Morning Meeting. Monday, September 17, Headlines on Securities Market. A Share Market Review

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1 Morning Meeting Headlines on Securities Market PBOC hiked the basis interest rate on deposit with and loan from financial institutions by 0.27 basis points. (China Securities Journal) Five ministries or commissions make concerted efforts to facilitate development of small and medium-sized enterprises. (Securities Times) The new version of securities trading agency agreement will be unveiled and implemented. (Securities Times) Mr. Huang Xiangping, head of Securities Association of China, pointed out that priority should be given to highlighting risk disclosure in account opening. (Shanghai Securities News) A Share Market Review S&P/CITIC300 Index closed last Friday at points, points higher than the last close or up 0.92%. S&P/CITIC50 Index closed at points, up points from the last close or 0.74%. The turnover on Shanghai and Shenzhen totaled Rmb billion, slightly higher than that on last trading day. The market fluctuated drastically and closed higher finally with more gaining stocks than falling ones and rotation of gaining sectors featuring strongly. Steel sector continued going up robustly with Baosteel (600019) and Wuhan Steel (600005) up 6%. Aviation and liquor sectors also presented eye-catching performance with Air China (601111), Southern Airlines (600029), Shanghai Airlines (600591) and Hainan Airlines (600221) hitting the limit-up. Cement stocks saw their strong momentum sustained with Conch Cement (600585) and Huaxin Cement (600801) reaching their intra-day ceiling and Jidong Cement (000401) rising over 9%. As the PBOC hiked the interest rate again, the market saw the demand bounce back after negative news had been unveiled. Therefore, one has to monitor the direction of macro-policies in figuring out the mid-term development of the market. Principal Market Indices Change % Index Close 1-Day 5-Day YTD S&P/CITIC S&P/CITIC Shanghai Composite index Hang Seng Index H share Index Red Chip Nikkei Dow Jones S&P NASDAQ Commodity Major Futures Close Change % USD 1-Day 5-Day YTD NYME Oil NYME Cotton NYME Gold LME Copper LME Aluminum Editor: Pei Jian Tel: Mail:peijian@citics.com Please do read the disclaimer after the text

2 Analysts Express Macro-economic research-review on interest rate adjustment in September, 2009: one should be well prepared for further interest hike With accelerated inflation and negative effective interest rate, this interest rate hike is in line with expectation. The interest rate will be further raised within this year. We believe PBOC will continue capitalizing on its moderately tightening policies and hike the interest rate further within this year. So the market should be well prepared psychologically. In addition, PBOC will also resort to measures to decrease liquidity such as raising the requirement reserve ratio, issuing treasury notes via private placement and executing repurchase with special TB. The critical state may emerge when the interest rate on lending goes up to 10%. Currently, the interest rate on one-yr loan stands at 7.29%, representing 2.71 ppts upside. Of course, the interest rate extreme is unlikely to be reached. When the frequent interest rate hikes combined have impact on ROE of enterprises, they will cut down on their loans, which in turn put brake on the economic growth. The central bank will stop hiking the interest rate. Macro-economic research, review on urban fixed assets investment data for the first eight months this year: two categories of sectors will benefit from rapid investment growth The market is at loss about the acceleration of investment going forward. We view that the momentum for faster growth of investment remains intact. Seen from the data released, cyclical sectors with uptrending business climate now see rapid investment growth. Rapid investment growth underpins fast increase of profit, in equipment manufacturing and resources sectors in particular which feature booming demand and rapid sectoral consolidation. But given price factor revaluation, we view that at present 50-60% growth is hard to maintain while around 30% profit growth is foreseeable and sustainable. Weekly strategy for mainland market: gaming between forces going long and going short further exacerbating After observing the market environment recently, we view the fluctuations of the major index and the plunge of the Shanghai 2

3 Composite Index last Tuesday reflect the further exacerbating gaming between the forces going long and going short and some factors deemed as negative news by the market will pose some psychological pressure on investors. The market now has entered the stage of primarily perceived inflation and frequent interest rate hikes, probably implying gradually increasing pressure from uptrending assets price. Therefore, the real impact of interest hikes to be rolled out by central bank on the economy should be given priority by the market. Policy controls, issuance of special TB and offering of new shares are likely to bring fund shortage to the market. In fact, the CHIBOR rallied drastically last week and various banks also feel the pin from tight fund supply, which is also a kind of test for the volatile market at present. Investors are advised to focus on individual stocks and pick those with definite growth potential and certain safety margin rather than keep less closer eye on the movement of indices. Out of prudent investment style, we keep the following ten stocks recommended last week for your reference: Baosteel (600019) (07/08 EPS: 1/1.20yuan; 07/08PE: 20/17X; Current price: 19.80yuan; Price target: 20yuan; Rating: Buy), ICBC (601398) (07/08 EPS: 0.22/0.31yuan; 07/08PE: 30/21X; Current price: 6.49yuan; Price target: 9yuan; Rating: Buy), Vanke (000004) (07/08 EPS: 0.60/0.92yuan; 07/08PE: 53/35X; Current price: 31.93yuan; Price target: 36yuan; Rating: Buy), Double-crane Pharmaceutical (600062) (07/08 EPS: 0.63/0.84yuan; 07/08PE: 43/32X; Current price: 27.10yuan; Price target: 35yuan; Rating: Buy), Zhongjin Gold (600489) (07/08 EPS: 0.95/1.78yuan; 07/08PE: 149/79X; Current price: yuan; Price target: 150yuan; Rating: Buy), Shandong Expressway (600350) (07/08 EPS: 0.32/0.42yuan; 07/08PE: 33/25X; Current price: 10.61yuan; Price target: 12yuan; Rating: Buy), Bohui Paper (600966) (07/08 EPS: 0.63/1.29yuan; 07/08PE: 32/15X; Current price: 19.98yuan; Price target: 32.25yuan; Rating: Buy), Huatai Paper (600308) (07/08 EPS: 1.15/1.80yuan; 07/08PE: 30/19X; Current price: 34.31yuan; Price target: 50.40yuan; Rating: Buy), Xinjiang Joinworld (600888) (07/08 EPS: 0.87/1.98yuan; 07/08PE: 40/18X; Current price: 34.97yuan; Price target: 70yuan; Rating: Buy) and Chengde Xinxin Vanadium and Titanium (07/08 EPS: 0.60/1.17yuan; 07/08PE: 37/19X; Current price: 22.37yuan; Price target: 28yuan; Rating: Buy). Research on non-ferrous metals sector: the sector performs strongly Outperform (Reiterate) Prices for most of the non-ferrous metals have bounced back robustly. Within medium and long term, prices for base metals are expected to fluctuate drastically within hefty territory. Listed electrolytic aluminium makers will continue seeing backing and filling. In the long run, the tight supply and demand relationship will underpin the sustainability of the super cycle for base metals. Prior to 2008, metal prices will go up faster than their costs. So the enterprises will see their profit margin improve and growth of profit slowing down but remain noticeably higher than the expectation of market. After that, with the cost factor standing out gradually, profit of mining enterprises will be eroded and business climate of the sector 3

4 may trend down. Review on major event of Jiangnan High Polymer Fiber (600527): stronger operating capability with quality assets acquired--buy Quality assets acquired. The shareholders meeting of the Company passed the resolution on Sep. 14 th, 2007 to enter into equity transfer agreement with Xinhua Chemical Fiber to acquire the 75% stake the latter has in Baosite for Rmb 16 million. Baosite has three polyester top production lines with an annual capacity of 6,000 tons. Stronger operating capability. When the acquisition is consummated, the supporting capability for polyester top production line of Baosite will be improved with more types of products so that its net profit will go up to about Rmb 17 million from Rmb 2 million, contributing Rmb 0.05 to the counter s EPS. Currently, the polyester top produced by the Company sees undersupply, with the gross profit margin at 32% and net profit approaching nearly 20%. New growth driver: increase in output and gross margin of composite fiber. Earnings forecast and Valuation: Jiangnan High Polymer Fiber (600527) (07/08 EPS: 0.38/0.62yuan; 07/08PE: 48/30X; Current price: 18.34yuan; Price target: 24yuan; Rating: Buy). 4

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