6 -692.6 2,206.8 -30.0 68.6 2,245.4 1,791.7 12/10A 2,486.0 2,895.8 1,895.2 344.6 7,621.5 351.3 86.3 432.6 8,491.7
3,632.5 480.0 585.3 4,697.8 266.7 4,964.5 3,457.3 69.9 8,491.7
12/11E 695.7 -1,354.3 39.1 -619.5 -533.0 -1,152.5 -533.0 -1,152.5 12/11E 1,333.4 3,711.0 2,347.5 340.3 7,732.3 816.3 77.5 432.6 9,058.7
3,541.5 480.0 585.3 4,606.8 266.7 4,873.5 4,110.0 75.2 9,058.7
12/12E 688.9 -164.2 90.9 615.6 -125.0 490.6 -125.0 490.6 12/12E 1,824.0 3,948.5 2,520.1 354.8 8,647.4 783.3 68.6 432.6 9,932.0
3,801.9 480.0 585.3 4,867.2 266.7 5,133.9 4,718.0 80.1 9,932.0
12/13E 770.6 64.8 88.5 924.0 -100.0 824.0 -100.0 824.0 12/13E 2,648.0 3,833.7 2,402.5 345.0 9,229.1 731.7 59.8 432.6 10,453.2
3,624.4 480.0 585.3 4,689.7 266.7 4,956.4 5,411.0 85.7 10,453.2
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Price (LHS)
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
39
20 June 2011
Infrastructure Sector
A spending spree is close to the end
Ingrid Wei 86 21 3856 0379 ingrid.wei@credit-suisse.com
Total
2009 967 601 106 61 1,735 40.5 77.9 7.3 59.5 49.2
2010 2011E 2012E 2013E 2014E 2015E 2006-10E 2011-15E 1,148 709 117 73 2,047 18.7 18.1 10.5 20.0 18.0 975 600 127 88 1,779 -15.1 -15.4 8.3 20.0 -13.1 894 513 143 110 1,660 -8.2 -14.6 12.9 25.0 -6.7 841 468 165 143 1,617 -5.9 -8.7 15.1 30.0 -2.6 817 435 187 164 1,603 -2.8 -7.1 13.7 15.0 -0.8 764 389 215 181 1,548 -6.6 -10.6 15.0 10.0 -3.4 4,075 1,980 497 229 6,781 4,291 2,404 838 685 8,219
Highway Rail (infrastructure) Waterway/port Metro Total YoY % Highway Rail Waterway/port Metro Total
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
40
20 June 2011
32.6 16.0
40.7%
38.0%
36.4%
10 0
2004
2010E
Source: MOF study group, DRC study group, CEIC, Credit Suisse estimates
Surging challenges force MOR to be more rational in spending On the railway front, the Ministry of Railways faces increasing challenges of low profitability of high speed rails, surging financial gearing and debt repayment burden. After a few years of spending spree, MORs balance sheet is getting stretched. According to a few channel sources, MORs total debt at the end of 2010 may reach approximately Rmb1.5 tn. We estimate its net gearing will surge to above 85% at the end of 2010. These challenges have forced it to be more rational on future investment spending. According to its 12th Five-Year Plan, MOR plans to spend Rmb2.8 tn over 2011-15, lower than the widely-talked original plan of Rmb3.0 tn to Rmb3.5 tn. Based on our discussion with industry experts, we estimate investment on the infrastructure network to be Rmb2.4 tn, lower than our original forecast of Rmb2.9 tn. MOR has already lowered FY11 railway infrastructure spending to Rmb600 bn from the previous Rmb700 bn.
Figure 28: Railway investment heavily relies on debt funding
Local govnt and enterprises 15.6% Other s 1.8% Central govnt subsidy 1.0% MOR (special railway construction) 23.9%
Low profitability of high speed rails, surging financial gearing and debt repayment burden We estimate Rmb2.4 tn on railway infrastructure network building
Total debt
Source: MOR, Credit Suisse estimates Source: MOR, Credit Suisse estimates
2008E
Net gearin g
41
20 June 2011
CRCC and CRGL to see new orders falling by 25-30% YoY in 2011 (versus previous forecast of a fall of 13% to 15%), driven by an estimated 50% YoY decline in railway new contracts and a 10% fall in highway, while we forecast CCCC to see a 2.3% YoY fall (versus the previous positive growth of 1.9%) in FY11 new orders given its more diversified business model with much smaller exposure to railway. Looking to 2012 and onwards, we expect the railway and highway new contracts to continue falling by 8% to 10% p.a. in 2012-13. Revenue will continue growing YoY in 2011-13 due to the strong backlog at the end of 2010. However, the YoY growth will be slowing to low-to-mid-single-digit growth on a weaker new order growth.
Source: Bloomberg
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
42
20 June 2011
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 16/06/11 On 16/06/11 the spot exchange rate was HK$7.8/US$1
1M -2.2 2.7
3M -8.2 -5.9
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
43
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 321,606 292,457.5 12,599.7 -2,075.2 24,799 6,174.8 18,624.1 2,682.2 108.2 15,941.9 3,267.0 12,674.9 48.6 12,626.3 12,626 12/12E 18,624 3,267.0 411.4 4,282.2 19,303.1 9,000.0 10,303.1 -9,000.0 -9,000.0 3,016.3 -3,016.3 7,286.8 12/12E 48,738.4 89,344.7 23,646.7 43,573.0 205,302.7 60,510.1 15,822.0 370.0 48,302.8 330,307.6
136,042.6 42,760.0 16,731.0 195,533.6 38,569.0 7,029.0 241,131.6 78,146.9 11,029.1 330,307.6
12/10A 12/11E 12/12E 12/13E 14,825.0 14,825.0 14,825.0 14,825.0 0.67 0.74 0.85 0.90 n.a. 0.73 0.81 0.95 0.16 0.18 0.20 0.21 0.88 1.06 1.30 1.36 12/10A 0.09 0.58 0.04 0.09 0.07 12/10A
20.2 12.8 37.0 37.0 7.1 5.2 4.6 3.6 8.2 1.3 0.54 7.5 10.3 17.2 10.0 0.89 0.87 0.80 4.3 58.8 2.1 5.7
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 272,734 249,261.0 10,685.0 -1,453.0 19,489 5,248.0 14,241.0 1,788.0 103.0 12,453.0 2,552.0 9,901.0 38.0 9,863.0 9,863 12/10A 14,241 2,289.0 61.0 1,731.2 13,051.0 15,670.0 -2,619.0 -13,000.0 -15,670.0 1,845.0 9,590.0 -1.0 7,744.0 5,125.0 12/10A 39,545.0 86,424.0 21,473.0 43,573.0 191,015.0 52,438.0 15,906.0 370.0 48,065.0 307,794.0
131,625.0 42,760.0 16,731.0 191,116.0 38,569.0 7,029.0 236,714.0 60,142.0 10,938.0 307,794.0
12/11E 300,731 274,137.8 11,781.8 -1,654.2 22,219 5,753.1 16,465.4 2,539.3 103.0 13,926.1 2,853.9 11,072.2 42.5 11,029.7 11,030 12/11E 16,465 2,853.9 -1,088.1 3,914.9 15,779.2 11,000.0 4,779.2 -11,000.0 -11,000.0 2,634.9 -2,634.9 2,144.4 12/11E 41,573.4 86,067.6 22,165.4 43,573.0 193,379.4 57,684.9 15,864.0 370.0 48,181.0 315,479.3
130,873.0 42,760.0 16,731.0 190,364.0 38,569.0 7,029.0 235,962.0 68,536.8 10,980.5 315,479.3
12/13E 336,657 306,557.1 13,189.4 -2,365.0 25,533 6,256.7 19,276.0 2,473.7 16,802.3 3,443.3 13,359.0 51.3 13,307.7 13,308 12/13E 19,276 3,443.3 476.0 3,783.0 20,091.7 5,000.0 15,091.7 -5,000.0 3,179.1 -3,179.1 11,912.6 12/13E 60,523.1 91,707.4 24,786.7 43,573.0 220,590.2 59,253.4 15,822.0 370.0 48,430.7 344,466.3
140,021.4 42,760.0 16,731.0 199,512.4 38,569.0 7,029.0 245,110.4 88,275.5 11,080.4 344,466.3
Key earnings driver Port construction revenue Railway construction Highway construction Port gp margin Railway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/13E 12/13E
4.7 3.5 5.4 5.4 7.6 5.7 5.0 4.0 6.1 0.9 0.33 4.4 5.8 16.0 12.8 0.98 0.87 0.80 3.5 20.9 5.3
Price (LHS)
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
44
20 June 2011
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 16/06/11 On 16/06/11 the spot exchange rate was HK$7.8/US$1
1M -5.0 -0.2
3M -22.2 -20.2
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
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
45
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 477,420 444,091.8 20,338.1 142.4 22,042 9,195.1 12,847.3 1,284.9 1.9 11,564.2 2,197.2 9,367.0 144.6 9,222.4 9,222 12/12E 12,847 1,284.9 -7,053.9 7,924.3 11,506.4 10,000.0 1,506.4 -10,000.0 500.0 2,679.6 -2,179.6 -673.2 12/12E 37,540.1 58,859.9 24,333.8 166,378.9 287,112.8 44,175.3 1,272.1 14,536.0 347,096.3
124,102.4 17,421.7 104,119.8 245,643.8 22,677.5 12,685.3 274,868.8 71,120.5 1,107.0 347,096.3
12/10A 12/11E 12/12E 12/13E 12,337.5 12,337.5 12,337.5 12,337.5 0.35 0.70 0.75 0.79 n.a. 0.72 0.84 0.90 0.10 0.20 0.22 0.23 0.45 -0.50 0.93 1.27 12/10A 0.30 -0.00 0.48 0.07 12/10A
32.3 -21.1 -27.6 -27.6 3.0 1.4 1.3 1.0 15.1 1.2 0.11 3.7 8.1 7.9 10.3 1.3 0.93 0.74 6.0 -27.8 -1.2 5.3
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 456,339 428,647.1 21,130.2 304.3 13,865 7,608.0 6,257.3 413.7 1.9 395.1 5,845.4 1,923.9 4,316.6 70.4 4,246.2 121.8 4,368 12/10A 6,257 665.5 -6,939.5 7,789.3 5,587.1 11,500.0 -5,912.9 659.7 -10,840.3 2,114.3 13,929.8 11,815.5 6,562.4 12/10A 56,294.8 56,531.4 26,615.3 152,599.0 292,040.5 42,349.2 1,272.1 14,532.3 350,194.0
141,196.2 17,421.7 104,119.8 262,737.6 22,677.5 12,685.3 291,962.6 57,403.3 828.1 350,194.0
12/11E 471,003 438,512.1 20,064.7 494.4 20,911 8,978.7 11,932.2 1,157.7 1.9 10,776.4 2,047.5 8,728.9 134.3 8,594.6 8,595 12/11E 11,932 1,157.7 -23,867.0 7,750.0 -6,161.3 10,000.0 -16,161.3 -10,000.0 577.0 2,497.2 -1,920.2 -18,081.5 12/11E 38,213.3 58,068.9 24,028.1 158,862.6 279,172.9 43,370.5 1,272.1 14,534.1 338,349.6
122,543.1 17,421.7 104,119.8 244,084.5 22,677.5 12,685.3 273,309.5 64,077.7 962.4 338,349.6
12/13E 490,484 455,754.1 20,894.6 780.4 22,209 9,153.8 13,055.2 1,241.3 1.9 11,815.8 2,490.0 9,325.8 154.1 9,171.7 634.1 9,806 12/13E 13,055 1,241.3 -3,500.5 7,297.9 15,611.3 8,000.0 7,611.3 -8,000.0 500.0 2,849.1 -2,349.1 5,262.2 12/13E 42,802.3 60,470.7 24,972.8 170,888.7 299,134.6 43,021.6 1,272.1 14,537.9 357,966.1
127,361.4 17,421.7 104,119.8 248,902.9 22,677.5 6,547.5 278,127.8 78,577.3 1,261.0 357,966.1
Key earnings driver Railway revenue growth Highway revenue growth Metro revenue growth Other infra revenue Railway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/13E 12/13E
2.7 1.6 6.3 6.3 4.5 2.7 2.4 2.0 6.7 0.8 0.13 2.9 4.9 13.1 13.4 1.4 0.91 0.79 4.5 -3.4 6.5
Price (LHS)
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
46
20 June 2011
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 16/06/11 On 16/06/11 the spot exchange rate was HK$7.8/US$1
1M -8.3 -3.6
3M -29.8 -28.0
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
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
47
20 June 2011
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 490,308 458,922.7 16,128.2 -500.0 23,918 8,160.8 15,756.9 2,792.3 -215.0 12,749.5 2,677.4 10,072.1 1,024.1 9,048.0 9,048 12/12E 15,757 2,677.4 -1,205.3 5,153.5 17,027.6 10,000.0 7,027.6 -10,000.0 1,416.4 -1,416.4 5,611.2 12/12E 62,790.8 87,315.1 31,433.1 137,304.3 318,843.2 50,241.4 19,925.2 25,599.0 414,608.9
198,028.3 60,444.0 14,648.0 273,120.3 42,915.0 15,734.0 324,135.3 81,409.0 9,064.6 414,608.9
12/10A 12/11E 12/12E 12/13E 21,299.9 21,299.9 21,299.9 21,299.9 0.34 0.40 0.42 0.45 n.a. 0.44 0.49 0.53 0.1 0.1 0.1 0.1 -0.05 -0.25 0.80 0.77 12/10A 0.50 0.02 0.38 0.05 0.05 12/10A
36.5 26.3 18.8 18.8 3.8 2.5 2.3 1.6 8.7 0.94 0.21 5.7 8.7 11.3 8.6 1.2 0.91 0.81 5.3 38.7 1.7 4.5
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 456,102 428,987.0 15,003.0 891.0 17,137 5,915.7 11,221.0 1,115.0 161.0 373.0 10,267.0 2,337.0 8,303.0 813.0 7,490.0 -291.1 7,199 12/10A 11,221 1,960.0 -14,031.0 3,599.0 -1,171.0 16,116.0 -17,287.0 -1,152.0 -17,268.0 749.0 3,975.0 27,336.0 -189.0 23,921.0 5,482.0 12/10A 54,860.0 84,530.0 30,026.0 129,238.0 298,654.0 42,476.0 22,407.0 25,599.0 389,136.0
209,308.0 40,444.0 14,648.0 264,400.0 42,915.0 15,734.0 315,415.0 66,581.0 7,140.0 389,136.0
12/11E 468,986 440,144.3 15,426.8 -700.0 21,671 7,555.5 14,115.3 2,475.4 300.0 11,939.8 2,507.4 9,432.5 900.5 8,532.0 8,532 12/11E 14,115 2,507.4 -22,332.8 5,380.1 -5,344.8 11,000.0 -16,344.8 -11,000.0 1,335.6 20,000.0 18,664.4 2,319.6 12/11E 57,179.6 83,518.1 30,146.9 133,079.1 303,923.6 47,191.6 21,135.9 25,599.0 397,850.1
189,925.3 60,444.0 14,648.0 265,017.3 42,915.0 15,734.0 316,032.3 73,777.4 8,040.5 397,850.1
12/13E 510,293 477,003.7 16,785.6 23,778 7,273.9 16,503.8 2,629.6 -215.0 13,659.2 2,868.4 10,790.7 1,107.8 9,683.0 9,683 12/13E 16,504 2,868.4 -1,643.1 4,429.3 16,421.6 8,000.0 8,421.6 -8,000.0 1,515.8 -1,515.8 6,905.8 12/13E 69,696.5 90,874.1 32,671.5 141,952.0 335,194.2 50,967.5 19,925.2 25,599.0 431,685.9
205,830.4 60,444.0 14,648.0 280,922.4 42,915.0 8,100.0 331,937.4 89,576.2 10,172.4 431,685.9
Key earnings driver Railway construction Highway construction Other construction Railway gp margin Highway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/13E 12/13E
4.1 4.7 7.0 7.0 4.7 3.2 2.7 1.9 6.5 0.70 0.19 4.1 5.8 11.3 9.8 1.2 0.83 0.79 4.3 33.7 3.8
Price (LHS)
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(%) FY11 FY12 FY11 FY12 FY11 FY12 (10) 0.0 0.2 n.a n.a NM 23.2
Figure 35: Iron ore inventory at Chinese ports at record high in May
(mn tons) 95 85 75 65 55 45 35 25 15 5 5 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Apr-09 Apr-10 Apr-11
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%
95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5%
YoY% growth
YoY% growth
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As a result, China iron ore import was flat at 615 mn tonnes in 2010, and again not growing in April and May. In our current model, we have generously assumed 5% China iron ore import growth in 2011-12E, driven by re-accelerating FAI growth. However, with the recent cut in China GDP projections from 8.8% to 8.7% for 2011E and from 8.9% to 8.5% for 2012E, we think risk to our demand forecast is rising. On the supply side, fleet growth averaged 12% YTD despite 30%+ of new ships not being delivered on schedule. We expect overall fleet to grow 14% in 2011 and 12% in 2012, significantly above historical trends.
Figure 36: China iron ore import not growing in Apr/May
80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Apr-08 Apr-09 Apr-10 Apr-11 (mn tons) 80 70 60 50 40 30 20 10 0 10 20
YoY% growth
Capesize
Handymax
Handysize
BDI has averaged 1,366 YTD, lower than our previous average estimate of 1,800. With shipping supply growth continued to be at 12-14% in 2011-12E, any demand slowdown will only worsen the oversupply situation. We have downgraded our 2011-12E BDI forecast to 1,350-1,500 points from 1,800-2,000 points.
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The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 16/06/11 On 16/06/11 the spot exchange rate was HK$7.8/US$1
1M -17.4 -13.3
3M -28.2 -26.3
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Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
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Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 93,455 88,160.8 4,791.1 -1,841.3 5,682 3,337.3 2,344.4 70.7 1,184.6 2,273.7 113.7 2,160.0 44.7 2,115.4 2,115 12/12E 2,344 113.7 -8.1 3,342.0 5,564.6 5,564.6 770.4 770.4 229.5 943.0 -2,045.9 -1,332.3 5,002.7 12/12E 56,815.3 7,473.2 2,534.6 151.9 66,974.9 56,105.6 203.0 2,734.8 45,233.0 145,759.4
16,272.0 1,617.7 5,415.1 23,304.8 56,527.1 4,606.2 84,438.0 47,517.4 13,803.6 145,759.1
12/10A 12/11E 12/12E 12/13E 10,216.3 10,216.3 10,216.3 10,216.3 0.67 -0.02 0.21 0.54 n.a. 0.26 0.38 0.49 0.09 0.04 0.11 1.08 0.63 0.54 1.14 12/10A 12/11E 12/12E 871.10 911.42 929.65 5,679,20 6,303,91 7,375,58 1,076.54 847.21 1,016.67 12/10A 12/11E 12/12E
40.9 272.1 191.8 13.4 9.8 9.6 7.1 7.1 1.1 0.76 5.7 7.8 15.5 11.0 0.64 1.0 0.9 2.5 22.2 1.1 59.7 -11.7 -103.9 -102.7 3.5 -0.4 -0.5 -0.2 -262.0 1.1 0.82 23.6 -190.8 -0.4 -0.5 0.60 1.2 1.0 2.4 16.1 3.2 -4.2 9.7 739.1 1,230.7 6.1 2.5 2.4 2.3 23.2 1.0 0.71 11.7 28.3 4.6 3.3 0.64 1.0 1.0 2.4 9.0 1.0 33.2
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 96,439 84,052.5 4,944.0 -1,989.5 12,884 3,452.4 9,431.6 158.0 1,351.2 9,273.6 1,189.0 8,084.6 1,226.1 6,858.5 6,858 12/10A 9,432 283.7 -1,699.6 3,559.4 11,007.7 8,496.7 495.6 2,511.1 -2,879.0 -10,880.1 3,955.4 625.5 1,591.6 -2,121.4 2,800.1 -474.9 2,452.9 12/10A 47,248.7 10,987.2 2,116.9 151.9 60,504.8 68,680.5 210.5 2,734.8 35,747.1 149,541.8
21,565.1 1,669.4 5,214.0 28,448.6 54,927.5 5,189.9 88,566.0 46,508.6 14,467.3 149,541.8
12/11E 85,180 82,917.0 4,366.9 -1,736.5 2,971 3,337.4 -366.8 87.5 999.5 -454.4 -454.4 -267.3 -187.1 -187 12/11E -367 -2,573.3 9,386.9 6,446.7 6,446.7 737.6 737.6 1,131.0 604.9 -1,396.5 -1,922.6 5,261.7 12/11E 51,812.6 6,811.5 2,263.0 151.9 61,039.0 59,439.2 206.7 2,734.8 40,407.8 141,959.9
15,240.6 1,474.5 5,310.3 22,025.4 55,727.3 4,817.2 82,569.9 45,402.0 13,988.4 141,960.4
12/13E 110,930 99,148.5 5,686.9 -1,364.2 10,796 3,337.2 7,458.9 123.9 7,335.0 1,100.3 6,234.8 713.9 5,520.9 5,521 12/13E 7,459 1,100.3 539.2 4,698.0 11,595.9 11,595.9 510.3 510.3 676.1 1,102.3 -2,978.8 -2,552.6 9,553.6 12/13E 66,368.9 8,870.6 2,940.1 151.9 78,331.4 52,772.0 199.4 23,459.7 154,762.6
18,563.5 1,920.2 5,530.4 26,014.1 57,326.8 4,541.5 87,882.4 52,615.2 14,264.5 154,762.1
Key earnings driver Average Freight Rates Volume handled (TEUs) Container shipping net Cosco Pacific net profit Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/13E 12/13E
18.7 218.2 161.0 161.0 9.7 6.7 6.6 5.0 8.9 0.9 0.42 4.3 6.2 11.0 9.9 0.72 1.0 0.9 2.3 -4.4 60.2
2007
2008
2009
2010
Price (LHS)
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P/E (x) 14 13 10 7 17 11 14 12 14 10 12 10 9 16 7 9 8 12 12 12 10 11 9 13 6 12 7 12 11 11 8 11 8 8 13 9 9 8 8 10 11 10
P/B (x) 3.2 1.6 3.4 1.0 0.9 0.8 4.4 3.2 3.0 3.5 2.1 1.3 2.2 1.5 1.8 2.2 2.2 0.9 2.8 2.7 2.0 2.7 1.5 2.7 0.9 0.9 0.8 3.4 2.7 2.5 2.8 1.8 1.2 1.6 1.4 1.5 1.8 1.9 0.9 2.3 2.3 1.6 2.3 1.3 2.4 0.8 0.9 0.7 2.7 2.2 2.1 2.1 1.6 1.1 1.4 1.3 1.3 1.6 1.6
EV/EBITDA 8.8 7.0 8.9 4.3 7.3 4.5 11.2 10.4 15.5 10.0 4.0 10.8 9.6 14.9 8.3 11.0 6.0 7.0 7.5 6.2 3.3 6.4 3.8 5.9 7.5 9.1 6.1 3.8 6.8 5.9 9.2 5.7 6.8 4.4 4.5 6.4 6.9 6.6 5.2 5.5 7.0 2.5 5.2 2.7 4.8 6.8 6.2 4.9 2.7 5.4 4.2 7.6 6.4 6.1 3.8 3.5 5.0 5.9 6.0
ccy US$ bn 10A 11E 12E 10A 11E 12E 10A 11E 12E 92.4 17 17.7 16 18.9 14 15.6 8 7.5 25 3.4 21 15.0 25 9.7 18 5.8 22 2.9 20 2.9 15 1.8 14 5.9 13 11.5 n.a. 21.1 7 11.3 14 7.2 10 18 18 15 10
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However, we believe this cellular industry supply shock is now behind us. Notwithstanding lower GDP growth, there is still a revenue growth opportunity in China, given headline penetration of 62.7% and traffic penetration of only 49.0%. Furthermore, while we forecast that voice revenues will grow at a CAGR of 5.6% from FY10 to FY13, we expect data access revenues to grow at a CAGR of 18.6%. Importantly, the 9.6% overall service revenue growth is permitting all three cellular players to grow EBITDA and net profit into FY11, as the capacity built in the 2008 supply shock is utilised.
Figure 40: China voice revenues still growing
600 500 400 300 200 321 100 FY09A FY10A FY11E FY12E FY13E FY10-13E CAGR
FY09A FY10A FY11E
51 20
57 29
71 37
85 44
96 51
334
340
344
348
100 151 50
172
201
237
FY12E
FY13E
FY10-13E CAGR
China Mobile
China Telecom
China Unicom
China Mobile
China Telecom
China Unicom
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(9.4) (0.4)
We are also becoming more optimistic on the prospects of the fixed line business, again due to secular factors. The two fixed line operators in China enjoy a duopoly on the provision of broadband services in China. Indeed, given that China Telecom has a stronger network coverage reach in the southern provinces versus China Unicoms better reach in the northern provinces, in many areas the two players represent de facto fixed line monopolies. With an average FY10 broadband ARPU of Rmb78.3 (US$12.0) per month and Rmb57.9 (US$8.9) for China Telecom and China Unicom, respectively, broadband services represent a key driver of revenues and returns on invested capital.
Figure 44: Broadband industry revenue and revenue market share forecasts
2009 Revenue (Rmb mn) China Telecom (xDSL) 47,807 China Unicom (xDSL) 23,898 Total 71,705 Broadband as % fixed line revenue China Telecom (xDSL) China Unicom (xDSL) 27.7 29.3 54,965 29,822 84,787 33.2 36.6 60,825 34,050 94,875 36.9 41.7 64,882 36,504 101,386 39.4 44.7 66,425 38,557 104,982 40.4 46.9 2010 2011E 2012E 2013E
FY10-15 2015E CAGR (%) 67,514 42,189 109,703 41.5 50.2 4.2 7.2 5.3
We note that broadband revenue reached 33.2% of China Telecoms recurring fixed line revenue in FY10, and 36.6% of China Unicoms. Thus, after stripping out the Xiaolingtong revenues, China Telecoms fixed line revenue declined by only 0.1% in FY10, while Unicoms actually increased by 2.8%. We view this as an important inflection point. Looking forward, we expect China Telecom and China Unicoms fixed line revenues to be flat into FY11 and FY12 (rising if the Xiaolingtong revenues are stripped out).
Figure 45: Fixed line capex (Rmb mn) and capex to sales
10 0.0 9 0.0 8 0.0 7 0.0 6 0.0 5 0.0 4 0.0 3 0.0 2 0.0 1 0.0 0.0 FY08A FY09A FY1 0 fixed line capex FY 11 FY12 FY13 Ope rating free cashflow 80 .2 66.5 89 .0 7 3.1 15.0% 63.8 55.3 10.0% 5.0% 0.0% FY0 8A FY09A FY10 FY11 FY1 2 FY13 FY10 -13E CAGR 30.2 % 26.4% 25.1% 2 1.7 % 34.2% 35.0% 28.9% 30.0% 25.0% 20.0% 50 .0 40 .0 30 .0 20 .0 10 .0 49 .3 4 2.2 26.5 45.2 39.6 60 .0 57.9 40.0%
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capex). LTE provides a more lasting solution but its full commercial launch, with smartphones, might only make an impact in FY13. On the other hand, China Mobile has by far the strongest balance sheet position and the stock can be expected to perform well in a falling stock market. Our DCF-based target price for China Mobile is HK$86 and we rate the company a NEUTRAL. Telecoms asset purchase likely earnings accretive, but value destructive China Telecoms key consolidated earnings driver cellular business is the improving scale of the cellular division, which is set to reach net profit breakeven in FY11. This is set to continue, and the intended acquisition of the CDMA network from its unlisted parent in late FY12 is likely to be earnings accretive from FY13 (though we have factored in HK$0.51/share of value destruction; investors should consider the capex of the CDMA network, and the fact that it will replace existing lease fees, rather than just the non-cash depreciation charges). China Telecoms fixed line business (contributing 72.9% of revenues in FY11) is also stabilising due to broadband growth, and the slow pace of reform by the cable operators in China defers a potential competitive threat. Given China Telecoms relatively strong balance sheet, and the recent stock price decline, we rate China Telecom a NEUTRAL, with a target price of HK$4.56.
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ADVANC TB AXIATA MK BTEL IJ BHARTI IN 941 HK DIGI MK EXCL IJ GLO PM IDEA IN ISAT IJ 032640 KS MAXIS MK M1 SP 9437 JP TLKM IJ RCOM IN 017670 KS 315 HK STH SP DTAC TB
Bt 98.50 RM 4.93 Rp 360.00 Rs 376.75 HK$ 70.25 RM 28.72 Rp 6,200 P 875 Rs 74.20 Rp 5,150 W 5,460 RM 5.52 S$ 2.45 143,800 Rp 7,250.00 Rs 93.55 W 153,500 HK$ 12.28 S$ 2.74 Bt 59.75
O O U O N O O O O O N O N N O N O U U O
128.00 6.30 185.00 450.00 86.00 29.60 7,200 1,000 95.00 7,900 6,600 6.10 2.66 150,000 9,750 120.00 201,000 12.00 2.31 68.00
Note: 1) Rating: O = Outperform; N = Neutral; U = Underperform; R = Restricted, 2) The averages are based on market capitalisation., 3) The PE for non-Asian stocks are based on Credit Suisse adjusted EPS., 4) The financial years of KDDI, NTT, NTT DoCoMo, Softbank, Bharti, Reliance and SingTel are ended in March. For the sake of comparison, the FY05 of these companies in this matrix represents FY3/06 of their financial years and etc., 5) FCF yield = (EBITDA - interest exp. - tax - capex) / mkt cap. Source: Company data, Credit Suisse estimates
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Insurance Sector
Relatively defensive in a slowdown
Arjan van Veen 852 2101 7508 arjan.vanveen@credit-suisse.com
Figure 49: Insurance Valuation Table
Company T = Dec 10 China Life Ping An China Pacific China Taiping PICC* 2628.HK 2318.HK 2601.HK 0966.HK 2328.HK Ticker CS Rating NTRL RSTR OPFM NTRL NTRL TP Price (%) Up/dn Local Target Chg (%) 25.65 75.40 30.30 18.70 11.98 30.00 41.00 22.00 11.00 0.0 0.0 0.0 0.0 0.0 PE (x) T+1 EPS (local) T+1 T+2 1.57 3.59 1.86 0.81 0.70 2.00 4.43 2.21 1.06 0.81 EV (local)* T+1 T+2 14.23 35.18 17.27 12.59 3.37 16.03 40.96 19.09 14.81 4.66 VNB EV* P/EV* (x) multiple (x) (%) T+1 T+2 T+1 T+2 T+1 1.8 2.1 1.8 1.5 3.6 1.6 1.8 1.6 1.3 2.6 12.1 9.1 14.7 10.7 12.8 9.2 17.4 8.9 na na 14 13 14 31 28 VNB growth (%) T+1 17 18 25 25 na
Relative to other cyclical sectors, the insurance industry is less impacted by any slowdown in the Chinese economy. The key drivers for insurance companies are: Demand for savings products (correlated to GDP/disposable income and demographics) Demand for insurance (i.e., related to wealth/income and other factors such as number of motor vehicles) Interest rates Insurance earnings are highly leveraged to interest rates (detailed below), with rising rates positive for insurers.
While there is some longer-term correlation to GBP growth, we highlight that the insurance industry (both life and P&C) has continued to grow reasonably robustly even during periods of weaker growth. P&C tends to be a little more cyclical as this is mainly (~75%) motor vehicle insurance in China; it reacts quicker to economic cycles.
Figure 50: Life insurance less correlated
Life insurance premiums (Rmb bn) and growth (% p.a.)
1,200,000 60%
growth (%pa)
1,000,000 Bancassurance (mainly single premiums) 50%
350,000
800,000
40%
300,000 250,000
600,000
30%
200,000
20% 15%
400,000
20%
150,000 100,000 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
200,000
10%
50,000 0
2000 2001 Premiu ms 2002 2003 2004 Growth 2005 2006 2007 2008 2009 2010
0%
Premiums
Growth
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Currently, the impact of continuously falling average (three-year) interest rates is negatively impacting the earnings of the insurers (2H10 in particular). In addition, the somewhat flat yield curve and high bank deposits are also posing some near-term margin strain on the insurers (i.e., forcing increased crediting rates without fully offset from higher yields). We believe both these headwinds will start to disappear from 2H11 onwards, with average yield starting to rise and we should also start to see a steepening of the yield curve at some stage. Liability reserves calculations are done using 750-day (three-year) moving average interest rates, which are still decreasing during 2H10, as highlighted below. Assuming flat rates from here, these moving average starts should be positive again in 2H11.
Figure 52: Change in 750-day moving average bond yields (%)
Cash rate 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 -0.03 -0.02 -0.02 -0.02 -0.02 0.00 1-yr bond -0.11 -0.12 -0.02 -0.03 -0.02 0.13 3-yr bond -0.12 -0.10 -0.03 -0.04 0.01 0.14 5-yr bond -0.12 -0.08 -0.03 -0.04 0.01 0.11 10-yr bond -0.11 -0.06 -0.02 -0.04 0.02 0.08
We deem interest rates will become a net positive from late 2011
We deem a moderate tightening environment as the ideal scenario for the listed Chinese life insurers, with the following impacts specifically for insurers: (1) Medium term improving investment returns. Insurers effectively earn the spread between return on their assets (weighted to bonds) and what is credited to customers with higher spreads usually achievable in higher interest rate environments. (2) Mature guaranteed portfolios highly leveraged. On products where insurers guarantee the rate of return, the sensitivity to rising rates is material (and non-linear) as insurers do not need to pass through any rise in yields. Ping An and CPIC have large historical portfolios with guarantees averaging above 5% (pre-July 1999: 2.5% maximum guarantee cap). As such, these have the highest sensitivity to rising rates as highlighted in Figure 54. While the China Life pre-1999 portfolio is not part of the listed entity, it does sell low guaranteed products in rural areas (as does CPIC) and, as such, has some reasonably strong leverage as well. We note that the embedded value sensitivities in Figure 54 are for a 25 bp rise in investment yields, which could also lead to changes in risk discount rates and falls in capital values which offset this.
Figure 53: China 10-year bond yield up 57 bp in 2H10
CPIC quarterly EPS (2009-2010)
6.0%
5.0%
10yr bond yield
10.0%
4.0%
7.5%
3.0%
5.0%
3yr bond yield
2.0%
2.5%
1.0%
0.0% EV
0.0% Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
China Life
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Sensitivity differences are as follows: Embedded value Ping An and China Pacific have the highest sensitivity to rising rates, given they have the highest guaranteed portfolios (although we note they already assume rising bond yields over the next five years or so). China Life is the next highest as it has a portfolio of low guaranteed business sold in rural areas. Value of new business Given lower current profit margin (due to lower scale and distribution channel mix), China Taiping is the most sensitive to rising rates. Others are roughly similar.
Shorter-term headwinds from increased crediting rates We highlight that while longer term rising rates are positive for insurers, investors must also consider the returns available on competing products such as bank deposits (particularly important for bancassurance channel). As highlighted below, the five-year bank deposit rate is now around 5%, which is well above the 10-year bond yields (around 4%) and the credit rate on most life insurance policies.
Figure 55: Bank deposit rate exceeding credit rates
Ping An universal life crediting rate vs bank deposit rate
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
2.0 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
Ping An individual
5 yr deposit
3 yr deposit
10 yr + 150 bps
5 yr deposit
As such, we deem that while this issue remains, insurers may be forced to raise crediting rates without full offset from rising asset yields on their own portfolios (noting large bond yield holdings). P&C insurance more impacted by shorter yields Property & Casualty insurers have positive leverage to bond yields in that insurance premiums are generally paid at the beginning of the year and hence the insurer earns interest on the premiums until it needs to pay the claim. Insurers generally try to match the duration of their assets and liabilities (asset liability management or ALM), with mismatches often penalised by regulators minimum capital calculations (which often involve stress testing the portfolio). As such, the type of business a P&C insurer writes will determine the key bond yield to examine. For short-term (tail) businesses such as motor insurance, the policy duration is usually one year and reporting delays are minimal (for the property part) and as such the one-year bond benchmark is likely to be the most relevant. For longer-term (tail) businesses, which are generally liability (also know as casualty) insurance, premiums are also generally annual, but the reporting delay can be long. The most common type of liability insurance is workers compensation (or employers liability) which insures for, among other things, personal injury while at work. The most extreme P&C insurers benefit more immediately from rising rates than their life insurance peers
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obvious example is asbestos, where the time period between exposure (when an employee is insured) and symptoms of related diseases developing can be as long as 40 years. Given property and casualty insurers invest in the shorter end of the yield curve (as 75% of their portfolio is short tail motor), they benefit more immediately from interest rate rises than their life insurance peers.
Figure 57: Chinese government bond yields have moved more at the short end
1yr bond 31-Dec-09 30-Jun-10 31-Dec-10 24-May-11 2011 YTD 2H10 Source: Reuters, Credit Suisse estimates 1.55 1.87 2.95 3.06 0.11 1.08 3yr bond 2.40 2.45 3.51 3.30 -0.21 1.06 5yr bond 2.95 2.69 3.56 3.58 0.02 0.87 10yr bond 3.60 3.33 3.90 3.95 0.05 0.57
For a motor portfolio, an increase in the one-year bond yield by 100 bp would lead to a profit increase of ~5% (assuming a combined ratio of 95%).
Figure 58: Three-year bonds 100 bp in 2H10
Government bond yields (%)
6.0%
4.0%
3.0%
3yr bond yield
2.0%
1.0%
Premium Claims + expenses Underwriting profit Investment income Profit (pre-tax) Change in profit Capital Interest rate
0.0% Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
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Companies Mentioned (Price as of 16 Jun 11) For details on all companies mentioned in this report, see Figures 9, 11, 12, 13, 15, 18, 39, 48, 49.
Disclosure Appendix
Important Global Disclosures Vincent Chan & Peggy Chan, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stocks total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stocks total return is expected to be in line with the relevant benchmark* (range of 10-15%) over the next 12 months. Underperform (U): The stocks total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stocks total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analysts coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analysts coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisses distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 40% (56% banking clients) Underperform/Sell* 10% (50% banking clients) Restricted 3%
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