Post on 27-May-2020
12 April 2011 Nomura 1
Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 38 to 44.
Strategy | C H I N A
Henry Wu, CFA +852 2252 2122 henry.wu@nomura.com
Action The Chinese equity market performed strongly in March, led by banking, coal,
utilities and property stocks. We highlight three focal points for investors in 2Q11: 1) further NIM expansion at Chinese banks following rate hikes; 2) high inflation and price controls; and 3) the impact of policy tightening on the real economy, including a possible growth slowdown. We expect banking stocks to continue to outperform, defensive stocks such as telecoms to do well but cyclicals to reverse their performance. Consumer staples look set to remain under pressure given the government’s price control efforts.
Anchor themes We think the market will continue to trend up in 2Q11 and we reiterate our year-end HSCEI index target of 16,000 and MSCI China index target of 83 given unstretched valuations (12.2x and 10.6x forward PE for 2011F and 2012F). Such valuations already factor in a slowing earnings growth scenario in 2011, in our view.
Trend is up for 2Q but so is the risk Banks: NIMs set to expand further in 2Q11
We think the market will continue to trend up in 2Q11 amid sector rotation. We believe Chinese banks will see significant margin expansion, driven by the past rounds of rate hikes as well as improving pricing power. In addition, Nomura’s economics team has brought forward its expectations for the next rate hike — it now expects a 25bp hike in each of 2Q and 3Q, rather than in 3Q and 4Q.
Price controls
We see the recent suspension of planned price increases by some Chinese enterprises as underlining growing efforts in China to rein in prices. For this reason we think consumer staples will likely remain under pressure. The near-term outlook for retail sales is, by Chinese standards, not encouraging (15.8% y-y in January-February, vs 19% y-y in 4Q10). Also, we note that in the past several inflation cycles, staples have generally underperformed.
Growth slowdown – the main near-term risk
We highlight possible economic growth slowdown as a major risk for the equity market in 2Q11, as previous tightening policies, including interest rate and RRR hikes, could drag down corporate earnings. Supply chain disruption caused by the earthquake in Japan will also likely affect 1Q/2Q results, especially in the manufacturing sectors.
Nomura stock selection
Our top picks: China Life Insurance (2628 HK), China Unicom (762 HK), China Yurun Food (1068 HK), Gome Electrical Appliances (493 HK), and ICBC (1398 HK).
N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D
Stocks for action Our top picks: potential front-line beneficiaries of investment opportunities in China in 2Q11 and those that: 1) benefit from interest rate hikes and meat scandals; 2) will likely see the least impact from high inflation and price controls; and 3) are defensive.
TOPDOWN
Analysts Henry Wu, CFA
+852 2252 2122
henry.wu@nomura.com
Yang Luo (Researcher)
+852 2252 2141
yang.luo@nomura.com
Michael Shen (Researcher)
+852 2252 2140
michael.shen@nomura.com
Stock Rating Price Price
target
China Life Insurance (2628 HK) BUY 30.3 40.0
China Unicom (762 HK) BUY 13.6 15.8
China Yurun Food (1068 HK) BUY 27.6 39.0
Gome Electrical Appliances (493 HK) BUY 2.9 4.3
ICBC (1398 HK) BUY 6.7 7.6
Priced as at 6 April 2011 close; local currency
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 2
Contents
Overview 3
Market index performance in 1Q11 6
Sector rotation to continue 11
Tainted meat scandal 25 What is going on? 25 How serious is it? 25 Who benefits? 26
How we value the shares 30 Gome 30 China Life 30 Tingyi 30 Yurun 30 ICBC 31 China Unicom 31
Appendix 32
Also see the following reports: China Strategy — Making it happen, Henry Wu, 9 March 2011
China Strategy – Wage hikes, tax reform and investment opportunities, 18 February 2011
2011 outlook strategy report – 2011 Outlook – Higher ground, 7 December 2010
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 3
Summary
Overview After a weak January-February, the Chinese equity market posted a good performance in March, with the HSCEI up 6.5% and MSCI China up 5.2%. Banking and property stocks started to catch up in performance terms towards the end of 1Q11, backed by strong 2010 results, margin expansion (banks) and appealing valuations.
Exhibit 1. Overview of MSCI China sector performance and indicators
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD
MSCI China Index 22.8 16.8 14.1 25.5 25.3 29.3 52.3 85.5 40.9 64.9 66.6 70.8
MSCI China Return (%) (32) (26) (16) 80 (1) 16 79 64 (52) 59 3 6
- Consumer-Discretionary (%) (33) 28 2 104 (20) (10) 37 73 (64) 146 (7) (2)
- Energy (%) n.a. 4 19 137 2 32 67 61 (57) 74 19 12
- Consumer-Staple (%) (41) 10 (20) 224 (24) 0 89 48 (41) 113 1 (2)
- Healthcare (%) n.a. (9) 100 77 (17) (41) (28) n.a. n.a. 39 16 (3)
- Material (%) (29) (10) 28 225 (2) 13 89 99 (69) 82 0 10
- Industrial (%) (25) (23) (1) 70 14 (7) 48 104 (62) 46 4 (2)
- Telecom services (%) n.a. (36) (32) 40 7 30 77 96 (45) (4) 8 1
- IT (%) (3) (13) (36) 25 (34) 5 (7) 20 (57) 231 1 17
- Utilities (%) 79 34 4 96 (18) (7) 49 59 (40) (2) (11) 7
- Financial (%) 2 37 (44) 89 (5) 20 138 34 (46) 68 (3) 7
Macro 2011
Inflation (CPI) – Actual (%) 0.4 0.7 (0.8) 1.2 3.9 1.8 1.5 4.8 5.9 (0.7) 3.3 4.9*
Inflation (CPI) – Target (%) n.a. n.a. n.a. n.a. n.a. 4.0 3.0 3.0 4.8 4.0 3.0 4***
Inflation (PPI) – Actual (%) 2.8 (1.3) (2.2) 2.3 6.1 4.9 3.0 3.1 6.9 (5.4) 5.5 6.0*
China GDP growth (%) 8 8 9 10 10 11.3 12.7 14.2 9.6 9.2 10.3 9.8*
US GDP growth (%) 4 1 2 2 4 3.1 2.7 2.0 0.0 (2.6) 2.9 2.9*
Lending Rate (1Y) (%) - - -54bp - +27bp - +54bp +135bp -216bp - +50bp +100bp*
FX-RMB change (%) 0.0 0.0 0.0 0.0 0.0 2.6 3.3 6.9 6.9 0.1 3.1 6.5*
M2 growth, y-y (%) 14.0 14.4 16.8 19.6 14.6 17.6 16.9 16.7 17.8 27.7 19.7 16***
Crude Oil (OPEC) (%) (3) (27) 62 5 21 47 1 62 (61) 117 16 34.4*
Raw Coal (Aus BJ) (%) 28 (3) (8) 45 44 (23) 27 75 (10) 3 50 n.a.
Company Fundamental 2011
EPS 0.66 1.11 1.34 1.68 2.16 2.41 2.57 3.81 3.16 3.83 4.88** 5.82**
EPS Growth (%) (78) 68 21 25 29 12 7 48 (17) 21 27 20
ROE (%) 10 20 16 16 19 21 20 23 18 19 20** 20**
Company Valuation 2011
Forward P/B (x) 2.4 1.4 1.1 1.9 1.7 1.8 2.4 3.7 1.6 2.2 2.0** 2.0**
Forward P/E (x) 20.5 12.6 8.4 11.8 10.5 11.4 13.7 27.1 10.7 13.4 11.9** 12.2** Note: Pricing as of 6 March, 2011; * Nomura estimates; ** consensus estimates; *** government target
Source: WIND, CEIC, Bloomberg, Nomura research
We think the market will continue to trend upward in 2Q11, and we reiterate our year-end HSCEI index target of 16,000 and MSCI China index target of 83.
On the valuation front, MSCI China is trading at 12.2x 2011F and 10.6x 2012F consensus earnings. These valuations are based on a scenario that already takes in a slowdown in earnings growth in 2011, in our view.
On the earnings front, the market is looking for growth of 20% in 2011F, a slowdown from 27% y-y in 2010. Historically (in 2004, 2006 and 2007), following interest rate hikes, growth in MSCI China earnings has tended to slow in subsequent years (Exhibit 1). For example, MSCI China EPS growth slowed to 12% and 7% in 2005 and 2006, from 29% in 2004, following a series of 27bps interest rate hikes. The exception is 2007, when a cumulative 189bps rate hike failed to bring down earnings growth. Instead, the financials sector fully benefited from the hikes, posting strong earnings that more than offset slowdowns in other sectors.
Banking and property sectors outperformed in March 2011 backed by strong fundamentals
We are still bullish on the market and favour the banking sector, but consumer staples seems under short-term pressure
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 4
We think banking stocks will continue to outperform, with further NIM expansion in 2Q11 expected following recent interest rate hikes. Meanwhile, we think consumer staples will likely remain under pressure, given the government’s increasing efforts to rein in prices and the slightly disappointing retail sales outlook in the near term (15.8% y-y in Jan-Feb, vs 19% y-y in 4Q10).
On the downside, we think a possible economic growth slowdown would be a major near-term risk to the equity market in 2Q11. Apart from the tightening policies since 2H10 that we believe are starting to impact the economy, supply chain disruption caused by the earthquake in Japan will likely result in relatively weak 1Q/2Q11 results — especially for the manufacturing sector.
We think certain specific events will create some investment opportunities, such as the meat scandal (as reported by China Central Television, 15 March, 2011). We think the market is concerned that the scandal may take in other meat producers (during the milk industry scandal of 2008-09 concern spread to other milk producers). In our opinion, the clenbuterol-tainted pig feed scandal may have only a limited negative impact on the meat industry (for reasons see later in this report).
Exhibit 2. Index performance under IR hike cycles
Last IR hike cycle since Apr. 2006 to
Dec. 2007
IR hike cycle since October
2010
+27bp +27bp
+27bp
+18bp
+27bp
+18bp
+27bp+18bp
+25bp+25bp
+25bp +25bp
11 %
12 %
13 %
14 %
15 %
16 %
(50)
% 0
% 50
100
150
200
1 31 61 91 121
151
181
211
241
271
301
331
361
391
421
451
481
511
541
571
601
MSCI China Index relative performance
days
Qly GDP (06-07 cycle,RHS)
(%) (%)
Source: WIND, CEIC, Bloomberg, Nomura research
Exhibit 3. One year performance comparison during IR hike
1y performance since Oct. 2004 IR
hike
IR hike cycle since October
2010
+27bp
+25bp
+25bp+25bp
+25bp
9.0 %
9.5 %
10.0 %
10.5 %
11.0 %
11.5 %
% (20)
% (10)
% 0
% 10
% 20
% 30
1 31 61 91 121
151
181
211
241
271
301
331
361
MSCI China Index relative performance
days
Qly GDP (04 cycle, RHS)
(%) (%)
Source: WIND, CEIC, Bloomberg, Nomura research
Our top picks: China Life Insurance (2628 HK), China Unicom (762 HK), China Yurun Food (1068 HK), Gome Electrical Appliances (493 HK), and ICBC (1398 HK). Our top picks are potential front-line beneficiaries of investment opportunities in China in 2Q11,
We highlight the near-term risk of economic slowdown
Meat scandal — potential winners/losers
Repeat of market index in 2006-07 interest rate hike cycle?
Stock picks
Repeat of market index in 2004 interest rate hike cycle?
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 5
and those which: 1) should benefit from interest rate hikes and the meat scandal; 2) see the least impact from high inflation and price controls; and 3) are defensive stocks.
Exhibit 4. Valuation snapshot
EPS - Nomura EPS Growth (%) EPS - Consensus PE (x) - Nomura PE (x) - Consensus RoE - Nomura (%) Net debt/equity - Nomura (%)
Ticker 2009 2010F 2011F 2012F 2010 2011F 2012F 2010F 2011F 2010 2011F 2012F 2011F 2012F 2010 2011F 2012F 2009 2010 2011F
China Life Insurance 2628 HK 1.16 1.19 1.55 1.88 2.6 30.3 21.3 1.39 1.69 21.4 16.5 13.6 18.4 15.1 16.0 19.1 19.4 (1.2) (11.8) na
China Unicom 762 HK 0.40 0.16 0.38 0.53 (60.0) 137.5 39.5 0.28 0.49 71.6 30.1 21.6 40.5 23.2 2.7 4.2 5.7 30.5 38.6 46.1
China Yurun Food 1068 HK 1.00 1.45 1.95 2.57 45.0 34.5 31.8 1.69 2.07 18.9 14.0 10.7 18.9 14.0 23.9 22.7 24.8 Net cash Net cash Net cash
Gome Elec Appliances 493 HK 0.09 0.13 0.16 0.18 41.1 26.0 12.5 0.15 0.19 18.9 15.0 13.3 15.8 12.8 14.8 16.5 17.1 Net cash Net cash Net cash
ICBC 1398 HK 0.39 0.48 0.57 0.70 23.1 18.8 22.8 0.57 0.66 11.7 9.8 8.0 9.9 8.4 22.1 22.5 23.6 (178.0) na na
Note: Pricing as of 6 April 2011
Source: Bloomberg, Nomura research estimates
Exhibit 5. Stock performance
Mkt cap Nomura Consensus Nomura Consensus Share performance (%)
Ticker Price (US$bn) rating Buys Holds Sells Buy % TP Upside to TP (%) TP 1mth 3mth YTD 2-yr beta
China Life Insurance 2628 HK 30.30 98.3 BUY 14 20 3 37.8 40.00 32.0 33.7 0.5 (5.5) (4.6) 0.90
China Unicom 762 HK 13.60 41.2 BUY 19 8 8 54.3 15.80 16.2 13.5 2.7 22.3 22.3 0.62
China Yurun Food 1068 HK 27.60 6.4 BUY 32 1 1 94.1 39.00 41.3 32.9 6.0 2.8 8.0 0.58
Gome Electrical Appliances 493 HK 2.85 6.2 BUY 16 3 - 84.2 4.30 50.9 3.4 (0.3) (3.7) 1.8 0.97
ICBC 1398 HK 6.65 257.8 BUY 38 4 - 90.5 7.60 14.3 7.5 7.8 12.5 14.9 0.97 Note: Pricing as of 6 April 2011
Source: Bloomberg, Nomura research estimates
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 6
Market review
Market index performance in 1Q11
Exhibit 6. Monthly price performance for index (2011)
(3)
0
3
6
9
MSCI China HSCEI SHCOMP HSI
January performance February performance March performance(%)
Source: Bloomberg, Nomura research
Exhibit 7. Monthly price performance for MSCI China sectors (2011)
(10)
(5)
0
5
10
15
Dis
cret
iona
ry
Sta
ples
Ene
rgy
Fin
anci
al
Hea
lthca
re
Indu
stria
l
IT
Mat
eria
l
Tel
ecom
Util
ities
January performance February performance March performance(%)
Source: Bloomberg, Nomura research
Exhibit 8. January 2011 price performance
-1.0%-0.6%-0.2%
1.8%
(8)
0
8
16
IT
Tel
ecom HS
I
Dis
cret
iona
ry
Indu
stria
l
Mat
eria
l
MS
CI
Chi
na
Ene
rgy
Util
ities
SH
CO
MP
HS
CE
I
Fin
anci
al
Hea
lthca
re
Sta
ples
(%)
Source: Bloomberg, Nomura research
1Q11: best performance in March for China indices
1Q11: best performance in March for most sectors
IT was the best performer in January 2011…
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 7
Exhibit 9. February 2011 price performance
4.1%
-0.4% -0.5%-1.9%
(8)
(4)
0
4
8
SH
CO
MP IT
Hea
lthca
re
Ene
rgy
HS
CE
I
HS
I
Fin
anci
al
MS
CI
Chi
na
Util
ities
Mat
eria
l
Tel
ecom
Dis
cret
iona
ry
Sta
ples
Indu
stria
l
(%)
Source: Bloomberg, Nomura research
Exhibit 10. March 2011 price performance
6.5%5.2%
0.8% 0.8%
(4)
0
4
8
12
16
Mat
eria
l
Util
ities
Ene
rgy
Fin
anci
al
HS
CE
I
MS
CI
Chi
na
Sta
ples
Indu
stria
l
Hea
lthca
re
SH
CO
MP
HS
I
Dis
cret
iona
ry
Tel
ecom IT
(%)
Source: Bloomberg, Nomura research
Exhibit 11. 1Q11 price performance
4.9% 4.3%2.9% 2.1%
(10)
(5)
0
5
10
15
IT
Ene
rgy
Mat
eria
l
Util
ities
HS
CE
I
SH
CO
MP
Fin
anci
al
MS
CI
Chi
na
HS
I
Tel
ecom
Hea
lthca
re
Dis
cret
iona
ry
Indu
stria
l
Sta
ples
(%)
Source: Bloomberg, Nomura research
… and in February 2011
Material was the best performer in March 2011
IT was the best performer in 1Q11
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 8
Exhibit 12. Index performance breakdown by countries for 1Q11
4.9% 4.3%2.1%
(8)
(4)
0
4
8
12
Rus
sia
US
Can
ada
HK
- H
SC
EI
Fra
nce
Chi
na
Kor
ea
Aus
tral
ia
HK
UK
Bra
zil
Japa
n
Chi
le
Indi
a
(%)
Source: Bloomberg, Nomura research
Exhibit 13. Index performance breakdown by countries for January 2011
1.8%
-0.6% -1.0%
(12)
(8)
(4)
0
4
8
Fra
nce
US
Rus
sia
HK
Japa
n
Can
ada
Aus
tral
ia
Kor
ea
Chi
na UK
HK
- H
SC
EI
Chi
le
Bra
zil
Indi
a
(%)
Source: Bloomberg, Nomura research
Exhibit 14. Index performance breakdown by countries for February 2011
4.1%
-0.4% -0.5%
(8)
(4)
0
4
8
Japa
n
Can
ada
Chi
na US
Rus
sia
Fra
nce
UK
Aus
tral
ia
Bra
zil
HK
- H
SC
EI
HK
Indi
a
Chi
le
Kor
ea
(%)
Source: Bloomberg, Nomura research
Emerging markets had a mixed performance in 1Q11
By monthly performance, emerging markets started to catch up; France and the US markets posted the best returns in January 2011
Japan and Canada were the best performers in February 2011
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 9
Exhibit 15. Index performance breakdown by countries for March 2011
6.5%
0.8% 0.8%
(10)
(5)
0
5
10
15In
dia
Kor
ea
HK
- H
SC
EI
Chi
le
Rus
sia
Bra
zil
HK
Chi
na
Aus
tral
ia
US
Can
ada
UK
Fra
nce
Japa
n
(%)
Source: Bloomberg, Nomura research
Exhibit 16. MSCI China and sector valuation – Sectors with current forward PE lower than historical average forward PE (January 2003 – April 2011)
HighHigh
High
HighHigh
Low Low Low Low Low
High
Low0 x
10 x
20 x
30 x
40 x
MSCI China Utilities Discretionary Financial Industrial * Telecomservices
±1 std. Average forward PE Current forward PEForward PE
Note: Pricing as of 6 April 2011. * We made adjustment as there are outlying numbers in 2009 which we believe do not objectively reflect market valuation
Source: Bloomberg, Nomura research
Exhibit 17. MSCI China and sector valuation – Sectors with current forward PE greater than historical average forward PE (January 2003 – April 2011)
High
High
High
High High
High
Low Low Low LowLow Low0 x
10 x
20 x
30 x
40 x
MSCI China IT Healthcare Energy Staples Material *
±1 std. Average forward PE Current forward PEForward PE
Note: Pricing as of 6 April 2011. * We made adjustment as there are outlying numbers in 2009 which we believe do not objectively reflect market valuation
Source: Bloomberg, Nomura research
India and Korea were the best performers in March 2011
Valuations of discretionary and financials look appealing…
…in contrast to IT and healthcare sectors where 2011 forward PEs are much higher than the historical average
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 10
Exhibit 18. Market performance under 2004 inflation
20
25
30
35
10/1
/200
3
12/1
/200
3
2/1/
2004
4/1/
2004
6/1/
2004
8/1/
2004
10/1
/200
4
12/1
/200
4
2/1/
2005
4/1/
2005
6/1/
2005
8/1/
2005
0
3
6
9
MSCI China index price Monthly CPI (RHS)
Down 30% from peak
4Q03 - 1Q04: CPI trends up, index
went down
Mid 04: Market consolidation
during CPI peak
Post 3Q04: Market rally amid
CPI declining
(%)
Source: WIND, Bloomberg, Nomura research
Exhibit 19. Market performance under current inflation
58
61
64
67
70
May
-10
Jun-
10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
2.5
3.5
4.5
5.5 MSCI China price Monthly CPI (RHS)
Down 14% from peak in Nov-2010
(%)
Source: WIND, Bloomberg, Nomura research
CPI weighed on market performance in the 2003-04 cycle…
…and is again during this inflation cycle
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 11
2Q11 outlook
Sector rotation to continue As we see it, the central bank’s second 25bp rate hike in 2011 (announced on 5 April) and upcoming administrative measures for price controls by the National Development and Reform Commission (NDRC) suggest that inflation could again surprise on the upside. We expect range trading and sector rotation to continue in 2Q11 in the face of high inflation and still tightening liquidity.
During the current inflation cycle since CPI reached 3.3% in July 2010, no sector outperformed the MSCI China Index for more than three straight months with the exception of the energy sector (outperformed from August 2010 to December 2010). This was all the more than so in 1Q11, when not one sector outperformed for more than two consecutive months. Given no significant improvement in market liquidity, we expect sector rotation to continue in 2Q11.
We highlight three likely focal points for the market in the current quarter: 1) CPI and continued price controls; 2) NIM expansion at Chinese banks; and 3) a possible slowdown in economic growth. We think rising inflation in tandem with a declining real economy spells the biggest risk in the second quarter, as the negative impact on corporate earnings from the previous tightening policy is likely to be felt in 2Q 11.
CPI and price controls
CPI showed no sign of decelerating during the first two months of this year (4.9% for January and February). Surging food CPI looks to be passing through to non-food as well. Targeting 4% CPI for 2011F has incurred significant pressure for policymakers, particularly in 1H11 when considering the relatively low base set in 1H10. Together with a tight supply-demand balance in agri-products, loosening liquidity globally, rising commodity prices, cost-push and imported inflation, as well as the possibility of extreme climate events, our economics team forecasts a 2011F CPI of 4.9%.
According to the ‘Government report’ presented by Premier Wen Jiabao on ‘Two Sessions (The Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC))’, the Premier stated that combating inflation remains top of the government’s agenda for 2011F. Due to the lagged effects of market-based approaches on curbing inflation, including interest rate and required reserved ratio (RRR) hikes, the government is also relying on administrative measures to directly implement price controls on certain products that are believed to be closely tied to the surge in CPI. The National Development and Reform Commission (NDRC) first carried out price controls on certain food products in November 2010 after the October CPI accelerated to 4.4%, from 3.6% in September 2010.
Price controls are again taking centre stage, with the NDRC recently expanding controls to non-food sectors. According to Caixin.com, a liquor industry conference has convened twice in the past week in a bid to stabilise liquor prices. According to ‘NDRC criticised the price hike of liquor industry’ published by Caixing.net on 6 April 2011, NDRC officials have publicly criticised liquor producers for allegedly collaborating in raising prices. The NDRC has also urged coal firms not to raise prices, especially for thermal coal.
According to our utilities and basic material analyst, Ivan Lee, China’s local spot price will likely rise significantly heading into June, on the following factors: 1) coal imports have declined owing to the international price (around RMB880/t at Newcastle plus transportation (RMB70/t) being 20%-plus higher than local spot (RMB770/t)); 2) low coal inventory; and 3) increasing summer demand from June. Nomura forecasts an 8% rise in the average spot price in 2011F and another 5% rise in 2012F, though the latest coal shortage could intensify the situation. We think power companies will be forced to buy more coal products from the spot market and hence will be subject to higher costs. Coal producers with relatively large spot sales (relatively small contract sales) should
Sector rotation likely to continue in 2Q11 given no significant improvement in liquidity
CPI could again surprise on the upside in the short term
Key themes in 2Q11
Curbing inflation is the government’s main priority
Increasing price control efforts by policymakers
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 12
receive a boost in the coming several months, we believe. Moreover, potential price hikes in daily chemical products and Tingyi’s (322 HK, BUY, TP: HK$24.0) products have been postponed after the NDRC expressed its concern, according to The Wall Street Journal on 6 April 2011, titled ‘Tingyi postponed its scheduled price hike’.
We believe price controls have already started to weigh on the performance of consumer stocks, and we expect this to remain the case. CPI will likely remain high in 2Q11, making it difficult to implement further price hikes, especially for consumer staple companies and utilities whose price changes have a significant impact on overall inflation.
Though their share-price performance recovered slightly in March, staples remain the weakest-performing sector in the MSCI China index. In our view, short-term weakness in retail sales in China and high CPI will likely continue to impact the share-price performance of staples.
On a 10-year view, staples have in general outperformed the discretionary sector, with the exception of three occasions (2003-04, 2007-08, 2H10 to date) when CPI exceeded 3%. China’s recent interest rate hike ahead of the release of CPI data could be taken as an indication that March CPI will surprise on the upside. In our view, this does not bode well for the short-term performance of staples.
China will announce March retail sales data on 15 April, and we see this as a key data point, since it has implications for overall retail sales trends in the medium term (following weak February data) and, by extension, the performance outlook of staple and discretionary stocks. In general, the outperformance of Chinese staple names relative to discretionary stocks over the past 10 years has been underpinned by growing income levels in China and the resulting increase in spending on staples.
Exhibit 20. Top performers vs worst performers during inflation cycle (July 2010 – March 2011)
Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Q310 Q410 Q111
Discretionary ▲ ▼ ▼ ▼ ▲ ▼ ▼ ▲ ▼ ▼ Staples ▲ ▼ ▼ ▼ ▼ ▼ Energy ▼ ▲ ▲ ▲ ▲ ▲ ▲ ▲ Financial ▼ ▼ ▲ ▼ ▼ ▲ Healthcare ▼ ▲ ▲ ▼ ▼ ▼ ▲ ▼ Industrial ▲ ▼ ▲ ▼ ▼ IT ▲ ▼ ▲ ▲ ▲ ▼ ▲ ▲ ▲ Material ▲ ▲ ▲ ▲ ▲ ▲ ▲ Telco ▼ ▼ ▲ ▲ ▼ ▼ Utilities ▲ ▼ ▼ ▼ ▲ ▼ ▼ Monthly return
MSCI China (%) 4.1 (2.6) 8.3 3.8 (2.2) (0.6) (0.2) (1.9) 5.2 9.8 0.8 2.9
HSCEI (%) 3.8 (4.2) 8.8 6.1 (2.7) (1.0) (1.0) 0.4 6.5 8.2 2. 4.9
CPI (%) 3.3 3.5 3.6 4.4 5.1 4.6 4.9 4.9 5.3 3.5 4.7 5 0
Note: ▲stands for top THREE performers and ▼ stands for worst THREE performers in comparison with MSCI China Index monthly returns
Source: Bloomberg, Nomura research
Consumer staples are under pressure
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 13
Exhibit 21. Outperformers vs underperformers during inflation cycle (July 2010 – March 2011)
Jul-1 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Q310 Q410 Q111
Discretionary O O O U U U O U U O U U
Staples U O O U U U U U U O U U
Energy U O O O O O U O O O O O
Financial O U U O U U U O O U O O
Healthcare U O O U U U U O U O U U
Industrial O U O U U U O U U O U U
IT O U O U U O O O U O O O
Material O O O U O O O U O O U O
Telecom U O U U O O O U U U U U
Utilities U O U U U O U U O U U O
Monthly return
MSCI China (%) 4.1 (2.6) 8.3 3.8 (2.2) (0.6) (0.2) (1.9) 5.2 9.8 0.8 2.9
HSCEI (%) 3.8 (4.2) 8.8 6.1 (2.7) (1.0) (1.0) (0.4) 6.5 8.2 2.3 4.9
CPI (%) 3.3 3.5 3.6 4.4 5.1 4.6 4.9 4.9 5.3 3.5 4.7 5.0 Note: “O” stands for “Outperform” and “U” stands for Underperform in comparison with MSCI China Index monthly returns
Source: Bloomberg, Nomura research
Exhibit 22. Food inflation comparison (2007-08 vs current)
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Food inflation during 2007-2008
Food inflation in 2010~2011
(%)
Price control at provincial level since Jun 07
Price control nationwide since Jan 08
Food inflation started to pick up in Jan 07 in last cycle
Food CPI peaked at 23% in Feb 2008 in last cycle
Same scenario in Jan 2010
Food CPI hit 11% in Feb. 2011
Month
Source: CEIC, Nomura research
Exhibit 23. Food inflation comparison (2003-04 vs current)
0
3
6
9
12
15
18
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Food inflation in 2010~2011
Food inflation during 2003-2004
(%)
Food inflation started to pick up in Sep 03
Food CPI peaked at 14.6% in July 2004 in last cycle
Month
Source: Bloomberg, Nomura research
Food inflation seems to be nearing a peak, going by what happened in 2007-08…
…and in 2003-04
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 14
Exhibit 24. Relative performance for staples over discretionary
% (400)
% 0
% 400
% 800
% 1,200
% 1,600Ja
n-99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Relative performance for staples over discretionary(%)
Source: WIND, Bloomberg, Nomura research
Exhibit 25. Milk production vs relative performance of staples over discretionary
0
50
100
150
200
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
0
150
300
450
600
Liquid milk production (10,000 ton)
Relative performance-Staples to Discretionary (RHS)
(%)
Source: CEIC, Nomura research
Exhibit 26. Retail sales breakdown by weight (2000-2010)
0
25
50
75
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Staples as % of total consumption Discretionary as % of total consumption
(%)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Staples have outperformed discretionary since 2003…
…and we note a close correlation with milk production
But staples are accounting for a smaller proportion of total consumption over time…
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 15
Exhibit 27. F&B and daily necessities as % of retail sales
10
13
16
19
22
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
3
4
5
6
7
F&B as % of consumption (LHS)
Daily necessities as % of consumption (RHS)
(%)(%)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Exhibit 28. Garment and household appliance as % of retail sales
8
10
12
14
16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
5
7
9
11
13 Garment as % of consumption (LHS)
Household appliance as % of consumption (RHS)
(%) (%)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Exhibit 29. Petro products, auto and jewellery as % of retail sales
0
10
20
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Feb-11
1
2
3
4
Petro products as % of consumption (LHS)
Auto as % of consumption (LHS)
Jewelry as % of consumption (RHS)
(%) (%)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
…as is F&B …
…and garment and household appliance
Discretionary consumption is accounting for a greater proportion of total consumption
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 16
Exhibit 30. Price performance under inflation - staples
% (3)
% 0
% 3
% 6
% 9
Jan-
01A
pr-0
1Ju
l-01
Oct
-01
Jan-
02A
pr-0
2Ju
l-02
Oct
-02
Jan-
03A
pr-0
3Ju
l-03
Oct
-03
Jan-
04A
pr-0
4Ju
l-04
Oct
-04
Jan-
05A
pr-0
5Ju
l-05
Oct
-05
Jan-
06A
pr-0
6Ju
l-06
Oct
-06
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11
(50) %
(25) %
0 %
25 %
50 %
&Consumer-Staple sector relative performance against MSCI China Index (Under/Outperform) (RHS)Monthly CPI (LHS)
CPI=3%
During inflation period: Consumer-Staple sector
UNDERPERFORM the market
Pre- and post- inflation periods: Consumer-Staple sector
OUTPERFORM the market
(%) (%)
&
Source: WIND, Bloomberg, Nomura research
Exhibit 31. Price performance under inflation – discretionary
% (3)
% 0
% 3
% 6
% 9
Jan-
01
Apr
-01
Jul-0
1O
ct-0
1Ja
n-0
2A
pr-0
2Ju
l-02
Oct
-02
Jan-
03
Apr
-03
Jul-0
3O
ct-0
3Ja
n-0
4A
pr-0
4Ju
l-04
Oct
-04
Jan-
05
Apr
-05
Jul-0
5O
ct-0
5Ja
n-0
6A
pr-0
6Ju
l-06
Oct
-06
Jan-
07
Apr
-07
Jul-0
7O
ct-0
7Ja
n-0
8A
pr-0
8Ju
l-08
Oct
-08
Jan-
09
Apr
-09
Jul-0
9O
ct-0
9Ja
n-1
0A
pr-1
0Ju
l-10
Oct
-10
Jan-
11
(50) %
(25) %
0 %
25 %
50 %
&Consumer-Discretionary sector relative performance against MSCI China Index (Under/Outperform) (RHS)Monthly CPI (LHS)
CPI=3%
During inflation period: consumption sector
During and post-inflation period:
Consumer-Discretionary sector
Pre- and post- inflation periods: consumption
t OUTPERFORM
Pre-inflation periods: Consumer-Discretionary sector
OUTPERFORM the market
`
(%) (%)
&
Source: WIND, Bloomberg, Nomura research
Exhibit 32. CPI vs Consumer Confidence Index & Satisfaction Index
90
95
100
105
110
115
120
125
130
Jan-
91
Jan-
93
Jan-
95
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Jan-
07
Jan-
09
Jan-
11
(5)
0
5
10
15
20
25
30
35 CPI (RHS)
Consumer Confidence Index (LHS)
Consumer Satisfaction Index (LHS)
(%)
Source: WIND, Nomura research
Consumer staples generally underperform the market during high inflation…
…as does consumer discretionary
High inflation erodes consumer confidence
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 17
Exhibit 33. Relative performance for food over retailing — Japan
(900)
(700)
(500)
(300)
(100)
100
300
Jan
-72
Jan
-74
Jan
-76
Jan
-78
Jan
-80
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Relative performance-Food over Retailing (JP Nikkei 225)(%)
Source: WIND, Bloomberg, Nomura research
Exhibit 34. Food expenditure as % of total
20
25
30
35
40
45
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Food expenditure as % of total
China: 2010 food expenditure as % of total = 36%
(%)
Source: Statistical Survey Department, Statistics Bureau, Ministry of Internal Affairs and Communications, Nomura research
Bank stocks – NIM expansion to continue
A look back at what we said in our 7 December, 2010, report: China Strategy: 2011 Outlook – Higher ground.
“With lower new loan quotas in 2011F, the profitability outlook for banks in 2011 will be more dependent on the interest rate outlook, in our view. We forecast four quarterly symmetrical interest rate hikes in 2011F, for a total increase of 100bps. This should help banks to achieve better profits in 2011F, driving sentiment on banking stocks. Despite share price underperformance due to fund raising and policy uncertainties, banking sector earnings have been on the rise since 2008. On the valuation side, we find that China banking stocks are trading at only 9.2x 2011F earnings and 7.3x 2012F earnings, and 1.7x and 1.5x price to book for 2011F and 2012F, respectively, with RoEs in both years forecast to exceed 20%.”
Our banking team reiterated its Bullish stance on Chinese banks in its 17 March report: Wider NIM more than offsets lower loan growth… (http://www.nomura.com/research/getpub.aspx?pid=425009).
The recently released FY10 results of Chinese banks highlighted NIM expansion on the back of interest rate hikes. All the banks reported NIM expansion in FY10, especially in 4Q10, following two rate hikes in October and December (Exhibits 35 and 36). The Big Four Chinese banks reported NIM expansion of more than 10bps apiece in 4Q10. Moreover, Jiang, Jianqing, president of ICBC guided that NIM further
NIM expansion for banks…
In Japan staples have underperformed discretionary
China’s food expenditure as a percentage of total consumption — heading south
We like the banking sector in 2011
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 18
expanded by more than 8bps in January-February (see our research report on ICBC, 30 March 2011 http://www.nomura.com/research/getpub.aspx?pid=427309).
The PBoC announced a second interest rate hike in 2011 on 5 April. The hike is slightly asymmetric, with deposit rates rising by 25bps but lending rates rising by 25bps (less than 12 months), 30bps (1-3 years) and 20bps (over 3 years), respectively. The structure of the rate hike is therefore more complex than in previous rounds. Of note, the PBoC raised the demand deposit rate by 10bps to 0.50%, following on from a 4bps hike during the last round of hikes.
Nomura’s banking analyst Lucy Feng believes that 1Q11 results will feature significant margin expansion at almost all Chinese banks, driven by previous rounds of rate hikes as well as improving pricing power.
Nomura economist Chi Sun brought forward her expectations for the next rate hike. Chi now expects one more 25bps hike in 2Q and another in 3Q, rather than one in 3Q and another in 4Q. We see the banking sector as a potential beneficiary of this change in expectations. The banking sector continued to perform well in terms of share-price performance in 1Q11, and we expect appealing valuations (9.3x FY11F earnings and 7.2x FY12F earnings, 1.8x FY11F book value and 1.4x FY12F book value, with FY11F ROE of 21%, on Nomura forecasts), expanding NIM expectations and improving asset quality to support Chinese banks’ market performance in 2Q11.
Exhibit 35. China Big Four banks NIM change (2004-2011F)
27 bps0 bps
54 bps
-216 bps
0 bps
50 bps
135 bps
100 bps
-240 bps
-120 bps
0 bps
120 bps
240 bps
2004 2005 2006 2007 2008 2009 2010 2011F*
China Big 4 banks NIM change
1 year lending rate change
Nomura NIM estimate: +9~15 bps
* Nomura estimated
Source: Bloomberg, company data, Nomura research
Exhibit 36. China big four banks NIM change (1Q10-4Q10)
0 bps 0 bps 0 bps
50 bps
-10 bps
0 bps
10 bps
20 bps
30 bps
40 bps
50 bps
1Q10 2Q10 3Q10 4Q10
China Big 4 banks NIM change
1 year lending rate change
2010 Calendar:20 Oct.: +25bps26 Dec.: +25bps
Source: Bloomberg, company data, Nomura research
…resulting in significant margin expansion
In our view, banks look set to record NIM expansion amid interest rate hikes…
…starting in 4Q10
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 19
Exhibit 37. A- and H-shares: premium / discount
Ticker (HK listed) Ticker (CN listed) Company 4/6/2011 (%)
939 HK 601939 CH China Construction Bank Corp 24
998 HK 601998 CH China Citic Bank Corp Ltd (18)
1288 HK 601288 CH Agricultural Bank of China Ltd 31
1398 HK 601398 CH Industrial & Commercial Bank of China 22
1988 HK 600016 CH China Minsheng Banking Corp Ltd 6
3328 HK 601328 CH Bank of Communications Co Ltd 18
3968 HK 600036 CH China Merchants Bank Co Ltd 18
3988 HK 601988 CH Bank of China Ltd 10 Note: Pricing as of 6 April 2011
Source: Bloomberg, Nomura research
Possible macro growth slowdown
We think the risk of a slowdown in growth of the real economy is the major risk in 2Q11, with previous tightening policies, including interest rate and RRR hikes, potentially dragging down corporate earnings and, in turn, weighing on the equity market. Consumption has yet to pick up, growth in exports is decelerating, and government-backed fixed asset investment is cooling, and the combined impact has clear implications for future economic development, in our view. With Nomura’s economics teams forecasting GDP growth of 9.7% in 2Q11, we think the possible slowdown in economic development is the biggest risk to the equity market.
Growth in nominal retail sales of consumer goods in the first two months of 2011 fell short of market expectations, slipping to 15.8% y-y, about 3.3pp lower than the December 2010 data. Given the CPI stood at 4.9% for the first two months of 2011, real growth in retail sales of consumer goods was only 10.9%, the lowest reading since January 2008. Rising inflation has actually pushed down real retail sales of consumer goods since mid-2010, when the CPI started to accelerate while growth in nominal retail sales was flat. We attribute this to the consumption slowdown in property and autos. Surging CPI has also affected consumer confidence.
Decelerating export growth and unsustainable fixed asset investment could further weigh on economic development, in our view. We think the trade structure of China is at the tipping point from low-end, labour intensive products to more value-added products as a result of rising costs in China, including surging wages (average wage CAGR of 15% over the past decade per CEIC data) and higher land costs. We think China products are losing their competitive edge over time which may lead to decelerating growth in exports from a long-term perspective. According to the General Administration of Customs of the People’s Republic of China (China Customs), China recorded its first quarterly trade deficit in six years of US$1bn for 1Q11, compared with a US$14bn trade surplus for 1Q10.
Announced by the State Council, China initiated an aggregate RMB4tn investment plan in November 2008 aiming to stimulate the economy in response to the financial crisis. According to the National Bureau of Statistics of China, the RMB4tn investment plan was completed by end 2010. Our economics team forecasts fixed asset investment will cool to 22% in 2011 and 21% in 2012, from almost 24% in 2010, to reflect slower investment.
Possible economic growth slowdown — major potential risk for 2Q11
H share stocks generally enjoy a premium over respective dual-listed A shares
Consumption growth in real terms has decelerated since mid-2010
China recorded its first quarterly trade deficit in six years
Investment likely to slow
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 20
Exhibit 38. Retail sales nominal vs real
2
7
12
17
22
27
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
(4)
(0)
4
8
12
16
CPI (RHS)
Nominal retail sales y-y % (LHS)
Real retail sales y-y % (LHS)
(%) (%)
Source: Bloomberg, Nomura research
Exhibit 39. Retail sales and growth – autos
0
50,000
100,000
150,000
200,000
250,000
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(40)
0
40
80
120
160
Auto monthly sales (LHS) y-y % (RHS) (%)(RMBmn)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Exhibit 40. Retail sales and growth – garment
0
25,000
50,000
75,000
100,000
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(25)
0
25
50
75
Garment monthly sales (LHS) y-y % (RHS) (%)(RMBmn)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Growth in retail sales fell sharply both in nominal and real terms…
…due to slowing auto…
…and garment sales…
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 21
Exhibit 41. Retail sales and growth – F&B
0
25,000
50,000
75,000
100,000Ja
n-01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(25)
0
25
50
75
F&B monthly sales (LHS) y-y % (RHS) (%)(RMBmn)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Exhibit 42. Retail sales and growth – jewellery
0
5,000
10,000
15,000
20,000
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(30)
0
30
60
90 Jewelry monthly sales (LHS) y-y % (RHS) (%)(RMBmn)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
Exhibit 43. Retail sales and growth – household appliances
0
15,000
30,000
45,000
60,000
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
(20)
0
20
40
60
Household appliance monthly sales (LHS) y-y % (RHS) (%)(RMBmn)
Note: All data are for above designated size enterprise according to National Bureau of Statistics of China
Source: National Bureau of Statistics of China, CEIC, Nomura research
…as well as F&B consumption…
But jewellery sales seem immune to this trend
Even household appliance sales growth dropped
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 22
Exhibit 44. Consumer Confidence Index
90
100
110
120
130Ja
n-91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Consumer Confidence Index
12 per. Mov. Avg. (Consumer Confidence Index)
Source: WIND, Nomura research
Exhibit 45. Macro-economy forecast
% y-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012
Real GDP 9.6 9.8 9.4 9.7 9.9 10.0 9.0 9.4 10.3 9.8 9.5
Consumer prices 3.5 4.7 5.0 5.2 4.9 4.3 5.2 5.4 3.3 4.9 5.2
Core CPI (excl. food & energy) 1.1 1.5 2.2 2.4 2.6 2.7 2.4 2.5 0.9 2.5 2.6
Retail sales (nominal) 18.4 18.8 20.1 19.7 19.9 20.1 20.3 20.6 18.4 20.0 21.0
Fixed-asset investment (nominal, ytd) 24.0 23.8 23.0 23.5 22.5 22.0 20.5 22.5 23.8 22.0 21.0
Industrial production (real) 13.5 13.3 12.8 14.2 15.1 16.0 15.1 14.1 15.7 14.5 14.2
Exports (value) 32.3 25.2 26.5 18.5 13.0 14.0 17.5 11.2 31.3 17.0 12.0
Imports (value) 27.1 29.6 32.6 20.0 18.0 20.0 15.0 18.0 38.7 22.5 17.0
Trade surplus (US$bn) 65.7 63.1 (0.8) 43.4 55.5 48.8 (1.0) 20.0 183.0 138.0 69.0
Current account (% of GDP) 5.2 3.1 1.7
Fiscal balance (% of GDP) (1.6) (1.3) (1.0)
Net increase in RMB Loans (RMBtn) 8.0 8.0 8.4
1-yr bank lending rate (%) 5.31 5.81 6.06 6.56 6.81 6.81 7.06 7.31 5.81 6.81 7.56
1-yr bank deposit rate (%) 2.25 2.75 3.00 3.50 3.75 3.75 4.00 4.50 2.75 3.75 5.00
Reserve requirement ratio (%) 17.00 18.50 20.00 20.50 21.00 21.00 21.00 21.00 18.50 21.00 21.00
Exchange rate (CNY/USD) 6.70 6.62 6.56 6.40 6.32 6.22 6.14 6.06 6.62 6.22 5.90 Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome)
Source: CEIC, Nomura Global Economics
China’s consumer confidence index has been declining over time
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 23
Exhibit 46. 12-month moving average net exports y-y % (January 2004 – February 2011)
(100)
% 0
100
200
300
Jan&
Feb
-04
May
-04
Aug
-04
Nov
-04
Mar
-05
Jun-
05
Sep
-05
Dec
-05
Apr
-06
Jul-0
6
Oct
-06
Jan&
Feb
-07
May
-07
Aug
-07
Nov
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Apr
-09
Jul-0
9
Oct
-09
Jan&
Feb
-10
May
-10
Aug
-10
Nov
-10
Mar
-11
Net export y-y % (12-mth moving avg)(%)
Note: We manually sum up the January and February data to avoid extraordinary seasonality.
Source: WIND, Nomura research
Exhibit 47. Fixed-asset investment y-y %
RMB4trn stimulus plan initiated
23
26
29
32
35
Feb
-08
Apr
-08
Jun-
08
Au
g-08
Oct
-08
De
c-08
Feb
-09
Apr
-09
Jun-
09
Au
g-09
Oct
-09
De
c-09
Feb
-10
Apr
-10
Jun-
10
Au
g-10
Oct
-10
De
c-10
Feb
-11
Rmb4trn stimulus plan
completed
(%)
Source: WIND, CEIC, Nomura research
Exhibit 48. PetroChina relative performance vs oil price
0
300
600
900
1,200
1,500
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
0
30
60
90
120
150
PetroChina relative performance (LHS)
Opec crude oil price (RHS)
Opec crude oil price: US$(%)
Source: WIND, CEIC, Bloomberg, Nomura research
Growth in net exports trending down
Fixed-asset investment cooling post RMB4tn investment stimulus
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 24
Exhibit 49. Sinopec relative performance vs oil price
0
300
600
900
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
0
30
60
90
120
150
Sinopec relative performance (LHS)
Opec crude oil price (RHS)
Opec crude oil price: US$(%)
Source: WIND, CEIC, Bloomberg, Nomura research
Exhibit 50. CNOOC relative performance vs oil price
(300)
% 0
300
600
900
1,200
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
0
30
60
90
120
150
CNOOC relative performance (LHS)
Opec crude oil price (RHS)
Opec crude oil price: US$(%)
Source: WIND, CEIC, Bloomberg, Nomura research
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 25
Event spotlight
Tainted meat scandal Although consumer staples were hit by price controls to combat inflation, we see investment opportunities triggered by certain specific events. We evaluated the prevailing meat scandal and believe that it will have limited negative impact on the meat industry. We think China Yurun Food Group (1068 HK, BUY, TP: HK$39.0) is a beneficiary (for reasons mentioned later in this report). Moreover, we expect corporates that are integrated into the industry chain vertically from raw materials to final products are better placed as this arrangement can buttress quality control and economies of scale. For distribution channels, the large supermarkets and agri-product trading platforms are likely to receive support from the government for tighter food quality controls and stricter detection methods are likely to be implemented.
The meat scandal may weaken consumer confidence in domestic meat products, and in turn lifting demand for imports. We think US and EU producers should benefit — 43% of China’s imported meat products came from the US and EU in 2010, as per WIND.
What is going on? The scandal of Clenbuterol-tainted pig feed (also called ‘lean meat powder’) was initially made public by the government-backed CCTV (China Central Television) on 15 March, 2011. It follows another major food safety case involving melamine-tainted milk power in 2008, and comes on the heels of a year-long programme conducted by China’s Ministry of Agriculture (MOA) to eliminate the use of illegal additives in pig feed.
According to Wikipedia, Clenbuterol is a sympathomimetic amine used by sufferers of breathing disorders as a decongestant and bronchodilator. People with chronic breathing disorders such as asthma use this as a bronchodilator to make breathing easier. It is most commonly available as the hydrochloride salt clenbuterol hydrochloride. Clenbuterol is banned as an additive in pig feed in China because it can end up in the flesh of pigs and is poisonous to humans if ingested. The chemical will most likely accumulate in the animal’s organs, such as the liver.
How serious is it? The meat scandal originated in Henan province, central China. Henan Shuanghui Investment (000895 CH, Not rated), China’s largest meat producer, was arguably worst hit. Trading in its A shares has been suspended since 15 March, 2011, after the stock fell by 10% in a single day. Management convened a staff conference on 31 March, 2011, according to the Chinese-language Nanfang Daily (2 April 2011), where the chairman of the board Wan Long indicated that total losses could reach RMB12.1bn.
The latest scandal came to light at a time when consumer confidence in food safety in China was already weak. Recall the food safety concerns raised in 2008, when melamine-tainted milk powder killed at least six infants and sickened over 300,000 children across the country. Consumer confidence in the country's dairy industry slumped, with consumption of liquid milk in China falling 2.4% in 2008 (to 35.4mn mt) and then 16.4% in 2009 (29.6mn mt), from a 2007 peak of 36.3mn mt.
We believe that one concern in the market now is that the meat scandal could spread to other meat producers, just as occurred in the milk industry. In our opinion, though, the Clenbuterol-tainted pig feed scandal will have only a limited impact on the meat industry as a whole. Our rationale:
Government has no incentive to crack down on the meat industry — In our view, the ideal outcome for the government would be to completely eliminate use of illegal additives in pig feed in short the term and regain consumer confidence in meat products in the long run.
Tainted meat scandal gaining public attention
Shuanghui was worst hit
The tainted meat scandal is arguably not as serious as the dairy scandal of 2008, in our view. We spot potential winners and losers
Global implications
We believe the meat scandal is different from the dairy scandal of 2008
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 26
Too big to lose — Pork is an important component of the Chinese diet, arguably the most important. Consumption of pork and pork products reached 50.7mn MT in 2010, accounting for around 60% of meat consumption in China. We think this reliance on pork means people are more likely to choose well-known major meat producers such as China Yurun (1068 HK, BUY, TP: HK$39.0) than stop consuming pork altogether.
Meat scandal has had less of a real world impact than the milk scandal — The meat scandal so far has not had health implications of the magnitude of the tainted milk scandal, when six lives were lost and over 300,000 children were sickened.
Social discontent not as serious as tainted milk powder case — While some of the details of the case are as yet unknown, we think people are inclined to see the meat scandal as a regional one rather than an industry-wide one.
Tolerance of food safety incidents seems to be increasing — According to China’s Ministry of Health, the number of food poisoning cases increased to 271 in 2009, from 97 a decade ago.
Who benefits? Given our view that the negative impact of the tainted pig feed scandal is likely to be felt regionally rather than industry-wide, we think other meat producers, such as China Yurun Good Group (1068 HK, BUY, TP: HK$39.0), stand to benefit. The shares are up only 1.8% since the meat scandal hit the headlines on 15 March to HK$26.1 on 31 March 2011 (vs 3.7% of HSI), and we would look for further share price appreciation in the short term. We note that Suning Appliance’s (002024 CH, Not rated) share price was up more than 30% to RMB8.5 in the month following official confirmation that Gome Electrical (493 HK, BUY, TP: HK$4.3) chairman of the board Huang Guangyu was under investigation (19 November 2008) (vs 19.5% of HSI).
Nomura consumer analyst Emma Liu believes that the meat scandal will benefit Yurun in the long term. According to management, Yurun’s operations have not been affected by the scandal and its slaughtering volume growth has remained strong since news of the scandal broke. Management believes the government is likely to further tighten control of the industry. We believe this could accelerate industry consolidation, to the benefit of Yurun in the long run.
In the long term, we expect the government to strengthen food safety through implementation of stricter measures. Corporates that are vertically integrated — from raw materials through to final products — are likely to be well positioned in such a scenario. As for distribution channels, we think the large supermarkets and agri-product trading platforms are likely to receive support from the government in food quality control, with stricter detection methods likely to be implemented. Any further weakening in consumer confidence in domestic meat products would likely heighten demand for imported products.
Long-term beneficiaries
Yurun will likely benefit, in our view
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 27
Exhibit 51. Suning share performance since confirmation that Gome's chairman was put under investigation
0
8
16
24
32
21-N
ov-0
8
22-N
ov-0
8
23-N
ov-0
8
24-N
ov-0
8
25-N
ov-0
8
26-N
ov-0
8
27-N
ov-0
8
28-N
ov-0
8
29-N
ov-0
8
30-N
ov-0
8
1-D
ec-0
8
2-D
ec-0
8
3-D
ec-0
8
4-D
ec-0
8
5-D
ec-0
8
6-D
ec-0
8
7-D
ec-0
8
8-D
ec-0
8
9-D
ec-0
8
(%)
Source: Bloomberg, Nomura research
Exhibit 52. Yurun share performance since meat scandal
(20)
(15)
(10)
(5)
0
5
14-M
ar-1
1
15-M
ar-1
1
16-M
ar-1
1
17-M
ar-1
1
18-M
ar-1
1
19-M
ar-1
1
20-M
ar-1
1
21-M
ar-1
1
22-M
ar-1
1
23-M
ar-1
1
24-M
ar-1
1
25-M
ar-1
1
26-M
ar-1
1
27-M
ar-1
1
28-M
ar-1
1
29-M
ar-1
1
30-M
ar-1
1
31-M
ar-1
1
(%)
Source: Bloomberg, Nomura research
Exhibit 53. Mengniu share performance since milk scandal
(68)
(51)
(34)
(17)
0
10-S
ep-0
8
11-S
ep-0
8
12-S
ep-0
8
13-S
ep-0
8
14-S
ep-0
8
15-S
ep-0
8
16-S
ep-0
8
17-S
ep-0
8
18-S
ep-0
8
19-S
ep-0
8
20-S
ep-0
8
21-S
ep-0
8
22-S
ep-0
8
23-S
ep-0
8
24-S
ep-0
8
25-S
ep-0
8
26-S
ep-0
8
27-S
ep-0
8
28-S
ep-0
8
29-S
ep-0
8
(%)
Source: Bloomberg, Nomura research
Suning’s share price rose significantly after Gome’s chairman was put under investigation
Yurun’s share price has started to perform
The 2008 dairy scandal seriously hit milk producers like Mengniu…
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 28
Exhibit 54. Yili share performance since milk scandal
(60)
(45)
(30)
(15)
0
10-S
ep-0
8
12-S
ep-0
8
14-S
ep-0
8
16-S
ep-0
8
18-S
ep-0
8
20-S
ep-0
8
22-S
ep-0
8
24-S
ep-0
8
26-S
ep-0
8
28-S
ep-0
8
30-S
ep-0
8
2-O
ct-0
8
4-O
ct-0
8
6-O
ct-0
8
8-O
ct-0
8
10-O
ct-0
8
(%)
Source: Bloomberg, Nomura research
Exhibit 55. Imported dairy products and growth
0
100
200
300
400
500
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Ma
r-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Ma
r-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
(40)
0
40
80
120
160 Imported dairy products (LHS) y-y % (RHS)(US$mn) (%)
Source: CEIC, Nomura research
Exhibit 56. Imported meat products breakdown by territories
0
100
200
300
Jan
-08
Ma
r-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan
-09
Ma
r-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan
-10
Ma
r-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Meat imported from US (US$mn) Meat imported from EU Others
Source: WIND, Nomura research
…and Yili
…but triggered an increase in imports of dairy products
We think US and EU meat producers should benefit from the meat scandal
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 29
Exhibit 57. Liquid milk consumption and growth
Milk scandalin H208
0
10,000
20,000
30,000
40,000
50,00019
89
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(40)
(20)
0
20
40
60 Sales volume-liquid milk (LHS)
y-y % (RHS)
(%)('000 mt)
Source: USDA Foreign Agricultural Service, Nomura research
Exhibit 58. Food poisoning in China
Food poisoning # of cases # of poisoned people # of people died
1999 97 4,999 103
2000 150 6,237 135
2001 185 15,715 146
2002 128 7,127 138
2003 379 12,876 323
2004 397 14,586 282
2005 256 9,021 235
2006 596 18,063 196
2007 506 13,280 258
2008 245 10,016 162
2009 271 11,007 181
2010 220 7,383 184 Source: Ministry of Health, Nomura research
Milk consumption has dropped since the 2008 dairy scandal
Food safety is a big concern in China
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 30
Valuation method and risk to price targets
How we value the shares Gome
Valuation method
Our price target of HKD4.3 is based on 22x FY11F P/E (EPS: RMB0.155), in line with its historical 12-month forward P/E. We see potential for upside revision due to better-than-expected store efficiency and store numbers.
Investment risks
Lower-than-expected SSS and margins.
China Life
Valuation method
Our PT of HKD40 is premised on a New Business (NB) multiple of 21.7x derived by a risk discount rate (RDR) of 11% based on China Life’s EV assumptions. We use our explicit VoNB growth forecasts for FY11-13F and assume 16% VoNB growth over the next 13 years (FY14-26F). The valuation is based on a 15-year basis and assumes no perpetuity growth, an approach similar to standard actuarial practice, as long-term growth is deemed too uncertain and therefore has close to zero value. We apply the target NB multiple to China Life’s FY12F New Business Value and then add the FY11F Embedded Value.
Investment risks
Key downside risks include poor returns from the A-share market, which would affect sentiment on insurers in general, in our view, as well as intensified competition leading to a continued squeeze in NB margins for life insurers, especially China Life, which hopes to recapture market share.
Tingyi
Valuation method
Our PT of HKD24 is based on 30x 12-month forward EPS of USD0.1, a 30% premium to the F&B sector average. We apply a 30% premium to reflect Tingyi’s premium brand, extensive distribution network and strong execution. We apply an earnings-based valuation method, which is in line with our valuation method for the whole F&B sector.
Investment risks
Downside risks include weaker-than-expected sales growth and larger-than-expected cost pressure.
Yurun
Valuation method
Our price target of HKD39.0/share is based on a sum-of-the-parts valuation. We apply a P/E of 23x (at par to the sector average) to its 12-month forward core EPS of HKD1.52 and 11.5x (half of the P/E multiple for its core EPS) to value its government subsidy per share of HKD0.43.
Investment risks
An unexpected outbreak of pig disease across the country and food safety scandals within the food processing sector or at Yurun.
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 31
ICBC
Valuation methodology
Our price target of HKD7.60 is based on 2.21x P/BV multiplier and FY11F BVPS of RMB2.76. Our sustainable ROE assumption is 15.8%. We use the Gordon Growth Model [target P/BV = (sustainable ROE – long-term growth)/(cost of equity – long-term growth)] to derive our fair P/BV range, assuming a cost of equity of 11.5% and a terminal growth rate of 7.9%. We derive our terminal growth figure by applying a 50% payout ratio to our long-term sustainable ROE.
Investment risks
As the largest bank in China, ICBC and its performance remain closely tied to the Chinese economy. Hence, we believe that severer-than-expected macro tightening could result in a sharp rise in bad debt costs. In addition, a slowing economy would have negative implications for loan growth, in our view. The concept of market and operation-related risks has only been introduced to the bank over the past few years. Moreover, fewer-than-expected rate hikes in 2011F is likely to pose a downward risk to our NIM assumption.
China Unicom
Valuation
Our DCF-based price target of HKD15.80 uses a WACC of 11.2% and a long-term growth-to-perpetuity rate of 1.0%.
Investment risks
The risks to our investment view include: 1) irrational tariff competition — if China Mobile or China Telecom were to lower mobile tariffs in an attempt to gain market share, we believe China Unicom might respond by launching similar tariff plans; 2) the regulatory environment — any significant change in the regulatory environment could have important implications for mainland telecom operators; and 3) new technologies may disrupt the industry landscape — the introduction of new technologies could complement or cannibalise existing technologies (i.e., GSM, GPRS and EDGE). Given that telecom operators have invested heavily in their existing networks, the potential obsolescence of networks could lead to asset write-offs, in our view.
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 32
Appendix
Appendix
Exhibit 59. P/E for Nomura covered sectors (FY11F)
0 20 40 60 80
Financials
Oil & Gas/Chemicals
Property
Health Care & Pharmaceuticals
Industrials
Basic Materials
Transport/Logistics
Conglomerates
China - Total
Telecoms
Technology
Consumer Related
Power & Utilities
Media & Internet
Gaming, Hotels & Leisure
(PER)
Source: Nomura research
Exhibit 60. Price performance for Nomura covered sectors (1M)
(4) 0 4 8 12 16
Property
Basic Materials
Power & Utilities
Oil & Gas/Chemicals
Financials
China - Total
Industrials
Consumer Related
Gaming, Hotels & Leisure
Media & Internet
Health Care & Pharmaceuticals
Conglomerates
Telecoms
Technology
Transport/Logistics (%)
Source: Nomura research
Valuations of financials and property sectors seem appealing
Property sector posted the best price performance over the past month
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 33
Exhibit 61. Property price estimates for 2011
Property price change target (y-y)
First-tier city
Beijing <=0%
Shanghai <8%
Guangzhou <10%
Shenzhen <10%
Second-tier city <10%~15%
Third-tier/below city <9~50%
Source: Nomura research
Exhibit 62. MSCI China consensus 2011 EPS growth by sector
50
36
2521 21 20
13 13 12 117
0
25
50
-Inf
orm
atio
nte
chno
logy
-Mat
eria
l
-Hea
lthca
re
-Ene
rgy
-Fin
ance
MS
CI
Chi
na
-Con
sum
er--
Sta
ple
-In
dust
rial
-Util
ities
-Con
sum
er--
Dis
cret
iona
ry
-Tel
ecom
serv
ices
(%)
Source: Bloomberg, Nomura research
Exhibit 63. % of 2011 consensus EPS has been revised for MSCI China Index (January 2011 – 2011YTD)
36
22 20 20
9 95 3 1
(6)
(14)(20)
0
20
40
-Inf
orm
atio
nte
chno
logy
-Ene
rgy
-Ind
ustr
ial
-Hea
lthca
re
MS
CI
Chi
na
-Con
sum
er--
Dis
cret
iona
ry
-Fin
ance
-Tel
ecom
serv
ices
-Mat
eria
l
-Con
sum
er--
Sta
ple
-Util
ities
(%)
Source: Bloomberg, Nomura research
Estimates of property price growth
Consumer staples and discretionary are expected to report less EPS growth than the market index, on our estimates
Index EPS has been revised up…
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 34
Exhibit 64. Consensus estimate 2011 EPS revisions
5.2
5.4
5.5
5.7
5.8
6.0Ju
n-10
Jul-1
0
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan-
11
Feb
-11
Mar
-11
Apr
-11
1,040
1,080
1,120
1,160
1,200
1,240MSCI China EPS revision
HSCEI EPS revision (RHS)
(LHS)
Source: Bloomberg, company data, Nomura research
Exhibit 65. Monthly performance breakdown by sector – July 2010
10.0%
4.5% 4.1% 3.8%
(4)
0
4
8
12
IT
SH
CO
MP
Indu
stria
l
Mat
eria
l
Dis
cret
iona
ry
HS
I
Fin
anci
al
MS
CI
Chi
na
HS
CE
I
Util
ities
Sta
ples
Ene
rgy
Tel
ecom
Hea
lthca
re
(%)
Source: Bloomberg, Nomura research
Exhibit 66. Monthly performance breakdown by sector – August 2010
0.0%
-2.3% -2.6%
-4.2% (6)
(3)
0
3
6
Hea
lthca
re
Util
ities
Sta
ples
Tel
ecom
Dis
cret
iona
ry
SH
CO
MP
Mat
eria
l
Ene
rgy
HS
I
MS
CI
Chi
na
Indu
stria
l
IT
HS
CE
I
Fin
anci
al
(%)
Source: Bloomberg, Nomura research
…for both MSCI China and HSCEI
IT was the best performer in July 2010
Healthcare was the best performer in August 2010
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 35
Exhibit 67. Monthly performance breakdown by sector – September 2010
8.9% 8.8% 8.3%
0.6%
0
5
10
15
20
Dis
cret
iona
ry
Mat
eria
l
Hea
lthca
re IT
Ene
rgy
Sta
ples
Indu
stria
l
HS
I
HS
CE
I
MS
CI
Chi
na
Fin
anci
al
Tel
ecom
Util
itie
s
SH
CO
MP
(%)
Source: Bloomberg, Nomura research
Exhibit 68. Monthly performance breakdown by sector – October 2010
12.2%
6.1%3.8% 3.3%
(10)
(5)
0
5
10
15
SH
CO
MP
Fin
anci
al
Ene
rgy
HS
CE
I
MS
CI
Chi
na
HS
I
Indu
stria
l
IT
Mat
eria
l
Tel
ecom
Sta
ples
Util
ities
Dis
cret
iona
ry
Hea
lthca
re
(%)
Source: Bloomberg, Nomura research
Exhibit 69. Monthly performance breakdown by sector – November 2010
-0.4%
-2.2% -2.7%
-5.3%
(9)
(6)
(3)
0
3
Ene
rgy
HS
I
Mat
eria
l
Tel
ecom
MS
CI
Chi
na IT
Hea
lthca
re
Indu
stria
l
HS
CE
I
Fin
anci
al
Dis
cret
iona
ry
Sta
ples
SH
CO
MP
Util
ities
(%)
Source: Bloomberg, Nomura research
Consumer discretionary was the best performer in September 2010
Financials was the best performer in October 2010
Energy was the best performer in November 2010
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 36
Exhibit 70. Monthly performance breakdown by sector – December 2010
0.1%
-0.4% -0.6% -1.0%
(12)
(8)
(4)
0
4
8E
nerg
y IT
Mat
eria
l
Tel
ecom HS
I
Util
itie
s
SH
CO
MP
MS
CI
Chi
na
HS
CE
I
Indu
stria
l
Fin
anci
al
Hea
lthca
re
Sta
ples
Dis
cret
iona
ry
(%)
Source: Bloomberg, Nomura research
Exhibit 71. Quarterly performance breakdown by sector – 3Q10
8.2%9.8%10.7%11.1%
0
10
20
30
Mat
eria
l
Dis
cret
iona
ry IT
Hea
lthca
re
Indu
stria
l
Sta
ples
HS
I
Ene
rgy
SH
CO
MP
MS
CI
Chi
na
HS
CE
I
Util
itie
s
Fin
anci
al
Tel
ecom
(%)
Source: Bloomberg, Nomura research
Exhibit 72. Quarterly performance breakdown by sector – 4Q10
5.7%3.0% 2.3% 0.8%
(20)
(10)
0
10
20
Ene
rgy
SH
CO
MP
HS
I
Fin
anci
al
HS
CE
I
IT
MS
CI
Chi
na
Mat
eria
l
Indu
stria
l
Tel
ecom
Sta
ples
Hea
lthca
re
Util
itie
s
Dis
cret
iona
ry
(%)
Source: Bloomberg, Nomura research
Energy was the best performer in December 2010
Material was the best performer in 3Q10
Energy was the best performer in 4Q10
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 37
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 38
Any Authors named on this report are Research Analysts unless otherwise indicated
Analyst Certification We, Henry Wu, Yang Luo and Michael Shen, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures Mentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures China Life Insurance 2628 HK 30.30 HKD 08-Apr-2011 Buy Not Rated 4,58,123 China Unicom 762 HK 14.42 HKD 08-Apr-2011 Buy Not Rated 3,4,8,47,48,55,58,123 China Yurun Food 1068 HK 27.95 HKD 08-Apr-2011 Buy Not Rated Gome Electrical Appliances 493 HK 2.85 HKD 08-Apr-2011 Buy Not Rated 4 ICBC 1398 HK 6.63 HKD 08-Apr-2011 Buy Not Rated 4,12,50,58,61
Disclosures required in the U.S.
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Previous Rating Issuer name Previous Rating Date of change China Life Insurance Not Rated 02-Nov-2010 China Unicom Neutral 11-Feb-2010 China Yurun Food Neutral 14-Nov-2008 Gome Electrical Appliances Neutral 27-Jan-2010 ICBC Strong Buy 10-Dec-2008
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 39
China Life Insurance (2628 HK) 30.30 HKD (08-Apr-2011) Rating and target price chart (three year history)
Buy (Sector rating: Not Rated)
Date Rating Target price Closing price 02-Nov-2010 40.00 34.50 02-Nov-2010 Buy 34.50 08-Oct-2010 Not Rated 33.50 26-Aug-2009 45.00 34.30 26-Aug-2009 Buy 34.30 12-Aug-2009 33.00 33.45 28-May-2009 27.00 27.75 20-Jan-2009 24.00 21.95 13-Oct-2008 25.00 26.00 13-Oct-2008 Neutral 26.00
For explanation of ratings refer to the stock rating keys located after chart(s)
China Unicom (762 HK) 14.42 HKD (08-Apr-2011) Rating and target price chart (three year history)
Buy (Sector rating: Not Rated)
Date Rating Target price Closing price 04-Mar-2011 15.80 13.24 13-Oct-2010 13.50 11.26 11-Feb-2010 10.80 8.93 11-Feb-2010 Buy 8.93 25-Jun-2009 10.00 10.32 22-May-2009 Neutral 9.46 01-Apr-2009 9.50 7.61 27-Nov-2008 16.20 8.97 27-Nov-2008 Buy 8.97 26-Aug-2008 14.15 13.12 24-Apr-2008 16.56 17.18
For explanation of ratings refer to the stock rating keys located after chart(s)
China Yurun Food (1068 HK) 27.95 HKD (08-Apr-2011) Rating and target price chart (three year history)
Buy (Sector rating: Not Rated)
Date Rating Target price Closing price 19-Nov-2010 39.00 27.85 14-Jul-2010 34.00 25.45 09-Apr-2010 31.00 24.50 11-Jan-2010 28.00 22.40 16-Nov-2009 21.00 17.50 31-Jul-2009 16.20 12.26 14-Nov-2008 12.10 9.37 14-Nov-2008 Buy 9.37 27-Aug-2008 12.60 12.74 27-Aug-2008 Neutral 12.74 04-Jun-2008 13.50 11.70 04-Jun-2008 Buy 11.70 10-Apr-2008 13.20 10.50
For explanation of ratings refer to the stock rating keys located after chart(s)
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 40
Gome Electrical Appliances (493 HK) 2.85 HKD (08-Apr-2011) Rating and target price chart (three year history)
Buy (Sector rating: Not Rated)
Date Rating Target price Closing price 07-Dec-2010 4.30 3.05 07-Apr-2010 4.10 2.90 27-Jan-2010 4.00 2.61 27-Jan-2010 Buy 2.61 23-Sep-2009 2.40 2.12 24-Jun-2009 2.10 1.76 24-Jun-2009 Neutral 1.76 14-Nov-2008 1.30 1.19 14-Nov-2008 Reduce 1.19
For explanation of ratings refer to the stock rating keys located after chart(s)
ICBC (1398 HK) 6.63 HKD (08-Apr-2011) Rating and target price chart (three year history)
Buy (Sector rating: Not Rated)
Date Rating Target price Closing price 14-Jan-2011 7.60 6.08 22-Oct-2010 7.30 6.14 30-Jul-2010 7.00 5.82 13-May-2010 7.70 5.62 03-Feb-2010 7.36 5.72 18-Dec-2009 7.50 6.08 31-Aug-2009 6.70 5.19 26-Jun-2009 6.25 5.35 26-Mar-2009 4.94 4.03 10-Dec-2008 4.97 4.38 10-Dec-2008 Buy 4.38 30-Apr-2008 7.45 6.05
For explanation of ratings refer to the stock rating keys located after chart(s)
Important Disclosures Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-eu@nomura.com for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 41
Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 42
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
Strategy | China Henry Wu, CFA
12 April 2011 Nomura 43
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Strategy | China Henry Wu, CFA
12 April 2011 Nomura 44
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