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China market strategy

January 14, 2008

1Q08

China & Hong Kong

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Stephen Wang 886.2.2181.8730 stephen.wang@kgi.com.tw Sabrina Lee (Coordinator) 86.21.6125.8674

Midway to the next market peak
Following a 105% increase in 2007, A-shares face more uncertainty in 2008. In 1H08, inflation and government macro tightening measures are areas of concern, while economic growth could come under pressure in 2H08. We expect A-shares to trade in a box range of 5,000-6,000 points this year. In 1Q08, we expect Shanghai Stock Exchange (SSE) to rebound and then to return to a consolidation trend. Renminbi appreciation has accelerated since December and will continue in 1Q08. We forecast robust corporate earnings results for 4Q07 and 2007, on the basis of the record-high net margin of 6.5% in November. However, policy risk will be heightened after Chinese New Year. China’s tourism sector will be the major beneficiary of the 2008 Beijing Olympic Games. Ahead of the commencement of the games in August, we expect the tourism sector will also benefit from positive developments in cross-straits relations in 2Q08. Both of the candidates for Taiwan’s presidential election support stronger direct links with China, especially in the area of Chinese tourism. Although the SSE has fallen 14% from the high of 6,124 points in October, small and medium cap stocks continue to reach new highs. Heavily-weighted sectors like financial and property are being harder hit by macro control measures and risk concerns. Thus, we expect the SSE to trade in a narrow range. The tourism, fertilizer, steel and cement sectors will outperform. Energy conservation concept stocks will also do well on government support measures. Our 1Q08 top picks are Shanghai Int’l Airport (600009.SS), CYTS Tours (600138.SS), Salt Lake Potash (000792.SZ), Shandong Helon (000677.SZ), China Merchants Bank (600036.SS), Jidong Cement (000401.SZ), Huayi Electric (600290.SS) and Wuhan Iron & Steel (600005.SS).

China research team Judith Chen Huei-chen Flannery Angus Lin Shuai Wang Honda Wei Kay Wu Michelle Wei Han Young Zharlen Zhang Mark Chang Nico Zhang Hong Kong research team Mark Go Wilson Chai Mark Leung Vincent Lee Tin Hung Ken Su Timothy Yeung Debby Zhu

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China market strategy

Executive Summary
Despite the implementation of a series of stringent macro control measures, we believe the bull run of China’s stock markets has yet to be derailed. In 2008, we expect Shanghai Stock Exchange (SSE) will hit the midpoint of a long-term bull run which could well reach 8,000 points. While we are concerned about the global economic slowdown and don’t expect China’s economy to grow as strongly in 2008 as in 2006-07, we are confident economic growth will be robust. Downside risk is limited by the renminbi appreciation effect and forecast 10.5% GDP growth this year. Our 2008 target range for the SSE is 5,000-6,000 points, particularly in 1H08. We also don’t expect stringent macro control policies to ease up, provided consumer prices, capital investment and loan growth stay high. Small and medium cap stocks will likely outperform the broader market. We recommend sectors with domestic market exposure, strong assets and government support.

Structural uncertainties to come
In addition to the possibility of further macro tightening after the NPC/CPPCC conferences in March, structural change in the securities markets is another risk factor. The specific developments are: (1) the potential opening of a futures market in 2Q08, resulting in equities market volatility in the early stages and downward pressure on heavily weighted stocks; and (2) the release of an estimated 81.2bn previously restricted shares, mainly in 3Q08. This compares to 56.2bn shares released in 2007. However, as many large cap financial, telecom and state-owned energy IPOs occurred in 2007, the impact of share release in 2008 will be less marked. The 2Q-3Q08 period will see the most share issue activity, though it is likely the market will discount any concerns in advance.

Consolidation around 5,000-6,000 points for SSE
We believe the SSE’s decline to the 4,800-5,000 point range due to a glut of negative news in 4Q07 is the bottom for the market. Improving sentiment, abundant liquidity and solid corporate earnings will see a return of investor confidence. Moreover, market PE has fallen to 30-35x (2008) from 40-50x (2007). We expect SSE to hit 6,000 points once again, and then return to a trading range of 5,000-6,000 in 1Q08. Our rationale is based on stabilization and consolidation as the key elements of economic policy, especially given concerns about inflation and economic overheating. In 1H08, the SSE is likely to see box-range consolidation.

1Q08 – Positive & negative factors at play
Historically, stocks perform well in the 1Q, aided by the January effect and the Chinese New Year holidays. In 1Q08, we expect two factors to have a positive effect on the market: (1) increased liquidity; and (2) the prospect of improved cross-straits interaction. Regarding the cross-straits factor, the presidential candidates of both Taiwan’s political parties – the ruling DPP and opposition KMT – have pledged to ease restrictions on cross-straits relations. Ying-jeou Ma of the KMT has said, for example, that he would allow Chinese tourists to visit Taiwan within a month of being elected president. However, the National People’s Congress (NPC) and National Committee of the Chinese People’s Political Consultative Conference (CPPCC) meetings are also taking place in March. While these meetings will likely act as a stabilizer of the stock market, they could be a turning point. This is because certain economic figures continue to cross the red line of policy makers, which will prompt further macro tightening after Chinese New Year.

Assumptions & top picks
Our 2008 investment assumptions are: (1) continued renminbi appreciation; (2) forecast 10% GDP growth; (3) realization of cross-straits interaction; (4) box-range consolidation of stock markets; and (5) outperformance of small and medium cap stocks. Companies with domestic market exposure, especially the tourism market, and with good assets are recommended. We also like sectors that enjoy government support such as the energy conservation concept sector. Our top picks are Shanghai Int’l Airport (600009.SS, Rmb38.3, OP), CYTS Tours (600138.SS, Rmb35.53, OP), Salt Lake Potash (000792.SZ, Rmb86.1, OP), Shandong Helon (000677.SZ, Rmb25.55, OP), China Merchants Bank (600036.SS, Rmb39.07, OP), Jidong Cement (000401.SZ, Rmb25.15, OP), Huayi Electric (600290.SS, Rmb40.81, OP) and Wuhan Iron & Steel (600005.SS, Rmb20.76, OP).

Renminbi appreciation will support a bullish trend
We expect the investment environment in China will have become uncertain by 1H08, due primarily to government macro control measures. We don’t think a strong stock market rally will be possible in 1H08. However, renminbi appreciation is a potential positive, as the historical record shows that assets and currencies move in the same direction. We forecast renminbi appreciation of 10-15% in 2008-09. Thus, together with strong corporate earnings, reasonable share valuations and a pullback in the SSE to around 5,000 points, we believe stocks have limited downside. Based on Taiwan’s experience in 1986-90, as long as the renminbi continues appreciating, equities will remain in a bullish trend. In our view, we are now at the halfway point to the next market peak, which we think will reach 8,000 points for the SSE.

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Table of Contents
Page China market strategy Midway to the next market peak Our top picks Summary of top picks Jidong Cement (000401.SZ/000401 CH): Capacity to double Shandong Helon (000677.SZ/000677 CH): Special fibre to fuel earnings growth Salt Lake Potash (000792.SZ/000792 CH): Rising potassium chloride prices a boon Wuhan Steel (600005.SS/600005 CH): Capacity expansion & product mix upgrade Shanghai Int'l Airport (600009.SS/600009 CH): Good long-term value China Merchants Bank (600036.SS/600036 CH): Top pick in the banking sector CYTS (600138.SS/600138 CH): Biggest tour operator in northern China Huayi Electric (600290.SS/600290 CH): Long-term growth assured by wind field projects Sectors Sector summary & valuation Auto sector: Further growth in passenger vehicles in 2008 Chemicals sector: Rising oil prices & new energy policy a catalyst Viscose fibre sector: Complete product chain & differential products are key Wind power equipment sector: Goldwind IPO has triggered sector re-rating Coal sector: Earnings to surge in 2008 on rising coal prices Steel sector: Cyclical upturn continues, valuations attractive Cement sector: Balanced supply & demand in 2008 Property sector: More control measures in store in 2008 Power sector: Electricity price hikes possible amidst sector recovery Airport sector: Outlook strong in 1Q08 Shipping sector: Bulk shipping peaking; container shipping prices rising Port sector: Throughput growth will continue to slow in 2008 Tourism sector: Good prospects in 1Q08 Technology sector: A mixed bag Food & beverage sector: Pricing ability is key to success Banking sector: Clouds clearing Stock market Cash calls and cash supply Portfolio weightings China maroeconomy Positive internal conditions little affected by external weakness Appendices Summary of US economic indicators Summary of China economic indicators Market valuation Sectoral performance Stock performance – China Stock screens – China value stocks Stock screen – China growth stocks Stock screens – China short stocks Stock screens – A, B & H-share price discount Changes to earnings estimates Changes to investment ratings KGI universe valuation table (China) KGI universe valuation table (Hong Kong) 4 10 11 13 15 17 19 21 23 25 27 29 31 35 36 38 40 42 44 46 47 49 50 51 53 55 57 59 60 61 66 67 68 70 72 73 74 75 76 79 81 82 86

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Strategy No sign of downturn
The main argument of our 2008 investment strategy is that we are now at the midway point to the next market peak. This means that the SSE is likely to consolidate in 2008, which will ease concerns about overheating and new share supply. We have a strong positive view on the long-term prospects of the SSE as no signs have emerged of a market downturn. As the ongoing rally is driven by currency appreciation and high economic growth, the three key determinants of stock market trends are money supply, the inter-bank rate and the foreign exchange rate. Money supply M1 growth falling below M2 growth (the so-called ‘dead-cross’) is a warning sign. In Taiwan in the 1986-90 period, M1 growth fell below that of M2 in 2Q89. The Taiex peaked six months later. However, we don’t expect to see the monetary ‘dead-cross’ occur in China in 2008. Though money supply growth will slow as a result of tightened credit controls, the trade surplus and inflow of hot money will keep both M1 and M2 growth at doubt-digit rates this year. Figure 1: Taiex vs. M1 growth vs. M2 growth in 1986-90
Taiex, points (LHS); M1 & M2 change, percent (RHS)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Taiex M1 M2
Money supply 'dead cross'

sharply, say by three or four times normal level, investors should exercise considerable caution. Again, we can easily find evidence from Taiwan’s experience. The inter-bank rate hit a record high in Taiwan in late 1989, surging from 2-3% to 6-12%, followed soon after by a plunge in the Taiex. Even before this surge, the average inter-bank rate was already high, which should have served as a warning to investors. The correlation between the SSE and the inter-bank rate is also quite strong. The SSE dropped from the 6,142-point level in October 2007 after the inter-bank rate rose to a new high in September. However, China’s inter-bank rate is still low at 2-3%, suggesting banking system liquidity is not a cause for concern. Figure 3: Taiex vs. inter-bank rate in 1986-90
Taiex, points (LHS); inter-bank rate, percent (RHS)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Taiex Inter-bank rate
Liquidity got tighter from 1989

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Sources: TEJ; KGI Securities

Figure 4: SSE index vs. inter-bank rate in 2005-07
60 50 40 30 20 10 0 (10) (20)

SSE index, points (LHS); inter-bank rate, percent (RHS)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan-05 Jun-05 SSE Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Inter-bank rate 3.5 3.0 2.5 2.0 1.5 1.0 Dec-07

Sources: TEJ; KGI Securities

Figure 2: China M1 growth vs. M2 growth in 2005-08F
M1 & M2 change, percent
26 23 20 17 14 11 8 5 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 M2 Jul-07 Dec-07 May-08 Oct-08 M1

Sources: Wind Information; KGI Securities

Foreign exchange rate The foreign exchange rate fuels stock market momentum. Provided there is a healthy trade surplus and an expectation currency appreciation will continue, stocks will be driven upward. In Taiwan in late 1989, the trade surplus shrank sharply after the NT dollar appreciated 35% and the expectation of further appreciation disappeared. This explains the steep decline in money stock, or M2 money supply, from 2H89. In China, we expect the trade surplus will stay at a high level despite the US economic slowdown. Exports to Europe and emerging markets will continue to be strong. Also, further renminbi appreciation is virtually assured. The currency has appreciated only 11% since deregulation. All told, China’s money stock will continue to grow in 2008, ensuring a robust stock market.

Sources: Wind Information; KGI Securities

Inter-bank rate The inter-bank rate is a useful indicator as it is the liquidity thermometer of the stock market. If the inter-bank rate increases

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January 14, 2008

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0 7.6% in 3Q07. However.4% YoY.000 6.6 5. M2 change.3) (22. KGI Securities Institutional portal: http://research. percent (RHS) 50 40 30 20 10 0 4Q06 GDP change 1Q07 2Q07 3Q07 4Q07F Investor confidence index change 12. only slightly lower than the 10.0 11. points (LHS).3) (21.000 10.8) (10.8) Taiwan (14.0 6. Also. points (LHS).000 2. percent 45 40 35 30 25 20 15 10 5 0 Banking Energy Food Power Property Steel Sources: Wind Information. Thus. percent 6. the SSE’s decline points to a clear divergence from company fundamentals. 2008F Earnings growth of China’s business sectors.000 0 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 M2 SSE 25 20 15 10 5 0 In 4Q07. and (2) the easing of overheating concerns. percent (RHS) 7.3) Sources: Wind Information.0 9.kgi.000 6. weakened investor confidence and the poor market performance have engendered two positive factors: (1) the SSE has discounted potential economic slowdown as a result of macro controls. we have a neutral to positive view of the investment environment. After hitting a new high 6. corporate net margin hit a new high of 6.0 10.2 6.2 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Sources: TEJ. M2 change Taiex.000 0 Jan-86 Aug-86 Mar-87 M2 Oct-87 May-88 Dec-88 Jul-89 Feb-90 Sep-90 Taiex 30 25 20 15 10 5 0 Figure 9: Corporate net margin hit a new high in November Net margin of Chinese corporations. KGI Securities Figure 6: SSE index vs.3) Korea (1.000 3.000 4. 2008 5 .0 2007F 2008F Sources: KGI Securities Sources: Wind Information.4 6.0) UK (0. Figure 7: China’s stock market underperformed in 4Q07 4Q07 change.000 5. GDP YoY.4 5.000 12. the SSE then dropped as much as 22%. KGI Securities Sources: Wind Information. KGI Securities SSE hit bottom in 4Q07 In 1Q08. monetary policy and the property sector.800-5. However.000 8.5) (11.000 points in 4Q07. China’s stock market was one of the worst performers globally in 4Q07.0 8. Market turnover fell more than 50% in late 4Q07 from peak.com January 14.China & Hong Kong China market strategy Figure 5: Taiex vs.4) (16.8 5.8% in December. percent (RHS) 14.000 2.000 1.9) US (2. We believe the liquidity and corporate earnings outlook is healthy and that the SSE hit bottom at 4.5%. Figure 10: Earnings growth by sector.6 6. percent (LHS). 2007F vs. M2 change. KGI Securities Figure 8: China investor confidence hit 9-month low in December Change of investor confidence index.124 points in October. compared to 44. Figure 8 shows that investor confidence hit a 9-month low of 35. in November. M2 change SSE index. the government introduced a series of control measures tightening regulations on lending.000 4. we estimate 4Q07 GDP growth of 10.0 5. percent QoQ (%) High-low differential (%) SSE (6.3% in September.

08) (0.09) (0.6 10. percent (LHS).9 10. For companies in the KGI universe.04) (0. of capital investment and of property prices. Thus. However. This indicates that capital inflow has speeded up.4 11. We forecast the CPI will again rise around 6% in 1H08. Thus. Given that.3 1. US dollar since December Renminbi appreciation vs. We expect China’s central bank. the renminbi saw its biggest monthly appreciation against the US dollar in 2007. China’s stock market also tends to outperform in 1Q.9 7. we can deduce that there is a 100% probability the Taiex will rise in January 2008. an SSE index PE of 30-40x is reasonable China GDP growth.1 to Rmb7.7 2004-05 2005-06 1999-2000 2000-01 2001-02 2002-03 2003-04 Sources: TEJ. 1Q peak season for stocks 1Q is the peak season for the Taiex. of lending growth. looser liquidity control will be necessary.kgi.3/US$1. to move to aggressively absorb excess liquidity to stave off inflation pressure. particularly if the latest economic figures do not point to an easing of consumer prices. All told. Because we don’t expect the economic numbers to indicate an easing of conditions in 1H08.000-point level represents the bottom for the SSE.07) (0. we have not added such non-reoccurring earnings into our 2008 model.com January 14. We also believe the 4. a new high.2 11. the banking and property sectors.6 11. Aside from recovery from the bearish 4Q07. In December. The SSE rose every January/February in 2002-07. We expect policy makers at the two conferences will request further macro controls be implemented. The SSE’s higher PE is justified by expected double-digit economic and corporate earnings growth in 2008 and abundant liquidity. we are cautious about the post-Chinese New Year outlook. KGI Securities Figure 14: Renminbi higher vs. Higher earnings growth in 2007 can be partly attributed to asset injection.6 5. We believe a PE of 30-40x is reasonable this year. Rmb 0.2 12. we can conclude that China’s banking system is in a state of high liquidity.01) (0. 25% earnings growth is a healthy figure. The correction in 4Q07 will help ease overheating concerns and strengthen long-term momentum. x (RHS) 11. Thus. we have a neutral to positive view of the 1Q08 investment outlook. US dollar. policy making will be a big risk factor in late 1Q08.2 10.10) (0.8 10. lower than the 40% in 2007.05) (0.0 2006 GDP growth 2007F 2008F SSE index PE ratio 70 65 60 55 50 45 40 35 30 Figure 12: January is a strong month for the Taiex Taiex December-January performance. 2008 6 .03) (0.02) (0. The outcome of the March conferences of the NPC and CPPCC will also be important. percent 32.11) Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Sources: People’s Bank of China Policy making a big risk factor in late 1Q08 However. SSE trend Jan-Feb March April 2001 ↓ ↑ ↑ 2002 ↑ → → 2003 ↑ → ↑ 2004 ↑ → ↓ 2005 ↑ ↓ ↓ 2006 ↑ → ↑ 2007 ↑ → ↑ 2008F ↑ ↓ ↓ Sources: Wind Information.China & Hong Kong China market strategy Figure 11: Given forecast GDP growth of 10.06) (0. both targets of more stringent regulation. the SSE has stayed flat. from 46x in 2007 and 64x in 2006. market valuation has become attractive since the 4Q07 correction. Before and during previous NPC and CPPCC sessions. SSE index PE ratio. There is further evidence to suggest loose liquidity in the beginning of 1Q08. We forecast SSE PE will fall to around 34x in 2008. and we are confident it will rise again this year. More importantly. the longer Chinese New Year holidays this year will give an added boost. will realize higher earnings growth of 30%. we forecast 2008 earnings growth of 25%. From Figure 12. This is due to strong domestic demand and the government’s ‘shareholder encouragement plan’ to boost the earnings growth of state-run companies.0 10.800-5.00 (0. the People’s Bank of China (PBOC). KGI Securities Sources: KGI Securities Figure 13: Beginning of 1Q is a good time for the SSE index Valuations become attractive We expect earnings growth to slow in 2008.5% in 2008. rising Rmb0.4 10.5 2. Institutional portal: http://research. good corporate earnings and attractive valuations.

and more specifically 1H08. As long as there is an expectation renminbi appreciation will continue. ‘000 1. in 2008-09. The NT dollar started rising from 1986. Figure 15: Recent polls on Taiwan’s 2008 presidential election Poll of electoral support for KMT & DPP. historical. compared to the millions that go to Hong Kong every year.000 4. Both candidates have run on similar China policies that call for the opening up of relations.A. Ying-jeou Ma. and allow renminbi exchange in Taiwan Open (3. he would open up Taiwan to Chinese tourists within one month. points (RHS) 40 36 32 28 24 20 Jan-86 Aug-86 Mar-87 Oct-87 May-88 Dec-88 Jul-89 Feb-90 Taiex Sep-90 NT dollar/US dollar 14. ERA Figure 16: Comparison – DPP vs.000 10.000 points. Moreover.000 8. Thus. During the 1986-90 period.000 2. KGI Securities Midway to the next market peak Liquidity is not an issue for China’s stock markets. the Taiex posted a huge rally that took it from 1.kgi. After appreciating 6% in 2007.000 6. is just the midway point to the next market high. Although uncertainty is increasing as the election approaches. the long-awaited cross-straits rapprochement cannot now be avoided and will materialize after May 20. and 1. 2008.600 1. geographical. when the NT dollar appreciated another 15% and the Taiex surged to 12.A. Judging by Taiwan’s experience. In our view. NT$ (LHS). Only about 400k Chinese tourists have visited Taiwan in the past two years. KMT cross-straits policies Policy Direct flights Inbound Chinese capital Outbound capital to China Financial sector investment in China Chinese tourists Chinese immigration Long-term goals Sources: KGI Securities KMT Open Open Remove 40% ceiling DPP Starting with charter flights only Conditionally open Conditionally remove 40% ceiling N. KGI Securities Signing of peace agreement and N. The second turning point came in 1988-89. TVBS.China & Hong Kong China market strategy Thawing of cross-straits relations Better cross-straits relations can be expected in 1Q08. Institutional portal: http://research. there were three turning points. has around 48% support.4mn in 2009.com January 14. and was accompanied by a surging stock market and property market through 1990 (see Figure 18). In the same year. we expect the renminbi to gain another 10-15%. For these reasons. NT dollar in 1986-90 NT dollar/US dollar exchange rate.500 points to 8. given its close political. … are a huge boost to the tourism industry The KMT’s Ying-jeou Ma said in December last year that if elected. 2008 7 . Polls indicate the opposition KMT candidate for the presidential election in March. The third turning point was late 1989 when the NT dollar was stabilizing around NT$25-26/US$1 and the Taiex began a precipitous downturn (from 1990). an improvement of cross-straits interaction is assured regardless of who wins.200 1. capital will continue to flow in and push stocks up. Other factors are the 2008 Beijing Olympic Games and renminbi appreciation. Open. there is no reason to be bearish on the SSE.000 tourists per day in Conditionally open early stages) Open (except for Chinese laborers) Open for certain qualified persons only Sources: TEJ.000 0 KMT DPP Sources: China Times. the SSE’s bull run has a long way still to go. We believe Taiwan has more tourism potential for the Chinese than Hong Kong. the inauguration date of the new president.000 12. and given that the expectation of renminbi appreciation is still high. China’s higher interest rates and economic growth rate are attracting hot money. cultural and social ties to China. Figure 18: Taiex vs. more cross-straits interaction will be a huge.400 1.000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F Sources: Taiwan Immigration Office. long-term boost to both China’s and Taiwan’s tourism sectors. Taiex. at least. United Daily News. Thus. The first was in 1987 when the NT dollar appreciated a steep 20% against the US dollar. percent 60 50 40 30 20 10 0 China Times United Daily News TVBS ERA Figure 17: Chinese tourists to Taiwan to surge in 2009 Chinese tourists to Taiwan. compared to the ruling DPP candidate Frank Hsieh’s 23%. We estimate 650k Chinese tourists will visit Taiwan in 2008.000 points. build-up of a common market It is worth again looking at the Taiwan experience to predict the future course of China’s stock markets.

We believe the 12-month moving average is a good long-term indicator of market performance.000 8. and we can see from Figure 22 it is also supportive of the index. 12-month moving average in 1986-90 Taiex & 12-month moving average. We forecast a further 10-15% renminbi appreciation in 2008-09. In other words.000-point target for the SSE. Sources: Wind Information. KGI Securities Figure 20: SSE index only midway to next peak Taiex & SSE index. the 12-month moving average became the key support level of the Taiex during its bullish phase. A trading range of 5.com January 14. KGI Securities Figure 22: SSE index vs.000 10.000 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 SSE index With inflation under control With macro controls Jan-08 Jul-08 Jan-09 Jul-09 12-month moving average Sources: Wind Information. 2008 8 .000 1. these factors can also be seen as negative.000 0 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Taiex 12-month moving average SSE index Sources: Wind Information.000 0 Conclusion 1Q08 is a good long-term buying opportunity We believe our 1Q08 top picks represent an excellent long-term buying opportunity.000 12.000 3.000 0 Jan-86 Aug-86 Mar-87 Taiex Oct-87 May-88 Dec-88 Jul-89 Feb-90 Sep-90 stabilization/consolidation requirements of policy makers.7 7. we can see the Taiex did not fall below its 12-month moving average in 1985-89. while we have been referring to Taiwan as a gauge of what may happen in China.000 7. though Taiex momentum is stronger.000 5. However.000 2. Thus.000 7. It is instructive to now analyse the SSE in relation to its 12-month moving average.kgi. we expect economic conditions in China will continue to cross the red line of policy makers.000 6. the power of intervention in the stock market of the Chinese government is much more extensive than that of the Taiwan government. we forecast increased risk in 1Q08 and 1H08.6 8.000 2. Namely. it is likely that the ongoing bull run of the SSE will be smoother than the Taiex’s was but that the SSE peak will be lower. Thus. points 14.000 10.000 3. SSE volatility is less marked than that of the Taiex.0 7.000 2.000 4. In 1H08.000 8. points 8. SSE index. KGI Securities The renminbi has appreciated only 11% since 2005. Institutional portal: http://research. while we have argued that liquidity and strong corporate earnings growth will support the SSE and that government intervention will serve to stabilize the market.3 8. points (LHS) 8. we note that there is one key difference between the two countries.000 4.000-6. Figure 21: Taiex vs.000 12. In fact.000 points is the most likely outcome for the SSE in 1H08.000 2. We therefore have an 8. This makes us optimistic about the long-term performance of Chinese stocks. In Figure 21. 12-month moving average in 2005-07 SSE index & 12-month moving average.000 6. renminbi appreciation is likely to speed up. Rmb (LHS).000 6.000 5. Thus.1 6.000 1.5 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Renminbi/US dollar SSE index 8.000 6. and there is abundant pressure for it to appreciate further.000 4. However. which would incidentally satisfy the Sources: Wind Information.000 4. points 14. both externally and internally.4 7. KGI Securities Technical analysis – Index performance & the 12-month moving average For a technical analysis.China & Hong Kong China market strategy Figure 19: Renminbi still appreciating Renminbi/US dollar exchange rate. it is worth again referring to Taiwan.8 6.

China & Hong Kong China market strategy Our 1Q08 investment strategy is summarized below: 1. Institutional portal: http://research. 6. and Renminbi appreciation remains the major driver of the SSE. Tighter macro controls may push the SSE down in late 1Q08/beginning 2Q08 to test the 5. Companies with exposure to the domestic market and sectors with government support will outperform.000-point support level. 2008 9 . 2.000 points would satisfy the stabilization demands of policy makers.kgi. 5. A trading range of 5. SSE downside is limited as its supportive 12-month moving average is climbing toward the 5.com January 14. 1Q08/1H08 is a good long-term buying opportunity for Chinese stocks. 1Q08/1H08 is the midway point to the next market peak.000-6. 3.000-point mark. 4.

Our 12M target price is Rmb110.00 15. and 2009.50.SZ Outperform Nico Zhang 86.China & Hong Kong China market strategy Our Top Picks Figure 23: Our top picks Company Jidong Cement Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Shandong Helon Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Salt Lake Potash Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Wuhan Steel Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Shanghai Int’l Airport Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) China Merchants Bank Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) CYTS Tours Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Huayi Electric Rating Analyst Share price (Rmb) 12M target price Upside/downside (%) Source: KGI Securities Valuation 000401. We expect demand growth to continue into 2008.4 600290.20 8.68. resource oligopoly. Passenger/cargo throughput at Pudong Airport rose steadily in 2007.41.62. 2008.SZ Outperform Han Yang 25.53 41. Outperform rating maintained. shipments of over 300 units in 2008 and the launch of 1. we expect stronger growth for the firm. The firm plans to raise differential staple fibre's weighting to around 60% in 2008 to improve profitability.We derive a 12M target price of Rmb30 based on 30x our 2008 EPS forecast. the firm can fully supply itself with cotton pulp. 2008 10 . Likely direct flights and tourism in the wake of the 2008 presidential election in Taiwan hint at growth prospects for Shanghai Airport. which has gross margin 2-18 ppts higher than average viscose staple fibre.SS Outperform Huei-Chen Flannery 38.5 Rationale The firm will increase capacity in the coming years -. Outperform rating retained. 2008. and 2009. alleviating tight capacity. Capacity will expand steadily over the next few years while product mix migrates toward the high end. also the firm has maintained good cost controls despite continued expansion. Rmb0. The new runway and terminal will be operational in March. given its solid R&D capability and long-term cooperation with Xinjiang Goldwind. Considering the firm's flexible business mode and sales network. China Merchants Bank is the most attractive Chinese bank in terms of solid fundamentals.6 600009.SS Outperform Huei-Chen Flannery 35.55 30.2 based on 40x our 2008 EPS forecast.kgi.8 600005. sales looks set to grow steadily. Outperform rating maintained. If Taiwan lifts its ban on mainland visitors after the March election.15 27. Considering the firm's geographical advantage. for CAGR of over 9% in 2008-10. Considering the good growth prospects. driving sales growth.81 50. Potassium fertilizer prices should continue rising in 2008 on robust global demand. The firm enjoys solid brand recognition in the tourism service sector. we have set a 12M target price of Rmb50. With an integrated production chain. 2008.70 22. Wind power has become the mainstream among renewable energy technologies. Outperform rating maintained.10 110. We believe the best buying timing has emerged given the recent correction among peers.00 27.1 600138. We estimate EPS of Rmb0. Rmb0. The vast northern part of China where the firm is based should continue to display robust demand. and given that its solid consumer banking segment is less sensitive to government macro cooling policies. and high marine freight rates.20 16.SS Outperform Honda Wei 40. China National Materials Group has announced plans to invest no less than Rmb13bn over the next three years to expand cement capacity to 130mn mt by 2010. the firm should benefit from increasing outbound travel as a result of renminbi appreciation.11.98. Buttressed by demand from the Beijing 2008 Olympic Games and growing domestic tourism.30 41. Institutional portal: http://research. and Rmb4.current clinker and cement capacity stands at 15mn mt/24. in turn claiming sectoral leadership. We forecast cement demand from Northern China to grow to 350mn mt in 2010. Since acquiring a controlling stake. Outperform rating maintained. we have set our 12M target price at Rmb27. and Rmb1. which boosts bottom line and mitigates price hike risks.2 000667.4 000792.00 22.5MW wind turbine scheduled for early 2008.20 for 2007. and 2009.0 600036.07 47. CMB has been the most defensive play among Chinese banks and continues to display upside potential in the bullish market. The firm enjoys sector leadership in differential fibre. Salt Lake Potash enjoys premium profits and substantial sales growth on price hikes and flattish costs. Also.39 for 2007.00 for 2007.SS Outperform Ken Su 39. We estimate EPS of Rmb0. We are positive on the firm's wind power equipment development.SS Outperform Michael Wang 20. Outperform rating maintained. We estimate EPS of Rmb1. and Rmb1.40mn mt.com January 14. Outperform rating maintained. As the local sector leader. Rmb3.00 17.00 7. we remain upbeat about its secular growth potential.76 24. We expect forthcoming asset injections to catalyze share performance. CMB has a 10% stake in Taizhou Commercial Bank and recently won approval to set up a New York branch.SZ Outperform Nico Zhang 25.

northeastern and northwestern China to grow 9. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The percentile of excess return (%) Dividend yield-12/07E (%) L 25.894 3.9 Balance Sheet Book value/shr-12/07E (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 2. Jidong Cement had annual clinker capacity of 15mn metric tons (mt) and cement capacity of 24.kgi. price performance relative to SZEA.2. Liaoning. performance (3. Given Jidong Cement’s rapid capacity expansion and strong demand outlook in its home base of northern China.0 24.8 15.68 in 2008 and Rmb1.12M) (%) Rel.2 24.68 1.41 in 2007. percent (RHS) 28.8 124. Jilin.213 EV/Inv.6125.2. 2008 Institutional portal: http://research.8 62. As of the end of 2007.41 0.21.9 25. While 70mn mt of outdated capacity will be shut down each year in northern China in 2007-10. Existing and planned future capacity spans Hebei.8 Gross Profit (Rmb mn) 671 1.6 53. KGI Securities estimates May-07 Jul-07 Aug-07 Oct-07 Nov-07 90 80 70 60 50 40 30 20 10 0 (10) Jan-08 Price performance relative to SZEA Institutional portal: http://research.15 27. we expect cement demand in northern. Promising outlook – Outperform rating maintained We forecast EPS of Rmb0. Return Price as of Jan. Sinoma (unlisted).8 22.com January 14.8 Trading 52-week trading range (Rmb) Mkt cap-Rmb$ bn/US$ mn Outstanding shares (mn) Free floating shares (%) The largest shareholder (%) 3M avg.2 Net Income (Rmb mn) 201 391 827 1.0 4.20 8.0 in 2009.8 2.2 18. Jidong Cement share price chart Share price.0% annually in the next three years to reach 350mn mt by 2010. focused on the Bohai Sea coastal area and northeastern and western China.1 6.5mn mt and 52. yielding a target price of Rmb27.A. C.1 3.0 12.0 8.0 16.0 31. As a result. has said it will invest Rmb13bn over three years to increase the company‘s annual cement capacity to 130mn mt by 2010.6 EPS (Rmb) 0.SZ/000401 CH) January 14.932 P/E (X) 17. 2008 11 .7 21.4 EBITDA (Rmb mn) 620 871 1.6 Strong demand in northern China Jidong Cement has annual cement capacity of 279mn mt in its home base of northern China. Jidong Cement is the leading cement enterprise in northern China.999 EV/Sales (X) 2. daily trading (mn) Abs.Jidong Cement (000401.12M) (%) N 5 .721 2.com Cement China Outperform Maintained 1 2 3 1 2 3 Stephen Wang 886. Jidong Cement had annual clinker capacity of 15mn metric tons (mt) and cement capacity of 24.5 EBIT (Rmb mn) 288 519 959 1. 34.21 0. Outperform. 80 Company Description O Headquartered in Hebei Province. among other provinces and regions of northern China. 406 22.kgi.2181.2 17. Shaanxi and Xinjiang.2 68. (X) 1. 6 20.985 5. Existing and planned future clinker and cement capacity amount to 34. Rmb (LHS).418 EV/EBITDA (X) 10.3 32. we have a 2008 target PE of 40x.com.tw Han Yang (Coordinator) 86. Inner Mongolia.2/3.6. Shanxi. Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A 2007F 2008F 2009F Sales (Rmb mn) 2.4mn mt.wang@kgi.0 Jan-07 Feb-07 Apr-07 Share price Source: Company data.9 2.862 7.9 8.402 1. to become Jidong Cement’s top shareholder.104 963 515 N. performance (3.5mn mt per year. a number of national development projects will commence. 92.0 36.8730 stephen.4mn mt. respectively. 7.6.00 ROAE (%) 8.25.037 1.3 3.458 EV/EBIT (X) 21.8679 Capacity to double Sinoma the top shareholder.0 20. Rmb0.9 15.9 5. capacity to double by 2010 As of the end of 2007.0 0.

960 0.582 4.6% 2006A 65.1 5.87 4.98 6.5 93.393 2.418 (124) 103 226 30 240 1.0 Cash x = Tax Rate 85.35 0.497 233 2.0% 13.720 260 1.603 456 413 431 303 4.319 1.3% 11.375 963 773 640 2007F 8.68 2009F 7.6 0.83 0.9 15.898 165 5.932 1.9 15.0 18.725 1.549 808 2.213 3.10 0.0% 11.0 54.1% 2009F 62.15 0.2 0.6 0.4 2.387 0.0 Operating Year x Margin 2005A 7.288 362 6.2 151.5 1.5% 6.2% 13.319 208 2.726 397 10 3.40 0.77 2.0% 16.4 7.0% Other Assets + = Revenue 0.604 165 4.8% 10.252 1.0 2007F 0. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 62.236 889 2.8% Working Capital Year 1/ + Revenue 2005A 0.1 0.13 0.8 3.6 35.3 16.3 0.23 0.13 2006A 2.0 0.751 165 7.21 0.5% 8.6 0.318 402 6.14 0.China & Hong Kong Jidong Cement Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 6.5 0.647 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op.862 4.4% 2009F 17.794 357 1.8 37.730 1.3 59.0 2008F 0.4% 2007F 65.9 61.984 111 4.6 69. 0.7% Year 1Depreciation Revenue 14.642) (10) (5) (937) 1.985 2.4 34.79 0.527 1.283 514 (42) (30) (515) (500) (10) (5) 1.9 0.54 0.564 282 1.067 (0) 1.016 247 4.4 2.223 671 383 288 (161) 19 179 34 105 267 48 219 (17) 201 620 0.383) 135 (17) (718) 774 (95) 793 76 56 2006A 667 219 332 151 (34) (330) (221) (101) (7) 337 (130) (2) (104) (25) 207 2007F 720 441 352 (18) (55) (1.7 1.47 2.6 0.05 5.5 35.9 2009F 36.9 93.681 701 1.8 68.6 2006A 25.3 110.5 21.133 2.0 13.8 Capital Turnover 0.721 762 959 (152) 67 219 40 234 1.257 2.1% 2008F 63.657) (1.30 N.3 Source: Company data.8 2.0% 2007F 13.7 80.0 21.6 0.9 131.0 51.2 10.42 5.4 68.5 0.613 0.2% 16.7 7.1 8.1 0.2 3.0 9.0% 13.710 162 4.0 2008F 47.334 7.9 2.47 3.6) 23.210 (400) (279) (104) (17) 810 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 25.7 24.2 16.5 1.5 1.41 0.8 1.288 220 6.0% 4.518 2.4 16.0% 82.21 2007F 3.068 2009F 1.4 17. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 2.894 2.0 2009F 0.6 1.9% 82.7 0.9 0.5 5.0 74.3% 81.713 2009F 14. KGI Securities estimates Source: Company data.8% 7.6 70.8 1.040 1.6 35.00 Source: Company data.393 1.0% 82.1 2006A 0.3 5.250 887 442 (40) (40) (1.1 5.1 (10.134 2.0 21.3 8. 2008 12 .5 47.3 0.7 0.5) 18.7% Capital Turnover 0.176 963 775 438 2006A 6.1 84.2 57.265) (1.2 3.5 58.0% 13.643 1.016 4.586 1.730 578 1.7 17.1 After-tax Return on Inv.999 5.147 0.2 23.3% 13.8 22.766 963 773 1.082 4.7 0.8 22.2 58.066 2 130 2008F 1.0% 2008F 16.9% 7.0 1.037 518 519 (196) 23 219 55 159 537 97 441 (50) 391 871 0.1 65.9 60.9 11.9 2.1 29.1 + Operating Exp.0 50.074 1.2 40.8 126.3 3.315) (1. = Revenue 15. Capital 3.288 651 2.639 3.41 2008F 5.309 1.0 73.2 7.D.439 2.5 0.4 13.9 111.4 1. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.3 5. KGI Securities estimates Institutional portal: http://research.6 15.2 72.090 1.26 2.2 2.030 2008F 12.0 0.298 443 2.3 18.3 420 1.9 26.213 1. KGI Securities estimates Source: Company data.141 1.541 2.300) (10) (5) (65) 3.4 23.9 46.108 767 667 7.1 124.474 1.774 535 354 181 (130) 14 144 3 107 160 24 137 (9) 127 510 0.283 (70) 1.900 5.68 1.9 (8.5 0.8% 2006A 10.761 165 6.633 1.01 0.4% 17.402 0. Net Cash Flow 2005A 547 137 330 84 (3) (1.5% Source: Company data.405 2.880 210 2.734 828 562 489 7.com January 14.508 2.4 2.7 Net cash 7.17 0.8 0.375 312 5.3 0.0 103.6 3.948 1.55 2.0% Operating Margin 7.60 1.6 30.9 147.617 646 452 271 248 5.613 3.00 1.4% Net PPE Revenue 2.213 3.236 203 7.410 2.kgi.21 4.0 15.7 0.3 0.19 0.6 0. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.030 726 590 382 332 6.082 195 887 (60) 827 1.1 0.6 46.9) (11.458 1.3 2007F 37.

it makes viscose filament and non-woven fabric. 151. 7.62 0.25.5 24. technology and vertical integration. percent (RHS) 27. which gross margin is 2-18 ppts higher than that of ordinary staple fibre. Shandong Helon has key competitive advantages in scale.1 EPS (Rmb) 0.55 30.com January 14.Shandong Helon (000677.0 ppts to 18.8730 stephen. driving down viscose profitability. gross margin rose 4.12M)(%) Rel. 585 21.5 10. In light of Shandong’s leadership status. Capacity will increase by 110k/year in the near future.7 EBIT (Rmb mn) 207 493 721 841 EV/EBITDA (X) 4. The company is a leader in the production of special staple fibre. cord fabric and canvas fabric fields.com Chemicals China Outperform Maintained 1 2 3 1 2 Stephen Wang 886. 2008 Institutional portal: http://research.734 EV/Sales (X) 1.6125.9 12.8680 Special fibre to fuel earnings growth Viscose prices high.20 ROAE (%) 8. Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A Sales (Rmb mn) 2. Return Price as of Jan. The company is also a leader. in terms of capacity.0 11.0 4.0 -- Vertical integration & special staple fibre underpin profitability Shandong makes cotton pulp in-house. Positive long-term outlook – Outperform rating maintained We forecast EPS of Rmb0.6 9. boosting Shandong Helon’s profitability. in the cotton pulp.6 EBITDA (Rmb mn) 499 810 1.9 25.6 41. we believe these shares deserve to trade at a PE of 30x. mitigating the effect of raw material cost increases and boosting margin. 144 Company Description O Shandong Helon is China’s top viscose staple fibre manufacturer.9 2007F 2008F 2009F Gross Profit (Rmb mn) 382 695 948 1. we have derived a 12-month target price of Rmb30. strong viscose fibre demand also increased demand for and prices of raw materials.7 .3 2.7 3. C. Shandong plans to increase the sales weighting of special staple fibre to 60%. boosting overall profitability. KGI Securities estimates 170 150 130 110 90 70 50 30 10 (10) Jan-08 May-07 Jul-07 Aug-07 Oct-07 Nov-07 Price performance relative to SZEA Institutional portal: http://research.079 1. 76.0/1.9 4.A.wang@kgi. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 25. In addition. Rmb0.0 7.0 Jan-07 Feb-07 Apr-07 Share price Source: Company data.3 Net Income (Rmb mn) 73 256 423 518 EV/Inv. respectively. with annual capacity of 120k metric tons.4 83.6.98 and Rmb1.0 15. daily trading (mn) Abs. performance (3.12M)(%) N 3.980 3.1 21.20 in 2007.6.kgi.21. In January-October. Rmb (LHS). We have maintained our Outperform rating on this counter.0 19. comprehensive production chain and strong product development.2181.00 17.259 P/E (X) 17.2 26. especially of ordinary viscose.0 23. 7 19.0 Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg. price performance relative to SZEA. 2008 13 . Based on 30x our 2008 EPS forecast.18 0.8 14.5 Balance Sheet Book value/shr-12/037 (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 2.4%.com.1 15.080 EV/EBIT (X) 11.5 28.6 11.62.6 3. Shandong Helon share price chart Share price. margin of ordinary viscose inching down on higher costs Viscose fibre prices surged 50% in 2007 on robust demand. 2008 and 2009. However.415 432 228 N.484 3.kgi.0 3.SZ/000677 CH) January 14.7 73.98 1.6 8.7 31.0 3. (X) 0.475 2.tw Nico Zhang (Coordinator) 86. performance (3.2.

2 1.645 2.2 20.0 0.8 35.270 250 393 367 27 857 411 90 355 2007F 3.62 6.1) 2009F (0.4 138.07 1.0 2.1) 2008F (0.2) 17.381 18 2.7 25.0 0.8) 2007F 20.134 432 90 611 2008F 4.4 28.D.4 58.3 1.7 3.183 984 972 227 496 471 25 783 411 86 285 2006A 3.0 0.8% Source: Company data. 0.20 0.6 1.2) Source: Company data.316 0 2.3% 16.18 2007F 2.8 1.4 0. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.3 (34.7 0.0 57.4% Other Assets + = Revenue 0.64 1.2 4.7 170.980 2.417 18 2.1 9.4 73.2 3.98 1.4 62.0% Operating Margin 9.059 2.6 1.7 4.5 52.67 N.2 130.1) 2006A 17.095 0 2. 0.5 96. Net Cash Flow 2005A 507 84 279 143 0 (698) (657) (14) (27) (191) 301 8 271 22 110 2006A 88 73 292 (277) (1) (476) (403) 12 (85) (388) 196 2 193 1 (192) 2007F 675 256 318 102 0 (235) (427) (0) 192 440 (179) 21 (203) 3 261 2008F 810 423 358 30 0 (404) (404) 0 0 406 77 0 72 5 483 2009F 922 517 418 (14) 0 (150) (150) 0 0 772 (186) (0) (191) 5 586 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 11. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 2.034 2009F 5.7) 17.6 621 0.98 2009F 3.975 1.484 2.50 N.9 0.60 8.1 0.20 Source: Company data.229 345 436 231 216 2.7% 10.1 0.2) (13.9 46.110 1.0 61.557 432 90 1.677 600 358 311 2.0% 75. 2008 14 .5% 6.1% 75.90 1.677 1.1 8.265 1.1 0.2% Net PPE Revenue 1.2 1.841 2.3% 2007F 16.7) (24.090 550 334 290 2.059 0.5% Capital Turnover 1.8 0.4 1. 0.5% 6.1 0.4 (13. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 69.8 31.0% 32.7 31.6 123. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.7 27.094 382 175 207 (126) 11 137 1 17 98 24 73 (0) 73 499 0.3 Net cash 4.2) 15.2) 2006A (0.0 12.0 27.0 2.285 695 203 493 (157) 12 169 0 5 341 85 256 0 256 810 0.9 4.7 0.7% 2009F 22.1% 6.95 N.D.113 18 2.3 1.7 34.18 0.7 126.788 2.229 537 304 159 228 2.655 1.com January 14.0) 2007F (0.7 0.89 2.734 2.1 249. 0.075 314 388 358 30 1.4 115.4 33.0% 2008F 62.8 0.2 (90.6 120.7 4.D.8 35.90 5.363 0 3.9 26 1.2 0.2) 2009F 7.08 6.6 0.81 3.5% 2009F 59.9 23.0 0.553 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op.080 239 841 (156) 35 190 0 5 690 172 517 1 518 1.5% 20.946 1.7 2.259 1.1) 2008F 16.9 + Operating Exp.7 (0.750 360 157 203 (104) 7 112 (0) 14 113 29 84 (0) 84 483 0.129 367 411 376 35 1.0 Cash x = Tax Rate 74.3 129.233 29 2.2% 11.13 0.8 0. = Revenue 7.7 26.1 1.5 63.9 190.8 (31.1 0.China & Hong Kong Shandong Helon Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 3.9 22.7 28.5 0.098 0.181 1.3% 11.6 22.645 1.0 (24.0) Operating Year x Margin 2005A 9.3 20.7% 2006A 72.5 0.8% 2007F 66.6% 2006A 8.640 606 500 286 248 2.075 432 90 1.17 4.4 184.079 0.5 33.49 0.02 0.7 13.0 58. Capital 8.537 948 226 721 (162) 21 184 0 5 564 141 423 1 423 1.4 8.9% Working Capital Year 1/ + Revenue 2005A (0.88 1.0% 75.5 27.8% 10.2 16.7 11.8 35.5 0.4 4.39 2.2 65.4 22.9 After-tax Return on Inv.62 2008F 3.1 9.6% 8.4% 7.4 251.5 0.236 986 393 369 329 40 2.62 1.0 0.2 8.19 N.6 0.4% 25.9 (27.475 2.615 1.9 150.7 1.03 0.6 16.5 1.2 (30.090 114 2.064 1.D.9 10.679 2.kgi.462 1.0 3. KGI Securities estimates Source: Company data.0 0.8% 17.20 2006A 2.207 192 2. KGI Securities estimates Institutional portal: http://research.80 8.7% 22.334 18 2.5% Year 1Depreciation Revenue 13.8% 6.6% 75.6 Capital Turnover 1.6 4.5% 2008F 20.4 825 0. KGI Securities estimates Source: Company data.6 6.20 2.1 1.3 16.7 22.453 1.4 1.395 876 1.984 2.6 0.6 0.1 64.088 2.

9 12.381 6. C.11 and Rmb4.5 EBIT (Rmb mn) 1. price performance relative to SZEA.86.8730 stephen.426 1.39 ROAE (%) 43.3 34.06 1.1 21.082 5.0 60.119 4. During the potash fertilizer import negotiations.8 95. daily trading (mn) Abs.50.6 46.7 19. KGI Securities estimates 40 30 20 10 0 (10) (20) (30) May-07 Jul-07 Aug-07 Oct-07 Nov-07 (40) Jan-08 Price performance relative to SZEA Institutional portal: http://research.5 .831 2.4 27. Belorussian Potash Company (Belarus) raised powder potassium chloride CIF prices in the Asian spot market to US$500/metric ton (mt).277 6.0 80.com Chemicals China Outperform Maintained 1 2 3 1 2 Stephen Wang 886.wang@kgi.7 5. Salt Lake Potash share price chart Share price.2 31. the dominant global potash fertilizer manufacturers proposed to increase the price of China-bound potassium chloride by US$150/mt in 2008.2.9 Gross Profit (Rmb mn) 1. We attribute the price surge to robust demand and the scarcity of supply.0 70.SZ/000792 CH) January 14. 3 45. prices soared 50% in 2007.8 15.2181.926 4.8680 Rising potassium chloride prices a boon Potassium chloride price rising on robust global demand & high shipping fees Global potassium chloride prices doubled in 2007. Based on 35x our 2008 EPS forecast. (X) 2. significantly boosting earnings.com January 14.6.39 in 2007. SLP is engaged in the manufacture of potassium chloride. percent (RHS) 90. Since 70% Return Price as of Jan.10 110.com. In mid-December. 128. Rmb3. 2008 15 .2 EPS (Rmb) 1. 7.388 3.091 4.0 of China’s potassium chloride is imported.kgi.1 66. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 86.0 30.2 16. we have derived a 12-month target price of Rmb110.21.11 4.754 EV/EBITDA (X) 7.6125.6 Net Income (Rmb mn) 812 1. 60. 2008 Institutional portal: http://research.2 Cash Earnings to rise on high potash fertilizer prices – Reiterate Outperform In view of rising potash fertilizer prices.5 7. performance (3.50 3.6.5 55. which will boost annual capacity by 500k-1.0 Jan-07 Feb-07 Apr-07 Share price Source: Company data.366 EV/Inv. 31 Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A 2007F 2008F 2009F Sales (Rmb mn) 2. Annual potassium chloride capacity is 1.A.0mn mt when completed.151 2. Rmb (LHS).0 50.6 Company Description O Based in Qinghai Province.12M)(%) N 22. respectively.671 2.7 EBITDA (Rmb mn) 1.Salt Lake Potash (000792.tw Nico Zhang (Coordinator) 86. we forecast EPS of Rmb1.8 64.0 40.00 27. which is one of the three key agricultural crop fertilizers. Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg.12M)(%) Rel.7 11.5 10. both of which enabled international potash giants to push prices up. Outperform rating maintained.012 5.0 20. performance (3. SLP’s main expansion project is a liquefied potash plant.582 3.7 57.1/8.2 8. (mt).518 7.0 1.140 EV/EBIT (X) 9.9mn metric tons. Balance Sheet Book value/shr-12/037 (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 3.7 23.473 768 336 N. Salt Lake Potash benefiting from surging potash fertilizer prices Salt Lake Potash raised its ex-factory potash fertilizer price by 45% in 2007 without increasing production costs. Salt Lake Potash (SLP) has the largest potash fertilizer production base in China.112 P/E (X) 15.434 EV/Sales (X) 5.4 11. 2008 and 2009.kgi. 268 47.

0 22. 2008 16 .649 768 207 674 2006A 5.112 4.8 19.9% 74.6% 2007F 24.1 25.5 2006A 0.7 0.13 0.91 1.6 71.102 2007F 6.605 1.1% 2009F 12.9 2008F 83.8 70.50 0.0 0.425 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 30.024 154 869 (83) 8 91 (0) 339 1.798 627 (384) 911 100 3.0 30.480 620 2.7 1.50 0.9 79.565 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op.381 299 4.5% 6.374 405 98 0 (569) (569) 0 0 1.7 0.648 437 7.4 107.9 2009F 34.4 82.0 1.374 (562) 812 1.6 23.9 26.9 53.300 2.1 46.971 896 5. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 1.7% 9. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab. KGI Securities estimates Source: Company data.158 0 3.9 49.253 0.9 64.558 768 208 3.889 7.142 284 0 1.8 2.5 19. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 11.40 2.4 74.8 41.5 3.4% Year 1Depreciation Revenue 24.3 17.704 4 7.36 1.113 5.8 0.11 2009F 7.831 1.com January 14.541 768 208 6.700 0 7.0 77.303 645 3.796 1.3% 84.0 14.2% 15.06 1.7 46.1 5.7% 5.905 1.844 (693) 1.39 Source: Company data.269) 2.6 107.119 193 1.3 Operating Year x Margin 2005A 54.700 3.6 135.32 0.37 5.979 755 464 645 115 2.4 Net cash 23.877 1.1 16.1 1.063 2008F 3.86 0.383 4.144 300 1.4 3.9 228.6 135.91 2006A 2.388 4.68 7.8 4.3 2.754 (172) 26 198 (0) 390 5.7 3.9 104.657 196 (390) 0 (2.92 2.6 3.71 3.819 1.296 2009F 5.782) (2.3 42.4 13.140 387 5.6% Working Capital Year 1/ + Revenue 2005A 0.0 38.51 0.4 2007F 16.9% 2006A 55.7 41.078 768 208 1.5 61.635 1.379 4.6 77.349 2.2 29.076 359 (322) 0 (2.59 2.9 69.88 0. = Revenue 9.3 2008F 0.7 18.5 66.2 111. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.6 745 0.2 3.6 72.807 4 2.1 96.0 1.846 768 208 1.748 4 5.4 148.6 43.758 1.9% 55.5 130.965 325 5.0% 85.710) 3.0 0.1 31.15 2.9 64.671 244 1.4% 5.7 3.3 22.738 550 1.19 5.012 894 2.0 0.9% 2008F 74.914 1.0% 77.4% Capital Turnover 0.3 173.622 1.582 2009F 14.707 1.8% 47.4 61.190 100 1.2 41.06 2007F 3.463 3.8 After-tax Return on Inv.478 1.185 3.366 6.5 0.8% Source: Company data.71 3.7 55.643 885 207 0 678 2. Net Cash Flow 2005A 984 983 384 (383) 0 (628) (628) 0 0 356 (61) (409) 177 172 295 2006A 1.6 130.50 0.71 3.8% Net PPE Revenue 1.629 249 0 1.7 0.8 46.368 510 924 113 2.0% 85.973 588 117 123 348 2.299 (236) (384) 127 20 1.9 40.8 64.8% 50.8% 86.294 6. Capital 21.82 9.4 5.50 2008F 5.0% 2009F 77.3 70.1 (11) 1.207 3.50 1.400 4.6 64.175 2007F 1.5 151.85 9.5 2006A 62.1 50.7 10.462 923 1.5 Source: Company data.8 43.9 16.926 (82) 16 97 (0) 300 2.6 130.0 Cash x = Tax Rate 87.082 (119) 18 136 (0) 340 4.4 2.7 172. KGI Securities estimates Source: Company data.126 143 983 (288) 695 1.858 5.538 1.073 177 3.3% 2007F 63.0 0.5 0.7 35.8% 33.091 1.315) (2.5 32. KGI Securities estimates Institutional portal: http://research.7% 39.5 106.385 1.4% 5.06 1.1 29.0 66.5 25.2 26.2% 2006A 19.4 79.0 42.China & Hong Kong Salt Lake Potash Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 4.3 2007F 0.518 1.39 4.2% 2008F 17.870 2008F 10.277 3.782) (0) 0 681 615 (675) 1.1 23.854 949 196 0 753 2.0 31.9 82.639 0 2.8 + Operating Exp.584 561 1.621 247 1.804 0 3.0 Capital Turnover 0.7 470 1.426 (86) 10 96 (0) 281 1.076 (1.4 25.5 130.151 2.6 54.824 1.11 3.3 40.8 3.280 2.3 2009F 0.8 56.0% Operating Margin 54.308 (133) (383) (107) 357 1.6 49.4 16.1 629 4.8 25.721 2.1 18.4 2.5% 3.315) (0) 0 2.5% 4.2 68.kgi.1 62.8 17.9 40.5 449 3.90 0.500 7.8 0.765 580 1.50 0.844 165 (190) 0 (520) (519) (0) 0 1.3 63.3% 63.744 0 5.2 55.434 1.657 (1.162 4 3.7 0.3 13.2% Other Assets + = Revenue 0.643 4 2.137 4.94 7.9 146.6 32.196 2.582 911 1.

897 6.3 EBIT (Rmb mn) 5. Profitability improving on product mix upgrade Capacity additions in coming years will be focused on higher margin.1mn mt of cold-rolled steel and 20k mt of silicon steel capacity will become operational.6 17.wang@kgi.9 Trading 52-week trading range (Rmb) Mkt cap. 7.com January 14.50 0. This year.838 7.12M)(%) Rel. Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A Sales (Rmb mn) 41. 48 20.373 69. 213 27.2. 2008 17 . steel refining and steel rolling.0 28. hot-rolled coil. 2008 Institutional portal: http://research. Wuhan Steel is one of China’s leading steel makers. cold-rolled silicon steel.21 162. high-end products.930 9. daily trading (mn) Abs.728 EV/Sales (X) 0.6 32.633 18.0 11. performance (3. up from 10mn mt in 2006. price performance relative to SSEA. Specialized in high-end steel products.590 EV/Inv.9 4.2 25.317 58.6125.927 11.9 2.21 1.380 P/E (X) 5. oriented silicon steel capacity will reach 400k mt later this year. Wuhan Steel added annual capacity of 3.0 5.4 Balance Sheet Book value/shr-12/07E (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 3. including cold-rolled sheet. Sales to grow on capacity expansion & better product mix – Maintain Outperform We expect Wuhan Steel’s sales to grow over the next few years on steady capacity expansion and product mix upgrade.271 16. high-speed wire rod and steel bar. 1.3 6. NT$ (LHS).4 Return Price as of Jan.0 1.838 N.84 1. Annual capacity is 10mn metric tons of more than 500 products covering seven categories.com.6 82.0 17. 42. (X) 0. performance (3.6.3 12.739 14.0 13.4 Net Income (Rmb mn) 3. large profile. KGI Securities estimates 70 60 50 40 30 20 10 0 May-07 Jul-07 Aug-07 Oct-07 Nov-07 (10) Jan-08 Price performance relative to SSEA Institutional portal: http://research.7 9.0 11.kgi.5 27.6.7 2. this segment of Wuhan Steel has stayed highly profitable. Wuhan Steel’s total capacity will reach 18mn mt in 2008.A.76 24.640 16.3 2.8 8. As China is still heavily reliant on imports of oriented silicon steel.3 3.413 63.6 2.0 14.2181.0 20. we expect the local silicon steel market will experience robust development growth and strong pricing going forward.0 8.8730 stephen.9 EBITDA (Rmb mn) 8.35 ROAE (%) 18.SS/600005 CH) January 14.6 .0mn metric tons (mt) of corrugated steel pipe and 3. Further near-term expansion of oriented silicon steel capacity will give the company’s blended gross margin another boost. Wuhan boasts an integrated production line of state-of-the-art iron refining.2.491 10.kgi. C.7/21.7 EPS (Rmb) 0. As China’s sole oriented silicon steel supplier.247 EV/EBIT (X) 4.3 2007F 2008F 2009F Gross Profit (Rmb mn) 6.324 13.12M)(%) N 6. mid-to-thick plate.1 15.155 EV/EBITDA (X) 3.745 14. In particular.6 17.9 24. 58 Company Description O Founded in 1997. Wuhan Steel share price chart Share price.992 12.0mn mt of hot-rolled steel.8776 Capacity expansion & product mix upgrade Capacity to expand to 18mn metric tons in 2008. 99.Wuhan Steel (600005. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 20.tw Michael Wang (Coordinator) 86. up from 10mn metric tons in 2006 In 2007.0 Jan-07 Feb-07 Apr-07 Share price Source: Company data.com Steel China Outperform Maintained 1 2 3 1 2 Stephen Wang 886. percent (RHS) 23.050 7.20 16. We have maintained our Outperform rating on this counter.613 9.Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg.

2 Net cash -6.953 7.0% 75.6 25.613 9.1 2009F 10.7 50.230 0 29.7 38.961 15.62 0.844 0.7 8.728 53.59 5.897 2.219 7.1 0.0 2008F (0.613 3.271 16.413) 14 0 989 32 (1.652 7.915 2.5 23. KGI Securities estimates 2009F 69.120 3.242 1.91 2.906 47 21. Income/(Loss) (119) (170) (170) (170) Pretax Income 7.0 0.195 911 6.1 9.825 2.1% 6.101 9.413 63.752 1.2) (19.3 1.114 3 3.510 2.3 26.5 27.9 1.5 + Operating Exp.345 11.35 Source: Company data.930 9.6 0.1 2008F 8.25 1.27 0.5% 2006A 77.0 -6.4 68.6 1.4 20.838 5.775 19.590 18.35 1.213 50 41.1% 2009F 20.45 1.1 10.927 11.809 6.6% 6.8 11.994) (243) 0 (1.0) 2009F (0.738 (150) (2.63 0.4 69.7% 5.4% 17.733 Gross Profit 8.655 Income Taxes 2.016 525 870 24.324 13.901 Operating Profit 6.4 10.0) Operating Year x Margin 2005A 17.221 130 1.775 27.296) 2007F 10.274 15.1 17.6% Working Capital Year 1/ + Revenue 2005A 0.9 52.395 429 (17) (8.0 27.6 36.4% 2007F 17.838 5.312 13.5 43.7 48.971 10.838 5.353 4.China & Hong Kong Wuhan Steel Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 36.1 0.380 1.4 42.739 Net Interest Income 199 27 32 70 Interest Income 199 27 32 70 Interest Expense 0 0 0 0 Net Investment Income/(Loss) 11 17 17 17 Net other Non-op.491 EBITDA 9.590 0 10.399) (7.1% 2008F 20.89 0.382 13.775 12.7 1.0 0.5 After-tax Return on Inv.3 43.624 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 68.3% 67.3 2007F 41.1 -5.279 823 (17) (8.530 10.164 Net Profit Before Extraordinaries 4. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 74.3 14.8 -6.838 5.7 11.8 17.772 12.160 4.893 16.063 50 33. Net Cash Flow 2005A 8.7 32.817 7.4% 3.469 1. KGI Securities estimates Source: Company data.402 130 1.606 2009F 73.3 23.7 48.71 4.0 46.442 50 26.76 0.273 9.308 8.4 25.3 24.50 0.1% 67.301 0 31.33 7.7 1.4 (15.756 2008F 13.825 3.766 (2.30 1.6 Capital Turnover 1.133) (200) 0 6.501 9.90 1.992 101 771 30.6 0.8% 2009F 70.237) (7.6 23.9 Source: Company data.2 15.4 4.976 5.991 1.5 27.3 0.1% Net PPE Revenue 0.0% 3.30 1.746 41.640 Operating Expenses 1.0% 3.136 9.533) (763) (2. 2008 18 .0% Other Assets + = Revenue 0.0% 75.491 Extraordinaries (incl.131 5.4% 13.6 28.492 11.84 1.0) (10.21 EPS (Rmb) Source: Company data.8 14.332 1.234 1.496) (7.2 18.181 951 38.78 5.267 39.168 35.4 15.1% 20.6 50.113 14.0 0.775 8.155 118 118 0 17 (170) 14.897 6.26 3.390 46.590 4.3 20.9 0.907 3.4 1.20 0.27 0.1 26.81 0.0 -6.782 9.9 19.388 197 20.3% 2008F 70. KGI Securities estimates Institutional portal: http://research.897 6.0 0.585 6.9 -5.736 6.351) 1.013 0 7.804 9.204 2007F 51.296) (200) 0 7.570 0.466 2008F 62.5% Source: Company data.9 28.881 20.668 48.8 14.1 20.6 38.871 12.688 34.4% 19.3% Year 1Depreciation Revenue 5.0 Cash x = Tax Rate 68.894 413 (17) (7.29 8.30 1.481 16.890 3.6 1.448 662 (2.6) (19. Minority Interest) 0 0 0 0 Net Profit After Extraordinaries 4.7 0.046 120 1.402 8.1 19.com January 14.613 9.373 Cost of Goods Sold 32.844 Profit & Loss Year to 31 Dec (Rmb mn) 2005A 2006A 2007F 2008F Sales 40.4 23.710 8.80 2.62 0.7 1.0 25.374 0.0 48.1% 23.317 58.7 1.84 1.419 257 24.0 0.351) 1.3% Capital Turnover 1.351) 3.168 41.5 1.788 9.6 11.5 59.082 997 1.053 14.396 2.162 0 16.092 14.50 0.745 14.1% 20.2 50.942 6.2) 16.0 2007F 0.271 7.0% Operating Margin 17.703 3.5 25.992 12.321 0 6.395 42.388 4.1% 2006A 14.1 0.022 2006A 6.005 2.150 10.699 6.9 2006A 1.654 (1.512 8.7 20.7 69.775 6.4% 2007F 74.5 41.7 43.kgi.2 15.350 30.4 25.461 15.1 26. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.2 0.263 15.7% 2.6 1.7 53.24 8.225 352 (17) (7.4 1.646 5.067 5. Capital 19.762 0 17.701 1.7 1.047 (55) 1.658 2006A 39.059 6. = Revenue 2.991 0 25.1% 14.633 0.079 7.89 5.0 11.1 22.630 4.0 4.0 2006A 0.6 0.257 3.836 1.6 1.960) 2.2 4.30 1.725 734 34.493 23.333) (7.458 7.5 11.8% 5.4 29.508) (200) 0 1.21 1.3 1 1.2 -6.8 -9.243 (11) (7.018 3.2 1.0 11.6 -7.110 2009F 15.9 0.8% 23.1 22.6 6.838 5.247 2.825 3.030) (2.351) 4.3 -5.708) (8.491 3.09 1.279 517 29.0 16.

7 18.8675 Good long-term value Strong passenger traffic outlook in 2008 Shanghai Int’l Airport’s (SIA) passenger traffic growth slowed in 2H07 on efforts by the CAAC to cut flights in order to prevent delays.8/9.862 2.0 22.0 0.0 Jan-07 50 40 30 20 10 0 (10) (20) Feb-07 Apr-07 May-07 Jul-07 Aug-07 Oct-07 Nov-07 (30) Jan-08 Share price Source: Company data.com.0 20.567 EV/EBIT (X) 17.wang@kgi.086 EV/Inv.Shanghai Int’l Airport (600009.7 15.709 1.2181. -25.921 2.30 41.21.462 1.93 1.com Transportation China Outperform Maintained 1 2 3 1 2 Stephen Wang 886.0 35. 5.SS/600009 CH) January 14. China’s second largest airport in terms of passenger volume (29mn in 2007). (X) 2. performance (3.12M)(%) N 20.0 41.8730 stephen.89 0.7.08 ROAE (%) 15. and a third runway and second terminal are scheduled to open in 2008. 7.039 4.9 4. C.3. Both UPS and DHL plan to build express transfer hubs at Pudong Int’l Airport (operated by SIA).701 1. percent (RHS) 45. well ahead of other major hub airports in China.342 4.3 5. Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg.5 15. It currently has two runways and one terminal.6 38.955 3.123 2.4 Net Income (Rmb mn) 1.kgi.0 25.6.503 1. 88 5. 6 -0.4 EPS (Rmb) 0.9 44.4 .12M)(%) Rel. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 38.0 65.79 0.51mn metric tons in 2007. Return Price as of Jan.6. performance (3.4 At the forefront of China’s cargo business SIA’s cargo throughput grew 17% to 2.00 7.7 36.3.8 31.4 EBITDA (Rmb mn) 1.kgi. In cargo.9 14.5 4.207 P/E (X) 17. to be in operation by 2010. SIA ranks top in the country and 5th in the world. Our DCF-based target price of Rmb41 is equivalent to 44x and 38x our respective 2008 and 2009 EPS estimates. A new cargo station is also under construction and will more than double capacity on completion this year. Cross-straits direct flights a future growth driver – Maintain Outperform Balance Sheet Book value/shr-12/07 (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 5.9 6.716 1. We expect stronger growth this year on expansion of airport capacity and air space as a result of the launch of RVSM.0 40. daily trading (mn) Abs. putting SIA at the forefront of China’s cargo business.5 18. We reiterate our Outperform rating on SIA. Shanghai Int’l Airport share price chart Share price. price performance relative to SSEA.3 35.com January 14.6 43.725 3.2 The likely realization of cross-straits direct flights and tourism in the near future will become a further growth driver for SIA.834 EV/Sales (X) 9.927 997 N. Potential asset injection will also boost earnings by 30%. -5.109 2.42.2 Company Description O Shanghai Int’l Airport (SIA) operates Shanghai Pudong Int’l Airport.301 EV/EBITDA (X) 14.6125. Rmb (LHS). KGI Securities estimates Price performance relative to SSEA Institutional portal: http://research. given Shanghai is the biggest port for cross-straits air travel.0 30.5 73.A.2.tw Huei-chen Flannery (Coordinator) 86.6 EBIT (Rmb mn) 1.513 1.7 15.7 Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A 2007F 2008F 2009F Sales (Rmb mn) 2.1 22.0 Gross Profit (Rmb mn) 1.7 27. 2008 19 . 2008 Institutional portal: http://research.788 2.828 2.

2% Working Capital Year 1/ + Revenue 2005A 0.2 38.4 13.79 0.73 1.828 0.788 0 1.976) (2.927 2.88 0.434 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 14.52 2.570 1.39 0.433) (2.1% 7.7 2.19 0.1% 2008F 27.167) 192 (1) (406) (193) (193) (1) 0 (599) 2006A 1.9% 50.363 13 15 1 232 0 1.35 6.1 0.554 0.326 446 2.155 1.9% 2007F 50.614 4.4 6.416 (982) (482) (500) 0 1. KGI Securities estimates Source: Company data.3 0.607 218 1.9 50.9 61.6 (796) 0.8 2009F 19.781 695 2.3 3.5 99.263 475 1.9% 18.China & Hong Kong Shanghai Int’l Airport Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 9.08 Source: Company data.4 7.5% 11.6 56.93 1.91 4.363 336 462 459 148 4 308 2 2 0 9.7 19.227 435 18 732 42 13.5 1.597 360 3.4 55.2% 2007F 32.3 0.132 3.389 365 48 (232) (1.6% 11.4 12.701 (47) 5 52 316 (1) 1.0 2007F 13.1% 87.7% Net PPE Revenue 2.098) 316 (29) (541) 648 (482) 1.7 13.246 1.9% 2008F 47.3 80.927 2. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 29.8 50.9 20.8 64.26 1.8 1.450 2.7 53.1 28.0% 4.5 14.72 2006A 2.955 1.com January 14.30 0.649 2007F 14.207 1.10 1.573 1.8% 2006A 50.4 + Operating Exp.7 273 0.53 0.8 43.90 1.370 361 0 0 0 10.00 0.568 9.617 2006A 12.08 1.568 6.716 0 1.375 505 125 125 0 12.0% 5.834 2.900 604 100 100 0 14.7 0.20 0.9 15.277 2009F 2.694 329 1.2 12.413 670 12.0% Operating Margin 50.3 0.1% 79.568 5.086 906 (7) (535) (34) (500) 485 (19) 2.5% Other Assets + = Revenue 0.057 1.913 182 1.451 3.8 15.566 (289) (289) 0 0 1.3 43.877 1.3 1.0 37.4 1. = Revenue 6.3 91.3 0.4 27.3 15.9 63.567 4.73 0.301 (54) 36 90 535 (1) 2.123 202 1.9 12.294 3.262 3.5% 13.000) 381 (19) 1.9 42.25 0.5% Source: Company data.1 2008F 0.058) 884 (481) 1.1 51.1 2009F 0.3 Source: Company data.086 0 2.8 8. Capital 14.0 2.6 1065.0 2.89 2008F 4.5% 2009F 28.1 2.2 2007F 0.681 1.716 407 463 (316) (2.7 16.883 2008F 16. KGI Securities estimates Institutional portal: http://research.5% 2006A 31.5 51.374 1.427 0.8 51.267 2.2 52.6 44.350 650 7.738 224 1.393 350 3.6% 2009F 47.95 5.6% Capital Turnover 0.68 2.6% 47.927 2.2 13.1 47. KGI Securities estimates Source: Company data.0% 12.72 0.0 15.4 0.1 0.788 805 22 (411) (637) (1.526 163 1.646) 215 (2) (1.862 160 1.71 0.7 3.3% 11.2 2006A 10.9 22.3 80.1 39.2 1.7 0.0 2.6 1.146 28 1.716 2.9 1.7 50.6 47.0 18.712 24 885 50 13.378 1.5 0.1 0.039 1.657 700 12.9 317.8% 50.3 11.200 370 3.9 0.513 324 (229) (234) (2.342 1.3 0.203 1.15 0.389 0 1.320 750 12.137 345 2.144 1.111 1.93 2009F 4. 2008 20 .3 5.8 310.086 3.9% 47.1 Cash x = Tax Rate 86.916 2.725 0.5 Capital Turnover 0.89 1.389 1.3 396.8 17.5 44.0 0.0% 75.9 57.568 8.8% 5.223 502 14 671 35 8.728 0.2 15.4 After-tax Return on Inv.9 22.2 1.2 4.9 13.3 0.2 14.788 2.927 2.913 1.5% 12.3 502.10 5.1 0.2 10.329 2.25 0.4 2008F 20.9 0.3 0.2 40.6% Year 1Depreciation Revenue 13.3 119.78 0.7 0.4 1.2% 19.129 0 106 2008F 2.6 16.4 (179) 1.1 13.513 1.0 16.2 4.970 254 1.55 7.79 2007F 3.567 266 2.482 1.3 41.382 2009F 17.51 1.7 16.1 2006A 0.709 206 1.1 Net cash 1091.7 3.6 7.1 Operating Year x Margin 2005A 50. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.4% 87.3 80.0 26.641 1.365 328 15 968 53 10.059 60 13.375 418 125 125 0 11.3 0.4 1.6 66.8 Net cash 31.927 2.9 29.987 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op.3 0.513 0 1.kgi.4 13.8 0.692 669 9.6 67.0 2. Net Cash Flow 2005A 1.109 0. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 2.503 1 4 3 234 (1) 1.480 1.9 8. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.1 73.671 1.921 (67) 15 83 411 (1) 2.5 10.270 1.4 1.7 19.812) (3.032 528 1.365 0 (174) 2007F 2.

21 4.09 ROAA (%) 0.1-45. performance (3. CMB has a distinctive strategy in consumer banking which differentiates it from competitors in China.tw Top pick in the banking sector A defensive banking play China Merchants Bank (CMB) is the best bank in China in terms of fundamentals.0 35.384.79 7. 144 P/CE Dividend Yield Company Description O Incorporated in 1987. Rmb (LHS).9 5.0 40.0 35.9 EPS (Rmb) 0.0 20. with clients numbering over 176k in 1H07.9 19.6762 ken.1 88.6 2. 7. 76.6. The bank has also purchased a 10% stake in Taizhou Commercial Bank (unlisted) and has approval to open a branch in New York.8 19.6.4 12.8 25.6 0.SS/600036 CH) January 14.8 BVPS BVPS Growth (Rmb) 4.5 (%) 0. Good cost control despite continued expansion Aside from injecting assets into CMB International Capital Corp. Year-end 2006A 2007F 2008F 2009F Year-end OP.com January 14.6 64.12M) (%) N 15.8 Balance Sheet Cost/Income Ratio 07E (%) NPL Ratio 07E (%) Provision/Total Loans 07E (%) M 40.0 10. The consumer banking segment is the bedrock of CMB’s valuation.850 49.5/69. NIM is improving due to consumer banking strengths and higher demand deposits weighting of 56.5mn dual currency credit cards. and have maintained our 12-month target prices of HK$45.051 61.2 19.876 P/BVPS (X) 5.9 1.1 1.0 45.4 15.0 30.7 3.6 0. 2008 Institutional portal: http://research. Good time to engage – Maintain Outperform on both H-shares & A-shares We may revise up our 2007 forecasts on better-than-expected preliminary results.0 1. We see now as a good time to engage CMB. percent (RHS) 50.62 (X) 23. China Merchants Bank (CMB) is the sixth-largest bank in China with capital of around Rmb1.5 0. 32 19.1 26.su@kgi.1 Return Price as of Jan.869 23. Its Golden Sunflower wealth management product is also the most recognized brand in China.5 4.4 22. Consumer loans accounted for 21.084 37.3 14.0 25.4 22.A.090 18. daily trading (mn) Abs.kgi.0 15. performance (3.7 for A-shares.8% of all loans in 1H07 and the bank’s Golden Sunflower wealth management product and its credit cards boast an enormous client base.0 10.28 1.5 12.73 5. Rev. Outperform on both shares. CMB plans to open 50-100 branches every year. China Merchants Bank share price chart Share price. price performance relative to SSEA.017 P/E (X) 2006A 2007F 2008F 2009F 46.1tn and 528 branches nationwide (1H07). shifting focus to central and western China.kgi.710 N.5 16.108 13. CMB has proven a strong defensive play among China’s banks and promises further upside in a bullish market. (Rmb mn) 25.2 44.2.5 ROAE (%) 17.2878.7 22.54 0.1 1.70 22.12M) (%) Rel. (unlisted) and increasing its stake in China Merchant Fund.1 EPS Growth (% YoY) 48.5 for H-shares and Rmb47.2 (% YoY) 102.705 4.0 Jan-07 Feb-07 Apr-07 May-07 Jul-07 Aug-07 Oct-07 Nov-07 50 40 30 20 10 0 (10) (20) Jan-08 Share price Source: Company data.8% in 1H07.China Merchants Bank (600036.5 Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (%) The largest shareholder (%) 3M avg.89 1.5 574. Its strengths in consumer banking mean it is less affected by government macro cooling measures. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The percentile of excess return (%) Dividend yield-12/07E (%) L 39.com Banking China Outperform Maintained 1 2 3 Ken Su 852.07 47. 151.com. The bank has issued over 14. 5921. CMB has also obtained approval to set up a leasing company. KGI Securities estimates Price performance relative to SSEA Institutional portal: http://research. 2008 21 .4 NP (Rmb mn) 7.

312 12.4 19.4 41.622.021 4.566 448 419 0 9.6 960.7 19.126.0 27.714 37.3 Growth: Investment income .757 6.0 977.854 566 1.098 634.0 59.3 3.662 21.5 1. KGI Securities estimates Profit & Loss Year to 31 Dec (Rmb mn) Interest Income Interest Expense Net Interest Income Credit Card (Net) Commission & Fee (Net) Trading Income .110 19.3 8.165 926 0 11.803 1.908 407 399 0 6. to Total Deposits (%) Loan-to-deposit ratio (%) Interbank Assets/Inter.8 39.4 96.0 93.4 2009F 1.235 16.1 2007F 694.404 472.0 1.530 1.342 5.539 885 17.636 Past-due loans (Rmb mn) 12.557 0 0 0 878.7 49.7 Int.308 130.458 3.1 31.110 11.270 16.507 2.333 18.500.007 1.950.5 1.688 13.6 Cost/Income Ratio (%) 47.Core Capital (%) Debt/Assets .kgi.376 3.514 607 454 0 3.7 58.7 0.6 19.312 790.285 100.393 249.0 66.536 618.616 25.282 3.6 94.0 1.1 9.0) (12.757 978.536 9.614 1.401 28.117 47.613 634.835 5. KGI Securities estimates Asset Quality Year to 31 Dec (Rmb mn) Loans Normal Monitored Sub-standard Doubtful Losses Total Provisions Total (Beginning) + Provision expenses +Recovery .846.238 11.757 565.922 7.973 26.994 110.534 3.185 10.117 960.327 55.0 5.5 2009F 1.6 Source: Company data.058 78.737 3.484 2009F 173.2 929 487 13.0 10.3 100.616 70.0 100.0 100.6 10.114 0 708.511 15.0 1.006 2.7 2008F 871.509 0 2.0 63.021 28.4 5.235 14.989 4.290 18.642 0 1.279 492 440 0 11.325 5.FX (%) 49.534 10.0 25.089.6 Growth: Average Interest Bearing Liabilities (%) Cost of Funds (B)(%) 1.617 31.3 28.5 4.6 2.3 Source: Company data.FX (Net) Investment Income (Net) Other Operating Income Non-Interest Income Operating Revenue General & Administration Depreciation/Amortization Other Operating Expenses Non-Interest Expenses Operating (Recurring) Profit Loan Loss Provision Non-operating Expense Non-operating Profit (Loss) Earning Before T & Extraord.776 3.861 1.8 17.261 854 0 9.4 25.017 24.455 11.377.503 793.0 93.230 35.7 42.951 934.063 3.0 67.6 Growth: Gross Loans (%) 25.6 2007F 135.9 2.477.788 (452) 745 13.7 2006A 542.822 549 1.290 7.5 72.0 4.9 3.7 2.691 12.5 10.0 10.6 2.196 0 1.2 47.312 311.297.-Earning Assets (A)(%) 4.3 2007F 1.6 2.924 4.823 721.481 21.639.1 1.529.2 100.989 21.007 4.9 3.562.650 3.282 2.5 63.990 4.860 4.935 3.2 41.653 411 618. (%) Cost/Income Ratio (%) Capital Adequacy Capital Adequacy Ratio (%) Tier 1 .753 2.7 25.510 4.7 2.285 945 0 25.990 12.588 17.920 3.4 3.251.828 28.2 2.China & Hong Kong China Merchants Bank Balance Sheet Year to 31 Dec (Rmb mn) Total Liquid Assets Deposits with Banks Marketable Securities Net Loans & Advances (NLA) Long-term Investment Fixed Assets (Net) Other Assets/Intangible Assets Total Interbank Liabilities Total Customer Deposits Offical Deposits (from CBC) Other Liabilities Medium & LT Liabilities Liabilities Total Shareholder's Equity Total Liabilities & Equity 2005A 66.6 5.297.869 2009F 78.249 156.833 3.204 16.0 4.379 0 178.787 2006A 33.997 734.157 934.636 38 111 6.083 1.6 26.0 Source: Company data.6 16.675 48.8 4.647 65. of Employeesn (units) No.647 1.013 111.185 20.5 40.316 1.135 94 276 31.917 138.569 20.3 8.643 25.161 69.562.662 1.942 1.679 1.753 4.8 15.1 1.5 2008F 1.179 8.503 0 0 0 34. 2008 22 .6 2006A 934.974 1.3 10.9 3.0 5.0 25.8 15. Liabilities (%) TD/Total Customer Deposits (%) Total Liquid Asset Ratio (%) 2005A 734.3 (1.058 1.959 23.5 25.828 1.135 (900) 840 22.500.2 103.236 4.0 945.770 2.216 1.397 3.0 14.6 94.850 15. Income/Operating Rev.0 93.1 Growth: Investment income .0 (33.433 49.491 472.622.200.702 13.Securities (%) (82.081 603 14.5 25.399 104.753 16.877 9. Items Tax Minority Shareholder's interest Net Profit (Loss) 2005A 25.9 15.112 93.819 114. to Total Deposits (%) Customer Depo.530 16.135 16.420 658.647 60.0 1.370 54.051 19.905 139.3 44.366 89.689 1.1 1.2 11.092 3.713 3.575 25.5 3.8 44.266 773.074 21.8 1.379 926.181.7 2006A 60.778 901.4 67.0 2009F 20.251.272 1.com January 14.115 10.1 4. KGI Securities estimates Institutional portal: http://research.3 759.046 142.617 1. of Domestic Branches (units) Interest Earning Assets (Rmb mn) Interest Bearing Liabilities (Rmb mn) Margins Average Interest-Eearing Assets (Rmb mn) Interest Income (Rmb mn) Loan yield (A)(%) Average Interest Bearing Liabilities (Rmb mn) Interest Expense (Rmb mn) Cost of Funds (B)(%) Net Interest Spread (A-B) (%) Net Interest Margin (%) Profitability/Performance Return On Average Assets (%) Return On Average Equity (%) Operating Revenue/Per Employee ((Rmb '000) Operating Profit/Per Employee ((Rmb'000) Non-Int.7 5.494 7.900 1.1 4.9 94.5) 926.680 33.Write-offs Total (Ending) NPL Ratio (%) Provisions/NPLs (%) Provisions/Total loans (%) 2005A 445.223.921 734.102 773.352 85.552 899.3 24.529.6 10.803 676.422 1.2 7.567 509 461 0 2.974 Key Financial Ratios Year to 31 Dec (Rmb mn) Size Total Assets (Rmb mn) Total Deposits (Rmb mn) Gross Loans & Advances (Rmb mn) No.0 Growth: Average Interest-Eearing Assets (%) 18.7 3.6 3.2 26.212 61.9 16.691 37 132 10.8 11.985 20.0 64.090 2008F 60.361 22.402 1.091 13.152 (615) 765 16.876 Source: Company data.4 39.1 71.2 592.8 94.372 1.167 Past-due loans /Total loans (%) 2.178 896 0 16.7 67.216 49.510 2.5 9.8 25.5 2008F 45.561 85.8 100.592 528 1.4 1.5 93.503 14.688 (840) 776 20.252 1.7 0.484 1.935 1.877 4.613 2006A 2007F 2008F 86.777 Total provision expenses (Rmb mn) 3.7 1.641 25.5 3.372 39. KGI Securities estimates Source: Company data.159 6.9 17.387 199.422 978.805 0 10.401 18.038.040 771.500 2.993 3.688 85 282 25.0) 896.1) Depreciation/Amortization (Rmb mn) 854.834 7.613 40.860 1.108 2007F 47.658 104. KGI Securities estimates Key Assumptions Year to 31 Dec (Rmb mn) 2005A Growth: Commission & Fee (%) 76.102 1.566 1.Debt Ratio (%) Liquidity Net Loans & Adv.787 4.0 5.376 9.2 21.110 41 210 18.102 1.5 Fixed Assets (Rmb mn) 6.514 4.921 80.242 549.777 12.038.200 503 790.183 458.404 0 34.537 19.411 83.572 565.236 28.702 23.223.680 759.016 41.136 0 5.975 5.424 977 0 20.481 1.014 24. Int.8 9.745 13.597 4.084 10.235 3.173.110 (800) 657 17.8 2.643 592.7 59.950.618 0 8.235 1.200.0 27.6 Effective Tax Rate (%) 41.0 16.6 30. on Avg.

4 Balance Sheet Book value/shr-12/037 (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 5.com.8 3.6 14.53 41.36.2 43. Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A 2007F 2008F 2009F Sales (Rmb mn) 2.0 15.wang@kgi.Maintain Outperform The potential opening up of cross-straits tourism will be an opportunity for CYTS to expand into Taiwan tourism for Chinese travelers. CYTS has in recent years diversified into the hotel and resort business.2. performance (3. price performance relative to SSEA.8 EBITDA (Rmb mn) 185 393 549 696 P/E (X) 22. 5 31.2 14.866 3.CYTS (600138.7 55.455 5. percent (RHS) 40.3 6. 9.5 18.0 61.7 26.82 0.5.8 Gross Profit (Rmb mn) 365 622 925 1.738 5.0 Net Income (Rmb mn) 91 155 219 243 EV/Inv.016 EV/EBIT (X) 33.4 53. driven strongly by renminbi appreciation Return Price as of Jan.9 1. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 35.1 3. CYTS is well positioned to benefit from these trends. We have maintained our Outperform rating on CYTS.4/1.6. 53.3 EPS (Rmb) 0. It now owns a hotel chain of 10 budget hotels and the well-known Wuzhen resort.5 34.91 ROAE (%) 7.4 CYTS’ outbound tour business has grown rapidly in recent years and become a new focus.6125. property development and leasing. CYTS is the largest tour operator in northern China.kgi.0 25. CYTS share price chart Share price. The travel agent business generated about 85% of revenues in 2006.21.0 20. 150 39. Our 12M target price of Rmb41 is based on 50x and 45x our respective 2008 and 2009 EPS forecasts.4 39. 7.7 27.0 0. 2008 23 . performance (3.kgi.5 3. 26 Company Description O Established in 1997 and headquartered in Beijing.tw Huei-chen Flannery (Coordinator) 86. 2008 Institutional portal: http://research.34 0. We think growing per capita income in China will continue to provide a solid base for growth.8 Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg. Rmb (LHS).SS/600138 CH) January 14.2181. and 40% of that came from inbound travel.8675 Biggest tour operator in northern China Inbound & domestic travel business outlook strong in 2008 The China inbound travel business was steady in 2007 and is likely to see stronger demand in 2008 from the Olympic Games.58 0.12M)(%) Rel. Outbound travel business a new focus.4 78. daily trading (mn) Abs.8730 stephen.0 30. The domestic tour business will also grow more strongly on the back of the new favorable public holiday plan and paid holiday system.com Tourism China Outperform Maintained 1 2 3 1 2 Stephen Wang 886.9 2.4 14.0 10. while renminbi appreciation will further stimulate demand for overseas travel.0 15. We expect to see explosive growth in cross-straits tourism within the first few years of travel restrictions being lifted.7 1.5 11.12M)(%) N 13.0 35.com January 14.A.6 .6. Cross-straits tourism a huge opportunity .6 EBIT (Rmb mn) 76 192 297 365 EV/EBITDA (X) 13.3. KGI Securities estimates Price performance relative to SSEA Institutional portal: http://research.1 11.455 320 209 N. and its other investments include lottery sales. C.0 Jan-07 Feb-07 Apr-07 May-07 Jul-07 Aug-07 Oct-07 Nov-07 40 30 20 10 0 (10) (20) (30) Jan-08 Share price Source: Company data. (X) 1.663 EV/Sales (X) 0.

202 130 3.001 267 1.2 112.2 11.0 30.412 267 598 547 2008F 4.China & Hong Kong CYTS Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 3.91 Source: Company data.0 0.489 434 619 1.3 0.7 23.15 6. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.8 185.490 687 387 300 1.1 Operating Year x Margin 2005A 1.660 250 1.1 2009F 0.0 74.7) 2.4 153. KGI Securities estimates Source: Company data.28 0.4 805 0.646 1.4 7.29 14.738 3.4 528 0.64 0.71 21.305 105 2.5 5.8 169.1 29.37 0.9 180.308 2.0 0.34 0.250 267 603 380 2006A 3.9 35.3 11.9 33.9 45.23 2006A 2.016 651 365 (28) 14 42 26 28 392 82 310 (67) 243 696 0.7 167.1 7.34 2007F 3.608 242 605 761 431 175 256 1.4 3.4% 2009F 76.039 1.0% Operating Margin 1.1 16.5 6.58 1.9% 10.3 2008F 0.0 2009F 3.76 5.1 1.334 212 1.1 After-tax Return on Inv.6 6.6 43.7 81.1 6.1 5.590 267 598 725 2009F 4.1 10.5 2.1% 11.1 0.6% 5.9 28.91 2.4 70.0 60.kgi.21 1.0 0.3 7. = Revenue 8.319 118 1.15 1.541 208 1.4 17.791 267 598 926 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op. Capital 1.8 2006A 24.083 119 1.792 2.868 120 3.0 Cash x = Tax Rate 76.9% 2006A 2.75 4.0% 2008F 78.1 11.4% Year 1Depreciation Revenue 4.882 299 600 984 700 400 300 1. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.5 0.203 2.343 2.3 1.436 712 412 300 1.58 2008F 5.994 2.3 14.9 5.com January 14.8 55.9 54.18 0.4 10.3 2.5% 11.0 0.82 2009F 5.6) 10.4 54.510 523 300 2.041 1.9% 83.8 11.3 2007F 0.2 35.516 446 581 1.455 4.311 265 158 1.8% Net PPE Revenue 0.1% 5.9 1.68 8.5% 8.6) (13.0 2008F 45.0 152.251 263 1.9 0.2 70.0 29.3 0.0 0.162 543 311 2.17 1.866 2.2 5.9 0.0% 80.4% 2009F 6.0 35.142 227 136 1.60 4.1 70.2 0.8 8.1 2.6 64.608 276 2.3 10.5 3.11 0.057 250 206 45 (0) 4 4 1 23 69 17 53 10 62 143 0.8 2.1% 2008F 5.0 101.6 22.12 0.3% 3. KGI Securities estimates Source: Company data.8 39.5 (129.0 33.8 51.5% Other Assets + = Revenue 0.2 69.386 371 1.3 14.582 1.7 39.0 0.4% 4.3 29.3 0.9 26.4 0.1% 6.2 0.8 41.73 0.1 16.6 0.7 0.8 10.4% Capital Turnover 1.2% 83.1 107.4 Capital Turnover 1.8 0. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 2.2% Working Capital Year 1/ + Revenue 2005A 0.6% 3.8 22.2 0.72 0.33 5.9 6.721 216 1.3 5.7 135 0.5 710 0.2 45.4) (3.663 4.342 138 1. Net Cash Flow 2005A (554) 53 98 (704) (1) (362) (416) 63 (9) (916) 695 (49) 603 141 (222) 2006A 207 98 109 37 (36) (96) (156) 17 44 112 (54) (36) 22 (40) 58 2007F 243 195 201 (108) (44) (474) (346) (68) (60) (231) 216 (48) 220 44 (15) 2008F 868 278 252 376 (38) (805) (800) 25 (30) 64 (9) (40) 31 0 55 2009F 997 310 331 383 (26) (662) (650) 13 (25) 336 (106) (43) (64) 0 229 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A 32.4% 6.6 5.994 2.2 (13.9 6.1 2.4 650 0.82 1.8 1.2 35. 2008 24 .4 1.8% 5.00 0.116 622 430 192 (20) 11 31 44 19 235 40 195 (40) 155 393 0.96 20.4 1.0% 79.5% 11.558 358 205 1.1 + Operating Exp.1 1.17 0.2 Source: Company data. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 84.2 5.89 10.144 60 2.6% 2007F 5.23 0.3 1.9 2007F 30.4 1.531 925 627 297 (29) 10 39 38 41 347 69 278 (59) 219 549 0.4% 2007F 78.6 62.9% 2.791 882 195 145 542 908 613 295 1.201 2.1 59.4 12.6% 5. KGI Securities estimates Institutional portal: http://research.7% Source: Company data.9% 2006A 83.1 41.2 158.2 2.1 17.9 12.4 2006A 0.500 365 290 76 (6) 11 17 36 10 117 19 98 (7) 91 185 0.5 2.5 1.9% 10.5 0.16 1.305 267 598 440 2007F 3.7 30.2 232.43 1.

9 45. 2 16.0 Gross Profit (Rmb mn) 36 205 549 794 EV/EBIT (X) (60. 118. Huayi Electric share price chart Share price.0 10.5 89.44 ROAE (%) N. 2008 (Rmb) 12M target price (Rmb/shr) Upside/downside (%) The ranking of excess return (%) Dividend yield-12/07E (%) L 40. C. performance (3. in cooperation with local governments.2mn kW and equipment business worth over Rmb10bn (nearly Rmb5. we expect Huayi’s shipments of wind turbine to rise to over 300 units in 2008.0 -- Balance Sheet Book value/shr-12/037 (Rmb) P/B-12/07E (x) Net debt/equity-12/07E (%) M 1.7) 76. Rmb (LHS).5 28.2. Our 12-month target price is Rmb50.6.Huayi Electric (600290.34 1.0 Feb-07 Mar-07 Apr-07 May-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 170 150 130 110 90 70 50 30 Jan-08 Share price Source: Company data.0 20.A. We are upbeat about Huayi’s positioning in the wind power equipment market. Huayi derives most of its income from power switch (sets) used in grid construction.SZ.3 Return Price as of Jan.2 12. percent (RHS) 45.0 and Rmb1.0 11.0 30.0 15. Based on post-private placement market cap. Wind field development strong.6 18.6 41. significantly boosting its chances of winning a sizable share of China’s Rmb100bn wind power equipment market. Based on these factors. 306 23.5 10/1. (X) 4. NR) for the past two years.1 50. Rmb46.00 22. equipment business worth over Rmb10bn We expect Huayi’s business model of bundling wind tower production with wind field development will prove strongly supportive of long-term growth. we expect wind power equipment sales to surpass those of power switch equipment. we forecast 2008 and 2009 EPS of Rmb1. 31. Benefiting from increased power grid investment in China. Wind field development projects.6. 2008 25 .0 27.277 244 69 N. performance (3.12M)(%) Rel.174 EV/Sales (X) 4.8730 stephen. 2008 Institutional portal: http://research.SS/600290 CH) January 14.A.44. In 2008.7 66. Year to Dec 2006A 2007F 2008F 2009F Year to Dec 2006A 2007F 2008F 2009F Sales (Rmb mn) 319 892 2.kgi. It has also been cooperating with wind power equipment maker Xinjiang Goldwind (002147.7 19.0 11.8673 Long-term growth assured by wind field projects Wind turbine shipments to take off in 2008 Huayi Electric has an experienced R&D team and a flexible sales model. Given that wind field development takes 2-3 years. respectively.00) 0.81 50. Huayi’s first 1. 30.0 35.7 per share between 2010 and 2012. price performance relative to SSEA.4 3.0 28.6. the earnings contribution of these projects will average Rmb1.6125.0 earnings contribution per share). -6.8 EBIT (Rmb mn) (21) 131 329 476 EV/EBITDA (X) 51.A.wang@kgi.4 Net Income (Rmb mn) (0) 84 243 351 EV/Inv.kgi. making Huayi one of the most attractive green concept stocks in China.195 3.tw Honda Wei (Coordinator) 86.0 40.0 25.3 29.6 19.com January 14. Huayi is specialized in two areas: electric power equipment and wind power equipment manufacturing.3 EPS (Rmb) (0. KGI Securities estimates Price performance relative to SSEA Institutional portal: http://research. Solid long-term business outlook – Outperform maintained Wind power technology has assumed mainstream status in the renewable energy market.12M)(%) N 10 .2181.6 Trading 52-week trading range (Rmb) Mkt cap-Rmb bn/US$ mn Outstanding shares (mn) Free floating shares (mn) Foreign ownership (mn) 3M avg.6 8.com Electric China Outperform Maintained 1 2 3 1 2 Stephen Wang 886.9 EBITDA (Rmb mn) 24 150 349 497 P/E (X) N.2 4.2.21. 104 Company Description O Huayi Electric listed on Shanghai Stock Exchange via a buy-out of SFM.com.00 1.42. daily trading (mn) Abs.5MW four-pole double-feed wind power unit will go into trial in 1Q08. 7. amount to installed capacity of 2. Maintain Outperform.

3 28. (0.2 44.4% Working Capital Year 1/ + Revenue 2005A 0. 63.5%) 2007F 14. = Revenue 15.32 (0.1 Capital Turnover 1.6 11.1 4. KGI Securities estimates Cash Flow Year to 31 Dec (Rmb mn) Operating Cash Flow Net Profit Depreciation & Amortization Change in Working Capital Others Investment Cash Flow Net CAPEX Change in LT Investment Change in Other Assets Free Cash Flow Financing Cash Flow Change in Share Capital Net Change in Debt Change in Other LT Liab.6 39. 0.6 44.4 96.5 After-tax Return on Inv.0 15.8% 8.2 1.9% 17.1) 2007F 0.6) 0.18 0.9 0.5 44.2 2006A (0.4 101.1 132.6 (13.1 Net cash -0.8 (5.00) 2007F 892 687 205 74 131 (0) (0) 0 0 (1) 131 43 87 (4) 84 150 0.46 9.0% Other Assets + = Revenue 0.52 3.2 2008F 0.4) -(0. Minority Interest) Net Profit After Extraordinaries EBITDA EPS (Rmb) 2005A 323 288 35 51 (16) (9) (9) 0 (8) (11) (44) 0 (45) 3 (42) 24 (0.A.5 41.6 113.1 0.44 Source: Company data.89 13.7% 15.5) 1.7) N.1) 7.95 N.34 0.6 33. KGI Securities estimates Rates of Return on Invested Capital COGS + Revenue 2005A 76.6 53 (0.3 1.3 133.0 1. 0.0% Capital Turnover 1.0 2.7 (78) 1. 29.4 5.5 189.A.9% 0.D.51%) 14. 515.00 1.0 15 0.4 104. N.7 2008F 146.6% 49.0% 75. 1.0% 75.7 31.9 N.35 N.195 1.00 1.8 2.3 (6.7% 2008F 15.1% 0.5 (357) 1.1 Operating Year x Margin 2005A (5.104 694 120 270 20 254 26 207 20 407 397 170 177 50 10 0 10 950 244 34 672 Profit & Loss Year to 31 Dec (Rmb mn) Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Interest Income Interest Income Interest Expense Net Investment Income/(Loss) Net other Non-op.358 1.3 2006A (1.0% 10.54 N.9 0.6 N.D.9 189.3 26.07) N. 2.1 2009F 0.0 15.4 0.5) N.4 5.8 30.1 151.5) 7.0% Operating Margin (5.9 11.8 13. KGI Securities estimates Source: Company data.8 19.0%) (12. Income/(Loss) Pretax Income Income Taxes Net Profit Before Extraordinaries Extraordinaries (incl.6 110.00) 0.1) N.3 30.9 61.6 0.5% 2006A 74.09) N.08 2.34 2008F 2.0 Cash x = Tax Rate 100.9 0.A.1 0.7 -2.3) N.D.A.46 3.7 2. 11.6 0.5 90.2%) 20.9 27.6% Net PPE Revenue 0.17) (0.A.9% 112.5 45.6 18.7 2.2 40.8% 62.83 1.0% Year 1Depreciation Revenue 12.6 126.A.0 13.10%) (6.00 2009F 3.17) 2006A 319 283 36 57 (21) (7) (7) 0 (0) 30 3 (0) 3 (3) (0) 24 (0.42 1. N.7% 14.3 97.6 N.2 1.7 16. KGI Securities estimates Institutional portal: http://research. N.2) N.D.0% Source: Company data.5 25.kgi.2 0.0 0. 23.31 (0.00) 0.1% 2.0 -2.4 75.3 18.82 1.9% 67.A.0 -1.174 2. 10.1% 2009F 74.A.44 1.1 51.0 15.0 0.5 25.9% 2008F 74.7 Net cash -2.6 -0.D.0% 2009F 15.3 Source: Company data.6 33 (0.0 15. KGI Securities estimates Source: Company data.5 25.6 42.01 1.com January 14. Net Cash Flow 2005A (80) (45) 41 (84) 8 18 (59) 17 60 (62) 26 6 17 3 (36) 2006A 140 3 45 92 0 (54) (49) (0) (5) 86 (62) 3 (68) 3 25 2007F (93) 87 19 (200) 0 (25) (24) 0 (1) (118) 193 70 124 (1) 75 2008F 253 247 20 (15) 0 (10) (9) 0 (1) 243 (18) 0 (18) 0 224 2009F 358 357 21 (20) 0 (32) (31) 0 (1) 326 12 0 12 0 339 Key Ratios Year to 31 Dec (Rmb mn) Growth (% YoY) Sales OP EBITDA NP EPS Profitability (%) Gross Margin Operating Margin EBITDA Margin Net Profit Margin ROAA ROAE Stability Gross Debt/Equity (%) Net Debt/Equity (%) Interest Coverage (x) Interest & ST Debt Coverage (x) Cash Flow Interest Coverage (x) Cash Flow/Interest & ST Debt (x) Current Ratio (x) Quick Ratio (x) Net Debt (Rmb mn) Per Share Data (Rmb) EPS CFPS BVPS SPS EBITDA/Share DPS Activity Asset Turnover (x) Days Receivables Days Inventory Days Payable Cash Cycle 2005A (11.5 2007F 179.9) (8.646 549 220 329 (0) (0) 0 0 1 330 82 247 (5) 243 349 1.5 11.3 2009F 44.8 9.A.381 794 317 476 (1) (1) 0 0 1 477 119 357 (6) 351 497 1.6 0. (51.5 2.1 -(0. 2008 26 .0 14.3% 10.0% 15.China & Hong Kong Huayi Electric Balance Sheet Year to 31 Dec (Rmb mn) Total Assets Current Assets Cash & ST Investments Inventories Accounts Receivable Others Non-current Assets LT Investments Net fixed Assets Others Total Liabilities Current Liabilities Accounts Payable ST Borrowings Others Long-term Liabilities Long-term Debts Others Shareholders' Equity Common Stock Capital Surplus Retained Earnings 2005A 487 249 49 92 98 10 238 26 195 17 288 280 90 127 63 8 0 8 200 174 34 (9) 2006A 517 270 70 85 110 4 247 26 201 20 315 304 79 59 166 11 0 11 202 174 34 (6) 2007F 750 497 142 100 235 20 253 26 206 20 393 383 150 183 50 10 0 10 356 244 34 78 2008F 984 742 362 110 250 20 242 26 196 20 385 375 160 165 50 10 0 10 599 244 34 321 2009F 1.A.6 50. Capital (6.6% 2007F 74.5 + Operating Exp. 2.1 0.1%) 2006A (6.5 Net cash -2.A.7 -(0.66 0.1 4.

enterprises with a complete product chain and specialty fiber business will prove more competitive and profitable. The steel sector to remain in cyclical upturn in 2008. we expect GDP growth to be slower than in 2007. Overcapacity & fierce competition linger. Demand to grow as the State Council announced a new holiday plan at end-2007 and the new labour law entitles employees to a certain number of paid holidays. Therefore. Demand growth will be key to sector recovery. We remain Overweight the sector.Overweight Shanghai Int'l Airport (600009. will see stable growth in 2008. We also like suppliers of heavy machinery. supply growth to slow & utilization to recover in 2008. including Kweichow Moutai. Firms located in sulphuric acid (made by pyrite) rich regions will be competitive due to low raw material costs. The current valuation has by and large factored in sales growth expectations. We like Yangtze Power. covering railways and power grids. Dongfeng and Denway Motors. Restrictions abound as in the nitrogenous fertilizer segment. closely linked to FAI. We expect power demand to stabilize. We like firms with resources and diversified development. respectively. we expect viscose fiter prices to remain high and rising raw material prices will weigh on makers. stable deposits structure. we remain Overweight the sector. 2008 27 . Upbeat economic outlook for emerging markets and strong demand from oil-exporting nations in the Middle East will drive up global container shipping and we think shipping rates will grow further in 2008. Changan. We estimate China's 2008 FAI growth will remain at 15-20% given no sharp drop in the global economy and launch of China's 11th Five Year Plan. Earnings plunged/ losses incurred due to rising phosphorite and sulphuric acid prices.Overweight Tourism .52mn units (up 20%) and 2. The segment enjoys preferential policies while constrained by price limits and export duty. and its ability to act as a defensive investment target admist economic uncertainty. Ongoing consolidation within the industry to help sector leaders expand and boost industry integration. We are Overweight the sector. We estimate 4. cross-straits relations will likely see a breakthrough. the key driving force of coal share prices. slowing port throughput growth. In 2007. Port throughput growth is closely related to economic growth. The supply-demand gap will narrow going forward. The 2008 outlook is good. We remain Neutral on the oil shipping sector.SS) Source: KGI Securities Institutional portal: http://research. automobile shipments could exceed 10mn units. and the launch of the RVSM. and aerospace & military.SZ) Fertilizer Coal Overweight Food & beverage Overweight Technology Power Neutral Neutral Property Neutral Machinery Overweight Steel Overweight Wuhan Steel (600005. Going forward. we remain Neutral on the sector.e. though sector valuation is below average. Great Wall Motor. We remain Neutral on the sector as car demand will remain strong.Overweight CYTS Tours (600138. and (6) decreasing cost-to-income ratio of listed banks suggests better operating efficiency. Tighter regulation in 2008 will stem house price rises. The machinery sector. we recommend companies that can justify high valuations through sales/earnings growth or asset acquisition. (1) Solid economic growth continues and accelerating renminbi appreciation favors private consumption. Around 70% of products are imported. We remain Overweight the sector on relatively strong demand. Since China will adopt a tight monetary policy in 2008. Huaxin Cement.SS) Cement Overweight Jidong Cement (000401. energy-conservation & environmental protection. earnings will surge.kgi. Our top picks are passenger vehicle plays SAIC. its non-cyclical nature. Some listed companies expecting asset injection will also experience significant growth.4x in 2009. cement output & prices both rose and profitablity improved. completion of expansion projects. Ports without capacity expansion will see growth slow. while ports with increasing capacity will grow at a faster rate. Hence. Expectation of an electricity price hike is rising on higher contract coal prices. Continued renminbi appreciation particularly will boost outbound travel. We have raised our rating on the container shipping sector to Overweight from Neutral. car shipments were brisk in 2007. Given China's high economic growth and wealth effect from the booming stock market and renminbi appreciation. price restrictions and higher export duties.000-5. we expect passenger and commercial vehicle shipments to total 7. Prices fluctuate with international market.China & Hong Kong China market strategy Sector Summary Figure 24: Our sector view – China Sector Auto Rating Neutral Rationale Thanks to solid demand. High oil prices will keep shipping rates high. and both sides will move faster toward the establishment of direct flights and relaxation of cross-straits tourism. Jidong Cement and Jiangxi Cement . Sector upturn throughout 2007 despite control measures. faster re-pricing pace of loans than deposits and improving inter-bank yield. but high raw material prices ate into sector profitability. where overcapacity remains acute. We forecast FAI growth will remain over 20% in 2008 and demand will maintain 8-10% annual growth in the next three years. Undercapacity will be eased due to increasing flight routes & load rates. Tsingtao Brewery and Shuanghui Development. Global potash fertilizer makers will likely raise prices.com January 14. We also expect coal prices to be more market driven and sector consolidation to accelerate in 2008. Huaneng & SDIC Huajing Power. We expect the earnings growth of coal companies. implying upside. potash fertilizer prices will rise further. We forecast average forward PE will be an attractive 30. Cargo throughput to maintain strong growth in 2008. Sector consolidation & impressive profit growth look set to continue this year despite tough conditions due to control measures. Hotel & restaurant sales continued double-digit growth in 4Q07 and uptrend is set to continue in 2008. and commercial vehicle makers Yutong and King Long Motor. strong downstream demand boosted viscose fibre prices by a hefty 50%. especially leading players.SZ) Top picks Bank Overweight China Merchants Bank (600036. Financial Street & China Enterprise Outperform. Overcapacity has emerged.SZ) Nitrogenous fertilizer Neutral Phosphate fertilize Underweight Potash fertilizer Overweight Viscose fibre Neutral Salt Lake Potash (000792. (4) stable local enterprise earnings growth and lower provision needs in 2008 ensure banks' asset quality and profitability. Demand will continue to grow ahead of the Olympic Games. As local production costs will remain unchanged.000 mt of cement production lines were shut down in 2007 and more uncompetitive capacity will be phased out in the next three years. We remain Overweight the sector and Outperform Conch. 2008 outlook is weak because export duties rose significantly and sulphur price will likely surge. Coal prices will likely be steady in 2H08. In terms of supply control. Therefore. 1Q08 slow season. Given port throughput growth will slow.SS) Airport . which will stay at cycle peak due to longer shipping distances & port congestion. railways & power grids). Assuming the KMT wins Taiwan's presidential election in March. We rate Vanke.Neutral Shipping . we rate the sector Neutral.83mn units (up 13% YoY) in 2008. Hence. (3) more revenue contribution from consumer banking. We are particularly upbeat about sub-sectors that are closely related to major infrastructure (i.We expect automakers to maintain net margins at an impressive 6% in 2008 on higher utilization rates. Huayi Electric (600290. (2) NIM can be further improved due to demand deposit rate-cuts. nuclear/wind power/aerospace equipment and precision machining equipment. This will benefit major airports. We are upbeat on the sector in 2008. Overall. (5) favourable tax reform in 2008. the phase-out of outdated cement kilns will be key. Earnings will fall on rising raw materials costs.SS) Transportation Port . We remain Overweight the bulk shipping sector. to be higher in 2008 than in previous years. We like sector leaders which have attractive valuations and clear growth prospects. In 2007.SS) Shandong Helon (000677. benefiting coal makers. which is less sensitive to macro-cooling measures.

6 59.7 19.8 6.9 26.2 15.CN PE.7 11.2 23.6 27.8 46.0 17.0 8.7 14.5 8.7 14.7 29.5 5.7 35.1 18.2 19.2 23.8 38.5 8.8 5.7 75.7 16.6 29.8 32.1 10.3 32.6 24.6 26.8 21.7 19.6 4.3 46.9 50.8 18.1 5.5 33.4 11.0 14.2 27.0 18.4 28.7) 22.4 7.6 44.8 33.0 16.2 52.2 12.2 46.6 41.9 51.8 24.9 58.7 10.1 68.6 35.8 6.8 6.4 4.4 18.1 60.4 Figure 26: PE vs.2 18.3 29.5 55.7 15.1 47.1 15.1 21.7 5.7 29.6 19.3 27.6 3.2 17. percent (y-axis) 24 22 20 Manufacturing Securities Steel Textile Power Auto Bank Transportation Petrochemical Cement KGI universe Real estate Tourism Glass Retail & trade Electrical Chemical Energy Food Cement Chemical Tourism 18 Medicine Energy 16 Food Electrical Conglomerate Medicine Steel Textile Retail & trade 14 12 10 80 4.0 15.3 5.3 P/B (x) 2007F 5.1 22.8 5.9 16.9 4. percent (y-axis) 150 120 90 60 30 0 (30) 20 30 40 50 60 Securities Transportation Auto Bank Petrochemical Power Manufacturing KGI universe Electronics Real estate Glass Conglomerate Figure 27: P/B vs.6 ROAE (%) 2007F 2008F 16.7 4.5 5.4 118. x (x-axis).7 13.8 46.1 53.0 17.2 23.0 99. EPS growth.5 6.5 7.4 8.5 20.1 32.7 25.2 20.9 (9.6 36.0 10.2 14.0 Source: KGI Securities Source: KGI Securities Institutional portal: http://research.5 2008F 4.0 17.6 26. 2008 28 .0 52.2 7.8 25.8) 54.2 6.8 22.5 6.8 4.3 55.1 21.0 16.0 12.3 9.7 35.2 EPS growth 2007F 2008F 85. EPS growth.0 6.9 27.5 7.0 8. 2007F .5 50.1 4.2 18.0 10.1 14. x (x-axis).8 22.3 23.8 27.3 34.6 31.7 14.5 6.2 53.2 119.8 2008F 27.8 30.8 71.9 30.7 17.1 17.9 9.0 38.6 21.5 4.com January 14.8 5.5 42.0 18.1 24.1 20.9 45.3 21.7 23.5 28.4 29. ROAE.6 48.8 35.2 24.China & Hong Kong China market strategy Figure 25: Sector valuation – China PE (x) Auto Bank Cement Conglomerate Chemical Electrical Electronics Energy Food Glass Manufacturing Medicine Petrochemical Power Real estate Retail and trade Securities Steel Textile Tourism Transportation KGI universe Source: KGI Securities 2007F 34.8 8.0 19.kgi.5 11.3 (3.1 15.1 42.4 148.0 Electronics 70 6.2 47. ROAE. 2007F .6 18.7 31.CN P/B.2 8.2 17.2 23.7 60.5 29.4 10.7 21.

6 liters and 2.28mn units. up 25. up 21. We forecast annual shipments of commercial vehicles to hit 2.0 10.3% in 2006 to 12% for the first 11 months of 2007.0 8. Source: CAAM Leading enterprises had impressive net margins in 2007 In September 2007.8730 3 stephen. brisk SUV and MPV sales indicate consumer demand is becoming increasingly diversified. Meanwhile. while shipments of sedans with engine sizes between 1.5 liters rose from 32. inventories did not rise too much relative to brisk vehicle sales.0 2002 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 Oct-07 Source: CAAM Figure 30: Inventories manageable in 2007 Inventories. Overall.63% mark posted for full-year 2006. For 2008.4% in 2006 to 38.36%.0 6.6% YoY.8677 Figure 29: High net margin for leading companies Average net margin of leading automakers. market share of sedans with engine displacements of 1 liter or less shrank from 16.0 Auto sales were brisk in 2007 and leading players’ net margins were impressive Passenger vehicles: More growth expected this year. For the first 10 months of 2007. while commercial vehicle shipments came in at 2. on the back of strong economic growth. As shown in Figure 4. ‘000 units 200 150 100 50 0 (50) Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Source: KGI Securities We expect passenger vehicle sales to total 7.wang@kgi. the average net margin of key auto enterprises selected and tracked by the Chinese government hit 7. MPV shipments in the same period totaled 204k units. up 23. In 2007. According to China Association of Automobile Manufacturers (CAAM).6125. surpassing the year’s previous peak posted in June.8% YoY. automobile shipments in China could exceed 10mn units in 2008. we expect automobile demand to remain robust and capacity utilization to keep boosting automakers. Also. up 13% YoY. Under these circumstances. We expect auto enterprises to maintain net margins at the impressive level of around 6% in 2008.2. percent 12. sedan shipments in the first 11 months of 2007 came in at 4. Passenger vehicle shipments to keep rising According to CAAM. we expect China’s economy to remain healthy as fixed-asset investment will not decrease significantly and personal income will keep growing. Institutional portal: http://research.com. while SUV shipments in the same time span grew 58% YoY to 316k units. in 2008.2% YoY. The significant rise in net margin is likely due to higher capacity utilization and better economies of scale. especially in mid-size models Commercial vehicles: Bus market outlook good We remain Neutral China’s auto sector Auto sales strong in 2007 Thanks to solid demand. key automakers in China posted net margin of 6.China & Hong Kong China market strategy Auto sector Further growth in passenger vehicles in 2008 1 Stephen Wang 2 86. as shown in Figure 3. automobile shipments were brisk in China in 2007. resulting in the wealth effect from the rising stock market and renminbi appreciation. in 2008.66mn units.24mn units. up 23.52mn units.95mn units for the first 11 months of 2007.com January 14. Specifically.21. Figure 28:Automobile sales were brisk in 2007 Monthly shipments.5% YoY. the wealth effect spurred the migration of auto consumption toward models with bigger engine displacements. passenger vehicle shipments came in at 5.3% for the first 11 months of 2007.62%.0 2. automobile shipments totaled 7.6% from the same period in 2006 and only slightly lower than our 2007 full-year forecast.83mn units. up 23. 2008 29 . up 20% YoY. ‘000 units 900 800 700 600 500 400 300 200 Jan Feb 2003 Mar Apr 2004 May Jun Jul 2005 Aug Sep 2006 Oct Nov Dec 2007 4.2181.kgi. up nearly 2 ppts over the 4.tw 1 Michelle Wei (Coordinator) 2 86.

Investment opportunity in 2008 will be an additional sales booster when national emissions standards (third-stage) are implemented.HK.0 25. as we forecast passenger vehicle shipments to reach 7. replacement demand will be strong in many regions. 2008 30 .com January 14. Great Wall Motor. Semi-trailer was the highlight of the commercial vehicle division again in 2007. will remain in 2008. up 27% YoY. such as fixed-asset investment and charging of toll fees by payload. according to CAAM. auto enterprises that will benefit from increased consumption of mid-end sedans. HK$5. Denway (0203. we recommend investors focus on two enterprise sets.1.7 13. We remain Neutral on China’s auto sector. OP). Therefore. We recommend SAIV (600104.5 liters 2.0-2. Institutional portal: http://research. Changan. which are mainly produced through joint ventures between Chinese and foreign auto enterprises. and Dongfeng (0489. and growth will continue for highway passenger traffic and turnover due to strong business/pleasure travel demand in China.0. Rmb34.0-1. and commercial vehicle makers Yutong and King Long Motor. HK$5. N). bus and bus chassis shipments totaled 312k units. which has just launched the eighth-generation Accord.3 Figure 32: Highway passenger traffic and turnover up in 2007 Annual growth rate of passenger traffic and turnover. However.SZ. First. The second set of enterprises are those that with clear profit growth outlook in 2008. as bus exports should grow fast. Rmb19. Rmb23.HK. making it a good investment target.6-2.5-3. up 17% YoY. up 20% YoY. Weifu Hi-Tech will be a beneficiary of the new standards. we believe the Chinese passenger vehicle market will keep growing on sustainable car demand in 2008.0 liters 2. Our top picks in this area are industry leaders King Long (600686. heavy-truck shipments might beat market expectation.0 liter 12. While demand will remain strong for the entire automobile market. Our top picks are passenger vehicle plays SAIC.8 47.China & Hong Kong China market strategy Figure 31: Demand for higher-end models up on the wealth effect Breakdown of auto shipments by engine size. especially during the Beijing Olympics in August.6 20.52mn units in 2008. Dongfeng and Denway Motors. N). In fact.SS.92. As a result. percent 30 25 20 15 47.SS. Rmb27.8. OP). percent 11.SS. we expect the passenger vehicle division to grow faster than other sub-sectors within the automobile industry.3 2006 ≦ 1.2. and truck and truck chassis shipments came in at 1. OP). N) and Yutong (600066. We expect the bus market to remain strong in 2008. Once strictly enforced. whose budding own-brand products are well received by the market.kgi.6 liters 1980 1983 1986 1989 1992 1995 1998 2001 2004 Jan-Nov 2007 Source: KGI Securities Highway passenger traffic growth Highway passenger turnover growth Source: KGI Securities As the wealth effect continues to boost per-capita income in China. valuations are demanding.81mn units. Conclusion In our opinion. such as Changan (000625. demand for heavy trucks could decline in 2009. some of the factors behind the fast growth in demand for heavy-duty vehicles (particularly heavy trucks) in 2007.0 liters 1. as semi-trailer shipments grew over 100% YoY to reach 166k units.17.0 2007 1.6 10 5 0 (5) ≧ 3. Commercial vehicles: Outlook for bus market rosy In the first 11 months of 2007.0 liters 16.

This has boosted demand for fertilizer and agricultural chemicals.ccmb360.21. almost doubling the prices of nitrogenous. export duty on nitrogenous fertilizer has been increased for 2008. Rising oil price has opened investment opportunities in potash fertilizer.com January 14. Due to the government’s policy to support agricultural development. In contrast. the production capacity of Europe and the US has dwindled out of environmental and labour costs considerations. Sulphur.3% to US$1. leaving many makers in the red. China has been aggressively developing alternative energies such as methyl alcohol and DME.tw 1 Nico Zhang (Coordinator) 2 86.2. saw prices jump 2. earnings will surge in 2008. including chemical raw materials and chemical products. especially for generically modified corn.5 times in 2007. was particularly robust. since 70% of China’s potash fertilizer is imported. we are not optimistic about the segment. all of which are at early development stage Rising oil price has given rise to new investment opportunities Rising oil prices were one of the focal points of the world economy in 2007. DME can be used as a household fuel as its physical properties are similar to liquefied gas. In the first ten months of 2007. polyurethane & POM markets.8680 enough to meet demand.kgi. The robust demand. agricultural chemicals exports grew by 23. many countries have been looking into alternative energies and substitute raw materials. domestic output is just Due to surging oil prices. providing a vast array of investment opportunities. They have significantly driven up the costs and prices of general merchandise. With regard to the phosphate fertilizer segment.wang@kgi. Source: www.ccmb360. benefiting leaders in the chlor-alkali. the raw material of phosphate fertilizer. Therefore.08bn. As a result. domestic prices are by and large in line with the international market. US$/mt 650 550 450 350 250 150 Jan-06 Apr-06 Baltic urea Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 US Gulf DAP Russia potassium chloride Source: www.com China’s agricultural chemicals sector has a solid foundation for further development. China’s agricultural chemicals exports have significantly increased on the robust biomass demand. but is coal rich There is a supply glut of nitrogenous fertilizer in China. With ever-rising potash fertilizer prices and production costs. DME is less toxic and corrosive.com China lacks oil and natural gas. This will pull down profitability. In China.8730 3 stephen. expanding corn fields. As for the potash fertilizer segment. Figure 33: Rising oil price has created investment opportunities Fertilizer Biomass Rising energy prices Alternative energy Rising oil price Rising raw materials prices Rising shipping prices Coal chemicals Products competitive in Asia Domestic prices rise on high shipping costs Agricultural chemicals DME PVC BDO Sodium carbonate Potash fertilizer Sulphuric acid Products Potash fertilizer Glyphosate Methyl alcohol Figure 34: Global fertilizer prices rising Fertilizer FOB price. sodium carbonate & dyestuff fields We are positive on the long-term outlook of the organic silicon. Therefore. resulting in fierce competition. It can also substitute for diesel. because its alkane-16 value is higher than 55. Figure 35: Glyphosate price skyrocketing China's glyphosate price. a non-selective systemic herbicide.2181. 2008 31 . This trend will continue in 2008. has been in high demand. Ethanol.6125. Institutional portal: http://research. Rmb'000/mt 70 65 60 55 50 45 40 35 30 25 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Source: KGI Securities One of the much sought-after alternative energies is biomass. glyphosate & coal chemical segments Energy-conservation and emissions-reduction policy will force out small operators. a biomass. Moreover. driving up prices by over 100% in 2007.China & Hong Kong China market strategy Chemicals sector Rising oil prices & new energy policy are catalysts 1 Stephen Wang 2 886. phosphate and potash fertilizers in the international markets in 2007. rising raw material costs and shipping charges have raised the prices of related products. the price of these fertilizers also increased last year by varying degrees. the glyphosate segment has a promising outlook. The international demand for glyphosate. As China will launch a quota system on agricultural chemicals exports to regulate the market.com.

0 1. Some small operators have thus been forced out of the market. We expect DME to be more widely used in cars. In an attempt to meet the target. and ranking first. lending and fiscal measures. Outdated production facilities are being phased out. resources and technology. This means the last three years of the Eleventh Five-year Plan period will face more challenges in energy conservation and emissions reduction.China & Hong Kong China market strategy with hazardous gas emissions lower than gasoline and diesel. the government has raised entry barriers and tightened lending standards for highly polluting and high energy-consumption industries. or US$430/mt. Also. raising downstream chemicals prices. However.4 1.6 1. Sales and earnings have declined in the short run. have become export competitive. healthy competition Capacity expansion. Sodium carbonate prices have been rising of late. have enjoyed excess profits. such as potash fertilizer and sulphuric acid. 1. cancelled export tax rebates and levied export duties on certain products.com January 14. At present.5 1. production costs have significantly increased. China’s sodium carbonate is more competitive in Asia.3 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Energy conservation & lower emissions . and thus is more environmentally friendly. we are positive on large methyl alcohol and DME manufacturers with an edge in location. the government has supported energy-conservation/emissions reduction technology upgrades and pollution controls via state bond funds and fiscal expenditures. the Chinese government has adopted administrative. Around 25% of American sodium carbonate exports are to Japan and Southeast Asian countries. accounting for over 80% of the global market. the government has increased resource tax. some products. With oil prices rising. Rmb'000/mt 2.0 mt of liquid waste water. Over 80% of global BDO plants use oil and natural gas as raw materials. For example. Moreover. fourth. Emission cut Environmental protection Small operators forced out Leaders will benefit Source: KGI Securities The chemicals sector is an energy guzzler and a huge polluter. This has provided development opportunities for China’s coal-based chemical products.4tn cubic meters of gas waste. including sodium carbonate. 2008 32 . the charge of shipping potassium chloride from Canada to Asia is around US$70/mt. The chemicals sector produced over 3. Leading players will therefore be able to secure their positions in the market.ccmb360. the calcium carbide. Institutional portal: http://research.kgi. whose costs are well below China-made sodium carbonate. High oil prices have made the prices of PVC produced by the ethylene technique high. By contrast. well below the target. However.8 1. PU. taxation. BDO is an important organic chemical and fine chemical raw material. emissions per GDP declined by just 1. 7% and 5% of the national industry total.78% in 1H07. reining in unchecked expansion. China and the US are the main sodium carbonate exporters. accounting for 15% of the total energy consumption in China. respectively. American sodium carbonate is natural soda. Figure 37: Investment opportunities from new energy policy Costs reduced Energy conservation Technology upgrade Prices to rise on lower supply Fewer players. In order to upgrade products. the calcium carbide technique brings about higher profits. synthetic ammonia.33% in 2006 and 2. phosphorous yellow and sodium carbonate segments will face a lot of pressure to cut pollution. reduce excess capacity and upgrade technology. these measures will help consolidate the sector. the oil and chemicals sectors combined consumed 374mn mt of energy.9 1.A challenge and an opportunity Conserving energy and cutting emissions is China’s long-term policy. and 84mn mt of solid waste. There are two technologies used in the production of PVC: ethylene technique and calcium carbide technique. including PVC and BDO. used in the manufacture of PBT. THF. have boosted merchandise prices to a certain extent. due to the high shipping costs. benefiting the sector in the long run. For this reason.7 1. driven by high oil prices and tight shipping capacity. The energy-conservation/emissions reduction policy has forced enterprises to spend money in technology upgrade and environment protection. PTMEG and GBL. In the chemicals sector. Using coal and calcium carbide will be more competitive. The Eleventh Five-year Plan aims to cut emissions by 20% per GDP and by 10% for main pollutants. Rising international shipping fees. trial use of DME in cars is making progress. manufacturers of heavily import dependent products.com Surging oil prices have also boosted the prices of oil-based chemical raw materials. Global and 15% of China’s output is generated by the ethylene technique. in the long run. However. In 2006. accounting for 16%. boosting profitability. and fifth nationwide. Figure 36: Sodium carbonate price rise accelerating China sodium carbonate price. Therefore. M&A Sales & earnings rise Light sodium carbonate Heavy sodium carbonate Source: www. caustic soda. For instance. accounting for 16% of FOB price.

organic silicon prices have dropped by 22% from the level at the beginning of 2007. China has four or five small TDI manufacturers. Since a 100k-mt/year organic silicon monomer plant started to operate in 2H07 and some other small plants have come on stream.342 7. TDI requires less complex technology to make. midsole and chemical fibres. organic silicon.176 447 1. such as agricultural chemicals.puworld.000 mt/day Phase out single equipment below 5. calcium carbide/PVC and sodium carbonate. light industry. These markets are mature in foreign countries. New materials segment a rising star The new materials segment includes polyurethane.com January 14. This goal will help the development of makers of heat insulation materials such as polystyrene and polyurethane. new plant has to be at least 300k mt/year with carbide waste-based cement capacity of 2.com * Effective July 1. Figure 39: Breakdown of rein-in measures by segment Segment Calcium carbide Industry policy Phase out single equipment below 25k mt/year. China’s downstream organic silicon Institutional portal: http://research. which is impacted by capacity.0mn mt/year and combining of soda facilities below 300k mt/year New single equipment has to be 600k mt/year and meet energy consumption and environment protection requirements Restrict sulphur-based acid equipment below 200k mt/year and pyritebased acid equipment below 100k mt/year Export duty 25-35% on urea and 20-30% on phosphate fertilizer 20% 5% 15% Export duty rebate cut from 5% to zero for disperse dye and from 13% to zero for reactive dye Export duty rebate cut from 11% to 5% Export duty rebate cut from 11% to 5% for finished products and from 13% to 5% for raw materials Export duty rebate cut from 13% to zero Export duty rebate cut from 13% to zero Export duty rebate cut from 13% to 1% Raised by Rmb0. As Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: cn.com Organic silicon is widely used in the electronic. but they are at early development stage in China. Rmb'000/mt 60 55 50 45 40 35 30 25 20 Jan-06 Phasing out old facilities. They are noteworthy over the long term. Rmb'000/mt 30 28 26 24 22 20 18 Jan-06 Apr-06 Jul-06 Pure MDI Oct-06 Jan-07 Apr-07 Jul-07 Poly-MDI Oct-07 Jan-08 Source: CPCIA In addition to the above-mentioned pollution controls.516 1. Yantai Wanhua is China’s only MDI maker. textiles. TDI and polyether.China & Hong Kong China market strategy Figure 38: Chemical products' energy usage weighting Product Calcium carbide Sodium carbonate Synthetic ammonia Caustic soda Yellow phosphorous Energy consumption indicator in 2006 ('000 grams standard coal) 1. raised by 0. MDI prices have been stable due to the high concentration of the sector. These products are used in sponge. 2007 Source: KGI Securities Figure 41: TDI price has plunged China TDI price. heat insulation materials for electronic appliances and buildings. boosting competitiveness. The levy of export duties aims to protect domestic resources and stimulate the upgrading of products. man-made leather.2/kWh for sectors to be phased out. 2008 33 . The polyurethane segment includes MDI. The energy-conservation/emissions reduction policy is good for the long-term healthy development of segments that have experienced less severe oversupply or slight supply shortage. new single equipment has to exceed 10k mt/year Restrict ammonia-soda process facilities below 1. China has been promoting the green building concept. the government has also raised approval standards. single new equipment must be 50k mt/year and total capacity of new plant must be at least 200k mt/year Phase out mercury electrolytic cell. Compared with MDI. The market faces high risk because price volatility is high. Figure 40: MDI prices remain stable Eastern China MDI price.kgi. cutting energy consumption by 101mn mt standardized coal. applied differential power tariffs and levied export duties to rein in the highly polluting and high energy consuming segments in the chemicals sector. Despite capacity increase.000 mt/year.05/kWh for restricted sectors Differential power tariffs Caustic soda Yellow phosphorous Sodium carbonate Coking coal Sulphuric acid Segment Fertilizer Yellow phosphorous Sulphuric acid Coking coal Dyestuff* PVC* Agricultural chemicals* Sodium carbonate* Caustic soda* Phosphorous products* Source: cn. restrict metal anode and graphite anode electrolytic cell and facilities below 150k mt/year. Among them. Leading players in these segments will benefit from the policy in terms of competitiveness and profitability. cutting almost 25% of total capacity. The Eleventh Five-year Plan aims to build over 2. yellow phosphorous and calcium carbide segments. MDI technology is complex.puworld. However. History shows the development of the organic silicon sector hinges on downstream applications. restrict installation of equipment of 5-10k mt/year. establishing approval standards and applying differential power tariffs will ease the severe oversupply situation in the caustic soda. medical and mechanic fields.16bn square metres of buildings. the current price situation is stable. they will see high demand growth and will be less susceptible to cyclicality. POM and modified plastics. construction materials.300 Weighting of energy consumption (%) 75 20 70-75 60 60 such. poly-MDI and polyether makers will be large beneficiaries.

We like leaders in the segment. energy conservation and emission reduction. We like leading firms with relocation of old plants and export policies. China has provided a host of incentives to encourage the development of the modified plastics segment. prices fluctuate with international Global potash fertilizer makers will likely raise prices. earnings will surge. TDI and polyether segments. Firms with resources and diversified developments are noteworthy. boosting exporters' earnings. Downstream products have great growth potential in China. Chinese players are more competitive than average of 20%. resulting in supply shortage reduction policy. Hualu Hengsheng and Hubei Yihua Liuguo Chemical Phosphate fertilizer Potash fertilizer Salt Lake Potash.com January 14. However. the main themes for investing in this sector are alternative energy. a highly concentrated segment with stable MDI and polyether makers. Jiangshan. with more market volatility. Overcapacity.kgi. benefiting advanced technology. This. restrictions are power tariffs will be cancelled. Due to high pollution and energy consumption. Rmb’000/mt 30 28 26 24 22 Jan-06 well below the global average of 20%. They will enjoy higher earnings due to rising prices and the phase-out of smaller operators. few years Caustic soda and PVC prices have risen as demand is robust due to Due to government policies. As local production costs will remain unchanged. 2008. MDI production requires China is aggressively pushing the green building concept. upstream monomer demand has been growing. Key players Yuntianhua. We are positive on leading and price rise companies in the sector. With downstream applications widening. Huaxing Chemical. we expect China's demand to rise by 15% in the next multinationals because of advantages in flexibility. polyether segment has many product specs. toys. together with rising coking coal prices and differential PVC makers using ethylene method close to incurring losses due to rising power tariffs. Caustic soda and oil prices. Highly concentrated sector with orderly competition. Raw materials and energy costs will rise. Only those with calcium carbide-powerchlor-alkali production chain will be competitive. Around 10% of China's plastics is modified plastics. technology and services are key Many small companies have entered the market. We are positive on leading firms. aviation and space-related sectors. earnings down significantly or losses Outlook weak because export duties rose significantly and sulphur price incurred due to rising phosphorous and sulphuric acid prices will likely surge. affected by Outlook promising due to robust demand.chemsino. Around 70% of products are imported. will bring new development opportunities for the organic silicon sector. Therefore. policy. Therefore. technology and services. selling price restrictions restricted and export duty levied and higher export duties. profitability is not impressive. various restrictions. Firms located in sulphur rich regions will be competitive due to low raw material costs. TDI segment filled with small operators. we are positive on the outlook as the market expands and demand grows. we expect China’s modified plastics market to grow by around 15% a year. As modified plastics are increasingly replacing steel and wood. New materials such as POM. PVC makers using calcium carbide method posting healthy calcium carbide-based PVC costs will rise in 2008 because preferential earnings. development. coupled with high-margin advanced products. stricter new environmental protection Firms with leading technology and optimal product mix will thrive. Sanyou Chemical and Shuanghuan Science & Technology Zhejiang Longsheng New materials Polyurethane Yantai Wanhua and Hongbaoli Organic silicon Xinan Chemical and Blue Star New Chemical Material Kingfa Science & Technology Modified plastics Chlor-alkali Yinglite Chemicals and Xinjiang Taiye Source: KGI Securities Institutional portal: http://research.com Conclusion The chemicals sector has many segments with different characteristics and development trends. Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: www. driving down prices Technology and product quality of small firms lags long way behind leaders. fierce competition. stricter new environmental protection policy forces Leading players will benefit from energy-conservation/emissions smaller operators to cut or cease production. Includes MDI. Modified plastics account for only 10% of China’s plastic products. Chinese makers are more competitive than multinational players due to their flexibility and responsiveness. Since different buyers require different product specifications. growth lower than demand growth. affected by exports. bringing new opportunities. Many players. widely used in car. epoxy resins and polycarbonate are at their early development stage in China. lower than global Due to diversified demand. High oil prices will market keep shipping charges high. will drive up calcium carbide prices. Figure 42: Organic silicon monomer prices have stabilized Yangtze River Delta region DMC price. Modified plastics. Overall. Guannong and Citic Guoan Agricultural chemicals Sodium carbonate Dyestuff Xinan Chemical.China & Hong Kong China market strategy products are limited in terms of type and are low-end. enjoys preferential policies. Yangnong Chemical and Chongqing Sanxia Paints Shandong Haihua. This. driving up prices Highly polluting. We forecast demand growth will be around 10% per annum in the next few years. calcium carbide supply will be tighter in upcycle of non-ferrous metal smelting and construction materials sectors. potash fertilizer prices will rise further. severe. prices Earnings will fall on rising raw materials costs. exit of highly poisonous chemicals and export quota policies International prices of agricultural chemicals. home appliances. The production scale and market are small. Figure 43: Status of chemicals segments & investment recommendations Segment Fertilizer Nitrogenous fertilizer Industry status Development & investment recommendations in 2008 Overcapacity. office products. 2008 34 . and new materials. especially glyphosate. Demand for plastic resin exceeded 20mn mt in 2005. power tools. sodium carbonate output resources and large scale. PPO. Technology is less advanced. electrical and electronic products. have risen significantly.

com Viscose fibre has many desirable qualities and has thus seen its application widen. and marketing of differential staple fibres such as ultra-fine. Complete product chain key to competitiveness The production of cotton pulp. By this standard. we expect companies producing differential products to outperform in the viscose fibre market in terms of earnings. and health-care products. causes heavy pollution.com. This means that viscose fibre enterprises must have their own pulp capacity or face raw material shortages.webtextiles. the viscose fibre industry comes with high entry levels in terms of capital and environmental protection.webtextiles. Thus.SZ. Rmb25. firms expanding are mostly established players that are experienced and are less likely to expand wantonly.6125.0D Whitened Colored Modal Fire-retardant Health-care Market price (Rmb '000/mt) 22. the more the profit Market price. which does not have its own pulp capacity.6mn metric tons (mt) a year. whitened. enterprises featuring a complete product chain and differential staple products will prove more competitive. While a number of new projects have emerged in the past two years. the viscose fibre industry still features a stronger YoY profit margin. posted viscose staple gross margin of 18. Also. much improving sector profitability. KGI Securities Conclusion At a time when raw material prices are rising and the normal staple product market is faced with ever fiercer competition. thereby bringing up raw material prices. China’s viscose fibre sector posted gross margin of 18. causing cotton pulp to remain in short supply most of the time. Rmb’000/mt 23 21 19 17 15 13 11 9 7 5 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 Viscose staple Viscose staple .3%. fire-retardant.com. For these reasons. causing price competition. we favor sector leader Shandong Helon (000677. the Chinese government is encouraging the development of differential staples by local enterprises. which has in-house pulp capacity. we expect demand for differential products to keep growing.5. the increase in supply has mostly been digested by demand growth.7 22. KGI Securities Differential viscose staple fibre products raise competitiveness Currently. most imports are differential viscose staple fibre-based products with high added-value.2181. Company data.7 22. 2008 35 .7 25 26 30-70 70-90 Cost comparison with normal staple fiber Slightly higher Slightly higher Slightly higher Slightly higher Rmb1500 higher per mt Slightly higher Slightly higher Source: www. most viscose fibre capacity in China goes into the production of normal products. but overall. while Zhangjiagang Aoyang.1.com January 14. up 630k mt from 2006.8730 3 stephen. According to webtextiles. With strong downstream demand has come demand for upstream material. respectively.kgi. It is estimated that by 2009. Enterprises with in-house pulp capacity enjoy higher Source: www.0 ppts YoY. Viscose fibre’s main raw material.2 22. Also. Helon will increase production of these differential products.5D Ultra fine 1. posted gross margin of 12. YTD. Helon supplies itself with 100% of the cotton pulp its needs and is leading peers in the development. As a result. Therefore.7%. Therefore.tw 1 Nico Zhang (Coordinator) 2 86. Figure 44: Viscose fibre main materials have seen prices surge Price.2D Ultra fine 1.China & Hong Kong China market strategy Viscose fibre sector Complete product chain & differential products are key 1 Stephen Wang 2 886.webtextiles. production.2.4% for the first ten months of 2007. colored. Next year.com. cotton linter and cotton pulp prices have risen 105% and 79%. Shandong Helon. In 2006. Institutional portal: http://research. strong downstream demand has boosted viscose fibre prices by a hefty 50%.03*cotton p Prices of viscose fibre products are solid Increase in raw material prices could hurt profitability.1.com.8680 profitability. Figure 45: The longer the sector chain. we are positive about Helon’s development prospects. up 4.wang@kgi. resulting in cutthroat competition. with the main export being normal products. The rising raw material prices have weighed on the sector profitability slightly. but viscose fibre sector still has solid earnings We like companies with complete product chain & differential viscose staple fibre products Viscose fibre sector maintains solid earnings Year-to-date. authorities have imposed strict restrictions on its production. Figure 46: Differential staple more lucrative than normal staple Normal 1. As China’s largest producer of viscose fibre. OP).21. China’s demand for viscose fibre will reach 1. To change this situation. By comparison. Rmb‘000/mt 16 14 12 10 8 6 4 2 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Cotton pulp/staple grade Cotton pulp/filament grade Cotton linter/second cut Source: www.37*cotton linter Viscose staple . modal. we expect the viscose fibre price to remain solid.

350 0.990 2.530) Average bidding rate at Rmb0.453 0.487 0. by far the biggest number among the five national bids.488 0.486 0.304 0.4789-0.420 Huiteng-Xile 2004 (Inner Mongolia) Tongyu (Jilin) Tongyu (Jilin) Dongtai (Jiangsu) Dafeng (Jiangsu) 2005 Anxi (Gangsu) Jimo (Shandong) Bayin (Inner Mongolia) Danjinghe (Hebei) Huitengliang 2006 (Inner Mongolia) Huitengliang (Inner Mongolia) Wulan-Bayin (Inner Mongolia) Tongliao (Inner Mongolia) Yumen (Gangsu) Chengde (Hebei) China Power Investment Huadian 1. 11 firms bid for Chengde-Yudaokou project in Hebei with and rates the ranging average rate between being Rmb0.China & Hong Kong China market strategy Wind power equipment sector Goldwind IPO has triggered sector re-rating 1 Stephen Wang 2 886. Summary of the fifth bid To summarize the fifth bid.437 0.487 0.518 (Rmb0. which brought about cutthroat competition and stripped investors of profits.519 0.8730 3 stephen.4790.5300/KWh and the average rate being Rmb0.5189/K Domestic sourcing a focus of the fifth bid In the fifth bid.380 0. This latest bid covers four projects with combined installed capacity of 950k kilowatts (kW): Wulan-Bayin project in Mongolia (300k kW).462 0.8673 Wh.486 0. the winners in the previous four bids were always those who offered the lowest rates.519 (Rmb0. The data indicate that bidding prices are converging and becoming more reasonable and that cutthroat competition is no longer prevalent. The national low was set at Rmb0. The latest bidding attracted a total of 26 bidders.4180-0.kgi.450 0.516) Average bidding rate at Rmb0.382 0.382 0.330 0. 11 firms bid for the Tongliao-Beiqinghe project ranging Rmb0. We believe the wind power sector will thus become highly profitable.380 0.5180/KWh.5400/KWh and the average rate being Rmb0. percent 100 80 60 40 20 2003 2005 2006 2007F Source: KGI Securities Rmb0.403 0.876 Longyuan CECIC North United Power China Guangdong Nuclear Power 15 bidders 11 bidders 14 bidders 11 bidders 300 2.588 2.385 Weighting of power rate levels brought down in bidding assessment process. and Chengde-Yudaokou project in Hebei (150k kW).432 0.21.501 0.tw 1 Honda Wei (Coordinator) 2 86. 2008 36 .436 0.561 (Rmb0.347 0.350 0.382/KW for the Huiteng-Xile project in Inner Mongolia in the 2004 bid.6125.com.496 0.467 (Rmb0.397 0.191 1.600 0.4180.5613/KWh.450 0. local sourcing of wind power generation units and technological solutions account for a respective 35% and 20% weighting in the bidder selection process. boosting sector earnings Latest bid is a huge opportunity for China’s wind power equipment makers Sector re-rating underway following Goldwind’s IPO Power tariff rebounds on bid for wind power projects Results of the fifth national bid for wind power concession projects were released in Beijing on November 11.47290.509 0. suggesting that the Institutional portal: http://research. regardless of other factors.126 N/A 2. The bid prospectus then specified that the bidder with the lowest on-grid wind power rate would win the contract.309 2.5290.485 0. The weighting was furthered trimmed to 30% in 2006 – though it remained the highest weighted criterion.wang@kgi.5293-0.358 Bid-winning Bid winner power rate (Rmb/kWh) Power ASP Average on-grid forecast after power rate equivalent full (Rmb/kWh) during load runs 30k concession period hours (20 years) (Rmb/kWh) 0. the government removed this rule from the bid prospectus and lowered the weighting of rate levels in the assessment process to 40% (from 100%).686 Power International 2. 15 firms bid for the Wulan-Bayin project in Mongolia with on-grid and with rates the rates ranging rate between being between 2003 First phase of Rudong (Jiangsu) Huilai (Guangdong) Second phase of Rudong (Jiangsu) Farsighted Guangdong Yudean Longyuan Beijing International Power Longyuan Huaneng China Shenhua China Power Investment 0. In 2005.2.63) Source: KGI Securities Figure 48: Weighting of power-rate in selection process falling Weighting of on-grid power rate in selection process.488 0.453 0. Yumen-Changma project in Gangsu (200k kW).501 0. Tongliao-Beiqinghe project in Inner Mongolia (300k kW).524 2.2181.420 0.393 300 300 200 150 2007 Average bidding rate at Rmb0.318 2.193 2. Figure 47: Results of four bids in 2003-06 Year Project Annual on-grid power volume Scale forecast by (MW) feasibility research (equivalent full load hour) 100 100 150 100 200 200 200 200 100 150 200 200 300 2.6300/KWh Rmb0.540) Average bidding rate at Rmb0. We attribute the popularity to changes in the bidding rules.453 0. 14 firms bid for the Yumen-Changma project in Gangsu with rates ranging between Rmb0.509 0.988 0. however.4665/KWh. The move effectively mitigated the risk of cutthroat price competition among bidders and benefited sector order.5159/KWh in Inner Mongolia average Rmb0. and The weighting of power rate levels in the assessment process was further lowered to 25% in the fifth national bid for wind power concession projects.273 2.417 0. As a result.466 0.com January 14. which are as follows: The government began to set the on-grid wind-power rate via a national concession project bid in 2003.4730.

China & Hong Kong

China market strategy

government

aims

to

encourage

domestic

production

of

wind-power equipment. Undoubtedly, this will benefit local wind turbine makers and components suppliers. We therefore remain Overweight China’s wind power equipment sector. Figure 49: Local sourcing good for equipment makers
Weighting of criteria in fifth bid, percent
Financial solution Financing capability
10 10

Blade: Wind turbine blade accounts for 20% of turbine production costs, making it the largest component segment. The supply of wind turbine blades is tight at present. Zhongfu Lianzhong Composites (unlisted) and ZhongHang Huiteng Windpower (unlisted) are China’s largest MW-grade blade makers in terms of capacity. Their main products are 34- and 37.5-metre blades. But Sinoma Wind Turbine Blades, a subsidiary of Sinoma Science & Technology (002080.SZ, Rmb31.7, NR), has greater potential than both. We believe its new 40.25-metre blades will win orders from Sinovel Windtec and Goldwind. Gearbox: Gearbox accounts for around 15% of MW-grade induction wind-turbine costs. It is not required in direct-drive wind turbine. However, we expect induction wind turbine to dominate China’s 1.5-2.0MW market. China’s largest wind turbine gearbox maker is C. Transmission (0658.HK, HK$19.0, NR), whose technology is supported by Dongfang Electrical Machinery Group (DEMG) and GE (US). We expect C. Transmission’s business to grow rapidly. However, Goldwind may see orders fall. Bearings: Bearings account for just 5% of wind turbine costs. Because there are only a few suppliers, profitability is high. Our top pick is Tianma Bearing (002122.SZ, Rmb154, OP), which has obtained orders from DEMG and more orders are in the pipeline. Conclusion In light of strong support from the Chinese government, we remain positive on the wind power equipment sector. We believe the high-profile IPO of Goldwind will boost the valuation of the sector. Among generation unit suppliers, we like Huayi Electric, which will see robust orders. In the components segment, we like Tianma Bearing and Sinoma Science & Technology for their competitive products. Figure 50: Peer comparison - Share price, EPS & PE
Company Miracle Sinoma Tianma Goldwind Great Wall Huayi Xiangtan Dongfang China High Speed Ticker 002009.SZ 002080.SZ 002122.SZ 002202.SZ 600192.SS 600290.SS 600416.SS 600875.SS 0658.HK Share price (Rmb) 48.00 31.73 153.80 142.57 16.61 40.81 31.56 11.18 19.00 EPS (Rmb) 2008F 2009F 0.71 1.00 0.44 0.91 2.81 3.89 2.30 3.00 0.31 0.65 1.00 1.44 0.35 1.00 3.19 3.26 0.41 0.65 PE (x) 2008F 2009F 67.6 48.0 72.1 34.9 54.7 39.5 62.0 47.5 53.6 25.6 40.8 28.3 90.2 31.6 3.5 3.4 46.3 29.2

Local sourcing of generation unit
35

Technological solution

20

25

On-grid power rate

Source: KGI Securities

Top-tier suppliers of wind power equipment & parts A production chain of megawatt-grade (MW-grade) wind-power equipment is being established in China, and we expect China-made products to become competitive in 2009. There are a number of top-tier wind turbine and components manufacturers which provide attractive opportunities for investors. Wind turbine: Based on orders received in 2007, Goldwind (002202.SZ, Rmb142.57, NR), Dongfang Electric (600875.SS, Rmb87.3, NR) and Sinovel Windtec (unlisted) are the three leaders in the MW-grade wind turbine field. However, we recommend investors watch the development of Huayi Electric (600290.SS, Rmb40.8, OP) due to its explosive business and long-term potential. Huayi Electric will complete the signing of sales contracts for 2008 in January and push for a private placement to finance MW-grade wind turbine production in 1H08. The business model of Huayi is similar to that of Goldwind. Both companies have a strategy to bundle wind turbine with wind farm investment. Currently, total capacity of Huayi’s wind farms, jointly developed with various local governments, stands at 2.15mn kW – higher than the 200k kW stated in Goldwind’s IPO prospectus – implying orders worth nearly Rmb10bn. This will underpin Huayi’s long-term growth. For this reason, we believe Hauyi’s investment risk is lower than that of other wind turbine manufacturers.

Source: KGI Securities

Figure 51: Wind power equipment production chain
Company Miracle Logistics Sinoma Tianma Bearings Goldwind Great Wall Electrical Huayi Xiangtan Electric Dongfang C. Transmission Ticker 002009.SZ 002080.SZ 002122.SZ 002147.SZ 600192.SS 600290.SS 600416.SS 600875.SS 0658.HK Product Wind turbine blade Wind turbine blade Bearings Whole equipment Generator Whole equipment Whole equipment and generator Whole equipment and blade Gearbox Main strategic partner Shanghai Electric (not confirmed) Sinovel & Goldwind Dongfang Electric Top five power companies Dongfang Electric Datang GD Power Goldwind, Dongfang Electric and GE Focus Composite bamboo blade a promising product; also engaged in glass-steel blade production; currently focused on 750kW products Has developed 40.3-metre blade, the longest in China; has received orders of Rmb1.0bn from Sinovel; may secure orders from Goldwind China's most competitive bearings maker; has received orders of nearly Rmb200mn from Dongfang Electric Will likely sell 500 units of 1.5 megawatt wind turbine in 2008; develops and invests in wind fields, with current capacity of 2,000 kW China's main wind power generator maker Develops wind fields jointly with local governments, with current capacity of 2,150mn kW, indicating orders of around Rmb10bn Is engaged in vertical and induction wind turbine production; 2.0 megawatt vertical wind turbine in pilot run Megawatt-grade wind turbine equipment maker with fast progress; 1.5-megawatt wind turbine sales will be 600 units in 2007 China's largest wind power gearbox maker

Source: KGI Securities

Institutional portal: http://research.kgi.com

January 14, 2008

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China & Hong Kong

China market strategy

Coal sector
Earnings to surge in 2008 on rising coal prices
1 Stephen Wang 2 886.2.2181.8730 3 stephen.wang@kgi.com.tw 1 Michael Wang (Coordinator) 2 86.21.6125.8676

Coal supply will be a bit tight in 2008 China will continue in 2008 with macro-economic policies to prevent the economy from overheating. Due to the slowing US economy, China’s exports growth will decelerate. We expect the Chinese economy to level off in 2008, although the growth rate will remain above 10.5% YoY. The economic slowdown will slightly decrease coal demand. We forecast coal demand growth of 8.5% in 2008. We forecast the respective growth rates of the power, steel, construction materials and chemical sectors at 13%, 15%, 10% and 12% in 2008, all lower than in 2008. On the supply side, in the January-November period, China’s raw coal output grew by 8.2% YoY to 2.2bn mt, of which 1.13bn mt were turned out by state-owned coalmines (up 9.8% YoY), 290mn mt by provincial coalmines (4.3%), and 780mn mt by town/village coalmines (7.4%). State-owned coalmine output growth continued to outpace provincial and town/village coalmine output growth. State-owned coal output weighting was 51.3%, while the respective provincial and town/village coal output weightings were 13.1% and 35.6%. State-owned, provincial and town/village coalmines contributed a respective 50.6%, 13.6% and 35.9% of output increase. We expect new coal capacity to come on stream slowly in 2008, while the government will shut down illegal coal operators at a faster pace. We forecast coal supply to grow 8-9%. The above analysis shows coal supply and demand will be by and large balanced in 2008. However, since the shutting down of illegal coal operators may be faster than we expected, and tight railway capacity will slow coal transportation, we believe coal supply will be a bit tight in 2008, as in 2007. By product line, steam coal supply is slightly higher than demand, but will be more impacted by railway capacity. Due to limited capacity increase, coking coal will likely be in shortage. However, the shortage won’t be as serious as in 2007 because demand is slowing. Anthracite supply and demand will be in equilibrium. We forecast steam coal spot prices to rise by 10% in 2008, coking coal prices by 5-10%, and anthracite prices by 5%. Lukewarm earnings growth in 2005-07 Despite the lukewarm earnings performance, coal share prices rose in 2007. Based on Figure 1, although coal prices have increased over the past few years, the earnings growth of coal makers has been unsatisfactory. In fact, the earnings growth rate of the coal sector was lower than that of the national industry average. This was because: (1) since 2005, coal price rises have been offset by cost rises; (2) the coal output increase of main manufacturers was low; and (3) coal makers tend to hide profits via intra-group transactions.

Coal contract prices to surge in 2008 Rising coal prices will boost 2008 earnings significantly Our top picks are Pingdingshan Tianan Coal & Huolinhe Opencut Coal; we remain Overweight China’s coal sector Coal contract prices to surge in 2008 Coal contract prices signed by main coal manufacturers for 2008 have risen significantly. The price rise is higher than those seen in 2005-07 and second only to the rise in 2004. Steam coal price was raised 10%. Coking coal price has increased 15-20%, with Xishan Coal and Electricity raising prices by 20% and Pingdingshan Tianan Coal raising prices by 15%. Anthracite prices rose by 5-10%. These increases are in line with our projections and are based on three factors. First, following a short correction in 2Q07, domestic coal spot prices started rising in late May. The price rise was stronger than in previous years, providing solid ground for coal contract prices to rise. Second, global coal spot prices rose continually in 2007, even in the slow season. As of December 24, the benchmark Australia steam coal spot price hit US$89.3/metric ton (mt), up US$38/mt YoY, or a hefty 74.2%. And third, the Chinese government reformed the domestic coal market at a faster pace, making it more market driven, at the expense of inflation. This was a key factor, markedly driving up the tightly-controlled steam coal prices. The coal price rises in 2007 and 2008 have set a solid stage for the Chinese government to launch a third round of coal-power price link measures. China’s resources pricing system reforms aim to promote energy savings and upgrade industries, which will improve economic structures. As such, power charges are set to rise, following coal price increases. We expect the government to implement the third coal-power price link policy in 1Q08. Figure 52: Coal prices FOB Qinhuangdao remain high
Datong quality mix coal price FOB Qinhuangdao, Rmb/mt
530 480 430 380 330 280 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07

Source: China Coal Resource; KGI Securities

Institutional portal: http://research.kgi.com

January 14, 2008

38

China & Hong Kong

China market strategy

Figure 53: Breakdown of coal firms’ EPS results
Rmb Pingdingshan Coal Lanhua Sci-tech Yanzhou Coal Guoyang New Energy Xishan Coal & Electricity Lu An Environment Shenhuo Shanghai Datun Energy Kailuan Clean Coal China Shenhua Energy Jinniu Energy Datun Coal Huolinhe Opencut Coal
Source: KGI Securities

Code 601666.SS 600123.SS 600188.SS 600348.SS 000983.SZ 601699.SS 000933.SZ 600508.SS 600997.SS 601088.SS 000937.SZ 601001.SS 002128.SZ

2001 2002 2003 2004 2005 2006 0.62 0.45 0.25 0.67 0.84 0.80 0.11 0.23 0.47 0.75 1.15 1.37 0.22 0.22 0.24 0.55 0.51 0.36 0.34 0.52 0.43 0.72 1.21 1.45 0.20 0.17 0.25 0.52 0.80 0.80 1.05 0.76 0.45 0.69 1.10 1.30 0.20 0.22 0.31 0.69 0.94 0.80 0.23 0.23 0.25 0.51 0.57 0.62 0.17 0.21 0.29 0.46 0.71 0.81 0.13 0.21 0.08 0.40 0.76 0.84 0.32 0.24 0.19 0.48 0.68 0.61 0.27 0.46 0.54 0.57 0.23 0.69 0.60

Conclusion We expect the earnings growth of coal companies, the key driving force of coal share prices, to be higher in 2008 than in previous years. We also expect coal prices to be more market driven and sector consolidation to accelerate in 2008, benefiting coal makers, especially lading players. We forecast the average forward PE will be an attractive 30.4x in 2009. Hence, we remain Overweight on China’s coal sector. We like Pingdingshan Tianan Coal (601666.SS, Rmb48.2, OP), Huolinhe Opencut Coal (002128.SZ, Rmb52.8, OP), Lu An Environment (601699.SS, Rmb77.0, N), Shenhuo (000933.SZ, Rmb58.6, OP), Xishan Coal and Electricity (000983.SZ, Rmb58.6, OP), Shanghai Datun Energy (600508.SS, Rmb34.2, OP), Lanhua Sci-tech Venture (600123.SS, Rmb55.4, N), China Shenhua Energy (601088.SS, Rmb14.6, OP) and Jinniu Energy (000937.SZ, Rmb31.7, OP).

Earnings to grow more robustly in 2008 on rising coal prices We expect rising coal prices to contribute more to earnings growth in 2008 on the grounds that (1) coal price rises in 2008 will be sharper than in previous years, as seen with Xishan Coal and Electricity and Pingdingshan Tianan Coal; (2) some coal makers, including Shenhuo and Lu An Environmental Energy, will begin to operate new plants; and (3) levies by the government on pollution and production improvement have been capped. A possible source of higher costs is that the government may base the resource tax on value, doubling the resource tax. However, due to low base, the impact will be limited. Given coal supply is expected to be slightly tight and the coal sector is more market-driven, we believe coal makers will be able to pass increased costs on to buyers. Moreover, due to mounting inflation pressure, we don’t expect a new resource tax policy to be launched soon. All told, we expect higher coal contract prices to make marked earnings contribution in 2008, raising the growth rate of the coal sector to above the national industry average. The strong growth rate will be a catalyst for coal share prices. Figure 54: Breakdown of 2007, 2008 & 2009 earnings forecasts
Pingdingshan Coal Lanhua Sci-tech Yanzhou Coal Guoyang New Energy Xishan Coal & Electricity Lu An Environment Shenhuo Shanghai Datun Energy Kailuan Clean Coal China Shenhua Energy Jinniu Energy Datun Coal Huolinhe Opencut Coal Average Code 601666.SS 600123.SS 600188.SS 600348.SS 000983.SZ 601699.SS 000933.SZ 600508.SS 600997.SS 601088.SS 000937.SZ 601001.SS 002128.SZ EPS (Rmb) Growth rate (%) 2006 2007F 2008F 2009F 2007F 2008F 2009F 0.80 1.15 1.77 2.03 43.8 53.9 14.7 1.37 1.37 1.72 1.85 0.0 25.5 7.6 0.36 0.50 0.64 0.66 38.9 28.0 3.1 1.45 0.98 1.32 1.58 (32.4) 34.7 19.7 0.80 0.82 1.43 1.56 2.5 74.4 9.1 1.30 1.36 1.78 1.95 4.6 30.9 9.6 0.80 1.42 1.82 2.10 77.5 28.2 15.4 0.62 0.81 1.03 1.12 30.6 27.2 8.7 0.81 0.94 1.38 1.42 16.0 46.8 2.9 0.84 1.06 1.50 1.82 26.2 41.5 21.3 0.61 0.77 1.07 1.18 26.2 39.0 10.3 0.57 0.51 1.08 1.15 (10.5) 111.8 6.5 0.60 0.98 1.31 1.47 63.3 33.7 12.2 22.1 44.3 10.9

Source: KGI Securities

Institutional portal: http://research.kgi.com

January 14, 2008

39

China & Hong Kong

China market strategy

Steel sector
Cyclical upturn continues, valuations attractive
1 2 3
Stephen Wang 886.2.2181.8730 stephen.wang@kgi.com.tw

Cost swells played another key role in contributing to steel price rises in 2007, particularly in 2H07. Iron ore and marine freight are the two items that saw the most drastic cost increases. The FOB price of Indian iron ore (63.5%-grade) hit US$140/metric ton (mt) on December 24, 2007, up US$84/mt, or 150%, from the beginning of the year. Figure 56: International iron ore price up a huge 150% in 2007
FOB price of India iron ore (63.5%-grade), US$/mt
150 130 110 90 70 50 30 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07

1 Michael Wang (Coordinator) 2 86.21.6125.8676

Robust demand & rising costs triggered price hikes in 2007 Tight supply to persist in 2008, boosting prices Attractive valuations; we like Wu Steel, Baosteel, Taigang Stainless & Handan; we remain Overweight China’s steel sector Demand & costs price boosters in 2007 China’s steel prices in general trended up in 2007, amid intense M&A activity. In particular, steel prices soared across the board in 4Q07. By product, prices of steel for construction were firmer than those of flat materials. On December 28, composite steel closed at 168.9 on the MyspiC (Mysteel price index of China), up a marked 34% YoY. Also on the MyspiC, long steel closed at 180.7 points (up 43.4% YoY), 178.8 points for rebar (up 44.2% YoY), and 182.6 points for wire rod (up 42.7% YoY). The MyspiC flat steel price rose 23.6% YoY to 154.5 points. By product, hot-rolled coil, mid-to-thick plate, and cold-rolled sheet index grew a respective 22.6%, 35.5%, and 13.4% YoY, while galvanized plate fell 2.1%. We attribute the steel price hikes in 2007 to rising demand and costs. On the demand front, rapid macroeconomic growth, especially fixed-asset investment (FAI), helped sustained robust demand for steel materials. In January-November, 2007, China’s FAI rose 26.8% YoY to Rmb10.06tn, outpacing the 2006 growth by 2.3 ppts. Property investment totaled Rmb2.16tn, up 31.8% YoY, versus a 21.8% growth in 2006. Meanwhile, such major downstream sectors as machinery, shipbuilding, and electric appliances display comparably rapid growth. Figure 55: China’s steel prices increased in 2007
Myspic for composite, long & flat steel
200 180 160 140 120 Jan-07 Feb-07Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Composite Index Index for long steel Index for flat steel

Source: Myspic; KGI Securities

Buttressed by prosperous global commodity trade for iron ore, coal, crops and more, as well as speculative money, marine freight rates surged around the globe in 2007. On December 24, 2007, the Baltic Dry Index (BDI) hit 9,143 points, up 108% from the beginning of the year, while the rate for the Tubarao (Brazil)-to-Beilun route spiked US$47.45/mt, or 141%, to US$81.09/mt. Figure 57: Marine shipping rates soared last year
Rate for routes from Western Australia to Beilun & from Tubarao (Brazil) to Beilun, US$/mt
100 80 60 40 20 0 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 Western Australia to Beilun Tubarao (Brazil) to Beilun

Source: National Bureau of Statistics; KGI Securities

Steel demand growth to decelerate in 2008 China’s apparent steel consumption amounted to 470mn mt in January-November, 2007, up 16.8% YoY, versus a 17.2% growth in 2006. We expect domestic demand for steel materials to slow in 2008 on the macroeconomic climate changes at home and abroad. On the international end, global economic growth should lose steam in 2008 on the sluggish US economy. Moreover, renminbi appreciation should continue, leading China’s export momentum to wane, which will impact China’s direct or indirect steel exports.

Source: Myspic; KGI Securities

Institutional portal: http://research.kgi.com

January 14, 2008

40

89. we believe the economy as a whole and FAI growth will recede to some extent. up just 4. and Anhui. Rmb20. reducing iron ore import costs. and strong pricing power. marine freight rates are unlikely to skyrocket as in 2007 since China’s iron ore demand growth has slowed. We foresee substantial growth for leading steel players in the coming years as they enjoy clear sales growth prospects. The steel sector should remain in a cyclical upturn in 2008. We believe steel stocks are undervalued on the whole. Heilongjiang.5% MoM. production cost swells should ease for China’s steel makers in 2008. Figure 58: Steel demand growth to slow in 2008 Apparent steel consumption. We remain Overweight China’s steel sector. a 50% rise should not appear again this year.31mn mt of iron capacities and 36.5% YoY. mn mt (LHS). Rmb18. Steel capacity construction usually takes two years. steel supply should fall on stricter control over outmoded capacities. As of end-November. Ongoing consolidation within the industry should help sector leaders expand and boost industry integration. Though China’s FAI in the steel industry fell 2. boosting prices China’s steel output totaled 515mn mt in January-November.2. We estimate full-year growth of 22. boosting the 2008 iron ore contract price. hurting steel demand. OP). the national government will tighten macro control measures in 2008 to curb overheated economic activity.21mn mt of iron capacities have been shut down. making them attractive investment targets. 29. In addition. We maintain our Outperform ratings on Wu Steel (600005.SS. high-end product mix. Overall. 2007.com January 14. production capability will shrink as the government has sped up the phasing-out of outdated capacity over the past two years in a bid to reduce emissions. China’s steel production expansion is slowing. including Jilin. According to the current roadmap. 2008 41 . 2007. However.China & Hong Kong China market strategy On the domestic end. However.8. First.2. up 22.10mn mt of steel capacities by 2010. Taigang Stainless (000825.kgi.5% YoY and down 7. percent (RHS) 50 40 30 20 10 2002 2003 2004 2005 2006 Nov-07 FAI growth Apparent steel consumption Apparent consumption growth 30 25 20 15 10 Cost hikes to slow in 2008 We expect iron ore spot price rises to slow in 2008 on slowing demand growth and increasing domestic output.5% to Rmb22. FAI in the steel industry has sustained only moderate growth.69mn mt across China in November. We expect steel output growth to fall short of the 2007 level this year on the following two factors.5% annually. OP).3%. Also. KGI Securities Sector boom to continue into 2008. alleviating pressure on releasing additional capacity. 2007. we anticipate less pressure in 2008 as construction projects that began in 2006 will be operational in 2008. apparent consumption growth & FAI growth.SS. Rmb26. As a result. Rmb9. OP). Source: National Bureau of Statistics.SS. Conclusion Institutional portal: http://research.47mn in 2006. We like sector leaders which have attractive valuations and clear growth prospects. renminbi appreciation looks set to accelerate in 2008. we expect China’s steel supply growth to fall YoY in 2008. supply should remain a little tight. down 30 ppts from the annual growth in 2005. OP) and Handan Iron & Steel (600001. Furthermore.40mn mt of steel capacities and 15. Sector players have attractive valuations Steel stocks continue to trade at lower valuations in the broader market.SZ. as evidenced by the crude steel output of 39. Together with the demand climate. We thus expect the iron ore price to climb 30-40% in 2008. Baosteel (600019. Consequently. Overall. the National Development and Reform Committee recently signed a pledge to shutting down outdated steel capacity in 18 provincial governments. Second. Steel prices should retain growth momentum going forward on the sector’s continued cyclical upturn. we do not expect a sharp demand decline as the domestic economy is still forecast to grow at over 10. China will have phased out 49.

As of end-November.6125. Average gross margin was 15. The first year of a new administration generally experiences an FAI peak.42/mt. China’s 219 key cement manufacturers turned out 450. Our rationale being: (1) the government has implemented a policy to revive rural villages. the annual growth rate reached 34. According to records.8/mt to Rmb290.5% YoY. due to high earnings growth of 35% in 2007.850 kg per person. Net profit margin was 5.21. By contrast.6 ppts. boosting real estate investment.O.tw 1 2 Han Yang (Coordinator) 86. average cement consumption per person per year of 2. suggesting production efficiency. We don’t think demand from the real estate market will fall markedly.2%. China’s FAI growth has remained over 20% for 71 consecutive months since January 2002. generating profits of Rmb20. During the same period.8%. As of end November. First. Cement demand to be strong in 2008 Cement demand is positively correlated with fixed-asset investment (FAI) to a high degree. suggesting great potential. 2008 42 . up 1.8679 Figure 59: Investment growth rate of project starts rising MoM Annual growth of project starts. with non-farm FAI growth significantly outpacing overall rural FAI growth. and (3) the government will launch further measures to curb speculation and stimulate supply. the government will have ample funds in 2008. up 1. construction projects in rural areas and infrastructure.7% in January-November 2007. Meanwhile. as fiscal revenue will surpass Rmb5.5mn mt. underpinning housing investment.2/mt YoY. reaching 73. up 10. Source: Wind. These figures point to further growth potential in 2008. up 22.7% YoY. The demand of rural construction projects will accelerate. annual investment growth of project starts & FAI completed. cement output and sales were healthy. During the January-November period. and (3) the central government replaced its officials in late 2007.2181. the weighting of non-farm investments has also risen every year for the past few years. up 12.wang@kgi. over 55% of FAI is financed by companies’ own funds. We expect FAI to continue to grow at a high rate in 2008.China & Hong Kong China market strategy Cement sector Balanced supply & demand in 2008 1 Stephen Wang 2 886.3 ppts higher growth than in January-November 2006.2. in Central and Western China.2 ppts. while that of infrastructure will remain high. cement demand from rural constructions will likely accelerate.000 kilograms (kg) means the cement market is mature. We forecast the rate will be over 25% in 2008 on the back of: (1) the government’s housing price rein-in policy has shifted from demand control to supply increase and restructuring. KGI Securities Cement demand come mainly from the real estate market. As announced by the NDRC. and massive funds raised in the capital markets. we remain Overweight China’s cement sector Sector performed well in January-November 2007 In the first eleven months of 2007. with Shanghai reaching 1. percent (RHS) 35 30 25 20 15 10 5 0 (5) May-04 Nov-04 Jun-05 Dec-05 Jul-06 Feb-07 Aug-07 Annual growth of project starts Growth rate of completed FAI projects 60 40 20 0 (20) (40) Investment growth rate of project starts Good sector performance in January-November 2007 Demand to be strong in 2008 We reiterate our Outperform rating on Conch Cement. while sales reached 461. or 21. Currently. Moreover. a turning point that should lead to accelerating urbanization. where the majority of the population resides in Institutional portal: http://research.900 kg per person and Zhejiang 1. (2) China’s urbanization ratio now stands at around 45%.5 cement was Rmb266.kgi. Second.42. the output-sales ratio increased by 1. Moreover. We forecast the rate will be 20% in the next one to two years on the following grounds: (1) The annual growth rate of new FAI and the number of project starts turned positive in May 2007 and has been rising ever since.32. Real estate investments grew by over 27% MoM in 2007.5 rose by Rmb7.6%. which will demand new construction. (2) average cement consumption per person per year in rural areas is well below that of the rich eastern region. We expect more small economical housing will be built. ‘000 (LHS). the cement sector posted sales of Rmb350.0tn. while the number of project starts increased by 24k YoY.O. (2) enterprises are cash rich. Rural FAI growth has risen every year for the past few years. total investment in project starts grew by 28% YoY.68/mt. up 64. We expect non-farm FAI to grow at a faster pace in the next few years. up Rmb10.com. the demand of the real estate market won’t drop significantly in 2008.3bn. Jidong Cement & Jiangxi Cement. while that of P. We therefore anticipate FAI to be robust this year.6mn metric tons (mt) of cement. In year to November.9%. China’s average cement consumption per person was 913 kg.4% – and the ratio had remained above the 100% level for the five straight months since July. Based on an average of 30-sqm living space per person.com January 14. FAI in small economical housing was up 31. and that own-funds portion is increasing by over 30% per month. the average ex-factory price of China’s P.9 ppts YoY to 102.8730 3 stephen. a 1-ppt increase in the urbanization ratio will bring in housing demand of around 400mn sqm. Huaxin Cement. indicating that the profitability of the cement sector was gradually rising. cement prices also rose. As in 2006.3% in 2006.7bn.3% YoY. As of end November.

we believe the phase-out of outdated cement kilns will be the key to supply control. more than needed. Thus.com January 14.65bn mt in 2008. Source: Wind. China will build 17k kilometers (km) of railway and 400k km of road – 35k km will be national main roads. We have maintained our Outperform rating on Conch (600585. OP) and Jiangxi Cement (000789. rural FAI growth. respectively. As a result. we forecast total cement capacity will be 1. Rmb11. Rmb75. 1.9.240 50 21 11 7 41 7 136 51 19 17 6 45 10 148 Source: Government file. KGI Securities Third. in 2005-10. KGI Securities Conclusion We remain Overweight China’s cement sector. China’s cement capacity will decline to 1. We forecast these projects will require over 400mn mt of cement per annum.55bn mt and 1. respectively. Figure 60: Rural FAI growth accelerated in recent years Non-farm FAI weighting. Institutional portal: http://research. The progress of the phasing-out of outdated kilns was much faster in 2H07 than in 1H07.44bn mt. 1.SS. especially around year-end. Phasing-out of outdated cement kilns key to supply control As of end 2006. respectively. cement supply and demand will reach equilibrium in the long term. percent (RHS) 80 70 60 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Non-farm FAI weighting Farm FAI growth rate Rural FAI growth rate Non-farm FAI growth rate 35 30 25 20 15 10 5 0 (5) Figure 61: Outdated cement kilns cease production fast in 2007-10 mn mt Eastern China Northern China Southwestern China Northwestern China Mid-south China Northeastern China Total Cement output in 2006 Kilns phased out in 2007-08 Kilns phased-out in 2009-10 502 147 126 60 298 72 1.47bn mt. percent (LHS). we forecast cement demand will grow by 8-10% a year in the next three years. indicating huge growth.SZ.kgi. 80-90mn mt and 60-70mn mt of manufacturing facilities will be phased out in 2008. Discounting outdated kilns. Jidong Cement (000401.1. reaching 1.SZ. intra-city railways. We expect capacity to increase by 140mn mt. We forecast 80-90mn mt. In addition.4bn mt. Huaxin Cement (600801. about 48. Therefore. According to the Eleventh Five-year Plan. farmers will want to improve their living standards. the respective figure was 671 kg per person and 605 kg per person.2.2. respectively. 2008 and 2009.56bn mt and 1. OP).65bn mt in 2007. Rmb25. According to the NDRC. 160mn mt and 160mn mt in 2007. Rmb39. while 18k km of road is planned for developing Western China. China’s cement production capacity was around 1. 2009 and 2010. OP). boosting cement demand. OP).3mn mt of clinker capacity and about 80mn mt of cement capacity were shut down in 2007. and (3) with China’s economy growing further and rural income increasing. ports/terminals and civil airports will be built. narrowing the supply and demand gap and raising utilization. 2009 and 2010.86bn mt in 2008 and 2009.China & Hong Kong China market strategy agricultural regions. 2008 43 . cement demand of infrastructure will remain robust.SS. respectively. 2008 and 2009. In summary.7bn mt and 1.

up 31.2. Specifically. outpacing October growth by 1.6 ppts.5% YoY. percent 111 109 107 Real estate policy Jan. The floor area of vacant residences fell 14. 2007 Financial policy 2007 Sep. In November. new & existing house price indices. 2007 Summary Urban land-use tax doubled per unit area. This compares to 24% growth in commodity investment grew 33. January-November property 2006. 2007 Mar. particularly speculative investment. House price rise accelerated in 2007. 2007 Nov. 2007 Sep.5% and 32.16tn housing nationwide. 12. second-house buyers treated as a whole household Sector controls to tighten in 2008 We expect the establishment of a housing guarantee system to be the government’s focus in 2008. 2007 Sep. This is in accordance with its pledge to guarantee basic housing needs of the population. Figure 62: New property sector regulations in 2007 Date Land policy Jan. new house prices grew 12. classification of house supply.2% to 57. In January-November. or 0. Figure 63: Feverish property investment sentiment in 2007 National real estate climate index. to go along with six rate hikes and ten reserve ratio rises by the central bank. The government will also Source: KGI Securities Despite the implementation of various control measures last year. 2007 30-60% land value-added tax on property developers effective February 1 Property transaction brokers required to open a specific deposit account open to official inspection Real Right Law: Residential land-use rights will be automatically renewed when 70-year period expires Tougher regulation/punishment of law violation during property development. the Chinese government tightened regulation of the country’s property market. respectively. average and high-end residences saw respective price hikes of 2. 2007 Aug.wang@kgi. 2007 May. 2007 Apr. 2007 Nov. 2007 Mar. In investment particular. Financial Street & China Enterprise Sector boomed in 2007 despite various cooling-off measures In 2007.1x the benchmark rate over the same period and in the same bracket. systematic land development plans Source: National Bureau of Statistics Figure 64: China house price rise accelerated from 2Q07 Change YoY of national.8% YoY. enhance the housing guarantee system and restrict the development of luxury housing. versus 8.54tn. Specifically. at least 10% of revenue from land assignment to be used to fund low-rent housing.7mn sqm. exceeding October growth by 1.2% YoY.3% YoY. points 107 106 105 104 103 102 101 100 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Sector upturn throughout 2007 despite control measures Tighter regulation in 2008 will stem house price rises Sector consolidation & impressive profit growth to continue this year despite tough conditions due to control measures We have an Outperform rating on Vanke. it imposed a 30-60% value-added tax on land. with highest level at Rmb30/sqm 30% of land-use fee from new farmland construction and conservation projects to go to municipal gov'ts One-time payment for state-owned land Housing for low-income families: Guarantee of no less than 70% of land supply for average housing units. we can conclude the government is focused on taxation and liquidity as a means of regulating the property sector.3 ppts higher than in Institutional portal: http://research. economical. measures will seek to improve the housing supply and demand structure. up 8. And in September the central bank and the Banking Regulatory Commission stipulated a down payment ratio of at least 40% for second-house buyers and a mortgage interest rate of no less than 1. 2007 Jan. it will be more difficult to hoard land and thereby drive up prices. other assitance for low-income families Management of funds to guarantee low-rent housing Provisions to guarantee low-rent housing units Provisions to guarantee affordable housing units 105 103 Jul/05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Feb-07 May-07 Aug-07 National house price index New house price index Existing house price index Source: National Development and Reform Commission Six rate hikes and ten reserve ratio rises by the central bank On property credit loans.2181. totalled Rmb2. By category. while existing house prices rose 9. In January last year.China & Hong Kong China market strategy Property sector More control measures in store in 2008 1 Stephen Wang 2 886. Thus.8730 3 stephen.3% decline YoY in October. along with a change of focus from supply control to demand control. By more closely regulating real estate developers and strengthening the housing guarantee system. or 5. investor sentiment in China’s property remained very positive. upgrade overall housing and control investment in the property market.21. down payment ratio of at least 40% for second-house buyers and mortgage interest rate of no less than 1.com January 14.9%.6% growth the year before.6125.6 ppts higher than in October. Completed residential floor area and sold floor area amounted to 273mn sqm and 550mn sqm. compared to a 13.3%.9% and 12.1x the benchmark rate over the same period and in the same bracket On commercial property credit control. 2007 Nov.kgi. in January-November 2007. house ASP in 70 major cities rose 10. brokerage & transaction Foreign property investment classified as restricted Housing for low-income families: Establishment of comprehensive housing guarantee & low-rent housing system.com.7% to Rmb1.8% and 13. 2008 44 .0 ppt.8670 the same period in 2006.tw 1 Judith Chen (Coordinator) 2 86. size of land lot to be developed restricted.5% YoY in November 2007. 2007 Dec.

However. KGI Securities estimates Increased project launch to shore up profitability With the price of land continuing to rise and house price rise expected to slow. outpacing 2007 by 7.5% to 273mn sqm. and thus anticipate limited impact.kgi. As housing starts rose faster in 2005-06. sector consolidation will benefit the major players which have plenty of cash on hand.2. We forecast moderate rises of between 54 bps and 81 bps in 2008.0 ppts. OP) have strong secular growth potential.SZ. with ASP up 10% in 2006 and nearly 20% in 2007. We forecast continued profit growth for China’s property developers of over 30% this year.SS. We believe house prices in Shanghai and Beijing will continue to climb on tight supply.SZ. new regulations on the purchase of state-owned land require one-time payments as opposed to instalments. Land prices have been rising rapidly over the past few years. while continuing to tighten liquidity in an effort to curb credit and stem speculation. We expect the proposed property tax will be imposed on certain cities in 2008 on a trial basis. In January-November 2007. up 32. renminbi appreciation and inflation have been the main drivers of house prices in China. leading to a healthy supply-demand situation. we expect sector profitability to continue rising in 2008 on the back of the current presale system. In addition. and we project inflation to hit 4. we forecast floor area completed to increase 15% to 680mn sqm in 2008.9.7.5% YoY. 2008 45 . Against the backdrop of heightened control measures. Housing starts floor area Floor area completed Source: National Bureau of Statistics Figure 66: Healthy housing supply-demand situation this year Shanghai floor area completed & floor area sold. Conclusion Because extensive tracts of land were acquired in 2006. As investment vehicles are rather limited for Chinese investors. Rmb30. OP) as its commercial property assets will Oct-03 May-04 Nov-04 Jun-05 Dec-05 Jul-06 Feb-07 Aug-07 insulate it from the effect of the government’s cooling-off measures. We estimate demand will be 650-700mn sqm this year. As a result of tightened credit for second-house buyers from early October last year and moral suasion restricting bank loans.com January 14. increased project launch by developers which will offset profit decline as a result of margin erosion.7% in 2008. However. the recent rate cuts in the US have reduced the potential range of rate hikes in China. Sector leaders Vanke (000002. Rmb31. the property market has become a popular option. and forecast 30%-plus growth of floor area completed among developers under KGI’s coverage. Thus. the profitability of the sector will decline. the profit margin of property developers will be Institutional portal: http://research. given that construction projects begun in 2007 will be mostly booked in 2009. We therefore expect real estate sector consolidation to continue in 2008. Renminbi appreciation & inflation continue to buttress prices Short supply. percent 50 45 40 35 30 25 20 15 10 5 0 (5) Apr-03 squeezed in 2008. we expect housing project launches to increase in 2008. we expect a marked decline in housing developers’ margin in 2009. floor area completed was up only 8. heightening funding needs. 550mn sqm of commodity housing was sold. OP) and China Enterprise (600675. mn sqm 700 600 500 400 300 200 100 0 2003 2004 2005 2006 2007F 2008F Floor area completed Floor area sold Source: National Bureau of Statistics.China & Hong Kong China market strategy maximize supply to ease the housing shortage and stabilize prices. If house price growth slows this year. We also like Financial Street (00402. Renminbi appreciation will likely accelerate. property developers will face a severe funding shortfall in 2008. In addition. Figure 65: Rapid increase in housing starts in 2006 presages substantial growth of floor area completed in 2008 Change YoY of housing starts floor area & floor area completed. Rmb23.

860 4. In addition.005 4. The 10-15% increase in contract prices for 2008 has narrowed their gap with market prices.China & Hong Kong China market strategy Power sector Electricity price hikes possible amidst sector recovery 1 Stephen Wang 2 886.424 5. coal prices in some regions have surged over 6-8%. Figure 69: Coal price hits another high Price of Datong quality mix coal at Qinhuangdao Port. we expect power consumption will increase at the slower pace of 13% in 2008. Given this.2181.7.tw 1 Judith Chen (Coordinator) 2 86.g. GD Power& SDIC Huajing Power Power demand to stabilize & supply growth to slow in 2008 In 2007 China’s power consumption is likely to grow 14. which likely rose 16% in 2007. Moreover. the exit price of Datong quality mix at Qinhuangdao Port rose 6-8%.5% in 2007.137 Power demand to stabilize.com January 14.cn/ Conclusion For 1Q08.221 5. We expect total installed capacity to climb 14. percent 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F Demand growth Installed capacity growth 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F Source: National Bureau of Statistics. we think sea freight rates are unlikely to rise significantly further in 2008 and coal prices will become steady in 2009.wang@kgi. electricity prices are set to rise. Source: National Bureau of Statistics.21. Rmb17.245 5. Utilization hours dropped 3. thereby raising expectations of a launch of the coal-electricity price linkage mechanism.588 4. Coal prices are unlikely to surge.7. Assuming China’s GDP will grow at a slower rate and the industry restructuring initiatives will set regulatory limits on high power consumption industries.460 5.3% in 2006. coal prices to be steady in 2H08 We like Yangtze Power. versus 14.SS.8670 Figure 68: Utilization to rise slightly in 2008 Utilization hours 5.2. and utilization hours will rebound. but then drop to 10. faster than in 2006. We like GD Power (600795. We think the downturn will be reversed in 2Q08 when we will see a lengthy rebound. The sharp rise was driven by increased industrial power demand. Figure 67: Installed capacity to grow at slower rate in 2008 Power demand growth & installed capacity growth. 2008 46 .com. We don’t foresee upward revisions to electricity prices until 2Q08.SS. This is partly because the power sector started to cut down on fixed-income investment from 2006 and partly because the government is demanding a shutdown of smaller generation units.cctd. Rmb20.5% in 2007. OP) for their attractive valuations. OP). We expect the utilization hours to advance 1% in 2008 and another 2% in 2009. new power generation units will likely be launched far more slowly. Major listed power operators.8730 3 stephen.5% in 2008.8% in 2006 and 3. the expectation of an asset injection is high in the power sector. we are Neutral on China’s power sector given the negative prospects regarding both rising coal prices and a continued drop in utilization hours. supply growth to slow & utilization to recover in 2008 Expectation of an electricity price hike rising on higher contract coal prices.517 5. Rmb/mt 550 530 510 490 470 450 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Source: http://www. OP) and China’s largest hydropower operator Yangtze Power (600900. Meanwhile. and the faster growth in expenses (e. expect to obtain an increasing amount of power assets. the utilization of power generation units is likely to turn around in 2008. KGI Securities estimates Coal-electricity price link-up likely on continued coal price rise In 2007.SS.com.6125. the outlook is rosy for the remainder of the year. Institutional portal: http://research.040 5. KGI Securities estimates Power utilization to increase moderately this year Due to steady demand growth and slower supply increases. Rmb18. when inflationary pressure should ease on a slowdown in CPI.3. which account only 30-50% of their groups by assets.5%. However.kgi. SDIC Huajing Power (600886. sea freight costs).

Rmb38.HK.864 in October and 127. The recently launched reduced vertical-separation minimum (RVSM). Source: Company data.0.com.SZ. The total number of flights came in at 140.8%.7% in November from around 12% in August and September. RVSM and new capacity creating room for growth With domestic peak-hour flights cut from August to prevent delays. 2008 47 . BCIA and Pudong will resume better growth. Increased flights and load rates were the drivers. Shenzhen Int’l Airport (000089.5% YoY in October and November. Passenger volume growth at Pudong slowed to 8. 600009.9% in October and 10.6125. GBIA now targets 50% contribution from retail sales by 2010. likely relaxation of a ban on cross-strait direct flights and tourism a catalyst We remain Overweight on China’s airport sector. Figure 70: Pax traffic growth strong at GBIA. mn (LHS). Cargo is another area of high profit growth.8730 3 stephen. with passenger and cargo volume up 15-17% and 10-12% YoY. BCIA saw weaker momentum in 4Q07.SS.tw 1 Huei-chen Flannery (Coordinator) 2 86.8675 Figure 71: Rising load rate hints at busier air traffic ahead Airline passenger volume.8% YoY in these two months. GBIA is putting cargo stations in nearby cities to compete with peers in the region.55. likely to be around 10-15%. traffic growth at major hub airports was strong in 4Q07.4.3. We think this is only transitional as the campaign will end in March when both BCIA’s and Pudong’s new runways and terminals start operating.7% and 17. -0.3% for passenger. HK$13.com January 14. Given a more favourable environment. percent 40 35 30 25 20 15 10 5 0 (5) (10) Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 BCIA Pudong GBIA Hongqiao Shenzhen Source: CAAC.610 in November. KGI Securities Busy air traffic the main driver Total air traffic turnover rose 16. percent (RHS) 19 17 15 13 11 9 7 5 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Load rate Oct-07 Passenger volume 65 80 75 70 85 Demand outlook strong in 1Q08 on flight increases and high load rate. Weak traffic growth at BCIA (2.SZ.3.kgi. as the space between aircraft has been halved to 300m.wang@kgi.2181. part of a global transition that began in 1997. 0694. Shenzhen & Hongqiao Passenger traffic growth. air travel and airport throughput will likely see growth in the high teens in 2008. BCIA and Pudong will more than double their shop area as new terminals are completed. With strong GDP outlook and the Olympic Games in August. 600004.2. Average passenger and cargo load rates improved over 4 ppts and 3 ppts from a year ago to 78. hub airports are making changes in retailing business.4% for cargo) was the result of the Civil Aviation Administration of China’s efforts to cut domestic flights to cool growth. Rmb13. N) and Hongqiao Airport (unlisted) rose 17-20% YoY in October and November.0% and 69. which is operated by Shanghai Int’l Airport (SIA. Shanghai Int’l Airport is our top pick Traffic growth strong at hub airports except for Beijing Except for Beijing Capital Int'l Airport (BCIA. new capacity coming online to alleviate constraints at major airports Increasing focus on cargo/retail business at hub airports a new growth driver. Passenger volume at Guangzhou Baiyun Int’l Airport (GBIA.China & Hong Kong China market strategy Airport sector Outlook strong in 1Q08 1 Stephen Wang 2 886. More focus on cargo and retail business To boost profit growth.21. such as leasing out shops to brand-name retailers and specialized duty-free operators. Pudong stands out as the best cargo play with two UPS and DHL express transfer hubs to be in operation by 2010. load rate. will nearly double airspace for flights. while Shenzhen Airport and GBIA sustained solid 9-10% throughput growth. respectively. OP) rose 18. Rmb23.371 more than last year. KGI Securities Institutional portal: http://research. OP). Cargo throughput at Pudong Airport. U). altogether 3.

000 700 400 100 Pudong Beijing Cargo throughput Guangzhou Shenzhen Growth rate Hongqiao 20 15 10 5 0 Source: Company data. We believe direct flights will significantly accelerate the growth of Taiwanese visits to the mainland.300 1. and its potential acquisition of Hongqiao Airport would provide a catalyst to the stock. and SIA is our top pick as its geographic advantage will help it to sustain long-term growth. Rmb20. As such. 2008 48 .600 1. and both sides of the Taiwan strait will move faster toward the establishment of direct flights and relaxation of cross-strait tourism.SS. particularly from mainlanders wishing to visit Taiwan as their visiting has been heavily restricted for many years.500 2. about 4. although the base is small. we remain Overweight on the airport sector.1mn Taiwanese visited China while only 173k mainlanders visited Taiwan. KGI Securities Prospect of direct flights & cross-strait tourism a big plus If the opposition Kuomintang (KMT) party wins Taiwan’s presidential election in March. and we have maintained our Neutral ratings on Shenzhen Airport and Xiamen Airport (600897. mn metric tons (LHS). Major hub airports will be the biggest beneficiaries. We have maintained our Outperform rating on GBIA due to its strong potential in cargo and retail sales. in our view. In 2006.China & Hong Kong China market strategy Figure 72: Cargo traffic strong at most major hub airports Jan-Nov 2007 cargo throughput. The number of mainland tourists visiting Taiwan will likely see an even greater increase.9. Institutional portal: http://research. This will no doubt drive up demand for tourism. cross-strait relations will very likely see a breakthrough. growth rate. percent (RHS) 2. N) as we see limited upside. Conclusion We think the outlook is solid for China’s airport sector on strong demand and improving environment.com January 14.200 1. which are currently increasing around 5% annually. We expect the number to easily jump a number of times in the first year. The potential opening up of cross-strait direct flights and tourism will provide room for further growth.kgi.900 1.

international trade volume via marine container transport will grow 9. raising the expectation that the scrapping of old single-hulk tankers will go into high gear. Conclusion Based on our optimistic views of the bulk shipping and container shipping markets. Rmb47. point 12.0 6. Specifically.4. on oil reserve increases by major countries.0 4.000 10. These factors. an increasing number of single-hulk oil tankers are being scrapped. the oil shipping market slumped. Among factors that may serve to boost demand is an oil output increase by OPEC.82. China turned to Brazil for iron ore import.kgi. container shipping price will likely keep rising In 2007.0 0. oversupply in the oil shipping market will improve ahead of schedule. YoY.000 8.2. the Asia-Europe routes saw shipping volume grow over 20% and prices rise significantly. with the BDI averaging 7.3% YoY. Source: Bloomberg.6125. our top picks remain China Shipping Development (600026. while Korea and Japan turned to Australia and the Americas for coal imports.000 6. and Logistics Net.000 0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Source: China Trade. percent (RHS) 160 16. Despite a slowdown in the US economy due to the credit crunch. This resulted in longer marine transport distances and greater shipping capacity consumption.0 10. shipping price to keep rising in 2008 Oversupply may continue to haunt oil shipping market. As significant new capacity will be devoted to Asia-Europe routes. Given the current supply/demand balance. resulting in longer shipping distances and congestion at European ports. The performance was mainly due to two factors.8% YoY to 143mn TEU.tw 1 Zharlen Zhang (Coordinator) 2 86. First. while capacity growth will likely remain slow in the short term. Further. we expect average bulk shipping rates to remain flat YoY. we remain Neutral on the oil shipping sector.China & Hong Kong China market strategy Shipping sector Bulk shipping peaking.wang@kgi. rebounding somewhat in 4Q07.0 2001 2002 2003 2004 2005 2006 2007F 2008F International trade via marine container transport Growth rate 140 120 100 80 60 40 20 0 Bulk shipping market continues to peak on increasingly long shipping distances & capacity reduction due to port congestion Supply & demand in container shipping market is basically balanced. KGI Securities In 2008. The BDTI rebounded in November 2007 as oil consumption went into high gear as winter weather boosted oil demand. OP) and COSCO (601919. However. mn TEU (LHS). In 2008. In 2008.HK. we expect container shipping prices to keep rising in 2008. Institutional portal: http://research. we expect actual shipping capacity to trail nominal shipping capacity by 2-3% in 2008. the BDI remains at a historically high level. a significant revival of the oil shipping market in 2008 is only possible with a demand increase.8730 3 stephen. Figure 73: Bulk shipping market still peaking BDI. congestion at main resource-exporting ports has resulted in longer shipping turnover and inefficient use of shipping capacity. Marine. up 123% YoY.HK. global container shipping capacity is expected to grow 13. the container shipping market rebounded markedly. 1. Rmb40.1.000 4. Second.7ppts slower than YoY growth in 2007. a VLCC (Very Large Crude Carrier) spilled over 10k mt of crude oil into the ocean. OP/1919. If this happens. OP). Oil shipping market: Demand growth key to market revival In 1Q-3Q07. port congestion will remain for some time to come. 2008 49 . the emerging markets’ economic outlook remains solid and consumption in oil-exporting nations in the Middle East remains strong. resulting in a mild oversupply situation. HK$22.8685 should sustain strong volume growth for global trade via marine container transport in 2008. container shipping prices rising 1 Stephen Wang 2 86.000 2. within Asia.083 points for the year. KGI Securities Despite a dip from the November peak. Among individual stocks. Also.0 2. we believe. In early December 2007. demand must increase before oil shipping market can improve in 2008 Bulk shipping market continues to peak 2007 brought unprecedented prosperity to the bulk shipping market.0 8. However. Meanwhile. Figure 74: Marine container transport trade growing rapidly Global trading volume via container transport.44.2181.0 14.com January 14.SS. OP/1138. we remain Overweight the bulk shipping sector and raise our rating on the container shipping sector from Neutral to Outperform. According to Clarkson. HK$21.SS.com. as the bulk shipping market will likely continue to peak. more bulk goods will now be carried by container ships as an estimated 1-2% of bulk goods transport demand will be digested by container ship operators.21.0 12. and lengthening of average shipping distances.

NR) have all announced container and bulk cargo handling fees for 2008.kgi.6125. In contrast. we expect ports without capacity expansion to see growth slow.0 2000 2001 2002 2003 2004 2005 2006 Growth rate 2007 (Jan-Nov) 30 25 20 15 10 5 0 Container throughput Growth rate Source: Ministry of Communications.0 3.SS.China & Hong Kong China market strategy Port sector Throughput growth will continue to slow in 2008 1 Stephen Wang 2 886. The move signifies port operators are shifting focus from volume to profits. Institutional portal: http://research.5.tw 1 2 Zharlen Zhang (Coordinator) 86. Rmb17. Overall.0 0.0 2. 2008 50 . This explains why the announced fee rise was a moderate 10%.SS. Figure 75: Port cargo throughput growth slowing China cargo throughput. Cargo throughput Source: Ministry of Communications. The growth rate was down 3.7% YoY to 4. mn TEU (LHS). Hence. Europe-bound goods growth remained robust. China’s high export growth has begun to plateau.8 metric tons (mt). as compared with bulk handling charges.wang@kgi. Focus on firms with capacity expansion & asset injection China’s port sector has passed the explosive-growth stage. we remain Neutral on China’s port sector. Some listed companies expecting asset injection will also experience significant growth.21. slowing port throughput growth. OP) are two players worth noting. OP). N).2. However.5 ppts YoY. Rmb28. Tianjin Port and Yan Tian Port Holdings (000088.7% YoY to 102mn TEU during the January-November period. Affected by the US sub-prime debacle. Port throughput growth is closely related to economic growth. Conclusion Since we expect port throughput growth to slow. percent (RHS) 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 (Jan-Nov) 45 40 35 30 25 20 15 10 5 0 China will adopt monetary tightening in 2008. Rmb9. partly triggered by rising costs.com. while ports with increasing capacity will grow at a faster rate.6.SS. port operators will wonder whether competing ports will follow suit. The Tianjin Port Group has pledged to inject the 300k-mt crude oil port under construction to Tianjin Port. bn mt (LHS).8730 3 stephen. exports to the US have declined significantly. growth rate.0 1.8685 Figure 76: Port container throughput to grow by 20% in 2008 Container throughput. Since China will adopt a monetary-tightening policy in 2008. Rmb14.SZ.33. We therefore forecast port container throughput growth will also slow in 2008. KGI Securities Container handling fees have room to rise Shanghai International Port (600018. reaching 20%. Rmb17. Coal. Rizhao Port (600017.2181. percent (RHS) 6. China’s port cargo throughput grew by 14. bulk cargo handling fee rise will depend on competition Earnings of listed companies with capacity expansion & asset injection will grow more significantly Port throughput growth will continue slowing in 2008 In the first eleven months of 2007.0 4. since shipping companies are less sensitive to container handling fees. KGI Securities Container throughput to grow by 20% in 2008 Container throughput increased by 21. However. The Yan Tian Port Group has Yantian Port Phase III to be injected to Yan Tian Port Holdings. Therefore. we expect GDP growth to be slower than in 2007.SS. iron ore and crude oil will continue to be the growth drivers of port throughput. As port competition remains fierce. Tianjin Port (600717. in considering raising bulk cargo handling fees.com January 14. huge bulk cargo fee increases will drive shippers away to nearby ports. in line with our forecast. growth rate.2. slowing port throughput growth Container handling fees will likely rise.8. we are positive on the outlook of Tianjin Port and Yan Tian Port Holdings. NR) and Lianyungang Port (601008. we believe container handling fees will likely rise.0 5.

2% to US$3. retained stable growth of around 10%.0 4.5bn in revenue. up 9. KGI Securities Figure 79: Inbound tourism revenue sees double-digit growth Inbound tourism revenue.8730 3 stephen.kgi. Source: China National Bureau of Statistics. percent (RHS) 140 120 100 80 60 40 20 0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Lodging & catering sales Growth rate 17 15 21 19 25 23 Source: China National Tourism Administration. and continuing renminbi appreciation will stimulate even more demand for overseas travel. bringing 23. with room and dining sales growing at about 21% YoY in October and November.49% YoY.com January 14. scrapping the Golden Week holiday and making three traditional festivals public holidays. Figure 77: Hotel & restaurant business growth up in 4Q07 Lodging & catering sales. annual growth rate.0 0.2% more revenue than in the year before.SS. which constitutes 30% of total industry revenue. Hotel and restaurant businesses also experienced stronger growth momentum in 4Q07.24bn. This generated US$31.0 1.tw 1 Huei-chen Flannery (Coordinator) 2 86. percent (RHS) 4.0 2.5 1. With demand growth from Beijing Olympics in August.com. we are Overweight China’s tourism sector Tourism industry holding strong on solid demand growth China’s tourism industry continued to see solid growth in 4Q07.0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Overnight visitors Growth rate 18 15 12 9 6 3 0 Demand outlook strong in 1Q08 on back of new national public holiday plan and paid holiday system Renminbi appreciation will continue to boost demand for outbound travel.0 1.4mn. and we believe the firm will benefit from the growing trend.5.0 3. annual growth. the three week-long national holidays were the most popular time for domestic travel. The revised labour law also entitles employees to a certain number of paid holidays after working for a company or organization for a year. To avoid traffic congestion. The Chinese government expects to see the number of outbound tourists reach 100mn in 2015.6% YoY and achieving 85% of the government’s full-year target. mn (LHS).2181. As a result. nearly 70% of total industry revenue. there will be 11 pubic holidays.5% CAGR over the nine-year period. growing at a CAGR of 23% over 2001-06. Until last year. In the A-share market.21.wang@kgi.5 0. Rmb35. implying a 12. up about 14% YoY due mainly to a stronger renminbi.6125.0 2.1% in November to 4. US$bn (LHS). while revenue rose 11. Rmb bn (LHS). OP) has the most exposure to the outbound travel business. and we estimate this segment to grow 15-20% in 2008. Outbound travel enjoyed particularly strong growth in 2007. Inbound tourism.China & Hong Kong China market strategy Tourism sector Good prospects in 1Q08 1 Stephen Wang 2 886. up 11.0 0.0 3. we expect growth of inbound travel to accelerate this year. tourists received over the Spring Festival and the May Day holiday weeks increased 20. In 1H07. We think higher per capita income will continue to provide a solid base for growth.8675 Figure 78: Growth of China’s inbound travel stable Overnight visitors.65mn. growth rate YoY.0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Inbound tourism revenue Annual growth 25 20 15 10 5 0 Source: China National Tourism Administration. contributing nearly a quarter of the full-year’s revenue.2. CYTS (600138.9% YoY.5 2. while domestic travel. Renminbi appreciation stimulates outbound travel Outbound visits have been particularly strong. Institutional portal: http://research. we maintain our Outperform rating on Jinjiang Int’l Hotel Development.0 5. saw much stronger momentum on robust economic growth and increased household income. 2008 51 . likely development of mainland travel to Taiwan a potential growth driver CYTS is our top pick.5 3. percent (RHS) 6. Overnight visits made by inbound tourists in the first 11 months of 2007 reached 45. KGI Securities New holiday plan & labour law good for domestic tourism Domestic travel has seen stronger growth in recent years as average household income has been increasing. KGI Securities Inbound tourism stable in 4Q07 but likely to pick up in 2008 Inbound overnight visitors increased 10. compared to the previous 10. the State Council has implemented a new plan for 2008. These two favourable measures will likely boost demand in the coming year for domestic tourism.

com January 14. CYTS is our top pick. Conclusion We think the outlook is promising for China’s tourism sector as demand will be strong given (1) rising per capita income. We think demand for mainlanders to visit Taiwan and do sightseeing will be very strong. This is another business in which we think CYTS has potential to compete. about 4. 2008 52 . Institutional portal: http://research. (3) continuing renminbi appreciation. We have also maintained our Outperform rating on Jinjiang Int’l Hotel Development (600754. (2) the improved public holiday plan and labour laws. KGI Securities Likely development of cross-straits tourism a potential driver Assuming the opposition Kuomintang (KMT) party wins Taiwan’s presidential election in March. We think the number of mainlanders to visit Taiwan will easily grow a number of times in the first year if restrictions are lifted.kgi.3.1mn Taiwanese visited China while only 173k mainlanders visited Taiwan under restricted terms.China & Hong Kong China market strategy Figure 80: Outbound Chinese visitors surging in recent years Number of Chinese outbound. cross-strait relations will likely see a breakthrough and both sides will move faster to launch direct flights and bolster cross-strait tourism. mn 35 29 20 17 12 31 CAGR = 23% 2001 2002 2003 2004 2005 2006 Source: China National Tourism Administration. and we expect explosive growth in the first few years if current restrictions are eased. Rmb21.SS. and (4) the likely opening of Taiwan tourism to mainlanders if the KMT wins Taiwan’s presidential election in March. In 2006. OP) as it is well-positioned to sustain growth through its fast-growing hotel and restaurant chain business in China.

0 7.0 2. Second. we are Neutral on China’s technology sector Global demand to slow. but healthy capex to boost profits We expect global semiconductor growth to remain slow due mainly to a possible slowdown in US consumer demand.0 5. The book-to-bill (B/B) ratio of the North American semiconductor equipment market has been below 0.000 500 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Order value Shipment value B/B ratio 0. As a result. as well as possible weakness in US consumer spending.0 0. but cost increases a worry Our top picks are Laibao. KGI Securities estimates Figure 83: Semiconductor equipment B/B ratio in a trough Semicon equipment book & bill value. Moreover.8672 Figure 82: Semiconductor foundries to cut capex in 2008 Global foundry capex. Zhongke Sanhuan & Ningbo Yunsheng. such as Changjiang Electronics (600584. but costs expected to rise Despite a slowdown in the global market. This can be seen in many technology sub-sectors such as semiconductor. advanced processes still demand high design costs. with significant decline in billing amount. though it is expected to improve slightly in 2008 to 6% YoY from a weaker 4. allowing manufacturers to improve profitability should demand exceed expectations.8730 3 stephen. Capex discipline will help keep supply healthy.500 2. as Chinese players upgrade technologies. While we expect Chinese tech players to post strong sales growth in 2008.0 1.China & Hong Kong China market strategy Technology sector A mixed bag 1 Stephen Wang 2 86. x (RHS) 3.0 6.0 4. renminbi appreciation is expected to accelerate in 2008. so suppliers are expanding low-cost backward capacity to meet customer demand. US$bn (LHS). which we think points to two developments.6125.0 0. First. will increase average labour cost by around 20-30%. but healthy capex to boost profits China growth outlook strong.500 3. telecom equipment and electronic components. We expect global semiconductor growth to stay tepid.2. disciplined capex for the industry should help boost profitability across the board. We attribute weak semiconductor growth to a lack of killer applications in 2008.21. we expect healthy capex to lift profits. capex growth.500 1.5 Source: SEMI China growth outlook strong. Source: SIA Institutional portal: http://research.9x since July 2007.000 1. 2008 53 . China’s new labour law.2181.tw 1 Angus Lin (Coordinator) 2 86. we are less optimistic on profitability due to rising costs and expenses. The figure indicates that global semiconductor suppliers are cutting capex for 2008.kgi. we recommend investors pay attention to companies with higher effective income tax rate in 2007. we expect Chinese technology players to post strong sales growth. However.SS. LCD.5 1. Figure 81: Global semiconductor sales still in the doldrums Three-month moving average of semiconductor sales growth. However. which will be enforced in 2008.0 3. OP). Rmb19. as the new policy to unify income taxes will lower their tax rate and offset the impact from cost hike.0 2004 2005 2006 2007 Capex growth 2008F Global foundry capex 5 0 (5) (10) (15) (20) (25) (30) (35) (40) Global demand to slow. US$bn (LHS). suppliers are turning cautious about market conditions.com. percent (RHS) 8. their market shares expand at the expense of foreign players.000 2. which will have a negative impact on tech companies as they export an average of 40-60% of their products. First.com January 14.0 1. Lower-end/ lower-cost products which Chinese players have an edge in should be less impacted by a demand slowdown in the US and retain high growth in China and other emerging markets.wang@kgi. percent 30 20 10 0 (10) (20) Jan-05 Jul-05 Americas Jan-06 Europe Jul-06 Japan Jan-07 Asia Pacific Jul-07 Worldwide Source: Company data.11. Secondly.5% YoY in 2007. B/B ratio. driven by increasing local demand and continued import substitution.

com January 14. 2008 54 . some electronics products. Rmb14. Rmb142. we see select Chinese technology stocks as offering a good investment opportunity. OP) and Ningbo Yunsheng (600366. as there are both positives and negatives. the largest electronics retailer in the US. We believe many Chinese handset makers will follow suit.SZ. We think Laibao (002106.TW. NT$503.SZ. We have maintained our Outperform ratings on Laibao. LG (KOR) and HTC (2498. such as LCD TV. and (2) Wind power supply chain: High growth in China’s wind power installation will drive huge demand in the supply chain. Rmb12. Touch panel and wind power supply chain shares are the two major investment themes to focus on in 2008.kgi. Thus. we still believe there are some good opportunities. KGI Securities Two themes in 2008: Touch panel & wind power Although we don’t expect a sector boom in 2008. still enjoy robust demand growth despite weakness in overall consumer spending. We recommend investors take a selective view of technology stocks.SS. driving domestic demand in 2008. According to the recent results of Best Buy. We have identified two themes in particular: (1) Touch panel: Leading global handset makers such as Apple (US). Conclusion We are Neutral on China’s technology sector in 1Q08.5.China & Hong Kong China market strategy Figure 84: Chinese tech players expected to outperform Sales growth. OP) in particular will benefit from this trend. We think Zhongke Sanhuan (000970. percent 40 30 20 10 0 (10) (20) (30) 2001 2002 2003 2004 2005 2006 2007 2008F Global semiconductor sales growth Changjiang Electronics sales growth Source: SIA. Rmb35. OP) have launched touchscreen models. Institutional portal: http://research. notebook PC and GPS. Zhongke Sanhuan and Ningbo Yunsheng. game console.SZ.9. NR) is dedicated to direct-drive rare earth magnet wind turbine. We believe the demand for rare earth magnets will soar since market leader Xingjiang Goldwind (002202.4. OP) will be the main beneficiaries of this trend.

when global economic growth is expected to slow and many new regulative polices will come out in China.000 per metric ton (mt) in 2003 to Rmb25.1. profitability of these two sectors is on the rise amid growing market demand.8730 3 stephen.4%.2181.800 per mt. NR/0168. Affected by drought in Australia. Rmb44.wang@kgi. beer segment sales and earnings grew 16. In 1Q08. Therefore. as a participant of international trade. High-end white liquor products are mainly sold to high-income groups and people in the political and business arenas who are less sensitive to price.0 6. management expense ratio. Institutional portal: http://research. KGI Securities The beer segment stands to benefit from the Beijing Olympics. Emboldened by the booming market. Rmb25. Therefore.0% and 56.SS. As the Chinese New Year high season is around the corner.8 2000 2001 2002 2003 2004 2005 2006 11. we expect the food and beverage sector to take its performance to an even higher level in 1Q08. Beer companies have been able to offset the negative impact of rising costs by repositioning products as high-end items.0 8.3% and 23. High-end white liquor makers such as Kweichow Moutai (600519. N) will boost brand awareness and market share.4. Also.SS.7%.8 1. raw material costs will continue rising in 2008. Rmb42. As in 2007. NR) and Tsingtao Brewery (600600. On one hand. We think the market is witnessing a transition from indirect to direct product price rise by beer makers.2 2. Olympics sponsors Yanjing Brewery (000729. we recommend industry leader Tsingtao Brewery. Wuliangye raised factory price again by Rmb30 per bottle. lowering alcohol content in liquor. while earnings grew a respective 32. beer consumption is linked to sports events as they bring in tourists and sports fans.2.6 2.8% YoY.0 0. This indicates that the market is no longer characterized by price competition. Yanjing and Snow Breweries have raised product prices in some regional markets and Tsingtao Brewery is set to follow. China must face the risks of a global demand slowdown. In 2008.8674 cities for liquor production. which imposed cost pressure on the beer segment. Therefore. we are Overweight the sector High-end white liquor: Brand value yields upside Beer: Pricing ability strengthened on Olympics demand Dairy products: Diverse product lines and high-end products to help resolve cost pressure Butchering & meat processing: Turnaround at hand A safe haven in periods of economic uncertainty In the first 11 months of 2007.4 2. Figure 85: Beer segment expense ratio keeps falling Finance expense ratio. High-end white liquor: Brand value supports share upside White liquor is the most prosperous segment in the food and beverage sector as January-November 2007 sales and earnings grew 34. Meanwhile.2. the supply of high-end white liquor is not known for fast growth as it is limited by production process.com. the beer sector managed to keep gross margin from falling too much and has maintained stable earnings growth.com January 14.0 5.0 1. using smaller bottles. OP) and Wuliangye Yibin (000858. We expect 1Q08 to most fit the above description.5%.SZ.0 7.tw 1 Sabrina Lee (Coordinator) 2 86. At home. HK$31.kgi. which is likely to take a toll on the profitability of China’s cyclical industries and export-driven industries. Behind the continued price rise is brand value. percent (LHS).9% and 43. number of vaults and number of suitable Financial cost ratio Management cost ratio Source: Wind. while gross margin hit 35. and conducting cost control more effectively.0 10. while gross margin was 33. In late 2007. the Chinese government will pursue monetary tightening policy and step up regulation of the economy. 2008 55 .4 1. the price barley imports in China surged 63. which is non-cyclical and stands to benefit from domestic market growth and consumption migration toward high-end products. sales of liquor are unlikely to be adversely affected by price rise.China & Hong Kong China market strategy Food & beverage sector Pricing ability is key to success 1 Stephen Wang 2 86. Overall.0 9. positive economic conditions in China will have to contend with economic weakness internationally.5.SZ. Despite this. we continue to recommend sub-sectors or companies that can raise price and upgrade products to fend off rising cost pressure.6125. In 1Q08. China’s food and beverage sales grew a respective 29.2 1. As the Olympics should usher in unprecedented beer demand. we expect prices of Moutai and Laojiao 1573 (both high-end liquor products) to rise by over 10%.1% and 26.9% YoY in January-October 2007.6%. Beer: Pricing ability strengthened on Olympics demand In January-November 2007. The current beer market can be better described as one that is controlled by a handful of leaders with well-known brand names and strong pricing ability.21.4% YoY. percent (RHS) 2.6 1. On the other hand. we recommend Kweichow Moutai and Luzhou Laojiao as both feature great cultural and historical appeal and strong brand-name value. we think investors can find a safe haven in the food and beverage sector. NR) have raised product prices several times to lead average liquor price to rise from Rmb16.8 2.0 Food & beverage sector a safe haven in periods of economic uncertainty.HK. Rmb212.

but same-period operating cost rose 31. Tsingtao Brewery and Shuanghui Development. But in 1Q08. profitability took a hit from higher pig prices. To counter the rising cost pressure. Therefore. On December 19. This sales growth was slower that seen in 2005 and 2006 due to relative saturation of the urban market. percent 40 38 36 34 32 30 28 26 24 22 20 2003 2004 2005 2006 2007 Figure 87: Pork price still on the rise Wholesale pork price.com January 14.kgi. while gross margin hit 22. Rmb/kg 24 22 20 18 16 14 12 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Source: Ministry of Commerce. and we favor industry leader Shuanghui (000895.4. OP) as it enjoys strong pricing ability and hence higher gross margin. leading dairy enterprises have raised prices. and we expect the increase of pig prices in 2008 to be markedly lower than in 2007 as a result of increased supply. which should help industry profitability rebound in 1Q08. the butchering and meat-processing segment’s sales grew 29. the price of raw milk rose by over 30% in 2007 and is expected to keep rising in 2008. and fewer sources of raw milk. we recommend investors pay attention to companies that can justify the high valuations through sales/earnings growth or asset acquirements.19% YoY. as the average price of pork grew 56% YoY in Jan-Nov 2007. In fact.06% YoY.3%. China Premier Wen Jiabao presided over a State Council meeting during which he said that China should come up with a 10-article regulation aimed at encouraging pig farming.China & Hong Kong China market strategy Dairy: New & high-end products to ease cost pressure In January-November 2007. With pig prices falling back. draft of another law regulating pig butchering was also passed. Figure 86: Growth of dairy product sales is slowing down Growth of dairy sector sales YoY. Pork price remains firmly on the uptrend. In the long-term. 2007. Such companies include Kweichow Moutai. 2008 56 . As the material (pigs) account for over 70% of total costs in the butchering and meat processing segment. dairy product segment sales and earnings grew 24. and its ability to act as a defensive investment target.9% YoY. KGI Securities estimates Conclusion We remain Overweight China’s food and beverage sector on relatively strong market demand. Rmb57.SZ. pig prices will remain high. Supportive policies and rising pork prices have kindled a passion for pig farming. Meanwhile. we think a better way of dealing with rising material costs will be to add value to products and to explore new dairy product markets. higher cost of milk cow farming in China. the dairy product sector is under enormous cost pressure due to rising raw milk prices worldwide. Source: National Bureau of Statistics. In the same meeting. KGI Securities estimates Butchering & meat processing sector: Turnaround at hand In Jan-Nov 2007. its non-cyclical nature.5% and 25. We expect pig prices to start falling in 2Q08. It’s worth noting that the current valuations of food and beverage stocks have by and large already factored in sales and earnings growth expectations. Institutional portal: http://research. pork enterprises could enjoy lower material cost and a rebound in profitability from 2Q08 onward.

and easing pressure on small-to-medium-sized banks in particular.6% during the same period. Besides that. the asset qualities of the nation’s banks cannot improve at an equal level. re-pricing & prolonged duration of loans We recommend ICBC. Banking shares are a good investment target due to revenue diversification & improving asset quality despite looming credit tightening measures NIM solid on low funding costs.kgi.8% in 2006.4270 ken. stable deposits structure. faster re-pricing pace of loans than deposits and improving inter-bank yield. (3) stable local enterprise earnings growth and lower provision needs in 2008 ensure the banks’ asset quality and the profitability. suggesting an emerging impact from current curbs on loans. OP). Real estate accounts for 8-14% of banks’ corporate loans. indicating increased diversification of financing channels and stronger market competition. (5) The cost-to-income ratio of listed banks decreased to 34. An improving cost-to-income ratio suggests better operating efficiency.SS. Continual monetary tightening and quarterly loan reviews are expected for 2008. (3) uncertainty regarding A-share market strength. CMB & SPDB on strong fundamentals & defensive qualities In 2008. which will likely set a record for some time to come. However. Stable net interest income in 2008 Annual growth of loans decelerated to 17. Figure 88:Limited impact on loans from credit tightening policies Loan & deposit growth.0. we believe the negative impact on local banks remains manageable. HK$6.2% 2006. higher retail banking revenue and lower loan-to-deposit ratios remain defensive players with upside potential. Therefore.5% from 96. excluding listed city commercial banks. However.0% in November from 17. we reiterate our preference for ICBC (601398. percent 30 25 20 15 10 5 0 2000 2001 Loan growth 2002 2003 Deposit growth 2004 2005 Reserve ratio 2005 2006 2007F One-year lending rate Controlling asset quality in 1H08 The average NPL ratio fell to 2. the cutting of the demand deposit rate to 0. concerns about the profitability of the banking sector are centered around: (1) government credit tightening measures and loan restrictions for individual banks set by China’s central bank (the People’s Bank of China or PBOC).2878. which is relevant to local banks’ stock market-related fee income. Loan growth for 2008 may decrease to 13-15% given our forecast of at least 2-3 more further prime rate hikes and a 200-300 basis point reserve rate adjustment. Rmb7.com cost) will be implemented in 2008. We. The loan-to-deposit rate stabilized at 67-69% in 2007.HK. probably in 2H08. which is less sensitive to macro-cooling measures. the weighting of the loan rate. and (4) property sector austerity measures. 2008 57 . However. We believe the asset quality in 1H08 will remained strong.6% in 3Q07 from 25. OP). OP) and CMB (600036. despite the fact that demand deposit growth has slowed since September. therefore. However. These administrative measures on the banking sector will likely outweigh the impact from monetary policy changes. favourable rate hikes. banks with higher demand deposit weightings.07% in 2006. which is below the benchmark rate.1. and (6) higher growth momentum given the attractive valuation levels in comparison with other sectors. Though it is hard to predict the direction and extent of looming measures. Source: Bloomberg.2% in 3Q07 from 39. we believe the earning growth for this sector remains promising. (2) more revenue contribution from consumer banking. remain positive on this sector in the coming quarter.and third-tier banks would be the first to be exposed to credit risk given their weaker ability to choose the better clients – thus the NPL balance may rise further. respectively. CCB. CCB (0939. This is because: (1) NIM can be further improved due to demand deposit rate-cuts. qualified banks will likely have better bargaining power and discretion in choosing quality customers.7% in October. reserve ratio and one-year lending rate. and a further 40-50% earning growth is achievable in 2008 – despite the fact that loan growth will inevitably be depressed by credit tightening measures. and the NPL ratio may decrease further despite the continuing tightening cycle.72% has helped ensure a cheap funding advantage.97.SS. second.com January 14.su@kgia. increased to 28. Moreover. therefore the optimization of loan portfolios will continue. (4) positive tax reform (tax unification and tax reduction on staffing Institutional portal: http://research. and the provision ratio rose to 116. KGI Securities Banking sector outlook still bright for 2008 Total bank profits rose by around 65% YoY in 1Q-3Q07.67% in 3Q07 from 3. and we believe the ratio will not increase further in 2008 given the credit tightening effect. which accounted for 2-8% of H-shares banks’ total revenue in 1H07. we believe the PBOC will raise loan yields at a gradual pace in order to mitigate any negative impact on macro economic growth. (2) further prime rate and reserve rate rises given inflation pressure and the real negative interest rate environment. Rmb39.China & Hong Kong China market strategy Banking sector Clouds clearing 1 2 3 Ken Su 852. Given the restriction on loan growth and given that robust financing needs remains.

SS. though are increasingly cautious in some areas.kgi.China & Hong Kong China market strategy Conclusion and Recommendation We reiterate our Overweight rating on China’s banking sector. Rmb55.com January 14. on CCB given prominent NIM and superior profitability. on ICBC due to its relatively low loan-to-deposit ratio and diversified revenue mix. and SPDB (600000. Institutional portal: http://research. 2008 58 . We maintain our Outperform ratings on CMB.9. OP) in view of being the biggest beneficiary of tax reforms and its pivotal role as a key financial platform in Shanghai City. in view of its flagship consumer banking business.

China & Hong Kong China market strategy Stock Market .640 9. KGI Securities Figure 91: Breakdown of YTD new issue Percent CB [0.139 Rights Issue (Rmb mn) 683 9.921 5.36 3.875 55.76 2.3 IPO 60 30 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Securities and Futures Bureau. KGI Securities Source: CEIC.004 2. CSRC.518 34.358 99.00 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (1-8) Shenzhen Shanghai Source: CEIC.764 24.84 2.803 0 4.490 4.467 2.255 451.177 20. KGI Securities Source: CEIC.02 5.020 204. KGI Securities Source: CEIC.20 3.Cash Calls & Cash Supply Figure 89: Cash calls by type Prior to 1993 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 (1-8) IPO (Rmb mn) 20.21 60 40 1.965 5.283 143.854 7.673 28. KGI Securities Source: CEIC.90 1.082 CB (Rmb mn) 0 50 0 0 0 0 339 1. 2008 59 .684 27.867 4.com January 14.522 0 4.447 71.459 99.875 43.265 50.91 3.184 6.284 58.820 28.34 2.659 52.946 26.440 35.88 3. KGI Securities Institutional portal: http://research.640 Figure 93: Monthly turnover as share of mkt cap Percent 75 60 45 30 15 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: CSRC.15 Figure 94: Mkt cap in Shanghai and Shenzhen as share of GDP Percent 120 100 80 5.140 18.740 67.33 1.33 3.955 70.9 58.207 78.13 2. KGI Securities Figure 90: Cash call as percent of market capitalization Percent 11.485 9.kgi. KGI Securities Figure 92: Monthly turnover as share of mkt cap SSEA & SZSA Percent 90 75 60 45 30 15 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Shenzhen Shanghai Figure 96: Capital raised as share of GDP Percent 120 100 80 60 40 20 0 (20) 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: CEIC.8%] Figure 95: Mkt cap as share of GDP Percent 150 120 90 Rights issue 40.

kgi.SS 000972.SS QFII holdings (mn shares) 177 68 60 47 38 36 36 36 30 30 Figure 100: Top ten fund holding by market cap (Jan.SS 600066.SS 000911.2 16.588 51.4 12. 2008 60 .6 7.0 0.7 19.1 4.SZ QFII holdings as % of floating shares 23.SS 600823.China & Hong Kong China market strategy Stock Market – Portfolio Weightings Figure 97: Industry weightings (January 7.SS 002070.SS 002024. 2008) Agriculture Mining Chemical Metals Building Materials Machinery Electronics Transportation Equipment IT Homeappliances Food and beverage Textile Manufacturing Pharmaceuticals Utilities Transportation Property Financial Retails Tourism other Source: KGI Securities Total market cap (%) 1. 2008) Company 1 2 3 4 5 6 7 8 9 10 Guangdong Midea Baiyun Airpor Vanke Maanshan Iron & Steel HuaDian Power Int'l Shenzhen Dev.SS 000002.SZ 600312. 2008) Sector 1 2 3 4 5 6 7 8 9 10 Machinery Financial、Insurance Metal、Nonmetal Manufacture Real estate Mining Transportation Retail Food and Beverage Petroleum、Chemical Fund holdings Rmb bn 912 502 354 240 198 184 168 125 107 103 Source: Wind.624 76.6 1.0 3.SS 600000.5 10.2 32.5 2.2 11.SZ 600004.SS Fund holdings (Rmb mn) 99.2 12. KGI Securities Source: Wind.9 3.SZ 600808.7 0.SZ 600004.cnstock.SZ 601666.6 1.2 0.SZ 600519.1 2.SS 000002.803 19.com January 14.0 1.SS 000001.7 10. 7.0 3.8 1.7 3. 7.9 2.4 13.4 7.011 17.5 7.5 1.979 57.5 4.0 6. 7.7 0. NanNing Sugar Manufacturing BaiYun Int'l Airport XingJiang Chalkis PingGao Elec.4 10.4 4. KGI Securities Source: Wind.3 3.277 Figure 101: Top ten sector holding by fund by market cap (Jan.com.SZ 600019.SS 601988.SS 600823.SS 600030.SS 600027.8 7.7 10.1 10.7 1.6 1.8 2.199 24.4 7.SS 600125.5 4.SZ 000410. 2008) Company 1 2 3 4 5 6 7 8 9 10 QianJiang Water Resources Dev.365 27. Bank Tiana An Coal ShangHai ShiMao Bank of China Jiaozuo Wangfang Code 000527.SZ 000001.7 2.6 Figure 98: Top ten QFII holdings by shares (Jan.SS 600005. 2008) Company 1 2 3 4 5 6 7 8 9 10 China Merchants Bank CITIC Securities Ping An Insurance Pudong Development Bank Vanke Baosteel Suning Applian Shenzhen Dev.1 Zhongxing Shenyang Commercial Building 000715. KGI Securities Institutional portal: http://research.7 0. KGI Securities Figure 99: Top ten fund holding by market cap (Jan. Shanghai ShiMao Yutong Bus ZhongHe ShenYang Machine Tool Code 600283.6 Floating market cap (%) 0.SZ Source: www.2 7.695 57.1 13. 7.354 27.Bank Kweichow Moutai Wuhan Iron and Steel Code 600036.9 4.6 0.SS 601318.7 3.

banks and other institutions.com January 14. though the growth rate will remain high. underpinned by projects started in 2007. Market pundits have all revised down their 2008 forecasts for the US and OECD economic growth and world trade. This means uncertainty will mount.0 4. This is the largest uncertainty that China’s economy faces in 2008. they will have plenty of cash to support FAI. Positive domestic conditions: Investment remains robust We expect investments to increase in 2008. Since China’s economy has become increasingly dependent on exports in recent years. up 36. The slowdown in the US economy due to the US housing market plunge will also hamper demand for China-made goods.0 7. percent 7. We believe China will face positive internal conditions and foreign weakness in 2008. slowing economic growth in 2008. The profitability of industrial enterprises was also impressive. industrial enterprises posted earnings of Rmb2. we believe China is capable of staving off the impact since China has not fully opened up its capital market and has a huge reservoir of foreign exchange. investment accelerates in such years.0 8. Rmb tn (LHS).0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Wind. This means that even if the government exerts tighter control over project starts in 2008. First. These uncertainties will likely hinder China’s economic growth.74%. As China’s foreign exchange reserves are enormous and banks’ earnings are growing fast.7% YoY.0 0.0 2.0 10. Figure 103: Investment growth rises in cabinet change year Fixed-asset investment.0 3. In addition.0 1992 1994 1996 1999 2001 2003 2005 Fixed-asset investment Annual growth rate 70 60 50 40 30 20 10 0 (10) 2007 Source: Wind.0 5. Investment in new projects Investment in projects under construction Source: Wind. The US sub-prime turmoil and economic slowdown will likely affect China’s economy via the following three channels: (1) sub-prime bonds held by the Chinese government. with GDP growing at an estimated 11. and (3) slowing exports due to economic slowdown in the US and the world. KGI Securities External weakness: Uncertainty heralds economic slowdown Compared with the robust growth momentum in China.5%. the highest since 1995. KGI Securities Second. losses incurred from sub-prime bonds won’t be too big. the growth rate of project starts. As of November 2007.0 1.6 ppts.0 9. Renminbi appreciation and rising labour costs will drive up product prices.0 0. including (1) volatility in international financial markets caused by the US sub-prime mortgage crisis.0 6. Even with tight credit. Figure 104: Profitability of industrial firms at record high Profitability of industrial enterprises.0 1.0 4. 2008 61 . High profitability means these enterprises have incentives Institutional portal: http://research.0 6. reaching a record high of 6. and (2) cost pressure due to rising oil and other commodity prices. We therefore expect export growth to decelerate markedly in 2008. Based on published data. a slowdown in foreign demand will cap China’s economic growth going forward. percent (RHS) 11. (2) financial market fluctuations triggered by a global credit crunch. FAI growth will be high. a leading indicator of fixed-asset investment (FAI).0 5. up 21.kgi. KGI Securities A key reason we expect strong investment is that profitability remained high in 2007. accelerated in 2007. This means China’s banking system will have adequate funds to lend. other economies are full of uncertainties. We expect FAI growth to be 26% in 2008.3tn.92. However. Local governments tend to start more construction projects in a cabinet re-shuffle year. Figure 102: Project starts growth accelerated in 2007 Growth of investment in new projects & projects under construction YoY.0 2. the amount of such holdings is limited. which will affect China’s export growth.0 3. annual growth rate. China’s cabinet will change in 2008. According to past records. most of these holdings are of higher rating. percent 125 100 75 50 25 0 (25) (50) Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 to invest further and that they have adequate funds of their own. while the comprehensive index of economic efficiency of industrial enterprises reached 209.China China market strategy China economic conditions: Positive internal conditions little affected by external weakness Analysis and comments China’s economy grew rapidly in 2007.

7 11.3 11.9 1.73% of China’s total exports.9 7.0 2008F IMF IMF WEO uopdate 4.0 9.0 11.5) World Bank 3.1) 0.1 1.7 2.7% as of end-October 2007.1) 2.4 6.0 1.3 11.0 1.1 9.9 16.4 2.5 Latin America Source: Bloomberg.7 1.4 13.3 1.1 22.5 19. though. KGI Securities Second.2) (0. Leading indicators for 2008 indicate that the slowdown in the EU will be less severe than it will be in the US.8 2.5 13.8 7.1 1.4 7.6 4.9 6.5 2.9 20.7 (3.8 1.9 7.4 21.2 1.9) 2.0 5.7 10.3 1.9 2.9 5.6 1.8 16.1 16.4 6.5 (0.3 16.5 1.9 2.4 4.1) 2.8 (0.9 3.6 7.4 2.8 1.0 Source: Bloomberg.2 (0.5 1.3 1. the weighting of US-bound exports from China has been shrinking.7 13.2 4.1 2.4 11. Figure 109: China export & import growth highly correlated Annual growth of China’s imports & exports. while exports to the EU and ASEAN have been growing.3 17.5 (0. percent 100 80 60 40 20 0 (20) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Imports Exports Source: CEIC. we expect China’s economy to continue growing at a high rate on the following grounds. respectively. China’s export competitiveness is also built upon production scale.1 2.4 3.4 3.0 7.8%. respectively.3 4.9 4.6) 1.2 1.0 21.3 15.6) 7. resulting in a trade surplus of around US$2.6 18.9 2.2 2.8% and 12. especially ASEAN.4 5.1 1.3) 6.9 2.0 1.3 1.0 24. China-made products have remained competitive.4 3.0 2.9 18.euro World Bank 3.0 6.5) (0.3 1.1) (0.2 3. As China’s export markets diversify. despite renminbi appreciation.0 2.7 5.2 1.4 13. Therefore.1% and 17% in 2008.4 10.6 0.0 14. begin to substitute imports.6 1.5 0.7 17.0 (0.0 1.1 1.0 US 17.0 9. Therefore. reaching 22.8 2.5 21.4 1.2 9. domestically made products.2 4.0 11.9 20.4 13.1 11.3 2007F IMF IMF WEO update 5.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 3. percent 17.3 12. China’s enormous processing business and import substitutes mean imports and exports move in the same direction and the trade surplus will remain high.7 4.8 2.4 2. KGI Securities Figure 108: Price rise of US imports from China still low US import price index.0 1.4 1.4 17.7 (0.5 13.2 (0.2 2.7 1.9 (0. the processing business accounted for 50.3 (0.57% of the trade surplus.com January 14. First.4 7.0 19.9 16.1 1.0 8. China’s import growth also slows. In 2007.5 2.3 4.9 1.4 16.0 17.5 2.9 4.5 8.2 17.2 3. KGI Securities Institutional portal: http://research. will likely mitigate the effect of weaker demand from the US for China exports.3 7.6 2.China & Hong Kong China market strategy Figure 105: Breakdown of economic forecasts 2005 2006 Percent Global GDP OECD United States EU Japan Developing economies Russia China India ASEAN-4 Brazil Volume of world trade CPI of G7 countries Non-oil commodities prices 6-month Libor . we expect foreign demand for China-made goods to remain strong in 2008. points 165 155 145 135 125 115 105 95 Dec-03 Jun-04 China Dec-04 Jun-05 Canada Dec-05 Jun-06 EU Dec-06 Jun-07 Source: World Bank.5 7.0 15.4 14.7 21.1) 1.9 18.8 17.7 5.8 20.1 21.3 1.4) 2.4 12.2 5. especially machinery and transport equipment. resulting in 94.1 1.0 17.0 12.4) 1.5 7. IMF.4 21.5 15.1 21.7) Figure 107: Weighting of US imports from China rising Total US imports/US imports from China. 2008 62 .0 15. we forecast exports and imports will grow by 19.8 18.2 7.7 (0. China’s total exports and exports to the US still grew at a high rate during the same period.6 2.4 1. according to US statistics.9 (0.1) 4.0 Hong Japan ASEAN Korea Russia Taiwan Canada Australia Others Kong 24.2 4.5 14. Although renminbi appreciation began accelerating in 2005. the slowdown in the US won’t pose too big a threat.6 7.7 6.7bn a month.US$ 6-month Libor . Compared with other countries.8 4. Figure 106: China has been diversifying export markets EU Percent 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 13. Source: Wind.6 16.6 2.5 17.4 9.0 1.0 7.6 1. However.1 (0. KGI Securities Despite the above-mentioned negative factors.9 7.0 7.1 8.3 15.5 6.0 13.0 5. When China’s production capacity expands and technology advances.0 4.4 16.5 20.5 10.5 1. When foreign demand slows.6 4. increasing demand from the EU and developing countries.kgi.9 1.2 2.0 13.8 6. In recent years.0 1. KGI Securities Third.6 5.6 1.7 2.3) (0.0 0. China remains competitive as prices have only risen moderately.7 1.0 15. The growth of US imports slowed from 10.1 4.2 1.9% in 2006 to 4.6 1.6 6. the weighting of China’s exports to the US has been increasing.0 5.8 2.

international payments imbalance and rising inflation risk. Impacted by inflation and the narrowed interest rate spread between the dollar and the renminbi. 1991 and 2001. This indicates the central bank will launch more macro cooling policies in 2008. such as restricting lending.0% range.6% against the dollar in 2007. robust domestic demand will underpin the economy. Crude oil was at US$90 a barrel in December from US$53 a barrel in January. The non-oil commodities price index rose 10% Jan-Sep 2007. issuing central bank notes to banks that exceed loan ceilings. percent 16 14 12 10 8 6 4 2 0 (2) (4) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 US GDP China GDP 60 50 40 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Source: CEIC. If exports decline too excessively. the number of times of the interest rate will be raised in 2008 will be fewer than in 2007. it will likely tighten credit via administrative measures. the central bank will likely raise the reserve requirement ratio twice in 1Q07. controlling quarterly loan disbursements.com January 14. As such. domestic demand will remain a strong factor in keeping economic growth healthy. we don’t rule out the possibility of a zero growth rate or even a recession in the US. Although China’s current economy is more dependent on foreign markets. the global economic slowdown will help ease inflation pressure. This has increased costs for businesses and the general public alike. issue special state bonds and strictly control the approval of new projects. Figure 112: Global oil prices surged in 2007 Crude oil price. US$/barrel 100 90 80 70 Source: CEIC. In order to prevent loan disbursements and FAI from rebounding. Under such circumstances. Nevertheless. Figure 111: US recessions have limited impact on China’s economy US & China GDP growth. ensuring healthy growth. lending and exports. the central bank will continue to raise interest rates. Therefore.China & Hong Kong China market strategy Figure 110: Local machinery & transport equipment are replacing imports Net export of machinery & transport equipment. We expect China’s inflation to be in the 4. by 1. We also expect deposit rate increase to outpace loan rate increase. the number of times the interest rate is raised will depend upon inflation. fending off hot money. The surge in prices of commodities. inflation has Institutional portal: http://research. The central bank will also be engaged in open market operations. The renminbi appreciated by 6. The Chinese government has been working to tame the surging Chinese economy in recent years by controlling investment. Also. 2008 63 . leaving China under pressure from the EU for further Source: Bloomberg. We forecast loan growth will decline to 15% in 2008 from 17% in 2007. the leveling-off of export growth will narrow China’s trade surplus. our foregoing analysis is based on the assumption that US economic growth will slow to 2% in 2008. leading to zero or negative trade surplus growth. However. Since this wave of rising commodity prices is demand driven. KGI Securities Fourth. we forecast China’s GDP growth will be 10. Moreover.0 ppt along with interest rates. This explains why the trade surplus remained high in 2007. the government can ease controls on investment growth. the People’s Bank of China raised the reserve requirement ratio by 1. KGI Securities Monetary policy: Strengthen the renminbi Following the Central Economic Task Force’s proposal in 2007 to adopt a tighter monetary policy. a slowing global economy is to a certain extent good for China. US$bn 120 100 80 60 40 20 0 (20) (40) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 become one of the largest concerns of the government. it will try to maintain the interest rate spread. foods in particular. We expect the central bank’s first priority to be staving off inflation in order to drive real interest rates into positive territory.5% in 2008. The central bank will likely raise the reserve requirement ratio again. China is troubled by an overheating economy. All told. KGI Securities In fact.0 ppt each time. has boosted prices in China significantly. Moreover. However.5-5. monetary policy and adjust trade policies to attain desired economic growth. easing money supply and trade friction. Global oil and other commodities prices have been rising significantly since 2007.kgi. China’s export growth will likely slow further. Meanwhile. the trade-weighted nominal effective exchange rate (NEER) almost stagnated. China’s economic growth was not markedly impacted by US recessions in the early 1980s. warranting two or three interest rate hikes. due to high inflation risk. Historically.

4 27.8 6.9 27. The Central Economic Task Force has said that if China is impacted by slowing foreign demand.3 1Q08F 10.kgi.3 25.9 Source: KGI Securities estimates Institutional portal: http://research.5 4Q07F 10.8 26. improving international payments imbalance and easing inflation pressure. we forecast the renminbi will rise at a faster rate in 2008. the impact on the industrial and agricultural sectors will be mitigated.5 4.9 17. as the profitability of enterprises is high and agricultural product prices are rising.2 25.1 15.com January 14.1 3Q07 11. or 8%. Now is a good time to allow the renminbi to appreciate faster. which will prompt the Fed to cut interest rates further. International Settlement Bank.2 26.4 8.6 7.6 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Renminbi/US dollar exchange rate BIS effective exchange rate index 114 112 110 108 106 104 102 100 98 96 94 92 90 Source: Bloomberg.9 17. Money supply pressure will also be eased.6 15.4 26. points (RHS) 7.2 7.China & Hong Kong China market strategy renminbi appreciation.7 19.0 26.4 7.1 3. reaching Rmb6.4 18. percent GDP CPI Fixed-asset investment Industrial value-added International trade Retail sales of consumer goods M2 1Q07 11. reducing trade disputes.0 16. the macro cooling measures are likely to be less stringent. 2008 64 . Our economic forecasts for 1Q08 are tabulated in the following figure: Figure 114: Breakdown of key economic forecasts for China Annual growth.6 17. Rmb (LHS).7 17. KGI Securities Due the slowdown in the US economy. BIS effective exchange rate.4 20.9 18.5 18.8 14.8 8.3 27.4 17.5 6. the global economy faces higher uncertainty in 2008. Figure 113: Renminbi NEER well below rate against the dollar Rmb/US$ exchange rate.7 per dollar. Thus.2 8.3 5. The NEER will hence begin to strengthen.3 2Q07 11.0 8.3 18. As such. We expect the US economy to slow in 2008.7 16.

0 6.3 40.5 2.011 11.7 1.9 438 34.5 1.470 5.941 10.2 1.1 4.8 177.412 18.6 260.0 3.9 1.3 565 37.718 13.8051 1152.122 19.2 14.52 2007F 23.132 17.6 11.6 13.5 8.25 2006 20.264 28.926 26.3 4.9 5.331 16.200 12.5 7.5 2.584 9.702 4.5 6.7 2.036 17.7 1.919 7.422 23.797 10.5 1.287 21.5 2.7 792 20.2 6.451 19.485 13.330 14.5 1.0 594 35.1 48.5 4.41 Institutional portal: http://research.3 4.1 3.3 9.232 10.5 10.162 11.China & Hong Kong China market strategy Figure 115: Summary of key China economic indicators GDP Primary industry Secondary industry National accounts Tertiary industry VAI* FAI* Retail sales Imports Trade Exports Absolute trade value Trade balance CPI Core CPI Food price index PPI M2 Money M1 M0 US dollar exchange rate Foreign exchange reserves FDI* 1-yr deposit interest rate Source: KGI Securities estimates Prices Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY Value YoY YoY YoY YoY Value YoY Value YoY Value YoY Year-end Value YoY Value YoY Unit Rmb bn % Rmb bn % Rmb bn % Rmb bn % Rmb bn % Rmb bn % Rmb bn % US$bn % US$bn % US$bn % US$bn point point point point Rmb bn % Rmb bn % Rmb bn % Rmb US$bn % US$bn % % 2003 11.3 7.728 11.0 4.40 1.1 34.2 8.584 4.8 10.688 9.6 1.4 1.638 13.3 13.com January 14.160 36.0 75.5 9.0 4.121 17.621 11.7 7.4 2.7 63.5 6.2 29.693 2.975 14.1 25.4 4.1 25.0 4.6 5.4 9.703 17.1 4.497 28.2 4.9 51.127 12.077 6.510 27.7 3.1 413 39.194 13.7000 1916.0 69.5 2.4 7.244 8.0 33.1 1.9 8.2770 609.350 24.3 15.739 9.340 10.345 20.3 7.272 5.3 32.5 18.4 9.2 6.3 2.3 3.078 13.6 8.2971 1533.8 1.3 25.0 1.9 11.7 7.3 3.4 2.0 3.192 11.567 13.3 60.5 1.105 18.2 60.176 23.6 851 37.0 2.3 2.9 12.25 2005 18.6 10.603 17.876 17.kgi.6 762 28.6 13.761 23.7 2.2 330.218 25.14 2008F 25.0 8.0 969 27.5 3.9 8.4 3.0702 819.7 8.558 16.571 18.6 9.0 22.707 12.0 4.0 4.6 1.643 16.8 53.746 16.7 7.98 2004 13.0 10.0 1.0 6.0 1.3 8.7 40.786 16.9 11.2 0.6 660 17.2 18.2 102.8 2.403 11.882 18.0 34.239 11.1 2.899 16.846 26. 2008 65 .048 12.0 10.5) 2.505 13.5 2.5 958 21.2767 403.3 (0.096 10.047 11.3 40.

4 1.0 2. percent (RHS) 600 400 200 0 (200) (400) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Change of payrolls Unemployment rate 8.0 1.0 7.050 1.0 (2.0 Figure 123: US dollar exchange rate Exchange rate.0 4. 2008 66 . 100 Japanese yen/US dollar and euro/US dollar 1.0 4.0) Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 GDP QoQ growth rate GDP YoY growth rate Figure 120: PMI US PMI and New Orders Index.1 1.8 0.6 Jan-99 Jan-00 Jan-01 Jan-02 100 yen Jan-03 Jan-04 Jan-05 Euro Jan-06 Jan-07 Source: Bloomberg.com January 14. points 75 65 55 45 35 Jan-93 Jan-95 Jan-97 PMI Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 New Orders Index Source: Bloomberg.China & Hong Kong China market strategy Appendix I: Summary of US Economic Indicators Figure 116: GDP growth rate GDP QoQ and YoY growth rate. KGI Securities Figure 117: Oil price trend WTI crude oil price.0 0.150 1. KGI Securities Institutional portal: http://research. KGI Securities Figure 119: Employment market Change of payrolls.kgi.0 6.9 0.0 0. percent 9 8 7 6 5 4 3 2 1 0 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 FFR Jan-07 10-yr treasury bond yield Source: Bloomberg.3 1. US$bn (LHS).7 0. 100mn barrels (RHS) 100 90 80 70 60 50 40 30 20 10 0 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 1.0 3.0 3. US$/barrel (LHS).0) (4.100 \ Figure 121: International trade Imports & exports.0 (1.000 950 900 850 800 Jan-01 Jan-03 Jan-05 Jan-07 Crude inventories West Texas Intermediate price Source: Bloomberg.0 2. crude inventories. percent 8.0 1.0 4.2 1.0 6. KGI Securities Source: Bloomberg. KGI Securities Figure 118: Price trend CPI and Core CPI growth rate. KGI Securities Source: Bloomberg. percent 5. US$bn (RHS) 200 180 160 140 120 100 80 60 40 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Imports Exports Trade balance 0 (10) (20) (30) (40) (50) (60) (70) (80) 1. KGI Securities Source: Bloomberg. trade balance.0) Jan-93 Jan-95 Jan-97 CPI Jan-99 Jan-01 Jan-03 Core CPI Jan-05 Jan-07 Figure 122: Interest rate trend Fed funds rate and 10-yr treasury bond yield.0 0.0 2.0 0. KGI Securities Source: Bloomberg.0 5. ‘000 (LHS). unemployment rate.

Rmb bn (LHS). growth rate. Rmb bn (LHS).China & Hong Kong China market strategy Appendix II: Summary of China Economic Indicators Figure 124: GDP growth rate GDP.5 Source: Bloomberg Source: Bloomberg Figure 125: Urban investment in fixed assets Fixed assets investment. percent (RHS) 7.000 800 600 400 200 0 Feb-00 Feb-01 Feb-02 FAI Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 50 40 30 20 10 0 (10) Figure 129: Retail sales and price trend Annual growth in retail sales & prices. US$ bn (LHS).5 Figure 128: CNY exchange rates Renminbi/US dollar and renminbi/euro exchange rate 11. percent (RHS) 1. percent 15 12 9 6 3 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1-yr deposit rate 1-yr lending rate Source: Bloomberg. core CPI.kgi.5 Apr-02 Nov-02 Jun-03 Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Rmb/US dollar Rmb/Euro 9.5 8.000 Mar-98 Jun-99 Sep-00 Dec-01 Mar-03 Jun-04 Sep-05 Dec-06 Mar-07 Jun-07 GDP Growth rate 12 11 10 9 8 7 6 5 6.200 1.000 1. KGI Securities Source: Wind Figure 126: International trade Trade balance. percent (RHS) 250 200 150 100 50 0 (50) Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Cummulative Trade Balance Export Growth Rate Import Growth Rate 70 60 50 40 30 20 10 0 Figure 130: Interest rate trends Interest rates.400 1.000 6.000 2. 2008 67 .5 7. percent 30 25 20 15 10 5 0 (5) 105 100 95 Jan-01 Jan-02 Jan-03 CPI Jan-04 Jan-05 PPI Jan-06 Jan-07 Core CPI Feb-02 Oct-02 Jun-03 M0 YoY Feb-04 Oct-04 M1 YoY Jun-05 Feb-06 Oct-06 Jun-07 M2 YoY Source: Wind.5 10. import/export annual growth. KGI Securities Source: Bloomberg Institutional portal: http://research. points 110 Figure 131: Money supply M0.com January 14.000 5.600 1. M1 and M2 annual growth. KGI Securities Source: Wind Figure 127: Price trends CPI.000 4. and PPI.000 3. percent 18 15 12 9 6 3 0 (3) Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 FAI growth rate YoY Total Retail Sales Growth Retail Price Growth Source: Bloomberg. annual growth rate.

500 51x 45x 39x 33x 27x 21x 15x The Shanghai A-share market over-heated in 4Q07 with the average PE ratio hitting 60-65x. x (RHS) 6.500 1. macro controls were later expanded. P/B ratio. KGI Securities Figure 133: Market P/B chart – Shanghai SSEA. points (LHS). points (LHS). KGI Securities Institutional portal: http://research.500 3. KGI Securities Figure 134: Market yield gap chart – Shanghai Percent 9 Yield gap is narrowing even though central bank has tightened interest rates.0x 5.500 4.0x 1.8x in 1Q08 5. 2008 68 .com January 14.6x 2.4x 3.500 2.500 Given the expanding macro 6. x (RHS) 6.kgi.2x 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 controls. PE ratio. we expect the average PB to fall to around 4.500 2.500 1.2-4.500 4.8x 2.500 3.500 500 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Wind. pushing the PE ratio back down to around 40x 2008 EPS 5. if the CPI does not decline.China & Hong Kong China market strategy Appendix III: Market Valuation Figure 132: Market PE chart – Shanghai SSEA. the bank will consider raising long-term rates 3 6 0 (3) Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Source: Wind. particularly in 1H08.500 500 Source: Wind.2x 4.

In light of macro controls. KGI Securities Figure 137: Market yield gap chart .100 900 700 500 300 100 outperforming Shanghai.0x.3x 1. 2008 69 . if the CPI does not decline.700 PE of Shenzhen market at higher level than that of Shanghai.3x 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Shenzhen market P/B is around 6. x (RHS) 1. KGI Securities Figure 136: Market P/B chart – Shenzhen SZEA. but potential correction pressure increasing 1.500 1.3x 2.China & Hong Kong China market strategy Figure 135: Market PE chart – Shenzhen SZEA.Shenzhen Percent 10 Yield gap is narrowing even 8 6 4 2 0 (2) (4) Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Source: Wind.100 900 700 500 300 100 Source: Wind. the bank will consider raising long-term rates Institutional portal: http://research.300 1. P/B ratio. will Shenzhen continue market also increasing 75x 65x 55x 45x 35x 25x 15x 1. points (LHS).3x 3.3x 6. sharp renminbi appreciation is supporting.kgi.700 7.300 1. KGI Securities though central bank has tightened interest rates.500 1. x (RHS) 1. but risks 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Wind.3x 5. points (LHS).com January 14.3x 4. PE ratio.

1 (1.3) 36.9) 7.1 (2.203 686 1.4) 14.0 80.5 10.5) (0.1) 9.5 11.0 0.7) (6.9 (1.8) 32.4) 14.5) 26.6) 12.6 79.9) 40.0 34.8 139. KGI Securities Institutional portal: http://research.014 1.9 88.3 1.9 24.2 (5.1 3.0 Energy Chemical Transportation equipment Electronics Consumer goods Metal & Steel Health care Utility Transportation Property Finance Others Food & beverage Industry SSEA Source: Wind.5 25.0 112.7) (27.1 6.7 76.796.9 0. Bloomberg.1 (5.7 1M 15.868 3.2 (8.6 (4.0 (0.8 7.5 59.9 60.5 2.China & Hong Kong China market strategy Appendix IV: Sector Performance – China Figure 138: Sector performance (January 7.186 1.0 12.4 80.8 39.6 20.554 290 3.7 90.4 11.7 (6.8 11.6 (1.256 1. Share of mkt cap.0 38.com January 14.8) 5.7 11.0 15.444 2.8 23.6) 15. 2008) Mkt cap.844 2.8) (6.8 108.9 (7.0) 15.7 439.5 126.6 0.340 5.997 7.2 52.080.7 22.0) 2.3 85.0 43.379 3.1 88.8 1.5 25.4 (8.1 7.7 (13.110 0.7 Relative performance to SSEA (%) 1M 3M 6M 12M 7.9 7.6) 4.7 19.836 0.0 (3.0 103.3) 94.2 437.3 17.0 0. (US$mn) (%) 1.0 23.6 41.5 390.5 213.6) 0.2) 3.9 22.6 102.3 35.1 (12.4 9.079 2.6) (14.6 12.8 94.kgi. 2008 70 .404 6.728 7.7 57.7) (7.9) (1.0 0. (Rmbbn) 7.6 11.719 7.9) (0.9 74.4 100.4 17.6 12M 267.0 (0.3) 14.9 6.6 8.9 5.9 (5.3 114.7 198.172 13.441 819 277 Mkt cap.1 Price performance (%) 3M 6M (4.2 (11.0 42.0) 64.0 335.3 21.2 (0.3 (5.1 53.6 13.2 17.5 0.492 2.762 32.8 47.537 3.0 298.852 19.5 5.7) 3.5) 9.244 2.

0) 0.0 80.0) (30.0 20.0 25.0) (5.0 35.0 30. KGI Securities Figure 140: 3M sector absolute performance Percent Industry Food & beverage Chemical Electronics Health care Transportation Finance Utility Transportation equipment Figure 144: 3M sector relative performance Percent Industry Food & beverage Consumer goods Others Energy Property Metal & Steel Utility Transportation equipment Consumer goods Others Energy Property Metal & Steel Finance Chemical Electronics Health care Transportation (15.0 25.0) (5.0 5.0 5.0 (10.0) (10.0 40.0 15.0 30.com January 14.0 200.0 (50.0 250.0 30.0 Source: Wind.0) 10.0) 0.0 10.0) 0.0 300.0 30.0 5.0 40.0 70. KGI Securities Source: Wind.0 90. KGI Securities Institutional portal: http://research.0 100.0 (40.0 20.0) (10.0 10.0 15.0 90.0 10.0) (10.0 150. KGI Securities Figure 141: 6M sector absolute performance Percent Metal & Steel Industry Transportation Chemical Finance Food & beverage Utility Electronics Transportation equipment Property Health care Others Energy Figure 145: 6M sector relative performance Percent Metal & Steel Industry Transportation Chemical Finance Food & beverage Utility Electronics Energy Transportation equipment Property Consumer goods Others Consumer goods 0. KGI Securities Source: Wind.0 10.0 30.0 50.0 20.0) 0.0 5.0 25.0 60. KGI Securities Source: Wind. KGI Securities Source: Wind.0 100.0 Source: Wind.0 40.China & Hong Kong China market strategy Figure 139: 1M sector absolute performance Percent Health care Electronics Utility Consumer goods Food & beverage Transportation equipment Transportation Metal & Steel Chemical Energy Others Property Industry Figure 143: 1M sector relative performance Percent Health care Electronics Utility Consumer goods Food & beverage Transportation equipment Transportation Metal & Steel Chemical Energy Others Property Industry Finance Finance (5.0 50.0) (30.0 Source: Wind.0) (5. KGI Securities Figure 142: 12M sector absolute performance Percent Metal & Steel Property Chemical Others Food & beverage Consumer goods Health care Transportation Finance Electronics Utility Industry Transportation equipment Energy Figure 146: 12M sector relative performance Percent Metal & Steel Property Chemical Energy Others Food & beverage Consumer goods Health care Transportation Finance Electronics Utility Industry Transportation equipment 0.kgi.0 15.0 10.0 110.0 30.0 30.0 25.0 Source: Wind.0 20.0 10.0) (20.0 50.0 35.0 20. 2008 71 .0 70.0 20.0 15.0) (10.0 (15.0) 0.

LuXiang YanHua Smartech Special Electric Motor Hyron Software Founder Motor JiaYing Pharmaceutical Leng Guang (300) (150) 0 150 300 450 600 750 900 (300) (150) 0 150 300 450 600 750 900 Source: Wind. Agricul Tural Products Chenming Paper HuaYi Electric LiYuan Hydraulic Guang Lu Measuring Instrument East Crystal Elec.225. & Tech. KGI Securities Source: Wind. LanGuang Sci. Taige Bio-Tech YuYuan Holding ShaanXi Construction Machinery (300) (200) (100) 0 100 200 300 400 500 600 700 (300) (200) (100) 0 100 200 300 400 500 600 700 800 Source: Wind. & Tech. Special Electric Motor YanHua Smartech GuangZhou LuXiang WanLida Elec. Centennial Brilliance SCI. & Tech. KGI Securities Institutional portal: http://research. 2008 72 . & Tech.225. LiNuo Solar Energy Bai Hua Cun JiLin Pharmaceutical Annada ShaanXi Construction Machinery (1. KGI Securities Figure 148: Large-cap (mkt cap above US$300mn) 12-month absolute performance (top 10 and bottom 10) Percent HeungKong Holking Space Applinace GuangJi Pharmaceutical AnHui Conch Cement Yunnan Copper Hanbell Precise Machinery HengYun Enterprises Yunnan Tin CRED Holding JinJian Cereals Figure 150: Less-liquid (mkt cap between US$100-300mn) 12-month absolute performance (top 10 and bottom 10) Percent YuYuan Holding Taige Bio-Tech Xin'An Sci.6) GuangYu Dev . & Tech. Wanlida Elec. LengGuang (1.China & Hong Kong China market strategy Appendix V: Stock Performance – China Figure 147: Large-cap (mkt cap above US$300mn) 3-month absolute performance (top 10 and bottom 10) Percent GuanJude The Pacific Securities KingTeller Tech. Xin'An Sci.6) Silv ertie Star Lake Bioscience ShuangLiang Air-Conditioning TianLi High & Newtech GuangBo GuoGuang Elec. Huitian Thermal Power Suning Univ ersal ZhongJin LingNan YueYang Paper ACHENG Relay JiNan Diesel Engine Yunnan Tin Yunnan Copper GuangJi Pharmaceutical Annada JiLin Pharmaceutical Bai Hua Cun LiNuo Solar Energy LanGuang Sci. Centennial Brilliance Sci.kgi. KGI Securities Source: Wind.com January 14. LiaoNing Publishing & Media Ov erseas Chinese Inv estment ChangJiang Securities Goldwind GhangJiang Riv er Water Transport GuoYuan Securities GuangDong China Sunshine Media Figure 149: Less-liquid (mkt cap between US$100-300mn) 3-month absolute performance (top 10 and bottom 10) Percent JiaYing Pharmaceutical Founder Motor Hyron Software GuangLu Measuring Instrument East Crystal Elec. & Tech.

6 3.kgi.China & Hong Kong China market strategy Appendix VII: Stock Screen – Value Stocks in China Figure 151: Comment Figure 154: Lowest price/NAV Company Code 2007 Price/NAV (x) The steel sector is the one of our favorite sectors in 1Q08.SS 600725.9 12.6 3.2 3.SS 002009.9 13.SS 600418.6 3.SS 600096.5 10.0 3.SS 000983.2 9.SS 600458.1 2.7 1.3 11.4 18.SS 600795.8 1.0 11.5 3.6 10.SZ 600005.1 24.SS 601666.8 12.1 1.SZ 000039.SS 2.9 9.6 3.2 3.2 26.SS 600596. Source: KGI Securities 600348.SZ 000338.7 14.6 10.SZ 600005.SS 002022.SS 601398.9 1.SZ 000726.1 11.8 10.9 2.9 24.3 25.SS 000401.SS 16.3 21.SZ 002033.0 19.SS 600019.7 11.SS 000089.SZ 600299.3 3.SZ 000422.3 8.SS 600005.SZ 601919.SS 000825.SS 600188.0 21.SZ 600426.SS 600584.7 Source: KGI Securities Figure 152: Lowest PE ratio Company Code 2007 PE (x) Figure 155: Highest dividend yield Company Code 2007 dividend yield (%) Taigang Stainless Steel HanDan Steel China Int'l Marine Containers Luthai Weichai Power China COSCO Baosteel Jianghuai Auto SDIC Power Wuhan Steel Source: KGI Securities 000825. 2008 73 .SZ 600019.SS 600418.SS 000002.SS 600886.4 10.1 9.1 Wuhan Steel YunNan YunWei Zhejiang Longsheng Xinan Industrial Yuntianhua Industrial and Commerial Bank Tianan Coal Jidong Cement HuaLu-Hengsheng Chemical Kehua Bio-Engineering Source: KGI Securities 600005.SZ 600001.SZ 000024.SZ 600650.SZ 600004.com January 14.SZ 3.7 1.SS 600290.SS 600383. Weichai Power China Int'l Marine Containers Xingchen New Chem Material Xishan Coal and Power HuaLu-Hengsheng Chemical Vanke LiJiang tourism Wuhan Steel Gemdale Times New Materials Source: KGI Securities 000338.5 Institutional portal: http://research.SS 600458.SS 600206.7 3.SS 000039.9 Company ZTE Corporation Hubei Yihua Baosteel Jianghuai Auto SDIC Power Taigang Stainless Steel China Merchants Jin Jiang Int'l Investment GD Power Huaneng Power Source: KGI Securities Guoyang New Energy Times New Materials Yanzhou Coal Grinm Semiconductor Materials Shenzhen Airport Guangzhou Baiyun Int'l Airport Changjiang Electronics Jiangsu Miracle Wuhan Steel HuaYi Elec.4 8. Its valuation is attractive and it should be less impacted by government macro control measures.SZ 600426.SS 600352.SS 600011.SS 2007 price to cash flow (x) 7.7 Figure 153: Lowest EV/EBITDA Company Code 2007 EV/EBITDA (x) Figure 156: Lowest price to cash flow 8.3 3.SS Code 000063.0 25.SS 600886.

0 148.SS 600519. HanDan Steel Weichai Power Source: KGI Securities Even though the property and financial sectors have been hit by government macro control measures.2 163.9 106. wind-power equipment.SS 000825.6 133.SZ 600383.SZ 002022.SZ 002122.9 34.SZ 600299.0 33.SS 000933.8 23.SZ 601919.5 40.SS 600001.3 31.SS 600290.6 24.0 33.SZ 000839.8 Figure 159: Highest EPS growth Company China COSCO JiangXi Wanninqing Cement Grinm Semiconductor Materials Shanghai Auto ShanDong Helon Jinjing Sci.SZ 600206.SZ 600586.SZ 600299.SS 2007 ROAE (%) 42.3 Source: KGI Securities Note: Current year PE divided by current year EPS growth Figure 158: Highest sales growth Company YunNan YunWei Guangshen Railway HuaYi Elec. we expect they will still enjor 3040% higher earnings growth in 2008. and tourism related stocks to have higher earnings growth.SS 000338.SS 600320.SZ 002097. In addition.5 32.SZ 002128.SZ 600206.SZ 2007 PEG (x) 2.6 12.China & Hong Kong China market strategy Appendix IX: Stock Screen – Growth Stocks in China Figure 157: Comment Figure 160: Lowest PEG ratio Company China COSCO Chongqing Sanxia JiangXi Wanninqing Cement Shanghai Auto Taigang Stainless Steel Grinm Semiconductor Materials ShanDong Helon Jinjing Sci.7 30.8 26.0 127.SS 002097.4 153.SZ 600596.SS 000825.SS 000789.4 345.1 9.9 13.3 196.8 111.SS 000538.3 23.3 28.SS 601919.com January 14.4 24.1 31.& Tech.SS 000869.SS 600596.SS 000338.6 Institutional portal: http://research.SS 000677.5 40.4 121.5 11.& Tech.4 119.0 37.SS 600104. Weichai Power Shanghai Auto China COSCO Chongqing Sanxia Gemdale Shen Huo Coal Xingchen New Chem Material Source: KGI Securities Figure 161: Highest ROAE 2007 sales growth (%) 244.7 15.SZ 600104.SZ 000792.2 29.9 268.SZ 002122.5 Company Weichai Power Salt Lake Potash Opencut Coal Tianma Bearing China COSCO Shen Huo Coal Sunward Intelligent Machinery Xinan Industrial Kweichow Moutai ZPMC Source: KGI Securities Code 600725.0 129.SZ 600586.SS 600801.SZ 2007 ROCE (%) 41. Taigang Stainless Steel CITIC GuoAn Xingchen New Chem Material Huaxin Cement Source: KGI Securities Figure 162: Highest ROCE 2007 EPS growth (%) 632.3 29.6 25.SZ 601919.4 25.2 280.SS 601333. 2008 74 .6 173.4 30.5 179.1 Company Weichai Power Kweichow Moutai Sunward Intelligent Machinery Tianma Bearing China COSCO Changyu Pioneer Wine Kehua Bio-Engineering China Shipping Xinan Industrial Yunnan BaiYao Source: KGI Securities Code 601919.SS 000565.SS 000933. Code 601919.SZ 000789.SZ 600104.4 3.SS Code 000338. we expect fertilizer.SS Code 000338.SS 000677.kgi.SS 000565.SZ 600026.0 151.0 478.SZ 600519.

SS 000625.2 21.9 50.3 58. 2008 75 .1 13.SZ 600290.SZ 600586.6 118.SZ 002129.SZ 600330.Next year 2007 EV/EBITDA (x) 72.0 Company Jinjing Sci.4 84.7 38.SZ 600585.6 37.com January 14.SS 000825.SS 000422.SZ 002009.6 84.SS 2008 earnings decline (%) 64.SZ 000063.SS 002122.SS 600290.3 Company HuaYi Elec.SZ 2007 earnings decline (%) 54.SZ 601006.1 89. CITIC GuoAn Zhonghuan Semi.0 42. Source: KGI Securities Figure 168: Highest earnings decline .0 26.SZ 000839.5 59.9 45.SS 000789.SZ 000839.8 37.0 66.SZ 002018.2 48.SS 000581.SZ 600586.SZ 002128.8 48.2 44.8 86. technology.SZ 600011. WangXiang QianChao Huaxin Cement ZTE Corporation Source: KGI Securities Code 002009. JiangXi Wanninqing Cement CITIC GuoAn Kweichow Moutai ZTE Corporation Conch Cement Source: KGI Securities Code 600352. Xiangtan Electric Manufacturing Zhejiang Xinhecheng Huaxing Chemical Chongqing Sanxia Kweichow Moutai China World Trade Center GEM-Year Industry Weifu Hi-tech Source: KGI Securities Figure 167: Highest earnings decline .SZ 600675.3 35.kgi. We thus suggest avoiding export-related.SS 000002.SS 000839.0 40.5 14.4 51.SS 002001.1 92.SS 000789.SS 600416.China & Hong Kong China market strategy Appendix XI: Stock Screen – Short Stocks in China Figure 163: Comment Figure 166: Highest price/NAV Company ZTE Corporation Huaneng Power ChangAn Auto Jiangsu Miracle Daqin Railway CITIC GuoAn Zhejiang Tiantong Electronic Hubei Yihua China Enterprise XJ Electric Source: KGI Securities We expect increasingly tight macro-control measures and a significant slowdown in the US economy in 1H08.SS 000839. Vanke Tianma Bearing Shanghai Auto HuaYi Elec.SZ 600104.SZ 2007 price/NAV (x) 28.SS 000933. Code 000063.5 50.9 34.SS 002029.6 34.SZ 600123.8 46.1 35. property.SS 000400.& Tech.SS 600007.5 Institutional portal: http://research.& Tech.SZ Code 600290.8 37.SS 000063.SZ 000559.SZ 600519.& Tech.7 66.9 52.Current year 2007 PE (x) 134.3 15.SZ 000565.2 Source: KGI Securities Note: Current year PE divided by current year EPS growth Figure 164: Highest PE ratio Company Jiangsu Miracle HuaYi Elec.SS Code 600586.6 Figure 165: Highest EV/EBITDA Company Zhejiang Longsheng Septwolves Industry ZTE Corporation CITIC GuoAn Lanhua Sci-Tech Taigang Stainless Steel Lu' an Environmental Energy Shen Huo Coal Opencut Coal Jinjing Sci.9 47.SZ 601699.5 14.SS 601002.SZ 600519.6 116.5 16. and electric power plant stocks.4 91.6 41.SZ 600801.SZ 600104.5 61.SZ 002122.4 13.7 86.SS 000063. JiangXi Wanninqing Cement Shanghai Auto Tianma Bearing Jinjing Sci.0 47.2 23.

50 22.64 4.31 4.SZ 000045.41 16.SZ 200011.46 18.72 7.SZ 000012.55 8.71 55.SZ 000056.SZ 200413.40 64.SZ 200029.77 59.58 8.32 50.57 4.30 16.59 7.32 2.17 8.70 8.15 7.SZ 200539.76 9.64 4.89 7.79 8.04 4.SZ 200570.SZ 000024.47 20.17 21.23 9.26 22.95 3.SZ 000726.49 2.68 8.SZ 000039.04 53.SZ 200002.com January 14.78 56.61 4. 2008 76 .83 44.SZ 000613.kgi.China & Hong Kong China market strategy Appendix XIII: Stock Screen – A.SZ 200725.95 14.76 44.47 58.52 55.05 15.55 15.SZ 000002.SZ 000521.98 15.SZ 000570.SZ 000058.30 26.14 5.30 4.17 61.48 42.62 25.20 7.87 65.SZ 000581.79 62.SZ 200030.SZ 000028.87 57.SZ 000761.92 47.35 10.69 62.00 41.73 21.45 62.SZ 200521.SZ 200596.SZ 000029.SZ 200625.10 7.47 17.SZ 200530.42 14.99 53.33 3.86 17.52 8.50 19.19 3.18 11.00 8. to A (%) 65.98 3.56 59.SZ 000017.96 53.78 50.SZ 200018.31 43.SZ 200037.56 59.SZ 000037.23 17.63 30.33 5.92 9.95 7.10 60.SZ 000055.SZ 200869.SZ 200055.76 7.03 12.92 B disc.68 9.23 10. Dev Changan Auto Gujing Distile South Glass Little Swan Luthai Textile Dadonghai Guangdong Power Jiangling Motor Shzh Tellus Health Mineral China Merchant Livzon Pharm Hefei Meiling Chenming Paper Fiyta Hold Shenbao Ind Shenzhen Textile Sez Real Estate Bengang Steel Fangda Nanshan Power Changchai Int’l container Weifu Fuel Foshan Light Dalian refrig SZ Konka Chiwan Wharf China Vanke Guangdong Pro Yantai Changyu China Bicycles Lionda Hold Source: KGI Securities Code B 200553.SZ 000026.SZ 000596.91 7.SZ 200726.73 2.SZ 000019.87 7. 2008) Company Hubei Sanonda Hainan Pearl Baoshi Shenzhen Seg SZ Huafa Orient Elec SZ INT Enter Victor On Text Pro.54 5.63 41.44 52.45 54.30 8.SZ 000550.SZ 200020.SZ 200019.53 7.SZ 200056.SZ 000530.62 19.SZ 000488.19 4.66 2.SZ 000011.SZ 000869.37 24.47 40.28 3.SZ 000513.31 9.85 21.59 13.SZ 200025.58 9.19 14.30 4.SZ 200581.47 6.11 47.SZ 200429.96 5.03 22.26 8.SZ 000413.03 11.SZ 000020.09 29.SZ 000025.66 5.01 80.SZ 200418.43 7.SZ 200550.80 9.SZ 000418.71 5.63 10.84 15.54 4.78 64.00 3. B & H-share Price Discount Figure 169: Shenzhen A & B-share price discount (January 7.SZ 200024.SZ 200028.SZ 200039.SZ Code A 000553.11 15.88 10.94 3.54 14.SZ 000030.SZ 200613.65 6.92 28.SZ 000539.SZ 000429.SZ 200513.17 60.74 2.15 8.55 12.SZ 200488.26 3.00 2.27 54.36 10.55 3.99 19.SZ 200045.01 51.12 10.88 9.SZ 200505.97 A share price (Rmb) 13.17 5.11 55.56 3.63) Institutional portal: http://research.80 27.SZ B share price (HK$) 4.85 8.85 60.01 24.38 (1.20 56.15 23.36 61.SZ 000016.17 63.SZ 000022.SZ 200541.SZ 000541.SZ 200026.18 B share price (Rmb) 4.SZ 200016.00 6.SZ 200017.SZ 200058.SZ 000725.80 10.SZ 200761.SZ 000625.20 6.92 6.45 14.SZ 000505.SZ 000018. & Res.62 5.SZ 200012.SZ 200022.61 65.34 6.29 10.03 38.

83 1.62 8.52 12.66 41.kgi.SS 600619.19 11.21 10.10 9.SS 600613.24 41.SS 900906.47 8.75 1.20 9.13 37.04 0.60 51.84 12.SS 900940.42 4.20 1.34 B disc.SS 900933.96 18.17 1.11 51.18 0.SS 600851.SS 900915.74 24.SS 600695.97 16.SS 600698.SS 900914.69 6.57 18.05 30.SS 900912.14 33.99 52.43 14.87 5.78 52.07 18. Friendship Lujiazui Huaxin Cement Jinjiang Tower Sanmao Textile Vacuum Heilongjiang Electric Zhenhua Haihang Matsuoka Source: KGI Securities Code B 900938.82 2.20 2.SS 600663.87 19.78 6.52 34. to A (%) 61.79 5.SS 600726.92 1.SS 900918.02 1.22 43.91 1.98 11.64 6.SS 900904.80 25.32 0.52 0.65 13.48 52.74 56.77 4.94 43.SS 600680.84 5.SS 900947.47 7.89 1.74 0.SS 900924.SS 600754.SS 600190.68 2.34 13.75 0.SS 900920.SS 900901.SS 600614.36 14.03 39.SS 900941.10 Institutional portal: http://research.67 6.33 49.35 48.81 5.80 20.SS 900903.SS 900909.16 7.SS 600272.35 0.49 22.SS 600295.SS 900952.65 1.27 12.22 0.39 29.70 13.SS 900917.45 1.81 8.14 25.51 52.SS 900902.SS 900937.com January 14.61 20.51 8.72 1.78 1.21 14.62 31.17 8.01 8.71 1.74 0.74 0.41 8.SS 600320.SS 900907.SS 600841.19 15.73 14.SS 600611.SS 900921.SS 600639.SS 600801.76 0.SS 600776.02 12.54 25.55 1.33 11.SS 600844.94 38.16 7.SS 600094.38 1.92 0.98 36.SS 600819.49 32.56 A share price (Rmb) 13.11 0.41 14.12 35.SS 900910.China & Hong Kong China market strategy Figure 170: Shanghai A & B-share price discount (January 7.41 13.SS 600617.SS 900925.50 9.93 6.32 8.SS 600835.78 47.80 42. 2008 77 .SS 600845.79 17.80 23.SS 900942.73 B share price (Rmb) 5.SS 900945.60 14.SS 900936.14 31.SS 900928.84 15.SS 900946.SS 900955.00 6.SS 900927.SS 900943.SS 600555.94 1.29 42.16 52.SS 900930.57 0.17 1.SS 900916.15 2.SS 900926.88 23.69 7. 2008) Company Tiensin Marine China Textile Lianhua Disel Engine kai Kai Auto Instruments Shanghai Worldbest Qingqi Dajiang (Group) Hero Posts & Telecoms Phoenix Haixin Steel Tube Forever Chlor Alkali Jinqiao 1st pencil Erfangji Shangling Tyre & Rubber Yaohua Pilington Outer Gaoqiao Wingsung Data Tech Shanggong Refrigerator Rubber Belt Erdos Cashmere Huangshan Tourism Jinzhou Harbour Goods & Materials New Asia Dazhong Esatern Comm.49 9.SS 600610.SS 600618.46 21.SS 900913.59 34.73 24.45 8.SS 600843.SS 900905.SS Code A 600751.72 20.42 6.66 17.98 49.64 0.70 35.24 47.SS 900922.SS 600054.85 8.53 34.17 12.57 3.68 7.SS 600827.86 20.36 47.SS 600689.23 33.49 15.61 20.SS 900932.70 30.SS 600604.SS 600612.76 13.SS 600822.26 37.SS 600679.SS 900919.SS 600818.SS 600650.SS B share price (US$) 0.16 1.36 3.09 5.61 35.66 2.SS 900908.01 2.SS 600602.72 53.23 60.29 14.SS 600623.SS 900911.SS 900934.SS 600648.21 46.30 9.54 15.12 1.SS 600221.71 2.86 12.SS 900923.36 17.26 47.02 9.42 4.58 1.SS 600848.06 31.

SS 601808.SS 600036.81 18.10 16.HK 1138.37 37.SS 600685.55 6.57 73.HK 1108.39 3.HK 1033.China & Hong Kong China market strategy Figure 171: A & H-share price discount (January 7.SZ 600012.SS 600332.19 1.43 4.11 102.HK 0857.05 60. 2008 78 .SS H Share price (HK$) 0.87 2.71 29.23 31.HK 0525.55 58.53 58.45 5.89 10.HK 0177.65 22.37 9.SS 601857.SS 000585.36 28.90 30.09 6.HK 1055.62 69.45 5.SS 000898.19 63.HK 0763.SS 600011.82 9.HK 2883.HK 1053.78 40.45 57.72 12.75 2.04 53.HK 1171.33 27.SS 600808.29 13.03 6.kgi.HK 0939.HK 2338.88 15.39 10.04 9.58 74.50 78.26 4.53 14.10 64.SS 600377.HK 0991.30 4.88 37.23 42.79 8.SS 601588.60 66.SS 601628.SS 600026.19 19.74 47.44 31.HK 0300.SZ 600188.62 10.49 2.81 3.84 14.39 56.01 4.94 23.84 48.57 37.43 4.SS 601390.50 8.66 3.06 10.93 3.SS 601398.75 11.HK 2600.SS 601866.08 8.92 5.95 3.63 8.HK 1065.91 30.07 66.82 9.97 67.62 64. to A (%) 90.55 6.79 6.HK 0548.49 6.SS 601318.59 7.40 20. 2008) Company Kelong Electrical Luoyan Glass Yizheng Chemical Fibre Nanjing Panda Beiren Printing Sinopec SSanghai Petrochem Northeast Electrical SSandong Xinhua Datang Power Beijing North Star China Eastern Airlines Jingwei Textile Machinery China Southern Airlines Jiangxi Copper Company CSCL Huadian Power International CHALCO China Air Tianjin Capital Environmental Prote Guangzhou Pharmaceutical Chongqing Steel China COSCO Petrochina Jiaoda Junji High-Tech China CITIC Bank MaanSSan Iron and Steel Sinopec COSL Guangzhou SSipyard Huaneng Power International Bank of China China SSipping Development GuangSSen Railway Weichai Power China Construction Bank SSenzhen Expressway ZTE Yanzhou Coal Bank of Communications Industrial and Commerial Bank CSEC China Life Angang New Steel Anhui Expressway Dongfang Electric Jiangsu Expressway Tsingtao Brewery Ping An of China China Merchants Bank Anhui Conch Cement China Railway Source: KGI Securities Code H 0921.38 4.91 42.SZ 600029.HK 0168.60 21.SS 601005.18 48.60 36.12 6.76 6.HK 0187.39 28.09 27.50 38.SS 000338.85 63.HK 1072.22 38.HK 3968.50 10.51 9.77 6.06 64.80 23.45 19.SZ 600876.88 42.17 12.45 58.HK 0902.SS 600027.SS 601998.HK 0347.84 38.HK 0719.88 2.67 2.SZ 601991.00 8.86 12.HK 0386.HK 0553.08 71.36 81.49 17.74 Institutional portal: http://research.87 43.20 7.HK 0358.18 7.HK 1088.83 34.92 11.63 11.49 16.HK 0323.80 6.HK 2866.57 19.86 90.SS 600775.32 42.26 17.45 40.18 67.36 4.28 28.SS 601600.33 7.SS 600585.33 11.47 7.55 35.SS 601919.64 34.51 70.36 73.39 39.07 3.HK 0914.HK 0390.63 9.SS 600860.94 85.53 15.HK 2628.84 74.94 77.SZ 000756.HK 0874.SS 601328.50 1.81 2.47 55.53 54.SS 600874.65 40.19 48.60 15.HK 0995.53 11.41 12.48 3.76 87.38 59.21 3.39 H disc.SS 000666.91 68.35 28.95 3.18 41.SS 600600.95 12.HK 0338.HK 0317.HK 0998.HK 2318.SS 601333.42 54.SS 000063.HK 1071.68 13.SS 600362.75 3.28 12.62 16.94 67.SS 600871.27 31.26 66.HK 1919.81 A Sare price (Rmb) 9.SZ 601939.SS 600548.HK 0753.52 4.75 5.35 10.05 5.83 21.24 20.61 6.61 9.HK Code A 000921.com January 14.70 4.SS 601988.10 13.60 41.59 59.12 11.77 10.HK 0350.38 55.27 45.37 3.56 51.HK 3988.98 20.06 5.SS 601088.HK 3328.70 30.SS 600028.SS 600688.91 55.H 0588.SS 600115.49 77.89 0.HK 0670.SS 601111.83 0.HK 0042.00 67.89 9.60 H Share price (Rmb) 0.07 75.59 32.41 35.08 4.HK 1398.85 40.SS 600875.85 70.16 20.SS 600806.82 47.67 12.

12 0. wheel hub) growing fast Sales of Bosch diesel system growing Initial coverage Stepping up China market deployment via Ford Mazda Initial coverage (leading viscose fiber enterprise). YoY decline of bulk goods throughput in 4Q07 likely to be reversed 3Q07 net income lower than expected 1Q-3Q07 results strong.59 1.SZ 000581.5 5.77 1.5) 40.0 1.2 (6.5) 4.77 0.1) (23.91 0.9 39.SZ Honda Wei Honda Wei Michelle Wei Michelle Wei Nico Zhang Nico Zhang Sabrina Lee Michael Wang Michael Wang Revision (%) 2007F 2.34 0.11 1.17 0. fuel costs rising mildly. operating.SZ 000625.SZ 000869.4) 42.28 0.SZ Zharlen Zhang 000063. KGI Securities Institutional portal: http://research.93 0.25 Rationale 3Q07 net income up 80%.61 0.34 1.9) 21.6) (10.SS 600754. steel product prices rise in 1Q08 3Q07 sales up 71. iron ore transport to be future growth highlight 1Q-3Q07 net income down 4.00 1.SZ Angus Lin 000338.SS Michael Wang 10-Dec 27-Nov 0.28 0.SZ Judith Chen 000022.9 19. downstream demand brisk Potassium chloride price will keep surging.5) 1.SS Huei-Chen Flannery 600183.51 0.58 0.7) 13.6% (19.SS Sabrina Lee 600584.7 (9.9) 23.42 0.SS Zharlen Zhang 600027.68 0. boosting profits Sales growing steadily Initial coverage 4Q07 results to be affected by levy of two funds (one for environmental protection.SS Angus Lin Han Yang Nico Zhang Huei-Chen Flannery Judith Chen Michelle Wei Zharlen Zhang Zharlen Zhang Nico Zhang Huei-Chen Flannery Judith Chen 15-Oct 26-Oct 25-Oct 7-Dec 26-Oct 26-Dec 21-Dec 23-Nov 6-Nov 29-Oct 25-Dec 26-Nov 2-Nov 12-Oct 3.08 1.3) Huaxing Chemical Pudong Development Bank Guangzhou Baiyun Int'l Airport Shnghai Port Container Baosteel China Shipping Huadian Power International China Merchants Bank Yu Tong Bus Shanghai Auto 002018.49 0.0 5.99 2.45 0.94 0.0) 2008F 11.SS Michelle Wei 600104.7 9.41 0.42 1.65 1.62 0.87 0. growth potential remains 3Q07 results exceeded expectation Performance up on brisk glyphosate demand Initial coverage Short of cash and insufficient land reserves 3Q07 sales lower than expected as shipment growth slowed Beigangchi project Phase III to lead container throughput growth In 2008. & Tech HuaYi Elec.7 0.SZ Michelle Wei 000401.0 13.SZ 000983.34 0.6 13.83 0.09 0.67 0.SS Judith Chen 600036.SS 600018.30 3.00 4.SS 600004.1% YoY.79 0.SS Nico Zhang Ken Su Huei-Chen Flannery Zharlen Zhang 4-Jan 31-Oct 28-Nov 16-Oct 22-Nov 16-Nov 9-Nov 24-Oct 8-Nov 24-Oct 0.13 Zhejiang Longsheng HuaLu-Hengsheng Chemical Kweichow Moutai Changjiang Electronics Jinjing Sci.SS 600795. rising product prices and increased shipments expected Management costs up. asset injection increasingly likely.1) (15.9 (1.23 0.0 (13.92 0.4) (10.1 (3.72 0.62 1. the other for helping workers of coal enteprises exiting the Initial coverage CCL price fell back in November 4 out of 10 shares from capital surplus will be transferred to common stock.7%.73 0.25 0.75 1.7 37.SS Michelle Wei 6.2 (6.SS 600717.0 (29. outlook good 3Q07 results good.8) Revised EPS (Rmb/HK$) 2007F 0.4 2. Xinan Industrial Jin Jiang Int'l Investment China Enterprise King Long Motor Tianjing Port Tianjing Port YunNan YunWei Jinjiang International Hotels GD Power 600352.6) 8.0 (7.5) Xingchen New Chem Material Guoyang New Energy 600299.3 Lanhua Sci-Tech CYTS Tours Shengyi Sci.47 0. ensuring growth Non-airline business to account for 50% sales in 2015 Acquired controlling stake in Jiujiang Port.SS 600586.68 7.03 2.3) 1.3 (17.7 11.6) 1. electricity tariff rising 3Q07 earnings up 128.36 0.6 Source: TEJ.5) 4. tax expenses will decrease.93 600019.2) (37.0 15.SS Michael Wang 600138.3 0.SS Honda Wei 27-Nov 22-Oct 27-Dec 17-Oct (3.SS 600686.19 0.SS Nico Zhang 600519.SS Ken Su 600066.3 10.50 0.6 (2.5 (14.17 1.17 0.58 0.62 0.0 (16.SZ Nico Zhang 000559.8 10.& Tech.4) 16. container handling fees up 10% on average Initial coverage 3Q07 results lower than expected 1Q-3Q07 net income up 65. cyclical demand from India to strengthen Longsheng's overall competitiveness Resume rating (urea/DMF leader with core technology in coal Results beat expectation.SS Nico Zhang 600426.68 0.5) 25.74 0.7) 13. partnering with Chile to enter Latin American wind power market Asset injection to lead sales growth 4Q07 results affected by levy of two funds (one for environmental protection.5 15.SZ 000625.96 2.31 1.26 1.5 (8.SS Nico Zhang 600348.41 0.SZ 000792. the other for helping workers of coal enteprises exiting the market) Stake in KIRI (India).5%.37 0.3 (2.SS 600717. Shanghai VW begins phase of fast earnings growth 4Q07 results affected by levy of two funds (one for environmental protection.9 (3.38 0.31 2. sales growth robust 3Q07 net income up 20%.89 0.49 1.60 0.SS Michael Wang 600026.kgi.20 1.com January 14.SS 600675.SZ 000937.72 1.53 0.66 1.China & Hong Kong China market strategy Appendix XIV: Change to Earnings Estimates Figure 172: Changes to earnings estimates Date of Company Vanke Chiwan ZTE Corporation Weichai Power Jidong Cement Hubei Yihua WangXiang QianChao Weifu Hi-tech ChangAn Auto ChangAn Auto ShanDong Helon Salt Lake Potash Changyu Pioneer Wine Jinniu Energy Xishan Coal and Power Code Analyst revision 31-Oct 1-Nov 29-Oct 31-Oct 24-Oct 31-Oct 15-Oct 16-Nov 14-Dec 21-Dec 7-Nov 6-Nov 20-Dec 20-Nov 27-Nov 000002. upstream material supply limited. operations along Yangtze River rising steadily Driven by raw material costs.42 0. management & financial expense ratios down Urea production technology upgrade and Zhangjiatun phosphate mine ramp-up are both behind schedule High-margin products (differential.11 0.55 0. 2008 79 .98 1.56 1.3 16.SZ 600000.37 0. expansion continues.7) (9.1 10. the other for helping workers of coal enteprises exiting the market) Sales surge on brisk glyphosate demand In 2008.41 0.99 1.04 1.SZ 000677.76 1.06 0.SS 600650.SS 600596.20 3.9 (15.62 0.73 1.37 0.0 11.77 0.SZ Han Yang 000422. 600123.80 4.63 0.SS Angus Lin 600290.82 2008F 1. cost control good Initial coverage Initial coverage (channeling outside partnerships and internal resources into building of its own brandname).SS 600725.

19 0.3 Source: KGI Securities Institutional portal: http://research.40 More toll road assets to be acquired to boost growth 0.SS Michael Wang 601001.HK 1138.67 Resume coverage (growth outlook reflected in share price) 1. electricity tariff rising 1.8 11. R&D expansion continues.2 11.0) (15. ICBC China COSCO AAC Acoustic Greatwall Motor Weichai Power China Life Xinyu Hengdeli CMB 601919.8 (2.3 (9.SS 601006.SS 0203.HK 1071.6% 0.6 31.48 0.4 4.HK 2333. H-share upside widens 3.60 Initial coverage 0.39 0.51 1.5 13.41 Profitability strong 0.45 0.1% YoY.7%.3 8.25 0.08 In 2008.com January 14.26 Cement capacity to keep growing fast.33 3Q07 results impressive.HK 0763.32 0.51 1.3) 34. losses related to subprime mortgage crisis limited 1.36 Numerous unpredictable factors could impact future sales growth 0.HK Zharlen Zhang Michelle Wei Michelle Wei Vincent Lee Vincent Lee Angus Lin Ken Su Judith Chen Zharlen Zhang Ken Su Zharlen Zhang Jennifer Liang Michelle Wei Michelle Wei Ken Su Tin Hung Ken Su 28-Dec 21-Nov 5-Dec 6-Dec 7-Nov 29-Oct 30-Oct 9-Nov 16-Nov 29-Oct 28-Dec 9-Nov 23-Oct 31-Oct 6-Dec 1-Nov 24-Oct 3.17 Issued A-shares to raise capital.HK 0939.6) Revised EPS (Rmb/HK$) 2007F 2008F Rationale 0.87 1Q-3Q07 results strong.9 3.8 51.3 26. coal contract price up over 10% 0.31 1Q-3Q07 net income down 4.1 (8.HK 3968.97 2.SS Judith Chen 600997.4) 10.20 Initial coverage 0.4 14.4 10. cost control improves 1.SS Michael Wang China COSCO Denway Motors Dongfeng Motor Shenzhen Expressway Hopewell Infra ZTE CCB Huadian Power China Shipping Dev.HK 1398. asset injection increasingly likely. iron ore transport a future growth highlight 0.20 1.SS Michael Wang Date of revision 18-Dec 31-Oct 12-Oct 27-Nov Revision (%) 2007F 2008F (1.57 1Q-3Q07 net income up 60.7 8.37 Initial coverage 0.25 0.28 3Q07 earnings up 128.37 1.17 Initial coverage 0.66 3Q07 net income up only 16.36 1.HK 1919.4 76.80 3Q07 net income lower than expected 0.89 1.kgi.SS Han Yang 600886.06 1.7 5.13 0.5) 8.4 3.04 4Q07 results affected by levy of two funds (one for environmental protection.30 0.8 12.HK 0548.HK 2018.91 4.7 16.90 1.62 Operations stable.40 0.HK 0737. cost control good DaTong Coal Daqin Railway Shen Hua Energy Bank of Communications Industrial and Commerial Bank Lu' an Environmental Energy 601001. to step up cooperation with international heavyweights after private placement deal 0.0 4.42 0.0 (9.80 4Q07 results affected by levy of two funds (one for environmental protection.3 3.SS Michael Wang Huei-Chen Flannery Michael Wang Ken Su Ken Su 4-Dec 12-Nov 13-Nov 2-Nov 29-Oct 27-Nov 0.79 1. credit loans and fee income grow strongly.9) 3.60 Strong rebound in 3Q07. losses related to subprime mortgage crisis limited 1.32 0.HK 0489.SS 601328.HK 3389. the other for helping workers of coal enteprises exiting the market) 0.84 1. 2008 80 .0) (6. quarterly EPS up 101% 0.53 3Q07 sales up 71. expansion continues.SS 601088.7% 0.5%.HK 2628.70 0.7 6.6 601699.China & Hong Kong China market strategy Figure 173: Change to earnings estimates Company Huaxin Cement SDIC Power Kai Luan Clean Coal DaTong Coal Code Analyst 600801. fuel cost rising mildly.7 5.44 Initial coverage 0.61 1. growth expected 1. the other for helping workers of coal enteprises exiting the market) 1.9 (6. credit loans and fee income grow strongly.SS 601398.7 15.60 Investment returns good 0.7) 9.5 73.HK 2338.97 2.33 3Q07 results impressive.60 Initial coverage 0.

China & Hong Kong China market strategy Appendix XV: Change to Investment Ratings Figure 174: Change to investment ratings Company Chiwan Weifu Hi-tech ChangAn Auto ShanDong Helon Jinniu Energy HanDan Steel HanDan Steel Guangzhou Baiyun Int'l Airport Shanghai International Airport Shnghai Port Container Huadian Power International Yu Tong Bus Shanghai Auto Code 000022. electricity tariff rising Strong sales growth partially factored in Initial coverage Initial coverage Nokia orders to boost sales growth Non-insurance sales solid growth Sales growth slows Initial coverage Initial coverage Limited upside Initial coverage Neutral Outperform Neutral Neutral Outperform Neutral CYTS Tours HuaLu-Hengsheng Chemical Conch Cement Jinjing Sci.SS 601002.HK 2319. Shanghai VW begins phase of fast earnings growth Initial coverage Resume coverage (urea/DMF leader with core technology in coal gasification) Resume coverage (capacity to expand swiftly in coming years) Initial coverage Initial coverage Initial coverage Initial coverage Initial coverage Initial coverage Initial coverage In 2008.HK 1919.5%.HK 0902.HK 1071.SS 600754.HK 0489.SS 0057. fuel cost rising mildly.SS 600650.HK 0941. higher costs weighed on profitability Operations stable. 2008 81 .SS 600009.SS 600592.SS 601001.HK 2333.SS 600018. operations along Yangtze River growing steadily 1Q-3Q07 net income down 4. electricity tariff rising Initial coverage Initial coverage (channeling outside partnerships and internal resources into building of its own brandname). LongXi Bearing Jin Jiang Int'l Investment King Long Motor King Long Motor YunNan YunWei Jinjiang International Hotels DaTong Coal GEM-Year Industry Daqin Railway Shen Hua Energy Bank of Communications Tianan Coal Lu' an Environmental Energy China COSCO Chen Hsong Denway Motors Denway Motors Prime Success Int'l Dongfeng Motor Shenzhen Expressway Hopewell Infra China Unicom Huaneng International China Netcom China Mobile Yurun Food Huadian Power BYD Neo-Neon China COSCO AAC Acoustic Ping An China Mengniu Greatwall Motor Weichai Power CIMH Xinyu Hengdeli Source: KGI Securities 600138.HK 0210. asset injection increasingly likely.SS 600001. CDMA service business slightly up Medium-term results beat forecast Initial coverage Sales strong.SS 600725.SZ 600001.HK Huei-Chen Flannery Nico Zhang Han Yang Han Yang Honda Wei Huei-Chen Flannery Michelle Wei Michelle Wei Nico Zhang Huei-Chen Flannery Michael Wang Huei-Chen Flannery Huei-Chen Flannery Michael Wang Ken Su Michael Wang Michael Wang Zharlen Zhang Tin Hung Michelle Wei Michelle Wei Ken Su Michelle Wei Vincent Lee Vincent Lee Mark Go Judith Chen Mark Go Mark Go Tin Hung Judith Chen Jennifer Liang Tin Hung Zharlen Zhang Jennifer Liang Ken Su Tin Hung Michelle Wei Michelle Wei Tin Hung Tin Hung 22-Oct 26-Oct 9-Aug 31-Jul 17-Sep 21-Dec 6-Nov 15-Aug 26-Nov 13-Sep 4-Dec 13-Aug 12-Nov 13-Nov 20-Aug 30-Jul 10-Aug 28-Dec 20-Jul 21-Nov 5-Jul 14-Sep 5-Dec 6-Dec 7-Nov 27-Aug 16-Aug 24-Aug 20-Aug 6-Aug 9-Nov 13-Sep 5-Jul 28-Dec 26-Jul 21-Aug 8-Aug 20-Sep 2-Aug 28-Aug 1-Nov Outperform Neutral Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Neutral Neutral Outperform Neutral Outperform Outperform Outperform Neutral Outperform Neutral Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Outperform Neutral Outperform Outperform Outperform Neutral Outperform Neutral Neutral Neutral Neutral Neutral Outperform Neutral Neutral Outperform Outperform Institutional portal: http://research.SS 600586. renminbi appreciation expected Higher pig price in China will boost ASP and top line 1Q-3Q07 net income down 4. cost control improves Initial coverage Initial coverage Initial coverage Initial coverage Initial coverage Risks include continued rise in accounts receivable and fluctuation in oil and metal prices Numerous unpredictable factors could impact sales growth Share price has risen to reasonable level Initial coverage Initial coverage Initial coverage Resume coverage (growth outlook reflected in share price) GSM service sales strong. YoY decline of bulk goods throughput in 4Q07 likely to be reversed Sales of Bosch diesel system begin to rise Initial coverage Initial coverage (leading viscose fiber enterprise).HK 2318.SS 600066.SS 600426.SS 601328.HK 0203. asset injection increasingly likely.SZ 600004.SS 600686.HK 2018. upstream material supply limited.SS 601666.SZ 000625.HK 3339.HK 0737.SS 601088.HK 1211.HK 3389.SS 601699.com January 14.SZ 000677. Olympics to bring demand Acquired controlling stake in Jiujiang Port.& Tech.SS 600585.HK 0548.SS 601006.SS Analyst Zharlen Zhang Honda Wei Michelle Wei Nico Zhang Michael Wang Michael Wang Michael Wang Huei-Chen Flannery Huei-Chen Flannery Zharlen Zhang Judith Chen Michelle Wei Michelle Wei Date of revision 1-Nov 16-Nov 14-Dec 7-Nov 20-Nov 19-Oct 23-Jul 28-Nov 7-Dec 16-Oct 9-Nov 8-Nov 24-Oct Rating Previous Neutral Neutral Revision Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Neutral Neutral Rationale 3Q07 net income up 20%. fuel cost rising mildly.HK 1868.SS 600027.HK 1068.SS 600104.SZ 000937.HK 0906.HK 0762. downstream demand brisk Initial coverage Steel product prices kept rising in 4Q07 Marine transport fees and iron ore costs to keep rising Non-airline business to account for 50% sales by 2015 New capacity ramping up. coal contract price to grow over 10% 1H07 results not good.SS 600686.HK 2338.5%.HK 0203.SZ 000581.kgi.SS 601919.

4 1.9) (5.5) 26.6 37.1) (1.1 9.5 33.3) 13.0 39. 6.A.1 10.9 56.8 7.6 2. 4.0) (1.0 8.4) 17.6 23.0 34.5 153.0) (5.5 4.5 (3.0 15. 7.9 0.2 15.0 14.3 151.7 2.1 305.6 57.8 55.A.8) 83.3 (7.6) (8.1 9.099 20.7) (4.1 249.0 17.5 8.2 77.9) (42.3 (4.2 14.8 68.4 4.4) (8.1 93.4 41.6 2.7 60.5 86.0) 72.2 (12.5 352.370 7.1 150.5 15.8 73.3 117.7 22.0 Target (Rmb) 122.6 12.6) 12.0 969 243.6 1.8) (60.1) 52.1 568.3 12.7 (0.7) (30.A.331 4.3) (17.3 (4.3 78.0 31.010 7.3 724 7.1 (0.5) (42.3 (18. 15.6 31.3 (5.4) (34. N.0 28.5 27.7 (11.2 45.8 (6.0 3.7 32.6 (6.7 127.9 54.5 11.9 44.5 (14.6 57.8) 27.2 N.1 2.4 1.5 14.8 N.105 3.079 9.4 30.0 3.9 2.6 90.9 220.7 25.1 183.1 25.8 15.5 12.9 16.3 (8.405 25.5 Relative performance 3m 6m 12m (4.1 36.7 23.0 1.5 92.0 (2.6 33.5) 55.0) (83.5 96.8 1.4 26.8 25. (1.9 62.9 (3.3 1.7 16.4 16.670 34.4 (1.2 136.6 (29.2 54.8 64.7 185.7 33.5 (14.198 12.6) 53.0 17.3 18.5) 18.1 N.5) 59.2 3.145 24.4 4.0 (4. 9.1 265.4) 12.3) 8.8 12.6 46.9 540 4.7 12.8 3.6 (21.1 14.5 87.1 1.5) 9.2 14.1 4.3) 44.459 7.5 38.0 12.8 33.2 217.5) 43.1) 3.5 18.7 30.2 39.4 4.0 21.4 23.4 196 15.1 58.1 257.0 106.A.2 12.8 1.4) 9.9 8.1 38.5 (17.8 658 31.6 (3.3 2.9 (8.0 8.6 20.7 112.5) 4.5 112.8 N.1 10.6 4.5 13.9 (28.9 1.0 (19.1 (5.9 (18.7) 23.8 21.7 790 5.7 24.8 90.8) N.3) 6.0 40.6) (14.5 24.4) 64.553 4.156 27.0 18.8) N.4 39.0) 5.0 78.3 14.7 98.4 3.9 69.091 4.8 519 5.0 (8.4) 19.4 23.082 5.0 35.1 21.6 22.3) (2.0 146.6 17.9) (7.4 165.8) 3.0 153.6) 104.9 0.0) 70.8 23.3 42.0 1. Shengyi Sci.4 (1.8 17.2 22.5 306.4) (1.1 (8.6) 130.150 25. 16.132 15.8 48.8 30.9 (9.1 88.1 38.7) 38.7 (28.5 69.2 87.7 (10.7 (3.7) 93.5 53.6) (8.126 49.4 265.235 7.4 (5.1 18.350.7) 6.4 776.844 65. N.3 (6.4 10.3 8.0 29.5 1.137 11.438 77.8 16.1 447.5 (2.2) (3.4 120.2 27.3 8.9) 37.7 73.6) (24.873 177.0 12.A.7 153.1 (4.3 28.9 1.3 59.5 2.0 50.0 (45.6) (5.2 44.7) 7.1 58.7) (29.5 0.A.8 31.6 22.6 47.4 41.0 23.9) 31.6 51.1 19.1 27.A.7 650 117.2) 1.3 450 62.0) 36.7 84.1 8.6 6.A.2 37.3 540.7 45.7) (7.3 172.2 23.8 63.0 Up / down 42.9 (25.1 67.0 19.A.6) 0.0 29.4 886 11.0 89.7 (5.1 38.0 19.4 3.2 6.2 456.6 19.1) 15.5 (11.661.4 (3.7) 158.3) (20.A.1 1.8 (2.7 77.5 142.9 35.6 24. 0.709 7.3 47.6 21.2) (3. (4.6 20.1 707 3.003 6.2 35.1 979 29.6 Bank Cement Chemical Conglomerate Electric Electronics Energy Source: KGI Securities Institutional portal: http://research.9 112.4 (9.0 420 13.1 (3.6) 30.4 93.A.110 117.3 8.046 1.6 34.8 54.0) 3.0 1.7 6.6 15.3 2. 2008 82 .3 13. 9.6) 19.9) 85.1 181.1 10.5 2.4 16.1 27.A.2) (7.9 334.1 82.5 58.7 9.7) 1.1) (3.822 11.641 37.0 32.5) 5.8 11.3) 36.1) 15. & Tech Grinm Semiconductor Materials Zhejiang Tiantong Electronic Sino-Microelectronics Ningbo Yunsheng Jiangsu Hengtong Jiang Su Zhong Tian Xiamen Faratronic Changjiang Electronics Shen Huo Coal Jinniu Energy Xishan Coal and Power Opencut Coal Lanhua Sci-Tech Yanzhou Coal Guoyang New Energy Shanghai Datun Energy Kai Luan Clean Coal DaTong Coal Shen Hua Energy Tianan Coal Lu' an Environmental Energy Rating Outperform Outperform Outperform Outperform Neutral Neutral Neutral Neutral Neutral Neutral Outperform Neutral Outperform Neutral Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Neutral Outperform Outperform Outperform Outperform Neutral Neutral Neutral Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Outperform outperform Outperform Outperform Neutral Neutral Neutral Neutral Outperform Outperform Outperform Outperform Mkt cap Rmb bn US$mn 44.7) 33.9 23.0 110.7 (10.6 52.7 16.5 (5.5 71.5 71.5 67.1 200.0 11.7 (0.0 (0.7 (22.3 313.9 78.492 29.7) (1.2) (51.1) 21.4 (9.4 606 7.0 23.5) 23.5 10.0) 7.8 (4.320 2.493 574.2 115.5) N.3) 19.1) (4.3) (24.3 (32.A.0 544 5.518 66. Xiangtan Electric Manufacturing LongXi Bearing ZTE Corporation Guangdong Goworld Zhongke Sanhuan DMEGC Megnetics Laibao Hi-tech Zhonghuan Semi.1 31.7 81.877 10.4) (2.1 103.0 52.6 19.9 Absolute performance 3m 6m 12m (5.9 15.6 14.6 (20.0 54.9 26.5 79. 1.0 (3.0 34.5 38.7 5.3 0.9 3.1) (7.9 58.7 1.4 (12.0) 42.2) 19.8 N.4 N.0 21.2 157.4 23.8 3. 21.0 78.2 169.2 8.2 (9.3 3.6) 22.1 39.2 (17.4 80.2 (14.3 98.A.com January 14.0 1.491 3.1) (4.6 (6.9 51.9 267.9 396.2 55.4 19.2 35.4 (18.3) (16.3 3.8 21.8) (11.4) 7.2 20.1 15.9 32.7 25.767 Price (Rmb) 85.2) 2.1 4.4 4.9 101.421 12.8 3.1 10.2 18.2 154.2 6.670 15.0) N.0 10.5) (8.0 44.029 25.5 34.4 54.5 75.2 19.0 73.1) 4.773 14.9 48.1 283.3) (39.029 751.8 1.A.0 11.325 25. 22.6 10.8 37.3 4.4 14.4 152.080 20.0 21.541 221.4 98.2 30.0) (14.446 20.8 (0.6 9.0 25.3 39.8 16.1 115.0 52.0 38.1 121.1 109.5 145.5 (2.020 3.5 17.0 37.5 75.8 20.1 64.2 6.8 13.5 4.8 (27.2) 65.7) 24.8 5.032 15.1 131.6 6.7) (21.7 17.6) (6.0 36.9 32.8 120.751 22.A.3 (9.8) (19.1 1.7 64.9 1.9) 2.2 26.7 781 5.6 23.2 192.9 (43.5 (14.1) 11.4) 6.6) 59.7 350.3) 112.1 N.1 102.6 118.0) (21.4 16.2 34.7 366.0 46.0 15.China & Hong Kong China market strategy Appendix XVI: KGI Universe Valuation Table (China) Figure 175: KGI universe valuation table Code Auto 000338 000559 000581 000625 000927 002076 600066 600104 600418 600686 600000 600016 600036 601328 601398 000401 000789 600585 600801 000422 000565 000677 000792 002018 600096 600143 600299 600309 600352 600426 600596 600725 000839 000400 002009 002026 002097 002122 600290 600416 600592 000063 000823 000970 002056 002106 002129 600183 600206 600330 600360 600366 600487 600522 600563 600584 000933 000937 000983 002128 600123 600188 600348 600508 600997 601001 601088 601666 601699 Company Weichai Power WangXiang QianChao Weifu Hi-tech ChangAn Auto Xiali Bright Star Light&Electricity Yu Tong Bus Shanghai Auto Jianghuai Auto King Long Motor Pudong Development Bank China Minsheng Banking China Merchants Bank Bank of Communications Industrial and Commerial Bank Jidong Cement JiangXi Wanninqing Cement Conch Cement Huaxin Cement Hubei Yihua Chongqing Sanxia ShanDong Helon Salt Lake Potash Huaxing Chemical Yuntianhua KingFa Sci.5 105.9 38.4 27.6 3. & Tech Xingchen New Chem Material Yantai Wanhua Zhejiang Longsheng HuaLu-Hengsheng Chemical Xinan Industrial YunNan YunWei CITIC GuoAn XJ Electric Jiangsu Miracle Weida Machinery Sunward Intelligent Machinery Tianma Bearing HuaYi Elec.4) 11.937 12.5 8.4 410.3) 4.0 8.1 N.5 22.5 79.4 20.0 61.0) N.6 1.0 9.836 24.5 70.6 (1.9 8.4 19.8) (4.0 20.0 412.0 14.6 (1.1 17.7 74.8 11.5 66.8 70.6 23.8 (34.2 151.8) 5.9 75.1 174.1) 2.0 15.0) 74.4 24.0 1.5 (4.3 730 1.9) (24.4 21.2 6.5) (8.1 (6.5 378.0 9.3 23.9) 99. 23.kgi.8 393.7 250.2 38.9 106.9 (13.7 294.0 23.4 86.8 141.6 85.5) 22.0) 25.8) (28.1 11.5 (1.8 76.0 26.4 5.4 89.2) 28.3 53.9 34.7 34.8 40.4 (25.0 249.6) 47.2 (12.9) 10.7 2.2 26.4 33.7 45.9 N.1 31.0) (31.2 3.804 51.6) 2.6 23.8 9.3 351.3 43.4) (10.8 (28.532 32.

5) 0.5 26.320 139.8 14.A.9 228.732 22.8 16.2 19.4 456.7) 9.5 3.8 17.8 33.0) 18.6 1.3) (10.6 164.4 543.0 30.2 3.7 32.4 (23.8 6.A.3 33.4 (5.3 0.4 26.7 (23.3 (0.3 215.5 20.2 (3.7 34.1 (4.7 54.9) 7.9 6.6 7.1 31.1 1. 10.3 62.9) (34.1 3.2 8.2 856 25.7 20.2 256.8 (1.068 70.1 5.3) 6.9 20.1) (50.286 90. Glass Manufacturing Medicine Petrochemical Power Property Retail and trade Securities Steel Textile Tourism Transportation Source: KGI Securities Institutional portal: http://research.5 8.1 11.7 5.3) (0.5 117.5 37.5 98.8 7.4 (6.365 41.5 98.1 41.0 20.kgi.6) 11.7) (24.8 10.8 64.0 4.7 (1.5 (1.7 21.6 (3.2 236.198 14.9 24.1) 24.8 (17.8) 15.0 22.6 13.3 17.3) (3.383 318.157 50.8) (3.4 7.4 Target (Rmb) 86.5 6.2 63.8 5.6 39.0 153.5 26.7 (4.5 (25.5 23.1 13.1 (10.3 19.0 24.2 59.7 109.7 27.8 3.985 3.1 5.0 37.4 28.5) (54.0 64.9) (53.0 66.2 6.4 (7.5 42.9) 9.2 (10.3 (4.598 6.4) 10.8 N.0 38.0 99.0) (18.5 20.8 10.2) (47.6 23.2 110.1 3.2) (21.2 856 364.6 46.5 99.4 27.8 4.0 (3.0 6.7 (1.2 (9.2 21.& Tech.6) 35.3 7.3 21.2 140.7 (0.5 (59.118 18.1 10.4 342.2) 15.3 0.4 39.0 23.1 (13.9 198.5 85.0 1.4 52.788 1.9) 1.6) 28.0 101.6 29.5 17.8 26.3 (2.0 31.0) 3.9) 17.0 50.9 47.0) 23.0) (16.5 3.4 32.3 13.935 135.4 (5.8 (21.5 41.5) 49.4 147.8) (8.6) 50.3 62.2 33.2 17.8 (0.8 18.0 21.6 23.045.9 530 2.4 4.072 8.6) 35.5 26.9) 7.0) 14.676 11.1 3.5 25.9) (4.0 73.1 87.562 12.1) (25.450 27.8 7.0 (12.7) (57.9 3.9 18.7) 2.6 2.3 26.2 27.8) (52.5) (21.0 28.9 28.693 7.5) (7.0) 50.4) 7.7 32.4 14.8 26.6) (1.0 1.771 17.752 34.4) 47.4 26.827 300.4 (10.7 4.7 7.5 216.6 (12.3 29.9 36.6 (5.9) 8.0 Up / down 8.9 122.7 22.6 5.4 (5.7 18.9 5.3 22.9) (35.374 21.0 204.3 102.7 20.0) (42.3) (6.2 68.2 105.4 17.0) 11.9 11.1) 11.2) 30.0 11.2 (16.9 30.6 12.7) (61.1 24.3 (3.8 385 11.4 (19.6 41.7 11.0 (11.2 22.3 36.A.0 (10.4 22.992 18.7 24.4 19.9 23.6 15.5 (18.434 41.7) 48.5 162.0 31.0) 38.0 28.9 5.5 23.3 9.132 39.8 231.055 19.7) (44.0 49.1) (6.9) 35.1 (15.7) (1.684 26.2 44.3 37.7 13.5 2.1) (26.6) 2.7 23.7 10.8) 1.8 34.875 15.7 10.8 5.3 125.7 67.1 24.2 31.6 8.2 15.6 62.4 131.6 10.7 15.1 42.1 87. 2008 83 .6 30.8 2.2 35.0 (7.0) 2.8 8.9 22.0) 32.511 9.0) (58.2 722 6.6 255.2) (36.0) 36.3 30.8 7.9 43.1 234.6 8.3 8.1 2. Relative performance 3m 6m 12m 16.0 9.8 115.0 32.1 90.688 6.2) (5.0) 54.9) 0.0) 28.0 0.5) 60.6) (4.5 9.9 25.5 1.9 (9.7 1.6 9.3 41.1 20. China Int'l Marine Containers ZPMC Times New Materials Jinxi Axle GEM-Year Industry S Dong-E E-jiao Yunnan BaiYao Huadong Medicine Zhejiang Xinhecheng Kehua Bio-Engineering Hisun Pharmaceutical Guangzhou Pharmaceutical Modern Pharmaceutical Pientzehuang Huahai Pharmaceutical Sinopec Guangdong Electric Power Huaneng Power Huadian Power International GD Power SDIC Power China Yangtze Power Vanke China Merchants Finance Street China World Trade Center Gemdale China Enterprise Sinochem International CITIC Securities Taigang Stainless Steel HanDan Steel Wuhan Steel Baosteel Luthai Septwolves Industry LiJiang Tourism CYTS Tours Jinjiang International Hotels Chiwan Yantian Port Shenzhen Airport Guangzhou Baiyun Int'l Airport Shanghai International Airport Shnghai Port Container China Shipping Dalian Tielong YingKou Port Cosco Shipping Jin Jiang Int'l Investment Tianjing Port Xiamen Airport Daqin Railway Guangshen Railway China COSCO Rating Outperform Outperform Outperform Outperform Underperform Outperform Outperform Outperform Neutral Neutral Neutral Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Underperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Outperform Neutral Neutral Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Neutral Neutral Outperform Outperform Outperform Neutral Outperform Underperform Outperform Mkt cap Rmb bn US$mn 41.3 10.2 29.5 21.3) (30.3 27.2 9.6 (13.6 7.7 24.3 33.6 1.7 2.5 12.9 8.1 33.9 1.5 (6.1 2.643 73.9 39.4 212.722 190.3) 1.4 158.457 22.9 183.6 283.7) 178. 8.4 90.2 5.3 119.0 9.4 17.0) 16.5 155.5 39.8 (6.1) 15.8 9.2 27.0 4.9) 12.7 1.4 2.170 53.7 84.7 516 5.3 (2.7) 14.2) 35.7) 36.1 607.6 92.9) 31.1 (77.4 336.9 281.558 18.4) (80.8 175.2 99.6 30.1) (65.9 72.1) 3.8 6.6) (34.8 (22.6 15.8 13.3 (5.4) 62.0 (0.0 35.0 22.9 2.6 39.5) 7.1 18.9) (27.7 63.1 4.702 85.5 127.3 (26.5 2.0 (28.4) 32.0) 17.A.9) 29.8 38.2 1.8 19.4) 26.4 1.1 (27.1 11.3 63.1) 6.0) 38.7 102.9 1.8 19.1 N.3 126.4 (17.2 224.0 31.7 1.8) (48.1 66.2 30.4 207.1 (32.4) (25.0 19.5 54.7 28.1) 52.5) 45.1 36.681 484.0 13.113 5.6 13.com January 14.0 167.8 (9.4 3.9 7.7 789 2.6 0.4 5.5) 8.3 57.0) (6.8 18.3 (10.8) (71.5 (2.7 20.9 10.0 16.4 (30.8) 9.8 934 2.1 4.3 33.3 37.6 (3.0 40.8 1.0 11.4 9.957 35.4 11.5 11.8 13.2 120.6 21.3 N.3 16.7) (25.9 17.6 7.5 29.4 (16.831 162.8 123.5 163.9 Absolute performance 3m 6m 12m 14.7) (5.6 8.0 34.4 1.3 76.1 86.811 3.6) 31.9) (41.6 115.3) 19.2 7.341 34.8 18.4) 10.3 40.4 9.8 24.4 13.8) (39.567 22.3 1.0 2.2 2.037 10.1) 15.8 18.7 57.5 16.152 195.0 (3.2) N.187 59.8 105.8) (32.5 17.7 369 8.7 80.0) 9.8 22.5 95.0 11.7 (57.6 15.8) (1.478 70.8 49.7 (4.6 15.4) (2.477 7.4) (28.4 5.0 21.9) (40.2) (0.4 14.8 19.6) (2.2) 11.1) 41.8 (0.7 17.1 (4.6 18.6 (11.9 266 200.9 (19.0 5.6 158.3 80.8 167.4 48.4 (21.9 28.4 4.0 20.7 17.7 1.5 9.9) 7.3 12.0 12.5) (22.8 29.2 18.670 Price (Rmb) 79.5) (31.9 (26.034 12.3 86.9 (20.6 (3.3 263.China & Hong Kong China market strategy Appendix XVII: KGI Universe Valuation Table (China) Figure 176: KGI universe valuation table Code Food 000869 000895 002086 600519 600887 600586 000039 600320 600458 600495 601002 000423 000538 000963 002001 002022 600267 600332 600420 600436 600521 600028 000539 600011 600027 600795 600886 600900 000002 000024 000402 600007 600383 600675 600500 600030 000825 600001 600005 600019 000726 002029 002033 600138 600754 000022 000088 000089 600004 600009 600018 600026 600125 600317 600428 600650 600717 600897 601006 601333 601919 Company Changyu Pioneer Wine S Shuanghui Development Oriental Ocean SCI-Tech Kweichow Moutai Inner Mongolia Yili Jinjing Sci.0 8.2 110.6) (18.9 33.0) (12.1 (7.4 (25.3 185.8 52.6 5.6 43.4) 74.2 231.569 191.6 16.7 66.

4 84.5 0.6 5. N.84 1. N.4 0.1 30.2 36.36 1.7 11.7 91.6 6.4 28.5 23.3 19.6 21.4 1.23 0.4 7.9 1.4 1.5 25. 2008 84 .6 N.5 N.3 17.3 0.5 15.8 118.5 0.3 59.8 0.10 0.04 0.4 0.7 7.3 98.6 9.1 15.3 7.0 25.4 17.0 16.3 42.6 0.81 0.5 24.8 (8.0 24.51 0.81 0.4 43.7 4.A.6 0.2 15.6 10.2 5.3 5.89 1.2 15.3 0.9 41.6 15.98 1.79 1.5 12.5 8.1 36.1 0.4 26.3 0. N.34 0.42 0.7 39.0 13.7 0.7 23.9 47.4 25.3 11.01 0.1 18.48 0.9 2.8 8.4 4.7 14.6 37.A. N.1 42.7 11.61 0.50 0.0 280. 0.8 25.3 60. N.5 45.6 0.4 246.1 478.2 1.4 (4. N.39 0.3 36.A.4 25.3 28.6 42. N.3 10.3 14.2 41. N.45 0.06 1.0 4.77 0.8 21.2 14.6 65.A.1 32.61 0.90 1.7 29.8 0.7 16.1 20.5 54.A.1 70.2 0.3 3.70 0.13 1.5 0.2 42.6 25.69 0.8 P/B (x) 2007F 2008F 9.A.3 25.2 55.2 134.6 18.902.6 19.59 0.6 6.7 18.33 0.0 31.0 (32.80 0.4 9.28 0.6 7.7 45.1 1.2 49.8 44.07 0.0 56.4 19.4 0.5 30.4 0.4 18.9 12.3 0.8 6.8 8.5 49.6 26.7 Bank Cement Chemical Conglomerate Electric Electronics Energy Source: KGI Securities Institutional portal: http://research.21 0. Xiangtan Electric Manufacturing LongXi Bearing ZTE Corporation Guangdong Goworld Zhongke Sanhuan DMEGC Megnetics Laibao Hi-tech Zhonghuan Semi.A.7 14.0 32.4 14.5 27.A.1 51.57 0.1 12.9 32.7 26.4 0.34 0.55 0. Shengyi Sci.80 1.9 33.0 12.90 1.34 0.8 40.0 32.4 51.5 8.8 25.98 0. 189.2 12.9 13.1 54.0 51.3 43.94 1.A.1 0.7 10.0 16.1 47.5 18.3 0.85 2.7 17.5 15.3 31.2 30.5 15.7 14.6 8.36 0.2 43.39 0.1 32.3 34.1 6.7 N.6 1.5 8.93 0.1 42.5 (10.25 0.4 14.4 31.0 44.34 1.66 0.3 4.80 EPS growth (%) 2007F 2008F 12.0 41.6 5.9 18.9 18.7 0.5 16.7 28.7 1.2 62.6 32.24 1.6 18.25 0.20 0.31 1.22 0.6 14.7 (0.4 17.1) 16.4 25.0 34.20 0.7 74.0 37.4 31.1 32.0 4.5 20.4 32.8 0.0 15.1 23.9 23.8 5.62 0.11 0.1 48.A.7 7.41 0.6 7.9 36.6 64.5 42.27 0.8 17.7 7.7 0.8 26.A.7 22.5 20.73 0.0 4.8 17.4 24.7 0.5 0.0 53. N.4 5.4 28.0 14.9) 24.3 42.0 5.39 0.34 0.22 0.9 18.0 46.1 14.1 0.2 34.8 49.14 1.5 14.2 23.40 0.1 90.2 51.18 0.0 29.2 17.5 75.8 16.1 13.8 6. N.8 0.A.1 3. 0.33 1.68 1.0 30.2 13.22 0.2 13.0 6.9 39.4 0.0 66.4 19.2 19.7 5.4 23.5 13.5 27.42 0.9 26.93 0.54 0.6 0.62 0.1) 28.1 7.8 0.9 8.28 0.5 0.0 22.39 0.48 0.7 15.5 16.7 5.1 17.0 17.A.6 31.2 0.0 10.20 0.1 8.48 0.A.45 0.6 0.9 1.1 20.6 N. & Tech Xingchen New Chem Material Yantai Wanhua Zhejiang Longsheng HuaLu-Hengsheng Chemical Xinan Industrial YunNan YunWei CITIC GuoAn XJ Electric Jiangsu Miracle Weida Machinery Sunward Intelligent Machinery Tianma Bearing HuaYi Elec.4 0.7 0.5 42.6 80.80 1.74 0.5 46.7 19.4 18.8 24.A.6) 49.7 0.1 30.66 1.4 9.5 69.8 43.32 0.4 3.11 1.3 25.45 0.3 24.5 69.0 37.6 7.6 3.5 24.35 0.1 YIELD (%) 2007F 2008F 0.2 33.4 32.6 64.3 34.5 4.36 0.6 18.5 8.6 3.06 0.47 3.A.9 25.1 8.8 0.4 52.4 17.3 6.8 26.29 0.3 22.0 (11.8 66.32 0.6 54.67 0.0 2. N.7 4.8 N.4 8.57 0.4 14.3 4.8 41.7 0.3 43.2 0.8 0.0 20.8 40.7 4.9 17.4 17. 0.4 24.6 31.8 50.1 37.4 89.5 0.44 0.2 33.7 27.0 30.9 32.59 0.6 40.1 1.6 24.6 24.2 39.87 0.8 5.6 0.5 0.9 48.8 43.3 15.8 4. N.42 0.4 27.6 10.6 0.4 48.5 6.8 13.3 35.1 44.4 38.1 55.31 0.3 6.1 38.7 6.1 50.4 10.0 15.8 27.A.1 39.8 6.7 6.0 22.3 83.2 12.1 11.A.A.33 0.6 53.8 64.3 56.24 0.7 67.26 0.7 42.8 47. N.70 0.6 31.21 0.5 13.5 9.3 0.50 3.6 0.5 36.5 9.74 0.3 0.7 19.29 0.45 2.7 0.1 (0.9 4.3 0.6 19.China & Hong Kong China market strategy Appendix XVIII: KGI Universe Valuation Table (China) Figure 177: KGI universe valuation table Code Auto 000338 000559 000581 000625 000927 002076 600066 600104 600418 600686 600000 600016 600036 601328 601398 000401 000789 600585 600801 000422 000565 000677 000792 002018 600096 600143 600299 600309 600352 600426 600596 600725 000839 000400 002009 002026 002097 002122 600290 600416 600592 000063 000823 000970 002056 002106 002129 600183 600206 600330 600360 600366 600487 600522 600563 600584 000933 000937 000983 002128 600123 600188 600348 600508 600997 601001 601088 601666 601699 Company Weichai Power WangXiang QianChao Weifu Hi-tech ChangAn Auto Xiali Bright Star Light&Electricity Yu Tong Bus Shanghai Auto Jianghuai Auto King Long Motor Pudong Development Bank China Minsheng Banking China Merchants Bank Bank of Communications Industrial and Commerial Bank Jidong Cement JiangXi Wanninqing Cement Conch Cement Huaxin Cement Hubei Yihua Chongqing Sanxia ShanDong Helon Salt Lake Potash Huaxing Chemical Yuntianhua KingFa Sci.1 7.1 5.A.4 EV/EBITDA (x) 2007F 2008F 11.0 7.9 48.57 0.6 4.56 1.9 N.9 43.2 18.2 (92.7 38.8 4.81 1.5 38.3) 15.6 0.4) 50.9 37.6 43.06 1.56 0.54 1.13 0.8 5.8 64.A.3 19.7 5.7 29.4 18.8 22.0 11.3 8.0 6.3 0.5 37.com January 14.6 72.6 16.2 7.0 32.9 68.5 6.5 25.24 0.9 20.92 0.9 49.7 31.6 0.6 22.5 53.7 14.4 0.30 1.6 12.8 17.57 0.3 0.9 30.3 0.0 27.5 0.4 25.39 0.12 0.7 18.A.2 17.1 34.9 22.4 8.5 25.9 31.9 12.29 2.1 8.0 18.3 58.97 0.7 3.5 60.7 110.4 42.2 99.2 14.90 0.6 24.6 23.6 7.6 0.15 0.6 11.4 4. N.33 0.9 30.6 10.9 11. N.5 16.8 15.4 22.3 44.3 13.7 26.9 36.5 70.6 18.2 51.4 20.09 0.6 9.2 111.9 8.0 15.77 0.7 16.0 10.45 0.08 0.1 31.2 21.0 36.9 22.4 6.1 N.7 16.2 74.7 25.0 4.71 3.43 0.1 30.9 4.5 5.8 50.46 0.41 0.28 0.7 7.9 38.9 6.6 67.3 27.49 2.0 23.3 32.77 1.37 0.4 18.4 19.7 33.6 9.7 41.9 N.1 0.48 0.1 22.1 18.3 22.51 1.47 0.33 0.1 0.4 0.3 50.7 4.5 2.A.6 34.8 56.A.4 16.9 119.6 11.8 7.3 8.9 59.5 N.0 45.9 1. 0.4 19.34 0.7 27.8 45.9 13.9 0.73 1.4 0.7 0.2 6.5 20.4 0.9 58.3 60.1 28.38 0.7 3.2 40.38 0.2 0.7 3.8 4.4 42.5 12.4 35.3 65. N.8 6.80 0. N.A.1 15.0 34.9 13.A.24 0.3 27.7 30.83 0.7 33.2 5.4 23.8 6.7 49.9 12.1 3.37 0.43 0.4 26.2 5.1 2.8 107.7 20.A.1 3.0 10.67 0.34 1.3 40.08 1.2 3.1 21.8 17.3 56.57 0.3 7.1 49.4 0.5 16.0 116.2 5. N.3 29.9 36.6 0.98 1.7 2.0 6.6 41.9 4.99 0.A.9 28.4 45.3 48.4 28.39 0.7 16.16 0.2 78.81 (0.7 16.13 0.4 44.62 0.5 14.7 36.9 26.A.53 1. 31.23 0.9 17.6 0.7 16.20 1.5 11.7 N.31 0.6 19.3 0.37 0.55 0.2 34.0 21.84 1.77 0.4 13.8 39.47 0.8 6. N.99 1.9 56.9 25.9 26.0 45.3 24.05 0.3 47.7 18.30 0.94 0.7 15.9 26.7 42.5 249.4 0. N.9 82.5 0.3 0.8 32.4 0.9 22.8 25.5 20. N.5 12.A.1 33.9 13.7 35.2 44.4 62.69 0.72 0. N.9 23.51 1.26 0.8 52.5 0.30 0.9 53.6 23.28 0.6 11.6 16.5 41.0 14.0 53.4 41.4 40.6 44.2 26.4 14.2 7.37 1.7 0.6 20.3 45.3 0.9 25.9 13.0 35.24 0.7 18.6 4.7 21.6 37. N.9 48.1 0.3 8.0 23.9 5.91 4.00 0.8 29.4 23.2 5.33 0.3 6. 0.7 22.50 0.2 39.1 23.1 32.68 0.6 25.8 47.3 0.6 12.1 14.5 47.4 19. 1.3 30.62 0.21 0.2 17. & Tech Grinm Semiconductor Materials Zhejiang Tiantong Electronic Sino-Microelectronics Ningbo Yunsheng Jiangsu Hengtong Jiang Su Zhong Tian Xiamen Faratronic Changjiang Electronics Shen Huo Coal Jinniu Energy Xishan Coal and Power Opencut Coal Lanhua Sci-Tech Yanzhou Coal Guoyang New Energy Shanghai Datun Energy Kai Luan Clean Coal DaTong Coal Shen Hua Energy Tianan Coal Lu' an Environmental Energy EPS (Rmb/shr) 2006A 2007F 2008F 3.7 8.A.8 5.4 137.3 9.2 17.32 0.64 0.5 4.5 93.3 25.1 38.8 0.8 345.8 31.00) 0.3 5.9 34.7 0.8 21.3 3. N.4 10.A.A.3 1.9 152.4 11.82 1. 0.37 1.0 17.1 0.5 27.1 15.6 ROAE (%) 2007F 2008F 54.98 1.2 26.0 20.9 6.36 0.6 10.55 0.7 18.26 0.1 35.5 12.5 15.2 47.7 28.7 P/E (x) 2007F 2008F 21.8 10.0 36.62 1.9 14.17 0.1 0.kgi.1 4.4 27.5 40.A.0 0.4 22.2 20.2 64.9 7.0 39.8 9.8 0.63 0.2 5.98 0.0 28.4 26.1 57.1 31.7 17.8 8.4 16.3 37.9) 113.70 2.5 0.6 0.36 0.A.99 0. N.2 6.7 1.1 1.4 0.7 38.5 14.17 0.87 1.8 32.1 78.9 106.1 11.0 62.2 13.3) 13. 1.1 19.14 1.5 36.9 18.8 22.8 17.

7 41.9 27.2 34.8 17.7 43.4 15.4 50.6 20.59 0.6 10.9 YIELD (%) 2007F 2008F 1.2 6.2 20.6 12.73 0.4 18.35 0.9 6.6 39.0 16.3 2.8 3.19 0.8 8.1 18.6 79.5 69.7 4.2 1.6 5.0 13.3 (3.7 40.6 9.5 4.3 39.5 64.6 26.34 0.7 4.4 26.0 18.2 12.9 39.26 0.0 11.0 7.8 54.2 1.A.1 20.8 1.1 21.4 15.84 1.49 0.44 0.1 3.9 2.8 26.1 16.0 8.47 0.9 26.62 0.6 27.5 13.17 0.7 11.4) (6.0 15.3 58.9 23.0 1.5 24.6 15.0 27.0 21.8 0.2 3.5 5.7 27.50 0.6 12.2 18.6 24.2 4.0 22.9 4.24 0.4 77.4 6.59 0.8 3.2 0.9 25.2 11.2 12.5 24.2 3.4 3.1 13.7 127.4 1.75 0.74 0.5 0.9 6.95 0.1 61.7 4.1 1.4 11.9 86.4 0.2 30.8 5.6 32.2 17.53 2.1 8.3 0.1 5.6 11.8 7.4 1.6 80.6 8.2 10.69 0.1 0.8 50.62 0.7 6.7 20.0 20.6 23.6 1.0 0.4 43.5 14.0 27.0 31.4 1.7 74.67 1.5 14.3 N.2 3.4 30.8 46.51 0.1 6.8 32.3 11.2 35.21 0.55 0.41 0.67 0.2 11.8 28.9 24.0 32.63 0.7 14.57 0.9 27.8 0.4 24.9 4.6 21.24 0.1 105.39 0.1 1.7 12.54 0.65 0.4 25.2 32.4 0.2 4.09 0.5 6.7 39.49 0.5 6.2 10.8 28.5 15.3 28.6 0.4 17.6 31.50 0.8 23.7 13.2 0.1 1.4 24.8 9.0 53.4 69.5 1.8 14.34 0.0 84.7 0.3 8.35 0.8 1.8 1.58 0.61 0.66 0.6 9.7 12.3 20.9 37.28 0.4 52.6 11.45 0.6 20.9 0.4 22.0 23.0 21.60 0.3 1.7 1.6 35.2 32.4 14.39 0.30 0.9 9.34 0.13 0.68 0.7 29.5 63.7 1.7 10.1 43.51 0.29 0.2 6.9 9.3 1.3 21.12 1.3 6.8 4.3 25.76 1.2 66.3 28.7 0.63 0.3 0.68 0.8 22.3 24.1 16.94 1.3) 25.51 0.36 0.3 28.41 0.16 0.0 33.7 43.4 14.19 0.5 8.0 35.4 14.1 21.50 0.8 7.8 1.44 0.6 19.4 0.79 0.8 41.5 5.8 5.3 0.0 6.64 0.3 56.9 12.21 0.97 0.2 49.6 19. 2008 85 .79 1.58 0.8 19.5 0.A.3 7.6 1.8 60.9 17.6 16.9 8.0 67.0 4.17 0.29 0.82 0.1 46.7 1.4 2.1 9.8 61.4 27.3 43.7 33.1 52.7 26.6 14.0 34.31 0.54 0.0 31.3 3.93 0.7 69.7 10.4 47.2 9.9 1.com January 14.5 0.5 19.8 N.6 18.75 0.70 0.9 P/E (x) 2007F 2008F 71.1 26.2 N.73 0.31 1.3 18.0 14.4 37. China Int'l Marine Containers ZPMC Times New Materials Jinxi Axle GEM-Year Industry S Dong-E E-jiao Yunnan BaiYao Huadong Medicine Zhejiang Xinhecheng Kehua Bio-Engineering Hisun Pharmaceutical Guangzhou Pharmaceutical Modern Pharmaceutical Pientzehuang Huahai Pharmaceutical Sinopec Guangdong Electric Power Huaneng Power Huadian Power International GD Power SDIC Power China Yangtze Power Vanke China Merchants Finance Street China World Trade Center Gemdale China Enterprise Sinochem International CITIC Securities Taigang Stainless Steel HanDan Steel Wuhan Steel Baosteel Luthai Septwolves Industry LiJiang Tourism CYTS Tours Shanghai International Airport Chiwan Yantian Port Shenzhen Airport Guangzhou Baiyun Int'l Airport Shanghai International Airport Shnghai Port Container China Shipping Dalian Tielong YingKou Port Cosco Shipping Jin Jiang Int'l Investment Tianjing Port Xiamen Airport Daqin Railway Guangshen Railway China COSCO EPS (Rmb/shr) 2006A 2007F 2008F 0.A.7 0.9 3.5 27.39 0.3 36.0 39.19 0.1 50. 8.0 24.3 39.40 1.1 0.6 15.0 16.6 21.9 10.9 10.1 6.72 0.5 14.8 45.7 36.6 6.2 28.7 7.2 43.1 55.72 0.4 7.2 18.5 46.60 EPS growth (%) 2007F 2008F 32.1 51.1 6.2 0.8 13.91 0.5 24.1 13.5 47.2 40.1 58.7 20.0 69.7 34.3 11.5 32.6 12.2 25.0 42.1 9.9 51.67 0.0 14.4 18.0 36.& Tech.1 17.6 (6.6 30.0 15.53 0.8 38.0 41.2 0.5 59.2 12.4 21.1 0.4 0.0 27.9 18.7 6.2 14.2 P/B (x) 2007F 2008F 18.4 23.3 27.2 7.7 1.8 28.1 2.51 0.3 7.6 5.8 58.63 0.3 16.25 1.67 0.2 0.54 0.3 62.1 26.0 36.53 0.9 31.3 27.1 38.6 54.2 4.63 0.8 0.46 0.26 0.23 0.0 1.8 6.7) 24.74 0.8 19.5 12.8 23.9 43.6 24.7 (13.1 14.7 8.6 3.A.A.9 13.4 11.4 2.6 0.9 28.8) 30.93 0.7 0.92 1.4 16.32 0.0 26.55 0.4 1.5 12.5 4.1 18.29 0.5 18.6 25.85 0.4 0.7 55.3 39.9 12.24 0.6 3.1 148.1 23.4 42.2 1.4 1.26 0.0 1.4 13.8 11.62 0.8 1.87 0.40 0.5 10.1 21.6 12.5 14.89 0. N.5 0.1 39.96 1.5 31.0 24.0 8.8 24.2 19.1 38.6 21.1 37.58 0.1 33.0 34.9 5.6 1.9 19.9 45.3 8.8 20.7 25.8 0.7 7.2 101.6 1.7 12.6 0.9 8.4 34.6 57.8 0.9 3. 0.6 41.0 25.9 52.1 33.7) 168.9 22.2 17.28 0.65 1.1 9.3 6.9 24.0 53.7 24.37 1.67 0.7 7. N.4 10.84 1.1 6.6 41.8 12.1 41.48 0.0 6.3 26.0 13.3 632.0 28.35 0.27 1.1 32.1 30.35 0.1 14.A.4 1.6 71.4 0.2 4.6 40.8 0.62 0.5 23.9 16.A.4 2.4 31.9 10.7 35.26 0.5 8.32 0.7 2.7 17.1 1.31 0.3 6.66 3.7 28.6 0.0 Glass Manufacturing Medicine Petrochemical Power Property Retail and trade Securities Steel Textile Tourism Transportation Source: KGI Securities Institutional portal: http://research.3 40.3 20.93 0.9 39.1 1.6 5.2 0.31 0.3 45.6 27.8 33.3 17.2 33.3 1.24 0.04 1.4 1.0 5.49 0.28 3.5 16.8 0.5 83.3 28.2 6.9 4.8 9.1 1.4 87.0 1.7 8.2 6.8 25.China & Hong Kong China market strategy Appendix XIX: KGI Universe Valuation Table (China) Figure 178: KGI universe valuation table Code Food 000869 000895 002086 600519 600887 600586 000039 600320 600458 600495 601002 000423 000538 000963 002001 002022 600267 600332 600420 600436 600521 600028 000539 600011 600027 600795 600886 600900 000002 000024 000402 600007 600383 600675 600500 600030 000825 600001 600005 600019 000726 002029 002033 600138 600754 000022 000088 000089 600004 600009 600018 600026 600125 600317 600428 600650 600717 600897 601006 601333 601919 Company Changyu Pioneer Wine S Shuanghui Development Oriental Ocean SCI-Tech Kweichow Moutai Inner Mongolia Yili Jinjing Sci.8 25.8 16.8 8.0) 19.0 22.8 12.8 70.5 1.9 31.7 24.0 99.7 0.7 0.2 3.8 11.9 14.1 9.63 0.1 5.58 0.6 23.4 26.4 39.3 15.8 1.5 0.15 0.9 27.0 23.3 48.0 50.6 48.9 1.4 53.36 0.47 0.7 3.2 17.8 17.8 N.3 0.2 0.3 26.36 0.5 26.5 53.9 19.4 0.08 0.6 40.8 27.5 20.3 29.1 10.0 17.53 0.11 0.9 7.3 19.70 1.5 3.9 55.0 21.1 7.4 69.3 18.0 52.2 3.2 3.20 0.37 0.8 7.4 18.7 8.3 9.61 0.4 3. N.1 34.0 41.6 0.5 6.7 32.3 38.59 2.37 0.5 1.83 1.5 13.0 14.4 9.1 41.8 0.28 0.41 0.4 4.81 0.5 25.37 0.kgi. N.08 1.3 27.5 8.76 0.83 1.4 7.4 0.2 27.3 19.9 14.5 33.9 12.5 14.0 20. 0.2 ROAE (%) 2007F 2008F 27.6 29.1 75.4 36.7 32.83 0.6 5.3 21.59 1.4 4.2 20.7 0.2 9.6 24.97 2.7 34.6 6.17 0.9 3.A.3 51.8 19.7 54.0 14.5 3.28 1.4 20.6 86.8 4.61 0.1 4.4 20.9 25.1 16.7 0.9 26.2 24.3 29.2 32.7 43.7 15.2 3.3 0.6 5.4 4.7 23.2 50. 1.5 5.8 41.7 39.3 0.55 0.9 35.3 14.44 0.0 19.4 5.6 30.6 3.44 0.4 22.9 6.6 4.20 0.5 17.8 (10.41 0.3 23.6 55.8 17.4 6.6 31.8 17.7 4.2 30.8 0.4 92.4 1.8 7.0 27.63 0.0 19.2 0.5 92.1 15.46 0.7 0.8 18.2 0.47 0.6 1.4 0.4 16.0 29.45 3.0 8.8 22.2 49.9 EV/EBITDA (x) 2007F 2008F 47.2 44.0 13.8 30.6 38.8 7.58 0.7 0.9 18.5 6.7 36.72 0.6 50.0 19.6 10.2 32.6 30.4 4.14 0.53 0.4 0.8 45.9 38.2 38.9 12.5 1.48 0.7 71.4 75.18 1.92 0.4 13.5 12.8 0.1 12.37 0.1 16.4 11.3 0.5 22.9 21.9 5.2 16.7 2.89 1.6 17.5 1.8 3.7 13.6 15.34 0.1 (23.9 5.9 8.8 13.58 0.80 0.8 14.7 14.7 7.6 4.

2 102.57 0.0 374.10 14.4 6.2) 18.7) (9.1) (30.9 98.50 9.927 4 540 101 12.7 (22.2 26.A.0 29.9) 10.4) 39.578 7 872 196 25.0 (6.1) (7.90 6.0 (17.7) 5.3 39.80 4.1) (14.4) (12.A.5 (18.6 17.4 178.0) (30.6) (9.1) (2.2 19.18 22. 2008 86 .6 42.4) (14.6) (1.3 17.56 29.103 20 2.81 11.6 (13.4) 89.7) (50.2) (31.2 (21.4) (25.1 23.5) 44.78 0. (10.4) (7.6) (5.2) (32.48 6.2 (0.1) 47.7) (37.80 4.20 2.79 50.94 3.58 29.7 (14.6) 15.4) 6.0) (9.5 7.8) (38.8 68.981 24 3.3) 16.1) (37.4) (19.55 8.3 21.3 52.8) (32.6 (20.6) 6.86 8.80 8.2 24.60 9.36 5.20 13.0) (46.10 65.40 2.9 50.032 17 2.76 6.2 28.9 40.3 36.5) (9.1 26.3) (3.5 76.3) 10.2) (16.4) (20.3 (28.5 69.70 2.57 0.4 (40.00 2.359 24 3.9 N.3 5.5 184.826 2 314 75 9.68 1.9 (29.4 34.6 7.82 11.8) 6.81 11.1 22.8 (4.0) 29.7 34.4 24.10 1.25 62.522 54 6.3) (59.5) (1.76 41.0 (17.8 (0.8 (30.0 52.2 14.4 (14.7 (9.8) 19.0) (25.9) 2.4 Absolute performance (%) 3m 6m 12m (2.0 (21.0) (39.6 (19.6) (28.7) (50.9) (29.0) 43.428 15 1.2) 11.961 2 281 2 204 86 10.62 1.0 5.21 16.3) (23.7) (54.9 126.2 17.21 167.66 14.3) (69.4) (11.1 245.097 111 14.00 76.0 16.8) (5. (24.3 (33.00 4.1 (19.60 21.6 58.83 6.3) (46.00 3.9 8.80 14.5 3.48 4.10 14.8 (5.2 56.9) 39.5) 1.7 7.8) 15.80 2.50 46.6) 27.2) (31.8 1.7) (35.2) (3.6) 13.7 46.8) (4.37 0.9) 28.3 35.1) (22.9 129.7) 17.5 4.30 8.0) (14.5) (20.8) 10.4) (7.575 83 10.2 (15.7) (9.3) (13.4 24.3) 40.8 (17.015 7 856 11 1.3) (65.3) 86.1 40.2) (30.0 (0.1 26.2) (1.18 7.2 30.7) 138.5 12.4) 3.3 6. N.9 55.914 6 705 206 26.09 2.2) (5.6) 132.5 143.0) 24.6 6.3) (47.3) 11.9 (4.A.58 23.5 34.2) (9.7) 19.3) (39.9 (18.9 (30.4 (36.15 15.0) 63.40 7.3 (16.1) (65.0) (17.24 22.3) (35.4 144.9) (25.1 89.9 20.085 299 38.6) 4.20 3.34 31.5) 35.00 13.3) 47.7) (11.24 7.1) (38.80 9.22 6.8) (5.9 30.8 143.4) (41.0) (33.7 23.3 (23.13 5.8 50.6) 3.8 (2.8) 81.6) (27.00 Target (HK$) 5.2 3.8) (54.9 222.8) (57.5) (6.1 (14.44 6. Guangzhou Pharma Dalian Port Xiamen Port Tianjin Port Dev Huaneng International Datang Power Huadian Power Shanghai Zendai Guangshen Railway Sa Sa International Prime Success Int'l Giordano International Embry Holdings Xinyu Hengdeli China Shipping Dev.7 46.5) 34.4) (5.7) (3.20 6.1 3.2 44.6) 73.1) (20.2 12.4) 31.3) (58.7 (11.2 13.2 (5.663 157 20.1 (7.3 (30.0 92.9) (17.97 11.6) 1.8) (35.60 3.8) (25.8) 17.6 69.0 8.00 9.00 0.6 56.0 2.048 5 591 9 1.6) (1.0) 127.7 99.6) (7.3) (20.5 44.7) 44.0 (3.3) (14.1) (7.92 7.02 4.1 56.9 (7.0) (28.3) (21.1) 7.18 16.0) 5.7) (33.775 5 693 3 323 8 1.1) (51.95 46.6 (2.0 (4.7) (51.448 2 286 39 5.4 (30.3 (12.1 51.0) 10.3 115.9 (6.3 (5. N.0) (33.7) 30.7) 27.84 15.40 28.60 11.8) (52.68 5.5 (10.4) (1.9) (19.2) (41.89 3.6) (17.50 24.A.40 6.kgi.5 54.5 N.78 9.6 77.05 10.1 39.9 62.3) 8.1) (10.0 59.80 Up/down (%) (48.00 6.2 41.3 113.7 3. (12.52 2.85 45.8 15.0) 13.5) (22.1 60.3 80.1 27.8) (40.66 6.6 10.7 1.7) (37.5) 3.4 50.2) (26.3 (83.2 (2.3 (5.2) 13.439 38 4.0) (21.0 21.3 (8.70 12.6) (9.38 9.0 (23.7) 14.66 30.00 3.9) (9.9 160.3 78.4) N.8) 6.826 0 27 3 377 11 1.3) (46.10 16.0) 69.3) (26.6) (11.31 10.6) (27.3) 4.2) (22.1 29.67 0.3) (26.995 226 28.3 30.60 10.6 46.5 75.2) 44.8) (10.0) (58.3 3.5 25.35 5.8) 0.4 (9.1 1.4 17.6 39.50 5.7) (18.8) 4.3 N.546 39 5.5) (27.990 2 267 3 429 2 195 614 78.6 71.89 2.00 11.06 80.4) (12.95 12.394 7 870 12 1.0) (10.00 17.10 22.98 3.80 21.020 6 811 38 4.427 2.0 (20.7 21.4) (11.3 (19.0 28.5) (25.29 6.20 6.50 10.462 117 14.3 (40.9 15.45 1.8 2. N. Cons.3 (5.00 1.1 5.2 (5.7 48.6) 38.9) (15.395 178.15 16.3) (31.0) (1.7) 1.9 (31.55 8.6) N.5 26.99 22.9 (9.9 22.197 7 852 5 602 1.5) 46.4) (66.3) (1.612 42 5.4 16.0 (15.8) 16. Wumart China Flavors CNOOC Limited Tsingtao Brewery Ajisen Dynasty Wines Yurun Food Fu Ji Food Huiyuan Juice China Mengniu China Metal Hengan International Neo-Neon Lee & Man Paper Enric Energy China Comm.5 (18.20 21.6 54.8 65.36 6.8) (21.8) (18.3 (16.3 28.7) 6.2 74.3 44.7 175.2 84.0) (20.80 18.5) 51.6 33.5) (63.31 33.5) (45.84 21.1 22.8 (6.3) 42.6) (41.7) (2.3 (13.7 95.5) (34.9 16.5) 2.30 2.3 (5.2 5.1) (57.58 6.9) (41.0 47.0) (16.3 16.21 5.8 13.4 5.7) 0.8) (19.6 20.2) 14.2 (3.14 3.4) (5.60 7.02 0.8 (22.4) 41.A.0 37.60 9.354 1 134 9 1.4) 19.838 295 37.7 92.5 7.3 3.0 132.6) (43.85 13.8 33.5 4.20 6.36 6.5 58.5 (16. CRS Times Elec Ping An PICC P&C China Life CMA Logistics Chen Hsong Dongfang Electrical Weichai Power CIMH Next Media Sinopec PetroChina Co.5) 2.6 (35.0 6.7) (34.586 3 442 Price (HK$) 10.8) 9.529 27 3.2) (14.70 63.63 3.1 (0.20 56.70 12.12 17.5) 9. (23.96 24.56 2.A.4 (32.1 (21.6) (12.7) (16.0) (30.14 13.7) (2.0) (4.0 42.36 7.1) (11.3) (24.9 15.6) (10.5) 11.8) (24.0 55.224 8 1.1 (8.4 19.9) 5.0) (57.9) (23.4 11.2 7.4 (35.79 7.4 54.32 4.5 93.2 (42.2 69.71 3.00 4.3 (13.5) (16.45 3.7) (11.9) (21.8 (14.879 7 960 3 346 11 1.86 32.7 (16.2 (9.8 (2.2) (7.11 10.7) (10.8) N.6) 25.8 76.00 55.357 2 203 6 830 2 269 11 1.4 111.5) (17.4 61.1) 23.0) 20.00 1.6) (7.0 3.1) (41.6) 2.2) 15.4) 17.90 91.95 53.5) (18.3) (37.9 12.7 6.4) 16.8) 16.2) (7.3 (31.7) (1.5) (44.3) (11.7) (39.70 5.42 1.9) 12.6 (32.1 115.92 39.93 8.0 (30.50 31.5 58.2 14.1) (25.134 22 2.75 12.9) 9.5) (8.0 12.3) 24.9) (26.6 33.0) (4.20 5.7 10.6) (24.615 5 587 31 3.1 (7.3 Relative performance (%) 3m 6m 12m (4.194 1 123 2 204 2 212 3 335 2 230 4 551 4 512 3 407 10 1.50 8.4 73.7 (25.5) 26.1 (14.7) (23.8 17.0) (43.5 113.4) (31.2) (22.0) 12.1 4.1) (24.2) 1.75 7.108 30 3.7 31.A.A.6) (34.6) Banking Cement Coal Construction Consumer Chemical Energy Food Industrial Infrastructure Insurance Logistics Machinery Media Petrochemical Pharmaceutical Port Power Property Railway Retail Shipping Steel Technology Telecom Textile Tollroad Source: KGI Securities Institutional portal: http://research.72 3.1) (16.5) 15.5 20.1 36.3) (13.2 24.614 29 3.40 6.65 3.60 8.873 4 496 20 2.3 (20.2 5.00 0.65 6.8 (20.70 1.5 21.0 39.4) (13.9) 16.4) 46.55 3.7 3.3) (13.6) 6.9) (27.10 8.com January 14.9 79.3 (39.China & Hong Kong China market strategy Appendix XX: KGI Universe Valuation Table (Hong Kong) Figure 179: KGI universe valuation table Code Airport Auto 0357 0694 0203 0489 1114 2333 0939 1398 3328 3968 0914 1088 1171 2355 0322 0531 2331 2618 8277 3318 0883 0168 0538 0828 1068 1175 1886 2319 0319 1044 1868 2314 3899 1800 3898 2318 2328 2628 8217 0057 1072 2338 3339 0282 0386 0857 0874 2880 3378 3382 0902 0991 1071 0755 0525 0178 0210 0709 1388 3389 1138 1919 0347 0700 0732 0763 0903 0981 1211 2000 2018 2038 2342 2878 0728 0762 0906 0941 0311 0321 0333 0420 0539 0641 2307 2313 3398 0107 0177 0548 0576 0737 0995 Company Meilan Airport Beijing Capital Airport Denway Motors Dongfeng Motor Brilliance China Greatwall Motor CCB ICBC Bank of Comm.A.50 3.6) 1.7 (29.8) 6.7) (10.9) (26.4 58.9 72.9) (26.717 348.0) 5.79 3.54 32.2 (15.9 (7.9 (7.80 5.8 29.3) 19.887 441 56.6) (3.4) (42.9) 5.2) (23.2 (21.40 7.2 83.6 4.11 13.9 23. China COSCO Angang New Steel Tencent Truly International ZTE TPV Technology SMIC BYD Sim Tech AAC Acoustic Foxconn COMBA Solomon Systech China Telecom China Unicom China Netcom China Mobile Luen Thai Texwinca Holdings Topform Int'l Fountain Set Victory City Int'l Fong's Industries Kam Hing Int'l Shenzhou Int'l China Ting Sichuan Expressway Jiangsu Expressway Shenzhen Expressway Zhejiang Expressway Hopewell Infra Anhui Expressway FYE Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar Dec Dec Dec Dec Dec Dec Dec Mar Dec Dec Dec Mar Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar Jun Aug Mar Dec Dec Dec Dec Dec Dec Dec Dec Jun Dec Rating Outperform Underperform Outperform Outperform Neutral Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Neutral Neutral Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Underperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Neutral Outperform Neutral Outperform Neutral Neutral Outperform Outperform Outperform Outperform Outperform Neutral Outperform Neutral Neutral Outperform Outperform Neutral Outperform Outperform Neutral Outperform Outperform Outperform Neutral Outperform Neutral Outperform Outperform Outperform Outperform Outperform Neutral Neutral Outperform Underperform Neutral Neutral Outperform Outperform Outperform Outperform Neutral Outperform Outperform Outperform Outperform Neutral Outperform Neutral Neutral Outperform Outperform Outperform Outperform Outperform Outperform Neutral Outperform Outperform Neutral Outperform Mkt cap US$mn HK$ bn 2 291 20 2.5 (12.4 4.5) 10.9) (8.7 (7.8) 65.7) (5.7) 73.5 (19.4) 46.7 (74.9 56.2) (30.70 3.2 10.1 (35.80 41.9) 21.3) (71.9) (10.9) (0. N.2) 49.6) (27.8) 27.0 65.7) (49.A.0 (37.1 36.47 0.1) 36.3) (37.00 5.3) (7.10 6.165 6 719 2 309 12 1.4) 261. (9.8 (49.4) (18.90 2.16 34.05 7.00 12.8 31.6 84.7 342.1 (8.187 13 1.65 11.70 2.9 (22.4) (41.90 135.542 238 30.0 (24.7 3.5) 1.7 (7.0 28.1 (6.6 8.2 (7.340 6 824 16 2.1) (18.2 36.3 (25.1) (36.704 15 1.4) (40.2) 71.7) (36.974 159 20.568 9 1.1 190.7 3.5) 4.22 8.7 43.695 21 2.4) (18.2 140.00 18. (7.7 (16. CMB Anhui Conch China Shenhua Yanzhou Coal Baoye Tingyi Samson Holdings Li Ning TCL Comm.8) (14.8 100.4) (48.5 8.

1 51.2 5.2 9.14 0.2 5.0 6.2 1.4 9.27 0.4 13.M 677.9 2.3 4.9 (30.4 33.4 11.6 2.7 2. N.6) (1.34 N.4 15.0 14.A. Wulmart China Flavors CNOOC Limited Tsingtao Brewery Ajisen Dynasty Wines Yurun Food Fu Ji Food Huiyuan Juice China Mengniu China Metal Hengan International Neo-Neon Lee & Man Paper Enric Energy China Comm.1 19.9 27.4 22.7 31.3 1.0 15.6 8.5 2.1 N.22 2.0 13.5 5.0 2.6 19.9 21.6 N.5 1. N.1 16.3 9.9 46.6 15. N.4 0.26 0.1 N.1 10.2 3.1 3. N.7 2.29 0.7 103.7 0.7 22. N.38 0.8 30.8 19.6 64.31 0.37 0.5 34.20 0.2 2.0 4.8 2.0 10.9 10.41 0.66 0.5 27.4) 30.39 0.4 16.8 26.0 5.3 58.48 0.A.58 1.3 37.4 3.28 0.0 20.39 2.4 (36.4 5.8 30.8 39.30 0.8 96.54 1.1 20.4 1.15 0. N.3 14.4 17.2 (8.3 N.9 23.9 0.2 17.32 1.7 1.98 0.A.3 4.3 7.0 1.2 11.5 6.9 1.9 3.8 28.51 0.0 9.0 12.3 20.6) 0.4 1.87 0.5 10.62 0.3 27.6 3.27 0.2 43.23 0. N.50 0.5 1.A.24 0.0 50.7 19.0 6. N.9 1.1 1.5 1.8 4.18 0.68 0.2 46.4 17.5 18.8 24.8 0.6 1.8 16. 4.0) 67.72 1.1 YIELD (%) 2007 2008 1.31 1.0 1.9 (3.5) 32.34 0.2 1.5 8.3 12.0 2.7 10.8 25.31 0.5 3.2) 50.7 0.1 3.2 69.23 0.0 19.91 0.6 2.7 24.38 1.6 10.0 24.4 2.3 13.A.00 0.8 4.4 7.1 9.7 10.A.9 10.0 24.7 4.3 1.41 1.2 23.15 0.8 1.3 2.6 (17.6 12.9 24.51 0.5 21.5 15.6 (4.3 2.23 0.8 15.0 3.8 26.1 1.9 8.0 N.6 14.0 10.0 3. N.22 0.6 (6.5 14.9 0.5 27.A.8 20.A.7 13.55 0.44 0.7 6.8 4.0 1.1 29.9 2.14 0.4 19.9 5.9 8.A.26 0.06 0.9 3.A.22 0.7 11.05 3.6 0.5 17.11 0.6 N.3 5.A.61 0.3) 45.1 1.3 19.1 10.2 21.8 18.8 113. N.7 (20.47 1.6 22.4 28.1 11.7 53.6 23.93 0.1 3.4 9.7 15.4 20.2 15.5 11.99 2.31 0.1 2.8 4.5 0.14 0. 0.4 26.4 29.0 1.3 1.52 0.5 5.0 23.4 19.3) 23.A.8 8.3 1.8 11.6 32.23 0.A.2 24.5 31.8 26.3 1.9 N.4 8.67 0.8 36.0 4.8 1.9 113.3 3.6 12.A.A.A.9 71.9 10.2 N.34 0.3 2.0 1.1 0.29 0.9 1.2 0.0 21.9 6.4 2.China & Hong Kong China market strategy Appendix XXI: KGI Universe Valuation Table (Hong Kong) Figure 180: KGI universe valuation table (Hong Kong) Code Airport Auto 0357 0694 0203 0489 1114 2333 0939 1398 3328 3968 0914 1088 1171 2355 0322 0531 2331 2618 8277 3318 0883 0168 0538 0828 1068 1175 1886 2319 0319 1044 1868 2314 3899 1800 3898 2318 2328 2628 8217 0057 1072 2338 3339 0282 0386 0857 0874 2880 3378 3382 0902 0991 1071 0755 0525 0178 0210 0709 1388 3389 1138 1919 0347 0700 0732 0763 0903 0981 1211 2000 2018 2038 2342 2878 0728 0762 0906 0941 0311 0321 0333 0420 0539 0641 2307 2313 3398 0107 0177 0548 0576 0737 0995 Company Meilan Airport Beijing Capital Airport Denway Motors Dongfeng Motor Brilliance China Greatwall Motor CCB ICBC Bank of Comm.3 15.28 0.8 16.0 1. N. 1.47 0.1 4.6 3.36 1.38 0.0 7.0 2.6 9.1 N.2 N.3 N.1 32.21 0.15 0.6 0.0 10.8 N.9 26.A.7 21.13 0. N.8 1.1 4.6 6.5 N.0 16.0 40.M 8. 2.9 12.A.2 28.0 0.A.32 0.8 8.13 0.8 9.2 11.7 5.7 (18.5 2.7 1.20 0.10) 0.0 19. 0.6) 10.2 15.13 0.5) (1.8 7.54 0.0 0.37 0.5 9.A.1 30. CSR Times Elec Ping An PICC P&C China Life CMA Logistics Chen Hsong Dongfang Electrical Weichai Power CIMH Next Media Sinopec PetroChina Co.4 0.7 20.5 10.8 10.0 0.0 4.6 289. 7.6 1.8 21.55 (0.3 1.8 2.4 24.A.8 7.4 9.6 60. N.1 1.0 0.4 24.2 21.40 0.4 17.0 1.5 29.0 8. N.1 41.6 3.4 24.2 6.8 12.9 43.5 3.0 N.3 4.1 13.A.6 2.9 7.05 0.4 2.5 0.24 2.6 13.4 3.6 0.4 28.3 8.0 37.5 1.56 0.6 30.5 14.0 6.65 1.A.0 5.0 33.5 46. 3.7 6.40 0.26 0.3 2.2 18.9 0.4 24.9 N.4 2.3 18. 0.3 0.9 81.6 0.62 0.2 50.09 4.8 24.3) 13.3 1.9 1.9 30. 0.0 19.77 1.5 3.08 0.87 1.7 32.3 11.8 10.26 0.30 0.5 8.08 0.2 3.A.6 9.3 15.0 16.6 1.0 21.9 2.A.6) 26.M N.0) (4. Cons.5 29.46 0.7 27. (5.A.A.2 22.58 0.7 1.81 0.9 14.7 10.6 23.0) 36.8 29.5 2.38 0. 0.9 11.6 2.4 14.6 23.10 0.0 17.52 0. 1.4 14.41 0.A.5 23.79 0.8 28.20 0.1 3.2 7. N. 2.3 18.3 27.0 23.0 13.9 2.0 7.4 15.6 22.3 6.2 9.4 8.3) 116.4 1.4 0.3 1.45 0.7 41.A.6 2.5 1.0 0.2 14.A.3 7.2 0.6 17.3 N.4 20.8 13.0 26.1 1.9 3.4 3.A.9 1.9 18.2 53.9 11.9 13.2 23.1 2.66 N.3 0.A.28 0.1 69.9 43.9 10.14 0.7 6.0 20.7 35.8 (1.7 15.8 0.7 16.7) 10.7 2.26 0.6 6.1 18.49 0.36 0.27 0.5 3.0 0. N.0 9.5 11.9 14.2 29.6 2.3 11.0 N.30 0. CMB Anhui Conch China Shenhua Yanzhou Coal Baoye Tingyi Samson Holdings Li Ning TCL Comm.37 (0.25 0.5 5.7 6.2 16.5 N.3 0.3 40.8 24.4 0.2 18.0 20.49 EPS growth (%) 2007 2008 15.2 1.0 22.5 56.7 1.7 0.5 1.56 0.11 0.6 47.97 0.0 19.8 4.1 14.8 42.3 12.3 7.7 17.4 84.9 18.8 2.7 7.09 0.3 13.1 22.A.2 12.3 28. 28. 1.6 1.8 1.3 30.58 0.6 3.5 27.4 5.7 53.2 (0.0 16.A.8 7.1 3.3 11.25 0.2 0.2 11.4 3.4 43.5 26.4 1.5 18.8 3.6 5.2 12.3 21.0 6.8 32.7 5.8 31.8 0. N.7 4.8 24.6 25.20 4. N. 57.79 0.1 34.5 47. N.4 3.0 18.37 0.2 2.4 17.31 0.0 0.4 26.A.4 N.6 6.7 23.3 9.26 0.M 34.19 0.9 (1.58 0. 37.30 1.1 0.A.06 0.4 1.2 13.9 19.06 0.4 N.9 0.2 30.5 7.8 21.1 7.1 6.5 5.29 0.A.A.7 16.A.A.A.1 5.9 10.13 1.7 56.1 33.7 9.5 23.54 0.1 25.7 26.A.5 55.1 45.3 30.7 2.A.74 0. 1. 24.6 4.0 17.5 10.5 6.15 1.6 11.7 7.8 6.5 27.A.65 2.9 8.44 0.1 22.0 10.8 34.9 26.2 13. N.30 0.7 5.5 0.9 1.09 0.8 31.37 0.8 18.36 3.8 2.8 N.9 13.6 P/B (x) 2007 2008 2.1 6.68 0.0 28.9 18.1 22. N.80 1.7 14.1 7. N.54 0.0 55. N.3 22.6 25. China COSCO Angang New Steel Tencent Truly International ZTE TPV Technology SMIC BYD Sim Tech AAC Acoustic Foxconn COMBA Solomon Systech China Telecom China Unicom China Netcom China Mobile Luen Thai Texwinca Holdings Topform Int'l Fountain Set Victory City Int'l Fong's Industries Kam Hing Int'l Shenzhou Int'l China Ting Sichuan Expressway Jiangsu Expressway Shenzhen Expressway Zhejiang Expressway Hopewell Infra Anhui Expressway EPS (HK$/shr) 2006 2007 0.1) P/E (x) 2007 2008 33.8 9.5 4.44 0.75 0.3 6.A.26 0.3 0. N.54 0.2 8.5 11.8 7.7 9.7 5.3 (40.2 44.46 0.3 N.4 27.5 21.5 21.8 3.1 42.9 30.2 95.21 0.77 1.0 5.4 22.4 18.2 14.6 9.6 26.38 0.6 12. 2.8 13.7 16.2 1.35 5.5 29.2 4.7 8.4 8.5 25.5 1.0) (4.9 59.5 2.2 4.7 10.8 6.6 7.05 0.65 0.3 20.5 30.46 0.7 20.37 0.7 17.42 0.4 15.6 12.9 34.4 26.1) 8.7 4.A.8 26.2 24.0 7.1 17.20 0.0 31.6 21.3 100.9 27.28 0.23 0.6 8.3 5.5 20.5 9.5 1.9 11.02) (0.5 34.29 0. 8.1 2.9 8.5 31. N.28 0.3 8.39 0.4 1.0 12.71 0.0 3.9 77.3 1.18 0.1 1.75 1.8 17.8 3.67 0.1 12.7 0.A.5 6.3 22.9 7.8 35.6 2.0 14.2 17.kgi.6 0.54 0.6 16.70 0.01) 1.00 3.2 10.3 34.A.16 0.5 0. N.4 16.4 0.com January 14.A.2 13.1 6.9 20.9 4.6 15.4) (2.7 15.8 N.5 22.0 4.48 0.3 (17.7 10.3 24.07 0.32 0. N.0 21.8) 20.A.0 0.6 22.3 24.6 39.0 24.5 9.A.6 20.9 18.1 22.0 10.8 28.2 23.6 7.33 0.3 4.9 1.6 2.5 9.0 6.7 3.6 13.3 10.9 3.1 12. N.5 3.22 0.7 3.7 34. 6.3 43.8 1.08 0.3 1.38 0.0 0.1 9.0 18.9 19.3 1.6 2.3 0.27 0.1 4.00 1.4 17.2 39.8 22.4 3.35 0.1 13.7 5.4 20.8 N.9 22.5 1.17 1.44 0.00 0.6 5.0 6.8 2.2 1.1 26.1) 28.4 17.5 4.7 19.5 9.7 30. N.6 3.1) 5.9 15.9 (17.5 0.9 12. N.1 22. N.4 14.92 0.6 24.9 23.02 0.8 18.4 22.15 0. 2008 87 .5 10.9 (14.12 0.0 1.4 17.44 1.2 4.7 21.0) 213.0 24.5 N. N.6 0.67 0.62 0.9 18.0 N. N.0 4.9 495.2 17.47 0.24 0.5 20.3 44.0 -(20.5 11.9 41.6 27.6 14.0 1.7 14.0 30.7 35.A.18 0.60 0.7 23.21 5.1 3.5 5.11 0.9) 83.9 3.7 7.0 0.67 0.8 23.1 26.4 16.3 29.0 2.73 0.5 14.3 2.0 50.3 1.9 24.0 11.5 7.8 4.5 13. 77.4 6.7 8.6 1.A.0 31.2 13.0 36.32 0.A.A.3 17.4 15.4 10.4 14.0 11.42 0.A.9 1.2 23.69 0.45 0.0 0.0 9.A.47 0.0 2.A.46 0.9 20.4 1.6 23.78 1.22 0.7 5.8 17.1 1.7 1.5 1.22 0.14 1.8 34.42 0.4 27.9 2.5 6.0 1.3 2.4 0.1 1.0 0.7 27.6 42.6 6.19 0.8 (33.23 0.7) (1.9 ROAE (%) 2007 2008 8.9 5.4 9.5 13.2) 42.8 (40.5 5.2 19.5 26.7 15.4 1.3 3.6 (26.16 1.9 38.30 0.1 24.78 0. N.01 0.0 41.4 9.9 5.7 19.1 28.6 3.A.00 0. 4.56 0.6 3.3 9.55 0.5 0.2 35.4 13.A.1 29.6 16.4 13.3 7.2 0.34 0.26 0.09 0.3 18.16 0. N.7 3.3 8.0 13.21 0.7 6.9 19.6 28.A.7 7.0 13.8 N.4 12.77 0.8 11.5 2.9 0.14 0.8 60.4 57.62 1.7 1.0 21.62 1. N.86 1.7 13. Guangzhou Pharma Dalian Port Xiamen Port Tianjin Port Dev Huaneng International Datang Power Huadian Power Shanghai Zendai Guangshen Railway Sa Sa International Prime Success Int'l Giordano International Embry Holdings Xinyu Hengdeli China Shipping Dev.2 12.42 0.5 13.7) 10. 23.9 EV/EBITDA (x) 2007 2008 21.0 3. N.6 19.26 0.9 9.6 10.6 34.A.54 0.43 0.7 7.6 4.82 0.8 15.1 11.3 26.3 2.3 9.16 0.14 0.8 1.3 1.33 0.0 17.7 13. N.2 29.5 83.72 0.19 0.8 17.21 0.4 N.9 27.2 1.7 1.8 21.69 0.1 8.54 0.6 3.51 0.50 2008 0.9 6.68 0.9 5.32 0. 1.2 40.9 5.28 0.2 11.3 4.50 1.06 0.2 28.6 17.32 0.6) (9.7 21.4 11.0 0.71 1.3 N.4 2.5 22.17 0.5 0.9 27.8 4.6 6.A.0 2.5 3.5 0.8 23.8 0.4 7.95 0.6 (7.7 46.5 0.2 N.28 0.A.67 0.3 Banking Cement Coal Construction Consumer Chemical Energy Food Industrial Infrastructure Insurance Logistics Machinery Media Petrochemical Pharmaceutical Port Power Property Railway Retail Shipping Steel Technology Telecom Textile Tollroad Source: KGI Securities Institutional portal: http://research.9 6.5 8.7 1.1 2.9 1.8 4.9 1.5 1. 7.6 20.27 0.3 2.8 2.1 N.A.8 2.4 12.1 28.7 3.3 1.9 2.2 1.56 1.45 0.8 23.3 26.2 22.40 0.5 1.60 1.0 46.9 26.17 0.4 2.9) 1.5 0.5 17.6 26.2 14.2 2.A.9 49.1 24.74 0.58 0.6 28.5 6.A.M 11.22 0.4 4.0 23.2 3.A.3 16.3 N.4 3.5 11.3 19.2 40.7) 10.2 2.8 2.9 (95.0 1.13 0.1 1.A. 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