20121129-Goldman Sachs-China H-Share Strategy 2013 Outlook

November 29, 2012

China H-Share Strategy

2013 Outlook: Cyclical inch,

structural long march?

Portfolio Strategy Research

Entering a new era of reform for China equities

From cyclical to structural: Over the past five years, the key returns driver for

China equities has been the strong cyclicality of economic growth. Going

forward, we see less volatility in GDP growth and believe the market will shift

focus to structural reforms (vital to ensure the sustainability/quality of growth)

as the key driver of returns. We expect a mild cyclical recovery in 2013E with

8.1% GDP growth, which would be a welcome turnaround from the sharp

deceleration in 2012. As exports and domestic factors turn more favorable,

further policy loosening will be less likely on the monetary, fiscal, and property

fronts. We reiterate our mass market consumption theme, as we expect it to

be supported by a policy focus on safety nets/reducing wealth disparity.

We see slight earnings uptick; reform offers valuation upside

Our MXCN and HSCEI targets are 70.6 and 12,500 at end-2013E, respectively,

representing 18% upside for both. We forecast 2013/14E earnings growth of

9%/11% yoy (14%/13% ex banks), and a target valuation of 10.3X P/E by end-

2013E from 9.7X currently. We see a weaker start to the year (offshore market

expectations on near-term loosening and sharp recovery may be a bit high),

but better returns heading into 2Q13E on a pickup in exports and a kickoff of

reforms. Faster reform progress is the key upside risk to market valuation.

Thematic rather than beta sector picks; prefer A over H

We remain overweight insurance, brokers, retail, and healthcare, switch

our preference to diversified metals from cement, and are underweight

telecom and industrials. We introduce a new China reform basket

<GSSZCRFM>, and reiterate our preference for A shares over H shares.

High teens returns in 2013E driven by recovery in earnings and re-rating

Source: Bloomberg, Consensus Economics, GS Global ECS Research estimates.

Helen Zhu

+852-2978-0048 [email protected] Goldman Sachs (Asia) L.L.C.

Timothy Moe, CFA


Christopher Eoyang

+65-6889-1199 [email protected] Goldman Sachs (Singapore) Pte

Jason Sun

+86(10)6627-3187 [email protected] Beijing Gao Hua Securities Company Limited

Ben Bei


Chenjie Liu

+86(10)6627-3324 [email protected] Beijing Gao Hua Securities Company Limited

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Goldman Sachs

Key Theams

Cyclical pickup

Structural reform

Property Policy

Mass market consumption

Sector preference

Overweight

Retail

Insurance

Brokers

Health care

Metals/mining

Underweight

Industrials

Telecom

10,925

+3%

11,880

+12%12,500

+18%

0

5,000

10,000

15,000

20,000

25,000

6

7

8

9

10

11

12

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Consensus GDP forecast GS GDP path forecast HSCEI - RHS

Cyclical

dominance

Structural

opportunity

Forecast

November 29, 2012 China

Goldman Sachs Global Economics, Commodities and Strategy Research 2

Table of contents

The bottom line: Mild recovery, more upside contingent on reforms 3

2013 macro backdrop: A bit more growth, fewer concerns 4

Three key issues to watch: Reforms, property policy, mass market consumption 9

Earnings to recover moderately, valuation expansion contingent on reforms 22

Liquidity and fund flow outlook should remain supportive 29

Sector preferences: More focus on structural factors 31

Implementation: Top picks and reform basket; A shares favorable 38

Agrochemicals: Increasing acreage, affordability 42

Alternative energy: Solar – 2013, the year of transformation; illuminating the path to profitability 45

Alternative energy: LED – 2013, investing selectively as demand cycle turns up 46

Alternative energy – Nuclear/Wind power: Lack of positive catalysts 47

Auto: Growth to sustain, prefer luxury segment 50

Banks: Constructive on cyclical stabilization; consumption-led growth a key for rerating 54

Cement: Sustained price recovery from 2Q13E 58

Coal: Structural downcycle ahead; Buy Shenhua on diversity 61

Conglomerates: Prefer stocks with earnings visibility 65

Consumer Staples: Competition remains in focus 68

Healthcare: Lacking catalysts, EPS growth to drive performance 71

Insurance: Mild growth for longer; favor return and value 74

Internet/Education: Mobile & e-commerce the focus 77

Machinery: Strong structural growth in railway equipment; slow cyclical recovery in construction equipment 80

Media: Value emerging in a thriving industry 83

Metals: Divergent supply growth; prefer copper/gold 85

Oil & Gas: Improving operating results, limited downside risks 88

Ports: Potential upside from tariff hikes 91

Power Utilities: Lower interest rate and coal oversupply; Buy IPPs 93

Real Estate: Volume positive priced in; further upside driven by price increase 96

Retail: A better outlook in 2013, but need to be selective 101

Technology: China vendors poised to extend market share gains 104

Telecoms: Healthy but decelerating growth; stabilizing competition 108

Tourism: Growing market driven by domestic demand 111

Transport: Prefer Airlines; cautious on Bulk Shipping 113

MSCI disclosure 117

Basket disclosures 117

Disclosure Appendix 118

All prices in this report are as of the market close of November 23, 2012, unless stated otherwise.

The authors would like to thank Tim Wang for his contribution.



The bottom line: Mild recovery, more upside contingent on reforms

We forecast MXCN and HSCEI to rise to 70.6 and 12,500, respectively, by end-2013E,

representing 18% upside from current levels. We expect a weaker start to the year followed

by stronger returns later in 1H13E. We expect A shares to post higher returns than H shares

in 2013E.

1. Macro – a gradual pickup, less loosening. 2012 has been a challenging year with GDP

growth estimated at 7.6% from 9.3% in 2011. We expect GDP growth to rebound

slightly to 8.1% in 2013E, owing to both export and domestic improvement. Given that

the economy appears to be heading back on track, we expect monetary policy to

remain prudent with money supply growing steadily. We do not expect any interest

rate cuts, while a reserve requirement ratio (RRR) cut in early 2013 remains a

possibility. Fiscal policy should hold steady at 2% deficit/GDP (similar to 2012).

2. Three major themes to focus on: a) From cyclical to structural – In our view, the days

of roller coaster growth are behind us and investors will increasingly focus on reform

progress as the key driver of equities’ returns. While GDP growth can support earnings,

we think only reform can support a meaningful re-rating as China’s structural

sustainability improves. We recommend investors position their portfolio with reform

beneficiaries rather than just trade the beta cycle; b) Property policy is unlikely to

loosen in the near term. Thus, domestic investment cyclicals and developers may not

fare as well as they did in 2012; and c) Mass market consumption – We continue to

appreciate structural opportunities in lower-end consumption.

3. Earnings/valuation/liquidity – a slight pickup for each. Earnings should recover to

+9%/+11% in 2013E/14E from 0% in 2012E. Excluding banks (slowing growth due to

NIM and NPL pressures), the improvement would be more prominent, to +14%/+13%

in 2013E/14E from -7% in 2012E. We forecast valuation to move up slightly to around

10.3X P/E by end-2013E from the current 9.7X. More liquidity rotation to emerging

markets (EM) from developing markets (DM) is likely, given China’s low valuation and

positioning, while the supply overhang is not excessive. Any further re-rating beyond

our target would hinge on investors regaining confidence on reform outlook in 2H13,

while the potential for further cyclical re-rating may be more limited.

4. Index target and path – initial bumps, then better in 1H13; prefer A shares. Near term

we think H shares’ returns could be slightly challenged by a resetting of expectations,

as many offshore investors anticipate a cyclical stimulus post the leadership transition

in China, which we think may not be forthcoming. Moreover, the recovery may be

gradual rather than sharp. As growth solidifies and reform prospects draw nearer post

the March People’s Congress, we expect returns to improve into mid-2013E, while

2H13E will depend on whether the reform pace can positively surprise. Our end-2013E

MXCN and HSCEI targets are 70.6 and 12,500, respectively. Comparatively, we are

more upbeat on the A-share market, as we think cyclical expectations are lower, reform

expectations are minimal, and relative valuation/performance presents attractive entry

points for investors.

5. Sector allocation – Overweight insurance, brokers, retail, healthcare, and

metals/mining. We focus mainly on reform winners that may also benefit from cyclical

improvement and low valuations: insurance, brokers, and retail. We take profits on

cement and switch into metals/mining for more upside to our copper/gold estimates.

We remain overweight on healthcare. We are also underweight telecom and industrials.

6. Top picks and reform basket. We identify 12 top picks that are Buy-rated, and

introduce a new reform basket <GSSZCRFM>. We also reiterate our preference for A

shares over H shares in 2013E (relative performance, valuation, expectations).



2013 macro backdrop: A bit more growth, fewer concerns

Our GS Global ECS Research team’s macro view on 2013E China outlook is relatively

positive, with GDP growth reaccelerating to 8.1% and mostly centered on 1H13E. Although

inflation is not likely to be a significant policy constraint, we anticipate slightly more

prudent monetary policy, limited shifts in property policy, and a similarly proactive fiscal

policy with a structural focus. Medium term, our economics team forecasts 8.2-8.4% GDP

growth in 2014-16E underpinned by external demand recovery and gradual domestic

rebalancing. More details on our macro assumptions can be found in their report, “Asia

Economics Analyst,” dated November 29, 2012.

A better year – slight recovery in growth in 2013E

We forecast China’s GDP will grow 8.1% in 2013E vs. 7.6% in 2012E (Exhibit 1). More

importantly, the economy will see an acceleration in growth after a difficult 2012E that was

dominated by a significant deceleration of 1.7pp from 2011. We expect this acceleration to

come from:

1. Less drag on exports as external demand gradually picks up (our world GDP growth

forecast for 2013E is 3.3% vs. 3.0% in 2012E) (Exhibit 5);

2. Less inventory pressure, as indicated by declining PMI finished goods/PMI new order

ratio (Exhibit 3);

3. More domestic contributions (greater household consumption and accelerating infra

fixed asset investments (FAI)) (Exhibit 4).

Growth path: Recovering slightly in 1H2013E, stable in 2H2013E at around 8.2%

We expect GDP growth to rise slightly in 1H2013E then stabilize in 2H2013E due to:

1. Relatively low base in 1H2012 and inventory adjustment – sequential GDP growth

(seasonally adjusted) was 1.5% in 1Q2012, the lowest in recent years. Inventory

pressure (PMI index for finished goods) may ease slightly and the new supplement is

likely to boost growth recovery;

2. Infra FAI may accelerate further in 1H2013E, while manufacturing FAI growth remains

mostly stable and property FAI decelerates gradually in 2Q2013E (Exhibit 12);

3. However, our GDP growth forecast is slightly below Bloomberg consensus for

4Q2012E (GSe: 7.6% vs. consensus: 7.8%). Our economists think offshore market

expectations may be a bit high due to: a) further policy loosening or stimulus on both

the monetary and fiscal sides (2013 official M2 target may be lower than 2012 actual;

4Q12 fiscal expenditure may not be as strong as in past years due to less seasonality)

may not materialize as the market expects; b) surprisingly strong export growth in Sep-

Oct may not be sustainable given factors such as the US “fiscal cliff”.

Inflationary pressure may not be a big concern

1. We expect upward pressure on inflation to be limited in 2013E, and thus it should not

be a meaningful policy constraint. Commodity prices may be pressured by supply

factors and CPI will likely be slightly above 3% in 2H2013E, as forecast by our

economists (Exhibit 2);

2. Pricing deregulation reform may pick up in 2013E against the backdrop of low inflation

pressure.



Further policy loosening may not be significant in 2013E

Monetary policy may lean towards more caution

1. Monetary policy should remain stable or decelerate slightly as China’s economy

appears to be on a path to recovery. We do not expect any interest rate cut (though

RRR cut possible in early 2013) unless growth meaningfully misses our forecasts, and

we believe M2 growth may be around 13%-14% (Exhibit 7). Total social financing will

likely be an emphasis in 2013E and the share of indirect financing (loans) may decline

further (Exhibits 13-14);

2. In the mid/long term, monetary policy will likely be more conservative due to structural

concerns (e.g., increasing labor and other production factors’ costs, cited from PBOC’s

quarterly report, 2Q2012).

Fiscal policy may be slightly proactive and more structurally focused

1. We estimate the fiscal deficit to be close to 2.0% of GDP in 2013E, representing an

absolute amount of slightly over Rmb1.0tn vs. Rmb800bn in 2012E (Exhibit 8);

2. Structurally support livelihood areas, urbanization, and ecological civilization – social

housing, infra FAI, education, health care, environmental protection, etc. (For further

details see our report, “Surfing the waves of China’s reforms,” dated August 13, 2012).

Property policy – We do not anticipate meaningful changes on the property policy front in

the coming quarters, but think expansion of property tax pilots is likely following China’s

central economic working meeting in December. We discuss property policy in greater

detail in the next section of this report.

FX outlook – We expect the CNY vs. USD exchange rate to appreciate to 6.10 by end-2013E,

implying 3.2% annualized appreciation as USD is projected to weaken substantially against

other currencies (Exhibit 11).

Should we be concerned about China’s potential growth? Urbanization is key

1. China’s new leaders think the biggest domestic demand will come from the

urbanization process (as per Vice Premier Li Keqiang’s paper in Qiu Shi Journal, April

2012). We think urbanization will likely support China’s long-term GDP growth (Infra

FAI + consumption upgrading), though the growth rate may moderate gradually

(Exhibits 9-10);

2. Treat the potential growth slowdown properly – Although we expect China’s GDP

growth to drop slightly, this should not be cause for concern as we think urbanization

will likely support China’s growth. Over the next decade, a 1% increase in urbanization

rate will ensure average annual GDP growth of 7.1%, as indicated in economist Jian

Xinhua’s paper, Empirical Analysis and Forecast of the Level and Speed of

Urbanization in China, Economic Research Journal, March 2010. Recent evidence

suggests that policymakers appear willing to tolerate growth at around mid-7% (we

think the official 2013 GDP growth target may be set at 7.5%, equivalent to its 2012

target, likely providing downside protection).Our economics team estimates trend

growth of 7.5-8.5% in the next few years, as detailed in their September 20, 2012 report,

“Shifting to a lower gear.”

Long term (2014E-2016E), we believe:

1. Global conditions will improve further and most of the investment boost post the

leadership transition may take place in 2014E, although start in late 2013E).

Investments should moderate in subsequent years as infrastructure spending eases

and fiscal policy becomes less expansionary;



2. There will be gradual rebalancing, as consumption holds up reasonably well and

slightly exceeds investment growth rates;

3. The government will continue with some of the incremental reforms it initiated on

social safety net, consumption subsidy, etc, which will help to support consumption.

Key risks to our assumptions

1. Sharper slowdown in external demand due to the US fiscal cliff or a prolonged

European recession;

2. Inflation risk triggered by QE3;

3. Infra FAI growth pressured by funding issues;

4. Worse-than-expected slowdown in manufacturing and property FAI.

Exhibit 1: GS’ forecast GDP growth path: Recovering

slightly in 1H13E, stable in 2H13E at around 8.2%

Exhibit 2: We expect upward inflation pressure to be

limited until 4Q2013E

Source: CEIC, Gao Hua Securities Research, GS Global ECS Research


7.6

7.9

8.08.2

8.2

6

7

8

9

10

11

12

13

14

15

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(%)

The period of the 17th CPC


China - Real GDP (% chg yoy)

GS Forecast

The 18th CPC

2.0

2.5

2.8 3.2

3.4

-2

0

2

4

6

8

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(%)



China - CPI (% chg yoy)

GS Forecast

The 18th CPC



Exhibit 3: Inventory pressure has alleviated slightly

Exhibit 4: GS macro forecasts summary



Exhibit 5: China export may rebound further in 2H2013E,

along with global GDP growth

Exhibit 6: FAI growth tends to accelerate and peak in the

latter part of the 2nd and 3rd year of the political term

(2013-2014 for the period of 18th CPC)

Source: CEIC, GS Global ECS Research estimates

Source: CEIC, GS Global ECS Research

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

PMI finished goods inventory vs. PMI new order

Average

Inventory pressure

increasing

2010 2011 2012F 2013F 2014F

GDP by expenditure (growth) % yoy 10.4 9.3 7.6 8.1 8.4

Domestic demand % yoy 8.8 10.4 8.0 8.3 8.7

Consumption % yoy 7.9 9.6 8.7 8.7 8.7

Household % yoy 7.3 9.5 8.5 8.6 8.7

Government % yoy 9.3 9.8 9.2 9.0 8.8

GCF % yoy 9.7 11.3 7.4 7.9 8.6

GFCF % yoy 9.4 10.3 8.8 8.6 8.9

of which: manufacturing % yoy 10.3 13.7 9.6 8.5 8.8

of which: infrastructure % yoy 6.9 3.7 7.0 9.9 10.0

of which: property % yoy 12.7 12.1 6.4 4.4 4.6

Inventory % yoy 17.1 30.5 -14.0 -7.0 2.0

Net exports % yoy 47.2 -20.3 -7.9 0.0 -0.4

Net exports PPT 2.0 -0.8 -0.2 0.1 0.0

Exports % yoy 19.2 12.1 5.8 5.6 9.0

Imports % yoy 13.6 16.9 7.0 6.0 10

-3

-2

-1

0

1

2

3

4

5

6

-30

-20

-10

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

China - Exports of Goods/Services (% chg yoy)

World - Real GDP (% chg yoy, RHS)

(%) (%)

GS Forecast

0%

10%

20%

30%

40%

50%

60%

Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun

15th Party congress term 16th Party congress term 17th Party congress term

15th Party Congress

16th Party Congress

17th Party Congress

National

Congress

NationalCongress

NationalCongress

Transition Period

15th Party Congress

16th Party Congress

17th Party Congress

National

Congress

NationalCongress

NationalCongress

15th Party Congress

16th Party Congress

17th Party Congress

National

Congress

NationalCongress

NationalCongress

1997-2002

2007-2012

2002-2007



Exhibit 7: Monetary policy may be a bit more cautious in

2013E after some loosening in 2012

Exhibit 8: Fiscal deficit as % of GDP should be about 2.0%

in 2013E



Exhibit 9: Urbanization vs. GDP growth (Japan case) –

GDP growth declined along with a slowdown in

urbanization process

Exhibit 10: Same story for China? Historically, it would

appear to make sense

Source: UN, CEIC, Gao Hua Securities Research, GS Global ECS Research

Source: UN, CEIC, Gao Hua Securities Research, GS Global ECS Research

-50

450

950

1,450

1,950

0

5

10

15

20

25

30

35

40

45

2005 2006 2007 2008 2009 2010 2011 2012

Monthly loan (RHS) Credit yoy

M2 yoy M1 yoy

(%) (Rmb bn)

2.5%

2.3%

2.6%

2.2%

1.3%1.2%

0.8%

-0.6%

0.4%

2.3%

1.7%

1.1%

2.0% 2.0%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

Fiscal revenue

Fiscal expenditure

Fiscal deficit as % of GDP

0

2

4

6

8

10

12

14

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

GDP growth

Urbanization Ratio changes

(%)

(UN forecast)

Urbanization process vs. GDP growth (Japan case)

-2

0

2

4

6

8

10

12

14

1955

1960

1965

1970

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1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

GDP growth

Urbanization Ratio changes

(%)

(UN forecast)

Urbanization process vs. GDP growth (China case)



Exhibit 11: Slower pace of Rmb appreciation

Exhibit 12: FAI breakdown and path, as estimated by our

economists



Exhibit 13: Total social financing growth stabilized in

recent months but remains at fairly high levels

Exhibit 14: As a % of total social financing, the share of

indirect financing (loans) is declining, while the share of

direct financing (bonds etc.) is rising gradually



Three key issues to watch: Reforms, property policy, mass market

consumption

We identify three key issues that may move markets and affect sector performance in 2013:

1. Reform progress: Key to equities re-rating and sustaining growth over time; we think

progress will accelerate and positively surprise, favoring certain reform-beneficiary

sectors.

6.25

6.20

6.15

6.10

5.80

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60 China FX (Rmb vs. USD)

(Rmb vs. USD)

GS forecast

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013

Headline FAI Manufacturing FAI

Infrastructure FAI Property FAI

(%)

GS Forecast

0

5

10

15

20

25

30

Jan-11 Jul-11 Jan-12 Jul-12

M1 yoy growth

M2 yoy growth

Total amount of social financing yoy growth - RHS

(%) (%)

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Others Non financial institution equities

Corporate bond Bank acceptance

Trust loans Entrusted loans

Forex loans Rmb loans

As % of total social financing



2. Property policy: Any loosening could catalyze developers and upstream sectors – but

we a see low probability of such moves in the coming quarters.

3. Mass market consumption: Continuous policy introduction on safety nets, etc, will

likely be a high priority for the government. We see ongoing divergence between mass

market and luxury consumption trends and favor the former.

Issue #1: A new era – from cyclical to structural

China equities have been trading mainly on cyclical factors in the past 4-5 years: GDP

growth has seen significant revisions, with Consensus Economics moving from ~8% in

2006 to about 11% in 2007, falling back to <8% during the financial crisis, and then

recovering to double-digit levels in 2010 before correcting again to <8% in 2012.

Investors have familiarized themselves with such trends and profited from this mainly

by timing the cycle and making beta calls.

However, we are concerned on the sustainability of the current growth model. We

find investors are increasingly worried about issues such as wealth disparity, SOE

dominance, dependence on investment, and the widespread use of non-market

intervention to influence the economy. In our view, investors are no longer rewarding

cyclical upticks in the way we have seen in the past few years. Ramping up short-term

growth at the expense of longer-term structural risks is less welcomed, which makes

strategic sense.

Cyclical movements will be less volatile in the future, in our view. We believe we are

entering an era where the volatility in growth may diminish and GDP revisions may be

limited to <1pp or perhaps even <0.5pp on either side, rather than the 3pp seen in

recent years. Trend growth has slowed (see our economics team’s report, “Shifting to

a lower gear,” dated September 20, 2012 for details) to 7.5-8.5% in the next few years,

and policymakers are less willing to prioritize the quantity of growth than they used to.

This implies that the cyclical impact on earnings will be less dramatic than it has been

in the past. Our economics team forecasts a fairly stable growth trend over the next 3-4

years.

Reform will be key in the coming years. We believe reform will become the key driver

on China equity performance going forward. 1) earnings growth will increasingly

depend on reforms rather than just cyclical factors (e.g., interest rate deregulation’s

impact on banks or downstream pricing reform impact on oil); 2) reform will be

essential to support any sustained and meaningful valuation re-rating (we believe the

30% de-rating since 2010 relative to regional and global indices has been largely due to

market concerns over the lack of reforms, leading to bigger structural issues).

Why are reforms essential and hopefully imminent? In our view, public hopes for

reforms are significant and investors appear to realize that the problems associated

with the unsustainable current model (i.e., reliance on investment and exports,

excessive use of resources with significant environmental and other side effects,

worsening social inequality/instability risks, inefficient resource allocation leading to

stronger SOEs at the expense of private companies, etc.) have been exacerbated.

While some structural stresses have not worsened recently, we have only seen them

‘grow out of the problem’ in a few areas, but have not yet seen any permanent

solutions or reforms (e.g., local government debt/GDP ratio is declining, but there is

not yet much sustainable tax flow for local governments and limited advancement of

municipal bonds). Solutions have been identified but have been delayed due to the

leadership transition. With the new leadership in place for the next decade and a full

transition (Xi Jinping takes over the party and the military), we expect to see a

meaningful pickup in the pace of reforms.



A shares have already made the shift; H shares will follow: Based on our discussions

with A-share and offshore investors, we believe that reforms have already become the

predominant focus of A-share investors and the reform outlook is now more important

to A-share performance than cyclical factors. In contrast, H-share investors remain

more focused on cyclical factors. We believe this will change gradually and H-share

investors will converge towards the A-share side.

We think A-share investors have lower expectations than their H-share counterparts.

The contrast is greater on the cyclical views, where A-share investors expect limited

growth rebound, while H-share investors are more upbeat in anticipation of further

policy loosening following the Party Congress. Our economics team’s forecasts are

somewhere in between both views; it expects mild reacceleration (i.e., less bearish

than A-share investors’ view), but also less rebound near term than consensus on

limited further loosening. Both A-share and H-share investors have minimal

expectations on reforms.

Cyclical shifts mixed; reform upside: On the cyclical side, we think offshore investors

may be slightly disappointed, while A-share investors may see some positive surprises.

However, neither beats nor misses will likely be of significant degree. We think the key

factor to focus on will be potential upside on reform progress off a very low base. Our

August 13, 2012 report, “Surfing the waves of China’s reforms” outlines in detail the

seven key areas of reforms we expect to see. Progress so far has been quite limited.

Exhibit 15: GDP volatility has been very high in the past 5

years; earnings usually lags GDP growth changes by a

few months

Exhibit 16: GDP revisions appear to be significantly

correlated with index performance, suggesting cyclical

factors have dominated since the global financial crisis

Source: Consensus Economics, I/B/E/S, GS Global ECS Research

Source: Consensus Economics, MSCI, GS Global ECS Research

2

4

6

8

10

12

14

2

3

4

5

6

7

8

9

10

11

2010

2009

2009

2007

2008

2012

20122011

2011

2010

Consensus GDP growth (%) Consensus MSCI China EPS integer (RHS)

2013

2013

2006

2005

2008

2007

20062005 0

20

40

60

80

100

120

6

7

8

9

10

11

12

Consensus GDP growth (%) MXCN - RHS



Exhibit 17: China’s relative valuation vs. other markets

has compressed in the past few years, likely due to a lack

of reforms and rising structural concerns

Exhibit 18: However, China’s relative earnings growth vs.

other markets has not suffered to the same extent

Source: FactSet, MSCI, I/B/E/S, GS Global ECS Research

Source: FactSet, MSCI, I/B/E/S, GS Global ECS Research

Exhibit 19: Reform impacts vary widely by segment and may differ over time

Source: GS Global ECS Research estimates

(60)

(40)

(20)

0

20

40

60

80

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

12m P/E difference- MXCN vs MXAPJ, MXWD, MXWO and MXEF

MXCN vs MXAPJ MXCN vs MXWD MXCN vs MXWO MXCN vs MXEF

(%)

-10

-5

0

5

10

15

20

25

30

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Fwd EPS Growth Rates of MXCN, MXAPJ, MXWD, MXWO and MXEF

MSCI China Fwd EPS Growth Rate MSCI APXJ Fwd EPS Growth Rate

MSCI AC World Fwd EPS Growth Rate MSCI World Fwd EPS Growth Rate

MSCI Emerging Market Fwd EPS Growth Rate

(%)

Structural reforms in China Reform earnings impact by sector Valuation impact

Pricing deregulation Insurance Alt' energy

Tax reforms Railway Gas

Health care Property

Oil Coal

Social safety net & healthcare Airlines Banks

Financial sector deregulation Consumer retail Auto

Financial sector innovation Brokers

Railway restructuring Utilities

Metals and

minings

Energy saving & environmental

protection

Short term

depends on

direction of

earnings impact

Long term re-

rating



Exhibit 20: The seven different economic reforms we identified may face varying degrees of obstacles in

implementation

Source: GS Global ECS Research

Exhibit 21: Potential reforms on the seven fronts

Source: Xinhua Net, Hexun.com, GS Global ECS Research

Key reforms Rationale and agenda

Incremental/

reallocation Beneficiaries Losers GS comment on ease of implementation

Pricing deregulation

Move from controlled towards market

pricing for a variety of products and

services

RealloactionsDownstream oil,

IPPs

Energy consuming

industrial co's

Relatively straight forward, but may have negative

implications to many energy intensive industries.

Tax reformsVAT/BT reform; resource and property tax

expansion, etc.Realloactions

Consumers/house

holds, services

companies, etc

Property owners,

local govts (land

sellers), pollutive

industries, MOF

Reforms that cut taxes are easier to implement (less

direct impact on vested interest groups). Tax

reforms like property and resource taxes are harder.

Energy saving &

environmental

protection

Adhere to higher standards; reduce

pollution and congestion; encourage non-

fossil energy sources

Both

The general

population;

makers of energy

efficient products

Auto, Materials,

Utilities, Energy

Not difficult to implement, but need to consider

other reforms in affected sectors and enterprises'

profitability (for example IPPs are already

unprofitable, may not be able to bear more costs)

Social safety net and

healthcare

Increase wages; enhance safety nets;

improve healthcare coverage

breadth/depth, delink medicine and services

Both

Health care,

Consumer (mass

market)

Price-focused drug

makers, MOF

Limited pushback in terms of enhanced safety nets.

Healthcare reforms are tough in the sense of

separating medicine and services for hospitals.

Financial sector

deregulation

Move towards interest rate deregulation;

broaden scope of insurance investment

areas, etc.

Realloactions

Insurance,

Brokers,

depositors &

borrowers

Banks

Need to achieve balance between banking system

development and its impact on the broader macro

economy

Financial sector

innovation

To allow more financing channels for SME;

to prepare for RMB internationalization;

develop capital markets products, etc

Incremental

Banks, Insurance,

Brokers,

Consumers

Broader trend is clear with no real losers/major

pushback. Key is to engrain concepts of risk and

such and to take things at the appropriate pace.

Railway restructuring

Separate regulator and operators; make

system commercially viable and sustainable

on market oriented metrics

RealloactionsTransport, Cap

goods

Short-term,

railroad

passengers

Railroad passenger tariffs may rise to achieve more

sustainable returns. MOR organizational legacy and

leverage are challenges.

Reform topics Potential reforms

Further adjustments to downstream oil pricing regime

Expansion of gas pricing mechanism to more provinces

Withdrawal of contract coal price system

Gradual loosen price controls over a number of other resources and services

Further expansion of VAT/BT trial to more provinces

Coal resources tax charged on price instead of volume

A number of other tax reforms such as environmental tax, Insurance tax deferral pension,

windfall tax, and most notably the property tax, may be introduced in the coming years

Much closer implementation of existing policies is needed as well as implementation of new

requirements.

Potential introduction of carbon credits, environmental tax, etc.

Expansion of auto purchase restriction

Mandated income increase and adjustments to minimum wage

Expansion of healthcare reform and separate hospital revenue from consultation and medicine

Expansion and better implementation of Hukou reform

Further increase of public expenditure on social welfare

Further interest rate deregulation

Expansion of insurance sector investment scope

Allow brokers to take on higher leverage

Possible development of China hedge funds from new 'Mutual Fund Law'

Trial of life insurer tax deferral scheme

Additional exchange platforms, ETF and derivative products

Acceleration of development of corporate bond and muni bond markets

Potential new 3rd boards may be introduced, as well as international board.

Separation of railway regulatior, asset owner and operator

Encouraging private investment into railroad

Energy saving and environmental

protection

Pricing deregulation

Tax reform

Railway system reform

Social safety net & health care

Financial sector deregulation

Financials sector innovation



Exhibit 22: Political handover – structural reforms may be

possible post early 2013

Exhibit 23: 3rd plenary session has historically brought

significant economic reforms (the next is in October

2013)



Exhibit 24: We have seen selective alleviation of structural pressures in 2012, but mainly from ‘growing out of the

problem’ perspective rather than structural fixes. We hope to see more reforms


Oct 2012

Nov

Dec

Jan

Feb

Mar

Apr

MayJun

Jul

Aug

Sep

Oct

Nov

No major policy expected, but

cyclical policies

possible

Possible structural reforms plus

additional cyclical

policies

We expect no major policy move during

political handover

period, but we see

structural reform

potential in 2H2013

CEWC

2nd Plenary

Session

National

People's

Congress

3rd Plenary

Session

CRWC

18th Party

Congress and

1st Plenary

Session

Date Period Key topics and impacts

Dec-7811th CPC central

committee

The meeting managed to turn the Party's focus back to the construction

of socialist modernization. Deng Xiaoping formally launched the reform

and opening-up policy, which marked the start of next a few decades of

fast economic development in China. Household responsibility system

was introduced in rural areas as well.

Oct-8412th CPC central

committee

The meeting marked the expansion of economic reform focus from rural

to urban areas and the whole economy. The government also decided to

separate ownership and management of SOEs and boost of private

sector

Nov-9314th CPC central

committee

The meeting set up the blueprint of reform toward a more market driven

socialist economic system. Further reforms of SOE operational

mechanism was also a focus.


committee

The meeting focused on rural issues and raised the goal of constructing

socialist new countryside by 2010. Housing reforms was also initiated

within the same year, leading to the dramatic expansion of private

housing market.


committee

The meeting carried out a series of policies to perfect the socialist

market-based economy system, and boosted the development of capital

market and financial system.


committee

The meeting focused on the rural reform, planed more investment in

rural areas to improve healthcare, education and other infrastructures.

This session regulated the rural land circulation, which was a key issue

at that time

2012 status check 2013E outlook Reform agenda

ASPs have been stable and Retain firm control over ASP Extend property tax trials

controlled Continue to reduce local Accelerate urbanization and hukou reform

Land sales % of govt income govt reliance on land sales to improve end user demand

has fallen vs 2011's peak

Local government debt / GDP Potentially slightly more Make more progress towards municipal

ratio has been declining to support infra FAI push bonds and corporate bonds

Bank lending has been stable but but should not grow faster than

funding has come from other areas nominal GDP

like corporate bond issuance

Investment as a % of GDP has been No significant changes expected Tax reforms and other pro consumption

stable Infra FAI will accelerate while measures

Capital stock is reasonable but flow property and mfgr FAI will likely

is unsustainable longer-term slow

Limited progress in 2012 on preset High hopes for more progress on More advancement on previously

agenda such as downstream oil a variety of fronts esp in the identified key reforms

new mechanism, but some early commodities and financials

steps on gas trials; interest rates space

No substantial improvements but Difficult to achieve much within Healthcare reform; pension reform,

does not seem to be getting worse a short time but hope to see social housing; benefits adjustments;

given that property prices were more progress on safety nets, hukou reform, etc.

stable and low end wages are etc.

rising

LGFV leverage

Over investment /

reliance on FAI

Deregulation vs price

control / admin measures

Wealth disparity

widening

Property

bubble/economic reliance



Exhibit 25: A vs. H views on cyclical vs. reform – we think

A-share investors may see mild positive surprises, while

H-share investors may not see as much stimulus as they

had expected

Exhibit 26: A shares have continued to de-rate, while H

shares have risen on cyclical expectations recently



Issue #2: Property policy and investment implications – don’t expect

too much

One common question investors have been asking is whether we think the new leadership

will loosen policy towards the property sector after the handover is completed. This may

not be via explicit policy changes, but could manifest in the form of implicit acquiescence

to loosening of home purchase restrictions (HPR), for example. The rationale is that any

loosening may underpin developers’ stock performance and that of its upstream sectors as

well. Thus this is essential to 1H13 sector allocations. We do not think this will happen

because:

The property sector is fragmented and difficult to control, especially in the near term.

We think policy signals from the government may have unintended effects on the

market. For example, average selling prices (ASP) rose in mid-2012 as buyers

concluded that prices would no longer decline. It is difficult to prevent such volatility if

the policy shifts again, and any such volatility may undermine policy credibility and

social stability. Moreover, property sector fragmentation means that policy shifts are

usually met with several quarters of delays before investment activity happens,

suggesting this is not the easiest area to use as a near-term cyclical policy lever.

The need to loosen policy towards property is reduced by a recovering export picture

and more contribution from infra FAI. Property has become a counter-cyclical indicator,

and policies may more likely loosen if we approach a hard landing scenario, for

example.

Vice Premier Li Keqiang’s bias is towards supporting social housing to sustain activity.

As social housing completion targets ramp up, its contribution to offsetting potential

commodity housing slowdown should increase.

HPR is more effective in curbing demand/speculation than property tax, and thus

cannot be removed/phased out. For example, HPR cities like Shanghai and Beijing

have seen much better controlled trends vs. Chongqing (property tax only). We expect

property tax trials will extend to more cities in 1H13E, with some locations possibly

levying property taxes for existing inventory and not just new sales.

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Cyclical acceleration Reform progress(favors valuation)

Cyclical acceleration

(favors earnings)

Cyclical deceleration

Reformparalysis

H-share investors

A-share investors

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

12m fPE premium: CSI300 vs MXCN

A/H valuation premium Average



New starts activity is recovering and may in turn boost FAI by late 2013E. While new

starts remain negative, we estimate that better property sales over time will translate

into positive starts (as it has already boosted land sales recently) and expect some

property FAI rebound by 2H13E. We expect a sharp slowdown in property FAI in 1H13E

(due to completion of new starts recorded in 2011), but this will likely be offset by high

infra FAI. If property FAI recovery is lackluster in 3-4 quarters, our property team thinks

that any late-stage policy adjustments may include targeted loosening on mortgage

rates, etc., in the non-HPR lower tier cities by end-2013E.

Exhibit 27: FAI forecast path – despite a dip in property

FAI in 1H13, we do not expect property loosening

Exhibit 28: Property as a % of total FAI is still over 20%


Source: CEIC, NBS, GS Global ECS Research.

(30%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

-09

Mar-

09

May-0

9

Ju

l-09

Sep

-09

No

v-0

9

Jan

-10

Mar-

10

May-1

0

Ju

l-10

Sep

-10

No

v-1

0

Jan

-11

Mar-

11

May-1

1

Ju

l-11

Sep

-11

No

v-1

1

Jan

-12

Mar-

12

May-1

2

Ju

l-12

Sep

-12

No

v-1

2

Jan

-13

Mar-

13

May-1

3

Ju

l-13

Sep

-13

No

v-1

3

Property FAI yoy growth (quarterly) GFA new starts ytd yoy growth - RHS

GFA completion ytd yoy growth - RHS GS forecast

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Manufacturing % of total Infrastructure as % of total

Real estate % of total Other % of total

ytdfigure



Exhibit 29: Property policies have already shifted towards the more dovish side recently but we do not expect more

loosening for the coming quarters

Source: MSCI, GS Global ECS Research, Gao Hua Securities Research

Exhibit 30: Developer and mortgage loans are still under

scrutiny and have only risen slightly since 2010

Exhibit 31: Affordability (monthly mortgage/monthly

household income) is still not great especially in higher

tier cities

Note: Tier 1 cities refer to Beijing, Shanghai, Shenzhen, and Guangzhou; Tier 2 cities refer to Wuhan, Chongqing, Tianjin, Hangzhou, Chengdu, Nanjing, Xi’an, Shenyang, Xiamen, and Changsha; Tier 3 cities refer to Hohhot, Dalian, Ningbo, Hefei, Fuzhou, Nanchang, Jinan, Qingdao, Zhengzhou, Nanning, Lanzhou, and Haikou.

Source: CEIC, Gao Hua Securities Research

Source: Gao Hua Securities Research

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

-20

-15

-10

-5

0

5

10

15

20

Relative performance of offshore property index vs MSCI China (LHS)

NAV prem/disc (%) (RHS)

Price index

In Jan, the

State

Council held

a executive

meeting and

announced

8 property tightening

measures.

Around 15

cities had

announced

home

purchase

restrictions

policies as of end 2010.

In Feb, April,

July, PBOC

hiked

interest

rates,

respectively.

More cities

implemented

home

purchase

restrictions in

mid 2011.

Zhuhai and

Zhongshan

put Ceiling

on property

prices.

Shanghai and

Tianjin, etc.

lowered the bar for ordinary

properties.

PBOC officially

announced that

it will pledge

support for first-

home buyers.

PBOC lowered

interest rates in

June and July,

respectively.

In late Jan,

Chongqing and

Shanghai

announced

property tax tightening.

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 2006 2007 2008 2009 2010 2011 Sep 2012

Developer loan

Mortgage loan

Developer loan as % of total loan outstanding

Mortgage loan as % of total loan outstanding

Rmb bn

30%

40%

50%

60%

70%

80%

90%

100%

110%

Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12

China Tier 1 cities

Tier 2 cities Tier 3 cities

3-m mov. avg.



Exhibit 32: Property taxes will likely expand in coverage to more cities in 2013E, and may

extend beyond Shanghai or Chongqing implementations to include existing inventory in

some locations

Source: Xinhua Net, GS Global ECS Research

Exhibit 33: We believe HPR is more impactful in cooling the property market than property

taxes, and may not be phased out in the foreseeable term

Source: Gao Hua Securities Research

Property tax pilot plan Shanghai version Chongqing version

Calculation base 70% of the transaction price Transaction price of the properties

Tax rate

0.4% or 0.6% based on whether the transaction price for properties levied is higher than twice that of last years' annual average

price of newly built commodity properties

0.5%, 1.0%, or 1.2% based on the thresholds that the

transaction price for properties levied is higher than four times that of the annual average price, between

three and four times or below three times.

Conditions for exemption and reduction

60 sqm per person will be exempt from paying

property tax

Detached villa properties may have 180 sqm at most

for tax exemption and high-end properties may have

100 sqm at most for tax exemption.

Effective date Since Jan 28, 2011 Since Jan 28, 2011

Applicable properties Newly purchased unit only

(1) Detached villas (no matter newly purchased or

existing holdings);

(2) Newly purchased high-end properties, with prices

higher than twice of Chongqing's ASP in the past 2

years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Se

p

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Se

p

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Se

p

2012 monthly sales volume by city(mn sqm)

Beijing(HPR only)

Shanghai(HPR + property tax)

Chongqing(Property tax only)

2008-2011 monthly average high 2008-2011 monthly average low



Exhibit 34: GFA new starts may start to improve by end-

2012E, but will remain negative in 1H13E

Exhibit 35: Gross floor area (GFA) completions will also

slow meaningfully in 1H13E, which does not bode well

for property FAI near term



Exhibit 36: We expect social housing completions to increase despite a decelerating starts

pace... If 23.5mn units are started in 2011-13E, this would leave around 6mn per year in

2014-15E

Source: NBS, MOHURD, GS Global ECS Research estimates

Exhibit 37: Social housing will take a larger % of total residential housing supply in coming years

Source: NBS, CECI, MOHURD, GS Global ECS Research estimates.

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

New starts growth (base case) New starts growth (bear case)

New starts growth (bull case) New starts growth (NBS)

-10%

0%

10%

20%

30%

40%

50%

Completions growth (base case) Completions growth (bear case)

Completions growth (bull case) Completions growth (NBS)

Year

starts

(units)

completion

(units)

% of residential

completions

2010 5.9 1.8 12%

2011 10.0 3.0 17%

2012E 7.5 5.4 26%

2013E 6.0 10.0 38%

Total 29.4 20.2

Social housing

Residential housing

Growth

rate

Commod

housing

Growth

rate

Social

housing new

starts

Social

housing

completed

Growth

rate

Other

residential

housing

Growth

rate

Growth

rate

2010 885 7% 612 3% 336 107 150 1,754 7% 6% 12%

2011 1,198 35% 717 17% 562 166 55% 109 -27% 2,190 25% 8% 17%

2012E 1,258 5% 753 5% 422 301 81% 109 0% 2,420 11% 12% 26%

2013E 1,321 5% 790 5% 337 550 83% 109 0% 2,770 14% 20% 38%

Non-

residential

Floor space

completed

(sqm mn)

Total floor

space

completed

Social

housing

% of

total

Social

housing %

of

residential



Issue #3: Consumption sectors will continue to diverge – mass

market will be the winner

The third issue to watch for is whether there will there be a big cyclical rebound in the

luxury segment as the economy stabilizes. In this regard, we reiterate our view that the

structural opportunity is on the mass-market side rather than on the higher end.

The economic rebound will likely be mild rather than sharp. Unlike the past cycle

when GDP growth rebounded by 2-3pp, the rebound we expect is only 0.5pp, which

may not support a sharp cyclical demand recovery for high-end discretionary items.

Anti-corruption is a top priority. Structurally, the 18th party congress has identified

corruption as a significant threat to stability and intends to fight this. We think this may

pose headwinds to luxury demand over time.

Reducing the wealth gap and raising low-end income/safety nets will support low-end

consumption. In contrast, structural changes favor the lower-end segment across

products and services (for further details see our report, “Mass market consumption –

China’s structural opportunity,” dated May 4, 2012).

Divergence will create alpha opportunities. We see significant intra-sector stock-

picking opportunities to be derived from this theme.

Exhibit 38: Income gap widening is a key issue that needs

to be addressed

Exhibit 39: Low income groups have recently started to

enjoy higher wage growth, as well as more tax cuts



-

1

2

3

4

5

6

7

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

Income multiple (high income class vs low income class)

Income multiple (high income class vs mid income class)

5%

7%

9%

11%

13%

15%

17%

19%

2003 2004 2005 2006 2007 2008 2009 2010

Low income level Middle income level High income level National average



Exhibit 40: The government has tried various measures to resolve income disparity and could potentially introduce

more policies

Source: Media reports (China.com, Sina.com etc), GS Global ECS Research

Exhibit 41: Mass market demand outlook is consistently upbeat across sectors

Source: GS Global ECS Research.

Income disparity related reform/policies

Started / on progress

Area Details

Income tax Lift threshold and lower tax rate for majority tax payer; increase tax rate of high income class

Minimum wage Meaningful annual increase of minimum wage set by govts

Social housing Massive social housing projects started to provide affordable residence for mid to low income class

Property tax To collect tax from households whose living environment exceed basic needs

Social welfare scheme Better and larger coverage to rural residents and migrant workers

Healthcare reform To separate hospital revenue from consultation and medicine

Potential reforms Details

Gray income regulation Set up framework to regulate gray income and make compensation system more transparent

Wage of govt/ social units/

monopoly industries employees Set guidelines and gradually reduce the gap with other commercial areas

Luxury tax To collect tax from sales of luxury goods

Pension reform Changing retirement age; seek higher return for pension investment; more private pensions etc

Hukou reform Further lower the huddle for rural residents to obtain Hukou in city, except already crowded mega cities

Consumer types

SectorMass

market

Core mid

class

Aspirational

luxury

Movers &

shakers

Internet

Tourism and travel

Media

Auto

Healthcare

Handsets/PC

Restaurants/hotels

Casino and gaming

Branded apparels

Retail, dept stores

F&B/ HH products

Property

Sportswear

Telecom services



Earnings to recover moderately, valuation expansion contingent on

reforms

We forecast MXCN earnings growth of 9% in 2013E, recovering from 0% in 2012E largely

due to cyclical sectors’ reacceleration offsetting the slowdown from banks. We also extend

our forecast to 2014E at 11%. Valuation may expand to 10.3X P/E from 9.7X currently. In

combination, we forecast end-2013E HSCEI target of 12,500, 18% upside from current levels.

We think the market’s near-term focus will be on cyclical factors, and thus returns may be

muted through the beginning of the year. As we approach spring, the combination of our

expectations of global growth reacceleration and prospects of China reforms should

underpin stronger performance. A better-than-expected pace of reforms, should it

materialize, could catalyze further valuation re-rating into 2H13E.

Earnings growth to recover in 2013E, supported mainly by cyclical

sectors

2012 has been a year of earnings deceleration: Earnings of Chinese enterprises decelerated

meaningfully in 2012 on lackluster global demand (in 2Q-3Q) and much slower GDP growth

(almost a 2pp deceleration in one year). MSCI China 2012E EPS integer has been revised

down by 11% ytd, led by cuts in materials, insurance, and consumers. Utilities and banks

were the only two sectors that enjoyed upward earnings revisions ytd, owing to weak coal

prices and resilient margins.

However, we believe earnings will bottom in 2H12E, as:

1. GDP growth forecast has stabilized, and this has historically been a leading indicator

of earnings estimates by several months.

2. High frequency data picked up recently (like industrial enterprises’ profit and SOE

profit), pointing to stabilization or a mild recovery in cyclical sectors’ earnings. De-

stocking appears to be underway and is again heading towards normalized levels.

3. Earnings revision sentiment, another barometer for measuring the earnings trend,

bounced off its trough in July.

4. Magnitude of earnings cuts also contracted, as some larger cap sectors (like banks)

have seen mild upward revisions, offsetting cuts in other areas.

Exhibit 42: Ytd earnings cuts have been widespread

across almost all sectors

Exhibit 43: In the past month, however, some sectors’

forecasts have stabilized

Source: MSCI, I/B/E/S, FactSet, GS Global ECS Research

Source: MSCI, I/B/E/S, FactSet, GS Global ECS Research

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Pro

pe

rty

I.T.

Uti

liti

es

He

alt

h c

are

Insu

ran

ce

Ba

nks

Ind

ustr

ials

En

erg

y

Te

lco

s.

Co

ns. S

tap

.

Ma

teri

als

Co

ns. D

isc.

MX

CN

Valuation change

Earnings revision

Price performance

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Co

ns. D

isc.

Uti

liti

es

Fin

an

cia

ls

Ind

ustr

ials

Ma

teri

als

En

erg

y

Te

lco

s

Co

ns. S

tap

.

I.T.

He

alt

h c

are

MS

CI C

hin

a

Valuation change

Earnings change

Price performance



Exhibit 44: Modest recovery in high-frequency industrial

profit and SOE profit data may suggest listco earnings

stabilization could come

Exhibit 45: Industrial profit recovery has been driven by a

mild uptick in margin, while revenues have been

lackluster

Source: CEIC, MSCI, FactSet, GS Global ECS Research

Source: I/B/E/S, MSCI, GS Global ECS Research

Exhibit 46: China industrial sectors entered a de-stocking

phase (especially downstream) in 2012, impacting

earnings, but should provide support to following years

Exhibit 47: Earnings revision sentiment has rebounded

from trough levels seen in July-Aug



We forecast 0%/9%/11% 2012E-14E earnings growth; we are

slightly lower than consensus in 2012-13

Our top-down approach earnings forecasts, which is comprised of macro factors like

retail/export/FAI growth and price level, etc, leads us to a muted earnings growth (0%) this

year and high single-digit (9%) growth in 2013E, both slightly below I/B/E/S consensus. We

expect 2H12E will be the bottom of MXCN earnings and a recovery will be sustained

through 2013E. Unfortunately, despite a relatively strong rebound in cyclical earnings

growth (from earnings decline), overall MXCN growth will be weighed down by a

deceleration in banks’ earnings in 2013E (consensus expects low single-digit growth from

the teens in 2012), as a result of NIM compression (interest rate deregulation and loosening

impacts) and still rising NPLs.

In our report, “Why China’s corporate profit growth deviates from GDP growth,” dated

September 3, 2012, we explain that GDP acceleration or deceleration is magnified in

earnings trends due to operating leverage. We also highlight that going forward, structural

reforms may play an increasingly dominant role in impacting earnings (rather than the

pure cyclical drivers), particularly given the potential impacts on large cap sectors like

banks and oil.

-40

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12

SASAC SOE Profit growth NBS industrial sectors profit growth

MXCN exl financials profit growth%

0.00

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7.00

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Jan/Feb-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12

IP Rev YTD growth - LHS IP Profit YTD growth - LHS IP Margin - RHS(%) (%)

-10

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Upstream DownstreamRMB bn

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-80%

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60%M

ay

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China 1-wk rev MSCI China (Right)

Number of analysts' upgrades minus downgrades / total number of estimates



Exhibit 48: We forecast 0%/9%/11% earnings growth for

MXCN for 2012E/13E/14E

Exhibit 49: Growth next year will mainly be driven by an

earnings rebound in non-bank sectors; we expect 2014E

to be at more normalized levels

Source: I/B/E/S, GS Global ECS Research estimates


Exhibit 50: Our banks team expects lower NIM and

higher provisions next year, dragging banks’ earnings

growth

Exhibit 51: Stabilizing China CAI may also point to less

earnings risks

Source: Gao Hua Securities Research estimates


Exhibit 52: GS bottom-up estimates are modestly lagging consensus in 2012E/13E

Source: I/B/E/S, Goldman Sachs Research estimates, Gao Hua Securities Research estimates

2012E 2013E 2014EGS Top down forecasts 0.2% 8.8% 11.0%GS Previous forecasts 1.8% 8.6% N/AGS bottom-up forecasts 1.0% 9.3% 10.6%Consensus forecasts 2.1% 9.6% 9.6%

MSCI China EPS growthMSCI China 2012E 2013E 2014E

Non-financials 59% -7.1% 11.2% 13.3%

Banks 37% 12.2% 0.6% 7.2%

Diversified fin 0% -23.4% 21.0% 18.3%

Insurance 3% -3.5% 57.1% 13.0%

100% 0.2% 8.8% 11.0%

MSCI China ex banks -7% 14% 13%

Earnings

weight

(index adj)

EPS growth (%)

H share average 2012E 2013E 2014E

NIM 2.5% 2.3% 2.2%

PPOP yoy 13.8% 4.0% 10.8%

PPOP/ total loans 3.5% 3.1% 3.1%

Provision yoy 34.8% 10.2% 14.6%

Provision /total loans 2.7% 2.8% 2.9%

Net income yoy 12.5% 3.3% 11.1%

Net income /Avg RWA 2.2% 1.9% 1.8%

Note: data is based on simple average of our H share banks

coverage0

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4

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8

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12

14

CAI - China MSCI China 12m earnings growth (RHS,%)

(in HKD) 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Insurance (3.5) 57.1 13.0 (6.7) 90.5 16.0 (3) 33 3Computer hardware/assemblers (2.7) 28.8 22.5 (3.2) 34.4 22.2 (0) 6 (0)Transportation (8.1) 80.1 30.1 (4.1) 84.1 28.2 4 4 (2)Health Care (27.1) 18.3 17.9 (28.5) 21.9 20.7 (1) 4 3Chemicals (31.7) 57.1 8.3 (32.9) 60.1 6.9 (1) 3 (1)Autos and components (6.0) 17.1 15.5 (8.9) 19.7 8.5 (3) 3 (7)Diversified financials (23.4) 21.0 18.3 (23.7) 22.9 20.4 (0) 2 2Banks 12.2 0.6 7.2 11.4 2.4 9.3 (1) 2 2Consumer staples 2.5 20.6 20.6 1.6 22.1 19.0 (1) 2 (2)Software and services 28.2 25.5 22.7 25.9 26.9 26.7 (2) 1 4Telecommunication services 3.5 4.0 6.1 (1.4) 5.0 4.0 (5) 1 (2)Diversified mining, precious metals (19.4) 13.4 0.9 (17.4) 14.3 8.2 2 1 7Retail, hotels, consumer durables and apparel (11.9) 24.0 17.7 (13.1) 24.2 17.0 (1) 0 (1)Industrials, conglomerates, business services (10.2) 5.6 13.3 (9.5) 4.7 15.7 1 (1) 2Utilities 46.7 18.2 11.6 45.5 16.5 10.6 (1) (2) (1)Oil and gas (4.7) 8.0 4.9 (2.8) 5.9 9.1 2 (2) 4Building materials, paper, packaging (31.7) 26.5 14.9 (27.8) 24.4 8.6 4 (2) (6)Property 8.8 11.8 12.8 5.5 (10.9) 5.2 (3) (23) (8)Steel, aluminium (376.3) NM NM (480.3) NM NM NM NM NMMSCI China 2.1 9.6 9.6 1.0 9.3 10.6 (1) (0) 1

Consensus estimates EPS growth (%) GS estimates EPS growth (%) GSe vs consensus difference



Valuation re-rating likely mild, unless we see significant global risk-

on sentiment or meaningful reform progress

MXCN has re-rated to 9.7X currently from about 8x+ forward P/E trough levels in 4Q11,

mainly due to improving cyclical factors (reduced risks of hard landing), in our view.

Despite this re-rating, we still see valuation as attractive for offshore Chinese equities:

1. Multiples are still at the low end of historical range: MSCI China is trading at 9.7X 12-

month forward P/E, close to -1 standard deviation of the historical mean, and 1.4X 12-

month forward P/B, close to the trough. Even excluding banks, a significant valuation

laggard in the index, multiples would still be below the historical average at 12X.

2. Attractive valuation vs. regional peers: China is one of lowest valued markets in the

region in terms of P/E and P/B, and it remains at the low end of the historical range,

while the majority of its regional peers already enjoy mid-cycle or higher valuation.

From an implied equity risk premium perspective, China also remains the highest in

Asia.

3. Robust valuation vs. profitability position: Valuation also appears attractive in terms of

P/B vs. ROE (Exhibit 57).

We now assume mild re-rating in our end-2013E target of 10.3X forward P/E. This is

mainly premised on cyclical recovery and global equities re-rating. If the progress of

structural reform positively surprises, it could be an additional boost to our current

assumptions.

1. Slight further cyclical re-rating is achievable: As our China economics team expects an

uptick in GDP growth in 2013E, while inflation stays low, this macro backdrop should

support a slight re-rating, in our view. However, we are incorporating only a 0.6X P/E

re-rating in 2013E, given: a) we think the market has already partially priced this in; and

b) structural concerns may persist. Our assumption appears reasonable vs. our global

strategy teams’ assumption of about 1.0X and 0.4X P/E re-rating for US and AeJ,

respectively. Even if we conservatively assume no re-rating for the banks, it would

imply that MXCN ex-banks would re-rate to 12.8X P/E by end-2013E from 12X P/E

currently, which we do not think is too aggressive.

2. Structural re-rating potential bigger but not yet in base case: As we believe the bulk of

China’s relative de-rating has been due to structural issues, we also believe reforms

are key to reversing this trend. Market expectations on this front appear low and

evidence of a more reformist leadership could significantly boost confidence towards

China’s growth sustainability over time. We think that more concrete data points and

progress could come after the leadership handover is completed in March. Historically,

key economic reforms were announced only by the third plenary session (likely to be

October 2013), but we think the pace could be relatively faster this time given the

greater urgency and desire by the incoming leadership to have an impact on the

economy.



Exhibit 53: MXCN valuation still appears reasonable

despite the recent rebound

Exhibit 54: Valuation vs. historical levels is even lower in

terms of P/B

Source: MSCI ,I/B/E/S, GS Global ECS Research


Exhibit 55: China valuation is near the historical trough,

while many other markets may be at or above mid cycle

Exhibit 56: China implied ERP is still the highest in Asia


Source: MSCI ,I/B/E/S, GS Global ECS Research estimates

0

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MXCN Market Average + 1sd

- 1sd MXCN ex banks

12m forward P/E (X)

0.0

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2.0

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MXCN Market Average Avg + 1sd

Avg - 1sd MXCN ex banks

12m forward P/B (X)

16.4 15.1 14.1 14.0 13.7 13.5 13.1 12.610.9 9.7

8.3

11.6

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AP

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12M forward P/E (X)

+/- 1 Stdev. Current

High/low

7.8

10.7

9.0

4.6

7.5

9.1 8.0

6.3

9.0

10.4 9.1 8.9

(4)

(2)

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MX

AP

J

Equity risk premium (%) +/- 1 S.D. Current High / Low

More attractively valued



Exhibit 57: China remains attractive in terms of valuation

vs. profitability

Exhibit 58: If we assume no re-rating for banks, MXCN ex

banks target P/E is 12.8X, close to the historical average



High teens returns; centered on 1H13E

The combination of 9% earnings growth and moderate valuation expansion adds up to

MXCN target at end-2013E of 70.6, implying high teens upside.

Bull case: Slightly higher earnings but mostly much higher target valuation. We think

this is achievable if we see more global risk-on and brisk reform progress, re-instilling

confidence in China’s structural outlook.

Bear case: Slightly lower earnings but mostly much lower target valuation (de-rating

back to 8.5X forward P/E). This would occur in the event of much less accommodative

domestic macro policies, a global slowdown, and/or lack of reform progress resulting

in worsening of structural problems.

Exhibit 59: Our earnings and valuation assumptions translate into high teens returns in

2013E

Source: Bloomberg, GS Global ECS Research estimates

Path – more muted near term; then a pickup in mid-1H13E: We expect the focus to

remain on cyclical factors in the near term, but structural factors should dominate by the

spring-summer.

Phase 1: Cyclical recovery/policies may disappoint vs. upbeat expectations – Our

economics team expects a gradual recovery path and forecasts slightly lower-than-

consensus GDP growth for 4Q12E/1Q13E. High frequency data (monthly release of

Australia

China

Hong Kong

India

JapanKorea

Malaysia

Philippines

Singapore

Taiwan

ThailandU.S

Europe

0.5

1.0

1.5

2.0

2.5

3.0

5 7 9 11 13 15 17 19 21 23 25

2013E P/B (X)

2013E ROE

(%)

Attractive

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MXCN Market Average + 1sd - 1sd MXCN ex banks

12m forward P/E (X)

MXCN

MXCN ex banks (assuming no re-

rating for banks)

MSCI China at 11/23/2012 59.7 HSCEI at 11/23/2012 10,607

2012E 2013E 2014E12E-14E CAGR

Implied +/- (%) P/E (X) P/B (X)

MSCI China Bull Case 5% 12% 15% 11% 85.3 43% 11.5 1.8 MSCI China 0% 9% 11% 7% 70.6 18% 10.3 1.6 MSCI China Bear Case -2% 5% 7% 3% 55.2 -8% 8.5 1.2 HSCEI 0% 9% 11% 7% 12,500 18% 8.7 1.2

2013E target/ implied

level

Implied forward valuationsEPS growth



macro/key sector data) may become more mixed vs. strong gains seen in

September/October. Uncertainty regarding the US fiscal cliff/debt ceiling/tax

preference expiration is also a risk factor. In addition, we do not believe any

meaningful stimulus package is forthcoming post the leadership transition. In this

regard, offshore investor expectations may see some re-setting. Even as earnings

continue to rebound gradually, room for valuation re-rating will be limited near term.

Phase 2: Cyclical recovery reaccelerates – As the global export outlook potentially

improves post the US fiscal cliff, our economics team expects more pronounced

reacceleration in China GDP growth in 3Q13E. Completion of the leadership transition

may also prompt higher reform hopes. These factors may support a rally once cyclical

expectations have re-set in phase 1 in the coming months.

Phase 3: To reform or not, that is the question – We now assume a more 1H13E-

loaded return path underpinned by phase 2. Whether phase 3 can deliver strong

returns will depend on reform conviction and progress. We are cautiously optimistic

that reform will pick up pace and see upside to reform expectations (vs very limited

expectations by investors).

Exhibit 60: We expect muted returns into the new year and better performance by 2Q13E


Factor Rest of 12 1Q13 2Q13 3Q13 4Q13

Rest of 12 1Q13 2Q13 3Q13

Indication of market performance

(assume price in several months in advance)

Manufacturing FAI

GDP recovery

CPI worsening

Monetary loosening

Export recovery

Property FAI

Infra FAI

Property policy loosening

Earnings recovery

Signal effect of GDP/CPI/other official

targets

Structural reform progress



Exhibit 61: Despite relatively subdued returns near term,

we expect returns to improve in 2013E, likely more front-

end loaded

Exhibit 62: 2013E returns will come from high single-digit

earnings growth and some valuation expansion; we see

upside risk to valuation


Source: GS Global ESC Research estimates

Exhibit 63: Global markets influence offshore more than

onshore – ytd correlation of MXCN and SPX has been

70%+

Exhibit 64: We remain more optimistic on AeJ and China

vs. DM in 2013E

Source: Bloomberg, GS Global ECS Research


Liquidity and fund flow outlook should remain supportive

The overall liquidity picture for Asia and offshore China markets have been favorable ytd,

especially after US’ QE3, evidenced by continued fund flows into the region and the strong

Hong Kong dollar.

We believe the accommodative liquidity environment will remain intact next year:

1. Macro growth outlook in EM will be stronger than DM, according to our global

economics team’s forecast (Exhibit 68), which may trigger continued fund flows into

the region. We expect DM monetary easing to continue. Our global strategy team is

positive on risk assets.

2. Chinese equities’ relative underperformance in the past years and low valuation are

unlikely to go unnoticed as investors search for cyclical visibility and potential upside

from reforms. In addition, expectations for Rmb appreciation may also lead investors

to hold Chinese equities or other Rmb-denominated/underlying assets (our economics

team expects about 3% appreciation in 2013E, while consensus is less bullish with

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

HSCEI

12,500 (+18%)

HSCEI 3m/6m/2013 end index forecast

10,925 (3%)

11,880 (12%)

CEWC

NPC

meeting

3rd plenary

session

-60%

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-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2005 2006 2007 2008 2009 2010 2011 2012

YTD

2013E

Valuation change

Earnings change

Price performance

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

MXCN & SHCOMP MXCN & SPX

Monthly return correlation (t24m)Forecast

Upside/ Downside

to 12m TP

Indices Current 3m 6m 12m (%)

S&P 500 1409 1450 1500 1575 12%

STOXX Europe 273 280 290 310 14%

MXAPJ 444 460 480 520 17%

TOPIX 776 820 900 930 20%



almost flattish forecast). Investors remain largely underweight China, so positioning

does not appear demanding.

3. Fund raising activities may still be below the historical average, even as they bounce

off the current trough. We expect total fund raising will take up close to 2% of total

market cap in the Hong Kong market, lower than the historical precedent at 3-4%. The

current larger cap SOE IPO pipeline is much smaller, and pressure from banks to recap

is limited.

Exhibit 65: We have seen net fund inflows to Asia turn

positive since mid-year

Exhibit 66: Liquidity is important to H shares, a stronger

HKD typically leads to positive stock returns

Source: AMG, Bloomberg, GS Global ECS Research


Exhibit 67: China continues to be UW by regional and

GEM funds, and the holdings of AeJ funds have dropped

recently

Exhibit 68: We expect stronger recovery in China and AeJ

vs. DM next year, which may attract more liquidity into

these markets

Source: EPFR, GS Global ECS Research


0

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(100)

(80)

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a N

et F

ore

ign

Flo

ws

(US

$ b

n)

(Cu

mu

late

d s

ince

Jan

-20

07

)

Emerging Asia - Net Foreign Flows… MSCI EM Asia (RHS)

7.75

7.76

7.77

7.78

7.79

7.8

7.8140

45

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75

MXCN Index HKD Curncy (RHS, reversed)

(1,000)

(800)

(600)

(400)

(200)

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China OW/(UW) in AEJ funds China OW/(UW) in GEM funds

China 9.3 7.6 8.1 8.4

Asia ex Japan 7.6 6.1 6.9 7.3

Japan (0.7) 1.7 0.3 1.1

US 1.8 2.2 1.9 2.9

Euro area 1.5 (0.4) (0.2) 0.9

World 3.8 3.0 3.3 4.1

Real GDP forecasts

(% yoy)2011 2012E 2013E 2014E



Exhibit 69: This year, fund raising (especially IPO) has

fallen to trough levels, but we expect some recovery next

year

Exhibit 70: The primary backlog remains large, partly due

to delayed projects this year, but ratio to market cap is

not stretched

Source: Wind, Bloomberg, GS Global ECS Research estimates

Source: IFR, Dealogic, GS Global ECS Research

Sector preferences: More focus on structural factors

We believe that structural factors should increasingly take center stage in driving sector

selection. In past years, when cyclical factors dominated, sector selection was focused on

beta. As cyclicality may lessen and reforms pick up pace, we think the market will

increasingly value sectors that benefit from reforms. Our OW sectors are insurance,

brokers, retail, healthcare, and metals/mining (we take profits on building materials and

move it to Neutral). UW sectors remain telecom and industrials.

Our sector selection framework – anchored on structural

opportunities

Structural winners are unlikely to change often: We have established a qualitative

scorecard to screen out the structural winners vs. losers (Exhibit 71). The reform

outlook scores are based on our analysis of potential earnings impact from reforms on

each sector. Other factors that we took into consideration include supply/demand,

growth potential, innovation/upgrade potential, and any changes in the competitive

environment (i.e., consolidation, etc.).

Cyclical winners may shift over time: For example, we currently believe cyclicals with

low inventory (like cement) are more sensitive to growth fluctuations than those with

significant inventory or other outstanding issues (like industrials). The property sector

is also less cyclically aligned than before as fundamentals depend more on policy

(which is more likely to loosen in weak macro environments) than on buyer confidence.

We prefer those sectors that benefit from both a cyclical rebound and structural

reform potential in 2013E: Ideally, we would concentrate most of our overweight (OW)

sector preference on structural winners. We may shift choices within these depending

on where we are in the economic cycle. Given we now face a gradual domestic and

global growth recovery outlook, we favor the slightly more cyclically sensitive sectors.

We also prefer good entry points in terms of valuation and performance. Of course,

valuation and entry points are also important, as is positioning. Our updated

weathervane screening tool helps to capture the right entry points (Exhibit 75).

0%

1%

2%

3%

4%

5%

6%

-

100

200

300

400

500

600

700

800

900

2006 2007 2008 2009 2010 2011 2012ytd 2013E

HK$ bn IPO Additional offering As % of total market cap (RHS)

Sector

# of

Deals

Fund Raising

(US$mm)

As % of current

mkt cap

Consumer & Retail 22 6,417 0.3%

Financials 10 14,973 0.6%

Health care 1 100 0.0%

Industrials 37 18,675 0.7%

Natural resources 21 11,980 0.5%

Real estate 9 5,251 0.2%

TMT 9 2,000 0.1%

Total 109 59,396 2.3%



Take profits on building materials

We are moving building materials to Neutral from OW. The sector has bounced 36% off the

bottom in August 2012 and has outperformed MXCN by 13% since then. While we maintain

our favorable view on supply/demand and pricing into next year, we think that

1. investor positioning has become more crowded recently;

2. winter seasonality can cause price pullbacks and a recovery catalyst may not

materialize until spring; and

3. the domestic infra FAI recovery story is now priced in, and we do not expect near-term

upside surprises on the property FAI demand side. Thus, we may see better entry

points later.

Exhibit 71: Structural positioning scorecard – the winners emerge

Source: MSCI, GS Global ECS Research estimates.

Sector

MXCN

weight

2013 supply

vs demand

Regulatory /

reform

outlook

Structural

growth

opportunity

longer term

Innovation/

upgrade

potential

Competitive

environment

change

Total

score

Health care 1% + ++ - +++Insurance 7% ++ ++ + -- +++Brokers 1% + ++ + - +++Oil and gas 18% + + ++Software and services 5% ++ + - ++Consumer staples 6% + + - +Retail 3% - + ++ - +Transportation 2% - + + +Autos 2% - - ++ + -Building materials 2% - +Computer hardware 1% + -Metals/ mining 1% + -Banks 24% - + - -Property 6% -- - + + -Utilities 3% - -Steel, aluminium 1% - -Chemicals 1% - -Industrials 4% -- - + --Telecom 13% - - --



Exhibit 72: Sector scorecard – we have more of a structural bias than a pure cyclical one

Source: GS Global ECS Research estimates.

Exhibit 73: Some of the structural reform winners are trading at higher valuations than the

structural reform losers...

Note: green shades denote the reform beneficiaries and grey shades the losers.

Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research.

Cyclical insensitive

Health care Telecom

Consumer

staples Utilities

Software Retail

Banks

Insurance Autos Property

Brokers Chemicals Industrials

Oil and gas Transport

Computer

hardware

Metals/

mining

Steel,

aluminium

Cyclical sensitive

Building

materials

Structural reform winners Structural reform losers

9.7

24.422.2

18.115.4 15.0 13.9

12.5 12.2 12.0 11.1 10.9 9.9 9.6 9.5 9.3 8.9 8.56.1

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00 +/- 1 std dev currentHigh/low



Exhibit 74: But on a Z score basis relative to valuation history, reform winners still look

attractive, particularly brokers, retail, insurance, healthcare and utilities

Note: green shades denote the reform beneficiaries and grey shades the losers.


Exhibit 75: Sector weathervane – our OW sectors tend to embody more favorable earnings, valuation, performance,

positioning and reform characteristics


We favor insurance, brokers, retail, healthcare, and metals/mining

Insurance: We expect mild growth in life insurance premiums in 2013E as opposed to

robust growth, but believe this is already priced in. Favorable factors for this sector

include: 1) Regulatory tailwinds to emerge (tax deferral pension, investment

liberalization, etc.); 2) Gradually improving liquidity should favor insurance over wealth

management products; 3) Expected A-share rebound on very bearish cyclical and

9.7

22.2

10.912.5

13.9

9.98.5 12.2

9.5 8.9 9.6

24.4

11.1

15.0 15.4

9.3

12.0

18.1

6.1

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00 +/- 1 std dev current 36M Z score (RHS)High/low

Sector Perceived Structural

GS MXCN Ytd revision 12m fP/E investor reform

Sectors Rating weighting 2013E 2014E 2013E 2014E 2013E EPS next 6m Z-score 6 months ytd 2012 positioning outlook

MSCI China 9.6 8.8 9.6 9.6 -12% Flat -0.5

Retail OW 3.1% 14.8 12.6 24.0 17.7 -31% Flat -0.4 -4% -17% Neutral Favorable

Insurance OW 7.3% 15.0 13.3 57.1 13.0 -17% Upward -0.5 4% 2% Slightly OW Favorable

Diversified financials OW 0.5% 10.9 9.2 21.0 18.3 -13% Upward -0.4 -12% -31% UW Favorable

Health care OW 0.9% 17.9 15.2 18.3 17.9 -12% Flat -0.8 14% 12% OW Favorable

Metals/ mining OW 1.4% 9.5 9.4 13.4 0.9 -21% Upward -0.3 11% -2% Slightly OW Unfavorable

Building materials Neutral 2.1% 8.7 7.6 26.5 14.9 -39% Flat -0.4 -5% -2% OW Unfavorable

Banks Neutral 24.2% 6.1 5.7 0.6 7.2 -8% Upward -0.8 0% -4% UW Unfavorable

Property Neutral 6.0% 8.4 7.5 11.8 12.8 -10% Flat -0.1 19% 40% Neutral Unfavorable

Autos Neutral 2.2% 10.8 9.3 17.1 15.5 -14% Flat 0.4 3% 4% Slightly UW Unfavorable

Computer hardware Neutral 1.5% 12.3 10.0 28.8 22.5 -26% Flat -0.1 -5% -5% Neutral Neutral

Software and services Neutral 5.0% 24.1 19.6 25.5 22.7 -1% Flat -0.4 5% 53% OW Neutral

Chemicals Neutral 0.5% 9.0 8.3 57.1 8.3 -30% Flat -0.7 -12% -25% Neutral Neutral

Steel, aluminium Neutral 0.6% 172.3 35.8 NM 381.0 -68% Downward -5.8 -8% -13% UW Unfavorable

Oil and gas Neutral 17.6% 9.6 9.1 8.0 4.9 -7% Flat -0.1 -1% -4% Neutral Favorable

Transportation Neutral 2.1% 13.4 10.3 80.1 30.1 -27% Flat -0.2 -5% -7% UW Favorable

Utilities Neutral 2.7% 11.8 10.6 18.2 11.6 9% Upward -0.5 10% 14% OW Favorable

Consumer staples Neutral 5.5% 21.8 18.1 20.6 20.6 -24% Flat 1.6 -8% -7% OW Neutral

Industrials UW 4.3% 9.9 8.7 5.6 13.3 -26% Flat -0.1 -7% -2% Slighly UW Neutral

Telecom UW 12.7% 12.1 11.4 4.0 6.1 -8% Flat 0.6 -1% -4% Neutral Neutral

Relative perf

P/E EPS Growth (%) vs MXCN

Earnings revision

trend



reform expectations. Risk is a supply overhang (from IPOs and unlocking of strategic

investors’ shares).

Brokers: This sector has been a major laggard in 2012 to date, underperforming MXCN

by 31% thus far. This presents an attractive entry point for investors, and we think that

an expected A-share rebound will be a key catalyst. Brokers should also be major

reform winners from financial sector innovation down the road.

Exhibit 76: Insurance vs. wealth management products

yields’ relative attractiveness is improving ytd

Exhibit 77: Not surprisingly, MXCN brokers have been

impacted by the weakness in A shares. We expect A

shares to rebound in 1H13E

Source: Wind, company data, Gao Hua Securities Research.


Retail: We think retail names will continue to enjoy scarcity value as the consumption

cyclicals (i.e., one of the macro slices composed of retail, internet, and auto) sub-sector

to be in. Auto faces structural challenges with supply, margins, potential purchase

bans, and emission standards scrutiny. Internet will likely be in a tough spot in terms

of the ad spend cycle, at least in 1H13E. Retail is at a cyclical low point, but it enjoys

inexpensive valuation and reform upside.

Healthcare: While this sector has been one of the best-performing defensives in 2012

to date (it has outperformed MXCN by 12% ytd), we think valuation still appears

reasonable with 18X 12-month forward P/E, lower than the historical average at 24X.

We still expect this sector to have a robust structural growth outlook. We remain OW

on this sector as we expect it to benefit from possible reforms via the enhancement of

social safety nets (more fiscal allocation in March 2013 MOF budget may be a catalyst),

expansion of healthcare reforms (separate consultation and medicine revenue of

hospitals), and improved price stresses.

Metals and mining: Offshore constituents for this sector are largely copper and gold

companies. While metals/mining has performed well in recent months due to QE3, we

still see further upside to our 6-month targets for both metals’ spot prices. Compared

with other commodities, copper has more constraints on the supply side; hence, it has

a better supply-demand outlook. Moreover, copper demand is more correlated to

construction completions (which remains robust in the near term), while other metals

such as steel are more closely related to construction starts (which we expect to be

weaker in the coming quarters). Gold has more upside to spot price forecasts as well

and will likely be supported by continued DM quantitative easing. Chinese

metals/mining equities have a high correlation to commodity prices. Valuations also

continue to appear reasonable.

5.2%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Jan

-11

Feb

-11

Mar-

11

Ap

r-11

May-…

Ju

n-1

1

Ju

l-11

Au

g-1

1

Sep

-11

Oct-

11

No

v-1

1

Dec-1

1

Jan

-12

Feb

-12

Mar-

12

Ap

r-12

May-…

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

No

v-1

2

Average yields of 3M wealth management products issued by listed banks

Life insurers' policy funding costs at 3%-3.5%

0

50

100

150

200

250 CSI300 MXCN Diversified Financials (relative to MXCN)



Exhibit 78: Diversified mining, precious metals valuation

still looks inexpensive despite the slight bounce recently

Exhibit 79: Metals price forecasts and upside – the metals

and mining sector constituents are focused on copper

and gold (both have double-digit upside)

Source: FactSet, I/B/E/S, GS Global ECS Research

Source: Bloomberg, GS Global ECS Research estimates.

We remain underweight on telecom and industrials

Telecom: This sector tends to perform well during periods of significant macro

concerns, which we do not expect to occur in 2013E. Tariff competition has stabilized

near term, but growth is decelerating. Potential 4G licensing in 2013E may lead to

concerns on earnings pressure from 1) capex/depreciation burden, and 2) intensifying

competition.

Industrials: Capital goods should, in theory, be beneficiaries of a growth rebound, but

we believe they require a much larger magnitude of cyclical rebound to revive demand

vs. other sectors like cement. We think the market expects a bigger demand rebound

than will likely materialize and that share prices may have already priced in such

positive expectations.

Exhibit 80: Building materials have rebounded

significantly since August despite the recent pullback

Exhibit 81: Healthcare has delivered upbeat performance

ytd

Source: FactSet, GS Global ECS Research


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan

-06

Ju

l-06

Jan

-07

Ju

l-07

Jan

-08

Ju

l-08

Jan

-09

Ju

l-09

Jan

-10

Ju

l-10

Jan

-11

Ju

l-11

Jan

-12

Ju

l-12

MXCN Diversified mining, precious metals 12m fP/E

MXCN Diversified mining, precious metals 12m fP/B

12m forward P/B (X) Spot Upside/downside

Commodities Units price 3m 6m 12m to 6m forecast

LME Aluminum $/mt 1,979.5 2,000 2,150 2,200 9%

LME Copper $/mt 7,779.8 8,000 9,000 8,000 16%

LME Nickel $/mt 16,626.0 16,500 17,000 17,000 2%

LME Zinc $/mt 1,956.5 1,950 2,000 2,100 2%

COMEX Gold $/troy oz 1,751.8 1,840 1,940 1,940 11%

COMEX Silver $/troy oz 34.1 30.7 32.4 32.4 -5%

Price forecast

80

85

90

95

100

105

110

115

Dec-1

1

Jan

-12

Feb

-12

Mar-

12

Ap

r-12

May-1

2

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

Building materials, paper, packaging Diversified mining, precious metals

Steel, aluminium Energy

80

85

90

95

100

105

110

115

120

125

130

Dec-1

1

Jan

-12

Feb

-12

Mar-

12

Ap

r-12

May-1

2

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

Telecommunication Services Utilities Consumer Staples Health Care



Exhibit 82: IT rose thanks to Tencent, while retail has

been a big laggard

Exhibit 83: Property outperformed other financials. We

expect insurance and brokers to catch up in 2013E



Exhibit 84: We swapped cement with metals/mining to capture a better short-term outlook

GS sector preference on MSCI China

Source: MSCI, GS Global ECS Research

80

90

100

110

120

130

140

Dec-1

1

Jan

-12

Feb

-12

Mar-

12

Ap

r-12

May-1

2

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

Automobiles & Components

Retail, hotels, consumer durables and apparel

Capital Goods

Information Technology

60

70

80

90

100

110

120

130

140

Dec-1

1

Ja

n-1

2

Fe

b-1

2

Mar-

12

Ap

r-12

Ma

y-1

2

Ju

n-1

2

Ju

l-12

Au

g-1

2

Sep

-12

Oct-

12

Banks Insurance Diversified financials Real estate

Weighting

GS Sector Offshore (previous) Offshore (new) MXCN MXCN

Retail, hotels, consumer durables and apparel OW OW 14.8 3.1%

Insurance OW OW 15.0 7.3%

Diversified financials OW OW 10.9 0.5%

Health care OW OW 17.9 0.9%

Diversified mining, precious metals Neutral OW 9.5 1.4%

Building materials, paper, packaging OW Neutral 8.7 2.1%

Banks Neutral Neutral 6.1 24.2%

Autos and components Neutral Neutral 10.8 2.2%

Steel, aluminium Neutral Neutral 172.3 0.6%

Property Neutral Neutral 8.4 6.0%

Computer hardware/assemblers Neutral Neutral 12.3 1.5%

Software and services Neutral Neutral 24.1 5.0%

Chemicals Neutral Neutral 9.0 0.5%

Utilities Neutral Neutral 11.8 2.7%

Oil and gas Neutral Neutral 9.6 17.6%

Transportation Neutral Neutral 13.4 2.1%

Consumer staples Neutral Neutral 21.8 5.5%

Industrials, conglomerates, business services UW UW 9.9 4.3%

Telecommunication services UW UW 12.1 12.7%

Weight on OW sectors 14% 13%

Weight on Neutral sectors 69% 70%

Weight on UW sectors 17% 17%

13E P/EGS strategy preference



Implementation: Top picks and reform basket; A shares favorable

1. We identify three key themes for 2013 – cyclical rebound, structural reforms, and mass

market consumption. We choose 12 top picks that align with our themes, focusing

more on sectors that we would favor.

2. In addition, we introduce a new China reform-beneficiary basket. These are some of

the more liquid names selected from a longer list of beneficiaries named in our report

on reform, or from key reform-beneficiary sectors identified in the same report.

Exhibit 85: GS 2013E top picks based on three themes

Note: NCI, Daphne, Zijin, Anhui Conch, CMB, China Power, China Gas, and CEA are on the regional Conviction List.


Exhibit 86: 2013E top picks comparable valuations

Note: 1) * denotes the stock is on our regional Conviction List; 2) prices as of November 23, 2012.

Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates

GS SectorStrategy

preferenceCyclical rebound

Structural

reforms

Mass market

consumption

Retail, hotels, consumer durables and apparel OW Daphne

Insurance OW NCI NCI NCI

Diversified financials OW

Health care OW Shineway Shineway

Diversified mining, precious metals OW Zijin

Building materials, paper, packaging Neutral Anhui Conch Anhui Conch

Banks Neutral CMB

Autos and components Neutral Dongfeng

Steel, aluminium Neutral

Property Neutral

Computer hardware/assemblers Neutral

Software and services Neutral Ctrip

Chemicals Neutral

Utilities Neutral China Power

Oil and gas NeutralSinopec,

China Gas

Transportation Neutral CEA CEA CEA

Consumer staples Neutral

Industrials, conglomerates, business services UW

Telecommunication services UW

Top Buy Ideas by Themes

Ticker Name

Price

(Local curr)

Market cap

(USD mn)

6M ADVT

(USD mn) Rating

Potential

upside to

PT

2012E

P/E(X)

2013E

P/E(X)

2012E

P/B(X)

2013E

P/B(X)

2012E

Div yld

(%)

2013E

Div yld

(%)

386 HK Sinopec 8.38 18,144 66 B 12% 7.8 7.6 1.1 1.0 4.1 4.3

3968 HK CMB 14.48 7,306 30 B* 42% 6.8 6.2 1.1 1.0 3.8 4.1

914 HK Anhui Conch 25.65 4,301 38 B* 17% 13.5 11.7 2.0 1.8 1.2 1.4

489 HK Dongfeng 10.56 3,891 30 B 9% 7.7 6.7 1.2 1.1 2.1 2.3

1336 HK NCI 24.20 3,229 7 B* 71% 14.7 12.3 1.6 1.4 0.7 0.9

384 HK China Gas 5.20 3,051 4 B* 6% 17.8 15.3 1.9 1.7 1.0 1.2

CTRP US Ctrip 18.05 2,506 47 B 39% 21.2 17.1 1.7 1.4 - -

2899 HK Zijin Mining 3.13 2,426 14 B* 29% 9.0 9.0 1.7 1.5 3.1 2.7

210 HK Daphne 9.35 1,987 5 B* 27% 13.4 10.9 2.8 2.4 2.5 2.8

2380 HK China Power 2.10 1,504 3 B* 29% 6.4 6.1 0.6 0.6 5.5 5.7

2877 HK China Shineway 11.82 1,261 1 B 9% 9.8 8.6 1.8 1.6 4.1 4.2

670 HK CEA 2.71 1,222 4 B* 62% 6.7 6.3 0.9 0.8 - -



Exhibit 87: Our China reform basket captures beneficiaries of potential structural reforms

Note: 1) minimum accessible liquidity of the basket calculated based on constituents' weight and their respective 6-mo ADVT; 2)* denotes the stock is on our regional Conviction List; 3) prices as of November 23, 2012; 4) NC = Not Covered. The ability to trade this basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade.

Source: FactSet, I/B/E/S, GS Global ECS Research estimates

Exhibit 88: Performance of China reform basket


1) We reiterate our preference for A shares over H shares in 2013:

H shares have outperformed A shares ytd, and most of the outperformance came in

2H2012. We attribute such divergence to two major reasons:

a) Strong global markets performance – H shares have been posting 70%+ correlation

with the SPX, and much of the ytd outperformance vs. A shares was in anticipation of

QE3 and the US economic recovery. A shares are less impacted by the global liquidity

picture.

6m Consensus estimates

Avg Daily Share Price/ Earnings EPS Growth P/B ROE Div Yld

GS Mkt Cap Volume Price 2012 2013 2014 2012 2013 2014 2013 2013 2013

Ticker Company Sector Rating (US$ mn) (US$ mn) (Local)Wgt

(%) (x) (x) (x) (%) (%) (%) (x) (%) (%)

6030 HK CITIC Securities Diversified Financials NC 2,311 16 15.20 10.7% 27.4 22.2 18.1 ‐62.7 23.2 22.6 1.5 6.8 1.7

3308 HK Golden Eagle Retailing B 4,588 10 18.38 10.5% 23.4 19.8 16.8 4.6 18.1 17.9 4.5 24.6 1.5

1336 HK New China Life Insurance Insurance B* 3,229 7 24.20 10.2% 19.1 14.7 12.3 ‐15.2 30.1 19.3 1.6 11.3 0.7

1880 HK Belle International Retailing B 17,085 24 15.70 9.9% 22.7 19.6 17.1 13.9 15.3 15.0 4.1 22.2 1.6

2318 HK Ping An Insurance Insurance B 23,987 77 59.40 9.7% 17.1 13.7 11.9 15.2 24.4 15.4 2.1 16.7 1.2

386 HK Sinopec Energy B 18,144 66 8.38 9.5% 9.9 7.8 7.6 ‐16.8 26.1 3.6 1.1 14.1 4.1

1766 HK CSR Capital Goods N 1,752 12 6.71 9.0% 17.7 14.8 13.2 ‐3.6 19.1 12.7 2.0 14.3 1.5

753 HK Air China Transportation B 3,038 9 5.16 8.9% 12.9 8.9 8.1 ‐43.2 44.5 10.6 1.0 11.7 1.9

1114 HK Brilliance Auto B 5,946 17 9.17 8.3% 15.9 12.3 10.0 31.7 29.4 23.5 3.0 27.8 0.0

966 HK China Taiping Insurance Insurance B 2,879 3 13.08 6.8% 20.4 13.2 10.8 120.0 54.4 23.1 1.5 12.1 0.0

867 HK China Medical System Healthcare B 1,645 2 5.28 4.2% 18.9 14.8 11.4 35.6 27.7 30.4 2.7 20.0 2.6

525 HK Guangshen Railway Transportation B 480 1 2.60 2.2% 10.6 10.1 8.4 ‐20.0 4.4 21.3 0.6 5.6 4.2

GS China Reform Basket (GSSZCRFM) 44 18.7 14.9 12.6 1.2 26.9 17.0 2.3 16.1 1.6

20

40

60

80

100

120

140

Dec-0

7

Mar-

08

Ju

n-0

8

Sep

-08

Dec-0

8

Mar-

09

Ju

n-0

9

Sep

-09

Dec-0

9

Mar-

10

Ju

n-1

0

Sep

-10

Dec-1

0

Mar-

11

Ju

n-1

1

Sep

-11

Dec-1

1

Mar-

12

Ju

n-1

2

Sep

-12

Dec-1

2

GSSZCRFM MXCN



b) H-share investors have higher expectations on the cyclical aspects: As mentioned

earlier, we found offshore investors are focusing more on cyclical factors than onshore

investors, and they have much higher expectations on such. Domestic investors are

focusing more on structural reforms, which we do not expect to pick up until 2013E.

In 2013E, we expect A shares to outperform H shares as cyclical recovery will surprise A

shares on the upside more, and any progress on reforms will also have a more immediate

impact on A-share valuations. In terms of relative valuation and performance, etc., we think

A shares look attractive.

To access the A-share markets, aside from direct QFII quota assigned to different

institutions, there are a few A-share ETFs tracking different A-share indices listed in HKEX

(Exhibit 91).

Exhibit 89: H shares outperformed A shares this year,

mostly after September

Exhibit 90: On a 3-month rolling return basis, the current

gap between H/A shares does not appear sustainable

and is likely to converge



Exhibit 91: There are currently a few A-share ETFs listed

in HK

Exhibit 92: A shares have underperformed H shares

meaningfully in 2H12

Source: Bloomberg, HKEX, GS Global ECS Research


90

95

100

105

110

115

120

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12

MSCI China CSI300 S&P 500

-40%

-30%

-20%

-10%

0%

10%

20%

30%

MXCN 3M rolling returns CSI300 3M rolling returns

Issuer Ticker Underlying asset

Trading

currency Underlying index

AUM

(US$mn)

83188 HK CNY

3188 HK HKD

83100 HK CNY

3100 HK HKD

82822 HK CNY

2822 HK HKD

83118 HK CNY

3118 HK HKD

iShares 2823 HKMarket Access

Products (MAPs)HKD FTSE China A50 6,718

Note: date as of 23 Nov 2012.

China

Southern

Harvest

China AMC

E Fund

Physical (RQFII)

Physical (RQFII)

Physical (RQFII)

Physical (RQFII)

1,037

447

1,558

242

CSI 300

CSI 100

FTSE China A50

MSCI China A

80

85

90

95

100

105

110

115

120

125

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12

MSCI China vs CSI300 relative performance



Sector snapshots

Agrochemicals: Increasing acreage, affordability 42

Alternative energy: Solar – 2013, the year of transformation; illuminating the path to profitability 45

Alternative energy: LED – 2013, investing selectively as demand cycle turns up 46

Alternative energy – Nuclear/Wind power: Lack of positive catalysts 47

Auto: Growth to sustain, prefer luxury segment 50

Banks: Constructive on cyclical stabilization; consumption-led growth a key for rerating 54

Cement: Sustained price recovery from 2Q13E 58

Coal: Structural downcycle ahead; Buy Shenhua on diversity 61

Conglomerates: Prefer stocks with earnings visibility 65

Consumer Staples: Competition remains in focus 68

Healthcare: Lacking catalysts, EPS growth to drive performance 71

Insurance: Mild growth for longer; favor return and value 74

Internet/Education: Mobile & e-commerce the focus 77

Machinery: Strong structural growth in railway equipment; slow cyclical recovery in construction equipment 80

Media: Value emerging in a thriving industry 83

Metals: Divergent supply growth; prefer copper/gold 85

Oil & Gas: Improving operating results, limited downside risks 88

Ports: Potential upside from tariff hikes 91

Power Utilities: Lower interest rate and coal oversupply; Buy IPPs 93

Real Estate: Volume positive priced in; further upside driven by price increase 96

Retail: A better outlook in 2013, but need to be selective 101

Technology: China vendors poised to extend market share gains 104

Telecoms: Healthy but decelerating growth; stabilizing competition 108

Tourism: Growing market driven by domestic demand 111

Transport: Prefer Airlines; cautious on Bulk Shipping 113



Agrochemicals: Increasing acreage, affordability

Analyst name: Carol Jin ([email protected])

Sector stance

2013 sector view

We believe global crop prices will remain at historically high levels in 1H2013 due to tight supply and demand before

new crops come to market. Hence, we expect this will boost agrochemicals demand via planting acreage expansion and

the improved affordability of agrochemical inputs for farmers. With elevated corn and soybean prices, farmers in the US

and Latin America especially, which are the key corn and soybean export countries, should be motivated by attractive

farming return to expand planting acreage. Chinese pesticide producers, highly export driven, are likely to benefit from

stronger export demand in those regions.

For fertilizers, we expect phosphate and potash to benefit more than nitrogen given farmers’ higher demand elasticity

and the typical nutrient requirement structure for soybean planting. That said, we also see pressure from ongoing

capacity expansions for all fertilizers both globally and domestically, especially for urea. We believe domestic nitrogen

producers will face pressures from both capacity expansion and weaker cost support from lower coal prices. However,

we see phosphate and potash as better positioned due to higher industry concentration and more disciplined

production.

Key drivers for 2013

Reform drivers

1. Industry consolidation for fertilizers: We expect industry consolidation to accelerate in the nitrogen and

phosphate industry as the government introduces and implements stricter and more detailed industry entry

standards under the 12th Five Year Plan. We expect large-scale producers with cost leadership and good integration

of upstream inputs resources to benefit as inefficient small capacities phase out due to severe industry competition.

2. Industry upgrade for pesticides: The government also targets to improve industry consolidation and upgrades

here under the 12th Five Year Plan, setting stricter standards for environmental protection, production scale, and

product structure. We believe companies with strong R&D, stricter environmental control and strong capital will

benefit and stand out as industry leaders.

3. Gas pricing reform: We believe the ongoing gas pricing reform will push national urea production cost higher,

which should offer good support to urea prices. Coal-based producers with cost leadership will benefit, in our view.

Cyclical drivers

1. Strong demand in spring planting season: We expect the elevated crop prices will drive strong demand for

agrochemicals in spring planting season globally, especially in North America and Latin America. Demand in 1H is

very critical as it normally sets a tone for full-year demand, especially for pesticides.

2. Restocking for phosphate in US and India: We believe the US and India need to restock for phosphate given

their low inventory levels currently. Hence, we expect exports to India to recover from the extremely low level this

year.

3. Restocking for potash in China and India: Potash import contracts for China and India are delayed significantly

in 2H12 and global giants are not expecting the contract signing by the end of 2012. We believe China and India will

need to restock for potash in 2013 on their low inventory.

Key risks to our view

1. Adverse weather conditions; 2. Sharp decline in crop prices; 3. Weak demand from India due to subsidy policy

changes and currency depreciation.

How we differ from consensus

We are below Bloomberg/Wind consensus on the sector earnings outlook as we have factored in higher raw material

costs and slower earnings growth amid a slower macro economic improvement.



Stock recommendations (offshore)

Buy #1: China BlueChemical (3983.HK)

Reasons/catalysts: 1) Intact cost leadership despite potential gas price hike with long-term offshore gas supply contract;

2) DAP capacity expansion contributes solid growth in 2013E; 3) Attractive valuation despite our conservative

assumptions.

Stock recommendations (A-share)

Buy #1: Hualu Hengsheng (600426.SS, on CL)

Reasons/catalysts: 1) Strong growth from new projects of adipic acid and acetic acid; 2) Market overly concerned on slow

EG project ramp-up; 3) Attractive valuation despite our conservative assumptions.

Buy #2: Qinghai Salt Lake Industry (000792.SZ)

Reasons/catalysts: 1) Stronger global demand on higher crop prices; 2) Slower-than-expected domestic supply

expansion; 3) Strong restocking demand domestically and globally for potash.

Sell #1: Yuntianhua (600096.SS)

Reasons/catalysts: 1) Expensive valuation with asset injection overly factored in; 2) Gas supply shortage may continue in

2013; 3) Increasing urea cost if gas pricing reform rolls out nationally; 4) Weak fiberglass demand on slow macro

economic recovery.

Exhibit 93: Stock valuations

Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.

Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.

Exhibit 94: Stock fundamentals


Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

3983 HK China BlueChemical B HKD 4.78 6.75 41.2% 2,843 7.9 1.2 4.7% 4.0

297 HK Sinofert Holdings N HKD 1.66 1.70 2.4% 1,504 10.8 0.6 1.3% 11.2

Ticker Name EPS growth

Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

3983 HK China BlueChemical 16.0% 14.3% 15.3% 32.1% 23.5% 17.1% 13.6% (0.2)

297 HK Sinofert Holdings 8.8% 5.2% -3.0% 3.3% 2.5% 2.0% 5.8% 0.4



Exhibit 95: Stock valuations (onshore)


Source: Factset, Goldman Sachs Research estimates, Gao Ha Securities Research estimates.

Exhibit 96: Stock fundamentals (onshore)


Exhibit 97: Performance

Source: MSCI, Factset, GS Global ECS Research

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600426 CH Hualu-Hengsheng Chemical B* CNY 6.75 9.70 43.7% 1,033 13.4 1.1 0.7% 7.8

000422 CH Hubei Yihua Chemical Industry N CNY 9.74 13.10 34.5% 1,404 9.6 1.3 2.1% 6.8

002391 CH Jiangsu Changqing N CNY 14.76 16.50 11.8% 488 16.4 1.6 1.2% 10.8

600486 CH Jiangsu Yangnong Chemical Co. N CNY 18.79 23.30 24.0% 519 13.9 1.5 1.6% 3.8

002250 CH Lianhe Chemical Technology Co. N CNY 18.44 20.40 10.6% 1,528 18.2 4.0 1.9% 13.4

000792 CH Qinghai Salt Lake Industry B CNY 23.95 32.70 36.5% 6,116 13.9 2.2 1.8% 13.1

600096 CH Yunnan Yuntianhua S CNY 12.54 6.20 -50.6% 1,397 51.5 1.5 1.6% 12.3


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600426 CH Hualu-Hengsheng Chemical 10.7% 39.8% 10.4% 15.8% 8.5% 5.4% 8.1% 0.8

000422 CH Hubei Yihua Chemical Industry 17.9% 17.3% 10.0% 16.1% 11.0% 4.1% 9.4% 1.3

002391 CH Jiangsu Changqing 17.7% 26.5% 27.6% 15.3% 12.2% 11.3% 9.6% (0.2)

600486 CH Jiangsu Yangnong Chemical Co. 17.2% 12.3% 16.5% 17.5% 10.3% 9.5% 10.6% (0.8)

002250 CH Lianhe Chemical Technology Co. 32.3% 25.8% 31.0% 18.6% 16.2% 13.2% 21.6% 0.1

000792 CH Qinghai Salt Lake Industry 26.6% 38.2% 28.1% 40.8% 35.6% 26.6% 14.0% 0.8

600096 CH Yunnan Yuntianhua 147.8% 13.0% 40.7% 16.5% 6.5% 1.4% 2.1% 1.6

60

70

80

90

100

110

120

130

40

50

60

70

80

90

100

110

Ja

n-1

1

Fe

b-1

1

Ma

r-11

Ap

r-11

Ma

y-1

1

Ju

n-1

1

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

Price Level Eq-wgt (Offshore Agrochemicals)

Relative Index (right scale)

Relative Index



Alternative energy: Solar – 2013, the year of transformation;

illuminating the path to profitability

Analyst name: Amy Song, CFA ([email protected])

Sector stance

2013 sector view

We believe the ongoing compression of ASP and earnings combined with higher gearing will trigger

rationalization/consolidation of the solar industry in two phases: 1) local governments and banks initiate the process to

disrupt the solar investment cycle; and 2) fundamental rationalization driven by technology, scale and cost leadership, as

laggards exit the industry during rationalization.

In the interim, we expect friction in solar trade discussions between the US, China and EU could be a near-term swing

factor for the fundamental competitiveness of solar companies globally, with potential tariff barriers leading eventually

to the reallocation of global effective solar capacity. Meanwhile, marginal demand upside might have more visibility as

the Chinese government is taking more steps to boost domestic market demand to support this struggling industry.


Reform drivers

1. Local governments & banks disrupt the ongoing solar investment cycle by ending easy access to land and funding.

Cyclical drivers

1. ASP deterioration amid a highly stressed earnings outlook, extending the ongoing down-cycle.

2. Trade frictions between the US, China and EU.

3. Government initiatives to boost domestic demand, which we think will have a positive impact on the sector only in

the medium term.


1. Higher-than-expected global demand.

2. Lower-than-expected ASP erosion.


1. 2013E EPS lower than consensus by -9% to -354% across the sector.


Sell #1: Yingli (YGE)

Reasons/catalysts: 1) High gearing ratio indicates potential credit risk; 2) High SG&A expense impacts earnings outlook.


Buy #1: Sungrow (300274.SZ)

Reasons/catalysts: 1) Sungrow’s strong balance sheet and leading inverter production scale could provide a competitive

advantage; 2) Sungrow appears to be well positioned to benefit from the secular growth outlook of domestic PV market.

Sell #1: Jingyuntong (601908.SS)

Reasons/catalysts: 1) Shipment/ASP to decline faster than peers, mainly due to its poor customer profile and lack of R&D

advantages; 2) Significant increase of working capital should bring higher financial burden to the company.



Alternative energy: LED – 2013, investing selectively as demand

cycle turns up

Analyst name: Amy Song, CFA ([email protected])

Sector stance

2013 sector view

We see two structural themes in LED for the next few years: 1) a continued shift in lighting product mix, from traditional

lighting to LED lighting. We believe stronger LED demand momentum should start from 2013, driven by more policy

catalysts and more affordable LED lighting products. 2) The ongoing industry consolidation, triggered by a tough macro

environment and fluctuating raw material cost structure, has forced many smaller players to exit both the traditional

lighting/fixture market and the LED manufacturing supply chain due to structural over-capacity. However, the LED

manufacturing supply chain in the near term is structurally over-supplied, which has created fierce competition and

pushed the industry into a rationalization and consolidation phase. We believe traditional lighting branded makers with

extensive branded/ODM&OEM distribution channels should be in a favorable position to incorporate the growth of LED

lighting.


Reform drivers

1. As ASPs of LED products approach the inflection point, we expect secular growth to expand into the

commercial/industrial segment, beyond the current outdoor lighting segment.

2. Stronger supportive policy catalysts from central and local governments.

Cyclical drivers

1. Ongoing industry consolidation due to the tough macro environment.

2. Positive policy catalysts and more affordable LED lighting products should boost LED demand momentum.


1. Higher-/lower-than-expected demand.

2. Fluctuating cost/ASP.


1. 2013E EPS lower than consensus by -15% to -42% across the sector.


Buy #1: Yankon Lighting (600261.SS)

Reasons/catalysts: 1) We favor Yankon’s strategy of transitioning from OEM maker to brand maker; 2) We believe

Yankon’s clean LED strategy and execution track record have paved the way for continued growth momentum.

Sell #1: Foshan Lighting (000541.SZ)

Reasons/catalysts: 1) Foshan Lighting’s gross margin will be negatively impacted by the increase in raw material/labor

costs and declining product ASPs, given the company’s lack of a well-structured distribution channel; 2) An uncertain Li-

battery business will pose a risk to the company’s profitability along its entire value chain.



Alternative energy – Nuclear/Wind power: Lack of positive

catalysts

Analyst name: Franklin Chow, CFA ([email protected])

Sector stance

2013 sector view

Wind farms: We think a lack of a clear case of capex discipline, earnings visibility/growth and free cash flow generation

potential may still curb investor confidence/interest. 1) Capex discipline: it appears that leading Chinese state-owned

wind farms may still prefer capex-driven growth (even at potentially declining marginal returns) to scaling back growth

for debt reduction and free cash flow generation. 2) Earnings visibility/growth: rapidly falling wind turbine utilization also

raises concerns on the defensiveness of the business model of Chinese wind farms. Weaker carbon credit cash receipt

further hurts the earning outlook.

Equipment makers: We think the industry is exposed to a trio of concerns: 1) slowing revenue growth due to weak

product demand and prices; 2) rising costs, e.g., selling costs, and receivable impairments; and 3) larger capital required

implies higher financing costs due to falling customer deposits, record-high receivable days.


Reform drivers

1. Emphasis on clean energy supply

We believe sustainable development of alternative energy is vital to providing sufficient electricity supply to the

Chinese economy over the long term. However, as evident in recent history, industry growth may not necessarily

result in earnings growth and share price performance mostly due to capex-driven (rather than profitability-driven)

business models for the utilities operators and oversupply for power equipment (e.g. wind and solar power).

Cyclical drivers

1. Falling utilization from grid curtailment and slower wind speed

Falling wind turbine utilization also raises concerns on the defensiveness of the business model of Chinese wind

farms. We think it is also difficult for stock investors to decipher the various causes of downside risks to

utilization/earnings in terms of project execution (e.g. site selection and construction, turbine quality), predictability

of wind resources, as well as the effectiveness of regulators’ enforcements to raise dispatch of wind power by the

state-owned power grids, generally wind farms’ only customers.

2. Weaker carbon credit cash receipt

Fallen carbon credit market prices may drastically cut the potential revenue/cash collection from existing and future

carbon credit contracts sold by Chinese wind farms. We expect carbon prices in newer contracts may be

considerably lower than those in prior contracts as market prices are now about half of the 2011 average. We also

see risks of contract term adjustments for prior contracts as buyers of carbon credits may leverage the considerably

cheaper spot prices to lower those contract prices with the Chinese wind farms.

3. Downside surprise from restart of nuclear projects

We think official confirmation from the central government has put a more definitive cap to the scale of near-term

project counts – until 2015, there would be only a few new projects in coastal areas and none inland. We expect this

to dampen bullish market expectations in terms of new orders for nuclear power equipment makers.


Revenue/margins/receivable and impairments/new orders vary from our assumptions.


2013 EPS estimates for the sector are generally below Reuters consensus estimates. We believe we have more

conservative assumptions on revenue and profit margins. We also place a strong emphasis on understanding and

forecasting weakening balance sheets for several power equipment makers.




Buy #1: Longyuan (0916.HK)

Reasons/catalysts: Top pick among Chinese wind farms under coverage, though capex discipline seems weaker than

expected.

Sell #1: Shanghai Electric (2727.HK)

Reasons/catalysts: We think Shanghai Electric is undergoing a structural decline in revenue and earnings growth. We

also think its current P/E valuation premium to peers is excessive. Our 2013 EPS estimate are 20% below Reuters

consensus estimate.

Sell #2: Goldwind (2208.HK)

Reasons/catalysts: We expect Goldwind to remain an industry leader when the industry consolidates. However, we are

still concerned about its earnings outlook due to 1) faltering demand; 2) falling product prices; 3) rising interest

expenses; and 4) difficult receivables collection.






Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

579 HK Beijing Jingneng Clean Energy N HKD 1.60 1.50 -6.3% 1,038 7.6 0.6 0.9% 11.9

658 HK China High Speed Transmission Equipment Group N HKD 2.64 2.20 -16.7% 464 11.9 0.4 0.0% 7.2

916 HK China Longyuan Power B HKD 4.85 5.60 15.5% 4,671 9.5 1.0 2.0% 9.5

1072 HK Dongfang Electrical Corporation (H) N HKD 13.56 9.20 -32.2% 3,506 10.4 1.2 1.0% 15.9

3800 HK GCL-Poly Energy Holdings N HKD 1.34 1.10 -17.9% 2,676 1.1 0.0% 9.6

270 HK Guangdong Investment B HKD 6.10 6.70 9.8% 4,906 11.0 1.5 3.4% 6.4

1133 HK Harbin Electric N HKD 6.49 5.80 -10.6% 1,153 7.8 0.6 2.0% 10.3

958 HK Huaneng Renewables Corporation N HKD 1.13 0.90 -20.4% 1,232 11.5 0.6 0.0% 8.8

JASO US JA Solar Holdings N USD 0.61 1.00 65.0% 119 0.1 0.0% 10.1

2222 HK NVC Lighting Holding RS HKD 1.92 773

2727 HK Shanghai Electric Group S HKD 3.19 2.50 -21.6% 5,278 10.9 1.0 2.8% 10.8

TSL US Trina Solar N USD 2.45 4.00 63.3% 173 0.2 0.0% 8.9

2208 HK Xinjiang Goldwind Science & Technology (H) S HKD 3.02 1.90 -37.1% 1,050 20.0 0.5 1.1% 37.2

YGE US Yingli Green Energy S USD 1.29 0.80 -38.0% 202 0.3 0.0% 30.3


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

579 HK Beijing Jingneng Clean Energy 26.7% 71.9% 43.6% 30.5% 12.4% 11.4% 7.9% 1.9

658 HK China High Speed Transmission Equipment Group 36.1% 7.4% 10.9% 17.4% 8.1% 3.2% 3.0% 0.8

916 HK China Longyuan Power 8.6% 14.2% 20.1% 48.9% 28.5% 15.0% 8.3% 1.6

1072 HK Dongfang Electrical Corporation (H) -11.2% -4.2% -6.7% 8.9% 5.4% 5.2% 11.3% (0.2)

3800 HK GCL-Poly Energy Holdings 105.7% 8.9% 19.9% 18.3% 7.4% 0.2% 0.3% 1.3

270 HK Guangdong Investment 5.8% 5.6% 2.7% 72.9% 60.3% 41.9% 11.4% (0.1)

1133 HK Harbin Electric -19.2% 2.2% -3.0% 5.8% 3.0% 3.8% 6.4% (0.0)

958 HK Huaneng Renewables Corporation 60.9% 22.0% 23.0% 89.5% 46.9% 14.2% 5.0% 2.1

JASO US JA Solar Holdings 63.4% -2.6% 376.0% 4.2% -4.5% -7.5% -7.7% 0.3

2222 HK NVC Lighting Holding

2727 HK Shanghai Electric Group -10.6% 2.9% -7.6% 6.4% 4.5% 4.1% 6.8% (0.3)

TSL US Trina Solar 73.1% -9.8% 172.2% 6.4% 0.4% -4.3% -5.8% 0.6

2208 HK Xinjiang Goldwind Science & Technology (H) 23.5% 11.6% 319.8% 2.5% 0.5% 2.4% 2.3% 0.4

YGE US Yingli Green Energy 36.9% -19.1% 278.1% 6.3% -6.6% -14.0% -19.3% 2.2










Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601908 CH Beijing Jingyuntong Technology Co. S CNY 5.93 2.40 -59.5% 819 47.8 1.3 0.0%

600875 CH Dongfang Electrical Corporation (A) N CNY 12.28 11.60 -5.5% 3,951 11.7 1.4 0.9% 16.6

000541 CH Foshan Lighting & Electrical S CNY 6.26 6.00 -4.2% 984 16.5 2.1 5.6% 10.3

300274 CH Sungrow Power Supply B CNY 7.45 11.00 47.7% 386 14.3 1.1 0.0% 7.4

002202 CH Xinjiang Goldwind Science & Technology (A) S CNY 5.34 2.50 -53.2% 2,310 44.1 1.1 0.5% 60.6

002006 CH Zhejiang Jinggong Science & Technology Co. N CNY 7.22 8.40 16.3% 528 18.0 2.2 0.0% 23.9

600261 CH Zhejiang Yankon Group B CNY 7.60 13.30 75.0% 787 14.7 1.9 2.0% 13.5


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601908 CH Beijing Jingyuntong Technology Co. 74.1% -3.0% 138.7% 4.0% -9.1% 30.2% 2.8% (0.6)

600875 CH Dongfang Electrical Corporation (A) -12.4% -4.2% -6.7% 8.9% 5.4% 5.2% 11.3% (0.2)

000541 CH Foshan Lighting & Electrical 16.4% 11.2% 11.4% 19.1% 14.9% 12.5% 12.4% (0.1)

300274 CH Sungrow Power Supply 25.8% 17.9% 50.1% 14.7% 13.0% 15.8% 7.8% (0.6)

002202 CH Xinjiang Goldwind Science & Technology (A) 21.8% 11.6% 319.8% 2.5% 0.5% 2.4% 2.3% 0.4

002006 CH Zhejiang Jinggong Science & Technology Co. 219.4% 0.9% 81.2% 13.3% 9.1% 19.2% 12.4% (0.2)

600261 CH Zhejiang Yankon Group 34.7% 27.2% 49.3% 10.3% 7.8% 9.5% 12.2% (0.0)

20

30

40

50

60

70

80

90

100

110

120

20

40

60

80

100

120

Ja

n-1

1

Fe

b-1

1

Ma

r-11

Ap

r-11

Ma

y-1

1

Ju

n-1

1

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-11

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct

-12

No

v-1

2

Price LevelEq-wgt (Offshore Clean Energy)


Relative Index



Auto: Growth to sustain, prefer luxury segment

Analyst name: Yipeng Yang ([email protected])

Sector stance

2013 sector view

We forecast the overall passenger car market will grow at 9.2%/7.8%/8.2% over 2012-2014. Compared to capacity growth

of 20%/21%/11%, this implies industry capacity utilization rate at 87%/77%/75%. We see sector-wise pricing weakness

and margin contraction ahead resulting from this sliding industry utilization rate. However, we still see secular growth in

the luxury segment at a 10% 10-year CAGR. The HDT market has been depressed this year due to macro tightening (Jan–

Sep. yoy down 31%) and is likely to bottom in 2H12E; we might see a mild recovery in 2013E along with the pick-up in

construction/logistics activity. For China dealers: 1) New car margin should stabilize after the trough in 1H2012; 2) In the

next five years, the aftermarket will likely outpace the new car market; 3) Consolidation should continue due to better

financial, human, and managerial resources of the leading dealer groups, which are favored by OEMs when competing

for new franchises; 4) Luxury dealerships remain more attractive than mainstream in terms of profitability and growth.

Therefore we favor auto dealers (esp. luxury dealer).


Reform drivers

1. Consumption upgrade.

2. Stricter emission standards for both PC and HDT.

3. Export of local OEMs.

Cyclical drivers

1. Industry utilization rate.

2. Pricing/industry destocking of both passenger car and HDT.

3. Policy loosening and construction/logistics activity pick up.


1. Weaker demand due to more cities introducing car purchase plates.

3. Slower-than-expected economic recovery;

4. Potential price competition from Japanese brands trying to regain market share.


1. For A-share names (excl. FAW), our 2012-14 estimates are on average -2%/-10%/-19% against Wind consensus.

2. For H-share names (excl. Sinotruk), our 2012-14 estimates are on average -13%/-7%/-6% against Bloomberg

consensus.


Buy #1: Brilliance China (1114.HK)

Reasons/catalysts

1. Strong growth: the luxury car sector continues to outpace the overall car market with stronger demand and more

localized product offerings; we also see better opportunities in entry luxury and SUV sub-segments.

2. Positive outlook for Brilliance BMW: Brilliance BMW reported above expected wholesale volume estimated to grow

at 37% in 2013E.

3. More product pipeline with X3 and 1 Series localization; near-term BMW brand benefit from weaker Lexus and

Infiniti, which were negatively impacted by the China-Japan tension.




Buy #2: Baoxin Auto (1293.HK)

Reasons/catalysts

1. Best luxury mix: Baoxin has the highest luxury car sales volume mix (60.8% in 2011 vs. 23.1%/53.3% for

Zhongsheng/Zhengtong).

2. Young store age, higher organic growth in new car sales and aftersales.

3. Low SG&A due to strategic geography concentration.

4. Strong balance sheet, more M&A opportunities.

Sell #1: BYD (1211.HK)

Reasons/catalysts

1. Weaker auto sales due to lower volume booking from SUV model S6 and the weak sales from aging models such as

F0, F6 and G6; GPM on a downward trajectory due to price erosion and economies of scale.

2. The solar panel division might continue posting losses due to weak domestic demand and trade sanctions from

overseas markets.

3. The rollout of EV is slower than expected due to regional protectionism and technology/safety issues.


Buy #1: SAIC (600104.SS; on CL)

Reasons/catalysts

1. Strong growth from SVW; we expect better volume and margin improvement from cost optimization and product

mix.

2. SGM/SVW will likely benefit from recent Japanese brand weakness.

3. Attractive valuation: 2013E PE/PB at 7.1X/1.1X vs. A share average at 10.0X/1.4X.

Buy #1: Huayu (600741.SS)

Reasons/catalysts

1. Stable growth along with SAIC and other mainstream OEMs.

2. Limited exposure to Japanese brands; will likely benefit from Japanese brand weakness.

3. Attractive valuation: 2013E PE/PB at 8.2X/1.1X vs. A share average (excl. FAW) at 10.0X/1.4X.

Sell #1: Changan (000625.SZ)

Reasons/catalysts

1. Weak revenue rebound owing to weak Changan own brand sedan and minivan sales in spite of aggressive new

product launch.

2. Weak investment income due to company’s Japanese brand exposure (Mazda/Suzuki).

3. Although factoring in Ford’s strong product offering/volume expansion, valuation is expensive at 2013E PE/PB at

15.5X/1.6X vs. A share average (excl. FAW) at 10.0X/1.4X.











Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

1293 HK Baoxin Auto Group B HKD 5.95 6.08 2.2% 1,941 9.2 2.4 1.1% 6.2

1114 HK Brilliance China Automotive Holdings B HKD 9.17 9.53 3.9% 5,908 11.5 2.9 0.0% 170.6

1211 HK BYD Company S HKD 19.54 10.92 -44.1% 5,736 40.3 1.7 0.0% 9.9

200625 CH Chongqing Changan Auto (B) S HKD 3.29 1.94 -41.0% 1,783 7.4 0.7 2.7% 16.6

489 HK Dongfeng Motor B HKD 10.56 11.56 9.5% 11,740 8.2 1.2 2.7% 3.4

175 HK Geely Automobile Holdings N HKD 3.85 3.16 -17.9% 2,904 11.3 1.8 1.1% 8.3

2333 HK Great Wall Motor Co. N HKD 24.90 22.06 -11.4% 8,797 10.4 2.5 2.9% 6.7

2238 HK Guangzhou Automobile Group Co N HKD 5.87 5.15 -12.3% 2,651 9.8 0.9 3.1%

425 HK Minth Group N HKD 8.40 9.40 11.9% 1,035 7.8 1.0 3.9% 3.7

3808 HK Sinotruk (Hong Kong) N HKD 5.10 4.28 -16.1% 1,817 10.2 0.6 1.0% 7.1

2338 HK Weichai Power (H) NR HKD 29.00 7,481 12.6 1.7 2.0% 7.2

1899 HK Xingda International N HKD 3.33 2.70 -18.9% 655 9.1 0.8 2.7% 6.0

1728 HK Zhengtong Auto Services Holdings N HKD 5.27 4.84 -8.2% 1,020 9.7 1.2 0.0% 6.1

881 HK Zhongsheng Group Holdings N HKD 9.64 9.15 -5.1% 1,940 9.5 1.6 1.1% 7.6


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

1293 HK Baoxin Auto Group 54.9% 53.8% 54.9% 7.5% 6.6% 4.3% 25.1% 0.4

1114 HK Brilliance China Automotive Holdings 28.6% 1.3% -1.6% 3.4% 0.6% 52.9% 26.4% (0.0)

1211 HK BYD Company 841.5% 9.1% 21.2% 9.8% 3.3% 1.8% 3.6% 0.4

200625 CH Chongqing Changan Auto (B) 63.3% 10.1% 73.6% 2.1% -2.3% 5.4% 10.3% (0.1)

489 HK Dongfeng Motor 15.3% 14.7% 19.5% 9.8% 7.2% 6.1% 14.5% (0.4)

175 HK Geely Automobile Holdings 8.4% 17.8% 21.0% 10.2% 7.5% 6.9% 15.2% 0.1

2333 HK Great Wall Motor Co. 11.2% 18.7% 11.6% 16.5% 13.7% 11.8% 23.5% (0.2)

2238 HK Guangzhou Automobile Group Co 55.3% 32.6% -37.7% -8.0% -11.8% 18.9% 9.1% 0.1

425 HK Minth Group 13.3% 14.8% 13.9% 23.4% 19.7% 18.6% 12.3% (0.4)

3808 HK Sinotruk (Hong Kong) 207.3% 18.8% 56.5% 8.3% 5.3% 3.3% 5.0% 0.3

2338 HK Weichai Power (H) 22.8% 8.7% 17.8% 12.3% 8.4% 7.4% 10.7% (0.3)

1899 HK Xingda International 33.0% 14.4% 19.8% 17.5% 11.3% 6.8% 6.2% 0.2

1728 HK Zhengtong Auto Services Holdings 35.4% 16.2% 22.1% 5.9% 4.7% 2.6% 11.8% 0.4

881 HK Zhongsheng Group Holdings 41.3% 20.3% 26.4% 5.4% 4.5% 2.3% 14.4% 1.1

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600418 CH Anhui Jianghuai Automobile Co. N CNY 5.22 5.44 4.2% 1,080 8.7 1.0 1.7% 3.1

000625 CH Chongqing Changan Auto (A) S CNY 5.57 3.26 -41.5% 3,757 15.5 1.6 1.3% 38.2

000800 CH FAW Car N CNY 6.21 6.89 11.0% 1,623 40.5 1.2 0.0% 12.1

601633 CH Great Wall Motor Co.(A) N CNY 18.42 18.30 -0.7% 8,323 9.5 2.3 3.1% 6.1

600741 CH Huayu Automotive Systems B CNY 9.18 10.25 11.7% 3,807 8.2 1.1 3.2% 3.5

600104 CH SAIC Motor B* CNY 13.56 17.69 30.5% 18,541 7.1 1.1 4.3% 4.3

000338 CH Weichai Power (A) NR CNY 22.00 7,062 11.9 1.6 2.1% 6.7








Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600418 CH Anhui Jianghuai Automobile Co. 10.8% 6.6% 8.5% 4.7% 2.2% 2.4% 10.8% (0.3)

000625 CH Chongqing Changan Auto (A) 61.2% 10.1% 73.6% 2.1% -2.3% 5.4% 10.3% (0.1)

000800 CH FAW Car 153.3% 48.2% 2.7% 0.4% 0.7% 3.1% 0.3

601633 CH Great Wall Motor Co.(A) 9.7% 18.7% 11.6% 16.5% 13.7% 11.8% 23.5% (0.3)

600741 CH Huayu Automotive Systems -4.5% 8.6% 0.3% 8.5% 6.4% 4.6% 8.8% (0.5)

600104 CH SAIC Motor -2.5% 6.0% 0.2% 6.6% 4.6% 4.1% 11.1% (0.3)

000338 CH Weichai Power (A) 21.2% 8.7% 17.8% 12.3% 8.4% 7.4% 10.7% (0.3)

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Price Level

MSCI China Auto & Comp Index


Relative Index



Banks: Constructive on cyclical stabilization; consumption-led

growth a key for rerating

Analyst name: Ning Ma ([email protected]); Cheng, Bowei ([email protected])

Sector stance

2013 sector view

We are constructive on China banks as the stabilization trend in corporate earnings/asset quality/GDP should support

banks’ NIM/NPL/NPAT and valuations. Economic policies post leadership transition are critical to watch to determine if

we will see a cyclical upturn or an ongoing de-rating for China banks. Prefer quality names with strong CAR/LLR, PPOP

ROA and differentiated franchises.


Reform drivers

1. Consumer credit development is critical to avoid a Japan-style recession as high corporate leverage may lead to

long-term risk.

2. CBRC’s potential rule on non-core tier I CAR could release capital-raising pressure in the mid-term.

3. Potential further interest rate deregulation may make banks’ earnings more pro-cyclical.

Cyclical drivers

1. Corporate earnings and NPLs stabilize on credit growth, GDP stabilization and corporate borrowing cost reduction

following two rate cuts.

2. We estimate total potential NPL ratios of 4%-6% for listed banks, lower than many investors’ concern of 10%+.

3. Rapid bond/TSF increase should help FAI growth/stabilize corporate earnings, though not enough to fuel a rebound.

4. NIM could be under pressure on weaker loan pricing power if GDP slows further in 2013, and given the continuing

rapid wealth mgmt. product growth.


1. Worse than-expected GDP/asset quality and property policy tightening after leadership changes.

2. Government encourages corporate/infrastructure investment at lower interest rates, further increasing corporate

leverage.


1. China bank valuations have limited downside as their valuations imply average 6.1%/5.4% 2012E NPLs vs. our

estimates of total potential NPL of 4% to 6% for listed China banks.

2. Corporate earnings will stabilize in 2H12E with falling interest rates and borrowing costs, and robust TSF(total social

financing) growth.




Buy #1: CMB (3968.HK; on CL)

Reasons/catalysts: 1) Stronger franchise, risk management capability and deposit franchise; 2) Potential to develop high

ROE consumer banking and SME banking business; 3) Attractive valuation trading at 1.1x 13E PB. Risks: worse-than-

expected GDP, and CMB’s NIM/deposit costs increase.

Buy #2: ABC (1288.HK)

Reasons/catalysts: 1) Strong deposit franchise and well positioned in fast-growing county areas; 2) Strong balance sheet

with 4.18% LLR/loan ratio and 58% LDR should withstand potential NPL cycle and NIM pressure; 3) Attractive valuation,

trading at 1.0x 13E PB with robust three-year EPS CAGR of 16%. Risks: worse-than-expected GDP, and ABC’s

NIM/earnings misses.

Sell #1: BoComm (3328.HK)

Reasons/catalysts: 1) Loan/deposit ratio reached 79%, close to CBRC cap; 2) Rising NPLs/overdues due to its above-peer

exposure to Yangtz River delta, wholesale & retail and manufacturing sectors of 34/13/22% total loans. Risks: much

better than expected China GDP.


Buy #1: Industrial (601166.SS; on CL)

Reasons/catalysts: 1) Better positioned given its leading interbank business built on its unique bank-bank platform

connecting over 40 smaller banks, as growth of interbank business will likely outpace normal banking business over the

long term despite regulatory scrutiny; 2) Likely continuing above expected balance sheet growth through 2013 aided by

strong interbank funding growth via product innovation; 3) Attractive valuation trading at 0.9x/5.2x 13E PB/PB despite

above-peer ROE. Risks: worse-than-expected GDP, and Industrial’s NIM/deposit costs/NPLs increase.

Sell #1: CEB (601818.SS)

Reasons/catalysts: 1) Relatively weaker tier-1 CAR of 8.2% in 3Q12 vs. peer average of 9.7% and BASEL 3 requirement of

8.5%; 2) Higher-than-peer loan exposure (49% of total loans in 1H12 vs. sector average of 43%) to risky sectors such as

manufacturing/retail/wholesale/local government funding vehicles (LGFVs); 3) higher overdue loan ratio of 1.7% vs.

sector average of 1.1%. Risks: much better than expected China GDP.




Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

1288 HK Agricultural Bank of China (H) B HKD 3.39 4.70 38.6% 142,065 5.4 1.0 6.5%

3988 HK Bank of China (H) N HKD 3.23 3.50 8.4% 116,336 5.2 0.8 6.7%

3328 HK Bank of Communications(H) S HKD 5.64 5.70 1.1% 54,042 6.1 0.8 4.1%

998 HK China CITIC Bank (H) N HKD 4.01 4.60 14.7% 24,207 4.5 0.7 5.5%

939 HK China Construction Bank (H) B HKD 5.94 7.30 22.9% 191,613 6.4 1.2 5.5%

3968 HK China Merchants Bank (H) B* HKD 14.48 20.60 42.3% 37,675 5.9 1.1 4.3%

1988 HK China Minsheng Banking (H) B HKD 7.44 9.20 23.7% 27,230 4.8 0.9 5.2%

3618 HK Chongqing Rural Commercial Bank B HKD 3.52 4.10 16.5% 4,224 5.0 0.8 6.0%

1398 HK Industrial and Commercial Bank of China (H) B HKD 5.24 6.20 18.3% 235,992 6.4 1.2 5.5%











Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

1288 HK Agricultural Bank of China (H) 9.7% 4.5% 37.2% 18.9%

3988 HK Bank of China (H) 6.8% 9.8% 15.5%

3328 HK Bank of Communications(H) 3.5% 7.0% 13.4%

998 HK China CITIC Bank (H) 2.3% 7.0% 33.8% 15.0%

939 HK China Construction Bank (H) 1.4% 4.8% 18.2%

3968 HK China Merchants Bank (H) 4.1% 6.4% 18.4%

1988 HK China Minsheng Banking (H) 1.3% 2.8% 34.7% 17.8%

3618 HK Chongqing Rural Commercial Bank 3.7% 8.1% 37.9% 15.4%

1398 HK Industrial and Commercial Bank of China (H) 2.4% 5.1% 41.9% 18.1%

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601288 CH Agricultural Bank of China (A) B CNY 2.58 3.80 47.3% 134,538 5.1 1.0 6.9%

601169 CH Bank of Beijing N CNY 7.28 8.10 11.3% 7,279 5.2 0.7 4.7%

601988 CH Bank of China (A) N CNY 2.76 2.90 5.1% 123,697 5.6 0.9 6.3%

601328 CH Bank of Communications (A) N CNY 4.22 4.70 11.4% 50,316 5.6 0.8 4.5%

601009 CH Bank Of Nanjing S CNY 7.70 7.70 0.0% 3,670 6.0 0.8 2.8%

002142 CH Bank of Ningbo N CNY 9.07 10.20 12.5% 4,199 7.4 1.1 2.3%

601998 CH China CITIC Bank (A) N CNY 3.66 3.70 1.1% 27,493 5.1 0.8 4.9%

601939 CH China Construction Bank (A) B CNY 4.15 5.90 42.2% 166,580 5.5 1.0 6.4%

601818 CH China Everbright Bank S CNY 2.60 2.70 3.8% 16,879 4.6 0.8 3.2%

600036 CH China Merchants Bank (A) B CNY 10.03 16.70 66.5% 32,473 5.1 0.9 5.0%

600016 CH China Minsheng Banking (A) B CNY 6.10 7.40 21.3% 27,781 4.9 0.9 5.1%

600015 CH Hua Xia Bank S CNY 8.60 7.10 -17.4% 6,891 5.6 0.8 4.5%

601398 CH Industrial and Commercial Bank of China (A) B CNY 3.85 5.00 29.9% 215,757 5.8 1.1 6.0%

601166 CH Industrial Bank B* CNY 12.56 19.80 57.6% 21,751 5.2 0.9 4.5%

000001 CH Ping An Bank Co. N CNY 13.26 14.40 8.6% 10,907 5.3 0.7 0.0%

600000 CH Shanghai Pudong Development Bank N CNY 7.51 8.80 17.2% 22,491 4.4 0.7 2.7%


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601288 CH Agricultural Bank of China (A) 8.3% 4.5% 37.2% 18.9%

601169 CH Bank of Beijing 5.7% 6.0% 38.7% 13.4%

601988 CH Bank of China (A) 6.8% 9.8% 34.8% 14.8%

601328 CH Bank of Communications (A) 3.5% 7.0% 13.4%

601009 CH Bank Of Nanjing -1.6% 5.8% 39.0% 14.0%

002142 CH Bank of Ningbo -1.7% 5.7% 35.2% 14.5%

601998 CH China CITIC Bank (A) 0.9% 7.0% 33.8% 15.0%

601939 CH China Construction Bank (A) 1.4% 4.8% 18.2%

601818 CH China Everbright Bank 11.0% 8.2% 36.8% 17.5%

600036 CH China Merchants Bank (A) 2.7% 6.4% 18.4%

600016 CH China Minsheng Banking (A) 0.0% 2.8% 34.7% 17.8%

600015 CH Hua Xia Bank 6.7% 4.9% 13.5%

601398 CH Industrial and Commercial Bank of China (A) 1.0% 5.1% 41.9% 18.1%

601166 CH Industrial Bank -4.8% 8.5% 36.4% 16.7%

000001 CH Ping An Bank Co. 3.4% 5.8% 13.3%

600000 CH Shanghai Pudong Development Bank 5.7% 8.4% 15.8%





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MSCI China Banks Index


Relative Index



Cement: Sustained price recovery from 2Q13E

Analyst name: Julian Zhu ([email protected])

Sector stance

2013 sector view

We anticipate cement demand to rebound further driven by the ongoing resumption of key infrastructure projects, the

start of recently approved new infrastructure projects and a potential pickup of new property projects starts. On the

supply side, we see the peak of capacity addition already behind us and the Chinese government continues to phase out

obsolete capacity, leading to further improvement of the cement supply and demand profile in 2013. East China should

be the best cement market when new capacity drops sharply to 37mtpa in 2013 from 90+mtpa in 2012, benefiting Conch

and CNBM. We estimate a 5% yoy increase in China average cement price in 2013.


Reform drivers

1. In principle, no new capacity would be approved since NDRC issued Article 38 banning new cement projects in Sep

2009. After the significant rise of new capacity growth in 2010/2011, we expect a sharp fall of new cement capacity

from 2013 onward.

2. Increasingly strict environmental regulations will likely lift industry operating costs, squeezing out less profitable

marginal producers and accelerating the elimination of obsolete capacity.

3. Industry leaders continue to expand via acquisition, raising industry concentration and eventually translating into

more disciplined supply.

Cyclical drivers

1. We expect a sustained and meaningful rebound in cement demand and prices after seasonal weakness in 1Q13E.

The newly approved infrastructure projects since mid-2012 will likely start after the March NPC meeting, supporting

stronger cement demand and pricing.


1. More new capacity than expected and slower-than-expected demand pickup.

2. Higher-than-expected energy cost.


1. We expect a rebound from 2Q13 to be meaningful and sustained, higher than normal seasonal pickup.


Buy #1: Anhui Conch (H) (0914.HK, on CL)

Reasons/catalysts: 1) Conch’s main operating region is East China, where we see very limited new capacity online

compared to 2012; 2) We expect the company to continue to benefit from its cost advantage, and maintain reasonable

margins even in a difficult market; 3) Conch’s strong balance sheet enables it to expand via acquisition in a downcycle.


Sell #1: Jidong Cement (000401.SZ)

Reasons/catalysts: 1) Jidong’s additional capacity has been causing operating margin squeeze, making the company

more vulnerable in a difficult market; 2) With its key market in northern China, we expect very limited earnings

contribution from 1Q and 4Q due to cold weather; 3) The company’s FY12 results (due in March 2013) are likely to

disappoint the market.








Exhibit 115: Stock valuations (Onshore)



Exhibit 116: Stock fundamentals (Onshore)


Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

914 HK Anhui Conch Cement (H) B* HKD 25.65 30.00 17.0% 17,538 11.8 1.9 1.3% 7.1

2009 HK BBMG Corporation (H) S HKD 6.48 4.30 -33.6% 3,582 6.1 0.8 1.5% 11.4

3323 HK China National Building Material B HKD 9.86 10.30 4.5% 6,869 5.8 1.1 3.4% 6.9

1313 HK China Resources Cement Holdings N HKD 4.76 4.00 -16.0% 4,004 12.3 1.4 1.2% 9.2

691 HK China Shanshui Cement Group N HKD 5.19 5.10 -1.7% 1,886 6.3 1.2 4.8% 4.8

2233 HK West China Cement N HKD 1.35 1.44 6.7% 743 8.1 1.0 2.7% 5.3


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

914 HK Anhui Conch Cement (H) 33.0% 10.3% 22.4% 32.9% 26.4% 18.0% 15.3% 0.1

2009 HK BBMG Corporation (H) 13.4% 8.9% 10.9% 12.9% 9.5% 11.1% 12.7% 0.9

3323 HK China National Building Material 23.4% 25.8% 19.1% 19.6% 15.8% 6.3% 14.1% 1.9

1313 HK China Resources Cement Holdings 39.9% 17.7% 32.1% 19.6% 13.3% 8.4% 10.8% 1.0

691 HK China Shanshui Cement Group 28.8% 16.1% 20.8% 24.6% 18.1% 9.6% 17.4% 1.0

2233 HK West China Cement 84.6% 31.9% 40.2% 30.7% 20.5% 11.3% 11.6% 0.7

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600585 CH Anhui Conch Cement (A) N CNY 16.11 16.00 -0.7% 13,707 9.3 1.5 1.6% 5.7

601992 CH BBMG Corporation (A) N CNY 5.91 5.30 -10.3% 4,065 7.1 1.0 1.3% 12.3

000401 CH Tangshan Jidong Cement Co S CNY 11.34 9.20 -18.9% 2,453 10.8 1.1 0.0% 6.0


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600585 CH Anhui Conch Cement (A) 31.3% 10.3% 22.4% 32.9% 26.4% 18.0% 15.3% 0.1

601992 CH BBMG Corporation (A) 11.3% 8.9% 10.2% 12.9% 9.5% 11.1% 12.7% 0.9

000401 CH Tangshan Jidong Cement Co 94.4% 15.3% 32.3% 30.7% 19.0% 9.1% 9.2% 0.7





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g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Ju

n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

Price LevelMSCI China Construction Materials


Relative Index



Coal: Structural downcycle ahead; Buy Shenhua on diversity

Analyst name: Julian Zhu ([email protected]), Han Yong ([email protected])

Sector stance

2013 sector view

We expect the decade-long railway bottleneck for coal transportation to ease as a significant amount of new railway

capacity enters operations from 2013. The rising supply (3% yoy in 2013 vs 2% in 2012) and railway debottlenecking are

structural developments in China’s coal industry that will continue to play out over the next three to five years, making

new coal projects in North and Northwest China a viable supply for coal users along the coast and in South China.

Moreover, with integration between IPPs and coal miners, pricing power of independent coal producers is likely to

become even weaker.

We see a structural down cycle for China thermal coal industry and estimate China’s spot coal price to fall by 3% yoy in

2013 as demand growth of 5% is not strong enough to offset supply growth. This, combined with cost inflation, suggests

further margin squeeze for coal producers. Although we favor coking coal in the long run due to its scarcity nature, we

expect the price to stay flat with pressure from the steel industry in the downstream.


Reform drivers

1. With the price difference at very low level, the Chinese government will likely finally remove the decade-long

“double systems of coal prices”, i.e., unifying the contract and spot coal markets. This would remove the policy

overhang on any upside of contract coal prices going forward should supply tighten again. However, given our

belief of a structural oversupply outlook, we don't expect any material earnings impact on contract coal producers in

2013.

Cyclical drivers

1. Rising supply from North and Northwest China.

2. As a late cycle play, coal should lag other commodities including cement and steel when demand rebounds.

3. China domestic coal prices should also be negatively impacted if imports rise on widening price arbitrage between

domestic and seaborne coal prices.


1. Bigger-/smaller-than-expected seaborne-domestic arbitrage opportunity.

2. Production interruption.


1. We have become increasingly cautious on the medium- and long-term thermal coal market in China as we see a

structural oversupply emerging, hurting coal producers’ margins and returns.


Buy #1: China Shenhua (1088.HK)

Reasons/catalysts: 1) Shenhua is the only truly integrated coal producer in China, and we consider the company to have

the highest earning visibility among peers, thanks to its diversified business model; 2) Shenhua enjoys the lowest

production costs among major thermal coal producers under our coverage.

Sell #1: Yanzhou Coal (1171.HK)

Reasons/catalysts: 1) Yanzhou’s increasing exposure to the seaborne market makes it more vulnerable to global coal

prices weakness; 2) We expect the company’s newly acquired Australian assets to stay unprofitable till 2H13, dragging

its overall profitability.




Buy #1: China Shenhua (601088.SS)

Reasons/catalysts: 1) Shenhua is the only truly integrated coal producer in China, and we consider the company to have

the highest earning visibility among peers, thanks to its diversified business model; 2) Shenhua enjoys the lowest

production costs among major thermal coal producers under our coverage.

Buy #2: Jizhong Energy (000937.SS; on CL)

Reasons/catalysts: 1) In past years, it completed several acquisitions, demonstrating strong execution; 2) Cost control

was better than peers in 3Q12, reducing earnings downside risk.

Buy #3: Lanhua Sci-Tech (600123.SS)

Reasons/catalysts: 1) The company has clear earnings visibility as its products (urea and anthracite) prices are more

stable; 2) It should see sustainable organic growth over the next four years; we expect its coal production to double.

Sell #1: Yanzhou Coal (600188.SS)

Reasons/catalysts: 1) Yanzhou’s increasing exposure to the seaborne market makes it more vulnerable to global coal

prices weakness; 2) We expect the company’s newly acquired Australian assets to stay unprofitable till 2H13, dragging

its overall profitability.

Sell #2: Datong Coal (601001.SS)

Reasons/catalysts: 1) Datong’s coal mines are aging, and the production of key mines has declined in recent years; 2) Its

cost is at the high end of the thermal coal sector, and its earnings are hurt more by coal price declines.






Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

1898 HK China Coal Energy (H) N HKD 7.87 7.80 -0.9% 13,463 11.8 0.9 2.5% 7.5

1088 HK China Shenhua Energy (H) B HKD 32.30 38.00 17.6% 82,893 11.5 1.8 3.4% 6.6

3948 HK Inner Mongolia Yitai Coal Co Ltd B HKD 43.40 51.40 18.4% 9,111 7.7 1.8 5.2% 4.9

1171 HK Yanzhou Coal Mining (H) S HKD 11.92 10.30 -13.6% 7,564 7.9 0.9 4.0% 6.0

900948 CH Yitai Coal B USD 5.43 6.59 21.5% 8,826 7.5 1.7 5.3% 4.8


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

1898 HK China Coal Energy (H) -12.4% 10.2% 3.9% 17.8% 10.6% 6.7% 7.5% 0.4

1088 HK China Shenhua Energy (H) -0.9% 2.3% 0.6% 32.9% 24.8% 18.0% 15.8% (0.1)

3948 HK Inner Mongolia Yitai Coal Co Ltd 4.9% 2.7% 5.1% 33.9% 30.6% 22.3% 20.5% (0.1)

1171 HK Yanzhou Coal Mining (H) -19.8% 1.8% 13.8% 22.9% 16.1% 10.1% 11.1% 0.6

900948 CH Yitai Coal 4.7% 2.7% 4.9% 33.9% 30.6% 22.3% 20.5% (0.1)








Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601101 CH Beijing Haohua Energy Resource N CNY 11.47 13.43 17.1% 2,210 12.6 1.8 3.4% 7.6

601898 CH China Coal Energy (A) N CNY 6.90 6.60 -4.3% 14,688 13.1 1.0 2.2% 8.0

601088 CH China Shenhua Energy (A) B CNY 21.73 26.80 23.3% 69,392 9.8 1.5 4.0% 5.7

601001 CH Datong Coal Industry S CNY 8.61 7.28 -15.5% 2,314 50.8 1.4 0.6% 5.8

600395 CH Guizhou Panjiang Refined Coal N CNY 14.71 16.84 14.5% 3,909 14.3 2.9 3.9% 8.2

000933 CH Henan Shen Huo Coal Industry & Electricity Power Co. N CNY 6.99 7.33 4.9% 2,133 9.5 1.0 1.2% 4.6

002128 CH Huolinhe Opencut Coal N CNY 12.52 12.70 1.4% 2,667 12.6 2.7 3.3% 8.9

000937 CH Jizhong Energy Resources B* CNY 11.00 18.45 67.7% 4,085 10.7 1.4 1.8% 5.0

600997 CH Kailuan Energy Chemical N CNY 9.10 9.05 -0.6% 1,804 19.2 1.5 0.8% 8.3

601666 CH Pingdingshan Tianan Coal Mining N CNY 7.94 8.37 5.4% 3,012 17.3 1.6 1.5% 4.4

000780 CH Pingzhuang Energy Resources N CNY 9.00 10.88 20.9% 1,466 15.5 1.6 0.7% 5.9

601918 CH SDIC Xinji Energy Co. N CNY 8.48 11.75 38.5% 2,519 9.7 1.6 2.8% 6.3

600123 CH Shanxi Lanhua Sci-Tech Venture B CNY 17.67 23.00 30.2% 3,241 9.7 1.8 2.1% 5.7

601699 CH Shanxi Lu'an Environmental Energy Development B CNY 16.66 24.14 44.9% 6,155 13.2 2.1 2.3% 5.4

000983 CH Shanxi Xishan Coal and Electricity Power N CNY 11.96 13.40 12.0% 6,051 17.3 2.2 1.3% 5.5

600348 CH Yangquan Coal Industry Group N CNY 13.02 15.11 16.1% 5,027 15.5 2.1 1.1% 5.4

600188 CH Yanzhou Coal Mining (A) S CNY 16.71 13.10 -21.6% 13,195 14.1 1.6 2.2% 8.7


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601101 CH Beijing Haohua Energy Resource -8.2% 0.3% -7.1% 25.6% 22.2% 15.7% 12.1% (0.2)

601898 CH China Coal Energy (A) -14.1% 10.2% 3.2% 17.8% 10.6% 6.7% 7.5% 0.4

601088 CH China Shenhua Energy (A) -2.8% 2.3% 0.0% 32.9% 24.8% 18.0% 15.8% (0.1)

601001 CH Datong Coal Industry -27.0% 3.6% 2.7% 8.2% 6.2% 0.8% 1.7% (0.2)

600395 CH Guizhou Panjiang Refined Coal 12.6% 18.0% 11.4% 33.2% 24.7% 18.6% 18.6% (0.0)

000933 CH Henan Shen Huo Coal Industry & Electricity Power Co. -66.2% 7.3% 13.4% 13.9% 8.4% 3.8% 9.3% 0.5

002128 CH Huolinhe Opencut Coal -6.7% 2.0% -3.4% 30.2% 22.9% 19.5% 20.7% 0.2

000937 CH Jizhong Energy Resources 4.5% 8.7% 6.2% 14.6% 9.7% 6.1% 12.0% 0.1

600997 CH Kailuan Energy Chemical -13.5% 0.3% -1.6% 9.5% 5.1% 2.8% 6.3% 0.4

601666 CH Pingdingshan Tianan Coal Mining -10.3% 5.4% -8.0% 14.7% 5.4% 4.1% 8.9% (0.1)

000780 CH Pingzhuang Energy Resources -8.2% 2.9% -8.3% 24.9% 17.5% 16.2% 10.6% (0.7)

601918 CH SDIC Xinji Energy Co. 13.5% 26.3% 10.5% 30.1% 22.7% 13.1% 16.0% 0.8

600123 CH Shanxi Lanhua Sci-Tech Venture 6.0% 11.1% 12.7% 39.0% 30.3% 24.0% 17.4% (0.2)

601699 CH Shanxi Lu'an Environmental Energy Development -1.4% 12.1% 6.1% 26.4% 14.2% 11.7% 15.7% (0.1)

000983 CH Shanxi Xishan Coal and Electricity Power -5.5% 5.3% -0.8% 22.2% 11.8% 6.8% 10.7% (0.1)

600348 CH Yangquan Coal Industry Group -7.4% 3.1% -5.1% 8.2% 4.9% 3.8% 12.6% (0.6)

600188 CH Yanzhou Coal Mining (A) -18.3% 1.8% 17.4% 22.9% 16.1% 10.1% 11.1% 0.6





20

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100

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Ap

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Ma

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1

Ju

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Ju

l-11

Au

g-1

1

Se

p-1

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Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

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Ju

l-1

2

Au

g-1

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Se

p-1

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Oct-

12

No

v-1

2

Price Level

Eq-wgt (Offshore Coal)


Relative Index



Conglomerates: Prefer stocks with earnings visibility

Analyst name: Simon Cheung ([email protected]), Frank He ([email protected])

Sector stance

2013 sector view

We prefer conglomerates companies with earnings visibility and structural growth opportunities against macro

uncertainty. We believe Shanghai Industrial and Tianjin Development offer a stable growth outlook while receiving

support from municipal governments to acquire quality assets at reasonable valuations. We believe the turnaround of

Shanghai Industrial’s property division and Tianjin Development’s acquisition of machinery assets have yet to be fully

priced in. On the other hand, we are cautious on companies with exposure to the steel sector, including Fosun and CITIC

Pacific.


Reform drivers

1. Asset restructuring and optimization: Conglomerates have leeway to adjust asset portfolios against different

economic cycles. We see Shanghai Industrial has allocated more resources to acquire infrastructure-related assets

and this trend will continue in 2013E. Its parent is in the late stages of acquire a minority stake of a toll bridge close

to Shanghai now and plans to inject the asset to Shanghai Industrial in 2013. In addition, the company recently

became involved in the waste-to-energy business. We also expect Tianjin Development to acquire more assets from

the government, leveraging on its high cash balance.

Cyclical drivers

1. Prolonged earnings turnaround of steel sector: Our Metals & Mining team remains cautious on steel, mainly

because the persisting over-capacity issue will likely result in unsustainable steel price recovery. In addition, our

global Commodities team expects the iron ore price to reach US$140/tonne in 2013, thus leading to ongoing margin

pressure for steel mills.


1. Strong steel price recovery due to ramp up in infrastructure investment may affect our cautious views on Fosun and

CITIC Pacific.


1. We have a more cautious outlook on CITIC Pacific on potential disappointment from higher-than-expected cash cost

for its iron ore project to be launched in Nov 2012.

2. We also hold a more conservative view on Fosun’s transformation to an insurance-based investment company due

to its stretched balance sheet and prolonged payback period.


Buy #1: Shanghai Industrial (0363.HK)

Reasons/catalysts: (1) We expect Shanghai Industrial Urban Development (SIUD)’s earnings to turn around by 2013,

driven by solid contract sales as well as potential share disposal in commercial projects such as U-Center and Xujiahui

Center; (2) We believe its parent will inject a minority stake of a toll bridge close to Shanghai into SIHL once its

acquisition is complete, and we are positive on its move into the waste-to-energy sector; (3) The company plans to

maintain absolute dividend payout at over HK$1.0/share in coming years, supported by strong dividend uplift from

infrastructure as well as consumer division.

Buy #2: Tianjin Development (0882.HK)

Reasons/catalysts: (1) We believe Tianjin Development’s recently-proposed acquisitions in machinery assets unwinds

its future growth strategy while partly utilizes its rich cash balance to generate returns; (2) We see a limited impact from

the earnings decline of Dynasty Wine as we estimate it accounts for only 6% of 2013E EV and we believe its earnings

turnover is set with ongoing distribution channel restructuring; (3) Given that net cash represents 79% of market cap and

the stock is trading at a 64% discount to 2013E NAV, we believe the stock offers value.













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

392 HK Beijing Enterprises Holdings N HKD 50.45 52.70 4.5% 7,404 14.5 1.3 2.1% 13.8

144 HK China Merchants Holdings N HKD 23.70 26.90 13.5% 7,567 15.3 1.3 3.3% 16.5

267 HK CITIC Pacific N HKD 9.85 10.70 8.6% 4,638 8.0 0.4 4.6% 15.7

1199 HK COSCO Pacific B HKD 10.96 13.20 20.4% 3,835 9.8 0.9 4.1% 15.8

2880 HK Dalian Port Company N HKD 1.75 1.70 -2.9% 999 7.0 0.5 5.7% 8.1

656 HK Fosun International S HKD 4.27 3.80 -11.0% 3,538 9.3 0.6 3.8% 10.4

177 HK Jiangsu Expressway (H) B HKD 6.97 8.20 17.6% 4,531 11.2 1.4 6.5% 7.3

363 HK Shanghai Industrial B HKD 25.40 27.80 9.4% 3,539 10.8 0.8 4.3% 10.7

548 HK Shenzhen Expressway (H) N HKD 2.87 2.80 -2.4% 808 7.7 0.5 6.9% 6.5

107 HK Sichuan Expressway (H) B HKD 2.46 3.00 22.0% 891 5.2 0.5 4.8% 7.4

3382 HK Tianjin Port Development Holdings N HKD 0.97 1.00 3.1% 764 7.5 0.5 5.4% 8.0

576 HK Zhejiang Expressway N HKD 5.91 5.60 -5.2% 3,312 11.8 1.3 6.4% 7.0


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

392 HK Beijing Enterprises Holdings 15.6% 20.8% 9.1% 11.9% 7.9% 8.7% 7.8% 0.2

144 HK China Merchants Holdings 8.6% 6.1% 7.6% 52.0% 32.8% 37.0% 8.2% 0.4

267 HK CITIC Pacific -28.9% 15.8% 26.2% 8.4% 5.7% 3.9% 5.1% 1.2

1199 HK COSCO Pacific 12.3% 11.1% 12.9% 47.8% 32.8% 47.3% 9.5% 0.5

2880 HK Dalian Port Company 17.2% 7.0% 2.8% 37.4% 23.1% 19.7% 6.1% 0.4

656 HK Fosun International 33.8% 9.6% 14.3% 14.2% 9.9% 4.1% 4.4% 0.8

177 HK Jiangsu Expressway (H) 3.8% 5.1% 0.5% 54.9% 41.5% 30.9% 12.5% 0.2

363 HK Shanghai Industrial -32.7% -2.3% -17.6% 32.6% 27.0% 14.3% 5.2% 0.4

548 HK Shenzhen Expressway (H) -3.7% -1.0% 2.3% 77.3% 47.3% 22.6% 5.8% 0.7

107 HK Sichuan Expressway (H) -4.4% 11.7% -2.1% 42.0% 31.7% 25.3% 10.3% 0.7

3382 HK Tianjin Port Development Holdings 3.3% 7.9% 1.8% 14.6% 9.8% 4.1% 3.6% 0.2

576 HK Zhejiang Expressway 3.6% 0.9% 1.3% 47.3% 34.3% 26.7% 8.9% (0.1)

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600377 CH Jiangsu Expressway (A) B CNY 4.90 6.70 36.7% 3,963 9.8 1.3 7.4% 6.5

600018 CH Shanghai International Port Group N CNY 2.48 2.90 16.9% 9,060 11.1 1.1 4.5% 6.8

600548 CH Shenzhen Expressway (A) S CNY 3.16 3.30 4.4% 1,106 10.5 0.7 5.1% 7.4

601107 CH Sichuan Expressway (A) N CNY 3.13 3.10 -1.0% 1,411 8.2 0.9 3.1% 9.2


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600377 CH Jiangsu Expressway (A) 2.4% 5.1% 0.5% 54.9% 41.5% 30.9% 12.5% 0.2

600018 CH Shanghai International Port Group 8.2% 6.7% 6.1% 34.4% 25.2% 16.8% 9.1% 0.2

600548 CH Shenzhen Expressway (A) -5.0% -1.0% 2.3% 77.3% 47.3% 22.6% 5.8% 0.7

601107 CH Sichuan Expressway (A) -5.7% 11.7% -2.1% 42.0% 31.7% 25.3% 10.3% 0.7





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100

105

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Ja

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Fe

b-1

1

Ma

r-11

Ap

r-11

Ma

y-1

1

Ju

n-1

1

Ju

l-11

Au

g-1

1

Se

p-1

1

Oct-

11

No

v-1

1

De

c-1

1

Ja

n-1

2

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

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n-1

2

Ju

l-1

2

Au

g-1

2

Se

p-1

2

Oct-

12

No

v-1

2

Price LevelMSCI China Industrial Conglomerates

IndexRelative Index (right scale)

Relative Index



Consumer Staples: Competition remains in focus

Analyst name: Lisa Deng ([email protected])

Sector stance

2013 sector view

In 2013, market competition is likely to remain a central theme with raw material prices expected to remain under

control. However, as the Chinese consumer becomes more sophisticated, the competitive landscape is evolving to one

with heavier emphasis on product and brand compared to the previous focus on distribution and cost. We expect

domestic Staples companies in 2013 to be challenged by a myriad of changing consumer trends, including a celebration

of choice, premiumization, concern for health and food safety, voicing of opinions on the internet, etc. As these play to

the strengths of more market-savvy MNCs, we believe market share shifts will be key to watch. Against this backdrop,

we prefer companies that are market leaders in segments that still have high growth potential and either differentiated

offerings or room for margin upside via scale and efficiency upgrades. Our top picks in the sector are Want Want and

China Foods. Uni-President China has demonstrated an impressive operational turnaround, but at the current valuation

the stock looks expensive.


Reform drivers

1. Wage inflation increasing spending power in lower-tier cities.

2. Increased focus on food safety causing companies to integrate upstream (e.g. dairy farms).

3. Rise of the modern trade and increasing competition from MNCs.

Cyclical drivers

1. Increasing competition in beverages.

2. Supply shortage and food safety concerns in dairy.

3. Over-capacity in tissues.


1. Downside: 1) continued sluggish China growth; 2) Worse-than-expected raw material inflation; 2) Intense

competition.

2. Upside: 1) Better-than-expected macro recovery; 2) Fall in raw material inflation; 3) Less intense competition.


1. Our sector view is more cautious vs. the street (2013/14 EPS forecasts generally in line or below consensus). We

believe increasing competition, over-capacity and efforts to rebrand will pose risk to top line and margins.


Buy #1: Want Want (0151.HK)

Reasons/catalysts: 1) 25% forecast EPS CAGR (1st quartile relative to peers) driven by continued sales upside in modern

trade and lower-tier cities; 2) Main investor concern of product innovation being addressed by added investment into

R&D and more rigorous application of innovation process.

Buy #2: China Foods (0506.HK)

Reasons/catalysts: Margin turnaround on the back of successful corporate restructuring in 2011, with a focus on cost

efficiency. We expect NPAT margin to rise from 2.3% in 2011 to 3.2% in 2014 – still an industry laggard.

Sell #1: Uni-President China (0220.HK)

Reasons/catalysts: We acknowledge that UPC has executed an impressive operational turnaround on the back of

successful product innovations in instant noodles and beverages. However, at 33.6x/28.2x on GS/Consensus 2013

estimates, we believe the stock is expensive.













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

506 HK China Foods B HKD 8.12 9.20 13.3% 2,928 21.2 2.8 1.7% 9.8

1068 HK China Yurun Food Group N HKD 4.88 5.95 21.9% 1,148 8.2 0.5 4.7% 5.9

468 HK Greatview Aseptic Packaging Company B HKD 4.05 5.25 29.6% 697 11.7 2.1 1.8% 7.7

1044 HK Hengan International N HKD 69.65 82.10 17.9% 11,045 22.0 5.6 2.6% 15.6

2319 HK Mengniu Dairy N HKD 21.60 22.15 2.5% 4,913 18.4 2.1 1.3% 7.7

2222 HK NVC Lighting Holding RS HKD 1.92 773

6808 HK Sun Art Retail Group B HKD 11.32 13.00 14.8% 13,933 27.7 4.4 1.4% 11.8

322 HK Tingyi (Cayman Islands) Holdings N HKD 21.85 18.95 -13.3% 15,760 27.7 5.0 1.8% 11.9

220 HK Uni-President China Holdings Ltd. S HKD 9.99 6.30 -36.9% 4,640 33.2 3.5 0.8% 16.9

151 HK Want Want China Holdings B HKD 11.28 11.85 5.1% 19,240 27.4 9.9 2.2% 18.9


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

506 HK China Foods 20.5% 15.5% 18.7% 5.9% 4.5% 2.9% 10.5% (0.1)

1068 HK China Yurun Food Group 209.4% 31.5% 887.3% 4.9% 3.5% 2.6% 5.8% 0.2

468 HK Greatview Aseptic Packaging Company 27.3% 42.7% 31.5% 22.3% 18.6% 14.0% 18.0% 0.1

1044 HK Hengan International 21.0% 26.8% 15.5% 23.1% 20.4% 15.9% 24.8% 0.2

2319 HK Mengniu Dairy 15.9% 15.1% 17.3% 7.6% 4.8% 3.7% 10.7% (0.4)

2222 HK NVC Lighting Holding

6808 HK Sun Art Retail Group 20.5% 15.8% 22.1% 7.1% 4.6% 3.2% 14.9% (0.3)

322 HK Tingyi (Cayman Islands) Holdings 35.6% 20.2% 23.6% 12.5% 8.4% 5.1% 14.1% 0.0

220 HK Uni-President China Holdings Ltd. 3.9% 19.4% 14.0% 8.0% 4.0% 3.5% 10.6% 0.6

151 HK Want Want China Holdings 29.1% 27.3% 29.5% 23.1% 20.7% 16.3% 36.0% (0.2)

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600361 CH Beijing Hualian Hypermarket Co. N CNY 4.60 4.20 -8.7% 492 39.2 1.0 2.4%

002264 CH Fujian New Hua Du Supercenter Co. B CNY 4.89 6.12 25.2% 420 15.2 1.8 0.7% 3.8

300146 CH Guangdong By-health Biotechnology Co. N CNY 51.50 53.70 4.3% 1,808 26.9 5.5 2.2% 20.9

601933 CH Yonghui Superstores B CNY 23.29 31.00 33.1% 2,871 26.3 3.5 0.4% 11.6

000759 CH Zhongbai Holdings Group Co. N CNY 6.11 5.40 -11.6% 668 19.2 1.4 0.0% 3.9


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600361 CH Beijing Hualian Hypermarket Co. 49.9% 14.0% 19.4% 3.2% 1.3% 0.6% 2.5% (1.2)

002264 CH Fujian New Hua Du Supercenter Co. 19.7% 26.0% 22.4% 4.9% 2.8% 2.0% 12.0% (0.7)

300146 CH Guangdong By-health Biotechnology Co. 46.0% 45.5% 51.2% 30.0% 28.9% 26.3% 20.5% (0.6)

601933 CH Yonghui Superstores 40.5% 32.2% 36.4% 5.0% 3.2% 2.0% 13.3% 0.3

000759 CH Zhongbai Holdings Group Co. 20.4% 18.4% 16.0% 3.6% 1.6% 1.2% 6.8% (0.5)





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Price Level

MSCI China Consumer Staples Index


Relative Index



Healthcare: Lacking catalysts, EPS growth to drive performance

Analyst name: Wei Du, Ph.D ([email protected]); Fengqi Qian ([email protected])

Sector stance

2013 sector view

We see limited policy catalysts in the near to medium term and believe earnings growth will be key to stock performance

in 2013. We think price cut overhang has largely lifted while hospital reform is the center of the focus. We expect

industry to grow at 17-20% yoy in 2013, as strong growth in lower tier cities offset the softened growth in more affluent

areas. We continue to favor medical device, service companies/distributors with limited risk exposure to price volatility

and companies with competitive products. We remain cautious on antibiotic manufacturers as demand is unlikely to

rebound as a result of restriction of antibiotic usage, in our view.


Reform drivers

1. Increasing reimbursement ratio and expanded insurance coverage continue to drive volume demand

2. Removal of drug mark up and total cost control measure weight on drugs with no significant clinical efficacy.

3. Potential centralized procurement on medical consumables pose a major near term overhang on pricing trend.


1. Shortfall of local government funding impose a major uncertainty to the direction of the ongoing healthcare reform

2. Worse than expect price decline in local tendering impose a major downside risk.


1. NA


Buy #1: CMS (0867.HK, Buy)

Reasons/catalysts: 1) Strong earnings CAGR of 31% from 2012-2014E; 2) Limited exposure to drug price cut; (3) potential

upside from new contract agreement and M&A due to rich cash position

Buy #2: Wuxi PharmaTech (WX, Buy)

Reasons/catalysts: 1) Easing margin pressure on moderate RMB appreciation and change in service mix; 2) Marin

improvement in manufacturing business due to rising utilization rate; 3) the ramp-up of the Wuhan facility as a low-cost

center helps easing opex pressure.

Sell #1: The United Lab (3933.HK, Sell)

Reasons/catalysts: 1) Weakening industry demand due to policy overhang; 2) rising corn prices weigh on margins.


Buy #1: Yuyue (002223.SZ; on CL)

Reasons/catalysts: 1) Strong revenue CAGR of 30% and net profit CAGR of 32% from 2011-14E; 2) Oxygenator export

orders a bright spot: 2011-15E export revenue CAGR of 70%; 3) Strong product pipeline: blood glucose meter and air

purifiers will become core earnings driver from 2013E.

Sell #1: NHU (002001.SZ, Sell)

Reasons/catalysts: 1) Weakening global demand amid uncertainly related European crisis; 2) continued downward

pricing pressure due to saturated capacity; 3) ramp-up of new business may lag behind schedule.











Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

867 HK China Medical System Holdings B HKD 5.28 5.11 -3.2% 1,645 14.7 3.4 3.4% 10.4

1011 HK China NT Pharma Group Company S HKD 0.85 0.53 -37.6% 119 0.4 0.0% 45.6

1093 HK China Pharmaceutical Group S HKD 2.17 1.41 -35.0% 430 16.6 0.5 0.0% 5.3

2877 HK China Shineway Pharmaceutical Group B HKD 11.82 12.90 9.1% 1,261 9.6 1.6 3.0% 4.9

874 HK Guangzhou Pharmaceutical (H) NR HKD 13.04 1,364 21.9 2.0 1.3% 27.2

MR US Mindray Medical International N USD 34.03 35.50 4.3% 3,922 17.6 2.7 1.6% 12.1

1066 HK Shandong Weigao Group N HKD 8.39 9.00 7.3% 4,846 22.3 3.0 1.0% 21.2

2607 HK Shanghai Pharmaceuticals Holding (H) N HKD 14.92 13.30 -10.9% 5,176 13.2 1.2 1.6% 7.2

460 HK Sihuan Pharmaceutical Holdings Group N HKD 3.07 3.10 1.0% 2,050 11.1 1.6 5.5% 7.5

SCR US Simcere Pharmaceutical Group N USD 7.92 7.50 -5.3% 435 20.3 1.2 0.0% 9.2

1177 HK Sino Biopharmaceutical N HKD 3.57 3.82 7.0% 2,276 17.5 3.9 3.4% 9.0

1099 HK Sinopharm Group Co. N HKD 24.80 27.10 9.3% 7,688 20.2 2.5 1.5% 9.4

3933 HK The United Laboratories International Holdings S HKD 3.81 3.10 -18.6% 800 15.0 1.0 0.0% 7.8

WX US WuXi PharmaTech Cayman B USD 15.94 17.40 9.2% 1,124 11.2 1.8 0.0% 7.6


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

867 HK China Medical System Holdings 30.8% 25.5% 25.7% 40.2% 33.5% 31.4% 22.9% (0.3)

1011 HK China NT Pharma Group Company 47.0% 8.1% 192.7% 1.6% 0.1% -3.3% -2.5% 0.2

1093 HK China Pharmaceutical Group 403.5% 12.3% 31.9% 11.7% 4.5% 2.6% 3.2% 0.2

2877 HK China Shineway Pharmaceutical Group 14.1% 11.7% 14.5% 44.8% 38.1% 35.4% 17.2% (0.6)

874 HK Guangzhou Pharmaceutical (H) 17.3% 15.0% 9.1% 4.4% 2.9% 5.4% 8.7% 0.0

MR US Mindray Medical International 16.2% 16.7% 17.5% 24.8% 19.5% 18.0% 15.2% (0.2)

1066 HK Shandong Weigao Group 23.5% 22.6% 28.5% 29.0% 25.9% 28.6% 13.3% (0.1)

2607 HK Shanghai Pharmaceuticals Holding (H) 21.0% 21.7% 23.0% 4.9% 4.1% 2.9% 8.0% (0.2)

460 HK Sihuan Pharmaceutical Holdings Group 24.7% 18.3% 19.7% 42.1% 32.2% 34.5% 14.8% (0.3)

SCR US Simcere Pharmaceutical Group 22.0% 7.0% 13.6% 13.9% 8.6% 6.0% 5.5% 0.0

1177 HK Sino Biopharmaceutical 25.8% 19.8% 18.5% 18.9% 16.6% 10.6% 15.6% (0.5)

1099 HK Sinopharm Group Co. 26.8% 25.0% 23.8% 4.0% 3.6% 1.4% 9.2% 0.3

3933 HK The United Laboratories International Holdings 12.7% 10.1% 13.1% 16.4% 9.4% 5.2% 6.9% 0.7

WX US WuXi PharmaTech Cayman 18.3% 17.0% 18.1% 24.5% 18.4% 17.2% 16.1% (0.1)

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

002038 CH Beijing SL Pharmaceutical N CNY 35.70 33.90 -5.0% 1,441 23.3 5.4 0.6% 19.5

000999 CH China Resources Sanjiu Pharmaceutical N CNY 20.25 22.70 12.1% 3,183 16.3 3.3 1.9% 10.1

300006 CH Chongqing Lummy Pharmaceutical B CNY 18.25 19.70 7.9% 536 22.8 4.2 1.1% 16.4

300146 CH Guangdong By-health Biotechnology Co. N CNY 51.50 53.70 4.3% 1,808 26.9 5.5 2.2% 20.9

600594 CH Guizhou Yibai Pharmaceutical N CNY 19.15 19.90 3.9% 1,109 15.3 3.8 0.7% 10.4

600276 CH Jiangsu Hengrui Medicine Co. N CNY 28.78 28.10 -2.4% 5,714 28.0 5.6 0.4% 19.9

002262 CH Jiangsu NHWA Pharmaceutical Co. N CNY 25.02 26.60 6.3% 940 26.2 6.6 0.4% 18.8

002223 CH Jiangsu Yuyue Medical Equipment & Supply B* CNY 13.34 19.40 45.4% 876 18.6 4.3 1.0% 13.9

600422 CH Kunming Pharmaceutical N CNY 17.34 17.20 -0.8% 875 22.1 5.4 2.5% 14.6

300003 CH Lepu Medical Technology N CNY 8.61 9.60 11.5% 1,122 13.5 2.3 2.2% 9.2

000423 CH Shandong Dong-E E-Jiao Co. B CNY 38.70 45.50 17.6% 3,592 17.6 4.7 1.3% 13.6

002022 CH Shanghai Kehua Bio-Engineering Co S CNY 10.38 9.50 -8.5% 820 17.7 4.9 4.9% 12.9

002399 CH Shenzhen Hepalink Pharmaceutical Co. N CNY 19.21 17.90 -6.8% 2,468 23.8 1.9 3.2% 14.5

600587 CH Shinva Medical Instrument B CNY 28.52 34.00 19.2% 615 21.6 2.8 0.8% 14.5

600535 CH Tianjin Tasly Pharmaceutical Co. N CNY 51.19 51.80 1.2% 4,011 28.7 5.0 0.0% 21.9

600079 CH Wuhan Humanwell Healthcare (Group) Co. B CNY 21.39 26.30 23.0% 1,695 19.7 3.0 0.6% 11.2

000538 CH Yunnan Baiyao Grp Co. N CNY 64.78 64.60 -0.3% 7,221 23.2 5.0 0.0% 18.3

600267 CH Zhejiang Hisun Pharmaceutical Co. N CNY 14.30 13.60 -4.9% 1,928 22.3 2.3 0.7% 22.3

600521 CH Zhejiang Huahai Pharmaceutical Co. N CNY 11.57 13.20 14.1% 1,001 16.3 3.0 1.5% 9.7

002001 CH Zhejiang NHU Co S CNY 17.93 14.60 -18.6% 1,920 12.4 1.9 2.9% 6.3








Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

002038 CH Beijing SL Pharmaceutical 26.2% 28.6% 28.3% 60.3% 57.8% 54.5% 22.6% (0.4)

000999 CH China Resources Sanjiu Pharmaceutical 22.2% 19.4% 22.1% 20.5% 17.6% 14.6% 18.7% (0.5)

300006 CH Chongqing Lummy Pharmaceutical 58.8% 32.4% 49.2% 26.7% 21.5% 17.6% 17.4% 0.3

300146 CH Guangdong By-health Biotechnology Co. 46.0% 45.5% 51.2% 30.0% 28.9% 26.3% 20.5% (0.6)

600594 CH Guizhou Yibai Pharmaceutical 38.1% 24.8% 36.5% 21.5% 18.9% 15.3% 24.6% (0.2)

600276 CH Jiangsu Hengrui Medicine Co. 17.8% 19.4% 21.8% 26.5% 23.8% 19.3% 19.2% (0.2)

002262 CH Jiangsu NHWA Pharmaceutical Co. 46.9% 26.1% 40.8% 12.1% 10.7% 9.1% 25.2% (0.3)

002223 CH Jiangsu Yuyue Medical Equipment & Supply 36.3% 30.7% 38.6% 25.3% 23.0% 20.0% 23.0% (0.3)

600422 CH Kunming Pharmaceutical 34.7% 18.1% 30.4% 10.0% 8.7% 6.6% 21.3% (0.1)

300003 CH Lepu Medical Technology 18.4% 18.1% 20.1% 52.1% 48.8% 44.1% 17.2% (0.4)

000423 CH Shandong Dong-E E-Jiao Co. 34.9% 31.2% 34.4% 42.1% 40.8% 37.6% 26.4% (0.6)

002022 CH Shanghai Kehua Bio-Engineering Co 10.7% 12.5% 11.1% 31.5% 29.6% 25.6% 25.7% (0.5)

002399 CH Shenzhen Hepalink Pharmaceutical Co. 6.7% 22.5% 9.7% 26.4% 25.1% 28.3% 7.9% (0.8)

600587 CH Shinva Medical Instrument 38.0% 29.9% 36.0% 8.8% 8.0% 6.2% 12.4% (0.2)

600535 CH Tianjin Tasly Pharmaceutical Co. 24.1% 22.4% 23.5% 11.6% 9.6% 8.8% 16.7% (0.0)

600079 CH Wuhan Humanwell Healthcare (Group) Co. 28.8% 23.2% 36.5% 19.8% 17.6% 8.9% 12.2% 0.4

000538 CH Yunnan Baiyao Grp Co. 25.2% 18.2% 24.5% 14.3% 13.8% 12.1% 21.5% (0.3)

600267 CH Zhejiang Hisun Pharmaceutical Co. 23.6% 15.2% 21.1% 9.1% 3.4% 7.9% 9.9% 0.3

600521 CH Zhejiang Huahai Pharmaceutical Co. 21.8% 20.5% 18.6% 26.5% 21.8% 15.6% 18.7% 0.0

002001 CH Zhejiang NHU Co 1.1% 12.8% -12.7% 36.7% 29.9% 24.6% 15.0% (0.4)

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MSCI China Healthcare Index


Relative Index



Insurance: Mild growth for longer; favor return and value

Analyst name: Mancy Sun ([email protected]), Ning Ma ([email protected])

Sector stance

2013 sector view

We believe the surprisingly long low growth cycle for life insurance companies may be already priced in. However, we

think 2013 growth will still be mild, and of mixed quality. Operating environment may stabilize in 2013, but value growth

may lag, as we believe the industry in general will shift more focus to volume instead of margin, in order to keep the

agency force engaged. Since there is not much differentiation from a growth perspective, we prefer names with higher

return (EV growth) and cheaper valuation.


Reform drivers

1. We expect the industry in general will focus more on volume than margin in 2013 to keep the agency force engaged,

but we believe there will be some strategy diversions between companies (volume camp vs. margin camp).

2. Pilot tax-deferrable pension scheme likely to be further delayed till mid 2013. Other new initiatives (supplemental

basic medical insurance scheme/investment liberalization) will take time to have an impact and depend on execution

or risk control.

3. Capital raising less of an issue/focus until 2014/2015 as insurers just finished a round of equity/sub-debt/convertible

bond raising.

Cyclical drivers

1. Operating environment, especially the bancassurance channel, to stabilize as China’s liquidity improves (insurance

products’ attractiveness to increase as yields on banks’ wealth management products fall). But the pick-up will likely

be gradual/mixed, not robust.

2. Potential A-share market rebound will benefit insurers’ embedded value growth, with players with smaller backbook

(NCI, Taiping) or a negative spread book (Ping An) to benefit more.

3. New business margin will stay flat/slightly trend down as volume competition increases.


1. Worse-than-expected GDP/insurance demand growth, or liquidity tightening.

2. Sharp decline of investment yields.


1. We believe insurers will refocus on volume competition, and sector margin will stay flat or even slightly trend down.

Operating environment will stabilize but value growth will lag.

2. Not much differentiation between players in new business growth, so investors should focus on stocks that offer

higher return and relative value.




Buy #1: New China Life (1336.HK; on CL)

Reasons/catalysts: 1) Story still intact but delayed: We believe the restructuring story is still intact at New China Life but

delayed given sector wide issues/executions. We now expect 0%/6/10% NBV growth in 2012E/2013E/2014E vs. previous

10%/14%/13%; 2) Continued focus on value creation and still some near-term potential for new business margin

improvement and: We believe the management plans to roll out value-centric KPI (with 50% weighting in VONB) for

managers and agency force, this will likely better align agents and branch managers’ interests with the firm’s interest.

We estimate mild upside in new business margin (2012E/13E/14E: 25%/26%/27%) from product mix improvement

through critical illness riders; 3) Undemanding valuation: current price implies 1.01x 13E EV for 14% EV growth. Risk:

Execution/share-sell overhang.

Buy #2: Taiping (0966.HK)

Reasons/catalysts: 1) Negatives likely priced in: undemanding valuation at 0.98x 13E/EV, for 16% EV growth; 2) Volume

strategy necessarily to a certain extent for Taiping, which lacks economy of scale: The company might focus more on

volume growth (vs. margin) given its 3-year goal to double premium income/asset/net profit, but we believe it is

necessary for Taiping in order to keep its cost down (given the small scale) and its high quality agency force engaged

(Taiping’s productivity is on par with Ping An and higher than other peers); 3) Capital position now less of an issue:

Taiping recently entered a financial reinsurance contract which would increase Taiping Life’s statutory solvency by

Rmb4bn. This would potentially increase 13E solvency margin ratio to 189% from 133% (regulatory category 1 minimum:

150%). This could come at the expense of new business margin (factored in our estimates), but might ease some

investor concerns on capital raising need. Risks: significant equity market decline/poor execution/significant margin

decline.


Buy #1: Ping An (601318.SS; on CL)

Reasons/catalysts: 1) Trading at 1.0X EV with little potential downside (sector average 1.21X); 2) Higher/similar return vs

China Life/CPIC (13% vs 10%/13%) while trading at much lower multiple (1.0X EV vs 1.7X/1.2X); 3) Still best positioned in

long term in terms of management quality/vision, agency productivity/training system, distribution channel build-out,

diversified earnings mix).






Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

2628 HK China Life Insurance Company N HKD 22.85 26.38 15.4% 83,332 15.8 2.2 2.1%

2601 HK China Pacific Insurance (H) N HKD 25.25 29.21 15.7% 29,523 15.5 2.0 2.3%

966 HK China Taiping Insurance Holdings B HKD 13.08 19.50 49.1% 2,893 9.8 1.6 1.0%

1336 HK New China Life Insurance (H) B* HKD 24.20 41.44 71.2% 9,733 12.5 1.5 2.0%

2318 HK Ping An Insurance Group B HKD 59.40 79.38 33.6% 60,670 10.6 2.0 1.5%


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

2628 HK China Life Insurance Company 129.9% 13.8%

2601 HK China Pacific Insurance (H) 171.9% 12.9%

966 HK China Taiping Insurance Holdings 103.5% 16.4%

1336 HK New China Life Insurance (H) 44.1% 4.3% 11.7%

2318 HK Ping An Insurance Group 49.5% 18.8%










Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601628 CH China Life Insurance Company (A) N CNY 17.71 21.37 20.7% 80,367 15.1 2.1 2.2%

601601 CH China Pacific Insurance (A) N CNY 17.14 23.66 38.0% 24,937 13.1 1.7 2.7%

601336 CH New China Life Insurance (A) B CNY 20.64 33.57 62.6% 10,329 13.3 1.6 1.9%

601318 CH Ping An Insurance Group (A) B* CNY 37.12 64.29 73.2% 47,177 8.2 1.5 2.0%


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601628 CH China Life Insurance Company (A) 129.9% 13.8%

601601 CH China Pacific Insurance (A) 168.3% 12.9%

601336 CH New China Life Insurance (A) 42.2% 4.3% 11.7%

601318 CH Ping An Insurance Group (A) 49.5% 18.8%

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Price LevelMSCI China Insurance Index


Relative Index



Internet/Education: Mobile & e-commerce the focus

Analyst name: Piyush Mubayi ([email protected]); Fei Fang ([email protected])

Sector stance

2013 sector view

We expect 2013 to be a year of rapid traffic migration from desktop computers to mobile devices, where we see

structural benefits for some of the category leaders in the sector, but headwinds for others. We expect the cyclical

recovery of domestic consumption to warrant a generally healthy shape for advertising-driven business models. We

believe online game developers will keep up R&D efforts for the shortened life cycles of new title launches, and enhance

the pipeline quality in order to capture growing revenues from web games. We also expect the online advertising

revenue cycle to bottom at around mid 2013.

E-commerce, in particular, plays a critical role in driving share price upside for our stock ideas. Two of our top Buy

theses, Tencent and Ctrip, will rely on the rising penetration of online shopping to materialize sustainable growth. We

believe new technology will accelerate the evolution of China’s e-commerce offerings, as mobile Internet has the

potential to blend social and local features into users’ web-based purchase behaviors.

The education sector will increasingly favor class-based tutoring format, in our view. Economic teacher-to-student

ratios and manageable facility utilization will be critical in sustaining margin amid rapid cost inflation in top tier cities,

and less favorable population demographics in lower tier cities.


Reform drivers

1. Rising 3G/4G penetration enabling Internet access on mobile devices (favor Tencent).

2. Rapid migration of advertising budget online to enhance advertisers’ return-on-investment (favor Youku).

3. Growing e-commerce penetration (favor Tencent and Ctrip).

4. Sustained demand for tutoring services and market share consolidation (favor TAL Education).

Cyclical drivers

1. Normalized advertising demand on the back of improved macro conditions.

2. Stabilizing price competition in the online travel space.


1. Monetization of mobile traffic and products remains at early stage.

2. Upfront investment on e-commerce infrastructure may weigh on margin.


1. Tencent: 2013E net profit c.10% above con. on better cost control and enhanced monetization of its platform.

2. Ctrip: 2013E net profit c.10% above con. on its leadership position in the industry and eased competition intensity.

3. TAL Education: 2013E net profit c.15% above con. on rising utilization, expansion and improved margin visibility.




Buy #1: Tencent Holdings (0700.HK)

Reasons/catalysts: 1) We expect incremental data points over the next 6-12 months on Tencent’s progress in mobile

internet, social graph-driven targeted advertising, open platform and game launches (League of Legends) to support our

positive view, and enable Tencent to benefit from increasing investor interest in evolving mobile internet and social

advertising growth; 2) We also expect investor concerns over margin compression, particularly from aggressive

headcount and new initiative set-up costs, as well as competitive challenges (from either rival microblogs evolving into

social networks or niche networks gaining prominence), to moderate near-term based on better cost control and

enhanced monetization of its platform.

Buy #2: Youku Tudou Inc. (YOKU)

Reasons/catalysts: 1) We view the merger between Youku and Tudou as a first step en-route to the combined company’s

attainment of scale as consolidation occurs in the fast-growing online video industry; 2) Online video companies that

execute well should extend their leadership over time by gaining scale and superior content as they leverage a strong

brand to attract more advertisers; 3) We attribute their strength to the ad format’s exposure to fast-moving consumer-

goods advertisers with strong demand for online branding.

Buy #3: Ctrip (CTRP)

Reasons/catalysts: 1) We believe the market is pricing in continued margin deterioration driven by intense customer

acquisition efforts. After consecutive quarters of cash rebates – and consecutive quarters of share price decline – we

believe OTAs are now constrained by capacity from escalating price competition further; 2) We view valuation

implications separately for the business and leisure segments, as customer behaviors and market opportunities drive

distinct growth and margin profiles; 3) Ctrip’s dominance in business is sustainable, in our view, as other agencies are

yet to develop the muscle to compete on service quality. Leisure travel is commoditized and Ctrip is less differentiated,

but low expectations have long been priced in.

Buy #4: TAL Education Group (XRS)

Reasons/catalysts: 1) Rising utilization of learning centers after the fast build-out in FY12 (end- February). We expect

FY13E growth to be driven by maturing of the 138 centers opened last year and increasing penetration in the cities

outside Beijing and Shanghai. The drivers should contribute to grow without further compressing gross margin; 2)

Continued geographical expansion via a prudent strategy, which has proved effective in upholding brand quality and

lowering execution risks; 3) Margin visibility has improved, since management has guided for 50 or less learning center

openings in FY13E, a substantial slowdown from 138 in FY12.




Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

BIDU US Baidu.com, Inc. N USD 96.22 135.00 40.3% 33,730 15.7 5.3 0.0% 10.2

CYOU US Changyou.com N USD 24.02 30.00 24.9% 1,247 4.4 1.3 0.0% 0.9

CTRP US Ctrip.com International B USD 18.05 25.00 38.5% 2,630 13.4 2.2 0.0% 6.8

EDU US New Oriental Education & Technology Group Inc. (ADR) RS USD 19.17 3,007 15.3 3.1 0.0% 7.4

SINA US SINA Corporation N USD 47.08 57.00 21.1% 3,114 59.0 2.7 0.0% 31.7

SOHU US Sohu.com N USD 37.88 52.00 37.3% 1,478 16.4 1.3 0.0% 2.5

SFUN US SouFun Holdings Limited B USD 18.60 24.00 29.0% 1,529 7.8 3.6 0.0% 5.1

XRS US TAL Education Group B USD 8.95 15.00 67.6% 698 14.3 3.0 0.0% 6.6

700 HK Tencent Holdings B HKD 256.40 280.00 9.2% 61,596 21.9 6.8 0.6% 13.3

XUE US Xueda Education Group B USD 3.18 5.40 69.8% 219 7.7 1.0 0.0%

YOKU US Youku Tudou Inc. B USD 17.87 23.00 28.7% 2,802 1.7 0.0%








Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

BIDU US Baidu.com, Inc. 29.5% 37.4% 33.7% 60.0% 51.5% 47.1% 33.4% (0.9)

CYOU US Changyou.com 2.1% 9.4% 3.7% 58.1% 55.5% 43.6% 29.3% (0.9)

CTRP US Ctrip.com International 18.9% 18.3% 9.1% 26.8% 24.0% 24.6% 16.2% (0.9)

EDU US New Oriental Education & Technology Group Inc. (ADR) 15.8% 26.3% 20.2% 20.4% 17.2% 17.7% 20.1% (1.3)

SINA US SINA Corporation 336.4% 16.9% 139.5% 12.4% 4.3% 8.7% 4.6% (0.6)

SOHU US Sohu.com 4.7% 12.6% 25.0% 26.8% 22.6% 8.0% 5.8% (0.7)

SFUN US SouFun Holdings Limited 16.7% 17.1% 17.9% 51.8% 48.8% 36.7% 45.4% (0.4)

XRS US TAL Education Group 32.9% 31.8% 40.6% 22.6% 17.1% 17.1% 21.3% (1.2)

700 HK Tencent Holdings 32.2% 31.3% 29.4% 41.9% 39.0% 30.9%

XUE US Xueda Education Group 95.2% 40.7% 93.7% 12.6% 7.1% 6.8% 13.7% (1.6)

YOKU US Youku Tudou Inc. 50.9% 46.9% 60.1% -7.2% -10.2% -9.2% -2.9% (0.3)

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MSCI Internet Software & Service


Relative Index



Machinery: Strong structural growth in railway equipment; slow

cyclical recovery in construction equipment

Analyst name: Tian Lu ([email protected])

Sector stance

2013 sector view

We expect modest recovery in construction equipment barring a further slowdown in property. In particular, we see a

stronger recovery in 2H13 than 1H13 due to: 1) property new starts are likely to revert to positive yoy growth in 2H13,

and 2) off a lower base in 2H12. We expect strong railway equipment new orders intake as well as delivery. For coal

mining equipment we expect continuous weakness in 2013 due to slow coal price recovery.


Reform drivers

1. We believe potential MOR reform to separate MOR’s administrative and operative roles would to a certain extent

liberalize the railway market and 1) drive more private investment, in particular on the cargo and inter-city HSR side;

2) Enhance railway profitability if more flexible pricing is allowed. Ultimately we believe such reform is necessary

and would be beneficial for rolling stocks demand in the long run; however, we also think it is very challenging to

manage smooth reform without disrupting/slowing current fast-paced railway construction in the short term.

2. c.3,000km HSR completion to drive new MU orders and delivery.

3. A multi-year build-out of urban railway systems in c.30 cities; we expect over Rmb2trn in investment over 2012-15E.

Cyclical drivers

1. Infrastructure investment continues to accelerate.

2. Mining equipment demand is likely to remain weak on slow coal price recovery and decelerating coal mining capex.


1. Slower-than-expected railway construction/completion.

2. Slower-than-expected growth infrastructure and property investments.


1. We believe credit risks are containable for major construction equipment manufacturers.


Buy #1: Zoomlion (1157.HK)

Reasons/catalysts: 1) Resilient growth in concrete machinery and tower crane; 2) Strongest B/S among peers that allow

the company to take more proactive actions to expand market share while its main competitors are cash stretched; and

3) Industry leader with highest CROCI.

Buy #2: Lonking (3339.HK)

Reasons/catalysts: 1) Attractive valuation at below 0.9X 2013E P/B while generating positive ROE and operating cash

flow even in a trough year; 2) Strong operational and financial leverage to benefit the most from a demand recovery.


Buy #1: CNR (601299.SS, on CL)

Reasons/catalysts: 1) We expect strong locomotives and MU orders and delivery in 2013; 2) We expect 3-4 ppt margin

expansion potential as the company gradually replaces key purchased power/control systems with in-house made

systems.













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

1766 HK China South Locomotive & Rolling Stock (H) N HKD 6.71 7.60 13.3% 11,950 14.1 1.9 1.4% 8.3

3339 HK Lonking Holdings B HKD 1.81 1.90 5.0% 1,000 6.7 0.8 2.7% 4.4

631 HK Sany Heavy Equipment International Holdings B HKD 3.91 5.20 33.0% 1,570 8.7 1.4 2.3% 7.0

1157 HK Zoomlion (H) B HKD 9.96 11.30 13.5% 9,903 6.2 1.2 4.0% 4.2


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

1766 HK China South Locomotive & Rolling Stock (H) 36.8% 19.5% 27.6% 8.3% 6.3% 5.1% 11.4% (0.2)

3339 HK Lonking Holdings 72.8% 12.1% 26.7% 17.7% 13.5% 10.2% 12.2% 0.1

631 HK Sany Heavy Equipment International Holdings 20.0% 29.5% 23.1% 19.7% 17.6% 17.3% 16.0% (0.1)

1157 HK Zoomlion (H) 12.0% 9.5% 6.6% 22.1% 20.9% 17.3% 19.8% (0.2)

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601299 CH China CNR Corporation B* CNY 4.18 5.50 31.6% 6,926 9.6 1.1 2.1% 7.5

601766 CH China South Locomotive & Rolling Stock (A) B CNY 4.72 6.10 29.2% 10,460 12.3 1.7 1.6% 7.2

000528 CH Guangxi Liugong N CNY 8.34 9.20 10.3% 1,507 10.9 0.9 2.4% 9.6

600761 CH Heli N CNY 7.89 8.40 6.5% 651 8.1 1.2 2.5% 4.9

600031 CH Sany Heavy N CNY 8.89 10.00 12.5% 10,839 9.3 2.2 2.7% 7.4

000680 CH Shantui S CNY 4.02 3.00 -25.4% 735 17.1 1.0 3.7% 10.3

002097 CH Sunward Intel S CNY 6.68 6.00 -10.2% 441 28.4 1.5 0.7% 9.8

600582 CH Tian Di Science & Technology N CNY 9.30 10.60 14.0% 1,813 8.6 1.8 1.6% 5.0

600815 CH Xiamen XGMA Machinery S CNY 6.08 4.40 -27.6% 780 15.1 1.1 1.6% 11.6

601717 CH Zhengzhou Coal Mining Machinery Group N CNY 9.30 11.80 26.9% 2,090 8.2 1.5 1.6% 4.7

000157 CH Zoomlion (A) B CNY 8.17 11.50 40.8% 10,108 6.4 1.3 3.9% 4.3


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601299 CH China CNR Corporation 41.3% 19.2% 29.2% 7.0% 5.3% 4.2% 11.4% 0.3

601766 CH China South Locomotive & Rolling Stock (A) 35.0% 19.5% 27.6% 8.3% 6.3% 5.1% 11.4% (0.2)

000528 CH Guangxi Liugong 78.8% 16.3% 62.9% 9.6% 7.7% 6.0% 8.4% 0.4

600761 CH Heli 24.9% 22.7% 25.3% 10.5% 8.1% 6.6% 13.9% (0.1)

600031 CH Sany Heavy 10.5% 9.4% 5.5% 18.3% 16.2% 13.1% 22.7% 0.2

000680 CH Shantui 149.9% 26.9% 25.6% 5.7% 3.9% 1.9% 5.2% 0.6

002097 CH Sunward Intel 71.1% 12.4% 25.8% 11.5% 8.5% 4.0% 5.1% (0.0)

600582 CH Tian Di Science & Technology 15.9% 11.7% 16.3% 18.1% 16.1% 7.9% 11.4% (0.1)

600815 CH Xiamen XGMA Machinery -19.2% 17.2% 39.9% 6.9% 5.0% 3.6% 7.4% 0.5

601717 CH Zhengzhou Coal Mining Machinery Group 9.3% 12.1% 12.2% 17.2% 15.8% 14.0% 18.0% (0.5)

000157 CH Zoomlion (A) 10.5% 9.5% 6.6% 22.1% 20.9% 17.3% 19.8% (0.2)





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MSCI China Machinery Index


Relative Index



Media: Value emerging in a thriving industry

Analyst name: Xufa Liao ([email protected]); Zhijing Liu ([email protected])

Sector stance

2013 sector view

The media industry is booming in China. Policy tailwinds, increasing influence of new media and increasing value of

content are three major structural changes we have observed in recent years. We continue to prefer subsectors such as

advertising and marketing, video entertainment and new media.


Reform drivers

1. We believe the government will continue to promote new policies to support the development of the media

industry. Key policy reforms include the integration of the cable networks, the establishment of broadcast control

platforms for new media, policies to support the development of the movie industry and support for content

producers.

Cyclical drivers

1. Entertainment demand growth driven by the increase of GDP per capita as well as structural spending pattern

change.

2. We expect growth of marketing spending to accelerate given the recovery of the macro economy.


1. Later-than-expected supportive policy launch.

2. Rising labor cost may squeeze margins through whole value chain.


Buy #1: Hualubaina (300291.SZ; on CL)

Reasons/catalysts

1. A recovery in the TV drama industry: Rising prices and falling production volumes will favor market share gains by

large firms like HLBN.

2. Profit growth to reaccelerate: We expect HLBN’s profit growth to bottom in 3Q12 given strong TV drama pipelines

and a low base in 4Q11. The firm is also utilizing its IPO proceeds as working capital, which should boost revenue

growth in 2013-2014.

3. The company is attractively valued, trading at below peer group average P/E levels.








Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601801 CH Anhui Xinhua Media N CNY 10.68 9.70 -9.2% 1,560 17.7 2.2 1.6% 11.3

300251 CH Beijing Enlight Media Co. B CNY 20.55 26.30 28.0% 271 18.9 2.4 2.1% 12.6

600037 CH Beijing Gehua CATV S CNY 6.36 5.97 -6.1% 1,083 20.1 1.2 2.0% 4.0

300291 CH Beijing Hualubaina Film & TV Co. B* CNY 53.06 65.90 24.2% 511 20.6 3.1 1.9% 13.6

600637 CH BesTV New Media B CNY 14.72 18.73 27.2% 1,675 21.4 4.3 0.5% 12.7

300058 CH BlueFocus Communication B CNY 21.87 26.94 23.2% 1,393 26.2 6.5 1.5% 14.6

601098 CH China South Publishing & Media B CNY 8.78 10.50 19.6% 2,532 14.2 1.8 2.8% 7.1

600373 CH Chinese Universe Publishing and Media N CNY 12.95 13.20 1.9% 1,179 13.2 1.9 7.1% 11.0

002400 CH Guangdong Advertising B CNY 22.59 25.13 11.2% 699 23.1 3.2 1.1% 11.5

002292 CH Guangdong Alpha Animation N CNY 17.48 17.50 0.1% 1,150 32.2 4.4 1.2% 23.9

300027 CH Huayi Brothers Media B CNY 15.23 17.15 12.6% 1,479 22.5 4.3 1.8% 15.5

601928 CH Jiangsu Phoenix Publishing & Media N CNY 6.67 8.10 21.4% 2,725 13.3 1.5 0.0% 8.4

300104 CH Leshi Internet Information & Technology N CNY 16.49 17.34 5.2% 1,107 25.1 4.9 1.0% 9.7

600831 CH Shaanxi Broadcast & TV Network S CNY 6.66 6.33 -5.0% 602 20.5 2.3 2.0% 5.7

002238 CH Shenzhen Topway Video Communication N CNY 10.25 11.91 16.2% 527 22.8 2.2 1.8% 7.1

600551 CH Time Publishing & Media N CNY 9.39 10.00 6.5% 763 14.3 1.5 2.8% 10.1

000665 CH Wuhan Plastics Industrial Group N CNY 9.89 11.45 15.8% 282 18.8 1.6 0.1% 8.0

300133 CH Zhejiang Huace Film & TV B CNY 16.82 19.60 16.5% 519 21.0 4.0 1.9% 14.9


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601801 CH Anhui Xinhua Media 12.8% 7.8% 12.3% 15.0% 13.0% 14.1% 12.1% (0.7)

300251 CH Beijing Enlight Media Co. 21.4% 22.8% 27.3% 29.1% 26.8% 24.2% 12.6% (0.5)

600037 CH Beijing Gehua CATV 15.2% 5.5% 11.0% 48.6% -5.9% 15.0% 5.9% (0.4)

300291 CH Beijing Hualubaina Film & TV Co. 30.0% 36.6% 36.6% 42.5% 42.2% 33.3% 15.0% (0.5)

600637 CH BesTV New Media 39.7% 28.7% 38.6% 47.2% 34.2% 32.4% 19.9% (0.6)

300058 CH BlueFocus Communication 32.5% 30.4% 37.6% 19.7% 17.0% 11.4% 22.1% (0.4)

601098 CH China South Publishing & Media 16.9% 8.4% 18.3% 14.1% 11.3% 14.8% 12.1% (0.9)

600373 CH Chinese Universe Publishing and Media 9.1% 16.3% 10.3% 6.6% 5.0% 5.8% 13.9% (0.1)

002400 CH Guangdong Advertising 31.7% 20.7% 42.4% 5.9% 5.6% 3.4% 12.5% (0.5)

002292 CH Guangdong Alpha Animation 35.9% 22.9% 39.2% 18.7% 16.3% 15.0% 13.3% (0.4)

300027 CH Huayi Brothers Media 29.9% 35.9% 42.9% 30.7% 26.6% 21.2% 19.0% 0.0

601928 CH Jiangsu Phoenix Publishing & Media 21.0% 11.8% 18.5% 14.0% 10.6% 17.0% 11.3% (0.7)

300104 CH Leshi Internet Information & Technology 38.8% 37.0% 30.3% 49.2% 22.1% 16.8% 19.5% 0.6

600831 CH Shaanxi Broadcast & TV Network 13.1% 15.8% 11.9% 35.5% 12.1% 9.6% 10.9% 0.1

002238 CH Shenzhen Topway Video Communication 14.9% 3.8% 6.2% 40.2% 16.3% 15.6% 9.2% (0.4)

600551 CH Time Publishing & Media 14.6% 7.6% 13.6% 12.6% 9.3% 11.7% 9.8% (0.4)

000665 CH Wuhan Plastics Industrial Group 18.7% 12.8% -2.6% 36.8% 16.9% 16.5% 8.0% (0.1)

300133 CH Zhejiang Huace Film & TV 34.8% 29.1% 35.7% 42.2% 41.0% 33.8% 18.6% (0.4)



Metals: Divergent supply growth; prefer copper/gold

Analyst name: Julian Zhu ([email protected])

Sector stance

2013 sector view

We prefer copper and gold as we expect the synchronized global quantitative easing and relatively tight supply growth

to continue supporting metal prices in 2013. Copper remains our most preferred base metal due to ongoing supply

setbacks on falling ore grade and lack of infrastructure in new mines. In contrast, we see persistent oversupply and

elevated inventory in steel and aluminum, which would cap any price rebound before a meaningful downstream

demand pickup. We expect lower but limited downside moly prices as many marginal producers are starting to make

losses on current prices.


Reform drivers

1. We expect supply growth to diverge further in 2013. The global setbacks on new mines should keep copper supply

still tight in 2013 while more new steel and aluminum capacity is set to come on stream, exacerbating the already

oversupplied markets. Further, the new copper projects require very high long term copper prices

(US$7,120/tonne@15% IRR) due to rising capex. By contrast, more lower-cost new aluminum capacity should further

reduce the overall industry average production costs, squeezing out existing high-cost producers.

Cyclical drivers

1. Improving downstream demand as a result of resumption of existing infrastructure/property projects and newly

approved projects starting up.

2. Limited new capacity coming on line for copper due to lower ore grade, technical issues, and lack of infrastructure.

3. In the long run, we believe the stricter entry barrier policy of moly benefits large producers that exit.


1. Higher-/lower-than-expected copper/aluminum/steel/gold prices.

2. Higher-/lower-than-expected raw material costs.


1. We expect a slow and modest margin recovery for steel producers in 2013.

2. We don't agree on the cost support argument on aluminum prices as we see more lower-cost new capacity coming

on stream, squeezing out existing high-cost suppliers.

3. We expect the market to be disappointed again by the scale of new copper capacity coming on stream in 2013.


Buy #1: Jiangxi Copper (0358.HK; on CL)

Reasons/catalysts: 1) Should benefit from the copper price hike; 2) The most self-sufficient on copper concentrate among

domestic peers.

Buy #2: Zijin Mining (2899.HK; on CL)

Reasons/catalysts: 1) Production to hold steady as new projects including Shuiyindong and Zuoan gold mines come on

line; 2) Output from copper, lead and zinc to increase after launch of Duobaoshan copper mine, Tuwa mine and

Sanguikou mine.



Sell #1: Angang (0347.HK)

Reasons/catalysts: 1) New capacity coming on stream to further exacerbate the already severe oversupply; 2) Limited

steel price rebound; 3) Iron ore prices are likely to rise on a steel production rebound.

Sell #2: Chalco (2600.HK)

Reasons/catalysts: 1) Overcapacity in China aluminum industry caps aluminum price rebound; 2) High power costs due

to relatively low self-sufficiency in energy.


Buy #1: Baogang (600019.SS; on CL)

Reasons/catalysts: 1) Industry leader with above-average margins due to more competitive product mix; 2) Has disposed

of non-performing COREX and specialty/stainless steel business; 3) The completion of the Zhanjiang project in three

years.

Sell #2: Chalco (601600.SS)

Reasons/catalysts: 1) Overcapacity in China aluminum industry caps aluminum price rebound; 2) High power costs due

to relatively low self sufficiency in energy.






Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

2600 HK Aluminum Corporation of China (H) S HKD 3.33 2.50 -24.9% 5,811 0.8 0.0% 13.6

347 HK Angang Steel (H) S HKD 5.02 2.80 -44.2% 4,686 0.7 0.0% 10.3

3993 HK China Molybdenum Co. N HKD 3.25 3.15 -3.1% 2,045 11.1 1.0 2.7% 5.7

1393 HK Hidili Industry International Development S HKD 1.98 1.20 -39.4% 528 7.3 0.4 2.7% 8.4

358 HK Jiangxi Copper (H) B* HKD 19.68 22.70 15.3% 8,793 9.9 1.2 2.0% 7.2

323 HK Maanshan Iron & Steel (H) N HKD 2.17 1.90 -12.4% 2,156 0.6 0.0% 7.8

639 HK Shougang Fushan Resources Group N HKD 2.98 2.39 -19.8% 2,058 9.7 0.8 4.1% 3.6

1818 HK Zhaojin Mining Industry N HKD 13.24 13.83 4.5% 4,979 13.5 3.4 2.7% 8.4

2899 HK Zijin Mining(H) B* HKD 3.13 4.05 29.4% 8,809 7.9 1.6 3.9% 4.6


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

2600 HK Aluminum Corporation of China (H) 80.2% 7.9% 289.4% 5.9% 1.4% -0.8% -2.4% 1.7

347 HK Angang Steel (H) 50.6% 5.3% 132.0% 7.0% -1.3% -3.1% -6.4% 0.8

3993 HK China Molybdenum Co. -2.0% 1.7% 9.8% 34.5% 25.0% 20.3% 8.5% (0.2)

1393 HK Hidili Industry International Development 31.2% 16.1% 13.3% 40.0% 32.7% 15.2% 5.2% 0.7

358 HK Jiangxi Copper (H) 6.0% -5.3% 7.0% 6.3% 5.2% 4.7% 11.5% (0.0)

323 HK Maanshan Iron & Steel (H) 69.7% 10.9% 70.6% 5.7% 0.3% -0.8% -2.9% 1.0

639 HK Shougang Fushan Resources Group -10.2% 1.8% -9.3% 47.9% 39.1% 24.7% 7.2% (0.3)

1818 HK Zhaojin Mining Industry 25.7% 17.8% 24.8% 51.9% 41.7% 28.9% 23.5% 0.3

2899 HK Zijin Mining(H) 25.2% 13.8% 21.1% 25.9% 21.6% 13.0% 16.6% 0.0










Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601600 CH Aluminum Corporation of China (A) S CNY 4.81 3.40 -29.3% 10,444 1.5 0.0% 16.7

000898 CH Angang Steel (A) N CNY 3.40 3.10 -8.8% 3,949 0.6 0.0% 9.6

600019 CH Baoshan Iron & Steel B* CNY 4.63 5.40 16.6% 13,018 12.9 0.7 3.7% 5.7

600362 CH Jiangxi Copper (A) N CNY 20.61 19.90 -3.4% 11,458 12.9 1.5 1.6% 9.5

600808 CH Maanshan Iron & Steel (A) N CNY 1.91 1.70 -11.0% 2,361 0.6 0.0% 8.0

600005 CH Wuhan Iron and Steel N CNY 2.43 2.50 2.9% 4,146 42.1 0.7 1.1% 5.3

601899 CH Zijin Mining (A) B CNY 3.71 4.84 30.5% 12,992 11.7 2.4 2.6% 6.5


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601600 CH Aluminum Corporation of China (A) 80.5% 7.9% 289.4% 5.9% 1.4% -0.8% -2.4% 1.7

000898 CH Angang Steel (A) 51.3% 5.3% 132.0% 7.0% -1.3% -3.1% -6.4% 0.8

600019 CH Baoshan Iron & Steel -46.7% 5.1% 13.3% 11.1% 3.8% 3.1% 5.1% 0.3

600362 CH Jiangxi Copper (A) 4.6% -5.3% 7.0% 6.3% 5.2% 4.7% 11.5% (0.0)

600808 CH Maanshan Iron & Steel (A) 70.1% 10.9% 70.6% 5.7% 0.3% -0.8% -2.9% 1.0

600005 CH Wuhan Iron and Steel 80.1% 4.9% 8.6% 8.8% 1.8% 0.6% 1.6% 0.5

601899 CH Zijin Mining (A) 23.6% 13.8% 21.1% 25.9% 21.6% 13.0% 16.6% 0.0

40

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MSCI China Metals & Mining


Relative Index



Oil & Gas: Improving operating results, limited downside risks

Analyst name: Nilesh Banerjee ([email protected]); Arthur Yan ([email protected]); Frank He ([email protected])

Sector stance

2013 sector view

In the first year under China’s new leadership, we expect more focus on downstream market growth, overseas M&A,

offshore exploration, natural gas infrastructure build-up, end-user gas market expansion, and regulatory reforms.

Upstream investments are heavily into unconventional oil & gas, deepwater, and conventional gas developments. Shale

gas excitement may recede as investors take on the challenges and barriers of developing it. We see insignificant shale

gas contribution to overall gas supply. Domestic refining margin depends on execution of oil products pricing reform

and oil markets. Petrochemical sustainability is relatively healthy. We are positive on downstream and oil services over

upstream.

For gas distribution, we believe growing low-cost piped gas supply will continue to support demand growth in 2013. In

addition, we identify natural gas vehicles and distributed energy system will emerge to be the key driver of overall gas

demand going forward. On the other hand, as gas pricing reform will be rolled out in the coming quarters in different

cities, we expect gas distributors’ should generally pass through the cost hikes to end users. But their dollar margin may

face some volatility in 2013 due to time lag between cost hike and tariff pass through. In addition, we believe M&A

opportunities still exist for gas distributors, and companies with low-cost funding and balance sheet such as CR Gas and

Kunlun are well-positioned.


Reform drivers

1. Oil pricing mechanism, which may be rolled out piecemeal starting in December 2012. NDRC adjusted the oil

products prices mostly in line with crude oil price changes in past months and we think the next focus could be

increasing transparency of the pricing mechanism.

2. Expansion of gas pricing reform to more provinces.

3. Rollout of gas pipelines (such as the 2nd West East and Sino-Myanmar) to support demand growth.

Cyclical drivers

1. Oil price.

2. Offshore exploration and overseas investments.


1. Sharp decline of oil price.

2. Major projects delays.

3. Lower demand due to economic slowdown; delayed reforms.


1. We are largely in line with consensus on sector earnings outlook overall. We are generally above consensus for the

upstream but below for the downstream. We are also above consensus for gas but below for oil services.




Buy #1: China Petroleum & Chemical Corp. (0386.HK)

Reasons/catalysts: 1) Positive regulatory reforms; 2) Heavy upstream investments; 3) Market-focused corporate changes.

Buy #2: COSL (2883.HK)

Reasons/catalysts: 1) New capacity additions; 2) Higher utilization rate.

Buy #3: China Gas (0384.HK, CL-Buy) Reasons/catalysts: 1) its earnings and return offers upside along with its plan to gradually phase out the loss-making LPG import and

wholesale business; 2) we see synergy from the strategic cooperation agreement between China Gas and Sinopec; 3) we believe the

potential completion of 51% stake acquisition on Panva Gas will provide earnings support in FY13.


Buy #1: China Petroleum & Chemical Corp. (600028.SS)

Reasons/catalysts: 1) Oil products pricing reform; 2) Natural gas pricing reform.






Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

384 HK China Gas Holdings B* HKD 5.20 5.50 5.8% 2,941 16.6 2.1 1.0% 9.0

2883 HK China Oilfield Services (H) B HKD 15.06 16.60 10.2% 8,735 10.0 1.5 2.0% 6.6

386 HK China Petroleum and Chemical (H) B HKD 8.38 9.35 11.6% 93,746 7.6 1.1 4.5% 4.5

1193 HK China Resources Gas Group N HKD 17.00 17.70 4.1% 3,102 18.7 2.5 1.1% 9.4

883 HK CNOOC NR HKD 16.54 95,327 8.5 1.6 3.5% 4.2

2688 HK ENN Energy Holdings N HKD 34.65 33.00 -4.8% 4,514 17.2 3.1 1.4% 9.1

135 HK Kunlun Energy Company B HKD 15.44 17.50 13.3% 14,246 16.0 2.4 1.8% 7.9

857 HK PetroChina (H) N HKD 10.28 11.00 7.0% 242,758 10.1 1.3 4.4% 5.4


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

384 HK China Gas Holdings 24.5% 5.6% 11.8% 18.1% 14.6% 6.7% 10.4% 0.7

2883 HK China Oilfield Services (H) 17.2% 20.5% 13.1% 41.9% 26.9% 20.7% 14.8% 0.5

386 HK China Petroleum and Chemical (H) 30.6% 2.8% 18.6% 7.2% 4.3% 2.9% 12.7% 0.4

1193 HK China Resources Gas Group 10.7% 31.7% 19.3% 19.1% 15.6% 8.1% 11.1% 0.2

883 HK CNOOC 2.0% 2.1% 1.3% 52.7% 38.3% 27.7% 19.2% (0.1)

2688 HK ENN Energy Holdings 16.2% 17.5% 11.8% 18.8% 15.7% 8.1% 14.6% 0.4

135 HK Kunlun Energy Company 11.3% 20.4% 22.3% 49.4% 32.7% 19.9% 10.7% 0.1

857 HK PetroChina (H) 13.3% 2.4% 9.4% 18.4% 11.0% 7.5% 12.9% 0.3










Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601808 CH China Oilfield Services (A) B CNY 15.81 21.30 34.7% 11,411 13.1 1.9 1.5% 8.1

600028 CH China Petroleum & Chemical (A) B CNY 6.06 7.95 31.2% 84,357 6.9 1.0 5.0% 4.2

601857 CH PetroChina (A) N CNY 8.52 9.90 16.2% 250,355 10.5 1.3 4.3% 5.5


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601808 CH China Oilfield Services (A) 15.6% 20.5% 13.1% 41.9% 26.9% 20.7% 14.8% 0.5

600028 CH China Petroleum & Chemical (A) 28.9% 2.8% 18.6% 7.2% 4.3% 2.9% 12.7% 0.4

601857 CH PetroChina (A) 11.8% 2.4% 9.4% 18.4% 11.0% 7.5% 12.9% 0.3

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MSCI China Oil Gas & Consumable Fuels Index


Relative Index



Ports: Potential upside from tariff hikes

Analyst name: Simon Cheung ([email protected])

Sector stance

2013 sector view

We forecast a modest pickup of container port throughput growth from 7% in 2012E to 8% in 2013E, in line with

guidance given by the port operators, supported by slight improvement in external demand as reflected by the Global

Leading Indicator (GLI) and resilient domestic volume growth. With the sector trading at 13x P/E in 2013E, in line with

historical average, we recommend investors to be selective and continue to prefer Buy-rated HPHT within our China/HK

port coverage universe.


Reform drivers

1. Delivery of more mega vessels favors the natural deep-water ports: With mega vessels (over 8,000 TEU) accounting

for over 90% of total container ship delivery by 2014E, we expect consolidation of shipping lines and cargos to the

natural deep-water ports. HPHT should benefit from this trend.

2. Consolidation of shipping lines to call the hub ports: Similarly, many shipping companies have formed consortiums

and seek to save costs by consolidating their cargos to the hub ports. This should also favor HPHT.

Cyclical drivers

1. Potential tariff hike, though modest, in 2013: Looking back in history, port operators typically raise their tariffs once

every two years and the last round of rate hikes happened in 2011. As port operators have suffered from margin

pressure due to sluggish port volume but rising costs in past two years, we believe they will try to negotiate up the

tariffs for next year, especially since the shipping companies are in much healthier positions having raised their

freight rates significantly in recent quarters.

2. Restocking cycle in the US: Retailers have been cautious and kept very lean inventory levels in recent years. Recent

macro data point to better consumption sentiment from the US. Should they start to restock, we may see a pickup of

international trade to underpin strong port throughput growth in China ports, particularly those situated in regions

more leveraged to global trade (i.e., Pearl River Delta and Yangtze River Delta regions).


1. Fiscal cliff in the US and fiscal tightening in the Eurozone having significant impact on domestic consumption and

hence international trades.

2. Competition from new region where the government has its own agenda to boost trade growth (e.g., Guangzhou).


1. Our port throughput growth forecast of 8% in 2013 is slightly ahead of consensus estimate of 5-6%.

2. We are more constructive on HPHT for its stronger bargaining power for leadership position and ability to benefit

from the “mega-vessel” trend.










Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

144 HK China Merchants Holdings N HKD 23.70 26.90 13.5% 7,567 15.3 1.3 3.3% 16.5

1199 HK COSCO Pacific B HKD 10.96 13.20 20.4% 3,835 9.8 0.9 4.1% 15.8

2880 HK Dalian Port Company N HKD 1.75 1.70 -2.9% 999 7.0 0.5 5.7% 8.1

3382 HK Tianjin Port Development Holdings N HKD 0.97 1.00 3.1% 764 7.5 0.5 5.4% 8.0

576 HK Zhejiang Expressway N HKD 5.91 5.60 -5.2% 3,312 11.8 1.3 6.4% 7.0


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

144 HK China Merchants Holdings 8.6% 6.1% 7.6% 52.0% 32.8% 37.0% 8.2% 0.4

1199 HK COSCO Pacific 12.3% 11.1% 12.9% 47.8% 32.8% 47.3% 9.5% 0.5

2880 HK Dalian Port Company 17.2% 7.0% 2.8% 37.4% 23.1% 19.7% 6.1% 0.4

3382 HK Tianjin Port Development Holdings 3.3% 7.9% 1.8% 14.6% 9.8% 4.1% 3.6% 0.2

576 HK Zhejiang Expressway 3.6% 0.9% 1.3% 47.3% 34.3% 26.7% 8.9% (0.1)

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Eq-wgt (Offshore Ports)


Relative Index



Power Utilities: Lower interest rate and coal oversupply; Buy IPPs

Analyst name: Franklin Chow, CFA ([email protected])

Sector stance

2013 sector view

We think the power utilities industry may be a rare area in China to still achieve the following: 1) revenue growth

(small capacity growth may offset even weak utilization); 2) margin expansion (persistently weak input [coal] prices;

generally rising labor costs in China affect them less as such costs are small within their cost structure; falling interest

rates to benefit these highly-geared firms); and 3) rising cash flows (they are unlikely to be troubled by receivable

collection but can lengthen their payable days due to stronger bargaining power vs. suppliers).


Reform drivers

1. Fuel cost pass-through or return-based tariff regime We think timing of reform is elusive and so this is not a key part of our investment analysis. Ability to effectively

pass on coal price hikes would meaningfully boost profitability and improve earnings visibility for power producers.

It may also encourage more capital investments into the sector in order to prevent power shortage. However, we

think the government would also balance the direct consequences of potentially lower power demand and higher

input costs for many key energy-intensive industries in China. Also, the reforms may be intertwined with potentially

lengthy and difficult reforms for the power grids which are currently state-owned and have less public disclosure.

Cyclical drivers

1. Lower unit coal cost We think the coal cost trend for Chinese independent power producers (IPPs) would remain favorable into 2013E as

we expect secular coal oversupply to be more apparent over the next 12 months.

2. Lower interest cost We expect lower effective interest rates to benefit these highly-geared companies.


Tariffs, coal costs, utilization and policy changes vary from our assumptions.

How we differ from consensus:

Our 2013 EPS estimates are generally below Reuters consensus estimates; we believe we have more conservative

assumptions on utilization and coal cost.


Buy #1: China Power International (2380.HK, on CL)

Reasons/catalysts: Uniquely significant exposure and profit mix in hydro power is not reflected by its 2013E P/E of 7.1X

(2013E EPS growth of 11% and ROE of 9%), in our view.

Buy #2: China Resources Power (0836.HK)

Reasons/catalysts: 1) Beneficiary to stable coal prices and falling effective interest rate; and 2) Development into a

diversified energy supplier (e.g. coal-fired and wind power, coal) could improve long-term earnings growth and

profitability.

Buy #3: Huaneng (0902.HK)

Reasons/catalysts: 1) Higher earnings sensitivity to lower-than-expected coal prices and falling effective interest rate; and

2) Higher dividend payout ratio than peers (5.1% vs. peers’ average of 3.0%).













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

579 HK Beijing Jingneng Clean Energy N HKD 1.60 1.50 -6.3% 1,038 7.6 0.6 0.9% 11.9

916 HK China Longyuan Power B HKD 4.85 5.60 15.5% 4,671 9.5 1.0 2.0% 9.5

2380 HK China Power International B* HKD 2.10 2.70 28.6% 1,384 7.1 0.6 5.6% 9.6

836 HK China Resources Power B HKD 17.12 19.60 14.5% 10,482 9.6 1.4 3.3% 8.4

991 HK Datang International Power Generation N HKD 2.73 2.90 6.2% 4,688 9.6 0.7 5.2% 8.9

270 HK Guangdong Investment B HKD 6.10 6.70 9.8% 4,906 11.0 1.5 3.4% 6.4

1071 HK Huadian Power International (H) N HKD 2.30 2.10 -8.7% 2,009 9.0 0.7 0.0% 9.2

902 HK Huaneng Power International (H) B HKD 6.38 6.50 1.9% 11,570 9.9 1.3 6.0% 8.0

958 HK Huaneng Renewables Corporation N HKD 1.13 0.90 -20.4% 1,232 11.5 0.6 0.0% 8.8


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

579 HK Beijing Jingneng Clean Energy 26.7% 71.9% 43.6% 30.5% 12.4% 11.4% 7.9% 1.9

916 HK China Longyuan Power 8.6% 14.2% 20.1% 48.9% 28.5% 15.0% 8.3% 1.6

2380 HK China Power International 12.3% 10.7% 11.4% 30.2% 18.4% 6.4% 6.4% 2.2

836 HK China Resources Power 22.3% 19.6% 28.4% 28.5% 18.1% 10.8% 11.0% 1.2

991 HK Datang International Power Generation 21.4% 6.2% 11.8% 31.0% 18.1% 3.7% 5.3% 3.1

270 HK Guangdong Investment 5.8% 5.6% 2.7% 72.9% 60.3% 41.9% 11.4% (0.1)

1071 HK Huadian Power International (H) 46.6% 9.6% 12.1% 22.1% 11.3% 2.3% 5.2% 3.7

902 HK Huaneng Power International (H) 22.7% 5.3% 5.5% 21.7% 12.8% 5.1% 10.8% 2.4

958 HK Huaneng Renewables Corporation 60.9% 22.0% 23.0% 89.5% 46.9% 14.2% 5.0% 2.1

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600900 CH China Yangtze Power B CNY 6.43 7.70 19.8% 17,034 14.3 1.4 3.7% 10.0

601991 CH Datang International Power Generation (A) N CNY 4.06 4.80 18.2% 8,676 17.8 1.3 2.8% 9.9

600027 CH Huadian Power International (A) N CNY 3.67 3.50 -4.6% 3,990 17.9 1.3 0.0% 10.1

600011 CH Huaneng Power International (A) B CNY 6.58 8.30 26.1% 14,849 12.7 1.6 4.7% 8.6


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600900 CH China Yangtze Power 4.9% 0.4% -0.4% 82.6% 53.0% 34.9% 9.9% 0.9

601991 CH Datang International Power Generation (A) 19.8% 6.2% 11.8% 31.0% 18.1% 3.7% 5.3% 3.1

600027 CH Huadian Power International (A) 44.7% 9.6% 12.1% 22.1% 11.3% 2.3% 5.2% 3.7

600011 CH Huaneng Power International (A) 21.0% 5.3% 5.5% 21.7% 12.8% 5.1% 10.8% 2.4





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MSCI China Utilities Index


Relative Index



Real Estate: Volume positive priced in; further upside driven by

price increase

Analyst name: Yi Wang ([email protected]); Vicky Li ([email protected])

Sector stance

2013 sector view

We think the strong sales so far this year will be maintained into the fourth quarter, and that the sequential sales decline

in September does not indicate falling demand. Instead, we think the monthly fall in September is due to a high base of

comparison and fading seasonality of sales in major cities. Overall, sales volumes have shown divergent trends, with

tier-1 cities still at their lows since 2008 and most others at the mid-point at best.

We expect such stable volume outlook to drive property price to recover from the 2Q trough level, but slowly, as we

believe developers are unlikely to regain strong pricing power in the coming quarters, given: 1) underlying demand, the

main driver for volume recovery, is affordability sensitive; 2) we estimate it would take another 1-2 quarters for

developers to repair balance sheets to a healthy level, partly due to still-high financing costs and a longer cash collection

cycle now vs. previous years; 3) new sales launches could rise further in 2H12 given construction in the pipeline is

sizable, not to mention units already launched but unsold are still at a historical high.


Reform drivers

1. Property tax presents a near-term risk, but a long-term positive: We think property tax is a way to normalize

tightening policies in the housing sector, i.e. replace home purchase restrictions. As such, we think it should be

positive in the longer run, but we cannot rule out the possibility that there could be a certain period when both the

HPR and a property tax are in place, providing downside risk to our volume expectations.

Cyclical drivers

1. Volume positive priced in; further upside driven by price increase: We believe our offshore coverage universe has

largely priced in a strong volume recovery. In our view, further upside would require sustainable property price

appreciation, which we think is unlikely in the near term given the low visibility around further potential easing

measures by the government.


1. Upside: Unexpected policy easing that leads to stronger-than-expected price recovery.

2. Downside: Further government policy tightening and/or macro hard landing.


Our current earnings estimates are about 6%/11%/21% below consensus for 2012E-2014E.


Buy #1: Longfor (0960.HK, on CL)

Reasons/catalysts: We expect Longfor to deliver stronger-than- peer contract sales growth in 2013 among our coverage

universe on its opportune land banking since 2Q12, strong brand equity, and execution ability. Catalysts: 1) With 16 new

projects added YTD, we estimate the number of key projects selling in 2013E will increase by 28% to 59 from 46 in 2012E,

representing the highest growth among our offshore coverage universe. Given ongoing uncertainty around government

policies and the outlook for property prices, we think an expanded project pipeline is required to grow contract sales in

2013E and drive share price outperformance; 2) We estimate out of its total Rmb53bn of unbooked sales as of August

2012, 20% is at low net margin (below 10%), which, in our view, is not as significant a portion as believed by many. With

selling price for some of these projects recovering faster than expected since 2Q, there could be upside to our 2013/2014

margin estimates.



Buy #2: Greentown (3900.HK, on CL)

Reasons/catalysts: We expect mean reversion of Greentown’s valuation on its earnings/margin normalization after the

repair of its balance sheet. Catalysts: 1) We expect Greentown to continue its strong sales performance, which should

serve as a positive catalyst for the stock. We now project presales in FY12 at 15% higher than the company’s target; 2)

Greentown shares have risen c.87% since the announcement of its strategic alliance with Wharf and we believe further

re-rating will be realized, driven by better-than-expected earnings. Underpinned by the highest revenue lock-in in the

sector (100% in both 2012 and 2013), our earnings forecasts are 39%/30%/5% ahead of Bloomberg consensus for 2012E-

14E. In our view, stronger-than-expected presales and stabilizing margins on the back of gradual ASP recovery from

previously distressed level (up 23% in Oct-12 from the trough level in Jun-12) will drive earnings upgrades from the

street.

Sell #1: Yanlord (YNLG.SI, Sell)

Reasons/catalysts: The following may all weigh on Yanlord, in our view:

Lack of new project launches in 2013E, low flexibility/motivation (in order to preserve its margin) on product adjustment

(from big units to smaller ones) and pricing (i.e. still high-end focused), possibly prolonged impact to its brand image

from the quality issues arising from its Shanghai Yanlord Townhouse project in recent months. Therefore, Yanlord will

be not only highly exposed to policy uncertainties given its high-end focus but also to unprecedented challenges in its

home markets in Yangtze River Delta region (Shanghai, Nanjing and Suzhou), which are key revenue sources

(contributing 70%/ 50% in 2012E/2013E) and profit contributors for the company. We expect downward revision of

consensus earnings estimates in the coming 12 months for Yanlord (our 2013-2014 underlying profit forecast is 18%/25%

below Bloomberg consensus).


Buy #1: Beijing Capital Development (600376.SS, on CL)

Reasons/catalysts: We like BCD as we believe: 1) It stands to benefits the most from any Beijing mass market demand

recovery, given its leading position in Beijing and its mass-market product focus; 2) It stands to benefit more than peers

as it has de-rated relative to peers since tightening began in May 2010; and 3) It has good potential to become a

nationwide player given its well-established footprint across China. We view potential upside surprise in 2012E contract

sales as a key catalyst. Our current 2012E contract sales estimate of Rmb15bn suggests 32% yoy growth and is 7% above

management’s FY12 guidance. With new launches of Guofeng Meitang II, Guofeng Meilun I, and Xiyueshan plot 3 (in

total, Rmb4bn saleable), its contract sales reached Rmb12.2bn as of end September, 87% of FY12 company target of

Rmb14bn, higher than peers’ avg of c.80%. Also, any progress in the rolling out of management cash incentive program

in 2H12 should provide better growth outlook in the medium term, in our view.

Sell #1: China World Trade Center (600007.SS, Sell)

Reasons/catalysts: 1) We expect its 2013E EPS growth to slow to mid-teens level, with normalized Phase III operation. In

addition, we expect office rental growth to taper off on the back of slowdown in China’s GDP and global economy, and

DTZ also expects Beijing’s Grade A office market to see balanced supply-demand in 2012-2013, rather than the supply

shortage seen in 2011; 2) Financial burden remains high with net gearing at 80% by end-1H12, not much improvement

from 84% level by end-2011.








Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

3383 HK Agile Property Holdings N HKD 9.79 10.05 2.6% 4,567 6.2 1.0 3.2% 5.2

81 HK China Overseas Grand Oceans Group N HKD 8.24 8.98 9.0% 2,426 7.9 1.9 2.7% 4.2

688 HK China Overseas Land & Investment N HKD 22.35 19.43 -13.1% 21,230 12.6 1.9 1.4% 8.6

1109 HK China Resources Land B HKD 20.10 21.20 5.5% 15,088 14.3 1.6 1.9% 10.2

200002 CH China Vanke (B) B HKD 11.07 13.21 19.4% 15,610 6.5 1.2 2.3% 3.4

2007 HK Country Garden Holdings Company B HKD 3.51 4.12 17.5% 8,262 7.1 1.3 4.9% 4.9

EJ US E-House (China) Holdings Limited N USD 3.63 4.91 35.2% 428 0.6 0.0% 17.7

3333 HK Evergrande Real Estate Group B HKD 3.67 4.46 21.6% 7,052 5.2 1.0 3.9% 5.7

817 HK Franshion Properties (China) N HKD 2.44 2.75 12.8% 1,922 9.9 0.9 1.5% 6.0

3900 HK Greentown China Holding B* HKD 11.62 12.91 11.1% 2,465 3.7 0.8 2.7% 4.9

2777 HK Guangzhou R&F Properties N HKD 11.00 11.06 0.5% 4,573 7.1 1.0 4.9% 4.7

1813 HK KWG Property Holding N HKD 4.94 5.50 11.3% 1,844 5.6 0.7 3.6% 7.8

960 HK Longfor Properties Co. B* HKD 14.06 16.87 20.0% 9,387 9.4 1.7 1.5% 7.0

PCRT SP Perennial China Retail Trust S SGD 0.49 0.45 -8.3% 452 42.4 0.6 7.1%

119 HK Poly Property Group Co. B HKD 5.07 6.10 20.4% 2,368 7.7 0.6 2.6% 10.0

813 HK Shimao Property N HKD 15.54 13.68 -12.0% 6,951 8.6 1.1 3.5% 7.7

272 HK Shui On land N HKD 3.63 3.54 -2.5% 2,165 16.0 0.5 0.9% 20.6

3377 HK Sino-Ocean Land Holdings N HKD 5.31 5.24 -1.4% 3,065 10.2 0.8 3.4% 9.2

410 HK SOHO China N HKD 5.59 6.14 9.8% 3,764 7.2 0.9 5.6% 5.1

1918 HK Sunac China Holdings B HKD 4.82 5.55 15.2% 1,868 5.5 1.0 1.8% 5.0

YLLG SP Yanlord Land S SGD 1.34 1.27 -5.6% 2,131 13.5 0.8 0.4% 10.1


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

3383 HK Agile Property Holdings -0.9% 13.6% -1.6% 33.1% 32.9% 15.6% 14.8% 0.6

81 HK China Overseas Grand Oceans Group 15.6% 37.2% -8.9% 29.7% 29.6% 17.8% 24.5% (0.1)

688 HK China Overseas Land & Investment -17.2% 2.8% -5.9% 32.9% 32.9% 20.0% 14.7% 0.2

1109 HK China Resources Land -12.0% 29.4% 3.1% 25.5% 24.9% 13.7% 10.2% 0.4

200002 CH China Vanke (B) 8.8% 7.4% 4.1% 25.5% 25.4% 12.8% 13.9% (0.2)

2007 HK Country Garden Holdings Company 16.8% 13.6% 18.3% 27.3% 26.5% 13.9% 17.3% 0.4

EJ US E-House (China) Holdings Limited 71.9% 5.9% 3.3% -3.2% -2.3% -1.7% (0.2)

3333 HK Evergrande Real Estate Group -18.2% 0.8% -13.0% 20.4% 20.0% 10.8% 17.4% 0.9

817 HK Franshion Properties (China) -24.6% 10.6% 8.2% 38.6% 37.3% 13.1% 6.3% 0.3

3900 HK Greentown China Holding -0.9% 16.3% 3.4% 24.7% 24.3% 13.5% 15.5% 0.5

2777 HK Guangzhou R&F Properties -10.4% 14.4% 0.2% 29.2% 28.2% 11.5% 13.8% 0.7

1813 HK KWG Property Holding 0.1% -14.5% -32.7% 29.6% 29.1% 20.3% 12.1% 0.7

960 HK Longfor Properties Co. 3.4% 45.6% -2.0% 23.8% 23.8% 13.6% 16.9% 0.4

PCRT SP Perennial China Retail Trust 70.5% 0.6% -218.0% -218.0% 350.2% 1.3% 0.4

119 HK Poly Property Group Co. -1.5% 28.4% 9.1% 21.3% 20.7% 10.4% 7.6% 0.9

813 HK Shimao Property -19.6% 2.7% -12.1% 23.6% 22.8% 12.6% 11.0% 0.5

272 HK Shui On land -40.3% 35.1% -24.6% 29.2% 28.2% 14.4% 3.6% 0.9

3377 HK Sino-Ocean Land Holdings -4.8% 3.6% -8.4% 19.0% 19.0% 7.9% 5.7% 0.6

410 HK SOHO China -8.1% 14.8% 5.5% 48.1% 47.5% 20.9% 11.8% 0.5

1918 HK Sunac China Holdings 8.1% 31.3% 18.5% 24.0% 23.9% 9.0% 14.5% 1.0

YLLG SP Yanlord Land -38.2% 30.6% -8.5% 28.3% 28.0% 7.9% 3.0% 0.2








Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600376 CH Beijing Capital Development Co. B* CNY 10.41 18.00 72.9% 2,498 6.0 1.0 3.3% 6.8

600266 CH Beijing Urban Construction Investment Development N CNY 11.59 15.54 34.1% 1,655 8.5 1.3 1.8% 6.7

000024 CH China Merchants Property (A) N CNY 23.07 25.70 11.4% 6,361 10.2 1.5 1.0% 6.4

000002 CH China Vanke (A) B CNY 8.45 12.33 45.9% 15,011 6.2 1.2 2.4% 3.8

600007 CH China World Trade Center S CNY 10.48 8.90 -15.1% 1,695 24.5 2.1 1.2% 10.6

000402 CH Financial Street Holding Co N CNY 5.71 7.80 36.5% 2,775 11.1 0.8 0.1% 11.0

600383 CH Gemdale Corp B CNY 5.23 7.70 47.3% 3,297 6.5 0.9 1.6% 6.6

002244 CH Hangzhou Binjiang Real Estate Group Co N CNY 8.65 9.42 8.9% 1,878 9.5 1.6 1.1% 11.1

600325 CH Huafa Industrial N CNY 7.22 9.40 30.2% 947 8.7 0.8 2.3% 16.8

600223 CH Lushang Property B CNY 4.53 5.88 29.7% 728 7.9 2.0 0.0% 8.5

600048 CH Poly Real Estate Group B CNY 11.49 15.00 30.5% 13,168 7.5 1.6 2.7% 6.7

002336 CH Renrenle Commercial Group Co. N CNY 8.88 8.05 -9.3% 570 38.5 1.0 0.5% 4.6

002146 CH Risesun Real Estate Development Co N CNY 10.88 11.00 1.1% 3,276 9.2 2.1 1.6% 8.5

600823 CH Shanghai Shimao Co. N CNY 9.83 12.65 28.7% 1,847 8.6 0.9 0.0% 9.5

002243 CH Shenzhen Beauty Star Co. B CNY 6.70 9.00 34.3% 278 14.3 2.0 0.7% 7.2

002285 CH Shenzhen World Union Properties Consultancy Co. B CNY 11.94 15.89 33.1% 626 12.8 2.3 2.6% 16.9

002408 CH Zibo Qixiang Tengda Chemical Co. N CNY 14.25 17.76 24.6% 1,069 13.2 2.1 1.5% 6.8


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600376 CH Beijing Capital Development Co. 20.9% 30.3% 17.2% 21.3% 20.8% 15.8% 15.1% 0.4

600266 CH Beijing Urban Construction Investment Development 4.9% 1.5% -10.0% 23.7% 23.0% 17.4% 14.1% 0.0

000024 CH China Merchants Property (A) 20.3% 25.9% 14.4% 22.4% 22.1% 15.0% 12.4% (0.2)

000002 CH China Vanke (A) 7.4% 7.4% 2.9% 21.4% 21.3% 12.8% 13.9% (0.2)

600007 CH China World Trade Center 11.0% 9.0% 9.4% 56.7% 36.3% 19.7% 8.6% 0.5

000402 CH Financial Street Holding Co 3.1% 13.6% 4.2% 20.4% 19.0% 12.2% 7.2% 0.5

600383 CH Gemdale Corp 10.9% 24.4% 16.3% 16.9% 16.7% 9.8% 9.8% 0.2

002244 CH Hangzhou Binjiang Real Estate Group Co 3.8% 43.9% 6.8% 28.1% 26.5% 19.2% 13.6% 0.7

600325 CH Huafa Industrial -5.7% 21.1% -9.6% 14.2% 13.7% 9.2% 6.5% 0.8

600223 CH Lushang Property 33.0% 27.3% 32.5% 18.7% 18.3% 11.3% 21.8% 1.2

600048 CH Poly Real Estate Group 28.7% 29.9% 23.1% 19.7% 19.3% 13.4% 16.0% 0.1

002336 CH Renrenle Commercial Group Co. 198.2% 15.4% 497.0% 2.6% 0.8% 0.6% 2.6% (0.5)

002146 CH Risesun Real Estate Development Co 9.5% 19.8% 9.6% 20.7% 19.9% 14.6% 20.7% 0.5

600823 CH Shanghai Shimao Co. 10.9% 26.8% 41.0% 26.4% 26.1% 15.7% 8.0% 0.4

002243 CH Shenzhen Beauty Star Co. 52.8% 20.4% 40.2% 22.0% 12.3% 9.0% 13.5% 0.4

002285 CH Shenzhen World Union Properties Consultancy Co. 64.0% 33.1% 62.9% 19.2% 17.4% 13.4% 18.0% (0.4)

002408 CH Zibo Qixiang Tengda Chemical Co. 52.6% 35.4% 42.2% 21.3% 16.9% 14.1% 16.2% (0.5)





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MSCI China Real Estate Index


Relative Index



Retail: A better outlook in 2013, but need to be selective

Analyst name: Joshua Lu ([email protected]), Caroline Li ([email protected]), Weibo Hu ([email protected])

Sector stance

2013 sector view

We expect retailers to gradually recover from the 2012 trough in 2013. Given the current valuation premium for DM over

the rest of Asia is still well below the historical average, we remain constructive on the retail sector. At the same time,

the structural changes on the China retail landscape mean that a rising tide will not lift all boats in this recovery. We

believe investors need to focus on companies with strong capability to differentiate and grow without sacrificing

margins.


Reform drivers

1. The government’s focus on driving income/consumption growth and the current fragmented nature of China’s retail

sector both imply further opportunity for expansion and consolidation.

Cyclical drivers

1. Recovery of domestic/external economies would lift consumption growth.

2. Gradual clearance of channel inventories, resulting in near-term margin pressure but a brighter long-term margin

outlook.


1. Rapid retail space buildup means certain markets face an oversupply situation.

2. Increasing recognition of the high pricing in China, e-commerce, and growing overseas travel all suggest that the

pricing-driven SSSG increase may no longer be sustainable.


1. Our sales forecasts in 2013 for most retailers are below consensus. We also believe the longer-term growth potential

of Sun Art and Chow Tai Fook are still underappreciated.


Buy #1: Sun Art (6808.HK) Reasons/catalysts 1. Best expansion potential among leading Chinese retailers due to current low penetration.

2. Productivity loop further strengthens its margin leadership over peers, which enables it to gain market share faster.

Buy #2: Daphne (0210.HK; on CL) Reasons/catalysts 1. Exposure to high growth mass market with leading market share.

2. Improving inventory position and continued operation turnaround could deliver sector-leading growth in 2013.













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

2020 HK Anta Sports Products S* HKD 5.83 4.20 -28.0% 1,875 12.5 1.6 5.0% 6.3

1880 HK Belle International Holdings B HKD 15.70 16.00 1.9% 17,085 19.5 4.0 1.5% 12.8

3998 HK Bosideng International Holdings N HKD 2.37 2.70 13.9% 2,402 9.9 1.9 7.1% 5.5

210 HK Daphne International Holdings B* HKD 9.35 11.90 27.3% 1,976 13.4 2.7 2.5% 6.8

3308 HK Golden Eagle Retail Group B HKD 18.38 20.00 8.8% 4,607 19.3 4.4 1.6% 13.4

493 HK Gome Electrical Appliances Holding S HKD 0.79 0.69 -12.7% 1,720 34.3 0.7 0.0% 15.6

1833 HK Intime Department Store (Group) Co. B HKD 9.18 11.20 22.0% 2,262 12.0 1.9 3.8% 12.1

2331 HK Li Ning Company N HKD 4.04 4.40 8.9% 546 10.0 0.9 0.0% 3.2

848 HK Maoye International Holdings B HKD 1.58 2.10 32.9% 1,098 10.4 1.1 3.8% 10.9

3368 HK Parkson Retail Group N HKD 5.81 7.50 29.1% 2,107 10.9 2.0 4.1% 6.1

6808 HK Sun Art Retail Group B HKD 11.32 13.00 14.8% 13,933 27.7 4.4 1.4% 11.8

551 HK Yue Yuen Industrial N HKD 26.80 25.00 -6.7% 5,710 8.5 1.3 5.0% 7.1


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

2020 HK Anta Sports Products -33.0% -10.8% -33.1% 16.1% 15.0% 13.5% 12.8% (0.6)

1880 HK Belle International Holdings 18.3% 21.9% 18.9% 19.1% 16.8% 13.4% 20.4% (0.3)

3998 HK Bosideng International Holdings 7.8% 10.6% 10.7% 20.5% 19.2% 15.3% 18.9% (0.5)

210 HK Daphne International Holdings 23.1% 16.9% 23.1% 16.6% 14.2% 10.5% 22.1% (0.2)

3308 HK Golden Eagle Retail Group 16.5% 20.2% 16.3% 46.6% 42.4% 32.3% 22.7% 0.0

493 HK Gome Electrical Appliances Holding 148.7% 13.1% 202.4% 0.8% 0.2% 0.5% 2.0% (0.2)

1833 HK Intime Department Store (Group) Co. 34.3% 18.1% 17.0% 33.8% 24.4% 27.5% 14.3% 0.3

2331 HK Li Ning Company 577.5% 7.9% 299.0% 10.2% 7.4% 4.4% 9.4% (0.2)

848 HK Maoye International Holdings -16.0% 11.2% 11.4% 44.1% 32.5% 17.1% 8.3% 0.3

3368 HK Parkson Retail Group 14.3% 16.1% 11.9% 29.9% 24.5% 19.0% 18.1% (0.3)

6808 HK Sun Art Retail Group 20.5% 15.8% 22.1% 7.1% 4.6% 3.2% 14.9% (0.3)

551 HK Yue Yuen Industrial 20.0% 8.9% 18.6% 10.8% 7.7% 7.5% 13.4% 0.1

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601116 CH Sanjiang Shopping Club Co. S CNY 9.55 6.67 -30.2% 630 22.9 2.4 1.2% 10.2

002269 CH Shanghai Metersbonwe Fashion & Accessories Co. N CNY 12.47 22.00 76.4% 2,012 12.2 3.2 5.7% 6.9

002024 CH Suning Appliance Co. N CNY 6.20 6.40 3.2% 7,349 26.6 1.5 0.4% 9.4


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601116 CH Sanjiang Shopping Club Co. -2.1% 2.8% -1.8% 4.4% 3.3% 3.2% 10.5% (0.9)

002269 CH Shanghai Metersbonwe Fashion & Accessories Co. 18.0% 18.0% 17.2% 16.1% 11.9% 8.5% 26.1% 0.2

002024 CH Suning Appliance Co. -38.3% 10.2% -32.5% 2.5% 1.4% 1.5% 5.5% (0.6)





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MSCI China Consumer Discretionary Index


Relative Index



Technology: China vendors poised to extend market share gains

Analyst: Donald Lu, Ph.D ([email protected]); Robert Yen ([email protected]); Sam Li ([email protected])

Sector stance

2013 sector view

1. Electronic components: We see 2013 being another year of high growth for smartphones and tablets. The next

chapter of the “Made in China” story will likely open in the acoustic industry, with China vendors poised to extend

recent global market share gains. We prefer acoustic and optical vendors that are exposed to the increasing focus on

user experience with ASP premiums.

2. Telecom equipment: We think wireless and transport networks are equally important in the upcoming LTE cycle in

2013E. We expect fiberoptic broadband companies and wireless vendors with high 3G/4G exposure to benefit from

this capex cycle, while opportunities for wireless network enhancement companies should emerge in the later stage.

3. Mobile internet: Carriers are now more reliant on data-related revenue. Their focus on network performance and

user experience should bring growth opportunities for software and service providers. However, we see strong

headwinds in business transition and believe this has a long way to go. Companies with good execution that are

committed to the mobile internet business transition should outperform.


Reform drivers

1. Government support on new technologies.

2. Acceleration of TD-LTE and the National Broadband Strategy.

Cyclical drivers

1. Continued share gains in the global tier-1 clients supply chain.

2. Faster pace in TD-LTE trial network deployment from China Mobile.

3. CM gets a fixed-line broadband license from MIIT.

4. China government policy stimulus and local enterprises’ demand for transformation.


1) Key technology changes; 2) Slower-than-expected wireless spending, TD-LTE commercial launch is later than

expected; 3) Corporate governance; 4) Faster-than-expected wage inflation; 5) Loss of key customers.


1) We are more positive on TD-LTE than consensus; 2) We are more positive on GoerTek’s market share gains, and ASP

rising trend; 3) We expect wage inflation to slow down in 2013.

Stock recommendations (Offshore)

Buy #1: AAC Technologies (2018.HK)

Reasons/catalysts: 1) We believe the continued focus of handset/tablet OEMs to enhance consumers’ acoustic user

experience has led to a scenario where the increase in dollar content per box could continue for a longer period than we

expected, resulting in possibly one of the major ASP upgrade cycles for non-semiconductor components in the past few

years; 2) We also believe AAC is gradually dominating this space, with superior margins keeping it ahead of the

technology and manufacturing curve, leading to a sustainable ROE if we exclude the risk of macro weakness; 3) We

continue to view AAC’s various design wins and potential EPS growth acceleration in the next few quarters as share

price catalysts. AAC’s penetration into global tier-1 customers (such as Apple and Samsung) and its preferred position

from some new entrants (such as Amazon and Xiaomi) seems to suggest that AAC is able to provide customized

products and scale advantage to fulfill different needs from cost/performance basis.



Buy #2: China Wireless (2369.HK)

Reasons/catalysts: 1) We believe China Wireless (CW, own-brand Coolpad) is likely to become the number one

smartphone maker among local OEMs in China in 4Q12, marginally surpassing its major rivals (Lenovo, Huawei and

ZTE) for the first time due to its customized smartphone models shipments to China Mobile (CM) and its solid execution

in product refresh/marketing; 2) Such share expansion, in our view, may not come at the expense of margins due to

changing competitive dynamics – most Chinese OEMs are making losses now. We still believe CW is in a sweet spot –

benefiting from China smartphone growth with decent profits; 3) After launching its 4G LTE smartphone in the US (with

MetroPCS) using its own brand for the first time, we expect CW to gradually penetrate other overseas operators for low-

end LTE smartphone. Additionally, as a strategic partner of CM, we see CW as initial beneficiary of TD-LTE terminal

device deployment.

Stock recommendations (A-Share)

Buy #1: GoerTek (002241.SZ)

Reasons/catalysts: 1) Favorable exposure to smart terminals should help it benefit the most from the prevalence of

smartphones/tablets. We forecast its 2012E exposure to smartphones and tablets to be 53%, vs industry average of 14%;

2) GoerTek has a strong client portfolio. We expect revenue from Apple and Sony to ramp up in 2012E with continuous

market share gains and Apple alone would account for 33%/50%/50% of its total revenue for 2012/2013/2014; 3) Industry

leading revenue scale and strong operating cash flow growth will help the company to gain market share and improve

profitability.

Buy #2: Fiberhome (600498.SS, on CL)

Reasons/catalysts: 1) We expect the company to deliver solid earnings growth driven by strong spending on the

transport network in 2012E/2013E; 2) Fiberhome is gaining market share as Chinese telco operators are optimizing

suppliers' structure due to its technology advantage; 3) We view the upcoming national broadband strategy and China

Mobile's potential broadband license as another driver of the company.




Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

2018 HK AAC Technologies B HKD 29.70 34.00 14.5% 4,706 12.4 4.0 3.2% 9.7

ASIA US AsiaInfo-Linkage NR USD 10.71 795 18.8 0.7 0.0% 5.6

AMAP US AutoNavi Holdings Ltd. B USD 11.55 17.30 49.8% 548 13.3 1.6 0.0% 4.9

2369 HK China Wireless Technologies B* HKD 2.46 3.30 34.1% 649 7.9 1.9 2.5% 3.6

2342 HK Comba Telecom Systems N HKD 3.14 2.50 -20.4% 618 13.4 1.1 1.5% 9.2

992 HK Lenovo Group N HKD 7.15 7.00 -2.1% 9,483 13.5 3.1 2.6% 5.0

763 HK ZTE Corporation (H) N HKD 11.74 12.50 6.5% 5,034 11.1 1.2 3.0% 7.2











Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

2018 HK AAC Technologies 36.7% 35.4% 36.9% 36.0% 31.5% 27.9% 32.4% 0.0

ASIA US AsiaInfo-Linkage 25.3% 11.6% 18.2% 13.3% 6.2% 7.0% 3.9% (0.3)

AMAP US AutoNavi Holdings Ltd. 17.1% 12.0% 13.3% 30.1% 25.9% 23.9% 11.1% (0.8)

2369 HK China Wireless Technologies 98.2% 62.9% 89.5% 3.8% 3.5% 2.9% 23.6% (0.8)

2342 HK Comba Telecom Systems 10.9% 254.4% 7.4% 5.5% 4.9% 8.4% 0.0

992 HK Lenovo Group 28.9% 14.5% 25.7% 3.1% 2.3% 1.8% 22.9% (1.1)

763 HK ZTE Corporation (H) 271.0% 21.8% 67.3% 5.6% 4.3% 2.6% 9.6% 0.4

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

002281 CH Accelink Technologies N CNY 16.58 17.80 7.4% 426 20.7 2.1 1.7% 17.6

002230 CH Anhui USTC iFLYTEK S CNY 27.08 18.70 -30.9% 1,644 42.2 7.2 0.7% 36.3

002148 CH Beijing Bewinner Communications N CNY 13.79 16.90 22.6% 251 25.3 2.9 1.0% 20.9

300002 CH Beijing Ultrapower Software B CNY 13.55 22.50 66.1% 825 9.3 1.5 3.2% 5.3

600498 CH Fiberhome Telecom Tech B* CNY 18.06 30.60 69.4% 1,399 12.1 1.5 1.8% 7.5

002241 CH GoerTek Inc. B CNY 34.40 49.00 42.4% 4,684 19.2 4.7 1.3% 13.6

002261 CH Hunan Talkweb Information System N CNY 7.94 9.80 23.4% 361 33.3 2.6 0.5% 25.9

300077 CH Nationz Technologies N CNY 13.52 14.00 3.6% 590 42.9 1.3 0.7%

002405 CH NavInfo Co. N CNY 10.09 11.20 11.0% 934 21.7 2.2 1.3% 15.9

300134 CH Shenzhen Tat Fook Technology N CNY 8.02 9.20 14.7% 412 59.1 1.1 0.0% 13.2

002313 CH Sunsea Telecommunications N CNY 15.04 22.40 48.9% 580 14.7 1.7 1.5% 10.0

000063 CH ZTE Corporation (A) N CNY 8.11 10.20 25.8% 4,327 9.6 1.0 3.5% 6.4


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

002281 CH Accelink Technologies 42.2% 21.2% 45.3% 10.9% 7.8% 10.2% 10.2% (0.2)

002230 CH Anhui USTC iFLYTEK 29.3% 33.5% 35.7% 24.7% 18.3% 22.4% 16.4% (0.4)

002148 CH Beijing Bewinner Communications 35.5% 22.6% 45.9% 20.6% 17.1% 20.0% 11.5% (0.4)

300002 CH Beijing Ultrapower Software 27.5% 25.7% 27.3% 33.9% 31.5% 29.1% 15.6% (0.5)

600498 CH Fiberhome Telecom Tech 28.0% 19.1% 20.0% 8.9% 6.1% 6.8% 11.0% (0.3)

002241 CH GoerTek Inc. 63.7% 63.1% 52.0% 18.2% 15.8% 12.8% 23.9% 0.0

002261 CH Hunan Talkweb Information System 52.2% 26.8% 44.4% 13.3% 9.5% 13.4% 7.2% (0.6)

300077 CH Nationz Technologies 56.4% 34.5% 40.7% -6.8% -11.5% 15.3% 3.0% (0.9)

002405 CH NavInfo Co. 71.4% 28.2% 23.6% 25.8% 18.0% 30.3% 10.0% (0.8)

300134 CH Shenzhen Tat Fook Technology 209.4% 25.9% 40.6% 9.5% 2.1% 3.0% 1.8% (0.3)

002313 CH Sunsea Telecommunications 32.1% 32.0% 33.2% 12.6% 11.4% 10.2% 11.1% (0.3)

000063 CH ZTE Corporation (A) 266.1% 21.8% 67.3% 5.6% 4.3% 2.6% 9.6% 0.4





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Relative Index



Telecoms: Healthy but decelerating growth; stabilizing competition

Analyst: Donald Lu, Ph.D ([email protected])

Sector stance

2013 sector view

We expect the following key trends in the China telecom market in 2013:

1. Wireless revenue growth will remain healthy though at a decelerating pace, driven by the prevalence of low-cost

smartphones in lower-tier cities and 2G/3G upgrade cycle. We view LTE (4G) as a game changer, which may help

China Mobile (CM) to regain market share if it could launch the service 12-18 months earlier than China Unicom (CU)

and China Telecom (CT), as the majority of high-end smartphones should be LTE-supportive in 2013. CM currently

plans to launch TD-LTE commercial service in HK in December 2012 and trial commercial service in China by the end

of 2013.

2. The fixed line business has passed the trough and started to grow yoy as fixed line broadband growth offset fixed

voice decline. This is positive to CU and CT. But we expect competition to intensify because CM and cable

companies are slated to enter the fixed broadband market, according to SINA.

3. Trade-off between scale and profitability would be another swing factor for the sector and would impact operators’

strategies, especially in marketing and subsidies spending. Operators have put more emphasis on profitability in

2H12 as all three telcos have shown slightly better margin seasonality in 3Q12. Our channel checks indicate that the

competition in wireless service has stabilized in recent months after a period of intensification. However, we caution

that CU/CT might become more aggressive again in 2013E prior to the revival of CM’s LTE launch.


Reform drivers: Government support on telecom infrastructure spending and proprietary technology.

Cyclical drivers We do not view cyclical factors as a main driver in this industry.


Regulatory risk remains the highest risk in this industry. LTE spectrum allocation, LTE licenses, network convergences

and possible asymmetric regulations are all subject to the regulators’ attitude on how to balance the three incumbents in

China.


1. We are more positive on LTE progression in China and we expect CM to carry out large-scale commercial trials of

TD-LTE by end of 2013E.

2. We are positive on the robust growth of ultra low-cost EDGE and TD smartphones in China in 2H2012 and 2013.


Buy #1: China Mobile (0941.HK)

Reasons/catalysts 1. We are positive on CM due to its LTE upside potential and expect it to take back market share if it can launch LTE

ahead of China Unicom and China Telecom.

2. We prefer CM on its defensiveness with attractive dividend yield and ability to pay sustainable dividends supported

by its strong balance sheet and free cash flow.


N/A













Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

552 HK China Communication Services N HKD 4.35 4.60 5.7% 3,887 9.3 1.1 4.3% 3.7

941 HK China Mobile (HK) B HKD 87.95 100.00 13.7% 227,456 11.6 1.8 3.7% 4.1

728 HK China Telecom N HKD 4.39 5.00 13.9% 45,842 14.6 1.0 2.1% 4.0

762 HK China Unicom N HKD 12.36 14.00 13.3% 37,576 21.2 1.1 2.7% 4.4


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

552 HK China Communication Services 10.1% 14.8% 13.6% 5.1% 4.5% 3.7% 11.9% (0.5)

941 HK China Mobile (HK) 2.9% 5.8% 2.2% 42.1% 23.8% 20.6% 15.6% (0.5)

728 HK China Telecom 34.0% 10.2% 37.8% 32.5% 10.3% 6.4% 7.0% 0.4

762 HK China Unicom 63.9% 11.3% 17.0% 30.0% 5.9% 3.9% 5.2% 0.6

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

002148 CH Beijing Bewinner Communications N CNY 13.79 16.90 22.6% 251 25.3 2.9 1.0% 20.9

600050 CH China United Network Communications N CNY 3.25 4.70 44.6% 11,060 18.6 0.3 3.0% 2.4

002261 CH Hunan Talkweb Information System N CNY 7.94 9.80 23.4% 361 33.3 2.6 0.5% 25.9


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

002148 CH Beijing Bewinner Communications 35.5% 22.6% 45.9% 20.6% 17.1% 20.0% 11.5% (0.4)

600050 CH China United Network Communications 61.8% 11.3% 17.0% 30.0% 5.9% 1.3% 1.7% 0.6

002261 CH Hunan Talkweb Information System 52.2% 26.8% 44.4% 13.3% 9.5% 13.4% 7.2% (0.6)





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MSCI China Telecom Services Index


Relative Index



Tourism: Growing market driven by domestic demand

Analyst name: Xufa Liao ([email protected]); Zhijing Liu ([email protected])

Sector stance

2013 sector view

We believe the China tourism sector is still in an early growth stage and expect tourism revenue from domestic and

inbound travel to post a CAGR of 13% over the next five years, driven mainly by domestic demand. Income growth as

well as supportive government policies will be the two main long-term structural drivers. We see duty-free, economy

hotels and chain restaurants best positioned in tourism industry, as branded economy hotel chains and online travel

agencies will likely continue to take market share from small-scale operators against the backdrop of a fragmented

supply landscape. Duty-free stores should benefit from luxury retail spending and supportive policy.


Reform drivers

1. Duty-free policy refresh could boost sales in Sanya duty-free stores significantly.

2. “Citizen Leisure Outline” program launch may come in early 2013, designed to strengthen the implementation of

paid vacation policies and thus increase tourism consumption.

Cyclical drivers

1. Scenic passenger traffic and hotel occupancy rate will improve if the economy continues to recover.

2. Japan tourism will start to recover as Sino-Japan tension eases.


1. Major disease outbreaks.

2. Lower-than-expected tourist volume at major scenic spots.


N/A


Buy #1: CITS (601888.SS; on CL)

Reasons/catalysts

1. We expect 2013 revenue for Sanya store to grow 63% yoy. On October 24, the Ministry of Finance

announced a duty-free policy refresh for Hainan province, including a 60% shopping allowance increase and more

flexible allowance usage. With the relaxed policy rules and improved operations, we estimate the Sanya store will

further optimize its sales structure and operating efficiency, and achieve Rmb3.7 bn revenue in 2013.

2. CITS’s Haitang Bay shopping center to begin operations in 2014, with 10X the duty-free floor space of the

current Sanya store. Along with policy support, we believe this will drive continuous growth for CITS in the duty-free

field in mid-long term.








Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

600258 CH Beijing Capital Tourism S CNY 10.60 11.20 5.7% 394 20.8 2.3 3.8% 9.9

300291 CH Beijing Hualubaina Film & TV Co. B* CNY 53.06 65.90 24.2% 511 20.6 3.1 1.9% 13.6

002306 CH Beijing Xiangeqing Co. N CNY 8.57 10.85 26.6% 550 20.1 2.5 2.5% 7.2

600138 CH China CYTS Tours Holding Co. N CNY 14.62 17.00 16.3% 975 16.9 2.0 1.8% 6.9

601888 CH China International Travel Service Corp. B* CNY 27.59 41.00 48.6% 3,898 16.2 3.6 1.2% 9.6

000888 CH Emei Shan Tourism Co. N CNY 18.52 19.17 3.5% 699 19.9 3.7 1.2% 10.7

000978 CH Guilin Tourism Co. Ltd. S CNY 6.08 5.20 -14.5% 352 26.5 1.4 1.5% 10.4

600054 CH Huangshan Tourism Development Co. N CNY 11.78 14.00 18.8% 891 13.7 2.6 3.6% 8.7

002033 CH Lijiang Yulong Tourism Co. B CNY 17.89 25.82 44.3% 334 18.0 3.1 2.5% 8.9

600754 CH Shanghai Jinjiang International Hotels B CNY 14.51 19.40 33.7% 1,405 20.1 2.0 2.5% 10.5

300144 CH Songcheng Tourism Development B CNY 12.10 17.12 41.5% 1,060 19.1 2.1 1.8% 12.1


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

600258 CH Beijing Capital Tourism 7.1% 6.2% 4.9% 9.4% 6.8% 3.8% 9.0% 0.1

300291 CH Beijing Hualubaina Film & TV Co. 30.0% 36.6% 36.6% 42.5% 42.2% 33.3% 15.0% (0.5)

002306 CH Beijing Xiangeqing Co. 24.6% 17.6% 16.2% 22.9% 12.9% 8.8% 12.3% (0.2)

600138 CH China CYTS Tours Holding Co. 14.5% 4.2% 8.4% 11.0% 8.2% 3.8% 6.9% (0.2)

601888 CH China International Travel Service Corp. 48.2% 17.0% 46.1% 12.6% 11.1% 7.9% 19.7% (0.3)

000888 CH Emei Shan Tourism Co. 33.3% 21.4% 21.8% 30.6% 22.6% 18.6% 18.3% (0.4)

000978 CH Guilin Tourism Co. Ltd. 13.9% 8.4% 1.5% 30.0% 15.0% 13.6% 5.2% (0.2)

600054 CH Huangshan Tourism Development Co. 27.4% 19.2% 22.2% 30.8% 26.1% 18.8% 18.8% 0.1

002033 CH Lijiang Yulong Tourism Co. 18.3% 11.1% 13.6% 51.8% 44.1% 24.2% 13.7% (0.1)

600754 CH Shanghai Jinjiang International Hotels 13.3% 14.9% 21.5% 28.0% 11.4% 15.6% 9.7% (0.2)

300144 CH Songcheng Tourism Development 28.7% 36.4% 29.0% 56.2% 44.2% 41.1% 11.1% (0.3)



Transport: Prefer Airlines; cautious on Bulk Shipping

Analyst name: Hino Lam ([email protected]); Ronald Keung ([email protected])

Sector stance

2013 sector view

Airlines: We expect overall load factors to remain healthy, tracking c.80%, thanks to carriers’ supply discipline. Carriers

remain cautious on the ramp-up of the high-speed rail network. We believe traffic diversion to HSR from air peaked in

2012 at 3.7%, and will slow to 2.9%. Meanwhile, supply growth for the year should remain manageable at 11.3% yoy (in

Available Seat Kilometer terms) against a recovering demand backdrop from 2Q12 levels of 9.7% yoy to 11.7% yoy for

the full year. On international routes, China/Japan routes remain a key wildcard and we believe demand headwind could

offset a more favorable travel environment to other destinations (specifically to Europe and Australia where carriers are

gaining market share from other Asia-Pacific carriers). Finally, we believe increased fuel hedging, coupled with a

stronger Rmb (against 1H12 Rmb depreciation vs. the US$) should offer additional support to 2013 profitability.

Shipping: We like containerships over bulkers given more favorable industry outlook and higher pricing power. We

expect container earnings to sequentially improve (from record losses in 2011 to narrower losses/breakeven in 2012) and

marginally better in 2013, thanks to more industry capacity discipline. We expect an industry up-cycle for containerships

in 2014 to be supported by favorable supply-demand dynamics. With China’s infrastructure build-out passing its peak,

we expect structurally slower demand ahead for bulker while oversupply persists.

Railroads: Recent cyclical headwinds on high-speed rail (HSR) diversion and weak coal throughput look well discounted

to us at trough cycle valuations, but not potential upside from MOR reform, more pricing deregulation and asset

injections. We expect ordinary passenger rail traffic to continue to face diversion to HSR as China’s HSR network takes

shape, but with full completion of the Beijing-Guangzhou HSR at the end of 2012, we expect cargo traffic to grow

significantly from 2013.


Reform drivers

1. Potential airfare liberalization: CAAC now provides pricing guidelines for fares, including benchmark and cap levels.

Approx 5% of routes are charging at cap levels. There could be potential airfare liberalization as CAAC recently

articulated plans to liberalize pricing on select routes. Potential reform in the airfare pricing mechanism would allow

airlines to freely set fares on select routes and the increased flexibility would boost yields, given the current high

load factor compared with historical levels. In our view, the market is not anticipating any fare liberalization (partial

or full), and revenue growth ahead would mostly be driven by traffic growth. While the timing of fare liberalization is

unknown, we believe any news toward more market-oriented pricing would be read positively by the market,

providing upside surprise for the three Chinese airlines.

2. MOR reform: We expect details of China’s MOR reform proposal to be announced over the next 12 months. In our

view, the potential MOR reform could lead to: relaxation of cargo tariff regulations which could be positive for China

railroads (given all-in rates on Daqin and Guangshen’s Guangping line are now lower than the national rate) and

potential asset injections into Daqin and Guangshen Railway, given that they are the only two major listed railroad

owners/operators in China.



Cyclical drivers

1. Airlines: Favorable demand and supply environment in both domestic and international markets will continue to

benefit Chinese airlines in 2013, in our view. We believe traffic growth will remain robust in 2013E underpinned by

less macro tightening while load factors remain healthy thanks to carriers’ supply discipline. In turn, we expect a

small pick up in yields thanks to higher utilization coupled with yield mix improvement from more first/business

class seats on the new fleet.

2. Shipping: Slower demand growth and uncertain economic outlook have resulted in strong discipline by liners in

controlling capacity. We expect the earnings for container to be marginally better in 2013 and an industry up-cycle in

2014. Due to slower commodities demand growth from China and an oversupply of bulk vessels, we do not expect

improvement in the supply-demand outlook for bulkers over 2013. In particular, we expect returns of bulkers to

remain below trend seen in the past decade.

3. Railroad: The completion of Beijing-Shanghai HSR will boost the cargo capacity on the original Beijing-Shanghai

rail line to over 100mn tons a year. We assume cargo volumes to return to levels in the 1990s of between 80- 90mn

tons in 2013E and over 100mn tons from 2014E. Helped by the lower labor capacity for the cargo business and

progressive rate hikes during these years, we expect Guangshen to experience an uplift in margins over the next few

years, leading to a higher return.


1) Further tightening and/or slowdown of the Chinese economy; 2) Lack of near-term earnings catalysts for shipping and

infrastructure; 3) Higher-than-expected HSR traffic diversion.


We are above Bloomberg consensus on earnings outlook due to: 1) Airlines: our more sanguine outlook in outbound

traffic and overall yield and lower traffic diversion risk to HSR on domestic air routes; 2) Infrastructure: MOR should

announce the detailed reform proposals in the next 12 months and airports could see an increase in charges on int’l

flights operated by Mainland carriers.


Buy #1: China Eastern Airlines (0670.HK, on CL-Buy)

Reasons/catalysts: 1) Positive earnings surprise from 4Q results on the back of load factor strength, 2) Lower than

expected traffic diversion to HSR.

Buy #2: Sinotrans Shipping (0368.HK, on CL-Buy)

Reasons/catalysts: 1) Seasonal pick-up in bulker rates into winter seasons helped by re-stocking; (2) Confirmation of

vessel acquisition plans at attractive prices; (3) Continued scrapping and delivery delays by industry players.


Buy #1: Shanghai International Airport (600009.SS, on CL-Buy)

Reasons/catalysts: 1) High exposure to the high yield int'l passengers; 2) Room for growth given under utilized capacity;

3) Benefit most amongst the listed China airports from the upcoming aeronautical charge hike on mainland carriers’ int’l

flights.

Buy #2: Daqin Railway (601006.SS, Buy)

Reasons/catalysts: 1) Improving coal shipments into Qinhuangdao; 2) Detailed MOR reform proposals announced; 3)

Relaxation of cargo tariff regulations on Daqin line.











Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

753 HK Air China (H) B HKD 5.16 7.00 35.7% 3,038 6.5 0.9 0.8% 5.4

694 HK Beijing Capital Int'l Airport N HKD 5.23 5.00 -4.4% 2,837 12.7 1.2 3.9% 7.7

1919 HK China COSCO Holdings (H) N HKD 3.70 3.50 -5.4% 4,877 164.3 1.1 0.0% 13.4

670 HK China Eastern Airlines (H) B* HKD 2.71 4.40 62.4% 1,222 5.4 0.9 0.0% 5.7

2866 HK China Shipping Container Lines (H) N HKD 2.13 2.10 -1.4% 3,211 30.9 0.7 0.0% 12.1

1138 HK China Shipping Development (H) N HKD 3.99 4.40 10.3% 1,753 73.0 0.5 0.4% 16.1

1055 HK China Southern Airlines (H) N HKD 3.47 4.00 15.3% 1,251 6.7 0.7 0.0% 5.7

525 HK Guangshen Railway (H) B HKD 2.60 3.10 19.2% 2,376 8.0 0.5 5.7% 2.8

316 HK Orient Overseas International B HKD 48.25 56.00 16.1% 3,896 14.0 0.8 1.7% 6.4

368 HK Sinotrans Shipping B* HKD 1.88 2.40 27.7% 968 15.4 0.4 2.2% 0.4


Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

753 HK Air China (H) 61.6% 11.4% 25.7% 19.0% 9.3% 7.1% 13.8% 1.1

694 HK Beijing Capital Int'l Airport 26.9% 9.7% 15.0% 55.4% 34.3% 18.9% 9.1% 0.9

1919 HK China COSCO Holdings (H) 102.7% 9.7% 728.5% 7.7% 2.9% 0.2% 0.7% 1.8

670 HK China Eastern Airlines (H) 46.4% 12.9% 22.3% 16.5% 7.6% 4.4% 16.0% 2.5

2866 HK China Shipping Container Lines (H) 643.1% 5.0% 65.9% 8.4% 4.0% 1.9% 2.3% 0.5

1138 HK China Shipping Development (H) 139.2% 18.3% 180.9% 18.7% 6.0% 1.1% 0.6% 1.2

1055 HK China Southern Airlines (H) 29.6% 10.3% 19.3% 15.5% 6.8% 3.6% 10.1% 1.6

525 HK Guangshen Railway (H) 35.2% 7.1% 20.9% 25.2% 15.7% 11.8% 6.8% (0.1)

316 HK Orient Overseas International 14.2% 9.3% 55.7% 11.4% 6.0% 3.9% 5.9% 0.3

368 HK Sinotrans Shipping 106.7% -3.2% 74.7% 43.2% 16.9% 29.3% 2.8% (0.4)

Ticker Name Rating

Pricing

currency

Price (Pricing

currency)

6M/12M

target Price

(Pricing

currency)

Potential

upside/

downside to

target price

Market

cap

(US$mn)

P/E CY

2013 (X)

P/B CY

2013 (X)

Dividend

yield

CY 2013

EV/EBITDA

CY 2013

(X)

601111 CH Air China (A) N CNY 4.65 7.00 50.5% 6,218 7.3 1.0 0.7% 5.7

601919 CH China COSCO Holdings (A) S CNY 4.25 2.90 -31.8% 6,971 1.6 0.0% 15.1

600115 CH China Eastern Airlines (A) B CNY 3.12 5.60 79.5% 3,898 7.7 1.2 0.0% 6.3

601866 CH China Shipping Container Lines (A) N CNY 2.21 2.30 4.1% 4,145 39.9 1.0 0.0% 14.1

600026 CH China Shipping Development (A) N CNY 4.27 5.00 17.1% 2,334 97.2 0.6 0.3% 17.6

600029 CH China Southern Airlines (A) N CNY 3.38 5.80 71.6% 3,811 8.2 0.8 0.0% 6.0

601006 CH Daqin Railway B CNY 6.26 7.70 23.0% 14,942 7.4 1.3 7.2% 5.0

601333 CH Guangshen Railway (A) N CNY 2.50 3.20 28.0% 2,843 9.5 0.7 4.8% 3.5

600009 CH Shanghai Int'l Airport B* CNY 11.06 15.70 42.0% 3,422 10.3 1.3 4.8% 5.8








Revenue,

sales

growth CY

2013

EBITDA

growth CY

2013

EBITDA

margin CY

2013 EBIT margin

Net margin

CY 2013

ROE CY

2013

Net

debt/equity

CY 2013

601111 CH Air China (A) 59.5% 11.4% 25.7% 19.0% 9.3% 7.1% 13.8% 1.1

601919 CH China COSCO Holdings (A) 102.6% 9.7% 728.5% 7.7% 2.9% 0.2% 0.7% 1.8

600115 CH China Eastern Airlines (A) 44.4% 12.9% 22.3% 16.5% 7.6% 4.4% 16.0% 2.5

601866 CH China Shipping Container Lines (A) 633.2% 5.0% 65.9% 8.4% 4.0% 1.9% 2.3% 0.5

600026 CH China Shipping Development (A) 138.7% 18.3% 180.9% 18.7% 6.0% 1.1% 0.6% 1.2

600029 CH China Southern Airlines (A) 27.9% 10.3% 19.3% 15.5% 6.8% 3.6% 10.1% 1.6

601006 CH Daqin Railway 14.8% 7.1% 9.6% 39.7% 30.7% 26.2% 17.1% 0.0

601333 CH Guangshen Railway (A) 33.4% 7.1% 20.9% 25.2% 15.7% 11.8% 6.8% (0.1)

600009 CH Shanghai Int'l Airport 27.1% 19.3% 21.6% 54.0% 36.9% 35.2% 11.8% (0.2)

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Relative Index



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20121129-Goldman Sachs-China H-Share Strategy 2013 Outlook