Will the Chinese Consumer Economy survive 2009 and offer Investment Opportunities?

1. “ Brave New China - 2009” - Future of the Chinese Consumer Economy & Opportunities for Investments PROPRIETARY & CONFIDENTIAL Jan 2009

3. Review and Highlights of a Turbulent 2008 PROPRIETARY & CONFIDENTIAL

4. People Opportunity PROPRIETARY & CONFIDENTIAL Trend 1 : China’s Domestic Retail Sales Continues to Grow Retail Sales Increase of 22% yoy in Oct 2008 ; Wage growth may sustain spending – rural income increase at faster rate of 11% in first 9 mths 2008 1H2008 domestic consumption contrinuted 50.2% to economic growth Becoming increasingly important driver for economic growth

5. People Opportunity PROPRIETARY & CONFIDENTIAL Economic boom has seen growth in domestic consumer brands Trend 2: Chinese Domestic Consumer Brands are Building Own Strengths Domestic brands ranked higher than foreign brands in trust Recent survey shows domestic brands’ strength in service; price appears less valued by consumers Domestic Brands Becoming Significant Players Superior Service Quality & Response Customised to local tastes & habits Long historical heritage Established distribution network

6. PROPRIETARY & CONFIDENTIAL Trend 3: Internet an Integral Part of the Chinese Consumer Economy.. China already has world’s largest internet population of over 260M Steady growth in cyber economy /online shopping supported by boom in online payment services Online clothing will be largest segment with sales of RMB 17B in 2008 Strong Social network & interaction aspects of Chinese internet helps spread brand knowledge, market products

7. But Chinese Economy Ends 2008 Weaker Amidst Lower Inflation Drop in Exports Experiencing Slowdown after 5 years of >10% annual growth- Real GDP 1st 3Qs of 2008 declined yoy to 9.9% from 11.9% in 2007past 5 years >10% Drop in Production(PMI below 50 in Oct) Drop in Consumer Confidence Continued yoy Retail Growth Slowdown in Inflation Appreciation of RMB- Cheaper Imports Growth in Umemployment as Manufacturing slows – already seen in Guangdong Retail sales continue to grow over 22% in Oct albeit slower than same period in 2007 Cut-back in spending on “Big-ticket” items – property/cars Impact on Growth of Consumer Economy in 2009 which now contributes 35% to China’s GDP -ve +ve

8. Investment Fund Raising Remain Active in 2008 To date, eight investments have been made from AEM3: a $50m investment for a majority stake in Beijing-based hot pot chain Xiabu Xiabu; a $103m investment, as part of a consortium, in Chinese company Ambow Education; a $65m investment, again as part of a consortium, in Chinese company 7 Days Inn Group; Paul Fletcher, senior partner, Actis, said, 'We are delighted to have assembled such an outstanding group of investors who continue to recognise the opportunities for private equity investment across the emerging markets, despite the current economic climate. ‘ We believe that underlying economic growth remains resilient in many of the emerging markets. Much of this growth can be linked to businesses benefiting from consumer demand and increased investment in domestic infrastructure and Actis's investment strategy is tailored accordingly. SignificantRMB-denominatd funds raised supplanting USD funds for the 1st time Asia (Including China) emerging funds continue to be successfully raised- increasingly focused on the Chinese consumer economy Emerging markets private equity investor Actis has closed its Actis Emerging Markets 3 fund on $2.9bn. E xceeding its original target of $2.5bn.

9. Investments Continue with Increasing Focus on the Consumer & related Industries/Services Internet+Media/Ent 9 (USD 420M) Medical & Healthcare 4 (USD 270M) Consumer Products/Retail 2 (USD 680M) Services (IT+Logistics) 9 (720M) Already close to 50% of deals and investments are related to the Consumer Economy.. Summary of deals tillQ3 2008

10. Fund Invested Company Deal Size (USD M) Remarks Beijing Hotpot Actis $50 For over 50% stake in a hotpot chain with 60 stores in Beijing and Tianjin Ambow Educational Co. Actis $103 Chinese educational provider targeting middle school WoWo Convenience Chain ARC $10 Convenience retail chain in Chengdu 7-Day Inn Actis $65 Best Roast Chicken Shenzhen Venture NA 2008 Top ten fast-food chain in China. Revenues over RMB 680M 老百姓大药房 EQT Partners NA Chamate Tea House Oak $23 60 stores across Bejing, Shanghai, Hangzhou,Nanjing Jiaguang Mart Co. Carrefour RMB40M Acquisition of hypermarket chain Xi'an Aijia Commerce Co China Resources RMB600M Acquisition of supermarket chain Metersbowen IPO Raised RMB1.38B Casual wear apparel chain with over 2000 stores and overseas outlets Little Lamb Hotpot IPO Raised HKD780M Well-known nation-wide hotpot chain invested by 3i Fujian New Hua Du Supermart IPO Raised HKD2.55B Leading supermart in Fujian province Recent Transactions in the Consumer Sector

11. Global Financial Crisis and Implications for China PROPRIETARY & CONFIDENTIAL

12. “ A Remedy Better than Painkillers” The financial crisis is real and the damage severe, so the government cannot shirk its responsibility to stabilize the economy. Many focus on what measures the government should take, or which policies to roll out, to ease the pain. However, from what we know about the cause of the crisis, the palliative effect of government policies will not boost productivity without conforming to business trends. Moreover, ingesting too many painkillers would work against economic rebalancing. In this sense, the Chinese government and private sector must make a distinction between short- and long-term tactics. Short-term measures can buy time needed to address long-term concerns. But real opportunity can be found only in the quest for solutions to fundamental ills. For policymakers, the best opportunity afforded by the crisis is to rapidly change the development model. China cannot continue relying on exports . Since the beginning of the 21st century, a clear objective for the government has been to transform the growth model. “Sound and fast development” was mentioned in a report of the 17th Communist Party Congress….. However, meaningful transformation has been elusive. Although encouraging change in good times can be less disruptive and less painful than in bad times, the steps taken before the crisis grew to its current proportions were half-hearted. Urgency was lacking. Now in hard times, pressure for change is there, but action is delayed for fear of pain. Even though the world economy is in recession and the Chinese economy is suffering the consequences of over-reliance on exports, inertia keeps the old model afloat. Now, policymakers have to recognize that economic transformation is an opportunity as well as their only choice . The price paid for moving slowly has already been high enough. We cannot afford to take additional chances. If pro-active steps toward transformation are not forthcoming, changes made in the future under pressure will be more painful and costly. Industry leaders should seek opportunities for growth. Enterprises cannot rely on policy favors for survival, so when business growth is flat or falling, it’s time to gather strength for future growth. Currently, meeting growth targets and easing pain while costs slide can foster excuses for keeping the status quo. However, survival of the fittest is an iron law of business….Clearly, China’s rebalancing will depend on the efforts of industries to move up the value chain, bring innovation to the services industry, and expand the domestic market. Seizing the opportunity to rebalance is better than waiting for government handouts. Making money in 2009 will not be as easy as in past years. But seeds for future growth can be sown with brains and brawn. Opportunities for development are waiting for those who embrace the future

16. Brave New China in 2009 PROPRIETARY & CONFIDENTIAL

18. Consumer/Retail Growth will Continue Growth between 13-18% Mark Mobius , the Singapore-based executive chairman of Templeton Asset Management Ltd.. – “ “aggressively” buying consumer stocks in emerging markets including China. Mobius, whose firm oversaw more than $24 billion in emerging-market stocks on Sept. 30, said growth in per-capita income is fueling a consumer “boom” in those countries. Buy Consumer Stocks Investors should favor consumer stocks over commodity producers as “emerging-market economic growth shifts from external to domestic demand,” “ Unmet” Needs from Rising Chinese Consumers McKinsey “ Urban Middle Class Commands RMB 500 M in consumer spending ” Emerging consumers from second/third tier cities- white collar/industrial workers “ First 3 days of retail sales in 2009 increased 13% yoy” Above expectations

19. Macro-Factors Driving China’s Future Consumer Economy (1) 3 + 1 Growth of Chinese Middle-Class Urbanization and Growth of Cities Growth and Impact of the Internet > 200 Cities with >1M residents By 2015, >300M lower-middle class; 100M luxury consumers NOW >300M users; >RMB 120B online consumer sales Recent RMB 4 trillion stimulus – focus on infrastructure, education, healthcare, social services

21. 3+1 Macro-Factors - Internet The Internet will be an intergral part of the consumer economy Most widespread media- access middle-class consumers Highest global participation rate & important social influencer Growth of B2C

22. Where Are Investment Opportunities? PROPRIETARY & CONFIDENTIAL

23. Key Consumer Trends Growth of Chinese Middle-Class Urbanization and Growth of Cities Growth and Impact of the Internet Govt Stimulus “ City-Living” Consumer Services Affordable Luxury for the Young Affluent “ Mass Market” + “Good Enough” Products Online Consumer Brands “ Knowledge” Services “ Health”+ “Well-being” Services 3 + 1

25. Investment Theme 1 : Emerging Niche Brands + Urban Inner City Retail & Services + Direct-to-Consumer Services (II) Fast-Food Services Food Service Industry is recording significant growth and with increasing urbanization, sector expected to continue strong growth.. Local fast-food chain “Kungfu” recorded sales of RMB1 B with 300 stores..planning to open 100-150 in 2009 YUM China has built a successful franchise of 2600 stores..and plans to open 500 outlets across China…including 3/4th tier cities

27. Investment Theme 2 : Branded Consumer Products + Supporting Services in Evolving Retail Value Chain (I) Leading domestic niche brands(wine, cosmetics) eg. Daobao SOD recently acquired by P&G for USD300M Leading Niche Domestic Brands at Major Retailers Major retailers like Hypermarkets offer channels to quickly help domestic products build brand and reach a wider market

28. Investment Theme 2 : Branded Consumer Products + Supporting Services in Evolving Retail Value Chain (II) Supporting Services & Channels As major retailers outsource support services, potentially will see growth of logistics, warehousing, distribution services; As manufacturers search for retail channels will drive growth of new channelseg. T eleshopping, shopping malls + management services Recent crisis will see further “Outsourcing” of support services to lower cost and leverage on scale

29. Investment Theme 3 : Education and Healthcare Services Education Services Tremendous growth opportunity in China’s education sector as household disposal income increases..still significantly below HK/Taiwan..Online Education also represents new opportunities Healthcare Services Key Findings -- Total healthcare spending in China is expected to grow at a CAGR of 11% between 2007 and 2012; -- Around 118 Million people are expected to be above 65 years of age in China by 2012, thereby increasing the prevalence of several chronic diseases; -- Middle class projected to have 160 Million people by 2012, reflecting a higher spending on healthcare and opportunities for healthcare companies; Leverging on the Chinese Govt’s recent stimulus focusing on improving the social welfare system in education & healthcare

31. Conclusion PROPRIETARY & CONFIDENTIAL

32. “ Opening of Services Sector Represents the Next 30 years of China’s Economic Reform ” … the period of 1978 to 2008 has been heralded with fanfare in China as “three decades of reform and opening.” This past year was spent remembering the accomplishments of those decades, culminating with a commemoration of the Third Plenum of the 11th Party Congress which, in December 1978, officially marked the beginning of the reform era … . President Hu Jintao spoke …whose central message was “press forward with reform and opening.” By insisting that reform must continue “without wavering, without slackening and without detours,” a fresh starting point for China’s future course was clearly set. ….. At the commemoration, President Hu repeated word-for-word the concluding remarks made at the 17th National Congress of the Communist Party in October 2007: “The reform and opening-up policies are in accord with both party consensus and the public will, and in compliance with the trends of the times. The direction and path are completely correct, the results and achievements cannot be denied, and any halt or retreat is unacceptable.”... Under present circumstances, then, our most pressing task is to turn a new corner for reform to maintain its momentum as well as economic growth and social stability. … We believe the new driver of growth would be to open up the services industry market in China. When per capita GDP reached around US$ 3,000 in the United States, Japan, South Korea and Taiwan, the services industry became a motor for growth. China’s GDP per capita is very likely to reach US$ 3,000 in 2008. This is an auspicious moment for developing China’s services industry, which can boost consumption and stimulate investment. The potential benefits are numerous. Such an industry can be a catalyst for transforming the economic structure, ease the pain of the economic downturn abroad and in China, reduce the domestic economy’s reliance on the property and auto sectors, create new jobs, relieve the strain on the environment, and improve the quality of life. … a services industry, which has been called a “third industry” in China. In the early days of China’s reform period, this sector covered wholesale, retail, transportation, warehousing and the property sector. More recently, it has expanded to include financial services, information technology and the media, arts and entertainment, education, health care, business services and other branches of the economy. The services industry has made great strides over the past 30 years, but its share in the economy has not grown as quickly as the so-called “second industry,” which includes mining, manufacturing and construction. Growth has been impeded by lagging reforms in a number of key sectors. The economy’s current slowdown may provide the right opportunity for the services industry to take off – a timely and necessary development.