This document provides an analysis of stagflation scenarios across several Asian countries and regions. It describes stagflation as significantly slowing growth and rising inflation affecting every Asian country. The document identifies sectors, industries, and companies that may perform well or poorly in a stagflationary environment. It also analyzes potential stagflation impacts on countries including Australia, China, Hong Kong, India, Korea, and Taiwan, and recommends policies to reduce economic instability.

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

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

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

6. Lehman Brothers | Equity Research
Table of Contents
Executive Summary 3
Country Summary 4
Sector Summary 5
Regional Strategy 9
Effects on equities from rising inflation and slower growth.................................................9
Country Analysis 15
Australia’s Brief Stagflation 16
Tight policies limit local stagflation risk ............................................................................16
China Stagflation Scenario 20
Can the government tame rising inflation and rescue slowing growth? .....................................20
HK Stagflation Scenario 31
Effects of rising inflation and slower growth .....................................................................31
India and Stagflation 36
Tight policies limit local stagflation risk ............................................................................36
Korea Stagflation Scenario 39
Effects of rising inflation and slower growth .....................................................................39
Taiwan Stagflation Scenario 45
Can politics offset rising inflation and slower growth? ............................................................45
Sector Analysis 53
Auto and Auto Parts 54
Effects of rising inflation and falling growth .....................................................................54
Banks 57
China Banks .......................................................................................................................57
India Banks.........................................................................................................................59
Taiwan Banks .....................................................................................................................61
Cement 62
India Cement ......................................................................................................................62
Conglomerates 64
Effects of rising inflation and slower growth .....................................................................64
Consumer 67
India Consumer ..................................................................................................................67
China/Hong Kong Consumer .............................................................................................69
Korean Consumer...............................................................................................................71
May 2008 6

7. Lehman Brothers | Equity Research
Electrical Equipment 73
India Electrical Equipment .................................................................................................73
IT Industry 75
Effects of rising inflation and slower growth .....................................................................75
Metal & Mining (China) 78
Effects of rising inflation and slower growth .....................................................................78
Materials (Taiwan) 80
Effects of rising inflation and slower growth .....................................................................80
Media/Internet 81
Effects of rising inflation and slower growth .....................................................................81
Oil and Gas 84
Effects of rising inflation and slower growth .....................................................................84
Oil Refining 87
Effects of rising inflation and slower growth .....................................................................87
Petrochemicals 89
Effects of rising inflation and slower growth .....................................................................89
Pharmaceuticals 91
India Pharmaceuticals.........................................................................................................91
Property 92
Reverting to basic needs for shelter....................................................................................92
India Real Estate.................................................................................................................98
Taiwan Property ...............................................................................................................100
Semiconductors – Foundry & SATS 101
Effects of rising inflation and slower growth ...................................................................101
Semiconductors – Memory 102
Effects of rising inflation and slower growth ...................................................................102
Technology – Hardware 104
Effects of rising inflation and slower growth ...................................................................104
Technology – Display 105
Effects of rising inflation and slower growth ...................................................................105
Technology – IC Design 107
Effects of rising inflation and slower growth ...................................................................107
Telecommunications Services 108
Effects of rising inflation and slower growth ...................................................................108
May 2008 7

8. Lehman Brothers | Equity Research
Transportation – Shipping 112
Effects of rising inflation and slower growth ...................................................................112
Utilities/Power/Renewable Energy 117
Effects of rising inflation and slower growth ...................................................................117
Valuation Methodologies 123
Asia Research Roster 138
Coverage Universe 140
Companies under Coverage in Asia, by Country (as of May 14, 2008) ...........................140
Companies under Coverage in Asia, by Sector (as of May 14, 2008)..............................148
May 2008 8

9. Lehman Brothers | Equity Research
REGIONAL STRATEGY
Effects on equities from rising inflation and slower
Paul Schulte
growth
LBAL, Hong Kong
Tel: (852) 2252 -1409
paul.schulte@lehman.com
INTRODUCTION: LOWER GROWTH AND HIGHER INFLATION
Justin Lau The world is slowly moving away from a systemic meltdown and toward some
LBAL, Hong Kong normalcy. Much of this has been accomplished through the intermediation of central
Tel: +852 2252 1420 banks. The introduction of a facility on March 20 to lend directly to investment banks for
justin.lau@lehman.com the first time in the history of the Federal Reserve helped greatly in calming markets.
These moves by the Fed – and more recently by the Bank of England – have been made
Chris Leung, CFA in conjunction with a sharp reduction in interest rates. There have been three
LBAL, Hong Kong consequences of this activity.
Tel: +852 2252 6183
1. Rising liquidity
chris.w.leung@lehman.com
There has been a sharp and sudden increase in risk appetite and a sharp rise in liquidity.
As risky or worthless assets are taken out of the market by central bank intervention,
Shubhankar Das
those assets most at risk often go up the most. So, values of risky assets may go up in
LBAL, Hong Kong
price. Government bonds would go down in price as investors sell risk-free government
Tel: +852 2252 1424
bonds and dive back into risky bonds.
shubhankar.das@lehman.com
2. Lower growth
The above scenario should be great for growth. It makes growth go down less. But the
problem is that much of this liquidity being created is not finding its way back to asset
creation. It is being bottled up on the balance sheet of banks which are themselves
dealing with bad asset liquidation and capital constraints. They are being forced to shed
assets from their balance sheet and write off losses against capital. They are being forced
to find alternative sources of liabilities (deposits). This is because banks must bring
down excessively high loan/deposit ratios at the same time that they are writing off bad
assets. So, the asset base must shrink even while liquidity is replenishing the system.
We present below the base case set forth by our economics team together with the worst
case scenario provided by the strategy team.
Figure 1: Slower growth/rising inflation – base case and worst case scenarios
GDP (% y-o-y) CPI (%y-o-y)
Base Case Worst Case Scenario Base Case Worst Case Scenario
Lehman Economics Team Lehman Stategy Team Lehman Economics Team Lehman Stategy Team
2008 2009 2008 2009 2008 2009 2008 2009
US 1.2 0.6 -0.9 -0.4 na na na na
Australia 2.5 2.0 1.1 0.9 3.1 2.2 3.1 3.2
China 9.8 8.0 6.1 5.9 5.5 2.8 6.7 6.9
Hong Kong 4.3 6.2 0.3 0.2 5.0 5.5 5.0 5.5
India 7.5 8.5 5.1 4.6 6.9 4.7 6.9 7.1
Indonesia 5.2 7.0 2.7 2.3 10.0 8.0 9.0 9.5
Malaysia 5.0 6.2 2.4 2.2 3.5 4.5 3.9 4.5
Philippines 5.0 7.0 2.6 2.4 7.8 5.5 8.5 8.9
Singapore 4.2 7.0 2.4 2.1 6.0 4.8 6.0 6.1
South Korea 4.1 5.2 2.1 2.0 4.5 3.5 4.1 4.3
Taiwan 3.9 5.7 2.9 2.6 3.8 3.5 3.8 3.9
Thailand 4.2 6.7 2.6 2.5 6.5 4.5 6.0 6.2
Asia ex-Japan 7.3 7.3 4.1 3.8 5.7 3.8 5.7 5.9
Source Lehman Brothers research
May 2008 9

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

14. Lehman Brothers | Equity Research
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May 2008 14

15. Lehman Brothers | Equity Research
COUNTRY ANALYSIS
May 2008 15

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

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

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

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

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

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

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

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