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A practical guide for investors on how China’s Communist Party operates We look at the growth challenges and reform agenda facing the new leaders… …as well as the implications for China’s equity and credit markets
The 18th National Congress of the Communist Party of China (CPC) will be held in Beijing in the coming weeks. This report aims to help investors understand how the CPC works and also looks at the implications for economic policy and markets. Power: The National Party Congress meets every five years. No date has been announced for this year, but we expect it to be held in mid-October (like the previous meeting). This congress is particularly significant. A once-in-a-decade leadership transition will take place and around two-thirds of important party and government positions will change hands. This presents challenges as well as an opportunity for change. Policy: The most pressing issue for the new leaders is to sustain growth and create jobs. Reforming the financial system, including the liberalisation of interest rates and the convertibility of the RMB, should be top of the policy agenda. Other reform priorities are fairer income distribution, industrial consolidation and bolstering the service industry. Stock implications: 1) A cyclical rebound is possible as growth stabilises and the transition of power goes smoothly; 2) a bull market will require further major reforms, and the 3rd plenum later next year could be a catalyst; 3) state-owned enterprises in large-cap sectors are likely to continue to underperform the private sector; 4) the themes that will capture the next phase of growth include smarter exports, new spending habits and health/old-age. We list 24 stocks with strong structural growth stories. Credit implications: Ensuring both the supply and efficient distribution of credit to fund growth remains the challenge. The local corporate credit market is expected to become the engine for funding, but genuine credit risk needs to be established. Risks loom for banks, which have stretched loan books and large corporate bond holdings.
China’s National Party Congress
What it means for macro and markets
20 September 2012
Steven Sun* (孙 瑜) Head of China Equity Strategy The Hongkong and Shanghai Banking Corporation Limited +852 2822 4298 firstname.lastname@example.org Hongbin Qu (屈宏斌) Co-Head of Asian Economic Research Chief China Economist The Hongkong and Shanghai Banking Corporation Limited +852 2822 2025 email@example.com Zhiming Zhang (张之明) Head of China Research The Hongkong and Shanghai Banking Corporation Limited +852 2822 4523 firstname.lastname@example.org
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
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
Multi-asset China Research 20 September 2012
Political cycle, the economy and stock market performance
The political cycle has a clear impact on the investment and credit growth cycles FAI a focus next year
60 50 40 30 20 10 0 1997 1998 1999 2000 2001 2002 2 003 20 04 20 05 200 6 2007 2008 2009 2010 2011 2012 2 013 15th N PC and po w er transition from De ng Xiaoping to Jiang Zemin 16th N P C and p ow er transitio n from Ji ang Zemin to Hu Jintao M 1 y /y , % FAI y td y /y R MB lo an y /y 18th N PC an d pow er tran sition from from H u Jinta o to Xi J inping
Source: CEIC, HSBC Equity Strategy Research
Political cycle and stock market performance 3rd plenum late next year could be a re-rating catalyst
50% 40% 30% 20% 10% 0% -10% -20% 4th - 5th 5th - 6th 1st - 2nd Congress 2nd - 3nd 3rd - 4th 6th - 7th Plenum Plenum Plenum National Plenum Plenum Plenum Party Shanghai Comp. perf. H-share perf. Red-chip perf. Hang Seng perf.
Avg. perf. (15th, 16th and 17th NPC)
Source: CEIC, HSBC Equity Strategy Research (average performance for the period of 6th-7th plenum, excludes the 16th National Party Congress as 2007 was a market bubble.)
12th Five-Year Plan (FYP) aims to ensure policy continuity under the new leadership (key theme: economic restructuring) Target Consumption Policy initiatives Job creation Urbanisation Policy measures
Create 45m new jobs, plus 40m migrant worker jobs; unemployment rate <5% Rate of urbanisation to rise from 47.5% in 2010 to 51.5% in 2015 Improve public services to facilitate migrant population who meet the conditions when transferring to become urban residents Social safety nets Coverage of basic pension insurance for urban residents to reach 357m Full coverage of rural pension scheme 36m units of public housing, covering 20% of the urban population Educational fiscal expenditure to reach 4% of GDP in 2012 3% increase in basic health insurance coverage Income distribution Per capita disposable income for urban residents to increase >7% p.a. Rural cash income to rise >7% p.a.; minimum wage to increase at >13% p.a. Consolidation and upgrading Promoting service sector Service sector as % of GDP to reach 47% in 2015 from the current 43% industries Develop a better business environment for service sector development Remove price discrimination in electricity, water, gas and heat supply Strategic emerging industry Set up a special industrial fund for SEI development and investment Channel social funds into enterprises doing innovative business in their early stage Use risk compensation and other financial incentives to encourage financial institutions to offer credit support to SEIs Infrastructure investment Clean energy development, including nuclear power, large hydropower plants Length of highway network to reach 83,000km; high-speed railway 45,000km, a new airport in Beijing by the end of 2015
Source: 12th FYP, HSBC estimates
Multi-asset China Research 20 September 2012
How does the Communist Party operate?
Power, hierarchy and central organisations A smooth transition would ensure policy continuity
Economic challenges and the reform agenda
Supporting growth and creating jobs New leadership’s reform agenda
Implications for China’s equity market
The political cycle and stock market performance Enter private capital Investment themes for the new phase of growth
15 17 19
Implications for credit
Credit challenge for the new leadership Too much of a good thing? Rising corporate bond exposure What LDK Solar tells us
27 28 29 29
Disclosure appendix Disclaimer
six. The collective leadership is designed to guard against a repeat of events such as the Cultural Revolution or the emergence of a dominant leader. Its current ideology was defined in the late 1970s under Deng Xiaoping to incorporate principles of market economics and the subsequent reforms have enabled China to enjoy three decades of rapid economic growth. from ideology and personnel to economic reforms and planning The 18 National Party Congress will convene in the coming th weeks and we expect a smooth handover of power. nine and 11 members and a smaller PSC means a relatively higher concentration of decision-making power. claiming over 82. to a pyramid (Chart 1): At the top. This represents over 6% of the population. Due to term and age limit restrictions. the power structure of the CPC can be likened. The party has since been in power for almost 63 years and its legal power is guaranteed by China’s national constitution.Multi-asset China Research 20 September 2012 abc How does the Communist Party operate? The National Party Congress is held every five years. Members of the PSC form a collective leadership in which each member has a rank and is responsible for a specific portfolio. seven of the nine 4 . hierarchy and central organisations Formed in July 1921 in Shanghai. more people than live in Germany. It is also the world’s largest party.6m members at the end of 2011. Since the 8th National Party Congress in 1956. in simple terms. which currently has nine members. The CPC assumed power in 1949. Its longevity is set to rival the 69 years of the Communist Party of the Soviet Union (1922-91). At different times the PSC has had five. the Chinese Communist Party (CPC) is the founding political party of the People’s Republic of China (PRC). the CPC has fluctuated between periods of reform and political conservatism. the leadership reshuffle presents both challenges and opportunities for change Power. it’s followed by seven Central Committee plenums over the next five years The National Party Congress and each plenum have a distinctive theme. Throughout its history. the most senior decision-making body is the Politburo Standing Committee (PSC) of the Central Committee of the CPC. seven.
which currently has 24 members. The third layer is the Central Committee. It also decides when to 5 .Multi-asset China Research 20 September 2012 abc Chart 1. The second level is the Political Bureau (Politburo). of which 31 represent different provinces. Its power is underpinned by the fact that its members simultaneously hold important state positions in the military. Having explained the pyramid. which includes some 200 full members and 150-170 alternative members (who have no voting rights). The Central Committee of the CPC is elected by the National Party Congress for a term of five years. China’s national-level Communist Party hierarchy Politburo Standing Committee 9 members Politburo 24 members Central Committee 203 members.6m members and 4m grass-root organisations. state and military. key provinces or municipalities. 4m grass-root organizations (at end-2011) Source: Communist Party of China (note: number of members for the top three layers refers to the current term of the 17th National Party Congress convened in 2007. Chart 2 illustrates the power structure of the CPC and how the party functions. nearly 22m people applied for party membership.6m members. Full and alternate members are elected by delegates once every five years at the National Party Congress. and the National Party Congress. autonomous regions and municipalities. including the nine PSC members.) PSC members will be retiring at the 18th National Party Congress. Membership turnover is rapid. The base of this pyramid rests on 82. a turnover rate of around 60%.270 delegates (18th NPC) Party Members 82. the Central Committee is in charge of party matters. In 2011. averaging 62% at the last six party congresses over the past 30 years. When the National Party Congress is not in session.270 party congress delegates elected from 40 constituencies. At least 14 out of the 24 Politburo members have reached the retiring age limit of 68 and will be replaced. The Central Committee contains leading figures from the party. an admission rate of less than 15%. 167 alternate members Party Congress 2.2m were admitted. but only 3. At the fourth level come the 2.
The Secretariat of the Central Committee is the administrative body of the Political Bureau and its Standing Committee. It is then that the new leadership traditionally focuses on economic reforms. normally held about a year after the National Party Congress. however. When the plenum of the Central Committee is not in session. Although negotiations and compromise are still an important part of the process. Each plenum has a particular theme.Multi-asset China Research 20 September 2012 abc convene the National Party Congress and the committee’s plenary sessions. A smooth transition would ensure policy continuity In an effort to ensure a smooth transition of power. We highlight the importance of the third plenum. And thanks to Deng Chart 2. The General Secretary of the Central Committee is responsible for calling sessions of both the Political Bureau and its Standing Committee. The central organisations of the CPC 中央委员会总书记 (General Secretary) 中央委员会 (Central Committee of the CPC) 中央政治局常务委员会 (Standing Committee of the Political Bureau) 中央政治局 (Political Bureau) 中国共产党 全国代表大会 (National Party Congress) 中央书记处 (Secretariat of the Central Committee) 中央军事委员会 (Central Military Commission of the CPC ) 中央纪律 检查委员会 (Central Commission for Discipline Inspection) Source: Communist Party of China 6 . the Political Bureau and its Standing Committee exercise the functions and powers of the Central Committee. according to article published in the Xinhua News Agency’s Outlook Weekly. or plenums. which are usually held seven times over the five-year term (see Table 3). That’s why we emphasise that it will be probably at least a few quarters before the changes needed to help create a bull market emerge. How the Political Bureau works internally is unclear. the CPC is attempting to institutionalise the way leaders are selected. with members nominated by the Standing Committee. and is in charge of the work of the Secretariat of the Central Committee. candidates for senior positions are now also judged on their administrative experience. it appears that the full Political Bureau meets once a month and the Standing Committee meets usually weekly or bi-weekly.
the document is still seen as an important roadmap for economic and social development and reform agenda. its Standing Committee. Given the rising challenges of running the world’s second largest economy. setting a framework for economic policy for the next few years. which will be followed by changes in government positions in the spring of 2013. Politburo members must retire at age 68 and can’t serve more than two five-year terms. major state ministries and the Central Military Commission will be replaced. 7 . These organisations represent three centres of power – the party. This is another mechanism to ensure policy continuity during the leadership changes. The importance of this year’s National Party Congress can’t be overstated. While power remains highly concentrated at the top. This emphasis on consensus means that the important personnel changes are sorted out well in advance of the National Party Congress and new faces have often been involved in policymaking for 2-3 years. Previous five-year plans provided strict policy guidance for ministries and local governments. Five-year plan ensures policy continuity Beijing released its 12th Five-Year Plan (2011-15) in March 2011. Around two-thirds of the members of the Politburo. consensus building is crucial to the decisionmaking process.Multi-asset China Research 20 September 2012 abc Xiaoping’s reforms. the State Council. While this has been relaxed slightly since the 11th Five-Year Plan. mainly due to term and age limits. The leadership reshuffle at the party and the military level at the National Party Congress. power-sharing and teamwork are expected to be recurring themes for future leadership transitions. the government and the military.
party General Secretary. before People’s Congress Late 2013 Late 2014 Late 2015 Late 2016 Late 2017 18th Party Congress (2012-17) 2. 2007 Days before 18th Party Congress 17th Party Congress (2007-12) 2. 2008 16-19 Sep. members of the Secretariat and Central Military Committee) Recommended state (government) leadership team for confirmation at the National People’s Congress. members of the Secretary. 2005 15-18 Oct. members of the Secretariat and Central Military Secretariat and Central Military Committee) Committee) Recommended state Recommended state (government) leadership team for (government) leadership team for confirmation at the National confirmation at the National People’s Congress. election advanced productive forces. 2011 9-12 Oct. 2001 3-5 Nov. 2002 15-21 Oct. approved People’s Congress. 2003 25-27 Feb.213 204 167 25 9 11 17th Party Congress (2007-12) 2. approved “Reform Plan of State Council “Opinions on Further Reforming Organisations” the Government Administration System and Organisations” “Decisions on Several Major “Decisions on Several Issues Issues of Agriculture and Rural concerning the Improvement of Work” the Socialist Market Economy” “Decisions on Several Major “Decisions on the Construction of Issues concerning Reform and the Governing Ability of the Party” Development of the State-owned and approval of Jiang Zemin’s Enterprises” resignation from the Central Military Commission “Suggestions concerning “Suggestions concerning Formulating National Economy & Formulating National Economy & Social Development Plan for the Social Development Plan for the 10th Five-Year Period” 11th Five-Year Period” “Decisions on Several Major “Decisions on Several Major Issues on Strengthening and Issues on Building a Harmonious Improving the Work Style of the Socialist Society” Party” Announced date for the next Party Announced date for the next Party Congress. 2007 24-26 Feb. 2003 9-12 Oct.114 198 158 24 1 9 8 October 2012? Day after Party Congress 2013. development and the creation of a Scientific Development Concept of the Central Committee and culture and representing the harmonious society as the party’s mission statement) alternate members. 1998 12-14 Oct.270 ? ? ? ? ? 18th Party Congress (2012-17) 15th Party Congress (1997-2002) 16th Party Congress (2002-07) 15th Party Congress (1997-2002) 16th Party Congress (2002-07) Further implementation of Ideological unity and Constitution amended to stipulate Constitution amended to stipulate the Three Representatives the theory of Scientific political mobilisation the theory of Deng Xiaoping Development Concept (potential amendment to the (emphasising economic theory (三个代表) (what the constitution to stipulate the construction and stability) as the (科学发展观) – sustainable party stands for in terms of nation’s guiding thought. approved “Opinions on Further Reforming the Government Administration System” “Decisions on Several Major Issues on Promoting the Reform and Development of Rural Areas” “Decisions on Several Major Issues on Strengthening and Improving the Governing Ability of the Party under New Situation” “Suggestions concerning Formulating National Economy & Social Development Plan for the 12th Five-Year-Period” “Decisions on Several Major Issues on Deepening Reform of Cultural System and Promoting the Great Development and Flourishing of Socialist Culture” Announced date for the next Party Congress. 1997 19 Sep.048 193 151 22 2 7 8 16th Party Congress (2002-07) 17th Party Congress (2007-12) 18th Party Congress (2012-17) 8-14 Nov. approved the Central Committee’s report to the next Party Congress and proposed an amendment to the Party Constitution Party leadership reshuffle (possible change in size of the Politburo standing committee) 1st Plenary session (Year 1) 2nd Plenary session (Year 2) Government reshuffle and administration reform (potential super ministry reform) 3rd Plenary session (Year 2) Economic reform 4th Plenary session (Year 3) Governing ability 5th Plenary session (Year 4) Economic planning 6th Plenary session (Year 5) Ideology 7th Plenary session (Year 1. 1997 25-26 Feb. 1999 9-11 Oct. approved the Central Committee’s report to the next Committee’s report to the next Party Congress and proposed an Party Congress and proposed an amendment to the Party amendment to the Party Constitution Constitution Elect and/or appoint party leadership teams (Politburo members and its Standing Committee. 2004 15-18 Sep. Snapshots of the past three National Party Congresses (the last two major political transitions occurred in 1997 and 2002) Timeline National Party Congress 1st Plenary session 2nd Plenary session 3rd Plenary session 4th Plenary session 5th Plenary session 6th Plenary session 7th Plenary session Headcount Party Congress delegates Central Committee members Alternate Central Committee members Politburo members Alternate Politburo members Politburo Standing Committee members Central Military Commission members Agenda/theme National Party Congress (Year 1) 15th Party Congress (1997-2002) 12-18 Sep. and Central majority of the people) as the Disciplinary Committee party’s mission statement Elect and/or appoint party Elect and/or appoint party leadership teams (Politburo leadership teams (Politburo members and its Standing members and its Standing Committee.Multi-asset China Research 20 September 2012 abc Table 1. 2002 2. 2000 24-26 Sep. 2009 8-11 Oct. approved the Central Congress. party General Committee. 2008 11-14 Oct. 2002 22 Oct. just before the next National Party Congress) Preparatory meeting Source: Communist Party of China 8 . 2010 8-11 Oct. party General Secretary. 2007 15 Nov. 1998 19-22 Sep. 2006 15-18 Oct.
The austerity measures designed to cool the property market have put a significant dent in domestic investment.7% y-o-y YTD in July. Chart 1. A slow policy response to the rapidly deteriorating 9 . A deteriorating employment situation 60 55 50 45 40 (3mma) 05 06 07 08 09 10 11 12 HSBC China Manufacturing PMI-Employ ment HSBC China Serv ices PMI-Employ ment Source: CEIC. July export growth dropped sharply and industrial production and bank lending were both lower than expected. August’s reading for the HSBC China Manufacturing Purchasing Managers’ Index (PMI) deteriorated to a post2009 low. HSBC Profits of industrial enterprises (annual revenues ≥ RMB20m) shrank 2. August’s employment index contracted for the sixth consecutive month (Chart 1). driving industrial consolidation and bolstering the service industry Supporting growth and creating jobs China’s economic growth expanded 7.Multi-asset China Research 20 September 2012 abc Economic challenges and the reform agenda The most pressing issue is to support growth and create jobs Financial reforms will be the top policy agenda.6% in the second quarter of this year.2% y-o-y. More worryingly. All this bad news is feeding through into corporate performance. the slowest pace in three years due to falling overseas demand and weakening domestic investment. with the finished goods subindex of the HSBC Manufacturing PMI rising to a record high. The numbers in July and August were also disappointing. Falling profits and rising inventory levels have forced corporations to cut jobs. support for interest rate liberalisation and RMB reform could gain momentum Other items on the agenda include promoting income distribution. Inventories are also on the rise. while SOE profits were down 12. Anecdotal evidence suggests that an increasing number of coastal enterprises are laying off workers or closing down factories.
or about 2% of annualised 1H12 GDP. less than half of the 4% full-year target. 28 August 2012). we expect another 200bp cuts in RRR for the rest of the year. Meanwhile. the social welfare system. Rising global grain prices may lift the cost of pork in China in the coming months. we can still expect more tax reductions for small. We still expect another 25bp interest rate cut in the coming months.Multi-asset China Research 20 September 2012 abc employment situation could hurt the economy badly in terms of consumer consumption and may raise concerns about social stability. we believe Beijing’s policymakers should not have to worry New leadership’s reform agenda Reforms are likely to focus on economic restructuring. Pressure to keep easing In our view. it’s a deliberation on the industry blueprint agreed upon the Fourth National Financial Working Conference in January 2012. Beijing’s policymakers want to rebalance China’s economic growth by expanding domestic demand and moving away from the current export-led model. the government recorded a fiscal surplus of RMB990bn in 1H12. more emphasis is being put on promoting social harmony. China’s Producer Price Index (PPI) has fallen into negative territory and the Consumer Price Index (CPI) dropped to 1. about inflation. With “steady and rapid economic development in the long run” remaining one of the key targets. Despite two cuts so far this year. water treatment plants and other infrastructure projects. growth is expected to recover to above 8% and stay there in 2013 and beyond (for more on China’s potential growth rate please refer to China Inside Out. aside from reverse repo and other open market operation tools. there is still plenty of ammunition left to stimulate the economy and reverse the slowdown. Reforming the financial system to improve capital allocation Beijing has made it clear that reforming the financial system will provide an important boost to the rebalancing of China’s economic growth model. the recent approval of more infrastructure investment projects should boost domestic demand. The new leaders will also make improving the balance of income distribution and developing the social welfare system policy priorities. given falling PPI and the modest pace of the recovery in domestic demand. there is room for increasing government spending on public works such as public housing. The PBoC has been leading the jointefforts of all financial regulators and published a lengthy report in mid-September on “12th FiveYear Plan on Development and Reforms of the Financial Industry”.5%.8%. resulting in a small deficit. 10 . While this is unlikely to be repeated in the second half of the year for seasonal reasons. energy efficiency and scientific development. but the rebound in the overall CPI will likely be small.and medium-sized enterprises (SMEs) in the coming months. the banks’ reserve requirement ratio (RRR) is still high at 19. Therefore. Once all the above easing measures filter through. With CPI likely staying below 3%. Although demand for credit from the manufacturing sector could remain weak on sluggish external demand. In a nutshell. Inflation will likely stay low despite rising global food prices. More importantly. We expect the following key reforms in the coming years: 1.
There are three key areas to watch – the reform of stated-owned banks. Banks: improving the supply of credit Chart 2. In simple terms.000 8. bank assets topped RMB113. At the end of 2011. with money market rates acting as the benchmark based on the supply and demand for funds. liberalising interest rates and RMB convertibility.000 0 (RMB bn) 80 60 40 20 0 2006 2007 2008 2009 2010 2011 Equity (Lhs) Bond (Lhs) Loan (Lhs) Bond as % of total financing (Rhs) Source: CEIC.4-4. As a result. For example. and reforming the IPO and delisting system. Under the current system the central bank. Assuming 10% nominal GDP growth in 2013-2015f. credit doesn’t always go to where it is needed most. China’s banking assets have ballooned along with the country’s economic growth rate. up from 4. Interest rate liberalisation Like its Asian neighbours. The aim of interest rate liberalisation is to establish a market-oriented structure. In 2011. bonds and the stock market – down from 57% in 2008 (Chart 2). it’s easy for big SOEs to get credit while many SMEs are starved of funds.000 10.3trn. the ratio stood at 6.000 6. bank loans have played a dominant role in financing China’s economic growth. creating a high spread that generates a large share of banks’ profits.Multi-asset China Research 20 September 2012 abc Two major goals to be achieved in the next three years are worthy highlighting: Financial industry value-added to reach 5% of the GDP. inferring faster growth for the industry than economic growth. It also means that savers earn negative returns on their deposits when headline inflation is high.5% in Japan and 8% in the US on average for the past decade.000 4. three times the total in 2005.5% for the past two decades. the People’s Bank of China (PBoC). financial sector has to grow at 14-15% per annum to reach the goal. In comparison. direct financing through the bond and equity markets has declined in the past few years. The downside is that this policy has slowed the development of financial services and reduced the efficiency of allocating funds to businesses.” According to the 12th Five-Year Plan. total RMB bond issuance (including treasury bonds and financial bonds issued by policy banks) accounted for 46% of total financing – bank loans. HSBC Beijing wants to “significantly lift the share of direct financing” by “actively promoting the development of the bond market. Fund raising in China 12. standardising the main board of the stock market and developing an SME board for the stock market.000 2. and The share of direct financing to total social financing to reach 15% by 2015. there are also plans to establish an international board. sets a ceiling for bank deposit rates and a floor for lending rates. The central bank would be able to influence the system by 11 . up from 11% at the end 2010. In contrast to the boom in bank credit.
We expect the full liberalisation of interest rates to be completed within three years. enhancing employment. This involves expanding domestic consumption demand. deepening income distribution reform and improving the social security system. This is in sharp contrast with the previous situation when investors saw the currency as a one-way appreciation play against the USD. It wants the disposable income of urban residents and the net income of the rural population to grow at the same rate as GDP.2% during the 11th Five-Year Plan (2006-10). RMB full capital account convertibility 2.and export-led growth towards consumption In April. Transforming the economic development model China’s economy expanded at an average of 11. steadily accelerating urbanisation. effective 6 July. Move away from investment. The central bank then allowed banks to be more flexible about the interest rates they can charge on bank loans (preferred customers can now borrow at 70% of the benchmark lending rate. While the currency has been convertible under the current account for 15 years. Chart 3. after appreciating 30% against a basket of currencies since it was depegged from the USD in 2005. This will increase competition between banks. as well as increase spending on education. In contrast. It asymmetrically cut the benchmark one-year lending rate by 31bp to 6% and the one-year deposit rate by 25bp to 3%. however. Higher income target to boost consumption 30 25 20 15 10 5 0 -5 -10 (%y r) 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Retail sales Total w age Source: CEIC. Beijing is also aiming to raise incomes at a faster rate. although debate over the pace of reform continues. policymakers now see a window of opportunity to further speed up the process.5%. but the PBoC is now accelerating the process of interest rate liberalisation. the 12th Five-Year Plan calls for economic restructuring and a preference for quality growth over large-scale expansion. Markets now have two-way expectations for the RMB exchange rate. this change does not apply to mortgage rates as the central bank reiterated that the property tightening measures would stay in place. 12 . as flagged in the 12th Five-Year Plan. the first change since 2007. even expecting depreciation from time to time. Reform has stalled for seven years. down from 80%). This is all part of rebalancing economic and social development so ordinary people can enjoy the benefits of economic growth.Multi-asset China Research 20 September 2012 abc adjusting money market rates instead of changing lending quotas and the reserve requirement ratio. This signals a move towards a more flexible and market-driven currency regime. Making the RMB a convertible currency is the ultimate goal of China’s exchange rate reform. HSBC The 12th Five-Year Plan (2011-15) aims to create 45m jobs in urban areas and lower the unemployment rate to below 5% (urban registered unemployment rate). healthcare and pension systems. The RMB exchange rate is also much closer to its market equilibrium level. China expanded the RMB’s trading band to 1% from 0. significantly exceeding GDP targets. Beijing aims to increase consumption’s share of GDP from 35% in 2010.
alternative energy. Promoting income equality By accelerating urbanisation and giving more policy support to western and central regions of China. 13 . HSBC Japan China Brazil India Korea Industrial consolidation and seven strategic emerging industries China has a large wealth gap and the problem has gotten worse in recent years. which continues to gain government support in the form of new strategic industries. high-end equipment manufacturing. including Shandong. Improving the tax system Seven strategic emerging industries (SEIs) – clean energy technology. Wages represent 80% of household income. Beijing wants to improve the situation by giving households a greater share of national income and 23 of the 31 provincial governments have promised to ensure that residential incomes increase in line with GDP growth. Service sector as % of GDP.Multi-asset China Research 20 September 2012 abc Promoting the service industry Chart 5. Zhejiang and the municipality of Chongqing. new materials and clean energy vehicles – have been selected as the drivers that will help China move away from low-end manufacturing to higher value-added industries and sustainable growth. Chart 4. The government intends to reform the tax system. However. This will involve reforming the SOE payroll system. the value-added of the service sector accounted for 43% of China’s GDP (vs. biotechnology. but tax reform could help increase competition in the service sector. 70-80% in developed countries and 50% in India) and only 34% of national employment. Beijing has a clear goal to grow SEIs In 2010. Beijing is trying to close the gap between urban and rural development. Beijing wants to grow their share of GDP from 5% in 2010 to 8% in 2015 and 15% in 2020. 2011 20 15 10 5 0 % 2010 2015e SEIs v alue added as % of GDP 2020e Source: 12th FYP. China’s economic growth relies heavily on secondary industries such as its manufacturing sector. improving the property tax system and social security payments. so Beijing wants to gradually raise the minimum wage to help narrow the wage gap between different industries. farmers have benefitted from a series of measures to lift their incomes. HSBC estimates 3. For example. Six governments. Fairer income distribution 80 60 40 20 0 % US Source: IMF. speeding up the development of the service industry will be done in parallel with upgrading manufacturing. pledged that income growth will outpace GDP. This includes increasing tax rates for the rich and cutting them for the poor. These SEIs will receive special funding and tax breaks. We believe this year’s pilot value-added scheme in Shanghai is a good start. next-generation IT.
Of the seven SEIs. 12th FYP to ensure policy continuity under the new leadership (key theme: economic restructuring) Target Consumption Policy initiatives Job creation Urbanisation Policy measures Create 45m new jobs plus 40m migrant worker jobs. minimum wage to increase at >13% p.000km. including nuclear power. a new airport in Beijing by the end of 2015 Social safety net Income distribution Consolidation and upgrading Promoting service sector of industries SEIs development Infrastructure investment Source: 12th FYP.a.a.5% in 2010 to 51.Multi-asset China Research 20 September 2012 abc Table 1. Service sector as % of GDP to reach 47% in 2015 from currently 43% Develop a better business environment to develop service sector Remove price discriminations of electricity. covering 20% of the urban population Educational fiscal expenditure to reach 4% of GDP in 2012 3% increase in basic health insurance coverage Per capita disposable income for urban residents to increase >7% p. urban unemployment rate <5% Rate of urbanisation to rise from 47. gas and heat supply Set up special industrial fund for SEIs development and investment Channel social fund into enterprises doing innovative business in their early stage Use risk compensation and other financial incentives to encourage financial institutions to offer credit support to SEIs Clean energy development. high-speed railway 45.5% in 2015 Improve public services to facilitate migrant population who meet the conditions when transferring to urban residents Coverage of basic pension insurance for urban residents reaching 357m Full coverage of rural pension scheme 36m units of public housing. HSBC estimates 4.000km. water. Rural cash income to rise >7% p. 14 . while the other are consistent with the government’s goal of moving up the value chain.. clean energy vehicles and clean energy technology) are in line with sustainable development targets. three (alternative energy.a. large-scale hydropower plants Length of highway network to reach 83. Going green Stretched natural resources and growing environmental problems have forced Beijing to set mandatory energy efficiency targets and launch a series of green initiatives.
it will affect different types of companies in different ways. or a specially convened party convention to discuss major economic issues. A cyclical market rebound is possible as history suggests that leadership reshuffles have an impact (usually positive) on investment activities and the credit cycle.Multi-asset China Research 20 September 2012 abc Implications for China’s equity market Cyclical rebound possible on growth stabilisation and smooth transition. consumer and healthcare in the long term Three themes for the next phase of growth: smarter exports. With China aiming for more balanced growth. 15 . particularly remarkable due to its orderly. We see this having a significant impact on the composition of a number of sectors within various market indices in the next few years. peaceful and institutionalised nature. A sustainable valuation re-rating hinges on further economic reforms that are needed to generate new growth momentum. The upcoming leadership transition could set another good precedent. especially when growth stabilisation and job creation are near-term priorities. Hopes are high that the new leadership will succeed in pushing through these reforms. with the last one (at the 16th National Party Congress in 2002). government and military) will change hands. A bull market will likely take longer. thus alleviating a key short-term market concern. it’s time to refresh those thoughts. With the 18th National Party Congress set to convene in a matter of weeks. 3rd plenum later next year could be a re-rating catalyst SOE-dominant big-cap sectors likely to continue to underperform private sectors like IT. We believe this is unlikely to happen until the third plenum of the Central Committee of the CPC in about a year. new spending. Some 60-70% of the most important positions (party. Key observations include: The generational power transition has only happened three times in the history of the PRC. health/old-age security The political cycle and stock market performance We first wrote about the political cycle and its impact on earnings in May 2010 (China Unplugged – Earnings warning system for 2012 reshuffle).
% FAI y td y /y RMB loan y / y 18th NPC and power transition from from Hu Jintao to Xi Jinping 2007 2008 2009 2010 2011 2012 2013 Source: CEIC. This is evidenced by the NDRC’s project approval spree in early September. In early 1998. This was a year after the 15th National Party Congress at which a new leadership team was installed after the death of Deng Xiaoping. led by tax cuts and spending on infrastructure and public housing. i. Data for 1978-2011 suggest that the economy was more balanced in years of moderate growth. This time around we believe there will be both similarities and differences. The high-volume. This means that expansionary fiscal policy will probably be the main tool used to spur growth. money supply (M1) growth bottomed out and fixed-asset investment (FAI) growth took off as efforts were made to smooth the turbulent aftermath of the Asian financial crisis. sewage treatment plants. The political cycle has a clear impact on investment and credit growth cycle FAI a focus next year 60 15th NPC and power 50 40 30 20 10 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 transition from Deng Xiaoping to Jiang Zemin 16th N PC and pow er transition from Jiang Z emin to Hu Jintao M1 y / y . including 25 urban rail transit projects.Multi-asset China Research 20 September 2012 abc Previous examples Let’s look at what happened after previous leadership transitions. so the next generation of leaders will have to balance the long-term goal of rebalancing the economy with the short-term goal of stabilising growth through stimulus. Chart 1. China’s economic growth continues to decelerate in 3Q12 to perhaps 7-8% and job creation will likely be a near-term priority for the new leadership. ports. low-cost and low value-added export model is outdated. economic reform has an important part to play in the next phase of growth. It was a similar story five years later after the 16th National Party Congress when Hu Jintao took over the leadership from Jiang Zemin (Chart 1). or a dedicated party convention for decision-making on major economic issues. which has exceeded the size of RMB1trn. HSBC Equity Strategy Research 16 . Yet.e. when consumption’s contribution to GDP was higher and that of investment was lower. etc. warehouses. and hence is unlikely until the 3rd plenum Central Committee of the CPC (a year later). We believe that 7-9% GDP growth is here to stay and that companies and investors should adapt to the new normal. 13 highway projects with total length of more than 2000km and constructions of rubbish burning power plant. as shown in previous political cycles (Chart 2). HSBC infrastructure analyst Anderson Chow estimates that around RMB700bn is incremental new spending.. Looking further ahead. initial signs that inflation might be picking up and the fact that property prices are rebounding following the surge in transaction volumes are likely to make the PBoC reluctant to ease aggressively. A bull market and sustainable re-rating still hinges on further reforms.
consumer discretionary and healthcare).6th 1st . Index weighting for POEs are on the rise Chart 4. 16th and 17th NPC) 4th . a closer look at the representation of state-owned enterprises (SOEs) and privately owned enterprises (POEs) in the MSCI China Index suggests otherwise (Chart 3-4). and it has doubled over the past five years in 2007-12.Multi-asset China Research 20 September 2012 abc Chart 2.5th 5th . HSBC Equity Strategy Research (average performance for the period of 6th -7th plenum excluded the 16th National Party Congress as 2007 was a year of market bubble. they are in four other sectors (staples.4 SOE POE 78. perf. FN: mainly real estates. H-share perf. Plenum However. the state enters and the people withdraw”) or one of privatisation (“国退民 进.3nd 3rd . CS: consumer staples. industrials and materials).1 CD 100% 80% 89.2 60% 40% 21. Red-chip perf. This may also be because Hong Kong is a preferred listing place for POEs: The index weighting of POEs has more than tripled to 22% during the past decade (200212). perf.8 07 02 07 12Q2 Source: Thomson Reuters Datastream.4th 6th . Political cycle and stock market performance 3rd plenum late next year could be a re-rating catalyst 50% 40% 30% 20% 10% 0% -10% -20% Shanghai Comp. HC: health care. Nationalisation (国进民退) is an expression used since 2009 to describe the apparent reversal of economic reforms as the state increased its stake in a number of important industries. the state withdraws and the people enter”). Hang Seng perf.7th IN IT Plenum Plenum Plenum National Plenum Source: CEIC. IN: industrials.2nd Congress 2nd .6 02 93.9 12Q2 20% 0% CS FN HC Plenum MT Party 10. IT: information technology: MT: materials) 17 . Chart 3. MSCI China Index is primarily comprised of Chinese companies listed on the HK Exchange) Source: Thomson Reuters Datastream (CD: consumer discretionary. (15th. real estate. Ten years ago POEs were only represented in three sectors (IT. Shifting sector composition of POEs 100% 80% 60% 40% 20% 0% 6. Avg.) Enter private capital Since the RMB4trn stimulus programme in 2009 there has been a debate about whether China’s economy is going through a process of nationalisation (“国进民退. HSBC Equity Strategy Research. Privatisation (国退民进) was a term introduced in the late 1990s to describe a policy promoted by former Prime Minister Zhu Rongji.
18 MT UT . In our view. trade-related business management and logistics. Great Wall Motor. healthcare. Statistics from the Xinhua News Agency show that state-owned capital is permitted to enter 72 of the 80 industries in China.g. utilities. according to the National Bureau of Statistics SMEs. including basic industries (e. industrials and utilities. railway transportation. threequarters of job creation and over 80% of new product development. Sector representation of private-owned enterprises Chart 6. overcapacity is much less of an issue for sectors where major players are POEs. Private capital. By and large. In the long run. the slew of new policies rolled out this year by almost all major central government agencies will encourage much broader private investments. HSBC Equity Strategy Research Source: Bloomberg Across different sectors (Chart 5). and domestic private capital has access to only 41. The only exception is consumer discretionary. for the past five years (2007-12). telecom services and financials. should the transformation proceed smoothly. fostering growth in private sectors is the way forward as China restructures its economy and narrows income inequality. due to better supply discipline. Hengan and Want Want.. However. 50% of tax revenue. private companies account for roughly 60% of China’s GDP.Multi-asset China Research 20 September 2012 abc Chart 5. financial services (banks and insurances). signalling a landmark change away from the bank-led and SOE-centric financing model of the past two decades. POE-heavy sectors like IT. The private sector is more efficient and generates more jobs. in particular equity (public and private). boosting consumption. consumer discretionary and staples have the highest representation of POEs (70-100%). will also play a more significant funding role in developing cutting-edge emerging strategic industries and service sectors. oil and gas exploration. Lenovo. IT. it could help China’s equity market to re-rate along the way. foreign capital is allowed in 62. as well as infrastructure. Interestingly. and even national defence science and technology. Sector performance in 2007-12 POE (% MSCI China sector w eighting) 100% 80% 60% 40% 20% 0% IT CD CS HC MT FN IN SOE (%) 80% 60% 40% 20% 0% -20% -40% -60% -80% HC MSCI China Sector Index Perf. outperforming the index (down 20%) and the SOE-dominant sectors like energy. similar to SOE-dominant sectors like materials. For instance. Examples include companies like Tencent. which has been suffering from overcapacity and high inventory since 2008. and telecom services). L5Y MXCN CD CS EN TS FN IN IT EN TS UT Source: Thomson Reuters Datastream. power generation. It is clear to us that future leaders will likely rely more on private capital to create jobs and boost investment. public housing. Belle. staples and healthcare have had positive returns of 20-70%.
to high-end functional parts to 20% (from less than 5% in 2012). the 2015 target is to enable domestic numerical control machine tools to take up 70% of the domestic market (versus 32% in 2011) and to increase the market share of domestic medium. Moreover. about 60% of Chinese exports are products that are typically exported by countries with GDP/capita of below US10. low wages have been a way of life for many Chinese companies. Herald van der Linde. The need to offset rising cost pressures has increased the need to change the product mix and Chart 7. In 2002. US Census (for both charts. as well as export more sophisticated products and adapt to new demand trends. For years. an ambitious goal.15k.25k. 19 . according to China’s 12th Five-Year Plan for the machine tool industry. are now seen as the keys to success. Export smarter goods China’s growth is slowing. most Chinese exports were not very sophisticated. China was exporting products that fitted the profile of mid. 1.to high-end numerical control systems in the domestic market to 50% (from less than 10% in2012). currency: USD) Source: HSBC Note: On the X-axis we show the percentage of products that are typically sold by countries with that respective income level. in line with products exported by low-income countries (Chart 7). China’s exports: Moving up the value chain (%) 60 50 40 30 20 10 0 <5k 5k.000.20k. highlighting a clear shift in quality.Multi-asset China Research 20 September 2012 abc Investment themes for the new phase of growth HSBC’s Head of Equity Strategy Research. innovation and adaptability.10k.35k. China’s exports: A shift in sophistication Chart 8. the State Council approved in late May a plan outlining the development of seven strategic emerging industries (SEIs) as the primary growth driver in the future (China Strategy: New priority industries: aiming high for quality growth. We estimate that the seven SEIs would need to grow by RMB4trn to RMB6trn (or 8% of GDP) in 2015 and by another RMB10trn to RMB16trn (or 15% of GDP) in 2020 to reach the target set by the plan.35k.30k. Hence.15k.to high-income countries.10k.20k. Productivity. Demand for automated machinery is driven by two trends in manufacturing: the phasing out of manual labour for repetitive processes with automation and the growing adoption of computer-controlled systems. particularly exporters. published a thematic report in early September titled Asia’s growth story: The next phase – How to spot structural growth stocks.>40k 10k 15k 20k 25k 30k 35k 40k 2011 2002 Source: HSBC. the government is trying to promote the machinery component industry. However. rather than cheap labour. particularly automation. Please see below for an excerpt that’s relevant to China: upgrade machinery. By 2011.30k.25k. For example. It wants to increase the domestic share of medium. In addition. labour costs are rising and firms now need to use workers more productively.>40k 10k 15k 20k 25k 30k 35k product sophistication 40k share in exports 2011 2002 100 80 60 40 20 0 <5k 5k. Chart 8 shows the same data on an accumulated percentage basis. AsiaPacific. 6 June 2012).
there is still room to grow and demand for cars should remain high in the coming years (Chart 9). they create what HSBC’s luxury goods research team led by Erwan Rambourg. Chart 9. These shopping malls. where and how to buy Likewise. Chinese retailers such as Intime and Golden Eagle (an Asia Super Ten portfolio stock) have been busy adjusting to this new terrain. For example. established brands like Louis Vuitton in favour of Coach or Prada. Golden Eagle acquired a food import distributor to ensure that this range of products was available in its stores.Multi-asset China Research 20 September 2012 abc 2. this has involved having to acquire land or retailers in areas where they previously had little exposure. These are known as “flash collections” and offerings are sometime on display for only about a month or so. with consumers moving away from the big. Consumers want a better shopping experience and more brands to choose from. footwear companies roll out regular new collections. Where and how: This is the age of the shopping mall in China. For instance. calls “first-mover disadvantage”. but also means more rush orders and the need for better just-intime inventory management.2009 USA JP UK Ger MY ID IN PH CH SL 100000 KR SG 10000 GNI per Capita (PPP). e. such as consumer credit availability and gaming. In some cases. Product upgrades can also be done in a different way. motorcycles and luxury goods remain low in China. 20 . For example. with playgrounds and F&B outlets. Car sales grow exponentially as income grows 900 800 700 600 500 400 300 200 100 BD 0 1000 Motor Vehicle per 1000 ppl . integrated shopping malls rather than department stores. as are “temporary” collections that increase the exclusivity of a product. What: It is well-documented that the penetration levels of products such as cars. Adidas and Nike have recently started to produce more volume per new product launch. This allows them to create production efficiencies that offset (partially) the rise in wages. they have even acquired suppliers. but have fewer product launches in a year. which are larger than department stores. There are plenty of other products and services that show similar S-curves. are often located outside city centres and cater for the whole family.. Footwear player Belle and fashion company China Lilang say consumers increasingly prefer large. Another trend in China is that department stores are increasingly active in managing the products they sell. Companies such as L’Occitane are spending money on regular store refurbishing to create a sense that product ranges change regularly. As consumers become more sophisticated about buying luxury products.Log Scale Source: World Bank. Boutique stores are becoming more important. This “less is more” approach creates a more focused product offering. At times. HSBC Some of the changes that are taking place are less obvious. This works differently for other consumer companies. This draws more consumers into stores. Emerging middle class: new spending and social habits Consumer dynamics are changing in China as the emerging middle class has developed new habits in terms of what. shoe companies have opted to have more seasonal product adjustments.g.
The industry advantage is its high concentration. A product mix change is also expected to take place. Further. with Internet penetration levels above 40%. comment on new stories (and sometimes. educated and high income). Social media platforms map connections between people (social graph) and between people and things they like (interest graph). An Xiaoqi has 150. This is all valuable data that marketers can exploit for targeted advertising. social media has filled an important void. rumours and speculation). Given the limited availability of licences in Macau. support customers and build brand loyalty HSBC’s telecom and internet analysts Tucker Grinnan and Chi Tsang think growth of social media has become one of the most important developments for China’s Internet sector and China as a whole. the growth of social media in China has grown mostly from “Twitter-like” micro-blogging services.Multi-asset China Research 20 September 2012 abc Social media is the new platform for brands to generate awareness. Kotex is currently running a campaign on Sina Weibo featuring videos using a fictional character named An Xiaoqi who lives in Shanghai to discuss feminine hygiene issues. This watershed event has changed Weibo from a social media to a sociopolitical phenomenon. retweet. In a series of videos entitled. Users tweet. which is unlikely to change soon. because of attractive demographics and levels of engagement: 1) 95% of Internet users living in tier 1-3 cities are registered on a social media site. with few large-scale dominant players. and share photos. Sina is among the first to monetise its Weibo platform. killing 40 people. with mass gaming to represent an estimated 50% of market revenue by 2020.000 followers. Branded companies are already paying for social media advertising in China now. Marketers can identify “what I like” (interest graph) and leverage that with “who I know” (social graph). engage with customers. word of mouth is more trusted by consumers that advertising. it is considered to have the best relations with branded companies as the leading online advertising portal in China. Within minutes the Weibo platform lit up and 26m messages were sent in five days. and demand on the rise. selling ads and working with enterprises to strengthen their social presence. Kotex uses humour and real life situations to raise awareness. We believe the company has the most attractive Weibo users in terms of demographics (tier 1. Gaming a niche growth story Gaming is a booming and distinct sub-sector and Macau leads the market following substantial investments in casinos.2bn. We think Sina is best positioned in China to capitalise on the advertising opportunity from its social media users. HSBC’s gaming analyst Sean Monaghan believes this is positive for profitability. up from 30% in 2011. Finally. and 3) in China. “Stuff Girls Don’t Say”. Social media advertising is hence an increasingly important part of display advertising. The user base has increased by over 10 times in the past two years. From a cultural perspective. one professional and 1-2 social profiles and total accounts number 1. Unlike Facebook in the US. The typical social media user has three social media profiles. Stocks that dominate 21 . We see significant advertising potential from social media in China. 2) the typical consumer spends 47 minutes per day on social networking sites. The best example of the power of Weibo occurred last July when a high-speed train crashed in Wenzhou. which was RMB28bn in 2011 and is estimated be RMB431bn by 2020. often anonymously using pseudonyms. The secret to social media advertising is data. a CAGR of 35%. There are over 250m users on social networks in China.
Chinese banks and insurers also hold large pools of deposits. according to one local When it comes to lifestyle choices. As incomes rise. i. In North Asia. July 2012). so there is potential to create strong demand for local equities. HSBC 22 . Galaxy Entertainment and MGM in Macau. in our view. are in the process of establishing pension and health care systems. there is evidence that a rapid increase in demand for financial instruments – to diversify these household assets – is already taking place. Chart 10. real estate and land. One clear consequence of these pension system changes is that. Health and old-age security A more “capable” labour force will demand better healthcare and better pension plans. The desire for improved work conditions goes hand in hand with changes in lifestyles in urban China.Log Scale Source: World Bank. Securities brokerages. Healthy lifestyles Currently. per capita GDP (USD) Chart 11. China’s pension system is set to grow from RMB7. In China. Across the region. including China. such as equities. This benefits companies that provide medical services. the pool of pension assets is the largest in the region. as institutional assets under management grow. The development of pension systems can act as a catalyst to increase Asia’s appetite for liquid financial investments. However. health is key. Healthcare expenditure grows exponentially 200% 150% 100% 50% 0% 0 Source: HSBC Singapore HK Malay sia Thailand China Indonesia Taiw an Korea India Health Exp per Capita (USD) - 10000 8000 2010 6000 4000 2000 IN PH ID Ger JP USA in '000 5 10 15 20 25 30 35 40 45 50 55 KR SG CH MY 0 TH 1000 10000 100000 GNI per Capita (PPP). as well as banks and insurers that sell mutual funds or savings products can reap the benefits. In turn. so does spending on a healthy lifestyle. demand for health products and insurance against sickness is on the rise.4trn at the end of 2012 to RMB28trn by 2020. healthcare and financial security in old-age become ever larger priorities.Multi-asset China Research 20 September 2012 abc are Sands China. Total pension AUM/GDP vs. These assets tend to be largely illiquid. Pension changes local demand for equities estimate (source: Z-Ben. although this may take years to complete. most Asian countries. we believe BOC HK should benefit from the internationalisation of RMB. In a theme related to household asset diversification. most of the wealth held by Asian households is non-financial. 3. medical equipment (China’s Shandong Weigao and Mindray) or pharmaceutical products – ranging from low-end generic drugs to the development of cutting-edge biosimilars. the market capitalisation of the stock market also tends to grow as a percentage of GDP (Chart 10).e. Healthcare spending typically increases exponentially as income grows (Chart 11). where societies are aging more rapidly.
This is also evident in food products. more expensive dairy products. Longyuan has contracts with high quality customers including the Austrian government. and at what price access to these returns comes. rather than local dairy producers. being a profitable is another. spending habits are also changing. Its exposure to commodity price volatility is limited. We believe stocks that benefit from this trend are companies such as KunLun Energy and China Longyuan Power. KunLun is a key developer of gas pipelines.0 3.Multi-asset China Research 20 September 2012 abc Aside from spending on health insurance and healthcare. Valuation approach The focus on green technology is increasing. The policy target is for natural gas to increase to over 8% of the national fuel mix from 4% during the 12th Five-Year Plan. It is well positioned to benefit from rising volumes. the return that is generated on this capital relative to other investments.0 Source: HSBC Not profitable. Norway’s Ministry of Finance. suggesting that they offer relatively good value (Chart 12). processing and distribution within the PetroChina/CNPC Group. We believe scatter diagrams are a useful way to do this. natural products. may benefit more. such as L’Occitane’s organic brand “Melvita” or Giant’s high-end bicycles. 5.0 1. China Longyuan Power is the largest wind farm developer in China and the fastest-growing globally. Choosing the right valuation metric is the key to identifying value. and 2) they need to offer value. our analyst forecasts Longyuan’s wind capacity at more than 16GW by 2015. any valuation methodology should encompass the level of capital that is employed. Chart 12. List of structural growth stocks Structural growth is one thing. good v alue traps ROE/COE <1 v alue ROE/COE >1 23 .COE). throughput fees and a more lightly regulated clean gas market for vehicles and vessels.0 2. low carbon fuels.0 PB 4. To select China stocks that play to structural themes. For example. we think food retailers such as China’s SunArt. They link PB multiples to excess returns (ROE . In our view. as this is largely absorbed by PetroChina. The stocks that interest us are those that generate excess returns (ROE > COE) while trading below the regression line. we add two criteria: 1) the stocks need to be Overweight rated by HSBC analysts. ex pensiv e Profitable. People want healthy. China is undergoing a policy-driven structural shift towards the adoption of cleaner burning. there are clear signs that people are buying better quality. Due to food security issues. the French state power company and large petroleum companies. Going green… 4.
5x turn hinder the group’s revenue and earnings growth. slower-than-expected growth of IT services could lead to weaker-than-expected margin expansion. forward PE of 21x Based on sum-of-the-part (SOTP) methodology Margin contraction in the natural gas sales and processing businesses. execution risk on regional expansion and wireless. Based on equally weighted Change in government policies.1x FY13e might be more negatively affected than we expect by the slowdown in the region’s economic growth. and lower oil prices. slower-than-expected LNG terminal utilisation ramp-up. Apparel & Luxury Goods Electronic Equipment China Lilang 1234 HK 4.6 (HKD) OW(V) CHINA OW CHINA Multiline Retail Oil & Gas Based on average one-year Continuous worsening of macro economy in Zhejiang. positive if Hengan diversify into FMCG Based on DCF valuation methodology Execution risk in managing store expansion plans. China Longyuan 916 HK Power Daphne 210 HK 5. slowdown in wind farm blend of DCF and ROEapproval. increasing R&D investments for the Sm@rt City projects could put a dent in Digital China’s near-term margin expansion trajectory. such as properties for the new Ma’anshan. a forward PE of 24x property injection of new stores from the sister property company.0 (USD) OW CHINA Sun Art 6808 HK 9. the weakening of of 27x the USD.4 (HKD) 7. steeper-than-expected raw material price increases and new regulatory requirements. Biostime 1112 HK 21. causing margin pressure on the company. eroding the gas business’s compelling economics.4 (HKD) 16. difficulties in further enhancing production efficiencies at its manufacturing facilities. Upside risk could be higher-than-anticipated demand for tissue and napkins in China. Hengan 1044 HK 76.0 (USD) Target Price 157. stronger competition and lower than expected investment. and any macro threat in China affecting watch sales or making investors believe that watch sales are at risk.5 (HKD) OW(V) CHINA Based on target PE multiple Excessive inventory build-ups by its distributors. with a three-year expected earnings growth rate. Apparel & Luxury Goods Electric Utilities Textiles. which could adversely impact consumer IT demand and corporate IT spending. lower pulp prices. Based on average of PE and DCF valuation methodology Risks Macro outlook dampening sentiments.8 (HKD) 11.6 (HKD) OW CHINA Computers & Based on target PE multiple A potential further deceleration in China’s PC demand. Based on DCF valuation methodology A substantial slowdown in the Chinese economy. Lenovo 992 HK 6.0 (HKD) OW CHINA Personal Products Hengdeli 3389 HK 2.Multi-asset China Research 20 September 2012 abc Table 1: Stocks that 1) play to our structural growth themes and 2) are OW rated by HSBC analysts Company Name BBG Code Baidu BIDU US Current Price 112.3 (HKD) 3. which in of 11.7 (HKD) 23. intensifying competition from JVs between foreign players and local players in the lower and mid segments Mindray MR US 34.7 (HKD) 16.3 (HKD) OW(V) CHINA Food & Staples Retailing Textiles.1 (HKD) 6. faster than expected ASP erosion on policy change. significant changes in the government’s technology policy.5 (HKD) 10. Our forecasts are below consensus by a wide margin already. implied PB Based on target PE multiple Inability to sustain its SSS growth and new store openings of 19x 2012e and.0 (HKD) OW(V) CHINA Golden Eagle 3308 HK 15. less of 28x 1-year forward than expected expansion in GPM with execution in new supplier contracts in 2H The most immediate risk is probably substantial earnings downgrades by the market. cost overruns in rolling out natural gas sales and processing businesses.7 (HKD) 19.6 (HKD) 95. financing and CDM risks. which Peripherals of 16. and an inability to contain marketing and headquarter expenses at a 14-15% level.7 (HKD) 6.0 (HKD) OW(V) CHINA Multiline Retail Based on average one-year Worse than expected sales in its Nanjing flagship stores. Health Care Based on average of PE Equipment and DCF valuation methodology Healthcare budget review in developed markets.2 (HKD) OW(V) CHINA Pharmaceutic Based on sum-of-the-part als (SOTP) methodology 24 . Jiangning and Hexi stores Based on target PE multiple Higher-than-expected wood pulp price. which may drive up raw material prices.0 (HKD) 13. Government enforcement of foreign ownership rules Importing all of Biostime’s products creates supply and FX risks. Other risks include worse-than-expected revenue and earnings this year and/or delay in an earnings recovery United Labo 3933 HK 3.0 (HKD) OW CHINA Multiline Retail Based on target PE multiple Potential share placement by cornerstone investors.6 (USD) 35.0 (USD) Rating Market OW(V) CHINA Sector Internet Valuation Methodology Based on PEG.9 (HKD) 9.8 (HKD) OW(V) CHINA Digital China 861 HK 11.2 (HKD) OW(V) CHINA Distributors Intime KunLun Energy 1833 HK 135 HK 8. higherthan-expected rent and staff cost inflation. near-term margin impact from higher expenses incurred on sales channel expansion. grid connectivity issues.1 (HKD) OW(V) CHINA 7.9 (HKD) 11.
Japan. and lower-than-expected income from associates. intensifying competition in the stent market.Multi-asset China Research 20 September 2012 abc Table 1: Stocks that 1) play to our structural growth themes and 2) are OW rated by HSBC analysts Company Name BBG Code BOC HK 2388 HK Current Price 24.9 (HKD) 11. The company’s earnings are sensitive to sales volumes and margins and this could result in lower-thanexpected earnings and a lower valuation. higher labour and raw material costs. 25 . Sh Weigao 1066 HK 9. prices as of 19 September 2012 Under our research model. that could affect our forecast.9 (HKD) Hotels Based on weighted average Generic risks for Macau casino concessionaires include Restaurants of SOTP and DCF unexpected changes in government gaming policy.0 (HKD) Rating Market OW HONG KONG Sector Valuation Methodology Risks Commercial Based on target PB multiple Unfavourable changes to the macro condition and credit Banks of 2x 2013e quality are the key downside risks..1 (HKD) 25. consumer sentiment in key markets (e. high capex required by operating dialysis centres that may take a while before meaningful financial contributions can be achieved. BOCHK is well capitalized and depends on it uses its capital. using Weaker-than-expected economic growth may further weigh 2007-09 mean PEG.9 (USD) OW HONG KONG Hotels Based on average of five Restaurants valuation methods: DCF. Offshore RMB business margin can also be negatively affected by the easing monetary policies in China.0 (HKD) OW(V) HONG KONG Mandarin MAND SP 1. government policy risk on price cuts or restrictions on higher-end consumables that may negatively impact the company’s consumable sales.3 (USD) 62. we rate the stocks Overweight (Overweight (V)). Source: HSBC estimates.0 (HKD) OW(V) HONG KONG OW(V) HONG KONG Specialty Retail Based on variant of Gordon Downside risks include deterioration in macro conditions in Growth Model China. the US and China) and how long the turnaround of Melvita will take.5 (HKD) OW(V) HONG KONG Hotels Based on weighted average Risks to our rating and estimates Generic risks for Macau Restaurants of our SOTP and DCF casino concessionaires include unexpected changes in & Leisure valuations government gaming policy.3 (HKD) Target Price 29. prior to on Sina’s performance. & Leisure one-year forward EV/EBITDA. a major slowdown in the Hong Kong economy and a delay in the launch of MOH’s managed hotels. or economic changes in China that could impair customer visitation and expenditure.3 (HKD) 12. Ch Metal Recycl 773 HK 6. it implied potential returns that were above the Neutral band.0 (USD) OW(V) CHINA Internet PEG methodology. including the forecast dividend yield when indicated. delays in hospital payments and potentially higher accounts receivable. therefore. and market value of leasehold land. PB trading range. Business concentration risk also exists given all of the company’s operations are largely centred in Macau SAR.5 (HKD) OW(V) HONG KONG Sina SINA US 66. Personal Products Based on DCF valuation methodology Key risks include currency (USD depreciating against EUR on the downside). Potential return equals the percentage difference between the current share price and the target price.g. Weibo enthusiasm Sina is also facing competition from rivals such as Tencent.3 (HKD) OW(V) HONG KONG CTF 1929 HK 10. Further weakening of the European economy. peer comparison. Offshore RMB business is a key driver in our forecast but that would be affected by the policymakers’ plan. At the time we set our target prices. government regulation creates uncertainty regarding VIE structure and usage of blogging. for stocks with (without) a volatility indicator. the Neutral band is 10 (5)ppts above and below the hurdle rate for China stocks of 10%.7 (HKD) 53. which would likely hurt jewellery sales. Galaxy 27 HK 25. or & Leisure valuations economic changes in China that can impair customer visitation and expenditure. and worsethan-expected gem-set gross profit margin. L'Occitane 973 HK 20. Health Care Based on average of PE Equipment and DCF valuation methodology Potential government policy changes in terms of licence approvals for dialysis centres that may lead to greater competition and adversely impact Weigao’s dialysis centre expansion plans. Metals & Mining Based on blend of PE and DCF valuation There is a risk that the sector consolidates more slowly than we anticipate and that margins are lower than we forecast.8 (HKD) 35. Melco 6883 HK 34.4 (USD) 1.8 (HKD) 10.
com.hk email@example.com firstname.lastname@example.org email@example.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc.hk firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com kevinzqlian@hsbc. Biostime International China Lilang Limited China Longyuan Power Daphne Digital China Golden Eagle Retail Group Hengan Hengdeli Holdings Ltd Intime Department Store KunLun Energy Lenovo Group Ltd Mindray Medical Internati Sun Art Retail Group United Laboratories Int BOC HK Holdings China Metal Recycling Chow Tai Fook Jewellery G Galaxy Entertainment Grou L''Occitane International Mandarin Oriental Intl Melco Crown Entertainment Shandong Weigao Group Med Sina Source: HSBC estimates BBG code BIDU US 1112 HK 1234 HK 916 HK 210 HK 861 HK 3308 HK 1044 HK 3389 HK 1833 HK 135 HK 992 HK MR US 6808 HK 3933 HK 2388 HK 773 HK 1929 HK 27 HK 973 HK MAND SP 6883 HK 1066 HK SINA US Rating Overweight (V) Overweight (V) Overweight (V) Overweight (V) Overweight (V) Overweight (V) Overweight (V) Overweight Overweight (V) Overweight (V) Overweight Overweight Overweight Overweight Overweight (V) Overweight Overweight (V) Overweight (V) Overweight (V) Overweight (V) Overweight Overweight (V) Overweight (V) Overweight (V) Name Chi Tsang* Catherine Chao* Chris Zee* Jenny Cosgrove* Chris Zee* Carrie Liu* Lina Yan* Walden Shing* Erwan Rambourg* Lina Yan* Kevin Lian* Jenny Lai* Carolyn Poon* Lina Yan* Nam Park* Todd Dunivant* Simon Francis* Lina Yan* Sean Monaghan* Erwan Rambourg* Stephen Wan* Sean Monaghan* Carolyn Poon* Chi Tsang* Telephone +852 2822 2590 +852 2996 6570 +852 2822 2912 +852 2996 6619 +852 2822 2912 +8862 6631 2864 +852 2822 4344 +852 2996 6751 +852 2996 6572 +852 2822 4344 +852 2822 4337 +8862 6631 2860 +852 2996 6586 +852 2822 4344 +852 2996 6591 +852 2996 6599 +852 2996 6620 +852 2822 4344 +65 66580610 +852 2996 6572 +852 2996 6566 +65 66580610 +852 2996 6586 +852 2822 2590 Email firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com firstname.lastname@example.org email@example.com chriscmzee@hsbc.Multi-asset China Research 20 September 2012 abc Table 2: Coverage and analyst contact details Company name Baidu.com.hk firstname.lastname@example.org email@example.com firstname.lastname@example.org waldenshing@hsbc. and is not registered/qualified pursuant to FINRA regulations 26 .com.com.com.com.hk email@example.com Inc.
the nation’s local corporate credit market needs to develop rapidly to offset the deceleration in loan growth. As such. The challenge lies in making sure there is enough to maintain healthy annual GDP growth above 8% without reviving a new round of inflation and inflationary expectations. Growth engine for credit Banks loans have dominated corporate credit for years. With 5 0% New RMB loan New loan/TSF (RHS) 27 . it has coincided with a period of underperformance by China’s stock market. policymakers and regulators in Beijing who oversee the nation’s domestic Fig. 1 Growth dependency on credit expansion 15 RMB (trn) 100% 80% 10 60% 40% 20% 0 12/2002 12/2004 12/2006 12/2008 12/2010 06/2012 TSF TSF/GDP (RHS) Source: CEIC. while at the same time stopping excessive amounts of credit flowing into the property sector and other areas of speculation. which have stretched loan books and large corporate bond holdings Credit challenge for the new leadership We believe one of the big challenges facing China’s new leadership after the 18th Party Congress is improving the flow of credit. but this is starting to change. Since 2009 other forms of financing have increased at the expense of bank loans. The other part of the equation is to ensure that enough money gets to companies that need funding such as SMEs. This is taking place at a time when banks’ capital is stretched thanks to substantial loan growth since Beijing’s large stimulus programme in 2009. more importantly. HSBC Increasing dependence of funding Over the last decade or so China’s growth has become increasingly dependent on funding. 1).Multi-asset China Research 20 September 2012 abc Implications for credit The big challenge is to ensure the supply and efficient distribution of credit to fund growth The local corporate credit market will likely become the growth engine for funding. but genuine credit risk needs to be restored Risks loom for banks. Unfortunately. The domestic corporate credit market is a relatively healthy and. transparent means of credit expansion. more new credit is needed to fund the corresponding rise in production (Fig. banks finding it difficult to raise equity capital in onshore and offshore stock markets. That means for every increase in GDP growth.
HSBC 10% 0% 100 0 07/09 10/09 01/ 10 04/10 07/10 10/10 01/11 AAA AAAAAA+ The market remained calm w hen LDK Solar's problems emerged 04/11 07/ 11 AA+ A 10/11 AA 01/12 04/ 12 07/12 Source: HSBC Too much of a good thing? China’s domestic credit market is booming – spreads are tight and there’s been a surge in bond issues – but we are not sure it is happening for all the right reasons. in turn. we wrote about how a small fibre maker. Fig. 2 Corporate bond YTD issuance hit 94% of the FY11 number 2012. However. rather than the stretched banking system. it is just storing up trouble for the future. 7 March 2012). Earlier this year. which was a record year (Fig. All this is reflected in China’s underperforming equity market. however. 3 Yield spreads China 5-year CP& MTN spreads over Treasury 700 b ps Shandong Helon's near default sent domestic credit spreads to record highs 8 6 4 RMB (trn) 50% 600 40% 30% 20% 500 400 300 200 2 0 FY 2011 Jan-Aug 2012 Corporate bond All bond corporate bond/all bond (RHS) Source: Wind. Fig. A government-backed bailout was arranged in the last minute. issuance of corporate credit by the end of August approached the total for the whole of 2011. is in trouble. for sustainable growth long-term. which have stretched loan books and large corporate bond holdings. means looming risks to banks. For example. As Beijing tries to push up flagging GDP growth. 2). Shandong Helon. Defaults would not be good for sentiment.Multi-asset China Research 20 September 2012 abc bond markets are all keen to expedite the growth of this form of credit. a US-listed Chinese green energy company with bonds maturing in October To explain why this is happening we have to look at the big picture. This is certainly a welcome sign. unnerved domestic credit markets in late 2011 when it almost became the first Chinese company to default on a corporate bond (see Default dynamics. Now. Why? We believe investors are ignoring credit fundamentals because they are expecting another bailout. Our concern is that while this may help companies raise funds and support growth in the short term. policymakers want the corporate bond market. getting credit to where it is needed most. but the potential problem is much larger. The implicit guarantee has resulted in tighter spreads and a slew of new bond issues as companies use this window of opportunity to refinance their maturing debt and extend their maturity profile. This. we believe a genuine credit culture has to be restored to avoid a potential credit bubble down the road. to become the main source of financing. LDK Solar. particularly valuation multiples in the financial sector. The pace of expansion of the domestic corporate credit market has accelerated. This is not surprising as Beijing has instructed local governments and banks not to allow bonds to default. 28 . this time the credit market has hardly blinked. Now something similar is happening.
they have opted to tolerate more risk by holding more corporate bonds. with Beijing’s backing. HSBC As the number of new bond issues rises. there’s little disclosure about the asset allocation of banks’ WMP. Meanwhile. 14 Banks held half of total corporate bonds in June 2012 Securities Trust Cooperativ e 5% Insurance 13% Company 3% Others 9% Comm ercial Bank 46% What LDK Solar tells us We believe LDK Solar provides us with a useful snapshot of a series of related problems debt-laden China’s corporate are facing. providing more funds to local government financing vehicles (LGFVs) for infrastructure projects. with 46% of the outstanding total. commercial banks were the largest holder of corporate bonds. This is also reflected in declining profitability across a large swathe of the state-owned and private sectors as China’s economy struggles to recover. It all started when the government released a large amount of credit into the financial system in 2009. However. Unfortunately. At the same time. With the implicit guarantee from local governments. LDK expanded rapidly just at the wrong time. it appears that banks are not too worried about one or two potential bond defaults. 29 . Some of this money was not invested appropriately – for example. the exposure is even higher. Risk has increased as more issuers with lower ratings join the market. this means banks’ loan books are facing potential asset quality risks. At the end of June 2012. as local governments would not have sufficient fire power to cope. especially during the economic slowdown. including many lower rated credits. Its business started to deteriorate as solar margins collapsed and demand slumped. Fund House 24% Source: CEIC.Multi-asset China Research 20 September 2012 abc Rising corporate bond exposure China’s banks have made a large amount of loans to the country’s corporate sector. but local media reports suggest that banks are raising the exposure to long-term corporate bonds in the search of higher returns in the current low-rate environment. In turn. Besides the risk of a rise in non-performing loans (NPLs). Fig. we believe the risks for the banks will continue to rise. If we take into account the additional amount of corporate bonds banks held via wealth management products (WMP). we believe it could be a completely different story if defaults became a common occurrence. new corporate bond issues have increased recently. banks are also exposed to default risks as a result of the increasing amount of corporate bonds they hold.
Multi-asset China Research 20 September 2012 abc Notes 30 .
Multi-asset China Research 20 September 2012 abc Notes 31 .
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage. Nam Park. 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. ratings should not be used or relied on in isolation as investment advice.hsbcnet. Given these differences.com/research. Zhi Ming Zhang. economist(s). and 2) from time to time to identify short-term investment opportunities that are derived from fundamental. In addition. Carolyn Poon. Erwan Rambourg. The performance horizon is 12 months. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. regional market established by our strategy team. which depend largely on individual circumstances such as the investor's existing holdings. 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. the potential return. and although ratings are subject to ongoing management review. including the forecast dividend yield when indicated. certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was. Lina Yan. Jenny Lai. Kevin Lian. Jenny Louise Cosgrove. which equals the percentage difference between the current share price and the target price. Sean Monaghan and Stephen Wan Important disclosures Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions. expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. change of volatility status or change in price target). investors should carefully read the entire research report and should not infer its contents from the rating. In any case. 32 . risk tolerance and other considerations. is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Steven Sun. Carrie Liu. For a stock to be classified as Overweight. Simon Francis. 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*). Chi Tsang. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.Multi-asset China Research 20 September 2012 abc Disclosure appendix Analyst Certification The following analyst(s). Stocks between these bands are classified as Neutral. Walden Shing. Details of these short-term investment opportunities can be found under the Reports section of this website. Investors should carefully read the definitions of the ratings used in each research report. Todd Dunivant. HSBC has assigned ratings for its long-term investment opportunities as described below. as appropriate. For a stock to be classified as Underweight. Catherine Chao. Hongbin Qu. 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 cost of equity for that stock’s domestic or. because research reports contain more complete information concerning the analysts' views. and/or strategist(s) who is(are) primarily responsible for this report. This report addresses only the long-term investment opportunities of the companies referred to in the report. 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*). Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Notwithstanding this. Chris Zee. quantitative. technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
11 1. as detailed below. stocks which we do not consider volatile may in fact also behave in such a way.70 9. the distribution of all ratings published is as follows: Overweight (Buy) 48% (27% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 38% 14% (26% 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. 5 1.14 6. 6. 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. 7.35 20.72 9. 7 5. BIOSTIME INTERNATIONAL BOC HK HOLDINGS CHINA LILANG LIMITED CHINA LONGYUAN POWER CHINA METAL RECYCLING CHOW TAI FOOK JEWELLERY GROUP DIGITAL CHINA GALAXY ENTERTAINMENT GROU HENGAN INTIME DEPARTMENT STORE KUNLUN ENERGY LENOVO GROUP LTD LOCCITANE INTERNATIONAL MANDARIN ORIENTAL INTL MELCO CROWN ENTERTAINMENT LTD SHANDONG WEIGAO GROUP MED SUN ART RETAIL GROUP UNITED LABORATORIES INT Source: HSBC Ticker BIDU.76 3. 4.HK Recent price 111.com/research. HSBC & Analyst disclosures Disclosure checklist Company BAIDU.HK 2388.hsbcnet. At the time of publication of this report. 7 4.Multi-asset China Research 20 September 2012 abc *A stock will be classified as volatile if its historical volatility has exceeded 40%. A covering analyst/s or a member of his/her household is an officer. 5 4 4 1. 11 4 4 4. is available from www. is a Market Maker in securities issued by this company. At the time of publication of this report.62 6.HK 0027. 5. 5.34 10. 7. however. director or supervisory board member of this company.60 25. 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. 5 1. 6.94 11. A covering analyst/s has received compensation from this company in the past 12 months. 7 6.72 Price Date 19-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 18-Sep-2012 Disclosure 4 1. As of 31 August 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company.HK 0135.HK 6808. 2.07 13.HK 0916.30 24. 5 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. as detailed below. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.00 1. HSBC Securities (USA) Inc. 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. 2. HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company 33 .HK 0861.HK 3933.05 8.HK 0973. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company. volatility has to move 2.HK 1929.HK 0773. As of 31 July 2012.SI 6883. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. 5 2.45 76. However.HK 1044. In order to avoid misleadingly frequent changes in rating.87 5. 11 2. Rating distribution for long-term investment opportunities As of 19 September 2012. 4.HK 1066.5 percentage points past the 40% benchmark in either direction for a stock's status to change. As of 31 July 2012. 6.HK 1234.15 4. 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.OQ 1112. 11 4.HK MOIL.HK 1833.44 34. 11 4 1.96 21.HK 0992. As of 31 July 2012.COM INC.
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Singapore Tarun Bhatnagar Banks Kar Weng Loo Xiushi Cai Commodities Thilan A Wickramasinghe 65 6658 0606 65 6658 0614 65 6658 0621 65 6658 0617 65 6658 0609 852 2822 4870 . Korea Jinil Yoon Paul Choi Banks Kathy Park Sojung Park 822 3706 8750 822 3706 8763 822 3706 8758 822 3706 8755 822 3706 8756 Asia Research Marketing Colin Davis Sunayana Daga Jenny Li Economics Qu Hongbin Frederic Neumann Leif Eskesen Paul Bloxham Donna Kwok Trinh Nguyen Ronald Man Luke Hartigan Sun Junwei Ma Xiaoping Su Sian Lim Izumi Devalier Quantitative Freddie Siu Tom Zhou Fixed Income – Credit Dilip Shahani Zhi Ming Zhang Devendran Mahendran Philip Wickham Keith Chan Louisa Lam Yi Hu Crystal Zhao Linus Fung Alex Zhang Fixed Income – Rates André de Silva. Brands and Retail Karen Choi 822 3706 8781 TMT Brian Sohn So-Yun Shin Howon Rim Ricky Seo Hongsik Jo Insurance Sinyoung Park 822 3706 8765 822 3706 8774 822 3706 8167 822 37068777 822 3706 8774 822 3706 8770 852 2996 6558 852 2996 6557 852 2822 2922 852 2996 6917 852 2822 4337 852 2822 4337 India Jitendra Sriram Head of Research. Global Research Stuart Parkinson Equities Chris Georgs Economics Stephen King Fixed Income Steven Major Currency Strategy David Bloom 44 20 7991 6705 44 20 7991 6781 44 20 7991 6700 44 20 7991 5980 44 20 7991 5969 Climate Change Centre of Excellence Nick Robins 44 20 7991 6778 Korea Industrials Brian Cho Head of Research. Asia Pacific Herald van der Linde 852 2996 6575 Taiwan Technology Jenny Lai Head of Research. Asia Pacific David May 852 2996 6753 Deputy Head of Equity Research. Asia Pacific Dilip Shahani 852 2822 4520 Equities Hong Kong Equity Strategy Garry Evans Herald van der Linde Steven Sun Roger Xie Devendra Joshi Banks Todd Dunivant York Pun Eric Mak Conglomerates & Transportk Mark Webb Parash Jain Shishir Singh Stephen Wan Dandan Yu Rajani Khetan Construction & Engineering Anderson Chow Elaine Lam Carson Ng Walden Shing Zhe Wei Sim Consumer Erwan Rambourg Chris Zee Christopher Leung Lina Yan Catherine Chao Walden Shing Healthcare Nam Park Carolyn Poon Insurance James Garner Michael Chang Grace Zhou Metals & Mining Simon Francis Thomas Zhu Chris Chen Oil & Gas / Chemicals Thomas Hilboldt Dennis Yoo Kevin Lian SI Tingting Real Estate Derek Kwong Michelle Kwok Phillip Zhong Perveen Wong Stanley Cheung Technology Steven Pelayo Telecoms Tucker Grinnan Neale Anderson Chi Tsang Eric Chen Utilities Jenny Cosgrove Gloria Ho Summer Y Y Huang 852 2996 6916 852 2996 6575 852 2822 4298 852 2822 4297 852 2996 6592 852 2996 6599 852 2822 4396 852 2996 6585 852 2996 6574 852 2996 6717 852 2822 4292 852 2996 6566 852 2822 4202 852 3941 0830 852 2996 6669 852 2822 4398 852 2822 4397 852 2996 6751 852 2996 6602 852 2996 6572 852 2822 2912 852 2996 6531 852 2822 4344 852 2996 6570 852 2996 6751 852 2996 6591 852 2996 6586 852 2822 4321 852 2996 6555 852 2822 3053 852 2996 6620 852 2822 4325 852 2822 4277 Consumer Sean Monaghan Permada (Mada) Darmono Real Estate Pratik Burman Ray David Choo Telecoms Luis Hilado Rajesh Raman Transport and Infrastructure Valerie Law 65 6658 0610 65 6658 0613 65 6658 0611 65 6658 0612 65 6658 0607 65 6658 0608 65 6658 0616 Head of Equity Research. CFA Oil & Gas / Chemicals Kumar Manish Puneet Gulati Real Estate Ashutosh Narkar Telecoms Rajiv Sharma 91 22 2268 1224 91 22 2268 1243 91 22 2268 1240 91 22 2268 1638 852 2822 2217 852 2822 4665 852 2822 6569 852 3941 7006 91 22 2268 1778 91 22 2268 1245 91 22 2268 1246 91 22 2268 1079 91 22 2268 1238 91 22 2268 1235 91 22 2268 1474 91 22 2268 1239 852 2996 6565 852 2996 6568 852 2822 1672 Singapore Industrials Neel Sinha Head of Research. CFA Pin-ru Tan Grace Qiu Himanshu Malik FX Strategy Paul Mackel Perry Kojodjojo Dominic Bunning Climate Change Strategy Wai-shin Chan 852 2996 6635 852 2822 4393 852 2822 8245 852 2822 2025 852 2822 4556 65 6658 8962 61 2925 52635 852 2996 6621 852 2996 6975 852 2996 6743 612 9255 2635 86 10 5999 8234 86 10 5999 8232 65 6658 8963 852 2822 1647 Consumer. India 91 22 2268 1271 852 2822 4520 852 2822 4523 852 2822 4521 65 6658 0618 852 2822 4522 852 2822 4527 852 2996 6539 852 2996 6514 852 2822 4687 852 2822 3232 852 2996 6629 852 2996 6918 852 2996 6535 852 2996 6571 852 2996 6590 852 2822 4391 852 2822 4686 852 2996 6716 852 2822 2590 852 2822 3165 852 2996 6619 852 2996 6941 852 2996 6976 Banks Sachin Sheth Tejas Mehta Consumer Amit Sachdeva Healthcare Girish Bakhru Industrials Arun K Singh Rahul Garg IT Services/Autos Yogesh Aggarwal Metals & Mining Jigar Mistry.abc Asia Research Team Asia Research Management Head of Research. Taiwan Yolanda Wang Tse-Yong Yao Joyce Chen Jerry Tsai Carrie Liu Banks Bruce Warden Non-tech Abel Lee 8862 6631 2860 8862 6631 2867 8862 6631 2861 8862 6631 2862 8862 6631 2863 8862 6631 2864 8862 6631 2868 8862 6631 2866 Global Management CEO.
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