China Market Strategy

Transcription

1 Asia Pacific/China Equity Research Strategy Research Analysts Vincent Chan Peggy Chan, CFA Trina Chen Jinsong Du China Market Strategy STRATEGY What to do with A shares now? Figure 1: Performance gap of A-shares versus MSCI China Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 CSI 300 MSCI China Source: DataStream Last year onwards, A-shares significantly underperformed H-shares. In this note, we explain the reasons for this and how investors can position themselves: Fund raising and structural concerns. The underperformance of A-shares versus H-shares is mainly due to: (1) domestic investor concerns about the massive IPO pipeline and its negative impact on liquidity. Poor performance of A-share IPOs in the last two years also hurt investor confidence a lot; and (2) domestic investors being more concerned than global investors on the structural slowdown of China versus whether the economic cycle has bottomed. Taking advantage of this poor sentiment. We recommend long-term investors take advantage of this poor market sentiment and accumulate: (1) dual-listed stocks which are trading at a significant discount to their H-share, such as Ping An, Shenhua, China Pacific and CCB; and (2) blue chip stocks such as Vanke and Baosteel which are trading at discounts to stocks of similar sectors in A-share. Our 12-month index target for the Shanghai A- share is 2,400, implying 15% potential upside. Possible catalysts. Investors would like to see the government continue to adopt measures to stabilise the economy. Simultaneously, they want to see it taking concrete steps towards reforms. In the near term, this includes implementing the sales tax-to-vat conversion and consolidation of the ministries in the State Council. DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit researchdisclosures or call +1 (877) U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus charts and tables Figure 2: Shanghai A forward earnings yield gap (%) Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Source: IBES aggregates, Bloomberg Shanghai A - 12M EY gap over 10-yr bond (%) Avg +1SD -1SD Figure 3: Lower correlation between A-share & US market yr rolling correlation co-efficient with S&P Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 MSCI China CSI 300 Source: DataStream Figure 4: Performance of IPOs in A-share and HK markets (2011 till now) Avg performance % of stocks A-share (437 companies) (%) Up > 15% Up 0-15% Down Buy in IPO and sell on day Buy in IPO and hold 1 year (31) Buy on day 1 and hold 1 month (4) Buy on day 1 and hold 6 months (19) Buy on day 1 and hold 1 year (42) Avg performance % of stocks HK stocks (131 companies) (%) Up > 15% Up 0-15% Down Buy in IPO and sell on day Buy in IPO and hold 1 year (11) Buy on day 1 and hold 1 month (1) Buy on day 1 and hold 6 months (5) Buy on day 1 and hold 1 year (15) Source: WIND Database Figure 5: Key announcements of the Central Economic Work Conference in the last ten years Fiscal policy Monetary policy Key themes Dec 2011 Expansionary Stable Growth amid stability. Balance the relationship between growth, structural adjustment and inflation Dec 2010 Expansionary Stable Stabilise growth, adjust economic structure, control inflation 5-7 Dec 2009 Expansionary Loose Ensure sustainable and stable macro policy 8-10 Dec 2008 Expansionary Loose Promote growth, expand domestic demand, adjust economic structure 3-5 Dec 2007 Stable Tight Contract total demand, stabilise inflation, adjust economic structure, facilitate economic balance 5-7 Dec 2006 Stable Stable Intensify and improve macro adjustments 29 Nov-1 Dec 2005 Stable Stable Ensure sustainable and stable macro policy 3-5 Dec 2004 Stable Stable Intensify and improve macro adjustments Nov 2003 Expansionary Stable Sustainable macro policy 9-10 Dec 2002 Expansionary Stable Expand domestic demand Source: China Market Strategy 2

3 What to do with A-shares now? From October 2011 onwards, the performance of MSCI China started to diverge from that of A-shares, with the former outperforming CSI 300 by around 60% until now. In our opinion, the weakness in the A-share market is mainly due to the hangover of market fund raising and domestic investors concerns over China s long-term social/economic outlook. However, the Chinese stocks listed overseas are buoyed by the stabilisation of the Chinese economy as well as the global financial market. Figure 6: MSCI China versus CSI Diverging market performance Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 CSI 300 MSCI China Source: DataStream To begin with, due to the difference in the investor base, the correlation co-efficient of MSCI China with S&P 500 (proxy for global market) has always been higher than that between CSI 300 and S&P 500. In recent years, the correlations between the two Chinese indices with S&P 500 are declining, but CSI 300 declined much more (into the negative territory in recent months). In the last five years, the correlation co-efficient of MSCI China and S&P 500 was 0.65, much higher than the 0.33 for CSI 300 and S&P 500. Therefore, with perceived global risk factors declining, MSCI China is benefiting more compared to A-shares. Figure 7: Lower correlation of A-shares with global market yr rolling correlation co-efficient with S&P Difference in correlation to the global market due to different investor base Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 MSCI China CSI 300 Source: DataStream China Market Strategy 3

4 The correlation co-efficient of both MSCI China (0.65) and CSI 300 (0.7) are quite high with China s industrial output growth (proxy for the state of economy). However, in recent months, while H-shares have reacted positively towards a stabilising macro outlook, we did not see the same benefits in the A-share market. It appears that domestic investors have more significant concerns over China s long-term economic development and have thus neglected the recent signs of macro stabilisation. Figure 8: Growth and market indices A-share investors are more concerned about a structural slowdown versus whether the economy has bottomed Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 MSCI China CSI 300 Industrial Output (RHS) 0 Source: CEIC, DataStream Apart from concerns over China s long-term development outlook, fund raising is another major hangover for the A-share market. According to the latest news from China Securities Regulatory (CSRC), (see , html) there are now 808 companies waiting to list in the A- share market. Of these, 90 have already been approved by relevant departments of the CSRC and can list when final approval from CSRC is granted. Compared to around 2,500 listed A-shares now, the waiting list of new companies is rather long. However, given that most of these will likely list on the SME board or ChiNext (China s GEM board), the amount of money each company is planning to raise is not that large. Based on the 563 companies which have published their fund-raising targets, the total amount of money targeted to be raised is about Rmb300 bn or 1.4% of the combined Shanghai-Shenzhen market cap, and about 7% of market cap in the hands of minority shareholders (assuming 20% of stocks are in the hands of the general public). This does not seem to be a lot of money. Why then, the concerns? The bigger problem probably lies in the fact that the IPO market in China is rather distorted and has steadily eroded investor confidence. Firstly, the performance of A-share IPOs 2011 onwards is bad, much worse than the Hong Kong market. We have compared the A-share market s IPO performance to that of Hong Kong IPOs, based on five strategies: (1) buy at IPO and sell on day 1 close; (2) buy at IPO and sell after one year; (3) buy on day 1 (average price) and sell one month later; (4) buy on day 1 and sell six months later; and (5) buy on day 1 and sell one year later. Fund raising is another major hangover Poor performance of A- share IPOs in the last two years has hurt investor confidence China Market Strategy 4

5 Basically, for both A-share and Hong Kong IPOs, only the first strategy i.e. buying the stock at the IPO price and selling on day 1 makes money. However, in the A-share market the situation is much more extreme than in Hong Kong. For example, despite the poor market environment in China s A share market, the first strategy will still deliver a very handsome 23% return, compared to only 6% in Hong Kong. In contrast, for genuine long-term investors who buy the stock on day 1 and sell it a year later (strategy number five), one would have lost on average 42% of one s money with A-share IPOs but only 15% with Hong Kong IPOs. And in the A-share market, if you buy an IPO stock on day 1 and hold it for a year, you will lose money in 95% of the cases. In the Hong Kong market, on the other hand, the outcome is more balanced: you have a 59% chance of making a positive return and only 37% chance of losing money which is a better deal. Figure 9: Performance of IPOs in A-share and HK markets (2011 till now) Avg performance % of stocks A-share (437 companies) (%) Up > 15% Up 0-15% Down Buy in IPO and sell on day Buy in IPO and hold 1 year (31) Buy on day 1 and hold 1 month (4) Buy on day 1 and hold 6 months (19) Buy on day 1 and hold 1 year (42) A-share investors who bought shares on the day of the IPO and held them for a year would have lost money 95% of the time Avg performance % of stocks HK stocks (131 companies) (%) Up > 15% Up 0-15% Down Buy in IPO and sell on day Buy in IPO and hold 1 year (11) Buy on day 1 and hold 1 month (1) Buy on day 1 and hold 6 months (5) Buy on day 1 and hold 1 year (15) Source: WIND Database Secondly, the distortion in the Chinese IPO market could also be reflected in the listing P/E. The average P/E of IPOs in Hong Kong during this two-year period was about 11x, roughly equal to the P/E of MSCI China. However, the average P/E of an A-share IPO during the same period was 40x much higher than the average market P/E of 14x. Therefore, what happens is that, the IPO price in the A-share market is set at an outrageously high level, pushed up further on the first day of trading, and then is in continual decline. It is difficult to prove whether there is market manipulation in both the A- share IPO pricing process and the first few days of trading, but this kind of market performance definitely hurts market confidence. Valuations and index targets The A-share market (Shanghai A index is used for the valuations below) has de-rated from 7x trailing P/B and 46x trailing P/E in the stock market bubble in 2007 to only 1.4x and 11x P/B and P/E, respectively. P/B and P/E are 1.1 and 1.4 standard deviations (SD) below historical averages and are at historical lows. Valuations are at historical lows China Market Strategy 5

6 Figure 10: Shanghai A trailing price-to-book (x) 7 Figure 11: Shanghai A trailing price-to-earnings (x) Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Shanghai A - P/B (x) Avg +1SD -1SD 10 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Shanghai A - trailing P/E (x) Avg +1SD -1SD Source: Bloomberg Source: Bloomberg Consensus is currently forecasting 15% EPS growth for 2013 and Shanghai A is trading at 8.5x forward P/E. Given that China s ten-year bond yield is at 3.5%, the earnings yield gap is very attractive at 8.3%, which is 2 SD above the historical average. Figure 12: Shanghai A 12-month forward P/E (x) Figure 13: Shanghai A forward earnings yield gap (%) Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Shanghai A - 12M P/E (x) Avg +1SD -1SD Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Shanghai A - 12M EY gap over 10-yr bond (%) Avg +1SD -1SD Source: IBES aggregates Source: IBES aggregates, Bloomberg We derive our index target using a three-stage DDM (dividend discount model), while consensus is more optimistic and forecasts 15% and 12% growth for 2013 and 2014, respectively. We are more conservative and assume earnings growth will be flat in the next two years. Based on our assumptions and consensus forecasts, the 12-month index targets for Shanghai A will be 2,400 (ours) and 3,000 (consensus) or 15% and 45% potential upside, respectively. Our index target only brings the forward P/E back to 1 SD below its historical average, and we could see higher potential upside if: (1) the market re-rates, the timing of which is unclear given the various concerns; or (2) earnings growth turns out to be better than our flattish assumption. Shanghai A index target based on our no-growth assumption is 2,400 China Market Strategy 6

7 Figure 14: Shanghai A Index targets 12-mth Implied Growth assumptions (%) P/E (x) target upside (%) CS 2, Consensus 3, Source: IBES aggregates, Credit Suisse estimates Figure 15: Other assumptions to our three-stage dividend discount model (DDM) Stage 1: FY1 to FY3 Stage 2: FY4 to FY12 Terminal: from FY13 Discount Growth Payout Growth Payout Growth Payout rate (%) CS or IBES Source: Credit Suisse estimates Stock picks Frankly, the overhang of IPO stocks and the structural weakness in the economy are problems that could last for a while, and until relevant policy initiatives become clear, it is difficult to predict when these concerns will be removed. However, while the market direction may not be clear, long-term fundamental investors should not be deterred from looking for investment opportunities. Firstly, investors could consider dual-listed stocks in which the A-share is trading at a significant discount to the H-share, particularly for those stocks which we like fundamentally. Also, if the current discount is larger than the three-year average, it could count as another positive factor. Among the top-40 dual-listed stocks in terms of market cap, we would recommend investors buy those companies in which the A-share is trading at a minimum 10% discount to its H-share counterpart and where we have an outperform rating on the H. Based on current prices, there are four stocks which fit these two criteria: Ping An, Shenhua, China Pacific and CCB. Indeed, with the exception of China Pacific, which has been listed for less than three years, the current discount of A versus H for Ping An, Shenhua and CCB is higher than the three-year average in all cases. When the overhang will be removed is unclear Dual listed A-share stocks often trade at significant discounts to H-shares China Market Strategy 7

8 Figure 16: Premium/(discount) of A-share versus H-share for top 40 dual-listed companies Market A/H (%) CS recommendation Ticker (H) Ticker (A) cap (US$ bn) Current 3Y avg. for H-share 0914.HK SH Anhui Conch 14 (22.2) (11.2) UNDERPERFORM 1800.HK SH China Communications Construction 12 (21.8) HK SH Ping An Insurance 52 (21.6) (18.4) OUTPERFORM 1186.HK SH China Railway Construction 11 (18.9) (0.5) 0390.HK SH China Railway Group Limited 10 (17.4) HK SH China Shenhua Energy 71 (16.5) (5.6) OUTPERFORM 2601.HK SH China Pacific Insurance 25 (15.8) - OUTPERFORM 3968.HK SH China Merchants Bank 36 (14.3) (12.0) NEUTRAL 6030.HK SH CITIC Securities 19 (13.5) - RESTRICTED 0939.HK SH China Construction Bank 190 (12.3) (6.4) OUTPERFORM 2607.HK SH Shanghai Pharmaceuticals Holding 6 (12.0) - NEUTRAL 1766.HK SH CSR 11 (11.8) 8.1 UNDERPERFORM 0168.HK SH Tsingtao Brewery 7 (10.9) (1.3) 2333.HK SH Great Wall Motor 9 (10.0) HK SH Sinopec 86 (8.2) 36.5 NEUTRAL 1398.HK SH ICBC 221 (8.0) (4.4) OUTPERFORM 2338.HK SZ Weichai Power. 7 (6.9) HK SH Bank of Communications. 51 (6.8) (3.1) UNDERPERFORM 1288.HK SH ABC 137 (3.7) - UNDERPERFORM 2628.HK SH China Life 81 (3.3) (6.9) NEUTRAL 6837.HK SH Haitong Securities OUTPERFORM 1211.HK SZ BYD HK SZ Zoomlion Heavy Industry UNDERPERFORM 1336.HK SH New China Life Insurance OUTPERFORM 1988.HK SH Minsheng Banking UNDERPERFORM 0857.HK SH Petrochina NEUTRAL 3988.HK SH Bank of China Limited NEUTRAL 1898.HK SH China Coal Energy OUTPERFORM 0753.HK SH Air China Limited OUTPERFORM 0998.HK SH China CITIC Bank NEUTRAL 2883.HK SH China Oilfield Services Limited OUTPERFORM 0902.HK SH Huaneng Power OUTPERFORM 0358.HK SH Jiangxi Copper NEUTRAL 1919.HK SH China COSCO UNDERPERFORM 2899.HK SH Zijin Mining Group OUTPERFORM 2727.HK SH Shanghai Electric Group NOT RATED 1618.HK SH Metallurgical Corporation HK SH Yanzhou Coal Mining UNDERPERFORM 2600.HK SH Aluminum Corporation of China UNDERPERFORM 0991.HK SH Datang International Power NEUTRAL Source: DataStream Among the A-shares which have no overseas listed counterparts, another way to evaluate them is to compare with similar stocks listed in Hong Kong. For example, it is definitely fair to compare Vanke with COLI given that they are amongst the top developers in China; the same goes for Baosteel versus Angang and Sany Heavy versus Zoomlion H. China Market Strategy 8

9 Figure 17: Valuation comparison of China stocks listed in different markets 2012 P/E (x) Price/ Avg ROE % P/B (x) NAV (x) ( ) SZ Vanke HK COLI SS Baosteel n.a HK Angang n.a SS Sany Heavy n.a HK Zoomlion H n.a. 20 Source: Company data, Credit Suisse estimates Based on this comparison, Vanke and Baosteel look very attractive. For Vanke, its average ROE in is much higher than COLI s, but it is trading at a much lower P/E than COLI and while it is trading at a substantial discount to its NAV, COLI is trading at a premium. Similarly, for Baosteel, despite the last three years in which the operating environment was very difficult, it is still making some money, while Angang is already making a loss; i.e., Baosteel is a much better company, but the P/B for the two companies is roughly similar to each other. In contrast, the case is much less strong for Sany Heavy. Catalysts As mentioned above, it is difficult to predict any particular government announcement or policy which can change investors confidence now. Sometimes, even after the right policy, it may take some time for investors to change their view. For instance, despite the Chinese economy picking up strongly from 2003, A-shares underperformed H-shares until the end of At that time, the major overhang was non-tradable share reforms. Although the government announced the first pilot programme of non-tradable share reforms on 9 May, 2005, A-shares continued to underperform H-shares until April 2006, when the market started to realise that the reform was actually beneficial to investors. Vanke and Baosteel s valuations look attractive relative to their HK- listed peers Hard to predict when the market will react to any policy announcements Figure 18: A-share performance relative to H-shares Relative performance of Shanghai A share vs. H share Non-tradable share reform started in May Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: DataStream In terms of major events ahead, investors should probably focus on two: (1) the Central Economic Work Conference (CEWC) in early to mid-december; and (2) National People s Congress in March In each year s CEWC, the Chinese government will decide on the tone of the fiscal and monetary policy, as well as on the key theme. We expect the government to keep the fiscal policy expansionary and monetary policy stable, while Major events ahead: CEWC and NPC China Market Strategy 9

10 stabilising growth. The GDP growth target will also be discussed, but may not be announced until next March. We expect the government s 2013 GDP growth target to remain at 7.5%, as in The market will generally be satisfied with such a policy stance, but is unlikely to get overly excited. Figure 19: Key announcements of the Central Economic Work Conference from 1994 onwards Fiscal policy Monetary policy Key themes Dec 2011 Expansionary Stable Growth amid stability. Balance the relationship between growth, structural adjustment and inflation Dec 2010 Expansionary Stable Stabilize growth, adjust economic structure, control inflation 5-7 Dec 2009 Expansionary Loose Ensure sustainable and stable macro policy 8-10 Dec 2008 Expansionary Loose Promote growth, expand domestic demand, adjust economic structure 3-5 Dec 2007 Stable Tight Contract total demand, stabilize inflation, adjust economic structure, facilitate economic balance 5-7 Dec 2006 Stable Stable Intensify and improve macro adjustments 29 Nov-1 Dec 2005 Stable Stable Ensure sustainable and stable macro policy 3-5 Dec 2004 Stable Stable Intensify and improve macro adjustments Nov 2003 Expansionary Stable Sustainable macro policy 9-10 Dec 2002 Expansionary Stable Expand domestic demand Nov 2001 Expansionary Stable Expand domestic demand, structural adjustment Nov 2000 Expansionary Stable Intensify and improve macro adjustments Nov 1999 Expansionary Stable SOE reform 7-9 Dec 1998 Expansionary NA Expansionary fiscal policy 9-11 Dec 1997 Tight Tight Growth amid stability Nov 1996 Tight Tight Growth amid stability 5-7 Dec 1995 Tight Tight Fight inflation 28 Nov- 1Dec 1994 Tight Tight Fight inflation Source: There are probably more things to watch out for in the NPC next March: (1) Despite the fiscal policy remaining expansionary from late 2008 CEWC onwards, the budget deficit as a percent of GDP actually shrank from 2.8% of GDP in 2009 to an around 1.5% in 2012 based on our GDP estimation and the budget deficit reduced from Rmb1 tn in 2010 to a government target of Rmb800 bn in In view of the difficulties faced by some local governments (particularly lower level ones, for example, counties in the hinterland) in pushing ahead with infrastructure investment, it would be interesting to see whether the central government is willing to provide more direct funding to them to support its infrastructure investment programme. Things to watch in next March s NPC Figure 20: China's budget deficit (Rmb bn) ,000 % Funding infrastructure investment -1, Budget -3.0 Rmb bn % of GDP Source: CEIC China Market Strategy 10

11 (2) The market will be interested to see whether the government will extend the tax regime unification experiment i.e., changing the sales tax currently paid by service sector companies to a VAT regime to the whole country. The market has already realised that it would not be easy for the government to push ahead major economic reforms such as opening up state-controlled sectors to private competition. So, it does not expect this to happen soon, but the market definitely wants to see the government push ahead with reforms that are less controversial, such as the tax reform. (1) Cabinet consolidation would also be another development which the market would pay attention to, as a proxy to judge how determined the government is to streamline its operations. Five years ago, there were also high hopes that the government would undertake a significant consolidation of the ministries in the State Council, similar to the 1998 restructuring in which State Council ministries reduced from 40 to 29, but it ended up with only one ministry being cut, on a net basis (see Figure 21 below for more details). Recently, an unconfirmed report was circulated on the Internet (for example in or edu.offcn.com, and one can find various re-postings of the document by searching through Baidu), that the government is planning to reduce the number of ministries from 27 to 18, and the three commissions related to the financial sector i.e., China Securities Regulatory (CSRC), China Banking Regulatory (CBRC) and China Insurance Regulatory (CIRC) will be merged into one. This proposition is currently speculation and has not been directly reported in major official media or big websites such as Sina, yet the government has not blocked search results, access to it, nor officially denied it. If any consolidation on this scale takes place, it will be a significant boost to market confidence, as the market will see it as a sign of the government s determination to carry out difficult reforms. VAT reform Cabinet consolidation China Market Strategy 11

12 Figure 21: Ministries and s under the State Council ( 国务院所属部委 ) General Office of the State General Office of the State General Office of the State General Office of the State Council (GOSC) Council Council Council Ministry of Foreign Affairs Ministry of Foreign Affairs Ministry of Foreign Affairs Ministry of Foreign Affairs Ministry of Foreign Affairs Ministry of Defence Ministry of Defence Ministry of Defence Ministry of Defence Ministry of Defence State Planning State Planning State Development Planning National Development and Reform National Development and Reform State Economic and Trade State Economic and Trade (SETC) State of Economic System Reform State of Economic System Reform State Education State Education Ministry of Education Ministry of Education Ministry of Education State of Science Technology of Science Technology and Industry for National Defence State of Science Technology of Science Technology and Industry for National Defence Ministry of Science and Technology Ministry of Science and Technology of Science of Science Technology and Industry for Technology and Industry for National Defence National Defence Ministry of Information Industry Ministry of Information Industry Ministry of Science and Technology Ministry of Industry and Information State Ethnic Affairs State Ethnic Affairs State Ethnic Affairs State Ethnic Affairs State Ethnic Affairs Ministry of Public Security Ministry of Public Security Ministry of Public Security Ministry of Public Security Ministry of Public Security Ministry of State Security Ministry of State Security Ministry of State Security Ministry of State Security Ministry of State Security Ministry of Supervision Ministry of Supervision Ministry of Supervision Ministry of Supervision Ministry of Supervision Ministry of Civil Affairs Ministry of Civil Affairs Ministry of Civil Affairs Ministry of Civil Affairs Ministry of Civil Affairs Ministry of Justice Ministry of Justice Ministry of Justice Ministry of Justice Ministry of Justice Ministry of Finance Ministry of Finance Ministry of Finance Ministry of Finance Ministry of Finance Ministry of Personnel Ministry of Personnel Ministry of Personnel Ministry of Personnel Ministry of Human Resources Ministry of Labour Ministry of Labour and Social Security Ministry of Geology and Minerals Ministry of Geology and Minerals Ministry of Labour and Social Ministry of Labour and Social Security Security Ministry of Land and Resources Ministry of Land and Resources Ministry of Land and Resources Ministry of Environmental Protection Ministry of Construction Ministry of Construction Ministry of Construction Ministry of Construction Ministry of Housing and Urban and Rural Construction Ministry of Energy Ministry of Electric Power Industry Ministry of Coal Industry Ministry of Railway Ministry of Railway Ministry of Railway Ministry of Railway Ministry of Railway Ministry of Communication Ministry of Communications Ministry of Communications Ministry of Communications Ministry of Communications and Transportation Ministry of Machine Building and Electronics Industry Ministry of Machine Industry Ministry of Electronics Industry Ministry of Aeronautics and Astronautics Industry Ministry of Metallurgy Industry Ministry of Chemistry Industry Ministry of Light Industry Ministry of Textile Industry Ministry of Post Ministry of Metallurgy Industry Ministry of Chemistry Industry Ministry of Post Ministry of Water Resources Ministry of Water Resources Ministry of Water Resources Ministry of Water Resources Ministry of Water Resources Ministry of Agriculture Ministry of Agriculture Ministry of Agriculture Ministry of Agriculture Ministry of Agriculture Ministry of Forestry Ministry of Commerce Ministry of Foreign Trade and Economics Ministry of Materials Ministry of Forestry Ministry of Foreign Trade and Economic Cooperation Ministry of Domestic Trades Ministry of Foreign Trade and Economic Cooperation Ministry of Commerce Ministry of Commerce Ministry of Culture Ministry of Culture Ministry of Culture Ministry of Culture Ministry of Culture Ministry of Radio Film and Ministry of Radio Film and Television Television Ministry of Health Ministry of Health Ministry of Health Ministry of Health Ministry of Health State Physical Culture and Sports State Physical Culture and Sports State Family Planning State Family Planning State Family Planning National Population and Family National Population and Family Planning Planning The People's Bank of China The People's Bank of China The People's Bank of China The People's Bank of China The People's Bank of China National Audit Office National Audit Office National Audit Office National Audit Office National Audit Office Source: Wikipedia China Market Strategy 12

13 Asia Pacific / China Steel Baosteel Rating NEUTRAL* Price (28 Nov 12, Rmb) 4.65 Target price (Rmb) 5.20¹ Upside/downside (%) 11.8 Mkt cap (Rmb mn) 81,431 (US$13,076 mn) Enterprise value (Rmb mn) 114,339 Number of shares (mn) 17, Free float (%) week price range ADTO - 6M (US$ mn) 18.5 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Trina Chen trina.chen@credit-suisse.com Frankie Zhu frankie.zhu@credit-suisse.com ( SS / CH) Solid operator, depressed cycle Maintain our Neutral rating. We expect depressed cycle in China steel sector to remain due to persistent excess supply. We maintain our NEUTRAL rating on Baosteel with a target price of Rmb5.2/sh. Sector will likely trade at de-rated multiples. We estimate 2013 Chinese steel demand to improve by a moderate 3%, driven by improvement in infrastructure, appliances and machinery (from a low base and potential 2H13 restocking), offset by moderate slowdown in property construction. Nevertheless, supply growth has accelerated again in 2012E, with 10M12 capex rising 32% YoY and capacity reaching above 900 mn t. The sector has the worst combination in supply excess capacity, poor expansion and production discipline, and a flat cost curve. With ROE lingering around 0 5% in the coming years, we believe the sector will likely trade at de-rated multiples, with average producers likely at x P/B. EBITDA and ROE to stagnate. We expect Baosteel s unit EBITDA to stay depressed at US$94/t in 2013, versus its historical average of US$190/t. ROE is expected to remain at 5%. Valuation. Our target price is based on 0.8x 2013E P/B, on low end of historical trading range, to reflect the persistent lower margin and return. Share price performance Price (LHS) Rebased Rel (RHS) 4 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on On the spot exchange rate was Rmb6.23/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 222, , , ,844.0 EBITDA (Rmb mn) 22, , , ,677.2 EBIT (Rmb mn) 9, , , ,954.5 Net profit (Rmb mn) 7, , , ,915.8 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Market Strategy 13

14 Asia Pacific / China Real Estate Management & Development China Vanke Co Ltd-A Rating OUTPERFORM* Price (28 Nov 12, Rmb) 8.34 Target price (Rmb) 12.50¹ Upside/downside (%) 49.9 Mkt cap (Rmb mn) 80,733 (US$12,964 mn) Enterprise value (Rmb mn) 96,691 Number of shares (mn) 9, Free float (%) week price range ADTO - 6M (US$ mn) 69.9 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Jinsong Du jinsong.du@credit-suisse.com ( SZ / CH) Undervalued leader in homebuilding Contracted sales outlook. China Vanke s 10M12 YTD contracted sales reached Rmb110 bn, +2% YoY. The corresponding sales volume increased 9% YoY to mn sq m. We expect Vanke s November contracted sales to be weaker than October, and December contracted sales will depend on how many transactions can turn into contracts within M12 revenue up 57.4% YoY. China Vanke delivered 3.93 mn sq m in 9M12, up 66.1% YoY. As a result, 9M12 revenue rose 57.4% YoY to Rmb46.13 bn. For 2012, Vanke targets delivering at least 7 mn sq m, i.e., 4Q12 delivery will reach about 3.07 mn sq m. Gearing remains one of the lowest among peers. Vanke acquired 36 projects in 9M12 with attributable GFA of 5.5 mn sq m. As a result, net gearing increased from 23.8% at end-fy2011 to 37.7% at end-3q12. China Vanke will stay active on land-banking in 4Q12, but expects gearing to fall to 30% as more cash will be collected from contracted sales. Valuation. We maintain our OUTPERFORM rating on Vanke, as we expect its sales to be better than peers. Our target price of Rmb12.50 is based on 10% discount to its 12-month net asset value (NAV). Share price performance Price (LHS) Rebased Rel (RHS) 6 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 The price relative chart measures performance against the MSCI CHINA F IDX which closed at on On the spot exchange rate was Rmb6.23/US$ Performance over 1M 3M 12M Absolute (%) Relative (%) Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 71, , , ,069.0 EBITDA (Rmb mn) 15, , , ,472.8 EBIT (Rmb mn) 15, , , ,472.8 Net attributable profit (Rmb mn) 9, , , ,511.7 EPS (CS adj.) (Rmb) Change from previous EPS (%) n.a Consensus EPS (Rmb) n.a EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) ROE (%) Net debt/equity (%) NAV per share (Rmb) Disc./(prem.) to NAV (%) Source: Company data, Thomson Reuters, Credit Suisse estimates. China Market Strategy 14

15 Companies Mentioned (Price as of 28-Nov-2012) Agricultural Bank of China (1288.HK, HK$3.35) Air China (0753.HK, HK$5.11) Aluminum Corporation of China (2600.HK, HK$3.26) Angang Steel Company Ltd (0347.HK, HK$4.86) Anhui Conch Cement Co. Ltd. (0914.HK, HK$25.45) Bank of China Ltd (3988.HK, HK$3.2) Bank of Communications (3328.HK, HK$5.47) Baosteel ( SS, Rmb4.65, NEUTRAL, TP Rmb5.2) BYD Co Ltd (1211.HK, HK$18.86) China Citic Bank (0998.HK, HK$3.93) China Coal Energy Co. (1898.HK, HK$7.68) China Communications Construction Co Ltd (1800.HK, HK$6.85) China Construction Bank (0939.HK, HK$5.8) China COSCO Holdings (1919.HK, HK$3.58) China Life (2628.HK, HK$22.4) China Merchants Bank - H (3968.HK, HK$14.44) China Minsheng Banking Corporation (1988.HK, HK$7.4) China Oilfield Services Ltd (2883.HK, HK$14.64) China Pacific (2601.HK, HK$24.3) China Petroleum & Chemical Corporation - H (0386.HK, HK$8.05) China Railway Construction Corp (1186.HK, HK$8.18) China Railway Group Ltd (0390.HK, HK$4.21) China Resources Land Ltd (1109.HK, HK$19.72) China Resources Power Holdings (0836.HK, HK$17.16) China Shenhua Energy Company Limited (1088.HK, HK$31.35) China Vanke Co Ltd-A ( SZ, Rmb8.34, OUTPERFORM, TP Rmb12.5) Citic Securities Co., Ltd. (6030.HK, HK$15.02) CSR Corporation Limited (1766.HK, HK$6.44) Datang International Power Generation Co. Ltd. (0991.HK, HK$2.73) Great Wall Motor (2333.HK, HK$24.5) Haitong Securities Co.,Ltd (6837.HK, HK$10.16) Huaneng Power International Inc (0902.HK, HK$6.28) Industrial & Commercial Bank of China (1398.HK, HK$5.15) Jiangxi Copper Company Ltd (0358.HK, HK$19.3) MCC (1618.HK, HK$1.52) New China Life (1336.HK, HK$23.3) PetroChina (0857.HK, HK$10.18) Ping An (2318.HK, HK$57.5) Sany Heavy Industry ( SS, Rmb8.2) Shanghai Electric Group Co., Ltd. (2727.HK, HK$3.1) Shanghai Pharmaceuticals Holding Co., Ltd. (2607.HK, HK$14.56) Tsingtao (0168.HK, HK$42.55) Weichai Power Co. Ltd (2338.HK, HK$27.65) Yanzhou Coal Mining Co. (1171.HK, HK$11.72) Zijin Mining Group Co., Ltd (2899.HK, HK$3.1) Zoomlion Heavy Industry (1157.HK, HK$9.48) Important Global Disclosures Disclosure Appendix I, Vincent Chan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Price and Rating History for China Vanke Co Ltd-A ( SZ) SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 22-Feb O 19-May Aug Aug Oct Nov Oct Dec Mar Jun Jul * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM China Market Strategy 15

16 Price and Rating History for Baosteel ( SS) SS Closing Price Target Price Date (Rmb) (Rmb) Rating 06-Jan O 04-Feb Apr May Aug Jan May Jul N 31-Aug Oct Dec O 30-Apr Jun Aug N * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM N EU T RA L The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of October 2, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* by at least 10-15% or more, (depending on perceived risk) over the next 12 months. Neutral (N) : The stock's total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U) : The stock's total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American, Japanese, and non -Japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relat ive attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the % and % levels in the Neutral stock rating definition, respectively. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts' sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst's expectation for the sector's fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst's expectation for the sector's fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst's expectation for the sector's fundamentals and/or valuation is cautious over the next 12 months. *An analyst's coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. China Market Strategy 16

17 Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 40% (47% banking clients) Underperform/Sell* 15% (41% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperf orm most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for China Vanke Co Ltd-A ( SZ) Method: Our target price of Rmb12.50 for China Vanke is based on 10% discount to its 12-month net asset value (NAV), due to its diversified presence and good sales track record. Risk: Risks to our target price of Rmb12.50 for China Vanke are: (1) demand conditions: if demand in China slows down, its earnings and growth should be negatively affected; (2) changes in the company's financial conditions; and (3) other macro changes. Price Target: (12 months) for Baosteel ( SS) Method: Our target price for Baoshan Iron and Steel (Baosteel) is Rmb5.20/shr and is based on 0.8x P/B on 2012E book value per share of Rmb6.5/sh. Risk: Risks to our target price of Rmb5.20/sh for Baosteel are steel price fluctuations, underpinned by industry capacity addition and demand growth, uncertainty in raw materials costs, and potential changes to government policies. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (0347.HK, 0386.HK, 0753.HK, 0836.HK, 0857.HK, 0902.HK, 0939.HK, 0991.HK, 0998.HK, 1088.HK, 1109.HK, 1171.HK, 1288.HK, 1336.HK, 1398.HK, 1766.HK, 1898.HK, 1988.HK, 2318.HK, 2600.HK, 2601.HK, 2628.HK, 2727.HK, 2883.HK, 2899.HK, 3328.HK, 3968.HK, 3988.HK, SS, 6030.HK, 6837.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (0347.HK, 0386.HK, 0939.HK, 0991.HK, 1398.HK, 1898.HK, 2601.HK, 2628.HK, 2727.HK, 2883.HK, 3328.HK, 3968.HK, 6030.HK, 6837.HK) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (0939.HK, 0998.HK, 1288.HK, 1398.HK, 2318.HK, 2628.HK, 3328.HK, 3968.HK, 3988.HK) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (0939.HK, 2601.HK, 2628.HK, 3328.HK, 3968.HK, 6837.HK) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (0347.HK, 0386.HK, 0939.HK, 0991.HK, 1398.HK, 1898.HK, 2601.HK, 2628.HK, 2727.HK, 2883.HK, 3328.HK, 3968.HK, 6030.HK, 6837.HK) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0347.HK, 0358.HK, 0386.HK, 0753.HK, 0836.HK, 0857.HK, 0902.HK, 0939.HK, 0991.HK, 1088.HK, 1109.HK, 1171.HK, 1211.HK, 1288.HK, 1336.HK, 1398.HK, 1766.HK, 1898.HK, 2318.HK, 2600.HK, 2601.HK, 2628.HK, 2727.HK, 2883.HK, 2899.HK, 3328.HK, 3968.HK, 3988.HK, SS, 6030.HK, 6837.HK) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0939.HK, 0998.HK, 1288.HK, 1398.HK, 2318.HK, 2628.HK, 3328.HK, 3968.HK, 3988.HK) within the past 12 months China Market Strategy 17

18 As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0347.HK, 0358.HK, 0386.HK, 0857.HK, 0902.HK, 0914.HK, 1088.HK, 1157.HK, 1171.HK, 1288.HK, 1398.HK, 1898.HK, 1988.HK, 2318.HK, 2600.HK, 2601.HK, 2628.HK, 2883.HK, 2899.HK, 3968.HK, 3988.HK). Credit Suisse has a material conflict of interest with the subject company ( SZ). Liping Zhang, an employee of Credit Suisse, is a director of China Vanke Credit Suisse has a material conflict of interest with the subject company (0386.HK). Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola. Credit Suisse has a material conflict of interest with the subject company (0857.HK). Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. Credit Suisse has a material conflict of interest with the subject company (2727.HK). Credit Suisse is acting as financial advisor to Shanghai Electric Group Limited regarding an acquisition of Shanghai Electric Insurance Co Brokerage Co Ltd and Shanghai Electric Leasing Co Ltd from its parent company, Shanghai Electric (Group) Corp. Credit Suisse has a material conflict of interest with the subject company (6030.HK). Credit Suisse is the financial advisor to Citic Securities regarding the proposed acquisition of Credit Agricole SA s CLSA unit. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company ( SZ, 0347.HK, 0358.HK, 0386.HK, 0753.HK, 0836.HK, 0857.HK, 0902.HK, 0914.HK, 0939.HK, 0991.HK, 0998.HK, 1088.HK, 1109.HK, 1157.HK, 1171.HK, 1211.HK, 1288.HK, 1336.HK, 1398.HK, 1766.HK, 1898.HK, 1919.HK, 1988.HK, 2318.HK, 2333.HK, 2600.HK, 2601.HK, 2607.HK, 2628.HK, 2727.HK, 2883.HK, 2899.HK, 3328.HK, 3968.HK, 3988.HK, SS, SS, 6030.HK) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited... Vincent Chan Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) China Market Strategy 18