Performance in Stagflation
Lehman Brothers | Title
PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES, INCLUDING FOREIGN AFFILIATE DISCLOSURES, ON PAGES 157–158
Falling Growth and Rising
Inflation in Asia
The relentless demand for resources is creating a need for large-scale investment
in agriculture, water, and alternative energy
Investors confront the reality of rising inflation and slowing growth
Regional Research Team
May 2008
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Lehman Brothers | Equity Research
EXECUTIVE SUMMARY
Describing Asian stagflation
Our definition of stagflation in an Asian context can be described as significantly slowing growth and rising inflation. We
have both of these in every single country in Asia, without exception. These stagflationary forces produce: (1) capital
shortages, (2) rising costs, (3) diminishing aggregate demand, (4) margin squeeze and (5) rising taxes. In this environment,
the characteristics of the likely winners, in our view, include (1) low debt, (2) pricing power, (3) captive buyers, (4) control
of input prices, (5) makers of consumer staples and (6) “sin” stocks.
Winners and losers
The countries which are implementing significant price control and/or large subsidy program risk economic destabilization.
These countries include India, China, the Philippines and Indonesia. Countries which allow market forces to determine prices
– and therefore which allow supply and demand to recalibrate effectively and quickly – are the likely winners. These include
Hong Kong, Singapore, Thailand and Taiwan. Countries which should also benefit are those which have large agricultural
sectors. Malaysia wins on this score. Korea stands as an outlier in that it is highly dependent on hard and soft commodities,
is heavily indebted, produces large-scale capital goods and is vulnerable to an economic slowdown in the West.
Sector winners and losers
Sectors which stand to benefit in a world of stagflation are iron ore, plantations, coal, telecom, properties and selected
utilities. Other consumer sectors include tobacco, alcohol, gambling and health care. Sectors which are likely to be affected
poorly by stagflation are lower margin, high-debt businesses, such as container shipping, shipbuilding, low margin
technology businesses, autos, high-end and discretionary consumer goods, basic materials, price-controlled oil & gas, and
selected construction materials.
Currencies
We also highlight countries with large current account surpluses and large budget surpluses which can withstand the
economic pressures from falling growth and rising prices. These include CNY, MYR, SGD and TWD. Countries with
troublesome current account deficits and budget deficits are threatened by excessive subsidies. These include Indonesia,
India and the Philippines.
Stagflation Portfolio
The following portfolio shows stocks which we believe will be winners under a stagflationary environment.
EV/
3 Mth Ave
P/E P/B Div Yield
EBITDA
Lehman Current Mkt Cap Liquidity ROE Net Debt/ Altman
Company Ticker Rating Price US$mn (US$mn) FY08E Assets Z-Score FY08E FY08E FY08E FY08E
Industry Sector
Cheung Kong Infra 1038 HK Utilities 1-OW 31.8 9,248 9.0 13 -2% 5.3 55.6 13.9 1.8 3.8
Hong Kong Electric 6 HK Utilities 1-OW 45.2 12,724 27.5 15 2% 3.5 9.4 12.8 1.9 4.4
China Mobile 941 HK Telecom 1-OW 132.5 379,182 477.7 28 -27% 10.1 10.8 20.6 5.4 2.1
Sun Hung Kai 16 HK Property 1-OW 138.0 45,174 178.8 6 10% NA 27.0 26.3 1.7 1.8
CNOOC 883 HK Oil & Gas E&P 2-EW 13.9 94,145 237.9 28 -16% 10.1 9.7 14.3 3.7 2.6
Shenhua 1088 HK Energy 1-OW 35.0 14,379 153.4 20 3% 1.9 2.0 20.4 4.0 1.7
Rio Tinto RIO AU Mining 0-NR 145.3 64,535 197.2 40 44% 1.4 4.8 15.7 4.9 1.2
IOI IOI MK Palm Oil 0-NR 7.1 13,801 31.3 26 7% 7.5 14.7 21.6 5.0 2.4
EGCO EGCO TB Utilities 2-EW 95.5 1,547 1.8 18 8% 3.4 8.8 6.4 1.1 5.7
HK and Shanghai Hotels 45 HK Hotels 1-OW 13.5 2,544 1.8 5 5% 2.9 12.0 20.1 0.9 1.5
Ranbaxy RBXY IS Pharmaceuticals 1-OW 466.3 4,355 4.6 24 44% 3.2 18.0 24.7 5.7 2.0
KT&G 033780 KS Consumer 1-OW 82500.0 11,019 31.2 23 -3% 11.3 10.7 14.8 3.3 NA
Melco 200 HK Equit Conglomerates 0-NR 11.6 1,891 7.5 4 11% 5.6 82.7 43.5 1.4 0.1
Average 50,350 104.6 27 6% 8.6 11.9 19.3 4.6 2.1
Source: BES, Worldscope, Lehman Brothers estimates
Prices as of May 7, 2008
Paul Schulte and regional team
Lehman Brothers Asia Limited
May 2008 3

Lehman Brothers | Equity Research
COUNTRY SUMMARY
Country Lehman Brothers Comments In a stagflation scenario
Top Gainers Top Losers
Australia Australian institutional processes and flexible, yet aggressive, policy settings Telstra Bluescope Steel
(David are likely to soften inflationary impacts, in our view. The demand side of the
PrimeAg Fairfax Media
Langford) stagflation equation may prove to be the toughest issue for Australian policy
makers. As a result, we believe that more attractive investment exposures
are likely to be provided by those companies which enjoy: (i) limited
exposure to input cost inflation (e.g., materials and labor); and (ii) product
sets with a high degree of substitutability for higher priced products in a cost-
conscious environment.
China China is trying to deal with rising inflation by appreciating the currency and COSL Guangzhou
(Cheng Khoo) keeping rates high. We believe growth is likely to slow down somewhat in R&F
China Shenhua
2008 and again in 2009. Inflation risks are to the upside.
Minsheng Bank
Hong Kong We expect Hong Kong’s internal consumption to slow, unemployment to rise, HK Electric Giordano
(Ivan Lee) and input cost (in terms of energy, labor, rental, etc.) to rise quickly. This is Hutchison Shangri-la Hotel
not positive, especially for the consumer, hotel, manufacturing, gaming,
Whampoa
financial, and export sectors, mainly due to Hong Kong’s fairly open
economy, close linkage with China’s economy, and because its currency is
pegged to the US dollar. However, housing prices will likely continue to
benefit from a negative interest rate environment, in our view. Also, we
expect regulated utilities, whose earnings are tied to capex instead of tariff
and fuel cost, and conglomerates with diversified earnings streams to have
earnings resilient performance.
India We do not believe that India will be hit significantly by stagflation and we Ranbaxy Larsen and
(Prabhat think growth will remain strong in relative terms. In our view, the negative Toubro
Hindustan Lever
Awasthi) impact will be felt by interest rate-sensitive stocks or by companies not in a Tata Motors
position to pass on cost pressures to consumers.
Korea In Korea, we expect defensive industries such as telco and tobacco to be the KT Hanjin Shipping
(Zayong Koo) least affected while other consumer related and export related industries KT&G LG Display
would be adversely affected. However, we believe Samsung Electronics
although the industry in which it operates is likely to be hurt by stagflation,
the company is nevertheless well positioned globally to actually benefit from
the downturn.
Taiwan We believe Taiwan’s export-oriented economy is likely to underperform TSMC AUO
(Kent Chan) compared with its Asian peers owing to its high dependence on technology,
Taiwan Cement Nanya Tech
excessive competition, and its dependence on imported oil. The domestic
economy (property, telecoms, and insurance) and asset reflation stocks
would continue to rise, potentially like they did after the inflation shock in the
1970s, in our view.
May 2008 4

Lehman Brothers | Equity Research
SECTOR SUMMARY
Sector Comments Top Gainers Top Losers
Auto The auto sector could be a likely loser since auto demand is tied to Denway Hyundai Motor
(Zayong Koo) economic conditions and the level of disposal income that consumers
enjoy. In a slower growth environment and with higher inflation, non-
essential high-cost items such as cars could face some pressure.
Banks Banks are mirrors of the underlying economy. We believe none of the Nil Huaxia Bank
(Lucy Feng) Chinese banks could survive well in a severe economic downturn.
Furthermore, players with weak fundamentals, poor risk management,
and less prudent lending procedures will suffer more.
Conglomerates Because of their business diversification, the earnings of Hutchison Shanghai Industrial
(Benjamin Lo) conglomerates have a higher degree of defensiveness than many Whampoa
other single-industry-focused companies. All conglomerates are also
cash-rich and some are industry leaders in their core businesses. We,
therefore, maintain an overall positive stance on conglomerates under
a stagflation scenario.
Consumer China retail softlines and department stores/broadlines are more Parkson People’s Food
(Phoebe Wong, resilient in the current high inflationary cycle, while F&B might not fare KT&G Lotte Shopping
Hong Taik as well because of their high exposure to soft commodities and thin
Chung) margins, in our view.
In the Korean retail space, we favor discount stores to department
stores. Among Korean consumer staple names, we expect top-tier
players that can prove strong market leadership and experience
steady consumer demand to generate stable earnings.
Info Tech Most IT manufacturers are likely to employ a low pricing policy to spur Samsung Hon Hai
(James Kim) demand and sustain fab utilization rates. However, we believe that a Electronics
rapid rise in material costs and labor expenses will make it very difficult
for IT companies to post meaningful profits. With the exception of a
few segments, we believe there will be few winners among IT
manufacturers when faced withising inflation and slowing growth.
Media/Internet The media/Internet sector in Asia-Pacific will weather the stagflation Focus Media Fairfax Media
(Paul Wuh) storm better than many other industrial sectors. We focus on media
companies that: (1) have a subscription model that is unlikely to face
lost revenues in an economic downturn and can raise prices if needed
to counter inflation (such as, cable TV and satellite TV companies); (2)
have relatively low operating costs and are able to easily scale their
businesses to meet changing business environments (such as Internet
gaming and e-commerce); (3) are relatively low cost to advertisers and
are success-based (such as Internet portal/search companies).
Metal and We believe inflation-driven upstream sectors (i.e., coal) should remain China Shenhua Chalco
Mining (Oliver the winners given their strong pricing power, while downstream sectors
Du) with relatively weak pricing power, such as aluminum and copper
smelters, would be the losers.
Oil & Gas We expect the physical oil demand to decline. In the near term, we Sinopec Honam
(Cheng Khoo) expect the tight supply situation to continue, which could further boost
oil prices. However, by the end of 2008 and especially in 2009, as new
capacities come into the market, we believe oil prices are likely to
decline.
Property (Paul Housing and low-end retail, we believe, should prove the most resilient SHKP HK Land
Louie, Min as they cover basic needs; office and high end-retail are likely to fare
Chow Sai) the worst. At the country level, performance should be tied to existing
supply levels. Hong Kong with the lowest expected housing supply for
the next four years should prove the most defensive, in our view.
Telecom In our opinion, the telecom services sector will do much better than Chunghwa Bharti
(Paul Wuh) other industries in a period of stagflation. However, revenue growth for Telecom
telecom operators in developing markets like China, India, and SE
Asia will be affected more than those in developed markets.
Transportation We believe the shipping sector would be a likely loser since demand is Nil Evergreen
(Andrew Lee) driven by global economies and shipping lines bear higher costs
because carriers struggle to pass on higher costs to customers.
Further, given that shipping is a highly fragmented industry, carriers
are mainly price takers.
Utilities and In a stagflation environment, defensive and regulated utilities that are HK Electric KEPCO
Renewable cash rich, have strong cash flow, and have fixed returns tied to a
Energy (Ivan regulated asset base tend to outperform, in our view.
Lee)
May 2008 5

Lehman Brothers | Equity Research
Table of Contents
Executive Summary 3
Country Summary 4
Sector Summary 5
Regional Strategy 9
Effects on equities from rising inflation and slower growth.................................................9
Country Analysis 15
Australia’s Brief Stagflation 16
Tight policies limit local stagflation risk ............................................................................16
China Stagflation Scenario 20
Can the government tame rising inflation and rescue slowing growth? .....................................20
HK Stagflation Scenario 31
Effects of rising inflation and slower growth .....................................................................31
India and Stagflation 36
Tight policies limit local stagflation risk ............................................................................36
Korea Stagflation Scenario 39
Effects of rising inflation and slower growth .....................................................................39
Taiwan Stagflation Scenario 45
Can politics offset rising inflation and slower growth? ............................................................45
Sector Analysis 53
Auto and Auto Parts 54
Effects of rising inflation and falling growth .....................................................................54
Banks 57
China Banks .......................................................................................................................57
India Banks.........................................................................................................................59
Taiwan Banks .....................................................................................................................61
Cement 62
India Cement ......................................................................................................................62
Conglomerates 64
Effects of rising inflation and slower growth .....................................................................64
Consumer 67
India Consumer ..................................................................................................................67
China/Hong Kong Consumer .............................................................................................69
Korean Consumer...............................................................................................................71
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Lehman Brothers | Equity Research
Electrical Equipment 73
India Electrical Equipment .................................................................................................73
IT Industry 75
Effects of rising inflation and slower growth .....................................................................75
Metal & Mining (China) 78
Effects of rising inflation and slower growth .....................................................................78
Materials (Taiwan) 80
Effects of rising inflation and slower growth .....................................................................80
Media/Internet 81
Effects of rising inflation and slower growth .....................................................................81
Oil and Gas 84
Effects of rising inflation and slower growth .....................................................................84
Oil Refining 87
Effects of rising inflation and slower growth .....................................................................87
Petrochemicals 89
Effects of rising inflation and slower growth .....................................................................89
Pharmaceuticals 91
India Pharmaceuticals.........................................................................................................91
Property 92
Reverting to basic needs for shelter....................................................................................92
India Real Estate.................................................................................................................98
Taiwan Property ...............................................................................................................100
Semiconductors – Foundry & SATS 101
Effects of rising inflation and slower growth ...................................................................101
Semiconductors – Memory 102
Effects of rising inflation and slower growth ...................................................................102
Technology – Hardware 104
Effects of rising inflation and slower growth ...................................................................104
Technology – Display 105
Effects of rising inflation and slower growth ...................................................................105
Technology – IC Design 107
Effects of rising inflation and slower growth ...................................................................107
Telecommunications Services 108
Effects of rising inflation and slower growth ...................................................................108
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Lehman Brothers | Equity Research
Transportation – Shipping 112
Effects of rising inflation and slower growth ...................................................................112
Utilities/Power/Renewable Energy 117
Effects of rising inflation and slower growth ...................................................................117
Valuation Methodologies 123
Asia Research Roster 138
Coverage Universe 140
Companies under Coverage in Asia, by Country (as of May 14, 2008) ...........................140
Companies under Coverage in Asia, by Sector (as of May 14, 2008)..............................148
May 2008 8

Lehman Brothers | Equity Research
REGIONAL STRATEGY
Effects on equities from rising inflation and slower
Paul Schulte
growth
LBAL, Hong Kong
Tel: (852) 2252 -1409
paul.schulte@lehman.com
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
Justin Lau The world is slowly moving away from a systemic meltdown and toward some
LBAL, Hong Kong normalcy. Much of this has been accomplished through the intermediation of central
Tel: +852 2252 1420 banks. The introduction of a facility on March 20 to lend directly to investment banks for
justin.lau@lehman.com the first time in the history of the Federal Reserve helped greatly in calming markets.
These moves by the Fed – and more recently by the Bank of England – have been made
Chris Leung, CFA in conjunction with a sharp reduction in interest rates. There have been three
LBAL, Hong Kong consequences of this activity.
Tel: +852 2252 6183
1. Rising liquidity
chris.w.leung@lehman.com
There has been a sharp and sudden increase in risk appetite and a sharp rise in liquidity.
As risky or worthless assets are taken out of the market by central bank intervention,
Shubhankar Das
those assets most at risk often go up the most. So, values of risky assets may go up in
LBAL, Hong Kong
price. Government bonds would go down in price as investors sell risk-free government
Tel: +852 2252 1424
bonds and dive back into risky bonds.
shubhankar.das@lehman.com
2. Lower growth
The above scenario should be great for growth. It makes growth go down less. But the
problem is that much of this liquidity being created is not finding its way back to asset
creation. It is being bottled up on the balance sheet of banks which are themselves
dealing with bad asset liquidation and capital constraints. They are being forced to shed
assets from their balance sheet and write off losses against capital. They are being forced
to find alternative sources of liabilities (deposits). This is because banks must bring
down excessively high loan/deposit ratios at the same time that they are writing off bad
assets. So, the asset base must shrink even while liquidity is replenishing the system.
We present below the base case set forth by our economics team together with the worst
case scenario provided by the strategy team.
Figure 1: Slower growth/rising inflation – base case and worst case scenarios
GDP (% y-o-y) CPI (%y-o-y)
Base Case Worst Case Scenario Base Case Worst Case Scenario
Lehman Economics Team Lehman Stategy Team Lehman Economics Team Lehman Stategy Team
2008 2009 2008 2009 2008 2009 2008 2009
US 1.2 0.6 -0.9 -0.4 na na na na
Australia 2.5 2.0 1.1 0.9 3.1 2.2 3.1 3.2
China 9.8 8.0 6.1 5.9 5.5 2.8 6.7 6.9
Hong Kong 4.3 6.2 0.3 0.2 5.0 5.5 5.0 5.5
India 7.5 8.5 5.1 4.6 6.9 4.7 6.9 7.1
Indonesia 5.2 7.0 2.7 2.3 10.0 8.0 9.0 9.5
Malaysia 5.0 6.2 2.4 2.2 3.5 4.5 3.9 4.5
Philippines 5.0 7.0 2.6 2.4 7.8 5.5 8.5 8.9
Singapore 4.2 7.0 2.4 2.1 6.0 4.8 6.0 6.1
South Korea 4.1 5.2 2.1 2.0 4.5 3.5 4.1 4.3
Taiwan 3.9 5.7 2.9 2.6 3.8 3.5 3.8 3.9
Thailand 4.2 6.7 2.6 2.5 6.5 4.5 6.0 6.2
Asia ex-Japan 7.3 7.3 4.1 3.8 5.7 3.8 5.7 5.9
Source Lehman Brothers research
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Lehman Brothers | Equity Research
3. Higher inflation
All this liquidity is not creating more assets. It is supporting the shrinking of assets in an
attempt to keep a balance sheet cleansing event from turning into a depression. The cost
we are paying for this dynamic is excessive liquidity with low growth. Inflation’s classic
definition is too much money chasing too few assets. This is as classic an inflationary
phenomenon as it gets. So, liquidity, like lava bursting from a volcano, will roll down the
mountain, seeking a path of least resistance to those areas where it is needed most: in the
shortages. The greatest shortage of liquidity in the world is in agriculture. The food
inflation problem has been brewing since 2004, but was rising right in the midst of the
credit crisis. So, this liquidity is creating inflation in an area which had chronic shortages
already. This food inflation has spread quickly and has created generally high inflation
all over Asia. Oil is part of this as well. Oil shortages are receiving the liquidity as well.
We think these price rises are a symptom of inflation, not the other way around.
EFFECT ON EBIT: SHRINKING MARGINS?
With rising costs in food and energy, the CPIs of many Asian countries are rising
quickly. This is because the CPI has a very large proportion of food and energy in the
baskets relative to the West. In many cases, it is 30-50%. So, price changes are
accelerating quickly. In addition, many governments are responding to sharp increases in
food, fertilizers, and oil with price caps and/or subsidies. We believe these policy
responses are unhelpful and lead to more inflation. This is because price caps, for
instance, lead consumers to consume more, given the perception that prices are unusually
low. This also leads to a cutback in production given the perception that producers are
not being given a fair price for the goods they sell. So, everyone loses. There are three
effects on margins. In the meantime, high fertilizer costs spill into higher food prices.
Higher oil spills into high coal prices. The chain reaction goes on.
1. Rising cost of labor
As food and energy prices increase, the employees at corporates demand higher wages
given that lifestyle costs are rising sharply. So, SG&A expenses rise. We are seeing this
all across Asia, as wage growth begins to rise in earnest. Wage rises are a response to
rising prices. In many parts of Asia, inflation is rising to multi-decade highs.
Figure 2: Asia CPI
% y-o-y
Headline CPI
8
Core CPI
6
4
2
0
Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Source: Lehman Brothers research
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Lehman Brothers | Equity Research
2. Rising cost of goods
The costs associated with production given rising energy costs are felt throughout the
industrial food chain. Cost of energy also goes up dramatically. So, input costs rise.
Growth, while falling, is still high in many parts of Asia. As a result, an increasing
number of companies have expressed confidence for the first time in many years to pass
through price increases to end users. Steel producers are passing prices through to buyers
of steel. This is best seen in the rise of the Producer Price Index.
Figure 3: Japan’s domestic corporate goods prices
% y-o-y
5
4
3
2
1
0
-1
-2
-3
-4
Jan-90 Jan-94 Jan-98 Jan-02 Jan-06
Source: CEIC, Lehman Brothers research
3. Rising cost of money
In the midst of a waning credit crisis, the sharp rise in liquidity is not reaching into the
cost of money. The cost of money has actually risen. This is because banks are trying to
recapitalize and at the same time shed bad assets. Concentrating on lending is the last
thing on their minds. So, while the cost of money is now down to 2% in the US, for
instance, the cost of a loan has barely budged. This also reaches into the world of
working capital. Working capital is also more expensive although rates are now a lot
lower. So, financing costs are higher and new money is harder to come by.
There will, of course, be exceptions. For example, we think price makers (monopolies,
plantations, oil producers) will make a windfall here. The middle man loses. Lower-end
retail wins. Banks which are healthy win big. Unhealthy banks lose altitude and are in
danger of crashing. Those banks which try to pick up cheap assets too early can get
dragged down.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
In an environment of restrained lending, rising costs, and increasing wages, corporates
may face three hurdles.
1. Working capital is working harder and may turn negative
Inflation drives up the cost of doing business. Some corporates will be able to pass on
these costs. Others will not. Those with less pricing power or those which sell low-
margin goods or middlemen are most at risk for a cash squeeze. (Our stagflation
portfolio favours companies that are most decidedly out of this area). Rising working
capital tends to be associated with an aversion to corporate activity or high cash levels
that have yet to be put to work. On the liabilities side, slowing payments (short-term
liabilities rising faster than short-term assets) in a world of liquidity but with hesitant
banks is not at all surprising to us.
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Lehman Brothers | Equity Research
2. Rising cost of funds for capex
One of our preferences in our portfolios has been for companies with cash flow sufficient
to cover capex. In a world of hesitant banks, the cost of finishing a project will very
likely rise. The assumptions for viability in projects included interest costs which were a
lot lower a year ago. We estimate that interest costs are up, on average, from Libor +150
to Libor +300 to 500. This is a significant increase in interest expense and eats into cash
flow.
3. Cutbacks in capex or cancellation of projects
The dangerous part of a global slowdown is that companies which are in the middle of
major expansion are in danger of not finishing a very expensive project. The anticipation
of completion is the source of earnings. In the event of cessation of funding in a half-
finished project, the problems are quite serious. With a great deal of money spent, the
value of the asset is essentially still zero. Companies in this sort of condition are either
forced to sell an impaired asset or are forced into bankruptcy proceedings.
WHAT HAPPENED IN THE 1970S?
In the early 1970s, the US was in the middle of an unwinnable and increasingly
expensive war. It was funding large budget deficits. It was facing high commodity
prices. The US – and other countries – imposed price controls to deal with inflation. If
this sounds familiar, it is because it is familiar. Many investors agree that analogies to
the 1970s are appropriate. As Mark Twain, however, said, “History does not repeat itself.
It rhymes.” History will likely play itself out differently, but with many similarities.
There are three similarities we see.
1. Inflation hit suddenly and hard
Inflation reared its head in a small way from the early 1970s and then hit all of a sudden.
When it did, it hit hard and took a long time to go away. Interest rates in 1980 were still
21%. Government bond yields peaked at 14%. Gold, oil, agricultural commodities, and
general prices soared. These conditions are eerily similar.
2. Growth slowed
While nominal growth was quite high given that inflation was in the high single digits,
real growth slowed dramatically. Wages can grow with inflation, but pretty soon, they
can no longer keep up. As a result, real wages fall and spending drops. Interest rates
would soar and the cost of borrowing becomes prohibitive. Tax revenues from slowing
economic activity would have to rise and deficits rise. Taxes would rise more. Real take-
home income then falls. A vicious cycle is born.
3. Inflation expectations rose
The hard part of price increases is that they are born of expectations. As people expect
prices to rise, prices rise. We have been living in a world for many years where we have
expected prices to go down. So, we delay expenditure and wait for prices to fall further.
As inflation grabs hold, we come to expect prices to rise and we rush our purchases. We
grab onto those types of investments which are seen as an inflation hedge. We eschew
fiat money. We seek out commodities, land, precious metals, and rare jewels. A plethora
of books have been written on this subject. Suffice to say that it takes much data (and
much time) for people to change their expectations on higher prices once higher prices
begin their gallop.
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Lehman Brothers | Equity Research
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Whether we like it or not, governments in the world are now deciding the price of assets
as much as investors are. The decision of the Federal Reserve in March to lend to
investment banks essentially put a ceiling on the price of debt for these banks. We think
governments can do three things to help.
1. Price controls and subsidies
We are facing a shortage of oil, a shortage of coal, and a shortage of food. Governments
can help by accelerating the development of alternative energy. They can introduce
conservation programs in terms of emissions regulation. They can place price caps on
retail prices or they can introduce subsidy programs which compensate producers and
make the consumer feel less pain at the cash register. While many insist that subsidies
and price controls are destructive in the longer term, they quell social unrest and prevent
riots. The problem is that they almost guarantee inflation as they incentivize consumers
to consume more and cause producers to produce less.
2. Crash investment programs
One of the results of high prices is the need for governments to pay for investment
programs for products which are price inelastic. Goods with inelastic prices must be
bought independent of price (basic necessities and staples). So, governments have a
responsibility to rush the production of these goods to people and so need to step in and
jump start programs such as oil exploration, cattle production, and farming.
3. Tax and regulatory relief
Governments are famous for changing rules mid-stream. In an environment of rising
costs, governments can act to reduce costs by turning a blind eye to restrictive
immigration policy. In an environment of bad debt and economic stagnation, they may
turn a blind eye to strict marking to market of that bad debt. They may allow banks to
alter classification. In a coal shortage, some countries may reduce strict safety standards.
In an oil shortage, countries may bend rules on oil drilling in wildlife preserves.
Governments can reduce taxes on corporates which are large employers in a period of
high unemployment. In other words, governments change valuations of companies and,
indeed, cash-flows in the blink of an eye with market-friendly policies which can
improve profitability. Conversely, governments which want to quell civil unrest may
stick it to some corporates which make staples such as food and gasoline. Price controls
can destroy shareholder value in the blink of an eye. We believe we are living in a world
of unprecedented intervention by governments. This is an added risk for markets.
Figure 4: Stagflation portfolio
EV/
3 Mth Ave
P/E P/B Div Yield
EBITDA
Lehman Current Mkt Cap Liquidity ROE Net Debt/ Altman
Company Ticker Rating Price US$mn (US$mn) FY08E Assets Z-Score FY08E FY08E FY08E FY08E
Industry Sector
Cheung Kong Infra 1038 HK Utilities 1-OW 31.8 9,248 9.0 13 -2% 5.3 55.6 13.9 1.8 3.8
Hong Kong Electric 6 HK Utilities 1-OW 45.2 12,724 27.5 15 2% 3.5 9.4 12.8 1.9 4.4
China Mobile 941 HK Telecom 1-OW 132.5 379,182 477.7 28 -27% 10.1 10.8 20.6 5.4 2.1
Sun Hung Kai 16 HK Property 1-OW 138.0 45,174 178.8 6 10% NA 27.0 26.3 1.7 1.8
CNOOC 883 HK Oil & Gas E&P 2-EW 13.9 94,145 237.9 28 -16% 10.1 9.7 14.3 3.7 2.6
Shenhua 1088 HK Energy 1-OW 35.0 14,379 153.4 20 3% 1.9 2.0 20.4 4.0 1.7
Rio Tinto RIO AU Mining 0-NR 145.3 64,535 197.2 40 44% 1.4 4.8 15.7 4.9 1.2
IOI IOI MK Palm Oil 0-NR 7.1 13,801 31.3 26 7% 7.5 14.7 21.6 5.0 2.4
EGCO EGCO TB Utilities 2-EW 95.5 1,547 1.8 18 8% 3.4 8.8 6.4 1.1 5.7
HK and Shanghai Hotels 45 HK Hotels 1-OW 13.5 2,544 1.8 5 5% 2.9 12.0 20.1 0.9 1.5
Ranbaxy RBXY IS Pharmaceuticals 1-OW 466.3 4,355 4.6 24 44% 3.2 18.0 24.7 5.7 2.0
KT&G 033780 KS Consumer 1-OW 82500.0 11,019 31.2 23 -3% 11.3 10.7 14.8 3.3 NA
Melco 200 HK Equit Conglomerates 0-NR 11.6 1,891 7.5 4 11% 5.6 82.7 43.5 1.4 0.1
Average 50,350 104.6 27 6% 8.6 11.9 19.3 4.6 2.1
Note: Prices as of May 7, 2008
Source: IBES, Worldscope, Lehman Brothers estimates
May 2008 13

Lehman Brothers | Equity Research
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May 2008 14

Lehman Brothers | Equity Research
COUNTRY ANALYSIS
May 2008 15

Lehman Brothers | Equity Research
AUSTRALIA’S BRIEF STAGFLATION
Tight policies limit local stagflation risk
David Langford
LBAUL, Sydney
Tel:+612 8062 8440
HOW WOULD STAGFLATION IMPACT AUSTRALIA?
david.langford@lehman.com
Lehman Brothers Asia is exploring the risks to Asia Pacific markets in the scenario of
falling global growth, resulting in slower Asian growth, but in the face of rising input
Stephen Roberts
costs. In our view, Australia could witness a brief period of stagflation, where inflation is
LBAUL, Sydney
high and relatively sticky and economic growth is weakening. However, we believe a
Tel:+612 8062 8431
lengthy period of stagflation is unlikely because of the Reserve Bank of Australia’s
stephen.roberts@lehman.com
(RBA) commitment to deliver sufficiently tight monetary conditions to ensure that
domestic spending growth and inflation fall.
Australia Research Team Unlike many of its Asian neighbors and major trading partners, Australia benefits from a
Tel:+612 8062 8000 de-regulated financial system. The characteristics of this system include a freely floating
exchange rate and an independent central or reserve bank. The RBA is free to use its
cash interest rate to tighten or loosen monetary conditions as it deems necessary. The
RBA has a formal 2-3% inflation target that it has agreed (with the Federal Treasurer) to
achieve over the course of the economic cycle. Thus, despite the relatively greater
acceleration of inflation in most Asian economies when compared with Australia over
the past 12 months, the RBA stands almost alone in lifting its cash rate aggressively and
allowing its currency to appreciate freely to dampen rising inflation. We consider that
Australia is different from Asia in the manner in which policy has responded to rising
inflation. In our view, while a consequence of comparatively tighter Australian monetary
conditions will be to deliver the “stag” part of stagflation, we expect the “flation” part to
recede.
The rise of stagflation among Australia’s major Asian trading partners represents a
material risk for many Australian companies, in our view. Asia receives around 70% of
Australian exports and almost all of Australia’s exports of coal and metal ores.
Weakening Asian growth, as a consequence of trying to contain high inflation, could
dampen raw material prices significantly, in our view.
We believe that attempts to calibrate Australian policy settings at a time when Asian
growth may turn in an unpredictable fashion, runs the risk of double trouble for
Australian economic growth prospects. Domestic spending is weakening owing to tight
monetary policies. We consider that this impact may be further reinforced by an erratic
pull-back in Asian demand and commodity prices.
May 2008 16

Lehman Brothers | Equity Research
WINNERS AND LOSERS
Figure 5: Winners and losers (Australia)
Winners Ticker Price TP Rating Comments
• Telstra’s large infrastructure/sunk cost base limits exposure
Telstra TLS.AX A$4.52 A$5.40 1-OW
to margin squeeze from a rising cost base, in our view.
Telecommunications
• Upgraded IT/customer care systems are likely to reduce its
exposure to increasing labor costs.
• Telstra’s products are believed to be attractive substitutes for
businesses and consumers when cutting costs (e.g. phone
services/video conf replaces travel)
• Inflation-sensitive labor represents ~14% of Austar’s FY08E
Austar AUN.AX A$1.35 A$1.65 1-OW
total cost base. Programming costs (~48% of Austar’s
Subscription Television
FY08E total costs) are subject to long-term contracts, we
Services
believe. We expect the outcome of these factors to be
margin strength.
• We consider subscription TV services to be price inelastic and a
cheap entertainment alternative for cost-conscious consumers.
• Austar’s set-top box costs (capex) are subject to declining
prices, driven by ongoing technology improvements.
• Waste management is an essential/non-discretionary
Transpacific TPI.AX A$8.35 A$12.50 1-OW
service, we believe.
Waste Management
Services
• We understand that long-term customer contracts (~35% of
FY08E revenues) include CPI adjustment clauses. We
expect this structure to provide Transpacific a level of
immunity from margin squeeze.
• PrimAg owns Australian agricultural land and produces soft
PrimeAg Australia PAG.AX A$1.99 A$2.25 1-OW
commodities.
Agricultural Commodities
• We expect the company to be a significant beneficiary of food
price inflation.
Losers Ticker Price TP Rating Comments
• Project cost inflation already represents a difficulty for future
WorleyParsons WOR.AX A$39.50 $40.00 2-EW
growth. Cost pressures may intensify particularly in labor- and
Hydrocarbon Engineering
commodity-based materials categories.
Services
• Around 85%+ of Bluescope’s EBIT is derived from sales of
Bluescope Steel BSL.AX A$10.61 A$9.35* 3-UW
commodity-grade flat steel products at international
Flat Steel Products
benchmark prices.
• Lower Asian growth may result in reduced steel demand (Asia
has been a key driver of global steel demand) and therefore,
lower international steel prices.
• Bluescope Steel’s earnings are highly leveraged to falling
international steel prices.
• Print advertising and circulation represents ~85% of Fairfax’s
Fairfax Media FXJ.AX A$3.34 A$3.80** 2-EW
FY08E revenue base. We expect a stagflationary environment to
Newspaper and Online
weaken ad growth and accelerate the secular trend to cheaper
Publisher
online alternatives.
• Labor costs comprise ~41% of Fairfax’s FY08E total cost
base. Accordingly, labor-intensive content requirements and
the shift of advertising online are likely to result in margin
squeeze, we believe.
May 2008 17

Lehman Brothers | Equity Research
•
Babcock & Brown BNB.AX A$15.38 A$16.20 2-EW Infrastructure investments employ significant gearing, which
creates earnings and cash flow risk in a high inflation/interest
Brokers and Asset
Managers rate environment, we believe.
• We expect principal trading gains to be nominally supported
by inflation. But the after-tax real gain will be much lower, we
believe, because the tax system does not distinguish
between real and nominal gains.
•
Macquarie Group MQG.AX A$60.75 A$62.80*** 2-EW Infrastructure investments employ significant gearing, which
creates earnings and cash flow risk in a high inflation/interest
Brokers and Asset
Managers rate environment, we believe.
• We expect principal trading gains to be nominally supported
by inflation. But the after tax real gain will, we believe, be
much lower because the tax system does not distinguish
between real and nominal gains.
Source: Lehman Brothers research. Prices as of May 7, 2008. * The 12-month target price for Fairfax Media was cut to A$3.80 (from A$4.30) on 14 May 2008.
** The 12-month target price for Bluescope Steel was revised to A$9.35 (from A$9.25) on 13 May 2008. *** The 12-month target price for Macquarie Group was
revised to A$62.80 (from A$59.20) on 15 May 2008
DOWNSIZING THE ENGINE ROOM?
Investment spending, in all forms, has been one of the strongest growing segments of the
Australian economy. We believe that strong growth has taken place across the spectrum,
from public sector infrastructure spending to business investment spending. In 2007, the
Australian economy grew 3.9% in real terms, but investment spending was up 8.7%.
We believe that the combination of (1) Asian stagflation resulting in weakening
commodity demand; and (2) tight domestic monetary policy aimed at softening domestic
spending is likely to result in jaundiced growth in investment spending. Apart, from the
negative short-term impact on economic growth, Australia’s longer-term potential
growth rate is also likely to suffer, in our view. Current Australian Federal Treasury
estimates put the country’s long-term potential growth rate at around 3.5% per annum.
However, we estimate that the long-term growth rate could fall to less than 3% per
annum on a material reduction in the pace of growth in investment spending.
WHAT HAPPENED IN THE 1970S?
In our view, Australia’s experience of stagflation in the past was caused by inappropriate
and ineffective monetary and fiscal responses to the oil price shock of the early 1970s.
There are many reasons for why we believe the current run-up in key commodity prices
will not trigger a re-run of the 1970s. First, we believe that it is more difficult for a
commodity price shock to trigger second-round inflation effects in wage claims that help
to develop an upward inflationary spiral. In the 1970s, Australia had near-automatic
wage indexation, which meant that the latest quarterly rise in inflation fed almost directly
into higher wages – i.e., four wage increases a year after each CPI reading. Second,
monetary policy was largely ineffective in the 1970s because of bank lending, deposit
and interest controls, and a fixed exchange rate regime. Third, the exchange rate could
only help to contain inflation periodically – i.e., on occasions when the dollar was
formally re-valued. Finally, fiscal policy was very loose, notwithstanding strong supply-
side pressures on inflation from higher commodity prices.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The government can only ease the pain by ensuring that the period of stagflation is as
brief as possible. Leaving the central bank to deal with inflation and providing it with the
independence and policy armory to do the job is a good start, in our view. We also
May 2008 18

Lehman Brothers | Equity Research
believe that prudent fiscal policy (Federal Budget surpluses at or above 1% of GDP)
should contain domestic inflationary pressures.
CONCLUSION
We consider that Asian stagflation represents a material risk to the Australian economy
and corporate earnings growth. However, we believe that Australian institutional
processes and flexible yet aggressive policy settings are likely to soften inflationary
impacts. In our view, the demand side of the stagflation equation may prove to be the
toughest issue for Australian policy makers. As a result, we believe that more attractive
investment exposures are likely to be provided by those companies which enjoy:
(1) limited exposure to input cost inflation (e.g., materials and labor); and (2) product
sets with a high degree of substitutability for higher priced products in a cost-conscious
environment.
May 2008 19

Lehman Brothers | Equity Research
CHINA STAGFLATION SCENARIO
Can the government tame rising inflation and rescue
Cheng Khoo
slowing growth?
LBAL, Hong Kong
Tel: +852 2252 6180
cheng.khoo@lehman.com
HOW WOULD STAGFLATION IMPACT CHINA?
Paul Schulte During a high inflationary period that coupled with slowing global and domestic
LBAL, Hong Kong economic growth, we think Chinese companies and the stock market would not be
Tel: +852 2252 1409 shielded from a downturn. The Chinese government is in a difficult position. It seems the
paul.schulte@lehman.com most logical course of action is to allow the currency to appreciate. In doing so, it: (1)
imports deflationary pressures; (2) reduces trade surplus; and (3) reduces the enormous
reserves. In essence, importing deflationary pressures and reducing inflationary domestic
China Research Team liquidity is just about the only thing China can do, in our view. Interest rates could be
raised further, but we believe that would be using the wrong tool. In our view, China’s
problems are due to insufficient upstream raw material supply and an excess capacity in
selected downstream manufacturing industries, in our view.
Ironically, we have to ask whether there has been sufficient investment in China. With
fixed capital investment running at 25% per year, we also expect nominal growth at
about 19%–20%. Is one way out of the supply-driven inflationary burst an even higher
level of capital investment, especially in water and agriculture? The government recently
increased its investment in agriculture by 30%, to around US$43 billion. It is also
running up large subsidy bills as it keeps consumers from feeling the full brunt of
international price increases of most commodities. Our favourite theme for the next few
years is agricultural investment. China needs to revolutionize its agricultural sector,
including its water supply. When it targets to achieve something, its policies tends to
succeed. This, we believe, represents the most promising sector for investors over the
coming years. Biofuels, genetically modified (GM) seeds, irrigation, and new labor in
rural areas are vital for China to get to the next level.
Earnings and margins outlook. We are already seeing the effects on margins in many
forms. (1) Many exporters’ margins are eroded by the appreciating renminbi. Other
companies are under severe pressure due to price caps on products. The renminbi has
appreciated by more than 9% against the dollar in the past few months, eliminating any
profits for low-margin businesses. (2) These price caps – actually, for most products in
the HSCEI – decimate margins as international prices rise. Consider the case of the
biggest oil refining company Sinopec – were it not for a subsidized check, many of them
would have already been in the red in 1Q08. Ironically, these price caps themselves are
inflationary as they discourage future expansion in plant and equipment, and, therefore,
are likely to produce lower installed capacity over time. This is a concern for us. (3) The
normal margin pressure comes from input prices going up while wages are also rising.
So, we can see many companies with rising land costs, rising energy costs, rising labor
costs, and rising capital costs.
Market performance. In January, we downgraded China from an overweight because
we saw inflationary pressures spilling out all over. We also saw China’s inflation-free
growth beginning to show wear and tear. The costs of land, labor, and capital are all
moving up dramatically. This is a phenomenon that we strongly believe is a reflection of
shortages and, hence, we are sceptical about the issue of overcapacity. So, China is
seeing its liquidity seep out of the economy as the government becomes reinvigorated by
the need to control inflation. We also think there is a need for a vast “Green Revolution”
or “New Deal” to deal with chronic food shortages and water shortages, among others.
This necessary, but very expensive, bonanza of spending is, in itself, also inflationary.
Hence, we expect a pause in growth as large capital investments are implemented, which
do not yield strong results.
May 2008 20

Lehman Brothers | Equity Research
We would consider upgrading China if we saw signs of inflation peaking. However, we
do not see that any time soon.
Our sector and company selections follow.
WINNERS AND LOSERS
Figure 6: Winners and losers (China)
Winners Ticker Price Target price Rating Comments
•
COSL 2883.HK HK$15.56 HK$21.0 1-OW Low earnings risk
•
China Shenhua 1088.HK HK$34.95 HK$57.0 1-OW Extremely tight supply and asset injections
• Price controls a risk
•
Hutchison Whampoa 0013.HK HK$78.00 HK$93.8 1-OW Cash rich; industry leader; diversified
Losers – Company Ticker Price Target price Rating Comments
•
Guangzhou R&F 2777.HK HK$21.00 HK$31.04 2-EW High gearing of 265%.
• A-share listing not assured in current unfriendly
environment.
•
Minsheng Bank 600016.SS RMB8.22 RMB9.85 2-EW Relatively weaker management; insufficient risk
management during a downturn.
•
CSCL 2866.HK HK$3.49 HK$2.9 3-UW Leveraged to changes in inflation and costs
Prices as of May 7, 2008
Source: Lehman Brothers estimates
LOWER GDP GROWTH WITH HIGHER INFLATION
Lehman Brothers’ China economist Mingchun Sun currently forecasts single-digit GDP
growth of 9.8% in 2008 for China, which indicates a decline from a growth rate of
11.6% in 2006 and 11.9% in 2007. Expecting deteriorating conditions exacerbated by
overinvestment, which is resulting in overcapacity situation in many sectors, he recently
downgraded the 2009 GDP forecast from 8.5% to 8%.
In terms of inflation, Sun forecasts a full-year 2008 CPI to reach 5.5%, up from 4.8% in
2007, but much lower than the 1Q08’s level of 8%, indicating that 2H08 inflation will
likely ease from a high base effect in 2H07. The easing trend then continues into 2009
with a FY09E CPI of 2.8%.
Figure 7: China real GDP growth vs CPI
China Real GDP Growth vs CPI (YoY % Change)
16 30
14 25
Real GDP growth
12 CPI (RHS) 20
10
15
8
10
6
5
4
0
2
0 -5
1985 1988 1991 1994 1997 2000 2003 2006 2009E
Source: CEIC, Lehman Brothers estimates
May 2008 21

Lehman Brothers | Equity Research
However, in this report, the equity strategy team explores the impact of equities in light
of a more negative scenario of a GDP growth rate of only 6.1% in 2008 and 5.9% in
2009 and escalating inflationary environment with a CPI of 6.7% in 2008 and rising
further to 6.9% in 2009. By applying higher inflation assumptions, we are exploring the
negative impact of real GDP growth. We analyze the risks to revenue growth and profit
margins in combination with higher input cost in the various sectors.
IMPACT ON REVENUE
The market is currently debating whether a slowdown in the US/developed economies
would impact the Asian and Chinese economies. Irrespective of the global economic
slowdown, Chinese exporters have already started to feel the pinch of rising costs and
competitive pressures. These include an appreciating currency, reduced VAT export
rebates (and in some cases an increase in export tariffs), removal of favourable policies for
processing trade; increasing cost pressure from rising prices of land, labour, energy and
raw materials; and tighter standard on product quality, labour conditions, and
environmental protection. In terms of trend, export growth has already slowed, especially
in volume terms. As global demand weakens, export growth is very likely to be hit further.
We think domestic consumption is unlikely to be strong enough to offset weakness in exports.
Furthermore, as export growth slows, we expect income growth to decline while high inflation
stands to erode the purchasing power of households and be a drag on real spending.
During a period of slowing GDP growth, demand normally enters a downward trend, and
excess capacity becomes a problem as operating rates decline. This is especially true in
sectors that are experiencing an overcapacity situation. Producers have to lower prices in
light of the heightened competition. With the global economy expected to slowdown
considerably more in 2H08, we expect exports to decline in 2H08, intensifying through
2009. About one quarter of China’s total industrial production is exported, even though
some sectors are more dependent on exports than others, such as mobile phones and
color TVs.
EFFECT ON EBIT: MARGIN SHRINKAGE?
As external demand weakens, we think inventories are likely to pile up as soon as in
3Q08, after the Olympics. A strong inventory is being built up in some areas such as fuel
and consumer products in anticipation of high demand during the Olympics. We believe
firms will probably compete on price despite rising cost, which will likely depress
margins. Profit margins are still trending around their highest levels since 1999, but seem
to have reached a plateau. The number of loss-making enterprises is currently rising at
8.5%, up from 0.3% in 2007.
Figure 8: China net profit margin
China Net Profit Margin (%)
12
10
8
6
4
2
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Worldscope, Lehman Brothers research
May 2008 22

Lehman Brothers | Equity Research
With significantly lower economic growth and a rising cost base, we expect corporate
earnings to come under pressure. According to consensus (IBES) estimates for Chinese
corporations, analysts are projecting slowing EPS growth of 17.6% for 2008 and 16.6%
for 2009, down from 32% in 2006. However, only four sectors (capital goods, retailing,
diversified financials, and insurance) have negative earnings growth projections for
2008, while only one sector (diversified financials) has negative earning growth estimate
in 2009(–10%). In our worst-case scenario, we expect potential downside to this set of
earnings estimates. Instead of a majority of the sectors showing earnings growth, we
expect the reverse to happen especially for those that are export focused and are facing
overcapacity.
Figure 9: China EPS growth estimates
EPS growth (%)
2007 2008E 2009E
China 32.3 17.6 16.6
Energy 7.6 18.7 9.6
Materials 4.8 24.9 14.2
Capital goods 38.6 -3.7 22.7
Transportation 155.2 12.7 9.7
Auto & components 38.4 19.2 16.1
Consumer durables 23.2 11.5 20.5
Consumer services 34.9 34.6 25.8
Retailing 52.0 -22.5 23.7
Food bev & tobacco 26.2 24.5 24.2
Household products 42.9 19.0 25.7
Banks 47.0 39.8 19.2
Diversified financials 360.6 -41.7 -10.0
Insurance 103.3 -17.2 17.3
Real estate 53.0 26.0 37.3
Software & services 24.1 17.1 30.7
Technology hardware & equip 61.0 15.5 15.3
Telecom 19.0 25.1 15.7
Utilities 10.0 1.3 18.2
Source: IBES
We believe weaker corporate earnings and rising bankruptcies will increase
unemployment and undermine the ability of the firms to repay loans. While bank non-
performing loans (NPLs) have declined in recent years, they rose slightly in 4Q07. In
addition, we are concerned that a credit cycle may kick in, and Chinese banks could face
increased new NPL formation, particularly in risky sectors such as property,
manufacturing, and exporters.
We think that the weakening earnings will likely be reflected in the stock market as P/E
ratios climb. Despite falling by about 30% this year, the Shanghai Stock Exchange A-
share Index at a P/E of 27.3 is still expensive compared to the other market index P/Es.
May 2008 23

Lehman Brothers | Equity Research
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
As earnings decline, we believe cash flows will constrict and companies will have less
incentive to invest in new capacities especially in areas that already have overcapacity.
Furthermore, the high interest rate and credit tightening situation is making it difficult for
companies to borrow funds. The falling stock market is also not conducive for fund
raising, which is already evident in the much reduced activity.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
China is steered in every direction by government policies depending on its focused
goals. Since 2004, the government has been trying to cool down the overheating
economy by introducing credit-tightening measures by a series of rate hikes and raising
bank reserve requirement ratios (RRR).
Figure 10: China policy rate vs RRR
China RRR vs 1Y Base Lending Rate
9 14
13
9
12
8 1Y Base Lending Rate
11
8 RRR (RHS)
10
7
9
7
8
6 7
6 6
5 5
1997 2000 2003 2006
Source: Lehman Brothers research
At the same time, by controlling prices of electricity, oil products, food, etc, it is trying
to combat rising inflation, which started to become a concern in 2H07. Ultimately, the
government is concerned about social issues, and consequently, political stability. High
inflation, unemployment, stock market losses, and severe negative growth are all
concerns. With slowing economic growth, the government’s policy priority could
quickly change from combating inflation to boosting employment. Our economist
expects no more rate hikes this year despite still high consumer product inflation (CPI)
inflation in 1H08 and that the pace of RMB appreciation to slow significantly in 2H08
(to 6.7 CNY/US$ by year-end). Meanwhile, the government could also expand fiscal
policy, especially by strengthening welfare programs to boost consumption. Timing,
however, is the essence.
May 2008 24

Lehman Brothers | Equity Research
SECTOR SUMMARIES
Auto and Auto Parts
We believe that, in a scenario of lower growth and higher inflation, the auto sector would
be a likely loser. With auto demand generally driven by global economic growth and
disposable income, a slowdown in the global economy would have an adverse impact on
high-ticket items such as automobiles, in our view. In addition, cost inflation driven by
higher inputs (e.g., gasoline) as well as limited financing could put further pressure on
demand. We expect China auto demand to experience 15% growth in 2008 and 12% in
2009, on our base-case GDP growth of 9.5% and 8%, respectively. However, under our
worse-case GDP growth of 6.5% in 2008 and 6.9% in 2009, we forecast that auto
demand growth will fall to 10% in 2008 and 10% in 2009.
We believe the auto industry faces possible overcapacity problems in the next couple of
years. DF PSA and Beijing Hyundai announced aggressive capacity expansion in China
last year to catch the last fastest-growing auto market on the earth. Moreover, national
leading automakers such as Shanghai Auto (600104 CH, 3-Underweight), Dongfeng
Motor (489 HK, 1-Overweight), Brilliance (1114, 3-Underweight), announced ambitious
new product development and capacity expansion programs in order to compete with
global original equipment manufacturers (OEM) in their home market. We expect the
problem to start emerging sometime in 2009 if most of current announced plans could be
completed. This means that the firms may face fierce price competition, margin pressure,
and even survival challenges in 2010.
We believe the relatively winning China auto stocks are Denway (203 HK, 1-
Overweight) and Weichai (2338 HK, 1-Overweight), which focus on luxury vehicles as
demand will be supported by industry structure change of product mix favouring luxury
vehicles. The relative losers will likely be Brilliance (1114 HK, 3-Underweight) and
Dongfeng (489 HK, 1-Overweight) as they are focusing on products that have
overcapacity.
Banks
The Chinese banks witnessed another strong earnings growth in 1Q08, with banks under
our coverage recording net profit growth of 77%–187% YoY. However, we will be
much more conservative on the banks’ earnings outlook under a heightened scenario of
rising inflation and slower growth. We are wary that a domestic economic slowdown
may have already surfaced since overall earnings growth of all A-share listed companies
stood at 31.3% in 1Q08 versus 80.2% in 1Q07.
We believe sector margin peaked (avg 3.22%, 70bp higher than regional banks) in 1Q08,
thanks to the ongoing asset re-pricing after the six rate hikes in 2007 as well as enhanced
loan pricing capability. Credit risk continues to represent the single-largest threat to the
safety and stability of Chinese banks, in our view. In general, we find that the exposure
of Chinese banks to credit losses is becoming increasingly manageable given the rising
loan-loss provisioning and much-improved capitalization.
However, there is a risk that asset quality trends may reverse if the US enters into
recession and China’s economic slowdown continues. In a worst-case scenario, our Asia
ex-Japan strategy team estimated Asia ex-Japan’s aggregate GDP growth to fall to 5.4%,
and China’s GDP to drop to 6.7% while CPI rise to 6.1% in full-year 2008. Under such
scenario, we estimate sector credit growth could slowdown to 12.8% YoY from current
level of 16.2% YoY (March 2008).
Banks are mirrors of the underlying economy. We believe none of the Chinese banks
could survive well in a severe economic downturn. Furthermore players with weak
fundamentals, poor risk management and less prudent lending procedures will suffer
more.
May 2008 25

Lehman Brothers | Equity Research
We identified Huaxia Bank (600015.SS, 3-Underweight, PT: RMB9.00), Minsheng
Bank (600016.SS, 2-Equal weight, PT: RMB9.85) and Shenzhen Development Bank
(000001.SZ, 1-Overweight, PT: RMB31.84) as the biggest losers under the scenario of
rising inflation and slower growth.
Conglomerates
Conglomerates, by definition, are diversified in nature and will not be totally immune to
stagflation. Nonetheless, it is also this business diversification that gives their earnings a
higher degree of defensiveness than many other single-industry-focused companies. All
conglomerates are also cash-rich, and some are industry leaders in their core businesses.
We therefore maintain an overall positive stance on conglomerates under a stagflation
scenario.
The biggest risk to conglomerates is price controls by the government, especially on
products and services that affect the household, such as utilities, food, energy prices.
Conglomerates with the biggest exposure to the utility sector is Beijing Enterprises (60%
of its NAV is from Beijing Gas).
Consumer
Among the key consumer segments, we believe China retail softlines and department
stores/broadlines are more resilient in the current high inflationary cycle; whereas food
& beverages (F&B) should fare less in light of the more vulnerable nature due to their
high exposure in soft commodities and thin margins, even though industry leaders should
be better protected by scale advantage and pricing power.
In the worst-case scenario, we estimate that earnings growth of China department
stores/retailers will decrease by 3–5 percentage points to 19%–44% from our current
growth forecast of 22%–49% in 2008 and by 5–7 percentage points to 10%–29% from
our current forecast of 15%–36% in 2009, respectively. As for F&B, we expect the dairy,
processed meat, and tissue paper segments to have the biggest earnings downside risk.
Our sensitivity analysis suggests that every 10% rise in the cost of raw milk, pork, and
pulp would lower respective operating margins by 4%, 4%, and 3%. As for Hong Kong
retailers, given the nature of their heavy cost exposure in rentals, our earnings growth
expectations (at 4%–20% for FY08–FY09E) could be easily wiped out should a rental
hike revive in the worst-case scenario.
In our coverage universe, we believe Parkson Retail, Li Ning, China Mengniu, China
Yurun, ctrip, and Li & Fung are the more defensive plays in the currently high
inflationary cycle, while Intime, People’s Food, and Bright Dairy are likely to lose out.
Media/Internet
In general, we believe that the media/Internet sector in the Asia-Pacific region will be
better than other sectors in dealing with a period of stagflation. Media companies often
require a large fixed upfront investment, but have relatively lower incremental costs to
support revenue streams. Furthermore, since media generally faces less tariff controls
than the telecom industry, rates are more adjustable in periods of higher inflation.
However, the media sector has numerous subsectors – some of which will be better able
to weather an environment of stagflation than others, in our view.
For example, we believe that media companies whose revenue is primarily based on a
subscription model versus an advertising revenue model will do better in a period of
stagflation. This group will include online gaming companies, cable TV, and satellite TV
companies.
For media companies that rely on advertising revenue, companies that have lower cost to
advertisers will be in a competitive advantage, in our opinion. In this group, we believe
that Internet portals that rely on advertising will do better in a period of stagflation than
traditional media companies that operate TV and radio stations or that publish
newspapers.
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Lehman Brothers | Equity Research
Nevertheless, all media companies that rely on advertising revenue will likely experience
some negative impact during a period of slower growth due to weaker advertising
budgets. We believe that the traditional print media companies will do worse in a period
of stagflation given their higher fixed and variable operating costs.
Given the above conclusions, we believe that the following media companies will
outperform during a period of stagflation: Kingsoft, The9, NCsoft, Neowiz Games.
Austar, Starhub. Sohu.com, sina.com, NHN, Ctrip.com, Focus Media, and Clear Media.
Metals and Mining
With different supply/demand dynamics, we believe the effect on gross margin and
EBIT margin should be analyzed on a case-by-case basis for different commodity sub-
sectors.
Being an upstream sector and enjoying both domestic and global tight supply, the
Chinese coal sector should enjoy relatively stronger pricing power, which allows coal
producers to pass through most of the cost hike pressure and to maintain margins.
Domestic 2008 thermal coal contract price jumped 15% YoY, underpinned by supply
tightness and sustained railway transportation bottleneck. Further potential upside for
2009 domestic contract price remains, given the deep discount (more than 20%) to the
spot prices.
Downstream sectors, particularly for copper smelters and aluminium, will likely
experience margin squeeze as the raw material cost and labour cost are expected to
increase in an inflationary environment. We believe domestic oversupply will constrain
their ability to pass through the cost increase. With continued progress to phase out the
inefficient capacity and accelerating industry consolidation, steel and cement companies
should be able to increase end-product (steel product/cement) prices and offset most of
the cost increase.
Winners: We think the coal sector should be the winner, underpinned by the shutdown
of small coal mines in China, sustained railway transportation bottleneck, and extremely
tight supply in Asia-Pacific seaborne-traded coal market. China Shenhua Energy (1088
HK, 1-Overweight) remains our top pick in the sector given its resilient organic growth,
steady increase in coal contract price, and likely value-accretive coal mine asset
injections from its parent company.
Losers: Aluminium producers would likely be the losers due to cost pressure and
domestic oversupply, which limits domestic aluminium price upside. Chalco (2600 HK,
3-Underweight) would likely suffer due to cost pressure (bauxite, energy, and power)
and limited upside in domestic aluminium prices.
Oil and Gas
Demand alone does not impact oil prices; the supply situation also plays an important
role. Over the past decade, limited new supply has created a tight situation. In particular,
non-OPEC supplies have lagged demand growth, leading to a drawdown in inventories
and OPEC spare capacity. However, by end-2008 and in 2009, we are expecting large
new fields in Saudi to come on-stream. Hence, our view is that oil price prices will
remain high for most of 2008, but will likely fall sharply by end-2008 and in early-2009.
We expect EBIT to grow in 2008 for most pure oil companies such as CNOOC Ltd.
(883.HK, 2-Equal weight) owing to high oil prices, although the magnitude of EBIT
expansion is likely to be muted by the impact of local currency appreciation and cost
escalation.
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Lehman Brothers | Equity Research
The Chinese integrated companies such as Petrochina and Sinopec, which also have
downstream refining exposure, are currently suffering from high oil prices but
constrained from raising oil product prices. We believe EBIT could improve with the
expected decline in crude oil prices in 2009 even if the government does not relax oil
product price controls. This will likely more than offset the gradual increase in
production cost. Meanwhile, fearing product shortages, the government is using other
regulatory measures such as import VAT rebate to help these companies.
In a severe economic downturn, coupled with a high inflationary environment, we expect
physical oil demand to decline although there could be demand for oil papers to hedge
against inflation. In the near term, we expect the tight supply situation to continue, which
could further boost oil prices. However, by the end of 2008 and especially in 2009, as
new capacities come on-stream, we believe that oil prices are likely to decline.
In the near term, we believe a pure oil company such as CNOOC Ltd is likely to
outperform in light of the expectation that oil prices could escalate further. However,
over the next 12-18 months, we believe that integrated oil companies such as Sinopec
and Petrochina will outperform when crude prices decline. A clear winner will likely be
COSL, an oil service company, the earnings of which we expect to be relatively
uncorrelated to immediate oil price movements, and which we believe will continue to
benefit from high capex spending by oil companies.
Utilities – Power
China IPPs’ earnings are sensitive to tariff, coal price, utilization rate, and interest rate,
in the order of their impacts. Lower GDP growth would mean not only lower power
demand and utilization, but also a lower coal price, as 60% of coal demand is driven by
power demand. The skyrocketing spot coal price this year – the Qinhuangdao standard
spot coal price already reached RMB895 per ton in 1Q (spot raw coal price at RMB640
per ton), similar to the New Castle price, due to unexpected snowstorms in China and a
strong regional coal price due to supply shortage – has been a key concern for IPPs’
profitability for 2008–09. We believe that slowing power demand and subsequent
softening of coal price should be viewed positively because this is likely to enhance
margins significantly. Our sensitivity analysis shows that, for every 1% drop in the coal
price, listed IPPs’ average earnings for 2008E–10E would rise 4%, and this compares
with a 3% earnings decline for each 1% fall in utilization hours.
Unlike the oil and gas sector, in which the government could easily provide one-off
subsidies (such as VAT and windfall tax rebates) to the two oil majors, the power sector
is fragmented, and this would likely restrict the government’s relief policy to just a tariff
hike (or a 17% VAT rebate on tariff). Power tariffs have not been increased since end-
2006, while the coal price has risen by 30% since then. According to the “coal-tariff
linkage” 70% pass-through policy, the on-grid power tariff would have to rise 14% in the
next review. This compares with our base-case assumption of a 3%–5% tariff hike in 3Q,
which means IPPs margins would nevertheless be eroded. If coal prices do not soften,
the biggest losers would be IPPs such as Huaneng, Huadian, Datang, CR Power, and
China Power International.
Utilities – Gas Distribution and Water
In terms of the China water and gas distribution sector, it is worth mentioning that
Chinese government does not only control the retail price but also the input cost to the
operators. Therefore, price control does not impact the water and downstream gas
companies at all, but that may limit potential upside from tariff hikes for water utilities.
In addition, we believe residential demand for these necessities (especially for water)
will not significantly slow, when a country is going through urbanization and when
natural gas remains 30% cheaper (per heat content) than other sources of energy, such as
coal gas, electricity, etc. However, we expect demand for natural gas from commercial
and industry users, which have been the major driver for demand growth over the past
couple years, to slow when economic activities slow.
May 2008 28

Lehman Brothers | Equity Research
In the downstream gas and water sector, we prefer water over gas during periods of
stagflation, despite limited potential upside from water tariff hike. In particular, we like
China Water Affair (855.HK, 2-Equal weight, TP HK$3.00) and China Everbright
International (257.HK, 1-Overweight, TP HK$4.70). We think gas distributors such as
Xinao Gas (2688.HK, 1- Overweight, TP HK$17.30), Zhengzhou Gas (3928 HK, 1-
Overweight, TP HK$1.50), HK & China Gas (3.HK, 3-Underweight, TP HK$17.06) and
Beijing Enterprise (392 HK, 1-Overweight, TP HK$42.70) could suffer as a result of
lower demand from commercial and industrial users and frozen tariffs.
Property/Asset Reflation
In a scenario of low growth and high inflation, we believe housing would prove to be the
most resilient asset class, followed by low-end retail. The office market should be the
most vulnerable. The main impact of a slowdown could be a delay in demand (not
extinguishing demand). Short-term supply is the key to holding the resilience of the
various markets. The tighter the supply picture, the more room there is for demand to be
cut before rents and prices have to adjust. Ranked from the lowest to highest supply, we
see Hong Kong housing, Hong Kong office, Singapore office, Singapore housing, and
then the China housing market.
Due to their high gearings and tight cash position, a potential delay in demand could
have more dire consequences on the Chinese developers. If demand proves weaker than
expected and contract sales lower, we believe highly geared developers will have little
choice but to dilute their NAVs by either taking on a JV partner or some equity issuance.
There are no winners under this scenario in the China property space, in our view, and
we think the biggest loser is Guangzhou R&F (2777.HK, 2-Equal weight). It is a highly
geared developer with a net debt:equity ratio of 140%. Including outstanding land
premium of Rmb10 billion, the net debt:equity ratio is near 265%. R&F is dependent on
good contract sales and potential A-Share listing to strengthen its cash flow, both of
which are difficult if inflation in China continues to stay high.
Telecommunications
We believe that telecom services would be hurt less than other sectors during a period of
slower growth and higher inflation as they are a relatively low-cost and important part of
life for a majority of the people in the region. In addition, in a period of slow growth,
businesses and consumers looking to reduce costs may use more telecom services
(through more phone calls/video conferences) while reducing travel.
However, we believe that revenue growth for telecom operators in the developing
markets such as China would suffer a greater impact than for those in developed markets
– especially as they depend on growth from new low-end subscribers in rural areas
(where telephony expenses could represent up to 7%–10% of disposable income).
In China, we believe that slower economic growth coupled with higher inflation could
result in a negative impact on revenue growth due to weaker subscriber growth and a
sharper decline in average revenue per user (ARPU). For example, according to CEIC
data, residents in rural China spend 46% of their disposable income on food and 7% on
transport, post, and telecom services. If food prices continue to increase, we believe that
telecom services could be an expenditure that is reduced. Telecom usage reduction (both
for voice and SMS) will result in lower ARPU. On the other hand, we do not believe that
there will be any upward adjustments to mobile tariffs due to inflation. In fact, mobile
phone rates have continued to decline in China with the average tariffs (revenue/MOU)
down more than 17% in FY07 for China Mobile.
Telecom operators that would do worse in an environment of stagflation include high-
growth companies such as China Mobile and China Unicom.
May 2008 29

Lehman Brothers | Equity Research
Transportation/Shipping
We believe that in a scenario of lower growth and higher inflation, shipping sector would
be a likely loser.
With container demand driven by global economic growth, consumption, and disposable
income, we are already forecasting global container demand to slow, and we have a
cautious view on the container sector. This is driven not only by slowing global demand
but also by cost inflation pressures (such as bunker fuel cost, terminal handling charges
and inland transportation costs), as container carriers struggle to pass through the higher
costs to customers. The net effect is pressure on margins.
Under our worst-case scenario, margins would come under further pressure with
declining freight rates from a mixture of slowing demand and excess supply, while
container shipping carriers are already struggling to pass through higher costs. Given the
current shortage in bulk shipping capacity, we believe the bulk sector will be affected
only from 2H09 when the sector switches to excess supply. We believe lower growth
and higher inflation will likely exacerbate the problems now faced by the container lines
and could even lead to losses.
In our opinion, there are no winners but only losers in the shipping sector. Furthermore,
we believe the government is unlikely to assist shipping lines. Within China shipping
sector, being the only pure container play in China, we believe CSCL (2866.HK,
3-Underweight) will be the largest potential loser in a scenario of slowing growth and
rising inflation as the company is most leveraged to changes in freight rates and costs
due to low profitability and low margins.
CONCLUSION
In an environment of severely slowing economic growth and much-higher-than-expected
inflation, we think the China equity stock market would likely tumble, especially if the
market is expecting corporate earnings growth to be still strong in 2008E and 2009E,
which is unlikely to be the case in our worst-case scenario. More than in other countries,
we think government policies (monetary and fiscal policies), including interest rates and
the reserve requirement ratio, currency policies, price caps and tariffs, etc., are crucial to
the potential outcome of our stagflation scenario. The timing as to when these policies
will be implemented is essential in whether the government can tame rising inflation and
rescue slowing growth.
May 2008 30

Lehman Brothers | Equity Research
HK STAGFLATION SCENARIO
Effects of rising inflation and slower growth
Ivan Lee
LBAL, Hong Kong
Tel: +852 2252 6213 HOW WOULD STAGFLATION IMPACT HONG KONG?
ivan.lee@lehman.com
The US sub-prime problem is looming large, and alongside the continued weakness in
the US dollar, falling global economic growth, and a quick washout of wealth effect
HK Research Team
from the stock and property markets, we believe Hong Kong is likely to enter into a
phase of stagflation.
This is also underpinned by our views of an economic slowdown, a persistent high
inflation and the low likelihood of easing of macro administrative controls in China,
which we think will affect ‘hot’ money flowing into Hong Kong and mainlanders’
expenditure in Hong Kong.
We expect Hong Kong’s internal consumption to slow, unemployment to rise and input
costs (in terms of energy, labor and rental, among others) to increase rapidly. This is not
a positive backdrop, especially to the consumer, hotel, aviation, manufacturing, gaming,
financial and export sectors, due mainly to Hong Kong’s fairly open economy, its close
linkage to China’s economy, and the pegged currency to the US. Potential losers could
include SaSa (178.HK, 1-Overweight), Giordano (709.HK, 2-Equal weight), Shangri-la
Hotel (69.HK, 2-Equal weight), and Galaxy (27.HK, 1-Overweight).
Housing prices, however, will continue to benefit from a negative interest rate
environment, in our view. Nonetheless, this is not without risk, as when unemployment
continues to rise and the economic confidence level continues to weaken, we believe the
appetite for long-term investment may turn sour although affordability is at an all-time
high. Other risks may also surface should the US decide to hike rates to curtail inflation,
which will be followed by Hong Kong, and when the US dollar recovers. As such, we
would be more positive on the economy housing segment than on the front-running high-
end property segment. We suggest overweighting SHKP (16.HK, 1-Overweight) and
Sino Land (83.HK, 1-Overweight).
We expect regulated utilities, whose earnings are tied to capex instead of tariff and fuel
cost, and conglomerates with diversified earnings streams to have earnings resilient
performance. In particular, we believe utilities and consumer staples (like telephony) will
outperform because of their demand and price inelasticity. We believe regulated power
utilities, such as HK Electric (HKE) (6.HK, 1-Overweight), CLP (2.HK, 2-Equal
weight), and Cheung Kong Infrastructure (CKI) (1038.HK, 1-Overweight), will be
winners. Telecom operators such as PCCW (8.HK, 2-Equal weight) and Smartone
(315.HK, 2-Equal weight) will also perform well due to their inelastic demand in voice
and cable services.
We believe there is not much that the Hong Kong government can do to counter the
inflationary pressure and slipping economy, given the government’s minimal
intervention policy, currency peg and the non-government controlled utilities sector.
Nevertheless, we think that the government will likely expedite infrastructure investment
and reduce the tax rate further to revive the economy. Still, we believe any impact could
be short-lived.
May 2008 31

Lehman Brothers | Equity Research
Figure 11: Factors affecting the Hong Kong market
Hong Kong Consumption reduced
Weak US stock market HK Stock market to correct
drag down Economic growth reduced Unemployment to increase
US sub-prime Slow US economic growth Export
stimulate reduced inflation Reduced demand for property
Weak US dollar Weak HK dollar import inflation Inflation
USD-HKD peg
Lower US interest rate Lower HK interest rate Negative interest rate Asset price to increase
Source: Lehman Brothers research
Figure 12: Winners and losers in a stagflation scenario
Winners –
Company Ticker Price Target Price Rating Comments
•
HK Electric 6.HK HK$45.20 HK$52.0 1-OW 90% of earnings generated from Hong Kong scheme of control (SOC),
which allows a 9.99% ROA
• Net cash in 2008E; 5% dividend yield
• High earnings and capex visibility, upside from potential overseas M&A
•
CLP 2.HK HK$60.2 HK$62.0 2-EW 70% of earnings generated from Hong Kong SOC
• Under-geared balance sheet; 5% yield
• HK$3 bn development funds act as earnings cushion to any adverse
market condition
•
Hutchison Whampoa 13.HK HK$78.05 HK$93.8 1-OW Well-diversified earnings base
• Exposure to resilient sectors – oil, port, and housing
•
Cheung Kong 1038.HK HK$31.75 HK$34.0 1-OW 85% of earnings attributed from regulated assets in HK, Australia, and
Infrastructure the UK
• HK$1.5 bn net cash inflow per year; Net cash in 2008E; 4% dividend
yield
• Potential upside from M&A
•
PCCW 8.HK HK$4.95 HK$5.1 2-EW Similar to the situation of mobile operators, Hong Kong has six fixed-
line operators, so it is unlikely fixed-line operators will increase tariffs.
• Indeed, we believe fixed-line operators may be even more defensive
than mobile operators in a stagflation environment because fixed-line
operators are less dependent on VAS and more on monthly tariffs. We
believe mobile operators generate higher margins on VAS services.
•
Smartone 315.HK HK$8.85 HK$7.6 2-EW Even in an inflationary environment, we believe it is unlikely that Hong
Kong mobile operators will increase mobile tariffs. For the past many
years, mobile tariffs in Hong Kong have been on a downward trend due
to intensive competition among mobile operators.
• Under our worst-case scenario, we believe mobile subscribers may cut
their usage of value-added services (eg, MMS, color ring tones, etc). In
Hong Kong, the tariffs for VAS are still at a relatively high level when
compared with other countries. Given that voice service has become
quite an essential part of subscribers’ daily life, we believe it is unlikely
that mobile subscribers will cut voice usage.
•
SHKP 16.HK HK$138.0 HK$200.5 1-OW Hong Kong’s second-largest housing provider (22% market share) and
largest shopping mall owner (10 mn sq ft) should show resilience
performance to a downturn.
• Furthermore, with net debt:equity ratio of only 14%, SHKP has a strong
balance sheet to weather any short-term slowdown.
•
Sino Land 83.HK HK$21.20 HK$29.8 1-OW Highest leverage to Hong Kong housing and retail. Every 10% increase
in housing and retail boost would NAV by 8.2%.
• Most near-term catalysts in the form of upcoming pre-sales. The
Palazzo and Lake W are both triggers for NAV and earnings upgrades.
May 2008 32

Lehman Brothers | Equity Research
Comments
Losers – Company Ticker Price Target Price Rating
•
Giordano 709.HK HK$3.40 HK$3.33 2-EW High margin to leverage rental cost change
• Vulnerable on top-line squeeze amid their more cyclical nature
•
Sa Sa 178.HK HK$2.98 HK$3.93 1-OW Ditto
•
HK Land HKL SP US$4.82 US$5.95 1-OW Property stock with the highest proportional exposure to the office
market.
• HK and SG offices make up 87% of HK Land’s NAV. That said, with
existing vacancy at a very low 1.1% in Central, there is ample cushion
before HK Land should need to trade rents for occupancy.
•
HK & China Gas 3.HK HK$19.84 HK$17.06 3-UW Limited upside to HK Towngas tariff and demand amid stagflation
• Property earnings nearing an end
• Excessive valuation at 34x recurring gas P/E, the most expensive gas
utilities in the world
•
Shangri-la Hotel 69.HK HK$22.40 HK$19.9 2-EW Near-term RevPAR growth risks as weaker demand will likely hurt
occupancy levels.
• On the other hand, the subdued new hotel room supply in the next few
years in HK luxury hotel segment should help preserve hotel operators’
pricing power.
• Fair valuations – stock is fairly valued at 9% premium to SOTP of
$19.9/share. Our TP of $19.9 is based on par to SOTP.
•
Galaxy 27.HK HK$5.69 HK$8.5 1-OW Lower visitor arrivals may slow gaming revenue growth, although we
have yet to witness this YTD, thanks to strong growth in VIP market.
• Potential margin compression for casino operators due to higher
effective junket commissions.
• Stock is trading at 24% discount to NAV of $7.7/share. We see long-
term value from a large undeveloped Cotai site, and also potential
short-term market share boost from proposed Jumbo VIP facility. Our
TP of $8.5 is the sum of NAV and a Cotai land option value of $0.80.
Source: Lehman Brothers Research; Pricing as of 7 May 2008
PROPERTY
Under our worst-case scenario of low growth and high inflation, we believe housing
should prove to be the most resilient asset class followed by low-end retail. The office
market should be the most vulnerable.
Housing – Covers basic needs for security. The need for shelter and shortages in
available units are likely to drive up rents. Unless we are to envision a world where there
is mass emigration, we think demand for shelter should prove very resilient.
Retail – Under a recessionary scenario, low-end retail typically outperforms as
consumers tighten their budget. Still, we believe that the more important distinction lies
in retail mix management as a good mall should be able to adjust its trade mix.
Office – For developed and service-based economies such as Hong Kong and Singapore,
we think a slowdown in economic activity should affect the office market the most.
In the worst-case scenario, we believe housing and low-end retail should be the most
resilient as they cover basic needs. Office and high end-retail are likely to fare the worst.
At the country level, performance should be tied to existing supply levels. Hong Kong,
which has the lowest expected housing supply for the next four years, should prove to be
the most defensive, in our view.
May 2008 33

Lehman Brothers | Equity Research
UTILITIES
Hong Kong power utilities would fare the best amid stagflation, in our view, given their
high earnings visibility, under-geared balance sheet and strong cash flow despite rising
inflation and fuel costs. This is because earnings are based on capex (with a fixed 9.99%
return on net fixed asset under “scheme of control [SOC]”), not on tariff, and fuel costs
are passed through.
However, we believe that Hong Kong gas company, HK & China Gas (3 HK, 3-
Underweight) could be affected because it is non-regulated, and its tariff in Hong Kong
could be frozen for a longer period of time due to rising inflation and an already lucrative
return (31% on net fixed asset), while demand for gas in Hong Kong and China will
likely also slow when GDP growth starts to turn south. This is especially true in China,
where a majority of gas demand growth is driven by commercial and industrial users.
FINANCIALS
We think stagflation should be neutral to the Hong Kong banks’ net interest margin, but
will lead to increased cost pressure (i.e. staff cost & office overheads). Banks that have a
better record of controlling cost, such as Hang Seng Bank (0011.HK, 1-Overweight) and
Wing Hang Bank (0302.HK, 1-Oveweight) should manage the situation better, in our
view.
Slowing economic growth would erode profitability of small and medium enterprises.
Local banks which have a higher exposure to the SME loans, will likely see increases in
loan loss provision.
On loan growth, we believe the effect would be relatively neutral – a slower economy
should lead to slower credit growth, but this could be offset by a higher property-related
loan growth.
Overall, we believe stagflation would be slightly negative on Hong Kong banks.
TELECOMMUNICATION
For countries such as Hong Kong, we believe the impact from potential stagflation is
more likely to be felt via a lower usage of value-added services (VAS) than higher
mobile tariffs. Over the past few years, Hong Kong mobile operators have been lowering
the tariffs of voice services. However, tariffs of VAS (color ring tones, etc) still stay at
relatively high levels. If the domestic economy slows, we believe it is possible that
mobile subscribers will cut back on their usage of VAS. Given voice service is a core
part of mobile telephony, we believe it is unlikely to decline because of slower economic
growth.
CONSUMER
While a mild inflationary environment is a welcome factor to drive healthier earnings
growth in the consumer sector due to the better leverage from both pricing and sales
perspective, any severe inflationary pressure may post a reverse outcome amid
heightening margin risk as operators are squeezed to absorb part of the cost hike to share
the burden with their suppliers.
For Hong Kong retailers, given the nature of their heavy cost exposure into rental, our
earnings growth expectations (at 4%-20% for FY08-09E) could be easily wiped out
should rental hikes revive in a worst-case scenario. Overall, in our Hong Kong
consumer-related stocks universe, we believe that Li & Fung (0494.HK, 1-Overweight)
is the most defensive play against our inflation topic, thanks to its commission-driven
business model, which is on a cost-plus basis, while Giordano and Sa Sa are more
sensitive to it.
May 2008 34

Lehman Brothers | Equity Research
CONGLOMERATE
In a stagflation environment, those companies that have: (1) a pricing power to pass on
rising costs, (2) a control in input costs, and (3) strong recurring cash flows and healthy
balance sheets, will be the likely winners. As a result, we believe those conglomerates
that possess industry leadership (hence pricing power), scarce resources (hence input
cost control), larger exposure to infrastructure (recurring cash flows), and cash-rich
balance sheets, should weather stagflation better than others.
In terms of sector exposure amongst the conglomerates, we believe Hong Kong housing
should be the most resilient to stagflation, followed by energy and transportation
infrastructure. Low-end manufacturing, airlines and office market should be the least
defensive.
Conglomerates, by definition, are diversified in nature and will not be totally immune to
stagflation. Nonetheless, it is also because of this business diversification that gives their
earnings a higher degree of defensiveness than many other single-industry-focused
companies. All the conglomerates are also cash-rich, and some are industry leaders in
their core businesses. We therefore maintain an overall positive stance on conglomerates
under a stagflation scenario.
SHIPPING AND TRADE
We believe that under a scenario of lower growth and higher inflation, the shipping
sector will be the likely loser.
With container demand driven by global economic growth, consumption and disposable
income, we forecast global container demand to slow and we have a cautious view on the
container sector. This is driven by not only slowing global demand but also cost inflation
pressures (such as bunker fuel cost, terminal handling charges, and inland transportation
costs) since container carriers struggle to pass through the higher costs to customers. The
net effect is margins pressure. We believe lower growth and higher inflation will
exacerbate the problems currently facing the container lines and could even lead to
losses.
May 2008 35

Lehman Brothers | Equity Research
INDIA AND STAGFLATION
Tight policies limit local stagflation risk
Prabhat Awasthi
LBSPL, India
Tel: +91 22 40374180
HOW WOULD STAGFLATION IMPACT INDIA?
prabhat.awasthi@lehman.com
Lehman Brothers Asia is exploring the potential risks to Asia-Pacific markets in a
scenario of slowing global growth, resulting in slower Asian growth, but in the face of
India Research Team
rising input costs. The current inflationary risks in India are the result of rising
Tel: +91 22 40374037
commodity and food prices. Indian inflation has already seen a significant increase: from
a low of 3.07% in October 2007, wholesale price inflation in India moved to 7.57% on
April 19, 2008.
The Indian central bank, the Reserve Bank of India (RBI), started a tightening policy in
October 2006 in the wake of serious asset inflation. This policy continues and has been
joined by a series of fiscal measures, such as cuts in import duty for edible oil, steel and
cement, etc., which are causing inflation to rise.
We believe that inflation will remain high for some more time, due largely to the base
effect. In our view, the government, especially due to the proximity of elections, is
unlikely to let many cost increases be passed on to consumers, but will likely absorb
them by increasing fiscal deficit. Crude price increases have not been passed on to
customers in the form of increases in the prices of diesel, petrol, LPG or kerosene.
Increases in fertilizer costs have not been passed on to farmers for the same reasons. This
would mean a swelling of deficit for the government.
The ballooning of fiscal deficit is one of the primary risks we perceive at a time when
monetary conditions are tight. This essentially means a tight environment for interest
rates going forward. One of the major reasons for India’s premium expansion has been
the reduction in fiscal deficit, a process which could be derailed in the short term due to
inflationary headwinds.
The sectoral impact is likely to be less obvious than a straightforward extrapolation of
high interest rates onto sectors sensitive to them. We believe that further increases in
interest rates to consumers will remain limited as they have already risen considerably.
We also believe a significant slowdown in investment spending is unlikely, given that
corporates are flush with cash and there are significant shortages in key sectors, such as
steel and power.
The risks are significant for part of the banking sector, companies with a high proportion
of fixed-price contracts and companies with high energy usage without the ability to pass
on increased costs. We believe that the following sectors will be the most affected:
• Public sector banks
• Infrastructure companies with a high proportion of fixed-price contracts
• Automobile companies
• Cement companies
Beneficiaries in a weak economic environment laced with inflation can only be relative.
Classic defensive sectors, such as pharmaceuticals and fast-moving consumer goods
(FMCG), will be the least affected, in our view.
May 2008 36

Lehman Brothers | Equity Research
WINNERS AND LOSERS
Figure 13: Winners and losers (India)
Winners Ticker Price (INR) TP (INR) Rating Comments
•
Ranbaxy RANB.NS 466 603 1-OW We expect the slowdown in Indian GDP growth in CY08 to result in a
proportional slowdown in the growth of the Indian pharmaceutical market.
However, the Indian market contributes just 19% of Ranbaxy’s revenue.
• A slowdown in India’s GDP growth to 6.5% would imply only a 1% adverse
impact on our CY08 EPS estimate for Ranbaxy.
• Ranbaxy has a strong product pipeline and front-end presence in 49
countries, providing healthy core business performance. It also has strong
earnings support from potential exclusivity related upsides in CY09 and CY10,
in our view.
•
Nicholas NICH.BO 336 524 1-OW Domestic formulations contribute close to 50% of the company’s sales. A
Piramal slowdown in India’s GDP growth to 6.5% would imply a 3% adverse impact on
our FY09 EPS estimate for Nicholas Piramal.
• Its CRAMS business is gaining traction and is expected to contribute
increasingly more to EBITDA margins. This business would not be affected by
a slowdown in India’s GDP growth in CY08, according to our estimates.
• The adverse impact on NP’s TP due to a GDP growth slowdown would be
only 1%, which would still imply 53% potential upside from current levels.
•
Hindustan HLL.BO 252 293 1-OW We expect the home and personal care (HPC) categories to remain largely
Unilever insulated from new competition.
• We expect margins to expand in an inflationary environment on account of
reduced competitive intensity and aggressive pricing action.
• The impact of a slowdown is likely to be minimal on volumes. However, in an
extreme downturn, people may down trade, in our view.
•
Bharti Airtel BRTI.BO 816 1,110 1-OW Defensive business model. Sells low ticket necessities.
• Low penetration and strong growth.
• Asset owner available at reasonable price.
Losers Ticker Price (INR) TP (INR) Rating Comments
•
Larsen & LART.NS 2,993 5,003 1-OW Potential order inflow slowdown due to economic slowdown.
Toubro
• Margins could be adversely affected by rising raw material costs.
• Trading at a relatively higher multiple than other construction companies,
hence risk of de-rating of P/E multiple.
•
State Bank SBI.NS 1,769 1,900 3-UW We believe a macro slowdown will disproportionately impact asset quality,
of India especially in the small and medium enterprises (SME) segment, which has
been a focus area for the bank and which has been clocking higher growth in
the past two years.
• Our concern on SBI is that management seems to be pursuing strong asset
growth at a time of heightened risk in the asset quality environment.
• Regulatory risks.
• CRR continues to be RBI’s tool for targeting inflation. A hike in CRR is a
significant tax on the banking system (state-owned banks may not be able to
recover costs by raising lending yields, given the government policy
environment and limited pricing power).
• The recently announced government farm loan waiver has led to a spike in
State Bank’s agricultural bad debts and the risk of moral hazard continues,
more so in a weak economic outlook.
•
Tata Motors TAMO.NS 680 976 1-OW A GDP slowdown would be likely to result in a sharp decline in the sales of
commercial vehicles.
• Margins could also come under pressure due to unfavorable product mix.
•
Ambuja GACM.NS 111 100 3-UW The stock is currently trading at an EV per ton of US$216, which we believe is
Cements expensive, given the deteriorating fundamentals of the Indian cement sector.
We believe the sector will see overcapacity and a price correction even in the
base-case scenario.
• In the stagflation scenario, a price correction could be much more severe than
our forecast of 10% and given the increase in input prices, profitability could
decrease significantly from the current operating margin of 28%.
May 2008 37

Lehman Brothers | Equity Research
• In such a scenario, we expect the company to trade at a replacement cost
valuation of US$90 per ton.
Source: Lehman Brothers estimates (Prices as of May 7, 2008)
DOWNSIZING THE ENGINE ROOM?
India’s capital spending has been growing at a rapid clip and has been the primary reason
for the acceleration in GDP growth.
WHAT HAPPENED IN THE 1970S?
We believe a comparison with 1970s would not be appropriate at this time, given that the
Indian economy was protected by high tariffs and capacity controls in the 1970s. India
did not have a well-developed capital market, and the public sector controlled most of
the economy.
The impact on Indian GDP growth was felt with a lag – FY72 was a flat-growth year and
FY73 was a recession year.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The government has been using fiscal measures alongside monetary measures to reduce
the inflationary impact on consumers. Unfortunately, some of these measures mean that
true market economics are not reflected in the economy. If the inflation period is
prolonged, we expect the government to start passing on some of the suppressed price
increases (especially those relating to crude oil and fertilizers) in small doses. However,
we do not expect this anytime soon, given the proximity of the elections.
CONCLUSION
India’s positive in the event of stagflation is the investment cycle, which is predicated on
significant demand-supply gaps. The RBI has been extremely vigilant and has not
allowed the build-up of excesses in the system. We do not believe that India would be
affected significantly in a stagflation scenario and growth would remain strong in
relative terms, in our view. The negative impact would likely be felt by interest rate-
sensitive stocks or by companies that are not in a position to pass on cost pressures to
consumers, in our view.
May 2008 38

Lehman Brothers | Equity Research
KOREA STAGFLATION SCENARIO
Effects of rising inflation and slower growth
Korea Research Team
Seoul Based
HOW WOULD STAGFLATION IMPACT KOREA?
Zayong Koo
LBIE, Seoul We are exploring the risks to the Korean market in the scenario of falling global growth,
Tel: 822.2116.7550 resulting in slower Asian growth – but in the face of rising input costs. In general, we
zayong.koo@lehman.com believe most Korean industries would be adversely affected by rising inflation and
slower growth, as many of these are export driven, and much of their inputs (e.g., raw
James Kim materials) are imported.
LBIE, Seoul
As global growth, especially US growth, decelerates, we would expect Korea’s export-
Tel: +822.2116.7570
driven industries, such as autos, discretionary consumer electronics (e.g., mobile phones,
james.kim@lehman.com
LCD TVs, etc.) and semiconductors (via PCs) to face great challenges. Domestic
industries –retail, travel, and even utilities – are also likely to be adversely affected by
Mark Yoon
such a stagflation environment.
LBIE, Seoul
Tel: +822.317.5159
On the other hand, such an environment would also likely increase the demand for
mark.yoon@lehman.com
necessities like food and beverages. As a result, consumer demand would likely increase
at discount stores, where food and beverages account for more than half the total sales.
CW Chung
In addition, we would expect relatively inelastic consumer demand for consumer staples
LBIE, Seoul
like cigarettes.
Tel: 852.2116.7558
The Korean economy entered a slowdown in 1Q08, and the leading composite economic
cwchung@lehman.com
index slowed in February, suggesting further economic weakening. Our economics team
expects the Bank of Korea (BOK) to cut rates by 100bp in 2H08 to counter slowing
Stanley Yang
growth in the economy. However, with a market-oriented new president having taken
LBIE, Seoul
Tel: +822.317.5168 office, it is our view that he will focus on revitalizing the domestic economy as soon as
stanley.yang@lehman.com possible to minimize the length of such stagflation.
Michelle Cho
LBIE, Seoul
Tel: +822.2116.7559
michelle.cho@lehman.com
Hong Taik Chung
LBIE, Seoul
Tel: +822.317.5148
hongtaik.chung@lehman.com
Jee Hoon Park
LBIE, Seoul
Tel: +822.2116.7567
jeehoon.park@lehman.com
HK-Based
Andrew Lee
LBAL, Hong Kong
Tel: 852.2252.6197
andrewkw.lee@lehman.com
Ivan Lee
LBAL, Hong Kong
Tel: +852.2252.6213
ivan.lee@lehman.com
May 2008 39

Lehman Brothers | Equity Research
WINNERS AND LOSERS
Figure 14: WINNERS AND LOSERS (Korea)
Winners Ticker Price Target Price Rating Comments
•
KT 030200.KS KRW45,250 KRW46,700 2-EW Telecom spending is very defensive to macro economic
downturn.
Telecommunication
• Inflationary costs pressure is also limited.
•
KT&G 033780.KS KRW82,500 KRW101,000 1-OW Cigarette demand is almost inelastic with regard to economic
turnarounds.
Consumer
• Significant earnings are backed by export cigarette business
and 100%-owned subsidiary Korea Ginseng.
• Profitability will improve on increasing imported leaf tobacco.
• Extraordinary shareholder friendly measures.
•
Samsung Electronics 005930.KS KRW741,000 KRW920,000 1-OW Strong cost competitiveness.
•
Tech – Semiconductors Highest ASP in the industry.
• Strong financial structure.
Losers Ticker Price Target Price Rating Comments
• With container demand driven by global economies,
Hanjin Shipping 000700.KS KRW43,350 KRW39,000 2-EW
consumption, and disposable income, shipping lines are
the likely losers.
Transportation
• Among the listed Asian container stocks, Hanjin has one
of the highest exposures to the transpacific route.
• If demand weakened significantly more than expected, it
Honam Petrochem 011170.KS KRW88,900 KRW165,000 1-OW
would exacerbate the existing negative environment
caused by oversupply.
Petrochemical
• Honam’s product suite remains concentrated on ethylene
derivatives, where we expect overcapacity to be most
severe.
• Rising fuel costs, a deprecating won, and limited chances
KEPCO 015760.KS KRW33,950 KRW26,900 3-UW
of securing a tariff hike amid high inflation imply downside
risks to FY08 earnings.
Utilities
• Slowing down of power demand (assuming growth slows
down) may exert further pressure on the deteriorating
bottom line.
• Sensitive to economic environment.
Kia Motors 000270.KS KRW13,500 KRW17,500 1-OW
• The domestic market is small and highly reliant on
Autos overseas markets, with over 50% of its exports going to
developed markets.
• Input costs are rising.
• Lower sales volumes would increase fixed costs and raise
incentive levels, resulting in a margin squeeze.
• Demand slowdown from the US/EU regions, especially for
LG Display* 034220.KS KRW48,500 KRW54,000 2-EW
TV panels, could significantly limit earnings growth.
•
Tech – Hardware Increased capex in 2008, combined with a demand
slowdown, could lead to serious oversupply in the LCD
industry in 2009.
• Lower operational efficiency.
LIG Insurance 002550.KS KRW20,850 KRW24,500 2-EW
• Weaker underwriting capabilities and sustainability of
Non-life Insurance customer retention efforts.
• Lesser exposure to health-related long-term insurance
products (that has greater growth potential) than others.
• Over-extended shipbuilding capacity expansion
STX Shipbuilding 067250.KS KRW37,650 KRW30,000 3-UW
(especially in overseas markets) could bite during down
cycle.
Shipbuilding
• Undiversified business scope, with 100% of revenues
from ordinary cargo ships, puts vulnerable earnings at
risk.
*Note: Closing price as of May 7, 2008; Source: Lehman Brothers research. *The investment rating for LG Display was downgraded to 2-EW and the 12-month
target price was cut to W54,000 (from W65,000) on 15 May 2008
May 2008 40

Lehman Brothers | Equity Research
EFFECT ON EBIT: SHRINKING MARGINS?
In the lower growth and higher inflation scenario, margins for most industries would be
under greater pressure, with declining prices from a mixture of slowing demand and
excess supply. The situation is further exacerbated by higher input costs, and it is
becoming increasingly difficult to pass this on fully to end consumers. However, the
magnitude of margin pressure for certain industries, such as tobacco and banks, would
likely be minimal. We believe Korea’s leading tobacco player, KT&G, would maintain
its profitability given stable domestic cigarette demand, growing exports, and declining
raw material costs, due to greater usage of relatively cheap imported tobacco leaves.
We believe that banks’ margins are relatively well protected. Since we expect banks to
refrain from aggressive loan growth, we believe they can command better pricing power
for loans. Banks had not been able to fully price in the rise in interest rate until now due
to heated lending competition. Hence, even if the central bank cuts rates aggressively in
2H08, we believe that banks will enjoy better spreads from interest earnings assets and
interest-bearing liabilities.
WHAT HAPPENED IN THE 1970S?
The 1970s for Korea was still a period of strong growth and low per capita GDP, with
average GDP growth persisting at over 8% and per capita GDP at less than US$2,000. In
addition, the manufacturing sector’s contribution to GDP started to rise, accounting for
over 17% of real GDP, up from 14% in the 1960s and 9% in 1953. This was largely
driven by export-oriented industries. The real turmoil for Korea arose only in 1980
during the second oil shock (which contracted Korea’s GDP by over 4%) and post the
assassination of the late President Chung Hee Park, who was instrumental in the
industrialization of Korea in the 1960s and 1970s.
Figure 15: Korea GDP Growth
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
*Growth (%) 8.8% 7.5% 4.2% 12.1% 6.7% 4.1% 12.4% 10.8% 10.4% 6.1% -4.2%
*Based on Real GDP/Source: Bank of Korea
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The government’s measures to boost the domestic economy (e.g., reducing income taxes,
comprehensive real estate taxes, special consumption taxes, lower interest rates, etc.)
could help from the macro perspective. In addition, Korean financial regulators increased
loan loss reserve standards for banks in 2006 and 2007 to strengthen asset quality.
However, given the current strong asset quality of Korean banks, which boast
historically low NPS ratios of 50-100bp and high NPL coverage of more than 150%, we
believe the reserve standards could also be eased.
SECTOR SUMMARIES
Autos
We believe that under a scenario of lower growth and higher inflation, the auto sector
would be a likely loser. With auto demand generally driven by global economic growth
and disposable income, a slowdown in global economy would have an adverse impact on
high ticket items such as automobiles, in our view. In addition, cost inflation driven by
higher input (e.g., gasoline) costs and limited financing could, in our view, put further
pressure on demand.
May 2008 41

Lehman Brothers | Equity Research
Consumer
We believe low growth and higher inflation are likely to exert a negative impact on the
Korean consumer sector, suggesting a potential slowdown in domestic consumption due
to lower employment and real wage growth. However, we expect to see a mixed outlook
for individual players given diverse consumer sub-markets.
Financials
Despite the central bank’s efforts to support economic growth, we believe it will be
tough for commercial banks to comply, given their difficult funding environment. The
loan-to-deposit ratios of major nationwide commercial banks are all above 100%, which
means that banks will have to rely mostly on market funding to support any sizable loan
growth. However, given that market funding bears higher cost versus deposits, loan
growth supported by market funding will mean NIM contraction for banks. We believe
banks will be prudent when it comes to increasing loans, given NIM control is a major
issue for banks at this stage.
Internet
In general, we believe the Korean Internet/Gaming sector will be better than other
sectors in dealing with a period of stagflation. We believe online gaming companies
whose revenues are primarily based on a subscription model versus an advertising
revenue model will do better in a period of stagflation. However, we believe an
economic downturn is likely to have some negative impact on an Internet portal’s top-
line growth, due to advertisers’ cut in overall advertisement budgets.
Metals
A weak economy, coupled with higher input costs, is, in our opinion, likely to exert
pressure on steel makers, especially since they cannot fully pass on the higher costs in
this stagflation environment. We believe this is the scenario that has plagued the Korean
steel makers in recent times.
Non-Life Insurance
Under a scenario of lower growth and higher inflation, we think there is a likelihood of
downside risks to insurers but the magnitude of downside could be limited, in our view.
An economic downturn accompanied by inflation could work adversely for insurers
because of possible claim cost escalation along with diminished demand for insurance.
At the same time, insurers cannot pass the potential claim cost escalation on to
policyholders when there is an increase in inflationary pressures, as insurance premiums
are included in Consumer Price Index (CPI) baskets. Therefore, we believe a scenario of
stagflation could hurt both the growth and profitability of insurers.
However, the insurance underwriting cycle responds to supply and demand inputs with a
number of drivers affecting the equation. Several factors, including economic activity,
inflation and demographics could impact the demand for non-life insurance; thus the
scope for downside risks could be contained if one of these factors nearly outweighs the
others, in our view.
Shipbuilding
We believe the shipbuilding industry would benefit from 3–4 years’ worth of orderbook
outstanding, in that it provides a cushion of locked-in revenue stream for that time
horizon. However, we believe cost inflation in the form of rising steel prices, wage rates,
and a weaker US dollar (i.e., a higher FX rate) could materially erode profitability on
outstanding orderbooks (most orders have prices fixed in US dollars, without cost pass-
through or escalation clauses).
Moreover, the aforementioned topline visibility is unlikely to insulate shipbuilding
stocks from macro headwinds leading to a slowdown in orderflows (exacerbating the
May 2008 42

Lehman Brothers | Equity Research
ongoing cyclical order downturn, coming off a prolonged upturn in the last four years),
which is a major driver for share prices. In our view, if capital shortage (leading to ship
financing market crunch) and capex cutbacks by ship buyers induce them to start
cancelling outstanding orders, it could mitigate revenue visibility and also lead to sharp
de-rating on this predominantly sentiment-driven sector.
Technology – Hardware
In a prolonged stagflation scenario ignited by the US credit crisis, we believe the LCD
industry would face two key issues: one, panel demand from the US and European
regions could slow down rapidly, especially for TV panels; two, increased capex in 2008
(up almost 60% YoY), combined with the demand slowdown, could lead to serious
oversupply in 2009. Considering that we regard TVs as the key future growth driver for
the overall LCD sector and developed countries make up a major portion of global TV
demand, the US/EU economic slowdown could pose a material threat for the display
industry. However, we note that the US broadcasting system’s move to digital from
analog in February 2009 could limit the downside. Also, strong CRT replacement
demand from emerging markets could, in our opinion, offset the overall global demand
slowdown to some extent. However, in a prolonged stagflation, we believe overall
demand slowdown is likely to negatively impact most panel makers’ profitability,
especially at the advent of an industry-wide oversupply in 2009.
Technology – Semis
We believe that a combination of high inflation and economic recession would result in
slower demand for memory, particularly for NAND flash, as flash demand contribution
from the US and Europe is much greater than that for DRAM. Also, NAND flash-
equipped applications are designed for entertainment, which is more susceptible to an
economic slowdown. At the same time, we believe that slower NAND flash consumption
would also be negative for the DRAM market. This is because we should see increased
DRAM supply if the NAND flash market becomes weak, as production should shift from
NAND flash to DRAM. However, we think a recession would affect memory makers
differently. While a severe recession may impede the sector recovery as a whole, it
would accelerate industry restructuring, strengthening the position of first-tier makers, in
our view. Unlike other industries, the semi memory industry is characterized by a huge
gap in cost competitiveness and funding ability between first- and second-tier makers.
Telecommunications
Overall, we believe that telecom services will be affected less than other sectors during a
period of slower growth and higher inflation. Telecom services are relatively low-cost
and an important part of life for a majority of the people in the region. In addition, in a
period of slow growth, businesses and consumers looking to reduce costs may use more
telecom services (more phone calls/video conferences) while reducing travel, in our
view. However, we believe Korean telcos could be under pressure due to a tariff cut
driven by regulatory dynamics, where inflation pressure translates into wireless tariff cut
pressure given that telecom spending roughly represents 6% of CPI baskets in Korea.
Transportation
We believe that, in a scenario of lower growth and higher inflation, players in the
shipping sector could be likely losers. With container demand driven by global economic
growth, consumption, and disposable income, we are already forecasting a slowdown in
global container demand, and our view on the container sector is cautious. Our view is
driven not only by slowing global demand but also by cost inflation pressures (such as
bunker fuel cost, terminal handling charges, and inland transportation costs) as container
carriers struggle to pass through higher costs to customers. The net effect is margin
pressure. We believe lower growth and higher inflation would exacerbate the problems
currently faced by the container lines and could even lead to losses.
May 2008 43

Lehman Brothers | Equity Research
Utilities
Lower growth with higher inflation would imply downside risks to power demand
growth plus limited scope for securing a tariff hike, in our view. If this comes against a
backdrop of rising fuel costs (mainly coal), we believe it would imply shrinking margins
at the operating level.
CONCLUSION
Overall, stagflation is not a desired environment in any country or region. It leads to
lower sales, higher input costs, and ultimately a margin squeeze. Governments try to
implement policies to minimize the impact, but there are limitations to what they can do
when the weakened environment transcends their borders. In Korea, we expect defensive
industries such as telco and tobacco to be the least affected, while other consumer-related
and export-related industries would be harder hit. However, we believe Samsung
Electronics is well positioned globally to actually benefit from the downturn, although
the industry in which it operates is likely to be hurt by stagflation.
May 2008 44

Lehman Brothers | Equity Research
TAIWAN STAGFLATION SCENARIO
Can politics offset rising inflation and slower growth?
Kent W.B. Chan
LBAL, Hong Kong
Tel: +852.2252.1408
HOW WOULD STAGFLATION IMPACT TAIWAN?
kent.chan@lehman.com
• In an environment of slowing global growth and high INFLATION, Taiwan’s
Josephine Ho
export-oriented economy stands to underperform relative to its Asian peers owing
LBAL, Hong Kong
to its high dependence on technology, excessive competition, and its
Tel: 8862 8723 1663
josephine.ho@lehman.com dependence on imported oil. The domestic economy and asset reflation stocks
would continue to rise, potentially like they did after the inflation shock in the
John Hsu
1970s.
LBSTL, Taiwan
Tel: 8862 8723 1627
•
john.hsu@lehman.com Margin risks are high from (1) potentially lower utilization at capital intensive
industries (semiconductors, TFTs, materials) and (2) rising input costs, both of
Sarah Hung, CFA
which Taiwan may not able to pass on due to the competitive nature of its key
LBSTL, Taiwan
industries, which may create downside risks for earnings in LEH’s worst-case
Tel: 8862 8723 1618
scenario.
sarah.hung@lehman.com
• Domestic oriented companies would continue to outperform and rising inflation
Yolanda Wang
could further support the property sector and asset reflation stocks, while telecoms
LBSTL, Taiwan
and insurance/select banks could outperform, particularly exporters as the market
Tel: 8862 8723-1623
look for domestic spending and increases in fixed asset investment.
yolanda.wang@lehman.com
• Winners and Losers: Despite risks to earnings, the financial risks should be
Alex Yang
limited due to healthy (over capitalized) balance sheets; outperformers would
LBSTL, Taiwan
include global leaders, brand winners, property plays and select financials, and
Tel: 8862-8723-1619
alex.yang@lehman.com defensives; losers are abundant in the export sector, but led by low-margin tech
assemblers and consumer goods exporters.
Danny Chu
LBAL, Hong Kong
Tel: +852.2252.6209
danny.chu@lehman.com
Andrew Lee
LBAL, Hong Kong
Tel: 852 2252 6197
andrewkw.lee@lehman.com
Yong Liang Por
LBAL, Hong Kong
Tel: 852 2252 6220
yongliang.por@lehman.com
Felix Pan
LBSTL, Taiwan
Tel: +8862.8723.1614
felix.pan@lehman.com
Zona Chen
LBSTL, Taiwan
Tel: + +8862.8723.1628
zona.chen@lehman.com
Maggie Huang
LBSTL, Taiwan
Tel: + +8862.8723.1631
maggie.huang@lehman.com
May 2008 45

Lehman Brothers | Equity Research
WINNERS AND LOSERS IN A STAGFLATION SCENARIO
Figure 16: WINNERS AND LOSERS (Taiwan)
Winner-Company Ticker Rating Target Price Comments
•
TSMC 2330.TW 1-OW NTD 76.0 We believe industry leaders like TSMC will be the winners in a
slowing economy with inflation, as industry leaders are usually R&D
innovators for advanced technology.
•
Taiwan Cement 1101.TW 1-OW NTD 61.0 Taiwan Cement will be the winner of Chinese cement industry
consolidation and capacity increase in 2008.
•
Cathay FHC 2882.TW 1-OW NTD 97.7 Companies with higher real estate exposure, such as Cathay may
see smaller impact as appreciation of real estate is likely to offset
part of their loss in the business.
•
China Trust 2891.TW 1-OW NTD 30.1 Banks with higher consumer banking exposure, such as Chinatrust
will likely to perform better.
•
Chunghwa Telecom 2412.TW 2-EW NTD 84.0 The potentially lower MOU from mobile subscribers may be
partially offset by its steady fixed-line and broadband business.
•
Acer 2353.TW 1-OW NTD 80.2 Acer will be better off under stagflation than Dell and Asus based
on its higher exposure to low-end segment. However, the revenue
growth will be slower too based on slower high-end demand.
•
Ju Teng 3336.HK 1-OW HKD 5.15 The only winner is consumer NB component vendor like plastic
casing vendor, Ju Teng based on that they can transfer more of
rising cost to clients and stronger demand from industry growth.
May 2008 46

Lehman Brothers | Equity Research
Loser- Company Ticker Rating Target Price Comments
•
ProMOS 5387.TWO 2-EW NTD 7.3 We view second tier makers like ProMOS as the eventual losers in
the memory industry.
•
Sunplus 2401.TW 3-UW NTD 50.0 Sunplus with higher global consumer demand and less room for
cost reduction is clearly a loser
•
Asustek Computer 2357.TW 1-OW NTD 135.0 For desk top ODMs and MB vendors like Asustek will be the losers
under stagflation, as they have greater exposures to desktop and
motherboards which will be replaced by low-end NBs.
•
High Tech Corp 2498.TW 1-OW NTD 841.0 HTC will suffer as it has larger exposure to high-end handset
products.
•
Foxconn Tech 2354.TW 3-UW NTD 140.0 As a metal casing supplier, Foxconn Tech’s products are exposed
to high-end NBs.
•
Catcher 2474.TW 3-UW NTD 100.5 As a metal casing supplier, Catcher’s products are exposed to
high-end NBs.
•
Formosa Chemical 1326.TW 3-UW NTD 62.0 FCFC faces more headwinds as aromatic margins are likely to
and Fibre continue being the most adversely affected by a combination of
record crude prices, weakening end-demand and increasing
supply.
•
Evergreen Marine 2603.TW 3-UW NTD 18.9 Evergreen is the most leveraged to changes in freight rates and
costs due to low profitability and low margins.
Source: Lehman Brothers research
May 2008 47

Lehman Brothers | Equity Research
WE HAVE ALREADY CUT OUR 2008E EPS, BUT WHAT ABOUT 2009?
Lehman Brothers Asia is exploring the risks to the Asia Pacific market in a scenario of
falling global growth, resulting in slower Asian growth, but when asked, most analysts
say they have already cut their 2008 numbers, and 2009 global growth will be
better….right? What if 2009 is not better, but worse? Add on to that the risk of deflation,
with slower unit demand, and the cocktail becomes disturbing quite quickly, especially
for a capital intensive exporter like Taiwan. We are concerned that despite Lehman’s
17% cut to 2008 profit estimates in our Taiwan universe of stocks, we still increased
2009 estimates by 6% so far this year; hence, if stagflation were to hit in 2009, there
could still be MORE downside risk to our estimates.
Figure 17: Earnings Revisions vs. Taiex, 1998-2008
TaiEX (RHS) Up/Downgrade Momentum (LHS)
0.60
12700
0.40
10700
0.20
0.00 8700
-0.20
6700
-0.40
4700
-0.60
-0.80 2700
6/30/1988
2/28/1989
10/31/1989
6/29/1990
2/28/1991
10/31/1991
6/30/1992
2/26/1993
10/29/1993
6/30/1994
2/28/1995
10/31/1995
6/28/1996
2/28/1997
10/31/1997
6/30/1998
2/26/1999
10/29/1999
6/30/2000
2/28/2001
10/31/2001
6/28/2002
2/28/2003
10/31/2003
6/30/2004
2/28/2005
10/31/2005
6/30/2006
2/28/2007
10/31/2007
Source: I/B/E/S and Lehman Brothers
Despite the seemingly steep cut to I/B/E/S estimates for Taiwan (please see chart above)
we explore the risks in a worst-case scenario where stagflation hits Taiwan and the
region. Although domestic Taiwan would likely continue it outperformance vs exporters
and tech, risks of a short-term market sell-off would be high as seen in the initial
inflation shock in 1974. Below we explore the risks.
LOWER GDP GROWTH WITH HIGHER INFLATION
Lehman Brothers Asia is exploring the risks to the Asia Pacific market in a scenario of
falling global growth, resulting in slower Asian growth, but in the face of rising input
prices. Lehman Brothers economists project 2008 GDP growth of 3.9% in 2008 and
rebounding to 5.7% in 2009 on 3% inflation, in expectations that fiscal policy and
domestic spending may result in better growth after a weak year in 2008, and where tech
earnings remain resilient, despite the deterioration of the export markets, most notably
the U.S. However, we wonder WHAT IF growth fails to reaccelerate and
deteriorates in 2009, primarily based on slower global growth but also due to rising
inflation?
May 2008 48

Lehman Brothers | Equity Research
Our equity strategy team chose to explore a more negative scenario to global growth,
applying higher inflation assumptions: negatively impacted real GDP growth in 2008, if
growth were to fall to 2.9%, and more importantly falling again to 2.6% in 2009 with
inflation closer to 4%. We analyze the risks by sector. However, in such an environment,
we see Taiwan underperforming, especially its low-margin technology assembly and
manufacturing stocks, which would could see a fall in product demand. However, the
more capital intensive portions of its manufacturing sectors, semiconductors, steel, and
petrochemicals, would likely face lower utilization and higher input costs. As such, the
export oriented portion of Taiwan would likely face margin and profit pressure
exacerbated by the slowing demand, in our view.
EFFECT ON REVENUES: LOWER UNIT SALES?
As global growth, and especially U.S. growth, decelerates, unit shipment growth is likely
to face challenges and will likely impact Taiwan’s export driven tech sector, particularly
discretionary consumer electronics such as mobile phones and LCD TVs, though we
have not seen signs of this yet. Our house view calls for global PC unit growth of 12% in
2008 and 10% in 2009, 12% and 8% for handsets, and 38% and 25% for LCD TV
growth. The risk is that not only will unit shipment growth decelerate but average selling
prices (ASPs) may also fall as consumers spend more frugally. Although we have not yet
seen lower unit shipment guidance, the risks of deceleration remain a key risk and
concern to Taiwan market EPS where tech accounts for nearly half of the market’s EPS.
Our concerns are that this deceleration is felt in 2H08 and into 2009, and meanwhile, as
unit shipments and ASPs slow, we may see rising input costs, resulting in a margin
squeeze.
Figure 18: Historical inventory level of US tech companies
220 Days
200
180
160
140
120
100
Q2 03
Q3 03
Q4 03
Q1 04
Q2 04
Q3 04
Q4 04
Q1 05
Q2 05
Q3 05
Q4 05
Q1 06
Q2 06
Q3 06
Q4 06
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
EMS Semis PC
Source: Company data, Lehman Brothers
An additional risk to unit shipments are rising technology inventories, most notably in
the U.S. PC space, which is persistently higher in 2007 into 1Q08. We also note that PC
inventories drive demand for semiconductors and peripherals, and historically lead EMS
and semi sector inventories. Although inventory levels are still below 2001 post-bubble
levels, the increase is disconcerting at a time when demand is expected to slow. And a
suddenly disappointing global growth outlook in 2009 combined with rising inventory is
a cocktail for lower utilization and thus, lower profit margins.
May 2008 49

Lehman Brothers | Equity Research
EFFECT ON EBIT: MARGIN SHRINKAGE?
Margins go down in our scenario, and the question is whose margins will fall the most.
The combination of slowing unit demand, falling capacity utilization, and rising input
costs hit everyone in the manufacturing sector. Although the capital intensive (high
operating leverage) companies, semis and materials, may see less impact potentially
from rising marginal input prices, the risks of lower utilization is equally damning.
While global leaders like a TSMC might gain market share in a falling market, players
without dominant technology or low pricing power or excessive competition, stand to
lose the most, in our view. The hardware sector would face adverse challenges in this
environment, with rising input prices on falling unit demand. As such, one would expect
to see the domestic portion of the economy outperforming. While financials, consumer
and asset reflation stocks might see slower growth, relative to exporters, these sub-
sectors would likely outperform, especially on the margin front, in our view.
WHAT HAPPENED IN THE 1970S?
During the period of severe inflation in the 1970s, Taiwan’s underlying stock market
(TaiEx) performed remarkably well, after the initial inflation shock to CPI between 1973
and 1974, which coincided with a period of negative U.S. growth. However, after this
initial shock, from 1974 to 1983, the market rose nearly three-fold, despite the persistent
rise of inflation. Although we do not have company data back to the ‘70s, this may have
been due to the potential increase in exports, as Taiwan began to emerge as a consumer
goods manufacturer in the ‘70s through to the ‘80s (possibly from Japanese outsourcing)
particularly in plastics. Eventually, this rise in CPI and gains in the stock market led to
the asset bubble of the 1980s (coinciding with Japan) which eventually burst along with
Japan again into the 1990s.
Figure 19: 1973-1983 TaiEx vs US CPI, Taiwan CPI and US Real GDP Growth
TaiEX TWN CPI Growth Rate
65% 800
US CPI Growth Rate US Real GDP Growth Rate
700
55%
600
45%
500
35%
400
25%
300
15%
200
5% 100
-5% -
Mar-73
Mar-74
Mar-75
Mar-76
Mar-77
Mar-78
Mar-79
Mar-80
Mar-81
Mar-82
Mar-83
Source: CEIC; Bloomberg; Lehman Brothers
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
To combat inflation, the government may consider a policy of strengthening the New
Taiwan Dollar (NT$), as our economists highlight that the NT$ is one of the most under-
valued currencies in the region and has shown continuous weakness over the last five
years. While Taiwan is largely self-sufficient, it does import wheat and oil, thus, should
it see external demand fall, the risks associated with a strong NT$ may not be as painful
as rising costs for select commodities, particularly oil. Meanwhile, with a projected fiscal
surplus potentially in 2008, and hopes around the KMT campaign promise to support
investment of NT$4 trillion in Taiwanese infrastructure in the next eight years (half
May 2008 50

Lehman Brothers | Equity Research
funded by the private sector). Otherwise, we could expect to see the newly elected
executive branch invest in infrastructure and urban gentrification throughout Taiwan,
especially in key cities, to offset slower growth and revive the local economy via
domestic consumption.
Figure 20: NT$ vs US$ Figure 21: Taiwan Annual Surplus/Deficit (NT$ mn)
36.0 NT$/US$ TW: Governm e nt Surplus or Deficit: ANNUAL
NTD m n
35.0 100000
0
34.0
-100000
33.0
-200000
32.0
-300000
31.0
-400000
30.0 -500000
-600000
29.0
May-03
May-04
Nov-07
Mar-08
Jan-03
Sep-03
Jan-04
Sep-04
Jan-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jul-07
-700000
1967 1972 1977 1982 1987 1992 1997 2002 2007
Source: Bloomberg, Lehman Brothers Source: CEIC
Meanwhile, with rising inflation, and potentially lower interest rates from the U.S, we
would expect to see the property market and asset reflation stocks improve. With cash-
rich Taiwanese depositors facing our scenario of 4% inflation, and 10-year bond yields at
2.5% and six month deposit rates at 2%, real interest rates would hover around -1.5-2%
and potentially push further investment into physical assets or gold. This combined with
the likelihood of governmental stimulus spending, we could see outperformance by the
materials, property and asset reflation stocks continue, as we have seen so far in 2008.
CONCLUSION
In the face of surprisingly weaker-than-expected global growth and higher-than-expected
inflation, Taiwan’s economy and thus, stock market, would initially underperform vs
regional markets, in our opinion. However, financial/solvency risks are low, saving and
forex reserves are high, and with a new presidential administration focused on domestic
reinvestment and closer economic ties with China, Taiwan could surprise to the upside
even if exports slow more than expected.
Although the make up of the Taiwanese economy is more externally oriented today, we
do not expect to see the same growth in the stock market as we saw from the late 1970s
into the early 1980s. However, with upside in the currency, domestic fixed asset
investment and leveraging trade and investment with China, there is a large portion of
the domestic economy that remains untapped and could grow as the external economy
shrink, in our view. We think Taiwan, and the TaiEx, though initially a potential
underperformer relative to other Asian economies with less exposure to exports,
could potentially see the domestic side of the economy surge faster and further than
anyone can analyze at this time, and which has realistically consolidated and been
dormant since the early 1990s.
May 2008 51

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May 2008 52

Lehman Brothers | Equity Research
SECTOR ANALYSIS
May 2008 53

Lehman Brothers | Equity Research
AUTO AND AUTO PARTS
Effects of rising inflation and falling growth
Zayong Koo
Korea Autos & Regional
Coordinator INTRODUCTION: LOW GROWTH AND HIGH INFLATION
LBIE, Seoul
In an environment of low growth and high inflation, we believe the auto sector will be a
Tel: 822 2116 7550
loser. Since auto demand is generally driven by global economic growth and high
zayong.koo@lehman.com
disposable income, a slowdown in the global economy is likely to have an adverse effect
on high ticket items such as automobiles, in our view. Cost inflation that is driven by
Prabhat Awasthi
higher inputs (for example gasoline) as well as limited financing could also put
India Autos
additional pressure on demand.
LBSPL, India
We expect certain markets to have less of an impact than others, depending on the
Tel: 9122 4037 4180
vehicle penetration levels and the markets served. For example, main markets for
prabhat.awasathi@lehman.com
automakers in China and India are normally their own local markets, which, even, in our
worst case scenario, are estimating between 5%-6% growth in both 2008 and 2009.
Yankun Hou
Korea, on the other hand, would be the most affected because its vehicle penetration rate
China Autos
is the highest among the three major auto-producing countries (250 vehicles per 1,000 in
LBAL, Hong Kong
Korea versus 33 vehicles per 1,000 in China versus 8.5 vehicles per 1,000 in India), and
Tel: 852 2252 6234
our worst case scenario GDP growth rate is the lowest, at only 2%. In addition, more
yankun.hou@lehman.com
than 50% of Korea’s exports are slated for developed markets such as the US and
Europe, where the effects of low growth and high inflation could be severe had the
exports been more to developing markets.
We believe demand for autos in China will experience 15% growth in 2008 and 12% in
2009, higher than our base case scenario GDP growth of 9.5% and 8%, respectively.
However, under our worse case scenario GDP growth of 6.5% in 2008 and 6.9% in
2009, we estimate auto demand growth will fall to 10% in 2008 and 10% in 2009.
Moreover, we believe the China auto industry will face overcapacity problems in the
next couple of years. DF PSA (not listed) and Beijing Hyundai (not listed) announced
aggressive capacity expansions in China last year. Moreover, leading national
automakers such as Shanghai Auto (600104 CH, 3-Underweight), Dongfeng Motor (489
HK, 1-Overweight) and Brilliance (1114 HK, 3-Underweight) have announced
ambitious new product developments and capacity expansions to compete with global
original equipment manufacturers (OEM) in their home markets. We believe the problem
will start emerging in 2009 if most of the current announced plans are completed. This
means firms may face strong price competition, margin pressures and even survival
challenges in 2010. If firms were to remain under margin pressures and competition
heightens, we think those companies that survive would emerge as leading automakers in
China, with an even stronger profile.
EFFECT ON EBIT: MARGIN SHRINKAGE?
In an environment of low growth and high inflation, automakers would suffer margin
pressures because they are likely to provide more incentives to increase sales. We
believe higher incentives are more likely to be implemented in the developed markets,
such as the US and Europe. In addition, weaker sales may lead to higher fixed costs due
to lower capacity utilization rates. This coupled with higher raw material costs (for
example steel) is likely to put a squeeze on margins for automakers.
May 2008 54

Lehman Brothers | Equity Research
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
With EBIT margins under pressure, we also expect slow growth/high inflation
environment to have an adverse effect on cash flow. Since the Asian automakers are still
in the phase of capacity expansion, falling cash flow as well as capital shortage resulting
from weakened demand could hamper their ability to continue their growth stage,
including developing new products.
As a result of falling cash flow and capital shortage, capex spending could be delayed,
which could affect the Asian automakers’ ability to capture market share when market
improvement occurs because it takes around two years to build a new factory and
between 2-3 years to develop new products. This could put the automakers under cash
flow pressures behind the curve of those with a stronger financial position.
WHAT HAPPENED IN THE 1970S?
Most Asian auto stocks were not listed in the 1970s except for a few Korean auto
companies. Hence, it is very difficult to draw any parallels during this period.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
In an environment where growth is slow and inflation persists, governments from all
around the world are likely to offer assistance by way of lowering consumption and fuel
taxes, and other road subsidies, besides lowering rates on auto financing. We had seen
similar actions by the Korean government to spur auto demand in 2001 and 2004 when it
announced a temporary cut in the special excise tax for autos by 1%-2% percentage
points in both 2001 and 2004, depending on the engine displacement size.
The Chinese government has been subsidizing gasoline price for decades, which has
substantially distorted the pricing system. The reform gasoline price system is one of the
most important tasks for the current cabinet. The earliest window for gasoline price
reform would be late 2008 after the consumer price index (CPI) starts trending down.
We believe increasing gasoline prices and/or imposing a tax on gasoline directly can
adversely affect vehicle demand, which is one of the main reasons why we have a
cautious view on the sector. At the same time, the Chinese government could possibly
launch a few new regulations to support automakers to develop an economy car with
greater fuel efficiency and one which is more environmentally friendly, to reduce the
gasoline burden on consumers.
The Indian government too may offer some incentives to the industry, by cutting excise
duties on cars and commercial vehicles. But, we believe the benefits from such an act
will be marginal for passenger vehicle consumption, given low income growth. This may
also not result in any benefits for commercial vehicles because buying is more dependent
on expected freight volume growth, which may slow with slowing GDP.
CONCLUSION
We believe the auto sector will likely be a loser due to auto demand being tied to the
economic conditions and the level of disposal income that the consumers enjoy. In a
slow growth environment and during times of high inflation, non-essential high cost
items such as cars could face some pressures.
May 2008 55

Lehman Brothers | Equity Research
WINNERS AND LOSERS IN A STAGFLATION SCENARIO
Within the Asian auto sector, we believe the winners will likely be China and India auto
stocks because they are dependent on the domestic markets where growth is still robust
despite a slowdown. In China, we believe the winners will be Denway (203 HK, 1-
Overweight) and Weichai (2338 HK, 1-Overweight) because we expect them to
benefit from the booming industry structural demand, namely a change in product mix.
The losers in a stagflation scenario will likely be Brilliance (1114 HK, 3-Underweight)
and Dongfeng (489 HK, 1-Overweight) as they are actively expanding their capacity. In
India, we prefer Maruti Suzuki (MSIL IN, 1-Overweight). In our view, the biggest
losers in a stagflation scenario will be the Korean auto makers such as Hyundai Motor
(005380 KS, 1-Overweight), Kia Motors (000270 KS, 1-Overweight) and Ssangyong
Motor (003620 KS, 1-Overweight) because their local market is small, and they are
highly dependent on the overseas markets.
May 2008 56

Lehman Brothers | Equity Research
BANKS
China Banks
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Lucy Feng
LBAL, Hong Kong
Tel: +852-2252-6174 Expect weakening earnings outlook
lucy.feng@lehman.com Chinese banks witnessed another round of strong earnings growth in 1Q08, with banks,
under our coverage, recording net profit growth of 77%–187% YoY. However, we
would have a far more conservative earnings outlook for banks in a scenario of rising
inflation and slower growth. We are wary that a domestic economic slowdown may have
already surfaced, as the overall earnings growth of all A-share listed companies stood at
31.3% in 1Q08 versus 80.2% in 1Q07.
Downward margin trend
We believe the sector margin peaked (average: 3.22%, 70bp higher than regional banks)
in 1Q08 on account of (1) the ongoing asset re-pricing following the six rate hikes in
2007 and (2) enhanced loan pricing capability. However, we think the sector NIM will
likely head downhill in the medium to long term.
Credit quality outlook – what happened in the 1997 Asia financial crisis?
Credit risk continues to be the single largest threat to the safety and stability of Chinese
banks, in our view. In general, we find that the exposure of Chinese banks to credit
losses is becoming increasingly manageable, given rising loan-loss provisioning and
much-improved capitalization.
However, there is a risk that asset quality trends may reverse if the US enters into a
recession and the slowdown in China’s economy continues. In a worst-case scenario, our
Asian ex-Japan strategy team forecasts the following: (1) Asia ex-Japan’s aggregate
GDP growth to fall to 5.4% (2) China’s GDP may drop to 6.7% while the CPI may rise
to 6.1% in 2008. In such a scenario, we estimate credit growth of the sector would likely
slow to 12.8% YoY from the current 16.2% YoY in March 2008.
In addition, we are concerned that a credit cycle may kick-in and Chinese banks may
face severe new NPL formations, particularly in risky sectors, such as property,
manufacturing, and exporters.
Nevertheless, it is still difficult to forecast the magnitude and scale of new NPL
formation, without the support of a thorough macro data point analysis. A relevant data
point that investors can refer to is the NPL ratio of Chinese banks, post the Asian
financial crisis. At that time, the new NPL formation ratio of joint-stock banks peaked to
5.5%–7.5%.
CONCLUSIONS
In general, the fundamentals of China banks have improved significantly over the past
three years of reforms, restructuring and IPOs. However, as the newly listed Chinese
banks have not passed through any full credit cycle, their book quality was never tested
in an economic downturn.
Banks are mirrors of the underlying economy. We believe none of the Chinese banks
would survive well in a severe economic downturn. Further, players with weak
fundamentals, poor risk management and less prudent lending procedures will suffer
more, we believe.
May 2008 57

Lehman Brothers | Equity Research
WINNERS AND LOSERS
We have identified Huaxia Bank (600015SS, 3-Underweight), Minsheng Bank
(600016SS, 2-Equal weight) and Shenzhen Development Bank (000001SS, 1-
Overweight) as potential losers in a scenario of rising inflation and slower growth.
Figure 22: Valuation comparison of H-share and A-share Chinese banks
Ticker Rating Target Price Price Mkt. Cap EPS BVPS DPS P/E (x) P/B (X) ROAE (%) ROAA(%) Div. Y
(US$mn) 07A 08E 09E 07A 08E 09E 07A 08E 09E 07A 08E 09E 07A 08E 09E 07A 08E 09E 07A 08E 09E 07A 08E 09E
ICBC-H HK.1398 1-OW 8.08 6.10 290,613 0.25 0.35 0.46 1.63 1.96 2.26 0.02 0.16 0.21 22.2 15.6 11.88 3.36 2.79 2.41 16.2% 19.5% 21.8% 1.02% 1.27% 1.51% 0.29% 2.88% 3.79%
BOC-H HK.3988 2-EW 3.84 3.95 165,800 0.22 0.29 0.37 1.66 1.84 2.08 0.04 0.10 0.13 16.0 12.1 9.5 2.14 1.92 1.70 14.0% 16.8% 19.0% 1.10% 1.29% 1.48% 1.13% 2.82% 3.68%
CCB-H HK.939 1-OW 8.86 6.97 210,916 0.30 0.45 0.58 1.81 2.21 2.63 0.23 0.18 0.23 21.1 14.0 10.7 3.46 2.83 2.37 18.4% 22.2% 24.0% 1.15% 1.48% 1.71% 3.64% 2.85% 3.72%
BCOM-H HK.3328 1-OW 12.52 10.84 68,785 0.43 0.61 0.78 2.72 3.00 3.27 0.10 0.24 0.31 22.6 16.0 12.5 3.57 3.24 2.97 18.2% 21.3% 24.9% 1.07% 1.33% 1.51% 0.99% 2.50% 3.20%
CMB-H HK.3968 1-OW 35.53 31.80 67,114 1.04 1.61 2.30 4.62 6.06 7.98 0.12 0.48 0.69 27.5 17.7 12.4 6.17 4.70 3.57 24.8% 30.1% 32.8% 1.36% 1.66% 2.04% 0.42% 1.69% 2.42%
CITIC Bank-H HK.998 2-EW 5.63 4.93 33,844 0.21 0.33 0.42 2.15 2.38 2.66 0.02 0.10 0.15 20.7 13.6 10.5 2.05 1.85 1.66 14.4% 14.4% 16.7% 0.97% 1.17% 1.30% 0.42% 2.21% 3.33%
H share sector mean 139,512 0.33 0.48 0.65 2.03 2.43 2.88 0.09 0.18 0.24 21.1 14.6 11.2 3.33 2.78 2.37 17.1% 20.4% 22.7% 1.09% 1.36% 1.59% 1.37% 2.71% 3.57%
ICBC-A(3) SS.601398 Not rated na 6.28 290,532 0.25 0.35 0.46 1.63 1.96 2.26 0.02 0.16 0.21 25.5 18.0 13.6 3.86 3.20 2.77 16.2% 19.5% 21.8% 1.02% 1.27% 1.51% 0.25% 2.51% 3.30%
BOC-A(3) SS.601988 Not rated na 5.00 165,753 0.22 0.29 0.37 1.66 1.84 2.08 0.04 0.10 0.13 22.6 17.0 13.4 3.02 2.72 2.40 14.0% 16.8% 19.0% 1.10% 1.29% 1.48% 0.80% 2.00% 2.61%
CCB-A(3) SS.601939 Not rated na 7.77 210,856 0.30 0.45 0.58 1.81 2.21 2.63 0.23 0.18 0.23 26.3 17.4 13.4 4.30 3.52 2.95 18.4% 22.2% 24.0% 1.15% 1.48% 1.71% 2.92% 2.29% 3.00%
BCOM-A(3) SS.601328 Not rated na 9.89 68,766 0.43 0.61 0.78 2.72 3.00 3.27 0.10 0.24 0.31 23.0 16.3 12.7 3.63 3.30 3.02 18.2% 21.3% 24.9% 1.07% 1.33% 1.51% 0.98% 2.46% 3.15%
CMB-A(3) SS.600036 Not rated na 32.63 67,096 1.04 1.61 2.30 4.62 6.06 7.98 0.12 0.48 0.69 31.5 20.3 14.2 7.06 5.38 4.09 24.8% 30.1% 32.8% 1.36% 1.66% 2.04% 0.37% 1.48% 2.12%
CITIC Bank-A(3) SS.601998 Not rated na 6.82 33,835 0.21 0.33 0.42 2.15 2.38 2.66 0.02 0.10 0.15 32.0 20.9 16.2 3.17 2.86 2.57 14.4% 14.4% 16.7% 0.97% 1.17% 1.30% 0.27% 1.43% 2.16%
SPDB(4) SS.600000 1-OW 35.48 29.32 23,756 1.26 1.74 2.20 6.50 10.01 11.28 0.15 0.16 0.40 23.2 16.8 13.3 4.51 2.93 2.60 20.7% 24.2% 20.7% 0.69% 1.10% 1.16% 0.51% 0.55% 1.35%
Industrial Bank(2) SS.601166 Not rated na 37.05 26,512 1.75 2.38 2.98 7.78 9.60 12.18 0.32 0.46 0.59 21.2 15.6 12.5 4.76 3.86 3.04 31.2% 23.7% 24.2% 1.17% 1.20% 1.13% 0.86% 1.23% 1.59%
Minsheng SS.600016 2-EW 9.85 8.22 22,143 0.44 0.40 0.51 3.47 3.80 4.02 - 0.05 0.10 18.8 20.4 16.0 2.37 2.16 2.04 18.2% 13.4% 13.2% 0.77% 0.90% 0.97% 0.00% 0.61% 1.25%
Huaxia SS.600015 3-UW 9.00 13.24 7,958 0.50 0.66 0.84 3.16 3.59 4.14 0.11 0.23 0.29 26.5 20.0 15.7 4.19 3.69 3.20 16.7% 19.6% 21.8% 0.40% 0.43% 0.49% 0.83% 1.75% 2.22%
SZDB SS.000001 1-OW 31.84 26.89 8,826 1.25 1.78 2.44 5.67 8.93 11.32 - 0.18 0.24 21.5 15.1 11.0 4.74 3.01 2.38 27.0% 24.9% 24.1% 0.86% 1.11% 1.28% 0.00% 0.66% 0.91%
Bank of Nanjing(2) SS.601009 Not rated na 15.44 4,059 0.62 0.67 0.84 5.41 5.86 6.53 0.30 0.21 0.26 24.9 23.1 18.4 2.85 2.64 2.37 14.5% 11.3% na 1.40% 1.32% na 1.94% 1.36% 1.68%
Bank of Ningbo(2) SS.002142 Not rated na 14.18 5,073 0.38 0.52 0.68 3.21 3.68 4.26 0.08 0.17 0.21 37.3 27.4 21.0 4.42 3.85 3.33 17.0% 15.8% 17.7% 1.44% 1.81% 1.61% 0.59% 1.18% 1.46%
Bank of Beijing(2) SS.601169 Not rated na 15.92 14,189 0.63 0.74 0.96 4.28 4.80 5.88 0.12 0.13 0.28 25.3 21.5 16.6 3.72 3.31 2.71 18.3% 16.3% 19.1% 1.07% 1.32% 1.33% 0.75% 0.82% 1.76%
A share sector mean 67,811 0.41 0.58 0.77 2.43 2.98 3.53 0.10 0.19 0.25 25.3 17.9 13.7 4.01 3.33 2.84 17.7% 20.4% 22.4% 1.07% 1.33% 1.53% 1.04% 2.07% 2.76%
Note: (1)Closing price of May 7, 2008
(2) For banks Lehman does not cover, we use Bloomerg Estimates as consensus
(3) For SPDB (SS.600000) we have factored in the new share issuance of 800mn and bonus shares issuance of 1.3bn in 2008.
(4) For SZDB (SS.000001) we have factored in the A share full listing plan which every 10 tradable shares can receive 1 bonus share and 1.5 warrants at a strike price of RMB 19.00.
(5) For Minsheng (SS. 600016) we have factored in a 3.6bn new shares issuance in 2008, which accounted for 20% of the bank's enlarged share capital base.
Source Company data, Lehman Brothers estimates
May 2008 58

Lehman Brothers | Equity Research
India Banks
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Srikanth Vadlamani
LBSPL, India
Banking is a macro sector, closely linked to the state of the overall economy and would
Tel: +91 22 40374191
be affected by deterioration in the macro environment, especially in the case of the
srikanth.vadlamani@lehman.com
Indian banking sector, on account of rapid asset growth over the past few years.
We believe the key risk to Indian banking from an economic downturn will be through
its impact on asset quality. The past few years have seen Indian banks rapidly building
up loan books. We estimate that, on a net basis, around 50% of the current loan book
may have been added over the past three years; on a gross basis, which is the more
relevant number, in our view, this proportion is likely to be even larger. In addition,
growth over the past two years has been driven by SMEs and mid-corporates. This is the
segment most leveraged to an economic downturn, and, hence, enhances the risk profile
of Indian banks.
However, we also note that corporate balance sheets are now much better able to
withstand a downturn compared with the conditions in 1998-2000 (which was the last
time we had major corporate asset quality issues). Key metrics, in terms of debt-equity
ratios and interest coverage ratios, are still close to historical lows.
On balance, in the base-case scenario for economic growth, we expect asset quality to
deteriorate, but only to the historical mean asset quality levels for the sector. We believe
that this level of asset quality deterioration is manageable, and is factored into the price
of public sector banks (which are likely to be impacted the most, in our view).
In the worst-case scenario for economic growth, however, we believe the impact on asset
quality will be non-linear, and we would expect to see a rapid deterioration in asset
quality.
Continued high inflation would be a negative for banks, in our view. It would imply high
interest rates, which is a negative from demand and asset-quality perspectives. More
importantly, the RBI has been trying to combat inflation through liquidity management,
for which the cash reserve ratio (CRR) has been an important tool. High CRR levels are
a direct tax on banks’ margins and are a negative factor.
EFFECT ON PROFITABILITY
We expect profitability to be under pressure in a high inflation scenario, as banks may
have to absorb the costs of maintaining tight liquidity. In addition, corporate fee income
growth has been a key driver of non-interest income, which is likely to be affected in the
event of a slowdown.
EFFECT ON FUNDING/CAPITAL
A major part of Indian banks’ funding is through stable retail deposits. We do not expect
any funding problems for Indian banks. In addition, most banks are well capitalized, and
are unlikely to require capital from the markets for the next one to two years.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
As discussed, one of the RBI’s tools to target inflation has been CRR, which is a
negative for banks. Government policies, such as the recently announced farm waiver,
are also a negative for banks, in our view. We would characterize the regulator’s role as
neutral to negative for the banking sector, in the event of stagflation.
May 2008 59

Lehman Brothers | Equity Research
CONCLUSION
We believe that banks will be negatively affected in a stagflationary environment. In our
view, the negative impact in a worst-case scenario would be disproportionately high
compared with the base-case scenario, on account of asset-quality issues.
WINNERS AND LOSERS
The key losers in a stagflationary environment would be public sector banks including
SBI, in our view. The major winner in a stagflationary environment would be ICICI
Bank, as the transformation of its liabilities profile would take place independent of the
unfolding economic environment. We also believe that HDFC would be a beneficiary as
its growth would be the least impacted by the systemic slowdown, its asset quality
continues to be driven by strong risk management, and unlike banks, it would not be
affected by potential CRR hikes.
Figure 23: Base-case and worst-case scenarios
Company Ticker Price (INR) Rating FY09E EPS (INR) FY10E EPS (INR)
Base case Worst case % chg Base case Worst case % chg
ICICI Bank ICBK.NS 919 1-OW 41.7 37.2 -11 53.3 47 -12
HDFC Bank HDBK.NS 1542 1-OW 49.3 47 -5 68.4 65 -5
HDFC HDFC.NS 2732 1-OW 79.1 78.5 -1 94.9 92.2 -3
SBI SBI.NS 1769 3-UW 159 137 -14 178 149 -16
Punjab National Bank PNBK.NS 539 1-OW 69.4 65.1 -6 83.1 76.9 -7
Canara Bank CNBK.NS 244 1-OW 42.6 39.5 -7 49.9 44.5 -11
Bank of Baroda BOB.NS 318 1-OW 42.2 38.5 -9 51 44.6 -13
Union Bank of India UNBK.NS 174 1-OW 27.1 25.7 -5 30.7 28.5 -7
Indian Overseas Bank IOBK.NS 149 1-OW 26.8 25 -7 32 28.8 -10
Edelweiss Capital EDEL.NS 819 1-OW 43.2 39.1 -9 55.9 47.4 -15
Source: Lehman Brothers estimates (Prices as of May 7)
May 2008 60

Lehman Brothers | Equity Research
Taiwan Banks
BANKS AND FINANCIALS
Sarah Hung, CFA
LBSTL, Taiwan Effects of rising inflation and slower growth
Tel: 8862 8723 1618
Introduction: Lower growth and higher inflation
Sarah.hung@lehman.com
A stagflation scenario is negative to financials as their business is highly reliant upon the
economic situation. However, given a specific domestic recovery from new
government’s accession, we think the financial sector will perform better than the
exporting sector in Taiwan due to their domestic business concentration. And with a
steep yield curve and negative real interest rates, there may be more debt
issuance/demand, potentially offsetting the impact of lower consumer spending as
growth decelerates.
Effect on ebit: margin shrinkage?
Financials will likely see limited impact from inflation in accounting for
banks/financials, as their assets and liabilities are in monetary terms. However, given an
inflation premium, the interest spread may widen versus the current situation, and the
search for alternative investments in the face of negative real interest rates may stimulate
more investment and mortgage lending, particularly in the consumer property sector.
Effect on cash flow: effect on capex given falling cash flows and capital
shortage?
We expect limited impact on banks as they hold mostly monetary assets and owe
monetary liabilities. Insurance companies may benefit in some ways as they hold more
property assets, which may see an upward valuation reversion, this could somewhat
offset the negatives from weak business under a weak economy.
What happened in the 1970s?
There are limited records for Taiwan financials from the 1970s, as at the time, most
financial institutions in Taiwan were state-owned and there was full-control of pricing as
well as full financial support from the government.
Winners and losers
Inflation may result in an increase in interest rates. For insurance, if the interest rate goes
up, it is positive to insurance on the asset side, as their investment rates will go up;
however, inflation would decrease sales of insurance policies at the same time, even
though the increase in the interest rate would lower the price of insurance policies—they
will likely buy policies if the yield curve steepens in ordinary situation but not under
expectations of inflation, as the purchasing power of long-term monetary instruments
would be largely decreased. We think insurance companies will be better off amid a
stagflation scenario versus banks, due to their real estate holdings, but they are still
unlikely to be pure winners in the scenario, in our view, given their exposure to banking
operations and the equity markets as well.
For banks, in an increasing interest rate environment, their interest spreads my increase at the
same time. However, under a stagflation environment (low GDP growth and high inflation),
banks will likely suffer from weak demand from the corporate side and consumer side, more
than the technical gains from the spread increase due to inflation, in our view
All financials will be mostly negatively impacted in the scenario, in our view.
Companies with higher real estate exposure, such as Cathay FHC (2882.TW; 1-
Overweight) and Shin Kong FHC (2888.TW; 1-Overweight) may see smaller impact as
appreciation of real estate is likely to offset part of their business losses. Banks with
higher consumer banking exposure, such as Chinatrust FHC (2891.TW; 1-Overweight)
will likely perform better.
May 2008 61

Lehman Brothers | Equity Research
CEMENT
India Cement
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Satish Kumar
LBSPL, India
Cement demand growth is linked to GDP growth. Specifically, demand growth is
Tel: +91 22 40374183
affected by the change in gross fixed capital formation. At present, our cement demand
satish.kumar@lehman.com
growth assumptions are 10% for FY09 and FY10. If GDP growth were to slow down to
our stagflation prediction of 5.1% in 2008 and 4.6% in 2009, demand growth would also
witness a sharp slowdown, in our view.
The cement sector is going through some rough times, since companies cannot pass on
increased raw material prices to consumers. Even if cement demand increases by 10% in
FY09E and FY10E, the sector would witness overcapacity and a steep correction in
cement prices in fiscal 2H09. In a stagflation scenario, falls in prices, and, subsequently,
profitability, could be much steeper than the 10% correction we are currently building in.
EFFECT ON EBIT: SHRINKING MARGINS?
The only raw material that cement companies source from outside is coal. Coal prices
have increased significantly over the past five months and in case of an inflationary
scenario we could expect these prices to be higher still. Cement companies would be
affected depending on the amount of increase that can be passed on to consumers. Even
in a strong demand scenario, companies have been unable to pass on input price
pressures because of regulatory checks on prices. In a weak demand scenario, companies
will be unable to pass on any of this cost pressure and EBIT margins would fall sharply
from current levels of 30%, in our view.
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Cash flows will contract as margins decrease. The cement sector has planned significant
capex over the next two years. Nearly 70 million tons of new capacity is expected to
come online in the next two years. In our view, a shortage of cash flow could affect
capex in FY10 but not in FY09, since most of the capacity scheduled to come online in
FY09 has been ordered.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
We believe the government can ease the pain by not subjecting the sector to further
regulatory controls. The cement sector has witnessed constant regulatory action over the
past one year in the form of the elimination of import duty, an increase in excise duty,
the elimination of counter veiling duty (CVD), and price rationing, in some cases, to rein
in the prices of cement. These regulations have restricted companies’ ability to pass on
hikes in input costs to end-consumers even in the prevalent strong demand scenario.
CONCLUSION
In conclusion, we believe that in the event of stagflation, the environment for cement
companies would turn from bad to worse. We would recommend staying away from the
sector in such a scenario.
In terms of valuation, we believe that fundamentally stocks should not trade below their
replacement cost value. However, if the fall in prices, and, hence, profitability is very
steep, stocks could trade below replacement cost values as well.
May 2008 62

Lehman Brothers | Equity Research
Figure 24: Base-case and worst-case scenarios
Rating Price Ticker Base case (Current) Stagflation
(INR)
Target price Valuation of cement Worst-case Valuation of cement asset
(INR) asset in US$ per ton price (INR) in US$ per ton
ACC 3-UW 738.2 ACC.NS 698 115 560 90
Ambuja Cements 3-UW 111.5 GACM.NS 100 176 50 90
Shree Cement 2-EW 955.2 SHCM.NS 1,070 130 1,110 90
India Cement 3-UW 165.9 ICMN.NS 207 165 95 90
UltraTech
3-UW 742.5 ULTC.NS 735 110 580 90
Cement
Grasim Industries 2-EW 2336.5 GRAS.NS 2,474 115 1,829 90
Source: Lehman Brothers estimates (Prices as of May 7)
WINNERS AND LOSERS
We have worked out the worst-case valuation for stocks, which, in our view, is the
replacement cost valuation for cement stocks. We have worked with a replacement cost
of US$90 per ton. Thus, in terms of potential downside, clearly there is very high
potential downside for Ambuja Cement and India Cement, while ACC and Grasim
Industries have relatively lower potential downside.
Figure 25: Potential downside
Country Potential downside from current price in a stagflation scenario (%)
ACC -24.1
Ambuja Cements -55.1
Shree Cement 16.2
India Cement -42.7
UltraTech Cement -21.9
Grasim Industries -21.7
Source: Lehman Brothers estimates
May 2008 63

Lehman Brothers | Equity Research
CONGLOMERATES
Effects of rising inflation and slower growth
Benjamin Lo
LBAL, Hong Kong
(852) 2252 6208
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
benjamin.lo@lehman.com
In a stagflation environment, companies with the following attributes will emerge likely
winners: (1) pricing power to pass on rising costs, (2) control over input costs, (3) strong
recurring cash flows and (4) healthy balance sheets. As a result, those conglomerates
with industry leadership (hence pricing power), scarce resources (hence input cost
control), wider exposure to infrastructure (recurring cash flows), and cash-rich balance
sheets, should be able to better withstand stagflation than others, in our view.
In terms of sector exposure among the conglomerates, we believe the Hong Kong
housing sector should be the most resilient to stagflation, followed by energy and
transportation infrastructure. Low-end manufacturing, airlines and the office market
should be the least defensive.
IMPACT ON EBIT: MARGIN SHRINKAGE?
Rising raw material and operating costs exert varying degrees of margin pressure on
different industries. Those conglomerates with higher exposure to infrastructure projects
have relatively more resilient earnings, due to the larger proportion of fixed costs, such
as depreciation. For instance, we assume that the variable operating costs of Chinese port
operators (such as China Merchants) will increase by 30% this year, and yet given the
high proportion of fixed costs (60% of total costs), EBIT margins would still expand by
1 percentage point if revenue growth exceeds 16% (based on less than 15% throughput
growth and a 3-5% tariff increase). Separately, rising borrowing costs are also not a
major concern for cash-rich and infrastructure-focused conglomerates, in our view.
Figure 26: Sample P&L for a more mature container Figure 27: A sample P&L for a growing container
terminal in China terminal in China
2007 2008 YoY% 2007 2008 YoY%
Revenue 100.0 125.0 25%
Revenue 100.0 117.0 17%
Cash cost (variable) (33.3) (43.3) 30%
Cash cost (variable) (20.0) (26.0) 30%
Cash cost (fixed) (10.0) (10.0) 0% Cash cost (fixed) (16.7) (16.7) 0%
EBITDA 70.0 81.0 16% EBITDA 50.0 65.0 30%
EBITDA margins 70% 69% EBITDA margins 50% 52%
Depreciation (20.0) (21.0) 5% Depreciation (20.0) (21.0) 5%
EBIT 50.0 60.0 20% EBIT 30.0 44.0 47%
EBIT margins 30% 35%
EBIT margins 50% 51%
Source: Lehman Brothers estimates Source: Lehman Brothers estimates
May 2008 64

Lehman Brothers | Equity Research
IMPACT ON CASH FLOWS: EFFECT ON CAPEX GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Given the generally strong balance sheets and steady cash flows from infrastructure
projects, most conglomerates have either net cash or comfortable gearing levels.
Therefore, the conglomerates in our universe do not plan to slow capex this year. In fact,
investors would be eager to see them improve their inefficient capital structure by
reinvesting surplus cash into core businesses.
Figure 28: End-2007 net debt-to-equity comparison – generally healthy for
conglomerates
(% )
40
30
20
10
0
(1 0 )
(2 0 )
Shanghai
Citic Pacific
Cosco Pacific
Enterprises
Wham poa*
HK & Shanghai
Mandarin
Swire Pacific
Shangri-La Asia
China Merchants
Industrial
Shun Tak
Oriental
Hutchison
Beijing
Hldgs (Int'l)
Hotels
* excluding loans from minority shareholders
Source: Company data, Lehman Brothers
WHAT HAPPENED IN THE 1970S?
Most conglomerates in our coverage universe either did not exist in the 1970s, or had an
absolutely different asset mix, as compared with their current structure. Nevertheless,
since the Asian financial crisis of 1997-98 when companies suffered from over-extended
balance sheets and over-optimistic projections, the conglomerate managements have
become much more cautious while deploying their capital, to the extent that they receive
investor criticism for being too conservative and inefficient in managing their capital
structures. In addition, the conglomerates under our coverage have increased their
exposure to various types of infrastructure projects as a foundation of their recurring
cash flows. As a result, they may emerge as winners in snatching up attractively valued
assets while their competitors face cash flow issues.
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Lehman Brothers | Equity Research
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The biggest risk facing conglomerates, in our view, is government price controls,
especially on products and services that affect households, such as utilities, food and
energy. A conglomerate with the highest exposure to the utility sector is Beijing
Enterprises (60% of its NAV is from Beijing Gas). On the other hand, natural gas, as an
environmentally friendly alternative energy source, is being encouraged by the
government through the accelerated build-out of a gas pipeline network and gas-fired
power plants. This should ensure structurally growing demand for natural gas and,
hence, is a long-term positive for Beijing Enterprises, we believe.
CONCLUSION
Conglomerates, by definition, are diversified and will not be totally immune to
stagflation. Nonetheless, this business diversification gives their earnings a higher degree
of defensiveness than many other single-industry-focused companies. The conglomerates
under our coverage are also cash-rich, and some are industry leaders in their core
businesses. We, therefore, maintain an overall positive stance on conglomerates in a
stagflation scenario.
WINNERS AND LOSERS
Figure 29: Winners and losers (Conglomerates)
Name Ticker Price Rating TP NAV 07-10E EPS 08E P/E 07 Net debt (cash) 08E Yield Comments
(7-May) (HK$) (HK$) Cagr (%) (x) / equity (%) (%)
WINNERS
Well-diversified exposure to relatively resilient sectors of
Hutchison Whampoa 13 HK 78.05 1-OW 93.8 115.7 (7.4) 28.3 26.0 2.4 oil, ports and housing
Strong \"Peninsula\" hotel brand and prime residential
HK&S Hotels 45 HK 13.54 1-OW 14.3 18.0 13.6 20.3 7.0 1.5 investment properties
Natural gas is being encouraged by Chinese
Beijing Enterprises 392 HK 31.25 1-OW 42.7 40.7 26.0 20.9 (8.5) 1.9 government; Beijing Gas enjoys automatic pass-through
LOSERS
Despite being cash-rich, SIHL has little pricing power
Shanghai Industrial 363 HK 32.00 3-UW 25.7 32.1 10.4 16.8 (13.7) 2.8 and control of input costs
Source: Bloomberg, Company data, Lehman Brothers estimates
May 2008 66

Lehman Brothers | Equity Research
CONSUMER
India Consumer
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Manish Jain
LBSPL, India
The fast-moving consumer goods sector has shown close links to overall economic
Tel: +91 22 40374186
growth over the past few years. Growth in the sector has been on a structural upturn over
manish.jain@lehman.com
the past five years, due largely to a strong macroeconomic environment.
However, we believe that the impact of an economic slowdown would be minimal on the
Jamil Ansari
sector, chiefly because these home and personal care (HPC) products typically have a
LBSPL, India
small share of the wallet, and, hence, spending on these products is usually the last to be
Tel: +91 22 40374192
affected. It is usually the high-involvement consumer discretionary items that are
jamil.ansari@lehman.com
expected to be affected immediately by such a slowdown. Lifestyle changes are unlikely
unless the situation reaches extremes, in our view. Hence, the impact of slower economic
growth is likely to be limited to the extent of consumer down-trading to lower value
items in respective categories.
Inflation, unlike popular perception, has been beneficial for these consumer companies.
Increases in raw material prices enable them to increase end-product prices aggressively
because of: (1) decreased intensity of competition and (2) strong industry-wide focus on
improving margins. We expect larger consumer goods companies to benefit in an
inflationary environment as this enables margin expansion.
EFFECT ON EBIT: SHRINKING MARGINS?
In an inflationary environment, the impact on operating margins is positive due to
aggressive pricing action. For instance, in CY07, margins in the soap and detergent
category for Hindustan Unilever increased by 250 bp following a 74% YoY increase in
palm oil prices. We expect this trend to continue and believe that consolidated margins
will improve by 110 bp in CY08E and 100 bp in CY09E. However, lower volume
growth and an inferior product mix would have a negative impact on these companies, in
our view.
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Consumer goods companies are characterized by low asset intensity and high operating
cash flows. Thus, a slowdown in growth owing to an overall economic slowdown should
have an insignificant impact on the cash flows of these companies. The capex required in
these businesses is a small proportion of the revenue generated and is unlikely to be
impacted by a slowdown, in our view. Even in the worst-case scenario, if earnings were
to come under pressure, there would be no major impact on the cash flow position of
these companies, in our view.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Apart from aggressive pricing, another key reason the sector benefits in a high inflation
period is that there are usually a series of measures implemented by the government,
which benefits these consumer companies. For instance, import duty on palm oil was cut
last year from about 45% to 20%. Further excise duty cuts and peak customs duty cuts
also tend to ease the pressure.
May 2008 67

Lehman Brothers | Equity Research
CONCLUSION
In conclusion, we reiterate that being defensive plays, an economic slowdown has a
negligible impact on companies in this sector. Low involvement usually means that if
consumer spending is under pressure, these products are the last to be affected.
Furthermore, inflation is likely to be beneficial for these companies as aggressive pricing
action would more than offset any pressure from raw material cost increases, in our
view.
WINNERS AND LOSERS
Given the stability of revenue growth, we believe that the consumer goods stocks as a
basket will likely outperform in a choppy macroeconomic environment. A slowdown in
the economy would have a minimal impact on the bottom line of these companies.
Hindustan Unilever is our top pick, given the likely earnings surprise, strong brand
portfolio, and impressive distribution network. We reiterate our 1-Overweight ratings on
Asian Paints, Marico and Tata Tea. However, we remain concerned on the lower long-
term growth prospects for ITC’s cigarette business and reiterate our 3-Underweight
rating on the stock.
Figure 30: Base-case and worst-case scenario
Company Ticker CMP (INR) Rating FY09E EPS FY10E EPS
Base case Worst case % change Base case Worst case % change
Hindustan Unilever * HLL.BO 252 1-OW 9.6 9.2 (4.2) 11.5 11.1 (3.5)
Asian Paints ASPN.NS 1274.45 1-OW 52.8 49.9 (5.5) 62.9 60.5 (3.8)
Marico MRCO.NS 66.45 1-OW 3.4 3.3 (2.9) 4.2 4.1 (2.4)
Tata Tea TTTE.BO 914.95 1-OW 71.1 67.3 (5.3) 79.5 72.1 (9.3)
Godrej Consumer GOCP.NS 136.65 1-OW 7.7 7.4 (3.9) 9.1 8.9 (2.3)
Dabur DABU.NS 106.9 3-UW 4.4 4.2 (4.5) 5.0 4.9 (2.1)
*= calendar year ending
Source: Lehman Brothers estimates (Prices as of May 7)
May 2008 68

Lehman Brothers | Equity Research
China/Hong Kong Consumer
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Phoebe Wong
LBAL, Hong Kong
Tel: 22521403 Our view of the impact
phoebe.wong@lehman.com A mild inflationary environment is a welcome factor to drive healthy earnings growth in
the consumer sector, in our view, due to the better leverage from both pricing and a sales
Candy Huang perspective. However, any significant inflationary pressure may result in the reverse,
LBAL, Hong Kong amid heightening margin risk, as operators are squeezed to absorb a part of the cost hike
Tel: 22521407 to share the burden with their suppliers. Among the key consumer segments, we believe
candy.huang@lehman.com China retail softlines and department stores/broadlines are more resilient in the current
high inflationary cycle, whereas F&B should fare less well given that they are more
Christine Peng vulnerable owing to their high exposure to soft commodities and thin margins, though
industry leaders should be better protected due to advantages of scale and pricing power,
LBAL, Hong Kong
we believe.
Tel: 22526191
christine.peng@lehman.com
Earnings and margin Downside risk
In a worst case scenario, we estimate the earnings growth of China department
stores/retailers to decline by 3–5 percentage points to 19%–44% in 2008 from our
current growth forecast of 22%–49%, and by 5–7 percentage points to 10%–29% in 2009
from our current forecast of 15%-36%. For the F&B sector, we expect the dairy,
processed meat and tissue paper segments to face the highest earnings downside risk.
Our sensitivity analysis suggests that every 10% increase in the cost of raw milk, will
reduce the operating margins on milk, pork and pulp by 4%, 4% and 3%, respectively.
As for Hong Kong retailers, given the nature of their heavy cost exposure to rentals, our
earnings growth expectations (at 4%–20% for FY08-09E) could be easily wiped out in
the case of a rental hike, in a worst case scenario. Overall, in our Hong Kong consumer-
related stocks universe, we think Li & Fung is the most defensive play against our
inflation topic, due to its commission-driven business model which is on a cost-plus
basis.
EFFECT ON CAPEX, GIVEN DECLINING CASH FLOWS AND CAPITAL
SHORTAGE?
Capex has far less impact on the consumer sector, compared with other sectors, as most
segments, particularly retail, are cash-rich and are based on asset-light business models.
This apart, operating cash flows may worsen due to higher working capital outflow on
account of rising raw material/merchandise costs.
WINNERS AND LOSERS
In our coverage universe, we believe that Parkson Retail, Li Ning, China Mengniu,
China Yurun, Ctrip and Li & Fung are the more defensive plays in the current high
inflationary cycle, while Intime, People’s Food, and Bright Dairy are likely to lose.
May 2008 69

Lehman Brothers | Equity Research
Figure 31: Valuation comparison of our coverage universe
Company Code Price REC Net profit growth P/E (x) Yield (%) EV/EBITDA (x)
7-May-08 08E 09E 08E 09E 08E 09E 08E 09E
HK consumer
Esprit 330HK 92.00 1-OW 30.3% 20.9% 16.7 13.8 4.79 6.15
Li & Fung 494HK 31.10 1-OW 46.8% 27.5% 28.1 22.0 2.9 3.7
Sa Sa 178HK 2.98 1-OW 33.2% 18.9% 11.5 12.6 6.7 8.0
Lifestyle 1212HK 16.90 2-EW 16.0% 18.4% 27.1 23.0 1.5 1.7
Giordano 709HK 3.40 2-EW 7.2% 4.3% 16.0 15.4 6.6 6.8
China retail
China Resources Enterprise 291HK 29.50 1-OW 23.8% 17.2% 27.7 23.6 1.8 2.3
Li Ning 2331HK 21.95 1-OW 49.1% 35.7% 29.7 21.9 1.3 1.8
Belle 1880HK 8.30 1-OW 47.6% 36.4% 27.2 19.9 0.9 1.3
Parkson 3368 HK 72.50 1-OW 47.2% 29.9% 37.2 29.1 1.3 1.7
Golden Eagle 3308 HK 7.87 1-OW 22.8% 29.3% 27.9 21.6 1.1 1.4
Intime 1833 HK 6.07 3-UW 15.0% 23.4% 23.6 18.8 1.3 1.6
Avg 28.9 13.9 0.7 1.0
China supermarkets
Lianhua 980 HK 10.88 1-OW 21.5% 16.0% 19.2 16.6 1.6 1.8
Times 1832 HK 3.57 1-OW 65.5% 21.3% 18.7 14.3 1.6 2.1
Avg 19.0 15.4 1.6 2.0
F&B
China Foods 506 HK 4.26 2-EW 44.8% 39.4% 22.7 16.3 1.54 2.14 14.59 10.89
People’s Food PFH SP 1.15 1-OW 13.3% 22.4% 11.68 9.54 2.16 2.72 6.18 4.82
China Yurun Food 1068 HK 13.40 1-OW 15.0% 20.5% 20.7 17.2 1.21 1.46 14.41 11.84
China Mengniu 2319 HK 24.55 1-OW 25.8% 19.0% 27.6 23.2 0.73 0.86 12.63 9.80
Tingyi 322 HK 10.38 1-OW 34.0% 26.1% 28.6 22.7 2.17 2.38 13.25 10.41
Tsingtao Brewery 168.HK 23.10 1-OW 39.7% 32.2% 37.2 28.1 2.69 3.56 12.59 9.79
Avg 24.7 19.5 1.75 2.19
Prices as of 7 May 2008
Source: Lehman Brothers, Bloomberg
May 2008 70

Lehman Brothers | Equity Research
Korean Consumer
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
HongTaik Chung
LBIE, Seoul
822-2116-7561 introduction: Lower growth and higher inflation
hongtaik.chung@lehman.com Low growth and higher inflation will likely have a negative impact on the Korean
consumer sector, suggesting a potential slowdown in domestic consumption, due to
lesser employment and low growth in real wages. Nonetheless, we expect a mixed
outlook for individual players, given the diverse consumer sub-markets.
For instance, such an environment will likely increase the demand for necessity items
such as food and beverages. Consequently, consumer demand for discount stores in
which food and beverages account over half of total sales, will likely increase during an
inflationary environment. Particularly, we expect solid demand for private labels, which
offer relatively cheap prices than ordinary items. On the other hand, we expect adverse
consumer demand for department stores which carry a relatively large portion of
apparels and accessories.
Meanwhile, we expect largely inelastic consumer demand, regardless of economic
turnarounds for consumer staple categories like cigarettes.
EFFECT ON EBIT: MARGIN SHRINKAGE?
We find a correlation between the trend in department stores’ same-store sales growth
and GDP growth. Under our base case scenario assumptions, we estimate same-store
sales growth of 3%-plus YoY and 1%-plus YoY for HDS and Lotte Shopping,
respectively in 2008E. However, in a worst case scenario, we estimate their same-store
sales will likely decline to 1% and -1%, respectively. As a result, we estimate the EBIT
margin to shrink by 0.4% percentage points and 0.3% percentage points, from the current
forecast of 8.9% (HDS) and 7.4% (Lotte Shopping), respectively assuming Lotte’s other
divisions such as discount store and supermarket post stable earnings.
Meanwhile, we believe Korea’s leading tobacco player KT&G is likely to maintain its
profitability, given stable domestic cigarette demand, rising exports, and declining raw
material costs owing to the higher usage of relatively cheap imported leaf tobacco.
EFFECT ON CASH FLOWS: EFFECT ON CAPEX GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Given the rising cost of funds for capex, retailers with aggressive new store opening
plans will likely face some challenges, in our view. We believe domestic oligopolistic
department store players such as Lotte Shopping and HDS have aggressive store opening
plans lined up from this year, hurting overall earnings visibility. Meanwhile, we estimate
Shinsegae to be able to generate FCF for the first time from 2009, given its secured land
sites for new discount stores and fewer plans for opening new department stores.
WHAT HAPPENED IN THE 1970S?
Most consumer stocks were not listed in the 1970s. Besides, department stores had a
very insignificant presence, with no existence of discount stores.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
We think the government may try to boost domestic consumption through additional
measures such as income tax and real-estate holding tax cuts, apart from monetary
expansionary policies.
May 2008 71

Lehman Brothers | Equity Research
CONCLUSION
In the retail space, we favor discount stores to department stores despite concerns about
discount store saturation in the long term. Among consumer staple names, we expect the
top-tier players, who have strong market leadership and experience, and steady consumer
demand, to generate stable earnings. For instance, we believe KT&G will be better
insulated in a challenging environment. Also, CJCJ could pass on the cost burden to
consumers by increasing average selling prices, given its strong market leadership in
oligopolistic sub-markets. We believe that Hite Brewery too will likely be able to pass
on any potential cost burden by raising the average selling price, in a stable duopoly
market, despite the fact that beer sales fluctuate in line with consumption trends.
Figure 32: Korean consumer players – Valuation comparison
Company Shinsegae HDS Lotte Shopping GSHS CJHS KT&G Hite Brewery CJCJ
Code 004170 KS 069960 KS 023530 KS 028150 KS 035760 KS 033780 KS 000140 KS 097950 KS
Rating 1-Overweight 1-Overweight 2- Equal Weight 2- Equal Weight 2- Equal weight 1-Overweight 1-Overweight 1-Overweight
Price (Won, May 7th
2008) 650,000 100,000 365,000 66,100 66,700 82,500 123,000 245,000
12-month price target
(Won) 770,000 112,000 370,000 72,000 65,000 101,000 165,000 303,000
Upside potential (%) 18.5 12.0 1.4 8.9 (2.5) 22.4 34.1 23.7
Market cap (Wbn) 12,259 2,266 10,601 434 733 11,834 2,711 2,983
Market cap ($bn) 12.0 2.2 10.4 0.4 0.7 11.6 2.7 2.9
P/E (x) 2007 19.5 12.9 15.3 7.7 17.5 17.8 16.2 N/A
2008E 16.8 12.1 14.2 9.0 13.3 15.8 14.3 17.5
2009E 14.7 11.5 13.2 8.9 12.0 14.7 12.1 14.3
P/B (x) 2007 3.0 1.7 1.3 1.3 1.6 3.8 2.0 N/A
2008E 2.5 1.5 1.2 1.3 1.5 3.6 1.9 3.6
2009E 2.2 1.3 1.1 1.2 1.4 3.1 1.7 3.1
EV/EBITDA (x) 2007 12.7 12.3 9.5 3.7 12.0 13.2 12.8 N/A
2008E 11.6 11.3 9.1 4.9 10.5 12.2 11.2 12.3
2009E 10.2 10.7 8.4 4.7 10.4 11.5 10.2 10.8
EV/Sales (x) 2007 1.5 1.4 1.0 0.2 0.5 4.9 3.8 N/A
2008E 1.4 1.3 1.0 0.2 0.5 4.6 3.4 1.3
2009E 1.3 1.3 0.9 0.2 0.4 4.3 3.1 1.2
EBITDA margin (%) 2007 9.9 11.2 10.8 4.7 4.3 36.9 29.7 N/A
2008E 10.3 11.5 10.6 4.2 4.6 37.4 30.0 10.5
2009E 10.7 11.8 10.8 4.2 4.3 37.6 30.7 11.2
ROE (%) 2007 16.3 14.2 8.7 14.6 5.6 21.4 10.7 N/A
2008E 16.2 13.2 8.5 11.7 8.1 22.5 11.5 22.1
2009E 15.9 12.3 8.4 11.5 8.8 22.1 12.6 23.2
EPS growth (% y-y) 2007 4.6 (0.6) (8.8) (6.1) (33.0) 12.9 39.6 N/A
2008E 21.9 7.0 7.8 (14.3) 31.9 12.8 13.7 N/A
2009E 14.9 4.8 7.4 0.9 10.4 7.6 17.7 N/A
Net debt-to-equity
ratio (%) 2007 87.6 10.8 Net cash Net cash 10.2 Net cash 69.6 70.6
3-yr EPS CAGR (%) 13.6 3.7 1.8 (6.7) (0.8) 11.1 23.1 17.7
DPS (Won) 2008E 1,500 800 1,600 3,000 1,200 2,800 1,600 5,000
Dividend yield (%) 2008E 0.2 0.8 0.4 4.5 1.8 3.4 1.3 2.0
Prices as of May 7th 2008
Note: Excluding Samsung Life Stake for Shinsegae and excluding amortization costs for Lotte Shopping, GSHS, CJHS, and Hite Brewery
Source: Company data, Lehman Brothers estimates
May 2008 72

Lehman Brothers | Equity Research
ELECTRICAL EQUIPMENT
India Electrical Equipment
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Satish Kumar
LBSPL, India
We believe that engineering stocks under our coverage would be significantly affected
Tel: +91 22 40374183
by a slowdown in GDP growth to 5.1% in 2008 and 4.6% in 2009. In addition, if slower
satish.kumar@lehman.com
growth is accompanied by higher inflation, these companies could be doubly affected as
they are large users of ferrous and non-ferrous metals. Engineering stocks are trading at a
significant premium to the broader market and any significant deceleration in growth
could lead to the shrinking of high multiples. In this scenario, we would prefer Bharat
Electronics (BAJE.NS, 1-Overweight) as the company’s revenue growth is dependent on
India’s defence expenditure, which, we believe, would remain strong, even if there is a
slowdown in GDP growth.
EFFECT ON EBIT: SHRINKING MARGINS?
EBIT margins would be affected by an increase in the prices of metals – both ferrous and
non-ferrous. The actual impact would depend on:
• The percentage of the company’s business that comes from pass-through contracts,
i.e., contracts with price-escalation clauses.
• The raw material sourcing strategy of the company, i.e., whether the company buys
through long-term or short-term contracts.
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Engineering companies do not require large amounts for capex. They are not short of
cash, owing to the high growth they have seen over the past five years. In addition, they
are also debt free, so raising funds would not be a problem, in our view. Thus, we would
not expect see a slowdown in capex owing to shortage of funds.
There could be a delay in capex, not because of a shortage of funds but because of lower
visibility on growth, if there is a protracted slowdown.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The government could help by making speedy decisions on infrastructure projects.
Companies in the electrical equipment sector derive a significant part of their revenue
from the power sector. Thus, speedy and timely execution of power projects could help
offset the impact of an industrial slowdown.
CONCLUSION
In conclusion, in our stagflation scenario, we believe engineering stocks would be badly
hit. These stocks are trading at high multiples because of high expected growth. A slower
growth scenario would mean a de-rating of multiples and this, coupled with a slowdown
in earnings, could mean that the stocks would take a beating. We have worked out worst-
case valuations for the stocks under our coverage for a possible stagflation scenario.
Under our worst-case scenarios, we have reduced both revenue growth and margin
assumptions. The resulting lower growth could lead to a contraction of P/E multiples for
these stocks.
May 2008 73

Lehman Brothers | Equity Research
For our stagflation scenario analysis, we have reduced our revenue growth and margin
assumptions for 2008 and 2009. We have calculated DCF-based prices under two
scenarios of expected risk premium (ERP) – 5% and 6%. We have assumed a risk-free
rate of 8% to calculate the cost of equity.
Figure 33: Stagflation scenario analysis
Rating Price (INR) Ticker Equity BETA Base case (INR) Stagflation (INR)
ERP = 5% ERP = 6% ERP = 5% ERP = 6%
ABB 1-OW 1087.0 ABB.NS 0.9 1,464 1,185 750 650
BHEL 2-EW 1785.4 BHEL.NS 1.3 1,538 1,329 964 871
Crompton Greaves 1-OW 252.1 CROM.NS 1.1 385 327 186 157
Bharat Electronics 1-OW 1229.8 BAJE.NS 0.9 2,125 1,899 1,417 1,265
Source: Lehman Brothers estimates (Prices as of May 7)
WINNERS AND LOSERS
In a stagflation scenario, from the stocks under our coverage, we would prefer Bharat
Electronics, as the stock is least leveraged to slower GDP growth and its driver is Indian
defence expenditure, which we believe will be largely unaffected by a slowdown in GDP
growth. Our least preferred stocks would be BHEL, followed by ABB.
Figure 34: Potential downside from current price
Potential downside from current price (%)
ERP = 5% ERP = 6%
ABB -31.0 -40.2
BHEL -46.0 -51.2
Crompton Greaves -26.2 -37.7
Bharat Electronics 15.2 2.9
Source: Lehman Brothers estimates
May 2008 74

Lehman Brothers | Equity Research
IT INDUSTRY
Effects of rising inflation and slower growth
James Kim
LBIE, Seoul
Tel: 822 2116 7570 INTRODUCTION: STAGFLATION IS DETRIMENTAL FOR THE ASIAN IT
james.kim@lehman.com INDUSTRY
With so much uncertainty in the global economy, we analyze the outlook for the Asian
CW Chung
IT industry in the event of a prolonged economic slowdown. If we were to experience a
LBIE, Seoul
period of prolonged stagflation, the overall Asian IT industry would show a significant
Tel: 852 2116 7558
slowdown in demand as well as deterioration in profitability.
cwchung@lehman.com
In 2008, we expect the US consumer electronics market to decrease in size. The home
appliance market, in particular, should contract by about 20% year on year. The
John Hsu
consumer integrated circuit (IC) market will also likely be a loser, in our view, given our
LBSTL, Taiwan
expectation a prolonged economic setback. We think the TV market should also
Tel: 8862 8723 1627
experience a slowdown in demand, even with the US broadcasting system’s full
John.hsu@lehman.com
digitalization in early 2009. We also expect distinct contraction in corporate PC demand
because companies are likely to delay investments due to an unfavourable macro
Alex Yang
environment. If we were to see a severe and prolonged stagflation for the rest of 2008
LBSTL, Taiwan
and 2009, the negative impact would not only apply to the US market, but also to the
Tel: 8862-8723-1619
global electronics market.
alex.yang@lehman.com
Most IT makers will likely employ a low pricing policy to spur demand and sustain
Yolanda Wang production line utilization rates. However, we believe a rapid rise in material costs and
LBSTL, Taiwan labour expenses will make it difficult for IT companies to post meaningful profits. With
the exception of a few segments, we think that there will be very few winners among IT
Tel: 8862 8723-1623
manufacturers in an environment of rising inflation and slowing growth.
yolanda.wang@lehman.com
However, we think the worst-case scenario for Korean handset makers, such as Samsung
Electronics (005930.KS, 1-Overweight) and LG Electronics (066570.KS, 2-Equal
Weight), is not as gloomy vis-à-vis other regional IT manufacturers. Even though the
high-end handset market should also contract when faced with an economic depression,
weak performance by Motorola (MOT, 1-Overweight) and Sony Ericsson (not rated)
should enable Korean makers to easily increase market share. Korean handset makers’
profitability should also improve somewhat because they have significantly improved
their cost structure and design capability since 2007. In addition, foreign exchange trends
are also working in favour of Korean exporters compared with their Japanese and
Taiwanese counterparts. We think the Korean Won will likely remain weak against the
US dollar, while the Japanese Yen and the Taiwanese dollar should remain relatively
strong.
For the memory industry, we think a severe economic slowdown should accelerate the
memory industry’s restructuring where the position of first-tier makers such as Samsung
Electronics and Hynix (000660.KS, 1-Overweight) should be strengthened. For the PC
market, we expect low-end notebooks to replace high-end desktops and other notebooks.
Lastly, we think the display industry could experience worse-than-expected oversupply in
2009.
May 2008 75

Lehman Brothers | Equity Research
EFFECT ON EBIT: WE EXPECT OVERALL WEAK MARGINS
Prolonged stagflation would bring about a slowdown in overall IT demand. This, then,
would negatively impact overall industry supply/demand dynamics, in our view. In turn,
average selling prices would fall rapidly, causing makers’ margins to deteriorate.
Component makers in Taiwan could experience a rapid fall in margins, while display
makers’ profitability could remain stable through to fiscal year 3Q08 based on a shortage
in the industry. From fiscal year 4Q08, however, we expect display makers’ margins to
show a significant drop based on industry oversupply and rapidly falling ASPs.
We view the memory sector to be an exception, however. We believe the memory
industry has already hit bottom in fiscal year 1Q08, and that it would be difficult for
makers’ margins to deteriorate further from current levels. While a severe recession may
slow a sector recovery as a whole, this could accelerate industry restructuring where the
position of first-tier makers is strengthened, in our view. Unlike other industries, the
semi-memory industry is characterized by a huge gap in cost competitiveness and
funding ability between first- and second-tier makers.
Korean handset makers’ margins should be able to sustain double-digit margins, in our
view. We think Motorola and Sony Ericsson’s weakness should enable Samsung
Electronics and LG Electronics to increase their market share.
EFFECT ON CASH FLOW: MAKERS LIKELY TO CUT CAPEX
Overall, IT players will be forced to reduce capex, in our view, if an economic setback
causes demand to slow and ASPs to fall rapidly. The memory industry should see an
acceleration of industry restructuring that has already started. We note that foundries
have already cut capex by about 30% to 50% in 2008, and we expect this trend to
continue.
LCD makers, however, will likely stick to their original fab expansion plans in 2008
(capex to be up about 60% year on year in 2008). However, we think expected
oversupply in 2009 combined with a potential economic slowdown should prompt LCD
makers to lower capex levels in 2009.
WINNERS AND LOSERS
Winners:
• Korean handset makers competitors’ weakness and favourable F/X trend
• First-tier memory makers accelerated industry restructuring
• Notebook casing makers low-end notebook demand boost
Losers:
• IC design weaker demand, especially for consumer IC products
• General electronics component makers rapid ASP fall and higher material costs
• Handset component makers in Taiwan who supply to non-Korean handset makers
• LCD makers 2009 industry oversupply
May 2008 76

Lehman Brothers | Equity Research
Figure 35: Asia IT Sector – winners and losers in a prolonged stagflation
Winners 33
Mkt Cap Absolute Performance (%) P/E P/B ROE
Company Ticker Currency Rating Shr Price
(US$ mn) 1m 3m 1yr 07 08E 09E 07 08E 09E 07 08E 09E
12.8 11.9 10.6 1.8 2.2 1.9
Samsung Electronics 005930.KS KRW 1-OW 741,000 118,830 14.0 20.9 26.2 15% 19% 19%
13.2 9.0 10.1 2.3 2.7 2.2
LG Electronics 066570.KS KRW 2-EW 153,500 21,639 11.6 64.5 134.4 18% 37% 14%
36.2 n/a 7.5 1.4 1.5 1.3
Hynix Semiconductor 000660.KS KRW 1-OW 28,300 12,689 3.1 8.6 (15.0) 4% -3% 18%
16.6 15.1 12.4 3.7 3.3 3.1
TSMC 2330.TW TWD 1-OW 68.0 57,329 5.6 10.7 (1.1) 22% 23% 23%
7.1 4.8 3.2 1.3 1.1 0.9
Ju Teng 3336.HK HKD 1-OW 2.9 366 14.9 16.3 46.2 22% 26% 31%
21.9 15.8 12.0 8.5 7.4 6.0
High Tech Corp 2498.TW TWD 1-OW 830.0 15,648 22.6 38.6 87.3 44% 50% 55%
9.5 8.3 n/a 2.2 2.2 n/a n/a
Inventec Appliance Corp 3367.TW TWD 2-EW 66.7 1,013 10.2 19.3 15.0 27% 28%
17.2 15.6 12.4 4.4 4.0 3.5
Silitech Technology 3311.TW TWD 1-OW 117.0 580 26.6 31.2 (14.5) 28% 27% 30%
Losers
Mkt Cap Absolute Performance (%) P/E P/B ROE
Company Ticker Currency Rating Shr Price
(US$ mn) 1m 3m 1yr 07 08E 09E 07 08E 09E 07 08E 09E
11.6 9.9 n/a 1.4 1.2 n/a n/a
Sunplus 2401.TW TWD 3-UW 40.5 742 1.1 18.4 (38.6) 19% 17%
n/a n/a n/a 0.7 0.9 1.0
ProMOS 5387.TWO TWD 2-EW 8.1 1,794 0.1 2.4 (40.2) -10% -20% -8%
26.8 17.7 13.9 2.7 4.0 3.4
Foxconn Tech 2354.TW TWD 3-UW 177.0 4,419 (6.8) (1.7) (39.1) 13% 18% 27%
17.9 11.9 10.8 2.0 1.9 1.6
Asustek Computer 2357.TW TWD 1-OW 100.0 12,264 8.0 19.2 29.6 14% 18% 17%
11.3 n/a n/a 2.8 n/a n/a n/a n/a
Hon Hai Precision 2317.TW TWD 1-OW 165.0 34,144 (7.0) (4.1) (17.8) 29%
9.2 13.1 9.0 2.1 2.1 1.6
Catcher 2474.TW TWD 3-UW 110.0 1,960 (14.1) 16.3 (48.7) 29% 17% 22%
8.7 6.3 12.5 1.6 1.3 1.2
AU Optronics 2409.TW TWD 1-OW 62.7 16,084 13.0 17.9 16.5 19% 21% 9%
13.2 4.7 10.5 2.1 1.5 1.4
LG Display 034220.KS KRW 1-OW 48,500 16,913 3.9 18.7 21.6 18% 37% 14%
8.2 5.2 15.8 1.3 1.1 1.0
Chi Mei Optoelectronics 3009.TW TWD 1-OW 43.5 9,630 4.7 12.8 16.0 16% 20% 6%
10.9 5.2 103.7 1.0 0.8 0.8
Chunghwa Picture Tubes 2475.TW TWD 1-OW 10.1 2,795 5.5 7.0 22.0 9% 15% 1%
Pricing as of 7 May 2008
Source: Bloomberg, Company data, Lehman Brothers estimates
May 2008 77

Lehman Brothers | Equity Research
METAL & MINING (CHINA)
Effects of rising inflation and slower growth
Oliver Du
LBAL, Hong Kong
Tel: 852 2252 1402
INTRODUCTION: LOW GROWTH AND HIGH INFLATION
oliver.du@lehman.com
According to our China economist, Mingchun Sun, China’s GDP growth will be 9.8%
and 8.5% in 2008 and 2009, respectively; below 10% growth for the first time in six
Nick Wang
years because of weak exports and a likely profit margin squeeze by Chinese companies.
LBAL, Hong Kong
On the other hand, we expect the consumer price index (CPI) to remain at a high of 5.5%
Tel: 852 2252 1598
in 2008, primarily due to a surge in food prices. We also expect it to decline sharply to
nick.wang@lehman.com
2.8% in 2009 once the food supply shortage alleviates.
If the scenario worsens and China’s GDP growth drops dramatically to 6.1% and 5.9% in
2008 and 2009, respectively, and CPI soars to 6.7% and 6.9% in 2008 and 2009,
respectively, we expect: (1) lower-than-expected economic growth to result in a soft
demand for various commodities, which may be moderated by supply tightness; and (2)
higher-than-expected inflation to drive up costs for Chinese metal & mining companies.
EFFECT ON EBIT: MARGIN SHRINKAGE?
With different supply-demand dynamics, the effect on gross margin and EBIT margin
should be analyzed on a case-by-case basis for different commodity sub-sectors.
Since metals & mining is an upstream sector and enjoys both domestic and tightening
global supply, we believe the Chinese coal sector will enjoy strong pricing power, which
may allow coal producers to pass on most of their cost hikes to maintain margins. The
domestic thermal coal contract price in 2008 jumped 15% year on year, underpinned by
tightness in supply and a sustained bottleneck in the country’s railway transportation.
Further potential upside for the domestic contract price in 2009 remains, in our view,
given the deep discount (more than 20%) in spot prices.
Downstream sectors, particularly sectors for copper smelters and aluminium, will
experience margins squeeze because we expect raw material and labour costs to increase
in an inflationary environment. Domestic oversupply may constrain their ability to pass
on costs increases. Since we expect continued progress to phase out inefficient capacities
and acceleration in industry consolidation, we think steel and cement companies should
be able to increase end-product (steel product and cement) prices and offset most costs
increases.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
Chinese metals & mining companies generally enjoy a solid balance sheet, underpinned
by strong demand, a solid commodity prices trend and strong operating cash flows for
the past few years. Particularly, we expect top industry players to expand their capacities
or continue their M&A activities funded by a strong balance sheet and the government’s
preferential bank loan support to top industry leaders.
HOW WILL THE GOVERNMENT HELP EASE THE PAIN?
Faster RMB appreciation should lower costs of imported raw materials. We think the
Chinese steel sector should particularly benefit from RMB appreciation because global
iron ore prices soared by 71% in 2008, following a 9.5% rise in 2007. We estimate
imported iron ore, on an adjusted iron content basis, will account for 58% of China’s
total iron ore requirement in 2008. Assuming a 7% RMB appreciation, we estimate our
2008 earnings estimates will change by 2.8% for Angang Steel (347 HK, 1-Overweight),
May 2008 78

Lehman Brothers | Equity Research
4.2% for Baosteel (600019 CH, 2-Equal Weight), 8.7% for Maanshan Iron & Steel (323
HK, 3-Underweight). We do not expect much of an earnings impact from the Chinese
coal, cement, aluminium and copper sectors.
Also, to maintain a stable GDP growth rate, we expect the Chinese government to
maintain resilient fixed asset investment (FAI) growth in 2008, which should serve to
partially offset a likely weak exports performance this year. A continued resilient FAI
bodes well for the commodities demand, in our view.
CONCLUSION
We believe a potential and dramatic slowdown in Chinese GDP growth will negatively affect
demand for commodities, and, hence, prices. However, global supply shortage/disruptions
coupled with years of underinvestment in mining should offset the demand weakness. Also,
potentially resilient FAI growth encouraged by the Chinese government to offset exports
weakness should also lend support for commodities, in our view.
The impact of inflation, driven by costs hikes on margins of different commodity sub-
sectors, depends on whether each sector is able to pass on price increase. Upstream
sectors (i.e. coal) should remain winners, given their strong pricing power. Downstream
sectors with weak pricing power, such as aluminium and copper smelters, will be losers,
in our view.
WINNERS AND LOSERS
Winner: The coal sector should be the winner, in our view, underpinned by the shutdown
of small coal mines in China, a sustained bottleneck in the country’s railway
transportation and an extremely tight supply in the Asia Pacific seaborne-traded coal
market. China Shenhua Energy (1088 HK, 1-Overweight) remains our top pick in the
sector, given its resilient organic growth, a steady increase in coal contract price and the
possibility of value-accretive coal mine asset injections from its parent company.
Losers: The aluminium producers are likely to be losers because costs pressures and a
domestic oversupply scenario would limit potential upside of domestic aluminium prices. We
believe Chalco (2600 HK, 3-Underweight) is likely to suffer due to costs pressures (bauxite,
energy and power), and we think there is limited upside in domestic aluminium prices.
Figure 36: China metals & mining valuation comparison
Company Ticker Price Mkt. cap REC P/E (x) P/B (x) EPS growth (%) ROE Div yield (%)
(USD mn) 08E 09E 08E 09E 08E 09E 08E 09E 08E 09E
Shenhua 1088.HK HKD34.95 89,350 1-OW 19.1 16.4 4.6 3.8 48.5 16.1 24.0 23.4 1.8 2.1
Energy
China Coal 1898.HK HKD16.04 24,191 1-OW 19.4 14.4 5.5 4.3 44.7 35.3 28.4 29.8 1.3 1.7
Yanzhou Coal* 1171.HK HKD14.70 9,246 1-OW 11.3 10.3 2.6 2.2 78.3 10.2 22.6 21.2 2.7 2.9
Angang 347.HK HKD20.00 18,607 1-OW 13.2 11.0 2.2 1.9 21.6 20.2 16.4 17.6 3.0 3.6
Baosteel 600019.SS CNY12.95 30,157 2-EW 16.4 13.5 2.4 2.1 8.7 21.9 14.4 15.8 2.7 3.3
Magang 323.HK HKD5.16 4,281 3-UW 12.0 12.3 1.4 1.3 8.9 -2.2 11.9 10.8 3.5 2.8
Chalco 2600. HK HKD13.10 22,771 3-UW 13.5 14.8 2.4 2.2 6.5 -8.7 18.0 14.8 2.2 2.0
Jiangxi Copper 358.HK HKD18.18 7,424 3-UW 10.3 10.1 2.3 1.9 21.6 2.1 23.0 19.9 2.1 2.2
Anhui Conch 914. HK HKD63.90 12,800 1-OW 20.5 16.5 6.2 4.7 76.9 24.7 30.2 28.6 0.7 0.9
CNBM 3323. HK HKD18.36 4,997 1-OW 19.8 13.4 2.8 2.3 126.4 48.0 14.1 17.5 0.4 0.6
Average 16.1 13.8 3.2 2.7 38.7 16.6 19.7 19.4 1.9 2.1
Source Bloomberg, Lehman Brothers estimates. Pricing as of 7 May 2008. *The investment rating forYanzhou Coal was upgraded to 1-OW and the 12-month
target price was raised to HK$20.00 (from HK$15.00) on 15 May 2008
May 2008 79

Lehman Brothers | Equity Research
MATERIALS (TAIWAN)
Effects of rising inflation and slower growth
Josephine Ho
LBAL, Hong Kong
Tel: 8862 8723 1663
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
josephine.ho@lehman.com
Cement: cement consumption is a function of FAI (fixed asset investment) and GDP
growth, so lower growth and higher inflation is likely to weaken cement consumption.
However, due to controlled supply landscape in Taiwan and the ongoing consolidations
in China, we expect cement prices to remain high in 2008 and 2009.
Steel: steel consumption is a function of FAI (fixed asset investment) and GDP growth,
so lower growth and higher inflation is likely to weaken steel consumption. While cost
hikes have been putting pressure on margins for steel makers, we believe profit/ton
should be sustained given the global steel supply discipline in 2008.
EFFECT ON EBIT: MARGIN SHRINKAGE?
Cement: we expect margin declines despite cost-push price increases. However, overall
bottom-line earnings should remain healthy for Taiwan Cement (1101.TW, 1-
Overweight) given the capacity ramp-up in China and continued efforts to reduce non-
core assets. Asia Cement (1102.TW, 1-Overweight) is likely to have higher earnings
downside risks, as (1) it saw no capacity increase in 2008, and (2) earnings volatility
from U-Ming Marine (2606.TW, 1-Overweight).
Steel: margins are likely to be under pressure in 2008. However, global supply discipline
should allow steel makers to raise prices and to pass on cost increases, thus maintaining
profit/ton. We therefore expect China Steel’s earnings and dividend yield to sustain in
2008.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
We expect little impact to Taiwan cement and steel companies’ cash flows and capex as
we forecast their earnings should be supportive due to industry structural changes.
Additionally, these companies have very low net gearings (between 10% and 40%).
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
TWD appreciation against USD could help ease cost pressure but the impact is likely to
be marginal. Any government intervention, likely to be price control, will be negative to
cement and steel companies in Taiwan, in our view. Taiwan is a net importer all its raw
materials, including iron ore, coking coal, and thermal coal; thus, it has no control over
costs. Government intervention in the form of fixing prices would inevitably lead to
margin pressures, in our view.
CONCLUSION
While we think margins would inevitably slide due to higher ASP, we believe structural
changes in the cement and steel industry (more concentrated supply landscape resulting
from industry consolidation) should allow cement and steel producers to sustain their
profitability per ton. Our preferred stock is Taiwan Cement (1101.TW; 1-Overweight)
owing to its significant China capacity increase in 2008.
May 2008 80

Lehman Brothers | Equity Research
MEDIA/INTERNET
Effects of rising inflation and slower growth
Paul Wuh
LBAL, Hong Kong
Tel: (852) 2252-6182
INTRODUCTION: LOW GROWTH AND HIGH INFLATION
paul.wuh@lehman.com
In general, we believe the media/internet sector in the Asia-Pacific region will be better
than other sectors at dealing with stagflation. Media companies often require a large
fixed upfront investment but have low incremental costs to support revenue streams.
Furthermore, since the media sector generally faces fewer tariff controls than the telecom
industry, rates are more adjustable in periods of high inflation.
However, the media sector has numerous subsectors – some of which will be better able
to weather an environment of stagflation than others, in our view.
For example, we believe media companies whose revenue is primarily based on a
subscription model (versus an advertising revenue model) will do better in a period of
stagflation. This group would include online gaming companies, cable TV, and satellite
TV companies.
For media companies that rely on advertising revenue, companies that offer low costs to
advertisers will have a competitive advantage, in our opinion. In this group, we believe
internet portals that rely on advertising will do better than traditional media companies
that operate TV and radio stations or that publish newspapers, in a period of stagflation.
Nevertheless, all media companies that rely on advertising revenue will experience some
negative impact during a period of slow growth due to weak advertising budgets.
EFFECT ON EBIT: MARGIN SHRINKAGE?
As with telecom services, the media sector generally has a large fixed/sunk cost in
building out the distribution, but the incremental costs are low. Again, the impact on
EBIT depends on subsectors within media.
First, we expect newspaper companies to do worse in a period of stagflation, given the
high costs of producing a newspaper (paper, ink, etc.) and distribution (higher gasoline
costs).
However, new advertising media companies have low incremental costs. For example,
companies such as Focus Media (FMCN, 1-Overweight) in China have already deployed
their digital frames and can change the advertising content in the frames with little
variable costs.
For internet gaming companies, variable costs are dependent upon the number of
subscribers – with new servers added only as the popularity of a game increases. There
will be higher costs related to wages for game developers and other employees, but this
is a small part of the cost structure for these companies.
For cable TV companies, there is also a large fixed-cost component to roll out the
service, but the incremental operating costs are low.
Finally, for internet portal and e-commerce companies, there are also minimal
incremental expenses that would increase during a period of stagflation.
May 2008 81

Lehman Brothers | Equity Research
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
As with other service industries, we believe the media industry will not face a major drop
in cash flow in an environment of stagflation. We also believe companies such as cable
TV operators could decide to postpone upgrades to their networks if subscription growth
slows during a period of stagflation. This would actually lead to higher returns on capital
for these companies.
As for capex and capital needed for other media companies, we do not think there will be
any major shortfall. Much of the incremental spending is success-based and will only be
deployed when the number of users increases, in our view.
For the new outdoor media companies, such as Focus or Air Media, the incremental
rollout or upgrade plans for digital frames could be postponed during a period of
economic slowdown. This may result in slower longer-term growth but offer high short-
term returns.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Although some media companies face regulatory scrutiny in terms of content, there is
less regulation in terms of pricing media services versus telecom services. As such, we
believe there are fewer measures that governments can adopt during a period of
stagflation to assist media companies.
CONCLUSION
As with telecom services, we believe the media/internet sector in the Asia-Pacific region
will weather the stagflation storm better than many other industrial sectors.
In particular, we would focus on media companies that: (1) have a subscription model
that is unlikely to face loss of revenue in an economic downturn and can raise prices if
needed to counter inflation (such as cable TV and satellite TV companies), (2) have low
operating costs and are able to easily scale their businesses to meet changing business
environments (such as internet gaming and e-commerce), and (3) are low cost to
advertisers and success-based (such as internet portal/search companies).
On the other hand, we believe the traditional print media companies will do worse in a
period of stagflation, given their higher fixed and variable operating costs.
WINNERS AND LOSERS
We believe the following media companies will outperform during a period of
stagflation:
• Online gaming companies: Kingsoft (3888.HK, 1-Overweight), The9 (NCTY, 1-
Overweight), NCsoft (036570.KQ, 1-Overweight, covered by Stanley Yang) and
Neowiz Games (095660.KQ, 1-Overweight, covered by Stanley Yang).
• Cable TV companies: Austar (AUN.AX, 1-Overweight, covered by David
Langford) and Starhub (STAR.SI, 1-Overweight).
• Internet and internet search portals: NHN (035420.KQ, 1-Overweight, covered
by Stanley Yang).
• E-commerce: Ctrip.com (CTRP, 1-Overweight, covered by Candy Huang).
• Outdoor new media: Focus Media (FMCN, 1-Overweight) and Clear Media
(100.HK, 1-Overweight).
May 2008 82

Lehman Brothers | Equity Research
Several media companies that could lose out in a stagflation environment include
Fairfax Media (FJX.AX, 2-Equal Weight, covered by David Langford) in Australia, as
newspaper companies rely on print advertising for a large percentage of their revenue.
Figure 37: Selected companies’ valuation
Market cap Price & EPS EPS 07-09E P/E PEG
Name Ticker Rating (US$mn) Currency Price 2008E 2009E EPS CAGR 2008E 2009E 2008E 2009E
Internet
Alibaba 1688 HK Not rated 9,418 HKD 14.54 0.25 0.36 35% 57.9 40.3 1.7 1.2
Tencent 700 HK Not rated 12,428 HKD 54.05 1.63 2.25 40% 33.1 24.0 0.8 0.6
Baidu BIDU Not rated 12,258 USD 359.13 4.10 6.60 63% 87.6 54.4 1.4 0.9
Sina SINA Not rated 2,542 USD 46.49 1.41 1.76 34% 33.0 26.5 1.0 0.8
Sohu SOHU Not rated 2,699 USD 71.52 2.43 3.14 87% 29.4 22.8 0.3 0.3
Weighted Average 49% 55.8 37.5 1.2 0.8
Online games
Shanda SNDA Not rated 2,422 USD 33.83 2.08 2.46 15% 16.3 13.8 1.1 0.9
Perfect World PWRD Not rated 1,623 USD 29.05 2.21 2.64 69% 13.2 11.0 0.2 0.2
Giant GA Not rated 4,129 USD 16.05 0.78 1.01 18% 20.5 15.9 1.1 0.9
NetEase NTES 2-EW 2,963 USD 23.23 1.37 1.42 2% 17.0 16.4 9.4 9.1
The9 NCTY 1-OW 522 USD 21.39 2.00 2.73 41% 10.7 7.8 0.3 0.2
Kingsoft 3888 HK 1-OW 450 HKD 3.08 0.28 0.42 50% 11.0 7.3 0.2 0.1
Weighted Average 22% 17.0 14.3 2.9 2.7
Media
Clear Media 100 HK 1-OW 461 HKD 6.91 0.44 0.49 35% 15.7 14.1 0.5 0.4
Focus Media FMCN 1-OW 5,138 USD 39.91 2.06 2.68 31% 19.4 14.9 0.6 0.5
VisionChina VISN Not rated 1,137 USD 16.63 0.58 0.84 176% 28.9 19.9 0.2 0.1
Weighted Average 55% 20.7 15.7 0.5 0.4
Note: Pricing as of 7 May 2008
Source Lehman Brothers estimates for rated companies and Bloomberg estimates for non-rated companies
May 2008 83

Lehman Brothers | Equity Research
OIL AND GAS
Effects of rising inflation and slower growth
Cheng Khoo
LBAL, Hong Kong
Tel: 2252 6180
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
cheng.khoo@lehman.com
There is a chicken and egg relationship between oil prices and inflation. Since oil is a
major energy source and a major input cost across all industries, high oil price is a
Gordon Wai
contributor to inflation. On the other hand, inflation causes crude oil production cost to
LBAL, Hong Kong
escalate. Furthermore, oil, not unlike gold, is viewed by many as a natural hedge during
Tel: 2252 6176
inflationary periods.
gordon.wai@lehman.com
Our worst case scenario of a severe economic recession (where US growth is -0.9% in
2008 and -0.4% in 2009, while Asian growth slows to 4.1% in 2008 and 3.8% in 2009)
would likely lead to a slowdown in global oil demand. So far in 2008, we have already
witnessed a slowdown in US oil demand partly due to the high price and partly due to
the economic slowdown. However, demand in Asia (China, in particular) and the Middle
East has shown strong growth. In these economies, the governments are subsidizing
prices, which essentially removes the impact of price elasticity. Additionally, China is
building up inventory, which we think will continue until mid-2008. We believe an
impactful global demand slowdown is unlikely until the end of 2008, and become more
severe in 2009.
Demand alone does not impact oil prices; the supply situation also plays an important
role. Over the past decade, limited new supply has created a tight situation. In particular,
non-OPEC supplies have lagged demand growth, leading to a drawdown in inventories
and OPEC spare capacity. However, by end-2008 and in 2009, we are expecting large
new fields in Saudi Arabia to come on-stream. Hence, our view is that oil price prices
will remain high for most of 2008 but will fall sharply by end-2008 and in early-2009.
EFFECT ON EBIT: SHRINKING MARGINS?
We expect EBIT to grow in 2008 for most pure oil companies (CNOOC Ltd., PTTE&P)
owing to high oil prices although the magnitude of EBIT expansion is likely to be muted
by the impact of local currency appreciation and cost escalation. International crude oil is
priced in US dollars. In this inflationary environment and given current US monetary
policy, local currencies are likely to continue to appreciate against the US dollar. In
2009, we expect the decline in earnings to be greater than the decline in oil prices if
inflationary problems escalate.
Most oil companies listed in Asia (such as Petrochina, Sinopec, PTT, ONGC, and
Reliance) are integrated and have exposure to downstream refining and marketing
businesses. These companies also come under regulatory controls imposed by their
governments. Their EBIT will depend on changes in regulatory policies.
For Chinese integrated companies currently suffering from high oil prices but
constrained from raising oil product prices, we believe EBIT could improve with the
expected decline in crude oil prices in 2009 even if the government does not relax oil
product price controls. This will more than offset the gradual increase in production cost,
in our view. Meanwhile, fearing product shortages, the government is using other
regulatory measures such as import VAT rebate to help these companies.
May 2008 84

Lehman Brothers | Equity Research
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE
After enjoying several years of strong profits, oil companies are flooded with cash and
are finding it challenging to spend more than they earn; hence, there has been a gradual
improvement in net gearing across the board and many companies are net cash. These
companies intend to gear up to a reasonable level and hence we do not expect capex to
fall off in the next two to three years.
WHAT HAPPENED IN THE 1970s?
There were two distinct periods of high inflation in the 1970s – one in the early 1970s
and another more severe one in the late 1970s. During both these periods, the stock
market (Dow) declined. In the first downturn, oil stocks underperformed the Dow.
However, during the second downturn, oil stocks outperformed the market significantly,
because the second inflationary period was the result of a commodity price rally and oil
prices, in particular, were extremely high, benefitting oil companies.
Figure 38: Stock price, oil price, and inflation during the 1970s-80s
stock price inflation and oil price
200% 1600%
1400%
150%
1200%
100% 1000%
800%
50%
600%
0% 400%
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
200%
-50%
0%
-100% -200%
Aggreated performance of XOM, BP, CVX, RDSA Dow Crude Oil-WTI (RHS) Inflation (RHS)
Source: Datastream
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
As mentioned briefly above, the oil sector is subject to significant regulatory control, as
it is considered a strategic sector manufacturing products that influence economic
activities. The government can either cause a lot of pain to the companies by controlling
prices and taxing them or it can help them out by lifting price controls and reducing
taxes/tariffs. Most of all, governments strive to strike a balance between ensuring supply
sufficiency and controlling inflation.
CONCLUSION
In a severe economic downturn coupled with a high inflationary environment, we expect
physical oil demand to decline although there could be demand for oil papers to hedge
against inflation. In the near term, we expect the tight supply situation to continue, which
could further boost oil prices. However by the end of 2008 and especially in 2009, as
new capacities come on-stream, we believe that oil prices are likely to decline.
May 2008 85

Lehman Brothers | Equity Research
Figure 39: LB crude oil (Brent) price forecast
US$/bbl 2006 2007 2008E 2009E 2010E Long term
Q1 61.85 58.11 96.31 80.00
Q2 69.85 68.73 110.00 85.00
Q3 70.09 74.91 110.00 90.00
Q4 59.71 88.84 95.00 75.00
Year Avg 65.38 72.65 103.00 83.00 83.00 70.00
Source: Bloomberg, Lehman Brothers estimates
WINNERS AND LOSERS
In the near term, we believe pure oil companies such as CNOOC Ltd and PTTE&P are
likely to outperform in light of expectations that oil prices could escalate further.
However, over the next 12-18 months, we believe that integrated oil companies such as
Sinopec and Petrochina will outperform when crude prices decline. We think a clear
winner would be COSL, an oil service company, the earnings of which we expect to be
relatively uncorrelated to immediate oil price movements. We believe it can continue to
benefit from high capex spending by oil companies.
Figure 40: Valuation comparison of select companies
Sh price Target Price Potential Mark. cap PE (x) PBV (x) ROE (%) Yield (%)
Reuters Rating (loc curr) (loc curr) Upside (%) (US$ bn) 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E
Petrochina 0857.HK 1-OW HK$ 11.46 HK$ 15.80 38% 446.8 11.3 11.3 2.2 1.9 20% 17% 4.0% 4.0%
Sinopec 0386.HK 1-OW HK$ 8.14 HK$ 10.50 29% 142.7 9.1 7.6 1.7 1.4 19% 19% 2.8% 2.9%
Reliance Ind. RIL.BO 1-OW Rs 2,682.4 Rs 3,800.0 42% 94.3 20.3 16.0 3.8 3.2 21% 22% 0.8% 1.0%
CNOOC 0883.HK 2-EW HK$ 13.88 HK$ 13.50 -3% 79.5 13.0 12.5 3.4 2.7 26% 22% 3.0% 3.1%
ONGC ONGC.BO 1-OW Rs 1040 Rs 1500 44% 53.8 10.8 10.1 2.5 2.2 25% 23% 3.6% 3.7%
PTT PTT.BK 1-OW Bt 348 Bt 388 11% 30.7 10.3 10.8 2.0 1.8 22% 22% 3.9% 3.7%
PTT E&P PTTE.BK 2-EW Bt 179 Bt 154 -14% 18.5 15.5 15.3 4.4 3.7 32% 26% 2.6% 2.6%
COSL 2883.HK 1-OW HK$ 15.56 HK$ 21.00 35% 14.0 21.5 17.0 3.3 2.7 15% 16% 1.1% 1.4%
Average 14.0 12.6 2.9 2.5 22% 21% 2.7% 2.8%
Prices as of 7 May 2008
Source: Company data and Lehman Brothers estimates
May 2008 86

Lehman Brothers | Equity Research
OIL REFINING
Effects of rising inflation and slower growth
Michael Lo
LBAL, Hong Kong
+852 2252 6225
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
michael.lo@lehman.com
In our opinion, lower global growth along with higher inflation is negative for refiners
regionally. Lower global growth rates will likely reduce consumption growth of oil
Cheng Khoo
products, and hence, margins of refiners. Gasoline demand will likely be the worst hit, in
LBAL, Hong Kong
our view, with the US being the largest consumer. Furthermore, rising inflation will
+852 2252 6180
likely keep oil prices at high levels thereby pushing up feedstock costs, and squeezing
cheng.khoo@lehman.com
margins of refiners. This is especially true for countries such as China and India that
have pricing controls on end-products.
EFFECT ON EBIT: MARGIN SHRINKAGE?
We estimate refining margins will likely decline by 30% YoY in FY08-09 on the back of
deteriorating supply and demand fundamentals globally. In our view, global supply
growth of 2.6% in 2009 will likely outstrip demand growth of 1.6% during the same
period. The add-on effect of a weaker global economy will likely worsen our expectation
of margin deterioration. In our base case scenario, we expect global demand growth for
oil products to soften to 1.4%, and gasoline to be the worst hit as the US is the largest
consuming nation. This could lead to a 5%–10% correction to our Singapore refining
margin estimates for 2009. In a worst case scenario, we expect global demand growth to
decline to only 0.8% YoY in FY08-09 and refining margins to decline an estimated
20%–30% from our original forecast. The most significant change will come from a
reduction in gasoline demand growth, which we estimate will decline to 0.7% YoY in
FY08-09, from an estimated 1.5% on account of a much weaker US economy.
Figure 41: GDP and global consumption growth Figure 42: Consumption by region 2007E
100%
10.0%
90%
8.0%
32% 36% 37%
80% 43%
6.0%
70%
4.0%
13%
60%
15% 15%
2.0%
50% Others
16%
13%
0.0%
Asia
40%
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
19%
25%
-2.0% Europe
18%
30%
US
-4.0% 42%
20%
29%
-6.0% 24% 23%
10%
Global GDP growth% oil consumption growth%
-8.0% 0%
light distillates middle distillates heavy oil total consumption
Source: Datastream Source: Datastream
May 2008 87

Lehman Brothers | Equity Research
EFFECT ON CASH FLOWS: EFFECT ON CAPEX GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
We believe the decline in cash flows due to weaker-than-expected earnings, will have a
minimal impact on capex plans for two key reasons: Firstly, the long lead time in
building a new refinery (three–four years) implies that refineries, scheduled to be
operational over the next two to three years, have already been financed and are
currently under construction. We think that these projects will likely proceed as planned.
Secondly, most new refineries in Asia will be built out of China and India by national
companies which face no capital shortage. Moreover, we think China is set to rectify its
current refining capacity shortage and will likely add new refining capacity, in line with
its long-term demand growth goal to ensure balanced demand-supply.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
The governments of China and India are battling inflationary pressures arising from
soaring oil prices, by controlling the prices of end-products. Though this could lower
inflation, the subsidies on oil products are a burden for the country and domestic refiners.
Other Asian countries with hefty taxes on oil products are reducing tax rates in order to
control the impact of high oil prices on the domestic economy and inflation.
CONCLUSION
We believe that a period of slow growth, coupled with inflation, is negative for refiners
regionally. Refiners in countries where the prices of end-products are controlled will
likely be the worst hit.
WINNERS AND LOSERS
In our opinion, refiners with a diversified revenue stream will likely be the least affected
on account of deteriorating refining margins. We prefer refiners with E&P exposure, as
high oil prices will likely help sustain earnings during a period of high inflation. Of our
refining stocks universe, we believe that Reliance Industries (RIL IN, 1-Overweight) will
likely be the least affected given its diversified business mix.
Figure 43: Comparing valuation of select companies
Sh price Target Price Potential Mark. cap PE (x) PBV (x) ROE (%) Yield (%)
Reuters Rating (loc curr) (loc curr) Upside (%) (US$ bn) 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E
Petrochina 0857.HK 1-OW HK$ 11.46 HK$ 15.80 38% 446.8 11.3 11.3 2.2 1.9 20% 17% 4.0% 4.0%
Sinopec 0386.HK 1-OW HK$ 8.14 HK$ 10.50 29% 142.7 9.1 7.6 1.7 1.4 19% 19% 2.8% 2.9%
Reliance Ind. RIL.BO 1-OW Rs 2,682.4 Rs 3,800.0 42% 94.3 20.3 16.0 3.8 3.2 21% 22% 0.8% 1.0%
PTT PTT.BK 1-OW Bt 348 Bt 388 11% 30.7 10.3 10.8 2.0 1.8 22% 22% 3.9% 3.7%
Formosa Petrochemical 6505.TW 2-EW NT$ 90.90 NT$ 82.00 -10% 27.5 12.9 17.2 3.2 3.4 25% 16% 7.0% 4.3%
SK Energy 096770.KS 1-OW W 118,000 W 210,000 78% 10.5 7.5 8.0 1.4 1.3 21% 17% 1.7% 1.7%
S-Oil 010950.KS 2-EW W 68,500 W 74,000 8% 7.5 9.5 15.0 2.1 2.1 21% 14% 7.5% 7.5%
SK Holdings 003600.KS 1-OW W 152,000 W 298,000 96% 7.0 6.7 6.4 1.4 1.2 24% 20% 1.3% 1.3%
Shanghai Petrochem 0338.HK 1-OW HK$ 3.18 HK$ 3.55 12% 6.6 11.3 7.4 0.9 0.8 8% 11% 3.5% 5.4%
Thai Oil TOP.BK 1-OW Bt 70.50 Bt 98.0 39% 4.5 6.9 10.0 1.7 1.6 27% 17% 7.0% 4.8%
GS Holdings 078930.KS 1-OW W 39,950 W 78,000 95% 3.6 5.2 7.4 1.1 1.0 23% 14% 2.8% 2.8%
PTT Aromatics & Refining PTTAR.BK 1-OW Bt 36.00 Bt 57.00 58% 3.4 7.4 11.1 1.4 1.3 20% 12% 5.4% 3.6%
Average 9.9 10.7 1.9 1.7 21% 17% 4.0% 3.6%
Note: Pricing as of 7 May 2008
Source Company data and Lehman Brothers estimates
May 2008 88

Lehman Brothers | Equity Research
PETROCHEMICALS
Effects of rising inflation and slower growth
Yong Liang Por
LBAL, Hong Kong
Tel: 852 2252 6220
INTRODUCTION: LOW GROWTH AND HIGH INFLATION
yongliang.por@lehman.com
We believe the sector will be severely impacted in an environment of low growth and
high inflation. Since chemicals are primarily bulk commodities, manufacturers may find
Cheng Khoo
it difficult to raise end-product pricing in an environment of weakening demand. The
LBAL, Hong Kong
situation is likely to be exacerbated once significant new supply comes online from the
Tel: 852 2252 6180
Middle East and Asia, beginning from end-2008. This, we believe, will signal the
cheng.khoo@lehman.com
beginning of a down-cycle.
EFFECT ON EBIT: MARGIN SHRINKAGE?
We expect margins to be significantly impacted. Crude oil prices have doubled over the
past 12 months, leading to higher prices of naphtha, the primary chemical feedstock in
Asia. Meanwhile, we have observed faltering demand for products, such as polyester.
While margins for olefin derivatives have held up well so far, we estimate a significant
deterioration in margins by next year. For example, we estimate the ethylene-naphtha
spread to halve from USD497 per tonne in 2008 to USD249 per tonne in 2009.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
In most cases, chemical companies have positioned themselves for the downturn, having
concluded the bulk of capex over the past two years. They have mainly been successful
in de-gearing balance sheets, and, hence, we do not expect a significant deterioration in
their financial health, even with the downturn.
WHAT HAPPENED IN THE 1970S?
There is no direct comparison with the 1970s. During the previous downturn in 2001,
ethylene demand growth fell to just 1.2%, compared with its ten-year historical growth
rate of around 3.6%.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Governments will be unable to alleviate the situation because prices are set by the
market.
CONCLUSION
We believe these conditions can serve to accelerate the arrival of the downturn. While
margins currently remain at reasonable levels, we think the confluence of rising costs,
slowing demand and impending overcapacity will likely erode margins.
WINNERS AND LOSERS
We do not expect any companies to benefit – the only issue is which company is best
placed to weather the downturn. In this respect, in an environment of low growth and
high inflation we believe that earnings of companies such as Formosa Plastics
(1301.TW, 2-Equal weight) and LG Chem (011590.KS, 1-Overweight) will be more
resilient because of their diversified and strong product stream. In contrast, in an
environment of low growth and high inflation Honam (011070.KS, 1-Overweight) and
Formosa Chemicals (1326.TW, 3-Underweight) are likely to be negatively impacted due
to their dependence on olefin and aromatic derivatives.
May 2008 89

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Figure 44: Select companies’ valuation
Sh price Target Price Potential Mark. cap PE (x) PBV (x) ROE (%) Yield (%)
Reuters Rating (loc curr) (loc curr) Upside (%) (US$ bn) 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E
Nanya Plastics 1303.TW 2-EW NT$ 72.5 NT$ 78.0 8% 18.1 11.6 11.0 1.9 1.9 17% 17% 7.8% 8.2%
Formosa Plastics 1301.TW 2-EW NT$ 85.60 NT$ 82.00 -4% 16.0 10.8 13.1 1.9 1.9 18% 15% 7.3% 6.1%
Formosa Chemical & Fibre 1326.TW 3-UW NT$ 75.40 NT$ 62.00 -18% 13.6 11.1 13.6 1.6 1.6 14% 12% 7.7% 6.3%
LG Chem 051910.KS 1-OW W 107,500 W 106,500 -1% 7.9 7.7 9.0 1.9 1.7 22% 16% 2.9% 2.4%
PTT Chemical PTTC.BK 2-EW Bt 111 Bt 138 24% 5.2 8.1 10.4 1.6 1.5 20% 15% 5.9% 4.6%
Honam Petrochemical 011170.KS 1-OW W 88,900 W 165,000 86% 2.8 5.5 16.6 0.8 0.8 17% 5% 1.1% 1.1%
Source Company data, Lehman Brothers estimates. Pricing as of 7-May 2008
May 2008 90

Lehman Brothers | Equity Research
PHARMACEUTICALS
India Pharmaceuticals
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Saion Mukherjee
LBSPL, India
Tel: 91 22 40374184
Historically, growth in the Indian pharmaceutical market (IPM) has mirrored broader
Saion.mukherjee@lehman.com GDP growth (IPM grows at about 1.5x GDP growth). So, if GDP growth is lower in
FY09, we anticipate corresponding lower growth for IPM. Although the Indian pharma
Prasanth MLNPP sector is likely to be adversely affected by such a slowdown, we expect the impact to be
limited, given the high proportion of revenue generated from markets outside India.
LBSPL, India
Tel: 91 22 40374197
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
mlnpp.prasanth@lehman.com
Modern medicine penetration is just at around 30% in India. In a stagflationary scenario,
we would expect the government to ease pressure on drug prices through measures such
as excise duty cuts.
CONCLUSION
The pharmaceutical sector has companies with wide-ranging dependencies on the
domestic market. We expect the adverse impact of a possible slowdown to be lower on
contract manufacturing companies and generic companies (with lower domestic market
revenue contribution). The impact would likely be much higher on MNC pharma
companies and certain domestic pharma companies, which derive most of their revenue
from the domestic market.
WINNERS AND LOSERS
Among the companies under our coverage, we estimate the slowdown would cause only
a 1-3% adverse impact on our FY09 EPS estimates. Revenue contributions from the
domestic market are at 15-50% for these companies. The corresponding change in target
price is likely to be 1-3%, according to our estimates.
Figure 45: Stagflation scenario – 6.5% GDP growth in FY09/CY08
Ticker Sensitivity Our target Change Sensitivity Our Change (%) Sensitivity Our current Change
analysis – price (INR) analysis – current analysis – EBITDA
(%) (bp)
FY09 EPS FY09 EPS EBITDA margins
price (INR)
(INR) estimates margins forecast
(INR)
FY09E (%) FY09E (%)
Ranbaxy RANB.NS 597 603 -1 19.8 20.0 -1 16.0 16.1 (9)
Sun Pharma SUN.NS 1,301 1340 -3 71.1 72.8 -2 47.8 48.1 (28)
Dr Reddy’s REDY.NS 601 618 -3 31.8 32.5 -2 16.6 16.8 (18)
Cipla CIPL.NS 190 192 -1 10.9 11.1 -1 22.6 22.7 (7)
Nicholas Piramal NICH.BO 518 524 -1 20.8 21.4 -3 20.0 20.3 (30)
Source: Lehman Brothers estimates
May 2008 91

Lehman Brothers | Equity Research
PROPERTY
Reverting to basic needs for shelter
Paul Louie
LBAL, Hong Kong
Tel:+852 2252 6189
MASLOW’S HIERARCHY OF NEEDS
paul.louie@lehman.com
Abraham Maslow’s psychological theory of a ‘hierarchy of needs’ proposes that lower-
level physiological needs must first be met before higher-level psychological and esteem
Min Chow Sai
needs. Food, water, and air are the most basic needs, followed by safety and the need for
LBAL, Hong Kong
shelter. In the worst-case scenario of low growth and high inflation, we believe housing
Tel:+852 2252 1412
should prove to be the most resilient asset class, followed by low-end retail. The office
msai@lehman.com
market should be the most vulnerable.
Jackie Choy Housing – It covers the basic need for security of body. The need for shelter and a
LBAL, Hong Kong shortage of available units are likely to drive up rents. Unless we were to envision a
Tel:+852 2252 6226 world where there is mass emigration, demand for shelter should prove very resilient.
jackie.choy@lehman.com
Retail – In recessionary scenario, low-end retail typically outperform as consumers tighten
their budget. That said, we believe the more important distinction lies in retail mix
management because a good mall should be able to adjust its trade mix in a down market.
Office – For developed and service-based economies such as Hong Kong and Singapore,
a slowdown in economic activity should impact the office market most.
CORRELATION TO GDP GROWTH
Historically, home prices in Hong Kong and Singapore have shown only a limited
correlation with real GDP growth, at 0.62 and 0.65, respectively. On the other hand,
office rents have been tied more closely in Hong Kong, with a 0.85 correlation, and less
closely in Singapore, with a 0.23 correlation.
Figure 46: Correlation between GDP growth, home prices and office rents
Change in Volatility (Standard deviation) Correlation with Real GDP Growth Period
HK Home Prices 22% 0.620 1990-Now
HK Office Rents 17% 0.850 1995-Now
HK Retail Rents 7% 0.880 1995-Now
SG Home Prices 13% 0.650 1991-Now
SG Office Rents 13% 0.230 1991-Now
SG Retail Rents 8% 0.270 1991-Now
Source: Lehman Brothers estimates
Strictly by the numbers, if GDP growth were to pull back to worst-case levels, this
would suggest that office rents could fall as much as 15% in Hong Kong and 3% in
Singapore. Note, however, the mild decline in Singapore’s case because, even in our
worst-case scenario, we expect GDP growth to be still 2%–3%. In the scenario where
Singapore slides into a prolonged recession, we think office rents will be flat in 2008E-
09E, but could fall 20% in 2010E.
SUPPLY TIGHTNESS KEY TO POTENTIAL DEMAND LAG
The main impact of a slowdown should be a delay in demand (not extinguishing
demand). Short-term supply is the key to holding the resilience of the various markets.
The tighter the supply picture, the more room there is for demand to be cut before rents
and prices have to adjust. Ranked from the lowest to the highest supply, we see Hong
Kong housing, Hong Kong office, Singapore office, Singapore housing, and then the
China housing market.
May 2008 92

Lehman Brothers | Equity Research
Figure 47: Property supply in 2008 and 2009 vs historical average
Com pletions Surplus/Deficit to Avg
2008 2009 Vs. Metric 2008 2009
HK Housing (units) 10,634 11,215 10 Yr Avg 23,751 -55% -53%
HK Central Grade A Office (m sf) 0.26 - 10 Yr Avg 0.82 -68% -100%
HK Overall Grade A Office (m sf) 5.79 1.37 10 Yr Avg 2.45 136% -44%
SG Private Housing (units) 11,000 16,000 10 Yr Avg 7,350 50% 118%
SG Office (sq m) 99,000 168,000 10 Yr Avg 104,000 -5% 62%
China Housing* (m sqm) 12.10 18.90 3 Yr Avg 5.30 128% 257%
Note: China housing proxied by China Overseas, CR Land, Guangzhou R&F, Shimao, Agile
Source Lehman Brothers estimates
BALANCE SHEET KEY TO WEATHERING THE STORM: (1) HK, (2) SG, (3) CHINA
In general, Hong Kong property companies have the strongest balance sheet to weather
the worst-case scenario. Hong Kong property companies have a net debt:equity ratio of
only 19%, versus 81% (47% if SC Global is excluded) for Singapore and 63% of China
property companies.
Figure 48: Net debt:equity ratios
HK Developers/Landlords HK REITS China Developers SG Developers/REITs
Net Debt- Net Debt- Net Debt- Net Debt-
Code Name Code Name Code Name Code Name
Equity Equity Equity Equity
0101.HK HLP na 0405.HK GZI Reit -30% 2007.HK Country Garden na CATL.SI Capitaland -47%
0014.HK Hysan -8% CRCT.SI CRCT (S$) -33% 0917.HK New World China -26% KLAN.SI Keppel Land -40%
0001.HK Cheung Kong -14% 0823.HK Link Reit -36% 0337.HK SPG Land -29% CTDM.SI City Development -48%
0016.HK SHKP -14% 2778.HK Champion Reit -37% 0688.HK China Overseas -30% SCGO.SI SC Global -320%
0012.HK Hend Land -15% 0808.HK Prosperity Reit -57% 0813.HK Shimao -36% BSES.SI Bukit Sembaw ang -89%
0083.HK Sino Land -22% 1109.HK China Res Land -49% CDLT.SI CDL Hosp. Trust -21%
0041.HK Great Eagle -22% 0754.HK Hopson -58% CMIT.SI Cambridge REIT -50%
HKLD.SI HK Land -24% 3383.HK Agile -60% KASA.SI K-REIT -36%
0017.HK NWD -26% 2337.HK Shanghai Forte -95%
0004.HK Wharf -27% 3900.HK Greentow n China -103%
2777.HK Guangzhou R&F -140%
Average -19% Average -38% Average -63% Average -81%
Source: Company data, Lehman Brothers estimates
May 2008 93

Lehman Brothers | Equity Research
WHAT HAPPENED IN THE 1970S?
As the Asian property market was only in its infancy in the 1970s, we turn to the US to
look at how property stocks performed in a “stagflationary” environment. For six years
after the end of 1976, property stocks outperformed the Dow Jones Industrial Average by
more than 70%.
Figure 49: 1970s inflation era
175.0 16.0
14.0
155.0
12.0
135.0 10.0
115.0 8.0
6.0
95.0
4.0
75.0
2.0
55.0 0.0
Nov-72
May-73
Nov-73
May-74
Nov-74
May-75
Nov-75
May-76
Nov-76
May-77
Nov-77
May-78
Nov-78
May-79
Nov-79
May-80
Nov-80
May-81
Nov-81
May-82
Listed Property Index (LHS) Dow Jones Indust (LHS) CPI Inflation (RHS)
Source: Worldscope, IBES, Lehman Brothers estimates
TWO KEY RISKS
Overall, the very low supply in the housing and office market should provide a good
buffer against a general slowdown in economic activity. However, that said, we see two
main risks to property in a stagflationary environment: (1) government intervention and
(2) 1980s style rate hike.
1. Government intervention. With costs rising, we believe there will be an increasing
call especially among low income earners to safeguard their housing needs. There is
a risk for a big push for the return and build out of public housing. The main risk lies
in a policy that is unclear with substantial overlap between public and private
housing, in which the private sector gets crowded out by an overly ambitious public
housing program.
2. Massive rate hikes to curtail inflation. If inflation continues unchecked, we worry
about a repeat of the massive rate hikes similar to those in the early 1980s when the
Fed Funds rate was raised to as high as 19% in June 1981. Property is most
correlated with real rates and if the Fed Funds were to approach double digit, real
rates should return to positive territory and we should see a switch from property
back to cash.
STOCK IMPACT: EARNINGS FOR HK, LIQUIDITY FOR CHINA, RNAV FOR SG
Hong Kong: As we highlighted in our note “Sanity Check 4: Point of maximum disgust”
dated March 27, 2008, if demand/take-up were to pull back by 10% and vacancy to
climb 5%, we estimate an average FY08 earnings drop of 7%. In a somewhat
counterintuitive finding, small land-bank developers suffer more as they have pre-sold
fewer of their properties.
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Figure 50: Earnings sensitivity to delayed consumption
FY 08 Net Profit (HK$m) FY 09 Net Profit (HK$m)
Year End Base Case Bear Case Change Base Case Bear Case Change
Cheung Kong Dec 31 10,963 10,900 -1% 14,995 14,973 0%
Henderson Land Jun 30 5,004 4,347 -13% 5,247 5,742 9%
SHKP Jun 30 13,765 12,605 -8% 16,394 16,976 4%
New World Dev Jun 30 4,895 4,614 -6% 4,451 4,590 3%
Sino Land Jun 30 3,244 3,150 -3% 4,049 3,978 -1.8%
Hang Lung Properties Jun 30 6,008 4,939 -18% 6,397 7,260 14%
Developers average 43,881 40,556 -8% 51,533 53,520 4%
Wharf Dec 31 5,470 5,088 -7% 6,233 6,175 -1%
Hysan Dec 31 950 898 -5% 1,012 957 -5%
Great Eagle Dec 31 1,095 979 -11% 1,293 1,173 -9%
Hongkong Land (US$) Dec 31 450 424 -6% 727 697 -4%
Landlords average 11,021 10,269 -7% 14,208 13,743 -3%
Overall average 54,902 50,825 -7% 65,741 67,263 2%
Source: Lehman Brothers estimates
China: Due to their high gearings and tight cash position, a potential delay in demand
could have more dire consequences on the Chinese developers. If demand proves weaker
than expected and contract sales lower, we believe highly geared developers (see Figure
48) will have little choice but to dilute their NAVs by either taking on a JV partner or
some equity issuance.
Singapore: As we highlighted in our report “Overall tight housing market to prolong up-
cycle into 2010E” dated April 30, 2008, in the worst-case scenario, we expect home
prices to fall 5% in 2008E, flat in 2009E, and 30% in 2010E; office rents to be flat over
2008E-09E and fall 20% in 2010E. In the worst-case scenario, we believe the most
diversified developer CapitaLand will be the least affected with a 7%–8% cut in its
RNAV, while a pure residential developer such as Bukit Sembawang will be the most
affected with a 53% cut in its RNAV.
Figure 51: RNAV sensitivity to worst case
end-08E RNAV (S$) end-09E RNAV (S$)
Base Case Worst Case Change Base Case Worst Case Change
CapitaLand 7.12 6.61 -7% 7.43 6.87 -8%
City Developments 16.85 14.24 -15% 18.70 15.62 -16%
Keppel Land 9.12 8.43 -8% 9.45 8.61 -9%
Bukit Sembaw ang 15.43 7.30 -53% 15.43 7.30 -53%
SC Global 3.75 2.13 -43% 3.77 2.15 -43%
Source: Lehman Brothers estimates
CONCLUSION
In a worst-case scenario, we believe housing and low-end retail should prove the most
resilient as they cover basic needs. Office and high-end retail are likely to fare worst. At
the country level, performance should be tied to existing supply levels. Hong Kong, with
the lowest expected housing supply for the next four years, should prove the most
defensive.
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WINNERS AND LOSERS
Winners
SHKP (16 HK, 1-Overweight) – Hong Kong’s second-largest housing provider (22%
market share) and largest shopping mall owner (10 million sqft) should show resilient
performance in a downturn. Furthermore, with a net debt:equity ratio of only 14%,
SHKP has a strong balance sheet to weather any short-term slowdown, in our view.
CapitaLand (CAPL SP, 1-Overweight) – South-east Asia’s largest developer is well-
diversified in terms of business segments and geographical regions, and is therefore
defensive against near-term volatility in a specific business/area – every 10% change in
Singapore home prices and office rents translates into just a 1% change each in its
RNAV. Net debt:equity of 47% and a strong liquidity position of S$4.4 billion in cash as
of end-07 (20% of market cap in cash) put CapitaLand in a comfortable position in the
current market.
Losers
HK Land (HKL SP, 1-Overweight) – It is the property stock with the highest
proportional exposure to the office market. HK and SG offices make up 87% of HK
Land’s NAV. That said, with existing vacancy at a very low 1.1% in Central, there is
ample cushion for HK Land, should it need to trade rents for occupancy.
Guangzhou R&F (2777 HK, 2-Equal weight) – A highly geared developer with net
debt:equity ratio at 140%. Including outstanding land premium of Rmb10 billion, net
debt:equity ratio is near 265%. R&F is dependent on good contract sales and potential A-
Share listing to strengthen its cash flow, both of which are difficult if inflation in China
continues to stay high.
CDL Hospitality Trusts (CDREIT SP, 2-Equal weight) – 87%–88% of FY08E-
FY09E gross revenue is derived from Singapore hotels. Although 25%–27% of FY08E-
FY09E gross revenue is fixed, in the scenario when RevPAR declines 15% in 2008E and
2009E (vs our current projection of 15% and 10% growth, respectively) – back in 1Q98
and 1Q99 when real GDP growth in Singapore last dropped to 2%–3%, hotel occupancy
fell to 71% and RevPAR fell 15% YoY – we estimate that FY08E DPU will be cut 25%
from S$0.11 to S$0.08 and FY09E DPU will be cut 41% from S$0.11 to S$0.07. Fair
value will be cut by 25% from S$2.22 to S$1.66.
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Figure 52: Peer comparison table
Valuation and recom m endation
NAV
Curr End-09 Grow th Prem / Prem / Target
Share Mkt cap NAV NAV (Now to (Disc) to (Disc) to Target Price Potential
HK Property Developers Price (HK$) (US$m n) (HK$) (HK$) End-09) Curr End-09 disc. (HK$) upside Rec
0001.HK Cheung Kong 123.20 36,584 119.5 157.8 32% 3% -22% 7.5% 169.00 37% 1-OW
0012.HK Henderson Land 60.35 15,030 67.6 72.5 7% -11% -17% -10% 65.00 8% 2-EW
0016.HK SHKP 138.00 45,369 140.7 164.8 17% -2% -16% 25% 205.00 49% 1-OW
0017.HK New World Dev 21.05 9,888 27.4 30.8 12% -23% -32% -10% 27.50 31% 2-EW
0083.HK Sino Land 21.20 12,464 19.2 25.9 35% 10% -18% 15% 29.80 41% 1-OW
0101.HK Hang Lung Properties 31.00 16,464 25.3 30.7 21% 22% 1% 5% 32.30 4% 2-EW
NAV
Curr End-09 Grow th Prem / Prem / Target
Share Mkt cap NAV NAV (Now to (Disc) to (Disc) to Target Price Potential
HK Property Investors Price (HK$) (US$m n) (HK$) (HK$) End-09) Curr End-09 disc. (HK$) upside Rec
0004.HK Wharf 41.95 13,165 54.8 63.4 16% -23% -34% -5% 60.00 43% 1-OW
0014.HK Hysan 23.35 3,159 39.2 43.7 12% -40% -47% -20% 35.00 50% 1-OW
0041.HK Great Eagle 24.70 1,903 47.8 55.2 15% -48% -55% -20% 44.00 78% 1-OW
HKLD.SI HK Land (US$) 4.82 11,063 6.8 7.5 10% -29% -36% -20% 5.95 23% 1-OW
Enterprise Spread on Total
Share Mkt cap Value 10 year Fair Value Potential potential
HK REITs Price (HK$) (US$m ) (HK$m ) NTA P/NTA 2008 Yield EFN (bps) (HK$) upside return Rec
0823.HK Link REIT 18.98 5,201 52,746 13.62 39% 4.2% 142 20.54 8% 12% 1-OW
0405.HK GZI REIT 2.94 377 4,206 3.20 -8% 7.5% 471 3.37 15% 22% 2-EW
0808.HK Prosperity REIT 1.59 260 3,763 2.50 -36% 8.0% 527 1.97 24% 32% 1-OW
CRCT.SI CapitaRetail China (S$) 1.43 436 845 1.06 35% 5.0% 218 3.57 150% 155% 1-OW
2778.HK Champion REIT 3.97 1,426 18,302 6.98 -43% 9.4% 669 5.25 32% 42% 1-OW
Prem /
Curr Optim ised With Rm b Prem / (Disc) to Target Target
Share Mkt cap NAV NAV Apprec'n (Disc) to Optim ised Prem ./ Price Potential
China Developers Price (HK$) (US$m n) (Rm b) (Rm b) (HK$) Curr NAV NAV (Disc.) (HK$) upside Rec
0688.HK China Overseas Land 16.10 15,223 9.5 12.4 13.6 52% 16% 23% 16.78 4% 2-EW
1109.HK China Resources Land 15.26 6,501 15.1 17.7 19.4 -9% -22% 0% 19.40 27% 1-OW
2777.HK Guangzhou R&F 21.15 8,738 20.2 25.7 28.2 -6% -26% 10% 31.04 47% 2-EW
3900.HK Greentow n 9.20 1,809 18.5 18.7 19.6 -55% -56% -20% 15.57 69% 1-OW
0337.HK SPG Land 3.91 520 7.0 7.0 7.3 -50% -50% -15% 6.24 60% 1-OW
Current End-08E Prem / Prem / Target
Share Mkt cap RNAV RNAV (Disc) to (Disc) to Target Price Potential
Singapore Developers Price (S$) Shares (m ) (US$m n) (S$) (S$) Curr End-08E Prem /Disc (S$) Upside Rec
BSES.SI Bukit Sembaw ang Estates 9.48 108 705.4 14.8 15.4 -36% -39% 0% 15.40 62% 1-OW
CATL. SI CapitaLand 6.70 2,806 12,965.5 6.6 7.1 1% -6% 15% 8.20 22% 1-OW
CTDM.SI City Developments 11.96 909 7,500.2 15.7 16.8 -24% -29% 0% 16.90 41% 1-OW
KLAND.SKeppel Land 6.00 720 2,980.0 7.0 9.1 -15% -34% 14% 10.40 73% 1-OW
SCGO.SI SC Global Developments 1.47 395 400.4 3.6 3.8 -60% -61% 0% 3.80 159% 1-OW
Enterprise Spread on Total
Share Mkt cap Value 10 year Fair Value Potential potential
Singapore REITs Price (S$) (US$m ) (S$m ) NAV P/NAV 2008 Yield SGS (bps) (S$) upside return Rec
KASA.SI K-REIT Asia 1.43 690 1,468 2.26 63% 5.9% 361 2.17 52% 58% 1-OW
CMIT.SI Cambridge Industrial Trust 0.71 419 880 0.77 92% 8.5% 620 0.88 24% 32% 1-OW
CDLT.SI CDL Hospitality Trusts 2.05 1,256 1,965 1.61 127% 5.1% 282 2.22 8% 13% 2-EW
Prices as of May 7, 2008
Source: Lehman Brothers estimates
May 2008 97

Lehman Brothers | Equity Research
India Real Estate
EFFECTS OF RISING INFLATION AND SLOWER GROWTH
Manish Gunwani
LBSPL, India
Tel: 91 22 4037 4182
A stagflation scenario would result in lower disposable income, thus directly affecting
manish.gunwani@lehman.com demand for residential property in India and indirectly affecting demand for retail mall
space. We believe a lower GDP growth rate would also slow down the expansion of the
Aatash Shah corporate sector in India, which could affect demand for commercial property. The
Indian IT/ITES sector contributes 60-70% of commercial space demand and any
LBSPL, India
prolonged slowdown worldwide would likely result in low off-take of IT special
Tel: 91 22 4037 4194
economic zones (SEZs) and IT parks, in our view.
aatash.shah@lehman.com
At the same time, rising inflation may prompt higher interest rates, which would likely
be a double blow for the sector.
EFFECT ON EBIT: SHRINKING MARGINS?
Higher inflation could result in higher costs for developers. However, we believe this
will not affect margins to a great extent because we are building in the assumption of 5%
growth in the cost for developers every year. In addition, costs are low compared with
product prices, and companies are currently reporting EBIT margins of 45-70%. If costs
increase 10% and product prices are kept constant, EBIT margins could change by
200 bp-300 bp, but developers are unlikely to suffer significantly, in our view, as they
already have high margins.
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
We believe that in such an environment developers will not launch new projects and
might even delay existing under-construction projects. If projects have to be completed,
lack of sales to self-fund construction could result in developers leveraging themselves to
a large extent at a rising cost of funds.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Low growth in income and high interest rates are a double blow for the sector and also
for buyers looking for homes. Currently, it takes about a year for any project to be
approved and a reduction in approval time would result in lower overheads for
developers. The government could also consider reducing stamp duties for buyers and
providing mortgages at lower rates for first-home buyers. Tax incentives for corporates
could result in better take-up of commercial space.
CONCLUSION
A stagflation scenario will result in real estate stocks underperforming, in our view. Real
estate stocks in India are valued on an NAV basis and trade at varying multiples to NAV.
While we believe that real estate stocks should trade at a premium to NAV given our
long-term structural view of the sector, the market might not share our enthusiasm. In
such a situation, stocks would trade at best at NAV for large caps and for mid- and
small-cap stocks even at a discount to NAV.
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Lehman Brothers | Equity Research
WINNERS AND LOSERS
We prefer Puravankara Projects Ltd. (PPRO.BO, 1-Overweight) in such a scenario as the
valuations are highly attractive. Even in a stagflationary scenario, where we have
assumed no new launches for FY09E and FY10E, kept prices constant until FY10E,
increased costs by 10% each in FY09E and FY10E, reduced nominal GDP growth rate in
the beyond NAV period, and increased discount rates by 100bp, the NAV of
Puravankara is still 14% above the current market price. DLF Ltd’s (DLF.NS, 1-
Overweight) and Unitech Ltd’s (UNTE.NS, 1-Overweight) NAVs in a stagflation
scenario are lower than the current market price by 37% and 55%, respectively. Thus
according to our sensitivity analysis for stagflation, Unitech shows the highest potential
downside while Puravankara shows the lowest.
Figure 53: NAV and target price sensitivity to stagflation
(INR per share) Ticker Rating Current market Current target Sensitivity to stagflation
price price
Target price (%) NAV (%)
DLF Ltd DLF.NS 1-OW 653 1,088 (29) (33)
Unitech Ltd UNTE.NS 1-OW 305 386 (42) (45)
Puravankara Projects Ltd PPRO.BO 1-OW 290 610 (29) (28)
Source: Lehman Brothers estimates (Prices as of May 7)
May 2008 99

Lehman Brothers | Equity Research
Taiwan Property
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
Josephine Ho
LBAL, Hong Kong
Property is generally perceived as an inflation hedge. Rental yield in Taiwan is
Tel: 8862 8723 1663
extremely low, at some 2% for residential and about 5% for commercial, and CPI year-
josephine.ho@lehman.com
on-year growth reached 3.59% in 1Q08 (the full-year average was 1.8% in 2007). With
the anticipated return on property (rental yield + inflation = anticipated return on
property) in Taiwan at 5.6% to 8.6%, investors are buying property as an inflation hedge.
The degree of property value appreciation in Taiwan has been lagging behind other
major countries in the region due to the slow domestic economy.
EFFECT ON EBIT: MARGIN SHRINKAGE?
For most Taiwanese developers, margins have sustained on the continued rise in housing
prices. The cost of land has gone up sharply, but developers have been able to pass it on
to the home buyers so far, especially at high-end luxury residential projects.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
Various government-led economic stimulants, including closer ties with China, banking
regulation reform, and the TWD4.0 trillion (USD131bn) infrastructure “I-Taiwan” 12
Projects, are expected to revive the local economy via domestic consumption. That said,
we see little risk of significant rate hikes in Taiwan, as the new administration, led by the
KMT from May 20, 2008, on a four-year term, is likely to keep interest rates relatively
low, to encourage investment and consumption. A revived domestic economy should
help improve the average income and release some pressure from inflation.
CONCLUSION
We view Taiwan Fertilizer (1722.TW; 3-Underweight) as the premiere asset play in
Taiwan. Additionally, investment in its fertilizer related business, Al Jubail, is bearing
fruit – the 85% share price appreciation year-to-date (vs an 11% rise in the Taiex over
the same period). However, we believe that Taiwan Fertilizer’s current share price
implies that its property values in Nangang (a developing business park with little
infrastructure in place) are valued at only a 4% discount to the property price in Sinyi
district (an established business area), which is hard to justify, in our view. We thus
advise to take profits on Taiwan Fertilizer.
May 2008 100

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SEMICONDUCTORS – FOUNDRY & SATS
Effects of rising inflation and slower growth
John Hsu
LBSTL, Taiwan
Tel: 8862 8723 1627
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
john.hsu@lehman.com
In a low growth and high inflation scenario, foundries and backend players will
definitely suffer, in our view. Although IDM customers might release more outsourcing
orders to foundries and backend suppliers to reduce in-house production costs, the
potential order increase might not offset the negative impact of a demand slowdown. In
addition, end demand will likely shift to low-end/low-price products, which may lead to
unfavourable product mixes, thus reducing margins, in our view.
EFFECT ON EBIT: NARROWER PROFIT MARGINS
We believe that high inflation will lead to increased material prices and production costs
for foundries and semiconductor assembly and test services (SATS) suppliers – the
negative impact would dampen upstream players’ profit margins severely, in our view.
In addition, upstream semi players would likely have a hard time maintaining their
revenue growth and margin levels amid a slowing economy, as capacity utilization is
difficult to maintain when end demand slows.
EFFECT ON CAPEX: EVEN MORE CAUTIOUS
Starting late-2007, the major foundries began to announce plans to reduce their 2008
capex budgets by 30-50%, compared to 2007, in order to maintain healthy competition
within the industry. Meanwhile, backend suppliers have also become more cautious
about their capacity expansion, for similar reasons. Amid an economic slowdown, we
believe that semi-upstream players will become even more cautious towards expansion,
due to concerns about slow end demand.
EFFECT ON CASH FLOW: GREATER RELIANCE ON INTERNAL CASH FLOW
We believe that semi-upstream players will rely more on internal cash flows for future
capacity expansions or R&D expenses in a low growth and high inflation environment.
We believe their future expenditure levels will be limited to cash generated from
operations.
CONCLUSION
Amid an inflation or stagflation scenario, we believe that foundries will relatively
outperform within the semiconductor upstream space, followed by packaging and testing
suppliers (backend) and then the IC substrate makers.
WINNERS AND LOSERS
We believe industry leaders such as TSMC (2330.TW; 1-Overweight) will be the
winners in a scenario of slowing economy with inflation, as industry leaders are usually
R&D innovators for advanced technology. In addition, industry leaders tend to have
wider profit margins that mitigate the negative impact of inflation. We believe the
potential losers in a scenario of slowing economy with inflation are IC substrate
suppliers, such as PPT (2446.TW; 1-Overweight) and Nanya PCB (8046.TW; 2-Equal
weight), as soaring material costs will likely narrow their profit margins.
May 2008 101

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SEMICONDUCTORS – MEMORY
Effects of rising inflation and slower growth
CW Chung
LBIE, Seoul
Tel: 852 2116 7558
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
cwchung@lehman.com
Under the scenario of high inflation combined with economic recession, we believe it
would naturally result in slower demand for memory, particularly for NAND flash, as flash
demand contributions from the US and Europe are much greater than that for DRAM. In
addition, NAND flash-equipped applications are designed for entertainment purposes,
which are more susceptible to economic slowdowns. At the same time, we believe that
lower NAND flash consumption would also be a negative for the DRAM market. This is
because we should see increased DRAM supply if the NAND flash market becomes weak,
as production should shift from NAND flash to DRAM, in our view. However, we believe
that a recession would affect memory makers very differently. While a severe recession
may slow the sector recovery as a whole, it should accelerate industry restructuring, where
the position of first-tier makers could strengthen, in our view. Unlike other industries, the
semi memory industry is characterized by a huge gap in cost competitiveness and funding
ability between the first and second-tier makers.
EFFECT ON EBIT: MARGIN SHRINKAGE?
At this point, second-tier DRAM makers are generating margins of between –50% and
–80%. If the market situation worsens from current levels, we view industry production
cuts, spending cuts, and accelerated consolidation as inevitable. While we may expect a
slower recovery speed or a delay in industry recovery, even if the market situation
weakens, we do not expect profitability to worsen from current levels.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE
Memory makers’ free cash flow has seen a huge decline over the past two years. While
negative cash flow was initially due to excessive spending, memory makers’ cash flow
situations have continued to worsen with the recent deterioration in EBITDA margins.
As such, we believe that these makers have no choice but to cut spending. If fundraising
becomes more difficult, we believe that this would aggravate the position of second-tier
players even more and accelerate industry restructuring.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
As semi memory is an important sector for both Korea and Taiwan, the respective
governments have several methods to support memory makers should they face funding
difficulties. However, we believe both governments have limited ability to provide direct
support in terms of increasing makers’ competitiveness vis-à-vis their peers.
CONCLUSION
The memory sector is in the early stages of recovery after an industry downturn
instigated by excessive investment, resulting in oversupply. Although an economic
recession may lead to a slower recovery for the industry, we believe this would facilitate
eventual industry restructuring centred on first-tier makers.
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WINNERS AND LOSERS
Potential winners in the memory sector include first-tier makers such as Samsung
Electronics (005930.KS, 1-Overweight), Hynix Semiconductor (000660.KS, 1-
Overweight) and Elpida Memory (6665.T, 1-Overweight), who have greater cost
competitiveness, market shares and funding ability versus the second-tier makers. We
have the view that second-tier makers will be the eventual losers in the memory industry.
May 2008 103

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TECHNOLOGY – HARDWARE
Effects of rising inflation and slower growth
Alex Yang
LBSTL, Taiwan
Tel: 8862-8723-1619
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
alex.yang@lehman.com
Rising inflation coupled with consumption recession will cause demand to slow, especially
for desktop and mid- to high-end notebooks, in our view. However, we expect low-end
notebooks and ultra low-priced notebooks (internet device) to replace mid- to high-end NB
PC and desktop PC, with more market share gains. Previously, market watchers assumed
ultra-low-cost PCs (Internet Device) would account for 10% of the total NB PC market in
2H08. If stagflation occurs, the market share of this sub-sector could go up even further, in
our view. For each unit shipped to replace a mid-to-high-end NB or DT PC, it means a
vendor loss of at least US$100 per unit, and possibly reaching US$500 per unit. Similarly,
stagflation will result in weakening demand for high-end handsets.
EFFECT ON EBIT: MARGIN SHRINKAGE?
For the labor-intensive sector, PC makers, handset original design manufacturers
(ODMs), and component vendors may find their margins compressed due to rising raw
material prices, labor costs and other manufacturing costs. Besides, the slower demand
reduces manufacturing scale, which also squeezes gross margins.
EFFECT OF CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH
FLOWS AND CAPITAL SHORTAGE?
Stagflation will result in lower capex, but we expect minimal impacts on the operations
of hardware companies given that these companies have lower maintenance costs
compared with the semiconductor sector.
CONCLUSION
We believe that ODMs and component vendors related to DT PC, the mid- to high-end
NB segments, and the smartphone segments will suffer the most under stagflation.
WINNERS AND LOSERS
Losers
DT ODMs and mother board (MB) manufacturers such as Hon Hai (2317.TW, 1-
Overweight) and Asustek (2357.TW, 1-Overweight) will be the losers under stagflation.
Metal component vendors of NB PC, such as Foxconn Tech (2354.TW, 3-Underweight)
and Catcher (2474.TW, 3-Underweight), will suffer because of higher exposure to the
mid- to high-end NB and consumer segments, in our view.
NB ODMs will suffer slightly given the transition from high-end NB demand to low-end
NB demand, in our view.
Winner
The only winner is consumer NB component vendor, such as plastic casing vendor Ju
Teng (3336.HK, 1- Overweight), which has the ability to transfer rising costs to clients
as compared to its competitors due to stronger demand from industry growth.
Smartphone and mobile handset components manufacturers such as HTC (2498.TW, 1-
Overweight) and IAC (3367.TW, 2-Equal weight) will suffer the most, in our view. As
for component vendors like Silitech (3311.TW, 1-Overweight), we believe they will
have less of an impact because of compensation from low-end phone orders.
May 2008 104

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TECHNOLOGY – DISPLAY
Effects of rising inflation and slower growth
James Kim
LBIE, Seoul
Tel: (822) 2116-7570
INTRODUCTION: WEAKER DEMAND + MASSIVE CAPEX = OVERSUPPLY
james.kim@lehman.com
Under a prolonged stagflation scenario triggered by the US credit crisis, the LCD
industry faces two key issues: (1) panel demand from the US and European regions will
Yolanda Wang
likely slow rapidly, especially for TV panels, in our view, and (2) increased capex in
LBSTL, Taiwan
2008 (up 64% YoY to US$18.8 trillion), combined with a slowing demand, could lead to
Tel: (8862) 8723-1623
serious oversupply in 2009. Considering that we regard TVs as the key future growth
yolanda.wang@lehman.com
driver for the overall LCD sector and that developed countries make up a major portion
of global TV demand, an economic slowdown in the US/EU could pose a material threat
to the display industry, in our view. However, we note that the move from analog to
digital in February 2009 by the US broadcasting system could limit the downside. In
addition, strong CRT replacement demand from emerging markets should somewhat
offset an overall global demand slowdown. However, in a prolonged stagflation, we
think that it is inevitable that an overall demand slowdown will adversely affect the
overall profitability of most panel makers, especially at the advent of industry-wide
oversupply in 2009.
EFFECT ON EBIT: WE EXPECT MARGIN TO CONTRACT SIGNIFICANTLY
Year to date, the LCD industry continues to face supply tightness. However, the recent
aggressive pricing strategy adopted by some global top-tier TV makers to gain more
market shares could weigh on LCD TV panel prices till 2009, in our view. This,
combined with our global stagflation scenario, should cause the average selling price
(ASP) of TV panel to come down by more than 25%. IT panel prices could also rise less
than expected. As such, the above 20% operating profit level enjoyed by LCD makers in
1Q08 could drop to below 10% from 4Q08, in our view. As we expect an oversupply in
2009, LCD makers’ operating margins should continue to remain below 10% in 2009. A
seasonal fall in LCD panel prices in 1H09 could turn out to be the worst LCD pricing
environment since 2007.
EFFECT ON CASH FLOW: WE EXPECT 2009 CAPEX TO DECREASE YOY
We think the LCD industry will face a shortage in 2008, enabling makers to enjoy high
profit margins and ample cash surplus. Owing to the increased cash levels, we expect
LCD makers to maintain their original line expansion schedules in 2008 (capex up 58%
YoY in 2008). However, this should lead to oversupply in 2009 and deteriorating
profitability. On the back of margin contraction in 2009, we expect LCD makers to
reduce capex in 2009.
CONCLUSION
Even under our worst-case scenario, LCD makers should be able to show healthy
profitability through to 3Q08 on an industry-wide shortage. However, starting from
4Q08, makers’ margins should worsen sharply on rapid ASP fall and 2009 oversupply,
in our view.
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WINNERS AND LOSERS
Overall, we believe the LCD industry is unable to weather the storm in a prolonged
economic recession. Under our worst-case scenario, cost savings would unlikely offset
the rapid falling ASP of panels. However, if we have to pick a winner in the display
sector, we think AUO (2409.TW, 2-Equal weight) will stand out as a winner in the short
term, as the company supplies to aggressive top-tier TV makers, such as Sony and
Samsung. In the long term, we think LG Display (LGD) (034220.KS, 2-Equal weight)
should emerge as a winner because of the support it received from LG Electronics
(066570.KS, 2-Equal weight) and the latter’s aggressive share gains in the global TV
market.
May 2008 106

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TECHNOLOGY – IC DESIGN
Effects of rising inflation and slower growth
Yolanda Wang
LBSTL, Taiwan
Tel: (8862) 8723-1623
INTRODUCTION: SLOWER DEMAND = FURTHER MARGIN CONTRACTION
yolanda.wang@lehman.com
During stagflation (high inflation combined with an economic recession), we believe that
demand for IC, especially for consumer IC products, will slow. As such, companies are
likely to engage in pricing competition, which could cause margins to contract further.
We view this as a negative for Taiwan’s fabless companies.
For 2008, we expect most Taiwan fabless companies to witness top line growth with
margin contractions since they aim to maintain market shares during a downturn. Slower
demand or declining revenue will further aggravate the degree of margin contraction, in
our view.
NEGATIVE ON OPERATING MARGIN, IN OUR VIEW
IC design houses are unable to control capacity, so cost reduction is one avenue to help
counter stagflation since it is difficult for them to cut raw material prices. However, cost
reduction via technology migration takes time to deliver results. Furthermore, rising
R&D expense will likely hurt profit margins. Therefore, if stagflation lasts longer than
one year, we think it is inevitable that profit margins of IC design houses will face
significant erosion.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
As IC design is an important sector for Taiwan, we believe that the Taiwan government
may have several measures (such as providing subsidies, tax credit or a lower tax rate) to
support the fabless companies.
Nonetheless, we believe impacts from these measures are likely to be limited, as
subsidies and/or new tax/monetary policy implemented would not be able to mitigate
effectively the pricing competition faced by most fabless companies. The average selling
price for IC design house will be highly dependent on global demand and supply rather
than on the government policies or subsidies, in our view.
CONCLUSION
IC design houses, as a whole, in our view, will be losers in times of stagflation when
consumer demand slows. Product prices will likely decline and companies with inferior
cost-cutting capability will lose more compared with its peers, in our view.
WINNERS AND LOSERS
Sunplus (2401.TW, 3-Underweight) with higher global consumer demand and less room
for cost reduction would be a loser, in our view.
May 2008 107

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TELECOMMUNICATIONS SERVICES
Effects of rising inflation and slower growth
Paul Wuh
LBAL, Hong Kong
Tel: (852) 2252-6182
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
Paul.Wuh@lehman.com
We believe that telecom services will be affected less than other sectors during a period
of slower growth and higher inflation. Telecom services are relatively low-cost and an
important part of life for a majority of the people in the region. In addition, in a period of
slow growth, we believe businesses and consumers looking to reduce costs may use
more telecom services (more phone calls/video conferences) while reducing travel.
However, we believe that the impact of a period of higher inflation/slower growth will
be greater on the revenues of operators in developing markets than on the revenues of
operators in developed markets across the region.
In terms of phone tariffs, we believe that telecom operators are unlikely to raise rates due
to competitive forces and regulatory restrictions. This restriction on raising tariffs could
also exert some pressure on real revenue growth for operators in both developed and
developing markets in the region.
Developing market: In China, India, Indonesia, and other countries in SE Asia, we believe
that slower economic growth coupled with higher inflation could have a negative impact
on revenue growth due to weaker subscriber growth and a sharper decline in ARPUs.
While many low-income mobile subscribers are willing to spend a larger percentage of
their disposable income on telecom services as compared with users in developed
markets, at some point, they may have to cut back on phone services. In addition, much
of the incremental new user growth in these countries is from rural areas where there is
less income to buy a mobile phone and pay for the monthly service.
For example, according to CEIC data, residents in rural China spend 46% of their
disposable income on food and 7% on transport, post, and telecom services. If food
prices continue to increase, we believe that spend on telecom services could be reduced.
Telecom usage reduction (both for voice and SMS) would result in lower ARPUs. On
the other hand, we believe that upward adjustments to mobile tariffs due to inflation are
unlikely. In fact, mobile phone rates have continued to decline in China with average
tariffs (revenue/MOU) down over 17% in FY07 for China Mobile.
Finally, if inflation accelerates and the average selling price (ASP) of mobile handsets
increases (instead of falling by 10% to 20% per annum, historically), the affordability of
a mobile phone could be affected, resulting in fewer new subscribers signing up for the
service. (Alternatively, more new subscribers would sign up for more inexpensive
phones made by local vendors).
Developed markets: In developed markets in the Asia-Pacific region, we believe
stagflation will affect revenue growth for the telecom services sector much less because
it represents a much smaller percentage of disposable income for customers in these
countries. Overall, we estimate that telecom services represent less than 2% of per capita
disposable income in developed markets in the region.
Furthermore, given that telecom services are considered a necessity in developed
markets, we believe that there would be little, if any, negative revenue impact from a
higher level of inflation or slower growth. If unemployment increases due to a recession
in the region, mobile ARPUs are likely to increase as those looking for employment in
developed markets are more likely to use their mobile phones.
With respect to tariff regulations, we believe it is unlikely that a short period of
stagflation will bring about major policy changes. This could change if the problem were
to become more long term. The Korean telecom regulator could require more mobile
tariff cuts in an inflationary environment to ensure that telecom spending remains within
a certain percentage of the CPI basket.
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EFFECT ON EBIT: MAINLY DUE TO HIGHER WAGES
For telecom operators in both the developing and developed markets, we believe that the
impact of slower growth/higher inflation would be evident in higher personnel costs.
This is a significant factor, given that telecom operators tend to have large employee
bases, and some countries have strong labor unions representing telecom employees.
On the other hand, telecom services have a higher proportion of fixed/sunk costs
compared with other industries. Therefore, while there will be some margin pressure, it
could be comparatively less painful.
EFFECT ON CASH FLOW: EFFECT ON CAPEX GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
Although we believe that EBIT margins could be under pressure and revenue growth is
likely to slow in an environment of higher inflation/slower growth, we also expect cash
flow to see some downward pressure. Of course, with inflation, the value of the cash on
the balance sheet would also drop.
In developing markets, where wireless operators are still expanding coverage, we believe
that inflation could result in scaled-back build out plans as the cost for the infrastructure
build out increases. As a result, we might have to lower our growth projections for these
operators.
In developed markets, capital expenditure for next generation networks could be scaled
back during a period of slower growth. Difficulty in funding fund capital expansion and
longer technology upgrade cycles could result in an enhanced return to invested capital
in the short term but would lower our longer-term DCF valuations.
Many of the telcos in developed market also have significant dividend payouts from their
high levels of free cash flow. If these operators face pressure due to higher costs and
slower revenue growth due to inflation or slower growth, dividends could be reduced.
Moreover, if telecom operators in the region believe that the higher level of inflation is a
multi-year phenomenon, they could choose to accelerate capex spending—especially
since many telecom operators in the region have net cash positions with little or no debt.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
As mentioned above, we believe that telecom regulators could help if inflationary
pressures result in higher wages and input costs by allowing telecom operators to raise
tariffs. If all telecom operators in a market are allowed to raise tariffs by the core CPI
level, this would help offset some competitive pressures. On the other hand, allowing for
higher tariffs due to inflation could lead to an inflationary spiral that the regulators are
trying to avoid.
CONCLUSIONS
Although there are some negatives from slower growth and higher inflation, we believe that
the telecom services sector will do much better than other industries in a period of stagflation.
Even in a period of stagflation, we believe that customers will continue to use telephony
services—especially as it has become an integral part of the lives of a large percentage of
the population in the region. Some believe that businesses and consumers will increase
their use of telephony services to lower expenses.
However, we believe that revenue growth for telecom operators in developing markets
like China, India, and SE Asia will be more impacted than those in developed markets—
especially because they depend on growth from new low-end subscribers in rural areas
(where telephony expenses could represent up to 7% to 10% of disposable income).
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For telecom companies in developed markets, given that telephony represents less than
2% of disposable income for these markets, we do not expect a major slowdown in
revenue growth during a period of stagflation.
On the expense front, both developed and developing market telecom operators will face
higher wage pressures and some higher input costs. However, these expenses are
relatively limited compared with those faced by other industries, in our opinion.
Furthermore, as telecom services have a relatively high proportion of fixed/sunk costs,
the industry would have lesser exposure to an inflating cost base than other industries.
WINNERS AND LOSERS
Overall, we believe that in an environment of stagflation, share prices for telecom
services companies should outperform those of companies in other sectors.
Within the telecom sector, we believe that investors should focus on telecom companies
in developed markets—especially in markets where telecom regulators take a more
laissez-faire attitude. In addition, we would focus on companies that have a high free
cash flow and an attractive dividend yield.
In a period of stagflation, we would consider companies such as Far EasTone,
Chunghwa Telecom, Taiwan Mobile, Telstra, LG Telecom, and KT.
Telecom operators that would suffer during stagflation include high-growth companies
in developing markets such as China Mobile, China Unicom, Bharti, Indosat, PT
Telkom, and Reliance Communications.
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Figure 54: Valuation comparison
7-May-08 EV/EBITDA Dividend Yield FCFE Yield P/E
Mkt. Cap. In
Ticker US$mn 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E
Reco'n Current Price
Mobile
1-OW Advanc TB THB 92.00 8,602 5.5 5.3 6.8% 8.1% 8.3% 8.9% 12.9 12.4
AIS
1-OW Bharti IN INR 816.15 37,293 10.0 7.9 1.4% 2.5% 2.5% 4.9% 17.4 13.8
Bharti
1-OW 941 HK HKD 132.50 339,197 10.3 8.6 2.3% 2.8% 3.0% 4.5% 21.1 18.0
China Mobile
China Unicom 1-OW 762 HK HKD 16.62 31,748 6.2 5.6 1.6% 1.8% 6.5% -0.6% 24.7 22.4
1-OW DIGI MK MYR 25.00 5,883 7.9 7.1 4.8% 5.3% 5.4% 6.1% 15.7 14.1
DiGi.com
1-OW 4904 TT NT$50.20 6,347 6.1 5.9 5.6% 5.7% 9.0% 9.0% 15.0 14.8
Far Eastone
HTIL 2-EW 2332 HK HKD 10.92 6,659 6.3 4.9 0.8% 1.1% 4.3% 6.0% 23.7 19.0
2-EW IDEA IN INR 104 6,583 10.6 8.2 0.0% 0.9% -4.5% 1.6% 21.2 17.0
Idea Cellular
1-OW ISAT IJ IDR 6,300 3,702 4.9 4.5 3.4% 3.6% -2.6% 3.1% 14.6 13.8
Indosat
KTF 2-EW 032390 KS KRW 28,750 5,402 4.0 3.5 2.4% 2.4% 5.9% 8.5% 17.8 11.9
1-OW 032640 KS KRW 9,400 2,540 4.2 3.8 0.0% 0.0% 1.8% 8.6% 8.0 7.5
LG Telecom
2-EW M1 SP SGD 1.94 1,240 5.6 5.6 9.9% 10.0% 7.0% 7.2% 10.1 10.0
Mobile One
1-OW RCOM IN INR 540.05 26,625 10.0 7.4 0.9% 1.5% -1.1% 5.8% 17.0 13.5
Reliance
SK Telecom 2-EW 017670 KS KRW 209,000 16,534 4.9 4.6 4.5% 3.8% 9.0% 10.8% 11.9 10.0
2-EW 315 HK HKD 8.85 659 3.7 3.5 3.3% 3.3% 8.0% 7.3% 30.5 29.9
Smartone
2-EW 3045 TT NT$55.70 6,909 6.5 6.3 5.4% 5.8% 8.5% 7.6% 14.9 13.8
Taiwan Mobile
DTAC 2-EW DTAC SP USD 1.52 3,559 6.7 6.0 2.6% 3.8% 2.1% 3.8% 13.5 11.9
Asian Mobile Median 6.2 5.6 2.6% 3.3% 5.4% 6.1% 15.7 13.8
Asian Mobile Average 6.7 5.8 3.3% 3.7% 4.3% 6.1% 17.1 14.9
Integrated
Chunghwa 2-EW 2412 TT NT$78.00 24,568 6.3 6.1 5.9% 6.1% 8.1% 8.0% 15.1 14.7
3-UW 906 HK HK$24.80 21,560 5.1 4.8 2.1% 2.0% 9.0% 9.1% 17.2 17.8
China Netcom
3-UW 728 HK HK$5.40 57,129 5.8 5.5 1.5% 1.6% 7.3% 7.2% 18.0 18.0
China Telecom
Hanaro Telecom 1-OW 033630 KS HK$8,650 2,165 4.5 3.7 0.0% 0.0% 34.2% 23.3% 28.9 9.0
2-EW 030200 KS KRW 45,250 8,736 3.6 3.4 4.4% 4.4% -1.3% 14.0% 10.6 8.6
KT
1-OW 015940 KS KRW 20,250 1,601 5.0 4.0 3.2% 4.2% 4.2% 10.1% 13.6 8.2
LG Dacom
MTNL 3-UW MTNL IN INR 106 1,616 3.3 2.6 5.5% 7.7% 15.2% 18.8% 9.1 7.8
2-EW 8 HK HK$4.95 4,287 7.3 7.0 2.5% 2.8% 11.6% 18.8% 15.8 14.4
PCCW
2-EW TLKM IJ IDR 8,750 19,074 5.4 4.9 5.4% 6.7% 9.8% 13.2% 11.2 9.7
PT Telkom
1-OW ST SP SGD 3.82 44,355 7.9 7.4 5.1% 6.3% 5.9% 6.6% 13.8 12.7
Singapore Tel
Starhub 1-OW STH SP SGD 3.01 3,753 8.2 7.7 6.2% 7.5% 7.4% 8.3% 14.4 13.3
1-OW T MK MYR 3.68 3,967 2.4 2.2 14.3% 16.7% 13.6% 19.0% 5.3 4.8
Telekom Malaysia
1-OW TLS AU AUD 4.52 42,183 6.6 6.2 6.4% 6.9% 6.3% 8.0% 14.9 13.9
Telstra
Telecom New Zealand 2-EW TEL NZ NZD 3.85 8,967 4.9 5.0 7.7% 7.0% 6.2% 6.2% 9.7 10.7
1-OW TRUE TB THB 4.94 692 4.7 4.0 0.0% 0.0% 17.6% 24.8% -10.8 46.4
True Corporation
Integrated Median 5.1 4.9 5.1% 6.1% 8.1% 10.1% 13.8 12.7
Integrated Average 5.4 5.0 4.7% 5.3% 10.3% 13.0% 12.5 14.0
Prices as of 7 May 2008
Source Company data, Lehman Brothers estimates
May 2008 111

Lehman Brothers | Equity Research
TRANSPORTATION – SHIPPING
Effects of rising inflation and slower growth
Andrew Lee
LBAL, Hong Kong
Tel: 852 2252 6197
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
andrewkw.lee@lehman.com
We believe that, in a scenario of lower growth and higher inflation, the shipping sector
would be a likely loser.
With container demand driven by global economic growth, consumption, and disposable
income, we are already forecasting global container demand to slow, and we have a
cautious view on the container sector. This is driven by not only by slowing global
demand but also by cost inflation pressures (such as bunker fuel cost, terminal handling
charges, and inland transportation costs), as container carriers struggle to pass through
the higher costs to customers. The net effect is pressure on margins. We believe lower
growth and higher inflation will likely exacerbate the problems now faced by the
container lines and could even lead to losses.
We believe there is likely to be a time lag before slower economic growth affects bulk
shipping because of: (1) Asia lacking natural resources and relying on imports from
resource-rich regions (such as Australia and Latin America) and (2) shortage of capacity
(vessels). However, with the potential switch from current attractive demand imbalance
to oversupply from end-1H09, we believe any slowdown in demand will likely put
freight rates under increasing pressure. Furthermore, as demand is also driven by
industrialisation, we expect slowing exports to lead to slowing bulk imports.
EFFECT ON EBIT: MARGIN SHRINKAGE?
In a lower growth and higher inflation scenario, margins would come under further
pressure with declining freight rates from a mixture of slowing demand and excess
supply, while container shipping carriers are already struggling to pass through higher
costs. Given the current shortage in bulk shipping capacity, we believe the bulk sector
will be affected only from 2H09, when the sector switches to excess supply.
EFFECT ON CASH FLOW: EFFECT ON CAPEX, GIVEN FALLING CASH FLOWS
AND CAPITAL SHORTAGE?
Although the supply of vessels (both bulk and container) is expected to increase more
than 60% in the next few years (based on Clarksons), we believe this is unlikely to result
in cancellation of new vessels because the balance sheet and gearing have significantly
improved. For example, the container sector’s average gearing level was only 31% in
2007 compared with 163% in 2003. Likewise, the Asian bulk sector gearing was 227%
in 2003 compared with only 11% in 2007.
WHAT HAPPENED IN THE 1970S?
Asian shipping stocks were de-listed in the 1970s. In the previous down-cycles,
container shipping lines were loss-making, as earnings were driven primarily by long
haul routes of Asia-Europe and Asia-US.
HOW CAN THE GOVERNMENT HELP EASE THE PAIN?
We believe the governments around the world are unlikely to assist shipping lines.
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Lehman Brothers | Equity Research
CONCLUSION
We believe the shipping sector will be a likely loser because demand is driven by global
economies, and shipping lines bear the higher costs because carriers struggle to pass
through the higher costs to the customer. Furthermore, given that shipping is a highly
fragmented industry, carriers are mainly price takers.
NO WINNERS, ONLY LOSERS FOR SHIPPING
Within the container shipping sector, we believe Evergreen and Yang Ming would be the
largest potential losers in a scenario of slowing growth and rising inflation because both
stocks are most leveraged to changes in freight rates and costs due to low profitability
and low margins.
Figure 55: 2008 net profit sensitivity to a 1% change in Figure 56: 2008 net profit sensitivity to a 1% change in
overall rates bunker prices
40% 7%
35% 6%
30% 5%
25%
4%
20%
3%
15%
2%
10%
1%
5%
0% 0%
Wan Hai
Wan Hai
OOIL
HMM
Hanjin
OOIL
Hanjin
CCH
HMM
NOL
CSCL
Yang Ming
NOL
CSCL
Yang Ming
Evergreen
Evergreen
Source: Lehman Brothers estimates Source: Lehman Brothers estimates
Figure 57: Container revenue breakdown Figure 58: Container volume breakdown
Transpacific Asia Europe Intra Asia Others Transpacific Asia Europe Intra Asia Others
COSCON 33% 24% 20% 23% COSCON 25% 24% 46% 5%
CSCL 44% 28% 13% 15% CSCL 25% 24% 47% 4%
Evergreen 50% 18% 20% 12% Evergreen 41% 18% 30% 11%
Hanjin 59% 29% 7% 5% Hanjin 54% 30% 11% 5%
HMM 60% 24% 16% 0% HMM 60% 24% 17% -1%
NOL 55% 24% 21% 0% NOL 43% 25% 32% 0%
OOIL 43% 20% 24% 13% OOIL 31% 17% 43% 9%
Wan Hai 17% 6% 68% 9% Wan Hai 11% 4% 85% 0%
Yang Ming 48% 29% 18% 5% Yang Ming 38% 25% 33% 4%
Source: Company data, Lehman Brothers estimates Source: Company data, Lehman Brothers estimates
Likewise, for the bulk shipping sector, Korea Line is the most leveraged to changes in
bulk freight rates because the company has the highest exposure to the spot market. We
estimate that roughly 70% of Korea Line’s revenue is generated from the spot market.
Hence, Korea Line would be the largest loser among Asian bulk carriers in a scenario of
slower growth and rising inflation.
May 2008 113

Lehman Brothers | Equity Research
Figure 59: 2008 net profit sensitivity to a 5% change in BDI Figure 60: Breakdown of spot vs long-term contracts
100%
20.0%
80%
60%
15.0%
40% 70
60 60
50 50 50
20% 35
10.0% 28
6
0%
Pacific Basin
Sincere
U-Ming
China Cosco
STX Pan Ocean
Korea Line
TTA
Precious
MBC
5.0%
0.0%
China Sincere MBC U-Ming Precious Pacific Thoresen
STX Pan Korea
COSCO Basin Thai Ocean Line
Spot Long term
Source: Lehman Brothers estimates Source: Lehman Brothers estimates
May 2008 114

Lehman Brothers | Equity Research
Figure 61: Asian bulk shipping valuation comparison
7-May-08
Stock tickers, ratings and price targets
Listing Current Price Pot. upside/ Market cap Avg daily t/o
Stock currency Ticker Rating price target (downside) (US$ m) (US$ m)
China Cosco HK$ 1919 HK 1-Overweight 24.25 26.50 9% 31,783 92.2
Korea Line Won 005880 KS 1-Overweight 212,500 335,000 58% 2,383 31.4
Malaysian Bulk Carriers RM MBC MK 1-Overweight 4.30 5.50 28% 1,364 1.5
Pacific Basin HK$ 2343 HK 1-Overweight 14.76 20.40 38% 2,954 30.6
Precious Shipping Thb PSL TB 3-Underweight 25.25 31.00 23% 829 1.5
Sincere Navigation NT$ 2605 TT 2-Equalweight 61.20 79.00 29% 971 10.2
STX Pan Ocean S$ STX SP 2-Equalweight 3.80 3.90 3% 5,758 27.1
Thoresen Thai Thb TTA TB 1-Overweight 48.50 80.00 65% 985 19.7
U-Ming NT$ 2606 TT 1-Overweight 102.50 134.00 31% 2,884 40.2
Balance sheet analysis
Return on ROFV/WACC Target Current Net debt/ Fixed Current
Stock fleet value WACC spread EV/Fleet EV/Fleet equity asset t/o ratio
China Cosco 13.4% 9.2% 4.2% 1.8 x 1.5 x -14% 2.2 x 0.9 x
Korea Line 18.1% 9.9% 8.2% 2.0 x 1.3 x 70% 1.9 x 1.2 x
Malaysian Bulk Carriers 18.8% 10.8% 8.0% 1.9 x 1.4 x -21% 0.6 x 5.8 x
Pacific Basin 17.5% 10.3% 7.3% 1.8 x 1.5 x 1% 1.6 x 5.5 x
Precious Shipping 12.5% 12.4% 0.2% 1.0 x 0.8 x -25% 0.8 x 4.2 x
Sincere Navigation 5.9% 7.3% -1.4% 0.8 x 0.5 x 66% 0.5 x 1.3 x
STX Pan Ocean 15.6% 10.9% 4.7% 1.5 x 1.3 x -6% 5.3 x 1.5 x
Thoresen Thai 20.7% 11.4% 9.3% 1.9 x 0.9 x 31% 1.1 x 2.1 x
U-Ming 11.8% 8.9% 2.9% 1.4 x 0.9 x -28% 0.9 x 3.6 x
Bulker average 14.9% 10.1% 4.8% 1.6 x 1.1 x 8% 1.7 x 2.9 x
Traditional multiples
Pre-exceptional P/E Dividend Yield
Stock 2006 2007E 2008E 2009E 2006 2007E 2008E 2009E
China Cosco 139.0 x 12.2 x 9.5 x 9.1 x 0% 2% 3% 3%
Korea Line 44.1 x 7.8 x 6.7 x 10.1 x 0% 0% 1% 1%
Malaysian Bulk Carriers 16.7 x 10.1 x 8.4 x 10.1 x 7% 9% 9% 7%
Pacific Basin 25.1 x 8.3 x 6.8 x 9.5 x 3% 8% 7% 5%
Precious Shipping 3.5 x 7.4 x 5.3 x 6.0 x 13% 8% 8% 7%
Sincere Navigation 24.5 x 12.7 x 9.3 x 8.5 x 8% 7% 5% 6%
STX Pan Ocean 23.7 x 9.6 x 7.8 x 11.8 x 1% 3% 4% 3%
Thoresen Thai 11.8 x 7.3 x 3.9 x 5.4 x 3% 3% 6% 5%
U-Ming 21.8 x 9.9 x 6.2 x 7.3 x 5% 6% 10% 8%
Bulker average 34.5 x 9.5 x 7.1 x 8.6 x 4% 5% 6% 5%
P/B ROE
Stock 2006 2007E 2008E 2009E 2006 2007E 2008E 2009E
China Cosco 9.3 x 3.0 x 2.4 x 2.0 x 7% 25% 25% 22%
Korea Line 4.7 x 3.6 x 2.1 x 1.6 x 9% 46% 31% 16%
Malaysian Bulk Carriers 2.7 x 2.6 x 2.5 x 2.5 x 7% 9% 9% 7%
Pacific Basin 6.1 x 3.4 x 2.8 x 2.1 x 21% 41% 41% 23%
Precious Shipping 1.1 x 1.7 x 1.5 x 1.4 x 30% 24% 28% 23%
Sincere Navigation 2.6 x 3.1 x 3.0 x 2.9 x 11% 24% 33% 34%
STX Pan Ocean 5.9 x 3.0 x 2.2 x 2.0 x 24% 27% 28% 17%
Thoresen Thai 2.6 x 1.9 x 1.3 x 1.2 x 22% 26% 34% 22%
U-Ming 4.3 x 2.2 x 1.8 x 1.6 x 20% 23% 28% 22%
Bulker average 4.4 x 2.7 x 2.2 x 1.9 x 17% 27% 29% 21%
Source Company data, Lehman Brothers estimates
May 2008 115

Lehman Brothers | Equity Research
Figure 62: Asian container shipping valuation comparison
7-May-08
Stock tickers, ratings and price targets
Listing Current Price Pot. upside/ Market cap Avg daily t/o
Stock currency Ticker Rating price target (downside) (US$ m) (US$ m)
China Cosco HK$ 1919 HK 1-Overweight 24.25 26.50 9% 31,783 92.2
CSCL HK$ 2866 HK 3-Underweight 3.49 2.90 -17% 5,231 31.0
Evergreen Marine NT$ 2603 TT 3-Underweight 28.30 18.90 -33% 2,706 25.3
Hanjin Shipping Won 000700 KS 2-Equalweight 43,350 39,000 -10% 3,087 35.9
Hyundai Merchant Won 011200 KS 3-Underweight 43,500 31,400 -28% 5,749 8.7
NOL S$ NOL SP 2-Equalweight 3.51 3.70 5% 3,771 13.6
OOIL HK$ 316 HK 1-Overweight 51.75 63.00 22% 4,155 10.7
Wan Hai NT$ 2615 TT 2-Equalweight 26.85 24.90 -7% 1,812 8.9
Yang Ming NT$ 2609 TT 3-Underweight 23.60 14.10 -40% 1,826 13.8
Balance sheet analysis
Return on ROFV/WACC Target Current Net debt/ Fixed Current
Stock fleet value WACC spread EV/Fleet EV/Fleet equity asset t/o ratio
China Cosco 13.4% 9.2% 4.2% 1.8 x 1.5 x -14% 2.2 x 0.9 x
CSCL 9.9% 9.6% 0.3% 1.0 x 1.2 x -19% 1.6 x 1.5 x
Evergreen Marine 5.2% 7.9% -2.7% 0.6 x 0.7 x 2% 3.0 x 0.8 x
Hanjin Shipping 6.6% 7.6% -1.0% 0.8 x 0.8 x 62% 1.9 x 0.9 x
Hyundai Merchant 7.3% 7.9% -0.6% 0.9 x 1.2 x 75% 1.6 x 2.2 x
NOL 13.1% 9.8% 3.3% 1.4 x 1.3 x 3% 3.3 x 1.2 x
OOIL 11.4% 8.8% 2.7% 1.4 x 1.0 x 16% 1.7 x 2.4 x
Wan Hai 8.3% 8.3% 0.0% 1.0 x 1.1 x 55% 1.5 x 1.6 x
Yang Ming 5.7% 7.8% -2.1% 0.7 x 0.8 x 57% 2.2 x 1.3 x
Container average 9.0% 8.5% 0.5% 1.1 x 1.1 x 26% 2.1 x 1.4 x
Traditional multiples
Pre-exceptional P/E Dividend Yield
Stock 2006 2007E 2008E 2009E 2006 2007E 2008E 2009E
China Cosco 139.0 x 12.2 x 9.5 x 9.1 x 0% 2% 3% 3%
CSCL 24.6 x 6.4 x 11.3 x 12.5 x 1% 4% 2% 2%
Evergreen Marine n.m. 10.6 x 18.2 x 45.8 x 0% 0% 3% 2%
Hanjin Shipping 99.1 x 20.7 x 20.5 x 19.9 x 2% 2% 2% 2%
Hyundai Merchant 67.4 x 33.9 x 34.2 x 50.6 x 1% 1% 1% 2%
NOL 6.8 x 6.4 x 7.3 x 9.6 x 2% 4% 3% 2%
OOIL 10.3 x 7.2 x 11.3 x 12.0 x 18% 18% 3% 2%
Wan Hai 29.9 x 13.7 x 14.2 x 13.3 x 4% 8% 3% 4%
Yang Ming 98.7 x 14.0 x 16.5 x 19.4 x 1% 5% 3% 3%
Container average 59.5 x 13.9 x 15.9 x 21.3 x 3% 5% 3% 2%
P/B ROE
Stock 2006 2007E 2008E 2009E 2006 2007E 2008E 2009E
China Cosco 9.3 x 3.0 x 2.4 x 2.0 x 7% 25% 25% 22%
CSCL 1.3 x 1.2 x 1.1 x 1.0 x 5% 12% 10% 8%
Evergreen Marine 1.4 x 1.2 x 1.1 x 1.0 x -7% 11% 6% 2%
Hanjin Shipping 1.3 x 1.2 x 1.1 x 0.9 x 1% 6% 5% 4%
Hyundai Merchant 2.8 x 2.6 x 2.5 x 2.5 x 4% 8% 7% 5%
NOL 1.8 x 1.4 x 1.3 x 1.2 x 23% 20% 15% 11%
OOIL 1.5 x 1.0 x 0.8 x 0.7 x 15% 13% 7% 6%
Wan Hai 1.9 x 1.6 x 1.7 x 1.6 x 6% 12% 12% 12%
Yang Ming 1.3 x 1.1 x 1.0 x 0.9 x 1% 8% 6% 5%
Container average 2.5 x 1.6 x 1.4 x 1.3 x 6% 13% 10% 8%
Source Company data, Lehman Brothers estimates
May 2008 116

Lehman Brothers | Equity Research
UTILITIES/POWER/RENEWABLE ENERGY
Effects of rising inflation and slower growth
Ivan Lee
LBAL, Hong Kong
852.2252.6213
HONG KONG
ivan.lee@lehman.com
Lower growth and higher inflation
Hong Kong power utilities (Hongkong Electric Company (HKE, 6 HK, 1-Overweight,
TP – HK$52.0), CLP Holdings (CLP, 2 HK, 2-Equal weight, TP – HK$62.0), and
Cheung Kong Infrastructure (CKI, 1038 HK, 1- Overweight, TP – HK$34.0) are the
most defensive sector for stagflation, in our view, given their high earnings visibility and
strong cash flow, despite rising inflation and fuel costs. This is because earnings are
based on capex (with a fixed 9.99% return on net fixed asset under the Scheme of
Control [SOC]), not on tariff, and fuel costs are passed through.
Being a mature economy, Hong Kong’s power (peak) demand growth has been very
stable at 1-3% per year over the past decade. Also, Hong Kong power utilities are either
net cash or under-geared (10-30%) and always generate positive free cash flow.
Therefore, their capex plans will not be affected amid the prevailing credit crunch
environment. Instead, their expansions through M&A could speed up because more
quality assets are now available at distressed prices.
However, we believe that the Hong Kong gas company, HK & China Gas (3 HK, 3-
Underweight, TP – HK$17.06), could be affected because it is non-regulated, and its
tariff in Hong Kong could be frozen for a longer period of time due to rising inflation
and an already lucrative return (31% on net fixed asset), while the demand for gas in
Hong Kong and China will also be slowing when GDP growth starts to turn south. This
is especially true for China, where the majority of gas demand growth is driven by
commercial and industrial users.
CHINA
Lower growth and higher inflation
China independent power producers’ (IPP) earnings are sensitive to tariffs, coal price,
utilization rate, and interest rate, in the order of their impacts. Lower GDP growth would
not only mean lower power demand and utilization, but also a lower coal price because
60% of coal demand is driven by power demand. Skyrocketing spot coal price this year
(Qinhuangdao standard spot coal price already reached RMB895 per ton in 1Q [spot raw
coal price at RMB640 per ton], similar to Newcastle price, due to unexpected
snowstorms in China and strong regional coal price due to supply shortage) has been a
key concern to IPPs’ profitability for 2008-09. We believe that slowing power demand
and subsequent softening of coal price should be viewed positively because this is likely
to enhance margins significantly. Our sensitivity analysis shows that for every 1% drop
in coal price, listed IPPs average earnings for 2008E-10E would be lifted by 4%, and this
compares with a 3% earnings decline for each 1% fall in utilization hour.
Effect on ebit: margin shrinkage?
However, higher inflation would mean price controls would persist and interest rates
would stay high for a longer period of time. This compares to our base-case assumption
of a 3% tariff hike in 3Q (or in the form of VAT rebate), with the bulk of the increase
going to industrial users, while residential tariff remains unchanged. Our sensitivity
analysis shows that listed IPPs’ average earnings for 2008E-10E will likely be affected
by 17%, if tariffs are frozen from now on..
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Effect on cash flow: effect on capex, given the falling cash flows and
capital shortage?
It is reported by the China Electricity Information Network that 70% and 15% of the
power plants in China were in loss and would face cash flow deficits during 1Q08, given
a 20% rise in coal price, frozen tariffs, and power-line suspension. In addition, a number
of small and inefficient power plants have been forced to suspend production due to
insufficient cash flow to cover variable costs. If demand growth were to slow further and
tariffs were to be frozen for a longer period of time, we would see continued losses in the
sector going to 2H08 and 2009, even though listed IPPs should be able to maintain a tiny
profit, given their better-then-average asset quality. Nevertheless, listed IPPs’ near-term
capex (for power plants commissioning in 2008 and 2009) will not likely be affected
since most of the resources have been allocated, but longer-term capex plan may be
shelved, in our view. However, this will likely result in a higher negative free cash flow,
higher gearing, and negative EVA, further dragging down the profitability and investors’
appetite for the sector, and, hence, capital inflow to the sector. If that persists, we expect
power shortages to resume sooner than later.
How can the government help ease the pain?
Unlike the oil and gas sector, in which the government can easily provide one-off
subsidies (such as VAT and windfall tax rebates) to the two oil majors, the fragmented
structure of the power sector would likely restrict the government’s relief policy just to a
tariff hike (or a VAT [17%] rebate on tariff). Power tariffs have not been increased since
end-06, while coal prices have risen by 30% since then. According to the “coal-tariff
linkage” 70% pass-through policy, on-grid power tariff would have to rise by 14% in the
next review. This compares with our base-case assumption of a 3% tariff hike in 3Q,
which means IPPs’ margins would nevertheless be eroded.
In terms of the China water and gas distribution sector, it is worth mentioning that the
Chinese government does not only control the retail price but also the input cost to the
operators. Therefore, price control does not impact the water and downstream gas
companies at all, but this could limit potential upside from tariff hikes for water utilities.
In addition, we believe residential demand for these necessities (especially for water)
will not significantly slow, when a country is going through urbanization and when
natural gas remains 30% cheaper (per heat content) than other sources of energy, such as
coal gas, electricity, etc. However, we expect demand for natural gas from commercial
and industry users, which have been the major driver for demand growth over the past
couple years, to slow when economic activities slow.
KOREA
Lower growth and higher inflation
Lower growth with higher inflation would imply potential downside risks to power
demand growth plus limited scope for securing a tariff hike. When the above comes with
a backdrop of rising fuel costs (mainly coal), it would imply margin shrinkage at the
operating level. We believe KEPCO (015760 KS, 3-Underweight, TP – W26,900)
remains the most susceptible to risks presented by the above phenomenon. For KOGAS
(036460 KS, 3-Underweight, TP – W54,500), we do not see big downside to demand
unless KEPCO decides to offtake lower LNG for its power facilities.
Effect on ebit: margin shrinkage?
The only positive aspect for KEPCO, in our view, is strong power demand growth,
which contributes to healthy operating leverage. Every 1% contraction in demand, with
costs remaining the same, would bring down its operating profit by 1.4-1.5%, according
to our estimates. We presently forecast demand growth of 5.0% for FY08 on 4.3% GDP
growth.
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Effect on cash flow: effect on capex, given falling cash flows and capital
shortage?
For KEPCO, capex pipeline still remains strong at W8.5-9 trillion. Moreover, Korea still
operates under single-digit reserve margins, implying that there could be potential risks
to the upside to KEPCO’s capex. A risk to demand growth would further put pressure on
operational cash flows, and we believe KEPCO may have to resort to debt to fund its
incremental capex in the event of a demand downturn. We currently expect capex
spending to the tune of W8.6 trillion and even at 5% demand growth, KEPCO would still
be free cash flow negative, according to our estimates. For KOGAS, the impact on the
cost front is likely to be minimal, given that the tariff mechanism incorporates material
cost pass-through to KEPCO and the city gas companies. However, demand downturn
could hurt core LNG earnings.
How can the government help ease the pain?
For KEPCO, government intervention is indispensable in the form of tariff hike (which
KEPCO, in principle, deserves, in our view). Tariff hikes could be a possibility, but
given the inflationary conditions, the government is already talking about tariff cuts in
certain segments (such as residential). Hence, we believe an overall tariff hike may be
difficult to pull off and a scenario of falling demand may worsen an already deteriorating
financial position, in our view.
On the whole, given that the tariff-setting mechanism for KEPCO is entirely at the
discretion of the government, the government will have to play its part through a tariff
hike to ensure that KEPCO is not unduly affected by rising fuel costs and capex.
SOUTH-EAST ASIA
Lower growth and higher inflation
Lower growth with higher inflation would imply downside risks to power demand
growth plus limited scope for securing a tariff hike. When the above comes with a
backdrop of rising fuel costs (mainly coal), it would imply margin shrinkage at the
operating level. We believe Tenaga (TNB MK, 2-Equalweight, TP – RM8.30) in
Malaysia remains the most susceptible to risks presented by the above phenomenon. For
Thailand, the capacity schedule for the next three to four years has already been lined up
and the IPPs, EGCO (EGCO TB, 2-Equal weight, TP – THB106) and Ratchaburi
Electricity (RATCH TB, 2-Equal weight, TP – THB42) have pass-through mechanisms
and guaranteed 19% ROE from EGAT, thereby securing their bottom lines to a large
extent. For Indonesia, higher oil prices would present enhanced opportunity for
Perusahaan Gas (PGAS IJ, 1-Overweight, TP – IDR19,400) to move its customers to gas
from oil, given that its current gas price is still at a steep discount to the subsidised oil
price.
Effect on ebit: margin shrinkage?
The only positive aspect for Tenaga is strong power demand growth, which contributes
to its healthy operating leverage. Every 1% contraction in demand, with costs remaining
the same, would bring down its operating profit by 2.4%, according to our estimates. We
presently forecast 6.5% demand growth for FY08 on 5% GDP growth. During 1H08,
power demand grew 7.7% YOY.
Effect on cash flow: effect on capex, given falling cash flows and capital
shortage?
We expect Tenaga’s capex to come down in the coming years owing to modest
generation capex (in view of the prevailing high reserve margin of around 40%). We
expect the company to spend around RM4 billion as capex this year, which we expect to
fall going into FY09. In spite of contractions in operating margin, we do not expect
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Tenaga to face serious issues with respect to its ability to meet its capex. For Thai IPPs,
given their modest expansion plans beyond FY10-FY11, we expect operational cash
flows to be sufficient to fund their capex. Perusahaan Gas will also be nearing the end of
its capex cycle once SSWJ pipeline is online by October 2008. So, the impact to
Perusahaan gas and Thai IPPs, EGCO and RATCH, will be limited, but Tenaga will be
adversely affected, in our view.
How can the government help ease the pain?
For Tenaga, government intervention is indispensable, in our view. Tariff hikes could be
one possibility, but given the inflationary conditions, it may be difficult to pull off, we
believe. In order to cushion the impact of rising coal costs, the government could offer
some subsidy to Tenaga so that financial impact to it is minimal in spite of no tariff hike.
On the whole, given that the utilities sector is regulated and tariff-setting mechanism for
most of the economies in South-East Asia is still at the hands of the governments, the
governments will have to play their part in ensuring that the utility companies are not
unduly affected by current phenomenon.
INDIA
Lower growth and higher inflation
Lower growth with higher inflation would imply downside risks to power demand
growth plus limited scope for higher tariffs. With respect to Indian utilities, since most of
the capacity pipeline has already been firmed up, we see minimal downside risks to
earnings, given that India is still in a power shortage situation. We expect companies
such as NTPC (NATP IN, 2-Equal weight, TP – INR224.0) to be relatively insulated,
given that they execute mostly regulated projects (where returns are based on capex and
tariff incorporates pass-through with respect to fuel, interest, etc). For Reliance
Infrastructure (formerly known as Reliance Energy, RLEN.BO) (RELI IN, 2-Equal
weight, TP – INR960), Reliance Power (RPWR IN, not rated), and Tata Power (TPWR
IN, 2-Equal weight, TP – INR940), most of their projects would be coming online over
the next three to four years, and, hence, the immediate impact will also likely be neutral.
Effect on ebit: margin shrinkage?
Most of the capacity additions in India have been on the regulated route (meaning
projects enjoy post-tax ROE of 14% excluding incentives) with tariffs being fixed
accordingly. Hence, for companies such as NTPC, the impact on EBIT is likely to be
minimal. For companies such as Tata Power, Reliance Infrastructure and Reliance
Power, existing assets comprise mainly regulated ones, although the ones in the pipeline
comprise ultra mega power projects (UMPP), which have levelised tariffs, and merchant
power plants (mainly for Reliance Power). Given the long time horizon over which these
projects will come online, the immediate impact on EBIT is likely to be minimal for
them as well, in our view.
Effect on cash flow: effect on capex, given falling cash flows and capital
shortage?
Since tariffs under regulated projects take into account the capex (and a debt:equity of
70:30), tariffs ensure a steady recovery of capital. Given that NTPC is also adding
capacity only at a distributed pace over 2007-12, we believe operational cash flows can
support their capacity expansion. With respect to Reliance Power, we believe that funds
raised from its recent IPO should help meet initial capex requirements.
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How can the government help ease the pain?
The government’s role would mainly come in respect of merchant power plants where
the rates are relatively higher compared with regulated projects. In the event of
stagflation, higher power rates may be difficult to sustain, and, hence, the government
could step in to provide some kind of direction. Also, given that recently there has been a
thrust on using imported coal by private players, some kind of regulation on coal prices
could help, especially in the case where the impact of fuel costs cannot be wholly passed
on in the form of higher tariffs.
On the whole, with India looking to build a decent portfolio in merchant power (hitherto,
the portfolio was comprised mainly of regulated projects), we believe the role of the
government will be all the more important in respect of setting guidelines to provide
some kind of direction to merchant rates so that, on one hand, customers do not end up
paying too much, while at the same time, utilities having merchant portfolios make
decent returns.
CONCLUSION
In a stagflation environment, we would like defensive and regulated utilities, which are
cash rich (high dividend yield), have strong cash flow (to make dividend payments and
capex), and have a fixed return tied to regulated asset base (capex), have a well-defined
capex plan and a 100% fuel cost pass-through.
These are typical attributes of Hong Kong power utilities (HKE, CLP, and CKI), Thai
utilities (EGCO and RATCH) and Indian regulated utilities (NTPC), which have limited
exposure to UMPPs and merchant power projects.
In particular, we like HKE, CKI, EGCO, and RATCH, as more than 80% of their
earnings are represented by regulated assets with fixed returns, while HKE and CKI are
also in net cash. We think potential upside to HKE and CKI will also come from: (1) a
higher dividend payout; (2) potential bargain asset hunting opportunities amid the
prevailing credit crunch environment; and (3) NAV enhancements when capital structure
improves.
In the downstream gas and water sector, we prefer water over gas during periods of
stagflation, despite the limited potential upside from water tariff hike. In particular, we
like China Water Affair (855.HK, 2-Equal weight, TP – HK$3.00) and China Everbright
International (257.HK, 1-Overweight, TP – HK$4.70). We think gas distributors such as
Xinao Gas (2688.HK, 1-Overweight, TP – HK$17.30), Zhengzhou Gas (3928 HK, 1-
Overweight, TP – HK$1.50), HK & China Gas (3.HK, 3-Underweight, TP – HK$17.06),
and Beijing Enterprise (392 HK, 1- Overweight, TP – HK$42.70), could suffer as a
result of lower demand from commercial and industrial users and frozen tariffs.
In Korea, we believe KEPCO is a potential loser in the event of a demand downturn,
while the impact to KOGAS could be neutral to slightly negative (assuming KEPCO cuts
down on its offtake of LNG from KOGAS).
In South East Asia, Perusahaan Gas could be a winner by virtue of its selling price (for
gas) being lower than subsidised oil. Tenaga could be losing out, if the government
cannot provide it a tariff hike or some other arrangement such as a subsidy, etc.
In India, we believe the impact will be neutral over a one-year period to NTPC, Tata
Power and Reliance Infrastructure. However, NTPC seems to have a better stand, given
that the majority of its portfolio is represented by regulated projects (where returns are
based on capex and tariff incorporates pass-through with respect to fuel, interest, etc.)
with limited exposure to UMPPs and merchant power plants.
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WINNERS AND LOSERS
Figure 63: WINNERS AND LOSERS
Share Target
price price Mkt cap
Company Type BBG ticker (local $) (local $) Rating (US$m) Curcy EPS (local $) EPS growth (%) PER (x) Price to book (x) Yield (%)
08f 09f 10f 08f 09f 10f 08f 09f 10f 08f 09f 10f 08f 09f 10f
Winners
HKE Integrated 6 HK 45.20 52.00 1-OW 12,370 HKD 3.82 2.88 2.89 10% -25% 0% 11.8 15.7 15.6 1.9 1.9 1.8 4.7% 5.1% 5.1%
CKI Integrated 1038 HK 31.75 34.00 1-OW 9,178 HKD 2.45 2.23 2.46 16% -9% 10% 12.9 14.2 12.9 1.7 1.6 1.5 3.9% 4.2% 4.6%
CLP Integrated 2 HK 60.20 62.00 2-EW 18,591 HKD 4.28 3.52 3.72 -3% -18% 6% 14.1 17.1 16.2 2.2 2.2 2.1 4.7% 4.7% 4.9%
EGCO IPP EGCO TB 95.50 106.00 2-EW 1,551 THB 16.22 17.33 19.46 2% 7% 12% 5.9 5.5 4.9 1.0 0.8 0.7 6.8% 10.0% 11.2%
Ratchiburi, IPP RATCH TB 45.25 42.00 2-EW 2,024 THB 4.47 5.17 5.58 11% 16% 8% 10.1 8.7 8.1 1.4 1.2 1.0 5.0% 5.8% 6.2%
Petronas Gas Gas PTG MK 10.30 10.70 2-EW 6,267 MYR 0.55 0.56 0.57 -13% 1% 1% 18.7 18.5 18.2 2.6 2.5 2.4 3.7% 3.8% 3.8%
Perusahaan Gas Gas PGAS IJ 13,550 19,400 1-OW 6,703 IDR 748 867 1,072 116% 16% 16% 18.1 15.6 12.6 6.8 5.1 3.9 1.4% 1.6% 2.0%
Losers
HKCG Gas 3 HK 19.84 17.06 3-UW 16,958 HKD 0.84 0.68 0.74 -43% -19% 8% 23.6 29.1 26.9 4.1 3.9 3.6 1.9% 1.9% 2.0%
Tenaga Integrated TNB MK 7.10 8.28 2-EW 9,461 MYR 0.80 0.67 0.68 -16% -17% 1% 8.9 10.7 10.5 1.1 1.0 0.9 5.2% 5.4% 5.6%
Kepco Integrated 015760 KS 33,950 26,900 3-UW 20,815 KRW 2,850 3,299 3,551 -21% 16% 8% 11.9 10.3 9.6 0.5 0.5 0.4 2.6% 3.0% 3.2%
Datang IPP 991 HK 5.19 6.60 1-OW 7,812 CNY 0.30 0.35 0.46 -4% 16% 31% 15.4 13.3 10.1 1.9 1.8 1.6 3.2% 3.6% 4.8%
Huaneng IPP 902 HK 6.35 8.90 1-OW 9,816 CNY 0.37 0.53 0.69 -27% 42% 30% 15.4 10.8 8.3 1.4 1.3 1.2 3.6% 5.1% 6.7%
Huadian IPP 1071 HK 2.66 3.83 1-OW 2,054 CNY 0.11 0.20 0.29 -49% 88% 44% 22.5 11.9 8.3 1.0 0.7 0.7 1.6% 3.5% 5.6%
CR Power IPP 836 HK 20.00 18.50 1-OW 10,644 HKD 1.12 1.42 1.56 30% 27% 10% 16.0 12.6 11.5 2.4 2.1 1.9 1.9% 2.4% 2.6%
China Power Int'l IPP 2380 HK 2.74 4.30 1-OW 1,267 CNY 0.20 0.23 0.23 31% 13% 1% 12.1 10.7 10.6 0.9 0.9 0.8 3.4% 3.8% 3.9%
Xinao Gas Gas 2688 HK 14.24 17.40 1-OW 1,844 CNY 0.62 0.74 0.88 21% 19% 20% 20.5 16.2 13.5 2.4 2.0 1.7 1.5% 2.2% 2.6%
Beijing Enterprises Integrated 392 HK 31.25 42.70 1-OW 4,564 HKD 1.50 1.72 2.04 47% 15% 19% 20.9 18.2 15.3 1.8 1.6 1.5 1.9% 2.2% 2.6%
Sources: Lehman Brothers estimates; Share prices as of 7 May 2008
EARNINGS SENSITIVITY FOR THE CHINESE IPPS: ON COAL, TARIFF AND UTILIZATION
Figure 64: Earnings sensitivity for the Chinese IPPs
1% rise in utilisation hours 1% rise in tariff
2007f 2008f 2009f 2010f Avg 2007f 2008f 2009f 2010f Avg
Datang 0% 5% 4% 3% 3% Datang 0% 7% 6% 5% 4%
Huaneng 0% 5% 4% 3% 3% Huaneng 0% 11% 8% 6% 6%
Huadian 0% 8% 5% 4% 4% Huadian 0% 31% 19% 13% 16%
CR Power 0% 2% 1% 1% 1% CR Power 0% 4% 5% 5% 3%
CPI 0% 3% 2% 2% 2% CPI 0% 11% 11% 11% 8%
Avg 3% Avg 8%
1% rise in coal price If no 3% tariff hike in July-2008
2007f 2008f 2009f 2010f Avg 2007f 2008f 2009f 2010f Avg
Datang 0% -3% -3% -2% -2% Datang 0% -10% -17% -13% -10%
Huaneng 0% -6% -4% -3% -3% Huaneng 0% -16% -23% -18% -14%
Huadian 0% -19% -11% -8% -9% Huadian 0% -46% -51% -36% -33%
CR Power 0% -2% -2% -2% -2% CR Power 0% -6% -12% -13% -8%
CPI 0% -7% -7% -7% -5% CPI 0% -16% -32% -33% -20%
Avg -4% Avg -17%
Our base case has assumed 3% tariff hike in 3Q08
Source: Lehman Brothers estimates
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VALUATION METHODOLOGIES
Security Valuation Methodology
Acer We believe the fair value for Acer should be the average diluted earnings multiple, 16x, for the last
cycle, since we expect Acer to maintain its growth momentum for the next two years. Based on the
diluted 2008 EPS estimate, NT$ 5.01, we derive a target price of NT$ 80.2 for Acer.
Advanced Info Services Our discounted cash flow valuation (DCF) uses a 10.4% WACC and a terminal growth rate of 2%.
Aluminum Corp of China We use discounted cash flow (DCF) analysis to derive our fair value and price target of Chalco of
HK$9.6. We use a seven-year unleveraged free cash flow (FCF) model and assume a terminal growth
rate of 2%, given that we expect Chalco to continue to grow its alumina and aluminum volume, in both
the domestic and overseas markets. In deriving our weighted average cost of capital (WACC) of 9.7%,
we assume a cost of equity of 13.3%, an after-tax cost of debt of 3.0% and a target debt-to-capital ratio
of 35%. In deriving our terminal values, we capitalize our terminal-year free cash flow assumption,
adjusted for long-run capex, over our WACC assumption less our estimate of terminal growth.
Ambuja Cements We have valued the company on the basis of long term expected return on its cement assets. Long term
growth rate and pre tax WACC have been assumed as 6% and 11.5% respectively.
Angang Steel H-share Our 12-month price target (PT) of HK$28.5 incorporates two parts: (1) Angang’s existing business,
which is worth of HK$24.6 based on 15x 08e P/E or 0.7x PEG (2007-09E) and (2) potential NAV
enhancement from likely steel-asset injection of Benxi Steel from Angang Group, its parent company.
we applied a peer group average EV/tonne of RMB6,380 – the average of its domestic peers. We
calculate that Benxi Steel will add around HK$3.9 per share for Angang.
Anhui Conch We derive our 12-month price target of HK$100 based on EV/tonne of cement capacity at US$174 and
estimated cement capacity of 124.8mt for 2009. Our EV/tonne of US$174 is calculated based on our
forecasted EBITDA/tonne of US$12.4/t as a result of cement price increase and 14x EV/EBITDA
multiple. Our EV/tonne of US$174/t is still lower than the average EV/tonne over US$232/t commanded
by Indian cement producers.
Ashok Leyland We have valued Ashok Leyland based on DCF of Free Cash Flow to Equity(FCFE). We have assumed
a terminal growth rate of 6% and discount rate of 13% for this purpose.
Asustek Computer We have used EV/IC analysis to derive our valuation of ASUSTeK. We have assumed ASUSTeK’s beta
to be 0.88. This results in a WACC assumption of 9.7%. Based on forward-looking invested capital and
EBIT numbers and EV mn, we set our target price at NT$135 for ASUSTeK shares
Our target price of NT$65 is based on the mid-cycle average P/B of 1.25x.
AU Optronics
Austar United Communications We adopt a 12 month DCF valuation methodology. Our PT is based on a WACC of 9.7% and terminal
Limited growth rate of 3.0%. We assume a risk free rate of 6.4%, 1.0 equity beta, 1.5% credit premium and
5.5% equity market risk premium for our WACC calculations.
Babcock & Brown Limited Our 12-month target price is derived using target P/E. Our target P/E is derived using a global peers
comparison. The target P/E of 8.1x is 10% below is the median FY08E trading P/E of 9x for global
investment banks under Lehman Brothers’ equity research coverage. The current methodology is
adopted on 28 March 2008; prior to that we used a dividend discount model (DDM) -based valuation.
Bank of China (H-shares) We used the Gordon growth model to derive our target of HK$3.84, assuming a sustainable ROE of
15.2%, a COE of 11.5%, and 7.6% long-term growth.
Bank of Communications Gordon Growth Valuation Methodology. Our 12-month price target HK$12.52 is based on target multiple
of 3.57x P/BV and 2008E PB of RMB 3.00. Our target PB/V ratio is based on 17.6% long-term ROE,
11.25% COE, and 8.8% long-term growth and a long term pay out ratio of 50%.
Baoshan Iron & Steel Our price target of Rmb14.0 is based on a P/E multiple of 17.7x 2008e EPS of Rmb0.79.
This is in line with Baosteel’s historical one-year forward P/E average.
Beijing Enterprises In our view, NAV (or sum-of-the-parts value) remains the best valuation methodology for asset-intensive
and diversified conglomerates. We value BEHL’s different businesses based on what we believe to be
the most appropriate valuation benchmark for each of them. Our 2008E NAV of HK$49.5bn comprises
HK$39.5bn for infrastructure/utility division (based on DCF), HK$8.6bn for brewery division (based on
15x forward EV/EBITDA), and HK$1.4bn for all other businesses (based on market values or book
values). Our TP is based on 2008E NAV plus a HK$2/sh acquisition premium. We expect a gradual re-
rating given a more focused business portfolio and the expected significant improvement in earnings
quality following the acquisition of Beijing Gas.
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Security Valuation Methodology
Belle International Holdings Limited Our price target of HK$9.55 is based on a multiple of 24.1x our FY09 EPS estimate of HK$0.385, a 20%
premium to the major peers’ average.
Bharti Airtel Limited We derive our price target using a base DCF, a towerco upside and a TRAI recommendation downside.
Both our base DCF, towerco upside & TRAI reco downside is derived using an 11% WACC and a
terminal FY03/2016 growth rate of 3%. For our towerco upside, we have also used a 10% holdco
discount.
Bluescope Steel Limited Our A$9.35 12-month price target is derived using a DCF valuation. We have employed a WACC of
10.75% and a terminal free cash flow growth rate of 2.5% p.a.
Bukit Sembawang Estates Target price at parity to end-08E RNAV
Cambridge Industrial Trust We employ a SOTP valuation methodology to arrive at our fair value of S$0.88 per share; of this S$0.82
or 93% is from our five-year DDM valuation of the current portfolio and S$0.06, or 7% of fair value, is
derived from our 10-year DDM valuation of potential acquisitions of S$90mn a year over the next three
years. We have assumed a cost of equity of 7.2% (risk free rate of 3%, beta of 1.05 and equity-risk
premium of 4%) and terminal yield of 6.8% in our DDM valuation.
CapitaLand Our target price for CapitaLand is pegged at a 15% premium to our end-CY08E RNAV estimate.
CapitaRetail China Trust We value CRCT using a sum of the parts approach. On its existing portfolio, we use a 10-year dividend
discount model based on beta of 0.5 and terminal yield of 7.0%. On its future acquisition pipeline, we
present value the yield accretion on future asset acquisition based on entrance yield of 7.5%.
Catcher Technology Our price target of NT$100.5 is derived from a multiple of 12x our 2008 fully diluted EPS estimate of
NT$8.38. 12x is Cather’s average P/E multiple in the past five years and a conservative multiple for
hardware component names, in our view. We believe it is a reasonable valuation methodology because
we believe that Catcher can maintain its long-term growth momentum with existing product lines and
diversify its portfolio in the next three years. The conservative multiple has factored in the uncertainty
risk of new product lines.
Cathay Financial Holding Co. Our valuations of Taiwan financial holding companies are based on sum-of-the-parts valuations of their
subsidiaries. Among subsidiaries, life insurance subsidiaries are valued at embedded value (EV) and
actuarial value (AV), and banks are valued on a target P/B multiple derived from the equation of (ROE-
g)/(k-g), where ROE stands for normalized sustainable ROE, g stands for longer-term growth
expectation, and k stands for require rate of return. Enterprise value is derived from the target P/B
multiple and FY07 book value forecast, adjusted for off-balance-sheet items, including unrealized
gains/losses. Our ROE assumptions for CUB and Cathay Century are 13%, with a cost of capital of
8.0%, and a growth rate at 3%. For Cathay Life, we assume a 10.7% cost of capital and apply
embedded value and actuarial valuation methodology to value the life insurance operation. Our
valuation indicates a target P/B of 4.0x our FY08 NPL adjusted BVPS estimate of NT$24.4 or 2.5x its
fully adjusted BVPS estimate of NT$39.1.
CDL Hospitality Trust Target price of S$2.22, based on a sum-of-the-parts (SOTP) valuation methodology – S$1.83 or 82% of
our fair value is attributed to a 5-year Dividend Discount Model (DDM) valuation of CDLHT’s existing
property portfolio, and S$0.39 or 18% of our fair value is attributed to a 10-year DDM valuation of
potential acquisitions in the pipeline. Cost of equity of 6%, based on a beta of 0.75, equity risk premium
of 4% and risk-free rate of 3%. Terminal yield of 6.3%.
Champion REIT Our HK$5.25 price target is based on a 10-year dividend discount model using 5.0% risk-free rate, 5.0%
market risk premium, beta of 0.5 and a terminal yield of 5.5%
China Shenhua Energy Our price target of HK$57 includes two parts – (1) existing business by using sum-of-the-parts valuation
based on DCF analysis; (2) our estimated NAV enhancement from coal mine assets to be injected. For
existing business, we use DCF analysis to separately value Shenhua’s coal and power operation to get
the fair value, assuming a long-term coal price of US$45/tonne and terminal growth rate of 2%. Our
WACC assumption is 8.9% based on cost of equity at 14.1%, cost of debt at 3.8%. To value coal mine
assets to be injected, we apply regional peers’ comparable EV/tonne of reserve at US$8.5/t based on
the parent company’s scheduled injection of coal reserves of 2,992mt into Shenhua.
Cheung Kong Our HK$169.00 is based on 7.5% premium to Cheung Kong’s end-09E NAV (premised on HK$93.80
price target for Hutchison Whampoa, which is computed is based on the sum of 2008E ex-3G NAV of
HK$82.8/sh and 3G fair value of HK$11/sh (representing 33% of 3G NAV of HK$33/sh, to reflect our
estimate of 33% probability of corporate activities to unlock the 3G value). Our ex-3G NAV of
HK$82.8/sh comprises HK$23.1/sh from properties/hotels (using a mix of DCF, yield basis and per room
valuation), HK$35.4/sh from container terminals (using DCF), HK$9.7/sh from retail/manufacturing
(using P/E), HK$34.2/sh from infrastructure/energy (using market value and Lehman’s target price), and
HK$8.7/sh from listed telecom assets (using market value and Lehman’s target price).
Chi Mei Optoelectronic Corp To derive our target price of NT$45, we apply the mid-cycle average of 1.15x price to 4Q-forward book
multiple of the benchmark to our adjusted book value estimate.
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Security Valuation Methodology
China CITIC Bank (H Share) We have used the Gordon Growth model (target P/BV = (sustainable ROE – long-term growth)/ (cost of
equity – long-term growth) to derive our fair P/BV, assuming a cost of 11.25%, a long-term growth rate
of 7.8%, and a payout ratio of 50%. Our target price of HKD 5.63 is based on end-2008E BVPS of RMB
2.38.
China Coal We derive our 12-month price target of HK$32.0 for China Coal (27.5 x 09e P/E), close to our fair value
for Shenhua (1088 HK, 1-OW), representing P/E multiple of 28.6x. Compared to Shenhua, despite
China Coal’s smaller production scale (80mt vs. Shenhua’s 152mt for ‘07) and lower margins, China
Coal enjoyed a higher ROIC at 38% vs. Shenhua’s 24% for 2008. We have also cross-checked with its
peers by using EV/tonne of coal reserve. If we incorporate China’s acquired coal reserve associated
with its coal-based chemical projects and the reserve held by its parent, China Coal’s EV/tonne of
reserve would trade at US$4/t, undemanding compared to the global peer average of US$8.5/t.
China Construction Bank Our price target of HK$8.86 is based on our long-term ROE assumption of 18.4%. We used a Gordon
growth model to derive our fair price to book value multiple. Other valuation assumptions include a cost
of equity of 11.5% and a long-term growth rate of 9.2%.
China COSCO Our target price is based on sum-of-the-parts valuation. We apply a modified EV/invested capital (IC)
multiple to arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company
is creating value by generating positive economic returns where ROIC > WACC, we ascribe a multiple
greater than 1x to the IC. The key difference in our methodology is that we apply this metric to a
shipping company, where we can value its assets (i.e. its fleet) using secondhand market transactions
instead of accounting-based invested capital, which tends to be distorted by different accounting policies
and historical costs. We believe this should provide a better reflection of a shipping company’s asset
value and returns.
Within our sum-of-the-parts valuation, we use return on fleet value estimates, which are based on
expected returns for FY08E-FY09E of 10.9%, against a relatively conservative WACC of 9.2%. We
assume long-term growth of 1.5%, which represents the average annual global fleet developmentro
1991-2005. We assume maintenance capex of 4% of fleet value, which reflects the amount of ongoing
investment to maih current fleet aging profile.
Our EV/FV valuation factors in a fleet value target multiple of 1.2x.
China Everbright International Our valuation is based on the discount cash flow methodology, employing a WACC of 9.50% with no
Limited terminal growth rate.
China Foods We base our 12-month price target of HK$5.1 based on sum-of-the-parts methodology. We use 2009E
EV/EBITDA multiple of 14x to value the Great Wall wine business on the back of estimated 33% and
31% EBITDA growth in 2008 and 2009, respectively. We use a 2009E EV/EBITDA multiple of 10x to
value CBL, the Coca-Cola bottling business, projecting a 15% EBITDA CAGR during 2006-09.
China Mengniu We use the 2-stage DCF methodology (assuming a terminal growth rate of 3% and a WACC of 11%) to
value Mengniu. We think only the DCF valuation can capture Mengniu’s strong operating cash flow
generation, expanding market share in the fast growing China dairy sector and expected margin
improvements.
China Merchants Bank (H-shares) Our price target of HKD35.53 is derived from the Gordon growth model which we use for Asian
emerging-market banks, assuming a sustainable ROE of 18.0%, COE of 10.8%, and long-term growth
of 9.0%.
China Merchants Hldgs (Int’l) Our NAV is based on a sum-of-the-parts methodology, for which we adopt separate valuation
benchmarks to assess the fair values of each different operating unit. Specifically for ports, which are
typically of long-term nature and have relatively predictable and stable cash flows, we use discounted
cash flow (DCF) analysis. Our price target of HK$49.50 is based on par to 2008 NAV of HK$119bn
(HK$115.8bn for ports, HK$12.6bn for the remaining businesses, and subtracting HK$9.4bn head-
office’s net debt), or HK$49.5 per share.
China Minsheng Bank Co. We used the Gordon Growth Model to derive our fair value P/B multiple. Our target price of Rmb
9.85/share is based on 2.59x end-2008E adjusted BVPS (post money), assuming 16.2% sustainable
ROE, 11.25% COE, and 8.1% terminal growth.
China Mobile Limited Our DCF valuation uses a risk-free rate of 6%, equity risk premium of 6.5% and a cost of equity of
13.8%, and a WACC of 10.1%. Our DCF also assumes a long-term growth rate of 1.5%.
China National Building Materials We apply a sum-of-the-parts valuation given CNBM’s four different business segments. For CNBM’s
cement operation, we apply EV/tonne of US$121/t, 30% discount to our target EV/t for Anhui Conch
(914 HK, 1-OW) given Anhui Conch’s higher profitability. We also assume 108m tonnes of attributable
cement capacity at end-2008 for CNBM. To value other business segments, we apply average P/E
multiple of industry peers.
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Security Valuation Methodology
China Netcom Group Our 12-month target price of HK$16.0 is based on a discounted cash flow (DCF) methodology. Our DCF
valuation uses a risk-free rate of 6%, an equity risk premium of 6.5%, a cost of equity of 15.1%, growth
to perpetuity of 0.5%, and a WACC of 10.5%.
China Oilfield Services Ltd Our price target of HK$21 is derived from (ROIC-g/WACC-g) – ROACE: 24%; WACC: 9% and long-term
growth rate of 5%. Our WACC of 9% is based on a risk free rate of 4.6%; risk premium of 5.6%; cost of
debt of 2.7%; cost of equity of 10.2% and beta of 1.0.
China Overseas Land Our price target is based on 23% premium to China Oversea’s forward NAV of HK$12.40. This 23%
premium reflects China Overseas surplus returns on its market value NAV over its cost of equity.
China Power International The target price is based on 13x 2009E P/E
China Resources Enterprise Our price target of HK$31.4 is derived from a sum-of-parts valuation, on a premium of 25% of our NAV
estimate of HK$25.1, to reflect the rising exposure to the consumer sector, the ability to execute, and
the potential corporate activity.
China Resources Land Our HK$19.40 price target for CR Land is based on 0% premium to its forward optimised NAV. This
includes potential value from another round of asset injection from parent China Resources Holdings.
China Resources Power Our price target for CR Power is based on a 13x of FY09 P/E.
China Shenhua Energy Valuation Methodology: Our price target of HK$57 includes two parts – (1) existing business by using
sum-of-the-parts valuation based on DCF analysis; (2) our estimated NAV enhancement from coal mine
assets to be injected. For existing business, we use DCF analysis to separately value Shenhua’s coal
and power operation to get the fair value, assuming a long-term coal price of US$45/tonne and terminal
growth rate of 2%. Our WACC assumption is 8.9% based on cost of equity at 14.1%, cost of debt at
3.8%. To value coal mine assets to be injected, we apply regional peers’ comparable EV/tonne of
reserve at US$8.5/t based on the parent company’s scheduled injection of coal reserves of 2,992mt into
Shenhua.
China Shipping Container Lines We apply a modified EV/invested capital (IC) multiple to arrive at our fair value, calculated as
ROIC/WACC adjusted for terminal growth. If a company is creating value by generating positive
economic returns where ROIC > WACC, we ascribe a multiple greater than 1x to the IC. The key
difference in our methodology is that we apply this metric to a shipping company, where we can value its
assets (i.e. its fleet) using secondhand market transactions instead of accounting-based invested
capital, which tends to be distorted by different accounting policies and historical costs. We believe this
should provide a better reflection of a shipping company’s asset value and returns.
Our return on fleet value estimate is based on expected returns for FY08E-FY09E of 9.9%, against a
conservative WACC of 9.6%. We assume long-term growth of 1.5%, which represents the average
annual global fleet development from 1991-2005. We assume maintenance capex of 4% of fleet value,
which reflects the amount of ongoing investment to maihe current fleet aging profile.
Our EV/FV valuation factors in a fleet value target multiple of 1.0x.
China Telecom Our 12-month target price of HK$4.30 is based on a discounted cash flow (DCF) methodology. Our DCF
valuation uses a risk-free rate of 6%, an equity risk premium of 6.5%, a cost of equity of 14.5%, and a
WACC of 10.5%.
China Unicom Ltd. We use a discounted cash flow (DCF) model valuation and have assumed a WACC of 10.9% and a
FCF growth to perpetuity of 1%. Our DCF also uses a risk-free rate of 6% and an equity risk premium of
6.5%.
China Water Affairs Group Limited Our 12-month price target of HK$3.00 is based on a discounted cash flow (DCF) valuation methodology,
assuming a weighted average cost of capital (WACC) of 13.5% and a terminal growth rate of 0%.
China Yurun Food We use a two-stage DCF valuation methodology to calculate our price target of HK$12.8 for Yurun. We
think DCF best captures the company’s strong operating cash flow generation, and we expect its free
cash flow will turn positive from 2009. We use a WACC of 10.9% and a 3% terminal growth rate to
capture the long-term growth of food & beverage consumption in China.
Chinatrust Financial Holding Co. The valuation of Taiwan financial holding companies are sum-of-the-parts valuations of their
subsidiaries. Among subsidiaries, life insurance subsidiaries are valued at embedded value (EV) and
actuarial value (AV), banks are valued based on a target P/B multiple derived from the equation of
(ROE-g)/(k-g), where ROE stands for normalized sustainable ROE, g stands for longer-term growth
expectation and k stands for require rate of return. Enterprise value, at the same time, is derived from
the target P/B multiple and FY07 forecast book value, adjusted for off-balance sheet items including
unrealized gains/losses. Our valuation for CTCB, the major subsidiary of CFHC, is based a long-term
ROE of 15%, a growth rate of 3.5%, and a cost of capital of 8.5%. The target price implies an target
P/adj. book multiple of 2.27 times FY08 forecast NPL adjusted book NT$16 per share.
Chunghwa Picture Tubes With the current healthy industry conditions, we think it is fair to apply a cycle-average price-to-book of
1.4x for the derivation of the stock’s target price. Coupled with the trailing 4Q book value NT$11.1 per
share, we calculate our target price of NT$15.19 for the stock.
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Chunghwa Telecom Co. Ltd. Our 12-month target price is based on a DCF valuation with a WACC of 11.2%, a cost of equity of
14.1% and a long-term FCF growth rate of 0%.
City Developments Target price pegged at parity to end-08E RNAV
CJ Home Shopping Our price target is calculated by a sum-of-the-parts valuation, applying 3.5x 2008E EBITDA (KRW
84.7bn) and W500,000/subscriber value for its SO holdings. We apply 15x 2008E P/E (NP 08E: KRW
16bn) to MBC Dramanet, the program provider, 1x 2008E EV/sales (Sales 08E: KRW 1,575bn) to its
China subsidiary, 0.5x 07 net asset value (W38bn) of BSI, and book value for other stake holdings.
Clear Media We apply DCF valuation, with WACC of 11.6% and terminal growth rate of 2%.
CLP Holdings Our target for CLP is derived by DCF, assuming a 2009 tariff cut of 20%, a 2009 SOC return of 9.99%, a
WACC of 8.75% and a terminal growth rate of 1.5%.
CNOOC We use two methodologies to value CNOOC: (1) EV/CE; and (2) sum of the parts (DCF). Our preferred
valuation methodology for CNOOC is an absolute valuation approach, which links its returns to share price,
as we believe share prices are driven by asset returns (returns on capital. Our target price of HK$13.5 is
based on average 08-09E ROACE/WACC (32.3%/11%). Our WTI oil price forecasts are US$93/bbl for
2008E, US$83/bbl for 2009E, US$75/bbl for 2010E and LT oil price estimates of US$60/bbl.
Datang International The target price is based on 13x 2009E P/E
Digi.Com Berhad We value DiGi using a DCF with 8.8% WACC and 2% terminal growth rate
Electricity Generating PCL DCF, using a WACC of 9.19% and zero terminal growth rate.
Esprit Holdings Our price target of HK$135.0 is based on a PEG of 1x (implied 1-yr fwd PER of 22.0x).
Evergreen Marine We apply a modified EV/invested capital (IC) multiple to arrive at our fair value, calculated as
ROIC/WACC adjusted for terminal growth. If a company is creating value by generating positive
economic returns where ROIC > WACC, we ascribe a multiple greater than 1x to the IC. The key
difference in our methodology is that we apply this metric to a shipping company, where we can value its
assets (i.e. its fleet) using secondhand market transactions instead of accounting-based invested
capital, which tends to be distorted by different accounting policies and historical costs. We believe this
should provide a better reflection of a shipping company’s asset value and returns.
Our return on fleet value estimate is based on expected returns for FY08E-FY09E of 5.2%, against a
WACC of 7.9%. We assume long-term growth of 1.5%, which represents the average annual global fleet
development from 1991-2005. We assume maintenance capex of 4% of fleet value, which reflects the
amount of ongoing investment to mainn the currentfleet aging profile.
Our EV/FV valuation factors in a fleet value target multiple of 0.6x.
Fairfax Media Limited We base our target price of A$3.80 on a 12-month discounted cash flow methodology that assumes a
9.9% WACC and a 0.5% terminal free cash flow growth. Our WACC is based on a 6.3% risk free rate, a
1.0 equity beta, a 1.5% credit premium, and 30% debt to total capital.
Far EasTone Telecommunication Our 12-month target price is based on a DCF valuation with a WACC of 11.2%, a cost of equity of
14.1% and a long-term FCF growth rate of 0%.
Focus Media Holding Limited We use a DCF valuation with a WACC of 11.5% and terminal growth rate of 3%.
Formosa Chemical and Fibre We value FCFC using a sum-of-the-parts methodology. We value FCFC’s core business at a 2008E
EV/IC of 1.0x (WACC of 9% and ROIC of 9.4%), investments in Formosa companies at our price target,
mark its other listed investments to market, and value its unlisted investments at cost.
Formosa Petrochemical We value FPCC using an asset-based approach, linking equity valuation to ROCE. Our price target of
NT$82 is derived from a target EV/CE of 2.2x, which assumes a 2008E-2009E average ROCE of 16.5%
and a WACC of 7.6%.
Formosa Plastics Our price target of NT$82 is derived by a sum-of-the-parts analysis, which values FPC’s core business
at 1.7x EV/IC (average 08E-09E ROIC of 15.0%; WACC of 8.5%); investments in the Formosa Group at
our price targets, other listed investments at market price, and unlisted investments at book value.
Foxconn Technology We have concerns that Foxconn Tech may not be able to recover to its previous peak valuation multiple
based on the rising risks of labor and material cost and volatility from Nintendo’s EMS business. There
is a gap before the company’s next catalyst materializes. As such, we have assigned a diluted earnings
multiple of 14x to Foxconn Tech to derive its long-term fair value since 14x is often used as a hardware
component player’s fair valuation.
Foxconn Technology We have concerns that Foxconn Tech may not be able to recover to its previous peak valuation multiple
based on the rising risks of labor and material cost and volatility from Nintendo’s EMS business. There
is a gap before the company’s next catalyst materializes. As such, we have assigned a diluted earnings
multiple of 14x to Foxconn Tech to derive its long-term fair value since 14x is often used as a hardware
component player’s fair valuation.
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Galaxy Entertainment Group Our PT is the sum of ‘08E NAV (HK$7.70), dominated by gaming assets valued at 7.2x ‘10E
EV/EBITDA; and a Cotai land option value ( HK$0.80), which is estimated proportional to the gaming
assets value estimated for GalaxyWorld Phase I based on the gaming area proposed for GalaxyWorld
Phase I and Phases II-IV respectively.
Giordano International Our price target of HK$3.33 is based on a PER of 15.7x FY08E EPS of HK$0.212, at a 5% premium to
peers (the reflection of an M&A premium).
Golden Eagle Retail Group Our target price of HKD8.2 per share is based on 20x 2009E P/E multiple (EPS RMB0.337), in line with
domestic peers average. We also expect the US$1=RMB6.4 by end-2009. Our DCF valuation suggests
a fair value of HKD12.5 (terminal growth:3%, discount rate:9.5%)
Great Eagle Our HK$44.00 price target is based on a 20% discount to Great Eagle’s end-09 NAV of HK$55.20.
Greentown Our 15.57 price target is based on 20% discount to Greentown’s current NAV of HK$18.48 plus 5%
Rmb appreciation. The 20% discount reflects Greentown’s average 2008 and 2009 return on assessed
NAV and its costs of equity.
GS Holdings Our price target of W78,000 is based on a sum-of-the-parts valuation methodology. We use the market
value of GS Home Shopping, the implied value of GS Caltex based on our calculation of ROCE/WACC
of 15%/11.5%, and the book value of GS Retail (W339bn), GS EPS (W101bn), and GS Sports (W2bn).
GS Home Shopping Our price target is calculated by a sum-of-the-parts valuation, applying 3.3x 2008E EBITDA, and
applying W500,000/subscriber value for its SO holdings with 30% discount. Our price target is
equivalent to 11x 2008E P/E or 9x 2008 P/E when excluding amortization costs related to SO
acquisitions.
Guangzhou R&F Our HK$31.04 price target is based on 10% premium to R&F’s forward optimised NAV of Rmb25.7 and
factored in a 10% appreciation in Rmb.
GZI Real Estate Investment Trust Our HK$3.37 price target is based on a 10-year dividend discount model using 5.0% risk-free rate, 7.5%
market risk premium and a beta of 0.5.
Hanaro Telecom Our target price is based on DCF valuation, with a WACC of 9.94% and terminal growth rate of 2% after
2010E.
Hang Lung Properties Limited Our HK$32.30 price target is based on 5% premium to our HLP end-09E NAV of HK$30.7 per share.
Hanjin Shipping We apply a modified EV/invested capital (IC) multiple to arrive at our fair value, calculated as
ROIC/WACC adjusted for terminal growth. If a company is creating value by generating positive
economic returns where ROIC > WACC, we ascribe a multiple greater than 1x to the IC. The key
difference in our methodology is that we apply this metric to a shipping company, where we can value its
assets (i.e. its fleet) using secondhand market transactions instead of accounting-based invested
capital, which tends to be distorted by different accounting policies and historical costs. We believe this
should provide a better reflection of a shipping company’s asset value and returns.
Our return on fleet value estimate is based on expected returns for FY08E-FY09E of 6.6%, against a
conservative WACC of 7.6%. We assume long-term growth of 1.5%, which represents the average
annual global fleet development from 1991-2005. We assume maintenance capex of 4% of fleet value,
which reflects the amount of ongoing investment to main the current fleet aging profile.
Our EV/FV valuation factors in a fleet value target multiple of 0.8x.
Henderson Land Our HK$65.0 price target is based on 10% discount to Henderson Land’s end-09 NAV of HK$72.49
Hero Honda We have valued Hero Honda by discounting free cash flow to equity (FCFE). For this purpose we have
used discount rate of 13% and a terminal growth rate of 4%.
High Tech Computer We believe HTC’s earnings multiple can be traded back to last upcycle average, 16x. Using 16x our
2008 our diluted 2008 EPS estimate of NT$ 52.59 as a reasonable valuation, we derive the target price
as NT$ 841.
Hindustan Unilever Limited We have used a P/E multiple based valuation methodology. We have valued HUL at 29x current year’s
earnings, which is at a 24% premium to the average multiple of our coverage universe. We believe that
the premium is justified due to:
a) strong brand portfolio of the company,
b) the large size and enhanced liquidity in the stock, c) the historically high multiples that the company
has traded in the past and d) the strong ROE and high dividend yield that the stock offers.
Hite Brewery Our share price target of KRW165,000 is based on a sum-of-the-parts valuation and is equivalent to 19x
our 2008 adjusted EPS estimate of KRW8,508. We begin with a DCF-based operating value of
KRW128,830 per share and add to this a holding equity value, adjusted to Hite’s holding stake with a
30% discount, of KRW31,034, and a value for other subsidiaries (also at a 30% discount) of KRW4,676.
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Hon Hai Precision We carried out our valuation using EV/IC analysis. We assumed Hon Hai’s beta to be 1.24 and the tax
rate to be 20%. This resulted in a WACC assumption of 8.4%. By this method, we have derived a fair
share price of NT$242 for Hon Hai.
Honam Petrochemical We value Honam on a sum-of-the-parts valuation methodology. Based on our NAV valuation of Honam
petrochemical, we believe the company is undervalued compared to our fair value of W165,000 per
share. We value the company’s core business on an ROIC/WACC analysis of 12%/10% and equity
investments are added to derive our target price of W165,000 per share.
Hong Kong & China Gas We use a DCF analysis with a WACC of 8.2% and a terminal growth rate of 3%.
Hongkong & Shanghai Hotels Our PT is based on sum-of-the-parts, with HSH’s hotel operations valued at a global peer average of
12x 08E EV/EBITDA, and its investment properties valued at a 40% discount to 2008E NAV.
Hongkong Electric Our target for HKE is derived by DCF, assuming a 2009 basic tariff cut of 20%, a 2009 SOC return of
9.99%, a WACC of 7.4%, and a terminal growth rate of 1%.
Hongkong Land Our US$5.95 target price is based on 20% discount to end-2009 NAV estimate of US$7.48.
Huadian Power International The target price is based on 13x 2009E P/E
Huaneng Power International The target price is based on 13x 2009E P/E
Huaxia Bank We used the Gordon Growth Model to derive our fair value P/B multiple. Our target price of Rmb
9.00/share is based on 2.51x mid-2008E BVPS, assuming 16.5% sustainable ROE, 11.5% COE, and
8.2% terminal growth.
Hutchison Telecommunications Intl Our price target is based on a SOTP DCF using a WACC of 8-11% and a terminal year exit multiple of
3-5x for its various operations. We also apply a 30% holdco discount on its operations and a 10%
discount on its cash balance.
Hutchison Whampoa Our TP is based on the sum of 2008E ex-3G NAV of HK$82.8/sh and 3G fair value of HK$11/sh
(representing 33% of 3G NAV of HK$33/sh, to reflect our estimate of 33% probability of corporate
activities to unlock the 3G value). Our ex-3G NAV of HK$82.8/sh comprises HK$23.1/sh from
properties/hotels (using a mix of DCF, yield basis and per room valuation), HK$35.4/sh from container
terminals (using DCF), HK$9.7/sh from retail/manufacturing (using P/E), HK$34.2/sh from
infrastructure/energy (using market value and Lehman’s target price), and HK$8.7/sh from listed
telecom assets (using market value and Lehman’s target price).
Hynix Semiconductor Inc. Our price target of W38,000 is based on 1.9x our mean 2008 and 2009 BPS estimate of W20,356.
Hysan Development Our price target of HK$35.00 is based on applying 20% discount to end-09E NAV of HK$43.70.
Hyundai Department Store Our 12-month price target of W112,000 is equivalent to 13.5x 2008E P/E with EPS of W8,363. We
calculate our target by summing the company’s W1.9t operating value (applying 8.7x 08E EBITDA) and
W840bn equity-holdings value (applying 30% discount to estimated value) and subtracting its net debt
(W196b).
Idea Cellular Limited We value IDEA Cellular using a DCF with 11.3% WACC and 3% terminal growth rate
Indosat We derive our price target using a 20% discount on Telkomsel ‘08 EV/EBITDA for Indosat’s mobile
business and a 5.2x ‘08 EV/EBITDA for its fixed-line business.
Industrial & Comml Bank of China(H) We have used the Gordon growth model to derive our target 2008E P/B, based on the following
estimates: sustainable ROE of 18.6%, cost of equity of 11.5%, and terminal growth of 9.3%. Other
assumptions include a US$/Rmb exchange rate of 7.1 by the end of 2008.
Intime Department Store (Group) Our sum-of-the-parts valuation of Intime’s equity suggests a valuation of HKD5.2 per share,
representing 16.1x 2009E earnings of RMB0.298. To value its core recurring business, we use 15.3x
2009EP/E, which is at a 40% discount to its domestic peer group To value its A-share investment, we
use 25x 2009E EPS, in line with A-share-listed consumer stocks.
Inventec Appliances Corp In view of the continued risks, we maintain our previous conservative valuation methodology of a 10x
forward earnings multiple. Based on the NT$ 7.95 of 2008E EPS estimates, we derive our TP of NT$
79.5 and we maintain our 2-EW rating.
Jiangxi Copper Our price target of HK$17.0 would represent 9.7x 2008e P/E, relatively in line with Jiangxi Copper’s
historical 1-year forward P/E average of 9.5x. Our 2008 EPS forecast is Rmb1.58 and HK$/Rmb
exchange rate of 0.9.
Ju Teng International We use a P/E valuation methodology. We believe that it would be fair to use a forward earnings multiple
of 10x for Ju Teng, which is a discount to its Taiwan-listed competitors, as this takes into consideration
the company’s lower liquidity and smaller market capitalization. Applying a 10x multiple to our average
2007/2008 EPS estimate of HK$0.53, we derived our 12-month price target of HK$5.3
Kia Motors Corporation Our 12-month price target is W17,500 for Kia Motors based on 5.2x our one-year forward CFPS of
W3,357 representing mid-year earnings as we believe the company is coming out of a trough valuation.
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Kingsoft Corp. Inc. Our 12-month price target of HK$3.90 is based on 14x FY08E EPS of HK$0.28. The average FY08 P/E
for Chinese online gaming companies is 13.9x. We believe that using a P/E multiple is the best valuation
methodology for the gaming sector, given the cyclical and uncertain nature of the industry.
Korea Electric Power Corp. DCF with a WACC of 9.7% and a terminal growth rate of 2%.
Korea Line Our target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to shipping company,
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical cost. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-FY09E of 18.1%,
against a conservative WACC of 9.9%. We assume long-term growth of 1.5%, which represents the
average annual global bulk fleet development from 1991-2005. We assume a maintenance capex estimate
of 4% ofleet value, which reflects the amount of onvtment to maintain the current fleet aging profile
Our EV/IC valuation factors in a fleet value multiple of 2.0x.
K-REIT Asia DDM valuation using fully-diluted DPU forecasts from FY08E to FY12E, cost of equity of 5.6% (beta
0.65, risk-free 3%, equity risk premium 4%) and terminal yield of 4.9%.
KT Our target price is based on a sum-of-the-parts valuation. The parent company value is derived from
DCF analysis using a 9.69% WACC and a -1.0% terminal growth rate of FCF after 2010.
KT&G Our 12-month price target of W101,000 is based on a sum-of-the-parts valuation and is equivalent to
18.3x 2008E P/E of W5,511 or 4.3x 2008E P/B (24% ROE).
KTF Our price target for KTF is based on DCF methodology, for which we use a 10.00% of WACC and a 0%
terminal growth rate after 2010.
Larsen & Toubro We have valued L&T using a sum-of-the-parts (SOTP) analysis. Our core E&C business (L&T
standalone) valuation is based on a dividend discount methodology. We estimate the one-year forward
value of the E&C business at INR4,010 per share. To this value, we have also added values for L&T
Infotech, L&T Finance, Capital and Infrastructure Finance, L&T IDPL, the housing company for L&T’s
BOT projects, L&T’s ECC and EC&P’s subsidiaries and associates, manufacturing associates, foreign
subsidiaries, as well as value for L&T’s holding in Ultratech Cement. Hence, we estimate our one-year
forward target price at INR5,003 per share.
LG Chem Based on our EV/CE analysis of 18%/9%, we value LG Chem at W8.9tri or W106,500 per share.
LG Dacom We raise our target price by 8% to W27,900 from W25,800 on the back of upwardly revised earnings
forecasts of PWC. Our price target of W27,900 is based on a 10% discount to the sum of Dacom’s
discounted cash flow (DCF) and 45% of the DCF value of Powercom (PWC).
LG Display Co., Ltd Our target price of W54,000 is based on 1.8x 2008E BVPS of W30,313.
LG Electronics Inc. Our target price is based on our global basis sum-of-the-parts valuation. We employ global basis (global
= parent + LGE’s overseas subsidiaries) figures, as a major portion of LGE’s business is operated
globally. For our sum-of-the-parts valuation, we split the company into its three major business divisions:
Home Appliance, Display & Media and Telecom Equipment (including Handset), and compared each
with its global peers. We applied a discount to the peer average ‘08E EV/EBITDA multiple to account for
factors such as relatively low brand equity. From this analysis, we arrived at our global basis firm value,
which we then reduced by the company’s net debt of W4.9tn (global basis). We then added back the
value of LGE’s investment holdings to arrive at our total equity value. This yields a fair value of between
W176000 and W163,000. We have taken the median of this range as our target price.
LG Telecom Our target price of KRW10,600 is based on our DCF valuation for which we apply a 9.9% WACC and a
0% terminal growth rate after 2014.
Li & Fung Our price target of HK$35.3 is based on rolling forward PER of 29.0x, on an unchanged 20% premium
to the 3-year trading average.
Li Ning Our price target of HK$25.0 is based on a forward PEG of 0.84x, implying a PER of 26.2x EPS FY09E
estimate of RMB0.928.
Lianhua Our price target of HK$13.00 for Lianhua is based on a multiple of 22.9x 2008E EPS of RMB0.52, in line
with its historical 3-year average 12-month forward P/E. We assume a 5% appreciation in the renminbi
against the US dollar for 2008E. Our fair value represents 14.5x 2008E ex-cash P/E and 5.5x 2008E
EV/EBITDA.
Lifestyle International Holdings Our price target of HK$17.6 is derived by a sum-of-the-parts valuation.
Limited
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LIG Insurance We derive our price target of W24,500 with a two-stage Gordon Growth Model, assuming a sustainable
ROE of 14.5%, COE of 11.3% and terminal growth rate of 5%.
Link REIT Our price target for Link is based on a 10-year DDM using 5.0% risk free rate, 5.0% risk premium, beta
of 0.5 and a terminal yield of 7.25%.
Lotte Shopping Our 12-month target price is calculated by the sum-of-the-parts valuation by summing its operating
value (W9.3trn) and equity-holdings (W1.5trn after applying 30% discount to our estimated value) value
and subtracting its net debt (W56b). When deriving the operating value, we apply 7.8x 2008E EBITDA
multiple, which reflect global peers’ average.
Maanshan Iron & Steel Our 12-month PT of HK$5.0 is based on 11.5x 2008E P/E multiple, 20% higher than its historical
average one-year forward P/E multiple, given Magang’s capacity expansion in high-end flat products.
Our target 2008 P/E multiple of 11.5x for Magang is lower than our target 2008 P/E multiple of 19.2x for
Angang H-shares and 17.5x for Baosteel. We believe the discount is justified given Magang’s relatively
commodity-grade focused product mix and the lack of asset injection or M&A activity ahead.
Macquarie Group Limited Our price target of A$62.80 is based the average per share valuations of the dividend discount model
(A$61.78) and relative dividend yield valuation of A$63.89. Our DDM assumes a risk-free rate of 6%, an
equity-risk premium of 5.5% and beta of 1.5. Sustainable ROE is assumed to be 19.5% and assumed
dividend payout is 55%. For the past 10 years, MQG’s dividend yield was on average 0.8% below that of
the average of the four major Australian commerical banks.
Mahanagar Telephone Nigam We use DCF with WACC at 11.8% and a terminal year growth rate of 2%.
Malaysian Bulk Carriers Target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to a shipping company,
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical cost. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Key assumptions include a return on fleet value (08E-09E) of 18.8%, a WACC of 10.8%, and a long-
term growth rate of 1.5%.
Our EV/IC valuation factors in a fleet value multiple of 1.9x.
Maruti Suzuki India Limited We have discounted Free Cash Flow to Equity (FCFE) to arrive at our target price. Our target price of
INR1,042 builds in a terminal growth rate of4% and 4% CAGR in free cash flow to equity (FCFE) in the
long run, after an intermediate stage earnings CAGR of 12.6% from FY08E to FY20E.
MobileOne We value M1 using a DCF with 8.4% WACC and 0% terminal growth rate.
Nan Ya Plastics Our share price target of NT$78 is derived by our sum-of-the-parts analysis, valuing NYP’s core
business at 2.2x EV/IC (2008E-2009E average ROIC of 19.0%; WACC of 8.5%), investments in the
Formosa Group at our price targets, other listed investments at market price, and unlisted investments
at book value.
Nan Ya Plastics Our share price target of NT$78 is derived by our sum-of-the-parts analysis, valuing NYP’s core
business at 2.2x EV/IC (2008E-2009E average ROIC of 19.0%; WACC of 8.5%), investments in the
Formosa Group at our price targets, other listed investments at market price, and unlisted investments
at book value.
NetEase We derive our price target by applying 15x 2008PE to 2008 EPS estimate of US$1.37
New World Development Our HK$27.50 price target is based on 10% discount to NWD’s end-09E NAV of HK$30.70.
Nicholas Piramal India Ltd We value NP using the sum-of-parts valuations, determining the worth of its (1) base business,
excluding the innovation R&D entity and (2) 18% stake in the innovation R&D entity. We value the base
business using dividend discount model (DDM) to arrive at our Mar 2009 price target of INR 508/share.
Our end-FY09 price target of INR 508/share implies a multiple of 18.6x FY10E earnings. We value the
innovation R&D facility separately. NP has decided to hive off the innovation R&D entity effective 1st
April 2007. We value the R&D entity value at US$ 488mn (end-FY09), or INR 91/share. Therefore, 18%
stake in this entity would add INR 16/share to the base business value of INR 508/share, giving a end-
FY09 price target INR 524/share.
Oil and Natural Gas Corp We have valued ONGC based on ROIC/WACC (19%/11%) analysis and further added value of its
overseas oil and gas reserves and other investments to derive our price target.
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Pacific Basin Target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to a shipping company,
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical costs. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Our return on fleet value estimate is based on expected returns for FY08E-FY09E of 17.5%, against a
conservative WACC of 10.3%. We assume long-term growth of 1.5%, which represents the average
annual global bulk shipping fleet development from 1991-2005. We assume maintenance capex of 4%
of fleet vich reflects the amount of ongoing inent to maintain the current fleet aging profile.
Our EV/FV valuation factors in a fleet value target multiple of 1.8x.
Parkson Retail Group Our price target of HKD93 per share is based on 35x 2009E P/E (EPS of RMB2.31) and assumes
14.5% RMB appreciation against the US dollar for 2008-09E. This represents a 30% premium to the
valuation for domestic peers and branded China consumer universe to justify the company’s favourable
industry, faster estimated earnings growth, and plenty of potential share price catalysts.
PCCW Our 12-month target price is based on sum-of-the-parts valuation methodology. For the fixed-line
business, we use a WACC of 10% and long term terminal growth rate of 0%.
PCCW Our 12-month target price is based on sum-of-the-parts valuation methodology. For the fixed-line
business, we use a WACC of 10% and long term terminal growth rate of 0%.
People’s Food We use a DCF valuation methodology to calculate our price target of SGD1.24 for PF.We think DCF
best captures the company’s strong operating cash flow generation, and we expect it to remain free
cash flow positive in the future. We use a WACC of 13.2% and a 3% terminal growth rate to capture the
long-term growth of food & beverage consumption in China. We are using the book value of Pine
Agritech to calculate our target price because we do not expect management to sell the stakes in the
near future.
Perusahaan Gas Negara We use a discounted cash flow (DCF) methodology to value Perusahaan Gas, as we believe it best
captures the company’s stable earnings profile. We use a weighted average cost of capital (WACC) of
9.0% and a 2.5% terminal growth rate. Our 12-month price target is set at INR19,400.
PetroChina The valuation methodology we use to derive our target price for Petrochina is based on ROACE/WACC
= EV/CE. This preferred valuation methodology for PetroChina is an absolute valuation approach, which
links returns to share price, as we believe share prices are driven by asset returns (returns on capital).
This also captures the market risk premium as well as considers the financial structure of the company.
Our target price of HK$15.8 derived from the sum of (i) HK$12.10 per share (based on average 08E-
09E ROACE/WACC (19.8%/10.3%) and LT growth rate: 1.5%) and (ii) HK$3.7 of our estimated oil and
gas new discoveries’ value. Our oil price (Brent) forecasts are US$93/bbl for 2008E, US$83/bbl for
2009E, US$75/bbl for 2010E and LT oil price forecast of US$60/bbl.
PetroChina The valuation methodology we use to derive our target price for Petrochina is based on ROACE/WACC
= EV/CE. This preferred valuation methodology for PetroChina is an absolute valuation approach, which
links returns to share price, as we believe share prices are driven by asset returns (returns on capital).
This also captures the market risk premium as well as considers the financial structure of the company.
Our target price of HK$15.8 derived from the sum of (i) HK$12.10 per share (based on average 08E-
09E ROACE/WACC (19.8%/10.3%) and LT growth rate: 1.5%) and (ii) HK$3.7 of our estimated oil and
gas new discoveries’ value. Our oil price (Brent) forecasts are US$93/bbl for 2008E, US$83/bbl for
2009E, US$75/bbl for 2010E and LT oil price forecast of US$60/bbl.
Petronas Gas DCF methodology with a WACC of 10.8% and a terminal growth rate of 2%.
Precious Shipping Our target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to a shipping company
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical cost. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-FY09E of12.5%,
against a WACC of 12.4%. We assume long-term growth of 1.5%, which represents the average annual
global bulk fleet development from 1991-2005. We assume a maintenance capex estimate of 10% of
fleet value which reflects our view of how much the comnould theoretically be reinvesting back into fleet
renewal to reduce the current fleet aging profile. Alternatively, the fleet would become obsolete.
Our EV/IC valuation factors in a fleet value multiple of 1.0x.
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Security Valuation Methodology
PrimeAg Australia Limited Our 12 month price target of A$2.25 is derived using a discounted cash flow valuation. We empoy a
WACC of 10% and terminal growth rate of 3%.
ProMOS We apply a cycle trough P/B multiple of 0.86x for ProMOS as our benchmark valuation to derive our
target price. Combining the P/B benchmark and our updated 4Q-forward book value of NT$8.5 (2Q09),
we derive our target price of NT$7.3 for ProMOS.
Prosperity Real Estate Investment Our HK$1.97 target price is based on a ten-year dividend discount model using 5.0% risk-free rate,
Trust 5.0% market risk premium, beta of 0.5 and a terminal yield of 5.7%
PT Telkom We derive our Telkom DCF using a 12.2% WACC (on a 9% 10-yr risk-free rate) and a 3% terminal
FY12/2015E growth rate for both the mobile and the non-mobile businesses.
PTT Aromatics & Refining Our price target of Bt57 is based on a target EV/CE of 1.5x (derived from a 2008E ROCE of 14.7%,
WACC of 9.8% and ‘g’ of zero) and valuing its new expansion projects at 1x replacement value.
PTT Chemical Our price target of Bt138 is based on a 2008E EV/IC multiple of 1.7x (ROIC 18.1%, WACC 10.4%),
Bt7.9 valuation of PTT Polyethylene, listed investments at market value and unlisted investments at
book.
PTT Exploration & Production Our price target of Bt154 is based on a field-by-field DCF using a WACC of 8.9%. The long-term growth
rate is 0% and ROACE (2008E) is 21%.
PTT PCL We mark PTT’s listed investments to market, and value the remainder of its businesses as follows:
PTT’s natural gas business on a DCF (WACC of 10% and g of zero), oil marketing business at book,
and unlisted investments at book value.
Ranbaxy Laboratories Ltd We use a dividend discount model as detailed below to value the base business. To arrive at the base
business earnings, we make the following adjustments: a) subtract the upside related to one-off
exclusivity gains; b) subtract the upside related to one-off notional gains on FCCB; and c) add back NCE
R&D spend. RBXY will be hiving off its innovation research entity. Hence, the assumption of adding
back the innovation research spends after adjusting for the tax benefit is justified, in our view. The key
assumptions of our dividend discount model are:
(1) Explicit forecast for the CY08-09 period. (2) Adjusted profit growth to slow down from 25% in
CY10E to 7% in the terminal year CY19E. This implies an adjusted profit CAGR of 18% over CY10-
19 (3) Long-term adjusted RoE of 25% compared with 23.5% in CY09 (4) Discount rate of 13% (5)
Terminal growth rate of 7%.
(2) Based on the dividend discount model, we arrive at Mar-09 price of the base business of INR
441/share. To this, we add INR 140/share as one-off exclity gains. We build in value of INR
22/share for innovation R&D, which should be hived off in a separate entity. This gives us Mar-09
price target of INR 603/share. Earlier, we were treating FCCB as debt and were not building in
conversion. Accordingly, we were earlier subtracting the FCCB liability from the valuation. However,
now with increase in our target price and strong earnings growth we expect conversion of the
FCCB. Therefore, we are now treating FCCB as equity and are using fully diluted number of share
for computing per share value.
Ratchaburi DCF with a WACC of 8.97% and zero terminal growth rate
Reliance Communications Ltd We are using a DCF methodology with WACC at 11.0% and a terminal year growth rate of 3%.
Reliance Industries We valued RIL’s core business based on an ROIC-growth/WACC-growth (21%/9%) analysis as we
believe share prices are driven by asset returns. We further add the value of assets which are not
captured in our core valuation methodology to derive our target price.
Sa Sa International Our price target of HK$3.93 is derived from one-year forward PER of 16.6x, on par with that of its peers,
to reflect its market leadership and sustainable high dividend payout policy, despite a discount for being
more cost-sensitive.
Samsung Electronics Our price target of W920,000 is based on 2.5x our mean 2008 and 2009 BPS estimate of W367,848.
SC Global Developments Target price pegged at parity to end-08E RNAV
Shanghai Industrial In our view, NAV (or sum-of-the-parts value) remains the best valuation methodology for asset-intensive
and diversified conglomerates. We value SIHL’s different businesses based on what we believe to be
the most appropriate valuation benchmark for each of them. Our 2008E NAV of HK$34.4bn (from
HK$45.3bn) or HK$32.1/share (from HK$42.5/share) comprises HK$11.8bn (from HK$14.3bn) for
consumer products (based on P/E multiples and Lehman’s target price), HK$7.0bn (from HK$7.9bn) for
infrastructure (based on DCF and investment cost), HK$2.1bn (from HK$3.6bn) for pharmaceutical
(based on P/E multiple), HK$7.9bn (from HK$10.5bn) for property (based on sum-of-the-parts),
HK$2.0bn (from HK$2.6bn) for information technology (based on market value and investment cost),
and HK$3.6bn (from HK$6.3bn) head-office net cash. Our price target is based on 20% discount (from
5%) to 2008E NAV. Such discount is fair in our view, given the challenges for SIHL to achieve market
leadership at its various businesses, and its overall modest ROE outlook.
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Security Valuation Methodology
Shanghai Pudong Development We used the Gordon growth model to derive our fair value P/BV multiple. Our target price of RMB
Bank 35.48/share is based on 3.86x our end-2008E adjusted BVPS (post money) assuming a 18.2%
sustainable ROE, an 11.25% COE, and 9.1% terminal growth.
Shangri-La Asia Ltd Our PT is based on sum-of-the-parts, with SLA’s hotel operations valued at a historical average of 14x
08E EV/EBITDA, and its investment properties valued at a 40% discount to 2008E NAV. In arriving at
our 2008E EBITDA estimate, we have assumed RevPAR growth 5% – 13% for SLA’s various hotels
depending on their locations, and a largely flat EBITDA margin.
Shenzhen Development Bank We used the Gordon growth model to derive our fair value P/B multiple. Our target price of Rmb
31.84/share is based on 3.56x end-2008E BVPS of RMB 8.93, assuming 17.6% sustainable ROE,
11.25% COE, and 8.8% terminal growth.
Shinsegae We set our target price at W770,000, based on the sum-of-the-parts valuation. The target price is
calculated by summing up the operating value (W11trn), which is derived by DCF valuation and equity
holding value (W3.4trn after applying 30% discount to estimated value except Samsung Life Insurance).
Shinsegae holds a 14% stake in Samsung Life Insurance, and we reflect its value based on 1.8x Mar
07FY P/B. In our valuation, we assume a WACC of 8.0% (cost of equity at 10.8% and cost of debt at
5.1%), terminal growth of 4% and beta of 0.9.
Silitech Technology We conduct ROIC/WACC to derive the fair value of Silitech, as we believe that this methodology can
eliminate and screen out short-term uncertainties and focus on long-term value. We have assumed
Silitech’s beta to be 0.96 and the tax rate to be 20%. This has led to a WACC assumption of 8.2%.
Using EV/IC analysis, we have calculated a fair share price of NT$126 for Silitech.
Sincere Navigation Our target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to arrive
at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating value by
generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than 1x to the IC.
The key difference in our methodology is that we apply this metric to a shipping company where we can value
its assets (i.e. its fleet) using secondhand market transactions instead of accounting-based invested capital,
which tends to be distorted by different accounting policies and historical cost. We believe this should provide
a better reflection of a shipping company’s asset value and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-FY09E of 5.9%,
against a WACC of 7.3%. We assume long-term growth of 1.5%, which represents average annual bulk
fleet development from1991-2005. We assume a maintenance capex estimate of 4% of fleet value,
which reflts the amount of ongoing investment to maintae current fleet aging profile. When we calculate
the ROFV/WACC spread adjusted for growth, we arrive at a multiple of 0.8x.
Sincere Navigation Our target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to a shipping company
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical cost. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-FY09E of 5.9%,
against a WACC of 7.3%. We assume long-term growth of 1.5%, which represents average annual bulk
fleet development from1991-2005. We assume a maintenance capex estimate of 4% of fleet value,
which reflts the amount of ongoing investment to maintae current fleet aging profile. When we calculate
the ROFV/WACC spread adjusted for growth, we arrive at a multiple of 0.8x.
SingTel We value Singtel using a sum-of-the-parts and discounted-cash-flow methodology. We base its
associate stakes in Bharti, Telkomsel and AIS at our target price. We value its local business on DCF
with 8% WACC and 0.5% TGR. We value Optus on DCF with 8.0% WACC and 1% TGR.
Sino Land Our HK$29.80 price target is based on a 15% premium to Sino Land’s end-09E NAV of HK$25.90.
Sinopec The valuation methodology we use to derive our target price for Sinopec is based on ROACE/WACC =
EV/CE. This preferred valuation methodology for Sinopec is an absolute valuation approach, which links
returns to share price, as we believe share prices are driven by asset returns (returns on capital). This
also captures the market risk premium as well as considers the financial structure of the company. Our
target price of HK$10.5 derived from the sum of (i) HK$8.40 per share (based on an average 08E-09E
ROACE/WACC (15.4%/9.5%) and (ii) HK$2.1 of our estimated oil and gas new discoveries’ value. Our
oil price (Brent) forecasts are US$93/bbl for 2008E, US$83/bbl for 2009E, US$75/bbl for 2010E and LT
oil price forecast of US$60/bbl.
Sinopec Shanghai Petrochemical Our price target of HK$3.55 is derived from ROACE/WACC (11%/10.5%). Our WACC calculation of
10.5% assumes a risk-free rate of 4.58%, a risk premium of 7.5%, a cost of debt of 5.8%, a cost of
equity of 11.5%, and a beta of 0.92.
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SK Energy Based on our EV/IC analysis, applied to our 2008 earnings estimates, we value SK Energy operating
business at W121,765bn. We further add our valuation for SK Incheon at W3,777bn based on EV/CE. In
total, we value SK Energy at W19,490bn or W210,000/share.
SK Holdings SK Holding’s NAV is derived based on our fair value for SK Energy of W245,000/share and SK Telecom
W230,000/share plus market valuation for other subsidiaries listed subsidiaries.
SK Telecom SKT’s target price is based on a sum-of-the- parts valuation for which we use a DCF method for the
parent company, with 10.79% WACC, and terminal growth rate of -1.0% after 2014E.
SmarTone Our 12-month target price is based on a discounted cash flow model. We are using a WACC of 11.9%
and a terminal growth rate of 0%.
S-Oil Corporation We valued S-Oil at W74,000/share based on our EV/CE valuation formula with ROCE/WACC of
24%/11%.
SPG Land Our HK$6.24 price target is based on 15% discount to SPG’s current NAV of Rmb6.99 plus 5% Rmb
appreciation. The 15% discount reflects SPG’s 2009 return on assessed NAV and its costs of equity.
StarHub Ltd We value StarHub using a DCF with 8.1% WACC and 0.5% terminal growth rate.
State Bank of India We value SBI using sum-of-the-parts (SOTP) valuation, valuing the banking and non-banking
businesses separately. Our 12 month forward SOTP fair value is INR 1900. We value the parent using a
three-stage dividend discount model (DDM) with explicit forecasts up to FY10E, intermediate growth
phase between FY10E-FY28E and terminal phase beyond that. We are building an intermediate growth
of 16%p.a over FY10E-FY19Eand 10%p.a. over FY20E-FY28E and a sustainable RoE of 15.5%. We
are building in a 5% terminal growth in earnings. Using this methodology, we arrive at a 12-month fair
value of INR 1590 for the banking business. We value the subsidiaries at a combined INR310. Of this
the largest subsidiary, life insurance is valued at 20xFY10E NBAP, which imlpies a value of INR
238/shr.
STX Pan Ocean For STX Pan Ocean our target price is based on sum-of-the-parts with return on fleet value (ROFV)
estimate based on expected returns for FY08E-FY09E of 15.6%, against a WACC of 10.9%. We
assume long-term growth of 1.5%, which represents the average annual fleet development from 1991-
2005. We assume a maintenance capex estimate of 4% of fleet value, which reflects the amount of
ongoing investment to maintain the current fleet aging profile. Our EV/IC valuation factors in a fleet
value multiple of 1.5x.
STX Shipbuilding Our W30,000 price target is based on risk-adjusted 3-stage DCF approach, using a 16% WACC to
arrive at our base-case fair value of W51,033 then applying a 41% risk-adjustment discount.
Sun Hung Kai Properties Our HK$205.00 price taget is based on 25% premium to SHKP’s end-09E NAV of HK$164.8.
Sunplus Technology Co. Ltd. The target price of NT$50 is based on FY08 EPS of NT$4.13 and the historical floor multiple of 12x.
Taiwan Cement Our price target is based on a sum-of-the-parts, where we take the value of its cement business (based
on EV/tonne of USD140/tonne and capacity of 20.25mn tonnes) less net debt, and then add the value of
its investments (based on 15% conglomerate discount to both market value for listed companies and
book value for non-listed companies). The discount is lower than Asia Cement due to less cyclical
earnings.
Taiwan Mobile Our 12-month target price is based on a DCF valution with a WACC of 11.2%, a cost of equity of 14.1%
and a long-term FCF growth rate of 0%.
Tata Motors We have valued Tata Motors by Sum of Parts methodology. For this purpose we have done a DCF for
the standalone business and a multiple based valuation for other key subsidiaries. For DCF we have
used a terminal growth rate of 6% and discount rate of 13%.
Telecom Corporation of New We apply a 12 month DCF based valuation for TEL. Our calculations factor 6.5% risk free rate, 6.0%
Zealand equity risk premium, 0.9 equity beta and 10.1% WACC.
Telekom Malaysia Bhd We use a sum-of-the-parts methodology, with a WACC varying between 8% and 14% and terminal exit
multiples between 4.5x and 5.0x.
Telstra Discounted cash model (DCF) that assumes a WACC of 9.6% and a terminal growth rate of 0.5%.
Tenaga Nasional DCF based on WACC of 9.7% and terminal growth rate of 2%.
Thai Oil Our valuation is derived from a fair EV/CE multiple of 2.0x, which assumes a ROCE of 21.5%, WACC of
10.6% and long-term growth rate of 0%.
The9 Limited Our $30 12-month target price is based on 15x FY08 earnings of $2/share, which is in-line with the
average for Chinese online gaming companies’ FY08 P/E multiples. We do not include The9’s
$9.40/share in cash in our valuation.
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Security Valuation Methodology
Thoresen Thai Our target price is based on a sum-of-the-parts valuation. We apply a modified EV/invested capital (IC)
multiple to arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company
is creating value by generating positive economic returns where ROIC > WACC, we ascribe a multiple
greater than 1x to the IC. The key difference in our methodology is that we apply this metric to a
shipping company where we can value its assets (i.e., its fleet) using second-hand market transactions
instead of accounting-based invested capital, which tends to be distorted by different accounting policies
and historical cost. We believe this should provide a better reflection of a shipping company’s asset
value and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-09E of 20.7%,
against a conservative WACC of 11.4%. We assume long-term growth of 1.5%, which represents the
average annual fleet development from 1992 to 2006. Note that our ROFV could be conservative, ae
assume an aggressive maintenance capex estimate of 10%. In our view, a high maintenance capex
assumption is necessary if we are to assume that the company wishes to continue as a going concern.
Our EV/IC valuation factors in a fleet value multiple of 1.9x.
Times We value Times at 14.5x 2009E P/E, in line with the average for China grocery chain store operators.
Our target valuation suggests 0.6x PEG and 6.5x 2009E EV/EBITDA.
Tingyi We use a DCF valuation methodology to calculate our price target of HK$12.0 for Tingyi. We think DCF
best captures the company’s strong operating cash flow generation, and we expect it to remain free
cash flow positive in the future. We use a risk-free rate of 4.5%, an equity-risk premium of 7.5% and a
beta of 1.1. We factor a long-term debt weight of 25%, a capital weight of 75%, and an after-tax cost of
debt of 6.6%. This gives us a WACC of 11.2%. We use a 3% terminal growth rate to capture the long-
term growth of food & beverage consumption in China.
Total Access Communication We are using DCF (Discounted Cash flow) method to arrive at the target price. Our WACC and terminal
growth rate assumptions are 10.2% and 2.0% respectively
Transpacific Industries Limited We value TPI on a SOTP EV/EBIT multiple of 13.3 times. This is in line with domestic peer company
comparisons. We have assigned a higher multiple for the company’s defensive earnings and a lower
multiple to its more cyclical divisions. Our target price implies a FY08E P/E multiple of 20.6x.
True Corporation We value True Corp using a sum-of-the parts discounted-cash-flow methodology. We value wireless
business on DCF with 12.2% WACC and 2% TGR. We value Wireline business on DCF with 12.2%
WACC and 0% TGR and we value Pay TV business on DCF with 12.2% WACC and 3% TGR.
TsingTao Brewery (H share) We use a DCF valuation methodology to calculate our price target of HK$23.6 for TB. We think DCF
best captures the company’s strong operating cash flow generation, and we expect it to remain free
cash flow positive from 2009 onwards. We use a risk-free rate of 4.5%, an equity-risk premium of 7.5%
and a beta of 1.1. We factor a long-term debt weight of 25%, a capital weight of 75%, and an after-tax
cost of debt of 5.6%. This gives us a WACC of 11%. We use a 3% terminal growth rate to capture the
long-term growth of food & beverage consumption in China.
TSMC We raise our 12-month TP to NT$76, 3.7x our ‘08 estimated BVPS (NT$20.3), the peak level PB
valuation in the ‘05-’07 cycle.
TVS Motor We have valued the company by discounting free cash flow to equity (FCFE). For this purpose we have
taken a terminal growth rate of 4% and a discount rate of 13%
U-Ming Marine Our target price is based on sum-of-the-parts. We apply a modified EV/invested capital (IC) multiple to
arrive at our fair value, calculated as ROIC/WACC adjusted for terminal growth. If a company is creating
value by generating positive economic returns where ROIC > WACC, we ascribe a multiple greater than
1x to the IC. The key difference in our methodology is that we apply this metric to a shipping company,
where we can value its assets (i.e. its fleet) using secondhand market transactions instead of
accounting-based invested capital, which tends to be distorted by different accounting policies and
historical cost. We believe this should provide a better reflection of a shipping company’s asset value
and returns.
Our return on fleet value (ROFV) estimate is based on expected returns for FY08E-FY09E of 11.8%,
against a WACC of 8.9%. We assume long-term growth of 1.5%, which represents the average annual
fleet development from 1991-2005. We assume a maintenance capex estimate of 4% of fleet value,
which reflcts the amount of ongoing investment to maintain the current fleet aging profile. Our EV/IC
valuation factors in a fleet value multiple of 1.4x.
Wharf (Holdings) Ltd. Our HK$60.00 price target is based on 5% discount to Wharf’s end-09 NAV of HK$63.35.
WorleyParsons Limited Our price target is derived from 24x our FY09E EPS forecast of AUD 1.66. Our P/E target multiple is at
a 13% premium to the Lehman Brothers target P/E multiple for the E&C sector global average. Our
valuation premium is due to WOR’s minimal exposure to fixed price contracts relative to its peers.
Xinao Gas Our HK$17.30 target price is based on our DCF value, which is based on the NAV at the end of 2008.
Our model does not incorporate any unannounced project or acquisition that has not been approved. A
10.5% WACC is derived at a 15.4% cost of equity and a 50% long-term debt to capital ratio. We roll over
FCF to 2022 with a 0% terminal growth rate.
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Yanzhou Coal Mining Co Ltd Our 12-month price target of HK$20.0 is based on our -year DCF analysis. Our WACC assumption is
9.7%, incorporating a cost of equity at 12.2% and a cost of debt at 3.8%. Our terminal growth rate
assumption is 2% given Yanzhou Coal’s long reserve life (59 years) and likely continued M&A efforts.
On our PT, it would represent 15.3x 08e P/E and 14.2x 09e P/E.
Zhengzhou Gas We have used a DCF methodology to derive a fair value of HK$1.51, rounded to HK$1.50. We have
assumed a terminal growth rate of 0%, a one-year forward foreign exchange rate of HK$1.12 per RMB
and a WACC of 10.8% (debt cost 7%, raw beta: 0.90 adjusted to 0.93, a risk-free rate of 5.0%, a risk
premium of 8% and a long-term debt-to-equity ratio of 30%).
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ASIA RESEARCH ROSTER
INVESTMENT STRATEGY & MACRO FINANCIAL SERVICES
Japan
Economics
Global Chief Economist Walter Altherr .........................813.6440.1662 ....................walter.altherr@lehman.com
Paul Sheard .......................... 1.212.526.0067...........................psheard@lehman.com Takayuki Hayano...................813.6440.1389 ............... takayuki.hayano@lehman.com
Non-Japan Asia Junsuke Senoguchi....................813.6440.1676 .............junsuke.senoguchi@lehman.com
Robert Subbaraman ................. 852.2252.6249.............................. rsuba@lehman.com Miwako Tani ........................813.6440.1634 .....................miwako.tani@lehman.com
Mingchun Sun ...................... 852.2252.6248.............................minsun@lehman.com Non-Japan Asia
Young Sun Kwon .................. 852.2252.1370................. youngsun.kwon@lehman.com Michelle Cho ..........................822.2116.7559 .................... michelle.cho@lehman.com
Stephen Roberts .................... 61.2.8062. 8431..................stephen.roberts@lehman.com Jee Hoon Park .........................822.2116.7567 ................... jeehoon.park@lehman.com
Japan Lacey Cho..............................822.317.5141 ........................ lacey.cho@lehman.com
Kenichi Kawasaki.................... 813.6440.1420...............kenichi.kawasaki@lehman.com Lucy Feng...............................852.2252.6174 .........................lucy.feng@lehman.com
Hiroshi Shiraishi .................... 813.6440.1427............................hshirais@lehman.com Kenneth Fong ........................852.2252.6196 ....................kenneth.fong@lehman.com
Non-Japan Asia Strategy Sarah Hung ..........................8862.8723.1618 ...................... sarah.hung@lehman.com
Paul Schulte.......................... 852.2252.1409...................... paul.schulte@lehman.com Timothy Mak .........................61.2.8062. 8449 ..................... timothy.mak@lehman.com
Shubhankar Das .................. 852.2252.1424.................shubhankar.das@lehman.com India
Japan Strategy Srikanth Vadlamani ...............91.22.4037.4191 ............ srikanth.vadlamani@lehman.com
Hidenao Miyajima ................ 813.6440.1380..............hidenao.miyajima@lehman.com Deepak Reddy ...................91.22.4037.4190 ................. deepak.reddyr@lehman.com
CUSTOM PRODUCTS
HEALTH CARE
Non-Japan Asia
Justin Lau................................ 852.2252.6697.......................... justin.lau@lehman.com Non-Japan Asia
Philip Lo .............................. 852.2252.6617...........................philip.lo@lehman.com Christine Peng .........................852.2252.6191 .................. christine.peng@lehman.com
Jibo Ma............................... 852.2252.6619........................... jibo.ma@lehman.com Pharmaceuticals
Japan Japan
Suni Kim ................................ 813.6440.1351........................... suni.kim@lehman.com Toshihide Yoda .......................813.6440.1674 ............................. tyoda@lehman.com
Yukigi Naka .........................813.6440.1668 ......................yukigi.naka@lehman.com
SMALL & MID-CAP RESEARCH India
Saion Mukherjee ..................91.22.4037.4184 ............... saion.mukherjee@lehman.com
Non-Japan Asia
MLNPP Prasanth .................91.22.4037.4197 ................ mlnpp.prasanth@lehman.com
Josephine Ho........................ 8862.8723.1663.................... josephine.ho@lehman.com
India
INDUSTRIAL
Manish Gunwani ................. 91.22.4037.4182................manish.gunwani@lehman.com
Manish Jain....................... 91.22.4037.4186...................... manish.jain@lehman.com Automotive
Aatash Shah ..................... 91.22.4037.4194......................aatash.shah@lehman.com Non-Japan Asia
Jamil Ansari....................... 91.22.4037.4192...................... jamil.ansari@lehman.com Zayong Koo .............................822.317.5145 ..................... zayong.koo@lehman.com
Lydia Shin...............................822.517.5146 ........................ lydia.shin@lehman.com
AGRICULTURE Yankun Hou............................852.2252.6234 ......................yankun.hou@lehman.com
Japan
Non-Japan Asia
Tsuyoshi Mochimaru .................813.6440.1338 ........... tsuyoshi.mochimaru@lehman.com
Bradley Clibborn.................... 61.2.8062.8447................bradley.clibborn@lehman.com
Emi Ohbu.............................813.6440.1647 ........................ emi.ohbu@lehman.com
CONSUMER Rie Serizawa ........................813.6440.1624 .................... rie.serizawa@lehman.com
India
Retail
Prabhat Awasthi ..................91.22.4037.4180 ............... prabhat.awasthi@lehman.com
Non-Japan Asia
Kapil Singh........................91.22.4037.4199 .......................kapil.singh@lehman.com
Christine Peng ........................ 852.2252.6191................... christine.peng@lehman.com
Building Materials & Construction
Phoebe Wong........................ 852.2252.1403...................phoebe.wong@lehman.com
India
Hong Taik Chung...................... 822.317.5148................. hongtaik.chung@lehman.com
Satish Kumar ........................91.22.4037.4183 ...........................satishku@lehman.com
Candy Huang ........................ 852.2252.1407.................... candy.huang@lehman.com
Abhinav Sharma .................91.22.4037.4198 .........................abhinsha@lehman.com
Japan Saion Mukherjee ..................91.22.4037.4184 ............... saion.mukherjee@lehman.com
Yasuyuki Sasaki ...................... 813.6440.1681................. yasuyuki.sasaki@lehman.com Tanuj Shori ........................91.22.4037.4028 ....................... tanuj.shori@lehman.com
Consumer Chemicals
India Mikiya Yamada.......................813.6440.1645 .......................miyamada@lehman.com
Manish Gunwani ................. 91.22.4037.4182................manish.gunwani@lehman.com
Yusuke Inoue.........................813.6440.1695 ....................yusuke.inoue@lehman.com
Osamu Iwasawa ...................813.6440.1648 ............... osamu.iwasawa@lehman.com
Conglomerates
ENERGY/POWER
Non-Japan Asia
Oil & Gas Benjamin Lo ............................852.2252.6208 ........manchuenbenjamin.lo@lehman.com
Non-Japan Asia Perveen Wong ......................852.2252.6254 ..................perveen.wong@lehman.com
Cheng Khoo .......................... 852.2252.6180...................... cheng.khoo@lehman.com Sylvia Chan ..........................852.2252.1414 .................. sylviasw.chan@lehman.com
Michael Lo............................. 852.2252.6225........................ michael.lo@lehman.com General
Yong Liang Por ..................... 852.2252.6220...................yongliang.por@lehman.com Non-Japan Asia
Gordon Wai........................ 852.2252.6176...................... gordon.wai@lehman.com Martin Baker .........................61.2.8062. 8444 .................... martin.baker@lehman.com
Martin Baker ........................ 61.2.8062. 8444..................... martin.baker@lehman.com Machinery -Japan
Tsutomu Kijima ........................813.6440.1678 .................. tsutomu.kijima@lehman.com
Power & Utilities
Non-Japan Asia Koji Takahashi.......................813.6440.1526 ...................koji.takahashi@lehman.com
Ivan Lee................................. 852.2252.6213........................... ivan.lee@lehman.com Machinery -Korea
Evan Li ................................ 852.2252.1405.............................evan.li@lehman.com Mark Yoon ...............................822.317.5159 .......................mark.yoon@lehman.com
Metals and Mining
Clarisse Pan ......................... 852.2252.6264......................clarisse.pan@lehman.com
Japan Non-Japan Asia
Masanori Maruo..................... 813.6440.1370................ masanori.maruo@lehman.com Oliver Du ...............................852.2252.1402 ......................... oliver.du@lehman.com
Miharu Kiuchi ....................... 813.6440.1659.................... miharu.kiuchi@lehman.com Zayong Koo .............................822.317.5145 ..................... zayong.koo@lehman.com
Lydia Shin...............................822.517.5146 ........................ lydia.shin@lehman.com
EQUITY SPECIALIST Bradley Clibborn ....................61.2.8062.8447 ............... bradley.clibborn@lehman.com
India
Japan
Prabhat Awasthi ..................91.22.4037.4180 ............... prabhat.awasthi@lehman.com
Christopher Schreiber............... 813.6746.7608.......... christopher.schreiber@lehman.com
Alok Kumar Nemani ............91.22.4037.4193 .............alokkumar.nemani@lehman.com
Shipbuilding
Non-Japan Asia
Zayong Koo ........................ 822.317.5145..................zayong.koo@lehman.com
Mark Yoon .......................... 822.317.5159....................mark.yoon@lehman.com
Transportation
Non-Japan Asia
Andrew Lee ............................852.2252.6197 .................. andrewkw.lee@lehman.com
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INTERNET & MEDIA TELECOMMUNICATIONS
Game Software
Telecom Services
Mia Nagasaka....................... 813.6440.1644.................. mia.nagasaka@lehman.com
Non-Japan Asia
Internet Paul Wuh ...............................852.2252.6182 .........................paul.wuh@lehman.com
Non-Japan Asia
Lei Tang ...............................852.2252.6134 ........................... lei.tang@lehman.com
David Langford ...................... 61.2.8062.8440.................. david.langford@lehman.com
Danny Chu.............................852.2252.6209 ....................... danny.chu@lehman.com
Thomas Kierath ................. 61.2.8062.8448.................. thomas.kierath@lehman.com
Stanley Yang ............................822.317.5168 .................... stanley.yang@lehman.com
Japan
Sophia Yoon...........................822.317.5165 .................... sophia.yoon@lehman.com
Keiichi Yoneshima ................... 813.6440.1635.............. keiichi.yoneshima@lehman.com
David Langford.......................61.2.8062.8440 ................. david.langford@lehman.com
Azusa Ejiri ........................... 813.6440.1686........................ azusa.ejiri@lehman.com
Thomas Kierath ..................61.2.8062.8448 ..................thomas.kierath@lehman.com
Media
Japan
Non-Japan Asia
Tetsuro Tsusaka........................813.6440.1393 ..................tetsuro.tsusaka@lehman.com
David Langford ...................... 61.2.8062.8440.................. david.langford@lehman.com
Thomas Kierath ................. 61.2.8062.8448.................. thomas.kierath@lehman.com
India
MANAGEMENT
Prabhat Awasthi .................. 91.22.4037.4180................ prabhat.awasthi@lehman.com
Global Head of Equity and Fixed Income Research
Kapil Singh ....................... 91.22.4037.4199....................... kapil.singh@lehman.com
Ravi Mattu ............................1.212.526. 0206 ............................. rmattu@lehman.com
QUANTITATIVE RESEARCH Head of Equity and Fixed Income Research in Asia
Hua He .................................813.6440.1434 ................................ hhe@lehman.com
Japan
Co-Deputy Head of Research, Non-Japan Asia
Fumiyuki Takahashi.................. 813.6440.1640............. fumiyuki.takahashi@lehman.com
Kent Chan .............................852.2252.1408 ..................... kent.chan@lehman.com
Hiroko Tada......................... 813.6440.1684...................... hiroko.tada@lehman.com
Co-Deputy Head of Research, Non-Japan Asia
Hongsong Chou..................... 813.6440.2712................. hongsong.chou@lehman.com
Cheng Khoo ...........................852.2252.6180 ..................... cheng.khoo@lehman.com
Yingchuan Wang.................. 813.6440.2670...... dorithyyingchuan.wang@lehman.com
Head of Research, Japan
Koichiro Chiwata ....................813.6440.1660 ...............koichiro.chiwata@lehman.com
REAL ESTATE
Head of Research, India
Property Prabhat Awasthi ..................91.22.4037.4180 ............... prabhat.awasthi@lehman.com
Non-Japan Asia Head of Research, Australia
Paul Louie .............................. 852.2252.6189........................ paul.louie@lehman.com David Langford.......................61.2.8062.8440 ................. david.langford@lehman.com
Jackie Choy ......................... 852.2252.6226...................... jackie.choy@lehman.com Product Manager in Non-Japan Asia
Min Chow Sai........................ 65.6433.6959.....................sai.minchow@lehman.com Terri Ellis ................................852.2252.6164 .................... teresa.ellis@lehman.com
India Sunayana Agarwal ................852.2252.1415 ............sunayana.agarwal@lehman.com
Manish Gunwani ................. 91.22.4037.4182................manish.gunwani@lehman.com
Product Manager in Korea
Zayong Koo .............................822.317.5145 ..................... zayong.koo@lehman.com
TECHNOLOGY
Communication Equipment & Components
Non-Japan Asia
James Kim................................ 822.317.5143........................ james.kim@lehman.com
John Kim................................ 822.317.5169.......................... john.kim@lehman.com
Computer Hardware and Display Industry
Non-Japan Asia
James Kim................................ 822.317.5143........................ james.kim@lehman.com
John Kim................................ 822.317.5169.......................... john.kim@lehman.com
Electronic Components
Japan
Masaru Koshita....................... 813.6746.7620..................masaru.koshita@lehman.com
Eric Lee ................................. 813.6440.1627............................eric.lee@lehman.com
Information Technology
India
Harmendra Gandhi .............. 91.22.4037.4181............. harmendra.gandhi@lehman.com
Sarvottam Kumar................ 91.22.4037.4188................ sarvottam.kumar@lehman.com
Semiconductors
Non-Japan Asia
John Hsu.............................. 8862.8723.1627...........................john.hsu@lehman.com
Yolanda Wang .................... 8862.8723.1623.................. yolanda.wang@lehman.com
Alex Yang............................ 8862.8723.1619........................ alex.yang@lehman.com
CW Chung............................ 822.2116.7558..........................cwchung@lehman.com
Felix Pan............................ 8862.8723.1614.......................... felix.pan@lehman.com
Japan
Steven Myers.......................... 813.6440.1636.....................steven.myers@lehman.com
Keiji Takeda........................... 813.6440.1638...................... keiji.takeda@lehman.com
May 2008 139

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COVERAGE UNIVERSE
Companies under Coverage in Asia, by Country (as of May 14, 2008)
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Australia Austar United Communications Limited AUN.AX Langford,David LBAUL, Sydney 1,623.97 1 1.32 -8.16 -1.88
Australia Babcock & Brown Limited BNB.AX Mak,Timothy LBAUL, Sydney 4,909.39 2 15.99 -46.95 -43.32
Australia Bluescope Steel Limited BSL.AX Clibborn,Bradley LBAUL, Sydney 7,604.39 3 10.74 -13.46 -7.54
Australia Fairfax Media Limited FXJ.AX Langford,David LBAUL, Sydney 4,822.81 2 3.42 -32.68 -28.07
Australia Macquarie Group Limited MQG.AX Mak,Timothy LBAUL, Sydney 16,410.82 2 64.15 -28.32 -23.42
Australia OneSteel Limited OST.AX Clibborn,Bradley LBAUL, Sydney 5,182.38 1 6.33 0.64 7.52
Australia PrimeAg Australia Limited PAG.AX Clibborn,Bradley LBAUL, Sydney 270.43 1 1.94 0.00 0.00
Australia Seek Limited SEK.AX Langford,David LBAUL, Sydney 1,470.74 1 5.48 -27.42 -22.45
Australia Telstra TLS.AX Langford,David LBAUL, Sydney 43,772.51 1 4.53 -7.55 -1.23
Australia Transpacific Industries Limited TPI.AX Baker,Martin LBAUL, Sydney 2,258.58 1 8.44 -37.44 -33.16
Australia WorleyParsons Limited WOR.AX Baker,Martin LBAUL, Sydney 8,978.58 2 41.58 41.91 51.62
China Aluminum Corp of China 2600.HK Du,Oliver LBAL, Hong Kong 6,866.89 3 13.58 24.13 1.99
China Angang Steel H-share 0347.HK Du,Oliver LBAL, Hong Kong 3,034.82 1 21.80 33.75 9.90
China Anhui Conch 0914.HK Du,Oliver LBAL, Hong Kong 13,612.85 1 67.80 85.75 52.62
China Bank of China (H-shares) 3988.HK Feng,Lucy LBAL, Hong Kong 39,181.65 2 4.02 0.50 -17.43
China Bank of Communications 3328.HK Feng,Lucy LBAL, Hong Kong 31,877.89 1 10.78 27.88 5.07
China Baoshan Iron & Steel 600019.CH Du,Oliver LBAL, Hong Kong 35,036.00 2 14.01 5.50 16.59
China Beijing Enterprises 0392.HK Lo,Benjamin LBAL, Hong Kong 4,577.90 1 31.35 36.90 12.48
China Bright Dairy & Food Co., Ltd 600597.SS Peng,Christine LBAL, Hong Kong 1,536.97 3 10.33 -8.75 0.85
China Brilliance China Automotive 1114.HK Hou,Yankun LBAL, Hong Kong 677.53 3 1.44 -22.58 -36.39
China CITIC Pacific 0267.HK Lo,Benjamin LBAL, Hong Kong 9,971.35 1 35.40 12.03 -7.95
China CITIC Securities Co., Ltd. 600030.SS Feng,Lucy LBAL, Hong Kong 34,626.77 2 36.57 35.90 38.90
China CNOOC 0883.HK Khoo,Cheng LBAL, Hong Kong 83,839.21 2 14.76 108.77 71.53
China COSCO Pacific 1199.HK Lo,Benjamin LBAL, Hong Kong 4,179.32 1 14.52 -27.25 -40.23
China China CITIC Bank (H Share) 0998.HK Feng,Lucy LBAL, Hong Kong 7,870.78 2 4.95 -22.78 -36.55
China China COSCO 1919.HK Lee,Andrew Kam Wing LBAL, Hong Kong 8,139.23 1 24.60 162.54 115.71
China China Coal 1898.HK Du,Oliver LBAL, Hong Kong 8,603.37 1 16.34 87.17 53.79
China China Construction Bank 0939.HK Feng,Lucy LBAL, Hong Kong 207,127.88 1 7.19 46.14 20.07
China China Everbright International Limited 0257.HK Li,Evan LBAL, Hong Kong 1,286.74 1 3.20 25.49 3.11
China China Foods 0506.HK Peng,Christine LBAL, Hong Kong 1,485.23 2 4.15 -21.25 -35.30
China China Mengniu 2319.HK Peng,Christine LBAL, Hong Kong 4,589.51 1 25.10 -6.52 -23.19
China China Merchants Bank (H-shares) 3968.HK Feng,Lucy LBAL, Hong Kong 10,546.16 1 30.90 50.73 23.85
China China Merchants Energy Shipping 601872.SS Lee,Andrew Kam Wing LBAL, Hong Kong 4,456.85 3 9.09 -22.57 -14.43
China China Merchants Hldgs (Int'l) 0144.HK Lo,Benjamin LBAL, Hong Kong 11,123.16 1 36.05 -2.30 -19.73
China China Minsheng Bank Co. 600016.SS Feng,Lucy LBAL, Hong Kong 21,692.15 2 8.07 -13.54 -4.45
China China Mobile Limited 0941.HK Chu,Danny LBAL, Hong Kong 340,302.93 1 132.50 79.66 47.62
China China National Building Materials 3323.HK Du,Oliver LBAL, Hong Kong 5,373.08 1 18.98 74.45 43.33
China China Netcom Group 0906.HK Chu,Danny LBAL, Hong Kong 21,649.89 3 25.30 31.91 8.38
China China Oilfield Services Ltd 2883.HK Khoo,Cheng LBAL, Hong Kong 3,030.50 1 15.40 87.58 54.12
China China Overseas Land 0688.HK Louie,Paul LBAL, Hong Kong 15,636.74 2 15.74 49.05 22.47
China China Power International 2380.HK Lee,Ivan LBAL, Hong Kong 1,225.05 1 2.65 -33.42 -45.29
China China Resources Land 1109.HK Louie,Paul LBAL, Hong Kong 7,375.77 1 14.26 38.99 14.20
China China Resources Power 0836.HK Lee,Ivan LBAL, Hong Kong 10,117.82 1 19.02 23.99 1.87
China China Shenhua Energy 1088.HK Du,Oliver LBAL, Hong Kong 14,379.35 1 33.00 50.69 23.81
China China Shipping Container Lines 2866.HK Lee,Andrew Kam Wing LBAL, Hong Kong 1,702.46 3 3.54 30.96 7.60
China China Shipping Development 1138.HK Lee,Andrew Kam Wing LBAL, Hong Kong 4,386.69 3 26.40 59.42 30.99
China China Techfaith Wireless Comm Tech Ltd CNTF.P Wang,Yolanda LBSTL, Taiwan 254.68 3 5.88 -22.63 -17.11
China China Telecom 0728.HK Chu,Danny LBAL, Hong Kong 57,278.15 3 5.52 24.05 1.92
China China Unicom Ltd. 0762.HK Chu,Danny LBAL, Hong Kong 29,262.81 1 16.74 43.08 17.56
China China Water Affairs Group Limited 0855.HK Li,Evan LBAL, Hong Kong 446.66 2 2.81 -42.65 -52.88
China China Yangtze Power 600900.SS Lee,Ivan LBAL, Hong Kong 19,690.83 2 14.65 -0.61 9.84
China China Yurun Food 1068.HK Peng,Christine LBAL, Hong Kong 2,448.61 1 12.50 40.92 15.79
China Clear Media 0100.HK Wuh,Paul LBAL, Hong Kong 459.85 1 6.84 -17.09 -31.88
China Cosco Shipping 600428.SS Lee,Andrew Kam Wing LBAL, Hong Kong 3,770.68 3 40.30 84.02 103.38
China Ctrip.com International Ltd CTRP.C Huang,Candy LBAL, Hong Kong 4,072.17 1 62.34 72.93 85.27
China Datang International 0991.HK Lee,Ivan LBAL, Hong Kong 3,754.79 1 5.09 2.62 -15.68
China Denway Motors Limited 0203.HK Hou,Yankun LBAL, Hong Kong 4,019.82 1 4.17 22.65 0.77
China Dongfeng Motor Group Co Ltd 0489.HK Hou,Yankun LBAL, Hong Kong 1,493.84 1 4.08 -5.99 -22.76
China Focus Media Holding Limited FMCN.OQ Wuh,Paul LBAL, Hong Kong 4,876.30 1 39.47 1.21 8.43
China Geely Automobile Holdings 0175.HK Hou,Yankun LBAL, Hong Kong 666.84 2 1.00 -14.53 -29.78
China Golden Eagle Retail Group 3308.HK Huang,Candy LBAL, Hong Kong 1,817.40 1 7.80 30.00 6.81
China Great Wall Motor Co 2333.HK Hou,Yankun LBAL, Hong Kong 499.13 1 9.42 -11.63 -27.39
China Greentown 3900.HK Louie,Paul LBAL, Hong Kong 1,888.29 1 9.58 -36.81 -48.08
China Guangzhou R&F 2777.HK Louie,Paul LBAL, Hong Kong 2,972.15 2 20.50 3.33 -15.10
China Hengan International 1044.HK Peng,Christine LBAL, Hong Kong 4,029.50 3 27.50 1.48 -16.62
China Hongguo International HGUO.SI Peng,Christine LBAL, Hong Kong 153.77 1 0.54 -62.06 -59.51
China Huadian Power International 1071.HK Lee,Ivan LBAL, Hong Kong 2,014.86 1 2.61 -41.61 -52.03
China Huaneng Power International 0902.HK Lee,Ivan LBAL, Hong Kong 9,273.86 1 6.00 -31.97 -44.11
China Huaxia Bank 600015.SS Feng,Lucy LBAL, Hong Kong 8,144.97 3 13.58 0.52 11.09
China Industrial & Comml Bank of China(H) 1398.HK Feng,Lucy LBAL, Hong Kong 65,170.72 1 6.12 42.00 16.67
China Inner Mongolia Yili 600887.SS Peng,Christine LBAL, Hong Kong 2,163.08 3 22.74 -24.45 -16.51
China Intime Department Store (Group) 1833.HK Huang,Candy LBAL, Hong Kong 1,361.61 3 5.90 -10.61 -26.55
China Jiangxi Copper 0358.HK Du,Oliver LBAL, Hong Kong 3,248.30 3 18.26 35.86 11.63
China LDK Solar LDK Pan,Clarisse L LBAL, Hong Kong 3,736.75 2 35.94 0.00 0.00
China Lenovo Group Ltd 0992.HK Yang,Alex LBSTL, Taiwan 7,069.44 2 6.19 94.65 59.94
China Li & Fung 0494.HK Wong,Phoebe LBAL, Hong Kong 13,064.12 1 29.50 12.17 -7.84
China Li Ning 2331.HK Wong,Phoebe LBAL, Hong Kong 3,256.51 1 24.45 50.00 23.25
China Lianhua 980.HK Huang,Candy LBAL, Hong Kong 283.45 1 10.68 6.16 -12.77
China Maanshan Iron & Steel (H) 0323.HK Du,Oliver LBAL, Hong Kong 1,281.99 3 5.77 -14.90 -30.08
China NetEase NTES.OQ Wuh,Paul LBAL, Hong Kong 3,116.17 2 24.43 36.10 45.81
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 140

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MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
China PT Davomas Abadi TBK DAVO.JK Peng,Christine LBAL, Hong Kong 326.94 1 245.00 -18.33 -30.98
China Parkson Retail Group 3368.HK Huang,Candy LBAL, Hong Kong 5,184.85 1 72.55 34.35 10.39
China People's Food PFFH.SI Peng,Christine LBAL, Hong Kong 982.32 1 1.20 -42.31 -38.43
China PetroChina 0857.HK Khoo,Cheng LBAL, Hong Kong 29,485.84 1 10.90 7.28 -11.85
China Prime Success 0210.HK Peng,Christine LBAL, Hong Kong 976.49 1 4.65 -20.78 -34.91
China Shandong Weigao 8199.HK Peng,Christine LBAL, Hong Kong 645.84 1 14.50 2.40 -15.86
China Shanghai Automotive Co. 600104.SS Hou,Yankun LBAL, Hong Kong 13,723.98 3 14.67 -6.98 2.81
China Shanghai Industrial 0363.HK Lo,Benjamin LBAL, Hong Kong 4,245.63 3 30.80 30.23 7.00
China Shanghai Pudong Development Bank 600000.SS Feng,Lucy LBAL, Hong Kong 25,086.62 1 31.03 37.86 52.37
China Shenzhen Development Bank 000001.SZ Feng,Lucy LBAL, Hong Kong 9,134.19 1 27.89 0.14 -1.81
China Sinopec 0386.HK Khoo,Cheng LBAL, Hong Kong 16,114.39 1 7.49 -7.19 -23.74
China The9 Limited NCTY.OQ Wuh,Paul LBAL, Hong Kong 701.47 1 23.94 -43.14 -39.08
China Tianjin Capital Environmental 1065.HK Li,Evan LBAL, Hong Kong 134.70 3 3.09 -42.46 -52.72
China Times 1832.HK Huang,Candy LBAL, Hong Kong 392.20 1 3.50 0.00 0.00
China Tingyi 0322.HK Peng,Christine LBAL, Hong Kong 7,237.02 1 10.10 14.51 -5.91
China TsingTao Brewery (H share) 0168.HK Peng,Christine LBAL, Hong Kong 1,931.71 1 23.00 54.78 27.17
China Weichai Power 2338.HK Hou,Yankun LBAL, Hong Kong 690.92 1 42.60 -5.23 -22.13
China Xinao Gas 2688.HK Lee,Ivan LBAL, Hong Kong 1,804.71 1 13.94 28.84 5.86
China Xingda International 1899.HK Hou,Yankun LBAL, Hong Kong 311.02 2 1.75 -60.67 -67.69
China Yanzhou Coal Mining Co Ltd 1171.HK Du,Oliver LBAL, Hong Kong 3,861.76 2 15.38 50.20 23.41
China Yingli Green Energy YGE Pan,Clarisse L LBAL, Hong Kong 3,089.31 1 24.34 0.00 0.00
China Yue Yuen 0551.HK Peng,Christine LBAL, Hong Kong 5,023.13 2 23.55 -15.59 -30.65
China ZTE Corp. 0763.HK Wuh,Paul LBAL, Hong Kong 944.32 1 32.85 26.35 3.81
Hong Kong ASM Pacific 0522.HK Hsu,John LBSTL, Taiwan 3,095.13 1 61.80 14.44 -5.97
Hong Kong BOC Hong Kong Holdings Ltd. 2388.HK Asia,Equity Research LBAL, Hong Kong 27,653.30 2 20.40 3.87 -14.66
Hong Kong Bank of East Asia 0023.HK Asia,Equity Research LBAL, Hong Kong 9,391.74 1 44.20 -6.16 -22.90
Hong Kong Belle International Holdings Limited 1880.HK Wong,Phoebe LBAL, Hong Kong 9,675.56 1 8.94 0.00 0.00
Hong Kong CITIC 1616 Holdings Ltd 1883.HK Tang,Lei LBAL, Hong Kong 535.03 1 2.11 -37.94 -49.01
Hong Kong CLP Holdings 0002.HK Lee,Ivan LBAL, Hong Kong 19,127.65 2 61.95 9.07 -10.39
Hong Kong Champion REIT 2778.HK Choy,Tsun Kit (Jackie) LBAL, Hong Kong 1,438.24 1 4.09 -8.50 -24.82
Hong Kong Cheung Kong 0001.HK Louie,Paul LBAL, Hong Kong 36,288.43 1 122.20 15.94 -4.74
Hong Kong Cheung Kong Infrastructure 1038.HK Lee,Ivan LBAL, Hong Kong 9,248.51 1 32.00 10.73 -9.02
Hong Kong China Communications Services Corp. Ltd. 0552.HK Chu,Danny LBAL, Hong Kong 1,640.35 1 6.42 30.22 7.00
Hong Kong China High Speed Transmn 0658.HK Pan,Clarisse L LBAL, Hong Kong 2,266.65 1 14.20 0.00 0.00
Hong Kong China Resources Enterprise 0291.HK Wong,Phoebe LBAL, Hong Kong 8,506.48 1 27.80 -1.42 -19.00
Hong Kong Comba Telecom System 2342.HK Wuh,Paul LBAL, Hong Kong 237.57 1 2.17 -45.20 -54.98
Hong Kong Dah Sing Banking Group Ltd. 2356.HK Asia,Equity Research LBAL, Hong Kong 1,819.94 1 15.24 -11.81 -27.54
Hong Kong Dah Sing Financial Holdings 0440.HK Asia,Equity Research LBAL, Hong Kong 1,824.45 2 56.90 -16.39 -31.30
Hong Kong Esprit Holdings 0330.HK Wong,Phoebe LBAL, Hong Kong 14,836.53 1 93.10 -2.10 -19.56
Hong Kong Foxconn International Holdings 2038.HK Yang,Alex LBSTL, Taiwan 10,640.49 2 11.76 -50.38 -59.23
Hong Kong GZI Real Estate Investment Trust 0405.HK Louie,Paul LBAL, Hong Kong 376.94 2 2.94 -3.61 -20.80
Hong Kong Galaxy Entertainment Group 0027.HK Wong,Perveen LBAL, Hong Kong 2,876.20 1 5.70 -22.13 -36.02
Hong Kong Giordano International 0709.HK Wong,Phoebe LBAL, Hong Kong 669.31 2 3.50 -10.49 -26.45
Hong Kong Great Eagle 0041.HK Louie,Paul LBAL, Hong Kong 1,934.34 1 24.95 -18.60 -33.12
Hong Kong HSBC Holdings Plc 0005.HK Asia,Equity Research LBAL, Hong Kong 205,865.00 1 135.30 -7.90 -24.32
Hong Kong Hang Lung Properties Limited 0101.HK Louie,Paul LBAL, Hong Kong 16,368.07 2 30.80 25.97 3.50
Hong Kong Hang Seng Bank 0011.HK Asia,Equity Research LBAL, Hong Kong 39,317.33 1 160.40 45.16 19.27
Hong Kong Henderson Land 0012.HK Louie,Paul LBAL, Hong Kong 16,335.33 2 59.35 10.11 -9.53
Hong Kong Hong Kong & China Gas 0003.HK Lee,Ivan LBAL, Hong Kong 16,972.51 3 19.86 28.05 5.21
Hong Kong Hongkong & Shanghai Hotels 0045.HK Wong,Perveen LBAL, Hong Kong 2,543.68 1 13.76 3.15 -15.25
Hong Kong Hongkong Electric 0006.HK Lee,Ivan LBAL, Hong Kong 12,724.36 1 46.50 16.54 -4.25
Hong Kong Hongkong Land HKLD.SI Choy,Tsun Kit (Jackie) LBAL, Hong Kong 11,453.17 1 4.99 3.96 10.95
Hong Kong Hutchison Telecommunications Intl 2332.HK Wuh,Paul LBAL, Hong Kong 6,687.88 2 10.90 -31.88 -44.03
Hong Kong Hutchison Whampoa 0013.HK Lo,Benjamin LBAL, Hong Kong 43,155.14 1 78.95 2.20 -16.03
Hong Kong Hysan Development 0014.HK Louie,Paul LBAL, Hong Kong 3,059.48 1 23.00 6.98 -12.10
Hong Kong Ju Teng International 3336.HK Yang,Alex LBSTL, Taiwan 397.46 1 3.10 59.79 31.29
Hong Kong Kingsoft Corp. Inc. 3888.HK Wuh,Paul LBAL, Hong Kong 571.16 1 4.18 0.00 0.00
Hong Kong Lifestyle International Holdings Limited 1212.HK Wong,Phoebe LBAL, Hong Kong 3,631.82 2 16.60 24.58 2.36
Hong Kong Link REIT 0823.HK Louie,Paul LBAL, Hong Kong 5,179.48 1 18.90 5.47 -13.34
Hong Kong New World Development 0017.HK Louie,Paul LBAL, Hong Kong 9,962.19 2 20.80 5.93 -12.96
Hong Kong Orient Overseas International 0316.HK Lee,Andrew Kam Wing LBAL, Hong Kong 4,248.38 1 52.95 -19.65 -33.98
Hong Kong PCCW 0008.HK Chu,Danny LBAL, Hong Kong 4,250.11 2 4.89 -2.59 -19.96
Hong Kong Pacific Basin 2343.HK Lee,Andrew Kam Wing LBAL, Hong Kong 2,720.71 1 13.38 50.34 23.52
Hong Kong Prosperity Real Estate Investment Trust 0808.HK Louie,Paul LBAL, Hong Kong 255.02 1 1.59 -3.64 -20.82
Hong Kong SPG Land 0337.HK Choy,Tsun Kit (Jackie) LBAL, Hong Kong 522.81 1 3.93 -31.05 -43.35
Hong Kong Sa Sa International 0178.HK Wong,Phoebe LBAL, Hong Kong 541.00 1 3.06 15.91 -4.77
Hong Kong Semiconductor Mfg Intl Co. (SMIC) 0981.HK Hsu,John LBSTL, Taiwan 1,334.49 3 0.56 -47.66 -57.00
Hong Kong Shangri-La Asia Ltd 0069.HK Wong,Perveen LBAL, Hong Kong 8,111.97 2 21.95 3.78 -14.73
Hong Kong Shun Tak Holdings 0242.HK Wong,Perveen LBAL, Hong Kong 3,047.20 1 10.14 -7.82 -24.26
Hong Kong Sino Land 0083.HK Louie,Paul LBAL, Hong Kong 13,234.00 1 21.25 19.52 -1.80
Hong Kong Sinopec Shanghai Petrochemical 0338.HK Khoo,Cheng LBAL, Hong Kong 878.28 1 2.94 -50.51 -59.33
Hong Kong SmarTone 0315.HK Chu,Danny LBAL, Hong Kong 662.19 2 8.98 -0.22 -18.02
Hong Kong Solomon Systech 2878.HK Wang,Yolanda LBSTL, Taiwan 148.92 2 0.48 -53.43 -61.74
Hong Kong Standard Chartered Plc 2888.HK Asia,Equity Research LBAL, Hong Kong 50,732.20 1 280.20 13.44 -6.79
Hong Kong Sun Hung Kai Properties 0016.HK Louie,Paul LBAL, Hong Kong 45,174.01 1 137.40 45.24 19.34
Hong Kong Swire Pacific Ltd 0019.HK Lo,Benjamin LBAL, Hong Kong 11,210.36 2 95.50 5.82 -13.06
Hong Kong TPV Technology Co. 0903.HK Wang,Yolanda LBSTL, Taiwan 1,340.50 1 5.37 0.75 -17.22
Hong Kong Towngas China Company 1083.HK Lee,Ivan LBAL, Hong Kong 878.44 2 3.50 -17.04 -31.84
Hong Kong Wharf (Holdings) Ltd. 0004.HK Louie,Paul LBAL, Hong Kong 14,564.42 1 41.25 35.30 11.17
Hong Kong Wing Hang Bank 0302.HK Asia,Equity Research LBAL, Hong Kong 3,993.56 1 105.60 14.78 -5.69
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 141

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Hong Kong Zhengzhou Gas 3928.HK Lee,Ivan LBAL, Hong Kong 78.37 1 1.11 -2.63 -20.00
Hong Kong Zhongyu Gas 8070.HK Lee,Ivan LBAL, Hong Kong 182.01 2 0.73 -40.16 -50.84
India ABB India ABB.NS Kumar,Satish LBSPL, India 5,307.94 1 1062.55 24.05 0.02
India ACC Ltd ACC.NS Kumar,Satish LBSPL, India 3,021.17 3 683.00 -21.26 -36.51
India Ambuja Cements GACM.NS Kumar,Satish LBSPL, India 4,003.62 3 111.55 -9.79 -27.26
India Ashok Leyland ASOK.NS Awasthi,Prabhat LBSPL, India 1,204.27 2 38.40 2.26 -17.54
India Asian Paints ASPN.NS Jain,Manish LBSPL, India 2,788.62 1 1233.25 56.40 26.11
India Bajaj Auto BJAT.NS Awasthi,Prabhat LBSPL, India 3,047.67 1 675.85 -52.11 -61.39
India Bank of Baroda BOB.NS Vadlamani,Srikanth LBSPL, India 2,534.06 1 295.10 9.34 -11.84
India Bharat Electronics BAJE.NS Kumar,Satish LBSPL, India 2,330.69 1 1235.85 -25.30 -39.77
India Bharat Heavy Electricals Ltd (BHEL) BHEL.NS Kumar,Satish LBSPL, India 20,071.24 2 1739.30 41.61 14.18
India Bharti Airtel Limited BRTI.BO Wuh,Paul LBAL, Hong Kong 36,743.79 1 821.25 -0.34 -19.64
India Canara Bank CNBK.NS Vadlamani,Srikanth LBSPL, India 2,252.49 1 233.05 1.26 -18.35
India Cipla Ltd CIPL.NS Mukherjee,Saion LBSPL, India 3,803.08 3 207.55 -1.68 -20.72
India Crompton Greaves CROM.NS Kumar,Satish LBSPL, India 2,004.79 1 232.00 2.77 -17.14
India DLF Ltd. DLF.NS Gunwani,Manish LBSPL, India 24,716.45 1 615.00 0.00 0.00
India Dabur India DABU.NS Jain,Manish LBSPL, India 2,023.59 3 99.35 10.45 -10.94
India Dr Reddy's Laboratories Ltd REDY.NS Mukherjee,Saion LBSPL, India 2,475.61 2 624.40 -4.12 -22.69
India Edelweiss Capital Ltd EDEL.NS Vadlamani,Srikanth LBSPL, India 1,342.59 1 760.05 0.00 0.00
India Exide Industries EXID.NS Jain,Manish LBSPL, India 1,415.37 1 75.05 70.30 37.31
India Godrej Consumer GOCP.NS Jain,Manish LBSPL, India 827.50 1 136.00 -0.34 -19.65
India Grasim Industries GRAS.NS Kumar,Satish LBSPL, India 4,794.41 2 2218.50 -9.91 -27.36
India HCC HCNS.NS Mukherjee,Saion LBSPL, India 788.02 1 130.45 35.67 9.40
India HCL Technologies HCLT.NS Gandhi,Harmendra LBSPL, India 4,605.00 1 293.60 -11.12 -28.34
India HDFC HDFC.NS Vadlamani,Srikanth LBSPL, India 17,800.85 1 2658.20 58.23 27.58
India HDFC Bank HDBK.NS Vadlamani,Srikanth LBSPL, India 12,386.89 1 1482.20 48.82 20.00
India Hero Honda HROH.NS Awasthi,Prabhat LBSPL, India 3,756.04 2 797.90 15.62 -6.77
India Hindustan Unilever Limited HLL.BO Jain,Manish LBSPL, India 12,612.48 1 245.65 27.91 3.14
India ICICI Bank ICBK.NS Vadlamani,Srikanth LBSPL, India 23,288.67 1 887.85 2.05 -17.72
India ITC Limited ITC.BO Jain,Manish LBSPL, India 20,029.06 3 225.45 39.17 12.21
India IVRCL Infra. IVRC.NS Mukherjee,Saion LBSPL, India 1,335.37 1 427.70 36.21 9.83
India Idea Cellular Limited IDEA.BO Wuh,Paul LBAL, Hong Kong 6,375.18 2 104.30 -8.59 -26.29
India India Cements ICMN.NS Kumar,Satish LBSPL, India 1,023.33 3 154.00 -16.28 -32.50
India Indian Overseas Bank IOBK.IN Vadlamani,Srikanth LBSPL, India 1,925.17 1 149.90 26.39 1.91
India Infosys Technologies INFY.NS Gandhi,Harmendra LBSPL, India 23,541.23 1 1747.20 -12.74 -29.64
India Larsen & Toubro LART.NS Mukherjee,Saion LBSPL, India 19,397.16 1 2814.75 66.78 34.47
India Mahanagar Telephone Nigam MTNL.BO Wuh,Paul LBAL, Hong Kong 1,506.68 3 101.45 -33.97 -46.76
India Marico Limited MRCO.NS Jain,Manish LBSPL, India 912.35 1 63.55 9.47 -11.73
India Maruti Suzuki India Limited MRTI.NS Awasthi,Prabhat LBSPL, India 5,245.26 1 770.15 -4.19 -22.74
India NTPC NTPC.BO Lee,Ivan LBAL, Hong Kong 37,376.56 2 192.30 23.07 -0.76
India Nagarjuna Constructions NGCN.NS Mukherjee,Saion LBSPL, India 1,113.18 1 206.35 21.28 -2.21
India Nicholas Piramal India Ltd NICH.BO Mukherjee,Saion LBSPL, India 1,703.10 1 345.65 30.38 5.13
India Oil and Natural Gas Corp ONGC.BO Lo,Michael LBAL, Hong Kong 50,275.09 1 997.10 9.96 -11.34
India Punjab National Bank PNBK.NS Vadlamani,Srikanth LBSPL, India 3,683.35 1 495.55 -7.44 -25.37
India Puravankara Projects Ltd. PPRO.BO Gunwani,Manish LBSPL, India 1,319.81 1 262.25 0.00 0.00
India Ranbaxy Laboratories Ltd RANB.NS Mukherjee,Saion LBSPL, India 4,268.22 1 485.10 22.87 -0.93
India Redington India REDI.NS Gunwani,Manish LBSPL, India 644.94 1 351.35 95.63 57.74
India Reliance Communications Ltd RLCM.BO Wuh,Paul LBAL, Hong Kong 26,549.63 1 545.65 13.16 -8.76
India Reliance Energy RLEN.BO Lee,Ivan LBAL, Hong Kong 7,440.26 2 1381.25 170.09 117.78
India Reliance Industries RIL.BO Lo,Michael LBAL, Hong Kong 85,719.66 1 2501.45 54.32 24.44
India Satyam Computer SATY.NS Gandhi,Harmendra LBSPL, India 7,849.29 1 495.95 7.49 -13.33
India Shree Cement SHCM.NS Kumar,Satish LBSPL, India 741.79 2 903.25 -14.07 -30.71
India State Bank of India SBI.NS Vadlamani,Srikanth LBSPL, India 24,830.08 3 1668.00 46.62 18.22
India Sun Pharmaceutical Industries Ltd SUN.NS Mukherjee,Saion LBSPL, India 6,617.02 1 1355.25 37.01 10.48
India Suzlon Energy Limited SUZL.BO Lee,Ivan LBAL, Hong Kong 9,984.95 1 282.95 11.50 -10.10
India TVS Motor TVSM.NS Awasthi,Prabhat LBSPL, India 231.27 2 41.30 -33.76 -46.59
India Tata Consultancy Services TCS.NS Gandhi,Harmendra LBSPL, India 20,894.08 1 905.70 -27.50 -41.54
India Tata Motors TAMO.NS Awasthi,Prabhat LBSPL, India 6,051.10 1 665.85 -6.74 -24.81
India Tata Power TTPW.BO Lee,Ivan LBAL, Hong Kong 6,288.76 2 1348.00 130.51 85.86
India Tata Tea TTTE.BO Jain,Manish LBSPL, India 1,349.93 1 926.00 16.32 -6.21
India Tech Mahindra TEML.NS Gandhi,Harmendra LBSPL, India 2,583.94 1 902.60 -41.01 -52.44
India Ultratech Cement ULTC.NS Kumar,Satish LBSPL, India 1,954.74 3 666.10 -18.75 -34.49
India Union Bank of India UNBK.NS Vadlamani,Srikanth LBSPL, India 1,914.73 1 160.80 35.18 9.00
India Unitech Ltd. UNTE.NS Gunwani,Manish LBSPL, India 10,541.21 1 275.45 17.95 -4.89
India Wipro WIPR.NS Gandhi,Harmendra LBSPL, India 17,021.23 1 494.20 -9.14 -26.74
Indonesia Indosat ISAT.JK Wuh,Paul LBAL, Hong Kong 3,536.88 1 6050.00 -11.03 -24.81
Indonesia PT Telkom TLKM.JK Wuh,Paul LBAL, Hong Kong 18,869.47 2 8700.00 -10.77 -24.59
Indonesia Perusahaan Gas Negara PGAS.JK Asia,Equity Research LBAL, Hong Kong 7,289.21 1 14750.00 43.90 21.61
Japan ALPS ELECTRIC 6770.T Lee,Eric LBJ, Tokyo 1,944.48 2 1127.00 -3.01 22.27
Japan Acom 8572.T Altherr,Walter LBI, New York 4,869.39 1 3210.00 -26.38 -7.18
Japan Advantest 6857.T Myers,Steven LBJ, Tokyo 5,357.57 2 2825.00 -47.20 -33.43
Japan Aeon 8267.T Sasaki,Yasuyuki LBJ, Tokyo 11,204.56 1 1473.00 -34.09 -16.91
Japan Aiful 8515.T Altherr,Walter LBI, New York 3,066.85 3 1927.00 -42.48 -27.48
Japan Amada 6113.T Kijima,Tsutomu LBJ, Tokyo 3,619.97 1 945.00 -36.00 -18.90
Japan Aozora Bank 8304.T Senoguchi,Junsuke LBJ, Tokyo 4,625.99 1 295.00 -31.87 -14.11
Japan Asahi Kasei 3407.T Yamada,Mikiya LBJ, Tokyo 7,944.11 2 596.00 -26.51 -7.35
Japan Astellas Pharma Inc. 4503.T Yoda,Toshihide LBJ, Tokyo 21,206.40 2 4300.00 -17.94 3.45
Japan Bank of The Ryukyus 8399.T Tani,Miwako LBJ, Tokyo 405.30 1 1085.00 -56.25 -44.84
Japan Bank of Yokohama 8332.T Senoguchi,Junsuke LBJ, Tokyo 9,731.98 2 747.00 -18.45 2.81
Japan Brother Industries, Ltd. 6448.T Takeda,Keiji LBJ, Tokyo 3,792.61 2 1438.00 -12.74 10.01
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 142

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Japan Canon 7751.T Myers,Steven LBJ, Tokyo 70,084.64 1 5530.00 -20.55 0.17
Japan Canon Marketing Japan 8060.T Takeda,Keiji LBJ, Tokyo 2,928.85 1 2040.00 -14.47 7.83
Japan Capcom 9697.T Nagasaka,Mia LBJ, Tokyo 1,997.21 1 3150.00 66.67 110.12
Japan Chubu Electric Power 9502.T Maruo,Masanori LBJ, Tokyo 17,692.87 2 2390.00 -34.34 -17.22
Japan Chugai Pharmaceutical 4519.T Yoda,Toshihide LBJ, Tokyo 7,998.61 1 1504.00 -49.45 -36.27
Japan Chugoku Electric Power 9504.T Maruo,Masanori LBJ, Tokyo 8,004.32 2 2270.00 -11.33 11.79
Japan Chuo Mitsui Trust Holdings 8309.T Senoguchi,Junsuke LBJ, Tokyo 6,691.28 2 713.00 -39.32 -23.50
Japan Circle K Sunkus 3337.T Sasaki,Yasuyuki LBJ, Tokyo 1,294.02 2 1580.00 -23.67 -3.77
Japan CyberAgent 4751.T Yoneshima,Keiichi LBJ, Tokyo 954.78 1 152000.00 104.85 158.26
Japan Daicel Chemical Industries 4202.T Yamada,Mikiya LBJ, Tokyo 2,233.42 1 644.00 -15.93 5.99
Japan Daiei 8263.T Sasaki,Yasuyuki LBJ, Tokyo 1,000.77 1 859.00 -35.75 -19.00
Japan Daihatsu Motor 7262.T Mochimaru,Tsuyoshi LBJ, Tokyo 4,911.32 2 1210.00 28.86 62.45
Japan Daiichi Sankyo Co. 4568.T Yoda,Toshihide LBJ, Tokyo 19,557.45 1 2800.00 -20.68 0.00
Japan Daikin Industries 6367.T Kijima,Tsutomu LBJ, Tokyo 14,734.38 2 5290.00 20.50 52.60
Japan Dainippon Sumitomo Pharmaceutical 4506.T Yoda,Toshihide LBJ, Tokyo 3,183.80 2 842.00 -34.01 -16.81
Japan Daiwa Securities Group Inc 8601.T Altherr,Walter LBI, New York 13,802.36 1 1034.00 -24.85 -5.26
Japan DeNA 2432.T Yoneshima,Keiichi LBJ, Tokyo 3,523.88 2 763000.00 98.70 150.50
Japan E-Trade Securities 8701.Q Yoneshima,Keiichi LBJ, Tokyo 3,453.23 3 105000.00 -20.45 0.28
Japan Eisai 4523.T Yoda,Toshihide LBJ, Tokyo 10,795.19 2 3830.00 -32.40 -14.30
Japan Elpida Memory 6665.T Myers,Steven LBJ, Tokyo 4,969.81 1 4030.00 -19.08 2.02
Japan FUJIFILM Holdings 4901.T Takeda,Keiji LBJ, Tokyo 19,464.12 1 3980.00 -21.19 -0.64
Japan FamilyMart 8028.T Sasaki,Yasuyuki LBJ, Tokyo 3,518.19 1 3790.00 22.26 54.13
Japan Fanuc 6954.T Kijima,Tsutomu LBJ, Tokyo 25,264.08 3 11100.00 -1.86 23.73
Japan Fuji Fire & Marine Insurance Co Ltd 8763.T Altherr,Walter LBI, New York 1,542.89 2 344.00 -33.20 -15.79
Japan Fuji Heavy Industries 7270.T Mochimaru,Tsuyoshi LBJ, Tokyo 3,489.16 3 469.00 -15.80 6.15
Japan Fujitsu 6702.T Myers,Steven LBJ, Tokyo 15,107.60 2 768.00 2.67 29.44
Japan Fukuoka Financial Group 8354.T Tani,Miwako LBJ, Tokyo 4,093.51 2 501.00 -41.90 -26.70
Japan GMO Internet 9449.T Yoneshima,Keiichi LBJ, Tokyo 687.53 2 720.00 -15.79 6.16
Japan H2O Retailing 8242.T Sasaki,Yasuyuki LBJ, Tokyo 1,575.66 2 802.00 -28.33 -9.64
Japan Hino Motors 7205.T Mochimaru,Tsuyoshi LBJ, Tokyo 3,494.55 1 640.00 -2.44 23.00
Japan Hirose Electric 6806.T Koshita,Masaru LBJ, Tokyo 4,632.29 2 12180.00 -11.68 11.35
Japan Hiroshima Bank 8379.T Tani,Miwako LBJ, Tokyo 3,238.34 1 545.00 -19.62 1.34
Japan Hitachi 6501.T Myers,Steven LBJ, Tokyo 22,949.21 2 717.00 -19.17 1.91
Japan Hitachi Chemical 4217.T Yamada,Mikiya LBJ, Tokyo 4,415.28 1 2230.00 -15.05 7.10
Japan Hitachi Construction Machinery 6305.T Kijima,Tsutomu LBJ, Tokyo 7,277.48 2 3560.00 -8.95 14.78
Japan Hokkaido Electric Power 9509.T Maruo,Masanori LBJ, Tokyo 4,439.64 1 2170.00 -27.91 -9.11
Japan Hokuriku Electric Power 9505.T Maruo,Masanori LBJ, Tokyo 5,119.41 2 2445.00 -7.03 17.20
Japan Honda Motor 7267.T Mochimaru,Tsuyoshi LBJ, Tokyo 57,888.70 1 3320.00 -18.63 2.59
Japan Ibiden 4062.T Koshita,Masaru LBJ, Tokyo 6,994.59 1 4880.00 -23.63 -3.72
Japan Index Holdings 4835.Q Yoneshima,Keiichi LBJ, Tokyo 512.58 3 23110.00 -36.60 -20.07
Japan Internet Initiative Japan 3774.T Yoneshima,Keiichi LBJ, Tokyo 665.59 1 340000.00 -12.60 10.19
Japan Isuzu Motors 7202.T Mochimaru,Tsuyoshi LBJ, Tokyo 8,304.43 2 515.00 -11.97 10.98
Japan JSR 4185.T Yamada,Mikiya LBJ, Tokyo 5,653.64 1 2325.00 -12.43 10.40
Japan KDDI 9433.T Tsusaka,Tetsuro LBJ, Tokyo 29,834.64 1 700000.00 -31.37 -13.48
Japan KOEI 9654.T Nagasaka,Mia LBJ, Tokyo 1,074.47 3 1647.00 -14.75 7.47
Japan Kansai Electric Power 9503.T Maruo,Masanori LBJ, Tokyo 21,956.44 2 2400.00 -23.81 -3.95
Japan Komatsu 6301.T Kijima,Tsutomu LBJ, Tokyo 30,181.56 2 3180.00 4.95 32.31
Japan Konami 9766.T Nagasaka,Mia LBJ, Tokyo 5,075.52 2 3890.00 28.38 61.85
Japan Konica Minolta Holdings 4902.T Takeda,Keiji LBJ, Tokyo 8,968.01 2 1775.00 11.71 40.83
Japan Kubota 6326.T Kijima,Tsutomu LBJ, Tokyo 9,189.49 1 752.00 -22.71 -2.56
Japan Kuraray 3405.T Yamada,Mikiya LBJ, Tokyo 4,806.27 2 1321.00 -2.15 23.36
Japan Kyocera 6971.T Koshita,Masaru LBJ, Tokyo 18,307.34 3 10070.00 -14.66 7.59
Japan Kyorin 4569.T Yoda,Toshihide LBJ, Tokyo 841.86 2 1182.00 -26.77 -7.67
Japan Kyushu Electric Power 9508.T Maruo,Masanori LBJ, Tokyo 10,296.58 2 2285.00 -31.99 -14.26
Japan Lawson 2651.T Sasaki,Yasuyuki LBJ, Tokyo 4,098.34 3 4330.00 -0.92 24.92
Japan Lopro Corp 8577.T Altherr,Walter LBI, New York 91.09 1 84.00 -53.59 -41.49
Japan Marui Group 8252.T Sasaki,Yasuyuki LBJ, Tokyo 2,810.19 2 928.00 -32.56 -14.98
Japan Maruman & Co.,Ltd. 7834.OJ Altherr,Walter LBI, New York 57.75 2 572.00 -21.75 -1.35
Japan Matsui Securities 8628.T Yoneshima,Keiichi LBJ, Tokyo 1,929.27 1 754.00 -20.21 0.59
Japan Mazda Motor 7261.T Mochimaru,Tsuyoshi LBJ, Tokyo 6,200.84 2 460.00 -30.20 -12.00
Japan Mediceo Paltac Holdings Co Ltd 7459.T Yoda,Toshihide LBJ, Tokyo 4,220.12 2 1826.00 -15.70 6.80
Japan Millea Holdings Inc 8766.T Altherr,Walter LBI, New York 33,333.88 2 4360.00 -6.84 17.45
Japan Minebea 6479.T Kijima,Tsutomu LBJ, Tokyo 2,404.95 1 634.00 -7.31 16.85
Japan Mitsubishi Chemical Holdings 4188.T Yamada,Mikiya LBJ, Tokyo 10,435.08 2 729.00 -31.10 -13.13
Japan Mitsubishi Electric 6503.T Myers,Steven LBJ, Tokyo 23,669.61 1 1160.00 5.36 32.83
Japan Mitsubishi Motors 7211.T Mochimaru,Tsuyoshi LBJ, Tokyo 8,578.13 3 163.00 -13.30 9.31
Japan Mitsubishi Rayon 3404.T Yamada,Mikiya LBJ, Tokyo 2,058.34 2 361.00 -53.54 -41.43
Japan Mitsubishi Tanabe Pharma 4508.T Yoda,Toshihide LBJ, Tokyo 6,866.34 2 1287.00 -23.03 -2.96
Japan Mitsubishi UFJ Financial Group 8306.T Senoguchi,Junsuke LBJ, Tokyo 108,895.09 2 1055.00 -21.27 -0.74
Japan Mitsui Chemicals 4183.T Yamada,Mikiya LBJ, Tokyo 4,597.10 1 613.00 -35.13 -18.22
Japan Mitsui Sumitomo Insurance Group Holdings 8725.T Altherr,Walter LBI, New York 17,136.31 2 4280.00 -15.25 6.85
Japan Mixi Inc. 2121.T Yoneshima,Keiichi LBJ, Tokyo 1,119.26 3 780000.00 -3.11 22.15
Japan Mizuho Financial Group 8411.T Senoguchi,Junsuke LBJ, Tokyo 55,989.09 2 517000.00 -33.46 -16.12
Japan Monex Beans Holdings 8698.T Yoneshima,Keiichi LBJ, Tokyo 1,551.00 2 69600.00 -31.76 -13.98
Japan Murata Mfg. 6981.O Koshita,Masaru LBJ, Tokyo 11,195.77 2 5230.00 -37.89 -21.69
Japan NEC 6701.T Myers,Steven LBJ, Tokyo 10,126.48 2 525.00 -16.53 5.23
Japan NEC Electronics 6723.T Myers,Steven LBJ, Tokyo 2,552.62 1 2175.00 -22.74 -2.59
Japan NGK SPARK PLUG 5334.T Koshita,Masaru LBJ, Tokyo 2,916.48 3 1337.00 -30.00 -11.75
Japan NHK Spring 5991.T Koshita,Masaru LBJ, Tokyo 1,992.33 1 859.00 -23.58 -3.65
Japan NSK 6471.T Kijima,Tsutomu LBJ, Tokyo 4,887.70 2 933.00 -23.90 -4.06
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 143

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Japan NTN 6472.T Kijima,Tsutomu LBJ, Tokyo 3,362.05 2 752.00 -24.27 -4.53
Japan NTT 9432.T Tsusaka,Tetsuro LBJ, Tokyo 74,494.13 1 498000.00 -12.01 10.92
Japan NTT DoCoMo 9437.T Tsusaka,Tetsuro LBJ, Tokyo 67,797.48 1 159000.00 -24.29 -4.55
Japan Namco Bandai Holdings 7832.T Nagasaka,Mia LBJ, Tokyo 3,346.10 1 1375.00 -30.17 -11.96
Japan Nidec 6594.O Koshita,Masaru LBJ, Tokyo 10,650.48 1 7730.00 9.96 38.62
Japan Nihon Inter Electronics 6974.T Myers,Steven LBJ, Tokyo 70.52 1 235.00 -60.90 -50.70
Japan Nikon 7731.T Myers,Steven LBJ, Tokyo 12,395.03 2 3260.00 9.03 37.45
Japan Nintendo 7974.T Nagasaka,Mia LBJ, Tokyo 78,488.09 1 58300.00 50.65 89.92
Japan Nissan Motor 7201.T Mochimaru,Tsuyoshi LBJ, Tokyo 41,241.90 2 960.00 -25.64 -6.25
Japan Nitto Denko 6988.T Yamada,Mikiya LBJ, Tokyo 8,190.06 2 4960.00 -8.82 14.95
Japan Nomura Holdings Inc 8604.T Altherr,Walter LBI, New York 32,787.13 1 1755.00 -29.52 -11.14
Japan Olympus 7733.T Takeda,Keiji LBJ, Tokyo 8,584.77 2 3330.00 -28.54 -9.91
Japan Ono Pharmaceutical 4528.T Yoda,Toshihide LBJ, Tokyo 6,178.49 2 5380.00 -18.11 3.24
Japan Osaka Gas Company 9532.T Maruo,Masanori LBJ, Tokyo 7,835.24 2 382.00 -14.92 7.26
Japan Promise 8574.T Altherr,Walter LBI, New York 4,242.23 2 3310.00 -15.13 7.00
Japan Rakuten 4755.Q Yoneshima,Keiichi LBJ, Tokyo 7,593.52 1 61100.00 29.18 62.85
Japan Resona Holdings 8308.T Senoguchi,Junsuke LBJ, Tokyo 20,366.82 3 188000.00 -33.80 -16.55
Japan Ricoh 7752.T Takeda,Keiji LBJ, Tokyo 12,897.74 1 1822.00 -31.12 -13.16
Japan Rohm 6963.O Koshita,Masaru LBJ, Tokyo 7,654.38 2 6780.00 -35.55 -18.75
Japan SBI Holdings, Inc. 8473.T Yoneshima,Keiichi LBJ, Tokyo 3,568.81 1 30200.00 -21.66 -1.24
Japan SFCG Co. Ltd 8597.T Altherr,Walter LBI, New York 1,362.62 1 11710.00 -46.26 -32.25
Japan SMC 6273.T Kijima,Tsutomu LBJ, Tokyo 8,175.16 2 11970.00 -17.90 3.50
Japan Sanken Electric 6707.T Lee,Eric LBJ, Tokyo 821.65 2 689.00 -43.10 -28.27
Japan Santen Pharmaceutical 4536.T Yoda,Toshihide LBJ, Tokyo 2,199.95 1 2665.00 -16.19 5.65
Japan Seiko Epson Corp. 6724.T Takeda,Keiji LBJ, Tokyo 4,777.09 3 2560.00 -26.22 -6.99
Japan Seven & I Holdings 3382.T Sasaki,Yasuyuki LBJ, Tokyo 29,630.33 1 3260.00 -6.05 18.44
Japan Shikoku Electric Power 9507.T Maruo,Masanori LBJ, Tokyo 6,930.13 3 3000.00 3.81 30.87
Japan Shin-Etsu Chemical 4063.T Yamada,Mikiya LBJ, Tokyo 26,321.42 2 6410.00 -18.55 2.68
Japan Shinko Electric Ind. 6967.T Koshita,Masaru LBJ, Tokyo 1,957.64 1 1524.00 -31.20 -13.26
Japan Shinsei Bank 8303.T Senoguchi,Junsuke LBJ, Tokyo 8,732.43 3 446.00 -16.64 5.10
Japan Shionogi 4507.T Yoda,Toshihide LBJ, Tokyo 6,873.90 1 2060.00 -5.72 18.86
Japan Shizuoka Bank Ltd 8355.T Senoguchi,Junsuke LBJ, Tokyo 8,469.18 2 1255.00 -0.87 24.97
Japan Showa Denko 4004.T Yamada,Mikiya LBJ, Tokyo 3,783.97 2 319.00 -23.50 -3.56
Japan SoftBank 9984.T Tsusaka,Tetsuro LBJ, Tokyo 20,693.12 3 2015.00 -20.36 0.41
Japan Sompo Japan Insurance Inc 8755.T Altherr,Walter LBI, New York 10,550.34 2 1124.00 -24.87 -5.28
Japan Square Enix 9684.T Nagasaka,Mia LBJ, Tokyo 3,774.18 1 3450.00 7.81 35.92
Japan Sumitomo Chemical 4005.T Yamada,Mikiya LBJ, Tokyo 9,989.61 2 635.00 -15.89 6.03
Japan Sumitomo Mitsui Financial Group 8316.T Senoguchi,Junsuke LBJ, Tokyo 61,001.81 2 830000.00 -24.55 -4.87
Japan Sumitomo Trust & Banking 8403.T Senoguchi,Junsuke LBJ, Tokyo 13,833.38 2 869.00 -25.73 -6.36
Japan Suruga Bank 8358.T Tani,Miwako LBJ, Tokyo 3,718.12 1 1477.00 -1.30 25.10
Japan Suzuken 9987.T Yoda,Toshihide LBJ, Tokyo 3,660.47 2 4100.00 -4.65 20.21
Japan Suzuki Motor 7269.T Mochimaru,Tsuyoshi LBJ, Tokyo 13,820.14 1 2680.00 -15.46 6.58
Japan T-ZONE HOLDINGS,INC. 8073.Q Altherr,Walter LBI, New York 467.64 2 1485.00 -38.76 -22.80
Japan TDK 6762.T Koshita,Masaru LBJ, Tokyo 8,953.02 2 7270.00 -26.64 -7.51
Japan THK 6481.T Kijima,Tsutomu LBJ, Tokyo 2,881.18 2 2265.00 -19.40 1.62
Japan Tadano 6395.T Kijima,Tsutomu LBJ, Tokyo 1,335.24 1 1085.00 -37.03 -20.61
Japan Taisho Pharmaceutical 4535.T Yoda,Toshihide LBJ, Tokyo 6,057.27 3 1989.00 -12.57 10.22
Japan Taiyo Yuden 6976.T Lee,Eric LBJ, Tokyo 1,346.65 2 1176.00 -55.20 -43.20
Japan Takashimaya 8233.T Sasaki,Yasuyuki LBJ, Tokyo 3,473.96 3 1105.00 -24.00 -4.19
Japan Takeda Pharmaceutical Co. 4502.T Yoda,Toshihide LBJ, Tokyo 49,943.91 1 5910.00 -23.05 -2.99
Japan Takefuji 8564.T Altherr,Walter LBI, New York 3,072.44 3 2195.00 -47.61 -33.96
Japan Teijin 3401.T Yamada,Mikiya LBJ, Tokyo 3,593.51 2 384.00 -43.11 -28.28
Japan Tohoku Electric Power 9506.T Maruo,Masanori LBJ, Tokyo 10,967.55 1 2295.00 -19.76 1.16
Japan Tokyo Electric Power 9501.T Maruo,Masanori LBJ, Tokyo 33,169.23 1 2580.00 -33.85 -16.60
Japan Tokyo Electron 8035.T Myers,Steven LBJ, Tokyo 11,568.17 1 6740.00 -22.44 -2.22
Japan Tokyo Gas Company 9531.T Maruo,Masanori LBJ, Tokyo 10,681.77 2 410.00 -32.12 -14.42
Japan Tokyo Tomin Bank 8339.T Tani,Miwako LBJ, Tokyo 894.41 2 2350.00 -44.31 -29.80
Japan Toray Industries 3402.T Yamada,Mikiya LBJ, Tokyo 8,670.19 3 651.00 -20.90 -0.28
Japan Toshiba 6502.T Myers,Steven LBJ, Tokyo 27,223.91 1 885.00 -2.96 22.34
Japan Toshiba TEC 6588.T Takeda,Keiji LBJ, Tokyo 1,957.85 3 715.00 4.23 31.40
Japan Tosoh 4042.T Yamada,Mikiya LBJ, Tokyo 2,547.92 1 446.00 -26.77 -7.67
Japan Toyota Motor 7203.T Mochimaru,Tsuyoshi LBJ, Tokyo 173,005.70 2 5280.00 -27.87 -9.06
Japan Uny 8270.T Sasaki,Yasuyuki LBJ, Tokyo 2,032.73 2 1130.00 -20.65 0.04
Japan Verisign Japan 3722.T Yoneshima,Keiichi LBJ, Tokyo 381.80 2 88300.00 -29.92 -11.65
Japan Yahoo! JAPAN 4689.T Yoneshima,Keiichi LBJ, Tokyo 26,361.46 2 45850.00 6.88 34.74
Japan Yamaha Motor 7272.T Mochimaru,Tsuyoshi LBJ, Tokyo 5,566.97 2 2045.00 -34.24 -17.10
Japan Zeon 4205.T Yamada,Mikiya LBJ, Tokyo 1,249.14 1 543.00 -52.62 -40.27
Japan kabu.com Securities 8703.T Yoneshima,Keiichi LBJ, Tokyo 1,335.01 1 144000.00 -18.18 3.15
Malaysia Digi.Com Berhad DSOM.KL Wuh,Paul LBAL, Hong Kong 5,898.44 1 24.80 18.10 24.68
Malaysia MISC Berhad MISC.KL Lee,Andrew Kam Wing LBAL, Hong Kong 10,810.14 1 9.50 -2.56 2.87
Malaysia Malaysian Bulk Carriers MBCB.KL Lee,Andrew Kam Wing LBAL, Hong Kong 1,315.39 1 4.30 31.74 39.09
Malaysia Petronas Gas PGAS.KL Asia,Equity Research LBAL, Hong Kong 6,053.02 2 10.00 7.53 13.53
Malaysia Telekom Malaysia Bhd TLMM.KL Wuh,Paul LBAL, Hong Kong 3,873.96 1 3.54 10.75 16.93
Malaysia Tenaga Nasional TENA.KL Asia,Equity Research LBAL, Hong Kong 9,080.60 2 6.85 -41.95 -38.71
New Zealand Telecom Corporation of New Zealand TEL.NZ Langford,David LBAUL, Sydney 5,370.70 2 3.89 -18.05 0.68
Singapore Bukit Sembawang Estates BSES.SI Sai,Min Chow LBAL, Hong Kong 737.67 1 9.44 -20.67 -15.34
Singapore CDL Hospitality Trust CDLT.SI Sai,Min Chow LBAL, Hong Kong 1,177.02 2 1.97 -1.45 5.18
Singapore Cambridge Industrial Trust CMIT.SI Sai,Min Chow LBAL, Hong Kong 408.92 1 0.71 -22.83 -17.64
Singapore CapitaLand CATL.SI Sai,Min Chow LBAL, Hong Kong 13,532.31 1 6.62 -21.66 -16.39
Singapore CapitaRetail China Trust CRCT.SI Louie,Paul LBAL, Hong Kong 652.47 1 1.46 -52.60 -49.41
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 144

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Singapore China Energy Limited CENR.SI Por,Yong Liang LBAL, Hong Kong 526.27 1 0.58 -56.39 -53.46
Singapore City Developments CTDM.SI Sai,Min Chow LBAL, Hong Kong 7,704.82 1 11.70 -30.77 -26.11
Singapore K-REIT Asia KASA.SI Sai,Min Chow LBAL, Hong Kong 670.22 1 1.43 -48.74 -45.29
Singapore Keppel Land KLAN.SI Sai,Min Chow LBAL, Hong Kong 2,976.83 1 5.70 -39.36 -35.28
Singapore Mandarin Oriental Int'l Ltd MOIL.SI Lo,Benjamin LBAL, Hong Kong 2,130.17 2 2.15 -3.15 3.36
Singapore MobileOne MONE.SI Wuh,Paul LBAL, Hong Kong 1,289.52 2 1.99 -9.96 -3.90
Singapore Neptune Orient Lines NEPS.SI Lee,Andrew Kam Wing LBAL, Hong Kong 4,001.81 2 3.76 3.20 8.30
Singapore SC Global Developments SCGO.SI Sai,Min Chow LBAL, Hong Kong 427.18 1 1.49 -42.14 -38.24
Singapore STATS ChipPAC Ltd STTSY.PK Hsu,John LBSTL, Taiwan 1,733.95 2 8.43 -30.56 -25.70
Singapore STX Pan Ocean STXP.SI Lee,Andrew Kam Wing LBAL, Hong Kong 5,501.27 2 3.69 125.00 140.13
Singapore SingTel STEL.SI Wuh,Paul LBAL, Hong Kong 42,964.69 1 3.73 9.71 17.08
Singapore StarHub Ltd STAR.SI Wuh,Paul LBAL, Hong Kong 3,649.34 1 2.95 -0.34 6.37
Singapore Wilmar International WLIL.SI Por,Yong Liang LBAL, Hong Kong 22,938.13 1 4.96 64.24 75.28
South Korea Ace Digitech 036550.KQ Kim,James LBIE, Seoul 445.79 3 20300.00 9.43 18.11
South Korea CJ Cheil Jedang 097950.KS Chung,HongTaik LBIE, Seoul 2,696.92 1 250500.00 0.00 0.00
South Korea CJ Home Shopping 035760.KQ Chung,HongTaik LBIE, Seoul 683.97 2 65100.00 4.16 12.42
South Korea Daegu Bank 005270.KS Cho,Michelle LBIE, Seoul 1,904.71 2 15100.00 -1.63 -14.33
South Korea Daewoo Shipbldg & Marine Eng. 042660.KS Yoon,Mark LBIE, Seoul 7,656.01 2 41900.00 3.33 -10.01
South Korea Display Manufacturing Service 068790.KQ Chung,CW LBIE, Seoul 170.87 2 9000.00 6.51 14.95
South Korea Dongbu Insurance 005830.KS Cho,Michelle LBIE, Seoul 2,453.62 1 36300.00 36.98 19.30
South Korea Finetec 033500.KS Yoon,Mark LBIE, Seoul 186.88 2 13050.00 -26.69 -20.87
South Korea GS Holdings 078930.KS Lo,Michael LBAL, Hong Kong 3,499.45 1 39450.00 -13.77 -24.90
South Korea GS Home Shopping 028150.KQ Chung,HongTaik LBIE, Seoul 412.28 2 65800.00 -15.75 -9.07
South Korea Halla Climate Control 018880.KS Koo,Zayong LBIE, Seoul 1,090.58 1 10700.00 4.90 -8.64
South Korea Hana Financial Group 086790.KS Cho,Michelle LBIE, Seoul 9,000.35 1 44500.00 -3.16 -15.66
South Korea Hanaro Telecom 033630.KS Yang,Stanley LBIE, Seoul 1,947.97 1 8650.00 -10.36 -3.26
South Korea Hanjin Heavy I&C 097230.KS Yoon,Mark LBIE, Seoul 2,322.90 1 51400.00 0.00 0.00
South Korea Hanjin Shipping 000700.KS Lee,Andrew Kam Wing LBAL, Hong Kong 3,424.09 2 45050.00 9.88 -4.30
South Korea Hankook Tire 000240.KS Koo,Zayong LBIE, Seoul 2,193.97 2 15100.00 0.33 -12.62
South Korea Hankuk Carbon 017960.KS Yoon,Mark LBIE, Seoul 175.18 1 6220.00 -45.20 -52.27
South Korea Hite Brewery 000140.KS Chung,HongTaik LBIE, Seoul 2,448.65 1 121000.00 -3.97 -16.36
South Korea Honam Petrochemical 011170.KS Lo,Michael LBAL, Hong Kong 2,913.92 1 95800.00 -2.24 -14.86
South Korea Hynix Semiconductor Inc. 000660.KS Chung,CW LBIE, Seoul 12,890.98 1 29400.00 -6.52 -18.58
South Korea Hyundai Department Store 069960.KS Chung,HongTaik LBIE, Seoul 2,046.62 1 94500.00 -4.16 -16.53
South Korea Hyundai Heavy Industries 009540.KS Yoon,Mark LBIE, Seoul 25,395.01 2 350000.00 28.21 11.66
South Korea Hyundai Marine & Fire 001450.KS Cho,Michelle LBIE, Seoul 1,843.56 2 21600.00 72.80 50.50
South Korea Hyundai Merchant Marine 011200.KS Lee,Andrew Kam Wing LBAL, Hong Kong 5,564.56 3 43800.00 41.06 22.86
South Korea Hyundai Mipo 010620.KS Yoon,Mark LBIE, Seoul 4,429.81 3 232000.00 -2.73 -15.28
South Korea Hyundai Mobis 012330.KS Koo,Zayong LBIE, Seoul 7,814.52 1 95400.00 17.78 2.58
South Korea Hyundai Motor Company 005380.KS Koo,Zayong LBIE, Seoul 18,598.34 1 88600.00 37.15 19.45
South Korea Industrial Bank of Korea 024110.KS Cho,Michelle LBIE, Seoul 7,426.53 1 19200.00 5.49 -8.12
South Korea Jusung Engineering 036930.KQ Chung,CW LBIE, Seoul 627.05 2 20250.00 72.34 86.00
South Korea KT 030200.KS Yang,Stanley LBIE, Seoul 12,125.23 2 46150.00 8.97 -5.09
South Korea KT&G 033780.KS Chung,HongTaik LBIE, Seoul 11,018.04 1 82000.00 18.50 3.20
South Korea KTF 032390.KQ Yang,Stanley LBIE, Seoul 5,335.76 2 29000.00 -4.76 -17.05
South Korea Kia Motors Corporation 000270.KS Koo,Zayong LBIE, Seoul 4,475.25 1 13500.00 16.38 1.36
South Korea Kookmin Bank 060000.KS Cho,Michelle LBIE, Seoul 21,259.53 1 66200.00 -21.19 -31.36
South Korea Korea Electric Power Corp. 015760.KS Lee,Ivan LBAL, Hong Kong 20,532.72 3 33500.00 -15.51 -26.42
South Korea Korea Exchange Bank 004940.KS Cho,Michelle LBIE, Seoul 9,604.80 2 15600.00 -0.64 -13.46
South Korea Korea Gas Corporation 036460.KS Lee,Ivan LBAL, Hong Kong 6,264.26 3 84900.00 104.58 78.17
South Korea Korea Line 005880.KS Lee,Andrew Kam Wing LBAL, Hong Kong 2,260.90 1 205500.00 136.48 105.96
South Korea LG Chem 051910.KS Lo,Michael LBAL, Hong Kong 7,757.71 1 108000.00 89.47 65.02
South Korea LG Dacom 015940.KS Yang,Stanley LBIE, Seoul 1,594.26 1 20050.00 -7.39 -19.34
South Korea LG Display Co., Ltd 034220.KS Kim,James LBIE, Seoul 17,012.02 1 49800.00 26.24 9.94
South Korea LG Electronics Inc. 066570.KS Kim,James LBIE, Seoul 21,404.78 2 155000.00 130.31 100.58
South Korea LG Micron 016990.KQ Kim,James LBIE, Seoul 348.70 1 48700.00 81.72 96.12
South Korea LG Petrochemical 012990.KS Lo,Michael LBAL, Hong Kong 2,261.19 1 52400.00 32.66 15.54
South Korea LG Telecom 032640.KQ Yang,Stanley LBIE, Seoul 2,541.28 1 9600.00 5.49 -8.12
South Korea LIG Insurance 002550.KS Cho,Michelle LBIE, Seoul 1,331.81 2 23250.00 41.30 23.10
South Korea Lotte Shopping 023530.KS Chung,HongTaik LBIE, Seoul 9,011.38 2 325000.00 -10.96 -22.45
South Korea Meritz Fire & Marine 000060.KS Cho,Michelle LBIE, Seoul 1,090.91 2 9230.00 21.19 5.55
South Korea NCsoft Corp 036570.KQ Yang,Stanley LBIE, Seoul 1,045.74 1 53500.00 -18.32 -28.86
South Korea NHN Corporation 035420.KQ Yang,Stanley LBIE, Seoul 9,557.14 1 208000.00 30.57 40.92
South Korea Neowiz Games 095660.KQ Yang,Stanley LBIE, Seoul 312.43 1 34150.00 0.00 0.00
South Korea POSCO 005490.KS Koo,Zayong LBIE, Seoul 46,113.51 2 554000.00 30.97 14.06
South Korea PSK 031980.KQ Chung,CW LBIE, Seoul 144.83 1 7740.00 -40.00 -35.24
South Korea Phoenix PDE 050090.KQ Kim,James LBIE, Seoul 38.58 2 1545.00 -44.12 -39.69
South Korea Pusan Bank 005280.KS Cho,Michelle LBIE, Seoul 2,093.59 1 14950.00 8.73 -5.31
South Korea S-Oil Corporation 010950.KS Lo,Michael LBAL, Hong Kong 7,276.59 2 67700.00 -4.92 -17.19
South Korea SK Energy 096770.KS Lo,Michael LBAL, Hong Kong 9,505.36 1 109000.00 0.00 0.00
South Korea SK Holdings 003600.KS Lo,Michael LBAL, Hong Kong 6,680.36 1 149000.00 11.52 -2.88
South Korea SK Telecom 017670.KS Yang,Stanley LBIE, Seoul 16,394.61 2 211500.00 1.20 -11.87
South Korea SL Corporation 005850.KS Koo,Zayong LBIE, Seoul 204.27 1 7570.00 7.22 -6.62
South Korea STX Shipbuilding 067250.KS Yoon,Mark LBIE, Seoul 2,653.30 3 38600.00 8.73 -5.30
South Korea Samsung Electronics 005930.KS Chung,CW LBIE, Seoul 103,782.20 1 738000.00 28.57 11.98
South Korea Samsung Fire & Marine 000810.KS Cho,Michelle LBIE, Seoul 10,289.57 1 227500.00 37.46 19.72
South Korea Samsung Heavy Industries 010140.KS Yoon,Mark LBIE, Seoul 8,673.38 1 39350.00 11.00 -3.33
South Korea Samsung SDI Co. Ltd. 006400.KS Kim,James LBIE, Seoul 3,240.32 2 74500.00 32.33 15.25
South Korea Samsung Techwin 012450.KS Chung,CW LBIE, Seoul 4,351.90 2 59200.00 33.03 15.86
South Korea Samyoung M-Tek 054540.KS Yoon,Mark LBIE, Seoul 52.09 1 4960.00 -61.85 -58.82
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 145

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
South Korea Seoul Semiconductor 046890.KQ Kim,James LBIE, Seoul 441.28 1 19100.00 -14.54 -7.77
South Korea Shinhan Financial Group 055550.KS Cho,Michelle LBIE, Seoul 20,085.18 2 53100.00 -2.57 -15.14
South Korea Shinsegae 004170.KS Chung,HongTaik LBIE, Seoul 10,227.74 1 568000.00 -6.89 -18.90
South Korea Simmtech Co., Ltd. 036710.KQ Kim,James LBIE, Seoul 146.98 1 5660.00 -44.24 -39.82
South Korea Ssangyong Motor 003620.KS Koo,Zayong LBIE, Seoul 638.94 1 5540.00 -16.69 -27.44
South Korea Taewoong 044490.KS Yoon,Mark LBIE, Seoul 1,658.70 1 104600.00 120.44 137.92
South Korea Webzen Inc 069080.KQ Yang,Stanley LBIE, Seoul 115.69 3 9340.00 -31.82 -26.42
South Korea Wooree ETI 082850.KS Kim,James LBIE, Seoul 172.00 1 9450.00 -3.28 4.39
South Korea Woori Financial Group 053000.KS Cho,Michelle LBIE, Seoul 15,659.37 1 20350.00 -7.29 -19.26
Taiwan AU Optronics 2409.TW Wang,Yolanda LBSTL, Taiwan 15,528.35 1 61.20 20.73 7.51
Taiwan Acer 2353.TW Yang,Alex LBSTL, Taiwan 5,282.61 1 68.10 9.72 -2.30
Taiwan Advanced Semiconductor Eng 2311.TW Hsu,John LBSTL, Taiwan 5,790.63 1 32.75 -4.09 -14.60
Taiwan Asia Cement 1102.TW Ho,Josephine LBSTL, Taiwan 4,938.49 1 56.00 72.80 53.87
Taiwan Asustek Computer 2357.TW Yang,Alex LBSTL, Taiwan 11,733.60 1 97.50 27.62 13.64
Taiwan Catcher Technology 2474.TW Yang,Alex LBSTL, Taiwan 2,139.47 3 122.50 -41.56 -47.96
Taiwan Cathay Financial Holding Co. 2882.TW Hung,Sarah LBSTL, Taiwan 24,321.88 1 81.30 14.03 1.54
Taiwan Chang Hwa Bank 2801.TW Hung,Sarah LBSTL, Taiwan 3,629.21 2 23.40 23.81 10.25
Taiwan Chi Mei Optoelectronic Corp 3009.TW Wang,Yolanda LBSTL, Taiwan 9,455.29 1 43.20 17.00 4.18
Taiwan Chia Hsin Cement 1103.TW Ho,Josephine LBSTL, Taiwan 671.67 2 31.00 66.67 48.41
Taiwan China Steel 2002.TW Ho,Josephine LBSTL, Taiwan 19,278.23 2 52.00 35.42 20.59
Taiwan Chinatrust Financial Holding Co. 2891.TW Hung,Sarah LBSTL, Taiwan 8,366.29 1 30.85 15.76 3.08
Taiwan Chipbond Technology 6147.TWO Hsu,John LBSTL, Taiwan 380.60 1 37.80 -1.71 -12.48
Taiwan Chunghwa Picture Tubes 2475.TW Wang,Yolanda LBSTL, Taiwan 3,032.93 1 9.92 17.95 5.03
Taiwan Chunghwa Telecom Co. Ltd. 2412.TW Chu,Danny LBAL, Hong Kong 24,194.95 2 78.50 24.01 10.43
Taiwan Compal Electronics 2324.TW Yang,Alex LBSTL, Taiwan 4,550.38 1 36.50 24.56 10.91
Taiwan E-TON Solar Tech Co Ltd 3452.TWO Pan,Clarisse L LBAL, Hong Kong 831.10 1 392.50 14.77 2.19
Taiwan Epistar 2448.TW Hsu,John LBSTL, Taiwan 1,989.15 3 99.40 -15.01 -24.32
Taiwan Evergreen Marine 2603.TW Lee,Andrew Kam Wing LBAL, Hong Kong 2,836.69 3 28.75 43.75 28.00
Taiwan Everlight 2393.TW Hsu,John LBSTL, Taiwan 1,416.37 2 125.00 8.64 -3.26
Taiwan Far EasTone Telecommunication 4904.TWO Chu,Danny LBAL, Hong Kong 5,253.95 1 50.00 2.27 -8.93
Taiwan Formosa Chemical and Fibre 1326.TW Por,Yong Liang LBAL, Hong Kong 13,593.57 3 76.30 18.11 5.17
Taiwan Formosa Petrochemical 6505.TW Por,Yong Liang LBAL, Hong Kong 27,855.85 2 93.40 28.12 14.09
Taiwan Formosa Plastics 1301.TW Por,Yong Liang LBAL, Hong Kong 16,454.88 2 89.20 37.23 22.20
Taiwan Foxconn Technology 2354.TW Yang,Alex LBSTL, Taiwan 4,601.21 3 188.00 -35.08 -42.19
Taiwan Fubon Financial Holding Co. Ltd. 2881.TW Hung,Sarah LBSTL, Taiwan 8,637.62 2 34.70 18.63 5.64
Taiwan GeoVision 3356.TW Yang,Alex LBSTL, Taiwan 383.32 1 247.00 52.94 36.19
Taiwan High Tech Computer 2498.TW Yang,Alex LBSTL, Taiwan 15,340.23 1 830.00 98.71 76.94
Taiwan Holy Stone Enterprise Co. Ltd. 3026.TW Yang,Alex LBSTL, Taiwan 385.36 2 44.20 -21.21 -29.84
Taiwan Hon Hai Precision 2317.TW Yang,Alex LBSTL, Taiwan 36,008.08 1 177.50 -10.13 -19.97
Taiwan Innolux Display 3481.TW Wang,Yolanda LBSTL, Taiwan 8,075.85 1 90.40 -5.53 -15.87
Taiwan Inotera Memories 3474.TW Hsu,John LBSTL, Taiwan 2,841.35 2 26.40 -26.45 -34.51
Taiwan Inventec 2356.TW Yang,Alex LBSTL, Taiwan 1,526.67 3 19.50 -13.79 -23.23
Taiwan Inventec Appliances Corp 3367.TW Yang,Alex LBSTL, Taiwan 966.28 2 64.90 13.57 1.13
Taiwan King Yuan Electronics Co Ltd 2449.TW Hsu,John LBSTL, Taiwan 677.86 1 17.30 -29.53 -37.24
Taiwan Kinik Company 1560.TW Hsu,John LBSTL, Taiwan 244.10 2 56.70 -46.99 -52.79
Taiwan MediaTek 2454.TW Wang,Yolanda LBSTL, Taiwan 13,660.99 3 407.00 -14.44 -23.82
Taiwan Mega Financial Holding Co. Ltd. 2886.TW Hung,Sarah LBSTL, Taiwan 9,254.83 1 25.95 24.46 10.83
Taiwan Motech Industries Inc 6244.TWO Pan,Clarisse L LBAL, Hong Kong 1,888.92 1 284.00 -16.82 -25.93
Taiwan Nan Ya Plastics 1303.TW Por,Yong Liang LBAL, Hong Kong 17,971.11 2 73.10 16.59 3.82
Taiwan Nanya PCB 8046.TW Hsu,John LBSTL, Taiwan 3,218.61 2 161.50 -15.85 -25.07
Taiwan Nanya Technology Co. 2408.TW Kerr,Naiwen LBSTL, Taiwan 2,703.12 1 17.85 -27.60 -37.30
Taiwan Novatek Microelectronics Corp 3034.TW Wang,Yolanda LBSTL, Taiwan 2,095.48 1 120.00 -24.91 -33.13
Taiwan Optimax Technology 3051.TW Wang,Yolanda LBSTL, Taiwan 193.66 2 11.85 -36.63 -43.57
Taiwan Opto Tech 2340.TW Hsu,John LBSTL, Taiwan 540.26 1 32.15 -15.40 -22.80
Taiwan Phoenix Precision Technology Corp 2446.TW Hsu,John LBSTL, Taiwan 514.67 1 23.30 -35.05 -42.16
Taiwan Powerchip Semiconductor 5346.TWO Hsu,John LBSTL, Taiwan 3,263.36 1 12.90 -29.32 -37.06
Taiwan Powertech Technology Inc. 6239.TW Hsu,John LBSTL, Taiwan 1,913.77 1 126.00 22.28 8.88
Taiwan ProMOS 5387.TWO Hsu,John LBSTL, Taiwan 1,756.22 2 8.12 -37.78 -44.59
Taiwan Quanta Computer 2382.TW Yang,Alex LBSTL, Taiwan 5,793.98 2 51.70 8.95 -2.98
Taiwan Realtek 2379.TW Wang,Yolanda LBSTL, Taiwan 1,368.87 1 93.80 -30.09 -37.75
Taiwan RichTek Technology 6286.TW Wang,Yolanda LBSTL, Taiwan 1,208.78 1 315.00 -3.66 -14.21
Taiwan Shin Kong Financial Holding Co. 2888.TW Hung,Sarah LBSTL, Taiwan 4,783.33 1 27.50 -13.51 -22.98
Taiwan Siliconware Precision 2325.TW Hsu,John LBSTL, Taiwan 5,255.04 2 53.00 -19.33 -28.17
Taiwan Silitech Technology 3311.TW Yang,Alex LBSTL, Taiwan 556.55 1 114.50 -19.52 -28.33
Taiwan Sincere Navigation 2605.TW Lee,Andrew Kam Wing LBAL, Hong Kong 982.61 2 63.00 23.05 9.57
Taiwan SinoPac Holdings 2890.TW Hung,Sarah LBSTL, Taiwan 3,298.61 2 14.40 -1.71 -12.47
Taiwan Sunplus Technology Co. Ltd. 2401.TW Wang,Yolanda LBSTL, Taiwan 770.47 3 42.90 -32.59 -39.97
Taiwan Synnex Technology Intl Corp 2347.TW Yang,Alex LBSTL, Taiwan 2,925.86 2 83.70 110.00 87.00
Taiwan TSMC 2330.TW Hsu,John LBSTL, Taiwan 56,696.69 1 68.60 2.59 -8.64
Taiwan Taishin Financial Holding Co. 2887.TW Hung,Sarah LBSTL, Taiwan 2,752.95 2 14.95 -9.67 -19.56
Taiwan Taiwan Cement 1101.TW Ho,Josephine LBSTL, Taiwan 5,290.42 1 50.50 64.53 46.51
Taiwan Taiwan Chi Cheng Enterprise Co. 3095.TW Yang,Alex LBSTL, Taiwan 153.18 1 32.70 -65.75 -69.50
Taiwan Taiwan Fertilizer 1722.TW Ho,Josephine LBSTL, Taiwan 4,645.60 3 147.00 146.23 119.26
Taiwan Taiwan Mobile 3045.TW Chu,Danny LBAL, Hong Kong 6,790.43 2 55.40 17.62 4.73
Taiwan Topco Scientific Co Ltd 5434.TW Hsu,John LBSTL, Taiwan 223.22 1 51.80 -28.02 -35.90
Taiwan Transcend Information 2451.TW Pan,Felix LBSTL, Taiwan 1,470.15 1 123.00 7.08 -4.65
Taiwan U-Ming Marine 2606.TW Lee,Andrew Kam Wing LBAL, Hong Kong 2,849.91 1 103.00 62.97 45.12
Taiwan United Microelectronics Corp 2303.TW Hsu,John LBSTL, Taiwan 8,075.28 2 18.95 -32.60 -39.98
Taiwan Vanguard Intl Semiconductor 5347.TW Hsu,John LBSTL, Taiwan 1,163.13 3 21.20 -30.15 -37.80
Taiwan Wan Hai Lines 2615.TW Lee,Andrew Kam Wing LBAL, Hong Kong 1,809.60 2 27.00 20.27 7.09
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 146

Lehman Brothers | Equity Research
MarketCap Absolute Relative
Company Ticker Analyst Entity
Country Rating Price
USD (MN) 12M % 12M %
Taiwan Wellypower Optronics 3080.TW Wang,Yolanda LBSTL, Taiwan 344.69 2 66.70 -30.12 -37.78
Taiwan Winbond 2344.TW Wang,Yolanda LBSTL, Taiwan 1,120.94 2 9.17 -19.56 -28.37
Taiwan Wistron 3231.TW Yang,Alex LBSTL, Taiwan 2,366.34 1 53.10 6.39 -5.26
Taiwan Yageo Corporation 2327.TW Yang,Alex LBSTL, Taiwan 845.24 1 10.75 -21.82 -30.38
Taiwan Yang Ming Marine 2609.TW Lee,Andrew Kam Wing LBAL, Hong Kong 1,772.44 3 23.60 11.68 -0.55
Taiwan Yuanta Financial Holdings 2885.TW Hung,Sarah LBSTL, Taiwan 7,623.06 2 28.30 86.18 65.79
Thailand Advanced Info Services ADVA.BK Wuh,Paul LBAL, Hong Kong 8,799.09 1 96.50 3.91 -11.83
Thailand Electricity Generating PCL EGCOf.BK Asia,Equity Research LBAL, Hong Kong 1,548.19 2 95.50 -6.80 -20.91
Thailand PTT Aromatics & Refining PTTAR.BK Por,Yong Liang LBAL, Hong Kong 2,897.46 1 31.75 0.00 0.00
Thailand PTT Chemical PTTC.BK Por,Yong Liang LBAL, Hong Kong 4,885.42 2 106.00 21.84 3.39
Thailand PTT Exploration & Production PTTE.BK Por,Yong Liang LBAL, Hong Kong 19,094.09 2 188.00 100.00 69.71
Thailand PTT PCL PTT.BK Por,Yong Liang LBAL, Hong Kong 30,029.01 1 346.00 46.55 24.36
Thailand Precious Shipping PSL.BK Lee,Andrew Kam Wing LBAL, Hong Kong 816.25 3 25.50 0.00 -15.14
Thailand Ratchaburi RATC.BK Asia,Equity Research LBAL, Hong Kong 2,031.56 2 45.50 0.56 -14.67
Thailand Thai Oil TOP.BK Por,Yong Liang LBAL, Hong Kong 4,240.24 1 67.50 3.82 -11.91
Thailand Thoresen Thai TTA.BK Lee,Andrew Kam Wing LBAL, Hong Kong 991.05 1 50.00 34.27 13.93
Thailand Total Access Communication DTAC.BK Wuh,Paul LBAL, Hong Kong 107.91 2 1.48 45.10 54.86
Thailand True Corporation TRUE.BK Wuh,Paul LBAL, Hong Kong 576.29 1 4.92 -38.58 -47.88
USA AirMedia Group Inc. AMCN.O Wuh,Paul LBAL, Hong Kong 1,104.65 1 17.07 0.00 0.00
Vietnam JSM Indochina JSM.L Louie,Paul LBAL, Hong Kong 153.33 1 0.62 0.00 0.00
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 147

Lehman Brothers | Equity Research
Companies under Coverage in Asia, by Sector (as of May 14, 2008)
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Agriculture PrimeAg Australia Limited PAG.AX Clibborn,Bradley 270.43 1 1.94 0.00 0
Asia Consumer Asian Paints ASPN.NS Jain,Manish 2,788.62 1 1233.25 56.40 26.11
Asia Consumer Belle International Holdings Limited 1880.HK Wong,Phoebe 9,675.56 1 8.94 0.00 0
Asia Consumer Bright Dairy & Food Co., Ltd 600597.SS Peng,Christine 1,536.97 3 10.33 -8.75 0.853
Asia Consumer CJ Cheil Jedang 097950.KS Chung,HongTaik 2,696.92 1 250500.00 0.00 0
Asia Consumer China Foods 0506.HK Peng,Christine 1,485.23 2 4.15 -21.25 -35.298
Asia Consumer China Mengniu 2319.HK Peng,Christine 4,589.51 1 25.10 -6.52 -23.192
Asia Consumer China Resources Enterprise 0291.HK Wong,Phoebe 8,506.48 1 27.80 -1.42 -19.002
Asia Consumer China Yurun Food 1068.HK Peng,Christine 2,448.61 1 12.50 40.92 15.789
Asia Consumer Dabur India DABU.NS Jain,Manish 2,023.59 3 99.35 10.45 -10.94
Asia Consumer Godrej Consumer GOCP.NS Jain,Manish 827.50 1 136.00 -0.34 -19.65
Asia Consumer Golden Eagle Retail Group 3308.HK Huang,Candy 1,817.40 1 7.80 30.00 6.813
Asia Consumer Hengan International 1044.HK Peng,Christine 4,029.50 3 27.50 1.48 -16.624
Asia Consumer Hindustan Unilever Limited HLL.BO Jain,Manish 12,612.48 1 245.65 27.91 3.14
Asia Consumer Hite Brewery 000140.KS Chung,HongTaik 2,448.65 1 121000.00 -3.97 -16.36
Asia Consumer Hongguo International HGUO.SI Peng,Christine 153.77 1 0.54 -62.06 -59.505
Asia Consumer ITC Limited ITC.BO Jain,Manish 20,029.06 3 225.45 39.17 12.21
Asia Consumer Inner Mongolia Yili 600887.SS Peng,Christine 2,163.08 3 22.74 -24.45 -16.505
Asia Consumer Intime Department Store (Group) 1833.HK Huang,Candy 1,361.61 3 5.90 -10.61 -26.551
Asia Consumer KT&G 033780.KS Chung,HongTaik 11,018.04 1 82000.00 18.50 3.2
Asia Consumer Li Ning 2331.HK Wong,Phoebe 3,256.51 1 24.45 50.00 23.246
Asia Consumer Lianhua 980.HK Huang,Candy 283.45 1 10.68 6.16 -12.773
Asia Consumer Marico Limited MRCO.NS Jain,Manish 912.35 1 63.55 9.47 -11.73
Asia Consumer Parkson Retail Group 3368.HK Huang,Candy 5,184.85 1 72.55 34.35 10.388
Asia Consumer People's Food PFFH.SI Peng,Christine 982.32 1 1.20 -42.31 -38.428
Asia Consumer Prime Success 0210.HK Peng,Christine 976.49 1 4.65 -20.78 -34.913
Asia Consumer Tata Tea TTTE.BO Jain,Manish 1,349.93 1 926.00 16.32 -6.21
Asia Consumer Times 1832.HK Huang,Candy 392.20 1 3.50 0.00 0
Asia Consumer Tingyi 0322.HK Peng,Christine 7,237.02 1 10.10 14.51 -5.912
Asia Consumer TsingTao Brewery (H share) 0168.HK Peng,Christine 1,931.71 1 23.00 54.78 27.171
Asia Consumer Yue Yuen 0551.HK Peng,Christine 5,023.13 2 23.55 -15.59 -30.647
Asia Healthcare Shandong Weigao 8199.HK Peng,Christine 645.84 1 14.50 2.40 -15.863
Asia Oil & Gas CNOOC 0883.HK Khoo,Cheng 83,839.21 2 14.76 108.77 71.533
Asia Oil & Gas China Oilfield Services Ltd 2883.HK Khoo,Cheng 3,030.50 1 15.40 87.58 54.119
Asia Oil & Gas Oil and Natural Gas Corp ONGC.BO Lo,Michael 50,275.09 1 997.10 9.96 -11.34
Asia Oil & Gas PetroChina 0857.HK Khoo,Cheng 29,485.84 1 10.90 7.28 -11.852
Asia Oil & Gas Reliance Industries RIL.BO Lo,Michael 85,719.66 1 2501.45 54.32 24.44
Asia Oil & Gas Sinopec 0386.HK Khoo,Cheng 16,114.39 1 7.49 -7.19 -23.742
Autos & Auto Parts Ashok Leyland ASOK.NS Awasthi,Prabhat 1,204.27 2 38.40 2.26 -17.54
Autos & Auto Parts Bajaj Auto BJAT.NS Awasthi,Prabhat 3,047.67 1 675.85 -52.11 -61.39
Autos & Auto Parts Brilliance China Automotive 1114.HK Hou,Yankun 677.53 3 1.44 -22.58 -36.389
Autos & Auto Parts Daihatsu Motor 7262.T Mochimaru,Tsuyoshi 4,911.32 2 1210.00 28.86 62.45
Autos & Auto Parts Denway Motors Limited 0203.HK Hou,Yankun 4,019.82 1 4.17 22.65 0.771
Autos & Auto Parts Dongfeng Motor Group Co Ltd 0489.HK Hou,Yankun 1,493.84 1 4.08 -5.99 -22.759
Autos & Auto Parts Exide Industries EXID.NS Jain,Manish 1,415.37 1 75.05 70.30 37.31
Autos & Auto Parts Fuji Heavy Industries 7270.T Mochimaru,Tsuyoshi 3,489.16 3 469.00 -15.80 6.15
Autos & Auto Parts Geely Automobile Holdings 0175.HK Hou,Yankun 666.84 2 1.00 -14.53 -29.775
Autos & Auto Parts Great Wall Motor Co 2333.HK Hou,Yankun 499.13 1 9.42 -11.63 -27.394
Autos & Auto Parts Halla Climate Control 018880.KS Koo,Zayong 1,090.58 1 10700.00 4.90 -8.64
Autos & Auto Parts Hankook Tire 000240.KS Koo,Zayong 2,193.97 2 15100.00 0.33 -12.62
Autos & Auto Parts Hero Honda HROH.NS Awasthi,Prabhat 3,756.04 2 797.90 15.62 -6.77
Autos & Auto Parts Hino Motors 7205.T Mochimaru,Tsuyoshi 3,494.55 1 640.00 -2.44 23
Autos & Auto Parts Honda Motor 7267.T Mochimaru,Tsuyoshi 57,888.70 1 3320.00 -18.63 2.59
Autos & Auto Parts Hyundai Mobis 012330.KS Koo,Zayong 7,814.52 1 95400.00 17.78 2.58
Autos & Auto Parts Hyundai Motor Company 005380.KS Koo,Zayong 18,598.34 1 88600.00 37.15 19.45
Autos & Auto Parts Isuzu Motors 7202.T Mochimaru,Tsuyoshi 8,304.43 2 515.00 -11.97 10.98
Autos & Auto Parts Kia Motors Corporation 000270.KS Koo,Zayong 4,475.25 1 13500.00 16.38 1.36
Autos & Auto Parts Maruti Suzuki India Limited MRTI.NS Awasthi,Prabhat 5,245.26 1 770.15 -4.19 -22.74
Autos & Auto Parts Mazda Motor 7261.T Mochimaru,Tsuyoshi 6,200.84 2 460.00 -30.20 -12
Autos & Auto Parts Mitsubishi Motors 7211.T Mochimaru,Tsuyoshi 8,578.13 3 163.00 -13.30 9.31
Autos & Auto Parts Nissan Motor 7201.T Mochimaru,Tsuyoshi 41,241.90 2 960.00 -25.64 -6.25
Autos & Auto Parts SL Corporation 005850.KS Koo,Zayong 204.27 1 7570.00 7.22 -6.62
Autos & Auto Parts Shanghai Automotive Co. 600104.SS Hou,Yankun 13,723.98 3 14.67 -6.98 2.81
Autos & Auto Parts Ssangyong Motor 003620.KS Koo,Zayong 638.94 1 5540.00 -16.69 -27.44
Autos & Auto Parts Suzuki Motor 7269.T Mochimaru,Tsuyoshi 13,820.14 1 2680.00 -15.46 6.58
Autos & Auto Parts TVS Motor TVSM.NS Awasthi,Prabhat 231.27 2 41.30 -33.76 -46.59
Autos & Auto Parts Tata Motors TAMO.NS Awasthi,Prabhat 6,051.10 1 665.85 -6.74 -24.81
Autos & Auto Parts Toyota Motor 7203.T Mochimaru,Tsuyoshi 173,005.70 2 5280.00 -27.87 -9.06
Autos & Auto Parts Weichai Power 2338.HK Hou,Yankun 690.92 1 42.60 -5.23 -22.132
Autos & Auto Parts Xingda International 1899.HK Hou,Yankun 311.02 2 1.75 -60.67 -67.688
Autos & Auto Parts Yamaha Motor 7272.T Mochimaru,Tsuyoshi 5,566.97 2 2045.00 -34.24 -17.1
Banks Aozora Bank 8304.T Senoguchi,Junsuke 4,625.99 1 295.00 -31.87 -14.11
Banks Bank of Baroda BOB.NS Vadlamani,Srikanth 2,534.06 1 295.10 9.34 -11.84
Banks Bank of China (H-shares) 3988.HK Feng,Lucy 39,181.65 2 4.02 0.50 -17.426
Banks Bank of Communications 3328.HK Feng,Lucy 31,877.89 1 10.78 27.88 5.068
Banks Canara Bank CNBK.NS Vadlamani,Srikanth 2,252.49 1 233.05 1.26 -18.35
Banks China CITIC Bank (H Share) 0998.HK Feng,Lucy 7,870.78 2 4.95 -22.78 -36.551
Banks China Construction Bank 0939.HK Feng,Lucy 207,127.88 1 7.19 46.14 20.072
Banks China Merchants Bank (H-shares) 3968.HK Feng,Lucy 10,546.16 1 30.90 50.73 23.847
Banks China Minsheng Bank Co. 600016.SS Feng,Lucy 21,692.15 2 8.07 -13.54 -4.449
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 148

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Banks Chuo Mitsui Trust Holdings 8309.T Senoguchi,Junsuke 6,691.28 2 713.00 -39.32 -23.5
Banks Daegu Bank 005270.KS Cho,Michelle 1,904.71 2 15100.00 -1.63 -14.33
Banks HDFC Bank HDBK.NS Vadlamani,Srikanth 12,386.89 1 1482.20 48.82 20
Banks Hana Financial Group 086790.KS Cho,Michelle 9,000.35 1 44500.00 -3.16 -15.66
Banks Huaxia Bank 600015.SS Feng,Lucy 8,144.97 3 13.58 0.52 11.092
Banks ICICI Bank ICBK.NS Vadlamani,Srikanth 23,288.67 1 887.85 2.05 -17.72
Banks Indian Overseas Bank IOBK.IN Vadlamani,Srikanth 1,925.17 1 149.90 26.39 1.91
Banks Industrial & Comml Bank of China(H) 1398.HK Feng,Lucy 65,170.72 1 6.12 42.00 16.669
Banks Industrial Bank of Korea 024110.KS Cho,Michelle 7,426.53 1 19200.00 5.49 -8.12
Banks Kookmin Bank 060000.KS Cho,Michelle 21,259.53 1 66200.00 -21.19 -31.36
Banks Korea Exchange Bank 004940.KS Cho,Michelle 9,604.80 2 15600.00 -0.64 -13.46
Banks Mitsubishi UFJ Financial Group 8306.T Senoguchi,Junsuke 108,895.09 2 1055.00 -21.27 -0.74
Banks Mizuho Financial Group 8411.T Senoguchi,Junsuke 55,989.09 2 517000.00 -33.46 -16.12
Banks Punjab National Bank PNBK.NS Vadlamani,Srikanth 3,683.35 1 495.55 -7.44 -25.37
Banks Pusan Bank 005280.KS Cho,Michelle 2,093.59 1 14950.00 8.73 -5.31
Banks Resona Holdings 8308.T Senoguchi,Junsuke 20,366.82 3 188000.00 -33.80 -16.55
Banks Shanghai Pudong Development Bank 600000.SS Feng,Lucy 25,086.62 1 31.03 37.86 52.366
Banks Shenzhen Development Bank 000001.SZ Feng,Lucy 9,134.19 1 27.89 0.14 -1.81
Banks Shinhan Financial Group 055550.KS Cho,Michelle 20,085.18 2 53100.00 -2.57 -15.14
Banks Shinsei Bank 8303.T Senoguchi,Junsuke 8,732.43 3 446.00 -16.64 5.1
Banks State Bank of India SBI.NS Vadlamani,Srikanth 24,830.08 3 1668.00 46.62 18.22
Banks Sumitomo Mitsui Financial Group 8316.T Senoguchi,Junsuke 61,001.81 2 830000.00 -24.55 -4.87
Banks Sumitomo Trust & Banking 8403.T Senoguchi,Junsuke 13,833.38 2 869.00 -25.73 -6.36
Banks Union Bank of India UNBK.NS Vadlamani,Srikanth 1,914.73 1 160.80 35.18 9
Banks Woori Financial Group 053000.KS Cho,Michelle 15,659.37 1 20350.00 -7.29 -19.26
Brokers & Asset Managers Babcock & Brown Limited BNB.AX Mak,Timothy 4,909.39 2 15.99 -46.95 -43.318
Brokers & Asset Managers CITIC Securities Co., Ltd. 600030.SS Feng,Lucy 34,626.77 2 36.57 35.90 38.9
Brokers & Asset Managers Daiwa Securities Group Inc 8601.T Altherr,Walter 13,802.36 1 1034.00 -24.85 -5.26
Brokers & Asset Managers Macquarie Group Limited MQG.AX Mak,Timothy 16,410.82 2 64.15 -28.32 -23.421
Brokers & Asset Managers Nomura Holdings Inc 8604.T Altherr,Walter 32,787.13 1 1755.00 -29.52 -11.14
Building Materials & Construction ACC Ltd ACC.NS Kumar,Satish 3,021.17 3 683.00 -21.26 -36.51
Building Materials & Construction Ambuja Cements GACM.NS Kumar,Satish 4,003.62 3 111.55 -9.79 -27.26
Building Materials & Construction Anhui Conch 0914.HK Du,Oliver 13,612.85 1 67.80 85.75 52.622
Building Materials & Construction Asia Cement 1102.TW Ho,Josephine 4,938.49 1 56.00 72.80 53.87
Building Materials & Construction Chia Hsin Cement 1103.TW Ho,Josephine 671.67 2 31.00 66.67 48.41
Building Materials & Construction China National Building Materials 3323.HK Du,Oliver 5,373.08 1 18.98 74.45 43.333
Building Materials & Construction Grasim Industries GRAS.NS Kumar,Satish 4,794.41 2 2218.50 -9.91 -27.36
Building Materials & Construction HCC HCNS.NS Mukherjee,Saion 788.02 1 130.45 35.67 9.4
Building Materials & Construction IVRCL Infra. IVRC.NS Mukherjee,Saion 1,335.37 1 427.70 36.21 9.83
Building Materials & Construction India Cements ICMN.NS Kumar,Satish 1,023.33 3 154.00 -16.28 -32.5
Building Materials & Construction Larsen & Toubro LART.NS Mukherjee,Saion 19,397.16 1 2814.75 66.78 34.47
Building Materials & Construction Nagarjuna Constructions NGCN.NS Mukherjee,Saion 1,113.18 1 206.35 21.28 -2.21
Building Materials & Construction Shree Cement SHCM.NS Kumar,Satish 741.79 2 903.25 -14.07 -30.71
Building Materials & Construction Taiwan Cement 1101.TW Ho,Josephine 5,290.42 1 50.50 64.53 46.51
Building Materials & Construction Ultratech Cement ULTC.NS Kumar,Satish 1,954.74 3 666.10 -18.75 -34.49
Business Services Li & Fung 0494.HK Wong,Phoebe 13,064.12 1 29.50 12.17 -7.839
Chemicals Asahi Kasei 3407.T Yamada,Mikiya 7,944.11 2 596.00 -26.51 -7.35
Chemicals China Energy Limited CENR.SI Por,Yong Liang 526.27 1 0.58 -56.39 -53.458
Chemicals Daicel Chemical Industries 4202.T Yamada,Mikiya 2,233.42 1 644.00 -15.93 5.99
Chemicals Formosa Chemical and Fibre 1326.TW Por,Yong Liang 13,593.57 3 76.30 18.11 5.17
Chemicals Formosa Plastics 1301.TW Por,Yong Liang 16,454.88 2 89.20 37.23 22.2
Chemicals Hitachi Chemical 4217.T Yamada,Mikiya 4,415.28 1 2230.00 -15.05 7.1
Chemicals Honam Petrochemical 011170.KS Lo,Michael 2,913.92 1 95800.00 -2.24 -14.86
Chemicals JSR 4185.T Yamada,Mikiya 5,653.64 1 2325.00 -12.43 10.4
Chemicals Kuraray 3405.T Yamada,Mikiya 4,806.27 2 1321.00 -2.15 23.36
Chemicals LG Chem 051910.KS Lo,Michael 7,757.71 1 108000.00 89.47 65.02
Chemicals LG Petrochemical 012990.KS Lo,Michael 2,261.19 1 52400.00 32.66 15.54
Chemicals Mitsubishi Chemical Holdings 4188.T Yamada,Mikiya 10,435.08 2 729.00 -31.10 -13.13
Chemicals Mitsubishi Rayon 3404.T Yamada,Mikiya 2,058.34 2 361.00 -53.54 -41.43
Chemicals Mitsui Chemicals 4183.T Yamada,Mikiya 4,597.10 1 613.00 -35.13 -18.22
Chemicals Nan Ya Plastics 1303.TW Por,Yong Liang 17,971.11 2 73.10 16.59 3.82
Chemicals Nitto Denko 6988.T Yamada,Mikiya 8,190.06 2 4960.00 -8.82 14.95
Chemicals PTT Chemical PTTC.BK Por,Yong Liang 4,885.42 2 106.00 21.84 3.39
Chemicals Shin-Etsu Chemical 4063.T Yamada,Mikiya 26,321.42 2 6410.00 -18.55 2.68
Chemicals Showa Denko 4004.T Yamada,Mikiya 3,783.97 2 319.00 -23.50 -3.56
Chemicals Sinopec Shanghai Petrochemical 0338.HK Khoo,Cheng 878.28 1 2.94 -50.51 -59.333
Chemicals Sumitomo Chemical 4005.T Yamada,Mikiya 9,989.61 2 635.00 -15.89 6.03
Chemicals Taiwan Fertilizer 1722.TW Ho,Josephine 4,645.60 3 147.00 146.23 119.26
Chemicals Teijin 3401.T Yamada,Mikiya 3,593.51 2 384.00 -43.11 -28.28
Chemicals Toray Industries 3402.T Yamada,Mikiya 8,670.19 3 651.00 -20.90 -0.28
Chemicals Tosoh 4042.T Yamada,Mikiya 2,547.92 1 446.00 -26.77 -7.67
Chemicals Zeon 4205.T Yamada,Mikiya 1,249.14 1 543.00 -52.62 -40.27
Computer Hardware Acer 2353.TW Yang,Alex 5,282.61 1 68.10 9.72 -2.3
Computer Hardware Asustek Computer 2357.TW Yang,Alex 11,733.60 1 97.50 27.62 13.64
Computer Hardware Catcher Technology 2474.TW Yang,Alex 2,139.47 3 122.50 -41.56 -47.96
Computer Hardware Compal Electronics 2324.TW Yang,Alex 4,550.38 1 36.50 24.56 10.91
Computer Hardware Foxconn Technology 2354.TW Yang,Alex 4,601.21 3 188.00 -35.08 -42.19
Computer Hardware GeoVision 3356.TW Yang,Alex 383.32 1 247.00 52.94 36.19
Computer Hardware High Tech Computer 2498.TW Yang,Alex 15,340.23 1 830.00 98.71 76.94
Computer Hardware Holy Stone Enterprise Co. Ltd. 3026.TW Yang,Alex 385.36 2 44.20 -21.21 -29.84
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 149

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Computer Hardware Hon Hai Precision 2317.TW Yang,Alex 36,008.08 1 177.50 -10.13 -19.97
Computer Hardware Inventec 2356.TW Yang,Alex 1,526.67 3 19.50 -13.79 -23.23
Computer Hardware Inventec Appliances Corp 3367.TW Yang,Alex 966.28 2 64.90 13.57 1.13
Computer Hardware Ju Teng International 3336.HK Yang,Alex 397.46 1 3.10 59.79 31.292
Computer Hardware Lenovo Group Ltd 0992.HK Yang,Alex 7,069.44 2 6.19 94.65 59.935
Computer Hardware Quanta Computer 2382.TW Yang,Alex 5,793.98 2 51.70 8.95 -2.98
Computer Hardware Samsung Techwin 012450.KS Chung,CW 4,351.90 2 59200.00 33.03 15.86
Computer Hardware Simmtech Co., Ltd. 036710.KQ Kim,James 146.98 1 5660.00 -44.24 -39.82
Computer Hardware Synnex Technology Intl Corp 2347.TW Yang,Alex 2,925.86 2 83.70 110.00 87
Computer Hardware Taiwan Chi Cheng Enterprise Co. 3095.TW Yang,Alex 153.18 1 32.70 -65.75 -69.5
Computer Hardware Wistron 3231.TW Yang,Alex 2,366.34 1 53.10 6.39 -5.26
Computer Hardware Yageo Corporation 2327.TW Yang,Alex 845.24 1 10.75 -21.82 -30.38
Conglomerates Beijing Enterprises 0392.HK Lo,Benjamin 4,577.90 1 31.35 36.90 12.482
Conglomerates CITIC Pacific 0267.HK Lo,Benjamin 9,971.35 1 35.40 12.03 -7.951
Conglomerates COSCO Pacific 1199.HK Lo,Benjamin 4,179.32 1 14.52 -27.25 -40.23
Conglomerates China Merchants Hldgs (Int'l) 0144.HK Lo,Benjamin 11,123.16 1 36.05 -2.30 -19.729
Conglomerates Galaxy Entertainment Group 0027.HK Wong,Perveen 2,876.20 1 5.70 -22.13 -36.02
Conglomerates Hongkong & Shanghai Hotels 0045.HK Wong,Perveen 2,543.68 1 13.76 3.15 -15.249
Conglomerates Hutchison Whampoa 0013.HK Lo,Benjamin 43,155.14 1 78.95 2.20 -16.028
Conglomerates Mandarin Oriental Int'l Ltd MOIL.SI Lo,Benjamin 2,130.17 2 2.15 -3.15 3.36
Conglomerates Shanghai Industrial 0363.HK Lo,Benjamin 4,245.63 3 30.80 30.23 7.004
Conglomerates Shangri-La Asia Ltd 0069.HK Wong,Perveen 8,111.97 2 21.95 3.78 -14.729
Conglomerates Shun Tak Holdings 0242.HK Wong,Perveen 3,047.20 1 10.14 -7.82 -24.26
Conglomerates Swire Pacific Ltd 0019.HK Lo,Benjamin 11,210.36 2 95.50 5.82 -13.057
Display Industry AU Optronics 2409.TW Wang,Yolanda 15,528.35 1 61.20 20.73 7.51
Display Industry Ace Digitech 036550.KQ Kim,James 445.79 3 20300.00 9.43 18.11
Display Industry Chi Mei Optoelectronic Corp 3009.TW Wang,Yolanda 9,455.29 1 43.20 17.00 4.18
Display Industry Chunghwa Picture Tubes 2475.TW Wang,Yolanda 3,032.93 1 9.92 17.95 5.03
Display Industry Innolux Display 3481.TW Wang,Yolanda 8,075.85 1 90.40 -5.53 -15.87
Display Industry LG Display Co., Ltd 034220.KS Kim,James 17,012.02 1 49800.00 26.24 9.94
Display Industry LG Micron 016990.KQ Kim,James 348.70 1 48700.00 81.72 96.12
Display Industry Optimax Technology 3051.TW Wang,Yolanda 193.66 2 11.85 -36.63 -43.57
Display Industry Phoenix PDE 050090.KQ Kim,James 38.58 2 1545.00 -44.12 -39.69
Display Industry Samsung SDI Co. Ltd. 006400.KS Kim,James 3,240.32 2 74500.00 32.33 15.25
Display Industry TPV Technology Co. 0903.HK Wang,Yolanda 1,340.50 1 5.37 0.75 -17.22
Display Industry Wellypower Optronics 3080.TW Wang,Yolanda 344.69 2 66.70 -30.12 -37.78
Display Industry Wooree ETI 082850.KS Kim,James 172.00 1 9450.00 -3.28 4.39
EMG Oil & Gas PTT Exploration & Production PTTE.BK Por,Yong Liang 19,094.09 2 188.00 100.00 69.71
EMG Oil & Gas PTT PCL PTT.BK Por,Yong Liang 30,029.01 1 346.00 46.55 24.36
Electrical Equipment ABB India ABB.NS Kumar,Satish 5,307.94 1 1062.55 24.05 0.02
Electrical Equipment Bharat Electronics BAJE.NS Kumar,Satish 2,330.69 1 1235.85 -25.30 -39.77
Electrical Equipment Bharat Heavy Electricals Ltd (BHEL) BHEL.NS Kumar,Satish 20,071.24 2 1739.30 41.61 14.18
Electrical Equipment Crompton Greaves CROM.NS Kumar,Satish 2,004.79 1 232.00 2.77 -17.14
Electronic Components ALPS ELECTRIC 6770.T Lee,Eric 1,944.48 2 1127.00 -3.01 22.27
Electronic Components Hirose Electric 6806.T Koshita,Masaru 4,632.29 2 12180.00 -11.68 11.35
Electronic Components Ibiden 4062.T Koshita,Masaru 6,994.59 1 4880.00 -23.63 -3.72
Electronic Components Kyocera 6971.T Koshita,Masaru 18,307.34 3 10070.00 -14.66 7.59
Electronic Components Murata Mfg. 6981.O Koshita,Masaru 11,195.77 2 5230.00 -37.89 -21.69
Electronic Components NGK SPARK PLUG 5334.T Koshita,Masaru 2,916.48 3 1337.00 -30.00 -11.75
Electronic Components NHK Spring 5991.T Koshita,Masaru 1,992.33 1 859.00 -23.58 -3.65
Electronic Components Nidec 6594.O Koshita,Masaru 10,650.48 1 7730.00 9.96 38.62
Electronic Components Rohm 6963.O Koshita,Masaru 7,654.38 2 6780.00 -35.55 -18.75
Electronic Components Sanken Electric 6707.T Lee,Eric 821.65 2 689.00 -43.10 -28.27
Electronic Components Shinko Electric Ind. 6967.T Koshita,Masaru 1,957.64 1 1524.00 -31.20 -13.26
Electronic Components TDK 6762.T Koshita,Masaru 8,953.02 2 7270.00 -26.64 -7.51
Electronic Components Taiyo Yuden 6976.T Lee,Eric 1,346.65 2 1176.00 -55.20 -43.2
Engineering & Construction WorleyParsons Limited WOR.AX Baker,Martin 8,978.58 2 41.58 41.91 51.62
Environmental Services Transpacific Industries Limited TPI.AX Baker,Martin 2,258.58 1 8.44 -37.44 -33.155
Financial Institutions BOC Hong Kong Holdings Ltd. 2388.HK Asia,Equity Research 27,653.30 2 20.40 3.87 -14.657
Financial Institutions Bank of East Asia 0023.HK Asia,Equity Research 9,391.74 1 44.20 -6.16 -22.895
Financial Institutions Cathay Financial Holding Co. 2882.TW Hung,Sarah 24,321.88 1 81.30 14.03 1.54
Financial Institutions Chang Hwa Bank 2801.TW Hung,Sarah 3,629.21 2 23.40 23.81 10.25
Financial Institutions Chinatrust Financial Holding Co. 2891.TW Hung,Sarah 8,366.29 1 30.85 15.76 3.08
Financial Institutions Dah Sing Banking Group Ltd. 2356.HK Asia,Equity Research 1,819.94 1 15.24 -11.81 -27.536
Financial Institutions Dah Sing Financial Holdings 0440.HK Asia,Equity Research 1,824.45 2 56.90 -16.39 -31.299
Financial Institutions Fubon Financial Holding Co. Ltd. 2881.TW Hung,Sarah 8,637.62 2 34.70 18.63 5.64
Financial Institutions HSBC Holdings Plc 0005.HK Asia,Equity Research 205,865.00 1 135.30 -7.90 -24.324
Financial Institutions Hang Seng Bank 0011.HK Asia,Equity Research 39,317.33 1 160.40 45.16 19.267
Financial Institutions Mega Financial Holding Co. Ltd. 2886.TW Hung,Sarah 9,254.83 1 25.95 24.46 10.83
Financial Institutions Shin Kong Financial Holding Co. 2888.TW Hung,Sarah 4,783.33 1 27.50 -13.51 -22.98
Financial Institutions SinoPac Holdings 2890.TW Hung,Sarah 3,298.61 2 14.40 -1.71 -12.47
Financial Institutions Standard Chartered Plc 2888.HK Asia,Equity Research 50,732.20 1 280.20 13.44 -6.792
Financial Institutions Taishin Financial Holding Co. 2887.TW Hung,Sarah 2,752.95 2 14.95 -9.67 -19.56
Financial Institutions Wing Hang Bank 0302.HK Asia,Equity Research 3,993.56 1 105.60 14.78 -5.69
Financial Institutions Yuanta Financial Holdings 2885.TW Hung,Sarah 7,623.06 2 28.30 86.18 65.79
Food PT Davomas Abadi TBK DAVO.JK Peng,Christine 326.94 1 245.00 -18.33 -30.983
Food Wilmar International WLIL.SI Por,Yong Liang 22,938.13 1 4.96 64.24 75.284
Game Software Capcom 9697.T Nagasaka,Mia 1,997.21 1 3150.00 66.67 110.12
Game Software KOEI 9654.T Nagasaka,Mia 1,074.47 3 1647.00 -14.75 7.47
Game Software Konami 9766.T Nagasaka,Mia 5,075.52 2 3890.00 28.38 61.85
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 150

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Game Software Namco Bandai Holdings 7832.T Nagasaka,Mia 3,346.10 1 1375.00 -30.17 -11.96
Game Software Nintendo 7974.T Nagasaka,Mia 78,488.09 1 58300.00 50.65 89.92
Game Software Square Enix 9684.T Nagasaka,Mia 3,774.18 1 3450.00 7.81 35.92
General Retail CJ Home Shopping 035760.KQ Chung,HongTaik 683.97 2 65100.00 4.16 12.42
General Retail GS Home Shopping 028150.KQ Chung,HongTaik 412.28 2 65800.00 -15.75 -9.07
General Retail Hyundai Department Store 069960.KS Chung,HongTaik 2,046.62 1 94500.00 -4.16 -16.53
General Retail Lotte Shopping 023530.KS Chung,HongTaik 9,011.38 2 325000.00 -10.96 -22.45
General Retail Shinsegae 004170.KS Chung,HongTaik 10,227.74 1 568000.00 -6.89 -18.9
Healthcare Mediceo Paltac Holdings Co Ltd 7459.T Yoda,Toshihide 4,220.12 2 1826.00 -15.70 6.8
Healthcare Suzuken 9987.T Yoda,Toshihide 3,660.47 2 4100.00 -4.65 20.21
Imaging Technology Brother Industries, Ltd. 6448.T Takeda,Keiji 3,792.61 2 1438.00 -12.74 10.01
Imaging Technology Canon 7751.T Myers,Steven 70,084.64 1 5530.00 -20.55 0.17
Imaging Technology Canon Marketing Japan 8060.T Takeda,Keiji 2,928.85 1 2040.00 -14.47 7.83
Imaging Technology FUJIFILM Holdings 4901.T Takeda,Keiji 19,464.12 1 3980.00 -21.19 -0.64
Imaging Technology Konica Minolta Holdings 4902.T Takeda,Keiji 8,968.01 2 1775.00 11.71 40.83
Imaging Technology Olympus 7733.T Takeda,Keiji 8,584.77 2 3330.00 -28.54 -9.91
Imaging Technology Ricoh 7752.T Takeda,Keiji 12,897.74 1 1822.00 -31.12 -13.16
Imaging Technology Seiko Epson Corp. 6724.T Takeda,Keiji 4,777.09 3 2560.00 -26.22 -6.99
Imaging Technology Toshiba TEC 6588.T Takeda,Keiji 1,957.85 3 715.00 4.23 31.4
Independent Refiners Formosa Petrochemical 6505.TW Por,Yong Liang 27,855.85 2 93.40 28.12 14.09
Independent Refiners GS Holdings 078930.KS Lo,Michael 3,499.45 1 39450.00 -13.77 -24.9
Independent Refiners PTT Aromatics & Refining PTTAR.BK Por,Yong Liang 2,897.46 1 31.75 0.00 0
Independent Refiners S-Oil Corporation 010950.KS Lo,Michael 7,276.59 2 67700.00 -4.92 -17.19
Independent Refiners SK Energy 096770.KS Lo,Michael 9,505.36 1 109000.00 0.00 0
Independent Refiners SK Holdings 003600.KS Lo,Michael 6,680.36 1 149000.00 11.52 -2.88
Independent Refiners Thai Oil TOP.BK Por,Yong Liang 4,240.24 1 67.50 3.82 -11.91
Insurance/Non-Life Dongbu Insurance 005830.KS Cho,Michelle 2,453.62 1 36300.00 36.98 19.3
Insurance/Non-Life Hyundai Marine & Fire 001450.KS Cho,Michelle 1,843.56 2 21600.00 72.80 50.5
Insurance/Non-Life LIG Insurance 002550.KS Cho,Michelle 1,331.81 2 23250.00 41.30 23.1
Insurance/Non-Life Meritz Fire & Marine 000060.KS Cho,Michelle 1,090.91 2 9230.00 21.19 5.55
Insurance/Non-Life Samsung Fire & Marine 000810.KS Cho,Michelle 10,289.57 1 227500.00 37.46 19.72
Insurance: General Fuji Fire & Marine Insurance Co Ltd 8763.T Altherr,Walter 1,542.89 2 344.00 -33.20 -15.79
Insurance: General Millea Holdings Inc 8766.T Altherr,Walter 33,333.88 2 4360.00 -6.84 17.45
Insurance: General Mitsui Sumitomo Insurance Group Holdings 8725.T Altherr,Walter 17,136.31 2 4280.00 -15.25 6.85
Insurance: General Sompo Japan Insurance Inc 8755.T Altherr,Walter 10,550.34 2 1124.00 -24.87 -5.28
Internet CyberAgent 4751.T Yoneshima,Keiichi 954.78 1 152000.00 104.85 158.26
Internet DeNA 2432.T Yoneshima,Keiichi 3,523.88 2 763000.00 98.70 150.5
Internet E-Trade Securities 8701.Q Yoneshima,Keiichi 3,453.23 3 105000.00 -20.45 0.28
Internet GMO Internet 9449.T Yoneshima,Keiichi 687.53 2 720.00 -15.79 6.16
Internet Index Holdings 4835.Q Yoneshima,Keiichi 512.58 3 23110.00 -36.60 -20.07
Internet Internet Initiative Japan 3774.T Yoneshima,Keiichi 665.59 1 340000.00 -12.60 10.19
Internet Matsui Securities 8628.T Yoneshima,Keiichi 1,929.27 1 754.00 -20.21 0.59
Internet Mixi Inc. 2121.T Yoneshima,Keiichi 1,119.26 3 780000.00 -3.11 22.15
Internet Monex Beans Holdings 8698.T Yoneshima,Keiichi 1,551.00 2 69600.00 -31.76 -13.98
Internet Rakuten 4755.Q Yoneshima,Keiichi 7,593.52 1 61100.00 29.18 62.85
Internet SBI Holdings, Inc. 8473.T Yoneshima,Keiichi 3,568.81 1 30200.00 -21.66 -1.24
Internet Verisign Japan 3722.T Yoneshima,Keiichi 381.80 2 88300.00 -29.92 -11.65
Internet Yahoo! JAPAN 4689.T Yoneshima,Keiichi 26,361.46 2 45850.00 6.88 34.74
Internet kabu.com Securities 8703.T Yoneshima,Keiichi 1,335.01 1 144000.00 -18.18 3.15
Internet & New Media AirMedia Group Inc. AMCN.O Wuh,Paul 1,104.65 1 17.07 0.00 0
Internet & New Media Clear Media 0100.HK Wuh,Paul 459.85 1 6.84 -17.09 -31.879
Internet & New Media Ctrip.com International Ltd CTRP.C Huang,Candy 4,072.17 1 62.34 72.93 85.2653
Internet & New Media Focus Media Holding Limited FMCN.OQ Wuh,Paul 4,876.30 1 39.47 1.21 8.4263
Internet & New Media Kingsoft Corp. Inc. 3888.HK Wuh,Paul 571.16 1 4.18 0.00 0
Internet & New Media NCsoft Corp 036570.KQ Yang,Stanley 1,045.74 1 53500.00 -18.32 -28.86
Internet & New Media NHN Corporation 035420.KQ Yang,Stanley 9,557.14 1 208000.00 30.57 40.92
Internet & New Media Neowiz Games 095660.KQ Yang,Stanley 312.43 1 34150.00 0.00 0
Internet & New Media NetEase NTES.OQ Wuh,Paul 3,116.17 2 24.43 36.10 45.8113
Internet & New Media The9 Limited NCTY.OQ Wuh,Paul 701.47 1 23.94 -43.14 -39.078
Internet & New Media Webzen Inc 069080.KQ Yang,Stanley 115.69 3 9340.00 -31.82 -26.42
Japan Machinery Amada 6113.T Kijima,Tsutomu 3,619.97 1 945.00 -36.00 -18.9
Japan Machinery Daikin Industries 6367.T Kijima,Tsutomu 14,734.38 2 5290.00 20.50 52.6
Japan Machinery Fanuc 6954.T Kijima,Tsutomu 25,264.08 3 11100.00 -1.86 23.73
Japan Machinery Hitachi Construction Machinery 6305.T Kijima,Tsutomu 7,277.48 2 3560.00 -8.95 14.78
Japan Machinery Komatsu 6301.T Kijima,Tsutomu 30,181.56 2 3180.00 4.95 32.31
Japan Machinery Kubota 6326.T Kijima,Tsutomu 9,189.49 1 752.00 -22.71 -2.56
Japan Machinery Minebea 6479.T Kijima,Tsutomu 2,404.95 1 634.00 -7.31 16.85
Japan Machinery NSK 6471.T Kijima,Tsutomu 4,887.70 2 933.00 -23.90 -4.06
Japan Machinery NTN 6472.T Kijima,Tsutomu 3,362.05 2 752.00 -24.27 -4.53
Japan Machinery SMC 6273.T Kijima,Tsutomu 8,175.16 2 11970.00 -17.90 3.5
Japan Machinery THK 6481.T Kijima,Tsutomu 2,881.18 2 2265.00 -19.40 1.62
Japan Machinery Tadano 6395.T Kijima,Tsutomu 1,335.24 1 1085.00 -37.03 -20.61
Japan Retail Aeon 8267.T Sasaki,Yasuyuki 11,204.56 1 1473.00 -34.09 -16.91
Japan Retail Circle K Sunkus 3337.T Sasaki,Yasuyuki 1,294.02 2 1580.00 -23.67 -3.77
Japan Retail Daiei 8263.T Sasaki,Yasuyuki 1,000.77 1 859.00 -35.75 -19
Japan Retail FamilyMart 8028.T Sasaki,Yasuyuki 3,518.19 1 3790.00 22.26 54.13
Japan Retail H2O Retailing 8242.T Sasaki,Yasuyuki 1,575.66 2 802.00 -28.33 -9.64
Japan Retail Lawson 2651.T Sasaki,Yasuyuki 4,098.34 3 4330.00 -0.92 24.92
Japan Retail Marui Group 8252.T Sasaki,Yasuyuki 2,810.19 2 928.00 -32.56 -14.98
Japan Retail Seven & I Holdings 3382.T Sasaki,Yasuyuki 29,630.33 1 3260.00 -6.05 18.44
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 151

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Japan Retail Takashimaya 8233.T Sasaki,Yasuyuki 3,473.96 3 1105.00 -24.00 -4.19
Japan Retail Uny 8270.T Sasaki,Yasuyuki 2,032.73 2 1130.00 -20.65 0.04
Leisure Maruman & Co.,Ltd. 7834.OJ Altherr,Walter 57.75 2 572.00 -21.75 -1.35
Media Austar United Communications Limited AUN.AX Langford,David 1,623.97 1 1.32 -8.16 -1.878
Media Fairfax Media Limited FXJ.AX Langford,David 4,822.81 2 3.42 -32.68 -28.071
Media Seek Limited SEK.AX Langford,David 1,470.74 1 5.48 -27.42 -22.452
Metals & Mining Aluminum Corp of China 2600.HK Du,Oliver 6,866.89 3 13.58 24.13 1.991
Metals & Mining Angang Steel H-share 0347.HK Du,Oliver 3,034.82 1 21.80 33.75 9.897
Metals & Mining Baoshan Iron & Steel 600019.CH Du,Oliver 35,036.00 2 14.01 5.50 16.594
Metals & Mining Bluescope Steel Limited BSL.AX Clibborn,Bradley 7,604.39 3 10.74 -13.46 -7.536
Metals & Mining China Coal 1898.HK Du,Oliver 8,603.37 1 16.34 87.17 53.786
Metals & Mining China Shenhua Energy 1088.HK Du,Oliver 14,379.35 1 33.00 50.69 23.808
Metals & Mining China Steel 2002.TW Ho,Josephine 19,278.23 2 52.00 35.42 20.59
Metals & Mining Jiangxi Copper 0358.HK Du,Oliver 3,248.30 3 18.26 35.86 11.63
Metals & Mining Maanshan Iron & Steel (H) 0323.HK Du,Oliver 1,281.99 3 5.77 -14.90 -30.076
Metals & Mining OneSteel Limited OST.AX Clibborn,Bradley 5,182.38 1 6.33 0.64 7.521
Metals & Mining POSCO 005490.KS Koo,Zayong 46,113.51 2 554000.00 30.97 14.06
Metals & Mining Yanzhou Coal Mining Co Ltd 1171.HK Du,Oliver 3,861.76 2 15.38 50.20 23.406
Pharmaceuticals Astellas Pharma Inc. 4503.T Yoda,Toshihide 21,206.40 2 4300.00 -17.94 3.45
Pharmaceuticals Chugai Pharmaceutical 4519.T Yoda,Toshihide 7,998.61 1 1504.00 -49.45 -36.27
Pharmaceuticals Cipla Ltd CIPL.NS Mukherjee,Saion 3,803.08 3 207.55 -1.68 -20.72
Pharmaceuticals Daiichi Sankyo Co. 4568.T Yoda,Toshihide 19,557.45 1 2800.00 -20.68 0
Pharmaceuticals Dainippon Sumitomo Pharmaceutical 4506.T Yoda,Toshihide 3,183.80 2 842.00 -34.01 -16.81
Pharmaceuticals Dr Reddy's Laboratories Ltd REDY.NS Mukherjee,Saion 2,475.61 2 624.40 -4.12 -22.69
Pharmaceuticals Eisai 4523.T Yoda,Toshihide 10,795.19 2 3830.00 -32.40 -14.3
Pharmaceuticals Kyorin 4569.T Yoda,Toshihide 841.86 2 1182.00 -26.77 -7.67
Pharmaceuticals Mitsubishi Tanabe Pharma 4508.T Yoda,Toshihide 6,866.34 2 1287.00 -23.03 -2.96
Pharmaceuticals Nicholas Piramal India Ltd NICH.BO Mukherjee,Saion 1,703.10 1 345.65 30.38 5.13
Pharmaceuticals Ono Pharmaceutical 4528.T Yoda,Toshihide 6,178.49 2 5380.00 -18.11 3.24
Pharmaceuticals Ranbaxy Laboratories Ltd RANB.NS Mukherjee,Saion 4,268.22 1 485.10 22.87 -0.93
Pharmaceuticals Santen Pharmaceutical 4536.T Yoda,Toshihide 2,199.95 1 2665.00 -16.19 5.65
Pharmaceuticals Shionogi 4507.T Yoda,Toshihide 6,873.90 1 2060.00 -5.72 18.86
Pharmaceuticals Sun Pharmaceutical Industries Ltd SUN.NS Mukherjee,Saion 6,617.02 1 1355.25 37.01 10.48
Pharmaceuticals Taisho Pharmaceutical 4535.T Yoda,Toshihide 6,057.27 3 1989.00 -12.57 10.22
Pharmaceuticals Takeda Pharmaceutical Co. 4502.T Yoda,Toshihide 49,943.91 1 5910.00 -23.05 -2.99
Power & Utilities CLP Holdings 0002.HK Lee,Ivan 19,127.65 2 61.95 9.07 -10.387
Power & Utilities Cheung Kong Infrastructure 1038.HK Lee,Ivan 9,248.51 1 32.00 10.73 -9.023
Power & Utilities China Everbright International Limited 0257.HK Li,Evan 1,286.74 1 3.20 25.49 3.107
Power & Utilities China High Speed Transmn 0658.HK Pan,Clarisse L 2,266.65 1 14.20 0.00 0
Power & Utilities China Power International 2380.HK Lee,Ivan 1,225.05 1 2.65 -33.42 -45.293
Power & Utilities China Resources Power 0836.HK Lee,Ivan 10,117.82 1 19.02 23.99 1.874
Power & Utilities China Water Affairs Group Limited 0855.HK Li,Evan 446.66 2 2.81 -42.65 -52.882
Power & Utilities China Yangtze Power 600900.SS Lee,Ivan 19,690.83 2 14.65 -0.61 9.844
Power & Utilities Datang International 0991.HK Lee,Ivan 3,754.79 1 5.09 2.62 -15.683
Power & Utilities E-TON Solar Tech Co Ltd 3452.TWO Pan,Clarisse L 831.10 1 392.50 14.77 2.19
Power & Utilities Electricity Generating PCL EGCOf.BK Asia,Equity Research 1,548.19 2 95.50 -6.80 -20.91
Power & Utilities Hong Kong & China Gas 0003.HK Lee,Ivan 16,972.51 3 19.86 28.05 5.214
Power & Utilities Hongkong Electric 0006.HK Lee,Ivan 12,724.36 1 46.50 16.54 -4.245
Power & Utilities Huadian Power International 1071.HK Lee,Ivan 2,014.86 1 2.61 -41.61 -52.025
Power & Utilities Huaneng Power International 0902.HK Lee,Ivan 9,273.86 1 6.00 -31.97 -44.106
Power & Utilities Korea Electric Power Corp. 015760.KS Lee,Ivan 20,532.72 3 33500.00 -15.51 -26.42
Power & Utilities Korea Gas Corporation 036460.KS Lee,Ivan 6,264.26 3 84900.00 104.58 78.17
Power & Utilities LDK Solar LDK Pan,Clarisse L 3,736.75 2 35.94 0.00 0
Power & Utilities Motech Industries Inc 6244.TWO Pan,Clarisse L 1,888.92 1 284.00 -16.82 -25.93
Power & Utilities NTPC NTPC.BO Lee,Ivan 37,376.56 2 192.30 23.07 -0.76
Power & Utilities Perusahaan Gas Negara PGAS.JK Asia,Equity Research 7,289.21 1 14750.00 43.90 21.612
Power & Utilities Petronas Gas PGAS.KL Asia,Equity Research 6,053.02 2 10.00 7.53 13.53
Power & Utilities Ratchaburi RATC.BK Asia,Equity Research 2,031.56 2 45.50 0.56 -14.67
Power & Utilities Reliance Energy RLEN.BO Lee,Ivan 7,440.26 2 1381.25 170.09 117.78
Power & Utilities Suzlon Energy Limited SUZL.BO Lee,Ivan 9,984.95 1 282.95 11.50 -10.1
Power & Utilities Tata Power TTPW.BO Lee,Ivan 6,288.76 2 1348.00 130.51 85.86
Power & Utilities Tenaga Nasional TENA.KL Asia,Equity Research 9,080.60 2 6.85 -41.95 -38.71
Power & Utilities Tianjin Capital Environmental 1065.HK Li,Evan 134.70 3 3.09 -42.46 -52.721
Power & Utilities Towngas China Company 1083.HK Lee,Ivan 878.44 2 3.50 -17.04 -31.839
Power & Utilities Xinao Gas 2688.HK Lee,Ivan 1,804.71 1 13.94 28.84 5.856
Power & Utilities Yingli Green Energy YGE Pan,Clarisse L 3,089.31 1 24.34 0.00 0
Power & Utilities Zhengzhou Gas 3928.HK Lee,Ivan 78.37 1 1.11 -2.63 -19.999
Power & Utilities Zhongyu Gas 8070.HK Lee,Ivan 182.01 2 0.73 -40.16 -50.836
Property Bukit Sembawang Estates BSES.SI Sai,Min Chow 737.67 1 9.44 -20.67 -15.337
Property CDL Hospitality Trust CDLT.SI Sai,Min Chow 1,177.02 2 1.97 -1.45 5.18
Property Cambridge Industrial Trust CMIT.SI Sai,Min Chow 408.92 1 0.71 -22.83 -17.636
Property CapitaLand CATL.SI Sai,Min Chow 13,532.31 1 6.62 -21.66 -16.388
Property Cheung Kong 0001.HK Louie,Paul 36,288.43 1 122.20 15.94 -4.74
Property China Overseas Land 0688.HK Louie,Paul 15,636.74 2 15.74 49.05 22.467
Property China Resources Land 1109.HK Louie,Paul 7,375.77 1 14.26 38.99 14.196
Property City Developments CTDM.SI Sai,Min Chow 7,704.82 1 11.70 -30.77 -26.113
Property Great Eagle 0041.HK Louie,Paul 1,934.34 1 24.95 -18.60 -33.116
Property Greentown 3900.HK Louie,Paul 1,888.29 1 9.58 -36.81 -48.079
Property Guangzhou R&F 2777.HK Louie,Paul 2,972.15 2 20.50 3.33 -15.103
Property Hang Lung Properties Limited 0101.HK Louie,Paul 16,368.07 2 30.80 25.97 3.503
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 152

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Property Henderson Land 0012.HK Louie,Paul 16,335.33 2 59.35 10.11 -9.529
Property Hongkong Land HKLD.SI Choy,Tsun Kit (Jackie) 11,453.17 1 4.99 3.96 10.95
Property Hysan Development 0014.HK Louie,Paul 3,059.48 1 23.00 6.98 -12.104
Property JSM Indochina JSM.L Louie,Paul 153.33 1 0.62 0.00 0
Property K-REIT Asia KASA.SI Sai,Min Chow 670.22 1 1.43 -48.74 -45.289
Property Keppel Land KLAN.SI Sai,Min Chow 2,976.83 1 5.70 -39.36 -35.284
Property New World Development 0017.HK Louie,Paul 9,962.19 2 20.80 5.93 -12.961
Property SC Global Developments SCGO.SI Sai,Min Chow 427.18 1 1.49 -42.14 -38.244
Property SPG Land 0337.HK Choy,Tsun Kit (Jackie) 522.81 1 3.93 -31.05 -43.35
Property Sino Land 0083.HK Louie,Paul 13,234.00 1 21.25 19.52 -1.801
Property Sun Hung Kai Properties 0016.HK Louie,Paul 45,174.01 1 137.40 45.24 19.337
Property Wharf (Holdings) Ltd. 0004.HK Louie,Paul 14,564.42 1 41.25 35.30 11.169
Real Estate CapitaRetail China Trust CRCT.SI Louie,Paul 652.47 1 1.46 -52.60 -49.409
Real Estate Champion REIT 2778.HK Choy,Tsun Kit (Jackie) 1,438.24 1 4.09 -8.50 -24.821
Real Estate DLF Ltd. DLF.NS Gunwani,Manish 24,716.45 1 615.00 0.00 0
Real Estate GZI Real Estate Investment Trust 0405.HK Louie,Paul 376.94 2 2.94 -3.61 -20.8
Real Estate Link REIT 0823.HK Louie,Paul 5,179.48 1 18.90 5.47 -13.343
Real Estate Prosperity Real Estate Investment Trust 0808.HK Louie,Paul 255.02 1 1.59 -3.64 -20.824
Real Estate Puravankara Projects Ltd. PPRO.BO Gunwani,Manish 1,319.81 1 262.25 0.00 0
Real Estate Unitech Ltd. UNTE.NS Gunwani,Manish 10,541.21 1 275.45 17.95 -4.89
Regional Banks Bank of The Ryukyus 8399.T Tani,Miwako 405.30 1 1085.00 -56.25 -44.84
Regional Banks Bank of Yokohama 8332.T Senoguchi,Junsuke 9,731.98 2 747.00 -18.45 2.81
Regional Banks Fukuoka Financial Group 8354.T Tani,Miwako 4,093.51 2 501.00 -41.90 -26.7
Regional Banks Hiroshima Bank 8379.T Tani,Miwako 3,238.34 1 545.00 -19.62 1.34
Regional Banks Shizuoka Bank Ltd 8355.T Senoguchi,Junsuke 8,469.18 2 1255.00 -0.87 24.97
Regional Banks Suruga Bank 8358.T Tani,Miwako 3,718.12 1 1477.00 -1.30 25.1
Regional Banks Tokyo Tomin Bank 8339.T Tani,Miwako 894.41 2 2350.00 -44.31 -29.8
Semiconductor Capital Equipment Advantest 6857.T Myers,Steven 5,357.57 2 2825.00 -47.20 -33.43
Semiconductor Capital Equipment Nikon 7731.T Myers,Steven 12,395.03 2 3260.00 9.03 37.45
Semiconductor Capital Equipment Tokyo Electron 8035.T Myers,Steven 11,568.17 1 6740.00 -22.44 -2.22
Semiconductor Devices MediaTek 2454.TW Wang,Yolanda 13,660.99 3 407.00 -14.44 -23.82
Semiconductor Devices Novatek Microelectronics Corp 3034.TW Wang,Yolanda 2,095.48 1 120.00 -24.91 -33.13
Semiconductor Devices Realtek 2379.TW Wang,Yolanda 1,368.87 1 93.80 -30.09 -37.75
Semiconductor Devices RichTek Technology 6286.TW Wang,Yolanda 1,208.78 1 315.00 -3.66 -14.21
Semiconductor Devices Solomon Systech 2878.HK Wang,Yolanda 148.92 2 0.48 -53.43 -61.738
Semiconductor Devices Sunplus Technology Co. Ltd. 2401.TW Wang,Yolanda 770.47 3 42.90 -32.59 -39.97
Semiconductors ASM Pacific 0522.HK Hsu,John 3,095.13 1 61.80 14.44 -5.968
Semiconductors Advanced Semiconductor Eng 2311.TW Hsu,John 5,790.63 1 32.75 -4.09 -14.6
Semiconductors Chipbond Technology 6147.TWO Hsu,John 380.60 1 37.80 -1.71 -12.48
Semiconductors Display Manufacturing Service 068790.KQ Chung,CW 170.87 2 9000.00 6.51 14.95
Semiconductors Elpida Memory 6665.T Myers,Steven 4,969.81 1 4030.00 -19.08 2.02
Semiconductors Epistar 2448.TW Hsu,John 1,989.15 3 99.40 -15.01 -24.32
Semiconductors Everlight 2393.TW Hsu,John 1,416.37 2 125.00 8.64 -3.26
Semiconductors Fujitsu 6702.T Myers,Steven 15,107.60 2 768.00 2.67 29.44
Semiconductors Hitachi 6501.T Myers,Steven 22,949.21 2 717.00 -19.17 1.91
Semiconductors Hynix Semiconductor Inc. 000660.KS Chung,CW 12,890.98 1 29400.00 -6.52 -18.58
Semiconductors Inotera Memories 3474.TW Hsu,John 2,841.35 2 26.40 -26.45 -34.51
Semiconductors Jusung Engineering 036930.KQ Chung,CW 627.05 2 20250.00 72.34 86
Semiconductors King Yuan Electronics Co Ltd 2449.TW Hsu,John 677.86 1 17.30 -29.53 -37.24
Semiconductors Kinik Company 1560.TW Hsu,John 244.10 2 56.70 -46.99 -52.79
Semiconductors Mitsubishi Electric 6503.T Myers,Steven 23,669.61 1 1160.00 5.36 32.83
Semiconductors NEC 6701.T Myers,Steven 10,126.48 2 525.00 -16.53 5.23
Semiconductors NEC Electronics 6723.T Myers,Steven 2,552.62 1 2175.00 -22.74 -2.59
Semiconductors Nanya PCB 8046.TW Hsu,John 3,218.61 2 161.50 -15.85 -25.07
Semiconductors Nanya Technology Co. 2408.TW Kerr,Naiwen 2,703.12 1 17.85 -27.60 -37.3
Semiconductors Nihon Inter Electronics 6974.T Myers,Steven 70.52 1 235.00 -60.90 -50.7
Semiconductors Opto Tech 2340.TW Hsu,John 540.26 1 32.15 -15.40 -22.8
Semiconductors Phoenix Precision Technology Corp 2446.TW Hsu,John 514.67 1 23.30 -35.05 -42.16
Semiconductors Powerchip Semiconductor 5346.TWO Hsu,John 3,263.36 1 12.90 -29.32 -37.06
Semiconductors Powertech Technology Inc. 6239.TW Hsu,John 1,913.77 1 126.00 22.28 8.88
Semiconductors ProMOS 5387.TWO Hsu,John 1,756.22 2 8.12 -37.78 -44.59
Semiconductors STATS ChipPAC Ltd STTSY.PK Hsu,John 1,733.95 2 8.43 -30.56 -25.7016
Semiconductors Samsung Electronics 005930.KS Chung,CW 103,782.20 1 738000.00 28.57 11.98
Semiconductors Semiconductor Mfg Intl Co. (SMIC) 0981.HK Hsu,John 1,334.49 3 0.56 -47.66 -56.998
Semiconductors Siliconware Precision 2325.TW Hsu,John 5,255.04 2 53.00 -19.33 -28.17
Semiconductors TSMC 2330.TW Hsu,John 56,696.69 1 68.60 2.59 -8.64
Semiconductors Topco Scientific Co Ltd 5434.TW Hsu,John 223.22 1 51.80 -28.02 -35.9
Semiconductors Toshiba 6502.T Myers,Steven 27,223.91 1 885.00 -2.96 22.34
Semiconductors Transcend Information 2451.TW Pan,Felix 1,470.15 1 123.00 7.08 -4.65
Semiconductors United Microelectronics Corp 2303.TW Hsu,John 8,075.28 2 18.95 -32.60 -39.98
Semiconductors Vanguard Intl Semiconductor 5347.TW Hsu,John 1,163.13 3 21.20 -30.15 -37.8
Semiconductors Winbond 2344.TW Wang,Yolanda 1,120.94 2 9.17 -19.56 -28.37
Shipbuilding Daewoo Shipbldg & Marine Eng. 042660.KS Yoon,Mark 7,656.01 2 41900.00 3.33 -10.01
Shipbuilding Finetec 033500.KS Yoon,Mark 186.88 2 13050.00 -26.69 -20.87
Shipbuilding Hanjin Heavy I&C 097230.KS Yoon,Mark 2,322.90 1 51400.00 0.00 0
Shipbuilding Hankuk Carbon 017960.KS Yoon,Mark 175.18 1 6220.00 -45.20 -52.27
Shipbuilding Hyundai Heavy Industries 009540.KS Yoon,Mark 25,395.01 2 350000.00 28.21 11.66
Shipbuilding Hyundai Mipo 010620.KS Yoon,Mark 4,429.81 3 232000.00 -2.73 -15.28
Shipbuilding STX Shipbuilding 067250.KS Yoon,Mark 2,653.30 3 38600.00 8.73 -5.3
Shipbuilding Samsung Heavy Industries 010140.KS Yoon,Mark 8,673.38 1 39350.00 11.00 -3.33
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 153

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Shipbuilding Samyoung M-Tek 054540.KS Yoon,Mark 52.09 1 4960.00 -61.85 -58.82
Shipbuilding Taewoong 044490.KS Yoon,Mark 1,658.70 1 104600.00 120.44 137.92
Small & Mid Cap Research PSK 031980.KQ Chung,CW 144.83 1 7740.00 -40.00 -35.24
Small & Mid Cap Research Redington India REDI.NS Gunwani,Manish 644.94 1 351.35 95.63 57.74
Small & Mid Cap Research Seoul Semiconductor 046890.KQ Kim,James 441.28 1 19100.00 -14.54 -7.77
Software & IT Services HCL Technologies HCLT.NS Gandhi,Harmendra 4,605.00 1 293.60 -11.12 -28.34
Software & IT Services Infosys Technologies INFY.NS Gandhi,Harmendra 23,541.23 1 1747.20 -12.74 -29.64
Software & IT Services Satyam Computer SATY.NS Gandhi,Harmendra 7,849.29 1 495.95 7.49 -13.33
Software & IT Services Tata Consultancy Services TCS.NS Gandhi,Harmendra 20,894.08 1 905.70 -27.50 -41.54
Software & IT Services Tech Mahindra TEML.NS Gandhi,Harmendra 2,583.94 1 902.60 -41.01 -52.44
Software & IT Services Wipro WIPR.NS Gandhi,Harmendra 17,021.23 1 494.20 -9.14 -26.74
Specialty Finance Acom 8572.T Altherr,Walter 4,869.39 1 3210.00 -26.38 -7.18
Specialty Finance Aiful 8515.T Altherr,Walter 3,066.85 3 1927.00 -42.48 -27.48
Specialty Finance Edelweiss Capital Ltd EDEL.NS Vadlamani,Srikanth 1,342.59 1 760.05 0.00 0
Specialty Finance HDFC HDFC.NS Vadlamani,Srikanth 17,800.85 1 2658.20 58.23 27.58
Specialty Finance Lopro Corp 8577.T Altherr,Walter 91.09 1 84.00 -53.59 -41.49
Specialty Finance Promise 8574.T Altherr,Walter 4,242.23 2 3310.00 -15.13 7
Specialty Finance SFCG Co. Ltd 8597.T Altherr,Walter 1,362.62 1 11710.00 -46.26 -32.25
Specialty Finance T-ZONE HOLDINGS,INC. 8073.Q Altherr,Walter 467.64 2 1485.00 -38.76 -22.8
Specialty Finance Takefuji 8564.T Altherr,Walter 3,072.44 3 2195.00 -47.61 -33.96
Specialty Stores Esprit Holdings 0330.HK Wong,Phoebe 14,836.53 1 93.10 -2.10 -19.564
Specialty Stores Giordano International 0709.HK Wong,Phoebe 669.31 2 3.50 -10.49 -26.452
Specialty Stores Lifestyle International Holdings Limited 1212.HK Wong,Phoebe 3,631.82 2 16.60 24.58 2.358
Specialty Stores Sa Sa International 0178.HK Wong,Phoebe 541.00 1 3.06 15.91 -4.765
Technology China Techfaith Wireless Comm Tech Ltd CNTF.P Wang,Yolanda 254.68 3 5.88 -22.63 -17.1111
Technology Comba Telecom System 2342.HK Wuh,Paul 237.57 1 2.17 -45.20 -54.976
Technology Foxconn International Holdings 2038.HK Yang,Alex 10,640.49 2 11.76 -50.38 -59.23
Technology LG Electronics Inc. 066570.KS Kim,James 21,404.78 2 155000.00 130.31 100.58
Technology Silitech Technology 3311.TW Yang,Alex 556.55 1 114.50 -19.52 -28.33
Technology ZTE Corp. 0763.HK Wuh,Paul 944.32 1 32.85 26.35 3.811
Telecom Services Advanced Info Services ADVA.BK Wuh,Paul 8,799.09 1 96.50 3.91 -11.83
Telecom Services Bharti Airtel Limited BRTI.BO Wuh,Paul 36,743.79 1 821.25 -0.34 -19.64
Telecom Services CITIC 1616 Holdings Ltd 1883.HK Tang,Lei 535.03 1 2.11 -37.94 -49.01
Telecom Services China Communications Services Corp. Ltd. 0552.HK Chu,Danny 1,640.35 1 6.42 30.22 6.996
Telecom Services China Mobile Limited 0941.HK Chu,Danny 340,302.93 1 132.50 79.66 47.616
Telecom Services China Netcom Group 0906.HK Chu,Danny 21,649.89 3 25.30 31.91 8.381
Telecom Services China Telecom 0728.HK Chu,Danny 57,278.15 3 5.52 24.05 1.92
Telecom Services China Unicom Ltd. 0762.HK Chu,Danny 29,262.81 1 16.74 43.08 17.557
Telecom Services Chunghwa Telecom Co. Ltd. 2412.TW Chu,Danny 24,194.95 2 78.50 24.01 10.43
Telecom Services Digi.Com Berhad DSOM.KL Wuh,Paul 5,898.44 1 24.80 18.10 24.68
Telecom Services Far EasTone Telecommunication 4904.TWO Chu,Danny 5,253.95 1 50.00 2.27 -8.93
Telecom Services Hanaro Telecom 033630.KS Yang,Stanley 1,947.97 1 8650.00 -10.36 -3.26
Telecom Services Hutchison Telecommunications Intl 2332.HK Wuh,Paul 6,687.88 2 10.90 -31.88 -44.026
Telecom Services Idea Cellular Limited IDEA.BO Wuh,Paul 6,375.18 2 104.30 -8.59 -26.29
Telecom Services Indosat ISAT.JK Wuh,Paul 3,536.88 1 6050.00 -11.03 -24.811
Telecom Services KDDI 9433.T Tsusaka,Tetsuro 29,834.64 1 700000.00 -31.37 -13.48
Telecom Services KT 030200.KS Yang,Stanley 12,125.23 2 46150.00 8.97 -5.09
Telecom Services KTF 032390.KQ Yang,Stanley 5,335.76 2 29000.00 -4.76 -17.05
Telecom Services LG Dacom 015940.KS Yang,Stanley 1,594.26 1 20050.00 -7.39 -19.34
Telecom Services LG Telecom 032640.KQ Yang,Stanley 2,541.28 1 9600.00 5.49 -8.12
Telecom Services Mahanagar Telephone Nigam MTNL.BO Wuh,Paul 1,506.68 3 101.45 -33.97 -46.76
Telecom Services MobileOne MONE.SI Wuh,Paul 1,289.52 2 1.99 -9.96 -3.9
Telecom Services NTT 9432.T Tsusaka,Tetsuro 74,494.13 1 498000.00 -12.01 10.92
Telecom Services NTT DoCoMo 9437.T Tsusaka,Tetsuro 67,797.48 1 159000.00 -24.29 -4.55
Telecom Services PCCW 0008.HK Chu,Danny 4,250.11 2 4.89 -2.59 -19.964
Telecom Services PT Telkom TLKM.JK Wuh,Paul 18,869.47 2 8700.00 -10.77 -24.591
Telecom Services Reliance Communications Ltd RLCM.BO Wuh,Paul 26,549.63 1 545.65 13.16 -8.76
Telecom Services SK Telecom 017670.KS Yang,Stanley 16,394.61 2 211500.00 1.20 -11.87
Telecom Services SingTel STEL.SI Wuh,Paul 42,964.69 1 3.73 9.71 17.084
Telecom Services SmarTone 0315.HK Chu,Danny 662.19 2 8.98 -0.22 -18.019
Telecom Services SoftBank 9984.T Tsusaka,Tetsuro 20,693.12 3 2015.00 -20.36 0.41
Telecom Services StarHub Ltd STAR.SI Wuh,Paul 3,649.34 1 2.95 -0.34 6.367
Telecom Services Taiwan Mobile 3045.TW Chu,Danny 6,790.43 2 55.40 17.62 4.73
Telecom Services Telecom Corporation of New Zealand TEL.NZ Langford,David 5,370.70 2 3.89 -18.05 0.68
Telecom Services Telekom Malaysia Bhd TLMM.KL Wuh,Paul 3,873.96 1 3.54 10.75 16.93
Telecom Services Telstra TLS.AX Langford,David 43,772.51 1 4.53 -7.55 -1.226
Telecom Services Total Access Communication DTAC.BK Wuh,Paul 107.91 2 1.48 45.10 54.856
Telecom Services True Corporation TRUE.BK Wuh,Paul 576.29 1 4.92 -38.58 -47.88
Transportation China COSCO 1919.HK Lee,Andrew Kam Wing 8,139.23 1 24.60 162.54 115.712
Transportation China Merchants Energy Shipping 601872.SS Lee,Andrew Kam Wing 4,456.85 3 9.09 -22.57 -14.428
Transportation China Shipping Container Lines 2866.HK Lee,Andrew Kam Wing 1,702.46 3 3.54 30.96 7.597
Transportation China Shipping Development 1138.HK Lee,Andrew Kam Wing 4,386.69 3 26.40 59.42 30.986
Transportation Cosco Shipping 600428.SS Lee,Andrew Kam Wing 3,770.68 3 40.30 84.02 103.375
Transportation Evergreen Marine 2603.TW Lee,Andrew Kam Wing 2,836.69 3 28.75 43.75 28
Transportation Hanjin Shipping 000700.KS Lee,Andrew Kam Wing 3,424.09 2 45050.00 9.88 -4.3
Transportation Hyundai Merchant Marine 011200.KS Lee,Andrew Kam Wing 5,564.56 3 43800.00 41.06 22.86
Transportation Korea Line 005880.KS Lee,Andrew Kam Wing 2,260.90 1 205500.00 136.48 105.96
Transportation MISC Berhad MISC.KL Lee,Andrew Kam Wing 10,810.14 1 9.50 -2.56 2.87
Transportation Malaysian Bulk Carriers MBCB.KL Lee,Andrew Kam Wing 1,315.39 1 4.30 31.74 39.09
Transportation Neptune Orient Lines NEPS.SI Lee,Andrew Kam Wing 4,001.81 2 3.76 3.20 8.3
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
May 2008 154

Lehman Brothers | Equity Research
MarketCap Absolute Relative
USD (MN) Rating 12M % 12M %
Company Ticker Analyst Price
Sector
Transportation Orient Overseas International 0316.HK Lee,Andrew Kam Wing 4,248.38 1 52.95 -19.65 -33.982
Transportation Pacific Basin 2343.HK Lee,Andrew Kam Wing 2,720.71 1 13.38 50.34 23.522
Transportation Precious Shipping PSL.BK Lee,Andrew Kam Wing 816.25 3 25.50 0.00 -15.14
Transportation STX Pan Ocean STXP.SI Lee,Andrew Kam Wing 5,501.27 2 3.69 125.00 140.132
Transportation Sincere Navigation 2605.TW Lee,Andrew Kam Wing 982.61 2 63.00 23.05 9.57
Transportation Thoresen Thai TTA.BK Lee,Andrew Kam Wing 991.05 1 50.00 34.27 13.93
Transportation U-Ming Marine 2606.TW Lee,Andrew Kam Wing 2,849.91 1 103.00 62.97 45.12
Transportation Wan Hai Lines 2615.TW Lee,Andrew Kam Wing 1,809.60 2 27.00 20.27 7.09
Transportation Yang Ming Marine 2609.TW Lee,Andrew Kam Wing 1,772.44 3 23.60 11.68 -0.55
Utilities Chubu Electric Power 9502.T Maruo,Masanori 17,692.87 2 2390.00 -34.34 -17.22
Utilities Chugoku Electric Power 9504.T Maruo,Masanori 8,004.32 2 2270.00 -11.33 11.79
Utilities Hokkaido Electric Power 9509.T Maruo,Masanori 4,439.64 1 2170.00 -27.91 -9.11
Utilities Hokuriku Electric Power 9505.T Maruo,Masanori 5,119.41 2 2445.00 -7.03 17.2
Utilities Kansai Electric Power 9503.T Maruo,Masanori 21,956.44 2 2400.00 -23.81 -3.95
Utilities Kyushu Electric Power 9508.T Maruo,Masanori 10,296.58 2 2285.00 -31.99 -14.26
Utilities Osaka Gas Company 9532.T Maruo,Masanori 7,835.24 2 382.00 -14.92 7.26
Utilities Shikoku Electric Power 9507.T Maruo,Masanori 6,930.13 3 3000.00 3.81 30.87
Utilities Tohoku Electric Power 9506.T Maruo,Masanori 10,967.55 1 2295.00 -19.76 1.16
Utilities Tokyo Electric Power 9501.T Maruo,Masanori 33,169.23 1 2580.00 -33.85 -16.6
Utilities Tokyo Gas Company 9531.T Maruo,Masanori 10,681.77 2 410.00 -32.12 -14.42
Source: Lehman Brothers estimates; 1 = Overweight, 2 = Equalweight, 3 = Underweight, 4 = Rating suspended
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Lehman Brothers is acting as a financial adviser to the special committee of ASE Test Limited with respect to Advanced Semiconductor Engineering Inc.’s privatization
proposal.
Lehman Brothers is acting as a financial adviser to Taishin Financial Holding Co., Ltd. with respect to its acquisition of Chang Hwa Commercial Bank, Ltd.
Lehman Brothers Inc. and/or its affiliates beneficially owns 1% or more of any class of common equity securities of Davomas Abadi TBK PT as of the end of last month.
Lehman Brothers is acting as financial adviser to Knight Inc. in the potential sale of 80% of its NGPL subsidiary to Babcock & Brown Ltd.
Lehman Brothers acted as financial adviser to Aluminum Corporation of China (‘Chinalco’) on their acquisition of 12 percent of the share capital of Rio Tinto Plc.
Lehman Brothers Inc. or an affiliate is a market maker or liquidity provider in the securities of JSM Indochina Ltd.
Guide to Lehman Brothers Equity Research Rating System
Lehman Brothers coverage analysts in Asia (ex Japan) use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see
definitions below) relative to the country index of the country in which a stock is listed.
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions
below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including
the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight – The stock is expected to outperform the unweighted expected total return of the relevant country index over a 12-month investment horizon.
2-Equal weight – The stock is expected to perform in line with the unweighted expected total return of the relevant country index over a 12- month investment horizon.
3-Underweight – The stock is expected to underperform the unweighted expected total return of the relevant country index over a 12- month investment horizon.
RS-Rating Suspended – The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances
including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transaction involving the company.
Sector View
1-Positive – sector coverage universe fundamentals/valuations are improving.
2-Neutral – sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative – sector coverage universe fundamentals/valuations are deteriorating.
Distribution of Ratings
Lehman Brothers Equity Research has 2157 companies under coverage.
38% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 30% of companies with this rating are investment
banking clients of the Firm.
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47% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 36% of companies with this rating are
investment banking clients of the Firm.
11% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 22% of companies with this rating are
investment banking clients of the Firm.
Lehman Brothers Inc. and Its Foreign Affiliates Involved in the Production of Equity Research
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