China Slowdown: Where To Strike When Hunting For Extraordinary Value

20 June 2011 Asia Pacific/China Equity Research Macro
China Market Strategy

Research Analysts Strategy Vincent Chan 852 2101 6568 vincent.chan@credit-suisse.com Peggy Chan, CFA 852 2101 6305 peggy.chan@credit-suisse.com Banks Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com Property Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com Wind Equipment Yang Y. Song 852 2101 6550 yang.y.song@credit-suisse.com Infrastructure Ingrid Wei 86 21 3856 0379 ingrid.wei@credit-suisse.com Dry Bulk Shipping Sam Lee 852 2101 7186 sam.lee@credit-suisse.com Basic Materials Trina Chen 852 2101 7031 trina.chen@credit-suisse.com Telecoms Colin McCallum, CA 852 2101 6514 colin.mccallum@credit-suisse.com Insureance Arjan van Veen 852 2101 7508 arjan.vanveen@credit-suisse.com
STRATEGIC ANALYSIS
Debt threats: Sector and stock level impact
Rising risks to asset quality: Our analysis shows China's credit-to-GDP has risen to alarming levels in the past two years due to massive offbalance-sheet financing. Market has only focused on banking system loans which do not capture this. This raises a red flag for future asset quality problems in banks. Further, based on a bottom-up approach, interest coverage of some 1,000 non-financial companies in 1Q11 declined nearly to 2008-crisis levels. Possible scenarios. Whether it is a soft landing, hard landing or sluggish landing scenario depends on the interaction of a number of forces: (1) how the LGFV debt problems are settled; (2) the extent of the property market correction; (3) the CPI inflation outlook; and (4) the global economic outlook. We believe a sluggish landing is the most likely scenario. Market implications. We cut our rating on Banks from Overweight to UNDERWEIGHT, on ABC from Outperform to UNDERPERFORM and on BOC from Outperform to NEUTRAL. We have also adjusted earnings, target prices and ratings for other sectors including property, capital goods, infrastructure and shipping. (For a full list of our estimate and target price revisions please see page 6.)
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101
(206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai
20 June 2011
Focus charts
Figure 1: China credit and bank loan (x government bond)
(% of GDP) 180 160 140 120 100 80 60 M ar 93 Mar 96 Mar 99 M ar 02 M ar 05 Mar 08 Mar 11 Wid ened gap
Figure 2: Credit-to-GDP gap from long-term trend

(% points) 30 20 10 0 -10 -20 -30 Mar 00 Sep 01 Mar 03 US Sep 04 China Mar 06 Sep 07 Japan Mar 09 Sep 10 Spain Critical lev el - 10% points
C redit-to-GDP
Loan-to-GDP
* Credit includes bank loan, corporate bond and other off-balance sheet financing. Source: PBOC, CEIC, BIS, Credit Suisse estimates
Source: PBOC, IMF, CEIC, BIS, Credit Suisse estimates
Figure 3: Declining operating cash flow

R mb bn (seasonally adjusted) 500 450 400 350 300 250 200 150 100 50 0 Dec 07 Dec 09 Dec 08 Dec 10 Jun 08 Jun 07 Jun 09 Mar 10 Mar 07 Sep 08 Mar 09 Sep 09 Jun 10 M ar 11 Sep 07 Mar 08 Sep 10
Figure 4: New supply of system funding

(% of GDP) 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E Loans Off-balance sheet loans Corp Bond Equity & Insurance 0.9 0.2 16.0 22.1 0.8 1.9 0.8 2.0 0.6 0.5 13.3 1.0 2.0 15.2 2.2 4.4 14.7 1.6 1.8 2.7 15.8 2.1 3.8 4.6
2.2 3.0 9.6
30.9 21.0
2.2 4.5 6.8 15.7
15.0
* Based on 1,536 A-share companies, seasonally adjusted Source: Wind Database, Credit Suisse estimates
Source: CEIC
(% of GDP) 50 40 30 20 10 1990 1995 China Korea
Source: CEIC
Pacific Asset Management (Pamria, LLC) Two Union Square 601 Union Street Suite # 4200 Seattle, WA 98101 (206) 933-1600 Direct (206) 600-3175 Fax China: JinMao Tower, Suite #31/F +182-0117-7074 Shanghai
Figure 5: High leverage
high investment ratio
Figure 6: Upside/downside to 12-month index targets

(% upside/dow nside) 80 60 40 20 0 -20 -40 -60 -80 "Soft Landing" "Hard Landing" MSCI China HSCEI "Sluggish Landing" Shanghai A
2000 India Brazil
2005 Indonesia Japan
2010
Source: Datastream, Credit Suisse estimates
20 June 2011
Figure 7: Chinese economy scenarios

Scenarios Chance LGFV loans settlement Soft landing 35% Quick decision in the next 6-9 months on how to settle the cost among different parties Limited or no correction; sales rebound in 2012 14-15% (9%+ real growth, 4-5% inflation) 15%+ Stable Remains strong; credit-to-GDP ratio remains high Hard landing 10% No decision on settlement; local governments unable to repay by 2013 Sharp correction (30%+); market doesn't recover in the next 3-5 years Below 8% (7% or lower real growth, no inflation or deflation) Negative or loss making Sharp rise to 5-10% Sluggish landing 55% Compromised decisions made after tough negotiations; some problems removed from the banking system, but not all Modest correction (15-20%); market sluggish with only a mild increase in the next 2-3 years 11-12% (7.5-8.5% real growth, 4-5% inflation) Around 10%
Property market
Nominal GDP growth Listed corporate earnings growth Bank NPL ratio Financial system credit growth
Gradual rise to more sustained level, e.g. 2% Sharp slowdown; credit-to-GDP ratio Slows to lower-than-nominal GDP rapidly drops to below long-term growth level; credit-to-GDP ratio trend gradually back to long-term trend
Source: Credit Suisse estimates
Figure 8: China indices under different scenarios

Index Pot. up/do target (12-mth) Soft landing scenario (35%) MSCI China HSCEI Shanghai A Hard landing scenario (10%) MSCI China HSCEI Shanghai A Sluggish landing scenario (55%) MSCI China HSCEI Shanghai A 98 20,000 4,400 34 7,000 1,300 76 15,000 3,000 54 64 58 -47 -42 -53 19 23 7 15.7 18.1 23.0 10.0 10.0 10.0 10.0 10.0 10.0 15.5 16.2 19.1 -30.0 -30.0 -30.0 10.0 10.0 10.0 13.8 14.8 18.4 -25.0 -25.0 -25.0 8.0 8.0 8.0 8.0 8.0 8.0 6.0 6.0 6.0 6.5 6.5 6.5 16.5 15.2 18.8 6.0 5.7 6.2 13.5 12.2 14.3 14.3 13.1 15.8 8.6 8.2 8.9 12.3 11.1 13.0 12.6 11.4 13.3 11.5 10.9 11.8 11.4 10.3 12.1 (%) 2011E EPS growth (%) 2012E 2013E Medium-Term Implied P/E (x) 2011E 2012E 2013E
Source: DataStream, Credit Suisse estimates
20 June 2011
Debt threats: Sector and stock level implications

There are signs of an economic slowdown in China, and we believe that this may not be just a transient problem, as the situation is much more complex with structural problems. In this report, we re-evaluate Chinas macro outlook and look at market implications in view of the recently published system credit statistics.
Credit overhang larger than expected

For the first time, the PBOC has released total system financing data, including the previously opaque off-balance sheet data. We adopted the Basel Committee approach to evaluate the credit risk for the banking sector by looking at the gap between the current credit-to-GDP ratio and its long-term trend, and found that it is already well above 10% (figure 2), the suggested critical level, which is a cause for concern. As a result, we believe even if inflation genuinely comes down (which is doubtful), room for credit relaxation would become much smaller. We compared the credit-to-GDP ratio of China with nine other countries and found that this exercise predicted the outbreak of historical crises relatively accurately. On conducting a separate analysis on China by just looking at loan-to-GDP instead of total credit, i.e., excluding off-balance-sheet items and corporate bond, we find that the deviation is still problematic, but not so severe. This underlies the importance of off-balance-sheet banking activities affecting the policy decisions right now. Credit-to-GDP ratio is 10% higher than the long-term trend
Key macro implications and possible scenarios

We see a few macro implications: First, the pace of relaxation could be smaller than expected even if inflation eases, which could, in turn, dampen economic growth. Second, how the government handles the LGFV will have a meaningful impact on the economy and the market. Third, the biggest risk (not our base-case though) is in the worst-case scenario when the property market corrects significantly along with the general economy. In that case, the negative impact would be severe, and affect investment and overall economic growth. We outline three possible scenarios soft landing, hard landing and sluggish landing based on various factors, and assign the probability of occurrence (35%, 10% and 55%, respectively) of each scenario. We believe the sluggish landing scenario is the most likely, whereby some but not all LGFV will be removed from the system, the property market only corrects modestly, nominal GDP will be 11-12%, EPS growth will be 10%, the bank NPL ratio will rise to a more sustained level of around 2% and credit-to-GDP will be lowered to the long-term trend level with slower credit growth than nominal GDP growth. We expect a sluggish landing scenario
Market implications
We cut our EPS growth forecast for the MSCI China, the HSCEI and Shanghai A share to 10% for 2011 and 2012, and our new index targets are 76, 15,000 and 3,000, respectively, which still represent 7-23% potential upside. However, we expect the market to remain very difficult and volatile in the next few months. We have made changes to our model portfolio. Most importantly, we are now UNDERWEIGHT (UW) banks from Overweight (OW) previously. In contrast, we have increased our OVERWEIGHT on insurance and consumer, while changing utilities from Market Weight (MW) to OVERWEIGHT. On the flip side, we have increased our UNDERWEIGHT position on the energy and capital goods sectors. We cut HSCEI target from 17,500 to 15,000
OVERWEIGHT insurance and consumer and UNDERWEIGHT banks (marginally) and cyclicals
20 June 2011
Table of contents
Earnings estimates and target price revisions .....................................................................6 Sector impact .......................................................................................................................7 China Banks Sector .............................................................................................................8 Agricultural Bank of China ...........................................................................................10 Bank of China Ltd ........................................................................................................12 China Property: Maintain UNDERWEIGHT .......................................................................14 Guangzhou R&F Properties Co Ltd ...............................................................................17 Greentown China Holdings Ltd......................................................................................19 Kaisa Group .................................................................................................................21 KWG Property Holding Limited......................................................................................23 Poly (Hong Kong) Investments Ltd ................................................................................25 Shimao Property Holdings Ltd .......................................................................................27 Sino-Ocean Land Holdings Ltd......................................................................................29 Wind Equipment Sector .....................................................................................................31 Xinjiang Goldwind Science & Technology .....................................................................34 China High Speed Transmission Equipment .................................................................36 China Ming Yang Wind Power Group Ltd......................................................................38 Infrastructure Sector...........................................................................................................40 China Communications Construction Co Ltd.................................................................43 China Railway Construction Corporation.......................................................................45 China Railway Group Ltd...............................................................................................47 Dry Bulk Shipping Sector ...................................................................................................49 China COSCO Holdings ..............................................................................................51 China Basic Materials Sector .............................................................................................53 Telecoms: structural positives ............................................................................................55 Insurance Sector ................................................................................................................60
20 June 2011
Earnings estimates and target price revisions

Figure 9: Bank Sector: Gordon growth model derived target price
Bank Rating 12-13E COE ROE (%) (Rf+Rm*beta) (%) 17.6 17.5 13.5 13.6 14.3 18.1 13.7 13.6 13.3 11.3 11.3 11.7 12.0 12.5 11.5 12.3 12.6 12.3 g (%) 5 5 5 5 5 5 5 5 5 Implied P/B (x) 1.99 1.98 1.28 1.23 1.24 2.01 1.19 1.13 1.14 FV Implied (HK$) P/E (x) 6.43 7.05 3.88 2.94 6.69 18.10 5.50 5.90 3.96 11.3 11.3 9.5 9.1 8.7 11.1 8.7 8.3 8.6 FV (HK$) 7.31 8.22 4.29 4.16 8.34 19.83 5.35 6.84 4.32 Avg FV = TP 6.87 7.64 4.09 3.55 7.51 18.96 5.43 6.37 4.14 CMP (HK$) 5.81 6.64 3.82 4.02 7.23 18.10 4.96 7.19 4.73 Up(dn)side (%) Old TP Chg % -13 -15 -20 -33 -18 -12 -7 -21 -13 ICBC Outperform CCB Outperform BOC Neutral ABC Underperform BCOM Neutral CMB Neutral CNCB Neutral CMBC Underperform CRCB Underperform 18.2 7.93 15.0 8.99 7.1 5.12 -11.8 5.29 3.9 9.22 4.8 21.60 9.4 5.86 -11.4 8.10 -12.4 4.78
Source: Bloomberg, Credit Suisse estimates
Figure 10: Property sector

Company GZ R&F Greentown Kaisa KWG Poly HK Shimao Sino Ocean Recommendation New N U N N N N N Old N U O O N N N Target New 10.0 6.9 3.1 5.4 6.1 10.1 3.9 Old 12.0 7.9 3.5 7.4 7.8 12.0 5.2 12M forward NAV New 18.0 17.3 5.7 9.9 11.1 18.3 7.1 Old 22.0 19.9 6.4 13.4 14.0 21.7 9.5 2011E EPS New 1.40 1.16 0.30 0.67 0.50 1.15 0.44 Old 1.46 1.13 0.31 0.68 0.58 1.18 0.51 2012E EPS New 1.40 1.85 0.32 0.65 0.64 1.22 0.45 Old 1.50 1.89 0.34 0.77 0.80 1.35 0.54 2013E EPS New 1.43 2.03 0.36 0.70 0.89 1.53 0.56 Old 1.56 2.38 0.41 0.91 1.11 1.71 0.67
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates
Figure 11: Wind equipment sector

EPS Old 2011 Goldwind (HKD) 2208.HK CHST (HKD) 0658.HK MY (USD) MY US n.a. 1.01 1.41 2012 n.a. 1.04 1.54 EPS New* 2011 0.69 0.79 0.80 2012 0.60 0.79 0.75 TP* Old n.a. 16.86 15.2 New 7.2 9.5 7.5 Rating* Old n.a. O O New U N N
* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011. Source: Company data, Credit Suisse estimates
Figure 12: Infrastructure sector

Mkt cap Code CCCC CRCC CRGL 1800 HK 1186 HK 0390 HK Curr HKD HKD HKD 6.57 6.45 3.55 13,159 12,252 13,374 CS N N N 7.48 7.12 3.90 Upside/ TP downside 13.9 10.4 9.9 EPS 11E 0.74 0.70 0.40 12E 0.85 0.75 0.42 EPS chg % 11E -1.1 -3.2 -4.9 12E -1.2 -8.4 -10.3 P/E 11E 7.4 7.8 7.5 12E 6.3 7.0 6.8 Divd yield 11E 3.1 3.6 2.0 PB 11E 1.2 1.0 0.9 Price (US$ mn ) rating
Source: Company data, Credit Suisse estimates
Figure 13: Dry bulk shipping sector

CS Company Ch Cosco Ticker rating 1919 HK U Price Local Target 5.78 5.20 EPS chg (%) FY11 FY12 n.m. (42) TP (%) Up/dn Chg (21) EPS EPS grth (%) P/E (x) FY12 23.2 Div. yld (%) ROE P/B FY11 (%) 0 (0.4) (x) 1.1
(%) FY11 FY12 (10) 0.0 0.2
FY11 FY12 FY11 n.a n.a n.m.
20 June 2011
Sector impact
20 June 2011
China Banks Sector

Downgrade on asset quality concerns
Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com
Earnings and target price changes

Figure 14: Key earnings drivers revisions for Chinese banks (2012-2013E)
2012E New Loan growth (%) Fee growth (%) Margin (%) Credit cost (bp) 12.8 17.1 2.61 107 Old 13.6 20.0 2.65 74 Chg -0.7 -2.9 -0.04 33 New 12.1 15.1 2.61 145 2013E Old 13.3 19.7 2.67 79 Chg -1.2 -4.7 -0.06 66
Figure 15: Gordon growth model derived target price

Bank Rating 12-13E COE ROE (%) (Rf+Rm*beta) (%) 17.6 17.5 13.5 13.6 14.3 18.1 13.7 13.6 13.3 11.3 11.3 11.7 12.0 12.5 11.5 12.3 12.6 12.3 g Implied (%) P/B (x) 5 5 5 5 5 5 5 5 5 1.99 1.98 1.28 1.23 1.24 2.01 1.19 1.13 1.14 FV Implied (HK$) P/E (x) 6.43 7.05 3.88 2.94 6.69 18.10 5.50 5.90 3.96 11.3 11.3 9.5 9.1 8.7 11.1 8.7 8.3 8.6 FV Avg FV (HK$) = TP 7.31 8.22 4.29 4.16 8.34 19.83 5.35 6.84 4.32 6.87 7.64 4.09 3.55 7.51 18.96 5.43 6.37 4.14 CMP Up(dn)(HK$) side (%) 5.81 6.64 3.82 4.02 7.23 18.10 4.96 7.19 4.73 18.2 15.0 7.1 -11.8 3.9 4.8 9.4 -11.4 -12.4 Old TP 7.93 8.99 5.12 5.29 9.22 21.60 5.86 8.10 4.78 Chg % -13 -15 -20 -33 -18 -12 -7 -21 -13
ICBC Outperform CCB Outperform BOC Neutral ABC Underperform BCOM Neutral CMB Neutral CNCB Neutral CMBC Underperform CRCB Underperform
Source: Bloomberg, Credit Suisse estimates
More leveraged than meets the eye

Using the social financing data released by PBoC for the first time, we find that credit penetration, including the previously opaque off-balance-sheet financing, has risen sharply in China over the past two years. In fact, it is already above the critical levels of credit-toGDP being >10% ahead of the long-term trend which has, as per econometric models of Basel committee, led to banking sector stresses in many markets. This alarming statistic is not visible if we simply use the on-balance-sheet lending of the banking system. In a bottom-up approach, analysing the 1Q11 cash flow of some 1,000 non-financial companies in China, we estimate that interest coverage was 8x, down close to the levels last seen during the global financial crisis (2008-09). Higher debt-levels mean that even moderating inflation may not lead to an easing that the market is keenly expecting. Chinas total credit-GDP levels now up to critical levels of >10% above longterm trend, a sign of banking sector stress according to Basel committee
Asset quality the key variable

We have trimmed our forecast loan growth (GDP deceleration) to 12-13% in 2012-13E (from 13-14%), fee income growth (slower demand) to 15-17% (from 20%), and net interest margins (no more interest income when a borrower defaults) to 2.6% (from 2.652.67%). The biggest impact on earnings is from asset quality, where we now assume NPLs rising to 1.8% levels in 2012E (from 1.1-1.2% earlier) and 2.5% levels in 2013E. This leads to our credit cost assumption increasing to approximately 75 bp in 2011E (from ~60 bp earlier), 100 bp in 2012E (from ~70 bp) and 150 bp in 2013E (from ~75-80 bp). These levels are not extreme or theoretical Thai/Indo/Korean banks lost double-digit percentage of loans during the Asian Financial Crisis (similar case of fixed asset We trim our loan growth assumptions and increase our credit costs assumptions to 100-150 bp in 2012-13E
20 June 2011
investment binge led by mis-pricing of cost of capital). China itself has seen 200 bp levels in the earlier part of the last decade (based on our checks and estimates, since banks did not start getting listed until 2005). Of course, some observers will worry about evergreening by banks and that such NPLs may never show up. If the GDP downturn is short lived then banks may be able to gloss over it but a protracted slowdown, especially with stricter CBRC (not to forget a new administration taking over in 2012), may lead to better transparency.
Downgrading the bank sector

We downgrade Chinas bank sector to UNDERWEIGHT and ABC to UNDERPERFORM, BOC to NEUTRAL (from Outperform). ABC has greater risks from its county portfolio, in our view, while BOC grew its loan book massively (particularly domestic loans by 56%) in 2009. CCB remains OUTPERFORM on fundamentals, but we recognise the technical overhang to be created by the 10.2% stake held by Bank of America coming off the lockup in August. ICBC is our top pick. 2Q11 results in late August, supply of equity in 2H, and GDP indicators would be the catalysts. Regulatory action may provide negative risks while a government carve-out of LGFV related bad loans would be positive for bank stocks, in our view. ICBC is our top pick; downgrading ABC to UNDERPERFORM and BOC to NEUTRAL
20 June 2011
Asia Pacific / China Regional Banks
Agricultural Bank of China

(1288.HK / 1288 HK)
Rating (from Outperform) UNDERPERFORM* [V] Price (17 Jun 11, HK$) 4.02 Target price (HK$) (from 5.29) 3.55 Chg to TP (%) -11.7 Market cap. (HK$ mn) 1,305,672 Number of shares (mn) 324,794.12 Free float (%) 10.1 52-week price range 4.75 - 3.21
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
County loan book more concerning; downgrade to UNDERPERFORM

Downgrade to UNDERPERFORM; earnings cut in 2012-13E: We cut our earnings forecast for ABC by 19% and 31%, respectively, in 2012E and 2013E, primarily driven by a higher credit cost assumption (raised to 150bp and 175bp in 12-13E from 96 bp and 100 bp in 10A and 11E). We also revise down our loan growth by about 1% to 13-14%, and trim margins by 26 bp in 12-13E. We downgrade the stock to UNDERPERFORM (from Outperform) with our target price cut to HK$3.55 (from HK$5.29). County loan book more concerning amid a macro slowdown: The bank has the largest county level loan exposure (about 30% of its loan book) among big banks. Its county loan business recorded 173 bp and 130 bp credit cost against 87 bp and 81 bp in urban areas during 2009 and 2010, according to our estimate. We believe ABC will probably have bigger risks from its county portfolio when growth starts to decelerate amid tighter liquidity and a higher interest rate environment. Higher exposure in risky sectors: ABC had about 11% of its loan made to developers by end-2010, the highest among big banks (5-8% at peers). It also has more than 20% loan exposure in the manufacturing industry, higher than ICBC and CCB at 14% and 17%. Higher risky sectors exposure could add more credit quality pressure as anecdotally we heard that, of late, SMEs and developers are finding it tough to borrow. Valuation: The stock had outperformed peers by 3-9% and MSCI China by 8% year-to-date. Its multiple discount to ICBC and CCB had narrowed to 5% and 10% from the historical average of 10% and 15%. We believe rising concerns over its asset quality could lead to a relative weakness in its price performance. Our new target price of HK$3.55 (indicating 12% potential downside) is implied from 1.5x 11E BPS and 7.8x 11E EPS.
12/10A 164,146.0 120,734.0 94,873.0 0.32 n.a. n.a. 29.8 10.3 4.6 1.7 2.0 21.4 1.0 9.8 12/11E 214,594.0 161,027.8 124,755.7 0.38 0 0.39 18.4 8.7 4.6 2.0 1.7 20.9 1.1 9.3 12/12E 247,534.9 155,458.2 120,431.1 0.37 -19.3 0.48 -3.5 9.0 4.4 2.2 1.5 17.6 1.0 9.0 12/13E 275,784.4 153,448.0 118,863.4 0.37 -30.9 0.57 -1.3 9.1 4.4 2.4 1.4 15.7 0.8 8.7
Research Analysts Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com
Share price performance

Price (LHS) 6 5 4 3 2 Jul-10 Nov-10 Mar-11 Rebased Rel (RHS) 140 120 100 80
The price relative chart measures performance against the MSCI China Free index which closed at 63.73 on 17/06/11 On 17/06/11 the spot exchange rate was HK$7.8/US$1
Performance Over Absolute (%) Relative (%)
1M -10.7 -6.0
3M -0.5 -0.1
12M
Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com
Financial and valuation metrics Year Pre-prov Op profit (Rmb mn) Pre -tax profit (Rmb mn) Net attributable profit (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) CS adj. BVPS (Rmb) P/B (x) ROE ROA (%) Tier 1 Ratio (%)
Source: Company data, Thomson Reuters, Credit Suisse estimates.
10
20 June 2011
Agricultural Bank of China 1288.HK / 1288 HK

Price (17 Jun 11): HK$4.02, Rating: UNDERPERFORM [V], Target Price: HK$3.55, Analyst: Sanjay Jain
Per Share Data No. of shares (wtd avg) (mn) EPS (Credit Suisse) (Rmb) Book value per share Tangible book value per share DPS (Rmb) Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (Rmb mn) Interest income Interest expense Net interest income pre Fee and commission income Trading income Insurance inc & premiums Other income Total non interest income Total income Personal expense Total expenses Pre provision profit Loan loss provisions Operating profit Other non operating inc/(exp) Pre-tax profit Income tax (expense) Net profit before minorities Minority interests Preferred dividends Net income (CS) (Rmb mn) 12/10A 292,397.00 0.32 1.67 1.67 0.15 12/10A 29.8 10.3 2.0 2.0 4.6 12/10A 357,660.0 115,508.0 242,152.0 46,128.0 -244.0 1,722.0 50,101.0 292,253.0 67,130.0 128,107.0 164,146.0 43,412.0 120,734.0 120,734.0 25,827.0 94,907.0 34.0 94,873.0 12/11E 324,794.00 0.38 2.00 2.00 0.15 12/11E 18.4 8.7 1.7 1.7 4.6 12/11E 457,430.8 157,563.9 299,866.9 59,966.4 500.0 1,722.0 64,388.4 364,255.3 80,556.0 149,661.3 214,594.0 53,566.3 161,027.8 161,027.8 36,231.3 124,796.5 40.8 124,755.7 12/12E 324,794.00 0.37 2.22 2.22 0.15 12/12E -3.5 9.0 1.5 1.5 4.4 12/12E 550,600.7 200,764.7 349,836.0 68,961.4 300.0 500.0 70,961.4 420,797.4 96,667.2 173,262.4 247,534.9 92,076.7 155,458.2 155,458.2 34,978.1 120,480.1 49.0 120,431.1 12/13E 324,794.00 0.37 2.43 2.43 0.15 12/13E -1.3 9.1 1.4 1.4 4.4 12/13E 646,348.0 250,463.6 395,884.4 300.0 500.0 80,616.0 476,500.4 116,000.6 200,716.0 275,784.4 122,336.4 153,448.0 153,448.0 34,525.8 118,922.2 58.8 118,863.4 Key earnings driver 12/10A 12/10A 21.4 21.4 1.0 21.7 2.0 168.1 7.7 9.8 10.4 30.7 16.9 43.9 46.0 18.5 53.9 12/11E 12/11E 20.9 20.9 1.1 18.6 2.0 180.8 9.8 9.3 11.6 24.6 16.8 30.7 31.5 15.0 53.9 12/12E 12/12E 17.6 17.6 1.0 18.3 2.5 168.7 9.3 9.0 11.2 15.5 15.8 15.4 -3.5 13.0 54.1 12/13E 12/13E 15.7 15.7 0.8 18.6 3.1 158.5 9.0 8.7 10.8 13.2 15.8 11.4 -1.3 13.0 54.1
Key ratios and valuation ROE stated - return on ROE - CS adj.return on ROA - credit suisse adj. Gearing (x) Asset quality (%) NPL to gross loans ratio Reserves to NPL ratio Capital ratios (%) Eqt Tier 1 Ratio (12/11E, Tier 1 ratio (12/11E, %) Capital adequacy ratio Growth and balance Revenue growth Operating expense growth Pre-provisional op. profit Net profit growth Deposit growth Loan-deposit ratio
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates.
Balance sheet 12/10A 12/11E 12/12E 12/13E Assets Gross customer loans 4,956,741.0 5,716,510.8 6,533,720.0 7,424,614.3 Risk provisions 168,733.0 206,079.9 279,769.6 367,151.8 Net customer loans 4,788,008.0 5,510,431.0 6,253,950.4 7,057,462.4 Interbank Loans 698,599.0 838,318.8 1,005,982.6 1,207,179.1 Investment & Securities Cash and cash equivalents 2,082,332.0 2,118,355.6 2,002,364.5 1,846,809.3 Fixed Assets 121,391.0 127,460.6 133,833.6 140,525.3 Intangible assets & goodwill (Rmb 1.0 Other assets 119,645.0 176,495.5 189,069.5 202,656.2 Total assets 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0 Liabilities Interbank deposits 701,131.0 620,449.0 620,450.5 620,452.1 Customer deposits 7,497,618.0 8,887,905.0 10,225,420.0 11,551,872.0 Total deposits 9,508,354.0 10,845,870.5 12,172,324.1 13,672,895.0 Other liabilities 224,472.0 246,311.4 270,051.5 296,122.5 Total liabilities 9,795,170.0 11,154,525.9 12,504,719.6 14,031,361.5 Shareholders' equity 542,071.0 649,287.7 719,816.6 790,507.6 Minority interest 165.0 165.0 165.0 165.0 Preferred stock Total liabilities and shareholders' 10,337,406.0 11,803,978.6 13,224,701.2 14,822,034.0
11
20 June 2011
Asia Pacific / China Regional Banks
Bank of China Ltd

(3988.HK / 3988 HK)
Rating (from Outperform) NEUTRAL* Price (16 Jun 11, HK$) 3.83 Target price (HK$) (from 5.12) 4.09 Chg to TP (%) 6.8 Market cap. (HK$ mn) 1,069,134 Number of shares (mn) 279,147.24 Free float (%) 18.0 52-week price range 5.00 - 3.83
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months.
Rising credit quality risks; tighter balance sheet liquidity

Downgrade to NEUTRAL; earnings cut: We cut BOCs 2011-13E earnings by 9%, 18% and 31%, as we stacked up credit cost assumption to 70 bp, 95 bp and 120 bp on rising asset quality concerns amid a macro slow down. We have also revised down loan growth by 1% and margin by 3-7 bp in 201213E. We downgrade BOC to NEUTRAL (from Outperform) with our target price being cut to HK$4.09 (from HK$ 5.12). Most aggressive in lending among big banks in 2009: It was the most aggressive lender among the big five in 2009 with its domestic loan book swelling by 56%. Credit quality may face pressure if economy slows down together with tight monetary policy in place. Liquidity pressure should be negative on margin: Our sensitivity also showed BOC has the least upside to a rising rate cycle compared to peers. Rising RRR (now record high at 21.5%) could adversely impact its BS liquidity (LDR at 74.9% in 1Q11, the highest among the big four). Higher interbank rate will have a negative impact on margin as it is a net interbank borrower. Interbank funds accounted for 16% of liabilities (vs peers 7-9%). Valuation: Nevertheless, BOC also faces relatively lower market expectations. We downgrade it to NEUTRAL (from Outperform). Our GGM derived target price of HK$4.09 is based on 13.5% mid-term ROE, 11.7% COE, 5% long-term growth. The stock is now trading at 1.3x 2011E BVS and and 8.4x 2011E EPS.
12/10A 154,109.0 142,145.0 104,418.0 0.41 n.a. n.a. 28.9 7.7 4.6 2.3 1.4 18.0 1.1 10.1 12/11E 185,108.5 144,689.4 105,874.2 0.38 -8.8 0.43 -7.6 8.4 4.7 2.5 1.3 15.6 1.0 9.5 12/12E 210,779.4 148,126.5 107,967.1 0.39 -18.3 0.50 2.0 8.2 4.7 2.8 1.1 14.5 0.9 9.3 12/13E 227,938.5 139,043.8 100,364.4 0.36 -30.9 0.58 -7.0 8.8 4.4 3.0 1.1 12.5 0.7 9.0
Research Analysts Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com

Price (LHS) 6 5 4 3 2 Jun-09 Oct-09 Feb-10 Jun-10 Oct- 10 Feb-11
Rebased Rel (RHS) 120 110 100 90 80
1M -9.0 -4.4
3M -6.1 -3.7
12M -2.5 -8.4
Financial and valuation metrics Year Pre-prov Op profit (Rmb mn) Pre -tax profit (Rmb mn) Net attributable profit (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) CS adj. BVPS (Rmb) P/B (x) ROE ROA (%) Tier 1 Ratio (%)
12
20 June 2011
Bank of China Ltd 3988.HK / 3988 HK

Price (16 Jun 11): HK$3.83, Rating: NEUTRAL, Target Price: HK$4.09, Analyst: Sanjay Jain
Per Share Data No. of shares (wtd avg) (mn) EPS (Credit Suisse) (Rmb) Book value per share Tangible book value per share DPS (Rmb) Valuation EPS growth (%) P/E (x) P/B (x) P/TB (x) Dividend yield (%) Income statement (Rmb mn) Interest income Interest expense Net interest income pre Fee and commission income Trading income Insurance inc & premiums Other income Total non interest income Total income Personal expense Total expenses Pre provision profit Loan loss provisions Operating profit Other non operating inc/(exp) Pre-tax profit Income tax (expense) Net profit before minorities Minority interests Preferred dividends Net income (CS) (Rmb mn) 12/10A 254,366.25 0.41 2.31 2.30 0.15 12/10A 28.9 7.7 1.4 1.4 4.6 12/10A 313,718.1 119,640.0 193,962.0 54,483.0 3,491.0 2,000.0 82,556.0 276,518.0 53,420.0 122,409.0 154,109.0 12,993.0 141,116.0 142,145.0 32,454.0 109,691.0 5,273.0 104,418.0 12/11E 279,147.00 0.38 2.54 2.53 0.15 12/11E -7.6 8.4 1.3 1.3 4.7 12/11E 393,899.8 163,531.8 230,368.1 68,029.6 5,500.0 100,413.6 330,781.6 64,104.0 145,673.1 185,108.5 41,551.0 143,557.5 144,689.4 33,278.6 111,410.8 5,536.7 105,874.2 12/12E 279,147.00 0.39 2.78 2.77 0.15 12/12E 2.0 8.2 1.1 1.1 4.7 12/12E 469,651.7 205,381.7 264,269.9 78,748.9 6,255.0 112,329.2 376,599.1 75,642.7 165,819.7 210,779.4 63,897.9 146,881.5 148,126.5 34,069.1 114,057.4 6,090.3 107,967.1 12/13E 279,147.00 0.36 2.99 2.98 0.14 12/13E -7.0 8.8 1.1 1.1 4.4 12/13E 529,763.2 240,515.5 289,247.8 7,132.0 126,734.8 415,982.5 87,745.6 188,044.1 227,938.5 90,264.3 137,674.2 139,043.8 31,980.1 107,063.7 6,699.3 100,364.4 Key earnings driver Loan growth Net interest margin Fee growth Cost-inc ratio P&L provision (% of loans) Key ratios and valuation ROE stated - return on ROE - CS adj.return on ROA - credit suisse adj. Gearing (x) Asset quality (%) NPL to gross loans ratio Reserves to NPL ratio Capital ratios (%) Eqt Tier 1 Ratio (12/11E, Tier 1 ratio (12/11E, %) Capital adequacy ratio Growth and balance Revenue growth Operating expense growth Pre-provisional op. profit Net profit growth Deposit growth Loan-deposit ratio 12/10A 14.79 2.04 16.31 43.89 0.93 12/10A 18.0 18.0 1.1 16.6 1.1 142.1 9.1 10.1 11.1 18.9 14.1 23.0 29.2 13.0 74.0 12/11E 12.56 2.11 17.71 43.52 0.50 12/11E 15.6 15.6 1.0 16.4 1.2 129.7 10.1 9.5 12.6 19.6 19.0 20.1 1.4 15.0 73.1 12/12E 12.25 2.21 18.08 43.67 0.65 12/12E 14.5 14.5 0.9 16.7 1.6 111.4 9.5 9.3 11.1 13.9 13.8 13.9 2.0 13.0 71.8 12/13E 12/13E 12.5 12.5 0.7 17.0 2.0 9.3 9.0 10.8 10.5 13.4 8.1 -7.0 13.0 70.4
Balance sheet 12/10A 12/11E 12/12E 12/13E Assets Gross customer loans 5,660,621.0 6,439,663.5 7,180,956.8 7,996,422.9 Risk provisions 149,679.2 162,714.0 186,402.2 Net customer loans 5,537,765.0 6,287,243.7 6,979,255.0 7,738,566.7 Interbank Loans 1,787,638.0 2,085,322.2 2,203,494.1 2,372,303.7 Investment & Securities Cash and cash equivalents 722,344.0 754,364.8 951,986.6 1,148,330.2 Fixed Assets 123,568.0 129,746.4 136,233.7 143,045.4 Intangible assets & goodwill (Rmb 2,342.0 2,342.0 2,342.0 2,342.0 Other assets 230,884.0 246,776.1 264,162.7 283,188.5 Total assets 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7 Liabilities Interbank deposits 1,152,424.0 1,580,030.0 1,659,031.5 1,692,212.1 Customer deposits 6,620,552.0 7,483,254.0 8,605,742.1 9,724,488.6 Total deposits 9,063,284.0 10,264,773.6 11,416,700.7 12,714,728.5 Other liabilities 588,544.0 625,523.3 661,166.2 700,007.7 Total liabilities 9,783,715.0 11,022,183.9 12,209,753.9 13,546,623.1 Shareholders' equity 644,165.0 709,284.2 775,960.4 834,217.6 Minority interest 31,985.0 35,183.5 38,701.9 42,572.0 Preferred stock Total liabilities and shareholders' 10,459,865.0 11,766,651.6 13,024,416.1 14,423,412.7
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20 June 2011
China Property: Maintain UNDERWEIGHT

Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 / duo.chen@credit-suisse.com
Earnings estimates and target price revisions

Figure 16: Change summary
Company GZ R&F Greentown Kaisa KWG Poly HK Shimao Sino Ocean Recommendation New N U N N N N N Old N U O O N N N Target New 10.0 6.9 3.1 5.4 6.1 10.1 3.9 Old 12.0 7.9 3.5 7.4 7.8 12.0 5.2 12M forward NAV New 18.0 17.3 5.7 9.9 11.1 18.3 7.1 Old 22.0 19.9 6.4 13.4 14.0 21.7 9.5 2011E EPS New 1.40 1.16 0.30 0.67 0.50 1.15 0.44 Old 1.46 1.13 0.31 0.68 0.58 1.18 0.51 2012E EPS New 1.40 1.85 0.32 0.65 0.64 1.22 0.45 Old 1.50 1.89 0.34 0.77 0.80 1.35 0.54 2013E EPS New 1.43 2.03 0.36 0.70 0.89 1.53 0.56 Old 1.56 2.38 0.41 0.91 1.11 1.71 0.67
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates
Sales turning non-cash; widespread price cuts should soon lead to further de-rating
With banks delaying the approval and release of mortgage loans, developers cash collection on property pre-sales has declined significantly. Moreover, due to the banks tighter loan quota, several high-end projects have started allowing home buyers to pay on an installment basis. Therefore, the cash collection for high-end players may deteriorate much more significantly than the sector average. Given a more bearish macro outlook and potentially worse-than-expected financial conditions of property developers, we expect the property price cuts in 2H11 to be more significant. When widespread property price cuts happen, volumes would dry up instead of increasing home buyers would wait for the bottoming of prices instead of rushing to buy, in our view. The deteriorating financial condition of developers, property prices and volume drop in 2H11E should lead to a further derating of the China property sector, in our view.
Figure 17: Key drivers
FY11E Major markets housing price YoY change (%) Before
Major markets primary housing transaction volumes, YoY change (%)
Before Developers financing cost (direction) Before Source: Credit Suisse estimates
-10 -5 -15 -10 Increase YoY Flat YoY
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20 June 2011
Figure 18: Valuation table

CS Company Guangzhou R&F Greentown Kaisa KWG Property Poly HK Shimao Property Sino-Ocean Land Ticker 2777 HK 3900 HK 1638 HK 1813 HK 119 HK 813 HK 3377 HK Rating N U O O N N N Price Year Local Target 9.65 7.25 2.8 4.9 4.73 8.94 3.52 12 7.95 3.5 7.4 7.8 12 5.2 10-Dec 10-Dec 10-Dec 10-Dec 10-Dec 10-Dec 10-Dec EPS Chg(%) -4 2 -2 -1 -13 -2 -13 -7 -2 -7 -16 -20 -10 -17 TP (%) Up/dn Chg -17 -13 -10 -27 -22 -16 -25 24 10 25 51 65 34 48 EPS 1.5 1.1 0.3 0.7 0.6 1.2 0.5 1.5 1.9 0.3 0.8 0.8 1.4 0.5 EPS grth (%) 28 22 7 53 57 17 54 3 67 13 14 39 15 6 P/E (x) 5.5 5.3 7.6 6 8.2 6.3 5.7 5.4 3.2 6.7 5.3 5.9 5.5 5.4 Div. yld (%) ROE T+1 7.3 7.5 1.6 3.1 1.8 4.4 4.9 (%) 21.9 17.3 15.8 15.4 8.2 15.5 11 P/B (x) 1.1 0.9 1.3 0.9 0.6 1 0.6
T T+1 T+2
(%) T+1 T+2 T+1 T+2 T+1 T+2
Persistent credit tightening should lead to sector derating

The Credit Suisse economist and strategist believe the chances of a soft landing for Chinas economy is diminishing, and inflation is likely to be more persistent than the current market expectation. Therefore, we expect the Chinese government to keep tightening the property sector despite the potential property market weakness. Moreover, continued RRR and interest rate hikes should also severely deteriorate property developers financial conditions and reduce home buyers demand. Therefore, we revise our assumptions for the China property sector as follows: (1) Property prices in major markets to decline 10% YoY in 2011E. Previously, we had assumed a 5% YoY decline in property prices in Chinas major property markets. Given the more bearish macro outlook and potentially worse-than-expected financial conditions of property developers, we expect the property price cuts in 2H11 to be more significant. (2) Primary housing transaction volumes in major markets to decline 15% YoY in 2011E. When we established a 10% YoY volume decline assumption for 2011E in October 2010, Credit Suisse was the only broker with a negative outlook on 2011E volumes. This was because we believe when widespread property price cuts happen, volumes would dry up instead of increasing home buyers would wait for the bottoming of prices instead of rushing to buy. Now, with a potentially sharper and more persistent property price decline, we expect transaction volumes to dry up further, especially with a very strong sales surge in 4Q10A. (3) Financing costs are rising in 2011E and beyond. With the current credit tightening, many developers are facing difficulties borrowing from banks at normal bank lending rates. As a result, they have been raising capital/borrowing from alternative sources at much higher rates (for details, please refer to our 30 May China property sector report, Holes in the bull argument). Therefore, we have increased the assumed average financing cost for developers each developers financing costs are different.
High-end players in bigger cities should suffer more

As the current government policies focus on suppressing investment-driven demand for residential properties, we expect sales of high-end projects in bigger cities to weaken. Moreover, due to the banks tighter loan quota, several high-end projects have started allowing home buyers to pay on an installment basis. Therefore, the cash collection for high-end developers may deteriorate much more significantly than the sector average. As a result, we maintain COLI (0688.HK, CP HK$15, UNDERPERFORM, TP HK$13), a high-end developer, as our top Underperform idea. Also, we downgrade high-end developer KWG (1813.HK) from Outperform to NEUTRAL, and downgrade big city (Shenzhen) based player Kaisa (1638.HK) from Outperform to NEUTRAL. We significantly
15
20 June 2011
reduce our target price for high-end developer Shimao, but maintain our NEUTRAL rating as its share price has already significantly underperformed.
How clients should be positioned

We still believe that investors should reduce their exposure in more expensive, high-end developers (such as COLI), and those focusing on major cities (such as Sino Ocean, KWG and Kaisa). On a relative basis, those with mass-market products in smaller cities, such as Evergrande (3333.HK) and China Vanke (000002.SZ), should suffer less from the sector downturn, in our view.
16
20 June 2011
Asia Pacific / China Real Estate Management & Development
Guangzhou R&F Properties Co Ltd (2777.HK / 2777 HK)

Rating NEUTRAL* Price (16 Jun 11, HK$) 9.65 Target price (HK$) (from 12.00) 10.00 Chg to TP (%) 3.6 Market cap. (HK$ mn) 31,095.8 Enterprise value (Rmb mn) 51,149 Number of shares (mn) 3,222.37 Free float (%) 28.0 52-week price range 13.02 - 9.59
Reduce target price due to a more bearish sector outlook

We reduce our target price for Guangzhou R&F from HK$12 to HK$10: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volumes to drop 15% YoY (10% previously). As a result, we reduce our forward NAV estimate for Guangzhou R&F from HK$22 to HK$18, and reduce the target price from HK$12 to HK$10. Sales uncertainty to increase in 2H11E: From January to May, R&F recorded Rmb11.2 bn of contracted sales, representing 30% of its full-year guidance. We believe its contracted sales may become uncertain in 2H11E, especially when property price cuts become more widespread, which could affect transaction volumes. Valuation: Guangzhou R&F is trading at 54% to 12-month NAV. Given the current sector downturn, we think the current valuation is fair.
Research Analysts Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com
Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Price (LHS) 20 15 10 5 0 Jun-09 Oct-09 Feb-1 0 Jun-10 Oct-10 Feb -11
Rebased Rel (RHS) 120 100 80 60 40
1M -3.5 1.4
3M -4.3 -1.8
12M -4.5 -10.2
Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com
Financial and valuation metrics Year Revenue (Rmb mn) EBITDA (Rmb mn) EBIT (Rmb mn) Net income (Rmb mn) EPS (CS adj.) (Rmb) Change from previous EPS (%) Consensus EPS (Rmb) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 24,641.8 8,313.6 7,969.1 3,665.6 1.14 n.a. n.a. 45.4 7.1 6.2 5.4 1.3 20.0 93.4
12/11E 31,148.3 9,340.9 8,962.0 4,510.0 1.40 -4.0 1.38 23.0 5.7 7.0 5.5 1.1 21.1 107.7
12/12E 34,612.6 9,038.6 8,621.8 4,509.5 1.40 -6.6 1.55 -0.0 5.7 7.0 6.5 1.0 18.5 124.7
12/13E 36,190.2 9,430.8 8,972.3 4,617.7 1.43 -8.2 1.72 2.4 5.6 7.1 7.1 0.9 17.0 137.6
Source: Company data, Thomson Reuters, Credit Suisse estimates
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20 June 2011
Guangzhou R&F Properties Co Ltd 2777.HK / 2777 HK

Price (16 Jun 11): HK$9.65, Rating: NEUTRAL, Target Price: HK$10.00, Analyst: Jinsong Du
Target price scenario Scenario Upside Central case Downside TP 10.00 % Up/dwn Assumptions 3.63 Per share data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 34,613 24,028.8 2,257.1 -295.1 9,039 416.8 8,621.8 720.0 214.0 8,115.8 3,165.2 4,950.6 441.2 4,509.5 4,509 12/12E 8,622 1,623.2 -10,418.3 -2,239.1 -5,658.8 442.1 -6,100.9 -442.1 1,804.0 -1,804.0 -7,904.9 12/12E 11,093.5 8,377.9 58,417.5 70,632.0 4,949.5 875.1 27,750.0 104,206.6 9,492.9 2,337.8 32,322.9 44,153.6 28,139.3 5,393.4 77,686.3 25,714.2 806.0 104,206.6 12/13E 36,190 25,183.6 2,344.2 -309.9 9,431 458.5 8,972.3 868.4 660.7 1.0 8,764.6 3,418.6 5,347.0 729.4 4,617.7 4,618 12/13E 8,972 1,753.1 -10,361.2 -2,790.1 -5,932.0 507.8 -6,439.8 -507.8 1,803.8 -1,803.8 -8,243.6 12/13E 12,202.8 9,129.6 1.0 69,998.6 82,623.9 5,460.2 875.1 31,702.3 120,661.5 10,442.2 2,922.3 36,644.3 50,008.8 35,269.5 5,361.5 90,639.8 28,485.3 1,535.4 120,660.5 Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x) 12/10A 3,222.4 1.14 n.a. 0.50 0.20 12/10A 35.4 63.9 45.4 45.4 33.7 32.3 28.2 14.9 7.1 1.3 1.8 5.4 5.6 20.0 11.2 0.32 0.87 0.54 3.9 93.4 2.2 8.5 12/11E 3,222.4 1.40 1.38 0.56 -1.49 12/11E 26.4 12.5 23.0 23.0 30.0 28.8 27.2 14.5 5.7 1.1 1.6 5.5 5.7 21.1 10.2 0.35 0.95 0.55 3.8 107.7 2.7 18.5 12/12E 3,222.4 1.40 1.55 0.56 -1.76 12/12E 11.1 -3.8 -0.0 -0.0 26.1 24.9 23.4 13.0 5.7 1.0 1.7 6.5 6.8 18.5 8.8 0.33 0.94 0.61 3.9 124.7 3.7 12.0 12/13E 3,222.4 1.43 1.72 0.57 -1.84 12/13E 4.6 4.1 2.4 2.4 26.1 24.8 24.2 12.8 5.6 0.9 1.9 7.1 7.5 17.0 7.7 0.30 0.98 0.61 4.0 137.6 10.3
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 24,642 15,348.6 1,547.2 -223.1 8,314 344.5 7,969.1 940.8 -67.8 6,960.5 3,189.2 3,771.4 685.0 105.8 4,350.6 -685.0 3,666 12/10A 7,969 1,392.1 -4,049.8 -1,869.8 657.4 334.8 322.6 -334.8 998.9 -998.9 -676.3 12/10A 9,168.1 7,229.4 40,694.0 52,052.1 4,119.1 875.1 20,370.6 77,416.9 7,845.4 1,496.2 25,252.1 34,593.7 15,169.4 7,654.5 57,417.7 19,787.7 211.5 77,416.9
12/11E 31,148 20,134.9 2,308.0 -256.6 9,341 378.9 8,962.0 484.9 1.7 8,478.8 3,815.5 4,663.3 153.4 4,510.0 4,510 12/11E 8,962 1,695.8 -10,330.4 -1,746.8 -4,811.0 384.2 -5,195.2 -384.2 1,288.9 -1,288.9 -6,484.1 12/11E 10,085.0 7,751.4 48,755.4 60,544.5 4,505.3 875.1 23,981.3 89,906.2 8,629.9 1,870.2 28,550.4 39,050.6 21,058.6 6,423.4 66,532.6 23,008.7 364.9 89,906.2
Share price vs P/E multiple

50 40 30 20 10 0 2006 80 70 60 50 40 30 20 10 0 2011
2007
2008
2009
2010
Price (LHS)
12m fwd PE (x) (RHS)
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20 June 2011
Greentown China Holdings Ltd

(3900.HK / 3900 HK)
Rating UNDERPERFORM* [V] Price (16 Jun 11, HK$) 7.25 Target price (HK$) (from 7.95) 6.90 Chg to TP (%) -4.8 Market cap. (HK$ mn) 11,884.5 Enterprise value (Rmb mn) 39,875 Number of shares (mn) 1,639.25 Free float (%) 37.3 52-week price range 10.04 - 7.02
Sluggish sales indicate more risks

YTD sales behind schedule: As of May, Greentown had achieved gross contracted sales of Rmb13.8 bn, down 15% YoY. In the first five months it achieved only 25% of its 2011 full-year sales target of Rmb55 bn, and its sales progress is among the slowest under our coverage. The companys management recently highlighted the difficulties in realising the target. We expect a higher possibility of slippage in the companys contracted sales this year and reduce our 2011 contracted sales forecast by 15% to Rmb47 bn. NAV reduced on new sector assumptions: We revise our assumptions for the China property sector we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we revise down our forward NAV estimate for Greentown to HK$17.3 from HK$19.9 and target price to HK$6.90 from HK$7.95. Earning impact lag to appear, gearing to climb soon: Given Greentowns longer-than-average development cycle, the blended effect from lower ASP and slower sales this year might show in 2012-13. However, the shortfall in sale proceeds will likely push the companys formidable gearing ratio even higher and may approach 200% (net debt to attributable equity) by year end. Valuation: Greentown is trading at a 58% discount to 12-month NAV and 1x P/B. Given the expected market downturn and the companys high-end position and aggressive strategy, we continue to see risks for the company and maintain our UNDERPERFORM rating.
Research Analysts
Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com

Price (LHS) 16 11 6 Jun-09 Oct-09 Feb-1 0 Jun-10 Oct-10 Feb -11
Rebased Rel (RHS) 120 100 80 60 40
1M -11.0 -6.6
3M -2.3 0.2
12M -15.5 -20.6
Duo Chen 852 2101 7350 duo.chen@credit-suisse.com
12/10A 11,161.3 1,816.6 1,816.6 1,531.8 0.93 n.a. n.a. 84.3 6.5 5.0 17.9 0.97 15.5 133.7
12/11E 20,117.2 5,130.6 5,130.6 1,896.9 1.16 1.9 1.29 24.0 5.2 7.7 7.8 0.87 17.6 158.1
12/12E 27,444.2 7,102.6 7,102.6 3,039.3 1.85 -2.2 1.95 60.2 3.3 12.3 4.8 0.75 24.8 129.5
12/13E 31,933.3 5,561.8 5,561.8 3,334.8 2.03 -14.6 2.48 9.7 3.0 13.5 6.4 0.65 23.5 121.3
19
20 June 2011
Greentown China Holdings Ltd

Target price scenario Scenario Upside Central Case Downside
TP 6.90 %Up/Dwn Assumptions -4.83
3900.HK / 3900 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 1,644.1 0.93 n.a. 0.30 6.65 12/10A
27.9 50.7 91.2 84.3 16.3 16.3 26.9 13.7 6.5 0.97 2.9 17.9 17.9 15.5 3.4 0.09 1.7 0.64 8.7 133.7 10.6 -13.3
Price (16 Jun 11): HK$7.25, Rating: UNDERPERFORM [V], Target Price: HK$6.90, Analyst: Wenhan Chen
12/11E 1,641.9 1.16 1.29 0.46 2.20 12/11E
80.2 182.4 23.8 24.0 25.5 25.5 25.2 9.4 5.2 0.87 2.0 7.8 7.8 17.6 6.4 0.14 1.0 0.51 9.1 158.1 5.0 5.3
12/12E 1,641.9 1.85 1.95 0.74 12/12E

36.4 38.4 60.2 60.2 25.9 25.9 26.1 11.1 3.3 0.75 1.2 4.8 4.8 24.8 9.4 0.17 1.0 0.57 8.6 129.5 3.4 6.8
12/13E 1,641.9 2.03 2.48 0.81 12/13E

16.4 -21.7 9.7 9.7 17.4 17.4 17.3 10.4 3.0 0.65 1.1 6.4 6.4 23.5 8.8 0.18 1.0 0.74 8.2 121.3 5.3
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 11,161 7,759.9 1,658.1 -73.3 1,817 1,816.6 -137.1 481.7 565.0 3,000.3 1,084.8 1,915.5 383.8 1,531.8 1,532 12/10A 1,817 1,084.8 11,344.0 -1,134.8 10,941.0 333.2 10,607.8 -333.2 584.5 5,430.4 3,884.2 3,299.7 13,907.5 12/10A 14,972.9 4,196.0 2,034.2 94,803.2 116,006.2 2,448.3 6,904.5 125,359.0
8,928.0 11,993.9 66,519.4 87,441.3 21,621.4 1,843.5 110,906.3 10,199.5 4,253.2 125,359.0
12/11E 20,117 12,783.9 2,276.0 -73.3 5,131 5,130.6 964.9 893.9 5,059.7 2,457.2 2,602.5 705.5 1,896.9 1,897 12/11E 5,131 2,457.2 4,000.7 -3,063.5 3,610.7 349.9 3,260.8 -349.9 496.5 5,000.0 636.8 140.3 3,401.1 12/11E 13,865.8 4,196.0 2,034.2 105,001.4 125,097.3 2,448.3 18,760.6 146,306.2
8,928.0 14,392.7 80,835.6 104,156.3 24,654.6 1,411.6 130,222.4 11,337.7 4,746.0 146,306.2
12/12E 27,444 18,145.4 2,269.4 -73.3 7,103 7,102.6 1,046.5 1,104.2 7,160.3 3,082.1 4,078.2 1,038.9 3,039.3 3,039 12/12E 7,103 -7,102.6 12/12E 15,069.4 4,196.0 2,034.2 112,578.7 133,878.2 2,448.3 23,991.8 160,318.3
8,928.0 17,271.2 92,222.5 118,421.7 21,776.1 1,411.6 141,609.3 13,161.3 5,547.7 160,318.3
12/13E 31,933 23,959.1 2,485.7 -73.3 5,562 5,561.8 1,046.5 995.7 5,511.0 1,431.0 4,080.0 745.1 3,334.8 3,335 12/13E 5,562 -5,561.8 5,425.7 12/13E 13,620.4 4,196.0 2,034.2 125,860.2 145,710.8 2,448.3 24,720.9 172,880.0
8,928.0 20,725.5 102,315.5 131,969.0 18,321.8 1,411.6 151,702.4 15,162.2 6,015.4 172,880.0
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)

25 20 15 10 5 0 2006 45 40 35 30 25 20 15 10 5 0 2007 2008 2009 2010
Price (LHS)
20
20 June 2011
Kaisa Group
(1638.HK / 1638 HK)
Rating (from Outperform) NEUTRAL* [V] Price (16 Jun 11, HK$) 2.80 Target price (HK$) (from 3.50) 3.14 Chg to TP (%) 12.1 Market cap. (HK$ mn) 13,733.1 Enterprise value (Rmb mn) 14,468 Number of shares (mn) 4,904.67 Free float (%) 22.0 52-week price range 3.39 - 1.51
Fairly priced
We downgrade Kaisa from Outperform to NEUTRAL: Although Kaisa contracted sales in May picked up to Rmb1.28 bn, up 125% MoM and 106% YoY, the companys first five months sales of Rmb3.2 bn accounted for just 21% of its full-year target of Rmb15 bn. Its YTD sales progress is among the slowest under our coverage. We expect the companys sales progress to continue to be hindered from the austerity measures and trim our 2011 contracted sales forecast to Rmb13 bn. Reducing NAV with new sector assumptions: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we revise down our forward NAV estimate for Kaisa to HK$5.7 from HK$6.4 and target price to HK$3.14 from HK$3.50. Valuation: Kaisa is trading at a 51% discount to 12-month NAV and 1.2x P/B. Given the current sector downturn and uncertainties ahead of its contracted sales, we downgrade Kaisa from Outperform to NEUTRAL.
Research Analysts
Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Price (LHS) 6 4 2 0 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Rebased Rel (RHS) 120 100 80 60 40
1M 0.7 5.8
3M 8.1 10.9
12M 75.0 64.4
12/10A 7,755.9 2,450.4 2,422.4 1,409.5 0.29 n.a. n.a. 173.6 8.1 1.2 6.3 1.1 16.9 40.3
12/11E 9,310.0 2,512.1 2,479.8 1,564.3 0.30 -2.1 0.29 4.4 7.8 1.9 5.8 1.3 15.5 30.0
12/12E 12,407.5 3,072.7 3,035.6 1,788.5 0.32 -6.5 0.40 7.9 7.2 2.1 5.1 1.2 17.2 41.6
12/13E 16,302.2 3,587.2 3,544.6 2,011.4 0.36 24.0 0.61 12.5 6.4 17.9 3.7 1.0 17.4 16.3
21
20 June 2011
Kaisa Group 1638.HK / 1638 HK

Price (16 Jun 11): HK$2.80, Rating: NEUTRAL [V], Target Price: HK$3.14
TP 3.14 %Up/Dwn Assumptions 12.14
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (HK$) Operating cash flow per 12/12E 12,408 8,273.6 1,112.1 -13.8 3,073 37.1 3,035.6 48.1 2,987.5 1,199.1 1,788.5 1,788.5 1,788 12/12E 3,036 471.7 -1,945.7 -996.0 -377.7 29.3 -407.0 520.3 -393.0 -942.6 -1,320.4 12/12E 7,752.9 7,690.4 1,231.5 19,238.9 35,913.6 94.0 5,894.6 41,902.2
1,858.4 18,231.9 20,090.3 4,475.4 6,779.2 31,345.0 10,551.7 5.4 41,902.2
12/10A 4,927.9 0.29 n.a. 0.03 -0.00 12/10A

66.0 156.7 239.0 173.6 31.6 31.2 30.6 18.2 8.1 1.1 2.0 6.3 6.4 16.9 10.2 0.29 0.98 0.59 2.6 40.3 1.6 42.6
12/11E 5,237.9 0.30 0.29 0.05 0.17 12/11E

20.0 2.4 11.0 4.4 27.0 26.6 26.3 16.8 7.8 1.3 1.6 5.8 5.8 15.5 11.9 0.28 0.99 0.64 3.2 30.0 1.2 45.8
12/12E 5,547.9 0.32 0.40 0.06 -0.07 12/12E

33.3 22.4 14.3 7.9 24.8 24.5 24.1 14.4 7.2 1.2 1.3 5.1 5.2 17.2 12.2 0.30 0.98 0.60 4.0 41.6 1.4 42.0
12/13E 5,547.9 0.36 0.61 0.50 0.55 12/13E

31.4 16.8 12.5 12.5 22.0 21.7 21.5 12.3 6.4 1.0 0.8 3.7 3.8 17.4 13.9 0.30 0.99 0.57 4.3 16.3 45.6
12/10A 7,756 4,745.0 594.5 -6.0 2,450 28.0 2,422.4 45.8 2,376.5 967.0 1,409.5 1,409.5 1,410 12/10A 2,422 476.2 -1,383.0 -573.3 -10.2 26.5 -36.7 704.7 -123.7 -855.0 -865.2 12/10A 4,869.7 2,482.3 603.3 12,484.2 20,439.4 106.1 5,877.0 26,422.5
1,751.7 7,530.5 9,282.2 6,175.7 1,199.9 16,429.1 9,988.5 4.9 26,422.5
12/11E 9,310 6,111.4 740.3 -21.6 2,512 32.2 2,479.8 31.7 2,448.1 883.8 1,564.3 1,564.3 1,564 12/11E 2,480 385.7 -465.1 -742.2 886.8 27.9 858.9 596.4 -273.4 -897.7 -10.9 12/11E 6,034.1 4,652.3 965.9 15,468.2 27,120.5 101.8 5,885.4 33,107.7
1,804.3 12,816.7 14,621.0 1,490.4 6,779.2 22,890.7 10,211.8 5.2 33,107.7
12/13E 16,302 10,890.7 1,883.6 -16.7 3,587 42.6 3,544.6 44.0 3,500.6 1,489.2 2,011.4 2,011.4 2,011 12/13E 3,545 530.5 1,080.9 -1,065.6 3,029.4 30.7 2,998.7 558.4 -400.6 -989.8 2,039.7 12/13E 10,678.8 11,943.6 1,847.2 23,915.7 48,385.3 82.1 5,904.7 54,372.1
1,914.1 28,067.2 29,981.3 5,309.0 6,479.2 41,769.6 12,596.8 5.7 54,372.1

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-09 12 10 8 6 4 2 0 Mar-10 May-10 Aug-10 Nov-10 Feb-11 May-11
Price (LHS)
22
20 June 2011
KWG Property Holding Limited

(1813.HK / 1813 HK)
Rating (from Outperform) NEUTRAL* [V] Price (16 Jun 11, HK$) 4.90 Target price (HK$) (from 7.40) 5.40 Chg to TP (%) 10.2 Market cap. (HK$ mn) 14,176.4 Enterprise value (Rmb mn) 20,636 Number of shares (mn) 2,893.15 Free float (%) 30.0 52-week price range 7.13 - 4.56
Increasing risk of missing guidance; Shanghai launch time less favourable

We downgrade KWG from Outperform to NEUTRAL: KWGs May sales were weaker than expected, due to the slower sell-through for some of its high-end projects. Its Beijing project is also affected significantly by the severe tightening measures there. From January to May, KWG recorded Rmb5.53 bn of contracted sales, representing 37% of its full year guidance. We expect KWGs sales to remain relatively weak in the coming months, increasing the likelihood of reducing its FY11E contracted sales guidance. Shanghai project launch becomes riskier now: KWG had originally planned to launch its first Shanghai project in 2Q11, and we upgraded KWG on 14 February with the hope of a successful launch. Now, this project launch has been delayed to September/October. Given the potentially deteriorating market sentiment, we believe the Shanghai project launch has become riskier. Reducing NAV with new sector assumptions: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volumes to drop 15% YoY (10% previously). As a result, we reduce our forward NAV estimate from HK$13.4 to HK$9.9, and reduce our target price from HK$7.4 to HK$5.4. Valuation: KWG is trading at a 49% discount to 12-month NAV. Given the current sector downturn and KWGs exposure in the high-end segment and major cities, we think the current valuation is fair.
12/10A 7,465.9 2,501.5 2,490.3 1,280.8 0.44 n.a. n.a. 65.9 9.2 2.0 6.9 0.96 11.0 45.0 12/11E 9,764.0 3,313.7 3,301.4 1,930.7 0.67 -1.5 0.62 50.7 6.1 3.1 6.2 0.89 15.2 66.9 12/12E 10,471.4 3,327.6 3,314.0 1,873.1 0.65 -15.8 0.80 -3.0 6.3 3.0 7.0 0.80 13.4 78.8 12/13E 12,322.1 4,061.4 4,046.5 2,038.5 0.70 -22.9 0.98 8.8 5.8 3.2 6.0 0.72 13.1 76.0
Research Analysts Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Price (LHS) 8 6 4 2 Jun-09 Oct-09 Feb-10 Jun-10 Oct- 10 Feb-11
Rebased Rel (RHS) 120 100 80 60
1M -7.0 -2.3
3M -5.0 -2.6
12M 5.4 -1.0
23
20 June 2011
KWG Property Holding Limited

1813.HK / 1813 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 2,893.8 0.44 n.a. 0.08 0.14 12/11E 2,893.8 0.67 0.62 0.13 -1.50 12/12E 2,893.8 0.65 0.80 0.12 -1.02 12/13E 2,893.8 0.70 0.98 0.13 -0.49
Price (16 Jun 11): HK$4.90, Rating: NEUTRAL [V], Target Price: HK$5.40, Analyst: Jinsong Du
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 7,466 4,368.3 656.6 -49.3 2,501 11.2 2,490.3 -13.5 2,503.8 1,223.0 1,280.8 0.0 1,280.8 1,281 12/10A 2,490 909.4 -646.5 -529.9 404.4 318.3 110.6 86.1 4.5 -212.2 144.7 -540.7 -685.4 -493.1 12/10A 6,803.6 47.7 2,553.8 15,515.1 24,920.1 1,343.9 13,770.3 40,034.3
10,416.2 2,281.7 2,733.8 15,431.6 10,050.0 2,258.5 27,740.1 12,284.3 10.0
12/11E 9,764 5,980.7 933.0 -451.0 3,314 12.3 3,301.4 -15.6 3,317.0 1,386.2 1,930.7 1,930.7 1,931 12/11E 3,301 1,370.9 -5,113.2 -1,154.5 -4,337.2 286.5 103.1 -4,623.7 3.8 -187.2 240.1 1,451.8 1,211.7 -3,312.7 12/11E 8,011.5 54.8 4,451.5 17,089.8 29,607.7 1,618.1 11,385.2 42,611.0
8,658.2 2,327.3 1,522.0 12,507.5 14,524.9 2,371.4 29,403.8 13,196.7 10.5
12/12E 10,471 6,792.8 875.6 -511.1 3,328 13.6 3,314.0 5.6 3,308.4 1,435.3 1,873.1 1,873.1 1,873 12/12E 3,314 1,330.0 -3,329.5 -1,597.0 -2,942.4 308.0 106.9 -3,250.4 4.1 -205.3 1.0 361.9 747.4 386.5 -2,761.2 12/12E 14,510.3 63.1 6,569.8 19,206.7 40,350.0 1,912.6 12,536.2 54,798.8
6,281.4 2,373.9 5,195.2 13,850.5 23,738.4 2,490.0 40,078.8 14,708.9 11.0
12/13E 12,322 7,248.7 1,154.6 -127.8 4,061 14.9 4,046.5 55.0 103.3 3,991.5 1,952.9 2,038.5 2,038.5 2,039 12/13E 4,047 1,447.4 -2,427.6 -1,589.2 -1,417.8 304.3 105.0 -1,722.1 3.9 -203.3 2.0 351.1 1,099.6 750.5 -870.5 12/13E 17,227.5 72.5 7,981.8 21,592.7 46,874.6 2,202.0 13,838.5 62,915.0
8,284.9 2,421.3 5,905.7 16,612.0 27,278.6 2,614.5 46,505.0 16,398.4 11.6
Key earnings driver ASP (Rmb per sqm) GFA (000 sqm) Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/10A 12/11E 12/12E 12/13E 11,475.6 12,032.1 12,530.7 1,001.74 1,054.21 1,453.78 1,706.44 12/10A
75.0 99.1 75.6 65.9 33.5 33.4 33.5 17.2 9.2 0.96 2.3 6.9 7.0 11.0 7.1 0.19 1.0 0.51 3.3 45.0 2.2 -184.3
12/11E
30.8 32.6 50.7 50.7 33.9 33.8 34.0 19.8 6.1 0.89 2.1 6.2 6.3 15.2 8.7 0.23 1.0 0.58 3.2 66.9 2.7 -211.6
12/12E
7.2 0.4 -3.0 -3.0 31.8 31.6 31.6 17.9 6.3 0.80 2.2 7.0 7.1 13.4 7.1 0.19 1.0 0.57 3.7 78.8 3.5 590.3
12/13E
17.7 22.1 8.8 8.8 33.0 32.8 32.4 16.5 5.8 0.72 2.0 6.0 6.0 13.1 7.2 0.20 1.0 0.51 3.8 76.0 73.5

18 80 16 70 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
Price (LHS)
40,034.3
42,611.0
54,798.8
62,915.0
24
20 June 2011
Poly (Hong Kong) Investments Ltd (0119.HK / 119 HK)

Rating NEUTRAL* [V] Price (16 Jun 11, HK$) 4.73 Target price (HK$) (from 7.80) 6.10 Chg to TP (%) 29.0 Market cap. (HK$ mn) 17,067.9 Enterprise value (HK$ mn) 35,716 Number of shares (mn) 3,608.44 Free float (%) 46.0 52-week price range 9.51 - 4.73
Valuation approaching appealing

May sales picked up while still long way ahead: Poly HK achieved contracted sales of Rmb2.4 bn in May, which boosted the companys YTD sales to Rmb5.6 bn. The companys first five months showed a 33% YoY growth while achieving just 31% of its full-year target of Rmb18 bn. The company divided its full-year target Rmb7 bn in 1H and Rmb11 bn in 2H and was confident of realising its 1H target. Given the market uncertainty, we are cautious on its sales in 2H11 and revise down our sales forecast by 10% to Rmb16.2 bn based on the companys target. We also noticed that the companys YTD ASP of Rmb7,000 psm is lower than its guidance of Rmb8,500 psm, which could put pressure on the companys margin. Land replenishment continuing: YTD, Polly HK has acquired around 2.2 mn in Guiyang, Yantai, Weihai and Ningbo with total cost of around Rmb1.9 bn and it also bought a large project with a GFA of 4 mn in Zunyi at a cost of Rmb2 bn. However, the company sees little possibility to conduct further asset injections in the near term due to weak share price and market sentiment. NAV reduced on new sector assumptions: We revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volumes to drop 15% YoY (10% previously). As a result, we revise down our forward NAV estimate to HK$11.1 from HK$14 and target price to HK$6.1 from HK$7.8. Valuation: Poly HK is trading at a 57% discount to 12-month NAV. Also its current price implies 0.78x P/B, which is approaching 1SD (0.67x) of threeyear moving average (1.15x). Our new target price is set at 1x P/B; maintain NEUTRAL
Research Analysts Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Rebased Rel (RHS) 200 150 100 50 0
1M -18.6 -14.5
3M -24.2 -22.2
12M -38.2 -41.9
Financial and valuation metrics Year Revenue (HK$ mn) EBITDA (HK$ mn) EBIT (HK$ mn) Net income (HK$ mn) EPS (CS adj.) (HK$) Change from previous EPS (%) Consensus EPS (HK$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/10A 8,514.1 2,802.8 2,802.8 1,209.6 0.37 n.a. n.a. 22.4 12.9 3.3 11.1 0.78 6.6 58.5
12/11E 13,049.1 3,622.6 3,622.6 1,808.1 0.50 -13.3 0.53 36.4 9.4 1.6 9.9 0.73 8.0 73.7
12/12E 19,536.4 4,810.3 4,810.3 2,322.8 0.64 -20.0 0.77 28.5 7.3 15.7 7.1 0.67 9.6 62.2
12/13E 24,440.2 6,231.0 6,231.0 3,221.9 0.89 -19.9 1.09 38.7 5.3 40.6 5.1 0.66 12.6 50.7
25
20 June 2011
Poly (Hong Kong) Investments Ltd

0119.HK / 119 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (HK$) DPS (HK$) Operating cash flow per 12/10A 3,292.6 0.37 n.a. 0.2 -0.11 12/10A
18.3 189.5 82.7 22.4 32.9 32.9 30.0 14.2 12.9 0.78 3.6 11.1 11.1 6.6 4.4 0.12 0.91 0.59 3.1 58.5 5.0 10.9
Price (16 Jun 11): HK$4.73, Rating: NEUTRAL [V], Target Price: HK$6.10, Analyst: Wenhan Chen
12/11E 3,608.4 0.50 0.53 0.1 -1.13 12/11E
53.3 29.3 49.5 36.4 27.8 27.8 25.6 13.9 9.4 0.73 2.7 9.9 9.9 8.0 5.0 0.16 0.92 0.61 3.3 73.7 5.1 10.8
12/12E 3,608.4 0.64 0.77 0.7 0.49 12/12E

49.7 32.8 28.5 28.5 24.6 24.6 23.0 11.9 7.3 0.67 1.8 7.1 7.1 9.6 6.4 0.19 0.94 0.60 3.7 62.2 3.6 14.3
12/13E 3,608.4 0.89 1.09 1.9 1.53 12/13E

25.1 29.5 38.7 38.7 25.5 25.5 24.1 13.2 5.3 0.66 1.3 5.1 5.1 12.6 8.7 0.19 0.95 0.60 4.5 50.7 18.4
Income statement (HK$ mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (HK$ mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (HK$ mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current Liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and shareholders' equity
12/10A 8,514 5,030.4 1,070.8 -389.8 2,803 2,802.8 257.3 11.6 2,557.1 1,049.4 1,507.7 298.1 1,209.6 1,210 12/10A 2,803 577.7 1,381.8 -3,973.3 -366.5 -366.5 131.3 -131.3 -497.8 12/10A 16,054.7 1,215.0 45,025.0 62,294.7 1,751.5 9,758.0 73,804.2
1,967.2 9,522.6 16,936.3 28,426.2 20,300.6 1,305.1 50,031.9 22,010.2 1,819.3
12/11E 13,049 8,280.1 1,362.4 -216.1 3,623 3,622.6 336.2 53.9 3,340.3 1,297.6 2,042.7 234.7 1,808.1 1,808 12/11E 3,623 680.9 -1,152.6 -5,864.1 -4,075.0 -4,075.0 559.3 -559.3 -4,634.4 12/11E 11,438.5 1,336.5 57,027.9 69,803.0 1,751.5 12,379.7 83,934.2
2,164.0 10,474.9 24,630.1 37,269.0 19,411.6 1,940.6 58,621.2 23,258.9 2,054.0
12/12E 19,536 13,241.7 1,787.4 -302.9 4,810 4,810.3 337.1 29.5 4,502.7 1,823.3 2,679.4 356.6 2,322.8 2,323 12/12E 4,810 893.1 4,899.8 -7,057.5 1,759.4 1,759.4 271.2 -271.2 1,488.2 12/12E 12,946.7 1,470.2 72,510.6 86,927.5 1,751.5 14,684.4 103,363.4
2,380.4 11,522.4 40,407.9 54,310.6 18,440.0 2,891.6 75,642.3 25,310.5 2,410.6
12/13E 24,440 16,198.3 2,270.4 -259.5 6,231 6,231.0 338.1 7.2 5,900.1 2,349.9 3,550.2 328.3 3,221.9 3,222 12/13E 6,231 1,183.4 8,941.0 -8,485.0 5,503.6 5,503.6 2,671.2 -2,671.2 2,832.3 12/13E 15,801.1 1,617.2 92,504.7 109,923.0 1,751.5 16,756.2 128,430.8
2,618.4 12,674.6 63,077.8 78,370.8 17,378.9 4,081.0 99,830.7 25,861.2 2,738.9

14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 120 100 80 60 40 20 0 2011
Price (LHS)
73,861.4
83,934.2
103,363.4
128,430.8
26
20 June 2011
Shimao Property Holdings Ltd

(0813.HK / 813 HK)
Rating NEUTRAL* [V] Price (16 Jun 11, HK$) 8.94 Target price (HK$) (from 12.00) 10.10 Chg to TP (%) 13.0 Market cap. (HK$ mn) 31,730.9 Enterprise value (Rmb mn) 51,730 Number of shares (mn) 3,549.32 Free float (%) 41.7 52-week price range 15.50 - 8.94
Lack of imminent catalyst

Revising down 2011 contracted sales forecast: As of May, Shimao had achieved contracted sales of Rmb11 bn (up 16% YoY) or 847,000 sqm (down 3% YoY), which means 31% of its 2011 full-year target of Rmb36 bn was achieved. Although its current sales progress is similar to that in 2010, we expect market conditions to be less favourable in 3Q than in 3Q10 when there was a significant volume rebound. Therefore, there will still likely be quite a few uncertainties in the coming months. We reduce our 2011 contracted sales forecast by 10% to Rmb33 bn. NAV reduced on new sector assumptions: We revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we revise down our forward NAV estimate for Shimao to HK$18.3 from HK$21.7 and target price to HK$10.1 from HK$12.00. Lack of catalyst in the near term: The companys YTD commercial properties sales are around Rmb2 bn, behind its target of Rmb10 bn. Also, the company indicated there is a little possibility to spin off its hotel portfolio. Therefore, there is no strong catalyst for the company in the near term. Valuation: Shimao is trading at a 51% discount to 12-month NAV and 1x P/B. Given the expected market downturn and the companys current sales progress, we maintain our NEUTRAL rating.
Research Analysts Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Rebased Rel (RHS) 120 100 80 60
1M -12.2 -7.8
3M -10.5 -8.2
12M -24.9 -29.4
12/10A 21,789.0 9,574.6 9,289.5 3,563.6 1.01 n.a. n.a. 25.1 7.4 4.7 5.1 0.99 14.2 67.9
12/11E 26,300.0 7,753.3 7,753.3 4,086.9 1.15 -2.3 1.20 14.7 6.5 4.3 6.7 0.97 15.1 72.7
12/12E 31,919.4 8,342.3 8,342.3 4,322.0 1.22 -9.9 1.43 5.8 6.1 4.5 5.8 0.89 15.2 65.6
12/13E 40,730.3 10,347.1 10,347.1 5,437.7 1.53 -10.1 1.73 25.8 4.8 5.8 4.8 0.85 18.0 65.7
27
20 June 2011
Shimao Property Holdings Ltd 0813.HK / 813 HK

Price (16 Jun 11): HK$8.94, Rating: NEUTRAL [V], Target Price: HK$10.10, Analyst: Wenhan Chen
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 31,919 21,176.5 2,400.6 8,342 8,342.3 451.3 381.7 8,272.6 3,349.0 4,923.6 601.6 4,322.0 4,322 12/12E 8,342 1,820.0 5,298.9 -2,312.9 9,508.3 9,508.3 1,348.7 -1,348.7 8,159.6 12/12E 11,852.9 5,124.3 37,186.4 54,163.6 6,553.6 2,280.5 48,600.4 111,598.0
17,813.9 9,376.7 23,212.5 50,403.0 24,695.5 2,613.2 77,711.7 29,594.6 4,291.7 111,598.0
12/10A 3,544.7 1.01 n.a. 0.35 1.31 12/10A

27.9 54.9 28.4 25.1 43.9 42.6 39.3 16.4 7.4 0.99 2.3 5.1 5.3 14.2 11.8 0.23 0.9 0.64 3.2 67.9 2.1 12.6
12/11E 3,544.3 1.15 1.20 0.32 1.86 12/11E

20.7 -16.5 14.7 14.7 29.5 29.5 28.2 15.5 6.5 0.97 2.0 6.7 6.7 15.1 8.8 0.25 1.0 0.61 3.4 72.7 2.9 14.4
12/12E 3,544.3 1.22 1.43 0.34 2.68 12/12E

21.4 7.6 5.8 5.8 26.1 26.1 25.9 13.5 6.1 0.89 1.5 5.8 5.8 15.2 8.8 0.29 1.0 0.60 3.3 65.6 2.7 15.4
12/13E 3,544.3 1.53 1.73 0.43 -1.65 12/13E

27.6 24.0 25.8 25.8 25.4 25.4 26.1 13.4 4.8 0.85 1.2 4.8 4.8 18.0 10.2 0.31 1.0 0.59 3.7 65.7 19.2
12/10A 21,789 13,812.1 1,647.0 -2,959.7 9,575 285.1 9,289.5 671.6 -48.1 8,569.9 3,079.4 5,490.5 819.4 4,671.1 -1,107.5 3,564 12/10A 9,290 2,007.6 -1,557.4 -1,083.2 4,641.3 4,641.3 1,346.4 8,100.9 6,754.6 11,395.9 12/10A 13,728.6 5,124.3 35,942.2 54,795.1 6,553.6 2,280.5 32,040.1 95,669.3
11,512.9 9,376.7 17,760.0 38,649.6 24,695.5 2,370.2 65,715.3 26,698.8 3,255.2 95,669.3
12/11E 26,300 16,316.9 2,229.8 7,753 7,753.3 466.0 117.8 7,405.1 2,883.2 4,521.9 435.0 4,086.9 4,087 12/11E 7,753 1,629.1 2,640.8 -2,161.0 6,604.0 6,604.0 1,417.7 -1,417.7 5,186.3 12/11E 11,522.6 5,124.3 35,240.0 51,886.9 6,553.6 2,280.5 43,939.4 104,660.4
15,745.4 9,376.7 21,348.7 46,470.8 24,695.5 2,488.7 73,655.0 27,315.2 3,690.2 104,660.4
12/13E 40,730 27,856.0 2,527.2 10,347 10,347.1 450.3 743.6 10,640.4 4,413.3 6,227.1 788.7 5,438.4 -0.7 5,438 12/13E 10,347 2,447.3 -11,265.7 -2,499.0 -5,864.9 -5,864.9 1,426.3 -1,426.3 -7,291.2 12/13E 10,426.6 5,124.3 1.0 55,541.3 71,093.1 6,553.6 2,280.5 51,713.3 131,640.5
34,838.6 9,376.7 23,999.9 68,215.2 24,695.5 2,743.8 95,654.5 30,904.6 5,080.4 131,639.5

35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 80 70 60 50 40 30 20 10 0
Price (LHS)
28
20 June 2011
Sino-Ocean Land Holdings Ltd

(3377.HK / 3377 HK)
Beijing risk remains high; financial condition worsening despite the perpetual bond
Reducing 2011E ESP due to the recently issued perpetual bond: We expect Sino Oceans recently issued perpetual bond to add Rmb155 mn financial cost in 2011E and Rmb267 mn from 2012E onwards; this translates into HK$0.03 and HK$0.06 per share. Reducing NAV with new sector assumptions: Together with Credit Suisse economist and strategists more bearish call on China, we revise our assumptions for the China property sector: we now expect ASP in major markets to drop 10% YoY (5% previously), and volume to drop 15% YoY (10% previously). As a result, we reduce our forward NAV estimate from HK$9.45 to HK$7.1. Also, the combined impact from the perpetual bond and the more bearish sector outlook result in 13%, 17% and 17% reduction in our 2011, 2012 and 2013 EPS estimates, respectively. Actual financial condition may deteriorate: Sino Oceans Beijing projects are affected significantly by the severe tightening measures there. From January to May, Sino Ocean recorded Rmb9.2 bn of contracted sales, representing 31% of its full-year guidance. We expect Sino Oceans sales to remain relatively weak in the coming months, increasing the likelihood of reducing its FY11E contracted sales guidance. Although net gearing appears improved on the perpetual securities issuance, but in fact its financial condition is deteriorating due to the cash outflow for its increasing number of commercial property projects. Valuation: Sino Ocean is trading at a 50% discount to 12-month NAV. Given the current sector downturn, Sino Ocean's exposure in major cities such as Beijing, as well as its potentially deteriorating financial condition, we maintain our NEUTRAL rating despite its recent share price weakness.
12/10A 13,720.7 3,385.5 3,385.5 1,663.1 0.30 n.a. n.a. 51.6 9.9 4.4 9.1 0.65 6.8 42.8 12/11E 20,107.9 5,231.9 5,231.9 2,504.2 0.44 -13.0 0.49 50.6 6.6 4.9 6.5 0.60 9.5 45.5 12/12E 23,868.8 5,075.1 5,075.1 2,539.6 0.45 -16.8 0.57 1.4 6.5 5.4 7.0 0.54 8.8 46.3 12/13E 30,638.8 5,755.4 5,754.4 3,132.5 0.56 -16.7 0.66 23.3 5.3 5.9 6.5 0.50 9.8 46.7
Jinsong Du 852 2101 6589 jinsong.du@credit-suisse.com Wenhan Chen 852 2101 6407 wenhan.chen@credit-suisse.com Duo Chen 852 2101 7350 duo.chen@credit-suisse.com

Rebased Rel (RHS) 120 70 20
1M -14.4 -10.0
3M -20.7 -18.7
12M -39.1 -42.8
Research Analysts
29
20 June 2011
Sino-Ocean Land Holdings Ltd

3377.HK / 3377 HK
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/10A 5,636.6 0.30 n.a. 0.13 -1.11 12/11E 5,636.6 0.44 0.49 0.14 0.53 12/12E 5,636.6 0.45 0.57 0.16 0.37 12/13E 5,636.6 0.56 0.66 0.17 0.77
Price (16 Jun 11): HK$3.52, Rating: NEUTRAL, Target Price: HK$3.90, Analyst: Jinsong Du
12/10A 13,721 9,596.0 898.3 -159.1 3,385 3,385.5 287.4 3,098.1 1,225.8 1,872.3 566.5 5.3 2,433.6 -770.5 1,663 12/10A 3,385 1,136.2 -6,913.4 -1,581.8 -6,245.9 29.8 342.4 -6,275.7 -574.7 5,814.0 628.0 1,500.0 -1,485.9 5,200.2 -1,620.4 12/10A 15,034.6 2,101.9 97.1 48,271.0 62,634.8 369.0 971.5 14,880.1 78,855.4
6,625.9 9,920.1 8,769.8 25,315.8 16,676.2 3,737.7 45,729.6 31,070.7 2,055.1 78,855.4
12/11E 20,108 13,644.4 1,453.4 -221.8 5,232 5,231.9 269.5 4,962.4 1,768.9 3,193.6 56.3 3,137.3 -633.1 2,504 12/11E 5,232 1,481.4 2,000.0 -2,739.7 3,010.8 31.3 448.7 2,979.6 -514.3 2,522.0 955.7 1,500.0 -1,796.8 1,269.5 3,766.0 12/11E 13,349.8 2,417.2 106.8 54,144.9 66,718.5 405.9 1,117.2 20,665.2 88,906.9
7,619.8 9,920.1 11,112.7 28,652.6 18,176.2 3,965.2 50,794.0 35,852.3 2,260.6 88,906.9
12/12E 23,869 17,424.7 1,725.2 -356.2 5,075 5,075.1 283.0 4,792.1 1,452.1 3,340.0 56.3 3,283.7 -744.1 2,540 12/12E 5,075 1,549.4 1,026.1 -2,476.2 2,075.7 395.6 2,075.7 395.6 14.5 1,500.0 1,485.5 1.0 3,957.7 12/12E 12,938.1 2,779.7 117.4 60,724.4 72,764.4 446.5 1,284.8 23,839.4 98,335.2
8,762.8 9,920.1 14,129.7 32,812.6 19,676.2 4,238.2 56,727.0 39,121.5 2,486.7 98,335.2
12/13E 30,639 23,127.3 2,214.5 -458.5 5,755 1.0 5,754.4 296.5 5,457.9 1,525.0 3,932.9 56.3 3,876.6 -744.1 3,133 12/13E 5,754 1,824.9 2,885.8 -2,447.8 4,367.5 395.6 4,367.5 395.6 1,177.8 1,500.0 322.2 2.0 5,087.3 12/13E 12,869.9 3,196.7 129.2 68,112.4 79,943.8 491.2 1,477.5 26,403.7 108,316.2
10,077.2 9,920.1 18,020.2 38,017.5 21,176.2 4,565.9 63,759.5 41,821.3 2,735.3 108,316.2
Key earnings driver ASP (Rmb per sqm) GFA (sqm) Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/10A 12/11E 12/12E 12/13E 12,950.0 14,218.9 14,212.1 14,489.5 1,660,22 1,774,33 2,153,77 2,572,65 12/10A
55.5 55.5 51.6 51.6 24.7 24.7 22.6 12.1 9.9 0.65 2.2 9.1 9.1 6.8 4.3 0.17 0.92 0.60 2.4 42.8 4.2 11.8
12/11E
46.6 54.5 50.6 50.6 26.0 26.0 24.7 12.5 6.6 0.60 1.7 6.5 6.5 9.5 6.1 0.23 0.95 0.64 2.3 45.5 3.3 19.4
12/12E
18.7 -3.0 1.4 1.4 21.3 21.3 20.1 10.6 6.5 0.54 1.5 7.0 7.0 8.8 5.8 0.24 0.94 0.70 2.4 46.3 3.8 17.9
12/13E
28.4 13.4 23.3 23.3 18.8 18.8 17.8 10.2 5.3 0.50 1.2 6.5 6.5 9.8 6.3 0.28 0.95 0.72 2.4 46.7 19.4

16 14 12 10 8 6 4 2 0 Sep-07 60 50 40 30 20 10 0 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11
Price (LHS)
30
20 June 2011
Wind Equipment Sector

Gone with the wind
Yang Y. Song 852 2101 6550 yang.y.song@credit-suisse.com

Figure 19: Key drivers
Key drivers Installed WTG (GW) Before WTG ASP (Rmb/KW) Before FY11E 17.0 n.s. 3650 4000 FY12E 16.8 n.a. 3252 3800 FY13E 16.5 n.a. 3100 3610
Figure 20: Earnings changes and target price

EPS old 2011 Goldwind (HK$) CHST (HK$) MY (US$) n.a. 1.01 1.41 2012 n.a. 1.04 1.54 EPS new* 2011 0.69 0.79 0.80 2012 0.60 0.79 0.75 TP* Old n.a. 16.86 15.2 New 7.2 9.5 7.5 Rating* Old n.a. O O New U N N
* Note: Changes implemented in China Wind Equipment Sector: Storm ahead, published 13 June 2011. Source: Company data, Credit Suisse estimates
Wind power demand goes ex-growth

The wind power industry is one of many industries in China that saw over-zealous investment during the past few years. Many wind farms have been constructed without adequate transmission/ grid interconnection planning. As of year end 2010, only 31.1 GW (or 69%) of the 45 GW installed wind turbines were connected to the grid. In addition, according to the CEC, approximately 11% of wind power generated in first half of 2010 was rejected by the power grid, with Inner Mongolia being the most affected after having 23% curtailment. Jilin and Gansu provinces followed suit with 15% and 12% of the generated wind power rejected by the grid. If this calculation were to include the opportunity lost by WTG shutdowns, as commanded by the grid central dispatch, the curtailment would be even higher. We believe as China addresses the debt problem developed during the past two years through continued tightening, the investments in the wind power sector will also slow down. We are forecast 16-17 GW in installed wind power growth per annum for 2011-15; decreasing from the 18.9 GW installed in 2010.
Figure 21: Installed and commissioned wind capacity forecast (GW)
2005 Connected wind capacity (cum) Installed wind capacity (cum) Previously installed but not connected Newly-installed wind capacity Commissioned wind Newly-installed but not connected % cumulative installed but not connected % newly installed wind connected to the grid Source: CEC, Credit Suisse estimates 1.1 1.3 2006 2.1 2.6 0.2 1.3 1.0 0.5 20.2 60.6 2007 4.2 5.9 0.5 3.3 2.1 1.7 28.7 48.7 2008 8.4 12.1 1.7 6.2 4.2 3.7 30.9 40.1 2009 16.1 25.9 3.7 13.8 7.7 9.8 37.7 29.1 2010 31.1 44.8 9.8 18.9 14.9 13.7 30.7 27.4 2011E 49.9 61.8 13.7 17.0 18.8 11.9 19.3 30.0 2012E 67.7 78.6 11.9 16.8 17.8 10.9 13.9 35.0 2013E 85.2 95.1 10.9 16.5 17.5 9.9 10.4 40.0 2014E 102.4 111.3 9.9 16.3 17.2 8.9 8.0 45.0 2015E 119.3 127.3 8.9 16.0 16.9 8.0 6.3 50.0
31
20 June 2011
We discuss factors contributing to slower wind power growth below: Government approvals become more stringent
According to the China Daily, China's National Energy Bureau (NEB) is drafting new regulations to standardise the approval on wind farms. Currently, China's local governments have the power to approve wind farm projects of less than 50 MW in installed capacity. Wind farm projects larger than 50 MW are approved by the NDRC. To get their projects approved by local governments, an easier and faster route than the approval by the central government, wind operators often divide their wind farm projects into multiple stages, each being smaller than 50 MW. As a result, numerous wind farms across the country are 49.5 MW in size. The new regulation would require local governments to first gain approval from the NEB before they can offer licences for wind projects. We believe this move is the central governments bid to curb over-enthusiasm in wind development at the provincial level and reshape wind development so that it is more coordinated with the regional transmission development. Difficulty in access to capital could also play a role in limiting wind capacity growth
Chinese authorities have been combatting inflation through monetary tightening, including reducing lending quota and increasing reserve requirement and the interest rate. As wind farms are typically financed by over 70% debt, there is concern that monetary tightening could affect growth in wind power capacity. We believe the SOEs with a good relationship with Chinese banks will see less impact while private developers or regional entities could be more affected. Anecdotally, we hear from small wind developers that access to capital is becoming increasingly difficult. Wind power integration constraints limit capacity growth beyond 2011/12
WTG industry is facing significant over capacity. We estimate capacity utilisation declines materially to 54% in 2011 from 73% in 2010, creating enormous pressure on WTGs average selling prices. We forecast the realised ASP for 2011 sales to be Rmb780/kW lower than 2010s, and decline by a further Rmb390/kW in 2012, guided by recent WTG tender pricing points in addition to the supply/ demand curve we constructed. As demand softens and ASP continues to decline, we see significant risk to earnings that is not yet acknowledged by the Street. In Figure 22, we show our estimates for these companies (Goldwind, CHST and Mingyang), and found our estimates are 20-40% below Street. We find the consensus is discounting unrealistically bullish assumptions in terms of sales volume, ASP and gross margin for the three companies and believe there is significant downward earning revision ahead.
We see significant wind power integration issues that are difficult to resolve within the medium term and, in our view, will cap the wind capacity growth beyond the immediate future. We believe the integration bottleneck is caused because of: (1) highly concentrated wind farm distribution in wind-rich areas as China pursues the 10+ GW wind base strategy; (2) lack of regulation capacity to ramp up/ down to accommodate intermittency of wind generation; and (3) lack of T&D infrastructure to transmit wind power to load centres. All above-mentioned issues may take years to be resolved hence our bearish view on the growth potential of wind generation in China beyond 2011/12.
2011/12 EPS estimates 20-40% below consensus
32
20 June 2011
Figure 22: CS versus consensus earnings estimates

Consensus (Rmb) 2011 Goldwind CHST MY 0.85 1.02 1.13 2012 0.89 1.10 1.20 CS (Rmb) 2011 0.69 0.79 0.80 2012 0.60 0.79 0.75 CS vs Consensus (%) 2011 -19 -22 -29 2012 -33 -28 -38
Source: IBES, Credit Suisse estimates
Negative catalysts abound

We expect consensus earnings for these stocks to fall 20-40% to properly reflect softening wind equipment demand and continued pressure in equipment ASPs, hence further share price weakness in both names, especially around the time of interim results (August). We also see continued news flow on ASP declining, quality issues of wind turbines and tightening government policies in the coming months. We value Goldwind, CHST and MY on 10x 2012 earnings and reach target prices of HK$7.20, HK$9.50 and UD$7.20, respectively, implying 11% downside, 14% upside and 36% upside from the 17 June closing. WE rate Goldwind UNDERPERFORM and both CHST and MY as NEUTRAL. We should point out that the upsides in our target prices for CHST and MY are purely valuation-based. Given the lack of WTG demand and pricing visibility and substantial downward revision we are expecting to theses stocks earnings, we believe the market will assign discount multiples to both names in the short run and the stock prices will remain depressed.
33
20 June 2011
Asia Pacific / China Electrical Equipment
Xinjiang Goldwind Science & Technology (2208.HK / 2208 HK)

Rating UNDERPERFORM* [V] Price (17 Jun 11, HK$) 8.54 Target price (HK$) 7.20 Chg to TP (%) -15.7 Market cap. (HK$ mn) 4,270.4 Enterprise value (Rmb mn) -3,826 Number of shares (mn) 500.05 Free float (%) 52-week price range 21.30 - 8.46
The Gold is losing its shine

Sales volume forecast too bullish. Goldwind forecasts 5.5 GW sales for 2011, which implies a market share gain of 12%, from 20% in 2010 to 32% in 2011, based on our 17 GW installed WTG forecast. We believe this is extremely difficult to achieve given our view that direct drive technology (that Goldwind is the champion) has balanced advantages and disadvantages compared with the double-fed wind turbine generators (WTGs) with gearboxes. The direct drive WTGs market share gain in the last four years (from 3% in 2007 to 20% in 2010) results from Goldwinds internal switch of WTG models from the smaller 750 kW geared WTG to the bigger 1.5 MW direct drive model. Goldwinds 750 kW geared WTGs market share decreased from 20% in 2007 to 1% in 2010. This alone explains the market share gain of direct drive against geared WTGs. As the 750 kW model has been almost completely phased out, we do not expect significant increase in direct drive WTGs market share going forward and thus no significant uptick in market share for Goldwind. ASP under pressure. Goldwind started the ASP decline to subRmb4,000/kW when it bid Rmb3,850/kW in the Xinjiang Hami tender last year. The company does not command an ASP premium versus other domestic players and will suffer from the same, as intense competition due to overcapacity and lack of differentiation continues to weigh on WTG price. Significant downside to earnings. Our 2011/12 EPS estimates are 19% and 33% below IBES consensus, primarily due to our lower assumption for Goldwinds WTG sales at 4,315 MW and 4,485 MW and domestic ASP at Rmb3,606/ kW and Rmb3,273/ kW for 2011/12. We expect material downward revisions to earnings in the not-so-distant future, especially around the time of interim results. Goldwind is our top short idea within the group.
12/10A 17,475.2 3,356.1 3,188.9 2,289.5 0.99 n.a. n.a. -20.7 7.2 5.6 -0.9 1.3 26.3 net cash 12/11E 16,663.3 2,650.9 2,352.1 1,592.7 0.69 0 0.85 -30.4 10.3 3.9 -1.4 1.2 12.4 net cash 12/12E 16,319.4 2,589.7 2,100.8 1,384.3 0.60 0 0.89 -13.1 11.8 3.4 -1.4 1.2 10.1 net cash 12/13E 16,555.6 2,660.8 2,049.6 1,339.4 0.58 0 0.95 -3.2 12.2 3.3 -2.2 1.1 9.2 net cash
Research Analysts Yang Y. Song 852 2101 6550 yang.y.song@credit-suisse.com

Price (LHS) 40 30 20 10 0 Oct-10 Feb -11 Rebased Rel (RHS) 120 100 80 60 40 Jun-11
The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6417.61 on 17/06/11 On 17/06/11 the spot exchange rate was HK$7.8/US$1
Performance over Absolute (%) Relative (%)
1M -21.0 -14.3
3M -40.8 -39.2
12M -4.3
34
20 June 2011
Xinjiang Goldwind Science & Technology

2208.HK / 2208 HK
12/10A 2,315.8 0.99 n.a. 0.40 0.09 12/10A
63.8 49.7 31.2 -20.7 19.2 18.2 16.0 13.1 7.2 1.3 -0.18 -0.9 -1.0 26.3 52.1 0.62 0.88 0.85 2.2 -49.1 -2.0 27.3
Price (17 Jun 11): HK$8.54, Rating: UNDERPERFORM [V], Target Price: HK$7.20, Analyst: Yang Song
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 16,319 13,235.7 833.1 244.8 -583.9 2,590 488.9 2,100.8 153.8 -254.2 1,692.8 251.5 1,441.4 57.0 1,384.3 1,384 12/12E 2,101 -251.5 -402.1 177.7 1,625.0 -1,000.0 625.0 -153.8 -1,153.8 -637.3 45.7 -591.6 -120.4 12/12E 10,209.4 3,786.3 4,371.4 1,131.5 19,498.6 6,353.8 501.3 1,176.7 27,530.4
5,848.8 296.7 2,756.3 8,901.8 2,670.2 807.2 12,379.2 14,158.6 438.7 27,530.4
12/11E 2,315.8 0.69 0.85 0.28 1.72 12/11E

-4.6 -26.2 -30.4 -30.4 15.9 14.1 11.7 9.6 10.3 1.2 -0.23 -1.4 -1.6 12.4 28.8 0.62 0.83 0.85 2.0 -51.3 -2.8 16.2
12/12E 2,315.8 0.60 0.89 0.24 0.70 12/12E

-2.1 -10.7 -13.1 -13.1 15.9 12.9 10.4 8.5 11.8 1.2 -0.23 -1.4 -1.8 10.1 24.0 0.59 0.81 0.85 1.9 -47.8 -2.8 13.7
12/13E 2,315.8 0.58 0.95 0.23 1.59 12/13E

1.4 -2.4 -3.2 -3.2 16.1 12.4 9.9 8.1 12.2 1.1 -0.36 -2.2 -2.9 9.2 24.2 0.58 0.80 0.85 1.8 -59.2 13.3
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 17,475 13,453.8 1,248.4 98.4 -681.5 3,356 167.2 3,188.9 117.0 -272.2 2,799.7 415.9 2,383.8 94.3 2,289.5 2,290 12/10A 3,189 -415.9 -1,895.4 -675.5 202.1 -1,454.9 -1,252.8 -1,040.5 -2,495.4 7,038.8 -165.8 342.8 63.0 7,278.8 4,985.6 12/10A 9,658.2 7,583.1 4,390.7 1,204.0 22,836.1 3,782.8 610.1 1,168.7 28,397.6
8,130.2 1,501.5 2,824.5 12,456.2 1,465.3 845.2 14,766.7 12,372.8 341.9 28,397.6
12/11E 16,663 13,271.5 1,051.0 249.9 -560.1 2,651 298.8 2,352.1 144.9 -259.6 1,947.6 289.3 1,658.3 65.6 1,592.7 1,593 12/11E 2,352 -289.3 1,941.1 -26.3 3,977.6 -2,250.0 1,727.6 -144.9 -2,394.9 -916.2 13.1 -903.1 679.6 12/11E 10,333.8 5,007.4 2,755.4 1,155.4 19,252.0 5,788.3 555.7 1,172.7 26,768.7
5,864.7 296.7 2,771.4 8,932.8 2,670.2 818.5 12,421.5 13,328.2 381.7 26,768.7
12/13E 16,556 13,474.9 730.0 248.3 -558.4 2,661 611.1 2,049.6 153.8 -257.9 1,637.9 243.3 1,394.6 55.2 1,339.4 1,339 12/13E 2,050 -243.3 1,570.0 298.1 3,674.4 -800.0 2,874.4 -153.8 -953.8 -553.9 62.9 -491.0 2,229.6 12/13E 12,435.0 3,841.1 2,884.2 1,147.9 20,308.2 6,597.1 446.9 1,180.7 28,532.8
5,954.5 296.7 2,804.6 9,055.8 2,670.2 815.0 12,540.9 14,962.0 493.9 28,532.8
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
[V] = Stock considered volatile (see Disclosure Appendix). Source: Company data, Thomson Reuters, Credit Suisse estimates

25 20 15 10 5 0 Oct-10 30 25 20 15 10 5 0 Dec-10 Mar-11
Price (LHS)
35
20 June 2011
China High Speed Transmission Equipment (0658.HK / 658 HK)

Rating Price (17 Jun 11, HK$) Target price (HK$) Chg to TP (%) Market cap. (HK$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-week price range NEUTRAL* 7.92 9.50 19.9 10,792.9 9,913 1,362.74 84.6 18.50 - 7.92
Weak wind market fundamentals priced in

Sales volume forecast bullish, ASP under pressure. CHST has forecast 12,000 MW sales for 2011, which implies domestic market share gain of more than 20%, from 55% in 2010 to 77% in 2011, based on our 17,000 MW installed WTG forecast. We believe this is extremely difficult to accomplish, as CHSTs market share has not seen any increase in the last three years. We also see significant pressure in ASP as WTG manufacturers continue to squeeze component suppliers. Hence, there is a high likelihood of margin erosion for the company. We forecast wind gearbox gross margin to decrease to 27% and 25% in 2011/12 from 31% in 2010. Weak wind market fundamentals priced in. We believe the softening wind turbine demand and declining ASP are largely priced in. We estimate the market is pricing in 10,500 MW in sales volume, 24% gross margin and a wind gearbox price drop of 17% from Rmb600/kW in 2010 to Rmb500/kW in 2012 (slightly lower than our forecast of 11,100 MW WTG sales, 25% gross margin and Rmb500/kW wind gearbox ASP). Given CHSTs growing potential in the export market (it received orders for wind gearboxes of 1,500 MW from GE in 2011 and plans to increase the delivery by 60% to 2,400 MW in 2012) and its major competitor in the international market Hansen Transmissions financial difficulties, we believe the companys wind gearbox export growth could surprise the market on the upside. On a pure valuation basis, we think the share price reflects much of the future weakness in the wind equipment market, hence our NEUTRAL rating. But our EPS estimates are 22% and 28% below IBES consensus. We believe downward revision in earnings and high uncertainty in ASP and demand will continue to weigh down this name. We believe there will be a better entry point for CHST after consensus estimates are revised down sufficiently.
12/10A 7,392.6 2,013.5 1,644.1 1,383.6 1.08 n.a. n.a. 39.1 6.1 3.3 5.2 1.4 23.4 19.1 12/11E 7,286.1 1,818.7 1,386.7 1,015.9 0.79 0 1.02 -26.6 8.3 3.9 5.5 1.0 13.1 11.7 12/12E 7,728.1 1,827.5 1,360.3 1,011.0 0.79 0 1.10 -0.5 8.3 2.8 5.1 1.0 11.9 4.1 12/13E 7,728.1 1,856.3 1,360.3 1,062.2 0.83 0 1.15 5.1 7.9 2.8 4.5 0.9 11.5 net cash

Price (LHS) 40 30 20 10 0 Jun-09 Oct-09 Feb-1 0 Jun-10 Oct-10 Feb -11
The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6417.61 on 17/06/11 On 17/06/11 the spot exchange rate was HK$7.8/US$1
Rebased Rel (RHS) 120 100 80 60 40
1M -22.2 -15.5
3M -34.7 -33.1
12M -53.2 -57.5
36
20 June 2011
China High Speed Transmission Equipment 0658.HK / 658 HK

Price (17 Jun 11): HK$7.92, Rating: NEUTRAL, Target Price: HK$9.50, Analyst: Yang Song
Per share data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/13E 7,728 5,676.8 781.1 52.8 -638.8 1,856 536.2 40.2 1,360.3 137.5 43.8 1,266.7 196.9 1,069.7 7.5 1,062.2 1,062 12/13E 1,360 -196.9 488.4 1,651.8 -400.0 1,251.8 -137.5 -537.5 -239.3 -500.0 7.5 -731.7 382.6 12/13E 3,013.4 3,983.7 1,401.6 18.7 8,417.4 5,095.4 75.9 961.0 893.5 15,443.2
2,911.6 1,357.8 183.2 4,452.6 1,142.2 30.0 5,624.8 9,674.8 143.5 15,443.2
12/10A 1,281.3 1.08 n.a. 0.22 1.39 12/10A

30.9 18.3 43.2 39.1 27.2 22.2 22.3 18.7 6.1 1.4 1.4 5.2 6.3 23.4 17.1 0.50 1.0 0.84 2.0 19.1 0.71 11.2
12/11E 1,281.3 0.79 1.02 0.25 1.35 12/11E

-1.4 -15.7 -26.6 -26.6 25.0 19.0 16.6 13.9 8.3 1.0 1.4 5.5 7.1 13.1 12.9 0.48 0.9 0.84 1.8 11.7 0.53 6.3
12/12E 1,281.3 0.79 1.10 0.19 1.19 12/12E

6.1 -1.9 -0.5 -0.5 23.6 17.6 15.6 13.1 8.3 1.0 1.2 5.1 6.9 11.9 12.4 0.51 0.9 0.84 1.7 4.1 0.20 6.9
12/13E 1,281.3 0.83 1.15 0.19 1.29 12/13E

5.1 5.1 24.0 17.6 16.4 13.7 7.9 0.9 1.1 4.5 6.2 11.5 12.3 0.50 0.9 0.84 1.6 -5.2 9.9
Income statement (Rmb mn) Total revenue Cost of goods sold SG&A (excluding R&D) R&D costs Other operating inc/(exp.) EBITDA Depr & amort (excl. goodwill) Goodwill impairment EBIT Net interest expense Net non operating inc (exp) Share of associates/JVs' equity Exceptional/extraordinary items Recurring PBT Taxes Profit after tax Other after tax income Minority interest Preferred dividends Reported net income Analyst after tax adjustment Net income (Credit Suisse) Cash flow (Rmb mn) EBIT Cash taxes paid Change in working capital Other cash & non-cash items Cash flow from operations Capex Disposals of PPE Free cash flow to the firm Acquisitions Divestments Other investment/(outflows) Cash flow from investment Net share issue/(repurchase) Dividends paid Change in debt Other financing inflows/outflows Cash flow from financing activities Effect of exchange rates Movements in cash/equivalents Balance sheet (Rmb mn) Cash and cash equivalents Accounts receivable Inventory Other current assets Total current assets Total fixed assets Intangible assets and goodwill Investment securities Other assets Total assets Current liabilities Accounts payable Short-term debt Other short term liabilities Total current liabilities Long-term debt Other liabilities Total liabilities Shareholders' equity Minority interest Total liabilities and
12/10A 7,393 5,093.8 747.2 50.5 -512.3 2,013 409.6 40.2 1,644.1 146.8 111.3 41.5 1,650.0 256.5 1,393.5 9.8 1,383.6 1,384 12/10A 1,644 -256.5 -76.3 470.9 1,782.1 -1,354.3 427.9 -712.3 -2,066.6 1,969.7 -327.4 534.4 70.8 2,247.5 1,963.0 12/10A 3,037.4 3,810.8 1,257.7 17.9 8,123.8 4,869.8 196.6 829.6 893.5 14,913.1
2,612.6 2,428.6 184.7 5,225.9 2,043.1 148.2 7,417.2 7,392.7 121.6 14,931.5
12/11E 12/12E 7,286 7,728 5,256.1 5,676.8 736.4 781.1 49.7 52.8 -574.8 -610.0 1,819 1,828 472.2 507.4 40.2 40.2 1,386.7 1,360.3 219.1 198.5 - 142,108,547, 43.8 43.8 1,211.5 1,205.7 188.4 187.5 1,023.1 1,018.2 7.2 7.2 1,015.9 1,011.0 1,016 1,011 12/11E 1,387 -188.4 104.8 424.7 1,727.9 -600.0 1,127.9 -219.1 -819.1 -327.4 -471.6 -111.0 -910.1 -1.2 12/11E 3,036.2 3,755.9 1,297.7 17.6 8,107.4 5,078.0 156.3 873.4 893.5 15,108.7
2,695.9 2,172.4 172.7 5,041.0 1,827.6 30.0 6,898.6 8,081.2 128.8 15,108.7
12/12E 1,360 -187.5 -106.5 460.0 1,526.3 -500.0 1,026.3 -198.5 -698.5 -240.4 -1,000.0 7.2 -1,233.2 -405.4 12/12E 2,630.8 3,983.7 1,401.6 18.7 8,034.8 5,151.1 116.1 917.2 893.5 15,112.7
2,911.6 1,629.3 183.2 4,724.2 1,370.7 30.0 6,124.8 8,851.8 136.0 15,112.7
Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)

45 40 35 30 15 25 20 10 15 10 5 5 0 0 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 25 20
Price (LHS)
37
20 June 2011
China Ming Yang Wind Power Group Ltd. (MY / MY US)

Rating Price (16 Jun 11, US$) Target price (US$) Chg to TP (%) Market cap. (US$ mn) Enterprise value (Rmb mn) Number of shares (mn) Free float (%) 52-week price range NEUTRAL* [V] 5.30 7.50 35.8 662.5 3,431 125.00 20.0 14.48 - 5.25
All about market share gain

Aggressive sales volume forecast. MY management is guiding aggressive commissioned WTG volume growth in 2011 (2,300-2,400 MW versus 936 MW in 2010) and significant market share gains (12-14% versus 5.5% in 2010). Our sensitivity analysis shows that whether MYs valuation is attractive at the current price hinges on the companys ability to grow its market share to 10% or above in 2012. Note that our US$7.50 target price assumes MY can achieve its stated goal to grow market share to at least 12%. There could be additional downside to our earnings estimates and target price if MY fails to deliver on this. Comparing MYs year-end 2010 order backlogs against those of other major domestic competitors, we do not see significant market shares gains. We remain sceptical on MYs ability to achieve its market share growth target. Street too bullish. Our 2011/12 earnings estimates are 29%/38% below IBES consensus. We estimate consensus earnings are discounting Rmb3,600/ kW+ for ASP (excluding VAT), 21%+ gross margin and 2GW+ WTG sales in 2012 versus our assumptions of Rmb3,217/ kW ASP, 17% gross margin and 2,149 MW WTG sales. We believe Street is too optimistic and aggressive given our view of moderating WTG installation from the 2010 levels and the ASP possibly declining to as low as Rmb3,050/kW. Time is not right. Besides deteriorating fundamentals of the wind energy market and the downward earnings revision by Street, US-listed China stocks are currently suffering from a crisis of confidence among investors, making it difficult to be more constructive on this name at present.

Price (LHS) 14 9 4 Oct-10 Feb-11 Jun-11 Rebased Rel (RHS) 120 100 80 60 40
The price relative chart measures performance against the MSCI CHINA F IDX which closed at 6491.91 on 16/06/11. On 16/06/11 the spot exchange rate was US$1./US$1
1M -32.9 -26.3
3M -49.0 -47.4
12M -4.3
12/10A 5,517.8 828.9 790.5 730.1 5.84 n.a. n.a. n.m 5.9 0 2.7 1.2 36.5 net cash
12/11E 6,516.2 772.6 695.7 652.6 5.22 0 7.37 -10.6 6.6 0 4.4 1.0 17.2 net cash
12/12E 6,933.3 855.7 688.9 608.0 4.86 0 7.82 -6.8 7.0 0 3.4 0.9 13.8 net cash
12/13E 6,731.7 931.1 770.6 693.1 5.54 0 7.07 14.0 6.2 0 2.3 0.8 13.7 net cash
38
20 June 2011
China Ming Yang Wind Power Group Ltd. MY / MY US

Price (16 Jun 11): US$5.30, Rating: NEUTRAL [V], Target Price: US$7.50, Analyst: Yang Song
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per Key ratios and valuation Growth (%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pre-tax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/10A 125.0 5.84 n.a. 1.91 12/10A

370.5 -686.1 -429.9 363.9 15.0 14.3 13.7 13.2 5.9 1.2 0.41 2.7 2.9 36.5 98.7 0.65 1.0 0.97 2.4 -56.9 -2.4 22.5
12/11E 125.0 5.22 7.37 -4.96 12/11E

18.1 -12.0 -10.6 -10.6 11.9 10.7 11.9 10.0 6.6 1.0 0.53 4.4 4.9 17.2 24.2 0.72 1.1 0.84 2.2 -20.4 -1.1 -8.6
12/12E 125.0 4.86 7.82 4.92 12/12E

6.4 -1.0 -6.8 -6.8 12.3 9.9 10.5 8.8 7.0 0.9 0.42 3.4 4.3 13.8 17.2 0.70 1.1 0.84 2.1 -28.0 -1.6 -20.0
12/13E 125.0 5.54 7.07 7.39 12/13E

-2.9 11.9 14.0 14.0 13.8 11.4 12.3 10.3 6.2 0.8 0.31 2.3 2.7 13.7 19.2 0.64 1.1 0.84 1.9 -39.4 -14.2
12/10A 12/11E 12/12E 12/13E 5,518 6,516 6,933 6,732 4,392.1 5,300.7 5,606.0 5,342.9 271.9 383.2 407.8 395.9 43.1 63.6 67.7 65.7 -18.2 -3.9 -3.9 -3.9 828.9 772.6 855.7 931.1 47.2 85.7 175.7 169.3 8.8 8.8 8.8 8.8 790.5 695.7 688.9 770.6 35.1 -80.8 -34.4 -54.1 - 44,408,920,9 44,408,920,9 44,408,920,9 2.6 2.1 2.1 2.1 758.1 778.6 725.4 826.9 20.9 120.7 112.4 128.2 737.2 657.9 612.9 698.7 7.1 5.3 4.9 5.6 730.1 652.6 608.0 693.1 730.1 652.6 608.0 693.1 12/10A 790.5 -381.4 -170.2 238.9 -570.0 -331.1 -122.6 -692.6 2,206.8 -30.0 68.6 2,245.4 1,791.7 12/10A 2,486.0 2,895.8 1,895.2 344.6 7,621.5 351.3 86.3 432.6 8,491.7
3,632.5 480.0 585.3 4,697.8 266.7 4,964.5 3,457.3 69.9 8,491.7
12/11E 695.7 -1,354.3 39.1 -619.5 -533.0 -1,152.5 -533.0 -1,152.5 12/11E 1,333.4 3,711.0 2,347.5 340.3 7,732.3 816.3 77.5 432.6 9,058.7
3,541.5 480.0 585.3 4,606.8 266.7 4,873.5 4,110.0 75.2 9,058.7
12/12E 688.9 -164.2 90.9 615.6 -125.0 490.6 -125.0 490.6 12/12E 1,824.0 3,948.5 2,520.1 354.8 8,647.4 783.3 68.6 432.6 9,932.0
3,801.9 480.0 585.3 4,867.2 266.7 5,133.9 4,718.0 80.1 9,932.0
12/13E 770.6 64.8 88.5 924.0 -100.0 824.0 -100.0 824.0 12/13E 2,648.0 3,833.7 2,402.5 345.0 9,229.1 731.7 59.8 432.6 10,453.2
3,624.4 480.0 585.3 4,689.7 266.7 4,956.4 5,411.0 85.7 10,453.2

16 14 12 10 8 6 4 2 0 Sep-10 1 0.8 0.6 0.4 0.2 0 Dec-10 Mar-11
Price (LHS)
39
20 June 2011
Infrastructure Sector
A spending spree is close to the end
Ingrid Wei 86 21 3856 0379 ingrid.wei@credit-suisse.com

Figure 23: We lower our forecast for railway and highway investment in 2011-15E
Key drivers Railway (infrastructure) investment (Rmb bn) Previous forecast Highway investment (Rmb bn) Previous forecast Source: Company data, Credit Suisse estimates 2011E 600 743 975 993 2012E 513 679 894 983 2013E 468 595 841 960 2014E 435 512 817 902 2015E 389 437 764 814
Figure 24: Chinas annual transport infrastructure spending, 2005-15E

Total 2005
Annual investment (Rmb bn)
Total
2006 623 155 87 24 889 13.6 74.6 26.2 50.7 23.1
2007 649 177 89 32 947 4.2 14.1 2.0 34.0 6.5
2008 688 338 99 38 1,163 6.0 90.5 11.4 18.8 22.8
2009 967 601 106 61 1,735 40.5 77.9 7.3 59.5 49.2
2010 2011E 2012E 2013E 2014E 2015E 2006-10E 2011-15E 1,148 709 117 73 2,047 18.7 18.1 10.5 20.0 18.0 975 600 127 88 1,779 -15.1 -15.4 8.3 20.0 -13.1 894 513 143 110 1,660 -8.2 -14.6 12.9 25.0 -6.7 841 468 165 143 1,617 -5.9 -8.7 15.1 30.0 -2.6 817 435 187 164 1,603 -2.8 -7.1 13.7 15.0 -0.8 764 389 215 181 1,548 -6.6 -10.6 15.0 10.0 -3.4 4,075 1,980 497 229 6,781 4,291 2,404 838 685 8,219
Highway Rail (infrastructure) Waterway/port Metro Total YoY % Highway Rail Waterway/port Metro Total
548 89 69 16 722 16.6 72.2 68.9 35.7 25.7
Figure 25: Earnings and target price changes and valuations

Mkt cap Code CCCC CRCC CRGL 1800 HK 1186 HK 0390 HK Curr HKD HKD HKD 6.57 6.45 3.55 13,159 12,252 13,374 CS N N N 7.48 7.12 3.90 Upside/ TP downside 13.9 10.4 9.9 EPS 11E 0.74 0.70 0.40 12E 0.85 0.75 0.42 EPS chg % 11E 12E -1.1 -1.2 -3.2 -8.4 -4.9 -10.3 P/E 11E 7.4 7.8 7.5 12E 6.3 7.0 6.8 Divd yield 3.1 3.6 2.0 PB 1.2 1.0 0.9 Price (US$ m) rating 11E 11E
Railway and highway investment, the key areas of slowdown

Chinas LGFV issue will impact local governments future infrastructure spending Although we had already expected Chinas annual transport infrastructure investment to peak in 2010, in particular, in the areas of railway and highway, we now view the large size of LGFV will force banks to be more cautious on lending to local governments sponsored/funded infrastructure projects in future, especially projects without profit or cash flow visibility. This will thus slow down local governments infrastructure spending over the next few years. Highway, compared to urban metro, will be more impacted, in our view, as the former has been already well developed in the affluent regions, while the latter is at the initial stage of development even in tier-one and tier-two cities. Highway will be more impacted
40
20 June 2011
Figure 26: Chinas highway investment by source, 2006-08

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 Loans Vehicle purchase tax Others
Source: MOT
Figure 27: Sharp rise in local government debt

% of GDP 60 50 40 30 20 6.3 16.1 18.9 22.3 Est. by the DRC Study Group Est. by the MOF Study Group
7.3% 7.8% 0.9% 9.0% 1.5% 32.8%
6.0% 7.5% 0.8% 12.1% 1.4% 34.2%
6.5% 7.0% 1.0% 11.8% 2.5% 34.8%
32.6 16.0
40.7%
38.0%
36.4%
10 0
2007 Local government Foreign investment
2008 Central fiscal spending Enterprises
2004
2007 Central Govt Local Govt
2010E
Source: MOF study group, DRC study group, CEIC, Credit Suisse estimates
Surging challenges force MOR to be more rational in spending On the railway front, the Ministry of Railways faces increasing challenges of low profitability of high speed rails, surging financial gearing and debt repayment burden. After a few years of spending spree, MORs balance sheet is getting stretched. According to a few channel sources, MORs total debt at the end of 2010 may reach approximately Rmb1.5 tn. We estimate its net gearing will surge to above 85% at the end of 2010. These challenges have forced it to be more rational on future investment spending. According to its 12th Five-Year Plan, MOR plans to spend Rmb2.8 tn over 2011-15, lower than the widely-talked original plan of Rmb3.0 tn to Rmb3.5 tn. Based on our discussion with industry experts, we estimate investment on the infrastructure network to be Rmb2.4 tn, lower than our original forecast of Rmb2.9 tn. MOR has already lowered FY11 railway infrastructure spending to Rmb600 bn from the previous Rmb700 bn.
Figure 28: Railway investment heavily relies on debt funding
Local govnt and enterprises 15.6% Other s 1.8% Central govnt subsidy 1.0% MOR (special railway construction) 23.9%
Low profitability of high speed rails, surging financial gearing and debt repayment burden We estimate Rmb2.4 tn on railway infrastructure network building
Figure 29: MORs surging net gearing

900 800 700 600 500 400 300 200 100 2006 2007 2005 Rmb bn 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0 % 2009E 2010E
Foreign fund (World Bank loan) 1.1%
Debt (bank loans + bonds) 44.2%
MOR (internal cash) 12.4%
Total debt
Source: MOR, Credit Suisse estimates Source: MOR, Credit Suisse estimates
2008E
Net gearin g
Slower new order and revenue growth

The stimulus package has pushed the base of new contracts in 2009 and 2010 very high for construction companies. With fewer new railway/highway projects to be launched, we expect
41
20 June 2011
CRCC and CRGL to see new orders falling by 25-30% YoY in 2011 (versus previous forecast of a fall of 13% to 15%), driven by an estimated 50% YoY decline in railway new contracts and a 10% fall in highway, while we forecast CCCC to see a 2.3% YoY fall (versus the previous positive growth of 1.9%) in FY11 new orders given its more diversified business model with much smaller exposure to railway. Looking to 2012 and onwards, we expect the railway and highway new contracts to continue falling by 8% to 10% p.a. in 2012-13. Revenue will continue growing YoY in 2011-13 due to the strong backlog at the end of 2010. However, the YoY growth will be slowing to low-to-mid-single-digit growth on a weaker new order growth.
Increasing working capital pressure under the tightening

We think contractors working capital is usually negatively impacted in a credit-tightening environment when their customers funding sources are limited. All the three companies, CRCC, CRGL and CCCC, mentioned that they are already under pressure and even MOR has delayed its payment compared to previous occasions. We also note the pressure from the 1Q11 results of both CRCC and CRGL. CRCCs operating cash flow turned to a negative Rmb4.2 bn in 1Q11 versus a positive Rmb2.8 bn in 1Q10, while CRGLs operating cash flow turned to a negative Rmb2 bn in 1Q11 versus a positive Rmb1.8 bn in 1Q10.
Valuations hit historical lows; no fundamental rerating catalyst

Underperforming for such a long time and trading at the historical low forward P/Es of 7x to 8x, the sector valuation looks undemanding and it seems most negatives are priced in and there may be limited downside from the current share price. However, given our forecast of the slowdown in Chinas transport infrastructure spending and limited room for margin expansion in an inflationary environment, we expect the sectors earnings growth to slow to single-digit in 2012-13, which means there is little chance for a re-rating, albeit low valuation multiples. In our view, CCCC will get less impacted by the investment slowdown than its two peers given its more diversified business model with the least exposure to railway investment slowdown and longer experience of operating in the more competitive port/highway construction industries. In addition, we view the upcoming A share IPO to help CCCC ease working capital pressure and lower financial gearing and develop new business like BOT/BT.
Figure 30: The sector trades at the historical low valuations
35 30 25 20 15 10 5 0 CRGL Current P/E CRCC Hist P/E + 1SD CCCC - 1SD 7.2 7.6 6.9 12m forward P/E (x)
We prefer CCCC to others in the sector
Figure 31: Construction stocks relative performance to MSCI China

5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% 1M 3M YTD 12M CRCC CCCC CRGL
Source: Bloomberg
42
20 June 2011
Asia Pacific / China Marine Ports & Services
China Communications Construction Co Ltd (1800.HK / 1800 HK)

Better positioned on a more diversified business model

Our preferred play in the sector: In our view, CCCC will get less impacted by Chinas railway and highway investment slowdown than its two peers given its more diversified business model with the least exposure to railway investment slowdown and longer experience of operating in the more competitive port/highway construction industries. Our 2011-12E earnings are lowered by only 1.1% and 2.3%, respectively. Our DCF-based target price is also lowered slightly to HK$7.48 from the previous HK$7.87. Stable new order growth in 4M11: According to our latest discussion with management, we see CCCCs new orders growing stably in 4M11. Segment wise, despite a significant fall in railway, port, highway/bridge and dredging grew by low double-digit YoY, while overseas was flat YoY and machinery was up over 60% YoY mainly driven by the recovery of international port machinery. Ashare IPO: Management expect the IPO to be completed in 2H11, hopefully sometimes July or August. We believe a successful IPO would help CCCC lower financial gearing and facilitate investment in new business, such as good-return BT and BOT projects. Valuation: The stock trades at the historical low of 7.3x and 6.4x 2011-12E earnings, compared to an EPS CAGR of 12.6%. The valuations look undemanding to us. If we factor in a potential EPS dilution of 10% to 12% from the A share IPO, the stock would trade at 8.25x to 8.44x 2011E P/E, which is still in the historical low level and looks fair to us. We maintain our NEUTRAL rating on the stock.
12/10A 272,734.0 19,489.0 14,241.0 9,863.0 0.67 n.a. n.a. 37.0 8.2 2.9 7.5 1.3 17.2 58.8 12/11E 300,730.9 22,218.5 16,465.4 11,029.7 0.74 -1.1 0.73 11.8 7.3 3.3 6.5 1.2 17.1 50.0 12/12E 321,606.1 24,798.9 18,624.1 12,626.3 0.85 -2.3 0.81 14.5 6.4 3.7 5.6 1.0 17.2 36.5 12/13E 336,657.4 25,532.7 19,276.0 13,307.7 0.90 0.95 5.4 6.1 3.9 4.4 0.9 16.0 20.9
Research Analysts Ingrid Wei 86 21 3856 0379 ingrid.wei@credit-suisse.com

Price (LHS) Rebased Rel (RHS) 120 100 80 60 40
12 10 8 6 4 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11
1M -2.2 2.7
3M -8.2 -5.9
12M -6.5 -12.2
43
20 June 2011
China Communications Construction 1800.HK / 1800 HK

Price (16 Jun 11): HK$6.57, Rating: NEUTRAL, Target Price: HK$7.48, Analyst: Ingrid Wei
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 321,606 292,457.5 12,599.7 -2,075.2 24,799 6,174.8 18,624.1 2,682.2 108.2 15,941.9 3,267.0 12,674.9 48.6 12,626.3 12,626 12/12E 18,624 3,267.0 411.4 4,282.2 19,303.1 9,000.0 10,303.1 -9,000.0 -9,000.0 3,016.3 -3,016.3 7,286.8 12/12E 48,738.4 89,344.7 23,646.7 43,573.0 205,302.7 60,510.1 15,822.0 370.0 48,302.8 330,307.6
136,042.6 42,760.0 16,731.0 195,533.6 38,569.0 7,029.0 241,131.6 78,146.9 11,029.1 330,307.6
12/10A 12/11E 12/12E 12/13E 14,825.0 14,825.0 14,825.0 14,825.0 0.67 0.74 0.85 0.90 n.a. 0.73 0.81 0.95 0.16 0.18 0.20 0.21 0.88 1.06 1.30 1.36 12/10A 0.09 0.58 0.04 0.09 0.07 12/10A
20.2 12.8 37.0 37.0 7.1 5.2 4.6 3.6 8.2 1.3 0.54 7.5 10.3 17.2 10.0 0.89 0.87 0.80 4.3 58.8 2.1 5.7
12/10A 272,734 249,261.0 10,685.0 -1,453.0 19,489 5,248.0 14,241.0 1,788.0 103.0 12,453.0 2,552.0 9,901.0 38.0 9,863.0 9,863 12/10A 14,241 2,289.0 61.0 1,731.2 13,051.0 15,670.0 -2,619.0 -13,000.0 -15,670.0 1,845.0 9,590.0 -1.0 7,744.0 5,125.0 12/10A 39,545.0 86,424.0 21,473.0 43,573.0 191,015.0 52,438.0 15,906.0 370.0 48,065.0 307,794.0
131,625.0 42,760.0 16,731.0 191,116.0 38,569.0 7,029.0 236,714.0 60,142.0 10,938.0 307,794.0
12/11E 300,731 274,137.8 11,781.8 -1,654.2 22,219 5,753.1 16,465.4 2,539.3 103.0 13,926.1 2,853.9 11,072.2 42.5 11,029.7 11,030 12/11E 16,465 2,853.9 -1,088.1 3,914.9 15,779.2 11,000.0 4,779.2 -11,000.0 -11,000.0 2,634.9 -2,634.9 2,144.4 12/11E 41,573.4 86,067.6 22,165.4 43,573.0 193,379.4 57,684.9 15,864.0 370.0 48,181.0 315,479.3
130,873.0 42,760.0 16,731.0 190,364.0 38,569.0 7,029.0 235,962.0 68,536.8 10,980.5 315,479.3
12/13E 336,657 306,557.1 13,189.4 -2,365.0 25,533 6,256.7 19,276.0 2,473.7 16,802.3 3,443.3 13,359.0 51.3 13,307.7 13,308 12/13E 19,276 3,443.3 476.0 3,783.0 20,091.7 5,000.0 15,091.7 -5,000.0 3,179.1 -3,179.1 11,912.6 12/13E 60,523.1 91,707.4 24,786.7 43,573.0 220,590.2 59,253.4 15,822.0 370.0 48,430.7 344,466.3
140,021.4 42,760.0 16,731.0 199,512.4 38,569.0 7,029.0 245,110.4 88,275.5 11,080.4 344,466.3
Key earnings driver Port construction revenue Railway construction Highway construction Port gp margin Railway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/11E 0.09 0.16 -0.06 0.09 0.07 12/11E

10.3 15.6 11.8 11.8 7.4 5.5 4.6 3.7 7.3 1.2 0.48 6.5 8.8 17.1 11.0 0.95 0.85 0.80 4.0 50.0 1.8 4.8
12/12E 0.08 0.07 -0.04 0.09 0.07 12/12E

6.9 13.1 14.5 14.5 7.7 5.8 5.0 3.9 6.4 1.0 0.43 5.6 7.5 17.2 12.2 0.97 0.86 0.80 3.7 36.5 1.3 5.1
12/13E 12/13E
4.7 3.5 5.4 5.4 7.6 5.7 5.0 4.0 6.1 0.9 0.33 4.4 5.8 16.0 12.8 0.98 0.87 0.80 3.5 20.9 5.3

25 20 15 10 5 0 Aug-07 Jan-08 60 50 40 30 20 10 0 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Price (LHS)
44
20 June 2011
China Railway Construction Corporation (1186.HK / 1186 HK)

Growth outlook, no longer attractive

Lower EPS and target price: We revise down our 2011-13E earnings for CRCC by 3.2%, 8.4% and 9.1%, respectively, to reflect our more cautious view on Chinas railway and highway investment over the period. Our DCFbased target price is also lowered to HK$7.12 from the previous HK$7.68. Railway, no longer a hot spot: We estimate CRCCs total new order will decline by 25.1% YoY in 2011. Being one of the two largest contractors for railway projects, CRCC will be hit more by a large slowdown of Chinas railway investment. We estimate CRCCs railway new contract will decline by 50% in 2011 and another 10% in 2012 (versus our previous forecast of a fall of 30% and 5% in the same period). New railway contracts accounted for 57.3% of CRCCs total new contracts in 2010. However, In 1Q11, CRCCs new railway contract of Rmb3.3 bn, is down more than 90% YoY. Our channel check shows that new bids open by MOR in 2Q11 remained at a low level. Highway will soft slightly, while metro a high-growth area: We expect CRCCs highway new contract to decline by a modest 10% in 2011, while urban metro new orders to grow by 22% YoY. We expect Chinas investment in city metro systems to experience fast growth in the next five to ten years, given the trend of urbanisation and currently low penetration rate. Historical low valuations, but no re-rating catalyst: Underperforming for such a long time and trading at the historical low P/Es of 7.7x for 2011E and 7.2x for 2012E, the stock looks undemanding and it seems most negatives are priced in and there may be limited downside from the current share price. However, given our forecast of the slowdown in Chinas transport infrastructure spending and limited room for margin expansion in an inflationary environment, we expect CRCCs earnings growth to slow to single digit in 2012-13, which means little chance for a re-rating, albeit low valuation multiples. We maintain our NEUTRAL rating. Downside risk may come from consensus EPS downgrade.
12/10A 456,338.9 13,865.2 6,257.3 4,368.0 0.35 n.a. n.a. -27.6 15.1 1.9 3.7 1.2 7.9 net cash 12/11E 471,003.5 20,910.9 11,932.2 8,594.6 0.70 -3.2 0.72 96.8 7.7 3.8 3.3 1.0 14.1 2.9 12/12E 477,419.6 22,042.4 12,847.3 9,222.4 0.75 -8.4 0.84 7.3 7.2 4.1 3.2 0.9 13.6 3.5 12/13E 490,484.4 22,209.0 13,055.2 9,805.9 0.79 -9.1 0.90 6.3 6.7 4.3 2.9 0.8 13.1 net cash

1M -5.0 -0.2
3M -22.2 -20.2
12M -33.0 -37.1
45
20 June 2011
China Railway Construction Corp. 1186.HK / 1186 HK

Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 477,420 444,091.8 20,338.1 142.4 22,042 9,195.1 12,847.3 1,284.9 1.9 11,564.2 2,197.2 9,367.0 144.6 9,222.4 9,222 12/12E 12,847 1,284.9 -7,053.9 7,924.3 11,506.4 10,000.0 1,506.4 -10,000.0 500.0 2,679.6 -2,179.6 -673.2 12/12E 37,540.1 58,859.9 24,333.8 166,378.9 287,112.8 44,175.3 1,272.1 14,536.0 347,096.3
124,102.4 17,421.7 104,119.8 245,643.8 22,677.5 12,685.3 274,868.8 71,120.5 1,107.0 347,096.3
12/10A 12/11E 12/12E 12/13E 12,337.5 12,337.5 12,337.5 12,337.5 0.35 0.70 0.75 0.79 n.a. 0.72 0.84 0.90 0.10 0.20 0.22 0.23 0.45 -0.50 0.93 1.27 12/10A 0.30 -0.00 0.48 0.07 12/10A
32.3 -21.1 -27.6 -27.6 3.0 1.4 1.3 1.0 15.1 1.2 0.11 3.7 8.1 7.9 10.3 1.3 0.93 0.74 6.0 -27.8 -1.2 5.3
12/10A 456,339 428,647.1 21,130.2 304.3 13,865 7,608.0 6,257.3 413.7 1.9 395.1 5,845.4 1,923.9 4,316.6 70.4 4,246.2 121.8 4,368 12/10A 6,257 665.5 -6,939.5 7,789.3 5,587.1 11,500.0 -5,912.9 659.7 -10,840.3 2,114.3 13,929.8 11,815.5 6,562.4 12/10A 56,294.8 56,531.4 26,615.3 152,599.0 292,040.5 42,349.2 1,272.1 14,532.3 350,194.0
141,196.2 17,421.7 104,119.8 262,737.6 22,677.5 12,685.3 291,962.6 57,403.3 828.1 350,194.0
12/11E 471,003 438,512.1 20,064.7 494.4 20,911 8,978.7 11,932.2 1,157.7 1.9 10,776.4 2,047.5 8,728.9 134.3 8,594.6 8,595 12/11E 11,932 1,157.7 -23,867.0 7,750.0 -6,161.3 10,000.0 -16,161.3 -10,000.0 577.0 2,497.2 -1,920.2 -18,081.5 12/11E 38,213.3 58,068.9 24,028.1 158,862.6 279,172.9 43,370.5 1,272.1 14,534.1 338,349.6
122,543.1 17,421.7 104,119.8 244,084.5 22,677.5 12,685.3 273,309.5 64,077.7 962.4 338,349.6
12/13E 490,484 455,754.1 20,894.6 780.4 22,209 9,153.8 13,055.2 1,241.3 1.9 11,815.8 2,490.0 9,325.8 154.1 9,171.7 634.1 9,806 12/13E 13,055 1,241.3 -3,500.5 7,297.9 15,611.3 8,000.0 7,611.3 -8,000.0 500.0 2,849.1 -2,349.1 5,262.2 12/13E 42,802.3 60,470.7 24,972.8 170,888.7 299,134.6 43,021.6 1,272.1 14,537.9 357,966.1
127,361.4 17,421.7 104,119.8 248,902.9 22,677.5 6,547.5 278,127.8 78,577.3 1,261.0 357,966.1
Key earnings driver Railway revenue growth Highway revenue growth Metro revenue growth Other infra revenue Railway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/11E 0.11 -0.05 0.35 0.05 0.07 12/11E

3.2 90.7 96.8 96.8 4.4 2.5 2.3 1.8 7.7 1.0 0.15 3.3 5.8 14.1 14.4 1.4 0.90 0.81 5.2 2.9 0.1 6.0
12/12E -0.01 -0.04 0.28 0.05 0.07 12/12E

1.4 7.7 7.3 7.3 4.6 2.7 2.4 1.9 7.2 0.9 0.15 3.2 5.4 13.6 13.9 1.4 0.90 0.81 4.8 3.5 0.1 6.4
12/13E 12/13E
2.7 1.6 6.3 6.3 4.5 2.7 2.4 2.0 6.7 0.8 0.13 2.9 4.9 13.1 13.4 1.4 0.91 0.79 4.5 -3.4 6.5

16 14 12 10 8 6 4 2 0 Mar-08 35 30 25 20 15 10 5 0 Sep-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11
Price (LHS)
46
20 June 2011
China Railway Group Ltd

(0390.HK / 390 HK)
Slower earnings growth

Lower EPS and target price: We revise down our 2011-13E earnings for CRGL by 4.9%, 10.3% and 9.7%, respectively, to reflect our more cautious view on Chinas railway and highway investment over the period. Our DCFbased target price is also lowered to HK$3.9 from the previous HK$4.43. Railway, a key driver for new order decline: We estimate CRGLs total new order to decline by 25.1% YoY in 2011. Being one of the two largest contractors for railway projects, CRGL will be hit by a large slowdown in Chinas railway investment. We estimate CRGLs railway new contract to decline by 50% in 2011 and another 10% in 2012 (vs our previous forecast of a fall of 30% and 5% in the same period). Railway new contracts accounted for 59.1% of CRGLs total new contracts in 2010. In 1Q11, CRGLs new railway contract of Rmb12 bn was down more than 80% YoY. Our channel check shows that new bids open by MOR in 2Q11 remained at a low level. Highway will soften slightly, while metro a high-growth area: We expect CRGLs highway new contract to decline by a modest 10% in 2011, while urban metro new order to grow by 25% YoY. We expect Chinas investment in city metro systems to experience fast growth in the next five to ten years, given the trend of urbanisation and currently low penetration rate. Historical low valuations, but no re-rating catalyst: Underperforming for such a long time and trading at the historical low P/Es of 7.4x for 2011E and 6.9x for 2012E, the stock looks undemanding and it seems most negatives are priced in. However, given our forecast of the slowdown in Chinas transport infrastructure spending and limited room for margin expansion in an inflationary environment, we expect CRCCs earnings growth to slow to single digit in 2012-13, which means little chance for a re-rating, albeit low valuation multiples. We maintain our NEUTRAL rating. Downside risk may come from consensus EPS downgrade.
12/10A 456,102.0 17,136.7 11,221.0 7,198.9 0.34 n.a. n.a. 18.8 8.7 1.9 5.7 0.94 11.3 38.7 12/11E 468,986.3 21,670.8 14,115.3 8,532.0 0.40 -4.9 0.44 18.5 7.4 2.1 5.4 0.85 12.2 56.4 12/12E 490,307.8 23,917.7 15,756.9 9,048.0 0.42 -10.3 0.49 6.0 6.9 2.3 4.7 0.77 11.7 44.8 12/13E 510,293.1 23,777.7 16,503.8 9,683.0 0.45 -9.7 0.53 7.0 6.5 2.4 4.1 0.70 11.3 33.7

1M -8.3 -3.6
3M -29.8 -28.0
12M -31.3 -35.5
47
20 June 2011
China Railway Group Ltd 0390.HK / 390 HK

Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 490,308 458,922.7 16,128.2 -500.0 23,918 8,160.8 15,756.9 2,792.3 -215.0 12,749.5 2,677.4 10,072.1 1,024.1 9,048.0 9,048 12/12E 15,757 2,677.4 -1,205.3 5,153.5 17,027.6 10,000.0 7,027.6 -10,000.0 1,416.4 -1,416.4 5,611.2 12/12E 62,790.8 87,315.1 31,433.1 137,304.3 318,843.2 50,241.4 19,925.2 25,599.0 414,608.9
198,028.3 60,444.0 14,648.0 273,120.3 42,915.0 15,734.0 324,135.3 81,409.0 9,064.6 414,608.9
12/10A 12/11E 12/12E 12/13E 21,299.9 21,299.9 21,299.9 21,299.9 0.34 0.40 0.42 0.45 n.a. 0.44 0.49 0.53 0.1 0.1 0.1 0.1 -0.05 -0.25 0.80 0.77 12/10A 0.50 0.02 0.38 0.05 0.05 12/10A
36.5 26.3 18.8 18.8 3.8 2.5 2.3 1.6 8.7 0.94 0.21 5.7 8.7 11.3 8.6 1.2 0.91 0.81 5.3 38.7 1.7 4.5
12/10A 456,102 428,987.0 15,003.0 891.0 17,137 5,915.7 11,221.0 1,115.0 161.0 373.0 10,267.0 2,337.0 8,303.0 813.0 7,490.0 -291.1 7,199 12/10A 11,221 1,960.0 -14,031.0 3,599.0 -1,171.0 16,116.0 -17,287.0 -1,152.0 -17,268.0 749.0 3,975.0 27,336.0 -189.0 23,921.0 5,482.0 12/10A 54,860.0 84,530.0 30,026.0 129,238.0 298,654.0 42,476.0 22,407.0 25,599.0 389,136.0
209,308.0 40,444.0 14,648.0 264,400.0 42,915.0 15,734.0 315,415.0 66,581.0 7,140.0 389,136.0
12/11E 468,986 440,144.3 15,426.8 -700.0 21,671 7,555.5 14,115.3 2,475.4 300.0 11,939.8 2,507.4 9,432.5 900.5 8,532.0 8,532 12/11E 14,115 2,507.4 -22,332.8 5,380.1 -5,344.8 11,000.0 -16,344.8 -11,000.0 1,335.6 20,000.0 18,664.4 2,319.6 12/11E 57,179.6 83,518.1 30,146.9 133,079.1 303,923.6 47,191.6 21,135.9 25,599.0 397,850.1
189,925.3 60,444.0 14,648.0 265,017.3 42,915.0 15,734.0 316,032.3 73,777.4 8,040.5 397,850.1
12/13E 510,293 477,003.7 16,785.6 23,778 7,273.9 16,503.8 2,629.6 -215.0 13,659.2 2,868.4 10,790.7 1,107.8 9,683.0 9,683 12/13E 16,504 2,868.4 -1,643.1 4,429.3 16,421.6 8,000.0 8,421.6 -8,000.0 1,515.8 -1,515.8 6,905.8 12/13E 69,696.5 90,874.1 32,671.5 141,952.0 335,194.2 50,967.5 19,925.2 25,599.0 431,685.9
205,830.4 60,444.0 14,648.0 280,922.4 42,915.0 8,100.0 331,937.4 89,576.2 10,172.4 431,685.9
Key earnings driver Railway construction Highway construction Other construction Railway gp margin Highway gp margin Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/11E 0.09 -0.03 0.26 0.06 0.05 12/11E

2.8 25.8 18.5 18.5 4.6 3.0 2.5 1.8 7.4 0.85 0.25 5.4 8.2 12.2 8.7 1.2 0.85 0.79 4.9 56.4 2.1 3.6
12/12E 0.02 -0.04 0.21 0.06 0.05 12/12E

4.5 11.6 6.0 6.0 4.9 3.2 2.6 1.8 6.9 0.77 0.23 4.7 7.1 11.7 9.5 1.2 0.81 0.79 4.6 44.8 1.7 3.6
12/13E 12/13E
4.1 4.7 7.0 7.0 4.7 3.2 2.7 1.9 6.5 0.70 0.19 4.1 5.8 11.3 9.8 1.2 0.83 0.79 4.3 33.7 3.8

14 12 10 8 6 4 2 0 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 60 50 40 30 20 10 0 May-11
Price (LHS)
48
20 June 2011
Dry Bulk Shipping Sector

Weaker demand aggravates industry oversupply
Sam Lee 852 2101 7186 sam.lee@credit-suisse.com
Earnings and target price changes:

Figure 32: A table on drivers Key drivers BDI (new) BDI (old) Global bulk demand growth (%) Global fleet growth (%)
Source: Credit Suisse
FY11 1,350 1,800 5.5 14.2
FY12 1,500 2,000 4.3 12.0
FY13 2,500 2,500 4.0 8.6
Figure 33: Earnings and target price changes

CS Company Ch Cosco Ticker rating 1919 HK U Price Local Target 5.78 5.20 EPS Chg(%) FY11 FY12 nm (42) TP (%) Up/dn Chg (21) EPS EPS grth (%) P/E (x) Div. yld (%) FY11 0 ROE P/B (%) (0.4) (x) 1.1
(%) FY11 FY12 FY11 FY12 FY11 FY12 (10) 0.0 0.2 n.a n.a NM 23.2
Further slowdown in China iron ore import

Iron ore trade demand has been the key growth driver for global bulk trade demand growth, and China imports accounted for 63% global iron ore trade in 2010. That said, China demand has been weak and import was flat YoY. Our commodity analyst Trina Chen expects only low single-digit steel production growth for 2011-12E, on credit tightening, government control on capacity, electricity restrictions and the weakening property market. On the other hand, domestic iron ore production is at peak level in May (growing average 12% YoY in Apr/May). As a contrast, China iron ore import was down 1% in Apr/May. The fact that iron ore inventory at Chinese ports rose to a record 83.3 mn tonnes in May also doesn't help import as well.
Figure 34: China iron ore production hit record in May
(mn tons) 110 100 90 80 70 60 50 40 30 20 10 0 10 20 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Oct-09 Apr-09 Apr-10 Oct-10 Apr-11
Figure 35: Iron ore inventory at Chinese ports at record high in May
(mn tons) 95 85 75 65 55 45 35 25 15 5 5 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Apr-09 Apr-10 Apr-11
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20%
95% 85% 75% 65% 55% 45% 35% 25% 15% 5% -5%
Iron ore production
YoY% growth
Iron ore inventory
YoY% growth
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20 June 2011
As a result, China iron ore import was flat at 615 mn tonnes in 2010, and again not growing in April and May. In our current model, we have generously assumed 5% China iron ore import growth in 2011-12E, driven by re-accelerating FAI growth. However, with the recent cut in China GDP projections from 8.8% to 8.7% for 2011E and from 8.9% to 8.5% for 2012E, we think risk to our demand forecast is rising. On the supply side, fleet growth averaged 12% YTD despite 30%+ of new ships not being delivered on schedule. We expect overall fleet to grow 14% in 2011 and 12% in 2012, significantly above historical trends.
Figure 36: China iron ore import not growing in Apr/May
80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Apr-08 Apr-09 Apr-10 Apr-11 (mn tons) 80 70 60 50 40 30 20 10 0 10 20
Figure 37: Dry bulk vessels delivery to remain high

(mn tons) 40 35 30 25 20 15 10 5 0 1Q09 3Q09 1Q10 3Q10 Panamax 1Q11 3Q11 1Q12 3Q12 Forecast
Iron ore imports
YoY% growth
Capesize
Handymax
Handysize
BDI has averaged 1,366 YTD, lower than our previous average estimate of 1,800. With shipping supply growth continued to be at 12-14% in 2011-12E, any demand slowdown will only worsen the oversupply situation. We have downgraded our 2011-12E BDI forecast to 1,350-1,500 points from 1,800-2,000 points.
Earnings cut for China Cosco; remain cautious on earnings loss

For China Cosco, 34% of revenue, and 39% of operating profit were derived from bulk shipping in FY10. Moreover, CCH is leveraged to the spot market, and we think its BDI break-even is high at 2,000+ points. CCH already made Rmb503 mn in 1Q11, when its container division was still profitable. Thus, our BDI forecast for 2011-12E thus imply loss making for its bulk shipping to continue. Based on our lower BDI forecast, we cut CCHs blended bulk freight rates by 15-19% in FY11-13E. Moreover, container freight rates have been weaker than expected and we thus also reduce that by 4% in FY11-13E. In addition, fuel price remains stubbornly high with spot price at US$670/tonne. We raise FY11-13 fuel price assumptions by 5-13% to US$630/tonne. As a result, we now expect CCH to make a loss of Rmb187 mn in FY11E (versus previous forecast of Rmb1.93 bn). We also cut CCHs FY12-13E earnings by 42% and 13% to Rmb2.12 mn and Rmb5.52 bn.
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20 June 2011
Asia Pacific / China Marine
China COSCO Holdings

(1919.HK / 1919 HK)
Rating UNDERPERFORM* Price (16 Jun 11, HK$) 5.78 Target price (HK$) (from 6.60) 5.20 Chg to TP (%) -10.0 Market cap. (HK$ mn) 59,050.1 Enterprise value (Rmb mn) 69,990 Number of shares (mn) 10,216.27 Free float (%) 35.8 52-week price range 9.79 - 5.78
Weaker demand aggravates oversupply

Cutting BDI assumptions. Dry bulk freight rates have been depressed by industry oversupply, with capesize daily rates around cash cost break-even of around US$9,000/day. CS economists recently downgraded China GDP, and we think weaker steel production and iron-ore import demand from China will worsen the operating environment in 2011-12E. We have thus downgraded our 2011-12 BDI forecast to 1,350-1,500 points from 1,8002,000 points. Earnings cut, expecting FY11E loss. 34% of CCHs revenue, and 39% of operating profit were derived from bulk shipping in FY10. Moreover, CCH is leveraged to the spot market, and we think its BDI break-even is high at 2000+ points. CCH already made Rmb503 mn in 1Q11 when its container division was still profitable. Thus, our lower BDI forecast for 2011-12E imply continued loss-making for its bulk shipping division. If container freight rates fail to recover in 2H11 and 2012, CCH could be overall loss-making in FY12E as well. Cut CCHs blended bulk freight rates: Based on our lower BDI forecast, we cut CCHs blended bulk freight rates by 15-19% in FY11-13E. Moreover, container freight rates have been weaker than expected and we thus also reduce that by 4% in FY11-13E. In addition, fuel price remains stubbornly high with spot price at US$670/tonne. We raise FY11-13 fuel price assumptions by 5-13% to US$630/tonne. As a result, we now expect CCH to make a loss of Rmb187 mn in FY11E (vs previous forecast of Rmb1.93 bn). We also cut CCHs FY12-13E earnings by 42% and 13% to Rmb2.12 mn and Rmb5.52 bn. Stocks have corrected but still not cheap. CCHs current 12-month forward P/B of 1.1x is still expensive among its dry bulk and container shipping peers. With projected small loss in FY11E and mediocre FY12E RoAE of 3%, we think CCH should trade at book value. Our new target price HK$5.20 (from HK$6.60) is based on a target P/B of 0.9x.
12/10A 96,438.5 12,884.0 9,431.6 6,858.5 0.67 n.a. n.a. n.a. 7.1 1.9 5.7 1.1 15.5 22.2 12/11E 85,180.5 2,970.5 -366.8 -187.1 -0.02 0.26 n.a. NM 0 23.6 1.1 -0.4 16.1 12/12E 93,455.0 5,681.7 2,344.4 2,115.4 0.21 -42.5 0.38 n.a. 23.2 0.9 11.7 1.0 4.6 9.0 12/13E 110,930.2 10,796.1 7,458.9 5,520.9 0.54 -12.6 0.49 161.0 8.9 2.3 4.3 0.9 11.0 net cash
Research Analysts Sam Lee 852 2101 7186 sam.lee@credit-suisse.com

1M -17.4 -13.3
3M -28.2 -26.3
12M -31.3 -35.4
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20 June 2011
China COSCO Holdings 1919.HK / 1919 HK

Price (16 Jun 11): HK$5.78, Rating: UNDERPERFORM, Target Price: HK$5.20, Analyst: Sam Lee
Per Share Data No. of shares (weighted EPS (Credit Suisse) Consensus EPS (Rmb) DPS (Rmb) Operating cash flow per 12/12E 93,455 88,160.8 4,791.1 -1,841.3 5,682 3,337.3 2,344.4 70.7 1,184.6 2,273.7 113.7 2,160.0 44.7 2,115.4 2,115 12/12E 2,344 113.7 -8.1 3,342.0 5,564.6 5,564.6 770.4 770.4 229.5 943.0 -2,045.9 -1,332.3 5,002.7 12/12E 56,815.3 7,473.2 2,534.6 151.9 66,974.9 56,105.6 203.0 2,734.8 45,233.0 145,759.4
16,272.0 1,617.7 5,415.1 23,304.8 56,527.1 4,606.2 84,438.0 47,517.4 13,803.6 145,759.1
12/10A 12/11E 12/12E 12/13E 10,216.3 10,216.3 10,216.3 10,216.3 0.67 -0.02 0.21 0.54 n.a. 0.26 0.38 0.49 0.09 0.04 0.11 1.08 0.63 0.54 1.14 12/10A 12/11E 12/12E 871.10 911.42 929.65 5,679,20 6,303,91 7,375,58 1,076.54 847.21 1,016.67 12/10A 12/11E 12/12E
40.9 272.1 191.8 13.4 9.8 9.6 7.1 7.1 1.1 0.76 5.7 7.8 15.5 11.0 0.64 1.0 0.9 2.5 22.2 1.1 59.7 -11.7 -103.9 -102.7 3.5 -0.4 -0.5 -0.2 -262.0 1.1 0.82 23.6 -190.8 -0.4 -0.5 0.60 1.2 1.0 2.4 16.1 3.2 -4.2 9.7 739.1 1,230.7 6.1 2.5 2.4 2.3 23.2 1.0 0.71 11.7 28.3 4.6 3.3 0.64 1.0 1.0 2.4 9.0 1.0 33.2
12/10A 96,439 84,052.5 4,944.0 -1,989.5 12,884 3,452.4 9,431.6 158.0 1,351.2 9,273.6 1,189.0 8,084.6 1,226.1 6,858.5 6,858 12/10A 9,432 283.7 -1,699.6 3,559.4 11,007.7 8,496.7 495.6 2,511.1 -2,879.0 -10,880.1 3,955.4 625.5 1,591.6 -2,121.4 2,800.1 -474.9 2,452.9 12/10A 47,248.7 10,987.2 2,116.9 151.9 60,504.8 68,680.5 210.5 2,734.8 35,747.1 149,541.8
21,565.1 1,669.4 5,214.0 28,448.6 54,927.5 5,189.9 88,566.0 46,508.6 14,467.3 149,541.8
12/11E 85,180 82,917.0 4,366.9 -1,736.5 2,971 3,337.4 -366.8 87.5 999.5 -454.4 -454.4 -267.3 -187.1 -187 12/11E -367 -2,573.3 9,386.9 6,446.7 6,446.7 737.6 737.6 1,131.0 604.9 -1,396.5 -1,922.6 5,261.7 12/11E 51,812.6 6,811.5 2,263.0 151.9 61,039.0 59,439.2 206.7 2,734.8 40,407.8 141,959.9
15,240.6 1,474.5 5,310.3 22,025.4 55,727.3 4,817.2 82,569.9 45,402.0 13,988.4 141,960.4
12/13E 110,930 99,148.5 5,686.9 -1,364.2 10,796 3,337.2 7,458.9 123.9 7,335.0 1,100.3 6,234.8 713.9 5,520.9 5,521 12/13E 7,459 1,100.3 539.2 4,698.0 11,595.9 11,595.9 510.3 510.3 676.1 1,102.3 -2,978.8 -2,552.6 9,553.6 12/13E 66,368.9 8,870.6 2,940.1 151.9 78,331.4 52,772.0 199.4 23,459.7 154,762.6
18,563.5 1,920.2 5,530.4 26,014.1 57,326.8 4,541.5 87,882.4 52,615.2 14,264.5 154,762.1
Key earnings driver Average Freight Rates Volume handled (TEUs) Container shipping net Cosco Pacific net profit Key ratios and valuation Growth(%) Sales EBIT Net profit EPS Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) P/E P/B EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE (%) ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt / EBITDA (x) Interest coverage ratio (x)
12/13E 12/13E
18.7 218.2 161.0 161.0 9.7 6.7 6.6 5.0 8.9 0.9 0.42 4.3 6.2 11.0 9.9 0.72 1.0 0.9 2.3 -4.4 60.2

45 40 35 30 25 20 15 10 5 0 2006 120 100 80 60 40 20 0 2011
2007
2008
2009
2010
Price (LHS)
52
20 June 2011
China Basic Materials Sector

Normalising demand
Trina Chen 852 2101 7031 trina.chen@credit-suisse.com We maintain our estimate that Chinas commodity demand will continue expanding at 49% CAGR in 2011-2015E, driven by a normalisation in property construction post 201112; continued double-digit growth in the consumption segment such as home appliances and autos, partly offset by structural deceleration in infrastructure investment from the high base in 2009-10E as the economic structural transformation is gradually played out. We believe construction demand for commodities will underperform manufacturing demand structurally in the coming years. This results in demand growth in base metals outperforming that in steel and cement, and flat steel outperforming long steel. We maintain our lower-than-consensus steel demand outlook (750 mn tonnes by 2015) for China, which if it takes place, would have negative implications for steel-making raw materials, in our view. Nevertheless, we also highlight that the supply picture is improving, with decelerating new capacity addition, closure of old capacity, and continued industry consolidation. This would improve industrys ability to protect margins in a soft demand growth environment, an improvement we are already seeing in sectors such as the cement industry.
Figure 38: Construction demand versus total (%)
Construction demand vs total (%) 100% 80% 60% 40% 20% 0% Steel Cement Al Cu
Source: MYSTEEL, Antaike, Credit Suisse estimates
Destocking in soft demand

We think 2011E will remain to be a year with soft demand growth, partly due to high base from 2009-2010. Both our monthly channel checks and recent chats with traders and distributors suggest that end demand remains soft on the ground, as decelerating real demand couples with destocking and a weak season ahead. The positives, if any, are falling inventory across the board from end goods to metals and steel, and the stabilising trend in order books. While we sense an inflection point towards the end of summer, the soft real demand may hinder the magnitude of a potential rebound. We view current valuations has factored in a soft landing scenario, with near-term downside risks. And thus we would demand more attractive valuations on basic material equities to justify a positive risk-reward stance. In the near term, we see upside risk in the thermal coal sector, range trading for cement, and downside risk in base metals and steel. Our top picks are CNBM, CR Cement and Chinacoal. Our less favoured stocks are Jiangxi Copper, Yanzhou, and Angang.
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20 June 2011
Figure 39: Sector valuation table

Target price Trading Company Shenhua Chinacoal Yanzhou Baosteel Angang Maanshan Conch CNBM CRC Shanshui CNM TCCI BBMG Chalco UC Rusal Jiangxi Cu Zijin Avg: steel Avg: cement Avg: coal Avg: base metals Source: Company data, Credit Suisse estimates Ticker 1088.HK 1898.HK 1171.HK 600019.SS 0347.HK 0323.HK 0914.HK 3323.HK 1313.HK 0691.HK 1893.HK 1136.HK 2009.HK 2600.HK 0486.HK 0358.HK 2899.HK Ratg O O N O N O N O O O O O O O O N N ccy 42.4 12.0 34.7 9.8 11.1 5.5 32.0 18.0 7.9 8.8 9.0 3.5 15.9 8.3 15.0 27.0 7.2 Price Upside Trading % 17 15 16 62 38 59 -3 29 15 8 41 -16 49 25 38 6 87 53 17 16 39 36.3 10.4 29.9 6.0 8.1 3.5 33.1 14.0 6.9 8.2 6.4 4.2 10.7 6.6 10.8 25.4 3.9 Mkt cap EPS for 1% US$/ Int rate Rmb -1 -1 -1 -2 -8 -6 -1 -6 -4 -3 -5 -6 -2 -11 -4 -1 0 -5 -4 -1 -4 -1 -2 -1 -3 -19 -7 0 0 0 0 0 0 0 -11 0 -2 -2 -10 0 -1 -3
P/E (x) 14 13 10 7 17 11 14 12 14 10 12 10 9 16 7 9 8 12 12 12 10 11 9 13 6 12 7 12 11 11 8 11 8 8 13 9 9 8 8 10 11 10
P/B (x) 3.2 1.6 3.4 1.0 0.9 0.8 4.4 3.2 3.0 3.5 2.1 1.3 2.2 1.5 1.8 2.2 2.2 0.9 2.8 2.7 2.0 2.7 1.5 2.7 0.9 0.9 0.8 3.4 2.7 2.5 2.8 1.8 1.2 1.6 1.4 1.5 1.8 1.9 0.9 2.3 2.3 1.6 2.3 1.3 2.4 0.8 0.9 0.7 2.7 2.2 2.1 2.1 1.6 1.1 1.4 1.3 1.3 1.6 1.6
EV/EBITDA 8.8 7.0 8.9 4.3 7.3 4.5 11.2 10.4 15.5 10.0 4.0 10.8 9.6 14.9 8.3 11.0 6.0 7.0 7.5 6.2 3.3 6.4 3.8 5.9 7.5 9.1 6.1 3.8 6.8 5.9 9.2 5.7 6.8 4.4 4.5 6.4 6.9 6.6 5.2 5.5 7.0 2.5 5.2 2.7 4.8 6.8 6.2 4.9 2.7 5.4 4.2 7.6 6.4 6.1 3.8 3.5 5.0 5.9 6.0
ccy US$ bn 10A 11E 12E 10A 11E 12E 10A 11E 12E 92.4 17 17.7 16 18.9 14 15.6 8 7.5 25 3.4 21 15.0 25 9.7 18 5.8 22 2.9 20 2.9 15 1.8 14 5.9 13 11.5 n.a. 21.1 7 11.3 14 7.2 10 18 18 15 10
0.8 5.3 1.9 10.2 2.0 8.3 1.4 10.1
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20 June 2011
Telecoms: structural positives

Slowdown to have a limited impact on telecoms
Colin McCallum, CA 852 2101 6514 colin.mccallum@credit-suisse.com We have long viewed the primary divers of returns on capital in the telecoms industry to be secular, rather than cyclical. While nominal GDP growth contributes to rising affordability for telecoms services and therefore contributes to rising penetration, rising usage and rising revenues we believe secular factors such as the introduction of well capitalised new entrants, the creation of additional secular growth curves such as the advent of mobile data usage via smartphones, and declining handset price points due to vendor competition and rising global scale, are more important factors. For example, the China cellular industry restructuring announced in May 2008, and the subsequent issuance of 3G licences, resulted in a classic industry supply shock; the cellular industry in China shifted from being a two-player market to a three-player market. This, in turn, had three key (negative) impacts for the returns on capital: rising capex as three rival nationwide networks were constructed (on both 2G and 3G), lower revenues (than might have been the case under a duopoly) as tariff discounts and airtime giveaways became more widespread, and lower EBITDA margins as handset subsidies were introduced. The revenue pie in China is growing Secular drivers are, in our view, more important than the rate of GDP growth
The industry supply shock is now three years behind us
However, we believe this cellular industry supply shock is now behind us. Notwithstanding lower GDP growth, there is still a revenue growth opportunity in China, given headline penetration of 62.7% and traffic penetration of only 49.0%. Furthermore, while we forecast that voice revenues will grow at a CAGR of 5.6% from FY10 to FY13, we expect data access revenues to grow at a CAGR of 18.6%. Importantly, the 9.6% overall service revenue growth is permitting all three cellular players to grow EBITDA and net profit into FY11, as the capacity built in the 2008 supply shock is utilised.
Figure 40: China voice revenues still growing
600 500 400 300 200 321 100 FY09A FY10A FY11E FY12E FY13E FY10-13E CAGR
FY09A FY10A FY11E
Figure 41: but data is where the real opportunity lies

5.6%
350 300 53 46 26 19 34 25 31 37 18.6%
51 20
57 29
71 37
85 44
96 51
250 200 150 19 10 131
334
340
344
348
100 151 50
172
201
237
FY12E
FY13E
FY10-13E CAGR
China Mobile
China Telecom
China Unicom
China Mobile
China Telecom
China Unicom
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20 June 2011
Figure 42: Aggregate cellular industry capex

300 250 200 150 100 50 0 FY08 China Mobile FY09 FY10 China Unicom FY11E China Telecom FY12E FY13E 23.6 38.7 45.6% 53.5 51.5% 61.5 27.7 46.7 36.0% 33.7% 166.3 169.4 147.3 153.4 151.5 31.0% 146.5 27.4% 35% 30% 25% 20% 23.3 50.3 24.9 52.9 26.0 48.8 60% 55% 50% 45% 40%
Figure 43: Aggregate cellular industry cash flow

150 5.3 100 50 50.2 0 -50 -100 FY08 FY09 FY10 FY11E FY12E FY13E FY10-13E CAGR China Mobile China Unicom China Telecom (12.0) (11.5) (51.7) 59.6 (37.3) 92.1 (21.2) (16.4) 94.8 (19.3) (5.2) 105.6 122.7 6.0 35.0%
(9.4) (0.4)
Industry capex to sales
We are also becoming more optimistic on the prospects of the fixed line business, again due to secular factors. The two fixed line operators in China enjoy a duopoly on the provision of broadband services in China. Indeed, given that China Telecom has a stronger network coverage reach in the southern provinces versus China Unicoms better reach in the northern provinces, in many areas the two players represent de facto fixed line monopolies. With an average FY10 broadband ARPU of Rmb78.3 (US$12.0) per month and Rmb57.9 (US$8.9) for China Telecom and China Unicom, respectively, broadband services represent a key driver of revenues and returns on invested capital.
Figure 44: Broadband industry revenue and revenue market share forecasts
2009 Revenue (Rmb mn) China Telecom (xDSL) 47,807 China Unicom (xDSL) 23,898 Total 71,705 Broadband as % fixed line revenue China Telecom (xDSL) China Unicom (xDSL) 27.7 29.3 54,965 29,822 84,787 33.2 36.6 60,825 34,050 94,875 36.9 41.7 64,882 36,504 101,386 39.4 44.7 66,425 38,557 104,982 40.4 46.9 2010 2011E 2012E 2013E
while broadband revenues expand
2014E 66,682 40,613 107,295 40.9 48.8
FY10-15 2015E CAGR (%) 67,514 42,189 109,703 41.5 50.2 4.2 7.2 5.3
We note that broadband revenue reached 33.2% of China Telecoms recurring fixed line revenue in FY10, and 36.6% of China Unicoms. Thus, after stripping out the Xiaolingtong revenues, China Telecoms fixed line revenue declined by only 0.1% in FY10, while Unicoms actually increased by 2.8%. We view this as an important inflection point. Looking forward, we expect China Telecom and China Unicoms fixed line revenues to be flat into FY11 and FY12 (rising if the Xiaolingtong revenues are stripped out).
Figure 45: Fixed line capex (Rmb mn) and capex to sales
10 0.0 9 0.0 8 0.0 7 0.0 6 0.0 5 0.0 4 0.0 3 0.0 2 0.0 1 0.0 0.0 FY08A FY09A FY1 0 fixed line capex FY 11 FY12 FY13 Ope rating free cashflow 80 .2 66.5 89 .0 7 3.1 15.0% 63.8 55.3 10.0% 5.0% 0.0% FY0 8A FY09A FY10 FY11 FY1 2 FY13 FY10 -13E CAGR 30.2 % 26.4% 25.1% 2 1.7 % 34.2% 35.0% 28.9% 30.0% 25.0% 20.0% 50 .0 40 .0 30 .0 20 .0 10 .0 49 .3 4 2.2 26.5 45.2 39.6 60 .0 57.9 40.0%
Figure 46: Fixed line cash flow generation (Rmb mn)

70 .0 8.6%
capex to sa les ratio
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No material stock by stock impact of GDP slowdown

With good visibility of cash flows, driven by secular factors, the telecoms sector as a whole tends to outperform in times of global financial stress and/or concerns over end-demand for Asias export industries. We therefore raise the sector to OVERWEIGHT. We have an OUTPERFORM rating on China Unicom and NEUTRAL ratings on China Mobile and China Telecom. We do not envisage that a GDP growth slowdown will affect our forecasts materially, given the pre-eminence of the secular/ structural drivers, and we therefore leave our projections and DCF-based target prices unchanged. We further note that balance sheets in the industry are relatively strong, particularly given that the secular 3G capex hump is increasingly behind the operators. While China Mobile has a net cash position, China Unicom had a net debt-to-EBITDA ratio of only 1.2x as at December 2010 and China Telecom had a net debt-to-EBITDA ratio of only 0.6x as at December 2010.
Figure 47: China telecoms sector comparative multiples
Current China Mobile China Unicom China Telecom Asia ex Japan integrated Asia ex Japan wireless 70.25 16.62 4.65 Target Upside 86.00 19.00 4.56 22.4 14.3 -1.9 P/E (x) FY12E 9.2 27.6 14.8 16.8 10.6 9.3 68.2 17.0 26.5 11.5 EV/EBITDA (x) FY11E 3.6 6.3 4.3 6.0 5.2 FY12E 3.3 5.3 5.5 5.8 4.7 FCF yield (%) FY11E 6.9 (3.9) 7.2 5.6 6.5 FY12E 8.0 (1.4) 10.3 6.9 8.1 Div yield (%) FY11E 4.6 0.5 1.8 4.2 4.7 FY12E 4.7 1.3 1.8 4.6 5.0 price (HK$) price (HK$) (%) FY11E
How clients should be positioned

Within the sector, our DCF-based target prices given in the figure above currently imply the highest upside for China Mobile, followed by China Unicom and China Telecom. Given China Mobiles large cash pile (HK$14.80/share) and relatively high cash flow yield it is arguably the most defensive of the three stocks at present, though it faces some near-term structural issues in competing for the data growth opportunity due to its use of TD-SDCMA technology for 3G services. Unicom is best-placed to increase its share of cellular revenues The fact that data is becoming more meaningful in the China market (3.8% 3G penetration as at 2010, rising to 10.2% in 2011) plays to Unicoms strengths. We have identified four key drivers for rising 3G net addition numbers: (1) improved W-CDMA handset supply and distribution channels; (2) a superior data experience for users; (3) an improving voice/2G coverage experience; and (4) more aggressive marketing, in the form of lower thresholds and more willingness to subsidise. Unicom is of course highly leveraged at the top line to success in this area, given average 2G ARPU levels of Rmb38, versus Rmb126 for newlyacquired 3G subscribers. We forecast that Unicom will grow cellular revenue at 20% during FY10-FY13 and that its revenue market share will likely expand from 13.4% in FY10 to 17.6% in FY13. Introduction of the MNP would only accelerate this. Our DCFbased target price of HK$19.00/share and OUTPERFORM rating are maintained. China Mobiles share of the revenue pie is declining, but its balance sheet is strong China Mobile can, we believe, continue to grow in Chinas three-player cellular market, though with a 78.8% revenue market share we expect it to grow more slowly than competitors. Growth will also be crimped relative to competitors due to the use of homegrown TD technology. Our extensive recent tests show that users in Beijing and Shanghai can expect a reasonable surfing experience on TD, but not an excellent one. Unicoms W-CDMA network delivers 2-10x faster speeds. China Mobiles Wi-Fi network delivers faster speeds than TD, but the coverage is still very patchy (hence China Mobiles rising
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capex). LTE provides a more lasting solution but its full commercial launch, with smartphones, might only make an impact in FY13. On the other hand, China Mobile has by far the strongest balance sheet position and the stock can be expected to perform well in a falling stock market. Our DCF-based target price for China Mobile is HK$86 and we rate the company a NEUTRAL. Telecoms asset purchase likely earnings accretive, but value destructive China Telecoms key consolidated earnings driver cellular business is the improving scale of the cellular division, which is set to reach net profit breakeven in FY11. This is set to continue, and the intended acquisition of the CDMA network from its unlisted parent in late FY12 is likely to be earnings accretive from FY13 (though we have factored in HK$0.51/share of value destruction; investors should consider the capex of the CDMA network, and the fact that it will replace existing lease fees, rather than just the non-cash depreciation charges). China Telecoms fixed line business (contributing 72.9% of revenues in FY11) is also stabilising due to broadband growth, and the slow pace of reform by the cable operators in China defers a potential competitive threat. Given China Telecoms relatively strong balance sheet, and the recent stock price decline, we rate China Telecom a NEUTRAL, with a target price of HK$4.56.
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Valuation multiples with regional comparisons

Figure 48: Regional comparative multiples
Closing Code Integrated operators China Telecom China Unicom HTHK KDDI KT NTT Softbank PCCW CTI PLDT SingTel SKB Telekom Malaysia Telstra True Corp TT&T NJA average integrated Mobile operators AIS AXIATA Bakrie Bharti China Mobile DiGi Excelcom Globe IDEA Indosat LGT Maxis M1 NTT DoCoMo PT Telkom Reliance SKT SmarTone StarHub TAC NJA average mobile Asia average telecoms 0728.HK 0762.HK 215 HK 9433 JP 030200 KS 9432 JP 9984 JP 8 HK 1137 HK TEL PM ST SP 033630 KS T MK TLS AU TRUE TB TTNT TB HK$ HK$ HK$ W HK$ HK$ P S$ W RM A$ Bt Bt 4.65 16.62 2.45 574,000 36,800 3,810 2,987 3.09 4.93 2,348 3.08 4,260 3.84 3.05 3.92 0.10 N O O O R O O N O O N N U O U U 4.56 19.00 2.90 670,000 R 4,700 4,500 4.00 7.10 2,800 3.62 4,800 3.25 3.30 2.85 0.11 17.0 68.2 14.0 9.2 6.8 9.5 13.5 12.8 12.5 12.2 11.6 83.0 29.1 11.6 25.0 n.m. 26.5 11.5 14.2 n.m. 14.6 9.3 17.1 13.4 12.2 19.2 23.4 6.6 17.8 13.5 11.6 11.4 7.1 7.0 13.9 15.2 13.4 11.5 16.0 14.8 27.6 11.4 8.0 6.3 8.6 12.1 10.5 11.5 12.1 10.5 22.1 22.5 10.7 19.3 n.m. 16.8 11.0 12.7 n.m. 10.6 9.2 16.0 11.6 12.0 11.3 13.7 6.1 17.6 12.5 11.3 10.5 5.4 6.6 11.8 14.2 16.1 10.6 12.4 4.3 6.3 7.5 3.2 3.0 2.6 4.6 7.7 5.9 6.0 6.1 3.9 5.4 4.9 5.9 7.1 6.0 5.6 6.8 10.3 7.2 3.6 8.6 5.8 4.8 6.5 5.0 3.1 10.4 7.4 3.7 5.2 5.4 3.5 8.5 8.1 5.5 5.2 5.0 5.5 5.3 6.5 2.7 2.8 2.4 3.8 7.4 5.5 5.4 5.6 3.5 5.0 4.7 5.6 6.4 5.8 5.4 6.1 9.6 5.7 3.3 8.2 5.2 4.8 4.8 4.2 2.7 10.3 7.0 3.5 4.8 4.4 3.3 6.9 7.8 5.6 4.7 4.6 7.2 (3.9) 6.2 12.2 14.1 15.6 7.1 11.5 4.5 6.4 8.5 3.0 2.4 11.1 5.1 243.5 5.6 11.1 6.0 1.5 3.1 6.9 6.1 6.1 5.8 (0.2) 2.0 12.5 5.1 7.1 9.0 8.6 16.1 5.9 5.3 5.2 10.2 6.5 7.5 10.3 (1.4) 7.7 13.6 15.9 17.4 9.1 11.0 6.6 8.4 8.8 7.7 5.6 10.6 4.7 259.6 6.9 11.1 7.6 3.0 8.1 8.0 6.4 8.3 1.2 8.5 14.0 15.7 5.4 7.6 9.3 9.9 22.2 8.0 6.4 5.5 9.5 8.1 8.9 1.8 0.5 5.0 2.6 7.9 3.7 0.2 5.5 6.0 8.2 5.5 5.1 9.2 4.2 8.7 2.2 2.8 4.6 5.8 2.6 7.2 0.3 2.3 4.6 7.2 6.0 3.9 4.9 3.5 6.1 7.2 7.3 13.4 4.7 4.1 1.8 1.3 6.6 2.8 8.5 3.9 0.2 6.7 6.9 8.3 6.2 5.1 9.2 4.6 9.1 2.4 4.4 4.7 6.2 3.4 7.3 1.1 4.4 5.5 7.2 6.7 3.9 5.5 7.3 6.5 8.5 7.3 7.4 5.0 4.3 Curr. price Rating Target Normalised P/E EV/EBITDA FCF yield (%) Div. yield (%)
price 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E
ADVANC TB AXIATA MK BTEL IJ BHARTI IN 941 HK DIGI MK EXCL IJ GLO PM IDEA IN ISAT IJ 032640 KS MAXIS MK M1 SP 9437 JP TLKM IJ RCOM IN 017670 KS 315 HK STH SP DTAC TB
Bt 98.50 RM 4.93 Rp 360.00 Rs 376.75 HK$ 70.25 RM 28.72 Rp 6,200 P 875 Rs 74.20 Rp 5,150 W 5,460 RM 5.52 S$ 2.45 143,800 Rp 7,250.00 Rs 93.55 W 153,500 HK$ 12.28 S$ 2.74 Bt 59.75
O O U O N O O O O O N O N N O N O U U O
128.00 6.30 185.00 450.00 86.00 29.60 7,200 1,000 95.00 7,900 6,600 6.10 2.66 150,000 9,750 120.00 201,000 12.00 2.31 68.00
Note: 1) Rating: O = Outperform; N = Neutral; U = Underperform; R = Restricted, 2) The averages are based on market capitalisation., 3) The PE for non-Asian stocks are based on Credit Suisse adjusted EPS., 4) The financial years of KDDI, NTT, NTT DoCoMo, Softbank, Bharti, Reliance and SingTel are ended in March. For the sake of comparison, the FY05 of these companies in this matrix represents FY3/06 of their financial years and etc., 5) FCF yield = (EBITDA - interest exp. - tax - capex) / mkt cap. Source: Company data, Credit Suisse estimates
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Insurance Sector
Relatively defensive in a slowdown
Arjan van Veen 852 2101 7508 arjan.vanveen@credit-suisse.com
Figure 49: Insurance Valuation Table
Company T = Dec 10 China Life Ping An China Pacific China Taiping PICC* 2628.HK 2318.HK 2601.HK 0966.HK 2328.HK Ticker CS Rating NTRL RSTR OPFM NTRL NTRL TP Price (%) Up/dn Local Target Chg (%) 25.65 75.40 30.30 18.70 11.98 30.00 41.00 22.00 11.00 0.0 0.0 0.0 0.0 0.0 PE (x) T+1 EPS (local) T+1 T+2 1.57 3.59 1.86 0.81 0.70 2.00 4.43 2.21 1.06 0.81 EV (local)* T+1 T+2 14.23 35.18 17.27 12.59 3.37 16.03 40.96 19.09 14.81 4.66 VNB EV* P/EV* (x) multiple (x) (%) T+1 T+2 T+1 T+2 T+1 1.8 2.1 1.8 1.5 3.6 1.6 1.8 1.6 1.3 2.6 12.1 9.1 14.7 10.7 12.8 9.2 17.4 8.9 na na 14 13 14 31 28 VNB growth (%) T+1 17 18 25 25 na
17 16.4 21.0 35 16.3 18 23.1 -8 17.2
Relative to other cyclical sectors, the insurance industry is less impacted by any slowdown in the Chinese economy. The key drivers for insurance companies are: Demand for savings products (correlated to GDP/disposable income and demographics) Demand for insurance (i.e., related to wealth/income and other factors such as number of motor vehicles) Interest rates Insurance earnings are highly leveraged to interest rates (detailed below), with rising rates positive for insurers.
While there is some longer-term correlation to GBP growth, we highlight that the insurance industry (both life and P&C) has continued to grow reasonably robustly even during periods of weaker growth. P&C tends to be a little more cyclical as this is mainly (~75%) motor vehicle insurance in China; it reacts quicker to economic cycles.
Figure 50: Life insurance less correlated
Life insurance premiums (Rmb bn) and growth (% p.a.)
1,200,000 60%
Figure 51: while P&C a little more cyclical

P&C insurance premiums (Rmb bn) and growth (% p.a.)
450,000 400,000 40% 35% 30% 25%
growth (%pa)
1,000,000 Bancassurance (mainly single premiums) 50%
350,000
800,000
40%
300,000 250,000
600,000
10yr CAGR (%pa)
30%
200,000
20% 15%
400,000
20%
150,000 100,000 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
200,000
10%
50,000 0
2000 2001 Premiu ms 2002 2003 2004 Growth 2005 2006 2007 2008 2009 2010
0%
10yr CAGR (%pa)
Premiums
Growth
10yr CAGR (%pa)
Source: CIRC, Credit Suisse estimates
Source: CIRC, Credit Suisse estimates
Leverage to rising rates

The main driver for insurance companies, in our view, is the prospect of further interest rate increase and a steepening of the yield curve. In this tightening cycle, we have seen some flattening of the yield curve.
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Currently, the impact of continuously falling average (three-year) interest rates is negatively impacting the earnings of the insurers (2H10 in particular). In addition, the somewhat flat yield curve and high bank deposits are also posing some near-term margin strain on the insurers (i.e., forcing increased crediting rates without fully offset from higher yields). We believe both these headwinds will start to disappear from 2H11 onwards, with average yield starting to rise and we should also start to see a steepening of the yield curve at some stage. Liability reserves calculations are done using 750-day (three-year) moving average interest rates, which are still decreasing during 2H10, as highlighted below. Assuming flat rates from here, these moving average starts should be positive again in 2H11.
Figure 52: Change in 750-day moving average bond yields (%)
Cash rate 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 -0.03 -0.02 -0.02 -0.02 -0.02 0.00 1-yr bond -0.11 -0.12 -0.02 -0.03 -0.02 0.13 3-yr bond -0.12 -0.10 -0.03 -0.04 0.01 0.14 5-yr bond -0.12 -0.08 -0.03 -0.04 0.01 0.11 10-yr bond -0.11 -0.06 -0.02 -0.04 0.02 0.08
We deem interest rates will become a net positive from late 2011
Source: Reuters, Credit Suisse estimates
We deem a moderate tightening environment as the ideal scenario for the listed Chinese life insurers, with the following impacts specifically for insurers: (1) Medium term improving investment returns. Insurers effectively earn the spread between return on their assets (weighted to bonds) and what is credited to customers with higher spreads usually achievable in higher interest rate environments. (2) Mature guaranteed portfolios highly leveraged. On products where insurers guarantee the rate of return, the sensitivity to rising rates is material (and non-linear) as insurers do not need to pass through any rise in yields. Ping An and CPIC have large historical portfolios with guarantees averaging above 5% (pre-July 1999: 2.5% maximum guarantee cap). As such, these have the highest sensitivity to rising rates as highlighted in Figure 54. While the China Life pre-1999 portfolio is not part of the listed entity, it does sell low guaranteed products in rural areas (as does CPIC) and, as such, has some reasonably strong leverage as well. We note that the embedded value sensitivities in Figure 54 are for a 25 bp rise in investment yields, which could also lead to changes in risk discount rates and falls in capital values which offset this.
Figure 53: China 10-year bond yield up 57 bp in 2H10
CPIC quarterly EPS (2009-2010)
6.0%
Figure 54: with strong value metric sensitivity

Sensitivity to 25 bp rise in investment yield
12.5%
5.0%
10yr bond yield
10.0%
4.0%
7.5%
3.0%
5.0%
3yr bond yield
2.0%
2.5%
1.0%
0.0% EV
0.0% 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
VNB Ping An China Pacific China Taiping AIA
China Life
3yr bond yield
10yr bond yield
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Sensitivity differences are as follows: Embedded value Ping An and China Pacific have the highest sensitivity to rising rates, given they have the highest guaranteed portfolios (although we note they already assume rising bond yields over the next five years or so). China Life is the next highest as it has a portfolio of low guaranteed business sold in rural areas. Value of new business Given lower current profit margin (due to lower scale and distribution channel mix), China Taiping is the most sensitive to rising rates. Others are roughly similar.
Shorter-term headwinds from increased crediting rates We highlight that while longer term rising rates are positive for insurers, investors must also consider the returns available on competing products such as bank deposits (particularly important for bancassurance channel). As highlighted below, the five-year bank deposit rate is now around 5%, which is well above the 10-year bond yields (around 4%) and the credit rate on most life insurance policies.
Figure 55: Bank deposit rate exceeding credit rates
Ping An universal life crediting rate vs bank deposit rate
6.0
Bond yiled and deposit rate (%)
Crediting vs deposit rate (%)
Figure 56: and spread to earnings rate shrinking

10-year government bond (+150 bp) vs 5-year deposit rate
7.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
2.0 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11
Ping An individual
5 yr deposit
3 yr deposit
10 yr + 150 bps
5 yr deposit
As such, we deem that while this issue remains, insurers may be forced to raise crediting rates without full offset from rising asset yields on their own portfolios (noting large bond yield holdings). P&C insurance more impacted by shorter yields Property & Casualty insurers have positive leverage to bond yields in that insurance premiums are generally paid at the beginning of the year and hence the insurer earns interest on the premiums until it needs to pay the claim. Insurers generally try to match the duration of their assets and liabilities (asset liability management or ALM), with mismatches often penalised by regulators minimum capital calculations (which often involve stress testing the portfolio). As such, the type of business a P&C insurer writes will determine the key bond yield to examine. For short-term (tail) businesses such as motor insurance, the policy duration is usually one year and reporting delays are minimal (for the property part) and as such the one-year bond benchmark is likely to be the most relevant. For longer-term (tail) businesses, which are generally liability (also know as casualty) insurance, premiums are also generally annual, but the reporting delay can be long. The most common type of liability insurance is workers compensation (or employers liability) which insures for, among other things, personal injury while at work. The most extreme P&C insurers benefit more immediately from rising rates than their life insurance peers
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obvious example is asbestos, where the time period between exposure (when an employee is insured) and symptoms of related diseases developing can be as long as 40 years. Given property and casualty insurers invest in the shorter end of the yield curve (as 75% of their portfolio is short tail motor), they benefit more immediately from interest rate rises than their life insurance peers.
Figure 57: Chinese government bond yields have moved more at the short end
1yr bond 31-Dec-09 30-Jun-10 31-Dec-10 24-May-11 2011 YTD 2H10 Source: Reuters, Credit Suisse estimates 1.55 1.87 2.95 3.06 0.11 1.08 3yr bond 2.40 2.45 3.51 3.30 -0.21 1.06 5yr bond 2.95 2.69 3.56 3.58 0.02 0.87 10yr bond 3.60 3.33 3.90 3.95 0.05 0.57
For a motor portfolio, an increase in the one-year bond yield by 100 bp would lead to a profit increase of ~5% (assuming a combined ratio of 95%).
Figure 58: Three-year bonds 100 bp in 2H10
Government bond yields (%)
6.0%
Figure 59: with profit sensitivity high

Profit sensitivity to 50 bp change in investment yield
Short-tail interest rate sensitivity

5.0%
10yr bond yield
4.0%
3.0%
3yr bond yield
2.0%
1.0%
Premium Claims + expenses Underwriting profit Investment income Profit (pre-tax) Change in profit Capital Interest rate
@3% 100 95 5 1.5 6.5 50 3.0%
@4% 100 95 5 1.8 6.8 3.8% 50 3.5%
0.0% 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
3yr bond yield
10yr bond yield
Source: Credit Suisse estimates
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Companies Mentioned (Price as of 16 Jun 11) For details on all companies mentioned in this report, see Figures 9, 11, 12, 13, 15, 18, 39, 48, 49.
Disclosure Appendix
Important Global Disclosures Vincent Chan & Peggy Chan, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stocks total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stocks total return is expected to be in line with the relevant benchmark* (range of 10-15%) over the next 12 months. Underperform (U): The stocks total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stocks total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analysts coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analysts coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisses distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 40% (56% banking clients) Underperform/Sell* 10% (50% banking clients) Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
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20 June 2011 Asia Pacific / China Equity Research
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China Slowdown: Where To Strike When Hunting For Extraordinary Value

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20 June 2011 Asia Pacific/China Equity Research Macro

China Market Strategy

Debt threats: Sector and stock level impact

Figure 2: Credit-to-GDP gap from long-term trend

Source: PBOC, IMF, CEIC, BIS, Credit Suisse estimates

Figure 3: Declining operating cash flow

Figure 4: New supply of system funding

2.2 3.0 9.6

2.2 4.5 6.8 15.7

(% of GDP) 50 40 30 20 10 1990 1995 China Korea

China Market Strategy

Figure 5: High leverage

high investment ratio

Figure 6: Upside/downside to 12-month index targets

2000 India Brazil

2005 Indonesia Japan

Source: Datastream, Credit Suisse estimates

Figure 7: Chinese economy scenarios

Source: Credit Suisse estimates

Figure 8: China indices under different scenarios

Source: DataStream, Credit Suisse estimates

China Market Strategy

Debt threats: Sector and stock level implications

Credit overhang larger than expected

Key macro implications and possible scenarios

China Market Strategy

China Market Strategy

Earnings estimates and target price revisions

Source: Bloomberg, Credit Suisse estimates

Figure 10: Property sector

Figure 11: Wind equipment sector

Figure 12: Infrastructure sector

Source: Company data, Credit Suisse estimates

Figure 13: Dry bulk shipping sector

(%) FY11 FY12 (10) 0.0 0.2

FY11 FY12 FY11 n.a n.a n.m.

Source: Company data, Credit Suisse estimates

China Market Strategy

China Market Strategy

China Banks Sector

Earnings and target price changes

Source: Company data, Credit Suisse estimates

Figure 15: Gordon growth model derived target price

Source: Bloomberg, Credit Suisse estimates

More leveraged than meets the eye

Asset quality the key variable

China Market Strategy

Downgrading the bank sector

China Market Strategy

Asia Pacific / China Regional Banks

Agricultural Bank of China

County loan book more concerning; downgrade to UNDERPERFORM

Research Analysts Sanjay Jain 65 6212 3017 sanjay.jain@credit-suisse.com

Share price performance

Performance Over Absolute (%) Relative (%)

China Market Strategy

Daisy Wu 852 2101 7167 daisy.wu@credit-suisse.com

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Agricultural Bank of China 1288.HK / 1288 HK

China Market Strategy

Asia Pacific / China Regional Banks

Bank of China Ltd

Rising credit quality risks; tighter balance sheet liquidity