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Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
Juicing The Return
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Juicing The Return

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• Momentum halted US equities indices were in a +/-1% range, after Treasury …

• Momentum halted US equities indices were in a +/-1% range, after Treasury
Secretary Geithner said the “vast majority” of banks have enough capital and
comments allayed concerns about next month’s “stress test” results, after an earlier
leak indicating otherwise. Big European banks also reported a brighter 1Q09 results or
guidance. Regional markets were mixed, with profit taking in Indonesia, Hong Kong
and Singapore, while Thailand and Malaysia were up.
• 14 painful years to breakeven at 5.4% p.a. Based on the available sample of MSCI
FExJ data, the long term capital returns for the MSCI FExJ markets works out to 5.4%
p.a. Including dividends, the total returns go up to 8.4% to 9.4%. The bad news is that
at this rate, it would take 14 miserable years before breakeven is achieved for
investments made at the October 2007 market.
• But 6.8% is probably more accurate The good news is that the 8.4% to 9.4% p.a.
returns is likely to be an underestimation of the potential returns of Asian equities. A
sanity check based on the historical cost of equity and the underlying ROE of the
countries under our coverage suggests that the long term returns are likely to be in the
10-18% range. Adding a trendline – albeit crude – to the FExJ index throws up an
implied 6.8% p.a. long term capital returns, or close to 12% total returns if dividends
are accounted for. This is also consistent with the long term returns of 10.7% that have
been documented for US equities.
• Juicing the returns beyond long term returns Returns are determined by the timing
of entry into the market. By definition, markets tend to oscillate around the long term
trendline. The FExJ index is currently below the trendline of its long term growth profile,
as expected. If investors are accurately discounting the GDP turning point that is
months away, risk tolerance should improve and equities should continue its march
upward. A reversion to the long term growth profile of the FExJ markets by the end of
this year implies an annualised return of 52%, while a less optimistic view of a
reversion only by the end of next year produces annualised returns of 24%. At 3.5x and
7.6x long term returns on conservative forecasts, the timing factor favours investors.

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  • 1. WEEKLY UPDATE Week ending: 24 April 2009 CIMB Research Report ASEAN View Toh Hoon Chew, CFA +60 (3)-20849684 – hoonchew.toh@cimb.com • Momentum halted US equities indices were in a +/-1% range, after Treasury Secretary Geithner said the “vast majority” of banks have enough capital and comments allayed concerns about next month’s “stress test” results, after an earlier leak indicating otherwise. Big European banks also reported a brighter 1Q09 results or guidance. Regional markets were mixed, with profit taking in Indonesia, Hong Kong and Singapore, while Thailand and Malaysia were up. 14 painful years to breakeven at 5.4% p.a. Based on the available sample of MSCI • FExJ data, the long term capital returns for the MSCI FExJ markets works out to 5.4% p.a. Including dividends, the total returns go up to 8.4% to 9.4%. The bad news is that at this rate, it would take 14 miserable years before breakeven is achieved for investments made at the October 2007 market. But 6.8% is probably more accurate The good news is that the 8.4% to 9.4% p.a. • returns is likely to be an underestimation of the potential returns of Asian equities. A sanity check based on the historical cost of equity and the underlying ROE of the countries under our coverage suggests that the long term returns are likely to be in the 10-18% range. Adding a trendline – albeit crude – to the FExJ index throws up an implied 6.8% p.a. long term capital returns, or close to 12% total returns if dividends are accounted for. This is also consistent with the long term returns of 10.7% that have been documented for US equities. Juicing the returns beyond long term returns Returns are determined by the timing • of entry into the market. By definition, markets tend to oscillate around the long term trendline. The FExJ index is currently below the trendline of its long term growth profile, as expected. If investors are accurately discounting the GDP turning point that is months away, risk tolerance should improve and equities should continue its march upward. A reversion to the long term growth profile of the FExJ markets by the end of this year implies an annualised return of 52%, while a less optimistic view of a reversion only by the end of next year produces annualised returns of 24%. At 3.5x and 7.6x long term returns on conservative forecasts, the timing factor favours investors. Figure 1: Regional equity markets and currencies YTD performance (indexed at 1 for start of the year) KLCI Index FSSTI Index 1.18 JCI Index SET Index HSI Index 1.08 0.98 0.88 0.78 1-Jan-09 11-Jan-09 21-Jan-09 31-Jan-09 10-Feb-09 20-Feb-09 2-Mar-09 12-Mar-09 22-Mar-09 1-Apr-09 11-Apr-09 21-Apr-09 1.090 Depreciation 1.070 1.050 1.030 MYR Curncy 1.010 SGD Curncy Appreciation IDR Curncy 0.990 THB Curncy 0.970 0.950 1-Jan-09 11-Jan-09 21-Jan-09 31-Jan-09 10-Feb-09 20-Feb-09 2-Mar-09 12-Mar-09 22-Mar-09 1-Apr-09 11-Apr-09 21-Apr-09 Source: Bloomberg Please read carefully the important disclosures at the end of this publication.
  • 2. Review of the week More optimistic news US home prices rose 0.7% mom in February, the first consecutive monthly gain in two years. Japan’s export slump slowed to 46% YoY in March from 49% in February, ending a four-month streak of record drops. Europe’s manufacturing and service industries contracted at the slowest pace in six months in April. China/HK China announced the establishment of a US$10bn infrastructure fund to help promote infrastructure projects in Southeast Asia. The Chinese government is said to be considering rules to ensure that bank lending end up in the real economy and not the stock market. Singapore Singapore’s inflation slowed to a 21-month low in March. The Manufacturing Production Index (MPI) contracted 33.9% yoy in March or -13.9% mom SA. Indonesia The finance minister held a meeting with analysts and economists. Among the updates include the MoF maintaining its 4.5% growth outlook for 2009 (CIMB: 3.5%), a surge of electricity consumption in March suggesting a pick-up in economic activity, and government spending that is slightly ahead of projections, with spending in 2Q09 likely to pick up further. Funding for 2009’s budget has largely been met and fund raising for 2010 is now being looked into. Stress tests were also conducted for banks and under a ‘severe’ environment, SOE banks (except for one unlisted smaller one) could withstand the pressure with no need for capital injection. Thailand The central bank slashed its 2009 growth forecast to a range of -3.5% to -1.5%, down from a forecast of zero to 2% growth made in January. Thailand’s exports declined for a fifth straight month in March, the longest contraction in seven years. Cabinet ministers have agreed to slash 200 billion baht in spending from the 2010 budget as the economic crisis eats into government tax revenues. Domestic new-vehicle sales could slide to a seven-year low of 500,000 units this year. Figure 2: Equity market and currency performance for week ending 24 April 09 Current valuations Mal (KLCI) SG (FSSTI) Indon (JCI) Thai (SET) HK (CIMB coverage) CY09 Core P/E (x) 14.6x 14.0x 10.4x 8.6x 11.3x CY10 Core P/E (x) 12.6x 11.2x 8.9x 7.9x 9.3x CY08-10 EPS Cagr (2-year) 2.7% -1.1% 4.9% 5.7% 6.8% CY09 gross yields 5.4% 4.4% 4.1% 5.2% 3.9% CY10 gross yields 5.1% 4.7% 4.3% 5.7% 4.8% CY08 P/BV (x) 1.7x 1.3x 2.0x 1.2x 1.9x CY09 P/BV (x) 1.6x 1.2x 1.8x 1.1x 1.7x CY10 P/BV (x) 1.5x 1.1x 1.6x 1.0x 1.5x CY09 ROE 11.5% 8.9% 18.4% 13.2% 15.6% CY10 ROE 12.6% 10.4% 19.0% 13.3% 17.4% 1W performance Mal (KLCI) SG (FSSTI) Indon (JCI) Thai (SET) HK (CIMB coverage) Index performance last week 2.9% -2.3% -2.7% 3.8% -2.1% Currency performance last week 1.0% 0.8% -0.8% 0.3% 0.0% US$ returns 3.8% -1.5% -3.4% 4.0% -2.1% INDEX TARGETS Mal (KLCI) SG (FSSTI) Indon (JCI) Thai (SET) HK (CIMB coverage) Market recommendation OVERWEIGHT OVERWEIGHT OVERWEIGHT NEUTRAL n.a. Current index level 993 1,853 1,591 474 n.a. Index tgt for end 2009 1,060 2,160 1,755 480 n.a. Index upside to end CY09 6.8% 16.6% 10.3% 1.3% 8.3% Net dividend yield of index for CY09 4.0% 3.6% 3.3% 4.7% 3.9% Total expected net returns CY09 10.8% 20.2% 13.6% 5.9% 12.2% Cost of equity 13.7% 9.6% 22.5% 14.6% 10.5% Returns less COE -2.9% 10.7% -9.0% -8.6% 1.8% CURRENCY TARGETS Mal (RM) SG ($) Indon (Rupiah) Thai (THB) HK ($) Current rate (vs US$) 3.58 1.49 10,810 35.38 7.75 End CY09 forecast 3.68 1.60 11,500 38.00 7.80 Upside/(downside) in 2008 -2.7% -6.9% -6.0% -6.9% -0.6% O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg, HSI valuation data based on consensus [2]
  • 3. Charts & trends Simplistic long term trend analysis If one believes that there are long term and stable returns for equities as an asset class, what do the trends tell us now? Figure 3: MSCI FExJ long term returns, peak-to-peak and trough-to-trough returns 700 600 Peak to peak = 2.8% p.a. 500 400 300 200 100 Trough to trough = 6.2% p.a. LT returns = 5.4% p.a. 0 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Source: CIMB Research, Bloomberg Trend returns The sample period is taken from December 1987 to the latest date, which is all the available data spanning a period of 21 years. Regional equities, as measured by the MSCI FExJ markets, have returned 5.4% p.a. during this time (red broken line in the chart above). Add in yields that average say 3-4% p.a. during that period and assuming no reinvestment of the cash dividends, the “long term” total returns for the FExJ markets adds up to 8.4% to 9.4% p.a. If instead we look at slightly shorter periods, the peak-to-peak (December 1993 peak to October 2007 peak, the two major highs in the market) gain per annum is lower at 2.8%. But looking at trough-to-trough (again the two major market bottoms – the Asian crisis in 1998 and the recent one last year), the per annum gains is higher at 6.2%. The question is this – if the FExJ markets returned an average of 5.4% p.a. in terms of capital appreciation in the long term, how long would it take for the market to get back to its recent peak back in October 2007? The answer is 14 years. But that may be too gloomy, to say that you have to wait 14 years to breakeven on your investments if you had entered the market at its last peak. Equity markets are inherently volatile – rarely do stocks move at such a steady pace. Figure 4: ASEAN + HK ROEs and COEs 18.1% 18.7% 20.0% 16.5% 12.9% 13.2% 15.0% 12.5% 12.1% 10.3% 9.9% 9.7% 10.0% 5.0% 0.0% Malaysia Singapore Indonesia Thailand Hong Kong Estimated cost of equity (since 1995) Estimated ROE over the next two years Source: CIMB Research Reversion and upside The preceding section assumes that the long term returns can be approximated by the starting point taken as December 2007 and the ending period taken as the latest index level. To the naked eye, this looks plausible. But this of course implies that both periods are at exactly the same point in the business cycle, among other things. The numbers derived in the preceding section on total estimated long term returns on FExJ equities – at 8.4% to 9.4% p.a. – turns out to be lower than the long term total returns on US stocks, which is estimated at 10.7% annually *. Bear in mind the US equity market has had a much longer history compared to Asian markets and is hence likely to be a more accurate reflection of the underlying returns. In all probability, the long term returns for FExJ markets is underestimated in the preceding section. Our calculations show that the required rate of return on equities for markets under our coverage had been in the range of 10% to 18% in recent history (see chart [3]
  • 4. above). A sanity check shows that the ROEs are not too far off these cost of equity numbers. The only exception is HK, where the companies are geared to the high-octane China growth. This range of 10-18% should theoretically be the long term total returns for Asian equities – while the average for the FExJ markets should lie somewhere between the two numbers. This is consistent with the fact that Asian equities have a much higher risk profile and requires a correspondingly higher return, when compared to the US market’s 10.7% p.a. * Stock Market Returns in the Long Run: Participating in the Real Economy, Ibbotson Associates, Inc. July 9, 2002 Figure 5: MSCI FExJ long term returns and reverting to the trendline 700 Gap where returns > LT 600 returns can be made 500 400 300 200 LT returns = 6.8% p.a. 100 0 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Source: CIMB Research, Bloomberg Reversion to trend returns The chart above shows a trendline for the FExJ markets. This trendline implies a more realistic long term capital return on FExJ equities of 6.8% p.a., compared to the 5.4% estimated previously. Adding in the current average 5% forward yield estimates that we have for the markets under coverage, the total return implied by this trendline is close to 12%. This is conservative, coming in at the lower end of the 10- 18% required rate of return on equities for markets under our coverage. Reversion to and oscillation around the trendline is normal, as the chart above shows. If so, assuming reversion to the trendline by end 2009, the FExJ markets have an upside potential of 35%, equivalent to an annualised return of 52%. If one is less confident that the return of risk-taking would be as quick and instead assume a reversion to the trendline by the end of next year, the return is still a respectable 40%, or 24% if annualised. If that is an adequate time buffer for investors, then equities becomes an attractive proposition at current levels. Hence, rather than banking on the long term 6.8% p.a. capital appreciation, the current situation offers the potential of excess returns over and above the long term returns. Timing is everything after all. As high cash holdings move away from the sidelines into riskier assets given the higher risk appetite, markets will likely overshoot on the upside (i.e. index moving above the trendline on the ascent), as it has tended to frequently do in the past. [4]
  • 5. Top picks summary Changes in top picks • MALAYSIA: No changes. • SINGAPORE: No changes. • INDONESIA: Replace top sell Panin Bank with Indo Tambangraya, as the former should be buffered on the downside by potential stake battle between founder and ANZ, while the latter has little catalyst post dividend. • THAILAND: No changes. • HONG KONG: No changes. Going against consensus • MALAYSIA: Gamuda and MRCB. • SINGAPORE: UOB, Starhub. • INDONESIA: Indo Tambangraya. • THAILAND: ITD, Rojana and MCOT. • HONG KONG: None. Notable counter-recommendation price movements • MALAYSIA: All the top sells up 2-3%. • SINGAPORE: None. • INDONESIA: Top buys Indocement and Bank Rakyat down 6%. • THAILAND: All the top sells up 11-30%. • HONG KONG: Top buys ICBC and China Mobile down 5-7%. Top sell Brilliance China up 9%. [5]
  • 6. Country top picks BUYs MALAYSIA 1. Gamuda – Gamuda is our top pump-priming construction play and stands a good chance of securing part of the RM30bn LRT mega project. 2. MRCB – MRCB is our preferred GLC contractor and its RNAV valuation is anchored by its strategically located prime KL Sentral land bank. 3. Resorts – The company has over RM4bn cash to embark on acquisitions and it will focus its attention on Macau casinos. P/B valuations are lower than Sars period. We believe the sell down due to the recent acquisition is overdone. SELLs 1. EON Capital - There is a lack of near term earnings catalysts as Primus-initiated restructuring will only bear fruit in the longer term. 2. IOI Corp – It is the proxy for the plantation sector given its size and liquidity. We are underweight on the plantation sector due to steep valuations and CPO price risks. 3. Maybank – The 9-for-20 rights issue is the first cash call in 18 years and will dilute EPS by 25%. The RM6bn cash call is larger than expected and double the requirement. Figure 6: Malaysia’s top buys & sells Share price Shr price @ 24 April Top Buy Analyst  B'berg ticker Tgt price (RM) Rating % to tgt price performance (1Week) 2009 Resorts World Soh May Yee RNB MK Equity 9.0% 2.54 2.95 O 16.1% Gamuda Sharizan Rosely GAM MK Equity -1.3% 2.37 2.90 TB 22.4% MRCB Sharizan Rosely MRC MK Equity 6.3% 0.93 1.15 TB 23.7% Share price Shr price @ 24 April Top Sell Analyst  B'berg ticker Tgt price (RM) Rating % to tgt price performance (1Week) 2009 EON Capital Winson Ng EON MK Equity 2.4% 3.44 2.24 U -34.9% Malayan Banking Winson Ng MAY MK Equity 2.3% 4.50 3.74 U -16.9% IOI Corp Ivy Ng IOI MK Equity 3.3% 4.40 4.38 U -0.5% KLCI KLCI Index 2.9% 993 1,060 OVERWEIGHT 6.8% O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg [6]
  • 7. BUYs SINGAPORE 1. Indo Agri – Benefited from London Sumatra acquisition, narrowing Plantations earnings gap with Wilmar. Position as the most highly geared planter should not count as such a negative, if financing concerns ease in current environment. We just upgraded our CPO price forecasts. 2. UOB – Market is overly focused on the marked-to-market losses on the AFS books. Consensus is almost uniformly negative on it. MTM works both ways, a rising market can see the AFS book marked-up as well in the coming results. 3. Venture – Risk remains further demand weakness and cancellation of programmes by HP but results show that 1) it is less dependent on HP today, 2) CDOs have been 89% written down, and knocked-down valuations of 6.5x P/E, 12% yield deserves some attention. SELLs 1. Starhub – We are wary on content competition for Starhub in the second-half of this year. 2. Cosco – Stock has surprisingly done well, when the sector is without fundamentals. Last results were impaired by provisions higher costs and delivery schedule ahead has no visibility. Also, ship repair, once deemed as counter-cyclical, is starting to show signs of weakness. 3. SIA – Feb passenger load factors have fallen below breakeven load factors for passengers. Cargo remains in the red. Unlike SARS, this is not just one quarter of pain. Profitability will be tested severely this year. Figure 7: Singapore’s top buys & sells Share price Shr price @ 24 April Top Buy Analyst  B'berg ticker Tgt price (S$) Rating % to tgt price performance (1Week) 2009 Indofood Agri Ivy Ng IFAR SP Equity 15.3% 0.94 1.26 TB 34.0% UOB Kenneth Ng UOB SP Equity -0.4% 11.18 14.28 O 27.7% Venture Jonathan ng VMS SP Equity 0.7% 6.00 6.00 O 0.0% Share price Shr price @ 24 April Top Sell Analyst  B'berg ticker Tgt price (S$) Rating % to tgt price performance (1Week) 2009 StarHub Simeon STH SP Equity -7.9% 1.87 1.65 U -11.8% Cosco Lim Siew Khee COS SP Equity -2.7% 1.07 0.36 U -66.1% SIA Raymond Yap SIA SP Equity -2.4% 10.60 7.60 TS -28.3% STI FSSTI Index -2.3% 1,853 2,160 OVERWEIGHT 16.6% O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg [7]
  • 8. BUYs INDONESIA 1. Bank Mandiri – strong ROE not reflected in valuation and also a high beta stock. One of the main beneficiaries of higher risk appetite. 2. Indocement – expect infra projects to start late 3Q-early 4Q09 and should be Java centric which benefits Indocement the most. Robust balance sheet and has most spare capacity are other positive attributes. 3. Bank Rakyat – still riding on the back of record earnings and lower bond yield. SELLs 1. Indo Tambangraya – running ahead of fundamental and dividend – its strong trait – may disappoint this year. 2. Timah – loss making in 4Q08, and given high cost inventory, 1H09 shall remain ugly. 3. Inco Indonesia – Rally mightily on being laggards, but with 1Q expected to be weak, no dividend disappointing retail investors and gearing creeping up, downside aplenty. Figure 8: Indonesia’s top buys & sells Share price Shr price @ 24 April Top Buy Analyst  B'berg ticker Tgt price (Rp) Rating % to tgt price performance (1Week) 2009 Mandiri Mulya Chandra BMRI IJ Equity -1.0% 2,450 3,450 O 40.8% Bank Rakyat Mulya Chandra BBRI IJ Equity -5.2% 4,975 7,000 O 40.7% Indocement Rania INTP IJ Equity -5.7% 5,000 6,500 O 30.0% Share price Shr price @ 24 April Top Sell Analyst  B'berg ticker Tgt price (Rp) Rating % to tgt price performance (1Week) 2009 Indotambang Rania ITMG IJ Equity -5.1% 14,000 13,000 TS -7.1% Timah Rania TINS IJ Equity -4.3% 1,320 770 U -41.7% Inco Rania INCO IJ Equity -11.5% 2,900 1,850 U -36.2% JCI JCI Index -2.7% 1,591 1,755 OVERWEIGHT 10.3% O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg [8]
  • 9. BUYs THAILAND 1. Kasikornbank – With new fund flows into the market, we believe that KBANK would Outperform the market. The stock is trading at only 0.9x CY09 P/BV. 2. Siam Commercial Bank – Strong NIM with high quality mortgage portfolio. Valuation becomes very attractive at 1.3x CY09 P/BV. 3. Italian-Thai Development – ITD has high chance of getting either Part II or Part III of Purple Line Electric Train Project. Its share price has underperformed its peers massively. SELLs 1. Rojana Industrial Park – With global slowdown and domestic political turmoil, industrial estate sector will be hit hard. Rojana’s high gearing of more than 200% is a concern. 2. Thai Airways – Weaker global economic growth is threatening to slow air traffic demand. Thai Airways is not expected to make money over the next few years. 3. MCOT – Murky outlook for adex and lack of leadership at MCOT are likely to drag down its performance during the economic slowdown more than its peers. Figure 9: Thailand’s top buys & sells Share price Shr price @ 24 April Top Buy Analyst  B'berg ticker Tgt price (THB) Rating % to tgt price performance (1Week) 2009 Kasikornbank Kasem KBANK TB Equity 2.6% 49.50 65.00 O 31.3% Siam Commercial Bank Kasem SCB TB Equity 4.1% 56.75 70.00 O 23.3% Italian-Thai Kasem ITD TB Equity 3.6% 2.28 2.70 TB 18.4% Share price Shr price @ 24 April Top Sell Analyst  B'berg ticker Tgt price (THB) Rating % to tgt price performance (1Week) 2009 Rojana Kasem ROJNA TB Equity 15.4% 3.60 3.30 U -8.3% Thai Airways Urasri THAI TB Equity 30.0% 13.00 9.90 U -23.8% MCOT Urasri MCOT TB Equity 11.2% 13.90 11.80 U -15.1% SET SET Index 3.8% 474 480 NEUTRAL 1.3% O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg [9]
  • 10. BUYs CHINA/HK 1. China Mobile: A low penetration rate, increases in disposable income, falling tariffs and increasing network effect indicate strong subscriber growth over the medium-term. 2. China Resources Power: We like China Resources Power for its production efficiency, proven track record in controlling cost and experienced and performance oriented management team. Longer term earnings growth could be secured by its coal mine investment. Should electricity tariffs be allowed to increase, there will be further earnings upside. 3. ICBC: ICBC has the most resilient ROE among H-share banks, thanks to resilient NIM and superior asset quality. Yet, the bank's share price still lagged peers earlier this year due to concern over expiring lock up periods for ICBC's foreign strategic stakes. That concern has been largely lifted after Goldman Sachs extended the lock up period for the majority of its ICBC shares. ICBC's 4Q08 NIM and NPL figures were also better than expected, reaffirming our view that ICBC is best positioned to weather this down turn. Given the encouraging 4Q08 results and lock-up period extension, we deem ICBC as our preferred PRC banking stock. SELLs 1. Parkson Group : Parkson’s 3Q08 results missed our expectation. Given the gloomier outlook for economic growth and dull prospects for the export-oriented industries in China, we expect Parkson to face lower sales growth and bigger margin pressure ahead. 2. Li & Fung: Although LF has been gaining market share, it was hurt by its increasing exposure to the discounters and continued trading down by existing customers. We see continued challenges in 2009 as consumer sentiment remains weak. The so- called one-off restructuring charges that dragged FY08 profits are likely recurrent, as long as the group continues its M&A initiative, while trade finance remains a concern as evidenced by banckruptcies of some LF customers. We rate UNDERPERFORM on the stock as we believe the market has been too optimistic too soon on LF’s ability to regain strong earnings growth in the current challenging environment. 3. Brilliance China: Margin for Zhonghua sedans segment remains subpar, and sales mix is shifting towards the low-priced models, which will translate into lower margins. The main earnings contributor, the BMW JV is at risk of a slowdown as the brand targets the premium segment, which hinges on discretionary spending. Balance sheet to remain stretched as cashflow from operations is likely to remain weak, and the company needs to refinance the Rmb 1.5bn CB as holders of the CB will be able to exercise their puts on 7 Jun 09. Figure 10: China/Hong Kong’s top buys & sells Share price Shr price @ 24 April Top Buy Analyst  B'berg ticker Tgt price (HK$) Rating % to tgt price performance (1Week) 2009 China Mobile Bertram Lai 941 HK Equity -6.6% 69.10 86.16 O 24.7% China Resources Power Keith Li 836 HK Equity 10.7% 17.32 20.70 O 19.5% ICBC Alexander Lee 1398 HK Equity -4.5% 4.27 5.15 O 20.6% Share price Shr price @ 24 April Top Sell Analyst  B'berg ticker Tgt price (HK$) Rating % to tgt price performance (1Week) 2009 Parkson Keith Li 3368 HK Equity 1.5% 9.54 4.70 U -50.7% Li & Fung Renee Tai 494 HK Equity -2.0% 20.00 13.30 U -33.5% Brilliance China Alice Chong 1114 HK Equity 8.6% 0.63 0.34 U -45.3% HSI HSI Index -2.2% 15,259 N/A N/A N/A O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, TS = Trading Sell and NR = Not Rated, OW = Overweight, UW = Underweight Source: Company, CIMB estimates, Bloomberg [ 10 ]
  • 11. DISCLAIMER This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. By accepting this report, the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein (including the “Restrictions on Distributions” set out below). Any failure to comply with these limitations may constitute a violation of law. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB. CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. 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  • 12. or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB. New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978. Singapore: This report is issued and distributed by CIMB-GK Research Pte Ltd (“CIMB-GKR”). Recipients of this report are to contact CIMB-GKR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. 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  • 13. RECOMMENDATION FRAMEWORK #1* STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is benchmark's total return. expected to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 12 months. is expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 3 months. is expected to underperform the relevant primary market index over the next 3 months. * This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M) RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: Expected positive total returns of 15% or more over the next OVERWEIGHT: The industry, as defined by the analyst's coverage universe, 12 months. has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months. NEUTRAL: Expected total returns of between -15% and +15% over the next NEUTRAL: The industry, as defined by the analyst's coverage universe, has 12 months. either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 15% or more over the UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, next 12 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 15% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, months. has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months. TRADING SELL: Expected negative total returns of 15% or more over the next TRADING SELL: The industry, as defined by the analyst's coverage universe, 3 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months. ** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. [ 13 ]

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