Post on 11-Nov-2014
November 29, 2012
China H-Share Strategy
2013 Outlook: Cyclical inch,
structural long march?
Portfolio Strategy Research
Entering a new era of reform for China equities
From cyclical to structural: Over the past five years, the key returns driver for
China equities has been the strong cyclicality of economic growth. Going
forward, we see less volatility in GDP growth and believe the market will shift
focus to structural reforms (vital to ensure the sustainability/quality of growth)
as the key driver of returns. We expect a mild cyclical recovery in 2013E with
8.1% GDP growth, which would be a welcome turnaround from the sharp
deceleration in 2012. As exports and domestic factors turn more favorable,
further policy loosening will be less likely on the monetary, fiscal, and property
fronts. We reiterate our mass market consumption theme, as we expect it to
be supported by a policy focus on safety nets/reducing wealth disparity.
We see slight earnings uptick; reform offers valuation upside
Our MXCN and HSCEI targets are 70.6 and 12,500 at end-2013E, respectively,
representing 18% upside for both. We forecast 2013/14E earnings growth of
9%/11% yoy (14%/13% ex banks), and a target valuation of 10.3X P/E by end-
2013E from 9.7X currently. We see a weaker start to the year (offshore market
expectations on near-term loosening and sharp recovery may be a bit high),
but better returns heading into 2Q13E on a pickup in exports and a kickoff of
reforms. Faster reform progress is the key upside risk to market valuation.
Thematic rather than beta sector picks; prefer A over H
We remain overweight insurance, brokers, retail, and healthcare, switch
our preference to diversified metals from cement, and are underweight
telecom and industrials. We introduce a new China reform basket
<GSSZCRFM>, and reiterate our preference for A shares over H shares.
High teens returns in 2013E driven by recovery in earnings and re-rating
Source: Bloomberg, Consensus Economics, GS Global ECS Research estimates.
Helen Zhu
+852-2978-0048 helen.zhu@gs.com Goldman Sachs (Asia) L.L.C.
Timothy Moe, CFA
+852-2978-1328 timothy.moe@gs.com Goldman Sachs (Asia) L.L.C.
Christopher Eoyang
+65-6889-1199 christopher.eoyang@gs.com Goldman Sachs (Singapore) Pte
Jason Sun
+86(10)6627-3187 jason.sun@ghsl.cn Beijing Gao Hua Securities Company Limited
Ben Bei
+852-2978-1220 ben.bei@gs.com Goldman Sachs (Asia) L.L.C.
Chenjie Liu
+86(10)6627-3324 chenjie.liu@ghsl.cn Beijing Gao Hua Securities Company Limited
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Goldman Sachs
Key Theams
Cyclical pickup
Structural reform
Property Policy
Mass market consumption
Sector preference
Overweight
Retail
Insurance
Brokers
Health care
Metals/mining
Underweight
Industrials
Telecom
10,925
+3%
11,880
+12%12,500
+18%
0
5,000
10,000
15,000
20,000
25,000
6
7
8
9
10
11
12
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Consensus GDP forecast GS GDP path forecast HSCEI - RHS
Cyclical
dominance
Structural
opportunity
Forecast
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 2
Table of contents
The bottom line: Mild recovery, more upside contingent on reforms 3
2013 macro backdrop: A bit more growth, fewer concerns 4
Three key issues to watch: Reforms, property policy, mass market consumption 9
Earnings to recover moderately, valuation expansion contingent on reforms 22
Liquidity and fund flow outlook should remain supportive 29
Sector preferences: More focus on structural factors 31
Implementation: Top picks and reform basket; A shares favorable 38
Agrochemicals: Increasing acreage, affordability 42
Alternative energy: Solar – 2013, the year of transformation; illuminating the path to profitability 45
Alternative energy: LED – 2013, investing selectively as demand cycle turns up 46
Alternative energy – Nuclear/Wind power: Lack of positive catalysts 47
Auto: Growth to sustain, prefer luxury segment 50
Banks: Constructive on cyclical stabilization; consumption-led growth a key for rerating 54
Cement: Sustained price recovery from 2Q13E 58
Coal: Structural downcycle ahead; Buy Shenhua on diversity 61
Conglomerates: Prefer stocks with earnings visibility 65
Consumer Staples: Competition remains in focus 68
Healthcare: Lacking catalysts, EPS growth to drive performance 71
Insurance: Mild growth for longer; favor return and value 74
Internet/Education: Mobile & e-commerce the focus 77
Machinery: Strong structural growth in railway equipment; slow cyclical recovery in construction equipment 80
Media: Value emerging in a thriving industry 83
Metals: Divergent supply growth; prefer copper/gold 85
Oil & Gas: Improving operating results, limited downside risks 88
Ports: Potential upside from tariff hikes 91
Power Utilities: Lower interest rate and coal oversupply; Buy IPPs 93
Real Estate: Volume positive priced in; further upside driven by price increase 96
Retail: A better outlook in 2013, but need to be selective 101
Technology: China vendors poised to extend market share gains 104
Telecoms: Healthy but decelerating growth; stabilizing competition 108
Tourism: Growing market driven by domestic demand 111
Transport: Prefer Airlines; cautious on Bulk Shipping 113
MSCI disclosure 117
Basket disclosures 117
Disclosure Appendix 118
All prices in this report are as of the market close of November 23, 2012, unless stated otherwise.
The authors would like to thank Tim Wang for his contribution.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 3
The bottom line: Mild recovery, more upside contingent on reforms
We forecast MXCN and HSCEI to rise to 70.6 and 12,500, respectively, by end-2013E,
representing 18% upside from current levels. We expect a weaker start to the year followed
by stronger returns later in 1H13E. We expect A shares to post higher returns than H shares
in 2013E.
1. Macro – a gradual pickup, less loosening. 2012 has been a challenging year with GDP
growth estimated at 7.6% from 9.3% in 2011. We expect GDP growth to rebound
slightly to 8.1% in 2013E, owing to both export and domestic improvement. Given that
the economy appears to be heading back on track, we expect monetary policy to
remain prudent with money supply growing steadily. We do not expect any interest
rate cuts, while a reserve requirement ratio (RRR) cut in early 2013 remains a
possibility. Fiscal policy should hold steady at 2% deficit/GDP (similar to 2012).
2. Three major themes to focus on: a) From cyclical to structural – In our view, the days
of roller coaster growth are behind us and investors will increasingly focus on reform
progress as the key driver of equities’ returns. While GDP growth can support earnings,
we think only reform can support a meaningful re-rating as China’s structural
sustainability improves. We recommend investors position their portfolio with reform
beneficiaries rather than just trade the beta cycle; b) Property policy is unlikely to
loosen in the near term. Thus, domestic investment cyclicals and developers may not
fare as well as they did in 2012; and c) Mass market consumption – We continue to
appreciate structural opportunities in lower-end consumption.
3. Earnings/valuation/liquidity – a slight pickup for each. Earnings should recover to
+9%/+11% in 2013E/14E from 0% in 2012E. Excluding banks (slowing growth due to
NIM and NPL pressures), the improvement would be more prominent, to +14%/+13%
in 2013E/14E from -7% in 2012E. We forecast valuation to move up slightly to around
10.3X P/E by end-2013E from the current 9.7X. More liquidity rotation to emerging
markets (EM) from developing markets (DM) is likely, given China’s low valuation and
positioning, while the supply overhang is not excessive. Any further re-rating beyond
our target would hinge on investors regaining confidence on reform outlook in 2H13,
while the potential for further cyclical re-rating may be more limited.
4. Index target and path – initial bumps, then better in 1H13; prefer A shares. Near term
we think H shares’ returns could be slightly challenged by a resetting of expectations,
as many offshore investors anticipate a cyclical stimulus post the leadership transition
in China, which we think may not be forthcoming. Moreover, the recovery may be
gradual rather than sharp. As growth solidifies and reform prospects draw nearer post
the March People’s Congress, we expect returns to improve into mid-2013E, while
2H13E will depend on whether the reform pace can positively surprise. Our end-2013E
MXCN and HSCEI targets are 70.6 and 12,500, respectively. Comparatively, we are
more upbeat on the A-share market, as we think cyclical expectations are lower, reform
expectations are minimal, and relative valuation/performance presents attractive entry
points for investors.
5. Sector allocation – Overweight insurance, brokers, retail, healthcare, and
metals/mining. We focus mainly on reform winners that may also benefit from cyclical
improvement and low valuations: insurance, brokers, and retail. We take profits on
cement and switch into metals/mining for more upside to our copper/gold estimates.
We remain overweight on healthcare. We are also underweight telecom and industrials.
6. Top picks and reform basket. We identify 12 top picks that are Buy-rated, and
introduce a new reform basket <GSSZCRFM>. We also reiterate our preference for A
shares over H shares in 2013E (relative performance, valuation, expectations).
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 4
2013 macro backdrop: A bit more growth, fewer concerns
Our GS Global ECS Research team’s macro view on 2013E China outlook is relatively
positive, with GDP growth reaccelerating to 8.1% and mostly centered on 1H13E. Although
inflation is not likely to be a significant policy constraint, we anticipate slightly more
prudent monetary policy, limited shifts in property policy, and a similarly proactive fiscal
policy with a structural focus. Medium term, our economics team forecasts 8.2-8.4% GDP
growth in 2014-16E underpinned by external demand recovery and gradual domestic
rebalancing. More details on our macro assumptions can be found in their report, “Asia
Economics Analyst,” dated November 29, 2012.
A better year – slight recovery in growth in 2013E
We forecast China’s GDP will grow 8.1% in 2013E vs. 7.6% in 2012E (Exhibit 1). More
importantly, the economy will see an acceleration in growth after a difficult 2012E that was
dominated by a significant deceleration of 1.7pp from 2011. We expect this acceleration to
come from:
1. Less drag on exports as external demand gradually picks up (our world GDP growth
forecast for 2013E is 3.3% vs. 3.0% in 2012E) (Exhibit 5);
2. Less inventory pressure, as indicated by declining PMI finished goods/PMI new order
ratio (Exhibit 3);
3. More domestic contributions (greater household consumption and accelerating infra
fixed asset investments (FAI)) (Exhibit 4).
Growth path: Recovering slightly in 1H2013E, stable in 2H2013E at around 8.2%
We expect GDP growth to rise slightly in 1H2013E then stabilize in 2H2013E due to:
1. Relatively low base in 1H2012 and inventory adjustment – sequential GDP growth
(seasonally adjusted) was 1.5% in 1Q2012, the lowest in recent years. Inventory
pressure (PMI index for finished goods) may ease slightly and the new supplement is
likely to boost growth recovery;
2. Infra FAI may accelerate further in 1H2013E, while manufacturing FAI growth remains
mostly stable and property FAI decelerates gradually in 2Q2013E (Exhibit 12);
3. However, our GDP growth forecast is slightly below Bloomberg consensus for
4Q2012E (GSe: 7.6% vs. consensus: 7.8%). Our economists think offshore market
expectations may be a bit high due to: a) further policy loosening or stimulus on both
the monetary and fiscal sides (2013 official M2 target may be lower than 2012 actual;
4Q12 fiscal expenditure may not be as strong as in past years due to less seasonality)
may not materialize as the market expects; b) surprisingly strong export growth in Sep-
Oct may not be sustainable given factors such as the US “fiscal cliff”.
Inflationary pressure may not be a big concern
1. We expect upward pressure on inflation to be limited in 2013E, and thus it should not
be a meaningful policy constraint. Commodity prices may be pressured by supply
factors and CPI will likely be slightly above 3% in 2H2013E, as forecast by our
economists (Exhibit 2);
2. Pricing deregulation reform may pick up in 2013E against the backdrop of low inflation
pressure.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 5
Further policy loosening may not be significant in 2013E
Monetary policy may lean towards more caution
1. Monetary policy should remain stable or decelerate slightly as China’s economy
appears to be on a path to recovery. We do not expect any interest rate cut (though
RRR cut possible in early 2013) unless growth meaningfully misses our forecasts, and
we believe M2 growth may be around 13%-14% (Exhibit 7). Total social financing will
likely be an emphasis in 2013E and the share of indirect financing (loans) may decline
further (Exhibits 13-14);
2. In the mid/long term, monetary policy will likely be more conservative due to structural
concerns (e.g., increasing labor and other production factors’ costs, cited from PBOC’s
quarterly report, 2Q2012).
Fiscal policy may be slightly proactive and more structurally focused
1. We estimate the fiscal deficit to be close to 2.0% of GDP in 2013E, representing an
absolute amount of slightly over Rmb1.0tn vs. Rmb800bn in 2012E (Exhibit 8);
2. Structurally support livelihood areas, urbanization, and ecological civilization – social
housing, infra FAI, education, health care, environmental protection, etc. (For further
details see our report, “Surfing the waves of China’s reforms,” dated August 13, 2012).
Property policy – We do not anticipate meaningful changes on the property policy front in
the coming quarters, but think expansion of property tax pilots is likely following China’s
central economic working meeting in December. We discuss property policy in greater
detail in the next section of this report.
FX outlook – We expect the CNY vs. USD exchange rate to appreciate to 6.10 by end-2013E,
implying 3.2% annualized appreciation as USD is projected to weaken substantially against
other currencies (Exhibit 11).
Should we be concerned about China’s potential growth? Urbanization is key
1. China’s new leaders think the biggest domestic demand will come from the
urbanization process (as per Vice Premier Li Keqiang’s paper in Qiu Shi Journal, April
2012). We think urbanization will likely support China’s long-term GDP growth (Infra
FAI + consumption upgrading), though the growth rate may moderate gradually
(Exhibits 9-10);
2. Treat the potential growth slowdown properly – Although we expect China’s GDP
growth to drop slightly, this should not be cause for concern as we think urbanization
will likely support China’s growth. Over the next decade, a 1% increase in urbanization
rate will ensure average annual GDP growth of 7.1%, as indicated in economist Jian
Xinhua’s paper, Empirical Analysis and Forecast of the Level and Speed of
Urbanization in China, Economic Research Journal, March 2010. Recent evidence
suggests that policymakers appear willing to tolerate growth at around mid-7% (we
think the official 2013 GDP growth target may be set at 7.5%, equivalent to its 2012
target, likely providing downside protection).Our economics team estimates trend
growth of 7.5-8.5% in the next few years, as detailed in their September 20, 2012 report,
“Shifting to a lower gear.”
Long term (2014E-2016E), we believe:
1. Global conditions will improve further and most of the investment boost post the
leadership transition may take place in 2014E, although start in late 2013E).
Investments should moderate in subsequent years as infrastructure spending eases
and fiscal policy becomes less expansionary;
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 6
2. There will be gradual rebalancing, as consumption holds up reasonably well and
slightly exceeds investment growth rates;
3. The government will continue with some of the incremental reforms it initiated on
social safety net, consumption subsidy, etc, which will help to support consumption.
Key risks to our assumptions
1. Sharper slowdown in external demand due to the US fiscal cliff or a prolonged
European recession;
2. Inflation risk triggered by QE3;
3. Infra FAI growth pressured by funding issues;
4. Worse-than-expected slowdown in manufacturing and property FAI.
Exhibit 1: GS’ forecast GDP growth path: Recovering
slightly in 1H13E, stable in 2H13E at around 8.2%
Exhibit 2: We expect upward inflation pressure to be
limited until 4Q2013E
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
7.6
7.9
8.08.2
8.2
6
7
8
9
10
11
12
13
14
15
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(%)
The period of the 17th CPC
The period of the 16th CPC
China - Real GDP (% chg yoy)
GS Forecast
The 18th CPC
2.0
2.5
2.8 3.2
3.4
-2
0
2
4
6
8
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
(%)
The period of the 17th CPC
The period of the 16th CPC
China - CPI (% chg yoy)
GS Forecast
The 18th CPC
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 7
Exhibit 3: Inventory pressure has alleviated slightly
Exhibit 4: GS macro forecasts summary
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Exhibit 5: China export may rebound further in 2H2013E,
along with global GDP growth
Exhibit 6: FAI growth tends to accelerate and peak in the
latter part of the 2nd and 3rd year of the political term
(2013-2014 for the period of 18th CPC)
Source: CEIC, GS Global ECS Research estimates
Source: CEIC, GS Global ECS Research
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
PMI finished goods inventory vs. PMI new order
Average
Inventory pressure
increasing
2010 2011 2012F 2013F 2014F
GDP by expenditure (growth) % yoy 10.4 9.3 7.6 8.1 8.4
Domestic demand % yoy 8.8 10.4 8.0 8.3 8.7
Consumption % yoy 7.9 9.6 8.7 8.7 8.7
Household % yoy 7.3 9.5 8.5 8.6 8.7
Government % yoy 9.3 9.8 9.2 9.0 8.8
GCF % yoy 9.7 11.3 7.4 7.9 8.6
GFCF % yoy 9.4 10.3 8.8 8.6 8.9
of which: manufacturing % yoy 10.3 13.7 9.6 8.5 8.8
of which: infrastructure % yoy 6.9 3.7 7.0 9.9 10.0
of which: property % yoy 12.7 12.1 6.4 4.4 4.6
Inventory % yoy 17.1 30.5 -14.0 -7.0 2.0
Net exports % yoy 47.2 -20.3 -7.9 0.0 -0.4
Net exports PPT 2.0 -0.8 -0.2 0.1 0.0
Exports % yoy 19.2 12.1 5.8 5.6 9.0
Imports % yoy 13.6 16.9 7.0 6.0 10
-3
-2
-1
0
1
2
3
4
5
6
-30
-20
-10
0
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China - Exports of Goods/Services (% chg yoy)
World - Real GDP (% chg yoy, RHS)
(%) (%)
GS Forecast
0%
10%
20%
30%
40%
50%
60%
Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun
15th Party congress term 16th Party congress term 17th Party congress term
15th Party Congress
16th Party Congress
17th Party Congress
National
Congress
NationalCongress
NationalCongress
Transition Period
15th Party Congress
16th Party Congress
17th Party Congress
National
Congress
NationalCongress
NationalCongress
15th Party Congress
16th Party Congress
17th Party Congress
National
Congress
NationalCongress
NationalCongress
1997-2002
2007-2012
2002-2007
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 8
Exhibit 7: Monetary policy may be a bit more cautious in
2013E after some loosening in 2012
Exhibit 8: Fiscal deficit as % of GDP should be about 2.0%
in 2013E
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Exhibit 9: Urbanization vs. GDP growth (Japan case) –
GDP growth declined along with a slowdown in
urbanization process
Exhibit 10: Same story for China? Historically, it would
appear to make sense
Source: UN, CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: UN, CEIC, Gao Hua Securities Research, GS Global ECS Research
-50
450
950
1,450
1,950
0
5
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 2012
Monthly loan (RHS) Credit yoy
M2 yoy M1 yoy
(%) (Rmb bn)
2.5%
2.3%
2.6%
2.2%
1.3%1.2%
0.8%
-0.6%
0.4%
2.3%
1.7%
1.1%
2.0% 2.0%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
2,000
4,000
6,000
8,000
10,000
12,000
Fiscal revenue
Fiscal expenditure
Fiscal deficit as % of GDP
0
2
4
6
8
10
12
14
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
GDP growth
Urbanization Ratio changes
(%)
(UN forecast)
Urbanization process vs. GDP growth (Japan case)
-2
0
2
4
6
8
10
12
14
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
GDP growth
Urbanization Ratio changes
(%)
(UN forecast)
Urbanization process vs. GDP growth (China case)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 9
Exhibit 11: Slower pace of Rmb appreciation
Exhibit 12: FAI breakdown and path, as estimated by our
economists
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Exhibit 13: Total social financing growth stabilized in
recent months but remains at fairly high levels
Exhibit 14: As a % of total social financing, the share of
indirect financing (loans) is declining, while the share of
direct financing (bonds etc.) is rising gradually
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Source: CEIC, Gao Hua Securities Research, GS Global ECS Research
Three key issues to watch: Reforms, property policy, mass market
consumption
We identify three key issues that may move markets and affect sector performance in 2013:
1. Reform progress: Key to equities re-rating and sustaining growth over time; we think
progress will accelerate and positively surprise, favoring certain reform-beneficiary
sectors.
6.25
6.20
6.15
6.10
5.80
5.90
6.00
6.10
6.20
6.30
6.40
6.50
6.60 China FX (Rmb vs. USD)
(Rmb vs. USD)
GS forecast
0
10
20
30
40
50
60
2008 2009 2010 2011 2012 2013
Headline FAI Manufacturing FAI
Infrastructure FAI Property FAI
(%)
GS Forecast
0
5
10
15
20
25
30
Jan-11 Jul-11 Jan-12 Jul-12
M1 yoy growth
M2 yoy growth
Total amount of social financing yoy growth - RHS
(%) (%)
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Others Non financial institution equities
Corporate bond Bank acceptance
Trust loans Entrusted loans
Forex loans Rmb loans
As % of total social financing
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 10
2. Property policy: Any loosening could catalyze developers and upstream sectors – but
we a see low probability of such moves in the coming quarters.
3. Mass market consumption: Continuous policy introduction on safety nets, etc, will
likely be a high priority for the government. We see ongoing divergence between mass
market and luxury consumption trends and favor the former.
Issue #1: A new era – from cyclical to structural
China equities have been trading mainly on cyclical factors in the past 4-5 years: GDP
growth has seen significant revisions, with Consensus Economics moving from ~8% in
2006 to about 11% in 2007, falling back to <8% during the financial crisis, and then
recovering to double-digit levels in 2010 before correcting again to <8% in 2012.
Investors have familiarized themselves with such trends and profited from this mainly
by timing the cycle and making beta calls.
However, we are concerned on the sustainability of the current growth model. We
find investors are increasingly worried about issues such as wealth disparity, SOE
dominance, dependence on investment, and the widespread use of non-market
intervention to influence the economy. In our view, investors are no longer rewarding
cyclical upticks in the way we have seen in the past few years. Ramping up short-term
growth at the expense of longer-term structural risks is less welcomed, which makes
strategic sense.
Cyclical movements will be less volatile in the future, in our view. We believe we are
entering an era where the volatility in growth may diminish and GDP revisions may be
limited to <1pp or perhaps even <0.5pp on either side, rather than the 3pp seen in
recent years. Trend growth has slowed (see our economics team’s report, “Shifting to
a lower gear,” dated September 20, 2012 for details) to 7.5-8.5% in the next few years,
and policymakers are less willing to prioritize the quantity of growth than they used to.
This implies that the cyclical impact on earnings will be less dramatic than it has been
in the past. Our economics team forecasts a fairly stable growth trend over the next 3-4
years.
Reform will be key in the coming years. We believe reform will become the key driver
on China equity performance going forward. 1) earnings growth will increasingly
depend on reforms rather than just cyclical factors (e.g., interest rate deregulation’s
impact on banks or downstream pricing reform impact on oil); 2) reform will be
essential to support any sustained and meaningful valuation re-rating (we believe the
30% de-rating since 2010 relative to regional and global indices has been largely due to
market concerns over the lack of reforms, leading to bigger structural issues).
Why are reforms essential and hopefully imminent? In our view, public hopes for
reforms are significant and investors appear to realize that the problems associated
with the unsustainable current model (i.e., reliance on investment and exports,
excessive use of resources with significant environmental and other side effects,
worsening social inequality/instability risks, inefficient resource allocation leading to
stronger SOEs at the expense of private companies, etc.) have been exacerbated.
While some structural stresses have not worsened recently, we have only seen them
‘grow out of the problem’ in a few areas, but have not yet seen any permanent
solutions or reforms (e.g., local government debt/GDP ratio is declining, but there is
not yet much sustainable tax flow for local governments and limited advancement of
municipal bonds). Solutions have been identified but have been delayed due to the
leadership transition. With the new leadership in place for the next decade and a full
transition (Xi Jinping takes over the party and the military), we expect to see a
meaningful pickup in the pace of reforms.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 11
A shares have already made the shift; H shares will follow: Based on our discussions
with A-share and offshore investors, we believe that reforms have already become the
predominant focus of A-share investors and the reform outlook is now more important
to A-share performance than cyclical factors. In contrast, H-share investors remain
more focused on cyclical factors. We believe this will change gradually and H-share
investors will converge towards the A-share side.
We think A-share investors have lower expectations than their H-share counterparts.
The contrast is greater on the cyclical views, where A-share investors expect limited
growth rebound, while H-share investors are more upbeat in anticipation of further
policy loosening following the Party Congress. Our economics team’s forecasts are
somewhere in between both views; it expects mild reacceleration (i.e., less bearish
than A-share investors’ view), but also less rebound near term than consensus on
limited further loosening. Both A-share and H-share investors have minimal
expectations on reforms.
Cyclical shifts mixed; reform upside: On the cyclical side, we think offshore investors
may be slightly disappointed, while A-share investors may see some positive surprises.
However, neither beats nor misses will likely be of significant degree. We think the key
factor to focus on will be potential upside on reform progress off a very low base. Our
August 13, 2012 report, “Surfing the waves of China’s reforms” outlines in detail the
seven key areas of reforms we expect to see. Progress so far has been quite limited.
Exhibit 15: GDP volatility has been very high in the past 5
years; earnings usually lags GDP growth changes by a
few months
Exhibit 16: GDP revisions appear to be significantly
correlated with index performance, suggesting cyclical
factors have dominated since the global financial crisis
Source: Consensus Economics, I/B/E/S, GS Global ECS Research
Source: Consensus Economics, MSCI, GS Global ECS Research
2
4
6
8
10
12
14
2
3
4
5
6
7
8
9
10
11
2010
2009
2009
2007
2008
2012
20122011
2011
2010
Consensus GDP growth (%) Consensus MSCI China EPS integer (RHS)
2013
2013
2006
2005
2008
2007
20062005 0
20
40
60
80
100
120
6
7
8
9
10
11
12
Consensus GDP growth (%) MXCN - RHS
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 12
Exhibit 17: China’s relative valuation vs. other markets
has compressed in the past few years, likely due to a lack
of reforms and rising structural concerns
Exhibit 18: However, China’s relative earnings growth vs.
other markets has not suffered to the same extent
Source: FactSet, MSCI, I/B/E/S, GS Global ECS Research
Source: FactSet, MSCI, I/B/E/S, GS Global ECS Research
Exhibit 19: Reform impacts vary widely by segment and may differ over time
Source: GS Global ECS Research estimates
(60)
(40)
(20)
0
20
40
60
80
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
12m P/E difference- MXCN vs MXAPJ, MXWD, MXWO and MXEF
MXCN vs MXAPJ MXCN vs MXWD MXCN vs MXWO MXCN vs MXEF
(%)
-10
-5
0
5
10
15
20
25
30
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Fwd EPS Growth Rates of MXCN, MXAPJ, MXWD, MXWO and MXEF
MSCI China Fwd EPS Growth Rate MSCI APXJ Fwd EPS Growth Rate
MSCI AC World Fwd EPS Growth Rate MSCI World Fwd EPS Growth Rate
MSCI Emerging Market Fwd EPS Growth Rate
(%)
Structural reforms in China Reform earnings impact by sector Valuation impact
Pricing deregulation Insurance Alt' energy
Tax reforms Railway Gas
Health care Property
Oil Coal
Social safety net & healthcare Airlines Banks
Financial sector deregulation Consumer retail Auto
Financial sector innovation Brokers
Railway restructuring Utilities
Metals and
minings
Energy saving & environmental
protection
Short term
depends on
direction of
earnings impact
Long term re-
rating
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 13
Exhibit 20: The seven different economic reforms we identified may face varying degrees of obstacles in
implementation
Source: GS Global ECS Research
Exhibit 21: Potential reforms on the seven fronts
Source: Xinhua Net, Hexun.com, GS Global ECS Research
Key reforms Rationale and agenda
Incremental/
reallocation Beneficiaries Losers GS comment on ease of implementation
Pricing deregulation
Move from controlled towards market
pricing for a variety of products and
services
RealloactionsDownstream oil,
IPPs
Energy consuming
industrial co's
Relatively straight forward, but may have negative
implications to many energy intensive industries.
Tax reformsVAT/BT reform; resource and property tax
expansion, etc.Realloactions
Consumers/house
holds, services
companies, etc
Property owners,
local govts (land
sellers), pollutive
industries, MOF
Reforms that cut taxes are easier to implement (less
direct impact on vested interest groups). Tax
reforms like property and resource taxes are harder.
Energy saving &
environmental
protection
Adhere to higher standards; reduce
pollution and congestion; encourage non-
fossil energy sources
Both
The general
population;
makers of energy
efficient products
Auto, Materials,
Utilities, Energy
Not difficult to implement, but need to consider
other reforms in affected sectors and enterprises'
profitability (for example IPPs are already
unprofitable, may not be able to bear more costs)
Social safety net and
healthcare
Increase wages; enhance safety nets;
improve healthcare coverage
breadth/depth, delink medicine and services
Both
Health care,
Consumer (mass
market)
Price-focused drug
makers, MOF
Limited pushback in terms of enhanced safety nets.
Healthcare reforms are tough in the sense of
separating medicine and services for hospitals.
Financial sector
deregulation
Move towards interest rate deregulation;
broaden scope of insurance investment
areas, etc.
Realloactions
Insurance,
Brokers,
depositors &
borrowers
Banks
Need to achieve balance between banking system
development and its impact on the broader macro
economy
Financial sector
innovation
To allow more financing channels for SME;
to prepare for RMB internationalization;
develop capital markets products, etc
Incremental
Banks, Insurance,
Brokers,
Consumers
Broader trend is clear with no real losers/major
pushback. Key is to engrain concepts of risk and
such and to take things at the appropriate pace.
Railway restructuring
Separate regulator and operators; make
system commercially viable and sustainable
on market oriented metrics
RealloactionsTransport, Cap
goods
Short-term,
railroad
passengers
Railroad passenger tariffs may rise to achieve more
sustainable returns. MOR organizational legacy and
leverage are challenges.
Reform topics Potential reforms
Further adjustments to downstream oil pricing regime
Expansion of gas pricing mechanism to more provinces
Withdrawal of contract coal price system
Gradual loosen price controls over a number of other resources and services
Further expansion of VAT/BT trial to more provinces
Coal resources tax charged on price instead of volume
A number of other tax reforms such as environmental tax, Insurance tax deferral pension,
windfall tax, and most notably the property tax, may be introduced in the coming years
Much closer implementation of existing policies is needed as well as implementation of new
requirements.
Potential introduction of carbon credits, environmental tax, etc.
Expansion of auto purchase restriction
Mandated income increase and adjustments to minimum wage
Expansion of healthcare reform and separate hospital revenue from consultation and medicine
Expansion and better implementation of Hukou reform
Further increase of public expenditure on social welfare
Further interest rate deregulation
Expansion of insurance sector investment scope
Allow brokers to take on higher leverage
Possible development of China hedge funds from new 'Mutual Fund Law'
Trial of life insurer tax deferral scheme
Additional exchange platforms, ETF and derivative products
Acceleration of development of corporate bond and muni bond markets
Potential new 3rd boards may be introduced, as well as international board.
Separation of railway regulatior, asset owner and operator
Encouraging private investment into railroad
Energy saving and environmental
protection
Pricing deregulation
Tax reform
Railway system reform
Social safety net & health care
Financial sector deregulation
Financials sector innovation
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 14
Exhibit 22: Political handover – structural reforms may be
possible post early 2013
Exhibit 23: 3rd plenary session has historically brought
significant economic reforms (the next is in October
2013)
Source: Xinhua Net, Hexun.com, GS Global ECS Research
Source: Xinhua Net, Hexun.com, GS Global ECS Research
Exhibit 24: We have seen selective alleviation of structural pressures in 2012, but mainly from ‘growing out of the
problem’ perspective rather than structural fixes. We hope to see more reforms
Source: GS Global ECS Research estimates
Oct 2012
Nov
Dec
Jan
Feb
Mar
Apr
MayJun
Jul
Aug
Sep
Oct
Nov
No major policy expected, but
cyclical policies
possible
Possible structural reforms plus
additional cyclical
policies
We expect no major policy move during
political handover
period, but we see
structural reform
potential in 2H2013
CEWC
2nd Plenary
Session
National
People's
Congress
3rd Plenary
Session
CRWC
18th Party
Congress and
1st Plenary
Session
Date Period Key topics and impacts
Dec-7811th CPC central
committee
The meeting managed to turn the Party's focus back to the construction
of socialist modernization. Deng Xiaoping formally launched the reform
and opening-up policy, which marked the start of next a few decades of
fast economic development in China. Household responsibility system
was introduced in rural areas as well.
Oct-8412th CPC central
committee
The meeting marked the expansion of economic reform focus from rural
to urban areas and the whole economy. The government also decided to
separate ownership and management of SOEs and boost of private
sector
Nov-9314th CPC central
committee
The meeting set up the blueprint of reform toward a more market driven
socialist economic system. Further reforms of SOE operational
mechanism was also a focus.
Oct-9815th CPC central
committee
The meeting focused on rural issues and raised the goal of constructing
socialist new countryside by 2010. Housing reforms was also initiated
within the same year, leading to the dramatic expansion of private
housing market.
Oct-0316th CPC central
committee
The meeting carried out a series of policies to perfect the socialist
market-based economy system, and boosted the development of capital
market and financial system.
Oct-0817th CPC central
committee
The meeting focused on the rural reform, planed more investment in
rural areas to improve healthcare, education and other infrastructures.
This session regulated the rural land circulation, which was a key issue
at that time
2012 status check 2013E outlook Reform agenda
ASPs have been stable and Retain firm control over ASP Extend property tax trials
controlled Continue to reduce local Accelerate urbanization and hukou reform
Land sales % of govt income govt reliance on land sales to improve end user demand
has fallen vs 2011's peak
Local government debt / GDP Potentially slightly more Make more progress towards municipal
ratio has been declining to support infra FAI push bonds and corporate bonds
Bank lending has been stable but but should not grow faster than
funding has come from other areas nominal GDP
like corporate bond issuance
Investment as a % of GDP has been No significant changes expected Tax reforms and other pro consumption
stable Infra FAI will accelerate while measures
Capital stock is reasonable but flow property and mfgr FAI will likely
is unsustainable longer-term slow
Limited progress in 2012 on preset High hopes for more progress on More advancement on previously
agenda such as downstream oil a variety of fronts esp in the identified key reforms
new mechanism, but some early commodities and financials
steps on gas trials; interest rates space
No substantial improvements but Difficult to achieve much within Healthcare reform; pension reform,
does not seem to be getting worse a short time but hope to see social housing; benefits adjustments;
given that property prices were more progress on safety nets, hukou reform, etc.
stable and low end wages are etc.
rising
LGFV leverage
Over investment /
reliance on FAI
Deregulation vs price
control / admin measures
Wealth disparity
widening
Property
bubble/economic reliance
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 15
Exhibit 25: A vs. H views on cyclical vs. reform – we think
A-share investors may see mild positive surprises, while
H-share investors may not see as much stimulus as they
had expected
Exhibit 26: A shares have continued to de-rate, while H
shares have risen on cyclical expectations recently
Source: GS Global ECS Research estimates
Source: GS Global ECS Research estimates
Issue #2: Property policy and investment implications – don’t expect
too much
One common question investors have been asking is whether we think the new leadership
will loosen policy towards the property sector after the handover is completed. This may
not be via explicit policy changes, but could manifest in the form of implicit acquiescence
to loosening of home purchase restrictions (HPR), for example. The rationale is that any
loosening may underpin developers’ stock performance and that of its upstream sectors as
well. Thus this is essential to 1H13 sector allocations. We do not think this will happen
because:
The property sector is fragmented and difficult to control, especially in the near term.
We think policy signals from the government may have unintended effects on the
market. For example, average selling prices (ASP) rose in mid-2012 as buyers
concluded that prices would no longer decline. It is difficult to prevent such volatility if
the policy shifts again, and any such volatility may undermine policy credibility and
social stability. Moreover, property sector fragmentation means that policy shifts are
usually met with several quarters of delays before investment activity happens,
suggesting this is not the easiest area to use as a near-term cyclical policy lever.
The need to loosen policy towards property is reduced by a recovering export picture
and more contribution from infra FAI. Property has become a counter-cyclical indicator,
and policies may more likely loosen if we approach a hard landing scenario, for
example.
Vice Premier Li Keqiang’s bias is towards supporting social housing to sustain activity.
As social housing completion targets ramp up, its contribution to offsetting potential
commodity housing slowdown should increase.
HPR is more effective in curbing demand/speculation than property tax, and thus
cannot be removed/phased out. For example, HPR cities like Shanghai and Beijing
have seen much better controlled trends vs. Chongqing (property tax only). We expect
property tax trials will extend to more cities in 1H13E, with some locations possibly
levying property taxes for existing inventory and not just new sales.
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Cyclical acceleration Reform progress(favors valuation)
Cyclical acceleration
(favors earnings)
Cyclical deceleration
Reformparalysis
H-share investors
A-share investors
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
12m fPE premium: CSI300 vs MXCN
A/H valuation premium Average
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 16
New starts activity is recovering and may in turn boost FAI by late 2013E. While new
starts remain negative, we estimate that better property sales over time will translate
into positive starts (as it has already boosted land sales recently) and expect some
property FAI rebound by 2H13E. We expect a sharp slowdown in property FAI in 1H13E
(due to completion of new starts recorded in 2011), but this will likely be offset by high
infra FAI. If property FAI recovery is lackluster in 3-4 quarters, our property team thinks
that any late-stage policy adjustments may include targeted loosening on mortgage
rates, etc., in the non-HPR lower tier cities by end-2013E.
Exhibit 27: FAI forecast path – despite a dip in property
FAI in 1H13, we do not expect property loosening
Exhibit 28: Property as a % of total FAI is still over 20%
Source: CEIC, GS Global ECS Research estimates
Source: CEIC, NBS, GS Global ECS Research.
(30%)
(20%)
(10%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jan
-09
Mar-
09
May-0
9
Ju
l-09
Sep
-09
No
v-0
9
Jan
-10
Mar-
10
May-1
0
Ju
l-10
Sep
-10
No
v-1
0
Jan
-11
Mar-
11
May-1
1
Ju
l-11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Ju
l-12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May-1
3
Ju
l-13
Sep
-13
No
v-1
3
Property FAI yoy growth (quarterly) GFA new starts ytd yoy growth - RHS
GFA completion ytd yoy growth - RHS GS forecast
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Manufacturing % of total Infrastructure as % of total
Real estate % of total Other % of total
ytdfigure
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 17
Exhibit 29: Property policies have already shifted towards the more dovish side recently but we do not expect more
loosening for the coming quarters
Source: MSCI, GS Global ECS Research, Gao Hua Securities Research
Exhibit 30: Developer and mortgage loans are still under
scrutiny and have only risen slightly since 2010
Exhibit 31: Affordability (monthly mortgage/monthly
household income) is still not great especially in higher
tier cities
Note: Tier 1 cities refer to Beijing, Shanghai, Shenzhen, and Guangzhou; Tier 2 cities refer to Wuhan, Chongqing, Tianjin, Hangzhou, Chengdu, Nanjing, Xi’an, Shenyang, Xiamen, and Changsha; Tier 3 cities refer to Hohhot, Dalian, Ningbo, Hefei, Fuzhou, Nanchang, Jinan, Qingdao, Zhengzhou, Nanning, Lanzhou, and Haikou.
Source: CEIC, Gao Hua Securities Research
Source: Gao Hua Securities Research
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
-20
-15
-10
-5
0
5
10
15
20
Relative performance of offshore property index vs MSCI China (LHS)
NAV prem/disc (%) (RHS)
Price index
In Jan, the
State
Council held
a executive
meeting and
announced
8 property tightening
measures.
Around 15
cities had
announced
home
purchase
restrictions
policies as of end 2010.
In Feb, April,
July, PBOC
hiked
interest
rates,
respectively.
More cities
implemented
home
purchase
restrictions in
mid 2011.
Zhuhai and
Zhongshan
put Ceiling
on property
prices.
Shanghai and
Tianjin, etc.
lowered the bar for ordinary
properties.
PBOC officially
announced that
it will pledge
support for first-
home buyers.
PBOC lowered
interest rates in
June and July,
respectively.
In late Jan,
Chongqing and
Shanghai
announced
property tax tightening.
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2005 2006 2007 2008 2009 2010 2011 Sep 2012
Developer loan
Mortgage loan
Developer loan as % of total loan outstanding
Mortgage loan as % of total loan outstanding
Rmb bn
30%
40%
50%
60%
70%
80%
90%
100%
110%
Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12
China Tier 1 cities
Tier 2 cities Tier 3 cities
3-m mov. avg.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 18
Exhibit 32: Property taxes will likely expand in coverage to more cities in 2013E, and may
extend beyond Shanghai or Chongqing implementations to include existing inventory in
some locations
Source: Xinhua Net, GS Global ECS Research
Exhibit 33: We believe HPR is more impactful in cooling the property market than property
taxes, and may not be phased out in the foreseeable term
Source: Gao Hua Securities Research
Property tax pilot plan Shanghai version Chongqing version
Calculation base 70% of the transaction price Transaction price of the properties
Tax rate
0.4% or 0.6% based on whether the transaction price for properties levied is higher than twice that of last years' annual average
price of newly built commodity properties
0.5%, 1.0%, or 1.2% based on the thresholds that the
transaction price for properties levied is higher than four times that of the annual average price, between
three and four times or below three times.
Conditions for exemption and reduction
60 sqm per person will be exempt from paying
property tax
Detached villa properties may have 180 sqm at most
for tax exemption and high-end properties may have
100 sqm at most for tax exemption.
Effective date Since Jan 28, 2011 Since Jan 28, 2011
Applicable properties Newly purchased unit only
(1) Detached villas (no matter newly purchased or
existing holdings);
(2) Newly purchased high-end properties, with prices
higher than twice of Chongqing's ASP in the past 2
years
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Se
p
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Se
p
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Se
p
2012 monthly sales volume by city(mn sqm)
Beijing(HPR only)
Shanghai(HPR + property tax)
Chongqing(Property tax only)
2008-2011 monthly average high 2008-2011 monthly average low
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 19
Exhibit 34: GFA new starts may start to improve by end-
2012E, but will remain negative in 1H13E
Exhibit 35: Gross floor area (GFA) completions will also
slow meaningfully in 1H13E, which does not bode well
for property FAI near term
Source: CEIC, GS Global ECS Research estimates
Source: CEIC, GS Global ECS Research estimates
Exhibit 36: We expect social housing completions to increase despite a decelerating starts
pace... If 23.5mn units are started in 2011-13E, this would leave around 6mn per year in
2014-15E
Source: NBS, MOHURD, GS Global ECS Research estimates
Exhibit 37: Social housing will take a larger % of total residential housing supply in coming years
Source: NBS, CECI, MOHURD, GS Global ECS Research estimates.
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
New starts growth (base case) New starts growth (bear case)
New starts growth (bull case) New starts growth (NBS)
-10%
0%
10%
20%
30%
40%
50%
Completions growth (base case) Completions growth (bear case)
Completions growth (bull case) Completions growth (NBS)
Year
starts
(units)
completion
(units)
% of residential
completions
2010 5.9 1.8 12%
2011 10.0 3.0 17%
2012E 7.5 5.4 26%
2013E 6.0 10.0 38%
Total 29.4 20.2
Social housing
Residential housing
Growth
rate
Commod
housing
Growth
rate
Social
housing new
starts
Social
housing
completed
Growth
rate
Other
residential
housing
Growth
rate
Growth
rate
2010 885 7% 612 3% 336 107 150 1,754 7% 6% 12%
2011 1,198 35% 717 17% 562 166 55% 109 -27% 2,190 25% 8% 17%
2012E 1,258 5% 753 5% 422 301 81% 109 0% 2,420 11% 12% 26%
2013E 1,321 5% 790 5% 337 550 83% 109 0% 2,770 14% 20% 38%
Non-
residential
Floor space
completed
(sqm mn)
Total floor
space
completed
Social
housing
% of
total
Social
housing %
of
residential
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 20
Issue #3: Consumption sectors will continue to diverge – mass
market will be the winner
The third issue to watch for is whether there will there be a big cyclical rebound in the
luxury segment as the economy stabilizes. In this regard, we reiterate our view that the
structural opportunity is on the mass-market side rather than on the higher end.
The economic rebound will likely be mild rather than sharp. Unlike the past cycle
when GDP growth rebounded by 2-3pp, the rebound we expect is only 0.5pp, which
may not support a sharp cyclical demand recovery for high-end discretionary items.
Anti-corruption is a top priority. Structurally, the 18th party congress has identified
corruption as a significant threat to stability and intends to fight this. We think this may
pose headwinds to luxury demand over time.
Reducing the wealth gap and raising low-end income/safety nets will support low-end
consumption. In contrast, structural changes favor the lower-end segment across
products and services (for further details see our report, “Mass market consumption –
China’s structural opportunity,” dated May 4, 2012).
Divergence will create alpha opportunities. We see significant intra-sector stock-
picking opportunities to be derived from this theme.
Exhibit 38: Income gap widening is a key issue that needs
to be addressed
Exhibit 39: Low income groups have recently started to
enjoy higher wage growth, as well as more tax cuts
Source: CEIC, GS Global ECS Research
Source: CEIC, GS Global ECS Research
-
1
2
3
4
5
6
7
198
5
198
6
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
Income multiple (high income class vs low income class)
Income multiple (high income class vs mid income class)
5%
7%
9%
11%
13%
15%
17%
19%
2003 2004 2005 2006 2007 2008 2009 2010
Low income level Middle income level High income level National average
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 21
Exhibit 40: The government has tried various measures to resolve income disparity and could potentially introduce
more policies
Source: Media reports (China.com, Sina.com etc), GS Global ECS Research
Exhibit 41: Mass market demand outlook is consistently upbeat across sectors
Source: GS Global ECS Research.
Income disparity related reform/policies
Started / on progress
Area Details
Income tax Lift threshold and lower tax rate for majority tax payer; increase tax rate of high income class
Minimum wage Meaningful annual increase of minimum wage set by govts
Social housing Massive social housing projects started to provide affordable residence for mid to low income class
Property tax To collect tax from households whose living environment exceed basic needs
Social welfare scheme Better and larger coverage to rural residents and migrant workers
Healthcare reform To separate hospital revenue from consultation and medicine
Potential reforms Details
Gray income regulation Set up framework to regulate gray income and make compensation system more transparent
Wage of govt/ social units/
monopoly industries employees Set guidelines and gradually reduce the gap with other commercial areas
Luxury tax To collect tax from sales of luxury goods
Pension reform Changing retirement age; seek higher return for pension investment; more private pensions etc
Hukou reform Further lower the huddle for rural residents to obtain Hukou in city, except already crowded mega cities
Consumer types
SectorMass
market
Core mid
class
Aspirational
luxury
Movers &
shakers
Internet
Tourism and travel
Media
Auto
Healthcare
Handsets/PC
Restaurants/hotels
Casino and gaming
Branded apparels
Retail, dept stores
F&B/ HH products
Property
Sportswear
Telecom services
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 22
Earnings to recover moderately, valuation expansion contingent on
reforms
We forecast MXCN earnings growth of 9% in 2013E, recovering from 0% in 2012E largely
due to cyclical sectors’ reacceleration offsetting the slowdown from banks. We also extend
our forecast to 2014E at 11%. Valuation may expand to 10.3X P/E from 9.7X currently. In
combination, we forecast end-2013E HSCEI target of 12,500, 18% upside from current levels.
We think the market’s near-term focus will be on cyclical factors, and thus returns may be
muted through the beginning of the year. As we approach spring, the combination of our
expectations of global growth reacceleration and prospects of China reforms should
underpin stronger performance. A better-than-expected pace of reforms, should it
materialize, could catalyze further valuation re-rating into 2H13E.
Earnings growth to recover in 2013E, supported mainly by cyclical
sectors
2012 has been a year of earnings deceleration: Earnings of Chinese enterprises decelerated
meaningfully in 2012 on lackluster global demand (in 2Q-3Q) and much slower GDP growth
(almost a 2pp deceleration in one year). MSCI China 2012E EPS integer has been revised
down by 11% ytd, led by cuts in materials, insurance, and consumers. Utilities and banks
were the only two sectors that enjoyed upward earnings revisions ytd, owing to weak coal
prices and resilient margins.
However, we believe earnings will bottom in 2H12E, as:
1. GDP growth forecast has stabilized, and this has historically been a leading indicator
of earnings estimates by several months.
2. High frequency data picked up recently (like industrial enterprises’ profit and SOE
profit), pointing to stabilization or a mild recovery in cyclical sectors’ earnings. De-
stocking appears to be underway and is again heading towards normalized levels.
3. Earnings revision sentiment, another barometer for measuring the earnings trend,
bounced off its trough in July.
4. Magnitude of earnings cuts also contracted, as some larger cap sectors (like banks)
have seen mild upward revisions, offsetting cuts in other areas.
Exhibit 42: Ytd earnings cuts have been widespread
across almost all sectors
Exhibit 43: In the past month, however, some sectors’
forecasts have stabilized
Source: MSCI, I/B/E/S, FactSet, GS Global ECS Research
Source: MSCI, I/B/E/S, FactSet, GS Global ECS Research
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Pro
pe
rty
I.T.
Uti
liti
es
He
alt
h c
are
Insu
ran
ce
Ba
nks
Ind
ustr
ials
En
erg
y
Te
lco
s.
Co
ns. S
tap
.
Ma
teri
als
Co
ns. D
isc.
MX
CN
Valuation change
Earnings revision
Price performance
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Co
ns. D
isc.
Uti
liti
es
Fin
an
cia
ls
Ind
ustr
ials
Ma
teri
als
En
erg
y
Te
lco
s
Co
ns. S
tap
.
I.T.
He
alt
h c
are
MS
CI C
hin
a
Valuation change
Earnings change
Price performance
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 23
Exhibit 44: Modest recovery in high-frequency industrial
profit and SOE profit data may suggest listco earnings
stabilization could come
Exhibit 45: Industrial profit recovery has been driven by a
mild uptick in margin, while revenues have been
lackluster
Source: CEIC, MSCI, FactSet, GS Global ECS Research
Source: I/B/E/S, MSCI, GS Global ECS Research
Exhibit 46: China industrial sectors entered a de-stocking
phase (especially downstream) in 2012, impacting
earnings, but should provide support to following years
Exhibit 47: Earnings revision sentiment has rebounded
from trough levels seen in July-Aug
Source: CEIC, GS Global ECS Research
Source: I/B/E/S, MSCI, GS Global ECS Research
We forecast 0%/9%/11% 2012E-14E earnings growth; we are
slightly lower than consensus in 2012-13
Our top-down approach earnings forecasts, which is comprised of macro factors like
retail/export/FAI growth and price level, etc, leads us to a muted earnings growth (0%) this
year and high single-digit (9%) growth in 2013E, both slightly below I/B/E/S consensus. We
expect 2H12E will be the bottom of MXCN earnings and a recovery will be sustained
through 2013E. Unfortunately, despite a relatively strong rebound in cyclical earnings
growth (from earnings decline), overall MXCN growth will be weighed down by a
deceleration in banks’ earnings in 2013E (consensus expects low single-digit growth from
the teens in 2012), as a result of NIM compression (interest rate deregulation and loosening
impacts) and still rising NPLs.
In our report, “Why China’s corporate profit growth deviates from GDP growth,” dated
September 3, 2012, we explain that GDP acceleration or deceleration is magnified in
earnings trends due to operating leverage. We also highlight that going forward, structural
reforms may play an increasingly dominant role in impacting earnings (rather than the
pure cyclical drivers), particularly given the potential impacts on large cap sectors like
banks and oil.
-40
-20
0
20
40
60
80
100
120
Ja
n-0
7
Ap
r-0
7
Ju
l-0
7
Oct-
07
Ja
n-0
8
Ap
r-0
8
Ju
l-0
8
Oct-
08
Ja
n-0
9
Ap
r-0
9
Ju
l-0
9
Oct-
09
Ja
n-1
0
Ap
r-10
Ju
l-10
Oct-
10
Ja
n-1
1
Ap
r-11
Ju
l-11
Oct-
11
Ja
n-1
2
Ap
r-1
2
Ju
l-1
2
Oct-
12
SASAC SOE Profit growth NBS industrial sectors profit growth
MXCN exl financials profit growth%
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
-10
0
10
20
30
40
50
60
70
80
Jan/Feb-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12 Oct-12
IP Rev YTD growth - LHS IP Profit YTD growth - LHS IP Margin - RHS(%) (%)
-10
-5
0
5
10
15
20
25
30
35
40
Jan
-09
Mar-
09
May-0
9
Ju
l-09
Sep
-09
No
v-0
9
Jan
-10
Mar-
10
May-1
0
Ju
l-10
Sep
-10
No
v-1
0
Jan
-11
Mar-
11
May-1
1
Ju
l-11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Ju
l-12
Sep
-12
Upstream DownstreamRMB bn
0
20
40
60
80
100
120
-80%
-60%
-40%
-20%
0%
20%
40%
60%M
ay
-08
Au
g-0
8
No
v-0
8
Fe
b-0
9
Ma
y-0
9
Au
g-0
9
No
v-0
9
Fe
b-1
0
Ma
y-1
0
Au
g-1
0
No
v-1
0
Fe
b-1
1
Ma
y-1
1
Au
g-1
1
No
v-1
1
Fe
b-1
2
Ma
y-1
2
Au
g-1
2
No
v-1
2
China 1-wk rev MSCI China (Right)
Number of analysts' upgrades minus downgrades / total number of estimates
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 24
Exhibit 48: We forecast 0%/9%/11% earnings growth for
MXCN for 2012E/13E/14E
Exhibit 49: Growth next year will mainly be driven by an
earnings rebound in non-bank sectors; we expect 2014E
to be at more normalized levels
Source: I/B/E/S, GS Global ECS Research estimates
Source: GS Global ECS Research estimates
Exhibit 50: Our banks team expects lower NIM and
higher provisions next year, dragging banks’ earnings
growth
Exhibit 51: Stabilizing China CAI may also point to less
earnings risks
Source: Gao Hua Securities Research estimates
Source: I/B/E/S, MSCI, GS Global ECS Research
Exhibit 52: GS bottom-up estimates are modestly lagging consensus in 2012E/13E
Source: I/B/E/S, Goldman Sachs Research estimates, Gao Hua Securities Research estimates
2012E 2013E 2014EGS Top down forecasts 0.2% 8.8% 11.0%GS Previous forecasts 1.8% 8.6% N/AGS bottom-up forecasts 1.0% 9.3% 10.6%Consensus forecasts 2.1% 9.6% 9.6%
MSCI China EPS growthMSCI China 2012E 2013E 2014E
Non-financials 59% -7.1% 11.2% 13.3%
Banks 37% 12.2% 0.6% 7.2%
Diversified fin 0% -23.4% 21.0% 18.3%
Insurance 3% -3.5% 57.1% 13.0%
100% 0.2% 8.8% 11.0%
MSCI China ex banks -7% 14% 13%
Earnings
weight
(index adj)
EPS growth (%)
H share average 2012E 2013E 2014E
NIM 2.5% 2.3% 2.2%
PPOP yoy 13.8% 4.0% 10.8%
PPOP/ total loans 3.5% 3.1% 3.1%
Provision yoy 34.8% 10.2% 14.6%
Provision /total loans 2.7% 2.8% 2.9%
Net income yoy 12.5% 3.3% 11.1%
Net income /Avg RWA 2.2% 1.9% 1.8%
Note: data is based on simple average of our H share banks
coverage0
5
10
15
20
25
2
4
6
8
10
12
14
CAI - China MSCI China 12m earnings growth (RHS,%)
(in HKD) 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E
Insurance (3.5) 57.1 13.0 (6.7) 90.5 16.0 (3) 33 3Computer hardware/assemblers (2.7) 28.8 22.5 (3.2) 34.4 22.2 (0) 6 (0)Transportation (8.1) 80.1 30.1 (4.1) 84.1 28.2 4 4 (2)Health Care (27.1) 18.3 17.9 (28.5) 21.9 20.7 (1) 4 3Chemicals (31.7) 57.1 8.3 (32.9) 60.1 6.9 (1) 3 (1)Autos and components (6.0) 17.1 15.5 (8.9) 19.7 8.5 (3) 3 (7)Diversified financials (23.4) 21.0 18.3 (23.7) 22.9 20.4 (0) 2 2Banks 12.2 0.6 7.2 11.4 2.4 9.3 (1) 2 2Consumer staples 2.5 20.6 20.6 1.6 22.1 19.0 (1) 2 (2)Software and services 28.2 25.5 22.7 25.9 26.9 26.7 (2) 1 4Telecommunication services 3.5 4.0 6.1 (1.4) 5.0 4.0 (5) 1 (2)Diversified mining, precious metals (19.4) 13.4 0.9 (17.4) 14.3 8.2 2 1 7Retail, hotels, consumer durables and apparel (11.9) 24.0 17.7 (13.1) 24.2 17.0 (1) 0 (1)Industrials, conglomerates, business services (10.2) 5.6 13.3 (9.5) 4.7 15.7 1 (1) 2Utilities 46.7 18.2 11.6 45.5 16.5 10.6 (1) (2) (1)Oil and gas (4.7) 8.0 4.9 (2.8) 5.9 9.1 2 (2) 4Building materials, paper, packaging (31.7) 26.5 14.9 (27.8) 24.4 8.6 4 (2) (6)Property 8.8 11.8 12.8 5.5 (10.9) 5.2 (3) (23) (8)Steel, aluminium (376.3) NM NM (480.3) NM NM NM NM NMMSCI China 2.1 9.6 9.6 1.0 9.3 10.6 (1) (0) 1
Consensus estimates EPS growth (%) GS estimates EPS growth (%) GSe vs consensus difference
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 25
Valuation re-rating likely mild, unless we see significant global risk-
on sentiment or meaningful reform progress
MXCN has re-rated to 9.7X currently from about 8x+ forward P/E trough levels in 4Q11,
mainly due to improving cyclical factors (reduced risks of hard landing), in our view.
Despite this re-rating, we still see valuation as attractive for offshore Chinese equities:
1. Multiples are still at the low end of historical range: MSCI China is trading at 9.7X 12-
month forward P/E, close to -1 standard deviation of the historical mean, and 1.4X 12-
month forward P/B, close to the trough. Even excluding banks, a significant valuation
laggard in the index, multiples would still be below the historical average at 12X.
2. Attractive valuation vs. regional peers: China is one of lowest valued markets in the
region in terms of P/E and P/B, and it remains at the low end of the historical range,
while the majority of its regional peers already enjoy mid-cycle or higher valuation.
From an implied equity risk premium perspective, China also remains the highest in
Asia.
3. Robust valuation vs. profitability position: Valuation also appears attractive in terms of
P/B vs. ROE (Exhibit 57).
We now assume mild re-rating in our end-2013E target of 10.3X forward P/E. This is
mainly premised on cyclical recovery and global equities re-rating. If the progress of
structural reform positively surprises, it could be an additional boost to our current
assumptions.
1. Slight further cyclical re-rating is achievable: As our China economics team expects an
uptick in GDP growth in 2013E, while inflation stays low, this macro backdrop should
support a slight re-rating, in our view. However, we are incorporating only a 0.6X P/E
re-rating in 2013E, given: a) we think the market has already partially priced this in; and
b) structural concerns may persist. Our assumption appears reasonable vs. our global
strategy teams’ assumption of about 1.0X and 0.4X P/E re-rating for US and AeJ,
respectively. Even if we conservatively assume no re-rating for the banks, it would
imply that MXCN ex-banks would re-rate to 12.8X P/E by end-2013E from 12X P/E
currently, which we do not think is too aggressive.
2. Structural re-rating potential bigger but not yet in base case: As we believe the bulk of
China’s relative de-rating has been due to structural issues, we also believe reforms
are key to reversing this trend. Market expectations on this front appear low and
evidence of a more reformist leadership could significantly boost confidence towards
China’s growth sustainability over time. We think that more concrete data points and
progress could come after the leadership handover is completed in March. Historically,
key economic reforms were announced only by the third plenary session (likely to be
October 2013), but we think the pace could be relatively faster this time given the
greater urgency and desire by the incoming leadership to have an impact on the
economy.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 26
Exhibit 53: MXCN valuation still appears reasonable
despite the recent rebound
Exhibit 54: Valuation vs. historical levels is even lower in
terms of P/B
Source: MSCI ,I/B/E/S, GS Global ECS Research
Source: MSCI ,I/B/E/S, GS Global ECS Research
Exhibit 55: China valuation is near the historical trough,
while many other markets may be at or above mid cycle
Exhibit 56: China implied ERP is still the highest in Asia
Source: MSCI ,I/B/E/S, GS Global ECS Research
Source: MSCI ,I/B/E/S, GS Global ECS Research estimates
0
5
10
15
20
25
30
Jan
-03
Ju
l-03
Jan
-04
Ju
l-04
Jan
-05
Ju
l-05
Jan
-06
Ju
l-06
Jan
-07
Ju
l-07
Jan
-08
Ju
l-08
Jan
-09
Ju
l-09
Jan
-10
Ju
l-10
Jan
-11
Ju
l-11
Jan
-12
Ju
l-12
MXCN Market Average + 1sd
- 1sd MXCN ex banks
12m forward P/E (X)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan
-03
Ju
l-03
Jan
-04
Ju
l-04
Jan
-05
Ju
l-05
Jan
-06
Ju
l-06
Jan
-07
Ju
l-07
Jan
-08
Ju
l-08
Jan
-09
Ju
l-09
Jan
-10
Ju
l-10
Jan
-11
Ju
l-11
Jan
-12
Ju
l-12
MXCN Market Average Avg + 1sd
Avg - 1sd MXCN ex banks
12m forward P/B (X)
16.4 15.1 14.1 14.0 13.7 13.5 13.1 12.610.9 9.7
8.3
11.6
0
5
10
15
20
25
30
35
Ph
ilip
pin
es
Ho
ng
Ko
ng
Ta
iwa
n
Ma
lay
sia
Ind
on
esia
Ind
ia
Sin
ga
po
re
Au
str
ali
a
Th
ail
an
d
Ch
ina
Ko
rea
MX
AP
J
12M forward P/E (X)
+/- 1 Stdev. Current
High/low
7.8
10.7
9.0
4.6
7.5
9.1 8.0
6.3
9.0
10.4 9.1 8.9
(4)
(2)
0
2
4
6
8
10
12
14
16
Au
str
ali
a
Ch
ina
Ho
ng
Ko
ng
Ind
ia
Ind
on
esia
Ko
rea
Mala
ysia
Ph
ilip
pin
es
Sin
gap
ore
Taiw
an
Th
ail
an
d
MX
AP
J
Equity risk premium (%) +/- 1 S.D. Current High / Low
More attractively valued
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 27
Exhibit 57: China remains attractive in terms of valuation
vs. profitability
Exhibit 58: If we assume no re-rating for banks, MXCN ex
banks target P/E is 12.8X, close to the historical average
Source: MSCI ,I/B/E/S, GS Global ECS Research
Source: GS Global ECS Research estimates
High teens returns; centered on 1H13E
The combination of 9% earnings growth and moderate valuation expansion adds up to
MXCN target at end-2013E of 70.6, implying high teens upside.
Bull case: Slightly higher earnings but mostly much higher target valuation. We think
this is achievable if we see more global risk-on and brisk reform progress, re-instilling
confidence in China’s structural outlook.
Bear case: Slightly lower earnings but mostly much lower target valuation (de-rating
back to 8.5X forward P/E). This would occur in the event of much less accommodative
domestic macro policies, a global slowdown, and/or lack of reform progress resulting
in worsening of structural problems.
Exhibit 59: Our earnings and valuation assumptions translate into high teens returns in
2013E
Source: Bloomberg, GS Global ECS Research estimates
Path – more muted near term; then a pickup in mid-1H13E: We expect the focus to
remain on cyclical factors in the near term, but structural factors should dominate by the
spring-summer.
Phase 1: Cyclical recovery/policies may disappoint vs. upbeat expectations – Our
economics team expects a gradual recovery path and forecasts slightly lower-than-
consensus GDP growth for 4Q12E/1Q13E. High frequency data (monthly release of
Australia
China
Hong Kong
India
JapanKorea
Malaysia
Philippines
Singapore
Taiwan
ThailandU.S
Europe
0.5
1.0
1.5
2.0
2.5
3.0
5 7 9 11 13 15 17 19 21 23 25
2013E P/B (X)
2013E ROE
(%)
Attractive
0
5
10
15
20
25
30
Jan
-03
Ju
l-0
3
Jan
-04
Ju
l-0
4
Jan
-05
Ju
l-0
5
Jan
-06
Ju
l-0
6
Jan
-07
Ju
l-0
7
Jan
-08
Ju
l-0
8
Jan
-09
Ju
l-0
9
Jan
-10
Ju
l-1
0
Jan
-11
Ju
l-1
1
Jan
-12
Ju
l-1
2
Jan
-13
Ju
l-1
3
MXCN Market Average + 1sd - 1sd MXCN ex banks
12m forward P/E (X)
MXCN
MXCN ex banks (assuming no re-
rating for banks)
MSCI China at 11/23/2012 59.7 HSCEI at 11/23/2012 10,607
2012E 2013E 2014E12E-14E CAGR
Implied +/- (%) P/E (X) P/B (X)
MSCI China Bull Case 5% 12% 15% 11% 85.3 43% 11.5 1.8 MSCI China 0% 9% 11% 7% 70.6 18% 10.3 1.6 MSCI China Bear Case -2% 5% 7% 3% 55.2 -8% 8.5 1.2 HSCEI 0% 9% 11% 7% 12,500 18% 8.7 1.2
2013E target/ implied
level
Implied forward valuationsEPS growth
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 28
macro/key sector data) may become more mixed vs. strong gains seen in
September/October. Uncertainty regarding the US fiscal cliff/debt ceiling/tax
preference expiration is also a risk factor. In addition, we do not believe any
meaningful stimulus package is forthcoming post the leadership transition. In this
regard, offshore investor expectations may see some re-setting. Even as earnings
continue to rebound gradually, room for valuation re-rating will be limited near term.
Phase 2: Cyclical recovery reaccelerates – As the global export outlook potentially
improves post the US fiscal cliff, our economics team expects more pronounced
reacceleration in China GDP growth in 3Q13E. Completion of the leadership transition
may also prompt higher reform hopes. These factors may support a rally once cyclical
expectations have re-set in phase 1 in the coming months.
Phase 3: To reform or not, that is the question – We now assume a more 1H13E-
loaded return path underpinned by phase 2. Whether phase 3 can deliver strong
returns will depend on reform conviction and progress. We are cautiously optimistic
that reform will pick up pace and see upside to reform expectations (vs very limited
expectations by investors).
Exhibit 60: We expect muted returns into the new year and better performance by 2Q13E
Source: GS Global ECS Research estimates
Factor Rest of 12 1Q13 2Q13 3Q13 4Q13
Rest of 12 1Q13 2Q13 3Q13
Indication of market performance
(assume price in several months in advance)
Manufacturing FAI
GDP recovery
CPI worsening
Monetary loosening
Export recovery
Property FAI
Infra FAI
Property policy loosening
Earnings recovery
Signal effect of GDP/CPI/other official
targets
Structural reform progress
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 29
Exhibit 61: Despite relatively subdued returns near term,
we expect returns to improve in 2013E, likely more front-
end loaded
Exhibit 62: 2013E returns will come from high single-digit
earnings growth and some valuation expansion; we see
upside risk to valuation
Source: GS Global ECS Research estimates
Source: GS Global ESC Research estimates
Exhibit 63: Global markets influence offshore more than
onshore – ytd correlation of MXCN and SPX has been
70%+
Exhibit 64: We remain more optimistic on AeJ and China
vs. DM in 2013E
Source: Bloomberg, GS Global ECS Research
Source: GS Global ECS Research estimates
Liquidity and fund flow outlook should remain supportive
The overall liquidity picture for Asia and offshore China markets have been favorable ytd,
especially after US’ QE3, evidenced by continued fund flows into the region and the strong
Hong Kong dollar.
We believe the accommodative liquidity environment will remain intact next year:
1. Macro growth outlook in EM will be stronger than DM, according to our global
economics team’s forecast (Exhibit 68), which may trigger continued fund flows into
the region. We expect DM monetary easing to continue. Our global strategy team is
positive on risk assets.
2. Chinese equities’ relative underperformance in the past years and low valuation are
unlikely to go unnoticed as investors search for cyclical visibility and potential upside
from reforms. In addition, expectations for Rmb appreciation may also lead investors
to hold Chinese equities or other Rmb-denominated/underlying assets (our economics
team expects about 3% appreciation in 2013E, while consensus is less bullish with
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
HSCEI
12,500 (+18%)
HSCEI 3m/6m/2013 end index forecast
10,925 (3%)
11,880 (12%)
CEWC
NPC
meeting
3rd plenary
session
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2005 2006 2007 2008 2009 2010 2011 2012
YTD
2013E
Valuation change
Earnings change
Price performance
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
MXCN & SHCOMP MXCN & SPX
Monthly return correlation (t24m)Forecast
Upside/ Downside
to 12m TP
Indices Current 3m 6m 12m (%)
S&P 500 1409 1450 1500 1575 12%
STOXX Europe 273 280 290 310 14%
MXAPJ 444 460 480 520 17%
TOPIX 776 820 900 930 20%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 30
almost flattish forecast). Investors remain largely underweight China, so positioning
does not appear demanding.
3. Fund raising activities may still be below the historical average, even as they bounce
off the current trough. We expect total fund raising will take up close to 2% of total
market cap in the Hong Kong market, lower than the historical precedent at 3-4%. The
current larger cap SOE IPO pipeline is much smaller, and pressure from banks to recap
is limited.
Exhibit 65: We have seen net fund inflows to Asia turn
positive since mid-year
Exhibit 66: Liquidity is important to H shares, a stronger
HKD typically leads to positive stock returns
Source: AMG, Bloomberg, GS Global ECS Research
Source: Bloomberg, GS Global ECS Research
Exhibit 67: China continues to be UW by regional and
GEM funds, and the holdings of AeJ funds have dropped
recently
Exhibit 68: We expect stronger recovery in China and AeJ
vs. DM next year, which may attract more liquidity into
these markets
Source: EPFR, GS Global ECS Research
Source: GS Global ECS Research estimates
0
100
200
300
400
500
600
700
(100)
(80)
(60)
(40)
(20)
-
20
40
60
80
100
Jan
-07
Ju
l-0
7
Jan
-08
Ju
l-0
8
Jan
-09
Ju
l-0
9
Ja
n-1
0
Ju
l-10
Ja
n-1
1
Ju
l-11
Ja
n-1
2
Ju
l-12
Em
erg
ing
Asi
a N
et F
ore
ign
Flo
ws
(US
$ b
n)
(Cu
mu
late
d s
ince
Jan
-20
07
)
Emerging Asia - Net Foreign Flows… MSCI EM Asia (RHS)
7.75
7.76
7.77
7.78
7.79
7.8
7.8140
45
50
55
60
65
70
75
MXCN Index HKD Curncy (RHS, reversed)
(1,000)
(800)
(600)
(400)
(200)
0
200
400
Jan
-05
Ap
r-05
Ju
l-05
Oct-
05
Jan
-06
Ap
r-06
Ju
l-06
Oct-
06
Jan
-07
Ap
r-07
Ju
l-07
Oct-
07
Jan
-08
Ap
r-08
Ju
l-08
Oct-
08
Jan
-09
Ap
r-09
Ju
l-09
Oct-
09
Jan
-10
Ap
r-10
Ju
l-10
Oct-
10
Jan
-11
Ap
r-11
Ju
l-11
Oct-
11
Jan
-12
Ap
r-12
Ju
l-12
Oct-
12
China OW/(UW) in AEJ funds China OW/(UW) in GEM funds
China 9.3 7.6 8.1 8.4
Asia ex Japan 7.6 6.1 6.9 7.3
Japan (0.7) 1.7 0.3 1.1
US 1.8 2.2 1.9 2.9
Euro area 1.5 (0.4) (0.2) 0.9
World 3.8 3.0 3.3 4.1
Real GDP forecasts
(% yoy)2011 2012E 2013E 2014E
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 31
Exhibit 69: This year, fund raising (especially IPO) has
fallen to trough levels, but we expect some recovery next
year
Exhibit 70: The primary backlog remains large, partly due
to delayed projects this year, but ratio to market cap is
not stretched
Source: Wind, Bloomberg, GS Global ECS Research estimates
Source: IFR, Dealogic, GS Global ECS Research
Sector preferences: More focus on structural factors
We believe that structural factors should increasingly take center stage in driving sector
selection. In past years, when cyclical factors dominated, sector selection was focused on
beta. As cyclicality may lessen and reforms pick up pace, we think the market will
increasingly value sectors that benefit from reforms. Our OW sectors are insurance,
brokers, retail, healthcare, and metals/mining (we take profits on building materials and
move it to Neutral). UW sectors remain telecom and industrials.
Our sector selection framework – anchored on structural
opportunities
Structural winners are unlikely to change often: We have established a qualitative
scorecard to screen out the structural winners vs. losers (Exhibit 71). The reform
outlook scores are based on our analysis of potential earnings impact from reforms on
each sector. Other factors that we took into consideration include supply/demand,
growth potential, innovation/upgrade potential, and any changes in the competitive
environment (i.e., consolidation, etc.).
Cyclical winners may shift over time: For example, we currently believe cyclicals with
low inventory (like cement) are more sensitive to growth fluctuations than those with
significant inventory or other outstanding issues (like industrials). The property sector
is also less cyclically aligned than before as fundamentals depend more on policy
(which is more likely to loosen in weak macro environments) than on buyer confidence.
We prefer those sectors that benefit from both a cyclical rebound and structural
reform potential in 2013E: Ideally, we would concentrate most of our overweight (OW)
sector preference on structural winners. We may shift choices within these depending
on where we are in the economic cycle. Given we now face a gradual domestic and
global growth recovery outlook, we favor the slightly more cyclically sensitive sectors.
We also prefer good entry points in terms of valuation and performance. Of course,
valuation and entry points are also important, as is positioning. Our updated
weathervane screening tool helps to capture the right entry points (Exhibit 75).
0%
1%
2%
3%
4%
5%
6%
-
100
200
300
400
500
600
700
800
900
2006 2007 2008 2009 2010 2011 2012ytd 2013E
HK$ bn IPO Additional offering As % of total market cap (RHS)
Sector
# of
Deals
Fund Raising
(US$mm)
As % of current
mkt cap
Consumer & Retail 22 6,417 0.3%
Financials 10 14,973 0.6%
Health care 1 100 0.0%
Industrials 37 18,675 0.7%
Natural resources 21 11,980 0.5%
Real estate 9 5,251 0.2%
TMT 9 2,000 0.1%
Total 109 59,396 2.3%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 32
Take profits on building materials
We are moving building materials to Neutral from OW. The sector has bounced 36% off the
bottom in August 2012 and has outperformed MXCN by 13% since then. While we maintain
our favorable view on supply/demand and pricing into next year, we think that
1. investor positioning has become more crowded recently;
2. winter seasonality can cause price pullbacks and a recovery catalyst may not
materialize until spring; and
3. the domestic infra FAI recovery story is now priced in, and we do not expect near-term
upside surprises on the property FAI demand side. Thus, we may see better entry
points later.
Exhibit 71: Structural positioning scorecard – the winners emerge
Source: MSCI, GS Global ECS Research estimates.
Sector
MXCN
weight
2013 supply
vs demand
Regulatory /
reform
outlook
Structural
growth
opportunity
longer term
Innovation/
upgrade
potential
Competitive
environment
change
Total
score
Health care 1% + ++ - +++Insurance 7% ++ ++ + -- +++Brokers 1% + ++ + - +++Oil and gas 18% + + ++Software and services 5% ++ + - ++Consumer staples 6% + + - +Retail 3% - + ++ - +Transportation 2% - + + +Autos 2% - - ++ + -Building materials 2% - +Computer hardware 1% + -Metals/ mining 1% + -Banks 24% - + - -Property 6% -- - + + -Utilities 3% - -Steel, aluminium 1% - -Chemicals 1% - -Industrials 4% -- - + --Telecom 13% - - --
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 33
Exhibit 72: Sector scorecard – we have more of a structural bias than a pure cyclical one
Source: GS Global ECS Research estimates.
Exhibit 73: Some of the structural reform winners are trading at higher valuations than the
structural reform losers...
Note: green shades denote the reform beneficiaries and grey shades the losers.
Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research.
Cyclical insensitive
Health care Telecom
Consumer
staples Utilities
Software Retail
Banks
Insurance Autos Property
Brokers Chemicals Industrials
Oil and gas Transport
Computer
hardware
Metals/
mining
Steel,
aluminium
Cyclical sensitive
Building
materials
Structural reform winners Structural reform losers
9.7
24.422.2
18.115.4 15.0 13.9
12.5 12.2 12.0 11.1 10.9 9.9 9.6 9.5 9.3 8.9 8.56.1
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00 +/- 1 std dev currentHigh/low
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 34
Exhibit 74: But on a Z score basis relative to valuation history, reform winners still look
attractive, particularly brokers, retail, insurance, healthcare and utilities
Note: green shades denote the reform beneficiaries and grey shades the losers.
Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research.
Exhibit 75: Sector weathervane – our OW sectors tend to embody more favorable earnings, valuation, performance,
positioning and reform characteristics
Source: MSCI, Bloomberg, I/B/E/S, GS Global ECS Research.
We favor insurance, brokers, retail, healthcare, and metals/mining
Insurance: We expect mild growth in life insurance premiums in 2013E as opposed to
robust growth, but believe this is already priced in. Favorable factors for this sector
include: 1) Regulatory tailwinds to emerge (tax deferral pension, investment
liberalization, etc.); 2) Gradually improving liquidity should favor insurance over wealth
management products; 3) Expected A-share rebound on very bearish cyclical and
9.7
22.2
10.912.5
13.9
9.98.5 12.2
9.5 8.9 9.6
24.4
11.1
15.0 15.4
9.3
12.0
18.1
6.1
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00 +/- 1 std dev current 36M Z score (RHS)High/low
Sector Perceived Structural
GS MXCN Ytd revision 12m fP/E investor reform
Sectors Rating weighting 2013E 2014E 2013E 2014E 2013E EPS next 6m Z-score 6 months ytd 2012 positioning outlook
MSCI China 9.6 8.8 9.6 9.6 -12% Flat -0.5
Retail OW 3.1% 14.8 12.6 24.0 17.7 -31% Flat -0.4 -4% -17% Neutral Favorable
Insurance OW 7.3% 15.0 13.3 57.1 13.0 -17% Upward -0.5 4% 2% Slightly OW Favorable
Diversified financials OW 0.5% 10.9 9.2 21.0 18.3 -13% Upward -0.4 -12% -31% UW Favorable
Health care OW 0.9% 17.9 15.2 18.3 17.9 -12% Flat -0.8 14% 12% OW Favorable
Metals/ mining OW 1.4% 9.5 9.4 13.4 0.9 -21% Upward -0.3 11% -2% Slightly OW Unfavorable
Building materials Neutral 2.1% 8.7 7.6 26.5 14.9 -39% Flat -0.4 -5% -2% OW Unfavorable
Banks Neutral 24.2% 6.1 5.7 0.6 7.2 -8% Upward -0.8 0% -4% UW Unfavorable
Property Neutral 6.0% 8.4 7.5 11.8 12.8 -10% Flat -0.1 19% 40% Neutral Unfavorable
Autos Neutral 2.2% 10.8 9.3 17.1 15.5 -14% Flat 0.4 3% 4% Slightly UW Unfavorable
Computer hardware Neutral 1.5% 12.3 10.0 28.8 22.5 -26% Flat -0.1 -5% -5% Neutral Neutral
Software and services Neutral 5.0% 24.1 19.6 25.5 22.7 -1% Flat -0.4 5% 53% OW Neutral
Chemicals Neutral 0.5% 9.0 8.3 57.1 8.3 -30% Flat -0.7 -12% -25% Neutral Neutral
Steel, aluminium Neutral 0.6% 172.3 35.8 NM 381.0 -68% Downward -5.8 -8% -13% UW Unfavorable
Oil and gas Neutral 17.6% 9.6 9.1 8.0 4.9 -7% Flat -0.1 -1% -4% Neutral Favorable
Transportation Neutral 2.1% 13.4 10.3 80.1 30.1 -27% Flat -0.2 -5% -7% UW Favorable
Utilities Neutral 2.7% 11.8 10.6 18.2 11.6 9% Upward -0.5 10% 14% OW Favorable
Consumer staples Neutral 5.5% 21.8 18.1 20.6 20.6 -24% Flat 1.6 -8% -7% OW Neutral
Industrials UW 4.3% 9.9 8.7 5.6 13.3 -26% Flat -0.1 -7% -2% Slighly UW Neutral
Telecom UW 12.7% 12.1 11.4 4.0 6.1 -8% Flat 0.6 -1% -4% Neutral Neutral
Relative perf
P/E EPS Growth (%) vs MXCN
Earnings revision
trend
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 35
reform expectations. Risk is a supply overhang (from IPOs and unlocking of strategic
investors’ shares).
Brokers: This sector has been a major laggard in 2012 to date, underperforming MXCN
by 31% thus far. This presents an attractive entry point for investors, and we think that
an expected A-share rebound will be a key catalyst. Brokers should also be major
reform winners from financial sector innovation down the road.
Exhibit 76: Insurance vs. wealth management products
yields’ relative attractiveness is improving ytd
Exhibit 77: Not surprisingly, MXCN brokers have been
impacted by the weakness in A shares. We expect A
shares to rebound in 1H13E
Source: Wind, company data, Gao Hua Securities Research.
Source: GS Global ECS Research
Retail: We think retail names will continue to enjoy scarcity value as the consumption
cyclicals (i.e., one of the macro slices composed of retail, internet, and auto) sub-sector
to be in. Auto faces structural challenges with supply, margins, potential purchase
bans, and emission standards scrutiny. Internet will likely be in a tough spot in terms
of the ad spend cycle, at least in 1H13E. Retail is at a cyclical low point, but it enjoys
inexpensive valuation and reform upside.
Healthcare: While this sector has been one of the best-performing defensives in 2012
to date (it has outperformed MXCN by 12% ytd), we think valuation still appears
reasonable with 18X 12-month forward P/E, lower than the historical average at 24X.
We still expect this sector to have a robust structural growth outlook. We remain OW
on this sector as we expect it to benefit from possible reforms via the enhancement of
social safety nets (more fiscal allocation in March 2013 MOF budget may be a catalyst),
expansion of healthcare reforms (separate consultation and medicine revenue of
hospitals), and improved price stresses.
Metals and mining: Offshore constituents for this sector are largely copper and gold
companies. While metals/mining has performed well in recent months due to QE3, we
still see further upside to our 6-month targets for both metals’ spot prices. Compared
with other commodities, copper has more constraints on the supply side; hence, it has
a better supply-demand outlook. Moreover, copper demand is more correlated to
construction completions (which remains robust in the near term), while other metals
such as steel are more closely related to construction starts (which we expect to be
weaker in the coming quarters). Gold has more upside to spot price forecasts as well
and will likely be supported by continued DM quantitative easing. Chinese
metals/mining equities have a high correlation to commodity prices. Valuations also
continue to appear reasonable.
5.2%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
Jan
-11
Feb
-11
Mar-
11
Ap
r-11
May-…
Ju
n-1
1
Ju
l-11
Au
g-1
1
Sep
-11
Oct-
11
No
v-1
1
Dec-1
1
Jan
-12
Feb
-12
Mar-
12
Ap
r-12
May-…
Ju
n-1
2
Ju
l-12
Au
g-1
2
Sep
-12
Oct-
12
No
v-1
2
Average yields of 3M wealth management products issued by listed banks
Life insurers' policy funding costs at 3%-3.5%
0
50
100
150
200
250 CSI300 MXCN Diversified Financials (relative to MXCN)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 36
Exhibit 78: Diversified mining, precious metals valuation
still looks inexpensive despite the slight bounce recently
Exhibit 79: Metals price forecasts and upside – the metals
and mining sector constituents are focused on copper
and gold (both have double-digit upside)
Source: FactSet, I/B/E/S, GS Global ECS Research
Source: Bloomberg, GS Global ECS Research estimates.
We remain underweight on telecom and industrials
Telecom: This sector tends to perform well during periods of significant macro
concerns, which we do not expect to occur in 2013E. Tariff competition has stabilized
near term, but growth is decelerating. Potential 4G licensing in 2013E may lead to
concerns on earnings pressure from 1) capex/depreciation burden, and 2) intensifying
competition.
Industrials: Capital goods should, in theory, be beneficiaries of a growth rebound, but
we believe they require a much larger magnitude of cyclical rebound to revive demand
vs. other sectors like cement. We think the market expects a bigger demand rebound
than will likely materialize and that share prices may have already priced in such
positive expectations.
Exhibit 80: Building materials have rebounded
significantly since August despite the recent pullback
Exhibit 81: Healthcare has delivered upbeat performance
ytd
Source: FactSet, GS Global ECS Research
Source: FactSet, GS Global ECS Research
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Jan
-06
Ju
l-06
Jan
-07
Ju
l-07
Jan
-08
Ju
l-08
Jan
-09
Ju
l-09
Jan
-10
Ju
l-10
Jan
-11
Ju
l-11
Jan
-12
Ju
l-12
MXCN Diversified mining, precious metals 12m fP/E
MXCN Diversified mining, precious metals 12m fP/B
12m forward P/B (X) Spot Upside/downside
Commodities Units price 3m 6m 12m to 6m forecast
LME Aluminum $/mt 1,979.5 2,000 2,150 2,200 9%
LME Copper $/mt 7,779.8 8,000 9,000 8,000 16%
LME Nickel $/mt 16,626.0 16,500 17,000 17,000 2%
LME Zinc $/mt 1,956.5 1,950 2,000 2,100 2%
COMEX Gold $/troy oz 1,751.8 1,840 1,940 1,940 11%
COMEX Silver $/troy oz 34.1 30.7 32.4 32.4 -5%
Price forecast
80
85
90
95
100
105
110
115
Dec-1
1
Jan
-12
Feb
-12
Mar-
12
Ap
r-12
May-1
2
Ju
n-1
2
Ju
l-12
Au
g-1
2
Sep
-12
Oct-
12
Building materials, paper, packaging Diversified mining, precious metals
Steel, aluminium Energy
80
85
90
95
100
105
110
115
120
125
130
Dec-1
1
Jan
-12
Feb
-12
Mar-
12
Ap
r-12
May-1
2
Ju
n-1
2
Ju
l-12
Au
g-1
2
Sep
-12
Oct-
12
Telecommunication Services Utilities Consumer Staples Health Care
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 37
Exhibit 82: IT rose thanks to Tencent, while retail has
been a big laggard
Exhibit 83: Property outperformed other financials. We
expect insurance and brokers to catch up in 2013E
Source: FactSet, GS Global ECS Research
Source: FactSet, GS Global ECS Research
Exhibit 84: We swapped cement with metals/mining to capture a better short-term outlook
GS sector preference on MSCI China
Source: MSCI, GS Global ECS Research
80
90
100
110
120
130
140
Dec-1
1
Jan
-12
Feb
-12
Mar-
12
Ap
r-12
May-1
2
Ju
n-1
2
Ju
l-12
Au
g-1
2
Sep
-12
Oct-
12
Automobiles & Components
Retail, hotels, consumer durables and apparel
Capital Goods
Information Technology
60
70
80
90
100
110
120
130
140
Dec-1
1
Ja
n-1
2
Fe
b-1
2
Mar-
12
Ap
r-12
Ma
y-1
2
Ju
n-1
2
Ju
l-12
Au
g-1
2
Sep
-12
Oct-
12
Banks Insurance Diversified financials Real estate
Weighting
GS Sector Offshore (previous) Offshore (new) MXCN MXCN
Retail, hotels, consumer durables and apparel OW OW 14.8 3.1%
Insurance OW OW 15.0 7.3%
Diversified financials OW OW 10.9 0.5%
Health care OW OW 17.9 0.9%
Diversified mining, precious metals Neutral OW 9.5 1.4%
Building materials, paper, packaging OW Neutral 8.7 2.1%
Banks Neutral Neutral 6.1 24.2%
Autos and components Neutral Neutral 10.8 2.2%
Steel, aluminium Neutral Neutral 172.3 0.6%
Property Neutral Neutral 8.4 6.0%
Computer hardware/assemblers Neutral Neutral 12.3 1.5%
Software and services Neutral Neutral 24.1 5.0%
Chemicals Neutral Neutral 9.0 0.5%
Utilities Neutral Neutral 11.8 2.7%
Oil and gas Neutral Neutral 9.6 17.6%
Transportation Neutral Neutral 13.4 2.1%
Consumer staples Neutral Neutral 21.8 5.5%
Industrials, conglomerates, business services UW UW 9.9 4.3%
Telecommunication services UW UW 12.1 12.7%
Weight on OW sectors 14% 13%
Weight on Neutral sectors 69% 70%
Weight on UW sectors 17% 17%
13E P/EGS strategy preference
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 38
Implementation: Top picks and reform basket; A shares favorable
1. We identify three key themes for 2013 – cyclical rebound, structural reforms, and mass
market consumption. We choose 12 top picks that align with our themes, focusing
more on sectors that we would favor.
2. In addition, we introduce a new China reform-beneficiary basket. These are some of
the more liquid names selected from a longer list of beneficiaries named in our report
on reform, or from key reform-beneficiary sectors identified in the same report.
Exhibit 85: GS 2013E top picks based on three themes
Note: NCI, Daphne, Zijin, Anhui Conch, CMB, China Power, China Gas, and CEA are on the regional Conviction List.
Source: GS Global ECS Research
Exhibit 86: 2013E top picks comparable valuations
Note: 1) * denotes the stock is on our regional Conviction List; 2) prices as of November 23, 2012.
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates
GS SectorStrategy
preferenceCyclical rebound
Structural
reforms
Mass market
consumption
Retail, hotels, consumer durables and apparel OW Daphne
Insurance OW NCI NCI NCI
Diversified financials OW
Health care OW Shineway Shineway
Diversified mining, precious metals OW Zijin
Building materials, paper, packaging Neutral Anhui Conch Anhui Conch
Banks Neutral CMB
Autos and components Neutral Dongfeng
Steel, aluminium Neutral
Property Neutral
Computer hardware/assemblers Neutral
Software and services Neutral Ctrip
Chemicals Neutral
Utilities Neutral China Power
Oil and gas NeutralSinopec,
China Gas
Transportation Neutral CEA CEA CEA
Consumer staples Neutral
Industrials, conglomerates, business services UW
Telecommunication services UW
Top Buy Ideas by Themes
Ticker Name
Price
(Local curr)
Market cap
(USD mn)
6M ADVT
(USD mn) Rating
Potential
upside to
PT
2012E
P/E(X)
2013E
P/E(X)
2012E
P/B(X)
2013E
P/B(X)
2012E
Div yld
(%)
2013E
Div yld
(%)
386 HK Sinopec 8.38 18,144 66 B 12% 7.8 7.6 1.1 1.0 4.1 4.3
3968 HK CMB 14.48 7,306 30 B* 42% 6.8 6.2 1.1 1.0 3.8 4.1
914 HK Anhui Conch 25.65 4,301 38 B* 17% 13.5 11.7 2.0 1.8 1.2 1.4
489 HK Dongfeng 10.56 3,891 30 B 9% 7.7 6.7 1.2 1.1 2.1 2.3
1336 HK NCI 24.20 3,229 7 B* 71% 14.7 12.3 1.6 1.4 0.7 0.9
384 HK China Gas 5.20 3,051 4 B* 6% 17.8 15.3 1.9 1.7 1.0 1.2
CTRP US Ctrip 18.05 2,506 47 B 39% 21.2 17.1 1.7 1.4 - -
2899 HK Zijin Mining 3.13 2,426 14 B* 29% 9.0 9.0 1.7 1.5 3.1 2.7
210 HK Daphne 9.35 1,987 5 B* 27% 13.4 10.9 2.8 2.4 2.5 2.8
2380 HK China Power 2.10 1,504 3 B* 29% 6.4 6.1 0.6 0.6 5.5 5.7
2877 HK China Shineway 11.82 1,261 1 B 9% 9.8 8.6 1.8 1.6 4.1 4.2
670 HK CEA 2.71 1,222 4 B* 62% 6.7 6.3 0.9 0.8 - -
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 39
Exhibit 87: Our China reform basket captures beneficiaries of potential structural reforms
Note: 1) minimum accessible liquidity of the basket calculated based on constituents' weight and their respective 6-mo ADVT; 2)* denotes the stock is on our regional Conviction List; 3) prices as of November 23, 2012; 4) NC = Not Covered. The ability to trade this basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade.
Source: FactSet, I/B/E/S, GS Global ECS Research estimates
Exhibit 88: Performance of China reform basket
Source: Bloomberg, GS Global ECS Research
1) We reiterate our preference for A shares over H shares in 2013:
H shares have outperformed A shares ytd, and most of the outperformance came in
2H2012. We attribute such divergence to two major reasons:
a) Strong global markets performance – H shares have been posting 70%+ correlation
with the SPX, and much of the ytd outperformance vs. A shares was in anticipation of
QE3 and the US economic recovery. A shares are less impacted by the global liquidity
picture.
6m Consensus estimates
Avg Daily Share Price/ Earnings EPS Growth P/B ROE Div Yld
GS Mkt Cap Volume Price 2012 2013 2014 2012 2013 2014 2013 2013 2013
Ticker Company Sector Rating (US$ mn) (US$ mn) (Local)Wgt
(%) (x) (x) (x) (%) (%) (%) (x) (%) (%)
6030 HK CITIC Securities Diversified Financials NC 2,311 16 15.20 10.7% 27.4 22.2 18.1 ‐62.7 23.2 22.6 1.5 6.8 1.7
3308 HK Golden Eagle Retailing B 4,588 10 18.38 10.5% 23.4 19.8 16.8 4.6 18.1 17.9 4.5 24.6 1.5
1336 HK New China Life Insurance Insurance B* 3,229 7 24.20 10.2% 19.1 14.7 12.3 ‐15.2 30.1 19.3 1.6 11.3 0.7
1880 HK Belle International Retailing B 17,085 24 15.70 9.9% 22.7 19.6 17.1 13.9 15.3 15.0 4.1 22.2 1.6
2318 HK Ping An Insurance Insurance B 23,987 77 59.40 9.7% 17.1 13.7 11.9 15.2 24.4 15.4 2.1 16.7 1.2
386 HK Sinopec Energy B 18,144 66 8.38 9.5% 9.9 7.8 7.6 ‐16.8 26.1 3.6 1.1 14.1 4.1
1766 HK CSR Capital Goods N 1,752 12 6.71 9.0% 17.7 14.8 13.2 ‐3.6 19.1 12.7 2.0 14.3 1.5
753 HK Air China Transportation B 3,038 9 5.16 8.9% 12.9 8.9 8.1 ‐43.2 44.5 10.6 1.0 11.7 1.9
1114 HK Brilliance Auto B 5,946 17 9.17 8.3% 15.9 12.3 10.0 31.7 29.4 23.5 3.0 27.8 0.0
966 HK China Taiping Insurance Insurance B 2,879 3 13.08 6.8% 20.4 13.2 10.8 120.0 54.4 23.1 1.5 12.1 0.0
867 HK China Medical System Healthcare B 1,645 2 5.28 4.2% 18.9 14.8 11.4 35.6 27.7 30.4 2.7 20.0 2.6
525 HK Guangshen Railway Transportation B 480 1 2.60 2.2% 10.6 10.1 8.4 ‐20.0 4.4 21.3 0.6 5.6 4.2
GS China Reform Basket (GSSZCRFM) 44 18.7 14.9 12.6 1.2 26.9 17.0 2.3 16.1 1.6
20
40
60
80
100
120
140
Dec-0
7
Mar-
08
Ju
n-0
8
Sep
-08
Dec-0
8
Mar-
09
Ju
n-0
9
Sep
-09
Dec-0
9
Mar-
10
Ju
n-1
0
Sep
-10
Dec-1
0
Mar-
11
Ju
n-1
1
Sep
-11
Dec-1
1
Mar-
12
Ju
n-1
2
Sep
-12
Dec-1
2
GSSZCRFM MXCN
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 40
b) H-share investors have higher expectations on the cyclical aspects: As mentioned
earlier, we found offshore investors are focusing more on cyclical factors than onshore
investors, and they have much higher expectations on such. Domestic investors are
focusing more on structural reforms, which we do not expect to pick up until 2013E.
In 2013E, we expect A shares to outperform H shares as cyclical recovery will surprise A
shares on the upside more, and any progress on reforms will also have a more immediate
impact on A-share valuations. In terms of relative valuation and performance, etc., we think
A shares look attractive.
To access the A-share markets, aside from direct QFII quota assigned to different
institutions, there are a few A-share ETFs tracking different A-share indices listed in HKEX
(Exhibit 91).
Exhibit 89: H shares outperformed A shares this year,
mostly after September
Exhibit 90: On a 3-month rolling return basis, the current
gap between H/A shares does not appear sustainable
and is likely to converge
Source: Bloomberg, GS Global ECS Research
Source: Bloomberg, GS Global ECS Research
Exhibit 91: There are currently a few A-share ETFs listed
in HK
Exhibit 92: A shares have underperformed H shares
meaningfully in 2H12
Source: Bloomberg, HKEX, GS Global ECS Research
Source: Bloomberg, GS Global ECS Research
90
95
100
105
110
115
120
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12
MSCI China CSI300 S&P 500
-40%
-30%
-20%
-10%
0%
10%
20%
30%
MXCN 3M rolling returns CSI300 3M rolling returns
Issuer Ticker Underlying asset
Trading
currency Underlying index
AUM
(US$mn)
83188 HK CNY
3188 HK HKD
83100 HK CNY
3100 HK HKD
82822 HK CNY
2822 HK HKD
83118 HK CNY
3118 HK HKD
iShares 2823 HKMarket Access
Products (MAPs)HKD FTSE China A50 6,718
Note: date as of 23 Nov 2012.
China
Southern
Harvest
China AMC
E Fund
Physical (RQFII)
Physical (RQFII)
Physical (RQFII)
Physical (RQFII)
1,037
447
1,558
242
CSI 300
CSI 100
FTSE China A50
MSCI China A
80
85
90
95
100
105
110
115
120
125
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12
MSCI China vs CSI300 relative performance
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 41
Sector snapshots
Agrochemicals: Increasing acreage, affordability 42
Alternative energy: Solar – 2013, the year of transformation; illuminating the path to profitability 45
Alternative energy: LED – 2013, investing selectively as demand cycle turns up 46
Alternative energy – Nuclear/Wind power: Lack of positive catalysts 47
Auto: Growth to sustain, prefer luxury segment 50
Banks: Constructive on cyclical stabilization; consumption-led growth a key for rerating 54
Cement: Sustained price recovery from 2Q13E 58
Coal: Structural downcycle ahead; Buy Shenhua on diversity 61
Conglomerates: Prefer stocks with earnings visibility 65
Consumer Staples: Competition remains in focus 68
Healthcare: Lacking catalysts, EPS growth to drive performance 71
Insurance: Mild growth for longer; favor return and value 74
Internet/Education: Mobile & e-commerce the focus 77
Machinery: Strong structural growth in railway equipment; slow cyclical recovery in construction equipment 80
Media: Value emerging in a thriving industry 83
Metals: Divergent supply growth; prefer copper/gold 85
Oil & Gas: Improving operating results, limited downside risks 88
Ports: Potential upside from tariff hikes 91
Power Utilities: Lower interest rate and coal oversupply; Buy IPPs 93
Real Estate: Volume positive priced in; further upside driven by price increase 96
Retail: A better outlook in 2013, but need to be selective 101
Technology: China vendors poised to extend market share gains 104
Telecoms: Healthy but decelerating growth; stabilizing competition 108
Tourism: Growing market driven by domestic demand 111
Transport: Prefer Airlines; cautious on Bulk Shipping 113
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 42
Agrochemicals: Increasing acreage, affordability
Analyst name: Carol Jin (carol.jin@ghsl.cn)
Sector stance
2013 sector view
We believe global crop prices will remain at historically high levels in 1H2013 due to tight supply and demand before
new crops come to market. Hence, we expect this will boost agrochemicals demand via planting acreage expansion and
the improved affordability of agrochemical inputs for farmers. With elevated corn and soybean prices, farmers in the US
and Latin America especially, which are the key corn and soybean export countries, should be motivated by attractive
farming return to expand planting acreage. Chinese pesticide producers, highly export driven, are likely to benefit from
stronger export demand in those regions.
For fertilizers, we expect phosphate and potash to benefit more than nitrogen given farmers’ higher demand elasticity
and the typical nutrient requirement structure for soybean planting. That said, we also see pressure from ongoing
capacity expansions for all fertilizers both globally and domestically, especially for urea. We believe domestic nitrogen
producers will face pressures from both capacity expansion and weaker cost support from lower coal prices. However,
we see phosphate and potash as better positioned due to higher industry concentration and more disciplined
production.
Key drivers for 2013
Reform drivers
1. Industry consolidation for fertilizers: We expect industry consolidation to accelerate in the nitrogen and
phosphate industry as the government introduces and implements stricter and more detailed industry entry
standards under the 12th Five Year Plan. We expect large-scale producers with cost leadership and good integration
of upstream inputs resources to benefit as inefficient small capacities phase out due to severe industry competition.
2. Industry upgrade for pesticides: The government also targets to improve industry consolidation and upgrades
here under the 12th Five Year Plan, setting stricter standards for environmental protection, production scale, and
product structure. We believe companies with strong R&D, stricter environmental control and strong capital will
benefit and stand out as industry leaders.
3. Gas pricing reform: We believe the ongoing gas pricing reform will push national urea production cost higher,
which should offer good support to urea prices. Coal-based producers with cost leadership will benefit, in our view.
Cyclical drivers
1. Strong demand in spring planting season: We expect the elevated crop prices will drive strong demand for
agrochemicals in spring planting season globally, especially in North America and Latin America. Demand in 1H is
very critical as it normally sets a tone for full-year demand, especially for pesticides.
2. Restocking for phosphate in US and India: We believe the US and India need to restock for phosphate given
their low inventory levels currently. Hence, we expect exports to India to recover from the extremely low level this
year.
3. Restocking for potash in China and India: Potash import contracts for China and India are delayed significantly
in 2H12 and global giants are not expecting the contract signing by the end of 2012. We believe China and India will
need to restock for potash in 2013 on their low inventory.
Key risks to our view
1. Adverse weather conditions; 2. Sharp decline in crop prices; 3. Weak demand from India due to subsidy policy
changes and currency depreciation.
How we differ from consensus
We are below Bloomberg/Wind consensus on the sector earnings outlook as we have factored in higher raw material
costs and slower earnings growth amid a slower macro economic improvement.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 43
Stock recommendations (offshore)
Buy #1: China BlueChemical (3983.HK)
Reasons/catalysts: 1) Intact cost leadership despite potential gas price hike with long-term offshore gas supply contract;
2) DAP capacity expansion contributes solid growth in 2013E; 3) Attractive valuation despite our conservative
assumptions.
Stock recommendations (A-share)
Buy #1: Hualu Hengsheng (600426.SS, on CL)
Reasons/catalysts: 1) Strong growth from new projects of adipic acid and acetic acid; 2) Market overly concerned on slow
EG project ramp-up; 3) Attractive valuation despite our conservative assumptions.
Buy #2: Qinghai Salt Lake Industry (000792.SZ)
Reasons/catalysts: 1) Stronger global demand on higher crop prices; 2) Slower-than-expected domestic supply
expansion; 3) Strong restocking demand domestically and globally for potash.
Sell #1: Yuntianhua (600096.SS)
Reasons/catalysts: 1) Expensive valuation with asset injection overly factored in; 2) Gas supply shortage may continue in
2013; 3) Increasing urea cost if gas pricing reform rolls out nationally; 4) Weak fiberglass demand on slow macro
economic recovery.
Exhibit 93: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 94: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
3983 HK China BlueChemical B HKD 4.78 6.75 41.2% 2,843 7.9 1.2 4.7% 4.0
297 HK Sinofert Holdings N HKD 1.66 1.70 2.4% 1,504 10.8 0.6 1.3% 11.2
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
3983 HK China BlueChemical 16.0% 14.3% 15.3% 32.1% 23.5% 17.1% 13.6% (0.2)
297 HK Sinofert Holdings 8.8% 5.2% -3.0% 3.3% 2.5% 2.0% 5.8% 0.4
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 44
Exhibit 95: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Ha Securities Research estimates.
Exhibit 96: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 97: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600426 CH Hualu-Hengsheng Chemical B* CNY 6.75 9.70 43.7% 1,033 13.4 1.1 0.7% 7.8
000422 CH Hubei Yihua Chemical Industry N CNY 9.74 13.10 34.5% 1,404 9.6 1.3 2.1% 6.8
002391 CH Jiangsu Changqing N CNY 14.76 16.50 11.8% 488 16.4 1.6 1.2% 10.8
600486 CH Jiangsu Yangnong Chemical Co. N CNY 18.79 23.30 24.0% 519 13.9 1.5 1.6% 3.8
002250 CH Lianhe Chemical Technology Co. N CNY 18.44 20.40 10.6% 1,528 18.2 4.0 1.9% 13.4
000792 CH Qinghai Salt Lake Industry B CNY 23.95 32.70 36.5% 6,116 13.9 2.2 1.8% 13.1
600096 CH Yunnan Yuntianhua S CNY 12.54 6.20 -50.6% 1,397 51.5 1.5 1.6% 12.3
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600426 CH Hualu-Hengsheng Chemical 10.7% 39.8% 10.4% 15.8% 8.5% 5.4% 8.1% 0.8
000422 CH Hubei Yihua Chemical Industry 17.9% 17.3% 10.0% 16.1% 11.0% 4.1% 9.4% 1.3
002391 CH Jiangsu Changqing 17.7% 26.5% 27.6% 15.3% 12.2% 11.3% 9.6% (0.2)
600486 CH Jiangsu Yangnong Chemical Co. 17.2% 12.3% 16.5% 17.5% 10.3% 9.5% 10.6% (0.8)
002250 CH Lianhe Chemical Technology Co. 32.3% 25.8% 31.0% 18.6% 16.2% 13.2% 21.6% 0.1
000792 CH Qinghai Salt Lake Industry 26.6% 38.2% 28.1% 40.8% 35.6% 26.6% 14.0% 0.8
600096 CH Yunnan Yuntianhua 147.8% 13.0% 40.7% 16.5% 6.5% 1.4% 2.1% 1.6
60
70
80
90
100
110
120
130
40
50
60
70
80
90
100
110
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level Eq-wgt (Offshore Agrochemicals)
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 45
Alternative energy: Solar – 2013, the year of transformation;
illuminating the path to profitability
Analyst name: Amy Song, CFA (amy.song@ghsl.cn)
Sector stance
2013 sector view
We believe the ongoing compression of ASP and earnings combined with higher gearing will trigger
rationalization/consolidation of the solar industry in two phases: 1) local governments and banks initiate the process to
disrupt the solar investment cycle; and 2) fundamental rationalization driven by technology, scale and cost leadership, as
laggards exit the industry during rationalization.
In the interim, we expect friction in solar trade discussions between the US, China and EU could be a near-term swing
factor for the fundamental competitiveness of solar companies globally, with potential tariff barriers leading eventually
to the reallocation of global effective solar capacity. Meanwhile, marginal demand upside might have more visibility as
the Chinese government is taking more steps to boost domestic market demand to support this struggling industry.
Key drivers for 2013
Reform drivers
1. Local governments & banks disrupt the ongoing solar investment cycle by ending easy access to land and funding.
Cyclical drivers
1. ASP deterioration amid a highly stressed earnings outlook, extending the ongoing down-cycle.
2. Trade frictions between the US, China and EU.
3. Government initiatives to boost domestic demand, which we think will have a positive impact on the sector only in
the medium term.
Key risks to our view
1. Higher-than-expected global demand.
2. Lower-than-expected ASP erosion.
How we differ from consensus
1. 2013E EPS lower than consensus by -9% to -354% across the sector.
Stock recommendations (offshore)
Sell #1: Yingli (YGE)
Reasons/catalysts: 1) High gearing ratio indicates potential credit risk; 2) High SG&A expense impacts earnings outlook.
Stock recommendations (A-share)
Buy #1: Sungrow (300274.SZ)
Reasons/catalysts: 1) Sungrow’s strong balance sheet and leading inverter production scale could provide a competitive
advantage; 2) Sungrow appears to be well positioned to benefit from the secular growth outlook of domestic PV market.
Sell #1: Jingyuntong (601908.SS)
Reasons/catalysts: 1) Shipment/ASP to decline faster than peers, mainly due to its poor customer profile and lack of R&D
advantages; 2) Significant increase of working capital should bring higher financial burden to the company.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 46
Alternative energy: LED – 2013, investing selectively as demand
cycle turns up
Analyst name: Amy Song, CFA (amy.song@ghsl.cn)
Sector stance
2013 sector view
We see two structural themes in LED for the next few years: 1) a continued shift in lighting product mix, from traditional
lighting to LED lighting. We believe stronger LED demand momentum should start from 2013, driven by more policy
catalysts and more affordable LED lighting products. 2) The ongoing industry consolidation, triggered by a tough macro
environment and fluctuating raw material cost structure, has forced many smaller players to exit both the traditional
lighting/fixture market and the LED manufacturing supply chain due to structural over-capacity. However, the LED
manufacturing supply chain in the near term is structurally over-supplied, which has created fierce competition and
pushed the industry into a rationalization and consolidation phase. We believe traditional lighting branded makers with
extensive branded/ODM&OEM distribution channels should be in a favorable position to incorporate the growth of LED
lighting.
Key drivers for 2013
Reform drivers
1. As ASPs of LED products approach the inflection point, we expect secular growth to expand into the
commercial/industrial segment, beyond the current outdoor lighting segment.
2. Stronger supportive policy catalysts from central and local governments.
Cyclical drivers
1. Ongoing industry consolidation due to the tough macro environment.
2. Positive policy catalysts and more affordable LED lighting products should boost LED demand momentum.
Key risks to our view
1. Higher-/lower-than-expected demand.
2. Fluctuating cost/ASP.
How we differ from consensus
1. 2013E EPS lower than consensus by -15% to -42% across the sector.
Stock recommendations (A-share)
Buy #1: Yankon Lighting (600261.SS)
Reasons/catalysts: 1) We favor Yankon’s strategy of transitioning from OEM maker to brand maker; 2) We believe
Yankon’s clean LED strategy and execution track record have paved the way for continued growth momentum.
Sell #1: Foshan Lighting (000541.SZ)
Reasons/catalysts: 1) Foshan Lighting’s gross margin will be negatively impacted by the increase in raw material/labor
costs and declining product ASPs, given the company’s lack of a well-structured distribution channel; 2) An uncertain Li-
battery business will pose a risk to the company’s profitability along its entire value chain.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 47
Alternative energy – Nuclear/Wind power: Lack of positive
catalysts
Analyst name: Franklin Chow, CFA (franklin.chow@gs.com)
Sector stance
2013 sector view
Wind farms: We think a lack of a clear case of capex discipline, earnings visibility/growth and free cash flow generation
potential may still curb investor confidence/interest. 1) Capex discipline: it appears that leading Chinese state-owned
wind farms may still prefer capex-driven growth (even at potentially declining marginal returns) to scaling back growth
for debt reduction and free cash flow generation. 2) Earnings visibility/growth: rapidly falling wind turbine utilization also
raises concerns on the defensiveness of the business model of Chinese wind farms. Weaker carbon credit cash receipt
further hurts the earning outlook.
Equipment makers: We think the industry is exposed to a trio of concerns: 1) slowing revenue growth due to weak
product demand and prices; 2) rising costs, e.g., selling costs, and receivable impairments; and 3) larger capital required
implies higher financing costs due to falling customer deposits, record-high receivable days.
Key drivers for 2013
Reform drivers
1. Emphasis on clean energy supply
We believe sustainable development of alternative energy is vital to providing sufficient electricity supply to the
Chinese economy over the long term. However, as evident in recent history, industry growth may not necessarily
result in earnings growth and share price performance mostly due to capex-driven (rather than profitability-driven)
business models for the utilities operators and oversupply for power equipment (e.g. wind and solar power).
Cyclical drivers
1. Falling utilization from grid curtailment and slower wind speed
Falling wind turbine utilization also raises concerns on the defensiveness of the business model of Chinese wind
farms. We think it is also difficult for stock investors to decipher the various causes of downside risks to
utilization/earnings in terms of project execution (e.g. site selection and construction, turbine quality), predictability
of wind resources, as well as the effectiveness of regulators’ enforcements to raise dispatch of wind power by the
state-owned power grids, generally wind farms’ only customers.
2. Weaker carbon credit cash receipt
Fallen carbon credit market prices may drastically cut the potential revenue/cash collection from existing and future
carbon credit contracts sold by Chinese wind farms. We expect carbon prices in newer contracts may be
considerably lower than those in prior contracts as market prices are now about half of the 2011 average. We also
see risks of contract term adjustments for prior contracts as buyers of carbon credits may leverage the considerably
cheaper spot prices to lower those contract prices with the Chinese wind farms.
3. Downside surprise from restart of nuclear projects
We think official confirmation from the central government has put a more definitive cap to the scale of near-term
project counts – until 2015, there would be only a few new projects in coastal areas and none inland. We expect this
to dampen bullish market expectations in terms of new orders for nuclear power equipment makers.
Key risks to our view
Revenue/margins/receivable and impairments/new orders vary from our assumptions.
How we differ from consensus
2013 EPS estimates for the sector are generally below Reuters consensus estimates. We believe we have more
conservative assumptions on revenue and profit margins. We also place a strong emphasis on understanding and
forecasting weakening balance sheets for several power equipment makers.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 48
Stock recommendations (offshore)
Buy #1: Longyuan (0916.HK)
Reasons/catalysts: Top pick among Chinese wind farms under coverage, though capex discipline seems weaker than
expected.
Sell #1: Shanghai Electric (2727.HK)
Reasons/catalysts: We think Shanghai Electric is undergoing a structural decline in revenue and earnings growth. We
also think its current P/E valuation premium to peers is excessive. Our 2013 EPS estimate are 20% below Reuters
consensus estimate.
Sell #2: Goldwind (2208.HK)
Reasons/catalysts: We expect Goldwind to remain an industry leader when the industry consolidates. However, we are
still concerned about its earnings outlook due to 1) faltering demand; 2) falling product prices; 3) rising interest
expenses; and 4) difficult receivables collection.
Exhibit 98: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 99: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
579 HK Beijing Jingneng Clean Energy N HKD 1.60 1.50 -6.3% 1,038 7.6 0.6 0.9% 11.9
658 HK China High Speed Transmission Equipment Group N HKD 2.64 2.20 -16.7% 464 11.9 0.4 0.0% 7.2
916 HK China Longyuan Power B HKD 4.85 5.60 15.5% 4,671 9.5 1.0 2.0% 9.5
1072 HK Dongfang Electrical Corporation (H) N HKD 13.56 9.20 -32.2% 3,506 10.4 1.2 1.0% 15.9
3800 HK GCL-Poly Energy Holdings N HKD 1.34 1.10 -17.9% 2,676 1.1 0.0% 9.6
270 HK Guangdong Investment B HKD 6.10 6.70 9.8% 4,906 11.0 1.5 3.4% 6.4
1133 HK Harbin Electric N HKD 6.49 5.80 -10.6% 1,153 7.8 0.6 2.0% 10.3
958 HK Huaneng Renewables Corporation N HKD 1.13 0.90 -20.4% 1,232 11.5 0.6 0.0% 8.8
JASO US JA Solar Holdings N USD 0.61 1.00 65.0% 119 0.1 0.0% 10.1
2222 HK NVC Lighting Holding RS HKD 1.92 773
2727 HK Shanghai Electric Group S HKD 3.19 2.50 -21.6% 5,278 10.9 1.0 2.8% 10.8
TSL US Trina Solar N USD 2.45 4.00 63.3% 173 0.2 0.0% 8.9
2208 HK Xinjiang Goldwind Science & Technology (H) S HKD 3.02 1.90 -37.1% 1,050 20.0 0.5 1.1% 37.2
YGE US Yingli Green Energy S USD 1.29 0.80 -38.0% 202 0.3 0.0% 30.3
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
579 HK Beijing Jingneng Clean Energy 26.7% 71.9% 43.6% 30.5% 12.4% 11.4% 7.9% 1.9
658 HK China High Speed Transmission Equipment Group 36.1% 7.4% 10.9% 17.4% 8.1% 3.2% 3.0% 0.8
916 HK China Longyuan Power 8.6% 14.2% 20.1% 48.9% 28.5% 15.0% 8.3% 1.6
1072 HK Dongfang Electrical Corporation (H) -11.2% -4.2% -6.7% 8.9% 5.4% 5.2% 11.3% (0.2)
3800 HK GCL-Poly Energy Holdings 105.7% 8.9% 19.9% 18.3% 7.4% 0.2% 0.3% 1.3
270 HK Guangdong Investment 5.8% 5.6% 2.7% 72.9% 60.3% 41.9% 11.4% (0.1)
1133 HK Harbin Electric -19.2% 2.2% -3.0% 5.8% 3.0% 3.8% 6.4% (0.0)
958 HK Huaneng Renewables Corporation 60.9% 22.0% 23.0% 89.5% 46.9% 14.2% 5.0% 2.1
JASO US JA Solar Holdings 63.4% -2.6% 376.0% 4.2% -4.5% -7.5% -7.7% 0.3
2222 HK NVC Lighting Holding
2727 HK Shanghai Electric Group -10.6% 2.9% -7.6% 6.4% 4.5% 4.1% 6.8% (0.3)
TSL US Trina Solar 73.1% -9.8% 172.2% 6.4% 0.4% -4.3% -5.8% 0.6
2208 HK Xinjiang Goldwind Science & Technology (H) 23.5% 11.6% 319.8% 2.5% 0.5% 2.4% 2.3% 0.4
YGE US Yingli Green Energy 36.9% -19.1% 278.1% 6.3% -6.6% -14.0% -19.3% 2.2
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 49
Exhibit 100: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 101: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 102: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601908 CH Beijing Jingyuntong Technology Co. S CNY 5.93 2.40 -59.5% 819 47.8 1.3 0.0%
600875 CH Dongfang Electrical Corporation (A) N CNY 12.28 11.60 -5.5% 3,951 11.7 1.4 0.9% 16.6
000541 CH Foshan Lighting & Electrical S CNY 6.26 6.00 -4.2% 984 16.5 2.1 5.6% 10.3
300274 CH Sungrow Power Supply B CNY 7.45 11.00 47.7% 386 14.3 1.1 0.0% 7.4
002202 CH Xinjiang Goldwind Science & Technology (A) S CNY 5.34 2.50 -53.2% 2,310 44.1 1.1 0.5% 60.6
002006 CH Zhejiang Jinggong Science & Technology Co. N CNY 7.22 8.40 16.3% 528 18.0 2.2 0.0% 23.9
600261 CH Zhejiang Yankon Group B CNY 7.60 13.30 75.0% 787 14.7 1.9 2.0% 13.5
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601908 CH Beijing Jingyuntong Technology Co. 74.1% -3.0% 138.7% 4.0% -9.1% 30.2% 2.8% (0.6)
600875 CH Dongfang Electrical Corporation (A) -12.4% -4.2% -6.7% 8.9% 5.4% 5.2% 11.3% (0.2)
000541 CH Foshan Lighting & Electrical 16.4% 11.2% 11.4% 19.1% 14.9% 12.5% 12.4% (0.1)
300274 CH Sungrow Power Supply 25.8% 17.9% 50.1% 14.7% 13.0% 15.8% 7.8% (0.6)
002202 CH Xinjiang Goldwind Science & Technology (A) 21.8% 11.6% 319.8% 2.5% 0.5% 2.4% 2.3% 0.4
002006 CH Zhejiang Jinggong Science & Technology Co. 219.4% 0.9% 81.2% 13.3% 9.1% 19.2% 12.4% (0.2)
600261 CH Zhejiang Yankon Group 34.7% 27.2% 49.3% 10.3% 7.8% 9.5% 12.2% (0.0)
20
30
40
50
60
70
80
90
100
110
120
20
40
60
80
100
120
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-11
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct
-12
No
v-1
2
Price LevelEq-wgt (Offshore Clean Energy)
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 50
Auto: Growth to sustain, prefer luxury segment
Analyst name: Yipeng Yang (yipeng.yang@ghsl.cn)
Sector stance
2013 sector view
We forecast the overall passenger car market will grow at 9.2%/7.8%/8.2% over 2012-2014. Compared to capacity growth
of 20%/21%/11%, this implies industry capacity utilization rate at 87%/77%/75%. We see sector-wise pricing weakness
and margin contraction ahead resulting from this sliding industry utilization rate. However, we still see secular growth in
the luxury segment at a 10% 10-year CAGR. The HDT market has been depressed this year due to macro tightening (Jan–
Sep. yoy down 31%) and is likely to bottom in 2H12E; we might see a mild recovery in 2013E along with the pick-up in
construction/logistics activity. For China dealers: 1) New car margin should stabilize after the trough in 1H2012; 2) In the
next five years, the aftermarket will likely outpace the new car market; 3) Consolidation should continue due to better
financial, human, and managerial resources of the leading dealer groups, which are favored by OEMs when competing
for new franchises; 4) Luxury dealerships remain more attractive than mainstream in terms of profitability and growth.
Therefore we favor auto dealers (esp. luxury dealer).
Key drivers for 2013
Reform drivers
1. Consumption upgrade.
2. Stricter emission standards for both PC and HDT.
3. Export of local OEMs.
Cyclical drivers
1. Industry utilization rate.
2. Pricing/industry destocking of both passenger car and HDT.
3. Policy loosening and construction/logistics activity pick up.
Key risks to our view
1. Weaker demand due to more cities introducing car purchase plates.
3. Slower-than-expected economic recovery;
4. Potential price competition from Japanese brands trying to regain market share.
How we differ from consensus
1. For A-share names (excl. FAW), our 2012-14 estimates are on average -2%/-10%/-19% against Wind consensus.
2. For H-share names (excl. Sinotruk), our 2012-14 estimates are on average -13%/-7%/-6% against Bloomberg
consensus.
Stock recommendations (offshore)
Buy #1: Brilliance China (1114.HK)
Reasons/catalysts
1. Strong growth: the luxury car sector continues to outpace the overall car market with stronger demand and more
localized product offerings; we also see better opportunities in entry luxury and SUV sub-segments.
2. Positive outlook for Brilliance BMW: Brilliance BMW reported above expected wholesale volume estimated to grow
at 37% in 2013E.
3. More product pipeline with X3 and 1 Series localization; near-term BMW brand benefit from weaker Lexus and
Infiniti, which were negatively impacted by the China-Japan tension.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 51
Stock recommendations (offshore)
Buy #2: Baoxin Auto (1293.HK)
Reasons/catalysts
1. Best luxury mix: Baoxin has the highest luxury car sales volume mix (60.8% in 2011 vs. 23.1%/53.3% for
Zhongsheng/Zhengtong).
2. Young store age, higher organic growth in new car sales and aftersales.
3. Low SG&A due to strategic geography concentration.
4. Strong balance sheet, more M&A opportunities.
Sell #1: BYD (1211.HK)
Reasons/catalysts
1. Weaker auto sales due to lower volume booking from SUV model S6 and the weak sales from aging models such as
F0, F6 and G6; GPM on a downward trajectory due to price erosion and economies of scale.
2. The solar panel division might continue posting losses due to weak domestic demand and trade sanctions from
overseas markets.
3. The rollout of EV is slower than expected due to regional protectionism and technology/safety issues.
Stock recommendations (A-share)
Buy #1: SAIC (600104.SS; on CL)
Reasons/catalysts
1. Strong growth from SVW; we expect better volume and margin improvement from cost optimization and product
mix.
2. SGM/SVW will likely benefit from recent Japanese brand weakness.
3. Attractive valuation: 2013E PE/PB at 7.1X/1.1X vs. A share average at 10.0X/1.4X.
Buy #1: Huayu (600741.SS)
Reasons/catalysts
1. Stable growth along with SAIC and other mainstream OEMs.
2. Limited exposure to Japanese brands; will likely benefit from Japanese brand weakness.
3. Attractive valuation: 2013E PE/PB at 8.2X/1.1X vs. A share average (excl. FAW) at 10.0X/1.4X.
Sell #1: Changan (000625.SZ)
Reasons/catalysts
1. Weak revenue rebound owing to weak Changan own brand sedan and minivan sales in spite of aggressive new
product launch.
2. Weak investment income due to company’s Japanese brand exposure (Mazda/Suzuki).
3. Although factoring in Ford’s strong product offering/volume expansion, valuation is expensive at 2013E PE/PB at
15.5X/1.6X vs. A share average (excl. FAW) at 10.0X/1.4X.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 52
Exhibit 103: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 104: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 105: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
1293 HK Baoxin Auto Group B HKD 5.95 6.08 2.2% 1,941 9.2 2.4 1.1% 6.2
1114 HK Brilliance China Automotive Holdings B HKD 9.17 9.53 3.9% 5,908 11.5 2.9 0.0% 170.6
1211 HK BYD Company S HKD 19.54 10.92 -44.1% 5,736 40.3 1.7 0.0% 9.9
200625 CH Chongqing Changan Auto (B) S HKD 3.29 1.94 -41.0% 1,783 7.4 0.7 2.7% 16.6
489 HK Dongfeng Motor B HKD 10.56 11.56 9.5% 11,740 8.2 1.2 2.7% 3.4
175 HK Geely Automobile Holdings N HKD 3.85 3.16 -17.9% 2,904 11.3 1.8 1.1% 8.3
2333 HK Great Wall Motor Co. N HKD 24.90 22.06 -11.4% 8,797 10.4 2.5 2.9% 6.7
2238 HK Guangzhou Automobile Group Co N HKD 5.87 5.15 -12.3% 2,651 9.8 0.9 3.1%
425 HK Minth Group N HKD 8.40 9.40 11.9% 1,035 7.8 1.0 3.9% 3.7
3808 HK Sinotruk (Hong Kong) N HKD 5.10 4.28 -16.1% 1,817 10.2 0.6 1.0% 7.1
2338 HK Weichai Power (H) NR HKD 29.00 7,481 12.6 1.7 2.0% 7.2
1899 HK Xingda International N HKD 3.33 2.70 -18.9% 655 9.1 0.8 2.7% 6.0
1728 HK Zhengtong Auto Services Holdings N HKD 5.27 4.84 -8.2% 1,020 9.7 1.2 0.0% 6.1
881 HK Zhongsheng Group Holdings N HKD 9.64 9.15 -5.1% 1,940 9.5 1.6 1.1% 7.6
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
1293 HK Baoxin Auto Group 54.9% 53.8% 54.9% 7.5% 6.6% 4.3% 25.1% 0.4
1114 HK Brilliance China Automotive Holdings 28.6% 1.3% -1.6% 3.4% 0.6% 52.9% 26.4% (0.0)
1211 HK BYD Company 841.5% 9.1% 21.2% 9.8% 3.3% 1.8% 3.6% 0.4
200625 CH Chongqing Changan Auto (B) 63.3% 10.1% 73.6% 2.1% -2.3% 5.4% 10.3% (0.1)
489 HK Dongfeng Motor 15.3% 14.7% 19.5% 9.8% 7.2% 6.1% 14.5% (0.4)
175 HK Geely Automobile Holdings 8.4% 17.8% 21.0% 10.2% 7.5% 6.9% 15.2% 0.1
2333 HK Great Wall Motor Co. 11.2% 18.7% 11.6% 16.5% 13.7% 11.8% 23.5% (0.2)
2238 HK Guangzhou Automobile Group Co 55.3% 32.6% -37.7% -8.0% -11.8% 18.9% 9.1% 0.1
425 HK Minth Group 13.3% 14.8% 13.9% 23.4% 19.7% 18.6% 12.3% (0.4)
3808 HK Sinotruk (Hong Kong) 207.3% 18.8% 56.5% 8.3% 5.3% 3.3% 5.0% 0.3
2338 HK Weichai Power (H) 22.8% 8.7% 17.8% 12.3% 8.4% 7.4% 10.7% (0.3)
1899 HK Xingda International 33.0% 14.4% 19.8% 17.5% 11.3% 6.8% 6.2% 0.2
1728 HK Zhengtong Auto Services Holdings 35.4% 16.2% 22.1% 5.9% 4.7% 2.6% 11.8% 0.4
881 HK Zhongsheng Group Holdings 41.3% 20.3% 26.4% 5.4% 4.5% 2.3% 14.4% 1.1
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600418 CH Anhui Jianghuai Automobile Co. N CNY 5.22 5.44 4.2% 1,080 8.7 1.0 1.7% 3.1
000625 CH Chongqing Changan Auto (A) S CNY 5.57 3.26 -41.5% 3,757 15.5 1.6 1.3% 38.2
000800 CH FAW Car N CNY 6.21 6.89 11.0% 1,623 40.5 1.2 0.0% 12.1
601633 CH Great Wall Motor Co.(A) N CNY 18.42 18.30 -0.7% 8,323 9.5 2.3 3.1% 6.1
600741 CH Huayu Automotive Systems B CNY 9.18 10.25 11.7% 3,807 8.2 1.1 3.2% 3.5
600104 CH SAIC Motor B* CNY 13.56 17.69 30.5% 18,541 7.1 1.1 4.3% 4.3
000338 CH Weichai Power (A) NR CNY 22.00 7,062 11.9 1.6 2.1% 6.7
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 53
Exhibit 106: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 107: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600418 CH Anhui Jianghuai Automobile Co. 10.8% 6.6% 8.5% 4.7% 2.2% 2.4% 10.8% (0.3)
000625 CH Chongqing Changan Auto (A) 61.2% 10.1% 73.6% 2.1% -2.3% 5.4% 10.3% (0.1)
000800 CH FAW Car 153.3% 48.2% 2.7% 0.4% 0.7% 3.1% 0.3
601633 CH Great Wall Motor Co.(A) 9.7% 18.7% 11.6% 16.5% 13.7% 11.8% 23.5% (0.3)
600741 CH Huayu Automotive Systems -4.5% 8.6% 0.3% 8.5% 6.4% 4.6% 8.8% (0.5)
600104 CH SAIC Motor -2.5% 6.0% 0.2% 6.6% 4.6% 4.1% 11.1% (0.3)
000338 CH Weichai Power (A) 21.2% 8.7% 17.8% 12.3% 8.4% 7.4% 10.7% (0.3)
80
85
90
95
100
105
110
115
120
600
850
1100
1350
1600
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Auto & Comp Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 54
Banks: Constructive on cyclical stabilization; consumption-led
growth a key for rerating
Analyst name: Ning Ma (ning.ma@ghsl.cn); Cheng, Bowei (bowei.cheng@ghsl.cn)
Sector stance
2013 sector view
We are constructive on China banks as the stabilization trend in corporate earnings/asset quality/GDP should support
banks’ NIM/NPL/NPAT and valuations. Economic policies post leadership transition are critical to watch to determine if
we will see a cyclical upturn or an ongoing de-rating for China banks. Prefer quality names with strong CAR/LLR, PPOP
ROA and differentiated franchises.
Key drivers for 2013
Reform drivers
1. Consumer credit development is critical to avoid a Japan-style recession as high corporate leverage may lead to
long-term risk.
2. CBRC’s potential rule on non-core tier I CAR could release capital-raising pressure in the mid-term.
3. Potential further interest rate deregulation may make banks’ earnings more pro-cyclical.
Cyclical drivers
1. Corporate earnings and NPLs stabilize on credit growth, GDP stabilization and corporate borrowing cost reduction
following two rate cuts.
2. We estimate total potential NPL ratios of 4%-6% for listed banks, lower than many investors’ concern of 10%+.
3. Rapid bond/TSF increase should help FAI growth/stabilize corporate earnings, though not enough to fuel a rebound.
4. NIM could be under pressure on weaker loan pricing power if GDP slows further in 2013, and given the continuing
rapid wealth mgmt. product growth.
Key risks to our view
1. Worse than-expected GDP/asset quality and property policy tightening after leadership changes.
2. Government encourages corporate/infrastructure investment at lower interest rates, further increasing corporate
leverage.
How we differ from consensus
1. China bank valuations have limited downside as their valuations imply average 6.1%/5.4% 2012E NPLs vs. our
estimates of total potential NPL of 4% to 6% for listed China banks.
2. Corporate earnings will stabilize in 2H12E with falling interest rates and borrowing costs, and robust TSF(total social
financing) growth.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 55
Stock recommendations (offshore)
Buy #1: CMB (3968.HK; on CL)
Reasons/catalysts: 1) Stronger franchise, risk management capability and deposit franchise; 2) Potential to develop high
ROE consumer banking and SME banking business; 3) Attractive valuation trading at 1.1x 13E PB. Risks: worse-than-
expected GDP, and CMB’s NIM/deposit costs increase.
Buy #2: ABC (1288.HK)
Reasons/catalysts: 1) Strong deposit franchise and well positioned in fast-growing county areas; 2) Strong balance sheet
with 4.18% LLR/loan ratio and 58% LDR should withstand potential NPL cycle and NIM pressure; 3) Attractive valuation,
trading at 1.0x 13E PB with robust three-year EPS CAGR of 16%. Risks: worse-than-expected GDP, and ABC’s
NIM/earnings misses.
Sell #1: BoComm (3328.HK)
Reasons/catalysts: 1) Loan/deposit ratio reached 79%, close to CBRC cap; 2) Rising NPLs/overdues due to its above-peer
exposure to Yangtz River delta, wholesale & retail and manufacturing sectors of 34/13/22% total loans. Risks: much
better than expected China GDP.
Stock recommendations (A-share)
Buy #1: Industrial (601166.SS; on CL)
Reasons/catalysts: 1) Better positioned given its leading interbank business built on its unique bank-bank platform
connecting over 40 smaller banks, as growth of interbank business will likely outpace normal banking business over the
long term despite regulatory scrutiny; 2) Likely continuing above expected balance sheet growth through 2013 aided by
strong interbank funding growth via product innovation; 3) Attractive valuation trading at 0.9x/5.2x 13E PB/PB despite
above-peer ROE. Risks: worse-than-expected GDP, and Industrial’s NIM/deposit costs/NPLs increase.
Sell #1: CEB (601818.SS)
Reasons/catalysts: 1) Relatively weaker tier-1 CAR of 8.2% in 3Q12 vs. peer average of 9.7% and BASEL 3 requirement of
8.5%; 2) Higher-than-peer loan exposure (49% of total loans in 1H12 vs. sector average of 43%) to risky sectors such as
manufacturing/retail/wholesale/local government funding vehicles (LGFVs); 3) higher overdue loan ratio of 1.7% vs.
sector average of 1.1%. Risks: much better than expected China GDP.
Exhibit 108: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
1288 HK Agricultural Bank of China (H) B HKD 3.39 4.70 38.6% 142,065 5.4 1.0 6.5%
3988 HK Bank of China (H) N HKD 3.23 3.50 8.4% 116,336 5.2 0.8 6.7%
3328 HK Bank of Communications(H) S HKD 5.64 5.70 1.1% 54,042 6.1 0.8 4.1%
998 HK China CITIC Bank (H) N HKD 4.01 4.60 14.7% 24,207 4.5 0.7 5.5%
939 HK China Construction Bank (H) B HKD 5.94 7.30 22.9% 191,613 6.4 1.2 5.5%
3968 HK China Merchants Bank (H) B* HKD 14.48 20.60 42.3% 37,675 5.9 1.1 4.3%
1988 HK China Minsheng Banking (H) B HKD 7.44 9.20 23.7% 27,230 4.8 0.9 5.2%
3618 HK Chongqing Rural Commercial Bank B HKD 3.52 4.10 16.5% 4,224 5.0 0.8 6.0%
1398 HK Industrial and Commercial Bank of China (H) B HKD 5.24 6.20 18.3% 235,992 6.4 1.2 5.5%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 56
Exhibit 109: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 110: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 111: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
1288 HK Agricultural Bank of China (H) 9.7% 4.5% 37.2% 18.9%
3988 HK Bank of China (H) 6.8% 9.8% 15.5%
3328 HK Bank of Communications(H) 3.5% 7.0% 13.4%
998 HK China CITIC Bank (H) 2.3% 7.0% 33.8% 15.0%
939 HK China Construction Bank (H) 1.4% 4.8% 18.2%
3968 HK China Merchants Bank (H) 4.1% 6.4% 18.4%
1988 HK China Minsheng Banking (H) 1.3% 2.8% 34.7% 17.8%
3618 HK Chongqing Rural Commercial Bank 3.7% 8.1% 37.9% 15.4%
1398 HK Industrial and Commercial Bank of China (H) 2.4% 5.1% 41.9% 18.1%
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601288 CH Agricultural Bank of China (A) B CNY 2.58 3.80 47.3% 134,538 5.1 1.0 6.9%
601169 CH Bank of Beijing N CNY 7.28 8.10 11.3% 7,279 5.2 0.7 4.7%
601988 CH Bank of China (A) N CNY 2.76 2.90 5.1% 123,697 5.6 0.9 6.3%
601328 CH Bank of Communications (A) N CNY 4.22 4.70 11.4% 50,316 5.6 0.8 4.5%
601009 CH Bank Of Nanjing S CNY 7.70 7.70 0.0% 3,670 6.0 0.8 2.8%
002142 CH Bank of Ningbo N CNY 9.07 10.20 12.5% 4,199 7.4 1.1 2.3%
601998 CH China CITIC Bank (A) N CNY 3.66 3.70 1.1% 27,493 5.1 0.8 4.9%
601939 CH China Construction Bank (A) B CNY 4.15 5.90 42.2% 166,580 5.5 1.0 6.4%
601818 CH China Everbright Bank S CNY 2.60 2.70 3.8% 16,879 4.6 0.8 3.2%
600036 CH China Merchants Bank (A) B CNY 10.03 16.70 66.5% 32,473 5.1 0.9 5.0%
600016 CH China Minsheng Banking (A) B CNY 6.10 7.40 21.3% 27,781 4.9 0.9 5.1%
600015 CH Hua Xia Bank S CNY 8.60 7.10 -17.4% 6,891 5.6 0.8 4.5%
601398 CH Industrial and Commercial Bank of China (A) B CNY 3.85 5.00 29.9% 215,757 5.8 1.1 6.0%
601166 CH Industrial Bank B* CNY 12.56 19.80 57.6% 21,751 5.2 0.9 4.5%
000001 CH Ping An Bank Co. N CNY 13.26 14.40 8.6% 10,907 5.3 0.7 0.0%
600000 CH Shanghai Pudong Development Bank N CNY 7.51 8.80 17.2% 22,491 4.4 0.7 2.7%
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601288 CH Agricultural Bank of China (A) 8.3% 4.5% 37.2% 18.9%
601169 CH Bank of Beijing 5.7% 6.0% 38.7% 13.4%
601988 CH Bank of China (A) 6.8% 9.8% 34.8% 14.8%
601328 CH Bank of Communications (A) 3.5% 7.0% 13.4%
601009 CH Bank Of Nanjing -1.6% 5.8% 39.0% 14.0%
002142 CH Bank of Ningbo -1.7% 5.7% 35.2% 14.5%
601998 CH China CITIC Bank (A) 0.9% 7.0% 33.8% 15.0%
601939 CH China Construction Bank (A) 1.4% 4.8% 18.2%
601818 CH China Everbright Bank 11.0% 8.2% 36.8% 17.5%
600036 CH China Merchants Bank (A) 2.7% 6.4% 18.4%
600016 CH China Minsheng Banking (A) 0.0% 2.8% 34.7% 17.8%
600015 CH Hua Xia Bank 6.7% 4.9% 13.5%
601398 CH Industrial and Commercial Bank of China (A) 1.0% 5.1% 41.9% 18.1%
601166 CH Industrial Bank -4.8% 8.5% 36.4% 16.7%
000001 CH Ping An Bank Co. 3.4% 5.8% 13.3%
600000 CH Shanghai Pudong Development Bank 5.7% 8.4% 15.8%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 57
Exhibit 112: Performance
Source: MSCI, Factset, GS Global ECS Research
80
85
90
95
100
105
110
120
140
160
180
200
220
240
260
280
300
320
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Banks Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 58
Cement: Sustained price recovery from 2Q13E
Analyst name: Julian Zhu (julian.zhu@gs.com)
Sector stance
2013 sector view
We anticipate cement demand to rebound further driven by the ongoing resumption of key infrastructure projects, the
start of recently approved new infrastructure projects and a potential pickup of new property projects starts. On the
supply side, we see the peak of capacity addition already behind us and the Chinese government continues to phase out
obsolete capacity, leading to further improvement of the cement supply and demand profile in 2013. East China should
be the best cement market when new capacity drops sharply to 37mtpa in 2013 from 90+mtpa in 2012, benefiting Conch
and CNBM. We estimate a 5% yoy increase in China average cement price in 2013.
Key drivers for 2013
Reform drivers
1. In principle, no new capacity would be approved since NDRC issued Article 38 banning new cement projects in Sep
2009. After the significant rise of new capacity growth in 2010/2011, we expect a sharp fall of new cement capacity
from 2013 onward.
2. Increasingly strict environmental regulations will likely lift industry operating costs, squeezing out less profitable
marginal producers and accelerating the elimination of obsolete capacity.
3. Industry leaders continue to expand via acquisition, raising industry concentration and eventually translating into
more disciplined supply.
Cyclical drivers
1. We expect a sustained and meaningful rebound in cement demand and prices after seasonal weakness in 1Q13E.
The newly approved infrastructure projects since mid-2012 will likely start after the March NPC meeting, supporting
stronger cement demand and pricing.
Key risks to our view
1. More new capacity than expected and slower-than-expected demand pickup.
2. Higher-than-expected energy cost.
How we differ from consensus
1. We expect a rebound from 2Q13 to be meaningful and sustained, higher than normal seasonal pickup.
Stock recommendations (offshore)
Buy #1: Anhui Conch (H) (0914.HK, on CL)
Reasons/catalysts: 1) Conch’s main operating region is East China, where we see very limited new capacity online
compared to 2012; 2) We expect the company to continue to benefit from its cost advantage, and maintain reasonable
margins even in a difficult market; 3) Conch’s strong balance sheet enables it to expand via acquisition in a downcycle.
Stock recommendations (A-share)
Sell #1: Jidong Cement (000401.SZ)
Reasons/catalysts: 1) Jidong’s additional capacity has been causing operating margin squeeze, making the company
more vulnerable in a difficult market; 2) With its key market in northern China, we expect very limited earnings
contribution from 1Q and 4Q due to cold weather; 3) The company’s FY12 results (due in March 2013) are likely to
disappoint the market.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 59
Exhibit 113: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 114: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 115: Stock valuations (Onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 116: Stock fundamentals (Onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
914 HK Anhui Conch Cement (H) B* HKD 25.65 30.00 17.0% 17,538 11.8 1.9 1.3% 7.1
2009 HK BBMG Corporation (H) S HKD 6.48 4.30 -33.6% 3,582 6.1 0.8 1.5% 11.4
3323 HK China National Building Material B HKD 9.86 10.30 4.5% 6,869 5.8 1.1 3.4% 6.9
1313 HK China Resources Cement Holdings N HKD 4.76 4.00 -16.0% 4,004 12.3 1.4 1.2% 9.2
691 HK China Shanshui Cement Group N HKD 5.19 5.10 -1.7% 1,886 6.3 1.2 4.8% 4.8
2233 HK West China Cement N HKD 1.35 1.44 6.7% 743 8.1 1.0 2.7% 5.3
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
914 HK Anhui Conch Cement (H) 33.0% 10.3% 22.4% 32.9% 26.4% 18.0% 15.3% 0.1
2009 HK BBMG Corporation (H) 13.4% 8.9% 10.9% 12.9% 9.5% 11.1% 12.7% 0.9
3323 HK China National Building Material 23.4% 25.8% 19.1% 19.6% 15.8% 6.3% 14.1% 1.9
1313 HK China Resources Cement Holdings 39.9% 17.7% 32.1% 19.6% 13.3% 8.4% 10.8% 1.0
691 HK China Shanshui Cement Group 28.8% 16.1% 20.8% 24.6% 18.1% 9.6% 17.4% 1.0
2233 HK West China Cement 84.6% 31.9% 40.2% 30.7% 20.5% 11.3% 11.6% 0.7
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600585 CH Anhui Conch Cement (A) N CNY 16.11 16.00 -0.7% 13,707 9.3 1.5 1.6% 5.7
601992 CH BBMG Corporation (A) N CNY 5.91 5.30 -10.3% 4,065 7.1 1.0 1.3% 12.3
000401 CH Tangshan Jidong Cement Co S CNY 11.34 9.20 -18.9% 2,453 10.8 1.1 0.0% 6.0
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600585 CH Anhui Conch Cement (A) 31.3% 10.3% 22.4% 32.9% 26.4% 18.0% 15.3% 0.1
601992 CH BBMG Corporation (A) 11.3% 8.9% 10.2% 12.9% 9.5% 11.1% 12.7% 0.9
000401 CH Tangshan Jidong Cement Co 94.4% 15.3% 32.3% 30.7% 19.0% 9.1% 9.2% 0.7
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 60
Exhibit 117: Performance
Source: MSCI, Factset, GS Global ECS Research
0
20
40
60
80
100
120
140
160
180
200
250
300
350
400
450
500
550
600
650
700
750
800
850
900
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price LevelMSCI China Construction Materials
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 61
Coal: Structural downcycle ahead; Buy Shenhua on diversity
Analyst name: Julian Zhu (julian.zhu@gs.com), Han Yong (yong.han@ghsl.cn)
Sector stance
2013 sector view
We expect the decade-long railway bottleneck for coal transportation to ease as a significant amount of new railway
capacity enters operations from 2013. The rising supply (3% yoy in 2013 vs 2% in 2012) and railway debottlenecking are
structural developments in China’s coal industry that will continue to play out over the next three to five years, making
new coal projects in North and Northwest China a viable supply for coal users along the coast and in South China.
Moreover, with integration between IPPs and coal miners, pricing power of independent coal producers is likely to
become even weaker.
We see a structural down cycle for China thermal coal industry and estimate China’s spot coal price to fall by 3% yoy in
2013 as demand growth of 5% is not strong enough to offset supply growth. This, combined with cost inflation, suggests
further margin squeeze for coal producers. Although we favor coking coal in the long run due to its scarcity nature, we
expect the price to stay flat with pressure from the steel industry in the downstream.
Key drivers for 2013
Reform drivers
1. With the price difference at very low level, the Chinese government will likely finally remove the decade-long
“double systems of coal prices”, i.e., unifying the contract and spot coal markets. This would remove the policy
overhang on any upside of contract coal prices going forward should supply tighten again. However, given our
belief of a structural oversupply outlook, we don't expect any material earnings impact on contract coal producers in
2013.
Cyclical drivers
1. Rising supply from North and Northwest China.
2. As a late cycle play, coal should lag other commodities including cement and steel when demand rebounds.
3. China domestic coal prices should also be negatively impacted if imports rise on widening price arbitrage between
domestic and seaborne coal prices.
Key risks to our view
1. Bigger-/smaller-than-expected seaborne-domestic arbitrage opportunity.
2. Production interruption.
How we differ from consensus
1. We have become increasingly cautious on the medium- and long-term thermal coal market in China as we see a
structural oversupply emerging, hurting coal producers’ margins and returns.
Stock recommendations (offshore)
Buy #1: China Shenhua (1088.HK)
Reasons/catalysts: 1) Shenhua is the only truly integrated coal producer in China, and we consider the company to have
the highest earning visibility among peers, thanks to its diversified business model; 2) Shenhua enjoys the lowest
production costs among major thermal coal producers under our coverage.
Sell #1: Yanzhou Coal (1171.HK)
Reasons/catalysts: 1) Yanzhou’s increasing exposure to the seaborne market makes it more vulnerable to global coal
prices weakness; 2) We expect the company’s newly acquired Australian assets to stay unprofitable till 2H13, dragging
its overall profitability.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 62
Stock recommendations (A-share)
Buy #1: China Shenhua (601088.SS)
Reasons/catalysts: 1) Shenhua is the only truly integrated coal producer in China, and we consider the company to have
the highest earning visibility among peers, thanks to its diversified business model; 2) Shenhua enjoys the lowest
production costs among major thermal coal producers under our coverage.
Buy #2: Jizhong Energy (000937.SS; on CL)
Reasons/catalysts: 1) In past years, it completed several acquisitions, demonstrating strong execution; 2) Cost control
was better than peers in 3Q12, reducing earnings downside risk.
Buy #3: Lanhua Sci-Tech (600123.SS)
Reasons/catalysts: 1) The company has clear earnings visibility as its products (urea and anthracite) prices are more
stable; 2) It should see sustainable organic growth over the next four years; we expect its coal production to double.
Sell #1: Yanzhou Coal (600188.SS)
Reasons/catalysts: 1) Yanzhou’s increasing exposure to the seaborne market makes it more vulnerable to global coal
prices weakness; 2) We expect the company’s newly acquired Australian assets to stay unprofitable till 2H13, dragging
its overall profitability.
Sell #2: Datong Coal (601001.SS)
Reasons/catalysts: 1) Datong’s coal mines are aging, and the production of key mines has declined in recent years; 2) Its
cost is at the high end of the thermal coal sector, and its earnings are hurt more by coal price declines.
Exhibit 118: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 119: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
1898 HK China Coal Energy (H) N HKD 7.87 7.80 -0.9% 13,463 11.8 0.9 2.5% 7.5
1088 HK China Shenhua Energy (H) B HKD 32.30 38.00 17.6% 82,893 11.5 1.8 3.4% 6.6
3948 HK Inner Mongolia Yitai Coal Co Ltd B HKD 43.40 51.40 18.4% 9,111 7.7 1.8 5.2% 4.9
1171 HK Yanzhou Coal Mining (H) S HKD 11.92 10.30 -13.6% 7,564 7.9 0.9 4.0% 6.0
900948 CH Yitai Coal B USD 5.43 6.59 21.5% 8,826 7.5 1.7 5.3% 4.8
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
1898 HK China Coal Energy (H) -12.4% 10.2% 3.9% 17.8% 10.6% 6.7% 7.5% 0.4
1088 HK China Shenhua Energy (H) -0.9% 2.3% 0.6% 32.9% 24.8% 18.0% 15.8% (0.1)
3948 HK Inner Mongolia Yitai Coal Co Ltd 4.9% 2.7% 5.1% 33.9% 30.6% 22.3% 20.5% (0.1)
1171 HK Yanzhou Coal Mining (H) -19.8% 1.8% 13.8% 22.9% 16.1% 10.1% 11.1% 0.6
900948 CH Yitai Coal 4.7% 2.7% 4.9% 33.9% 30.6% 22.3% 20.5% (0.1)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 63
Exhibit 120: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 121: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601101 CH Beijing Haohua Energy Resource N CNY 11.47 13.43 17.1% 2,210 12.6 1.8 3.4% 7.6
601898 CH China Coal Energy (A) N CNY 6.90 6.60 -4.3% 14,688 13.1 1.0 2.2% 8.0
601088 CH China Shenhua Energy (A) B CNY 21.73 26.80 23.3% 69,392 9.8 1.5 4.0% 5.7
601001 CH Datong Coal Industry S CNY 8.61 7.28 -15.5% 2,314 50.8 1.4 0.6% 5.8
600395 CH Guizhou Panjiang Refined Coal N CNY 14.71 16.84 14.5% 3,909 14.3 2.9 3.9% 8.2
000933 CH Henan Shen Huo Coal Industry & Electricity Power Co. N CNY 6.99 7.33 4.9% 2,133 9.5 1.0 1.2% 4.6
002128 CH Huolinhe Opencut Coal N CNY 12.52 12.70 1.4% 2,667 12.6 2.7 3.3% 8.9
000937 CH Jizhong Energy Resources B* CNY 11.00 18.45 67.7% 4,085 10.7 1.4 1.8% 5.0
600997 CH Kailuan Energy Chemical N CNY 9.10 9.05 -0.6% 1,804 19.2 1.5 0.8% 8.3
601666 CH Pingdingshan Tianan Coal Mining N CNY 7.94 8.37 5.4% 3,012 17.3 1.6 1.5% 4.4
000780 CH Pingzhuang Energy Resources N CNY 9.00 10.88 20.9% 1,466 15.5 1.6 0.7% 5.9
601918 CH SDIC Xinji Energy Co. N CNY 8.48 11.75 38.5% 2,519 9.7 1.6 2.8% 6.3
600123 CH Shanxi Lanhua Sci-Tech Venture B CNY 17.67 23.00 30.2% 3,241 9.7 1.8 2.1% 5.7
601699 CH Shanxi Lu'an Environmental Energy Development B CNY 16.66 24.14 44.9% 6,155 13.2 2.1 2.3% 5.4
000983 CH Shanxi Xishan Coal and Electricity Power N CNY 11.96 13.40 12.0% 6,051 17.3 2.2 1.3% 5.5
600348 CH Yangquan Coal Industry Group N CNY 13.02 15.11 16.1% 5,027 15.5 2.1 1.1% 5.4
600188 CH Yanzhou Coal Mining (A) S CNY 16.71 13.10 -21.6% 13,195 14.1 1.6 2.2% 8.7
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601101 CH Beijing Haohua Energy Resource -8.2% 0.3% -7.1% 25.6% 22.2% 15.7% 12.1% (0.2)
601898 CH China Coal Energy (A) -14.1% 10.2% 3.2% 17.8% 10.6% 6.7% 7.5% 0.4
601088 CH China Shenhua Energy (A) -2.8% 2.3% 0.0% 32.9% 24.8% 18.0% 15.8% (0.1)
601001 CH Datong Coal Industry -27.0% 3.6% 2.7% 8.2% 6.2% 0.8% 1.7% (0.2)
600395 CH Guizhou Panjiang Refined Coal 12.6% 18.0% 11.4% 33.2% 24.7% 18.6% 18.6% (0.0)
000933 CH Henan Shen Huo Coal Industry & Electricity Power Co. -66.2% 7.3% 13.4% 13.9% 8.4% 3.8% 9.3% 0.5
002128 CH Huolinhe Opencut Coal -6.7% 2.0% -3.4% 30.2% 22.9% 19.5% 20.7% 0.2
000937 CH Jizhong Energy Resources 4.5% 8.7% 6.2% 14.6% 9.7% 6.1% 12.0% 0.1
600997 CH Kailuan Energy Chemical -13.5% 0.3% -1.6% 9.5% 5.1% 2.8% 6.3% 0.4
601666 CH Pingdingshan Tianan Coal Mining -10.3% 5.4% -8.0% 14.7% 5.4% 4.1% 8.9% (0.1)
000780 CH Pingzhuang Energy Resources -8.2% 2.9% -8.3% 24.9% 17.5% 16.2% 10.6% (0.7)
601918 CH SDIC Xinji Energy Co. 13.5% 26.3% 10.5% 30.1% 22.7% 13.1% 16.0% 0.8
600123 CH Shanxi Lanhua Sci-Tech Venture 6.0% 11.1% 12.7% 39.0% 30.3% 24.0% 17.4% (0.2)
601699 CH Shanxi Lu'an Environmental Energy Development -1.4% 12.1% 6.1% 26.4% 14.2% 11.7% 15.7% (0.1)
000983 CH Shanxi Xishan Coal and Electricity Power -5.5% 5.3% -0.8% 22.2% 11.8% 6.8% 10.7% (0.1)
600348 CH Yangquan Coal Industry Group -7.4% 3.1% -5.1% 8.2% 4.9% 3.8% 12.6% (0.6)
600188 CH Yanzhou Coal Mining (A) -18.3% 1.8% 17.4% 22.9% 16.1% 10.1% 11.1% 0.6
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 64
Exhibit 122: Performance
Source: MSCI, Factset, GS Global ECS Research
20
30
40
50
60
70
80
90
100
110
20
30
40
50
60
70
80
90
100
110
120
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
Eq-wgt (Offshore Coal)
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 65
Conglomerates: Prefer stocks with earnings visibility
Analyst name: Simon Cheung (simon.cheung@gs.com), Frank He (frank.he@gs.com)
Sector stance
2013 sector view
We prefer conglomerates companies with earnings visibility and structural growth opportunities against macro
uncertainty. We believe Shanghai Industrial and Tianjin Development offer a stable growth outlook while receiving
support from municipal governments to acquire quality assets at reasonable valuations. We believe the turnaround of
Shanghai Industrial’s property division and Tianjin Development’s acquisition of machinery assets have yet to be fully
priced in. On the other hand, we are cautious on companies with exposure to the steel sector, including Fosun and CITIC
Pacific.
Key drivers for 2013
Reform drivers
1. Asset restructuring and optimization: Conglomerates have leeway to adjust asset portfolios against different
economic cycles. We see Shanghai Industrial has allocated more resources to acquire infrastructure-related assets
and this trend will continue in 2013E. Its parent is in the late stages of acquire a minority stake of a toll bridge close
to Shanghai now and plans to inject the asset to Shanghai Industrial in 2013. In addition, the company recently
became involved in the waste-to-energy business. We also expect Tianjin Development to acquire more assets from
the government, leveraging on its high cash balance.
Cyclical drivers
1. Prolonged earnings turnaround of steel sector: Our Metals & Mining team remains cautious on steel, mainly
because the persisting over-capacity issue will likely result in unsustainable steel price recovery. In addition, our
global Commodities team expects the iron ore price to reach US$140/tonne in 2013, thus leading to ongoing margin
pressure for steel mills.
Key risks to our view
1. Strong steel price recovery due to ramp up in infrastructure investment may affect our cautious views on Fosun and
CITIC Pacific.
How we differ from consensus
1. We have a more cautious outlook on CITIC Pacific on potential disappointment from higher-than-expected cash cost
for its iron ore project to be launched in Nov 2012.
2. We also hold a more conservative view on Fosun’s transformation to an insurance-based investment company due
to its stretched balance sheet and prolonged payback period.
Stock recommendations (offshore)
Buy #1: Shanghai Industrial (0363.HK)
Reasons/catalysts: (1) We expect Shanghai Industrial Urban Development (SIUD)’s earnings to turn around by 2013,
driven by solid contract sales as well as potential share disposal in commercial projects such as U-Center and Xujiahui
Center; (2) We believe its parent will inject a minority stake of a toll bridge close to Shanghai into SIHL once its
acquisition is complete, and we are positive on its move into the waste-to-energy sector; (3) The company plans to
maintain absolute dividend payout at over HK$1.0/share in coming years, supported by strong dividend uplift from
infrastructure as well as consumer division.
Buy #2: Tianjin Development (0882.HK)
Reasons/catalysts: (1) We believe Tianjin Development’s recently-proposed acquisitions in machinery assets unwinds
its future growth strategy while partly utilizes its rich cash balance to generate returns; (2) We see a limited impact from
the earnings decline of Dynasty Wine as we estimate it accounts for only 6% of 2013E EV and we believe its earnings
turnover is set with ongoing distribution channel restructuring; (3) Given that net cash represents 79% of market cap and
the stock is trading at a 64% discount to 2013E NAV, we believe the stock offers value.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 66
Exhibit 123: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 124: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 125: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 126: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
392 HK Beijing Enterprises Holdings N HKD 50.45 52.70 4.5% 7,404 14.5 1.3 2.1% 13.8
144 HK China Merchants Holdings N HKD 23.70 26.90 13.5% 7,567 15.3 1.3 3.3% 16.5
267 HK CITIC Pacific N HKD 9.85 10.70 8.6% 4,638 8.0 0.4 4.6% 15.7
1199 HK COSCO Pacific B HKD 10.96 13.20 20.4% 3,835 9.8 0.9 4.1% 15.8
2880 HK Dalian Port Company N HKD 1.75 1.70 -2.9% 999 7.0 0.5 5.7% 8.1
656 HK Fosun International S HKD 4.27 3.80 -11.0% 3,538 9.3 0.6 3.8% 10.4
177 HK Jiangsu Expressway (H) B HKD 6.97 8.20 17.6% 4,531 11.2 1.4 6.5% 7.3
363 HK Shanghai Industrial B HKD 25.40 27.80 9.4% 3,539 10.8 0.8 4.3% 10.7
548 HK Shenzhen Expressway (H) N HKD 2.87 2.80 -2.4% 808 7.7 0.5 6.9% 6.5
107 HK Sichuan Expressway (H) B HKD 2.46 3.00 22.0% 891 5.2 0.5 4.8% 7.4
3382 HK Tianjin Port Development Holdings N HKD 0.97 1.00 3.1% 764 7.5 0.5 5.4% 8.0
576 HK Zhejiang Expressway N HKD 5.91 5.60 -5.2% 3,312 11.8 1.3 6.4% 7.0
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
392 HK Beijing Enterprises Holdings 15.6% 20.8% 9.1% 11.9% 7.9% 8.7% 7.8% 0.2
144 HK China Merchants Holdings 8.6% 6.1% 7.6% 52.0% 32.8% 37.0% 8.2% 0.4
267 HK CITIC Pacific -28.9% 15.8% 26.2% 8.4% 5.7% 3.9% 5.1% 1.2
1199 HK COSCO Pacific 12.3% 11.1% 12.9% 47.8% 32.8% 47.3% 9.5% 0.5
2880 HK Dalian Port Company 17.2% 7.0% 2.8% 37.4% 23.1% 19.7% 6.1% 0.4
656 HK Fosun International 33.8% 9.6% 14.3% 14.2% 9.9% 4.1% 4.4% 0.8
177 HK Jiangsu Expressway (H) 3.8% 5.1% 0.5% 54.9% 41.5% 30.9% 12.5% 0.2
363 HK Shanghai Industrial -32.7% -2.3% -17.6% 32.6% 27.0% 14.3% 5.2% 0.4
548 HK Shenzhen Expressway (H) -3.7% -1.0% 2.3% 77.3% 47.3% 22.6% 5.8% 0.7
107 HK Sichuan Expressway (H) -4.4% 11.7% -2.1% 42.0% 31.7% 25.3% 10.3% 0.7
3382 HK Tianjin Port Development Holdings 3.3% 7.9% 1.8% 14.6% 9.8% 4.1% 3.6% 0.2
576 HK Zhejiang Expressway 3.6% 0.9% 1.3% 47.3% 34.3% 26.7% 8.9% (0.1)
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600377 CH Jiangsu Expressway (A) B CNY 4.90 6.70 36.7% 3,963 9.8 1.3 7.4% 6.5
600018 CH Shanghai International Port Group N CNY 2.48 2.90 16.9% 9,060 11.1 1.1 4.5% 6.8
600548 CH Shenzhen Expressway (A) S CNY 3.16 3.30 4.4% 1,106 10.5 0.7 5.1% 7.4
601107 CH Sichuan Expressway (A) N CNY 3.13 3.10 -1.0% 1,411 8.2 0.9 3.1% 9.2
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600377 CH Jiangsu Expressway (A) 2.4% 5.1% 0.5% 54.9% 41.5% 30.9% 12.5% 0.2
600018 CH Shanghai International Port Group 8.2% 6.7% 6.1% 34.4% 25.2% 16.8% 9.1% 0.2
600548 CH Shenzhen Expressway (A) -5.0% -1.0% 2.3% 77.3% 47.3% 22.6% 5.8% 0.7
601107 CH Sichuan Expressway (A) -5.7% 11.7% -2.1% 42.0% 31.7% 25.3% 10.3% 0.7
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 67
Exhibit 127: Performance
Source: MSCI, Factset, GS Global ECS Research
70
75
80
85
90
95
100
105
60
70
80
90
100
110
120
130
140
150
160
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price LevelMSCI China Industrial Conglomerates
IndexRelative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 68
Consumer Staples: Competition remains in focus
Analyst name: Lisa Deng (lisa.deng@gs.com)
Sector stance
2013 sector view
In 2013, market competition is likely to remain a central theme with raw material prices expected to remain under
control. However, as the Chinese consumer becomes more sophisticated, the competitive landscape is evolving to one
with heavier emphasis on product and brand compared to the previous focus on distribution and cost. We expect
domestic Staples companies in 2013 to be challenged by a myriad of changing consumer trends, including a celebration
of choice, premiumization, concern for health and food safety, voicing of opinions on the internet, etc. As these play to
the strengths of more market-savvy MNCs, we believe market share shifts will be key to watch. Against this backdrop,
we prefer companies that are market leaders in segments that still have high growth potential and either differentiated
offerings or room for margin upside via scale and efficiency upgrades. Our top picks in the sector are Want Want and
China Foods. Uni-President China has demonstrated an impressive operational turnaround, but at the current valuation
the stock looks expensive.
Key drivers for 2013
Reform drivers
1. Wage inflation increasing spending power in lower-tier cities.
2. Increased focus on food safety causing companies to integrate upstream (e.g. dairy farms).
3. Rise of the modern trade and increasing competition from MNCs.
Cyclical drivers
1. Increasing competition in beverages.
2. Supply shortage and food safety concerns in dairy.
3. Over-capacity in tissues.
Key risks to our view
1. Downside: 1) continued sluggish China growth; 2) Worse-than-expected raw material inflation; 2) Intense
competition.
2. Upside: 1) Better-than-expected macro recovery; 2) Fall in raw material inflation; 3) Less intense competition.
How we differ from consensus
1. Our sector view is more cautious vs. the street (2013/14 EPS forecasts generally in line or below consensus). We
believe increasing competition, over-capacity and efforts to rebrand will pose risk to top line and margins.
Stock recommendations (offshore)
Buy #1: Want Want (0151.HK)
Reasons/catalysts: 1) 25% forecast EPS CAGR (1st quartile relative to peers) driven by continued sales upside in modern
trade and lower-tier cities; 2) Main investor concern of product innovation being addressed by added investment into
R&D and more rigorous application of innovation process.
Buy #2: China Foods (0506.HK)
Reasons/catalysts: Margin turnaround on the back of successful corporate restructuring in 2011, with a focus on cost
efficiency. We expect NPAT margin to rise from 2.3% in 2011 to 3.2% in 2014 – still an industry laggard.
Sell #1: Uni-President China (0220.HK)
Reasons/catalysts: We acknowledge that UPC has executed an impressive operational turnaround on the back of
successful product innovations in instant noodles and beverages. However, at 33.6x/28.2x on GS/Consensus 2013
estimates, we believe the stock is expensive.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 69
Exhibit 128: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 129: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 130: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 131: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
506 HK China Foods B HKD 8.12 9.20 13.3% 2,928 21.2 2.8 1.7% 9.8
1068 HK China Yurun Food Group N HKD 4.88 5.95 21.9% 1,148 8.2 0.5 4.7% 5.9
468 HK Greatview Aseptic Packaging Company B HKD 4.05 5.25 29.6% 697 11.7 2.1 1.8% 7.7
1044 HK Hengan International N HKD 69.65 82.10 17.9% 11,045 22.0 5.6 2.6% 15.6
2319 HK Mengniu Dairy N HKD 21.60 22.15 2.5% 4,913 18.4 2.1 1.3% 7.7
2222 HK NVC Lighting Holding RS HKD 1.92 773
6808 HK Sun Art Retail Group B HKD 11.32 13.00 14.8% 13,933 27.7 4.4 1.4% 11.8
322 HK Tingyi (Cayman Islands) Holdings N HKD 21.85 18.95 -13.3% 15,760 27.7 5.0 1.8% 11.9
220 HK Uni-President China Holdings Ltd. S HKD 9.99 6.30 -36.9% 4,640 33.2 3.5 0.8% 16.9
151 HK Want Want China Holdings B HKD 11.28 11.85 5.1% 19,240 27.4 9.9 2.2% 18.9
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
506 HK China Foods 20.5% 15.5% 18.7% 5.9% 4.5% 2.9% 10.5% (0.1)
1068 HK China Yurun Food Group 209.4% 31.5% 887.3% 4.9% 3.5% 2.6% 5.8% 0.2
468 HK Greatview Aseptic Packaging Company 27.3% 42.7% 31.5% 22.3% 18.6% 14.0% 18.0% 0.1
1044 HK Hengan International 21.0% 26.8% 15.5% 23.1% 20.4% 15.9% 24.8% 0.2
2319 HK Mengniu Dairy 15.9% 15.1% 17.3% 7.6% 4.8% 3.7% 10.7% (0.4)
2222 HK NVC Lighting Holding
6808 HK Sun Art Retail Group 20.5% 15.8% 22.1% 7.1% 4.6% 3.2% 14.9% (0.3)
322 HK Tingyi (Cayman Islands) Holdings 35.6% 20.2% 23.6% 12.5% 8.4% 5.1% 14.1% 0.0
220 HK Uni-President China Holdings Ltd. 3.9% 19.4% 14.0% 8.0% 4.0% 3.5% 10.6% 0.6
151 HK Want Want China Holdings 29.1% 27.3% 29.5% 23.1% 20.7% 16.3% 36.0% (0.2)
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600361 CH Beijing Hualian Hypermarket Co. N CNY 4.60 4.20 -8.7% 492 39.2 1.0 2.4%
002264 CH Fujian New Hua Du Supercenter Co. B CNY 4.89 6.12 25.2% 420 15.2 1.8 0.7% 3.8
300146 CH Guangdong By-health Biotechnology Co. N CNY 51.50 53.70 4.3% 1,808 26.9 5.5 2.2% 20.9
601933 CH Yonghui Superstores B CNY 23.29 31.00 33.1% 2,871 26.3 3.5 0.4% 11.6
000759 CH Zhongbai Holdings Group Co. N CNY 6.11 5.40 -11.6% 668 19.2 1.4 0.0% 3.9
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600361 CH Beijing Hualian Hypermarket Co. 49.9% 14.0% 19.4% 3.2% 1.3% 0.6% 2.5% (1.2)
002264 CH Fujian New Hua Du Supercenter Co. 19.7% 26.0% 22.4% 4.9% 2.8% 2.0% 12.0% (0.7)
300146 CH Guangdong By-health Biotechnology Co. 46.0% 45.5% 51.2% 30.0% 28.9% 26.3% 20.5% (0.6)
601933 CH Yonghui Superstores 40.5% 32.2% 36.4% 5.0% 3.2% 2.0% 13.3% 0.3
000759 CH Zhongbai Holdings Group Co. 20.4% 18.4% 16.0% 3.6% 1.6% 1.2% 6.8% (0.5)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 70
Exhibit 132: Performance
Source: MSCI, Factset, GS Global ECS Research
80
85
90
95
100
105
110
115
120
800
900
1000
1100
1200
1300
1400
1500
1600
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Consumer Staples Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 71
Healthcare: Lacking catalysts, EPS growth to drive performance
Analyst name: Wei Du, Ph.D (wei.du@ghsl.cn); Fengqi Qian (fengqi.qian@ghsl.cn)
Sector stance
2013 sector view
We see limited policy catalysts in the near to medium term and believe earnings growth will be key to stock performance
in 2013. We think price cut overhang has largely lifted while hospital reform is the center of the focus. We expect
industry to grow at 17-20% yoy in 2013, as strong growth in lower tier cities offset the softened growth in more affluent
areas. We continue to favor medical device, service companies/distributors with limited risk exposure to price volatility
and companies with competitive products. We remain cautious on antibiotic manufacturers as demand is unlikely to
rebound as a result of restriction of antibiotic usage, in our view.
Key drivers for 2013
Reform drivers
1. Increasing reimbursement ratio and expanded insurance coverage continue to drive volume demand
2. Removal of drug mark up and total cost control measure weight on drugs with no significant clinical efficacy.
3. Potential centralized procurement on medical consumables pose a major near term overhang on pricing trend.
Key risks to our view
1. Shortfall of local government funding impose a major uncertainty to the direction of the ongoing healthcare reform
2. Worse than expect price decline in local tendering impose a major downside risk.
How we differ from consensus
1. NA
Stock recommendations (offshore)
Buy #1: CMS (0867.HK, Buy)
Reasons/catalysts: 1) Strong earnings CAGR of 31% from 2012-2014E; 2) Limited exposure to drug price cut; (3) potential
upside from new contract agreement and M&A due to rich cash position
Buy #2: Wuxi PharmaTech (WX, Buy)
Reasons/catalysts: 1) Easing margin pressure on moderate RMB appreciation and change in service mix; 2) Marin
improvement in manufacturing business due to rising utilization rate; 3) the ramp-up of the Wuhan facility as a low-cost
center helps easing opex pressure.
Sell #1: The United Lab (3933.HK, Sell)
Reasons/catalysts: 1) Weakening industry demand due to policy overhang; 2) rising corn prices weigh on margins.
Stock recommendations (A-share)
Buy #1: Yuyue (002223.SZ; on CL)
Reasons/catalysts: 1) Strong revenue CAGR of 30% and net profit CAGR of 32% from 2011-14E; 2) Oxygenator export
orders a bright spot: 2011-15E export revenue CAGR of 70%; 3) Strong product pipeline: blood glucose meter and air
purifiers will become core earnings driver from 2013E.
Sell #1: NHU (002001.SZ, Sell)
Reasons/catalysts: 1) Weakening global demand amid uncertainly related European crisis; 2) continued downward
pricing pressure due to saturated capacity; 3) ramp-up of new business may lag behind schedule.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 72
Exhibit 133: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 134: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 135: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
867 HK China Medical System Holdings B HKD 5.28 5.11 -3.2% 1,645 14.7 3.4 3.4% 10.4
1011 HK China NT Pharma Group Company S HKD 0.85 0.53 -37.6% 119 0.4 0.0% 45.6
1093 HK China Pharmaceutical Group S HKD 2.17 1.41 -35.0% 430 16.6 0.5 0.0% 5.3
2877 HK China Shineway Pharmaceutical Group B HKD 11.82 12.90 9.1% 1,261 9.6 1.6 3.0% 4.9
874 HK Guangzhou Pharmaceutical (H) NR HKD 13.04 1,364 21.9 2.0 1.3% 27.2
MR US Mindray Medical International N USD 34.03 35.50 4.3% 3,922 17.6 2.7 1.6% 12.1
1066 HK Shandong Weigao Group N HKD 8.39 9.00 7.3% 4,846 22.3 3.0 1.0% 21.2
2607 HK Shanghai Pharmaceuticals Holding (H) N HKD 14.92 13.30 -10.9% 5,176 13.2 1.2 1.6% 7.2
460 HK Sihuan Pharmaceutical Holdings Group N HKD 3.07 3.10 1.0% 2,050 11.1 1.6 5.5% 7.5
SCR US Simcere Pharmaceutical Group N USD 7.92 7.50 -5.3% 435 20.3 1.2 0.0% 9.2
1177 HK Sino Biopharmaceutical N HKD 3.57 3.82 7.0% 2,276 17.5 3.9 3.4% 9.0
1099 HK Sinopharm Group Co. N HKD 24.80 27.10 9.3% 7,688 20.2 2.5 1.5% 9.4
3933 HK The United Laboratories International Holdings S HKD 3.81 3.10 -18.6% 800 15.0 1.0 0.0% 7.8
WX US WuXi PharmaTech Cayman B USD 15.94 17.40 9.2% 1,124 11.2 1.8 0.0% 7.6
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
867 HK China Medical System Holdings 30.8% 25.5% 25.7% 40.2% 33.5% 31.4% 22.9% (0.3)
1011 HK China NT Pharma Group Company 47.0% 8.1% 192.7% 1.6% 0.1% -3.3% -2.5% 0.2
1093 HK China Pharmaceutical Group 403.5% 12.3% 31.9% 11.7% 4.5% 2.6% 3.2% 0.2
2877 HK China Shineway Pharmaceutical Group 14.1% 11.7% 14.5% 44.8% 38.1% 35.4% 17.2% (0.6)
874 HK Guangzhou Pharmaceutical (H) 17.3% 15.0% 9.1% 4.4% 2.9% 5.4% 8.7% 0.0
MR US Mindray Medical International 16.2% 16.7% 17.5% 24.8% 19.5% 18.0% 15.2% (0.2)
1066 HK Shandong Weigao Group 23.5% 22.6% 28.5% 29.0% 25.9% 28.6% 13.3% (0.1)
2607 HK Shanghai Pharmaceuticals Holding (H) 21.0% 21.7% 23.0% 4.9% 4.1% 2.9% 8.0% (0.2)
460 HK Sihuan Pharmaceutical Holdings Group 24.7% 18.3% 19.7% 42.1% 32.2% 34.5% 14.8% (0.3)
SCR US Simcere Pharmaceutical Group 22.0% 7.0% 13.6% 13.9% 8.6% 6.0% 5.5% 0.0
1177 HK Sino Biopharmaceutical 25.8% 19.8% 18.5% 18.9% 16.6% 10.6% 15.6% (0.5)
1099 HK Sinopharm Group Co. 26.8% 25.0% 23.8% 4.0% 3.6% 1.4% 9.2% 0.3
3933 HK The United Laboratories International Holdings 12.7% 10.1% 13.1% 16.4% 9.4% 5.2% 6.9% 0.7
WX US WuXi PharmaTech Cayman 18.3% 17.0% 18.1% 24.5% 18.4% 17.2% 16.1% (0.1)
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
002038 CH Beijing SL Pharmaceutical N CNY 35.70 33.90 -5.0% 1,441 23.3 5.4 0.6% 19.5
000999 CH China Resources Sanjiu Pharmaceutical N CNY 20.25 22.70 12.1% 3,183 16.3 3.3 1.9% 10.1
300006 CH Chongqing Lummy Pharmaceutical B CNY 18.25 19.70 7.9% 536 22.8 4.2 1.1% 16.4
300146 CH Guangdong By-health Biotechnology Co. N CNY 51.50 53.70 4.3% 1,808 26.9 5.5 2.2% 20.9
600594 CH Guizhou Yibai Pharmaceutical N CNY 19.15 19.90 3.9% 1,109 15.3 3.8 0.7% 10.4
600276 CH Jiangsu Hengrui Medicine Co. N CNY 28.78 28.10 -2.4% 5,714 28.0 5.6 0.4% 19.9
002262 CH Jiangsu NHWA Pharmaceutical Co. N CNY 25.02 26.60 6.3% 940 26.2 6.6 0.4% 18.8
002223 CH Jiangsu Yuyue Medical Equipment & Supply B* CNY 13.34 19.40 45.4% 876 18.6 4.3 1.0% 13.9
600422 CH Kunming Pharmaceutical N CNY 17.34 17.20 -0.8% 875 22.1 5.4 2.5% 14.6
300003 CH Lepu Medical Technology N CNY 8.61 9.60 11.5% 1,122 13.5 2.3 2.2% 9.2
000423 CH Shandong Dong-E E-Jiao Co. B CNY 38.70 45.50 17.6% 3,592 17.6 4.7 1.3% 13.6
002022 CH Shanghai Kehua Bio-Engineering Co S CNY 10.38 9.50 -8.5% 820 17.7 4.9 4.9% 12.9
002399 CH Shenzhen Hepalink Pharmaceutical Co. N CNY 19.21 17.90 -6.8% 2,468 23.8 1.9 3.2% 14.5
600587 CH Shinva Medical Instrument B CNY 28.52 34.00 19.2% 615 21.6 2.8 0.8% 14.5
600535 CH Tianjin Tasly Pharmaceutical Co. N CNY 51.19 51.80 1.2% 4,011 28.7 5.0 0.0% 21.9
600079 CH Wuhan Humanwell Healthcare (Group) Co. B CNY 21.39 26.30 23.0% 1,695 19.7 3.0 0.6% 11.2
000538 CH Yunnan Baiyao Grp Co. N CNY 64.78 64.60 -0.3% 7,221 23.2 5.0 0.0% 18.3
600267 CH Zhejiang Hisun Pharmaceutical Co. N CNY 14.30 13.60 -4.9% 1,928 22.3 2.3 0.7% 22.3
600521 CH Zhejiang Huahai Pharmaceutical Co. N CNY 11.57 13.20 14.1% 1,001 16.3 3.0 1.5% 9.7
002001 CH Zhejiang NHU Co S CNY 17.93 14.60 -18.6% 1,920 12.4 1.9 2.9% 6.3
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 73
Exhibit 136: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 137: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
002038 CH Beijing SL Pharmaceutical 26.2% 28.6% 28.3% 60.3% 57.8% 54.5% 22.6% (0.4)
000999 CH China Resources Sanjiu Pharmaceutical 22.2% 19.4% 22.1% 20.5% 17.6% 14.6% 18.7% (0.5)
300006 CH Chongqing Lummy Pharmaceutical 58.8% 32.4% 49.2% 26.7% 21.5% 17.6% 17.4% 0.3
300146 CH Guangdong By-health Biotechnology Co. 46.0% 45.5% 51.2% 30.0% 28.9% 26.3% 20.5% (0.6)
600594 CH Guizhou Yibai Pharmaceutical 38.1% 24.8% 36.5% 21.5% 18.9% 15.3% 24.6% (0.2)
600276 CH Jiangsu Hengrui Medicine Co. 17.8% 19.4% 21.8% 26.5% 23.8% 19.3% 19.2% (0.2)
002262 CH Jiangsu NHWA Pharmaceutical Co. 46.9% 26.1% 40.8% 12.1% 10.7% 9.1% 25.2% (0.3)
002223 CH Jiangsu Yuyue Medical Equipment & Supply 36.3% 30.7% 38.6% 25.3% 23.0% 20.0% 23.0% (0.3)
600422 CH Kunming Pharmaceutical 34.7% 18.1% 30.4% 10.0% 8.7% 6.6% 21.3% (0.1)
300003 CH Lepu Medical Technology 18.4% 18.1% 20.1% 52.1% 48.8% 44.1% 17.2% (0.4)
000423 CH Shandong Dong-E E-Jiao Co. 34.9% 31.2% 34.4% 42.1% 40.8% 37.6% 26.4% (0.6)
002022 CH Shanghai Kehua Bio-Engineering Co 10.7% 12.5% 11.1% 31.5% 29.6% 25.6% 25.7% (0.5)
002399 CH Shenzhen Hepalink Pharmaceutical Co. 6.7% 22.5% 9.7% 26.4% 25.1% 28.3% 7.9% (0.8)
600587 CH Shinva Medical Instrument 38.0% 29.9% 36.0% 8.8% 8.0% 6.2% 12.4% (0.2)
600535 CH Tianjin Tasly Pharmaceutical Co. 24.1% 22.4% 23.5% 11.6% 9.6% 8.8% 16.7% (0.0)
600079 CH Wuhan Humanwell Healthcare (Group) Co. 28.8% 23.2% 36.5% 19.8% 17.6% 8.9% 12.2% 0.4
000538 CH Yunnan Baiyao Grp Co. 25.2% 18.2% 24.5% 14.3% 13.8% 12.1% 21.5% (0.3)
600267 CH Zhejiang Hisun Pharmaceutical Co. 23.6% 15.2% 21.1% 9.1% 3.4% 7.9% 9.9% 0.3
600521 CH Zhejiang Huahai Pharmaceutical Co. 21.8% 20.5% 18.6% 26.5% 21.8% 15.6% 18.7% 0.0
002001 CH Zhejiang NHU Co 1.1% 12.8% -12.7% 36.7% 29.9% 24.6% 15.0% (0.4)
60
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100
105
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Price Level
MSCI China Healthcare Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 74
Insurance: Mild growth for longer; favor return and value
Analyst name: Mancy Sun (mancy.sun@gs.com), Ning Ma (ning.ma@ghsl.cn)
Sector stance
2013 sector view
We believe the surprisingly long low growth cycle for life insurance companies may be already priced in. However, we
think 2013 growth will still be mild, and of mixed quality. Operating environment may stabilize in 2013, but value growth
may lag, as we believe the industry in general will shift more focus to volume instead of margin, in order to keep the
agency force engaged. Since there is not much differentiation from a growth perspective, we prefer names with higher
return (EV growth) and cheaper valuation.
Key drivers for 2013
Reform drivers
1. We expect the industry in general will focus more on volume than margin in 2013 to keep the agency force engaged,
but we believe there will be some strategy diversions between companies (volume camp vs. margin camp).
2. Pilot tax-deferrable pension scheme likely to be further delayed till mid 2013. Other new initiatives (supplemental
basic medical insurance scheme/investment liberalization) will take time to have an impact and depend on execution
or risk control.
3. Capital raising less of an issue/focus until 2014/2015 as insurers just finished a round of equity/sub-debt/convertible
bond raising.
Cyclical drivers
1. Operating environment, especially the bancassurance channel, to stabilize as China’s liquidity improves (insurance
products’ attractiveness to increase as yields on banks’ wealth management products fall). But the pick-up will likely
be gradual/mixed, not robust.
2. Potential A-share market rebound will benefit insurers’ embedded value growth, with players with smaller backbook
(NCI, Taiping) or a negative spread book (Ping An) to benefit more.
3. New business margin will stay flat/slightly trend down as volume competition increases.
Key risks to our view
1. Worse-than-expected GDP/insurance demand growth, or liquidity tightening.
2. Sharp decline of investment yields.
How we differ from consensus
1. We believe insurers will refocus on volume competition, and sector margin will stay flat or even slightly trend down.
Operating environment will stabilize but value growth will lag.
2. Not much differentiation between players in new business growth, so investors should focus on stocks that offer
higher return and relative value.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 75
Stock recommendations (offshore)
Buy #1: New China Life (1336.HK; on CL)
Reasons/catalysts: 1) Story still intact but delayed: We believe the restructuring story is still intact at New China Life but
delayed given sector wide issues/executions. We now expect 0%/6/10% NBV growth in 2012E/2013E/2014E vs. previous
10%/14%/13%; 2) Continued focus on value creation and still some near-term potential for new business margin
improvement and: We believe the management plans to roll out value-centric KPI (with 50% weighting in VONB) for
managers and agency force, this will likely better align agents and branch managers’ interests with the firm’s interest.
We estimate mild upside in new business margin (2012E/13E/14E: 25%/26%/27%) from product mix improvement
through critical illness riders; 3) Undemanding valuation: current price implies 1.01x 13E EV for 14% EV growth. Risk:
Execution/share-sell overhang.
Buy #2: Taiping (0966.HK)
Reasons/catalysts: 1) Negatives likely priced in: undemanding valuation at 0.98x 13E/EV, for 16% EV growth; 2) Volume
strategy necessarily to a certain extent for Taiping, which lacks economy of scale: The company might focus more on
volume growth (vs. margin) given its 3-year goal to double premium income/asset/net profit, but we believe it is
necessary for Taiping in order to keep its cost down (given the small scale) and its high quality agency force engaged
(Taiping’s productivity is on par with Ping An and higher than other peers); 3) Capital position now less of an issue:
Taiping recently entered a financial reinsurance contract which would increase Taiping Life’s statutory solvency by
Rmb4bn. This would potentially increase 13E solvency margin ratio to 189% from 133% (regulatory category 1 minimum:
150%). This could come at the expense of new business margin (factored in our estimates), but might ease some
investor concerns on capital raising need. Risks: significant equity market decline/poor execution/significant margin
decline.
Stock recommendations (A-share)
Buy #1: Ping An (601318.SS; on CL)
Reasons/catalysts: 1) Trading at 1.0X EV with little potential downside (sector average 1.21X); 2) Higher/similar return vs
China Life/CPIC (13% vs 10%/13%) while trading at much lower multiple (1.0X EV vs 1.7X/1.2X); 3) Still best positioned in
long term in terms of management quality/vision, agency productivity/training system, distribution channel build-out,
diversified earnings mix).
Exhibit 138: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 139: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
2628 HK China Life Insurance Company N HKD 22.85 26.38 15.4% 83,332 15.8 2.2 2.1%
2601 HK China Pacific Insurance (H) N HKD 25.25 29.21 15.7% 29,523 15.5 2.0 2.3%
966 HK China Taiping Insurance Holdings B HKD 13.08 19.50 49.1% 2,893 9.8 1.6 1.0%
1336 HK New China Life Insurance (H) B* HKD 24.20 41.44 71.2% 9,733 12.5 1.5 2.0%
2318 HK Ping An Insurance Group B HKD 59.40 79.38 33.6% 60,670 10.6 2.0 1.5%
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
2628 HK China Life Insurance Company 129.9% 13.8%
2601 HK China Pacific Insurance (H) 171.9% 12.9%
966 HK China Taiping Insurance Holdings 103.5% 16.4%
1336 HK New China Life Insurance (H) 44.1% 4.3% 11.7%
2318 HK Ping An Insurance Group 49.5% 18.8%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 76
Exhibit 140: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 141: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 142: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601628 CH China Life Insurance Company (A) N CNY 17.71 21.37 20.7% 80,367 15.1 2.1 2.2%
601601 CH China Pacific Insurance (A) N CNY 17.14 23.66 38.0% 24,937 13.1 1.7 2.7%
601336 CH New China Life Insurance (A) B CNY 20.64 33.57 62.6% 10,329 13.3 1.6 1.9%
601318 CH Ping An Insurance Group (A) B* CNY 37.12 64.29 73.2% 47,177 8.2 1.5 2.0%
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601628 CH China Life Insurance Company (A) 129.9% 13.8%
601601 CH China Pacific Insurance (A) 168.3% 12.9%
601336 CH New China Life Insurance (A) 42.2% 4.3% 11.7%
601318 CH Ping An Insurance Group (A) 49.5% 18.8%
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Price LevelMSCI China Insurance Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 77
Internet/Education: Mobile & e-commerce the focus
Analyst name: Piyush Mubayi (piyush.mubayi@gs.com); Fei Fang (fei.fang@gs.com)
Sector stance
2013 sector view
We expect 2013 to be a year of rapid traffic migration from desktop computers to mobile devices, where we see
structural benefits for some of the category leaders in the sector, but headwinds for others. We expect the cyclical
recovery of domestic consumption to warrant a generally healthy shape for advertising-driven business models. We
believe online game developers will keep up R&D efforts for the shortened life cycles of new title launches, and enhance
the pipeline quality in order to capture growing revenues from web games. We also expect the online advertising
revenue cycle to bottom at around mid 2013.
E-commerce, in particular, plays a critical role in driving share price upside for our stock ideas. Two of our top Buy
theses, Tencent and Ctrip, will rely on the rising penetration of online shopping to materialize sustainable growth. We
believe new technology will accelerate the evolution of China’s e-commerce offerings, as mobile Internet has the
potential to blend social and local features into users’ web-based purchase behaviors.
The education sector will increasingly favor class-based tutoring format, in our view. Economic teacher-to-student
ratios and manageable facility utilization will be critical in sustaining margin amid rapid cost inflation in top tier cities,
and less favorable population demographics in lower tier cities.
Key drivers for 2013
Reform drivers
1. Rising 3G/4G penetration enabling Internet access on mobile devices (favor Tencent).
2. Rapid migration of advertising budget online to enhance advertisers’ return-on-investment (favor Youku).
3. Growing e-commerce penetration (favor Tencent and Ctrip).
4. Sustained demand for tutoring services and market share consolidation (favor TAL Education).
Cyclical drivers
1. Normalized advertising demand on the back of improved macro conditions.
2. Stabilizing price competition in the online travel space.
Key risks to our view
1. Monetization of mobile traffic and products remains at early stage.
2. Upfront investment on e-commerce infrastructure may weigh on margin.
How we differ from consensus
1. Tencent: 2013E net profit c.10% above con. on better cost control and enhanced monetization of its platform.
2. Ctrip: 2013E net profit c.10% above con. on its leadership position in the industry and eased competition intensity.
3. TAL Education: 2013E net profit c.15% above con. on rising utilization, expansion and improved margin visibility.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 78
Stock recommendations (offshore)
Buy #1: Tencent Holdings (0700.HK)
Reasons/catalysts: 1) We expect incremental data points over the next 6-12 months on Tencent’s progress in mobile
internet, social graph-driven targeted advertising, open platform and game launches (League of Legends) to support our
positive view, and enable Tencent to benefit from increasing investor interest in evolving mobile internet and social
advertising growth; 2) We also expect investor concerns over margin compression, particularly from aggressive
headcount and new initiative set-up costs, as well as competitive challenges (from either rival microblogs evolving into
social networks or niche networks gaining prominence), to moderate near-term based on better cost control and
enhanced monetization of its platform.
Buy #2: Youku Tudou Inc. (YOKU)
Reasons/catalysts: 1) We view the merger between Youku and Tudou as a first step en-route to the combined company’s
attainment of scale as consolidation occurs in the fast-growing online video industry; 2) Online video companies that
execute well should extend their leadership over time by gaining scale and superior content as they leverage a strong
brand to attract more advertisers; 3) We attribute their strength to the ad format’s exposure to fast-moving consumer-
goods advertisers with strong demand for online branding.
Buy #3: Ctrip (CTRP)
Reasons/catalysts: 1) We believe the market is pricing in continued margin deterioration driven by intense customer
acquisition efforts. After consecutive quarters of cash rebates – and consecutive quarters of share price decline – we
believe OTAs are now constrained by capacity from escalating price competition further; 2) We view valuation
implications separately for the business and leisure segments, as customer behaviors and market opportunities drive
distinct growth and margin profiles; 3) Ctrip’s dominance in business is sustainable, in our view, as other agencies are
yet to develop the muscle to compete on service quality. Leisure travel is commoditized and Ctrip is less differentiated,
but low expectations have long been priced in.
Buy #4: TAL Education Group (XRS)
Reasons/catalysts: 1) Rising utilization of learning centers after the fast build-out in FY12 (end- February). We expect
FY13E growth to be driven by maturing of the 138 centers opened last year and increasing penetration in the cities
outside Beijing and Shanghai. The drivers should contribute to grow without further compressing gross margin; 2)
Continued geographical expansion via a prudent strategy, which has proved effective in upholding brand quality and
lowering execution risks; 3) Margin visibility has improved, since management has guided for 50 or less learning center
openings in FY13E, a substantial slowdown from 138 in FY12.
Exhibit 143: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
BIDU US Baidu.com, Inc. N USD 96.22 135.00 40.3% 33,730 15.7 5.3 0.0% 10.2
CYOU US Changyou.com N USD 24.02 30.00 24.9% 1,247 4.4 1.3 0.0% 0.9
CTRP US Ctrip.com International B USD 18.05 25.00 38.5% 2,630 13.4 2.2 0.0% 6.8
EDU US New Oriental Education & Technology Group Inc. (ADR) RS USD 19.17 3,007 15.3 3.1 0.0% 7.4
SINA US SINA Corporation N USD 47.08 57.00 21.1% 3,114 59.0 2.7 0.0% 31.7
SOHU US Sohu.com N USD 37.88 52.00 37.3% 1,478 16.4 1.3 0.0% 2.5
SFUN US SouFun Holdings Limited B USD 18.60 24.00 29.0% 1,529 7.8 3.6 0.0% 5.1
XRS US TAL Education Group B USD 8.95 15.00 67.6% 698 14.3 3.0 0.0% 6.6
700 HK Tencent Holdings B HKD 256.40 280.00 9.2% 61,596 21.9 6.8 0.6% 13.3
XUE US Xueda Education Group B USD 3.18 5.40 69.8% 219 7.7 1.0 0.0%
YOKU US Youku Tudou Inc. B USD 17.87 23.00 28.7% 2,802 1.7 0.0%
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 79
Exhibit 144: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 145: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
BIDU US Baidu.com, Inc. 29.5% 37.4% 33.7% 60.0% 51.5% 47.1% 33.4% (0.9)
CYOU US Changyou.com 2.1% 9.4% 3.7% 58.1% 55.5% 43.6% 29.3% (0.9)
CTRP US Ctrip.com International 18.9% 18.3% 9.1% 26.8% 24.0% 24.6% 16.2% (0.9)
EDU US New Oriental Education & Technology Group Inc. (ADR) 15.8% 26.3% 20.2% 20.4% 17.2% 17.7% 20.1% (1.3)
SINA US SINA Corporation 336.4% 16.9% 139.5% 12.4% 4.3% 8.7% 4.6% (0.6)
SOHU US Sohu.com 4.7% 12.6% 25.0% 26.8% 22.6% 8.0% 5.8% (0.7)
SFUN US SouFun Holdings Limited 16.7% 17.1% 17.9% 51.8% 48.8% 36.7% 45.4% (0.4)
XRS US TAL Education Group 32.9% 31.8% 40.6% 22.6% 17.1% 17.1% 21.3% (1.2)
700 HK Tencent Holdings 32.2% 31.3% 29.4% 41.9% 39.0% 30.9%
XUE US Xueda Education Group 95.2% 40.7% 93.7% 12.6% 7.1% 6.8% 13.7% (1.6)
YOKU US Youku Tudou Inc. 50.9% 46.9% 60.1% -7.2% -10.2% -9.2% -2.9% (0.3)
60
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100
120
140
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MSCI Internet Software & Service
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 80
Machinery: Strong structural growth in railway equipment; slow
cyclical recovery in construction equipment
Analyst name: Tian Lu (tian.lu@ghsl.cn)
Sector stance
2013 sector view
We expect modest recovery in construction equipment barring a further slowdown in property. In particular, we see a
stronger recovery in 2H13 than 1H13 due to: 1) property new starts are likely to revert to positive yoy growth in 2H13,
and 2) off a lower base in 2H12. We expect strong railway equipment new orders intake as well as delivery. For coal
mining equipment we expect continuous weakness in 2013 due to slow coal price recovery.
Key drivers for 2013
Reform drivers
1. We believe potential MOR reform to separate MOR’s administrative and operative roles would to a certain extent
liberalize the railway market and 1) drive more private investment, in particular on the cargo and inter-city HSR side;
2) Enhance railway profitability if more flexible pricing is allowed. Ultimately we believe such reform is necessary
and would be beneficial for rolling stocks demand in the long run; however, we also think it is very challenging to
manage smooth reform without disrupting/slowing current fast-paced railway construction in the short term.
2. c.3,000km HSR completion to drive new MU orders and delivery.
3. A multi-year build-out of urban railway systems in c.30 cities; we expect over Rmb2trn in investment over 2012-15E.
Cyclical drivers
1. Infrastructure investment continues to accelerate.
2. Mining equipment demand is likely to remain weak on slow coal price recovery and decelerating coal mining capex.
Key risks to our view
1. Slower-than-expected railway construction/completion.
2. Slower-than-expected growth infrastructure and property investments.
How we differ from consensus
1. We believe credit risks are containable for major construction equipment manufacturers.
Stock recommendations (offshore)
Buy #1: Zoomlion (1157.HK)
Reasons/catalysts: 1) Resilient growth in concrete machinery and tower crane; 2) Strongest B/S among peers that allow
the company to take more proactive actions to expand market share while its main competitors are cash stretched; and
3) Industry leader with highest CROCI.
Buy #2: Lonking (3339.HK)
Reasons/catalysts: 1) Attractive valuation at below 0.9X 2013E P/B while generating positive ROE and operating cash
flow even in a trough year; 2) Strong operational and financial leverage to benefit the most from a demand recovery.
Stock recommendations (A-share)
Buy #1: CNR (601299.SS, on CL)
Reasons/catalysts: 1) We expect strong locomotives and MU orders and delivery in 2013; 2) We expect 3-4 ppt margin
expansion potential as the company gradually replaces key purchased power/control systems with in-house made
systems.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 81
Exhibit 146: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 147: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 148: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 149: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
1766 HK China South Locomotive & Rolling Stock (H) N HKD 6.71 7.60 13.3% 11,950 14.1 1.9 1.4% 8.3
3339 HK Lonking Holdings B HKD 1.81 1.90 5.0% 1,000 6.7 0.8 2.7% 4.4
631 HK Sany Heavy Equipment International Holdings B HKD 3.91 5.20 33.0% 1,570 8.7 1.4 2.3% 7.0
1157 HK Zoomlion (H) B HKD 9.96 11.30 13.5% 9,903 6.2 1.2 4.0% 4.2
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
1766 HK China South Locomotive & Rolling Stock (H) 36.8% 19.5% 27.6% 8.3% 6.3% 5.1% 11.4% (0.2)
3339 HK Lonking Holdings 72.8% 12.1% 26.7% 17.7% 13.5% 10.2% 12.2% 0.1
631 HK Sany Heavy Equipment International Holdings 20.0% 29.5% 23.1% 19.7% 17.6% 17.3% 16.0% (0.1)
1157 HK Zoomlion (H) 12.0% 9.5% 6.6% 22.1% 20.9% 17.3% 19.8% (0.2)
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601299 CH China CNR Corporation B* CNY 4.18 5.50 31.6% 6,926 9.6 1.1 2.1% 7.5
601766 CH China South Locomotive & Rolling Stock (A) B CNY 4.72 6.10 29.2% 10,460 12.3 1.7 1.6% 7.2
000528 CH Guangxi Liugong N CNY 8.34 9.20 10.3% 1,507 10.9 0.9 2.4% 9.6
600761 CH Heli N CNY 7.89 8.40 6.5% 651 8.1 1.2 2.5% 4.9
600031 CH Sany Heavy N CNY 8.89 10.00 12.5% 10,839 9.3 2.2 2.7% 7.4
000680 CH Shantui S CNY 4.02 3.00 -25.4% 735 17.1 1.0 3.7% 10.3
002097 CH Sunward Intel S CNY 6.68 6.00 -10.2% 441 28.4 1.5 0.7% 9.8
600582 CH Tian Di Science & Technology N CNY 9.30 10.60 14.0% 1,813 8.6 1.8 1.6% 5.0
600815 CH Xiamen XGMA Machinery S CNY 6.08 4.40 -27.6% 780 15.1 1.1 1.6% 11.6
601717 CH Zhengzhou Coal Mining Machinery Group N CNY 9.30 11.80 26.9% 2,090 8.2 1.5 1.6% 4.7
000157 CH Zoomlion (A) B CNY 8.17 11.50 40.8% 10,108 6.4 1.3 3.9% 4.3
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601299 CH China CNR Corporation 41.3% 19.2% 29.2% 7.0% 5.3% 4.2% 11.4% 0.3
601766 CH China South Locomotive & Rolling Stock (A) 35.0% 19.5% 27.6% 8.3% 6.3% 5.1% 11.4% (0.2)
000528 CH Guangxi Liugong 78.8% 16.3% 62.9% 9.6% 7.7% 6.0% 8.4% 0.4
600761 CH Heli 24.9% 22.7% 25.3% 10.5% 8.1% 6.6% 13.9% (0.1)
600031 CH Sany Heavy 10.5% 9.4% 5.5% 18.3% 16.2% 13.1% 22.7% 0.2
000680 CH Shantui 149.9% 26.9% 25.6% 5.7% 3.9% 1.9% 5.2% 0.6
002097 CH Sunward Intel 71.1% 12.4% 25.8% 11.5% 8.5% 4.0% 5.1% (0.0)
600582 CH Tian Di Science & Technology 15.9% 11.7% 16.3% 18.1% 16.1% 7.9% 11.4% (0.1)
600815 CH Xiamen XGMA Machinery -19.2% 17.2% 39.9% 6.9% 5.0% 3.6% 7.4% 0.5
601717 CH Zhengzhou Coal Mining Machinery Group 9.3% 12.1% 12.2% 17.2% 15.8% 14.0% 18.0% (0.5)
000157 CH Zoomlion (A) 10.5% 9.5% 6.6% 22.1% 20.9% 17.3% 19.8% (0.2)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 82
Exhibit 150: Performance
Source: MSCI, Factset, GS Global ECS Research
0
20
40
60
80
100
120
40
60
80
100
120
140
160
180
200
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Machinery Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 83
Media: Value emerging in a thriving industry
Analyst name: Xufa Liao (xufa.liao@ghsl.cn); Zhijing Liu (zhijing.liu@ghsl.cn)
Sector stance
2013 sector view
The media industry is booming in China. Policy tailwinds, increasing influence of new media and increasing value of
content are three major structural changes we have observed in recent years. We continue to prefer subsectors such as
advertising and marketing, video entertainment and new media.
Key drivers for 2013
Reform drivers
1. We believe the government will continue to promote new policies to support the development of the media
industry. Key policy reforms include the integration of the cable networks, the establishment of broadcast control
platforms for new media, policies to support the development of the movie industry and support for content
producers.
Cyclical drivers
1. Entertainment demand growth driven by the increase of GDP per capita as well as structural spending pattern
change.
2. We expect growth of marketing spending to accelerate given the recovery of the macro economy.
Key risks to our view
1. Later-than-expected supportive policy launch.
2. Rising labor cost may squeeze margins through whole value chain.
Stock recommendations (A-share)
Buy #1: Hualubaina (300291.SZ; on CL)
Reasons/catalysts
1. A recovery in the TV drama industry: Rising prices and falling production volumes will favor market share gains by
large firms like HLBN.
2. Profit growth to reaccelerate: We expect HLBN’s profit growth to bottom in 3Q12 given strong TV drama pipelines
and a low base in 4Q11. The firm is also utilizing its IPO proceeds as working capital, which should boost revenue
growth in 2013-2014.
3. The company is attractively valued, trading at below peer group average P/E levels.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 84
Exhibit 151: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 152: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601801 CH Anhui Xinhua Media N CNY 10.68 9.70 -9.2% 1,560 17.7 2.2 1.6% 11.3
300251 CH Beijing Enlight Media Co. B CNY 20.55 26.30 28.0% 271 18.9 2.4 2.1% 12.6
600037 CH Beijing Gehua CATV S CNY 6.36 5.97 -6.1% 1,083 20.1 1.2 2.0% 4.0
300291 CH Beijing Hualubaina Film & TV Co. B* CNY 53.06 65.90 24.2% 511 20.6 3.1 1.9% 13.6
600637 CH BesTV New Media B CNY 14.72 18.73 27.2% 1,675 21.4 4.3 0.5% 12.7
300058 CH BlueFocus Communication B CNY 21.87 26.94 23.2% 1,393 26.2 6.5 1.5% 14.6
601098 CH China South Publishing & Media B CNY 8.78 10.50 19.6% 2,532 14.2 1.8 2.8% 7.1
600373 CH Chinese Universe Publishing and Media N CNY 12.95 13.20 1.9% 1,179 13.2 1.9 7.1% 11.0
002400 CH Guangdong Advertising B CNY 22.59 25.13 11.2% 699 23.1 3.2 1.1% 11.5
002292 CH Guangdong Alpha Animation N CNY 17.48 17.50 0.1% 1,150 32.2 4.4 1.2% 23.9
300027 CH Huayi Brothers Media B CNY 15.23 17.15 12.6% 1,479 22.5 4.3 1.8% 15.5
601928 CH Jiangsu Phoenix Publishing & Media N CNY 6.67 8.10 21.4% 2,725 13.3 1.5 0.0% 8.4
300104 CH Leshi Internet Information & Technology N CNY 16.49 17.34 5.2% 1,107 25.1 4.9 1.0% 9.7
600831 CH Shaanxi Broadcast & TV Network S CNY 6.66 6.33 -5.0% 602 20.5 2.3 2.0% 5.7
002238 CH Shenzhen Topway Video Communication N CNY 10.25 11.91 16.2% 527 22.8 2.2 1.8% 7.1
600551 CH Time Publishing & Media N CNY 9.39 10.00 6.5% 763 14.3 1.5 2.8% 10.1
000665 CH Wuhan Plastics Industrial Group N CNY 9.89 11.45 15.8% 282 18.8 1.6 0.1% 8.0
300133 CH Zhejiang Huace Film & TV B CNY 16.82 19.60 16.5% 519 21.0 4.0 1.9% 14.9
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601801 CH Anhui Xinhua Media 12.8% 7.8% 12.3% 15.0% 13.0% 14.1% 12.1% (0.7)
300251 CH Beijing Enlight Media Co. 21.4% 22.8% 27.3% 29.1% 26.8% 24.2% 12.6% (0.5)
600037 CH Beijing Gehua CATV 15.2% 5.5% 11.0% 48.6% -5.9% 15.0% 5.9% (0.4)
300291 CH Beijing Hualubaina Film & TV Co. 30.0% 36.6% 36.6% 42.5% 42.2% 33.3% 15.0% (0.5)
600637 CH BesTV New Media 39.7% 28.7% 38.6% 47.2% 34.2% 32.4% 19.9% (0.6)
300058 CH BlueFocus Communication 32.5% 30.4% 37.6% 19.7% 17.0% 11.4% 22.1% (0.4)
601098 CH China South Publishing & Media 16.9% 8.4% 18.3% 14.1% 11.3% 14.8% 12.1% (0.9)
600373 CH Chinese Universe Publishing and Media 9.1% 16.3% 10.3% 6.6% 5.0% 5.8% 13.9% (0.1)
002400 CH Guangdong Advertising 31.7% 20.7% 42.4% 5.9% 5.6% 3.4% 12.5% (0.5)
002292 CH Guangdong Alpha Animation 35.9% 22.9% 39.2% 18.7% 16.3% 15.0% 13.3% (0.4)
300027 CH Huayi Brothers Media 29.9% 35.9% 42.9% 30.7% 26.6% 21.2% 19.0% 0.0
601928 CH Jiangsu Phoenix Publishing & Media 21.0% 11.8% 18.5% 14.0% 10.6% 17.0% 11.3% (0.7)
300104 CH Leshi Internet Information & Technology 38.8% 37.0% 30.3% 49.2% 22.1% 16.8% 19.5% 0.6
600831 CH Shaanxi Broadcast & TV Network 13.1% 15.8% 11.9% 35.5% 12.1% 9.6% 10.9% 0.1
002238 CH Shenzhen Topway Video Communication 14.9% 3.8% 6.2% 40.2% 16.3% 15.6% 9.2% (0.4)
600551 CH Time Publishing & Media 14.6% 7.6% 13.6% 12.6% 9.3% 11.7% 9.8% (0.4)
000665 CH Wuhan Plastics Industrial Group 18.7% 12.8% -2.6% 36.8% 16.9% 16.5% 8.0% (0.1)
300133 CH Zhejiang Huace Film & TV 34.8% 29.1% 35.7% 42.2% 41.0% 33.8% 18.6% (0.4)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 85
Metals: Divergent supply growth; prefer copper/gold
Analyst name: Julian Zhu (julian.zhu@gs.com)
Sector stance
2013 sector view
We prefer copper and gold as we expect the synchronized global quantitative easing and relatively tight supply growth
to continue supporting metal prices in 2013. Copper remains our most preferred base metal due to ongoing supply
setbacks on falling ore grade and lack of infrastructure in new mines. In contrast, we see persistent oversupply and
elevated inventory in steel and aluminum, which would cap any price rebound before a meaningful downstream
demand pickup. We expect lower but limited downside moly prices as many marginal producers are starting to make
losses on current prices.
Key drivers for 2013
Reform drivers
1. We expect supply growth to diverge further in 2013. The global setbacks on new mines should keep copper supply
still tight in 2013 while more new steel and aluminum capacity is set to come on stream, exacerbating the already
oversupplied markets. Further, the new copper projects require very high long term copper prices
(US$7,120/tonne@15% IRR) due to rising capex. By contrast, more lower-cost new aluminum capacity should further
reduce the overall industry average production costs, squeezing out existing high-cost producers.
Cyclical drivers
1. Improving downstream demand as a result of resumption of existing infrastructure/property projects and newly
approved projects starting up.
2. Limited new capacity coming on line for copper due to lower ore grade, technical issues, and lack of infrastructure.
3. In the long run, we believe the stricter entry barrier policy of moly benefits large producers that exit.
Key risks to our view
1. Higher-/lower-than-expected copper/aluminum/steel/gold prices.
2. Higher-/lower-than-expected raw material costs.
How we differ from consensus
1. We expect a slow and modest margin recovery for steel producers in 2013.
2. We don't agree on the cost support argument on aluminum prices as we see more lower-cost new capacity coming
on stream, squeezing out existing high-cost suppliers.
3. We expect the market to be disappointed again by the scale of new copper capacity coming on stream in 2013.
Stock recommendations (offshore)
Buy #1: Jiangxi Copper (0358.HK; on CL)
Reasons/catalysts: 1) Should benefit from the copper price hike; 2) The most self-sufficient on copper concentrate among
domestic peers.
Buy #2: Zijin Mining (2899.HK; on CL)
Reasons/catalysts: 1) Production to hold steady as new projects including Shuiyindong and Zuoan gold mines come on
line; 2) Output from copper, lead and zinc to increase after launch of Duobaoshan copper mine, Tuwa mine and
Sanguikou mine.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 86
Sell #1: Angang (0347.HK)
Reasons/catalysts: 1) New capacity coming on stream to further exacerbate the already severe oversupply; 2) Limited
steel price rebound; 3) Iron ore prices are likely to rise on a steel production rebound.
Sell #2: Chalco (2600.HK)
Reasons/catalysts: 1) Overcapacity in China aluminum industry caps aluminum price rebound; 2) High power costs due
to relatively low self-sufficiency in energy.
Stock recommendations (A-share)
Buy #1: Baogang (600019.SS; on CL)
Reasons/catalysts: 1) Industry leader with above-average margins due to more competitive product mix; 2) Has disposed
of non-performing COREX and specialty/stainless steel business; 3) The completion of the Zhanjiang project in three
years.
Sell #2: Chalco (601600.SS)
Reasons/catalysts: 1) Overcapacity in China aluminum industry caps aluminum price rebound; 2) High power costs due
to relatively low self sufficiency in energy.
Exhibit 153: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 154: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
2600 HK Aluminum Corporation of China (H) S HKD 3.33 2.50 -24.9% 5,811 0.8 0.0% 13.6
347 HK Angang Steel (H) S HKD 5.02 2.80 -44.2% 4,686 0.7 0.0% 10.3
3993 HK China Molybdenum Co. N HKD 3.25 3.15 -3.1% 2,045 11.1 1.0 2.7% 5.7
1393 HK Hidili Industry International Development S HKD 1.98 1.20 -39.4% 528 7.3 0.4 2.7% 8.4
358 HK Jiangxi Copper (H) B* HKD 19.68 22.70 15.3% 8,793 9.9 1.2 2.0% 7.2
323 HK Maanshan Iron & Steel (H) N HKD 2.17 1.90 -12.4% 2,156 0.6 0.0% 7.8
639 HK Shougang Fushan Resources Group N HKD 2.98 2.39 -19.8% 2,058 9.7 0.8 4.1% 3.6
1818 HK Zhaojin Mining Industry N HKD 13.24 13.83 4.5% 4,979 13.5 3.4 2.7% 8.4
2899 HK Zijin Mining(H) B* HKD 3.13 4.05 29.4% 8,809 7.9 1.6 3.9% 4.6
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
2600 HK Aluminum Corporation of China (H) 80.2% 7.9% 289.4% 5.9% 1.4% -0.8% -2.4% 1.7
347 HK Angang Steel (H) 50.6% 5.3% 132.0% 7.0% -1.3% -3.1% -6.4% 0.8
3993 HK China Molybdenum Co. -2.0% 1.7% 9.8% 34.5% 25.0% 20.3% 8.5% (0.2)
1393 HK Hidili Industry International Development 31.2% 16.1% 13.3% 40.0% 32.7% 15.2% 5.2% 0.7
358 HK Jiangxi Copper (H) 6.0% -5.3% 7.0% 6.3% 5.2% 4.7% 11.5% (0.0)
323 HK Maanshan Iron & Steel (H) 69.7% 10.9% 70.6% 5.7% 0.3% -0.8% -2.9% 1.0
639 HK Shougang Fushan Resources Group -10.2% 1.8% -9.3% 47.9% 39.1% 24.7% 7.2% (0.3)
1818 HK Zhaojin Mining Industry 25.7% 17.8% 24.8% 51.9% 41.7% 28.9% 23.5% 0.3
2899 HK Zijin Mining(H) 25.2% 13.8% 21.1% 25.9% 21.6% 13.0% 16.6% 0.0
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 87
Exhibit 155: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 156: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 157: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601600 CH Aluminum Corporation of China (A) S CNY 4.81 3.40 -29.3% 10,444 1.5 0.0% 16.7
000898 CH Angang Steel (A) N CNY 3.40 3.10 -8.8% 3,949 0.6 0.0% 9.6
600019 CH Baoshan Iron & Steel B* CNY 4.63 5.40 16.6% 13,018 12.9 0.7 3.7% 5.7
600362 CH Jiangxi Copper (A) N CNY 20.61 19.90 -3.4% 11,458 12.9 1.5 1.6% 9.5
600808 CH Maanshan Iron & Steel (A) N CNY 1.91 1.70 -11.0% 2,361 0.6 0.0% 8.0
600005 CH Wuhan Iron and Steel N CNY 2.43 2.50 2.9% 4,146 42.1 0.7 1.1% 5.3
601899 CH Zijin Mining (A) B CNY 3.71 4.84 30.5% 12,992 11.7 2.4 2.6% 6.5
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601600 CH Aluminum Corporation of China (A) 80.5% 7.9% 289.4% 5.9% 1.4% -0.8% -2.4% 1.7
000898 CH Angang Steel (A) 51.3% 5.3% 132.0% 7.0% -1.3% -3.1% -6.4% 0.8
600019 CH Baoshan Iron & Steel -46.7% 5.1% 13.3% 11.1% 3.8% 3.1% 5.1% 0.3
600362 CH Jiangxi Copper (A) 4.6% -5.3% 7.0% 6.3% 5.2% 4.7% 11.5% (0.0)
600808 CH Maanshan Iron & Steel (A) 70.1% 10.9% 70.6% 5.7% 0.3% -0.8% -2.9% 1.0
600005 CH Wuhan Iron and Steel 80.1% 4.9% 8.6% 8.8% 1.8% 0.6% 1.6% 0.5
601899 CH Zijin Mining (A) 23.6% 13.8% 21.1% 25.9% 21.6% 13.0% 16.6% 0.0
40
50
60
70
80
90
100
110
700
900
1100
1300
1500
1700
1900
2100
2300
2500
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-11
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct
-12
No
v-1
2
Price Level
MSCI China Metals & Mining
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 88
Oil & Gas: Improving operating results, limited downside risks
Analyst name: Nilesh Banerjee (nilesh.banerjee@gs.com); Arthur Yan (arthur.yan@ghsl.cn); Frank He (frank.he@gs.com)
Sector stance
2013 sector view
In the first year under China’s new leadership, we expect more focus on downstream market growth, overseas M&A,
offshore exploration, natural gas infrastructure build-up, end-user gas market expansion, and regulatory reforms.
Upstream investments are heavily into unconventional oil & gas, deepwater, and conventional gas developments. Shale
gas excitement may recede as investors take on the challenges and barriers of developing it. We see insignificant shale
gas contribution to overall gas supply. Domestic refining margin depends on execution of oil products pricing reform
and oil markets. Petrochemical sustainability is relatively healthy. We are positive on downstream and oil services over
upstream.
For gas distribution, we believe growing low-cost piped gas supply will continue to support demand growth in 2013. In
addition, we identify natural gas vehicles and distributed energy system will emerge to be the key driver of overall gas
demand going forward. On the other hand, as gas pricing reform will be rolled out in the coming quarters in different
cities, we expect gas distributors’ should generally pass through the cost hikes to end users. But their dollar margin may
face some volatility in 2013 due to time lag between cost hike and tariff pass through. In addition, we believe M&A
opportunities still exist for gas distributors, and companies with low-cost funding and balance sheet such as CR Gas and
Kunlun are well-positioned.
Key drivers for 2013
Reform drivers
1. Oil pricing mechanism, which may be rolled out piecemeal starting in December 2012. NDRC adjusted the oil
products prices mostly in line with crude oil price changes in past months and we think the next focus could be
increasing transparency of the pricing mechanism.
2. Expansion of gas pricing reform to more provinces.
3. Rollout of gas pipelines (such as the 2nd West East and Sino-Myanmar) to support demand growth.
Cyclical drivers
1. Oil price.
2. Offshore exploration and overseas investments.
Key risks to our view
1. Sharp decline of oil price.
2. Major projects delays.
3. Lower demand due to economic slowdown; delayed reforms.
How we differ from consensus
1. We are largely in line with consensus on sector earnings outlook overall. We are generally above consensus for the
upstream but below for the downstream. We are also above consensus for gas but below for oil services.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 89
Stock recommendations (offshore)
Buy #1: China Petroleum & Chemical Corp. (0386.HK)
Reasons/catalysts: 1) Positive regulatory reforms; 2) Heavy upstream investments; 3) Market-focused corporate changes.
Buy #2: COSL (2883.HK)
Reasons/catalysts: 1) New capacity additions; 2) Higher utilization rate.
Buy #3: China Gas (0384.HK, CL-Buy) Reasons/catalysts: 1) its earnings and return offers upside along with its plan to gradually phase out the loss-making LPG import and
wholesale business; 2) we see synergy from the strategic cooperation agreement between China Gas and Sinopec; 3) we believe the
potential completion of 51% stake acquisition on Panva Gas will provide earnings support in FY13.
Stock recommendations (A-share)
Buy #1: China Petroleum & Chemical Corp. (600028.SS)
Reasons/catalysts: 1) Oil products pricing reform; 2) Natural gas pricing reform.
Exhibit 158: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 159: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
384 HK China Gas Holdings B* HKD 5.20 5.50 5.8% 2,941 16.6 2.1 1.0% 9.0
2883 HK China Oilfield Services (H) B HKD 15.06 16.60 10.2% 8,735 10.0 1.5 2.0% 6.6
386 HK China Petroleum and Chemical (H) B HKD 8.38 9.35 11.6% 93,746 7.6 1.1 4.5% 4.5
1193 HK China Resources Gas Group N HKD 17.00 17.70 4.1% 3,102 18.7 2.5 1.1% 9.4
883 HK CNOOC NR HKD 16.54 95,327 8.5 1.6 3.5% 4.2
2688 HK ENN Energy Holdings N HKD 34.65 33.00 -4.8% 4,514 17.2 3.1 1.4% 9.1
135 HK Kunlun Energy Company B HKD 15.44 17.50 13.3% 14,246 16.0 2.4 1.8% 7.9
857 HK PetroChina (H) N HKD 10.28 11.00 7.0% 242,758 10.1 1.3 4.4% 5.4
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
384 HK China Gas Holdings 24.5% 5.6% 11.8% 18.1% 14.6% 6.7% 10.4% 0.7
2883 HK China Oilfield Services (H) 17.2% 20.5% 13.1% 41.9% 26.9% 20.7% 14.8% 0.5
386 HK China Petroleum and Chemical (H) 30.6% 2.8% 18.6% 7.2% 4.3% 2.9% 12.7% 0.4
1193 HK China Resources Gas Group 10.7% 31.7% 19.3% 19.1% 15.6% 8.1% 11.1% 0.2
883 HK CNOOC 2.0% 2.1% 1.3% 52.7% 38.3% 27.7% 19.2% (0.1)
2688 HK ENN Energy Holdings 16.2% 17.5% 11.8% 18.8% 15.7% 8.1% 14.6% 0.4
135 HK Kunlun Energy Company 11.3% 20.4% 22.3% 49.4% 32.7% 19.9% 10.7% 0.1
857 HK PetroChina (H) 13.3% 2.4% 9.4% 18.4% 11.0% 7.5% 12.9% 0.3
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 90
Exhibit 160: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 161: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 162: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601808 CH China Oilfield Services (A) B CNY 15.81 21.30 34.7% 11,411 13.1 1.9 1.5% 8.1
600028 CH China Petroleum & Chemical (A) B CNY 6.06 7.95 31.2% 84,357 6.9 1.0 5.0% 4.2
601857 CH PetroChina (A) N CNY 8.52 9.90 16.2% 250,355 10.5 1.3 4.3% 5.5
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601808 CH China Oilfield Services (A) 15.6% 20.5% 13.1% 41.9% 26.9% 20.7% 14.8% 0.5
600028 CH China Petroleum & Chemical (A) 28.9% 2.8% 18.6% 7.2% 4.3% 2.9% 12.7% 0.4
601857 CH PetroChina (A) 11.8% 2.4% 9.4% 18.4% 11.0% 7.5% 12.9% 0.3
80
85
90
95
100
105
110
115
120
500
600
700
800
900
1000
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Oil Gas & Consumable Fuels Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 91
Ports: Potential upside from tariff hikes
Analyst name: Simon Cheung (simon.cheung@gs.com)
Sector stance
2013 sector view
We forecast a modest pickup of container port throughput growth from 7% in 2012E to 8% in 2013E, in line with
guidance given by the port operators, supported by slight improvement in external demand as reflected by the Global
Leading Indicator (GLI) and resilient domestic volume growth. With the sector trading at 13x P/E in 2013E, in line with
historical average, we recommend investors to be selective and continue to prefer Buy-rated HPHT within our China/HK
port coverage universe.
Key drivers for 2013
Reform drivers
1. Delivery of more mega vessels favors the natural deep-water ports: With mega vessels (over 8,000 TEU) accounting
for over 90% of total container ship delivery by 2014E, we expect consolidation of shipping lines and cargos to the
natural deep-water ports. HPHT should benefit from this trend.
2. Consolidation of shipping lines to call the hub ports: Similarly, many shipping companies have formed consortiums
and seek to save costs by consolidating their cargos to the hub ports. This should also favor HPHT.
Cyclical drivers
1. Potential tariff hike, though modest, in 2013: Looking back in history, port operators typically raise their tariffs once
every two years and the last round of rate hikes happened in 2011. As port operators have suffered from margin
pressure due to sluggish port volume but rising costs in past two years, we believe they will try to negotiate up the
tariffs for next year, especially since the shipping companies are in much healthier positions having raised their
freight rates significantly in recent quarters.
2. Restocking cycle in the US: Retailers have been cautious and kept very lean inventory levels in recent years. Recent
macro data point to better consumption sentiment from the US. Should they start to restock, we may see a pickup of
international trade to underpin strong port throughput growth in China ports, particularly those situated in regions
more leveraged to global trade (i.e., Pearl River Delta and Yangtze River Delta regions).
Key risks to our view
1. Fiscal cliff in the US and fiscal tightening in the Eurozone having significant impact on domestic consumption and
hence international trades.
2. Competition from new region where the government has its own agenda to boost trade growth (e.g., Guangzhou).
How we differ from consensus
1. Our port throughput growth forecast of 8% in 2013 is slightly ahead of consensus estimate of 5-6%.
2. We are more constructive on HPHT for its stronger bargaining power for leadership position and ability to benefit
from the “mega-vessel” trend.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 92
Exhibit 163: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 164: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 165: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
144 HK China Merchants Holdings N HKD 23.70 26.90 13.5% 7,567 15.3 1.3 3.3% 16.5
1199 HK COSCO Pacific B HKD 10.96 13.20 20.4% 3,835 9.8 0.9 4.1% 15.8
2880 HK Dalian Port Company N HKD 1.75 1.70 -2.9% 999 7.0 0.5 5.7% 8.1
3382 HK Tianjin Port Development Holdings N HKD 0.97 1.00 3.1% 764 7.5 0.5 5.4% 8.0
576 HK Zhejiang Expressway N HKD 5.91 5.60 -5.2% 3,312 11.8 1.3 6.4% 7.0
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
144 HK China Merchants Holdings 8.6% 6.1% 7.6% 52.0% 32.8% 37.0% 8.2% 0.4
1199 HK COSCO Pacific 12.3% 11.1% 12.9% 47.8% 32.8% 47.3% 9.5% 0.5
2880 HK Dalian Port Company 17.2% 7.0% 2.8% 37.4% 23.1% 19.7% 6.1% 0.4
3382 HK Tianjin Port Development Holdings 3.3% 7.9% 1.8% 14.6% 9.8% 4.1% 3.6% 0.2
576 HK Zhejiang Expressway 3.6% 0.9% 1.3% 47.3% 34.3% 26.7% 8.9% (0.1)
60
70
80
90
100
110
120
30
35
40
45
50
55
60
65
70
75
80
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct
-11
No
v-1
1
De
c-11
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct
-12
No
v-1
2
Price Level
Eq-wgt (Offshore Ports)
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 93
Power Utilities: Lower interest rate and coal oversupply; Buy IPPs
Analyst name: Franklin Chow, CFA (franklin.chow@gs.com)
Sector stance
2013 sector view
We think the power utilities industry may be a rare area in China to still achieve the following: 1) revenue growth
(small capacity growth may offset even weak utilization); 2) margin expansion (persistently weak input [coal] prices;
generally rising labor costs in China affect them less as such costs are small within their cost structure; falling interest
rates to benefit these highly-geared firms); and 3) rising cash flows (they are unlikely to be troubled by receivable
collection but can lengthen their payable days due to stronger bargaining power vs. suppliers).
Key drivers for 2013
Reform drivers
1. Fuel cost pass-through or return-based tariff regime We think timing of reform is elusive and so this is not a key part of our investment analysis. Ability to effectively
pass on coal price hikes would meaningfully boost profitability and improve earnings visibility for power producers.
It may also encourage more capital investments into the sector in order to prevent power shortage. However, we
think the government would also balance the direct consequences of potentially lower power demand and higher
input costs for many key energy-intensive industries in China. Also, the reforms may be intertwined with potentially
lengthy and difficult reforms for the power grids which are currently state-owned and have less public disclosure.
Cyclical drivers
1. Lower unit coal cost We think the coal cost trend for Chinese independent power producers (IPPs) would remain favorable into 2013E as
we expect secular coal oversupply to be more apparent over the next 12 months.
2. Lower interest cost We expect lower effective interest rates to benefit these highly-geared companies.
Key risks to our view
Tariffs, coal costs, utilization and policy changes vary from our assumptions.
How we differ from consensus:
Our 2013 EPS estimates are generally below Reuters consensus estimates; we believe we have more conservative
assumptions on utilization and coal cost.
Stock recommendations (offshore)
Buy #1: China Power International (2380.HK, on CL)
Reasons/catalysts: Uniquely significant exposure and profit mix in hydro power is not reflected by its 2013E P/E of 7.1X
(2013E EPS growth of 11% and ROE of 9%), in our view.
Buy #2: China Resources Power (0836.HK)
Reasons/catalysts: 1) Beneficiary to stable coal prices and falling effective interest rate; and 2) Development into a
diversified energy supplier (e.g. coal-fired and wind power, coal) could improve long-term earnings growth and
profitability.
Buy #3: Huaneng (0902.HK)
Reasons/catalysts: 1) Higher earnings sensitivity to lower-than-expected coal prices and falling effective interest rate; and
2) Higher dividend payout ratio than peers (5.1% vs. peers’ average of 3.0%).
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 94
Exhibit 166: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 167: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 168: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 169: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
579 HK Beijing Jingneng Clean Energy N HKD 1.60 1.50 -6.3% 1,038 7.6 0.6 0.9% 11.9
916 HK China Longyuan Power B HKD 4.85 5.60 15.5% 4,671 9.5 1.0 2.0% 9.5
2380 HK China Power International B* HKD 2.10 2.70 28.6% 1,384 7.1 0.6 5.6% 9.6
836 HK China Resources Power B HKD 17.12 19.60 14.5% 10,482 9.6 1.4 3.3% 8.4
991 HK Datang International Power Generation N HKD 2.73 2.90 6.2% 4,688 9.6 0.7 5.2% 8.9
270 HK Guangdong Investment B HKD 6.10 6.70 9.8% 4,906 11.0 1.5 3.4% 6.4
1071 HK Huadian Power International (H) N HKD 2.30 2.10 -8.7% 2,009 9.0 0.7 0.0% 9.2
902 HK Huaneng Power International (H) B HKD 6.38 6.50 1.9% 11,570 9.9 1.3 6.0% 8.0
958 HK Huaneng Renewables Corporation N HKD 1.13 0.90 -20.4% 1,232 11.5 0.6 0.0% 8.8
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
579 HK Beijing Jingneng Clean Energy 26.7% 71.9% 43.6% 30.5% 12.4% 11.4% 7.9% 1.9
916 HK China Longyuan Power 8.6% 14.2% 20.1% 48.9% 28.5% 15.0% 8.3% 1.6
2380 HK China Power International 12.3% 10.7% 11.4% 30.2% 18.4% 6.4% 6.4% 2.2
836 HK China Resources Power 22.3% 19.6% 28.4% 28.5% 18.1% 10.8% 11.0% 1.2
991 HK Datang International Power Generation 21.4% 6.2% 11.8% 31.0% 18.1% 3.7% 5.3% 3.1
270 HK Guangdong Investment 5.8% 5.6% 2.7% 72.9% 60.3% 41.9% 11.4% (0.1)
1071 HK Huadian Power International (H) 46.6% 9.6% 12.1% 22.1% 11.3% 2.3% 5.2% 3.7
902 HK Huaneng Power International (H) 22.7% 5.3% 5.5% 21.7% 12.8% 5.1% 10.8% 2.4
958 HK Huaneng Renewables Corporation 60.9% 22.0% 23.0% 89.5% 46.9% 14.2% 5.0% 2.1
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600900 CH China Yangtze Power B CNY 6.43 7.70 19.8% 17,034 14.3 1.4 3.7% 10.0
601991 CH Datang International Power Generation (A) N CNY 4.06 4.80 18.2% 8,676 17.8 1.3 2.8% 9.9
600027 CH Huadian Power International (A) N CNY 3.67 3.50 -4.6% 3,990 17.9 1.3 0.0% 10.1
600011 CH Huaneng Power International (A) B CNY 6.58 8.30 26.1% 14,849 12.7 1.6 4.7% 8.6
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600900 CH China Yangtze Power 4.9% 0.4% -0.4% 82.6% 53.0% 34.9% 9.9% 0.9
601991 CH Datang International Power Generation (A) 19.8% 6.2% 11.8% 31.0% 18.1% 3.7% 5.3% 3.1
600027 CH Huadian Power International (A) 44.7% 9.6% 12.1% 22.1% 11.3% 2.3% 5.2% 3.7
600011 CH Huaneng Power International (A) 21.0% 5.3% 5.5% 21.7% 12.8% 5.1% 10.8% 2.4
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 95
Exhibit 170: Performance
Source: MSCI, Factset, GS Global ECS Research
80
90
100
110
120
130
140
150
160
250
300
350
400
450
500
550
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Utilities Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 96
Real Estate: Volume positive priced in; further upside driven by
price increase
Analyst name: Yi Wang (yi.wang@ghsl.cn); Vicky Li (vicky.li@ghsl.cn)
Sector stance
2013 sector view
We think the strong sales so far this year will be maintained into the fourth quarter, and that the sequential sales decline
in September does not indicate falling demand. Instead, we think the monthly fall in September is due to a high base of
comparison and fading seasonality of sales in major cities. Overall, sales volumes have shown divergent trends, with
tier-1 cities still at their lows since 2008 and most others at the mid-point at best.
We expect such stable volume outlook to drive property price to recover from the 2Q trough level, but slowly, as we
believe developers are unlikely to regain strong pricing power in the coming quarters, given: 1) underlying demand, the
main driver for volume recovery, is affordability sensitive; 2) we estimate it would take another 1-2 quarters for
developers to repair balance sheets to a healthy level, partly due to still-high financing costs and a longer cash collection
cycle now vs. previous years; 3) new sales launches could rise further in 2H12 given construction in the pipeline is
sizable, not to mention units already launched but unsold are still at a historical high.
Key drivers for 2013
Reform drivers
1. Property tax presents a near-term risk, but a long-term positive: We think property tax is a way to normalize
tightening policies in the housing sector, i.e. replace home purchase restrictions. As such, we think it should be
positive in the longer run, but we cannot rule out the possibility that there could be a certain period when both the
HPR and a property tax are in place, providing downside risk to our volume expectations.
Cyclical drivers
1. Volume positive priced in; further upside driven by price increase: We believe our offshore coverage universe has
largely priced in a strong volume recovery. In our view, further upside would require sustainable property price
appreciation, which we think is unlikely in the near term given the low visibility around further potential easing
measures by the government.
Key risks to our view
1. Upside: Unexpected policy easing that leads to stronger-than-expected price recovery.
2. Downside: Further government policy tightening and/or macro hard landing.
How we differ from consensus
Our current earnings estimates are about 6%/11%/21% below consensus for 2012E-2014E.
Stock recommendations (offshore)
Buy #1: Longfor (0960.HK, on CL)
Reasons/catalysts: We expect Longfor to deliver stronger-than- peer contract sales growth in 2013 among our coverage
universe on its opportune land banking since 2Q12, strong brand equity, and execution ability. Catalysts: 1) With 16 new
projects added YTD, we estimate the number of key projects selling in 2013E will increase by 28% to 59 from 46 in 2012E,
representing the highest growth among our offshore coverage universe. Given ongoing uncertainty around government
policies and the outlook for property prices, we think an expanded project pipeline is required to grow contract sales in
2013E and drive share price outperformance; 2) We estimate out of its total Rmb53bn of unbooked sales as of August
2012, 20% is at low net margin (below 10%), which, in our view, is not as significant a portion as believed by many. With
selling price for some of these projects recovering faster than expected since 2Q, there could be upside to our 2013/2014
margin estimates.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 97
Buy #2: Greentown (3900.HK, on CL)
Reasons/catalysts: We expect mean reversion of Greentown’s valuation on its earnings/margin normalization after the
repair of its balance sheet. Catalysts: 1) We expect Greentown to continue its strong sales performance, which should
serve as a positive catalyst for the stock. We now project presales in FY12 at 15% higher than the company’s target; 2)
Greentown shares have risen c.87% since the announcement of its strategic alliance with Wharf and we believe further
re-rating will be realized, driven by better-than-expected earnings. Underpinned by the highest revenue lock-in in the
sector (100% in both 2012 and 2013), our earnings forecasts are 39%/30%/5% ahead of Bloomberg consensus for 2012E-
14E. In our view, stronger-than-expected presales and stabilizing margins on the back of gradual ASP recovery from
previously distressed level (up 23% in Oct-12 from the trough level in Jun-12) will drive earnings upgrades from the
street.
Sell #1: Yanlord (YNLG.SI, Sell)
Reasons/catalysts: The following may all weigh on Yanlord, in our view:
Lack of new project launches in 2013E, low flexibility/motivation (in order to preserve its margin) on product adjustment
(from big units to smaller ones) and pricing (i.e. still high-end focused), possibly prolonged impact to its brand image
from the quality issues arising from its Shanghai Yanlord Townhouse project in recent months. Therefore, Yanlord will
be not only highly exposed to policy uncertainties given its high-end focus but also to unprecedented challenges in its
home markets in Yangtze River Delta region (Shanghai, Nanjing and Suzhou), which are key revenue sources
(contributing 70%/ 50% in 2012E/2013E) and profit contributors for the company. We expect downward revision of
consensus earnings estimates in the coming 12 months for Yanlord (our 2013-2014 underlying profit forecast is 18%/25%
below Bloomberg consensus).
Stock recommendations (A-share)
Buy #1: Beijing Capital Development (600376.SS, on CL)
Reasons/catalysts: We like BCD as we believe: 1) It stands to benefits the most from any Beijing mass market demand
recovery, given its leading position in Beijing and its mass-market product focus; 2) It stands to benefit more than peers
as it has de-rated relative to peers since tightening began in May 2010; and 3) It has good potential to become a
nationwide player given its well-established footprint across China. We view potential upside surprise in 2012E contract
sales as a key catalyst. Our current 2012E contract sales estimate of Rmb15bn suggests 32% yoy growth and is 7% above
management’s FY12 guidance. With new launches of Guofeng Meitang II, Guofeng Meilun I, and Xiyueshan plot 3 (in
total, Rmb4bn saleable), its contract sales reached Rmb12.2bn as of end September, 87% of FY12 company target of
Rmb14bn, higher than peers’ avg of c.80%. Also, any progress in the rolling out of management cash incentive program
in 2H12 should provide better growth outlook in the medium term, in our view.
Sell #1: China World Trade Center (600007.SS, Sell)
Reasons/catalysts: 1) We expect its 2013E EPS growth to slow to mid-teens level, with normalized Phase III operation. In
addition, we expect office rental growth to taper off on the back of slowdown in China’s GDP and global economy, and
DTZ also expects Beijing’s Grade A office market to see balanced supply-demand in 2012-2013, rather than the supply
shortage seen in 2011; 2) Financial burden remains high with net gearing at 80% by end-1H12, not much improvement
from 84% level by end-2011.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 98
Exhibit 171: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 172: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
3383 HK Agile Property Holdings N HKD 9.79 10.05 2.6% 4,567 6.2 1.0 3.2% 5.2
81 HK China Overseas Grand Oceans Group N HKD 8.24 8.98 9.0% 2,426 7.9 1.9 2.7% 4.2
688 HK China Overseas Land & Investment N HKD 22.35 19.43 -13.1% 21,230 12.6 1.9 1.4% 8.6
1109 HK China Resources Land B HKD 20.10 21.20 5.5% 15,088 14.3 1.6 1.9% 10.2
200002 CH China Vanke (B) B HKD 11.07 13.21 19.4% 15,610 6.5 1.2 2.3% 3.4
2007 HK Country Garden Holdings Company B HKD 3.51 4.12 17.5% 8,262 7.1 1.3 4.9% 4.9
EJ US E-House (China) Holdings Limited N USD 3.63 4.91 35.2% 428 0.6 0.0% 17.7
3333 HK Evergrande Real Estate Group B HKD 3.67 4.46 21.6% 7,052 5.2 1.0 3.9% 5.7
817 HK Franshion Properties (China) N HKD 2.44 2.75 12.8% 1,922 9.9 0.9 1.5% 6.0
3900 HK Greentown China Holding B* HKD 11.62 12.91 11.1% 2,465 3.7 0.8 2.7% 4.9
2777 HK Guangzhou R&F Properties N HKD 11.00 11.06 0.5% 4,573 7.1 1.0 4.9% 4.7
1813 HK KWG Property Holding N HKD 4.94 5.50 11.3% 1,844 5.6 0.7 3.6% 7.8
960 HK Longfor Properties Co. B* HKD 14.06 16.87 20.0% 9,387 9.4 1.7 1.5% 7.0
PCRT SP Perennial China Retail Trust S SGD 0.49 0.45 -8.3% 452 42.4 0.6 7.1%
119 HK Poly Property Group Co. B HKD 5.07 6.10 20.4% 2,368 7.7 0.6 2.6% 10.0
813 HK Shimao Property N HKD 15.54 13.68 -12.0% 6,951 8.6 1.1 3.5% 7.7
272 HK Shui On land N HKD 3.63 3.54 -2.5% 2,165 16.0 0.5 0.9% 20.6
3377 HK Sino-Ocean Land Holdings N HKD 5.31 5.24 -1.4% 3,065 10.2 0.8 3.4% 9.2
410 HK SOHO China N HKD 5.59 6.14 9.8% 3,764 7.2 0.9 5.6% 5.1
1918 HK Sunac China Holdings B HKD 4.82 5.55 15.2% 1,868 5.5 1.0 1.8% 5.0
YLLG SP Yanlord Land S SGD 1.34 1.27 -5.6% 2,131 13.5 0.8 0.4% 10.1
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
3383 HK Agile Property Holdings -0.9% 13.6% -1.6% 33.1% 32.9% 15.6% 14.8% 0.6
81 HK China Overseas Grand Oceans Group 15.6% 37.2% -8.9% 29.7% 29.6% 17.8% 24.5% (0.1)
688 HK China Overseas Land & Investment -17.2% 2.8% -5.9% 32.9% 32.9% 20.0% 14.7% 0.2
1109 HK China Resources Land -12.0% 29.4% 3.1% 25.5% 24.9% 13.7% 10.2% 0.4
200002 CH China Vanke (B) 8.8% 7.4% 4.1% 25.5% 25.4% 12.8% 13.9% (0.2)
2007 HK Country Garden Holdings Company 16.8% 13.6% 18.3% 27.3% 26.5% 13.9% 17.3% 0.4
EJ US E-House (China) Holdings Limited 71.9% 5.9% 3.3% -3.2% -2.3% -1.7% (0.2)
3333 HK Evergrande Real Estate Group -18.2% 0.8% -13.0% 20.4% 20.0% 10.8% 17.4% 0.9
817 HK Franshion Properties (China) -24.6% 10.6% 8.2% 38.6% 37.3% 13.1% 6.3% 0.3
3900 HK Greentown China Holding -0.9% 16.3% 3.4% 24.7% 24.3% 13.5% 15.5% 0.5
2777 HK Guangzhou R&F Properties -10.4% 14.4% 0.2% 29.2% 28.2% 11.5% 13.8% 0.7
1813 HK KWG Property Holding 0.1% -14.5% -32.7% 29.6% 29.1% 20.3% 12.1% 0.7
960 HK Longfor Properties Co. 3.4% 45.6% -2.0% 23.8% 23.8% 13.6% 16.9% 0.4
PCRT SP Perennial China Retail Trust 70.5% 0.6% -218.0% -218.0% 350.2% 1.3% 0.4
119 HK Poly Property Group Co. -1.5% 28.4% 9.1% 21.3% 20.7% 10.4% 7.6% 0.9
813 HK Shimao Property -19.6% 2.7% -12.1% 23.6% 22.8% 12.6% 11.0% 0.5
272 HK Shui On land -40.3% 35.1% -24.6% 29.2% 28.2% 14.4% 3.6% 0.9
3377 HK Sino-Ocean Land Holdings -4.8% 3.6% -8.4% 19.0% 19.0% 7.9% 5.7% 0.6
410 HK SOHO China -8.1% 14.8% 5.5% 48.1% 47.5% 20.9% 11.8% 0.5
1918 HK Sunac China Holdings 8.1% 31.3% 18.5% 24.0% 23.9% 9.0% 14.5% 1.0
YLLG SP Yanlord Land -38.2% 30.6% -8.5% 28.3% 28.0% 7.9% 3.0% 0.2
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 99
Exhibit 173: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 174: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600376 CH Beijing Capital Development Co. B* CNY 10.41 18.00 72.9% 2,498 6.0 1.0 3.3% 6.8
600266 CH Beijing Urban Construction Investment Development N CNY 11.59 15.54 34.1% 1,655 8.5 1.3 1.8% 6.7
000024 CH China Merchants Property (A) N CNY 23.07 25.70 11.4% 6,361 10.2 1.5 1.0% 6.4
000002 CH China Vanke (A) B CNY 8.45 12.33 45.9% 15,011 6.2 1.2 2.4% 3.8
600007 CH China World Trade Center S CNY 10.48 8.90 -15.1% 1,695 24.5 2.1 1.2% 10.6
000402 CH Financial Street Holding Co N CNY 5.71 7.80 36.5% 2,775 11.1 0.8 0.1% 11.0
600383 CH Gemdale Corp B CNY 5.23 7.70 47.3% 3,297 6.5 0.9 1.6% 6.6
002244 CH Hangzhou Binjiang Real Estate Group Co N CNY 8.65 9.42 8.9% 1,878 9.5 1.6 1.1% 11.1
600325 CH Huafa Industrial N CNY 7.22 9.40 30.2% 947 8.7 0.8 2.3% 16.8
600223 CH Lushang Property B CNY 4.53 5.88 29.7% 728 7.9 2.0 0.0% 8.5
600048 CH Poly Real Estate Group B CNY 11.49 15.00 30.5% 13,168 7.5 1.6 2.7% 6.7
002336 CH Renrenle Commercial Group Co. N CNY 8.88 8.05 -9.3% 570 38.5 1.0 0.5% 4.6
002146 CH Risesun Real Estate Development Co N CNY 10.88 11.00 1.1% 3,276 9.2 2.1 1.6% 8.5
600823 CH Shanghai Shimao Co. N CNY 9.83 12.65 28.7% 1,847 8.6 0.9 0.0% 9.5
002243 CH Shenzhen Beauty Star Co. B CNY 6.70 9.00 34.3% 278 14.3 2.0 0.7% 7.2
002285 CH Shenzhen World Union Properties Consultancy Co. B CNY 11.94 15.89 33.1% 626 12.8 2.3 2.6% 16.9
002408 CH Zibo Qixiang Tengda Chemical Co. N CNY 14.25 17.76 24.6% 1,069 13.2 2.1 1.5% 6.8
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600376 CH Beijing Capital Development Co. 20.9% 30.3% 17.2% 21.3% 20.8% 15.8% 15.1% 0.4
600266 CH Beijing Urban Construction Investment Development 4.9% 1.5% -10.0% 23.7% 23.0% 17.4% 14.1% 0.0
000024 CH China Merchants Property (A) 20.3% 25.9% 14.4% 22.4% 22.1% 15.0% 12.4% (0.2)
000002 CH China Vanke (A) 7.4% 7.4% 2.9% 21.4% 21.3% 12.8% 13.9% (0.2)
600007 CH China World Trade Center 11.0% 9.0% 9.4% 56.7% 36.3% 19.7% 8.6% 0.5
000402 CH Financial Street Holding Co 3.1% 13.6% 4.2% 20.4% 19.0% 12.2% 7.2% 0.5
600383 CH Gemdale Corp 10.9% 24.4% 16.3% 16.9% 16.7% 9.8% 9.8% 0.2
002244 CH Hangzhou Binjiang Real Estate Group Co 3.8% 43.9% 6.8% 28.1% 26.5% 19.2% 13.6% 0.7
600325 CH Huafa Industrial -5.7% 21.1% -9.6% 14.2% 13.7% 9.2% 6.5% 0.8
600223 CH Lushang Property 33.0% 27.3% 32.5% 18.7% 18.3% 11.3% 21.8% 1.2
600048 CH Poly Real Estate Group 28.7% 29.9% 23.1% 19.7% 19.3% 13.4% 16.0% 0.1
002336 CH Renrenle Commercial Group Co. 198.2% 15.4% 497.0% 2.6% 0.8% 0.6% 2.6% (0.5)
002146 CH Risesun Real Estate Development Co 9.5% 19.8% 9.6% 20.7% 19.9% 14.6% 20.7% 0.5
600823 CH Shanghai Shimao Co. 10.9% 26.8% 41.0% 26.4% 26.1% 15.7% 8.0% 0.4
002243 CH Shenzhen Beauty Star Co. 52.8% 20.4% 40.2% 22.0% 12.3% 9.0% 13.5% 0.4
002285 CH Shenzhen World Union Properties Consultancy Co. 64.0% 33.1% 62.9% 19.2% 17.4% 13.4% 18.0% (0.4)
002408 CH Zibo Qixiang Tengda Chemical Co. 52.6% 35.4% 42.2% 21.3% 16.9% 14.1% 16.2% (0.5)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 100
Exhibit 175: Performance
Source: MSCI, Factset, GS Global ECS Research
50
60
70
80
90
100
110
120
130
300
400
500
600
700
800
900
1000
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Real Estate Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 101
Retail: A better outlook in 2013, but need to be selective
Analyst name: Joshua Lu (Joshua.lu@gs.com), Caroline Li (Caroline.li@ghsl.cn), Weibo Hu (Weibo.hu@ghsl.cn)
Sector stance
2013 sector view
We expect retailers to gradually recover from the 2012 trough in 2013. Given the current valuation premium for DM over
the rest of Asia is still well below the historical average, we remain constructive on the retail sector. At the same time,
the structural changes on the China retail landscape mean that a rising tide will not lift all boats in this recovery. We
believe investors need to focus on companies with strong capability to differentiate and grow without sacrificing
margins.
Key drivers for 2013
Reform drivers
1. The government’s focus on driving income/consumption growth and the current fragmented nature of China’s retail
sector both imply further opportunity for expansion and consolidation.
Cyclical drivers
1. Recovery of domestic/external economies would lift consumption growth.
2. Gradual clearance of channel inventories, resulting in near-term margin pressure but a brighter long-term margin
outlook.
Key risks to our view
1. Rapid retail space buildup means certain markets face an oversupply situation.
2. Increasing recognition of the high pricing in China, e-commerce, and growing overseas travel all suggest that the
pricing-driven SSSG increase may no longer be sustainable.
How we differ from consensus
1. Our sales forecasts in 2013 for most retailers are below consensus. We also believe the longer-term growth potential
of Sun Art and Chow Tai Fook are still underappreciated.
Stock recommendations (offshore)
Buy #1: Sun Art (6808.HK) Reasons/catalysts 1. Best expansion potential among leading Chinese retailers due to current low penetration.
2. Productivity loop further strengthens its margin leadership over peers, which enables it to gain market share faster.
Buy #2: Daphne (0210.HK; on CL) Reasons/catalysts 1. Exposure to high growth mass market with leading market share.
2. Improving inventory position and continued operation turnaround could deliver sector-leading growth in 2013.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 102
Exhibit 176: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 177: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 178: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 179: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
2020 HK Anta Sports Products S* HKD 5.83 4.20 -28.0% 1,875 12.5 1.6 5.0% 6.3
1880 HK Belle International Holdings B HKD 15.70 16.00 1.9% 17,085 19.5 4.0 1.5% 12.8
3998 HK Bosideng International Holdings N HKD 2.37 2.70 13.9% 2,402 9.9 1.9 7.1% 5.5
210 HK Daphne International Holdings B* HKD 9.35 11.90 27.3% 1,976 13.4 2.7 2.5% 6.8
3308 HK Golden Eagle Retail Group B HKD 18.38 20.00 8.8% 4,607 19.3 4.4 1.6% 13.4
493 HK Gome Electrical Appliances Holding S HKD 0.79 0.69 -12.7% 1,720 34.3 0.7 0.0% 15.6
1833 HK Intime Department Store (Group) Co. B HKD 9.18 11.20 22.0% 2,262 12.0 1.9 3.8% 12.1
2331 HK Li Ning Company N HKD 4.04 4.40 8.9% 546 10.0 0.9 0.0% 3.2
848 HK Maoye International Holdings B HKD 1.58 2.10 32.9% 1,098 10.4 1.1 3.8% 10.9
3368 HK Parkson Retail Group N HKD 5.81 7.50 29.1% 2,107 10.9 2.0 4.1% 6.1
6808 HK Sun Art Retail Group B HKD 11.32 13.00 14.8% 13,933 27.7 4.4 1.4% 11.8
551 HK Yue Yuen Industrial N HKD 26.80 25.00 -6.7% 5,710 8.5 1.3 5.0% 7.1
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
2020 HK Anta Sports Products -33.0% -10.8% -33.1% 16.1% 15.0% 13.5% 12.8% (0.6)
1880 HK Belle International Holdings 18.3% 21.9% 18.9% 19.1% 16.8% 13.4% 20.4% (0.3)
3998 HK Bosideng International Holdings 7.8% 10.6% 10.7% 20.5% 19.2% 15.3% 18.9% (0.5)
210 HK Daphne International Holdings 23.1% 16.9% 23.1% 16.6% 14.2% 10.5% 22.1% (0.2)
3308 HK Golden Eagle Retail Group 16.5% 20.2% 16.3% 46.6% 42.4% 32.3% 22.7% 0.0
493 HK Gome Electrical Appliances Holding 148.7% 13.1% 202.4% 0.8% 0.2% 0.5% 2.0% (0.2)
1833 HK Intime Department Store (Group) Co. 34.3% 18.1% 17.0% 33.8% 24.4% 27.5% 14.3% 0.3
2331 HK Li Ning Company 577.5% 7.9% 299.0% 10.2% 7.4% 4.4% 9.4% (0.2)
848 HK Maoye International Holdings -16.0% 11.2% 11.4% 44.1% 32.5% 17.1% 8.3% 0.3
3368 HK Parkson Retail Group 14.3% 16.1% 11.9% 29.9% 24.5% 19.0% 18.1% (0.3)
6808 HK Sun Art Retail Group 20.5% 15.8% 22.1% 7.1% 4.6% 3.2% 14.9% (0.3)
551 HK Yue Yuen Industrial 20.0% 8.9% 18.6% 10.8% 7.7% 7.5% 13.4% 0.1
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601116 CH Sanjiang Shopping Club Co. S CNY 9.55 6.67 -30.2% 630 22.9 2.4 1.2% 10.2
002269 CH Shanghai Metersbonwe Fashion & Accessories Co. N CNY 12.47 22.00 76.4% 2,012 12.2 3.2 5.7% 6.9
002024 CH Suning Appliance Co. N CNY 6.20 6.40 3.2% 7,349 26.6 1.5 0.4% 9.4
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601116 CH Sanjiang Shopping Club Co. -2.1% 2.8% -1.8% 4.4% 3.3% 3.2% 10.5% (0.9)
002269 CH Shanghai Metersbonwe Fashion & Accessories Co. 18.0% 18.0% 17.2% 16.1% 11.9% 8.5% 26.1% 0.2
002024 CH Suning Appliance Co. -38.3% 10.2% -32.5% 2.5% 1.4% 1.5% 5.5% (0.6)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 103
Exhibit 180: Performance
Source: MSCI, Factset, GS Global ECS Research
70
90
110
130
150
200
250
300
350
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Consumer Discretionary Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 104
Technology: China vendors poised to extend market share gains
Analyst: Donald Lu, Ph.D (donald.lu@ghsl.cn); Robert Yen (rob.yen@gs.com); Sam Li (sam.z.li@ghsl.cn)
Sector stance
2013 sector view
1. Electronic components: We see 2013 being another year of high growth for smartphones and tablets. The next
chapter of the “Made in China” story will likely open in the acoustic industry, with China vendors poised to extend
recent global market share gains. We prefer acoustic and optical vendors that are exposed to the increasing focus on
user experience with ASP premiums.
2. Telecom equipment: We think wireless and transport networks are equally important in the upcoming LTE cycle in
2013E. We expect fiberoptic broadband companies and wireless vendors with high 3G/4G exposure to benefit from
this capex cycle, while opportunities for wireless network enhancement companies should emerge in the later stage.
3. Mobile internet: Carriers are now more reliant on data-related revenue. Their focus on network performance and
user experience should bring growth opportunities for software and service providers. However, we see strong
headwinds in business transition and believe this has a long way to go. Companies with good execution that are
committed to the mobile internet business transition should outperform.
Key drivers for 2013
Reform drivers
1. Government support on new technologies.
2. Acceleration of TD-LTE and the National Broadband Strategy.
Cyclical drivers
1. Continued share gains in the global tier-1 clients supply chain.
2. Faster pace in TD-LTE trial network deployment from China Mobile.
3. CM gets a fixed-line broadband license from MIIT.
4. China government policy stimulus and local enterprises’ demand for transformation.
Key risks to our view
1) Key technology changes; 2) Slower-than-expected wireless spending, TD-LTE commercial launch is later than
expected; 3) Corporate governance; 4) Faster-than-expected wage inflation; 5) Loss of key customers.
How we differ from consensus
1) We are more positive on TD-LTE than consensus; 2) We are more positive on GoerTek’s market share gains, and ASP
rising trend; 3) We expect wage inflation to slow down in 2013.
Stock recommendations (Offshore)
Buy #1: AAC Technologies (2018.HK)
Reasons/catalysts: 1) We believe the continued focus of handset/tablet OEMs to enhance consumers’ acoustic user
experience has led to a scenario where the increase in dollar content per box could continue for a longer period than we
expected, resulting in possibly one of the major ASP upgrade cycles for non-semiconductor components in the past few
years; 2) We also believe AAC is gradually dominating this space, with superior margins keeping it ahead of the
technology and manufacturing curve, leading to a sustainable ROE if we exclude the risk of macro weakness; 3) We
continue to view AAC’s various design wins and potential EPS growth acceleration in the next few quarters as share
price catalysts. AAC’s penetration into global tier-1 customers (such as Apple and Samsung) and its preferred position
from some new entrants (such as Amazon and Xiaomi) seems to suggest that AAC is able to provide customized
products and scale advantage to fulfill different needs from cost/performance basis.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 105
Buy #2: China Wireless (2369.HK)
Reasons/catalysts: 1) We believe China Wireless (CW, own-brand Coolpad) is likely to become the number one
smartphone maker among local OEMs in China in 4Q12, marginally surpassing its major rivals (Lenovo, Huawei and
ZTE) for the first time due to its customized smartphone models shipments to China Mobile (CM) and its solid execution
in product refresh/marketing; 2) Such share expansion, in our view, may not come at the expense of margins due to
changing competitive dynamics – most Chinese OEMs are making losses now. We still believe CW is in a sweet spot –
benefiting from China smartphone growth with decent profits; 3) After launching its 4G LTE smartphone in the US (with
MetroPCS) using its own brand for the first time, we expect CW to gradually penetrate other overseas operators for low-
end LTE smartphone. Additionally, as a strategic partner of CM, we see CW as initial beneficiary of TD-LTE terminal
device deployment.
Stock recommendations (A-Share)
Buy #1: GoerTek (002241.SZ)
Reasons/catalysts: 1) Favorable exposure to smart terminals should help it benefit the most from the prevalence of
smartphones/tablets. We forecast its 2012E exposure to smartphones and tablets to be 53%, vs industry average of 14%;
2) GoerTek has a strong client portfolio. We expect revenue from Apple and Sony to ramp up in 2012E with continuous
market share gains and Apple alone would account for 33%/50%/50% of its total revenue for 2012/2013/2014; 3) Industry
leading revenue scale and strong operating cash flow growth will help the company to gain market share and improve
profitability.
Buy #2: Fiberhome (600498.SS, on CL)
Reasons/catalysts: 1) We expect the company to deliver solid earnings growth driven by strong spending on the
transport network in 2012E/2013E; 2) Fiberhome is gaining market share as Chinese telco operators are optimizing
suppliers' structure due to its technology advantage; 3) We view the upcoming national broadband strategy and China
Mobile's potential broadband license as another driver of the company.
Exhibit 181: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
2018 HK AAC Technologies B HKD 29.70 34.00 14.5% 4,706 12.4 4.0 3.2% 9.7
ASIA US AsiaInfo-Linkage NR USD 10.71 795 18.8 0.7 0.0% 5.6
AMAP US AutoNavi Holdings Ltd. B USD 11.55 17.30 49.8% 548 13.3 1.6 0.0% 4.9
2369 HK China Wireless Technologies B* HKD 2.46 3.30 34.1% 649 7.9 1.9 2.5% 3.6
2342 HK Comba Telecom Systems N HKD 3.14 2.50 -20.4% 618 13.4 1.1 1.5% 9.2
992 HK Lenovo Group N HKD 7.15 7.00 -2.1% 9,483 13.5 3.1 2.6% 5.0
763 HK ZTE Corporation (H) N HKD 11.74 12.50 6.5% 5,034 11.1 1.2 3.0% 7.2
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 106
Exhibit 182: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 183: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 184: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
2018 HK AAC Technologies 36.7% 35.4% 36.9% 36.0% 31.5% 27.9% 32.4% 0.0
ASIA US AsiaInfo-Linkage 25.3% 11.6% 18.2% 13.3% 6.2% 7.0% 3.9% (0.3)
AMAP US AutoNavi Holdings Ltd. 17.1% 12.0% 13.3% 30.1% 25.9% 23.9% 11.1% (0.8)
2369 HK China Wireless Technologies 98.2% 62.9% 89.5% 3.8% 3.5% 2.9% 23.6% (0.8)
2342 HK Comba Telecom Systems 10.9% 254.4% 7.4% 5.5% 4.9% 8.4% 0.0
992 HK Lenovo Group 28.9% 14.5% 25.7% 3.1% 2.3% 1.8% 22.9% (1.1)
763 HK ZTE Corporation (H) 271.0% 21.8% 67.3% 5.6% 4.3% 2.6% 9.6% 0.4
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
002281 CH Accelink Technologies N CNY 16.58 17.80 7.4% 426 20.7 2.1 1.7% 17.6
002230 CH Anhui USTC iFLYTEK S CNY 27.08 18.70 -30.9% 1,644 42.2 7.2 0.7% 36.3
002148 CH Beijing Bewinner Communications N CNY 13.79 16.90 22.6% 251 25.3 2.9 1.0% 20.9
300002 CH Beijing Ultrapower Software B CNY 13.55 22.50 66.1% 825 9.3 1.5 3.2% 5.3
600498 CH Fiberhome Telecom Tech B* CNY 18.06 30.60 69.4% 1,399 12.1 1.5 1.8% 7.5
002241 CH GoerTek Inc. B CNY 34.40 49.00 42.4% 4,684 19.2 4.7 1.3% 13.6
002261 CH Hunan Talkweb Information System N CNY 7.94 9.80 23.4% 361 33.3 2.6 0.5% 25.9
300077 CH Nationz Technologies N CNY 13.52 14.00 3.6% 590 42.9 1.3 0.7%
002405 CH NavInfo Co. N CNY 10.09 11.20 11.0% 934 21.7 2.2 1.3% 15.9
300134 CH Shenzhen Tat Fook Technology N CNY 8.02 9.20 14.7% 412 59.1 1.1 0.0% 13.2
002313 CH Sunsea Telecommunications N CNY 15.04 22.40 48.9% 580 14.7 1.7 1.5% 10.0
000063 CH ZTE Corporation (A) N CNY 8.11 10.20 25.8% 4,327 9.6 1.0 3.5% 6.4
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
002281 CH Accelink Technologies 42.2% 21.2% 45.3% 10.9% 7.8% 10.2% 10.2% (0.2)
002230 CH Anhui USTC iFLYTEK 29.3% 33.5% 35.7% 24.7% 18.3% 22.4% 16.4% (0.4)
002148 CH Beijing Bewinner Communications 35.5% 22.6% 45.9% 20.6% 17.1% 20.0% 11.5% (0.4)
300002 CH Beijing Ultrapower Software 27.5% 25.7% 27.3% 33.9% 31.5% 29.1% 15.6% (0.5)
600498 CH Fiberhome Telecom Tech 28.0% 19.1% 20.0% 8.9% 6.1% 6.8% 11.0% (0.3)
002241 CH GoerTek Inc. 63.7% 63.1% 52.0% 18.2% 15.8% 12.8% 23.9% 0.0
002261 CH Hunan Talkweb Information System 52.2% 26.8% 44.4% 13.3% 9.5% 13.4% 7.2% (0.6)
300077 CH Nationz Technologies 56.4% 34.5% 40.7% -6.8% -11.5% 15.3% 3.0% (0.9)
002405 CH NavInfo Co. 71.4% 28.2% 23.6% 25.8% 18.0% 30.3% 10.0% (0.8)
300134 CH Shenzhen Tat Fook Technology 209.4% 25.9% 40.6% 9.5% 2.1% 3.0% 1.8% (0.3)
002313 CH Sunsea Telecommunications 32.1% 32.0% 33.2% 12.6% 11.4% 10.2% 11.1% (0.3)
000063 CH ZTE Corporation (A) 266.1% 21.8% 67.3% 5.6% 4.3% 2.6% 9.6% 0.4
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 107
Exhibit 185: Performance
Source: MSCI, Factset, GS Global ECS Research
80
85
90
95
100
105
110
115
120
100
110
120
130
140
150
160
170
180
190
200
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price LevelMSCI China Technology Hardware & Equipment Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 108
Telecoms: Healthy but decelerating growth; stabilizing competition
Analyst: Donald Lu, Ph.D (donald.lu@ghsl.cn)
Sector stance
2013 sector view
We expect the following key trends in the China telecom market in 2013:
1. Wireless revenue growth will remain healthy though at a decelerating pace, driven by the prevalence of low-cost
smartphones in lower-tier cities and 2G/3G upgrade cycle. We view LTE (4G) as a game changer, which may help
China Mobile (CM) to regain market share if it could launch the service 12-18 months earlier than China Unicom (CU)
and China Telecom (CT), as the majority of high-end smartphones should be LTE-supportive in 2013. CM currently
plans to launch TD-LTE commercial service in HK in December 2012 and trial commercial service in China by the end
of 2013.
2. The fixed line business has passed the trough and started to grow yoy as fixed line broadband growth offset fixed
voice decline. This is positive to CU and CT. But we expect competition to intensify because CM and cable
companies are slated to enter the fixed broadband market, according to SINA.
3. Trade-off between scale and profitability would be another swing factor for the sector and would impact operators’
strategies, especially in marketing and subsidies spending. Operators have put more emphasis on profitability in
2H12 as all three telcos have shown slightly better margin seasonality in 3Q12. Our channel checks indicate that the
competition in wireless service has stabilized in recent months after a period of intensification. However, we caution
that CU/CT might become more aggressive again in 2013E prior to the revival of CM’s LTE launch.
Key drivers for 2013
Reform drivers: Government support on telecom infrastructure spending and proprietary technology.
Cyclical drivers We do not view cyclical factors as a main driver in this industry.
Key risks to our view
Regulatory risk remains the highest risk in this industry. LTE spectrum allocation, LTE licenses, network convergences
and possible asymmetric regulations are all subject to the regulators’ attitude on how to balance the three incumbents in
China.
How we differ from consensus
1. We are more positive on LTE progression in China and we expect CM to carry out large-scale commercial trials of
TD-LTE by end of 2013E.
2. We are positive on the robust growth of ultra low-cost EDGE and TD smartphones in China in 2H2012 and 2013.
Stock recommendations (offshore)
Buy #1: China Mobile (0941.HK)
Reasons/catalysts 1. We are positive on CM due to its LTE upside potential and expect it to take back market share if it can launch LTE
ahead of China Unicom and China Telecom.
2. We prefer CM on its defensiveness with attractive dividend yield and ability to pay sustainable dividends supported
by its strong balance sheet and free cash flow.
Stock recommendations (A-share)
N/A
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 109
Exhibit 186: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 187: Stock fundamentals
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 188: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 189: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
552 HK China Communication Services N HKD 4.35 4.60 5.7% 3,887 9.3 1.1 4.3% 3.7
941 HK China Mobile (HK) B HKD 87.95 100.00 13.7% 227,456 11.6 1.8 3.7% 4.1
728 HK China Telecom N HKD 4.39 5.00 13.9% 45,842 14.6 1.0 2.1% 4.0
762 HK China Unicom N HKD 12.36 14.00 13.3% 37,576 21.2 1.1 2.7% 4.4
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
552 HK China Communication Services 10.1% 14.8% 13.6% 5.1% 4.5% 3.7% 11.9% (0.5)
941 HK China Mobile (HK) 2.9% 5.8% 2.2% 42.1% 23.8% 20.6% 15.6% (0.5)
728 HK China Telecom 34.0% 10.2% 37.8% 32.5% 10.3% 6.4% 7.0% 0.4
762 HK China Unicom 63.9% 11.3% 17.0% 30.0% 5.9% 3.9% 5.2% 0.6
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
002148 CH Beijing Bewinner Communications N CNY 13.79 16.90 22.6% 251 25.3 2.9 1.0% 20.9
600050 CH China United Network Communications N CNY 3.25 4.70 44.6% 11,060 18.6 0.3 3.0% 2.4
002261 CH Hunan Talkweb Information System N CNY 7.94 9.80 23.4% 361 33.3 2.6 0.5% 25.9
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
002148 CH Beijing Bewinner Communications 35.5% 22.6% 45.9% 20.6% 17.1% 20.0% 11.5% (0.4)
600050 CH China United Network Communications 61.8% 11.3% 17.0% 30.0% 5.9% 1.3% 1.7% 0.6
002261 CH Hunan Talkweb Information System 52.2% 26.8% 44.4% 13.3% 9.5% 13.4% 7.2% (0.6)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 110
Exhibit 190: Performance
Source: MSCI, Factset, GS Global ECS Research
80
90
100
110
120
130
140
150
160
110
120
130
140
150
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price Level
MSCI China Telecom Services Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 111
Tourism: Growing market driven by domestic demand
Analyst name: Xufa Liao (xufa.liao@ghsl.cn); Zhijing Liu (zhijing.liu@ghsl.cn)
Sector stance
2013 sector view
We believe the China tourism sector is still in an early growth stage and expect tourism revenue from domestic and
inbound travel to post a CAGR of 13% over the next five years, driven mainly by domestic demand. Income growth as
well as supportive government policies will be the two main long-term structural drivers. We see duty-free, economy
hotels and chain restaurants best positioned in tourism industry, as branded economy hotel chains and online travel
agencies will likely continue to take market share from small-scale operators against the backdrop of a fragmented
supply landscape. Duty-free stores should benefit from luxury retail spending and supportive policy.
Key drivers for 2013
Reform drivers
1. Duty-free policy refresh could boost sales in Sanya duty-free stores significantly.
2. “Citizen Leisure Outline” program launch may come in early 2013, designed to strengthen the implementation of
paid vacation policies and thus increase tourism consumption.
Cyclical drivers
1. Scenic passenger traffic and hotel occupancy rate will improve if the economy continues to recover.
2. Japan tourism will start to recover as Sino-Japan tension eases.
Key risks to our view
1. Major disease outbreaks.
2. Lower-than-expected tourist volume at major scenic spots.
How we differ from consensus
N/A
Stock recommendations (A-share)
Buy #1: CITS (601888.SS; on CL)
Reasons/catalysts
1. We expect 2013 revenue for Sanya store to grow 63% yoy. On October 24, the Ministry of Finance
announced a duty-free policy refresh for Hainan province, including a 60% shopping allowance increase and more
flexible allowance usage. With the relaxed policy rules and improved operations, we estimate the Sanya store will
further optimize its sales structure and operating efficiency, and achieve Rmb3.7 bn revenue in 2013.
2. CITS’s Haitang Bay shopping center to begin operations in 2014, with 10X the duty-free floor space of the
current Sanya store. Along with policy support, we believe this will drive continuous growth for CITS in the duty-free
field in mid-long term.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 112
Exhibit 191: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 192: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
600258 CH Beijing Capital Tourism S CNY 10.60 11.20 5.7% 394 20.8 2.3 3.8% 9.9
300291 CH Beijing Hualubaina Film & TV Co. B* CNY 53.06 65.90 24.2% 511 20.6 3.1 1.9% 13.6
002306 CH Beijing Xiangeqing Co. N CNY 8.57 10.85 26.6% 550 20.1 2.5 2.5% 7.2
600138 CH China CYTS Tours Holding Co. N CNY 14.62 17.00 16.3% 975 16.9 2.0 1.8% 6.9
601888 CH China International Travel Service Corp. B* CNY 27.59 41.00 48.6% 3,898 16.2 3.6 1.2% 9.6
000888 CH Emei Shan Tourism Co. N CNY 18.52 19.17 3.5% 699 19.9 3.7 1.2% 10.7
000978 CH Guilin Tourism Co. Ltd. S CNY 6.08 5.20 -14.5% 352 26.5 1.4 1.5% 10.4
600054 CH Huangshan Tourism Development Co. N CNY 11.78 14.00 18.8% 891 13.7 2.6 3.6% 8.7
002033 CH Lijiang Yulong Tourism Co. B CNY 17.89 25.82 44.3% 334 18.0 3.1 2.5% 8.9
600754 CH Shanghai Jinjiang International Hotels B CNY 14.51 19.40 33.7% 1,405 20.1 2.0 2.5% 10.5
300144 CH Songcheng Tourism Development B CNY 12.10 17.12 41.5% 1,060 19.1 2.1 1.8% 12.1
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
600258 CH Beijing Capital Tourism 7.1% 6.2% 4.9% 9.4% 6.8% 3.8% 9.0% 0.1
300291 CH Beijing Hualubaina Film & TV Co. 30.0% 36.6% 36.6% 42.5% 42.2% 33.3% 15.0% (0.5)
002306 CH Beijing Xiangeqing Co. 24.6% 17.6% 16.2% 22.9% 12.9% 8.8% 12.3% (0.2)
600138 CH China CYTS Tours Holding Co. 14.5% 4.2% 8.4% 11.0% 8.2% 3.8% 6.9% (0.2)
601888 CH China International Travel Service Corp. 48.2% 17.0% 46.1% 12.6% 11.1% 7.9% 19.7% (0.3)
000888 CH Emei Shan Tourism Co. 33.3% 21.4% 21.8% 30.6% 22.6% 18.6% 18.3% (0.4)
000978 CH Guilin Tourism Co. Ltd. 13.9% 8.4% 1.5% 30.0% 15.0% 13.6% 5.2% (0.2)
600054 CH Huangshan Tourism Development Co. 27.4% 19.2% 22.2% 30.8% 26.1% 18.8% 18.8% 0.1
002033 CH Lijiang Yulong Tourism Co. 18.3% 11.1% 13.6% 51.8% 44.1% 24.2% 13.7% (0.1)
600754 CH Shanghai Jinjiang International Hotels 13.3% 14.9% 21.5% 28.0% 11.4% 15.6% 9.7% (0.2)
300144 CH Songcheng Tourism Development 28.7% 36.4% 29.0% 56.2% 44.2% 41.1% 11.1% (0.3)
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 113
Transport: Prefer Airlines; cautious on Bulk Shipping
Analyst name: Hino Lam (hino.lam@gs.com); Ronald Keung (ronald.keung@gs.com)
Sector stance
2013 sector view
Airlines: We expect overall load factors to remain healthy, tracking c.80%, thanks to carriers’ supply discipline. Carriers
remain cautious on the ramp-up of the high-speed rail network. We believe traffic diversion to HSR from air peaked in
2012 at 3.7%, and will slow to 2.9%. Meanwhile, supply growth for the year should remain manageable at 11.3% yoy (in
Available Seat Kilometer terms) against a recovering demand backdrop from 2Q12 levels of 9.7% yoy to 11.7% yoy for
the full year. On international routes, China/Japan routes remain a key wildcard and we believe demand headwind could
offset a more favorable travel environment to other destinations (specifically to Europe and Australia where carriers are
gaining market share from other Asia-Pacific carriers). Finally, we believe increased fuel hedging, coupled with a
stronger Rmb (against 1H12 Rmb depreciation vs. the US$) should offer additional support to 2013 profitability.
Shipping: We like containerships over bulkers given more favorable industry outlook and higher pricing power. We
expect container earnings to sequentially improve (from record losses in 2011 to narrower losses/breakeven in 2012) and
marginally better in 2013, thanks to more industry capacity discipline. We expect an industry up-cycle for containerships
in 2014 to be supported by favorable supply-demand dynamics. With China’s infrastructure build-out passing its peak,
we expect structurally slower demand ahead for bulker while oversupply persists.
Railroads: Recent cyclical headwinds on high-speed rail (HSR) diversion and weak coal throughput look well discounted
to us at trough cycle valuations, but not potential upside from MOR reform, more pricing deregulation and asset
injections. We expect ordinary passenger rail traffic to continue to face diversion to HSR as China’s HSR network takes
shape, but with full completion of the Beijing-Guangzhou HSR at the end of 2012, we expect cargo traffic to grow
significantly from 2013.
Key drivers for 2013
Reform drivers
1. Potential airfare liberalization: CAAC now provides pricing guidelines for fares, including benchmark and cap levels.
Approx 5% of routes are charging at cap levels. There could be potential airfare liberalization as CAAC recently
articulated plans to liberalize pricing on select routes. Potential reform in the airfare pricing mechanism would allow
airlines to freely set fares on select routes and the increased flexibility would boost yields, given the current high
load factor compared with historical levels. In our view, the market is not anticipating any fare liberalization (partial
or full), and revenue growth ahead would mostly be driven by traffic growth. While the timing of fare liberalization is
unknown, we believe any news toward more market-oriented pricing would be read positively by the market,
providing upside surprise for the three Chinese airlines.
2. MOR reform: We expect details of China’s MOR reform proposal to be announced over the next 12 months. In our
view, the potential MOR reform could lead to: relaxation of cargo tariff regulations which could be positive for China
railroads (given all-in rates on Daqin and Guangshen’s Guangping line are now lower than the national rate) and
potential asset injections into Daqin and Guangshen Railway, given that they are the only two major listed railroad
owners/operators in China.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 114
Cyclical drivers
1. Airlines: Favorable demand and supply environment in both domestic and international markets will continue to
benefit Chinese airlines in 2013, in our view. We believe traffic growth will remain robust in 2013E underpinned by
less macro tightening while load factors remain healthy thanks to carriers’ supply discipline. In turn, we expect a
small pick up in yields thanks to higher utilization coupled with yield mix improvement from more first/business
class seats on the new fleet.
2. Shipping: Slower demand growth and uncertain economic outlook have resulted in strong discipline by liners in
controlling capacity. We expect the earnings for container to be marginally better in 2013 and an industry up-cycle in
2014. Due to slower commodities demand growth from China and an oversupply of bulk vessels, we do not expect
improvement in the supply-demand outlook for bulkers over 2013. In particular, we expect returns of bulkers to
remain below trend seen in the past decade.
3. Railroad: The completion of Beijing-Shanghai HSR will boost the cargo capacity on the original Beijing-Shanghai
rail line to over 100mn tons a year. We assume cargo volumes to return to levels in the 1990s of between 80- 90mn
tons in 2013E and over 100mn tons from 2014E. Helped by the lower labor capacity for the cargo business and
progressive rate hikes during these years, we expect Guangshen to experience an uplift in margins over the next few
years, leading to a higher return.
Key risks to our view
1) Further tightening and/or slowdown of the Chinese economy; 2) Lack of near-term earnings catalysts for shipping and
infrastructure; 3) Higher-than-expected HSR traffic diversion.
How we differ from consensus
We are above Bloomberg consensus on earnings outlook due to: 1) Airlines: our more sanguine outlook in outbound
traffic and overall yield and lower traffic diversion risk to HSR on domestic air routes; 2) Infrastructure: MOR should
announce the detailed reform proposals in the next 12 months and airports could see an increase in charges on int’l
flights operated by Mainland carriers.
Stock recommendations (offshore)
Buy #1: China Eastern Airlines (0670.HK, on CL-Buy)
Reasons/catalysts: 1) Positive earnings surprise from 4Q results on the back of load factor strength, 2) Lower than
expected traffic diversion to HSR.
Buy #2: Sinotrans Shipping (0368.HK, on CL-Buy)
Reasons/catalysts: 1) Seasonal pick-up in bulker rates into winter seasons helped by re-stocking; (2) Confirmation of
vessel acquisition plans at attractive prices; (3) Continued scrapping and delivery delays by industry players.
Stock recommendations (A-share)
Buy #1: Shanghai International Airport (600009.SS, on CL-Buy)
Reasons/catalysts: 1) High exposure to the high yield int'l passengers; 2) Room for growth given under utilized capacity;
3) Benefit most amongst the listed China airports from the upcoming aeronautical charge hike on mainland carriers’ int’l
flights.
Buy #2: Daqin Railway (601006.SS, Buy)
Reasons/catalysts: 1) Improving coal shipments into Qinhuangdao; 2) Detailed MOR reform proposals announced; 3)
Relaxation of cargo tariff regulations on Daqin line.
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 115
Exhibit 193: Stock valuations
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 194: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 195: Stock valuations (onshore)
Stock ratings: B-Buy; S-Sell; N-Neutral; B*- On Conviction Buy List; S*-On Conviction Sell List, NR-Not Rated, RS-Rating Suspended.
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
753 HK Air China (H) B HKD 5.16 7.00 35.7% 3,038 6.5 0.9 0.8% 5.4
694 HK Beijing Capital Int'l Airport N HKD 5.23 5.00 -4.4% 2,837 12.7 1.2 3.9% 7.7
1919 HK China COSCO Holdings (H) N HKD 3.70 3.50 -5.4% 4,877 164.3 1.1 0.0% 13.4
670 HK China Eastern Airlines (H) B* HKD 2.71 4.40 62.4% 1,222 5.4 0.9 0.0% 5.7
2866 HK China Shipping Container Lines (H) N HKD 2.13 2.10 -1.4% 3,211 30.9 0.7 0.0% 12.1
1138 HK China Shipping Development (H) N HKD 3.99 4.40 10.3% 1,753 73.0 0.5 0.4% 16.1
1055 HK China Southern Airlines (H) N HKD 3.47 4.00 15.3% 1,251 6.7 0.7 0.0% 5.7
525 HK Guangshen Railway (H) B HKD 2.60 3.10 19.2% 2,376 8.0 0.5 5.7% 2.8
316 HK Orient Overseas International B HKD 48.25 56.00 16.1% 3,896 14.0 0.8 1.7% 6.4
368 HK Sinotrans Shipping B* HKD 1.88 2.40 27.7% 968 15.4 0.4 2.2% 0.4
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
753 HK Air China (H) 61.6% 11.4% 25.7% 19.0% 9.3% 7.1% 13.8% 1.1
694 HK Beijing Capital Int'l Airport 26.9% 9.7% 15.0% 55.4% 34.3% 18.9% 9.1% 0.9
1919 HK China COSCO Holdings (H) 102.7% 9.7% 728.5% 7.7% 2.9% 0.2% 0.7% 1.8
670 HK China Eastern Airlines (H) 46.4% 12.9% 22.3% 16.5% 7.6% 4.4% 16.0% 2.5
2866 HK China Shipping Container Lines (H) 643.1% 5.0% 65.9% 8.4% 4.0% 1.9% 2.3% 0.5
1138 HK China Shipping Development (H) 139.2% 18.3% 180.9% 18.7% 6.0% 1.1% 0.6% 1.2
1055 HK China Southern Airlines (H) 29.6% 10.3% 19.3% 15.5% 6.8% 3.6% 10.1% 1.6
525 HK Guangshen Railway (H) 35.2% 7.1% 20.9% 25.2% 15.7% 11.8% 6.8% (0.1)
316 HK Orient Overseas International 14.2% 9.3% 55.7% 11.4% 6.0% 3.9% 5.9% 0.3
368 HK Sinotrans Shipping 106.7% -3.2% 74.7% 43.2% 16.9% 29.3% 2.8% (0.4)
Ticker Name Rating
Pricing
currency
Price (Pricing
currency)
6M/12M
target Price
(Pricing
currency)
Potential
upside/
downside to
target price
Market
cap
(US$mn)
P/E CY
2013 (X)
P/B CY
2013 (X)
Dividend
yield
CY 2013
EV/EBITDA
CY 2013
(X)
601111 CH Air China (A) N CNY 4.65 7.00 50.5% 6,218 7.3 1.0 0.7% 5.7
601919 CH China COSCO Holdings (A) S CNY 4.25 2.90 -31.8% 6,971 1.6 0.0% 15.1
600115 CH China Eastern Airlines (A) B CNY 3.12 5.60 79.5% 3,898 7.7 1.2 0.0% 6.3
601866 CH China Shipping Container Lines (A) N CNY 2.21 2.30 4.1% 4,145 39.9 1.0 0.0% 14.1
600026 CH China Shipping Development (A) N CNY 4.27 5.00 17.1% 2,334 97.2 0.6 0.3% 17.6
600029 CH China Southern Airlines (A) N CNY 3.38 5.80 71.6% 3,811 8.2 0.8 0.0% 6.0
601006 CH Daqin Railway B CNY 6.26 7.70 23.0% 14,942 7.4 1.3 7.2% 5.0
601333 CH Guangshen Railway (A) N CNY 2.50 3.20 28.0% 2,843 9.5 0.7 4.8% 3.5
600009 CH Shanghai Int'l Airport B* CNY 11.06 15.70 42.0% 3,422 10.3 1.3 4.8% 5.8
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 116
Exhibit 196: Stock fundamentals (onshore)
Source: Factset, Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 197: Performance
Source: MSCI, Factset, GS Global ECS Research
Ticker Name EPS growth
Revenue,
sales
growth CY
2013
EBITDA
growth CY
2013
EBITDA
margin CY
2013 EBIT margin
Net margin
CY 2013
ROE CY
2013
Net
debt/equity
CY 2013
601111 CH Air China (A) 59.5% 11.4% 25.7% 19.0% 9.3% 7.1% 13.8% 1.1
601919 CH China COSCO Holdings (A) 102.6% 9.7% 728.5% 7.7% 2.9% 0.2% 0.7% 1.8
600115 CH China Eastern Airlines (A) 44.4% 12.9% 22.3% 16.5% 7.6% 4.4% 16.0% 2.5
601866 CH China Shipping Container Lines (A) 633.2% 5.0% 65.9% 8.4% 4.0% 1.9% 2.3% 0.5
600026 CH China Shipping Development (A) 138.7% 18.3% 180.9% 18.7% 6.0% 1.1% 0.6% 1.2
600029 CH China Southern Airlines (A) 27.9% 10.3% 19.3% 15.5% 6.8% 3.6% 10.1% 1.6
601006 CH Daqin Railway 14.8% 7.1% 9.6% 39.7% 30.7% 26.2% 17.1% 0.0
601333 CH Guangshen Railway (A) 33.4% 7.1% 20.9% 25.2% 15.7% 11.8% 6.8% (0.1)
600009 CH Shanghai Int'l Airport 27.1% 19.3% 21.6% 54.0% 36.9% 35.2% 11.8% (0.2)
60
65
70
75
80
85
90
95
100
105
110
200
250
300
350
400
450
500
550
600
650
Ja
n-1
1
Fe
b-1
1
Ma
r-11
Ap
r-11
Ma
y-1
1
Ju
n-1
1
Ju
l-11
Au
g-1
1
Se
p-1
1
Oct-
11
No
v-1
1
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Ma
r-1
2
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Au
g-1
2
Se
p-1
2
Oct-
12
No
v-1
2
Price LevelMSCI China Transportation Index
Relative Index (right scale)
Relative Index
November 29, 2012 China
Goldman Sachs Global Economics, Commodities and Strategy Research 117
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Goldman Sachs Global Economics, Commodities and Strategy Research 118
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Goldman Sachs Global Economics, Commodities and Strategy Research 120
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