- The author expects Asia to enter an asset bubble if US interest rates take a long time to normalize due to the subpar US economic recovery. - A weak US recovery means the Federal Reserve will continue its easy monetary policy, fueling asset inflation in Asia, particularly in China. - The US bond market signals continued weakness in the US economy as Treasury yields remain well below their 2010 high. This suggests the US recovery remains lackluster. - Asia, especially China, is likely to be the epicenter of an asset bubble as long as Western monetary policy stays extremely accommodative due to weak Western growth and consumption.

1. Asia Themes 2011
Best ideas in Asian equities
16 December 2010
Trendlines (As at 15 Dec) What to watch for?
Large-cap BUYs with Anirudha Dutta
Baidu BIDU US
Bank of China 3988 HK
China Construction Bk 939 HK
China Mobile 941 HK We expect more of the same in 2011: Western economic growth
China Telecom 728 HK disappointments, reflation of Asian assets and more intervention to curb
Infosys INFO IB
inflation. Earnings growth should moderate sharply after a sterling 2010, while there is
PetroChina 857 HK
Ping An Insurance 2318 HK headroom for a rerating of Asia ex-Japan valuations, currently near 20-year means. Chris
Standard Chartered 2888 HK Wood remains sanguine with expectations of an asset bubble in Asia supporting his
Tencent 700 HK
Large-cap SELLs
Overweight stance on the region for now. Russell Napier warns of more government
BYD 1211 HK interference as the belief that markets have failed will spur politicians to establish their
Cathay Financial 2882 TT primacy over the world of finance. Capital controls are now just a matter of time. Eric
Chalco 2600 HK
CNOOC 883 HK Fishwick also expects tightening in 2H11, as well quicker Asian domestic consumption and
LG Electronics 066570 KS construction activity thanks to QE2. From China, Andy Rothman hopes that inflation will
Mega Financial 2886 TT
PICC 2328 HK
moderate as both monetary policy and weather conditions normalise. Sector themes
S-Oil 010950 KS include: stronger credit growth for banks; reviving consumption; strength in enterprise
Telkom Indonesia TLKM IJ spending on tech; return of revenue growth for telcos; resources M&As. Meanwhile, Amar
Zijin Mining 2899 HK
Gill identifies a few ROIC-Ebit/EV gems. By market, look for companies taking advantage
Valuations above mean of China’s various advances; best-managed Indian firms that leverage rising commodity
MSCI 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 Asia's 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
10
Source: 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, he
Asia: Autos; Banks;
believes equities and real-estate prices will surge on increasing wealth. Ample domestic
Consumer; 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 inflow
Australia: 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 500
A shares % YoY (RHS)
investment themes and ideas for 2011. Desh expects 25,000 400
Hong Kong: Property 20,000 300
rising costs to put pressure on margins, with India, 15,000 200
India: Market; Economics; Indonesia and Thailand most at risk. Amar’s high- 10,000 100
Politics
ROIC-EV/ Ebit screen has so far worked well in locating 5,000 0
Japan: Market 0 (100)
outperformance. And for the long-term believers in our
Malaysia: Market
India
Phil
Thailand
Taiwan
Pakistan
Indo
Vietnam
Japan
Korea
Billion Boomers story, Andrew and Evelyn recommend
Singapore: Market buying into plays that serve the growing
Thailand: 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 Markets
www.clsa.com
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor® proprietary database at clsa.com

2. Asia Themes 2011
Contents
What are the themes for 2011? Which stocks might get discovered?
Introduction by Anirudha Dutta ........................... 3 Asia thematics by Amar Gill .............................. 18
How does Asia's asset bubble play out? Seeking Asian exposure without EM risk?
Global strategy by Christopher Wood ................... 4 Australia market by Scott Ryall ......................... 18
Will the free movement of capital survive? How do you fight hot money?
Global strategy by Russell Napier ........................ 5 China strategy by Francis Cheung ...................... 19
What does QE2 mean for Asia? How to play to become No.1?
Global economics by Eric Fishwick ....................... 6 China market by Danie Schutte ......................... 20
Will inflation rise further? Will small still be beautiful?
China strategy by Andy Rothman ........................ 7 China A shares by Manop Sangiambut ................ 21
What 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 .................. 22
Where to invest in Asia? Commodity curse in 2011?
Asia sales view by Evelyn Moore ......................... 9 India market by N Krishnan .............................. 23
Does consumer remain the way to go? Will the investment upturn lose steam?
Asia sales view by Andrew Riddick ..................... 10 India economics by Rajeev Malik ....................... 24
Is the global sector in a sweet spot? Is politics a risk?
Asia autos by Geoff Boyd ................................. 11 India politics by Anirudha Dutta......................... 25
Will the sector continue to outperform? Is there “good” and “bad” inflation?
Asia banks by Daniel Tabbush........................... 12 Japan market by Andreas Schuster .................... 26
Will Asian Boomers ride high? Will the nation push meaningful reforms?
Asia consumer by Aaron Fischer, Anirudha Dutta . 13 Malaysia market by Clare Chin .......................... 27
How 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 ................ 28
Will 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 .......................... 29
Can data push revenue growth? Will the Rabbit leap into a wall?
Asia telecoms by Elinor Leung........................... 16 Asia Feng Shui by Philip Chow ........................... 29
Is Asia becoming more responsible? How did our 2010 predictions fare?
Asia social responsibility by Simon Powell ........... 17 Asia review by Amar Gill ................................... 30
Related reports to key themes
2 16 December 2010

3. Asia Themes 2011
Asia - INTRODUCTION
What are the themes for 2011?
Remain Overweight Asia.
Next year is likely to be similar in many ways to 2010, but watch for increased
policy risks. The recovery in the West remains anaemic and the USA is still in
a deflationary mode. Asian asset prices will continue to inflate as long as the
region is coupled to US monetary policy. Hence, we are likely to see more
government intervention in Asia even as inflation remains stubbornly high. For
now, we are Overweight the region. We provide insights from our strategists Anirudha Dutta
and research/sector heads in the following pages. (91) 2266505056
anirudha.dutta@clsa.com
Macro 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
1
Sectors - 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 Markets
Markets 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: Datastream
16 December 2010 3

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 earnings
growth to sharply moderate from 42.3% this year to 13.6% in 2011. The
12-month forward PE, at 12.1x, suggests valuations are not yet demanding
in the aggregate. We estimate strong free-cashflow growth of 98% for next
year. This, coupled with reasonable valuations, should provide upside to
regional markets even as EPS growth slows. Our strategists remain
Overweight Asia, while being cognisant of the risks, particularly from
government action. Meanwhile, according to our new Feng Shui master, the
year of the Metal Rabbit can be quite unpredictable, if history is any guide.
Global - STRATEGY
How does Asia's 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; hence
the Federal Reserve’s willingness to embark on QE2. The US bond
market continues to signal a subpar recovery. The more anaemic the
Western recovery proves to be, the longer it will take for Western
interest rates to normalise and so the more likely it will be that Asia
enters into an asset bubble. Christopher Wood
Unhealthy US recovery. By the first half of 2011, it should become (852) 26008516
christopher.wood@clsa.com
apparent whether US consumption and employment are really normalising.
The view here is that neither will recover healthily. This also seems to be
the message from the US government-bond market, which has remained
relatively well bid, despite the ongoing rally in the S&P500 amid rising
optimism. Indeed the 10-year Treasury bond yield is still 117bps lower Bond yield still below April high
than the 2010 high reached in April. In this sense, the US bond market S&P500 and US 10-year Treasury bond yield
continues to send an entirely different message from the US stockmarket.
1,500 S&P500 (LHS) (%) 4.5
Asian asset bubble . . . China is likely to be the epicentre of an Asian 1,400 US 10-year Treasury bond yield
4.0
bubble. The situation in the West is critical in terms of how the Asian cycle 1,300
evolves. Western policy is likely to remain super-easy because of the 1,200
3.5
lacklustre outlook for consumption and employment in an American 1,100
economy, where consumption still accounts for 70.4% of total nominal 1,000
3.0
GDP and 88.5% of nominal private-sector GDP. Another reason for policy 900
remaining super-easy in the West is the potentially systemic issue of 800 2.5
Euroland sovereign debt. 700
600 2.0
. . . and tightening policies. Asian governments and central banks are Jan 08 Dec 08 Dec 09 Dec 10
going to have to be very aggressive if they really want to head off the risk
of an asset bubble in an environment where Western monetary policy Source: Datastream, Bloomberg
stays so easy. Such an aggressive approach is theoretically possible in
terms 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 Asia
continue primarily to address symptoms of the bubble risk, such as higher MSCI AC Asia ex-Japan relative to MSCI AC World
property prices, not the cause of it.
300 (Jan 1988=100)
Renminbi appreciation. One important aspect of this potential Asian
policy response remains Chinese currency policy. For now the view here 250
remains that China will allow only an incremental appreciation of 5-7% per
year. Still, the political noise on the Chinese exchange-rate issue is likely 200
to escalate next year if the US labour market continues to be unhealthy.
150
Remain Overweight Asia. The extremely easy monetary policy in the
West remains a perfect ingredient for an asset bubble in Asia, which is 100
an argument for now to remain Overweight on the region. From a
50
longer-term perspective, the other side of an asset bubble in Asia, with
1988 1995 2003 2010
China at its epicentre, is a deflationary bust. This is why it is correct to
say that an extended period of near-zero rates in the USA has the Source: Datastream
potential to destabilise Asia in the sense that the long-term healthy
4 16 December 2010

5. Asia Themes 2011
domestic demand story anticipated in the original Billion Boomers
report (The Real Pacific Century - Asia’s Billion Boomers, September
2002) is fast-forwarded into a boom-bust cycle. Still, it is a positive
that the Chinese leadership, as well as other Asian governments,
understands this risk and will be seeking to counter it.
Global - STRATEGY
Will 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 finance
reverses the assertion of Thatcherism that ‘you can’t buck the market.’
Government retreat from the marketplace and a long disinflation
dramatically lifted the secondary-market valuation of capital from 1982 to
2000. We need to realise that we are faced with governments stepping
back into the marketplace and the end of that disinflation - a combination Russell Napier
that should structurally reduce secondary-market valuations for capital. (44) 1316549830
russell.napier@clsa.com
Merkelism is a convenient label. However, it is not confined to the ex-
members of the Free German Youth Movement of the German
Democratic Republic. Merkelism is a global movement forced upon
politicians by perceived market failures. Of course, many of these failures
stem from government intervention, most notoriously the refusal of
China to permit exchange-rate revaluation, but this is irrelevant in the
reactionary world, which is politics. Merkelism will have many
manifestations; the key one for investors will be that politicians will seek
‘I won’t let up on this because otherwise
solutions to Greenspan’s flaw. The flaw, as the Maestro outlined in that primacy of politics over finance can’t
testimony before Congress, is that the ‘enlightened self-interest’ of the be enforced,’ Angela Merkel, Chancellor of
private sector cannot correctly determine the appropriate level of credit Germany
for an economy. This is now the job of the authorities.
‘Primacy of politics over finance’. Anyone serious in asserting this
needs to make capital as sluggish and inflexible as labour and government.
The superior speed of capital has allowed it to arbitrage labour and
government and thus asserted the primacy of finance over politics. Capital
controls, whether introduced proactively in a Merkelist conversion or
reactively in a crisis, are now just a matter of time.
Capital controls - A barrier to arbitrage. The emerging-market Merkelists Current account directs economic adjustment
believe that they will be able to target interest rates, thus credit, and their Brazil’s financial and current accounts
exchange rates simultaneously. The emerging-market authorities are 25 (US$bn)
Financial account
marching down this route to avoid the credit bubble they suffered in the mid- 20
Current account
1990s and the US endured for the past decade or more. Such controls are
15
likely to be insufficient to control credit and defeat inflation and this will
inevitably lead the Merkelists to seek to more directly control bank credit. 10
Almost certainly one day they will have to follow Volcker rather than Merkel 5
and attack their endemic inflation problems with interest rates and abandon
0
the attempt to ‘whip inflation now’ with administrative measures. This
approach 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
95
emerging-market authorities to Merkelism rather than monetarism. As with
the USA in the 1970s, monetarism is a medicine too strong for all but those Source: Datastream
already weakened by a prolonged period of Merkelism.
Merkelism will spread. Most investors will be surprised that the
Merkelist drive to assert the ‘primacy of politics over finance’ will also
inflict Asia. Forecasting its spread within Europe is much less contentious.
When all else fails, Merkelism can save the euro but at the expense of the
free movement of capital and by cajoling private-sector savings into
public-sector debt. Many might see such a move as imminent as the fiscal
glue to cement the euro as it melts in the heat of Spain. This might be true
but ignores that fact that when the fiscal arbitrage that passes good credit
to bad credits reaches its limit, there is another solution in reserve. The
monetisation of European sovereign debt by the European Central Bank
(ECB) will save the euro.
16 December 2010 5

6. Asia Themes 2011
Markets versus central banks. Markets can take on and defeat USA as an anti-Merkelist bastion
governments whose fire power is limited to the funds they can extract Gross Federal debt as a portion of GDP
from 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 120
believe that the ECB would never pull this rabbit out of a hat because once
100
upon a time, in 1923, another European central bank tried a similar trick.
However, with the failure of the commercial banking system of Europe 80
assured, if the euro fails then the ECB will have to follow the Fed and the 60
Bank of England to defeat the markets. If the ECB saves the euro then
40
Merkelism need not. However, it will not be held in abeyance for long.
Once we thought Merkelism would appear to save the sovereign debt of 20
Portugal, Ireland, Greece and Spain. Of course, if the ECB saves them, 0
then one day Merkelism will appear but to save the sovereign debt of 1940 1952 1964 1976 1987 1999 2011E
Germany itself.
Source: whitehouse.gov
Will 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 any
movement towards the capital controls that would restrict the injection of
foreign savings, which send it to work every morning. This resistance may
even attract more capital as capital considers the balance between politics
and finance to be in its favour in the USA. However, the primacy of finance
in the USA is not some cunning legacy of Alexander Hamilton, but a result
of a society addicted to the easiest money of all - the easy money called
the reserve currency. Even the USA will question the primacy of finance
when it realises that finance is not always cheap and readily available.
That day for America will dawn when Volcker comes to Asia. When the
emerging markets are forced to attack their endemic inflation with high
interest rates and flexible exchange rates, then the USA will have to pay
the real cost of finance. It is a price that it arguably has not paid for a
century and at least not since the seventies. Emerging-market savings will
no longer be on tap and US Treasury yields will soar. Then, and probably
only then, will the USA be forced to impose capital controls, assert the
primacy of politics over finance and bring Merkelism to America.
Global - ECONOMICS
What 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 see
credit growth and accelerating domestic consumption and construction activity
in 2011. But GDP growth will be slower amid weak world trade. Malinvestment
resulting from emerging-market monetary policy internationalising QE2 will
define the end-game for this cycle, but the party could last several years. The
more immediate problem is consumer-price inflation. We expect Asian Eric Fishwick
monetary authorities to start tightening in 2H11. (852) 26008033
eric.fishwick@clsa.com
The “Bernanke put”. QE2 will drive down the cost of capital on a global
scale. It will accelerate credit cycles in those countries in which, as a result
of interest-rate and exchange-rate practices, import US liquidity. This
includes most of Asia. Next year is likely to see credit growth and domestic
Importing US liquidity
construction activity accelerate. Most of Asia is export-driven, so in the
Aggregate Asian forex reserves
weak-world-trade environment that we expect for 2011 GDP growth will be
slower than this. But consumption and investment will be stronger than 5.0 (US$tn) (US$tn) 2.0
previous 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 1.4
economic forecast makes it a certainty that the US will extend QE2 into
3.0 1.2
2H11 and potentially beyond.
2.5 1.0
Don’t overplay euro weakness. QE2 will generate liquidity flows into 2.0 0.8
risk assets far greater than the Fed’s direct purchases of Treasuries if it 1.5 0.6
1.0 0.4
makes the US dollar appear a risk-free short. At the moment, this is not
0.5 0.2
the case as the euro is contaminated by sovereign-risk concerns. Event
0.0 0.0
risk in the euro will dissipate only by Portugal and likely Spain following 2004 2005 2006 2007 2008 2009 2010
Ireland and Greece in accessing International Monetary Fund and
European Union funding. So doing will require aggressive austerity Source: Datastream, CEIC, CLSA Asia-Pacific Markets
6 16 December 2010

7. Asia Themes 2011
measures vindicating a pessimistic outlook for EU growth. As the bailout Credit decoupling Asia
pacts are progressively triggered for Portugal and finally for Spain, liquidity Real GDP forecasts
risk overhanging the euro will dissipate. As this happens, the currency 2009 2010CL 2011CL 2012CL
should again start to outperform the dollar. Australia 1.3 2.7 3.9 3.6
China 9.1 10.2 8.9 9.5
Asia a soft-currency region in 2011. With export growth already under Hong Kong (2.8) 7.0 5.4 4.3
pressure and China unwilling to allow anything more than a cosmetic India 7.4 8.8 8.3 9.0
appreciation of the yuan, Asia as a whole in 2011 will be a soft-currency
Indonesia 4.5 5.9 5.7 6.0
region. Exchange rates will appreciate versus the US dollar but only
Korea 0.2 6.4 5.1 5.4
because the latter is even weaker. Asian currencies will fall relative to
Malaysia (1.7) 6.7 4.3 4.5
physical stores of value (gold and commodities in general), freely floating
Philippines 1.1 7.0 4.8 5.3
commodity currencies (the Australian and New Zealand dollars) and, as
Singapore (1.3) 15.0 4.0 5.0
sovereign risk dissipates, the euro.
Taiwan (1.8) 10.2 5.1 4.1
Asia coupled to US monetary policy. In Asia, QE2 will appear as a Thailand (2.3) 7.7 4.0 4.7
reduced cost of capital as underleveraged banks try to raise loan/deposit
ratios (LDRs). The return on savings will also fall (especially in real terms). Memo: USA (2.6) 2.8 1.8 1.1
With cyclical (export) sectors weak, liquidity will pool in property markets. Memo EU (3.6) 1.1 0.0 0.5
The combination of QE2 and Asian monetary policy will support both China is a small upward revision. Recent PMI data
domestic 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 CY
pressure, Asian economies will appear finally to have decoupled from world- number up about 0.5ppts. I'll characterise as 8-9% in the
trade flows. Our forecasts for 2011 are slower than 2010 but far from text. Source: CLSA Asia-Pacific Markets
pessimistic given our US and EU assumptions. Asia will have decoupled, but
only by virtue of remaining intimately coupled to US monetary policy.
Inflation will rise in Asia. On the street, liquidity is likely to be most
visible as persistent upward pressure on property prices. Consumer-price
inflation is already appearing in Asian inflation statistics today. Asia, like
most emerging markets, is vulnerable to rising food prices because of the
large weight of unprocessed food in Consumer Price Indices (CPIs).
Inflation has started to rise across Asia and we expect headline rates to
rise further as QE2 continues.
Asia will become more “Chinese”. QE2 has the potential to make the Rerun of 2008 inflation, for longer
most 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 Overall
attempts to control banks’ ability to lend will characterise 2011. There is 14 Food
Non-food
also likely an increase in the use of capital controls to restrict inflows into 12
monetary systems at source, as is the case in China (which is therefore 10
8
one of the countries best able to handle them). And in 2011 we would
6
expect the rest of the region to become more “Chinese” in how it
4
administers banking systems.
2
Tightening will occur in second half. Eventually, Asian monetary 0
authorities will be forced to react. But historical precedent, both in how (2)
2003 2004 2005 2006 2007 2008 2009 2010
they respond to terms of trade shocks and their willingness to raise rates
while US rates remain low, suggests that interest rates and exchange rates Source: CEIC, CLSA Asia-Pacific Markets
will lag inflation. By end-2011, we expect interest rates to be raised and
attitudes towards currency appreciation to be more open. But it will have
taken inflation rates at or around 10% to have caused the shift.
China - STRATEGY
Will inflation rise further?
CPI to moderate next year as climate and monetary policy normalise.
Inflation in China is primarily a weather-driven phenomenon, with
monetary policy playing a supporting role. As these factors normalise next
year, 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 high
levels of liquidity and rising income to fuel price surges in the country’s
two asset classes - equities and real estate. Andy Rothman
(86) 2123066000
Largely bad weather. The primary driver of CPI inflation has been bad
andy.rothman@clsa.com
weather across the country, leading to a sharp fall in fresh vegetable and
fruit supplies. Food accounted for 74% of the November CPI rise, while
16 December 2010 7

8. Asia Themes 2011
residence expenses contributed another 18%. Ninety-two percent of the
headline CPI increase came from just those two categories. We are not
arguing that the sharp rise in the growth rate of money supply has had no
Sinology
China Macro Strategy
inflationary impact, but monetary conditions account for only a small share
of the CPI surge.
Fresh veggies and fruit the key driver
It isn’t always money. Core CPI was only 1.5% in November. The sharp CPI-Food, CPI-Fresh veggie and CPI-Fresh fruit
fall in money velocity has largely neutralised last year’s dramatic increase 135 (% YoY) CPI-Food
in money supply. Monetary policy accounts for only a small share of the 130 CPI-Fresh vegetable
CPI increase, and the growth rate of money supply is normalising. 125
CPI-Fresh fruit
120
Social unrest. Higher food prices are unlikely to result in social instability.
115
The key factor is that a decade of rapidly rising income has left Chinese far
110
better equipped than many of their emerging-market counterparts to
105
manage higher food prices.
100
Higher rates. Beijing is once again using administrative measures to cool Jan 10 Mar 10 Jun 10 Aug 10 Nov 10
off inflation. But as was the case in 2008, we don’t expect the Party to Source: CEIC
freeze food prices. The Communist Party will keep raising interest rates
until food prices cool off. This means two to three more 25bp increases are
likely by mid-2011. Lending and one-year deposit rates should rise in
Higher reserve requirement
tandem.
CPI-Food and RRR
Higher RRR. Bank reserve-requirement ratios (RRRs) will also rise with 125 (%) 20
CPI, but as with interest rates, this is primarily a political signal that will 120
CPI-Food 18
have little impact on food prices or bank lending. Demand for credit will RRR (RHS) 16
115
remain strong, and supply is controlled by quota. With the system-wide 14
110 12
loan/deposit ratio still at about 66%, well below the 75% ceiling, very few 10
105
banks will find their lending constrained by a much higher RRR. 8
100 6
Not significant tightening. Higher real rates and RRR will have little 95 4
impact on the economy or on the housing market, and do not foreshadow Jan 04 Sep 05 Jun 07 Feb 09 Nov 10
significantly tighter monetary policy next year. New lending will be very
Note: non-food inflation before 2005 is based on
low in December as the Party sticks close to its full-year target, but in estimate. Source: CEIC
2011 loans outstanding is likely to rise by 14-15%, near the average
annual rate of 15.7% during the five pre-stimulus years.
FAI will stay strong. Nominal fixed-asset investment (FAI) growth, No significant tightening
which drives commodities demand, will normalise at about 25% YoY this RRR, interest rate, M2 and loan growth
year 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)
9.0
exchange rate as a tactical tool for managing short-term problems such as 30 Interest rate for one-year loans 8.0
high food prices. Rather, gradually moving the currency towards a market- 25
20 7.0
based equilibrium rate is considered a long-term structural adjustment.
15
The renminbi is appreciating at a 5-7% annualised pace against the dollar, 10
6.0
and we expect that to continue for the next couple of years. 5 5.0
Jan 04 Sep 05 Jun 07 Feb 09 Nov 10
Non-food inflation. There are two factors keeping non-food prices low.
First, steady gains in productivity. Second, overcapacity in most Source: CEIC
manufacturing sectors severely limits the ability of firms to raise final
goods prices.
Hot money. A second round of quantitative easing in the USA has sparked Asset-price, not CPI inflation
expectations of a wave of “hot money” into emerging markets. In China, Shanghai composite index, interest rate and RRR
however, the key will continue to be domestic liquidity. Capital-account Shanghai stock composite index (LHS)
Benchmark interest rate for one-year loans
controls make it difficult to move money into the country, and the absence Required reserve ratio
7,000 (%) 19
of a significant bond market will make other emerging markets more 6,000 17
attractive to many investors. 5,000 15
13
4,000
Asset-price, not CPI inflation. While we expect CPI to be moderate next 3,000
11
9
year, high levels of liquidity and rising income are very likely to fuel price 2,000 7
rises in China’s two asset classes, equities and real estate. We note that in 1,000 5
2007, when rates rose seven times and the RRR was increased 10 times, Jan 07 Jul 07 Dec 07 Jun 08 Dec 08
the Shanghai composite index rose from 2,800 to 5,300. If this time Source: CEIC
investors also shrug off inflation and higher rates, there is ample domestic
liquidity - household bank deposits equal to US$4.4tn, larger than the
combined GDPs of Russia, India and Brazil - available to fuel a large asset-
price inflation cycle.
8 16 December 2010

9. Asia Themes 2011
Asia - MICROSTRATEGY
What 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 concerned
about margins. Costs are rising, particularly raw-material and energy
prices. This, and easing demand, creates widespread margin pressure.
Analysts underestimating these headwinds in their bottom-up forecasts
could put earnings at risk in 2011. Our India, Indonesia and Thailand Desh Peramunetilleke
analysts exhibit the most optimism in margin assumptions presently. (852) 26008293
desh.peramunetilleke@clsa.com
Rising costs add to margin pressure. Producer prices have risen Margin squeeze ahead
significantly in Asia, with the Producer Price Index (PPI) outpacing the PPI/CPI relationship with Ebitda margins
Consumer Price Index (CPI). History shows that this will create major Avg PPI YoY (LHS)
12 (%) (%) 20
headwinds for Ebitda margins. We expect by 2011 gross margins to hit an Avg CPI YoY (LHS)
Expected
10 19
all-time low as variable costs increase more than we forecast due to higher
Ebitda margin
8
input prices and rising wages in the region. 18
6
17
Peaking operating leverage. Any decline in global growth impacts Asian 4
16
earnings due to the high levels of operating leverage in the region. Given 2
15
the focus on manufacturing, Asian firms tend to have high proportions of 0
(2) 14
fixed costs. This means that any increase in sales goes directly to the Highier PPI
(4) hurts margins (5.0) 13
bottom line, so earnings growth can be spectacular when economic times
98A
99A
00A
01A
02A
03A
04A
05A
06A
07A
08A
09A
10F
11F
12F
are good. The recovery of Asian markets in 2009 saw operating leverage
peaking at 3.1. This should see a steady decline to 1.2x in 2011, Source: CLSA Asia-Pacific Markets
highlighting the pressure on margins. EPS for our Asia ex-Japan (ex
finance) universe is set to grow by 8.4% in 2011 but a 1ppt decline in
margins 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 on
ratios such as PE/G has always been a challenge given the volatility and
low reliability of EPS forecasts, especially when margin optimism in analyst
estimates remain a concern. One of our recent reports introduced
sustainable growth as a reliable long-term measure and a key component
behind through-the-cycle valuation analysis. Sustainable growth (SG),
defined as ROE X (1 - payout ratio), is the core organic growth potential of
a company, excluding M&A and any increase in gearing. Our backtests
further highlight that price of sustainable growth (PSG), defined as (12-
month forward PE/SG), is a better predictor of share-price performance
than PE/G for Asia. We found J-curve-driven Chindonesia® to be cheap on
a PSG basis.
Asia - SALES VIEW
Where to invest in Asia?
Buy affluence, sell peasantry.
Investors should structure their portfolio holdings to buy plays on affluence
and sell those on peasantry in 2011, in order to profit from Asia’s serious
wealth creation. Apart from higher wages, wealth will come from improved
investment returns, availability of leverage, new investment and consumer
credit products, and less savings for non-discretionary expenses. Labour is
no longer docile, but aspirational and connected. Social networks and Evelyn Moore
broadband have brought branded goods and luxury living to billions. (1) 2145288820
evelyn.moore@clsa.com
Buy stocks that service emerging wealth. Margins, valuation
expansion and shareholder profits will come from companies positioned to
sell to and service emerging wealth. Two decades ago, profits in Asia
stemmed from first-time buyers of government housing, taxi rides, eating
out, and wardrobes beyond workplace uniforms. Today, the riches want to
own the best-in-show products, to hide and insure assets, to be among
their own kind, to give children superior educations and to feel and look
16 December 2010 9

10. Asia Themes 2011
good to infinity. Buy stocks representing the best brands in discretionary Be long the yellow metal
items, land, travel, organic goods, online shopping, private transport, cool Gold price
tech gadgetry, blue-chip financial services, insurance, education and 1200 (US$/oz)
healthcare, and companies focusing on broadband buildout and internet
1000
mobility. Steer away from staples, utilities, bicycles and cigarette stocks.
Think paintings, not paint. In sum, when choosing stocks in Asia, buy 800
affluence and sell peasantry.
600
Behavioural finance will rule gold and Japan trades. Therefore, be
400
long gold as investors and pundits re-anchor their price target from recent
all-time high of US$1,423/oz to the inflation-adjusted high of US$2,387/oz. 200
When people think of something being at record highs, they are less likely
0
to buy, but when they reframe on a new anchor, their loss-aversion bias
Dec 44 Dec 57 Dec 70 Dec 83 Dec 96 Dec 09
kicks in and they are driven to act in order to take advantage of this
apparent “deal” before the “cheap” offering of gold disappears. Ready your Source: Bloomberg
portfolio for the view that gold has another 68% to go before it simply
matches its real money peak of 30 years ago. Recent performance of
Japanese equities and the yen will lead equity investors to re-anchor from
a view of multidecade decline to multiyear recovery.
Asia - SALES VIEW
Does consumer remain the way to go?
Thought-provoking insights on companies with economic moats.
A CLSA salesman caught singing the praise of non-CLSA research never
endears himself to his research colleagues. At the risk of being hung out to
dry, my recommendation is to get hold of some of the reports boutique
investment-fund managers Arisaig & Partners produces, for some provoking
thought process. As they say in their consumer-sector research, if
consumers don’t eat it, drink it, clean with it, wear it or shop in it, they do Andrew Riddick
not own it. These are the areas where cyclicality is most reduced and quality (852) 26008836
of earnings most increased. andrew.riddick@clsa.com
Dominant Asian companies create value. Arisaig constructed a simple, Upside in Asian demand
equally-weighted index of 54 Asian dominant consumer companies and Swiss-watch imports to GDP
looked at what might have happened if they had had the wisdom and
150 Swiss-watch imports (US$/capita)
foresight to buy and hold these since 1 January 1997 through to 31 Hong Kong
December 2009. During a period in which the MSCI Asia ex-Japan returned 100
Singapore
a net 4.2% Cagr with EPS growth of negative 0.1%, this index returned Saudi
UAE
31.0% Cagr with a 23.2% EPS Cagr. Consumer-staple companies in Africa 50 China
Thailand Arabia Taiwan France
and Latin America achieved similar massive outperformance over the same UK
USA
period. But not only there: as it happens, the story in the USA back in the 0
Germany
1980s is just as impressive. Stocks with high "moats" (brand, distribution, 0
Russia
20,000
Spain
40,000 60,000
scale) 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 as
Power of compounding. The conviction in the power of compounding conservative a result as Hong Kong is the largest importer
underlies 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 China
valuations is that we own for the long haul the alpha generating per-capita calculation on an urban population of 594m
businesses 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 Industry
shine (in short: scalability, high gross margins and low capital intensity).
In other words, it makes a great deal more sense to let the best
businesses do the heavy lifting for us than to make the mistake of trying Power of compounding
to time or finesse markets and sectors.’ Whether you agree with Arisaig or Compounded returns versus MSCI AxJ
not, their research underpins such a provocative and persuasive conclusion. 450 (%)
400 15% compounded
A 15% compounded is what you need. ‘Sometimes people forget the 350
simple maths: US$1m invested in a business that compounds its 300
250
earnings at 15% would be worth US$16m in 20 years. This would be 200
US$12m if the valuation compressed from say 25x to 18x in a straight 150
6% compounded
MSCI AxJ
line over that period. However, US$1m invested in a fund rotating across 100
50
sectors within a universe growing its earnings at say 6% (which is what 0
history suggests is likely) would be worth US$3m in 20 years; and, no Dec 99 May 03 Aug 06 Dec 09
doubt, less taking account of transaction costs and the inevitable
Source: Bloomberg, CLSA Asia-Pacific Markets
misjudgements along the way.’
10 16 December 2010

11. Asia Themes 2011
Masterly inaction. With a portfolio on 25x forward earnings, a period of
consolidation probably beckons, while some of their research is clearly also
designed to be self-serving. But it offers a rock whereby to try to look at
various investment opportunities. Increasingly I accept that the lack of
patience and unwillingness when investing in good businesses to give
them 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. Nor
Warren Buffet. There is a message in this.
Asia - AUTOS
Is 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 the
restructuring of General Motors. This is due to lacklustre capacity
expansion in developed markets and surprisingly strong addition in the
emerging world. Healthy free-cashflow generation in Asia raises the
question on deployment. We continue to like Kia Motors, Guangzhou
Automobile, Great Wall and Toyota in Japan. Maruti Suzuki is a top
long-term pick in India, though we are hesitant about it near term.
Geoff Boyd
Post GM restructuring. During 2000-08, General Motors famously (65) 64167853
“pushed” production into its US inventory system, forcing large incentives geoff.boyd@clsa.com
to move vehicles to customers. It was trapped in a vicious circle of high
fixed costs and declining market share but rising debt-service obligations.
Suggests a healthier USA
The bankruptcy that followed has shed its debt and the company is acting
Ford operating margin
more rationally now to allow demand to “pull” its production schedule.
8 (%)
Widening margins. As a result of GM’s more rational tone, the market 6
has turned more positive on the sector and consensus is forecasting 2010- 4
12 operating margin of 7.4% for companies like Ford. This compares with 2
0
the 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 2010-12F
US demand is ticking up. The overall US auto market was up 17% YoY in
November to a 12.3m run rate, beating our 13% expectation. Industry Source: Bloomberg
executives talk about dealers seeing people who “want” to buy a car, rather
than “need” to buy one. Some forecast 13m units of sales in 2011, while JD
Powers expects 15m vehicles in 2012, both ahead of our current forecasts of Indicative of global margin trend
12.5m and 13.5m. On the supply side, we see Volkswagen adding capacity Volkswagen operating margin
but not a dramatic rampup overall to disrupt the enjoyable returns. 7 (%)
6
Europe also improves. Renault and Fiat represent the mass-market 5
European manufacturers and we note that 2010-12 consensus margin 4
estimates have improved versus history: 3.1% for Renault versus the 3
2
1.1% it achieved over 2004-09; 4.6% for Fiat versus 3.8%; and 8.0% for
1
Daimler versus 3.3% and 9.0% for BMW versus 6.4% in recent years. An 0
improved Chinese business partly explains this, but also a generally Avg 2004-09 Avg 1999-09 Avg 2010-12F
healthy premium segment. Giant Volkswagen should also reach 5.8%
Source: Bloomberg
operating margin versus the 4% it achieved over the past decade.
Some disparities. The Japanese companies are suffering the most
relative to the past decade, due mostly to the strong yen. We forecast
operating 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 Nissan
Motor (7201 JP - ¥809 - U-PF) in 2011. This compares to a decade
average of 8.1%, 7.7% and 7.8%. We also expect demand from Europe to
be down YoY, post stimuli in key markets like Germany.
China still going strong. Latest data suggest China might finish 2010 up
30% YoY versus our forecast of 26% YoY from a couple months ago, and
19% at the start of the year. Demand growth is outstripping capacity
additions, and this will remain the case for 2011, so we expect industry
margins 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 Maruti
Suzuki (MSIL IB - Rs1,413.5 - O-PF) as a long-term pick but expects it to
languish on price wars with Toyota’s new models in India near term.
16 December 2010 11

12. Asia Themes 2011
Asia - BANKS
Will the sector continue to outperform?
Healthy credit growth, widening margins and limited provision costs.
A brilliant year awaits Asian banks, with healthy credit growth, widening
margins and limited provision costs. What’s more, Tier I ratios are high
and remain liquid - which is good in the new world of Basel III. Positive
structural factors are plentiful, including limited consumer-loan penetration
and young population. We remain Overweight Asian banks, focusing on
high-ROA, high-growth markets. Our top picks are Bank of China, Bank Daniel Tabbush
Central Asia, HDFC Bank and Standard Chartered. (66) 22574631
daniel.tabbush@clsa.com
Credit 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 growth
With increased investments in India, growth will rise and increased LDR versus Loan growth
corporate facilities in Thailand will drive growth in the country. Where 10CL LDR (%) Loan growth (% YoY)
India 78 25
Indonesia’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 18
down already, where study of our China Reality Research (CRR) team Singapore 72 17
suggests it will rise marginally. But for more developed regions, including StanChart 88 12
Australia, Korea and Japan, expect subpar loan volume to continue. Malaysia 83 12
Philippines 66 10
Credit quality. The global financial crisis was not global, as it never really Thailand
Korea
85
127
10
5
hit Asia. Nonperforming loans did not rise during 2009-10, even though Taiwan 73 4
Asian banks prepared for the worst, with higher provision costs. Going into Australia 131 4
HSBC 89 1
2011, 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 11
80% lower provision costs during 2010, persistently low loan-loss Source: Company reports, CLSA Asia-Pacific Markets
provisions (LLP) will characterise 2011. With average NPL-coverage rates
Key driver for China
at 131% on 11CL, this is in a different league to pre-Asian financial crisis,
China - Non-interest income to assets, 10CL
at 72%. Indonesia and the Philippines stand out, where LLP/loans remain
Thailand
high at 1.5-1.8% this year. Phils
Indonesia
StanChar
HSBC
China’s banks. A simple chart showing share-price performance of Malaysia
Avg
India
Indonesian, Indian, Thai, Malaysian and Philippine banks during 2010 Japan
Sing
shows 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
Korea
are many similarly positive structural features, no NPL formation, 17-20% 0.0 0.5 1.0 1.5 2.0 2.5
ROE and 1.2-1.5% ROA. Performance has been frustrating in 2010, but
with far less in the way of regulatory risk, good NPL trends and still good Source: Company reports, CLSA Asia-Pacific Markets
profit growth, China’s banks will shine in 2011.
Continue to improve
StanChart 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 (%) (%) 120
transformation, where the income delta has been negative for two years. Loan growth
100
40
While wholesale banking remains strong, credit costs low, meaningful 80
30
growth in CB will drive 14% EPS growth. HSBC’s (5 HK - HK$81.95 - O-PF) 60
20 40
ROA should see the best improvement among major Asian banks, from 20
25bps in 2009 to 85bps in 11CL, and 2010 should mark the first year of 10
0
more normal credit costs. An improved focus on commercial banking in 0 (20)
01A 02A 03A 04A 05A 06A 07A 08A 09A 10CL
Asia and Hong Kong will support revenue, allowing for total EPS growth of
29% in 11CL. Source: Company reports, CLSA Asia-Pacific Markets
ROA and recommendations. Countries with higher ROAs typically O-WT on higher returns
perform better and we doubt that will change in 2011. This is a key reason Change in ROA, 11CL versus 10CL
for our Overweight stance on markets with higher returns. When we Korea
HSBC
looked at actual stock performance over the past 15 years, the bank Taiwan
StanChar
Thailand
basket of high-ROA countries only underperformed in just one year. This Asia avg
Sing
compares with five years of underperformance for high-ROE countries. We Japan
Malaysia
Phils
are Overweight China, Indonesia, India, Hong Kong, Thailand, Malaysia China
Australia
India
and 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 50
BUY), Bank Central Asia (BBCA IJ - RP6500 - O-PF), HDFC Bank (HDFCB
IB - RS2236.1 - BUY) and StanChart. Source: CLSA Asia-Pacific Markets
12 16 December 2010

13. Asia Themes 2011
Asia - CONSUMER
Will Asian Boomers ride high?
Chindonesian consumers remain upbeat amid wage inflation.
China, India and Indonesia’s (Chindonesia®) consumer sectors should
exhibit J-curve hypergrowth over the next five to 10 years on rising
incomes and propensity to consume and take risks. Even in the face of
slower global growth, their consumers remain upbeat and will benefit from
strong liquidity inflows and wage inflation in 2011. Our top picks are Air
China, Baidu, Bank of China, Cathay Pacific, HDFC Bank, Evergreen, Aaron Fischer
Want Want, Parkson Retail, Sands China, Wynn Macau and SAIC. (852) 26008256
aaron.fischer@clsa.com
Rise of the middle class. We estimate that the middle class makes up
19% of Asia ex-Japan’s population, and that should rise to 30% in five
years, or an 11% Cagr. The aggregate number of those in the region’s
middle class will increase from 570m currently to 945m by 2015. China
will account for two-thirds of the new members, while Chindonesia® will
represent 90% of the 375m increment. We expect the social cluster’s
consumption spending to increase from US$2.9tn to US$5.1tn over this
period. 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 Dutta
revisited the Chinese, Indian and Korean respondents in our 20 20 20 (91) 2266505056
project in 2005. Now 25 years old, our 20 20 20s have certainly moved anirudha.dutta@clsa.com
ahead: most are now working, many of them outside their home countries
- and also spending. Despite the financial crisis, they remain optimistic
overall and confident about the future - not only for themselves, but their
countries. That said, they clearly have a more mature and balanced view
than they did in 2005.
Responsible hedonists. Now that most of our 20 20 20s are finally
earning a wage, they spend a good deal of it. This is clearly a generation
of “baby” consumer Boomers. But whereas brand awareness is high
(particularly for electronics), brand loyalty is not (especially when it comes
to clothing and sports goods). Pragmatism rules and the brands must be
seen to offer value. Our 20 20 20s may be consumer Boomers, but they’re
not spendthrifts. Most manage to save a significant amount of their
earnings, typically with the aim of buying big-ticket items such as cars and
travel, and eventually a home of their own (except in Korea, where renting
is the norm).
Moving up the J-curves. Some key trends of this generation: low loyalty
to brands; high savings rate but not financially savvy; increasingly
purchasing everything online; and priority areas of spend are travel, house
and car. Key sectors to benefit from the growing consumption would be
online travel companies, airlines, hotels, real estate, retail financial
services, automotive plays and companies earning the loyalty of this
generation by building strong franchisees. Global brands that have a
strong 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 spending
on autos, transport and tech, while telecoms should see a more moderate
increase. Travel and buying a house are among the top priorities for the
Asian Boomers. Our top consumer plays include Air China (753 HK -
HK$8.88 - BUY), Baidu (BIDU US - US$106.62 - BUY), Cathay Pacific (293
HK - 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 interest
rates and policy intervention could impact high-value discretionary
spending in 2H11.
16 December 2010 13