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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CHF53. GBP309. UW(V).0) Anheuser-Busch InBev (ABI BB. TP USD39) 4. OW. TP EUR175) Ericsson (ERICB SS.56.7. OW.4) Beiersdorf (BEI GR. GBP13. TP NOK225) Atrium ERE (ATRS AV. 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. OW. OW(V). EUR89. TP CHF66) BG Group (BG LN.54.2.70. UW. GBP0. NOK37. EUR22.0. SEK72. GBP11.33. OW. OW. GBP7. N(V). OW. TP EUR27) Experian (EXPN LN.75.71. TP EUR55) Richemont (CFR VX. Techtonic shifts E. 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.0.2.6.3) Most at risk Equity Asia 7 December 2010 2.26. TP GBP6.5) Norsk Hydro (NHY NO. OW.95. N.78. TP EUR75) Holcim (HOLN VX. USD31. Schneider Electric (SU FP. closing prices as of 23 November 2010 abc . OW. GR. GBP3. GBP40. N. OW(V). TP EUR8. TP GBP12. OW(V).00) Gagfah (GFJ. OW. EUR106. EUR43.0) Barratt (BDEV LN. TP EUR56. SEK97. EUR83. TP CHF75. CHF53. OW.04.74. TP EUR19) Source: HSBC. OW(V). TP GBP3. OW. GBP3. GBP2. EUR4.2.ON (EOAN GY. Cash-rich companies ArcelorMittal (MT NA. OW. OW(V).1) Portugal Telecom (PTC PL.15. OW. CHF65. 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. OW(V).0. UW.2.0). TP EUR115. Winners from Chinese growth 5. GBP5. TP EUR5. GBP7.9. cost cutting and better balance sheets 11% sales growth in 2011. OW.1.4 Europe: Key winners and losers from our five themes Europe Sector 1. TP EUR100).843.15) Veolia (VIE FP. EUR6. N(V).0) Antofagasta (ANTO LN. TP GBP0.8. OW. TP GBP16. TP GBP8.5) Volvo (VOLVB SS. TP GBP9. TP EUR53) Bunzl (BNZL LN. TP GBP4.1) Lamprell (LAM LN. OW(V). EUR22. UW(V). OW. TP SEK95) National Grid (NG/ LN. EUR62. shale gas extraction Beneficiaries Acciona (ANA SM. OW. EUR54.5.7. TP SEK120) Wacker Chemie (WCH GY. TP EUR125) Danone (BN FP.0) Daimler (DAI GR. PSA (UG FP. EUR49. EUR45.90. EUR44. UW. OW. TP GBP8.4. TP EUR47. TP CHF66) Rio Tinto (RIO LN. TP GBP2. TP EUR94. OW. TP EUR39 Pernod Ricard (RI FP. GBP7. NOK189. EUR10.65.0) SEGRO (SGRO LN.38.40) Allianz (ALV GR.5) Seadrill (SDRL NO. Effects of low rates 3. TP NOK49) WPP (WPP LN. EUR131.85. EUR30.00. TP GBP3. 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. N. TP GBP48.47) Capital Shopping Centres (CSCG LN.00) Richemont (CFR VX.63) Catlin (CGL LN.50.00) Siemens (SIE GY. TP EUR10.2.2.

900 IDR8.0 39.0 17.6 50.4 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 KRW454.500 SGD15.20 INR1.4 USD43.550 HKD26.4 25.8 KRW270.2 HKD5. Gas & Chemicals Materials Metals & Mining Industrials Conglomerates & Transport Current price Target price Potential return (%) 24.655 HKD30.377 IDR6.000 HKD128.8 22.500 KRW185.9 HKD3.5 41.1 HKD7.4 KRW826.000 KRW247.3 HKD7.Equity Asia 7 December 2010 abc High conviction ideas Asia Asia Sectors: 2011 high conviction stock ideas Ticker Energy Oil.8 HKD10.3 China Infrastructure Consumer Financials Banks Insurance Real Estate Technology Telecoms & Media Source: HSBC.81 KRW100000 KRW650.53 HKD3.139.8 KRW1.5 39.000 HKD171.000 AUD2.0 34.5 33.0 HKD7.0 USD54.0 34.1 34.0 41. closing prices as of 30 November 2010 5 .03 INR1.7 43.000 SGD19.6 KRW191.5 HKD9.9 19.000 AUD3.2 23.

closing prices as of 23 November 2010 6 .0 340p EUR53 EUR69.3 22.2 272p EUR43.9 40.0 15.8 24.78 EUR59.1 17.00 EUR100.2 EUR138.3 26.1 23.0 65.0 1690p EUR55.0 CHF66.0p EUR66.4 19.50 EUR20.0 EUR 29.0 -5.0 14.1 EUR43.7 CHF53.0 EUR17.65 EUR13.2 168p 321p EUR49.0 DKK168.9 CHF16.0 190p 380p Financials Banks UBS Insurance AXA Real Estate Unibail-Rodamco Telecoms.5 EUR39.0 CHF26.2 21.0 18.0 EUR23.9 13.5 28.0 48. Media and Technology Vodafone Utilities Centrica Source: HSBC.9 61.6 27.0 1479p EUR45.0 EUR130.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 (%) 30.44 EUR12.7p EUR57.7 EUR83.0 60.0 DKK270.3 19.0 EUR55.64 EUR30.7 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 EUR38.1 25.

When markets. Source: HSBC. such as food & beverage or energy. A decade ago.4 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.0 0. Although it has fallen back slightly since to around 70%. irrespective of their different fundamentals. the 7 .4 0.7 0. Correlation of MSCI sectors with overall index 1.2 0. Even sectors that 10 years ago moved to their own beat.8 0. 2. it is still well above the 40% or so in the more normal times of early 2007 (when the contract was launched). In 2010 to date. Thomson Reuters Datastream The same is true at the sector level. this should leave some dramatically mispriced securities.8 0. 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%. Correlation of MSCI country indexes with MSCI World average sector correlation is 92%. none of the 24 sectors has had less than an 83% correlation with the index (the lowest is autos).6 0.0 90 92 94 96 98 00 02 04 06 Av erage 08 10 Correlation has risen sharply even among individual stocks. 1.6 0.5 0.0 1995 1997 1999 2001 2003 2005 2007 2009 Energy Food & bev erage Source: HSBC.3 0. correlation should fall. and has been as high as 80% (Chart 1). now move largely in line with the overall index (Chart 2).Equity Asia 7 December 2010 abc (1) Pricing anomalies  Global equity markets have become increasingly correlated  As conditions normalise. throwing up opportunities for investors.2 0. this year it has averaged 74%. Thomson Reuters Datastream Capital goods Telecoms serv ices 0. 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%.1 0. sectors and countries move together.

4. have become more correlated since the 1990s too. IBES. Thomson Reuters Datastream 400 300 200 100 0 07 -100 08 09 10 What seems to have happened is that growth sectors (software. 5.0x) and the most expensive (real estate. Currently the range between the cheapest industry group by 12-month forward PE in the MSCI ACWI index (diversified financials on 10. Cumulative global flows into equity ETFs (USDbn) 0.0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 12M fw d PE dispersion index Source: HSBC.6 0. tech. almost USD400bn has flowed in equity ETFs globally (Chart 6). therefore. often with forward PEs of 20-30x. 6. for example. that some growth sectors now look undervalued. have lost their premium. Not only have capital flows become more globalised. Economic fundamentals. Over the past four years. energy Source: EPFR 8 . Thomson Reuters Datastream Source: HSBC.Equity Asia 7 December 2010 abc 3. 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. Bloomberg The heightened correlation has produced a much smaller range for sector valuations too. Traditionally cheap sectors such as banks. 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).8 0. but the growth of indexation and ETFs means that the components of an index tend to move more closely together. media. We think.2 0. Dispersion of forward PEs. MSCI ACWI sectors What has caused markets to move together in this way? Partly it is a reflection of growing globalisation. Implied correlation of S&P500 stocks (%) 100 80 60 40 20 Implied correlation 0 07 08 09 10 and materials remain cheap. 19. IBES.6x) is about the narrowest it has been for 15 years.4 0. pharma. such as economic growth. personal products) which traditionally traded at a significant premium to the market.

In Taiwan. Automakers such as Hyundai Motor (005380 KS.33 2.57 2. 3=Hold and 5=Sell). stocks with dividend yields well above risk-free rates should attract attention.93 2. Unsurprisingly.54 2. which is no longer justified. Analysts’ average rating (higher score. most of the companies under our coverage have 2011e dividend yields of around 5%. Korean insurance companies are usually priced on PB. also materials. Table 7 shows the country/sector pairs in the MSCI ACWI with the lowest average analyst ratings (where 1=Buy.2% or more of the MSCI ACWI. In Europe. In oil services. in a low interest rate environment. OW.55 Source: HSBC. analysts find the largest number of underpriced stocks in Korea.62 2. TP KRW240. for example. 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. our analyst argues that share prices of Iberian wind companies have been dragged down excessively because of sovereign risk concerns. real estate.Equity Asia 7 December 2010 abc What are the implications? As the economic situation continues to normalise over the coming few quarters. IT and healthcare.(or over-) valued securities.82 2. on more sophisticated measures such as price to embedded value. KRW172. Technology companies generally look cheap relative to history.63 2. In the clean energy sector. For example.63 2. 9 . with markets being driven less by momentous macro shifts. Thomson Reuters Datastream (Limited to country/sector pairs with at least 5 stocks and a market cap of 0. our analysts see such opportunities in sectors as varied as resources.62 2. To an extent.61 2.73 2. high correlation between stocks has thrown up opportunities particularly in dividend stocks. they look cheap.60 2.73 2. In Asia. 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.70 2.000) have traditionally traded at a discount to global peers due to earnings volatility and high leverage. construction and media. Unloved stocks.45 2. this has already started to happen over the past couple of months.64 2.77 2. this throws up the financials sector in a number of countries.500. 7.74 2. as Charts 1 and 3 above suggest.54 2. We discuss this in more detail in the next section. in our view correlation will begin to decline. Below we suggest some areas where we think these can be found. One way to spot mispricings is to look at which sectors and stocks are most out of favour with investors and analysts. investors should be rewarded for digging out under.33 2.56 2. As correlation declines.

In Europe.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. Thomson Reuters Datastream. it is important to remember that. although it should be noted that this doesn’t take into account share buybacks which have risen considerably over the last 30 years. where the rebound in earnings growth hasn’t been as strong. We must therefore also consider whether the current level of dividends is sustainable. In the US in particular the payout ratio is approaching a record low. Of course. investors will increasingly see yield as a reason to buy stocks. 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. unlike coupons on bonds. In addition. 2. but they have since returned to much more reassuring levels. Thomson Reuters Datastream. Charts 1 and 2 below show the trailing payout ratios for the US and European markets respectively. If 1. whilst the attraction of dividend yield is clear. MSCI av g av g 10 . dividend-paying stocks have the added advantage of acting as a hedge against inflation and also have the potential for upside if earnings grow. the payout ratio is still back below its long-term average. dividends are not guaranteed. As could be expected these rose sharply during the recession as earnings fell faster than dividends were cut. 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. Across much of the developed world equity yields look very attractive relative to the yield available on both government and corporate bonds. 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.

and a relatively low payout ratio which is no more than 10% higher than its fiveyear average.5 5.9 8.4 7.8 23.8 3. It also includes a number of European insurers – a sector highlighted by our analysts as being a key beneficiary of this theme.0 5.5 20.5 4.8 58.5 40.9 1.1 64.4 11.6 62.5 63.9 45.8 1.2 7.8 14.1 11.6 5.2 18.6 98.6 11.8 45.9%.8 117.0 28.4 6.5 7.1 9.5 1.1 41.2 56.4 111.2 36.8 4.9 15.8 13.2 1.2 86.4 7.5 9.3 55.1 50.2 76.0 5.35.7 6.3 119. 3.1 76.5 130.6 5. MSCI ACW stocks with high yield and sustainable dividend (MV>USD5bn.5 63.2 65.2 39.0 63.0 4.1 5.9 16.6 4.3 68.3 6. TP HKD28.8 7.7 13.9%).0 47.5 59.1 18.9 5.8 6.8 1.7 1.0 6.0 24.5 5.7 65.0 4.5 50.0 15.4 5.6 15.4 4.6 4. IBES 11 .2 7.0 5.2 13.5 5.6 11.9 1.3 23.5 5.5 16.8 12.2 5.9 14.6 15.5 50.3 5.2 2. HKD24.6 47.9 10.6 5.5 59.5 29.6 7.4 16.6 11.1 3.1 0. In table 3 we screen for companies from the MSCI All Country World universe that offer both high yields and sustainable dividends.4 64.7 4. payout ratio<70%.3 15.9 58.7 5.8 80. Dte Energy Teliasonera British American Tobacco Roche Holding Scana Credit Agricole Cemig Pn Orkla Centrica Reed Elsevier (Ams) Merck & Co.6 8.9 59.6 23.0 9.6 68.9 5.7 6.5 15.1 5.0 4.0 25.4 9. despite having outperformed the wider market since late 2009.7 7.4 52.6 54.9 5.Equity Asia 7 December 2010 abc The picture is equally encouraging when we consider individual stocks.4 8. Thomson Reuters Datastream.1 5.7 6.0 22.2 31.Pwr.1 8. our analysts like Hong Kong’s Link REIT (823 HK.1 6.4 5.2 31.5 90.3 3.9 3.0 12.8 4.3 7. Specifically we look for companies with a market cap greater than USD5bn.0 50.4 6.2 5.3 0.4 6.0 45.3 69.7 58.7 4.0 2.7 11.3 56.8 4. 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.6 41. 2010 DY>2. In Asia.6 6.6 8.1 2.6 53. In particular we would highlight interesting opportunities in REITs and in preference shares.8 4.2 4.3% as well as growth. at 4.0 14.2 5.4 9.1 47.Elec.4 5.6 4.1 5.2 32.9 6.2 56.1 10.6 2.9 8.6 100.8 10.9 4.2 3. Unsurprisingly the screen throws up many names from the high-yielding telecom and utilities sectors.7 4.7 18.7 7.6 58.3 50.4 21. potential for both dividend and earnings growth.2 42.9 23. 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 9.1 6.4 17.7 9.6 2.0 12.7 4.3 42.1 64.1 2.6 1.5 5. a dividend yield greater than the yield on 10-year US Treasuries (2.8 63.4 0.7 0.4 5.2 25.3 6.6 54.2 17.4 59.6 8.3 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.2 7.3 7.5 4.50).9 70. which has an indicative yield of 4.8 60.6 35.1 41.0 1.6 5.9% the MSCI All Country World REIT index still yields considerably higher than US Treasuries (Charts 4 and 5).6 Source: HSBC.3 69. for example.4 4.2 64.5 0.3 3.5 82.4 74.7 6. 2010e and 2011e DPS and EPS growth>0.1 2.7 4.0 25.5 54.7 5.6 42.2 65.5 12.6 4.1 6.6 3.4 60.9 26.8 6.2 6.8 67.1 6.9 6.0 12.0 5.9 62.0 3. Indeed.7 4.6 12.6 11.1 69.8 43. OW.0 0.0 8.3 10.7 56. We show the top 30 stocks ranked by their 2010 dividend yield from the 113 companies that meet the requirements. but there are some other attractive angles that are worth considering.0 5.0 4.8 107. Other yield plays Basic dividend yield is the most obvious way to find yield in the current environment.4 12.0 67.3 5.7 4.0 5.7 48.

REITs have outperformed this year 5. only short-term debt were refinanced then the aggregate level of profits would rise by 1. 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. If all non-financial corporate In Table 7 we screen for US non-financial stocks that could potentially benefit most from these lower costs. They pay a regular specified dividend and rank higher than ordinary shares in the case of liquidation. Many companies should be able to refinance their activities at lower rates and therefore increase margins and improve profitability. profits would rise by almost 10%.Equity Asia 7 December 2010 abc 4. corporate bonds currently yield around 3% (chart 6). 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.7 0. but usually carry no voting rights.1%.3% compared to a yield on the S&P500 of just 2%.5%. Thomson Reuters Datastream. However. 12 .6 0.5 0. In the US. IBES Global REIT DY Source: HSBC.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. Thomson Reuters Datastream. If. whereas the average effective interest rate being paid by non-financial companies is 5. the relatively few non-financial preference shares that are available also provide attractive yields.9 0.8 0. Given this status. IBES Preference shares represent a hybrid between equity and debt. We use the most recent interim data (annualised) in order to capture any refinancing that may already have taken place this year.0 0. 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. Bloomberg Falling borrowing costs On top of the dividend yield story. 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. debt were refinanced at the lower rate. But still offer very attractive yields 1. preference shares often yield more than both. where they are more risky than debt but don’t get the benefit of price appreciation like normal equity. 6. The current dividend yield for the S&P US Preferred Stock Index is 7. more realistically. low interest rates are likely to provide further support for equities through lower borrowing costs.

8 5.9 6.7 5.8 3.5 28.4 5.0 8.3 11.0 16.5 47.8 2.2 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 56.4 6.9 23.5 5.4 0.4 1.6 7.4 5.0 3.5 2.4 2.3 42.3 6.3 3.4 39. Goodyear Tire & Rub.5 22.0 32. Integrys Energy Group Dow Chemical Scana Mohawk Inds.8 85. this screen should provide a useful starting point for further analysis.2 2.7 20.8 2.8 8. Martin Mrta.2 2. 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 19.3 3.5 7.9 3. 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.4 2.8 4.0 21.4 5.0 20.7 51.3 7.4 3.8 7. Thomson Reuters Datastream.4 3.4 3.Equity Asia 7 December 2010 abc Obviously.4 3.8 55.6 14.6 37.’A’ Rowan Companies Abbott Laboratories Aes Dte Energy Nii Hdg.1 10.1 2.5 n/m 28.4 2.9 35.1 6.8 8.2 15.4 7.7 4.7 2.2 11.8 11.4 3.1 36.Mats.9 31.4 3. whether or not these companies are willing or able to refinance their debt will be determined by many other company specific factors.1 7.4 5. 7.9 3.2 15.6 4.R .6 2.0 10.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. Bloomberg 13 .7 9.8 30.9 32.0 2.7 20.0 3.3 n/m 33.3 1.0 6.4 3.2 6.4 5.2 3.2 3.0 3. Firstenergy Avon Products Oneok Centerpoint En.0 7.9 47.2 27.4 3. Nisource Pepco Holdings Republic Svs.9 21.3 6.9 23.5 2.0 2.0 100.5 41.9 5.Intl.8 3.4 15.6 27.8 12.3 8.2 6.0 3.3 19.7 31.0 3.4 27.4 5.4 3.4 5.8 39.4 2.7 37.4 2.2 6.9 41.8 3.9 14.7 5.6 17.4 3.2 7.7 3.6 2.6 2.7 6.7 20.6 45.7 35.8 2.5 33.6 29.7 3. However.7 4.8 3.4 4.8 31.3 6.6 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 6. MSCI.

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). MSCI Companies have surplus cash… Chart 1 and Table 2 highlight the fact that companies are currently cash-rich. 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. Interestingly. 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. 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. 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. we are seeing tentative evidence that companies are beginning to loosen their wallets. demand that companies use it (invest it) or lose it (return it to shareholders). quarterly reporting patterns. the pressure is likely to build if investors. And for those that continue to hoard cash. We see all of these drivers trending higher in 2011 and together they should provide support to stock prices. The first shows cash as a percentage of current assets for the MSCI US non-financials universe and the second the breakdown by sector. appropriate during the liquidity crises but perhaps not so now  With cyclical indicators picking up again. this should be a good proxy of the global situation. A combination of improving visibility on the macro picture and improving business confidence should persuade companies to deploy their surplus cash reserves. We can see that cash as a percentage of current assets currently stands at a record level of 40% for the market. quite rationally.Equity Asia 7 December 2010 abc (3) Cash-rich companies  Companies are sitting on piles of cash. Thomson Reuters Datastream. Nevertheless. 1. 14 .

In the report we argued that. Thomson Reuters Datastream 07 08 09 10 Eurozone Jun-10 Dec-10 Interestingly. the global capex cycle appears to have clearly turned up. following a soft patch in Q2-Q3. albeit from a very low level. First. This point is highlighted by our currency colleagues’ ‘US surprise index’ (see Chart 3). Ongoing economic strength in emerging markets and China specifically (see Theme 4. as companies become more confident in the recovery we would expect them to start to invest more. 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. Second. In Chart 4 we show new orders for both the US and Eurozone. we are seeing signs that business cycle indicators are beginning to stabilise and turn up again. And the evidence suggests that capex is indeed on the rise. 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. 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. We would also highlight technology and oil services as being additional beneficiaries from a continued pick up in capex. 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?. companies would likely start to either invest their surplus cash reserves or return the money to shareholders. it highlights just how far capex budgets got cut during the recent slump in activity. 4. 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.Equity Asia 7 December 2010 abc 2. There are two important points to note about this chart. 3. 30 July 2010. HSBC US surprise index …on capex… All other things being equal. if the macro backdrop were to show signs of stabilisation. 15 .

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.2bn of its shares from its USD13bn buyback programme which it suspended in 2007. we expect the trend increase in buyback activity to continue in 2011. With companies generating strong cash flow in a low rate environment. And with dividend cover a healthy 2. As Chart 5 shows. MSCI 3 2. an improvement in the availability of funds and attractive valuations. BHP. 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. 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. 6. see Chart 6) we see the potential for dividends to grow in 2011. MSCI. 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. decided to acquire the remaining USD4.Equity Asia 7 December 2010 abc …and on acquisitions… Rather than growing organically via capex.5 …via share buybacks… There were some high profile announcements during the Q3 results season that suggest share buybacks are back on the agenda. …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).6x (versus a long-run average of 2.5 …or starting to give it back to shareholders… Of course. a company may of course prefer to take the inorganic route and make an acquisition. LHS) Source: HSBC. 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. having missed out on Potash. rising business confidence. Thomson Reuters Datastream. US companies have announced USD258bn in buybacks during the first three-quarters of this year compared with just USD52bn in the same period in 2009.4x. 16 . 5. MSCI AC World dividend growth and dividend cover Value (USDbn. 2 1. In aggregate (source: Bloomberg). For example. 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 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.

OW(V). Luxury companies’ balance sheets were barely impacted by the downturn and we see cash piling up in 2011. 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. CHF53. 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. TP GBP48. Growth strategy of reinvesting cash flow in small bolt-on acquisitions has delivered cash returns of around 15-25% historically. 17 . HKD5. 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 USD5.60). OW(V).  Pacific Basin (2343 HK. we expect the cash to be returned to shareholders.78.25. With cash of USD960m.04.28. OW.50). OW. In 2011. TP HKD7.40). With sizeable high-quality targets scarce. enabling the company to hit its volume growth targets.0). HKD12. This could include returning more cash to shareholders and looking to become active again in the brewer consolidation process. the company can opportunistically acquire lowcost vessels to maximise returns.  Bunzl (BNZL LN.  Anheuser-Busch InBev (ABI BB.7.5bn. EUR43. OW(V). TP HKD18. With the balance sheet now cleaned up and M&A risk limited given the board’s guidance of a return to conservatism.0).  Richemont (CFR VX.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. TP GBP9. TP EUR53. GBP7. GBP40. Ample scope for consolidation in a fragmented market and a healthy balance sheet supports an inorganic growth strategy. Strong cash flow will allow further acquisitions.2.  China Coal (1898 HK.0). OW. TP CFH66.

Chinese stocks have performed sluggishly this year. As Table 2 shows. As a result.9% y-o-y in Q1 this year. Korea and Taiwan were growing at 8-10% a year. Even now. real GDP growth slowed to 9. although this comprises only 11% of GDP. but for the next decade its population will continue to grow by 0. with GDP per capita only 7% of that of the US. with the Chinese authorities sharply tightening monetary policy after inflation reached 4. The consensus continues to forecast about 9% real GDP growth in 2011 (HSBC forecasts 8. We do not believe. with MSCI China falling by 9% since early November. 40% of the population still work in agriculture. 1. Bloomberg All this suggests that China will remain a key driver of global demand over the coming years. Having grown 11. China last year comprised 59% of global demand for iron ore. they were already much richer relatively than China is now. 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. many investors worry that growth could slow further.4% y-o-y in October. for example. according to the United Nations (only fractionally slower than the 0.9%). It still has a lot of catching up to do.6% in Q3 (its slowest pace. a slightly slower pace of growth would make it more sustainable and less inflationary. When Japan. And. however.7% over the past 10 years). apart from the 2008-09 recession since 2004).6% a year. China’s growth is not likely to slow over the medium term either. that the China growth story is anywhere close to an end. It represents a large proportion of global demand for commodities. It is hard to exaggerate how important Chinese demand is.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. Perhaps more 18 . China will eventually have demographic problems. and over one-third of demand for four other major metals.

3. poor corporate governance.7 65. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 19 .9 140. 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 278.6 39.5 37. Chinese and global demand for metals _______________ Demand. then. 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).7 25. World Bank China is. see Chart 3). But that is set to change: McKinsey & Co estimates that Chinese consumption will grow at a 8. making China only the fifth largest consumer market in the world (and barely one-tenth of the size of the US).7 28. the negatives of investing in Chinese companies (excessively government interference. China has provided only 7% of incremental demand growth. China carried out 21% of the world’s capital investment (up from 6% at the beginning of the last decade.8% of total world consumption.0 145.1 61.1 83. WSA.6 31.4 35.6 44. that investors should continue to look for companies exposed to China growth. 2009 ________________ _______ Incremental demand growth.7 59. by which time China All of this suggests. as yet. 83% of the growth of investment globally has been contributed by China. In the past five years. It also uses 10% of the world’s oil. Although obviously some of these can be found in China. expensive valuations in attractive sectors) mean that our preference remains to look for foreign companies with strong and growing businesses in China. 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.8 58. 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. China represented more than 100% of incremental demand for all six of the most important metals. CEIC extraordinarily.1 67. generates 18% of the electricity and has 17% of mobile phone subscribers.6 37. in the past five years. risk in executing expansion plans.9 79.Equity Asia 7 December 2010 abc 2. Last year. nothing like as important for consumption: in 2007 (the last year of available data).5 188.8 233.2 Source: HSBC. Chinese consumption was only 3. 4.3% CAGR until 2020.

70). TP RMB8.15). China became the world’s largest auto market last year. Although China’s growth is not exactly a new theme. TP KRW56. CHF64.  Utilities. We also think that investors have become too pessimistic about the outlook for infrastructure growth. For example. in particular. TP CHF75. Intime (1833 HK. We forecast 11% growth in auto sales in China in 2011.88. China offers opportunities for European utilities companies which can offer technical innovation and technology transfer. TP EUR56) and. TP EUR75) as a particular beneficiary. TP HKD4. Cement companies such as Holcim (HOLN VX. although one has to be selective because of regulatory risk. On our projections. In China. We forecast 5. And obviously there are many Chinese stocks that will benefit from domestic demand growth too. We are more selective in consumer-related companies because valuations are stretched. Brazil and urban India.40). GBP11. an increasing amount of which is being imported by China. EUR62. This should be positive for all energy companies. in Korea. OW(V). given its strong portfolio in scotch. TP HKD7. KRW48. HKD3. compared to 15. but can find one or two we like. OW(V). where concerns over global gas prices in 2010 have kept valuations cheap. EUR50. cognac and vodka and its 42% market share in China. compared to 4. TP EUR27) (which already serves 25m people with water services in China).  Beverages. Chinese growth has been more significant for spirits companies than for brewers. OW) and Kia (000270 KS. and therefore like select names in steel and building materials (for example. should continue to see strong growth.  Oil & gas.62. OW. OW.22.50) and CR Cement (1313 HK. TP EUR39) and Daimler (DAI GR. our analysts believe investors still do not fully appreciate the impact of the rise of Chinese consumption. 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. HKD12. EUR20.9m units (25% of the global market).0). We see Pernod Ricard (RI FP. particularly sales to Chinese tourists abroad. OW.  Capital goods.Equity Asia 7 December 2010 abc In addition.1% CAGR of sales to 2050 for the company. Chinese demand for oil and natural gas will continue to be strong. OW(V).8m in the US. OW.21).28. where they believe foreign companies’ exposure to China has not been fully appreciated by the market. Our favourite stocks among beneficiaries of Chinese growth are PSA (UG FP. OW. the highest among its peers.11. OW. wage pressures will push companies to increase factory automation to keep costs down. such as Veolia (VIE FP. Chinese sales by 2014 will reach 21.97. in real estate our analysts like companies with exposure to commercial and high-quality residential property developments such as Shui On Land (272 HK.950.  Autos.  Building materials. and also below the levels of Russia. OW.10. for example. Baosteel (600019 CH. 20 .  Luxury goods. OW(V).  Personal goods. We particularly like BG Group (BG LN. one of the world’s largest traders of LNG. TP GBP16. EUR29. TP HKD15. This year capex in emerging markets will be bigger than in developed markets for the first time.3. HKD6.65.000). Hyundai Motor (005380 KS. HSBC’s analysts highlight the following sectors. for which emerging markets constitute 59% of capacity. but our analysts particularly focus on natural gas.79.8% for the global market. RMB6.

and it seems to us that a number of the scientific developments of the past decade (faster semiconductors. Similarly. but Microsoft today is still 50% below its 2000 peak (Chart 1). more efficient batteries) are all coming to fruition together now. by not spotting that a technology was maturing (or by picking eventual losers) returns would have been poor. 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. 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. with these devices forecast to grow from 270m units in 2010 (20% of total handsets) to 527m in 2014 (32% of the total). An investor who spotted correctly the three big tech waves of the past 25 years – the rise of the PC. Internet stocks jumped during the TMT bubble of 1998-2000. This will have repercussions for telecoms operators and equipment makers. Electric cars are close to becoming commercially viable. internet commerce. The rising price of commodities is propelling the search for alternative energy sources. After it. or growing use of plastics). Performance of selected tech stocks (log scale) Amazon rebounded strongly and created sustainable businesses. 1. emerging market internet plays such as Baidu have also performed strongly. lost their way.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. Next year looks like being the year that smartphones really take off. some such as 21 . such as Yahoo. aluminium for copper. Technological advances move in waves. as well as triggering new opportunities for internet-based businesses. alternative energy. and for substitutions (for example. the development of the internet and the growth of smartphones and similar devices – could have made wonderful returns. albeit one that is very hard to identify as an investor. 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. Apple’s share price has risen 3400% over that time. others. The launch of Apple’s iPod in October 2001 and its subsequent evolution into the iPhone and iPad triggered growth in smartphone stocks. More recently.

For example. TP GBP8. but only by about 4%. OW.  Further shifts of marketing dollars to the internet.0 2. TP SEK95) and other telecoms equipment vendors to benefit. TP GBP6. So we asked HSBC’s analysts to point to technologies and companies they see benefiting from the next tech wave.5 1.35. which control the supply of power using two-way digital communications. tech stocks underperformed massively (Chart 2).55. Distributor 3. 3.  The growth of smartphones will also lead to a big rise in demand for mobile data.0 1.5 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Tech h/w H/c equip Source: HSBC. compared to an average premium of 51% in 2003-07. We think the P-cap technology.5) is launching additional online marketing products such as email marketing in emerging economies.5 2. Here is what they came up with. Bloomberg Technology stocks have outperformed a little since the current bull market began in April 2009. TWD664. used in iPhones and iPads. OW(V).  2011 will be the year the smartphone really takes off. and even the premium of the software sector is only 19%. After the TMT bubble burst in 2000. TPK (3673 TT. will become the mainstream technology. The UK’s National Grid (NG/ LN. 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.68. which should allow it to become a market leader in transmission. N. The capacity crunch this will produce will trigger a significant increase in mobile telecoms capex. TP TWD850) has 45-50% of market share with Apple. Where most such sectors have typically traded at a big premium (Chart 3).  Touchscreen technology will be a key growth area in 2011 as iPads and other tablets continue to grow in popularity.1) is well placed in this technology. But they also lagged in the 2003-07 bull market. currently semiconductors and pharmaceuticals are on a discount to the market. MSCI ACWI sectors  Smart electricity grids. credit and marketing services provider Experian (EXPN LN. GBP7. OW. Bloomberg Semicon Softw are Pharma 22 .Equity Asia 7 December 2010 abc markets. We prefer to take exposure to this via sub-component and semiconductor makers. SEK72. excess competition). We expect Ericsson (ERICB SS. Forward PE relative to market. 2. Industry projections expect 18% CAGR in 2010-14. This has left tech-related growth sectors looking cheap relative to the market. short product lifetimes. as investors preferred commodities and began to doubt the long-term business model of many tech companies (high capex. GBP5. 180 160 140 120 100 80 60 99 00 01 02 03 04 05 06 07 08 09 10 Source: HSBC.0 0.

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

Equity Asia 7 December 2010 abc This page has been left blank intentionally. 24 .

Equity Asia 7 December 2010 abc Sectors 25 .

in our view.  Provisions: Most of Asia did not have a meaningful credit cycle in the recent global financial crisis. we see risks of moderate margin decline as competition narrows spread.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. We continue to believe this is a key theme for the medium to long term.com. In highly liquid markets like Hong Kong. however selective competition for new loans and/or funding likely moderates NIM expansion across the region. We do not expect a deteriorating credit cycle in 2011 as Asian economies continue to expand and credit growth remains relatively strong. despite growing margin pressure and monetary tightening across Asia. Markets with structurally higher rates (China. 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. in all markets except Singapore. Todd Dunivant* Head of Banks Research. On a y-o-y basis. and is not registered/ qualified pursuant to FINRA regulations 26 . Next year seems poised to be another year of volume growth to drive profits. bank lending is expected to remain robust. we forecast profit growth of 20%+ y-o-y in 2011 on an EPS basis. India would be an exception as the credit expansion cycle is likely to accelerate into 2011. 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. Expectations for the internationalisation of the RMB in 2010 have been a bit overzealous.  NIM: We expect a mixed story in 2011. The true contribution to earnings may fall short of market expectations in the near term. Whilst there are headwinds that could affect share price performance from time to time. however near-term gains are likely only incremental and not a material driver of income growth in 2011. 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. India and Indonesia) will see the greatest NIM expansion.Equity Asia 7 December 2010 abc Banks  Earnings continue to rise on persistent loan growth. 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 expect 2011 loan growth to be slower in nearly all markets.

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

Continued economic growth should sustain the demand for credit with the most pronounced demands in China. In general terms. economic growth has posted solid rebounds in 2010. this is the best bank on RMB internationalisation. The bank stands in a position to benefit from the continued lower USD rates. TP HKD30. Valuation Persistent economic growth in Asia Across the region.20/RMB8. Based on our 2011e book. Thus we have three preferred plays on Asia’s continued economic growth: China Construction Bank (CCB) in China. Axis Bank in India. we derive a target price of HKD30. OW(V). implying a 20% potential return inclusive of dividends. Whilst somewhat slower. 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. Recent PMI data and monthly GDP data suggest these trends will continue into 2011. 21% in India and 23% in Indonesia.Equity Asia 7 December 2010 abc Our preferred stock on the theme of lower rates is BOC-HK.4x 2011e book. but this is not really a theme for 2011. and 3) sharply lower turnover or poor sentiment in the Hong Kong equity market.63. 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.8% in 2010e to 7.80. we expect NIMs and operating income to expand on volume and higher yields. Risks Key risks to our call are: 1) significant changes in economic and monetary conditions. HKD26. As mentioned earlier in this section.80) BOC-HK sits in a unique position. TP HKD10.7. Specifically in these markets. The key risk to watch on the growth front is inflation.01/RMB4. Valuation and risks BOC-HK (2388 HK. China Construction Bank (939 HK/610939 CH. we expect system loans to expand in 2011 by 14% in China. 2) China policies that could affect RMB internationalisation and/or expansion of Chinese enterprises outward from 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. 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. markets. In our view. We expect Asia ex Japan growth to slow from 8.50) While CCB would not be the only Chinese bank to benefit from persistent growth in China.6% in 2011e. demand from loans as a byproduct of RMB appreciation and an expected rise in the turnover of the HKEx. BOC-HK is currently trading on 16x 2011e earnings and 2. 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. and Bank Mandiri in Indonesia. we see a few advantages including somewhat slower loan 28 .8x our 2011e book value using a simple Gordon growth methodology. OW. HKD7. we expect China and India to expand faster and to be key drivers of overall Asian growth. There is not a single bank that will give an investor maximum exposure to all high-growth economies in Asia. our economists forecast policy rate hikes across our coverage sectors except Hong Kong in 2011. India and Indonesia.

Equity Asia 7 December 2010 abc growth in the lending boom of 2009-10 than peers. and 4) measures to cool China’s economy that result in more significant and persistent slowing of the economy. Bank Mandiri (BMR IJ. Long-term investors may use this time to build positions. A relatively low loan-deposit ratio (72%) plus sticky. which implies a 40% potential return inclusive of dividends.6x our end-FY12e book using a weighted average combination of PE. CCB’s H-shares are currently trading on 8. We believe the bank is positioned better than peers to accelerate earnings growth in the context of broader economic growth of Indonesia.400.3x our 2011e earnings and 1. Risks Key risks to our call are: 1) short-term share overhang from upcoming 1Q11 rights issue. IDR6. the largest consumer loan book in China and diversified fee income.and A-shares respectively. Valuation Key downside risks to our call are: 1) draconian policies that significantly impact the growth and profitability of the bank. Bank Mandiri is currently trading on 13x our 2011e earnings and 3.655) Bank Mandiri is well positioned to benefit from the underlying growth potential. Risks We value CCB at 2. 2) rise in provisions due to higher minimum thresholds or deterioration in asset quality. and 4) falling interest rates. Valuation Valuation We value Axis Bank at 3. investors should consider that the Chinese banks are likely to underperform in the near term. Risks Key risks to our call include: 1) slower than expected loan growth. 2) slowing loan growth perhaps from slowing economic growth.6x our 2011e book which is derived using a simple Gordon growth model. Axis Bank is currently trading on 18x our 2011e earnings and 3x our 2011e book. we derive a target price of IDR8. 2) deterioration of asset quality. We value BMRI at 3.50 for the H. TP INR1900) Axis Bank is one of the banks well positioned to benefit from continued growth in India. implying a 35% potential return inclusive of dividends. 29 . and 4) slowing growth in India and/or policy moves on the back of rising inflation. Axis Bank (AXSB IN. PB and economic profit model methodologies. INR1329. implying a 50% potential return for the H-shares. OW. we derive target prices of HKD10.655. whereas shorter-term investors may wish to wait until we are closer to policy or earnings catalysts in 1Q/1H11. Given policy risks and expectations of further monetary tightening.20/RMB8. 3) significant asymmetric rate hikes that would narrow lending spreads for Chinese banks. Based on our 2011e book. OW. 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. 3) rising funding costs on the back of tighter liquidity in the market. This approach derives a target price of INR1900. a longer duration loan book to enhance yield from rate hikes.8x our 2011e book. 3) deteriorating asset quality. Based on our 2011e book.6x our 2011e book using a simple Gordon growth model. low-cost deposits provide the bank with a buffer to avoid funding cost pressures relative to peers. TP IDR8.35x our 2011 book.

8% 124.3% 28.0 15.4% 8.2% 6.000 48.41 1.36 2.7 17.4 2.3% 3.0% 5.0 15.3 8.0% 14.5% 16.5% -23.9% 1.4% 24.4% 5.18 1.40 11.7% 12.8% 4. Chinatrust Financial Holding Co.1 140.0 60.3% 11. First Financial Holding Co.2% -2.12 20.0 55.9% 5.1% 10.8 8.40 7.98 0.5% 4.54 1.0% 19.2% 3.4% 81.9% 91.2 17.7% 8.2 7.2 7.6 6.82 1.6 52.A China CITIC Bank .6 53.50 12.6% 34.53 1.25 20.2% 22.200 21.00 21.9% 18.8% 2.9 12.50 8.0% 18.2% 9.1% 13.5% 19.H China A-share banks Industrial & Commercial Bank of China .76 46.34 10.05 1.9 10.4% 1.6 21.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.5% 22.5% 130.0 9.67 2.4% 2.700 45.2% 2.9% 3.8% 2.0% 3.8% 6.15 2.19 1.08 1.0% 2.6% 23.3% 22.05 18.7% 31.1 23.2% 20.1 26.7 8.0% 18.94 1.9% 25.3 21.7 30.7% 15.0% 2.0 4.0% 80.7 30.96 1.7% 2.8 7.8% 15.A China Construction Bank -A Agricultural Bank of China .8% 12.5 21.8% 1.1% 6.5 10.5 13.H China CITIC Bank .00 30.92 1.2 7.9% 44.1 15.12 2.9% 15.A China Merchants Bank .4% 2.2% 7.62 2.8 18.3% 22.27 5.4% 20.H China Construction Bank -H Agricultural Bank of China .08 1.4 11.4% 24.5 9.8% 1.9% 23.4 6.9% 3.0% 12.1% 1.4 16.42 0.1 232.66 1.2% 11.70 2.4% 104.1 101.0% 5.31 1.42 1.3% 7.20 11.2% 4.5 19.2 1.8% 85.9% 33.35 37.3% 22.3% 25.70 67.88 1.0 13.6% 12.1 18.39 1.22 1.2% 50.5% 1.4% 24.2% 15.9% 18.8% 9.2 8.1% 24.5% 40.7 3.7 8.8% 23.9% 4.7% 43.7 43.6% 4.4% 11.6% 14.17 8.6 7.60 13.90 0.6 14.6% 19.10 18.4% 18.3 9.54 1.0 19.4% 95.40 1.31 1.1 26.200 14.8% 7.5% 20.0% 103.0% -60.5% 18.4% 22.7% 4.9% 18.3% 6.11 2.0% 0.9% 4.H Bank of Communications .450 13.1% 22.30 1.4 6.8% 9.93 1.59 1.1 28.94 21.6 2.6 8.9% 1.1 11.8% 2.2% 7.5% 403.05 4.0 10.5% 55.40 23.3% 44.3 2.6 17.300 38.2 10.5% 22.29 1.37 1.9% 2.26 1.0% 2.6 1.9% 3.6% 26.6% 26.4% 232.3 9.6% 12.0% 23.9 7.9 6.2% 2.65 1.0% 2.700 5.9 7.41 1.3% 19.3% 22.46 0.9% 19.A China Minsheng Bank .61 3.6% 3.A Bank of Communications .5 44.4% 1.5% 22.8 11.0% 4.2 6.3 7.2 9.0 90.0 7.8% 13.1% 4.7% 8.76 4.85 1.30 2.4 10.8% 6.1% 11.8% 20.8% 23.7% 1.17 1.27 2.76 0.7 6.9% 1.60 5.7% 3.7 17.3% 6.6 52.H China Merchants Bank .7% 13.9% 20.56 13.2 10.15 5.05 5.2% 20.6% 21.700 14.03 0.6% 6.7% 24.4% 18.5% 13.28 2.7% 9.1% 5.9% 10.3% 3.0 8.1% 13.6% 5.0% 1.2 6.3 9.50 3.5 8.5% 19.26 1.5% 1120.10 54.2% 34.05 2.8% 7.7% 15.6% 23.07 1.5% 12.6% 28.6% 5.7% 11.5% 16.1% 22.5% 7.H Bank of China .80 23.6 5.12 1.5 7.000 16.7 18.47 2.6% 2.5% 12.7% 2.7 10.6% 23.1% 25.4% 24.3% 0.4% 6.71 0.0 2.5% 21.1 7.1 13.3% 1.7% 3.53 1.1% 13.38 2.0% 1.1 16.8% 22.9% abc .8% 4.49 1.5% 37.9% 2.70 5.1% 20.3% 22.0 7.38 1.8% 15.7 8.3 13.56 1.3% 28.1% 3.00 8.6 223.0% 23.7% 327.5 44.80 4.30 7.6 223.0% 1.0% 3.3 6.6% 7.9 6.96 7.8% 14.5 8.5% 3. Fubon Financial Holding Co.3% 0.3% 36.46 1.1 140.3% 22.65 20.10 1.1% 52.3% 17.8% 1.1% 5.13 1.6% 12.1% 62.7% 18.78 1.8% 10.1% 24.600 19.1% 4.91 1.9% 3.1% 49.86 0.9% 25.9% 8.2 7.2% 5.6 14.78 1.5% 2.1% 3.5% 3.03 4.6% 15.2% 7.2% 20.9% 21.29 1.5% 1.3% 2.06 1.9% 18.1% 7. Mega Financial Holding Co.07 26.0% 68.9% 21.8% 33.5 15.21 0.7% 3. Korean banks KB Financial Group Shinhan FGL Woori FHC Hana FGL Industrial Bank of Korea Daegu Bank Busan Bank Source: HSBC estimates.90 0.3% 1.4% -9.1% 39.0% 19.01 0.5% 0.20 4.4 13.A Bank of China .0% 5.100 44.9% 44.27 1.28 0.3% 17.0% 888.29 2.9 8.75 1.2% 49.8% 5.56 1.4% 8.3 6.4% 1.80 44.7 18.1 7.7% 15.30 Asia banks: Valuation summary Stock China H-share banks Industrial & Commercial Bank of China .2% -9.3% 13.6% 2.6 33.6% 21.39 1.H China Minsheng Bank .43 5.7% 31.600 17.80 1.3 4.3% 1.32 2.4% 23.9 18.5% 37.4% 5.6% 21.3 13.1% 6.00 22.00 23.4% 23.5% 13.0% 4.50 10.8 26.2% 20.1 8.31 1.0 12.5 7.5 9.70 11.9% 23.7 16.9 2.6 131.7 11. Shin Kong Financial Holding Co. Yuanta Financial Holding Co.5% 23.3% 1.6% 26.0% 50.7 8.6% 199.4% 26.0% 1.43 6.8% 10.90 1.9 13.4% 24.87 1.9% 20.20 4.5% 41.9% 9.1 8.9% 26.100 54.30 28. 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 8.4% 9.6% 44.91 4.5% 3.000 16.75 1.4% 10.9% 29.6% 39.8 33.60 6.3% 19.9 7.83 0.5% 1.8% 6.0 18.6 131.0% 5.9% 72.1% 7.3 98.38 1.4% 7.20 52.5% 3.7% 39.8% 138.3 21. Sinopac Financial Holding Co.50 2.49 2.1 36.0 34.1% 5.6% 5.

8% 27.96 1.314 1.3% 20.22 10.90 1.2% 11.5% 30.6% 28.968 935 1.29 2.250 6.1% 19.4% 1.1 14.900 534 400 546 13.8% nm -3.5% 16.01 10.1% -6.2 16.70 5.64 11.39 2.9% 35.9% 21.7% 25.9 3.8% 24.3% 11.3 24.36 2.0% 21.6% 2.6% 7.0% 16.60 54.000 72.4% 3.8 12.48 2.9% 0.9 16.85 20.7 7.36 3.5% 14.33 1.3% 3.3% 24.84 6.9 20.3% -42.8% 4.8 27.3 3.3 7.8% 4.0% 26.8% -11.50 4.1% 22.7% 24.95 1.56 0.03 2.7% 6.8% 17.9% 2.7 10.2% 5.5 29.0% 0.4 21.8% 21.7 22.8 24.93 1.2% 1.8% 9.8% 19. 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 61.8 15.1 12.0 28.4% 2.9% 23.7% 77.0% 11.5% -21.0 14.000 39.400 4.56 2.92 1.8% 21.2% 0.2% 22.0% 19.9% 1.2 14.9% 10.3% 4.8% 62.9 8.6% 3.2 22.6% -3.8 17.41 2.6 31.9 13.36 1.3% 0.2% 0.7 13.28 1.30 1.5% 18.9% 2.6% 2.9% 29.0% 2.19 1.8 23.4% 10.4% 5.32 3.5% 18.1 16.0 14.35 17.7% 2.4% -5.7% 26.3% 21.6% 1.0% 0.52 2.7 41.3 13.3 24.20 3.1% 7.4 25.1% 4.2 2.7 1.28 3.9 21.8 10.7% 40.5 14.7% 19.5% 37.63 4.0 13.3% 15.1% 52.98 3.43 1.3% 1.1 28.7% 3.4% 9.850 1.3 10.80 8.2 15.6% 16.4% 1.9% 22.5% 11.9% 1.8 16.9% 3.8% 26.8% 14.5% 28.5% 16.4% 2.93 4.54 1.70 8.8 12.29 5.3% 0.1% 1.7 8.48 3.10 3.0% 1.25 1.7 17.8% 16.100 65.78 2.0% 39.6% 11.4% 2.13 22.0% 9.550 63.216 737 356 688 2.3% 8.7 7.6% 1.5% 104.91 2.4% 12.02 1.3 6.350 10.3% 12.5% 43.3% 57.3% 3.750 6.7 35.8% 1.1% 14.6% 1.6% 18.0 8.2% 2.700 8.0% 40.9% 3.8% 30.8 11.3 14.3% 26.6 11.800 1.2 35.9% -4.3% 3.2% 23.71 1.9 15.375 814 428 602 2.1% 24.7 13.1% 1.7% 16.3% 3.0 34.2% 2.3% 3.9% 9.5% 11.6% 27.9 13.41 5.8% 6.5 12.77 1.3% 69.6% 16.4% 45.3% 66.400 13.0% 26.4% 17.4 8.9 13.1% 35.1% 13.1% 73.7 13.7% 29.6 18.3% 26.04 6.3 37.5% 1.5% 2.6% 26.2% 11.1 12.000 71.62 14.7% 10.8 25.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.5% 2.4% 2.3% 1.9 25.04 18.3% 9.3% 27.6 11.92 2.51 1.0% 15.8% 1.88 3.3% 22.5% 14.2% 32.2 9.03 1.7% 41.2% 11.000 2.1% 11.3% 29.0% 24.8% 20.3% 1.2% 20.7% 2.000 34.2 13.97 20.7 6.0% 17.8% 1.0 26.1% 6.8% 10.5 8.2 17.377 309 292 470 14.4 6.9 11.2% 25.7% 1.55 1.63 1.2% 20.5% 3.0 34.4% 1.0% 4.1 27.655 210 8.2% 24.6 3.5 11.2% 1.5% 1.070 1.3% 1.13 2.2% 9.32 3.550 178 8.7% 6.2% 30.3% 1.0% -2.350 1.4% 27.45 1.7% 11.0% 3.2% 11.1% 25.4% 20.2% 16.5 14.0% 9.146 1.00 17.0 5.5% abc 31 .2% 1.5% 1.4% 34.7% 9.0% 1.32 3.01 4.48 3.9 8.86 2.9% 20.48 9.3% 19.5% 6.7 25.6% 26.3% 8.8% 5.7% 4.400 2.7% 27.9 19.7% 37.8% 18.28 4.5 12.8% 3.7% 24.

7% 24 1. As of September.4% 11.984 2.4% 10.801 1.265 2. China’s cement investment grew just 8. CR Cement and CEI 2011 outlook  Strong demand: Demand from infrastructure construction has been filtering through to the cement industry since 2H09. 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 .  Faster old capacity elimination: The government has been strict about eliminating vertical kiln capacity.805 1.1%  Assume inventory and exports stay at 1. we estimate cement production will grow by 10.1%  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. neutral on construction and toll roads  Top picks: Sinoma.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc.0bn tonnes in 2011.631 1. we expect this to last for 2-3 years as most of the key projects take some time to complete.0%  We expect 322m tonnes of vertical kilns to be shut -65 -15.7% y-o-y. we forecast new supply to come down to 195mt in 2012 from 247mt in 2009.com.383 1. this should offset slower demand from the private property market. and is not registered/ qualified pursuant to FINRA regulations China: Cement production and capacity.9% 7.0% 9.3% down in 2010-13e 4.390 178 253 247 221 195 -76 -74 -107 -80 -70 6.2% 77 4. As the construction period for cement plants is usually 18-20 months.4%  NDRC estimates total capacity in 2008 at 1. Year-to-October.6% 5. more than the number of 74mt in 2009.488 5.402 10.1% 6. new capacity should slow from 2H11.0% Net change in s/d as % of total production 2. Currently.2% 1. 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 1.5% Source: Digital Cement.87bn tonnes 163 -13.4% to 2.5% -72 -5.9% 88 4.124 2.1% 18.0% 10.  Tighter new supply: Following the tightening of cement investment requirements in September 2009.989 2. Together with boosting affordable housing construction.2% of production 8. down from 60% over the past two years. Based on estimated fixed asset investment growth of 22%.6% 2.4% 37 1. the total phase-out of old capacity reached 90mt. we expect slowing new capacity releases.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.211 2.

TP HK10) and Zhejiang Expressway (576. 33 . Hence. Capacity and volume growth. they have a social responsibility both domestically and overseas (to carry out government-related projects).45. It will take a year to stabilise the y-o-y impact. TP HKD12) and CRG (390. orders for CCC (1800 HK.HK. N. This is up to the MoR while constructors have little say in the matter. which is largely driven by M&As. Based on the government’s budget. We do not expect a significant margin improvement in 2011 as it is a structural issue. Infrastructure construction  Strong railway investment: The Ministry of Railways (MoR) is on track to meet its budget of RMB700bn (up 16.  Slow margin recovery. accounting for 44% of our original full-year earnings. OW. a record high) of railway investment in 2010. The latter is facing traffic diversion away from one of its operating toll roads.22.  Structural ASP growth: In view of the improving supply/demand dynamic. will be the key to earnings growth. TP HKD7. changes over the next five years. N. HKD6.15bn loss in 3Q10.3% y-o-y in 3Q10 after a new road commenced operation in July. HKD7. we expect another 80mt to be phased out next year.  Earnings outlook: Northwest and Southern regions should see the most stable ASPs in the short term.32. That means the MoR is still the largest railway investor. HKD8.0). Shangsan. In 1H11. we expect railway investment to remain high at RMB700bn pa over the next two years. However. It registered a RMB4. TP HKD8. Being one of the three largest constructors in China.44. we expect 6-7% organic volume growth in 2011.6% h-o-h increase in 2H10 largely due to one-off power restriction measures. Gross margins saw a slower-than-expected recovery in 2010. N. while traffic diversion due to new roads or high-speed rail is a longterm threat. The price-setting mechanism for the construction of high-speed railways has not yet been set. Railways are still the focus of transport development in the 12th Five-Year Plan.Equity Asia 7 December 2010 abc 2010. unless the constructors gain more pricing power. ASPs may fall on seasonality. we expect higher margins or gross profit per tonne in 2011. particularly in Eastern China where we saw a 13.0) are still slow as the majority of its sales are from port construction and global port machinery.HK.  High policy risk: CRC’s substantial loss on its overseas project (light rail in Saudi Arabia) reflects the political risk it faced. For Jiangsu Expressway (177 HK. while CRC and CRG should take about 90% of the construction market share. The unstable margin was due to rising raw material costs and delay in compensation on highspeed railway projects. TP HK8. HKD5. New order flow for the two railway constructors – CRC (1186 HK. HKD9. where traffic volume fell by 12.  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.7% y-o-y. accounting for nearly 95% of projects. we expect structural ASP growth starting in 2H11 with the slowing of new capacity. given the strong demand from infrastructure and pricing power of local producers.76.0) – should remain strong in 2011-12. The risk is to the upside.N. Coal prices are likely to stay at high levels with mild increases. thus there are significant policy and execution risks.

from 5. We use PE and EV/t pricing methodology to arrive at our target price of HKD7. which implies a 21.8% potential return. HKD33. We favour CEI given its solid track record in waste treatment and its diversification into alternative energy. We think this is unjustified. TP HKD38. sales volume upside surprises and stable ASPs on improving supply/demand conditions and strong pricing power. Catalysts include M&A and cement equipment orders.500 by 2010 and 2.Equity Asia 7 December 2010 abc  Stable toll rate: JSE has applied for rate hikes. TP HKD9. OW. the high end of regional and international peers with comparable growth. We are optimistic on earnings growth owing to high visibility on new capacity. Our target price of HKD9. We expect new orders to grow by 15% and 10% in 2011-12. with higher margins and earnings growth (EPS CAGR: 38. Techtonic shifts Under the 12th Five-Year Plan.) Risks At HKD7. and reduce unit GDP energy consumption to 40-45%. it trades at 13.4x 2011e PE. Margins and gross profit per tonne should remain high.2x 2011e PE. Risks Key risks to our view include weaker ASPs.1).  Growth priced in. Valuation At HKD6. below its mid-cycle PE of 17. It is also the largest cement equipment and engineering services provider in the world.2x. 6 December 2010.53. OW(V). delivering the highest earnings growth in our cement universe. (See our recent note. JSE and ZJE are trading at 16x 2011e PE. with fairly stable ASPs as 50% of sales (for key projects) are under contracted prices. subject to local government approval.9 is based on a sum-of-the-parts methodology and implies 33. HKD6.000+ to 3. Catalysts include M&A and falling coal costs. The market share of the top 10 producers is expected to rise from 23% to 60% by 2015. In early 2009.53.9% vs 15.11. Valuation Top pick Sinoma (1893 HK. The key risks to our view are new capacity in Northwest China and the potential for fundraising. equity fundraising and operation risk in JVs. a 29% discount to Conch (914 HK.4) CRC is the largest cement operator in Southern China with 15-20% market share. HKD7. For cement equipment.000 in 2020e. TP HKD7. CR Cement (1313 HK. N.9) Sinoma is the largest cement operator in Northwest China with 40% local market share. close to their 3-year average of 15-16x. 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.4. the stock trades at 13.8% in 201012e).11. The government aims to reduce the number of cement producers 34 . We do not expect rate hikes to be granted given inflation concerns. Gaining pricing power via acquisition. the PRC government drafted a proposal on energy development which entailed investing RMB5trn in clean and traditional energy over 2011-20. China promises to increase the use of non-fossil fuels as a percentage of total energy expenditure to 15% by 2020. overseas orders should be the key growth driver. Strong demand came from infrastructure construction.1% potential return.

waste water treatment (WWT). CEI trades at 21. supporting long-term growth. TP HKD5. etc. utilisation is rising and operating margins are increasing. We value each project using a DCF methodology (risk-free rate of 4%. Our target price of HKD5. Catalysts include encouraging policies and projects in the pipeline.34. including waste-to-energy (WTE).4 implies a potential return of 25. industrial solid waste landfill.4) CEI is a conglomerate focusing on environmental protection and alternative energy projects.1%. solar photovoltaic energy. while traffic remains stable.Equity Asia 7 December 2010 abc CEI (257 HK. market risk premium of 6. HKD4. OW(V). The government’s RMB5trn investment in new energy sectors over the next 10 years should accelerate its diversification from WWT/WTE to alternative energy. 35 .34.6x 2011e PE.0% for China and WACC of 8. Earnings growth is picking up as construction is on track. Valuation At HKD4. Risks The key risks to our view include delays in project execution and funding requirements for new projects.0%).

9 3.7 18.2 1.226 683 3.097 13.8 1.7 10.3 -9.16 2.2 0.149 16.2 14.668 3.070 2.0 8.7 0.7 4.5 60.7 11.3 11.8 27.4 5.1 9.42 26.3 38.1 10.2 9.0 24.18 22.57 0.1 0914 HK 3323 HK 1313 HK 1893 HK 0691 HK 1136 HK 0743 HK 1101 TT 1102 TT 18.0 3.3 1.8 -12.7 -0.1 15.1 14.6 3.6 0.6 1. *Local currency abc .55 0.9 18.5 2.32 22.4 5.3 6.11 7.0 8.32 3.4 21.2 19.20 32.037 2.8 6.1 2.46 0.2 -25.7 2.5 -1.1 17.2 11.8 2.209 1.7 0. Int.8 -7.45 30.1 73.3 2.3 -15.7 -17.7 15.5 1.4 11.8 29.5 3.9 2.90 6.6 3.673 OW(V) 4.3 1.0 14.59 0.4 15.6 3.3 1.2 -16.9 -7.7 24.5 12.17 0.3 3.1 0257 HK 1.6 2.51 0.4 1.32 15.15 0.5 5.45 31.053 N N(V) OW OW(V) OW(V) N(V) UW UW(V) UW 33.50 11.3 1.1 0.1 11.3 13.0 9.2 5. 6 December 2010).1 2.1 -12.3 3.2 13.4 12.7 0.581 3.34 1.45 7.5 3.2 2.7 2.6 12.1 1.1 17.42 0.6 18.3 2.40 0.7 38.3 15.5 1.20 25.4 25.9 5.8 -3.1 Source: Thomson Reuters Datastream.6 5.9 2.4 13.7 1.6 10.0 -4.3 3.7 15.9 23.8 30.9 -0.7 n/a 0.9 15.7 1.0 32.76 6.0 12.7 4.7 14.7 49.6 1.0 -30.51 1.4 25.4 6.17 0.131 3.5 -0.8 19. HSBC estimates.1 25.3 20.7 -6.8 -0.0 -10.0 3.34 8.4 28.4 7.30 0.1 2.3 2222 HK 1.6 31.6 21.0 0.8 16.9 10.0 0.3 Machinery Equipment Sany Heavy Equip.6 1.523 N N N OW(V) 5.4 16.3 2.0 0177 HK 0576 HK 4.3 7.4 14.4 -3.7 19.2 12.0 4.9 0.0 12.6 -2.5 3.5 2.8 33.7 0.4 39.3 1. except CR Cement – priced at 3 December close (see note Gaining pricing power via acquisition.2 16.52 0.4 1.9 2.4 -6.54 0.39 0.0 10.5 -3.6 4.984 OW(V) 4.3 6.2 0.8 -7.4 13.985 OW N 8.0 7.4 14.9 18.36 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.91 0.9 2.9 22.7 14.2 3.4 2.3 2.6 2.6 -15.1 -51.1 21.0 21.2 -1.5 1.26 N/a 4.712 5.2 28.074 5.00 17.1 12.80 1.7 14.8 2.1 21.1 0.3 -7.1 21.3 3.58 0.44 9.1 33.7 40.5 -0.0 6.5 -0.8 3.1 3.0 2.0 1.1 20.29 0.2 27.34 0.03 3.2 7.8 -5.3 1.5 47.2 3.0 7.5 11.0 -20.8 10.7 17.9 16.9 7.3 0.4 9.72 0.46 0.17 1.4 10.09 2.9 23. 0631 HK Lighting NVC 3.5 9.6 3.4 25. 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 14.35 30.53 6.4 1.1 1.50 23.70 2.4 9. Closing prices as of 30 Nov 2010.1 14.1 19.41 -9.3 20.0 94.9 6.4 15.5 n/a 6.1 17.43 0.1 -15.0 6.8 -0.3 0. Zhejiang Exp.367 OW(V) 12.4 13.22 6.23 0.7 1.9 33.30 0.8 14.8 2.0 13.2 20.

Cargo has been the star performer and has helped the sector outperform the MSCI AEJ by 22% y-t-d. We do not believe drybulk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. occupancy levels have stabilised and we expect hoteliers to push up room rates.com. The earnings recovery has been driven by a strong pick-up in passenger and cargo demand which has boosted load factors and yields. Pacific Basin 2011 outlook Aviation We forecast our Asian airline coverage will generate an aggregate 2010 recurring profit of USD6. we expect profit from cargo to fall y-o-y in 2011.hk Azura Shahrim* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6976 azurashahrim@hsbc.hk Parash Jain* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6717 parashjain@hsbc. Our top pick in the sector is Singapore Airlines. Since the occupancy-led recovery in 2010. In particular. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 markwebb@hsbc. 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.hk Shipping We remain generally less enthusiastic about shipping. resulting in the gap between demand-supply becoming wider.Equity Asia 7 December 2010 abc Conglomerates & Transport  We remain positive on passenger driven airlines. 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. has significant net cash balances and is the best value Asian airline. a sharp rebound from recurring losses in 2009.8bn. We forecast this will cause a sharp earnings rebound in 2011.com. Drybulk vessel supply is still huge. we believe profit growth will stall in 2011. which is more passenger focused. Mark Webb* Head of Conglomerates and Transport Research. While the airline outlook remains good. In general. and is not registered/ qualified pursuant to FINRA regulations 37 . and we forecast that demand growth in 2010-12 will moderate versus the previous cycle in 2004-08. 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. In addition.hk Stephen Wan* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2996 6566 stephenwan@hsbc. every dollar of revenue earned from a rate hike is three times more profitable than that earned from occupancy increases.com.com. Hotels A sector that enjoys the benefits of a travel rebound but has lagged the airlines is hotels.

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

49.9 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 0.1x to derive our enterprise value/invested capital (EV/IC). TP HKD7. Our target price implies a total negative return of 31% (zero dividend yield). Apart from SIA’s compelling value. HKD8. reversionary rents and commodity prices.25. HK Land and JC&C.1x). Our target price implies a potential return of 48% including dividend yield of 5%. TP SGD19) Valuation Pacific Basin (2343 HK. Based on this approach. the key price driver is likely to be measures to utilise its significant surplus net cash. Valuation and ratings Singapore Airlines (SIA SP.5 based on rating to economic profit (REP) combining returns and invested capital. the stock is trading at 1. At our target. TP USD54) Valuation China Cosco (1919 HK.6-3. our target is SGD19 and this plus FY11e DPS of SGD0.8x). Risks SIA’s share price tends to be driven by earnings momentum (0. Vietnam and Nigeria). We set our target at USD54.4 short term and 0. At our target price. OW. at a 30% discount (from 35%). Downside risks are sharp declines in Asia consumption. Pacific Basin’s share price tends to move closely with the Baltic Dry Bulk Index (0. which is at a discount to its average trading multiple of 1. Our appraised valuation is USD77/share (from USD70). HKD5.1x FY11e BV. We value China Cosco at HKD5. Jardine Matheson (JM SP. SIA would trade at 12x FY12e PE. USD43. Risks We value Pacific Basin at HKD7.4x P/BV and provide an FY12e dividend yield of 5%. We continue to argue that JM should trade at around the midpoint of its historical range (2005-8: 28-45% discount to appraised value). We apply a historical REP multiple of 0.7-5.5) 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. which may prove to be value-destroying. SGD15. 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. the stock is trading at 1.8x and used ROIC/WACC at 1.8x (range 0. Risks 70% of our appraised valuation comprises Dairy Farm.9 medium term) even when it has locked in a high portion of revenue at healthy levels.60 correlation since 2006) and its performance relative to the MSCI AEJ is highly negatively correlated with the change in jet fuel prices.6x. OW. TP HKD5. At our target price. 1. OW(V). Another downside risk is further expansion by the Gulf airlines on SIA’s key routes between Australia and Europe. 39 . particularly greenfield investments at transhipment ports. We are generally negative on China Merchants’ international expansion.42.Equity Asia 7 December 2010 abc Merchants may increase investments overseas (for example: Sri Lanka. which is also the stock’s average trading multiple (range 0.9) Valuation JM remains attractively valued at FY11e 12x PE. UW(V).24.0x adjusted FY11e BV.80 implies a 28% potential return.

HKD30.4 short term and 0. including dividend yield. 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. 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. it is currently trading at 19x 2011e PE and 1. higher than the long-term historical average of 15x. 40 . Key upside risk is higher-than-expected increases in average container handling tariffs.65. TP HKD31) Valuation After an 18% rise in the share price since its strong 1H10 results. we argue the stock is now fully valued.7). At our unchanged target of HKD31. China Merchants (144 HK.9 medium term) and short-term earnings momentum (0.Equity Asia 7 December 2010 abc Risks Risks China Cosco’s share price is highly correlated to the Baltic Dry Bulk Index (0.9x 2011e PB. thus we remain Neutral. Our target price is based on a sum-of-the-parts valuation (DCF for key ports) and implies a 3% potential return. N. 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.

3% 2.9x 1.00 18.0% 12.1% 11.5x 1.7% 3.0x 2.65 24.5x 3.7x 0.5% 11.2x 12.0% 10.1x 7.4x 0.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 10.0x 9. REP= rating to economic profit which is EV/IC divided by ROIC/WACC.3x 1.0 2.46 12.42 N(V) N UW UW(V) N(V) N(V) OW(V) UW OW 13.00 44.2x 1.1x 1.4x 9.7% 12.6% 5.8x 1.6% 13.4 0.1x 1.8x 1.2x 2.70 43.6% 1.2% 5.20 7.2x 1.2x 29.0x 4. 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 7.9x 13.6% 1.4x 2.5% 1.6% 6.35 4.2x 1.5x 0.5% 13.1x 3.00 58.0x 1.5x 8.1x 11.5% 4.50 62.2x 7.7% 7.5% 0.9x 8.1x 2.1x 29.3% 1.3x 0.2% 10.2x 1.8x 21.1% 20.49 3.8% 0.6% 5.7% 8.0x 2.9x 4.4x 1.5% 14.7% 27.8x 0.6x 15.3x 24.0x 18.2 1. 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.6 0.5% 1.4x 1.3x 1.6x 2.2% 74.3% 9.2x 7.1x 5.1x 7.3% 22.0x 1.2x 1.7% 12.2x 2.4x 1.7% 20.1% 19.6x 2.1x 1.4x 1.3x 19.3% 7.1x 1.3% 5.1% 3.37 119.7x 2. please see disclosure appendix.6 1.70 8.90 25.0x 7.4x 1.0x 8.9x 1.9x 1.9% 13.50 3.4x 1.1x 16.7x 1.3x 21.2x 6.7x 12.0x 2.6x 0.3x 5.1x 17.2x 0.7x 1.10 10.0x 11.0x 6.9 3.25 23.9x 0.19 2.1x 1.3% 8.6% 18.8x 1.6x 9.4x 7.3x 1.2% 8.6x 7.6% 71.7x 0.1x 1.8x 1.2x 5.3% 7.4x 10.5x 10.0% 10.0x 14.8x 1.1x 1.5x 21.3% 11.8x 5.0x 2.00 3.8% 108.3x 1.6 2.5% 20.6% 19.8x 2.5x 3.9x 18.8 3.9x 1.2x 1.9x 1.10 70.5x 25.65 19.0x 3.6x 3.0 3.0x 1.00 4.4x 0.3% 18.4% 44.1x 1.2x 16.25 124.0 0.2x 17.5% 6.9x 47.2 1.5x 0.5x 31.8x 1.7% 6.4x 1.9x 15.00 22. Closing prices as of 30 Nov 2010 41 .5% 60.3x 2.9 1.1x 1.0x 1.0x 0.7x 21.9% 24.8x 8.0x 1.4x 8.1% 5.3x 31.2 2.1 1.8x 20.20 N N OW(V) OW(V) N N OW OW OW(V) OW(V) OW N 15.3% 10.2x 18.5% 5.7% 15. lines China Shipping Dev.9x 1.7x 0.93 77.4% 1.6x 7.5x 12.1x 14.8x 6.3% 1.12 22.7 5.8x 1.4x 1.3% 6.35 5.1% 2.7x 15.2% 10.8x 2.2x 1.4x 1.1x 3.6x 16.0% 7.3x 1.5x 11.2% 5.2x 0.4% 17.8% 25.50 16.2 2.4% 9.2x 1.1x 1.6x 0.8% 9.5x 1.8x 0.1x 1.4x 2.5x 2.1x 80.1% 0.0 6.7% 27.3x 1.4% 10.9 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 5.2x 1.8x 1.4x 13.67 34.4x 8.0x 4.5 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 31.90 8.8x 1.Conglomerates and Transport: Valuation summary Company Airlines Air China .4% 11.9x 2.0% 16.2% 9.5x 7.40 12.2x 1.1 4.20 32.5 Airports / aviation service providers Hong Kong Aircraft Engine 44 HK SIA Engineering SIE SP Singapore Airport Ter.65 2.0x 0.3x 11.24 26.3x 2.7% 8.0 1.5% 8.2 0.4x 1.5x 18.5% 10.9x 13.2 2.8x 18.6x 2.5 2.5x 13.2 1.6x 11.8% 21.00 1000 66000 19.2% 9.3x 15.1x 7.0x 14.4x 1.6x 1.2x 2. Contr.3x 1.3% 8.9x 1.2x 14.9x 7.1x 2.1x 0.5 3.9x 0.8 3.5x 7.00 51900 30.2x 1.4x 11.2% 65.0x 7.4 2.4x 15.0x 17.4% 5.2x 16.1x 1.0x 0.6% 10.8x 0.1% 8. Source: HSBC estimates.7% 10.3% 2.9% 1.4% 60.1% 17.1x 0.0% 17.6 4.0x 1.7x 2.2 0.1% 1.3x 10.3x 1.5% 22.8x 20.2x 1.0x 3.5% 3.7% 9.9x 2.7x 195.9x 9.9% 21.4x 11.4x 15.0% 16.4 2.4x 2.1x 8.25 2.8% 32.4x 1.3x 5.20 4.5 2.8x 3.9 2.1% 10.2x 2.4% 9.2x 9.0x 1.7x 19.0x 9.7% 13.00 54.4x 1.9% 12.2x 1.3x 1.1% 1.60 52.8x 0.2x 1.0x 12.4x 1.1 abc Notes: (V) = Volatile.8% 28.3x 1.0 2.9x 3.3x 10.8x 0.H China Southern .5x 8.0 5.6% 10.1x 1.0x 2.6% 9.5x 3.8x 1.4x 2.1x 8.4 0.34 2.0 5.4 7.40 17.1% 25.4x 8.50 86.8x 9.8% 14.1 1.0x 6.7x 222.6 4.87 N N OW 31.5 0.8 4.6x 8.1 3.1% 11.9x 1.6x 3.0x 13.1x 3.8x 5. Ser.9% 9.7% 32.5x 1.00 2.68 61.9x 0.4x 22.7% 7.30 8.7x 748.0x 13.3x 1.0x 3.0x 0.75 2.4x 11.0x 8.1x 1.1 3.90 2.7x 10.2x 9.3x 9.2x 17.8% 19.9x 2.9x 0.4x 1.20 5.0% 20.3x 1.2x 6.8 0.2x 17.5% 7.5x 1.9x 10.7x 19.5x 0.6x 4.2x 2.8x 7.3x 1.2x 11.3% 48.7% 9.2x 1.2x 9.9x 12.1x 7.17 75.1x 19.9x 0.9x 1.4x 7.2x 16.9 3.80 UW(V) UW(V) OW(V) UW(V) N(V) OW(V) OW(V) OW OW(V) UW(V) N(V) 14.8x 0.4x 1.7 2.8x 2.5 5.5% 10.78 25.2x 28.1x 5.9 1.1x 2.8x 9.0x 1.1 2.00 10.1x 1.0 1.6% 11.9 0.0% 9.2x 1.7x 9.6% 11.9x 100.3% 11.9% 10.2 3.6 3.6x 10.4x 17.3x 1.2x 22.7% 1.7x 1.7x 7.7x 7.1x 8.5x 1.4% 14.3x 2.90 3.8% 5.0x 1.2x 1.9 4.4x 15.9x 14.6% 0.58 5.0x 0.4% 8.9% 19.1x 1.7x 2.9x 9.50 3.1x 2.97 13.H Cathay Pacific China Airlines China Eastern .6x 2.4% 15.3x 13.9 1.3x 3.4 3.8x 1.2x 0.2x 14.4x 1. PE calculated from recurring EPS.1x 13.2x 32.0x 7.0x 3.3x 6.5% 8.3x 11.2x 3.7 2.70 144.9x 1.3x 6.70 804 71000 15.1% 1.6% 11.9% 14.7x 10.50 15.8% 0.1% 13.2x 1.9x 1.70 2.8% 9.2x 0.2x 1.5x 1.3% 12.3x 14.5x 1.4x 13.6x 13.2% 10.9x 1.6x 1.1% 25.00 34.6x 0.3x 8.2x 2.1% 1.

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

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

Incomes are rising and.40) to benefit through continuous capacity India For investors. there are two issues at play in India. TP HKD7. expansion and diversification into higher-end packaging paper. For example. margins might face a temporary squeeze.76. it might take time to raise retail prices. First. Meanwhile. for now. men’s shampoo. we expect the government to announce a new round of environmental and emission control initiatives under its 12th FiveYear Plan. 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. for many. OW(V).35) Paper The paper sector in 2011 is likely to be characterised by continuous demand growth and a shift in the industry structure. to Indonesia. In China and Korea. As such. According to Nine Dragon. we expect large manufacturers like Nine Dragons (2689 HK.14.6-0. has struggled with rapid diversification in (too many?) new products and sudden weakness in their core product. Nine Dragons and Lee & Man Paper have net gearings of around 0. On the demand side. valuations are still 44 . which is likely to result in an accelerated shutdown of small paper mills. Most focus goes. Expect continued investment in advertisements and promotions in local brands in the coming year. menswear maker Lilang aims to build a brand that appeals to higher-end consumers instead of low-income consumers. India is the only Asian country where consumer stocks are trading back at levels seen in 2007.29. OW. in some markets. With higher interest expenses related to RMB rate hikes. OW(V). The major headwind faced by the paper manufacturers is rising interest rates in China. other multinationals are positioning themselves strategically to secure long-term exposure in these rapidly growing markets. On the supply side. HKD6. a 100bps increase in effective interest rate would hurt the bottom line by 3%. Lee & Man is less affected as all of its borrowings are denominated in HKD or USD. We prefer Southeast Asian stocks that are strong incumbents trading at reasonable valuations. Under this macro background.7x in 2010. Nine Dragons is particularly affected. This is not easy and. HKD11. Companies that appear to be successful in building strong. new emerging local rivals are threatening the position of local and international incumbents. 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. In addition. TP SGD0.Equity Asia 7 December 2010 abc Emerging Chinese brands A group of companies in China is now trying to build local brands. homegrown brands should continue to receive plenty of attention in the markets in 2011. SGD0. a shampoo brand. TP HKD18. Our top pick in this respect is Thai Beverage (THBEV SP. India’s consumer stocks are expensive. raw material prices are rising and although many companies can pass this on to consumers via higher prices. as about 70% of its borrowings are in RMB. Southeast Asia SEA consumer markets are undergoing substantial changes.00) and Lee & Man Paper (2314 HK. Bawang. Meanwhile.

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

Equity Asia 7 December 2010

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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

1 3.4 1.3 1.9 3.350 28.2 1.6 1.25 17.6 2.9 1.9 1.99 30.588 2.300 62. 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 3.6 2.000 120.6 19.000 660.2 1.9 8.2 0.0 1.3 2.11 13.5 1.4 2.4 1.1 4.8 11.6 2.631 24.34 12.000 84. HSBC estimates.112 11.3 abc 49 .0 1.8 0.566 410 712 3.2 1.458 32.8 6.400 445 618 3.5 40.1 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 2.9 2.000 320.346 18.54 77.000 440.000 1.4 21.32 4.684 928 114 341 445 287 180 132 3.8 0.87 11.000 150.080 2.92 14.000 48. MRCO IN.9 1.671 1.3 0. ITC IN.000 150.184 39. SHOP IN.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 30.000 117.6 48.917 6.28 7.0 1.473 2.373 971 2.Grand total Note: All numbers calendarised.1 2.965 22.5 13.1 1.916 11.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 .7 0.731 2.000 36.5 4.5 0. GITG IN.761 36.1 3.1 0.939 9.330 2.6 2.5 1.208 50.5 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 2.2 0.700 408.088 10 4 12 10 14 9 11 15 10 11 9 9 10 10 12 10 22 12 13 12 0.5 1.1 0.1 0.611 INR INR INR INR INR INR INR INR INR INR INR 33.1 1.9 CLGT IN.6 1.34 3.363 44.5 5.19 89.252 12.559 464 2.8 2.59 106. 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 204.9 4.7 3. DABUR IN. NEST IN PF IN.4 0. Source: Bloomberg.059 58.0 1.5 4.578 6.4 7.1 2.0 14.4 0.4 6.0 9.0 2. GCPL IN.366 1.762 7.583 3.61 103.7 1.000 473.1 1.550 1.33 5.2 1.1 25.32 15.2 1.276 7.106 11.500 567.2 1.8 5.14 6. TTAN IN.80 9.1 0.4 1. HUVR IN.000 600.5 0.86 18.0 6.31 38.6 0.8 1.60 40.284 KRW KRW KRW KRW KRW KRW KRW KRW KRW 21.1 4.936 645 3.9 1.0 1.055 10.3 2.926 14.3 0.4 18.8 3.2 1.2 1.500 214.000 240.1 0.05 3.5 4.

mainly driven by 1) the resumption of suspended projects.com Angela Hong* Analyst The Hongkong and Shanghai Banking Corporation Limited.hong@kr. we expect China and EM to continue to grow at 20% and the US to recover by 10%. overcapacity and demand from shipowners.2% from 7. which have shown an incremental recovery since last year (after the financial crisis in 2008).hsbc. we would not view this recovery as cyclical. Seoul Securities Branch +822 3706 8752 angela. *Employed by a non-US affiliate of HSBC Securities (USA) Inc. including Saudi Arabia and the UAE. and is not registered/ qualified pursuant to FINRA regulations 50 . China and EM and estimate their 2011 retail volume to increase by 12% to 6. which look set to provoke further investment in infrastructure as well as plants. We expect a gradual recovery to continue in 2010/11 due to a low base effect.hsbc. In 2010.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. largely driven by national oil companies such as ArabianAmerican Oil Co (ARAMCO). up 18%. We expect new orders to rise around 18% to 32.hsbc. Brian Cho* Head of Industrials Research.com Keith Hwang* Analyst The Hongkong and Shanghai Banking Corporation Limited. the strongest demand for overseas plant construction has come from Middle East. For 2011. Seoul Securities Branch +822 3706 8763 keithhwang@kr. Saudi Basic Industries Co and Abu Dhabi National Oil Company. helping HMC and Kia’s combined global market share to increase to 8. the two Korean automakers likely sold 5. However. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited. such as profitability of current new orders. driven by the economies of scale and cost efficiency through platform integration. We believe HMC and Kia’s operating margins will rise to 9% and 7% in 2011. Autos We expect the momentum of HMC and Kia’s new models to continue into 2011 in the US.7m vehicles globally. While we find that massive capital investments have led to fierce competition among the global engineering and construction players.com Engineering & construction To date. delays and price cuts.9m CGT in 2011. Seoul Securities Branch +822 3706 8758 paulchoi@kr.7% in 2009. while Kia Motors should benefit from Chinese growth 2011 outlook We expect the global capex cycle to continue to trend up in 2011.com Paul Choi* Analyst The Hongkong and Shanghai Banking Corporation Limited.hsbc. Many concerns remain. we believe Korean companies who successfully diversify their new order streams both by project type and region will eventually benefit. and 3) sustainable demand growth from emerging markets. crude oil). Seoul Securities Branch +822 3706 8750 briancho@kr. Hyundai Motor is most likely to benefit from pricing anomalies relative to peers. We believe that more time is definitely needed to see another strong cyclical upturn as in 2006-08. 2) strong commodity prices (eg. Shipbuilding We believe the shipbuilding industry bottomed out in 2009 following two consecutive years of order declines.5m.

KRW172.5x reflecting the new fair EV to 2011e backlog (30%). Samsung Engineering now trades at 29% 2010e EV to backlog versus the major overseas peers at 121%. Risks Key downside risks to our view include slower-thanexpected demand recovery in global markets. However. As most of the US projects look set to be carried out through a ‘cost + fee base’ mechanism. we apply target EV/EBITDA of 15. OW. Valuation Pricing anomalies Korean auto and auto parts stocks have historically traded at a discount to global peers. any significant quality problems with HMC vehicles and heightened tensions with North Korea. we believe the discount factors are fading away given solid global sales and strengthened balance sheets.500.500. a proprietary approach to gauge how far shares are trading on their future earnings in the upcycle. especially given its first-ever order win from the United States (Dow Chemical order). earnings sensitivity to FX movement and heightened tensions with North Korea. Hyundai Motor Company (005380 KS. OW(V). Stock most at risk: Mando (060980 KS. TP KRW140.000) With the stock trading at 1.4trn.4bn.000 is based on a sum-of-the-parts valuation.500. Valuation We apply a target PB multiple of 1.8x to 2011e BVPS. KRW185. Key downside risks to our view include dependency on OEM product cycle. we add net cash worth of KRW1. as a steady pace of diversification backed by proven quality works should continue to improve order visibility ahead.6x to derive our TP of W240. N(V). which implies a 20% discount to our 2.2x target multiple for Mobis. TP KRW247. entering a new USD100bn market and FEED business (front-end engineering and design). While EV to backlog is a good way to look at E&C valuations. an oligopoly market largely dominated by leading domestic peers such as Fluor Corp. Risks Key risks are higher raw material prices that erode margins of industrial plants. we believe 2011 new order guidance (KRW13. as the two companies’ global volume growth and margin expansion stories look similar.000) We believe HMC deserves to trade at Toyota’s upcycle average multiple during 2004-07. further KRW appreciation that weakens pricing power and heightened tensions with North Korea. due to the earnings volatility and high leverage. TP KRW240. Risks We apply a target PB multiple of 1. Valuation Out target price of KRW247. With non-core asset value at KRW87.6x 2011e PB and 10x PE. given that Mando’s 2011e ROE 16% is lower than Mobis’ 23%. KRW132.Equity Asia 7 December 2010 abc 2011 high conviction idea Top pick: Samsung Engineering (028050 KS. Our target multiple is based on Toyota’s average 1-year forward PB during the 2004-07 upcycle. 51 .000. For the core operations. we think Mando’s share price momentum has abated due to the KCC overhang.000) We believe Samsung Engineering is the best positioned name. We believe Samsung Engineering has reached a turning point in its business. Looking ahead.5trn) looks highly achievable. 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.

9x is based on a 20% premium to our target PB for HMC of 1. Valuation We apply a target PB multiple of 1. Our target multiple of 1. the shares would be trading at 8. Kia’s 2011 Chinese market share is likely to rise to 3. At our TP. following 40% growth in 2010. 52 .4% in 2010.000) We estimate Kia’s Chinese retail sales will grow 25% in 2011.8% in 2009.3% growth. Key downside risks to our view include any significant quality issues with Kia’s cars and heightened tensions with North Korea.2% in 2010 from 9. OW.950. With the launch of Sportage R (4Q10) and K5 (1Q11).Equity Asia 7 December 2010 abc Winners from Chinese growth The combined market share of HMC and Kia in China has grown to 10.7% from 3. Risks Kia Motors (000270 KS. KRW48.9x to 2011e BVPS to derive our TP of W56. We estimate that Korean automakers will outperform the Chinese auto market in 2011. TP KRW56. in light of the successful launch of Sportage R. given Kia’s higher ROE.6x.7x 2011e EPS with 12.000. K5 and YF Sonata. As such. momentum in SUVs and D-segment sedans should continue into 2011.

2% 3.5 23.0 7.2% 29.3 10.1% 8.998 10.7 6.1 11.8% 178.550 7.8 1.8% -8.5 25.000 39.8% 8.2 3.5% 11.9% 51.7 9.5 2.0 7.2% 11.6 8.000 25.1% 21.400 31.2% 21.500 105.7% 28.4% 9.0 4.100 4.038 5.1 1.2 7.5 25.6% 5.000 32.9 8.4% 12.6% 17.0% 9.5% 3.2% 17.964 63.6 10.2 5.1 8. 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 7.6 6.1% 11.163 33.2% 23.1% -36.7% 22.234 23.9% 10.3 12.8 5.9% 3.3 12.3 1.3 12.200 75.1 1.0% 2.9% 21.0% 10.7% 40.000 108.2% 14.3% 7.6 7.2% 6.2 1.1% 21.7 5.0% 1.2 10.2% 25.552 2.9 49. P/E EPS growth P/B ROE Source: Bloomberg.4 15.0% 10.1% 12.7% -1.9 13.1 2.1% 7.3% 1.5% 9.3% 10.3% 29.5% 8.200 42.4% 37.7% 29.3% 10.0% 2.4% 23.9% 56.5% 7.6 2.4% EBITDA mgn.4% 17.000 -3.7 17.5 1.1% 9.2% 15.0 6.9 9.0 3.4% 3.600 130.500 460.7% 3.2 1.0% 10.5 6.2 24.420 6.6% 27.4 0.8% 2.7 17.3 10.0 14.7 28.8 7.0% 10.8 20.4 27.800 80.9 9.0% 28.1% 8.2 20.850 30.7 1.9% 15.7 1.2 17.000 310.000 43.1 7.1% 8.8% 5.3% 4.3% 10.7 238.6 37.7 8.7 29.8 19.616 3.8% 18.436 48.2 13.9 43.5 0.7% 20.4 75.5% 22.0% 18.9 6.665 6.6 7.200 108.1% 6.5% 1. Closing prices as of 30 Nov 2010 abc 53 .0% 3.5 6.2% 9.3% 7.5% 13.5 12.061 27.0% 7.0% 12.5% 3.000 34.4% 3.6% 37.7% 2.000 19.5 8.6% 1.5 22.000 9.0 48.2 7.770 22.3 2.3% 15.4 6.2% 19.1 1.6% 9.8% 15.3% 28.9 5.7 27.4% 24.7% 0.4% 13.201 172.3% 5.288 185.6 11.9% 5.0 21.500 240.Korea Industrials: Valuation summary Company Samsung Eng.776 3.686 275.700 40.3% 46.8% 11.2 9.0 25.1% 2.0 9.0 5.2 37.4% 283.2 16.9% 15.496 33.3 16.7% 9.3% 10.1% 5.4% 6.800 110.4 0.4 21.2% 3.7 20.1% 9.8% -23.9 15. Hyundai Dev.000 4.4 7.0% 24.5% 7.9% 25.900 80.8% 7.2% 28.2% 1.2% 8.5% 2.9% 16.8% 35.7% 2.322 100.1 9.0% 20.2% 19.6 10.0% 24.4 -78.7 4.1% 13.0% 9.8 402.7 2.2 6.998 32.000 39.7% 37.7 34.8% 37.064 94.132 55.1% 17.000 28.3 7.4% 8.000 13. Samsung C&T GS E&C Hyundai E&C Daelim Ind.0 17.9 -10.3% 10.000 36.8 15.9 23.6 7.771 15.4 11.6 36.2 6.7% 38.5 7.1 9.1% 7.0% 7.167 76.516 2.4 11.9% -412.0 2.1 1.000 15.2% -9.9% 71.8% 26.3% 28.1% 23.1 38.9 32.4 13.4% 15.1% 21.2% 2.2% 8.6 12.1 6.3 1.8% 7.000 -10.4 1.9 -155.927 371.1 1.2% 12.7 11.1 1.246 80.1 1.1% 36.6% 14.0% 17.4 7.7% 59.6% 9.6% 13.6% 9.3% 34.000 44.8 1.5% 10.4 14.6 12.394 16.9% 306 259 23.950 56.500 247.5 11.4 -1.4 1.1% 17.1% 17.0 1.3 8.3 12.1 9.2 -8.7 15.9% 10.6 8. HSBC estimates.4% 7.5% 37.0% 14.1 1.1 5.0% 24.

PICC P&C was the strongest performer y-t-d. rising a staggering 66% in light of better than expected operational performance (6. which rose 13% during the period. 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. 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. the regulatory outlook may not be as positive going forward.hk Michael Chang* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6555 michaelpchang@hsbc. and is not registered/ qualified pursuant to FINRA regulations Korea The Korea SE Insurance index has fallen 11% year to date. 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. That said we see downside risks from the intensification of uneconomic competition (evident in 1H).g. down 30% y-t-d. CFA Head of Insurance Research. Taiking Life. The worst performer was China Life ‘A’ shares.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. New China Life. We continue to see share price upside in the ‘H’ and ‘A’ shares of China Life.garner@hsbc. The Life names have dragged the index down. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4321 james.oh@hsbc. Although operational results were much better than expected given the clampdown by the CIRC. according to local media such as 21st Century Business Herald and Hexun) and fallout from regulatory changes. PICC P&C is both expensive and poorly capitalised. which supports our current Overweight ratings.hk Seewon Oh* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 3053 seewon. China Taiping and Ping An. respectively 2011 outlook China The MSCI China Insurance Index has risen 2% year to date. We are cautious on the Non-life space. Garner*.com. with Tong Yang Life 54 .com. James E.8%pt unexpected swing in interim combined ratio) and a continuation of strong top-line growth. driven by an unexpected slowdown in new business value (NBV) growth and its unwelcome tag as an A-share proxy (Shanghai composite down 14%). underperforming the KOSPI.com. technical pressure from potential new listings (eg. car sales. in line with MSCI China. OW(V)-rated China Taiping and LIG are the best stocks to play the ‘Chinese growth’ and ‘Korean valuation’ anomaly themes.e.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. interest rate hikes) as they have done this year. PICC Group.

The group has a track record for product innovation. 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). 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. organic growth. Looking into 2011 we continue to have a strong preference for Non-life names where we see lower risks.000 target price. which rose 22% YTD. Samsung F&M is holding KRW3.604bn (=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. which has been hit with fee caps. surrender penalty caps and the proposed withdrawal of much-needed tax breaks on key products by 2012. relatively high exposure to negative spread products and growing concern about the provision of unhedged income & capital protection guarantees. 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. which is predicated on 30% weight to EV and a 70% weight to PB methodologies. a special dividend and a share buyback. We could also see share price catalysts in the form of a long overdue second round of auto insurance price hikes early next year. where the Life insurance penetration rate (4. The best-performing Korean insurance share was OW(V)-rated Hyundai F&M. Samsung F&M shares offer a 41% potential return against our KRW270. Key attractions of stock include:  Capital redeployment.  Quality play.  Auto loss ratio improvement. 55 . 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. intra-group sales) and significant economy of scale benefits (26% market share).Equity Asia 7 December 2010 abc being the worst performer (-17%) and both Korea Life and Samsung Life trading below their listing prices. One key catalyst could come from an improvement in the share price sensitive auto loss ratio which is at cyclical high. Risks Key risks to our OW rating comes from weaker than expected capital markets and a value destructive acquisition.6%) is 2x that of China (2. Samsung F&M benefits from having a strong brand.3%). EV disclosure and responsible management – investors can sleep relatively easy at night. 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. closely followed by Korea Re (+21%) and Dongbu (+20%). We hope that 2011 will herald a more stable regulatory environment for the Indian Life insurance industry. more valuation upside (even in the unlikely event that the industry embraces the unloved Embedded Value methodology) and stronger balance sheets.

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. In our more bullish scenario we assume Life and Non-life 15-year premium CAGRs of 21% and 24%. 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. respectively. we assume that the additional valuation benefit of higher Life premium growth from the introduction of generous.5% required return. 1% sustainable growth and a 10. 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. In the sensitivity analysis. as detailed in Exhibit 2. A multiple of 1. 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. 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. which should be positive for life insurance. The Korean sector is trading on just 0. we still believe China’s insurance industry offers significant premium growth potential. Our current valuations are predicated on our basecase Life and Non-life 15-year premium CAGR assumptions of 12% and 16%. Korean insurers offer deep value on more appropriate embedded value metrics. We believe the best way to play the Chinese growth story is through Overweight (V)-rated China Taiping.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.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%. lower margins on these products (we have assumed a margin haircut of 50%). 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. Exhibit 2: Sensitivity of target price to the introduction of generous.  The life insurance market remains relatively underpenetrated. easy-to-understand and tax-advantaged retirement savings products is offset by the likely 56 . The least exposed to the growth story is Underweight (V)-rated PICC P&C.  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.7x our 2011e group embedded value.6x is more appropriate for a sector given our ROEV expectation.

While Samsung F&M has disclosed EV data for 5 years.000 target by weightings of 30% and 70% to our ‘price to group embedded value’ (KRW462.783 69. quarterly NBV) and target focus if they want investors to buy into EV. whose shares should benefit the most from the migration to 100% weight to embedded value. potential return estimates increase from 23% to 132% if we were to base our price targets solely on the embedded value methodology.000 29. While the listing of three pure play life insurers will help the embedded value cause. KRW191.000 8.532 25.199).  Embedded value disclosure improvements. it will be some time before Korean insurance investors fully embrace the embedded value methodology which gives rise to materially higher valuations.302 23. a reconciliation from ‘shareholders funds’ to ‘adjusted net worth’. 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 38.000. Management must improve the quantity of EV data (e. We also incorporate a 10% discount to allow for weak disclosure. Interestingly.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. With 41% potential return indicated. Downside risks are: (1) Group uses ‘excess’ capital to make a value-destructive deal. Valuation and risks Samsung F&M (000810 KS. including. 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.000 14.000 14.000 29. Underweight (V)rated Korea Life shares will be least exposed.107 65.774 166% 211% 54% 97% 224% 138% 158% 121% Source: HSBC estimates Risks The biggest risk is if the market does not embrace embedded value methodology. OW(V). In Exhibit 3 we highlight that the total 57 . Korean insurers need to materially improve their embedded value disclosure in a number of key respects. We believe the best way to play the Korean valuation anomaly story is through Overweight (V)-rated LIG.410 18. 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.184) and ‘price to adjusted book value’ methodologies (KRW204.  Investor education. 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). TP KRW270. The biggest challenges to overcome the valuation methodology are:  Disclosure shift.300 270.000 -1% 29% -5% 19% 44% 7% 41% 20% 101.g. 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. its slower-moving peers only have 2 years of data.000 7.579 11. Many of the Korean non-life insurers shot themselves in the foot when they delayed the publication of EV data.0000) We derive our KRW270.502 492. we maintain our OW(V) rating.

TP KRW7.500) We derive our KRW7. UW(V). we maintain our OW(V) rating. LIG (002550 KS. with a sustainable ROE assumption of 20%. With 44% potential return indicated. 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).2.859). Key upside risks are: (1) investors put greater weight on embedded value methodology. OW(V). Key downside risks are: (1) capital raising. to arrive at a valuation and 12-month target price of HKD7. and roll forward the valuation date to 12 months from today. (2) further deterioration in ICBC relationship.360. KRW7. PICC P&C (2328 HK. China Taiping (966 HK. (2) The market continues to obsess about competition with Life insurers. based on our average ROE forecast over the FY10-12 period. policy lapse or rapid growth in new sales. Key downside risks to our rating include a faster than expected deterioration in the group’s large loan book.Equity Asia 7 December 2010 abc 400% solvency ratio is the highest among life and non-life peers in Korea. HKD11. weaker than expected capital markets and a further deterioration in 13th persistency ratio. Korea Life (088350 KS. HKD25. 58 .200. which generates a target price-to-book ratio of 2.073). and (3) weaker than expected NBV growth.8.500 target price by applying 50% weights to the valuation implied by ‘price to book value’ (KRW9.9.64. which is relatively lower than peers. especially Samsung Life.000 target by weightings of 10% and 90% to our ‘price to group embedded value’ (KRW60. 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.404) and ‘price to adjusted book value’ methodologies (KRW33.8) We value PICC using our PB methodology. TP HKD7.4%. OW(V). We apply this to our FY10 forecast of book value per share of HKD3.260) and ‘price to group embedded value’ (KRW12. We apply a 30% discount in light of disclosure (limited EV reporting track record). We assume a long-term growth rate of 4% and a cost of equity of 10.5x. KRW20. UW(V). 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. (2) Fall in exposure to high interest rate guarantee through financial engineering. We also incorporate a 20% discount to allow for weak disclosure. TP KRW29.000) We derive our KRW29. high burden of problematic fixed interest rate guarantee policies and relative capital weakness under a more realistic application of a RBC model.

6% 2.3% 0.6x 2.4% 3.0x 22.7x 23.6x 2.8x 20.1x 1.0x 18% 11% 12% 20% 17% 18% 11% 17% 19% 18% 12% 15% 15% 17% 12% 13% 16% 14% 16% 3.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) 788.1x 19.6x 2.999 960.2x 6.9x 1.6x 2.7% 0.760 191.9 25.200 7.4x 1.2x 1.5x 7.9x 1.6x 2.361.5x 0.6 89.7x 32.1x 18.805 1.0x 0.0x 15.6x 0.650 42.2x 18.0 31.7x 16.095 129.3x 2.8x 0.1x 7.9x 0.691 572.0x 0.2x 4.0 42.0x 4.2x 3.7x 8.250 22.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 .6x 1.2x 3.2x 6.708.4x 0.808 241.6x 0.109 677.7x 2.211.0 37.175 1.000 11.6x 20.062 73.0x 3.0x 24.9x 4.925 1.3x 1.576 31.7x 0.000 7.678 16.0x 6.2 56.4x 24.392.8x 4.750 20.5% 0.592 1.0 37.7x 2.081 228.6x 3.5x 1.9 11.6x 5.576 31.168 2.4% 3.7 38.8x 3.1x 0.002.360 11.1% 1.510 250.5x 0.0 35.252.600 270.4x -20.2x 8.6 22.7x 0.0x 8.221 44. Closing prices as of 30 Nov 2010 abc 59 .688 9.1x 33.8x 2.8x 0.0x 3.200 33.559 6.689 21.3x 22.380 1.3x 3.0% 3.000 26% 20% 43% -33% 23% 57% 34% 62% 10% 29% 2% 19% 44% 11% 41% 20% 42% 24% 40% 2.099 2.094 491.2x 3.8x 17.6x 4.2x 9.5x 4.8 110.210 207.3 23.8x 1.500 14.9% 1.000 8.000 29.3x 2.8% 2.672 101.2x 18% 11% 12% 20% 18% 18% 11% 18% 35% 58% 22% 11% 87% -516% 16% 53% 17% 7% 16% 19.514 1.000 29.6x 3.7x 26.9x 1.961 101.0x 20% 20% 25% 19% 23% 20% 20% 23% 18% 19% 13% 16% 13% 15% 17% 15% 21% 16% 21% 3.5x 5.2x 6.336 1.672 2.2x 3.4 30.3x 24.6% 1% 2% 2% Source: Thomson Reuters Datastream.0x 5.048.1x 5.0 92.062 5.7x 5.3x 3. HSBC estimates.4x 3.701 73.9x 1.8x 17.8x 0.5% 1.3% 0.6x 13.5x 5.4x 0.2x 1.000 14.3% 1.1x 2.2% 4.5% 2.045 829 7.0 7.400 7.727 5.

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

for instance steel companies acquiring raw material mines. An aggressive investment campaign through the cycle is likely to ensure the company is well positioned for the next upswing. 3 blast furnace (+2mtpa). New capacity continues to be held back by environmental. POSCO shares trade at a significant discount to its regional peer average PB of 1. A margin squeeze as a result of sluggish regional demand is at the root of 2H10 disappointment.000) POSCO remains our top regional steel pick for its diverse high-end product mix. 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. with many Asian countries now recognising their dependence on imports. peers (excluding India) at -30% . corporate interest is not only arriving from horizontal integrations (growth in the same sector).3mt of HRC plant in Gwangyang (operational in 2014e). However. governmental and local approvals. KRW454. 2 2011 high conviction idea POSCO (005490 KS. In such an environment. Barring any unforeseen events. this will underpin further consolidation activity and or capital management initiatives.1x 61 . it also means the benefit of lower 4Q10 contract prices for iron ore and coal in 1Q11. not POSCO. Relatively high commodity prices should see the sector generate strong cash flows. with regional and global companies also doing the same. TP KRW650. Indeed. the process of urbanisation and industrialisation remains well in train. just like China. We are now seeing an increased appetite from vertical integrations. there will be times of overshoot (from macro concerns or dollar swings). In our view. While this overstocked position resulted in higher raw material costs in 4Q10. In any case.We believe there have been two key factors driving this underperformance: 1 2H10 disappointment – POSCO was not alone in downgrading FY10 guidance. but overall we remain in the ‘stronger for longer’ camp. many state enterprises are increasingly becoming active in consolidation. In addition. Year to date.6trn for a 3. Hyundai Steel’s blast furnace expansion – The start up of HSC’s second blast furnace (4mtpa.500. low-cost operations and resilient balance sheet. This has not been helped by POSCO’s own announcement that it will invest KRW1. POSCO shares (down 27%) have underperformed the KOSPI (up 15%) and its domestic peers Dongkuk (DKS) +4%. Hyundai Steel (HSC) +27% but in line with its regional We see POSCO as a value play with strong organic growth potential going forward.9x PB. 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. 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. 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. OW(V). 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. primarily from Japanese mills. At 0.Equity Asia 7 December 2010 abc In the rest of Asia. sustained economic growth in emerging markets should continue to drive global commodities demand. we expect commodity prices to remain well supported at relatively (to history) high levels.

H-share: HKD4.3x PB (same) and our 2011e book value of KRW515.43. nickel. Looking forward to 2011. OW(V). and more importantly the fact that urbanisation and rural investment will remain a significant part of the shift towards a consumption-based economy. which in turn would negatively impact steel consumption growth. TP HKD4.9) 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. 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).705 per share. With the 12th Five-Year plan expected to mark China’s shift from an investment-/export-driven economy to a consumption-based growth model.7. RMB6. all other factors being equal. As a steel company strongly leveraged to construction- 62 . As China’s national steel champion. coal and nickel prices provide additional risk. Valuation Baosteel (600019 CH. TP RMB8. lies in the movement of steel prices.5) With its dominant market position in both the domestic home appliances and automobiles industry. 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.5%). N(V).3x from our residual income model (P/B= ROE-g/COE-g) using our 2010-12 forecast ROE of 16%. in our view. Valuation We maintain our OW(V) rating with a target price of KRW650. valuing the stock at 1. On the raw material side. A-share: RMB3. in line with its 2002-09 historical average.Equity Asia 7 December 2010 abc and in line with late 2008/early 2009 global financial crisis valuation levels.09. heavy FAI in domestic infrastructure and construction projects has provided the major backbone to China’s.6% of sales) and home appliances (11. We arrive at a PB multiple of 1. Baosteel has set ambitious targets in its 2010-15 Strategic Development Plan. the natural inclination for investors is to conclude that commodities will be the loser.50 is based on 1. we see Baosteel as a key beneficiary of consumption-driven Chinese economic growth. movements in coal. movements in iron ore. Baosteel relies on imported iron ore from Australia and Brazil.000. and in turn. global demand for commodities.4x PB and 2011e book value of RMB6. The key downside risks are a more severe slowdown in the US or China. and iron ore prices provide additional risks. In particular. Risks The upside and downside risks for POSCO lie in the movement of steel prices.4x from our residual income model (PB = ROE-g/COE-g) using a sustainable ROE of 15%. Risks The key downside risk. Management sees its key 2010 end-use demand segments being automobiles (19.28. earnings are poised to grow accordingly. this is too simplistic and ignores China’s progressive or gradual approach. Stock most at risk: Maanshan Iron & Steel (323 HK. Winners from Chinese growth Over the past decade. In our view.29/share. TP RMB3. On the raw material side. We have an Overweight (V) rating on Baosteel and our target price of RMB8. the company projects home appliance production growing by 15% while the domestic auto industry is forecast to increase output by 10% y-o-y.

diversification into other commodities through acquisitions is seen as a viable pathway. A better than expected recovery in the train wheels segment poses a key upside risk.55/share. Our H-share target price of HKD18. 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. TP HKD18. Support from strengthened demand (particularly from Asia) and firm commodity prices have allowed for positive cash-flow generation. Maanshan stands out as a losing player in this changing market dynamic.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.59. We arrive at a PB of 1. industry consolidation should be an ongoing theme in 2011. 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.28.Equity Asia 7 December 2010 abc driven long steel products. with a gradual decline the most likely outcome.1x PB and 2011e book value of HKD4. Our A-share target price of RMB16 is based on an A. 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. TP RMB16) China Coal has acquired 10bt of coal resources in four coal bases. The restructuring will be in steps and expect most injections to take place in 2013/2014. The acquisitions will support the volume growth and its targets to double output to 200mtpy and earnings to RMB20bn by 2014. is based on the A-share discount to the H-shares at the time the target prices were set. For those industry players that are constrained to single commodities with near to medium term headwinds. In particular. Valuation We have a Neutral (V) rating and a target price of HKD4. the company’s relatively risky investments in coal-to-chemical operations remain a concern. Maanshan should be able to optimise its product mix going forward to successfully adapt to shifting demand. Valuation squeezed by upstream raw material costs are likely to accelerate investment in upstream assets. Our target price for the A-shares.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. and the parent also increased its coal resources by 2bt through consolidation of local coal mines in Shanxi. at RMB3. That said. A-share: RMB10. 63 . As such. represents a key downside risk. This target PE is below China Coal’s average PE of 23x.90. Any potential credit tightening by the government.to H-share discount of 14%. as Maanshan. In addition. we believe the current pipeline of existing road.6.70 for the H-shares based on 1. has been a key beneficiary of the stimulus. In the absence of viable greenfield projects. We see companies across the sector deploying capital in developing extensive pipelines of growth projects. having an impact on stimulus spending. OW(V). H-share: HKD12. Risks Movement in steel prices represents a key risk for the stock. mid-stream smelters that have been excessively We have an Overweight (V) rating on China Coal. with its exposure to long steel. China Coal (1898 HK.

95. relate to movements in aluminium. alumina and energy prices.55 and Chalco’s stake in Simandou at HKD3. Our Chalco Ashare target price is RMB14. Risks The main upside and downside risks for Chalco. TP RMB14) Given unfavourable aluminium price moves for much of 2010 and a continually rising cost base. The resumption of a coal-power linkage. A-share: RMB10.Equity Asia 7 December 2010 abc Potential share price catalysts include higher-thanexpected coal prices. We have a Neutral (V) rating on Chalco with an H-share target price of HKD8.00 based on the current premium to the H-shares. permitting power companies to raise tariffs. in our view. valuing the stock at an equally blended EV/EBITDA and NPV valuation approach. We apply an EV/EBITDA multiple of 10. 64 .50. to our 2011e EBITDA for Chalco and arrive at a value of HKD5. TP HKD8. We arrive at an NPV of HKD11.66 per share. would be positive for thermal coal prices. in line with its five-year average. Chalco has been one of the few companies in our coverage universe that has not been cash-flow positive. an upgrade in the company’s output guidance and progress on the coal mine acquisitions.8%.33 per share using a DCF valuation assuming a WACC of 8.5. However.78. N(V). which we estimate may dilute 2011 EPS by 6%.10. H-share: HKD6. Chalco’s balance sheet is cash constrained. As a result of these coming capex commitments. Valuation Stock most at risk: Chalco (2600 HK.5x. this has not stopped the company embarking on domestic growth projects and diversifying into iron ore through its Simandou iron ore investment. we believe a potential new issue of 1bn A-shares remains a key overhang on the stock heading into 2011. With 2010e year-end gearing (ND/ND+E) at 126%. We value Chalco’s core business at HKD7.

1 8.5 4.6 13.1 26.9 5.7 3.1 21.1 6.5 12.6 1.933 11% 4.6 1.9 1.4 7.7 abc Source: HSBC estimates.09 TWD 37.9 1.9 0.9 26.0 97.4 6.28 CNY 9.392 -1% 4.9 7.5 3.7 1.8 7.9 13.8 15.1 7.1 7.4 6.5 1.0 9.5 12.0 18.0 1.4 2.4 2.1 1.4 2.0 12.5 67.4 11.6 12.2 162.3 2.664 18% 130.6 1. 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 650.6 92.8 7.5 0.393 19.0 10.1 2.6 12.4 14.736 7.8 8.9 11.3 9.4 5.1 1.6 23.3 4.4 3.4 7.2 5.9 1.9 1.3 1.0 5.5 26.0 2.1 9.9 20.5 6.6 1.4 5.1 2.8 0.2 1.75 HKD 12.5 0.5 1.5 0.5 17.4 7.0 0.0 2.4 38.2 4.6 2.0 18.0 591.659 5.6 na 5.884 14.1 5.7 3.3 21.3 1.1 8.2 4.3 0.9 1.5 1.5 11.4 12.4 22.4 2.8 5.90 3.3 0.8 3.1 9.7 8.7 7.4 2.900 16.3 2.2 6.5 1.3 AUD 2.8 2.3 2.6 2.3 10.2 4.8 3.4 6.530 29% 8.0 33.8 2.9 311.1 0.5 14.3 3.4 8.8 23.3 2.3 14.1 39% 14.2 2.917 -2% 216.148 1.6 23.0 5.8 4.4 1.5 10.7 0.6 4.93 43% 30% 26% 35% 16% 12% 14% 15% 18% 15% 23% 21% 31% 48% 29.3 10.00 7.6 5.0 9.5 3.3 2.0 9.944 3.0 178.4 INR 205.6 5.6 240.1 10.000 454.1 8.350 2.0 15.2 5.566 3.5 12.7 1.4 2.4 15.85 1.1 1.0 0.4 10.1 2.3 25.3 4.0 2.0 15.8 1.1 11.4 2.9 2.0 1.6 1.3 68.7 20.0 18.6 2.3 3.4 16.1 10.2 1.6 14.1 0.1 1.20 CNY 3.2 5.0 1.7 3.4 2.9 5.1 2.6 1.6 2.7 1.8 12.6 9.500 JPY 360 277 JPY 3.818 10% 10% 19% 19% -37% -37% -60% 39% 25% 25% 25% 25% 100% 100% 105% 39% 29% 29% 15% 15% -3% -3% 47% 0% 17.1 1.4 1.8 7.6 2.8 8.5 0.0 1.3 10.9 7.3 6.7 1.6 7.6 4.8 3.1 10.2 2.8 9.5 10.7 2.1 18.0 1.2 4.5 5.0 1.7 2.5 2.0 0.5 1.8 12.7 26.1 8.3 12.7 1.7 1.6 31.4 1.5 18.9 17.6 8.1 31.8 2.2 1.3 10.3 2.7 82.8 6.9 0.0 9.1 2.289 11.9 0.370.3 0.9 6.248 25% 5.6 2.0 60.545 23.6 2.4 3.5 5.5 6.4 2.0 1.9 18.049 11.3 34.7 1.8 69.3 0.5 3.70 4.4 1.4 2.6 1.1 14.0 210.8 2.391 12.7 12.831 15% 10.1 11.8 4.1 20.4 4.2 5. Closing prices as of 30 Nov 2010 65 .2 11.8 8.2 1.4 14.6 1.43 HKD 4.537 6.3 1.7 18.3 24.0 1.5 2.0 6.7 23.821 30% 11.7 5.7 5.8 7.893 16.9 26.7 3.6 4.6 9.9 12.0 45.1 25.3 0.743 -11% 14.4 51% 51% 53% 38% 28% 19% 14% -16% 14.661 CNY 8.9 2.607 5.5 11.514 22% 3.3 14.2 7.1 2.4 6.50 6.2 6.973 5% 14.8 0.1 10.2 1.1 1.1 8.0 37.8 2.132.5 6.6 1.0 20.0 2.4 10.2 12.6 25.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 1.6 27.9 0.1 0.2 7.8 1.7 1.6 5.9 1.1 2.3 13.2 4.7 2.280.7 1.6 8.7 3.7 11.0 0.5 10.3 10.9 0.0 31.6 1.3 4.0 4.2 9.0 390.1 15.5 2.2 1.5 9.9 28.4 2.7 1.6 14.2 0.7 9.8 14.0 4.5 14.1 18.6 37.5 1.3 5.0 1.6 1.9 1.5 26.3 1.9 17.379 -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 1.7 1.7 2.8 13.0 1.7 2.7 3.1 1.6 10.2 5.2 4.675 18% 2.2 3.6 1.6 1.6 11.7 1.5 2.6 8.9 1.7 3.6 7.1 3.115.1 6.3 11.8 0.0 1.0 624.6 1.2 0.9 2.9 8.0 2.5 260.1 24.2 22.7 1.9 74.1 7.7 21.0 1.4 3.1 28.0 1.9 INR 1.2 1.822 4% 20.6 11.4 2.8 69.2 7.9 7.6 0.1 1.0 350.7 7.0 3.9 5.4 11.2 8.9 0.3 1.5 2.7 1.4 2.2 2.2 5.5 42.1 14.0 8.674 3.0 2.8 15.0 10.0 8.2 13.2 15.9 0.7 2.4 10.5 5.1 8.7 2.2 32.8 1.9 1.2 0.4 2.8 95.0 201.3 3.7 1.50 11.5 10.688 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 21.7 9.5 1.5 5.2 6.6 0.8 352.4 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 14.2 INR 820.2 11.743 11% 4.0 2.8 4.2 11.1 3.7 4.2 16.0 19.2 9.1 4.0 250.6 161.0 31.8 20.494 59.7 9.0 1.3 12.4 11.8 0.2 16.3 59.3 180.8 INR 730.3 24.7 6.4 12.6 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 16.5 0.1 14.7 0.3 2.2 35.8 0.1 47.2 0.1 1.8 0.3 12.6 2.3 1.0 2.435 1.2 3.7 1.2 1.1 10.9 1.2 17.5 4.8 7.070 913 13.4 4.9 9.2 6.2 11.4 3.9 1.9 13.7 42.2 7.1 6.6 0.1 7.6 9.5 11.0 1.5 16.3 9.0 0.3 0.8 1.2 1.

China’s current wellhead selling price for gas is RMB0. China’s oil demand growth was driven by diesel. which yield less middle-distillate products. On the other hand. without imports. The potential diesel shortage could prompt an oil price rally as witnessed in 2007-08. According to the National Development and Reform Commission (NDRC).76/cm. In 2010. However.7-1. China is running out of oil. a significant portion of OPEC crude is natural gas liquids (NGLs). about 45% of demand should be supplied by imported gas and unconventionals. The nation’s aggregate reserve life of 10. 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. From an Asian standpoint.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. pricing regime. and is not registered/ qualified pursuant to FINRA regulations 66 .0-3. 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. China’s gas market should increase from 90bcm in 2009 to 250-300bcm in 2020.Equity Asia 7 December 2010 abc Oil. according to PetroChina. By 2020.38/cm for existing onshore production to RMB0. RMB2. Top picks CNOOC.7 years is less than a quarter of the world average. 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. This year.7% of the world’s crude but consumed 10. CBM). China’s gas EBITDAX margin is 40%. For China’s gas economics to be restored to a 40% EBITDAX margin. the EBITDAX margin plunges to 17%.0/cm for unconventional gas (shale. China produced 4.0/cm for pipe gas at the border and RMB3. Using a typical gas economics model. RMB0. non-OPEC supply will significantly decline from 2012 and dependence on OPEC is expected to increase. 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.5% of it. According to IEA’s 2010 medium-term forecast. above HSBC’s house view.5/cm for LNG at the receiving terminal. Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6557 soniasong@hsbc. we believe a number of factors may continue to support oil prices in 2011-12. LT strategy  Preference for Asian refining and chemicals over policy-ridden Chinese energy names. With 10% supply assumed to come from pipe gas and unconventional. Second. there is a demand/supply mismatch for crude types. gas production costs vary from RMB0.com. First.70/cm for new onshore. China Sonia Song* Head of Oil & Gas Research.

2m b/d (c4% of Asian capacity). While China’s refining capacity growth could accelerate in 2013. Responding to the UN’s gasoline embargo. 4) major production disruptions at existing facilities. thus decreasing the supply of PX and driving margins up 50% in 4Q10. Risks We believe our forecasts could be materially affected by the following: 1) PX margin collapse.200. and 6) regulatory fines.000) As Korea’s only pure refiner. Iran has reduced production of petrochemicals to maximise gasoline production. KRW80. 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. offsetting potential exports from China. Future production growth prospects are bright given China’s strong underlying demand for oil products and plastics 67 . FX effects.4x. We value S-Oil at KRW100.000 based on 201112e PB of 2. coupled with robust domestic demand growth. new regulations in Japan could cut the country’s refining capacity by c1.4% pa in 2011-14.3-2. Thus. Given the usual ramp-up delays of new projects.Equity Asia 7 December 2010 abc would have to increase domestic gas prices by 30% pa till 2015. The refining segment will contribute 45% of 2011 EBIT with the balance from associated refinery products. Refining Declining supply addition in China in 2011-12.8x. 2011 EPS would increase by 15% and DCF by 18%. HKD16. 2011 high conviction idea S-Oil (010950 KS. Asia/Middle East combined petrochemical capacity growth will sharply decline to 4. The embargo appears unlikely to end soon. our RV-based PB came out at 2. we believe the company is best positioned to benefit from the refining margin uptrend in 2011-12.0x GDP based on continuing urbanisation in the central and western parts of the country. 60% of reserves). China’s demand will likely absorb 80-85% of that incremental capacity from Asia/Middle East till 2014.5) CNOOC is the most leveraged to Chinese growth within our China universe based on its exceptional earnings growth potential without downstream dilution.84. Due to recent earnings revision and ROE improvement from robust PX margins. TP KRW100. based on a historical PB model. it essentially predicts a market in which both Asian and Middle Eastern producers can co-exist.4x. 2) disappointing refining margin recovery. As pure oil play (80% of sales. lube base oil and aromatics. Valuation Chemicals After peaking at 18% in 2010. 5) massive nonoperating losses. S-Oil is the most leveraged to improving refining margins. YTD oil prices and other factors. is likely to turn China into a net importer of refined products. OW. Winners from Chinese growth CNOOC (883 HK. Assuming Chinese demand growth is sustained at 1. OW. we will use historical multiple until we see signs of dividend payout improvement. 3) new aromatics unit ramp-up delay. much higher than the historical peak of 2. We expect Singapore complex margins to recover from USD4/b to USD7/b by 2014. However. its earnings stand to benefit most from any oil price surprise. If we were to use the current spot oil price vs our current forecast of USD76/bbl. TP HKD19. 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. our TP implies a potential return of 26% including dividend yield. 5%). At the current stock price.

Valuation market sentiment is rapidly catching up. KRW177.000/share. cost of equity 12. It also boasts a competitive cost structure.Equity Asia 7 December 2010 abc and stockpiling needs to fill new reserve and pipeline systems.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. Also. Pan American at 25% below the speculated price).6x target PB on normal ROE of 17.5x SoTP value by mid-2010. At the current share price. Risks Techtonic shift SK Energy (096770 KS. Risks Our forecasts could be materially affected by: 1) oil and gas prices higher/lower than our base case. Eagle Ford shale project at a 20% discount. Based on a sum-of-the-parts method. the Our forecasts could be materially affected by: 1) Failure to prove reserve potential at Brazil blocks. largely due to its long-standing company culture as a downstream giant in Korea.8%. 5) regulatory fines. This should shield the company from policy objectives in China. 3) valueeroding. SKE’s intrinsic value comes out at KRW190. the company made a strategic acquisition to keep the oil:gas ratio in its reserves at the current 60:40. We expect the next catalyst to come from the corporate de-merger effective from 1 January 2011. Also. timely ramp-ups of new E&P projects and continued management commitment to raise market awareness on E&P value. From 0. our TP implies a potential return of 18%.000. which will enhance divisional autonomy in business strategy and asset sales. However. KRW165. We had been worried that CNOOC would overpay for assets but the company made the last two acquisitions at lower-than-expected valuations (ie.5 based on a DCF methodology with a WACC of 10% and a longterm oil price of USD84/b. SKE hadn’t aggressively addressed its key upstream assets. including a dividend yield of 2. SoTP value itself will rise from any upside risk to our current oil price forecast of USD76/b for 2010 and LT USD84/b. 4) uneconomical investments under government pressure.0%). 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. strong returns and ample excess cash with a lack of debt.500. Until 1Q10. Using spot market data.9x. Valuation We value CNOOC at HKD19.8% is the return when SKE’s E&P EBIT represents 45% of total at HSBC’s base-case oil price assumption of USD76/b. 68 .5% (vs sector average 3. such as Brazil deepwater blocks (20% and 27% stakes in Brazil BMC-30 and BMC-32) and Vietnam shallow-water assets. OW(V).9% and a long-term growth rate of 4. 4) massive nonoperating losses. the current share price stands at 0. aggressive M&As. 2) major production disruptions. the sum-of-the-parts value of SKE comes out at KRW190. 2) production disruption/project delays. Normal ROE of 17. 3) lower oil prices or refining and chemicals margins below our base case/consensus.5% for FY10. We value SKE at 1.

3% 3.4 18.3% 14.8 0.2% 4.1 7.172 7.5 28.1 7.1 2.2 1.6 5.7 11.0 11.4% 1.0 7.3% 1.536 29.0 1.5% 14.5 1.2 1.9 3.4 2.1% 6505 TT 1301 TT 1326 TT 1303 TT UW N OW N TWD68 TWD75 TWD81 TWD63 84.2 18.8 1.9 5.1 11.5 1.7 13.5% 2.7 27.5 12.1 7.3 HKD3.4% 22.2 18.5 7.5% 23.466 20.5 12.222 3.3% 2.1 7.2 4.6% 1. Closing prices as of 30 Nov 2010 abc 69 .9 6.4 7.6 15.0 22.7 17.9 20.5 2.6% 1.3% 25.9 22.4% 1.5 7.7 5.843 19.6 8.2 26.1 10.1% 13.2% 5.8% 17.3 HKD9.043 3.7% 2.6 17.8% 2.8 9.7 11.8 23.5 14.6 6.3 11.8 12.2 1.5 17.8% 2.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) HKD19.3% 2.8 25.3 19.7 8.9 6.7% 1.6 8.6 5.2% 17.6% 16.84 9.5 4.3% 1.9% 15.2 10.5 11.0 12.338 18.8 8.0 5.7 11.1% 14.888 227.4 1.1 16.4 15.3 11.7 16.9 1.8 1.533 7.0 7.791 5.4 RMB13 RMB10.187 16.4% 1.8 6.9 24.7 1.2 10.4% 1.1 3.4 90.9 33.9% 14.2 21.7 10.5% 4.9 1.5 3.3 3.8 13.6 8.6% 15.4% 15.8% 0.5 HKD6.7 3.5 20.4 2.9% 9.5 38.4 15.2 3.5 8.9 12.3 12.3 10.0 1.0 1.6 10.8 46.2 6.9 10.6% 16.2% 14.2% 18.6% 28.3% 2.5 6.8 11.6 8.8 10.0 1.7% 0.1 25.2% 16.5 14.1 7.42 96.4% 0.8 16.4 8.7 10.2 1.0 22.0% 5.2 6.1 1.5% 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 22.9% 1.3 12.005 24.6 15.2 26.067 13.6% 1. HSBC estimates.1 19.905 303.8 5.7% 10.6 9.2 16.1% 0.0 11.7% 0.4 15.096 21.2 11.5 4.8 7.1% 25.2% 16.4 HKD12.4% 15.2% 0.8 15.4 3.8 13.9 26.8 16.3 3.5 2.7% 14.4 31.1 7.8 13.4% 15.4 2.4% 12.8% 16.2 25.0 2.4% 5.7 6.6 22.9 13.2 2.7 90.1% 13.2 3.4% 17.8 15.1 14.6 16.4% 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 167 153.9% 1.3 19.5% 15.7 12.7% 22.0 11.81 11.25 309 18.6 7.5 13.4 17.2 11.2% 14.4 15.6 2.4 12.1 6.7 17.0 28.8% 2.23 14.6 8.8% 2.8 8.0% 14.8 RMB14.1 21.2% 16.833 17.7 10.5 67.1 9.1 10.4 36.5% 4.8% 14.4 13.824 9.4% 31.4 6.9 11.2 8.1 2.1 2.7 11.6 11.5 12.2 10.2% 2.0 22.2 7.1% 5.0 1.7 8.3 27.6 11.291 7.483 80.8 9.8 8.6 12.2 27.5 15.4 14.3 5.0% 0.6 9.6% 1.7 9.9 13.5 HKD9.8 2.5% 1.3% 13.0% 1.0 19.3 11.3 20.3 2.5 12.2 12.2 20.8% 4.6 10.7 2.6 12.6 11.0 7.5 12.2 13.2 3.8 17.1 2.0 2.3 11.4 26.0% 2.4 15.6 12.0 6.4% 2.5% 15.8 9.2% 13.4 2.6 19.2% 17.8 15.3 2.4 18.0 8.5 1.2 2.3 67.6 11.07 8.1 22.5 3.4% 2.6% 1.7 15.8% 17.65 7.4 17.4% 14.1 23.5 2.13 21.1 2.9% 14.1 14.1 5.4 1.6 4.8 7.6 13.9% 2.5 8.7% 13.2 8.1% 12.7 14.8% 2.5 2.3% 0.6 2.822 8.5 14.9 14.7 5.5 11.9 2.7 4.2% Source: Thomson Reuters Datastream.0 14.2% 17.3 2.3 8.6 40.4% 1.5 20.0 9.8% 9.0 9.2 17.5% 13.9 9.0 10.3% 13.0% 16.7% 14.1 5.2 32.9 12.7% 1.1 9.5 22.5% 16.6 12.6% 0.653 4.6 9.7 RMB7 16.1 1.7 21.3% 1.9 16.0 10.1 14.5% 17.2 2.6 10.7 13.7 16.9 11.2 26.98 8.4 2.3 6.2% 16.2 7.6 11.863 14.4 6.5 4.972 105.6% 2.1% 2.5 10.7% 8.2 15.1% 13.5 1.4 14.7% 16.

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

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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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6 1.1 10.6 1.15 6.24 128.9 16.1 10.5 20.6 171.9 2.31 18 20 16.20 16.2 21.33 18.0 1.18 56.4 0.7 3. Closing prices as of 30 Nov 2010 abc .88 5.8 26.7 16.3 7.72 3.6 22.73 20.84 19.4 1.1 20.3 12.9 19.2 2.64 6.89 32.2 1.32 11.5 23.4 2.8 26.1 15.4 28.9 30.6 1.1 4.5 20.1 21.6 16.4 12.6 19.7 21.1 6.8 4.1 17.35 3.81 (24) (36) (47) (45) (37) (37) (25) 18.72 21.8 1.75 43.3 2.79 18.8 1.8 3.3 1.2 9.8 11.3 2.5 2.7 9. 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 36.1 1.1 1.7 18.1 32 57 23 (9) 3 21 (13) 122 75 22 33 41 19 30 19.0 9.5 (23) 17 22 54 3.1 1.9 11.0 2.5 27.5 23.92 13.4 0.8 1.74 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.5 1.4 50.0 2.3 688 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) 14.44 10.23 11 2 (25) (30) (13) (10) 22.7 32.62 6.63 18.5 19.92 2.3 15.7 24.3 Source: HSBC estimates.40 37.8 4 (17) 0 29 15 34 150 15 34 56 79 329 32.3 4.1 19.62 143.9 25.8 15.41 24.2 1.18 7.7 9.5 2.81 4.7 18.0 13.7 22.25 39.5 5.9 22.3 26.7 5.4 2.3 2778 HK 823 HK UW(V) OW 4.0 8.7 22.

we see greater upside for HDI suppliers for two reasons. 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. where the likes of TSMC. This situation is clearly playing out within the foundry space. focus on sub- component plays on faster growth segments  Top picks: Samsung Electronics. We see smartphone penetration rates continuing to increase together with the emergence of tablets. memory storage in devices will also become greater. However. ramping up volume at 40/45nm and setting the stage for a battle in 28/32nm next year. Secondly. while not all tablet devices will use CSP-based ICs (Windows/x86-based tablets likely to use flipchip BGA-based Intel CPUs). LED televisions and tablets  Rather than attempt the one hot product of 2011. The growth of smartphones (2010-14e CAGR of 18%) will continue to outpace that of handset industry (2010-14e CAGR of 6%). CFA Head of Technology Research. we believe that all tablets will use an HDI board.Equity Asia 7 December 2010 abc Technology  We are positive on technology and particularly those companies benefiting from techtonic shifts in smartphones. competition at 28nm in 2H11 from the likes of GlobalFoundries and Samsung may put pressure on pricing and hence margins may decline. Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2822 4391 stevenpelayo@hsbc. continually driving faster and cheaper new-generation chips. TPK and UMC Semiconductors Chasing Moore’s Law Moore’s Law continues to be an influence in the semiconductor space. However. Steven C Pelayo.com. driving demand for high density interconnect (HDI) boards and chip scale packages (CSP). 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. 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). GlobalFoundries and Samsung push the law’s limits. 75 . The continued process shrinks in the semiconductor space will allow for even lower power consumption in these mobile devices.hk Handsets Smartphones fuel growth Following expected 14% and 55% y-o-y global shipment growth for the handset and smartphone markets this year. IDC forecasts that 2011 will continue to be a good year for smartphones. Firstly.

Equity Asia 7 December 2010 abc The replacement of feature phones will continue to drive smartphone growth in the handset industry. 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. UW(V). version migration for smartphones will start to slow in 2011. This will pave the way for positive surprises in 2011 for LED-LCD TV sales and LED demand. the fourth-largest polysilicon producer. 6% for the industry overall).7bn units in 2014 (a 2010-14e CAGR of 6%). the impact of the poly oversupply in 2011 could be significantly worse than in 2009 as the end of an oligopolistic market is cemented. GCL-Poly (3800 HK. several Asian competitors were lured by the strong business case. based on IDC forecasts. 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. Android’s market share is forecast to increase to 25% in 2014 from 16% in 2010 (a 2010-14e CAGR of 31%). However. TP HKD1. New entrant build-out resulted in overcapacity and prices crashed to USD50/Kg by the end of 2009. The Android OS will continue to gain market share during 2010-14. implying y-o-y shipment growth of 194%.2) and Motorola (Android 3.52. In our view. LED-backlit LCD TVs) to reach 50% in 2011 (60% by end-2011) from below 20% in 2010 (20% now). global handset shipments will grow from 1. and smartphone shipments will grow from 270m units (20% of total handset) in 2010 to 527m in 2014 (32% of total handsets. representing a 2010-14e CAGR of 18% vs. Increased fragmentation has also come along with a more homogenous cost structure as well as declining differentiation. 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. Based on IDC forecasts. In addition.2GW). the competition is intensifying within Android OS. Brace for the hangover. but oversupply looks set to return in 2011 (see our sector downgrade report. 27 September 2010 for details). in line with the thesis in our 10 May 2010 report Expectations high – but so are the risks. Cheaper poly is a clear negative for producers of polysilicon as well as its substitutes (thin-film solar players).3bn units in 2010 to 1. 2) the phasing out of CCFL-LCD TV models. Given that the production cost of a fully-ramped up poly plant is only USD20-30/Kg. 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. HKD2. At the same time. HTC has been first to market with Android versions but Google has started to work with other vendors such as Huawei (Android 2. 3) legislation that will benefit the sector. 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). is our key underweight in this space.30). Solar The end of Oligo-poly Poly-Si prices at the peak of the shortage in 2008 surpassed USD450/Kg (9x current prices).0). which will also lower the technology barrier and allow latecomers such as LGE to catch up. This means that cutting oversupply in the sector would require much sharper price cuts than in the past. 15% below current prices). We expect the penetration rate (the percentage of 76 .

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. even with recent better than expected LCD TV sell-through in China.2x. In this space. Our TP of KRW1. Meanwhile we see a number of component players that are leveraging on the three major themes – rising LED penetration. the Galaxy Tab also reached sales of 600. which is the biggest cell & module maker globally. Risks Risks to our rating and estimates include a stronger KRW.000) To sum it all up.Equity Asia 7 December 2010 abc which could offset part of the price pressure on their products by lower polysilicon prices. and DCF (12% WACC). Being the global market leader in LED TVs.000 units in its first month after launch. the Galaxy S. Also. the recovery will be mild compared to the V-shape recovery seen in 2009.000. and global IT demand recovery. the proliferation in tablets next year will benefit Samsung greatly due to the explosive demand for NAND. maintaining its global No. Samsung’s flagship smartphone model. 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. OW. which cannot justify a sustained share price rebound. our preference is for Suntech Power (STP US.14. USD7. if any. is a huge success. business expansion into promising areas. touchpanel adoption and LCD utilisation – that we expect for 2011. Potential catalysts include strong quarterly results.50). upward revisions to market forecasts on memory. TP KRW1. KRW826. TP USD8. and a protracted delay in the global economic recovery. which was driven mainly by strong restocking demand. new product launches. N(V). 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. Though the LCD food chain has gone through inventory adjustment for about six months.139. sharp rise in industry capacity in memory and TFT-LCD. Lastly.000 is derived using an average of 2011e PB of 2. 2011 the year of component makers We do anticipate a recovery for the LCD sector’s business outlook starting from late 1Q11. we believe Samsung Electronics is well positioned to benefit greatly from the key 2011 techtonic shifts (discussed above) in smartphones. and offer better investment prospects versus the pure panel players. 15-20% in the last cycle). hitting sales of more than 7m units worldwide since its launch in June. we also believe that strong LED penetration growth rates will enable even higher sell-through in television units for the company.1 ranking. Thus the upside will be limited. product migration from CCFL-based LCD TVs to LED-based LCD TVs. We forecast the panel price recovery in 2Q11/3Q11 will be only 5-10% from trough to peak (vs. sum-of-the-parts (industry-average 2011e EV/EBITDA multiple). LED televisions and tablets thanks to its diversified business model and strong product portfolios. However.139. 77 . ASP erosion on key products such as handsets. Valuation Display Lack of catalysts for pure panel players. However. High conviction call Samsung Electronics (005930 KR. which are priced 30-50% higher. has slowed down size migration in the LCD TV segments.

Apple’s iPhone and iPad use what is called the P-cap solution. which creates risk from high single customer exposure.5) We continue to prefer UMC based on improved cycle-to-cycle metrics. which has 40% of the touchscreen market now. TP TWD16.5. We expect the projected capacitive (P-cap) solution. in the depths of the last downturn. the company generates well over 50% of sales from Apple alone. multi-touch performance. The multiple is based on a 20% premium to the normalised peak of YFO (Young Fast-3622 TT. which should also help dividend payouts. Furthermore.0x 2011e book value.86x 2011e book. stylus-free. Valuation Our target price is TWD16. where capital gains are hard to find. there is limited debt on the balance sheets of Taiwan technology companies. The premium is justified by the company’s high exposure to new technology (YFO – mostly conventional resistive) and Apple. Valuation UMC (2303 TT. There are many touchscreen technologies available. Back in 2007 the company developed the touchscreen of the first-generation iPhone. The success brought TPK opportunities to develop touchscreens for other Apple devices. UMC shares did not trade below 1. in our view). we expect TPK to be a main beneficiary with its leading technology. In addition. based on 1. Risks Our target price of TWD850 is based on 20x 2011e EPS. Most of the Taiwan technology companies in our coverage universe have 2011e dividend yields of around 5%.5x. TWD664. we expect TPK to maintain 45-50% share of Apple’s business in the long run. In the current investment climate. 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. TPK (3673 TT. Due to the close relationships forged during the codevelopments. The risks to our rating include: weak end-demand limiting recovery. valuation (0. OW(V). the ideal method to achieve responsive. Pricing anomalies 2010 and 2011 are two good years for investors for lofty dividend payments into 2012.Equity Asia 7 December 2010 abc 2011 themes Techtonic shift A key growth area in the display space for 2011 will be touchscreens. the shares bottomed at approximately 0. OW(V). we believe investors can seek defensive exposure by buying companies which pay out good dividends. which was the first commercially successful device with a multi-touch function. relatively high customer concentration from customers such as Texas Instruments.1. As a reminder. Apple touchscreen supplier TPK was the first company to adopt and commercialise P-cap on display screens. As more smartphones and tablets (other than Apple’s) adopt P-cap technology. However. TWD15. 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. and dividend yield (8%+ sustainable for at least two years. potential increased competition in the foundry space 78 . to become mainstream in 2011 and its area demand to increase at an even more robust +110% in 2011. Xilinx and Mediatek. TP TWD850) Leader in P-cap. another major touchscreen supplier) of 16.6x book value and now trade at 0.8x book and 66% of market cap in cash/investments).3x prior to early 2008.

but not impossible). and continued valuation multiple compression. 79 .Equity Asia 7 December 2010 abc resulting in loss in market share or margin pressure. 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.

8% 31.2% 19.000 1.9x 5.9x 0.0% 2.0% 0.1% 3.7x 13. 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) 63.6x 15.3x 14.9x -258.3x 1.3x 8.0 90.6% 2.5x 3.2x 8.9% 4.6x 2.9x 2.9x 3.5x 5.6% 25.9 28.9x UW OW(V) 390.0x 0.0x 12.0% 16.7x 8.5 263.3x 1.0x 5.9x 3.1% 5.1x 2.5x 9.3% 19.6x 9.4x 2.7x 2.5 31.9x 12.572 1.8x 6.4x 2.5 3.6x -11.7x 13.4x 2.6x 4.2% -11.4 15.8x 2.8x 7.4% 42.0x 0.2x 13.6x 11.2x 5.0% 0.2x 3.0 5.5% 0.8% 7.8x 5.7x 1.6x 0.0% 0.6x 1.8% 2.8x 0.3% -13.7x 1.9x 8.8 73.0 90.7x 4.9x 3.7 -16% 20% 13.3% 23.3x 16.1% 16.7x 9.1x 13.228 N(V) N(V) N(V) OW(V) 55.179 3.5x 5.0% 2.5 3.4x 13.0x 2.0x 11.9x 8.7% 5.5% 2.497 2.0x 2.9% 5.6x 8.5x 4.139.0x 5.3 93.5x 1.2% 11.0% 0.9x 16.1% 4.4x 8.8% 1.8x 1.9 4% -4% 5% 23% 2.9% 23.5% 4.9x 1.1% 5.6% 7.7% 16.5% 2.1x 1.3x 6.7x 12.7 57.8x 1.0% 5.4% 24.8 39% 36% 38% 25% 50% 27% 25% 38% 99.045 886 876 10.6x 10.9% 43.3x 5.6 8% 18% 11% 0% 51.822 5.0% 2.7x 21.0 8.5 3.8 37.2% 0.5% 2.0x 9.5x 5.0 110.0% 36.1% 22.2% 9.236 658 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% 29.8x 14.1x 8.4x 6.0x 14.0 41.0% 0.4% 23.7% 24.0% 5.9% 22.4% 25.9x 13.4 17.253 614 3.9x 1.4x 4.0 19.3x 19.4x 11.3x 10.7x 6.0x 12.2% 16.8x 4.1x 6.7% 46.4x 10.6x 5.9% 8.5x 11.7% 10.3x 13.5 13.9% 5.9 31.8 19.3 76.500 135.8x 6.2x 5.5x 7.2x 15.1% 8.2x 4.4x 0.9x 2.3% 5.4x 1.7x 1.4x 9.3x 79.853 12.3% 11.704 11.0x 7.4% 18.015 5.0 69.3x 3.9x 17.4x 23.3x 19.1% 5.7% 10.6x 1.979 2.8% 23.0% 24.000 997 1.9x 2.3% 7.0 35.8x 8.0x 1.1x 0.6x 1.481 1.7x 3.0% 5.000 23.7% 12.3% 2.0x 9.7% 23.80 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.9x 22. HSBC estimates.1x 3.8x 11.6% 0.8x 5.5% 0.1x -13.7x 5.2 59.000 108.3x 1.0% 1.2% 14.9x 3.5% 10.4% 9.8% 19.3x 12.6% 21.1% 3.1% 39.581 2.0% 0.5x 1.1% 5.6 34% 19% 24% 11% 3% 24% 15% 16% 22% -8% 18% 33.5x 6.3x 6.6 65.4% 17.6 72.4% 8.6x 4.5x 1.4x 0.1x 2.6x 1.0x 1.0x 2. Closing prices as of 30 Nov 2010 .1x 23.2x 1.7% 3.8x 0.8% 20.1x 14.6x 2.0 123.000 140.0 106.9x 2.915 1.6x 10.0 3.4x 3.2x 4.0% 5.3x 2.2% 4.3% 7.3% 17.1% 3.3x 19.1x 2.4% 11.8x 11.9% 4.5x 2.1 12.4x 10.3x 1.0 108.1 143.9% 4.5x 23.5 16.1% 27.4x 10.3% 5.9% 65.8x 2.5x 6.7% 2.6x 77.8x 21.4% 28.5x 3.1% 6.6 77.500 13.0% 0.4% 15.4 304.4x 10.7x 8.9% -2.0% 3.3x 8.0x 17.4x 13.8x 1.0% 22.7% 13.4x 7.4x 10.4% 17.000 103.1x 1.5x 18.5% 0.0x 16.6% 4.0 306.2% 6.2x 1.3x 3.3% 3.3% 2.9x 1.3x 20.9% 0.0x 2.8x 2.0x 2.4x 7.3x 4.6% -0.769 860 7.2x 7.500 32.945 889 OW(V) OW(V) OW(V) OW(V) N(V) OW N N(V) OW(V) N N(V) 108.8 7.5x 2.0 7.2x 8.4% 8.3% 8.3% 0.4% 1.7x 4.1x 15.6 55.0% 10.0 33.9% 17.6% 6.8% 5.7x 7.5x 27.4x 0.6x 8.7x 7.3% 12.0% 1.0 5.6 133.0% 3.2% 5.0 83.6x 4.0% 0.2% 1.9% 3.5x 0.104 2.1% 2.5x 9.3x 7.5x 1.0% 3.6x 9.6% 0.6% 17.3% 28.8x 10.9x 1.7% 1.9x 4.7% 7.7% 23.8x 14.876 OW OW(V) OW OW(V) OW(V) N(V) N(V) OW(V) 826.9x 4.9 10.9x 1.7x 6.6x 1.5% 8.298 1.0% 5.7x N(V) N(V) N(V) OW(V) 31.5 90.1x 5.2x 16.0 16.4x 1.2% 21.8x 4.8% 2.5x 13.2% 8.3x 3.5% 9.3% 17.0x 8.3x 47.2% 6.7% 9.5x 18.9% 21.0x 36.4x 3.9% 18.8x 1.2% 0.4x 3.0x 11.2x 8.3x 11.0 -5% 8% -1% 21% 5.3% 31.7% 2.7% 3.180 4.7x -26.9 61.603 3.0x 4.9x 2.1x 17.7% 3.279 7.929 109 abc Source: Factset.2x 1.3x 3.4x 13.6% 15.8x 0.8% 4.2x 4.3x 3.1x 2.0 15.6x 2.9% 2.8% 1.0% 0.746 13.4x 7.

6x 9.3% 2.4x 2.2x 1.3x 3.9% 5.9% 21.0x 9.2x 1.4% 16.3x 0.2x 18.2% 8.8% 9.4x 2.358 166.5 8.721 3.2x 15.9% 15.8x 1.0% 0.6x 1.7% 5.4x 17.7x 24.8% 8.0% 4.0% 0.7x 13.1x 1.7% 6.0 70.0 23.7x 23.9% 19.800 165.3x 6.2% 51.6x 5.500 106.953 701 1.5% 27.0 21.5x 15.3x 13.1x 14.0 -4% -32% 25% 11% 31% 18% 0% 21.0 23.9x 7.9x 2.8x 13.3x 35.2x abc Source: Factset.4x 5.9x 1.2x 11.4 97.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 30.0x 5.2x 5.0x 4.890 2.7% 1.7x 6.4x 16.5% 20.1% 1.0 5.381 39.6x 16.8x 9.3x 2.8x 21.3% 8.8% 42.2x 10.0% 0.5x 1.1% 2.3% 1.5x 14.5x 0.824 29.725 292.5x 4.8x 12.0x 8.1% 2.7 172.8x 10.9% 27.4% 0.0 53.0% 9.464 651 2.4% 17.0% 0.2% 13.6% 9.2x 4.987 1.8x 3.4x 10.9x 19.6x 1.7x 3.5x 3.2% 28.5% 9.7% 15.2x 1.1x 6.5 8.3x 10.0% 16.0 54.2% 0.4% 4.7x 4.1 9.3% 16. HSBC estimates.7x 15.438 1.3x 4.8x 1.2x 7.7x 1.6% 50.3% 30.901 1.6x 1.0 29.8x 6.6x 3.9% 18.6x 21.435 0.5x 6.3x 17.1x 4.6% 45.000 130.2% 19.8% 0.0 44.2x 12.0% 0.3x 0.8x 1.1x 23.5x 2.6x 1.3x 2.8% 13.6x 7.000 210.6x 6.4% 0.9x 1.6x 3.078 2.8% 15.6 23.8x 1.0 82.2x 1.9% 0.8x 12.0x 1.8% 9.9x 10.4% 35.5% 31.8x 4.6x 3.2x 1.4x 25.3x 1.8x 1.5 22.3x 13.0x 5.0% 2.9% 1.4x 1.6x 9.1 21.329 3.5x N UW(V) OW OW(V) OW N UW(V) 845.7% -6.3 19% -18% -40% -34% -6% -48% 1.7 25.500 664.1x 38.6% 0.2x 5.0 13% 22% 9% 18% 11% 10% 10.0 187.3x 1.0% 0.9x 0.6x 16.1x 25.0% 28.7x 1.9 10.3x 1.000 850.5% 3.8% 48.3x 26.8x 8.0 133.2 39.4x 16.7 38.4% 0.0x 43.6x 5.2% 13.7x 17.2% 4.0% 0.0 21.9x 6.8% 15.4x 14.5 676.0% 3.0 43.5x 17.8% 2.5% 0.7x 14.7% 9.9% N(V) UW(V) UW(V) UW(V) UW(V) UW(V) 7.980 4.279 1.6x 5.0% 0.2% 27.7x 6.4x 1.8x 30.124 0.5% 1.8x 6.0x 3.3% 15.9% 3.4% 27.3 742.1x 10.9x 1.8x 11.2x 19.2% 6.0 805.5 105.4x 1.0 111.5% -0.9x 17.0% 22.3% 17.7x 17.2x 2.0% 3.9x 9.4 120.1% 9.7x 15.1x 5.6x 10.9x 9.0 -17% -23% -18% 35% 4% 24% 37% 33% 22% 43% 32% 27% 27% 32% 48% 31% 16.1% 24.9% 9.7% 1.1% -0.9x 8.9x 4.550 97.0x 20.1 49.9x 3.3% 0.7x 7.4x 9.0% 0.1% 1.5x 2.4x 11.8% 0.1% 16.5 17.5x 17.6% 8.9x 1.1x 51.0x 14.3x 2.7x 9.0 152.9% 20.3x 6.4x 0.2% 0.3x 15.7x 2.7x 6.1x 5.0 820.0x 2.102 236.6x 8.2x 2.1% 2.7% 24.0 60.8 103.8x 12.0 21.1% 2.6x 9.2x 10.1% 16.000 38.4x 12.9% 21.0 112.0x 9.1% 11.3x 7.5% 30.504 1.3% 7.0 116.0 63.495 22.3% 2.2x 16.6x 6.7x 1.5x 2.4% 19.5x 22.6x 6.1x 10.6x 0.7% 17.7x 2.9% 66.2% 2.4x 5.8% 1.7x 5.000 125.8 39.4% 8.1x 78.7% 26.9x 7.2x 88.4% 23.2% 7.6x 7.0x 8.1x 13.1% 4.1% 5.4x 7.9% 5.4% 49.0x 46.6% 33.2x 16.1x 2.000 51.5x 10.9% 4.0x 3.0x 13.1x 6.650 5.8x 9.6x 1.622 978 857 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% 3.178 530 237 410 N(V) N(V) OW(V) OW(V) N(V) N(V) 28.7% 1.6x 4.3x 10.2% 53.3x 8.1 32.8% 0.0% 5.6% 20.8x 8.4% 0.4% 25.9% 17.6% 1.2% 0.7x 16.0% 0.7% 0.000 134.5x 1.3x 5.000 185.2x 11.5x 4.610 4.6x 4.1x 1.0 3.8% 0.0x 19.4x 2.0% 0.375 82.2% 1. Closing prices as of 30 Nov 2010 81 .5% 10.7x 35.185 69.0x 3.3x 32.2% 8.5x 3.7% 15.2x 2.9% 0.1 6.5% 32.8% 0.6x 8.1% 0.4% 0.684 9.9x 3.1x 1.4x 14.2% 16.5 125.795 9.1% 17.6x 7.0 32.5x 8.5x 5.3% 0.7 820.7x 16.4x 19.1x 10.5 41.8x 1.1x 20.5% 16.4x 8.9x 21.5x 1.0% 1.6x 20.0 1.3 2.2% 0.0 32.8x 8.0 45.

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.anderson@hsbc. wireless broadband business model. We remain positive on the China-Korea internet space. China is still in the early stages of the broadband revolution. Smartone. We see initial signs that some operators are regaining pricing power. At this juncture. based on an improved outlook for core business earnings growth and a shift towards higher dividend payouts.com.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.hk Neale Anderson* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6716 neale. In contrast to the telecoms services space. This capacity crunch creates challenges for operators that have underinvested in network capex but opportunities for operators that have overinvested to grab high-end. eAccess. data-centric customers. we have just one Overweight rating in each of the traditional growth markets of China. Tucker Grinnan* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4686 tuckergrinnan@hsbc. rather than chasing “risky” out-ofsector/market growth.hk *Employed by a non-US affiliate of HSBC Securities (USA) Inc. In more developed markets we like Korea Telecom. Axiata-Excelcomindo. and Telstra. PCCW. China Telecom and Korea Telecom 2011 outlook Telecom services We are cautiously optimistic on the Asian telecom services space. this is a developed market story and our Overweights are concentrated in Korea. This growth in organic demand/core business earnings is also allowing some operators to increase dividend payouts to shareholders. and are more cautious on the near-term profitability for China vendors  Key themes for 2011 will be the ability to monetise wireless data. Smartphone customers consume 10x as much data capacity as feature phone customers. with 30% internet penetration and dramatic increases in broadband access funded by a wave of Chinese telecom operator capex. Japan. DoCoMo. Hong Kong. and Tulip. and renewed interest in the internet services space  Top picks include Telstra. and Singapore. China internet services enjoy no 82 . allowing for significant increases in average revenue per customer (ARPU) on twoyear contracts. a greater emphasis on returning excess cash to shareholders. In contrast.com. India and Indonesia. The key driver for telecom services is the shift towards a datacentric. In developing markets we like China Telecom. 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.

which is highly geared to the uptake in mobile ad spending that we expect to see as the smartphone penetration rate surges. Telstra is our top dividend play. ZTE and Comba have emerged as powerful global competitors.Equity Asia 7 December 2010 abc government players. We are OW(V) on both Tencent and Netease and are bullish on the China online gaming. Risks: The key risks for Telstra relate to uncertainty over the dividend payment/NBN.3 per share. online advertising. is a fair-equitable solution that could be finalised before the end of the year. Telecoms equipment vendors We remain longer-term structural bulls on the Chinese telecom equipment vendors. as an aggressive focus on handsets/GEM expansion drags down OP margins (1% in 3Q10). We argue the proposed NBN deal. In Korea we like Daum Communications. Top pick for 2011 Telstra (TLS AU.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). 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. AUD2. and NCsoft. Our OW rating on Comba reflects a more bullish view on the antenna space. which would generate an NPV for Telstra shareholders of AUD11bn. easy-to-use interface to high speed 83 . Domestic Chinese vendors Huawei. 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. a leading global game developer that is geared to the China story. 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. 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. Valuation: We value Telstra using a dividend discount model – our target price is AUD3. Telstra has the best wireless network in Australia and is well positioned to regain share in the high-end. overlapping 3G networks based on three different technology standards is ample evidence of this bias. 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. with a focus on supporting domestic telecom equipment vendors at the expense of the domestic telecom services providers. and a focus on shareholder value creation.81. fuelled in part by a combination of direct/indirect subsidies/tax breaks. creating uncertainty over the dividend. China’s decision to build three huge. but are cautious on the near-term outlook for domestic capex earnings. In particular. OW. The release of Apple’s iPhone followed by a much wider range of Google Android-based devices has created a powerful. 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. no tariff/rate of return restrictions. China has moved to the old Korean-style management of the telco sector. Our Neutral (V) rating on ZTE reflects a cautious view on near-term earnings. datacentric smartphone segment. TP AUD3. and e-commerce markets and believe these emerging companies are much better structural proxies for the China domestic consumption story.

and a new CEO with the political power to push through a 16% cut in the workforce. OW. KT Corp (030200 KS. Risks: Investor scepticism on CDMA runs deep.000 is based on 8x 2011e EPS. in a market where most investors continue to focus on top-line versus bottom-line growth. regulatory approach and capital management.5% in 2010. we could see a return to value-destructive pricing/marketing spend wars. Valuation: Our target price of HKD5.1) 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. 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. smartphone-related marketing expenditure remains high. OW.91. Given our cautious stance on wireless penetration and M&A driven growth strategies. 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 development of a yield-centric domestic investor base is encouraging. Valuation: Our target price of KRW67. and local investors remain focused on top-line growth. the shift towards a bundled services model designed to lower sales and marketing costs. 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. China is driving down retail prices of low-end smartphones into the USD150-200 range. creating the potential for global adoption of the smartphone-driven wireless broadband operatingbusiness model. The smartphone-driven wireless model creates the potential for a structural shift in core business revenue/profit growth. 84 . KRW46. We are optimistic on the near-term KT dividend yield but acknowledge long-term systemic risks associated with the industry focus on IT services. The key challenges are the technical issue of the foreign ownership cap being filled. The development of the Apple and Google applications stores has allowed telecoms operators to outsource content development/management to skilled media companies. TP HKD5. The core fixed-line business continues to compress as PHS migrate off. which could overshadow the dramatic turnaround in the wireless segment. raising questions about the stock’s ability to re-rate despite strong sub growth. China Telecom (728 HK. TP KRW67. If all operators don’t continue to benefit from the smartphone shift. Explosive customer demand for these services is creating wireless capacity crunch pressures. We are 20% and 38% above consensus operating profit estimates for FY11-12. which in turn are allowing selected telco operators to push through de facto price increases.500. 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. HKD3.000) KT provides a rare combination of growth and yield at compelling valuations.Equity Asia 7 December 2010 abc networks and rich content. China Telecom’s 3G net ads are focused on the lower ARPU youth-student segment. KT has undergone a dramatic transformation over the last two years via the full integration of former wireless unit. It has expanded handset inventory and aggressively bundled services. KTF.1 is based on 13x 2011e EPS.

9x 12.2% 9.3% 7.7% 0.0% 0.5% 5.538 3.0% 5.700 3.5% 48.4% 29.0% 0.2% 9.3% 5.BO RLCM.3% 41.600 33.8% 10.3 72.6x 13.T 9427.8% 37.4x 10.0% 25.0% 0.4x 0.5x 9.0% 1.7x 9.5x 3.954 1.1% 11.0% 0.AX BRTI.000 75.9x 2.402 770 26.500 Potential return 3.958 2.9x 6.4x 8.KQ 078340.8% 10.1x 5.4x 8.800 7.2% 2.4x 13.290 5.1x 6.4 43.000 2.3 370.6% 1.0% 1.9% 1.0 54.KQ 9437.1x 2.5 3.0% 0.7% 5.1x 18.4x 8.8x 18.4x 2.4x 12.8x 8. Systems CITIC 1616 SmarTone South Korea-Telcom SK Telecom KT Corp LG U+ SK Broadband Japan NTT DoCoMo Inc.3x 8.3% 5.6x 12.8x 29.0% 0.9% 10.3% 4.8x 12.0 43.4% 1.0% 0.120 5.8 171.380 135.4x 3.5x 13.0 10.8x 20.648 8.T 9432.5x 10.6x 6.0% 0.088 28.061 988 7.9x 11.HK BIDU.3 2.6x 4.489 65.5% 23.5x 6.7x 6.507 61.0 11.8% 1.2x 4.2% 4.1% -2.2x 3.7 3.7 2.1x 13.2x 3.0 116.O PWRD.5% 7.600 5.5x 16.1 4.6% 5.0% 0.850 3.4% 0.545 4.6% 4.1% 7.3% 1.7% 2.HK 0008.8% 2.9% 8.700 2.1x 6.461 8.0 39.6x 8.TW 4904.7x 6.518 38.435 37.1 8.386 70.JK STEL.0x 51.4% 10.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.8% 1.0% 0.9% 0.7% 1.5x 9.6x 6.9% 4.9x 10.565 10.3x 26.0% 0.0% 0.0% 25.000 76.2x 12.2 174.0% 3.4% 0.621 6.683 29.9 8.0x 10.943 486.5x 14.0% 0.6x 11.066 138.2x 11.5% 8.6% 73.1% 3.012 1.084 23.4x 4.000 16.1% 1.1% 0.6x 5.2% 18.6x 14.214 3.240 5.2x 11.KS 035720.2x 3.7% 1.1 44.3x 4.8% 2.600 15.HK 0728.6 137.8% 2.1% 8.1x 20.0% 3.7x 3.600 3.BO TULP.487 3.6 11.HK 1883.1% 7.2x 8.7x 6.4x 7.716 46.6x 16.750 13.T 2412.0 170.658 1.0 75.500 255.8% 5.8x 2.713 41.700 74.0% 0.0x 7.7x 6.7 193.Asia Telecoms and Media: Valuation summary Company (USDm) China / HK -Telcom China Mobile China Telecom China Unicom PCCW Comba Tel.300 47.5x 4.2x 4.7x 9.3x 7.7x 3.9x 30.772 1.000 53.8x 10.1x 13.020 3.0 39.SI 0700.0% 3.7x 5.9% 40.839 885 874 312 133 113 19.6x 20.0x 4.7x 11.331 45.522 41.502 783 779 12.HK 2342.0% 0. China-Internet Tencent Holdings Baidu.8% 0941.000 88.4x 5.5x 48.5% 31.5x 5.489 3. 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.4x 14.2x 6.0% 1.454 546 635 15.5 23.051 10.4x 20.0% 0.1x 14.377 abc 85 .7x 12.6% 7.520 26.SI MONE.3x 11.4x 10.1x NM 8.428 29.5% 6.150 31.8% 3.8x 4.JK ISAT.8x 4.5x 12.0% 0.8% 3.0% 0.0% 0.8x 17.2% 15.9% 4.239 928 578 18.HK 017670.0x 3.1% -11.500 46.4% 4.2x 13.304 4.5x 15.2% 1.5% 3.9% 5.5x 7.0 105.O 035420.0% 0.6x 9.410 20.820 25.0 235.9x 13.3x 3.197 4.KS 033630.1 6.7% 0.T 9984.3% 4.3x 1.000 4.0x 23.5% 7.755 30.4x 3.7% 4.2% 1.1% -18.245 725 738 141 96 80 22.9% 4.3x 11.623 3.6% 1.6x 11.7x 11.9% 7.3x 13.4x 9.6x 2.0% 4.9x 2.2% 22.9x 9.2x 24.2 68.0 3.8% 39.6x 13.6% 4.9% 10.105 4.874 2.420 64.2% 2.KQ 063080.OQ NTES.0 211.1 2.0 33.5x 7.0% 0.7 14.0% 3.3% 5.0 69.323 6.7% 6.1x 5.3% 7.0x 18.261 27.4% 45.BO TLKM.2 39.3% 0.000 81.9% 6.000 320.5x 11.714 38.000 8.9x 13.2% 2.2% 6.0% 3.1x 10.5% 42.0x 4.1x 13.250 5.KS 030200.426 6.8x 5.KS 032640.2x 8.9x 14.3% 0.667 3.3% 0.190 1.8x 13.0% 4.8 2.000 18.0% 0.0% 0.0% 0.4x 5.4x 3. Netease.466 1.6% 5.1% -36.3% Rating MCAP EV ______EV/EBITDA______ _________ PE _________ __________ Dividend yield__________ 2011e 2012e 2011e 2012e 2010e 2011e 2012e 162.NS IDEA.1x 4.2x 6.540 4.2x 7.2% 0.561 49.0x 7.4% 8.KS 037150.5% 4.SI STAR.861 1. KDDI Corp eAccess Ltd Taiwan Chunghwa Telecom Taiwan Mobile Co.8x 14.8x 11.5% 0.2 38.6x 2.000 113.0 5.0% 8.2x 8.com Inc.8% 3.9% 19.3% 0.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.O SNDA.3x 4.7x 3.JK EXCL.0 9.4x 4.1% 0.1x 7.5x 7.0x 1.8x 4.805 2.5% 0.200 141.9x 9.700 6.5x 11.6x 6.1x 5.7x 4.8% 8.400 528.0x 7.2% 4.7% 6.1% 4.9x 19.2x 34.3x 47.4x 6.9% 17.HK 0762.3x 7.4x 2.0% 0.2% 0.0x 14.2x 47.6x 11.000 67.8x 6.8x 9.KQ 095660.864 1.434 6.8% 0.6% 6.0% 2.700 27.8% 4.6x 12.3% 6.4x 5.0% 1.0% 5.9% 5.5x 5.000 39.8x 5.0 2.4x 9.2% 0.364 8. Closing prices as at 1 Dec 2010 Equity Asia 7 December 2010 Ticker Price Target ____ Local Currency____ 78.8 350.9 2.0% 3.7% 29.3 240.7% 1. NTT SoftBank Corp.923 15.0x 2.8% 4.163 5.0% 0.4x 3.785 2.3% 8.9% 2.KQ 036570.9x 12.0% 0.9% -9.150 5.1 2.2% 6.150 7.9x 4.HK 0315.TW 3045.1x 14.1x 8.851 2.9% 4.BO GTLI.0 180.0% 1.2% 4.1 179.1x 6.3x 1.7% 0.2x 7.TW TLS.1% 0.T 9433.000 50.2% 1.9x 9.0% 0.0% 0.

Equity Asia 7 December 2010 abc Notes 86 .

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*). In any case.com/research. For a stock to be classified as Underweight. expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. because research reports contain more complete information concerning the analysts' views. 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. Notwithstanding this. 87 . HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. Stocks between these bands are classified as Neutral. investors should carefully read the entire research report and should not infer its contents from the rating. Important disclosures Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions. For a stock to be classified as Overweight. is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein. and although ratings are subject to ongoing management review. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. change of volatility status or change in price target). Investors should carefully read the definitions of the ratings used in each research report. quantitative. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. 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. 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*). technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www. *A stock will be classified as volatile if its historical volatility has exceeded 40%. 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. The performance horizon is 12 months. or as appropriate. In addition. 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. 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.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. Given these differences. However. risk tolerance and other considerations. Details of these short-term investment opportunities can be found under the Reports section of this website. which depend largely on individual circumstances such as the investor's existing holdings. regional market and the relevant equity risk premium established by our strategy team. and 2) from time to time to identify short-term investment opportunities that are derived from fundamental.hsbcnet.

hsbcnet. 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.Equity Asia 7 December 2010 abc stocks which we do not consider volatile may in fact also behave in such a way. 88 .5 percentage points past the 40% benchmark in either direction for a stock's status to change.is available from www. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. Rating distribution for long-term investment opportunities As of 06 December 2010. volatility has to move 2. however.com/research. In order to avoid misleadingly frequent changes in rating.

HK 0941. 11 1. 11 6.00 192000. 11 89 . 5.BO BMRI. 6.86 7. 7. 6. 11 4.00 894000. 4. 5.00 3. 7. Source: HSBC 2600.HK 0762.74 51700.13 1406. 5. 11 4. 7 11 1. 4. 11 1.66 3.8 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. 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. 6. 7. 4.HK SIAL.HK 2318. 5.95 469000.KS 0272. 7.SI 001450. 2.HK 1833.KS 088350. 6. 11 4. 11 6. 5. 2.04 22100.74 38000. 11 2.06 6. 11 4. 5.95 7.HK 0966.00 5.00 5.6 24.50 77. 11 6. 11 4 4 11 4. 2.00 184000.HK AXBK.HK HKLD. 11 4. 7 4. 7 6.HK 0763.00 4.10 8.KS 0323.KS 2343.KS 030200. 11 4 7 1.KS 0016.HK 005830. 11 1. 6.HK 7. 6. 7. 7 1.HK JARD. 7. 7 7 6. 11 1.HK 0939. 7 7.98 12.00 45650 4.80 2.HK 1898. 11 7 1. 7.23 132000.10 27.95 10.11 27.HK 0883. 11 4.KS 000810. 6. 5. 4.KL 0493.72 6.HK 060980. 6. 5.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.82 171.00 10.HK 005490. 11 7 1.HK 1800.33 11.HK 0823. 7 4.89 7.HK 2777. 11 11 1.62 90. 2. 7. 11 6 4 5.HK 1919.00 130.JK 1338.65 11.KS 005380.SI 096770. 7.KS 005930. 2.15 6700. 2.09 10. 5.70 44.HK 2388. 5.KS GENT. 7.00 7530.HK 0728. 11 1.62 17.AX 0700.55 4.KS 1398.HK TLS.78 174000.04 15.HK 1313. 11 4 1. 7.HK 0144. 5 2. 7 4 4. 2. 7 2.05 30.HK 0257.50 3. 5.SI 000270.HK 2328. 4.HK 1893.42 31.

INTIME DEPARTMENT STORE .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 . * HSBC Legal Entities are listed in the Disclaimer below. CHINA RESOURCES CEMENT . HSBC and/or its affiliates (including the funds. CHINA COAL ENERGY CO . economists. is a Market Maker in securities issued by this company. A covering analyst/s has received compensation from this company in the past 12 months. 1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : PING AN INSURANCE (GROUP) . directly or indirectly. 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 detailed below. As of 31 October 2010. MAANSHAN IRON & STEEL . and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. CHINA COSCO HOLDINGS CO . As of 31 October 2010. CNOOC LTD. 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. As of 31 October 2010. PACIFIC BASIN SHIPPING . SK ENERGY CO LTD . HSBC owned a significant interest in the debt securities of the following company(ies) : HONGKONG LAND HOLDINGS LI . as detailed below.hsbcnet. AXIS BANK LTD . HSBC Securities (USA) Inc. All market data included in this report are dated as at close 30 November 2010. AXIS BANK LTD 5 As of 31 October 2010. HSBC beneficially owned 16. PICC PROPERTY & CASUALTY COMP 7 As of 26 November 2010. sale or intermediation of. director or supervisory board member of this company. CHINA NATIONAL MATERIAL C . CHINA CONSTRUCTION BANK . A covering analyst/s or a member of his/her household has a financial interest in the securities of this company. GOME ELECTRICAL APPLIANCE . For disclosures in respect of any company mentioned in this report. HSBC beneficially owned 5% or more of a class of common equity securities of the following company(ies) : PING AN INSURANCE (GROUP) .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. SUN HUNG KAI PROPERTIES 8 As of 15 November 2007. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company Analysts. 4 As of 31 October 2010. unless otherwise indicated in the report. portfolios and investment clubs in securities managed by such entities) either. MANDO CORPORATION . A covering analyst/s or a member of his/her household is an officer. 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. At the time of publication of this report. SUN HUNG KAI PROPERTIES . HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 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. As of 31 October 2010 HSBC beneficially owned 1% or more of a class of common equity securities of this company. please see the most recently published report on that company available at www. own or are involved in the acquisition. GUANGZHOU R&F . At the time of publication of 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. 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 . Additional disclosures This report is dated as at 07 December 2010. SHUI ON LAND LIMITED . .com/research.

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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. Asia Pacific Dilip Shahani 852 2822 4520 Head of Equity 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 . 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. 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. 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. 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.abc Asia Research Team Equities Asia Research Management 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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