HSBC Sector Analysis

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7/24/2012
4:05 AM
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Asia-Pacific
Global Equity Research
Multi-sector
July 2012
David May*
Head of Equity Research, Asia-Pacific
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6753
davidmay@hsbc.com.hk
HSBC Nutshell - A guide to equity sectors and countries
Chris Georgs
Global Head of Equity Research
HSBC Bank plc
+44 20 7991 6781
chris.georgs@hsbc.com
HSBC Nutshell
A guide to equity sectors and countries in Asia-Pacific
This guide will help you gain a quick but thorough understanding of the major sectors, industry
groups and countries in the region
It provides detailed information on structures, key drivers, indicators, themes and valuation
approaches
Asia-Pacific
A product of the Global Equity Research Team
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
July 2012
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Asia-Pacific Equity Research

Multi-sector
July 2012
abc
Dear Client,
We are pleased to present HSBC Nutshell: A guide to equity sectors and countries, our inaugural suite of
multi-regional and global primers. The Nutshell guides have been compiled by our global equity research
team to help new and seasoned professionals gain a quick, but thorough, understanding of markets in
Latin America, EMEA, and Asia. For investors looking to invest globally and especially in emerging markets,
the guides provide a broad, top-down perspective on these markets and the sectors related to them.
We have assumed that our readers will have some basic working knowledge of the world economy,
equity markets, financial terminology and ratios, although the Nutshell guides are designed to be used by
anyone wanting to gain a deeper understanding of countries or industries with which they are not familiar.
The Nutshell guides are designed to provide consistency and comparability. For each sector, our analysts
explain how they value companies, and assess the key drivers affecting the sector, as well as the macro
issues and trends impacting the sector on a regional and global basis. We then build on the sector
framework to include regional macro overviews and country sections that provide a broader perspective
on the sectors and geographies that we cover, addressing topics such as market composition, liquidity,
fund flows, and political and regulatory structures.
We look forward to making our analysts available to you on a one-on-one or group basis to help you build
on your country, sector, industry or stock knowledge from the nuts and bolts of the industry dynamics
through to individual company valuation and recommendations. The front page of each industry or
country section within these guides includes the names and contact details of our sector analysts and,
where relevant, their specialist sales person/people. Please get in touch with your HSBC representative to
organise this, contact us directly, or email HSBC.Nutshell@us.hsbc.com.
We hope you find these guides useful, and we look forward to continuing to work with you in the future.
Regards,
Chris Georgs Global Head of Equity Research

Patrick Boucher Head of Product Management, Equity Research
David May Head of Equity Research, Asia Pacific

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July 2012
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Multi-sector
July 2012
Contents
Asia-Pacific overview
Countries
231
China
233
Hong Kong
241
India
249
Sectors
15
Chemicals
17
Cleantech
25
Climate Change
31
Indonesia
257
Consumer discretionary
41
Korea
265
Consumer staples
51
Malaysia
273
Consumer autos
59
Singapore
281
Financials banks
67
Taiwan
289
Financials insurance
79
Thailand
299
Financials property
87
Healthcare
97
The Philippines
307
Vietnam
315
Industrials China paper
105
Industrials conglomerates
111
Industrials construction machinery
119
Industrials construction materials
125
Industrials Korea E&C
133
Industrials offshore & marine
139
Industrials railway infrastructure
147
Industrials toll roads
153
Internet & media
159
Metals & mining
165
Oil & gas
175
Technology hardware
185
Technology IT services
195
Telecoms
203
Transport
211
Utilities
223
Basic valuation and

accounting guide
321
Disclosure appendix
338
Disclaimer
340

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July 2012
Notes
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July 2012
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Asia-Pacific overview
Country
China
Weight in MSCI Asia

Key sub-sectors
25%
Financials (37%),
Energy (18%),
Telecom (13%)
Three largest stocks
China Mobile, CCB,

ICBC
Hong Kong
India
Indonesia
Korea
Malaysia
11%
9%
4%
21%
Financials (61%), Financials (27%),
Financials (32%), Technology (25%),
Utilities (14%), Technology (16%),
Cons Disc (15%), Cons Disc (18%),
Cons Disc (13%)
Energy (12%) Cons Staples (13%)
Industrials (16%)
5%
Financials (30%),
Industrials (15%),
Telecom (12%)
Taiwan
Thailand
The Philippines
7%
15%
Financials (47%), Technology (55%),
Industrials (25%), Financials (15%),
Telecom (12%)
Materials (14%)
3%
Financials (38%),
Energy (26%),
Materials (13%)
1%
Financials (42%),
Industrials (23%),
Utilities (12%)
TSMC, Hon Hai,

Chunghwa
PTT, Siam
Commercial Bank,
PTT Exploration
SM Investments,
PLDT, Ayala Land
AIA Group, Sun

Hung Kai Prop,
Hutchison Whampoa
Infosys, Reliance
Industries, HDFC
2,469
17,155
2,310
8,085
1,060
2,744
377
427
910
5,397
261
525
642
1,052
645
3,346
303
919
214
153
Performance since 1 January 2000

Absolute
Relative to MSCI Asia
58%
1.4x
11%
0.3x
141%
3.5x
271%
6.6x
135%
3.3x
128%
3.1x
22%
0.5x
-32%
-0.8x
162%
4.0x
50%
1.2x
Correlations (5-year) with

MSCI Asia
M1
Country exports
US ISM
0.91
0.62
0.27
0.42
0.93
0.52
0.59
0.71
0.85
0.53
0.47
0.58
0.84
0.15
0.69
0.67
0.82
-0.03
0.49
0.76
0.73
0.53
0.49
0.74
0.91
0.26
0.68
0.70
0.89
0.61
0.76
0.73
0.8
0.67
0.74
0.82
0.66
0.2
0.68
0.67
Key sector stats

EPS growth 2011 (%)
Long-term average PE (x)
12-month forward PE (x)
Long-term average PB (x)
12-month forward PB (x)
Long-term average ROE (%)
12-month forward ROE (%)
9.9
12.8
8.2
1.6
1.3
12.5
15.9
22.4
14.9
13
1.8
1.1
12.1
8.6
8.9
13.8
12.4
2.8
2
20.3
16.1
20
12.8
11.6
2.8
2.6
21.9
22.6
-15.1
11
8.3
1.2
1.1
10.9
13.4
7.1
15.9
13.8
2.1
1.9
13.2
13.9
-5.8
15.9
12.1
1.8
1.3
11.3
10.6
-27.6
17.7
12.7
2.4
1.5
13.6
12.1
14.9
19.2
10.2
2
1.9
10.4
18.5
4.5
14.7
15.6
1.9
2.5
12.9
16
Trading data
Market cap (USDbn)
Average daily trading volume*
(USDm, 12 months)
Investment issues
Themes, characteristics
Astra International,
Samsung
Bank Central Asia, Electronics, Hyundai
Telekomunikasi Indo
Motor, POSCO
Singapore
CIMB Group, Singapore Telecom,

Maybank, DBS Group, United
Sime Darby
Overseas Bank
*The trading data and market cap data for the country stock exchanges
Source: MSCI, HSBC estimates as of mid-June 2012
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High degree of Dominated by

Substantial
One of Asias
Cyclical market A defensive
Stable market
Cross-Strait
Strong income Software
governmentproperty and
rerating in last
most open
populated with
market. Not very
with wellrelations
growth in rural
outsourcing and
led price
banks, so very
decade. Market
democracies.
sectors such as
liquid. Current
capitalised banks between Taiwan
areas on back of
remittances from
arrangements in
interest rate
volatility is
Elections in
technology,
account surplus
and strong
and China a
soft commodities
overseas
various
sensitive. One of
significantly
2014. Strong
autos and
implies little
regional real
recurring theme
boom
workers are two
industries
the most volatile
higher than
income growth in
shipbuilders.
reliance on
estate players
key themes.
markets in Asia
earnings volatility
rural areas on
Highly export led
foreign capital.
Strong income
back of
market
Domestic
growth in rural
commodities
investment funds
areas on back of
boom
are large owners
commodities
boom

Multi-sector
July 2012
Asia, by country
Sector
Consumer Discretionary Consumer Staples
Weight in MSCI Asia

ex Japan
Key sub-sectors
Energy
Financials
Healthcare
Industrials
Materials
Technology
Telecom
Utilities
31%
1%
10%
7%
18%
7%
4%
Banks, real estate Generics, hospitals

and insurance
Transport,
shipbuilding
Steel, Coal Hardware, software Telecoms, Internet,

Media
Electric and gas

utilities
10%
6%
7%
Korea and China

autos, retailers
Food & Beverage
Oil refiners,
distributors
1,285
493
776
3,121
136
1,275
1,112
2,368
587
275
234,257
135,514
178,201
751,842
21,355
236,283
175,848
446,643
157,001
91,661
Performance since 1 January 2000

Absolute
133%
3.3x
Three largest stocks
Hyundai Motor,
Hyundai Mobis,
Kia Motors
198%
4.9x
ITC, KT&G,
Want Want
361%
64%
102%
11%
8.8x
1.6x
2.5x
0.3x
CNOOC, China Constr. Bank,
Sun Pharma, Hutchison Whampoa,
ICBC, AIA Group Dr Reddys, Celltrion
PetroChina,
Keppel Corp,
Reliance
Hyundai Heavy
106%
2.6x
POSCO, China
Steel, LG Chem
0%
-29%
0.0x
-0.7x
Samsung Elec,
China Mobile,
TSMC, Tencent Singapore Telecom,
Chunghwa
57%
1.4x
CLP, HK and
CH Gas,
Power Assets
Trading data
Average daily trading volume*
(USDm,12 months)
Market cap (USDbn)

MSCI Asia
M1 Asia
0.94
0.7
0.85
0.52
0.96
0.38
0.98
0.6
0.78
0.56
0.96
0.43
0.94
0.51
0.86
0.73
0.78
0.05
0.85
0.43
Key sector stats (avg 2011-12 numbers)

Sales growth
15%
Net income growth
25%
ROE
20%
21%
18%
19%
16%
8%
17%
nm
nm
nm
16%
25%
18%
15%
6%
6%
17%
-10%
11%
16%
21%
16%
12%
9%
17%
10%
2%
12%
Key sector themes

Industry structure
Highly
competitive.
Companies
building brands,
with varied
success

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July 2012
Asia, by sector
Food inflation
Oil a key driver, Banking
Asia healthcare is Very varied
Steel is
Hardware
Mobile
With rising
puts pressure on
which is positive
penetration a
focused on
sector. Low
consolidating,
companies
penetration rising
energy costs and
margins, but
for exploration
driver in ASEAN.
generics, but
competition in
coal is an already
struggle with
in Indonesia. In
stable (Chinese)
industry leaders
plays but
In CH, capital
looking to
high-end oil rigs.
consolidated
margins, but
India, industry is
electricity prices,
pass this on over
pressures
requirements and
develop so-called
Shipbuilding
market
niches within
starting to
the utilities sector
time to
margins for
bad debt
biosimilars when
highly
hardware tech
consolidate. In
is facing a margin
consumers
refiners
(LGFVs) a recent
US/EU patents
competitive
growing fast.
China, new viable squeeze
theme
on biologic
Examples: Apple
global
products expire
iPad makers,
technologies will
AMOLED display
drive growth
*The trading data and market cap data for the MSCI Asia ex Japan sector indexes
Source: MSCI, HSBC estimates, as of mid-June 2012
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Multi-sector
July 2012
Asia-Pacific
overview
Introduction
In the last two decades Asia has experienced three large corrections. The first crisis (1997-98) was regional
and was caused by regional imbalances in currencies, balance sheets and capital deployment. The other two
the end of the tech bubble in 2001 and the financial turmoil of 2008-09 were driven by global events.
The chart below indicates that Asia is a volatile region. In this chapter we aim to look at the drivers of this
volatility market structure, correlations, earnings, valuations and fund flows.
Market structure
Market structure and liquidity are important in explaining volatility in Asian markets. Illiquid markets experience
more volatility. In markets with low volumes, prices often fall quickly when investors rush for the exit.
Asias largest stocks are two electronic giants (Samsung Electronics and Taiwan Semiconductor), a mobile
phone operator (China Mobile) and two banks (China Construction Bank and ICBC).
The top-10 stocks account for 20% of the region and financials and technology are the two dominant
sectors, accounting for almost half of total Asian market capitalisation.
The most concentrated markets are those where the top-10 stocks carry the largest accumulated weights in the
market Thailand, Indonesia and the Philippines. China, India and Taiwan are the most diversified markets.
Interestingly, if we rank countries by market liquidity, a similar story emerges. Smaller countries (think
ASEAN) tend to be much more concentrated around a few large, liquid stocks, while larger markets
(Hong Kong, Korea, China) have a better spread of sectors and stocks.
MSCI Asia ex Japan index
Largest stocks in MSCI Asia ex Japan
700
Stock rank Stock name
Asia ex Japan
400
1
2
3
4
5
300
Top-5
600
500
6
7
8
9
10
200
100
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
SAMSUNG ELECTRONICS
TSMC
CHINA MOBILE
CHINA CONSTRUCTION BANK
ICBC
5%
3%
3%
2%
1%
14%
AIA GROUP
CNOOC
HYUNDAI MOTOR
TENCENT HOLDINGS
PETROCHINA
Top-10
Source: MSCI, Thomson Reuters Datastream, HSBC
Index weight
1%
1%
1%
1%
1%
6%
Herald van der Linde*

Deputy Head of Research,
Asia-Pacific, and Head of
Equity Strategy, Asia-Pacific
The Hongkong and Shanghai
Banking Corporation Limited
+852 2996 6575
heraldvanderlinde@hsbc.com.hk
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
and is not registered/qualified
pursuant to FINRA regulations
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July 2012
Country weights of top-5 / top-10 stocks

Asia ex Japan (AEJ) market
Thailand
Indonesia
Philippines
Singapore
HK
Malaysia
Korea
China
India
Taiwan
Daily average stock market turnover (USDbn)

Top-5
Top-10
45%
51%
42%
49%
36%
35%
41%
35%
35%
34%
73%
72%
68%
65%
56%
55%
53%
52%
51%
45%
Current
5-year average
19.5
7.0
4.1
2.1
2.5
0.9
1.0
0.5
0.4
0.2
38.5
23.6
9.2
5.3
4.0
3.7
1.2
0.7
0.5
0.4
0.1
48.4
China
HK
Korea
India
Taiwan
Singapore
Thailand
Malaysia
Indonesia
Philippines
Asia ex Japan
Note: Ranked by 5-year turnover
Source: Bloomberg, HSBC
Market structure and liquidity are important in explaining volatility in Asian markets. Illiquid markets
experience more volatility. In markets with low volumes, prices often fall quickly when investors rush for
the exit.
Meanwhile, markets with large, dominant stocks are influenced by the share price performance of those
shares (e.g., TSMC in Taiwan, Samsung in Korea).
Measured over the last five years, the most volatile markets are Hong Kong, China, India and Indonesia.
The least volatile are Malaysia and Singapore.
Another way to examine volatility is to segment it into two components earnings (or forecasts) and
valuations. This is illustrated in the table below (the variation in valuation is defined as the difference
between market volatility and earnings volatility).
Earnings and index volatility
MSCI indices
______________ Earnings volatility ______________

10 years
5 years
Malaysia
Australia
Japan
Philippines
Singapore
Thailand
Taiwan
Korea
Indonesia
India
China
Hong Kong
Asia ex-Japan
Asia Pacific
18%
12%
81%
24%
27%
46%
51%
41%
26%
13%
16%
29%
23%
76%
26%
10%
98%
18%
17%
32%
63%
40%
18%
16%
18%
35%
25%
62%
______________ Market volatility _______________

10 years
5 years
16%
17%
22%
25%
22%
25%
26%
26%
30%
29%
32%
25%
23%
20%
17%
20%
24%
26%
26%
29%
29%
29%
31%
34%
38%
41%
28%
23%
Note: Ranked by market volatility over 5 years.

Earnings volatility is high in Hong Kong, Korea and Taiwan. Volatility in valuations (i.e., changes in the
PE for that market) is highest in Hong Kong, China and India.
Markets with the lowest valuation volatility are Malaysia, Hong Kong and Singapore (the latter two are
both developed markets under MSCI classification).
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July 2012
Correlations
So far we have briefly examined market structure, liquidity and volatility in earnings and valuations to
explain market behaviour. Another factor that drives market volatility is the sensitivity of markets to
global and domestic economic factors.
To examine this further, we correlated various macro (using ISM and country exports as a proxy for
global macro conditions and M1 money supply as a proxy for domestic economic conditions) and fund
flow factors with the market.
The results show that the countries most exposed to global economic conditions are Singapore, Taiwan
and Hong Kong.
In Korea this exposure to global factors appears low. However, the market is dominated by the
technology sector and Korean companies are part of a large global technology food chain.
Hence, the low correlation masks a relatively large domestic sector within the market that is rather
insulated from global conditions. Indeed, the technology sector in Korea shows a very high correlation
with proxies for global growth, such as the ISM index and exports.
On the other hand, Malaysia, India and Thailand are more sensitive to domestic liquidity conditions (M1
supply). Note that, in each of these markets, banks and financials play a dominant role in the index
composition.
Market correlations (since 2001)
Factors
Economic factors
ISM
Exports
Money supply
China Korea
0.56
0.35
0.51
Fund flows
past 10 years
past 5 years
previous 5 years
Indices (past 10 years)
Asia ex Japan
World
Hong Taiwan
Kong
0.71
0.33
0.00
0.76
0.60
0.42
0.51
0.56
0.36
0.84
0.72
0.80
0.70
0.90
0.77
India Singapore Indonesia Malaysia Thailand
0.76
0.74
0.63
0.71
0.52
0.52
0.73
0.78
0.67
0.60
0.66
0.51
0.84
0.67
0.79
0.70
0.76
0.54
0.45
0.72
0.56
0.07
0.72
0.49
0.66
0.20
0.21
0.26
0.87
0.80
0.66
0.61
0.65
0.50
The
Asia
Philippines ex Japan
0.78
0.59
0.56
0.67
0.59
0.22
0.77
0.53
0.48
0.62
0.68
0.49
0.34
0.36
0.37
0.72
0.73
0.72
0.71
0.62
0.56
0.49
Source: MSCI, Thomson Reuters Datastream, Bloomberg, HSBC
Earnings
Asian earnings are currently growing above trend, primarily driven by above trend growth in India and
China, and to a lesser extent Southeast Asia.
Asian earnings grew on average 11% annually in the last decade. Somewhat unfortunately for many
investors, the smaller and less liquid markets have shown the best earnings growth in this period
Indonesia, the Philippines and Thailand. Still, larger markets such as China and India have made it to the
top three.
10
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July 2012
Actual vs trend earnings
MSCI Asia ex Japan annual EPS growth
50
20%
EPS Grow th CAGR
40
AEJ=11%
15%
30
10%
20
5%
Korea
Taiwan
Malaysia
Hong
Singapore
India
Thailand
Trend
Indonesia
Actual Earnings
0%
Philippines
Sep-99
Jul-00
May-01
Mar-02
Jan-03
Nov-03
Sep-04
Jul-05
May-06
Mar-07
Jan-08
Nov-08
Sep-09
Jul-10
May-11
Mar-12
China
10
If we look at how accurate analysts have been in forecasting this growth, it becomes apparent that Asian
earnings have continuously been subject to upward revisions in the last decade, with the exception of
2009 when the global financial turmoil made analysts cut their numbers.
Momentum
MSCI Ax J Index y -o-y (RHS)
Note: Earnings momentum is defined as the 6 month % change in 12M forward EPS forecast
EPS grow th
2012
2011
2012
2011
2010
2009
2008
2007
2006
2005
-90
2010
-30
-60
2009
2008
30
120
90
60
30
0
-30
-60
-90
2007
90
60
(%)
30
25
20
15
10
5
0
-5
2006
120
2005
(%)
2004
40
30
20
10
0
-10
-20
-30
-40
12-month forward EPS growth* vs MSCI AEJ Index
2004
Earnings momentum: AEJ vs MSCI AEJ returns
*Percentage change in trailing 12-month and 12-month forward EPS

We can now ask the question do analysts in Asia have a good insight into market behaviour or
earnings? Analysts earnings upgrades and downgrades as well as their recommendation changes
correlate well with the market.
Still, this does not answer the question. Indeed, one has to be careful with the causal relationship is the
market moving higher because analysts are upgrading earnings and recommendations, or vice versa?
Here, evidence if more mixed. Markets were falling in late 2007, well before analysts started to cut their
numbers (but then again, valuations were also high in 2007).
However, there is also evidence that analysts earnings forecasts and ratings do matter. In 2009, for
example, analysts earnings forecasts and stock recommendations were raised before the market rallied
from its bottom.
11
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July 2012
Upgrades as % of total earnings revisions*

AEJ vs MSCI AEJ returns
80
Recommendation consensus score
(%)
120
-90
% upgrades
2.6
2.4
2.2
2.0
Analysts feeling more bullish
1.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Recommendation consensus score (RCS)
Av erage
2SD
*Number of EPS estimates up as a % of total number of revisions in estimates

Analyst s f eeling more bearish
2.8
2012
10
2011
-30
-60
2010
30
20
2009
2008
40
2007
30
2006
50
2005
90
60
2004
70
60
3.0
Note: the recommendation consensus score (RCS) assigns a score of 1 to each buy
recommendation, 3 for hold and 5 for sell.
This is also confirmed by looking at the recommendation consensus score (RCS) analysts were bullish
throughout 2009 before the market rallied. Indeed, they turned more cautious while the rally continued.
Still, one has to be careful with this. In Korea, analysts are more optimistic than elsewhere the number of
Buy ratings has been consistently much higher in the last decade than elsewhere in Asia.
But it can be argued that at least in Asia, analysts views do (sometimes) matter.
Valuations
In the last decade, Asia ex-Japan has traded on an average 12.3x earnings, with Hong Kong being the most
expensive market. Korea typically trades at a 30% discount to the market, presumably a reflection of complex
Korean ownership structures, crossholdings within conglomerates and its proximity to volatile North Korea.
Return on equity (ROE) in Asia has been relatively stable across the region at 15%, with the sole exception of
2008 when they fell to 10%. PB ratios, however, continued to rise in the early 2000s to peak in 2007.
This rerating of Asian equities (e.g. rising PBs while ROEs remained relatively stable) is also visible in PE
ratios, which rose quickly over 2002-07.
Forward PE, by market
PE now
China
HK
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Japan
Australia
Asia ex-Japan
Asia Pacific
8.2
12.8
11.9
11.6
8.3
13.8
15.8
12.0
12.9
9.8
10.7
10.5
10.0
10.4
Asia ex Japan: Earnings and bond yields

Avg
2001-12
% diff
12.5
15.7
14.1
10.2
9.2
14.1
14.0
14.5
14.2
10.5
18.3
13.9
12.3
15.3
12
-34%
-19%
-15%
14%
-10%
-2%
13%
-17%
-9%
-7%
-42%
-24%
-19%
-32%
Avg
1993-2012
12.8
14.9
13.8
12.8
11.0
15.9
14.7
15.9
17.7
19.2
28.9
14.5
14.2
23.6
% diff
-36%
-14%
-14%
-10%
-24%
-13%
8%
-25%
-27%
-49%
-63%
-28%
-30%
-56%
14
BY
12
EY
10
8
6
4
2
0
01
02
03
04
05
06
07
09
Source: MSCI, Bloomberg, Thomson Reuters Datastream, HSBC
10
11
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Multi-sector
July 2012
Part of this rerating can be explained by lower market risk. Bond yields have at times declined, reflecting
lower sovereign and corporate risk.
Thus, it can be argued that for a long time Asia offered excellent value. Valuations rose as risk fell and
earnings were upgraded. However, in late 2006, valuations started to reach excessive levels of optimism.
By that time, Asia was trading at PEs of close to 20x almost twice the average. A correction was to
come in 2008-09.
May-12
May-11
May-10
May-01
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.5
5x
May-09
1.0
10x
May-08
1.5
15x
May-07
2.0
20x
May-06
2.5
P rice level
May-05
1000
900
800
700
600
500
400
300
200
100
0
May-04
ROE/COE
May-03
PBR
3.0
Asia ex Japan PE band chart
May-02
Asia ex Japan: PB vs ROE/COE (12-month forward)
As the chart indicates, Asian equities have traded in a 10-20x PE band, with valuations only below 10x
during the financial turmoil in 2008-09 and coming close to 20x when Chinese equities rocketed in 2007.
We have also looked at sector valuations across Asia. Interestingly, the spread in valuations amongst
sectors is about equal to the differences in valuations between countries.
12-month forward PE vs 10-year average and standard deviations from average
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Healthcare
Financials
Technology
Telecom
Utilities
MSCI Asia ex Japan
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# Standard deviation from average
8.15
9.5
10.8
9.6
16.8
18.2
9.0
11.2
12.2
13.4
10.2
10.1
9.6
12.9
11.4
14.7
17.7
12.8
13.3
12.2
12.8
12.1
2.0
2.0
2.0
1.9
2.6
3.1
2.0
4.4
1.9
2.3
1.7
-0.9
0.0
-1.1
-1.0
0.8
0.2
-1.9
-0.5
0.0
0.2
-1.1
However, taking traditionally low valuation sectors (energy, materials), there is a marked difference. Asian
sectors trade closer around some average while country valuations can differ widely.
This is another indication that country factors matter more than sectors in Asia. Thus, when thinking
about asset allocation in Asia, spend more time on country analysis and worry less about sectors.
13
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July 2012
Fund flows
Cumulative foreign institutional funds since 2000 in AEJ*
Cumulative buying since January 2000

USDbn
250
Asia ex -Japan
200
$ bn
150
100
50
India
Taiwan
Indonesia
Thailand
Philippines
Korea
100.2
72.4
21.3
6.4
5.4
-1.2
Total
204.4
2011
2012
2010
2009
2007
2008
2006
2005
2004
2002
2003
2001
2000
*Korea, Taiwan, India, Indonesia, Thailand and the Philippines

In the last decade, investors have added USD204bn to their holdings in Asia (ex-Japan). However, there
is a wide divergence in where this money was allocated.
On a 10-year basis, investors have taken money out of Korea, kept their investments in Thailand and the
Philippines relatively stable but added significantly in both India and Taiwan.
But in doing so, they have met investment limits in certain markets (see table below).
Media is a sector where foreign investments are highly restricted in most countries and even forbidden in
China and the Philippines.
Banking is probably one of the most open sectors in Asia, closely followed by mining and oil & gas.
Singapore is open to investments in all sectors aside from media and transport. The most restrictive with
foreign investments are Thailand and the Philippines.
Particular sectors (outside media) where limitations are also in place are Indian insurance and
Malaysian electricity.
Foreign equity ownership limits (100 = full foreign ownership allowed)
Sectors
Mining, oil and gas
Agriculture and forestry
Light manufacturing
Telecommunications
Electricity
Banking
Insurance
Transportation
Media
China
Korea
India
Singapore
Indonesia
Malaysia
75
100
75
49
85
63
50
49
0
100
100
100
49
85
100
100
80
40
100
50
82
74
100
87
26
60
63
100
100
100
100
100
100
100
47
27
98
72
69
57
95
99
80
49
5
70
85
100
40
30
49
49
100
65
Source: World Bank Investing across the borders October 2010
14
Thailand Philippines
49
49
87
49
49
49
49
49
28
40
40
75
40
66
60
100
40
0

Multi-sector
July 2012
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Sectors
15

Multi-sector
July 2012
Notes
16
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Multi-sector
July 2012
Chemicals
Chemicals team
Thomas C Hilboldt*, CFA
Head of Oil, Gas & Petrochemical Research
+852 2822 2922
thomaschilboldt@hsbc.com.hk
Sriharsha Pappu*, CFA
Analyst
HSBC Bank Middle East
+97 1 4423 6924
sriharsha.pappu@hsbc.com
Dennis H C Yoo*, CFA

Analyst
+852 2996 6917
dennishcyoo@hsbc.com.hk
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
17
18
Chemicals
Petrochemicals Integrated
Petrochemicals - Downstream
Companies that own ethylene cracker and processs

derived downstream products
Companies that receive and process basic

intermediary products. Key products are in general
specialized in few categories. Korean and
Taiwanese players are dominant.
Naphtha feedstock is generally common in Asia,

while a few crackers uses gas/liquids mixed
feedstock
Naphtha feedstock:
LG Chem and Honam Petrochem (KR)
Formosa Petrochem (TW)
Sinopec Shanghai Petrochemical (CN)
Mixed feedstock:
PTT GC (TH)
Petronas Chemicals (MY)
Korea:
Hanwha Chem
Kumho Petrochem
KP Chemical
Cheil Industrial
Agrochemicals
Fertiliser producers:
China Bluechem (CN)
Sinofert Holdings (CN)
Taiwan Fertilizer (TW)
Industrial Gases
Yingde Gases (CN)

Multi-sector
July 2012
Sector structure
Crop protection and seed:

United Phosphorus (IN)
Taiwan:
FPC, FCF, NYP
TSRC Corp
China Petrochemical Development
Thailand:
Indorama Ventures
Source: HSBC
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Multi-sector
July 2012
Asian Chemicals: Ethylene cash margins vs stock index performance

800
1200
Global
financial crisis
Emergence of gas
based producers
700
1000
Eth ylene integrated margin
800
500
400
600
300
400
MSCI AP ex Japan Chemi cal Index
600
Global
Recession
200
200
100
Commodity
Boom
Asian Crisis
Policy-led
recovery
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
HSBC Ethy lene Integrated margin (USD/ton)
2004
2005
2006
2007
2008
2009
2010
2011
2012
MSCI AC AP ex Japan Chemical Index (RHS)
Source: IHS Chemical, HSBC estimates
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19
20
Multi-sector
July 2012
Asian Chemicals: EBIT margin asset turnover (2010-11)

1.7
13.4%
1.6
High asset turn efficient

volume driven strategies
1.5
High asset turn and high

margins; profitable industry
leaders strategies
LG Chemical Limited
1.4
Coromandel International
1.3
Asset Turnover (x)
1.2
1.1
Honam Petrochemical
1.0
0.9
0.81x
0.8
Formosa Chemical and Fibr
0.7
Hanwha Chemical
OCI Company Ltd
0.6
Formosa Plastics
Nanya Plastics
0.5
0.4
0.3
High margins; niche

players or brands with
strong pricing power
Taiwan Fertilizer
0.2
Low ROA companies.
Business restructuriung may
be required
0.1
0%
5%
10%
15%
20%
25%
30%
EBIT Margin(%)
Source: Thomson Reuters Datastream, HSBC
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Multi-sector
July 2012
Sector description
The listed Asian chemicals space ex Japan comprises primarily of producers making bulk grade basic
chemicals for use in plastics, synthetic fibre and synthetic rubber. The basic chemical industry is in turn a
classic cyclical commodity industry. Products are undifferentiated, used in intermediate processes and
almost exclusively sold to manufacturers. Product technology is widely available and there is little to no
evidence of branding and basic chemical producers therefore have limited pricing power.
In such an environment, the market price is determined by the marginal cost of supply. Producers can
pass through some of the raw material volatility but margin growth and real pricing power are possible
only when supply demand conditions are tight.
The capital-intensive nature of the chemical industry is the one of the biggest contributors to its
cyclicality. Strong demand growth inevitably creates a need for new greenfield capacity which, in turn,
leads to a capital building cycle. Chemical plants entail large capital costs, at least USD2-3bn for a world
scale integrated complex, and long lead times, on average a minimum of four to five years from drawing
board to test production.
abc
Thomas C Hilboldt*, CFA

Head of Oil, Gas &
Petrochemical Research
+852-2822-2922
Sriharsha Pappu*
Analyst
+97 1 4423 6924
Dennis H C Yoo*
Analyst
+852 2996 6917

and is not registered/ qualified
Given the investment and lead times involved, producers need to generate sufficient returns to justify new
plants or the expansion of existing plants. However, the periods of strong profits occur at the same time
for most producers, so that they simultaneously have excess cash for reinvestment. Furthermore, strong
demand conditions also tend to imply relatively easier lending environments, further shoring up
producers ability to build.
To avoid losing market share, producers generally conclude that they must grow and reinvest in
additional capacity. Furthermore, low-cost producers such as the Middle East companies have the
incentive to add capacity at any stage of the cycle.
In an industry as fragmented as basic chemicals, where producers end up expanding simultaneously to
meet anticipated market demand, the result is that the market is flooded with product at roughly the same
time. Capacity growth is also chunky, as plants cannot be started up in fractions and economies of scale
make running at reduced capacities unviable. As a result it takes time for demand growth to absorb excess
capacity, which causes lower industry margins and a trough in the cycle.
Producers then adopt austerity measures, halting plans for new capacity build, and a period of
underinvestment sets in. Over time, as the excess capacity is absorbed, margins start to expand again and
the lack of new capacity leads to an extended period of stronger margins and peak cycle conditions, at
which point the whole cycle of overinvestment resumes. Chemical cycles last about 7-8 years between
peaks on average and broadly track economic cycles.
Key themes
Leveraged to EM growth
The commodity chemical industry has been built with continued strong emerging market (EM) growth
expectations in mind. Over the past 20 years, the net increase in the capacity base in excess of demand
growth has totalled over 13m tonnes. This highlights the fact that, despite two decades of fairly robust
macro conditions, excess supply has not been absorbed by demand growth.
21

Multi-sector
July 2012
On our estimates, the incremental share of emerging market demand as a percentage of global commodity
chemical growth over the next five years is over 95%, while the share of China in this incremental growth
is close to 45%. It is therefore fair to say that this is a sector driven by expectations of continued strength
in EM demand. In an environment where EM growth surprises to the downside the sector is clearly
oversupplied, putting pressure on margins and operating rates.
Shifting cost structures and intensifying competition

One of the biggest changes in the commodity chemicals complex over the past couple of years has been
the re-emergence of the US as a key exporter, owing to the lower prices of domestic natural gas. This,
along with the Middle Eastern capacity additions that have come on stream over the same period, has
significantly added to the base of low-cost products available for export. Two years of strong demand
growth and restocking have allowed these increased volumes to be absorbed, with limited market impact.
However, as developed market volumes shrink in 2012, we would expect to see product rerouted towards
growth markets, putting pressure on prices and volumes for high-cost exporters. The production strategy
of low-cost commodity chemical producers is to maximise tonnage as long as cash costs are covered by
product prices. As this low-cost base now includes both the US and the Middle East, we expect to see
intensifying competition for business in export markets particularly in Asia as developed market
weakness results in product flows being redirected towards the few markets that are still growing.
Sector drivers
Operating rates
The key yardstick for measuring industry profitability is capacity utilisation, and the global proxy for
basic chemicals is operating rates for ethylene. The critical capacity utilisation level is about 90-92%. Our
analysis suggests that until utilisation rates reach a key level, often 90-92% for most products, margins
tend to be low.
After this level is reached, however, margins expand quite rapidly, causing a sharp rise in industry
profitability. The key operating rate number for the industry as a whole is therefore 90-92% and the move
towards operating rate tightness is driven by the delta between supply and demand growth rates. Supply,
as discussed earlier, tends to be fairly visible given the lead times; the critical factor for market balance
therefore is demand growth expectations.
Volume, price and costs

The three broad earnings drivers are volumes, prices and costs. Each varies based on a companys
position within the cost curve.
Volumes are a function of installed capacity base and operating rates. Low cost producers have every
incentive to maximise production, so tend to run flat out, while high cost producers match operating rates
to meet demand. Therefore, low cost producers tend to have limited volume leverage, while higher cost
producers have leverage to rising (and falling) operating rates.
Prices, in turn, are driven by marginal cost of production (set by naphtha and therefore crude) and by
supply demand dynamics. In a commodity business, marginal producers tend to have limited room to
price beyond cost unless the operating environment is tight and so, except in peak industry conditions,
22
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Multi-sector
July 2012
prices tend to reflect cost of production. Low cost producers have leverage to product pricing as higher
prices fall through to the bottom line while higher cost producers generally tend to pass on higher or
lower costs based on operating rates and therefore have limited price leverage.
Costs are determined largely by route of production choice of feedstock primarily which in turn is
dependent on availability. Given the current large disparity in gas and oil prices, the industry has
fragmented into a low cost gas bloc (Middle East, US, Southeast Asia) and a high cost naphtha bloc
(Northeast Asia, Europe), with the high cost bloc setting prices and the low cost bloc adding capacity to
meet export demand.
Valuation
Traditional single-year, forward-looking multiples do not work well in valuing the sector given its
cyclical characteristics. The average peak to trough earnings swings over the last five years have averaged
over 80%, and therefore it is all but impossible to apply single-year multiples without factoring in the
cyclicality of the sector.
Asset values and replacement cost frameworks are not suitable either as the profitability of an asset varies
depending on feedstock, geographical location, type of fuel used and the life of the asset. Therefore, the
value of any plant is independent of the cost of building and should be determined solely based on the
cash flows that the plant can generate.
The most widely used method for valuing the stocks is either a discounted cash flow or a normalised
earnings approach that adjusts for cyclicality based on mid-cycle earnings. This can either take the form
of an average historical ROE applied to a forward book value estimate or a normalised EPS and a midcycle PE. We calculate normalised EPS by assuming an average long-term price of crude and computing
the margins for each product in the companys portfolio.
Chemicals: Growth and profitability (calendarised data)

2008
2009
2010
2011e
2012e
17%
-4%
-10%
-28%
-19%
-23%
-32%
-23%
40%
63%
89%
78%
31%
26%
29%
24%
-1%
-1%
-4%
1%
23%
18%
13%
22%
15%
12%
25%
20%
16%
24%
19%
15%
24%
19%
15%
26%
0.62
0.20
16%
14%
0.48
0.25
15%
18%
0.61
0.27
19%
9%
0.70
0.23
21%
7%
0.65
0.17
19%
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
Note: based on all HSBC coverage of chemicals
Source: Company data, HSBC estimates
23
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Multi-sector
July 2012
Sector snapshot
Key industry driver: Ethylene utilisation rates
Key sector stats

Chemicals
90.0%
3.13% of MSCI Asia Pacific ex Japan
ADTV (USDm)
0.72
Aggregated market cap (USDbn)
75.1
Performance since 1 Jan 2000
Absolute
252%
Relative to MSCI Asia ex Japan
413%
3 largest stocks
LG Chem, Formosa Plastic Co, Orica
MSCI Asia Pacific ex Japan
0.81
Operating Rates (%)
89.0%
Trading data
89.0%
88.9%
88.9%
88.0%
87.0%
86.0%
87.0%
87.0%
85.0%
85.4%
85.4%
84.7%
84.0%
83.0%
82.0%
2008
2010
2012e
2014e
Top 10 stocks
Source: HSBC estimates
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
LG Chem
Formosa Plastics Co
Orica
Nan Ya Plastics
Formosa Chemical and Fiber
Petronas Chemicals
Incitec Pivot
Cheil
Honam Petrochem
PTT Global Chemical
Index weight
13.6%
11.8%
9.9%
9.4%
8.5%
5.7%
5.1%
4.4%
3.4%
3.2%
17x
650
550
14x
450
350
11x
250
150
8x
50
Country breakdown
Country
PE band chart
850
750
2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Weights (%)
Taiwan
Korea
Australia
Malaysia
Thailand
China
Hong Kong
India
34.4%
30.6%
15.0%
5.7%
4.7%
3.8%
3.0%
2.8%
PB vs ROE
3.0
21.0
2.5
19.0
17.0
2.0
15.0
1.5
13.0
12M Fwd PB
Jun-12
Dec-11
Jun-11
12M Fwd ROE (RHS)
24
Dec-10
Jun-10
Dec-09
Jun-09
Jun-08
9.0
Dec-08
0.5
Dec-07
11.0
Jun-07
1.0

Multi-sector
July 2012
abc
Cleantech
Alternative Energy Team
Jenny Cosgrove*, CFA
Head of Utilities and Alternative Energy, Asia-Pacific
+852 2996 6619
jennycosgrove@hsbc.com.hk
Gloria Ho*, CFA
Analyst
+852 2996 6941
gloriapyho@hsbc.com.hk
Summer Huang*
Associate
+852 2996 6976
summeryyhuang@hsbc.com.hk
25
26
Multi-sector
July 2012
Sector structure
Cleantech
Solar
Upstream
GCL-Poly
OCI
Trina Solar
Suntech Power
LDK Solar
Yingli Green Energy
Motech Industries
Gintech Energy
Wind
Developer
Huaneng Renewable
Datang Renewable
China Wind Power
China Longyuan Power Group
China Guangdong Nuclear Power Group
Upstream
Xinjiang Goldwind
China Ming Yang Power
Sinovel
Suzlon
United Power
Developer
Huaneng Renewable
Datang Renewable
China Wind Power
Source: HSBC
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Multi-sector
July 2012
Sector price history: MSCI Global Alternative Energy Index price history (August 2009June 2012)
140
The decline is in line with

the drop in average selling
prices thorough out the solar
value chain (from
polysilicon to modules)
120
Index value
100
80
60
40
20
0
Aug-2009
Nov-2009
Feb-2010
May-2010
Aug-2010
Nov-2010
Feb-2011
May-2011
Aug-2011
Nov-2011
Feb-2012
May-2012
Source: MSCI, Bloomberg
abc
27

Multi-sector
July 2012
Sector description
Solar
The sector comprises manufacturers along the value chain of solar PV system (mainly modules and
inverters) and solar farm developers who are the end users of the solar products. Currently solar modules
are manufactured using two technologies, crystalline and thin-film.
The crystalline technology involves casting or drawing molten silicon (semiconductor) into silicon ingots,
then cutting it into wafers and further processing it into modules. Thin-film consists of depositing
photovoltaic material (e.g. CdTe, CIGS) on a substrate such as glass. The crystalline technology is
dominant because of its higher conversion efficiency from solar irradiation to electricity.
The solar PV system (crystalline technology) manufacturing value chain begins with polysilicon, then
wafers, cells and modules, with inverters as peripheral devices. Key players for polysilicon in Asia
includes GCL-Poly, OCI and LDK. Many of the companies have achieved vertical integration along the
wafer to module chain.
Notable global leading companies include Yingli Green Energy, Trina Solar, Suntech Power, and LDK.
Thin film players include Sharp, Kyocera, and Trony Solar.
Solar farm developers are only beginning to emerge in Asia, mainly in China where solar installations are
growing from a low base. Major players at this stage are China Guangdong Nuclear Power Group, China
Wind Power and the renewable energy arms of the Chinese independent power producers such as China
Longyuan Power Group, Huaneng Renewables, and Datang Renewables.
Wind
The sector comprises manufacturers of wind turbines and wind farm developers. Similar to the solar
sectors, wind farm operators in Asia are the renewable energy arms of the Chinese independent power
producers such as China Longyuan Power Group, Huaneng Renewables, and Datang Renewables, and
independent group China Wind Power.
Key wind turbine manufacturers in Asia are Xinjiang Goldwind, Sinovel, United Power (a subsidiary of
China Guodian Power Group), China Ming Yang Power, and Suzlon, the majority of whom are global top
10 players. Two prevailing wind turbine technologies are direct drive and the traditional gearbox, each
with their own merits. Currently the predominant product for most of manufacturers is the 1.5MW turbine.
Key themes
Solar sector
The solar sector in Asia has performed poorly since 3Q11. Large oversupply across the value chain drives
down product average selling prices (ASPs) and puts pressure on margins. On the demand side, Europe, China
and the US represented 72%, 8% and 6.9% of the global demand in 2011. We expect global PV installations
to remain flat over FY12-13. The European debt crisis has led to feed-in tariff (FIT) cuts in a number of
countries, including Germany, Italy and Spain, and also made it more difficult to secure project financing.
We expect the oversupply situation to take time to correct and it will require extensive consolidation, with
less efficient operators exiting the industry through bankruptcy or halting production.
28
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Head of Utilities and Alternative
Energy, Asia-Pacific
+852 2996 6619


Multi-sector
July 2012
abc
We believe the key to survival will be to (1) maintain strong balance sheets, especially in terms of
working capital management and leverage; (2) focus on R&D to raise the conversion efficiency of
products; (3) seek production cost efficiency to achieve higher margins; and (4) avoid over-expansion of
capacity to minimise capital expenditure and preserve cash flow.
A more recent industry theme is that large Chinese manufacturers (especially module makers) are actively
involved in solar farm development projects, many of which are in the US and Europe. We believe that
margins for developing and then selling solar farms are relatively low. Nevertheless, the greatest benefit
for the Chinese companies is it guarantees demand for the products (e.g. modules) they manufacture.
Wind sector
The wind sector is in a similarly difficult situation as the solar sector. Oversupply has seen a sharp decline
of turbine prices. FIT cuts have also led to declining global installation demand. In China an additional
constraint for wind power has been limited grid connection. As at end of 2011, only about 70% of the
installed capacity had been connected to the grid.
This is a largely the result of the grid lacking the resources to connect the growing number of wind farms;
another factor is that it is more expensive for the state-run grid to acquire wind power than traditional
coal-fired power.
While Asian wind turbine manufacturers (mainly Chinese companies) face financial challenges to survive
the downturn, the future looks brighter. They are looking forward to developing the inter-tidal and
eventually the offshore wind market with large turbines (from 2.5MW to 6MW) and expanding overseas
through wind farm projects outside Asia.
Sector drivers
Solar and wind sector
Raw material prices: polysilicon for solar and rare earth for wind
Polysilicon is the key raw material for the solar sector. In 2011 the polysilicon price dropped from
cUSD71/kg to USD30/kg. Falling polysilicon prices benefit companies downstream but have also forced
many polysilicon manufacturers out of business. Prices continued to drop in 2012 but at a slower rate.
Direct drive wind turbine manufacturing requires rare earth materials, including neodymium,
praseodymium and dysprosium. From 2011 to mid-2012 rare earth prices rose by between 3.2x and 6.2x,
pushing up costs for certain turbine manufacturers. However, rare earth prices started to fall in 4Q11,
easing cost pressures.
Political environment: Feed-in tariff, renewable energy targets, and anti-dumping tariffs
Global demand is dependent on the policies of countries with high installation targets, such as Germany,
Italy, the US, and China. A feed-in tariff (FIT) is an incentive provided by the government to solar and
wind farms or rooftop solar installation owners. As the cost of solar and wind power generation is still
higher than other traditional sources of power (e.g. coal), the FIT is a key consideration as it affects the
returns on each project. Many countries are moving towards having a greater proportion of their energy
mix generated by renewable energy. The EU has set 20% as its base target by 2020 and China has an
29

Multi-sector
July 2012
installation target of 20GW for solar PV power and 100GW for wind power by 2015. Different states in
the US have different targets.
Anti-dumping sentiment is another political concern. In May 2012 the US Department of Commerce hit
Chinese solar companies with preliminary punitive import tariffs on modules produced in China or made
of Chinese-made cells. Many Chinese companies responded by sourcing cells from other countries for the
production of modules outside China. The final ruling is expected in October 2012. European solar
companies are pursuing similar cases in Europe.
In early June 2012, Chinese polysilicon manufacturers jointly filed a trade case with Chinas Ministry of
Commerce against US polysilicon imports. In January-May 2012, more than 40% of Chinas imported
polysilicon was originated from the US. Should an import tariff be imposed on US polysilicon, the
Chinese downstream module manufacturers would suffer from higher cost of production.
Financing
Constructing solar and wind projects, especially for utility scale projects such as solar/wind farms, require
large investment outlays. Normally about 80% financing comes from bank borrowings. Financing has
become more difficult since the European debt crisis and the higher cost of capital makes solar/wind
project returns less attractive.
Key segments
Solar sector
China
The Chinese companies have a presence along the value chain, from polysilicon to modules, as well as in
inverters.
Taiwan
Taiwan solar companies are mainly cell manufacturers. Their prices are on average 5-10% higher than
cells manufactured in China, a reflection of their quality and efficiency.
Valuation
We currently adopt a ROE implied PB valuation methodology for our stock coverage. In the solar
industry, players are struggling for near-term survival and market share with low or negative earnings and
the industry is undergoing heavy consolidation.
30
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Multi-sector
July 2012
Climate Change
Climate change Team
Nick Robins*
Head, Climate Change Centre of Excellence
HSBC Bank plc
+44 20 7991 6778
nick.robins@hsbc.com
Zoe Knight*
Director, Climate Change Strategy
HSBC Bank plc
+44 20 7991 6715
zoe.knight@hsbcib.com
Wai-Shin Chan*
Director, Climate Change Strategy Asia-Pacific
+852 2822 4870
wai.shin.chan@hsbc.com.hk
31
32
Canada
EU
Alberta Specified Gas Emitters regulation

(2007), Western Climate Initiative cap and
trade for BC, Manitoba, Ontario and Quebec
scheduled for January 2013. Carbon tax
planned in BC and Quebec (2012)
EU ETS energy and industrial sectors (2005).

Extended to the aviation sector January 2012.
Carbon taxes in Finland (1990), Sweden (1991),
Norway (1991), Denmark (1992), and Switzerland
(2008), Ireland oil and gas (2010), UK carbon
floor price scheduled April 2013

Multi-sector
July 2012
Emission trading schemes and carbon taxes around the world
China
Planned pilot cap and trade in
provinces (Beijing, Shenzhen,
Chongqing, Guangdong, Hubei,
Shanghai and Tianjin) (2014). Carbon
tax by 2015 under discussion
Japan
Voluntary ETS (2005),
Tokyo Metropolitan Trading
Scheme (2010); planned
carbon tax (October 2012)
US
Regional GHG Initiative
(RGGI) (2009), Western
Climate Initiative cap and
trade for California
scheduled for January 2013,
California Cap and Trade
scheduled for January 2013.
Carbon tax in Bay Area
District (California) and
Boulder (Colorado)
South Korea
Mandatory cap from
2012; ETS scheduled for
2015
India
Mexico
Tax on coal
production and
imports (2010). Energy
efficiency trading
scheme (PAT) (2012)
National Climate Change

Law proposes a national
emissions trading scheme
Brazil
Planned Rio de Janeiro
ETS (2013)
Key
Existing carbon reduction scheme
Planned carbon reduction scheme
Source: HSBC
Planned carbon tax (2013/14). Levy

on electricity from non-renewables
Australia
Carbon tax takes effect July
2012; Cap and trade scheduled
to replace carbon tax in 2015
New Zealand
ETS (2010). Waste
included from 2013,
agriculture from
2015
abc
Currently no schemes announced
South Africa

Multi-sector
July 2012
Sector description
Climate change a long-term structural force
Goods and services derived from the natural environment (natural capital) are crucial for local and
national economies and maintaining healthy natural capital is structurally important to future economic
prosperity. Land for agriculture, water for energy production and industrial processes, clean air for hightech goods are examples of natural capital. The long term advance of climate change can exacerbate
resource imbalances, but ecosystems are already impaired through over-extraction, pollution and nonnative species invasion.
The climate is best understood as average weather expressed in terms of temperatures, seasonal
variations, rainfall, as well as extreme events such as floods, storms and droughts. In essence, climate
change disrupts these historical patterns, exacerbating existing natural resource stresses confronting the
global economy. For example, agricultural yields are affected by increasing temperatures, industrial
production is disrupted by water availability (too much or too little) and lifestyles and health can be
distressed by extreme events and changes in the average weather.
abc
Nick Robins*
Head, Climate Change Centre
HSBC Bank plc
+44 20 7991 6778
nick.robins@hsbc.com
Zoe Knight*
Climate Change Strategy
HSBC Bank plc
+44 20 7991 6715
zoe.knight@hsbcib.com
Wai-Shin Chan*, CFA
Climate Change Strategy
+ 852 2822 4870
wai.shin.chan@hsbc.com.hk

To slow climate change, global policy momentum remains focused on reducing emissions, the map at the
front of this section shows the many schemes and policies which have been put in place globally in order
to reduce greenhouse gas (GHG) emissions. Some 138 countries covering 87% of global emissions have a
national climate change strategy in place (Copenhagen Accord). However, economic permafrost subpar economic growth and the era of austerity is not politically conducive to reducing emissions and the
re-carbonisation of the global economy is a real concern because, over the longer term, it affects the
natural capital which contributes so much to the economy. 2011 was a year of re-carbonisation for the
global economy (see tables at the back of this section), with emissions growing faster at 3.2% against
global GDP growth of 2.5%. On this basis we are moving too slowly to prevent a global warming
temperature rise of 2C from GHG emissions.
Whilst we are aware of the scientific basis behind climate change (see No debate among climate
scientists: its happening, 2 November 2011), we examine climate change from an investment
perspective. The two key issues at the heart of climate change analysis are (1) the impacts on industry and
the economy from a drive to reduce emissions, and (2) the impacts of disruption relating to rising
temperatures and the resultant weather extremes, such as the floods in Thailand last year. Since climate
change is a global phenomenon, these two issues are to some extent applicable to all sectors, all regions
and all asset classes.
Sector impacts
Climate change is multi-sector part of a wider resource nexus
The effects of climate change can be disruptive and the exacerbation of existing natural resource stresses
is already being felt across many industries. The chart below shows why the climate is so important to
key areas of the economy and especially to the strategic relationship between energy, water and food.
33
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Multi-sector
July 2012
Resource nexus
Energy
Climate
Decarbonising
energy
r
ate
w
g
s in s s
Ri stre
Fo
od
F u vs
el
Constraints
on thermal
power
Impacts
on yields
Fo
od
Fu vs
el
r
ate
w
ing ss
Ris stre
Water
Impacts on food
production
Food
Source: HSBC
Incorporating the climate factor into investment analysis involves examining the impact of changes and
strains within these strategically important relationships. For many sectors, whether the impact is positive
or negative depends on the nature of the exposure. A positive driver could mean increased revenue
opportunity from a beneficial regulatory environment (e.g. energy efficiency), or the disruptive impacts of
climate change creating market opportunity (e.g. agricultural chemicals). A negative driver could relate to
increased costs from regulation targeting emission reduction (e.g. electric utilities), or from increased
input costs from potential climate change related weather disruption (e.g. food producers). The timing and
magnitude of the climate factor in financial terms varies by sector and can only be fully determined at a
company level.
Climate change and energy: Energy is the source of 66% of global GHG emissions. Hence, in order to
restrain the acceleration of global warming, not only does energy demand need to be reduced but energy
supply itself needs to have a lower carbon footprint i.e. the decarbonisation of energy (see Energy in
2050, March 2011). For example, high oil prices are causing business to turn towards energy efficiency
which can help to save on costs (see Oil is the new carbon, 8 March 2012). The shale gas boom is
contributing towards energy security in the US and will help its emissions footprint over the short term,
although shale gas could also be taking investment away from other renewable energy technologies and is
under scrutiny for its potential environmental impact, such as groundwater pollution (see How does shale
fit into a low-carbon future, 10 February 2011). In Europe, we estimate that the combination of efficiency
and renewable energy laws could lead to the gradual decline of gas, and this should stimulate more
investment in other energy forms as environmental concerns have halted or slowed shale exploration
before it becomes commercial (see European Utilities: Gas consumption on the slide, 2 April 2012). The
Fukushima accident last year has also caused many countries to rethink their energy strategies but
replacing nuclear with a lower-emission technology is not easily done in the short term (see Thermal
spikes from nuclear loss, 10 May 2012).
34

Multi-sector
July 2012
abc
Climate change and food: Agricultural processes contribute 14% to global GHGs, while land use change
(mostly deforestation for agriculture) contributes a further 13%. Rising temperatures and increasing levels
of carbon dioxide in the atmosphere have direct impacts on agricultural output. Although mostly negative
for output, this is not always the case: increased carbon can boost crop fertilisation (up to a certain point)
and in temperate, colder regions, increased temperatures can boost yields. In Agriculture: Double Trouble
(12 December 2011), we look in detail at the climate impacts on the global agriculture sector,
highlighting that companies which improve productivity, such as fertiliser or seed producers and those
involved in crop protection, could be long-term winners. We also found that global cereal growth would
be lower with climate change, creating volatile prices and changing trade flows. The food issue is also a
concern as the global population is rising faster than agricultural yields. Food demand is estimated to
increase by 50-70% by 2050 whereas cereal production might only increase 30% (see Resources and the
great transformation food security, 25 January 2012).
Climate change and water: Water availability too much or too little is a major expression of climate
change. Rising temperatures can exacerbate droughts in regions already prone to water shortage and the
frequency and magnitude of extreme events can be influenced by increased water vapour (see Extreme
climate; expect more droughts and floods, 22 November 2011). The floods in Thailand last year had a
significant effect on local GDP (see More flooding: Thailand this time, 13 October 2011). Also, the growing
trend of shifting facilities to more cost-effective regions such as China means that water issues need to be
considered by companies which might be based in water abundant countries, but whose operations are
exposed to water-scarce regions (see The water hole in the supply chain, 29 November 2011)
The three resources of energy, food and water are also interrelated. Energy and food: There is tension
between producing agricultural crops for food or fuel. Food and water: Agriculture comprises c70% of
global water withdrawal, hence more erratic water availability for agriculture will likely lead to variable
output levels and volatile prices. Energy and water: Water supply is essential for thermal power
generation, whereas key renewable technologies are much more water-efficient; water constraints also
highlight the need for energy efficiency.
35

Multi-sector
July 2012
Regional impacts
Climate change is multi-regional reflected in national economic strategies
From a cross-boundary perspective, we compare the climate change vulnerability and opportunities of the
G-20 in Scoring Climate Change Risk (9 August 2011). At a national level, the sector drivers described
above come together to form policies such as energy and food security, GHG emission mitigation and
energy efficiency. Much of our work therefore focuses on climate strategies at a country level, and we
have published in-depth reports on the emerging markets of China, India, Brazil and South Korea; in
addition we publish shorter updates on policy for the EU and the US.
Global markets
We analyse global climate discussions for sector and regional impacts. The United Nations climate
negotiations provide a longer-term window of prospects for the global climate economy (see Dispatches
from Durban, 13 December 2011). The urgency of climate change is almost generally accepted although
how to deal with the issues and which country should shoulder more responsibility is often debated at
these climate negotiations (see Gear shift needed in climate talks, 20 May 2012). The perspective of
individual countries is often a sticking point as GHG emissions know no boundaries (see Aviation
wildcard BASICs remain as others waver, 24 February 2012).
Emerging markets
China: The impact of climate change could affect energy, agriculture, industry and water availability in
China. Natural capital is under great stress and this has serious implications for companies that source
from, operate in and sell to China (see Chinas rising climate risk, 6 October 2011). The impact on each
province is different and we look not only at national policies on emissions control, industrial efficiency,
and water usage but also how they filter down to various provinces and are implemented across such a
vast country (see Is China too big to filter down?, 21 March 2012).
India: The 2008 National Action Plan on Climate Change set out Indias ambitions for low-carbon
growth, driven by achieving climate and energy security as well as reducing emissions and dependence
on energy imports. The climate economy could grow in terms of solar power, energy efficiency and
renewable installations (see Sizing Indias climate economy, 28 January 2011). The subsequent launch of
the Perform, Achieve and Trade scheme has implications for energy consumption across many sectors.
We believe key beneficiaries to be solution-providers such as process control, automation and
manufacturers of more efficient equipment (see India: Trading energy efficiency, 12 April 2012).
Brazil: The resource nexus of water, energy and food supplies more than half of Brazils economy
producing sugar cane, coffee, beef and chicken as well as allowing hydropower to supply 75% of the
countrys electricity (see Brazil: Latams bio super power, 25 April 2012). However, of the G-20
countries Brazil is also the fifth most vulnerable to the disruptive effects of climate change because it is
so dependent on the basic resource most disrupted by climate change water availability. We look at how
Brazilian companies maintain their low-carbon energy advantage and strengthen resilience against
potential climate change impacts, especially across the agriculture, food processing, utilities and financial
services sectors (see Investing in the bio super power, 25 April 2012).
36
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Multi-sector
July 2012
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South Korea: Its economic success has been accompanied by rising energy consumption and a 96%
dependence on energy imports. With oil accounting for a quarter of total imports, Korea has committed
itself to green growth, breaking away from a high-energy, high-carbon trajectory. The national strategy
focuses on the export potential of its core industrial base for example, batteries, light-emitting diodes
(LED) technology, nuclear and solar (see Korea at the green growth crossroads, 16 March 2012). We
also examine the new carbon policies which constrain the emissions of large emitters, making carbon
performance another factor for investors to evaluate. At the same time, companies which accelerate the
design and deployment of smart technologies that can succeed in the worlds growing markets for lowcarbon solutions could be at the cutting edge of climate solutions such as fuel cell technology (see
Investing in Koreas green growth, 16 March 2012).
Developed markets
The greater disclosure in certain developed markets such as the EU and the US provide information on
how climate policy will be enacted and enforced. For example, efficiency targets in Europe have to filter
down to national targets (see EU efficiency deal inches closer, 1 March 2012) and politics can often take
the spotlight away from climate change issues in the US (see US: Emerald lining for efficiency, 15
February 2012). Austerity in developed markets does not mean that climate issues are falling down the
agenda, instead we believe it provides an opportunity to rebuild the economy in a more efficient manner
(see Designing a Green Exit : Five steps to a resource-efficient recovery, 25 May 2012).
Asset impacts
Climate change is multi-asset affecting asset allocation
The effects of climate change cut across all asset classes. Real estate investors may be aware that rising
sea levels may affect physical properties located in coastal areas; commodity traders may be aware that
rising temperatures affect commodity prices through agricultural yield disruptions; investors in forest
assets may forgo the wood harvest in return for payment in order to reduce emissions. The solutions
available to either reduce emissions or protect against climate impacts must still be financed and thus
provide investment opportunity within different asset classes.
For companies, insurance options change as assets are perceived to be more in harms way (see Insuring
Asia against climate risk and natural disasters, 7 February 2012). For investors, especially longer-term
investors such as pension funds, investing in fixed income or debt through bonds provides a less risky
option for investment into national strategy such as a changing the energy mix in favour of renewable
energy (see Offshore wind: The wheel of fortune, 28 May 2012). We estimate the value of bonds aligned
to the climate economy at cUSD174bn and expect more climate-themed bond issuance by development
banks, municipalities and project developers in the near future (see Bonds and climate change: the state
of the market in 2012, 23 May 2012). Currently, low-carbon transport such as rail dominates the climate
bond market, with Europe the largest source of outstanding bonds.
The climate-change theme is closely related to the work of our Clean Technology Team globally, which
analyses climate solutions through renewable technologies such as solar and wind power, also our
Quantitative Research Team produces HSBCs proprietary climate change index.
37
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Multi-sector
July 2012
Climate change drivers

Emissions are continuing to rise
Dev eloped
tCO2bn
35
on a recarbonising trend
Dev eloping
GDP
%yoy
6.0
30
4.5
25
3.0
20
CO2 emissions
1.5
15
Source: IEA. Fossil fuel emissions only
Source: IEA, Thomson Reuters, World Bank, HSBC
Temperatures are rising
increasing the likelihood of disruptive extreme events
0.9
Drought
Droughts
35
Flood (RHS)
Floods
250
30
0.6
2012
2008
2004
2000
1996
1992
-3.0
1988
1980
-1.5
1892
1898
1904
1910
1916
1922
1928
1934
1940
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
1984
0.0
10
200
25
0.3
0
20
150
15
100
10
-0.3
50
5
0
Source: NASA GISS. Anomaly relative to the 1951-1980 period
Source: EMDAT disaster database
Investors supporting a global policy framework are increasing
and climate bond financing is increasing
USDtrn
USDbn
25
(285)
20
15
(187)
(259)
Transport
119.0
10
5
2012
2007
A griculture
and
Fo restry
0.7
Energy 29.4
2009
38
Finance
22.4
B uildings
and
Industry 1.5
Waste 1.2
Source: CERES
2002
1997
1992
1987
1982
1977
1972
1967
0
1962
2012
2002
1992
1982
1972
1962
1952
1942
1932
1922
1912
1902
1892
1882
-0.6
2010
2011
Source: Bloomberg, Climate Bond Initiative, HSBC
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Multi-sector
July 2012
Wind: Top 10 markets for installed capacity today
2011
GW
120
100
80
60
40
20
0
Solar: Top 10 markets for installed solar PV today
2014e
2011e
GWp
2014e
40
30
20
Korea
Belgium
Czech
China
France
Spain
USA
Japan
Italy
0
Germany
Other,Europe
Canada
UK
France
Italy
India
Spain
Germany
US
China
10
Source: HSBC
Source: HSBC
Scoring climate risk reveal India as the most exposed and

sensitive to change (top right most vulnerable, bottom left
least vulnerable)
India is also less able to adapt on a relative basis (top right

most vulnerable, bottom left least vulnerable)
10.0
Sensitivity
8.0
Russia Germany
India
Indo nesia
Franc e
Italy
UK B razil
Saudi
M
exico
South A rabia
Argentina
A frica
Korea Turkey
6.0
4.0
2.0
Canada
US
Adaptive capacity
10.0
China
Australia
2.0
6.0
4.0
Ch ina
Indonesia
Saudi
S Africa
A rabia
Turkey B razil
Italy
M exico
R ussia
Germany
A
rgentina
France
Australia
UK
J apan
Ko rea Japan
2.0
0.0
0.0
India
8.0
4.0
6.0
Exp osure
8.0
US
2.0
10.0
Cana da
4.0
6.0
Adaptive potential
Source: World Bank, Thomson Reuters Datastream, HSBC
Source: World Bank, Thomson Reuters Datastream, HSBC
China has overtaken Germany as being the worlds largest

exporter of climate smart goods and technologies
Carbon intensity of the G20
Ex ports US$bn
CAGR 2005-10 (RHS)

35%
60
30%
50
25%
40
20%
30
15%
20
10%
10
5%
0%
US
Jp
Ita
Note: CSGT =-Climate Smart Goods and Technologies

Source: UN Commodity Trade Statistics Database
Fra
Kor
1
0
Russia
China
India
S.Africa
Indonesia
S_Arabia
Turkey
Australia
S.Korea
Mexico
Canada
US
Brazil
Argentina
EU27
Germany
Italy
UK
France
Japan
Ger
10.0
tCO2mn/USDbn
70
Ch
8.0
Note: Most recent data from 2008

Source: Thomson Reuters Datastream World Bank, WRI CAIT
39

Multi-sector
July 2012
Notes
40
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Multi-sector
July 2012
Consumer
discretionary
Consumer discretionary team
Erwan Rambourg*
Head of Consumer Brands & Retail Equity Research
+852 2996 6572
erwanrambourg@hsbc.com.hk
Chris Zee*
Consumer & Retail Analyst, Greater China
+852 2822 2912
chriscmzee@hsbc.com.hk
Christopher K Leung*
+852 2996 6531
christopher.k.leung@hsbc.com.hk
Lina Yan*
Dept Store and Food Retail Analyst, Greater China
+852 2822 4344
linayjyan@hsbc.com.hk
Cathy Chao*
+852 2996 6570
catherinefchao@hsbc.com.hk
Sean Monaghan*
Senior Gaming and Southeast Asia Analyst
The Hongkong and Shanghai Banking Corporation Limited,
Singapore Branch
+65 6658 0655
seanmonaghan@hsbc.com.sg
Permada Darmono*
Southeast Asia Analyst
Singapore Branch
+65 6658 0650
permada.w.darmono@hsbc.com.sg
Karen Choi*
Consumer Analyst, Korea
Seoul Securities Branch
+822 3706 8781
karen.choi@kr.hsbc.com
Jena Han*
Associate, Korea
+822 3706 8772
jenahan@kr.hsbc.com
Amit Sachdeva*
Consumer & Retail Analyst, India
HSBC Securities and Capital Markets (India) Private Limited
+91 22 2268 1240
amit1sachdeva@hsbc.co.in
41
42
Consumer Discretionary Asia
Dept Stores
Specialty Retail
Gami ng
Textiles, Apparel and Footwear
Inti me
Gome
Sands China
Belle
Go lden Eagle
Suning
Galaxy Entertainment
Daphne
Lotte Shopping
SaSa
Wynn Macau
Fast Retailing
Shinsegae
Hengdeli
SJM
ABC-Mart
Parkson Retail Asia
Chow Tai Fook
Melco Crown
Prada
Lifestyle
Luk Fook
MGM China
Li & Fung
Hyundai Dept Store
Titan Industries
Genting Si ngapore
Yue Yuen
Ks Holdings
Kangwon
Ports Design
Himart
Paradise
Li Ning
Mitra Adiperkasa
Grand Korea Leisure
Anta

Multi-sector
July 2012
Sector structure
Giordano
Source: HSBC
abc
350
Oct-Nov 2009:
Wynn Macau and Sands China list in Hong
Kong; led to rally in 2010-11 reflecting very
strong growth in the Macau gaming market
300
Nov 2011:
China consumer
confidence reaches
historical low
Aug 2010:
Li & Fung
acquires IDS

Multi-sector
July 2012
Sector price history
Aug 2009:
Belle sells Fila brand's Greater
China trademark and
operations to Anta Sports
250
200
150
Regulatory risks cause share price

pressure for Korean dept stores
Jun 2011:
Korean dept stores forced to
disclose commission rates
Sept 2011:
Forced to cut rates towards SMEs
100
50
Dec 2006:
Genting Singapore rallies on the back of
winning the right to build up casino; share
price broadly rising leading up to opening of
casino in 2010
Apr 2012:
Korean discount stores forced to
close two Sundays a month
0
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
MSCI Asia ex Japan Index
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
MSCI Asia ex Japan - Consumer Discretionary Index
Source: MSCI, Bloomberg (index base = 100 starting Jan-2000), HSBC
abc
43
44
Multi-sector
July 2012
Consumer Discretionary: EBIT margin asset turnover (2010-11)

2.8
9.3%
2.6
SaSa


leaders strategies
2.4
Asset Turnover (x)
2.2
2.0
Maruti Suzuki India Ltd

SJM Holdings Ltd.
1.8
Kia Motors
Titan Industries Ltd
Hero MotoCorp
LG Electronics
Bajaj Auto
Li Ning Wynn Macau Limited
TAN Chong
1.6
Mando Corporation
UMW Holdings
1.4
Gome Electrical Esprit
1.2
Merry Electronics
Pou Sheng
Techtronic Ind
Galaxy Entert Yue Yuen
1.0
Shinsegae
Lotte Shopping
Nexen Tire Corp
Hyundai Motor
Hathway Cable Brilliance
0.8
0.6
Dish Tv India Ltd
Hyundai Mobis
MGM China
L'Occitane
Belle
Anta Sports
0.93x
Woongjin Coway
Hengdeli Holdings Ltd
Geely Auto
Great Wall Motor
Prada SPA
Hankook Tires
Xtep Int'l
China Lilang Limited

Ports Design Ltd.
SM Entertainment
Samsonite Intl SA
High margins; niche
Sands China Ltd

Trinity Ltd
Xinyi Glass
Minth Group
China Dongxiang
Educomp
Pacific Andes Resources
Golden Eagle
Hyundai Department
Parkson
Genting
Singapore
Mandarin Oriental Intl
New World Department Stor Genting Malaysia
Maoye
Intime Department Store
Shangri-La Asia Ltd
Genting Berhad
Melco Crown
Low ROA companies.
be required
Chow Tai
Tata Motors
Cheil Worldwide
0.4
0.2
Parkson Retail
Daphne
Mitra
GAC Group
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
EBIT Margin (%)

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Multi-sector
July 2012
Because of the sectors diversity, we split it into three segments consumer discretionary, consumer
staples and autos.
Sector description
This sector comprises businesses that sell non-essential goods and services. These include retailers,
consumer services and consumer durables as well as apparel and auto manufacturers. Consumer
discretionary is the opposite of consumer staples, which consists of businesses that sell necessities like
food. It includes many small and medium-size market cap retailers, supermarkets, footwear brands, and
apparel companies but the largest companies are car manufacturers such as Hyundai Motor and Hyundai
Mobis in Korea (see separate autos section). Consumer discretionary constitutes 10% of MSCI Asia ex
Japan and is one of Asias best performing sectors in the last decade, outperforming the index by 3.3x.
abc
Erwan Rambourg*
Head of Consumer Brands &
Retail Equity Research
+852 2996 6572

Key themes
The sector relies on consumers to spend that part of their income that is disposable, so it performs better
when the economy is doing well and generally reflects the prevailing level of consumer confidence. The
savings rate the percentage of disposable income that is not spent is an important determinant of
future household disposable income. An increase in the savings rate means less consumer spending, with
a knock-on effect on GDP and household income. Inflation and rising interest rates are key themes.
Higher rates tend not to be conducive to discretionary spending. Although domestic growth conditions are
a big factor, they show a low correlation with domestic liquidity conditions (M2, the broadest measure of
money supply). This could be a reflection of two factors strong secular growth and the small and midcap nature of many companies.
Sector drivers
Department stores
Drivers include urban development and changes in the competitive landscape as well as choosing the
right expansion strategy.
Gaming
The primary drivers of growth in the gaming industry include:
Regulation: government regulations determine the size, structure growth and profitability of the legal
gaming industry
GDP growth: general economic growth will determine the extent of expenditure by domestic
residents as well as the extent of tourism.
The VIP casino gaming segment for high-rollers. The quality of facilities can also matter.
Luxury goods
Status and brand awareness are big factors as are global travel (the Chinese spend heavily on luxury
goods when abroad) and the increased spending power of women (The future is female is a theme we
have written about extensively).
45

Multi-sector
July 2012
Specialty retail
Rising wages, food quality and the growth of urbanisation and the middle class are important factors.
Manufacturing
Most manufacturers operate on a cost-plus model and their revenue/margin is generated from a
combination of price increases, volume growth and product mix. The primary driver for volume growth is
the demand from the US and Europe, and manufacturers in general are sensitive to the health of the global
economy. Capital expenditure is also key. Mild inflation tends to be positive for manufacturers but higher
inflation typically puts pressure on margins as they have limited pricing power to pass on cost increases.
Apparel and footwear

Urbanisation and rising incomes are the two major growth drivers. In China, urbanisation is the biggest
structural driver for this consumer segment. According to our HSBC Economics Research Team, Chinas
urban middle class is on the rise, with the proportion of the urban population with a household income of
more than RMB55,000 (USD8,500) increasing from 64% in 2006 to 85% in 2010.
Key segments
China Department Stores
Chinese retail is a highly competitive business experiencing strong growth. A combination of urban
development, rising incomes and increased brand awareness is rapidly changing how and where
consumers shop. Growth in supermarkets is slowing as hypermarkets such as Wal-Mart and Carrefour
have emerged to compete with local supermarket chains and department stores.
Korea Department Stores

Retailers and department stores are an important part of the consumer discretionary sector. In Korea this
segment is dominated by Lotte Shopping (market share of 44% in 2011), Shinsegae (19%) and Hyundai
Department Store (21%). Koreans have shown an increasing desire to shop at department stores. Our
analyst Karen Choi believes this relates to status consciousness and a preference for luxury goods even at
the expense of daily necessities. There has been a rise in the number of purchases and the average price
per purchase at department stores. This is why department stores have performed better than discount
stores. But domestic growth is slow and some stores are looking for opportunities outside Korea.
Experiences are mixed as many entered China with the wrong product mix and found it difficult to
become competitive. Some have started to exit the China market.
Gaming
The market cap of the Asian gaming industry is USD100-150bn, with the majority represented by listed
casino companies (e.g. Sands China, Genting). Asia accounts for the largest portion of the total market
cap of the global gaming industry and is the primary earnings driver of large US-listed companies such as
Las Vegas Sands, Wynn Resorts and MGM Resorts International. On a geographic basis the gaming
industry in Asia can be segmented as follows:
Japan: This is largely limited to gaming equipment and game suppliers including listed companies such
as Universal. There are no listed casino operators in Japan.
46
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Multi-sector
July 2012
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Korea: The largest listed companies are Kangwon, Paradise, and Grand Korea Leisure.
Macau: Macau is the largest casino gaming market in the world and has six casino concessionaires: SJM,
Galaxy, Melco Crown, MGM China, Sands China, and Wynn Macau.
ASEAN: The ASEAN region includes the worlds second-largest casino market (Singapore) as well as
new frontiers such as the Philippines and Vietnam. The Genting Group, which is the largest Asia based
gaming company, includes listed companies. Other major listed companies include Naga Corp which is
the largest casino company in Cambodia, Alliance Global, Bell Corp, and Bloomberry Resorts.
Manufacturing
The manufacturing sector is usually broken down according to product segments, as they can have
different raw material pressures and demand-side dynamics. Common product segments include apparel,
footwear, and leather goods. There are also companies that act as sourcing agents (e.g. Li & Fung).
Chinas labour costs have risen sharply in the past five years. This, coupled with structural changes in
environmental, land rights and social policies (pension plans), has increased operating costs for light
manufacturing plants in southern China (e.g. Shenzhen, Dongguan). Many of these plants have moved to
the mid-west of the country (e.g. Anhui province). There has also been continuous industry consolidation
as larger companies seek higher market share. Companies have also been moving from China to countries
which may be more cost-efficient for lower-skill production (e.g. Bangladesh, Vietnam and Indonesia).
China apparel and footwear

The apparel segment is typically broken down into gender/age categories (mens, womens, children) and
style (formal, casual). Footwear can be categorised as brand shoes, casual and athletic shoes. This
segment has enjoyed gradual revenue and margin growth in the past three years, driven by positive
operating leverage (high revenue growth while operating costs were contained). However, on the back of
economic growth concerns and high operating costs (rents, labour, marketing expenditure), margin
pressure emerged in 2012. Selected companies have implemented measures to mitigate the cost pressure.
For example in China, Belle and Daphne have more realistic store opening schedules and have contained
headquarters and administrative expenses.
In footwear, competition is on the rise, especially in sports shoes. This has led to rising inventories and
intensifying promotion and branding activities. In 2011 Li Ning, a leading domestic sports brand, started
to take back old logo products from distributors to speed up the clearance of excess inventory. It is also
opening more discount stores. In the ladies shoes segment, Belle, a market leader in both ladies and
sports shoes in China, is gradually expanding into other shoe categories, such as mens, childrens and
mass market. Foreign brands in China still have a limited presence, likely due to high start-up costs and
the difficulty of establishing a distribution network. Their products so far have only proved suitable for
more affluent consumers in first tier cities.
Luxury goods
This is becoming an increasingly important sub-segment, particularly in China. Growth in Asia-ex Japan
was 35% in 2011 and we expect this to normalise now that the base is bigger thanks to improved
distribution. First-time buyers still account for about 65% of sales of luxury brands in China.
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Southeast Asia
In Indonesia and Thailand the combination of low household leverage and rising wages makes consumers
much less sensitive to interest rates. Indeed, some of this growth is driven by higher soft commodity
prices, which supports rural income growth in Southeast Asia. As a result, demand for cars and
motorcycles has remained strong despite rising rates.
Valuation
Consumer discretionary has typically traded at 10-15x PE. Even in the 2008 financial crisis valuations
were rarely lower than 10x; in 2007 valuations peaked a touch above 20x. ROEs for the sector are on the
rise, moving to what appears to be a peak of 18% in 2011. Consequently, PB multiples have also moved
higher to over 2.2x. At the trough, the sector traded at 1.2x book value.
Price-to-earnings (PE) is the most common valuation methodology to value Chinese consumer branded
companies as it can better capture the companys earnings growth momentum and is easy to compute.
PEG can also be used when the visibility on growth is high and relevant. Price-to-book (PB) may also be
used for manufacturers, given that their growth momentum is not as high and they hold a significant
amount of property, plant and equipment.
To value companies in the Korean retail sector, we use EV/EBITDA as opposed to PE or PB, as we
believe it best captures the growth momentum of the sectors core business. Retail sales growth is
reflected purely at the operating level for each company; non-operating items are not factored in. The
Korean consumer sectors typical asset holdings (such as the value of the subsidiaries and non-core
assets) require a separate sum-of-the-parts analysis to properly value the enterprise structure.
Consumer Discretionary Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
-2.2%
-2.6%
-4.7%
22.1%
-0.7%
5.7%
22.5%
-1.9%
-0.9%
11.2%
27.8%
63%
21.8%
35.9%
42.1%
36.5%
7.5%
13.2%
13.3%
14%
9.7%
5.4%
5.2%
10.3%
6.7%
5.2%
11.6%
8.6%
8.5%
12.9%
10.1%
9.5%
13.6%
10.6%
10.1%
8%
0.8x
1.3x
19%
6%
0.9x
0.9x
18%
5%
0.5x
0.5x
19%
5%
0.4x
0.4x
21%
5%
0.3x
0.3x
20%
Note: based on all HSBC coverage of Consumer Discretionary; each figure represents the market cap-weighted average across the sector
Source: Company data, HSBC estimates
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Multi-sector
July 2012
Sector snapshot
Core industry driver: Retail sales growth
Key sector stats
Trading data
ADTV (USDm)
Aggregated market cap (USDm)
Absolute
3 largest stocks
3,121
751,842
64%
1.6x
Hyundai Motor,Kia Motors,
Hyundai Mobis

MSCI Asia
35%
4,000
31% of MSCI Asia ex Japan
30%
RM B b illion
Consumer discretionary
3,000
25%
20%
2,000
15%
10%
1,000
5%
0%
Jan-10
Jun-10
Nov -10
Apr-11
Sep-11
Retail sales v alue (China)
0.98
Mar-12
y oy grow th
Source: China National Bureau of Statistics, HSBC
PE band chart
Top 10 stocks
13.0%
7.3%
6.7%
6.4%
4.5%
3.5%
3.2%
3.0%
2.7%
2.7%
10x
5x
PB vs ROE
20
2.6
18
2.2
16
1.8
14
10
1.0
Fw d ROE % (LHS)
Dec-11
1.4
Dec-10
12
Dec-09
37.2
15.1
14.5
7.8
6.6
6.1
6.1
5.6
0.6
0.4
Dec-08
Weights (%)
Dec-04
Korea
Hong Kong
China
India
Singapore
Indonesia
Taiwan
Malaysia
Thailand
Philippines
15x
Country breakdown
Country
20x
Dec-07
Hyundai Motor
Kia Motors
Hyundai Mobis
Astra International
Li & Fung
Sands China
Belle International Hdg
Genting Singapore
Genting Berhad
Tata Motors
1000 P rice level

900
800
700
600
500
400
300
200
100
0
Dec-06
1
2
3
4
5
6
7
8
9
10
Index weight
Dec-05
Stocks
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
Fw d PB (x )
49

Multi-sector
July 2012
Notes
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Multi-sector
July 2012
Consumer staples
Consumer staples team
Erwan Rambourg*
Head of Consumer Brands & Retail Equity Research
+852 2996 6572
Christopher K Leung*
+852 2996 6531
christopher.k.leung@hsbc.com.hk
Cathy Chao*
+852 2996 6570
catherinefchao@hsbc.com.hk
Sean Monaghan*
Senior Gaming and Southeast Asia Analyst
The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch
+65 6658 0655
seanmonaghan@hsbc.com.sg
Permada Darmono*
Southeast Asia Analyst
+65 6658 0650
permada.w.darmono@hsbc.com.sg
Karen Choi*
Consumer Analyst, Korea
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
+822 3706 8781
karen.choi@kr.hsbc.com
Jena Han*
Associate, Korea
+822 3706 8772
jenahan@kr.hsbc.com
Amit Sachdeva*
Consumer & Retail Analyst, India
+91 22 2268 1240
amit1sachdeva@hsbc.co.in
Abel Lee*
Non-Tech Analyst, Taiwan
HSBC Securities (Taiwan) Corporation Limited
+886 2 6631 2866
abelchlee@hsbc.com.tw
51
52
Consumer Staples Asia
Food
Food Retail
Beverages
HPC
Tobacco
Sun Art
Tin gyi
LG H&H
ITC
Wumart
CRE
Amorepacific
Huabao
E-Mart
Meiji Holdings
LOccitane
KT&G
Woolworths
Ezaki Glico
Shiseido
Japan Tobacco
Puregold Price Club
Uni-President China
Unilever Indonesia
BAT Malaysia
Sumer Alfaria Trijaya
China Yurun
Godrej
Orion Corp
Hindustan Unilever
Nongshim
Unicharm
Ind ofood
Kao

Multi-sector
July 2012
Sector structure
Charoen Pokphand Foods
Non -alcoho lic
Alcoholic
Ch ina Mengniu
Tsingtao
Inner Mongol ia Yili
Kweichow Moutai
Ito En
Wuliangye
Coca-Cola West
Hite Jinro
Yakult Honshe
Asahi Group
Kirin Holdings
San Miguel
Source: HSBC
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Thai Beverage

Multi-sector
July 2012

400
Jul 2008:
Melamine found in milk and infant formula
in China; affects local producers including
Sanlu, Mengniu, and Yili
350
Jul 2011:
Sun Art, China's largest
hypermarket, lists in
Hong Kong
300
250
Sept 2011:
Live pig from China Yurun Group
tests positive for clenbuterol, an
illegal feed additive
200
150
Feb 2008:
China food CPI
peaks at 23.3%
100
50
0
Jan-2000
Jan-2001
Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
MSCI Asia ex Japan Index
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
MSCI Asia ex Japan - Consumer Staples Index
Source: MSCI, Bloomberg (index base = 100 starting Jan-2000), HSBC
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July 2012
Consumer Staples: EBIT margin asset turnover (2010-11)

3.6
3.4

3.2
10.8%
leaders strategies
Sumber Alfaria Trijaya
3.0
CP All
Mewah International
2.8
2.6
Dairy Farm Intl Holdings

Nestle India
Asset Turnover (x)
2.4
Unilever Indonesia
President Chain
2.2
2.0
Hindustan Unilever Ltd
Sun Art
1.8
Wumart Stores Inc.
1.6
Thai Beverages
LG Household
1.4
Olam International
Indofood CBP
Godrej Consumer Products
1.2
BAT Malaysia
Dabur India
1.0
Nongshim
0.8
CJ Cheil Jedang
Amorepacific
Wilmar International
Vinda Intern
Hite Jinro
0.6
Kuala Lumpur Kepong

IOI Corporation
Orion Corp
Nvc Lighting
Pacific Andes Intl Holdin
Uni-President
0.4
1.01x
Astra Agro Lestari
ITC
Hengan
China Fishery Group Ltd
High margins; niche

KT&G
Golden Agri-Resources
Low ROA companies.
be required
0.2
Indofood Agri Resources
Genting Plantations
First Resources
Bumitama Agri Ltd
0%
10%
20%
30%
40%
50%
60%
EBIT Margin (%)

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Multi-sector
July 2012
Sector description
This category comprises companies which sell the most common consumer products, such as food,
beverages, household items, tobacco and prescription drugs. This sector is smaller than its counterpart,
consumer discretionary. The larger players are food producers Tingyi and Want Want in China, Indias
ITC, which sells cigarettes, paper, packaged foods and personal care, palm oil processor Wilmar in
Singapore and Unilever Indonesia.
Key themes
abc
Erwan Rambourg*
Head of Consumer Brands &
Retail Equity Research
+852 2996 6572

Consumers still need basic supplies even when an economy is faltering. Consumer staples stocks normally
outperform when the economy shrinks and are considered defensive. The sector has underperformed MSCI
Asia ex Japan in the last decade. Correlation with MSCI Asia is higher (0.84 vs 0.74 for consumer
discretionary) but the sector is more responsive to liquidity conditions in the local economy (or M1 supply,
the amount of money in circulation.). This underperformance can be explained by the low growth nature of
some of the F&B industries. This sector is also one of the most sensitive to (food) inflation.
Another key theme is product re-pricing, which allows companies to pass on inflation to consumers. After
facing inflationary pressure in the last few years most F&B companies in Asia have strategies to deal with
rising food prices. Some have developed new brands while others have started to increase product prices,
with industry leaders often taking the lead. Examples include Tingyi, the biggest supplier of instant
noodles and ready-to-drink tea in China, Wings, a leading maker of soap and household goods in
Indonesia, and Indofood, a major food company in the same country.
Others have made attempts to accelerate the shift in product mix towards higher-priced and higher-margin
products (for example, Mengniu, a leading producer of dairy goods in China). We like the long-term
growth story of the F&B sector. It is probably one of the best ways to build exposure to income growth in
rural China, India and Indonesia.
Note also that China is expected to replace the US as the worlds largest grocery market by 2014.
Sector drivers
Food and beverage
Key demand drivers include rising income, growing urbanisation, and shifting consumer preference. Rising
income means higher affordability, and this translates into higher food demand. Growing urbanisation
means a larger market. Urban consumer preferences are shifting to more convenient and healthy food, and
this allows food and beverage companies to take advantage of trading-up effects by launching more premium
products that carry higher margins. Other drivers include product innovations and M&A activity.
Food retail
Drivers include urbanisation, the modern retail channel taking share from the traditional channel, and
consumption upgrades to higher priced/branded products.
Household and Personal Care (HPC)

The key sector driver is brand equity. As the market matures, companies that have brand power and the
ability to meet customer tastes continue to gain market share with margin improvements. They can be
55

Multi-sector
July 2012
either local (for example, LG H&H in Korea) or global brands. In most cases, growth is achieved through
price hikes or the launch of new products rather than increases in volume.
Tobacco
Thanks to its defensive character, gains in market share and shareholder returns (share buybacks and
dividends) are key drivers. Global brands appear to be gaining continuous market share in Asia but
regulatory risk such as tax hikes and anti-smoking campaigns remain long-term risks.
Key segments
China food and beverage
This sector is usually broken into two categories upstream and downstream and then divided into
different sub-sectors based on product segments. The competitive landscape varies across sub-sectors, but
there are common secular drivers that support demand growth, such as rising income and urbanisation.
Common product segments include hog-slaughtering, instant noodles, beer, dairy, soft-drinks, and spirits.
In a more competitive industry like beer, M&A plays a key role as the aim is to capture market share to
generate economies of scale and long-term benefits.
Upstream F&B companies (e.g., sweetener makers) tend to have low pricing power and their margins are
sensitive to soft-commodity price movements. Downstream F&B players (instant noodle and soft-drinks
makers) tend to have higher brand power and therefore their margins tend to be more resilient as they can
pass through part of the cost pressure to consumers. Other ways to mitigate input cost pressure include
hedging, product-mix upgrades, and change in product formulation.
China food retail

Of all the grocery retail formats in China, hypermarkets are not only growing the fastest by taking market
share from other traditional store formats but also consolidating the most rapidly, with the top players
becoming increasingly dominant. Hypermarkets and supermarkets are the two major modern retail
channels, accounting for 14% and 44% of total store-based grocery retailer sales, respectively.
Looking ahead, we expect hypermarkets to continue growing faster than supermarkets for two reasons:
The format is far less penetrated than supermarkets.
Evolving shopping behaviour should benefit hypermarkets most. Recent government policies have
focused on raising the income of lower-income groups. As these people get richer their consumer
aspirations increase and they tend to buy more non-grocery products. This will favour hypermarkets,
which generate much higher sales from mass-market priced non-grocery products than supermarkets
(40% vs 4%). Also, with rising car ownership, the car parking facilities at hypermarkets attract a
growing number of shoppers who drive.
India HPC
This fast-moving consumer goods (FMCG) sub-segment is growing rapidly, supported by increased
income levels in urban and rural India. The largest sub-category comprises soaps, shampoo and shower
gels; skincare and colour cosmetics are also important. Premium products only represent 4% of the total
market but the growth rate is nearly double that of the overall personal care category.
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These sub-categories tend to have high gross margins but are also associated with high operating costs
such as advertising and promotion. The pace of innovation has also picked up, making life quite tough for
the smaller players. Category attractiveness (high growth and high margins) have led to introduction of
many new products from domestic and multinational players. But the market is crowded and creating
successful new brands is difficult and expensive.
In the long run we see HPC in India being dominated by three or four players. We see multinationals such
as Hindustan Unilever, LOreal and P&G outpacing domestic players in several of these categories.
Korea FMCG
With population growth slowing and consumers tending to spend less on everyday necessities as their
incomes rise, volume growth in the Korean FMCG sector has stagnated. Companies are searching for ways
to increase market share and margins by raising prices or changing their portfolio mix to offer more
premium products. However, it is not easy to raise prices because the government tends to keep a close eye
on consumer prices. Cosmetic companies tend to be less affected by such regulatory risks and have found
ways around price resistance that include repackaging and have thus enjoyed relatively stable margins.
As it is becoming more difficult to expand in the domestic market, some FMCG companies are seeking
opportunities elsewhere. For example, Orions overseas confectionery sales were bigger than those
generated by its domestic business in 2011. Cosmetic companies such as AmorePacific and LG H&H
have also entered the China market and they expect it to emerge as a growth driver in the longer-term.
Valuation
Price-to-earnings (PE) is the most common valuation methodology to value Chinese food and beverage
companies as it can better capture the companys earnings growth momentum and is easy to compute. Other
common valuation methodology for Chinese food and beverage companies include DCF and EV/EBITDA.
The best methodology for Korean consumer is the sum of the parts. The EV/EBITDA valuation method
can be used to capture operating value.
As with the consumer discretionary sector, PE valuations have largely stayed in 10-20x band, with the
only exceptions being 2007 (a touch over 20x) and 2008 (10x). However, unlike in the discretionary
sector ROEs are not rising; at around 15-17% they translate into a PB multiple of 2.5x.
Consumer Staples: Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
39.0%
27.1%
28.7%
28.6%
-8.6%
5.7%
5.5%
7.5%
25.5%
11.6%
10.3%
12.3%
37.0%
23.5%
23.2%
21.6%
5.4%
10.1%
12.3%
14.6%
13.5%
11.8%
8.7%
15.6%
13.6%
10.2%
13.9%
12.0%
9.1%
12.5%
10.8%
8.1%
13.1%
11.5%
8.8%
6%
1.3x
0.1x
20%
5%
1.0x
0.2x
20%
7%
1.0x
0.3x
18%
5%
1.1x
0.3x
18%
4%
1.1x
0.3x
18%
Note: based on all HSBC coverage of consumer staples; each figure represents the market cap-weighted average across the sector
Source: company data, HSBC estimates
57
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Multi-sector
July 2012
Sector snapshot
Core industry driver: Inflation
Key sector stats

Consumer staples
Trading data
ADTV (USDm)
Absolute
3 largest stocks
MSCI Asia
493
135,514
198.3%
4.9x
ITC, KT&G, WANT WANT
110
105
100
95
90
0.85
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan04
05
06
07
08
09
10
11
12
China CPI
Top 10 stocks
Source: China National Bureau of Statistics, HSBC
Stocks
1
2
3
4
5
6
7
8
9
10
ITC
KT & G
WANT WANT CHINA
HENGAN INTL
HINDUSTAN UNILEVER
UNI PRESIDENT
WILMAR INTL
IOI CORP
TINGYI CYISL
CP ALL PCL
Index weight
6.9%
5.7%
5.5%
5.2%
5.0%
4.5%
4.0%
3.9%
3.6%
3.5%
Country breakdown
Country
China
Korea
India
Malaysia
Indonesia
Singapore
Taiwan
Thailand
Philippines
PE band chart
650 Price level

600
550
500
450
400
350
300
250
200
150
100
50
0
Weights (%)
25.4
18.4
13.4
10.0
9.2
8.2
7.1
6.5
1.8
25x
20x
15x
10x
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
PB vs ROE
19
4.0
3.5
18
3.0
17
2.5
Fw d ROE % (LHS)
58
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
1.5
Dec-06
15
Dec-05
2.0
Dec-04
16
Fw d PB (x )
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Multi-sector
July 2012
Consumer autos
Autos team
Yogesh Aggarwal*
Analyst
+91 22 2268 1246
yogeshaggarwal@hsbc.co.in
Carson Ng*
Analyst
+852 2996 6625
carsonksng@hsbc.com.hk
Paul Choi*
Analyst
+822 3706 8758
paulchoi@kr.hsbc.com
59
60
Autos
China
Domestic OEMS
Domestic OEMs
Great Wall
Geely
BYD
Chery
FAW
SAIC
GAC
Dongfeng
Changan
BAIC
Brilliance
Fujian Motor
Qingling
India
Foreign OEMs with JVs in

China
European & U.S. OEMS
Volkswagen-FAW
Volkswagen-SAIC
Audi-FAW
BMW-Brilliance
Daimler-BAIC
Daimler-Fujian Motor
PSA-Dongfeng
PSA-Changan
Fiat-GAC
GM-SAIC
Ford-Changan
Japanese, Korean and

Taiwanese OEMs
Source: HSBC
Two Wheelers
Four Wheelers
Auto
Domestic OEMs
Domestic OEMs
Domestic OEMs
Bajaj
Hero MotoCorp
Mahindra Two Wheelers
Royal Enfield
TVS Motor Company Ltd
Foreign OEMs
Honda
Yamaha
Piaggio
Suzuki
Three wheelers
Domestic OEMs
Bajaj
Atul Auto
Mahindra & Mahindra
TVS Motor Company Ltd
Force Motors Ltd
Foreign OEMs
Piaggio
Hindustan Motors
Mahindra & Mahindra
Maruti Suzuki
Tata Motors
Ashok Leyland
Eicher Motors (Volvo- Eicher)
Force Motors
Foreign OEMs
Honda Siel Cars
Hyundai Motor
BMW
Fiat
Force
Ford
General Motors
Mercedes-Benz India
Nissan Motor India
Renault India
SkodaAuto
Toyota Kirloskar
Volkswagen Audi Skoda
Hyundai Motor Corp

Kia Motors
Tire
Hankook Tire
Nexen Tire
Kumho Tire
Foreign OEMs
GM Daewoo
Renault Samsung
Ssangyong Motor
Auto Parts
Hyundai Mobis
Mando
Halla Climate
abc
Toyota-FAW
Toyota-GAC
Honda-GAIC
Honda-Dongfeng
Nissan-Dongfeng
Suzuki-Changan
Mitsubishi-GAC
Hyundai-BAIC
Yulong-Dongfeng
Yulong-Fujian Motor
Isuzu-Qingling
Mazda-FAW
Mazda-Changan
Korea

Multi-sector
July 2012
Sector structure

Multi-sector
July 2012

600.0
MSCI China Auto index
MSCI India Auto index
MSCI Korea Auto index
MSCI Asia
Concerns on the global macro
outlook prevailed after the
breakout of the European debt
crisis.
Benefiting from earthquake in

Japan, which caused supply
disruptions in the major Japanese
automakers.
500.0
400.0
Weakening auto demand in India due

to excise duty hike and high cost of
ownership due to rising petrol prices
and high interest rates
300.0
200.0
100.0
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
abc
61
62
Multi-sector
July 2012
Autos: EBIT margin asset turnover (2010-11)

2.1
9%
2.0
Maruti Suzuki India Ltd
1.9

leaders strategies
Kia Motors
1.8
Hero MotoCorp

1.7
Bajaj Auto
1.6
1.5
Mando Corporation
Asset Turnover (x)
1.4
1.3
TAN Chong Motor Holdings
UMW Holdings
Hyundai Mobis
1.2
Astra International
Tata Motors
1.1
1.01x
1.0
Great Wall Motor
Nexen Tire Corp
0.9
Hankook Tires
Geely Automobile Holdings
0.8
Hyundai Motor
0.7
Brilliance Auto
0.6
Xinyi Glass
Minth Group
0.5
0.4
0.3
GAC Group
High margins; niche

Low ROA companies.

be required
0.2
0.1
-5%
0%
5%
10%
15%
20%
25%
30%
35%
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
Asias auto manufacturing industry is dominated by China, Korea and India. China has been the largest
producer of cars in the world since 2008. The top five manufacturers are SAIC Group, Dongfeng Motor,
FAW Group, Changan, and Beijing Auto.
The Korea auto sector is the fifth-largest in the world measured by unit production, with Hyundai-Kia
accounting for near 80% of the domestic market. The Indian auto sector has enjoyed robust growth over
the past decade, registering a CAGR of c14%. Key domestic players include Tata Motors, Maruti Suzuki,
Mahindra & Mahindra, Bajaj Auto and Hero Motocorp. Seoul Securities Branch
Key themes
China
Chinas auto manufacturers produce passenger and commercial vehicles, both domestic brands and models
made via joint ventures with foreign companies. Due to rising GDP per capita and uneven income
distribution, the premium segment has been the best performing sub-sector in the passenger vehicle sector.
Domestic brands are losing market share to foreign rivals (down to 42.2% in 2011 from 45.6% in 2010),
with German brands particularly popular (market share rose to 16.5% in 2012 from 14.1% in 2011).
abc
Yogesh Aggarwal*
Analyst
HSBC Securities and Capital
Markets (India) Private Limited
+91 22 22681246
Paul Choi*
Analyst
Banking Corporation Limited,
+822 3706 8758
Carson Ng*
Analyst
+852 2996 6625
carsonksng@hsbc.com.hk

A new government procurement policy encourages government organisations to use domestic brands
such as Great Wall, Geely, BYD and Chery at the expense of joint venture models. China government has
introduced different measures to help the domestic brands. In addition, the auto industry is no longer an
FDI-encouraged industry which implies that it would be more difficult for new foreign manufactures to
set up new plants in China.
Korea
The main competitive strength of the Korean automakers is their cost efficiency driven by better economies
of scale coming from platform integration. The value of their brands also continues to improve. Both
Hyundai and Kia have surprised the market by gaining market share in the US, despite offering lower
incentives to consumers.
India
Two wheelers (motorcycles and scooters) are by far the most common means of personal transport for
burgeoning middle/rural India. Largely dominated by two players, Hero Moto Corp and Bajaj Auto, the
domestic two-wheeler market is the second largest in the world, with a CAGR of 17% over FY08-12. The
rural sales story, which represents about 45% of sales for Hero, continues to drive growth.
The car industry in India is dominated by entry level cars (mini and compact models), which together
account for about 80% share of total car sales. Some 80% of these entry level cars are bought through
financing arrangements, making them sensitive to interest rates. Increasing per capita income is helping to
improve the product mix.
The light commercial vehicle segment increased at a CAGR of 22% over FY04-11 compared with 15.5%
for the entire commercial vehicle category. This is largely due to success of the hub and spoke model,
whereby large trucks transport goods between the central hubs and smaller commercial vehicles facilitate
transport of goods from hub to the spoke, thereby enabling the last mile connectivity. The need for last
63

Multi-sector
July 2012
mile connectivity is critical to the success of the entire supply chain and this trend has fuelled the demand
for light commercial vehicles. Competition is increasing across the entire auto sector as foreign
competitors expand their operations and aggressively add capacity.
Sector drivers
China
Rising per capita income has been a long-term growth driver of vehicle sales around the world and China
is no exception. Car ownerships levels are also still low about 46 units per 1,000 people and six per
square kilometre. These are much lower than during the peak for Japan (about 330 units per 1,000 people
and 110 per sq km) so the long-term growth outlook is good. While China plans to expand its expressway
network to 108,000km in 2015 from 70,400km in 2010 its road density will still be much lower than
developed countries such as the US and Japan.
Korea
We believe average return on invested capital (ROIC) is a good measure of the health of an automaker in
the current cycle. Hedging the risk of weaker sales volume in the advanced economies by higher
emerging market exposure, both HMC and Kia have seen their ROIC improving since 2009 thanks to
higher utilisation rates, cost reductions, new model launches, improved quality and brand and a balanced
regional mix. In 2012 the Korea automakers plan launching 2-3 new models in each of the Korea, US,
Europe and emerging markets, along with local customised models in China and India.
India
The Indian passenger car market is an attractive opportunity, given the low level of car ownership, large
population and high-growth economy. India has 15 cars per 1,000 people, far fewer than rival developing
giant China (46).
Economic drivers like robust GDP growth, favourable demographics, shifting consumption patterns and
rising income levels add to rosy long-term outlook for the sector. The localisation of manufacturing
vehicle parts and in-house product development should help improve margins.
Valuation
In China, a single-stage PE method based on ROE and long-term growth is preferred as OEMs in China
are still expanding their capacities, which would affect their free cash flow. The sector had wide 5-year
historical PE trading range from low single digits to low-teens.
EV/EBITDA has been widely used to value European/US OEMs. However, as some Chinese auto
companies are using equity accounting to account for their joint ventures with foreign makers it would be
difficult to calculate EBITDA for direct comparison between peers.
In Korea, PB-ROE valuation is preferred given the cyclical nature of the industry. Korean auto names
trade at a discount to their global peers and we continue to believe they are undervalued. As we think
Korean automakers will generate higher growth on increasing competitive strength and improving market
positioning, the valuation gap should narrow.
64
abc
abc

Multi-sector
July 2012
In India, a DCF based valuation is the best way to capture the long term growth outlook. Large
conglomerates like Tata Motors are valued based on SOTP using EV/EBITDA and PE based relative
valuation. The two-wheeler original export manufacturers (OEMs) like Hero Motocorp and Bajaj Auto
historically trade at 14x and 15x one-year forward earnings, respectively.
Asia Auto: Growth and profitability (calendarised data)

India
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
-3.5%
-3.7%
-8.3%
41.4%
1.8%
16.6%
37.9%
-14.0%
-6.2%
4.2%
21.9%
62.5%
22.4%
38.9%
45.0%
39.3%
7.2%
12.5%
13.6%
12.2%
8.7%
4.7%
6.0%
10.0%
6.4%
5.1%
11.1%
8.3%
8.8%
12.5%
9.9%
10.0%
13.2%
10.4%
10.5%
7%
0.8x
1.8x
28%
5%
1.0x
1.3x
24%
4%
0.9x
0.6x
23%
5%
0.8x
0.6x
24%
4%
0.8x
0.4x
22%
Note: based on all HSBC coverage of auto companies across Asia. All data is market cap weighted
65
abc

Multi-sector
July 2012
Sector snapshot
Key sector driver: GDP per capita in China
Key sector stats

Automobile
5% of MSCI Asia ex-JP
Trading data
ADTV (USDm)
Absolute
3 largest stocks
GDP per capita (USD)
8,000
GDP per capita (USD)
7,000
n/a
30,328
6,000
686%
4.8x
HYUNDAI MOTORS, KIA
MOTORS, HYUNDAI MOBIS
4,000

MSCI Asia
0.61
7,153
6,118
5,000
5,289
3,000
2,665
2,000
3,758
1,000
0
2007
Top 10 stocks
3,432
4,425
2008
2009
2010 2011f 2012f 2013f
Source: CEIC, IMF, ADB, HSBC
2000 Price level

1800
1600
1400
1200
1000
800
600
400
200
0
Jan-12
Jan-11
PB vs ROE
22
20
18
16
14
12
10
8
6
Dec-11
Dec-10
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Fw d ROE % (LHS)
66
Jan-10
Jan-09
Jan-08
Dec-04
58.15
13.23
11.62
10.80
5.13
1.06
5x
Dec-09
KOREA
INDIA
INDONESIA
CHINA
TAIWAN
MALAYSIA
Weights (%)
10x
Dec-08
Country
15x
Jan-07
Country breakdown
20x
Dec-07
PE band chart for Indian Auto
Jan-06
24.6%
12.6%
12.4%
11.6%
6.1%
3.8%
3.1%
3.0%
3.0%
1.9%
Dec-06
HYUNDAI MOTOR
KIA MOTORS
HYUNDAI MOBIS
ASTRA INTERNATIONAL
TATA MOTORS
DONGFENG MTR.
CHENG SHIN RUB.
HANKOOK TIRE
MAHINDRA & MAHINDRA
BAJAJ AUTO
Jan-05
1
2
3
4
5
6
7
8
9
10
Index weight
Dec-05
Stocks
Jan-04
Stock rank
Fw d PB (x )
abc

Multi-sector
July 2012
Financials banks
Banks team
Todd Dunivant*
Head of Banks Research, Asia-Pacific
Focus: China banks, Hong Kong Banks
+852 2996 6599
tdunivant@hsbc.com.hk
York Pun*
Analyst
Focus: Hong Kong Bank, Exchanges, HK/China Brokers
+852 2822 4396
yorkkypun@hsbc.com.hk
Xiushi Cai*
Analyst
Focus: Thailand and Philippines Banks
Singapore Branch
+65 6658 0624
xiushicai@hsbc.com.sg
Sachin Sheth*
Anslyst
Focus: India Banks & NBFCs
+91 22 2268 1224
sachinsheth@hsbc.co.in
Kar Weng Loo*

Analyst
Focus: Singapore, Indonesia and Malaysia Banks
Singapore Branch
+65 6658 0654
karwengloo@hsbc.com.sg
Eric Mak*
Analyst
Focus:China Banks
+852 2996 6585
erichkmak@hsbc.com.hk
Tejas Mehta*
Analyst
Focus: India Banks & NBFCs
+91 22 2268 1243
tejasmehta@hsbc.co.in
Bruce Warden*
Analyst
Focus: Taiwan Financials
+886 2 8725 6028
brucewarden@hsbc.com.tw
Sector sales
Matthew Robertson
+44 20 7991 5077
matthew.robertson@hsbcib.com
Jonathan Weetman
+44 20 7991 5939
jonathan.weetman@hsbcib.com
Kathy Park*
Analyst
Focus: Korea Banks, Brokers and Monolines
+822 2 3706 8755
kathypark@kr.hsbc.com
67
68
Multi-sector
July 2012
Sector structure
Asian Financials
HK
China
Taiwan
Korea
Singapore
Indonesia
Malaysia
Thailand
Philippines
India
BOCHK
BEA
WHB
DSF
DSBG
ICBC
CCB
ABC
BOC
BOCom
CMB
CITIC
CMBC
CQRCB
PDB
IndB
Cathay
Chinatrust
Fubon
Shin Kong
Sinopac
E. Sun
Yuanta
Mega
First
HFG
IBK
KB
SFG
WFG
DB
BS
DBS
OCBC
UOB
BBCA
BBRI
BDMN
BMRI
MAY
CIMB
PBK
AMM
HLBK
RHBC
SCB
BBL
KBANK
KTB
BAY
TCAP
BDO
BPI
MBT
BOB
Canara
HDFCB
ICICI
PNB
SBIN
UTI
HDFC
Union
Yes
IndusInd
BOI
LICHF
LTFH
GTJAI
HKex
SGX
MAS
SS
KIH
SC
CITICS
Haitong
Banks/Holding Companies/NBFCs
Capital Markets
Monolines
Source: HSBC
abc
FEH
250.0
Sub-prime crisis
Greece dow ngrade;

Start of European crisis
LTRO 2
Bear Stearns sold
200.0
EFSF created
LTRO 1

Multi-sector
July 2012
Fannie Mae, Freddie

M ac taken ov er
150.0
Asian Financial
crisis
Dotcom bust
100.0
9/11
Lehm an bankruptcy ;
Merill Ly nch sold
50.0
M ay -97 Nov -97 May -98 N ov -98 M ay -99 Nov -99 May -00 Nov -00 M ay -01 Nov -01 May -02 N ov -02 M ay -03 Nov -03 May -04 Nov -04 May -05 Nov -05 May -06 N ov -06 M ay -07 Nov -07 May -08 Nov -08 May -09 Nov -09 May -10 N ov -10 M ay -11 Nov -11 M ay -12
M SCI Asia x JP
M SC I Asia x JP Banks
Source: MSCI, Thomson Reuters Datastream, rebased to May 1997; HSBC
abc
69

Multi-sector
July 2012
20.0
18.0
Taiwan FHCs
India Banks & NBFCs
16.0
Indonesia Banks
Philippine Banks
14.0
Singapore Banks
Malaysia Banks
Hong Kong Banks
12.0
Thailand Banks
FY12e PE
70
Asian banks PE, PB and ROE comparison for 2012
10.0
8.0
Korean Banks
China A-share Banks

China H-share Banks
6.0
4.0
2.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
FY12e PB
Source: Thomson Reuters Datastream, HSBC sector estimates; size of the bubble represents 2012e ROE
abc

Multi-sector
July 2012
Financials is Asias largest sector, almost twice as big as technology, the second-biggest sector. It has
outperformed MSCI Asia by 1.6x in the last decade. Given its size, we break the sector into three subsegments banks, property and insurance and dedicate a chapter to each.
Sector description
The bank sector functions as an intermediary between sources of capital (investors and depositors) and
users of capital (individuals, corporations and governments). In providing this function banks take on
three major risks: credit risk (the risk that a borrower will not repay a loan), interest rate risk (changes in
the yield curve may change funding costs and asset yields) and liquidity risk (the risk, usually in a crisis,
that assets cannot be liquidated quickly enough to cover any short-term funding deficiency).
abc
Todd Dunivant*
Head of Banks Research,
Asia Pacific
+852 2996 6599
tdunivant@yahoo.com

Within the financials sector, banks represent the biggest share, with a combined market cap in excess of
USD1.4trn. The large Chinese banks (Industrial and Commercial Bank of China, China Construction Bank,
Agricultural Bank of China and Bank of China) account for about 40% of the combined market capitalisation
of banks in Asia, excluding Australia and Japan. Asias banking sectors are a study in contrasts in terms
of government/regulator invention, product sophistication and business model evolution. More developed
sectors, as in Hong Kong and Singapore, may look more like developed market counterparts, with less
government intervention. Other banking sectors range from more developed (say, Korea) to earlier-stage
emerging markets (say Indonesia), with China and India somewhere in between.
Key themes
The global financial crisis was a stark reminder that financial markets have become increasingly linked.
While the export-centric economies of Asia have long depended on the spending power of Western
consumers, recent growth cycles have increased Western banks exposure to financial and economic risks
in Asia. Banks globally are linked through counterparty transactions, credit risks and currency volatility.
Another consequence of the crisis has been new regulations, including higher provision costs, limiting
yield on some lending assets and the introduction of Basel III capital and liquidity rules.
The low interest rate and flush liquidity environments that have emerged since the crisis, plus the
expectation of greater regulations, will put pressure on bank earnings. Banks are leveraged entities, so
lower leverage in a low rate environment tends to lead to lower returns on invested capital (ROE). Banks,
particularly in emerging markets, can be a proxy for economic expansion. Earnings are often closely
correlated to economic growth in the countries where they operate; volume growth is often a function of
GDP growth, whilst provisions/losses can be linked to both domestic and global economic risks. Other
than GDP, the main sector themes are lending and deposit volumes, interest rates and asset quality.
Sector drivers
How a bank manages the complexity of its balance sheet and mitigates the key risks (credit, interest rate
and liquidity risk) drives the profitability and return on assets. Key factors to watch are the following:
Net interest income (NII) the difference between the total interest earned from assets (loans,
investment assets) and total interest rate paid on liabilities (deposits, interbank borrowings, funding
debentures, debt capital). For Asian banks, NII typically represents 65-80% of operating income.
71

Multi-sector
July 2012
Fee and commission income includes product/agency fees, account fees, overdraft fees, payments,
arrangement fees, guarantees and asset management fees. Fee income is typically 15-30% of
operating income in Asia.
Trading income gains/losses from disposal of assets held as investments or to manage key risks
(primarily interest rate and liquidity risks). In addition, some banks may have businesses that derive
trading income by transacting in securities/derivatives/forex for customers. This component of
income is the most volatile and typically accounts for less than 10% of operating income across Asia.
Provision expense including charges to cover potential/actual losses on risk assets. There are two
main asset groups to consider: loans and investment securities. Banks set aside a proportion of
current income to cover possible losses or defaults. Non-performing loans (NPLs) tend to increase in
periods of economic difficulty and rising NPLs mean higher loan loss provisions. These charges
come through the P&L and reduce the current earnings power of the bank.
Key segments
Hong Kong
The Hong Kong banking sector is mature, with the top five banks accounting for over 60% of total
deposits in the system. It has the highest credit to GDP ratio in Asia, which can partially be explained by
Hong Kongs position as a regional hub for financial management and capital flows. Credit quality in
mid-2012 was the best in the last decade, the result of excess liquidity, low rates and robust economic
performance. Between 2009 and May 2012 Hong Kong banks total loans increased by nearly 50%, with
around half for overseas use, probably by Chinese companies.
Hong Kong banks are on the cusp of what could be a key structural change in Asia the rise of the
renminbi for off-shore banking and financial transactions. Following increased flexibility in deposit
accounts and trade settlement, renminbi deposits in Hong Kong peaked at RMB627bn in November 2011
and totalled RMB554bn at end-1Q12. The renminbi is expected to be a driver of future growth, especially
as more renminbi-denominated assets become available in Hong Kong.
China
Chinas banking system comprises four main groups of banks: state owned banks (SOE banks), joint
stock commercial banks (JSCBs), city/provincial commercial banks and credit co-operatives. Loans in the
system essentially doubled over 2007-11 partly due to the large stimulus programme triggered by the
global financial crisis. Bank lending is the primary source of capital in China and accounts for >70% of
total financing as the corporate bond market remains relatively small and equity market listings have
slowed in recent years.
The banking system remains heavily skewed to large, SOE banks. Five banks (ICBC, CCB, ABC, BOC,
and Bank of Communications) control nearly two-thirds of the deposit base. Mid-size banks (mostly
JSCBs) are liquidity constrained, with a maximum loan-to-deposit ratio (LDR) of 75%. Interestingly, the
largest (SOE) and the smallest (credit co-operatives) institutions are the most liquid and have the most
flexibility to lend.
72
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Multi-sector
July 2012
abc
There are three specific risks associated with Chinas banking sector: (1) Credit risk remains a concern as
a result of robust lending since 2007, particularly to local government financial vehicles (LGFVs) for
infrastructure projects. (2) Interest rate risk as regulators plan to liberalise interest rates in China. (3) Liquidity
risk may rise as deposits decline, adding complexity to balance sheet management. Given the historically
high level of intervention by the government in the banking system, the timing of regulatory change will
influence the size of these risks.
Taiwan
Taiwans financial system has evolved from a mix of banks, brokerages and insurance companies into a
core of financial holding companies (FHCs) since 2000. Some of these FHCs are more bank-centric (e.g.
Chinatrust or Mega), some insurance-centric (Cathay or Fubon), and other brokerage-centric (Yuanta).
Growth in Taiwan financials has been lacklustre compared with the rest of the region over the past few
years. Corporate investments have been made more outside Taiwan, mainly in China. Thin spreads for
bank loans have kept margins low and provide little buffer for any increase in credit costs.
Cross-Strait negotiations between Taiwan and China remain a focus. The Economic Co-operation
Framework Agreement (ECFA) signed in 2010 includes a tariff reduction for more than 500 Taiwan
imports into China. In future, there are expectations of closer collaboration between banks that may lead
to equity investments by Chinese banks in their Taiwan counterparts. Other drivers could be the
availability of renminbi for onshore trade settlement in Taiwan and renminbi-denominated products
(similar to Hong Kong but on a smaller scale).
Korea
Koreas banking system can be divided into four main sub-segments: large, more diversified banks (e.g.
KB Financial, Shinhan FG, Hana Financial, and Woori FG), mid-size/specialised banks (e.g. Industrial
Bank of Korea and Korea Exchange Bank), and regional banks (e.g. Daegu Banking Group and BS
Financial) and mutual savings banks.
Consolidation, competition and restructuring of corporate debt have been a feature of the sector since the
Asian Financial Crisis and IMF bailout of the late 1990s and early 2000s. Large corporate customers have
restructured their balance sheets, deleveraged and have shifted away from the banks in Korea, relying
more on global debt markets and banks in recent years. This has left the Korean banks to focus more on
the domestic economy, including household borrowers, small/medium enterprises (SMEs) and singleoffice/home-office (SOHO) businesses.
Following this period of restructuring, banks expanded their balance sheets at a faster rate than system
deposits and became increasingly reliant on debenture funding. The ease of raising additional debt
funding (often for 3-years or less) essentially offered no barrier to lending as loan demand remained
strong on the back of broader economic growth. The global financial crisis hit the banks hard. Many SME
loans were restructured (lower rates, interest payment holidays, extended terms) and credit costs soared
well above 150bps for some banks for SME loans and troubled project financing loans (PF loans). This
cycle is behind the banks and from 2012 attributable profits recovered due to sharp drops in credit costs.
73

Multi-sector
July 2012
ASEAN
Banks across ASEAN were among the first affected during the Asian Financial Crisis in the late-1990s.
Aside from Singapore, these banking sectors have been perhaps more prone to economic cycles simply
due to the more domestic focus of the banks. Like Hong Kong, Singapore does not have a central bank.
The Monetary Authority of Singapore regulates the banking system but, unlike central banks, it does not
manage monetary liquidity via interest rates; instead it uses foreign exchange mechanisms to target a
trading range for the Singapore dollar.
In Singapore, there are three main domestic banks. DBS is the largest bank and earns more than 90% of
profits from Singapore and Hong Kong. United Overseas Bank (UOB) makes c95% of consolidated
profits from banking services in Singapore, Malaysia, and Indonesia. The banking unit of OverseaChinese Banking Corp (OCBC) has a similar earnings concentration to UOB, but the groups business is
more diversified through a c85% holding in Great Eastern Holdings (the largest insurer in Singapore and
Malaysia) and the acquisition of ING Private Bank (rebranded Bank of Singapore).
In Indonesia, credit penetration stands at only 26%, one of the lowest in the region. Assuming average
20% credit growth pa and sustained 12% nominal GDP growth it will take more than 15 years to reach
the same credit penetration level as Thailand (76%) and 20 years to be where Malaysia (116%) is today.
As the economy continues to expand, so should demand for credit. Large, liquid banks with strong
deposit franchises such as BCA are best positioned to benefit from a cyclical pick-up in credit demand.
Loan growth in Malaysia has been at an all-time high and asset quality the most stable since the 1997-98
Asian Financial Crisis. Operating costs are quite lean for most banks. Re-rating of the Malaysian banks
has been driven by expanding sector ROE which has been driven more by lower credit costs than top-line
income growth. In Thailand banks should benefit from rising penetration of consumer banking products
such as car and motorcycle loans and mortgages. Corporate credit demand accelerated following the
floods of 4Q11, and fee income is likely to remain a key driver for continued expansion of return on assets,
especially for Siam Commercial Bank. Bangkok Bank stands out in terms of asset quality and its deposit
franchise; Kasikornbank is most exposed to the export cycle, as SMEs are major customers.
Economic growth in the Philippines accelerated in 2011 and 1Q12 on the back of increased government
spending, export growth and stronger domestic consumption. This, in turn, has seen bank credit accelerate
and the general momentum of the Philippine economy should continue to drive banking sector growth. A
big hurdle standing in the way of faster RoA expansion is operating costs, primarily staff wages. Operating
costs are rising in a sector with some of the higher cost-to-income metrics in Asia at 55-60%.
India
Indian banks can be grouped into three categories: public sector banks, where the government is the
sole/primary shareholder, private banks, and non-bank financials (NBFCs) that are a mix of specialised
financing companies which are predominately wholesale funded as they lack strong deposit bases.
The sector has experienced a period of rapid credit expansion since the global recession of 2008-09. Loan
demand for corporate capital expenditure, home mortgages and personal consumption (cars and
motorcycles) has contributed to this growth cycle. This has been accompanied by tight liquidity, higher
74
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Multi-sector
July 2012
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and somewhat stubborn inflation. In the first three months of 2012 Indias economic growth fell to its
lowest level in nine years, pointing to a slower growth outlook.
Valuation
Implied PB/Dividend Discount/Gordon Growth/Warranted Equity Model: All these valuation
techniques are basically variants of the dividend discount method. This produces a valuation which
reflects banks long-term profitability, using the following formula:
Implied PB = (ROE g)/(COE g), where:
ROE = sustainable return on equity
g = Reflects the expected growth of the bank in the long term
COE= Cost of equity, computed using the CAPM method:
COE = Rf + Er
where Rf = risk-free rate, = beta of the security, and Er = equity risk premium
DCF-based methodologies: Also called the residual income or the economic value added method with
some modifications to the discounted cash flow method. Residual income is calculated as (ROE COE)
Shareholders Equity. This signifies the excess of income earned over the cost of equity for a bank.
Implied PE can also be computed a slight change to the above calculation:
Implied PE = (ROE g)/(ROE [COE g])
This also has similar characteristics as the implied PB methodology.
Historical trading bands: This methodology assumes that for a stable business the trading multiple is
unlikely to change significantly unless there is a significant re-rating of the stock or the country.
75
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Multi-sector
July 2012
Asian banking sector summary data

_____ 2005 ______ ______2006 ______ ______ 2007 ______ ______2008 ______ ______ 2009 ______ ______2010 ______ ______ 2011 ______
LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn)
Hong Kong
Total assets
Total loans
% GDP
Total deposits
7,247
2,312
167%
4,068
935
298
China
Total assets
Total loans
% GDP
Total deposits
30,204
20,684
112%
30,021
3,743
2,563
Taiwan
Total assets
Total loans
% GDP
Total deposits
30,366
17,158
146%
22,991
925
522
Korea
Total assets
1,118,100
Total loans
756,710
% GDP
87%
Total deposits
656,728
Singapore
Total assets
Total Loan
% GDP
Total deposits
425
183
88%
224
Indonesia
Total assets
1,490,220
Total Loan
698,681
% GDP
25%
Total deposits 1,076,113
525
3,720
700
8,306
2,468
167%
4,757
1,068
317
36,517
23,828
110%
34,802
4,679
3,053
31,928
17,599
144%
24,172
980
540
1,106 1,262,067
749 874,152
96%
650 706,715
256
110
135
508
195
84%
272
4,459
742
1,327
380
35,363
27,775
104%
40,105
4,842
3,803
32,769
18,022
140%
24,390
1,010
556
1,357 1,409,803
940 988,989
101%
760 747,886
331
127
178
583
233
88%
315
753
5,491
752
10,754
3,286
196%
6,058
1,388
424
39,558
32,005
102%
47,844
5,798
4,691
34,939
18,470
146%
26,301
1,065
563
1,506 1,714,567
1,057 1,162,141
113%
799 873,391
405
162
219
668
272
100%
348
782
7,012
801
10,635
3,288
203%
6,381
1,372
424
52,080
42,560
125%
61,201
7,628
6,234
36,711
18,599
149%
27,975
1,148
581
1,361 1,642,947
923 1,169,474
110%
693 929,143
464
189
241
707
281
106%
391
823
8,964
875
12,291
4,228
243%
6,862
1,581
544
61,530
50,923
127%
73,338
9,337
7,728
37,797
19,853
146%
29,392
1,411 1,668,553
1,004 1,198,447
102%
798 986,529
503
200
279
782
323
106%
434
13,741
5,080
268%
7,591
1,769
654
69,797
58,189
123%
82,670
11,089
9,245
39,908
20,961
152%
30,782
1,318
692
1,470 1,782,550
1,056 1,287,224
104%
869 1,072,337
1,547
1,117
883
11,129
1,296
681
1,008
610
252
339
977
13,135
1,017
931
859
420
129%
483
663
324
373
151 1,716,895
71 796,460
24%
109 1,229,133
191 2,014,242
89 1,004,177
25%
137 1,462,862
214 2,343,090
107 1,313,873
27%
156 1,682,163
215 2,571,660
121 1,446,809
26%
154 1,913,571
274 3,054,595
154 1,783,600
28%
204 2,304,875
339 3,698,294
198 2,223,684
30%
256 2,736,415
408
245
1,093
593
103%
812
310
168
1,221
644
100%
869
369
195
1,338
727
98%
972
387
210
1,426
783
115%
1,063
417
229
1,550
883
115%
1,141
503
286
1,782
1,004
118%
1,299
562
317
8,647
5,861
75%
6,479
239
162
9,005
6,130
72%
6,480
267
182
10,047
6,824
75%
7,037
289
196
10,372
6,693
74%
7,004
311
201
11,746
7,456
74%
7,365
390
247
12,981
8,585
81%
7,865
411
272
4,289
1,695
27%
3,071
88
35
4,488
1,857
27%
3,185
109
45
5,035
2,181
28%
3,703
106
46
5,484
2,379
30%
4,126
119
51
6,132
2,591
29%
4,513
140
59
6,541
3,015
31%
4,756
149
69
34,600
17,663
41%
23,884
796
406
43,262
21,481
43%
29,526
1,078
535
52,386
26,454
47%
35,694
1,033
521
60,269
30,246
47%
42,688
1,183
594
71,835
36,446
47%
48,062
1,410
715
NA
42,670
48%
56,726
NA
838
Malaysia
Total assets
Total Loan
% GDP
Total deposits
959
558
107%
693
254
148
Thailand
Total assets
Total Loan
% GDP
Total deposits
7,988
5,530
78%
6,114
195
135
Philippines
Total assets
Total Loan
% GDP
Total deposits
3,857
1,539
27%
2,628
73
29
India*
Total assets
Total Loan
% GDP
Total deposits
27,859
13,525
37%
19,407
625
303
183
149
50
435
*All data December year-end except India, which is March year-end

Note: Conversion to USD done on the exchange rate as of year-end
Source: CEIC, Central bank websites
76
612
10,350
2,962
183%
5,869
230
179
63
549
263
192
77
736
281
202
78
704
310
210
89
838
370
244
103
943
302
410
249
108
1,113
abc

Multi-sector
July 2012
Sector snapshot
Core industry driver: Loan growth and NIM (2012e)
Key sector stats

Financials
30% of MSCI Asia ex-Japan
Trading data
ADTV (USDm)
Absolute
Relative to MSCI Asia ex Japan
3 largest stocks
MSCI Asia ex Japan
89.6
2,421.2
2012e
25%
7%
6%
20%
5%
15%
44%
6%
CCB, ICBC,BOC
10%
97%
0%
4%
3%
2%
5%
1%
0%
CH HK TW KO IN SG ID TH MA PH
Loan grow th(12e) (LHS)
NIM (12e)
Top 10 stocks (MSCI Asia x JP Banks)

Source: HSBC estimate
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
China Construction Bank

Industrial & Comm Bank of China
Bank of China
DBS Group
UOB
OCBC
Shinhan Financial
HDFC Bank
HDFC Limited
KB Financial
Index weight
9.96%
8.83%
6.16%
4.32%
4.13%
4.00%
3.28%
3.27%
3.03%
2.74%
Note: Data represents weighting in MSCI Asia ex-Japan Bank index

PE band chart
35
30
25
20
15
10
5
0
CN
Country breakdown
China
Singapore
India
Korea
Taiwan
Malaysia
Indonesia
Hong Kong
Thailand
Note: Data represents weighting in MSCI Asia ex-Japan Bank index
32.0
12.4
10.5
10.1
7.6
7.4
6.5
6.4
6.3
TW
KO
2010
Weights (%)
IN
SG
2011
ID
2012
TH MA
PH
2013
Source: MSCI, Thomson Reuters Datastream, HSBC estimates
PB vs ROE FY2012e
20
PH
TW
HK
15
ROE
Country
HK
SG
MA
10
IN
ID
TH
5
KO
CN
0
0.5
1.0
1.5
2.0
2.5
3.0
PB
77

Multi-sector
July 2012
Notes
78
abc

Multi-sector
July 2012
abc
Financials insurance
Insurance team
James Garner*
Head of Asian Insurance Research
+852 2822 4321
james.e.garner@hsbc.com.hk
Michael P Chang*
Analyst
+852 2996 6555
michaelpchang@hsbc.com.hk
Sinyoung Park*
Analyst
+822 3706 8770
sinyoungpark@kr.hsbc.com
Grace Q Zhou*
Analyst
+852 2822 3053
graceqzhou@hsbc.com.hk
79
80
Asia Insurance
Primary
Life
China
China Life
New China Life
Korea
Samsung Life
Korea Life
Tong Yang Life
Non Life
China
Korea
Dongbu
Hyundai M&F
LIG
Meritz F&M
Samsung F&M
Composite
Reinsurance
Conglomerate
Korea
Korean Re
China
Ping An

Multi-sector
July 2012
Sector structure
China
China Pacific
China Taiping
How an Insurance company makes money

Life-Spread investment
Life-Unit linked investment
Life-Protection
Non-life
+ Investment return
+ Management fee (% AUM)
+ Protection premium
+ Premiums
- Policyholder return*
- Expenses
- Claims costs
- Claims expense
= Investment spread
+/- Hedging profit/(loss)**
= Pre-tax profit (or Technical margin)
- Operating expense
- Expenses
= Pre-tax profit
= Pre-tax profit
= Underwriting profit/(loss)
+ Investment income
= Pre-tax profit
*Can be fixed guarantee return or profit sharing (e.g. 90% of investment profits)
Removed for Compliance reasons

Source: HSBC
abc
** Insurers sell income & capital protection guarantees and make a spread between premium and cost of external hedge
160
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
140
120
100
80
60
40
China Life A
China Pac H
China Pac A
Ping An H
Ping An A
NCL H
NCL A
China Taiping
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Jul-04
Apr-04
Jan-04
Oct-04
20

Multi-sector
July 2012
Chinese insurers versus 10-year Chinese government bond yield
China Life H
10 year yield (RHS)
Source: Thomson Reuters Datastream, CEIC, HSBC
Korean insurers versus Korean 10-year government bond yield
Korea SE Insurance
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
KTB 10Y(RHS)
81
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Sep-08
0.0%
May-08
0
Jan-08
1.0%
Sep-07
2.0%
3000
May-07
6000
Jan-07
3.0%
Sep-06
4.0%
9000
May-06
12000
Jan-06
5.0%
Sep-05
15000
May-05
6.0%
Jan-05
7.0%
18000
Sep-04
21000
May-04
8.0%
Jan-04
24000
82
Multi-sector
July 2012
Sector P/EV to ROEV scatter graph

30%
Meritz
Dongbu
China Taiping
Hyundai
20%
Samsung F&M
LIG
Bangkok Life
Ping An 'H'
Ping An 'A'
Samsung Life
AIA
10%
Tong Yang
Korean Re
Korea Life
China Pac 'H'
China Pac 'A'
China Life 'H'
China Life 'A'
0%
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
-10%
-20%
New China Life 'H'
New China Life 'A'
-30%
abc
Data as of 21 May 2012

Source: Company data, Thomson Reuters Datastream, HSBC

Multi-sector
July 2012
Sector description
Broadly speaking, insurance companies provide protection to individuals and businesses against uncertain
events by transferring risk to an underwriter, which promises to pay the insured an amount, usually unknown,
if those events occur. The unknowns make estimating profits difficult and give rise to accounting that has
been a topic of debate for investors and insurance companies for some time. Life insurance companies also
sell wealth accumulation/savings products where there may or may not be an insurance element.
The widely referenced industry S-curve, which highlights the level of maturity of the insurance market and
per capita GDP, is often used as an indication of potentially high-growth markets as GDP per capita increases.
The insurance sector is divided into primary insurance and reinsurance, depending on the nature of the
customer. Primary insurance, which underwrites risk directly from households and businesses, is further
split between life and property & casualty (commonly referred to as non-life). By contrast, reinsurers only
provide insurance to insurance companies. Some insurers also have banking and asset management
operations alongside the typical life and non-life underwriting segments.
Life insurance comprises two main classes of products, namely savings type and protection type products.
Savings products generate investment margins which can be investment spread (i.e. difference between
actual investment return and policyholder return) and investment fee (i.e. levered as % AUM) which must
cover administration and acquisition expenses. Protection products, also termed personal risk products,
which provide cover against death and disability usually generate underwriting margin (the difference
between premiums paid and claims).
abc
James Garner*
Head of Asian Insurance
The Hong Kong and Shanghai
+852 2822 4321
james.e.garner@hsbc.com.hk
Michael P Chang*
Analyst
+852 2996 6555
michaelpchang@hsbc.com.hk
Sinyoung Park*
Analyst
+822 3706 8770
sinyoungpark@kr.hsbc.com
Grace Q Zhou*
Analyst
+852 2822 3053
graceqzhou@hsbc.com.hk

Key themes
Insurance is the smallest of the sub-sectors within the Asian financials space. It has performed much in
line with the rest of Asia in the last decade, but remember that some larger (Chinese) players have only
listed in the last five years and there are many more listings to come. Key players in Asian insurance
market are AIA, China Life and Ping An.
Growth in the economy and per capita income boosts demand for insurance. As income rises, demand
expands from compulsory products (motor insurance) to more sophisticated products such as saving
products, asset protection such as household insurance and retirement products.
The insurance sector, like banks, needs to maintain a minimum level of solvency to be able to underwrite
new products and honour its future liabilities. Investors screen companies using regulatory solvency
models to measure the groups solvency position and gauge its financial and operational flexibility.
Underwriting profitability and investment returns are key elements of operating profits. Underwriting
profitability depends on the pricing of products, fee structure, claims experience and expenses, and is
relevant to both primary and reinsurance segments. Underlying profitability at life companies is
dependent on the type of product and can be broadly broken into risk result and investment spread for the
traditional products which are generally split between policyholder and shareholder in a defined
proportion and fee income for the unit-linked product. Surrender and lapses of policies also affect
profitability at life insurers and have to be considered for calculations along with expenses.
Primary non-life and reinsurance companies measure technical profitability based on the combined ratio,
the total of claims paid and losses incurred versus the premiums collected.
83

Multi-sector
July 2012
Sector drivers
China
Most H-share investors appraise Chinese life insurers using embedded value (EV) and new business value
(NBV) information. Key NBV growth drivers include; life agent numbers, agent productivity levels,
product mix (protection has higher margin), regulatory developments (e.g. banning life agents from bank
branches) and competition. Recently life insurance sales through bank channels have been cannibalised
by high-return wealth management products. H-share analysts usually ignore impossible to forecast life
earnings. In contrast, the share prices of non-life insurers are impacted by earnings. Key non-life earnings
drivers include combined ratio, premium growth and investment return.
Chinese insurance share prices are geared to equity markets in four ways: (1) fundamental equity gearing
as Chinese insurers are 10-14% equity invested; (2) solvency ratio is equity sensitive; (3) life insurance is
an A-share market proxy for investors constrained by the qualified foreign institutional investor (QFII)
scheme; (4) migration to more conservative valuation methodologies (e.g. from appraisal value to P/EV)
during an equity market rout. In addition, regulatory reforms have had a significant impact on the sectors
profitability and capital requirements and thus share prices.
Korea
Korean non-life insurance shares are appraised on a price to book basis and as such are driven by the
earnings outlook despite the provision of EV information. One peculiarity in Korea is that the auto
insurance loss ratio appears to have a disproportionately large impact on share prices even though auto
business accounts for only 10-20% of total premiums received. Life insurers are largely appraised on an
EV basis. As such the share price is sensitive to NBV growth outlook. In general, Korean insurers are
highly sensitive to interest rate movements. The interest rate sensitivity is compounded by the insurers
high exposure to high fixed return guarantees.
Key segments
China
The Chinese insurance industry is in its infancy and offers significant long-term growth potential. It could be
a potential beneficiary of the Chinese governments initiative to create more balanced growth by increasing
consumer spending power. The expected rise in social welfare spending will ease the burden on households
and help reduce their level of precautionary savings (mainly for education, healthcare and retirement).
The positioning of Chinas insurance industry on the S-curve is on the cusp of where we would expect
insurance growth to take off relative to GDP; within China, this relationship between GDP levels and
penetration exists across the countrys provinces.
The unleashing of the Chinese consumer offers opportunities for the industry through insurance on
durable goods (car insurance has already benefitted), increased spending on discretionary investment
type products (this represents a large portion of the life insurance sector) and potential for a higher
proportion of savings to be diverted into retirement products.
Still, the profitable development of Chinas insurance markets will not be a smooth ride and there are
several structural challenges, including the visible hand of the regulator, decentralised policy initiatives, a
tight insurance labour market, competitive threat posed by the banks, burgeoning legacy issues (systems,
products), and the likely revamp of the regulatory solvency system.
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Multi-sector
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Chinas non-life market is primed for strong premium growth in light of a relatively low penetration rate,
immature market structure evidenced by high dependence on the motor business versus more mature
markets and the governments pressing need to get insurance risks off its own balance sheet.
While the outlook for non-life premium growth is strong, the outlook for profitability is less so. Chinas
non-life market faces deep structural challenges. Competition has been characterised as intense, irrational
and on occasions legally dubious, and this is compounded by a lack of actuarial skills, relatively low
barriers to entry and undue focus on market share. Recent reforms by the regulator have improved the
operating environment, leading the current record high profitability ratios for the non-life sector. Looking
further out, we expect the existing top five incumbents will lose market share over the next 15 years as
direct distribution trends mirroring more developed markets take hold.
Our analysts are more positive about the profitable development of Chinas life sector, given the centralisation
of back offices, emphasis on higher margin products/lower cost distribution channels, professionalisation of
agency sales forces, the emergence of scale benefits (material expense overruns should dissipate) and
liberalisation of investment rules which could improve asset-liability mismatch and augment returns.
Korea
We do not see the Korean insurance market as ex-growth despite its superficially high premium
penetration rates and pedestrian valuations. For example, Korean insurance penetration is high but
premium density (e.g. premium per capita) of USD2,332 per capita is relatively low versus Japan
(USD4,441) and Taiwan (USD3,296). Also, Koreans are poorly prepared for retirement, with retirement
income equating to just 15% of final salary, in part due to serious flaws in the severance payment plan
which is in the process of being replaced with the new corporate pension scheme whose assets under
management (AUM) has grown rapidly to KRW52trn as of March 2012 from KRW16bn in May 2005.
Note that Korean insurers adopted a uniquely Korean version of Risk Based Capital (RBC) in 2011 which
will continue to flatter their solvency as Solvency 1 ratios do by ignoring longevity risk and levying
very low equity investment and asset-liability mismatch risk charges. On 31 January 2012, the
regulator highlighted a number of tightening measures for 2012 and the years to come. We believe that
the regulatory body will take a step-by-step approach as a more demanding RBC model could force most
insurers to raise money, even the recently listed insurers.
In Korea, insurers have sold a raft of income and capital protection guarantees to take a bigger slice of the
expanding variable annuity market. There is a risk that increasingly complicated income and capital protection
guarantees sold with variable annuity products are not being priced, let alone hedged, correctly as competition
intensifies. Insurers can limit guarantee risks through active portfolio management (e.g. automatic rebalance
when the market falls, equity caps) but active hedging remains both problematic and limited in Korea.
Valuation
A one-size-fits-all approach is not applicable to the Asian insurance space. While Chinese insurance
investors are comfortable using EV information, Korean insurance investors largely ignore it in favour of
earnings. HSBCs Asian insurance analysts use four valuation methodologies (1) appraisal value / sumof-the-parts; (2) price to EV; (3) price to book; and (4) price to tangible asset value and weight them
according to country business model specifics to gauge realistic 12-month price targets.
85
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Multi-sector
July 2012
Sector snapshot
Premiums in Koreas insurance market in 2010 totalled
KRW132,366bn
Key sector stats

Sector: Insurance
Trading data
ADTV (USDm)
Absolute
3 largest stocks
MSCI Asia
n/a
102,860
Non Life
37%
220%
1.5x
AIA, CHINA LIFE, PING AN
Life
63%
0.92
Top 10 stocks
400 P rice level

350
300
250
43.5
29.7
16.0
10.7
15x
Jan-12
Jan-11
10x
Jan-04
Weights (%)
China
Hong Kong
Korea
Taiwan
20x
200
150
100
50
0
Country breakdown
Country
25x
Jan-10
*Removed for compliance reasons

PE band chart
Jan-09
29.7%
19.4%
14.0%
7.3%
7.0%
5.6%
4.5%
3.1%
1.8%
1.8%
Jan-08
AIA GROUP
CHINA LIFE IN.
PING AN IN
CATHAY FINL
SAMSUNG F&M.
CHINA PAC.IN
SAMSUNG LIFE IN.
*
DONGBU INSURANCE
SHIN KONG FINL.HLDG.
Source: FSS, HSBC
Jan-07
1
2
3
4
5
6
7
8
9
10
Index weight
Jan-06
Stocks
Jan-05
Stock rank
PB vs ROE
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
16
Key sector driver: Premiums in Chinas insurance market in
2011 totalled RMB1,434bn
14
12
10
Non Life
33%
Fw d ROE % (LHS)
Life
67%
Source: CIRC, HSBC
86
Fw d PB (x )
Apr-12
May-11
Jun-10
Jul-09
Aug-08
Sep-07
Oct-06
Nov-05
Dec-04
abc

Multi-sector
July 2012
Financials property
Property team
Hong Kong & China
Southeast Asia
Derek Kwong*
Head of Real Estate Equity Research, Asia
+852 2996 6629
derekkwong@hsbc.com.hk
Pratik Ray*
Senior Analyst
Singapore Branch
+65 6658 0652
pratikray@hsbc.com.sg
Michelle Kwok*
Analyst
+852 2996 6918
michellekwok@hsbc.com.hk
Perveen Wong*
Analyst
+852 2996 6571
perveenwong@hsbc.com.hk
Phillip Zhong*
Analyst
+852 2996 6535
phillipyzhong@hsbc.com.hk
Stanley Cheung*
Analyst
+852 2822 4395
stanleyyccheung@hsbc.com.hk
David Choo*
Analyst
Singapore Branch
+65 6658 0651
davidthchoo@hsbc.com.sg
Taiwan
Abel Lee*
Analyst
+886 2 8725 6026
abelchlee@hsbc.com.tw
India
Ashutosh Narkar*
Analyst
+91 22 2268 1474
ashutoshnarkar@hsbc.co.in
87
88
Multi-sector
July 2012
Sector structure
Real Estate Investment
Indirect- Listed Company
Direct Property Asset
Developers
Landlords
REITs
China
Hong Kong
Developers
Source: HSBC
Guangzhou
Investment
Hui Xian
Developers
Cheung Kong
Hang Lung Properties
Kerry Properties
New World Development
Sino Land
Sun Hung Kai Properties
Landlords
Hongkong Land
Hysan
Great Eagle
Wharf
REITs
Champion
Fortune
Prosperity
Regal
Sunlight
The Link
abc
Agile
China Resources Land
China Overseas Land & Investment
Country Garden
Evergrande
Franshion
Greentown
Guangzhou R&F
KWG
Longfor
Shimao
Shui On Land
Sino Ocean
SOHO China
Yanlord
REITs
5,000
450
4,500
400
4,000
350

Multi-sector
July 2012
3,500
300
3,000
250
2,500
200
2,000
150
1,500
100
1,000
50
500
0
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
HK dev elopers index (LHS)
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
China dev elopers index (RHS)
abc
89
90
8,000
(HKDm)
(HKD)
7,000
70
60
6,000
50
5,000
40
4,000
30
3,000

Multi-sector
July 2012
Hong Kong core profit book value per share
20
2,000
10
1,000
0
0
2007
2008
2009
2010
2011
Core profits
2012e
2013e
2014e
Book v alue per share
Source: Company data, HSBC
China core profit book value per share

8,000
(HKDm)
(HKD)
7,000
12
10
6,000
8
5,000
4,000
3,000
2,000
2
1,000
0
0
2007
2008
2009
2010
Core profits
2012e
2013e
2014e
Book v alue per share
abc
Source: Company data, HSBC
2011

Multi-sector
July 2012
Sector description
Developers purchase the land, determine the design and marketing of a property, obtain the necessary
approvals and financing, organise construction and then lease, manage or sell the finished product.
Developers work with many different counterparts during each step of this process, including architects,
city planners, engineers, surveyors, inspectors, contractors and real estate agents.
The sector comprises both commercial and residential real estate. Residential property covers apartments,
villas, townhouses and condominiums, while commercial property is mainly used for business purposes
such as office buildings, shopping malls, industrial parks and hotels.
abc
Derek Kwong*
Head of Real Estate Equity
Research, Asia
+852 2996 6629
derekkwong@hsbc.com.hk

Key themes
The bellwether stocks are all listed in Hong Kong. The sector has been flat relative to MSCI Asia ex
Japan (0.3x) in the last decade and has been the worst performing sub-sector within the financials sector.
In addition to supply/demand dynamics, macro factors such as consumer confidence, the economic
outlook, the level of unemployment and interest rates are the key drivers of residential property prices.
Property often witnesses large swings in performance, especially when interest rate expectations change
(e.g. 2007 and 2009).
Sector drivers
Hong Kong developers
The developers revenue model is to acquire land at low cost and sell flats at higher prices. For Hong
Kong developers, more than 50% of their costs come from land, while interest and construction typically
account for roughly 20-40%. In order to increase their profit margin, some developers (e.g. Henderson
Land) avoid bidding for land at market price, and opt instead to accumulate agricultural land for
conversion to residential use. With a normal development cycle of 36-48 months, developers pre-sell
properties 12-24 months ahead of completion to finance the outstanding construction cost. Hence,
developers with execution ability, prudent cash flow management and strong land bank pipelines generate
stable revenue. In addition to residential project sales, most developers generate a high portion of revenue
coming from investment properties. Hence, a healthy commercial leasing market is also a key driver.
Landlords
Landlords revenue is relatively stable, as rental levels and lease tenure are governed by lease agreements.
Upon expiry (usually 36 months for office rentals), the landlord and tenant can renew the lease at
prevailing market rents. If the new lease commands a higher rent (positive reversion), the landlords
revenue increases (and vice versa). Landlords generally prefer to have leases which expire over a wide
time spread to avoid a spike in expiries during market downturns. The occupancy of office space is
supported by economic growth, especially for Central Grade A offices, which are highly sought after by
financial institutions and corresponding service providers.
China developers
In China, the focus is on residential property development in different cities as recurring income from
investment properties is immaterial. A key gauge of execution is the developers monthly contracted
sales. Another metrics closely scrutinised by the market is the cash collection ratio, given that mortgage
91

Multi-sector
July 2012
drawdowns from banks have remained slow for most of 2011. These two metrics are of great importance
as cash from pre-sales make up 70% of developers source of funding. Other key drivers for China
developers include balance sheet strength, given the capital intensive nature of the business, and
execution with respect to gross floor area (GFA) completion which affects developers earnings profile.
Key segments
China
Rapid urbanisation and rising incomes have led to a strong increase in demand (and supply) of real estate
across China, pushing transaction volume to a new high in 2011 despite the governments tight grip on
the administrative policy front. Our view remains that these administrative measures such as the Home
Purchase Restriction will stay in place, given that the central government appears to have successfully
engineered a soft landing in the property market by curbing speculative demand. In the current
environment, market consolidation will continue to be a key theme in 2012 as home buyers stick with
quality properties constructed by well-known developers.
With credit (both onshore and offshore) remaining tight and contracted sales being a key source of
funding, developers will continue to adopt a flexible pricing strategy for prudent cash flow management.
Against this backdrop, we prefer developers with a cost of capital advantage and strong execution,
measured by metrics such as project sell-through rate, contracted sales and cash collection.
Hong Kong
In Hong Kong, property companies have benefited from rising asset prices across all three asset classes
residential, office and retail since 2009. Key drivers of residential prices in Hong Kong are
unemployment and interest rates. With both being low, these have provided fundamental support for
residential prices since 2009. The Hong Kong housing market also enjoys low supply of 13,000-15,000
units per year over 2012-13 (according to government estimates), compared with the historical average of
18,500 units since 2000.
As for the commercial sector, general business activity is an important factor. With many multinational
firms increasing their focus on growth opportunities in Asia, this should help support demand.
Meanwhile, office vacancy has remained tighter than historical average (since 1995) while upcoming
office supply over 2012-14 is expected to come in below the historical average (according to Jones Lang
LaSalle), suggesting favourable supply conditions for office rental.
Singapore
Asset inflation is an issue in Singapore too. Various measures have been introduced to keep a check on
residential real estate prices and discourage speculation. These include a range of administrative measures
such as additional stamp duties upon purchase and sales of properties (for properties sold within four
years from time of purchase) as well as minimum loan-to-value ratios and stringent mortgage eligibility
criteria, especially on multiple property purchases.
While residential transaction volumes in Singapore may cool off, large Singapore-based developers have
strong balance sheets and have diversified their exposure by geography as well as asset type. Hence, they
are in a good position to weather any near-term policy driven slowdown in residential sales.
92
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Multi-sector
July 2012
abc
Valuation
Net asset value (NAV) is the most commonly used valuation yardstick for property developers and
landlords. In deriving NAV, we employ a DCF approach for development properties and an income
capitalisation approach for investment properties.
The valuation premium or discount to NAV reflects investors expectations on price/rental trends, sales
volume, as well as general market outlook. To a large extent, property companies trading
discount/premium is highly dependent on their track record on execution and the quality of the
management team. For Hong Kong developers and landlords, NAV discounts average 13.1% and 20.8%
since 2005, respectively. China developers tend to trade at deeper discounts 19.9% on average since
2005 due to higher earnings volatility as well as industry specific risks.
93
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Multi-sector
July 2012
Sector snapshot
Core industry driver: HK residential price trend
Key sector stats

Sector: Property
Trading data
ADTV (USDm)
Absolute
3 largest stocks
MSCI Asia
120
100
523
153,390
80
60
8%
0.24x
Cheung Kong, SHKP, The Link
40
20
0.90
94 95 96 97 98 99 00 01 02 03 0405 06 07 08 09 1011 12
Top 10 stocks
Source: Centaline, HSBC
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
CHEUNG KONG HOLDINGS

SUN HUNG KAI PROPERTIES
LINK RL.EST.INV.TST.
HANG LUNG PROPERTIES
WHARF HOLDINGS
CHINA OS.LD.& INV.
SWIRE PACIFIC A
CAPITALAND
HANG LUNG GROUP
HENDERSON LD.DEV.
Index weight
10.8%
10.0%
5.5%
5.3%
5.3%
5.2%
5.0%
3.6%
3.2%
3.2%
HK PE band chart
40
35
30
25
20
15
10
5
0
Country breakdown
Country
Hong Kong
China
Singapore
Philippines
India
Taiwan
Malaysia
92
Weights (%)
59.2
20.3
14.4
2.8
1.2
1.2
0.8
95
97
00
03
05
11
HK PB vs ROE
(x )
(%)
30
25
20
15
10
0
92
94
96 98
00
P/B (LHS)
02
04
06
08
ROE (RHS)
94
08
10
abc

Multi-sector
July 2012
Core industry driver: China residential price trend
8 ,00 0
RMB/sqm
6 ,00 0
4 ,00 0
2 ,00 0
0
1 99 8
2 0 01
2 0 04 2 00 7
Ye ar
2 01 0
Source: NDRC, CEIC, HSBC
China PE band chart
60
50
40
30
20
10
0
97
99
01
03
05
07
09
11
China PB vs ROE
(x )
(%)
25
20
15
10
0
97
99
01
03
P/B (LHS)
05
07
09
11
ROE (RHS)
95

Multi-sector
July 2012
Notes
96
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Multi-sector
July 2012
abc
Healthcare
Healthcare team
Nam Park*
Regional Head of Healthcare Research, Asia Pacific
+852 2996 6591
nampark@hsbc.com.hk
Carolyn Poon*
Analyst
+852 2996 6586
carolynpoon@hsbc.com.hk
Girish Bakhru*
Analyst
+91 22 22681683
girishbakhru@hsbc.co.in
97
98
Multi-sector
July 2012
Sector structure
Healthcare
Pharmaceutical
Chemical drugs
Original
Generics
Medical device
Drug / Medical device

distributors
Medical services
providers
Biologics
Original
Biosimilar
Source: HSBC
abc
800
European
Debt Crisis
Global
Financial
Crisis
600

Multi-sector
July 2012
MSCI Asia ex Japan Healthcare Index
400
200
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Source: MSCI, Bloomberg, HSBC
abc
99

Multi-sector
July 2012
1.2
18.7%
High asset turn efficient v olume
driv en strategies
High asset turn and high margins;
Green Cross Corp
1.0
IPCA Laboratories
profitable industry leaders strategies
Cadila Healthcare Ltd
Lupin
Torrent Pharma
LG Life Sciences Ltd.
Dr. Reddy 's Lab.
0.8
Asset Turnover(x)
100
EBIT margin asset turnover (2010-12 average)
Biocon Limited
Dong-A Pharmaceutical Co
Cipla
0.68
United Laboratories Int

Ranbax y
Mindray Medical Internati
0.6
Div is Laboratories
Shandong Weigao Group
Yuhan Corp
Sun Pharma
0.4
Low ROA companies. Business
High margins; niche play ers or
3Sbio Inc
restructuriung may be required
Microport Scientific
brands w ith strong pricing pow er
0.2
Celltrion
0%
10%
20%
30%
40%
50%
60%
70%
EBIT Margin(%)
abc

Multi-sector
July 2012
Sector description
Pharmaceutical companies develop, produce and markets drugs licensed for use as medications. They
deal in generic and/or branded medications and are subject to a variety of laws and regulations regarding
the patenting, testing and ensuring safety and efficacy and marketing of drugs.
Medical device companies develop, manufacture and markets devices for medical purposes. They include
instruments, apparatus, machines, implants or materials used in human beings for diagnosis, prevention,
treatment, monitoring of diseases or injuries, or for rehabilitation purposes. Drug companies are also
subject to a variety of laws and regulations regarding quality standard, safety and patents.
abc
Nam Park*
Regional Head of Healthcare
Research, Asia Pacific
+852 2996 6591
nampark@hsbc.com.hk
Medical distributors distribute drug and medical devices from manufacturers to medical service providers.
Distributors also provide value-added services like drug information statistics. Some forms of delivery,
especially vaccines and biopharma drugs, require expert handling (e.g. special temperature storage facilities).
Medical service providers offer preventive, curative, promotional or rehabilitative healthcare services to
individuals, families or communities. They include institutions like hospitals, healthcare centres,
pharmacies, medical laboratory or research centres.
Key themes
Healthcare is an emerging sector in the MSCI Asia ex Japan universe. Its market cap is still rather small at
USD22bn and is also one of the least liquid sectors. However, the sector has performed well it is up 102%
since January 2000 with most growth coming in recent years. It is also one of the fastest-growing industries.
The Asia healthcare market was estimated to be USD246bn in 2009 by Frost & Sullivan, or 24% of the
global healthcare market of USD1.06trn. The global market for pharmaceuticals reached USD830bn in
2010. It is now increasingly driven by demand in emerging markets China is already the third-largest
market. Asia pharmaceutical companies are moving up the value-added curve and starting to shift from
being purely generics producers or distributors of foreign drugs to doing their own R&D.
The larger Asian players are producers of generic products such as Indias Dr. Reddys Labs and Sun
Pharma as well as biosimilar makers such as Koreas Celltrion. The bigger players in China include
distributors Sinopharm and medical device player Shandong Weigao.
Biologics: one of the fastest growth areas

Biologics complex, expensive drugs made from living cells accounted for 14% of the global drug
market in 2010. Within biologics, monoclonal antibodies (mAbs), which stimulate the patients immune
system to attack malignant tumours, are at the forefront of targeted therapies for cancers and autoimmune diseases. We expect the biologics market to expand at a 2009-15 CAGR of 8.5%, much faster
than the global markets 3-5%.
But the biologics market is about to see major changes; the production of more affordable copies of original
biologics known as biosimilars are set for rapid growth as patents on the original expensive blockbuster
drugs expire. This will provide an opportunity for other drug makers to develop and produce biosimilars.
By 2015 we forecast that biosimilars will account for about 9% (USD15bn) of total biologics, implying a
CAGR of about 40%. However, regulatory, technical and capital barriers to entry are high for biosimilars,
101

Multi-sector
July 2012
particularly in developed markets. Regulators are setting the bar high, commercial plants can cost hundreds
of millions of US dollars and take years to build and certify, and these facilities need to be operated with
strict quality control as even minor deviations in the manufacturing process can lead to unacceptable
products. In our view, some firms in Asia are well positioned to ride the global biosimilar trend.
Patent expiries at peak

Some of the most popular branded drugs, with sales about USD37bn, are set to lose patent protection in
the US in 2012, offering opportunities for US and Indian makers of generic drugs. In addition, the rapid
increase in sales in emerging markets, including India, Russia and Latam, along with rationalisation of
costs, will drive earnings.
Sector drivers
Ageing populations
This will underpin demand in healthcare in Asia. In general, senior citizens spend more on healthcare,
especially now that people are having fewer children (e.g. the one-child policy in China) and retire earlier.
According to United Nations, one quarter of Chinas population will be over 65 by 2050.
Higher disposable incomes

The fast-growing economies in Asia are another growth driver for healthcare in Asia. A recent OECD
study projected that the middle class in the Asia Pacific would represent 54% of the worlds total by
2020. For 2012-15, the IMF estimates that China, India and Korea to have GDP per capita CAGR of
9.3%, 8.8% and 6.8%, respectively.
Higher government healthcare spending, greater accessibility

Higher government spending on healthcare will also drive growth. Emerging countries in Asia have been
playing catch up when it comes to healthcare, yet their spending is mostly below 5% of GDP; developed
countries public healthcare budgets are as much as 7-8% of GDP. Higher government spending in
emerging countries includes healthcare infrastructure upgrades, building public hospitals, and subsidising
patients directly via insurance schemes.
Valuation
We value healthcare companies mainly based on PE multiples, DCF, or a mixture of both. We also use
DCF because we do not want to neglect mid to longer-term multiple-year growth of healthcare
companies. We derive our PE multiples using one of the three methods below:
1
PE multiple using 1x PEG ratio, with appropriate discount applied afterwards;
PE target multiple from a sustainable, long-term ROE, calculated as follows:

Target PE = (RoE g) / (RoE [CoE g])
102
PE multiple using industry average as benchmark.
abc
abc

Multi-sector
July 2012
Asia Healthcare: Growth and profitability (calendarised data)

2008
2009
2010
2011e
2012e
Growth
Sales
EBITDA
EBIT
Net profits
17.3%
20.3%
20.5%
9.5%
-2.6%
-11.1%
-13.0%
-5.8%
25.4%
37.1%
36.6%
42.4%
21.6%
31.2%
35.1%
50.1%
9.8%
13.7%
14.8%
0.0%
Margins
EBITDA
EBIT
Net profit
25.5%
22.2%
15.7%
23.3%
19.9%
15.2%
25.4%
21.6%
17.2%
27.4%
24.0%
21.2%
28.4%
25.1%
19.3%
12%
0.6x
-0.1x
16%
6%
0.6x
-0.1x
14%
15%
0.6x
-0.1x
15%
11%
0.6x
-0.1x
19%
7%
0.6x
-0.2x
18%
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
Note: Based on all HSBC coverage of healthcare companies across Asia. All data is market cap weighted
103
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Multi-sector
July 2012
Sector snapshot
Core industry driver: public and private healthcare
expenditure (% of GDP)
Key sector stats

Healthcare
0.9% of MSCI Asia ex-JP
8%
Trading data
ADTV (USDm)
Absolute
3 largest stocks
136
21,355
6%
102%
2.5x
SUN PHARMA, DR REDDYS,
CELLTRION
4%

MSCI Asia
0.78
2%
0%
China
India
Indonesia
public ex penditure
Korea
priv ate ex penditure
Top 10 stocks
Source: OECD, HSBC
Stocks
1
2
3
4
5
6
7
8
9
10
SUN PHARMA
DR REDDYS
CELLTRION INCORP
KALBE FARMA
CIPLA LTD
SINOPHARM GROUP
SHANDONG WEIGAO
LUPIN LTD
RANBAXY LABS
YUHAN CORP
Index weight
14.9%
13.8%
13.6%
9.0%
9.0%
8.3%
7.1%
6.8%
5.2%
4.3%
Country breakdown
Country
INDIA
CHINA
KOREA
INDONESIA
PE band chart
Price level
750
675
600
525
450
375
300
225
150
75
0
Weights (%)
53.2
21.6
16.4
8.8
25x
20x
15x
10x
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
PB vs ROE (12-month forward)
22
4.5
20
4.0
3.5
18
3.0
16
2.5
Fw d ROE % (LHS)
104
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
1.5
Dec-05
2.0
12
Dec-04
14
Fw d PB (x )

Multi-sector
July 2012
abc
Industrials
China paper
Walden Shing*
Analyst
+852 2996 6751
waldenshing@hsbc.com.hk
105
106
Paper
Paper producers

Multi-sector
July 2012
Sector structure
Nine Dragons
Lee and Man
Youyuan
Fook Woo
Hengan
Vinda International
Source: HSBC
abc
80%
Share price performance
Nine Dragons
(%)
Lee and Man

Multi-sector
July 2012

Pulp prices hav e risen from USD580 (short fiber) and
USD680 (long fiber) per ton in January 2012 to USD670 and
Youy uan
USD720 respectiv ely in April 2012.
Fook Woo
60%
Hengan
Pulp prices in China trended higher in 1H11, but
Vinda International
hav e started falling since July due to sluggish

demand in the US and Europe in light of
40%
thesummer low season. Contract prices for

premium
20%
0%
-20%
-40%
August is usually the peak season for
China containerboard manufacturers, as there is higher
demand for bev erage packaging in the summer and gift
-60%
packaging due to the Mid-Autumn Festiv al. Nonetheless,

containerboard prices hav e so far remained flat, despite
higher energy and labour costs. This reflects soft demand in
Fook Woo suspended trading since
Chinas containerboard market.
late Nov ember
-80%
Jan 11
Feb 11
Mar 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
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Apr 11

Multi-sector
July 2012
Sector description
This sector can be broadly classified into two major segments, packaging paper and tissue paper.
Packaging paper mainly comprises linerboard and corrugating medium which are used to produce
corrugated boxes. Major players in this segment include Nine Dragons and Lee & Man Paper. The tissue
paper segment includes handkerchief tissue, facial tissue and toilet rolls. In China, Hengan was the
leading tissue paper by sales volume in 2010 with a market share of 8.6% (source: China National
Household Paper Industry Association).
Key themes
Tissue paper: a recession-proof product
Tissue paper is a recession-proof product in developed markets. Although Europe is a mature market,
consumption continued to grow 1.8-3% pa during 2001-10. Despite per-capita consumption in western
Europe already topping 16kg, tissue paper consumption continued to grow during 2001-10. The only
decline in consumption was in 2009 due to the global financial crisis and the fall was much smaller than
for many other products.
Packaging paper: Still in a consolidation phase

For packaging paper, new capacity planned during good times in early 2010 gradually came on-stream in
2011 and 2012. At the same time, packaging paper consumption growth has slowed down since 2011. In
2011, containerboard consumption only increased by 2.2m tons, or 6% y-o-y. Due to the over-supply
situation in the industry, the net margin per ton for leading containerboard manufacturers has stayed
depressed since 2011.
Currency movements have been favourable to paper mills

Major raw materials used by paper mills include recycled paper and wood pulp. These are mainly
procured through the international market in USD. However, the majority of the paper products sold in
China are denominated in renminbi, so there is a currency mismatch between sales and raw material cost.
The steady appreciation of the renminbi over the past few years has worked in favour of paper mills.
Sector drivers
Consumption in China
According to CNHPIA statistics, in 2010 China tissue consumption per capita was 3.48kg, relatively low
compared with developed markets 24kg in the US in 2009 and over 16kg in Germany, the UK and
Spain. However, in large cities like Shanghai and Beijing it has been more than 8kg since 2003. We think
tissue paper consumption in China is on a long-term growth trend, driven by increases in disposable
income and greater awareness of personal hygiene. We expect tissue paper consumption to grow at a
7.2% CAGR during 2010-15, with per-capita consumption reaching 4.25kg by 2013. This would place
per-capita tissue paper consumption in China at a level similar to the global average.
High-end product substitution

Consumers in China are migrating from low-end to high-end tissue products, as with many consumer
products. According to the CNHPIA, high-end wood pulp based tissue paper production, as a proportion
of total production, expanded from 27.3% (1.04m tons) in 2006 to 47.5% (2.49m tons) in 2010.
108
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Walden Shing*
Analyst
+852 2996 6751

Multi-sector
July 2012
abc
Consumption of wood pulp tissue increased at a 24.6% CAGR in 2006-10, much faster than the 8.8%
growth in overall tissue paper consumption in China.
Valuation
In general, a PE-based valuation methodology is appropriate due to limited visibility on the long-term
cash flow during an industry down cycle. We believe investors should focus on short-term metrics, such
as PE. To set our target PE multiple, we refer to the historical forward PE trading band of companies
under our coverage.
109

Multi-sector
July 2012
Notes
110
abc
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Multi-sector
July 2012
Industrials
conglomerates
Mark Webb*
Regional Head of Conglomerate and Transport Research
+852 2996 6574
markwebb@hsbc.com.hk
Stephen Wan*
Analyst
+852 2996 6566
stephenwan@hsbc.com.hk
111
112
Asia Conglomerates
Property
Transport
Consumer / Retail
Commodities
Infrastructure
Property is one of the main

businesses for Hong Kong and
China conglomerates like Swire,
Hutchison and Wharf because of its
profitability
Major transport and related

infrastructure investments include
Cathay Pacific and HAECO (Swire),
MTL (Wharf) and Hutchisons port
operations. With the exception of
Hutchison, these businesses focus
on Hong Kong and China
Asias consumption growth story is

attractive to conglomerates which
own some of the regions leading
consumer retail companies.
Examples include Dairy Farm
(Jardine Matheson), A. S. Watsons
(Hutchison) and Swires Coke
beverage business and Jardines
interest in Astra International
Rising commodity prices and strong

demand from China has lead to the
investments in Husky energy
(Hutchison), United Tractors (Astra
International) and Philex mining
(First Pacific)
Major players include Cheung Kong

Infrastructure, Metro Pacific
Investments and Astratel (Astra
International)

Multi-sector
July 2012
Sector structure: main businesses of Asian conglomerates
Source: HSBC
abc
250.0
Sector peaked w ith
200.0
Asian GDP grow th
2004-08 w as the boom period of
2009 global financial crisis
consumers and commodity driv en
impacted all the property heav y
conglomerates as low interest rates,
and ex port related conglomerates
w eak USD and strong consumption
resulting in share price drop

Multi-sector
July 2012
drov e the share prices
SARS in 2003 impacted

the property asset heav y
conglomerates in Asia
150.0
100.0
50.0
0.0
01/01/01
01/01/02
01/01/03
01/01/04
01/01/05
01/01/06
01/01/07
Sector share price
01/01/08
01/01/09
01/01/10
01/01/11
01/01/12
Note: HSBC index is market cap weighted and contains stocks Hutchison Whampoa, Swire Pacific, Wharf Holdings, Jardine Matheson, Astra International, First Pacific, MTR corporation
abc
113

Multi-sector
July 2012
1.3
13.7%

1.2

leaders strategies
Astra International
1.1
1.0
0.9
SembCorp Industries
0.8
0.7
Asset Turnover (x)
114
EBIT margin asset turnover (2010-11)
Doosan Corporation
Jardine Matheson
0.6
Jardine Strategic
0.5
Keppel Corp
0.38x
First Pacific
0.4
0.3
High margins; niche

Hutchison Whampoa
0.2
Shanghai Industrial
MTR Corporation Ltd
Low ROA companies.

be required
0.1
Swire Pacific
The Wharf (Holdings) Ltd
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
Our Asian conglomerate coverage comprises multi-industry companies primarily in Hong Kong. The
most important businesses within these groups are property investment and property trading, retail and
autos, ports and transportation and telecommunications. These businesses typically developed (although
not exclusively) from the Hong Kong based trading houses and the property opportunities that arose from
the redevelopment of industrial and marine sites in Hong Kong. The holding companies within this sector
are some of Hong Kongs largest landlords and they control the citys ports, major airlines and the food,
health and beauty retail industry.
abc
Mark Webb*
Analyst
+852 2996 6574
Key themes
While the individual operating businesses are leveraged to the key themes that we set out for each
particular sector, there are a number of differences between the holding companies in terms of strategy
and capital allocation. The first is geography. Hutchison Whampoa, Jardine Matheson and First Pacific
offer global or pan-Asian exposure and Swire Pacific, Wharf and MTR are focused on greater China. The
second differentiating factor is group structure. Hutchison, Wharf and MTRs operating businesses are
primarily wholly owned, while those of Swire Pacific, Jardine Matheson and First Pacific tend to have a
majority or even all of their businesses separately listed.
Another difference is management structure, with Swire in particular having a central management cadre
that rotates around each business while the others tend to have management more dedicated to each
business. The common theme is that these conglomerates aim to use superior access to capital, group
synergies, skill sets and relationships to develop and grow businesses faster than would be possible if they
were standalone entities.
Sector drivers
There are two main overriding drivers of the conglomerate share price performances. The first is the
underlying performance of each business. For example, in the first half of 2012 the market tended to
prefer conglomerates with Asian exposure to defensive, consumer related businesses and de-rated stocks
with a higher exposure to markets perceived to face greater risks such as Europe. Clearly how the market
views each of these sectors in the future will depend on the economic cycle and forecast growth rates in
various Asian and global regions.
The second conglomerate-specific factor is complexity, with the market assigning a greater value to
simple group structures with a higher degree of disclosure; a discount is applied for complexity.
Valuation
With each underling business segment facing their own specific industry drivers and growth rates, we
value each operating entity separately (for example, the chapter on transportation discusses how we value
ports and airlines). If these businesses are separately listed and under our coverage we use the one-year
forward target price as our fair value. We aggregate these valuations and deduct non-attributable holding
company net debt to arrive at an appraised valuation for each group.
In the past, conglomerates have tended to trade at a discount to our appraised valuations (and valuations
arrived at by aggregating the market capitalisations of listed businesses) of 15-45%. This discount tends
115
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Multi-sector
July 2012
to be greater for companies with a higher proportion of separately listed entities and for complex groups.
It also tends to rise in periods of risk aversion and contract as the economic cycle recovers.
The asset heavy Hong Kong conglomerates tend to correlate with Hong Kong nominal GDP growth rates
minus the Hong Kong dollar 10-year swap rates.
Asia Conglomerates: Growth and profitability (calendarised data)
2008
2009
2010
2011e
2012e
13.8%
-26.1%
-26.9%
-32.5%
-3.6%
44.7%
131.2%
241.1%
18.5%
26.5%
36.6%
30.6%
18.0%
14.0%
18.7%
29.9%
8.7%
6.8%
6.9%
9.6%
Margins
EBITDA
EBIT
Net profit
9.8%
4.2%
1.7%
14.7%
10.1%
6.1%
15.7%
11.7%
6.7%
15.2%
11.8%
7.4%
14.9%
11.6%
7.5%
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
6%
0.5x
0.4x
2%
45%
0.4x
0.3x
4%
17%
0.4x
0.3x
4%
15%
0.4x
0.2x
5%
7%
0.4x
0.2x
5%
Growth
Sales
EBITDA
EBIT
Net profits
Note: based on all HSBC coverage of Conglomerates across Asia. All data is market cap weighted
116
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Multi-sector
July 2012
Sector snapshot
Key sector stats
Industrial Conglomerate
Trading data
ADTV (USDm)
Absolute
3 largest stocks
MSCI Asia
Core industry driver: Asset heavy HK/China conglomerates

tend to have positive correlation with Hong Kong nominal
GDP growth minus the HKD 10-year swap rates
10%
20.0
n/a
85,057
60%
0.4x
Hutchison, Keppel, Sime Darby
0.96
5%
15.0
0%
-5%
10.0
-10%
5.0
-15%
-20%
Mar-92
Mar-97
Mar-02
Mar-07
Mar-12
Av erage share price

HK nominal GDP-10 y r sw ap
Top 10 stocks
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
HUTCHISON WHAMPOA
KEPPEL CORPORATION
SIME DARBY
FRASER AND NEAVE
LG CORP
SEMBCORP INDUSTRIES
SM INVESTMENTS CORP
BEIJING ENTS.HDG
SK HOLDINGS
FAR EASTERN NEW CENTURY
Index weight
21.6%
13.5%
9.9%
5.8%
5.5%
4.5%
4.2%
3.6%
3.6%
3.5%
Source: Thomson Reuters Datastream, Bloomberg, CEIC, HSBC
PE band chart
225 P rice level
20x
150
15x
10x
75
5x
Country breakdown
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05

16
14
12
10
8
6
4
2
3.0
2.5
2.0
1.5
1.0
Fw d ROE % (LHS)
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
0.5
Dec-05
25.7
23.8
14.2
11.4
10.8
7.6
3.5
2.9
Jan-04
Hong Kong
Singapore
Korea
Malaysia
Philippines
China
Taiwan
India
Weights (%)
Dec-04
Country
Fw d PB (x )
117

Multi-sector
July 2012
Notes
118
abc

Multi-sector
July 2012
abc
Industrials
construction machinery
Anderson Chow*
Analyst
+852 2996 6669
andersonchow@hsbc.com.hk
119
120
Machinery
Construction machinery
Domestic producers
Zoomlion Heavy Industry
Lonking Holdings
Sany Heavy Industry
*
Guangxi Liugong Machinery
Xiamen XGMA Machinery
Shantui Construction Machinery
Changlin Co Ltd
Zhejiang Jinggong Sci & Tech
Anhui Heli
Xi'an Dagang Road Machinery
Taiyuan Heavy Industry
Foreign producers
Mining machinery
Sany Heavy Equipment International
Tian Di Sci & Tech
International Mining Machinery
Power equipment
Chongqing Machinery and Electric
Harbin Electric
Dongfang Electric
Agricultural machinery
First Tractor

Multi-sector
July 2012
Sector structure
Doosan
Hyundai
Komatsu
Hitachi
Caterpillar
*Removed for Compliance reasons

Source: HSBC
abc
60%
Zoomlion

Multi-sector
July 2012

Lonking
(%)
The sharp slow dow n in machinery sales in 2H11

w as somew hat unex pected and w as driv en by
40%
w eakness in both residential property construction

spending (accounting for 26% of Chinas FAI in
2011) and infrastructure construction spending
(accounting for 21% of Chinas FAI).
20%
Demand has been w eak as infrastructure and
social housing projects hav e not resumed
normal progress especially in 1Q12
0%
-20%
-40%
-60%
Jan 11
Jul 11
Oct 11
Jan 12
Apr 12
121
abc
Apr 11

Multi-sector
July 2012
Sector description
The machinery sector can be divided into sub-sectors such as construction, mining, agriculture or power
generation. Companies specialise in various types of machinery such as cranes, concrete machinery,
excavators and wheel-loaders. Leading players include Zoomlion Heavy Industry and Sany Heavy
Industry. Foreign manufacturers have established a foothold in China but some are losing market share to
domestic manufacturers; for example, in 2011 Sany Heavy overtook Komatsu as the leading
manufacturer of excavators in China, with an 11.7% market share.
Key themes
Releasing pent-up demand
Construction activity witnessed a marked slowdown in 2H11 but is on course for a revival as pent-up
demand is released by the resumption of infrastructure and social housing construction projects. We
expect this revival to be supported by improved credit conditions in China, which should provide
construction contractors and machinery makers with greater access to working capital.
Fixed asset investment

Spending on construction machinery makes up about 1.5% of fixed asset investment (FAI) in China and
we expect this to continue. Listed machinery manufacturers use three data points as leading indicators to
estimate construction demand and guide their capital expenditure: (1) M2 money supply growth, (2)
machinery distributor orders, and (3) FAI new project starts. In our view, a better leading indicator for
construction machinery demand is property area sales. Since 2008, the average growth rate in annual
contracted area sold has been about 40% for the top 11 developers, versus 12% nationwide.
Sector drivers
Urbanisation
Just over half of Chinas population now live in towns or cities, up from 37.7% in 2001. Despite this,
China still has a long way to go as urbanisation in developed countries is around 75%. This points to
continued spending on public transport, energy and real estate sectors, which should see domestic demand
for construction machinery increase for many years to come.
Complexity of construction projects

The increasing complexity of construction projects could amplify the effect that economic growth has on
construction machinery spending. For example, in the transport sector the focus has shifted from building
highways in the late-1990s and early 2000s to more complex railway and urban mass transit projects.

The focus of Chinas FAI is shifting towards social housing development, water infrastructure and power
grid upgrades. The government aims to increase its affordable-housing programmes by adding about 36m
units between 2011 and 2015. In line with Chinas recent decision to accelerate water management
projects, we expect government spending in this area to increase substantially in the next 5-10 years.
According to the National Energy Administration in China, over 2011-20 approximately RMB5trn is
expected to be spent on new and renewable energy projects.
122
abc
Anderson Chow*
Analyst
+852 2996 6669

Multi-sector
July 2012
abc
Replacement supports long-term demand

We estimate replacement demand makes up about 10% of demand for construction machinery, given the
average useful life of construction machinery is about 10 years in China. This creates replacement
demand and demand for equipment upgrades, which helps to support long-term demand.
Developing markets to drive exports

The central government has set a target for Chinas construction machinery industry to more than double
exports from USD10.3bn in 2010 to USD20-25bn by 2015. To achieve this, Chinese manufacturers need
to improve in terms of technology, product quality and global brand recognition, while maintaining price
competitiveness. They are already beginning to make gains overseas, especially in developing markets
such as Eastern Europe, Latin America, Africa, India, the Middle East and Southeast Asia.
Key segments
Cranes
Demand should pick up from industrial and energy projects (wind power and nuclear power capacity
expansion). In particular, upgrades to truck cranes should boost higher-tonnage crane products.
Concrete machinery
Used throughout the concrete (ready-mix) production chain (transportation and pumping); upgrades to
truck-mounted pumps from stationary pumps are likely to increase.
Wheel-loaders
The most popular earth-moving machinery in China; the market is close to becoming mature, so
profitability could stay relatively flat driving industry consolidation.
Excavators
Capacity almost doubled between 2010 and 2012 and although import substitution may subside
competition among domestic players will intensify.
Valuation
As the construction machinery sector is cyclical in nature, it is difficult to predict cash flows through
cycles so a PE-based method works best. Our target PE is ROE based,
123

Multi-sector
July 2012
Notes
124
abc

Multi-sector
July 2012
abc
Industrials
construction materials
Elaine Lam*
Analyst
+852 2822 4398
elainehlam@hsbc.com.hk
125
126

Multi-sector
July 2012
Sector structure
Construction
Construction materials
Anhui Conch
CNBM
China Resources Cement
Shanshui Cement
China National Materials (Sinoma)
BBMG
West China Cement
TCC International
Asia Cement China
Real estate developers

China Overseas Land
China Resources Land
Longfor Properties
Shimao Property
SOHO China
Shui On Land
Guangzhou R&F
Agile Properties
Infrastructure and real estate constructors

China Railway Construction
China Railway Group
China Communications Construction
China State Construction International
Source: HSBC
abc
160%
Conch
CNBM
140%
CR Cement
High corporate profitability w as driv en
Shanshui
by strong demand and high cement
Sinoma
120%
ASP as a result of price coordination
TCCI
Share prices remained subdued in 1H12
AC China
mainly due to w eak dow nstream
Series8
demand, competition and rainy w eather

Multi-sector
July 2012
100%
80%
Share prices mov ed up due to
implementation of pow er cut measures
60%
beginning in July 2010
40%
20%
0%
-20%
-40%
-60%
Jan 10
Jan 11
Jul 11
Jan 12
127
abc
Jul 10

Multi-sector
July 2012
0.8
14.5%
ACC
Ultratech Cement
Shree Cements
0.7
Ambuja Cements Ltd

leaders strategies
China National Material C

China Shanshui Cement
0.6
Anhui Conch
0.55x
0.5
Asset Turnover (x)
128
CNBM
0.4
China Resources Cement
Asia Cement China
0.3
TCC Intl
0.2
High margins; niche

0.1
Low ROA companies.
be required
0%
5%
10%
15%
20%
25%
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
The construction material sector includes cement, aggregates, concrete and gypsum. The operations of
leading cement producers in China range from the excavation of limestone to the production, sales and
distribution of clinker, cement and concrete products. The major customers of cement producers are real
estate and social housing developers as well as builders of highways, railways and other infrastructure.
We estimate infrastructure, property and rural development account for 31%, 36% and 33% of total
cement consumption in China, respectively.
abc
Elaine Lam*
Analyst
+852 2822 4398
Building materials
Cement is a high quality and cost-effective building material that is a key component of construction
projects throughout the world. Various types of cement can be produced by grinding and mixing different
proportions of clinker with gypsum, blast furnace slag and other additives. The most common types found
in China are P.S32.5 (low-grade) and P.O42.5 (high-grade).
The principal raw materials used in the production of Portland cement are limestone and clay. Other raw
materials include gypsum, sand, shale, iron ore and blast furnace slag. Coal is the principal fuel used to
provide the necessary heat for the kilns, while electricity is the main source of energy throughout the
entire production process.
Anhui Conch and China National Building Material Co (CNBM) are the national producers in China,
with an especially strong presence in the eastern and south central regions. We estimate Conchs 2012
market share in Anhui and Jiangsu to be 39% and 15%, respectively, and CNBMs market share in
Zhejiang and Jiangxi 60% and 29%. Regional companies such as China Resources Cement (Southern
China), Sinoma (Northwest China) and Shanshui (Shandong) are also important players.
Some of the building material manufactures also produce lightweight or high-tech building materials such
as gypsum board, mineral fibre board and glass fibre. With the Chinese government advocating energy
conservation, energy-saving building materials have also grown more popular. Examples include Beijing
New Building Materials (CNBMs subsidiary) and Sinoma Science & Technology.
Key themes
Strict control on new capacity
The restriction in approving new cement capacity in recent years has made the demand and supply
balance much more favourable. Back in September 2009, the government promulgated Document 38 in
order to restrict the approval of construction of new cement capacity. In 2010 the Ministry of Industry and
Information Technology (MIIT) issued regulations which raised the entry barrier. As a result, it is very
difficult to get approval for the construction of new plants or the expansion of production lines in
provinces with new-dry process (NDP) clinker capacity of over 900kg per capita.
Industry consolidation to favour major players

Cement production of the top 10 players in China accounted for around 30% of the countrys total, which
is still below the governments target of 35% by 2015. Some of the major players have a history of
growth through acquisitions.
129
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Multi-sector
July 2012
Production discipline to support prices

Given an improving demand and supply balance, cement companies have begun to adopt a price-costprofit business model, as opposed to the volume-cost-profit model used in the past. In other words,
cement producers can achieve higher profitability through limiting production and price coordination.
How well the coordination is implemented among the producers is thus a key factor to their profitability.
Sector drivers
Fixed asset investment is the key driver of sector earnings, especially in railway construction, social
housing projects and real estate projects. Railway construction is likely to accelerate in 2H12 given that
80% of the suspended projects have resumed year-to-date, as reported by the local media. For social
housing, Chinas Ministry of Housing and Urban and Rural Development (MOHURD) said the target for
new starts and completed units for 2012 is 7m and 5m units, respectively (2011: 10.43m and 4.32m).
Valuation
Our target prices are PE-based, and our target multiples consider the stocks historical discounts to a
major players 10-year PE, largely in line with their historical average in the past 12 months. These
historical average trading discounts reflect differences in the profitability of their operating regions and in
financial leverage.
Asia Construction materials : Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
39.4%
19.0%
9.2%
13.9%
10.5%
18.1%
20.2%
19.8%
50.6%
44.4%
41.5%
40.3%
42.7%
64.9%
79.3%
76.5%
10.5%
-4.0%
-7.8%
-10.6%
20.9%
15.9%
11.7%
22.4%
17.3%
12.7%
21.4%
16.2%
11.8%
24.8%
20.4%
14.7%
21.5%
17.0%
11.9%
26%
0.6x
0.4x
16%
18%
0.5x
0.5x
15%
11%
0.6x
0.5x
15%
8%
0.6x
0.7x
21%
9%
0.6x
0.5x
16%
Note: based on all HSBC coverage of Construction materials companies across Asia. All data is market cap weighted
130
abc

Multi-sector
July 2012
Sector snapshot
Core industry driver: China cement prices by region
Key sector stats

Construction materials
Trading data
ADTV (USDm)
Absolute
3 largest stocks

n/a
34,273
252%
1.7x
TAIWAN CEMENT, SEMEN
GRESIK, ANHUI CONCH

MSCI Asia
Northern
Eastern
South Central
Western
Cement ASP
130
relativ e performance
120
110
100
90
80
70
0.86
Jan- Mar- May - Jul- Sep- Nov - Jan- Mar-
11
Top 10 stocks
11
11
11
11
11
12
12
Source: Digital Cement, HSBC
800 P rice level

700
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
4x

5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Fw d ROE % (LHS)
Apr-12
May-11
Jun-10
Jul-09
24
22
20
18
16
14
12
10
Aug-08
Weights (%)
32.9
18.5
17.7
14.4
14.0
2.5
8x
Dec-04
China
Indonesia
Taiwan
Thailand
India
Malaysia
12x
200
100
0
Country breakdown
Country
16x
600
500
400
300
Sep-07
PE band chart
Jan-06
10.8%
10.7%
10.6%
10.4%
10.0%
7.8%
6.9%
5.5%
5.3%
4.2%
Oct-06
TAIWAN CEMENT
SEMEN GRESIK TERBUKA
ANHUI CONCH CMT.
SIAM CEMENT PCL.(THE)
CHINA NAT.BLDG.MRA.
ICT.TUNGGAL PRAKARSA TBK
ASIA CEMENT
ULTRATECH CEMENT
AMBUJA CEMENTS
CHINA SHANSHUI CMT
Jan-05
1
2
3
4
5
6
7
8
9
10
Index weight
Nov-05
Stocks
Jan-04
Stock rank
Fw d PB (x )
131

Multi-sector
July 2012
Notes
132
abc

Multi-sector
July 2012
abc
Industrials
Korea E&C
Industrials team
Brian Cho*
Head of Research, Korea
+822 3706 8750
briancho@kr.hsbc.com
Neel Sinha*
Head of Equity Research, Southeast Asia
Singapore Branch
+65 6658 0658
neelsinha@hsbc.com.sg
Paul Choi*
Analyst
+822 3706 8758
Walden Shing*
Analyst
+852 2996 6751
Mark Webb*
Analyst
+852 2996 6574
Zhe Wei Sim*

Analyst
+852 2996 6602
weizwsim@hsbc.com.hk
Stephen Wan*
Analyst
+852 2996 6566
stephenwan@hsbc.com.hk
Anderson Chow*
Analyst
+852 2996 6669
Elaine Lam*
Analyst
+852 2822 4398
133
134

Multi-sector
July 2012
Sector structure
Industrials
Korea E&C
Daelim Industrials
Daewoo E&C
GS E&C
Hyundai E&C
Hyundai Development
Samsung C&T
Samsung Engineering
Shipbuilding
DSME
Hyundai Heavy
Hyundai Meepo
Rongsheng
Samsung Heavy
Source: HSBC
abc
(2004.1.2=100)
2,500
E&C Index
Overseas orders rose to record high to
$40bn in 2007 from $16bn in 2006
($/Barrel)
WTI
160
New orders noticeably declined from 4Q08 to

2Q09 until rebound in 3Q09
140
2,000
120
100
1,500

Multi-sector
July 2012
Korea E&C versus WTI price
80
1,000
60
New orders increased y-o-y base, but delays
occurred due to Arab Spring in Feb. 2011
500
40
New orders declined as project

cancellations occurred in 2009
20
0
04
05
06
07
08
09
10
11
12
Shipbuilding versus WTI price

(2004.1.2=100)
2,500
Shipbuilding Index
($/Barrel)
WTI
160
140
2,000
120
100
1,500
80
1,000
60
40
500
20
0
04
05
06
07
08
09
10
11
12
135
abc
136

Multi-sector
July 2012
EBIT margin asset turnover (based on end-2011)

12%
10%
Hyundai Dev.
Hyundai Mipo
Hyundai Heavy
Samsung Heavy
8%
DSME
Samsung Eng
Hyundai E&C
6%
Daelim
Daewoo E&C
GS E&C
4%
2%
0%
0.0
50.0
100.0
150.0
200.0
250.0
abc

Multi-sector
July 2012
The industrials sector comprises a wide range of companies ranging from engineering, construction and
shipbuilding, to cement, railways and toll roads. Given its size, we break the sector into eight sub-segments
and dedicate a chapter to each.
Sector description
Industrials constitute 11% of MSCI Asia ex Japan. The sector has underperformed Asia by 17% in the
last decade. It has one of the highest correlations with MSCI Asia across the region and is also one of the
most liquid sectors. However, there can be wide divergence between stocks within this sector as it
comprises a wide range of different companies. The three largest stocks in Korea engineering and
construction (E&C) sector are Samsung C&T, Hyundai E&C and Samsung Engineering. For
shipbuilding, Hyundai Heavy, Samsung Heavy and Daewoo Shipbuilding are the three largest stocks.
Key themes
abc
Brian Cho*
+822 3706 8750
Paul Choi*
Analyst
+822 3706 8758
Oil and gas capex cycle

A key theme in the industrials sector is the capex cycle in industries such as oil and gas. Capex is mostly
linked to oil prices. High oil prices make oil and gas related countries more prosperous, giving them the
funding capability to increase capex which eventually leads to new order growth. Usually, oil producers
place large project orders when oil prices are above USD85-90/bbl as uncertainty from increased
volatility in oil prices is the greatest risk to investment.
Raw material prices

Margin is another driver of the industrials sector. Margin contraction has become one of the biggest
concerns in the industrials sector as companies lower their bidding prices to win orders in the increasingly
competitive market. For this reason, stabilising raw material prices, particularly steel and plant
component prices, plays an important part in easing margin pressures.
Sector drivers
Korea E&C
Overseas: New order trend is the most important driver for the Korea E&C sector. In particular, rising oil and
gas capex mostly benefits Korea E&C players with high exposure to the overseas market. High oil prices
usually provide oil producing countries with better affordability, which leads to order expansion related to oil
and utility plants and faster order placement. Korea E&C shares have a high correlation with oil prices.
Domestic: Domestic new orders, housing permits and unsold housing units are the leading indicators for
the domestic market. Housing permits determine the level of housing supply and unsold units reflect the
strength of demand from house buyers. The indicators can be tracked on a monthly basis.
Korea shipbuilding
Shipbuilding stocks tend not to reflect current earnings but are more highly correlated with other variables
such as backlog, new order volume and vessel prices. Due to weak the macro environment, the demand
for commercial vessels has fallen significantly, resulting in deteriorating profitability of new orders and
new-build pricing. However, with oil and gas exploration and production (E&P) investments becoming
more active across the world, the demand for offshore platforms is surging. This has seen Korean
137

Multi-sector
July 2012
shipbuilders switch from commercial shipbuilding to offshore plays. Compared with commercial vessels,
the offshore market guarantees higher margin, and the backlog of Korean shipbuilders already shows that
offshore business is becoming increasingly important. Positive factors affecting the offshore market, such
as high E&P activity and rising oil prices, can also be considered as drivers for the sector.
Valuation
Korea E&C
EV/EBITDA (as opposed to PE or PB) best captures the growth momentum of the Korean E&C sectors
core business given that (1) new orders and backlog growth are reflected purely on the operating level for
each company, and (2) the way assets are held within the structure of Korean conglomerates requires a
separate sum-of-the-parts valuation.
The current EV/backlog is trading at 24%. The sector trades at an average of 30% but has been as high as
50% in 2H06-1H07, when strong new orders started to flow.
Korea shipbuilding
ROE is a key indicator of the different stages of the shipbuilding cycle, so we monitor movements in the
components of ROE. Shipbuilders have higher ROE when they win large orders due to (1) margin hikes
from higher vessel prices, (2) greater leverage in terms of asset/equity due to increased advance receipts,
and (3) growing asset turnover. When orders are thin on the ground ROE shrinks fast, sending another
clear signal about the industry cycle.
Therefore, we believe that the PB-ROE approach is the most appropriate way to assess the business cycle
of Korean shipbuilders. By looking at the relationship between ROE, historical ROE, and the relevant PB
multiples, we derive an appropriate multiple to reflect the current stage of industry development. This
valuation methodology involves subtracting growth rate (g) from implied ROE and dividing it by the
difference between COE and growth rate (g) to reach an implied PB ratio.
138
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Multi-sector
July 2012
abc
Industrials
offshore & marine
Neel Sinha*
Head of Research, Southeast Asia
+65 6658 0658
139
140
Seismic
CGG Veritas
PGS
WesternGeco
TGS Nopec
Fugro
Ion
EMGS
Dolphin
BGP
Subsea &
Offshore
Equipment
Subsea &
Offshore
Construction
FMC
Cameron
DrillQuip
Aker Solutions
GEVetco
Technip
NOV
Nexans
Prysmian
Technip
Saipem
McDermott
Bumi Armada
Floatec
Subsea 7
Clough
Ezra
Sapura Kencana
Keppel
Sembcorp
Marine
Samsung Heavy
Hyundai Heavy
Daewoo
Shipbuilding
STX Offshore
COSCO (S)
Yangzijiang
OSX
FPSO/
production
platforms
Offshore
drilling
Shipyard
Transocean
Noble
Diamond
Seadrill
ENSCO
Odfjell
Maersk
Fred Olsen
Rowan
China Oilfield
Services
Aban Offshore
SBM Offshore
BW Offshore
Modec
Bumi Armada
Saipem
MISC
Teekay
Prosafe
Maersk
Supply
vessels &
services
Tidewater
Bourbon
Farstad
Bumi Armada
Swire
Ezra
Edison Chouest
Maersk
Solstad

Multi-sector
July 2012
Offshore equipment and services value chain
Asia ex Japan companies highlighted in red
Source: HSBC
abc

Multi-sector
July 2012
Asia ex Japan offshore oil & gas equipment & services sector USD returns vs MSCI Asia ex Japan (Indexed)
1,600
1,500
1,400
1,300
1,200
1,100
2006-07 - oil price rises leading to a

new rig ordering cycle
1,000
900
800
700
600
2011 European Crisis
500
2008-09 Financial crisis

400
300
200
100
Aggregate retuns
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
MSCI Asia ex Japan
abc
141

Multi-sector
July 2012
50%
45%
Aban Offshore
40%
35%
EBIT margin (5 year average)
142
Asian offshore marine equipment & services five-year average EBIT margins and total asset turnover
Bumi Armada
Ezra Holdings
China Oilfield Services
30%
25%
20%
Yangzijiang Shipbuilding
15%
Keppel
Sembcorp Marine
Hyundai Heavy
Sapura Kencana
10%
COSCO (S)
Samsung Heavy
Daewoo Shipbuilding
5%
STX Offshore
0%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Total Asset Turnover (5 year average)
abc
Note: Sapura Kencana numbers are based on SapuraCrest & Kencana Petroleum reported numbers before their merger in May 2012
Source: Company, Thomson Reuters Datastream, HSBC

Multi-sector
July 2012
Sector description
The various segments of offshore and marine services industry are as follows:
Seismic. These companies provide services and equipment for geophysical studies of oil fields to
ascertain the quantity and quality of gas reserves. Based on seismic studies oil companies bid for oil
fields and develop drilling and production strategies.
Subsea & offshore equipment. This involves developing subsea equipment like trees which are used
to develop a pipeline network to supply the oil or gas produced from the wells to production
platforms.
abc
Neel Sinha*
Head of Research, Southeast
Asia
Singapore Branch
+65 6658 0658
Subsea & offshore construction. These companies buy equipment from subsea equipment suppliers
and are responsible for developing the pipeline network on the seabed to transfer the produce to
floating production, storage and offloading systems (FPSOs).
Shipyards. Offshore platforms operate and house the heavy-duty drilling equipment and production
facilities. Equipment made by shipyards includes drill-ships, jack-ups, semi submersibles, FPSOs,
supply & support vessels, manpower accommodation platforms.
Offshore drilling. These companies operate the drilling rigs in offshore oilfields owned by oil
companies which charter offshore drillers based on a per day rate. The day rate depends on the
prevailing supply demand dynamics for that particular rig (higher specification rigs get higher day
rates), duration of the contracts and type of field.
FPSO operators. These operators come into the picture after the well is ready to produce oil. If the
field is near the shore pipelines are developed to transfer the oil to an onshore processing facility. If
the field is in a remote area and/or is too small to warrant developing a pipeline, a floating oil
production/processing facility is used. Similar to offshore drillers, most FPSOs have a long-term day
rate contract with oil companies.
Supply vessels. Supply vessels are used to supply drilling chemicals, manpower and to move or
anchor heavy drilling equipment like jack-ups and semi-subs. Like drilling and FPSOs, there are
specialised companies that provide supply vessel support on a day rate basis.
The offshore oilfield equipment and services comprises of a number of large and small companies. For
several decades this sector was dominated by the US and European companies. Since the 2000s the rig
building industry is almost fully dominated by Asian rig-builders. The offshore services business is still
dominated by Western companies, but new Asian challengers have emerged over the last four to five years.
Asian Oil & gas equipment and services companies have provided a USD adjusted return of c7x over the
last 10 years compared with a return of 2.1x by the MSC Asia ex Japan USD index.
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Multi-sector
July 2012
Key themes
Oil & gas capex cycle
The main theme in the sector is the capex cycle in the oil & gas sector which is mostly linked to oil
prices. When prices are higher companies have more cash to spare for development activities.
Raw material prices

Margins in the oil & gas equipment division are also driven by steel which is the main raw material for
rig building. Rigs use a lot of special grade high tensile and high carbon steel which has limited and
specialised uses, so they dont really compete with the shipbuilding or general construction industry for
the more generic steel types. They can therefore lock in prices for two to three years from suppliers, as
there is a smaller number of takers for this type of steel.
Manpower cost
Oil and gas equipment services to a high degree and rig builders to a certain degree have high manpower
costs. The involvement of high technology in development and operation of rigs means skilled manpower
is critical.
Margins and accounting policy

Rig-builders use a percentage of completion method of accounting. They usually book lower profits
during initial stages of the project to allow for cost overruns. Once projects are closer to completion and
the company has a better estimate of the total margin, provisions booked previously are released and
margins tend to improve.
Sector drivers
Oil prices
Oil prices are the single biggest factor determining the demand for offshore rigs. For instance, new rig
orders fell sharply in 2009 along with the oil prices. In the case of offshore services companies, a strong
oil price usually means high equipment prices and the best charter rates a higher oil price.
Equipment fleet age

Equipment age is also one of the key factors determining the demand for equipment. When the average
age of a rig fleet increases older rigs need to be replaced with new equipment. This is particularly true
since the Maconda accident in the Gulf of Mexico. Another factor driving the demand for newer
equipment is the increase in drilling in difficult locations like the Arctic, in deep seas or in rough waters.
Oil and gas services companies with older fleets find it difficult to get new contracts.
Valuation
Discounted cash flow is the best way to value rig-building companies as discounted cash flow enables the
business to be valued across cycles. Conventional earnings multiples may not provide an accurate picture
of the prevailing market conditions. This is because rig-building is a long cycle business and the order to
delivery cycle can be two to three years. The orderbook may peak in bullish times but the profitability
peaks two to three years after the order peak. This is what happened in 2008-09, which were bad years for
new orders but were excellent for Singapore rig-builders from a profitability standpoint. As a result of this
144
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Multi-sector
July 2012
dynamic newsflow on new orders or contracts is typically a more important are share price driver than the
reporting of profits. Another variable which works well is the market value by order backlog.
In case of oil & gas services companies, a discounted cash flow approach also helps to value the company
or its assets across the full contract period and assists in estimating the options for extending contracts
once charters expire. Another useful valuation matrix is EV by order backlog (expected receipts from
current charters).
G TL
LNG
Oil Shale
Heavy
Enha nced
U ltra Dee p
Arctic
De ep Water
Other
OPEC Middle
140
120
100
80
60
40
20
0
Already
Hu rdle Range($/b arrel)
Estimated E&P hurdle rates by region and energy type
145

Multi-sector
July 2012
Notes
146
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Multi-sector
July 2012
abc
Industrials
railway infrastructure
Anderson Chow*
Analyst
+852 2996 6669
147
148
Railway
Construction companies
China Railway Group
China Railway Construction
China Communications Construction
China Railway Erju
Train and railway equipment makers

CSR Corp
Zhuzhou CSR Times
China CNR Corp
Shanghai Prime
Railway operators and logistics providers

Multi-sector
July 2012
Sector structure
Guangshen Railway
China Railway Tielong
Source: HSBC
abc
500%
New order flow for CSR and its subsidiary Zhuzhou CSR Times
CSR Corp
(%)
Zhuzhou CSR Times
has been negativ ely affected by the slow dow n in track construction
in 2011
July 2011: High-speed
CRG
train accident took place
CRC
near Wenzhou
CCCC
400%
Dec 2011: The MOR announced its 2012
budget to be RMB500bn consisting of

Multi-sector
July 2012
RMB400bn for construction and RMB100bn

for rolling stock.
300%
In August 2010, Zhuzhou CSR formed a JV w ith
Inv ensy s of the UK to jointly bid for subw ay
signalling sy stem in China
200%
100%
0%
October 2010: CRC announced a

RMB4.15bn loss in a metro light
rail project in Saudi Arabia.
-100%
Jan 09
Apr 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jul 11
Oct 11
Jan 12
Apr 12
149
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Jul 09

Multi-sector
July 2012
Sector description
This sector comprises railway infrastructure construction companies, train makers, railway equipment
makers and railway operators. Railway infrastructure is a priority in China as the government wants to
ease transport bottlenecks. The sector is centrally controlled by the Ministry of Railways (MoR) but the
intention is to attract more private capital investment in the future, especially railway operators. Rail
operators earnings rely on passenger and freight volume increases as well as tariff adjustments. MoR
funding currently depends heavily on debt financing (bank loans or railway development bonds).
Historically, the MoR has used railway freight operations to subsidise passenger services. The pending
change in industry structure, whereby the regulatory functions of the MoR would be separated from
commercial operations, should see more market-driven rail services.
Key themes
More government policy support
We think the central government will provide strong policy support to railway infrastructure in order to
ensure existing projects are completed. Comments back in April 2012 by Premier Wen Jiabao and the
MoR suggested that construction should be speeded up. Around 30,000km of track under construction
should be finished during the 12th Five-year plan (2001-15).
Rail industry reform

Reforms should resolve MOR financing issues through the separation of the ministrys regulatory and
commercial functions and the adoption of a more market-oriented tariff mechanism.
Sector drivers
Construction companies
New project wins from the MoR should be a major growth drivers for the construction companies.
Train makers
Duopoly market structure
Chinas regulatory framework for train manufacturing has created essentially a duopolistic market
structure. In 1999, the Chinese government and government-related authorities set out a policy to
encourage localised production, specifying that no less than 70% of equipment, as measured by value,
used in all urban rail projects must be sourced domestically. This limited direct foreign involvement in the
Chinese rail industry and essentially created a duopoly consisting of CSR and CNR Corp.
Track completion picking up
Demand for locomotive and rolling stock generally lags the completion of new railway tracks. Almost
30,000km of new railway track is scheduled to be laid by 2015, bringing the total network to 120,000km
and this should drive orders for new trains. In addition to network expansion, demand is driven by the
increase in electrification and dual track coverage, which requires upgrading rolling stock.
Increased traffic
We have seen a solid increase in rail passenger traffic and freight tonnage over the last two years in
China. This indicates healthy demand for locomotives, freight wagons, passenger carriages and electric
multiple units (EMU) for high-speed passenger trains. For 2011, the passenger km travelled increased
150
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Anderson Chow*
Analyst
+852 2996 6669

Multi-sector
July 2012
abc
8.7% y-o-y and freight tonne km travelled 6.7% y-o-y. It was a record year for freight wagon orders.
Expansion of the railway fleet also means the replacement cycle and maintenance will become a more
important source of revenue and profit for train makers. The normal maintenance cycle for trains is
around seven to eight years globally. However, given the high usage of EMU in China as indicated by
the total km travelled since commissioning the maintenance cycle is about four years.
Replacement and maintenance cycles
In mature rail markets, maintenance revenue can make up around 50% of total revenue for a train
manufacturer. CSR Corp already generates less than 20% of its sales from maintenance due to significant
demand for new trains. In general, trains operate for 20-25 years before they are replaced. This implies
roughly 4-5% of the fleet needs to be replaced every year. The maintenance and replacement cycles
provide a floor for revenue.
Product mix
CSR has acquired sophisticated technologies from overseas to develop patented, proprietary technologies
and products tailored to the needs of the domestic market. CSR maximises its profits by focusing on
higher-margin products such as equipment for high-speed passenger trains.
Vertical integration
As a vertically integrated manufacturer, CSR has achieved economies of scale. Zhuzhou CSR Times
Electric and other subsidiaries possess electric power generation and power conversion technologies.
Valuation
In general, we use EV/EBITDA to value a construction business, as it is cyclical, with volatile cash flow.
EV/EBITDA is more appropriate than PE, as it considers the balance sheet strength needed to generate
earnings. A discount is often applied to reflect the higher regulatory and political risks in the Chinese
infrastructure development market.
For property businesses, we value the companies on an NAV basis and apply a discount because of
government policy risk, in line with the Chinese property company trading discount. For dredging
businesses, our valuation is based on DCF methodology. Other businesses are valued in line with the
current trading PE multiple of the Hang Seng China Enterprise Index.
For train makers, we use DCF, as their earnings are more sustainable and have recurring earnings from
replacement demand and maintenance work.
151

Multi-sector
July 2012
Notes
152
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Multi-sector
July 2012
abc
Industrials
toll roads
ZheWei Sim*
Analyst
+852 2996 6602
153
154
Toll roads

Multi-sector
July 2012
Sector structure
Toll road operators

Anhui Expressway
Hopewell Highway Infrastructure
Jiangsu Expressway
Shenzhen Expressway
Yuexiu Transport Infrastructure
Zhejiang Expressway
Sichuan Expressway
Source: HSBC
abc
400%
Traffic v olume has historically grow n at a
From 2H11 to 1H12: policy ov erhang
Anhui Ex pressway
rate of about 1.4x GDP grow th. In 2011,
due to the clean up of toll roads, w hich
Hopew ell Highw ay Infrastructure
w e hav e seen traffic v olume grow th slow
took place in four stages:
dow n below this long-term av erage.
1) Inv estigation of current env ironment
(%)
Jiangsu Ex pressw ay
350%
2) Local self-correction of illegal toll

roads or tolling behav iour
Shenzhen Ex pressw ay
3) Rev iew of measures taken against
Yuex iu Transport Infrastructure

300%
policies of the v arious ministries

Negativ e grow th in traffic v olume in 2008 is
Zhejiang Ex pressw ay
Sichuan Ex pressw ay
4) Ov erall completion of rev iew
After the decline in 2008, traffic
attributed to many new road openings, w hich

Multi-sector
July 2012
v olume grow th resumed in 2009 as a
div erted traffic aw ay from the road netw ork of
low er y oy base of comparison w as
listed ex pressw ay companies.
established.
250%
200%
150%
100%
50%
0%
-50%
Jan 04
Jul 04
Jan 05
Jan 06
Jul 06
Jan 07
Jul 07
Jan 08
Jul 08
Jan 09
Jul 09
Jan 10
Jul 10
Jan 11
Jul 11
Jan 12
155
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Jul 05

Multi-sector
July 2012
Sector description
China expressway companies have historically been a relatively defensive sector, characterised by stable
cash flows and on average double-digit earnings growth. In the listed toll road universe, companies are
classified primarily by geography. They are mostly located in a single province with a portfolio of road
assets: (1) Guangdong Province in southern China Shenzhen Expressway, Hopewell Highway
Infrastructure, YueXiu Transportation Infrastructure; (2) Eastern China Jiangsu Expressway, Zhejiang
Expressway, Anhui Expressway; (3) Western China Sichuan Expressway. Often these companies
assets form a network within the province. Shenzhen Expressway and YueXiu Transportation have
investments outside of their own territory, while the others focus on the province in which they are based.
These road assets have fixed concession terms with a maximum of 25-30 years. The companies have 1619 years remaining on their concession terms. Key drivers for earnings are traffic volume growth and
tariff adjustments. However, the tariff is 100% regulated by the government and toll road operators in
China have no pricing power and have to rely on traffic volume to grow earnings.
Key themes
Policy risk
Policy risk has eased following the completion of a tariff review by the government in May 2012 which
will have little impact on revenues. The sector had derated 34% from the beginning of 2011 when the
tariff risk first became apparent.
Business diversification
Expressway companies have begun to diversify into areas such as property and infrastructure
construction, which may also act as a growth catalyst. Over the medium term we think that diversification
is needed, given the declining marginal Return on Equity (MROE) of new expressway investments. That
said, previous announcements of diversification have resulted in the short-term derating of companies.
Sector drivers
Traffic volume growth
This is the main growth driver. Although Chinese expressways do not have inflation-linked tariff
structures, this has been compensated for by an average 14% y-o-y traffic volume growth since 2000.
During this period traffic volume has fallen only once, in 2008 when many new roads were opening,
diverting traffic away from the road networks of listed expressway companies. Our analysis shows that
traffic volume growth has had a stronger correlation to GDP growth than to other factors, such as petrol
prices and car purchases. Over the longer term, however, we believe that there is likely to be a significant
positive correlation between traffic volume growth and growth in car ownership and personal income.
Tariff structure
Chinese expressway firms do not have pricing power. Unlike most toll roads elsewhere in the world, their
tariffs have not been a major growth driver as they are not linked to an inflation index. Instead, they are
reviewed on a periodic basis, which has resulted in little or no increase.
156
abc
ZheWei Sim*
Analyst
+852 2996 6602

Multi-sector
July 2012
abc
Traffic mix
The traffic mix is different for each expressway. Typically, inland provinces have the highest levels of
freight traffic, followed by the provinces surrounding the Yangtze River Delta and Pearl River Delta.
Companies with roads within cities (e.g. Shenzhen Expressway) have the lowest proportion of freight
vehicles and the highest proportion of passenger vehicles. We expect all expressways to see freight traffic
decrease as a proportion of total traffic as (1) private ownership of vehicles increases and (2) freight is
gradually diverted to rail. More mature roads have already begun to experience this trend.
Operating concessions
Expressways are run on a build-operate-transfer basis and have a fixed concession life. At the end of the
concession life, the assets are to be returned to the government. Prior to 2004, expressways were granted
a concession life of 30 years. Since 2004 this has been decreased to 25 years for most provinces. The
average remaining concession life for the sector is less than 19 years.
Others
Other catalysts for toll road companies include any major changes in business structure or direction. Asset
injections have historically been a positive catalyst, whereby new roads are injected into the listed
company by the parent company. We expect asset injections to become less frequent as the construction
of roads becomes more expensive and marginal MROE decreases. Expressways have also begun to
diversify into property and infrastructure construction.
Valuation
DCF methodology captures the steady long-term cash flows of these companies. We have lowered the
beta in our cost of equity (COE) calculation to 1.0x from 1.5x previously to reflect the reduced policy risk
after the completion of the toll tariff review.
157

Multi-sector
July 2012
Notes
158
abc
abc

Multi-sector
July 2012
Internet & media

Telecoms, media & technology
team
Tucker Grinnan*
Head of Asia Telecoms & Media Research
+852 2822 4696
tuckergrinnan@hsbc.com.hk
Chi Tsang*
Analyst
+852 2822 2590
chitsang@hsbc.com.hk
Howon Rim*
Analyst
+822 3706 8767
howonrim@kr.hsbc.com
159
160
China & Korea Internet Industry
Verticals
Ctrip
eLong
Xueda
E-Commerce
*
360Buy.com
Tencent
Dangdang
Vancl
Suning.com
Amazon China
Online Gaming
Tencent
Netease
Shanda
PerfectWorld
Changyou
Kingsoft
Ncsoft
Neowiz
Portals
Tencent
SINA
SOHU
Qihoo
NHN
Daum
Search Engines
Baidu
Google China
Sogou (Sohu)
Soso (Tencent)
Online Video
Youku
Tudou
SOHU
iQiyi (Baidu)
SINA
Social Networking
Tencent
SINA
SOHU
Renren
Jiayuan

Multi-sector
July 2012
Sector structure
*Removed for Compliance reasons

Note: The list of companies in this chart is not exhaustive, but we believe it offers the best representation of the sector
Source: HSBC
abc

Multi-sector
July 2012
Performance of Internet blue chips

5,000
EM flow s starts Tencent re-rating
4,000
Baidu launches
Phoenix Nest
3,000
2,000
1,000
0
Jun-06
Jun-07
Bidu
Jun-08
Netease
Jun-09
Sina
Jun-10
Tencent
NCSoft
Jun-11
Jun-12
NHN
abc
161

Multi-sector
July 2012
Sector description
Chinas Internet user base has increased 10x over the past decade, and with over 500m Internet users, the
penetration rate has reached nearly 40%. Over the past 5 years, Chinas E-economy has grown at an average
rate of 60%, comprised of 40% growth for online advertising, 27% for online gaming, 115% for ecommerce and 36% for mobile. The market is dominated by domestic private companies in each of the key
segments search, portals, gaming, e-commerce and online video. Importantly, asset managers and hedge
funds can actively invest in a broad selection of companies in various segments with market caps ranging
from less than USD1bn to more than USD50bn on the Nasdaq and the Hong Kong Stock Exchange.
Tencent, which has 750m registered accounts, is the leading portal, dominates online gaming and is a key
player in social networking. Baidu has an 80% market share in the personal computer (PC) search word
advertising market. NetEase and Shanda established the massive multi-player online role playing game
market in China. Sina is the dominant Internet portal, with more than 300m people using its leading social
networking platform. Dangdang, the leader in online book sales, is an important e-commerce company
with national reach. Finally, Youku is the No 1 online video company in China, with 300m unique
monthly visitors.
Koreas Internet user base rose a remarkable 159% between 1999 and 2001 and then increased at a more
gradual rate. We estimate Internet penetration had reached 74% as of 2011. This has mainly benefited the
Internet portals (online ads) and online game companies (monthly subscription, in-game item sales),
which have been able to monetise the increased traffic. Koreas Internet ad market expanded at 30%+
annually until 2007 when the growth rate started to decline. At 20%, online ad penetration rate is one of
the highest in the world and the market is still growing 10%+ a year.
Korea, a leader in online games, has seen this market record annual growth of 20%+ over the past five
years, underpinned by the launch of new major new titles. The domestic market is becoming more
saturated as competition increases, so Korean companies are increasingly focusing on overseas markets.
NHN is the largest Internet portal in Korea followed by Daum. NCsoft is the leading massive multiplayer
online role playing game (MMORPG) developer, while Neowiz Games is one of Koreas largest online
game publishers.
Key themes
Going mobile
The China Internet space is evolving rapidly and the competitive landscape is shifting from the PC to
mobile. Smartphone prices are declining and smartphone penetration in China is set to double in 2012 from
4% in 2011. This is driving a significant shift in user behaviour 20% of Baidus search volume is already
on mobile and 60% of Sinas Weibo users log in from smartphones. All of the players are scrambling to
develop strategies and business models to monetise mobile traffic, whether in advertising, gaming, social
networking or other applications. This shift in traffic from PC to mobile will have profound effects on all the
China Internet players and those with the most transferrable strengths will benefit the most.
Korea Internet companies started to focus on the online ad mobile platform in 2010. This has been driven
by the increasing smartphone penetration rate, which we estimate has reached 47% by end-2011. This is
also affecting online games, as mobiles are attracting traffic from casual online games.
162
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Tucker Grinnan*
Head of Asia Telecoms &
Media Research
+852 2822 4696

Multi-sector
July 2012
abc
Fragmentation of video
Increasing broadband adoption is driving much higher viewership of online video. The Chinese telcos
have invested heavily in a national fibre optic upgrade. One of the key drivers is the desire to expand into
Internet protocol television services (IPTV), which are currently subject to severe regulatory restrictions.
Since 2008, the average time spent playing online games has declined from 25% of usage to less than
10%. Online video consumption is cannibalising gaming, with usage increasing from 5% in 2008 to 30%.
China has a number of independent online video companies, such as Youku, but Baidu, Sohu (a portal
company) and Tencent, all have fast-growing online video businesses.
The rise of e-commerce

E-commerce has experienced a significant influx of capital in recent years, spawning hundreds if not
thousands of group-buying companies, business to consumer (B2C), consumer to consumer (C2C) and
business to business to consumer (B2B2C) businesses. Competition is intense, from both online players
such as 360buy, as well as bricks-and-mortar players such as Suning pushing sales online. Most recently,
Tencent acquired 51Buy and announced a USD1bn initiative for its own e-commerce unit.
More focus on overseas

As the market becomes more saturated there is an increasing need for Korea Internet and online gaming
companies to focus on overseas markets. Koreas online ad market growth has slowed due to a high
online ad penetration rate (online ads as a percentage of total ad market) which we estimate reached 20%
in 2011. The leading Internet portal, NHN, is investing in Japan and international markets are a priority
for Korean online game developers.
Valuation
Our preferred way of valuing the sector is on a PE-to-growth basis, using a three-year forward rolling
average earnings growth rate for each company. We believe this appropriately captures the near-term
earnings momentum of the companies.
163

Multi-sector
July 2012
Notes
164
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abc

Multi-sector
July 2012
Metals & mining

Metals & mining team
Simon Francis*
Head of Metals & Mining Research, Asia
+852 2996 6620
simonfrancis@hsbc.com.hk
Thomas Zhu*
Analyst
+852 28224325
thomasjzhu@hsbc.com.hk
Chris Chen*
Analyst
+852 2822 4277
chrislchen@hsbc.com.hk
Jeff Yuan*
Associate
Jigar Mistry*
Analyst
+91 22 2268 1079
jigarmistry@hsbc.co.in
Amit Pansari*
Analyst
+91 80 3001 3760
amitpansari@hsbc.co.in
Souradeep Dey*
Associate
165
166
Metals and Mining

Mining
Base Metals
Bulks
Aluminium
Alcoa
Rusal
Norsk Hydro
Chalco
Alumina
Nalco
Hindalco
Rio Tinto
Steel
Precious Metals
Iron Ore
Rio Tinto
BHP
Vale
Kumba
NMDC
Platinum / Palladium
Ferrexpo
Sesa Goa
Fortescue
Cliffs
Metalloinvest
Copper
Codelco
Antofagas ta
Aurubis
Grupo Mexico
Kazakhmys
SouthernCopper
FQM
F reeport
Xstrata
F reeport
KGHM
BH P
JiangxiC opper
Glencore
Coking / Thermal coal

NWR
BHP
AngloAmerican
Raspadskaya
Yanzhou
Fushan
Peabody
SouthGobi
Xstrata
Teck
Mec hel
Shenhua
China Coal
Hidlili
Macarthur
MMC
Zinc / Lead
Nyrstar
Korea Zinc
Hind. Zinc
Xstrata
Boliden
Terramin
Kagara
Gle ncore
Lonmin
Ampla ts
N ortham
Impala
R oyal Bafokeng Aquarius
Electric Arc
Nucor
Acerinox
Outokumpu
Blast Furnace
Salzgitter
SSAB
ArcelorMittal
T ata Steel
Gerdau
Gold / Silver
N ewmont
Goldfields
Goldcorp
Kinross
Polyus
Yamana
Buenaventura Barrick
R andgold
Polymetal
AngloGold
IAMGold
H armony
Centerra
Eldorado
Hoshschild
Petropavlo sk
Royal Gold
Z ijin Minin g
Zhaojin
Long Steel
Ezz
Nucor
Erdemir
Tata Steel
Rautarrukki
SAIL
Gerdau
ArcelorMit tal
Salzgitter
US Steel
Voestalpin e
C hina Steel
T ermium
Maanshan
Nickel
Norilsk
Vale
Severstal
MMK
Evraz
Flat Steel
Stainless
Acerionox
Outokumpu
Xstrata
JSPL
Vale Glencore
Pipes
TMK
Non-integrated
ArcelorMittal
U siminas
Ternium
US Steel
SAIL
CSN
Voestalpine
Nippon
NLMK
Posco
Gerdau
Salzgit ter
ThyssenKrupp
SSAB
Nucor
AK Steel
Baosteel
Angang
Maanshan
C hina Steel
abc
Diversified companies
Majors: Anglo American BHP Billiton Rio Tinto
Others: Bolid en
ENRC
Vedanta
ThyssenKrupp
Voestalpine
US Steel
Posco
JFE
Baosteel
Angang
Maanshan
AK Steel
CSN
Usiminas
ThyssenKrupp
SSAB
Posco
Nippon
JFE
Baosteel
Angang
AK Steel
U simin as
C SN
JSW
Integrated
Tin
Source: HSBC
China Steel
Ternium

Multi-sector
July 2012
Sector structure
600
European financial crisis and

weaker than expected global
economic growth
450
Chinese stock market
Global financial crisis,
bubble and record high

commodity prices
severe demand contraction

and plummetting commodity

Multi-sector
July 2012
prices
Strong commodity
demand driven by loose
300
Chinese monetary policy

and increasing US
consumer debt
Quantitative easing and

expectation of a global
demand recovery
150
0
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
abc
167

Multi-sector
July 2012
1.8
13.1%
1.6


leaders strategies
LG Chemical Limited
Hyosung Corp
1.4
Coromandel International
Cheil Industries Inc
1.2
Asset Turnover (x)
168
POSCO
1.0
Tata Steel Ltd
Honam
Ultratech Cement
Hindalco
0.8
Formosa Chemical
Shree Cements
Hon ChuanWelspun Corp Ltd

Jindal Saw Ltd
ACC
China Shanshui
Hanwha Chemical
Formosa Plastics
Nanya Plastics
CNBM
0.4
0.2
0.73x
Maharashtra Seamless Ltd
0.6
Jsw Steel Ltd

TCC Intl
Low ROA companies.

be required
Anhui Conch
China Resources
Asia Cement China
Sesa Goa Ltd
Youyuan International
Lee and Man

Nine Dragons Paper
Jindal Steel Power Ltd

OCI Materials Co
Sterlite Industries
Hindustan Zinc Ltd
National Aluminium Co Ltd

High margins; niche
Taiwan Fertilizer
Taiwan Cement
Asia Cement
-10%
0%
10%
20%
30%
40%
50%
60
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
The metals and mining sector falls broadly into two areas, mining and steel, although these sub-sectors
are closely interrelated. Miners encompass many independent industries, each focused on the extraction
and refining of metals, including base metals copper, aluminium, zinc, nickel, and the precious metals
gold, silver and platinum. Mining companies also produce bulk commodities such as thermal coal, coking
coal and iron ore, the latter two the raw materials for much of the steel industry. The steel industry is
largely a processor of raw materials into downstream products, grouped broadly as flat-rolled, stainless
and long steel, although some steelmakers are also backward integrated and own upstream assets.
abc
Simon Francis*
Head of Metals & Mining
Research, Asia
+852 2996 6620
simonfrancis@hsbc.com.hk
Steel and base metals are key materials for construction, infrastructure and consumer goods. Major
consumers include construction and automotive firms, capital goods producers, wire and cable
manufactures and food packaging companies. Gold is predominantly used as a store of wealth and in
jewellery, but also has some industrial end-uses, e.g. dentistry. Platinum group metals are mostly used in
vehicle emissions control devices, but can also be found in jewellery and electronics.
Metals and mining is arguably the oldest truly global sector, as all producers are subject to global
commodity prices and the sector has long been characterised by cross-border investment.
Key themes
Emerging market growth
Around one-third of industrial metals are consumed in China, and China is now about three times the size
of the US as a metal consumer. The acceleration of China as a metal consumer has led to a rise in global
metals demand growth from 2-3% pa for much of the 1980s and 1990s to 5-7% pa over the past decade.
Fresh capital needs to be constantly invested in new projects in order to meet demand and consequently
commodities are more dependent on incentive pricing the commodity price that is required to justify
investment in projects that have traditionally been seen as marginal.
This structural change in global demand has been driven by economic growth in China, which has led to 1520m people moving from the countryside to cities each year. Although this trend is difficult to define and
measure, a significant proportion of Chinas population has reached the personal income band where demand
for metal-intensive goods accelerates significantly. This is due to the move from rural housing and
employment to urban manufacturing jobs (which require plant and infrastructure) and accommodation (which
drives demand for materials such as steel-reinforced concrete and copper wiring). On our estimates, 75-90%
of the metal consumed in China stays in China, with the balance exported in the form of manufactured goods.
Although China still has a long way to go in terms of commodities consumption growth, in the longer run the
focus will shift to areas where consumptions levels are lower and where the longer-term growth prospects are
better, such as In India and Africa.
Deteriorating resources
A common theme in the sector (though not one that we entirely subscribe to) is the deterioration in the quality
of natural resources and the impact on commodity prices. Many commentators claim the quality and quantity
of ore for the next generation of mines will be lower than before, requiring higher incentive pricing and leading
to further delays and disruptions. While it is becoming more challenging to extract some metals, there is no
169

Multi-sector
July 2012
evidence of absolute depletion levels being reached. In fact, reserves and resources have risen over time as
technological advancements in exploration, processing and extraction have led to continued upgrading of
known resources and the containment of structural cost increases.
M&A versus organic growth

Buying has definitely outstripped building as a path to growth over the past decade. During the commodity
price upcycle, companies that were early in the acquisition process (e.g. Xstrata and ArcelorMittal) timed
their purchases of assets well, and were rewarded with strong cash flows. There are now significant
antitrust barriers to further consolidation in many metals industries, and the relatively small mining
companies often have dominant or blocking shareholders. Therefore, there has been a shift in strategy over
the past two years towards rediscovering organic growth.
Dividend yield or growth?

Mining stocks are usually relatively low yield, although the sector has derated significantly recently and core
dividend yields are becoming more attractive. These can be boosted by special dividends and share buybacks
when cash flows are strong. The low yield of core dividends is due to the cyclical nature of the companies
earnings, with management aiming to avoid having to cancel core dividends. This has not proved entirely
successful, with three of the four major miners in the UK cancelling dividends to preserve cash or pursue rights
issues during the 2008-09 downturn. Many of the Chinese companies maintain strong (often net-cash) balance
sheets but resist returning funds to shareholders because of the perceived growth opportunities.
Resource nationalism and political risk

Political risk is an old theme in mining that has been gaining fresh momentum in recent years. In major mining
regions, minerals are commonly owned by the state, and mining companies operate mines under systems of
mineral leases and royalties. Although the sector was plagued by nationalisation in South America and Africa
during the 1970s, more recent trends include the empowerment process in South Africa, the imposition of a
resources tax in Australia, and the proposed ban on the export of raw materials from Indonesia. In addition,
rapid demand growth is again pushing mining firms to return to areas of higher risk such as West Africa (iron
ore), the Congo (copper), and Afghanistan (iron ore and copper). Given Chinas dominance of demand and
relatively poor endowment of minerals (it is a major importer of iron ore and copper in particular), Beijing has
sought to take direct interests in a range of small and large mining companies, often with some political
resistance. It is likely that this will remain an issue in the sector for the foreseeable future.
Sector drivers
Commodity prices undoubtedly drive movements for all types of metals stocks. For miners, this is not
surprising given that their costs and output levels are broadly stable, so the fluctuating prices of metals
drive margins and cash flows. There are few ways to invest in the sector without taking a view of the
underlying commodity markets for a stock (such as spotting excess cash generation, buybacks and
M&A). In the case of steel, the difference between input (iron ore, scrap and coking coal) and output
(finished steel) prices, as well as operating rates, are critical for forecasting margins.
Due to its dependence on commodity markets, global economic growth is a major driver of stock performance,
and the metals and mining sector is high beta versus the broader market. Given the sectors size and volatility,
it has also attracted significant interest from hedge funds, and this faster money has tended to amplify the
sectors beta. The risk trade of buying or selling a high-beta sector on economic data points (particularly
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Multi-sector
July 2012
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those associated with Chinese economic growth or trade) has grown to dominate the sectors performance, and
this has made the timing of entering and exiting stock investments increasingly important.
Although commodity prices have a long history of mean reversion and asset lives of mines can stretch to
many decades (both implying that equity prices should not follow short-term commodity prices), mining
equities tend to be volatile and closely correlated to near-term metal price movements. In simple terms,
when commodity markets are good, the market expects them to stay good forever, and when they are bad,
the market expects them to stay bad forever. Remembering this simple principle, and trying to spot key
inflection points, is the key to moving beyond simple momentum investing in the sector.
Commodity markets are relatively straightforward in principle, but often complex in detail. Metals
markets typically work between two dynamics. In periods of poor demand, inventories in the industry, or
on exchanges for some commodities, rise and prices tend to fall to marginal cost typically a price at
which 10-25% of producers experience cash operating losses. This leads to an inevitable supply response
and returns a market to equilibrium. At the other extreme, in tight markets, as a result of demand growth
or supply interruptions, prices will explore an upper limit, which is usually defined by demand destruction
through substitution or the availability of new sources of supply.
Key segments
Coal
In Asia, coal companies represent a substantial part of the investable universe. Whereas China lacks good
quality or abundant resources of minerals such as copper and bauxite (for making aluminium), the
country does have substantial quantities of coal. Chinas heavy reliance on coal for its energy needs has
seen the development of large coal companies such as China Shenhua and China Coal Energy. The major
thermal coal companies tend to have substantial resource bases, strong cash flows, high margins and, in
our opinion, robust long-term growth prospects.
Industrial metals
Whereas the global mining industry has undergone significant consolidation over the past decade, it is now
dominated by six large companies, BHP Billiton, Rio Tinto, Anglo American, Xstrata, Glencore and Vale.
The industry in Asia remains much more fragmented. Much of the growth of global companies has occurred
through M&A. This has been possible because of the significant excess cash flow generated over the past
decade and offers faster growth than the development of greenfield projects which can take 10 years or
longer to bring on stream. In Asia, M&A is much more difficult to execute because of entrenched interests
(especially local or regional government interests in China) and we are yet to see widespread M&A-led
growth, although we do see Chinese companies taking a wider interest in assets in Australia.
Steel
The global steel industry has undergone substantial changes over the past decade. In developed markets
consolidation was often forced on an industry that suffered from overcapacity and insufficient margins,
whereas substantial new capacity has been built in emerging markets where urbanisation drives an increase in
steel consumption. China was the most notable example of this development and the country accounted for
45% of global steel production in 2011 up from just 15% in 2000.
The industry has also undergone significant changes in the way raw materials are priced, with long-term price
agreements for iron ore and coking coal being replaced by short-term agreements that reference spot market
171
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Multi-sector
July 2012
terms. For steel mills this causes substantially higher earnings volatility as raw material price fluctuations are
instantly reflected in steel prices, which in turn causes steel users to adjust their inventory more aggressively.
Raw materials prices have risen substantially over the past decade, giving backwardly integrated mills a
substantial cost advantage.
Valuation
Industrial metals, coal
In Asia, mining companies, including coal miners, tend to trade strongly on earnings expectations. PE is a
key valuation metric. Longer-run cash flow measures such as discounted cash flow (DCF) and net present
value (NPV) are also commonly used (often based on mine-life expectations). These valuation
approaches are less anchored than might first be expected, as consensus expectations for commodity
prices are dragged up and down by movement in spot prices for commodities.
Many of the companies listed in Asia have short trading histories and it is difficult to asses a
normalised multiple, especially given the huge volatility in the markets (and economies) over the past
few years. Chinese companies have tended to trade at higher multiples than their Western counterparts,
reflecting a perceived growth premium in emerging markets. In Europe, major miners have typically
traded at around 90% of the broader market multiple over the long-run, with a normalised absolute
forward PE of 9-11x, although during periods of risk aversion, this can fall to as low at 5-6x.
Book valuation metrics for the miners are less relevant, in part due to the slow asset turns in the industry.
Some miners are operating assets that have been in production for decades and are carried at a heavily
depreciated book value, while others which have made large acquisitions, have a revalued book.
Consequently, comparisons on book value metrics can be difficult. Write-downs to historical book values
have not been a negative catalyst for stocks in recent years.
Steel
As industrial companies with defined plant and equipment (and in China low returns), book values are more
relevant. ROEs vary widely from 2-3% for many Chinese companies operating towards the top end of the cost
curve, to around 10% for companies with better cost controls and/or some degree of product differentiation.
Asia materials: Growth and profitability (calenderised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
14.1%
-0.2%
-2.3%
27.1%
-187.3%
22.6%%
-32.9%
-9.5%
34.8%
50.3%
74.8%
59.7%
22.8%
-1.0%
-0.3%
-8.6%
0.4%
7.1%
4.1%
13.3%
18.2%
12.6%
9.4%
17.0%
10.3%
10.3%
19.0%
13.3%
12.2%
15.3%
10.8%
9.1%
16.3%
11.2%
10.2%
10%
0.8x
0.2x
13%
11%
0.7x
0.1x
11%
9%
0.8x
0.2x
14%
8%
0.8x
0.2x
11%
10%
0.8x
0.2x
12%
Note: based on all HSBC coverage of all materials companies across Asia. All data is weighted by market capitalisation.
172
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Multi-sector
July 2012
Sector snapshot
Core industry driver: Metals prices drive sector performance
4 ,000
450
3 ,000
300
2 ,000
150
1 ,000
Jan-12
Jan-11
Ja n-10
Ja n-08
J an -09
0
Jan-06
J an-07
0.94
Jan-0 5
106%
2.6x
POSCO, LG CHEM, FORMOSA
600
Jan-04
1,112
175,848
5 ,000
Jan -03
Trading data
ADTV (USD m)
Aggregated market cap (USD m)
Absolute
Relative to MSCI Europe
3 largest stocks
MSCI Europe
750
Jan -02
7.3% of MSCI Asia ex Japan
Ja n-01
Materials
J an -00
Key sector stats
M SCI Asia ex Jap an M ate rials (L HS )

LME Index (RHS )
Top 10 stocks
Weights (%)
31.2%
29.0%
16.7%
11.0%
4.5%
4.2%
3.5%
1 0x
5x

22
20
18
16
14
12
10
8
3.0
2.5
2.0
1.5
1.0
0.5
Fw d ROE % (LHS)
D ec-11
KOREA
TAIWAN
CHINA
INDIA
THAILAND
INDONESIA
MALAYSIA
1 5x
Dec-10
Country
2 0x
D ec -09
Country breakdown
1000 P rice level

900
800
700
600
500
400
300
200
100
0
D ec -0 8
PE band chart
Dec-0 7
11.3%
6.6%
6.1%
6.1%
5.1%
4.4%
2.9%
2.3%
2.2%
2.2%
D ec-06
POSCO
LG CHEM
FORMOSA PLASTICS CORP
CHINA STEEL CORP
NAN YA PLASTICS CORP
FRMCHEMS & FIBRE CORP
PETRONAS CHEMS GP BHD
HYUNDAI STEEL
CHEIL INDUSTRIES
ANHUI CONCH
Dec -05
1
2
3
4
5
6
7
8
9
10
Index weight
Dec -95
D ec-9 6
D ec-97
Dec -98
D ec-9 9
D ec-00
Dec -01
D ec-02
D ec-03
Dec -04
D ec-05
D ec-06
Dec-07
D ec-08
Dec-09
D ec-10
D ec-11
Stocks
D ec-0 4
Stock rank
F w d PB (x )
173

Multi-sector
July 2012
Notes
174
abc
abc

Multi-sector
July 2012
Oil & gas

Oil, gas & petrochemical team
Thomas C. Hilboldt*, CFA
Head of Oil, Gas & Petrochemical Research
+852 2822 2922
Kevin Lian*
Analyst
+852 6036 0790
kevinzqlian@hsbc.com.hk
Sriharsha Pappu*
Analyst
+97 1 4 423 6924
Tingting Si*
Analyst
+852 2996 6590
tingtingsi@hsbc.com.hk
Dennis Yoo*, CFA
Analyst
+852 2996 6917
Ritesh Jain*
Associate
175
176

Multi-sector
July 2012
Sector structure: Asia-Pacific Oil & Gas

Oil & Gas Sector
State Owned/Controlled and
Independent Players
Integrated Oil Companies
Independent Players
Independent Players
Upstream
Downstream
Transportation &
Distribution
IOC
Listed
E&P
R&M
Gas Pipeline: Trunk,

Branch, City, Vehicle
Seismic, Drilling, Well

Services, Vessel
support
E&C
(Upstream,
Downstream,
Transportation,
Petrochemicals)
(Upstream,
Downstream,
Transportation,
Petrochemicals)
Listed
Listed
Listed
Listed
Listed
Large and dominant

state-owned oil
companies eg: Saudi
Aramco, National Iranian
Oil Company, Petronas,
PetroVietnam, Pertamina
and KNOC.
These companies may
partner with listed majors
and may seek public
debt and selected equity
capital to finance their
operations, but they
generally retain tight
control of their in-country
value chain or appointed
subsector responsibility.
Global IOCs like

ExxonMobil, BP, RD
Shell and Total. Global
operators across the
value chain with long and
established Asian
presence.
Emerging Market IOCs
like PetroChina, Sinopec,
CNOOC, PTT,
Petrobras, Lukoil and
Reliance Industries. May
be partially state-owned,
but often or on occasion
represent state interests
and have growing global
portfolios through the
value chain.
NOCs and subsidiaries

of national IOCs like
CNOOC, PTTEP and
ONGC which are
controlled or majority
owned by the state, but
with entrepreneurial spirit
and incentivized
management.
Independents like Cairn
Energy, Woodside
Petroleum and Niko
Resources with some or
total focus in Asia.
International operators
like BG, Shell, Chevron
with Asian upstream
focus.
Country focused
downstream players like
S-OIL, SK Innovation,
LG Holdings, Formosa
Petrochemical, Thaioil,
Reliance, and
HPCL/BPCL, with
developed large crude
processing capacity
feeding local marketing
and/or downstream
chemical operations.
Also includes
international refining
operations of IOCs such
Esso Malaysia and
Thailand.
Natural gas processing

and distribution
companies like Kunlun
Energy, ENN, China
Gas, Sino Oil & Gas,
New Ocean Energy.
Petronas Gas, PT
Perusahaan Gas.
A slowly emerging sector

in Asia, with companies
like COSL in China, a
listed subsidiary of
CNOOC group.
Also smaller service
providers like Ezra and
equipment providers in
Malaysia.
International service
providers like
Schlumberger,
Halliburton and other
major providers are also
active in the Asian
region.
Specialized construction
of jackup, semisubmersible, floating
production facilities and
LNG carriers by Asianbased shipyards.
Includes companies like
Keppel Corp, Sembcorp
Marine, and Korea's
heavy industry players
Samsung Heavy,
Hyundai Heavy, Hudong
Zhonghua.
Also LNG receiving
terminal and refinery
construction by JCG,
Halliburton Bechtel
Samsung, LG and
others.
Source: HSBC
abc
IOC
State Owned-Unlisted
4,000
1994-98
3,000
Sustained low oil prices Asian Financial
2,000
dampened inv estments Crisis
1997
2001
2003
2005
9-11
Iraq w ar
Hurricanes
2005-08
2008 (end)
120
Rising demand in Onset of recession

2011
Katrina and Rita Asia
Liby an civ il w ar
1,000
Iran sanctions
80
60
40
-1,000
2006
-2,000
1999
-3,000
1995
1996
Non-OECD
2003
2004 2005
Non OPEC supply grow th
50
2006
2007
OPEC cut 4.2mmbbl/d

2008 2009 2010 2011 2012e 2013e
Demand grow th
bull market driv es v aluation premiums to 2008 peak
2.5
2009-12: Valuations normalize
20
Pre 2000: Limited equity univ erse focused
10
on dow nstream
v s.
2000-2004:New ly SOEs in China and Thailand
30
Brent-S/bbl (RHS)
2004-2008: GEM grow th, portfolio flow s and commodity
40
20
2009 beginning
Lebanon w ar
OPEC cut 4.2mmbbl/d

1997 1998 1999 2000 2001 2002
OECD
Global Peers
Large sector market cap ex pansion
1.5
1
Discounted relativ e v aluations persist
0.5
Valuations crash w ith Asian Financial crisis
100

Multi-sector
July 2012
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
CQ1
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Asia ex Japan Energy P/E-x (LHS)

177
Source: MSCI, Bloomberg, BP Statistical Review of World Energy, 2011, HSBC
Asia ex Japan Energy v s. World Energy Relativ e P/E -% (RHS)
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CQ1

Multi-sector
July 2012
2.6
15.5%
2.4
Bharat Petroleum
leaders strategies
2.2
S-Oil
Hindustan Petroleum
Sinopec
2.0
Petronet Lng Ltd
1.8
Asset Turnover (x)
178
Indian Oil
1.6
SK Innovation
1.4
High asset turn

efficient volume
driven strategies
1.2
1.09x
1.0
Trina Solar
0.8
Reliance Industries
PetroChina
Coal India Limited
ONGC.
China Coal Energy Co
CNOOC Ltd.
Yingli
China Shenhua Energy
Yanzhou Coal
Suntech Power Holdings
0.6
0.4
Oil India Limited
Low ROA
companies.
Business
restructuriung
may be
required
0.2
China Oilfield Services

Bumi Armada
GS Holdings
Hidili Industry Internati
Cairn India Limited.
0%
20%
40%
60%
80%
100%
120%
EBITDA Margin (%)

abc

Multi-sector
July 2012
Sector description
The Oil & Gas sector value chain includes the extraction of oil and gas, transportation of feedstock, the
refining of oil to produce gasoline, diesel, chemical feedstocks, other petroleum products and the
marketing of oil and gas products to consumers. This can involve piped gas, liquefied natural gas (LNG),
compressed natural gas (CNG), liquified petroleum gas (LPG) and ultimately combustion for power
sources including power generation, transportation and other industrial applications.
Integrated players operate across the entire value chain. Independents normally focus on a part of the
chain and have distinct technology, scale conversion or marketing capabilities to enhance
competitiveness. Upstream and downstream are commonly used terms in this sector. Upstream, also
referred to as exploration and production or E&P, refers to activities related to the search for, drilling
and production of both conventional sources and unconventional sources of crude oil, natural gas and
natural gas liquids (NGL). Downstream refers to activities at crude oil refineries, upgraders, integrated
abc
Thomas C. Hilboldt*, CFA

Head of Oil, Gas &
Petrochemical Research
+852 2822 2922

chemical facilities, natural gas and NGL processing, marketing, storage and transfer, and the selling and
distribution of natural gas and products derived from the preceding processing actions. These products
include LPG, gasoline, jet fuel, diesel fuel, chemical feedstock and other fuel oils.
Upstream is the key value generator

Integrated international oil companies (IOCs) view upstream as a key value generator, which normally
accounts for around 70% of their value, and on average attracts more than 70% of new investment.
Downstream oversupply and product mismatches are recurring problems

The refining industry suffers from period oversupply, particularly in mature OECD markets. This has
been exacerbated by three factors: (1) capacity additions/upgrades in Asia and the Middle East, (2) energy
conservation and efficiency, and (3) fuel switching into biofuels, natural gas and other alternatives
globally. The industrys reaction has been to reduce capacity through closures (many temporary) and
disposals. In some cases, expanding emerging market players are buying mothballed capacity to gain a
distribution toehold in mature markets.
Oil services
Oilfield services are diverse; some are asset heavy, some asset light. The main sub-sectors are seismic,
drilling, engineering and construction, subsea/offshore equipment and construction, supply vessels,
floating production and well services. One distinction among different parts of the sector is cyclicality.
All areas are cyclical, but some are longer cycle (related to capex), others shorter cycle (related to
operating expenditure and exploration activity).
The equity-listed structure of the global oilfields services sector is, unsurprisingly, more developed in the
Western world, but it is likely to become increasingly important (as a traded sector) in emerging markets,
particularly Latin America and Asia, with more companies growing to investable size. Also oil services
companies in Asia normally have less advanced technology and lower specialisation levels than global
peers. The construction sector has exposure to capex trends (long cycle) and to offshore activities, while
service providers such as COSL are more exposed to well services and vessel supply (the shorter cycle).
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Multi-sector
July 2012
Key themes
Access to resources
With growing resource nationalism, companies that have secured acreage in prospective, accessible areas
of the world (e.g. Australia, Brazil, West Africa, East Africa, the US Gulf and East Siberia, and Iraq) are
likely to have the potential for above-sector average growth. This can favour national energy
champions, many of them partly or wholly government-owned, which often have preferential access to
exploration acreage. Some governments also give their national companies automatic or optional
participation in discoveries made by other companies (e.g. CNOOC).
Low growth, long lead times, capital intensity

The industry is relatively mature. Globally, annual demand growth is 1% to 2% for oil and 2% to 3% for
gas. But non-OECD regions in Asia grow up to 2x faster, while OECD growth may be flat or negative.
New annual upstream productive capacity of 5% to 7% will deliver net capacity growth of 1% to 2%,
since output from existing fields declines at c3% to 5%. Development of this new capacity involves long
lead times, typically 5-10 years from discovery to monetisation, and longer for large projects. The
industry is also capital intensive with most material projects involving multi-billion dollar spending.
Emerging markets M&A, slower growth, transition to natural gas/alternatives

Energy powers economic activity and growth, and Asias rapid economic growth during the last decade
required large increases in primary energy consumption of c5% p.a., more than double the global average.
During the decade, China and Thailand listed state owned companies. These companies rationalised
operations, expanded investment and benefited from oil and gas price gains. As a result, they saw large
increases in market capitalisation and strong equity outperformance. The MSCI Asia ex Japan energy
sector has a market cap of USD178bn and since January 2000 has generated returns of over 360% and
outperformed MSCI Asia ex Japan 8.8x.
The sectors share price correlations with the MSCI Asia Index are among the highest. While the
correlation with domestic liquidity (M1) is low, it is still higher than all the other sectors. This probably
reflects its dominance in the various local economies (China, India, Thailand).
Three of Asias four largest listed energy companies are in China. PetroChina is Asias largest
producer of oil & gas, producing 3.4m barrels of oil equivalent per day (mmboe/d), as well as large oil
refinery and marketing capacities. Sinopec is the worlds largest refinery operator and Asias biggest
chemical maker, with about 5m barrels per day (mmbbl/d) of refinery capacity and over 9m tones p.a.
(mtpa) of ethylene capacity. Together, PetroChina and Sinopec have a near duopoly in Chinas oil
refining and oil product wholesale and retail businesses. CNOOC is Chinas largest producer of offshore
oil and natural gas. All three companies have actively diversified their asset portfolios through
acquisitions in the Americas, Central Asia, the Middle East and Africa.
The Asian emerging majors are Reliance Industries of India and the PTT group in Thailand. Reliance
has backward integrated from its original businesses of polyester and plastics processing and developed
assets that are among the most complex petroleum refining and ethylene cracking facilities in the world.
Its also involved in oil and gas exploration in India and other parts of Asia. PTT has an integrated model
180
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Multi-sector
July 2012
abc
leveraging its substantial gas resource base consisting of three main listed companies: PTT, PTTEP and
PTT Global Chemical and related companies Thaioil and IRPC.
Sector drivers
The three key price and margin levers for the income statement are oil prices, natural gas prices, and
refining margins. Production growth and refinery capacity can have a material impact during the
commissioning and early growth phases. The relative strength of the US dollar can also be a key driver,
with dollar strength pulling prices lower and dollar weakness pushing prices higher. Other variables
influencing profitability and returns are cost inflation and rising taxes, as governments have increased
various tax rates and levied new price based windfall taxes as commodity prices rose.
The oil industrys long lead times result in cyclical sub-sector performance. This cyclicality is typically
more pronounced in the downstream than in the upstream, although recent crude price volatility and
generally higher price levels has fuelled a capex boom to open up new sources of unconventional
resources. OPECs position as the swing producer and policy of managing production at a level sufficient
to collar oil prices, dampens some of the cyclicality in the upstream. OPEC appears able to exercise
control over oil price by varying production. It cut supplies in 2009 to stabilise the crude price at USD7080/bbl and increased supply in 2011 during the Libyan uprising to keep prices from rising materially
above the top end of its target range. Spare capacity is about 4mmbbl/d.
High levels of refining capital investment are required for both greenfield projects and the upgrading of
facilities in order to improve product quality and match refinery output with market demand. However,
returns in this sector are highly cyclical and often disappointing. Average utilisation rates can swing from
below 80% during periods of over capacity (e.g. the late 1990s), to stressfully high levels above 85%
during periods of rapid economic growth and tight capacity (e.g. 2005-07). Going forward, we believe
increases in demand will be met from capacity additions, mainly in Asia and the Middle East.
Key segments
Oil the pace of growth eases for the large caps
Oil prices impact oil companies in different ways. Higher oil prices are positive for E&P plays and can be
negative for refineries, while volatility tends to be negative for all. High oil prices benefit E&P stocks
across Asia examples are CNOOC in China, PTTEP in Thailand, Woodside in Australia and Cairn
Energy in India. They benefit not only from rising prices, but also because their major cost items
production and depreciation are relatively stable regardless of different oil price levels, allowing for
margin expansion. Meanwhile, as oil prices rise, refining margins are highly market dependent, for
example in China and India, where price controls can result in negative margins.
Gas continued above trend growth rates

Consumption of natural gas in Asia has grown more rapidly than oil, averaging over 6% over the last
decade, driven by an expansion of production, distribution and importing capacity. Asia is a large net
importer of natural gas, with an 18% share of total world consumption against only c15% of production
and 9% of the reserves. Imports comprise both LNG and increasing amounts of piped gas from Central
Asia, Southeast Asia and potentially Russia. Asia is the biggest LNG market, with 60% of global LNG
consumption. LNG demand is led by the hydrocarbon poor economies of Japan, Korea and Taiwan, and
181

Multi-sector
July 2012
now China, and fed by the resource rich Malaysian, Indonesian, Australian, Eastern Russia and
Africa/Middle East suppliers. Pipeline gas infrastructure and markets are in a rapid development phase in
the larger economies of China and India, but are better established in Southeast Asia.
The emergence of significant new resources in place and production volumes of so called
unconventional gas has altered the structure of global natural gas markets. This gas source includes
shale gas, tight gas, coal bed methane (CBM) or coal seam methane (CSM). These new gas resources are
produced using modified drilling and production techniques and have extended the life of certain basins
and opened new sources of natural gas and NGLs for conventional gas fired applications, chemical
feedstock and LNG. China and Australia have substantial potential resources of shale gas.
Globally, around 40% of natural gas is exposed to gas-to-gas competition (primarily the US market), 40%
is regulated and only 20% has a direct or indirect link to oil prices (Europe and Asia). We believe Asias
gas prices may retain their link to oil prices because of their dependence on imported LNG. Imported gas
prices tend to follow oil-based baskets, while domestic piped gas may be subsidised in some form. In
Europe we believe the link to oil prices is likely to remain in the medium term, but with an increased
blend of spot prices. The US could remain a low-price market through rising shale-gas production.
Refining persistent oversupply in OECD

The current overcapacity is expected to persist over the next 5-10 years unless large-scale closures take
place. For the balance of the decade, we believe increases in demand will be met from new capacity being
added, mainly in Asia and the Middle East. We expect OECD refining profitability to remain weak, with
Asian and Middle East refiners benefiting most from non-OECD demand growth.
Service sector capex trends the key

Asias investable service sector is narrow, but the oil industrys capital expenditure remains the key
driver. The state-owned companies in China have substantial in-house capabilities through their captive
subsidiaries. Offshore activity is driven mainly by areas like Brazil, West Africa, the North Sea,
Australasia and the US Gulf (hence concerns following the BP well blowout). Onshore is driven more by
the Middle East and Australasia for capex-related work, and North/South America, the Middle East/North
Africa and parts of Asia/FSU for opex-related work (i.e. existing oil-producing areas).
Valuation
The oil & gas sector typically trades around 10x PE, but valuations can show a high correlation with the
oil price and be sentiment driven at times, correlating strongly with the directional moves in oil prices.
Hence, when oil peaked in 2007, so did valuations at 20x PE. Sector earnings growth is largely a function
of price assumptions but valuing integrated large players, smaller independent companies, refiners,
distributors and service companies requires different approaches.
IOCs earnings and cash-flow multiples. The large integrated players are valued using traditional
multiples (Price/Earnings, Enterprise Value/Net Operating Profit after Tax, Price/Cash Flow, Enterprise
Value/Debt Adjusted Cash Flow multiples). A key variable is the assumed oil price. Analysts generally
use futures market prices, or more often their own forecasts. (HSBCs long-term Brent price is
USD90/bbl.) The most common valuation approach is PE-based. The long-run relative PE is around 80%,
182
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Multi-sector
July 2012
with some variation between developed and emerging markets. The PB ratio is a useful valuation check,
particularly for companies with significant construction in progress.
Analysts can use a sum of-the-parts (SOTP) approach for some multi-segment businesses. Upstream
assets tend to be valued using discounted cash flow (DCF) analysis or by using comparable transaction
values. Downstream assets are valued using per barrel approaches based on market transactions, with
adjustments for complexity, size and location. Other assets can be valued on a multiple basis either
earnings or cash-flow based using comparable companies as a reference point.
Upstream companies per barrel valuations or DCF. Upstream companies can be valued by deriving
a net asset value. This can involve a DCF valuation of the existing (and potential) resources or could use a
simple per barrel valuation of reserves based on unit economics of the asset portfolio, comparable
companies or recent transactions. Exploration assets can be valued similarly but risked to reflect the
likelihood of success and the difficulty of commercialisation.
Downstream companies SOTP and multiples. Downstream companies are normally valued on a
multiple or SOTP. Unlike for the majors, the multiple approach can involve pre-tax measures (Enterprise
Value/Earnings Before Interest and Taxes or Enterprise Value/Earnings Before Interest, Taxes and
Amortization) as tax rates vary less among downstream than upstream companies.
Oil services SOTP and multiples. The service sector is diverse, requiring a range of valuation
approaches. For asset-based companies (such as rig owners), a SOTP is often used with individual assets
being valued at replacement cost or by reference to comparable companies. Multiple-based approaches
can be pre and post-tax, as with downstream. Highly cyclical businesses can be valued using mid-cycle
valuations.
Asia Pacific Oil & Gas: Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2009
2010
2011
2012e
-5.4%
2.6%
-3.5%
-8.2%
43.2%
37.3%
39.6%
43.5%
34.8%
18.6%
21.2%
21.1%
-3.2%
0.2%
-2.9%
-3.8%
23.4%
15.4%
11.3%
22.4%
15.0%
11.3%
19.7%
13.5%
10.2%
20.4%
13.5%
10.1%
19%
0.8x
0.1x
14%
13%
0.9x
0.1x
18%
11%
1.0x
0.1x
18%
12%
0.9x
0.0x
16%
Note: based on all HSBC coverage of Asia Pacific Oil & Gas
183
abc

Multi-sector
July 2012
Sector snapshot
Industry driver: Oil & gas Brent price vs OPEC spare capacity
Key sector stats

Energy
7.39% of MSCI Asia
Oil & Gas
5.90% of MSCI Asia
Coal
1.49% of MSCI Asia
Trading data
For MSCI Energy
Average Daily Trading Volume (USDm)
776
178,201
Absolute
361%
Relative to MSCI Europe
8.8
3 largest stocks
CNOOC, PetroChina, Reliance
MSCI Asia
0.96
CNOOC
PetroChina
Reliance Industries
Sinopec
PTT
SK Innovation
PTT Exploration And Production
Kunlun Energy
ONGC
S-Oil
0
00
nJa
0
nJa
12
10
08
06
04
nnnnnJa
Ja
Ja
Ja
Ja
CO1-Front Month Brent - US$/bbl LHS
OPEC12 Spare Inv erted (mmb/d) RHS
Index weight
23.7%
19.7%
11.8%
10.9%
5.9%
5.1%
4.1%
2.6%
2.5%
2.5%
2000
1750
20x
1500
1250
15x
1000
750
500
10x
5x
250
0
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
1
2
3
4
5
6
7
8
9
10
50
PE band chart-MSCI Energy (oil & gas and coal)
Top 10 stocks Oil & gas only

Stocks
100
Stock rank
0.0
2.0
4.0
6.0
8.0
10.0
150
Country breakdown Oil & gas only

Country
Weights (%)
China
India
Korea
Malaysia
Taiwan
Thailand
58.5
15.1
9.3
3.1
2.3
11.8
PB vs ROE Oil & gas and coal (12-month forward)

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
22
20
18
16
Fw d ROE % (LHS)
184
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
14
Fw d PB (x )
abc

Multi-sector
July 2012
Technology
hardware
Asia technology team
Steven C. Pelayo
Regional Head of Technology Research
+852 2822 4391
stevenpleyao@hsbc.com.hk
Tse-yong Yao*
Analyst, Printed Circuit Board & Substrate
+886 2 6631 2861
tse-yongyao@hsbc.com.tw
Jenny Lai*
Head of Research, Taiwan, and Tech Hardware Analyst
+886 2 6631 2860
jennylai@hsbc.com.tw
Brian Sohn*
Analyst, Korean Technology (excl. Memory)
+822 3706 8765
briansohn@kr.hsbc.com
Carrie Liu*
Analyst, PC Hardware And Components
+886 2 6631 2864
carriecfliu@hsbc.com.tw
Jerry Tsai*
Analyst, Flat Panel Display, Touch and Taiwan LED
+886 2 6631 2863
jerrycytsai@hsbc.com.tw
Ricky Seo*
Analyst, Memory, System LSI
+822 3706 8777
rickyjuilseo@kr.hsbc.com
Yolanda Wang*
Analyst, Handsets and IC design
+886 2 6631 2867
yolandayywang@hsbc.com.tw
185
186
Asia Technology Hardware
Semiconductor
Handset
AAC Technologies
Compal Communications
Foxconn International
HTC
Largan Precision
LG Electronics
Merry Electronics
Samsung Electronics
Silitech
Foundry
Packaging/test
Fabless
Memory
PCB/substrate
TSMC
UMC
SMIC
Vanguard
ASE
Chipbond Technology
Siliconware Precision
STATS ChipPAC
Mediatek
Novatek
Realtek
Spreadtrum
Inotera Memories
Nanya Technologies
Samsung Electronics
SK Hynix
Career Technology
Flexium
Kingboard Chemical
Kingboard Laminates
Kinsus Interconnect
Nanya PCB
Unimicron
Taiflex Scientific
Tripod Technology
Equipment
ASM Pacific
Chroma ATE
PC
Display
Korean Tech
Conglomerate
Other
Cheil Industries
Communications
Duksa Hi-Metal
Consumer
OEM/ODM/EMS/
LG Chemicals
Industrials
Component
Flat panel/Touch
LED
Distributors
LG Electronics
OCI Company
Acer
Catcher Technology AU Optronics
Epistar
OCI Materials
Asustek
Chicony Electronics Coretronic
Everlight
Samsung Electro Mechanics
Compal Electronics Delta Electronics
Corning
LG Innotek
Samsung SDI
Digital China
Foxconn Technology Chimei Innolux
Radiant
Samsung Techwin
Hon Hai Precision
Ju Teng International LG
Seoul Semiconductor
Soulbrain
Display/Electronics SFA Engineering
Lenovo
LiteOn Technology
Samsung
Pegatron
Simplo Technology
Electronics
Quanta Computer
Sharp
Synnex Technology
TPK Holding
Wistron

Multi-sector
July 2012
Major Asia Technology ex Japan hardware sectors
Note: The list of companies in this chart is not exhaustive, but we believe it offers the best representation of the sector
Source: HSBC
abc
30-Dec-11
30-Jun-11
30-Dec-10
30-Jun-10
30-Dec-09
30-Jun-09
30-Dec-08
30-Jun-08
30-Dec-07
Apple iPod
launch
30-Jun-07
30-Dec-06
30-Jun-06
30-Dec-05
30-Jun-05
30-Dec-04
Dotcom burst
30-Jun-04
250
30-Dec-03
30-Jun-03
30-Dec-02
30-Jun-02
30-Dec-01
30-Jun-01
30-Dec-00
30-Jun-00
30-Dec-99
30-Jun-99
30-Dec-98
PC Era
30-Jun-98
30-Dec-97
30-Jun-97
30-Dec-96
30-Jun-96
30-Dec-95
30-Jun-95
30-Dec-94
300
Apple iPad
launch
Social media era

Facebook launch
Internet
Internet
revolution
revolution

Multi-sector
July 2012
MSCI Asia ex Japan Information Technology Index 1994-2012
200
Apple iPhone
launch
150
100
Shift to mobile
50
MSCI ex . JP Information Technology Index
Source: MSCI, HSBC
abc
187

Multi-sector
July 2012
3.4
8.1%
3.2

3.0
Synnex International
Digital China

leaders strategies
Wistron Corp
2.8
Pegatron Corp
2.6
Compal Electronics
2.4
Quanta
Hon Hai
Asset Turnover (x)
188
2.2
Acer
Asustek
Lenovo Group Ltd
2.0
1.8
Chicony
1.6
Radiant
1.4
Coretronic Corp
Foxconn
MindTree Ltd
Neowiz Games
1.2
Foxconn International
1.0
LG Innotek Co
LG Display
0.8
Nanya PCB
ZTE Corporation
Compal Communications
Ju Teng
Samsung SDI
Chimei Innolux
0.6
AU Optronics
0.4
Low ROA companies.

be required
0.2
Simplo Technology
HTC Corp
1.26x
TPK Holding
Samsung Electronics
Career
Flexium
Polaris
Gintech HCL
Motech
Novatek
Tripod
Samsung Electro
Wipro
Siliconware
Vanguard Int'l
Kingboard
Unimicron
Advanced Sem
Everlight Elect
Semiconductor
Com2us Corporation
SFA Engineering
MphasiS
Infosys
Taiflex Scientific
Tech Mahindra
Duksan Kinsus Inter

Chipbond
United Microe
Kingboard
ASM Pacific
TCS
MediaTek
Daum
SK Hynix Inc.
NCsoft
Persistent
Largan Precision
Taiwan Semiconductor
Gamevil Inc
GCL-Poly Energy Holdings
Epistar Corp
Catcher Technology
High margins; niche

NHN Corp
AAC Technologies
Chroma ATE Inc
-10%
0%
10%
20%
30%
40%
50%
60%
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
At a very high level, the technology sector can be broken down into the three Cs communications,
consumers and computing. Within these broad categories, it can be further segmented into PC hardware,
handsets, flat panel display, data communication/networking/storage, software and internet. These, in turn,
require core technologies, including semiconductors, hard-disk drives, printed circuit boards and batteries.
abc
Steven C. Pelayo, CFA

Regional Head of Technology
Research
+852 2822 4391
stevenpelayo@hsbc.com.hk
The US and Japan are home to traditional technology powerhouses such as Intel, Microsoft, Cisco,
Hewlett-Packard, Sony, Nintendo and Panasonic, but over the past 10 years other Asian competitors like
Koreas Samsung Electronics and LG Electronics and Chinas Huawei have emerged, supported by
companies from the upstream supply chain in Taiwan. Apple Inc. is arguably the most well-known
technology company thanks to products such as the iPhone, iPad and iMacs. Apple is also the worlds
biggest purchaser of semiconductors and has most of its components sourced and manufactured in Asia
(e.g. Apples key chips are designed in the US but mostly manufactured in both Korea and Taiwan).
Previously driven by corporates, the increasing demand from consumers is leading to a stronger
correlation between the sector and the global macro economy; as a result, technology companies
fundamentals and share prices have become more tightly correlated with global GDP growth trends. Price
elasticity is very important and hence consumer electronics is continually undergoing price deflation. The
key enabler of this deflation is Moores Law, the theory that the number of transistors that can be placed
on an integrated circuit doubles approximately every two years (or alternatively cost can be roughly
halved).
Key themes
Over the last 40 years, the technology sector has gone through many major cycles, starting with
computing then internet and, more recently, the shift to mobile. The mobile handset industry is the largest
market within the technology sector. Mobile phones continue to be the biggest driver, shipping more than
1.6bn units in 2012.
Within this segment, smartphones are growing rapidly with annual shipments approaching 700m units,
increasing 30-40% y-o-y. We expect smartphones to continue to outperform as penetration rates,
especially in emerging markets remain low, and price elasticity of sub-USD100 ASPs spurs adoption
rates. Apple and Samsung Electronics are the dominant brands, thus the focus has moved to the
components used in their devices. For example, TSMC, the worlds largest dedicated independent
contract chipmaker, makes chips for Qualcomm, a major US communications company and a key subcomponent in the majority of smartphones sold today.
In the medium to longer-term, we see further advances. These include 4G, known as LTE (Long-Term
Evolution), advanced 28 nanometer chips and AMOLED displays. The shift to cloud computing, touch, and
increasing silicon and battery content as more functions are put into a single device, are also important.
Sector drivers
The shift to mobile and the explosion of data traffic, storage and analytics are high-level drivers of the
technology sector. Some of the more specific drivers are as follows:
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End demand. Consumer end demand is arguably the most important driver in the technology sector. It
clears inventory fast and allows a chain effect of inventory replenishment/orders throughout the
electronics supply chain. Conversely, weak demand leads to the build-up of inventory and order cuts,
impacting the whole supply chain.
ASP. Average selling price (ASP) is important for both upstream and downstream companies. For enddevice vendors (e.g. handsets, PCs, TVs), ASPs are generally higher when new products are launched and
eventually trend downwards. Therefore, companies need to innovate to maintain or increase their ASPs.
Capacity/utilisation. This generally applies more to upstream technology companies, where higher
capacity allows them to accept more orders from customers, whereas tighter capacity may lead to supply
shortages. This usually implies that companies will have high utilisation rates, which is highly correlated
to margins (see below). For example, the March 2011 earthquake in Japan caused many upstream
companies to shut down their manufacturing plants, taking a substantial amount of capacity offline and
creating worldwide shortages (particularly hard-disk drives).
Capital intensity/depreciation. Asset-heavy companies like semiconductor foundries require substantial
capital intensity as they move down Moores Law. Higher capex usually results in higher depreciation
costs and hence put pressure on margins.
Inventory. Technology companies usually keep an average of at least 4-6 weeks of inventory in case of
any rush orders. Rising inventory levels are usually not necessarily a good sign as this may imply poor
demand, while inventory levels that are too lean are also a negative, as companies may not be able to
deliver increased orders and could lose out to competitors.
Margins. Typically, upstream tech companies enjoy higher margins than downstream ones (e.g. TSMCs
historical gross margins > 45%+ vs Acers 10%). Pricing power also dictates how high margins can be;
generally, greater innovation is rewarded by higher margins (think Intel, TSMC, Apple, Samsung).
Moores Law. Its why consumers can enjoy the benefits of having electronic devices with better
specifications at lower prices.
Product cycles. Technology is a fast moving sector, so companies must always come up with new
products. New product cycles can benefit the entire electronics supply chain as well as stimulate
consumer demand (e.g. iPhones, iPads, smartphones, ultrabooks).
Key segments
Handsets, operating systems. Smartphones are increasingly dominant. We see the market diverging,
with LTE at the high end and USD100-150 handsets accelerating smartphone use in emerging markets.
Chinas growth will be much higher than the global average and the country will become the secondlargest smartphone market in 2012. The release of Windows 8 is expected to support both Intel and ARM
Holdings platforms, which may help move mobile into the digital living room.
PCs and tablets. Consumers are increasingly switching from PCs to tablets, driven by the new Apple
iPad. The launch of new Windows 8 ultrabooks may help reinvigorate PC sales and cloud computing is
likely to continue to benefit from the continued growth of data consumption and storage.
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Flat panel display and touch. Lower prices are encouraging consumers to buy larger TVs, which may
ultimately lead to a recovery in panel prices. Integrated touch, which offers advantages in cost,
performance, brightness and energy efficiency, is expected to become increasingly important. Within
display, LED general lighting is at an early stage of market development.
Printed circuit boards and substrates. Taiwan PCB makers are outgrowing higher-cost competitors in
the US and Japan. As computers become more powerful, more complex uses of silicon are needed as well
as more advanced chip scale packages (CSP) packages (integrated circuit chip carriers). Flexible PCB,
used in smartphones and tablets, provides greater flexibility in design layout. Demand for high density
interconnect (HDI) substrate or boards with a higher wiring density remains strong.
Semiconductor foundries, packaging/test and equipment. The success of 28-nanometer (nm)
technology used in tablets and mobile phones saw supply trail demand in 2012. Rising capital intensity is
likely to be a long-term trend, which may result in further consolidation and separation of the
fabless/foundry business models.
Memory. DRAM market capacity hit a historical low in 2012, suggesting the start of an inventory
restocking cycle. In the medium term, lower-priced ultrabooks and the release of Windows 8 are catalysts
for demand, as are multichip packages (MCP) for smartphones and solid state disk (SSD) for ultrabooks.
Valuation
Prior to the 2000 dotcom crash, the technology sector was generally regarded as a growth industry with
many tech companies trading at high PE multiples. Since then, tech companies have experienced
substantial multiple contraction. Many tech companies are now generally seen as low growth cyclicals.
Handsets, components and IC design. PE methodology is the most common way to value tech
companies with proven track records of profitable growth. However, price-to-book also tends to be in
focus for companies with volatile earnings as well as those with more consistent ROE and dividend
payouts. In addition, many tech analysts use peer comparisons and 10-year DCF models with a terminal
growth rate assumption as a reality check.
PC hardware and components. Again, PE is the most common way to value these companies as most
have a proven track record of profitable growth. We also use peer comparison and 10-year DCF models
with a terminal growth rate assumption as a reality check.
Flat panel display, touch and LED. Price-to-book is the most common way to value companies in the
LCD and LED industries as the earnings patterns tend to be very volatile due to fluctuating prices and
high fixed costs. The valuation multiple is often based on the industry cycle, within the range of the
historical peak and trough. We use PE to value companies in the LCD component and touch panel
industries, which tend to have more stable earnings (they are in the assembly business where capex is
lower). We also set the valuation multiple based on the industry cycle. However, for the touch industry,
due to the limited trading history of many companies and potential shifts in key touch technologies, we
often base the valuation range on other firms, adjusting for the competitiveness of each player.
Korean technology (excluding memory). We believe Korean companies in the non-memory tech sector
should be valued in different ways, according to each companys characteristics. We think that a sum-of-
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the-parts (SOTP) valuation is appropriate for companies that operate businesses in different industries,
and we calculate an EV for each division. Otherwise, we use historical average 1-year forward multiple
(PE or price-to-book) to capture a companys full business cycle. If the companys earnings are stable, we
use historical average PE and, if not, we use price-to-book.
Semiconductor foundry, packaging/test and equipment. Given their high fixed costs and inconsistency
of earnings, price-to-book, price-to-sales and EV-to-EBITDA have been the most commonly used valuation
metrics for semiconductor foundry stocks. While the volatile earnings records at foundries make valuation
on a price-to-forward earnings basis difficult, we believe it is a useful metric during periods of cyclical
growth, if only as a reference against other technology sectors. For packaging/test companies the historical
PB multiple is an appropriate metric given inconsistent earnings. Equipment companies like Chroma ATE
which are in the growth stage can also be valued using PE. However, we also use 10-year DCF models for
all our companies with a terminal growth rate assumption as a reality check.
Memory. For memory companies such as Samsung Electronics and SK Hynix, using historical price-tobook multiples is appropriate as it is a high fixed asset/investment industry which is cyclical through its
sensitivity to economic cycles and seasonal demand.
Asia Information Technology: Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
12.5%
-0.1%
-2.8%
-9.6%
401.8%.
369.1%
281.7%
289.4%
28.8%
42.7%
70.1%
77.5%
13.0%
8.1%
-2.5%
-10.5%
19.3%
34.1%
50.7%
52.2%
17.7%
11.3%
9.9%
16.6%
8.6%
7.7%
18.3%
11.3%
10.6%
17.5%
9.8%
8.4%
19.7%
12.3%
10.7%
7%
1.3x
-0.1x
4%
6%
1.2x
-0.2x
14%
13%
1.2x
-0.1x
19%
13%
1.1x
-0.1x
14%
12%
1.1x
-0.2x
18%
Note: based on all HSBC coverage of IT companies across Asia. All data is market cap weighted
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Sector snapshot
Core industry driver
Key sector stats

Technology
Moore's Law
Trading data
ADTV (USDm)
Absolute
3 largest stocks
2,368
446,643
Margins
Capacity/Utilisation
Technology
0.0%
0.0x
SAMSUNG ELEC, TSMC,
TENCENT

MSCI Asia
Product cycles
End demand
Inventory
ASP/Shipment
Capital intensity/depreciation
0.86
Source: HSBC research
Note: Includes internet, media, software and services companies

PE band chart
SAMSUNG ELECTRONICS
TAIWAN SEMICON
TENCENT HOLDINGS
HON HAI
INFOSYS.
SAMSUNG ELECTR. (PREFD)
TATA CONSULTANCY
HTC CORP
SK HYNIX
MEDIATEK
25.9%
14.7%
6.5%
5.8%
4.3%
2.7%
2.4%
2.3%
2.2%
1.9%
Note: Includes internet, media, software and services companies

20x
15x
10x
5x
Dec-09
Feb-11
Apr-12
1
2
3
4
5
6
7
8
9
10
Index weight
Feb-04
Apr-05
Jun-06
Aug-07
Oct-08
Stocks
Jun-99
Aug-00
Oct-01
Dec-02
Stock rank
500 P rice level

450
400
350
300
250
200
150
100
50
0
Dec-95
Feb-97
Apr-98
Top 10 stocks
Country breakdown
24
21
18
15
3.0
2.5
2.0
12
9
6
3
1.5
Fw d ROE % (LHS)
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
1.0
Dec-06
45.7
36.7
9.0
7.7
0.8
Dec-05
Taiwan
Korea
China
India
Hong Kong

Weights (%)
Dec-04
Country
Fw d PB (x )
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Multi-sector
July 2012
Notes
194
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Multi-sector
July 2012
Technology IT
services
Yogesh Aggarwal*
Analyst
+91 22 2268 1246 yogeshaggarwal@hsbc.co.in
195
196
IT services
IT Serices
Heritage Indian IT
Service providers
Large Caps
TCS
Infosys
Wipro
HCL Technologies
Mid Caps
Tech Mahindra
Hexaware Technologies
Mphasis
KPIT Cummins
Mindtree
Persistent Technologies
Polaris Financial Tech
E-Clerx Services
ITC Infotech
Multi-national
Corporations
IBM
Accenture
Cognizant
HP
Capgemini
Logica
CSC
Atos Origin
Dell
iGate
BPO
SoftwareSand R&D
Multi-national
Corporations
Multi-national
Corporations
Genpact
WNS Global Services
Aegis Limited
Firstsource Solutions
IBM Daksh
Convergys
Indian BPO
TCS BPO
Wipro BPO
Infosys BPO
HCL BPO

Multi-sector
July 2012
Sector structure
SAP
Oracle
Microsoft
Cisco
Intel
Dell
GE
Honeywell
Technologies
Geometric Solutions
Source: HSBC
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Multi-sector
July 2012

180
160
Large number of
restructuring deals
140
120
100
80
S&P downgrade of
US credit rating
60
IT companies
undeperformed due to
strengthening of currency
40
20
S&P CNX 500
Apr-12
Feb-12
Dec-11
Oct-11
Aug-11
Jun-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
S&P CNX IT Index
Source: S&P, Thomson Reuters Datastream, HSBC
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July 2012
1.6
23.6%
1.5


leaders strategies
MindTree Ltd
1.4
Neowiz Games
1.3
1.2
Polaris Financial Technol
1.1
Asset Turnover (x)
198
TCS
MphasiS
HCL Technologies
1.0
0.9
0.94x
NHN Corp
Tech Mahindra
Infosys Technologies
0.8
Persistent Systems Ltd
Daum Communications Corp
Wipro
0.7
NCsoft
0.6
Gamevil Inc
0.5
Com2us Corporation
0.4
0.3
High margins; niche

0.2
Low ROA companies.
be required
0.1
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
EBIT Margin (%)

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Multi-sector
July 2012
Sector description
Information Technology (IT) plays a critical role in enhancing the efficiency and productivity of
businesses by automating processes and processing large amounts of information. It enables clients to
focus on their core business by handling their IT needs, often at a lower cost than would possible if the
work was done in-house.
India has emerged as the most attractive offshore outsourcing market. It has cost advantages and an ample
supply of the qualified staff who speak English. In the last decade Indias IT exports have grown 16 times
to reach an annual value of USD68bn.
abc
Yogesh Aggarwal*
Analyst
HSBC Securities and Capital
+91 22 2268 1246

Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies are the four largest Indian IT
players. They generate a high percentage of revenues from overseas clients by offering services ranging
from managing complex computer networks and call centres to software coding and maintaining
technology operations.
Tata has emerged as the biggest player in software for financial institutions, Infosys has a strong presence
in banking and also retail, Wipro focuses on R&D and engineering and HCL on infrastructure services.
Most of the major multinational IT service providers have also set up operations in India to capitalise on
the low-cost talent pool. We estimate that Indian IT companies have expanded their market share of
global IT services from 4% in 2007 to 8% in 2012. We expect this growth to continue.
The global market for IT services, estimated to be a USD600bn industry (source: Nasscom), has gone
through various growth phases. The 1990s saw unprecedented growth for the IT industry worldwide. IT
spending in the US grew from 3% of GDP in the early 1980s to 9% by 2000, creating demand that could
not be met in-house.
This led to outsourcing to other US-based vendors but an acute shortage of talent during the Y2K period
led to work being done off-shore in emerging countries, especially India. We believe Europe is today
where the US was in early 2000, with a lot of work still being done in-house, leaving huge potential
for outsourcing.
Another phase of growth came after the dot com bust of 2002, when companies started engaging in large
and complex application development and maintenance (ADM). We believe the current growth phase will
depend on factors such as cloud, mobility, analytics and big memory.
Hence, we believe that even after 20 years of strong expansion there is still huge potential for the IT
services and software business. New business opportunities and greater in-roads into Europe will fuel the
next phase of growth in India.
Key themes
IT and information technology enabled service (ITES) companies have both cyclical (software licensing,
consulting, system integration, R&D, restructuring) and non-cyclical (ADM, infrastructure services,
testing services) business components.
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Cloud, mobility, analytics and big memory

Cloud, mobility, analytics and big memory are new areas of growth. Cloud eliminates the need for clients
to invest in installing servers and customising solutions. The advent of devices like the iPad and
smartphones has increased the need for mobility, allowing employees direct access to business
applications. Companies are investing in analytics and big memory to analyse sales pattern in real time.
M&A
As clients increasingly want a complete range of services, cash rich IT companies regularly acquire small
niche players to ramp up their technology offering. Establishing a presence in different regions is also a
major reason for M&A and we expect further industry consolidation.
New geographies
In terms of outsourcing IT services, the US is the worlds biggest market followed by Europe. The Asia
Pacific and the Middle East are small but fast-growing markets. Europe has traditionally been
conservative in adopting IT outsourcing/offshoring but recent contract wins suggest a huge growth
opportunity is emerging.
Sector drivers
The large Indian companies have built their success on application development, maintenance and enterprise
resource planning (ERP) implementation. The first growth phase (FY04-06, earnings CAGR 36%) took
place in the early years of offshore outsourcing; the second cycle (FY06-08, CAGR 40%) was the golden
era of outsourcing/offshoring. Some parts of the industry grew faster than others; banking, financial services
and insurance (BFSI), ERP, retail and telecom were the growth accelerators during this period.
The latest growth phase following the sub-prime crisis (FY10-12, CAGR 22%) was driven by banks
looking to improve their financial performance by enhancing IT systems. In particular, M&A integration
and regulatory and compliance requirements led to strong revenue growth from the banking sector.
IT services companies
The revenue model of IT services companies is based on the ratio of employees who are earning (i.e. the
work they are doing is billed to clients). Hiring at the right time is critical. Delays can slow up billable
projects, while hiring too many people in advance hurts the bottom line. It is also important to get the
balance right between offshore and onshore projects.
IT software companies
Acquiring new customers is the key to growth as it provides opportunities to cross-sell products. New
licences are a key growth barometer for software companies as this leads to revenues from maintenance
and professional services. As costs do not increase in proportion to revenue, these companies generally
have high margins. Companies need to invest in R&D to develop new products or improve their services.
Key segments
There are four major sub-segments software and software related services, IT services, engineering
services and business process outsourcing (BPO).
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Software and software related services

Companies like SAP and Oracle develop enterprise-based solutions to integrate information flow across
an entire organisation. This software is very complex and difficult to implement across the whole
structure of the enterprise.
IT services
IT service providers help companies manage their IT infrastructure (maintaining their hardware and
software), implementing complex software across the business, integrating the information exchange
across the whole value chain and develop custom solutions/applications to make the system more
efficient.
Engineering services
In order to be agile and innovative, engineering firms (excluding automotive, aerospace companies)
outsource a range of upstream and downstream services that are not core to the firm. These upstream
services include concept design, simulation and design engineering. The downstream engineering services
include computer aided design and manufacturing, embedded software and localisation.
BPO
Companies outsource their non-core business operations such as maintaining customer service
representatives, process management and data management functions which can be remotely managed by a
third party at a lower cost. Retail banking, insurance, travel/hospitality and telecoms form the major customer
industry segments. Voice and data are the major revenue earners for traditional BPO companies but recently
knowledge process outsourcing (KPO) and legal process outsourcing (LPO) have been catching up.
Valuation
The traditional valuation metrics are forward-looking PE ratios. The Indian IT sector revenues rose at a
CAGR of near 20% over FY10-12 (22% for the top four Indian companies). Large cap companies tend to
trade at 12-month forward PE multiples of between 16x and 18x. The mid-caps historically trade at an
average PE of 12x
Asia IT (Software): Growth and profitability (calendarised data)

2008
2009
2010
2011e
2012e
19.3%
21.1%
21.1%
8.8%
-0.4%
7.1%
7.1%
7.8%
25.3%
27.0%
28.3%
25.6%
23.3%
20.2%
21.0%
16.8%
7.4%
6.5%
5.7%
5.2%
26.5%
23.9%
20.6%
28.5%
25.7%
22.3%
28.8%
26.3%
22.3%
28.1%
25.8%
21.1%
27.9%
25.3%
20.7%
5%
1.5x
-0.4x
49%
4%
1.0x
-0.4x
31%
4%
1.0x
-0.4x
29%
4%
1.0x
-0.4x
28%
5%
1.0x
-0.4x
27%
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
Note: based on all HSBC coverage of IT (software) companies across Asia. All data is market cap weighted
Source: company estimates, HSBC estimates
201
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Multi-sector
July 2012
Sector snapshot
Core industry driver: Enterprise software sales are a leading
indicator of downstream IT service revenues
Key sector stats

Trading data
ADTV (USDm)
Absolute
3 largest stocks
n/a
79,694
135%
0.9x
TENCENT, INFOSYS, TATA
CONSULTANCY SERVICES

MSCI Asia
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
IT (Software)
0.85
SAP License y -o-y in cc

Orac le DataBase & M iddlew are (y -o-y )
Top 10 stocks
Source: SAP, Oracle, HSBC
Stock rank
Stocks
1
2
3
4
5
6
7
8
9
10
TENCENT HOLDINGS
INFOSYS
TATA CONSULTANCY SERVICES
NHN CORPORATION
WIPRO
NCSOFT CORP
*
SK C&C
SATYAM COMPUTER
HCL TECHNOLOGIES
Index weight
36.5%
24.4%
13.7%
10.4%
4.7%
4.0%
2.8%
1.5%
1.1%
1.0%
*Removed for compliance reasons

PE band chart
1300P rice level
25x
1100
20x
900
700
15x
500
10x
300
India
China
Korea
44.8
39.3
15.9
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Weights (%)
Jan-06
Country
Jan-05
Jan-04
100
Country breakdown

9.0
8.0
7.0
6.0
33
30
5.0
4.0
3.0
2.0
27
Fw d ROE % (LHS)
202
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
24
Fw d PB (x )
abc

Multi-sector
July 2012
Telecoms
Asia team
Specialist sales
Tucker Grinnan*
Head of Asia Telecoms & Media Research
+852 2822 4686
Myles McMahon
+852 2822 4676
mylesmacmahon@hsbc.com.hk
Neale Anderson*
Analyst
+852 2996 6716
neale.anderson@hsbc.com.hk
Luis Hilado*
Analyst
Singapore Branch
+65 6658 0656
luishilado@hsbc.com.sg
Rajesh Raman*
Analyst
Singapore Branch
+65 6658 0636
rajeshraman@hsbc.com.sg
Howon Rim*
Analyst
+822 37068767
howonrim@kr.hsbc.com
Rajiv Sharma*
Analyst
+91 22 2268 1239 rajivsharma@hsbc.co.in
Chi Tsang*
Analyst
+852 2822 2590
chitsang@hsbc.com.hk
Yolanda Wang*
Analyst
+886 2 8725 6027 yolandayywang@hsbc.com.tw
203
204
Telecoms
Telecom Operators

Multi-sector
July 2012
Telecom
China: China Mobile, China Telecom

HK: Smartone, HKT
Japan: NTT Docomo, Softbank
South Korea: SK Telecom, KT Corp
Taiwan: Chunghwa Telecom, Fareastone
Australia: Telstra
India: Bharti airtel, Idea
Indonesia: PT Telkom, Indosat
Singapore: Singapore telecom,Starhub
Malaysia: Axiata, DiGi
Philippines: PLDT, Globe
Thailand: AIS, DTAC
Source: HSBC
abc

Multi-sector
July 2012
Asian Telecom DS Index

250
Launch of
Apple
iPhone
200
150
100
50
2004
2005
2006
2007
2008
2009
2010
2011
2012
abc
205

Multi-sector
July 2012
1.4
19.4%

leaders strategies
StarHub
1.2
Advanced Info Service
M1
1.0
Asset Turnover (x)
206
Digi Com
LG Uplus Corp.
SmarTone Telecommunicatio
0.8
KT Corp
SK Broadband Co Ltd
Total Access Comm

Tulip Telecom
Far Eastone
PT Telkom
XL Axiata
Tata Communications
0.6
SK Telecom
China Mobile
Idea Cellular Ltd
0.4
PCCW
Singapore Telecom
Bharti Airtel
China Telecom
Telekom Malaysia
Tata Teleservices
.52x
Maxis
Axiata Group
Chunghwa Telecom
China Unicom
Reliance Comm
0.2
HKT Trust
High margins; niche
Low ROA companies.

be required
Gtl Infrastructure
-20%
-10%
0%
10%
20%
30%
40%
50%
EBIT Margin (%)

abc

Multi-sector
July 2012
Sector description
Telecom service providers offer various combinations of voice, data and video services to both retail and
corporate customers over fixed and mobile networks. Data demand is rising rapidly due largely to video
services and now represents the majority of traffic on both fixed and mobile networks. On the fixed line
side, operators have tried to cope with the natural cannibalisation of voice services by expanding into
video via internet protocol television (IPTV). Most of the worlds wireless customers will move to
smartphones and smart tablet devices over the next few years, as aggressive market expansion by Chinese
vendors such as Huawei and ZTE drives broader global adoption. On the mobile side, the rapid increase
in smartphone penetration is driving an exponential rise in data capacity requirements, while network
abc
Tucker Grinnan*
Head of Asia Telecoms &
Media Research
+852 2822 4686

technology can only provide linear increases in spectrum efficiency. The HSBC Telecoms Team believes
the key global theme is that a wireless capacity crunch will drive higher capex, higher spectrum prices,
industry consolidation and the potential for wireless carriers to get pricing power for the first time in the
industrys history.
Key themes
Asian telecoms are entering a transition phase as the wireless penetration growth story has largely played
out and the data growth story is just beginning to kick in. Pre-paid wireless voice services are a fairly
simple business with low capex per subscriber, high returns on investments (ROIs) and an emphasis on
selling pre-paid SIM cards rather than bundled handset packages. Wireless data is a much more complex
business requiring much higher capex, lower returns on investment and an emphasis on selling
smartphones as part of a bundled service package. The shift to a data-centric wireless business model and
higher speed 4G LTE services will drive industry consolidation. The shift towards a more rational market
structure often a three player market with fairly balanced market shares tends to lead to price
increases via a shift from flat rate to tiered data packages. The HSBC Asian Telecoms Team believes
investors should focus on picking good telecom markets first and good telecom operators second, as
market structure, pricing, regulation and dividend policy are the key sector drivers.
In the last decade the sector underperformed Asia MSCI by 40%. This is a reflection of regulatory risk in
various countries and slowing growth in some places mobile phone penetration is now well above
100%. The prevalence of regulatory and government intervention is probably one reason why this sectors
correlation with Asia MSCI is relatively low (0.79).
Sector drivers
Market structure is the key to understanding telecom competitive dynamics and margin trends. Fixed
line services tend to be a natural monopoly and the primary competitors cable television (CATV)
companies that migrate to bundled services. The CATV sector is relatively underdeveloped in Asia given
tight regulatory restrictions on content, but we see a strong trend of wireless companies buying CATV
assets as part of a broader industry move back towards an integrated carrier model. Wireless services tend
to be more fragmented, as the easy access to 2G spectrum and relative ease of rolling out a wireless
network allowed subscale players to generate reasonable ROIs. We see clear evidence of industry
consolidation in wireless as higher capex and spectrum costs drive marginal players out of the business.
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Data pricing is the key to shifting the industry back towards a higher growth path. Over the past decade,
telecom has been seen as an inherently deflationary business as a combination of falling equipment prices
and a pro-consumer regulatory slant drove down prices. Data services require much higher capex on both
the wireless and wireline side, and operators have shown a reluctance to invest without clarity from
regulators on potential returns. The wireline upgrade to fibre and the wireless upgrade to LTE (long-term
evolution, or 4G) should provide large players with a significant structural competitive advantage that can
lead to industry wide increases in average revenue per user (ARPU).
Regulation is important as policymakers have to make a call on whether market forces should be allowed
to drive supply and demand for telecom services. Hong Kong has the best regulatory environment in the
region as the telecom regulator OFTA believes that strong facilities-based competition means the
regulator has no role in setting prices. Korea has the toughest regulatory framework in the region as
politicians believe any excess returns in telecom services should be redistributed to consumers or vendors.
The pending regulatory decisions on whether to treat data services as a basic service like electricity or
an optional consumer service like Internet will be key.
Dividends are the most effective way to assess the alignment of minority and majority shareholder
interests. A well run, scale telecom operator in a good market tends to generate significant excess free
cash flow (FCF). The three principal uses of FCF are capex investments in the network, M&A
investments in related companies or industries and returning cash to shareholders via dividends and stock
buybacks. Asian operators have tended to maintain a steady level of investment in the network and run
under-geared balance sheets. We see clear evidence of a bifurcation of the market with most operators in
Taiwan, Hong Kong, and Southeast Asia focusing on dividends while those in China, Korea, Japan, and
India are active in M&A. We see the emergence of a significant national, regional, and global investor for
Asian telecoms yield stocks as of the one key shifts over the past two to three years.
Cash-rich telcos continue to offer attractive dividend yields a positive trend offset by investor concerns
over the sustainability of these cash flows. Governments are also a factor here, with some operators under
pressure to use cash flows to make overseas acquisitions, furthering government policy goals (if not
necessarily those of shareholders). In the wireless sector, it is as yet unclear whether telcos will be able to
monetise booming demand for wireless data services, or whether a network capacity crunch will force
them to pour more capital into infrastructure.
Key markets
China
The key feature of Chinas telecom market is policy, as the entire sector is owned, regulated, financed,
managed, and owned by the Chinese government. China represents roughly 50% of total global telecom
operator capex. We forecast a better outlook for China Mobile based on its proprietary 3G TDS-CDMA
technology and iPhone prospects and see a significant global market opportunity for the 4G TD-LTE it is
deploying this year.
Korea
Koreas market reflects a very high level of regulatory pricing risk, combined with structural overinvestment in capex and significant M&A risk. Despite having a fairly stable three-player market, the
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Korean telcos have competed aggressively using price and handset subsidies. Tariff cuts are expected to
be a regular part of the market.
Taiwan
The three players that dominate the smartphone space focus on maximising dividend payments to both
strategic and minority shareholders. Taiwan telcos have a stable, consistent track record on dividend
payments and have avoided the kind of value destructive prices that undermine many markets. There have
been mandatory wireless voice tariff cuts, but we see limited near-term risk on wireless data prices.
Southeast Asia
This region features a positive cycle of higher dividend payments, expansion of the investor base to both
regional and global emerging market yield investors, and re-rating of stock prices. In Thailand, the
pending shift towards 3G licensing should be an industry-wide positive that will drive higher profitability,
dividend prices and stock prices. The key driver is the shift from sharing 25-30% of revenues with the
government to use 2G spectrum to a straight licence payment and 6% of revenues for 3G.
India
Indias market reflects a combination of fragmented industry structure, high regulatory risk, irrational
competitive strategies, and an absence of any commitment to dividends. The biggest issue surrounds the
regulatory framework, as a major scandal over 2G licences sparked a much broader review of spectrum
policy and pricing. We see initial signs of industry consolidation and structural shift towards higher 2G
wireless voice tariffs by most of the industry leaders.
Valuation
Our preferred valuation methodology is price to earnings (PE), as we believe the bulk of the money in
Asia is managed on a country versus a sector basis and PE is the best way to compare stocks across
divergent industry categories. We tend to use dividend discount models (DDMs) for stocks with a clear
track record of returning cash to shareholders and discounted cash flow models (DCFs) for growth
companies that are still investing in loss-making projects.
Asia telecoms: Growth and profitability (calenderised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011
2012
24.0%
16.0%
16.1%
22.7%
10.4%
19.2%
23.8%
22.9%
10.5%
-5.1%
-13.0%
-13.4%
15.0%
11.1%
7.4%
9.7%
9.7%
7.2%
7.0%
7.4%
50.7%
32.5%
25.3%
54.7%
36.5%
28.1%
47.0%
28.7%
22.0%
45.4%
26.8%
21.0%
44.4%
26.2%
20.6%
29%
0.6x
-0.3x
23%
26%
0.6x
-0.4x
25%
24%
0.5x
-0.3x
19%
24%
0.5x
-0.4x
18%
24%
0.5x
-0.4x
17%
Note: Based on all HSBC coverage of telecom companies across Asia. All data is market cap weighted.
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Sector snapshot
Core industry driver: China 3G Net Add Market share
China Mobile
Stocks
1
2
3
4
5
6
7
8
9
10
CHINA MOBILE
SINGAPORE TELECOM
CHUNGWA
TELEKOMUNIKASI INDO
CHINA UNICOM
CHINA TELECOM
TAIWAN MOBILE
ADVANCED INFO
AXIATA GROUP
DIGI COMP
Index weight
39.1%
12.4%
7.4%
5.2%
4.0%
3.9%
3.4%
3.2%
2.7%
2.5%
Country breakdown
Country
China
Taiwan
Singapore
Malaysia
Indonesia
Thailand
India
Korea
Philippines
Hong Kong
Weights (%)
48.0
12.9
12.8
8.9
6.0
3.2
2.9
2.4
1.9
0.9
China Unicom
Mar-12
Jan-12
Nov-11
Sep-11
China Telecom
Source: HSBC
PE band chart
300 P rice level
275
250
225
200
175
150
125
100
75
50
25
25x
20x
15x
10x
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
Jul-11
Mar-10
Top 10 stocks
May-11
0.78
Jan-11

MSCI Asia
Mar-11
-29.4%
-0.7x
CHINA MOBILE, SINGAPORE
TELECOM, CHUNGWA
China 3G Net Add Market Share (Mar 2010-Present)
Nov-10
587
157,001
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
Jul-10
Trading data
ADTV (USDm)
Absolute
3 largest stocks
Sep-10
Sector: Telecoms
May-10
Key sector stats

20
4.0
19
3.5
3.0
18
2.5
17
2.0
Fw d ROE % (LHS)
210
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
1.0
Dec-05
1.5
15
Dec-04
16
Fw d PB (x )

Multi-sector
July 2012
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Transport
Asia transport team
Mark Webb*
Regional Head of Conglomerate & Transport Research, Asia-Pacific
+852 2996 6574
Parash Jain*
Analyst
+852 2996 6717
parashjain@hsbc.com.hk
Shishir Singh*
Analyst
+852 2822 4292
shishirkumarsingh@hsbc.com.hk
Dan Dan Yu*
Analyst
+852 2822 4202
dandanyu@hsbc.com.hk
ZheWei SIM*
Analyst
+852 2996 6602 weizwsim@hsbc.com.hk
Rajani Khetan*
Analyst
+852 3941 0830 rajanikhetan@hsbc.com.hk
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Sector structure
Transport
Bulk Shipping
Dry bulk commodity focused
companies like China
COSCO, Pacific Basin and
STX Pan Ocean, Sinotrans
Shipping
Dry bulk heavy companies
also involved in other
businesses (Oil, Gas
Containers) like China
Shipping Development and
Japanese shipping companies
Container Shipping
Airlines
Ports
Majors hauling containerized

cargo on long haul routes
(Asia-EU, Asia-US) include
CSCL, OOIL, NOL and
Evergreen as well as bulk
focused companies like China
COSCO & Japanese shipping
companies.
Premium Carriers like Cathay

Pacific and SIA
Primarily includes ports

focused on containerized trade
in China i.e. COSCO Pacific,
China Merchants and HPHT
Cargo heavy airlines like

Korea Air and China Airlines
Low cost Carriers like Air Asia,
Cebu Pacific
Also includes ports focused on

import of commodities like
Adani Ports in India and
Dalian Port in China
Long tail of companies on

short-haul routes (viz. intraAsia) include SITC, Wan Hai
Source: HSBC
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500.0
Dry Bulk super-cy cle took hold in 2007;
450.0
container shipping, ports & airlines outperformed

too (in the same order)
Airlines & ports outperform shipping due to
400.0
former's more constrained supply
350.0
Strong outperformance of MSCI Ax J by all sub300.0
Airlines performed inline w ith MSCI Ax J in
sectors ex cept dry bulk, w hich w as depressed
2006; Ports w ere the biggest outperformers
by chronic ov ersupply
All sub-sectors underperform MSCI Ax J on

250.0
rising fuel costs; Ov ersupply hits shipping;

Dry Bulk performed inline w ith MSCI Ax J in
Ports are relativ e outperformers w ithin the sector
2005; rest of sub-sectors underperformed
All stocks decline due to global financial crisis;

Dry Bulk goes from robust
200.0
150.0
100.0
50.0
0.0
31-Dec-04
31-Dec-05
Dry Bulk
31-Dec-06
31-Dec-07
Containers
31-Dec-08
31-Dec-09
Ports
31-Dec-11
Airlines
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Source: MSCI, Thomson Reuters Datastream, HSBC; Indices are market cap weighted.
Dry Bulk Index Components are China COSCO, China Shipping Development, Pacific Basin, Sinotrans Shipping, STX Pan Ocean, U-Ming, Thoresen Thai, Precious Shipping, Mitsui OSK, Kawasaki Kisen, NYK
Containers Index Components are CSCL, OOIL, NOL, Evergreen, Wan Hai, Yang Ming, Hyundai Merchant Marine, Hanjin Shipping
Ports Index Components are COSCO Pacific, China Merchant Holdings, HPHT, ICTSI
Airlines Index Components are Cathay Pacific, SIA, CEA, Air China, CSA, China Airlines, EVA, Korean Air, Asiana, Tiger Airways, Thai Air, Air Asia, Cebu, Qantas, Garuda, All Nippon Air, Jet Air, Spice Jet
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July 2012
3.4
12%
3.2
leaders strategies
Glovis Co. Ltd
3.0

2.8
2.6
Spicejet Ltd
2.4
Asset Turnover (x)
214
2.2
2.0
1.8
1.6
Neptune Orient Lines
1.4
1.2
STX Pan Ocean
1.0
Evergreen Marine
0.8
Tiger Airways
China Eastern
Jet Airways
China COSCO
Korean Air
Thai AirwaysSingapore Airlines
Pacific Basin
Hong Kong Aircraft
0.6
0.4
0.54x
Orient Overseas Internati
Air China
SMRT Corp
IL&FS Transportation Sichuan Expressway
International Container
AirAsia
China Shipping Developmen
Low ROA companies.

be required
0.2
ComfortDelGro
SIA Engineering
SATS Ltd
China Southern
China Shipping
China Airlines
Cathay Pacific
EVA Airways
Sinotrans Shipping
COSCO Pacific
Hutchison Port HL
Anhui Expressway
Hopewell Highway
MTR Corporation Ltd

China Merchants
Zhejiang Expressway
High margins; niche

Jiangsu Expressway
Shenzhen Expressway
0%
10%
20%
30%
40%
50%
60%
EBIT Margin (%)

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Annual price performance of regional transport (%)
Out/(under) performance of transport vs MSCI AxJ (%)
80.0
50.0
62.4
14.6
31.9
26.0
22.5
30.0
8.1
0.4
39.5
40.0
20.0
0.0
7.5
10.0
-20.0
7.0
-1.0
2.9

0.0
-8.9
-25.3
-40.0
23.4
22.1
18.7
-10.0 -2.3
-37.7
-60.0 -38.0
-80.0
-8.6
-20.0
1997
1998
1999
2000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Thomson Reuters Datastream, HSBC estimates
-15.2
-20. 5
-30.0
-68.5
-19.8
-26.0
2004
2005
2006
2007
2008
2009
2010
2011
40.0
42.4
38.3
2001
2002
2003
60.0
20.0
72.8
45.8
Mark Webb*
Regional Head of
Conglomerate & Transport
Research, Asia-Pacific
+852 2996 6574
Sector description
The regional transport sector comprises airlines, container shipping, bulk shipping and ports. This is a
relatively high beta sector and the volatility of its earnings shows up in its price performance. For
instance, the sector has outperformed MSCI Asia Ex-Japan Index only by around 3% in last 15 years but
the average outperformance in good years (8 out of 15) was 18% and the average underperformance in
remaining years was 13%.
History also suggests that the sector tends to generate the biggest outperformance towards early cycle
(2002, 2003, 2010) or late cycle (2000, 2007). This isnt surprising since the sector benefits from lower
fuel, labour and interest costs in the earlier part of the cycle while demand strength helps pass on at least
some of the cost increases during later part of the cycle.
Leverage across the sector (operational, financial or both) also tends to be higher with a greater
proportion of costs being fixed in nature. This makes top-line volatility an important contributor to swings
in bottom line. Due to relative lack of fragmentation and greater differentiation, revenue is most stable in
ports and least in the commoditised and fragmented dry bulk sector.
%YoY Chg. in Avg. Brent (USD/Bbl)
Annual sector outperformance (vs MSCI Asia ex Japan Index) vs annual change in average fuel prices (Brent, USD/bbl)
80
2011
2008
2001
2000
60
1999
2004
40
2005
1996
20
2006
0
1997
-20
-40
2009
Late cy cle outperformance

despite rising fuel costs
2010
2003
2007
2002
early cy cle outperformance
1998
despite rising fuel costs
-60
-30
-20
-10
10
20
30
40
50
Annual Price Performance - Transport Sector Vs. MSCI AxJ

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Airlines
In Asia the airlines can be broken down into three main sub-sectors: the full service network carriers,
regional carriers and low cost carriers. The Asian airline industry is relatively highly regulated, suffers
from chronic over capacity and is capital intensive. The market is fragmented due to national ownership
laws, there are barriers to exit as a result of government support for flag carriers and aircraft financing is
surprisingly easy as jets are moveable dollar assets and manufacturers and trade bodies provide subsidies.
Demand is relatively cyclical, especially cargo, as volumes cannot be stimulated by pricing. The most
defensive segment tends to be domestic and intra-Asian passenger travel. Airlines have difficulty
controlling costs: jet fuel prices are high and volatile, labour is unionised and airports are monopolies.
Almost all costs are fixed once a flight is scheduled and the resultant very low marginal cost encourages
fare discounting if demand weakens. The impact is a highly competitive industry with relatively low
EBIT margins, low asset turnover and poor returns on invested capital.
Bulk shipping
Bulk shipping companies primarily move commodities from resource-rich countries, such as Australia,
Indonesia and Brazil to resource-deficient or emerging economies in Asia. Unlike airlines or liners,
bulkers dont sail on a fixed schedule or offer a fixed service between two locations. This lowers the
capital intensity and entry barriers in a highly commoditised business, leading to higher fragmentation
relative to other sub-sectors. While demand growth for seaborne commodities trade has been relative
stable in low-to-mid single digits y-o-y, a lack of industry concentration and supply discipline has often
resulted in prolonged periods of sub-optimal returns. The bargaining power of bulk players is further
reduced by the relatively large size of its customers (miners, steel companies, commodity traders). Costs
are generally fixed, with fuel and capital costs (interest & depreciation) accounting for the majority.
Container shipping
Container shipping is a cyclical and capital intensive business highly dependent on the trade between the
low-cost manufacturing bases in Asia and consumers in Europe and North America. The container boxes
transported overseas are mostly 20ft or 40ft in length; special and refrigerated containers are also used. In
addition to self-owned vessels, container liners also charter vessels from non-operating owners (lessors),
resulting in significant off-balance sheet funding. They also have to maintain a fleet of container boxes
which again is owned or leased. The container liner business is competitive and price wars are quite
common. Freight rates are volatile and depend on the demand-supply balance and earnings are also
impacted by high and volatile bunker (fuel) costs. As a result earnings and margins are volatile.
Ports
The ports sector is highly dependent on international merchandise trade and hence is highly correlated
with the global GDP. In the past 10 years containerised trade has grown at 3x the global GDP growth rate.
Terminal operations are structured as leases or concessions, whereby the operator undertakes to invest in
the infrastructure and manage operations by levying a fee to the user (container liners), in return for a
concession which may be fixed or variable, payable to the port authority or government granting such a
concession. Entry barriers are high as ports are mostly regulated and are limited by the location,
connectivity to the hinterland, heavy capital expenditure requirements and long-term concession contracts
which can be for as long as over 50 years. However, competition can increase if there are other ports
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nearby with relatively similar connectivity to the hinterland, or if there are multiple container terminal
operators within a port. While the tariff may be regulated or market driven based on the terms of the
concession agreement, it remains fairly steady. Cost structure for port operators are generally one-thirds
fixed and the remaining variable, resulting in relatively stable margins.
Key themes
Airlines
The most successful airlines in Asia tend to be well branded, whether as a premium carriers like
Singapore Airlines or Cathay Pacific or a low-cost carrier like Air Asia. This enables them to charge
higher prices for tickets, crucial in an industry of thin margins. The network carriers need to be based at
major cities and financial centres and have hubs with a high degree of connectivity. All the carriers need
to establish high market share on key trunk routes. Airlines, whether full service or budget, must secure
the lowest costs within their chosen market, particularly fleet costs. High asset turnover is crucial in cash
flow generation and this depends on acquiring the most efficient jets and having scale in each aircraft
type. Finally, airlines need to be financially strong (or have government support) to enable then to invest
in an attractive product and modern fuel efficient jets.
Given their more defensive passenger base and the fact that travellers trade down as growth slows, low
cost carriers tend to outperform in an economic downturn. Route right regulation is highest in markets
such as mainland China to protect relatively inefficient state-owned airlines.
Bulk shipping
Asian bulkers can be segregated according to the size and typical cargo carried by their vessels. Rates and
share prices tend to be most volatile for owners of ships with less diversified cargo options and more
concentrated customer base i.e. Capesize vessels, which typically haul iron ore from Australia and Brazil
to China or super tankers. Owners of smaller Handymax or Handysize carriers are generally more
defensive players during down-cycles. This is due to the more versatile and diverse cargo base carried by
these vessels. These vessels also benefit from better access to weaker port infrastructure in some
developing countries. Given the highly commoditised nature of this business, a major source of
outperformance is the capital cost of the fleet. Operators which invested heavily in building fleets at the
peak of the cycle typically risk a sharp deterioration in equity value during the downcycle. At the same
time, having the financial flexibility to benefit from low asset values during weak markets is critical in
generating across-the-cycle outperformance.
The adoption of slow-steaming since 2008 has been a relatively recent phenomenon. It has supported
utilisation rates, mitigated record-high fleet growth and partly offset the impact of high fuel costs. While
slow-steaming limits the downside, a reversal of this trend would likely cap any near-term rebound in
rates. As a result, sector ROE is likely to remain depressed in single digits until the middle of this decade.
Container shipping
The East-West trade routes make up the bulk of the container volumes followed by intra-Asia trade.
However, with the increasing economic strength of the Latin American countries, the North-South trade
route is gaining momentum. Vessel sizes have been on the rise in recent years as liners look to capitalise
on economies of scale and lower their per slot costs. Further, with rising bunker costs, liners have resorted
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July 2012
to slow steaming which results in considerable fuel savings. Since vessel construction takes 12-24
months, supply tends to be lumpy and this often results in supply-demand imbalance which results in
volatility in freight rates. The industry went into ordering overdrive to takes advantage of historically low
prices after the recession in 2008 in order to ramp up the fleet with larger vessels, resulting in significant
oversupply. While price wars to gain market share are common, liners co-operated at the start of 2012 to
manage capacity and form alliances to exchange slots and run joint services. These alliances should bode
well for rates in Asia-EU routes in the long term.
Ports
While container volumes for port operators are dependent on global GDP and the maritime merchandise
trade, pricing is relatively stable as competition is based more on the location and infrastructure of the
terminal rather than pricing. Connectivity to the hinterland, ability to accommodate larger ships with
sufficient berth length and draft, terminal facilities (storage and handling equipment), and efficiency
(turnaround time) are some of the factors which liners look for. Historically, ports were essentially
gateways serving origin and destination (O&D) freight markets and were close to hinterlands with
manufacturing areas or key consumer markets. But the move towards ever-larger container ships has seen
the development of hub ports with little, if any, hinterland. Container terminals which mostly handle
O&D traffic are relatively better off as volumes and pricing are relatively stable compared with the transshipment business, which is transient. While most of the operators under our coverage have a significant
presence in Asia, particularly China, port operators have now started to expand overseas, mainly to Africa
and Latin America, in search of growth opportunities.
Sector drivers
Airlines
The main short-term driver of earnings (and share prices) is demand in an airlines major markets as this
affects the load factor (seat or cargo space utilisation), ticket prices and freight rates. Airlines can
normally offset only 50-60% of fuel costs via surcharges; therefore, if fuel prices become volatile, this is
an additional key driver.
Bulk shipping
Supply side dynamics usually have a greater bearing on sector earnings than demand but longer-term
sector fundamentals are also driven by (1) seaborne trade of bulk commodities, primarily iron ore, coal
and oil; (2) fixed asset investment and industrial production in key developing economies; (3) business
model: contract of affreightment, voyage charter or time charter; and (4) gearing of individual operators.
Container shipping
Liner profits and valuations are largely driven by freight rate, capex plans, bunker costs and cost of
capital. Supply-demand balance is crucial for liners to be able to charge profitable freight rates and pass
on any increases in bunker costs. As we saw in 2011, freight rates declined to unsustainable levels due to
over supply. New vessel building prices and charter rates also drive the owned vs leased mix of vessels in
the fleet.
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Ports
Sector earnings and valuations are largely driven by throughput growth, pricing, capex plans, concession
fee negotiations and dividend yield. Investment opportunities in new terminals are also a potential catalyst
for share prices. Improvements in global merchandise trade and economic performance of the hinterland
also drive growth expectations.
Valuation
A number of different approaches can be used to value this sector. All segments of the transport business
tend to have high fixed costs with differing degrees of top-line volatility (lowest for ports, highest for
bulk shipping). This drives significant ROE or RoIC swings for individual companies across the cycle.
Our valuation approach tries to capture this volatility by using a PB or EV-to-IC (enterprise value divided
by invested capital) valuation, which reflects expectations of return profiles (ROE, RoIC). There are two
exceptions to this: (1) we use EV/EBITDAR multiples for low-cost carriers, where earnings have proved
to be less cyclical than the rest of the airline and shipping sector; and (2) we use DCF for ports, which
have a more predictable and less volatile earnings profile.
Airlines
As a result of cyclicality and a lack of earnings visibility, we value the network carriers using price to
book around the low points in the earnings cyclical. These airlines tend to trade below book value in a
downturn and then re-rate to a premium to book as the cycle starts to recover. When earnings visibility
rises we move to asset versus return valuation approaches (such as enterprise value/invested capital
compared with ROIC/WACC). As earnings have proved to be less cyclical, we value the low-cost carriers
using earnings multiples such as EV/EBITDAR. The ultimate share price driver for an airline is
positioning in the earnings cycle and this tends to be indicated by the GDP growth rates in key markets
and consensus earnings momentum (q-o-q change in one-year forward consensus estimates). The share
price correlation with fuel prices tends to rise as fuel prices increase.
Bulk shipping
We refer to a mix of three techniques to value the companies in the shipping sector: (1) A target price-tobook multiple, in line with our forecasts of the companys ROE or its historical PB-trading range. In some
cases, we adjust the book value to reflect current market value of underlying assets. This approach
provides reliable estimates during periods with limited earnings visibility. (2) The estimated value of the
companys fleet in the second-hand market based on asset values reported by Clarksons (the biggest
shipbroker). This is either used as a reference valuation to test results of other valuation methods or as a
direct input into our valuation. In some cases, (3) we also use economic value added (EVA) valuation
technique to ascertain a fair price-to-book multiple. EVA valuations are generally based on our view of
sustainable (across-the-cycle) ROE and cost of equity in a given business.
Container shipping
We use the average of three methods to value the container shipping sector: Absolute price-to-book value
in conjunction with the previous cycle, historical trading range (PB-to-ROE/COE) and price-to-adjusted
book value (sum-of-the parts). PB is the most commonly used method owing to the capital intensive
nature of the business, which is highly dependent on the fleet of vessels. The advantage of this approach
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is that during periods when there is a lack of earnings visibility it provides a reliable guidance to
valuation. The disadvantage is that it does not capture timing of the vessel purchases, chartered fleet and
near-term profits. During the previous cycle (2008-10), the sector traded in the range of 0.4-1.2x and an
average 0.9x 12-month forward PB.
The PB-to-ROE/COE methodology is calculated based on market value-to-book value (PB) divided by
ROE/COE. This approach focuses on potential return on equity investments. During the previous cycles
(2005-10) the sector traded at an average PB-to-ROE/COE of 1.6x. In the price-to-adjusted book value
(sum-of-the-parts valuation) approach, we attempt to appraise companies current order book in hand
based on current second-hand build prices. We have separately valued container fleets (vessels and
containers) on current prices, port investments, and the value of associates at book value. This approach
focuses on asset prices based on potential medium to long-term return on total investments.
Ports
Our approach is to apply an EV/NOPLAT multiple to our estimate of the various operating terminals. We
derive the EV/NOPLAT valuation multiple from discounted cash flow models we have constructed for
each of the major ports. Based on an explicit earnings model we forecast cash flows until each port or
phase of a port reaches full capacity. After that, we assume zero throughput growth until the expiry of the
concession. At the end of the concession period we assume the port has no further value given the
uncertainty over the cost of any renewal and the long time frame until the concession expires. We value
newer ports at investment costs or estimates based on per berth. In some cases we also use a PB to
ROE/COE methodology, which is calculated as market value to book value (PB) divided by ROE/COE.
This approach focuses on potential return on equity investments.
Asia transportation growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
15.4%
-20.5%
-46.8%
-50.2%
-17.3%
7.5%
1.8%
-11.5%
38.1%
53.5%
95.0%
142.5%
12.1%
-13.5%
-21.7%
-25.5%
7.5%
7.9%
-0.3%
1.1%
15.3%
8.7%
7.0%
19.9%
10.7%
7.5%
22.1%
15.1%
13.1%
17.1%
10.5%
8.7%
17.1%
9.8%
8.2%
15%
0.4x
0.4x
6%
14%
0.3x
0.3x
5%
14%
0.4x
0.2x
10%
16%
0.4x
0.2x
7%
21%
0.4x
0.3x
7%
Note: based on all HSBC coverage of all transportation companies across Asia. All data is market cap weighted
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Sector snapshot
Core industry drivers
Key sector stats

Transportation
Trading data
ADTV (USDm)
Absolute
3 largest stocks
2% of MSCI Europe
n/a
48,111
118%
0.8x
MTR CORP, SINGAPORE AIR,
HUTCHISON PORT

MSCI Asia
0.95
Drivers
Subsector
2008 2009 2010 2011 2012e 2013e
Airlines
Weighted GDP
7% 4% 12% 7% 6% 8%
growth
Ports
Throughput
8.2% -8.1% 18.0% 8.0% 4.0% 6.0%
growth
(HK/China-top 8)
Container CCFI
1,122 881 1,131 993 1,208 1,200
shipping
Dry bulk BDI
6,390 2,617 2,758 1,551 1,250 1,466
shipping
Source: BDI, HSBC
PE band chart
400
300
200
16x
12x
8x
4x
100
Jan-12
Jan-11
Jan-10
0
Jan-09
10.0%
9.4%
8.0%
7.0%
4.7%
4.6%
4.1%
3.9%
3.1%
3.0%
Jan-08
MTR CORP
SINGAPORE AIRLINES
HUTCHISON PORT
CHINA MIRCH. HDG. INTL
HYUNDAI GLOVIS
COMFORTDELGRO
COSCO PACIFIC
CATHAY PAC
MISC BERHAD
AIRASIA BHD
500 Price level
Jan-07
1
2
3
4
5
6
7
8
9
10
Index weight
Jan-06
Stocks
Jan-05
Stock rank
Jan-04
Top 10 stocks
Country breakdown
20
18
16
14
12
10
8
6
4
2
2.5
2.0
1.5
1.0
Fw d ROE % (LHS)
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
0.5
Dec-06
28.0
23.6
16.3
10.4
9.2
8.2
2.6
1.8
Dec-05
China
Singapore
Hong Kong
Korea
Taiwan
Malaysia
Philippines
India
Weights (%)
Dec-04
Country
Fw d PB (x )
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Notes
222
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Utilities
Utilities team
Head of Utilities and Alternative Energy, Asia-Pacific
+852 2996 6619
Gloria Ho*, CFA
Analyst
+852 2996 6941
gloriapyho@hsbc.com.hk
Summer Huang*
Associate
+852 2996 6976
summeryyhuang@hsbc.com.hk
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Sector structure
Utilities
Transmission & Distribution
Integrated
Power
HK
CLP
PAH
Korean
KEPCO
Philippines
Manila Electric
Malaysia
Tenaga
Gas
Power
HK
HKCG
HK
CKI
China
CR Gas
Towngas
ENN
China Gas
Beijing Enterprise
India
Power Grid
Producers
Conventional
China
Huaneng Power
CR Power
Datang Power
Huadian Power
China Power
Renewable
China
Huaneng Renewables
Datang Renewables
Philippines
EDC
India
NTPC
Tata Power
Adani Power
Reliance Power
Thai
Electricity Generating
Ratchaburi
Glow Energy
Malaysia
YTL Power
Source: HSBC
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MSCI Asia ex-Japan Utilities

It has performed strongly since the global recession,
showing its defensive qualities
250
The sector bounced back quickly

after the Asian financial crisis
200
Index value
150
100
50
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
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July 2012
2.5
15.7%
2.4
PTC India
2.3
2.2

leaders strategies

2.1
2.0
1.9
1.8
1.7
Asset Turnover (x)
226
1.6
1.5
1.4
1.3
1.2
1.1
GAIL
1.0
Indraprastha Gas Ltd
0.9
0.8
0.7
0.6
Huaneng Power International
0.5
NTPC
Tata Power
Cesc Ltd
0.4
0.37x
Hyflux
0.3
Reliance Infrastructure China Resources Power
0.2
Low ROA companies.

be required
0.1
High margins; niche

Power Grid Corp Of India

NHPC
Adani Power Limited
Jaiprakash Power Ventures
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
EBIT Margin (%)

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Sector description
The sector comprises companies operating across the value chain in electricity, gas and water. This
includes power generation, transmission and distribution, retail sales and services.
Key themes
The utilities sector in Asia is highly diverse. It ranges from low beta companies with regulation that is
independent (of government), transparent and predictable, resulting in certain and stable earnings, to high
beta players in risky regulatory environments or emerging markets such as alternative energy. Utilities
constitute 4% of MSCI Asia ex Japan.
abc

Head of Utilities and Alternative
Energy, Asia-Pacific
+852 2996 6619
The less volatile operators are the fully integrated electric power companies or gas distributors in mature
markets such as Australia and Hong Kong. Some of the regions listed independent power producers,
particularly in Malaysia and Thailand, also produce predictable recurring earnings due to strong and
reliable power purchasing agreements.
The high beta players are electric power generators in markets with less certain regulatory conditions such
as the electric power generation, gas distribution and integrated utility companies in China, India,
Malaysia and Korea.
The sector has broadened in recent years through the initial public offerings of alternative energy
companies. Listed wind power companies include wind generation equipment producers and wind farm
developers. Listed solar power companies operate across the solar value chain. Both are discussed further
in the cleantech section of this report.
Firms involved in water supply and or water treatment, well established in Europe and the US, have yet to
make a major presence among the listed utility stocks in Asia.
The more significant utilities, in terms or both market capitalisation and average daily trading volumes,
are electric power producers, gas distributors and solar power generation equipment manufacturers listed
or based in China, Hong Kong and India and Japan.
Sector drivers
Regulation
Asia Pacific has seen dramatic changes in power regulations in the past 20 years as governments
gradually distance themselves from ownership and control of companies and the role of the regulator
becomes one that is more independent of government. We expect that in coming years there will be
further gradual changes which are likely to be positive for the earnings certainty of utility stocks in the
region.
Fuel costs and tariffs

Traditionally the principal earnings driver has been fuel costs. The main fuels are natural gas, LNG and
thermal coal. Fuel prices in the region have been increasing due to strong economic activity and the
relative shortage of domestically supplied fuel across Asia.
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The pass-through to customers in tariff structures of changing fuel varies across the region. Some markets
like Hong Kong have automatic and timely pass-through of fuel costs assured under the regulatory
regime. The majority of other major markets are consider changing fuel costs in setting tariffs but tariff
revisions may not be immediate or fully compensate for rising fuel costs.
Environmental factors
A key risk to the earnings of utilities, especially those involved in thermal coal power generation, is
higher environmental related costs. In China, for instance, desulphurisation units have been mandatory for
all new coal-fired power plants for several years. Policy makers are also considering taxes for carbon and
other emissions costs. The introduction of emission trading systems also poses a potential risk.
At the same time, tighter environmental regulation should also mean greater opportunities for the new
energy companies. These include higher renewable energy targets and feed-in tariffs. Only two or three
years ago there were hardly any countries in Asia promoting solar energy, whereas China, India, Taiwan
and Thailand have now introduced favourable policies.
Key segments
China
Electric power producers and gas distribution companies do not determine their tariffs but are subjected to
market driven fuel costs. This has caused acute earnings erosion for the power producers when fuel costs
have been high. Gas companies have fared a little better as earnings come from a lower base and because
authorities have been relatively more generous with their tariff adjustments to support the build out of gas
pipeline infrastructure required to support the planned increases in gas supply and usage in China.
Hong Kong
The large, listed Hong Kong utilities enjoy secure and relatively high regulated returns. Excess free cash
flow from Hong Kong operations has been invested over the last decade in utility businesses around the
world, mainly in developed markets.
India
Large electric power or gas companies typically enjoy relatively better returns than Chinese peers. For
instance, the electric power operators have power purchase agreements for their projects.
Valuation
Long-term discounted cash flow (DCF) analysis is particularly suitable for utility companies. Cash flows
are typically relatively predictable and stable and utilities are either perpetual or long-life operations,
supporting the use of terminal valuations. The discount rates adopted use country specific assumptions in
setting the risk free rate and company specific assessments of risk in setting the asset beta. DCF
valuations are generally cross checked against PE and PB.
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Asia Utilities: Growth and profitability (calendarised data)
Growth
Sales
EBITDA
EBIT
Net profits
Margins
EBITDA
EBIT
Net profit
Productivity
Capex/sales
Asset turnover (x)
Net debt/equity
ROE
2008
2009
2010
2011e
2012e
16.1%
-4.2%
-9.3%
-15.9%
4.6%
15.2%
16.4%
15.0%
26.6%
18.5%
19.6%
13.2%
15.7%
8.5%
7.6%
2.3%
4.2%
6.0%
4.9%
2.5%
24.4%
17.8%
14.2%
26.9%
19.8%
15.6%
25.2%
18.7%
14.0%
23.6%
17.4%
12.4%
24.0%
17.5%
12.2%
33%
0.4x
0.6x
11%
35%
0.4x
0.7x
13%
32%
0.4x
0.7x
12%
27%
0.4x
0.8x
12%
27%
0.4x
0.9x
12%
Note: based on all HSBC coverage of utilities companies across Asia. All data is market cap weighted
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Sector snapshot
Core industry driver
Key sector stats

Utilities
3.8% of MSCI Asia ex-JP
Trading data
ADTV (USDm)
Absolute
3 largest stocks
Demand
Capital
expenditure
275
91,661
Tariff
Utilization
Utilities
Regulation
57%
1.4x
CLP HOLDINGS, HK AND CH
GAS, POWER ASSETS

MSCI Asia
0.85
Fuel cost
Fuel cost
pass
through
Source: HSBC
PE band chart
Top 10 stocks
P rice level
Stocks
1
2
3
4
5
6
7
8
9
10
CLP HOLDINGS
THE HK. AND CHIN. GAS
POWER ASSETS HDG
TENAGA NASIONAL
KOREA ELEC. PWR
PERUSA. GAS NEGARA
CHIN. RES. PWR. HDG
PETRONAS GAS
YTL CORP
ENN ENERGY HOLDINGS
Index weight
16.2%
12.4%
10.7%
6.1%
5.7%
4.7%
3.8%
3.6%
3.1%
3.0%
250
20x
200
150
15x
100
10x
50
5x
0
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Stock rank
300
Country breakdown
Country
Hong Kong
China
Malaysia
India
Korea
Indonesia
Philippines
Thailand
Weights (%)
43.0
15.5
14.6
10.7
6.2
4.8
4.2
1.1

13
1.8
12
1.6
11
10
1.4
1.2
Fw d ROE % (LHS)
230
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
1.0
Dec-04
Fw d PB (x )

Multi-sector
July 2012
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Countries
231

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July 2012
Notes
232
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July 2012
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China
Steven Sun*
Equity Strategist
+852 2822 4298
stevensun@hsbc.com.hk
Roger Xie*
Equity Strategist
+852 2822 4297
rogerpxie@hsbc.com.hk
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Introduction
A key feature of the China market is that none of its large stocks are dominant, especially compared with
other Asian markets, where 1-2 stocks tend to have a much larger weight in the market. However,
financials make up nearly 37% of the Chinese market. Thus, in China, sector selection can be more
important than stock selection for achieving portfolio outperformance.
Note that when discussing Chinese equities we typically refer to the H-share market shares of
companies that are incorporated in mainland China but trade in Hong Kong. Other markets in China are
explained at the end of the chapter.
Market structure
Chinese equities have generally performed strongly since 2003, boosted by the listing of numerous banks,
real estate companies and various industrials, which has broadened the overall market.
Within Asia, China is a relatively diversified market. The top-five companies make up 35% of the market
and the top 10 53%. Together with Korea and Taiwan, China is one of the three most diversified markets
in the region (measured by the dominance of stocks).
The largest companies all come from different sectors China Mobile in telecoms, ICBC and CCB in
banks and CNOOC in energy.
Market performance (Index levels)
0.3
0.3
0.2
0.2
0.1
0.1
0.0
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
120
100
80
60
40
20
0
Largest stocks in China
MSCI China
Rel to Asia ex Japan (RHS)
Index weight
1
2
3
4
5
Top-5
CHINA MOBILE
CHINA CONSTRUCTION BANK
ICBC
CNOOC
TENCENT
10%
8%
6%
6%
5%
35%
6
7
8
9
10
Top-10
PETROCHINA
BANK OF CHINA
CHINA LIFE INSURANCE
CHINA PTL & CHM CORP
PING AN IN
5%
5%
3%
3%
2%
18%
Three sectors (telecoms, energy and financials) make up 68% of the market. The consumer sector
(including healthcare) is relatively small, at 13%. Consequently, in recent years some investors have had
to use the telecom and financial sectors to build exposure to domestic consumption growth in China.
Average turnover in the China A-share market, which trades shares in renminbi, is USD19.5bn a day
versus about USD7bn for the Hong Kong H-share and red chip market. This compares with the average
USD3.8bn in Asia. The Chinese market is relatively liquid it takes about five months for the market cap
to turn over.
234
Steven Sun*
Equity Strategist
+852 2822 4298
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July 2012
37%
18%
13%
7%
7%
6%
6%
5%
3%
1%
25
CH
20
15
10
5
2011
2010
2009
2008
2007
0
2006
30
2004
FINANCIALS
ENERGY
TELCOM SERVICES
INFORMATION TECHNOLOGY
INDUSTRIALS
CONSUMER STAPLES
CONSUMER DISCRETIONARY
MATERIALS
UTILITIES
HEALTH CARE
Weights
2002
Sector
China: Stock market liquidity
2003
China market composition
Note: Chart represents the number of months that the market takes to turn over
Correlations
For Chinese equities, the domestic economy matters more than elsewhere in Asia. Chinese equities have a
relatively low correlation with global economic indicators such as the ISM index or exports. On the other hand,
changes in domestic money supply (M1) are a more important driver of the market than in the rest of Asia.
Correlations of MSCI China
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
China
Asia ex Japan
Since 2001
0.56
0.35
0.51
Since 2001
0.84
0.60
0.44
0.68
Past 15 years
0.75
0.56
Past 10 years
0.84
0.72
Geographic breakdown of corporate revenues (%)

Asia Pacific
Domestic
Rest of the world
92
91
8
It is also interesting to note that Chinese equities have become more linked to global markets. Its equity
market (H-share only) has moved more in line with global and regional markets in the last five years than
in the preceding 10. Its correlation with Asia ex-Japan and the global equities indices is also higher in the
last five years than the previous 15-year period.
Earnings and valuation

Currently, Chinese earnings are well above trend, even more so than in 2007 when valuations peaked.
Chinese earnings have been less volatile than in some other Asian markets. On average, growth has
hovered around 16-18% in recent years, with a dip in 2008 and a strong recovery in 2010.
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MSCI China annual EPS growth
7
6
5
4
3
2
1
0
% y -o-y
96.5%
China
60
40
20
0
Actual Earnings
(40)
(60)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
(20)
Trend
Earnings started to be upgraded in 2008 after the market recovered and in late 2010 and 2011 these
earnings upgrades continued while the market moved sideways.
A similar pattern emerges when looking at earnings growth forecasts, which currently hover around 12%
but in 2009 were on occasion over 20%. Even in years of slow economic growth, analysts forecasts still
exceeded 5-8% earnings growth, showing that some of the growth is driven by internal processes and
investment capital rather than external forces.
-10
-20
-40
Momentum
2012
2011
2010
2009
2008
2007
2006
2005
-80
2004
-30
MSCI CH Index y -o-y (RHS)
Note: Earnings momentum is defined as the 6 month % change in 12M forward EPS
forecast. Source: MSCI, Thomson Reuters Datastream, HSBC
80
15
40
10
-40
-80
EPS grow th
2012
40
120
2011
80
20
2010
10
160
2009
120
2008
20
(%)
25
2007
160
2006
(%)
2005
30
12-month forward EPS growth* vs MSCI China Index
2004
Earnings momentum vs MSCI China returns

Upgrades and downgrades also drive the market. It is a widely held notion that the market moves before
analysts change earnings, but on a rolling basis this is not always the case. Indeed, in 2009 analysts
started to downgrade earnings while the market only began to correct some months later.
There are also times when the relationship between the two breaks down. In 2011, earnings were
upgraded but the market fell.
Remember that government intervention in pricing in various markets (food, electricity, fuel, banking) is
not uncommon. Hence, the nature of earnings changes can be of importance too.
Since 2007, analysts have been structurally optimistic on Chinese equities, with only a brief period of
bearishness in 2008 when global financial markets were in turmoil. This is a marked change over 1994-2000,
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when analysts were in general very bearish. The change is due to changes in MSCI China constituents.
PetroChina and Sinopec were listed in 2000, which could partly explain the change in sentiment.
China vs MSCI China returns
(%)
160
120
80
40
0
-40
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
% upgrades

Analysts feeling more bearish
Analyst s feeling more bullish
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
2012
2011
2010
2009
2008
2007
2006
2005
-80
2004
90
80
70
60
50
40
30
20
10
0
recommendation, 3 to hold and 5 to sell.
PEs for Chinese equities peaked in 2007 at over 25x trailing earnings. Since then the market has derated
and PE multiples are currently back to levels seen in 2004.
On a relative basis, Chinese equities tend to trade in line with average Asian PE multiples. The exception was
in 2007 when Chinese valuations de-linked and the market traded at a 50% premium to the rest of Asia. Note
that at its lowest, China trades at a 20% discount to the region (2002, 2009 and 2012).
China: PE band chart
140
Relative valuation
P rice level
1.6
120
100
80
60
40
20
20x
1.4
15x
1.2
10x
1.0
5x
0.8
0.6
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
01 02 03 04 05 06 07 08 09 10 11 12
PE:CN/Ax J
Although bond yields have been relatively stable in recent years, earnings yields have been very volatile,
indicating that the perception of corporate risk has been subject to volatility.
Interestingly, Chinese ROEs rose steadily over 2004-07 and after a brief period of decline in 2008
continued to move higher.
PB multiples are currently lower than in 2004 despite the higher ROEs. In 2007, when markets assumed the
rise in ROE would continue and long-term growth assumptions were very high, PB multiples rose sharply to
a peak of 4.0x. The period 2006-07 can be described as the Chinese bubble years.
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China: Earnings and bond yields
BY
16
14
China: PB vs ROE/COE (12-month forward)
5.0
EY
PBR
ROE/COE
4.0
12
10
8
6
3.0
2.0
4
2
0
1.0
2012
2011
12
2010
11
2009
10
2008
09
2007
08
2006
07
2005
06
2004
0.0
Fund flows
In the last decade, mutual funds have invested a total of USD19.8bn in Chinese equities, as per EPFR
data. In 2006-07 we notice a rapid accumulation of Chinese equities when valuations for the market
increased substantially.
Following the 2008 financial crisis, foreigners returned to the market after a relatively short period of
being net sellers of Chinese equities.
While GEM funds have been structurally underweight Chinese equities, this is less the case for AEJ
funds, which have traditionally been much closer to the MSCI benchmark.
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials
Technology
Telecom
Utilities
MSCI China
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
7.8
7.6
9.3
10.5
19.2
15.1
6.3
18.6
11.0
11.2
8.4
10.1
11.4
13.5
13.1
15.7
15.4
13.9
18.1
12.9
13.0
12.2
2.1
3.8
3.7
3.5
3.2
9.6
5.0
5.0
3.0
2.1
2.8
-1.1
-1.0
-1.1
-0.8
1.1
0.0
-1.5
0.1
-0.6
-0.8
-1.4
Active weight
Z Score
Source: EPFR, HSBC
Source: EPFR, HSBC
238
China funds active weight and Z-score relative to benchmark

Funds
28
24
20
16
12
8
4
0
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
USDbn
Cumulative foreign institutional funds since June 2003
Current
-1M
-3M
-6M
-12M
-1.2
0.2
-1.3
0.2
-1.3
0.1
-1.1
0.4
-1.2
-0.1

Multi-sector
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abc
H-, A-, and B-share markets

Chinese equities trade in various markets, the most important being the A-share market (trading in Shanghai)
and the H-share market (trading in Hong Kong).
The H-share market refers to shares of companies that are incorporated in mainland China but trade
in Hong Kong.
There are two major Chinese stock exchanges:
The A-share market, which trades shares in renminbi; foreign investors have limited access.
The B-share market, in which shares trade in Shenzhen or Shanghai in foreign currencies.
Price discrepancies between H- and A-shares of the same company are very common. This can be
explained by different liquidity conditions (the renminbi is not a convertible currency) and the fact that
different information is available in both markets.
Economic basics
In 1978, after years of state control, the government started to introduce major economic reforms. It
encouraged the formation of private businesses, liberalised foreign trade and investment, relaxed state
control over some prices, and invested in industrial production and the education of its workforce.
Qu Hongbin
Co-Head of Asian Economic
Research, Chief China
Economist
+852 2822 2025
hongbinqu@hsbc.com.hk
Built on a series of five-year plans, Chinas economy has grown by around 10% a year on average over
the past three decades. Since its entry into the WTO in 2001, the country has become the worlds secondlargest economy, biggest commodity exporter, second-largest commodity importer, and millions of
Chinese people have been lifted out of poverty.
In 2009, with the world economy in its worst crisis in 70 years, Beijing unveiled an RMB4trn
(USD635bn) stimulus programme to fight the downturn. While it helped to sustain growth, the flood of
credit also lifted inflation and asset prices, which led Chinese government to tighten policy and unwind
the stimulus.
Economic policy primer

The government is working on reforms that will encourage more private investment, free up the financial
system and make the renminbi a global currency through wider use in international investment and trade
settlement. Beijing is committed to rebalancing its economy by reducing its dependency on investment
spending and exports and increasing domestic consumption.
The Peoples Bank of China (PBoC), the central bank, has gradually been liberalising both exchange rates
and interest rates. In April 2012 the PBoC widened the renminbis trading band against the US dollar for
the first time since 2007, signalling a drive towards a convertible currency that has also seen overseas
investors get bigger renminbi investment quotas. In June 2012 China cut borrowing costs for the first time
since 2008 and loosened controls on banks lending and deposit rates.
Chinas strong fiscal position has supported growth in recent years. Fiscal revenue grew 25% y-o-y in
2011 and fiscal reserves total RMB3trn (over USD480bn), allowing Beijing to deliver tax breaks and
spending to support the economy.
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Key economic data

% Year
2008
2009
2010
2011
2012f
Consumer spending
Government consumption
Exports
Imports
GDP
Industrial production*
CPI**
Current account (% GDP)
Budget balance (% GDP)
CNY/USD
1-year time deposit (%)
1-year lending (%)
8.9
9.8
26.1
11.2
8.5
9.6
12.9
5.9
9.4
-0.4
6.82
2.25
5.31
8
20.7
30.5
-17.9
-16.3
9.2
12.9
-0.7
5.7
-2.2
6.83
2.25
5.31
9.5
16
24.5
29.4
33.6
10.4
15.7
3.3
5.1
-2.5
6.59
2.75
5.81
9.4
15
23.8
18.3
19.9
9.2
13.9
5.4
2.8
-1.1
6.29
3.5
6.56
9.1
13
19
7
7
8.4
11.8
2.9
2.5
-1.6
6.3
3
5.81
*Excluding small businesses; **Average

Source: CEIC, HSBC estimates
Political structure
China is a one-party state that is divided into 22 provinces, with five autonomous regions and four
municipalities. The Central Committee is the main decision-making body, which elects the Politburo and
the Politburo Standing Committee. The National Peoples Congress is the national legislature and the
State Council the chief administrative authority.
Key regulatory bodies

The Peoples Bank of China (PBoC) is the central bank. Its mandate includes setting the renminbi
exchange rate and interest rates and stabilising prices.
The China Securities Regulatory Commission (CSRC) is the main securities regulator.
Other key regulators are the China Banking Regulatory Commission (CBRC) and the China
Insurance Regulatory Commission (CIRC).
The National Development and Reform Commission (NDRC) is Chinas top economic planning body.
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Hong Kong
Steven Sun*
Equity Strategist
+852 2822 4298
Roger Xie*
Equity Strategist
+852 2822 4297
rogerpxie@hsbc.com.hk
241
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Multi-sector
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Introduction
Hong Kong is one of the most volatile markets in the region, a result of the dominance of interest-rate sensitive
stocks. ROEs are below the Asian average, but the market deserves a premium to reflect optimism on longterm growth for Hong Kong as one of Chinas financial centres, but also the low risk attached to its market.
Market structure
In the last decade, the market has fluctuated between 10,000 (during the SARS epidemic in 2003) and
30,000 in 2007, when China related stocks traded at high multiples. This volatility is partially explained
by the market structure. Although the top-five stocks account for only 35% of the market low compared
with the rest of Asia they are all of a similar nature. Financials, including banks, real estate and insurance,
account for 61% of the market. It is more concentrated than Malaysia, India, China, Korea or Taiwan.
Largest stocks in Hong Kong
26
24
22
20
18
16
14
12
10
12000
10000
8000
6000
4000
2000
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
MSCI Hong Kong

1
2
3
4
5
Top-5
6
7
8
9
10
Index weight
AIA GROUP
SUN HUNG KAI PROPERTY
HUTCHISON WHAMPOA
CHEUNG KONG
CLP HOLDINGS
12%
6%
6%
6%
5%
35%
5%
4%
4%
4%
4%
HK.EXCHANGE & CLEARING

HK AND CHINA GAS
LI & FUNG
BOC HONG KONG
HANG SENG BANK
Top-10
21%
The dominance of financials is partially offset by some large consumer discretionary plays in the market
(think Li & Fung) as well as various utilities. These, in theory, should be more stable in nature.
Hong Kong is one of the most liquid markets in Asia as well, with a cumulative monthly market turnover
which is nearly 5x the daily market cap. Retail participation in this market is also relatively high (about
30% of total turnover), adding retail dynamics to the market.
Sector
FINANCIALS
UTILITIES
INDUSTRIALS
TELCOM SERVICES
ENERGY
MATERIALS
CONSUMER STAPLES
HEALTH CARE
Hong Kong: Stock market liquidity

Weights
61%
14%
13%
10%
1%
1%
0%
0%
0%
0%
50
HK
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Hong Kong market composition
242
Steven Sun*
Equity Strategist
+852 2822 4298
abc

Multi-sector
July 2012
Correlations
On average, Hong Kong tends to trade in line with the rest of the Asian market when it comes to
sensitivity and correlations with global or local indicators. This is partly because the Hong Kong market,
one of the largest and most liquid markets, sets the tone for the rest of the region.
Correlations of MSCI Hong Kong
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
Hong Kong
Asia ex Japan
Since 2001
0.76
0.60
0.42
Since 2001
0.84
0.60
0.44
0.68
Past 15 years
0.88
0.72
Past 10 years
0.90
0.77

Asia Pacific
Domestic
Rest of the world
74
33
26

Currently, Hong Kong earnings are trading above trend growth. The sharp recovery in recent years has
been driven by real estate and Hong Kongs exposure to China, a reflection of Chinese earnings which are
also above trend.
This is one of the key reasons why Hong Kong is a relatively volatile market in Asia. Banks and real
estate are both volatile, interest sensitive sub-sectors.
Large declines were seen during the Asian Financial Crisis in 1998 and smaller declines were evident
during the 2003 recession (including a period when the SARS epidemic swept the city).
MSCI Hong Kong annual EPS growth
900
800
700
600
500
400
300
200
% y -o-y
52.5
46.5
40
Hong Kong
30
20
10
2013
2011
2009
2005
2007
2003
2001
1999
-39%
1997
1995
Trend
(20)
1993
Actual Earnings
(10)
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
On average, earnings have grown 10% since 2005, which is below the Asian average of 15%.
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Earnings estimates have actually declined in recent years, with 12-month forward EPS growth now being
forecast to be flat to negative, down from EPS estimates of 20% at the peak in 2010.
12-month forward EPS growth* vs MSCI Hong Kong Index
Momentum
(%)
30
80
60
40
20
0
-20
-40
-60
20
10
0
-10
-20
EPS grow th
MSCI HK Index y -o-y (RHS)
2012
2011
2010
2009
2008
2007
2004
-30
2012
2011
2010
2009
2008
2007
2006
2005
2004
80
60
40
20
0
-20
-40
-60
2006
(%)
30
20
10
0
-10
-20
-30
-40
2005
Earnings momentum vs MSCI Hong Kong returns

Note that even at the peak, earnings growth estimates barely exceeded 20% for the Hong Kong market
(this was in 2004). At its worst, a decline of 20% was projected in 2008.
This gradual decline in earnings downgrades has led to analysts toning down their recommendations and
becoming fairly neutral on the market. Since 2003, analysts have been generally optimistic on their
ratings (based on recommendation consensus score, or RCS).
This is after very bearish views in the Asian Financial Crisis and the 2002 recession. Part of this structural
shift towards optimism comes from China. When looking at Chinese recommendations, a similar
structural shift can be noted.
Even in 2008, when global financial turmoil hit Hong Kong, analysts were at worst slightly bearish.
Hong Kong vs MSCI Hong Kong returns
(%)
100
80
60
40
20
0
-20
-40
-60
80
60
40
20
% upgrades
2012
2011
2010
2009
2008
2007
2006
2005
2004

3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
Analyst s f eeling more bear ish
Analyst s f eeling more bullish
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Average
2SD
Note: The recommendation consensus score (RCS) assigns a score of 1 to each buy
On average the market PE hovers around 15x, with peaks of over 20x in 2006 and a 10x trough in 2008. The
average PE in the last decade is 15.8x.
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All sectors, except utilities, offer good value compared with their own history. Relative valuations show
that Hong Kong tends to trade at a 20-30% premium to the rest of Asia.
Hong Kong ROEs have hovered around 8-10% in the last decade with a peak in 2007 (12%) and a trough in
2008 (6%). With ROEs not substantially higher than the rest of the region, most of this can be explained by
positive views on growth (think China) and lower perception of risk (lower cost of capital).
23000 Price level

21000
19000
17000
15000
13000
11000
9000
7000
5000
3000
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
25x
20x
15x
01 02 03 04 05 06 07 08 09 10 11 12
Apr-12
Feb-11
Dec-09
Oct-08
Aug-07
Jun-06
10x
Apr-05
Feb-04
Relative valuation
Dec-02
Hong Kong: PE band chart
PE:HK/Ax J
This coincides with a narrowing of the difference between bond and earnings yields, i.e. stocks were
expensive in 2006 during the height of optimism on Chinese growth and cheapest in 2008-09 during
times of financial turmoil.
Hong Kong: PB vs ROE/COE (12-month forward)
Hong Kong: Earnings and bond yields
2.5
12
PBR
ROE/COE
2.0
BY
EY
10
8
1.5
6
1.0
4
2
0.0
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.5
01 02 03
04 05 06
07 08 09 10 11 12
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Multi-sector
July 2012
Fund flows
While in large parts of Asia foreign investors have been steady accumulators of equities (e.g. Indonesia,
India), in Hong Kong this is not the case.
Investors have, in general, been overweight Hong Kong equities throughout the cycles. On a cumulative
basis since June 2003, mutual funds are net sellers of USD1.7bn equities, with a net accumulation of only
USD6bn in 2007 and a net outflow of USD2bn in 2008.
Hong Kong fund weights vs MSCI benchmark
Funds
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
Current
-1M
-3M
-6M
-12M
Active Weight
1.7
1.7
1.8
1.7
1.7
Z Score
0.4
0.6
0.7
0.5
0.7
Feb-12
Jan-11
Dec-09
Nov-08
Oct-07
Sep-06
Aug-05
Jul-04
Source: MSCI, EPFR, HSBC
Jun-03
USDbn
Source: EPFR, HSBC
Economic basics
After China started to reform its economy in 1978, Hong Kong reinvented itself from a manufacturing
base into an international trade and finance centre. As its manufacturing base moved moving over the
border into Guangdong province, its service industry has grown rapidly.
This enabled the city to survive three recessions in the decade to 2008, during which GDP growth
averaged 4.7% annually and income per capita rose by almost a third to USD32,900 (ranked fourth
highest in Asia today after Japan, Singapore and Macau). Over time, this process has also turned domestic
demand into an increasingly driver of growth. Private spending has contributed more to growth than net
merchandise exports since the end of 2010.
As a result of China easing travel restrictions, the number of mainland tourists to Hong Kong has surged
from 4.5m in 2001 to 20m in 2011, outnumbering visitors from all other countries combined. This has
boosted retail sales but also increased commercial rents and property prices.

Trade matters to Hong Kong not because of the actual production of exports, but because of the financing,
marketing, distribution, buying and selling of manufactured goods. These entrept services not
manufacturing itself are what keeps the citys trade machine humming. Manufacturing used to account
for over a fifth of the economy in the 1980s but less than 3% today; entrept services now account for
37% of the economy (21% from imports/exports and 16% from business logistic services), compared with
22% three decades ago.
Increasing integration with China, through trade, tourism, and financial links, has helped underpin
economic growth. The mainland has long been Hong Kongs largest trading partner, accounting for about
half of Hong Kongs exports by value. Hong Kong is also the premier stock market for Chinese firms
246
Donna Kwok
Economist
+852 2996 6621
donnahjkwok@hsbc.com.hk
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Multi-sector
July 2012
seeking to list abroad, and the top source of foreign direct investment and overseas direct investment)
funds entering and leaving China.
Hong Kong is well placed to accelerate the development of the offshore renminbi market, which for the
next 5-10 years should boost its status as a global financial centre. Hong Kong continues to link its
currency closely to the US dollar, maintaining an arrangement established in 1983. The fixed exchange
rate means the citys monetary policy is largely dictated by the US.
Key economic data
% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Stockbuilding (% GDP)
Domestic demand
Exports
Imports
GDP
Industrial production
Unemployment* (%)
Retail sales
Consumer prices
HKD/USD
3-month money (%)
Prime rate (%)
2.4
1.8
1
0.5
1.6
2.6
2.3
2.3
-6.7
4.1
10.6
4.3
0.1
7.75
2.36
5.313
0.7
2.4
-3.9
1.4
0.8
-10.1
-9
-2.6
-8.3
5
0.6
0.6
1.6
7.76
0.45
5
6.7
2.8
7.7
2.2
7.5
16.7
17.3
7.1
3.5
3.9
18.3
2.3
4.3
7.77
0.25
5
8.5
1.8
7.6
0.8
6
4.2
4.7
5
0.7
3.3
24.8
5.3
3.9
7.77
0.27
5
5.1
1.1
4
-0.2
3.4
3.9
4.1
3.1
2.5
3.3
15.5
5.3
3.4
7.8
0.48
5
*Average
Political structure
Hong Kong is a Special Administrative Region of China. The head of government in Hong Kong is the
Chief Executive, who serves for five years with a two-term limit. The Executive Council, presided over
by the Chief Executive, decides on matters of policy and the introduction of bills to the Legislative
Council, Hong Kongs legislative branch.

The Hong Kong Monetary Authority (HKMA) is responsible for maintaining monetary and banking
stability.
The Securities and Futures Commission (SFC) regulates the securities and futures markets in Hong
Kong.
Hong Kong Exchanges and Clearing Limited (HKEx) operates the securities market (the Stock
Exchange of Hong Kong) and a derivatives market and the clearing houses for those markets. The Hang
Seng Index is the major stock index.
247

Multi-sector
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Notes
248
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Multi-sector
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India
Jitendra Sriram*
India Strategist
HSBC Securities & Capital Markets (India) Private Limited
+91 22 2268 1271
jitendrasriram@hsbc.co.in
249
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Multi-sector
July 2012
Introduction
A combination of high ROEs (averaging above 15%) and EPS growth (CAGR of 17% over the last
decade) has propelled the market, with the Sensex showing a CAGR of 18%. The first phase (FY02-07)
was led by investment-related sectors (capital goods, banking, real estate) and the second (FY08-12) by
consumer sectors (staples, discretionary) and exporters (information technology, pharmaceuticals).
Market structure
Ownership: The Indian market has a blend of state-owned enterprises (banks like SBI and PNB and
energy companies ONGC, Coal India, OIL and GAIL), multinationals (ITC a BAT affiliate, Hindustan
Unilever, Maruti Suzuki), corporates (HDFC, HDFC Bank, ICICI) and family-owned enterprises (TCS,
Reliance, Dr Reddys). Foreign institutional investors (FIIs) own about 16.5% of the market and domestic
institutional investors (DIIs) 11.7.%.
Sectoral diversity: Compared with other Asian markets, India is relatively diversified. The top-five
stocks account for 35% of the MSCI market universe and the top-10 for 50%. This is in line with larger
markets such as China and Korea. Financials is the largest sector in India with a weight of 27% followed
by IT services and energy.
Participants: Stock market turnover currently averages about USD2bn a day and the futures & options
(F&O) market around USD12bn. India has an active F&O market with single stock futures and options
on over 200 stocks. The trading ratio of FIIs to DIIs is approximately 75:25.
Given the diversity of sectors in the market, sector and stock selection is key to performance.
800
600
Largest stocks in India
1.2
Stock rank
Stock name
1.0
1
2
3
4
5
Top-5
6
7
8
9
10
Top-10
INFOSYS
RELIANCE INDUSTRIES
HDFC BANK
HDFC CORP
TATA CONSULTANCY SERVICES
0.8
400
0.6
0.4
200
0.2
0.0
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
MSCI India
ITC
HINDUSTAN UNILEVER
TATA MOTORS
ICICI BANK
STATE BANK OF INDIA
250
Index weight
9%
8%
7%
6%
5%
35%
4%
3%
3%
3%
2%
15%
Jitendra Sriram*
India Strategist
HSBC Securities & Capital
+91 22 2268 1271
jitendrasriram@hsbc.co.in
abc

Multi-sector
July 2012
Liquidity of stock market
India market composition

Sector
30
IN
25
20
15
10
5
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
weights
FINANCIALS
ENERGY
CONSUMER STAPLES
MATERIALS
INDUSTRIALS
HEALTH CARE
UTILITIES
TELCOM SERVICES
27%
16%
12%
9%
9%
8%
6%
5%
5%
2%
Note: Daily market cap / cumulative monthly market turnover

Correlations
Despite the large contribution of export oriented sectors (energy and IT services), India shows a low
correlation with global macro factors (using the ISM index as a proxy). Conversely, correlation with
domestic macro factors using M1 growth as a proxy is relatively high versus the rest of Asia.
This relatively low correlation with global markets might be a reflection of the nature of the export
sectors. India is a global leader in IT services. Within the energy sector some stocks are domestic fuel
distributors and hence their profitability is largely driven by domestic fuel pricing policies. Note the
marked change in these correlations in the last five years. Substantial foreign inflows increased Indias
correlation with global markets (MSCI ACW index). Hence, as foreign participation increases, so will its
correlation with global markets.
Correlations of MSCI India
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
India
Asia ex Japan
Since 2001
0.71
0.52
0.52
Since 2001
0.84
0.60
0.44
0.60
0.66
0.51
Past 15 years
0.61
0.54
0.68
0.67
0.70
Past 10 years
0.79
0.70
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Corporate earnings grew strongly over FY02-07. With elevated growth expectations the markets
witnessed a strong re-rating, trading above the mean multiple of about 15x forward earnings. However, as
portfolio inflows slowed during the sub-prime crisis of 2008, growth expectations narrowed leading to a
de-rating. This reset of expectations has led to muted market performance over FY08-12.
Slowing growth and lack of policy action coupled with the twin deficits (current account and fiscal) have
led to (1) a depreciation of the INR versus the US dollar and (2) a worsening fiscal situation, with the
fiscal deficit at 5.8% of GDP for FY12. This has led to a derating in PB and PE terms. Sectors with
exposure to the investment cycle capital goods (BSE Capital Goods index down 59% FY08-12), real
estate (BSE realty index down 88%) and metals (BSE metal index down 45%) being hit hardest.
Consumer sectors such as FMCG (FMCG index up 167%) and autos (BSE auto index up 127%) have
outperformed the market along with export sectors.
MSCI India annual EPS growth
50
30
40
33.2
% y -o-y
India
20
30
10
20
-10
Trend
Earnings momentum India vs MSCI India returns
12-month forward EPS growth* vs MSCI India Index
Momentum
MSCI IN IDX YoY (RHS)
Note: Earnings momentum is defined as the 6 month % change in 12-month forward

EPS forecast.
252
EPS grow th ex p YoY
2011
2010
2009
5
2008
2012
2011
2010
2009
2008
2007
2006
2005
2004
-30
10
2007
-20
15
2006
-10
20
2005
25
2004
10
120
100
80
60
40
20
0
-20
-40
-60
2003
20
(%)
30
2002
120
100
80
60
40
20
0
-20
-40
-60
-80
2001
(%)
30
2012
Actual Earnings
-20
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
10
*Percentage change in trailing 12-month and 12-month forward EPS.

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India vs MSCI India returns
(%)
% upgrades
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4
Analyst s f eeling more bullish
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
2011
2010
2009
2007
2006
120
100
80
60
40
20
0
-20
-40
-60
-80
2005
2004
80
70
60
50
40
30
20
10
*Number of EPS estimates up as a % of total number of revisions in estimates.

India PE band chart
India: Earnings and bond yields
14
BY
25x
20x
12
15x
10
10x
EY
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
1350 P rice level

1200
1050
900
750
600
450
300
150
0
4
01 02 03 04 05 06 07 08 09 10 11 12
India: PB vs ROE/COE (12-month forward)
Relative valuation
PBR
1.6
ROE/COE
1.4
5.0
1.2
4.0
1.0
3.0
2.0
0.8
1.0
0.6
01 02 03 04
2012
2011
2010
2009
2008
2007
2006
2005
2004
0.0
05 06 07 08 09 10 11 12
PE:IN/Ax J
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Fund flows
In the last decade, India has seen a substantial amount of foreign investment. Since 2003 more than
USD90bn has been invested in Indian equities, which is highest among Asia ex-Japan countries. The
foreign investors continue buying Indian equities in the current calendar year (USD8.6bn y-t-d).
Over the years foreign investors have increased their holding across sectors, but net buying in consumer
(consumer staples and discretionary) and export oriented sectors (IT and healthcare) are currently at a
record high.
Historically, we have seen a strong correlation between foreign fund flows and the performance of the
Indian market. As the economy funds its current account deficit with capital flows, despite being a
domestically oriented economy, capital flows makes it closely track movements in global markets.
India funds active weight and Z-score relative to benchmark
Funds
Active weight
Z-score
Current
-1M
-3M
-6M
-12M
1.2
0.6
1.2
0.8
1.1
0.4
1.1
0.5
1.1
0.8
Source: EPFR, Thomson Reuters Datastream, HSBC
Economic basics
India launched market-oriented reforms in 1991 that transformed the countrys closed economy. The new
policies included encouraging international trade and investment, deregulation, privatisation, tax reforms,
and measures to control inflation. Today, in absolute terms, India is the 10th-largest economy in the world
and fourth when adjusted for purchasing power parity.
Since the second half of the 1990s, the economy has consistently grown 7.5% or more about twice the
rate of the years between independence in 1947 and the start of the reform process. A combination of
favourable demographics (over 50% of population is under 25) and rising income and aspirational levels
has led to strong consumption-led growth (consumption was 65% of GDP in FY11). The Indian economy
is predominantly consumption driven and, unlike the rest of Asia, exports contribute just 25% of GDP
versus 52% in Korea and 50% in Indonesia.
Indias middle-class is growing rapidly but the gap with the rural poor is growing and growth across the
country is uneven. More economic reform is still needed and high inflation and slower growth have put
pressure on Indian politicians to speed up reform, tackle corruption, and revive investment spending.

The Reserve Bank of India conducts monetary policy to maintain price stability, ensure adequate credit flow
to the productive sectors of Indias economy, support economic growth and safeguard financial stability.
The repo rate is the key monetary policy rate, with the reverse repo rate and Marginal Standing Facility
(MSF) rate determining the corridor for short-term money market interest rates. The RBI revisits monetary
policy every 45 days and on a quarterly basis provides a detailed assessment on the macro economy.
With the introduction of the Foreign Exchange Management Act (FEMA) in 2000, the objective of the Foreign
Exchange Department shifted from conservation of foreign exchange to facilitating external trade and
payment and promoting the orderly development and maintenance of foreign exchange market in India. The
254
Leif Eskesen
Chief Economist for India &
ASEAN
Singapore Branch
+65 6658 8782
leifeskesen@hsbc.com.sg
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exchange rate regime is officially classified as floating. The INR exchange rate is determined in the interbank
foreign exchange market. The RBI intervenes at times of excess volatility. RBI still exercises control on capital
account transactions, while there are very few restrictions for current account transactions.
The government implements fiscal policy through its annual budgets starting 1 April, but many major
fiscal policy decisions are also decided in the context of the five year plans. The current year marks the
beginning of the new 12th five year plan for the period 2012-17. Fiscal policy is guided by the Fiscal
Responsibility Act to help enforce fiscal discipline.
Key economic data
% Year
2008
2009
2010
2011
2012f
GDP*
GDP (Financial year)**
Consumer prices**
Current account (% GDP)**
Budget balance (% GDP)**
Broad money supply**
INR/USD***
3-month money*** (%)
10-year bond yield*** (%)
7.5
6.7
9.1
-2.5
-6
20.5
48.6
4.71
5.3
7.6
8.4
12.4
-1.9
-6.4
19.2
46.4
3.68
7.74
8.2
8.4
10.4
-3.1
-4.9
16.2
44.7
7.19
7.95
7.5
6.5
8.4
-3.2
-5.8
15.8
53
8.48
8.55
5.9
6.2
9.3
-4.1
-5.6
12.2
57
8.7
7.8
*Calendar year, **Based upon Indian fiscal year (April-March), ***Period-end

Political structure
India is a federal republic with 28 states and seven union territories. The Prime Minister heads the
government and presides over the Council of Ministers. Indias legislative branch has two houses: the
lower house (Lok Sabha) and the upper house (Rajya Sabha). The two main political parties are the
Indian National Congress Party (known as Congress or INC) and the Bhartiya Janta Party (BJP).

Reserve Bank of India: the central bank regulates the banking system, with a view to secure monetary
stability.
Securities and Exchange Board of India: Established in 1992, the basic function is to protect the
interest of investors in securities. It regulates both primary and secondary equity market.
National Stock Exchange: Founded in 1992, it is the largest exchange in India for cash equities and accounts
for over 90% of the F&O trading volume in the country. There are 1,688 companies listed in the NSE.
Bombay Stock Exchange: Founded in 1876, it is the oldest stock exchange in Asia. There are 5,049
companies listed in the BSE of which more than 2000 are actively traded.
Foreign Investment Promotion Board: Assists in administration and implementation of the
governments foreign direct investment policy. It provides a single window clearance for proposals on
FDI in India.
Competition Commission of India: Established in 2003, responsible for enforcing anti-trust laws to
prevent monopolistic behaviour.
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Multi-sector
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Notes
256
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Indonesia
Neel Sinha*
+65 6658 0658
257
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Introduction
The Indonesian equity market is the second most concentrated market in Asia. It is highly geared towards
the domestic economy and, despite relatively high foreign participation in the equity market, has one of
the lowest correlations with Asian and global markets within the region.
Indonesia has witnessed a substantial rerating in the last decade. Industrial restructuring and a rebuilding of
balance sheets allowed for a rapid rise in ROE, while the perceived risk of investing in Indonesia fell. Against
this background, Indonesia also transformed itself into one of Asias most vibrant democracies. All of this led
to a rapid increase in PE ratios for this market, from below 10x in 2002 to over 15x in 2009.
Market structure
Despite the existence of a wide variety of sectors in Indonesia, its equity market is quite concentrated.
Financials account for over 32% of the market, the top-five stocks account for 51% of the market and the
top-10 72%. It is Asias second most concentrated market after the Philippines.
1200
Largest stocks in Indonesia
2.0
1000
1.5
800
600
1.0
400
0.5
200
0.0
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
MSCI Indonesia

1
2
3
4
5
Top-5
6
7
8
9
10
ASTRA INTERNATIONAL
BANK CENTRAL ASIA
TELEKOMUNIKASI INDO
BANK RAKYAT INDO.
BANK MANDIRI
PERUSA.GAS NEGARA
UNITED TRACTORS
UNILEVER INDONESIA
SEMEN GRESIK
GUDANG GARAM
Top-10
Index weight
16%
10%
9%
8%
8%
51%
5%
5%
4%
4%
3%
21%
The two largest stocks, Astra International and Bank Central Asia (BCA), together represent nearly 26%
of the market.
This also suggests that domestic factors from car and motorcycle sales to interest rates and local
investment are important market drivers.
Indonesia is not a very liquid market, ahead of only the Philippines in Asia. Its in line with Malaysia and
Thailand but less liquid than Singapore.
258
Neel Sinha*
Asia
Singapore Branch
+65 6658 0658
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Multi-sector
July 2012
Indonesia: Stock market liquidity
Indonesia market composition

Sector
90
ID
75
60
45
30
15
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Weights
FINANCIALS
CONSUMER STAPLES
ENERGY
TELCOM SERVICES
MATERIALS
INDUSTRIALS
UTILITIES
HEALTH CARE
32%
15%
13%
12%
10%
7%
5%
4%
2%
0%
Note: Chart represents the number of months that the market takes to turnover.
Correlations
The existence of dominant, domestic oriented sectors (financials, consumer) is probably one reason for
the relatively low correlation of Indonesian equities with global indicators. Unlike the rest of Asia, fund
flows are a weak indicator of market performance.
Therefore, it comes as little surprise that Indonesia also has a low correlation with the rest of Asia or global
stock markets. This tendency to go its own way has a benefit to investors it allows for diversification.
Correlations of MSCI Indonesia
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
World
Indonesia
Asia ex Japan
Since 2001
0.72
0.56
0.07
Since 2001
0.84
0.60
0.44
0.20
0.21
0.26
Past 15 years
0.58
0.54
0.68
0.67
0.70
Past 10 years
0.68
0.61

Indonesias earnings have only recently moved above trend earnings. Interestingly, when Indonesia
experienced a large rerating in the market, earnings were not above trend earnings (2003-08).
Indonesias earnings have a volatile history and this has a lot to do with exchange rate volatility during
and after the Asian Financial Crisis in 1997-98. In more recent years, earnings growth hovered around 1520%, mostly driven by strong economic performance, which is partially the result of rising commodity
prices (crude palm oil, or CPO, and coal).
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MSCI Indonesia annual EPS growth*
77.1
Indonesia
2013
2011
2009
2007
2005
2003
2001
1999
-83.7%
1997
Trend
177.6
% y -o-y
1995
Actual Earnings
50
40
30
20
10
0
-10
-20
-30
-40
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
450
350
250
150
50
-50
-150
-250
1993
*The volatility in reported annual earnings growth is often due to exceptionals and oneoff items like asset disposals or write-offs.
Earnings momentum vs MSCI Indonesia returns
12-month forward EPS growth* vs MSCI Indonesia Index
Momentum
EPS grow th
MSCI ID Index y -o-y (RHS)
2012
2004
2012
2011
2010
2009
2008
2007
-60
2006
-30
2005
0
-30
2004
-20
2011
-10
2010
60
30
2009
10
150
120
90
60
30
0
-30
-60
2008
120
90
20
(%)
30
25
20
15
10
5
0
-5
2007
150
2006
(%)
2005
30

While still rising, the number of earnings upgrades has declined substantially in recent years so the rush
of rising estimates seems to have cooled to some extent.
Interestingly, after 2000 analysts have more or less been consistently positive on stocks. Even in 2008-09,
they were at worst neutral.
Indonesia vs MSCI Indonesia returns
100
(%)
150
120
90
80
60
60
30
40
% upgrades
2012
2011
2010
2009
2008
2007
-60
2006
0
2005
0
-30
2004
20

260
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
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Multi-sector
July 2012
Indonesia is currently trading at 11.6x PE, ahead of its 10-year average of 10.2x. As the table on the next
page shows, healthcare, consumer discretionary and utilities are the most expensive sectors (versus their
own history), while energy is the only sector trading below its long-term average.
History, however, is not a very good guide in Indonesia. As mentioned, its corporate sector went through
substantial adjustments after the Asian Financial Crisis.
ROE rose from low levels in the late 1990s to over 20% in 2004 and peaked at 28% in 2006. It is forecast
to be 23% in 2012.
Indonesia: PE band chart
Indonesia: PB vs ROE/COE (12-month forward)
P rice level
4.5
7500
6750
6000
5250
4500
3750
3000
2250
1500
750
0
20x
15x
10x
5x
PBR
ROE/COE
4.0
3.5
3.0
2.5
2.0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2001
1.0
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
1.5
Meanwhile, the cost of capital fell in the early 2000s. As a result, both bond and earnings yields have
declined in the last decade, aside from some volatility in 2008 when global markets were highly volatile. In
addition, the country underwent extensive constitutional reforms between 2000 and 2002 which culminated
in the first direct democratic Presidential election in 2004, won by current President Susilo Bambang
Yudhoyono, who embarked on a programme of economic reforms and pro-investment initiatives.
As a result, Indonesian equities witnessed a substantial rerating in the last decade. Market PEs were well
below 10x in 2002-03 but have hovered in a range of 12-15x in the recent years.
This also explains the strong outperformance versus the rest of Asia. Indonesias market valuations were
only 20% of those for the rest of Asia in 2002, but Indonesia currently trades at a 20% premium to Asia.
Indonesia: Earnings and bond yields
Relative valuation
21
1.4
BY
18
EY
1.2
1.0
15
0.8
12
0.6
0.4
0.2
01 02 03 04 05 06 07 08 09 10 11 12
3
03
04
06
07
08
09
11
12
PE:ID/Ax J
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Energy
Materials
Industrials
Cons Discretionary
Consumer Staples
Healthcare
Financials
Telecom
Utilities
MSCI Indonesia
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
8.1
11.9
11.9
12.7
17.1
20.0
11.0
11.8
12.9
11.8
10.5
10.6
12.8
10.2
14.0
11.9
10.7
11.0
13.3
10.9
4.3
3.0
5.1
3.6
3.8
5.2
2.7
2.5
2.9
2.9
-0.6
0.4
-0.2
0.7
0.8
1.6
0.1
0.3
-0.1
0.3
Fund flows
This recovery in the market has come on the back of substantial increases in foreign participation. Foreign
institutional funds have accumulated nearly USD20bn of Indonesian equities since June 2003.
While this might look small compared with the USD94bn accumulated by the same institutions in India
(over the same time period), it is more than the combined total for the Philippines and Thailand in the
same period.
Foreign ownership in the market is also high around 55% of the total market. This is probably more a
reflection of a small domestic mutual fund industry and few Indonesian savings being channelled into
equities in general.
As the following chart indicates, these foreign investors have been consistently buying Indonesian
equities.
USDbn
Indonesia funds active weights and Z-score relative to benchmark
24
Funds
20
Active weight
Z-score
16
12
Current
-1M
-3M
-6M
-12M
0.0
-2.3
0.0
-2.3
0.0
-2.1
0.0
-2.2
0.1
-2.1
Source: EPFR, HSBC
8
4
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Economic basics
Agriculture dominated economic output until 1991, when it was overtaken by manufacturing which has
expanded from basic textiles to steel, aluminium and cement. The country took time to recover from the
1997-98 Asian financial crisis, which saw GDP plunge, banks fail and many companies go bankrupt.
However, Indonesias domestically oriented economy has shown great resilience in the face of the global
economic slowdown. Today, Indonesia is Southeast Asias largest economy. Trade with the ASEAN is
increasing and the country is the worlds top exporter of liquefied natural gas. Private consumption is
262
Leif Eskesen
ASEAN
Singapore Branch
+65 6658 8782
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Multi-sector
July 2012
supported by favourable labour market conditions and strong structural drivers, including demographics
and rising incomes.
Despite being a market-based economy, the government regulates the prices of basic goods such as rice,
electricity and fuel. Long-awaited land acquisition reforms passed in 2011 are expected to cut
bureaucracy significantly and accelerate much-needed investment in infrastructure.

The country has made significant headway as an investment destination. For example, improvements
have been made in the World Banks Doing Business survey. However, the reform process is far from
complete. Foreign investors would like to see greater transparency with regards to legal processes and
government policies, as well as better infrastructure and less rigid labour laws.
The country has also yet to free itself from fuel subsidies, which could go towards improving education or
healthcare. These subsidies also create uncertainty for the national budget, ballooning whenever crude oil
prices rise sharply.
On the monetary policy front, Bank Indonesia has an inflation target of 3.5-5.5% which has been in place
since July 2005. The reference rate is the main policy rate. Open market operations, standing facilities and
reserve requirements are also used as monetary tools. The central bank also intervenes actively in the
foreign exchange market to curb excessive market volatility.
Key economic data
% Year
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
IDR/USD*
3-month money (%)*
2008
2009
2010
2011f
2012f
5.3
10.4
11.9
0.1
7.6
9.5
10
6
3.7
8.4
9.8
0
-0.1
11027
12.1
4.9
15.7
3.3
-0.1
5.2
-9.7
-15
4.6
2.2
7.9
4.8
2
-1.6
9425
7.1
4.7
0.3
8.5
0.5
5.9
15.3
17.3
6.2
4.7
7.1
5.1
0.7
-0.7
9010
6.6
4.7
3.2
8.8
0.9
6.2
13.6
13.3
6.5
6.2
6.6
5.4
0.2
-2.1
9068
5.3
4.7
4.8
7.3
0.7
5.2
2.5
5.1
6.1
5.3
5.5
4.5
-0.8
-2.4
9800
6
*Average
Political structure
Indonesia is a democratic republic with a presidential system. The President has the authority to appoint
the cabinet and is directly elected for a five-year term, renewable once. The Peoples Consultative
Assembly (MPR) is the bicameral legislative branch. The Peoples Representative Council (DPR) is part of
the MPR and the Regional Representative Council is a new chamber that covers regional management. The
DPR formulates and passes legislation at the national level, while the DPD does so at the regional level.
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July 2012

Bank Indonesia is the central bank responsible for monetary and financial stability.
The Indonesia Capital Market and Financial Institution Supervisory Agency (BAPEPAM-LK) is the
main financial regulator. A new regulator, known as the OJK, is scheduled to take over the supervision of
banks, brokerages and insurance firms from the central bank and BAPEPAM-LK in 2013.
The main stock market is the Indonesia Stock Exchange (IDX); the main index is the Jakarta Composite
Index.
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Korea
Brian Cho*
+822 3706 8750
265
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July 2012
Introduction
As in Taiwan, technology dominates and this sector shows high correlations with exports and global
economic indicators. Sector selection is key and selecting stocks within the technology sector is important
too, especially given the dominance of Samsung Electronics.

However, unlike Taiwan, domestic sectors (consumer) carry a larger weight in Korea. Domestic
economics, therefore, are more important than in Taiwan.
Market structure
Korea is, after China, the second-largest market in Asia ex Japan. It is an export-oriented market the
largest sector is technology, with a 34% share in the index.
Korea is a well diversified market in comparison with others in the region. Sectors such as consumer
discretionary, industrials, materials and financials are all important.
Stock-wise, it is also very diversified. Although Samsung Electronics is by far the largest company in
MSCI Korea, with a weight of 24%, the top-five and 10 companies constitute only 40% and 52% of the
index, respectively. This is much lower than elsewhere in Asia, with the exception of Taiwan.
Korea market composition
600
1.0
Sector
500
0.8
FINANCIALS
INDUSTRIALS
MATERIALS
CONSUMER STAPLES
ENERGY
UTILITIES
HEALTH CARE
TELCOM SERVICES
400
0.6
300
0.4
200
0.2
0.0
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
100
MSCI Korea
Weights
34%
18%
14%
13%
11%
5%
3%
1%
1%
1%
It is also one of the most liquid markets in the region after China and Hong Kong.
Daily turnover is about USD6.3bn, or 16% of the total turnover of Asia ex Japan. The ratio of market cap
to cumulative monthly turnover, which gives an estimate of churning frequency by market participants
(the lower the ratio the better it is), stands at 13.4x and has increased from 6.5x levels seen in 2011.
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+822 3706 8750
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Korea: stock market liquidity
Largest stocks in Korea

14
KR
12
10
8
6
4
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Note: Chart represents the number of months that the market takes to turn over.
1
2
3
4
5
Top-5
6
7
8
9
10
SAMSUNG ELECTRONICS
HYUNDAI MOTOR
POSCO
KIA MOTORS
HYUNDAI MOBIS
SHINHAN FINL.GROUP
SAMSUNG ELECTRONICS
KB FINANCIAL GROUP
LG CHEM
SK HYNIX
Top-10
Index weight
24%
6%
4%
3%
3%
40%
3%
3%
2%
2%
2%
12%
Correlations
Somewhat surprisingly, Koreas correlation with global indicators is low. Although it is a very export-oriented,
technology driven market, this does not mean that the other domestic-oriented sectors do not count.
This explains why correlations with both domestic and international factors (M1, exports, ISM) are relatively
low. One half of the market is very sensitive to global events (but not to domestic issues) and vice versa for
the other half. Indeed, the Korean tech sector only has a very high correlation with the ISM index.
Correlations of MSCI Korea
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
World
Korea
Asia ex Japan
Since 2001
0.71
0.33
0.00
Since 2001
0.84
0.60
0.44
0.51
0.56
0.36
Past 15 years
0.71
0.58
0.68
0.67
0.70
Past 10 years
0.80
0.70

Asia Pacific
Domestic
Rest of the world
78
61
22
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Korean earnings are just above trend growth. As in Taiwan, earnings are volatile and cyclical.
Earnings showed a sharp decline in recessionary periods such as 1996-97 (the Asian Financial Crisis),
2001 (the end of the tech bubble) and 2008. Conversely, earnings growth was very high in times of
recovery, such as in 1998-99, 2002, 2004 and 2009-10.
MSCI Korea annual EPS growth
60
% y -o-y
80
50
110.4%
131.4
357.9
Korea
60
30
40
20
20
10
2013
2011
2009
2005
2007
2003
2001
1999
1997
Trend
(40)
1995
Actual Earnings
(20)
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
1993
40
Earnings growth in the coming years is forecast to slow from high levels, hovering in a range of 10-15%.
Consensus seems apprehensive about growth but earnings momentum the rate of change in earnings
forecasts appears to have touched a bottom and has been trending slightly higher in recent months.
Analysts have been upgrading their numbers a little after big earnings cuts in 2010 and early 2011.
The chart that follows shows a similar picture consensus is expecting better growth in the next 12
months than was forecast in late 2010.
Another measure which shows this optimism within the sell-side community is the number of upgrades as a
percentage of total earnings revisions. This measure hit a bottom in March 2011 and has been rising since.
Korean analysts are the most bullish in Asia. Only in the depths of the global recession in 2009 and the
Asian Financial Crisis of 1997-98 did their ratings reflect bearish sentiment. Ever since, they have been
bullish about their stocks.
What counts, therefore, is the degree of optimism among Korean analysts and this seems to be high.
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12-month forward EPS growth* vs MSCI Korea Index

80
(%)
50
40
60
40
40
20
20
Momentum
30
20
10
0
EPS grow th
MSCI KR Index y -o-y (RHS)


Korea vs MSCI Korea returns
80
(%)
80
60
40
70
60
20
50
40
% upgrades
2012
2011
2010
2009
2008
2007
-60
2006
20
2005
-20
-40
2004
30

3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
2012
2011
2010
2009
2008
2004
-10
2012
2011
2010
2009
2008
2007
-60
2006
-40
2005
-20
-40
2004
-20
80
60
40
20
0
-20
-40
-60
2007
(%)
2006
60
2005
Earnings momentum vs MSCI Korea returns
Analysts feeling more
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
Valuations
Korea has always been the least expensive market in the region. The post-2001 average forward PE for
Korea is 9.2x compared with 12.3x for Asia ex Japan. Currently, Korea is trading at 8.3x, lower than its
post-2001 average but far below the current regional forward PE of 10.0x. At its best, it trades at 13-14x.
There are several reasons for this valuation gap. The intricate ownership structure of conglomerates is one
and the proximity to volatile North Korea another. Also, domestic growth in this relatively mature market
is low. Lastly, some companies have seen steady margin erosion, especially in the technology sector.
The table on the next page shows that healthcare, consumer staples and utilities are expensive compared
with their own history, whereas telecoms, energy and consumer discretionary are cheaper.
Over the years, the gap between earnings yield and bond yield has been narrowing, suggesting that the
risk perception of corporates is improving. Falling bond yields also signify a decline in the cost of capital.
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Korea: PE band chart
1.0
20x
0.9
15x
0.8
10x
0.7
0.6
5x
0.5
01 02 03 04 05 06 07 08 09 10 11 12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
0.4
Dec-02
1350
1200
1050
900
750
600
450
300
150
0
Relative valuation
P rice level
PE:KR/Ax J
Similar to PE valuations, Korea also trades at a lower PB multiple than the region. The post-2003 average
forward PB is 1.1x for Korea compared with 1.5x for Asia ex Japan.
ROEs have hovered around 14% over the last two years, down from 18% in early 2004, reflecting some
of the margin squeeze in the technology sector and low returns on investment by some Korean companies
outside Korea.
Korea: Earnings and bond yields
Korea: PB vs ROE/COE (12-month forward)
20
2.0
BY
EY
PBR
ROE/COE
1.8
15
1.6
1.4
10
1.2
1.0
0.8
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
01 02 03 04 05 06 07 08 09 10 11 12
2000
0.6
Energy
Materials
Industrials
Consumer Staples
Healthcare
Financials
Technology
Telecom
Utilities
MSCI Korea
270
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
6.4
8.2
9.3
7.4
14.5
19.4
6.7
8.8
6.5
20.1
8.3
8.8
7.8
9.5
8.6
12.7
13.2
8.6
11.2
9.0
28.5
9.3
2.5
2.1
2.8
1.7
3.1
4.1
1.5
4.5
1.3
364.0
1.7
-0.9
0.2
-0.1
-0.7
0.6
1.5
-1.2
-0.5
-1.9
0.0
-0.6
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Fund flows
Korea is the only market where foreigners have been net sellers on a cumulative basis since 2003. The
cumulative inflows touched a peak of USD24.6bn in September 2004 after which the funds started selling
until February 2009. By this time they had sold USD56.7bn; y-t-d foreigners are net buyers of USD6bn of
Korean equities.
According to EPFR mutual fund data, fund managers (on a historical average basis) have always had an
underweight position on Korea.
Cumulative foreign institutional funds since 2003
Korea funds active weights and Z-score relative to benchmark
Active weight
Z-score
Current
-1M
-3M
-6M
-12M
-0.9
-0.2
-0.9
-0.3
-0.9
-0.3
-0.6
0.6
-0.8
-0.2
Source: EPFR, HSBC
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
USDbn
Funds
40
30
20
10
0
-10
-20
-30
-40
-50
-60
Economic basics
In the 1960s South Koreas GDP was below that of both Burma and the Philippines. Since then, the
country has a remarkable record of growth and integration into the high-tech world economy. The country
started by exporting toys, shoes and other low-tech goods to the West before switching to cars, ships,
microchips and other advanced products.
Ronald Man
Economist
+852 2996 6743
ronaldman@hsbc.com.hk
The Asian financial crisis in 1997-98 forced the big conglomerates, known as chaebol, to become much
more internationally competitive. Despite the global financial crisis, Korea, helped by stimulus measures
and strong domestic consumption that compensated for a drop in exports, was able to avoid a recession.
Exports to China, South Koreas largest market, have also increased rapidly in the last few years. The two
countries are starting discussions about reaching a free-trade agreement.
An extremely competitive education system and a highly skilled and motivated workforce are two
important factors driving Koreas knowledge economy; challenges include relations with impoverished
neighbour North Korea and an ageing population.

Monetary policy is conducted by the Bank of Korea, which operates on an inflation targeting regime. Its
target for 2010-12 is 2-4% y-o-y as measured by headline CPI. Inflation expectations are also monitored
closely by the central bank, among many other indicators, which has remained persistently high since 2011.
Trend growth in Korea has moderated from roughly 10% in the late 1980s to its current level of around
4% as the country developed and moved up the value-added ladder, by our estimates. While Korea is still
relatively dependent on the manufacturing sector, development of services will receive a boost from
foreign knowledge being channelled into the economy as a result of recent free trade agreements.
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Korea has a strong fiscal position after years of responsible budget allocation. The countrys debt-to-GDP
ratio is among the lowest across OECD countries, helping its sovereign debt recently earn a positive outlook
by major rating agencies. While the Korean government pursues to strengthen its standing further by
achieving a fiscal balance in 2013, it also has the muscle to support growth if deemed necessary. Interventions
in the foreign exchange market are conducted by the central bank to curb excessive capital volatility.
Key economic data
% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)
Retail sales
Consumer prices
KRW/USD*
3-month CD yield (%)**
5-year Treasury yield*
1.3
4.3
-1.9
1.3
1.4
6.6
4.4
2.3
3.3
3.2
6.8
4.7
0.3
1.3
1263
5.5
3.8
0
5.6
-1
-1.7
-2.7
-1.2
-8
0.3
-0.7
3.7
4
2.8
3.9
-2.1
1166
2.6
4.9
4.4
2.9
5.8
-0.3
6.2
14.7
17.3
6.3
16.6
3.7
9.6
2.9
2.9
1.6
1121
2.7
4.1
2.3
2.1
-1.1
0.4
2
9.5
6.5
3.6
6.9
3.4
8.4
4
2.4
1.7
1159
3.4
3.5
2.1
5.2
4.5
0.1
2.9
5.1
4.9
3.1
4.6
3.6
3.5
2.6
2.4
1.6
1120
3.6
3.7
*Period-end; **Average
Political structure
South Korea is a constitutional democracy with a directly elected President and National Assembly. The
President, who serves a five-year term, appoints the Prime Minister, who is responsible for day-to-day
policy. The National Assembly is a 300-member legislature.

The Bank of Korea (BOK) is the central bank. Its primary purpose is pursuing price stability.
The Financial Supervisory Service (FSS) is an integrated financial regulator that supervises financial
institutions under the oversight of the Financial Services Commission (FSC), the government regulatory
authority.
Korea Exchange (KRX) is the sole securities exchange operator in South Korea. The main index is the
KOSPI.
The Ministry of Knowledge Economy (MKE) regulates some areas of economic policy, especially the
industrial and energy sectors.
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Malaysia
Neel Sinha*
+65 6658 0658
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Introduction
Neel Sinha*
Asia
Singapore Branch
+65 6658 0658
Malaysia has a high weighting for utilities and other defensive sectors. This is also reflected in low
market volatility and low correlations with global indicators. Domestic matters therefore carry a larger
weight when making investments in Malaysia.
Market structure
Although the two biggest sectors financials and industrials constitute around 45% of MSCI Malaysia,
the market has a higher proportion of stocks (35%) in defensive sectors (consumer staples, utilities and
telecoms) than other Asian markets.
As a consequence, Malaysias market volatility is low compared with the rest of Asia. If we look at
earnings and total market volatility, Malaysia scores low (i.e. it is relatively stable) on both counts. In
terms of PE multiple volatility, Malaysia is the most stable market in Asia.
60
1.0
40
400
0.8
300
0.6
200
0.4
100
0.2
-20
0.0
-40
2012
2011
2010
2009
2008
2007
2004
2003
-60
2001
Ax J
20
1999
MSCI Malay sia
Malay sia
2005
2006
1.2
500
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
600
2002
Average calendar year performance of MSCI Indices
2000
Malaysia market composition

Sector
FINANCIALS
INDUSTRIALS
TELCOM SERVICES
CONSUMER STAPLES
UTILITIES
MATERIALS
ENERGY
HEALTHCARE
Weights
30%
15%
12%
12%
11%
11%
6%
4%
0%
0%
MSCI Malaysia is a well diversified universe. The top-five and top-10 stocks are not dominated by any
particular sector, making up 35% and 56% of the index, respectively. On this measure it is more
diversified than Singapore and Hong Kong and substantially less than other ASEAN markets. It also
means that stock selection plays an important role. Also, Malaysia has a growing domestic fund
management industry, which is a large holder of stocks in the market.
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Malaysia is one of the smaller markets in the region, with a 5% weight in MSCI Asia ex Japan. Liquidity
is not very high and turnover is just 1% of the Asia ex Japan market.
Malaysia: Stock market liquidity
Largest stocks in Malaysia

80
MY
70
60
50
40
30
20
10
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
1
2
3
4
5
Top-5
6
7
8
9
10
Index weight
CIMB GROUP HOLDINGS

MAYBANK
SIME DARBY
GENTING
PETRONAS CHEMICALS
10%
8%
7%
5%
5%
35%
5%
4%
4%
5%
3%
TENAGA NASIONAL
IOI CORPORATION
THE PUBLIC BANK
AXIATA GROUP
DIGI COM
Top-10
21%
Correlations
Malaysia is a domestically driven market in that it has a high correlation with domestic M1 money supply
(0.66), higher than the regional average of 0.44, and a lower correlation with global equities (0.48) than
the regional average.
This is a reflection of the markets composition the larger stocks have a distinctly domestic flavour.
Correlations of MSCI Malaysia
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
Malaysia
Asia ex Japan
Since 2001
0.72
0.49
0.66
Since 2001
0.84
0.60
0.44
0.68
Past 15 years
0.63
0.38
Past 10 years
0.65
0.50
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Malaysias earnings are less volatile than the rest of the region. Currently, earnings have moved back to
trend growth after a decline in 2009.
Compared with other ASEAN countries, earnings volatility is also low.
MSCI Malaysia annual EPS growth*
40
35
30
25
20
15
10
5
0
40
226.1%
% y -o-y
Malay sia
20
0
Actual Earnings
-40
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
-20
Trend
*The volatility in reported annual earnings growth is often due to exceptionals and one-
off items like asset disposals or write-offs.

Although Malaysias economy is highly sensitive to global growth (its gross exports to GDP ratio is one
of the highest in Asia), this is not reflected in the stock market, where the largest players are in utilities,
telecoms, palm oil and gaming.
The earnings momentum chart shows the level of earnings upgrades and downgrades in a 12-month
forward period.
This indicator shows that analysts optimism for earnings over the next 12 months has started to rise.
While they are still revising up their forecasts, it is happening at a slower pace than in late 2010.
Earnings momentum* vs MSCI Malaysia returns
(%)
60
60
40
Momentum
MSCI MY Index y -o-y (RHS)

-40
EPS grow th
2012
2011
-60
2010
-15
2009
2012
2011
2010
2009
2008
2007
2006
-60
2005
-25
2004
-40
-20
-5
2008
-20
-15
2007
0
-5
20
2006
20
40
15
2005
15
276
(%)
25
2004
25
12-month forward EPS growth* vs MSCI Malaysia Index

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Multi-sector
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This muted optimism is also evident when looking at stock upgrades and downgrades. The number of upgrades
has started to decline, suggesting that analysts are becoming more cautious about Malaysian stocks.
This is also evident in the recommendation consensus score, which ranks and rates analysts stock
recommendations. After reaching a high level of bullishness, this ratio has started to turn towards the
historical average.
Malaysia vs MSCI Malaysia returns
100
(%)
60
40
80
20
60
0
40
-20
% upgrades
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
2012
2011
2010
2009
2008
2007
-60
2006
0
2005
-40
2004
20
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
recommendation, 3 to hold and 5 to sell

Malaysia is currently trading at a forward PE of 13.8x, while the average over the last 10 years has been
14.1x. The expected EPS growth is 12.4% for this year compared with 15.7% for the region.
Malaysia has traded at a 10% premium to Asia ex Japan region historically but currently the premium is
much higher at 40%.
Malaysia: PE band chart
Relative valuation
700 Price level
16x
1.5
1.4
600
1.3
500
14x
12x
1.2
10x
1.0
400
1.1
0.9
300
0.8
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
200
01 02 03 04 05 06 07 08 09 10 11 12
PE:MY/Ax J
Malaysia has always traded on a higher forward PE multiple than the rest of the region. Part of this
premium can be explained by its low correlation with global equities, having the highest weighting in
defensive sectors, low earnings volatility, and a large domestic institutional investor base.
Telecoms is the most expensive sector, followed by energy. The cheapest sectors are financials and
materials.
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Malaysian ROEs have hovered between a low of 11% in 2001 and a high of 15% in 2008. Current
forecasts point to a ROE of close to 14%, showing a strong recovery since 2008.
PB ratios have hovered in a range of 1.4x and 2.4x, but these include some extremes. The average is
about 1.8x, with current valuations above that level.
Malaysia: Earnings and bond yields
Malaysia: PB vs ROE/COE (12-month forward)
12
3.0
2012
01 02 03 04 05 06 07 08 09 10 11 12
2011
0.5
2010
2009
1.0
2008
2007
1.5
2006
2005
2.0
ROE/COE
2004
2002
2.5
2000
10
2003
PBR
EY
2001
BY
Energy
Materials
Industrials
Consumer Staples
Financials
Telecom
Utilities
MSCI Malaysia
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
18.1
13.4
13.5
12.2
15.8
12.1
18.7
14.0
13.8
11.2
14.9
14.3
13.4
15.2
13.4
15.7
13.9
13.9
3.5
2.8
1.9
2.4
1.9
1.3
1.6
1.2
1.2
2.0
-0.5
-0.4
-0.5
0.3
-0.9
1.8
0.1
-0.1
Fund flows
In the last decade, mutual funds have taken money out of Malaysia (about USD1bn). Large inflows, in
particular in 2003-07, peaked at a cumulative USD4bn by early 2007.
Since then, foreign investors have been selling Malaysian equities. Although they have been net buyers
since 2009, the level of buying has never been sufficient to build back the investment exposure these
investors had before the financial turmoil in 2008.
This is also reflected in fund weightings, with most investors being underweight Malaysia, both for AEJ
and GEM funds.
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USDbn
Malaysia funds active weights and Z-score relative to benchmark
4.0
Funds
3.0
Active weight
Z-score
2.0
1.0
Current
-1M
-3M
-6M
-12M
-0.4
-0.7
-0.4
-0.8
-0.4
-0.9
-0.3
-0.8
-0.3
-0.6
Source: EPFR, HSBC
0.0
-1.0
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
-2.0
Source: EPFR, HSBC
Economic basics
After being known as a major producer of tin and rubber, Malaysias economy has long since diversified.
Today Malaysia is an industrialised nation whose main trading partners are the US, Japan and Singapore,
and a major exporter of semiconductors, electronic goods and palm oil. The country also has significant
reserves of oil and gas. The oil and gas sector supplies more than 40% of government revenue.
Leif Eskesen
ASEAN
Singapore Branch
+65 6658 8782
As an export-dependent nation, Malaysia was severely affected by the global recession that followed the
financial crisis of 2008. In 2010 the government laid out an Economic Transformation Plan (ETP), an
ambitious initiative to double income per person to USD15,000 to reach developed-nation status by 2020.
The aim is to focus on high value investments and reduce dependence on lower-end manufacturing.
While the economy has slowed in recent quarters, domestic growth momentum is providing a healthy
cushion. This is partly due to favorable labour market conditions, subsidies and wage hikes, which have
supported consumption. Investment has also picked up, supported by both private and public-sector
spending related to the ETP.

In September 1998 Bank Negara Malaysia (BNM) pegged the USD/MYR exchange rate in response to
the Asian Financial Crisis. It moved the currency to a managed float in July 2005 and since then has
progressively liberalised the FX market, including allowing the use of MYR for trade settlement and
inter-company foreign currency borrowings.
In recent years the central bank has taken a more hands-off approach to the Malaysian ringgit than its
regional peers. This has helped to lend greater stability to the currency amidst the volatility of global
capital flows after the global recession.
On the fiscal side spending remains generous ahead of the general election, which has to be held before
March 2013. The administration has introduced a minimum wage policy, income-support programmes and
civil service pay rises. However, more broad-based productivity improvements and efforts to enhance the
investment climate will be needed to meet the ETP target of achieving developed-nation status by 2020.
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Key economic data

% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
MYR/USD*
3-month interbank rate (%)*
8.7
6.9
2.4
0.2
6.4
1.6
2.3
4.8
0.8
3.1
5.4
17.1
-4.6
3.46
3.37
0.6
4.9
-2.7
-1.4
-1.6
-10.9
-12.7
-1.5
-7.6
3.5
0.6
15.5
-6.7
3.42
2.17
6.6
2.9
10.4
1.2
10.4
11.3
15.6
7.2
7.3
3.2
1.7
11.1
-5.4
3.08
2.98
7.1
16.1
6.5
0.5
7.3
4.2
6.2
5.1
1.2
3
3.2
11
-4.8
3.17
3.22
6.5
7
16.7
0.5
9.3
2.7
7.5
4.2
3.6
3.3
2.4
9.3
-4.9
3.1
3.2
*Period-end
Political structure
Malaysia has a bicameral parliament composed of an upper house (Senate) and a lower house, the House
of Representatives (Dewan Rakyat). The head of government is the Prime Minister, who is appointed by
members of the House of Representatives.

Malaysias central bank, Bank Negara Malaysia, promotes monetary and financial stability.
The Securities Commission Malaysia supervises exchanges, clearing houses and central depositories.
Bursa Malaysia offers exchange-related services including trading, clearing, settlement and depository
services. The major index is the Kuala Lumpur Composite Index (KLCI).
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Singapore
Neel Sinha*
+65 6658 0658
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Introduction
Neel Sinha*
Asia
Singapore Branch
+65 6658 0658
Singapore is a stable developed market. It traditionally trades at a premium to the rest of the region. It is
concentrated, with financials dominating. This makes sector selection important.
Market structure
MSCI Singapore is concentrated, with financials constituting 47% of the index. The second-biggest sector
is industrials (25%), followed by telecoms (12%).
Most of these companies, however, have a distinctly non-Singapore flavour. For example, Singtel owns assets
in India and Indonesia, most industrials export equipment to oil producers globally or build ships for global
buyers, while various financials have expanded across Asia (DBS) or ASEAN (UOB).
700
600
500
400
300
200
100
0
Singapore market composition
1.5
Sector
1.4
FINANCIALS
INDUSTRIALS
TELCOM SERVICES
CONSUMER STAPLES
ENERGY
MATERIALS
UTILITIES
HEALTH CARE
1.3
1.2
1.1
1.0
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
0.9
MSCI Singapore
Weights
47%
25%
12%
9%
6%
0%
0%
0%
0%
0%
Indeed, five out of the 10 MSCI sectors are not present in MSCI Singapore. The top-5 and top-10 stocks
constitute 49% and 65% of the index, respectively. After the ASEAN markets, it is the most concentrated
market in the region.
Despite this concentration in financials, Singapore does offer a number of well-regarded companies in
sectors such as real estate, shipping, and telecoms. Some of these have global leadership in various niche
products (think oil rigs).
Singapore is classified as a developed market by MSCI. It is a liquid market with daily market cap about
32x cumulative monthly trading volumes. One of the Singapore governments investment arms, Temasek
Holdings, has material shareholdings in a number of large caps (e.g. Singtel, Sembcorp Industries and ST
Engineering).
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Singapore: Stock market liquidity
Largest stocks in Singapore

70
SG
60
50
40
30
20
10
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
1
2
3
4
5
Top-5
6
7
8
9
10
Top-10
SINGAPORE TELECOM
DBS GROUP HOLDINGS
UNITED OVERSEAS BANK
OCBC
KEPPEL CORPORATION
GENTING SINGAPORE
CAPITALAND
WILMAR
SINGAPORE PRESS
FRASER AND NEAVE
Index weight
12%
11%
10%
10%
6%
49%
4%
3%
3%
3%
3%
16%
Correlations
Being a small, open economy, Singapores GDP has a large export component. However, this does not
directly translate into a high correlation with exports. Given the large dependence on financials, the
Singapore equity markets correlation with exports (0.54) is not very high.
Thus, as in Korea, the market is not a good reflection of the underlying economy and the correlation of
market sectors to global and domestic trends can vary widely.
Equity returns also have a low correlation with the domestic money supply, implying that the market is
still more dependent on global factors than domestic ones. This is also evident from the fact that
Singapore has the highest correlation (0.79) with MSCI World in the region.
Thus, this is a market driven more by global than domestic factors, but less so than many other Asian countries.
Correlations of MSCI Singapore
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia x Japan
World
Singapore
Asia ex Japan
Since 2001
0.76
0.54
0.45
Since 2001
0.84
0.60
0.44
0.68
Past 15 years
0.84
0.73
Past 10 years
0.87
0.80

Asia Pacific
Domestic
Rest of the world
51
19
49
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Singapore earnings are currently trading below trend. Austerity measures to cool the real estate sector
might be one reason for the drop in earnings momentum in 1H12.
Singapore earnings are the most stable in the region. This is supported by the fact that earnings volatility
in the last five years has been 16.9%, well below the regional average of 24.6%. Indeed, on a five-year
historical basis, this is the least volatile market in Asia.
For example, during the downturn of 2008 Asia ex Japan EPS growth fell 27.8%, while Singapores EPS
registered negative growth of 12.7%.
2013
2011
Trend
2009
Actual Earnings
Singapore
2007
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
20
2005
40
2003
60
2001
80
66.9%
1997
100
63.3%
1999
% y -o-y
40
30
20
10
0
(10)
(20)
(30)
(40)
120
1995
140
1993
MSCI Singapore annual EPS growth*
1991
As the earnings momentum chart indicates, analysts earnings forecasts have closely tracked the market
over the years.
As Singapore companies earnings are more dependent on external factors, analysts have often turned
positive on earnings when there were signs of the trade cycle improving.
Investors have been more cautious on Singapore equities fell more than analysts earnings estimates as
the market was derated (on a PE basis).
Earnings momentum vs MSCI Singapore returns
(%)
90
20
10
60
30
90
60
10
30
0
Momentum
MSCI SG Index y -o-y (RHS)
EPS grow th
2012
2011
2010
2009
-60
2008
-20
2007
-30
2006
-10
2005
2012
2011
2010
2009
2008
-60
2007
-40
2006
-30
2005
-20
-30
2004
-10
284
(%)
20
2004
30
12-month forward EPS growth* vs MSCI Singapore Index

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The earnings revision ratio shows the number of upgrades in stock ratings. It is worth noting that the
correlation between this measure and MSCI Singapore monthly y-o-y returns is high (0.69). Thus,
analysts recommendations and the market move in line with each other (but, as always, the causal
relationship is unclear).
Analysts recommendations on Singapore stocks typically follow the trade cycle. Below, we can see that
analysts were busy upgrading in 1999-2000, 2002-03, 2006-08 and 2010. More recently, analysts have
started to revisit their outlooks and some downgrades have come through. Singapore analysts have moved
into bearish territory.
Singapore vs MSCI Singapore returns
100
(%)
90
-60
% upgrades
2012
0
2011
-30
2010
20
2009
2008
40
2007
30
2006
60
2005
60
2004
80

3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
Analysts f eeling more bullish
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
Singapore has always traded at a premium to the region (average c20%). The market has traded at an
average of 14.5x 12-month forward earnings but currently is trading at a forward PE of 12.1x. Analysts
expectations of EPS growth for 2012 are also low (7.5%) compared with the region, which gives room for
upside surprise.
Singapore on average has traded at a 20% premium to Asia ex Japan PE valuations. This is a reflection of
low volatility and lower risk to earnings. Currently, this premium is around 19%.
Singapores earnings yield has been stable over the cycles, mostly in the range of 6-8%, indicating low
risk to corporate earnings.
Forward ROE for Singapore is currently estimated at 10.6%, while the post-2001 average is 11.2%. But
the current forward PB multiple is 1.3x, lower than the average of 1.6x. This suggests that analysts are
optimistic about the future prospects of companies but investors have yet to price that in.
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A similar picture emerges on PE levels as depicted in the PE band chart earnings are forecast to rise but
the market has not yet priced this in.
Singapore: PE band chart
Relative valuation
2700
2400
2100
1800
1500
1200
900
600
300
0
20x
15x
1.8
1.6
1.4
10x
1.2
5x
1.0
01 02 03 04 05 06 07 08 09 10 11 12
May-12
May-11
May-10
May-09
May-08
May-07
May-06
May-05
May-04
May-03
May-02
0.8
PE:SG/Ax J
Singapore: Earnings and bond yields
Singapore: PB vs ROE/COE (12-month forward)
14
3.0
12
BY
EY
PBR
2.5
10
ROE/COE
2.0
1.5
2012
2011
2010
2009
2008
2007
2006
2005
01 02 03 04 05 06 07 08 09 10 11 12
2004
0.0
2003
2002
0.5
2000
2001
1.0
Industrials
Cons Discretionary
Consumer Staples
Financials
Telecom
MSCI Singapore
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
12.3
13.7
10.2
12.0
12.3
12.1
13.2
15.9
15.3
14.1
13.6
14.1
2.1
1.8
6.2
1.9
1.7
1.7
-0.4
-1.2
-0.8
-1.2
-0.7
-1.2
Fund flows
To gauge fund flows we depend on mutual fund data by EPFR for Singapore in the absence of FII data
from the stock exchange. The mutual funds went net negative late in 2010 for the first time since June
2003 and have stayed that way. Currently, AEJ funds are neutral on Singapore. As measured against
history, there is not much room for them to cut positions further.
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USDbn
Singapore funds active weight and Z-score relative to benchmark
4.0
Funds
3.0
Active weight
Z-score
2.0
1.0
Current
-1M
-3M
-6M
-12M
1.3
1.2
1.3
1.4
1.3
1.2
1.3
1.2
1.2
1.3
Source: EPFR, HSBC
0.0
-1.0
Mar-12
Aug-11
Jun-10
Jan-11
Apr-09
Nov-09
Sep-08
Jul-07
Feb-08
Dec-06
Oct-05
May-06
Mar-05
Jan-04
Aug-04
Jun-03
-2.0
Source: EPFR, HSBC
Economic basics
Singapore has a strong free-market economy and per capita GDP is higher than in most developed
countries. The economy depends heavily on exports, particularly consumer electronics, petroleum
products, pharmaceuticals, and a growing financial services sector.
Leif Eskesen
ASEAN
Singapore Branch
+65 6658 8782
The city-state is seen as a bellwether for the region as its trade is three times the size of its economy.
Given the global nature of its economy, Singapore is vulnerable to problems overseas, especially Europe
and the US. The global financial crisis hit Singapore hard. The economy contracted 1% in 2009 but then
rebounded 14.8% in 2010 and 5% in 2011 on the strength of renewed exports.
Over the longer term, the government hopes to establish a new growth path that focuses on raising
productivity. It is counting on two new integrated resorts to help fuel tourism and economic growth. The
government hopes to double visitor arrivals to 17m by 2015.

The primary objective of the Monetary Authority of Singapore (MAS) is to promote price stability as a
sound basis for sustainable economic growth. The MAS monitors core CPI inflation to capture price
pressures that are persistent and generalised in nature. The central bank has a reputation for being prudent
and effective in policy making.
Monetary policy is centred on the management of the exchange rate rather than targeting interest rate
levels. The MAS manages the Singapore dollar against a basket of currencies of the countrys main
trading partners and competitors. The trade-weighted nominal effective exchange rate (NEER) is allowed
to fluctuate within a policy band, and where necessary, MAS conducts direct interventions in the foreign
exchange market to maintain the exchange rate within this band. Changes in policy can involve a shift in
the position of the band, a change in the slope of the band, and a change in the width of the band.
Monetary policy meetings are typically held twice a year.
The government conducts fiscal policy through annual budgets prepared for each financial year beginning
1 April. By law the government is required to keep a balanced budget over the policy cycle. Many years
of prudent fiscal policies have allowed Singapore to build up significant fiscal reserves, and the
government does not borrow to fund expenditure.
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Key economic data

% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
SGD/USD*
3-month money (%)*
10-year bond yield (%)*
3.3
6.4
13
2.4
11.6
4.7
9.5
1.7
-4.2
2.7
6.6
13.9
1.5
1.43
0.96
2.05
0.1
3.6
-2.9
-2.6
-7
-7.8
-11.1
-1
-4.2
2.3
0.6
16.2
-0.9
1.41
0.68
2.66
6.5
11
7
-2.7
6.9
19.1
16.2
14.8
29.7
2.2
2.8
24.4
0.2
1.28
0.44
1.8
4.1
0.9
3.3
-1.3
5.4
2.6
2.4
5
7.8
2
5.2
21.9
1.3
1.3
0.39
1.4
3.8
4.3
2.8
-0.2
5.2
0.2
0.7
2.6
3
2.1
4.4
16.8
0.4
1.23
0.4
1.5
*Period-end
Political structure
Singapore is a parliamentary republic. The head of state is the President, but the post is largely
ceremonial. The head of government is the Prime Minister who represents the ruling party in the national
legislature, which has 87 seats.

The Monetary Authority of Singapore (MAS) is Singapores central bank. It also supervises the
securities industry, banking, insurance, and the financial sector in general.
Singapore Exchange (SGX) owns and operates Singapores Securities and derivatives exchange and
their related clearing houses. The Straits Times Index (STI) is the main benchmark index.
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Taiwan
Jenny Lai*, CFA
Head of Research, Taiwan, and Tech Hardware Analyst
+886 2 6631 2860
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Introduction
Taiwan is one of the most export-sensitive markets in the region, a reflection of its high dependence on
technology. This sector accounts for 55% of the market capitalisation, with 15% in financials and the rest
in smaller non-tech sectors. Sector selection is the key to portfolio performance. However, some large
tech stocks also dominate, so stock selection within the sector is also important.
Market structure
While technology accounts for more than half of the MSCI Taiwan (55%), a decade ago it was above
60%. Its still growing but other sectors are growing much faster, partly because of China.
Taiwan technology players are active in multiple sub-sectors within the tech supply chain, dominating in
PCs, tablets, digital cameras and smartphones. Taiwan also has a number of companies with the largest
market share globally in their respective sectors, including TSMC in foundry, Hon Hai in EMS
(electronics manufacturing service) and Quanta in notebook PC ODM (original design manufacturing).
This reliance on one, highly cyclical sector explains the volatile nature of Taiwan equities. The market
suffered the worst fall during the dotcom burst in 2000-01 where the Taiex (a market capitalisation
weighted index that consists of all companies listed on the Taiwan Stock Exchange) fell from around
10,000 to 4,000. The market suffered a similar fate in the 2008-09 financial crisis. Most recently, the
market lost 22% between June 2011 and May 2012 as a result of a capital gains tax and the weak global
economic outlook.
Taiwan market composition
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
500
400
300
200
100
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
MSCI Taiw an
Sector
Weights
FINANCIALS
MATERIALS
TELCOM SERVICES
INDUSTRIALS
CONSUMER STAPLES
ENERGY
UTILITIES
HEALTHCARE
55%
15%
14%
6%
4%
4%
3%
1%
0%
0%
The top five and top 10 stocks in MSCI Taiwan constitute 34% and 44% of the index, respectively.
Despite the dominance of technology, Taiwans largest (5-10) stocks have the lowest weight in the
overall index within the Asian universe. This is despite the fact that TSMC, the worlds largest foundry
player, is Taiwans biggest company, accounting for as much as 15% of the market.
Taiwan is also one of the most liquid markets in the region it trades USD2.5bn a day and the daily
average market cap is around 10x the equity turnover in a month.
Taiwan has a high retail participation of close to 60%. This can further add to market volatility.
290
Jenny Lai*, CFA

Head of Research, Taiwan,
and Tech Hardware Analyst
HSBC Securities (Taiwan)
Corporation Limited
+886 2 6631 2860
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Taiwan: Stock market liquidity
Largest stocks in Taiwan

20
TW
16
12
8
4
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Note: chart represents the number of months that the market takes to turn over.
1
2
3
4
5
Top-5
6
7
8
9
10
TAIWAN SEMICON (TSMC)

HON HAI
CHUNGHWA
CHINA STEEL
FORMOSA PLASTICS
HTC CORP
MEDIATEK
NAN YA PLASTICS
FORMOSA CHEMICALS & FIBRE
ASUSTEK COMPUTER
Top-10
Index weight
18%
7%
3%
3%
3%
34%
2%
2%
2%
2%
2%
10%
Correlations
Given its dominance in various technology supply chains, Taiwan is an export market. This also explains
the high market correlation with exports. Equities are highly correlated with domestic money supply (M1)
highlighting the fact that:
It is largely a retail-driven market
Financials form an important segment of the market
The foreign fund flows is another factor driving the market, as exhibited by the high correlation of 0.8 in
the last five years.
Correlations of MSCI Taiwan
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
Taiwan
Asia ex Japan
Since 2001
0.76
0.74
0.63
Since 2001
0.84
0.60
0.44
0.73
0.78
0.67
Past 15 years
0.74
0.59
0.68
0.67
0.70
Past 10 years
0.84
0.67

Asia Pacific
Domestic
Rest of the world
64
37
36
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Earnings
The chart showing trend and actual earnings indicates there are long periods when earnings are well above
or below trend. Indeed, earnings of Taiwan firms are the most volatile in the region (with volatility of 50.7%
in EPS growth in the last 10 years).
One of the underlying issues is the cyclical nature of demand and the shortening product cycle of global
technology sectors as well as, in some cases, high fixed costs (including capex) which allows for
substantial operational leverage, both up and down.
Lastly, many Taiwan companies operate on thin margins due to the nature of their assembly business, so
small changes in sales can have a big impact on earnings.
During any economic downturn, earnings can take a big hit (as in 2001 and 2008) but these can snap back
quickly when demand improves (as in 2009 and 2010). Also, as most of the earnings are from exports,
foreign exchange fluctuations in the worlds major currencies (especially USD, Japanese Yen and the
Euro) play an important part.
MSCI Taiwan annual EPS growth
28
% y -o-y
24
Taiw an
75
20
50
12
25
2013
2011
2009
2007
2005
2003
2001
1999
1997
Trend
(50)
1995
Actual Earnings
(25)
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
1993
16
The earnings momentum chart indicates that analysts have generally been optimistic about earnings in the
last decade, with the exceptions of 2005 and 2009 when global demand for tech products fell.
In the last couple of years, the earnings momentum has been falling, indicating that analysts have started
to factor in weakness in demand for tech. Also, banks might face lower earnings growth due to rising
interest rates across Asia, including Taiwan.
Analysts forecasts are important to Taiwan equities earnings upgrades and downgrades are key to
market performance. This is evident in the high correlation (0.72) between the 12-month forward EPS
growth and MSCI Taiwan (see chart on next page).
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Momentum
EPS grow th
MSCI TW Index y -o-y (RHS)
2012
2011
2010
2012
80
60
40
20
0
-20
-40
-60
2009
-60
2004
-40
-80
2011
-50
2010
-20
2009
-20
2008
20
10
2007
40
40
2006
70
2005
60
2004
100
(%)
80
60
40
20
0
-20
-40
-60
2008
80
2007
(%)
2006
130
12-month forward EPS growth* vs MSCI Taiwan Index
2005
Earnings momentum vs MSCI Taiwan returns
Note:- *Percentage change in trailing 12-month and 12-month forward EPS

Unlike some other Asian countries, analysts have been fairly neutral on stocks throughout the cycle, with
bouts of optimism in 2004, 2006, late 2007 and 2010. But in 2005, early 2006 and 2009 analysts were
busy downgrading.
More recently, analysts have been revising down earnings forecasts, depicted by a revision ratio of less
than 30% (i.e. more downgrades than upgrades). This coincided with cuts in ratings.
Analysts are below the average level of their historical forecasts on Taiwan, as suggested by the
recommendation consensus score (RCS) chart below.
It is interesting to note that Taiwan analysts have in general been more negative than other Asian country
analysts in the early parts of 2000s, with RCS well into bearish territory. This changed in 2006, when
markets recovered, and in 2009 after the financial crisis.
Taiwan vs MSCI Taiwan returns
100
(%)
80
60
80
40
60
20
40
0
-20
20
-40
-60
% upgrades
2012
2011
2010
2009
2008
2007
2006
2005
2004

3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
Analyst s f eeling more bearish
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
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Valuations
The PE band chart shows that Taiwan has mostly traded at 10-15x forward earnings. In the early 2000s
PEs were inflated by excessively high global technology valuations before the Internet bubble.
On a relative basis, on average Taiwan has traded at a 20% premium to the region. But a closer look at the
chart below reveals that its a rather technical number in the sense that if it werent for the spike in
relative valuations in 2009, this market would have traded more or less on a par with the rest of the
region. Note also that Taiwan has a relatively high dividend yield of 4.0% compared with the regional
average of 2.6% for Asia ex Japan. This is mostly driven by high telecom and tech yields.
Taiwan: PE band charts
2.7
2.4
20x
2.1
1.8
15x
10x
1.5
1.2
0.9
0.6
01 02 03 04 05 06 07 08 09 10 11 12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
5x
Dec-02
600
525
450
375
300
225
150
75
0
Relative valuation
P rice level
PE:TW/Ax J
Telecoms and consumer sectors are expensive against their own history (as shown in the table above).
Telecoms often acts as a defensive sector, given its high dividend yields and stable earnings.
There has been a wide gap between the earnings yield and bond yield, except in 2009, when the earnings
yield fell significantly due to the market slump. Earnings yields have been very volatile, suggesting risk
due to volatile markets and volatility in analysts forecasts because of corporate earnings risk.
Taiwans forward ROE has been around 14-16% since 2004. It went down during the cyclical downturn,
but is now back at 2004 levels. On the other hand, forward PB valuations havent risen to their pre-crisis
levels, suggesting a lack of confidence that excessive capacity in many industries (e.g. memory, LCD and
solar) will be fully utilised in the foreseeable future.
Taiwan: Earnings and bond yields

12
BY
EY
10
Taiwan: PB vs ROE/COE (12-month forward)

4.0
PBR
3.5
ROE/COE
3.0
8
2.5
2.0
1.5
1.0
0.5
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2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
07 08 09 10 11 12
2001
01 02 03 04 05 06
2000
0.0
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Materials
Industrials
Consumer Staples
Financials
Technology
Telecom
Energy
MSCI Taiwan
Current PE
Rolling 10-yr avg
Rolling 10-yr SD
# SD from avg
14.6
13.9
15.2
18.9
12.1
12.5
16.8
22.9
13.2
11.8
14.4
14.6
17.8
14.4
15.8
12.3
17.8
13.9
2.9
6.2
7.1
2.2
2.4
10.9
2.4
4.8
3.5
1.0
-0.1
0.1
0.5
-0.9
-0.3
1.9
1.1
-0.2
Fund flows
Foreigners like the Taiwan market since June 2003 they have invested USD58bn in Taiwan equities. This is
39% of the total invested amount for six Asian markets (based on FII data). Foreigners currently own 31% of
the Taiwan market.
The maximum fund flows received in a year was USD22.2bn in 2005, and the maximum outflow was
USD14.7bn in 2008.
In 2009 foreigners invested the same amount that they took out in 2008, indicating that the outflow was
cyclical rather than a reallocation to other countries.
Year to date 2012, Taiwan has had a net outflow of USD0.8bn.
According to data from EPFR, a US company that tracks fund flows, AEJ mutual funds are currently
32.5% underweight on Taiwan, while historically they have been 13% underweight.
Similarly, GEM funds are also underweight but this is in line with their historical weightings and it is
important to note that these funds have never invested much in Taiwan.
USDbn
Taiwan funds active weights and Z-score relative to benchmark
80
Funds
60
Active weight
Z-score
Current
-1M
-3M
-6M
-12M
-1.1
-1.3
-1.1
-1.7
-1.1
-1.4
-0.9
-0.8
-0.8
-0.3
40
Source: EPFR, HSBC
20
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
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Economic basics
Taiwans export model switched from basic manufacturing to technology-intensive industries in the
1980s. Today, it is one of the worlds leading producers of electronics. This means that while the
economy typically enjoys a disproportionate boost when the global trade cycle is on an upturn, it also
tends to suffer more during downturns.
The economy has suffered from structural challenges over the last two decades, including the hollowing
out of some sectors as industries moved to the mainland, accompanied by both human and financial
capital. This, in turn, has kept wage inflation (both nominal and real) extremely low, curtailing the
spending power of households and the development of private consumption into a fully fledged growth
driver as occurred in Hong Kong and South Korea.
China is absorbing a growing proportion of Taiwans exports, more than making up for the fall in Western
demand during the depths of the global financial crisis. Increasingly, this appetite is being fed by Chinas
domestic demand as opposed to its export machine. Cross-Strait economic ties have expanded rapidly
through the implementation of the Economic Co-operation Framework Agreement (ECFA) signed in 2010.

As one of Asias highest-beta economies, Taiwan is highly reliant on external demand and more exposed
to Western demand than its peers. With a quarter of its economy driven by manufacturing and 45% of its
workers employed in either trade or manufacturing, domestic demand is also critically dependent on the
global trade cycle.
The island runs a large trade surplus, and its foreign reserves are the worlds fourth largest, behind China,
Japan, and Russia. China has overtaken the US to become Taiwans second-largest source of imports after
Japan. Better cross-Strait relations should accelerate Taiwans discussions with other countries and
regions in terms of similar free trade agreements.
One sector that has grown rapidly is tourism. In 2010, mainland travellers became the biggest visitor group
to Taiwan in 2010, after having risen more than 10-fold since 2004. About half of the increase took place
after 2008, when mainlanders were allowed to visit Taiwan directly without travelling via a third country.
296
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Donna Kwok
Economist
+852 2996 6621
donnahjkwok@hsbc.com.hk
abc

Multi-sector
July 2012
Key economic data

% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
TWD/USD
3-month CD (%)*
Policy rate (%)
-0.9
0.8
-12.4
1
-2.4
0.9
-3.7
0.7
-1.8
4.1
3.5
6.9
-0.5
32.9
2.1
2
0.8
4
-11.2
-1
-3.7
-8.7
-13.1
-1.8
-8.1
5.8
-0.9
11.4
-3.5
32
0.5
1.25
3.7
0.6
24
1
9.8
25.6
28.2
10.7
26.9
5.2
1
9.3
-2.3
30.4
0.6
1.63
3
1.9
-3.9
0.2
0.3
4.5
-0.7
4
5
4.4
1.4
8.9
-2
30.3
0.9
1.88
2.3
1.4
1.5
-0.3
1.4
2.6
1.5
2.3
5.1
4.4
1.4
7.4
-1.8
29.4
1
2
*Average
Political structure
Taiwans legislative body is known as the Legislative Yuan, which has one chamber with 113 seats and
each member serving a four-year term. Taiwan has two major political parties the Kuomintang (KMT)
and the Democratic Progressive Party (DPP).

The Central Bank of China (Taiwan) aims to promote financial stability and ensure sound banking
operations.
The Financial Supervisory Commission acts as a single regulator for the banking, securities and
insurance sectors.
The Taiwan Stock Exchange (TWSE) is the largest stock exchange. The main index is the TAIEX.
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Notes
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Thailand
Neel Sinha*
+65 6658 0658
299
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Multi-sector
July 2012
Introduction
Even well before the Asian Financial Crisis in 1997-98 Thai equities started to slide from elevated levels.
The market bottomed in late 1998 but did not recover until 2003-04, by which time most Thai balance
sheets had been repaired. Since then, the market has performed remarkably well.
Market structure
Despite a wide variety of sectors in Thailand, its equity market is quite concentrated. Energy and
financials make up 64% of the market. The top-five companies account for over 44% and PTT and PTT
E&P nearly 20%. This makes Thailand the most concentrated market in the region.
Largest stocks in Thailand
2.0
700
600
500
400
300
200
100
0
1.5
1.0
0.5
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
0.0
MSCI Thailand

1
2
3
4
5
Top-5
6
7
8
9
10
Top-10
PTT
SIAM COMMERCIAL BANK
PTT EXPLORATION
KASIKORNBANK
BANGKOK BANK
ADVANCED INFO SERVICE
CP ALL
SIAM CEMENT
CHAROEN POKPHAND FOODS
PTT GLOBAL CHEM
Index weight
12%
9%
8%
8%
7%
44%
7%
7%
5%
5%
4%
28%
Thailand is dependent on two cyclical sectors energy (oil, coal) and financials (interest rates).
Note that Thailand is also one of the less liquid markets in Asia on a par with Indonesia, but well below
the trading liquidity seen in India, China or the North Asian markets.
Thailand: Stock market liquidity
Thailand market composition

Sector
50
TH
40
30
20
10
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
300
FINANCIALS
ENERGY
MATERIALS
CONSUMER STAPLES
TELCOM SERVICES
UTILITIES
INDUSTRIALS
HEALTHCARE
Weights
38%
26%
13%
12%
7%
2%
1%
1%
0%
0%
Neel Sinha*
Asia
Singapore Branch
+65 6658 0658
abc

Multi-sector
July 2012
Correlations
Partially because of the market segmentation (skewed towards energy and financials), Thailand shows a high
correlation to both global indicators such as the ISM index as well as exports and local M1 money supply.
The energy sector is exposed to trends in global oil prices, while the banks are sensitive to domestic economic
conditions (using M1 money supply as a proxy).
For the global indicators, its correlation does not stand out and is in line with the rest of Asia, i.e.
Thailand is equally sensitive to global indicators as the rest of Asia.
But its sensitivity to changes in local money supply is higher than the rest of Asia a reflection of the
importance of banks and financials in Thailand. The domestic economy matters.
Correlations of MSCI Thailand
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
Thailand
Asia ex Japan
Since 2001
0.78
0.59
0.56
Since 2001
0.84
0.60
0.44
0.62
0.68
0.49
Past 15 years
0.64
0.49
0.68
0.67
0.70
Past 10 years
0.71
0.62

Thailand has been one of the most volatile markets in Asia in the last decade. Part of this is because Thai
earnings are volatile. Some of the volatility is related to political tensions, which can hurt business
confidence and lead to swings in investment cycles. Compounding this is the dominance of a few large,
cyclical companies.
Thailand has had times when earnings growth was significantly above or below trend, much more so
than, for example, Indonesia. Currently, earnings are still below trend growth.
MSCI Thailand annual EPS growth*

% y -o-y
102% 810.5%
120%
75
40
30
20
10
0
-10
-20
-30
Thailand
50
25
0
2013
2011
2009
2005
2007
2003
2001
1999
1997
1995
Trend
1993
Actual Earnings
(50)
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
(25)
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In recent years earnings growth has hovered around 20% and analysts have, as the chart on earnings
momentum indicates, been upgrading their forecasts since 2009.
It is interesting to note that earnings started to be upgraded in 2009 before the market recovered and that
in late 2010 and 2011, these upgrades continued while the market moved sideways.
This is likely a reflection of a strong domestic economy, partially driven by higher agricultural prices and
higher rural income as well as a stronger than expected rebound from the twin events of the Japan earthquake
led supply chain disruptions and floods in 2011.
Earnings momentum vs MSCI Thailand returns
120
(%)
100
120
90
80
90
60
60
60
40
30
20
Momentum
2012
2011
2004
EPS grow th
MSCI TH Index y -o-y (RHS)
2010
-60
2012
2011
2010
2009
2008
2007
2006
2005
-60
2009
-30
2008
0
-20
-30
2007
2006
30
2005
(%)
2004
40
30
20
10
0
-10
-20
-30
-40
12-month forward EPS growth* vs MSCI Thailand Index

The confidence of the local analyst community is also visible in earnings revisions, of which 72% are
earnings upgrades. Note that this measure fell sharply in March 2010 as inflation became a market theme.
Still, we note that the markets performance is highly correlated with earnings upgrades and downgrades
(a correlation of 64% since 2004). In Thailand, analysts forecasts do matter.
The optimism in recent years from the domestic analyst community is also reflected in the RCS, or
recommendation consensus score.
Thailand vs MSCI Thailand returns
100
(%)
120
90
80
60
60
30
40
% upgrades
2012
2011
2010
2009
2008
2007
-60
2006
0
2005
-30
2004
20

302
4.0
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
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Multi-sector
July 2012
Thailand has typically traded at a discount to the regional average PE valuation. Since 2001, MSCI AEJ
has traded at an average PE of 12.5x with Thailand at 10.6x.
Industrials, financials and telecoms are the cheapest sectors while consumer staples and utilities are the
most expensive. The latter two are relatively defensive sectors, where risk to cash flows is low.
One has to be careful when looking at history; as with Indonesia, the Thai market has witnessed a
substantial rerating since the early 2000s, partially driven by stronger balance sheets following the Asian
Financial Crisis.
The relative discount to the rest of Asia was at its widest in 2007 and late 2008, during times of financial
turmoil.
Thailand: PE band chart
Relative valuation
20x
800
700
600
500
400
300
200
100
0
1.2
1.1
15x
10x
1.0
0.9
0.8
5x
0.7
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
0.6
01 02 03 04 05 06 07 08 09 10 11 12
PE:TH/Ax J
Taking these periods out of the equation, it appears that Thailand trades, on average, at a 10% discount to
the rest of Asia. This is most likely a reflection of higher risks associated with investing in Thailand.
When comparing earnings and bond yields in Thailand, we note that they diverge only in times of
financial turmoil (2003 and 2008). In between, the two seem to move in tandem, with earnings yields
about double that of local bond yields.
A comparison between PB multiples and ROE shows why Thailand has witnessed a rerating since the
early 2000s the profitability of its corporate sector showed substantial improvements. In more recent
years, Thai ROEs have hovered in a range of 14-20%.
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Thailand: Earnings and bond yields
Thailand: PB vs ROE/COE (12-month forward)
20
BY
EY
PBR
ROE/COE
3.0
15
2.5
2.0
10
1.5
1.0
0.5
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.0
0
01 02 03 04 05 06 07 08 09 10 11 12
Fund flows
Foreign investors have been net buyers since 2005. On a cumulative basis they have bought USD6.9bn since
June 2003 and this peaked at USD8.1bn in July 2007, implying some outflows when markets were in turmoil.
Both AEJ funds and GEM funds are overweight Thailand.
Thailand funds active weight and Z-score relative to benchmark
Funds
9.0
7.5
6.0
4.5
3.0
1.5
0.0
-1.5
-3.0
Current
-1M
-3M
-6M
-12M
Active weight
0.6
0.6
0.6
0.6
0.8
Z-score
0.4
0.4
0.6
0.7
1.7
Source: EPFR, HSBC
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
USDbn
Economic basics
Thailand embarked on a strategy to become an open and liberal economy in the 1980s. Between 1985 and
1996, the country underwent rapid economic transformation and grew at an average rate of 10.5%
annually, supported by a burgeoning manufacturing and export sector. However, the 1997-98 Asian
financial crisis hit the banking sector hard, which in turn weakened economic growth.
In 2001 a dual track economic policy promoted domestic activity along with growth in foreign
investment and trade. Thailand today serves as an anchor economy for the neighbouring states of Laos,
Burma and Cambodia. It is also a major global producer of automobiles and electronics. Tourism is
another important aspect of the economy, accounting for around 6% of GDP.
By 2010, Thailand had recovered from the global financial crisis, with a robust growth rate of 7.8%. The
following year the economy was hit by the supply-chain shock that followed the Japan earthquake and
severe floods that damaged key manufacturing areas of the country. The economy has since staged a
sharp V-shaped recovery.
304
Leif Eskesen
ASEAN
Singapore Branch
+65 6658 8782
abc

Multi-sector
July 2012

The current administration is focused on delivering the measures promised before the July 2011 election
and improving flood control. These include a near-40% hike in minimum wages across the country from
April 2012 and the revival of a price-guarantee scheme for rice farmers.
To alleviate the impact of higher wages on employers, the corporate income tax rate was cut to 23% from
30% at the start of 2012 any may be lowered further. Over the next few years THB350bn of floodprevention schemes will be rolled out. Collectively these measures will result in a widening of the central
government deficit.
On the monetary policy front, the Bank of Thailand (BOT) was one of the more pro-active central banks
during the global financial crisis but some measures were wound back in late 2011 and early 2012. Given
the strength of domestic demand and the possibility that the government could remove some of its
subsidies and price controls, the BOT is likely to resist pressure to ease its policy rate further.
Key economic data
% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
THB/USD*
3-month interbank rate (%)
2.9
3.2
1.2
1.6
4.3
5.1
8.9
2.5
3.9
1.4
5.5
0.8
-1.1
34.9
3.6
-1.1
7.5
-9.2
-2.4
-6.9
-12.5
-21.5
-2.3
-7.2
0.9
-0.8
8.3
-4.4
33.3
1.5
4.8
6.4
9.4
0.8
10.3
14.7
21.5
7.8
14.4
0.7
3.3
4.1
-1.5
30.1
1.6
1.3
1.1
3.3
0.2
1
9.5
13.7
0.1
-9.3
0.4
3.8
3.5
-1.5
31.6
3.2
5.7
0.8
9.5
1.2
7.4
4.2
6.2
5.5
6
0.7
3.4
1.9
-3.4
30.9
3.2
*Period-end
Political structure
Thailand has been a constitutional monarchy under a parliamentary democracy since 1932. The Prime
Minister is elected from members of the House of Representatives. The legislative branch is composed of
a bicameral National Assembly: one is the Senate, where members serve six-year terms, and the other is
the House of Representatives, where members serve four-year terms.

The Bank of Thailands main objective is to maintain financial stability and the soundness of financial
institutions.
The Ministry of Finance regulates the banking and financial services industry.
The Securities and Exchange Commission focuses on primary market supervision.
The Stock Exchange of Thailand (SET) lays down regulations and guidelines for brokers conduct. The
main indices are the SET Index, SET50 Index and SET100 Index.
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July 2012
Notes
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Multi-sector
July 2012
The Philippines
Neel Sinha*
+65 6658 0658
307
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Multi-sector
July 2012
Introduction
The Philippines is the smallest and least liquid market in Asia (with the exception of some frontier
markets such as Vietnam). It accounts for only 1% of the market cap of MSCI Asia ex Japan. Therefore,
stock selection is critical to portfolio performance.
Market structure
The Philippine market is highly concentrated. There are 15 stocks in MSCI Philippines and the top-10
constitute 69% of the index. Industrials is the biggest sector with 35% weight in the index, followed by
financials (34%). Five of the 10 MSCI sectors are not represented.
Largest stocks in Philippines
800
700
600
500
400
300
200
100
0
1.8
1.5
1
2
3
4
5
Top-5
6
7
8
9
10
Top-10
1.2
0.9
0.6
Jan-95
Feb-96
Mar-97
Apr-98
May-99
Jun-00
Jul-01
Aug-02
Sep-03
Oct-04
Nov-05
Dec-06
Jan-08
Feb-09
Mar-10
Apr-11
May-12
0.3
MSCI Philippines
SM INVESTMENTS
PLDT
AYALA LAND
ABOITIZ
BDO UNIBANK
SM PRIME
AYALA CORP
ABOITIZ POWER
MANILA ELECTRIC
ICTS
Index weight
12%
8%
8%
8%
7%
43%
7%
6%
5%
4%
4%
26%
Liquidity is negligible compared with the region because of the markets small size. Average daily
turnover of USD0.1bn is only 0.25% of the total turnover in Asia ex Japan. The market cap of the stock
exchange is on average 70x the monthly turnover.
The Philippines: Stock market liquidity
Philippines market composition

Sector
600
PH
500
400
300
200
100
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Note: Chart represents the number of months that market takes to turnover
308
INDUSTRIALS
FINANCIALS
UTILITIES
TELCOM SERVICES
CONSUMER STAPLES
ENERGY
MATERIALS
HEALTHCARE
Weights
35%
34%
13%
11%
4%
4%
0%
0%
0%
0%
Neel Sinha*
Asia
Singapore Branch
+65 6658 0658
abc

Multi-sector
July 2012
Correlations
Philippine equities show a low correlation with domestic money supply compared with the region. One
reason for this is excess liquidity doesnt get routed to the equity markets but is channelled into other
asset classes.
Perhaps because it is a small market, the correlation between the market and both foreign fund flows and
the performance of global equities is low.
Correlations of MSCI Philippines
Macro correlations
ISM
Exports
Money supply
Fund flows
past 10 years
past 5 years
previous 5 years
Indices
Asia ex Japan
Aworld
Philippines
Asia ex Japan
Since 2001
0.67
0.59
0.22
Since 2001
0.84
0.60
0.44
0.34
0.36
0.37
Past 15 years
0.63
0.51
0.68
0.67
0.70
Past 10 years
0.56
0.49

Corporate earnings growth in the Philippines is historically not very volatile. It was high just after the Asian
Financial Crisis, presumably because geared balance sheets had yet to be repaired. Currently, earnings are a
touch above trend growth.
Earnings volatility for the last decade is 41.1%, but only 18.8% for the last five years. Similar to other
Asian markets, the 2008-09 recession did not have a large negative impact on Philippine earnings.
MSCI Philippines annual EPS growth*
50
45
40
35
30
25
20
15
10
% y -o-y
40
Philippines
124.9% 71.5%
595.7%
20
0
2013
2011
2009
2005
2007
2003
2001
1999
1997
1995
Trend
1993
Actual Earnings
(40)
1991
Nov-99
Sep-00
Jul-01
May-02
Mar-03
Jan-04
Nov-04
Sep-05
Jul-06
May-07
Mar-08
Jan-09
Nov-09
Sep-10
Jul-11
May-12
(20)
Although analysts made substantial revisions to their earnings in 2008-09, they started upgrading their
forecasts in the middle of 2009 and are forecasting earnings growth of just below 12.3% in 2012 and
11.7% in 2013.
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As the chart below indicates, EPS growth has been revised down (from over 60% in 2010) to around
10%, where the economy shows nominal GDP growth of well over 10%.
Earnings momentum vs MSCI Philippines returns
(%)
80
(%)
40
80
60
40
20
0
-20
-40
-60
60
20
40
10
20
0
-20
-10
30
20
10
-40
Momentum
EPS grow th
MSCI PH Index y -o-y (RHS)
2012
2011
2010
2009
2008
2007
2006
2004
2012
2011
2010
2009
2008
2007
2006
2005
-60
2004
-20
2005
30
12-month forward EPS growth* vs MSCI Philippines Index

In 2H11, analysts revised up their overall forecasts but lowered the number of stock upgrades.
The RCS for the Philippines has been very volatile over the years. Analysts were at their most optimistic
in 2000 after the Asian Financial Crisis, when valuations were very low. On average, analysts have
become increasingly bearish in recent quarters.
Philippines vs MSCI Philippines returns
120
(%)
80
60
90
40
20
60
0
-20
30
-40
% upgrades
2012
2011
2010
2009
2008
2007
2006
2005
-60
2004

3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
1.4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Av erage
2SD
On a PE basis, the market is trading at 15.6x forward earnings, higher than the post-2001 average of 14x
and well above the current regional PE of 10.2x.
The Philippines has traded at a premium to the region because aggregate valuation has been high as a
result of the dominance of a handful of investible companies.
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Philippines: PE band chart
Relative valuation
1100
1000
900
800
700
600
500
400
300
200
100
0
1.8
20x
15x
1.6
1.4
1.2
10x
5x
1.0
0.8
01 02 03 04 05 06 07 08 09 10 11 12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
0.6
PE:PH/Ax J
Although often considered a high risk market, valuations have never been very low. Still, there have been
times when the earnings yield has been lower than the bond yield a reflection of high corporate risk.
Over the last few years, the gap between the two has narrowed, probably due to a decline in sovereign
risks rather lower corporate risk.
ROEs have seen a steady increase, from only 10% in 2004 to 16% in 2012. Hence, part of the reason for
relative high valuations is this improvement in corporate profitability.
Philippines: Earnings and bond yields
Philippines: PB vs ROE/COE (12-month forward)
18
2.8
BY
EY
2.4
15
2.0
12
1.6
1.2
0.8
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2001
0.4
6
3
PBR
01 02 03 04 05 06 07 08 09 10 11 12
ROE/COE

Current PE
Energy
Industrials
Consumer Staples
Financials
Technology
Telecom
Utilities
MSCI Philippines
14.8
28.1
14.7
18.8
12.3
13.2
15.6
Rolling 10-yr avg
Rolling 10-yr SD
7.2
13.7
17.6
19.6
16.5
4.1
10.5
9.6
13.5
1.0
2.7
4.7
5.5
2.5
1.4
1.8
3.6
1.7
# SD from avg
0.4
2.2
-0.9
0.9
1.0
1.0
1.2
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Fund flows
The Philippines has seen a net inflow of USD5.4bn since 2003. Foreigners were net sellers until mid2004. Since then, foreign investments gradually increased and 2012 levels now surpass the previous peak
seen just before the 2008 Asian Financial Crisis.
It seems that this pace of investing is slowing. Country weightings of mutual funds as (compared with the
neutral weightings in benchmark indexes) indicate that investors are currently less overweight than they
were three to six months ago. This is the case for both AEJ designated funds as well as GEM funds.
Philippines funds active weights and Z-score relative to benchmark
Funds
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
Active weight
Z-score
Current
-1M
-3M
-6M
-12M
0.3
1.8
0.3
2.3
0.2
1.2
0.2
1.2
0.2
-0.5
Source: EPFR, HSBC
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
USDbn
Cumulative foreign institutional funds since 2003
Economic basics
Following World War II, the Philippines was one of the richest countries in Asia but years of
mismanagement and political instability caused the economy to stagnate. A series of broad range reforms,
coupled with efforts to restore macroeconomic stability, helped the economy expand in the 2000s.
Progress continues to be made. President Aquinos efforts to fight corruption and increase government
efficiency are helping. Private-public partnership projects are likely to be rolled out in 2012, helping to
improve the countrys infrastructure.
Growth momentum is also resilient thanks to robust remittances, exports and fiscal spending. Remittances
from overseas Filipino workers make up around 10% of GDP. In addition, the country has received a
more positive outlook from rating agencies and made progress with political reforms.

The economy is highly dependent on the service sector, which contributes more than half of GDP
(industry makes up about a third and agriculture less than 20%). The main industries are food processing,
textiles and garments, electronics and automobile parts, and business process outsourcing. Mining has
great potential in the Philippines, which possesses significant reserves of chromate, nickel, and copper.
Private consumption makes up around 70% of the economy, backed by remittances. Investment as a
percentage of GDP hovers around 20%, an area in need of improvement. The poverty rates remain high,
with more than 20% living below poverty line. In addition, the labour market faces a high rate of
underemployment at around 19%.
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Economist
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trinhdnguyen@hsbc.com.hk
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Key economic data

% Year
2008
2009
2010
2011
2012f
Consumer spending
Fixed investment
Domestic demand
Exports
Imports
GDP
Unemployment (%)*
Consumer prices
PHP/USD
3-month money (%)*
3.7
0.3
3.2
-0.5
6.6
-2.7
1.6
4.2
4.3
7.7
8.2
2.1
-0.9
47.5
5.6
2.3
10.9
-1.7
-1.8
1.1
-7.8
-8.1
1.1
-4.8
7.3
4.2
5.6
-3.7
46.5
4.2
3.4
4
19.1
0
8.2
21
22.5
7.6
11.2
7.4
3.8
4.5
-3.5
43.6
3.6
6.3
1
0.2
1.6
4.5
-4.2
0.2
3.9
4.7
7.2
4.7
3.1
-2
43.8
1.4
5
9.2
3.4
0
5.1
4.5
1.8
4.8
5.9
7.1
3.3
4
-2.4
42.4
3.3
*Average
Political structure
The Philippines is a constitutional republic that has 80 provinces. The President is the directly elected
head of state, who is limited to one six-year term. The legislative branch has two houses: the Senate and
the House of Representatives.

The Bangko Sentral ng Pilipinas (BSP) is the central bank and the countrys central monetary authority.
The Securities and Exchange Commission (SEC) is responsible for securities laws and regulating the
securities industry. The SEC is an agency within the Department of Finance.
The Philippine Stock Exchange is the national stock exchange. The main index is the PSE Composite
Index.
The Philippine Securities and Exchange Commission is responsible for securities laws and regulating
the securities industry.
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Notes
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Vietnam
Head of Equity Strategy, Asia-Pacific
+852 2996 6575
Devendra Joshi*
Equity Strategy
+852 2996 6592
devendrajoshi@hsbc.com.hk
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Introduction
Vietnam is an MSCI frontier market, as are Pakistan, Sri Lanka and Bangladesh. Frontier markets are
investable but have lower market cap and liquidity than the more developed emerging markets.
They are typically popular with investors seeking high, long-term returns and low correlations with other
markets.
Market structure
Vietnam has two stock exchanges the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock
Exchange (HNX). HOSE is mostly dedicated to equities trading, while HNX trades equities, bonds and
over the counter (OTC) securities.
HOSE was initially established as the Ho Chi Minh City Securities Trading Center (HoSTC) in 2000. It was
later upgraded and renamed in 2007. Prior to 1 March 2002, shares were only traded on alternate days.
The Vietnam equities market has come a long way in a short time. In January 2006, there were only 34
companies listed on HOSE; this has increased to 303, with the market cap expanding from USD1.1bn in
2006 to USD29.9bn today.
The biggest 10 HOSE companies account for 50% of total market cap, making it a very concentrated market.
Market performance (Index level)
HOSE: Number of stocks and market cap (USDbn)
1200
HCM Index lev el
1000
350
Index members (LHS)
35
300
Market cap
30
10
50
400
Mar-12
Jun-11
Sep-10
Dec-09
Mar-09
Jun-08
Sep-07
Dec-06
200
Jan-12
15
100
Jan-11
150
Jan-10
600
Jan-09
20
Jan-08
200
Jan-07
25
800
Jan-06
250
In terms of sector composition, HOSE is skewed towards financials. Only c50 companies are financial
institutions, but they constitute more than 49% of the total market cap. The consumer staples sector is a
distant second (19%), followed by utilities (12%) and materials (6%).
The largest company listed on HOSE is an oil & gas firm, PetroVietnam. It has a market cap weight of
10% on the VN Index (Ho Chi Minh Index). It is closely followed by Bank of Foreign Trade of Vietnam
and a real estate firm, Vingroup. These stocks account for nearly 29% of the total market.
In Vietnam, foreign investors have to consider liquidity and foreign ownership limits, so sector analysis
may not be as meaningful as it is in other markets.
Vietnam has begun to adopt a body of Vietnamese Accounting Standards (VAS) that are based on,
although not identical to, the related International Accounting Standards (IAS).
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Turnover on both Vietnamese bourses is quite low. The 20-day moving average of the combined daily trading
value (as of 15 June 2012) of HOSE and HSX is USD61.9m, with HOSE accounting for USD38.8m.
HOSE sector composition in terms of market cap
Materials,
Liquidity is low
250
Others, 7%
6%
HCM
Hanoi
200
6%
Utilities,
Financials,
12%
49%
USDm
Industrials,
150
100
50
Consumer
Jan-12
Apr-11
Jul-10
Oct-09
Jan-09
Apr-08
Jul-07
Jan-06
19%
Oct-06
staples,

The VN Index is trading at a trailing PE of 11.1x (based on reported EPS in the last four quarters).
This is a c18% discount to the MSCI Asia ex Japans trailing PE of 13.5x. Based on the history available (since
2006), we see that on average the VN Index has been trading almost at par with the Asia ex Japan average
trailing PE. However, a detailed look at the time series reveals that Vietnam was trading at a premium between
February 2006 and March 2008. Since then, Vietnam has traded at a average discount of 27%.
If we compare the current trailing PE to the long-term average trailing PE of 17.4x, it trades at a 36%
discount. Making a similar comparison with the post-2008 trailing PE reveals a 8% discount. This
suggests the Vietnam market is currently trading at a discount to the region as well as to its own history.
A similar picture emerges when looking at PB ratios. Vietnam is trading at a trailing PB of 1.6x, which is
6% lower than the Asia ex Japan average of 1.7x. The current trailing PB of 1.6x represents a 18%
discount to the post-2008 average trailing PB of 1.9x and 49% to the long- term average of 3.1x.
Trading at a discount to the regional trailing PE
Vietnam: PB ratio relative to Asia
50x
3.5x
M ay -12
D ec -11
J ul-11
F eb-11
Sep-10
MSCI AEJ Trailing PB
Apr-10
N ov -09
J un-09
M ar-08
M ar-12
1.0x
J ul-11
0x
N ov -10
1.5x
M ar-10
10x
J ul-09
2.0x
N ov -08
20x
M ar-08
2.5x
J ul-07
30x
N ov -06
3.0x
M ar-06
40x
HCM Trailing PB
J an-09
MSCI AEJ Trailing PE
Aug-08
HCM Trailing PE
Source: Bloomberg, Thomson Reuters Datastream, HSBC
The trend in the trailing 12-month dividend yield since 2006 suggests that yields have been rising since
early 2010. The chart below shows that the dividend yield has doubled to 4.5% since late 2008.
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A new investment law came into effect in 2006. As part of Vietnams efforts to meet the criteria for
accession to the WTO, the National Assembly attempted to unify principles relating to investment in
Vietnam by foreign and domestic investors. However, it appears that a common legal framework has not
yet been achieved in all areas.
Rising dividend yields
6
5
4
3
2
1
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Vietnam Dividend yield (%)

Economic basics
The economy was originally based on agriculture, mainly rice, coffee, tea, and rubber. Growth has
increased rapidly since the country was reunited in 1976, with the government implementing structural
reforms to modernise the economy and create more competitive export-driven industries such as textiles.
Vietnam joined the WTO in January 2007, providing access to the global market. The global financial
crisis hurt growth, with GDP growing less than the 7% annual average achieved during the last decade.
Export growth resumed in 2010, driving up GDP, but the government has struggled to control one of the
regions highest inflation rates, but this recently dipped to single figures for the first time in two years.
Although the global recession hurt the economy, Vietnam has shown an impressive ability to make
progress in the face of adversity. With favourable demographics, geographical proximity to China and a
strong entrepreneurial culture, the economy has robust fundamentals. But without reforms to eliminate
longstanding structural bottlenecks such as inefficient state-owned enterprises (SOEs) , public
investment, and the banking sector the country could be stuck on a below trend growth trajectory over
the medium term.

Vietnams economy remains dominated by SOEs which still produce about 40% of GDP. Agricultures
share of economic output has continued to shrink from about 25% in 2000 to about 20% in 2010, while
industrys share increased from 36% to 41% in the same period.
When inflation reached 23% in February 2011, Vietnam shifted its focus away from economic growth to
stabilising its economy by tightening fiscal and monetary policies. While this curbed demand for goods,
especially food, economic growth suffered. On the export front, the formula of low-wage, low-cost
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manufacturing no longer works as it once did as countries such as Cambodia and Bangladesh now
undercut Vietnam.
Slowing growth has focused attention on reform. A law will be passed to require SOEs to disclose their
earnings and it is hoped that much-anticipated changes to the banking sector will make the financial
system more transparent.
Political structure
Vietnam is a one-party state that has 58 provinces and five municipalities. The Politburo is responsible for
government policy, while the Secretariat is in charge of overseeing day-to-day policy. The National
Assembly has 500 members, who are elected for a five-year term.

The State Bank of Vietnam is the central bank. It is responsible for promoting monetary stability and the
supervision of financial institutions.
The Ho Chi Minh City Stock Exchange (HOSE) is the largest stock market. The benchmark index is the
VN-Index.
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Basic valuation and

accounting guide
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Five forces and SWOT

INDUSTRY
Scoring range 15 (high score is good)
Power of suppliers
New entrants
A concentration of suppliers will mean less chance to

negotiate better pricing. Substitute producers provide
a price ceiling. A single strategic supplier can put
pressure on industry margins. If switching costs are
high, suppliers can put pressure on the industry.
Downstream integration: the industry can be
disintermediated.
Barriers to entry will be high if economies of scale are

important, access to distribution channels is restricted,
there is a steep experience curve, existing players
are likely to squeeze out new entrants, legislation or
government action prevents entry, branding or
differentiation is high.
Rivalry
High rivalry will result from the extent to which players
are in balance, growth is slowing, customers are
global, fixed costs are high, capacity increases require
major incremental steps, switching costs are low,
there is a liquid market for corporate control and exit
barriers are high.
Substitute products
Power of customers
Alternative means of fulfilling customer needs through

alternative industries will put pressure on demand and
margins. Product for product (email for fax),
substitution of need (precision casting makes cutting
tools redundant), generic substitution (furniture
manufacturers vs holiday companies), avoidance
(tobacco).
Buyer power will be high if buyers are concentrated

with a small number of operators where there are
alternative types of supply, where material costs are a
high component of price (ie low value added), where
switching is easy and low cost and the threat of
upstream integration is high.
COMPANY
Strengths
Patents
Strong brand and/or reputation
Location of the business
The products, are they new and innovative?
Quality process and procedures
Specialist marketing expertise
Opportunities
Developing market eg Internet, Brazil

Mergers, strategic alliances
Loosening of regulations
Removal of international trade barriers
Moving into a new market, through new products or new market place
Market lead by an ineffective competitor
Scoring range 15 (high score is good)

Weaknesses
Undifferentiated products and services, in relation to the market

Poor quality goods or services
Damaged reputation
Competitors have superior access to distribution channels
Location of the business
Lack of marketing expertise
Threats
New competitor
Price war
Competitor has a new, innovative substitute product or service
Rivals have superior access to channels of supply and distribution
Increased trade barrier
Taxation and/or new regulations on a product or service
Source: HSBC. Note: The upper score represents an assessment of the balance of strengths and weaknesses. Similarly the bottom number scores the balance of opportunities and risks.
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The foregoing figure combines a diagram of a Five Forces model used to analyse an industry, with an
outline of a SWOT analysis for evaluating a company.
Porters Five Forces is an analytical approach that assesses industries or a company by five strategic
forces; it helps to indicate the relationship between the different competitive forces within the industry.
Five Forces can be used by a business manager trying to develop an edge over a rival firm or by analysts
trying to evaluate a business idea.
Porters Five Forces has a scoring system in which positive, negative or neutral results are combined to give a
final score for each force. The higher the score, the more sound the industry, or business is.
SWOT analysis is routinely used to help the strategic planning of a firm in the business world. Strengths
and weakness (SW) apply to any internal factors within the firm, while the opportunities and threats (OT)
are the many external factors that a firm must account for.
Valuation
The following sections give a brief introduction to the main accounting issues and valuations techniques,
their definitions and ratio analysis. It is structured by addressing what is valued, how it is valued, and the
inputs of the valuation. This accounting guide can be used to gain a better understanding of a companys
financial statements. We include a brief introduction to balance sheet items. The valuation measures and
methods described below apply only to listed companies.
Valuing what?
Enterprise value (EV)
An enterprise is a company and therefore the enterprise value is a measure of the whole companys value.
It is believed by many to have more uses than market capitalisation, because it takes into account the
value of debt for a company (and also adjusts for minorities and associates) to make it suitable for ratios
above the P&L interest line such as EV/sales, EV/EBITDA and EV/EBIT.
Calculate by: market capitalisation (all share classes) + net debt (and other liabilities, such as pension
deficits) + minority interests associates (both fair value).
There are three types of enterprise value: total, core and operating.
Enterprise value
Total Enterp rise Value
The value of all business activitie s
Operating Enterprise Value
Core Ente rprise Value
Total EV less non-operating assets at market value
Total EV less non-core asse ts, th is makes Core EV

more subje ctive but can be used for ratios such as Core
EV/core business sale s.
Source: HSBC
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Market capitalisation (market cap)

The value of all the shares of a corporation; it is useful as part of EV and for ratios such as PE
(price/earnings = market cap/net income) or DY (dividend yield = dividends/market cap).
Calculate by: multiplying a companys shares outstanding (i.e., excluding treasury shares owned by itself)
by the current market price of one share.
Net debt
This is the total amount of debt and liabilities a company has after subtracting the value of its cash and
cash equivalents. A company with more cash than debt would be said to have Net Cash.
Minority interest three main definitions:

Where an investor or company owns less than 50% of another companys voting shares, e.g. owning
a minority interest.
A non-current liability on a balance sheet representing the portions of its subsidiaries owned by
minority shareholders. Consolidated accounts show 100% of sales, EBITDA, EBIT (in the P&L);
100% of the assets and liabilities (in the balance sheet) and 100% of the cash flows of a subsidiary,
but also deduct the minorities shares of profits in a separate minorities P&L line, their share of net
assets in a minorities balance sheet line and any dividends paid to them in the cash flow. For
example, if Company A owns 80% of Company B, where Company B is a GBP100m company.
Company A will have a GBP20m liability, on its balance sheets, to represent the 20% of Company B
that it does not own, this being the minority interest.
As an adjustment in an EV, DCF valuation, etc, at fair value (rather than the book value used in the
balance sheet). For example, if fair value was GBP30m, this would be added to EV and deducted as
part of the DCF.
Pension obligations
This is a projected sum of total benefits that an employer has agreed to pay to retirees and current
employees entitled to benefits. There are two main types of pension scheme:
Defined Benefit, where payment is linked to employees salary level and years of service. The
benefits are fixed but, as the actuarial assessment of the liability depends on changing factors (such as
life expectancy and discount rates), the companys liabilities (and contributions) are variable. The
company has an obligation to pay out the determined benefit and, if there is a shortfall in the fund,
must draw on the companys profits to subsidise the discrepancy.
Defined Contribution, where the employers contributions are fixed but the benefits are variable.
The pension in retirement depends on the cumulative contributions to the fund, returns from its
investments and annuity rates at retirement.
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Common terms used to discuss pensions

Accumulated Benefit Obligation (ABO)
An estimate of liability if the pension plan assumes immediate discontinuation; it does not take into
account any future salary increases.
Discount Rate
The rate used to establish the present value of future cash flows.
Prior Service Costs
Retrospective benefit costs for services prior to pension plan commencement or after plan
amendments.
Projected Benefit Obligations (PBO)
This assumes the pension plan is ongoing, as the employee continues to work, and therefore it
projects future salary increases.
Service Cost
The present value of benefits earned during the current period.
Vested Benefit Obligations (VBO)
Most plans require a certain number of years service before benefits can be collected, and this is
Vested. The VBO represents the actuarial present value of vested benefits.
Source: HSBC
Valuing how?
Cash flow
This indicates the amount of cash generated and used by a company over a given period. There are several
different measures, used for different purposes, plus a cash flow statement in the reports and accounts.
Free cash flow (FCF)

The cash flow after everything except dividends, so attributable to shareholders, used in performance
measures (e.g. FCF Yield = FCF/market cap). Generally, the higher the FCF the better, at least in the
short term, though too much cost cutting or underinvestment can be risks.
Calculate by: EBITDA capex working capital change net interest tax
Free cash flows to the firm (FCFF)

The cash flow after everything except interest (net of tax) and dividends, used in DCF calculations (see below).
Calculate by: EBITDA capex working capital change tax
Discounted cash flow (DCF)

The present value of an investment, ie adjusted for the time value of money. It is the sum of the value of
each periods FCFF, discounted back to the present day.
For a project lasting n years calculate by:
For a business lasting beyond the n years for which you have estimated cash flow, add a terminal value,
being the value at year n discounted to the present day. The value at year n+1, if thought to be a
perpetuity growing at rate g per annum, would have a value in year n of CFn (1+g)/(r-g) and a present
value of CFn(1+g)/(r-g)/(1+r)n.
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Market assessed cost of capital (MACC)

MACC turns conventional valuation methodology around; instead of comparing returns on capital and
cost of capital to arrive at an estimate of fair value, it compares market return on capital with market
value to derive an estimate for market assessed cost of capital (MACC). This MACC value can be used
for comparisons against historical observations for the same stock, or for use against peers.
Multiples
Multiple
Calculation
Definition/Interpretation
PE ratio
Price of a stock
Earnings per share
Helps to give investors an overview of how much they are paying for a stock; the ratio
states how many years it would take for the investors to recoup their investment, with the
company keeping profits steady (if fully distributed as dividends).
Generally companies with high PE (over 20) are faster growing, while a low PE may be
an indication that the companies are low-growth or mature industries.
PEG ratios
Price/Earnings Ratio
Annual EPS Growth
This ratio is used to determine a stocks value taking into account earnings growth,
especially if growth is very high. A low PEG company may reflect high risk.
Price to Book ratio (PB)
EV/Sales
EV/EBITDA
Market capitalisation
Total assets Intangible assets
Liabilities
(equal to price / book value per share)
This ratio compares stock market value with book value; it can be compared throughout
the same industry sector. It can be based on net assets or after deducting intangibles.
EV (see above to calculate)

Annual Sales
As sales are above the interest, associates and minorities lines in the P&L, it is more
consistent and popular to compare EV (including net debt and adjusted for minorities
and associates) with sales than, say, price/sales.
EV (see above to calculate)

Annual EBITDA
EBITDA (earnings before interest, tax, depreciation and amortisation) is also above the
interest, associates and minorities lines, so comparing with EV is consistent and popular.
Source: HSBC
Economic value added (EVA), Residual Income

This is a measure of a companys profits, after deducting capital costs (being the capital employed x cost
of capital). It is usually calculated on an enterprise basis: with EBIT, taxes based on EBIT, capital
employed including financed by debt and weighted average cost of capital (WACC see below).
Calculate by:
Net Sales Operating Expenses = Operating Profit (EBIT)
EBIT Taxes
= Net operating Profit After Tax (NOPLAT)
NOPLAT Capital Costs
= Economic Value Added (EVA)
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Components and inputs of valuation

DCF inputs
Weighted average cost of capital (WACC)
This calculates the firms cost of capital, with each category of capital proportionally weighted. It is used
with pre-interest cash flows (e.g. DCF) or profits (e.g. economic profit).
Calculate by:
WACC = E Re + D Rd (1 Tc)
(E+D)
(E+D)
Re= cost of equity

Rd = cost of debt
E = market value of the firms equity
D = market value of the firms debt
Tc = Corporate tax rate
Cost of debt
This is the effective rate that a corporation pays on its current debt; it can be measured either pre- or posttax. It is usually higher than the risk-free rate (e.g. 10-year government bond yields) because of the spread
over such bonds that corporate bond holders tend to demand.
Cost of equity
This is in theory the return a stockholder requires for holding shares in a company, representing the
compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
Calculate by: Risk-free rate + equity beta x equity risk premium
Equity beta
The correlation between a share and the general stock market: It is useful to estimate the cost of equity for
a stock as an investor can, in principle, diversify away uncorrelated risks, but not correlated sensitivity to
the market.
Equity risk premium
This is the premium investors would expect for investing in equities because of the higher risk. It is a
measure for the general stock market rather than individual stocks.
MACC inputs
Invested capital (IC)
This is capital that the company can invest within itself or has already invested internally.
Calculate by: Long-term debt +stock + retained earnings
Cash return on capital invested (CROIC)
This evaluates a companys cash return to its equity: it measures the cash profits of a company and
compares this with the proportion of the funding required to generate it.
Calculate by:
Gross Cash Flow

Average Gross Cash Invested (GCI)
Where:
Gross cash flow is operating cash flow plus post-tax gross interest expense
GCI: Gross fixed assets plus gross intangible assets plus net working capital plus cash
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Multiple inputs
Earnings per share
Net profit per share, which may be headline or adjusted (for example, to exclude the impact of nonrecurring items). Shares are normally those in issue (excluding treasury shares owned by the company).
Calculate by:
Net profit for the year

Number of shares
Book value
The value at which an asset is carried on the balance sheet, taking into account depreciation that may have
occurred each year after the asset was brought. Each asset, from the smallest piece of equipment to the
whole business, has a book value. The fair value of an asset may be higher than its book value, and often
is. However, if the fair value is lower than the book value, it should be written down to fair value.
Sales
Total amount of goods sold over a given period, usually reported net of any sales taxes (e.g. value-added tax).
Dividend
This is the distribution of earnings to shareholders. It can be paid in money, stock or, very rarely,
company property. The occurrence of the dividend payment depends on the company; it can either be
paid quarterly, half yearly or once a year, and may be ordinary (usually expected to recur) or
special/extraordinary (often non-recurring).
EVA inputs
Net sales
This is the sales figure with deductions for any discounts, returns, and damaged or missing goods or sales
taxes (e.g. value-added tax).
Operating expenses (OPEX)
Any expenses brought about by the operations of the company, e.g. cost of goods sold, SG&A (selling,
general and administrative expenses). It does not include non-operating costs (such as interest or tax).
Net operating profit less adjusted taxes (NOPLAT)
This is operating profit (net sales less opex) minus the tax that would be paid if there were no other
factors (such as tax-deductible interest).
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Key accounting ratios

Ratio
Current ratio
Quick ratio
Debt/equity ratio
Calculation
Current Assets
Current Liabilities
This indicates the ability of a company to pay its debts in the

short term. A higher ratio is preferable.
Current assets Inventories

Current Liabilities
Also measures the ability of a company to pay its short-term

debt but with its most liquid assets. A higher ratio is preferred.
Financial LIabilities
Shareholder Funds
This measures the companys financial leverage, by indicating

the ratio of debt to equity.
Net profit margin ratio
Profit After Tax

Sales
Interest coverage ratio
EBIT
Interest
Return on equity (ROE)
Net Income
Shareholders Equity
* 100
Used when comparing companies in similar industries; it is a

rate of profitability. Its weakness is that it depends not only on
operations but interest, etc.
This indicates the debt servicing capacity of the company;
the greater the buffer, the safer the debt holders.
* 100
Measures a corporations profitability from a shareholders

point of view. It depends on operating success and leverage.
Return on invested
capital (ROIC)
NOPLAT
Total Capital
Measures profitability from an operating point of view, for both

shareholders and bond holders. It does not depend on
leverage so is more comparable across a sector.
Asset turnover ratio
Sales
Assets
The amount of sales generated by each dollar (or whatever

unit sales are measured in) worth of assets.
Inventory turnover ratio
Sales
Inventory
This ratio shows how many times a companys inventory is

sold and then replaced over a year.
Debtors turnover ratio
Sales
Average Debtors
This implies the number of times a debtor is turned over every

year. A high ratio is good for low working capital requirement.
Creditors turnover ratio
Credit Purchase
Average Creditors
This indicates the credit period that firms benefit from before
they pay off their creditors. A high ratio indicates that the
creditors are being paid promptly, while a low ratio is good for
working capital.
Dividend payout ratio
Yearly Dividend Per Share

Earnings per share
This is the percentage of earnings paid to shareholders in

dividends. Investors often prefer a high ratio, but a low ratio
retains more earnings for use in the business.
Dividend yield
Annual Dividends Per Share

Price per share
Indicates how much a company pays out in dividends relative

to its share price. It may be useful when estimating a floor
value of a stock (if the dividend is sustainable). Some funds
target high-yielding stocks (called Yield Funds).
Source: HSBC
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Income statement line items

Sales or revenues
The total amount of money in a given period that a company obtains after deductions for discounts and
returned merchandise and usually after deducting any sales taxes (e.g. value-added tax).
Cost of goods sold (COGS)

The cost of buying or making the goods sold in the period.
Gross margin
Gross Profit (sales less COGS) as a percentage of sales.
Selling, general & administrative expenses (SG&A)

This is operating costs other than COGS, between gross profit and EBITDA in the P&L.
Earnings before interest, tax, depreciation and amortisation (EBITDA)

It can be used for comparing profitability and efficiency ratios for a firm. It is one of the most common
ways of comparing the performances of differing companies.
Depreciation
The reduction in value of an asset through time, use, etc. EBITDA less depreciation and amortisation is
EBIT. It is non-cash (the cash already having been paid to acquire the asset) but a part of the P&L and an
annual reduction in balance sheet asset value. If an asset is depreciated over its useful life, it may well
need replacing when fully depreciated at end-of-life.
Amortisation
This is a reduction in the cost of an intangible asset through changes in income. If Company A buys a
piece of equipment with a patent for GBP25m and the patent lasts for 10 years, GBP2.5m each year
would be recorded as amortisation. (Depreciation, by contrast, is for tangible assets such as land,
building, plant and equipment.)
Operating profit or EBIT

Earnings Before Interest and Taxes; it is after D&A but before interest and other financial charges and taxes.
Calculate by: Revenue Operating Expenses
Interest
Financial income (on cash, etc) less expense (on bonds, bank debt, etc). Some companies include their
share of profits from associates, dividends from investments and various other factors (e.g. FX gains and
losses) in a Financial Items line along with interest.
Pre-tax profit (PTP or PBT)

Profit after interest but before tax has been taken away from it.
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Tax
Taxes on company profit, as opposed to sales taxes (usually deducted directly from sales) or operating
taxes (usually added to staff costs, property costs, etc, in opex).
Net profit, net income or earnings

Profit after everything (except dividends which are a distribution of earnings, after dividends would be
called retained profits), ie after interest, tax and minority charges (the share of any profits attributable to
minority shareholders of subsidiaries of the company).
Note: The above items should appear in most P&L accounts (financial companies often being a notable
exception), while the items below are rarer.
Provision
Costs are provided for if they are expected but have not yet been paid. For example, banks unlikely to
collect all the money lent provide for the proportion they expect not to collect, damages for a law suit
expected to be lost, etc. Provisions are often included within COGS or SG&A.
Clean profit
Restructuring and other non-recurring costs (or income) are often separately identified by companies to help
understand and predict future profits and often adjusted for in clean profit measures, e.g. clean EBIT.
Continuing operations
These are the segments within a business expected to continue functioning for the foreseeable future.
For investors it indicates what the business could rationally be expected to replicate in future.
Discontinued operations
These are any segments of a business that have been sold, disposed of or abandoned. This is reported
separately in the accounts to continuing operations.
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Balance sheet line items

Assets
Anything owned by a business that has commercial value.
Non-current assets
Assets not easily convertible to cash, or not expected to become cash within the next year. Also known as
long-life assets.
Fixed assets
Assets that a company uses over a long period of time; they are not expected to be sold on.
Intangible assets
An asset that is not physical in nature, such as corporate intellectual property rights, goodwill, brand
recognition.
Investment assets
An asset not used within the companys operations.
Deferred tax assets

The present value of tax credits (e.g. from past losses) are expected to reduce future tax payments that
would otherwise be incurred.
Receivables
All accounts receivable and debt owed to a company, whether they are due in the short or long term.
Current assets
Assets expected to be turned into cash within the coming year, or assets that are expected to be sold.
Inventories
The value of the firms raw materials, work in process, supplies used in operations and finished goods.
Cash & cash equivalents (CCE)

Assets already in cash or that can be converted into cash rapidly; generally high liquidity and relatively
safe; for example, a Treasury bill.
Liabilities
Money, services and goods that are owed by a company.
Non-current liabilities
Liabilities not expected to be paid with a year.
Financial liabilities: debt and financial derivatives

Bonds and borrowings from banks and other lenders that must be repaid (with interest).
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Provisions for liabilities and charges

Liability value is not known accurately and therefore an amount is set aside to cover it; for example, the
estimated cost of restructuring or losing a legal case.
Retirement benefit obligations

The present value (usually net of tax) of the expected liabilities for payments to former and current staff
for pensions, healthcare, etc. accumulated during their service.
Current liabilities
Liabilities expected to be paid throughout the coming year. They include short-term debt, payable
accounts, unpaid wages, tax due, etc.
Trade and other payables

Liabilities to suppliers.
Shareholders equity, net assets

Total assets less total liabilities (excluding shareholders equity itself). By definition, this must either have
been provided to the company through issuing shares or have built up through retained earnings. Therefore,
net assets = total assets total liabilities = share capital + retained earnings = shareholders equity.
Calculate by: Total assets less total liabilities, or by share capital + retained earnings
Share capital
The original value of the shares issued by a company; therefore, even if there is a rise in the share price,
this is not taken into account. Shares may be issued at the creation of the company or later and may be at
nominal value or with a share premium on top.
Retained earnings
Cumulative total earnings minus that which has been distributed to the shareholders as dividends.
Calculate by: Closing retained earnings = opening retained earnings plus earnings in the period less
dividends declared in the period
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Cash flow statement line items

Net cash flow from operating activities
Operating activities include the production, sales and delivery of the companys product, as well as
collecting payment from its customers. This could include purchasing raw materials, building inventory,
advertising, and shipping the product.
Revenue and expenses
These include cash receipts from sale of goods and services and cash payments to suppliers for goods and
services.
Other income
These include interest received on loans, dividends received on equity securities, payment to employees, etc.
Non-cash items
These include depreciation, amortisation, deferred taxes, etc, which are added back to/subtracted from the
net income figure.
Net cash flow from investing activities

This reports the change in a companys cash position resulting from losses or gains from investments that
have been made in financial markets or operating subsidiaries. Changes can also result from the amounts
spent on investment in capital assets.
Capital expenditure
Any buying or selling of fixed assets that allow the running of the company to take place.
Expenditure on intangible assets
Buying or selling of intangible assets that contribute to the company.

Disposals of property, plant & equipment
Any profits or losses occurred from discarding concrete material of the companies, such as land and machinery.
Investment in financial assets
This is profit gained from investing in an asset that does not have a physical worth, such as stocks, bonds,
and bank deposits.
Proceeds from sale of financial assets
The money gained by selling the financial asset.
Net cash flow from financing activities

This reports the change in a companys cash position resulting from raising or repayment of financial liabilities.
Issue of equity shares
Companies raise capital by issuing new shares either in the initial market (first-time equity issue) or in the
secondary market (subsequent issues of equity).
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Proceeds from exercise of share options
The exercise of share options is the purchasing of an issuers common stock at the price set by the option,
regardless of the price of the stock at the time the option is exercised. Proceeds can thus be obtained if the
price set by the option initially is less than the current stock price.
Purchase of own shares
This occurs when a company purchases its own shares. A number of restrictions and conditions must be
met for this to occur. The company must pay for the shares out of distributable profits or out of the
proceeds of a fresh share issue to finance the purchase. Following the company share repurchase, the
shares are treated as cancelled.
Dividends paid to equity shareholders
The distribution of the portion of a companys earnings to their equity shareholders.

Increase in new borrowings
An increase in the new borrowings issued by a company.

Reduction of borrowings
When a company reduces its debt by decreasing borrowings.

Cash interest payable
The cash interests, which are the amounts that accrue periodically on an account that can be paid out
eventually to the account holder, payable to the company.
Further multiples
Multiple
Calculation
EV/EBIT
EV
EBIT
EV/NOPLAT
EV/IC
ROIC/WACC
EV
NOPLAT
EV
IC
ROIC
WACC
Can be used to value a company, regardless of its capital structure. Takes into
account D&A.
This is another profit multiple, and can be used as a substitute for EV/EBIT. Takes
into account tax.
This is an unlevered price-to-book ratio.
Dividing ROIC by WACC helps to compare returns between markets (or companies)
with different WACC, and may help in judging what EV/IC is reasonable.
Source: HSBC
This basic valuation and accounting guide was written for the 2010 edition of the HSBC Nutshell. It
has been reviewed by Xavier Gunner, Managing Director, Global Research, HSBC Bank Plc
(employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified
pursuant to FINRA regulations).
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Notes
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Notes
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Disclosure appendix
Analyst Certification
Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views
about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author
accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related
to the specific recommendation(s) or view(s) contained therein: Chris Georgs, David May, Herald van der Linde, Jitendra
Sriram, Neel Sinha, Brian Cho, Jenny Lai, Steven Sun, Devendra Joshi, Roger Xie, Hongbin Qu, Ronald Man, Leif Eskesen,
Donna Kwok, Trinh Nguyen, Thomas Christian Hilboldt, Sriharsha Pappu, Dennis Yoo, Jenny Louise Cosgrove, Gloria Ho,
Summer Huang, Nick Robins, Zoe Knight, Wai-shin Chan, Erwan Rambourg, Chris Zee, Christopher Leung, Lina Yan,
Catherine Chao, Sean Monaghan, Permada Darmono, Karen Choi, Jena Han, Amit Sachdeva, Abel Lee, Yogesh Aggarwal, Ka
Shun Carson Ng, Paul Choi, Todd Dunivant, Xiushi Cai, Kar Weng Loo, Eric Mak, Tejas Mehta, Kathy Park, York Pun,
Sachin Sheth, Bruce Warden, James Garner, Michael Chang, Sinyoung Park, Grace Zhou, Derek Kwong, Michelle Kwok,
Perveen Wong, Stanley Cheung, Pratik Burman Ray, Tze Hui, David Choo, Ashutosh Narkar, Nam Park, Carolyn Poon, Girish
Bakhru, Mark Webb, Stephen Wan, Anderson Chow, Elaine Lam, Walden Shing, Zhe Wei Sim, Tucker Grinnan, Chi Tsang,
Howon Rim, Simon Francis, Thomas J Zhu, Chris Chen, Jigar Mistry, Amit Pansari, Steven Pelayo, Carrie Liu, Jerry Tsai,
Yolanda Wang, Tse-yong Yao, Brian Sohn, Ricky Seo, Neale Anderson, Luis Hilado, Rajesh Raman, Rajiv Sharma, Parash
Jain, Shishir Singh, Dan Dan Yu and Rajani Khetan
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investors existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: (1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month horizon; and
(2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical
or event-driven techniques on a 0- to 3-month horizon and which may differ from our long-term investment rating. HSBC has
assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC
publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research.
Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points (ppt) over the next 12
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July 2012
months (or 10ppt for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to
underperform its required return by at least 5ppt over the next 12 months (or 10ppt for a stock classified as Volatile*). Stocks
between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of
volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management
review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without
necessarily triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
months average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5ppt past the 40% benchmark in either direction for a stocks status to change.
Rating distribution for long-term investment opportunities

As of 24 July 2012, the distribution of all ratings published is as follows:
Overweight (Buy)
50%
(27% of these provided with Investment Banking Services)
Neutral (Hold)
37%
Underweight (Sell)
13%
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
HSBC Legal Entities are listed in the Disclaimer overleaf.
Additional disclosures
1
2
3
This report is dated as at 30 July 2012.

All market data included in this report are dated as at close 21 May 2012, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBCs analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBCs Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
MSCI disclaimer
The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this
information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any 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 and MSCI indexes are service marks of MSCI and its affiliates.
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Disclaimer
*Legal entities as at 12 June 2012
Issuer of report
UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking
The Hongkong and Shanghai Banking
Corporation Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC
Corporation Limited
Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt
Level 19, 1 Queens Road Central
AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India)
Hong Kong SAR
Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt
SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong
Telephone: +852 2843 9111
and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking
Telex: 75100 CAPEL HX
Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation
Fax: +852 2596 0200
Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC
Website: www.research.hsbc.com
Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC
Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA,
Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo;
HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The
Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong
Kong SAR
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC) in the conduct of its Hong Kong regulated
business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it
is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is
regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If
it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and
such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any
investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently
verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or
their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from
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HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons
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and MICA (P) 206/01/2012
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Asia-Pacific
Global Equity Research
Multi-sector
July 2012
David May*
Head of Equity Research, Asia-Pacific
+852 2996 6753
davidmay@hsbc.com.hk
HSBC Nutshell - A guide to equity sectors and countries
Chris Georgs
Global Head of Equity Research
HSBC Bank plc
+44 20 7991 6781
chris.georgs@hsbc.com
HSBC Nutshell
A guide to equity sectors and countries in Asia-Pacific
This guide will help you gain a quick but thorough understanding of the major sectors, industry
groups and countries in the region
It provides detailed information on structures, key drivers, indicators, themes and valuation
approaches
Asia-Pacific
A product of the Global Equity Research Team
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
July 2012
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

HSBC Sector Analysis

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HSBC Nutshell - A guide to equity sectors and countries

A product of the Global Equity Research Team

Asia-Pacific Equity Research

Chris Georgs Global Head of Equity Research

Asia-Pacific Equity Research

Asia-Pacific Equity Research

Industrials China paper

Industrials construction machinery

Industrials construction materials

Industrials Korea E&C

Industrials offshore & marine

Industrials railway infrastructure

Industrials toll roads

Internet & media

Metals & mining

Oil & gas

Basic valuation and

Asia-Pacific Equity Research

Asia-Pacific Equity Research

Weight in MSCI Asia

Three largest stocks

China Mobile, CCB,

TSMC, Hon Hai,

AIA Group, Sun

Performance since 1 January 2000

Correlations (5-year) with

Key sector stats

CIMB Group, Singapore Telecom,

High degree of Dominated by

Asia-Pacific Equity Research

Consumer Discretionary Consumer Staples

Weight in MSCI Asia

Banks, real estate Generics, hospitals

Steel, Coal Hardware, software Telecoms, Internet,

Electric and gas

Korea and China

Food & Beverage

Performance since 1 January 2000

Correlations (5-year) with

Key sector stats (avg 2011-12 numbers)

Key sector themes

Asia-Pacific Equity Research

Asia-Pacific Equity Research

Largest stocks in MSCI Asia ex Japan

Stock rank Stock name

Source: MSCI, Thomson Reuters Datastream, HSBC

Herald van der Linde*

Asia-Pacific Equity Research

Country weights of top-5 / top-10 stocks

Daily average stock market turnover (USDbn)

Source: MSCI, Thomson Reuters Datastream, HSBC

______________ Earnings volatility ______________

______________ Market volatility _______________

Note: Ranked by market volatility over 5 years.

Asia-Pacific Equity Research

India Singapore Indonesia Malaysia Thailand

Source: MSCI, Thomson Reuters Datastream, Bloomberg, HSBC

Asia-Pacific Equity Research

Actual vs trend earnings

MSCI Asia ex Japan annual EPS growth

Source: MSCI, Thomson Reuters Datastream, HSBC

Source: MSCI, Thomson Reuters Datastream, HSBC

MSCI Ax J Index y -o-y (RHS)

Earnings volatility

Market volatility _