China / Hong Kong Market Focus Strategist's Blog outlook. Our 3 month and 12 month HSI targets are 22,332 and 25,440 respectively ... points. Similarly, the Hang Seng Utilities Index

www.dbsvickers.com

sa- AH

Three themes for rest of the year • China FAI plays and property are sweet spots in our

investment theme matrix

• China banks and autos are attractive laggards

• Adding Bocom, CRCC, GAC, and ZTE to top ten picks

Tick shaped market. Fed rate futures indicate only a 28% probability for a Fed rate hike later this week (pg 2). Although a rate hike delay is likely, we believe the Hong Kong market will not re-rate strongly due to other overhangs. But we do not expect large market downside based on index P/BV and several market-fear measurements (pg 3-5). We also believe Hang Seng Index PE comparisons to past troughs are not reliable due to component changes since 1998 and 2009 (pg 7-8). We believe the market to be tick-shaped, with a substantial rebound coming in the medium term if: 1) A-shares fall back to pre-rally PE valuations, 2) China rolls out more pro-growth policies, and 3) there is more clarity on Fed rate outlook. Our 3 month and 12 month HSI targets are 22,332 and 25,440 respectively (pg 9).

Three themes for rest of year. We have mapped out relevant macro trends that will impact the market in the coming months (pg 13). In this environment, we prefer 1) companies that can benefit from expected macro policies and growth initiatives (pg 14), 2) companies that can benefit from expected monetary policies and currency trends (pg 15), and 3) value and laggard picks (pg17). We believe China fixed asset investment and properties are sweet spots in the market as they fit into multiple themes (pg 20). ZTE and TK Group also score well. In addition, we like China banks and China autos as laggard picks with turnaround potential.

Upgraded CH property, CH construction, and CH materials;

downgraded HK banks, healthcare, and coal. We have upgraded China property and China railway and construction from Neutral to Overweight. Both sectors have lagged, but will benefit from lower Rmb interest rates and fiscal support. We have also upgraded materials to Neutral. However, we have downgraded Hong Kong banks to Neutral on slower USD rate hike and macro uncertainties. We have also downgraded healthcare on valuation grounds and coal on poor fundamentals (pg 21). Adding four stocks to top ten. We are adding BoCom (3328.HK), China Railway Construction (1186.HK), Guangzhou Automobile (2238.HK), and ZTE (763.HK) into our top ten picks as they fit into our three investment themes. We have taken out Far East Horizon (3360.HK), Yestar (2393.HK), Dah Sing Financial (440.HK), and CR Land (1109.HK) (pg 22).

HSI : 21,455

Analyst Alexander LEE CFA, +852 2971 1930 [email protected] Ian Chui [email protected]

China/Hong Kong Research Team · (852) 2820 4844 · [email protected]

DBSV top picks performance (market cap weighted)

90

100

110

120

130

140

150

160

170

180

Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15

DBSV top picks - market cap weightedHSI

(28 Feb 2014 = 100)

Source: DBS Vickers

DBSV top ten

Closing Tgt

T ick er price PBV PER y ield ROE Price(HK$) (X ) (X ) (%) (%) (HK$)

BOCOM 3328.HK 5.56 0.6 4.8 6.7 12.5 9.34COLI 688.HK 22.75 1.0 6.8 3.0 15.5 38.96CH Railway Constr 1186.HK 11.08 0.9 8.5 1.8 11.6 17.00GZ Automobile 2238.HK 5.61 0.7 5.4 5.5 12.9 8.30Nexteer Auto 1316.HK 7.88 2.4 9.7 2.1 26.9 8.75Sinopharm Group 1099.HK 28.00 1.9 15.0 1.8 13.4 34.00Tencent 700.HK 131.20 7.2 23.4 0.5 31.4 184.00Value Partners 806.HK 7.14 2.5 9.4 6.3 27.6 14.20Wasion Group 3393.HK 8.22 1.4 9.0 4.0 16.8 12.50ZTE 763.HK 17.02 1.8 14.4 1.7 13.4 24.00

F Y16F

Source: DBS Vickers

Based on 15 September 2015 closing prices

DBS Group Research . Equity 16 September 2015

China / Hong Kong Market Focus

Strategist's Blog

Refer to important disclosures at the end of this report

Market Focus

Strategist's Blog

Page 2

Delay in rate hike is more likely. Fed Fund Futures are pricing in a 28% probability for a rate hike decision this week. This has declined from 60% at the start of the year. Market expectations for a first hike in or before December is still fairly high at 60% probability. But this too, has been dropping from 80% at the start of the year. Weighing in arguments for and against a rate hike now, we believe the ‘against’ arguments dominate this round:

Arguments for a hike now:

- Monthly non-farm payrolls since 2014 have improved by 84% from 2010-2011 levels (240,600 compared to 131,000).

- Unemployment rate has declined to 5.1% from the peak of 10%. This is below the original unemployment target of 6.5%.

Arguments for waiting:

- Core PCE inflation is below the 2% Fed target at 1.2%.

- Unemployment rate, if adjusted for current low labor participation rate of 62.6% (vs. 66% before crisis), would be quite high at 10%.

- Macro uncertainty of emerging markets. According to the IMF, emerging and developing economies account for almost half of 2014 US exports.

ADP employment change

US unemployment rate (reported and adjusted)

(1,000)

(800)

(600)

(400)

(200)

0

200

400

03 04 05 06 07 08 09 10 11 12 13 14 15

(k)

0

2

4

6

8

10

12

14

16

03 04 05 06 07 08 09 10 11 12 13 14 15

Assuming 66% labor participation

Reported

(%)

Sources: Bloomberg Finance L.P., DBS Vickers

Probability of rate hike according to Fed Fund Futures

0%

20%

40%

60%

80%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep

Probability of rate hike in or before Dec 2015Probability of rate hike in or before Sept 2015


Market Focus

Strategist's Blog

Page 3

Several gauges suggest market is near bottom. Although the HSI 12 month forward PE is higher than past trough levels, we believe HSI membership and weighting changes since 2009 make an apple-to-apple comparison difficult. Instead, we have explored other market indicators to gauge potential downside.

We find several indicators which suggest limited downside from current levels.

Price to book. The HSI trailing P/BV is now at 1.14, which is just slightly above 2009’s trough of 1.1x. Meanwhile, the HSCEI P/BV of 0.94 is already below the 2009 trough of 1.05.

HSI trailing P/B

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

HSI 1yr trailing P/B +2 stdev 10 yr mean -2 stdev(x)

1.14 1.10 0.94


HSCEI trailing P/B

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15

HSCEI 1yr trailing P/B +2 stdev 10 yr mean -2 stdev(x)

0.94 1.050


Measurements of market fear. The China telecom sector’s PE relative to the market is near 2 standard deviations above mean. This implies de-risking action by investors have already been carried out for some time. This relative measure was high in 3Q13, 3Q14, and 1Q15, which were favorable entry points. Similarly, the Hang Seng Utilities Index has already outperformed the HSI strongly in recent months. Meanwhile,

the HSI volatility index has also spiked to 41% in early September, a level not seen since 2009. In addition, HSBC’s forward dividend yield spiked to above 6% (pg 5). This is assuming HSBC can payout US$0.5 per share in DPS in 2015 and 2016. Such high yields only occur during crisis times and market performance in the subsequent year after such high yields have usually been positive.

Market Focus

Strategist's Blog

Page 4

China telecom operators PE vs. HSI PE HS Utilities Index performance relative to HSI

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

China telecom / HSI 2yr mean-2 stdev +2 stdev

x

10,000

15,000

20,000

25,000

30,000

35,000

0.4

0.6

0.8

1.0

1.2

1.4

05 06 07 08 09 10 11 12 13 14 15

HSU vs. HSI HSI (RHS)(1/1/'03 = 1.0)

HSI volatility index

0

10

20

30

40

50

60

70

80

07 08 09 10 11 12 13 14 15

(%)


Market Focus

Strategist's Blog

Page 5

HSBC forward dividend yield (top), Hang Seng Index (middle), and HSBC share price (bottom)

-

2.0

4.0

6.0

8.0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

(%)

Buy signals

Sell signals

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

-

20

40

60

80

100

120

140

160

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

(HK$)


Market Focus

Strategist's Blog

Page 6

HSI PE comparison to past troughs is unreliable. In contrast to above gauges, HSI PE levels suggest there is still large downside if we were to reach 2009 crisis levels. The HSI 12 month forward PE is 10x, still significantly higher than 2009’s trough of 7.7x. However, we believe HSI member and weighting changes since 2009 have raised the PE levels of the HSI.

More high PE members in current HSI compared to 2009 and 1998. We tried to reconstruct the HSI PE charts using only current members or past members, but this is technically

challenging. Also, some current members were not listed in the past. Instead, we have calculated the weighted index PE using current members, 2009 members, and 1998 members using current valuations. The weighted average PE using current HSI members is 14.6x, which is higher than the 12.4-12.8x average when using past HSI members and weightings in 2009 and 1998. This confirms HSI PE comparison to the past is not an apples-for-apples comparison. We believe the HSCEI PE bands serve as a better trading range indicator for the market.

HSI 12 month forward P/E

-

5

10

15

20

25

30

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

HSI 1yr forward P/E 5yr mean -2 stdev +2stdev(x)

10.05 7.70

6.08


HSCEI 12 month forward P/E

-

5

10

15

20

25

30

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

HSCEI 1yr forward P/E 5yr mean -2 stdev +2 stdev(x)

6.63 6.83


Market Focus

Strategist's Blog

Page 7

Current weighted PE using current HSI weightings

Current weighted PE using 2009 HSI weightings

Current Current

Index Bloomberg Weighted

Current members weight (%) Est . PE PE (x )

Weighted average PE 14.61

HSBC Holdings PLC 11.5 9.7 1.12

Tencent Holdings Ltd 10.1 32.2 3.25

China Mobile Ltd 7.9 13.5 1.06

AIA Group Ltd 7.2 17.0 1.22

China Construction Bank 6.2 4.8 0.30

ICBC 4.7 5.0 0.23

CK Hutchison Holdings Ltd 4.0 11.9 0.48

Bank of China Ltd 3.8 4.9 0.19

HKEx 2.9 25.6 0.74

China Life Insurance Co Ltd 2.8 13.2 0.36

Ping An Insurance 2.7 10.0 0.27

CNOOC Ltd 2.2 13.8 0.31

Sun Hung Kai Properties Ltd 2.1 11.5 0.25

Cheung Kong Property 2.1 13.4 0.28

PetroChina Co Ltd 1.8 16.9 0.30

Sinopec 1.7 12.8 0.22

CLP Holdings Ltd 1.7 14.9 0.25

Hang Seng Bank Ltd 1.5 12.3 0.19

Hong Kong & China Gas 1.4 22.3 0.32

Power Assets Holdings Ltd 1.4 19.2 0.26

Link REIT 1.3 20.9 0.28

China Overseas Land 1.3 7.1 0.09

BOC Hong Kong 1.2 9.8 0.12

CITIC Ltd 0.9 6.6 0.06

Sands China Ltd 0.9 17.1 0.16

China Unicom 0.8 15.8 0.13

Hengan International 0.8 21.0 0.18

Wharf Holdings Ltd/The 0.8 11.3 0.09

Henderson Land Dev 0.8 15.6 0.12

Galaxy Entertainment 0.8 15.8 0.12

MTR Corp Ltd 0.7 18.8 0.13

Swire Pacific Ltd 'A' 0.7 12.1 0.08

Belle International 0.7 9.4 0.06

Want Want China 0.7 17.8 0.12

Lenovo Group Ltd 0.7 34.3 0.23

Bank of Communications 0.7 5.2 0.04

China Resources Land Ltd 0.7 8.6 0.06

China Shenhua Energy Co Ltd 0.6 8.2 0.05

New World Development 0.6 9.6 0.06

Hang Lung Properties Ltd 0.5 12.8 0.07

Bank of East Asia Ltd/The 0.5 11.1 0.06

China Mengniu Dairy Co Ltd 0.5 16.3 0.08

China Resources Power 0.5 6.9 0.03

Sino Land Co Ltd 0.5 12.5 0.06

China Merchants Holdings 0.4 13.9 0.06

China Resources Ent 0.4 73.5 0.30

Li & Fung Ltd 0.4 13.2 0.05

Tingyi 0.3 20.4 0.06

Kunlun Energy Co Ltd 0.3 11.2 0.03

Cathay Pacific Airways Ltd 0.2 8.6 0.02

2009 Current


2009 members weight (%) Est . PE PE (x )


China Mobile Ltd 14.1 13.5 1.99

HSBC Holdings PLC 13.1 9.7 1.33

China Construction Bank Corp 5.9 4.8 0.30

ICBC 5.7 5.0 0.30

China Life Insurance Co Ltd 5.3 13.2 0.74

PetroChina Co Ltd 4.4 16.9 0.78

CNOOC Ltd 3.9 13.8 0.57

Cheung Kong Holdings Ltd 3.1 11.9 0.39

Sun Hung Kai Properties Ltd 3.0 11.5 0.36

CLP Holdings Ltd 2.7 14.9 0.43

Sinopec 2.4 12.8 0.32

HKEx 2.4 25.6 0.64

Bank of Communications 2.4 5.2 0.13

Hang Seng Bank Ltd 2.3 12.3 0.30

Bank of China Ltd 2.1 4.9 0.11

China Unicom Hong Kong Ltd 2.1 15.8 0.34

Power Assets Holdings Ltd 1.7 19.2 0.34

China Shenhua Energy Co Ltd 1.7 8.2 0.15

Ping An Insurance 1.6 10.0 0.17

Tencent Holdings Ltd 1.5 32.2 0.50

Swire Pacific Ltd 'A' 1.5 12.1 0.18

Hong Kong & China Gas 1.4 22.3 0.33

China Overseas Land 1.3 7.1 0.10

Hang Lung Properties Ltd 1.1 12.8 0.15

BOC Hong Kong 1.0 9.8 0.10

Li & Fung Ltd 1.0 13.2 0.13

Henderson Land Dev 0.9 15.6 0.15

Wharf Holdings Ltd/The 0.9 11.3 0.10

Bank of East Asia Ltd/The 0.8 11.1 0.09

MTR Corp Ltd 0.7 18.8 0.15

Sino Land Co Ltd 0.6 12.5 0.08

New World Dev 0.6 9.6 0.06

China Merchants Holdings 0.5 13.9 0.07

China Resources Ent 0.5 73.5 0.37

CITIC Ltd 0.3 6.6 0.02

Cathay Pacific Airways Ltd 0.3 8.6 0.03

Yue Yuen Industrial 0.3 12.6 0.04

COSCO Pacific Ltd 0.3 11.7 0.03

F IH Mobile Ltd 0.2 13.1 0.03

Hutchison Whampoa Ltd 2.5 n.a.

Esprit Holdings Ltd 1.4 n.a.

Aluminum Corp of China Ltd 0.5 n.a.


Market Focus

Strategist's Blog

Page 8

Current weighted PE using 1998 HSI weightings

Current weighted PE using 1998 HSI weightings (con’t)

1998 Current


1998 members weight Est . PE PE (x )


HSBC Hldgs plc 26.9 9.7 2.92

China Telecom 7.6 13.5 1.15

Hang Seng Bank 7.0 12.3 0.96

CLP Hldgs 6.2 14.9 1.04

SHK Prop 5.6 11.5 0.72

Cheung Kong 5.4 11.9 0.71

HK Electric 3.3 19.2 0.71

Swire Pacific 'A' 3.0 12.1 0.41

CITIC Pacific 2.8 6.6 0.21

HK & China Gas 2.8 22.3 0.69

Henderson Land 2.6 15.6 0.46

New World Dev 2.1 9.6 0.23

CKI Hldgs 1.6 16.3 0.29

Wharf (Hldgs) 1.5 11.3 0.19

Cathay Pac Air 1.4 8.6 0.14

Bank of E Asia 1.1 11.1 0.13

19 98 Curren t

Index B loomberg W eigh t ed

1998 members w eigh t Est . PE PE (x )

Amoy Prop 1.0 12.8 0.14

China Resources 0.9 73.5 0.76

Shanghai Ind Hldgs 0.8 7.3 0.07

Wheelock 0.8 6.9 0.06

Hy san Dev 0.8 14.3 0.13

Hang Lung Dev 0.8 9.6 0.08

Shangri-La Asia 0.6 29.3 0.19

TV B 0.5 8.6 0.05

F irst Pacific 0.4 8.1 0.04

Sino Land 0.4 12.5 0.06

HK & S Hotels 0.4 18.9 0.08

Guangdong Inv 0.4 16.5 0.07

Hopewell Hldgs 0.3 12.4 0.04

Great Eagle Hldgs 0.2 9.3 0.02

HK Telecom 0.0 12.5 0.01

Hutchison 9.7 n.a.

Henderson Inv 1.0 n.a. Sources: Bloomberg Finance L.P., DBS Vickers

Some key overhangs need to be lifted for sustainable rebound. Although we do not expect downside for the market, meaningful re-rating can only come when more overhangs are lifted. Firstly, the A-share market overhang needs to be addressed. We believe A-shares will continue to correct back to pre-rally PE valuations. This implies 12% downside for the SHCOMP. CSRC said it has cleaned up 60% of the grey market margin financing in the system, while the official margin financing amount has also declined from the peak. This paves the way for the final phase of the A-share market correction without repurcussions to the financial sector. This

concern was why there was frantic response in July to halt the A-share decline.

Secondly, there needs to be higher confidence in corporate earnings. Current market earnings forecasts point to an earnings recovery scenario for 2016, thanks to low base effect. 2016 earnings growth projections for the HSI and HSCEI are 7.7% and 7.4% respectively. But weak macro conditions and potential CNY depreciation can trim earnings outlooks. More pro-growth policies from China and more clarity on CNY trends will help stabilize earnings expectations.

SHCOMP still needs to fall 12% to 2,650, to return to pre-rally PE level of 10x

-

1,000

2,000

3,000

4,000

5,000

6,000

05 06 07 08 09 10 11 12 13 14 15 16

SHCOMP 5 yr mean of 1 yr forward P/E +1 std -1 std +2 std -2 std

17.1x

14.7x

12.3x

10.0x

7.6x

Sources: DBS Vickers

Market Focus

Strategist's Blog

Page 9

HSI earnings forecasts (index points) HSCEI earnings forecasts (index points)

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

Jan/13 Jul/13 Jan/14 Jul/14 Jan/15 Jul/15

2014 2015 2016

1,200

1,300

1,400

1,500

1,600

1,700

1,800


2014 2015 2016

CNY / USD CSI300 earnings forecasts (index points)

6.006.056.106.156.206.256.306.356.406.456.50


200 220 240 260 280 300 320 340 360 380 400


2015 2016


More bullish index targets in the medium term. We expect the market will remain in low valuations in the near term due to macro uncertainties and overhang from A-shares. This is reflected in our 3 month index targets, which only offer small upside. But we anticipate the medium term return for the market can be substantial. This is assuming China will roll out

more pro-growth policies, CNY depreciation will stabilize, and A-shares will become less of a drag on the Hong Kong market. Upside will be driven by slight PE re-rating and earnings recovery from a low base in China banks, China telecom, commodities, and gaming.

Hang Seng Index 3 month and 12 month targets

15,000

17,000

19,000

21,000

23,000

25,000

27,000

29,000

10 11 12 13 14 15 16

HSI 3M target 12M target

25,440

22,332

Tgt PE =10.5x

Tgt PE =11x


Market Focus

Strategist's Blog

Page 10

HSI PE bands

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

08 09 10 11 12 13 14 15 16 17

HSI 5 yr mean of 1 yr forward P/E +1 std -1 std +2 std -2 std

12.7x

11.6x

10.5x

9.3x

8.2x


HSCEI 3 month and 12 month targets

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

10 11 12 13 14 15 16

HSCEI 3M target 12M target

11,773

9,926

Tgt PE =7.8x

Tgt PE =7.1x


HSCEI PE bands

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

HSCEI 5 yr mean of 1 yr forward P/E +1 std -1 std +2 std -2 std

5.8x

11.3x

9.9x

8.5x

7.1x


Market Focus

Strategist's Blog

Page 11

Consensus earnings outlook for HSI components

HSI 2014 2015 2016 2015 2016China banks BoCom HK3328 1.12 1.07 1.09 -4.7% 2.2%

BOC HK3988 0.77 0.72 0.75 -6.2% 4.4%ICBC HK1398 0.98 0.95 0.98 -3.6% 3.8%CCB HK939 1.15 1.13 1.17 -2.2% 3.8%

HK banks BEA HK23 2.72 2.35 2.47 -13.7% 5.0%BOCHK HK2388 2.30 2.48 2.73 7.8% 10.2%Hang Seng Bank HK11 7.91 11.85 10.08 49.8% -15.0%HSBC HK5 5.35 6.20 6.31 15.9% 1.7%HKEX HK388 4.44 7.10 7.89 59.9% 11.1%

Insurance China Life HK2628 1.43 2.03 2.24 42.2% 9.9%Ping An HK2318 3.10 3.87 4.07 24.8% 5.3%AIA HK1299 2.25 2.48 2.76 10.0% 11.3%

Telcos China Mobile HK941 6.77 6.68 7.05 -1.3% 5.5%China Unicom HK762 0.68 0.64 0.70 -5.4% 9.3%

Oil PetroChina HK857 0.74 0.34 0.46 -54.6% 37.5%Sinopec HK386 0.50 0.40 0.49 -19.6% 22.9%CNOOC HK883 1.70 0.62 0.79 -63.7% 27.9%

Coal China Shenhua HK1088 2.45 1.54 1.59 -37.1% 3.2%China Coal HK1898 1.54 1.62 1.87 5.3% 15.3%

Gas Kunlun Energy HK135 0.70 0.52 0.63 -26.3% 22.3%Towngas HK3 0.61 0.67 0.72 10.0% 7.3%

Power CLP HK2 4.44 4.35 4.56 -2.0% 4.6%China Res Power HK836 1.94 2.64 2.70 36.2% 2.2%Power Assets HK6 7.88 3.69 3.77 -53.2% 2.4%

HK property MTR HK66 2.13 1.86 1.60 -12.8% -13.8%Cheung Kong HK1 16.30 8.75 9.80 -46.3% 12.0%SHK Land HK16 8.53 7.36 8.73 -13.7% 18.6%Henderson Land HK12 5.11 2.84 3.09 -44.4% 8.6%New World Development HK17 1.37 0.80 0.90 -41.3% 12.4%Hang Lung Property HK101 2.29 1.39 1.36 -39.4% -2.2%Sino Land HK83 1.01 0.85 0.92 -15.9% 8.6%Llink REIT HK823

China property COLI HK688 3.39 3.20 3.59 -5.6% 12.0%China Resources Land HK1109 1.94 2.16 2.45 11.3% 13.4%

Conglomerates China Resources HK291 (0.07) 0.34 0.45 -584.3% 33.6%Citic Pacific HK267 1.60 2.15 2.11 34.6% -1.9%China Merchants HK144 1.59 1.80 1.96 12.9% 9.3%Swire HK19 7.36 7.10 7.30 -3.5% 2.8%Wharf HK4 3.46 3.79 4.07 9.5% 7.5%

Gaming Galaxy HK27 2.44 1.40 1.60 -42.5% 14.3%Sands China HK1928 2.45 1.49 1.51 -39.1% 1.1%

Tech Lenovo HK992 0.60 0.64 0.20 7.3% -69.7%Tencent HK700 3.25 4.07 5.28 25.2% 29.8%

Transport Cathay Pacific HK293 0.80 1.65 1.82 105.9% 10.3%Cosco Pacific HK1199 0.78 0.86 0.93 10.5% 7.9%

Commerce Li & Fung HK494 0.41 0.38 0.43 -6.8% 11.5%Consumer Hengan HK1044 3.19 3.51 3.95 10.0% 12.4%

Belle Int'l HK1880 0.67 0.68 0.70 1.5% 3.1%Want Want HK151 0.36 0.37 0.42 2.5% 13.0%Tingyi HK322 0.56 0.57 0.68 2.3% 18.8%

EPS (HK$) EPS growth


Market Focus

Strategist's Blog

Page 12

Consensus earnings outlook for HSCEI components

2014 2015 2016 2015 2016

Banks BOC HK3988 0.77 0.73 0.76 -5.6% 4.5%

BoCom HK3328 1.12 1.06 1.09 -5.1% 2.2%

CCB HK939 1.15 1.14 1.18 -1.2% 3.9%

CMB HK3968 2.79 2.92 3.22 4.5% 10.3%

ICBC HK1398 0.98 0.95 0.99 -3.6% 4.3%

ABC HK1288 0.69 0.68 0.71 -1.9% 4.9%

Citic Bank HK998 1.10 1.07 1.13 -2.9% 5.5%

Minsheng HK1988 1.65 1.62 1.72 -1.8% 5.9%

Insurance China Life HK2628 1.43 1.98 2.17 38.3% 9.8%

PICC Group HK1339 0.39 0.45 0.47 15.4% 3.3%

CPIC HK2601 1.54 2.09 2.30 36.0% 9.9%

PICC P&C HK2328 1.34 1.49 1.52 10.9% 2.5%

Ping An HK2318 3.10 3.62 3.85 16.6% 6.4%

Brokers and AM Citic Securities HK6030 1.30 1.86 2.01 42.9% 8.3%

Haitong HK6837 1.01 1.55 1.58 53.7% 1.7%

China CINDA HK1359 0.42 0.52 0.61 23.1% 17.8%

Telcos China Telecom HK728 0.28 0.29 0.32 3.6% 9.7%

Oil and serv ices PetroChina HK857 0.74 0.37 0.54 -50.4% 46.6%

Sinopec HK386 0.50 0.40 0.51 -20.4% 29.1%

China Oilfield HK2883 1.98 0.69 0.89 -65.3% 29.7%

China property Dalian Wanda HK3699 4.88 4.81 5.97 -1.4% 24.1%

China Vanke HK2202 1.80 1.97 2.29 9.6% 15.9%

Power Huaneng Power HK902 0.96 1.08 1.18 12.8% 8.9%

China Longyuan HK916 0.40 0.58 0.67 44.5% 16.3%

CGN Power HK1816 0.21 0.17 0.20 -20.0% 19.6%

Construction and China Railway HK390 0.61 0.67 0.75 9.7% 12.0%

machinery China Comm Cons HK1800 1.08 1.15 1.29 6.1% 12.5%

Cement Anhui Conch HK914 2.61 2.10 2.32 -19.6% 10.7%

CNBM HK3323 1.38 0.82 0.94 -40.8% 15.5%

Coal China Coal HK1898 0.08 (0.19) (0.09) -341.0% -54.3%

China Shenhua HK1088 2.45 1.52 1.58 -37.9% 3.9%

Autos BYD HK1211 0.23 0.95 1.10 314.3% 15.8%

GAC Group HK2238 0.62 0.69 0.84 11.1% 21.8%

Dongfeng Motors HK489 1.88 1.69 1.85 -10.1% 9.2%

Greatwall Motor HK2333 3.32 3.94 4.52 18.6% 14.7%

Others Tsingdao HK168 1.85 1.87 2.05 1.1% 9.5%

Sinopharm HK1099 1.40 1.60 1.91 14.5% 19.3%

Air China HK753 0.39 0.78 0.79 99.0% 1.3%

J iangxi Copper HK358 1.06 0.66 0.80 -37.6% 20.4%

EPS (HK$) EPS growth


Market Focus

Strategist's Blog

Page 13

Expected macro environment and their impacts

IndexAlready occurredOngoing eventsExpected eventsImpacts

MSCI did not include A‐shares

Desperate scramble to

prevent domino effect on margin

China's macro outlook remains

weak

Rmb depreciation t rend

Fiscal action to help

transformation

IMF SDR basket review delayed until

3Q16

China's interest rate cut cycle is

lengthening

China's real interest rate dipping to zero

Fear of impact to financial system due to excess leverage

Overhang for A‐share market from eventual exit plan

China can let market forces sort

itself

Domestic fisca l plan to prop up jobs in near term

Accelerate reforms and new

economy

China' s five year plan for 2016‐

2020

Winded down most toxic

leverage products

A‐shares not as appealing until

MSCI talks resume

Domestic property appetite to increase

FAI through Private Public Partnership

One belt one road to export excess

capacity

Increase tech and automation in manufacturing

Investment in infra and green

sectors

Exports to find some relief

IT and automation solution providers to benefit

Railway, construction,

telecom and power equipment to benefit

Water, alternative energy, waste management to

benefit

China property developers to benefit

Exporters and Chinese companies with overseas

revenues to benefit


Market Focus

Strategist's Blog

Page 14

Three investment themes

China’s macro outlook remains lacklustre. We have mapped out the expected macro environment companies face on the next page. China’s macro trends are still weak despite rate cuts since November 2014. The official data are well circulated so we will not repeat their publication here. If we look at

other economic gauges, they point to an even more drastic slowdown than what the official figures suggest. In this environment, we recommend companies that can benefit from expected macro and monetary policies. We also favor laggards with turnaround potential.

Electricity production

Railway freight

-10%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600


Electricity production yoy% (RHS)

(kWh bn)

-20%

-10%

0%

10%

20%

30%

170,000 180,000 190,000 200,000 210,000 220,000 230,000 240,000 250,000 260,000 270,000


Railway freight ton km m yoy% (RHS)

(Ton km m)

Sources: CEIC, Bloomberg Finance L.P., DBS Vickers

Theme 1: Companies that benefit from macro policies and initiatives

China to accelerate reforms and new initiatives. China will roll out its next five year plan for 2016-2020 in coming months. We expect the plan will focus on accelerating reforms and new initiatives, to prop up new industries and wean China from its reliance on traditional FAI and cheap exports. Hence, we believe the upcoming five year plan will reiterate a lot of initiatives that were rolled out in the government work report earlier this year. These include encouraging companies to go global, partly through the “one belt one road” scheme. China

will also upgrade its manufacturing sector, combat pollution, and continue SOE reforms to improve efficiency.

We expect infrastructure companies and equipment providers to benefit from the go-global initiative, especially for companies with track record of winning overseas contracts. Meanwhile, IT and automation solution providers will see continued growth opportunities in China’s economic shift. Similarly, environmental and alternative energy sectors should see faster growth than China’s GDP given pollution initiatives. Lastly, SOEs earmarked for reform and restructuring can potentially benefit from efficiency or bargaining power gains.

Market Focus

Strategist's Blog

Page 15

Some anticipated policies of upcoming five-year plan

Polic ies Benef ic iaries

F inancialreforms

Rely less on SOE banks to channel country's sav ings Insurance, brokerages, asset managers

Go globalst rategy

Encourage Chinese companies to go global, particularly forrecommended sectors. Silk road plan complements thisstrategy.

Railways, electric power, communications,engineering machinery, automobile, aircraft,electronics

"Made inChina 2025"

Upgrade manufacturing to German model, with moreautomation and design. China will also promotebreakthroughs in ten sectors

Automation, information technology, railwayequipment, energy-sav ing cars, high-end medicalequipment

SOE reform Introducing mixed ownership to SOEs, through divestmentsand employee share incentives.

SOEs with restructuring possibilities. Ie COFCOgroup, Everbright Ltd, Sinopharm, CNBM.

Combatpollut ion

Energy and water conservation, increase renewable energysources, emission controls.

Water companies, alternative energy, waste toenergy operators

Promotedesiredconsumpt ion

Encourage development of in healthcare, information goods,and leisure serv ices and goods

Healthcare, airlines, theme parks, internet


Theme 2: Companies that benefit from monetary and currency trends

China’s real interest rate decline to benefit property and FAI. We expect Chinese policy makers will continue to cut interest rates. We expect another 50bps in benchmark rate cuts to come before mid-2016. This will help lower funding cost for investments. Combined with lower funding hurdles for

infrastructure projects enacted by the NDRC recently, we expect FAI will gradually pick up. Further interest rate cuts will also push China’s real deposit rates towards zero. This should further help property pre-sales recovery, especially when A-shares is less appealing as an asset class. Thus we expect China property and fixed asset investment plays to benefit from China’s interest rate cycle.

Falling real interest rates in China

China property monthly pre-sales

(6)

(4)

(2)

0

2

4

6

8

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

(%)

1 yr real lending rate 1 yr real deposit raterate hikes rate cuts

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,000

Jan-

06Ju

n-06

Nov

-06

Apr

-07

Sep-

07Fe

b-08

Jul-0

8D

ec-0

8M

a y-0

9O

ct-0

9M

ar-1

0A

u g-1

0Ja

n-11

Jun-

11N

ov-1

1A

pr-1

2Se

p-12

Feb-

13Ju

l-13

Dec

-13

Ma y

-14

Oct

-14

Mar

-15

Au g

-15

Rmb m


USD strength to help exporters. Our DBS currency team forecasts continued USD strength in the coming 12 months, and foresee substantial EUR weakness and moderate weakness in CNY and Asian currencies. We believe Chinese

exporters can benefit from a weaker CNY, but we favor companies that export more to the US rather than to Europe. On the flip side, Chinese companies with HKD or USD borrowing stand to lose from USD strength.

Market Focus

Strategist's Blog

Page 16

DBS house currency forecasts

EUR usd/ usd/ usd/ usd/ usd/ usd/ usd/ usd/ usd/ usd/

/usd JPY CNY HKD TWD KRW SGD MYR THB IDR PHP

9-Sep 1.1204 120.48 6.3778 7.7509 32.480 1191 1.4162 4.3230 36.068 14,260 46.900

4Q15 1.10 119 6.42 7.76 32.6 1,204 1.42 4.34 36.0 14,470 47.9

1Q16 1.08 120 6.45 7.76 33.0 1,223 1.43 4.35 36.5 14,850 48.4

2Q16 1.06 121 6.49 7.76 33.4 1,242 1.45 4.36 36.9 15,230 48.8

3Q16 1.04 122 6.52 7.76 33.8 1,262 1.47 4.37 37.4 15,610 49.3

4Q16 1.04 122 6.50 7.76 33.7 1,257 1.46 4.37 37.3 14,640 49.1


Winners and losers from Rmb depreciation

Sector Companies Impact

Posit iv e Exporters Techtronic (669.HK)

TK Group (2283.HK)

Shenzhou Int'l (2313.HK)

Pacific Textiles (1382.HK)

Vtech (303.HK)

Samson (531.HK)

T echnology Lenovo (992.HK)

ASM (522.HK)

AAC Acoustics (2018.HK)

A utos and Minth (425.HK) 30% of sales are from overseas while costs are largely Rmb

others Guangdong Investment (270.HK) Water sales to HK are fixed in HK$ but costs are in Rmb

ZTE (763.HK) Margins or competitiveness for overseas business to improve

Negat iv e A irlines Air China (753.HK), China EasternAirlines (670.HK), China SouthernAirlines (1055.HK)

Revenues are in Rmb, but majority of debt and some costs areUS$ based

Paper L&M Paper (2314.HK) Rmb revenues but forex cost base; HK$/US$ liabilities

Nine Dragons (2689.HK) Rmb revenues but forex cost base; HK$/US$ liabilities

Chinaproperty

COGO (81.HK), COLI (688.HK),Agile (3383.HK)

Has HKD/USD liabilities

HK bank s BEA (23.HK) Rmb depreciation will have negative translation effect. Moreimpact for BEA given larger portion of Rmb assets.

HK retail Slightly lower purchasing power of mainland tourists in HK$terms

Gaming Slightly lower spending power of mainland tourists

Others Texhong (2678.HK) 90% revenues are in Rmb but 65% of COGS is in USD

Brilliance China (1114.HK) Slight negative as some engines are imported from Germany

Value Partners (806.HK) Translation of A-shares to fund NAVs for performance fees

China Unicom (762.HK) Offshore debt translation

Baosteel (600019) USD debt translation to hit Rmb EPS

Far East Horizon (3360.HK) Offshore funding

Maanshan Iron & Steel (323.HK) USD/EUR debt is 30% of total debt

Sinopharm (1099.HK) Some procurement of overseas drugs for sale in China

Majority of costs are in Rmb while sales are largely in foreigncurrencies.

Sales are primarily denominated in USD, while costs are largely inRmb.


Market Focus

Strategist's Blog

Page 17

Theme 3: Value and laggard picks

Chinese banks and autos as laggard picks. Airlines, oil, global banks, gaming, Chinese brokers, banks, and autos are key laggards since the A-share collapse on July 8, 2015. Among these, we believe China banks and China autos are attractive bottom fishing targets. Both sectors’ ROE vs. P/BV relationships are on the cheap side. China banks’ PB hit 2 standard deviations below mean, which is only justified if

there is systemic risk in the system. We also expect Chinese banks’ earnings growth recovery next year can be a catalyst. Earnings confidence for the sector will be higher with more pro-growth initiatives from China. Meanwhile, we have seen improving m-o-m auto sales in August, and this should continue in 4Q thanks to new models and seasonality. Our PEG screen also contained many auto companies which have low PEGs.

Sector performance since July 8th

-30%

-20%

-10%

0%

10%

20%

30%

Tran

spor

t (ai

rlin

es)

Oil

Ban

ks -

Glo

bal

Gam

ing

Bro

kers

-Ch

ina

Ban

ks -

Chi

naA

uto

s an

d p

arts

HSC

EIC

onsu

mer

(ret

aile

rs)

Coa

lSt

eel &

alu

min

ium

Con

sum

er (h

ouse

hol

d)H

SIPr

ope

rtie

s -H

KC

onsu

mer

(lux

urie

s)G

asPr

oper

ties

-Chi

naFo

od

and

bev

erag

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anks

-H

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ftw

are

& IT

ser

vice

sC

ong

lom

erat

es -

HK

Har

dwar

e &

equ

ipIn

sura

nce

Pow

er -

Chi

naRE

ITC

emen

tTe

leco

m -

HK

Tele

com

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hina

Phar

mac

eutic

als

Wat

er, e

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ron

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tal

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ustr

ial

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oll

road

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ansp

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(por

ts)

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sum

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ppa

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(spo

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ear)


China banks’ P/BV

China autos PE relative to market PE

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

x

0.78

'13 trough =0.86

'13 max =1.31

14 max = 0.99

14 trough = 0.76

0.0

0.5

1.0

1.5

2.0

2.5

3.0

08 09 10 11 12 13 14 15

Auto / HSI 2yr mean-2 stdev +2 stdev

x


Market Focus

Strategist's Blog

Page 18

P/B vs. ROE

China banks

China non-bank financials

China property

EnvironmentalRailway and construction

Apparel and footwear

China auto and parts

China IPPs

China materials

China telecom carriers

China telecom equipment

Hong Kong banks

Hong Kong property

Hong Kong telecom

Pharmaceutical & healthcare

Textiles

China coal

China F&B

Oil

Retailers

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

(2016F ROE)

(201

5P/

B)

Sources: PBOC, DBS Vickers

Stocks with earnings growth improvement in 2016 and reasonable valuations (2016F PE < 10x or PEG < 1x)

EPS CA GR

T icker Company 2015F 2016F change 2014 2015F 2016F 14-16 PEG

173 K. Wah Intl -6% 93% 100% 12.8 13.7 7.1 34.5% 0.37

3333 Evergrande Real Estate -50% 37% 87% 4.4 8.8 6.4 -17.3% (0.25)

311 Luen Thai -7% 65% 72% 8.0 8.5 5.2 24.3% 0.33

817 Franshion Properties -47% 24% 71% 3.4 6.5 5.2 -18.9% (0.18)

1114 Brilliance China -22% 28% 51% 7.2 9.3 7.2 -0.1% (50.0)

570 China Traditional Chinese Medicine 16% 73% 57% 27.8 24.0 13.9 41.6% 0.67

1300 Trigiant Group -37% 13% 50% 3.8 6.0 5.2 -15.2% (0.25)

3377 Sino-Ocean Land -21% 26% 47% 5.8 7.4 5.9 -0.4% (13.8)

1117 China Modern Dairy -26% 20% 45% 7.2 9.6 8.0 -5.6% (1.27)

1378 China Hongqiao Group -14% 30% 44% 3.6 4.2 3.2 5.7% 0.63

1109 China Resources Land -28% 16% 43% 7.4 10.2 8.8 -8.6% (0.85)

6136 Kangda International -4% 38% 41% 10.1 10.4 7.6 15.2% 0.66

1313 China Resources Cement -24% 4% 29% 5.7 7.5 7.2 -11.3% (0.50)

2007 Country Garden -20% 8% 27% 4.1 5.1 4.7 -7.0% (0.59)

1366 J iangnan Group -1% 23% 24% 6.4 6.4 5.2 10.3% 0.62

489 Dongfeng Motor Group 1% 10% 9% 5.1 5.0 4.5 5.8% 0.88

2202 China Vanke 8% 17% 8% 9.6 8.9 7.6 12.3% 0.79

998 China CITIC Bank 1% 8% 7% 4.3 4.2 3.9 4.6% 0.92

EPS growth PE


Market Focus

Strategist's Blog

Page 19

Lowest PEG ratios in DBSV universe

EPS CA GR

T icker Company 2015F 2016F 2014 2015F 2016F 14-16 PEG

881 ZhongSheng 70% 35% 7.0 4.1 3.0 51.8% 0.13

165 China Everbright Ltd 71% 61% 11.5 6.7 4.2 65.6% 0.18

2678 Texhong Textile Group 70% 64% 12.3 7.2 4.4 67.1% 0.18

1728 China ZhengTong 34% 21% 6.4 4.8 3.9 27.3% 0.23

2333 Great Wall Motor 36% 22% 6.8 5.0 4.1 28.3% 0.24

337 Greenland (Hong Kong) 328% 207% 69.8 16.3 5.3 262.5% 0.27

1148 Xinchen China Power Hldgs 14% 32% 6.9 6.1 4.6 22.2% 0.31

311 Luen Thai -7% 65% 8.0 8.5 5.2 24.3% 0.33

2238 Guangzhou Automobile 33% 16% 8.4 6.3 5.4 24.1% 0.35

2342 Comba 105% 15% 19.0 9.3 8.0 53.8% 0.35

173 K. Wah Intl -6% 93% 12.8 13.7 7.1 34.5% 0.37

175 Geely Automobile 77% 12% 16.8 9.5 8.5 40.6% 0.41

3777 China F iber Optic Network 5% 19% 5.5 5.2 4.4 11.8% 0.47

605 China F inancial Serv ices 12% 13% 5.9 5.3 4.7 12.6% 0.47

3618 Chongqing Rural Bank 12% 7% 4.7 4.2 3.9 9.6% 0.49

2283 T K Group 30% 18% 11.8 9.1 7.7 23.8% 0.50

EPS growth PE


Barbell strategy – buy policy beneficiaries and laggards. No sector fit into all of the three themes, mainly because it is hard for a stock to lag the market when its fundamentals should benefit from ongoing interest rate cuts and expected fiscal policies. Hence we believe the sweet spot to be the

overlapping area between beneficiaries of macro and monetary policies. These would include China property and fixed asset investment plays. At the same time, we also recommend laggards with turnaround potential, being Chinese banks and Chinese autos.

Market Focus

Strategist's Blog

Page 20

Matrix for stock selection

Can benefit from Can benefitexpected fis ca l initia tives from monetary pol ic ie s or

currency trends

China railway and construction China property (net +ve)Environmental companies CH property China railway and constructionOther infra and FAI plays China railway and Environmental companies

IT and automation solutions construction HK banks (net +ve for non-CNH)Environmental

SOE reform: COFCO, Sinopharm, ZTE 763 Exporters: Techtronic 669, Vtech 303, CNBM, Unicom, COSCO Pac Textile 1382, Shenzhou 2313,

Sinopec Samson 531

Offshore revenues:Lenovo 992, Minth 425

GD Inv 270Sinopec 386 TK Group 2283

China banksChina autos and parts

Airlines, global banks, oilChinese brokers, gaming

Screen - growth improvement with cheap valuations:CTCM 570, Kangda 6136, Luen Thai 311China Modern Dairy 1117, Jiangnan 1366

Laggards and va lue picks


Market Focus

Strategist's Blog

Page 21

Recommended sector weightings

Overweight on China banks, property, railway and construction, environmental, and IT. We have upgraded China property and China railway and construction from Neutral to Overweight. Both sectors have lagged, but will benefit from lower Rmb interest rates and fiscal support. We were lukewarm towards China banks during the results season and took out our China banking picks from our top ten. But we are now more positive as valuations have hit 2 standard deviations below mean. We like banks with low dilution risk and strong ability to pay dividends even in the face of rising NPLs. We also like environmental and IT and e-commerce

companies, as they will likely be featured in the coming five year plan.

Underweight on China coal, F&B, HK property, HK REITs, and HK retailers. Hong Kong is entering a structural downturn. We do not see a turnaround for HK retail, and HK property outlook is clouded by USD rate changes and poor capital market performance in recent weeks. For these reasons, we have downgraded Hong Kong banks to Neutral. We still expect HK banks to benefit from USD rate hikes, but macro uncertainties and CNH funding pressures can offset the benefit. We also downgraded China coal to underweight due to poor profitability and earnings revisions.

Latest recommended sector weightings

Sector Weight ing Change Rat ionale

China banks Overweight Trough valuations; earnings recovery from low base to be catalyst

China property Overweight Upgraded Expecting sales recovery due to rate cut, HPR and mortgage policies

Railway and construction Overweight Upgraded Lower borrowing rates, domestic fiscal spending, and overseas contracts

Environmental Overweight Pollution control to be featured in 5 yr plan; prefer smaller caps

Internet and e-commerce Overweight E-commerce continues to gain market share; IT to be featured in 5-year plan

Apparel and footwear Neutral Prefer sportswear companies; avoid companies with large HK exposure

China airlines Neutral Earnings upgrades thanks to falling oil price, but hurt by CNY depreciation

China appliances Neutral Outlook to improve on back of expected rebound in property sales

China auto and parts Neutral Slow car sales balances cheaper commodity input costs

China coal Neutral Documentary "Under the Dome" is scary; structurally unattractive

China IPPs Neutral Helped by lower coal prices; prefer operators with more alternative exposure

China materials Neutral Upgraded Fundamentals can improve slightly if domestic FAI picks up moderately

China non-bank financials Neutral We look to rev isit this sector when SZ-HK stock connect kicks off

China retailers Neutral Prefer players with strong O2O initiatives or defense against e-commerce

China telecom carriers Neutral VAT reform will no longer negatively drag earnings in 2016

China telecom equipment Neutral 4G network capex to slow slightly in 2015; prefer overseas exposure

Gaming Neutral Worst seems to be over for y-o-y gaming revenue declines

Hong Kong banks Neutral Downgraded A rare sector that can benefit from USD interest rate normalisation

Hong Kong telecom Neutral Industry consolidation should help pricing in the future

Oil Neutral Oil price remains weak on both demand and supply concerns

Pharmaceutical + healthcare Neutral Downgraded Positive long term drivers, but pricey valuations limit upside in current mkt

Textiles Neutral Profitability is normalizing in 2015 thanks to cotton prices

China coal Underweight Downgraded Documentary "Under the Dome" is scary; structurally unattractive

China F&B Underweight High valuations cap upside, particularly with earnings downgrades

Hong Kong property Underweight US interest rate cycle and HK political pressure are key risks

HK REITs Underweight Rising risk appetite and US$ interest rate normalization are key risks

HK retailers Underweight Unfavorable structural change in mainland tourist spending behavior


Market Focus

Strategist's Blog

Page 22

Top ten picks

Adding BoCom, CRCC, GAC, and ZTE. We are adding these stocks as they fit into our three investment themes. We took out China banking picks in early 3Q due to macro uncertainty and an extension in China’s interest rate cut cycle. We believe the sector is now oversold and see value re-emerging. Thus we are adding BoCom (3328.HK) back into our top ten picks. Aside from China banks, we also like China autos as another laggard play. We like Guangzhou Automobile (2238.HK) as its sales YTD have fared well, while seasonality and new models should lift 4Q sales.

We are also adding in ZTE. The company stands to benefit from Rmb depreciation. Overseas contracts should also grow as China accelerates its go-global and “one belt one road” initiatives as part of its 2016-2020 five year plan. Similarly, we

believe CRCC (1186.HK) will benefit from overseas contract wins and a pick up in domestic FAI.

Taking out Yestar, Dah Sing, Far East Horizon, and CR Land. Yestar has gained 33% since we highlighted it as an oversold play and included it in our top ten. We believe its risk-reward is less appealing than before and we opt for larger caps in our top ten list. Meanwhile, we are taking out Far East Horizon as an extension of China’s interest rate cut cycle will hurt its interest margins. The de-rating of pure play healthcare service companies also dampens FEH’s sentiment. For Dah Sing Financial, we still like the stock, but we believe large caps may be in focus in the first leg of a market recovery. Lastly, we are also replacing CR Land, largely to make room for more diversified picks. We leave COLI to represent China properties, which we like as a sweet spot for the market.

GAC sales

BoCom P/BV bands

0 20,000 40,000 60,000 80,000

100,000 120,000 140,000 160,000 180,000 200,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2012 2013 2014 2015

unit

2

3

4

5

6

7

8

9

10

11

12

07 08 09 10 11 12 13 14 15 16

HK$

0.62x

0.71x

0.80x

0.89x

0.98x


DBSV top picks performance (simple average)

DBSV top picks performance (market cap weighted)

90

100

110

120

130

140

150

160


DBSV top picks HSI

(28 Feb 2014 = 100)

90

100

110

120

130

140

150

160

170

180


DBSV top picks - market cap weightedHSI

(28 Feb 2014 = 100)


Market Focus

Strategist's Blog

Page 23

DBSV top ten BUYs

EPS

Clo s ing DBSV T g t CA G RT ic k er p ric e rat in g Pric e F Y 15F F Y 16F 14 - 16 F Y 1 5F F Y 16F F Y 15F F Y 16F F Y 15 F F Y 1 6F

T o p p ic k s (HK $ ) (HK $ ) (X ) (X ) (% ) (% ) (% ) (X ) (X ) (% ) (% )BOCOM 3328.HK 5.56 BUY 9.34 5.0 4.8 2.7 13.4 12.5 0.6 0.6 6.3 6.7

COLI 688.HK 22.75 BUY 38.96 7.3 6.8 -0.7 17.2 15.5 1.0 1.0 2.8 3.0

CH Railway Constr. 1186.HK 11.08 BUY 17.00 9.2 8.5 6.2 12.2 11.6 1.0 0.9 1.6 1.8

GZ Automobile 2238.HK 5.61 BUY 8.30 6.3 5.4 24.1 12.3 12.9 0.7 0.7 4.8 5.5

Nexteer Auto 1316.HK 7.88 BUY 8.75 12.1 9.7 27.1 27.2 26.9 2.9 2.4 1.7 2.1

Sinopharm Group 1099.HK 28.00 BUY 34.00 17.4 15.0 16.3 12.8 13.4 2.1 1.9 1.6 1.8

Tencent 700.HK 131.20 BUY 184.00 30.1 23.4 32.1 31.8 31.4 9.5 7.2 0.4 0.5V alue Partners 806.HK 7.14 BUY 14.20 9.5 9.4 29.2 32.3 27.6 2.8 2.5 6.2 6.3

Wasion Group 3393.HK 8.22 BUY 12.50 10.7 9.0 21.5 16.4 16.8 1.6 1.4 3.3 4.0

ZTE 763.HK 17.02 BUY 24.00 16.4 14.4 21.7 13.1 13.4 2.0 1.8 1.5 1.7

Simp le av erage 13 .2 11 .3 19 .7 19 .5 18 .8 2 .6 2 .2 2 .7 3 .0

* consensus estimates

PER RO E Div y ieldPB V


Our updated top ten list:

Bank of Communications (3328.HK) 2Q NPL and NPL formation trends were better than other SOE banks. The bank has higher exposure to Yangtze River Delta,

which has hurt the bank in the past. But NPL pressure is now higher in Western, Central, and Northeast China. BoCom was approved by the State Council to conduct mixed-ownership reform. Better ownership structure and internal

reforms (e.g. employee stock ownership plan, performance-driven compensation system) will help to align interest and improve efficiency and profitability.

Allowed to acquire Huaying Securities, and can have headstart in leveraging its bank network on new non-bank financial businesses.

China Overseas Land (688.HK)

Recently revised up sales targets after gaining market share from smaller peers

Impact of Rmb depreciation is not as bad as feared since 2/3 of foreign liabilities are hedged by foreign cash and investments

Can benefit from falling real interest rates and a lukewarm equity market

China Rail Construction (1186.HK) Chinese policy makers are helping infrastructure funding by lowering borrowing costs and project capital requirements, and

this will help domestic demand. Company can win overseas contracts as part of China’s “one belt one road” strategy. Decline in borrowing costs to help high gearing companies like CRCC.

GAC Group (2238.HK) Has lagged the market on slowing sales concerns; current valuation is attractive against new growth profile (PEG of 0.35). New models and seasonality should help 4Q sales. Parent company Guangzhou Automobile Industry Group has been buying H-shares.

Nexteer (1316.HK)

Nexteer is the world's leading electronic power steering producer

Push for fuel-efficiency is triggering shift from hydraulic power steering to electronic systems

Traditionally strong in the US, Nexteer is expanding to China to augment growth

Market Focus

Strategist's Blog

Page 24

Sinopharm (1099.HK)

Healthcare is highlighted as a focus area in China's government work report; parent company is also pilot for SOE reform

Aging population and rising wealth underpin the industry's demand growth

Large drug distributors like Sinopharm has been gaining market share with its reliability in supply and ability to extend credit

Tencent (700.HK)

New advertising offerings help drive revenue growth; Tencent only has 5% market share in online ads

We foresee Tencent can better monetize its >800m users through new ad offerings and new apps

We project Tencent can grow its revenues by 50% CAGR during FY14-16

Value Partners (806.HK)

We do not foresee large downside risk to AUM given market valuations and past redemption patterns, while P/AUM is already at trough levels

The fund house is still in a performance fee cycle, because watermark levels are attainable

Company will also benefit from trend of mainland wealth diversifying to offshore assets and asset managers

Wasion (3393.HK)

Energy metering and energy efficiency management company. Customers include the State Grid, the Southern Grid, various industries and local governments in China, Egypt, Indonesia, Thailand, Vietnam, Brazil.

The company has been winning overseas contracts to augment growth. Latest contract wins include a US$9.4m AMI contract in Tanzania. It has also won Rmb68m and Rmb10m AMI contracts in Mexico and Brazil through partnership with Siemens. Total overseas contract value amounts to >Rmb300m YTD.

China’s power grid needs upgrading to minimize energy loss as part of China’s conservation plans. The company benefits from increasing ADO sales orders.

ZTE (763.HK)

Beneficiary of Rmb depreciation thanks to overseas revenues and Rmb cost base.

4G network buildout in China supports strong growth in the near-term.

Beneficiary of “one belt one road” and “go global” initiatives.

Market Focus

Strategist's Blog

Page 25

DBSV universe comparison table

St ockcode St ock name

M k tCap

(US$m)

SharePric e

(HK $)

T argetPric e

(HK $)upside

(% ) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (% )

15FRO E (% )

15FA ut o manuf ac t urers & dealers

1114 Brilliance China 6,083 9.38 12.60 34 B 9.3 7.2 1.8 1.4 22.01728 China ZhengTong 830 2.91 5.50 89 B 4.8 3.9 0.6 4.2 12.31828 Dah Chong Hong 671 2.84 3.70 30 B 7.4 6.4 0.5 4.0 7.3

489 Dongfeng Motor Group 10,184 9.16 11.35 24 B 5.0 4.5 0.8 2.6 16.4175 Geely Automobile 3,759 3.31 3.30 0 H 9.5 8.5 1.2 1.6 13.7

2333 Great Wall Motor 8,793 22.40 48.10 115 H 5.0 4.1 1.3 7.0 28.9601633 Great Wall Motor-A @@@ 9,818 25.01 49.65 99 H 7.1 5.8 1.8 6.3 28.5

2238 Guangzhou Automobile 4,658 5.61 8.30 48 B 6.3 5.4 0.7 4.8 12.3425 Minth Group 2,073 14.52 15.00 3 B 10.4 9.0 1.4 3.8 14.5

1316 Nexteer Automotiv e Group 2,540 7.88 8.75 11 B 12.1 9.7 2.9 1.7 27.21148 Xinchen China Power Hldgs 292 1.76 3.30 88 B 6.1 4.6 0.7 0.0 11.8

881 ZhongSheng 845 3.05 6.70 120 B 4.1 3.0 0.4 4.9 11.0Bank ing and F inance (Ch ina- A ) @ @ @

601288 Agricultural Bank of China-A 145,894 3.16 4.04 28 H 5.7 5.6 0.9 5.8 16.7601988 Bank of China-A 180,725 3.91 5.11 31 H 6.6 6.4 0.9 5.9 15.0601328 Bank of Comm-A 74,856 6.42 8.16 27 B 7.2 7.0 0.9 3.6 13.4601998 China CITIC Bank-A 45,104 6.14 7.26 18 S 7.0 6.6 1.0 3.8 14.6601939 China Construction Bank-A 216,288 5.51 7.39 34 H 6.0 5.9 1.0 4.2 17.3600036 China Merchants Bank-A 71,314 18.01 23.42 30 B 7.3 6.6 1.2 4.2 18.3600016 China Minsheng Bank-A 51,786 9.04 10.64 18 FV 6.6 6.1 1.1 2.3 17.9601398 ICBC-A 254,052 4.54 6.37 40 B 5.7 5.6 0.9 5.8 17.4

Bank ing and F inance (Ch ina)1288 Agricultural Bank of China 127,401 3.04 4.63 52 H 4.4 4.2 0.7 7.6 16.73988 Bank of China 135,607 3.57 5.86 64 B 4.8 4.5 0.7 6.7 15.03328 Bank of Communications 53,277 5.56 9.34 68 B 5.0 4.8 0.6 6.3 13.4

998 China CITIC Bank 28,072 4.65 8.31 79 B 4.2 3.9 0.6 7.1 14.6939 China Construction Bank 175,167 5.43 8.47 56 B 4.7 4.5 0.8 7.0 17.3605 China F inancial Serv ices 259 0.52 0.92 77 B 5.3 4.7 0.6 4.7 12.5

3968 China Merchants Bank 60,397 18.56 26.82 45 B 5.9 5.3 1.0 5.1 18.31988 China Minsheng Bank 34,837 7.40 12.19 65 H 4.3 3.9 0.7 3.5 17.93618 Chongqing Rural Bank 5,136 4.28 7.50 75 B 4.2 3.9 0.7 6.5 17.11398 ICBC 217,520 4.73 7.30 54 B 4.7 4.5 0.8 7.0 17.4

Bank ing and F inance (HK )2388 Bank of China HK 33,287 24.40 26.40 8 B 9.7 8.8 1.4 4.1 14.6

23 Bank of East Asia 8,813 26.10 33.50 28 H 9.0 8.7 0.8 4.6 9.6165 China Everbright Ltd 3,792 17.44 23.84 37 B 6.7 4.2 0.9 5.9 12.6

2356 Dah Sing Banking Group 2,652 14.66 14.90 2 B 9.7 9.2 1.0 2.6 10.43360 Far East Horizon 3,114 6.11 7.92 30 B 6.5 6.0 0.8 3.5 14.1

11 Hang Seng Bank (1) 35,868 145.40 143.80 -1 B 13.9 16.5 2.2 4.1 16.65 HSBC Holdings 151,696 60.10 93.70 56 B 8.2 8.1 0.7 7.0 9.4

Cement 914 Anhui Conch Cement 16,274 23.80 28.96 22 B 10.9 9.7 1.4 2.9 13.5

600585 Anhui Conch Cement-A @@@ 12,629 18.47 23.20 26 B 10.3 9.1 1.3 3.7 13.53323 China Nat'l Bldg Mat 3,253 4.67 4.45 -5 FV 5.5 5.6 0.4 2.7 8.01313 China Resources Cement 3,085 3.66 4.26 16 H 7.5 7.2 0.8 2.7 10.8

691 Shanshui Cement 2,743 6.29 2.20 -65 FV 38.6 35.8 1.6 0.4 3.9Chemicals

2283 T K Group 235 2.20 3.50 59 B 9.1 7.7 2.7 4.4 33.5

Source: DBS Vickers

(1) TP and/or Rec under review

@@@ denominated in RMB

Market Focus

Strategist's Blog

Page 26

DBSV universe comparison table (con’t)

St oc kc ode St oc k name

M k tCap

(US$m)

SharePric e

(HK $)

T argetPric e

(HK $)upside

(% ) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (% )

15FRO E (% )

15FCong lomerat es- HK

4 Wharf Holdings # 16,700 42.70 53.00 24 B 11.4 10.4 0.5 4.5 3.620 Wheelock # 8,966 34.20 41.40 21 B 6.9 6.7 0.7 3.4 5.1

F ood and Bev erages600597 Bright Dairy & F ood@@@ 2,429 15.30 19.70 29 B 26.6 21.3 3.9 2.3 15.2

506 China F oods 1,335 3.70 3.95 7 B 31.4 25.1 1.7 0.0 5.42319 China Mengniu 6,694 26.45 36.90 40 B 16.4 14.0 1.8 1.4 11.61117 China Modern Dairy 1,410 2.06 3.10 50 B 9.6 8.0 0.5 0.0 7.9

322 Tingy i Holding 8,460 11.70 13.20 13 H 21.8 18.5 2.6 2.3 12.4168 Tsingtao Brewery 6,066 34.80 31.90 -8 H 23.0 24.0 2.3 1.3 10.5

600600 Tsingtao Brewery -A @@@ 5,355 30.72 26.20 -15 F V 24.8 25.8 2.5 1.2 10.5220 Uni-President China 3,957 7.10 7.75 9 H 24.9 23.1 2.1 1.2 9.0345 V itasoy 1,588 11.80 12.30 4 H 32.8 28.8 6.4 2.1 20.3151 Want Want China 11,200 6.61 7.00 6 H 18.7 17.2 4.6 1.5 26.6

Hardw are & Equ ipment552 China Comm Serv ices 2,636 2.95 4.50 53 B 7.5 6.8 0.7 4.0 9.4

3777 China F iber Optic Network 434 1.57 2.90 85 B 5.2 4.4 0.8 0.0 16.22342 Comba 372 1.56 1.90 22 H 9.3 8.0 0.7 2.7 8.22618 TCL Communication 860 5.29 5.50 4 H 5.8 5.8 1.4 6.0 25.61300 Trigiant Group 305 1.51 2.30 52 B 6.0 5.2 0.8 9.4 14.6

856 V ST Holdings 419 2.13 3.00 41 B 5.4 5.0 0.7 5.5 13.8303 V Tech 3,029 93.45 110.00 18 B 12.8 12.0 5.0 7.7 39.7763 ZTE 9,059 17.02 24.00 41 B 16.4 14.4 2.0 1.5 13.1

000063 ZTE -A @@@ 7,936 14.91 24.00 61 H 17.9 15.8 2.2 1.4 13.1Househo ld /Personal (Ch ina/HK )

1880 Belle Int'l 7,139 6.56 11.50 75 B 9.3 8.8 1.8 11.2 18.92111 Best Pacific Int'l Hldgs 422 3.20 4.40 38 B 10.2 9.1 1.7 2.9 18.16388 Coach @ ^^^ 821 23.00 48.10 109 H 7.9 7.4 2.8 5.0 36.7

210 Daphne International 366 1.72 1.35 -22 H 657.6 20.1 0.6 0.0 0.11169 Haier Electronics 4,607 12.78 18.41 44 B 9.2 8.2 1.8 1.1 21.51044 Hengan 11,667 73.85 87.50 18 H 21.4 19.1 4.7 3.0 22.8

494 Li & F ung 5,429 5.00 11.30 126 B 8.8 7.7 2.1 8.0 24.52331 Li Ning 890 3.66 4.80 31 B 201.5 17.3 1.8 0.0 1.0

311 Luen Thai 172 1.29 1.80 40 B 8.5 5.2 0.4 3.6 5.21382 Pacific Textile 2,053 11.00 12.50 14 B 14.8 14.1 4.6 7.3 28.91913 Prada 10,202 30.90 33.18 7 H 20.0 22.1 3.0 3.1 15.8

531 Samson Holding 397 1.01 1.24 23 B 16.0 14.9 0.8 11.9 5.11910 Samsonite Int'l ^^ 4,466 24.55 26.54 8 B 21.6 18.6 3.2 2.2 15.51023 Sitoy Group 486 3.76 4.05 8 H 9.1 8.7 1.8 6.1 20.11836 Stella International 1,968 19.20 20.80 8 H 14.8 13.0 2.0 4.9 13.72678 Texhong Textile Group 594 5.20 8.50 63 B 7.2 4.4 1.0 4.1 14.2

321 Texwinca 1,350 7.57 9.00 19 B 13.5 11.2 1.7 7.4 12.8

Source: DBS Vickers

# P/NAV ; '@ denominated in USD ; @@@ denominated in RMB; ^^^ Valuation based on US-listed share; ^^ Core profit and EPS

Market Focus

Strategist's Blog

Page 27


Stockcode Stock name

Mk tCap

(US$m)

SharePrice

(HK$)

TargetPrice

(HK$)upside

(%) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (%)

15FROE (%)

15FIndust rials

517 Cosco International 868 4.39 5.20 18 B 19.3 17.7 0.8 2.6 4.41366 J iangnan Group 805 1.53 2.20 44 B 6.4 5.2 1.0 3.9 17.5179 Johnson Electric 3,068 27.00 27.20 1 H 15.1 13.7 1.7 2.1 11.5

2314 Lee and Man Paper 2,638 4.45 5.50 24 H 8.9 7.9 1.1 4.0 12.62689 Nine Dragons 2,577 4.28 4.50 5 FV 12.6 11.1 0.6 1.6 5.23393 Wasion Group 1,089 8.22 12.50 52 B 10.7 9.0 1.6 3.3 16.4

Inf rast ructure152 Shenzhen International 2,634 10.76 14.04 30 B 10.1 9.5 1.1 3.0 11.1

Inv estment Serv ices (China / HK)806 Value Partners Group 1,701 7.14 14.20 99 B 9.5 9.4 2.8 6.2 32.3

Media 752 Pico Far East 301 1.91 2.98 56 B 8.3 7.4 1.3 6.4 16.6511 TVB 1,509 26.70 35.09 31 FV 6.5 10.3 1.3 7.4 20.2

Pharmaceut ical & Health Care2877 China Shineway 991 9.29 9.50 2 H 8.8 8.6 1.2 4.5 14.1570 China Traditional Chinese Med 3,042 5.50 11.30 105 B 24.0 13.9 1.8 0.0 10.0

1681 Consun Pharmaceutical 632 4.90 6.80 39 B 14.9 11.9 2.5 0.7 17.6000999 CR Sanjiu Medical & Pharm@@ 3,527 22.95 36.20 58 B 18.8 16.8 3.0 1.9 16.7

853 Microport Scientific 564 3.07 1.95 -36 FV n.a. 69.5 1.7 0.0 -2.11498 PuraPharm Corporation 119 4.10 7.20 76 B 20.0 13.0 2.0 0.0 15.21066 Shandong Weigao 3,107 5.38 5.10 -5 H 17.9 15.9 1.9 1.7 10.81099 Sinopharm Group 9,997 28.00 34.00 21 B 17.4 15.0 2.1 1.6 12.8

600535 Tasly Pharmaceutical Group 6,005 35.40 32.00 -10 H 21.8 19.4 6.0 1.6 30.7300026 Tianjin Chase Sun Pharm@@@ 2,380 16.63 21.40 29 H 27.3 22.1 3.3 0.4 15.2

2393 Yestar International 822 2.93 4.27 46 B 27.4 18.2 4.4 1.7 23.6Propert ies (China) (2)

3383 Agile Property # 1,900 3.76 3.66 -3 H 3.5 3.9 0.2 7.1 8.8832 Central China # 451 1.43 1.89 32 B 3.8 3.5 0.2 7.8 11.1

1224 CC Land # 631 1.89 2.06 9 H 4.3 20.8 0.7 4.6 7.481 China Overseas Grand Oceans 710 2.41 4.30 78 B 3.4 2.3 0.3 2.1 12.5

688 China Overseas # 28,945 22.75 38.96 71 B 7.3 6.8 0.9 2.8 17.21109 China Resources Land # 16,580 18.54 24.98 35 B 10.2 8.8 0.7 2.7 11.02202 China Vanke 23,806 16.70 23.41 40 B 8.9 7.6 0.7 3.9 18.2

000002 China Vanke-A @@@ 18,561 13.02 19.31 48 B 8.4 7.2 0.7 4.2 18.22007 Country Garden # 7,898 2.71 4.86 79 B 5.1 4.7 0.6 6.4 15.43333 Evergrande Real Estate # 8,519 4.55 5.35 18 H 8.8 6.4 0.5 2.8 5.7fsg sp F irst Sponsor Group @@ 1 1.23 1.57 28 B 13.4 11.8 0.6 1.4 5.9

817 Franshion Properties # 2,575 1.87 2.97 59 B 6.5 5.2 0.4 4.6 7.9813 Shimao Property # 5,027 11.22 13.50 20 B 4.3 4.0 0.4 8.0 15.2272 Shui On Land # 1,750 1.69 1.97 17 H n.a. n.a. 0.3 0.5 -1.5

3377 Sino-Ocean Land # 4,041 4.16 6.70 61 B 7.4 5.9 0.5 4.5 8.3410 Soho China # 2,006 2.99 3.60 20 FV 46.6 28.0 0.3 1.1 0.7337 Greenland (Hong Kong) # 1,153 3.58 8.28 131 B 16.3 5.3 0.6 0.0 7.7

Yllg sp Yanlord Land # @@ 1,453 1.05 1.54 47 B 10.5 7.2 0.5 1.3 4.6123 Yuexiu Property # 1,968 1.23 1.49 21 H 7.4 6.4 0.4 5.6 5.7

Source: DBS Vickers

@@ denominated in SGD; # P/NAV

(2) core net profit

Market Focus

Strategist's Blog

Page 28


St oc kcode St oc k name

M k tCap

(US$m)

SharePric e

(HK $)

T argetPric e

(HK $)upside

(% ) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (% )

15FRO E (% )

15FPropert ies (HK )

1113 CK Property 28,362 56.95 75.20 32 B 13.7 12.1 0.6 2.4 6.541 Great Eagle # 2,020 23.55 28.60 21 H 9.9 10.0 0.3 3.1 3.010 Hang Lung Group # ^ 4,703 26.90 42.25 57 H 10.0 9.8 0.5 3.0 4.8

101 Hang Lung Properties # ^ 10,270 17.70 25.05 42 B 13.8 13.5 0.5 4.3 4.312 Henderson Land # ^ 20,534 48.15 51.15 6 B 16.7 15.8 0.6 2.4 3.9

HKL SP Hongkong Land ^ # @ 15,764 6.70 9.32 39 B 17.5 17.2 0.6 2.8 3.214 Hy san Dev elopment # 4,391 32.00 39.40 23 B 14.7 14.5 0.5 4.0 3.4

173 K. Wah Intl # 1,125 3.11 4.66 50 B 13.7 7.1 0.3 4.8 2.6683 Kerry Properties # 4,058 21.75 29.80 37 B 8.5 8.1 0.3 3.7 4.5488 Lai Sun Dev elopment # 332 0.13 0.26 105 B 11.3 12.2 0.1 2.0 1.1

66 MTR ^ # 26,415 35.00 36.60 5 H 18.7 23.1 0.9 3.0 6.517 New World Dev # 8,974 7.73 11.74 52 B 10.2 9.2 0.4 5.4 4.016 SHK Properties # ^ 37,267 100.40 140.00 39 B 14.3 11.5 0.5 3.3 4.683 Sino Land # 0 11.54 13.98 21 B 13.2 13.2 0.5 4.3 4.6

1972 Swire Properties # 16,418 21.75 28.20 30 B 17.1 17.0 0.6 3.1 3.588 Tai Cheung # 490 6.15 8.65 41 B 6.9 10.9 0.3 4.9 8.2

369 Wing Tai Properties # 737 4.26 5.24 23 B 14.0 17.7 0.3 3.2 1.8Railw ay & Const ruc t ion

1800 China Comm Construction 20,244 9.70 15.80 63 B 8.1 7.3 1.0 2.8 12.6601800 China Comm Construction-A @@@ 24,126 11.56 25.30 119 H 12.1 10.9 1.4 2.4 12.6

1186 China Railway Construction 19,414 11.08 17.00 53 B 9.2 8.5 1.0 1.6 12.2601186 China Railway Construction-A @@@ 24,355 13.90 26.90 94 H 14.4 13.4 1.6 1.3 12.2

390 China Railway Group 21,075 7.15 11.45 60 B 10.2 9.2 1.1 1.5 11.9601390 China Railway Group-A@@@ 33,013 11.20 22.90 104 H 19.4 17.9 2.2 0.9 12.2

1766 CRRC Corp 33,098 9.40 18.40 96 B 15.5 12.8 2.2 1.9 15.3601766 CRRC Corp-A @@@ 43,908 12.47 33.50 169 H 25.7 21.2 3.6 1.5 15.3

3311 China State Construction 5,551 10.72 12.20 14 H 9.9 8.6 1.8 3.0 19.9Real Est at e Inv est ment T rust

2778 Champion REIT 2,845 3.82 4.78 25 B nmf nmf 0.5 5.1 2.3778 F ortune REIT 1,803 7.42 9.18 24 B nmf nmf 0.6 6.2 3.7

6139 J inmao Inv estment 1,213 4.70 5.49 17 B nmf nmf 1.1 9.5 3.9808 Prosperity REIT 514 2.78 3.06 10 B nmf nmf 0.6 6.2 3.6435 Sunlight REIT 821 3.89 4.23 9 B nmf nmf 0.5 5.7 2.9823 Link REIT 12,157 41.75 47.10 13 B nmf nmf 0.8 4.4 25.4

Rest au rant s538 Ajisen China 445 3.16 5.40 71 F V 10.6 9.7 1.0 5.6 9.9341 Cafe de Coral 1,890 25.15 28.60 14 H 24.7 21.9 4.0 2.7 15.9

Ret ailers814 Beijing J ingkelong 96 1.80 1.50 -17 H 18.9 15.6 0.4 6.7 2.0653 Bonjour Holdings 134 0.31 0.38 25 H 2.2 10.2 0.9 3.4 53.5116 Chow Sang Sang 1,357 15.54 20.33 31 B 7.8 8.6 1.1 4.9 14.9330 Esprit Holdings 1,618 6.45 6.70 4 F V n.a. 133.4 0.9 0.5 -20.6709 Giordano 778 3.84 4.25 11 H 13.2 12.1 2.0 7.2 15.5

3308 Golden Eagle % 1,929 8.68 8.54 -2 H 12.7 12.6 2.1 2.9 17.6493 Gome Elec Appliances % 2,583 1.18 1.26 7 H 12.2 11.0 0.9 3.3 7.8

3389 Hengdeli 648 1.05 0.94 -10 H 10.4 9.6 0.7 2.9 6.51833 Intime Department Store 2,327 8.24 10.00 21 B 12.7 11.1 1.4 4.3 10.9

J D US J D.com ^^@ 34,552 24.98 40.40 62 B 595.0 107.5 6.2 0.0 -4.6980 Lianhua Supermarket 563 3.90 4.14 6 H 158.2 132.6 1.1 0.0 0.7

Source: DBS Vickers

^ EPS and Net Profit exclude fair value changes on investment properties; % - Fully Diluted EPS; # P/NAV; ^^Core profit and EPS; '@ denominated in USD

Market Focus

Strategist's Blog

Page 29



MktCap

(US$m)

SharePrice

(HK$)

TargetPrice

(HK$)upside

(%) RemdPE (x )

15FPE (x )

16FPB (x )

15FYld (%)

15FROE (%)

15FRetailers (cont 'd)

1212 Lifesty le 2,378 11.48 13.69 19 H 8.6 8.6 1.5 5.3 18.9590 Luk Fook 1,476 19.42 28.00 44 B 7.1 7.4 1.3 5.7 20.0825 New World Dept Stores 318 1.46 1.93 32 H 9.2 9.1 0.4 5.4 4.1

1438 Nirvana Asia Ltd 662 1.90 3.05 61 B 12.9 11.2 1.9 3.9 15.3398 Oriental Watch 78 1.06 1.56 47 H 134.2 37.7 0.3 0.9 0.2

3368 Parkson 360 1.03 0.90 -13 FV 44.9 13.7 0.4 5.9 1.0178 Sa Sa 1,138 3.10 2.90 -6 H 10.5 13.8 3.6 7.6 35.0

1700 Springland Int'l 655 2.08 2.33 12 H 7.7 7.3 0.8 5.2 10.76808 Sun Art Retail Group 7,546 6.13 5.20 -15 FV 19.4 18.8 2.3 2.2 12.2891 Trinity Ltd 146 0.65 1.00 54 H n.a. 15.4 0.3 n.a. -0.2

1025 Wumart ^^ 581 3.50 3.57 2 H 12.8 12.7 0.8 0.0 7.0Sof tware & Computer Serv ices

268 Kingdee 996 2.65 3.80 43 B 26.9 20.6 1.8 0.6 8.5700 Tencent ^^ 159,146 131.20 184.00 40 B 30.1 23.4 9.5 0.4 31.8

600588 Yonyou Network Tech@@@ 5,045 22.02 17.00 -23 FV 63.1 48.5 5.5 0.9 10.1Steel, aluminium & copper

347 Angang Steel 3,062 3.28 5.73 75 B 66.5 38.2 0.4 0.4 0.6000898 Angang Steel-A @@@ 4,294 4.60 4.99 8 H 113.1 65.0 0.7 0.2 0.6600019 Baoshan Iron & Steel Co-A@@@ 14,662 5.67 9.09 60 B 22.8 15.5 0.8 3.2 3.6

1378 China Hongqiao Group 3,164 3.85 4.45 16 H 4.2 3.2 0.5 6.2 13.9323 Maanshan I & S 1,779 1.79 1.32 -26 FV nm nm 0.6 0.0 -10.0

600808 Maanshan I & S-A @@@ 2,971 2.99 1.45 -52 FV nm nm 1.1 0.0 -10.0486 United Co RUSAL PLC 6,881 3.51 7.00 99 B 6.1 4.9 1.1 0.0 27.0

Telecom Serv ices (China)941 China Mobile 238,168 90.15 129.00 43 B 13.7 13.0 1.6 3.1 12.5762 China Unicom 31,455 10.18 12.60 24 B 16.1 14.4 0.9 2.4 5.4728 China Telecom 41,667 3.99 5.00 25 B 14.0 12.5 0.9 2.3 6.4

Telecom Serv ices (HK)1883 CITIC Telecom 1,060 2.43 3.60 48 B 10.5 10.1 1.2 4.7 11.56823 HKT Trust 8,754 8.96 9.50 6 H 19.8 19.2 1.8 6.0 9.1215 Hutchison Telecom 1,872 3.01 3.70 23 H 14.6 14.0 1.2 5.1 8.7315 SmarTone 1,948 14.26 17.00 19 B 16.0 17.0 3.9 4.2 26.6

T ransportat ion - Port s & A irport s694 Beijing Capital Intl Airport 4,208 7.53 6.35 -16 B 16.1 14.5 1.4 2.5 9.1144 China Merchants Hldgs 8,328 24.95 36.60 47 B 12.1 11.2 0.9 3.1 7.6

1199 COSCO Pacific 3,805 10.03 13.00 30 B 12.6 11.8 0.8 3.2 6.3Ut it ilies

1816 CGN Power 18,003 3.07 4.60 50 B 18.7 15.4 2.1 1.6 10.7Warehouse

925 Beijing Properties 393 0.45 0.70 56 B n.a. n.a. 0.6 0.0 -1.4600340 China Fortune Land Dev@@@ 9,430 22.70 31.60 39 B 12.6 10.1 4.4 0.8 40.9

1668 China South City 1,973 1.91 2.96 55 B 3.9 7.1 0.6 7.3 16.6200053 Shenzhen Chiwan Petroleum 581 12.87 21.48 67 B 22.9 24.8 0.6 0.4 6.0

Source: DBS Vickers

@@ denominated in SGD; @@@ denominated in RMB

^^Core profit and EPS

Market Focus

Strategist's Blog

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MktCap

(US$m)

SharePrice

(HK$)

TargetPrice

(HK$)upside (%) Remd

PE (x )15F

PE (x )16F

PB (x )15F

Y ld (%)15F

ROE (%)15F

Water Inf rast ructure, Env ironmental371 Beijing Enterprises Water % 6,097 5.42 6.50 20 B 20.1 16.3 2.6 1.5 14.0

1381 Canvest Environment Protection 883 3.42 4.00 17 B 29.5 18.3 2.7 0.0 9.5257 China Everbright Intl 6,028 10.42 13.80 32 B 22.1 16.8 2.6 1.4 12.3

CEWL SP China Everbright Water @@ 1,200 0.65 0.80 24 B 18.9 13.8 1.4 0.0 7.41363 CT Environmental Group 1,768 2.24 2.90 29 B 18.9 15.3 4.4 1.1 28.56136 Kangda International 542 2.03 2.60 28 B 10.4 7.6 1.1 0.0 11.0

SIIC SP SIIC Environment @@ 1,296 0.16 0.18 10 H 22.1 17.9 1.7 0.0 8.3967 Sound Global 7,521 7.00 10.71 53 B 11.5 9.0 1.9 0.0 18.3

1065 Tianjin Cap Environmental 748 4.06 3.50 -14 S 13.0 12.1 1.1 1.5 8.5600874 Tianjin Cap Environmental-A @@@ 1,370 7.44 7.50 1 S 29.0 27.0 2.4 0.7 8.5

CEL SP CITIC Envirotech @@ 1,219 1.52 1.70 12 B 23.5 23.8 2.1 0.3 12.2

Source: DBS Vickers

@@ denominated in SGD; @@@ denominated in RMB

% - Fully Diluted EPS

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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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Documents

China / Hong Kong Market Focus Strategist's Blog outlook. Our 3 month and 12 month HSI targets are 22,332 and 25,440 respectively ... points. Similarly, the Hang Seng Utilities Index