20131121 goldman sachs-asia pacific portfolio strategy 2014 outlook
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20131121 goldman sachs-asia pacific portfolio strategy 2014 outlook 20131121 goldman sachs-asia pacific portfolio strategy 2014 outlook Document Transcript

  • November 21, 2013 Asia Pacific 2014 Outlook: Back on track Portfolio Strategy Research DM recovery and China reform drive our North Asia preference Better absolute and relative returns We expect 13% total US$ return in 2014 (MXAPJ 525 target), which would be an improvement on the region’s 2% return in 2013 and 20% under- performance vs. DM. We see improving global growth, the related tapering of quantitative easing in the US, policy adjustment in Asia (China reform, south Asia macro tightening), and politics as key macro themes. Earnings: key performance driver We expect earnings to accelerate back to trend in 2015 after 4 years of sub- trend growth. Our top-down EPS growth forecasts are 10% and 14% for 2014 and 2015. Capex discipline and moderating input costs should help non-financial margins improve 50bp to 7% in 2015 after a 20bp gain in ’14. Little room for valuation expansion, except in China Equal-weighted P/E valuations are 15.9x forward earnings, 0.8sd above the 10-yr mean and 31% higher than cap-weighted multiples. Macro models and real earnings yield gaps point to flat valuations. EPS growth will therefore be the main return driver. China is the exception: we expect multiples to recover from a low base as confidence in reform builds. Upgrade China, Taiwan; three flavors of earnings We upgrade China on improving reform momentum, and also raise Taiwan and stay Overweight Korea for their exposure to improving DM growth. By macro slice, we advocate global cyclicals vs. asset-sensitive financials. Stock ideas: three flavors of earnings: delta (rising margins), value (attractively priced growth), and destination (Europe-exposed). Secular themes: consumption digitalization, urbanization and green GDP. China’s valuations may respond favorably to reforms; Korea and Taiwan are most sensitive to stronger global growth Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. Timothy Moe, CFA +852-2978-1328 timothy.moe@gs.com Goldman Sachs (Asia) L.L.C. Kinger Lau, CFA +852-2978-1224 kinger.lau@gs.com Goldman Sachs (Asia) L.L.C. Richard Tang, CFA +852-2978-0722 richard.tang@gs.com Goldman Sachs (Asia) L.L.C. Sunil Koul +852-2978-0924 sunil.koul@gs.com Goldman Sachs (Asia) L.L.C. Ketaki Garg +91(80)6637-8601 ketaki.garg@gs.com Goldman Sachs India SPL Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only. The Goldman Sachs Group, Inc. Global Investment Research AU CN HK IN ID KR MY PH SG TW TH 0.1 0.2 0.3 0.4 0.5 0.25 0.3 0.35 0.4 0.45 0.5 Sensitivity Correlation Asian markets and global cycle 5 10 15 20 25 J-01 J-03 J-05 J-07 J-09 J-11 J-13 12-month forward P/E (MXCN)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 2 Table of contents Executive summary: Back on track 3 Market view changes: Upgrade China and Taiwan to Overweight 8 Implementation: Emphasizing earnings 14 Key questions for 2014 21 Performance context: Intra-regional differentiation at play 26 Macro: Return expectations, views, and path 29 Earnings: Back to trend growth in 2015 after 4 years of weakness 37 Valuations: Not much room for expansion except for China 43 Positioning: Potential for continuing shift to North Asia 46 Secular themes: Buy on dips 49 Events in 2014 and beyond 55 Appendix 1: Goldman Sachs macro forecasts 56 Appendix 2: Valuations at a glance 57 Appendix 3: China reform policies 58 Disclosure Appendix 62 The authors would like to thank Vincent Lau and Nitin Chanduka for their valuable contributions. All prices in this report are as of November 18, unless mentioned otherwise.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 3 Executive summary: Back on track After a year of flat returns and dramatic underperformance vs. DM, we expect 2014 to be a better year in absolute and relative terms. We believe earnings growth will be the main performance driver since aggregate valuations are full. We favor China on improving reform momentum, Korea and Taiwan for their exposure to better DM growth, and three flavors of earnings growth (delta, value, and revenue-source).  Regional return. We expect the MXAPJ index to reach 525 by end-2014, implying 10% price and 13% total returns in USD. Earnings growth will be the key propellant, but 3% weighted-average exchange rate depreciation and some valuation compression may serve to offset some of the earnings gains. Within the region, we upgrade China and Taiwan to Overweight and stay positive on Korea. Total US$ returns for these markets could be 15% to 23%.  Expected path. Our 3m and 6m targets are 485 and 490, implying a modest start to the year and a stronger 2H. Key influences are likely to be the timing and magnitude of Fed tapering, the reaction to China’s reform policies, the political calendar in markets like India and Indonesia, and whether corporate Asia is able to deliver earnings. Policy decisions will be sensitive to high-frequency macro indicators, which means markets will be data dependent and the price path noisy.  Key themes. The main macro themes we see are the improvement in global growth to 3.6% from 2.8% (PPP terms) driven by the US, and the related tapering of quantitative easing as US monetary policy begins to normalize. Within the region, policy adjustment (China reform, south Asia macro tightening) and politics will also impact markets. The key micro theme is the potential earnings growth recovery in 2015 (which the market will anticipate in 2H14), driven in good measure by supply side factors such as capex discipline and cost management.  Performance context. Regional equities are roughly flat for 2013 with wide amplitude of intra-year swings. Performance is at the 36th percentile in absolute terms relative to the MXAPJ’s 26-year history and the 20th percentile relative to DM equities over the same time frame. Market rotation was greater than sector rotation, and FX weakness reduced USD returns by 5%. Looking forward, we expect currency to be an important component of returns (albeit less negative), and expect meaningful market, theme and stock performance differentiation.  Earnings: key return driver. We expect earnings growth to accelerate back to trend in 2015 after 4 years of sub-trend growth. Our top-down regional earnings growth forecasts are 10% and 14% for 2014 and 2015 (EPS integers are $38.40 and $43.70). These are 2% below and 4% above the respective consensus expectations. Demand-side models have overestimated earnings recently, because the shortfall has come from margins rather than revenues. Regional capacity utilization currently stands at 67.3%, a full 10pp below the 77.6% level in the US, and this excess capacity has depressed profitability. Capex discipline and moderating input cost pressures should result in non-financial margins improving 50bp to 7% in 2015 after a 20bp uptick in 2014.  Valuation: Not much room for expansion. The region currently trades at 12.1x forward 12m earnings and 1.6x trailing book value, about 0.7sd below the 10-yr mean. However, cap-weighted valuations are distorted downwards by China SOEs and Korea electronics stocks. Equal-weighted valuations are 31% higher at 15.9x forward earnings, which is 0.8 sd above average and from which point historical returns have been subdued. Macro models point to flat valuations relative to our forecasts, and real earnings yield gaps also look fair relative to range. In sum, we expect little valuation change in 2014: EPS growth will be the main return driver.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 4  Positioning: Potential for continuing shift to N Asia. Regional equity flows recovered after the mid-year selloff, with $28bn ytd inflows overall. India continues to attract the highest flows ($17bn) with Korea and Taiwan next at $14bn combined, and Thailand and Indonesia seeing net selling. Active positioning remains biased towards south Asia, with mutual funds overweight India and ASEAN by 495 and 948bp and underweight China, Korea and Taiwan by 582, 769 and 649bp. Given better macro characteristics relative to our global forecasts, we see scope for added flows to N Asia and for flows from bonds to equities.  Risks: The principal macro threats to our more constructive stance are a) global growth falling short of our expected improvement, b) more aggressive Fed policy tightening, c) China faltering on reform implementation, d) politically-driven volatility, e) an oil shock (we expect a benign price path), and f) contagion from other EMs. The main micro risk is continuing earnings shortfall if Asian companies are not able to deliver the margin recovery we expect.  Secular themes. Focal areas include: o Digitalization of consumption: Smartphone demand, internet commercialization, disruptive technologies like array cameras, and big data and cloud computing. o Urbanization: Includes infrastructure and healthcare. o Green GDP: Environmental protection is emerging as a key China theme, and includes alternative energy such as solar, gas, wind and hydro.  Key questions. o Asia vs DM relative performance. Our forecasts for the key global regions imply more equivalent returns in 2014 as opposed to the lopsided performance in 2013. The region’s relative performance may improve later in 2014 if earnings show signs of a pickup as we expect. o ASEAN. We expect ASEAN to continue to lag the broader region after outperforming from 2006 to 2012. 2H14 may be a better time to revisit once the current cyclical macro adjustment is more mature. o China internet and Macau gaming. These were the strong performers of 2013 and helped many investors perform. We advocate buying corrections because the fundamental theme is powerful and not yet mature. o China banks. The top 10 country-sectors in the MXAPJ index account for 42% of market cap, meaning decisions in this area will have outsized impact on relative performance. China banks are the fourth largest country sector (after Australia banks and Taiwan and Korea tech). Risk is to the upside near-term given reform momentum. o Tech. Tech is the 2nd largest sector regionally, accounting for 15% of market cap. We are overweight and expect ‘old tech’ to perform well, along with ‘new tech’.  Markets: Raise China and Taiwan, continue to favor Korea o Overweight China: Upgrade: policy reform could raise valuation off low base Korea: Attractive macro profile, mid-teens EPS growth, inexpensive Taiwan: Upgrade: favorable macro exposure enhanced by high yield
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 5 o Market weight India: Reduced external vulnerability, earnings holding up Malaysia: Upgrade given moderating external risk and low vol; full vals Philippines: Strongest ASEAN-4 fundamentals; valuations still high Singapore: Downgrade: better alternatives in N Asia o Underweight Australia: Weak domestic fundamentals, significant AUD downside risk Hong Kong: Challenges from QE exit; high valuation relative to China Indonesia: Tighter policy to impact n/t growth; outlook better later in 2014 Thailand: Downgrade on macro/policy risks; earnings/valuations fair  Sectors: selected cyclicals o Overweight: Autos, tech hardware & semis, banks, software, transport o Market weight: Energy, health care, capital goods, insurance, metals/mining, chemicals, retail o Underweight: Real estate, utilities, staples, telecom  Implementation: Emphasizing earnings o Markets: long Korea; HSCEI 3-month call spreads, China reform- beneficiary basket o Macro slices: global cyclicals vs. asset-sensitive financials (GSSZMSGC vs. GSSZMSFA) o Three flavors of earnings: Delta earnings (margin expansion); Value earnings (attractively priced growth); Destination earnings (Europe- exposed stocks) o Secular themes: Plays on consumption digitalization, urbanization, green GDP o Derivatives: Preferred downside hedge is ASX 200 Mar-end puts.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 6 Exhibit 1: We expect more balanced returns between regions in 2014 Note: TOPIX EPS is based on fiscal, not calendar years. Source: Goldman Sachs Global Investment Research. Exhibit 2: We prefer North Asia Source: Goldman Sachs Global Investment Research. Exhibit 3: Market scorecard Note: Blue cells refer to favorable metrics, whilst grey cells refer to unfavorable ones. For GDP, blue (grey) cells indicate sharp acceleration (deceleration) vs 2013. For inflation, blue (grey) cells indicate sharp deceleration (acceleration) vs 2013. For sensitivity, blue cells refer to significant positive impact in equity market returns given changes in our Global Leading Indicator. For detail, please refer to Asia Pacific: Portfolio Strategy: Bridging macro to micro: 18 ideas for North Asia, October 24. Source: FactSet, MSCI, Goldman Sachs Global Investment Research Total Forward P/E Price Price Target Price Return Return EPS Growth Current Year-End Index 19-Nov-13 3-mo 6-mo 12-mo 3-mo 6-mo 12-mo (USD) 2014E 2015E Consensus 2014E TOPIX 1,237 1,350 1,375 1,450 9 % 11 % 17 % 12 % 21 % 14 % 14.3 x 13.6 x Stoxx Europe 600 323 330 340 360 2 5 12 19 14 13 13.5 12.9 MXAPJ 478 485 490 525 1 2 10 13 10 14 12.1 12.0 S&P 500 1,788 1,800 1,850 1,900 1 3 6 8 8 8 14.9 15.2 EPS growth (%) 12-month return forecasts (%) Allocation Market Index Index level (Nov 18) CY14E CY15E Local price return FX change Dividend yield USD total return China HSCEI 11,307 10 11 10.0 13,600 20 -1 3 23 Taiwan TWSE 8,191 11 13 14.0 9,200 12 2 3 17 Korea KOSPI 2,011 15 15 9.1 2,350 17 -3 1 15 Singapore FSSTI 3,203 8 14 12.5 3,300 3 8 4 15 Malaysia FBMKLCI 1,792 8 10 15.3 1,950 9 0 3 12 Philippines PCOMP 6,343 8 16 15.5 6,300 -1 9 2 10 India NIFTY 6,189 12 18 13.7 6,900 11 -3 2 10 Indonesia JCI 4,394 12 17 13.0 5,000 14 -2 3 15 Thailand SET 1,424 9 11 11.8 1,510 6 -1 4 8 Hong Kong MXHK 13,310 6 9 15.0 14,100 6 -1 3 8 Australia AS51 5,385 8 11 14.5 5,900 10 -9 5 5 Asia Pacific ex Japan (USD) MXAPJ 478 10 14 12.0 525 12 -3 3 13 Asia ex Japan (USD) MXASJ 556 11 13 11.4 625 13 -1 3 15 Underweight Target P/E (X) Index target Marketweight Overweight China Taiwan Korea Singapore Malaysia Philippines India Indonesia Australia Thailand HongKong 2014 GDP growth (%) 7.8 3.8 3.7 3.8 5.0 6.3 5.0 5.3 2.0 4.2 3.7 2014 Inflation (%) 3.1 1.4 2.4 3.3 2.8 3.8 6.5 6.8 2.9 2.8 3.3 Sensitivity to global growth √ √ √ √ 2014E-15E EPS CAGR (%) 11 12 15 11 9 12 15 15 10 10 8 NTM P/E (X) 9.3 14.1 8.8 14.1 15.5 18.5 14.4 13.3 14.5 11.9 15.0 LTM P/B (X) 1.5 1.8 1.2 1.5 2.2 3.1 2.5 3.1 2.0 2.2 1.3 Avg. of 10y Z scores for P/E & P/B (1.0) (0.2) (0.8) (0.4) 0.7 1.5 (0.6) (0.1) 0.1 0.5 (0.6) Currency 12-mo chg vs. US$ (%) (0.6) 1.9 (3.4) 8.4 0.1 8.8 (6.0) (1.7) (9.3) (1.3) (0.6) Positioning Asia-fund bp OW/UW √ √ √ X O O X O X X X OW OW OW MW MW MW MW UW UW UW UW Macro Valuations EPS growth
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 7 Exhibit 4: Cyclicals over defensives Source: FactSet, MSCI, Goldman Sachs Global Investment Research Exhibit 5: China, Taiwan, Korea and 3 flavors of earnings Source: Goldman Sachs Global Investment Research GS Asia STAMP Current STAMP Scores based on our macro views and latest data Macro EPS Relative Current Current GS Views Sentiment Valuation STAMP Score Allocation Autos & Components √√ √√ √ √√ Overweight Tech Hardware & Semis √√ x √√ Overweight Banks √ √√ √√ Overweight Software & Services √√ √√ xx √ Overweight Transportation x Overweight Energy √√ √√ √√ Marketweight Health Care √ √ Marketweight Capital Goods xx √ Marketweight Insurance & other Financials √ Marketweight Metals & Mining √ x Marketweight Chemicals & other Materials xx x xx Marketweight Consumer Retail & Services √ xx xx xx Marketweight Real Estate x √ √√ Underweight Utilities x xx x Underweight Consumer Staples xx x xx Underweight Telecom Services xx x √ xx Underweight Current "Simplified" Macro Views Growth: A mild pick up Dom. vs. Extenal: External Infl. vs. Growth: Neutral Policy: Neutral Current metric is: √√ Very favorable √ Favorable Neutral x Negative xx Very Negative Our trade recommendations China: Reform beneficiaries; HSCEI 3-month call-spreads Taiwan: Stock ideas in 'Old Tech' Korea: EWY, KOSPI 200 6-month call-spreads Macro slices Global Cyclicals vs Asset-Sensitive Fins. <GSSZMSGC vs. GSSZMSFA> Margin expansion (Delta Earnings) Growth at value (Value Earnings) Europe-exposed (Destination Earnings) Downside Hedge March expiry outright puts on ASX 200 (Australia) Secular Themes Digitalization of consumption, Urbanization, and Green GDP Style / Themes: Earnings Growth Markets
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 8 Market view changes: Upgrade China and Taiwan to Overweight China: Upgrade to OW on improving reform momentum; 3 ways to engage We upgrade China to Overweight from Market weight for the following reasons:  The long-waited catalyst has materialized: A full plenary document was released on November 15, a few days after the closure of the session. The detailed document, which covers many specific commitments including market deregulation/financial reform, fiscal and tax policy, safety nets/demographics, urban/rural; and SOE reform, has reinvigorated market expectations on reform and China’s longer-term growth prospects.  Reform momentum is likely to stay strong in the coming months: While we are mindful of being carried away by policy-driven sentiment swings as the speed and effectiveness with which the measures will be executed remains to be seen and China still needs to work through numerous structural challenges, we believe there is a reasonable chance that we may see a more concrete timetable and implementation details to be announced at the ministry level in the coming few months.  A decent fundamental configuration: Our economists expect China’s GDP to grow 7.8% on a real basis in both 2014 and 2015, leading to stable 10% and 11% EPS growth for China in those respective years based on our top-down forecast.  Inexpensive valuations: China currently trades on 9.3x forward P/E and 1.5x trailing book, 0.9 and 1.1 s.d. to the attractive side of their respective 10-year ranges. We fully acknowledge that low valuation is not always a strong argument to turn bullish, but we think it is a tailwind for returns when catalysts emerge.  Light positioning: EPFR data suggests GEM- and Asia-focused funds are currently underweight China by 290 bps and 582 bps respectively, suggesting favorable positioning normalization risk.  Implementation: We recommend 3 ways to get upside exposure to China o We continue to favor reform beneficiaries and highlight 9 buy-rated stocks which revolve around the themes of mass market consumption, healthcare, brokers and defense (Exhibit 8). o Chinese banks, which are the fourth largest country-sector in MXAPJ, are trading at very low absolute valuations (5.1X 2014E P/E, 0.9X P/B) and may see asymmetric upside risk if more bank-specific reform policies are laid out in the foreseeable future. We are OW banks at both regional market and China levels. o We recommend investors take advantage of moderate vol and elevated call-skew (OTM calls expensive relative to ATM calls) by buying call- spreads on HSCEI. 3-month 105/115% call-spreads currently cost 2.15%, at 27% cost-savings to outright 105% calls (2.95%), much higher than similar call-spreads on most markets globally. The trade provides a maximum payout of 4.7x if HSCEI rallies 15% by expiry. Risks: Buyers of 105/115% call-spreads risk capped upside if HSCEI rises more than 15% and loss of up-front premium if HSCEI rises less than 5% by expiry.  Key risks to our upgrade: Reform implementation falls short of market expectation, and tighter-than-market-expected liquidity. Also see China: Portfolio Strategy Research: Third Plenary: Ambitious blueprint to boost sentiment, November 18.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 9 Exhibit 6: Chinese banks are trading at attractive valuation levels Exhibit 7: Active managers are underweight China Source: FactSet, EPFR, I/B/E/S, Goldman Sachs Global Investment Research Source: FactSet, EPFR, I/B/E/S, Goldman Sachs Global Investment Research Exhibit 8: We favor China reform-beneficiaries * indicates the stock is on our regional Conviction List. Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research Exhibit 9: HSCEI call-skew has increased with OTM calls trading expensive vs. ATM calls, compared to their historical relationship Exhibit 10: Call-spreads on HSCEI currently offer meaningful cost savings (27%) unlike most major markets globally Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research. 9.3 5yr z-score: -0.73 12.1 5yr z-score: -0.09 4 10 16 22 28 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 MXCN 12m fP/E MXCN 12m fP/E ex. banks Forward PE -290 10yr z-score: -0.32 -582 10yr z-score: -0.89 -800 -700 -600 -500 -400 -300 -200 -100 0 100 200 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Fund Allocation (OW/ UW, bps) EM Funds Asian Funds China Bloomberg Name Reform Theme Sector Listed Mkt Cap (US$ mn) 6M ADVT (US$ mn) Price (Quote) GS Rating 12m Potential +/(-)% 2013E EPSg (%) 2014E EPSg (%) 2014E P/E (X) 2014E P/B (X) 2014E D/Y (%) 6881 HK China Galaxy Financial reform Other financials 1,182 7 5.42 B 25% 21% 18% 13.0 1.2 2.0% 151 HK Want Want One child policy Cons. Stap. 18,487 20 10.84 B 15% 19% 20% 23.3 8.6 2.9% 2357 HK AviChina National defense Industrials 1,173 4 3.86 B 24% 20% 21% 19.3 1.6 1.0% 1193 HK China Resources Gas Environment protection Utilities 5,751 10 20.05 B* 22% 19% 22% 16.8 2.8 1.2% 270 HK Guangdong Investment Environment protection Utilities 5,263 7 6.54 B 31% 8% -4% 11.5 1.4 3.4% 958 HK Huaneng Renewables Environment protection Utilities 1,455 8 3.23 B -7% 106% 36% 14.1 1.5 1.2% 2196 HK Shanghai Fosun Pharm. Health care reform Healthcare 867 6 20.00 B -5% 4% 12% 17.4 2.1 1.5% 867 HK China Medical System Health care reform Healthcare 2,099 4 6.74 B* 26% 22% 25% 16.1 3.5 2.3% 700 HK Tencent Mass market consumption Internet 100,634 180 419.6 B* 7% 27% 28% 30.3 8.2 0.4% Avg 16% 27% 20% 18.0 3.4 1.8% 0.86 0.88 0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 Jan‐10 Apr‐10 Jul‐10 Oct‐10 Jan‐11 Apr‐11 Jul‐11 Oct‐11 Jan‐12 Apr‐12 Jul‐12 Oct‐12 Jan‐13 Apr‐13 Jul‐13 Oct‐13 HSCEI 3-mo call-wing skew (25-delta call / ATM vol) 42% 27% 25% 23% 13% 13% 12% 7% 7% 6% 4% 4% 4% 3% 2% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Bovespa HSCEI Nikkei 225 TOPIX NIFTY RDXUSD HSI KOSPI 200 S&P 500 EuroStoxx50 MSCI World TWSE FTSE 100 MSCI Sing ASX 200 Call-spread cost-saving vs. calls (3-mo 105/115% call-spreads vs. 105% calls)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 10 2) Taiwan: US + China exposures; upgrade to OW We upgrade Taiwan to Overweight from Market weight for the following reasons:  A favorable macro profile: Top-down, we still feel very comfortable on how Taiwan stacks up against its global and Asia EM peers: Taiwan’s leverage is not excessive, the current account is in significant surplus (12% of GDP), the currency is not overvalued and FX volatility is low, and the FX reserve (to GDP) provides a strong liquidity cushion. These characteristics should help Taiwan weather market volatility when investors turn their attention to EM macro vulnerability and contagion risk, possibly when the Fed begins to taper, which our economists expect will be in March 2014.  Compelling thematic exposures: In addition to Korea, we view Taiwan as an efficient market to gain global cyclical exposures as its economy and equity market are closely linked to the US (25% of revenue). Additionally, we feel China reform optimism may have positive sentiment spillover to ‘China Plays’ in Taiwan, including petrochem/materials, select financials, and tourism, which in aggregate represent 16% of equity market revenue.  A more sustainable and balanced earnings growth profile in 2014: After growing earnings by 27% in 2013 from a low base, Taiwan is likely to deliver a more sustainable mid-teen EPS growth of 11% and 13% in 2014 and 2015 as margins gradually recover to mid-cycle levels. Growth contribution is likely to be more balanced than in previous years when upstream semi (TSMC) and select non-tech sectors subsidized the losses from PC supply chain segments and the petrochem industry.  Valuations are not low but should not be a key concern: Taiwan currently trades on 14.1X forward P/E and 1.8X trailing book, 17% and 9% above the regional aggregates (0.68 and 1.0 s.d.). The high absolute and relative valuations have been a key consideration preventing us from turning more positive on Taiwan, but given our economists’ rising conviction on DM recovery and Taiwan-specific merits (a favorable macro profile, high and stable dividend yields), we feel the valuation burden should not dismiss our positive investment case (and return expectation) on Taiwan which will be driven primarily by fundamental earnings growth.  Light investor positioning: Similar to China and Korea, global- and Asia-focused investors are underweight by a wide margin – 249bps by GEM funds and 649bps by Asian-mandated funds. The recent FINI inflows of US$7.6bn since July look high at the first glance, but less significant compared with the depth of the market.  A better year for ‘Old tech’. As we detail in the ‘Key questions’ section, we expect 'Old tech', which accounts for half of total market cap, to have a better year in terms of absolute return as: o Valuation has now reached arguably attractive levels, especially relative to ‘New tech’ which focuses on software design and other tech- related value-added services. o Taiwan tech appears more favorably skewed towards a DM recovery story given their revenue exposures there. o Our analyst remains fundamentally bullish on TSMC (Buy, on Conviction list), the largest stock in MSCI Taiwan (20%) and TAIEX (12%).
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 11 Exhibit 11: Taiwan’s macro profile looks solid relative to global/Asia EMs Exhibit 12: Taiwan’s fundamentals are well linked to the US and China Source: Haver, CEIC, MSCI, Goldman Sachs Global investment Research Source: MSCI, Goldman Sachs Global investment Research Exhibit 13: Growth contribution is likely to be more balanced in 2014 Exhibit 14: Valuations are not low but shouldn’t be a major concern Source: I/B/E/S, MSCI, Goldman Sachs Global Investment Research Source: FactSet Exhibit 15: Stocks we highlight in Taiwan B* indicates the stock is on Conviction Buy list. Source: I/B/E/S, Lionshare, FactSet, Goldman Sachs Global Investment Research 86% 68% 25% 12% -14% 37% 22% 9% 1% 10% 20% 44% 8% 0% 8% -20% 0% 20% 40% 60% 80% 100% FX reserve/GDP (%) GDPg correl. with the US Sales Exp. to the US C/A as % of GDP (%) FX over- /undervaluation Taiwan AeJ EM (%) 25% 19% 12% 9% 8% 6% 8% 3% 3% 12% 16% 3% 11% 13% 8% 9% 3% 5% 1% 9% 10% 14% 13% 12% 9% 8% 6% 5% 4% 11% 0% 10% 20% 30% 40% 50% 60% Taiwan India Korea HongKong Australia Singapore Philippines Malaysia Thailand MXAPJ MSCI Indexes Revenue Exposure (%) % from EU % from CN % from US -7% 3% 32% 8% 13% 25% 25% 20% 11% 24% 19% 9% 17% 15% 7% 13% 11% 3% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013E Earnings 2014E Earnings 2014E Earnings Growth Contribution Technology Distributors wafer PCB Solar power Other Tech IC packaging and testing Acer Consumer electronics LED Touch screen ODM/OEM Other components (NB) Fabless design Foundry Others Financials Petrochem TFT-LCD (panel) 8.0 10.0 12.0 14.0 16.0 18.0 20.0 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Fwd PE Prem/ Disc (%) Fwd PE Prem/ Disc (MXTW vs. MXAPJ) MXTW - 12M forward P/E fPE: 14.1X 5-yr z-score: 0.42 Forward PE (X) Ticker Name Sector Listed Mkt Cap (US$ mn) 6M ADVT (US$ mn) Price (Quote) GS Rating* 12m Pot. +/(-)% 14E EPSg (%) Agg. EM Funds OW/UW (bps) 5yr avg. ROE 5yr avg. CROCI 14E P/E (X) 5yr PE z- score 14E P/B (X) 2330 TT TSMC Semi 91,212 116 104.00 B* 25% 16% 14.5 23% 18% 12.5 -0.2 2.7 2317 TT Hon Hai Comp. H/W 33,440 81 75.30 B 17% 3% -76.2 16% 13% 9.4 -0.5 1.1 2308 TT Delta Elec Comp. H/W 11,838 23 144.00 B 17% 27% -23.2 19% 24% 15.7 0.9 3.3 2891 TT Chinatrust Fin. Banks 9,406 21 18.90 B* 22% 21% -23.1 9% - 11.3 -0.2 1.3 2311 TT Advanced Semi Semi 7,897 19 30.10 CS - 23% -15.7 14% 10% 12.5 -0.2 1.8 3008 TT Largan Comp. H/W 4,510 45 994.00 B 36% 18% -9.1 26% 41% 12.6 -1.1 3.3 2474 TT Catcher Tech. Comp. H/W 4,507 38 177.50 B 7% -3% -9.5 17% 14% 10.4 -0.5 1.8 2823 TT CH Life Insur. (TW) Insurance 2,555 12 27.75 B 23% 7% -5.2 18% - 12.6 -0.5 1.5 2439 TT Merry Electronics Comp. H/W 640 8 107.50 B* 35% 60% 0.1 11% 14% 12.2 1.2 2.8 Avg 23% 19% -16.4 17% 19% 12.1 -0.1 2.2 TW Avg - 11% -6.9 11% 14% 17.8 0.6 2.2 Taiwan
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 12 3) Korea: A global cyclical recovery play; reiterate Overweight We reiterate our Overweight stance for Korea’s leverage on the global cyclical recovery. Our end-2014 target for KOSPI is 2,350, implying 17% upside. Our arguments are as follows:  Macro: well positioned for DM recovery, improving domestic sentiment. Korea is among the markets that are most leveraged to the global macro cycle. In value-added terms, the US and Europe are the two largest markets for Korea exports. Our economists expect GDP growth to accelerate to 2.9% in 2014 from 1.7% in 2013 in the US, and 1.1% from -0.4% in the Euro area. China, the third largest export destination for Korea, will likely maintain stable growth in our view. We are also seeing early signs of a pickup in domestic demand after a long period of weakness. Housing markets have gradually improved, imports of machinery have further risen, and credit expansion has resumed. Given the “twin engines” of growth, we expect GDP growth to accelerate to 3.7% next year from 2.9% in 2013.  Earnings: highest growth in the region. We forecast 15% EPS growth in Korea each in 2014 and 2015, compared to consensus of 20% and 11%. Although some moderate negative revisions are likely, we expect Korea will still be the market with the fastest earnings growth in the region next year. Even without valuation expansion, Korea should be able to deliver decent returns just “riding on earnings”.  Valuation: attractive relative to the region. Korea is currently trading at 8.8X forward P/E and 1.2X trailing P/B, which are 0.5 and 1.2 s.d. below the 10-year average. It is also trading at a deep discount to the region (27% for P/E and 32% for P/B). Although relative valuations have risen, they are only 13% and 18% above trough levels. We believe there is potential for further valuation expansion.  Positioning: potential for inflow to continue given funds’ underweight. Year- to-date, foreigners have bought US$6.5bn of Korean equities. Despite the inflows, mutual funds remain strongly underweight the market (by 769bp). Given light investor positioning, we see potential for more inflows.  Implementation: Buy EWY (US-listed ETF); prefer KOSPI 200 call-spreads for asymmetric exposure. We suggest buying EWY (US-listed ETF on MSCI Korea) as a direct way to position for long exposure in Korea. Although EWY is US- denominated and hence exposed to FX risk, we see modest depreciation pressure on KRW next year. Investors who can trade derivatives and want to limit any downside risk can take advantage of low implied volatility. 6-month implied vols on KOSPI 200 are currently trading at 15.4v, which is less than 1 vol point above its lows (14.8v) and in the 3rd percentile of its history since 2007. We prefer call-spreads to outright calls. 6-month 105/115% call-spreads on KOSPI 200 currently cost 1.9% with maximum potential payout of 5.3x. Risks: Buyers of 105/115% call-spreads risk capped upside if KOSPI 200 rises more than 15% and loss of up-front premium if KOSPI 200 rises less than 5% by expiry.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 13 Exhibit 16: “Twin engines” of growth: DM recovery and improving domestic sentiment to lift GDP growth in 2014 Exhibit 17: We expect Korea to deliver the strongest earnings growth in the region Source: Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. Source: Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. Exhibit 18: Korea’s valuations remain attractive vs. the region Exhibit 19: Active managers are still underweight the market Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research Source: EPFR, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research 8.7 7.6 4.5 4.9 4.3 3.5 3.6 3.4 2.8 2.4 1.6 1.5 1.5 2.3 3.3 4.2 4.2 3.9 3.6 3.3 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 2010-1Q 2010-2Q 2010-3Q 2010-4Q 2011-1Q 2011-2Q 2011-3Q 2011-4Q 2012-1Q 2012-2Q 2012-3Q 2012-4Q 2013-1Q 2013-2Q 2013E-3Q 2013E-4Q 2014E-1Q 2014E-2Q 2014E-3Q 2014E-4Q Real GDP (yoy) Korea 15% 12% 12% 11% 10% 9% 8% 8% 8% 8% 6% 10% 4% 6% 8% 10% 12% 14% 16% Korea Indonesia India Taiwan China Thailand Australia Philippines Malaysia Singapore HongKong MXAPJ 2014E EPS growth (%) -80% -70% -60% -50% -40% -30% -20% -10% 0% 10% 20% Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Valuation Prem/ Disc (MXKR vs MXAPJ) Trailing PB Prem/ Disc Fwd PE Prem/ Disc -25% 10yr z-score: -0.29 -31% 10yr z-score: -1.24 -1200 -800 -400 0 400 800 1200 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 ASEAN India Hong Kong China Korea Taiwan Asia-fund OW/UW (bps)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 14 Implementation: Emphasizing earnings 1) Earnings growth: Stylistic and thematic implementation One of our core themes for 2014 is seeking earnings growth without too much exposure to valuation risk. We highlight three different flavors of earnings-related implementation: a) Delta Earnings (Margin expansion) b) Value earnings (attractively priced growth) and c) Destination earnings (Europe-exposed stocks), as described in detail below. a) Margin expansion  Identifying cyclical margin recovery and structural margin expansion stocks: We believe the magnitude of margin improvement next year will remain mild, but that it will be much stronger in 2015. Despite this, we see a few sectors with potential for early margin recovery on improving demand/supply dynamics. Together with names that have structural margin expansion stories, we highlight a list of 12 stocks in the region (Exhibit 20).  Entry points matter: Within our list, some China names have rallied sharply along with the overall market on reform enthusiasm. While we are confident on their improving margin outlook, we suggest investors wait for better entry levels.  Appealing growth/valuation profile: Our analysts forecast these stocks overall will see 2014 earnings growth accelerating to 18% (from 1% in 2013), and they are trading at 10.8X 2014E P/E on median. Their growth/valuation profile thus looks favorable compared to the overall market. Exhibit 20: Stocks whose earnings may benefit from expanding margins B* indicates the stock is on Conviction Buy list. Source: Goldman Sachs Global Investment Research. Ticker Name Country Sector Listed Mkt Cap (US$ mn) 6M ADVT (US$ mn) Price (Quote) GS Rating 12m Potential +/(-)% 2013 EPSg (%) 2014 EPSg (%) 2013 NM (%) 2014 NM (%) 2015 NM (%) 2014 P/E (X) 2014 P/B (X) 2014 D/Y (%) 005380 KP Hyundai Motor Korea Autos 51,576 96 249000 B 18% 1% 14% 10% 10% 11% 5.6 0.9 0.8% TTMT IS Tata Motor India Autos 16,437 53 386 B* 18% 34% 18% 7% 7% 7% 6.8 1.8 0.2% 914 HK Anhui Conch Cement China Materials 4,567 39 27.25 B* 19% 32% 18% 16% 17% 18% 11.5 1.8 1.7% 3323 HK China National Building Material China Materials 2,822 36 7.60 B 30% 9% 31% 5% 6% 7% 4.0 0.8 3.7% SMM SP Sembcorp Marine Singapore Industrials 7,394 10 4.41 B 20% -1% 53% 10% 11% 11% 12.1 2.9 4.1% 2039 HK China Itnl' Marine Containers China Industrials 2,601 2 14.10 B 16% -36% 90% 2% 3% 5% 12.5 1.3 2.4% 012630 KP Hyundai Dev. Korea Industrials 1,701 7 24000 B* 13% NM NM -3% 5% 5% 8.2 0.8 4.2% 386 HK Sinopec China Oil and gas 21,388 67 6.50 B 12% 17% 14% 3% 3% 3% 6.8 1.0 5.8% 023530 KP Lotte Shopping Korea Retailing 11,164 13 377000 B 17% -9% 11% 3% 4% 4% 10.1 0.6 0.4% 2331 HK Li Ning Co. Ltd. China Retailing 1,169 5 6.62 B 30% -85% -115% -6% 1% 5% 125.5 2.5 0.0% 2439 TT Merry Elec. Taiwan Retailing 640 8 108 B* 35% 102% 60% 9% 12% 13% 12.2 2.8 3.5% 347 HK Angang Steel China Steel 682 9 4.87 B* 31% -130% 90% 2% 3% 5% 11.8 0.6 4.5% Median 18% 1% 18% 4% 5% 6% 10.8 1.2 3.0%
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 15 b) Growth at value We classify the bottom 25 percentile of stocks based on Forward PE as Value stocks and top 25 percentile of stocks based on sales growth in each market as Growth stocks and make the following observations:  Growth has outperformed value 9 years in a row (Exhibit 21).  Growth looks quite expensive relative to value (51% PE and 44% PB premium), but growth remains scarce, and value stocks could be a trap given low ROEs.  We prefer select growth stocks with reasonable valuations. We screen the bottom 25th percentile of stocks among Growth stocks based on their P/E. The combined Growth+Value strategy has performed better than either Growth or Value individually. We highlight Sembcorp Marine, Largan Precision, Tata Motors and Geely as stocks that screen well within our list (Exhibit 25). Exhibit 21: Growth has outperformed value 9 years in a row Exhibit 22: Value stocks are valued at high discounts to growth stocks Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 23: The combined growth+value strategy has performed even better Exhibit 24: Value has low ROE but growth seems expensively priced Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research -60% -30% 0% 30% 60% 90% 120% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD Annual Return (%) Value Growth MXAPJ -15% 0% 15% 30% 45% 60% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(Curr.) Growth vs. Value Rel Fwd PE Prem/ Disc Growth stocks more expensive 80 100 120 140 160 180 200 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Rebased Index Value Growth Growth (Value) MXAPJ Value vs Growth Value Growth MXAPJ Growth (+Low fPE) 2014 EPSg 9.9% 20.1% 12.1% 20.2% 2015 EPSg 9.3% 16.5% 10.2% 13.0% 2014 SPSg 6.8% 18.7% 7.0% 20.5% 2015 SPSg 6.4% 15.3% 6.0% 11.1% Fwd PE 9.8 14.9 12.6 9.2 10yr z-score (0.58) 0.76 (0.28) (0.36) Trailing PB 1.4 2.0 1.7 1.2 10yr z-score (1.21) (0.33) (0.87) (0.86) Return (Ytd) 1.0% 10.4% 3.1% 5.1% Volatility (10Y, Ann.) 25% 26% 27% 30% Sharpe Ratio (10Y, Ann.) 0.66 1.06 0.32 1.23 FundementalValuationPrice
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 16 Exhibit 25: Growth stocks at modest valuations B* indicates the stock is on Conviction Buy list. Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research c) Europe-exposed stocks While our Global Cyclicals thematic slice is largely concentrated in the Info Tech sector, we also look at specific stocks that have high revenue exposures to DM (US and Europe) and should therefore benefit from a meaningful recovery in external demand. We note that US- exposed stocks (with at least 35% revenue exposure to the US) have risen 16% on an average from June lows (vs. 12% for MXAPJ) and outperformed MXAPJ by 12% year-to- date. On the other hand, the Europe-exposed stocks have lagged underperforming MXAPJ by 11% year-to-date. Our economists forecast expansion in Euro area GDP of 1.1% in 2014 and 1.5% in 2015 coming after two years of contraction in output, which should bode well for our EU-exposed stocks, in our view. We highlight a list of 18 stocks with at least 30% revenue exposure to Europe and that are currently trading at less than 20x P/E on 2014 expected earnings (Exhibit 26). The portfolio has an average revenue exposure of 43% to Europe, compared to 8% for the overall region. With 20.5% EPS growth and 13.1x P/E for next year (PEG ratio of 0.64), our Europe-exposed portfolio offers a better growth/valuation profile than the overall region on average (15.9x avg. P/E, 16.7% avg. EPS growth and PEG ratio of 0.95). The growth/valuation profile of our Europe-exposed portfolio is also higher than the US-exposed basket with an average revenue exposure of 51% to US and PEG ratio of 0.9 (16.5x avg. P/E and 19% EPS growth). >75th Percentile <15X Ticker Name Country Sector Listed Mkt Cap (US$ mn) 6M ADVT (US$ mn) Price (Quote) GS Rating 12m Potential +/(-)% 2014E EPSg (%) 2015E EPSg (%) 2014E SPSg (%) Fwd PE (X) 2014E P/E (X) 2014E P/B (X) 2014E D/Y (%) 2014E ROE (%) 2015E ROE (%) 037620 KP Mirae Asset Korea Insur. & other fin. 1,272 4 32300 NC - 66% 10% 69% 8.1 7.8 0.6 2.5% 8% 8% SMM SP Sembcorp Marine Singapore Industrials 7,394 10 4.41 B 20% 26% 8% 28% 14.2 14.0 3.0 3.9% 22% 21% PGAS IJ PT Perusahaan Gas Indonesia Utilities 10,118 13 4850 N 3% 31% 8% 25% 10.7 10.5 3.3 5.0% 32% 29% 813 HK Shimao Property China Property 8,509 17 19.00 B 3% 25% 15% 23% 6.6 6.5 1.1 4.7% 17% 17% 3008 TT LARGAN Precision Taiwan Computer H/W 4,510 45 994 B 36% 15% 12% 20% 13.0 12.9 3.7 3.0% 29% 27% HCLT IS HCL Technologies India I.T. services 11,988 22 1086 B 22% 24% 12% 20% 12.8 12.7 3.5 1.4% 28% 25% 1 HK Cheung Kong Hong Kong Property 36,175 58 121 B* 19% 8% 6% 18% 9.4 9.3 0.7 2.8% 8% 8% TTMT IS Tata Motors India Autos 16,437 53 386 B* 18% 22% 12% 15% 8.2 8.0 2.0 0.6% 24% 22% 3968 HK China Merc. Bank China Banks 9,071 42 15.32 B* 28% 6% 13% 15% 5.6 5.6 1.0 4.9% 18% 17% 175 HK Geely Automobile China Autos 4,518 33 3.98 B* 31% 14% 13% 15% 8.8 8.7 1.5 1.6% 17% 16% Avg 24% 11% 25% 9.7 9.6 2.0 3.0% 20% 19% APJ Avg. 17% 16% 11% 15.9 15.4 2.4 2.9% 15% 15%
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 17 Exhibit 26: We expect Europe-exposed Asian stocks to benefit as external demand recovers Criteria: EU sales exposure > 30%, 2014 P/E < 20x Note: B= Buy, N= Neutral, NC=Not Covered; * denotes stock is on our Regional Conviction List Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research. Exhibit 27: While US-exposed stocks have outperformed, Europe-exposed stocks have lagged in the recent rally Note: Europe-exposed stocks comprises of Asian stocks with more than 30% sales exposure to Europe; US-exposed stocks comprises of Asian stocks with more than 35% sales exposure to US Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research Ric Name EU Sales Exposure Market Sector Curncy Price (Quote) Listed market cap (US$ mn) 3M ADVT (US$ mn) GS Rating 2014 P/E 2014 EPS Growth HGG.AX Henderson Group 90% Australia Financials AUD 3.79 3,948 10.4 B 14.8 11.9 VARD.SI Vard Holdings 80% Singapore Industrials SGD 0.83 776 3.1 N 8.1 40.2 028050.KS Samsung Engineering 63% Korea Industrials KRW 64,800 2,460 30.0 N 14.1 - AMC.AX Amcor 55% Australia Materials AUD 11.12 12,608 38.5 N 15.6 15.5 TEML.NS Tech Mahindra 51% India Software and services INR 1,734 6,144 34.4 B* 12.7 14.0 0013.HK Hutchison Whampoa 46% Hong Kong Industrials HKD 95.9 52,071 66.7 B 12.1 12.2 SCMN.SI Sembcorp Marine 46% Singapore Industrials SGD 4.41 7,394 9.4 B 14.0 26.0 006360.KS GS Engg & Construction 42% Korea Industrials KRW 32,200 1,525 17.0 N 14.3 - BIOS.SI Biosensors International 40% Singapore Health Care SGD 0.89 1,205 2.6 N 14.2 4.4 000210.KS Daelim Industrial 38% Korea Industrials KRW 96,000 3,177 18.5 N 7.9 19.0 TISC.NS Tata Steel 38% India Steel, aluminium INR 386.1 5,762 48.0 NC 10.0 50.7 BXB.AX Brambles 35% Australia Industrials AUD 9.30 13,631 40.5 B 17.7 14.0 ITMG.JK PT Indo Tambangraya 34% Indonesia Oil and gas IDR 31,200 3,151 2.8 N 11.0 30.4 2439.TW Merry Electronics Co. 34% Taiwan Consumer Discretionary TWD 115 640 9.9 B* 12.8 55.3 IOIB.KL IOI Corp. Bhd. 33% Malaysia Consumer Staples MYR 5.46 10,937 7.2 N 17.9 1.7 0005.HK HSBC Holdings 32% Hong Kong Banks HKD 86.3 206,973 128.1 B 10.9 7.2 REDY.NS Dr. Reddy's Laboratories 30% India Health Care INR 2,464 6,610 12.5 CS 18.8 14.5 2018.HK AAC Technologies 30% China Offshore Comp. hardware/assemblers HKD 31.5 4,846 22.9 B 11.4 2.6 43% 13.1 20.5 8% 15.9 16.7 Europe-exposed stocks (Average) MXAPJ (Equal-weight, Avg.) 80 90 100 110 120 130 140 150 Jan‐12 Mar‐12 May‐12 Jul‐12 Sep‐12 Nov‐12 Jan‐13 Mar‐13 May‐13 Jul‐13 Sep‐13 Nov‐13 MXAPJ Europe- exposed stocks US-exposed stocks STOXX 600 85 90 95 100 105 110 115 120 125 130 75 80 85 90 95 100 105 110 115 Jan‐12 Mar‐12 May‐12 Jul‐12 Sep‐12 Nov‐12 Jan‐13 Mar‐13 May‐13 Jul‐13 Sep‐13 Nov‐13 MXAPJ (rhs) Europe-exposed stocks vs. MXAPJ (Equal-weighted)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 18 2) Global Cyclicals vs. Asset Sensitive Financials We recommended Global Cyclicals vs. Asset Sensitive Financials as one of our preferred trades for the fourth quarter. So far, the trade has gained 5% while the MXAPJ has posted flat returns. We continue to like this trade for 2014 as we believe Asian equities will benefit next year from a moderate improvement in growth (largely helped by the recovery in the US and EU) while liquidity will marginally tighten (Fed tapering and domestic policy normalization). The net impact should be positive for areas with export orientation and high revenue exposures to external demand while negative for asset price inflation. Along these lines, the Global Cyclicals and Asset Sensitive Financials (which largely includes property stocks) remain at opposite ends. The entry point of the long/short trade still looks attractive with almost 13% upside to 2011 highs. In addition to this, growth/valuations profile for Global Cyclicals is also better than that of Asset Sensitive Financials. Global Cyclicals trade at 9.8x forward P/E, which is a 20% discount to Asset Sensitive Financials (at 12.5x forward P/E). With 2014 EPS growth of 16%, Global Cyclicals offers higher growth at a lower price (PEG ratio of 0.6) than both Asset Sensitive Financials (PEG ratio of 1.0) and the overall region (PEG ratio of 1.1). Exhibit 28: Global Cyclicals vs. Asset Sensitive Financials theme could continue to generate alpha as external demand recovers and monetary policy normalizes Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research Exhibit 29: Global Cyclicals offer better growth at lower price than both Asset Sensitive Financials and broader region Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research 90 95 100 105 110 115 120 125 130 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Global Cyclicals vs. Asset Sensitive Financials (Relative performance, indexed) GSSZMSGC / GSSZMSFA 0.5 1.0 1.5 2.0 2.5 3.0 3.5 (1.00) (0.50) 0.00 0.5 1.0 1.5 2.0 2.5 3.0 USGrowthSensitivity US Rates Sensitivity Global Cyclicals Rate-Sensitive Financials Asset-Sensitive Financials Commodity Cyclicals Defensives Domestic Cyclicals Size of bubble indicates sensitivity to China Growth 6X 8X 10X 12X 14X 16X 18X 20X 22X 24X 26X Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 NTMPE Global Cyclicals Asset-Sensitive Financials Global Cyclicals are trading at 20% discount to Asset Sensitive Financials Global Cyclicals Asset- Sensitive Financials MXAPJ Valuation P/E (NTM) 9.8 12.5 12.1 10yr Z-score P/E (NTM) (1.1) (0.9) (0.3) Consensus Earnings Growth 2013E (%) 19.2 4.9 7.0 2014E (%) 16.0 12.7 11.1 P/E to EPS growth ratio 2014E (X) 0.6 1.0 1.1
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 19 3) Preferred downside hedge: Buy ASX 200 Mar-end 95% puts Given the potential event risk in the early part of the year regarding timing and magnitude of Fed tapering (our expectation is for tapering to begin in March), we highlight our preferred hedge for investors looking to limit downside risk. We recommend buying March-expiry outright puts on ASX 200 given our cautious stance on Australian equities on weak domestic fundamentals coupled with inexpensive option pricing and attractive risk-reward to recent lows. We summarize our key arguments below:  Implied vol is low globally and currently trading in the bottom decile of its 7- yr history across most markets. Short-dated implied vols have declined significantly over the last few months with 3-month ATM implied vol on most markets currently trading in the bottom decile of its 7-year history.  We prefer outright puts to put-spreads given low vol and moderate skew. Short-dated put -skew is still low, trading below average in most markets. Consequently cost savings on put-spreads is currently less significant. Outright puts thus offer better risk-reward for hedging, in our view.  ASX 200 is more sensitive to a taper surprise given significantly higher weighting in the high-yield defensives. The high-yield defensive parts of the market may potentially come under pressure from Fed tapering. ASX 200 has around 60% weighting in the high-yield defensives (dividend yield > 4%, beta <1) significantly higher than other major markets globally and thus is more sensitive to taper surprise in our view (Exhibit 32).  ASX 200 puts are currently the most inexpensive across major markets globally. Indicatively March-end expiry 95% puts on ASX 200 currently cost 1.55%, the least expensive across markets globally.  ASX 200 puts offer best payouts if markets revert to their recent lows. Given event risk of potential Fed tapering, we look at the payouts (return on premium paid) on various March-end expiry 5% OTM put options if indices were to revert to their recent lows in late June / early July. Based on this metric, ASX 200 puts would provide a return of 465% on premium paid, the highest across major markets we track globally. Risks: ASX 200 95% put buyers risk loss of upfront premium if index falls less than 5% by March-end expiry. Exhibit 30: ASX 200 puts are the most inexpensive across major markets globally Exhibit 31: ASX 200 puts offer best returns if markets revert to their respective lows in June/July this year Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 EWZ Nikkei 225 RDXUSD EEM FXI EWY HSCEI EWJ EuroStoxx50 Bovespa HSI NIFTY S&P 500 FTSE 100 KOSPI 200 TWSE ASX 200 Indicative cost of Mar-end 95% puts (as % of spot) ‐50% 50% 150% 250% 350% 450% 550% ASX 200 EuroStoxx50 EWY Bovespa KOSPI 200 HSI S&P 500 HSCEI FXI Nikkei 225 EWJ RDXUSD FTSE 100 EEM EWZ NIFTY TWSEReturn on premium paid at expiry (if markets revert to their respective June/July lows)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 20 Exhibit 32: ASX 200 has significantly higher weighting in the high-yield defensives vs. rest of the world Exhibit 33: Implied vol is low across markets and currently trading in the bottom decile of its 7-yr history Source: FactSet, local exchanges, MSCI, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research 57 36 28 13 7 0 10 20 30 40 50 60 Australia UK Canada Europe US Country wgt. in defensive high yield Country-weight in high-yield defensives (Div. yield > 4%, beta < 1) 10 20 30 40 50 60 70 80 Jan‐07 Jun‐07 Nov‐07 Apr‐08 Sep‐08 Feb‐09 Jul‐09 Dec‐09 May‐10 Oct‐10 Mar‐11 Aug‐11 Jan‐12 Jun‐12 Nov‐12 Apr‐13 Sep‐13 AEJ 3-month ATM implied vol (%) (Avg. of KOSPI 200, HSI, HSCEI, NIFTY, TWSE and ASX 200) %tile since  2007: 5%
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 21 Key questions for 2014 Will Asia recover its underperformance vs. DM in 2014?  We believe Asia’s relative performance may improve if it can deliver the earnings growth that we expect it to in 2014 and 2015, given: o A low starting point: Asia (MXAPJ) has trailed the world index since mid-2010. In 2013 (ytd), Asia has lagged the global benchmark by 17pp, the 20th percentile over the past 25 years. This underperformance has been driven by compression in relative valuation, which has retreated to 2005 levels in term of forward P/E. o A better fundamental configuration: Our forecasts imply a more balanced return profile among major equity markets globally, suggesting Asia is better positioned fundamentally relative to DM in 2014 than in the past few years. o Earnings recovery in Asia: Asia has struggled to grow earnings in the past 3 years. While its DM peers have as well, investors seem to have traded weak margins more than solid topline growth in Asia, leading to valuation de-rating. We forecast Asia’s EPS to grow 10% and 14% in 2014/2015, with margins modestly expanding in 2014 and further in 2015. o Narrowing policy gaps: We expect the US to start normalizing its policy in 2014, whereas Asia is already at a more mature tightening cycle. The closing gaps may help support Asia’s relative returns, especially if the risks of tapering are better reflected in asset prices than in summer 2013, as we argue in the macro section. Exhibit 34: Asia has lagged the world index since 2010 Exhibit 35: Asia’s P/E discounts are back to 2005 levels now Exhibit 36: Margins will likely further recover in Asia Exhibit 37: Policy gaps between DM and Asia may narrow Source: DataStream, FactSet, Goldman Sachs Global Investment Research 50 75 100 125 150 175 200 225 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13 Relative Performance Index (MXAPJ vs. MXWO) -26pp 2013ytd rel. return: -17pp (20th percentile in annal rel. return) 144 14.4 10yr z-score: 0.51 12.1 10yr z-score: -0.27 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 -40% -30% -20% -10% 0% 10% 20% Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Fwd PE Prem/ Disc (MXAPJ v.s MXWO) MXAPJ vs. MXWO The World index MXAPJ Forward PE (X) -16% 10yr z-score: -0.90 -10% 0% 10% 20% 30% 40% 50% 60% -10% 0% 10% 20% 30% 40% 50% 60% 2010 2011 2012 2013E 2014E 2015E 2010 2011 2012 2013E 2014E 2015E Consensus EPSg Consensus NM Consensus SPSg MXWO MXAPJ Less Margin Compression 4.4 4.3 4.3 1.7 2.1 2.3 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 5Y govt yield (%) Yield Gap (RHS) Asia (GDP-weighted) US Yield Gap (%)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 22 Will ASEAN regain momentum in 2014?  We believe it may continue to lag the region in 2014 after having outperformed from 2006 to 2012. 2H14 could be a better time to revisit.  We believe the classic EM growth story remains intact for the ASEAN region: Favorable base effect, ample room for productivity enhancement, strong demographics, and much stronger balance sheet than in the previous crisis period (e.g. AFC).  However, a few factors could pressure equity returns cyclically: o Indonesia and Thailand need to slow excess credit growth, which has been running hot in recent years. Also, they have to trim their current account deficits further, mainly through suppressing domestic demand (i.e. higher policy rates, demand-side tightening). o These macro adjustments mean growth estimates may need to be revised down further, leading to lower EPS growth. Our earnings forecasts for ASEAN markets are generally below consensus in 2014; and o ASEAN markets’ relative valuations to the region remain at the expensive side of their historical ranges.  We look to re-engage in 2H14 when political visibility emerges and cyclical adjustments become mature. Exhibit 38: The classic EM story remains intact for ASEAN Exhibit 39: While the base is low, cyclical adjustments are needed in Indonesia, and to a lesser extent, Thailand Note: Excess credit growth is calculate by subtracting the GDP growth (209- 2012) from the nominal credit growth (2009-2012) Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 40: More downward revisions may take place Exhibit 41: Valuations do not look attractive yet Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research ASEAN4 AeJ G7 *Capita stock per worker (US$) 18,432 49,276 225,191 *GDP per Capita (US$) 5,532 5,956 45,798 Population below 40 71% 62% 53% Avg worker wages (Mth, US$) 372 1061 3494 * The numbers are weighted by GDP. 273% 253% 238% 172% 152% 145% 130% 96% 85% 56% 48% 52% 46% 31% -7% 14% 25% 11% 8% 42% -10% 0% 10% 20% 30% 40% 50% 60% -50% 0% 50% 100% 150% 200% 250% 300% HongKong Singapore China Malaysia Korea Taiwan Thailand India Philippines Indonesia Total debt to GDP (%) Total Debt to GDP (2012) Excess Credit Growth (09-12, RHS) Excess Credit Growth (%) -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 ASEAN Consensus Estimates GDP (yoy) 2004 GDP 2005 GDP 2006 GDP 2007 GDP 2008 GDP 2009 GDP 2010 GDP 2011 GDP 2012 GDP 2013 GDP 2014 GDP 19% 5yr z-score: 0.84 21% 5yr z-score: 0.67 -20% -10% 0% 10% 20% 30% 40% Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Valuation Prem/ Disc (ASEAN vs. MXAPJ) Fwd PE Prem/ Disc Trailing PB Prem/ Disc
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 23 What will re-rate Chinese banks?  We believe specific policies will be the key re-rating catalysts for Chinese banks in 2014. We see upside risks to the sector as reform momentum gathers pace.  Chinese banks are the fourth largest country-sector in MXAPJ, and are trading at very low absolute valuations (5.1X 2014E P/E, 0.9X P/B), meaning decisions in this area will have outsized impact on relative performance.  Chinese banks’ valuations have significantly de-rated relative to their global and regional peers, and are now implying a 6.1% NPL ratio, versus the 1% reported in 3Q. These suggest a great deal of banks specific risk is already priced in.  However, we do not think cyclical growth on its own or liquidity improvement would be enough to re-rate Chinese banks (or prompt outperformance) because they have become less sensitive to macro factors.  In that vein, we think bank-specific policies including a timetable of interest rate liberalization (remove overhang), more clarity on preferred share issuance scheme (improve capital structure), more transparency on accounting and classifying liability and NPLs (estimate potential loss), and potential measures regarding bad debt management (NPL carve out, loss absorption, etc.) will be important share price drivers. Exhibit 42: China banks are the 4th largest country sector in AeJ, and are trading at very low absolute valuations Exhibit 43: Current market prices are implying 6.1% NPL for Chinese banks Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 44: Chinese banks have de-rated relative to global peers Exhibit 45: Chinese banks have become less sensitive to macro factors Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 9% 6% 5% 4% 4% 3% 3% 2% 2% 1% 13.8 14.0 7.3 5.1 12.0 12.6 8.9 10.9 18.4 14.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% AUBanks TWTech KRTech AUMetal HKProperty CNEnergy CNTelcos HKInsurance INBanks MXAPJ Weighting (%) 2014E PE (X) ChinaBanks 6.3 5.7 6.4 8.4 6.0 5.8 5.5 6.7 8.2 6.6 5.8 6.7 8.8 6.16.1 5.2 6.0 5.6 5.85.8 4.8 6.2 5.35.4 0 1 2 3 4 5 6 7 8 9 ICBC(H) BOC(H) CCB(H) ABC(H) BoCom(H) CMB(H) CNCB(H) Minsheng(H) CQRCB ICBC(A) BOC(A) CCB(A) ABC(A) BoCom(A) CMB(A) CNCB(A) Minsheng(A) SPDB Industrial HuaXia BONB BOBJ BONJ CEB Formation covered by general provision Implied new formation Buy-rated stocks 2013 NPL ratio Average = 6.1 -29% 5yr z-score: -1.34 -9% 5yr z-score: -1.68 -19% 5yr z-score: -1.00 -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% 160% Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Trailing PB Prem/ Disc (%) CN Banks vs. MXAPJ Banks CN Banks vs. World Banks CN Banks vs. EM Banks -6 -4 -2 0 2 4 6 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Rolling 3Y t-Stat of CN CAI, FCI on MXCN banks return CN FCI CN CAI Insignificant zone (Critical value = +/- 1.96)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 24 China internet and Macau gaming: Buy, hold, or sell?  We recommend buying on any major corrections, China internet in particular.  Macau gaming and China internet (HK- and US-listed) have been the favorite ‘consensus buy’ sectors in the HK/China universe. They boast strong fundamental investment case; they are liquid; and have performed well enough that many investors can’t afford to go underweight.  Top-down, we think these two sectors are not yet at the levels where investors should be too concerned about risks of overshooting, because: o Their past 3Y returns don’t look stretched relative to historical boom-bust episodes; o Their performance has been supported by fundamental earnings growth (and upgrades), which appears healthier than past cases where valuation was a key return driver.  Bottom-up, while our analysts (and consensus) continue to forecast strong but declining EPS growth for these two sectors, the growth is mostly contributed by top-line as opposed to margin expansion (China internet in particular), suggesting that their optimistic EPS growth forecasts are not aided by stretching their profitability assumptions. Exhibit 46: Macau gaming and China internet have been the two best performing sectors in the past few years Exhibit 47: Their performance does not look stretched relative to some historical episodes Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 48: The rally has been backed by fundamentals Exhibit 49: EPS growth is not driven by stretching margins Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 66% 64% 66% 43% 67% 60% 21% 56% 59% 45% 52% 55% 62% 51% 61% 51% 40% 20% 30% 40% 50% 60% 70% -100% 0% 100% 200% 300% 400% 500% 600% 700% Macau(626%) CNInternet(244%) HKTelcos(82%) HKDisc.(56%) HKIndustrials(51%) CNUtilities(47%) HKUtilities(33%) HKFin.(19%) CNTelcos(10%) CNStap.(-1%) CNEnergy(-4%) CNHealthcare(-16%) CNFin.(-18%) CNDisc.(-21%) CNIndustrials(-26%) CNMaterials(-43%) HKI.T.(-47%) Return since 2010 (%) Return since 2010 % of buy rating (RHS) I/B/E/S Consensus Rating (%) 0 100 200 300 400 500 600 700 800 900 T=0 T=7 T=14 T=21 T=28 T=35 T=42 T=49 T=56 T=63 T=70 T=77 T=84 T=91 T=98 T=105 T=112 T=119 T=126 T=133 T=140 T=147 T=154 Rebased Performance Index KR Telcos (TMT) KR ID (China 03-07) CN Property (China 03-07) CN Materials (China 03-07) Macau Gaming TW I.T. (TMT) JP Property (1980s) CH Software (# of Weeks) 3 years before the peak 63% 472% 603% 475% 630% 244% 182% -19% 294% 84% 185% 136% -18% -13% 82% 178% 519% 290% 494% 262% 195% -100% 0% 100% 200% 300% 400% 500% 600% 700% -100% 0% 100% 200% 300% 400% 500% 600% 700% JapanProperty KRTelcos+TWI.T. ChinaRealEstate ChinaMaterials KoreaIndustrials MacauGaming ChinaSoftware % Chg in country sectors rally (since 3 years before the peak) Price Chg Earnings Chg Valuation Chg -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 2011 2012 2013E 2014E 2015E EPSg NM SPSg Macau Gaming 2011 2012 2013E 2014E 2015E China Internet
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 25 How should investors position in the tech sector?  While we think internet and software (a.k.a new technology) will continue to do well in 2014, we expect ‘Old tech’ to perform better than in 2013.  Tech is the 2nd largest sector in MXAPJ, accounting for 14.5% of the regional index weighting of which 54% comes from Samsung and TSMC combined.  Regional tech has performed reasonably well so far in 2013 but with noticeable divergence: ‘New tech’ has significantly outperformed ‘Old tech’, which primarily focuses on semi and hardware design and manufacturing.  As noted in several sections in this report, we expect ‘New tech’ to continue to perform well, backed by secular growth drivers. However, we think ‘Old tech’ will likely have a better year in absolute return terms, because: o Valuation has now reached arguably attractive levels in both absolute and relative terms; o Our analysts remain fundamentally bullish on Samsung (Buy) and TSMC (Buy, on Conviction List), the largest and 5th largest stocks in MXAPJ; o Thematically, ‘Old tech’ appears more favorably skewed towards a DM recovery story given their revenue exposures there. Exhibit 50: ‘New tech’ has generated significant alpha for investors in 2013... Exhibit 51: ...but ‘Old tech’ still remains important for absolute returns given its heavy index weighting Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 52: The valuation gaps between ‘New’ and ‘Old’ are quite substantial Exhibit 53: ‘Old tech’ seems better positioned for a DM recovery theme Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 78% 68% 65% 31% 8% 7% 1% -11% -12% -40% -20% 0% 20% 40% 60% 80% KRSoftware CNSoftware CNSemi INSoftware MXAPJTech TWSemi KRSemi TWComp.H/W KRComp.H/W Ytd Return (%, USD) KR Semi 33% KR Software 4% KR Comp. H/W 3% TW Semi 23% TW Comp. H/W 16% CN Software 10% CN Comp. H/W 2% CN Semi 0% IN Software 8% Korea 39% Taiwan 39% China 12% India 8% Weighting in MXAPJTech (%) 22.5 10yr z-score: 0.81 12.1 10yr z-score: -0.19 8.4 10yr z-score: -1.05 5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Fwd PE (X) MXAPJ Software & Services MXAPJ Technology H/W MXAPJ Semi 99% 97% 75% 61% 51% 49% 42% 16% 8% 13% 22% 38% 21% 53% 9% 17% 17% 9% 20% 24% 9% 9% 10% 4% 17% 8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% CN Software KR Software KR Comp. H/W CN Comp. H/W TW Comp. H/W TW Semi KR Semi IN Software Sales exposure as % of total Others EU US Asia
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 26 Performance context: Intra-regional differentiation at play Year-to-date, the MXAPJ index essentially posted flat returns, but beneath the headline, the region had a tough summer followed by a sharp rebound. With excessive volatility coupled with frequent market rotations, the risk-reward on AEJ equities this year has been less attractive compared to DM equities or Asian currencies. We highlight various themes that were in play in 2013 which inform our views and implementation ideas for next year:  A difficult “flat” year with less attractive risk-reward. MXAPJ has essentially posted flat returns ytd, but beneath the surface the region has witnessed a roller- coaster ride with four rallies and four pullbacks. Looking over the past 26 years of history, the ytd returns for MXAPJ are well below historical averages (at 36th percentile in absolute terms and at 20th percentile relative to DM equities). To capture the excessive volatility, we compare AEJ with DM equities and currencies on a risk-adjusted return basis (as measured by returns / realized vol) and note that DM equities and Asian FX have had much better risk-adjusted returns than AEJ equities.  Frequent market rotations: country macro in focus. Market leadership continued to rotate frequently in 2013, continuing the pattern in 2012. Korea fell almost 15% during 1H13, underperforming MXAPJ, but bounced back 15% in 3Q posting the best returns in the region. Similarly ASEAN retained its leadership in 1H13 but underperformed in 2H13 on concerns over Fed tapering. Sector leadership saw relatively less intense rotations. Looking at the dispersion of returns (as measured by standard deviation) also shows that country dispersion was higher in 2013.  Currency weakness impacting total equity returns. Most Asian currencies weakened in 2013 impacting the total returns in dollar terms (particularly for South Asian markets). For example, currency depreciation subtracted 13% and 17% from India and Indonesia, respectively, in US dollar total return terms and 5% return from the overall region. We have previously noted that FX changes make up on average 25% of short and longer-term total returns and expect currency to play an important role next year as well.  Better stock picking opportunities. Average stock correlations, which had risen during the May-June sell-off, have reduced meaningfully suggesting more opportunities for bottom-up stock picking.  Several intra-regional themes at play. The excessive volatility coupled with frequent market rotations made navigating the investment environment tougher this year. But several intra-regional trends were still at play, as summarized below: o North Asia outperformed ASEAN. We argued at the beginning of the year that ASEAN would underperform the region in 2013 after 7 years of consistent outperformance. Although ASEAN continued to do well early in the year, it came under intense pressure during the summer. The North Asian markets also rallied strongly post summer and outperformed South Asia (India, ASEAN) by 23% from their July low. o Thematic alpha opportunities. Notwithstanding frequent rotation, several macro themes, as embodied in our “macro slice” framework, priced consistently in 2013. Global Cyclicals consistently outperformed given tailwinds of improving DM growth and weaker Asian currencies. Asset Sensitive Financials and Commodity Cyclicals remained under pressure given headwinds of Fed tapering and slowing China growth.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 27 Exhibit 54: DM equities have had much better risk-adjusted returns than MXAPJ in 2013 Source: Bloomberg, FactSet, MSCI, Goldman Sachs Global Investment Research Exhibit 55: Most Asian currencies have also had better risk-adjusted returns than AEJ equities Source: Bloomberg, FactSet, MSCI, Goldman Sachs Global Investment Research Exhibit 56: Stock correlations have reduced, suggesting “alpha” opportunities Exhibit 57: Correlation of market returns is still quite negative, indicating frequent rotation Source: FactSet, MSCI, Goldman Sachs Global Investment Research Source: FactSet, MSCI, Goldman Sachs Global Investment Research Price returns Realized vol 2013 Ytd %tile vs. Vol-adj returns %tile vs. returns 26-yr history (Returns / vol) 26-yr history S&P 500 ($) SPX 26.1% 76% 10.0 2.61 96% Topix (¥) TPX 44.4% 96% 23.3 1.91 84% Stoxx Europe 600 (£) SXXP 15.5% 60% 11.5 1.35 64% MSCI Asia-Pac ex-Japan ($) MXAPJ 2.5% 36% 12.6 0.20 36% MSCI Emerging Market ($) MXEF -3.0% 40% 13.1 -0.23 40% MXAPJ vs. MSCI Dev. World ($) MXAPJ / MXWO -15.6% 20% 11.0 -1.42 4% Risk-adjusted returns Equities Ticker 2013 Ytd rlzd vol (%) 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 IDR Australia INR JPY AUD PHP Malaysia MYR TWD THB SGD Philippines Taiwan Hong Kong India Singapore China EUR Thailand KRW MXAPJ HKD Korea Indonesia Equities FX 3.6 Absolute Risk-adjusted returns (Returns / realized vol, YTD) 20% 30% 40% 50% 60% 70% 80% Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 Avg Stock Correlation (3-mo correlation with MXAPJ) "Macro" Trading "Micro" Trading -0.50 -0.25 0.00 0.25 0.50 May-96 Mar-97 Jan-98 Nov-98 Sep-99 Jul-00 May-01 Mar-02 Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13 Correlation This month's return vs. last month's return (across Asian markets, 12-mo avg) Relative to the past 17 years, 2012 and 2013 are years of extreme rotation
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 28 Exhibit 58: Market rotation has been more intense than sector rotation Source: FactSet, MSCI, Goldman Sachs Global Investment Research Exhibit 59: Markets have varied more than sectors, indicating country macro was more in focus Exhibit 60: Currency weakness has had a significant impact on MXAPJ market returns in USD terms Source: FactSet, MSCI, Goldman Sachs Global Investment Research Source: FactSet, MSCI, Goldman Sachs Global Investment Research Exhibit 61: North Asian markets have outperformed South Asia Exhibit 62: Global Cyclicals have outperformed Asset sensitive financials Source: FactSet, MSCI Source: Bloomberg, Goldman Sachs Global Investment Research Quarterly Market Rotation (US$ Returns) 1Q13 2Q13 3Q13 4Qtd Australia 8% Taiwan 2% Korea 15% India 7% ASEAN 6% ASEAN -5% China 11% China 6% HK 3% HK -6% Australia 10% Korea 4% Taiwan 0% India -6% HK 8% Australia 4% India -3% China -9% Taiwan 1% ASEAN 3% Korea -4% Korea -10% India -6% HK 3% China -5% Australia -15% ASEAN -6% Taiwan 1% Outperform In-Line Underperform Quarterly Sector Rotation (US$ returns) 1Q13 2Q13 3Q13 4Qtd Healthcare 7% Telcos. 1% Materials 13% Cons. Disc. 6% Utilities 6% Info. Tech. -4% Cons. Disc. 10% Info. Tech. 5% Financials 6% Cons. Disc. -4% Industrials 9% Healthcare 5% Cons. Stap. 4% Healthcare -6% Info. Tech. 7% Materials 5% Info. Tech. 1% Cons. Stap. -7% Energy 7% Financials 5% Cons. Disc. 0% Utilities -8% Financials 5% Energy 4% Industrials -1% Industrials -9% Healthcare 3% Cons. Stap. 3% Telcos. -2% Financials -10% Cons. Stap. 2% Industrials 2% Energy -4% Energy -14% Telcos. 1% Utilities 1% Materials -9% Materials -15% Utilities 1% Telcos. -1% Outperform In-Line Underperform (6.0) (4.0) (2.0) 0.0 2.0 4.0 6.0 8.0 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 in Local currency in USD Higher COUNTRY dispersion Higher SECTOR dispersion Country LESS Sector Dispersion (Rolling 3-mo return basis) % YTD returns (Local) YTD returns (US$) Australia 17% Hong Kong 8% Philippines 11% Australia 5% Malaysia 8% Philippines 4% Hong Kong 8% Korea 3% MXAPJ 7% Malaysia 3% India 5% Taiwan 3% Taiwan 4% China 3% Singapore 3% MXAPJ 2% China 3% Singapore 1% Korea 2% Thailand -4% Thailand -1% India -8% Indonesia -2% Indonesia -19% 85 90 95 100 105 110 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 MXAPJ (local, +7% ytd) MXAPJ (US$, +2% ytd) 85 90 95 100 105 110 115 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13 Sep‐13 Oct‐13 Nov‐13 North Asia vs.South Asia (Relative performance, indexed) North Asia = China, Korea and Taiwan ; South Asia = India and ASEAN +23% -9% 90 92 94 96 98 100 102 104 106 108 110 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Global Cyclicals vs. Asset Sensitive Financials (Relative performance, indexed) GSSZMSGC / GSSZMSFA
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 29 Macro: Return expectations, views, and path Bottom-line: Roughly 10% fundamental-driven returns, event- dependent path and trading strategies  Our 2014 macro forecasts for Asia: Growth to improve moderately (6.1% to 6.4%), inflation to stay in check (3.4% to 3.9%), policy to tighten marginally (+40bps on average across AeJ), and Asian FX to weaken vs. the USD (-3% weighted by GDP). The key growth delta is the macro recovery in DM, and its reinforcing impact on domestic demand in Asia.  Top-down returns expectation: Close to 10% fundamental upside for MXAPJ (slightly different from our official forecast); likely range between 470 and 580, +/- 10% from our end-14 MXAPJ target of 525.  An eventful policy and political year: QE tapering in the US (March 2014), growth rebalancing and reform in China, potential further easing in Japan (April 2014), and important elections in Europe and South Asia in mid-2014.  An event-dependent path and intra-year allocation, specifically: 1. Start the year with a positive tilt to China on a favorable yoy growth trend and liquidity combo and potential carry-through of positive reform momentum from 4Q13, and stay conservative on ASEAN due mainly to the looming tapering concerns; 2. Look to accumulate Korea, especially on weakness, around the BoJ meeting in April to trade a better external demand picture in 2H14 and 2015; 3. Watch for buying opportunities for Indonesia, and possibly India around summer when political visibility emerges and cyclical adjustments mature there; 4. Turn aggressive on broad market beta in 2H14, notably our three earnings- related ideas, for a potential acceleration in earnings growth in 2015. Baseline views for 2014: Growth to improve moderately, inflation to stay in check, and policy to tighten marginally  Our economists expect the overall growth picture for AEJ to improve next year, from 6.1% in 2013 to 6.4%, in line with current consensus;  The driver of growth would be a meaningful recovery in external demand, and the resulting positive spillover to domestic private consumption growth. The external demand recovery will be led by the US (2.9% in 2014), which may operate close to trend growth, and the Euro area, which may return to expansion (+1.1%) after staying in recession for two consecutive years (-0.6% for 2012 and -0.4% for 2013);  Inflation is likely to edge higher to 3.9% for 2014, from 3.4% in 2013 as output gaps close;  Liquidity normalization may continue given our expected QE tapering in the US, and forecasted policy rate hikes across Asian economies;  Except for SGD and PHP, our economists see Asian FX generally trading weaker against the USD as the US begins to normalize its policy in 2014. Details of our economists’ forecast on growth, inflation, rates, and FX are shown in Appendix 1.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 30 Exhibit 63: The growth and inflation configuration for AEJ is likely to be similar to 2013 Exhibit 64: Our economists expect a moderate pickup in growth, in line with consensus expectation Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 65: Growth contribution will likely come from net exports and the ripple effects on local consumption Exhibit 66: Liquidity conditions may normalize in Asia, partly driven by QE tapering in the US Note: The forecasted paths are calculated based on our interest rate forecasts Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Translating our macro expectations into equity returns  Approach 1: Top-down regression model points to 8% upside for the region.  While we fully acknowledge the drawbacks of basing our views on regression models, it helps distill the macro-to-market transmission mechanisms and locate a reasonable range of where fair value may lie relative to macro fundamentals, in our view.  Specifically, we employ two models—level and yoy return for MXAPJ—to estimate fundamental upside for the region. Our models, which incorporate GDP growth, inflation, financial conditions (US and Asia), and nominal earnings in Asia, show 8% potential upside for the MXAPJ index in 2014 (USD), based on our end-14 forecasts on these variables. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 AnnualrealGDP(yoy) Annual CPI (yoy) Year GS Consensus GS Consensus Dec-03 6.4% 7.3% 6.5% 90 bp 10 bp Dec-04 8.2% 6.8% 6.8% -140 bp -140 bp Dec-05 7.7% 7.6% 7.1% -10 bp -60 bp Dec-06 8.7% 8.2% 7.6% -50 bp -110 bp Dec-07 9.5% 8.5% 8.8% -100 bp -70 bp Dec-08 7.0% 5.5% 6.3% -150 bp -70 bp Dec-09 5.7% 8.7% 7.6% 300 bp 190 bp Dec-10 9.1% 8.4% 7.8% -70 bp -130 bp Dec-11 7.4% 7.1% 7.2% -30 bp -20 bp Dec-12 6.2% 6.9% 6.6% 70 bp 40 bp Dec-13 6.1% 6.4% 6.4% 30 bp 30 bp Change in GDP growth expectationsGS Current year expected GDP (yoy) Next year GDP growth (yoy) Asia ex-Japan 2.5 2.6 2.8 2.9 2.6 2.7 1.0 1.7 0.8 0.9 1.0 1.2 0.6 0.4 0.4 0.4 2.6 2.5 3.9 3.4 1.4 1.4 0.4 1.0 0.3 0.4 0.0 0.2 0.2 0.7 1.0 0.7 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E AeJ China South Asia North Asia Real GDP (yoy) Net Exports Total Fixed Investment Public consumption Private Consumption 99 (1% yoy) 102 (0.7% yoy) 96 98 100 102 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May- 12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 FCI Ex-Equity (Yr 1999 = 100) US FCI AeJ FCI Financial tightening Financial loosening
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 31  Approach 2: Earnings growth/valuation sensitivity suggests the fair value of MXAPJ may range from 470 to 580.  We complement our top-down return forecasts with bottom-up earnings and valuation analysis.  A combination of our 14/15 EPS growth forecast of 10%/14% and a target forward P/E multiple of 12.0X in Dec 2014 suggests MXAPJ should trade at 525 by end-14, 10% upside from current levels.  To account for forecasting errors (EPS growth) and potential valuation over-/under- shoots (+/- 0.5 standard deviation), we believe the reasonable fair-value range for MXAPJ should be bounded between 470 and 580, about 10% downside/upside from our base-case return. This is admittedly a wide range but not an implausible one given the volatility that we have seen so far this year. Exhibit 67: Our top-down model for MXAPJ suggests around 8% for the regional market Source: FactSet, MSCI, Bloomberg Exhibit 68: A combination of our EPS growth forecast and target P/E multiple suggests a reasonable range of 470 to 580 Source: FactSet, MSCI, Bloomberg 514 0 100 200 300 400 500 600 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 Dec-11 Dec-12 Dec-13 Dec-14 MXAPJ Index Level MXAPJ Fitted line Dependent Variable = MXAPJ price level Format Variables Coefficients t-Stat Assumption Level Intercept -59 -4.8 - yoy Regional GDP 1866 12.5 6.4% yoy Regional CPI 837 4.2 3.9% yoy Regional FCI -3293 -8.1 0.7% level nominal tEPS 11 29.5 10.0% R^2 89% 2014 expected annual return 8% Format Variables Coefficients t-Stat Assumptions Level Intercept -0.6 -12.9 - yoy Regional GDP 10.2 16.5 6.4% yoy Regional CPI 0.9 1.2 3.9% yoypp UST10Y 11.7 7.6 0.5% yoy Regional FCI -8.6 -5.9 0.7% R^2 75% 2014 expected annual return 7% 7% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 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 Dec-11 Dec-12 Dec-13 Dec-14 MXAPJ (USD, yoy) MXAPJ Fitted line Dependent Variable = MXAPJ yoy return Avg. 2014 expected annual return = 8% Estimate - 5% Estimate + 5% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 10.8 417 427 438 449 459 470 481 491 502 513 523 11.0 426 437 448 459 470 481 492 503 514 525 536 Target - 0.5SD 11.3 436 447 458 470 481 492 503 514 525 537 548 11.5 446 457 469 480 491 503 514 526 537 549 560 11.8 455 467 479 490 502 514 525 537 549 560 572 12.0 465 477 489 501 513 525 537 549 560 572 584 12.3 475 487 499 511 523 536 548 560 572 584 596 12.5 484 497 509 522 534 547 559 571 584 596 609 Target + 0.5SD 12.8 494 507 519 532 545 557 570 583 596 608 621 13.0 504 517 530 543 556 568 581 594 607 620 633 13.3 514 527 540 553 566 579 593 606 619 632 645 2014 EPS Growth (%) TargetForwardPEMultiple(X) GS 2014E EPS Growth 2014 year-end target Fwd PE multiple
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 32 Framing views and path around macro and political events We anticipate an eventful year in terms of macro, political, and policy developments globally: QE tapering in the world’s largest economy, growth rebalancing and reform in the 2nd largest (China), a potential increase of QE in the 3rd largest (Japan), and important elections in select parts of Europe and Asia where the results may have significant implications to the rest of their regions, and even to the global markets. In this vein, while our macro forecasts, which drive our equity return forecast for Asia, reflect our best estimate of how fundamentals may evolve over the course of 2014, these event uncertainties imply the variance around our base case would likely be high. Additionally, the rapid advancement and adoption of technology, globalization, and high equity valuations (average) will likely further complicate the reaction functions in the equity market than would normally be implied by simple historical analysis. Below, we overlay our fundamental return expectations with our view on the aforementioned macro and political events, aiming to form a guide as to how and when the market may trade these events, and calibrate our intra-year market allocations and strategies accordingly. Exhibit 69: Our hypothetical path of return: A slow start, followed by a strong finish Source: Goldman Sachs Global Investment Research. 1) QE tapering in March 2014: A less dramatic response than in summer 2013  Our expectations: The Fed to begin tapering in March 2014 (from US$85bn/month to US$75bn), and exit QE by the end of 2014. However, its strong commitment to forward guidance should keep financial conditions at very accommodative levels, especially at the front-end of the yield curve. Our economists expect the 10Y UST to rise to 3.25% by end-14.  Non-linear and specific impact to Asian equities: Equities that are favorably exposed to improving global demand but less affected by rising rates (interest cost, valuation, FX, and property), and vice versa. By markets and sectors, they include Korea, autos, and select financials on the long side, and Australia, Philippines, HK, utilities, telecoms, and property on the short side (Exhibit 70). 470 480 490 500 510 520 530 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 MXAPJ Index Mar 2014 1)US QE Tapering 2)China policy momentum carries over 1Q Apr 2014 BOJ Monetary Policy Meeting (Potential stimulus announcement) 2H2014 2015E EPS growth accelerates 2014E MXAPJ return +10% May-July 2014 Indonesia, India, UK, Spain, Portugal, Greece Election 1Q14 2Q14 3Q14
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 33  How will the market react when the Fed tapers in March? We believe the reaction will be less dramatic than in summer 2013 when MXAPJ plunged 16% from peak to trough, given: a) the meaningful macro and asset market adjustments that have been made in several CA deficit economies; b) US rates are less undervalued from a term-premium standpoint and relative to our Sudoku model, and; c) market participants are arguably better prepared, mentally and in terms of positioning. That said, we still believe the expectation of QE tapering will keep Asia, notably South Asia, under pressure until this overhang is removed. Exhibit 70: QE tapering framework: We think the impact on Asian equities would be non-linear and specific Source: Goldman Sachs Global Investment Research Exhibit 71: We expect current accounts in South Asia to improve in 2014 Exhibit 72: US rates are currently more in line with fundamentals Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 73: Asian financial assets appear less vulnerable to the QE/liquidity shocks than they were in May Source: Goldman Sachs Global Investment Research Improving growth and rising interest rate Higher Interest rate AU/TH; Utilities/ Transport. Utilities/ Telecoms Philippines Multinational banks and regional insurers Property Foreign Exchange Growth recovery (Better demand outlook) Korea, Taiwan Autos/ Industrials Cost of funding Yield compression Valuation compression Yield curve shift/ steepening Exporters Cyclicals Potentially stronger USD Real asset valuation Hong Kong/ Regional property Asian exporters to the US Companies reporting in USD/ CA deficit Potential Beneficiaries Potential Losers 16.5 1.0 1.5 1.7 3.0 8.3 -5.1 -3.1 -1.4 0.8 2.0 -4.4 -4.0 -3.9 -2.9-2.2 -4.9 -3.1 -3.8 -2.9 3.84 2.49 2.61 2.75 3.25 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 -6 -3 0 3 6 9 12 15 18 2009 2013-2Q 2013E-3Q 2013E-4Q 2014E Current Account Deficit (As % of GDP) Malaysia Thailand Indonesia India UST10Y (RHS) UST10Y Yield 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2009 2010 2011 2012 2013 2014 2015 2016 (%) +/- 1 std dev. US 10-yr yield Sudoku 'Fair' Value Current Market Pricing Old GS forecast 5% -1%-1% -4%-5%-5% -7% -13% -16%-17% -28% -4% 10% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% Korea China HongKong Taiwan Australia Malaysia Singapore India Thailand Philippines Indonesia MXAPJ SPX Chg in equities since May peak (USD, %) 3% 1% 0% 0% -2% -6% -6% -6% -8% -13% -15% -4% -16% -12% -8% -4% 0% 4% KRW CNY HKD TWD SGD PHP THB MYR AUD INR IDR DXY Chg in FX since May peak (%) 239 121 75 71 50 46 43 41 39 34 -56 58 -100 -50 0 50 100 150 200 250 300 Indonesia India Australia China Thailand Korea HongKong Singapore Taiwan Malaysia Philippines US Chg in bond yield Since May Peak (bps)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 34 2) China: 1H is likely a better trading environment A reasonably favorable growth + liquidity combo in 1H14; reform momentum may continue. Besides improving reform momentum, which is the key argument for our upgrade on China, we suggest starting the year with a positive tilt to China because:  Growth: Our economists project yoy GDP growth momentum to be strong in 1H14, mainly on a favorable base effect, but the sequential trend could be weak due to inventory destocking. Overall, this seems to provide a conducive environment for equity returns in 1H as we note that the market tends to trade yoy growth rather than sequential growth (Exhibit 75).  Liquidity: Liquidity conditions tend to be more accommodative early in the year. As last June’s interbank rate spike and ensuing market sell-off demonstrated, China’s asset markets are sensitive to liquidity conditions, especially given the increase in corporate leverage in recent years. Exhibit 74: China’s yoy and sequential growth momentum is likely to diverge in 1H14 Exhibit 75: Equity markets tend to trade yoy growth more than sequential growth momentum Period of analysis: Since 2007, monthly frequency. The calculation is done with a 1-month lag to take into account the reporting lag of China econ data. Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 76: Liquidity conditions have tended to be more favorable in the early part of the year in China Exhibit 77: Reform may bode well for the economy, but the fundamental impact on the equity market is likely to be mixed Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8 8.1 8.2 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 2012-1Q 2012-2Q 2012-3Q 2012-4Q 2013-1Q 2013-2Q 2013-3Q 2013E-4Q 2014E-1Q 2014E-2Q 2014E-3Q 2014E-4Q China GDP (qoq. Ann.) GDP (qoq. Ann.) GDP (yoy, RHS) China GDP (%) -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 APJ China HK India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Australia yoy +, seq + yoy +, seq - yoy -, seq + yoy -, seq - 308.8 -129.0 403.1 98.6 -2.5 117.4 -269.7 -60.5 12.9 -307.1 -162.3 -36.5 -400 -300 -200 -100 0 100 200 300 400 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average difference in NSA.TSF and SA.TSF since 2002 (RMBbn) Better liquidity conditions in 1Q 17% 17% 13% 9% 16% 16% 25% 40% 28% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Market cap weighted 2013E earnings weighted Impact of Policy Reforms on MXCN Sectors (%) Others Negative (Banks) Negative Neutral Positive
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 35 3) Abenomics: Limited impact on AEJ’s fundamentals, more manageable headwinds to Korea this time around  Abe’s first arrow set to be loosed again. Our economists expect the BoJ to step up its monetary easing effort to offset the negative impacts of the consumption tax hike in April and to boost inflation which is far short of its 2% target. They believe the monetary policy easing is likely to be the most important driver for USD/JPY (JPY to weaken), and continue to expect USDJPY to rise to 107 in 12 months.  Muted fundamental impact on AEJ so far. At the macro level, the relationships between Japan’s FCI and AEJ’s have been weak, suggesting limited financial/liquidity spillover to the region from Abenomics so far (Exhibit 79). In terms of real activity, Korean exports (nominal and relative to Japan’s exports), which have been widely regarded as the major loser when JPY depreciates, have posted record numbers in the latest October print, supporting our strong and long- held view that Korean exports’ FX sensitivity is much lower than investors have generally perceived.  Potential headwinds to Korea in March/April, but more manageable than in 1H13. However, investors’ perception/concern remains entrenched: Korea underperformed MXAPJ by 8pp in 1H13 when USDJPY and TPX rallied 16% and 28%. Looking ahead to the April BoJ meeting, we believe Korea will be less impacted, mainly because: a) the extent to which the JPY may depreciate should be much smaller than when Abenomics was first announced; and, b) investors should be less concerned about Korea’s deteriorating FX competitiveness by then given the resilient export performance since September 2012. We would take any JPY-created market weakness as a buying opportunity to position for global growth acceleration in the next two years. Exhibit 78: Our economists expect the BoJ to announce further easing measures in April Source: FactSet, Goldman Sachs Global Investment Research. Jan 1 NISA initiation Mid Jan. Ordinary Diet Session begins (FY2014 budget, FY2013 supplementary budget bills deliberation) Late Jan. - Feb. Earnings results for 3Q13/14 Jan. 21-22 Jan. 21-22 BOJ Monetary Policy Meeting (Interim assessment on the BOJ outlook report) Feb. 22-23 G20 Finance minister & central bank governors meeting (Sydney) Feb-Mar Annual spring wage negotiation End Mar FY2014 budget established Apr 1 Consumption tax rate hike from 5% to 8% Apr 30 BOJ Monetary Policy Meeting (Outlook Report) - Our Econ team expected that BOJ will remain under pressure to provide additional easing to mitigate the impact of the tax hike. If economic conditions deteriorate versus BOJ’s current scenario, our econ team believes BOJ will make additional easing moves by purchasing ETFs and other risking assets. May 20-21 BOJ Monetary Policy Meeting Jun 4-5 G8 Summit Meeting (Russia) Jun 12-13 BOJ Monetary Policy Meeting During Jun Public works from the October 2013 economic package starts to kick in Mid Nov 2014 Q3 GDP (Important for final devision of 2nd consumption tax rate hike, from Oct 2015) Key Events in 2014
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 36 Exhibit 79: Japan’s financial conditions do not seem to have significant spillover impact on AEJ Exhibit 80: Korea’s exports do not seem severely impacted by a weakening JPY Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research Exhibit 81: Korea has traded more negatively than what history would suggest when JPY depreciates Exhibit 82: We expect JPY to weaken further, but the magnitude should be moderate Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 4) Elections in South Asia and Europe While we do not take a view on the outcome of these elections, we believe they may be market-moving events with fundamental implications in some cases, and investors should monitor developments for better risk management and more effective tactical trading. In this vein, we have compiled a detailed timetable of policies and events that may have significant implications for Asia in the Appendix. We believe these events include the parliamentary and presidential elections in India and Indonesia, and a number of parliamentary elections in the peripheral European economies which may have spillover effects to specific areas (e.g. Europe-exposed stocks) and even to the global markets. 89 91 93 95 97 99 101 103 105 107 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Financial Condition Index (Yr 2005 = 100) Japan Korea Regional FCI Financial tightening Financial loosening 148 11.3 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.590 100 110 120 130 140 150 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Rebased Index Relative export Index (KR vs JP) KRW/JPY (RHS) JPY/KRW (Reverse) 18% 17% 17% 16% 15% 15% 14% 14% 13% 9% 4% 17% 21% 12% 17% -15% 7% -7% 23% -16% 4% 6% 9% 1% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% China India HongKong Korea Malaysia Singapore Philippines Australia Indonesia Taiwan Thailand MXAPJ Market Return Correlation with USDJPY 10 Year Since Sep 2012 65 70 75 80 85 90 95 100 105 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 Rebased Currency Index JPYUSD JPYKRW
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 37 Earnings: Back to trend growth in 2015 after 4 years of weakness We see limited room for further multiple expansion given current valuation levels. Therefore, equity returns next year will have to be primarily driven by earnings. We expect earnings growth to accelerate back to trend in 2015 after 4 years of sub-trend growth. Our top-down regional earnings growth forecasts are 10% and 14% for 2014 and 2015. Demand-side models have overestimated earnings recently because the shortfall has come from margins rather than revenues. Weak capacity utilization and excess capacity have depressed profitability. Looking forward, capex discipline and moderating input cost pressures should result in non-financial margins improving 50bp to 7% in 2015 after a 20bp uptick in 2014. We outline our logic below. Revenue growth should stay steady; the wild card is margins Revenue growth has generally followed the path of nominal GDP growth. In our view, the region will be able to deliver roughly 7% revenue growth in the next two years given our assumption of gradually improving economic growth. The wild card is margins. During 2011 and 2012, a sharp margin decline offset positive revenue growth, leading to flat earnings for two consecutive years. Margins have now troughed, but the magnitude of improvement has been minimal, with merely 20bp potential expansion this year. What has driven the weakness in margins? We believe there are two major reasons. Costs have outgrown revenues Operating costs have outgrown revenues, leading to a sharp drop in margins.  Commodity prices rose 50% from mid-2010 to mid-2011. Brent price, for example, went from a low of US$70/barrel to a high of US$125. We expect a gradual decline in commodity prices over the next few years given supply debottlenecking.  Wages have grown rapidly. In China, CAGR has been 10% in real terms over the past 5 years. Although it is likely that labor wages will continue to go up, we believe the pressure is at least not intensifying. With this outlook in mind, Asian firms are likely to see some relief in cost pressure in our view. However, we do not see a significant uplift to profit margins until 2015 as we believe the degree of operating leverage will remain dampened next year due to overcapacity. Overinvestment in capex has led to low capacity utilization and hurt margins Overcapacity in Asia has not been driven by weaker demand alone. We believe aggressive supply addition (i.e. capex) has played an important role. To illustrate why it is important to consider supply dynamics, we update our top-down earnings model, which takes into account three core macro variables – domestic demand, exports, and inflation. This approach, which is largely demand based, significantly over-estimated actual earnings growth in 2011-2012 and 2005-2007, even with perfect foresight forecasts on the macro variables. During these two periods, we saw a significant drop in capacity utilization, and net margins pulled back offsetting revenue growth. We make the following points on capex and capacity utilization.  Capex intensity in Asia over the past few years is back on the rise, in both capex/sales and capex/depreciation terms. Capex growth has slowed, but not enough relative to the magnitude of demand slowdown.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 38  This has led to weak capacity utilization, which forms a sharp contrast with the US. Revenue growth in both regions dropped, but Asian margins fell very sharply while those in the US held up, similar to its utilization rate.  Heavy capex of the past years is also draining cash away. As of 2012, capex alone took up 100% of operating cash flow generated by Asian firms, who had to draw on their cash reserves and raise debt to finance other operations. As a result, leverage increased noticeably.  In our view, Asia is unlikely to be able to afford more capex with internal funding. In fact, we observe that capex intensity has started to decline.  We expect to see better supply discipline, and stronger margin expansion, as we move into 2015. Margins have historically troughed roughly 1-2 years after capex peaked. In our view, a sharp drop in capex intensity in 2013 could lead to a meaningful margin pickup in 2015. From a bottom-up perspective, we also study the potential changes in supply growth by sector; the result indicates that although some sectors may see a reduction in excess capacity next year, most are smaller in index weights (China steel/cement, China solar, regional bulkers, etc.). The broad- based improvement should be more visible as we move into 2015. Below-trend EPS growth in 2014; stronger margin expansion to fuel growth acceleration in 2015 Based on the above, we assume a modest 20bp margin expansion in 2014. Together with high-single digit revenue growth assumption, we believe profit growth will remain moderate, and we maintain our 10% MXAPJ EPS growth forecast. As we move into 2015, margins will likely improve by a larger magnitude of 50bp, and this should fuel EPS growth acceleration back to trend at 14% after 4 years of weakness. This compares to 12% and 10% EPS growth consensus expectations. By market, our forecasts are meaningfully different vs consensus. For 2014 estimates, we are most below consensus for Korea and Thailand. Despite our expectation of negative revisions, we still expect Korea’s earnings growth will still be the highest in Asia. We are slightly above consensus for the Philippines, and roughly in line with consensus for China, Taiwan, Singapore and Malaysia. Risks to our forecasts As much as we discuss the supply-side dynamics, the demand side of the earnings equation is also important, and it heavily depends on the macro outlook. We expect the banks and insurance sectors to contribute one-fifth of the 10% earnings growth we forecast for the region next year. Earnings in these sectors generally have a strong relationship with the macro environment. Our high single digit to mid-teens % growth forecasts for most sectors are driven by the view of steadily accelerating Asia GDP growth and an eventual rise in interest rates. Of note, the growth improvement we expect is fairly dependent on the improvement of external demand (as we highlighted in the macro section). For this reason, the pace of US and Europe macro recovery will be a critical risk factor to our earnings growth forecasts.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 39 Exhibit 83: We expect Asian earnings to return to trend growth in 2015, after 4 years of weakness Earnings growth time series Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. Exhibit 84: We maintain our 10% EPS growth forecast for 2014; our expectation for 2015 is 14%, 4pp above current consensus GS top-down and consensus earnings growth forecasts by market Source: FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. Exhibit 85: We expect 2014 earnings growth to be driven by a broad range of sectors 2014 earnings growth contribution by sector, based on our estimates Source: FactSet, I/B/E/S, MSCI. -10% -5% 0% 5% 10% 15% 20% 25% 30% 1994 1997 2000 2003 2006 2009 2012 2015E MXAPJ EPS growth (local currency) +59% +49%+184% -17% -36%-52% -47% Average: 14% GS top-down Consensus Markets 2014E 2015E 2014 2015 Australia 8% 11% 11% 8% China 10% 11% 10% 10% Hong Kong 6% 9% 9% 11% India 12% 18% 14% 15% Indonesia 12% 17% 16% 15% Korea 15% 15% 20% 11% Malaysia 8% 10% 9% 9% Philippines 8% 16% 6% 14% Singapore 8% 14% 9% 10% Taiwan 11% 13% 12% 9% Thailand 9% 11% 14% 12% MXAPJ 10% 14% 12% 10% 0% 2% 4% 6% 8% 10% Banks/ins. Cap.goods Materials Retail Autos Others Energy Semi Utilities Property Staples Hardware Internet/ITsvcs Healthcare Otherfin. Telecoms Transport MXAPJ 2014 EPS growth contribution
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 40 Exhibit 86: We assume roughly 7% sales growth in the next 2 years MXAPJ sales growth time series Exhibit 87: Margin improvement in 2014 should remain modest, but we expect strong margin expansion to fuel acceleration of earnings growth in 2015 MXAPJ net margin time series Exhibit 88: Both cost of goods sold and SG&A as % of sales have sharply increased again during 2011-2012, contributing to a drop in net margin Cost structure of MXAPJ companies Exhibit 89: A simple demand-based model has not been able to explain the earnings disappointment over the past few years Actual vs. fitted of our top-down (demand-based) EPS model Exhibit 90: Low capacity utilization has dampened margin recovery over the past few years... Capacity utilization of Asia ex Japan and US Exhibit 91: ... as Asia has over-invested in capacity relative to the moderation in sales growth, in our view Revenue vs. Net PP&E growth in APJ and US Source: FactSet, Haver, I/B/E/S, MSCI, Goldman Sachs Global Investment Research. 6% 8% 10% 12% 14% 16% 18% -5% 0% 5% 10% 15% 20% 25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013P 2014E 2015E MXAPJ sales growth (actual and GS forecasts) Including financials Excluding financials Nominal GDP growth 8.4%8.6%8.8% 9.3% 6.1%6.3%6.5% 7.0% 4% 5% 6% 7% 8% 9% 10% 11% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013P 2014E 2015E MXAPJ net margin (actual and GS forecasts) Including financials Excluding financials 70% 75% 80% 85% 90% 95% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cost breakdown Net margin Taxes & others Interest Other opex SG&A COGS -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 1994 1997 2000 2003 2006 2009 2012 Actual EPS growth Fitted EPS growth from top-down model Significant over-estimation by our top-down model 60 65 70 75 80 85 May-88 May-90 May-92 May-94 May-96 May-98 May-00 May-02 May-04 May-06 May-08 May-10 May-12 Capacity utilization Asia Pacific ex Japan US 0% 2% 4% 6% 8% 10% 12% 14% 16% -5% 0% 5% 10% 15% 20% 25% 30% Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 3-year CAGR for both, APJ Revenue Net PP&E (RHS) 0% 2% 4% 6% 8% 10% 12% 14% 0% 2% 4% 6% 8% 10% 12% 14% Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 3-year CAGR for both, US Revenue Net PP&E (RHS)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 41 Exhibit 92: Capex intensity in Asia has sharply risen Capex/sales and capex/depreciation ratios, global comparison (ex-financials, energy, utilities) Exhibit 93: Capex spending alone is now taking up 100% of the operating cash flow generated by Asian companies Capex as % of operating cash flow, global comparison (ex- financials, energy, utilities) Exhibit 94: Firms are rapidly drawing their cash reserves to finance their other cash usages Cash balance ratio, global comparison (ex-financials, energy, utilities) Source: FactSet, MSCI. Exhibit 95: Capex intensity is starting to reduce as companies cannot afford more capex with their internal cash, but margin has historically troughed roughly 1-2 years after capex peak; a sharp drop in capex intensity in 2013 suggests a meaningful margin pickup in 2015 Capex intensity (reversed) vs. net margin Source: FactSet, MSCI. 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capex/sales APJ US Europe Japan 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capex/depreciation APJ US Europe Japan 20% 40% 60% 80% 100% 120% 140% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Capex as % of OCF US Europe Japan APJ 6% 7% 8% 9% 10% 11% 12% 13% 14% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cash balance as % of total asset US Europe Japan APJ 2% 3% 4% 5% 6% 7% 8% 9% 10% 11%1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Capex/depreciation (X) Net margin (%) 2y Same 1y 2y 1y Same ?Capex/dep (reversed) Net margin
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 42 Exhibit 96: Our study on sector supply suggests that most sectors in Asia will still have supply expansion in 2014; we may see more broad-based improvement in supply discipline in 2015 Note: margin change is with respect to the past 5 years. Net debt/equity ratio is as of 2013. Potential change in capacity is for 2014. Black shading is applied to sharp margin contraction over the past 5 years, high net debt/equity and potential reduction in capacity. Blue shading is applied to sharp margin expansion over the past 5 years, low net debt/equity and potential expansion in capacity. Source: FactSet, industry sources, Goldman Sachs Global Investment Research. Exhibit 97: The top 5 sectors contribute about 80% of earnings in each market Source: FactSet, I/B/E/S, MSCI. Margin change (pp) (%) Hong Kong 1.0% 8.2 n.m. 10% → Korea 0.5% 0.2 7% 37% → China 0.4% (0.9) -13% -11% → Australia 0.3% 9.9 n.m. 35% → Australia 2.2% 1.0 25% 30% → China 0.7% (0.3) -6% 6% Korea 0.6% (3.6) -37% 30% → India 0.5% 3.5 30% 9% India 0.9% (0.1) -1% -44% → China 0.5% (11.6) -30% -44% Korea 0.3% 17.6 n.m. -21% Taiwan 2.5% (0.5) -15% -2% Korea 0.4% (0.5) -11% 16% Korea 8.7% 6.5 n.m. -31% → Taiwan 2.8% 4.8 33% -6% China 2.1% (1.6) -10% -23% Singapore 0.5% (2.7) -12% 30% Australia 0.4% 0.1 0% 98% Taiwan 0.4% (4.6) -22% -1% Hong Kong 0.8% (12.9) -39% 41% China 0.6% 9.3 851% 164% Potential chg in capacity Telecom services 4% Retail / gaming 3% Consumer staples and Health Care 5% Utilities 3% Software and services 2% Computer hardware 3% Semiconductors 12% Net D/E ratio Sector 2014 Erns wgt Top markets 2014 Erns wgt Margin change (pp) (%) China 3.5% (1.8) -21% 37% Australia 1.2% (14.4) -64% 38% India 0.9% (7.8) -55% 16% Thailand 0.6% 2.0 67% 39% Korea 0.5% 1.0 83% 33% Korea 0.8% (0.3) -11% 69% Taiwan 0.5% 3.3 78% 18% China 0.5% (1.7) -18% 192% Australia 0.4% 2.0 60% 72% → Metals & mining 4% Australia 3.5% 5.3 38% 41% Korea 0.8% (5.8) -65% 62% Australia 0.5% 43.5 -183% 84% → India 0.2% (2.8) -41% 140% Taiwan 0.1% (2.1) -35% 79% → China 0.0% (2.0) -177% 182% Korea 1.7% (0.3) -15% 72% → China Sing Australia 0.4% (4.0) -43% 76% Cont. China 0.3% 4.7 219% 76% Bulk. Korea 3.9% 2.4 151% 23% China 0.6% 5.4 111% -15% India 0.4% (1.0) -14% 12% Potential chg in capacity 29% Building materials 1% Steel, aluminium 2% (1.6) -38% Shipbuilding Transportation 1% Autos 5% 5% Oil and gas 7% Upstream Refining Chemicals 2% Singapore 0.7% Net D/E ratio Sector 2014 Erns wgt Top markets 2014 Erns wgt Banks Banks Property Banks Banks Semi Banks Industrials Banks Semi Banks Mining Energy Ins. Energy Autos Autos Utilities Banks Industrials Computer HW Energy Staples Telco Durables Tech Telco Banks Staples Telco Property Banks Chem. Ins. Prop. Utilities Staples Staples Ind. Ind. Property Telco Ins. Building Mat. Property Insurance Industrials Autos Building Mat. Chemicals Telco Utilities Staples Chemicals Telco 0% 20% 40% 60% 80% 100% Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Earnings weight of top 5 sectors (2014E)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 43 Valuations: Not much room for expansion except for China As we have noted, Asia’s headline valuations may look undemanding (at 12.1X forward P/E), but the region doesn’t look particularly attractive as average stock valuations are 31% higher (at 15.9x) and expensive relative to history. Overall, we would argue the current valuations for Asia are at best fair relative to the macro backdrop, except for China where we expect multiples to recover from a low base as confidence in reforms builds. We expect the aggregate region to trade at 12.0X forward P/E at the end of 2014, a slight de- rating from current elevated levels. We summarize our key arguments below:  Headline regional valuations are undemanding relative to its history. MXAPJ is currently trading at 12.1X forward 12m earnings and 1.6x trailing book, which are 0.3 and 1.0 standard deviation below their ten year averages, respectively. Even looking at individual markets, cap-weighted valuations for most markets except Philippines and Malaysia are trading near or below their 10 year averages.  But average stock valuations look expensive. As we have noted previously, the region doesn’t look particularly attractive on equal-weighted (average) valuations. The average stock valuation for MXAPJ is 31% higher at 15.9, which is 0.8 standard deviations on the expensive side of its 10-year history.  While the valuation gap between headline and average does exist in other regions, the effect is more pronounced in Asia. The valuation divergence between market-cap weighted and average valuations is largely due to inexpensive but large sectors in Asia, such as China banks and Korean exporters, which are increasingly weighing down aggregate (i.e. market cap weighted) valuations. Indeed, looking within individual markets we note that China & Korea’s cap weighted valuations are approximately 30% below their equal weighted valuations. While valuation gaps do exist in other regions, we note that the effect is more pronounced in Asia than in other parts of the region (Exhibit 101).  Macro fundamentals suggest valuations are at best fair for headline but expensive on an average basis. Our macro-models based on global and domestic growth, long-term rates and inflation indicate that the region could trade at 11.5x forward earnings on a market-cap weighted basis, which is at best fair compared to current valuations. The average valuations however look expensive relative to the macro backdrop as the average stock model is more sensitive to growth and valuations have expanded despite slowing growth expectations.  Most markets look fair relative to the current liquidity backdrop, but a rise in bond yields could cause valuations to come under pressure. Based on the yield gap (difference between earnings yield and real short rates) analysis, we find that most Asian markets look fairly priced relative to their ranges. However, a rise in bond yields could potentially cause valuations to come under pressure.  Empirical evidence also suggests flat returns at current average valuation entry points. As we have noted (see AsiaPac Valuations: What works, and when, Mar 12, 2012), the starting point of valuations plays a vital role in determining subsequent returns. From the current expensive levels of average stock P/E, the region’s subsequent returns have historically been almost flat.  We see limited room for further re-rating except for China. While the valuation changes hinge upon both domestic and global growth changes, we note that the recent re-rating in Asia was largely because of global factors as evident in recent re-rating in equities globally. We expect MXAPJ to trade at 12.0X forward P/E at the end of 2014, a slight de-rating from current elevated levels. China is the exception, where we expect multiples to recover from a low base as confidence in reform builds.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 44 Exhibit 98: MXAPJ headline valuations look undemanding compared to historical averages... Exhibit 99: ...but average stock valuations look expensive Exhibit 100: The average stock valuations are 30% higher than the cap-weighted headline valuations in the region Exhibit 101: The valuation gaps between headline and average P/E are higher in Asia than in US and EU Exhibit 102: Our model suggests that the current headline valuations are fair, based on our macro expectations... Exhibit 103: Yield gap analysis shows most Asian markets look fairly valued relative to the liquidity backdrop Source: FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research Valuation vs. 10-Year History Current 10-year Z-score P/E P/B P/E P/B Avg. (NTM) (LTM) (NTM) (LTM) Z-Score China 9.3 1.5 -0.9 -1.1 -1.0 Korea 8.8 1.2 -0.5 -1.2 -0.8 Hong Kong 15.0 1.3 -0.4 -0.8 -0.6 India 14.4 2.5 -0.2 -1.1 -0.6 Singapore 14.1 1.5 0.1 -1.0 -0.4 Taiwan 14.1 1.8 0.1 -0.5 -0.2 Indonesia 13.3 3.1 0.5 -0.7 -0.1 Australia 14.5 2.0 0.7 -0.4 0.1 Thailand 11.9 2.2 1.0 0.1 0.5 Malaysia 15.5 2.2 1.1 0.3 0.7 Philippines 18.5 3.1 1.8 1.3 1.5 MXAPJ 12.1 1.6 -0.3 -1.0 -0.7 15.9 10yr z-score:- 0.8 12.1 10yr z-score:- -0.3 8x 10x 12x 14x 16x 18x 20x Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Market Cap-weighted P/E MXAPJ 12-mo forward P/E (X) Equal-weighted P/E China 13.5x 8.8x 53% Korea 13.0x 8.6x 51% Thailand 15.7x 11.8x 33% Australia 18.6x 14.5x 28% Taiwan 17.7x 14.1x 26% India 17.5x 14.0x 25% Singapore 16.4x 13.9x 18% Malaysia 17.7x 15.5x 14% Indonesia 14.5x 13.2x 10% Hong Kong 15.8x 14.7x 7% Philippines 19.0x 18.4x 4% MXAPJ 15.9x 12.1x 31% 12-mo forward P/E (X) Market Equal- weighted Market Cap- weighted Difference 31% 22% 17% 13% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Fwd PE premium between index headline Fwd PE and equal- weighted Fwd PE MXAPJ SPX STOXX TPX 6x 8x 10x 12x 14x 16x 18x Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 MXAPJ Actual 12-mo forward P/E MXAPJ Fitted 12-mo forward P/E R-sq = 72% 11.5X (5) - 5 10 15 20 Australia China HongKong Indonesia India Korea Malaysia Philippines Singapore Taiwan Thailand Yield gap (Earnings yield - real short rates, %) Average Current level +/- 1 Std.dev. High/low more extended valuations relative to the liquidity environment more attractive valuations relative to the liquidity environment
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 45 Exhibit 104: Average stock valuations look expensive relative to the macro backdrop Source: DataStream, FactSet, MSCI, I/B/E/S, Goldman Sachs Global Investment Research Exhibit 105: Asia’s valuations have risen largely due to the re-rating of global equities Exhibit 106: Empirical evidence indicates almost flat returns at current average valuation entry levels Source: DataStream, FactSet, Goldman Sachs Global Investment Research Source: DataStream, FactSet, Goldman Sachs Global Investment Research 6x 8x 10x 12x 14x 16x 18x 20x Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 MXAPJequal-weightedforwardP/E Fitted Actual Downgrades to Asian GDP growth estimates but average stock valuations re-rated on global factors -11% -6% 1% -5% -25% 36% -12% -13% 13% 14% 2% 11% 11% 13% -5% -2% -6% 3% -13% 12.1 12.8 14.3 15.5 10.8 14.5 12.8 10.3 11.9 12.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 -40% -30% -20% -10% 0% 10% 20% 30% 40% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Re-/de-rating due to Asia's specific factors Changes in global equities' valuations MXAPJ forward P/E (X) Fwd PE (X)Re-de-rating (%) Starting Avg. P/E and Forward Return When MXAPJ % of Average Returns Avg. PE is... (X) obs 1-mo 3-mo 6-mo 1-yr Less than 9.5 1 % 5 % (3)% 33 % 81 % 9.5 to 11.0 5 3 % 15 % 25 % 45 % 11.0 to 12.5 16 0 % 3 % 10 % 23 % 12.5 to 14.0 25 0 % (0)% 2 % 8 % 14.0 to 15.5 28 0 % (0)% (3)% (2)% 15.5 to 17.0 14 0 % (0)% (0)% (5)% 17.0 to 18.5 8 2 % 5 % 7 % (1)% 18.5 to 20.0 3 0 % 7 % 7 % (7)% Greater than 20.0 1 (0)% (4)% (8)% (31)%
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 46 Positioning: Potential for continuing shift to North Asia Foreign flows have recovered after a tough summer, with flows primarily favoring North Asia. Allocation data still shows investable gaps, and more aggressive allocations to North Asia could amplify returns, in our view. We continue to expect flows to rotate out of bonds to equities, which could be supportive for overall equities in 2014. We summarize our key points below:  Foreign flows have recovered post summer as risk appetite picked up. After net outflows of US$16bn since their respective May peak (for the Asian markets that report exchange-level net foreign activity), the region has seen inflows of US$23bn since September with net inflows of US$28bn year-to-date. The recovery in foreign flows has coincided with the 10% rebound in MXAPJ from its August lows as regional risk appetite picked up after the tough summer.  Flows have primarily favored North Asia. The North Asian markets have received the lion’s share of recent foreign inflows. Since August lows, Korea and Taiwan have seen cumulative net foreign buying of almost US$20bn (Korea: US$12.5bn, Taiwan: US$7.4bn). The recent foreign buying is partly reflective of the higher sensitivity of these markets to a better external environment with less exposure to the risk of US monetary policy normalization, in our view.  Active funds still have strong underweights in North Asia; we see potential for more inflows. While many investors argue that recent flows and performance indicate that long North Asia is already a “consensus trade”, we note that allocation data still shows investable gaps in North Asia. Based on allocation data from EPFR, both GEM and Asia-focussed mutual funds remain underweight North Asia by a significant margin. For example, mutual funds with Asia mandates still have strong underweights in Korea (-769bp) and Taiwan (-649bp) while holding strong overweights in India (+495bp) and ASEAN (+948bp). Given allocation gaps and our view that North Asian markets offer the clearest way to gain exposure to improving global growth, we see potential for more inflows to North Asia.  Active managers have performed in line with the region despite a strong start; more aggressive allocations to North Asia could amplify returns. Asia- Pacific focused mutual funds had a strong start to the year, outperforming MXAPJ by 5pp in the first two quarters of the year. But the post summer rebound has seen active funds underperforming MXAPJ with the year-to-date tracking in line vs. region. The underperformance since 3Q may partly be attributed to the fact that North Asian markets outperformed South Asian markets and the relative allocations to North Asian markets are still low. More aggressive allocations to North Asia in 2014 could help amplify performance, in our view.  ‘Meta level’ flow / positioning dynamics remain constructive for equities. As per ICI flow data, bond funds are on pace for their first year of net outflows since 2004. Excluding the ETFs, active bond funds have already seen US$30bn net outflows post the Fed’s taper debate in June. We continue to anticipate investor flows to rotate from bond to equities in 2014. Also comparing investor positions in equity and debt markets, we continue to believe that investor positions are less extended in equity markets (relative to debt markets). Foreign positioning risk still looks relatively higher in local currency debt markets given a significant rise in foreign ownership levels post the GFC and the relatively lower liquidity of bond markets.
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 47 Exhibit 107: Net foreign buying in EM Asia Exhibit 108: Foreign flows have been favoring North Asia Source: Bloomberg Source: Bloomberg Exhibit 109: After net outflows of US$ 16bn during summer, the region has seen net inflows of US$ 24bn Source: Bloomberg Exhibit 110: Active funds are still underweight North Asian markets and overweight South Asia Exhibit 111: AEJ-focused MFs have performed in line with MXAPJ ytd Top 50 AEJ benchmarked funds covering US$10 bn of assets Source: EPFR, FactSet, MSCI Source: Bloomberg, FactSet 18 20 1 36 30 33 18 -2 -70 61 65 -14 51 28 (80.00) (60.00) (40.00) (20.00) - 20.00 40.00 60.00 80.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD Annual foreign buy of EM Asia cash equities USD bn -$4 $1 $6 $11 $16 $21 $26 $31 $36 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 North Asia South Asia Cumulative FII net buying ($ bn) FII flows: How much "came out" during May-June sell-off and subsequently recovered? Inflows to May 22 Outflows till July 8 Since 2013 Prior % of last % of 2013 % of 2013 YTD beginning 3 Months $ mn 3-mo flows flows till May $ mn outflows net flows India 14,723 6,465 -1,017 16% 7% 5,039 495% 16,677 Korea -4,338 -4,140 -4,237 n/a n/a 12,471 294% 6,453 Taiwan 5,078 3,177 -5,686 179% 112% 7,438 131% 8,341 Thailand -146 -24 -2,550 n/a n/a 127 5% -3,656 Indonesia 2,665 1,075 -2,921 272% 110% -277 n/a -1,058 Philippines 1,601 762 -74 10% 5% -354 n/a 935 Emerging Asia 19,584 7,314 -16,486 225% 84% 24,444 148% 27,692 Inflows since Aug 28 -1600 -1200 -800 -400 0 400 800 1200 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 ASEAN India Hong Kong China North Asia (Korea, Taiwan) Asia-fund OW/UW (bps) 96 98 100 102 104 106 108 110 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Asia ex-Japan Avg. Mutual Fund Performance Avg. MF return vs. MXAPJ (Indexed) YTD: in-line with MXAPJ; Strong start to the year but underperformed since 3Q
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 48 Exhibit 112: We continue to anticipate flows to shift from bonds to equities Exhibit 113: We see less extended positions in most equity markets (except India) Source: ICI, AMG, Lipper US Fund Flows Source: Bloomberg Exhibit 114: Foreign ownership of Asian equities has steadily risen... Exhibit 115: ...while foreign ownership of bonds has risen significantly post GFC Source: Bloomberg,, local stock exchanges Source: CEIC, AsianBondsOnline Exhibit 116: Positioning risk still looks higher in bonds, given a significant rise in ownership and relatively lower liquidity Source: Bloomberg, CEIC, Stock exchanges, AsiaBondsOnline 0 50 100 150 200 250 300 350 -60 -40 -20 0 20 40 60 80 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Equity Funds Bond Funds (RHS) US$ bn US$ bn Cumulative net buying (ex ETF) since 2011 -$2 $0 $2 $4 $6 $8 $10 $12 -$5 $5 $15 $25 $35 $45 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 India ASEAN (rhs) Cumulative FII net buying ($ bn) 10 15 20 25 30 35 40 45 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Equity Foreign ownership (%) Korea Taiwan India (FII, Quarterly) Thailand Philippines 31.0 17.9 31.2 9.8 77.1 0 10 20 30 40 50 60 70 80 90 0 5 10 15 20 25 30 35 40 Mar-96 Jan-97 Nov-97 Sep-98 Jul-99 May-00 Mar-01 Jan-02 Nov-02 Sep-03 Jul-04 May-05 Mar-06 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12 Sep-13 MY TH ID KR AU (rhs) Foreign ownership of Asian local govt. bonds Cumulative FII flows Avg daily value traded # Days trading in case of a Current foreign Foreign ownership Avg daily value traded # Days trading in case of a since 2010 (US$ mn) full unwind ownership in 2010 (US$ mn) full unwind India 70,024 2,495 28.1 507 47.4 Philippines 6,036 246 24.5 - - 320 - Indonesia 5,951 617 9.6 31.2 18.6 79 164.1 Korea 32,498 5,488 5.9 9.8 7.0 2,406 6.5 Taiwan 13,925 3,162 4.4 - - 7,786 - Thailand 1,235 1,560 0.8 17.9 3.2 796 42.8 Malaysia - 570 - 31.0 13.3 459 73.2 Australia - 4,829 - 77.1 62.0 700 60.4 Note: Local govt. bonds ownership and liquidity estimates do not include corporate or foreign currency bonds Equities Local government bonds Market Cum. FII buying of $ 24 bn
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 49 Secular themes: Buy on dips As we highlighted in our outlook piece last year, we see certain global and Asia-specific macro trends that are rapidly changing our daily lives, as well as reshaping the investment landscape and offering potentially rewarding returns when they are available at reasonable valuations. Broadly, we group them under three main categories in Asia: Digitalization of consumption, urbanization, and green GDP. They all share some common characteristics:  They boast a clear investment case of delivering strong secular topline growth;  Importantly, they aren’t just investment themes under the broad Asia growth story— they are (and have become) influential building blocks of that story;  Stocks which are favorably exposed to these themes tend to trade at high valuation multiples. Our strategy is to ensure we understand the logic and driver of growth, identify potential winners in these areas through a micro lens, and await opportunities to accumulate these stocks when market corrections come or attractive entry levels emerge.  We highlight stocks which may benefit from these themes, complemented by our analysts’ bottom-up industry positioning and micro fundamental analysis in Exhibit 117. Exhibit 117: Buy on dips: Any major weakness would present strategically sound opportunity to accumulate these potential long-term winners, in our view *Denotes stock is on our regional Conviction List. Source: FactSet, MSCI, Goldman Sachs Global Investment Research Bloomberg Name Country Sector Listed Mkt Cap (US$ mn) 6M ADVT (US$ mn) Price (Quote) Curncy GS Rating 12m Potential +/(-)% 2013E EPSg (%) 2014E EPSg (%) 2014E P/E (X) 2014E P/B (X) 2014E D/Y (%) EM smartphone demand 005930 KP Samsung Electronics Korea Semi 196,418 320 1424000 KRW B 26% 35% 13% 6.9 1.4 1.0% 2330 TT TSMC Taiwan Semi 90,793 117 103.50 TWD B* 26% 11% 16% 12.5 2.7 2.9% 2454 TT Mediatek Taiwan Semi 18,741 82 410.50 TWD NR - 53% 29% 15.8 2.7 3.8% Potential disruptive technology - Array camera 2382 HK Sunny Optical China Computer H/W 958 10 6.77 HKD B 40% 17% 57% 10.5 2.1 2.1% Big Data & Cloud computing 2308 TT Delta Electronics Taiwan Computer H/W 11,759 23 143 TWD B 17% -3% 27% 15.6 3.3 4.0% Internet commercialization 700 HK Tencent China Internet 98,526 179 411 HKD B* 10% 26% 38% 24.5 7.7 0.5% BIDU UW Baidu China Internet 43,436 516 159 USD N 1% 9% 26% 24.0 6.5 0.0% Infrastructure - Railroad 601006 CG Daqin Railway China Transportation 17,692 32 7.25 CNY B 23% 10% 15% 7.4 1.3 8.1% 601299 CG China CNR China Industrials 9,181 40 5.42 CNY B* 14% 12% 27% 11.6 1.4 2.6% Infrastructure - Construction LT IS Larsen & Toubro India Industrials 13,753 46 939 INR B* 2% -1% 9% 15.9 2.1 1.2% Urbanization - Staples and healthcare KLBF IJ PT Kalbe Farma IndonesiaHealthcare 5,719 9 1300 IDR B 18% 18% 30% 23.0 6.2 2.2% 1099 HK Sinopharm China Healthcare 2,647 13 20.65 HKD N 11% 8% 20% 19.3 2.2 1.6% 867 HK China Medical System China Healthcare 2,096 4 6.73 HKD B* 26% 25% 25% 15.7 3.5 2.5% Green Energy 600900 CG China Yangtze Power China Utilities 17,090 19 6.31 CNY B 35% -5% 1% 10.4 1.2 5.3% 1193 HK China Resources Gas China Utilities 5,751 10 20.05 HKD B* 22% 14% 23% 17.5 2.9 1.4% 958 HK Huaneng Renewables China Utilities 1,447 8 3.21 HKD B -7% 93% 55% 16.3 1.9 1.4% Port. Avg. 20% 26% 15.4 3.1 2.5% APJ Avg. 8% 18% 15.6 2.7 2.9%
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 50 Digitalization of consumption  We remain structurally positive on the growth potential for the rising penetration, broadening usage, and further commercialization of internet/mobile technology.  Our main argument is that we believe the virtuous cycle of amalgamating consumption and technology remains intact. Specifically, significant capex in mobile communication infrastructure (4G/LTE) is likely to increase penetration for mobile devices, which incentivizes investment in new technology and hardware components. That will subsequently drive demand for mobile applications and (big) data. Data allows corporates to analyze consumer behavior more accurately and target customers in a more efficient and scalable manner, thereby innovating new online business models and offline business strategies.  Among many sub-themes that look promising, including 3D printing, LED, internet gaming and media, and battery technology, we think liquid investment opportunities in Asia are clustered around the following areas: o EM smartphone demand: Samsung Electronics, Mediatek and TSMC o New and potential disruptive technology – Array camera: Sunny Optical o Big data and cloud computing: Delta o Internet commercialization: Tencent and Baidu Exhibit 118: The virtuous cycle of consumption digitization Exhibit 119: Infrastructure of mobile communication is likely to see strong growth in 2014 Exhibit 120: EM smartphone demand has risen strongly Exhibit 121: Rising demand for smartphones has incentivized innovation and new technology Source: IDC, Goldman Sachs Global Investment Research. Infrastructure capex Mobile devices Software and components Big Data/Cloud computing Consumption digitalization Boost demand Incentivize investment Efficient customer strategy Drive data traffic Stimulate further investment 5 54 85 101 104 101 90 - 20 40 60 80 100 120 2012 2013E 2014E 2015E 2016E 2017E 2018E Total 4G LTE Capex in China (Rmb bn) 89 110 183 249 296 337 364 380 51 63 116 223 384 721 955 1,172 0 200 400 600 800 1,000 1,200 1,400 1,600 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E Global Handset Sales Volumn (mn) EM Smartphones DM Smartphones 0% 0% 1% 3% 6% 9% 0% 4% 8% 12% 16% 20% 0 50 100 150 200 250 300 350 400 450 2012 2013E 2014E 2015E 2016E 2017E (mn units) Total array camera shipment and penetration rate (main and front-facing camera) Total array camera shipment (LHS) Array camera penetration rate (RHS)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 51 Exhibit 122: A wider usage of mobile communication has led to more demand for data traffic, storage, and analysis... Exhibit 123: ...which opens up business opportunities and creates new business models Source: IDC Source: Euromonitor Urbanization + Infrastructure in EM Asia  A favorable base effect has been one of the key arguments for investing in Asia as it implies growth potential here could be high if the appropriate institutional setup is in place.  The two inter-related supply-side factors—urbanization and infrastructure— largely determine to what extent EM Asia may realize its growth potential, in our view.  Clearly, these two themes have been well broadcasted, but we believe investors may not have fully grasped the direct implications and ripple effects they might have on aggregate demand.  For infrastructure, while there have been hiccups and disappointments due to political, safety, funding, and specific implementation issues, we believe it remains one of the most promising growth stories in EM Asia, particularly if investors get their bottom-up picks right, because: a) infrastructure quality in EM Asia, notably in ASEAN and India, is far below global standards; and, b) governments understand the lack of infrastructure investment will suppress growth and trigger inflation. Indeed, we continue to see strong infrastructure investment growth in China and select parts of South Asia.  Urbanization will become more or less a natural economic development if good infrastructure is in place as the latter should help facilitate labor and capital movements, and raise productivity.  Importantly, this is conducive to middle-income class formation across EM Asia, which will drive demand for consumer staples and healthcare as income grows.  Related areas which offer liquid and compelling bottom-up stories include: o Railroad: CNR and Daqin Railway o Infrastructure: Larsen & Toubro o Staples and healthcare, mass market consumption: CMS, Sinopharm, and Kalbe Pharma 0 200 400 600 800 1000 1200 1400 2010 2011 2012 2013E 2014E 2015E Global wireline and mobile broadband traffic volume (Annual, in exabytes) 0 50 100 150 200 250 300 350 0 100 200 300 400 500 600 700 800 900 1,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E Size of internet retailing World Asia Pacific World (US$bn) Asia Pacific (US$bn)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 52 Exhibit 124: The base effect still looks favorable in EM Asia Exhibit 125: Urbanization continues to be a powerful trend Source: Goldman Sachs Global Investment Research Source: World Bank Exhibit 126: Urbanization requires the support of better infrastructure Exhibit 127: Strong infrastructure investment growth is likely to continue Source: World Bank Source: Local Government Data, Goldman Sachs Global Investment Research Exhibit 128: The rise of middle-income class will create significant demand for consumer goods and services in EM Exhibit 129: Healthcare-related services remain one of the most compelling themes in Asia, in our view Source: Goldman Sachs Global Investment Research Source: World Bank, Ministry of Health, Taiwan, Goldman Sachs Global Investment Research. 167,119 133,695 45,718 28,691 24,431 15,414 8,428 5,976 80,016 225,191 - 50,000 100,000 150,000 200,000 250,000 Taiwan Korea Malaysia Thailand China Indonesia Philippines India Asia G7 Capital stock per urban worker (US$) 83% 74% 71% 53% 52% 49% 34% 32% 61% 80% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Korea Malaysia Taiwan China Indonesia Philippines Thailand India Asia G7 Urbanization rate (%) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Korea Taiwan Malaysia China India Indonesia Thailand Philippines Infrastructure Quality Index Railroads Ports Air Transport Electricity Supply US$bn (2013-2020) CN IN PH TH ID MY Transport 2,188 345 36 51 104 20 Power 2,184 380 5 16 53 11 Water 291 142 8 - 4 2 I.T. & Comm. 259 177 1 1 23 - Social Infra. 973 - 12 4 - 11 Total 5,895 1,044 62 72 183 45 % of Next 5yr GDP 10% 8% 3% 3% 3% 2% 1,876 3,638 50 916 498 299 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2010 Brazil Russia India China G7 RoW 2030 Global Middle Class Population (mn) Net Changes 8608 5939 4065 3609 1616 1322 1121 807 346 278 202 97 95 59 17% 9% 9% 9% 7% 7% 10% 6% 3% 4% 4% 4% 3% 4% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 US Australia Japan UK Korea Taiwan Brazil Russia Malaysia China Thailand Philippines Indonesia India Per Capita Expenditure on Health (2011) Total Expenditure on Health as % of GDP (2011) (RHS) (USD)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 53 Green GDP (in China)  We believe the theme of environmental protection has gradually evolved from an investment idea that syncs well with national policy to a crucial driver of sustainable, high quality growth for China going forward.  Simply, the strong growth in China over the past 30 years has partly come at the expense of inefficient use of natural resources, and the side effects are clear: Area of arable land, air quality, and clean-water available per capita have noticeably deteriorated in the past five years (Exhibit 130).  Generally, two options are available: (a) lower growth and consumption of resources, which is not likely to be a wise policy choice when growth is challenged; or (b) grow in a more environmentally friendly and/or more efficient manner, which makes more political and economic sense. This puts alternative energy, among other pollution-control-related areas (e.g. filters for coal-fired power plant, water and air purifiers, etc.) under the spotlight.  Indeed, largely due to policy support and rising public concern, we are seeing a gradual shift of energy consumption away from coal to renewable and less polluting energy sources, including natural gas, hydro, wind, and solar power, leading to explosive growth of capacity installation in these new energy sources in recent years.  While the alternative energy space has been developing fast, we believe it is still at the nascent stage because: (a) China’s energy dependence on coal remains very high in global terms; and (b) the economics of using renewable energy havemeaningfully improved, and application of technology will likely bring costs down further in the foreseeable future.  We like the following market leaders in the alternative energy space: o Gas: China Resources Gas o Wind: Huaneng Renewable Energy o Hydro: Yangtze Power Exhibit 130: Environmental protection has become a serious concern in China Exhibit 131: The shift in energy consumption mix is gradually taking place Source: Aquastat,, World Bank, CNEMC Source: BP Statistical Review 71 76 70 71 72 73 74 75 76 77 2007 2011 Aiur Pollution Index (Avg. of 62 cities) 2159 2060 2,040 2,060 2,080 2,100 2,120 2,140 2,160 2007 2011 Renewable water per capita (tho. m^3) 11.8% 11.9% 12.0% 12.1% 12.2% 12.3% 12.4% 12.5% 12.6% 12.7% 12.8% 2007 2011 Arable Land (As % of Total) 12.8% 11.9% 65% 70% 75% 80% 85% 90% 95% 100% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Energy Consumption Mix by Energy Categories in China Renewable and others Hydro Natural gas Oil Coal
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 54 Exhibit 132: Capacity installation for solar, nuclear, and wind energy are forecasted by our analysts to remain strong in 2014 and 2015 Exhibit 133: Economics of using alternative energy has meaningfully improved Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research 34% 29% 14% 11% 5% 78% 39% 24% 14% 6% 4% 49% 36% 20% 12% 4% 4% 0% 10% 20% 30% 40% 50% 60% 70% 80% Solar Nuclear Wind Natural gas Hydro Coal Capacity Expansion (yoy) 2013E 2014E 2015E 213% 0.9 0.6 0.5 0.4 0.3 0.2 0.8 0.5 0.5 0.3 0.3 0.2 0.7 0.5 0.5 0.3 0.3 0.2 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Solar Wind Gas Coal Hydro Nuclear 2011 2012 2013ELCOE (Rmb/kWh)
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 55 Events in 2014 and beyond Exhibit 134: Near-term events include China CEWC, Fed taper, BOJ easing, India/Indonesia elections Event timeline Source: Consensus Economics, media sources, Goldman Sachs Global Investment Research Month Country Events/elections/government changes and meetings Nov - Dec India Legislative elections in India Early Dec China Central Economic Working Conference (CEWC) Dec Korea Potential appointment of the next central bank governor Late this year Korea Potential change of cabinet (earliest time line) Feb - Apr Asia: 4Q13/FY13 reporting season Mar 18-19 United States Potential QE tapering announcement Apr 1 Japan Consumption tax hike from 5% to 8%, BOJ Tankan Report Apr 9 Indonesia Parliamentary election Apr 30 Japan BOJ Monetary Policy Meeting (Potential further easing) May - Jun Asia: 1Q14 reporting season May India Parliamentary election May 22 - 25 European Union Presidential election May United Kingdom Parliamentary election May Greece Presidential election May Portugal Parliamentary election May Spain Parliamentary election Jun 4 Korea Municipal election Jul - Aug Asia: 2Q14 reporting season July Indonesia Presidential election Oct - Nov Asia: 3Q14 reporting season Nov G-20 G-20 summit in Brisbane Late 2014 Taiwan Municipal election Time Country Next round of elections 2015 Thailand Parliamentary 2016 Australia Parliamentary 2016 Hong Kong Legislative 2016 Japan Parliamentary 2016 Philippines Presidential, legistlative and local elections 2016 Singapore Parliamentary 2016 Korea National Assembly 2016 Taiwan Presidential and parliamentary 2017 Hong Kong Presidential (Chief Executive) 2017 Singapore Presidential 2017 Korea Presidential 2018 China New govt at National People's Congress 2018 Malaysia Parliamentary 2014 2015 onwards 2013
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 56 Appendix 1: Goldman Sachs macro forecasts Exhibit 135: GDP growth forecasts Source: Goldman Sachs Global Investment Research. Exhibit 136: Inflation forecasts Exhibit 137: Foreign exchange forecasts Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Greater China & North Asia China 7.7 7.7 7.8 7.8 7.8 7.7 7.9 8.2 7.7 7.6 7.6 7.7 7.8 7.8 Hong Kong 1.5 3.2 3.7 4.4 2.9 3.7 1.8 3.9 4.3 4.7 4.4 4.4 4.4 4.4 Taiwan 1.3 2.4 3.8 3.9 3.0 3.3 3.4 3.4 4.1 4.0 4.0 4.0 3.8 3.9 Korea 2.0 2.9 3.7 3.8 3.3 4.2 4.2 3.9 3.6 3.3 3.6 3.7 3.8 3.9 India & ASEAN markets India 5.1 4.5 5.0 6.2 4.6 4.2 4.2 4.9 5.4 5.7 5.9 6.1 6.4 6.6 Singapore 1.3 3.2 3.8 4.2 3.8 5.0 3.7 3.7 3.8 3.9 3.8 4.2 4.2 4.3 Indonesia 6.2 5.6 5.3 6.0 5.6 5.0 5.6 5.3 5.1 5.3 6.2 6.1 5.4 6.1 Malaysia 5.6 4.7 5.0 5.2 5.0 5.1 4.9 5.1 4.9 4.9 5.3 5.2 5.3 5.2 Philippines 6.8 7.0 6.3 6.5 7.0 5.9 6.4 6.4 6.3 6.4 6.4 6.5 6.7 6.3 Thailand 6.5 3.4 4.2 4.5 2.7 2.5 4.2 4.3 4.3 4.0 4.5 4.4 4.5 4.5 Asia ex Japan 6.1 6.1 6.4 6.7 6.2 6.3 6.3 6.6 6.4 6.4 6.6 6.6 6.7 6.8 Australia 3.7 2.3 2.0 2.6 2.1 2.0 1.9 1.8 2.2 2.2 2.3 2.5 2.6 2.9 Japan 2.0 1.8 1.6 1.2 2.7 3.3 3.2 1.3 1.1 0.6 0.0 1.5 1.9 1.2 US (yoy) 2.8 1.7 2.9 3.2 1.7 2.0 2.5 2.7 2.9 3.4 3.4 3.2 3.1 3.0 US (qoq ann.) 2.8 1.7 2.9 3.2 2.8 1.5 3.0 3.5 3.5 3.5 3.0 3.0 3.0 3.0 Euro area (0.6) (0.4) 1.1 1.5 (0.4) 0.4 0.9 0.9 1.2 1.4 1.4 1.6 1.6 1.6 World 3.1 2.8 3.6 4.0 2.9 3.2 3.5 3.5 3.6 3.7 3.8 3.9 3.9 3.9 Real GDP forecasts (% yoy) 2012 2013 2014 2015 2013E 2014E 2015E Inflation (yoy) 2012 2013F 2014F 2015F Australia 1.8 2.4 2.9 2.6 China 2.7 2.6 3.1 3.0 Hong Kong 4.1 4.0 3.3 3.3 India 7.5 6.3 6.5 6.1 Indonesia 4.3 8.2 6.8 5.5 Korea 2.2 1.2 2.4 2.6 Malaysia 1.7 2.3 2.8 2.6 Philippines 3.2 3.2 3.8 3.5 Singapore 4.6 3.0 3.3 3.5 Taiwan 1.9 0.8 1.4 1.8 Thailand 3.0 2.5 2.8 3.0 AeJ 3.7 3.4 3.9 3.7 FX (vs. USD) 2012 2013F 2014F 2015F Australia 1.04 0.96 0.87 0.85 China 6.29 6.14 6.05 6.05 Hong Kong 7.75 7.80 7.80 7.80 India 54.78 64.00 65.00 66.95 Indonesia 9670 12000 11800 11800 Korea 1071 1080 1100 1150 Malaysia 3.06 3.20 3.15 3.00 Philippines 41.19 43.50 40.00 38.00 Singapore 1.22 1.25 1.15 1.15 Taiwan 29.14 29.80 29.00 28.70 Thailand 30.63 33.00 32.00 30.00
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 57 Appendix 2: Valuations at a glance Exhibit 138: Consensus bottom-up valuations Source: FactSet, I/B/E/S, MSCI. Bloomberg P/E (X) EPS growth (%) P/B (X) D/Y (%) ROAE (%) ticker 2013E 2014E 2013E 2014E 2013E 2013E 2013E MSCI markets (local currency) Australia MXAU 16.0 14.4 4.9 10.5 2.0 4.4 12.9 China MXCN 10.1 9.2 12.8 10.3 1.5 3.2 15.5 Hong Kong MXHK 16.4 14.9 9.7 9.6 1.3 2.7 8.3 India MXIN 16.2 14.2 5.7 14.0 2.5 1.5 16.0 Indonesia MXID 15.2 13.2 10.4 15.5 3.1 2.7 21.6 Japan MXJP 17.1 14.5 64.3 18.7 1.3 1.8 8.2 Korea MXKR 10.4 8.6 9.6 20.1 1.2 1.0 11.3 Malaysia MXMY 16.7 15.4 -1.6 9.0 2.2 2.9 13.5 Philippines MXPH 19.5 18.4 9.7 6.0 3.1 2.3 16.5 Singapore Free SIMSCI 15.2 14.0 -3.8 8.7 1.4 3.4 9.8 Taiwan MXTW 15.6 13.9 27.0 11.9 1.8 3.1 11.6 Thailand MXTH 13.5 11.8 11.3 14.2 2.2 3.2 16.8 AC Asia Pacific ex Japan MXAPJ 13.3 11.9 8.5 12.3 1.6 3.1 12.6 AC Asia ex Japan MXASJ 12.6 11.1 10.1 13.1 1.5 2.5 12.5 USA MXUS 16.6 15.1 6.4 10.0 2.6 2.0 16.1 Europe (USD) MSDUE15 15.2 13.3 -3.2 14.4 1.7 3.3 11.7 EAFE (USD) MXEA 15.5 13.6 2.9 13.6 1.6 3.1 10.8 Emerging Markets MXEF 11.7 10.7 2.8 9.1 1.5 2.8 13.3 AC World (USD) MXWD 15.4 13.9 4.1 11.1 2.0 2.5 12.8 MSCI AC Asia Pacific ex Japan GICS sectors (local currency) Energy MXAPJEN 11.7 10.5 0.7 11.1 1.4 3.4 12.3 Materials MXAPJMT 15.3 12.7 -2.1 19.8 1.6 2.7 10.6 Industrials MXAPJIN 18.2 14.1 -10.1 29.2 1.4 2.5 7.7 Consumer discretionary MXAPJCD 12.9 11.2 6.9 14.5 2.0 1.9 16.0 Consumer staples MXAPJCS 22.0 19.4 2.2 13.4 2.8 2.8 13.1 Health care MXAPJHC 24.2 20.9 12.9 16.1 4.4 1.7 18.9 Financials MXAPJFN 11.9 10.9 7.3 9.0 1.4 3.9 12.0 Information technology MXAPJIT 11.7 10.5 34.0 11.0 2.0 1.6 18.0 Telecommunication services MXAPJTC 14.5 13.8 5.8 5.4 2.1 4.4 15.3 Utilities MXAPJUT 15.6 13.4 24.7 16.5 1.5 3.2 9.4
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 58 Appendix 3: China reform policies Exhibit 139: Key reforms from the 3rd Plenum Source: Xinhua News, Goldman Sachs Global Investment Research. Key reforms from Third Plenum decision document Market economy/deregulation/financial reform New approach: negative list, easier company registration/approval, registered capital subscription Market pricing reform in water / oil / gas / power / transport / telecom Land market: Unify urban/rural construction land market Financial reform: Private small/medium banks Registration system for IPO Speed up interest rate deregulation Market-pricing of CNY / treasury yield Speed up capital account convertibility Deposit insurance Capital market exit channel (bankruptcy/delist?) Corporate-oriented reform in science/ academia Support FTZ development Improve market entry institution / customs regulation / investment protection / e-commer Potentially open more FTZs In other qualified regions More opening up of inland adjacent areas Liberalize foreign investment access SOE vs private enterprise Maintain essential role of the public ownership economy Support mixed ownership economy: cross holdings between public/private State owned assets mgmt: establish various state owned assets mgmt companies SOEs to focus on public good: focus on national security, crucial sectors, public services etc Social security fund: transfer some SOE shares over to fund safety nets Natural monopoly SOEs: separate party and operational structure Encourage competition, open the market for competitive business to non-SOEs Corporate governance focus, enhance transparency/disclosure and market based operation Payout ratio raise to 30% by 2020, for social welfare use Create fair environment for private capital and allow to non-SOEs enter authorized business area Lower entry barrier/establish negative list for investment. Simplify business registration procedures Fiscal / tax Budget system reform: more longer term, more accountability and transparency Enhance debt management and risk alert system for central and local governments Fiscal expenditure structure: Increase transfer payments to underdeveloped areas Tax: simplify VAT Increase consumption tax for high pollution / energy inefficient / luxury products Speed up legislation for property tax, resource taxes, environmental protection taxes Expenditure allocation between central/local gov'ts: fiscal transfer reforms Establish governmentbalance sheet at national and local levels
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 59 Exhibit 140: Key reforms from the 3rd Plenum Source: Xinhua News, Goldman Sachs Global Investment Research. Key reforms from Third Plenum decision document Urban / rural More asset ownership rights to farmers: Allow farmers to trade / lease / profit land or property, establish rural property market More protection to farmers: encourage investment projects in rural areas Urbanization: Allow local government to diversify funding channels including debt and private capital Hukou reform: fully open hukou in smaller cities, gradually open hukou in mid sized cities Include urban residents with rural hukous into the social and housing safety net system Connect rural pension / healthcare programs with urban systems Allow diversified investment (incl foreign) into areas like childcare, senior care, etc Safety nets Establish appropriate income distribution system: (some overlap with income redist above) Align wage growth with productivity growth, ensure minimum wages Improve collective bargaining system Improve income redistribution through tax, transfer payments and social welfare system Establish individual income/asset ownership data system Social welfare / pension system: Improve personal pension account system, incentivize contribution Improve minimum living standards protection for urban/rural areas Expand social insurance coverage, lower fee rates Improve fiscal contribution and budgeting into welfare system Develop diversified pention products such as annuities Study gradual increase of retirement age threshold Health care reform: Comprehensive reform on medicial insurance, service, pharm chains and supervision; Encouraging private capital involvement in hospital operations Eliminate subsidizing service fees with medicine revenue Enhance critical illnesses treatment / insurance schemes Anti-corruption/govt administration Streamline administrative processes: reduce meetings, documents and other unnecessary items Control spending Fortify budgeting and auditing system Reduce 'san gong' spending and govt buildings construction Explore 'official residence' system Regulate business affairs of officials' relatives Sophisticate macro control system: monetary / fiscal / price / industry specific policies Develop national database of individual property ownership and credit records Withdraw administrative approvals, tackle overcapacity Revise econ KPI for gov't officials: include environment / debt / overcapacity / innovation etc Gradually restructure public institutions into corporates Streamline administration structure, control public service headcounts Others One child policy: Two children will be allowed for a couple as long as one of the couple is an only child Environmental protection: enhance natural resources assets ownership/usage system, apply usage with compensation system, increase industrial land price. Culture reform: consolidate media resources; encourage mergers and acquisitions Reform standardized testing system: lean away from one time college education system
  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 60 Equity Basket disclosures The Securities Division of the firm may have been consulted as to the various components of the baskets of securities discussed in this report prior to their launch; however, none of this research, the conclusions expressed herein, nor the timing of this report was shared with the Securities Division. The ability to trade these baskets will depend upon market conditions, including liquidity and borrow constraints at the time of trade. MSCI disclosures All MSCI data used in this report is the exclusive property of MSCI, Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced or redisseminated in any form and may not be used create any financial instruments or products or any indices. This information is provided on an “as is” basis, and the user of this information assumes the entire risk of any use made of this information. Neither MSCI, any of its affiliates nor any third party involved in, or related to, computing or compiling the data makes any express or implied warranties or representations with respect to this information (or the results to be obtained by the use thereof), and MSCI, its affiliates and any such third party hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. MSCI and the MSCI indexes are service marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) were developed by and is the exclusive property of MSCI and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by The Goldman Sachs Group, Inc. ETF disclosures Exchange Traded Funds (ETFs) are redeemable only in specified units and only through a broker that is an authorized participant in that ETF program; redemptions are for the underlying securities. The public trading price of a redeemable unit of an ETF may be different from its net asset value; an ETF can trade at a discount or premium to the net asset value. There is always a fundamental risk of declining stock prices, which can cause investment losses. Availability of information Investors should consider the investment objectives, risks, and charges and expenses of an ETF carefully before investing. Each ETF prospectus contains such information about the ETF, and it is recommended that investors review carefully such prospectus before investing. A copy of the prospectus for all ETFs mentioned in this material can be obtained by investors from their Goldman Sachs sales representative, or from the offices of Goldman, Sachs &
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  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 62 Disclosure Appendix Reg AC We, Timothy Moe, CFA, Kinger Lau, CFA, Richard Tang, CFA and Sunil Koul, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. I, Ketaki Garg, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of the firm's business or client relationships. Disclosures Option Specific Disclosures Price target methodology: Please refer to the analyst’s previously published research for methodology and risks associated with equity price targets. 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  • November 21, 2013 Asia Pacific Goldman Sachs Global Investment Research 64 securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research or data available on a particular security, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. © 2013 Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.