Equity Asia

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Global Research
 Another year of macro dominance has kept market correlations high, leaving many stocks mispriced  We believe the macro environment will stabilise next year and stockpicking will become more important again  We identify five themes, and the sectors and stocks that should benefit
Macro factors have dominated equity markets since mid2007. But the economic environment is likely to be somewhat more stable in 2011. And the risk-on/risk-off high-correlation environment of the past few quarters means that many stocks and sectors have moved together that should not have. This suggests that a more bottom-up stockpicking approach can be successful in 2011, as investors look for mispriced stocks and themes that were ignored in the macro hiatus. In conjunction with HSBC’s analysts in Europe and Asia, we have developed what we see as the themes that will drive markets in 2011. In this report, our analysts preview the outlook for their sectors in 2011, describe their highest conviction ideas, and identify the stocks they think will be most affected by our strategy themes.

The Year Ahead in Asia
Five themes for 2011

7 December 2010
Chris Georgs Head of Equity Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6753 chris.georgs@hsbc.com.hk Garry Evans* Global Head of Equity Strategy The Hongkong and Shanghai Banking Corporation Limited +852 2996 6916 garryevans@hsbc.com.hk Eliot Camplisson* Global Head of Research Marketing The Hongkong and Shanghai Banking Corporation Limited +852 2996 6514 eliot.camplisson@hsbc.com.hk Peter Sullivan* Strategist HSBC Bank plc +44 20 7991 6702 Robert Parkes* Strategist HSBC Bank plc +44 20 7991 6716

Our five themes are:
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peter.sullivan@hsbcib.com

Pricing anomalies. The high correlation of stock markets throws up some badly mispriced securities Effects of low rates. Interest rates in the developed world will stay ultra-low for a long time. This boosts the income attraction of some stocks and reduces companies’ borrowing costs Cash-rich companies. Companies are sitting on piles of cash. Some will spend it on M&A or capex; others will return it to shareholders Winners from Chinese growth. The China story still has a way to go. We identify some less obvious winners ‘Techtonic’ shifts. Technological developments of the past decade are coming to fruition in areas as diverse as smartphones, electric cars and solar energy

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robert.parkes@hsbcib.com

Daniel Grosvenor* Strategist The Hongkong and Shanghai Banking Corporation Limited +852 2996 6592 daniel.grosvenor@hsbc.com.hk View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

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Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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Equity Asia 7 December 2010

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Contents
High conviction ideas (1) Pricing anomalies (2) Effects of low rates (3) Cash-rich companies 5 7 10 14 Insurance 54
Outlook for Chinese insurance shares remains uncertain as positive impact from rate hikes is offset by regulatory headwinds – we still see strong upside in Chinese insurance ‘A’ shares. Reiterate our preference for Composite over Life insurance names in Korea – most preferred stock is OW-rated Samsung F&M. In our view, OW(V)rated China Taiping and LIG are the best stocks to play the ‘Chinese growth’ and ‘Korean valuation’ anomaly themes, respectively.

(4) Winners from Chinese growth 18 (5) ‘Techtonic’ shifts Sectors Banks 26
Earnings continue to rise on persistent loan growth, despite growing margin pressure and monetary tightening across Asia, as well as continued improvement in asset quality. Key themes for 2011 will be the effects of low rates and persistent economic expansion in Asia. Top picks are CCB, Axis Bank and Bank Mandiri as beneficiaries of economic growth in Asia and BOC-HK as being well positioned in the low rate environment.

Metals & Mining

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China’s shift to a more sustainable growth model with focus on urbanisation and rural investment is positive for metals demand. Strong cash generation to support capital management initiatives and/or consolidation activity. Preference for upstream over midstream but steel looks oversold. Top picks OW(V)-rated China Coal and POSCO.

Oil, Gas & Chemicals

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Urbanisation and wage increases in China will continue to drive demand for oil products and plastics. Key themes for 2011 will be unique value proposition from favourable product mix, pricing regime, LT strategy. Preference for Asian refining and chemicals over policy-ridden Chinese energy names. Top picks CNOOC, S-Oil and SK Energy.

China Infrastructure

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Real Estate

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Cement: tighter supply and strong demand leads to industry consolidation and structural ASP growth. Positive on cement and environmental sectors on reduced overcapacity and favourable policy; neutral on construction and toll roads. Top picks: Sinoma, CR Cement and CEI.

China’s real estate sector still clouded by policy headwinds; players with firm specific catalysts & solid recurrent income will outperform. HK property sales volume will take a breather while prices remain firm, underpinned by negative real rates; buy on dips. High conviction call: SHKP (16 HK, OW, TP HKD171.8).

Conglomerates & Transport

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Technology

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We remain positive on passenger driven airlines, hotels and conglomerates leveraged to Asian consumption and more negative on cargo and Western-focused stocks. Key themes for 2011 will be sources of earnings growth and how cash-rich Asian companies utilise surplus cash. Top picks include Singapore Airlines, Jardine Matheson, Pacific Basin.

We are positive on technology and particularly those companies benefiting from techtonic shifts in smartphones, LED televisions and tablets. Rather than attempt the one hot product of 2011, focus on sub-component plays on faster growth segments. Top picks: Samsung Electronics, TPK and UMC.

Telecoms & Media

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Consumer

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The theme: dealing with excess liquidity. This will impact the consumer sector through interest rates, price controls and (high) valuations. Key ideas: Gome, Intime, Anta.

Industrials

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We have shifted towards a more positive view on telecom services in developed markets based on wireless data/dividend catalysts. We remain positive on the China-Korea internet space, and are more cautious on the near-term profitability for China vendors. Key themes for 2011 will be the ability to monetise wireless data, a greater emphasis on returning excess cash to shareholders, and renewed interest in the internet services space. Top picks include Telstra, China Telecom and Korea Telecom.

We see improving prospects for the global capex cycle. Further investments expected in infrastructure and plants on top of strong commodity prices and resumption of suspended projects. Our highest conviction pick is Samsung Engineering; Hyundai Motor is most likely to benefit from pricing anomalies relative to peers, while Kia Motors should benefit from Chinese growth.
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Disclosure appendix Disclaimer

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Asia: Key winners from our five themes
Asia Sector 1. Pricing anomalies Autos Consumer Insurance Technology REITs Metals & mining Shipping Telecoms Autos Cement Consumer Insurance Oil & gas Real estate Steel Clean energy Technology Telecoms
Source: HSBC; closing prices as of 30 November 2010 (*CRC priced at close 3 December 2010)

Equity Asia 7 December 2010

Reason Korean discount should fade away Corporate governance problems excessively punished Korean insurers priced on PB, not EV Many Taiwan tech companies have high dividend yields and low PBs We like names with yield plus internal growth Positive cash flow may spur M&A Shippers with cash can buy low-cost vessels Surge in data usage boosting cash flow Korean automakers growing market share Government measures will increase share of top companies China consumption growth to continue Chinese insurers premium growth to continue Strong underlying demand for oil and plastics We prefer commercial and high-quality residential Steel demand to remain stronger than consensus expects China’s next five-year plan focused on non-fossil fuels Touchscreens are a key growth area Successful use of CDMA technology

Potential beneficiaries Hyundai Motor (005380 KS, OW, KRW172,500, TP KRW240,000) GOME Electrical Appliance (493 HK, OW(V), HKD3.06, TP HKD3.76) LIG (002550 KS, OW(V), KRW20,200, TP KRW29,000) UMC (2303 TT, OW(V), TWD15.10, TP TWD16.50) Link REIT (823 HK, OW, HKD24.35, TP HKD28.50) China Coal (1898 HK, OW(V), HKD12.28, TP HKD18.60) Pacific Basin (2343 HK, OW(V), HKD5.25, TP HKD7.50) KT Corp (030200 KS, OW, KRW46,500, TP KRW 67,000) Kia Motors (000270 KS, OW, KRW48,950, TP KRW56,000) CRC (1313 HK, OW, HKD6.11, TP HKD7.40)* Genting (GENT MK, N, MYR10.10, TP MYR11.34), Intime (1833 HK, OW(V), HKD12.10, TP HKD15.21) China Taiping (966 HK, OW(V), HKD25.9, TP HKD37) CNOOC (883 HK, OW, HKD16.84, TP HKD19.50) Shui On Land (272 HK, OW(V), HKD3.88, TP HKD4.70) Baosteel (600019 CH, OW(V), RMB6.28, TP RMB8.50) CEI (257 HK, OW(V), HKD4.34, TP HKD5.40) TPK (3673 TT, OW(V), TWD664.00, TP TWD850.00) China Telecom (728 HK, OW, HKD3.91, TP HKD5.10)

2. Effects of low rates 3. Cash-rich companies

4. Winners from Chinese growth

5. ‘Techtonic’ shifts

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TP EUR19) Source: HSBC. TP GBP9.00) Richemont (CFR VX. OW. GBP7. TP EUR175) Ericsson (ERICB SS. TP EUR39 Pernod Ricard (RI FP. EUR22.65.40) Allianz (ALV GR.3) Most at risk Equity Asia 7 December 2010 2. TP EUR27) Experian (EXPN LN. OW(V). OW.78.4 Europe: Key winners and losers from our five themes Europe Sector 1.1) Portugal Telecom (PTC PL. high profitability Growth in spirits Chinese demand for cement to remain robust EM capex has overtaken DM Room for big increase in penetration rate Full impact of Chinese consumption not appreciated Upside risk to oil price Technology transfer Shift of marketing dollar to internet Modern roads in EM trigger sales of sophisticated trucks Solar reaching scale Growth of smartphones will require more capex Smart grid. TP EUR115. OW(V).00) Gagfah (GFJ. TP EUR56. GBP5. GBP11. EUR10.75.7. UW. TP GBP2. TP SEK120) Wacker Chemie (WCH GY. OW. TP EUR94.5) Seadrill (SDRL NO.15) Veolia (VIE FP.26. GBP2. CHF53. TP EUR100). EUR54.2.0) Barratt (BDEV LN.90. GBP7. Pricing anomalies Clean energy Construction Insurance Oil & gas Real estate Metals & Mining Telecom & Media Insurance Real estate Beverages Business services Food Luxury goods Metals & Mining Autos Beverages Building materials Capital goods Food Luxury goods Oil & gas Utilities Business services Capital goods Clean energy Telecom & Media Utilities Reason Iberian stocks oversold on sovereign concerns Value of UK housebuilders’ land holdings overstated Sector implied cost of capital high High correlations among oil services companies throwing up mispricing Some stocks on excessive discounts to NAV Copper stocks pricing in price appreciation.9. TP EUR10. GBP3. OW(V). OW.5.8.2. EUR62. CHF65. UW. TP EUR125) Danone (BN FP.4) Beiersdorf (BEI GR. TP GBP8.00.38.0) SEGRO (SGRO LN.85. GBP13.15.33.1) Lamprell (LAM LN. OW. OW. TP NOK49) WPP (WPP LN. OW. GBP3. OW.95. GR. TP GBP16. CHF53. GBP40. OW. OW. TP CHF66) Rio Tinto (RIO LN. TP GBP3. EUR83. EUR106.2. USD31. EUR4. cost cutting and better balance sheets 11% sales growth in 2011. EUR30.2. OW(V). TP EUR55) Richemont (CFR VX.1. EUR44. N.0) Anheuser-Busch InBev (ABI BB. TP EUR47.0.0.6. UW(V). aluminium ones not Misalignments between FCF and implied cost of capital High FCF and dividend yield Property yields relative to risk-free rate Cash allows capex.70. TP EUR8. EUR22. EUR43. Schneider Electric (SU FP. NOK37.56. M&A and will be returned to shareholders Healthy balance sheet allows more M&A Cash for market share enhancing M&A Strong balance sheets High prices.5) Volvo (VOLVB SS. OW.50.0) Antofagasta (ANTO LN. TP GBP0.2.47) Capital Shopping Centres (CSCG LN. GBP0. PSA (UG FP. TP GBP12. OW. EUR49. TP EUR5. GBP309. OW(V). OW. N. SEK97. SEK72.5) Norsk Hydro (NHY NO. OW. Techtonic shifts E. TP NOK225) Atrium ERE (ATRS AV. EUR6. TP CHF75.0. TP EUR53) Bunzl (BNZL LN.843. OW.71. TP EUR75) Holcim (HOLN VX. OW. closing prices as of 23 November 2010 abc .74.00) Siemens (SIE GY.4. NOK189. TP SEK95) National Grid (NG/ LN. UW.0) Daimler (DAI GR. UW(V). OW. GBP7.04.0). OW. TP GBP8. Cash-rich companies ArcelorMittal (MT NA. OW(V). OW. OW(V). TP GBP6.2.63) Catlin (CGL LN. Winners from Chinese growth 5. N(V). N. EUR131.7. TP CHF66) BG Group (BG LN. EUR45.ON (EOAN GY. TP USD39) 4. TP GBP4. TP GBP48. N(V). Effects of low rates 3. EUR89. shale gas extraction Beneficiaries Acciona (ANA SM.54. TP GBP3.

8 KRW1.03 INR1.0 39.0 41.7 43.000 AUD3.9 HKD3.000 AUD2.0 34.377 IDR6.8 HKD10.6 KRW191.655 HKD30.0 HKD7.4 KRW826.0 USD54.139.500 KRW185.4 USD43.2 23.4 25.9 19.1 34.1 HKD7.5 41.81 KRW100000 KRW650.000 HKD171.5 33.550 HKD26.000 SGD19.000 KRW247.500 SGD15.4 S-Oil POSCO Samsung Engineering Singapore Airlines Jardine Matheson Pacific Basin Sinoma Gome CCB Axis Bank Bank Mandiri BOC-HK Samsung F&M SHKP Samsung Electronics Telstra 010950 KS 005490 KS 028050 KS SIA SP JM SP 2343 HK 1893 HK 493 HK 0939 HK AXBK BO BMRI IJ 2388 HK 000810 KS 16 HK 005930 KR TLS AU KRW80200 KRW454.3 China Infrastructure Consumer Financials Banks Insurance Real Estate Technology Telecoms & Media Source: HSBC.8 KRW270.0 17.900 IDR8. Gas & Chemicals Materials Metals & Mining Industrials Conglomerates & Transport Current price Target price Potential return (%) 24.000 HKD128. closing prices as of 30 November 2010 5 .0 34.2 HKD5.20 INR1.53 HKD3.8 22.3 HKD7.5 HKD9.6 50.Equity Asia 7 December 2010 abc High conviction ideas Asia Asia Sectors: 2011 high conviction stock ideas Ticker Energy Oil.5 39.

Media and Technology Vodafone Utilities Centrica Source: HSBC.0 DKK168.0 14.5 28.9 CHF16.44 EUR12.0 EUR 29.0 60.00 EUR100.0 EUR17.3 22.0 340p EUR53 EUR69.7 Total Vestas Wind Rio Tinto BASF Lafarge Safran Siemens Deutsche Post-DHL Peugeot Richemont Morrison Anheuser-Busch InBev Inditex Aggreko Danone FP FP VWS DC RIO LN BAS GR LG FP SAF FP SIE GR DPW GR UG FP CFR VX MRW LN ABI BB ITX SM AGK LN BN FP UBSN VX CS FP UL FP VOD LN CAN LN EUR38.0 DKK270.2 168p 321p EUR49.9 61.2 21.1 EUR43.6 27.9 40.0 48.0 1479p EUR45.1 23.4 19.7p EUR57.0 EUR23.2 272p EUR43.0 15.7 EUR83. closing prices as of 23 November 2010 6 .50 EUR20.65 EUR13.2 EUR138.3 26.0 CHF26.0p EUR66.7 CHF53.0 190p 380p Financials Banks UBS Insurance AXA Real Estate Unibail-Rodamco Telecoms.8 24.3 19.9 13.0 EUR55.78 EUR59.0 -5.Equity Asia 7 December 2010 abc High conviction ideas Europe Pan-European sectors: 2011 high conviction stock ideas Stock Energy Oil & Gas Clean Energy Materials Metals & Mining Chemicals Construction Industrials Aerospace & Defense Capital Goods Transport Consumer Discretionary Automobiles Luxury Goods Food Retail Beverages General Retail Business Services Consumer Staples Food & HPC Ticker Current price Target price Potential return (%) 30.5 EUR39.0 CHF66.1 25.1 17.0 1690p EUR55.64 EUR30.0 65.0 18.0 EUR130.

1 0. now move largely in line with the overall index (Chart 2). Although it has fallen back slightly since to around 70%. 1. The options contract on S&P500 implied correlation (traded on the Chicago Board Options Exchange) shows that in late September this year correlation reached 80%. Even sectors that 10 years ago moved to their own beat. irrespective of their different fundamentals. correlation should fall.2 0. it is still well above the 40% or so in the more normal times of early 2007 (when the contract was launched).0 90 92 94 96 98 00 02 04 06 Av erage 08 10 Correlation has risen sharply even among individual stocks. In 2010 to date. When markets. Source: HSBC.3 0. Correlation of MSCI country indexes with MSCI World average sector correlation is 92%.Equity Asia 7 December 2010 abc (1) Pricing anomalies  Global equity markets have become increasingly correlated  As conditions normalise. Thomson Reuters Datastream The same is true at the sector level.2 0.6 0. exceeding even the level at the time of Lehman Brothers’ bankruptcy (Chart 3). presenting opportunities for investors to dig out mispriced securities  We suggest some areas where these can be found High correlations offer opportunities The past decade – and the past three years in particular – have seen a big increase in correlations across equity markets. Correlation of MSCI sectors with overall index 1. this year it has averaged 74%.4 0.8 0.4 0. the 7 . the three-month correlation of weekly returns between the 47 countries in the MSCI All Country World Index (ACWI) and the overall index was about 40%. A decade ago. and has been as high as 80% (Chart 1).7 0. throwing up opportunities for investors. none of the 24 sectors has had less than an 83% correlation with the index (the lowest is autos). sectors and countries move together.0 0. 2.8 0.0 1995 1997 1999 2001 2003 2005 2007 2009 Energy Food & bev erage Source: HSBC. Thomson Reuters Datastream Capital goods Telecoms serv ices 0. this should leave some dramatically mispriced securities. such as food & beverage or energy.5 0.6 0.

IBES. have become more correlated since the 1990s too. but the growth of indexation and ETFs means that the components of an index tend to move more closely together.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 12M fw d PE dispersion index Source: HSBC. 19.6x) is about the narrowest it has been for 15 years. Bloomberg The heightened correlation has produced a much smaller range for sector valuations too. The dispersion of valuations has fallen steadily (except for a hiatus in the crisis of 1999) since the TMT bubble in 19992000 and is now the lowest since 1995 (Chart 4). Dispersion of forward PEs. Implied correlation of S&P500 stocks (%) 100 80 60 40 20 Implied correlation 0 07 08 09 10 and materials remain cheap. MSCI ACWI sector 12-month forward PEs 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: HSBC. therefore.6 0. have lost their premium.4 0. 6. media.Equity Asia 7 December 2010 abc 3. Currently the range between the cheapest industry group by 12-month forward PE in the MSCI ACWI index (diversified financials on 10. 4.8 0. Thomson Reuters Datastream Source: HSBC. such as economic growth. Cumulative global flows into equity ETFs (USDbn) 0. Economic fundamentals. personal products) which traditionally traded at a significant premium to the market. for example. Traditionally cheap sectors such as banks. Over the past four years. that some growth sectors now look undervalued. energy Source: EPFR 8 . Thomson Reuters Datastream 400 300 200 100 0 07 -100 08 09 10 What seems to have happened is that growth sectors (software. almost USD400bn has flowed in equity ETFs globally (Chart 6). tech. Not only have capital flows become more globalised. often with forward PEs of 20-30x. IBES. We think. MSCI ACWI sectors What has caused markets to move together in this way? Partly it is a reflection of growing globalisation.0x) and the most expensive (real estate. pharma. 5.2 0.

Unloved stocks. We excluded sectors which have a more bullish rating now than the 10-year average) Many of these examples illustrate a broader theme in which. One way to spot mispricings is to look at which sectors and stocks are most out of favour with investors and analysts. on more sophisticated measures such as price to embedded value. stocks with dividend yields well above risk-free rates should attract attention. also materials.73 2. this has already started to happen over the past couple of months. To an extent. this throws up the financials sector in a number of countries. with markets being driven less by momentous macro shifts. 7. in a low interest rate environment. for example.Equity Asia 7 December 2010 abc What are the implications? As the economic situation continues to normalise over the coming few quarters.(or over-) valued securities.70 2. In the clean energy sector.55 Source: HSBC. as Charts 1 and 3 above suggest. in our view correlation will begin to decline.63 2.77 2.62 2. KRW172. Korean insurance companies are usually priced on PB.62 2.33 2.33 2.54 2. which is no longer justified. our analysts see such opportunities in sectors as varied as resources. Table 7 shows the country/sector pairs in the MSCI ACWI with the lowest average analyst ratings (where 1=Buy. For example. most of the companies under our coverage have 2011e dividend yields of around 5%.61 2.000) have traditionally traded at a discount to global peers due to earnings volatility and high leverage. 9 . In Taiwan. IT and healthcare. they look cheap.2% or more of the MSCI ACWI.73 2.82 2. In Asia.74 2. We discuss this in more detail in the next section. In Europe. TP KRW240. high correlation between stocks has thrown up opportunities particularly in dividend stocks.54 2. Unsurprisingly. real estate. OW.57 2. Thomson Reuters Datastream (Limited to country/sector pairs with at least 5 stocks and a market cap of 0. Analysts’ average rating (higher score. Technology companies generally look cheap relative to history. the more bearish) Current rating 10-year average Spain Financials Sweden Financials Australia Consumer Staples South Africa Materials Italy Financials France Materials South Africa Financials Taiwan IT Germany Financials Australia Financials Japan Health Care 3. investors should be rewarded for digging out under. analysts find the largest number of underpriced stocks in Korea.60 2. construction and media.63 2. Below we suggest some areas where we think these can be found.93 2. As correlation declines.500. In oil services. Automakers such as Hyundai Motor (005380 KS.56 2. our analyst argues that share prices of Iberian wind companies have been dragged down excessively because of sovereign risk concerns.45 2.64 2. 3=Hold and 5=Sell).

Thomson Reuters Datastream. but they have since returned to much more reassuring levels. where the rebound in earnings growth hasn’t been as strong. If 1. Across much of the developed world equity yields look very attractive relative to the yield available on both government and corporate bonds. dividend-paying stocks have the added advantage of acting as a hedge against inflation and also have the potential for upside if earnings grow. As could be expected these rose sharply during the recession as earnings fell faster than dividends were cut. investors will increasingly see yield as a reason to buy stocks. In the US in particular the payout ratio is approaching a record low. it is important to remember that. unlike coupons on bonds. MSCI 80% 70% 60% 50% 40% 30% 20% 70 73 76 79 82 85 88 91 94 97 00 03 06 09 Europe Source: HSBC. We must therefore also consider whether the current level of dividends is sustainable. Thomson Reuters Datastream.Equity Asia 7 December 2010 abc (2) Effects of low rates  Interest rates in the developed world are likely to remain at ultra-low levels for a prolonged period  This will boost the income attraction of equities…  …and will enable some companies to reduce borrowing costs and increase profitability Playing the yield We have argued for some time that in the current ultra-low interest rate environment. Charts 1 and 2 below show the trailing payout ratios for the US and European markets respectively. whilst the attraction of dividend yield is clear. Of course. In Europe. the payout ratio is still back below its long-term average. although it should be noted that this doesn’t take into account share buybacks which have risen considerably over the last 30 years. dividends are not guaranteed. US payout ratio companies must pay out a large proportion of their earnings to sustain their dividends then the risk of cuts is obviously higher. MSCI av g av g 10 . Europe payout ratio 80% 70% 60% 50% 40% 30% 20% 70 73 76 79 82 85 88 91 94 97 00 03 06 09 US Source: HSBC. In addition. 2.

4 60.9 9.7 58.6 7.2 1.6 8.5 90.4 59.1 2.3 7.4 9.2 31.9 1.6 8.9 4.0 1.2 56. Specifically we look for companies with a market cap greater than USD5bn.0 2.4 9.0 25.1 10.8 6.2 39.4 6.6 4.0 47.8 14.0 3.9 10.2 56.1 5.7 6. REITs are legally obliged to distribute a large proportion of their earnings in order to maintain their status and so naturally offer attractive yields.5 0.6 54. 2010e and 2011e DPS and EPS growth>0.0 8.7 7.0 12.0 63.0 4.4 7.5 59.6 12.1 18.6 41.2 5.8 80.7 4.3 3. Media Telecom Services Materials Energy Energy Insurance Insurance Insurance Banks Telecom Services Telecom Services Banks Banks Capital Goods Utilities Telecom Services Utilities Transportation Utilities Utilities Telecom Services Food Bev &Tobacco Pharma & Biotechnology Utilities Banks Utilities Capital Goods Utilities Media Pharma & Biotechnology 31.9 45.0 67.7 5.4 6.6 2.7 65.8 1.5 9.6 15.5 5.5 59.3 68. IBES 11 .0 12.1 6. In table 3 we screen for companies from the MSCI All Country World universe that offer both high yields and sustainable dividends.6 15.2 76.7 48.6 4.0 0.7 6.5 40.3 0.2 65.5 1.1 6.8 4.6 5.7 4.6 54.5 50.0 5. We show the top 30 stocks ranked by their 2010 dividend yield from the 113 companies that meet the requirements. Indeed.2 13.0 4.5 4.1 41.5 5.0 5.1 5.0 5.9 26.7 56.4 7.2 65.2 7.9 5.0 28. Other yield plays Basic dividend yield is the most obvious way to find yield in the current environment.4 111. but there are some other attractive angles that are worth considering.6 8.9 8.7 9.6 11.6 3.0 5.2 7.0 4.0 15.9%. OW.1 64.8 23.0 45. Unsurprisingly the screen throws up many names from the high-yielding telecom and utilities sectors.9 5.9 14.6 2. payout ratio < 5-year avg +10%) Company Industry group MV ________________________________ IBES consensus estimates ________________________________ ___ Dividend yield___ ____ DPS growth ____ ______ EPS growth ______ _ Dividend payout ratio _ USDbn 2010e 2011e 2010e 2011e 2010e 2011e 2010e 5-year avg Vivendi Kpn Kon Kumba Iron Ore Eni Total Cnp Assurances Axa Sampo ‘A’ ANZ Banking Group SK Telecom KT Corp Korea Exchange Bank Komercni Banka Bae Systems Red Electrica Corp BCE Consolidated Edison Atlantia Amer. potential for both dividend and earnings growth.0 5.8 4.1 5.5 82.5 5.6 6.1 6.6 5.0 25.9 1.2 17. Thomson Reuters Datastream.8 4.4 5.Pwr.8 67. 2010 DY>2.3 3.7 6.5 20.6 68.2 32.3 56.4 11.2 25.8 45.2 86.2 64.1 2.8 60.0 12.6 11.2 5.4 8.0 9. TP HKD28.6 100.8 10.0 14.5 130.7 6.5 5.9 5.3 6.6 35. for example.7 11.5 16.2 7.7 4.4 21.3 69.9 6.6 1.3 15.3 6.4 64.8 43. at 4. It also includes a number of European insurers – a sector highlighted by our analysts as being a key beneficiary of this theme. MSCI ACW stocks with high yield and sustainable dividend (MV>USD5bn.1 5.9 6.4 4.7 7.7 4.3 5.1 50.6 58.4 74.4 16. In particular we would highlight interesting opportunities in REITs and in preference shares.8 1.4 6.8 107.2 36.6 11.3 42.8 117.1 69.8 7.2 18.1 11.4 5.6 62.5 54.6 98.5 12.2 2.8 58.7 1.5 15.3 23.2 5.1 0. payout ratio<70%.6 42.3 69.9 16. a dividend yield greater than the yield on 10-year US Treasuries (2. HKD24.5 7.5 4.2 4.6 Source: HSBC.1 8.6 4.5 29. our analysts like Hong Kong’s Link REIT (823 HK.9%).4 52.2 3.1 6.0 5.3 10.1 76.7 4.8 3.4 4. despite having outperformed the wider market since late 2009.5 63.9 58.8 63.1 41.1 9.0 22.9 23.8 13.8 4.3 55.6 53.5 5.1 64.4 5. In Asia. 3.0 24.50).Elec.6 5.7 18.Equity Asia 7 December 2010 abc The picture is equally encouraging when we consider individual stocks.7 0.0 50.7 13.6 47. Dte Energy Teliasonera British American Tobacco Roche Holding Scana Credit Agricole Cemig Pn Orkla Centrica Reed Elsevier (Ams) Merck & Co.4 5.6 4.9 8.2 31.2 6.3 7.6 11.5 50.5 63.9 70.1 2.9 59. and a relatively low payout ratio which is no more than 10% higher than its fiveyear average.35.0 4.3 6.4 17. which has an indicative yield of 4.6 23.8 6.9 15.9% the MSCI All Country World REIT index still yields considerably higher than US Treasuries (Charts 4 and 5).7 4.1 47.3% as well as growth.3 50.2 42.3 119.6 5.9 3.9 62.7 4.3 5.7 5.4 0.8 12.0 6.1 3.4 12.

Thomson Reuters Datastream.9 0. The current dividend yield for the S&P US Preferred Stock Index is 7. Many companies should be able to refinance their activities at lower rates and therefore increase margins and improve profitability. preference shares often yield more than both. but usually carry no voting rights. the relatively few non-financial preference shares that are available also provide attractive yields. low interest rates are likely to provide further support for equities through lower borrowing costs. IBES Global REIT DY Source: HSBC. The table is ranked by the impact that refinancing all short-term debt would have on 2010 net income and only the top 30 companies are shown. To do this we identify those stocks which have an effective interest rate (interest expense/total debt) which is higher than the yield on a five-year corporate bond with an equivalent rating. only short-term debt were refinanced then the aggregate level of profits would rise by 1.8 0.Equity Asia 7 December 2010 abc 4. whereas the average effective interest rate being paid by non-financial companies is 5.6 0. Bloomberg Falling borrowing costs On top of the dividend yield story.1%. But still offer very attractive yields 1. Thomson Reuters Datastream.3% compared to a yield on the S&P500 of just 2%. corporate bonds currently yield around 3% (chart 6). IBES Preference shares represent a hybrid between equity and debt.0 0. If all non-financial corporate In Table 7 we screen for US non-financial stocks that could potentially benefit most from these lower costs.5 0.7 0. debt were refinanced at the lower rate. Yield on 5-year US corporate bonds 12 10 8 6 4 2 0 03 04 05 06 07 08 09 10 AA BBB A BB Source: HSBC. profits would rise by almost 10%. 6. where they are more risky than debt but don’t get the benefit of price appreciation like normal equity. 12 . It should be noted that the majority of preference shares are issued by banks (over 80% of the S&P index) as they can be included in Tier 1 capital ratios and are often a cheaper form of financing than ordinary shares. more realistically.4 May -06 Mar-07 Jan-08 Nov -08 Sep-09 Jul-10 14 12 10 8 6 4 2 0 05 06 07 08 09 UST 10Y Global REITs relativ e Source: HSBC. They pay a regular specified dividend and rank higher than ordinary shares in the case of liquidation. If. We use the most recent interim data (annualised) in order to capture any refinancing that may already have taken place this year. Given this status. However. REITs have outperformed this year 5. In the US.5%.

6 4.4 3.2 3.2 2.8 3. Integrys Energy Group Dow Chemical Scana Mohawk Inds.7 20.4 3.0 8.Intl.5 28.9 3.4 5.4 5.7 6. Martin Mrta.4 3.5 7.8 7.5 2.7 6.4 3.8 3.4 5.4 27.7 51.5 n/m 28.7 5.4 3.8 2.7 9. Sunoco Caterpillar General Electric Spectra Energy Ingersoll-Rand Boston Scientific Hormel Foods Retailing Capital Goods Capital Goods Food Bev &Tobacco Telecom Services Materials Autos & Components Utilities House & Personal Prod Utilities Utilities Utilities Utilities Comm Servs & Supps Energy Pharma & Biotechnology Utilities Utilities Telecom Services Utilities Materials Utilities Cons Durables & Appl Energy Capital Goods Capital Goods Energy Capital Goods Health Care Eq & Servs Food Bev &Tobacco 51.6 45.0 2.6 2.7 3.8 3.8 85.8 8.4 0.7 5.9 21.8 4.2 2.2 6.6 37. MSCI US ex financials companies with potential to lower borrowing costs (effective interest rate paid > yield on 5y corporate bond) Company Industry group Interest/ Gross debt/ 2010 EBIT equity % % Short term/ Effective Equivalent 5y I.2 11.0 7.Equity Asia 7 December 2010 abc Obviously.3 19.0 2. 7.R . However.1 2.7 3.9 41.4 3.2 6.Mats.6 29.3 6.9 31.4 5.8 5.5 2.6 27.7 35.0 16.4 2.8 8.2 6.7 20.9 23.2 15.8 39.BY total debt interest rate bond yield % % % % ___Impact on 2010 net income ___ All debt refin Short term refin % % Sears Holdings Deere Harsco Bunge Qwest Comms.8 11.7 4.4 2.7 31.3 6.2 15.9 35.2 7. whether or not these companies are willing or able to refinance their debt will be determined by many other company specific factors.4 4. Nisource Pepco Holdings Republic Svs.8 2.4 2.8 55.6 7.3 1.8 3.0 3.4 3.8 2.3 42.6 2.3 n/m 33.6 14.4 1.9 14.7 37.1 10.8 12.2 37 390 78 33 n/m 73 579 169 206 193 298 152 103 89 46 87 290 121 102 86 118 135 50 87 291 428 147 48 55 15 56.6 2.0 10.9 6.5 22.0 3.9 3.4 2.4 2.0 6.4 7. Bloomberg 13 .5 47.3 7.9 32.3 8.0 3.5 33. this screen should provide a useful starting point for further analysis.4 5.9 23.8 30.4 3. MSCI.5 5.4 5.0 100. Goodyear Tire & Rub.0 21.3 3.2 27.4 5.5 41.4 39.1 7.7 20.8 31. Firstenergy Avon Products Oneok Centerpoint En.6 19.3 6.1 6.0 3.7 4. Thomson Reuters Datastream.4 3.’A’ Rowan Companies Abbott Laboratories Aes Dte Energy Nii Hdg.1 36.6 56% 44% 42% 32% 54% 37% 110% 46% 21% 38% 70% 40% 52% 40% 19% 19% 57% 49% 44% 24% 35% 25% 23% 41% 16% 18% 27% 21% 28% 4% 32% 14% 12% 9% 9% 9% 8% 8% 8% 8% 8% 8% 7% 6% 6% 6% 6% 6% 6% 5% 5% 5% 5% 5% 5% 4% 4% 4% 4% 4% Source: HSBC.7 2.4 15.4 3.9 5.6 17.3 11.2 3.9 47.0 32.0 3.0 20.4 6.3 3.

We see all of these drivers trending higher in 2011 and together they should provide support to stock prices. Thomson Reuters Datastream. And for those that continue to hoard cash. the pressure is likely to build if investors. appropriate during the liquidity crises but perhaps not so now  With cyclical indicators picking up again. quarterly reporting patterns. We focus on the US because the data is more time-sensitive due to Table 2 tells us that the healthy cash position is broad-based with all ten MSCI US sectors currently registering a cash surplus position (relative to the average since 1998). shareholder pressure on companies to deploy these cash reserves is likely to increase  We see both investment (capex and M&A activity) and returns to shareholders (buybacks and dividends) increasing in 2011 Use it or lose it Companies are cash-rich but will they start to spend it? We think the answer is yes. MSCI US non-financials: cash as % of current assets 45 40 35 30 25 20 98 99 00 01 02 03 04 05 06 07 08 09 10 Cash as % of current assets Source: HSBC. The first shows cash as a percentage of current assets for the MSCI US non-financials universe and the second the breakdown by sector. We can see that cash as a percentage of current assets currently stands at a record level of 40% for the market. 14 . Both the capex and M&A cycles appear to be turning up and returns to shareholders are increasing with dividends being raised and share buyback programmes being restarted.Equity Asia 7 December 2010 abc (3) Cash-rich companies  Companies are sitting on piles of cash. we are seeing tentative evidence that companies are beginning to loosen their wallets. Nevertheless. this should be a good proxy of the global situation. demand that companies use it (invest it) or lose it (return it to shareholders). MSCI Companies have surplus cash… Chart 1 and Table 2 highlight the fact that companies are currently cash-rich. quite rationally. Interestingly. 1. A combination of improving visibility on the macro picture and improving business confidence should persuade companies to deploy their surplus cash reserves. And if we compare this to the average level of 32% it suggests surplus cash of around USD250bn for our MSCI US non-financials universe.

HSBC US surprise index …on capex… All other things being equal. In the report we argued that. This point is highlighted by our currency colleagues’ ‘US surprise index’ (see Chart 3). We would also highlight technology and oil services as being additional beneficiaries from a continued pick up in capex. 3. There are two important points to note about this chart. And the evidence suggests that capex is indeed on the rise. MSCI US sectors: cash as % of current assets 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3Q10 32 25 40 37 24 40 58 33 35 Avg Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care IT Telecoms Utilities 14 8 40 21 12 28 32 25 15 16 9 40 24 14 29 39 22 19 16 8 40 18 11 32 42 13 13 15 15 37 20 11 34 47 14 22 18 16 44 24 13 34 50 27 20 23 18 46 29 18 33 53 32 20 32 21 46 29 20 39 57 32 18 32 20 31 29 21 42 55 33 13 28 19 30 30 19 36 52 26 23 25 17 30 29 18 35 48 25 20 29 19 32 27 18 35 49 31 26 24 29 43 34 22 39 56 29 27 23 17 38 27 17 35 49 26 21 Source: HSBC. Ongoing economic strength in emerging markets and China specifically (see Theme 4. if the macro backdrop were to show signs of stabilisation. as companies become more confident in the recovery we would expect them to start to invest more. Second. Thomson Reuters Datastream 07 08 09 10 Eurozone Jun-10 Dec-10 Interestingly. 30 July 2010. it highlights just how far capex budgets got cut during the recent slump in activity. Thomson Reuters Datastream …and are starting to spend it as the business cycle stabilises… The surplus cash theme is one that we have actively been pushing since July when we published Results season analysis: where’s the double-dip?.Equity Asia 7 December 2010 abc 2. This stabilisation is clearly important both for those investors that feared another significant leg down in economic activity and in terms of business confidence in general. companies would likely start to either invest their surplus cash reserves or return the money to shareholders. the global capex cycle appears to have clearly turned up. In Chart 4 we show new orders for both the US and Eurozone. albeit from a very low level. Chart 3) is a key reason to be remain positive on the outlook for capex and we reiterate our overweight call on the global industrials sector. we are seeing signs that business cycle indicators are beginning to stabilise and turn up again. New orders: US and Eurozone 20 10 0 -10 -20 -30 -40 -50 Dec-08 Jun-09 Dec-09 US Source: HSBC 150 140 130 120 110 100 90 80 70 60 05 06 US Source: HSBC. 15 . First. following a soft patch in Q2-Q3. 4.

5 …via share buybacks… There were some high profile announcements during the Q3 results season that suggest share buybacks are back on the agenda.5 …or starting to give it back to shareholders… Of course. an improvement in the availability of funds and attractive valuations. 6. …and increased dividend payments The same applies to dividends where the growth rate (year-on-year) has now turned positive for the MSCI AC World index (see Chart 6). For example. MSCI. And Cisco announced an additional buyback worth up to USD10bn as it This is an interesting development given the global equity dividend yield is already on a par with the global risk free-rate (the US 10-year Treasury yield). we expect the trend increase in buyback activity to continue in 2011. Factset–Mergerstat Number (RHS) We expect to see upward momentum in the value of deals in 2011 on the back of a more stable macro backdrop. 5. see Chart 6) we see the potential for dividends to grow in 2011.4x. As Chart 5 shows. Thomson Reuters Datastream. Record-low funding costs also appear to be driving buyback behaviour with Microsoft being the latest high-profile company to announce plans to issue debt to pay for dividends and share repurchases.2bn of its shares from its USD13bn buyback programme which it suspended in 2007. having missed out on Potash. US companies have announced USD258bn in buybacks during the first three-quarters of this year compared with just USD52bn in the same period in 2009. decided to acquire the remaining USD4. 2 1. LHS) Source: HSBC. And with dividend cover a healthy 2. With companies generating strong cash flow in a low rate environment. rising business confidence. a company may of course prefer to take the inorganic route and make an acquisition. we are seeing evidence that the global M&A cycle is turning up – another indicator of corporate confidence and a sign that companies are starting to spend again. if companies cannot find any valueenhancing investment opportunities for their surplus cash then they may decide (or face investor pressure) to return it to shareholders.Equity Asia 7 December 2010 abc …and on acquisitions… Rather than growing organically via capex. Global M&A: number and value of deals 1500 1250 1000 750 500 250 0 01 02 03 04 05 06 07 08 09 10 9000 8000 7000 6000 5000 4000 moves to return part of its huge cash pile (USD39bn as at 30 October) to shareholders. BHP. 16 . 30 20 10 0 -10 -20 -30 -40 00 01 02 03 04 05 06 07 08 09 10 MSCI ACWI div idend grow th (LHS) MSCI ACWI div idend cov er (RHS) Source: HSBC. In aggregate (source: Bloomberg). MSCI 3 2. MSCI AC World dividend growth and dividend cover Value (USDbn.6x (versus a long-run average of 2.

 China Coal (1898 HK.0). 17 . OW.Equity Asia 7 December 2010 abc Selected company beneficiaries Our sector analysts have identified the following companies as being beneficiaries from the surplus cash theme:  Rio Tinto (RIO LN.78.  Bunzl (BNZL LN. TP CFH66. CHF53. HKD5. GBP40. OW. This could include returning more cash to shareholders and looking to become active again in the brewer consolidation process. Luxury companies’ balance sheets were barely impacted by the downturn and we see cash piling up in 2011. With sizeable high-quality targets scarce. the company can opportunistically acquire lowcost vessels to maximise returns. Ample scope for consolidation in a fragmented market and a healthy balance sheet supports an inorganic growth strategy.5bn. enabling the company to hit its volume growth targets. TP HKD7. we believe A-B InBev will consider alternative use of its cash due to the fact that the brewer has aggressively paid down its debt.40). OW(V).0). TP GBP48. we expect the cash to be returned to shareholders. Richemont looks well placed with an expected net cash position of more than EUR2bn by end-March 2011 and annual FCF in excess of EUR1bn in the next three years.04. Strong cash flow will allow further acquisitions.  Richemont (CFR VX.2. In 2011. OW. With cash of USD960m. OW(V). TP HKD18. we see the company generating cash returns over the next 12 months (even under our conservative commodity price assumption) and ending 2011 with a net cash position of USD5.7. OW(V). Growth strategy of reinvesting cash flow in small bolt-on acquisitions has delivered cash returns of around 15-25% historically.60).25. With the balance sheet now cleaned up and M&A risk limited given the board’s guidance of a return to conservatism. TP GBP9. HKD12.0).28. EUR43.  Anheuser-Busch InBev (ABI BB.50). GBP7. TP EUR53.  Pacific Basin (2343 HK.

We do not believe. however. It represents a large proportion of global demand for commodities. As Table 2 shows. China last year comprised 59% of global demand for iron ore. Bloomberg All this suggests that China will remain a key driver of global demand over the coming years. real GDP growth slowed to 9. but for the next decade its population will continue to grow by 0. It is hard to exaggerate how important Chinese demand is. As a result.9% y-o-y in Q1 this year. according to the United Nations (only fractionally slower than the 0. Even now. for example. apart from the 2008-09 recession since 2004).7% over the past 10 years). Having grown 11. although this comprises only 11% of GDP. many investors worry that growth could slow further. Korea and Taiwan were growing at 8-10% a year. China will eventually have demographic problems. with GDP per capita only 7% of that of the US. Chinese stocks have performed sluggishly this year. with MSCI China falling by 9% since early November.6% a year. with the Chinese authorities sharply tightening monetary policy after inflation reached 4.6% in Q3 (its slowest pace. they were already much richer relatively than China is now.Equity Asia 7 December 2010 abc (4) Winners from Chinese growth  It’s an old story – but we think it still has a long way to run  China’s growth will remain robust for the next decade  We focus on foreign companies with exposure to China – some not obvious A way to go The slowdown in Chinese economic growth over the past few quarters has worried many investors. a slightly slower pace of growth would make it more sustainable and less inflationary. Chinese real GDP growth 16% 14% 12% 10% 8% 6% 4% 2% 0% 94 96 Q-o-q sa ann Y-o-y 98 00 02 04 06 08 10 Source: HSBC. In many ways. Perhaps more 18 . The consensus continues to forecast about 9% real GDP growth in 2011 (HSBC forecasts 8. 1. 40% of the population still work in agriculture. that the China growth story is anywhere close to an end. When Japan.9%). It still has a lot of catching up to do.4% y-o-y in October. And. China’s growth is not likely to slow over the medium term either. and over one-third of demand for four other major metals.

7 65. that investors should continue to look for companies exposed to China growth.2 Source: HSBC.8 58. Largest foreign groups in China by revenue (2007) Foreign group Sales (RMBbn) 25% 20% 15% 10% 5% 0% Foxconn Volkswagen Quanta Toyota Nokia Samsung Motorola Sony Ericsson General Motor Chimei Innolux Honda Inventec Flextronics DELL Nissan Acer Total TPV Ford Seagate Source: Chinese Ministry of Commerce 278.7 25.Equity Asia 7 December 2010 abc 2. 83% of the growth of investment globally has been contributed by China.9 140.1 83. in the past five years. China carried out 21% of the world’s capital investment (up from 6% at the beginning of the last decade.6 31. It also uses 10% of the world’s oil. the negatives of investing in Chinese companies (excessively government interference. China has provided only 7% of incremental demand growth.0 145. 3. But that is set to change: McKinsey & Co estimates that Chinese consumption will grow at a 8. nothing like as important for consumption: in 2007 (the last year of available data).8% of total world consumption.5 37. then.1 67.6 44. Although obviously some of these can be found in China. generates 18% of the electricity and has 17% of mobile phone subscribers. expensive valuations in attractive sectors) mean that our preference remains to look for foreign companies with strong and growing businesses in China.1 61. risk in executing expansion plans. 2009 ________________ _______ Incremental demand growth.7 28.4 35. CEIC extraordinarily. Chinese and global demand for metals _______________ Demand. Chinese capital investment as percentage of world total will be the third-largest market in the world and almost one-quarter the size of the US.9 79. Which foreign companies have the biggest businesses in China? Table 4 shows the largest foreign groups in China (compiled by aggregating the revenues of all subsidiaries and joint ventures). poor corporate governance. In the past five years.5 188.6 39.6 37. as yet. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 19 . WSA. 4. World Bank China is. Last year. China represented more than 100% of incremental demand for all six of the most important metals. 2000-09 _______ Global China China % of Global China China % of demand demand growth Steel Iron ore Aluminium Copper Zinc Nickel (mt) (mt) (kt) (kt) (kt) (kt) 1121 1853 35301 17244 10140 1311 542 1098 13879 6520 4061 409 48% 59% 39% 38% 40% 31% 361 882 10105 2084 1156 196 418 923 10504 4670 2710 344 116% 105% 104% 224% 234% 176% Source: Brook Hunt. Chinese consumption was only 3.8 233. making China only the fifth largest consumer market in the world (and barely one-tenth of the size of the US).3% CAGR until 2020. see Chart 3).7 59. by which time China All of this suggests.

in particular.21). compared to 4. China became the world’s largest auto market last year. an increasing amount of which is being imported by China. This should be positive for all energy companies.15). OW. Chinese sales by 2014 will reach 21.  Building materials. We particularly like BG Group (BG LN. HKD3. TP EUR39) and Daimler (DAI GR.22. OW.9m units (25% of the global market). TP CHF75. Cement companies such as Holcim (HOLN VX. where they believe foreign companies’ exposure to China has not been fully appreciated by the market. the highest among its peers.  Utilities. for which emerging markets constitute 59% of capacity. Chinese demand for oil and natural gas will continue to be strong. OW(V).000). but can find one or two we like. in Korea. TP KRW56.50) and CR Cement (1313 HK. should continue to see strong growth.  Capital goods. Our favourite stocks among beneficiaries of Chinese growth are PSA (UG FP. RMB6. although one has to be selective because of regulatory risk. EUR62. In China. TP HKD7. for example. China offers opportunities for European utilities companies which can offer technical innovation and technology transfer. in real estate our analysts like companies with exposure to commercial and high-quality residential property developments such as Shui On Land (272 HK.  Personal goods.10.79.  Autos. cognac and vodka and its 42% market share in China. TP HKD15.97. Baosteel (600019 CH. EUR50. TP EUR75) as a particular beneficiary. and also below the levels of Russia. On our projections. HSBC’s analysts highlight the following sectors. particularly sales to Chinese tourists abroad. 20 . CHF64.Equity Asia 7 December 2010 abc In addition. OW.3. where concerns over global gas prices in 2010 have kept valuations cheap.88.62.70).0). Chinese growth has been more significant for spirits companies than for brewers. OW. Although China’s growth is not exactly a new theme. Intime (1833 HK. This year capex in emerging markets will be bigger than in developed markets for the first time. We forecast 5. TP HKD4. OW(V).65. and therefore like select names in steel and building materials (for example.8% for the global market.28. HKD6. TP EUR27) (which already serves 25m people with water services in China). For example.  Beverages.40). OW. given its strong portfolio in scotch.1% CAGR of sales to 2050 for the company. We see Pernod Ricard (RI FP. compared to 15. EUR20. Penetration rates have a long way to go: per capita consumption of skin care products are only 30-50% of the level of mature markets.  Oil & gas.  Luxury goods. OW(V). TP GBP16. GBP11.8m in the US. TP RMB8. OW. such as Veolia (VIE FP. We forecast 11% growth in auto sales in China in 2011. OW(V). Brazil and urban India. We are more selective in consumer-related companies because valuations are stretched. Hyundai Motor (005380 KS. KRW48. HKD12. OW) and Kia (000270 KS. OW. EUR29. our analysts believe investors still do not fully appreciate the impact of the rise of Chinese consumption. wage pressures will push companies to increase factory automation to keep costs down. but our analysts particularly focus on natural gas. one of the world’s largest traders of LNG. And obviously there are many Chinese stocks that will benefit from domestic demand growth too.11. We also think that investors have become too pessimistic about the outlook for infrastructure growth.950. TP EUR56) and.

as well as triggering new opportunities for internet-based businesses. Internet stocks jumped during the TMT bubble of 1998-2000. by not spotting that a technology was maturing (or by picking eventual losers) returns would have been poor. Performance of selected tech stocks (log scale) Amazon rebounded strongly and created sustainable businesses. Electric cars are close to becoming commercially viable. Next year looks like being the year that smartphones really take off. What is particularly exciting about these developments is that technology-related sectors are available very cheaply on global stock 100000 10000 1000 100 85 87 89 91 93 95 97 99 01 03 05 07 09 MSFT AAPL AMXN BIDU YHOO Source: HSBC. or growing use of plastics). Bloomberg (Jan 1985 or IPO date=100) In the late 1980s and early 1990s stocks such as Microsoft and Intel soared as PC demand took off. and it seems to us that a number of the scientific developments of the past decade (faster semiconductors. The rising price of commodities is propelling the search for alternative energy sources. The launch of Apple’s iPod in October 2001 and its subsequent evolution into the iPhone and iPad triggered growth in smartphone stocks. others. Apple’s share price has risen 3400% over that time.Equity Asia 7 December 2010 abc (5) ‘Techtonic’ shifts  The tech developments of the past decade are coming to fruition  From smartphones to electric cars. a new wave of technology is going to change the investment landscape  Our analysts pick their favourite areas and companies The next tech wave Technological advance is always a major driver of stock markets. lost their way. some such as 21 . 1. aluminium for copper. albeit one that is very hard to identify as an investor. This will have repercussions for telecoms operators and equipment makers. the development of the internet and the growth of smartphones and similar devices – could have made wonderful returns. Technological advances move in waves. emerging market internet plays such as Baidu have also performed strongly. Similarly. but Microsoft today is still 50% below its 2000 peak (Chart 1). An investor who spotted correctly the three big tech waves of the past 25 years – the rise of the PC. After it. internet commerce. alternative energy. More recently. and for substitutions (for example. more efficient batteries) are all coming to fruition together now. such as Yahoo. with these devices forecast to grow from 270m units in 2010 (20% of total handsets) to 527m in 2014 (32% of the total).

The capacity crunch this will produce will trigger a significant increase in mobile telecoms capex. as investors preferred commodities and began to doubt the long-term business model of many tech companies (high capex.5 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Tech h/w H/c equip Source: HSBC. After the TMT bubble burst in 2000. excess competition).  The growth of smartphones will also lead to a big rise in demand for mobile data. will become the mainstream technology. We expect Ericsson (ERICB SS. tech stocks underperformed massively (Chart 2). 180 160 140 120 100 80 60 99 00 01 02 03 04 05 06 07 08 09 10 Source: HSBC. TP GBP8.68. TPK (3673 TT. Bloomberg Semicon Softw are Pharma 22 . Where most such sectors have typically traded at a big premium (Chart 3).0 0.5 1. Bloomberg Technology stocks have outperformed a little since the current bull market began in April 2009. TP GBP6. N. We prefer to take exposure to this via sub-component and semiconductor makers.  2011 will be the year the smartphone really takes off. TP TWD850) has 45-50% of market share with Apple.  Touchscreen technology will be a key growth area in 2011 as iPads and other tablets continue to grow in popularity. Industry projections expect 18% CAGR in 2010-14. We think the P-cap technology.55. OW. 3. This has left tech-related growth sectors looking cheap relative to the market.0 2. used in iPhones and iPads. But they also lagged in the 2003-07 bull market.Equity Asia 7 December 2010 abc markets.  Further shifts of marketing dollars to the internet. OW. Forward PE relative to market.35.5) is launching additional online marketing products such as email marketing in emerging economies. So we asked HSBC’s analysts to point to technologies and companies they see benefiting from the next tech wave. currently semiconductors and pharmaceuticals are on a discount to the market. Here is what they came up with. GBP5.1) is well placed in this technology. The UK’s National Grid (NG/ LN.5 2. For example. which should allow it to become a market leader in transmission. OW(V). 2. SEK72. TP SEK95) and other telecoms equipment vendors to benefit. but only by about 4%. compared to an average premium of 51% in 2003-07. GBP7. TWD664. and even the premium of the software sector is only 19%. which control the supply of power using two-way digital communications. IT sector relative to MSCI All Country World Index But which technologies? Identifying the technologies that will take off over the coming years (particularly those where this is not yet fully appreciated by the market) and picking the winners from these technologies is obviously a bottom-up judgement.0 1. short product lifetimes. MSCI ACWI sectors  Smart electricity grids. Distributor 3. credit and marketing services provider Experian (EXPN LN.

L. stockpicking is important. as China and India build out modern road systems. 259p. transport firms will be able to use heavy advanced trucks. TP EUR175). OW(V). an energy conglomerate.  As emerging market infrastructure improves. This demonstrates the country’s determination to be a leader in the clean energy field. HKD4. rather than underpowered flatbed trucks they typically use now.  One focus of China’s next five-year plan is to increase use of non-fossil fuels to 15% of energy use by 2020. for its track record in waste treatment and sensible diversification into alternative energy. We prefer high-quality upstream polysilicon players such as Wacker Chemie (WCH GY.34. But excess capacity in some areas of the business. As this is a crowded sector. OW. high-tech products will sell for the first time. TP 325p) is increasingly shifting sales of electronic products to a web-based platform.Equity Asia 7 December 2010 abc Electrocomponents (ECM. TP HKD5. 23 .40).0. OW(V). One less obvious implication of this is that.  The falling cost of solar energy means it is approaching grid parity in key markets. The upfront costs of such trucks are higher but their superior performance will significantly boost productivity. means investors have to be choosy. We like China Everbright Int’l (257 HK. EUR132.

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Equity Asia 7 December 2010 abc Sectors 25 .

we expect 2011 loan growth to be slower in nearly all markets. in all markets except Singapore. We do not expect a deteriorating credit cycle in 2011 as Asian economies continue to expand and credit growth remains relatively strong. as well as continued improvement in asset quality  Key themes for 2011 will be the effects of low rates and persistent economic expansion in Asia  Top picks are CCB. we forecast profit growth of 20%+ y-o-y in 2011 on an EPS basis. Benign credit costs persist except where we expect a sharp decline in provisions in Korea after three rounds of corporate loan restructuring in and weakening in project finance loan quality in 2010. Markets with structurally higher rates (China. bank lending is expected to remain robust. Axis Bank and Bank Mandiri as beneficiaries of economic growth in Asia and BOC-HK as being well positioned in the low rate environment 2011 outlook We remain constructive and generally positive for the banking sector in Asia in 2011. India and Indonesia) will see the greatest NIM expansion. and is not registered/ qualified pursuant to FINRA regulations 26 . Next year seems poised to be another year of volume growth to drive profits. despite growing margin pressure and monetary tightening across Asia. In highly liquid markets like Hong Kong.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. in our view. we see risks of moderate margin decline as competition narrows spread. We continue to believe this is a key theme for the medium to long term. Expectations for the internationalisation of the RMB in 2010 have been a bit overzealous. The true contribution to earnings may fall short of market expectations in the near term. The most significant factors to our earnings forecasts are:  Loan growth: As Asian economic growth continues to be above the global average. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 tdunivant@hsbc. On a y-o-y basis. however selective competition for new loans and/or funding likely moderates NIM expansion across the region. Whilst there are headwinds that could affect share price performance from time to time.Equity Asia 7 December 2010 abc Banks  Earnings continue to rise on persistent loan growth.  NIM: We expect a mixed story in 2011.  Provisions: Most of Asia did not have a meaningful credit cycle in the recent global financial crisis. Todd Dunivant* Head of Banks Research. India would be an exception as the credit expansion cycle is likely to accelerate into 2011.com. however near-term gains are likely only incremental and not a material driver of income growth in 2011.

Asian economies have been thrown new challenges following the recent financial crisis. borrowers could be gaining c200bps.Equity Asia 7 December 2010 abc Systemically important banks & CAR We believe bank earnings and credit quality stability will be most affected by two continuing themes in 2011. Themes for 2011 Effects of low rates Persistent low rates in the West. We expect these trends to continue pushing market turnover higher in 2011. pushing turnover and valuations higher. and in particular China and India. Loan yield declines should slow in EM Asia. and there will be further actions to absorb abundant liquidity. Central banks are likely to raise policy rates in all markets except Hong Kong. This was at a time when lending in Hong Kong began to accelerate from 18% y-o-y in 1H10 to 26% y-o-y by end-October. namely India and Hong Kong. Perhaps this is most pronounced in Hong Kong where RMB deposits have grown 246% from end-2009 which has really accelerated in 2H10. Improved market turnover from inflows. have created a wave of capital flows in 2010 that has begun to raise risks in Asia. The impacts to banks can be wide depending on the actions (or inaction) of central banks and monetary authorities in Asia. ‘Carry trade’ rising in loan books. We expect the policy actions to continue into 2011. low USD rates and appreciating currencies in Asia have increased the hunt for assets in EM Asia. As rates remain low on USD loans and the RMB is set to appreciate c3% y-o-y. In essence a borrower is swapping USD deposits for RMB and pledging these deposits against a USD loan. deposit yield and RMB appreciation. To simplify the discussion here we will focus on three possible implications for banking systems across the region: Rising liquidity due to inflows. due to the USD peg. Additionally Hong Kong has witnessed an increase in retail brokerage activities coming from mainland China investors. this sounds negative for banks. Initially. This so-called ‘hot money’ risk seems to be alive in Asia and perhaps has been somewhat exacerbated by appreciating currencies in Asia and actions by central banks in the region to raise rates. Weaker USD. the consequences may include asset bubbles. declining spreads for banks and inflation. especially in markets where the currency has an appreciation bias and potential for central bank actions that may increase the appreciation expectation of the currency. Left unattended. Yet we argue that these measures can be largely constructive for banks. somewhat less linked to concerns of asset bubbles and interbank participants could see upside as liquidity is withdrawn. credit growth may be 27 . Second will be the continued economic growth in Asia. After considering borrowing costs. is not sustainable through 2011. in our opinion. Aside from property we have seen a significant rise in FII flows in some markets in Asia. coupled with stronger economic growth in Asia. Nonetheless. without USD rates moving higher or RMB appreciation slowing it is unlikely that these loans will cease. We also expect the Hong Kong market to see a boost in turnover from the perspective that USD can be more easily invested in equities that have underlying earnings derived from China growth. Use of capital controls likely expands to slow ‘hot money’ and more specific actions on property prices should be expected. The demand for this trade is accelerating loan growth and. corporate loans have boomed. We have seen evidence of so-called currency trades emerging to drive bank lending growth. First the effects of low rates in Western markets and the possible knock-on effects in Asia and reactions by policymakers. From rising property prices to net inflows in equity markets to inflationary pressures driven by abundant liquidity.

Instead we see BOC-HK well positioned take advantage of higher loan growth on low-cost liquidity flowing into Hong Kong and the fee-related services from a more buoyant market in Hong Kong.50) While CCB would not be the only Chinese bank to benefit from persistent growth in China. OW(V). In our view. OW.8x our 2011e book value using a simple Gordon growth methodology. There is not a single bank that will give an investor maximum exposure to all high-growth economies in Asia.Equity Asia 7 December 2010 abc Our preferred stock on the theme of lower rates is BOC-HK. and Bank Mandiri in Indonesia.01/RMB4. Based on our 2011e book. 2) China policies that could affect RMB internationalisation and/or expansion of Chinese enterprises outward from China. India and Indonesia. BOC-HK is currently trading on 16x 2011e earnings and 2.6% in 2011e. implying a 20% potential return inclusive of dividends. Valuation Persistent economic growth in Asia Across the region. HKD7. TP HKD10.7.8% in 2010e to 7. we expect NIMs and operating income to expand on volume and higher yields. Whilst somewhat slower. demand from loans as a byproduct of RMB appreciation and an expected rise in the turnover of the HKEx. but this is not really a theme for 2011. The key risk to watch on the growth front is inflation. 21% in India and 23% in Indonesia. China Construction Bank (939 HK/610939 CH.20/RMB8.63. TP HKD30.80. HKD26. In general terms.4x 2011e book. Central banks in Asia have started to address inflationary concerns with rate hikes and efforts to absorb abundant liquidity to guard against misallocation of capital that could further fuel inflation. Risks Key risks to our call are: 1) significant changes in economic and monetary conditions. Valuation and risks BOC-HK (2388 HK. The banks are unlikely to raise prime lending rates with no action expected by the US Fed and HIBOR should remain low as liquidity remains abundant on the back of Asian growth and easing measures by the Fed and the ECB.80) BOC-HK sits in a unique position. Axis Bank in India. this is the best bank on RMB internationalisation. economic growth has posted solid rebounds in 2010. We expect Asia ex Japan growth to slow from 8. we expect system loans to expand in 2011 by 14% in China. our economists forecast policy rate hikes across our coverage sectors except Hong Kong in 2011. The bank stands in a position to benefit from the continued lower USD rates. markets. Specifically in these markets. we expect China and India to expand faster and to be key drivers of overall Asian growth. Continued economic growth should sustain the demand for credit with the most pronounced demands in China. and 3) sharply lower turnover or poor sentiment in the Hong Kong equity market. Recent PMI data and monthly GDP data suggest these trends will continue into 2011. As mentioned earlier in this section. these rates hikes should be positive for bank earnings and coupled with robust loan growth in the higher economic growth We value BOC-HK at 2. Rates in Hong Kong will remain low. we see a few advantages including somewhat slower loan 28 . we derive a target price of HKD30. Thus we have three preferred plays on Asia’s continued economic growth: China Construction Bank (CCB) in China. PMI readings continue to show expansion in Asia and consumption has remained steady as a buffer from near-term fallout from somewhat slower Western growth in 2011.

Axis Bank (AXSB IN.6x our 2011e book using a simple Gordon growth model.Equity Asia 7 December 2010 abc growth in the lending boom of 2009-10 than peers. and 4) slowing growth in India and/or policy moves on the back of rising inflation. and 4) measures to cool China’s economy that result in more significant and persistent slowing of the economy. CCB’s H-shares are currently trading on 8. Long-term investors may use this time to build positions.50 for the H.6x our end-FY12e book using a weighted average combination of PE.35x our 2011 book. Bank Mandiri (BMR IJ. Based on our 2011e book. 2) slowing loan growth perhaps from slowing economic growth. INR1329. A relatively low loan-deposit ratio (72%) plus sticky. Risks Key risks to our call include: 1) slower than expected loan growth. and 4) falling interest rates. 3) significant asymmetric rate hikes that would narrow lending spreads for Chinese banks.8x our 2011e book. Valuation Valuation We value Axis Bank at 3. Based on our 2011e book. implying a 50% potential return for the H-shares. 3) deteriorating asset quality. OW. we derive target prices of HKD10. the largest consumer loan book in China and diversified fee income.and A-shares respectively. implying a 35% potential return inclusive of dividends.655) Bank Mandiri is well positioned to benefit from the underlying growth potential. whereas shorter-term investors may wish to wait until we are closer to policy or earnings catalysts in 1Q/1H11. Risks We value CCB at 2. low-cost deposits provide the bank with a buffer to avoid funding cost pressures relative to peers.6x our 2011e book which is derived using a simple Gordon growth model. investors should consider that the Chinese banks are likely to underperform in the near term. We believe the bank is positioned better than peers to accelerate earnings growth in the context of broader economic growth of Indonesia. 2) rise in provisions due to higher minimum thresholds or deterioration in asset quality. Risks Key risks to our call are: 1) short-term share overhang from upcoming 1Q11 rights issue.20/RMB8. TP INR1900) Axis Bank is one of the banks well positioned to benefit from continued growth in India. 29 . The relatively high CASA deposit base (42%) should provide a buffer to protect or modestly expand margins in a growth cycle with more limited liquidity. We value BMRI at 3. Valuation Key downside risks to our call are: 1) draconian policies that significantly impact the growth and profitability of the bank. 2) deterioration of asset quality.3x our 2011e earnings and 1. Given policy risks and expectations of further monetary tightening.655. a longer duration loan book to enhance yield from rate hikes. IDR6. Bank Mandiri is currently trading on 13x our 2011e earnings and 3. This approach derives a target price of INR1900. PB and economic profit model methodologies. which implies a 40% potential return inclusive of dividends.400. 3) rising funding costs on the back of tighter liquidity in the market. we derive a target price of IDR8. Axis Bank is currently trading on 18x our 2011e earnings and 3x our 2011e book. OW. TP IDR8.

5% 3.0 34.10 54.87 1.53 1.60 13.0% 2.0 19.00 8.07 1.3 7.1 7.7 8.4% 18.A Bank of China .5% 19.21 0.8% 4.9% 18.2% 2.7% 12.0% 1.9% 18.6% 14. Yuanta Financial Holding Co.50 2.8% 15.05 2.9 7.0 55.H China Minsheng Bank .1% 10.0 7.9 7.2% 5.2 17.8% 1.10 18.2 7.3% 3.6% 34.8% 4.3% 7.4% 24.1 26.0 15.60 6.85 1.6 131.7% 24.5% 16.1% 3.9% 2.1% 6.15 2.7% 31.37 1.7% 3.17 8.5 7.1 101.9% 1.5% 403.7 3.3% 17.0% 5.61 3. First Financial Holding Co.00 30.6% 12.20 4.29 2.7% 1.8% 6.A China Minsheng Bank .7 18.9% 20.5 9.8% 7.5% 1.38 1.46 1.7 17.600 17.6 1.4% 23.38 1.80 23.93 1.7 16.3 2.0% 50.H China A-share banks Industrial & Commercial Bank of China .7% 3.7 17.38 2.3% 3.1% 7.9% abc .6 6.9% 23.8% 10.9% 25.6% 5.7 8.2% 7.80 1.5% 1.27 5.5% 22.0% 1.2% 9.3% 1.0% 5.9% 2.28 2.5 19.2 9.0% 68.35 37.7 10.0 10.0% 2.34 10.5% 130.6 223.8% 12.2% 3.5% 37.6 14.1% 49.4% 1.2% 2.9 10.6% 26.3% 1.2% 7.6% 21.4 6.31 1.8% 10.5 15.6% 5.41 1.6 52.5% 7.200 21.8% 2.7% 15.3 9.8% 20.70 2.96 7.78 1.4% 1.1 28.4% 10.91 4.3% 0.9% 21.5% -23.00 21.5% 3.9% 8.5% 2.10 1.3 13.1% 24.2% 49.0% 0.82 1.31 1.700 45.9% 19.28 0.3 8.5 21.8% 2.200 14.9% 4.49 2. Mega Financial Holding Co.18 1.0% 888.5% 3.54 1.0% 103.1 13.5% 16.0% 18.5% 23.9 7.6% 6.40 23.43 6.86 0.6% 23.000 16.3% 6.9% 18.4% 8.2 8.A Hong Kong banks BOC Hong Kong Holding Bank of East Asia Wing Hang Bank Ltd Dah Sing Financial Dah Sing Banking Group Hong Kong brokers Guotai Junan International Taiwan FHCs Cathay Financial Holding Co.4 10.56 1.7 11.3 21.450 13.H China Merchants Bank .7% 39.3% 36.56 13.5 44.7% 13.6% 26.5% 21.1% 13.1% 62.5 10.0% 2.7 30.6 8.19 1.5% 12.0 18.300 38.A China Merchants Bank .3% 19.6% 199.30 7.2% 7.3% 22.4% 26.1 8.8% 6.6% 21.08 1.4% 1.2 7.39 1.5% 1.7% 18.0% 19.8 7.0% 1.3 9.50 12.8 33.3 21.8% 9.4% 95.76 0.20 4.1% 22.39 1.7 18.26 1.0% 4.66 1.7% 43.1% 13.1% 5.06 1.1 16.20 52.3% 25.4% 232.3 6.4% 104.1% 20.0 2.9 13.70 5.6 17.27 2.0% 3.9% 10.6% 21.2% -2.0% -60.6% 23.2% 20.67 2.3% 19.05 4.3% 44.2% 50.5 13.9% 26.50 3.2% 20.9% 23.98 0.2% 20.4% 5.0 8.6 21.32 2.5 7.1% 4.3% 6.6 33.07 26.2% 11.5 9.1 11.70 67.700 14.0% 4.6% 2.92 1.2 6.8% 2.7% 15.75 1.1 15. Chinatrust Financial Holding Co.1% 24.9% 3.7% 8.12 20.42 0.17 1.6% 44.1% 6.7% 8.H Bank of China .2% 34.5% 41.3% 22.03 4.4% 23.7% 2.2 6.3% 0.4% 24.6% 12.9 12.8 8.8% 6.41 1.25 20.00 23.5 8.8% 5.8 18.1% 39.6 5.03 0.1% 52.3% 11.2 7.3% 28.A China CITIC Bank .4% 81.700 5.A China Construction Bank -A Agricultural Bank of China .9% 44.5% 4.9% 15.0% 14.9% 20.30 Asia banks: Valuation summary Stock China H-share banks Industrial & Commercial Bank of China .6% 2.05 18.5 44.9% 72. Fubon Financial Holding Co.8% 7.0 13.9% 3.83 0.5% 18.H China CITIC Bank .76 46.20 11.6 131.15 5.6% 5.5% 13.65 1.1 232.0% 80.1% 22.12 1.7% 4.4 16.6 52.7% 2.9% 44.4% 7.5% 12.7 8.600 19.26 1.4 2.4% 18.6 7.3% 22.47 2.0 9.4% -9.5% 37.8 26.8% 22.8% 1.4% 20.9 6.2% 22.4% 2.9% 1.4% 24.1% 1.05 5.100 54.0% 1.2 10.56 1.75 1.1 18.8% 15.11 2.100 44.94 21.9% 29.7 8.4 13. Shin Kong Financial Holding Co.71 0.8% 9.2% 6.7% 11.6% 23.2% -9.3% 22.6% 28.53 1.6 14.1% 13.3% 1.8% 23.78 1.7 43.1% 5.0 7.0% 2.6 2.9% 3.8% 13.1 7.59 1.7 30.43 5.90 1.8% 14.9% 5.2 7.9% 18.70 11.9% 4.30 1.0% 3.1 26.5% 22.50 10.08 1.62 2.8% 1.4% 11.1% 11.8% 124. Sinopac Financial Holding Co.6% 12.12 2.4 6.3% 22.5% 19.0% 5.5 8.1% 3.3% 1.65 20.2 1.0% 12.9% 1.2 10.2% 20.5% 20.80 4.8% 85.A Bank of Communications .9% 25.0 12.3 13.4% 2.0% 5.29 1.H Bank of Communications .05 1.7% 15.7% 9.5% 22.30 28.01 0.22 1.5% 1120.0% 18.80 44.0 90.0 15.54 1.50 8.7% 3.000 16.1% 5.42 1.9 2.0 4.9% 33.40 11.9% 3.6% 26.0% 19.3 6.96 1.6% 39.27 1.4% 5.1% 25.60 5.1% 4.4% 9.7 6.30 2.31 1.000 48.49 1.0 60.6 223.1 23.4% 22.4% 6.1 8.1 140.46 0.3% 13. Korean banks KB Financial Group Shinhan FGL Woori FHC Hana FGL Industrial Bank of Korea Daegu Bank Busan Bank Source: HSBC estimates.5% 13.0% 23.8 11.9 6.7% 31.88 1.3% 2.8% 23.3 98.9 8.13 1.3% 17.2% 15.9% 9.5% 55.1% 7.3 4.4% 24.3% 28.4% 24.8% 33.5% 40.1 140.91 1.94 1.9 18.H China Construction Bank -H Agricultural Bank of China .8% 138.29 1.3 9.6% 7.40 1.6% 3.4% 8.9% 91.6% 15.0% 23. Closing prices as of 30 Nov 2010 Equity Asia 7 December 2010 Rating Ticker Curr Target price Share price Potential return Mkt cap ____ PE (x) ____ ___ EPS growth____ ______ PB ______ ______ ROE _____ ____ Dividend yield ____ (USDbn) 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e OW(V) OW(V) N(V) OW(V) OW(V) OW(V) N(V) N(V) OW(V) OW(V) OW(V) OW(V) OW(V) OW(V) UW(V) N(V) OW UW UW N N N(V) N OW OW N OW OW N UW OW N N(V) OW OW OW N 1398 HK 0939 HK 1288 HK 3988 HK 3328 HK 3968 HK 0998 HK 1988 HK 601398 CH 601939 CH 601288 CH 601988 CH 601328 CH 600036 CH 601998 CH 600016 CH 2388 HK 0023 HK 0302 HK 0440 HK 2356 HK 1788 HK 2882 TT 2891 TT 2881 TT 2890 TT 2885 TT 2886 TT 2892 TT 2888 TT 105560 KS 055550 KS 053000 KS 086790 KS 024110 KS 005270 KS 005280 KS HKD HKD HKD HKD HKD HKD HKD HKD CNY CNY CNY CNY CNY CNY CNY CNY HKD HKD HKD HKD HKD HKD TWD TWD TWD TWD TWD TWD TWD TWD KRW KRW KRW KRW KRW KRW KRW 8.36 2.2% 4.6 53.7% 327.90 0.6% 4.5% 0.4 11.1 36.3% 22.00 22.5% 3.40 7.9% 21.90 0.76 4.6% 19.

3% 11.48 9.216 737 356 688 2.0% 19.000 2.28 1.32 3.33 1.01 4.9% 1.4% 17.0% 26.2% 24.2% 9.1% 4.5% 30.6% 26.2 13.5% 6.3% 66.5% 43.36 1.13 2.000 39.1% 6.6 3.3 13.9% 22.9% 23.9 19.3% 4.1 28.25 1.28 3.3% 24.7% 6.3 6.9 15.2% 1.2% 11.7 13.7 7.7 7.2% 23.3% 26.7% 4.4 21.93 1.2 16.5% 1.4% 1.7% 10.7 10.7% 40.8% -11.9 13.3% 3.6% 16.8% 26.Asia banks: Valuation summary (cont’d) Equity Asia 7 December 2010 Stock Korean Brokers Mirae Asset Securities Co Samsung Securities Co Ltd Korea Investment Holding Korean non-bank monolines Samsung Card Co Ltd India Banks & NBFCs State Bank of India Bank of Baroda Punjab National Bank Canara Bank Union Bank Of India HDFC HDFC Bank ICICI Bank Axis Bank Ltd Yes Bank IndusInd Bank Bank of India Singapore Banks DBS Group UOB OCBC Indonesia Banks Bank Central Asia Tbk PT Bank Rakyat Indonesia Bank Danamon Indonesia Tb Bank Mandiri Persero Tbk Exchanges Hong Kong Exchange Singapore Exchange Source: HSBC estimates.3% 26.56 2.1% 52.3% 29.77 1.7% 3.03 1.60 54.03 2.2% 0.86 2.9% 9.4% -5.63 4.900 534 400 546 13.8 11.29 5.550 63.3% 21.4% 3.3% -42.80 8.8% 4.7% 11.5% 14.8 10.1% 7.655 210 8.8% 1.63 1.2 17.1 12.5% 18.800 1.43 1.9 8.4% 20.51 1.2 15.000 72.78 2.2 35.48 2.35 17.9 16.85 20.41 5.2 9.3% 22.70 8.0% 39.7% 41.04 18.8% 18.1 12.9 3.314 1.8% 21.8 12.29 2.0 34.0% 0.0% 4.3% 1.8% nm -3.91 2.0% 26.5 14.8% 10.3% 3.97 20.9% 20.7% 16.7 8.71 1.9% 0.6% 18.7 35.64 11.8% 5.6 11.550 178 8.2% 16.3% 8.6% 2.41 2.4 8.5 12.22 10.2% 30.2% 11.3% 3.9% 10.9 20.7% 6.4% 12.5% -21.1% 14.1 27.5% 11.4% 2.8% 19.95 1.1% 73.750 6.48 3.55 1.377 309 292 470 14.5 11.5% 1.7% 2.0 5.54 1.1% 19.1% 1.350 10.4 25.4% 1.0 8.7% 25.000 71.7 22.400 4.6% 2.3% 57.5% 1.28 4.3 7.8% 30.8% 27.5 29.5% 2.250 6.5% 14.1% 35.0% 9.146 1.070 1.45 1.32 3.3 10.8 27.0% 0.3% 1.8% 17.0 26.8 17.2% 32.1% 1.400 13.4% 2.8 15.7 41.9 11.0% 24.0% 1.01 10.98 3.3% 1.7 13.8% 3.9 8.4% 2.8 25.39 2.1 16.0 14.6% 11.2% 2.968 935 1.6% -3.0% 21.4% 1.20 3.9% 3.1% 25.92 2.0% 40.8 12.3% 0.1 14.84 6.9% 2.2 22.2% 20.700 8.2% 11.48 3.5% 11.9% -4.7% 9.2% 2.0% -2.850 1.7% 29.3 14.0% 3.7% 2.6% 26.92 1.5% 28.3% 69.7% 24.7 17.02 1.1% 22.350 1.3% 1.8% 24.8 24.7% 26.9 13. Closing prices as of 30 Nov 2010 Rating Ticker Curr Target Current price price Potential return Mkt cap ____ PE (x) ____ ___ EPS growth____ ______PBV______ ______ ROE _____ ____ Dividend yield ____ (USDbn) 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e N OW N(V) OW UW N N OW N N(V) OW OW OW OW(V) OW N UW UW UW OW N UW OW N UW 037620 KS 016360 KS 071050 KS 029780 KS SBIN IN BOB IN PNB IN CNBK IN UNBK IN HDFC IN HDFCB IN ICICIBC IN AXBK BO YES IN IIB IN BOI IN DBS SP UOB SP OCBC SP BBCA IJ BBRI IJ BDMN IJ BMRI IJ 0388 HK SGX SP KRW KRW KRW KRW INR INR INR INR INR INR INR INR INR INR INR INR SGD SGD SGD IDR IDR IDR IDR HKD SGD 61.5% 2.2% 1.3 24.5% 16.4% 5.6 11.50 4.2% 5.62 14.1% 11.8% 14.10 3.5 12.0 14.8% 4.8% 1.4% 27.8% 16.0% 9.8% 62.8% 21.2% 1.3% 8.8% 9.8% 20.400 2.0 13.9% 21.00 17.4% 45.2% 11.9 25.5% abc 31 .3% 3.375 814 428 602 2.4% 2.5 14.1% 24.3 37.5% 16.0% 17.90 1.4% 10.36 2.7 13.36 3.6% 16.5% 3.6 31.100 65.2% 25.3% 12.5% 18.6 18.9% 29.6% 28.7% 24.9% 3.0% 15.0% 11.4 6.3% 27.7 1.2% 22.7 25.1% 13.04 6.7% 27.9 13.13 22.5 8.30 1.8 16.3 24.4% 34.3% 15.2 14.6% 27.9% 35.6% 3.5% 37.7% 1.1% -6.0% 1.9% 1.0 34.70 5.3% 19.8 23.0 28.8% 1.6% 7.0% 2.2% 0.0% 16.3% 1.7% 19.9% 2.56 0.3% 20.000 34.6% 1.7 6.8% 6.3% 9.93 4.19 1.6% 1.7% 37.9 21.2% 20.4% 9.7% 77.32 3.3% 3.2 2.88 3.3 3.3% 0.52 2.96 1.5% 104.6% 1.

1% 18.5% -72 -5. Following the 107mt to be eliminated in Elaine Lam* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4398 elainehlam@hsbc. HSBC estimates 32 . As the construction period for cement plants is usually 18-20 months.383 1.124 2.3% down in 2010-13e 4.2% of production 8.6% 5.0% Net change in s/d as % of total production 2. the total phase-out of old capacity reached 90mt. Together with boosting affordable housing construction.984 2.6% 2. this should offset slower demand from the private property market.87bn tonnes 163 -13. down from 60% over the past two years.7% y-o-y.4% 10.  Tighter new supply: Following the tightening of cement investment requirements in September 2009.2% 77 4.390 178 253 247 221 195 -76 -74 -107 -80 -70 6. we expect slowing new capacity releases.9% 7. we forecast new supply to come down to 195mt in 2012 from 247mt in 2009.1%  Assume inventory and exports stay at 1.0bn tonnes in 2011.211 2.402 10.7% 24 1.4% 11.4%  NDRC estimates total capacity in 2008 at 1.0%  We expect 322m tonnes of vertical kilns to be shut -65 -15.2% 1. more than the number of 74mt in 2009.9% 88 4. and is not registered/ qualified pursuant to FINRA regulations China: Cement production and capacity.4% to 2. Year-to-October. As of September. China’s cement investment grew just 8. neutral on construction and toll roads  Top picks: Sinoma. CR Cement and CEI 2011 outlook  Strong demand: Demand from infrastructure construction has been filtering through to the cement industry since 2H09.com.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. Based on estimated fixed asset investment growth of 22%.4% 37 1.0% 9.805 1. we expect this to last for 2-3 years as most of the key projects take some time to complete.1% 6.989 2.Equity Asia 7 December 2010 abc China Infrastructure  Cement: tighter supply and strong demand leads to industry consolidation and structural ASP growth  Positive on cement and environmental sectors on reduced overcapacity and favourable policy.488 5. Currently.  Faster old capacity elimination: The government has been strict about eliminating vertical kiln capacity. we estimate cement production will grow by 10.631 1.0% 10.5% Source: Digital Cement. new capacity should slow from 2H11.801 1.265 2. 2008-13e 2008 Production (mt) y-o-y Capacity (mt) -Newly added (mt) -Phase out (mt) y-o-y 2009 2010e 2011e 2012e 2013e 10-13e HSBC comment CAGR 1.1%  NSP as % of clinker production increased from 81% to 100% by 2013e 85  The rising demand gap should drive up cement price in 2012-13e 3.

Gross margins saw a slower-than-expected recovery in 2010. The price-setting mechanism for the construction of high-speed railways has not yet been set.Equity Asia 7 December 2010 abc 2010. will be the key to earnings growth. we expect another 80mt to be phased out next year. while traffic diversion due to new roads or high-speed rail is a longterm threat.76. The unstable margin was due to rising raw material costs and delay in compensation on highspeed railway projects. HKD8. The risk is to the upside. In 1H11. ASPs may fall on seasonality. N. New order flow for the two railway constructors – CRC (1186 HK.  Slow margin recovery. HKD5. we expect structural ASP growth starting in 2H11 with the slowing of new capacity. Coal prices are likely to stay at high levels with mild increases. accounting for nearly 95% of projects. Hence. The latter is facing traffic diversion away from one of its operating toll roads.  Earnings outlook: Northwest and Southern regions should see the most stable ASPs in the short term. Being one of the three largest constructors in China. It will take a year to stabilise the y-o-y impact.  Low pricing power: The structure or system of railway investment should not see major Toll roads  Steady traffic growth: We see slow organic traffic volume growth. Shangsan. This is up to the MoR while constructors have little say in the matter.  High policy risk: CRC’s substantial loss on its overseas project (light rail in Saudi Arabia) reflects the political risk it faced.  Structural ASP growth: In view of the improving supply/demand dynamic. N.3% y-o-y in 3Q10 after a new road commenced operation in July. TP HK8. TP HK10) and Zhejiang Expressway (576. It registered a RMB4.6% h-o-h increase in 2H10 largely due to one-off power restriction measures. we expect higher margins or gross profit per tonne in 2011. Based on the government’s budget.0). a record high) of railway investment in 2010. TP HKD7.0) are still slow as the majority of its sales are from port construction and global port machinery. We do not expect a significant margin improvement in 2011 as it is a structural issue. we expect railway investment to remain high at RMB700bn pa over the next two years. changes over the next five years. which is largely driven by M&As. Infrastructure construction  Strong railway investment: The Ministry of Railways (MoR) is on track to meet its budget of RMB700bn (up 16. while CRC and CRG should take about 90% of the construction market share.7% y-o-y. accounting for 44% of our original full-year earnings. TP HKD12) and CRG (390. Capacity and volume growth.22. particularly in Eastern China where we saw a 13.N.HK. 33 . HKD9. OW. TP HKD8. HKD7. N.HK. However. given the strong demand from infrastructure and pricing power of local producers. HKD6. orders for CCC (1800 HK. Railways are still the focus of transport development in the 12th Five-Year Plan.32. they have a social responsibility both domestically and overseas (to carry out government-related projects).44. thus there are significant policy and execution risks. That means the MoR is still the largest railway investor. we expect 6-7% organic volume growth in 2011. where traffic volume fell by 12. unless the constructors gain more pricing power.0) – should remain strong in 2011-12.15bn loss in 3Q10.45. For Jiangsu Expressway (177 HK.

HKD33. the stock trades at 13.4x 2011e PE.1% potential return. below its mid-cycle PE of 17. We use PE and EV/t pricing methodology to arrive at our target price of HKD7. We think this is unjustified.4. and reduce unit GDP energy consumption to 40-45%. Gaining pricing power via acquisition.2x. subject to local government approval.8% in 201012e). TP HKD9. it trades at 13. Risks Key risks to our view include weaker ASPs. a 29% discount to Conch (914 HK. OW(V).Equity Asia 7 December 2010 abc  Stable toll rate: JSE has applied for rate hikes. delivering the highest earnings growth in our cement universe. Our target price of HKD9. with fairly stable ASPs as 50% of sales (for key projects) are under contracted prices.  Growth priced in.000+ to 3. Valuation At HKD6.9% vs 15. China promises to increase the use of non-fossil fuels as a percentage of total energy expenditure to 15% by 2020.53.11. sales volume upside surprises and stable ASPs on improving supply/demand conditions and strong pricing power. Strong demand came from infrastructure construction. which implies a 21. Margins and gross profit per tonne should remain high. Catalysts include M&A and falling coal costs.500 by 2010 and 2. from 5. HKD6.11. TP HKD38. Valuation Top pick Sinoma (1893 HK. Techtonic shifts Under the 12th Five-Year Plan. overseas orders should be the key growth driver. 6 December 2010. JSE and ZJE are trading at 16x 2011e PE.8% potential return. We expect new orders to grow by 15% and 10% in 2011-12. The key risks to our view are new capacity in Northwest China and the potential for fundraising.53.9 is based on a sum-of-the-parts methodology and implies 33. CR Cement (1313 HK. For cement equipment. TP HKD7. the PRC government drafted a proposal on energy development which entailed investing RMB5trn in clean and traditional energy over 2011-20. We are optimistic on earnings growth owing to high visibility on new capacity.000 in 2020e. equity fundraising and operation risk in JVs. OW. The government aims to reduce the number of cement producers 34 . Themes for 2011 Winners from Chinese growth The listed cement producers would be benefited from the elimination of obsolete capacities and restriction on approval of new capacities and gaining market share from M&As. (See our recent note. The market share of the top 10 producers is expected to rise from 23% to 60% by 2015. Catalysts include M&A and cement equipment orders. It is also the largest cement equipment and engineering services provider in the world. close to their 3-year average of 15-16x.9) Sinoma is the largest cement operator in Northwest China with 40% local market share.4) CRC is the largest cement operator in Southern China with 15-20% market share. HKD7. In early 2009.) Risks At HKD7. the high end of regional and international peers with comparable growth. N. We do not expect rate hikes to be granted given inflation concerns. with higher margins and earnings growth (EPS CAGR: 38.1).2x 2011e PE. We favour CEI given its solid track record in waste treatment and its diversification into alternative energy.

Earnings growth is picking up as construction is on track.0% for China and WACC of 8.4) CEI is a conglomerate focusing on environmental protection and alternative energy projects. Risks The key risks to our view include delays in project execution and funding requirements for new projects.4 implies a potential return of 25.34. market risk premium of 6. Valuation At HKD4. while traffic remains stable. CEI trades at 21.6x 2011e PE. supporting long-term growth. 35 . waste water treatment (WWT). utilisation is rising and operating margins are increasing.1%. solar photovoltaic energy. TP HKD5. The government’s RMB5trn investment in new energy sectors over the next 10 years should accelerate its diversification from WWT/WTE to alternative energy. Our target price of HKD5.34.0%). etc. OW(V). HKD4. Catalysts include encouraging policies and projects in the pipeline. We value each project using a DCF methodology (risk-free rate of 4%. including waste-to-energy (WTE). industrial solid waste landfill.Equity Asia 7 December 2010 abc CEI (257 HK.

2 14.0 8.9 22.1 0.50 23.8 -12.3 7.8 6. 0631 HK Lighting NVC 3.7 19.0 7.5 11.9 15.7 10.58 0.3 0.5 60.3 2.53 6.5 -3.4 15. *Local currency abc .55 0.5 3. Zhejiang Exp.29 0.3 2.9 23.3 6.44 9.43 0.6 0.4 10.9 2.097 13.17 0.5 2.2 12.3 20.7 17.70 2.45 30.2 11.4 11.5 5.4 -6.1 33.8 29.0 3.1 2.11 7.52 0.6 21.17 1.7 -6.2 20.5 2.3 13.9 0.2 3.8 30.7 14.1 0914 HK 3323 HK 1313 HK 1893 HK 0691 HK 1136 HK 0743 HK 1101 TT 1102 TT 18.1 20.7 1.7 0.3 1.0 0.35 30.074 5.0 8.9 2.131 3.4 25.4 25.4 2.4 13.2 3.7 49.8 33.4 1.7 1.50 11.9 33.209 1.6 -2.1 0.4 14.72 0.4 39.2 0.32 3.1 2.6 4.15 0.6 18.0 -20.51 1.39 0.0 12.0 -30.22 6.6 5.3 6.4 1.1 2.3 20.7 4.3 3.8 19.1 21.17 0.5 1.0 10.9 23.8 -5.2 2.3 Machinery Equipment Sany Heavy Equip.4 12.4 7.3 -7.3 1.7 15.8 -7.5 1.7 -0.226 683 3.0 32.6 31.0 -4.18 22.4 21.0 -10.4 13.1 -51.45 31.7 18.9 5.2 27.5 12.1 17. WTE CEI Ticker Mkt cap (USDm) Rating Price (local) Perf TP YTD (local) Potential ____ EPS* ____ EPS CAGR ____ PE (x) ___ ___ PB (x) ___ __________ 2011e___________ ____Consensus earnings (2011e) ____ return 2010e 2011e 2010-12e 2010e 2011e 2010e 2011e Div yield RoE Net margin YTD chg Mth'ly chg HSBC vs (%) (%) (%) (%) (%) (%) cons'us (%) Equity Asia 7 December 2010 0390 HK 1186 HK 1800 HK 3311 HK 14.1 9.3 0.712 5.053 N N(V) OW OW(V) OW(V) N(V) UW UW(V) UW 33.4 15.8 27.4 6.2 -16.7 0.6 12.54 0.5 -0.4 14.6 10.7 n/a 0.984 OW(V) 4.20 25.2 1.46 0.1 15.1 14.9 2.3 38.9 10.1 12.9 -7.6 3.16 2.6 1.0 9.9 6.57 0.2 19. Closing prices as of 30 Nov 2010.149 16.2 5.3 1.32 15.1 Source: Thomson Reuters Datastream.7 0.32 22.1 21.985 OW N 8.0 13.1 1.6 3.3 1.2 13.3 15.1 73.40 0.6 1.26 N/a 4.51 0.8 16.1 0257 HK 1.2 28.7 2.0 4.9 18.1 21.4 5.7 1. HSBC estimates.0 0.7 14.3 2.76 6.4 5.0 14.30 0.7 40.673 OW(V) 4.7 2.4 13.59 0.80 1.2 9.8 2.4 -3.7 15.46 0.0 6.41 -9.2 -25.9 16.1 -15.5 1.4 1.4 28.8 -0.1 10.00 17.0 0177 HK 0576 HK 4.1 19.6 3.668 3. Int.0 7.1 3.1 -12.45 7.34 0.7 0.2 16.8 14.3 11.5 3.7 38.7 11.5 -1.581 3.0 2.03 3.6 2.8 2.8 -0.42 0.0 94.23 0.6 1.4 9.8 10.8 1.34 1.9 2.1 17.7 14.5 -0.8 -7.0 24.1 17.9 -0.4 25.037 2.36 China Infrastructure: Valuation summary Company Construction CRG CRC CCC CSC Building Materials Anhui Conch CNBM CR Cement Sinoma Shanshui Cement TCC Int'l AC China Taiwan Cement Asia Cement Toll roads Jiangsu Exp.3 2.3 3.4 16.6 -15.3 3.7 24.3 1.42 26.0 1.1 11.6 3.4 9.3 -15.0 21.91 0.8 2. except CR Cement – priced at 3 December close (see note Gaining pricing power via acquisition.30 0.5 n/a 6.2 -1.9 3.523 N N N OW(V) 5.9 7.070 2.5 47.5 -0.3 2222 HK 1.7 4.0 3.0 6. 6 December 2010).5 9.1 14.3 -9.8 -3.7 -17.367 OW(V) 12.1 25.2 0.2 7.34 8.3 1.90 6.5 3.0 12.1 1.9 18.6 2.20 32.8 3.3 3.09 2.

In general. and we forecast that demand growth in 2010-12 will moderate versus the previous cycle in 2004-08. Hotels A sector that enjoys the benefits of a travel rebound but has lagged the airlines is hotels.com. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 markwebb@hsbc.hk Stephen Wan* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2996 6566 stephenwan@hsbc. In particular. We forecast this will cause a sharp earnings rebound in 2011. There has been a clear slowdown in cargo growth while capacity has rebounded and we believe this will cause load factors and yields to drop y-o-y in 2011. resulting in the gap between demand-supply becoming wider. hotels and conglomerates leveraged to Asian consumption and more negative on cargo and Western-focused stocks  Key themes for 2011 will be sources of earnings growth and how cash-rich Asian companies utilise surplus cash  Top picks include Singapore Airlines. and is not registered/ qualified pursuant to FINRA regulations 37 . we believe mergers and acquisitions will be a key theme in 2011 as some of the cash-rich companies may target competitors still in financial distress from the recent economic slowdown. has significant net cash balances and is the best value Asian airline.com. Mark Webb* Head of Conglomerates and Transport Research. The earnings recovery has been driven by a strong pick-up in passenger and cargo demand which has boosted load factors and yields. Cargo has been the star performer and has helped the sector outperform the MSCI AEJ by 22% y-t-d. every dollar of revenue earned from a rate hike is three times more profitable than that earned from occupancy increases. which is more passenger focused.hk Parash Jain* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6717 parashjain@hsbc.8bn. Our top pick in the sector is Singapore Airlines.Equity Asia 7 December 2010 abc Conglomerates & Transport  We remain positive on passenger driven airlines. we expect profit from cargo to fall y-o-y in 2011. occupancy levels have stabilised and we expect hoteliers to push up room rates. Since the occupancy-led recovery in 2010. While the airline outlook remains good. Pacific Basin 2011 outlook Aviation We forecast our Asian airline coverage will generate an aggregate 2010 recurring profit of USD6. We do not believe drybulk *Employed by a non-US affiliate of HSBC Securities (USA) Inc.hk Shipping We remain generally less enthusiastic about shipping.hk Azura Shahrim* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6976 azurashahrim@hsbc. we believe profit growth will stall in 2011. Jardine Matheson.com. In addition. a sharp rebound from recurring losses in 2009. Drybulk vessel supply is still huge.com.

Almost all its businesses are Asian focused and it is leveraged to pan-Asian consumption. Cash-rich companies Another theme for 2011 will be how some of our cash-rich coverage companies use their funds. With limited acquisition opportunities in China. we expect this trade to be more resilient. We argue the best placed is Pacific Basin: it has cash of USD960m and net cash of USD86m as at 1H10 which it can use to opportunistically acquire low cost vessels (newbuilds and secondhand) to maximise returns. Possible inflation and rising commodity prices as 38 . In contrast. particularly in transhipment ports. our favourite plays for 2011 will be those that are primarily driven by Asian demand. we believe a sustainable rate recovery is conditional on liners maintaining price discipline and curbing capacity as volume growth starts to decline. we expect Chinese and Asian growth will continue to diverge from developed markets. we remain bullish on the Asian port sector’s profit outlook. A possible loser in this scenario is port operator China Merchants Holdings International. given the significant fall in dry bulk vessel prices and decent returns on assets at the moment. we expect Asia-Europe spot rates to come under pressure as more capacity enters the market.Equity Asia 7 December 2010 abc shipping rates will return to previous highs. China Themes for 2011 Winners from Chinese and Asian growth In 2011. Therefore. and expect them to remain rangebound. the port sector has plenty of potential investors but a limited pool of attractive assets and we are wary of greenfield investments. Hoteliers are another sector where assets priced at distressed levels may enter the market. Our favourite play on Asian growth is Jardine Matheson. This company is highly exposed to Asia-EU container trade and has a large vessel orderbook locked in at high prices. and conglomerates with businesses focused in Asia. We expect cash-rich airlines to return funds to shareholders as we believe foreign ownership rules limit the acquisition opportunities in Asia (and in the rest of the world). we believe they will look for greenfield or brownfield acquisitions outside China. Indeed. Ports The HSBC port index has outperformed the Hang Seng Index by 13% year to date. we prefer passenger and travel-related stocks to cargo-driven companies. Our least favourite play is China Cosco. A key risk is that greenfield investments may prove to be value-destroying. commodity prices and HK investment properties. we expect dry bulk shippers to increasingly acquire more vessels. With limited acquisition opportunities for Asian port operators within China. Finally. As we now believe restocking is largely complete. With most new orders destined for this route. Container shipping rates have rebounded from 2009 lows. a result of strong Asian growth also tends to be negative for the airlines and container shipping companies if fuel prices rise. As Transpacific rate hikes are negotiated annually. The inventory rebuild in 2010 boosted trade with the West despite relatively weak underlying demand and allowed air and containerised sea freight to stage substantial recoveries. While we forecast slower growth in port throughput in 2011. We believe the two key profit drivers will be a turnaround in recent investments in new terminals and industry-wide tariff increase. which will depress returns in the medium term. However. it recently announced it will be constructing 10 new handy vessels consisting of 6 handysize and 4 handymax (and purchase options for 2 handysize vessels) for delivery in 2012-13.

SGD15. Valuation and ratings Singapore Airlines (SIA SP.49. Apart from SIA’s compelling value.Equity Asia 7 December 2010 abc Merchants may increase investments overseas (for example: Sri Lanka.5) Valuation We continue to value SIA using our rating to economic profit multiple which sets an enterprise value/invested capital multiple using our forecast ROIC/WACC. We are generally negative on China Merchants’ international expansion. Risks 70% of our appraised valuation comprises Dairy Farm.8x and used ROIC/WACC at 1.42. Our target price implies a potential return of 48% including dividend yield of 5%.9 based on rating to economic profit (REP) based on enterprise value equalling to invested capital given the absence of economic profit and ROIC/WACC of 0.4x P/BV and provide an FY12e dividend yield of 5%.6-3. USD43. TP HKD7. Our appraised valuation is USD77/share (from USD70).25. at a 30% discount (from 35%). We apply a historical REP multiple of 0. At our target price. which is at a discount to its average trading multiple of 1. OW. 39 . We set our target at USD54. the key price driver is likely to be measures to utilise its significant surplus net cash. HKD5. Other risks to our rating and estimates include handysize rates weakening due to slower to ship commodities and/or excess supply due to owners prolonging use of older vessels or greater than expected new orders entering the market. Our target plus FY11e dividend implies a 28% potential return. Based on this approach.7-5.1x FY11e BV.60 correlation since 2006) and its performance relative to the MSCI AEJ is highly negatively correlated with the change in jet fuel prices. the stock is trading at 1. Our target price implies a total negative return of 31% (zero dividend yield). UW(V). SIA would trade at 12x FY12e PE.8x). Vietnam and Nigeria).5 based on rating to economic profit (REP) combining returns and invested capital. We value China Cosco at HKD5.1x to derive our enterprise value/invested capital (EV/IC).4 short term and 0.24. TP USD54) Valuation China Cosco (1919 HK. Jardine Matheson (JM SP.6x. 1. We continue to argue that JM should trade at around the midpoint of its historical range (2005-8: 28-45% discount to appraised value).80 implies a 28% potential return. Another downside risk is further expansion by the Gulf airlines on SIA’s key routes between Australia and Europe.9 medium term) even when it has locked in a high portion of revenue at healthy levels. Risks We value Pacific Basin at HKD7. HK Land and JC&C.9) Valuation JM remains attractively valued at FY11e 12x PE. our target is SGD19 and this plus FY11e DPS of SGD0. the stock is trading at 1. At our target. OW(V). Risks SIA’s share price tends to be driven by earnings momentum (0.8x (range 0. Downside risks are sharp declines in Asia consumption. OW.0x adjusted FY11e BV. Pacific Basin’s share price tends to move closely with the Baltic Dry Bulk Index (0. TP HKD5. TP SGD19) Valuation Pacific Basin (2343 HK. HKD8. which is also the stock’s average trading multiple (range 0.1x). At our target price. reversionary rents and commodity prices. particularly greenfield investments at transhipment ports. which may prove to be value-destroying.

N.9 medium term) and short-term earnings momentum (0. Our target price is based on a sum-of-the-parts valuation (DCF for key ports) and implies a 3% potential return.7). Key downside risks include a slowdown in global trade that causes slower-than-expected port throughput growth and a de-rating of the port sector.Equity Asia 7 December 2010 abc Risks Risks China Cosco’s share price is highly correlated to the Baltic Dry Bulk Index (0.65. China Merchants (144 HK. we argue the stock is now fully valued. 40 . CMHI’s aggressive international expansion could also pose a risk in future and it does not have a track record of managing ports outside Hong Kong and China. HKD30.4 short term and 0. Other risks to rating and estimates include capesize rates recovering strongly in 2011-12 due to massive cancellation or scrapping of vessels or demand for iron ore rising substantially or port congestion absorbing capesize capacity. higher than the long-term historical average of 15x. it is currently trading at 19x 2011e PE and 1. At our unchanged target of HKD31. TP HKD31) Valuation After an 18% rise in the share price since its strong 1H10 results. including dividend yield. thus we remain Neutral. Key upside risk is higher-than-expected increases in average container handling tariffs.9x 2011e PB.

2x 9.5x 7.4% 8.4% 15.8% 28.8x 1.6% 10.2x 1.00 1000 66000 19.2 3.1% 10.6% 71.1x 1.0x 0.2x 12.9x 8.8% 0.8x 0.7% 15.0x 3.2x 1.65 19.3x 9.9x 1.8x 8.3% 48.2x 1.5 ASII IJ 144 HK 267 HK 1199 HK DFI SP 13 HK JM SP JS SP 363 HK 716 HK 19 HK 4 HK IDR HKD HKD HKD USD HKD USD USD HKD HKD HKD HKD 60000 31.7x 195.7x 12.H EVA Air Jet Airways Korean Air Singapore Airlines Ticker Ccy Target price Share price Rating ______PE ______ ______P/B _____ ______ROE_____ __ EV/EBITDA __ _____ EV/IC ____ _____ ROIC ____ _____ REP _____ _ Dividend yield_ 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e Equity Asia 7 December 2010 753 HK 293 HK 2610 TT 670 HK 1055 HK 2618 TT JETIN IN 003490 KS SIA SP HKD HKD TWD HKD HKD TWD INR KRW SGD 10.97 13.5% 7.2x 11.3% 2.5% 14.5x 7.2x 1.4x 1.0x 1.5% 60.7x 2.3x 5.9x 1.0x 8.7% 7.7x 15.2x 0.4 7.1x 8.0x 2.4x 2.1x 7.2 2.3x 1.4x 7.3% 8.4% 11.0x 12.1% 19.3x 1.00 34.4x 1.9x 9.6x 0.2x 14.9 0.75 2.2x 3.90 25.1% 25.8x 1.6x 2.5% 22.6% 9.9x 1.5x 0.4x 1.1x 1.34 2.2 2.2x 1.2x 14.9 3.6% 11.20 5.5% 5.2% 5.40 12.90 2.8x 1.2% 5.8% 5.0x 0.1 1.7x 10.20 N N OW(V) OW(V) N N OW OW OW(V) OW(V) OW N 15.2 0.6% 11.1x 17.2x 1.4x 2.2x 2.7x 0.0x 1.4x 1.6x 16.5x 21.5x 12.5 2.5x 1.35 4.5% 10.2x 16.2% 74.2x 18.1 abc Notes: (V) = Volatile.2 2.4% 10.7x 222.5x 10.9% 24.00 18.1x 5.0x 6.2% 8.4 2.8x 20. lines China Shipping Dev.7% 13.3x 1.8x 20.9% 9.2x 6.1x 3.00 51900 30.0x 0.5 2.3x 21.8x 0.1% 1.9x 12.8x 0.0x 1.8% 21.1x 1.1x 1.46 12.2x 17.1x 7.4x 1.6x 7.4% 9.8 3.10 10.1% 3.2x 28.8x 7.4x 0.H Cathay Pacific China Airlines China Eastern .8% 14.0x 3.2x 1.0 2.7% 7.2x 17.7x 21.7% 10.3x 1.0% 7.5% 8.0x 1.5x 3.5x 8.5% 11.3x 8.6 1.1x 1.2x 6.2% 10.7x 1.0% 17.7% 3.1x 19.42 N(V) N UW UW(V) N(V) N(V) OW(V) UW OW 13.2x 1.7% 32.Conglomerates and Transport: Valuation summary Company Airlines Air China .0x 1.3% 6.68 61.7x 10.5x 1.1 3.4x 22.1x 0.0x 2.2% 10.6x 2.1x 1.00 22.1% 11.1 2.1% 13.12 22.2x 1.1x 1.0x 1.2x 0.8x 18.0x 7.2x 0.2x 1.9x 1.0x 0.7% 20.5% 3.6 2.3x 0.8x 21.67 34.5x 13.2x 2.2x 1.6x 8.4% 60.00 4.9x 1.0 1.6% 13.2x 29.0x 2.19 2.4x 1.0x 13.7x 2.0x 1.9x 0.7 2.5x 0.7% 8.5% 20.1x 3.00 44.5 3.7% 27.1% 1.50 16.1x 1.6% 18.1% 17.2x 1.9x 7.2x 9.4x 1.1x 2.7x 7.0x 14.2x 1.9x 1.4x 11.1x 14.7x 19.8x 1.1 1.0x 11.4x 1.3x 1.6 0.5% 1.6 4.9x 3.5% 13.6x 1.2x 22.1x 2.9 1.4% 9.0% 20.6x 13.3x 1.5% 10.8x 2.1x 1.6x 9.50 15.5x 1.5x 3.8% 19.0x 17.0x 1.6% 6.1% 5.3% 22.5 0. please see disclosure appendix.1% 2.9x 1.6 3.9% 1.4x 2.1% 0.0% 12.9x 0.4x 1.8x 9.2x 5.2 1.9% 14.5x 3.7x 748.3x 1.3% 1.9x 2.0x 9.9% 19.9x 13.4x 0.3% 7.17 75.2x 2.7% 12.93 77.3x 1.2 0.70 43.1x 1.4x 1.7x 0.4x 10.1% 1.4 0.8x 5.3x 6.3% 18.65 24.4x 1.5% 4.4% 1.8% 9.4x 8.9x 100.1 3.0 2.9x 47.4x 15.4x 8.0 3.20 32.6% 5.70 144.0% 10.1x 8.6x 4.1x 29. Contr.9x 18.0x 6.1% 1.6% 11.3x 1.9x 2.1x 7.6% 19.6% 10.0x 18.8 0.2x 2.6% 5.3% 7.7x 1.0x 13.3% 12.3x 3.6x 15.3x 13.8% 32.4x 13.4x 9.8x 1.4x 1.50 3.9 2.9x 1.0 0.0 6.5% 1.25 2.9x 14.1x 13.0x 7.1x 1.8x 2.7% 8.2x 1.6x 3.3x 1.5x 11.7x 19.5x 8.0x 7.0 5.6x 0.8x 0.9x 0.4 0.65 2.2x 16.0x 0.3x 19.7x 7.87 N N OW 31.7x 1.0% 16.2x 1.7x 0.10 70.2x 1.0 5.4x 11.24 26.3x 1.9x 0.2x 1.3x 5.50 62.0x 4.4x 13.4x 1.1 4.2% 65.2x 7.3% 5.6x 0.9 3.9x 4.2x 17.9% 10.2 1.6x 1.78 25.9% 13.8x 1.6x 7.0% 9.9 4.0x 3.1% 25.9 1919 HK 2866 HK 1138 HK 2603 TT NOL SP 316 HK 2343 HK 598 HK 368 HK STX SP 2606 TT HKD HKD HKD TWD SGD HKD HKD HKD HKD SGD TWD 5. SATS SP Conglomerates and Ports Astra International China Merchants Int'l Citic Pacific Cosco Pacific Dairy Farm International Hutchison Whampoa Jardine Matheson Jardine Strategic Shanghai industrial Singamas Swire Pacific Wharf (Holdings) Shipping China COSCO Holdings China Ship.20 7.5x 0.9x 9.00 58.4x 7.4x 1.2x 7.3% 11.5% 8.25 124.8x 5.8x 9.25 23.1x 0.3% 2.4x 1.1x 1.50 3. PE calculated from recurring EPS.2% 9.9x 2.5x 1.3x 10.8x 0.9 1.1x 16.8x 1.3x 24.9x 0.8x 1.8x 6.0 1.2x 0.7 5.7% 12.0x 4.4 3.3x 6.6% 0.4x 17.2x 16.1x 7.9x 1. Ser.2x 2.3x 7.7x 9.9% 21.0x 9.0x 8.0% 10.8x 1.00 2.4x 1.3% 1.6x 3.1x 3.1x 1.50 86.2% 9.1x 2. Source: HSBC estimates.4x 15.2 1.7% 6.1x 80.7 2.4% 44.2x 2.6x 10.8 4.9x 1.49 3.5x 18.00 10. Closing prices as of 30 Nov 2010 41 .00 3.5 5.0x 3.3x 10.2% 10.1x 8.0x 2.6x 2.6% 1.7% 9.H China Southern .1x 2.1x 1.0x 2.8% 9.6% 1.40 17.37 119.6 4.60 52.70 2.30 8.9x 10. Evergreen Marine Corp Neptune Orient Line Orient Overseas Int'l Pacific Basin Shipping Sinotrans Sinotrans Shipping STX Pan Ocean U-Ming Marine Transport HKD SGD SGD 114.3x 14.9x 1.4 2.2x 32.9x 13.00 54.0x 14.1x 1. REP= rating to economic profit which is EV/IC divided by ROIC/WACC.35 5.2x 1.9 1.5x 31.8x 3.5x 1.5x 25.2x 1.70 8.5% 0.8x 1.90 8.1% 8.4% 17.5 Airports / aviation service providers Hong Kong Aircraft Engine 44 HK SIA Engineering SIE SP Singapore Airport Ter.1% 20.0x 1.80 UW(V) UW(V) OW(V) UW(V) N(V) OW(V) OW(V) OW OW(V) UW(V) N(V) 14.1x 11.2x 9.4x 11.4x 8.1x 5.90 3.1x 1.4% 14.8 3.7% 9.3x 31.8x 2.6x 2.3x 2.8x 0.7% 27.3% 10.4% 5.3% 8.58 5.3x 15.3x 11.5% 6.3x 2.3x 11.7x 2.3% 9.3% 11.3x 1.3x 2.1% 11.3x 1.8% 108.8% 25.3x 1.4x 15.9% 12.5x 1.6x 11.9x 1.4x 2.8% 0.5x 2.4x 1.20 4.9x 15.7% 1.8x 1.0% 16.5x 1.70 804 71000 15.

especially on those companies that either import or export their products. Practically. Especially in China. pulp and paper companies are probably most impacted by these rate movements. We expect the market will toy with the impact of (1) higher interest rates.choi@kr. indicated that growth in its stores was as high as >30% in the lower-tier cities while growth in tier 1 cities (Shanghai.hsbc. In our view.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. The last effect of excessive liquidity on consumer stocks could come through valuations. Intime. excessive liquidity and inflation could also lead to intervention in markets. Already. (2) inflation and price controls. we wrote that the big theme in Chinese consumers was the regional diversification of the consumer landscape. we believe that investors need to be very careful and selective when investing in Asian consumer stocks. Consumer markets would move from a few (Chinese) people with a lot of money to spend to many with less money to spend. A change in the exchange rate will also have an impact. at times. Note also that Chinese consumers. Guangzhou) was about 15-20%. having a strong net-cash position backed by plenty of savings. a luxury watch retailer.co. loose liquidity conditions and low (perceived) risk to earnings can. most likely more so on products that need to be financed (cars. what this means is that consumer stocks can run a little further than what we believe Herald van der Linde* Head of Consumer Research. and (4) stock valuations. there is an increasing risk of price controls in food-related industries. Beijing. Consumer markets in tier 2 and 3 cities would become the driver of overall consumer spending. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6575 heraldvanderlinde@hsbc. a new theme for the consumer sector in 2011 will be the impact of excess (monetary) liquidity on the sector. In our universe. Anta 2011 outlook Dealing with excess liquidity For 2010. there is a risk of further interest rate increases across Asia Pacific.Equity Asia 7 December 2010 abc Consumer  The theme: dealing with excess liquidity  This will impact the consumer sector through interest rates. Growth in tier 3 and 4 cities has outpaced tier 1 cities across China. and is not registered/ qualified pursuant to FINRA regulations 42 . sustain such high valuations.com Lina Yan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4344 linayjyan@hsbc.hk Percy Panthaki* Analyst HSBC Securities and Capital Markets (India) Private Limited +9122 2268 1240 percypanthaki@hsbc. might actually find a positive income effect from higher interest rates – they simply earn more interest on savings. Excess liquidity impacts investors in the consumer sector in various ways.com. highticket items). which could impact consumer spending. For example.com. A common argument is that valuations for the sector are high against their own history. Hengdeli.in Karen Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited. While this is true. First of all. price controls and (high) valuations  Key ideas: Gome. Meanwhile. (3) exchange rate movements. This has happened and is likely to continue to be a theme in the coming year. Seoul Securities Branch +822 3706 8781 karen.

However. For F&B companies that deal with rising raw materials. This will continue to be a key feature for earnings growth in this Chinese sub-sector in 2011. where they traditionally have been. Chinese department stores This sector deals with rapid expansion of new department stores across many cities in China. products like palm oil and soybean are imported. all within one large complex. The fastest-growing sector within department stores are those that offer new. Whether this continues and is the start of a trend of sustained inflationary pressures is questionable. This is where penetration of the larger brands is still relatively low and where income growth is sufficient to support higher sales and higher sales productivity. Indeed. This is exactly what companies such as Mengniu are doing – gradually introducing new. Below we provide a very quick snapshot of the key themes playing in various sub-sectors in Asian consumers (Chinese sub-sectors first. even if retail prices for various goods remain stable. high-growth locations. the key earnings driver is entrance into tier 2-5 cities. the best way to deal with this is to either:  raise retail prices and pass on these costs to the consumer. These new locations are not always in the centre of a city. Korea and India): foodstocks have been some of the reasons why food prices have increased in late 2010. However. our economists believe this is a near-term phenomenon and headline inflation is likely to ease after Chinese new Year. some of these companies have allocated large parts of their budgets to sponsor local Chinese sport teams (Olympic teams). short supply in various specific food items (palm oil. Companies that have adapted to these new trends and have come with new. or  improve their product mix so that their ASPs increase. fresh shopping formats with a larger variety of stores and services within the hypermarket or department stores. new location’ department stores have in the last year started to grow faster and offer better margins than the traditional hypermarkets located in the centre of a city. Better infrastructure and higher car ownership allow consumers to travel to areas on the periphery of a city. but also that downside risk to the sector is most likely to come from either higher interest rates and the introduction of price controls. this growth in tier 3 and 4 cities will continue to be a key driver of earnings in 2011. innovative ideas and formats are Intime and Golden Eagle. F&B Rising food prices have become a concern to the market in late 2010. Hence. ‘new format. And this growth in earnings and cash flow is reinvested into brandbuilding through advertising and promotions of their new products. wheat and corn. Although China is selfsufficient in rice. Indeed. Companies such as Xstep and Anta are key beneficiaries of this trend. Chinese sportswear In this sector.Equity Asia 7 December 2010 abc would be reasonable valuations. vegetables) is likely to continue to put upward pressure on some food items. These new format department and hypermarket stores are often also located in new. higherpriced dairy products. These new services can be anything from a children’s playground to a larger variety of brands surrounding a traditional supermarket. Lower acreage and limits to supply of many of these 43 . followed by SEA.

6-0. With higher interest expenses related to RMB rate hikes. Meanwhile. The major headwind faced by the paper manufacturers is rising interest rates in China. for many. The issue for these newly emerging Chinese brands is their ability to manage growth and formulate a correct strategy. which has proven to offer strong growth in consumer demand and a stable political environment for investment. First. this will be a multi-year programme of investing in brand awareness and product quality. we expect packaging paper consumption to grow at over 8% per annum on rising domestic demand and a rebound in exports.29. there are two issues at play in India. India is the only Asian country where consumer stocks are trading back at levels seen in 2007.35) Paper The paper sector in 2011 is likely to be characterised by continuous demand growth and a shift in the industry structure.7x in 2010.Equity Asia 7 December 2010 abc Emerging Chinese brands A group of companies in China is now trying to build local brands. As such.40) to benefit through continuous capacity India For investors. OW(V). OW. has struggled with rapid diversification in (too many?) new products and sudden weakness in their core product. it might take time to raise retail prices. Expect continued investment in advertisements and promotions in local brands in the coming year. In addition. HKD6. men’s shampoo. to Indonesia. margins might face a temporary squeeze. Bawang. Nine Dragons and Lee & Man Paper have net gearings of around 0. TP HKD18. a 100bps increase in effective interest rate would hurt the bottom line by 3%. as about 70% of its borrowings are in RMB. in some markets. On the demand side. India’s consumer stocks are expensive. Lee & Man is less affected as all of its borrowings are denominated in HKD or USD. other multinationals are positioning themselves strategically to secure long-term exposure in these rapidly growing markets. we expect large manufacturers like Nine Dragons (2689 HK. valuations are still 44 . HKD11. we expect the government to announce a new round of environmental and emission control initiatives under its 12th FiveYear Plan. In China and Korea. a shampoo brand. TP SGD0. On the supply side. Our top pick in this respect is Thai Beverage (THBEV SP. new emerging local rivals are threatening the position of local and international incumbents. raw material prices are rising and although many companies can pass this on to consumers via higher prices.00) and Lee & Man Paper (2314 HK. Companies that appear to be successful in building strong. which is likely to result in an accelerated shutdown of small paper mills. homegrown brands should continue to receive plenty of attention in the markets in 2011. Under this macro background. Incomes are rising and. Nine Dragons is particularly affected. According to Nine Dragon. For example.76. TP HKD7. Most focus goes. for now. SGD0. Southeast Asia SEA consumer markets are undergoing substantial changes.14. OW(V). menswear maker Lilang aims to build a brand that appeals to higher-end consumers instead of low-income consumers. We prefer Southeast Asian stocks that are strong incumbents trading at reasonable valuations. expansion and diversification into higher-end packaging paper. This is not easy and. Meanwhile.

one of the best ways to play this is through Chinese retailers such as Intime. We take this as a very positive move as Yansha only has four stores now but has already been able to build a strong brand name. Intime (1833 HK. OW. Of these. We believe these high valuations against their own history will keep further performance in check. the issue for Gome has been corporate governance. 2011 high conviction idea Gome (493 HK. In general.500. the product offering in China is different. While there are some changes in consumer behaviour that take place in Korea. TP HKD3.21) In our view. however. HKD12. Many have entered the Chinese market in an attempt to build fast-growing businesses. Intime originates from 45 . We expect Gome to stop losing market share to Suning from 2H10 as it has returned to positive network expansion. Share options issued to key management and other employees have increased management stability and reduced succession risk. OW(V).06. as its fast expansion in 2007-09 diluted profitability. We now believe the current structure provides a balance of power between the largest shareholder. Gome now trades at an average 30-40% discount (on HSBC earnings) to the leaders in retail subgroups. Some. such as single store efficiency and margins. it just recently acquired 50% of Yansha. Korea For Korean consumer companies. but experiences have been mixed. TP KRW600. a famous department store chain in Beijing.000) In the past. This company is at the bottom of the profitability cycle. seem to have been able to get to grips with practices in the Chinese department store market and are starting to see a meaningful contribution from their China operations. OW(V). which we think will close as historic perceptions of governance problems fade. KRW473. We also expect margins to improve on investments in management systems. TP HKD15.76) Our research on multiple performance measures. Being very active in industry consolidation opportunities. Winners from Chinese growth Stocks that benefit from this are obviously the Chinese consumer stocks. We also believe Bain will continue to play a key role in improving corporate transparency.10. We are ahead of FY12 consensus. and our 201012e net profit CAGR of 28% is above the peer group average of 21%. But the Korean retailers are increasingly building businesses in China and investors should also think about companies such as Genting in Malaysia. supply chains are different and brands that are popular in the Korean market are relatively unknown in the Chinese market. especially in China. management and institutional investors. distribution capacity and reduction in restructuring related costs. shows Gome is now either overtaking or closing the gaps with Suning. which is traditionally not where the company is strong. the core issue is how the Koreans can benefit from growth elsewhere. As such. we believe Gome will be one of the best-performing stocks in the Asian consumer space in 2011. this is an excellent way to enter Beijing. our top pick is Lotte Shopping (023530 KS. For Intime.Equity Asia 7 December 2010 abc below previous peaks. which benefit from Chinese gambling in Southeast Asia. HKD3. the domestic market is nearly saturated and shows low demand growth.

Equity Asia 7 December 2010

abc

Zhejiang province and while it is widely known in those regions, it is a relative newcomer with little brand visibility in Beijing.

assumes boardroom battles continue to drag on the shares and the 40% discount to peers remains. Taking the midpoint of these scenarios reflects the most likely outcome, which is that the recovery of investor confidence in the company will be slow but the market will eventually respond to the improved earnings that we forecast to result from its operational restructuring. Catalysts: formal announcement of Gome’s strategy based on a plan mutually agreed between the largest shareholder and the board and stronger than expected industry sales at above an FY08-10 CAGR of 10%.
Risks

Stock most at risk: Bawang (1338 HK, N(V), HKD3.15, TP HKD3.10)
Shampoo company Bawang is in an excellent position to benefit from Chinese growth, but a small management team and fast diversification into new products (skincare, herbal teas) raises execution risks. A recent incident where it was suggested that some of its shampoo carried too much dioxane, a substance that is allowed only within certain limits, has hurt its image. While the allegations have been refuted, such newsflow has severely damaged the brand and sales have subsequently fallen. Thus, a relative small management team has wound up trying to rebuild their core brand while also diversifying into new markets, such as for skincare and herbal teas. This, we argue, will keep execution risk high in 2011.

Changes in the shareholding structure, changes in the management team that might slow or change the decision-making process or corporate strategy, competitive pressures in retailing.

Intime
Valuation

Pricing anomalies
Gome
We think the biggest example of a stock price anomaly is Gome. This stock is slowly shrugging off the corporate governance issues that plagued it in the past. For more details, see the previous paragraphs on Gome.

We rate this stock OW(V) with a TP of HKD15.21. We use a target multiple of 30x to reflect: 1) 30% core earnings CAGR for FY10-12e, and 2) a strong store opening pipeline in 2013 in the company’s home market, Hangzhou, and new market, Hefei, with total GFA of about 400,000sqm. Intime currently has about 815,000sqm GFA.
Risks

In our view, key risks include delays in store openings and weaker than expected sales.

Valuations and risks
Gome
Valuation

Our HKD3.76 target price is based on 20.9x 2011e EPS and implies a 23% potential return. The forward multiple is the average of 1) our bull case, which assumes Gome shares return to trading in line with peers as corporate governance issues are resolved, and 2) our bear case, which

46

Equity Asia 7 December 2010

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Bawang
Valuation

We use a multiple of 15.5x forward earnings, which represents the average PE between July and November 2009, and set a TP of HKD3.1. We have a N(V) rating on the stock. Note that if we used the lowest-ever PE that Bawang shares have traded on (12.7x in September 2009), our fair value would fall to HKD2.5.
Risks

The key risk is the aftermath of the dioxane incident. On 12 November we lowered our 2H profit forecast to reflect weaker sales and rising advertising costs to rebuild Bawang’s brand. At that time, we maintained our EPS forecast for 2011, which implied a return to normality next calendar year, on two key assumptions:  Monthly run rate for Bawang shampoo would recover from RMB90m in October 2010 to the 2009 normal level of RMB120m by April 2011.  Herbal tea sales would reach RMB306m in FY11 from RMB84m in FY10. It is the largest sales growth driver in 2011, contributing 35% to overall sales growth. There is now a risk that weak sales performance might extend into 2011 if the brand remains tainted by the 2010 dioxane incident. This illustrates how fragile new brands can be in China. Upside risks include sell-through of herbal tea and new product launches.

47

48

Asia Consumer: Valuation summary Share price Company Greater China Anta Bawang Belle China Agri China Dongxiang China Fishery China Lilang China Mengniu Dairy China Yurun Food CyberLink Daphne Esprit Giant Manufacturing Golden Eagle GOME Hengan Hengdeli Huabao Intime Lee and Man Li & Fung Li Ning Lifestyle L'Occitane Maoye New World Department Nine Dragons Parkson Ports Design Pou Sheng Tingyi Holding Tsingtao Brewery Uni-President Enterprises Want Want Wumart Xtep Int''l Youyuan International Yue Yuen Industrial Mean Ticker Rating Currency Target Market Reporting ____ EPS ____ __ P/E (x) __ __ P/B (x) __ _ EV/EBITDA _ _ ROA (%)__ __ ROE (%) _ Net debt/q Dividend price cap __ Equity (%) __ ___yield (%) ___ (USDm) currency 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e

Equity Asia 7 December 2010

2020 HK 1338 HK 1880 HK 606 HK 3818 HK CFG SP 1234 HK 2319 HK 1068 HK 5203 TT 210 HK 330 HK 9921 TT 3308 HK 493 HK 1044 HK 3389 HK 336 HK 1833 HK 2314 HK 494 HK 2331 HK 1212 HK 973 HK 848 HK 825 HK 2689 HK 3368 HK 589 HK 3813 HK 322 HK 168 HK 1216 TT 151 HK 8277 HK 1368 HK 2268 HK 551 HK

OW(V) N(V) N(V) N(V) N(V) OW(V) N(V) OW UW(V) N(V) N(V) OW(V) N OW(V) OW(V) N N(V) OW(V) OW(V) OW(V) N(V) N(V) N(V) N(V) N(V) N(V) OW(V) N(V) OW(V) OW(V) OW N N N UW(V) OW OW(V) OW

HKD HKD HKD HKD HKD SGD HKD HKD HKD TWD HKD HKD TWD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD TWD HKD HKD HKD HKD HKD

14.48 3.15 14.12 9.28 3.47 2.18 11.20 22.15 27.75 111.50 8.85 37.55 117.00 22.70 3.06 71.60 5.05 12.30 12.10 6.14 48.40 20.45 19.92 20.95 4.02 7.19 11.76 12.92 24.00 1.50 19.22 42.10 42.15 6.69 20.50 6.77 4.44 28.05

18.00 3.10 14.90 10.30 4.40 2.60 8.20 30.50 27.00 131.00 9.60 52.00 120.00 22.40 3.76 73.00 4.70 12.00 15.21 7.40 45.00 23.90 14.40 22.00 3.46 7.70 18.00 15.05 22.80 2.10 23.10 43.00 37.00 6.40 12.90 9.00 4.80 32.90

4,648 1,179 15,331 4,824 2,531 1,664 1,731 4,955 6,470 432 1,866 6,227 1,368 5,677 6,573 11,284 2,847 4,984 2,744 3,707 25,036 2,769 4,305 3,983 2,660 1,561 7,048 4,672 1,751 828 13,823 7,204 5,951 11,378 3,300 1,896 572 5,954

RMB RMB RMB HKD RMB USD RMB RMB HKD TWD HKD HKD TWD RMB RMB HKD RMB HKD RMB HKD HKD RMB HKD EUR RMB HKD RMB RMB RMB USD USD RMB TWD USD RMB RMB RMB USD

0.61 0.05 0.40 0.66 0.29 0.16 0.35 0.78 1.30 8.09 0.41 3.22 7.89 0.50 0.13 2.21 0.13 0.48 0.32 0.39 1.28 1.06 0.66 0.07 0.11 0.34 0.59 0.37 0.91 0.01 0.08 1.25 1.95 0.03 0.44 0.36 0.23 0.28

0.75 0.17 0.48 0.81 0.29 0.19 0.46 1.04 1.54 9.01 0.49 3.28 9.20 0.65 0.16 2.66 0.17 0.58 0.35 0.46 1.68 1.01 0.73 0.08 0.14 0.46 0.82 0.50 1.09 0.01 0.10 1.46 2.12 0.04 0.54 0.45 0.34 0.31

21 53 30 14 10 10 28 24 21 14 22 12 15 39 21 32 33 25 32 16 38 17 30 31 31 21 17 30 23 22 31 29 22 30 40 16 16 13 24

16 16 25 11 10 9 21 18 18 12 18 11 13 30 17 27 25 21 29 13 29 17 27 27 24 15 12 22 19 14 24 25 20 24 33 13 11 12 19

5.3 3.8 6.3 1.8 2.1 2.4 6.1 3.4 3.7 2.4 5.5 2.9 3.1 11.0 2.3 8.6 3.9 8.7 4.9 2.5 9.5 5.2 5.0 7.2 4.8 2.5 2.3 7.1 5.8 1.1 8.0 5.1 2.4 10.5 6.3 3.8 2.9 1.8 4.8

4.6 3.2 5.9 1.7 2.0 2.0 5.2 3.0 3.2 2.4 4.4 2.6 2.7 9.0 2.2 7.7 3.6 7.1 4.9 2.3 8.7 4.4 4.5 5.7 4.2 2.3 2.0 5.8 5.0 1.0 6.7 4.5 2.2 9.0 5.7 3.4 2.5 1.6 4.2

17 39 23 8 8 7 25 14 27 10 13 9 10 26 14 23 20 21 18 10 32 11 21 19 16 12 9 18 18 9 14 17 58 23 19 13 11 9 18

12 10 17 8 5 7 17 9 19 6 9 7 8 19 10 18 14 16 17 11 25 10 19 14 12 7 9 13 14 7 11 14 61 17 14 9 9 8 13

24 6 17 6 20 14 19 9 14 14 16 18 10 15 5 18 9 31 7 9 10 19 9 16 7 8 7 9 20 3 12 10 8 19 8 20 13 8 13

26 18 20 7 19 14 22 11 14 15 17 17 11 16 6 20 9 31 8 10 12 16 10 14 7 10 9 11 23 5 13 11 8 20 7 23 14 8 14

28 7 21 12 21 26 24 15 21 18 29 26 23 31 14 27 16 37 14 18 26 35 16 33 14 12 14 26 35 5 21 18 12 36 19 25 25 13 21

30 22 24 13 20 25 27 17 19 20 28 24 23 33 14 29 16 36 16 18 32 28 16 24 15 15 17 28 36 7 22 19 12 40 17 28 24 14 22

-43 -72 -37 47 -86 35 -45 -63 -13 -85 -49 -25 12 -39 -48 -16 -18 -47 17 64 22 -49 -6 -55 6 -68 70 -19 -12 -2 -15 -46 30 -24 -75 -69 12 2 -21

-50 -66 -39 52 -87 19 -43 -68 -10 -87 -56 -22 1 -25 -69 -13 -6 -56 -5 64 14 -56 -37 -65 41 -57 59 -70 -19 -8 -22 -55 27 -28 -84 -74 29 -1 -25

3.2 1.3 3.0 1.8 7.1 3.0 1.4 0.9 1.2 5.9 1.5 4.4 2.0 1.0 0.0 1.9 1.1 1.8 1.2 2.2 2.2 2.5 1.4 2.6 1.0 2.2 1.3 1.2 2.6 0.0 1.6 1.0 2.1 2.3 1.1 4.6 1.4 3.2 2.1

4.0 1.9 3.2 2.2 7.2 3.8 1.9 1.4 1.4 6.5 1.8 5.2 2.4 1.3 0.0 2.2 1.3 2.2 1.4 2.7 2.9 2.3 1.6 2.3 1.2 2.6 1.6 1.6 3.2 0.0 2.1 1.4 2.3 3.4 1.4 5.5 2.2 3.6 2.5

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Note: All numbers calendarised. Source: Bloomberg, HSBC estimates; Closing prices as of 30 Nov 2010

61 103.1 4.6 0.0 6.34 12. SHOP IN.5 40.0 1.731 2.000 473.8 11.1 1.5 1.2 0.000 84.4 2. GITG IN.Grand total Note: All numbers calendarised.28 7.19 89.276 7.3 abc 49 .7 3.5 4.400 445 618 3.4 1.350 28.363 44.9 1.6 2.208 50.80 9.000 150.8 5.0 1.6 1.2 1.583 3. MRCO IN.5 5.1 20 22 3 21 23 18 20 27 9 21 31 20 17 16 18 6 17 19 16 17 23 10 18 23 17 14 42 25 5 20 21 20 18 38 4 6 15 19 14 35 24 5 17 22 21 19 36 4 6 15 19 14 132 52 13 39 78 31 37 133 10 13 43 53 27 122 45 15 34 76 32 33 130 11 11 44 50 26 -189 -29 97 54 -87 -8 7 -35 99 3 -15 -9 -12 -212 -47 96 43 -93 -16 -14 -57 91 -6 -19 -21 -18 2.5 1.1 0. NEST IN PF IN.32 4.611 INR INR INR INR INR INR INR INR INR INR INR 33.4 0.6 2.588 2.500 567.86 18.8 1. Closing prices as of 30 Nov 2010 Ticker Rating Currency Target Market Reporting ____ EPS ____ ___PE (x) __ __ PB (x)___ _ EV/EBITDA _ _ ROA (%)__ __ ROE (%) _ Net debt/q Dividend price cap __ Equity (%) __ ___yield (%) ___ (USDm) currency 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 004370 KS 097950 KS 103150 KS 069960 KS 000080 KS 033780 KS 001800 KS 023530 KS 004170 KS N OW OW OW OW(V) OW OW OW N KRW KRW KRW KRW KRW KRW KRW KRW KRW 204.3 2. GCPL IN.000 240.4 0.366 1.60 40.106 11.300 62.3 1.917 6.34 3.3 2. Source: Bloomberg.550 1.2 1.3 0.088 10 4 12 10 14 9 11 15 10 11 9 9 10 10 12 10 22 12 13 12 0.6 2.330 2.9 2.346 18.2 1.05 3.0 2.9 8.9 1.080 2.559 464 2.25 17.5 4.4 1.9 CLGT IN.4 1.578 6.4 21.11 13.671 1.762 7.Asia Consumer: Valuation summary (cont’d) Equity Asia 7 December 2010 Share price Company Korea Amorepacific CJ Cheil Jedang Hite Brewery Hyundai Department Store JINRO KT&G LG Household & Health Care Lotte Shopping Shinsegae Mean India Colgate-Palmolive Dabur India Gitanjali Gems Ltd Godrej Consumer Products Hindustan Unilever Ltd ITC Marico Industries Nestle India Pantaloon Retail Shoppers Stop Ltd Titan Industries Ltd Mean Mean .1 2.566 410 712 3.000 117.2 1.631 24. N OW OW(V) N UW N UW UW N(V) UW(V) N INR INR INR INR INR INR INR INR INR INR INR 860 93 249 410 298 169 130 3.0 14.1 25.99 30.926 14.0 1.965 22.055 10.000 440.684 928 114 341 445 287 180 132 3.2 0.7 1.8 3.373 971 2.6 48.000 36.1 4.184 39.8 0.54 77.0 9.7 0. DABUR IN.284 KRW KRW KRW KRW KRW KRW KRW KRW KRW 21.112 11.000 1.1 2.6 1.5 13.8 2.8 6.4 6.6 19.700 408.31 38.8 0.9 4. HSBC estimates.2 1.000 120.2 1.59 106.1 3.1 1.458 32.4 7.000 600.4 18.5 4. ITC IN. TTAN IN.9 1. HUVR IN.1 0.33 5.5 0.936 645 3.44 26 28 8 28 30 27 30 40 31 58 47 32 24 23 23 6 22 27 23 25 34 24 46 36 26 19 30.761 36.9 3.14 6.939 9.916 11.5 7 7 5 11 9 9 23 8 8 10 4 9 8 11 10 7 25 8 9 10 7 16 4 9 7 18 19 5 10 11 7 8 5 9 8 15 9 5 7 8 10 32 11 14 15 22 38 7 19 19 10 13 12 13 16 18 15 8 11 13 -34 30 93 16 36 -12 45 23 41 27 -39 19 79 14 29 -17 39 21 32 20 2.3 0.5 0.1 1.2 1.5 1.0 1.059 58.000 150.000 320.32 15.92 14.500 214.1 0.87 11.473 2.2 1.1 3.000 660.1 0.9 1.252 12.6 2.0 1.000 48.1 0.

hsbc. Shipbuilding We believe the shipbuilding industry bottomed out in 2009 following two consecutive years of order declines. For 2011.com Angela Hong* Analyst The Hongkong and Shanghai Banking Corporation Limited. Seoul Securities Branch +822 3706 8758 paulchoi@kr. we believe Korean companies who successfully diversify their new order streams both by project type and region will eventually benefit. such as profitability of current new orders. which have shown an incremental recovery since last year (after the financial crisis in 2008).hsbc. largely driven by national oil companies such as ArabianAmerican Oil Co (ARAMCO). crude oil). while Kia Motors should benefit from Chinese growth 2011 outlook We expect the global capex cycle to continue to trend up in 2011. In 2010. mainly driven by 1) the resumption of suspended projects.com Keith Hwang* Analyst The Hongkong and Shanghai Banking Corporation Limited. which look set to provoke further investment in infrastructure as well as plants. Seoul Securities Branch +822 3706 8763 keithhwang@kr.hsbc. driven by the economies of scale and cost efficiency through platform integration. we expect China and EM to continue to grow at 20% and the US to recover by 10%. *Employed by a non-US affiliate of HSBC Securities (USA) Inc. We expect a gradual recovery to continue in 2010/11 due to a low base effect. Seoul Securities Branch +822 3706 8750 briancho@kr.Equity Asia 7 December 2010 abc Industrials  We see improving prospects for the global capex cycle  Further investments expected in infrastructure and plants on top of strong commodity prices and resumption of suspended projects  Our highest conviction pick is Samsung Engineering. and is not registered/ qualified pursuant to FINRA regulations 50 . Brian Cho* Head of Industrials Research. the two Korean automakers likely sold 5.7% in 2009. Seoul Securities Branch +822 3706 8752 angela. Many concerns remain. Hyundai Motor is most likely to benefit from pricing anomalies relative to peers. including Saudi Arabia and the UAE. China and EM and estimate their 2011 retail volume to increase by 12% to 6. We believe that more time is definitely needed to see another strong cyclical upturn as in 2006-08. we would not view this recovery as cyclical. Autos We expect the momentum of HMC and Kia’s new models to continue into 2011 in the US. 2) strong commodity prices (eg. delays and price cuts. and 3) sustainable demand growth from emerging markets.2% from 7. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited.7m vehicles globally. We believe HMC and Kia’s operating margins will rise to 9% and 7% in 2011. However. up 18%.hsbc.com Engineering & construction To date. overcapacity and demand from shipowners.hong@kr.com Paul Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited. Saudi Basic Industries Co and Abu Dhabi National Oil Company. While we find that massive capital investments have led to fierce competition among the global engineering and construction players. the strongest demand for overseas plant construction has come from Middle East.5m. We expect new orders to rise around 18% to 32.9m CGT in 2011. helping HMC and Kia’s combined global market share to increase to 8.

TP KRW240.500. as a steady pace of diversification backed by proven quality works should continue to improve order visibility ahead.4bn.4trn. given that Mando’s 2011e ROE 16% is lower than Mobis’ 23%. any significant quality problems with HMC vehicles and heightened tensions with North Korea. We believe Samsung Engineering has reached a turning point in its business.500. Samsung Engineering now trades at 29% 2010e EV to backlog versus the major overseas peers at 121%. KRW185. as the two companies’ global volume growth and margin expansion stories look similar.2x target multiple for Mobis. Valuation Pricing anomalies Korean auto and auto parts stocks have historically traded at a discount to global peers. we believe 2011 new order guidance (KRW13.5trn) looks highly achievable. which implies a 20% discount to our 2. entering a new USD100bn market and FEED business (front-end engineering and design). due to the earnings volatility and high leverage.000) With the stock trading at 1. Risks We apply a target PB multiple of 1. TP KRW247. Valuation Out target price of KRW247. further KRW appreciation that weakens pricing power and heightened tensions with North Korea. N(V). an oligopoly market largely dominated by leading domestic peers such as Fluor Corp. Valuation We apply a target PB multiple of 1.Equity Asia 7 December 2010 abc 2011 high conviction idea Top pick: Samsung Engineering (028050 KS. Risks Key risks are higher raw material prices that erode margins of industrial plants. With non-core asset value at KRW87. For the core operations.6x to derive our TP of W240. we believe its entrance into new markets will continue to provide a strong cushion to offset margin contraction risks from fierce competition in the Middle East.6x 2011e PB and 10x PE. Looking ahead.8x to 2011e BVPS.000) We believe HMC deserves to trade at Toyota’s upcycle average multiple during 2004-07. we apply target EV/EBITDA of 15. Key downside risks to our view include dependency on OEM product cycle. we think Mando’s share price momentum has abated due to the KCC overhang. 51 . Risks Key downside risks to our view include slower-thanexpected demand recovery in global markets. As most of the US projects look set to be carried out through a ‘cost + fee base’ mechanism. However.5x reflecting the new fair EV to 2011e backlog (30%). a proprietary approach to gauge how far shares are trading on their future earnings in the upcycle. KRW172. Our target multiple is based on Toyota’s average 1-year forward PB during the 2004-07 upcycle. KRW132. OW. While EV to backlog is a good way to look at E&C valuations.000 is based on a sum-of-the-parts valuation. OW(V).000) We believe Samsung Engineering is the best positioned name. Stock most at risk: Mando (060980 KS. Hyundai Motor Company (005380 KS.500. we add net cash worth of KRW1. we believe the discount factors are fading away given solid global sales and strengthened balance sheets. earnings sensitivity to FX movement and heightened tensions with North Korea.000. TP KRW140. especially given its first-ever order win from the United States (Dow Chemical order).

Our target multiple of 1. the shares would be trading at 8. Risks Kia Motors (000270 KS.000) We estimate Kia’s Chinese retail sales will grow 25% in 2011. We estimate that Korean automakers will outperform the Chinese auto market in 2011. momentum in SUVs and D-segment sedans should continue into 2011. Valuation We apply a target PB multiple of 1. K5 and YF Sonata. KRW48.3% growth.7x 2011e EPS with 12. given Kia’s higher ROE.7% from 3. OW. TP KRW56. As such. following 40% growth in 2010. 52 .9x to 2011e BVPS to derive our TP of W56.Equity Asia 7 December 2010 abc Winners from Chinese growth The combined market share of HMC and Kia in China has grown to 10.4% in 2010. Key downside risks to our view include any significant quality issues with Kia’s cars and heightened tensions with North Korea.950. With the launch of Sportage R (4Q10) and K5 (1Q11). in light of the successful launch of Sportage R. Kia’s 2011 Chinese market share is likely to rise to 3.2% in 2010 from 9.000.8% in 2009. At our TP.9x is based on a 20% premium to our target PB for HMC of 1.6x.

2% 28.8% 2.7 27.9 8.246 80.927 371.998 32.7% 28.1 1.4 11.4 7.776 3.5 6.1 6.3 12.1% 17.6 12.7% 2.0 1.6 37.3 10.9 9.7% 38.6% 37.1 1.8% 18.998 10.3% 5.2 13.3% 10.2% 15.5 11.9% 15.7% 9.1% 23.2% 11.770 22.4 27.038 5.000 32.0% 28.6 8.516 2.0 3.0 7.6% 27.7 2.1 5.1% 2.4 6.2% 2.1% 12.2% 21.3% 46.665 6.7% 22.1% 9.850 30.8 20.5 25.9 15.000 43.9 9.3% 28.3 1.5% 7.4% 8.552 2.3% 7.8 15.5% 10.8 1.000 9.2% -9.2 24.000 44.3 10.2 7.6% 14.7% 37.9% 10.4 7.2 6.0% 10.163 33.7 15.000 28.0% 2.1% 8.4 -78.6% 5.0 14.2% 19.9 23.7% 20.2 7.500 247.3% 7.200 75.7 5.2% 19.5 25.5 7.1 1.7 34.0% 7.0% 17.4 21.8 1.800 110.5% 22.9% 16.800 80.7% 3.8% 7.4 14.4 0.7 1.4% 24.394 16.6% 13.0% 1.9% 15.0 17.1 1.8% 26.6% 1.8% 37.1 1.7% -1.4% 23.4 0.6 2.5 2.5 22.322 100.2 10.8 19.000 34.7 8.0 6.4 11.5% 9.000 108.8% 8.1% 36.616 3.3 1.2 -8.0% 10.9% 10.5 0.500 240. P/E EPS growth P/B ROE Source: Bloomberg.9% 3.7 17.2% 1.3 8.9% 25.9% -412.167 76.7 29.2% 8.3% 10.4% 12.1% 21.4% 15.8 402.7% 40.4% 9.6% 9. Samsung C&T GS E&C Hyundai E&C Daelim Ind.0 48.420 6.6% 9.7% 29.200 42.4 1.4% 17.400 31.7 9.3% 15.2% 25.0 2.7 1.000 4.1% 21.4% EBITDA mgn.3 2.2 5.4% 3.2% 3.6 11.1% 7.1 2.000 39.7 238.2% 3.5% 37.436 48.4 13.3 12.2 6.000 -10.9 32.0% 7.9 -155.000 310.1% 5.0% 12.2% 8.000 19.100 4.1 8.0% 24.000 15.2 3.5% 7.771 15.686 275.950 56.0% 9.3 7.200 108.3% 10.1% 13.5% 11.5 12.9% 5.4 1.7% 0.3% 29.132 55.2 1.5% 2.2 9.5% 3.7 11.0% 18.1% 9. Closing prices as of 30 Nov 2010 abc 53 .6 7.3 12.061 27.964 63.6 12.3% 34.1% 8.8% 15.0% 14.0 5.8% 178.0 7.6 8.1% 11.5% 8.6 7.7% 59.4% 3.500 460.6 10.7 17.496 33.5 23.000 36.5% 13.5 8.5% 1.3% 4.8% -8.3 16.1% -36. HSBC estimates.1 11.234 23.2 20.8% 7.0 25.550 7.3% 10.900 80.288 185.000 39.9% 51.8% -23.0 4.2 16.1 1.0% 10.7 28.000 -3.000 13.1% 8.2% 17.4 75.3% 10.2% 9.8 7.5 6.3% 1.4% 7.3% 28.600 130.2% 14.9% 306 259 23.6 10.4% 37.9 6.0% 20.9 43.201 172.5% 3.0% 24.2 37.1 1.4 15.6 6.9% 21.9% 71.8% 11.2% 6.1 7.064 94.4% 283.1% 6.2% 23.2% 12.9% 56. Hyundai Heavy Samsung Heavy Hyundai Motor KIA Motor Hyundai Mobis KEPCO Doosan Heavy KEPCO E&C KPS BHI Equity Asia 7 December 2010 Code Rating Market cap Share price Target price Potential return EV/EBITDA 028050 KS 000830 KS 006360 KS 000720 KS 000210 KS 012630 KS 009540 KS 010140 KS 005380 KS 000270 KS 012330 KS 015760 KS 034020 KS 052690 KS 051600 KS 083650 KS OW(V) OW(V) N(V) OW OW(V) N(V) OW(V) OW OW OW OW OW OW(V) N(V) OW(V) N(V) (KRWbn) (USD m) (KRW) (KRW) (%) 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 7.1 9.0 21.6 7.0% 10.1 9.1 38.5 1.7 20.9 5.0% 9.1% 21.4% 13.8 5.2 1.2% 29.4 -1.6 36.500 105.9 -10.7% 2.2 17.1% 7.6% 9.9 49.0 9.1% 17.0% 24.3 12.4% 6.Korea Industrials: Valuation summary Company Samsung Eng.1 9.000 25.700 40. Hyundai Dev.1 1.8% 5.7 6.6% 17.7 4.9 13.0% 3.8% 35.1% 17.0% 2.

the regulatory outlook may not be as positive going forward. We accept there is a risk that the starting point of a grossly overvalued stock may be overlooked and the shares trade on momentum (e. PICC P&C is both expensive and poorly capitalised. technical pressure from potential new listings (eg.8%pt unexpected swing in interim combined ratio) and a continuation of strong top-line growth. interest rate hikes) as they have done this year.com. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4321 james. Garner*. CFA Head of Insurance Research.hk Michael Chang* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6555 michaelpchang@hsbc.com. according to local media such as 21st Century Business Herald and Hexun) and fallout from regulatory changes. rising a staggering 66% in light of better than expected operational performance (6.Equity Asia 7 December 2010 abc Insurance  Outlook for Chinese insurance shares remains uncertain as positive impact from rate hikes is offset by regulatory headwinds – we still see strong upside in Chinese insurance ‘A’ shares  Reiterate our preference for Composite over Life insurance names in Korea – most preferred stock is OW-rated Samsung F&M  In our view. PICC Group. We are cautious on the Non-life space. which supports our current Overweight ratings. We continue to see share price upside in the ‘H’ and ‘A’ shares of China Life. which rose 13% during the period. underperforming the KOSPI. Although operational results were much better than expected given the clampdown by the CIRC.hk Seewon Oh* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 3053 seewon. OW(V)-rated China Taiping and LIG are the best stocks to play the ‘Chinese growth’ and ‘Korean valuation’ anomaly themes. The CIRC is considering allowing up to 17 foreign insurers to sell compulsory auto products which can be used to cross-sell more profitable non-compulsory lines. This past three months we have already seen potentially damaging guidance from the CBRC on bancassurance and also the CIRC proposing to liberalise Traditional Life guarantee rates. The worst performer was China Life ‘A’ shares. in line with MSCI China. PICC P&C was the strongest performer y-t-d. car sales.g.e. That said we see downside risks from the intensification of uneconomic competition (evident in 1H). respectively 2011 outlook China The MSCI China Insurance Index has risen 2% year to date. China Taiping and Ping An. and is not registered/ qualified pursuant to FINRA regulations Korea The Korea SE Insurance index has fallen 11% year to date. The Life names have dragged the index down. New China Life.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. down 30% y-t-d. driven by an unexpected slowdown in new business value (NBV) growth and its unwelcome tag as an A-share proxy (Shanghai composite down 14%).com.oh@hsbc.garner@hsbc. with Tong Yang Life 54 . Taiking Life. James E.

The successful listing of an Indian insurer coupled with a long-awaited increase in FDI limits could open the floodgates for more listings in this important market. EV disclosure and responsible management – investors can sleep relatively easy at night. which is predicated on 30% weight to EV and a 70% weight to PB methodologies. surrender penalty caps and the proposed withdrawal of much-needed tax breaks on key products by 2012.  Auto loss ratio improvement. which rose 22% YTD. We could also see share price catalysts in the form of a long overdue second round of auto insurance price hikes early next year. The group has a track record for product innovation. Samsung F&M shares offer a 41% potential return against our KRW270.6%) is 2x that of China (2.000 target price. Loss ratios tend to improve from January and Samsung F&M could improve further owing to a second round of auto price increases and positive regulatory intervention (replace lump sum deductible for proportional claims insurance). more valuation upside (even in the unlikely event that the industry embraces the unloved Embedded Value methodology) and stronger balance sheets. We hope that 2011 will herald a more stable regulatory environment for the Indian Life insurance industry. Looking into 2011 we continue to have a strong preference for Non-life names where we see lower risks. 55 .  Quality play. It seems investors share our cautious view on the Korean Life insurance industry that is ‘generally’ characterised by weak capital bases (on a more realistic RBC basis). excellent group connections (management talent.3%). Samsung F&M benefits from having a strong brand. intra-group sales) and significant economy of scale benefits (26% market share). Key attractions of stock include:  Capital redeployment. where the Life insurance penetration rate (4. relatively high exposure to negative spread products and growing concern about the provision of unhedged income & capital protection guarantees. One key catalyst could come from an improvement in the share price sensitive auto loss ratio which is at cyclical high. closely followed by Korea Re (+21%) and Dongbu (+20%). organic growth. The best-performing Korean insurance share was OW(V)-rated Hyundai F&M. Valuation India There are no quoted pure play insurers in the Indian market although that could be about to change with the expected listing of Reliance Life (spun out of Reliance Capital) and Standard Life HDFC. a special dividend and a share buyback. Risks Key risks to our OW rating comes from weaker than expected capital markets and a value destructive acquisition.604bn (=38% current market cap) above the 200% solvency ratio and is considering deploying some of their ‘to be defined’ excess capital and have kept all options on the table including M&A.Equity Asia 7 December 2010 abc being the worst performer (-17%) and both Korea Life and Samsung Life trading below their listing prices. which has been hit with fee caps. 2011 high conviction idea Overweight Samsung F&M Samsung F&M is a well managed and well capitalised group that offers value at current share price levels. Samsung F&M is holding KRW3.

In the sensitivity analysis. Pricing anomalies Korea embracing Embedded Value The Korean insurance industry is a genuine anomaly where stocks are valued on a punitive PB methodology instead of a more conventional Embedded Value (EV) approach. The Korean sector is trading on just 0. as detailed in Exhibit 2. In our more bullish scenario we assume Life and Non-life 15-year premium CAGRs of 21% and 24%. Exhibit 2: Sensitivity of target price to the introduction of generous. 1% sustainable growth and a 10. The least exposed to the growth story is Underweight (V)-rated PICC P&C. It is interesting to note that the Korean insurers trade at a significant discount to their Chinese Stock beneficiary Migration from our base case to bull case premium growth assumptions would have an impact on our valuations. easy-to-understand and tax-advantaged retirement savings products is offset by the likely 56 . easy to understand and tax-advantaged insurance pension annuities FX ___ Current ____ TP Pot’l return __ Bull case ___ TP Pot’l return China Life 'H' China Pacific 'H' China Taiping PICC 'H' Ping An 'H' China Life 'A' China Pacific 'A' Ping An 'A' Source: HSBC estimates HKD HKD HKD HKD HKD CNY CNY CNY 42 37 37 7. which should be positive for life insurance.8 110 35 31 92 19% 12% 28% -34% 20% 44% 24% 52% 55 50 53 8 154 46 42 131 65% 62% 105% -31% 72% 106% 81% 131% Risks The biggest risks to our valuation comes from lower than expected growth.7x our 2011e group embedded value. We consider our base case premium growth forecasts to be extremely conservative as they are predicated on world average penetration rates in 2015 that are significantly below the levels seen in other Asian countries. A multiple of 1. Our current valuations are predicated on our basecase Life and Non-life 15-year premium CAGR assumptions of 12% and 16%. we assume that the additional valuation benefit of higher Life premium growth from the introduction of generous. driven by a plethora of powerful forces:  Increased recognition by the government that net exports and investments can no longer be the drivers of long-term GDP growth and that consumption will have a bigger role to play.Equity Asia 7 December 2010 abc Winners from Chinese growth Chinese insurers should benefit Despite posting impressive premium growth over the past decade. which implies a meagre 8% ROEV versus our average expectation of 16%. China is on the cusp of an average GDP per capita level where consumers withdraw deposits and replace them with higher return long-term structured products. we still believe China’s insurance industry offers significant premium growth potential.  The life insurance market remains relatively underpenetrated. lower margins on these products (we have assumed a margin haircut of 50%).5% required return. respectively. Korean insurers offer deep value on more appropriate embedded value metrics.  Potential introduction of tax-advantaged insurance products which remains the biggest delta in the insurance industry We estimate annual insurance premium growth for the Chinese insurance market over the next 15 years after making assumptions about nominal GDP growth and what the insurance penetration rate will rise to within the next 15 years.6x is more appropriate for a sector given our ROEV expectation. We believe the best way to play the Chinese growth story is through Overweight (V)-rated China Taiping.

With 41% potential return indicated.502 492. whose shares should benefit the most from the migration to 100% weight to embedded value. In Exhibit 3 we highlight that the total 57 . including.774 166% 211% 54% 97% 224% 138% 158% 121% Source: HSBC estimates Risks The biggest risk is if the market does not embrace embedded value methodology.302 23.000 -1% 29% -5% 19% 44% 7% 41% 20% 101.000 29. potential return estimates increase from 23% to 132% if we were to base our price targets solely on the embedded value methodology.107 65.000 29.g. Exhibit 3: Potential return increases from 20% to 134% under EV methodology FX ____ Current _____ ____ 100% EV ____ TP Pot’l based Pot’l return TP return Dongbu Hyundai Korea Life Korean Re LIG Meritz Samsung F&M Tong Yang Life KRW KRW KRW KRW KRW KRW KRW KRW 38. we maintain our OW(V) rating. We believe the best way to play the Korean valuation anomaly story is through Overweight (V)-rated LIG.783 69. a reconciliation from ‘shareholders funds’ to ‘adjusted net worth’.000 target by weightings of 30% and 70% to our ‘price to group embedded value’ (KRW462. Management must improve the quantity of EV data (e.Equity Asia 7 December 2010 abc counterparts on price to embedded value multiples and yet there is only a 5ppt difference in our average ROEV (akin to ROE in EV calculation) between the two sectors over the next three years.000 8. Samsung F&M showed an intention to expand in the overseas market in its FY08 results release: above Stock beneficiaries All Korean insurers screen inexpensive in both absolute and relative terms on embedded value metrics.  Embedded value disclosure improvements. TP KRW270. While Samsung F&M has disclosed EV data for 5 years. Many of the Korean non-life insurers shot themselves in the foot when they delayed the publication of EV data. Underweight (V)rated Korea Life shares will be least exposed.000 7.  Investor education. There is little impact on our current price targets as we only assign a 10-50% weight to EV in our price target derivation calculation.579 11. it will be some time before Korean insurance investors fully embrace the embedded value methodology which gives rise to materially higher valuations.0000) We derive our KRW270. quarterly NBV) and target focus if they want investors to buy into EV. Korean insurers need to materially improve their embedded value disclosure in a number of key respects.184) and ‘price to adjusted book value’ methodologies (KRW204. The biggest challenges to overcome the valuation methodology are:  Disclosure shift. We also incorporate a 10% discount to allow for weak disclosure. While the listing of three pure play life insurers will help the embedded value cause. KRW191. OW(V).199). It is no wonder that many analysts and investors focus on PB given that Korean insurers provide monthly earnings data (versus annual EV data) and earnings targets (versus no EV targets).000 14.000 14. standalone EV calculations and roll forwards for Life and Group basis and adoption of EEV methodology to allow investors to draw a line in the sand with respect to embedded high fixed return guarantees. its slower-moving peers only have 2 years of data.000. Interestingly.532 25.300 270. Valuation and risks Samsung F&M (000810 KS. Downside risks are: (1) Group uses ‘excess’ capital to make a value-destructive deal.410 18.

000) We derive our KRW29. KRW7. OW(V).200. Key downside risks are: (1) capital raising.404) and ‘price to adjusted book value’ methodologies (KRW33.8. We apply this to our FY10 forecast of book value per share of HKD3. based on our average ROE forecast over the FY10-12 period. HKD25. LIG (002550 KS. (2) The market continues to obsess about competition with Life insurers. (2) further deterioration in ICBC relationship. with a sustainable ROE assumption of 20%.8) We value PICC using our PB methodology.000 target by weightings of 10% and 90% to our ‘price to group embedded value’ (KRW60. China Taiping (966 HK. high burden of problematic fixed interest rate guarantee policies and relative capital weakness under a more realistic application of a RBC model. We assume a long-term growth rate of 4% and a cost of equity of 10. OW(V).500 target price by applying 50% weights to the valuation implied by ‘price to book value’ (KRW9. weaker than expected capital markets and a further deterioration in 13th persistency ratio. UW(V). which generates a target price-to-book ratio of 2. Key downside risks to our rating include a faster than expected deterioration in the group’s large loan book.5x. and roll forward the valuation date to 12 months from today. With 44% potential return indicated. to arrive at a valuation and 12-month target price of HKD7. Key upside risks are: a stronger-than-expected A-share market and an earlier-than-expected listing of PICC’s parent on the A-share market. We also incorporate a 20% discount to allow for weak disclosure. especially Samsung Life.859). (2) Fall in exposure to high interest rate guarantee through financial engineering. and (3) weaker than expected NBV growth. 58 . HKD11. We apply a 30% discount in light of disclosure (limited EV reporting track record). Korea Life (088350 KS.360. Samsung Life is the largest life insurer in Korea and aims to grow in the lining benefit market and retirement pension market where Samsung F&M is focusing with long-term products.Equity Asia 7 December 2010 abc 400% solvency ratio is the highest among life and non-life peers in Korea. TP KRW7.260) and ‘price to group embedded value’ (KRW12.2. KRW20. TP KRW29. policy lapse or rapid growth in new sales. TP HKD37) We derive our HKD37 price target by weightings of 70% and 30% to our ‘price to group embedded value’ (HKD38) and ‘price to embedded value’ methodologies (HKD35).9. TP HKD7.4%. we maintain our OW(V) rating.64. which is relatively lower than peers.073). PICC P&C (2328 HK. UW(V).500) We derive our KRW7. Key upside risks are: (1) investors put greater weight on embedded value methodology.

5% 2.6x 0.678 16.961 101.8x 4.500 14.3x 24.0x 3.2x 1.048.2x 8.6x 2.3% 1.925 1.0% 3.5% 0.7x 2.2x 6. Closing prices as of 30 Nov 2010 abc 59 .6x 13.5x 4.8x 1.6x 3.0x 5.1x 18.000 26% 20% 43% -33% 23% 57% 34% 62% 10% 29% 2% 19% 44% 11% 41% 20% 42% 24% 40% 2.1x 19.3% 0.6x 0.4x 0.510 250.9x 1.8 110.7x 8.576 31.727 5.672 2.8x 2.8% 2.672 101.5x 0.999 960.2x 6.3x 22.8x 20.360 11.0x 3.6x 2.2x 3.250 22.9x 4.6x 1.6% 1% 2% 2% Source: Thomson Reuters Datastream.2x 9.336 1.045 829 7.5% 1.000 7.805 1.4% 3.559 6.0x 18% 11% 12% 20% 17% 18% 11% 17% 19% 18% 12% 15% 15% 17% 12% 13% 16% 14% 16% 3.3x 2.6x 3.4x 0.380 1.576 31.5x 5.2x 1. HSBC estimates.3x 2.0 31.8x 3.592 1.691 572.2 56.760 191.1% 1.5x 1.1x 5.2x 4.221 44.168 2.9x 0.1x 33.062 73.0 37.7x 16.0x 0.252.7x 0.200 7.000 8.0x 6.4% 3.099 2.392.2x 3.3x 1.109 677.650 42.9 11.0x 24.3% 0.1x 2.6 22.708.0x 15.600 270.0x 0.094 491.6x 2.514 1.361.0x 22.211.2x 18% 11% 12% 20% 18% 18% 11% 18% 35% 58% 22% 11% 87% -516% 16% 53% 17% 7% 16% 19.000 11.Sector* HKD HKD HKD HKD HKD RMB RMB RMB KRW KRW KRW KRW KRW KRW KRW KRW USD USD USD OW(V) N(V) OW(V) UW(V) OW(V) OW(V) OW(V) OW(V) N(V) OW(V) UW(V) N(V) OW(V) N(V) OW(V) N(V) 788.4 30.808 241.3 23.8x 17.0 37.5x 0.688 9.2% 4.200 33.2x 6.0 35.6x 4.2x 18.7x 32.400 7.3x 3.9% 1.8x 0.2x 3.6% 2.0x 20% 20% 25% 19% 23% 20% 20% 23% 18% 19% 13% 16% 13% 15% 17% 15% 21% 16% 21% 3.6x 2.1x 1.9x 1.8x 0.4x -20.0 92.210 207.4x 24.9 25.8x 17.2x 3.7% 0.750 20.7x 23.1x 7.6 89.701 73.689 21.7x 2.081 228.095 129.Asia Insurance: Valuation summary Company Country (Curr) Rating Market cap (LCYm) Market cap (USDm) Share price Target price Potential return P/EV 2011e Avg ROEV 2011-13e P/B 2011e Avg ROE 2011-13e P/TNAV 2011e Avg RoTNAV ______ PE _______ 2011-13e 2011e 2012e Div Yld 2011e Equity Asia 7 December 2010 China Life 'H' China Pacific 'H' China Taiping PICC 'H' Ping An 'H' China Life 'A' China Pacific 'A' Ping An 'A' Dongbu Hyundai Korea Life Korean Re LIG Meritz Samsung F&M Tong Yang Life China Korea Asia .062 5.7x 0.6x 5.0x 4.0 7.000 29.8x 0.175 1.1x 0.4x 3.4x 1.3x 3.5x 7.7 38.0 42.000 14.9x 1.6x 2.7x 5.002.6x 20.7x 26.9x 1.5x 5.0x 8.000 29.

With the shift towards a consumption (and more sustainable) driven economic growth model (ie. Within the sector.hk Jigar Mistry* Analyst HSBC Securities and Capital Markets (India) Private Limited +9122 2268 1079 jigarmistry@hsbc. While growth should clearly moderate to more sustainable levels. Macro uncertainty and rising European sovereign risks will likely remain an ongoing influence in commodity (and equity) markets. Top picks OW(V)-rated China Coal and POSCO 2011 outlook A better year ahead 2010 has been a turbulent year for the Metals & Mining sector. increased focus on reducing carbon intensity should help contain excess supply. we expect this will likely underpin further consolidation activity and capital management initiatives.com.in Lun Zhang* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6569 lunzhang@hsbc. Asia now accounts for nearly two-thirds of global demand across most commodities.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. For 2011.com. and is not registered/ qualified pursuant to FINRA regulations 60 . Both are supportive of commodities demand. the shortfall has been more than offset by Asia.co. while commodities demand in the US and Europe has actually fallen. driven largely by macro forces. prices should remain well supported at relatively high levels. This is crucial as it is Asia that is driving global commodity markets at present. in shifting to a more consumer-driven economy. these efforts should keep commodities market relatively tight and support prices at higher for longer levels.com. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6669 danielkang@hsbc. Asian inflationary pressures may be contained with its growth avoiding derailment. In turn. While we forecast commodity prices to moderate from current levels. while aluminium is preferred over copper in the metals. China will focus on urbanisation and increasing investment in rural areas. China’s moves towards a more sustainable consumption driven growth model should ultimately prove positive for commodity markets. Under such a scenario. Over the past decade. we believe the clouds should begin to lift. providing strong cash generation and balance sheets. the natural inclination is for investors to think that this is negative for commodities demand. we prefer coal and steel plays over iron ore in the bulks. So long as fullblown contagion is avoided. Together. Chinese policy changes and of course dollar swings. China’s 12th Five-Year plan is critical in the outlook for commodities. Meanwhile. less investment and export-driven).hk Sarah Mak* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4551 sarahmak@hsbc.Equity Asia 7 December 2010 abc Metals & Mining  China’s shift to a more sustainable growth model with focus on urbanisation and rural investment is positive for metals demand  Strong cash generation to support capital management initiatives and/or consolidation activity  Preference for upstream over midstream but steel looks oversold. We disagree. the prospect of subpar growth in the West and continued strength in the East is perhaps the ‘goldilocks’ scenario for commodity markets. Daniel Kang* Head of Metals & Mining Research.

we expect commodity prices to remain well supported at relatively (to history) high levels. for instance steel companies acquiring raw material mines. governmental and local approvals. but overall we remain in the ‘stronger for longer’ camp. In such an environment. POSCO shares trade at a significant discount to its regional peer average PB of 1. Japanese exports will likely fill the void created by China’s continued withdrawal from export markets as it looks to reduce the economy’s export reliance. A margin squeeze as a result of sluggish regional demand is at the root of 2H10 disappointment. At 0. specific to POSCO was the company’s overstocked position in higher priced raw materials (at 3Q contract price levels) due to expansion delays mainly at Pohang No. low-cost operations and resilient balance sheet.Equity Asia 7 December 2010 abc In the rest of Asia. New capacity continues to be held back by environmental. Barring any unforeseen events. sustained economic growth in emerging markets should continue to drive global commodities demand. with many Asian countries now recognising their dependence on imports. many state enterprises are increasingly becoming active in consolidation. In any case. OW(V).6trn for a 3. not POSCO. just like China. Hyundai Steel’s blast furnace expansion – The start up of HSC’s second blast furnace (4mtpa. In our view. POSCO shares (down 27%) have underperformed the KOSPI (up 15%) and its domestic peers Dongkuk (DKS) +4%. TP KRW650.1x 61 . However.9x PB. An aggressive investment campaign through the cycle is likely to ensure the company is well positioned for the next upswing. there will be times of overshoot (from macro concerns or dollar swings). with regional and global companies also doing the same.3mt of HRC plant in Gwangyang (operational in 2014e). The reality here is that Korea has been a significant importer of around 14-15mtpa of high-end flat steel for a very long time. it also means the benefit of lower 4Q10 contract prices for iron ore and coal in 1Q11. 2 2011 high conviction idea POSCO (005490 KS. cumulative 8mtpa since the beginning of 2010) along with its announcement that it will consider a third blast furnace (c4mtpa) has raised investor concerns on oversupply. Hyundai Steel (HSC) +27% but in line with its regional We see POSCO as a value play with strong organic growth potential going forward.500. primarily from Japanese mills. peers (excluding India) at -30% . the process of urbanisation and industrialisation remains well in train.We believe there have been two key factors driving this underperformance: 1 2H10 disappointment – POSCO was not alone in downgrading FY10 guidance. While this overstocked position resulted in higher raw material costs in 4Q10. In addition. Year to date.000) POSCO remains our top regional steel pick for its diverse high-end product mix. this will underpin further consolidation activity and or capital management initiatives. We are now seeing an increased appetite from vertical integrations. This has not been helped by POSCO’s own announcement that it will invest KRW1. corporate interest is not only arriving from horizontal integrations (growth in the same sector). 3 blast furnace (+2mtpa). Indeed. Given the volatility in commodity markets. HSC and POSCO’s growth will replace imports so it will ultimately be the Japanese mills that will lose out. KRW454. Relatively high commodity prices should see the sector generate strong cash flows.

705 per share. which in turn would negatively impact steel consumption growth. As China’s national steel champion.9) The shift away from investment-driven growth inherently means that large-scale capital commitment to infrastructure and construction projects may be a thing of the past.5%). the natural inclination for investors is to conclude that commodities will be the loser. movements in iron ore. and in turn.4x from our residual income model (PB = ROE-g/COE-g) using a sustainable ROE of 15%. valuing the stock at 1. TP RMB3. Management sees its key 2010 end-use demand segments being automobiles (19. Risks The key downside risk. As a steel company strongly leveraged to construction- 62 . in line with its 2002-09 historical average.09. TP HKD4.7. nickel. in our view. We arrive at a PB multiple of 1.5) With its dominant market position in both the domestic home appliances and automobiles industry. this is too simplistic and ignores China’s progressive or gradual approach. Baosteel relies on imported iron ore from Australia and Brazil. H-share: HKD4. On the raw material side.4x PB and 2011e book value of RMB6. the company projects home appliance production growing by 15% while the domestic auto industry is forecast to increase output by 10% y-o-y. Looking forward to 2011. With the 12th Five-Year plan expected to mark China’s shift from an investment-/export-driven economy to a consumption-based growth model. global demand for commodities.29/share.6% of sales) and home appliances (11. Stock most at risk: Maanshan Iron & Steel (323 HK. all other factors being equal. coal and nickel prices provide additional risk. Baosteel has set ambitious targets in its 2010-15 Strategic Development Plan.43. A-share: RMB3. In particular.000. Valuation Baosteel (600019 CH. We have an Overweight (V) rating on Baosteel and our target price of RMB8. In our view. N(V).50 is based on 1. OW(V). The key downside risks are a more severe slowdown in the US or China. and more importantly the fact that urbanisation and rural investment will remain a significant part of the shift towards a consumption-based economy. We arrive at a PB of 1. aiming to grow revenue to RMB270bn by 2015 (+37% from 2010 levels) with 2015 crude steel capacity increasing to 33mt (+25% from 2010 levels). TP RMB8. and iron ore prices provide additional risks.28. we see Baosteel as a key beneficiary of consumption-driven Chinese economic growth. RMB6. movements in coal. Winners from Chinese growth Over the past decade. heavy FAI in domestic infrastructure and construction projects has provided the major backbone to China’s.Equity Asia 7 December 2010 abc and in line with late 2008/early 2009 global financial crisis valuation levels. On the raw material side.3x PB (same) and our 2011e book value of KRW515. earnings are poised to grow accordingly. lies in the movement of steel prices. With domestic capacity of 34mtpa set grow to 41mt over the next few years with additional potential upside from offshore capacity growth in Indonesia and India. Valuation We maintain our OW(V) rating with a target price of KRW650. Risks The upside and downside risks for POSCO lie in the movement of steel prices.3x from our residual income model (P/B= ROE-g/COE-g) using our 2010-12 forecast ROE of 16%.

63 . Maanshan should be able to optimise its product mix going forward to successfully adapt to shifting demand. we believe the current pipeline of existing road. has been a key beneficiary of the stimulus. Our H-share target price of HKD18. TP RMB16) China Coal has acquired 10bt of coal resources in four coal bases. In addition.55/share.59. having an impact on stimulus spending. H-share: HKD12. Valuation squeezed by upstream raw material costs are likely to accelerate investment in upstream assets. In the absence of viable greenfield projects.70 for the H-shares based on 1.to H-share discount of 14%. the company’s relatively risky investments in coal-to-chemical operations remain a concern. As such. as Maanshan. The restructuring will be in steps and expect most injections to take place in 2013/2014. mid-stream smelters that have been excessively We have an Overweight (V) rating on China Coal.1x PB and 2011e book value of HKD4.1x from our residual income model (PB = ROE-g/ COE-g) using a sustainable ROE estimate of 9% in line with our forecast average ROE over 2010-12. Risks Downside risks to our rating and estimates include slower-than-expected Chinese economic and industrial growth and an increase in the coal resource tax. This target PE is below China Coal’s average PE of 23x. represents a key downside risk. Our target price for the A-shares. We see companies across the sector deploying capital in developing extensive pipelines of growth projects. diversification into other commodities through acquisitions is seen as a viable pathway. at RMB3. TP HKD18. Support from strengthened demand (particularly from Asia) and firm commodity prices have allowed for positive cash-flow generation. is based on the A-share discount to the H-shares at the time the target prices were set. Valuation We have a Neutral (V) rating and a target price of HKD4. with its exposure to long steel. For those industry players that are constrained to single commodities with near to medium term headwinds. Cash-rich companies A broad-based recovery from the carnage of the global financial crisis has seen balance sheets across the Metals & Mining spectrum largely restored. rail and construction projects will ensure steady demand in the near/medium term.Equity Asia 7 December 2010 abc driven long steel products.90. A better than expected recovery in the train wheels segment poses a key upside risk. The acquisitions will support the volume growth and its targets to double output to 200mtpy and earnings to RMB20bn by 2014. OW(V). Risks Movement in steel prices represents a key risk for the stock. industry consolidation should be an ongoing theme in 2011. Maanshan stands out as a losing player in this changing market dynamic. with a gradual decline the most likely outcome. We arrive at a PB of 1. Any potential credit tightening by the government. Volume growth will come from (1) capacity planned or under construction – 50mtpa in 4 years (2) Shanxi/Shaanxi/Inner Mongolia new resources with production of 20mtpa (3) parent M&A with a capacity of 40mtpa and resources of more than 2bt. A-share: RMB10. That said.6.28.6 is based on a 2011e PE of 17x using the midpoint of China Shenhua Energy’s average PE of 20x since its listing and the global coal peers’ PE of 14x. China Coal (1898 HK. Our A-share target price of RMB16 is based on an A. and the parent also increased its coal resources by 2bt through consolidation of local coal mines in Shanxi. In particular.

H-share: HKD6.5. N(V).Equity Asia 7 December 2010 abc Potential share price catalysts include higher-thanexpected coal prices. to our 2011e EBITDA for Chalco and arrive at a value of HKD5.55 and Chalco’s stake in Simandou at HKD3.50. Chalco’s balance sheet is cash constrained. we believe a potential new issue of 1bn A-shares remains a key overhang on the stock heading into 2011. We value Chalco’s core business at HKD7.33 per share using a DCF valuation assuming a WACC of 8. We apply an EV/EBITDA multiple of 10.8%. this has not stopped the company embarking on domestic growth projects and diversifying into iron ore through its Simandou iron ore investment. in line with its five-year average. TP HKD8. However. alumina and energy prices. which we estimate may dilute 2011 EPS by 6%. TP RMB14) Given unfavourable aluminium price moves for much of 2010 and a continually rising cost base. relate to movements in aluminium. Chalco has been one of the few companies in our coverage universe that has not been cash-flow positive. Risks The main upside and downside risks for Chalco. permitting power companies to raise tariffs. 64 .66 per share. With 2010e year-end gearing (ND/ND+E) at 126%.10. would be positive for thermal coal prices. As a result of these coming capex commitments. The resumption of a coal-power linkage. Our Chalco Ashare target price is RMB14. in our view.5x. We have a Neutral (V) rating on Chalco with an H-share target price of HKD8. We arrive at an NPV of HKD11.78. valuing the stock at an equally blended EV/EBITDA and NPV valuation approach. Valuation Stock most at risk: Chalco (2600 HK.95. A-share: RMB10. an upgrade in the company’s output guidance and progress on the coal mine acquisitions.00 based on the current premium to the H-shares.

2 7.9 1.8 6.0 2.3 13.2 5.6 1.8 1.6 1.5 2.8 7.9 17.494 59.2 1.0 1.7 abc Source: HSBC estimates.3 12.93 43% 30% 26% 35% 16% 12% 14% 15% 18% 15% 23% 21% 31% 48% 29.2 6.1 10. Closing prices as of 30 Nov 2010 65 .2 17.9 13.0 1.7 4.7 23.4 6.6 1.0 0.500 JPY 360 277 JPY 3.7 2.9 1.3 1.2 0.8 2.3 10.6 1.4 3.1 11.9 1.6 1.0 0.392 -1% 4.0 250.6 14.6 8.5 4.4 2.1 8.6 8.2 INR 820.8 5.5 10.8 0.9 0.1 21.6 1.3 2.3 3.5 9.537 6.8 2.4 2.7 82.6 2.0 60.7 1.7 18.2 2.9 26.3 9.944 3.3 11.0 0.8 13.4 3.4 11.2 5.6 1.4 4.0 350.8 4.2 11.2 22.5 18.1 1.7 2.8 23.5 26.3 12.8 12.6 2.2 1.9 26.6 1.0 3.6 OW(V) OW(V) OW(V) OW(V) OW(V) OW(V) N(V) N(V) 601898 SS 1898 HK 601088 SS 1088 HK 600188 SS 1171 HK 1393 HK 639 HK CNY HKD CNY HKD CNY HKD HKD HKD 16.7 1.1 1.0 178.6 0.2 4.3 68.1 1.0 201.9 8.90 3.7 5.2 6.8 352.7 3.0 9.7 1.9 5.7 1.1 2.7 3.1 8.1 14.0 9.5 2.8 4.7 2.5 67.370.1 7.1 8.1 5.7 8.070 913 13.1 11.5 1.9 28.3 10.4 1.3 3.9 13.9 1.7 9.2 4.6 10.1 47.8 3.3 1.0 4.4 2.6 14.248 25% 5.9 0.0 45.9 12.6 1.3 12.8 0.5 6.1 8.0 18.8 7.3 59.7 3.3 0.8 12.5 0.1 1.2 7.3 10.2 9.0 210.5 12.2 1.1 3.28 CNY 9.7 0.2 1.3 24.6 1.607 5.3 3.7 1.1 39% 14.6 5.6 0.0 390.6 13.8 7.280.8 7.6 1.2 162.4 2.9 7.350 2.7 1.7 3.9 1.9 1.0 1.1 6.4 12.4 51% 51% 53% 38% 28% 19% 14% -16% 14.4 10.4 7.566 3.1 2.8 1.8 2.1 2.8 20.0 18.7 2.9 INR 1.9 2.6 4.4 2.5 2.1 6.6 9.7 9.6 12.9 9.2 6.1 1.8 0.1 2.893 16.5 260.2 0.5 0.0 1.5 10.7 5.7 7.7 1.5 11.75 HKD 12.884 14.00 7.85 1.3 0.1 8.5 1.9 7.6 2.0 1.7 1.289 11.5 12.9 74.9 2.0 0.6 23.3 14.4 2.3 24.8 15.3 21.3 2.0 1.3 AUD 2.2 5.831 15% 10.9 1.1 25.2 16.7 1.6 1.3 2.6 2.8 15.8 2.4 1.7 1.0 10.743 -11% 14.20 CNY 3.7 2.0 18.1 24.5 5.2 32.4 2.379 -30% -85% -58% -10% -75% -75% -51% -51% -24% 1% -75% 34% na -89% 47% 229% 60% 124% 400% 400% 299% 299% 92% -8% 120% 13% -47% 41% 29% 90% 39% 4% 73% 73% 81% 81% 9% -7% 39% 52% 2% 105% 11.0 33.1 0.1 31.1 1.2 1.1 9.0 31.2 2.3 0.1 9.0 1.4 1.5 5.3 2.7 21.6 5. Target Current Price Price Pot’l Mkt cap __ HSBC EPS growth (%) __ ____ HSBC PE (x) ____ _______ P/B (x) ______ ___ EV/ EBITDA (x)___ ______ Yield (%) _______ Return (USDm) 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e 2009 2010e 2011e Equity Asia 7 December 2010 OW(V) OW(V) OW(V) OW(V) N(V) N(V) N(V) N(V) OW(V) N OW(V) N(V) OW OW(V) 005490 KS 5401 JP 5411 JP 600019 SS 000898 SZ 347 HK 600808 SS 323 HK 2002 TT SAIL IN TATA IN JSTL IN JSP IN BSL AU KRW 650.7 11.0 8.9 20.8 3.1 8.2 3.2 0.2 5.6 7.9 18.3 1.9 0.0 1.5 42.7 2.6 25.6 2.3 0.2 11.4 14.0 2.1 7.5 10.4 2.0 9.1 1.3 1.6 2.8 2.4 11.6 1.3 4.2 15.3 180.0 8.1 1.2 11.6 8.4 8.2 13.5 5.7 0.674 3.3 2.0 1.4 6.3 1.0 2.973 5% 14.9 1.818 10% 10% 19% 19% -37% -37% -60% 39% 25% 25% 25% 25% 100% 100% 105% 39% 29% 29% 15% 15% -3% -3% 47% 0% 17.4 INR 205.3 34.4 6.4 1.0 12.9 11.5 26.1 10.0 2.1 14.9 5.5 0.0 20.8 INR 730.049 11.7 3.6 11.5 1.8 95.4 N(V) N(V) OW(V) UW N(V) N(V) UW(V) UW(V) N(V) N(V) OW(V) OW N OW(V) UW(V) 601600 SS 2600HK HNDL IN NACL IN NACL IN 1333 HK 600362 SS 358 HK OZL AU BHP AU RIO AU STLT IN HZ IN SESA IN NMDC IN CNY HKD INR INR AUD HKD CNY HKD AUD AUD AUD INR INR INR INR 14.3 10.2 7.4 11.8 8.3 10.2 1.3 2.4 38.4 12.7 1.0 10.50 11.115.2 3.1 2.4 3.2 35.4 2.3 25.5 1.7 3.6 240.2 1.2 4.4 5.0 4.5 14.2 8.8 69.0 2.900 16.7 9.9 1.3 5.1 15.743 11% 4.1 10.0 5.7 1.393 19.3 0.4 6.5 3.0 37.8 0.7 6.4 15.0 0.659 5.2 7.2 5.1 10.5 0.8 7.8 8.50 6.3 4.9 0.2 1.7 1.8 9.6 9.2 2.6 92.0 97.4 5.5 17.1 2.6 31.435 1.514 22% 3.09 TWD 37.530 29% 8.9 1.0 1.545 23.9 6.8 8.1 2.6 9.6 0.822 4% 20.0 5.6 23.2 5.3 9.0 1.5 10.3 4.6 11.821 30% 11.2 0.391 12.1 4.6 4.2 12.1 7.0 2.5 5.6 37.2 1.1 20.5 11.0 2.7 2.0 1.0 6.6 2.4 2.4 4.2 9.132.2 4.000 454.4 16.0 19.5 11.9 1.2 4.4 22.7 12.8 1.5 3.7 1.0 2.9 7.4 2.7 42.4 2.5 2.8 0.6 4.6 5.1 18.664 18% 130.1 14.1 0.1 1.7 1.4 2.6 12.4 2.688 na na -37% -32% -100% 49% -3% -3% na -12% 5% -59% 18% na -36% -118% -118% 46% 19% na -23% 106% 106% 1311% 81% 147% -30% 2% 62% 34% 374% 374% 28% 40% 180% -16% -11% -11% 12% 28% 14% 18% 12% 14% 34% na na 21.4 10.Asia Metals & Mining: Valuation summary Company Steel POSCO Nippon Steel JFE Baosteel Angang A Angang H Maanshan A Maanshan H China Steel SAIL TATA JSW JSPL Bluescope Average Base metals & Diversifieds Chalco A Chalco H Hindalco Nalco Alumina Ltd Zhongwang Jiangxi Copper A Jiangxi Copper H OZL BHP Ltd RIO Ltd Sterlite Hindustan Zinc Sesa Goa NMDC Average Coal China Coal A China Coal H China Shenhua A China Shenhua H Yanzhou Coal A Yanzhou Coal H Hidili International Fushan Intl’ Average Rating RIC Curr.0 624.6 na 5.0 15.8 69.4 7.9 17.1 7.0 591.3 6.1 0.7 1.0 1.9 5.70 4.0 1.5 16.2 11.675 18% 2.917 -2% 216.2 4.5 6.1 18.5 1.5 3.1 10.3 2.0 15.7 3.4 14.5 14.8 3.5 4.1 6.661 CNY 8.9 311.0 1.8 1.1 3.2 6.8 0.9 2.0 9.2 16.736 7.4 7.5 1.0 1.3 14.1 26.9 0.148 1.8 14.7 20.1 28.0 31.7 26.9 0.4 10.5 6.6 27.5 0.0 1.6 7.6 2.6 161.5 2.43 HKD 4.3 0.5 12.6 1.8 4.933 11% 4.4 3.5 1.9 0.7 7.3 1.

5% of it. the EBITDAX margin plunges to 17%. The nation’s aggregate reserve life of 10. S-Oil and SK Energy 2011 outlook Crude oil The Brent crude price has risen from USD76/bbl in January to USD86/bbl in November. On the other hand. according to PetroChina. there is a demand/supply mismatch for crude types.5/cm for LNG at the receiving terminal. Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6557 soniasong@hsbc. China’s current wellhead selling price for gas is RMB0.7% of the world’s crude but consumed 10. This year.7 years is less than a quarter of the world average. RMB2.com. From an Asian standpoint. According to IEA’s 2010 medium-term forecast.0/cm for pipe gas at the border and RMB3. Using a typical gas economics model. By 2020. Natural gas China’s gas economics look set to continue to deteriorate due to insufficient price increases in spite of China’s ambitious expansion in gas infrastructure and unconventional gas development drives. First. Gas & Chemicals  Urbanisation and wage increases in China will continue to drive demand for oil products and plastics  Key themes for 2011 will be unique value proposition from favourable product mix. above HSBC’s house view. According to the National Development and Reform Commission (NDRC). However. and is not registered/ qualified pursuant to FINRA regulations 66 . China is running out of oil. China’s gas EBITDAX margin is 40%. gas production costs vary from RMB0. China Sonia Song* Head of Oil & Gas Research. For China’s gas economics to be restored to a 40% EBITDAX margin. RMB0. pricing regime. China’s gas market should increase from 90bcm in 2009 to 250-300bcm in 2020.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. Second. which yield less middle-distillate products.0-3. China’s oil demand growth was driven by diesel.Equity Asia 7 December 2010 abc Oil. without imports.0/cm for unconventional gas (shale.70/cm for new onshore. LT strategy  Preference for Asian refining and chemicals over policy-ridden Chinese energy names. non-OPEC supply will significantly decline from 2012 and dependence on OPEC is expected to increase. Top picks CNOOC. we believe a number of factors may continue to support oil prices in 2011-12. CBM).38/cm for existing onshore production to RMB0. about 45% of demand should be supplied by imported gas and unconventionals.76/cm. The potential diesel shortage could prompt an oil price rally as witnessed in 2007-08. China produced 4. In 2010.7-1. a significant portion of OPEC crude is natural gas liquids (NGLs). With 10% supply assumed to come from pipe gas and unconventional. This will continue to drive Chinese oil majors into global markets to secure oil assets at potentially aggressive valuations and boost the oil price outlook in both the short and long term.

84. Due to recent earnings revision and ROE improvement from robust PX margins.000 based on 201112e PB of 2. We value S-Oil at KRW100. At the current stock price. new regulations in Japan could cut the country’s refining capacity by c1. Refining Declining supply addition in China in 2011-12. Responding to the UN’s gasoline embargo. 2011 EPS would increase by 15% and DCF by 18%. However. 60% of reserves). we will use historical multiple until we see signs of dividend payout improvement. our TP implies a potential return of 26% including dividend yield. OW. our RV-based PB came out at 2. HKD16. Valuation Chemicals After peaking at 18% in 2010. thus decreasing the supply of PX and driving margins up 50% in 4Q10.4x. If we were to use the current spot oil price vs our current forecast of USD76/bbl. much higher than the historical peak of 2.000) As Korea’s only pure refiner. its earnings stand to benefit most from any oil price surprise. 2011 high conviction idea S-Oil (010950 KS. Iran has reduced production of petrochemicals to maximise gasoline production. based on a historical PB model. we believe the company is best positioned to benefit from the refining margin uptrend in 2011-12.4x. The refining segment will contribute 45% of 2011 EBIT with the balance from associated refinery products.2m b/d (c4% of Asian capacity). TP HKD19. Asia/Middle East combined petrochemical capacity growth will sharply decline to 4. Thus. While China’s refining capacity growth could accelerate in 2013.8x. S-Oil is also the best poised in Asia to benefit from a sustained increase in PX operating margins which are even higher than refining’s (15% vs. OW. 4) major production disruptions at existing facilities. 5) massive nonoperating losses. The embargo appears unlikely to end soon. We expect Singapore complex margins to recover from USD4/b to USD7/b by 2014. YTD oil prices and other factors. and 6) regulatory fines. Assuming Chinese demand growth is sustained at 1.200.0x GDP based on continuing urbanisation in the central and western parts of the country. KRW80. it essentially predicts a market in which both Asian and Middle Eastern producers can co-exist. As pure oil play (80% of sales. Future production growth prospects are bright given China’s strong underlying demand for oil products and plastics 67 . 2) disappointing refining margin recovery.5) CNOOC is the most leveraged to Chinese growth within our China universe based on its exceptional earnings growth potential without downstream dilution. Risks We believe our forecasts could be materially affected by the following: 1) PX margin collapse.3-2. Winners from Chinese growth CNOOC (883 HK. Given the usual ramp-up delays of new projects. China’s demand will likely absorb 80-85% of that incremental capacity from Asia/Middle East till 2014. coupled with robust domestic demand growth. lube base oil and aromatics. 3) new aromatics unit ramp-up delay. FX effects.4% pa in 2011-14. TP KRW100. offsetting potential exports from China.Equity Asia 7 December 2010 abc would have to increase domestic gas prices by 30% pa till 2015. and S-Oil is the best positioned in Asia to benefit from robust PX margins as it will double its PX/ benzene capacity in 2Q11. 5%). S-Oil is the most leveraged to improving refining margins. is likely to turn China into a net importer of refined products.

the sum-of-the-parts value of SKE comes out at KRW190. We expect the next catalyst to come from the corporate de-merger effective from 1 January 2011. SKE’s intrinsic value comes out at KRW190.8%. KRW177. 4) uneconomical investments under government pressure.Equity Asia 7 December 2010 abc and stockpiling needs to fill new reserve and pipeline systems. aggressive M&As. Also. KRW165. 5) regulatory fines.000) SK Energy is set to evolve from a low-margin refinery/chemical producer (2-3%/7-8% EBIT margin) to an integrated energy company with E&P earnings contribution (40-60% EBIT margin) rising to roughly half of total EBIT. SoTP value itself will rise from any upside risk to our current oil price forecast of USD76/b for 2010 and LT USD84/b.5x SoTP value by mid-2010. It also boasts a competitive cost structure. which will enhance divisional autonomy in business strategy and asset sales. the Our forecasts could be materially affected by: 1) Failure to prove reserve potential at Brazil blocks. Risks Our forecasts could be materially affected by: 1) oil and gas prices higher/lower than our base case. 2) major production disruptions.000/share. the company made a strategic acquisition to keep the oil:gas ratio in its reserves at the current 60:40.000.9% and a long-term growth rate of 4. Eagle Ford shale project at a 20% discount. Using spot market data.500. We value SKE at 1. largely due to its long-standing company culture as a downstream giant in Korea. At the current share price.8% is the return when SKE’s E&P EBIT represents 45% of total at HSBC’s base-case oil price assumption of USD76/b. Also. From 0.6x target PB on normal ROE of 17. strong returns and ample excess cash with a lack of debt. Until 1Q10. 68 . 3) lower oil prices or refining and chemicals margins below our base case/consensus.9x. We choose the PB method (or the residual value model) over SoTP in order to establish a common valuation methodology for the Asian refining and petrochemical sector.0%). 2) production disruption/project delays. Valuation market sentiment is rapidly catching up. including a dividend yield of 2. Normal ROE of 17. However. Risks Techtonic shift SK Energy (096770 KS. such as Brazil deepwater blocks (20% and 27% stakes in Brazil BMC-30 and BMC-32) and Vietnam shallow-water assets. Valuation We value CNOOC at HKD19. cost of equity 12. 3) valueeroding. timely ramp-ups of new E&P projects and continued management commitment to raise market awareness on E&P value. the current share price stands at 0. our TP implies a potential return of 18%.5% (vs sector average 3.5% for FY10. SKE hadn’t aggressively addressed its key upstream assets. 4) massive nonoperating losses. OW(V). We had been worried that CNOOC would overpay for assets but the company made the last two acquisitions at lower-than-expected valuations (ie. Pan American at 25% below the speculated price).5 based on a DCF methodology with a WACC of 10% and a longterm oil price of USD84/b. Based on a sum-of-the-parts method. This should shield the company from policy objectives in China.

0 9.6 9.9 13.5 HKD6.1 10.5 15.2 2.7 RMB7 16.8% 17.8 15.6% 28.1% 25.0 8.4% 12.1 2.4% 1.1% 0.6% 1.187 16.3 HKD9.8 8.3 11.4% 15.5 12.6 12.4 15.4 15.9 1.5 6.6 8.096 21.7 3.1 9.4 13.2 6.1% 13.6 9.7% 22.7% 2.1 14.6 11.6 15.2 3.5 4.3 19.3 67.3 2.6 11.7 11.5% 17.5% 4.4% 0.1% 14.4 15.972 105.2 1.7% 10.9 12.4% 22.0 2.4% 15.2% 17.6% 15.9 14.2 7.2% 0.4 2.6 8.5 12.1 2.5% 13.7 13.3% 13.8 1.4 26.4 18.5 28.9 24.0 14.3 10.25 309 18.0 1.2 18.3% 1.5% 1.2% 16.3 8.6 4.4% 17.1 19.7 2.2% 14.9 1.843 19.5% 16.8% 2.3% 14.7% 1.7 14.1 10.5 17.4% 1.6 6.9% 9.8 7.6% 0.8% 17.9 33.533 7.5 10.2 1.3 3.3 3.0% 5.0 5.4 12.3% 2.5 12.1 14.6 11.5% 23.4 6.5 7.84 9.5 14.0 22.5 2.2% 14.172 7.2 11.8 RMB14.9 12.1 2.8 13.7 9.1 2.6 10.6 9.3% 25.7 8.6 12.6% 2.7 10.2 4.4% 31.0 7.3 HKD3.6 5.1% 2.2% Source: Thomson Reuters Datastream.466 20.5 2.5 7.8 46.7% 13.42 96.9 2.5 1.4 17.8 5.8 8.HSBC Asia Energy comps Company China CNOOC Petrochina Sinopec China Oilfield Services Sinopec Shanghai Petrochemical Kunlun Energy Petrochina A Sinopec A China Oilfield Services A Sinopec Shanghai Petrochemical A Average Average ex A-shares Korea LG Chem SK Energy S-Oil GS Holdings Hanhwa Average Taiwan Formosa Petrochem Formosa Plastics Formosa Chem & Fibre Nan Ya Plastics Average Ticker Rating Target price Share price Mkt cap ____________PE (x) ____________ _________EV/EBITDA (x) ________ ____ PB (x) ____ ___ Yield (%) ____ ____ ROE (%)____ USDm 2009a 2010e 2011e 2012e 2009a 2010e 2011e 2012e 2010e 2011e 2009a 2010e 2010e 2011e Equity Asia 7 December 2010 883 HK 857 HK 386 HK 2883 HK 338 HK 135 HK 601857 SS 600028 SS 601808 SS 600688 SS OW N(V) N(V) OW(V) N(V) UW(V) OW(V) OW(V) N(V) UW(V) HKD19.9% 2.3 20.7 16.1% 13.2 26.0 11.5% 4.822 8.9 22.4 17.067 13.8% 9.6 11. HSBC estimates.005 24.0 1.5 11.2 7.653 4.5 3.1 2.483 80.5% 14.8 15.8% 0.1 14.4% 2.5 67.5 8.8 11.1% 13.1 21.8 23.2 17.8 9.81 11.4 2.6 5.8 8.7 27.2 1.0 1.4 18.0 11.2% 17.4% 15.0% 2.2 1.4% 2.9 26.9 11.905 303.863 14.4% Thailand PTT E&P PTTEP TB PTTCH PTTCH TB Thai Oil TOP TB PTT PTT TB Average Region average (excluding A-shares) N OW(V) OW(V) N THB195 THB130 THB65 THB270 167 153.6 8. Closing prices as of 30 Nov 2010 abc 69 .0% 1.0 22.8 12.3 2.2% 2.6 7.2 15.8 13.0 28.3 11.9 9.2 26.1 7.1% 6505 TT 1301 TT 1326 TT 1303 TT UW N OW N TWD68 TWD75 TWD81 TWD63 84.4 8.3 11.2 2.2 3.2 16.3% 1.222 3.4 36.5 2.2 20.6% 1.7% 1.5 22.1 1.8% 2.1% 5.8 2.8 7.9 5.1 23.5 4.824 9.9% 14.3% 0.0 10.0 1.9 6.3 5.5 1.7 17.3 12.0 2.2% 16.2 8.0 9.9 20.0 22.1 7.9 11.0 19.7 16.5 14.2 18.7 8.7% 0.7% 16.8% 16.4% 1.5% 15.0% 14.6 19.7 11.4 1.6% 16.5 20.1 3.5 4.1 25.07 8.5 12.6 15.6 22.8 1.9% 15.1 16.1 11.2% 5.6 13.1% 12.5% 051910 KS 096770 KS 010950 KS 078930 KS 009830 KS N(V) KRW367000 OW(V) KRW177000 OW KRW100000 OW(V) KRW70000 UW(V) KRW17000 388000 165500 80200 62900 31750 22.2 6.2 32.5 3.4 15.8% 2.6% 1.7 90.9% 14.7% 8.833 17.5 1.0% 16.8 17.2 21.5 11.1 5.3% 2.6 10.8 16.4% 14.2 10.8 16.9% 1.2 26.7 4.4 HKD12.1 1.6% 1.0 10.043 3.6 2.2 27.1 7.8% 14.7 5.6 8.0 7.1 5.2% 17.4% 1.4 31.6 8.1 9.536 29.4 2.9 13.8% 4.7 11.4 2.4 7.6 10.3% 2.8 9.5 12.7% 0.4% 5.9% 1.3% 1.9 6.5 13.6 11.7 21.0 6.8 10.6 17.2 25.8 15.4 14.3% 3.3 2.3 11.2 13.23 14.1 6.888 227.2% 13.4 14.0% 0.7 1.6% 16.1 22.6% 1.6 2.4% 1.4 90.3 6.2 12.2% 16.1 7.5% 2.13 21.5 38.7 10.7 5.9 3.5 HKD9.5 2.65 7.5% 15.5 14.7% 14.4 15.4 1.2 11.2 3.8 0.0 1.3% 13.7% 14.2 8.8 13.5 1.7 17.338 18.6 40.6 12.4 2.2 10.7 12.3 27.1 7.6 16.2% 4.1 7.4 6.2 10.2% 18.2% 16.8 9.7 15.4 RMB13 RMB10.7 13.3 19.291 7.8% 2.8% 2.0 11.8 6.9 10.98 8.2 2.7 11.8 25.5 20.791 5.9 16.0 12.7 10.0 7.5 8.7 6.6 12.3 12.4 3.

TP HKD171.com.com. According to Soufun. are anxious to recoup cash flows to alleviate balance-sheet strains through active project launches. the rapid jump in supply in 2011 could be a remedy. In spite of this. In our Michelle Kwok* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6918 michellekwok@hsbc. Developers. but the property market has been indifferent to the austerity measures announced. namely Beijing. as underlined by the timing. There exists a tug-of-war between the government and developers. frequency and nature of the measures announced. given the inherent nature of the business model which requires fast asset turnover. With more than 40% of developers’ capital coming from pre-sale proceeds.hk Stanley Cheung* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2822 4395 stanleyyccheung@hsbc. players to sell projects at lower prices for the much-needed cash that needs to be spent on construction capital expenditure so as to meet aggressive 2012 completion targets. we believe the property measures have not yet been fully reflected in the market.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. which hopefully will put an end to the current tightening environment. The combination of these factors will lead to more notable declines in physical market property prices. players with firm specific catalysts & solid recurrent income will outperform  HK property sales volume will take a breather while prices remain firm. In our view. new home sales volumes in Beijing and Shanghai were down 38% and 17% m-o-m in October. the restriction on the usage of pre-sale proceeds may be imposed in more cities than the existing three. resulting in robust sales – an indication of strong market demand which may invite more restrictive property measures. we would not be surprised to see cash-strapped players pull back on heavy construction capex in 2011.8) China property – 2010 recap The China property market has experienced several rounds of tightening in 2010. forcing market 70 . In term of sales volume. Chengdu and Dalian. on the other hand. with the government showing little tolerance for further price inflation. We believe 1H11 will continue to be a challenging period for developers as the follow-on effects of policies filter through the system. leading to completion slippage in 2012. OW. buy on dips  High conviction call: SHKP (16 HK. In our view. with Beijing and Shanghai secondary prices up 2% and 7% in the year to October. underpinned by negative real rates. limitations on households’ home purchases in 16 cities and noise about direct price intervention are a doublewhammy to developers. and is not registered/ qualified pursuant to FINRA regulations 2011 outlook Headwinds persist We think the developers’ dilemma of lowering prices and taking a more passive land banking approach (against the backdrop of new tightening concerns) will persist in 2011.Equity Asia 7 December 2010 abc Real Estate  China’s real estate sector still clouded by policy headwinds.

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view, a more sustainable property price recovery will not come until 2H11. Despite the cloudy physical market outlook in 1H11, we believe equity investors should revisit the sector during the period, as shares tend to rebound 4-9 months ahead of property price recovery. We believe home purchase demand is solid but the timing of purchases is highly dependent on expectations of policy measures and price trends. For investors currently looking for exposure in the sector, we recommend stocks with company-specific drivers and recurrent income, such as Shui On Land.

Indeed, our breakeven analysis indicates that home prices need to rise 24% and 16% in order to offset the new levy based on investment horizons of 6 months and 1 year, respectively. Our view is that home prices will decline by 5-10% before regaining upward momentum in 2Q11. The combination of soaring inflation expectations, a negative rate environment as well as spillover demand from Chinese buyers will continue to provide solid support to property prices. On this, we recommend investors to buy on dips.

2011 high conviction idea
We have a preference for HK developers over China developers, as risk/reward profiles in Hong Kong are more attractive.

HK property – 2010 recap
Recapping key events in 2010, the HK government stunned the market by imposing a special stamp duty of as high as 15% on speculative deals with holding periods of 6 months or less, on the back of rapid residential price growth of 18% in the first 10 months of 2010. The new levy has put a dent in near-term market sentiment, with weekly secondary residential volume in 35 estates slumping 80% w-o-w immediately post-announcement. Home prices, however, have seen little impact thus far.

SHKP: better placed to weather the storm
Based on our view that properties with price tags of less than HKD3m will be most affected by the special stamp duty, we think SHKP will be best positioned to weather the storm, given the strong sales pipeline in the luxury end of the residential market, as well as a balanced development property/investment property portfolio. We estimate a luxury residential pipeline of ~1m sqft GFA in 2011 to bring in some HKD12bn of revenue if fully sold. Together with strong growth in the commercial leasing market, SHKP is well placed to capitalise on both residential sales and the commercial leasing market as it is one of the largest landlords in HK generating gross rental income of over HKD11bn/year.
Valuation

2011 outlook
Maintain positive stance – volume takes a breather but not price
With the latest measures announced on 19 November, we expect mass residential market transactions to shrink 40-60% from present levels through the lunar year holidays in February 2011, followed by a ‘lunar year rebound’ in sales volume. During periods of property tightening in the past, we note that transaction volume generally takes a breather over a period of 6-8 weeks. This time round, sales volume will take longer to recover, as the measures were harsher than expected.

We have an OW rating on SHKP with a target price of HKD171.8, which is based on a 20% premium to our 12-month forward NAV of HKD143.2. Our target implies a potential return of 36%, including a dividend yield of 2.1%, over the closing price of HKD128.4 as at 30 November.

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Risks

Most at risk
GZ R&F (2777 HK, UW(V), HKD10.32, TP HKD9.4)
High debt level a key concern

Key downside risks to our rating are (1) fasterand sharper-than-expected interest rate hikes, and (2) delays in project launches or completions.

Winners from Chinese growth
Since 2005, China’s turbo-charged economy has surged more than 150% in terms of nominal GDP. During the same period, the property market has been growing hand-in-hand, with average residential prices in Beijing surging ~200%.

GZ R&F’s high gearing has been a concern to us, as a result of overly aggressive land acquisitions in recent years. The company has seen its repayment of borrowings exceed operating cash inflow since 2008. In our view, recouping cash from property sales and a temporary suspension of land purchases is the best way to de-lever, but it has become a challenging task in the wake of the tightening measures.
Valuation

Shui On Land (0272 HK, OW(V), HKD3.88, TP HKD4.70)
High-quality IP highly sought after

With China’s GDP expected to grow by 8.9% in 2011 (based on HSBC Economics estimates), increasing maturity in the real estate market in terms of product mix, and a more established system for resident relocation, SOL’s high-quality investment properties will be highly sought after, allowing the company to generate high growth in recurrent income and hence cash flow. Furthermore, SOL’s exposure to commercial property in turn offers protection against policy risks such as bank credit tightening, lending rate hikes and other austerity measures. Last but not least, faster-than-expected relocation in Shanghai is a key catalyst for the stock for substantial rerating in NAV, as the new relocation scheme (introduced in end-2009) has thus far been effective in shortening the process.
Valuation

We have an UW(V) rating on GZ R&F with a target price of HKD9.4, which is based on 50% discount to our 12-month forward NAV of HKD18.8. The steep NAV discount is applied given the concerns stated above and based on average trading range during the previous downcycle in 2008. Our target implies a potential return of -7%, including a dividend yield of 2.2%.
Risks

Key risks include: (1) stronger-than-expected contracted sales and completions and (2) looserthan-expected political environment targeting the property sector.

Key beneficiary of low rates
Cap rates of investment properties in Hong Kong have been hovering at historical low levels, benefiting landlords of commercial properties in terms of valuation uplift as well as REITs generating DPU yields well above the HKMA 10year note.

We have an OW(V) rating and a target price of HKD4.7, set at a 25% discount to our 12-month forward NAV of HKD6.2. Our target price implies a potential return of 24%, including a dividend yield of 3.0%.
Risks

Key downside risks include (1) slippage in development, (2) lower-than-expected ASP, and (3) general execution and business risks.

Link REIT: more juice from AEI; yield spread still attractive (823 HK, OW, HKD24.35, HKD28.5)
Link REIT’s internal growth story (through asset enhancement initiatives and rental mark-ups) is

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intact over the next 2-3 years, with c40% of IFA expiring in 2H11 and FY12, presenting a tremendous opportunity to raise rents on the back of strong retail sales. In addition to growth from mark to market of existing leases, the existing AEI pipeline will take five years to exhaust, assuming the historical project completion run rate of around six properties per annum holds. Based on our estimated ROI of 26% (historical average ROI) for the 28 retail properties that have not yet gone through substantial enhancement works, we estimate the incremental NPI to be HKD601m. In aggregate, we estimate an NPI uplift of HKD1bn upon completion of all enhancement works at the top 50 properties.
Valuation

Most at risk
HKL: Fundamentally sound but valuation stretched (HKL SP, UW, USD6.78, USD5.7)
With the largest market share in the Grade-A office market in Central, HKL by default is the key beneficiary of the low cap rate environment as well as robust rental recovery cycle. While the Central office market recovery will carry through 2011 due to tight availability and a robust owneroccupier market, HKL shares are up 51% since May 2010, trading at a 4% premium to our NAV estimate. Hence, in spite of sound fundamentals, we believe HKL’s valuation is stretched and see higher downside risks for the stock.
Valuation

We have an OW rating on Link REIT with a target price of HKD28.5, which is based on a yield of 4.2% and our FY11/12 DPU estimate of HKD1.2/unit. We believe the DPU yield spread above the HKMA 10-year note of 189bp is still attractive. Our target price implies a potential return of 21%, including a dividend yield of 4.4%.
Risks

We have an UW rating on HKL. The company is trading at 1.1x our 2011e BV, which is the peak since 1994 and well above the mid-cycle PB range of 0.75x since 1990. Our target price for HKL is USD5.7, based on a 15% discount to our NAV estimate of USD6.8. Our target implies a potential return of -15%, including a dividend yield of 2.4%.
Risks

Key risks include (1) political/social issues such as protests against rent rises, (2) delays in AEI projects and (3) a softer-than-expected retail property market.

Key upside risks to our UW rating include a stronger and faster-than-expected recovery in the office leasing market.

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5 20.8 1.4 1.0 13.1 6.92 13.9 22.92 2.9 16.3 4.25 39.32 11.0 8.2 9.84 19.0 1.44 10. Closing prices as of 30 Nov 2010 abc .4 50.2 1.7 24.1 1.81 (24) (36) (47) (45) (37) (37) (25) 18.18 56.6 171.1 10.1 17.1 20.24 128.31 18 20 16.40 37.1 32 57 23 (9) 3 21 (13) 122 75 22 33 41 19 30 19.4 2.7 21.9 11.9 25.2 1.5 (23) 17 22 54 3. REITs Champion REIT* Link REIT* China Props China Overseas Land China Resources Land Franshion Properties Guangzhou R&F Shimao Property Shui On Land SOHO China 101 HK HKL SP 14 HK 683 HK 83 HK 16 HK N(V) UW OW(V) OW(V) OW(V) OW 36.75 43.1 1.6 1.88 5.7 32.4 12.8 1.7 5.2 21.18 7.3 2.4 2.1 4.8 1.0 9.8 4.5 19.81 4.8 26.5 23.73 20.4 28.5 20.35 3.3 26.33 18.7 9.7 9.3 688 HK 1109 HK 817 HK 2777 HK 813 HK 272 HK 410 HK N(V) OW(V) OW(V) UW(V) UW(V) OW(V) N(V) 14.5 5.6 16.72 21.3 12.6 1.62 6.15 6.63 18.2 2.9 30.5 2.79 18.6 19.0 2.1 1.7 16.9 19.20 16.5 23.1 15.4 0.3 1.3 2778 HK 823 HK UW(V) OW 4.3 Source: HSBC estimates.9 2.3 2.64 6.8 15.8 4 (17) 0 29 15 34 150 15 34 56 79 329 32.6 22.41 24.5 2.8 3.1 19.8 26.7 18.7 3.4 0.7 18.89 32.0 2.7 22.1 10.3 15.5 27.3 7.72 3.5 1.23 11 2 (25) (30) (13) (10) 22.74 Stock coverage Company HK Props Ticker Rating Share price Target price (HKD) (HKD) +/(%) Market cap (HKDbn) 12M Fwd NAV (HKD/sh) (Disc)/Prem ____________ Core PE (x) ___________ (%) FY09 FY10e FY11e Yield (%) FY10e P/B (x) FY10e Equity Asia 7 December 2010 Hang Lung Properties Hongkong Land (USD) Hysan Kerry Properties Sino Land Sun Hung Kai Prop.62 143.7 22.6 1.1 21.8 11.

while not all tablet devices will use CSP-based ICs (Windows/x86-based tablets likely to use flipchip BGA-based Intel CPUs). The continued process shrinks in the semiconductor space will allow for even lower power consumption in these mobile devices. IDC forecasts that 2011 will continue to be a good year for smartphones. The growth of smartphones (2010-14e CAGR of 18%) will continue to outpace that of handset industry (2010-14e CAGR of 6%). We see smartphone penetration rates continuing to increase together with the emergence of tablets. competition at 28nm in 2H11 from the likes of GlobalFoundries and Samsung may put pressure on pricing and hence margins may decline. we see greater upside for HDI suppliers for two reasons. where the likes of TSMC. Steven C Pelayo. 2010 will be remembered as the year when ARM-based architecture (made possible because of seemingly never-ending process shrink) emerged as a serious competitor to Intel’s x86 thanks to smartphones. TPK and UMC Semiconductors Chasing Moore’s Law Moore’s Law continues to be an influence in the semiconductor space.com. However.hk Handsets Smartphones fuel growth Following expected 14% and 55% y-o-y global shipment growth for the handset and smartphone markets this year. smartphones and tablets consume a greater dollar value of HDI (on the order of USD4-8 per unit) than CSP (less than USD2 per unit). memory storage in devices will also become greater. 75 . driving demand for high density interconnect (HDI) boards and chip scale packages (CSP). focus on sub- component plays on faster growth segments  Top picks: Samsung Electronics.Equity Asia 7 December 2010 abc Technology  We are positive on technology and particularly those companies benefiting from techtonic shifts in smartphones. continually driving faster and cheaper new-generation chips. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4391 stevenpelayo@hsbc. GlobalFoundries and Samsung push the law’s limits. PCBs Greater demand for HDI suppliers We see the continued growth for smartphones and tablets remaining a key theme for PCB and IC substrate suppliers in 2011. we believe that all tablets will use an HDI board. However. Firstly. Secondly. LED televisions and tablets  Rather than attempt the one hot product of 2011. This situation is clearly playing out within the foundry space. ramping up volume at 40/45nm and setting the stage for a battle in 28/32nm next year. CFA Head of Technology Research.

the impact of the poly oversupply in 2011 could be significantly worse than in 2009 as the end of an oligopolistic market is cemented. and smartphone shipments will grow from 270m units (20% of total handset) in 2010 to 527m in 2014 (32% of total handsets. 15% below current prices).Equity Asia 7 December 2010 abc The replacement of feature phones will continue to drive smartphone growth in the handset industry. 2) the phasing out of CCFL-LCD TV models. GCL-Poly (3800 HK. based on IDC forecasts. This means that cutting oversupply in the sector would require much sharper price cuts than in the past. in line with the thesis in our 10 May 2010 report Expectations high – but so are the risks. but oversupply looks set to return in 2011 (see our sector downgrade report. Cheaper poly is a clear negative for producers of polysilicon as well as its substitutes (thin-film solar players). representing a 2010-14e CAGR of 18% vs. Brace for the hangover. UW(V).30). the fourth-largest polysilicon producer. This will pave the way for positive surprises in 2011 for LED-LCD TV sales and LED demand. Android’s market share is forecast to increase to 25% in 2014 from 16% in 2010 (a 2010-14e CAGR of 31%).0). LED-backlit LCD TVs) to reach 50% in 2011 (60% by end-2011) from below 20% in 2010 (20% now).7bn units in 2014 (a 2010-14e CAGR of 6%). In our view. The top-5 poly producers which accounted for 95% and 75% of production in 2006 and 2008 respectively would account for less than 45% while exiting 2009. version migration for smartphones will start to slow in 2011.2) and Motorola (Android 3. Increased fragmentation has also come along with a more homogenous cost structure as well as declining differentiation.3bn units in 2010 to 1.52. HKD2. A strong pull-in of demand due to various subsidy cuts at the end of 2010 has helped prices to rise by 10% since then. which will also lower the technology barrier and allow latecomers such as LGE to catch up. HTC has been first to market with Android versions but Google has started to work with other vendors such as Huawei (Android 2. TP HKD1. the competition is intensifying within Android OS. several Asian competitors were lured by the strong business case. 6% for the industry overall). But we have recently turned positive as we believe LED-LCD TV demand will accelerate for two reasons: 1) retail prices will soon reach mass market levels (ie. 3) legislation that will benefit the sector. Solar The end of Oligo-poly Poly-Si prices at the peak of the shortage in 2008 surpassed USD450/Kg (9x current prices). We expect the penetration rate (the percentage of 76 . In addition. implying y-o-y shipment growth of 194%. At the same time. Given that the production cost of a fully-ramped up poly plant is only USD20-30/Kg. The Android OS will continue to gain market share during 2010-14. We estimate that more than 90% of global supply produces at a cash cost of under USD30/Kg and price pressure will be severe when demand drops below 18GW in 2011 (HSBC estimate: 13. Based on IDC forecasts. global handset shipments will grow from 1. poly oversupply is a positive for downstream solar manufacturers LED LED TV penetration to reach 50% in 2011 A major inventory adjustment happened industrywide in 3Q10 due to disappointing sales of LEDbacklit LCD televisions (LED-LCD TVs). New entrant build-out resulted in overcapacity and prices crashed to USD50/Kg by the end of 2009. is our key underweight in this space. However.2GW). 27 September 2010 for details).

which is the biggest cell & module maker globally.2x. which are priced 30-50% higher. and offer better investment prospects versus the pure panel players. touchpanel adoption and LCD utilisation – that we expect for 2011. TP KRW1. In this space. even with recent better than expected LCD TV sell-through in China. hitting sales of more than 7m units worldwide since its launch in June. However.139. business expansion into promising areas. the Galaxy Tab also reached sales of 600. We forecast the panel price recovery in 2Q11/3Q11 will be only 5-10% from trough to peak (vs.14. Though the LCD food chain has gone through inventory adjustment for about six months. Our TP of KRW1. The increasing number of major flagship smartphone models and new TV products with AMOLED display to come into the market looks set to further boost Samsung’s LCD division. which cannot justify a sustained share price rebound.000 is derived using an average of 2011e PB of 2. sum-of-the-parts (industry-average 2011e EV/EBITDA multiple). and global IT demand recovery.1 ranking.000. the proliferation in tablets next year will benefit Samsung greatly due to the explosive demand for NAND.000) To sum it all up. new product launches. N(V). Also. our preference is for Suntech Power (STP US. we also believe that strong LED penetration growth rates will enable even higher sell-through in television units for the company. 15-20% in the last cycle). Risks Risks to our rating and estimates include a stronger KRW.139. which was driven mainly by strong restocking demand. KRW826. Being the global market leader in LED TVs. the excess inventory level in the LCD TV segment (55% of total area) improved only marginally from a global perspective We forecast ROE for LCD panelmakers will stand at 1-7% in 2011.000 units in its first month after launch. OW. 77 . ASP erosion on key products such as handsets. Samsung’s flagship smartphone model. USD7. if any. sharp rise in industry capacity in memory and TFT-LCD. High conviction call Samsung Electronics (005930 KR. and a protracted delay in the global economic recovery. has slowed down size migration in the LCD TV segments. LED televisions and tablets thanks to its diversified business model and strong product portfolios. However.50). TP USD8. product migration from CCFL-based LCD TVs to LED-based LCD TVs. Valuation Display Lack of catalysts for pure panel players. and DCF (12% WACC).Equity Asia 7 December 2010 abc which could offset part of the price pressure on their products by lower polysilicon prices. Lastly. Thus the upside will be limited. the Galaxy S. maintaining its global No. we believe Samsung Electronics is well positioned to benefit greatly from the key 2011 techtonic shifts (discussed above) in smartphones. we believe only the NB and monitor segment (accounting for 40% of area demand for the LCD sector) inventory levels in the food chain are back to slightly lower levels. upward revisions to market forecasts on memory. 2011 the year of component makers We do anticipate a recovery for the LCD sector’s business outlook starting from late 1Q11. is a huge success. Meanwhile we see a number of component players that are leveraging on the three major themes – rising LED penetration. Potential catalysts include strong quarterly results. the recovery will be mild compared to the V-shape recovery seen in 2009.

As more smartphones and tablets (other than Apple’s) adopt P-cap technology. Back in 2007 the company developed the touchscreen of the first-generation iPhone. multi-touch performance.5. which creates risk from high single customer exposure. in the depths of the last downturn. OW(V). TWD664. Valuation Our target price is TWD16. there is limited debt on the balance sheets of Taiwan technology companies. the company generates well over 50% of sales from Apple alone. in our view). There are many touchscreen technologies available. Pricing anomalies 2010 and 2011 are two good years for investors for lofty dividend payments into 2012. As a reminder.1. we expect TPK to maintain 45-50% share of Apple’s business in the long run. the shares bottomed at approximately 0. the ideal method to achieve responsive. and dividend yield (8%+ sustainable for at least two years. TP TWD850) Leader in P-cap.6x book value and now trade at 0. Risks Our target price of TWD850 is based on 20x 2011e EPS. which has 40% of the touchscreen market now. Apple’s iPhone and iPad use what is called the P-cap solution. relatively high customer concentration from customers such as Texas Instruments. Risks The company’s own yield issues and/or improvement in the yields of competitors will reduce the technology gap of TPK and is the biggest risk faced by the company. OW(V). We expect the increasing popularity of tablet PCs (iPads and iPad-like) and robust growth in smartphone sales to drive about 45% growth for touchscreens in 2011. However. TPK (3673 TT. The multiple is based on a 20% premium to the normalised peak of YFO (Young Fast-3622 TT. which was the first commercially successful device with a multi-touch function. Apple touchscreen supplier TPK was the first company to adopt and commercialise P-cap on display screens. stylus-free. TP TWD16. The success brought TPK opportunities to develop touchscreens for other Apple devices. based on 1.8x book and 66% of market cap in cash/investments). In addition.5x. The premium is justified by the company’s high exposure to new technology (YFO – mostly conventional resistive) and Apple. another major touchscreen supplier) of 16. We expect the projected capacitive (P-cap) solution.0x 2011e book value.Equity Asia 7 December 2010 abc 2011 themes Techtonic shift A key growth area in the display space for 2011 will be touchscreens. Most of the Taiwan technology companies in our coverage universe have 2011e dividend yields of around 5%. Xilinx and Mediatek. Valuation UMC (2303 TT.86x 2011e book. UMC shares did not trade below 1.5) We continue to prefer UMC based on improved cycle-to-cycle metrics.3x prior to early 2008. valuation (0. TWD15. In the current investment climate. which should also help dividend payouts. we believe investors can seek defensive exposure by buying companies which pay out good dividends. The risks to our rating include: weak end-demand limiting recovery. Furthermore. to become mainstream in 2011 and its area demand to increase at an even more robust +110% in 2011. potential increased competition in the foundry space 78 . we expect TPK to be a main beneficiary with its leading technology. where capital gains are hard to find. Due to the close relationships forged during the codevelopments.

and continued valuation multiple compression. Potential upside catalysts include increased demand offsetting oncoming supply or a potential takeout by a larger competitor (unlikely in our view. struggles with technology roadmap. but not impossible). 79 .Equity Asia 7 December 2010 abc resulting in loss in market share or margin pressure.

6% 2.3x 1.8% 1.9% 65.6x -11.4x 8.5x 18.3% 17.2% 6.8x 14.6x 4.5x 13.7x 4.5x 5.0 123.8x 2.5x 23.7x 3.500 32. Samsung Techwin Elpida Memory Inotera Memories Nanya Tech Winbond Average PC Hardware Hon Hai Asustek Acer Lenovo Quanta Wistron Compal D-Link Synnex Catcher Ju Teng Average Rating Share price Target price Pot’l return Mcap ____Rev growth ___ ____EBIT margin____ ______ROE______ ____ Div yield ___ ______ PE_______ ______ PB ______ ___ EV/EBITDA ___ (USDm) 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e Equity Asia 7 December 2010 N(V) OW(V) N(V) UW(V) 63.3% 28.572 1.3x 47.4x 13.0% 10.4x 1.8x 2.000 1.6 72.6x 10.1% 8.0% 0.6x 4.5x 18.8% 2.704 11.5x 5.5 31.6% 0.5% 0.5 16.9x 4.2x 4.0% 3.4x 10.4x 7.0x 4.4x 3.3% 7.0% 0.0% 5.3x 3.4x 10.2x 5.0 15.9% 43.2x 15.9x 2.253 614 3.4% 28.1% 3.4% 25.0x 9.4% 42.7% 10.80 Asia tech: Valuation comparison Company Foundry TSMC UMC Vanguard SMIC Average Packaging and Test ASE Siliconware ASM Pacific Chroma ATE Average Fabless Mediatek Spreadtrum Average PCB/Substrates Unimicron Tripod Nan Ya PCB Kingboard Lam Average Memory Samsung Hynix LG Elec.9% 22.228 N(V) N(V) N(V) OW(V) 55.1% 5.2% 0.1x 8.5x 1.3x 11.0x 2.0x 2.3x 6.3x 13.5x 5.1x 2.769 860 7.4% 1.6x 11.2x 1.4% 15.0x 0.1x 3.6x 2.3% 11.4x 10.1% 5.7x 13.2% 11.5x 27.7x 7.6x 2.0% 2.5% 2.3% 23.7x 6.4x 7.4x 2.0% 0.0 19.9x 2.8x 14.0x 12.0 69.9x 2.0x 17.3x 10.6x 1.1% 3.945 889 OW(V) OW(V) OW(V) OW(V) N(V) OW N N(V) OW(V) N N(V) 108.0% 3.8% 31.0x 2.6x 15.6% 21.5% 0.5x 1.6x 8.2x 7.0% 5.4x 6.6% 0.8x 1.9% 2.5 3.9x 2.9x 3.4x 3.0x 11.4x 2.5% 4.0x 14.3x 6.1x 6.3% 5.1% 39.6 55.045 886 876 10.5 3.0x 2.603 3.8x 1.6x 1.015 5.7x 6.2% 1.2x 1.7 -16% 20% 13.3% 17.1x 15.4% 24.3% 19.4x 11.0 41.8 73.5x 1.2x 16.3x 1.1x 0.929 109 abc Source: Factset.2% -11.0 110.7% 23.8x 21.8x 1.5x 3.0x 5.8x 4.0 90.8x 6.7x 5.0% 0.1 12.6x 4.3% 5.3x 4.4x 3.5% 0.0% 36.3% 0.9x 12.4 17.1x 13.0 5.4 15.1x -13.2% 14.1x 1.746 13.7% 3.6x 8.6 77.0 16.2x 4.9x 1.9% 17.9x 8.6% 6.1% 4.7% 13.1x 2.7x 21.0% 5.6% -0.0% 2.9% 3.3x 8.4x 1.0% 3.4% 11.5% 2.3% 2.0% 22.497 2.8x 7.8% 7.7% 12.9x 17.7x 1.000 140.5x 1.9x 16.581 2.7x 1.8% 20.3x 8.0 106.0 35.0x 0.4% 17.6x 1.2x 13.6x 1.0 306.6 8% 18% 11% 0% 51.4x 0.5% 8.8% 2.481 1.0 8.0% 1.0% 2.5x 11.5x 3.0% 24.7% 3.0% 16.4x 7.4% 17.0% 0.6x 1.7x -26.7x 12.2x 8.9% 5.1x 23.3x 19.0% 5.4% 8.0x 12.9x 1.3% 12.0x 2.8% 5.9% 8.6x 2.5x 9.5x 2.1x 14.4x 9.7x 13.3 76.2% 21.0% 5.236 658 64 41% 37% 28% 46% 38% 123% 11% 97% 73% 76% -1% 224% 112% 50% 26% 31% 49% 39% 15% 64% 7% 24% 41% 30% 0% 64% 31% 40% -27% 15% 12% 34% 16% 32% 10% 23% 21% -5% 17% 8% 7% 5% 6% 6% 8% -1% -4% 16% 5% -6% 51% 22% 16% 16% 27% 7% 16% 8% 5% 11% 9% 39% 39% 0% 6% 15% 21% -13% 15% 36% 14% 25% 13% 14% 22% 17% 10% 16% 38% 19% 12% 0% 17% 12% 9% 33% 30% 21% 28% 21% 24% 13% 14% 4% 22% 13% 12% 27% 0% 8% 6% -8% -5% 12% 6% 3% 4% 3% 1% 2% 2% 3% 3% 2% 21% 9% 3% 35% 18% 13% 3% 17% 12% 8% 32% 30% 20% 26% 20% 23% 14% 14% 11% 22% 15% 11% 20% 3% 10% 17% 8% 5% 7% 10% 3% 4% 3% 2% 2% 2% 3% 4% 2% 19% 10% 3% 29.0x 11.8x 6.1 143.0x 1.0x 5.5x 9.4x 0.1% 2.1% 5.9x 3.7% 5.4% 18.2x 1.9x 22.2x 8.7% 7.822 5.9x -258.5x 6.2% 6.2x 5.7% 24.2x 4.0 3.4x 0.6% 4.0% 0.8x 2.3x 7.6x 5.9x 3.5x 0.4x 13.5x 4.3x 14.9% 23.7x 8.180 4.9x 1.3x 3.7x 7.7% 9.8% 19.2% 19.7x 1.9x 2.6x 0.0 -5% 8% -1% 21% 5.3x 19.2% 9.9x 1.1% 5.5x 6.4x 2.9% 5.0 83.4x 13.9x 3. HSBC estimates.8x 5.7% 2.3x 20.7% 3.9% 0.8 39% 36% 38% 25% 50% 27% 25% 38% 99.6% 15.0 7.6x 77.5 3.9% 18.7x N(V) N(V) N(V) OW(V) 31.8x 10.7% 46.500 13.0x 8.139.3x 19.1% 3.9 61.4% 23.7% 23.000 103.2% 16.4x 10.3x 3.5 90.0 90.876 OW OW(V) OW OW(V) OW(V) N(V) N(V) OW(V) 826.0 108.8x 8.1x 17.5 13.9x 0.4x 4.0% 0.500 135.0x 36.979 2.6x 9.4 304.7x 2.9 10.2% 5.0x 16.6x 9.3x 79.1% 27.0% 0.1% 16.9x 13.0% 1.179 3.9% 21.9 31.8x 4.7% 1.9x 5.000 108.7% 2.2x 8.8x 0.0x 9.9 28.3x 3.9% 4.8x 0.298 1.8x 5.7x 8.1x 5.2x 3.000 997 1.6% 7.0% 0.7% 10.1% 22.9% -2.6 65.7x 4.7% 16.6% 17.8 7.0x 7.8% 23.8 19.8% 4.3 93. Closing prices as of 30 Nov 2010 .3x 12.8x 1.1x 1.1x 2.4x 10.9x 4.8 37.5x 7.3% 2.000 23.3% 3.7x 9.3% 7.279 7.3x 16.8x 11.5x 2.6x 10.3x 2.5% 10.104 2.0x 1.5 263.7 57.2% 8.0 5.3% 31.3x 3.3x 1.9x UW OW(V) 390.5% 2.853 12.3% -13.9 4% -4% 5% 23% 2.6 133.4% 9.3x 1.2% 0.6 34% 19% 24% 11% 3% 24% 15% 16% 22% -8% 18% 33.1% 6.1x 2.5% 9.2 59.9x 1.3% 8.9x 8.2% 4.915 1.9% 4.4% 8.8% 1.9% 4.0 33.3x 5.4x 23.8x 0.8x 11.6% 25.

5% 1.7% -6.2x 18.000 130.4x 14.0 23.6% 50.1x 5.6x 5.000 850.1% 2.0 1.1 21.725 292.000 134.0 187.5x 8.3x 2.1% 5.0 21.9x 21.6x 1.2% 0.6x 8.6x 20.7% 1.0% 0.5 8.3 742.7x 15.6x 6.610 4.4x 1.1% 24.0 21.504 1.5x 4.1% 16.8% 15.4x 1.375 82.7 38.0x 9.8x 12.9% 5.6% 20.9% 19.9x 1.7x 6.4% 35.6x 3.8% 0.9% 21.0 116.890 2.8x 12.0% 0.0 111.7x 1.9x 0.8x 4.8x 1.3% 17.1 49.5x N UW(V) OW OW(V) OW N UW(V) 845.8x 9.4% 4.5% 16.2% 13.7x 14.3x 6.6x 8.9x 4.2x 1.6x 3.3x 35.435 0.6% 1.5 105.4x 12.7x 16.550 97.7x 16.5x 1.1x 10.795 9.0 54.3% 0.1x 51.0% 0.9x 3.1x 1.0x 43.7x 6.8x 8.8% 9.3 19% -18% -40% -34% -6% -48% 1.0% 0.0 112.0% 16.9% 0.6x 9.6x 21.2x 88.0 70.6x 16.5x 6.0% 0.2% 8.1x 6.0% 2.2x 15.102 236.178 530 237 410 N(V) N(V) OW(V) OW(V) N(V) N(V) 28.6x 9.0 21.5x 1.2x 10.8x 8.4x 10.1% 1.2% 28.2x 5.078 2.5x 1.8x 13.4x 2.7% 24.8x 12.381 39.650 5.7x 17.0 32.3 2.8 39.4x 14.7x 17.1% 9.684 9.5% 31.0 5.5% 27.8x 8.4x 16.5% 9.5x 14.1x 5.6x 9.0 29.3% 15.358 166.3% 2.6% 0.4x 7.3x 26.9x 10.8% 1.5x 5.987 1.3% 7.9% 5.0 44.2% 2.3x 17.3x 1.3% 2.7% 26.8x 9.8x 6.0x 14.3x 3.0 133.9% 4.5x 3.1% 2.9x 6.3x 1.2x 16.0 45.2x 2.0 -4% -32% 25% 11% 31% 18% 0% 21.4% 19.6x 7.9% 15.6x 5.0% 5.7x 1.1% -0.3x 4.2x 5.0 23.1% 1.0 53.0 -17% -23% -18% 35% 4% 24% 37% 33% 22% 43% 32% 27% 27% 32% 48% 31% 16.8% 2.2 39.0 32.0x 13.1x 23.5 22.6x 4.2% 0.6x 1.3% 8.1x 20.7 172.2x 11.4% 16.6x 0.3% 16.2% 1.824 29.901 1.8% 42.2x 19.3x 10.8% 0.721 3.8x 1.4% 25.800 165.3x 8.0x 8.9x 9.9x 1.5x 15.2% 0.6x 6.0x 2.5% 0.7x 7.0x 1.2% 6.6x 4.8% 48.2x abc Source: Factset.4 120.6x 1.8% 9.9% 17.1% 2.0x 5.0 60.7 820.8x 21.3x 13.5 125.3x 13.0 13% 22% 9% 18% 11% 10% 10.5 41.Asia tech: Valuation comparison (cont’d) Equity Asia 7 December 2010 Company Flat Panel/Display AUO Innolux LG Display Novatek Sharp Radiant Everlight Epistar SemCo LG Innotek Seoul Semi Samsung SDI Cheil Industries TPK Coretronic Corning Average Handsets HTC FIH Largan AAC Silitech Merry Compal Average Media/Telecom Equip ZTE Perfect World Tencent Netease Shanda Baidu Average Solar Suntech Yingli LDK Solar Motech Trina GCL Average Rating Share price Target price Pot’l return Mcap ___ Rev growth ___ ___ EBIT margin ___ ______ ROE _____ ____Div yield ____ _______PE ______ _______ PB ______ ___ EV/EBITDA ___ (USDm) 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e 2010e 2011e UW(V) UW(V) UW OW UW(V) OW OW(V) OW(V) OW OW(V) OW(V) OW(V) OW OW(V) OW OW 30.9% 18.4% 0.5% 10.2% 4.0 805.6x 10.1 32.1 6.3x 2.6% 8.5% 30.2% 16.0x 20.6x 16.622 978 857 36% 196% 25% 32% -3% 29% 50% 57% 31% 70% 91% 4% 18% 187% 18% 17% 54% 92% 12% 52% 52% 28% 24% -12% 36% 22% 15% 52% 46% 13% 81% 38% 63% 66% 111% 100% 86% 197% 104% 11% 15% 14% 12% 2% 24% 26% 27% 29% 29% 47% 3% 22% 135% 9% 1% 25% 44% 10% 28% 35% 21% 16% -1% 22% 15% 31% 31% 31% 22% 55% 31% -20% -20% -21% -25% -20% 8% -16% 3% 0% 5% 14% 2% 6% 13% 28% 12% 6% 12% 7% 7% 9% 5% 22% 9% 16% -2% 38% 32% 15% 11% 0% 16% 8% 42% 51% 45% 25% 48% 37% 9% 21% 16% 14% 23% 26% 18% 2% 1% 4% 16% 2% 6% 13% 26% 12% 6% 14% 7% 7% 9% 5% 22% 9% 14% 0% 38% 32% 14% 11% 0% 15% 8% 46% 51% 47% 28% 47% 38% 12% 17% 9% 9% 18% 20% 14% 3.0% 0.4x 5.9% 9.1x 25.1x 2.7x 23.9% 27.3x 6.2x 11.0% 3.6x 1.7% 0.2x 1.5x 0.8% 0.4% 0.8% 8.0% 0.4x 11.3x 5.3% 30.3x 0.0% 0.1x 10.2% 13.5x 17.4x 19.0 3.2x 4.3x 10.0 820.2% 51.0% 22.4% 17.7x 2.2% 53.0x 8.8x 1.9 10.1% 16.279 1.8x 1.9x 19.6x 7.9% 3.6x 1.9% 66.185 69.3x 2.9% N(V) UW(V) UW(V) UW(V) UW(V) UW(V) 7.4% 0.2x 1.0 63.7% 9.1x 1.000 125.6% 45.5 17.1% 2.9x 17.4% 49.2% 27.9% 21.0% 0.2x 2.8x 6.4% 27.5x 3.5x 2.2x 16.7% 6.1x 78.7 25.7x 9.7x 15.0x 4.7x 6.1x 4.7% 15.2% 7.0% 3.8% 0.5x 4.4x 25.0% 4.0x 19.4% 23.0% 1.5 676.7x 4.1x 10.438 1.500 106.0% 9.4x 2.7x 5.9x 3.0% 0.9x 7.1x 14.5% -0.4x 8.1% 11.0% 28.9x 2.7x 1.4x 0.4x 1.5% 3.5x 22.4x 2.1% 4.7x 13.2x 12.1 9.9x 8.4% 0.2% 8.0x 3.8x 1.6 23.6x 6.7x 3.8% 13.9% 20.7% 15.000 51.8x 1.7x 2.3x 7.0x 5.5% 20.980 4.5x 17.3x 15. Closing prices as of 30 Nov 2010 81 .000 210.0x 3.0 152.8% 0.6x 7.9% 0.6x 5.3% 0.1x 1.329 3.1% 0.000 185.2x 1.2x 7.7% 1.1% 17.4% 8.2% 0.8x 3.4% 0.8 103.9x 9.1x 38.0 43.000 38.7% 17.4x 5.0x 9.2% 19.5x 2.464 651 2.9x 1.2x 10.0% 0.3% 1.0x 46.4x 16.0x 3.4x 17.9x 7.9% 1.6% 33.6x 3.3x 0.7% 5.8% 15.3x 1. HSBC estimates.1x 6.2x 1.5x 2.4x 9.9x 1.5x 10.6% 9.4 97.495 22.7x 24.500 664.8x 30.124 0.953 701 1.5% 32.7x 35.1x 13.8x 11.7% 1.3x 32.2x 2.5 8.8x 10.0 82.

and Telstra. We see increased investor interest in India on the back of the resignation of telecoms minister Andimuthu Raja but believe it’s too early to invest. Axiata-Excelcomindo. In contrast. allowing for significant increases in average revenue per customer (ARPU) on twoyear contracts. We see initial signs that some operators are regaining pricing power. wireless broadband business model. This capacity crunch creates challenges for operators that have underinvested in network capex but opportunities for operators that have overinvested to grab high-end. Hong Kong. and are more cautious on the near-term profitability for China vendors  Key themes for 2011 will be the ability to monetise wireless data. In contrast to the telecoms services space. PCCW. rather than chasing “risky” out-ofsector/market growth. a greater emphasis on returning excess cash to shareholders. This growth in organic demand/core business earnings is also allowing some operators to increase dividend payouts to shareholders. DoCoMo. China internet services enjoy no 82 . Japan. based on an improved outlook for core business earnings growth and a shift towards higher dividend payouts. We remain positive on the China-Korea internet space. Tucker Grinnan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4686 tuckergrinnan@hsbc. Smartphone customers consume 10x as much data capacity as feature phone customers. and is not registered/ qualified pursuant to FINRA regulations Internet services We remain structural bulls on both the China and Korea internet services space and believe that content creation-distribution companies are the most attractive subsegment in our coverage universe. India and Indonesia. and Tulip. In more developed markets we like Korea Telecom. At this juncture.Equity Asia 7 December 2010 abc Telecoms & Media  We have shifted towards a more positive view on telecom services in developed markets based on wireless data/dividend catalysts.com. we have just one Overweight rating in each of the traditional growth markets of China. In developing markets we like China Telecom. this is a developed market story and our Overweights are concentrated in Korea.anderson@hsbc. with 30% internet penetration and dramatic increases in broadband access funded by a wave of Chinese telecom operator capex. eAccess. China is still in the early stages of the broadband revolution. Smartone.hk Neale Anderson* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6716 neale.com. and renewed interest in the internet services space  Top picks include Telstra. and Singapore.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. The key driver for telecom services is the shift towards a datacentric. data-centric customers. China Telecom and Korea Telecom 2011 outlook Telecom services We are cautiously optimistic on the Asian telecom services space.

In particular. as an aggressive focus on handsets/GEM expansion drags down OP margins (1% in 3Q10).3) We believe Telstra is a high risk/high return play given the uncertainty over the regulatory framework for network separation – the National Broadband Network (NBN). fuelled in part by a combination of direct/indirect subsidies/tax breaks. creating uncertainty over the dividend.3 per share. a leading global game developer that is geared to the China story. We are OW(V) on both Tencent and Netease and are bullish on the China online gaming. the decision to task dominant wireless operator China Mobile with the national service obligation to fund the development of the native TD-SCDMA standard is a harbinger. easy-to-use interface to high speed 83 . Telecoms equipment vendors We remain longer-term structural bulls on the Chinese telecom equipment vendors. The current political coalition ruling Australia is fragile and the opposition party has suggested a wholesale review of NBN is likely if they return to power. Themes for 2011 Techtonic shifts The emergence of smartphone-based wireless broadband services provides the biggest structural catalyst for the developed market telecom business model in the past decade. TP AUD3. Telstra is our top dividend play. China’s decision to build three huge. Management lost focus on the core business earlier in the year and the commitment to invest AUD1bn in operating costs in FY June 2011 to recapture market share is positive. In Korea we like Daum Communications. which would generate an NPV for Telstra shareholders of AUD11bn. Telstra has the best wireless network in Australia and is well positioned to regain share in the high-end. We expect these trends to continue and see another wave of domestic China capex coming with the deployment of 4G LTE and modernisation of the Chinese cable TV (CATV) industry in 2012. and a focus on shareholder value creation. Valuation: We value Telstra using a dividend discount model – our target price is AUD3. online advertising. The release of Apple’s iPhone followed by a much wider range of Google Android-based devices has created a powerful. no tariff/rate of return restrictions. We argue the proposed NBN deal. which is highly geared to the uptake in mobile ad spending that we expect to see as the smartphone penetration rate surges. Risks: The key risks for Telstra relate to uncertainty over the dividend payment/NBN. datacentric smartphone segment. AUD2. China has moved to the old Korean-style management of the telco sector. ZTE and Comba have emerged as powerful global competitors. Our Neutral (V) rating on ZTE reflects a cautious view on near-term earnings. but are cautious on the near-term outlook for domestic capex earnings. OW. Top pick for 2011 Telstra (TLS AU. is a fair-equitable solution that could be finalised before the end of the year. and e-commerce markets and believe these emerging companies are much better structural proxies for the China domestic consumption story. overlapping 3G networks based on three different technology standards is ample evidence of this bias. with a focus on supporting domestic telecom equipment vendors at the expense of the domestic telecom services providers. Domestic Chinese vendors Huawei.Equity Asia 7 December 2010 abc government players. and NCsoft. Our OW rating on Comba reflects a more bullish view on the antenna space.81. Telstra has moved up over the past few weeks on positive management comments on the stable dividend for the next two years and the possibility of a special dividend in the event of a rapid NBN resolution.

We are encouraged by the recent trend towards Asian operators returning cash to shareholders rather than chasing higher-risk acquisitions outside their core markets/countries. but careful cost management and a preferential off-balance sheet lease structure for the CDMA network should allow a doubling of net profit margin (NPM) to 8. in a market where most investors continue to focus on top-line versus bottom-line growth.1 is based on 13x 2011e EPS. ZTE’s recent release of a lowcost Indian smartphone in the run-up to 3G launch highlights the potential of this technology to stimulate a global shift in wireless data growth. the shift towards a bundled services model designed to lower sales and marketing costs. The smartphone-driven wireless model creates the potential for a structural shift in core business revenue/profit growth.Equity Asia 7 December 2010 abc networks and rich content. KRW46. KT has undergone a dramatic transformation over the last two years via the full integration of former wireless unit. Valuation: Our target price of HKD5. and local investors remain focused on top-line growth. Given our cautious stance on wireless penetration and M&A driven growth strategies.500. regulatory approach and capital management. China Telecom (728 HK. creating the potential for global adoption of the smartphone-driven wireless broadband operatingbusiness model. Valuation: Our target price of KRW67. raising questions about the stock’s ability to re-rate despite strong sub growth. Risks: Investor scepticism on CDMA runs deep. If all operators don’t continue to benefit from the smartphone shift. It has expanded handset inventory and aggressively bundled services.000) KT provides a rare combination of growth and yield at compelling valuations. Risks: Korea is our favourite market in Asian telco services on a growth/valuation basis and the key risks relate to industry level shifts in competitive intensity. the development of a yield-centric domestic investor base is encouraging. We are optimistic on the near-term KT dividend yield but acknowledge long-term systemic risks associated with the industry focus on IT services. and a new CEO with the political power to push through a 16% cut in the workforce. The key challenges are the technical issue of the foreign ownership cap being filled. which could overshadow the dramatic turnaround in the wireless segment. OW. we could see a return to value-destructive pricing/marketing spend wars. OW. which in turn are allowing selected telco operators to push through de facto price increases. 84 . HKD3.5% in 2010.1) China Telecom is our only OW in the China space and is one of our top regional telco services picks. Cash-rich companies One of the key themes for our telecom services companies is the re-rating catalyst created by higher dividend payouts. TP KRW67.91. China Telecom’s 3G net ads are focused on the lower ARPU youth-student segment. We are 20% and 38% above consensus operating profit estimates for FY11-12. China is driving down retail prices of low-end smartphones into the USD150-200 range. TP HKD5. Explosive customer demand for these services is creating wireless capacity crunch pressures.000 is based on 8x 2011e EPS. KT Corp (030200 KS. The development of the Apple and Google applications stores has allowed telecoms operators to outsource content development/management to skilled media companies. smartphone-related marketing expenditure remains high. The core fixed-line business continues to compress as PHS migrate off. It has executed a remarkable turnaround in the CDMA business and should surpass Verizon as the largest CDMA operator in the world in 1Q11 with over 100m subscribers. KTF.

2% 9.3% 4.2x 6.714 38.8% 2.KQ N OW UW OW OW (V) OW (V) OW N OW OW N N N UW OW OW (V) N N UW OW N (V) UW (V) N (V) UW (V) OW N UW OW (V) N N N OW (V) N (V) OW (V) N (V) N (V) N OW (V) OW OW (V) N (V) OW (V) OW (V) 201.9x 2.4x 8.2% 6.6x 12.4x 5.2x 3.2 38.600 33.4x 10.8 350.3x 4.1% 8.540 4. NTT SoftBank Corp.9% 4.2x 13.434 6.0x 1.0% 0.0% 1.2% 2.1% -18.8x 4.5% 7.9% -9.5% 0.7% 6.8% 8.4x 3.0x 51.000 81.KQ 9437.0% 2.8x 18.8% 39.O SNDA.5x 11.2% 2.4x 9.9x 12.805 2.000 50.5x 7.0% 8.BO GTLI.1 2.2x 24.1% 4.2 68.6% 73.9 2.250 5.000 320.6% 1.9% 5.428 29.8x 9.5% 8.0% 0.4x 10.000 16.6x 5.5% 48.500 46.5x 13.0% 0. KDDI Corp eAccess Ltd Taiwan Chunghwa Telecom Taiwan Mobile Co.8x 12.7 2.2% 0.3x 47.6x 11.7 3.5x 7.8x 20.461 8.O 035420.6% 1.7x 6.4x 3.9% 4.2% 1.0% 0.4x 8.839 885 874 312 133 113 19.6x 13.402 770 26.4x 7.500 Potential return 3.502 783 779 12.3 240.4x 6.500 255.6x 16.304 4.6% 6.0% 3.0% 0.800 7.0% 0.9% 7.4 43.com Shanda Perfect World Co South Korea-Internet NHN Corp NCsoft Daum Communications NEOWIZ Games CJ Internet GAMEVIL INC COM2US Corporation Asia Pac Average (ex Internet stocks) Source: HSBC estimates.3x 7.874 2.T 9433.667 3.3x 8.KS 030200.8x 11.4x 9.BO TULP.0% 3.1x 6.0% 0.4x 14.000 8.6x 8.2% 4.KQ 095660.8% 5.3% 41.1 6.700 6.6x 4.0 211.2x 3.750 13.150 7.545 4.000 113.2x 3.6x 6.518 38.KQ 063080.7% 4.8% 2.9x 9.5x 7.0% 0.JK EXCL.9% 4.0% 0.9x 2.1x 14.9% 2.150 5.713 41.190 1.600 3.0 235. China-Internet Tencent Holdings Baidu.3% 7.9x 19.623 3.0% 1.0x 4.683 29.700 3.0 39.8% 3.HK 1883. Systems CITIC 1616 SmarTone South Korea-Telcom SK Telecom KT Corp LG U+ SK Broadband Japan NTT DoCoMo Inc.0% 0.4x 3.3x 7.4x 4.290 5.923 15.0% 0.9% 40.0% 1.5x 6.9x 9.1x 4.0% 3.5x 15.T 9427.489 65.T 2412.5% 4.5% 3.6% 4.T 9432.7% 6.0 10.2x 11.000 2.0x 10.2% 4.2x 8.3% 0.0 116. Netease.KS 032640.4x 2.9% 19.3% 8.5x 5.7% 1.TW 3045.8 2.1x 10.487 3.9% 17.AX BRTI.522 41.6x 6.O PWRD.0 39.400 528.000 53.1x 6.658 1.4% 45.0 11.9% 10.8% 1.0 170.4% 1.TW 4904.1x 5.9 8.0% 4.8% 10.8x 13.0 33.7% 5.2x 7.0% 3.2% 18.0% 0.4x 5.3x 13.864 1.5% 42.SI MONE.2 39.331 45.0% 1.5x 9.0% 4.HK 017670.7x 3.1% 1.4% 0.0% 0.061 988 7.1% 11.850 3.7x 11.507 61.KQ 036570.066 138.OQ NTES.3% 5.3% 5.0 43.9x 12.7% 2.8x 29.700 27.1% -2.861 1.1x 13.KS 033630.600 15.6x 9.HK 0728.8% 4.785 2.7x 9.3% 0.2% 9.1x 7.3x 4.0% 3.3x 1.5% 6.1 179.1% -11.3% 7.5x 4.0% 0.197 4.0% 0.1x 5.5x 48.7 14.TW TLS.261 27.2x 6.958 2.5% 0.9% 10.466 1.0% 3.7x 9.9% 6.4% 0.0% 0.2x 4.0% 25.3% 0.9x 14.000 76.4x 2.4x 4.239 928 578 18.HK 2342.565 10.454 546 635 15.5% 7.6x 13.0 2.520 26.0% 0.0% 5.000 88.0% 0.6% 5.435 37.700 74.7% 0.0% 1.6x 2.000 4.0 69.489 3.377 abc 85 .9x 9.8% 3.9% 5.com Inc.2% 1.7% 1.7x 6.HK BIDU.6% 5.8x 5.0% 0.1x 14.1 2.3x 11.200 141.7x 6.1% -36.3 72.2% 15.9x 6.943 486.8x 4.2x 4.KS 037150.5 3.0% 0.2x 7.9% 4.820 25.5x 11.2% 2.600 5.3% 1.4% 29.5x 12.9% 0.NS IDEA.716 46.561 49.KQ 078340.621 6.426 6.8% 10.3x 1.8% 0.2x 47.BO RLCM.7x 12.0% 0.1x 5.7% 0.648 8.6x 14.323 6.2x 11.538 3.0x 2.1x 13.0x 18.1% 3.T 9984.0x 7.SI 0700.4x 13.9x 10.0% 25.6 11.4x 20.6% 4.7x 5.386 70.HK 0008.4x 5.9% 1.163 5. Far EasTone Australia Telstra Corp India Bharti Airtel Reliance Communications Idea Cellular Ltd GTL Infrastructure Tulip Telecom Indonesia PT Telkom Indosat XL Axiata Singapore Singapore Telecom Starhub M1 Ltd.9x 13.8x 6.0% 0.1 4.0x 3.9% 8.6x 11.7x 6.8x 2.0 75.5x 5.Asia Telecoms and Media: Valuation summary Company (USDm) China / HK -Telcom China Mobile China Telecom China Unicom PCCW Comba Tel.245 725 738 141 96 80 22.1x 18.5x 10.9x 30.0 3.084 23.1x 20.000 75.2% 1.0% 0.8x 14.0 180.0% 0.000 18.BO TLKM.7% 1.240 5.8x 17.7x 4.8 171.0 54.1x 8. Closing prices as at 1 Dec 2010 Equity Asia 7 December 2010 Ticker Price Target ____ Local Currency____ 78.300 47.0% 0.8% 1.2% 0.380 135.8x 10.000 39.1% 0.8x 5.2% 0.8% 37.3% 5.6% 7.0x 7.0% 0.HK 0315.5% 5.3% 0.1x NM 8.7% 29.0 5.KS 035720.5% 31.1x 2.2x 8.8% 2.1% 7.6x 11.3% Rating MCAP EV ______EV/EBITDA______ _________ PE _________ __________ Dividend yield__________ 2011e 2012e 2011e 2012e 2010e 2011e 2012e 162.7 193.5x 16.755 30.410 20.4% 10.6x 20.SI STAR.0% 5.1x 6.4x 3.3 370.051 10.0x 7.2x 34.JK STEL.4% 8.0x 14.0x 23.851 2.5x 9.020 3.000 67.3% 6.4% 4.1 8.3% 4.105 4.8x 4.954 1.7x 3.3x 11.4x 0.772 1.6x 12.HK 0762.2x 8.0 9.0% 0.120 5.9x 13.2x 12.420 64.5% 23.1x 13.214 3.7% 0.150 31.2 174.6x 6.8% 0941.9x 4.4x 12.1% 0.0x 4.2% 6.3x 26.012 1.5 23.5x 14.9x 11.700 2.8% 3.364 8.2% 4.6 137.0 105.8x 8.0% 0.2% 22.8% 4.6x 2.3x 3.1% 7.7x 11.0% 0.3 2.088 28.1 44.5x 3.4x 8.JK ISAT.7x 3.1% 0.

Equity Asia 7 December 2010 abc Notes 86 .

and 2) from time to time to identify short-term investment opportunities that are derived from fundamental. For a stock to be classified as Underweight. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. regional market and the relevant equity risk premium established by our strategy team. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www. ratings should not be used or relied on in isolation as investment advice. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage. Given these differences. quantitative. because research reports contain more complete information concerning the analysts' views. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.com/research. the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Investors should carefully read the definitions of the ratings used in each research report. Important disclosures Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions. or as appropriate. The performance horizon is 12 months. Stocks between these bands are classified as Neutral. HSBC has assigned ratings for its long-term investment opportunities as described below. However. investors should carefully read the entire research report and should not infer its contents from the rating. *A stock will be classified as volatile if its historical volatility has exceeded 40%. the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). 87 . and although ratings are subject to ongoing management review. if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. For a stock to be classified as Overweight.Equity Asia 7 December 2010 abc Disclosure appendix Analyst Certification Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was. Details of these short-term investment opportunities can be found under the Reports section of this website. change of volatility status or change in price target). HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. This report addresses only the long-term investment opportunities of the companies referred to in the report. Notwithstanding this. which depend largely on individual circumstances such as the investor's existing holdings. risk tolerance and other considerations. HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon. In addition. expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein.hsbcnet. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic. In any case.

com/research.is available from www. 88 .Equity Asia 7 December 2010 abc stocks which we do not consider volatile may in fact also behave in such a way. the distribution of all ratings published is as follows: Overweight (Buy) 47% (22% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 38% 15% (19% of these provided with Investment Banking Services) (21% of these provided with Investment Banking Services) Information regarding company share price performance and history of HSBC ratings and price targets in respect of its longterm investment opportunities for the companies the subject of this report. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating. volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 06 December 2010. however.hsbcnet.

KS 1398.80 2.HK 0763.00 10.JK 1338. 11 1. 7.95 469000. 6.HK SIAL.KS GENT.HK 2328.HK 0941.00 894000. 11 1. 4.00 45650 4.HK AXBK.00 192000. 6. 7. 4.00 5. 7. 5.HK 1800.HK 0966. Source: HSBC 2600.04 22100. 6.HK 1833. 5. 11 4. DONGBU INSURANCE CO LTD GENTING BERHAD GOME ELECTRICAL APPLIANCE GUANGZHOU R&F HONGKONG LAND HOLDINGS LI HYUNDAI MARINE & FIRE INS HYUNDAI MOTOR INDUSTRIAL & COMMERCIAL BANK OF CHINA INTIME DEPARTMENT STORE JARDINE MATHESON KIA MOTORS KOREA LIFE INSURANCE KT CORP MAANSHAN IRON & STEEL MANDO CORPORATION PACIFIC BASIN SHIPPING PICC PROPERTY & CASUALTY COMP PING AN INSURANCE (GROUP) POSCO SAMSUNG ELECTRONICS SAMSUNG FIRE & MARINE SHUI ON LAND LIMITED SINGAPORE AIRLINES SK ENERGY CO LTD SUN HUNG KAI PROPERTIES TELSTRA CORP TENCENT THE LINK REIT ZTE CORP.HK 0728.HK 060980.00 184000. 4. 5.78 174000. 7 7. 2.86 7. 5.HK 005490.HK 0144.66 3.BO BMRI.11 27. 6. 5 2. 6.00 7530. 11 89 . 7 2.33 11. 2.HK HKLD.Equity Asia 7 December 2010 abc HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure ALUMINUM CORP OF CHINA AXIS BANK LTD BANK MANDIRI PERSERO TBK BAWANG INTERNATIONAL BOC HONG KONG HOLDINGS CHINA COAL ENERGY CO CHINA COMMUNICATIONS CONS CHINA CONSTRUCTION BANK CHINA COSCO HOLDINGS CO CHINA EVERBRIGHT INTL CHINA MERCHANTS INT'L CHINA MOBILE CHINA NATIONAL MATERIAL C CHINA RESOURCES CEMENT CHINA TAIPING INSURANCE CHINA TELECOM CORPORATION CHINA UNICOM CNOOC LTD.09 10. 2.74 51700. 7. 7.HK 7. 11 4. 5. 7. 11 1.62 90.KS 005930. 5. 7.55 4.KS 0323. 6.23 132000.KS 000810.06 6.70 44. 11 4. 11 4 7 1. 11 4 4 11 4.82 171.HK 2318.6 24. 11 7 1.89 7.50 3.KS 088350.13 1406. 11 1. 5. 11 4.HK 0762. 11 11 1.KS 005380.10 8. 11 4. 2. 11 6.HK TLS.HK 0883. 5. 7 4 4. 6.KS 030200. 11 4 1. 4. 5. 7.00 3.KS 2343.15 6700.KS 0016.72 6.HK 005830.50 77.04 15.HK 1919.HK 1898.HK 1313. 6.SI 001450.HK 0939. 7.HK 2777.62 17. 2. 4. 2. 5.SI 000270.HK JARD. 2.10 27. 11 6.00 5. 7 11 1. 11 4.KL 0493.8 03-Dec-2010 04-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 03-Dec-2010 4.98 12. 7. 11 6 4 5.KS 0272. 11 1. 5. 11 6.95 7.00 130. 7 6.65 11.HK 0823.00 4. 11 7 1.HK 0257.05 30. 7 1.SI 096770. 7 4. 11 2.74 38000.95 10.HK 2388. 7 7 6.42 31.AX 0700. 7 4.HK 1893. 7.

own or are involved in the acquisition.com/research. SK ENERGY CO LTD . A covering analyst/s or a member of his/her household is an officer. CHINA COAL ENERGY CO . HSBC and/or its affiliates (including the funds. CNOOC LTD. CHINA RESOURCES CEMENT . As of 31 October 2010. CHINA NATIONAL MATERIAL C . HSBC owned a significant interest in the debt securities of the following company(ies) : HONGKONG LAND HOLDINGS LI . . At the time of publication of this report. SUN HUNG KAI PROPERTIES 8 As of 15 November 2007. portfolios and investment clubs in securities managed by such entities) either. 1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : PING AN INSURANCE (GROUP) . this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. SHUI ON LAND LIMITED . HSBC beneficially owned 2% or more of a class of common equity securities of the following company(ies) : PING AN INSURANCE (GROUP) 6 As of 31 October 2010. ALUMINUM CORP OF CHINA . and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. HSBC Securities (USA) Inc. sale or intermediation of. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. is a Market Maker in securities issued by this company. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. HSBC beneficially owned 16. as detailed below. As of 31 October 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company. MANDO CORPORATION . directly or indirectly. MAANSHAN IRON & STEEL . AXIS BANK LTD 5 As of 31 October 2010. Additional disclosures This report is dated as at 07 December 2010. PICC PROPERTY & CASUALTY COMP 7 As of 26 November 2010.hsbcnet. this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company Analysts. GUANGZHOU R&F . As of 31 October 2010. At the time of publication of this report. unless otherwise indicated in the report. HSBC beneficially owned 5% or more of a class of common equity securities of the following company(ies) : PING AN INSURANCE (GROUP) . AXIS BANK LTD . HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. GOME ELECTRICAL APPLIANCE . director or supervisory board member of this company. 4 As of 31 October 2010. economists. PACIFIC BASIN SHIPPING . please see the most recently published report on that company available at www. All market data included in this report are dated as at close 30 November 2010. SUN HUNG KAI PROPERTIES .784% of a class of common equity securities of PING AN INSURANCE (GROUP) CO 9 HSBC has been appointed as book running lead manager by Steel Authority of India for the potential further public offer 10 HSBC is acting as a co-lead underwriter for ICBC (Asia)'s announced rights offering 1 2 3 90 . as detailed below. this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 October 2010. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company. A covering analyst/s has received compensation from this company in the past 12 months. INTIME DEPARTMENT STORE . For disclosures in respect of any company mentioned in this report. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business.Equity Asia 7 December 2010 abc 1 2 3 4 5 6 7 8 9 10 11 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. * HSBC Legal Entities are listed in the Disclaimer below. CHINA CONSTRUCTION BANK . CHINA COSCO HOLDINGS CO .

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Brands and Retail Karen Choi 822 3706 8781 Sojung Park 822 3706 8756 Banks Kathy Park TMT Brian Sohn So-Yun Shin Howon Rim Asia Research Marketing Eliot Camplisson Sunayana Daga Jenny Li Economics Hongbin Qu Frederic Neumann Leif Eskesen Paul Bloxham Donna Kwok Song Yi Kim Sherman Chan Wellian Wiranto Seiji Shiraishi Yukiko Tani Quantitative Dodo Cheng Freddie Siu Fixed Income – Credit Dilip Shahani Zhi Ming Zhang Mary Ellen Olson Devendran Mahendran Keith Chan Sheldon Chan Becky Liu Louisa Lam Yi Hu Fixed Income – Rates André de Silva. Asia Pacific Dilip Shahani 852 2822 4520 Head of Equity Research. India Strategy Vivek Misra Banks Sachin Sheth Tejas Mehta 91 22 2268 1243 91 80 3001 3699 852 2996 6625 852 2996 6558 852 2822 4686 852 2996 6716 91 22 2268 1224 91 22 2268 1243 852 2822 4520 852 2822 4523 852 2822 4524 852 2822 4521 852 2822 4522 852 2822 3232 852 2822 4392 852 2822 4527 852 2996 6539 852 2996 6574 852 2996 6976 852 2996 6717 852 2996 6566 Industrials / Electric Utilities Tarun Bhatnagar 91 80 3001 3726 Suman Guliani 91 80 3001 3747 Arun K Singh 91 22 2268 1778 Rahul Garg 91 22 2268 1245 IT Services Yogesh Aggarwal Real Estate Ashutosh Narkar Consumer Percy Panthaki 852 2996 6669 852 2822 4551 852 2996 6569 91 22 2268 1246 91 22 2268 1474 852 2822 2217 852 2822 4665 852 2822 4277 Singapore Industrials Neel Sinha Head of Research. CFA 91 80 3001 3747 852 2996 6565 852 2822 4340 852 2996 6568 65 6239 0653 91 22 2268 1239 65 6239 0654 65 6239 0624 91 22 2268 1238 91 22 2268 1235 65 6239 0652 91 22 2268 1638 65 6239 0656 91 22 2268 1079 . Korea Paul Choi Angela Hong Keith Hwang Jinkyu Ryu 822 3706 8750 822 3706 8758 822 3706 8752 822 3706 8763 822 3706 8783 852 6394 7866 852 2996 6555 852 2822 3053 Climate Change Centre of Excellence Nick Robins 44 20 7991 6778 852 2996 6557 Consumer.abc Asia Research Team Equities Asia Research Management Head of Research. Singapore Commodities Thilan A Wickramasinghe Banks Kar Weng Loo Xiushi Cai Real Estate Pratik Burman Ray Telecoms Luis Hilado 65 6239 0658 91 22 2268 1240 Small & Mid Cap Suman Guliani Telecoms Rajiv Sharma Oil & Gas / Chemicals Kumar Manish Puneet Gulati Healthcare Girish Bakhru Metals & Mining Jigar Mistry. Asia Pacific Chris Georgs 852 2996 6753 Taiwan Technology Frank Su Yolanda Wang Joyce Chen Jerry Tsai Carrie Liu Banks Sarah Hung 886 2 8725 6025 886 2 8725 6027 886 2 8725 6022 886 2 8725 6023 886 2 8725 6024 Hong Kong Equity Strategy Garry Evans Steven Sun JacquelineTse Banks Todd Dunivant York Pun Eric Mak Construction & Engineering Ken Ho Elaine Lam Insurance James Garner Michael Chang Seewon Oh Oil & Gas / Chemicals Sonia Song Real Estate Michelle Kwok 852 2996 6916 852 2822 4298 852 2996 6602 Global Management Head of Global Research Bronwyn Curtis Economics Stephen King Fixed Income Steven Major Currency Strategy David Bloom 44 20 7991 2134 44 20 7991 6700 44 20 7991 5980 44 20 7991 5969 852 2996 6599 852 2822 4396 852 2822 4396 886 2 8725 6026 Korea 852 2996 6593 852 2822 4398 Industrials Brian Cho Head of Research. CFA Virgil Esguerra Ki Yong Seong FX Strategy Richard Yetsenga Daniel Hui Perry Kojodjojo 852 2996 6514 852 2822 4393 852 2822 8245 852 2996 6918 852 2822 2025 852 2822 4556 65 6239 0840 61 2925 52635 852 2996 6621 852 2822 4870 852 2996 6975 65 6230 2879 813 5203 3802 813 5203 3827 Consumer Herald van der Linde Jessie Guo Christopher Leung Lina Yan Robby Gu Walden Shing Technology Steven Pelayo Nam Park Tse-Yong Yao Shishir Singh Carolyn Poon Telecoms Tucker Grinnan Neale Anderson Conglomerates & Transport Mark Webb Azura Shahrim Parash Jain Stephen Wan Metals & Mining Daniel Kang Sarah Mak Lun Zhang 822 3706 8755 852 2996 6575 852 2996 6572 852 2996 6531 852 2822 4344 852 2882 4337 852 2996 6751 822 3706 8765 822 3706 8774 822 3706 8167 India 852 2822 4391 852 2996 6591 852 2822 4397 852 2822 4292 852 2996 6586 Roopesh Patel Head of Research.

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