Asia Themes 2011                                       Best ideas in Asian equities                                       ...
Asia Themes 2011ContentsWhat are the themes for 2011?                                   Which stocks might get discovered?...
Asia Themes 2011Asia - INTRODUCTIONWhat are the themes for 2011?Remain Overweight Asia.Next year is likely to be similar i...
Asia Themes 2011 After two years of positive returns, Singapore is no longer cheap. Focus    on dividend-related investme...
Asia Themes 2011domestic demand story anticipated in the original Billion Boomersreport (The Real Pacific Century - Asia’s...
Asia Themes 2011Markets versus central banks. Markets can take on and defeat                       USA as an anti-Merkelis...
Asia Themes 2011measures vindicating a pessimistic outlook for EU growth. As the bailout          Credit decoupling Asiapa...
Asia Themes 2011residence expenses contributed another 18%. Ninety-two percent of theheadline CPI increase came from just ...
Asia Themes 2011Asia - MICROSTRATEGYWhat is the key earnings risk in 2011?Rising costs and easing demand create widespread...
Asia Themes 2011good to infinity. Buy stocks representing the best brands in discretionary        Be long the yellow metal...
Asia Themes 2011Masterly inaction. With a portfolio on 25x forward earnings, a period ofconsolidation probably beckons, wh...
Asia Themes 2011Asia - BANKSWill the sector continue to outperform?Healthy credit growth, widening margins and limited pro...
Asia Themes 2011Asia - CONSUMERWill Asian Boomers ride high?Chindonesian consumers remain upbeat amid wage inflation.China...
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
Clsa asia themes 2011
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Clsa asia themes 2011

  1. 1. Asia Themes 2011 Best ideas in Asian equities 16 December 2010Trendlines (As at 15 Dec) What to watch for?Large-cap BUYs with Anirudha DuttaBaidu BIDU USBank of China 3988 HKChina Construction Bk 939 HKChina Mobile 941 HK We expect more of the same in 2011: Western economic growthChina Telecom 728 HK disappointments, reflation of Asian assets and more intervention to curbInfosys INFO IB inflation. Earnings growth should moderate sharply after a sterling 2010, while there isPetroChina 857 HKPing An Insurance 2318 HK headroom for a rerating of Asia ex-Japan valuations, currently near 20-year means. ChrisStandard Chartered 2888 HK Wood remains sanguine with expectations of an asset bubble in Asia supporting hisTencent 700 HKLarge-cap SELLs Overweight stance on the region for now. Russell Napier warns of more governmentBYD 1211 HK interference as the belief that markets have failed will spur politicians to establish theirCathay Financial 2882 TT primacy over the world of finance. Capital controls are now just a matter of time. EricChalco 2600 HKCNOOC 883 HK Fishwick also expects tightening in 2H11, as well quicker Asian domestic consumption andLG Electronics 066570 KS construction activity thanks to QE2. From China, Andy Rothman hopes that inflation willMega Financial 2886 TTPICC 2328 HK moderate as both monetary policy and weather conditions normalise. Sector themesS-Oil 010950 KS include: stronger credit growth for banks; reviving consumption; strength in enterpriseTelkom Indonesia TLKM IJ spending on tech; return of revenue growth for telcos; resources M&As. Meanwhile, AmarZijin Mining 2899 HK Gill identifies a few ROIC-Ebit/EV gems. By market, look for companies taking advantageValuations above mean of China’s various advances; best-managed Indian firms that leverage rising commodityMSCI Asia ex-Japan trailing PE prices; reform plays in Malaysia; dividend-payers in Singapore; and growth stocks in 30 (x) Thailand. Our Feng Shui master warns that the bunny is an ecstatic but unpredictable 25 Max 25.46 animal. Enjoy the ride and best wishes for the Year of the Rabbit. 20 15 Avg 14.26 GLOBAL STRATEGY: How does Asias asset bubble play out? Chris Wood remains 10 Min 9.63 steadfast in his belief that global recovery is subpar and the extremely easy monetary 5 policy in the West has set the stage for an Asian asset bubble. While this is the near-term argument for remaining Overweight Asian equities, the long-term consequence will be an 93 94 96 98 00 02 04 06 08 10Source: CLSA Asia-Pacific Markets inevitable boom-bust cycle in the region. However, Chris is more optimistic about Asian governments, which understand the risks and seek to counter them.Hypergrowth in Chindonesia® GLOBAL STRATEGY: Will the free movement of capital survive? No, it will not, if Russell Napier is right. He argues that as governments step back into the marketplace to assert the primacy of politics over finance and mark the end of long-term deflation, the secondary-market valuation for capital will decline. The USA is likely to stand out as an anti-Merkelist bastion and in the near term attract more capital. GLOBAL ECONOMICS: What does QE2 mean for Asia? Eric Fishwick expects cost of capital to come down globally thanks to QE2. This will boost credit, domestic consumption and construction activity in Asia. Regional currencies should remain soft and inflation is likely to rise. Eric believes monetary authorities will start tightening in 2H11 and the region will become more “Chinese” in how it administers banking systems, ie, using capital controls to restrict inflows at source.Also inside CHINA STRATEGY: Will inflation rise further? Andy Rothman remains a bull on China. While he expects CPI to moderate next year, as weather and monetary policy normalise, heAsia: Autos; Banks; believes equities and real-estate prices will surge on increasing wealth. Ample domesticConsumer; Resources;Technology; Telecoms; Social liquidity will shrug off concerns about rate hikes and Which countries will be FII favourites?responsibility; Thematics fuel a large asset-inflation cycle. YTD net FII inflowAustralia: Market 833% ASIA THEMATICS. Desh Peramunetilleke, Amar Gill, (US$m) (%)China: Strategy; Market; Andrew Riddick and Evelyn Moore also highlight their 30,000 YTD net 500A shares % YoY (RHS) investment themes and ideas for 2011. Desh expects 25,000 400Hong Kong: Property 20,000 300 rising costs to put pressure on margins, with India, 15,000 200India: Market; Economics; Indonesia and Thailand most at risk. Amar’s high- 10,000 100Politics ROIC-EV/ Ebit screen has so far worked well in locating 5,000 0Japan: Market 0 (100) outperformance. And for the long-term believers in ourMalaysia: Market India Phil Thailand Taiwan Pakistan Indo Vietnam Japan Korea Billion Boomers story, Andrew and Evelyn recommendSingapore: Market buying into plays that serve the growingThailand: Market discretionary-consumption market and companies that Note: FII = Foreign institutional investment.Asia: Feng Shui; Review are building strong franchises. Source: Bloomberg, CLSA Asia-Pacific Marketswww.clsa.comFind CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com
  2. 2. Asia Themes 2011ContentsWhat are the themes for 2011? Which stocks might get discovered?Introduction by Anirudha Dutta ........................... 3 Asia thematics by Amar Gill .............................. 18How does Asias asset bubble play out? Seeking Asian exposure without EM risk?Global strategy by Christopher Wood ................... 4 Australia market by Scott Ryall ......................... 18Will the free movement of capital survive? How do you fight hot money?Global strategy by Russell Napier ........................ 5 China strategy by Francis Cheung ...................... 19What does QE2 mean for Asia? How to play to become No.1?Global economics by Eric Fishwick ....................... 6 China market by Danie Schutte ......................... 20Will inflation rise further? Will small still be beautiful?China strategy by Andy Rothman ........................ 7 China A shares by Manop Sangiambut ................ 21What is the key earnings risk in 2011? Will HK property prices fall in 2011?Asia microstrategy by Desh Peramunetilleke ......... 9 Hong Kong property by Nicole Wong .................. 22Where to invest in Asia? Commodity curse in 2011?Asia sales view by Evelyn Moore ......................... 9 India market by N Krishnan .............................. 23Does consumer remain the way to go? Will the investment upturn lose steam?Asia sales view by Andrew Riddick ..................... 10 India economics by Rajeev Malik ....................... 24Is the global sector in a sweet spot? Is politics a risk?Asia autos by Geoff Boyd ................................. 11 India politics by Anirudha Dutta......................... 25Will the sector continue to outperform? Is there “good” and “bad” inflation?Asia banks by Daniel Tabbush........................... 12 Japan market by Andreas Schuster .................... 26Will Asian Boomers ride high? Will the nation push meaningful reforms?Asia consumer by Aaron Fischer, Anirudha Dutta . 13 Malaysia market by Clare Chin .......................... 27How will miners spend their capital? Does a strong currency hurt its status?Asia resources by Andrew Driscoll, Daniel Meng .. 14 Singapore market by Ashwin Sanketh ................ 28Will 2011 be a “cleaner” year? Can the SET go up three years in a row?Asia technology by Bhavtosh Vajpayee .............. 15 Thailand market by Tim Taylor .......................... 29Can data push revenue growth? Will the Rabbit leap into a wall?Asia telecoms by Elinor Leung........................... 16 Asia Feng Shui by Philip Chow ........................... 29Is Asia becoming more responsible? How did our 2010 predictions fare?Asia social responsibility by Simon Powell ........... 17 Asia review by Amar Gill ................................... 30Related reports to key themes2 16 December 2010
  3. 3. Asia Themes 2011Asia - INTRODUCTIONWhat are the themes for 2011?Remain Overweight Asia.Next year is likely to be similar in many ways to 2010, but watch for increasedpolicy risks. The recovery in the West remains anaemic and the USA is still ina deflationary mode. Asian asset prices will continue to inflate as long as theregion is coupled to US monetary policy. Hence, we are likely to see moregovernment intervention in Asia even as inflation remains stubbornly high. Fornow, we are Overweight the region. We provide insights from our strategists Anirudha Duttaand research/sector heads in the following pages. (91) 2266505056 anirudha.dutta@clsa.comMacro and global - From Washington with love US recovery remains weak and the outlook on EU is pessimistic; monetary policy in the West will remain loose; secondary-market valuations will decline as governments step back into the marketplace. Ample liquidity in Asia should result in asset inflation, particularly in Still rising equities and property; China will be the epicentre of the Asian asset Asian inflation weighted for GDP bubble. 10 (% YoY) 9 With accelerating domestic consumption and construction in the region, 8 inflation will remain a key concern in 2011. 7 Increased government intervention, first in property and likely to follow 6 5 with capital controls; the renminbi should continue to appreciate, by 4 7% next year. 3 A key risk is margin pressure. 2 1Sectors - A(utos) to T(echnology) 0 (1) Autos are in a sweet spot globally with developed-market capacity 98 99 00 01 02 03 04 05 06 07 08 09 10 addition muted and demand from the emerging world surprising on the Source: CEIC, CLSA Asia-Pacific Markets upside. A brilliant year awaits Asian banks, with healthy credit growth, widening margins and limited provision costs; focus on banks with high ROAs. Sharply up since the downturn Asian consumers remain upbeat and will benefit from the positive job US-dollar market performance since end-2008 outlook and wage inflation in 2011; buy affluence and companies that Indonesia are building strong sustainable franchises. Thailand Hong Kong residential-property prices will continue to rise; we prefer Phillipines Korea the landlords to the developers. India Resources companies are well placed with healthy cashflows and Taiwan Singapore therefore, capex and M&A will remain in focus. MSCI Asia A positive year ahead for technology: enterprise spending will remain Malaysia Hong strong after a decade of underinvestment; new products will keep China consumer demand high. Stop worrying about wage inflation. USA (%) Japan Telcos will witness revenue growth again on growth in data revenue, 0 100 200 300 cheaper smartphones and Asian telcos’ own application stores. Valuations are undemanding. Source: Bloomberg, CLSA Asia-Pacific MarketsMarkets of choice Australia offers exposure to the growth of Asia without emerging- Upgrades are moderating market risk. Consensus EPS forecasts 50 (%) With China emerging as the No.1 global consumer, there are multiple ways to play the theme. Negative sentiment for the policy-sensitive 2010E 45 stockmarket could reverse as weather and monetary policy normalise. 2011E 2012E Commodity-price hikes and governance issues plague the Indian 40 market. Inflation, high prices of resources and tight liquidity conditions are likely to be transient and we expect a revival in investment 35 demand. 30 Return of inflation is good news for Japan, an oversold market with undemanding valuations. We see upside potential. 25 Malaysia is likely to see progress in reforms notwithstanding the Feb 09 Sep 09 Apr 10 Nov 10 sceptics, which will drive a market rerating. Source: Datastream16 December 2010 3
  4. 4. Asia Themes 2011 After two years of positive returns, Singapore is no longer cheap. Focus on dividend-related investment themes. A continuation of capex and credit growth alongside a return of the present government after the next election will boost earnings in Thailand. Markets will react positively.Valuations - Room for upside. We forecast Asia ex-Japan earningsgrowth to sharply moderate from 42.3% this year to 13.6% in 2011. The12-month forward PE, at 12.1x, suggests valuations are not yet demandingin the aggregate. We estimate strong free-cashflow growth of 98% for nextyear. This, coupled with reasonable valuations, should provide upside toregional markets even as EPS growth slows. Our strategists remainOverweight Asia, while being cognisant of the risks, particularly fromgovernment action. Meanwhile, according to our new Feng Shui master, theyear of the Metal Rabbit can be quite unpredictable, if history is any guide.Global - STRATEGYHow does Asias asset bubble play out?Asia to enter a bubble if US interest rates take a long time to normalise.The macroeconomic backdrop in America remains deflationary; hencethe Federal Reserve’s willingness to embark on QE2. The US bondmarket continues to signal a subpar recovery. The more anaemic theWestern recovery proves to be, the longer it will take for Westerninterest rates to normalise and so the more likely it will be that Asiaenters into an asset bubble. Christopher WoodUnhealthy US recovery. By the first half of 2011, it should become (852) 26008516 christopher.wood@clsa.comapparent whether US consumption and employment are really normalising.The view here is that neither will recover healthily. This also seems to bethe message from the US government-bond market, which has remainedrelatively well bid, despite the ongoing rally in the S&P500 amid risingoptimism. Indeed the 10-year Treasury bond yield is still 117bps lower Bond yield still below April highthan the 2010 high reached in April. In this sense, the US bond market S&P500 and US 10-year Treasury bond yieldcontinues to send an entirely different message from the US stockmarket. 1,500 S&P500 (LHS) (%) 4.5Asian asset bubble . . . China is likely to be the epicentre of an Asian 1,400 US 10-year Treasury bond yield 4.0bubble. The situation in the West is critical in terms of how the Asian cycle 1,300evolves. Western policy is likely to remain super-easy because of the 1,200 3.5lacklustre outlook for consumption and employment in an American 1,100economy, where consumption still accounts for 70.4% of total nominal 1,000 3.0GDP and 88.5% of nominal private-sector GDP. Another reason for policy 900remaining super-easy in the West is the potentially systemic issue of 800 2.5Euroland sovereign debt. 700 600 2.0. . . and tightening policies. Asian governments and central banks are Jan 08 Dec 08 Dec 09 Dec 10going to have to be very aggressive if they really want to head off the riskof an asset bubble in an environment where Western monetary policy Source: Datastream, Bloombergstays so easy. Such an aggressive approach is theoretically possible interms of much higher interest rates and allowing currencies to float freely.But the most likely outcome at present is that Asian tightening policies will Continue to Overweight Asiacontinue primarily to address symptoms of the bubble risk, such as higher MSCI AC Asia ex-Japan relative to MSCI AC Worldproperty prices, not the cause of it. 300 (Jan 1988=100)Renminbi appreciation. One important aspect of this potential Asianpolicy response remains Chinese currency policy. For now the view here 250remains that China will allow only an incremental appreciation of 5-7% peryear. Still, the political noise on the Chinese exchange-rate issue is likely 200to escalate next year if the US labour market continues to be unhealthy. 150Remain Overweight Asia. The extremely easy monetary policy in theWest remains a perfect ingredient for an asset bubble in Asia, which is 100an argument for now to remain Overweight on the region. From a 50longer-term perspective, the other side of an asset bubble in Asia, with 1988 1995 2003 2010China at its epicentre, is a deflationary bust. This is why it is correct tosay that an extended period of near-zero rates in the USA has the Source: Datastreampotential to destabilise Asia in the sense that the long-term healthy4 16 December 2010
  5. 5. Asia Themes 2011domestic demand story anticipated in the original Billion Boomersreport (The Real Pacific Century - Asia’s Billion Boomers, September2002) is fast-forwarded into a boom-bust cycle. Still, it is a positivethat the Chinese leadership, as well as other Asian governments,understands this risk and will be seeking to counter it.Global - STRATEGYWill the free movement of capital survive?From mercantilism to Merkelism and the perils to capital.The Merkelists’ desire to assert the primary of politics over financereverses the assertion of Thatcherism that ‘you can’t buck the market.’Government retreat from the marketplace and a long disinflationdramatically lifted the secondary-market valuation of capital from 1982 to2000. We need to realise that we are faced with governments steppingback into the marketplace and the end of that disinflation - a combination Russell Napierthat should structurally reduce secondary-market valuations for capital. (44) 1316549830 russell.napier@clsa.comMerkelism is a convenient label. However, it is not confined to the ex-members of the Free German Youth Movement of the GermanDemocratic Republic. Merkelism is a global movement forced uponpoliticians by perceived market failures. Of course, many of these failuresstem from government intervention, most notoriously the refusal ofChina to permit exchange-rate revaluation, but this is irrelevant in thereactionary world, which is politics. Merkelism will have manymanifestations; the key one for investors will be that politicians will seek ‘I won’t let up on this because otherwisesolutions to Greenspan’s flaw. The flaw, as the Maestro outlined in that primacy of politics over finance can’ttestimony before Congress, is that the ‘enlightened self-interest’ of the be enforced,’ Angela Merkel, Chancellor ofprivate sector cannot correctly determine the appropriate level of credit Germanyfor an economy. This is now the job of the authorities.‘Primacy of politics over finance’. Anyone serious in asserting thisneeds to make capital as sluggish and inflexible as labour and government.The superior speed of capital has allowed it to arbitrage labour andgovernment and thus asserted the primacy of finance over politics. Capitalcontrols, whether introduced proactively in a Merkelist conversion orreactively in a crisis, are now just a matter of time.Capital controls - A barrier to arbitrage. The emerging-market Merkelists Current account directs economic adjustmentbelieve that they will be able to target interest rates, thus credit, and their Brazil’s financial and current accountsexchange rates simultaneously. The emerging-market authorities are 25 (US$bn) Financial accountmarching down this route to avoid the credit bubble they suffered in the mid- 20 Current account1990s and the US endured for the past decade or more. Such controls are 15likely to be insufficient to control credit and defeat inflation and this willinevitably lead the Merkelists to seek to more directly control bank credit. 10Almost certainly one day they will have to follow Volcker rather than Merkel 5and attack their endemic inflation problems with interest rates and abandon 0the attempt to ‘whip inflation now’ with administrative measures. Thisapproach is currently too radical, as it will inflict the political pain of higher (5)interest and exchange rates simultaneously. Political expediency is driving the (10) 09 97 99 01 03 05 07 75 77 79 81 83 85 87 89 91 93 95emerging-market authorities to Merkelism rather than monetarism. As withthe USA in the 1970s, monetarism is a medicine too strong for all but those Source: Datastreamalready weakened by a prolonged period of Merkelism.Merkelism will spread. Most investors will be surprised that theMerkelist drive to assert the ‘primacy of politics over finance’ will alsoinflict Asia. Forecasting its spread within Europe is much less contentious.When all else fails, Merkelism can save the euro but at the expense of thefree movement of capital and by cajoling private-sector savings intopublic-sector debt. Many might see such a move as imminent as the fiscalglue to cement the euro as it melts in the heat of Spain. This might be truebut ignores that fact that when the fiscal arbitrage that passes good creditto bad credits reaches its limit, there is another solution in reserve. Themonetisation of European sovereign debt by the European Central Bank(ECB) will save the euro.16 December 2010 5
  6. 6. Asia Themes 2011Markets versus central banks. Markets can take on and defeat USA as an anti-Merkelist bastiongovernments whose fire power is limited to the funds they can extract Gross Federal debt as a portion of GDPfrom their citizens. However, markets must bend to the central bankers 140 (%)whose fire power is unlimited as they conjure money out of thin air. Most 120believe that the ECB would never pull this rabbit out of a hat because once 100upon a time, in 1923, another European central bank tried a similar trick.However, with the failure of the commercial banking system of Europe 80assured, if the euro fails then the ECB will have to follow the Fed and the 60Bank of England to defeat the markets. If the ECB saves the euro then 40Merkelism need not. However, it will not be held in abeyance for long.Once we thought Merkelism would appear to save the sovereign debt of 20Portugal, Ireland, Greece and Spain. Of course, if the ECB saves them, 0then one day Merkelism will appear but to save the sovereign debt of 1940 1952 1964 1976 1987 1999 2011EGermany itself. Source: whitehouse.govWill the USA hold out? The USA is likely to stand out as an anti-Merkelist bastion. As the owner of the reserve currency, it must resist anymovement towards the capital controls that would restrict the injection offoreign savings, which send it to work every morning. This resistance mayeven attract more capital as capital considers the balance between politicsand finance to be in its favour in the USA. However, the primacy of financein the USA is not some cunning legacy of Alexander Hamilton, but a resultof a society addicted to the easiest money of all - the easy money calledthe reserve currency. Even the USA will question the primacy of financewhen it realises that finance is not always cheap and readily available.That day for America will dawn when Volcker comes to Asia. When theemerging markets are forced to attack their endemic inflation with highinterest rates and flexible exchange rates, then the USA will have to paythe real cost of finance. It is a price that it arguably has not paid for acentury and at least not since the seventies. Emerging-market savings willno longer be on tap and US Treasury yields will soar. Then, and probablyonly then, will the USA be forced to impose capital controls, assert theprimacy of politics over finance and bring Merkelism to America.Global - ECONOMICSWhat does QE2 mean for Asia?Asia to see credit growth and faster consumption and construction.QE2 will drive down the cost of capital globally and thus Asia is likely to seecredit growth and accelerating domestic consumption and construction activityin 2011. But GDP growth will be slower amid weak world trade. Malinvestmentresulting from emerging-market monetary policy internationalising QE2 willdefine the end-game for this cycle, but the party could last several years. Themore immediate problem is consumer-price inflation. We expect Asian Eric Fishwickmonetary authorities to start tightening in 2H11. (852) 26008033 eric.fishwick@clsa.comThe “Bernanke put”. QE2 will drive down the cost of capital on a globalscale. It will accelerate credit cycles in those countries in which, as a resultof interest-rate and exchange-rate practices, import US liquidity. Thisincludes most of Asia. Next year is likely to see credit growth and domestic Importing US liquidityconstruction activity accelerate. Most of Asia is export-driven, so in the Aggregate Asian forex reservesweak-world-trade environment that we expect for 2011 GDP growth will beslower than this. But consumption and investment will be stronger than 5.0 (US$tn) (US$tn) 2.0previous export-GDP correlations would suggest. QE2 represents the 4.5 Rolling 12M change 1.8 4.0 1.6“Greenspan put” supersized into the “Bernanke put” of 2011. Our bearish Level (LHS) 3.5 1.4economic forecast makes it a certainty that the US will extend QE2 into 3.0 1.22H11 and potentially beyond. 2.5 1.0Don’t overplay euro weakness. QE2 will generate liquidity flows into 2.0 0.8risk assets far greater than the Fed’s direct purchases of Treasuries if it 1.5 0.6 1.0 0.4makes the US dollar appear a risk-free short. At the moment, this is not 0.5 0.2the case as the euro is contaminated by sovereign-risk concerns. Event 0.0 0.0risk in the euro will dissipate only by Portugal and likely Spain following 2004 2005 2006 2007 2008 2009 2010Ireland and Greece in accessing International Monetary Fund andEuropean Union funding. So doing will require aggressive austerity Source: Datastream, CEIC, CLSA Asia-Pacific Markets6 16 December 2010
  7. 7. Asia Themes 2011measures vindicating a pessimistic outlook for EU growth. As the bailout Credit decoupling Asiapacts are progressively triggered for Portugal and finally for Spain, liquidity Real GDP forecastsrisk overhanging the euro will dissipate. As this happens, the currency 2009 2010CL 2011CL 2012CLshould again start to outperform the dollar. Australia 1.3 2.7 3.9 3.6 China 9.1 10.2 8.9 9.5Asia a soft-currency region in 2011. With export growth already under Hong Kong (2.8) 7.0 5.4 4.3pressure and China unwilling to allow anything more than a cosmetic India 7.4 8.8 8.3 9.0appreciation of the yuan, Asia as a whole in 2011 will be a soft-currency Indonesia 4.5 5.9 5.7 6.0region. Exchange rates will appreciate versus the US dollar but only Korea 0.2 6.4 5.1 5.4because the latter is even weaker. Asian currencies will fall relative to Malaysia (1.7) 6.7 4.3 4.5physical stores of value (gold and commodities in general), freely floating Philippines 1.1 7.0 4.8 5.3commodity currencies (the Australian and New Zealand dollars) and, as Singapore (1.3) 15.0 4.0 5.0sovereign risk dissipates, the euro. Taiwan (1.8) 10.2 5.1 4.1Asia coupled to US monetary policy. In Asia, QE2 will appear as a Thailand (2.3) 7.7 4.0 4.7reduced cost of capital as underleveraged banks try to raise loan/depositratios (LDRs). The return on savings will also fall (especially in real terms). Memo: USA (2.6) 2.8 1.8 1.1With cyclical (export) sectors weak, liquidity will pool in property markets. Memo EU (3.6) 1.1 0.0 0.5The combination of QE2 and Asian monetary policy will support both China is a small upward revision. Recent PMI datadomestic credit growth and fixed capital formation. With exports under suggest that sequentially 4Q will be stronger than 3Q and this pushed the CY10 number up a little and the CYpressure, Asian economies will appear finally to have decoupled from world- number up about 0.5ppts. Ill characterise as 8-9% in thetrade flows. Our forecasts for 2011 are slower than 2010 but far from text. Source: CLSA Asia-Pacific Marketspessimistic given our US and EU assumptions. Asia will have decoupled, butonly by virtue of remaining intimately coupled to US monetary policy.Inflation will rise in Asia. On the street, liquidity is likely to be mostvisible as persistent upward pressure on property prices. Consumer-priceinflation is already appearing in Asian inflation statistics today. Asia, likemost emerging markets, is vulnerable to rising food prices because of thelarge weight of unprocessed food in Consumer Price Indices (CPIs).Inflation has started to rise across Asia and we expect headline rates torise further as QE2 continues.Asia will become more “Chinese”. QE2 has the potential to make the Rerun of 2008 inflation, for longermost economic difference in economies like Indonesia and India, which Average CPI inflation (2009 GDP weights)historically have had high cost of capital and constrained bank balance 18 (% YoY)sheets. More and more aggressive interference in property markets and 16 Overallattempts to control banks’ ability to lend will characterise 2011. There is 14 Food Non-foodalso likely an increase in the use of capital controls to restrict inflows into 12monetary systems at source, as is the case in China (which is therefore 10 8one of the countries best able to handle them). And in 2011 we would 6expect the rest of the region to become more “Chinese” in how it 4administers banking systems. 2Tightening will occur in second half. Eventually, Asian monetary 0authorities will be forced to react. But historical precedent, both in how (2) 2003 2004 2005 2006 2007 2008 2009 2010they respond to terms of trade shocks and their willingness to raise rateswhile US rates remain low, suggests that interest rates and exchange rates Source: CEIC, CLSA Asia-Pacific Marketswill lag inflation. By end-2011, we expect interest rates to be raised andattitudes towards currency appreciation to be more open. But it will havetaken inflation rates at or around 10% to have caused the shift.China - STRATEGYWill inflation rise further?CPI to moderate next year as climate and monetary policy normalise.Inflation in China is primarily a weather-driven phenomenon, withmonetary policy playing a supporting role. As these factors normalise nextyear, the increase in CPI will not be dramatically higher than the 3.6%average annual rate of the five pre-stimulus years. Still, we expect highlevels of liquidity and rising income to fuel price surges in the country’stwo asset classes - equities and real estate. Andy Rothman (86) 2123066000Largely bad weather. The primary driver of CPI inflation has been bad andy.rothman@clsa.comweather across the country, leading to a sharp fall in fresh vegetable andfruit supplies. Food accounted for 74% of the November CPI rise, while16 December 2010 7
  8. 8. Asia Themes 2011residence expenses contributed another 18%. Ninety-two percent of theheadline CPI increase came from just those two categories. We are notarguing that the sharp rise in the growth rate of money supply has had no Sinology China Macro Strategyinflationary impact, but monetary conditions account for only a small shareof the CPI surge. Fresh veggies and fruit the key driverIt isn’t always money. Core CPI was only 1.5% in November. The sharp CPI-Food, CPI-Fresh veggie and CPI-Fresh fruitfall in money velocity has largely neutralised last year’s dramatic increase 135 (% YoY) CPI-Foodin money supply. Monetary policy accounts for only a small share of the 130 CPI-Fresh vegetableCPI increase, and the growth rate of money supply is normalising. 125 CPI-Fresh fruit 120Social unrest. Higher food prices are unlikely to result in social instability. 115The key factor is that a decade of rapidly rising income has left Chinese far 110better equipped than many of their emerging-market counterparts to 105manage higher food prices. 100Higher rates. Beijing is once again using administrative measures to cool Jan 10 Mar 10 Jun 10 Aug 10 Nov 10off inflation. But as was the case in 2008, we don’t expect the Party to Source: CEICfreeze food prices. The Communist Party will keep raising interest ratesuntil food prices cool off. This means two to three more 25bp increases arelikely by mid-2011. Lending and one-year deposit rates should rise in Higher reserve requirementtandem. CPI-Food and RRRHigher RRR. Bank reserve-requirement ratios (RRRs) will also rise with 125 (%) 20CPI, but as with interest rates, this is primarily a political signal that will 120 CPI-Food 18have little impact on food prices or bank lending. Demand for credit will RRR (RHS) 16 115remain strong, and supply is controlled by quota. With the system-wide 14 110 12loan/deposit ratio still at about 66%, well below the 75% ceiling, very few 10 105banks will find their lending constrained by a much higher RRR. 8 100 6Not significant tightening. Higher real rates and RRR will have little 95 4impact on the economy or on the housing market, and do not foreshadow Jan 04 Sep 05 Jun 07 Feb 09 Nov 10significantly tighter monetary policy next year. New lending will be very Note: non-food inflation before 2005 is based onlow in December as the Party sticks close to its full-year target, but in estimate. Source: CEIC2011 loans outstanding is likely to rise by 14-15%, near the averageannual rate of 15.7% during the five pre-stimulus years.FAI will stay strong. Nominal fixed-asset investment (FAI) growth, No significant tighteningwhich drives commodities demand, will normalise at about 25% YoY this RRR, interest rate, M2 and loan growthyear and next, roughly the same pace as in the six pre-stimulus years. 45 (%) (%) 10.0 40 Loan growth YoY (LHS)No change to currency policy. The Party does not consider the 35 Required reserve ratio (LHS) M2 growth YoY (LHS) 9.0exchange rate as a tactical tool for managing short-term problems such as 30 Interest rate for one-year loans 8.0high food prices. Rather, gradually moving the currency towards a market- 25 20 7.0based equilibrium rate is considered a long-term structural adjustment. 15The renminbi is appreciating at a 5-7% annualised pace against the dollar, 10 6.0and we expect that to continue for the next couple of years. 5 5.0 Jan 04 Sep 05 Jun 07 Feb 09 Nov 10Non-food inflation. There are two factors keeping non-food prices low.First, steady gains in productivity. Second, overcapacity in most Source: CEICmanufacturing sectors severely limits the ability of firms to raise finalgoods prices.Hot money. A second round of quantitative easing in the USA has sparked Asset-price, not CPI inflationexpectations of a wave of “hot money” into emerging markets. In China, Shanghai composite index, interest rate and RRRhowever, the key will continue to be domestic liquidity. Capital-account Shanghai stock composite index (LHS) Benchmark interest rate for one-year loanscontrols make it difficult to move money into the country, and the absence Required reserve ratio 7,000 (%) 19of a significant bond market will make other emerging markets more 6,000 17attractive to many investors. 5,000 15 13 4,000Asset-price, not CPI inflation. While we expect CPI to be moderate next 3,000 11 9year, high levels of liquidity and rising income are very likely to fuel price 2,000 7rises in China’s two asset classes, equities and real estate. We note that in 1,000 52007, when rates rose seven times and the RRR was increased 10 times, Jan 07 Jul 07 Dec 07 Jun 08 Dec 08the Shanghai composite index rose from 2,800 to 5,300. If this time Source: CEICinvestors also shrug off inflation and higher rates, there is ample domesticliquidity - household bank deposits equal to US$4.4tn, larger than thecombined GDPs of Russia, India and Brazil - available to fuel a large asset-price inflation cycle.8 16 December 2010
  9. 9. Asia Themes 2011Asia - MICROSTRATEGYWhat is the key earnings risk in 2011?Rising costs and easing demand create widespread margin pressure.Margins remain a key EPS-growth driver at almost any point in the cycle.From a top-down perspective, there are some reasons to be concernedabout margins. Costs are rising, particularly raw-material and energyprices. This, and easing demand, creates widespread margin pressure.Analysts underestimating these headwinds in their bottom-up forecastscould put earnings at risk in 2011. Our India, Indonesia and Thailand Desh Peramunetillekeanalysts exhibit the most optimism in margin assumptions presently. (852) 26008293 desh.peramunetilleke@clsa.comRising costs add to margin pressure. Producer prices have risen Margin squeeze aheadsignificantly in Asia, with the Producer Price Index (PPI) outpacing the PPI/CPI relationship with Ebitda marginsConsumer Price Index (CPI). History shows that this will create major Avg PPI YoY (LHS) 12 (%) (%) 20headwinds for Ebitda margins. We expect by 2011 gross margins to hit an Avg CPI YoY (LHS) Expected 10 19all-time low as variable costs increase more than we forecast due to higher Ebitda margin 8input prices and rising wages in the region. 18 6 17Peaking operating leverage. Any decline in global growth impacts Asian 4 16earnings due to the high levels of operating leverage in the region. Given 2 15the focus on manufacturing, Asian firms tend to have high proportions of 0 (2) 14fixed costs. This means that any increase in sales goes directly to the Highier PPI (4) hurts margins (5.0) 13bottom line, so earnings growth can be spectacular when economic times 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10F 11F 12Fare good. The recovery of Asian markets in 2009 saw operating leveragepeaking at 3.1. This should see a steady decline to 1.2x in 2011, Source: CLSA Asia-Pacific Marketshighlighting the pressure on margins. EPS for our Asia ex-Japan (exfinance) universe is set to grow by 8.4% in 2011 but a 1ppt decline inmargins would see growth become negative at -1.2%.Focus on sustainable growth. Asia has long been a paradise for growth-at-a-reasonable-price (Garp) investors. However, pricing growth based onratios such as PE/G has always been a challenge given the volatility andlow reliability of EPS forecasts, especially when margin optimism in analystestimates remain a concern. One of our recent reports introducedsustainable growth as a reliable long-term measure and a key componentbehind through-the-cycle valuation analysis. Sustainable growth (SG),defined as ROE X (1 - payout ratio), is the core organic growth potential ofa company, excluding M&A and any increase in gearing. Our backtestsfurther highlight that price of sustainable growth (PSG), defined as (12-month forward PE/SG), is a better predictor of share-price performancethan PE/G for Asia. We found J-curve-driven Chindonesia® to be cheap ona PSG basis.Asia - SALES VIEWWhere to invest in Asia?Buy affluence, sell peasantry.Investors should structure their portfolio holdings to buy plays on affluenceand sell those on peasantry in 2011, in order to profit from Asia’s seriouswealth creation. Apart from higher wages, wealth will come from improvedinvestment returns, availability of leverage, new investment and consumercredit products, and less savings for non-discretionary expenses. Labour isno longer docile, but aspirational and connected. Social networks and Evelyn Moorebroadband have brought branded goods and luxury living to billions. (1) 2145288820 evelyn.moore@clsa.comBuy stocks that service emerging wealth. Margins, valuationexpansion and shareholder profits will come from companies positioned tosell to and service emerging wealth. Two decades ago, profits in Asiastemmed from first-time buyers of government housing, taxi rides, eatingout, and wardrobes beyond workplace uniforms. Today, the riches want toown the best-in-show products, to hide and insure assets, to be amongtheir own kind, to give children superior educations and to feel and look16 December 2010 9
  10. 10. Asia Themes 2011good to infinity. Buy stocks representing the best brands in discretionary Be long the yellow metalitems, land, travel, organic goods, online shopping, private transport, cool Gold pricetech gadgetry, blue-chip financial services, insurance, education and 1200 (US$/oz)healthcare, and companies focusing on broadband buildout and internet 1000mobility. Steer away from staples, utilities, bicycles and cigarette stocks.Think paintings, not paint. In sum, when choosing stocks in Asia, buy 800affluence and sell peasantry. 600Behavioural finance will rule gold and Japan trades. Therefore, be 400long gold as investors and pundits re-anchor their price target from recentall-time high of US$1,423/oz to the inflation-adjusted high of US$2,387/oz. 200When people think of something being at record highs, they are less likely 0to buy, but when they reframe on a new anchor, their loss-aversion bias Dec 44 Dec 57 Dec 70 Dec 83 Dec 96 Dec 09kicks in and they are driven to act in order to take advantage of thisapparent “deal” before the “cheap” offering of gold disappears. Ready your Source: Bloombergportfolio for the view that gold has another 68% to go before it simplymatches its real money peak of 30 years ago. Recent performance ofJapanese equities and the yen will lead equity investors to re-anchor froma view of multidecade decline to multiyear recovery.Asia - SALES VIEWDoes consumer remain the way to go?Thought-provoking insights on companies with economic moats.A CLSA salesman caught singing the praise of non-CLSA research neverendears himself to his research colleagues. At the risk of being hung out todry, my recommendation is to get hold of some of the reports boutiqueinvestment-fund managers Arisaig & Partners produces, for some provokingthought process. As they say in their consumer-sector research, ifconsumers don’t eat it, drink it, clean with it, wear it or shop in it, they do Andrew Riddicknot own it. These are the areas where cyclicality is most reduced and quality (852) 26008836of earnings most increased. andrew.riddick@clsa.comDominant Asian companies create value. Arisaig constructed a simple, Upside in Asian demandequally-weighted index of 54 Asian dominant consumer companies and Swiss-watch imports to GDPlooked at what might have happened if they had had the wisdom and 150 Swiss-watch imports (US$/capita)foresight to buy and hold these since 1 January 1997 through to 31 Hong KongDecember 2009. During a period in which the MSCI Asia ex-Japan returned 100 Singaporea net 4.2% Cagr with EPS growth of negative 0.1%, this index returned Saudi UAE31.0% Cagr with a 23.2% EPS Cagr. Consumer-staple companies in Africa 50 China Thailand Arabia Taiwan Franceand Latin America achieved similar massive outperformance over the same UK USAperiod. But not only there: as it happens, the story in the USA back in the 0 Germany1980s is just as impressive. Stocks with high "moats" (brand, distribution, 0 Russia 20,000 Spain 40,000 60,000scale) generate high ROEs, create cash and permit growth, both organic Italy Japan GDP/capita (US$)and acquisitive. ¹ Assuming 50% of exports to HK are re-exported to China. This is a meaningful adjustment to achieve asPower of compounding. The conviction in the power of compounding conservative a result as Hong Kong is the largest importerunderlies Arisaig’s research. To quote, ‘what matters more than short term of Swiss-made watches in the world (imports are 3x larger than China). The federation also bases its Chinavaluations is that we own for the long haul the alpha generating per-capita calculation on an urban population of 594mbusinesses that have what it takes to compound earnings come rain or (not 1.3bn). The data are based on annual data, collected monthly. Source: Fed of Swiss Watch Industryshine (in short: scalability, high gross margins and low capital intensity).In other words, it makes a great deal more sense to let the bestbusinesses do the heavy lifting for us than to make the mistake of trying Power of compoundingto time or finesse markets and sectors.’ Whether you agree with Arisaig or Compounded returns versus MSCI AxJnot, their research underpins such a provocative and persuasive conclusion. 450 (%) 400 15% compoundedA 15% compounded is what you need. ‘Sometimes people forget the 350simple maths: US$1m invested in a business that compounds its 300 250earnings at 15% would be worth US$16m in 20 years. This would be 200US$12m if the valuation compressed from say 25x to 18x in a straight 150 6% compounded MSCI AxJline over that period. However, US$1m invested in a fund rotating across 100 50sectors within a universe growing its earnings at say 6% (which is what 0history suggests is likely) would be worth US$3m in 20 years; and, no Dec 99 May 03 Aug 06 Dec 09doubt, less taking account of transaction costs and the inevitable Source: Bloomberg, CLSA Asia-Pacific Marketsmisjudgements along the way.’10 16 December 2010
  11. 11. Asia Themes 2011Masterly inaction. With a portfolio on 25x forward earnings, a period ofconsolidation probably beckons, while some of their research is clearly alsodesigned to be self-serving. But it offers a rock whereby to try to look atvarious investment opportunities. Increasingly I accept that the lack ofpatience and unwillingness when investing in good businesses to givethem time to do their work is one of the greatest errors of many investors.For the time being that is not something Arisaig can be criticised for. NorWarren Buffet. There is a message in this.Asia - AUTOSIs the global sector in a sweet spot?A healthy world supply/demand picture after the GM restructure.The global auto sector should remain in a sweet spot after therestructuring of General Motors. This is due to lacklustre capacityexpansion in developed markets and surprisingly strong addition in theemerging world. Healthy free-cashflow generation in Asia raises thequestion on deployment. We continue to like Kia Motors, GuangzhouAutomobile, Great Wall and Toyota in Japan. Maruti Suzuki is a toplong-term pick in India, though we are hesitant about it near term. Geoff BoydPost GM restructuring. During 2000-08, General Motors famously (65) 64167853“pushed” production into its US inventory system, forcing large incentives geoff.boyd@clsa.comto move vehicles to customers. It was trapped in a vicious circle of highfixed costs and declining market share but rising debt-service obligations. Suggests a healthier USAThe bankruptcy that followed has shed its debt and the company is acting Ford operating marginmore rationally now to allow demand to “pull” its production schedule. 8 (%)Widening margins. As a result of GM’s more rational tone, the market 6has turned more positive on the sector and consensus is forecasting 2010- 412 operating margin of 7.4% for companies like Ford. This compares with 2 0the negative 4.1% and negative 1.5% the US automakers reported for the (2)five and 10 years to 2009. We believe this indicates a better pricing (4)environment in the USA, despite the generally weaker demand this year. (6) Avg 2004-09 Avg 1999-09 Avg 2010-12FUS demand is ticking up. The overall US auto market was up 17% YoY inNovember to a 12.3m run rate, beating our 13% expectation. Industry Source: Bloombergexecutives talk about dealers seeing people who “want” to buy a car, ratherthan “need” to buy one. Some forecast 13m units of sales in 2011, while JDPowers expects 15m vehicles in 2012, both ahead of our current forecasts of Indicative of global margin trend12.5m and 13.5m. On the supply side, we see Volkswagen adding capacity Volkswagen operating marginbut not a dramatic rampup overall to disrupt the enjoyable returns. 7 (%) 6Europe also improves. Renault and Fiat represent the mass-market 5European manufacturers and we note that 2010-12 consensus margin 4estimates have improved versus history: 3.1% for Renault versus the 3 21.1% it achieved over 2004-09; 4.6% for Fiat versus 3.8%; and 8.0% for 1Daimler versus 3.3% and 9.0% for BMW versus 6.4% in recent years. An 0improved Chinese business partly explains this, but also a generally Avg 2004-09 Avg 1999-09 Avg 2010-12Fhealthy premium segment. Giant Volkswagen should also reach 5.8% Source: Bloombergoperating margin versus the 4% it achieved over the past decade.Some disparities. The Japanese companies are suffering the mostrelative to the past decade, due mostly to the strong yen. We forecastoperating margins of 1.2%, 6.0% and 6.0% for Toyota Motor (7203 JP -¥3,260 - BUY), Honda Motor (7267 JP - ¥3,170 - U-PF), and NissanMotor (7201 JP - ¥809 - U-PF) in 2011. This compares to a decadeaverage of 8.1%, 7.7% and 7.8%. We also expect demand from Europe tobe down YoY, post stimuli in key markets like Germany.China still going strong. Latest data suggest China might finish 2010 up30% YoY versus our forecast of 26% YoY from a couple months ago, and19% at the start of the year. Demand growth is outstripping capacityadditions, and this will remain the case for 2011, so we expect industrymargins to remain at healthy levels.Top picks. We like Toyota in Japan, Kia Motors (000270 KS - 51,300 won- O-PF) in Korea, as well as Guangzhou Automobile (2238 HK - HK$10.58 -BUY), SAIC Motor (600104 CH - Rmb17.21 - BUY) and Great Wall Motor(2333 HK - HK$24.80 - BUY) in China. Abhijeet Naik still likes MarutiSuzuki (MSIL IB - Rs1,413.5 - O-PF) as a long-term pick but expects it tolanguish on price wars with Toyota’s new models in India near term.16 December 2010 11
  12. 12. Asia Themes 2011Asia - BANKSWill the sector continue to outperform?Healthy credit growth, widening margins and limited provision costs.A brilliant year awaits Asian banks, with healthy credit growth, wideningmargins and limited provision costs. What’s more, Tier I ratios are highand remain liquid - which is good in the new world of Basel III. Positivestructural factors are plentiful, including limited consumer-loan penetrationand young population. We remain Overweight Asian banks, focusing onhigh-ROA, high-growth markets. Our top picks are Bank of China, Bank Daniel TabbushCentral Asia, HDFC Bank and Standard Chartered. (66) 22574631 daniel.tabbush@clsa.comCredit growth. For the highest-growth countries, credit growth is 15-25%per annum and more countries are likely to enter this range during 2011. Focus on high growthWith increased investments in India, growth will rise and increased LDR versus Loan growthcorporate facilities in Thailand will drive growth in the country. Where 10CL LDR (%) Loan growth (% YoY) India 78 25Indonesia’s banks become more aggressive at raising loan/deposit ratios Indonesia 77 22(LDR), loan growth will accelerate. China has seen its loan growth step HK 67 20 China 61 18down already, where study of our China Reality Research (CRR) team Singapore 72 17suggests it will rise marginally. But for more developed regions, including StanChart 88 12Australia, Korea and Japan, expect subpar loan volume to continue. Malaysia 83 12 Philippines 66 10Credit quality. The global financial crisis was not global, as it never really Thailand Korea 85 127 10 5hit Asia. Nonperforming loans did not rise during 2009-10, even though Taiwan 73 4Asian banks prepared for the worst, with higher provision costs. Going into Australia 131 4 HSBC 89 12011, the region’s NPLs/loans should be below pre-Asian Crisis (1997) Japan 65 (4)lows, at 2.5% versus 3.9% in 1996. Where many banks have seen 50- Average 83 1180% lower provision costs during 2010, persistently low loan-loss Source: Company reports, CLSA Asia-Pacific Marketsprovisions (LLP) will characterise 2011. With average NPL-coverage rates Key driver for Chinaat 131% on 11CL, this is in a different league to pre-Asian financial crisis, China - Non-interest income to assets, 10CLat 72%. Indonesia and the Philippines stand out, where LLP/loans remain Thailandhigh at 1.5-1.8% this year. Phils Indonesia StanChar HSBCChina’s banks. A simple chart showing share-price performance of Malaysia Avg IndiaIndonesian, Indian, Thai, Malaysian and Philippine banks during 2010 Japan Singshows no discrimination, with a 55% increase. Adding China to the chart Taiwan Australia HK (%)leads to anomaly in performance, up 10% during the year. And yet, there China Koreaare many similarly positive structural features, no NPL formation, 17-20% 0.0 0.5 1.0 1.5 2.0 2.5ROE and 1.2-1.5% ROA. Performance has been frustrating in 2010, butwith far less in the way of regulatory risk, good NPL trends and still good Source: Company reports, CLSA Asia-Pacific Marketsprofit growth, China’s banks will shine in 2011. Continue to improveStanChart and HSBC. The big shock in 2011 for Standard Chartered StanChart CB - Fee income vs loan growth(2888 HK - HK$217.60 - BUY) will be its consumer-banking (CB) Fee growth (LHS) 50 (%) (%) 120transformation, where the income delta has been negative for two years. Loan growth 100 40While wholesale banking remains strong, credit costs low, meaningful 80 30growth in CB will drive 14% EPS growth. HSBC’s (5 HK - HK$81.95 - O-PF) 60 20 40ROA should see the best improvement among major Asian banks, from 2025bps in 2009 to 85bps in 11CL, and 2010 should mark the first year of 10 0more normal credit costs. An improved focus on commercial banking in 0 (20) 01A 02A 03A 04A 05A 06A 07A 08A 09A 10CLAsia and Hong Kong will support revenue, allowing for total EPS growth of29% in 11CL. Source: Company reports, CLSA Asia-Pacific MarketsROA and recommendations. Countries with higher ROAs typically O-WT on higher returnsperform better and we doubt that will change in 2011. This is a key reason Change in ROA, 11CL versus 10CLfor our Overweight stance on markets with higher returns. When we Korea HSBClooked at actual stock performance over the past 15 years, the bank Taiwan StanChar Thailandbasket of high-ROA countries only underperformed in just one year. This Asia avg Singcompares with five years of underperformance for high-ROE countries. We Japan Malaysia Philsare Overweight China, Indonesia, India, Hong Kong, Thailand, Malaysia China Australia Indiaand the Philippines, and Underweight Japan, Australia, Korea, Singapore HK Indonesia (%)and Taiwan. Our top stock picks are Bank of China (3988 HK - HK$4.22 - 0 10 20 30 40 50BUY), Bank Central Asia (BBCA IJ - RP6500 - O-PF), HDFC Bank (HDFCBIB - RS2236.1 - BUY) and StanChart. Source: CLSA Asia-Pacific Markets12 16 December 2010
  13. 13. Asia Themes 2011Asia - CONSUMERWill Asian Boomers ride high?Chindonesian consumers remain upbeat amid wage inflation.China, India and Indonesia’s (Chindonesia®) consumer sectors shouldexhibit J-curve hypergrowth over the next five to 10 years on risingincomes and propensity to consume and take risks. Even in the face ofslower global growth, their consumers remain upbeat and will benefit fromstrong liquidity inflows and wage inflation in 2011. Our top picks are AirChina, Baidu, Bank of China, Cathay Pacific, HDFC Bank, Evergreen, Aaron FischerWant Want, Parkson Retail, Sands China, Wynn Macau and SAIC. (852) 26008256 aaron.fischer@clsa.comRise of the middle class. We estimate that the middle class makes up19% of Asia ex-Japan’s population, and that should rise to 30% in fiveyears, or an 11% Cagr. The aggregate number of those in the region’smiddle class will increase from 570m currently to 945m by 2015. Chinawill account for two-thirds of the new members, while Chindonesia® willrepresent 90% of the 375m increment. We expect the social cluster’sconsumption spending to increase from US$2.9tn to US$5.1tn over thisperiod. For more of our analysis, see our spring report, Mr & Mrs Asia -Moving up the J-curves.High aspirations, though grounded in reality. This autumn, we Anirudha Duttarevisited the Chinese, Indian and Korean respondents in our 20 20 20 (91) 2266505056project in 2005. Now 25 years old, our 20 20 20s have certainly moved anirudha.dutta@clsa.comahead: most are now working, many of them outside their home countries- and also spending. Despite the financial crisis, they remain optimisticoverall and confident about the future - not only for themselves, but theircountries. That said, they clearly have a more mature and balanced viewthan they did in 2005.Responsible hedonists. Now that most of our 20 20 20s are finallyearning a wage, they spend a good deal of it. This is clearly a generationof “baby” consumer Boomers. But whereas brand awareness is high(particularly for electronics), brand loyalty is not (especially when it comesto clothing and sports goods). Pragmatism rules and the brands must beseen to offer value. Our 20 20 20s may be consumer Boomers, but they’renot spendthrifts. Most manage to save a significant amount of theirearnings, typically with the aim of buying big-ticket items such as cars andtravel, and eventually a home of their own (except in Korea, where rentingis the norm).Moving up the J-curves. Some key trends of this generation: low loyaltyto brands; high savings rate but not financially savvy; increasinglypurchasing everything online; and priority areas of spend are travel, houseand car. Key sectors to benefit from the growing consumption would beonline travel companies, airlines, hotels, real estate, retail financialservices, automotive plays and companies earning the loyalty of thisgeneration by building strong franchisees. Global brands that have astrong resonance with this generation are Apple (i-Whatever), Canon(7751 JP - ¥4,080 - BUY), Nokia, Samsung Electronics (005930 KS -929,000 won - O-PF) and Sony (6758 JP - ¥2,988 - BUY).Top picks and risks. We project hypergrowth in discretionary spendingon autos, transport and tech, while telecoms should see a more moderateincrease. Travel and buying a house are among the top priorities for theAsian Boomers. Our top consumer plays include Air China (753 HK -HK$8.88 - BUY), Baidu (BIDU US - US$106.62 - BUY), Cathay Pacific (293HK - HK$23.70 - O-PF), HDFC Bank (HDFCB IB - RS2236.1 - BUY),Evergreen (238 HK - HK$5.45 - BUY), Want Want China (151 HK -HK$6.76 - BUY), Parkson Retail (3368 HK - HK$12.86 - BUY), Sands China(1928 HK - HK$16.58 - BUY), Wynn Macau (1128 HK - HK$17.06 - BUY)and SAIC Motor (600104 CH - RMB17.21 - BUY). However, rising interestrates and policy intervention could impact high-value discretionaryspending in 2H11.16 December 2010 13

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