• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Jpm china view 121018
 

Jpm china view 121018

on

  • 683 views

 

Statistics

Views

Total Views
683
Views on SlideShare
682
Embed Views
1

Actions

Likes
0
Downloads
0
Comments
0

1 Embed 1

http://www.linkedin.com 1

Accessibility

Categories

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Jpm china view 121018 Jpm china view 121018 Document Transcript

    • Asia Pacific Equity Research 18 October 2012JPM China ViewBuy BanksDemand metrics continue to downshift. While headline October macro Director of Asia Pacific Equitydata appears encouraging, details are uninspiring. Discretionary Researchconsumption has weakened further and across the board, pricing power Sunil Garg ACremains elusive, suggesting a volume-margin trade-off. Earnings (852) 2800-8518expectations for 2013 (JPMe 6.5%/ consensus 9%) appear high amidst sunil.garg@jpmorgan.comthe backdrop of continuous macro forecast reductions. In a growth- J.P. Morgan Securities (Asia Pacific) Limitedstarved world, companies that can deliver growth, with visibility, should Rajiv Batracontinue to outperform, despite what may appear as expensive (91-22) 6157-3568valuations. Amongst the major sectors, banks offer that possibility – on rajiv.j.batra@jpmorgan.combetter NIM outcomes in 3Q and on better asset quality outcomes in 2013. J.P. Morgan India Private Limited Signs of Optimism – A rebound in liquidity metrics (money supply, Asia Pacific Equity Strategy AC loan growth, and deposit growth), railway capex are the only signs of Adrian Mowat optimism in our view. Stabilization in pricing in some sectors such as (852) 2800-8599 adrian.mowat@jpmorgan.com steel reflects supply cuts rather than demand revival. J.P. Morgan Securities (Asia Pacific) Limited False Signs of Optimism – A pick-up in export and import growth in Oct has prompted calls for a bottoming out. We would be cautious - Greater China Economist trade to US/EU actually worsened and import pick-up appears to have Haibin ZhuAC (852) 2800-7039 been led by “re-stocking” without visible demand increases. haibin.zhu@jpmorgan.com Signs of Deterioration – Discretionary consumption, automobiles, tech, JPMorgan Chase Bank, N.A., Hong Kong internet revenues, airlines, property, energy, are all showing signs of incremental demand deterioration, suggesting risks to earnings estimates. Investment Strategy – While we see risks to 2013 headline EPS estimates, the one sector that has potential upside, at least in the near- term is banks. Weaker NIM forecasts and asset quality deterioration had led estimates lower for China banks. While we continue to recognize structural challenges, better pricing discipline in 3Q may support NIMs and easier liquidity could support asset quality. Buy ICBC and CCB.Table 1: Our highest-conviction recommendations Company Ticker Rating Price Target Company Ticker Rating Price Target Top Picks Stocks to Avoid 21Vianet. VNET US OW 12.0 16.3 Anta Sports 2020 HK UW 6.9 3.6 Baidu BIDU US OW 113 200 CHALCO 2600 HK UW 3.4 2.7 Beijing Capital Int. Airport 694 HK OW 5.2 8.3 China Merchants Holdings 144 HK UW 24 20 Beijing Enterprises 392 HK OW 49 60 Glorious Property 845 HK UW 1.15 1.00 China Shenhua Energy 1088 HK OW 31 35 New China Life Insurance 601336 CH UW 23 25 China Shipping Cont. Lines 2866 HK OW 1.9 2.9 PetroChina 857 HK UW 11 8.75 China ZhengTong Auto 1728 HK OW 4.7 5.5 Country Garden 2007 HK OW 3.1 3.6 Golden Eagle Retail 3308 HK OW 17 20 ICBC - H 1398 HK OW 4.9 5.8 Nine Dragons Paper 2689 HK OW 4.8 5.3 Ping An Insurance 2318 HK OW 61 65 Sinopec 386 HK OW 7.8 9.0 United Labs 3933 HK OW 4.2 4.5 ZTE 763 HK OW 10.9 16.0Source: J.P. Morgan estimates, Bloomberg, Pricing date is 16 October 2012See page 38 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that thefirm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision. www.morganmarkets.com
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.com Table of ContentsFigure 1: China Banks Forward PE Macro Sectors...........................................................................3 24.0 Consumption ............................................................................3 22.0 20.0 Investment ................................................................................4 18.0 +1SD Trade..........................................................................................4 16.0 14.0 Energy & Utilities......................................................................4 Average 12.0 China leadership change .........................................................9 10.0 8.0 Economics ..............................................................................12 6.0 -1SD 4.0 Automobiles............................................................................13 05 06 07 08 09 10 11 12 Banks.......................................................................................14Source: J.P. Morgan, IBES, MSCI, Datastream. Cement ....................................................................................15 Consumer................................................................................16Figure 2: China Banks Trailing PB Energy (O&G)..........................................................................17 5.0 Gaming ....................................................................................18 4.5 4.0 Healthcare ...............................................................................19 +1SD 3.5 Infrastructure ..........................................................................20 3.0 Average 2.5 Insurance ................................................................................21 2.0 Internet ....................................................................................22 1.5 1.0 -1SD Metal & Mining ........................................................................23 0.5 Real Estate ..............................................................................24 05 06 07 08 09 10 11 12 Ship Building ..........................................................................25Source: J.P. Morgan, IBES, MSCI, Datastream. SMID-Caps ..............................................................................26 Technology hardware ............................................................27 Telecom...................................................................................28 Transportation ........................................................................29 Utilities & Power Equipment..................................................30 Q-Profile for China..................................................................31Table 2: China Sector Valuation Price MSCI P/E (X) EPS growth P/B (X) Dividend yield P/E EPS CAGR PEG Risk Adj 15 Oct Wts 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E 2011 (12-14) Ratio PEGMSCI China 57.4 100% 10.1x 9.5x 1% 7% 1.5x 1.3x 3.2% 3.2% 10.1 10.1 1.0 0.64Consumer Disc. 188.9 5% 12.7x 11.7x -4% 8% 2.0x 1.8x 2.0% 2.3% 12.4 18.7 0.7 0.88Cons. Staples 1,196.1 6% 25.4x 20.7x 6% 23% 3.4x 3.1x 1.5% 1.8% 26.7 19.7 1.4 6.38Energy 720.9 18% 9.8x 9.8x -2% 0% 1.5x 1.4x 3.5% 3.1% 9.4 6.2 1.5 2.06Financials 407.1 37% 7.4x 7.2x 7% 2% 1.2x 1.1x 4.0% 4.2% 7.9 7.9 1.0 0.25Health Care 128.5 1% 35.7x 31.0x 9% 15% 3.7x 3.4x 0.6% 0.7% 27.3 20.5 1.3 0.75Industrials 116.0 6% 12.3x 9.7x -13% 27% 1.0x 0.9x 3.0% 2.8% 10.8 18.9 0.6 1.46IT 133.3 7% 27.6x 19.4x -9% 42% 4.4x 3.7x 0.7% 0.8% 24.3 25.6 0.9 1.60Materials 714.7 5% 12.5x 9.2x -34% 36% 1.2x 1.1x 2.8% 2.5% 8.4 21.7 0.4 0.17Telecom 136.6 13% 12.6x 12.1x 1% 4% 1.6x 1.5x 3.4% 3.5% 12.5 6.5 1.9 2.62Utilities 413.58 3% 12.9x 10.9x 44% 19% 1.5x 1.4x 1.7% 2.4% 18.7 15.9 1.2 3.67Source: J.P. Morgan estimates, Bloomberg, MSCI. Note: For all sectors forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using J.P. Morgan estimatesfor covered stocks and Bloomberg estimates for the rest. Companies with different yearends are calendarised to December yearends and are free float adjusted for aggregation2
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comMacro Sectors ConsumptionEconomy – Weak Recovery Passenger Vehicles – Low/Mid marketSmall, sequential improvements in PMI, trade data, loan Overcapacitygrowth and imports suggest that a weak recovery is Nick’s demand/supply model for passenger vehicles inunderway. However, Haibin and team have pared back China suggests that while growth rates will moderatemonetary easing expectations (now only 1 RRR cut of across the board, the luxury segment (34% CAGR 2004-50bp before year end) and GDP growth forecasts for 15E) will continue to grow 3-4x of the general market2013 to 8% (previous 8.3%). and within the luxury market, ultra-luxury brands will have growth rates 1/3rd higher (c43% CAGR) thanOutlook: Policy making continues to be in a holding aggregate luxury market. Pressure on volume growth andpattern ahead of the leadership change. Provincial pricing for low-mid market players is expected to drivegovernments have announced investment projects ROEs lower in this segment. Amongst the automakers,aggregating nearly Rmb20trn (in many case well over Nick is bullish on the SUV segment. Top Picks: Geely,100% of GDP). We see gaps in funding besides the Great Wall.extended time frame over which these investmentswould be made - making us less than excited about Consumer – Tough for Discretionarythese announcements. A lack of discounting is hampering sales recovery and on a like-for-like basis, Ebru fears that 4Q for discretionaryFinancials – Liquidity Led Optimism consumer business may be worse than 3Q’12. Within theBanks – A revival in monetary aggregates (M1 growth retailer space, Ebru sees loss of competitiveness for7.3% vs. <5% for over 8 months/ M2 growth 14.8%/ department stores as other channels (outlet malls,Loan growth 16.3%/ Deposit growth 13.3%). Easier shopping malls and online stores) gain. However playersliquidity conditions should ease credit quality concerns such as Golden Eagle are seen as having the ability toand Joshs positive stance on ICBC and CCB is premised increase share in a fragmented market.on superior capitalization and liquidity metrics, helpingdeliver industry leading ROEs as well as ability to Staples growth rates are holding up and pressure frommaintain dividend payouts. Top Pick: ICBC. input prices is yet to be felt. There are selected cases of overcapacity though, for example in tissues.Property – Reduce ExposurePrimary sales fell 7%m/m (to 7.22mn sqm, below Despite the promise, discretionary growth remainsexpectations) in Sep as developers opted to protect elusive while staples stocks, albeit expensive, have seenmargins, sacrificing volumes in the process. Lucia steady upward earnings revisions. Top Pick: Goldenbelieves that developers still lack pricing power and Eagle. Stock to Avoid: Anta Sportsexpects a price-volume trade-off for now withexpectations of quieter primary volumes until Chinese Gaming – Growth ModeratesNew Year. Meantime, inventories in major cities have Sep revenue fell 9%m/m (to MOP23.9bn) with VIPrisen (highest since Feb ’12). Lucia’s expectation is for segment down 7%m/m (YoY growth rates in Sep’12inventories to remain high in tier 2/3 cities and relatively benefited from a typhoon impacted base in Sep’11 andlower in tier 1 cities. Our property team is higher weekend days in Sep12). While mass marketrecommending switching out of property stocks in view (higher margin) should continue to stay strong, inof volume growth expected to slacken, lack of further particular due to expected infrastructure improvements,monetary easing signals and the fact that sector Ken sees slower growth rates in the short-term, thusperformance has been solid. Top Picks: Country expecting stocks to consolidate after a 15% ptGarden, Franshion. outperformance since Aug’12. Top Picks: Wynn Macau (below HK$20), Galaxy(in low 20s) and Sands (at HK$25-26). Technology – Growth Moderation TV and smartphone sales during golden week have accelerated from 1H levels but fell short of market expectations. Alvin and team have also revised down PC 3
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comgrowth forecasts (5-10% y/y in 4Q vs. 10-15% expected players have gained share. Coalmine machinery FAIearlier) due to delayed energy efficiency subsidies and rebounded 19% y/y in Aug (vs. 3% in Jul).awaiting Win-8 launch (Oct 26th). Karen is positive on infrastructure E&C, and cautious on construction machinery. Top Picks: CRG, CRCC.An important issue that is brewing is the outcome forZTE’s operations in the US. While the US is a relativelysmall 5% of ZTE’s operations –prospects of similar Metals & Mining – Bottoming Outactions by other countries as well as potential Sentiment is improving in the China metals & miningretaliation within China make the outcomes volatile at space, with a bottoming in commodity prices continuingthe minimum. As such, investors seeking value in Top to play out (thermal coal, steel) and improving near-termPick ZTE, should factor this in. supply/demand dynamics. Stimulus measures - either monetary or fiscal, are likely to remain a key catalyst forTelecom- 3G Migration = ARPU Boost the domestic market. Daniel remains selectively OW with preferred beta exposure in steel for Angang (TopUnderutilized 3G networks (20-30%) along with Pick).proliferation of cheaper smartphones (15-20% of 2Gusers have smartphones) is expected to increase Cement – Oversupply Caps Pricingmigration from 2G to 3G, hence boosting ARPUs. Lucy, Nick estimates a surplus of 150mn tones of capacity thatMichelle and team expect that the upper end of 2G is significant (2x of entire US consumption) enough tosubscriber base presents an upgrade opportunity and they cap cement prices in China (down 12% in Jan-Sep12).see CT and CU as major gainers with CU in particular Within the space, Nick continues to recommend marketgiven its competitive advantage in the low end leader Anhui Conch (Top Pick) and UW on smaller CRsmartphone market. Top Pick: China Unicom. Cement.Internet – Advertising Outlook WorsensDick is incrementally even more cautious on advertising Tradeoutlook following conversations with TV and online ad Shipping – Positive on Bulk Shippersagencies. Dick thus sees downside risks to 3Q earningsand 4Q12 guidance. Dick continues to see resilience in Corrine’s constructive view on Bulk shipping isthe online gaming market. Top Picks: Baidu and Youku. supported by only moderate growth in global bulk fleet (+0.4% m/m in Sep) making annualized 12% growthAirlines – Overcapacity Woes rates at 2/3rds of projected 18% supply growth. Corrine thus continues to believe that supply growth as impliedOvercapacity, higher fuel prices and FX losses will all by the orderbook is over-estimated. Meantime, Chinacombine to depress Airline profitability in China, Cosco and CSCL’s plans to cooperate on domesticaccording to Corrine. As such, she expects substantial container shipping routes is a positive marketdownside to consensus estimates (Corrine’s forecasts are development. Top Pick: CSCL.58% below consensus). Corrine’s long-term view onChina’s passenger aviation market remains Infrastructure – Port Pick Upconstructive. Top Pick: Air China. Port sector – Yantian’s 3Q run-rate is up 19% q/q supporting Karen’s Sep expectations of high singleInvestment digits-low teens growth. Karen Li likes Hutch Ports in this space.Infrastructure – Railway BoomContinues Tollroads – Latest data suggests bottoming out in September.Railway FAI rose 93% y/y in Sep (to Rmb73bn) withcivil works spend rising faster at 111% y/y. Meantime,2012 infrastructure spend target (civil works focused) hasbeen raised a fourth time in three months (aggregate 30% Energy & Utilitiesabove initial target). Oil & Gas – Overcapacity = ExportsMachinery – Sequential excavator sales decline appears Demand for petroleum products in China is growing atto be moderating (-5% m/m in Aug) although domestic very low rates, around 2% ytd. Diesel in particular is weak, driven by weak exports and industrial production.4
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comGasoline is slightly better, possibly due to the lower fuel prices. Demand for gas and water utilitiesclassification of products used in the gasoline pool. remains resilient. Boris recommends switching out of outperformers that lack incremental catalysts. InWhile demand growth is weak, Chinese companies are particular, further gains from lower coal prices areexpanding refining capacity at a greater rate. Post 2012 unlikely. Top Picks: Beijing Enterprises, ENN.Brynjar expects a product demand growth rate of 4%,which compares to refinery capacity build in the range of6-7%. This will result in a combination of lower Quantitative Strategies/ Valuationscapacity utilization, higher exports and closure of Cheap Value – Following a c10% rebound of earlysmaller inefficient refineries. Brynjar is assuming 80% Sep’12 lows, MSCI China is now trading on 2013E PEutilization as the absolute low, and our demand picture of 9.5x and PB of 1.3x – both 1 standard deviation belowhence results in increased exports from China. Top Pick: vs. historical average. PE multiples are balanced by aSinopec 10% EPS CAGR over next 2 years. Within MSCI China, lowest PEG at 0.4 is for Materials and highest 1.9 is forUtilities – Weak Demand, Better Margins Telecom stocks. Our risk-adjusted PEG metric suggestsChina IPP demand and hence capacity utilization should financials as amongst the most attractive sectors.remain under pressure according to Boris, but earningsare helped by better margins, in turn a beneficiary ofFigure 3: PEGs and Stability of Growth EPS CAGR / Std dev = Stability of Growth 5.0 Banks 4.5 4.0 Financials 3.5 3.0 2.5 Materials 2.0 PEG China Healthcare 1.5 Real Estate 1.0 Cons. Disc. Energy 0.5 Insurance Telecom Industrials IT Utilities 0.0 Cons. Staples 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00Source: IBES, MSCI, Datastream, J.P. Morgan. 5
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comTable 3: Investment view on our highest-conviction recommendationsCompany, Sector, Analyst Analyst CommentaryTop Picks21Vianet Group Inc. Selling shovels: Weve written many times that data is extremely hard for telecom operators to monetize profitably. Given that, play the major increase in data usage throughSector: Internet Infrastructure infrastructure providers. We think VNET is the best regional example of this theme.Analyst: James R. Sullivan, CFA EPS forecasts + valuation now supportive. We had previously stated that VNET shares may stall for a period of time due to a lack of earnings upgrades and no longer ‘cheap’ valuations. Since that time, EPS forecasts were reduced too aggressively in our view (cut 44% since 2Q earnings despite in line guidance), we are now 20% ahead of street forecasts for 2012 EPS.Baidu.com Leveraged to potential macro improvement. Attractive valuation good corporate governance and long-term search market growth. We believe Qihoo impact is small to Baidu, and BaiduSector: Internet to gradually increase its market share. In addition, we think concerns over mobile usage growth are overdone, and expect mobile search to boost profits for the company..Analyst: Dick WeiBeijing Capital International Airport We believe BCIA is now reaching an inflection point with compelling valuation of EV/EBITDA <10x and11% EBITDA growth in the next 3 years, on our estimates. Key value drivers: (1)Sector: Airports After taking into account potential capex related to the BJ #2 airport project but no incremental benefit, BCIA still looks undervalued to us. We think the stock has possiblyAnalyst: Karen Li, CFA factored in all potential concerns on capex front. Removing all capex associated with new airport project could raise our PT to HK$13 by Dec-12. (2) BCIA aims to restore payout level of 2011, maintain consistent record in future. By FY14E, we estimate BCIA could potentially offer 7% yield with payout ratio of 45% all else being equal.Beijing Enterprises Strong resilient gas demand from new gas fired power plants in Beijing thanks to the newly imposed “Environmental Air Quality Standards”, where big cities have to impose moreSector: China Utilities stringent control on concentration of small particles (PM 2.5).We have seen more evidence of increased demand, as Beijing Jingneng (579 HK, NR) has recently raised its 2013 targetAnalyst: Boris Kan gas-fired power capacity to ~4,600MW (from ~3,400MW previously) by fast-tracking its 1,200MW Beijing Shijingshan Co-Generation Plant. Overall, we expect a >30% gas sales volume CAGR in Beijing from 2012-15E. Other upsides include (1) strong gas demand on mid stream pipelines from newly connected areas in Shandong (2) BJE Water (earnings up (up 27% Y/Y, 8% of total) thanks to margin improvement on sewage operations (up from 49% to 54%). Overall, we expect a >25% EPS CAGR from 2012-14E..China Shenhua Energy - H Shenhua is the lowest cost coal producer in China, unique for its horizontally integrated rail and port infrastructure assets while its vertically integrated power assets (c25% of revenue)Sector: Mining reduce exposure to the volatile spot price. We forecast organic volume growth of over 5%pa through to 2015 (+10% in FY12E) from existing operations with the potential of furtherAnalyst: Daniel Kang parent asset acquisition growth. Shenhua currently trades at a significant valuation discount to historical PE levels (c13x) on our estimates.China Shipping Container Lines CSCL provides unique exposure as the largest player in the domestic China shipping trade. Overcapacity risks are lower as CSCL’s newbuild vessel deliveries will be more than offsetSector: Shipping by the return of chartered-in vessels. CSCL also has a lower unit cost structure than sector average. We expect CSCL to be profitable in 2H12 and expect margins to expand by 300bpsAnalyst: Corrine Png in 2013 and see no equity-raising risk. Valuations at 0.6x FY12E P/B are attractive and have overly discounted the challenging industry outlook, in our viewChina ZhengTong Auto Our recent visit in China suggests that overall inventory and pricing pressure among dealers have gradually eased, thanks to automaker trimming sales target, providing for support forSector: Auto dealers and also a sequential improvement in car sales. Margin as a result is expected to improve in 2H12 vs. the bottom in 2Q12. Momentum in luxury vehicle remains intact with BMWAnalyst: Nick Lai and Audi’s volume, for instance, both up by over 30% YTD vs. overall passenger vehicle of 8%. In the near term, 4Q is peak season in China; we expect a strong sales volume toward year end.Country Garden We like Country Garden because of its relatively strong balance sheet, which gives them the warchest to expand when its peers are deleveraging. Country Garden has bought plenty ofSector: Property land in 1H2012, utilizing the money they raised in share placement, and this should allow them to gain market share under the current market. We expect Country Garden’s contractedAnalyst: Ryan Li, CFA sales to outperform its peers in 4Q2012 and 2013Golden Eagle Retail Golden Eagle’s 1H result was weak on the back of new store openings and also weak SSSG. We do not expect a major recovery in 2H but given the long term bottom up drivers for thisSector: Consumer name and given that short term weakness is priced in we reiterate our OW rating for Golden Eagle. The stock is trading at 17x 1-yr forward P/E, pricing in the short-term weaknessAnalyst: Ebru Sener Kurumlu already in our view. We believe it is one of the best-positioned department stores in China (given the positioning, regional dominance and property ownership) and we are looking for c25% earnings CAGR post 2012 driven largely by new store additions and SSSG (around 14% post 2012).ICBC - H ICBC is our top pick in the sector given its leading deposit franchise (50% demand deposits), strong capital position (T1 10.3%), and prudent growth, which produces leading ROEsSector: Banks through the cycle. ICBC is less affected by the recent rate cuts, yet we still see material NIM compression from easing and deregulation, alongside higher credit costs. We think the stockAnalyst: Josh Klaczek offers significant value at 1.1x book and 6.4x FY13E earnings, as prices increasingly reflect the structural challenges ahead.Nine Dragons Paper Nine Dragons Paper (NDP) is the largest producer of containerboards in China and second largest globally. We see a good entry point in NDP following poor FY (June 12) results whichSector: SMID-Caps showed a record low gross margin of 16%. We believe that demand from containerboards, which is mainly driven by packaging for domestic consumer goods, is starting to be boostedAnalyst: Leon Chik by more government stimulus and credit easing in China. There has been no strong incentive to start new production capacity since early CY11 and therefore we see very few new lines being completed in 2013 (a new line takes 2 years to build). NDP has already lifted its price of containerboards by 2% in September despite stable-to-falling costs which is a key signal to us that the oversupply that has plagued the industry for over 12 months is coming to an end. We see the potential for further price hikes before year-end and improving margins for FY13 as key catalysts for a re-rating.6
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comPing An Insurance Group - H Ping An continues to have the best life insurance franchise in China in our view which is agency dominated. We think its non-life operation should weather the rise in combined ratioSector: Insurance better than its close peers as it gains further economies of scale. The plan to raise up to Rmb26 billion of convertible debt should help to satisfy near-term capital need, alleviating theAnalyst: Bao Ling Chan need for equity capital raising.Sinopec Corp - H We expect lower oil/higher product prices will turn refining losses to profits, generating good earnings growth. Increased likelihood of more frequent price adjustments will also benefitSector: Integrated Oils Sinopec and possibly rerate the stock on top of earnings growth. Petchems is very weak now, but next year if the global economy picks up, we don’t expect further weakness. SinopecAnalyst: Brynjar Eirik Bustnes, CFA trades at 1.0x 2013E book and should generate close to 13 pct roe going forward on our estimates, which indicates to us it is undervalued.The United Laboratories Commodity prices are trending or stabilizing around 2012 high. With TUL highly levered with sales of commodity prices due to large fixed costs and high capacity, the businesses ofSector: Pharmaceuticals intermediates and bulk medicines can become very profitable quickly especially TUL has announced a price increase of 20rmb/kg for 6-apa and amoxicillin bulk medicine. We thinkAnalyst: Sean Wu Antibiotics restriction is already priced in and finished product sales are rebounding back to 2H11 levels when price cuts and restriction of antibiotics use were not in effect. Current valuation does not reflect the great potential of the company’s human insulin franchise, in our view.ZTE ZTE is trading at 1x forward P/B, almost 3 std. below its historical mean, and such valuation is on par with the worst point of Global Financial Crisis. The stock has come off by 10% inSector: Technology last 2 trading sessions on the back of perceived US political risk, which we see as limited given 1) ZTE does not sell infrastructure telecom equipment in the US; 2) US handset revenueAnalyst: Qin Zhang accounts for only 7%/4% of 1H12 revenue/OP. We expect the acceleration of LTE deployment of China Mobile will help the stock re-rate to 1.5x P/B, or 2 std. below mean. TD-LTE spectrum allocation announcement has confirmed that TD-LTE infrastructure build could happen soon, and further clarity on CM’s TD-LTE capex budget for 2013 in Nov-Dec could present the next catalyst. Our Dec-13 PT is HK$16.Stocks to AvoidAnta Sports Products Ltd. We maintain our UW rating. We believe the sportswear sector is still struggling with inventory problems and heavy discounting. We have not yet seen any major consolidation takingSector: Footwear place in the sector and expect more shake-up as franchisees will in our view find it difficult to run profitable businesses given high discount levels. As partially seen in 1H result weAnalyst: Ebru Sener Kurumlu believe current margins of the company are not sustainable and expect margin erosion to continue in 2012 and 2013.Aluminum Corporation of China - H We think Chalco will struggle to return to profit this year — we forecast a loss of Rmb4.6bn. The company’s diversification strategy (coal, iron ore and power) will add further pressure toSector: Metals an already stretched balance sheet. Meanwhile, Indonesias recent policy changes to bauxite exports have impacted Chalco’s operations, forcing alumina output cut. With valuations stillAnalyst: Daniel Kang well above historical trough levels, we recommend an UW position.China Merchants Holdings Intl China’s weaker-than-expected industrial activity in May with a sharp decline in new export orders a key driver for de-rating. We view CMHI as a proxy for China’s industrial activity andSector: Conglomerates & Multi-industry containerized trade flow, with its key ports located in Shanghai (SIPG), Hong Kong (MTL) and Western Shenzhen. China’s NBS PMI eased more than expected to 50.4 in May, nearlyAnalyst: Karen Li, CFA 2.0-pt below market expectations and a sharp deceleration from the April reading (53.3). CMHI’s valuation–at 13x P/E FY12E and 50% premium to COSCO Pacific (“CP”)–does not look cheap to us. Despite the richer valuation compared to its peers, CMHI’s FY12E ROE is only on par with our estimate for CP, while dividend yield is lower than HPH Trust (CMHI at 3% vs. HPHT’s 10% on a 1-year forward basis).Glorious Property Chairman of Glorious Property is alleged by US SEC to have engaged in potential insider trading. We expect the litigation to drag on for a period and would be a major investor concern.Sector: Property Although contract sales run rates improved in Jun/Jul, Glorious would still need to roll-over Rmb5B of bank borrowings due in 2H12. We think the potential litigation may affect theAnalyst: Lucia Kwong, CFA companys access to loans especially offshore borrowings.New China Life Insurance Company Ltd - A We think New China Life likely to stay under pressure despite the recent de-rating in view of weak monthly premium growth trend with restructuring currently underway and overhangSector: Insurance - Life concern from possible stake disposal by existing shareholders (including Baosteel) when lock-up period expires in mid-Dec. Its capital position remains more vulnerable than peers givenAnalyst: Bao Ling Chan limited room to issue subordinated debts. It also appears to be using a relatively aggressive set of investment yield assumptions in view of its weak investment track record.PetroChina Petrochina trades at a 30 pct premium to Sinopec, meaning it is already pricing in refining profit turnaround and natural gas price reform in our view. Nat gas price reform is unlikely inSector: Integrated Oils the next 1-2 years, hence with increased imports of loss generating nat gas, we think Petrochinas earnings are capped. On top of this, we estimate an increase in capex which isAnalyst: Brynjar Eirik Bustnes, CFA already at very high levels will likely result in 13-14 pct ROE. The stock trades at 1.3x 2013E book, which is overvalued, in our viewSource: J.P. Morgan Lan Deng’s role has been limited to assisting in gathering information for this report 7
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comTable 4: Valuation comps for our highest-conviction recommendations Mkt cap Rating Price PT P/E P/B ROE DYCompany BB CMP (US$MM) target End date FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13ETop Picks21Vianet Group Inc. VNET US 12 677 OW 16.3 31-Dec-13 141.3 87.2 8.4 7.9 5.6 9.3 0.0 0.0Baidu.com BIDU US 113 39,370 OW 200 31-Dec-13 24.4 18.1 9.6 6.1 48.6 41.3 0.0 0.0Beijing Capital International Airport 694 HK 5.22 2,917 OW 8.3 31-Dec-12 13.1 10.6 1.2 1.1 9.3 10.5 1.1 1.4Beijing Enterprises 392 HK 49.4 7,250 OW 60 30-Jun-13 18.4 13.7 1.2 1.1 6.6 8.2 1.6 2.2China Shenhua Energy - H 1088 HK 31.45 73,309 OW 35 30-Jun-13 11.1 10.3 2.0 1.8 19.0 18.3 3.4 3.7China Shipping Container Lines 2866 HK 1.88 3,708 OW 2.85 31-Dec-13 NM 25.2 0.7 0.7 -1.0 2.7 0.0 0.0China ZhengTong Auto 1728 HK 4.71 1,342 OW 5.5 30-Jun-13 12.9 10.1 1.2 1.1 9.8 11.1 0.0 1.1Country Garden 2007 HK 3.06 7,197 OW 3.55 30-Jun-13 7.7 6.9 1.2 1.1 17.4 16.7 5.0 5.7Golden Eagle Retail 3308 HK 17.08 4,259 OW 19.5 30-Jun-13 21.7 19.1 5.2 4.6 25.4 25.4 2.3 2.6ICBC - H 1398 HK 4.88 214,727 OW 5.8 31-Dec-12 6.2 6.3 1.2 1.1 21.3 18.3 5.1 5.1Nine Dragons Paper 2689 HK 4.78 2,876 OW 5.3 31-Dec-13 13.1 9.7 0.8 0.8 6.7 8.6 1.8 2.4Ping An Insurance Group - H 2318 HK 61.35 56,678 OW 65 31-Dec-12 15.9 13.1 2.6 2.2 17.5 18.2 0.9 1.0Sinopec Corp - H 386 HK 7.82 85,238 OW 9.0 31-Dec-12 7.5 6.8 1.0 0.9 14.6 14.4 3.2 3.5The United Laboratories 3933 HK 4.15 871 OW 4.5 31-Dec-12 21.8 12.3 1.3 1.2 5.6 9.9 1.7 3.1ZTE 763 HK 10.94 4,949 OW 16.0 31-Dec-13 13.9 9.9 1.2 1.1 8.7 11.5 2.4 3.4Stocks to AvoidAnta Sports Products Ltd. 2020 HK 6.9 2,220 UW 3.6 30-Jun-13 9.6 14.4 2.0 2.0 21.9 13.9 6.4 4.3Aluminum Corporation of China - H 2600 HK 3.39 9,356 UW 2.7 30-Jun-13 NM 138.2 0.8 0.8 -9.3 0.6 0.0 0.0China Merchants Holdings Intl 144 HK 23.8 7,645 UW 20 31-Dec-12 13.4 12.8 1.3 1.2 9.9 9.9 3.3 3.4Glorious Property 845 HK 1.15 1,156 UW 1.00 31-Dec-12 5.0 5.3 0.4 0.4 8.0 7.4 0.0 0.0New China Life Insurance Company Ltd - A 601336 CH 23.24 11,192 UW 25 31-Dec-12 23.6 15.5 2.1 1.9 9.3 12.7 1.8 0.6PetroChina 857 HK 10.7 258,390 UW 8.75 31-Dec-12 10.4 10.1 1.5 1.3 14.6 13.9 4.3 4.5Source: J.P. Morgan estimates, Bloomberg. Pricing date is 16 October 2012.Figure 4: 2012 Earnings growth vs. Earnings revisions momentum 6 56 3 month back 1 month back Current 2012 EPS Growth (RHS) 49 3 42 0 35 -3 28 -6 21 -9 14 7 -12 0 -15 -7 -18 -14 Real Estate Cons. Staples Cons. Disc. Financials Healthcare Insurance Telecom Industrials Materials China Banks Utilities IT EnergySource: J.P. Morgan, IBES. Pricing date is 15 October 2012. Note: The bar shows the 3 month earnings revision (%) today, 1 month back and 3 month back. The red dots shows you 2012 earnings growth estimate as of today8
    • Adrian Mowat Asia Pacific Equity Research(852) 2800-8599 18 October 2012adrian.mowat@jpmorgan.com members; Hu Jintao, Wu Bangguo, Wenjiabao, JiaChina leadership change Qinglin, Li Changchun, Xi Jinping, Li Keqiang, He Guoqiang, and Zhou Yongkang).The 18th National Congress of the Chinese For the top position the expectations are: Xi JinpingCommunist Party (CCP) starts in Beijing on 8 succeeds Hu Jintao the general party secretary. LiNovember. The CPC meet every five years. It is the Keqiang succeeds Wen Jiabao as premier. It is likelymost important event in China’s political calendar this that the standing committee is reduced to seven. Theyear. The congress has two major tasks: election of other Politburo Standing Committee (PSC) members, politburo and Central Committee is still wide1. To report the work done by the party since the last open. party congress and elect new party leaders2. To set the guidelines for the coming five years. The 12th National People’s Congress (NPC) in March 2013 will elect the top leaders of the new government,At the top of the agenda is the election of new party including the president, premier and the state council.leaders, in four steps. The NPC is the highest state body and the only legislative house in China, and consists of nearly 3,000 The first step, which has already taken place, is to delegates. The NPC meetings occur at the same time as elect delegates for the party congress. A total of the Chinese People’s Political Consultative conference. 2270 delegates have been elected from Beijing, local areas, and the army. The election has become more Myths of leadership change competitive in recent years, although delegate The last leadership change was in March 2003. The candidacy is controlled by the Organization economy was suffering from deflation and the shock of Department of the party. SARs. These events were more important for the market The second step is the election of members of the and economy than leadership change. Events in 1989 led Central Committee of the party by these delegates. to Deng Xiaoping’s go for growth policies. In the early 1990s growth and inflation was high. In 1993 the PBoC The third is the election of the Political Bureau by eventually tightening policy and devalued the Renminbi the Central Committee. There are 24 members now, by a third. We find it shocking that commentators after removal of Bo Xilai. claim that leadership will result in specific economy or Finally the appointment of the Standing Committee market events based on historical relations. Two events of the Political Bureau. There are currently nine are not statistically significant and conditions were very different.Figure 5: Political Transition: important timelineSource: J.P. Morgan Economics 9
    • Adrian Mowat Asia Pacific Equity Research(852) 2800-8599 18 October 2012adrian.mowat@jpmorgan.com 3. With labor market healthy and inflation increasingWhat can we say? into 2013 the need and the room for stimulus is low.1. Clarity on membership of the standing committee should reduce political uncertainty. Figure 6: China CPI and Nominal GDP2. Current goals are likely to be restated. The new Nominal GDP (LHS, %oya) 40 30 leaders will reemphasize goals of building a Headline inflation (RHS, % oya) “harmonious society” and achieving balanced and 25 efficient economic growth in his new term. This 30 20 means improving the social safety network (e.g. 15 universal medicare and pension system), reducing 20 income inequality and developing the west, and etc. 10 And there may also be more aggressive economics 5 reforms including pushing forward China’s financial 10 and economic reforms and liberalization, capital 0 account liberalization, Rmb internationalization and 0 -5 interest rate liberalization. Amore cynical view is that 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 many of the goals were stated a decade ago. Since Source: CEIC. Note: Shaded area denotes deflation period then the economy is less balanced and income inequality higher.Figure 7: Political transition: 3-tier leadership structureSource: J.P. Morgan Economics10
    • Adrian Mowat Asia Pacific Equity Research(852) 2800-8599 18 October 2012adrian.mowat@jpmorgan.com Figure 8: Members of StandingCommittee of Political Bureau of the China Communist Party (CPC)Name PositionsSep 2002Jiang Zemin General Secretary of the CPC, President of PRC, Chairman of the Central Military CommissionLi Peng Chairman of the Standing Committee of the National Peoples Congress NPCZhu Rongji Premier of the State CouncilLi Ruihuan Chairman of the National Committee of the Chinese Peoples Political Consulative Conference (CPPCC)Hu Jintao Vice President of PRC, General Secretary of the CPC, Vice Chairman of the CPC Central Military CommissionWei Jianxing Member of the Secretariat of the CPC Central Committee, Secretary of the Central Commission for Discipline InspectionLi Lanqing Vice Premier of the State CouncilOct 2007Hu Jintao General Secretary of the CPC, President of PRC, Chairman of the Central Military CommissionWu Bangguo Chairman of the Standing Committee of the NPCWen Jiabao Premier of the State CouncilJia Qinglin Chairman of the National Committee of the Chinese Peoples Political Consulative Conference (CPPCC)Zeng Qinghong Vice President of PRC, General Secretary of the CPC, President of the Party School of the CPC Central CommitteeHuang Ju * Vice Premier of the State CouncilWu Guanzheng Secretary of the Central Commission for Discipline InspectionLi ChangchunLuo Gan State Councilor, Secretary of the Political and Legislative Affaires committee of the CPC Central CommitteeOct 2012Hu Jintao General Secretary of the CPC, President of PRC, Chairman of the Central Military CommissionWu Bangguo Chairman of the Standing Committee of the NPCWen Jiabao Premier of the State CouncilJia Qinglin Chairman of the National Committee of the Chinese Peoples Political Consulative Conference (CPPCC)Li Changchun Member of the Standing Committee of the Political Bureau of the CPC Central CommitteeXi Jinping Vice President, Vice Chairman of the Central Military CommissionLi Keqiang First ranked Vice Premier and deputy party secretary of the State Council of the PRCHe Guoqiang Secretary of the Central Commission for Discipline Inspection The Secretary of the Central Political and Legislative Committee, an organ directing Central Government legal policy and theZhou Yongkang legislative agendaSource: baidu website, * Huang Ju died in June 2007. 11
    • Haibin Zhu Asia Pacific Equity Research(852) 2800-7039 18 October 2012haibin.zhu@jpmorgan.com sequential growth by 0.30%pt in 4Q and 0.50%pt in eachEconomics quarter of 2013. As a result, our forecast of full-year GDP growth for 2012 stays at 7.6%oya and for 2013 it isChina’s September manufacturing PMI shows that the revised down to 8.0% from 8.3%. The dynamics ofeconomy is on the way of recovery, although the growth pattern remains similar. In the coming quarters,improvement in sequential growth momentum remains the economy should see moderate improvement on aweak. Both NBS and Markit manufacturing PMIs seasonally-adjusted basis. In yoy terms, we expectrecorded moderate improvement over the previous growth to weaken further and bottom in 4Q12.month, but still remained below the 50-point threshold.In addition, exports posted moderate growth in China: manufacturing PMIsSeptember, while the shipments to developed markets Index, sa NBS PMIremained soft. NBS PMI 60The acceleration in policy easing since May hassupported pickup in public investment in areas such asinfrastructure, railway, environmental protection and 50clean energy. However, the impact appears to bemoderate and has been offset by weakness in exports and Markit PMIthe manufacturing sector. In particular, industry profits 40continued to decline, falling by 6.2%oya in August, and 04 05 06 07 08 09 10 11 12 13profit margins eased to 5.3%. The weakness in industrialprofits, together with the high destocking pressure, has China: real GDP growthcontributed to the soft domestic demand. %oya %q/q, saar %oya 16 20Fiscal policy plays a more prominent role than monetary 14 %q/q, saarpolicy at this moment. In recent months, both the central 15and local governments have announced large-scale 12investment projects, with total value amounting to nearly 10 10CNY20 trillion. However, we expect the immediate 5impact on growth to be moderate, as most of these 8projects will span over the next several years, and local 6 0governments face funding difficulties. On monetary 05 06 07 08 09 10 11 12policy, since the two interest rate cuts in June and July,the PBoC appears to adopt a cautious attitude in China: real GDP and industrial productionmonetary easing. Policy rate has remained on hold since %q/q, saar, both scalesJuly, and reverse repos have been used to delay the 20 Real IP 40timing of widely expected RRR cuts. 15 30Looking ahead, the likelihood of further interest rate cuts 20in 2012 is diminishing. From economic perspective, we 10expect growth momentum to improve but inflation to 10 5 Real GDPpick up towards the end of the year as favorable base 0effect disappears. In addition, the busy political agenda 0 -10going ahead implies that the prospect of meaningful 04 05 06 07 08 09 10 11 12policy easing in the near term becomes more remote.We have revised our monetary policy forecast to Source: J.P. Morgan Economicsunchanged interest rate and one more 50bp RRR cut forthe rest of the year. This is one rate cut and one RRR cutless than our initial expectations. The shortage inmonetary easing implies that the recovery of growthmomentum could be weaker than we had initiallyexpected. Our model suggests that it will bring down12
    • Nick Lai Asia Pacific Equity Research(886-2) 2725-9864 18 October 2012nick.yc.lai@jpmorgan.com Table 5: Demand/Supply dynamicsAutomobiles mn units; % Capacity 2009 2010 2011 2012E 2013E Total Capacity 12.3 15.0 17.5 19.6 23.0Demand for PVs – luxury boom for the next decade Incremental n/a 2.702 2.47 2.115 3.41 yoy change (%) n/a 22% 16% 12% 17%A multi-year theme in the auto sector for the next decade Production 10.6 14.1 15.1 16.1 17.2is now lying ahead - rising penetration. We reckon this yoy change (%) n/a 33% 7% 6% 7%rising tide will especially favour the luxury auto vehicles Utilization (%) 86.3 94.1 86.5 82.2 75.0 Net exports/(imports) -0.5 -0.5 -0.5 -0.5 -0.6as the spending power of the upper middle class in China Sales volumeis expected to grow rapidly with wealth accumulation Domestic sales 10.4 13.8 14.5 15.3 16.5and property market’s up-cycle. We estimate luxury cars yoy change (%) n/a 33% 5% 6% 8%(Mercedes-Benz, BMW, Audi and Lexus) to grow at Net exports/(imports) 0.7 0.8 1.0 1.2 1.2 yoy change (%) n/a 14% 25% 20% 0%34% CAGR in 2007-2015E, ultra-luxury cars Inventory 0.0 0.0 0.1 0.1 0.1(Lamborghini, Ferrari, Bentley and Rolls-Royce) to grow ROE (%) 19% 24% 19% 16% 16%at 43% CAGR, and broader PV market in the same Source: Company data, TEJ, and J.P. Morgan estimatesperiod to grow at merely 13% CAGR. The latest tensions Figure 9: YoY growth of new car sales by segmentbetween Japan and China also highlight some risk in the Luxury Ultra-luxury Total passenger vehicledemand for Japanese auto brands in China. 100% Growth of luxury 90% cars is 3-4 times 80%Supply for PVs – overcapacity being a key issue faster than overall 70% market in our viewUnder our assumption of a luxury boom ahead, imported 60%cars will still see demand over supply, but domestically 50%made cars will see some overcapacity risks. We forecast 40% 30%capacity utilization in PVs market to deteriorate from 20%87% in 2011 to 82% in 2012, and further down to 75% in 10%2013E. This imbalance implies: 1) declining operating 0%leverage and hence margin in the sector, and 2) price 2008 2009 2010 2011 2012E 2013E 2014E 2015E Source: CAAM, J.P. Morgan.competition is inevitable when auto makers face Figure 10: Market share of domestic made cars by source ofinventory pressures. We see this overcapacity risk to brands (i.e. Japanese, Korean, Chinese, European) in Chinaremain especially in the medium-end car segments from 100%2H12 onwards. Therefore auto producers that havehigher exposures to these segments might face a greater 80%margin pressure. 9% 14% 14% 13% 60% 12% 14% 17% 17% 15% 21% 23%Margins & Returns – luxury/non-Jap outperform 40% 23% 26% 29% 31% 25% 23% 23%From this angle, we are forecasting a better earnings 20% 40% 36%momentum/profitability for those companies that 29% 29% 29% 28% 28% 30% 32%dominate in the luxury auto market. Among auto dealers, 0%Baoxin (strong presence in luxury/ultra-luxury auto sales) 2004 2005 2006 2007 2008 2009 2010 2011 YTDis expected to make >25% ROE for 2012E/13E whilst Western Japan China Korea Others 2012Zhongsheng (Toyota’s major dealer) is expected to make Source: China Auto Market and J.P. Morgan11~13% ROE. Among automakers, Geely and Great Figure 11: Commercial vehicle sales growth by segment analysisWall are domestic auto makers that will benefit from 80% 68%technology advance and SUV sales whilst DFM is 60% Truck Trailerexpected to suffer from its high exposures to Japanesebrand, Nissan. 40% 37% 26%CVs on a downward trend 20% 9% 5% 5%We worry CV sector because of two structural challenges 2% 2% 0%and concerns: 1) China is transforming from a 2009 2010 2011 2012E 2013E -5%investment-heavy economy into a more balanced one, -20%And 2) substitution effect from the improving railway -27%network. Therefore we hold an UW stance on both of our -40%CV stock: Weichai Power and Sinotruk. Source: CAAM, J.P. Morgan estimates.. 13
    • Josh Klaczek Asia Pacific Equity Research(852) 2800-8534 18 October 2012josh.klaczek@jpmorgan.com Figure 12: China’s Policy Path Shows a Turn in M1, +7.3% Y/YBanks 3500 40% 35% 3000While it’s too early to call a turning point in onshore 30% 2500liquidity, the rise of M1 to +7.3% Y/Y, after 25%languishing below 5% for 8 consecutive months, helps 2000 20%temper the risk of a more acute rise in NPLs. We also 15% 1500see positives in lending data. While new loans came in 10%below estimates at RMB623bn (JPMe: 615bn), the 1000 5%increased mix of longer-term lending August (40%) and 500 0%September (46%) is +ve for the NIM outlook & possiblyreflects improving credit demand. FX Reserves ($bn) RRR Loan Growth M1 Growth Source: CEIC.Improved liquidity growth reflects both the increasing Figure 13: Boosted by Recent Liquidity Injections from PBOC -400 -3000use of OMO, with almost RMB1 trillion of net injections -300 -2500since May 2012, as well as the lagged impact from the -2000previous 3 RRR cuts in Dec-11, Feb-12, and May-12. -200 -1500The rise in M2 to +14.8% Y/Y in September from -100 -1000+13.5% in August could also reflect increasing credit 0 -500growth via bond issuance, which is up 85% Y/Y on a 100 0 500YTD basis. 200 1000 300 1500Some argue that bond growth matters less because banks 400 2000are the predominant buyer of supply, but this confusestwo points. From a leverage & credit perspective, Via Issuance Via Maturity Cum. Net Drain (+) / Injection (-) (RHS)buying bonds does add risk to bank balance sheets; Source: CEIC.but it also boosts money supply via the money Figure 14: Depedence on ST-Lending Also Looks to be Decliningmultiplier. This may be an important driver of credit 1,200 80%creation in spite of the LDR limit of 75%, allowing 70% 1,000China to further boost leverage without compromising its 60%prudential ceiling on LDRs. 800 50% 600 40%The key negative we see in recent data is the persistent 30%trade surplus, which shows an unwillingness and/or 400 20%inability to rebalance the economy. The key number is 200 10%not better growth in merchandise exports (+9.9% Y/Y) in 0 0%September (Aug: +2.7%), but persistently weak importgrowth, which rose just +2.4% Y/Y (Aug: -2.6%). Thecontinued rise in FX reserves, by $50bn in 3Q12 & Short-term Lending LT Corporate LT Personal ST as % of Total$109bn YTD, also likely limits the potential for further Source: CEIC.monetary easing going forward. Figure 15: The Key is Whether Banks Sacrifice Growth to Protect Pricing 70 (%)The muted outlook for future easing reinforces our viewthat ICBC & CCB remain our top picks despite better 60M2, M1, and export data. As a sidenote, export data is 50+ve as it relates to rising NPLs in the manufacturing & 40trade-related sectors (+5% H/H, +31%), which we 30reviewed in our 2Q report (see link). In contrast, CMB 20(UW) & Minsheng (N) remain constrained by both high 10LDRs (73%, 72%) & low core capital (8.3%, 8.4%).Moreover, these banks are already growing assets well- 0above loans (26/20% vs. 15/14%), which could bedilutive to long-term NIM & ROA, particularly from 10% Above 10-30% Above 30-50% Above 50-100% Above Above 100%interbank lending. Source: CEIC.14
    • Nick Lai Asia Pacific Equity Research(886-2) 2725-9864 18 October 2012nick.yc.lai@jpmorgan.com Table 6: Demand/Supply dynamicsCement mn tons Capacity 2009 2010 2011 2012E 2013E Total Capacity 2,081 2,281 2,488 2,633 2,691Oversupply - big issue for 2008-2013E Incremental 301 200 207 145 58 yoy change (%) 17% 10% 9% 6% 2%Year to August, the new FAI in cement business is Production 1,629 1,868 2,063 2,135 2,178Rmb43bn and the accumulated investment is Rmb269bn. yoy change (%) 17% 15% 10% 3% 2%Although this represents -49%YoY and -13%YoY Utilization 78.3 81.9 82.9 81.1 80.9 Demandrespectively, 6m-average monthly demand growth has Consumption 1,617 1,855 2,055 2,122 2,159fell from 8% from a year ago. We forecast total new yoy change (%) 19% 15% 11% 3% 2%capacity coming on line during this period could top 1bn Inventory 12.0 13.0 8.0 13.0 19.0tons whilst at the same time incremental new Gross Profit* (%) 22% 31% 33% 22% 22%consumption collectively will be merely ~850mn tons. Source: CEIC, Company data, Digit Cement, and J.P. Morgan estimates *Under JPM coverageThis gap of ~150mn tons is significant if we compare to Figure 16: FAI in China cement industrythe entire cement consumption in the US being merely Accumulated investment60~70mn tons per year, according to Taiwan Cement. 450 New investment 383 397Based on current demand growth run rate in China at 400 354around mid single digit, it may take another year to 350digest the additional volume. Cement sector is facing 300 255 269quite a challenge here. 250 200 172 150Economic data reinforce our view of poor outlook 108 114 119 100Whilst monetary easing is short of expectations due to 43 50government’s fear of inflation, fiscal easing takes time to 0feed into real investment. Our house view is one more 2008 2009 2010 2011 Aug-1250bp RRR cut and no significant fiscal stimulus by the Source: China Cement Association, J.P. Morgan.year end. The approved investment projects are expected Figure 17: Accumulated demand vs. supply in 2008-2013Eto have a moderate impact on the near-term growth (mn tons)outlook and the potential funding problem in the local 1,200government might further limit the magnitude and speed 1,000of the impact. From this angle, we see less upside risk to 2013Eour base case of poor demand outlook and sliding 800 Major 2012Eutilization rate for the cement sector for the next 6~9 demand 600 2011months. /supply gap 2010 400 2009Cement price stays flat from now to 1H13 2008Cement price have fallen 12% in the first 9 months. The 200falling trend has turned slow in 3Q (-3%QoQ). We are -expecting cement price to stay flat from now to 1H13, Additional demand Net supply increasewithout much downside as lots of smaller players are Source: China Cement Association and J.P. Morgannow struggling to breakeven and stay in business. Larger Figure 18: Cement price change by region in Chinaplayers have less incentives to cut price as profitability 5% 3%(gross profit per ton) has dropped by ~50% or more 1% -6% -5% 0% -3% -3% 0% -4%compared to 1H11. Seasonal production cut during the Southwestern China Northwestern China Northeastern China Central/Southern China Northern China 0% Eastern China ChinaChinese New Year in 1Q13 might lead to some price -5%recoveries, though not significant, in 2Q13. -10% -6% -12%Stay with the market leaders: Anhui Conch & CNBM -15% -14%Under such a difficult environment, we favour bigger -20%players like Anhui Conch and CNBM as they have a -18% -25%better stance to stay profitable and to even squeeze out -25% YTD 3Q12 so farthe smaller players. Among these two names, we prefer -30%Anhui Conch for its lower leverage (net debt to equity at Source: China Cement Association, J.P. Morgan27% vs. 223% for CNBM). We stay Neutral on BBMGand UW on smaller players: CR Cement and Sinoma. 15
    • Ebru Sener Kurumlu Asia Pacific Equity Research(852) 2800-8521 18 October 2012ebru.sener@jpmorgan.comConsumer Figure 19: China household paper industry supply and demand differenceIn consumer front two subsectors are seeing pressure 000 tonsfrom demand/supply in balance in our view. 50% 44% 3,000 45%In staples we are seeing notable supply build up in tissue 40% 35% 2,500paper. Chart on the left summarizes our analysis on 35% 2,000oversupply which surges to 36% in 2012 and 44% in 30%2013 vs historical levels of 16-17%. Therefore, we 25% 17% 1,500 17% 16% 2,672 20%believe margins will be under pressure for majority of 15% 1,885 1,000tissue products. We have already started to see 10% 500 5% 686 706 863aggressive price promotions in the market. Vinda andHengan are vulnerable companies. 0% 0 2009 2010 2011 2012E 2013E Oversupply % of total demandIf oversupply occurs, we believe toilet roll products willbe most vulnerable, because quality requirements and Source: China National Household Paper Industry Association, CNHPIA.brand loyalty are relatively lower for toilet rolls, in our Euromonitor.view. Vinda might be more vulnerable given its higherexposure in toilet rolls. Toilet rolls accounted for 61% of Figure 20: Department store sales as % of Retail sales (2011)sales for Vinda, For Hengan, toilet was 29% of tissue 35.0 28.9paper division sales and tissue paper is about 49% of 30.0overall sales. 25.0 20.2 20.0 15.0Within discretionary universe we believe department 10.0stores is a distribution channel which is seeing lots of 6.4 6.2 5.5 3.0 5.0 2.6 2.1 2.0 2.0supply coming to the market and especially given low -consumer spending so far this year coupled with just USA UK HK,China Malaysia China Taiwan Indonesia Thailand Japan S. Koreaemerging competition from other distribution channelssuch as shopping malls, e-commerce and outlet malls, we Source: J.P. Morgan, Euromonitorexpect department stores to lose share. Figure 21: Department store density per million of urbanIn China department store density is relatively high population (2011)compared to the region. Chart on the RHS also shows 14.0% 11.6%that in China department stores are still the main 12.0% 9.9%distribution channel accounting for 10% of total retail 10.0% 9.4% 9.3% 7.9%sales. In the long run we expect department stores lose 8.0%share to other formats. Therefore we are cautious on the 6.0% 5.7% 4.9% 4.6% 4.2%sector and only focus on few select companies which is 4.0% 2.8%likely to increase their market share given that they are 2.0%introducing more relevant formats which are able to 0.0%compete with malls. We believe one such player is S. Korea China HK Taiwan Malaysia Japan USA UK Thailand IndonesiaGolden Eagle. Especially given fragmented structure ofthe market we believe the company can easily increase Source: Euromonitor, IMFits market share from current levels.Market Share Comparison (%) China Japan USA South Korea Company Market Share Company Market Share Company Market Share Company Market Share Parkson Retail 2.0 Takashimaya 12.5 Macys 17.9 Lotte Shopping 48.5 Dashang Group 1.8 Mitsukoshi 8.7 Kohls 14.1 Hyundai Department Store 21.1 Beijing Wangfujing 1.8 Daimaru 7.1 JC Penney 11.6 Shinsegae 15.2 Shanghai Bailian 1.7 Sogo 6.7 Sears Holdings 10.0 E Land World 5.2 Top 4 7.3 Top 4 35.0 Top 4 53.6 Top 4 90.0 Source: Euromonitor, J.P. Morgan.16
    • Brynjar Eirik Bustnes, CFA Asia Pacific Equity Research(852) 2800-8578 18 October 2012brynjar.e.bustnes@jpmorgan.comEnergy (O&G) Table 8: New ref capacity in China by company – 2012-2015 – mn BOPDDemand for petroleum products in China is growing atvery low rates, around 2% ytd vs last year. Diesel in 15 10%particular is weak, driven by weak exports and industrial 12 8% 9 6%production. Gasoline is slightly better, possibly due to the 6 4%classification of products used in the gasoline pool. 3 2% - 0%Table 7: Product demand in China – mn BOPD 2012E 2013E 2014E 2015EkBOPD 2011 2012-TD YTD y/y %Diesel 3.4 3.4 0.7 Sinopec PetroChina Others y/y % - RHSGasoline 1.8 1.9 11Jet Kero 0.4 0.4 6Total products 9.3 9.4 2 Source: JPMorgan estimates, Bloomberg.Source: JPMorgan estimates, BloombergWhile demand growth is weak, Chinese companies are Figure 22: Chinese annual (2009-2011) GRM vs Brent oil priceexpanding refining capacity at a greater rate. Post 2012 12 120we expect a product demand growth rate of 4%, whichcompares to refinery capacity build in the range of 6-7%. 8 90The result of this is either refineries have to run at lower 4 60rates or if they run at higher rates we will get more 0 30exports of products from China compared to historicallevels. Another effect could be closures of smaller -4 0 10M12 2009 2010 2011inefficient refineries (teapots – 3 mn BOPD/30%), whichthe government has wanted to do for quite some time, but Theorectical Chinese GRM Brent (US$/bbl - RHS)met resistance at the local level.In term of profitability and margins in the refining Source: Bloomberg, J.P. Morgan estimatessegment, it has in recent years been very difficult tomake money as end user prices are controlled by the Figure 23: Chinese utilization (%) vs capacity (mn BOPD)government while input/feedstock cost of crude is atinternational levels (China imports more than half its oilfeedstock). Refineries make money (from 2004-2008they were loss making) only when oil droppedsignificantly in late 2008 and throughout 2009/1H10. Wehence don’t relate margins/profitability of refineries toany levels of supply/demand/utilization, but rather seethis entirely depending on refined product pricing policy.We are assuming 80% utilization as the absolute low, andour demand picture hence results in increased exports Source: Bloomberg, J.P. Morgan estimatesfrom China. Figure 24: Chinese net imports of total productsPricing policy is moving towards becoming moredynamic and linked to international oil prices. Since late 352008 this “formula” has been in place, but as oil moved 30up above US$100/bbl, it “fell apart” and prices did not 25follow upwards. Currently we do expect further 20 15improvement in margins (September apparently avoided 10losses on cheaper imports and price hikes) and next year 5our expectations of US$100/bbl Brent will make it more 0 2004 2005 2006 2007 2008 2009 2010 2011 10M12likely that refineries make decent margins. This Net product imports - mn tonturnaround in margins will be main driver behindearnings growth by Sinopec and PetroChina, where we Source: Bloomberg, J.P. Morgan estimatessee Sinopec having best leverage to this and hence is ourtop pick in the Chinese oil sector. 17
    • Kenneth Fong , CFA Asia Pacific Equity Research(852) 2800-8597 18 October 2012kenneth.kc.fong@jpmorgan.comGaming Figure 25: Macau monthly gaming revenue growth Monthly Gaming Revenue (MOP bn) yoy change (R.H.S) 30 100%Headline revenue: September generated MOP23.9bn, up 2512% yoy or down 9% mom. By segment, VIP rose 7% 80%yoy and mass was up a strong 30%. VIP junket chips 20volume (not affected by luck) was flat yoy (improved 60%from August’s -7%) but down 7% mom due to normal 15seasonality. Win rate was 3.18%, above historical 40% 10average of 3.1%. The favorable comparison forSeptember is in part helped by the typhoon that hurt last 5 20%year revenue and extra weekend days this year. Overall,headline revenue for 3Q was flat qoq with high-margin 0 0% Oct 10 Nov 11 Dec 11 Jan 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Nov 10 Dec 10 Feb 11 Apr 11 Oct 11 Jan 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Feb 10 Mar 10 Apr 10 Jan 11 Mar11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Feb 12 Mar 12 Apr 12Mass (+8% qoq) outpacing VIP (-2% qoq).With twomajor infrastructure improvements scheduled to becompleted by end of 2012/early 2013, mass should Source: J.P. Morgan estimates, DICJ.continue to stay strong medium term. This should benefit Figure 26: Macau VIP gaming revenuethe sector profitability, in our view. MOP bn Monthly VIP revenue yoy change (R.H.S.) 25 140%Market share: VIP segment: By junket rolling chip 120%market share, Sands China experienced the strongest 20mom improvement of 1.3%. However, its headline VIP 100%market share (-2.1% mom) was hurt by a very weak luck 15 80%factor. MGM’s chips share decreased by 1.6%. Mass 60%segment: SJM’s mass share gained the most by 1.4% as 10 40%Sands’ mass share also gained 0.6% after Sands Cotai 20%Central phase 2 opened. This was at the expense of 5 0%Melco Crown (-1.8%) and Galaxy (-0.4%). 0 -20% Jan 10 May 10 Jun 10 Jul 10 Oct 10 Nov 11 Dec 11 Jan 12 May 12 Jun 12 Jul 12 Aug 10 Sep 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar11 Apr 11 May 11 Jun 11 Jul 11 Oct 11 Aug 12 Sep 12 Feb 10 Mar 10 Apr 10 Aug 11 Sep 11 Feb 12 Mar 12 Apr 12Sector view – to consolidate near term: Macau gamingsector has rallied more than 20% (HSI +5%) since earlyAugust with VIP revenue stabilization. As we move Source: J.P. Morgan estimates, DICJ.closer to the end of the year, investors will increasingly Figure 27: Macau mass gaming revenuefocus on November and December revenues to assess thesector’s growth momentum and to form the new base MOP bn Monthly Mass revenue yoy change (R.H.S.)case expectation for 2013. As such, we believe the sector 8.0 50%is likely to consolidate in the near term as the revenue 7.0 45%growth continues to stabilize and investors adjust 40% 6.0 35%expectations. That said, we do not see a lot of downside 5.0 30%to the share prices here as: 1) the valuation is still 4.0 25%undemanding at mid-teens P/Es with a 4-5% dividend 3.0 20%yield, and 2) growth expectation for 2013 is still low. 15% 2.0 10% 1.0 5%To position for the sector, we recommend investors to 0.0 0%accumulate the following stocks on weakness over the Nov 10 Dec 10 Jan 11 Mar11 May 11 Jun 11 Jul 11 Oct 11 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Oct 10 Aug 11 Sep 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 10 Sep 10 Feb 11 Apr 11 Aug 12 Sep 12next few months: (1) Wynn Macau at below HK$20.for a potentially better-than-expected 3Q result and apotential special dividend announcement in November. Source: J.P. Morgan estimates, DICJ.(2) SJM at HK$16 as a defensive name with downsidesupport from net cash balance sheet (20% of market cap)and high 5-6% dividend yield, (3) Galaxy at lowHK$20s and MGM HK$13 as key valuation support.(4) Sands China offering good entry points at HK$25-26 for its mass market focus and a gradual ramp up ofSands Cotai Central casino as catalyst for 2013.18
    • Sean Wu Asia Pacific Equity Research(852) 2800-8538 18 October 2012sean.wu@jpmorgan.com reimbursement for serious illnesses such as leukemia andHealthcare cancer. The new premium will be paid alongside that for basic medical insurance.“Strategic Report for China Health in 2020” by MOH– pointing the way to a healthier industry. The report 2013 will be a year of continued healthcare reform –stipulated that Chinese government aims to increase major uncertainty would be about tendering ofhealthcare spending as a proportion of GDP from expanded EDL: If the government releases an expandedcurrently ~5% to 6.56-7% by 2020 with government EDL list of about 700 drugs as expected by YE2012, thebudgeting increasing proportion of its spending on provinces will start tendering for drugs on the list inhealthcare, from current 5.3%, to 8% by 2015, and 11% 2013, the pricing and bidding awards will determineby 2020. The MOH also outlined plans to support the whether companies will be better off with drugs added todevelopment of seven key areas with a total budget of the list. We expect the roll-out of reimbursement reforms,400bn RMB, including the expansion of local healthcare total pre-payment control or diagnosis-related groupsystem, the prevention and treatment of psychiatric reimbursement in more areas, while seeing deepeningdiseases, the establishment of electronic information involvement of private hospital services providers. If thesystem, the prevention of major and chronic diseases, and channel markup rules get implemented starting in Aprilsupport of innovation. With GDP growing, this guideline 2013, we may see dramatic alterations to the sales andimplies 15% healthcare spending growth to 2020. marketing for drugs and even medical consumable.Hospital traffic offering encouraging sign for drug Recommendations: (1) We continue to view TUL assales in 2H12 and 2013: According to hospital traffic one of the best stocks in the healthcare space – a high-data released by MOH, up to July 2012, total number of beta play with commodity prices recovering andoutpatient visits to hospitals reached 1.39bn, up 15% Y/Y substantial potential for its insulin franchise. (2) We arevs. up 9% for the corresponding period of 2011. OW on Sino Biopharma for its top-notch productMeanwhile, total impatient visits reached 68.3mn, up portfolio and product pipeline. (3) 2877 HK is our only19% Y/Y, compared to 11% Y/Y in the corresponding UW because of its outsized exposure to EDL sales andperiod last year. The fastened pace of Y/Y growth for uncertainties and controversies surrounding continuedboth inpatient and outpatient visits probably means better widespread use of TCM injections.insurance, and lower drug prices have driven up patientvolume growth, which should be strongly positively Figure 28: Rising insurance a key driver for industry growth 900correlated with sales of drugs and medical consumables. 800The continued strength of patient volume should also 700 600bode well for 2H12 and 2013. 500 400 300Insurance coverage for critical illness may 200 100dramatically improve affordability and expand drug 0 2005 2006 2007 2008 2009 2010sales: The NDRC and six ministries of PRC jointlyannounced a new policy on critical illness insurance that New Rural Cooperative Health Care System Urban Residents Basic Medical Insurance Basic Medical Insurance Systemstipulates effective reimbursement rate for critical illnessshould not be any lower than 50%. Although through Source: MOR, J.P. Morgan research.government subsidies, up to 95% of Chinese people havesome level of health insurance, the coverage varies Figure 29: Chinese government aims to increase healthcare spending as % of GDP to 6.5-7% by 2020greatly and is very shallow in the rural areas, where it is 20.0common for the entire family falls into deep poverty 18.0 16.0when one member is afflicted with serious illness. The 14.0new policy aims to ensure that each patients total 12.0 10.0medical expenditure is no greater than the "household 8.0expenditure for healthcare," to be set at the level of the 6.0 4.0regional annual per capita disposable income. When 2.0patients medical bills for necessary treatments under the -existing basic healthcare insurance system such as ruralco-op program exceed that level, patients will be % GDP (1980) % GDP (1990) % GDP (2000) % GDP (2009)reimbursed by the newly launched critical illnessinsurance project. With a government subsidy of Rmb1 Source: MOC, J.P. Morgan research.per person, each rural resident pays Rmb9 and can claim 19
    • Karen Li, CFA Asia Pacific Equity Research(852) 2800-8589 18 October 2012karen.yy.li@jpmorgan.comChapman Deng, CFA(852) 2800-8577chapman.zw.deng@jpmorgan.com The MOR reported September’s railway FAI at Rmb73B,Infrastructure up 93% Y/Y. In particular, the month’s spend on civil works surged to Rmb64B, up 111% Y/Y, 63% M/M and 126% vs. the run rate in 8M2012. This year’s new targetChina excavator sales in August still showed no sign looks attainable assuming rail capex during theof improvement though the sequential decline remaining three months can be sustained at September’sappears to be moderating: CCMA estimated China run rate.excavator sales (including exports) at 5,511 units in Figure 30: China railway infra FAI monthly spend (FAI on civilAugust, down 30% Y/Y (worse than the 24% fall in July). works only)YTD sales totaled 90,060 units, down 36% Y/Y. The 150% 111%sequential decline in August appears to be narrowing, at 100% 56%5% M/M (vs. 31% fall in July - the beginning of the 50% 36%31% 19% 2%summer low season), but was worse than in previous 0% -1%-4%years (up 3% M/M on average in 2007–2011). Excluding -50% -17% -26% -27% -36% -20% -38% -50%distortions caused by the different timing of the CNY, -100% -59% -70% -76% -75% -52% -56%August data recorded a new low since mid-2009, on a Feb-11 Mar-11 Apr-11 May-11 Oct-11 Feb-12 Mar-12 Apr-12 May-12 Jan-11 Jun-11 Jul-11 Aug-11 Sep-11 Nov-11 Dec-11 Jan-12 Jun-12 Jul-12 Aug-12 Sep-12monthly basis. Key highlights: (1) YTD the export ratiomore than doubled: Export volume growth realized at Source: MoR80% Y/Y during the first eight months of the year,forming 5% of total industry sales (vs. 2-3% over 2009- China tollroad: traffic is bottoming out gradually:2011). Exports surged to 10% of total sales during the while tollroad traffic had been on downward trend sinceJul-Aug period. (2) Market share analysis: Domestic mid of the last year, the latest monthly figure suggestsproducers have been grabbing more market share that the traffic is bottoming out. Management confirmsduring the downturn. YTD overall share of domestic the trend based on September preliminary figures.brands rose to 46%, up 10% vs. 2011. SANY’s sharerose to 14%, up 3% vs. 2011. All major foreign brands China coalmine machinery: coalmine FAI in Chinaretreated except for CAT. The market share of Korean recorded 19% YoY growth in August, rebounding frombrands (Doosan and Hyundai) and Japanese brands 3% in July. YTD, the accumulated FAI growth remains(Komatsu, Hitachi and Kobelco) dropped by 2% and 4% resilient at 18%.each in Jul-Aug compared to 1H, while CAT’s share rose Figure 31: China Coalmine FAIby 4%. 80,000 60% 70,000 50% 60,000Equipment manufacturers: going through a 50,000 40%destocking process; Utilization rate is trending down: 40,000 30,000 30% 20%after meeting Lonking management in Shanghai, we 20,000 10%believe machinery makers are struggling with high 10,000 0 0% Jan-10 Nov-10 Jan-11 Nov-11 Jan-12 Mar-10 May-10 Jul-10 Sep-10 Mar-11 May-11 Jul-11 Sep-11 Mar-12 May-12inventory but sluggish demand growth in China. Lonking Jul-12is cutting down its inventory level from Rmb4.3b as of China monthly coalmining FAI (Rmb mn) YoY (RHS)the end of 2011 to Rmb3.4B by June 2012 by cutting Source: CEICproduction, and mgt targets to further trim down theinventory to Rmb2.8B by end of 2012. Meanwhile, Ports: Yantian’s 3Q run rate in Jul-Aug surged by 7%feedback from Japanese manufacturers suggests that their Y/Y and 19% vs. 2Q. We expect September growth ofmanufacturing plants in China right now are running at high-single-digits to low-teens based on our channelless than 30% utilization rate at the moment. checks. HIT’s volume growth stayed at high single-digits in 3Q based on our channel checks, similar to the rateChina E&C: Resurgence of China’s rail spending, achieved in 1H. HIT’s resilient performance YTD is inalong with China’s fourth raise in 2012 capex target: sharp contrast to other port operators in HK, MTL inChina’s 2012 railway infra spend target (the portion on particular. Given the overall container traffic at the Kwaicivil works only) is now lifted to Rmb516B. This is the Chung port area slipped to negative territory since June,fourth consecutive raise within just three months, while other container port operators in the Kwai Chung regionthe new target now stands at 30% above the initial target may have recorded a c10% decline Y/Y during July-of Rmb400B. This round of capex hike is once again August.asymmetric, as the spend target on equipment purchase& upgrade stays unchanged at Rmb114B; this year’s totalrailway investment therefore works out to be Rmb630B.20
    • Bao Ling Chan Asia Pacific Equity Research(852) 2800-8592 18 October 2012baoling.chan@jpmorgan.com Figure 32: Monthly premium growth trendInsurance 50% 40% 30%1H12 results were poor but showed no further worsening 20%compared to the momentum reported for 2H11. That 10%said, neither of the management has guided a better 0%outlook in 2H12. We believe that 2H12 NBV only -10%promises a modest recovery (+6% y/y) on a low base -20%effect while the outlook for 2013 remains highly -30%uncertain depending on government policy post Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 May-12 Aug-12 China Life Ping An Life CPIC Lifeleadership change. Taiping Life NCL Source: Company data. Note: Only Ping An and CTIH had reported August data as ofKey observations from 1H12 results: 1) Earnings September 11, 2012.continued to be dragged down by impairment losses,which had widened to Rmb26.1 billion (vs. 15.6 billionin 2H11). 2) Bancassurance new sales dropped by 32% Figure 33: New business value growth momentum and newy/y (vs. -17%/-38% y/y in 1H11/2H11). 3) The weak business margin trend for the life insurance sectoragency new sales (-12% y/y) suggested a broader 50% 22.0%demand issue while challenges in agent recruitmentpersisted. 4) New business margin rose sharply to 16.9% 40% 20.0% 17.3% 16.9%(vs. 13.3% in 1H11) on reduced bancassurance share and 30% 18.0% 42%better product mix for the agency channel. 5) A divergent 20% 16.0%trend in combined ratio for Ping An P&C (+20bps in 20% 21% 13.3% 22% 10% 14.0%1H12) and CPIC P&C (+310bps) but with clear sign of -2% 13.3% 10%less reserves set aside. 6) Capital position held up for 0% 12.0% 12.1% 12.5% 11.9% -1%most thanks to MTM gains on bond investments. -10% 10.0% 1H09 2H09 1H10 2H10 1H11 2H11 1H12Outlook for 2H12: 1) Uncertainties in sales outlook to NBV growth (y/y) New business margin (NBV/FYPs)-rhspersist in 2H12 with a modest NBV growth pickup from Source: Aggregate data for China Life, Ping An, CPIC, New China Life and CTIH. Note:-1% y/y in 1H12 to 6% y/y in 2H12E. 2) Sept/Oct data 1H11, 2H11 and 1H12 included New China Life data.would be crucial in signaling a bottoming of sales trend.3) The drop in A-share market since 1H12 risks loweringearnings as impairment losses widen. 4) The lack of non-life underwriting improvement in 1H12 suggests that Figure 34: Combined ratio trend for CPIC and Ping Ancombined ratio has started to deteriorate. 5) Capital 110.0%position likely to stay supported amid uncertainties in A- 105.0%share markets in view of debt issuance pipeline. 100.0%Operating outlook stays challenging: While we argue 95.0%that the worse is probably over for the sector, the 90.0%operating outlook remains challenging from theunderwriting and investment perspective. The 85.0%unexpected equity capital raising by the well-capitalized CPIC Ping An 80.0%CPIC could be a pre-emptive move by the insurer to 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12better prepare for the challenging 2013-2014. China Lifeis our near-term (6-month) top pick given further margin Source: Ping An, CPIC.improvement in 2H12, while Ping An stays as our long-term (12-month) top pick given its best insurancefranchise to mitigate a challenging growth outlook. A-share market rally and positive regulatory changes are theupside risks. 21
    • Dick Wei Asia Pacific Equity Research(852) 2800-8535 18 October 2012dick.x.wei@jpmorgan.com Figure 35: China online ad marketInternet 16,000 90% 84.0% 14,501Advertisers still remain cautious – not turning better, 14,000 80%yet not turning worse 12,000 67.8% 11,241 70%Advertisers start forming their 2013 budget. From our 10,000 60%conversation with TV and online ad agencies, sentiment 51.5% 8,227 50% 8,000for 2013 budget is still very cautious. No special events 36.6% 40%in 2013. Some market watchers expect CCTV pricing 6,000 22.9% 4,903 29.0% 30%(for same inventory) could be flattish, while total CCTV 4,000 2,632 3,235 20%auction sales to be low-double-digit growth (below 2,000 10%12.5% last year). We see some downside risks in 3Q12 0 0%results and 4Q12 guidance, related to Japanese auto 2008 2009 2010 2011 2012E 2013Emakers pulling back in ad spending. Internet Ad Market (US$ Mn) (LHS) Growth Rate (RHS) Source: J.P. Morgan.Positing for a potential rebound in ad market: BIDUand YOKU Figure 36: Sector Valuation – Fwd P/E TrendWe believe if there were more signs of fiscal stimulus orimprovement in China economy, high beta large-cap 50 Fwd PE (x)internet stocks shall benefit. Ad company to benefit more 45 40.5compared to game companies. Baidu and Youku are 40 35currently two of our top-picks in the sector. We believe 30 32.8x 27.4ximpacts from Qihoo entry into search market to only 25 22.0xhave small impact to Baidu. We expect sentiment to 20Baidu to turn more positive with good 3Q12 results and 15 16.6x4Q12 guidance, with Qihoo market share gradually 10 11.5 11.2x 5decline from current around 10% level. 0 Aug-05 Nov-05 Feb-06 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-12The importance of this ad format is that this is the first Source: J.P. Morgan estimates, Bloomberg. Note: index includes BIDU, Tencent, SOHU,time that Weibo open up its newsfeed section for NTES, Sohu, Shanda Games.advertising. We expect Weibo to launch SME adplatform during 4Q12, and be driver for the stock. Figure 37: Relative Performance – Jan.12 to Oct.12 – China Online AdsGames market healthy: NetEase looks interestingFrom our checks, gaming market remains healthy.Tencent’s new game YL Online, League of Legend.NetEases new gamers: Zhan Hun, Wu Hun, and YingXiong San Guo all see pretty momentum. On the otherhand, Changyou’s new game TaoYuan needed furtherfine-tuning post launch.With the disappointing 2Q12 results, NetEase sharespulled back. But we think shares over-corrected.Particularly, company is set to launch WoW upgrade in4Q12, as well as major upgrades in Fantasy WWJ andWWJ2. We see clearer share drivers before year-end. Source: Bloomberg.22
    • Daniel Kang Asia Pacific Equity Research(852) 2800 8570 18 October 2012daniel.kang@jpmorgan.comMetal & Mining Figure 38: Metals and Mining sector sees recent uptickSentiment is improving in the China metals & miningspace, with a bottoming in commodity prices continuing 700 600to play out (thermal coal, steel) and improving near-term 500supply/demand dynamics. Stimulus measures - either 400monetary or fiscal, is likely to remain a key catalyst for 300the domestic market. We understand that liquidity 200remains tight, so any further RRR or rate cuts would 100certainly help. On the fiscal side, recent FAI project 0approvals have aided sentiment and any continued policy Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12announcements are likely to see further positivereactions. We stay selectively OW the sector with our MSCI World Metals & Miningpreferred beta exposure in steel for Angang while wecontinue to favor Shenhua in coal. Source: Bloomberg.Continued supply discipline to result in 4Q margin Figure 39: Annualised Chinese steel output on a downtrendrecovery. A dip in commodity prices in 3Q has resulted 750in higher cost marginal producers accelerate productioncuts, particularly in coal and steel. This positive 700development has seen market dynamics re-balance. With 650improving near-term fundamentals, we see the likelihoodof a 4Q margin recovery (particularly in steel). With the 600market already pricing in an expected weak 3Q results 550season, we believe a cyclical bottom is near. 500Looking for 4Q seasonal pick up in end use demand. Nov-10 Nov-11 Jan-11 May-11 Jan-12 May-12 Mar-11 Jul-11 Mar-12 Jul-12 Sep-10 Sep-11 Sep-12While key demand indicators have been sluggish ytd, weare now entering the seasonally stronger 4Q demand Source: Bloomberg, J.P. Morgan estimates.season. In our opinion, seasonality will play an importantnear-term role in supporting both prices and market Table 9: Demand is seasonally stronger in 4Qbalances. 4Q typically sees uplifts in manufacturing andconstruction activity. We estimate that since 2006, end Demand Indicators – Avg qtrly 1Q 2Q 3Q 4Q movement since 2006use output rises by 22% qoq on average in 4Q. Total floor space started (%) -14 31 -12 28 Total floor space completed (%) -63 21 8 193Shenhua and Angang our top picks. Given improving FAI infrastructure (%) -44 108 7 17fundamentals and potential policy support, we continue Output of machinery (%) -15 19 2 5to see a trading opportunity in the steel sector – OW Output of white goods (%) 8 28 -14 -1 Freezers (%) 19 25 -18 -2Angang our top steel pick. We expect seasonal Air conditioner production (%) 22 37 -28 1conditions from 4Q industrial activity and winter Packaging (Canned Food) (%) -16 16 43 -13restocking (for 1Q13) to support thermal coal Auto output (%) 9 6 -6 10consumption but given continued high levels of power Shipbuilding output (%) -14 27 4 33 Locomotives output (%) -2 25 -9 27plant inventories, we expect a muted recovery in thermal Power generating eq. (%) -23 26 -4 20coal prices toward marginal costs of Rmb650-700/t Power cables (%) -18 29 8 12(currently Rmb645/t). Given this outlook, we prefer Transformers (%) -6 18 4 5 Communication cables (%) -19 17 3 5Shenhua but recognise that any beta rally will support Average demandChina Coal Energy and Yanzhou. We stay indicator movement (%) -12 29 -1 23fundamentally UW on Chalco given record high levels Source: Bloomberg, CEIC, J.P. Morgan estimates.of aluminium output, which continues to defy sluggishdemand fundamentals. We attribute this in part due tolocal government power subsidies. 23
    • Lucia Kwong, CFA Asia Pacific Equity Research(852) 2800-8526 18 October 2012lucia.yk.kwong@jpmorgan.com Figure 40: Total construction starts* vs. developers funding, YTDReal Estate Y/Y % chg (up to Aug-12) Sqm in mnDevelopers opted for margins at the expense of 80%volume: Primary home sales volume in the 8 major cities 70% 60%fell 7% M/M in September to 7.22 mn sqm, which fell 50%below expectation. Developers have easier access to 40%credits at lower costs and are less keen to cut prices to 30% 20% 9.1%drive volume. However, we view that developers are still 10%lack of pricing power and would have to sacrifice volume 0%once they raise prices considerably, as HPR has stopped -10% -7%most investors from entering the market. -20% -30% Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12We believe more developers would capture the still warmmarket sentiment to launch the projects, hence volume Developers funding Y/Y%chg Total construction starts Y/Y%chgshould pick up in the rest few weeks. However, after the Source: Soufun, CREIS. *Includes residential and commercial property construction starts.peak season we expect sales performance to quiet down Figure 41: Inventory build-up in major cities (up to Sep-12)until Chinese New Year. mn sqm No of mthsInventory and housing starts: Inventories in the major 80 35cities picked up and were the highest since Feb-12, as 70 64 66 6868 67 63 61 30 61 63 61 60more projects were granted presale permits and could be 60 57 53 5252 54 57 58 55 56 5454 5353 56 25 51launched in October if not September. In the next few 50 50 49 49 47 45 44 42 44 41 4142 46 46 4343 4343 4444 44 43 44 47 20months, we expect destocking to continue but the process 40 15would be slower, as credit (mainly mortgage quota) is 30 10usually less available towards the end of the year thus 20 5affecting sales momentum. Meanwhile, new home starts 10would likely speed up as access to funding improves as 0 Sep/08 Mar/09 Sep/09 Mar/10 Sep/10 Mar/11 Sep/11 Mar/12 Sep/12 -well as more land sales in the next 6 months. Overall, the GFA Available for sale Inventory monthsunits available for sale would remain high in the lowTier-2/ Tier-3 cities though supply in Tier-1 would Sources: Soufun, CREIS, real estate trading center websites, J.P. Morgan estimates. Note:remain contained given slower land supply. Incl Shanghai, Beijing, Guangzhou, Shenzhen, Hangzhou, Chongqing, ChengduSector view: With the hopes of further rate cuts waning Figure 42: Centaline secondary price index by city (up to Sep-12)and available credit in the rest of the year to be channeled Index (May-04=100)to public investments, we expect China property stocks 450to start underperforming other sectors. In particular, wewill enter the slack season after October and developers 400 388.0have no guidance on FY13 delivery and contract sales 350plans as yet. We see margins should be bottoming out 323.5and contract sales growth in FY13 is still possible but it 300 313.5 310.7is too early to play out the theme, in our view. The sector 250 245.0is also least preferred within the Asian real estatemarkets. We suggest rotation out of the sector, leaving 200Country Garden and Franshion as preferred stocks. 150 100 Jan /06 No v/06 Jan /11 No v/11 May/04 Jul/08 May/09 Mar/05 Mar/10 Sep /07 Sep /12 Shenzhen Guangzhou Beijing Shanghai Tianjin Source: Centaline China24
    • Ajay Mirchandani Asia Pacific Equity Research(65) 6882-2419 18 October 2012ajay.mirchandani@jpmorgan.com Figure 43: Monthly Global bulk carrier ordersShip Building mn DWT 10.0 9.8Order cancellations still coming through: We continue 9.0 8.0to see order cancellations within the sector we remains a 7.0 6.0 3.2key “negative” catalyst for the space. Moreover with (i) 5.0 3.8 3.6 4.0 2.9 3.0 3.1back-loaded payment structure (60-70% of payment due 3.0 2.4 2.1 2.5 2.6 2.2 1.7 2.0 1.5 1.6 1.1 1.4at delivery of vessel), (ii) falling vessel prices and (iii) 2.0 1.0 0.8 0.8 0.5high gearing (of certain yards), we believe this exposes 0.0 May -11 May -12 Jan-11 Jun-11 Nov -11 Jan-12 Jun-12 Feb-11 Mar-11 Apr-11 Jul-11 Aug-11 Sep-11 Oct-11 Dec-11 Feb-12 Mar-12 Apr-12 Jul-12 Aug-12 Sep-12sector to increased “cash-flow” concerns. China South Korea OthersRe-emergence of “bulk” new-build market,“successful” transition to offshore critical for any Source: Clarksons“potential” re-rating of China Shipyards: Ship "new"orders (especially bulk & tankers) are likely to remain at Figure 44: New orders & Orderbook - Chinaa trickle in medium term. However, we could potentially 000 CGTsee some medium-term momentum in tanker orders 80,000 4000.0since, as per recent news flow, four Chinese shipping 70,000 3500.0groups (China Shipping, Sinotrans, Cosco and China 60,000 3000.0Merchants Energy Shipping) could potentially order 50 50,000 2500.0VLCCs at Chinese yards(by 2020) as China aims to 40,000 2000.0 30,000 1500.0transport 60% of total crude imports with Chinese- 20,000 1000.0flagged vessels. However, this will depress rates even 10,000 500.0further and delay any recovery. We see order-wins 0 0.0(within shipbuilding segment) as "short term excitement” Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12rather than “re-rating” catalysts. Success in Offshoretransition remains a “potential” re-rating event, however Orderbook New Contracts (RHS)we see “low probability” of either evens re-emerging Source: Clarksons.over next 6-12 months. Figure 45: Dry bulk demand/supply growthDemand growth likely to outpace supply: While %demand (in bulk segment) is projected to be around 4%,the supply is likely to continue to outpace demand (albeit 20.0% 17.2%at a much lower level compared to last two years). While 14.5% 15.0% 13.0%we are likely to see delivery delays which could result instronger demand growth (compared to supply), we 9.0% 10.0% 6.9% 6.8% 12.6% 6.1%believe upside (if any) would flow to the shipping 6.1%companies with any “near term” recovery in new orders 5.0% 7.4% 7.0% 7.0% 3.3% 4.0% 3.9%to be limited. 0.0% -5.0% -2.7%Continue to avoid the sector: While valuations may 2006 2007 2008 2009 2010 2011 2012E 2013Eseem cheap, we view it as “less” relevant given “virtually Demand Supplyno new order wins" and “continued cloudy outlook”.1101 HK (UW) continues to remain our "key stock to Source: Clarksons.avoid" (given gearing, recent profit warning, likely lowersubsidies & pure shipbuilding exposure). YZJ (N) is our“most preferred” stock in an “unloved” sector (given itsstrong execution, net cash B/S and potential offshoreexpansion). Key risks to our recommendation is steeprebound in bulk orders for the sector as well as betterthan expected success in offshore job wins. 25
    • Leon Chik, CFA Asia Pacific Equity Research(852) 2800-8590 18 October 2012leon.hk.chik@jpmorgan.com [Type sidebar content. A sidebar is a standalone supplement to the main document. It is often aligned on the left or right of the page, or located at the top or bottom. Use the Text Box Tools tab to change the formatting of the sidebar text box. Figure 46: 1-year SMID-Cap performanceSMID-Caps 30%Improving demand with limited capacity additions 20%During the past year, margins have fallen to levels thatwere low enough to encourage a wave of capacity 10%withdrawals and market consolidation. We are starting 0%to see demand improve for SMID caps in China starting -10%in September 2012 due to a combination of improved 10/7/11 12/7/11 2/7/12 4/7/12 6/7/12 8/7/12 10/7/12credit conditions, start of government stimulus policy,and a restocking ahead of the peak season. Most SMID-Caps are now operating at near capacity but have not yet MSCN MXCNSCembarked on more expansion. Therefore we expect a 12-18 month period of improving pricing environment forindustrial SMID-Caps. Source: Bloomberg, J.P. Morgan, Sep 2011- 12Tough 1H but some recovery in 2H. We believe the Figure 47: China CPI /PPIweak demand in 1H12 has been somewhat offset bysome margin expansion. The sharper drop in PPI against 15the CPI in China in 1H12 should help most industrialSMID-Caps improve pricing power in 2H12 especially 10those where demand remained stable. We have alreadyseen containerboard companies being able to lift prices 5 CPIwhich is a sign that oversupply is coming to an end. PPI 0Buy good companies around 6x and great companiesaround 12x. Many SMID-Caps fell precipitously from -5bottomed at a trough forward PE of around 5-6x earlier -10this year (now at 8-9x). We now focus on findingindustrial companies that trade at 6-7x 2013E PE or Source: Bloomberg (CNCPIYOY Index), J.P. Morgan, 1 Jul 05 - Presentleading innovative or branding companies which trade at10-12x 2013E PE, which can grow faster than the overall Figure 48: 13E PE (x) for SMID Capsmarket. 20.0 15.0Key stock recommendations: 10.0Top picks – NDP, on improving pricing power; CSC, 5.0contracts continue to surge; Techtronic Industries, its - JOHNSON… TECHTRONIC… KINGBOARD… XINYI GLASS…brand products should lift as US demand recovers. KB LAMINATES FUFENG CHINA LIANSU YUANDA TCL MULTI SKYWORTH ND PAPER HAITIAN TCL COMM DCH VTECH LM PAPER CSCKey Avoid calls – Vtech (UW) on challenges to its 40%European business; Fufeng (N), another year of stiffcompetition for MSG; KBL (N) on tough pricingenvironment. Source: Bloomberg, J.P. Morgan, 12 Sep 201226
    • Alvin Kwock Asia Pacific Equity Research(852) 2800-8533 18 October 2012alvin.yl.kwock@jpmorgan.comQin Zhang, CFA(852) 2800-8532qin.zhang@jpmorgan.com Table 10: Golden Week Holiday Retail and Dining SalesTechnology hardware (2009-2012) Rmb Golden Week holiday retail and dining spending duringChina Mobile Accelerates TD-LTE Rollout dates Golden Week y/y growthOn September 27, China Mobile held a conference with 10/1/2009-10/8/2009 570.0 million ~18%handset manufacturers and indicated that the world’s 10/1/2010-10/7/2010 592.5 million 18.7%largest cell phone operator will speed up the large-scale 10/1/2011-10/7/2011 696.2 million 17.5%deployment of the pre-commercial TD-LTE network. 9/30/2012-10/7/2012 800.6 million ~15%Chinas economic growth has been slowing down and the Source: Ministry of Commerce, J.P. Morgangovernment wary of ordering the banks to lend to moreinvestment projects. However, cash-rich China Mobilecan kill two birds with one stone by investing in buildingand upgrading 20,000 TD-LTE base stations in 2012 and Table 11: Gomes Golden Week Price Cuts 2011 vs. 2012over 200,000 base stations in 2013. The TD-LTE rollouthelps prop up Chinas economic growth as well as puts 2011 Golden Weekthe TD-LTE in position to be a global standard. Product category Price cut range 3C 10%-20%Golden Week Sales Fall ShortJ.P. Morgan’s preliminary channel checks on the Golden 2012 Golden WeekWeek promotional period suggests that TV and cell Product category Price cut rangephone sales were slightly below consensus expectations. 3C 10%-40%Electronic retailers blamed the temporarily elimination of cell phones 10%-20%highway tolls during this year’s Golden Week for driving PCs 10%-40%many Chinese out of the cities and away from stores. TV TVs 15%-50%unit shipments grew 5%-8% y/y from September 3 to Source: Gome Electrical Appliance, J.P. MorganOctober 8, according to AVC. Smartphone sales wererobust, but lower than the industry’s expectations.Smartphone makers are no longer suffering fromshortages in chipsets. We revised PC sales growth down Table 12: Gome TV price cuts by origin of manufacturerto 5%-10% y/y in 4Q 2012 from 10%-15% because: 1) TV brand price cutsthe energy efficiency subsidy for PCs did not go into Japanese 20%-50%effect until October 1 and 2) retailers are waiting until Chinese 10%-15%after Windows 8 is launched October 26 to start Source: Gome Electrical Appliance, J.P. Morganpromotions for PCs.Top PicksJ.P. Morgan has removed Lenovo from the Asia Analyst Table 13: Valuation TableFocus List and put in ZTE instead. Lenovo’s shares have Share Mkt Cap Target EPS P/E (x)rallied 17% from recent low, but we do not see much Price Growthfurther upside in light of our downward revision on 10/9/2012 US$ mn Price 12E 13E 12E 13EChina’s 4Q 2012 PC market growth rates. With ZTEs ZTE 11.90 6,062 16.0 6% 41% 15.3 10.9 Lenovo 6.22 8,106 8.1 22% 26% 14.0 11.2shares trading a 3 standard deviations below its historical Source: Bloomberg and J.P. Morgan estimatesmean, we believe that there is more upside thandownside, even if ZTE is barred from sellinginfrastructure equipment to the U.S. ZTE (along withHuawei) are best positioned to benefit from ChinaMobile’s rollout of the TD-LTE network. 27
    • Lucy Liu Asia Pacific Equity Research(852) 2800-8566 18 October 2012lucy.y.liu@jpmorgan.comTelecom Figure 49: CU and CT are expected to continue gaining market share of mobile service revenue thanks to the fast growing 3GTelcos accelerating 2G->3G migration to contribution.fill light-loaded 3G networks 100% 13% 15% 16% 90% 18% 20%During our recent trip to China, a phenomenon we have 80% 8% 10% 12%observed is that 3G is penetrating the mass market. 2G is 70% 13% 14%becoming an important source to the 3G subscriber 60%growth driven by declining 3G smartphone price pointsand operators push for internal upgrade. 50% 40% 79% 75% 72% 69% 66% 3G smartphone prices have fallen to a 30% comparable level to 2G ones: The number of low 20% end and ultra low end smartphones has risen in the 10% past months as costs come down quickly. The 0% 2010 2011 2012E 2013E 2014E improved affordability of 3G smartphones should CM CT CU help 3G services penetrate 2G market. We see CU as Source: Company and J.P. Morgan estimates. best positioned given its competitive advantage in the ultra low end and low end smartphone segment, Figure 50: 3G penetration is expected to increase from 15% to especially in the open market. 42% in 2015E. Chinese telcos: 2G/3G subs net adds forecast High end 2G segment presents upgrade 80,000 100.0% opportunities: 1) We estimate 15% to 20% of 2G 80.5% 90.5% 91.7% 89.3% 91.7% subs are using smartphones and the % of Android 60,000 75.0% Net adds forecast (000) 17,294 65.4% 66.8% 30,510 31,767 smartphone users on CU’s 2G network is relatively 40,000 57.0% 50.0% 46.5% 47.6% 37,611 high compared to the other two telcos; and 2) There 8,220 42,253 is a substantial number of 2G subs that can afford 28.0% 38,223 24,000 20,000 32,368 35,453 25.0% 35,041 34,988 25,959 23.9% 44,440 11,318 26,210 3G services, especially in high tier cities. According - 19,871 8,521 6,275 4,027 3,802 11,950 3,880 3,226 0.0% to our conversation with the local management from CM CM CM CM CU CU CU CU CT CT CT CT 2010 2011 2012E 2013E * 2010 2011 2012E 2013E * 2010 2011 2012E 2013E CU’s local branch is a tier-2 city, 40% of their 2G 2G 3G 3G net adds as % of total adds customers have ARPU over Rmb50, which is higher than the requirement monthly spending for low-end Source: MIIT and J.P. Morgan estimates. Rmb36/ Rmb46 3G plans. We see these two kinds of 2G customers, arguably the high-end 2G segment, Figure 51: We forecast CU will have the largest 3G subscriber are the potential 3G service users operators will be base while CT’s 3G proportion will be the highest. targeting in 4Q12. Chinese telcos 3G subscribers 140,000 70%Network capacity ready for faster 2G->3G migration: 120,000 60%The 3G networks in China are currently fairly light- 100,000 52% 50%loaded. The average 3G network utilization rate is only 42% 3G subs as % of total subs 42%between 20-30%, although in some hot spots this can be 80,000 40% 3G net adds (000) 35% 32% 32%as high as 50-60%. This allows enough capacity on the 60,000 24% 29% 26% 30%networks for further increase in 3G penetration from the 40,000 16% 20% 20% 23% 20% 14%current sub-20%. 20,000 7% 9% 10% 11% 11% 13% 16% 10% 12% 16% 10% 8% 8% 9% 7% 6% 7% 5% 4% 4% 2% 3% 2% 3% 0% 1% 1%CU and CT the main beneficiaries: The on-going - 0% 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2012E 2013E 0%internal upgrade should have a greater revenue impact to CT 3G net adds CT 3G subs as % of total CM 3G net adds CM 3G subs as % of total CU 3G net adds CU 3G subs as % of totalCU and CT compared to CM thanks to a higher ARPU Source: Company data and J.P. Morgan estimates.lift from upgrading 2G customer to 3G. We areforecasting the ARPU gap between 2G and 3G will beRmb49 and Rmb45 for CU and CT respectively in2013E, vs. CM Rmb7.28
    • Corrine Png Asia Pacific Equity Research(65) 6882-1514 18 October 2012corrine.ht.png@jpmorgan.com positioned to leverage on the sector recovery as theTransportation largest bulk shipping company globally and estimate 11ppts margin expansion in 2013E (though remain lossChina Cosco and CSCL’s plans to co-operate on making) and further 5ppts in 2014E (turns profit making)domestic routes is a positive development as the two but has higher financial leverage and has potentialliners combined services would likely serve c.70% of the equity-raising risks.domestic market, providing stability and potential upside The airline sector faces oversupply this year whichfor freight rates on domestic routes. This also opens up will depress industry profitability, exacerbated by higheropportunities for further cooperation. Potential industry fuel prices and F/X losses due to the weaker Rmb.consolidation is possible in the longer term in our view. Demand growth has picked up but it will take time toChina Cosco is the worlds fourth largest container absorb the increased supply. B/S has strengthenedshipping company with c.4.3% global market share while slightly following the govt’s capital injection into AirCSCL is the ninth largest with c.3.4% global market China, CEA and CSA. There is still significant downsideshare. Combining the two Chinese carriers services risk to consensus estimates, in our view – our forecastswould significantly enhance their global market position. are c.58% lower. We expect a more benign operatingTheir combined operations will be nearly half the size of environment from 2013 onwards as demand-supplythe worlds largest operator Maersk (which has c.15.6% growth balances again. China’s low travel penetrationmarket share) and nearly the same size as third largest rate and rising incomes underpin our bullish view on thecarrier CMA CGM (c.8.1% market share). Given the sector’s LT growth prospects. We prefer Air Chinaweak global demand and lack of peak shipping season given its better organic growth, leverage to West China’sthis year, liners will need to cut more capacity to development and lowest exposure to hi-speed railimplement these hikes successfully. The industry outlook competition. It will also have the highest marginremains challenging as vessel deliveries will only peak expansion in 2013 based on our estimates.next year. The new vessels are expected to add c.10% toindustry capacity in 2013. However, due to financing Figure 52: China-Rest of the World spot freight rate trends (SCFI)challenges and low freight rates, net effective capacity 5,000 2000 4,000growth may fall short. Some shipping stocks look 3,000 1500 1000oversold. Our top pick is CSCL. CSCL provides unique 2,000 1,000 500exposure as the largest player in the domestic China 0 0shipping trade. Overcapacity risks are lower as CSCL’s Oct-09 Nov-09 Dec-09 Oct-10 Nov-10 Dec-10 Oct-11 Nov-11 Dec-11 Jan-10 May-10 Jun-10 Jan-11 May-11 Jun-11 Jan-12 May-12 Jun-12 Feb-10 Mar-10 Apr-10 Jul-10 Aug-10 Sep-10 Feb-11 Mar-11 Apr-11 Jul-11 Aug-11 Sep-11 Feb-12 Mar-12 Apr-12 Jul-12 Aug-12 Sep-12newbuild vessel deliveries will be more than offset by the Shanghai-Europe (US$/TEU) Shanghai-USWC (US$/FEU) Shanghai-USEC (US$/FEU) Composite Index (RHS)return of chartered-in vessels. CSCL also has a lower unit Source: China Container Freight Indices.cost structure than sector average. We expect CSCL to be Figure 53: Historical Newbuild Bulkcarrier Delivery Slippagesprofitable in 2H12 and expect margins to expand by 120 10%300bps in 2013 and see no equity-raising risk. Valuations 100 0%at 0.6x FY12E P/B are attractive and have overly 80 -10% 60discounted the challenging industry outlook, in our view. -20% 40 -30%Global bulk shipping fleet rose only marginally m/m 20 0 -40%by 0.4% in September and 8.9% y/y ytd. This implies 2012E 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011an annualized capacity growth of c.12%, which is c.33% Actual deliveries (LHS) Delivery (Shortfall)/Surplus (RHS)lower than the projected supply growth of 18% for Source: Clarksons.2012E if every ship is delivered on schedule. This Figure 54: Chinese Airlines: Passengers Carried (% chg y/y)supports our view that the industry supply growth 70%implied by the orderbook is likely overstated. Scrapping 60% Total Passengers Carried Domestichelped to remove 419 ships (+29% y/y) in Jan-Sep or 50% 40% HK/Macau/T aiwan Internationalc.4% of global capacity. Further, we should see a pick-up 30%from 4Q12 and demand-supply growth balance from 20% 10%2H13 with potential supply shortage in 2014 as the 0%existing orderbook is implying only a c.2-3% addition to -10%global fleet. Shipping stocks tend to price in earnings -20% -30%recovery around 9-12 months ahead. We should look to Jan-06 Oct-06 Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Oct-11 Jan-12 Apr-06 Jul-06 Apr-07 Jul-07 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-11 Apr-12 Jul-12buy the higher quality bulk shipping stocks during thisperiod of weakness. China Cosco (1.1x P/B) is well- Source: CEIC database 29
    • Boris Kan Asia Pacific Equity Research(852) 2800-8573 18 October 2012boris.cw.kan@jpmorgan.com Figure 55: Monthly Y/Y growth on natural gas demand (%)Utilities & Power Equipment 50% 40%Share price performance & news flow past 3 months 30%City gas distributors (~1%) and water operators (~4%)were the only market performers amongst China utilities 20%thanks to their resilient demand. On the contrary, wind 10%farm operators and power equipment makers have 0%underperformed by ~21-26% on uncertainty on wind -10%farm utilization and coal-fired equipment demand. IPPsalso underperformed by 14% as spot coal price stalled. -20% May-08 May-09 May-10 May-11 May-12 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Aug-08 Nov-08 Aug-09 Nov-09 Aug-10 Nov-10 Aug-11 Nov-11 Aug-12Power demand growth remained weak at ~3.5-4.5% overthe past 3 months, and so was QHD (@ 630 -640 / ton) Source: Bloomberg.over the same time period. Meanwhile, gas demandgrowth (especially from industrial users) in 3Q2012 Figure 56: Coal inventory level at power plants (# of inventoryappeared to have stabilized. New wastewater treatment days)project inflows also remained robust. 30Demand / supply / capacity utilization dynamics 25We expect utilization for China IPPs will fall in light ofthe weak demand this year, but margin will actually 20improve on the contrary thanks to the expected decline incorresponding fuel prices. As for water / gas utilities, 15demand remains resilient overall and will not likely beaffected. 10Key catalysts to watch out for over the next 3-6M 5Going forward, the market will focus on sub-sectors / Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12stocks that will continue to deliver more +ve surprises Source: CCTDbeyond 1-3Q2012, and shift away from outperformerswithout further sustainable catalysts. Future Figure 57: QHD Spot coal price (5,500kcal/kg)performances for underperformers will be decided on RMB/tonne 900signs of potential turnaround, and previous weakperformance will not likely be good reasons for catch-up. 800Specifically, we believe (1) spot QHD coal price willlikely have limited downside, (2) more new wastewater 700projects will come through as part of the Governmentstimulus, (3) certain gas distributors will be under the 600overhang on weaker gas sales to industrial users andconnection fee cut, and (4) grid connection bottleneck 500will continue. Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12Stock recommendations Source: CCTDOur top picks are (1) BJ Ent (strong volume supportfrom mid stream pipeline and gas-fired power plants inBJ), (2) ENN (energy saving solutions to seize newopportunities, sustainable margin improvement), (3) Ch.Everbright (China stimulus related wastewater and solidwaste treatment sectors), (4) Guangdong Investment(potential restructuring / injection opportunities). Stockto avoid includes Longyuan (overhang on shareplacement and grid connection)30
    • Robert Smith Asia Pacific Equity Research(852) 2800 8569 18 October 2012robert.z.smith@jpmorgan.comQ-Profile for ChinaJPM Q-ProfileChina, All (China / All)As Of: 30-Sep-2012 Quant_Strategy@jpmorgan.comLocal Share Price Current: 55.70 12 Mth Forward EPS Current: 6.23 120.00 9.00 8.00 100.00 7.00 6.00 80.00 5.00 60.00 4.00 3.00 40.00 2.00 1.00 20.00 0.00 -1.00 0.00 -2.00 Aug/97 Mar/98 Dec/99 Feb/01 Sep/01 Apr/02 Nov/02 Jun/03 Jan/04 Aug/04 Mar/05 Dec/06 Feb/08 Sep/08 Apr/09 Nov/09 Jun/10 Jan/11 Aug/11 Mar/12 Oct/98 May/99 Jul/00 Oct/05 May/06 Jul/07 Aug/97 Mar/98 Oct/98 May/99 Dec/99 Feb/01 Sep/01 Apr/02 Nov/02 Aug/04 Mar/05 Oct/05 May/06 Dec/06 Feb/08 Sep/08 Apr/09 Nov/09 Aug/11 Mar/12 Jul/00 Jun/03 Jan/04 Jul/07 Jun/10 Jan/11Earnings Yield (& local bond Yield) Current: 0.11 Implied Value Of Growth* Current: -0.31 20% 12Mth fwd EY China BY Proxy 0.80 18% 0.60 16% 0.40 14% 12% 0.20 10% 0.00 8% -0.20 6% 4% -0.40 2% -0.60 0% -0.80 Mar/98 Feb/01 Mar/05 Feb/08 Mar/12 Aug/97 Dec/99 Jul/00 Sep/01 Apr/02 Nov/02 Jun/03 Jan/04 Aug/04 Dec/06 Jul/07 Sep/08 Apr/09 Nov/09 Jun/10 Jan/11 Aug/11 Oct/98 May/99 Oct/05 May/06 Aug/97 Mar/98 Dec/99 Jul/00 Feb/01 Sep/01 Apr/02 Nov/02 Jun/03 Jan/04 Aug/04 Mar/05 Dec/06 Jul/07 Feb/08 Sep/08 Apr/09 Nov/09 Jun/10 Jan/11 Aug/11 Mar/12 Oct/98 May/99 Oct/05 May/06PE (1Yr Forward) Current: 8.9x Price/Book Value Current: 0.7x 30.0x 6.0x PBV hist PBV Forward 25.0x 5.0x 20.0x 4.0x 15.0x 3.0x 10.0x 2.0x 5.0x 1.0x 0.0x 0.0x Aug/97 Mar/98 Oct/98 May/99 Dec/99 Feb/01 Sep/01 Apr/02 Nov/02 Jun/03 Jan/04 Aug/04 Mar/05 Oct/05 May/06 Dec/06 Feb/08 Sep/08 Apr/09 Nov/09 Jun/10 Jan/11 Aug/11 Mar/12 Jul/00 Jul/07 Aug/97 Mar/98 Dec/99 Jul/00 Feb/01 Sep/01 Apr/02 Nov/02 Jun/03 Jan/04 Aug/04 Mar/05 Dec/06 Jul/07 Feb/08 Sep/08 Apr/09 Nov/09 Jun/10 Jan/11 Aug/11 Mar/12 Oct/98 May/99 Oct/05 May/06ROE (Trailing) Current: 17.40 Dividend Yield (Trailing) Current: 3.2325.00 6.0 5.020.00 4.015.00 3.010.00 2.0 5.00 1.0 0.00 0.0 Mar/98 Feb/01 Apr/02 Mar/05 Feb/08 Apr/09 Mar/12 Aug/97 May/99 Dec/99 Jul/00 Sep/01 Nov/02 Jun/03 Jan/04 Aug/04 May/06 Dec/06 Jul/07 Sep/08 Nov/09 Jun/10 Jan/11 Aug/11 Oct/98 Oct/05 Mar/98 Feb/01 Apr/02 Mar/05 Feb/08 Apr/09 Mar/12 Aug/97 May/99 Dec/99 Jul/00 Sep/01 Nov/02 Jun/03 Jan/04 Aug/04 May/06 Dec/06 Jul/07 Sep/08 Nov/09 Jun/10 Jan/11 Aug/11 Oct/98 Oct/05SummaryChina, All 0.00 As Of: 30-Sep-12China 0 SEDOL CN All Local Price: 55.70All 0.00 EPS: 6.23 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 8.94x 5.60 25.30 11.49 12.14 18.90 5.39 -37% 183% 29% 36%P/BV (Trailing) 0.65x 0.43 5.33 1.95 1.99 3.78 0.21 -34% 718% 199% 206%Dividend Yield (Trailing) 3.23 0.69 5.56 2.33 2.43 4.10 0.76 -78% 72% -28% -25%ROE (Trailing) 17.40 5.67 21.23 16.71 15.21 23.61 6.82 -67% 22% -4% -13%Implied Value of Growth -31.1% -0.69 0.62 0.04 0.05 0.53 -0.43 -122% 298% 112% 116%Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 31
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comTable 14: J.P. Morgan China UniversePrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)Apparel & TextileAnta Sports Products Ltd.** Sener, Kurumlu Ebru UW 2020.HK 6.9 3.60 -47.8 2,220 0.58 0.39 -16.4 -33.1 9.6 14.4 2.0 2.0 21.9 13.9 6.4 4.3China Lilang Ltd.** Sener, Kurumlu Ebru OW 1234.HK 4.2 7.20 72.7 646 0.50 0.66 -4.0 32.2 6.8 5.1 1.6 1.4 25.5 29.1 8.7 9.8Mkt Cap Weighted Aggregates 2,867 0.6 0.4 -14.2 -20.0 9.0 12.3 1.9 1.8 22.7 17.4 6.9 5.5Auto & Auto PartsBrilliance China Automotive** Lai, Nick YC OW 1114.HK 9.0 8.00 -11.0 5,829 0.44 0.51 21.3 16.9 16.5 14.1 4.0 3.1 27.3 24.6 - -China ZhengTong Auto Service Holding Limited** Lai, Nick YC OW 1728.HK 4.7 5.50 16.8 1,342 0.30 0.38 17.2 27.8 12.9 10.1 1.2 1.1 9.8 11.1 - 1.1DongFeng Motor Co., Ltd.** Lai, Nick YC UW 0489.HK 9.9 7.50 -24.2 11,006 1.15 1.14 -5.7 -0.5 7.0 7.0 1.3 1.1 19.5 16.7 2.2 2.2Great Wall Motor Company Limited** Lai, Nick YC OW 2333.HK 20.6 24.00 16.5 8,631 1.62 1.78 32.7 10.3 10.3 9.3 2.4 2.0 26.2 23.6 1.8 1.8Geely Automobile Holdings Ltd.** Lai, Nick YC OW 0175.HK 3.2 6.00 86.9 3,098 0.26 0.35 26.0 34.0 9.9 7.4 1.7 1.4 18.5 20.4 0.9 0.9Guangzhou Automobile Group Co. Ltd.** Lai, Nick YC N 2238.HK 5.1 6.50 27.5 4,880 0.35 0.56 -49.7 60.8 11.8 7.3 0.9 0.8 7.5 11.4 4.9 4.9Minth Group** Lai, Nick YC N 0425.HK 7.8 9.00 15.5 1,083 0.76 0.82 3.5 7.6 8.3 7.7 1.1 1.0 13.2 13.4 4.3 3.6Weichai Power** Lai, Nick YC UW 2338.HK 26.4 18.50 -29.8 6,481 2.17 2.52 -35.4 16.0 9.8 8.5 1.4 1.1 14.7 14.7 2.0 0.5Mkt Cap Weighted Aggregates 44,372 1.1 1.2 -11.4 12.4 10.6 8.9 1.9 1.5 19.0 18.2 2.1 1.9Building Materials & ConstructionAnhui Conch Cement Company Limited - A Lai, Nick YC OW 600585.SS 15.9 17.00 6.9 14,442 1.16 1.39 -47.1 20.0 13.7 11.5 1.7 1.5 12.6 13.7 2.2 2.1Anhui Conch Cement Company Limited - H** Lai, Nick YC OW 0914.HK 25.6 25.00 -2.2 14,442 1.16 1.39 -47.1 20.0 17.8 14.9 2.2 1.9 12.6 13.7 1.7 1.6BBMG Corp** Lai, Nick YC N 2009.HK 5.9 5.50 -6.9 3,730 0.68 0.72 -16.4 6.0 7.0 6.6 0.9 0.8 13.9 13.4 1.5 2.8China Communications Construction Co. Ltd.** Li, Karen OW 1800.HK 6.9 11.00 58.5 12,065 0.84 0.92 5.6 9.4 6.7 6.1 1.0 0.9 16.2 15.5 3.6 3.9China National Building Material** Lai, Nick YC OW 3323.HK 8.6 10.50 21.7 6,012 0.99 1.21 -33.4 21.9 7.0 5.8 1.4 1.1 13.7 14.7 3.1 2.8China National Materials** Lai, Nick YC UW 1893.HK 2.2 1.50 -32.1 1,018 0.13 0.15 -68.0 17.6 13.7 11.6 0.6 0.6 4.3 4.8 3.4 0.9China Railway Construction Corporation Limited** Li, Karen OW 1186.HK 7.5 8.50 13.6 9,915 0.71 0.84 11.4 18.5 8.5 7.2 1.0 0.9 12.6 13.5 3.5 4.2China Railway Group Limited** Li, Karen OW 0390.HK 3.7 4.10 11.7 9,113 0.34 0.38 8.0 12.0 8.7 7.8 0.8 0.7 9.6 10.0 2.3 2.6China Resources Cement** Lai, Nick YC UW 1313.HK 4.6 3.00 -34.6 3,861 0.25 0.37 -60.9 48.6 14.8 9.9 1.1 1.0 8.1 10.9 1.6 0.7China Liansu** Hsu, Andrew Tak Jun OW 2128.HK 4.4 4.70 6.8 1,710 0.44 0.47 5.7 6.7 8.0 7.5 1.8 1.5 24.3 21.9 3.1 3.3Yuanda China Holdings Ltd** Chik, Leon OW 2789.HK 0.7 0.90 25.0 577 0.11 0.14 -31.5 30.0 5.5 4.2 0.8 0.7 15.0 17.5 3.8 4.9Mkt Cap Weighted Aggregates 76,886 0.8 1.0 -34.3 17.7 11.2 9.4 1.4 1.2 12.9 13.5 2.6 2.7ChemicalsChina BlueChemical Ltd** Handa, Akhil OW 3983.HK 5.2 7.60 46.7 3,081 0.41 0.52 60.2 26.2 10.3 8.1 1.6 1.5 16.8 19.1 3.3 5.4Mkt Cap Weighted Aggregates 3,081 0.4 0.5 60.2 26.2 10.3 8.1 1.6 1.5 16.8 19.1 3.3 5.4Consumer GoodsChina Huiyuan Juice Group Ltd** Hong, Jessica Chien Han N 1886.HK 2.4 5.00 111.0 452 0.09 0.16 NM 74.9 20.9 12.0 0.6 0.5 2.9 4.4 1.2 2.1China Mengniu Dairy Co. Ltd.** Hong, Jessica Chien Han OW 2319.HK 22.6 28.00 24.2 5,144 0.91 1.14 -0.2 25.5 20.1 16.0 2.5 2.3 15.1 15.8 1.1 1.4China Resources Enterprise Sener, Kurumlu Ebru N 0291.HK 25.3 23.00 -9.1 7,836 1.47 1.62 24.6 9.8 17.2 15.7 1.5 1.4 5.1 5.6 2.3 2.5China Yurun Food Group Hong, Jessica Chien Han UW 1068.HK 5.9 4.60 -22.0 1,388 0.28 0.66 -71.9 NM 21.2 9.0 0.7 0.6 -3.4 0.3 1.2 2.8China Agri-Industries Chan, Ying-Jian OW 0606.HK 4.9 5.30 9.1 2,532 0.29 0.40 -45.6 36.3 16.6 12.2 0.9 0.9 5.7 7.4 1.2 1.6Fufeng Group** Chik, Leon N 0546.HK 2.7 3.50 28.2 613 0.38 0.48 16.7 25.9 5.8 4.6 1.0 0.9 18.2 20.1 5.5 6.9Huabao International Holdings Limited Hong, Jessica Chien Han N 0336.HK 4.2 3.70 -10.8 1,684 0.58 0.64 5.4 9.5 7.1 6.5 1.7 1.4 26.4 24.2 4.2 4.6Hengan International Group Ltd Hong, Jessica Chien Han UW 1044.HK 73.7 61.00 -17.2 11,687 2.92 3.50 35.0 19.9 25.3 21.1 6.7 6.0 27.6 30.0 2.6 3.1NVC Lighting Holdings Ltd* Chik, Leon OW 2222.HK 2.0 2.60 28.7 823 0.01 0.02 -77.4 NM 42.1 13.7 1.4 1.3 4.0 9.6 0.4 1.0Tibet 5100 Water Resources Holdings Ltd** Hong, Jessica Chien Han OW 1115.HK 2.2 2.30 7.0 713 0.17 0.22 8.0 23.1 9.9 8.1 2.0 1.6 16.4 17.1 0.0 0.0Tingyi (Cayman Islands) Holding Corp* Sener, Kurumlu Ebru N 0322.HK 23.7 18.00 -24.1 17,102 0.09 0.10 23.0 6.8 33.1 31.0 55.0 49.0 18.7 21.6 1.5 1.6Tsingtao Brewery - H** Sener, Kurumlu Ebru UW 0168.HK 44.1 32.00 -27.4 7,370 1.37 1.60 6.9 16.2 25.9 22.3 3.8 3.3 15.6 15.7 0.6 0.7 32
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comPrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)Tsingtao Brewery - A Sener, Kurumlu Ebru UW 600600.SS 32.8 26.00 -20.7 7,370 1.37 1.60 6.9 16.2 23.9 20.5 3.5 3.0 15.6 15.7 0.6 0.7Uni-President China Holdings Ltd** Hong, Jessica Chien Han UW 0220.HK 9.1 6.80 -25.3 4,226 0.22 0.29 NM 27.0 32.7 25.8 3.6 3.3 11.4 13.3 0.9 1.2Want Want China Holdings Ltd* Hong, Jessica Chien Han N 0151.HK 10.3 8.50 -17.8 17,647 0.04 0.05 34.5 23.9 31.3 25.2 11.4 9.7 39.3 41.6 2.0 2.4Mkt Cap Weighted Aggregates 86,587 0.9 1.0 18.6 18.3 26.5 22.3 15.3 13.5 20.9 22.7 1.7 2.0Financial ServicesAgricultural Bank of China - H** Klaczek, Josh A N 1288.HK 3.2 3.75 17.9 129,960 0.45 0.44 20.1 -2.0 5.7 5.8 1.1 1.0 20.9 17.9 5.3 4.7Bank of China - H** Klaczek, Josh A N 3988.HK 3.1 3.75 22.1 118,641 0.47 0.45 5.2 -4.3 5.3 5.5 0.9 0.8 17.1 14.7 6.4 6.6Bank of China - A Klaczek, Josh A N 601988.SS 2.7 3.20 16.8 118,641 0.47 0.45 5.2 -4.3 5.9 6.1 0.9 0.9 17.1 14.7 5.8 6.0Bank of Communications Co** Klaczek, Josh A OW 3328.HK 5.7 6.75 18.0 52,843 0.81 0.69 -0.9 -14.6 5.7 6.7 0.9 0.8 16.5 13.0 3.5 3.0China Citic Bank - H Share** Klaczek, Josh A N 0998.HK 4.1 5.00 23.5 26,620 0.71 0.66 7.2 -7.0 4.6 5.0 0.8 0.7 17.3 14.2 5.0 5.0China Construction Bank** Klaczek, Josh A OW 0939.HK 5.7 6.75 18.8 182,590 0.73 0.74 7.2 1.4 6.3 6.2 1.2 1.1 20.7 18.4 5.5 5.9China Merchants Bank - H** Klaczek, Josh A UW 3968.HK 14.3 14.25 -0.5 36,299 1.77 1.72 5.5 -2.9 6.5 6.7 1.3 1.1 21.2 17.7 3.4 3.4China Merchants Bank Co., Ltd - A Klaczek, Josh A N 600036.SS 10.3 11.75 14.0 36,299 1.77 1.72 5.5 -2.9 5.8 6.0 1.1 1.0 21.2 17.7 3.8 3.8China Minsheng Banking - A Klaczek, Josh A N 600016.SS 5.8 6.00 2.9 25,993 1.03 0.97 -1.6 -6.1 5.7 6.0 1.0 0.9 19.0 15.8 4.9 4.8China Minsheng Banking - H** Klaczek, Josh A N 1988.HK 6.7 7.25 8.7 25,993 1.03 0.97 -1.6 -6.1 5.2 5.6 1.0 0.9 19.0 15.8 5.3 5.2CITIC Securities Co Ltd - A Leung, Joseph Man Joe N 600030.SS 11.7 11.50 -1.3 20,556 - - - - - - - - - - - -CITIC Securities Co Ltd - H** Leung, Joseph Man Joe N 6030.HK 14.9 14.00 -5.8 20,556 0.42 0.56 -65.6 31.3 28.3 21.6 1.5 1.5 5.4 6.9 1.2 1.7Chongqing Rural Commercial Bank** Leung, Joseph Man Joe N 3618.HK 3.5 5.40 56.5 4,140 0.56 0.69 21.6 21.8 4.9 4.1 0.8 0.6 17.1 17.4 5.5 6.1GF Securities Leung, Joseph Man Joe N 000776.SS 13.5 12.50 -7.3 12,746 0.35 0.26 -9.1 -27.3 38.2 52.6 2.5 2.5 6.5 4.7 1.9 1.9Haitong Securities - A Leung, Joseph Man Joe N 600837.SS 9.6 8.50 -11.5 14,461 0.39 0.36 2.7 -7.4 24.8 26.8 1.6 1.5 6.5 5.7 1.7 1.6Haitong Securities - H** Leung, Joseph Man Joe OW 6837.HK 10.7 10.50 -1.9 14,461 0.39 0.36 2.7 -7.4 22.3 24.1 1.4 1.3 6.5 5.7 1.9 1.7Industrial and Commercial Bank of China - H** Klaczek, Josh A OW 1398.HK 4.9 5.80 18.9 214,731 0.63 0.62 6.0 -1.3 6.2 6.3 1.2 1.1 21.3 18.3 5.1 5.1Industrial Bank Leung, Joseph Man Joe N 601166.SS 12.3 15.80 28.6 21,161 2.23 2.27 23.7 2.1 5.5 5.4 1.2 1.0 23.5 20.0 2.7 2.8Industrial and Commercial Bank of China - A Klaczek, Josh A OW 601398.SS 3.8 4.75 24.3 214,731 0.63 0.62 6.0 -1.3 6.1 6.1 1.2 1.1 0.2 0.2 5.3 5.2Noah Holdings Ltd Leung, Joseph Man Joe OW NOAH 4.7 6.00 27.1 264 0.33 0.37 -22.9 12.8 14.3 12.6 1.6 1.5 11.2 12.1 - -Shanghai Pudong Development Bank Leung, Joseph Man Joe OW 600000.SS 7.5 12.00 60.9 22,213 1.76 2.06 20.0 17.4 4.3 3.6 0.8 0.7 20.1 19.9 3.5 4.1Ping An Bank Co Ltd Chan, Bao Ling N 000001.SZ 13.2 19.00 43.7 10,812 2.54 2.70 26.5 6.4 5.2 4.9 - 0.7 15.9 14.6 0.8 0.9Mkt Cap Weighted Aggregates 1,324,711 0.7 0.7 5.6 -1.2 6.8 7.0 1.1 1.0 15.5 13.4 4.9 4.9HealthcareChina Shineway Pharmaceutical Group Limited** Wu, Sean UW 2877.HK 10.9 12.00 10.5 1,159 0.88 0.97 -4.1 10.7 10.0 9.1 1.7 1.5 18.1 17.6 3.0 3.3Concord Medical Services Holdings Limited Wu, Sean OW CCM 4.0 5.30 31.8 191 0.40 0.50 NM 24.6 9.9 8.0 0.7 0.6 5.2 5.6 0.0 0.0MicroPort Scientific Corp** Wu, Sean N 0853.HK 4.2 4.50 6.6 775 0.21 0.24 -4.8 15.1 16.3 14.2 2.0 1.8 13.5 13.6 0.0 0.0Mindray Medical Wu, Sean OW MR 34.3 35.00 2.2 3,964 1.77 2.08 19.8 17.6 19.4 16.5 2.8 2.4 16.6 16.7 1.1 1.3Shandong Weigao Group Medical Polymer Co. Ltd.** Wu, Sean OW 1066.HK 10.4 9.60 -7.7 6,007 0.22 0.27 23.5 25.1 38.5 30.8 4.6 4.2 16.2 14.3 1.1 1.4Sihuan Pharmaceutical Holdings** Wu, Sean OW 0460.HK 3.1 4.90 60.7 2,036 0.18 0.21 14.2 13.2 13.6 12.0 1.5 1.3 11.8 11.9 0.0 0.0Sino Biopharmaceutical Wu, Sean OW 1177.HK 3.0 3.60 19.6 1,919 0.15 0.18 59.3 18.6 20.2 17.0 3.7 3.5 18.8 21.2 3.7 4.4The United Laboratories** Wu, Sean OW 3933.HK 4.2 4.50 8.4 871 0.19 0.34 NM 76.8 21.8 12.3 1.3 1.2 5.6 9.9 1.7 3.1Mkt Cap Weighted Aggregates 16,922 0.6 0.7 21.2 18.7 24.8 20.2 3.2 2.9 15.4 15.2 1.4 1.7InsuranceChina Life Insurance - A Chan, Bao Ling N 601628.SS 18.4 16.00 -13.1 83,661 0.90 1.32 38.5 47.4 20.5 13.9 2.3 2.0 12.1 15.5 1.5 1.9China Life Insurance - H** Chan, Bao Ling N 2628.HK 23.4 21.00 -10.3 83,661 0.90 1.32 38.5 47.4 21.1 14.3 2.4 2.1 12.1 15.5 1.5 1.9China Pacific Insurance Group - A Chan, Bao Ling N 601601.SS 19.4 21.00 8.2 26,940 0.99 1.24 2.1 26.0 19.7 15.6 2.0 1.8 10.7 12.4 1.8 2.1China Pacific Insurance Group - H** Chan, Bao Ling N 2601.HK 25.0 26.00 4.0 26,940 0.99 1.24 2.1 26.0 20.5 16.3 2.1 1.9 10.7 12.4 1.7 2.0New China Life Insurance Company Ltd - A Chan, Bao Ling UW 601336.SS 23.2 25.00 7.6 11,192 0.99 1.50 -24.0 52.3 23.6 15.5 2.1 1.9 9.3 12.7 1.8 0.6New China Life Insurance Company Ltd - H** Chan, Bao Ling N 1336.HK 25.9 30.00 15.8 11,192 0.99 1.50 -24.0 52.3 21.2 14.0 1.9 1.7 9.3 12.7 2.0 0.7 33
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comPrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)Ping An Insurance Group - A Chan, Bao Ling OW 601318.SS 41.8 49.00 17.3 56,680 3.13 3.79 24.9 21.1 13.4 11.0 2.2 1.9 17.5 18.2 1.1 1.2Ping An Insurance Group - H** Chan, Bao Ling OW 2318.HK 61.4 65.00 5.9 56,680 3.13 3.79 24.9 21.1 15.9 13.1 2.6 2.2 17.5 18.2 0.9 1.0Mkt Cap Weighted Aggregates 356,945 1.6 2.1 22.5 29.6 18.8 13.8 2.3 2.0 13.4 15.7 1.4 1.6Leisure Products & Leisure TimeAjisen China Holdings Ltd Hong, Jessica Chien Han N 0538.HK 5.5 5.00 -9.3 763 0.15 0.20 -52.8 34.2 36.2 26.9 2.0 1.9 5.6 7.3 1.5 2.17 Days Group Holdings Limited*** Fong, Kenneth KC OW SVN 12.0 20.00 67.2 598 3.32 3.95 20.9 19.1 22.6 19.0 2.1 1.9 9.7 10.5 - -China Lodging Group Limited*** Fong, Kenneth KC OW HTHT 16.9 25.20 49.4 1,027 2.41 3.49 27.6 45.3 43.9 30.2 2.6 2.4 6.3 8.4 - -Home Inns & Hotels Management Inc.*** Fong, Kenneth KC OW HMIN 28.2 40.00 41.8 1,278 3.62 9.24 -76.5 NM 48.8 19.1 2.0 1.8 4.2 9.9 - -Mkt Cap Weighted Aggregates 3,666 2.5 4.9 -60.9 94.9 40.5 23.8 2.2 2.0 5.9 9.0 0.3 0.4Machinery & Capital GoodsChina High Speed Transmission** Kan, Boris N 0658.HK 2.5 2.60 2.2 447 0.35 0.37 -15.3 6.7 5.9 5.6 0.4 0.3 6.2 6.3 5.6 6.0China Rongsheng Heavy Industries Group HoldingsLtd** Mirchandani, Ajay UW 1101.HK 1.2 0.80 -35.5 1,120 0.07 0.05 -70.9 -32.1 14.0 20.6 0.5 0.5 3.3 2.2 2.1 1.5CSR Corp Ltd.** Li, Karen OW 1766.HK 5.6 9.30 67.0 9,446 0.35 0.45 7.5 29.4 12.8 9.9 1.5 1.3 16.8 16.6 1.5 2.0Changsha Zoomlion Heavy Industry** Li, Karen N 1157.HK 9.8 10.00 2.5 10,426 1.10 1.24 4.9 13.0 7.2 6.4 1.5 1.2 21.9 21.0 3.3 3.7China International Marine Containers A Li, Karen N 000039.SZ 10.1 10.50 4.3 3,747 0.95 0.87 -31.6 -7.8 10.6 11.5 1.3 1.2 13.0 11.1 3.3 3.0China International Marine Containers B** Li, Karen N 200039.SZ 9.6 9.50 -0.7 3,747 0.95 0.87 -31.6 -7.8 8.2 8.8 1.0 0.9 13.0 11.1 4.3 4.0Dongfang Electric Corporation Limited - A Kan, Boris UW 600875.SS 13.7 10.50 -23.4 4,182 1.25 1.29 -18.0 2.8 11.0 10.7 1.7 1.5 16.7 14.7 0.9 0.9Dongfang Electric Corporation Limited - H** Kan, Boris N 1072.HK 12.3 12.90 4.7 4,182 1.25 1.29 -18.0 2.8 8.0 7.7 1.2 1.1 16.7 14.7 1.2 1.2Harbin Electric Company Limited** Kan, Boris OW 1133.HK 6.3 7.90 24.6 1,126 0.91 0.99 1.4 9.3 5.7 5.2 0.6 0.5 9.4 9.3 3.0 3.3Haitian International Holdings** Chik, Leon OW 1882.HK 9.1 11.00 20.6 1,878 0.67 0.76 -2.8 13.2 11.0 9.8 2.2 2.0 21.5 21.5 3.8 4.4Johnson Electric Holdings* Chik, Leon OW 0179.HK 5.1 6.30 22.8 2,386 0.06 0.07 18.5 14.2 11.1 9.7 1.5 1.3 14.2 14.5 1.9 2.2Lonking Holdings Ltd** Li, Karen N 3339.HK 1.5 3.50 130.3 839 0.38 0.40 -4.8 4.2 3.2 3.1 0.8 0.7 28.8 24.7 8.6 9.0Shanghai Electric Group Company Limited** Kan, Boris UW 2727.HK 3.1 2.80 -9.4 7,617 0.27 0.29 7.2 4.9 9.1 8.7 1.0 0.9 11.3 10.6 3.4 3.7SANY Heavy Equipment International HoldingsCompany** Deng, Chapman N 0631.HK 3.9 5.00 26.9 1,581 0.30 0.35 19.6 19.1 10.7 9.0 1.6 1.4 16.1 16.8 1.7 2.0Techtronic Industries Chik, Leon OW 0669.HK 13.1 16.00 22.3 3,079 0.11 0.14 25.5 22.3 NM 93.2 15.2 13.4 14.4 15.7 0.2 0.2Xinjiang Goldwind Science & Technology Co., Ltd. Kan, Boris N 2208.HK 2.9 2.80 -2.1 2,153 0.11 0.15 -52.2 38.0 26.6 19.3 0.6 0.6 2.2 3.0 0.4 0.5Mkt Cap Weighted Aggregates 57,954 0.7 0.7 -11.6 7.4 9.7 13.8 2.0 1.8 15.5 14.7 2.5 2.7Media & EntertainmentBona Film Group Ltd. Wei, Dick N BONA 5.2 6.00 16.5 313 0.24 0.31 -2.1 29.9 21.7 16.7 1.5 1.4 9.0 9.9 - -Mkt Cap Weighted Aggregates 313 0.7 0.3 NM -55.8 21.7 16.7 1.5 1.4 9.0 9.9 NA NAMetals & MiningMaanshan Iron & Steel - A Kang, Daniel OW 600808.SS 1.9 2.25 17.2 2,263 -0.39 0.05 NM NM NM 37.6 0.6 0.6 -11.9 1.6 0.0 1.0Maanshan Iron & Steel - H** Kang, Daniel OW 0323.HK 1.9 2.20 13.4 2,263 -0.39 0.05 NM NM NM 30.7 0.5 0.5 -11.9 1.6 0.0 1.3Aluminum Corporation of China - H** Kang, Daniel UW 2600.HK 3.4 2.70 -20.4 9,356 -0.34 0.02 NM NM NM NM 0.8 0.8 -9.3 0.6 0.0 0.0Aluminum Corporation of China - A Kang, Daniel UW 601600.SS 5.0 4.80 -3.8 9,356 -0.34 0.02 NM NM NM NM 1.4 1.4 -9.3 0.6 0.0 0.0China Hongqiao Group** Kang, Daniel OW 1378.HK 3.6 6.00 67.1 2,726 0.90 1.20 -12.8 32.7 3.2 2.4 0.8 0.6 26.4 28.4 8.1 10.7China Coal Energy - H** Kang, Daniel N 1898.HK 7.4 7.50 0.8 14,344 0.63 0.71 -15.4 13.4 9.6 8.5 0.9 0.8 9.8 10.4 3.1 3.5China Coal Energy - A Kang, Daniel N 601898.SS 7.1 8.00 12.4 14,344 0.63 0.71 -15.4 13.4 11.4 10.0 1.1 1.0 9.8 10.4 2.6 3.0China Shenhua Energy - H** Kang, Daniel OW 1088.HK 31.5 35.00 11.3 73,310 2.29 2.48 -0.3 8.2 11.1 10.3 2.0 1.8 19.0 18.3 3.4 3.7China Shenhua Energy - A Kang, Daniel OW 601088.SS 22.6 26.50 17.2 73,310 2.29 2.48 -0.3 8.2 9.9 9.1 1.8 1.6 19.0 18.3 3.8 4.2Baoshan Iron & Steel - A Kang, Daniel OW 600019.SS 4.5 6.00 33.3 12,579 0.68 0.40 61.8 -41.8 6.6 11.4 0.7 0.7 10.7 6.0 6.8 4.0Angang Steel - H** Kang, Daniel OW 0347.HK 4.4 5.50 24.7 4,024 -0.37 0.06 NM NM NM 61.0 0.5 0.5 -5.3 0.8 0.0 0.8Angang Steel - A Kang, Daniel OW 000898.SZ 3.5 4.50 29.7 4,024 -0.37 0.06 NM NM NM 59.4 0.5 0.5 -5.3 0.8 0.0 0.8 34
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comPrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)Mongolian Mining Corporation* Kang, Daniel OW 0975.HK 3.9 7.50 94.8 1,840 0.05 0.10 65.5 81.0 9.3 5.2 1.9 1.4 22.7 31.2 0.0 4.8SouthGobi Resources Ltd* Kang, Daniel OW 1878.HK 16.7 56.00 234.5 393 -0.06 0.57 NM NM NM 3.8 0.6 0.5 -1.7 15.4 0.0 0.0SouthGobi Resources Ltd. (SGQ CN)***** Kang, Daniel OW SGQ.TO 2.1 7.00 241.5 379 -0.06 0.57 NM NM NM 3.6 0.6 0.5 -1.7 15.4 0.0 0.0Yanzhou Coal Mining - H** Kang, Daniel N 1171.HK 12.4 12.00 -3.2 11,978 1.54 1.28 -15.3 -17.0 6.5 7.8 1.0 1.0 16.8 12.7 4.6 3.8Yanzhou Coal Mining - A Kang, Daniel N 600188.SS 18.7 18.70 -0.1 11,978 1.54 1.28 -15.3 -17.0 12.2 14.7 1.9 1.8 16.8 12.7 2.5 2.0Mkt Cap Weighted Aggregates 248,467 1.6 1.7 -4.3 8.6 8.7 11.1 1.5 1.4 13.9 14.2 3.2 3.4Multi-IndustryChina Cosco Holdings, Ltd.** Png, Corrine OW 1919.HK 3.7 5.80 56.8 6,546 -0.94 -0.14 NM NM NM NM 1.2 1.3 -32.2 -5.7 0.0 0.0China Merchants Holdings Intl Li, Karen UW 0144.HK 23.8 20.00 -16.0 7,645 1.78 1.86 -21.1 4.6 13.4 12.8 1.3 1.2 9.9 9.9 3.3 3.4Kingboard Chemical Chik, Leon OW 0148.HK 21.9 25.00 14.2 2,415 2.60 3.31 -12.5 27.3 8.4 6.6 0.6 0.6 7.9 9.5 2.8 3.6Kingboard Laminates Chik, Leon N 1888.HK 3.5 3.40 -2.9 1,355 0.43 0.47 -3.4 10.9 8.2 7.4 0.9 0.8 11.4 11.7 3.7 4.1Mkt Cap Weighted Aggregates 17,961 0.8 1.2 -21.8 53.6 7.4 6.9 1.1 1.1 -5.6 4.3 2.0 2.2Oil & GasChina Oilfield Services Limited** Handa, Akhil N 2883.HK 14.3 15.00 5.0 10,531 1.04 1.19 16.1 14.3 11.1 9.7 1.6 1.4 15.8 15.6 1.8 2.1CNOOC** Bustnes, Brynjar Eirik UW 0883.HK 15.9 13.00 -18.4 91,820 1.37 1.16 -13.0 -15.1 9.4 11.1 1.9 1.7 21.4 15.8 2.1 2.3China Resources Gas Group Limited Kan, Boris OW 1193.HK 15.7 17.10 8.6 4,192 0.76 1.03 15.8 34.8 20.7 15.4 3.4 2.9 17.9 20.4 0.7 0.9MIE Holdings Corporation** Handa, Akhil OW 1555.HK 2.1 4.00 86.9 731 0.29 0.32 78.9 12.5 6.1 5.4 1.7 1.3 32.2 27.0 0.0 0.0Sinopec Corp - H** Bustnes, Brynjar Eirik OW 0386.HK 7.8 9.00 15.1 85,239 0.84 0.93 -0.4 10.4 7.5 6.8 1.0 0.9 14.6 14.4 3.2 3.5Mkt Cap Weighted Aggregates 192,513 1.1 1.1 -7.4 -4.2 8.9 9.2 1.5 1.3 18.0 15.3 2.5 2.7Real EstateAgile Property Holdings Ltd** Li, Ryan OW 3383.HK 8.6 12.50 44.8 3,841 1.28 1.42 10.5 10.8 5.4 4.9 0.9 0.8 18.6 16.7 4.9 4.9C C Land Li, Ryan N 1224.HK 1.8 1.60 -11.1 601 0.16 0.21 57.7 31.8 11.2 8.5 0.3 0.3 2.7 4.0 2.8 3.3China Overseas Land & Investment Kwong, Lucia Yuen Kei OW 0688.HK 19.8 21.00 6.0 20,899 1.92 2.33 20.4 21.6 10.3 8.5 2.0 1.6 20.6 21.0 1.9 2.2China Resources Land Kwong, Lucia Yuen Kei N 1109.HK 17.2 16.50 -4.1 12,932 1.24 1.32 20.6 6.8 13.9 13.0 1.5 1.2 10.8 10.4 1.6 1.9China Vanke** Kwong, Lucia Yuen Kei N 200002.SZ 9.8 10.60 8.6 14,296 0.89 0.95 1.9 6.8 8.8 8.3 1.4 1.2 17.1 15.9 1.7 1.8Country Garden Holdings** Li, Ryan OW 2007.HK 3.1 3.55 16.0 7,197 0.32 0.36 -4.0 11.6 7.7 6.9 1.2 1.1 17.4 16.7 5.0 5.7Evergrande Real Estate** Li, Ryan OW 3333.HK 3.3 3.90 17.8 6,393 0.74 0.58 -2.5 -22.0 3.6 4.6 1.0 0.9 20.2 19.6 6.7 7.7Franshion Properties (China) Ltd. Kwong, Lucia Yuen Kei OW 0817.HK 2.4 2.90 21.3 2,825 0.30 0.34 88.4 13.9 8.0 7.1 0.8 0.8 10.4 11.4 3.0 3.2Glorious Property** Kwong, Lucia Yuen Kei UW 0845.HK 1.2 1.00 -13.0 1,156 0.18 0.18 -19.4 -4.3 5.0 5.3 0.4 0.4 8.0 7.4 0.0 0.0Guangzhou R&F Properties** Li, Ryan OW 2777.HK 9.2 12.20 33.0 3,812 1.53 1.69 2.1 9.9 4.8 4.4 1.0 0.9 19.1 22.0 8.1 9.0Longfor Properties Co. Ltd.** Li, Ryan N 0960.HK 12.0 11.70 -2.8 8,431 1.06 1.14 -13.1 6.9 9.2 8.6 1.8 1.5 20.1 19.5 2.0 2.3KWG Property Holding Ltd.** Li, Ryan OW 1813.HK 4.5 5.80 28.9 1,680 0.70 0.82 8.9 17.3 5.2 4.4 0.7 0.6 14.2 13.8 5.8 6.8Shimao Property Holdings** Kwong, Lucia Yuen Kei N 0813.HK 13.7 13.50 -1.6 6,147 1.29 1.64 6.0 27.4 8.6 6.8 1.1 1.0 12.6 15.4 3.2 4.4Mkt Cap Weighted Aggregates 92,681 1.1 1.3 9.9 13.2 9.1 8.2 1.4 1.2 16.6 16.5 3.0 3.4RetailingBaoxin Auto Group Limited** Lai, Nick YC OW 1293.HK 5.1 6.00 18.1 1,657 0.40 0.53 46.4 33.2 10.3 7.8 2.4 1.6 27.7 25.1 - -Belle International Holdings Ltd.** Sener, Kurumlu Ebru N 1880.HK 13.6 13.50 -0.9 14,821 0.55 0.64 9.4 15.1 19.9 17.3 4.1 3.6 22.2 22.2 2.0 2.3Dah Chong Hong** Chik, Leon OW 1828.HK 7.0 9.00 28.6 1,650 0.80 0.92 10.2 14.8 7.1 6.1 1.4 1.3 16.9 17.5 4.3 4.9Golden Eagle Retail Group Ltd** Sener, Kurumlu Ebru OW 3308.HK 17.1 19.50 14.2 4,259 0.64 0.72 2.2 13.6 21.7 19.1 5.2 4.6 25.4 25.4 2.3 2.6Li Ning Co Ltd** Sener, Kurumlu Ebru UW 2331.HK 4.8 3.30 -31.7 658 -0.05 0.23 NM NM NM 16.7 1.2 1.2 -1.7 7.0 0.0 2.4New World Department Stores Ltd Sener, Kurumlu Ebru OW 0825.HK 4.4 7.75 76.1 957 0.35 0.45 5.1 28.2 12.5 9.7 1.6 1.5 13.0 15.5 4.0 5.1Parkson Retail Group Ltd** Sener, Kurumlu Ebru UW 3368.HK 6.7 5.60 -16.5 2,433 0.38 0.42 -4.0 8.5 14.1 13.0 2.6 2.4 19.5 19.2 3.5 3.9Ports Design** Sener, Kurumlu Ebru UW 0589.HK 5.8 7.00 20.7 415 0.67 0.74 -11.3 9.9 7.0 6.3 1.3 1.2 19.8 19.7 7.2 7.9Zhongsheng Group Holdings** Lai, Nick YC UW 0881.HK 9.6 7.50 -22.0 2,366 0.50 0.69 -32.1 36.4 15.4 11.3 1.8 1.6 10.9 12.9 1.7 1.1Mkt Cap Weighted Aggregates 29,218 0.5 0.6 1.3 18.3 17.2 15.1 3.5 3.1 20.7 21.0 2.3 2.6 35
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comPrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)Technology - Hardware21Vianet Group Inc.*** Sullivan, James OW VNET 12.0 16.30 35.8 671 0.53 0.86 28.2 62.1 18.2 11.2 1.1 1.0 5.6 9.3 0.0 0.0BYD** Kwock, Alvin YL UW 1211.HK 14.4 42.00 192.1 5,209 1.42 1.78 -17.7 25.2 8.2 6.5 1.4 1.2 18.4 20.1 2.4 3.1Digital China Zhang, Qin OW 0861.HK 13.4 16.00 19.8 1,884 1.35 1.55 18.3 15.1 9.9 8.6 1.9 1.6 20.2 20.4 3.5 4.1GCL Poly Energy Park, JJ UW 3800.HK 1.2 1.70 38.2 2,456 -0.15 -0.02 NM NM NM NM 1.0 1.0 -11.1 -1.9 0.0 0.0Lenovo Group Limited* Hariharan, Gokul OW 0992.HK 6.3 8.10 28.6 8,390 0.06 0.07 22.3 25.7 14.2 11.3 3.6 3.0 25.8 31.5 3.0 3.4Skyworth Digital Holdings Chik, Leon OW 0751.HK 4.0 4.70 16.9 1,403 0.58 0.62 26.1 5.9 6.9 6.5 1.1 1.0 17.9 17.0 4.4 4.7SMIC* Hsu, Rick N 0981.HK 0.3 0.32 8.5 1,218 0.00 0.00 NM NM NM 11.9 0.5 0.5 -1.3 2.1 0.0 0.0Spreadtrum Communications Zhang, Qin OW SPRD 20.9 22.00 5.5 980 1.96 2.33 -21.4 18.8 10.6 8.9 2.5 2.1 29.0 27.9 2.5 1.7TCL Communication Technology Hsu, Andrew Tak Jun OW 2618.HK 2.5 3.50 41.7 360 0.13 0.29 -82.1 NM 19.6 8.5 1.0 0.9 5.3 11.7 1.7 3.9TCL Multimedia Hsu, Andrew Tak Jun OW 1070.HK 4.5 5.30 17.8 767 0.65 0.66 55.8 1.1 6.9 6.9 1.2 1.1 22.4 19.6 4.3 4.4VTech Holdings* Chik, Leon UW 0303.HK 92.9 90.00 -3.1 3,001 0.80 0.84 5.9 3.9 14.9 14.3 5.3 5.2 36.0 36.8 6.4 6.6ZTE Corp** Zhang, Qin OW 0763.HK 10.9 16.00 46.3 4,949 0.63 0.89 5.9 40.5 13.9 9.9 1.2 1.1 8.7 11.5 2.4 3.4Mkt Cap Weighted Aggregates 31,288 0.6 0.8 -10.1 24.8 10.8 9.1 2.3 2.0 17.5 20.7 2.8 3.2Technology - Software & IT ServicesAirMedia Wei, Dick N AMCN 2.2 3.50 56.3 148 -0.17 -0.04 NM NM NM NM 1.1 1.2 -2.3 1.7 0.0 0.0Ambow Education*** Wei, Dick OW AMBO 2.8 9.00 227.3 204 0.05 0.48 -79.8 NM NM 35.9 3.0 2.8 3.2 10.3 0.0 0.0AsiaInfo-Linkage Inc. Zhang, Qin OW ASIA 9.9 19.00 91.5 719 0.57 1.09 -43.9 89.8 17.3 9.1 0.6 0.6 3.9 6.8 0.0 0.0Baidu.com Wei, Dick OW BIDU 113.8 200.00 75.7 39,769 4.64 6.25 57.0 34.7 24.5 18.2 9.6 6.1 48.6 41.3 0.0 0.0Focus Media Wei, Dick NR FMCN 24.1 - - 3,112 1.94 2.33 34.7 20.3 12.4 10.3 2.1 1.8 23.4 22.9 1.6 2.7iSoftstone Wei, Dick OW ISS 4.8 15.00 211.9 273 0.38 0.58 19.3 51.9 12.7 8.3 0.8 0.8 7.0 9.5 0.0 0.0NetEase Wei, Dick OW NTES 53.0 65.00 22.8 6,920 4.21 4.35 9.9 3.3 12.6 12.2 2.6 2.1 25.3 21.0 0.0 0.0Shanda Games*** Wei, Dick N GAME 3.8 4.00 6.4 1,053 0.66 0.65 -5.2 -1.8 35.8 36.5 6.4 5.4 25.1 17.8 0.0 0.0Sohu.Com*** Wei, Dick OW SOHU 39.3 64.00 63.0 1,492 1.71 3.33 -56.7 95.4 23.0 11.8 1.1 1.0 13.0 17.5 0.0 0.0Tencent** Wei, Dick OW 0700.HK 260.0 276.00 6.2 62,085 6.95 9.17 26.8 32.0 30.2 22.9 9.5 6.7 37.6 35.1 0.3 0.4VanceInfo Wei, Dick OW VIT 7.4 18.00 142.6 314 0.46 0.80 -5.8 73.1 16.1 9.3 1.0 0.9 6.4 10.3 0.0 0.0Mkt Cap Weighted Aggregates 120,028 5.5 7.2 37.4 31.7 25.6 19.5 8.5 5.9 38.1 34.3 0.2 0.3TransportationBeijing Capital International Airport** Li, Karen OW 0694.HK 5.2 8.30 59.0 2,917 0.32 0.40 25.1 23.1 13.1 10.6 1.2 1.1 9.3 10.5 1.1 1.4China Shipping Container Lines** Png, Corrine OW 2866.HK 1.9 2.85 51.6 3,708 -0.02 0.06 NM NM NM 25.2 0.7 0.7 -1.0 2.7 0.0 0.0Mkt Cap Weighted Aggregates 6,625 0.1 0.2 NM 60.4 5.8 18.8 0.9 0.8 3.5 6.1 0.5 0.6Telecom ServicesChina United Network Communications Liu, Lucy Yajun N 600050.SS 3.6 7.00 92.3 12,316 0.10 0.15 38.8 57.9 37.4 23.7 1.1 1.1 1.0 1.6 0.9 1.5China Unicom (Hong Kong) Limited** Liu, Lucy Yajun OW 0762.HK 13.3 15.60 17.3 40,437 0.28 0.43 58.5 52.2 37.9 24.9 1.2 1.2 3.2 4.7 1.3 2.0China Mobile Limited** Liu, Lucy Yajun N 0941.HK 83.7 92.00 9.9 217,060 6.31 6.27 0.6 -0.6 10.7 10.8 1.9 1.7 18.5 16.6 4.0 4.0China Telecom Corporation Limited** Liu, Lucy Yajun OW 0728.HK 4.7 5.40 15.9 48,660 0.18 0.25 -10.8 38.4 20.9 15.1 0.9 0.9 4.8 5.9 1.7 2.7Mkt Cap Weighted Aggregates 318,473 4.4 4.4 0.8 0.2 16.8 13.7 1.6 1.5 13.8 12.9 3.2 3.4UtilitiesAnhui Expressway** Deng, Chapman OW 0995.HK 3.5 9.10 159.3 925 0.51 0.52 6.6 3.2 5.6 5.4 0.7 0.7 13.8 13.2 7.9 8.1Beijing Enterprises Water Wu, Elaine OW 0371.HK 1.8 2.20 24.3 1,578 0.12 0.15 31.6 25.2 15.0 12.0 1.4 1.3 9.7 11.3 2.0 2.5Cheung Kong Infrastructure Wu, Elaine OW 1038.HK 46.6 56.00 20.3 14,990 4.08 4.24 20.7 4.0 11.4 11.0 2.1 2.1 18.4 19.1 3.8 3.9China Everbright International Wu, Elaine OW 0257.HK 3.9 4.80 21.8 2,048 0.33 0.33 51.5 1.1 11.9 11.8 2.0 1.8 18.0 16.1 1.7 1.7China Longyuan Power Group Corp.** Kan, Boris N 0916.HK 5.3 5.50 3.8 5,104 0.32 0.37 -9.2 16.8 13.3 11.4 1.1 1.0 9.5 9.3 1.5 1.7China Gas Holdings Limited Kan, Boris N 0384.HK 4.1 2.60 -36.9 2,410 0.24 0.30 47.9 22.7 17.1 13.9 1.6 1.5 10.0 11.1 0.0 0.0China Resources Power Holdings Kan, Boris OW 0836.HK 16.2 18.60 14.5 9,969 1.39 1.70 46.0 22.6 11.7 9.5 1.5 1.3 13.1 14.6 2.7 3.4 36
    • Sunil Garg Asia Pacific Equity Research (852) 2800-8518 18 October 2012 sunil.garg@jpmorgan.comPrice as of Price Target Price Mkt EPS EPS Y/Y Growth P/E P/BV ROE Div. YieldOct 16, 2012 Analyst Rec RIC Ticker Upside Cap FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2EExchange rate = 6.26 (HKD) (HKD) (%) (US$MM) (HKD) (HKD) (%) (%) (x) (x) (x) (x) (%) (%) (%) (%)China Yangtze Power Co Ltd - A Kan, Boris OW 600900.SS 6.5 9.80 51.7 17,015 0.53 0.54 6.5 1.9 12.1 11.9 1.5 1.5 13.1 12.7 5.0 5.0Datang International** Wu, Elaine N 0991.HK 2.7 2.50 -7.3 8,025 0.24 0.30 56.0 26.4 9.1 7.2 0.7 0.7 8.0 9.6 4.4 5.6Hollysys Automation Technologies Ltd. Deng, Chapman OW HOLI 10.5 13.00 23.8 588 1.02 1.12 35.2 9.7 10.3 9.4 1.8 1.5 19.5 17.9 0.0 0.0Huadian Power International - H** Wu, Elaine UW 1071.HK 2.0 2.00 2.0 3,662 0.18 0.20 NM 16.1 9.0 7.7 0.6 0.6 7.4 7.7 0.0 0.0Huaneng Power Intl - A Kan, Boris UW 600011.SS 5.9 4.90 -16.9 12,508 0.46 0.52 NM 13.3 12.7 11.2 1.5 1.4 12.4 13.2 4.0 4.6Huaneng Power Intl - H** Kan, Boris N 0902.HK 5.7 6.00 5.1 12,508 0.46 0.52 NM 13.3 10.0 8.8 1.2 1.1 12.4 13.2 5.2 5.8Jiangsu Expressway - H** Deng, Chapman OW 0177.HK 6.8 8.60 27.4 4,018 0.48 0.47 -1.3 -0.4 11.5 11.5 1.5 1.4 13.0 12.6 6.6 6.6Towngas China Company Limited Kan, Boris OW 1083.HK 6.2 5.95 -3.5 1,955 0.36 0.43 23.4 20.2 17.2 14.3 1.3 1.2 8.1 8.9 0.0 0.0Shenzhen Expressway - H** Deng, Chapman OW 0548.HK 2.9 8.50 191.1 1,025 0.37 0.41 7.7 11.3 6.4 5.8 0.6 0.5 9.0 9.6 7.3 8.1Shenzhen Expressway - A** Deng, Chapman OW 600548.SS 3.3 6.90 112.3 1,025 0.37 0.41 7.7 11.3 8.8 7.9 0.8 0.7 9.0 9.6 5.3 5.9Sichuan Expressway** Deng, Chapman OW 0107.HK 2.4 4.10 68.7 1,327 0.39 0.44 5.4 11.2 5.0 4.5 0.6 0.6 13.7 13.8 4.7 5.2Sound Global Limited**** Wu, Elaine OW SOGL.SI 0.5 0.70 34.6 549 0.35 0.40 8.5 14.0 7.7 6.7 1.3 1.1 18.1 17.7 2.0 2.3ENN Energy Holdings Limited Kan, Boris OW 2688.HK 32.8 36.00 9.9 4,511 1.49 1.88 25.2 26.0 17.7 14.1 3.4 2.8 20.4 21.7 1.4 1.8Yuexiu Transport Infrastructure Limited** Deng, Chapman OW 1052.HK 3.5 4.30 24.3 747 0.33 0.35 -0.8 5.9 8.4 8.0 0.6 0.6 6.9 7.1 7.1 7.5Zhejiang Expressway** Deng, Chapman OW 0576.HK 5.6 7.10 26.8 3,138 0.40 0.37 -4.9 -7.1 11.4 12.3 1.3 1.2 11.2 10.2 6.8 6.8Mkt Cap Weighted Aggregates 109,626 1.0 1.1 32.5 9.1 11.7 10.5 1.5 1.4 13.0 13.5 3.8 4.2JPM Country Average 3,141,182 1.5 1.7 6.8 10.2 11.5 10.4 2.1 1.8 16.0 15.1 3.5 3.6 Source: Bloomberg, J.P. Morgan Estimates *Price Currency=HKD & Reporting Currency=USD **Price Currency=HKD & Reporting Currency=CNY ***Price Currency=USD & Reporting Currency=CNY ****Price Currency=SGD & Reporting Currency=CNY *****Price Currency=SGD & Reporting Currency=CNY 37
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comAnalyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple researchanalysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the documentindividually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the viewsexpressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part ofany of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or viewsexpressed by the research analyst(s) in this report.Important Disclosures Market Maker: JPMS makes a market in the stock of Focus Media. Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for ChinaHongqiao Group within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: China Hongqiao Group,China ZhengTong Auto Service Holding Limited, Focus Media, Lonking Holdings Ltd. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investmentbanking clients: China Hongqiao Group, China ZhengTong Auto Service Holding Limited. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the followingcompany(ies) as clients, and the services provided were non-investment-banking, securities-related: China Hongqiao Group, FocusMedia. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,and the services provided were non-securities-related: China Hongqiao Group. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking ChinaHongqiao Group, China ZhengTong Auto Service Holding Limited. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment bankingservices in the next three months from China Hongqiao Group, China ZhengTong Auto Service Holding Limited. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or servicesother than investment banking from China Hongqiao Group, Focus Media. "J.P. Morgan Securities plc and or its affiliates (J.P. Morgan) is acting as a Joint Bookrunner and Joint Lead Manager to ChinaHongqiao Group Ltd (“China Hongqiao”) on its Reg S Only USD 5 year benchmark offering as announced on 21 Sep 2012. J.P. Morganwill be receiving fees for so acting. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for ChinaHongqiao or its associates and may have other interests in or relationships with China Hongqiao or its affiliates, and receive fees,commissions or other compensation in such capacities. This research report and the information herein is not intended to serve as anendorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a securityholder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.” “J.P. Morgan Securities plc and/or its affiliates (J.P. Morgan) is acting as Sole Global Coordinator and Sole Bookrunner to ChinaZhengTong Auto Services Holdings Limited on US$300-350mm bond offering as announced on 26 April 2012. J.P. Morgan will bereceiving fees for so acting. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for China ZhengTongAuto Services Holdings Limited or its associates and may have other interests in or relationships with China ZhengTong Auto ServicesHoldings Limited or its affiliates, and receive fees, commissions or other compensation in such capacities. This research report and theinformation herein is not intended to serve as an endorsement of the proposed transaction or result in procurement, withholding orrevocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. Norepresentation is made that it is accurate or complete.” “J.P. Morgan Securities (Asia Pacific) Limited (J.P. Morgan) is acting as financial advisor to the Independent Committee of the boardof directors of Focus Media Holding Limited (FMCN) in a potential going private transaction of FMCN from affiliates of FountainVestPartners, The Carlyle Group, CITIC Capital Partners, CDH Investments, China Everbright Limited and FMCN’s Chairman and ChiefExecutive Officer, Mr Jason Nanchun Jiang, and his affiliates, as announced on 23 Aug 2012. J.P. Morgan will be receiving fees for soacting. J.P. Morgan may perform, or may seek to perform, other financial or advisory services for FMCN or its associates and may haveother interests in or relationships with FMCN or its affiliates, and receive fees, commissions or other compensation in such capacities.This research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result inprocurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publiclyavailable information. No representation is made that it is accurate or complete.” " J.P. Morgan Securities plc and or its affiliates (J.P. Morgan) is acting as dealer manager to Lonking Holdings Limited on its PartialTender for up to US$80,000,000 of aggregate amounts outstanding of 2016 notes via modified Dutch auction as announced on 7th Sep2012. J.P. Morgan will be receiving fees for so acting. J.P. Morgan may perform, or may seek to perform, other financial or advisoryservices for Lonking or its associates and may have other interests in or relationships with Lonking or its affiliates, and receive fees,38
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comcommissions or other compensation in such capacities. This research report and the information herein is not intended to serve as anendorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a securityholder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.” MSCI: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without priorwritten permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used tocreate any financial products, including any indices. This information is provided on an as is basis. The user assumes the entire risk ofany use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling theinformation hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particularpurpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or anythird party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI,Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailingresearch.disclosure.inquiries@jpmorgan.com with your request.Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return ofthe stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, ifapplicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policyreasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not arecommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return iscompared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appearin the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s researchwebsite, www.morganmarkets.com. J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 12% IB clients* 52% 46% 34% JPMS Equity Research Coverage 42% 48% 10% IB clients* 69% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for coveredcompanies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analystor your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.Equity Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation basedupon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-USaffiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, publicappearances, and trading securities held by a research analyst account.Other DisclosuresJ.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketingname for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.Options related research: If the information contained herein regards options related research, such information is available only to persons who havereceived the proper option risk disclosure documents. For a copy of the Option Clearing Corporations Characteristics and Risks of Standardized Options,please contact your J.P. Morgan Representative or visit the OCCs website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf 39
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comLegal Entities DisclosuresU.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in theUK by the Financial Services Authority. U.K.: J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorized andregulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. SouthAfrica: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. MorganSecurities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission inHong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. MorganAustralia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is aparticipant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India PrivateLimited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National StockExchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBIRegistration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities(Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and ExchangeCommission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK.Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and ExchangeCommission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P.Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealerby the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan SecuritiesSingapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange SecuritiesTrading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCBSingapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd(18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the SecuritiesCommission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securitiesand Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom ofSaudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai:JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is DubaiInternational Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.Country and Region Specific DisclosuresU.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.Investment research issued by JPMS plc has been prepared in accordance with JPMS plcs policies for managing conflicts of interest arising as a result ofpublication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. Thisreport has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000(Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by personswho are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will beengaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) intheir home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue ordistribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior writtenconsent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G ofthe Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt Branch and J.P.Morgan ChaseBank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as ofthe previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered withthe Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end datafrom two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bearcontracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk.Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to theexchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee andconsumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorganSecurities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau(kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II FinancialInstruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to timeby affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securitiesdiscussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above.India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributedby JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of theirbusiness, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consentof JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a publicoffering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territorythereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectuswith the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to anexemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The informationcontained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs ofthe recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws ofCanada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securitiescommission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein40
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comor the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regardedas professional clients as defined under the DFSA rules.General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative toJPMS and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for thesecurities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to changewithout notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of anyfinancial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are notintended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its ownindependent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments orannouncements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise."Other Disclosures" last revised September 29, 2012.Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold orredistributed without the written consent of J.P. Morgan. #$J&098$#*P 41
    • Sunil Garg Asia Pacific Equity Research(852) 2800-8518 18 October 2012sunil.garg@jpmorgan.comJ.P. Morgan Hong Kong and China Equity Research TeamSunil Garg Asia Pacific Head of Research 852 2800 8518 sunil.garg@jpmorgan.comAdrian Mowat Market Strategy 852 2800 8599 adrian.mowat@jpmorgan.comJoseph Leung HK Strategy/ Banks 852 2800 8517 joseph.mj.leung@jpmorgan.comJoanne Cheung HK Strategy 852 2800 8596 joanne.cy.cheung@jpmorgan.com.Joshua Klaczek Banks 285 2800 8534 Josh.klaczek@jpmorgan.comHelen Ye Banks/Insurance 852 2800 8513 Helen.zj.ye@jpmorgan.comJoy Wu Banks Joy.wu@jpmorgan.comEbru Sener Consumer 852 2800 8521Jessica Hong Consumer 852 2800 8559 jessica.ch.hong@jpmorgan.comKenneth Fong Gaming & Lodging 852 2800 8597 kenneth.kc.fong@jpmorgan.comSean Wu Healthcare 852 2800 8538 sean.wu@jpmorgan.comKaren Li Infrastructure 852 2800 8589 karen.yy.li@jpmorgan.comChapman Deng Infrastructure 852 2800 8577 chapman.zw.deng@jpmorgan.comBao Ling Chan Insurance 852 2800 8592 baoling.chan@jpmorgan.comDick Wei Internet & New Media 852 2800 8535 dick.x.wei@jpmorgan.comEvan Zhou Internet & New Media 852 2800 8505 Evan.z.zhou@jpmorgan.comDaniel Kang Metal & Mining 852 2800 8570 daniel.kang@jpmorgan.comLun Zhang Metal & Mining 852 2800 8561 Lun.zhang@jpmorgan.comBrynjar Bustnes Oil & Gas 852 2800 8578 brynjar.e.bustnes@jpmorgan.comSophie Tan Oil & Gas 852 2800 8531 sophie.lm.tan@jpmorgan.comAkhil Handa Oil & Gas 852 2800 8563 akhil.x.handa@jpmorgan.comRobert Smith Quantitative 852 2800 8569 robert.z.smith@jpmorgan.comChris Ma Quantitative 852 2800 8530 Christopher.x.ma@jpmorgan.comLucia Kwong Real Estate 852 2800 8526 lucia.yk.kwong@jpmorgan.comAmy Luk Real Estate 852 2800 8524 amy.kp.luk@jpmorgan.comRyan Li Real Estate 852 2800 8529 ryan.lh.li@jpmorgan.comLeon HK Chik SMID Caps 852 2800 8590 leon.hk.chik@jpmorgan.comAndrew Hsu SMID Caps 852 2800 8572 andrew.t.hsu@jpmorgan.comAlvin Kwock Technology 852 2800 8533 alvin.yl.kwock@jpmorgan.comGokul Hariharan Technology 852 2800 8564 gokul.hariharan@jpmorgan.comLucy Liu Telecoms 852 2800 8566 lucy.y.liu@jpmorgan.comQin Zhang Technology 852 2800 8532 qin.zhang@jpmorgan.comMichelle Wei Telecoms 852 2800 8562 michelle.z.wei@jpmorgan.comBoris Kan Utilities 852 2800 8573 boris.cw.kan@jpmorgan.comElaine Wu Utilities 852 2800 8561 elaine.wu@jpmorgan.comJ.P. Morgan Regional and Hong Kong Sales TeamChristopher Knight Regional 852 2800 8828 christopher.knight@jpmorgan.comCynthia Lam Regional 852 2800 8899 cynthia.wy.lam@jpmorgan.comEd Bell Regional 852 2800 8885 ed.h.bell@jpmorgan.comMaria Hong Regional 852 2800 8865 maria.hong@jpmorgan.comNick Paolucci Regional 852 2800 7808 nicholas.g.paolucci@jpmorgan.comAllan Murray Hong Kong & China 852 2800 8811 ag.murray@jpmorgan.comNewman Mou Hong Kong & China 852 2800 8893 newman.sb.mou@jpmorgan.comJennifer Lee Hong Kong & China 852 2800 7710 jennifer.a.lee@jpmorgan.comKelly Wen Hong Kong & China 852 2800 7871 kelly.l.wen@jpmorgan.comStella Chow Hong Kong & China 852 2800 7818 stella.chow@jpmorgan.com42