China / Hong Kong Market Focus Quarterly Strategy Outlook · Five-year plan to sweeten outlook for...

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Market overhangs are lifting

• We believe the market hit bottom in Sept and expect a meaningful rebound if China and Fed policies accommodate

• Upcoming five-year plan to boost confidence in select sectors

• We are adding in CCB, CGN Power, and PetroChina into our top ten picks

Catalysts emerging to lift market off trough. We argued the market would be tick-shaped in our Sept 16 report “Three themes for rest of the year”, due to uncertainties with China’s macro outlook, US interest rates, CNY outlook, and A-share market. We believe three of these overhangs are easing. China has adopted more pro-growth policies (pg 6). Policy makers will also roll out a preliminary 13th five-year plan later this month to bolster confidence for favoured segments. Meanwhile, weak US data is delaying Fed rate hike expectations (pg 4). Finally, the CNY has stabilized and government rhetoric suggests large depreciation is unlikely. These events and low valuations pave way for a market rebound. We turn more bullish and are lifting our 3 month and 12 month HSI targets to 23,667 and 26,518 (pg 7).

Five-year plan to sweeten outlook for select segments. We expect a draft 13th five year plan for 2016-2020 will be released this month. Based on this year’s government work plan and unmet targets of the 12th five year plan, we expect the upcoming draft to feature automation, SOE reform, pollution control, alternative energy, and one-belt-one-road as some of the key initiatives (pg 9). H-shares have generally performed well in the first year of five-year plans (pg 15).

Overweight on China banks, property, infrastructure, environmental and autos. We continue to like our 3 investment themes highlighted in our Sept 16 report (pg 16). But as we expect a more stable CNY in the near term, we are less fearful of Chinese companies with USD debt (pg 18). We like China banks, property, infrastructure, environmental, and China autos (pg 20). Meanwhile, oil, and gaming are also attractive laggards. On the flip side, we are less upbeat on Hong Kong property, REITs, HK retail, coal, and food and beverage. Our team’s latest sector views are summarized on pages 27-37. We have downgraded IT and software to Neutral due to cannibalization from US ADRs on MSCI inclusion.

Adding CCB, CGN, and PetroChina to top ten. Our top ten list fell 15.4% during 3Q15, slightly better than the HSI’s 20.6% decline and the HSCEI’s 27.5% fall. Our list has outperformed the HSI by 24% since inception in Feb 2014. In this update, we are substituting BoCom with CCB (939.HK, BUY) as our China banking pick. In addition, we are adding in CGN Power (1816.HK, BUY) as a beneficiary of the upcoming five year plan. We are also adding in PetroChina (857.HK, NR) as a laggard pick. To make room for our new additions, we have removed BoCom, Tencent, and ZTE (pg 24).

HSI : 22,459

Analyst Alexander LEE CFA, +852 2971 1930 [email protected]

Ian CHUI [email protected]

China/Hong Kong Research Team · (852) 2820 4844 · [email protected]

Top Ten BUY list

Closing Tgt

T ick er price PBV PER y ield ROE Price(HK$) (X ) (X ) (%) (%) (HK$)

CCB 939.HK 5.66 0.7 4.7 7.1 15.9 8.47CGN Power 1816.HK 3.43 2.0 17.2 1.7 12.7 4.60COLI 688.HK 24.95 1.1 7.5 2.7 15.5 38.96CH Railway Constr 1186.HK 12.18 1.0 9.4 1.6 11.6 17.00GZ Automobile 2238.HK 6.72 0.8 6.5 4.6 12.9 8.30Nexteer 1316.HK 8.24 2.5 10.3 1.9 26.7 9.60PetroChina * 857.HK 6.30 0.8 13.7 3.0 5.4 n.a.Sinopharm Group 1099.HK 29.25 2.0 15.7 1.7 13.4 34.00Value Partners 806.HK 8.80 3.0 11.6 5.1 27.6 14.20Wasion Group 3393.HK 8.97 1.6 9.8 3.6 16.8 12.50

F Y16F

*consensus forecasts

Source: Thomson Reuters, DBS Vickers

DBSV top pick performance vs. HSI

90

100

110

120

130

140

150

160

Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15

DBSV top picks HSI

(28 Feb 2014 = 100)

Source: Bloomberg Finance L.P., DBS Vickers

Based on 9 October 2015 closing prices

DBS Group Research . Equity 12 October 2015

China / Hong Kong Market Focus

Quarterly Strategy Outlook

Refer to important disclosures at the end of this report

Market Focus


Hong Kong Research T eam

Head of Research, China Propert yCarol Wu (852) 2863 8841

[email protected] ickers.com

A utomobile, Inf rast ructure, MachineryRachel Miu (852) 2863 8843


Bank ing & F inanceShujin Chen, CFA (852) 2820 4920

[email protected] ickers.comNicole Wu (852) 2820 4919

[email protected] ickers.comChina Propert y

Danielle Wang, CFA (852) 2820 [email protected] ickers.com

Ken He, CFA (86) 21 6888 [email protected] ickers.com

Andy Yee, CFA (852) 2971 [email protected] ickers.com

ConsumerMav is Hui (852) 2863 8879

mav [email protected] ickers.comAlice Hui, CFA (852) 2971 1960

[email protected] ickers.comSteve Chow (852) 2820 4611

[email protected] ickers.comAlison Fok (852) 2971 1938


Env ironmental, Indust rialPatricia Yeung (852) 2863 8908


HealthcareMark Kong, CFA (852) 2820 4619

mark_kong @hk.dbsv ickers.com

Hong Kong Propert yJ eff Yau, CFA (852) 2820 4912

[email protected] ickers.comAllen Chan (852) 2971 1932

[email protected] ickers.comAndrew Lam


Metal, CementAddison Dai (852) 2971 1931


St rat egyAlexander Lee, CFA (852) 2971 1930

[email protected] ickers.comIan Chui


Small M id CapsDennis Lam (852) 2971 1922

[email protected] ickers.comChris Ko

[email protected] ickers.comTony Wu, CFA


T elecomTam Tsz-Wang, CFA (852) 2971 1772


Table of Contents

Market outlook – overhangs are clearing 3

Lifted our index targets 7

Upcoming Five year plan to boost confidence in highlighted sectors 9

Recommended exposures 16

Sector valuations vs. market valuations 21

Top ten BUY list 24

Summary of sector views 27

Stock profiles of our top ten BUYs 38

Appendix: Best EPS revisions among index stocks in 3Q15 49

Appendix: Worst EPS revisions among index stocks in 3Q15 50

Appendix: HSI and news flow 53

Appendix: DBSV universe comparison table 55

Market Focus


Market outlook – overhangs are clearing

Tick-shaped prediction playing out – likely saw bottom of tick. In our Sept 16 report, we argued the market was very cheap judging from i) Hang Seng Index’s price to book, ii) relative outperformance of Hang Seng utilities index, iii) Chinese telecom sector’s high PE relative to the HSI, and iv) HSBC’s dividend yields. However, we believed the market will get cheaper because of four overhangs, and foresaw a tick-shaped market. Three of the four overhangs are easing, and this paves the way for a meaningful rebound after the bottom of the tick was hit.

Overhang 1: Fed rate hike

Expectations are softening on weak data. Fed Fund futures are only pricing in a 38.8% probability for a rate hike in 2015. This is down from 60% just over a month ago at the end of August. Our economic team expects the latest string of weak data will push back the Fed rate hike cycle.

Nonfarm payrolls have deeply disappointed two months in a row. Private sector payrolls only rose by 100k and 118k in August and September, some 145k below what they averaged in 2014. Job growth at goods producing industries has slumped since March and the drop accounts for half of the 145k shortfall in payrolls. This is likely due to a 9% drop in goods exports since February. In addition, as we noted in our previous report, inflationary pressure is low and the US unemployment rate is still high if we adjust for discouraged workers.

New house view: only 50bps before Dec 2016. Given the recent data disappointments, we do not expect there will be a rate hike in 2015. Our economic team also cut their 2016 Fed rate hike expectation from 100bps to 50bps. With a milder US rate hike cycle, concerns of fund outflows from Asia should be less. CNY depreciation pressure will also be lower.

US – nonfarm payrolls (goods)

US – export of goods

-40

-20

0

20

40

60

80

100

Jan-12 Jan-13 Jan-14 Jan-15

NFP x 1000, sa

124

126

128

130

132

134

136

138

140


US$bn/mth, sa, BoP basis

US unemployment rate (reported and adjusted)

US CPI

0

2

4

6

8

10

12

14

16

03 04 05 06 07 08 09 10 11 12 13 14 15

Assuming 66% labor participation

Reported

(%)

(3)

(2)

(1)

0

1

2

3

4

5

6

03 04 05 06 07 08 09 10 11 12 13 14 15

(%)

Sources: CEIC, Bloomberg Finance L.P., DBS Vickers

Market Focus


Fed fund futures pricing

Probability of first rate hike to come before these dates

0%

20%

40%

60%

80%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Probability of hike in or before Dec 2015

0%

20%

40%

60%

80%

100%

120%

Dec‐15 Jan‐16 Mar‐16 Apr‐16 Jun‐16 Jul‐16 Sep‐16

Captured in July Captured in August Latest

Sources: Bloomberg Finance L.P., DBS Vickers

Overhang 2: Milder CNY pressure

CNY has stabilized. A softer USD from a milder Fed rate hike cycle helps lower CNY pressure, which is a relief on earnings revisions. Consensus earnings forecasts for HSI and HSCEI members in HKD terms were cut sharply in August due to the one-off depreciation. We believe the CNY will only go to 6.4-6.5 by mid-2016, when CNY / USD should stabilize

ahead of SDR inclusion in 3Q16. We only look for a mild depreciation given government rhetoric while China’s foreign reserves are still ample. A 6.4-6.5 range is much better than the 6.7-6.8 range CNY and CNH futures were pricing in shortly after the one-off adjustment in August. This should give more confidence on 2016F EPS forecasts in HKD, especially if China rolls out more fiscal measures to help the economy.

Consensus earnings forecasts for HSI

Consensus earnings forecasts for HSCEI

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

Jan/14 Jul/14 Jan/15 Jul/15

2014 2015 2016

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jan/14 Jul/14 Jan/15 Jul/15

2014 2015 2016


Market Focus


CNY

CNY non-deliverable forward

6.006.056.106.156.206.256.306.356.406.456.50

Jan/13 Jul/13 Jan/14 Jul/14 Jan/15 Jul/15

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

Jan/13 Jul/13 Jan/14 Jul/14 Jan/15 Jul/15

CNY / EUR

China’s foreign reserves

6.0

6.5

7.0

7.5

8.0

8.5

9.0

12 13 14 15

(CNY/EUR)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

07 08 09 10 11 12 13 14 15

(US$ bn)

Sources: WIND, DBS Vickers

Overhang 3: China’s macro uncertainty

Pro-growth fiscal measures accelerated in September. China’s key macro indicators continued to decelerate despite interest rate cuts since November 2014. We believe targeted fiscal measures are more helpful in turning around China’s economy, but some in the market feared China’s current leadership will sacrifice growth for reforms. But we have seen a pickup in fiscal measures in September, which

suggests China’s leadership is trying to balance growth and reforms. We expect more initiatives will be rolled out in the upcoming fifth plenum this month. This is because real deposit rates are declining close to zero and relying on interest rate cuts is not an attractive option. As more supportive measures are released, we believe they will help earnings confidence of Chinese corporates, particularly those in highlighted segments.

Market Focus


Low real interest rates limit amount of PBOC rate cuts

China CPI

(6)

(4)

(2)

0

2

4

6

8

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

(%)

1 yr real lending rate 1 yr real deposit raterate hikes rate cuts

(5)

0

5

10

15

20

25

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(%) CPI Food CPI yoy Non-food CPI yoy

Sources: WIND, DBS Vickers

Fiscal policy and tax concessions sped up during September Date Policy

9/1/2014PBOC and CBRC loosened mortgage restrictions by allowing buyers of second homes to beconsidered first-time buyers if they have paid off their first home mortgages.

5/27/2015NDRC encourages high quality enterprises to issue bonds to finance development in certainsectors

6/24/2015 Regulators announced they will lift 75% loan to deposit ratio cap7/2/2015 PBOC lent Rmb157.6bn to China Development Bank in June for shantytown reforms

8/18/2015PBOC Completes Injection Into China Development Bank (US$48bn) and Export-Import Bank ofChina (US$45bn)

8/24/2015 CBRC and NDRC ask banks to support large infrastructure projects8/27/2015 China eases restrictions for property purchases by foreigners

9/1/2015 China lowered down payment on second homes from 30% to 20% for home buyers who tapthe public housing fund

9/3/2015 MOF announce temporary tax relief for small companies9/7/2015 China to cut div idend taxes for long-term shareholders9/13/2015 State Council releases a guideline to modernize SOEs9/14/2015 NDRC announced 8-point pro growth initiatives

9/16/2015NDRC removes quota approval proccesses for companies that want to raise overseas debt with aterm of more than 1 year

9/16/2015NDRC said China will v igorously promote public-private partnerships (PPP) in infrastructure andpublic serv ices investments

9/17/2015

China will expand preferential treatment for fixed-asset depreciation to 10 sectors includingautomobile, textile, machinery and light industry from 6 sectors prev iously . China will allowaccelerated depreciation or shorter depreciation periods for equipment valued more than Rmb1m.The policy is expected to bring tax relief about Rmb5bn this year.

9/20/2015 China Premier Calls for SOE Mergers, Disposal of ‘Zombie’ F irms9/30/2015 PBOC Cuts Mortgage Down payment Requirement to 25% from 30% for first time home buyers

10/1/2015Chinese government has announced that the purchase tax on small cars (<1.6L capacity ) will behalved to 5%, effective from 1 Oct, and will be valid until end of 2016

Sources: NDRC, PBOC, DBS Vickers

Market Focus


Lifted our index targets

A-share overhang may linger. The fourth overhang, the A-share market, is trickier to predict. We believe A-shares will be flat until MSCI inclusion probability increases. But this may not come until mid-2016. We don’t expect large declines because A-share valuations have returned to mean levels and deleveraging has made ample progress. But eventual support fund exit and IPO resumptions limit upside. However, we believe there is scope for H-shares to re-rate even if A-shares remain flat because of A-shares’ >20% premium over H-shares. The lifting of the other three overhangs are enough.

12 month HSI target at 26,518. We have lifted our 3 month HSI target from 22,173 to 23,667, and our 12 month target from 25,257 to 26,518. We expect the HSI to gradually re-rate back to early 2015 levels, while factoring in slight cuts to earnings forecasts in HKD terms. Our 3 month target is based on 11.1x forward PE and our 12 month target PE level is 11.6x.

12 month HSCEI target of 12,644. We have also lifted our 3 month and 12 month HSCEI targets to 10,953 and 12,644. This is assuming H-shares will re-rate back to the five year mean PE of 8.5x in a year’s time with slight cuts to earnings forecasts. We are more upbeat on HSCEI outlook when compared to HSI, as the market rebound will likely concentrate on China plays in the near term.

3 month and 12 month HSI targets

15,000

17,000

19,000

21,000

23,000

25,000

27,000

29,000

10 11 12 13 14 15 16

HSI 3M target 12M target

26,518

23,667

Tgt PE =11.1x

Tgt PE =11.6x


3 month and 12 month HSCEI targets

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

10 11 12 13 14 15 16

HSCEI 3M target 12M target

12,644

10,953

Tgt PE =8.5x

Tgt PE =7.8x


Market Focus


Hang Seng Index PE bands

10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000 26,000 28,000 30,000

08 09 10 11 12 13 14 15 16 17

HSI 5 yr mean of 1 yr forward P/E +1 std -1 std +2 std -2 std12.8x

11.6x

10.5x

9.3x

8.2x


HSCEI PE bands

-2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000 20,000

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

HSCEI 5 yr mean of 1 yr forward P/E +1 std -1 std +2 std -2 std

5.7x

11.3x

9.9x

8.5x

7.1x


Market Focus


Upcoming Five year plan to boost confidence in highlighted sectors

2015 government work plan as blueprint. We will likely see a draft five year plan for 2016-2020 in the upcoming fifth plenary session of the 18th Communist Party of China Central Committee to be held later this month. This is the first five year plan after President Xi was elected President of the PRC by the 12th National People’s Congress in 2013. We believe the 2015 government work plan offers a good preview for the 2016-2020 five year plan, as the government work report featured long term reforms and initiatives for China’s development. We have summed up the 2015 government work report on pages 11-13. The timeline on the roll out of the previous five year plan (pg14) also serves as an expected timeline for the upcoming plan.

Most 2011-2015 goals were attained. China is on track to attain most goals highlighted in the 12th five-year plan for 2011-2015. We have provided a summary of the previous five year plan on the next page. However, two goals were still below their targets when looking at historical data. They are research & development as percentage of GDP and non-fossil fuel usage as % of total energy consumption. Although the trajectories suggest these goals can be met by 2015, these goals seem to be at most risk of not meeting targets. Hence we may see more aggressive efforts to boost these two areas.

China’s R&D spending as % of GDP

Non-fossil fuel usage as % of total energy consumption

Sources: CEIC, DBS Vickers

Some of the targets we expect for the 2016-2020 five year plan are:

- Annual GDP growth of 6.5%, down from 2011-2020’s 7.0%. Focus will be on quality rather than quantity of growth, including:

Lower power consumption per unit of GDP, and lower fossil fuel usage.

Lower fossil Alternative energy to boost non-fossil fuel usage.

Increase service sector and consumption’s contribution to GDP.

- Boost research and development as % of GDP to expand higher tech and value added industries

- Encourage developments in information technology and automation

- Further increase urbanization target

- Financial reforms to support efficient funding for innovative industries. Develop capital markets to increase funding channels outside of the banking system.

- Expand Rmb internationalization

- Environmental targets for cutting emissions, conserving resources, and improving water and air quality

- Tax reform to replace business tax with VAT

- Implement One belt one road initiative to deepen ties and trade with countries along the silk road and maritime silk route

- Deepen SOE reform to improve efficiency

Market Focus


Summary of the 12th five year plan (2011-2015)

Ca te gory Obje c ti ve Se le c te d pol i c y ta rge tsGrowth Annual GDP growth 7%Inflation Price level to remain stableUnemployment Rate Unemployment rate below 5% in urban areasBalance of Payments Balance of Payments to remain stable

Create 45mn jobs in urban areasPer capita disposable income for urban residents up 7%. Totalincome for rural residents up 7%Urbanization rate to reach 51.5%, up 4 percentage pointsService sector value-added output to account for 47% of GDP, up 4percentage pointsEnergy consumption per unit of GDP to be cut by 16%.Non-fossil fuel to account for 11.4% of primary energy consumptionCarbon dioxide emission per unit of GDP to be cut by 17%Water consumption per unit of value-added industrial output to becut by 30%Expenditure on R&D to account for 2.2% of GDP3.3 patents per 10,000 people

Population Population to be no larger than 1.39bnPreserving farmland reserves to minimum 1.818bn muWater efficiency coefficient in argicultural irrigation to reach 0.53Total food prodution capacity to reach minimum of 540mn tons/yearForest coverage rate to rise to 21.66% and forest stock to increaseby 600mn cubic metersDecrease emission of sulfur dioxide (-8%), ammonia (-8%), andnitrous oxide (-10%)

Education 9-year compulsory education retention to reach 93%Lifespan/person to increase by 1 year to 74.5 yearsHealth insurance participation rate for urban employees, urbanresidents, and rural cooperative increase by 3 percentage ponts

Social Security 357 mn urban residents to participate in basic pension schemeWestern China - develop infrastructureto exploit competitive advantage innatural resources

Continue development of railroads, highways, air, water transportnetworks. Continue building oil & gas pipelines, powerlines

Northeast China - Revitalize andupgrade traditionally industrialnortheastern regions

Increase focus to financial services, logistics, tourism, and software

Eastern China coastal regions - topioneer reforms

Coastal regions will focus on international cooperation andcompetition. They will lead the efforts to innovate and "open up"

Central China - consolidategeographic comparative advantage infood production and transport

To become the main food production and energy raw materialproduction base in China

Encourage financial innovationIncrease direct financing - i.e. bond marketStrengthen liquidity managementDebt to equity swaps to recapitalize companies aging industriesEncourage development of small stock boardsEncourage steady progress in sercuritizationSteady development of derivative markets

Currency Expand offshore use of Rmb, gradually open Rmb convertibility

RegulationStrengthen regulation of financial institutions to ensure stabilityand minimize systemic riskEncourage public listing of SOE'sEncourage mixed ownership for solely owned SOEsImprove corporate governance of SOEsPrevent SOEs from monopolizing markets

Encourage development of privatesector commerce and reform state-owned assets

Shifting growth drivers from exportsand investment to domesticconsumption

Upgrading output to high skill, hightech, low pollution and low resourceintensity

Agriculture

Environmental

Healthcare

Financing

Comme rc e

Ma c ro-e conomicta rge ts

Improving GDPgrowth qua l i ty

Qua l i ty of Li fe

Ge ogra phica l l ySpe c i fic

Fina nc ia lsys te m

Sources: Xinhua, NDRC, DBS Vickers

Market Focus


Highlights from 2015 government work plan De e pe ning Re form a nd Ope ning Up

Ac ce le ra te pri c ing re formsThe government will stop setting prices for most pharmaceuticals and delegate to lower-levelgovernments the power to set prices for certain basic public services.Expand the trials of pricing reforms for electricity transmission and distributionCarry out pricing reforms for water used in agriculture, and improve pricing policies to make themmore conducive to energy conservation and environmental protection.

Re form of fi sc a l a nd ta x sys te msWe will devote serious energy to completing work to replace business tax with VAT across the boardAdjust and improve policies on consumption taxExtend price-based resource taxes to cover more types of resources

Fina nc ia l re form to be tte r se rve the re a l e conomyWe will encourage qualified private investors to establish, in accordance with the law, small andmedium-sized banks and other financial institutionsA deposit insurance system will be established. We will further liberalize interest rates and improvethe central bank's framework for their regulation.Launch the Shenzhen-Hong Kong Stock Connect on a trial basis at an appropriate timeWe will strengthen the multilevel capital market and implement the reform to introduce a system ofregistration for issuing stocks.We will develop regional equity markets to serve small and medium-sized enterprises, encourage thesecuritization of credit assets, prompt an expansion of the issuance of corporate bonds, and developthe financial derivatives market.

Re form of s ta te -owne d e nte rpri se s (SOEs ) a nd s ta te c a p i ta lIntroducing mixed ownership to SOEs, and both encourage and regulate equity investment made bynon-state capital in SOE investment projects.Accelerate structural reform of the electricity, oil, and natural gas industries.We will continue to push ahead with reforms in science, technology, education, culture, medical andhealth care, pensions, public institutions, and the housing provident fund.

Ma king more use of fore ign c a p i ta lWe will focus on making the service and manufacturing sectors even more open by halving thenumber of industries in which foreign investment is restricted

Imple me nta tion of the "go g loba l" s tra te gyWe will encourage Chinese companies to participate in overseas infrastructure development projectsWe will work to increase the international market share of Chinese railway, electric power,communications, engineering machinery, automobile, aircraft, electronics, and other equipmentEncourage the metallurgical, building materials, and other industries to invest overseas

Ne w e nvi ronme nt in a l l -round ope n ing upWe will work with the relevant countries in developing the Silk Road Economic Belt and the 21stCentury Maritime Silk RoadWe will work actively to develop pilot free trade zones in Shanghai, Guangdong, Tianjin, and Fujian

Multi la te ra l , b i la te ra l , a nd re g iona l ope n ing up a nd coope ra tionEnsuring that agreements on free trade zones with the Republic of Korea and Australia are signed assoon as possibleEndeavoring to complete the talks on upgrading the China-ASEAN Free Trade Zone and onestablishing the Regional Comprehensive Economic Partnership


Market Focus


Highlights from 2015 government work plan (con’t) Ba la nc ing Ste a dy Economic Growth a nd Struc tura l Improve me nt

Foste r growth a re a s of consumptionWe will promote consumption in elderly care, domestic services, and health services, help strengthenspending on information goods and services, raise consumer spending on leisure and tourism, giveimpetus to green consumption, keep housing consumption stable, and encourage people to spendmore on education, culture, and sports.We will press ahead with the nationwide project to deliver telecoms, radio, television, and Internetservice over a single broadband connection, accelerate the development of fiber-optic networks,significantly increase broadband speeds, develop logistics and express delivery services, and ensurethat new forms of Internet-based spending, which combine online-offline activities, come to thrive.

Effe c tive inve stme nt in pub l ic goodsLaunch a number of major new projects, including:

Projects for rebuilding rundown urban areas and renovating dilapidated housing, urban undergroundpipe network projects, and other projects to improve living standardsMajor railway, highway, and inland waterway transport projects in the central and western regionsAgricultural projects on water conservancy and developing high-quality farmlandProjects that involve major information, electricity, oil, and natural gas networksClean energy projects, and oil, natural gas, and mineral resource supply projectsEnergy-saving, environmental protection, and ecological conservation projects

We will invest over 800 billion yuan in railway construction and open over 8,000 kilometers of railwaysto trafficConstruction on the 57 ongoing major water conservancy projects needs to be accelerated;construction will be started on an additional 27 such projects this year, and investment in the majorwater conservancy projects under construction will exceed 800 billion yuan. Projects to be weightedtoward Central and Western China.

Mode rn iz e a gricu l tureWe will carry out work on designating permanent basic cropland throughout the country, andstrengthen the building of irrigation and water conservancy facilities, and work hard to developwater-efficient agriculture.We will give high priority to building roads and water facilities. This year, we will ensure that 60 millionmore rural residents gain access to safe drinking water; that 200,000 kilometers of rural roads arebuilt or upgradedWe will increase rural incomes through multiple channels and keep narrowing the urban-ruralincome gap.

Ac hie ve bre a kthroughs in promoting a ne w type of urba niz a tionWe will redouble efforts to rebuild rundown urban areas and renovate dilapidated urban and ruralhousing. This year, our plan includes building an additional 7.4 million units of government-subsidizedhousing, of which 5.8 million are to be located in rundown urban areas, an increase of 1.1 millionover last year.People originally from rural areas who live and work in urban areas but have yet to gain urbanresidency will be able to access basic public services on the basis of their residence certificates


Market Focus


Highlights from 2015 government work plan (con’t)

Move forwa rd in industria l s truc tura l upgra ding, a iming a t a me dium-high le ve lWe will implement the "Made in China 2025" strategyUpgrade China from a manufacturer of quantity to one of quality.We will promote the extensive application of information technologies in industrialization, developand utilize networking, digitalization, and smart technologiesWe will launch major projects to develop high-end equipment, information networks, integratedcircuits, new energy, new materials, biomedicines, aero engines, and gas turbinesWe will develop the "Internet Plus" action plan to integrate the mobile Internet, cloud computing,and big data with modern manufacturing, to encourage development of e-commerce, industrialnetworks, and Internet banking, and to guide Internet-based companies to increase their presence inthe international market.We will deepen the reform and opening up of the service sector, and implement fiscal, tax, land, andpricing policies to support its development.

Stre ngthe n soc ia l se curi ty a nd inc re a se ind ividua l inc omeThe basic pension benefits for enterprise retirees will be increased by 10%.We will improve the mechanism for adjusting minimum wages.

Promote fa i r a c ce ss to a nd s tre ngthe n the qua l i ty of e duca tionWe will move more quickly to help all schools providing compulsory education to meet standards, andimprove basic conditions in boarding schools and schools that are poorly built and operated.

Improve the ba s ic me dic a l a nd he a l thca re sys te msWe will put a stop to the practice of charging more for medicines to make up for low prices for medicalservices, lower extortionate prices on medicines, make appropriate adjustments to medical serviceprices, and take measures such as reforming medical insurance payouts to control costs of medicalservices.

Ena b le pe ople to e n joy more of the fru i ts of cu l tura l de ve lopme ntWe will put into practice core socialist values and promote fine traditional Chinese culture.

Conse rving e ne rgy, re duc ing e miss ions , a nd improving the e nvi ronme ntThis year, we will cut the intensity of carbon dioxide by at least 3.1%, reduce both chemical oxygendemand and ammonia nitrogen emissions by around 2%, and reduce emissions of sulfur dioxide andnitrogen oxides by around 3% and 5% respectively.Prevent and control air pollution; carry out coordinated inter-regional prevention and control efforts;upgrade coal-burning power plants to achieve ultra-low emissions; and strive for zero-growth in theconsumption of coal in key areas of the country.We will promote the use of new-energy vehicles, reduce vehicle exhaust emissionsIn China, we will put great weight behind the development of wind power, photovoltaic power, andbiomass energy, work actively to develop hydropower, stress safety in developing nuclear power, andexploit and utilize shale gas and coal seam gas.


Market Focus


Timeline of the formation of the 12th five year plan (2011-2015)

Ste p Sta rt Da te End Da te Ac tion De ta i l

1 3/15/2008 12/24/2008 Review 11th FYP progressCollect information on the progress of the previous FYP.Organized by NDRC and implemented by variousministries, local authorities, and 3rd parties

2 12/24/2008 12/15/2009 NDRC selects key research areas

NDRC identified 8 key areas and 29 issues to beresearched. Thousands of experts chosen to conductresearch. Considered the largest policy consulting andresearch activity conducted in the world

3 12/15/2009 2/15/2010 FYP "general guidelines" formed

Using research reports the NDRC created the first draft ofthe "General Guidelines" (基本思路) and submitted it tothe Central Committee of the Chinese Communist Partyand the State Council. The Politburo Standing Committeedeliberated and agreed on core concepts that reflectedthe thoughts of party big-wigs.

4 2/15/2010 10/15/2010 "Consultative Draft" developed

A Drafting Small Group, headed by Li Keqiang andincluding members from the State Council's DevelopmentResearch Center and the NDRC, created an "Outline"(提纲) that was discussed with key party leaders andfurther altered to become the "Consultative Draft" (建议)

5 10/15/2010 10/18/2010Draft discussed in 5th plenarysession of the 17th centralcommittee of the CPC

Additional opinions for revision were collected from partyofficials. Consultative Draft accepted on Oct 18 andreleased on Oct 27

6 10/18/2010 1/15/2011National Experts Committeediscussed draft

37 experts selected by the State Council convened withthe NDRC to discuss the draft and submitted a report toState Council and NPC

7 11/1/2010 2/15/2011 Finished draft of the final plan

Written by the NDRC, this final plan (纲要) used morethoughts and opinions collected during the NDRC'sannual December Work Conference and regional,ministerial and industrial conferences

8 1/15/2011 2/15/2011Premier Wen Jiaobao collectsopinions from general public

The Politburo Standing Committee then revisied thedraft's "Essential Points" (纲要[草案]), a 16-pointdocument outlining the general focus areas of the plan.

9 3/14/201112th FYP submitted and acceptedby the National People'sCongress

During the Two Meetings, an annual conference whereboth the NPC and CPPCC hold sessions, the new plan waspresented by Premier Wen Jiabao.

10 3/14/2011 3/15/201612th FYP implemented acrossChina

The plan was disseminated and plans to implement itsgoals locally were released by the State Council.

Sources: Xinhua, DBS Vickers

Market Focus


H-shares generally perform well in the first year of five-year plans. H-shares have generally performed well in the first year of five-year plans. Since 1995, the simple average of annual calendar year returns of H-shares was 15%. But the

average return during the first year of five-year plans was 27%. However, the opposite is true for the HSI. Average return during the first year of five-year plans was 5.8%, compared to the overall average of 8.6%.

HSCEI performance in the first year of five-year plans

-100%

-50%

0%

50%

100%

150%

200%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

HSCEI index annual return1st year of five year plans


HSI performance in the first year of five-year plans

-60%-40%-20%

0%20%40%60%80%

100%120%140%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

HSI Index annual return

1st year of five year


Market Focus


Recommended exposures

Three themes for rest of year. We have mapped out relevant macro trends that will impact the market in the coming months (pg 17). In this environment, we prefer 1) companies that can benefit from expected macro policies and growth initiatives, 2) companies that can benefit from expected monetary policies and currency trends, and 3) value and laggard picks. We believe China fixed asset

investment, environmental, and China properties are sweet spots as they fit into multiple themes. CGN Power and TK Group also score well. In addition, we like China banks, China autos, oil, and gaming as laggard picks with turnaround potential. Please kindly refer to our Sept 16 report titled “Three themes for rest of the year” for more details.

Three investment themes for 4Q

Can benefit from Can benefitexpected fis ca l initia tives from monetary polic ies or

currency trends

China railway and construction CGN 1816 China property (net +ve)Environmental companies COSCO 1199 China railway and constructionOther infra and FAI plays China infrastructure Environmental companies

IT and automation solutions and FAI plays HK banks (net +ve for non-CNH)Environmental

SOE reform: COFCO, Sinopharm, CNBM 3323 Exporters: Techtronic 669, Vtech 303, CNBM, Unicom, COSCO Pac Textile 1382, Shenzhou 2313,

Sinopec Samson 531

Offshore revenues:Lenovo 992, Minth 425

GD Inv 270

Sinopec 386 China propertyKangda Int. 6136 TK Group 2283

China banksChina autos and parts

Airlines, global banks, oilChinese brokers, gaming

Screen - growth improvement with cheap valuations:CTCM 570, Kangda 6136, Luen Thai 311China Modern Dairy 1117, Jiangnan 1366

Laggards and va lue picks

Source: DBS Vickers

Market Focus

Strategist's Blog

Expected macro environment and their impacts

IndexAlready occurredOngoing eventsExpected eventsImpacts

MSCI did not include A‐shares

Desperate scramble to

prevent dom ino effect on margin

China's macro outlook remains

weak

Rmb depreciation

trend

Fiscal action to help

transformation

IM F SDR basket review delayed until

3Q16

China's interest rate cut cycle is

lengthening

China's real interest rate dipping to zero

Fear of impact to financial system due to excess leverage

Overhang for A‐share market from eventual

exit plan

China can let market forces

sort itself

Domestic fiscal plan to prop up jobs in near term

Accelerate reforms and new

economy

China's five year plan for 2016‐

2020

W inded down most toxic leverage products

A‐shares not as appealing until

MSCI talks resume

Domestic property appetite

to increase

FAI through Private Public Partnership

One belt one road to export excess capacity

Increase tech and automation in manufacturing

Investment in infra and green

sectors

Exports to find some relief

IT and automation solution providers to

benefit

Railway, construction, telecom and power equipment to benefit

Water, alternative energy, waste

management to benefit

China property developers to benefit

Exporters and Chinese companies with overseas

revenues to benefit

Sources: DBS Vickers

Market Focus


Companies with Rmb revenues or financial reporting that have high USD/HKD borrowing

Stock 2015F net Gearing at t rib.

Code Company USD/HKD Rmb Others gearing to non-Rmb debt

2689 Nine Dragons 69% 30% 1% 108% 74%

2314 Lee and Man Paper 100% 0% 0% 63% 63%

1378 China Hongqiao Group 57% 43% 0% 108% 62%

81 China Overseas Grand Oceans 75% 25% 0% 75% 56%

337 Greenland (Hong Kong) 69% 31% 0% 80% 55%

371 Beijing Enterprises Water 46% 51% 3% 115% 53%

2678 Texhong Textile Group 99% 1% 0% 50% 50%

763 ZTE 92% 8% 0% 52% 48%

272 Shui On Land 54% 46% 0% 88% 47%

1313 China Resources Cement 77% 23% 0% 55% 43%

123 Yuexiu Property 59% 41% 0% 67% 40%

691 Shanshui Cement 32% 68% 0% 119% 38%

832 Central China 62% 38% 0% 59% 37%

3377 Sino-Ocean Land 49% 51% 0% 72% 35%

3383 Agile Property 46% 54% 0% 74% 34%

728 China Telecom 99% 1% 0% 34% 33%

3308 Golden Eagle 100% 0% 0% 33% 33%

817 Franshion Properties 52% 48% 0% 49% 26%

2007 Country Garden 43% 57% 0% 59% 25%

1700 Springland Int'l 85% 15% 0% 29% 24%

322 Tingy i Holding 82% 18% 0% 29% 24%

410 Soho China 71% 29% 0% 33% 24%

Yllg sp Yanlord Land 48% 52% 0% 49% 23%

1109 China Resources Land 58% 42% 0% 40% 23%

506 China Foods 100% 0% 0% 22% 22%

688 China Overseas 81% 19% 0% 27% 22%

600019 Baoshan Iron & Steel Co-A 68% 32% 0% 31% 21%

323 Maanshan I & S 30% 70% 0% 69% 21%

2319 China Mengniu 86% 0% 14% 24% 21%

Borrow ing mix (%)

Source: Companies, DBS Vickers

Market Focus


2015F ROE vs. 2014 P/BV by sector - China property, banks, and autos score well

China banks

China non-bank financials

China property

Environmental

Railway and construction

Apparel and footwear

China appliances

China auto and parts

China IPPs

China materials

China telecom carriers

China telecom equipment

Hong Kong banks

Hong Kong property

Hong Kong telecom

Pharmaceutical & healthcare

Textiles

China coal

China F&B

Oil

Retailers

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

(2015F ROE)

(201

4P/

B)

Source: DBS Vickers

YTD sector share price performance – We like highlighted sectors among laggard sectors

‐50%‐40%‐30%‐20%‐10%0%10%20%30%40%50%

Brokers‐Ch

ina

Gaming

Coal

Stee

l & aluminium

Consum

er (luxuries)

Consum

er (retailers)

Banks ‐

Glob

al Oil

Hardware & equ

ipPo

wer ‐Ch

ina

Banks ‐

China

HSCEI

Food

and be

verages

Consum

er (app

arel)

Prop

ertie

s ‐HK

Insurance

Indu

stria

lAu

tos and

parts

Conglomerates ‐HK

Telecom ‐Ch

ina

HSI

Transport (shipping)

Gas

Transport (po

rts)

Pharmaceu

ticals

Telecom ‐HK

Water, enviro

nmen

tal

Power, in

fra & utilities

Consum

er (personal)

REIT

Prop

ertie

s ‐Ch

ina

Banks ‐

HKCo

nsum

er (hou

seho

ld)

Transport (toll roads)

Alternative en

ergy

Rail & con

struction

Cemen

tTransport (airline

s)Co

nsum

er (spo

rtsw

ear)

Softw

are & IT services


Market Focus


Summary of sector views Sector Weight ing Change Rat ionale

China banks Overweight Trough valuations; earnings recovery from low base to be catalyst

China property Overweight Expecting sales recovery due to rate cut, HPR and mortgage policies

Railway and construction Overweight Lower borrowing rates, domestic fiscal spending, and overseas contracts

Environmental Overweight Pollution control to be featured in 5 yr plan; prefer smaller caps

China auto and parts Overweight Upgraded Tax cuts can help sales for this laggard sector

Apparel and footwear Neutral Prefer sportswear companies; avoid companies with large HK exposure

China airlines Neutral Earnings upgrades thanks to falling oil price, but hurt by CNY depreciation

China appliances Neutral Outlook to improve on back of expected rebound in property sales

China IPPs Neutral Helped by lower coal prices; prefer operators with more alternative exposure

China materials Neutral Fundamentals can improve slightly if domestic FAI picks up moderately

China non-bank financials Neutral We look to rev isit this sector when SZ-HK stock connect kicks off

China retailers Neutral Prefer players with strong O2O initiatives or defense against e-commerce

China telecom carriers Neutral VAT reform will no longer drag earnings in 2016; potential restructuring

China telecom equipment Neutral 4G network capex to slow slightly in 2015; prefer overseas exposure

Gaming Neutral Worst seems to be over for y-o-y gaming revenue declines

Hong Kong banks Neutral USD interest rate rebound cycle is slower than expected

Hong Kong telecom Neutral Industry consolidation should help pricing in the future

Internet and e-commerce Neutral Downgraded 5-year plan highlight; But US ADR inclusion and valuation premium to mkt

Oil Neutral Year-on-year oil price trend to be better in 2016 on supply outlook

Pharmaceutical + healthcare Neutral Positive long term drivers, but valuations limit upside in current env ironment

Textiles Neutral Robust US orders and stable raw material prices

China coal Underweight Documentary "Under the Dome" is scary; structurally unattractive

China F&B Underweight High valuations cap upside, particularly with earnings downgrades

Hong Kong property Underweight HK retail, political pressure, and USD interest rates are key risks

HK REITs Underweight HK retail and USD interest rate normalization are key risks

HK retailers Underweight Structural change with mainland tourists; negative wealth effect for locals

Source: DBS Vickers

Downgrading IT and e-commerce to Neutral. We recommend to be overweight on five sectors as they score well in our three investment themes or offer value. We shuffled our sector weighting in our Sept 16 report, but we make two more changes at this juncture. We have upgraded the auto sector from Neutral to Overweight, and favor small car and energy car makers. The sector has lagged due to inventory concerns, but de-stocking has seen some progress. The tax concessions on small cars and likely positive policies for energy efficient cars should also help

alleviate investory concerns. Meanwhile, we are downgrading IT and E-commerce from Overweight to Neutral. We still like the prospects of this segment, and believe it will be featured in the upcoming five year plan. However, the MSCI inclusion of US ADRs in November dilutes the scarcity premium for players like Tencent. We also believe the market rebound will focus on cyclicals and laggards initially, and expect this sector’s valuation premium to the market to narrow.

Market Focus


Sector valuations vs. market valuations

China banks PB / HSI PB

China property PB / HSI PB

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

2010 2011 2012 2013 2014 2015 2016

China banks / HSI 2yr mean

+2 stdev -2 stdev

x

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

08 09 10 11 12 13 14 15

China Property / HSI 2yr mean PB

-2 stdev +2 stdevx

China brokers PE / HSI PE

China insurance PE / HSI PE

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


China Brokers / HSI 2yr mean PE

-2 stdev +2 stdev

x

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Insurance / HSI 2yr mean PE

-2 stdev +2 stdev

x

China steel PB / HSI PB

China cement PE / HSI PE

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0


Steel / HSI 2yr mean PB

-2 stdev +2 stdev

x

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7


Cement / HSI 2yr mean-2 stdev +2 stdev

x


Market Focus


Tencent PE / HSI PE

Gaming PE / HSI PE

1.5

2.0

2.5

3.0

3.5

4.0

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Tencent / HSI 2yr mean PE

-2 stdev +2 stdev

x

0.5

1.0

1.5

2.0

2.5

3.0

3.5


Gaming 2yr mean PE

-2 stdev +2 stdev

x

Water and environmental PE / HSI PE

China department store PE / HSI PE

0.0

0.5

1.0

1.5

2.0

2.5

08 09 10 11 12 13 14 15

Water / HSI 2yr mean PE-2 stdev +2 stdev

x

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 2.5

08 09 10 11 12 13 14 15

Dept Store / HSI 2yr mean

-2 stdev +2 stdev

x

China autos PE / HSI PE

Apparel and footwear PE / HSI PE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

08 09 10 11 12 13 14 15

Auto / HSI 2yr mean-2 stdev +2 stdev

x

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1


Apparel / HSI 2yr mean-2 stdev +2 stdev

x


Market Focus


HK property PB / HSI PB

HK banks PB / HSI PB

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

08 09 10 11 12 13 14 15

HK Property / HSI 2yr mean PB

-2 stdev +2 stdev

x

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

06 07 08 09 10 11 12 13 14 15

HK banks / HSI 2yr mean +2 stdev -2 stdev

x

China telecom PE / HSI PE

China oil and gas PE / HSI PE

1.0

1.2

1.4

1.6

1.8

2.0

2.2


China telecom / HSI 2yr mean-2 stdev +2 stdev

x

0.6

0.8

1.0

1.2

1.4

1.6

1.8


Oil & Gas / HSI 2yr mean PE-2 stdev +2 stdev

x

Luxury retailers PE / HSI PE

0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

08 09 10 11 12 13 14 15

Luxury / HSI 2yr mean

-2 stdev +2 stdev

x


Market Focus


Top ten BUY list

Top ten picks declined 15.4% during 3Q15. Our top ten picks declined 15.4% during 3Q15, slightly better than the HSI’s 20.6% decline and the HSCEI’s 27.5% fall. Our top

ten pick performance was helped by solid gains from Value Partners after its inclusion on August 25th and GAC after being added on Sept 16th. Nexteer Auto was also resilient during 3Q15. The Yestar trade from July 6th to Sept 16th also padded performance. On the other hand, Wasion, CR Land, and Sinopharm underperformed the HSI during 3Q15.

Relative performance of top ten pick vs. HSI

Top ten pick performance relative to HSI

90

100

110

120

130

140

150

160


DBSV top picks HSI

(28 Feb 2014 = 100)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0


DBSV top pick relative performance vs. HSI

(28 Feb 2014 = 0)

(%)

Sources: Thomson Reuters, DBS Vickers

Adding CCB, CGN Power, and Petrochina. We have substituted BoCom with CCB as our China banking pick. Our banking team adjusted the banking sector’s NPL figures in their “Asset quality: Seeing through banks reported numbers (Part 1)” report on Oct 7. We believe CCB has a cleaner loan book when compared to peers and is now our top pick among SOE banks. We are also adding in CGN Power, as we believe alternative energy will be favored in the upcoming five year plan. In addition, we are also adding in PetroChina as a laggard play. A deceleration in US shale

supply and recovering optimism for China should ensure year-on-year oil price trend in 2016 to be much better than 2015’s decline.

Taking out BoCom, Tencent, and ZTE. We are still upbeat on Tencent’s outlook, but the MSCI inclusion of US ADRs will dilute the stock’s scarcity premium. We are also less upbeat on ZTE due to a possible merger between China Unicom and China Telecom. Telecom equipment demand will likely take a hit if there is one less telecom operator in China.

Our updated top ten list:

CCB (939.HK)

Scored better than peers in our in depth asset quality analysis of Chinese banks, where we adjusted NPL figures of listed banks for more objective comparison.

Has lower dilution risk and higher ability to keep paying high dividends due to ROE and capital adequacy strengths.

Dividend yield should exceed 6% even with rising bad debt and credit cost environment.

CGN Power (1816.HK)

China will likely push up target for non-fossil fuel usage in upcoming five year plan.

CGN Power should see EPS growth resume in 2016 after IPO dilution for 2015 EPS.

Expected capacity growth to drive earnings growth, while high barrier of entry should limit competition.

Market Focus


China Overseas Land (688.HK)

Recently revised up sales targets after gaining market share from smaller peers

Impact of Rmb depreciation is not as bad as feared since 2/3 of foreign liabilities are hedged by foreign cash and investments

Can benefit from falling real interest rates and a lukewarm equity market

China Rail Construction (1186.HK)

Chinese policy makers are helping infrastructure funding by lowering borrowing costs and project capital requirements, and this will help domestic demand.

Company can win overseas contracts as part of China’s “one belt one road” strategy.

Decline in borrowing costs to help high gearing companies like CRCC.

GAC Group (2238.HK)

Has lagged the market on slowing sales concerns; current valuation is attractive against new growth profile (PEG of 0.35).

New models and seasonality should help 4Q sales.

Parent company Guangzhou Automobile Industry Group has been buying H-shares.

Nexteer (1316.HK)

Nexteer is the world's leading electronic power steering producer

Push for fuel-efficiency is triggering shift from hydraulic power steering to electronic systems

Traditionally strong in the US, Nexteer is expanding to China to augment growth

PetroChina (857.HK)

Boom in US shale oil production to be less of a factor in 2016

More pro-growth policies from China will increase confidence in global economic growth

Year on year crude oil price trends to be much better in 2016 compared to 2015’s sharp decline from 2014

Sinopharm (1099.HK)

Healthcare is highlighted as an encouraged consumption area in China's government work report; parent company is also pilot for SOE reform

Aging population and rising wealth underpin the industry's demand growth

Large drug distributors like Sinopharm has been gaining market share with its reliability in supply and ability to extend credit

Value Partners (806.HK)

VP will be an ideal market recovery play thanks to how earnings are leveraged to performance fees and AUM trends

The fund house is still in a performance fee cycle, because watermark levels are attainable

Company will also benefit from trend of mainland wealth diversifying to offshore assets and asset managers

Wasion (3393.HK)

Energy metering and energy efficiency management company. Customers include the State Grid, the Southern Grid, various industries and local governments in China, Egypt, Indonesia, Thailand, Vietnam, Brazil.

The company has been winning overseas contracts to augment growth. Latest contract wins include a US$9.4m AMI contract in Tanzania. It has also won Rmb68m and Rmb10m AMI contracts in Mexico and Brazil through partnership with Siemens. Total overseas contract value amounts to >Rmb300m YTD.

China’s power grid needs upgrading to minimize energy loss as part of China’s conservation plans. The company benefits from increasing ADO sales orders.

Market Focus


Valuation table for our Top Ten Picks

EPS

Closing DBSV T gt CA GRT icker price rat ing Price F Y15F F Y16F 14-16 F Y15F F Y16F F Y15F F Y16F F Y15F F Y16F

T op pick s (HK$) (HK$) (X ) (X ) (%) (%) (%) (X ) (X ) (%) (%)CCB 939.HK 5.66 BUY 8.47 4.9 4.7 3.0 17.3 15.9 0.8 0.7 6.7 7.1

CGN Power 1816.HK 3.43 BUY 4.60 20.9 17.2 (2.2) 10.7 12.7 2.3 2.0 1.4 1.7

COLI 688.HK 24.95 BUY 38.96 8.0 7.5 (0.7) 17.2 15.5 1.1 1.1 2.6 2.7

CH Railway Constr. 1186.HK 12.18 BUY 17.00 10.1 9.4 6.2 12.2 11.6 1.1 1.0 1.5 1.6

GZ Automobile 2238.HK 6.72 BUY 8.30 7.6 6.5 24.1 12.3 12.9 0.9 0.8 4.0 4.6

Nexteer 1316.HK 8.24 BUY 9.60 12.7 10.3 26.6 27.2 26.7 3.1 2.5 1.6 1.9

PetroChina * 857.HK 6.30 NR n.a. 18.1 13.7 (20.1) 4.3 5.4 0.8 0.8 2.5 3.0Sinopharm Group 1099.HK 29.25 BUY 34.00 18.2 15.7 16.3 12.8 13.4 2.2 2.0 1.5 1.7

Value Partners 806.HK 8.80 BUY 14.20 11.7 11.6 29.2 32.3 27.6 3.4 3.0 5.1 5.1

Wasion Group 3393.HK 8.97 BUY 12.50 11.7 9.8 21.5 16.4 16.8 1.7 1.6 3.0 3.6

Simple av erage 12.4 10.6 10.4 16.3 15.8 1.7 1.6 3.0 3.3

Div y ieldPBVPER ROE

Source: DBS Vickers, Thomson Reuters

* consensus estimates

Market Focus


Summary of sector views

Sector outlooks in alphabetical order

Neutra l Top BUY(S): Belle (1880.HK) Least preferred: n.a.

Lead analyst: Alice Hui, +852 2971 1960, [email protected]

Neutra l Top BUY(S): Haier (1169.HK) Least preferred: Nil

Lead analyst: Mavis Hui, +852 2863 8879, [email protected]

Appare l and footwear

While visibility remains weak and consumer sentimentstays soft in general, there has been some divergent inperformance at different segments. Sportswearcontinued to outperform with major players reportingsteady SSSG and solid trade fair orders, while someapparel players also posted mild recovery in SSSG.However, sales performance for women’s footwearplayers remained soft on intense competition and trafficdiversion from online, hence despite the low base, asignificant recovery is nowhere in sight yet. In lack ofcatalyst, we recommend investors to stick to quality playswith strong brand, good cash flow and strong operatingefficiency. We maintain a Buy rating on Belle as currentvaluation should have largely priced in most negativeswith yield expected at a decent 5% level. For thoselooking for exposure in the sportswear, Li Ning shouldhave good chance for a profit turnaround this year.

Apparel & footwear sector 1yr forward P/E

Source: Thomson Reuters, DBS V ickers

China appliances

We anticipate home appliance demand in China totrend upwards moderately starting into 4Q15 or early2016, given a 9-12 months’ time lag in the impacts fromrecovering home sales this year. In particular, the ruralmarkets could still benefit from lower home appliancepenetration rates to see more room for expansion. Haier’s acquisitions to beef up its downstream division,especially in e-commerce and logistics operations,should also help lifting growth prospects.

Appliance sales vs. property pre-sales

Source: CEIC

0

5

10

15

20

25

30

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

x

Average: 14x

-40%-20%

0%20%40%60%80%

100%120%

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

China properties pre-salesHome appliance retail sales

A large proportion of property demand was due to investment purpose, hence sales pickup in home appliance was weaker

Growthy-o-y


Market Focus


Sector outlooks in alphabetical order (con’t) China autos and parts GAC (2238 HK)Overweight Top BUY(S): Geely (175.HK) Least preferred: n.a.

Dongfeng (489.HK)

Lead analyst: Rachel Miu, +852 2863 8843, [email protected]

Overweight Top BUY(S): CITIC Bank-H (998.HK) Least preferred: ABC (1288.HK)CMB-A (600036.CH)

Lead analyst: Shujin Chen, +852 2820 4920, [email protected]: Thomson Reuters, DBS V ickers

Monthly PV sales in China

Source: CEIC

The Chinese government cut auto purchase tax by half tostimulate small car demand (1.6L capacity and below),after several months of weak sales as economicconfidence dipped. The purchase tax policy will expire atthe end of 2016. The overall impact is positive, as thesmall car segment accounts for about 70% of the totalPV market. In addition, the government also continues tosupport new energy car development, with a focus onkey technology such as car batteries and fuel celltechnology. Share prices of automakers have reactedpositively to the latest announcement, with Great WallMotor moving up >20% in one day. We like Geely,Dongfeng Motor and Guangzhou Auto.

China banks

We believe H-share banks are oversold with an averagerolling P/BV of 0.73x, lower than 2013 and 2014 troughlevels. Six out of nine banks we cover are trading belowor close to 2 std below 2-year average. 1H15 resultswere largely disappointing evidenced by slow net profitgrowth (3% on average) and rising NPL formation rate(1.07% in 1H15 vs 0.86% in 2H14) but PPOP growth wasstill steady (12%). With strong provision in place (210%loan loss coverage at end-June), Chinese banks canabsorb more NPL than valuations of 0.7x 2015F P/B implyand we do not foresee significant book value erosion.Glencore crash and plunging commodity prices will havelimited impacts on listed banks as total exposure (loan tomining and off BS Letter of Credit) was small, only ~6% oftotal loan book. We also see efficiency and profitabilityimprovement potential for banks in the medium to longrun driven by mixed-ownership reform, internalrestructuring and subsidiary spin-off. We remain positiveon the sector and top picks are CITIC Bank among H-share China banks and CMB among A-share Chinabanks.

Sector P/BV

0.0

0.5

1.0

1.5

2.0

2.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 2011 2012

2013 2014 2015

m units

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

x

0.73

'13 trough =0.85

'13 max =1.3

14 max = 0.99

14 trough = 0.76


Market Focus


Sector outlooks in alphabetical order (con’t)

Underwe ight Top BUY(S): China Mengniu (2319.HK) Least preferred: Nil

Lead analyst: Alice Hui, +852 2971 1960, [email protected]

Neutra l Top BUY(S): CGN Power (1816 HK) Least preferred: Nil

Lead analyst: Addison Dai, +852 2971 1931, [email protected]

Nuclear power is key beneficiary of China's plan to lowerits carbon footprint. President Xi pledged during hisrecent US visit to start a so-called cap-and-trade systemto reduce emissions from electric power in 2017.

Top picks: CGN Power - The largest nuclear powerproducer in China with proven track record. Visibleearnings growth. Key beneficiary of China’s expandingnuclear power industry. Our 12-month new TP ofHK$4.60 is equivalent to unchanged 0.75x P/NPV. Thisimplies 28x FY15F and 23x FY16F PE. We think the impliedPE target valuation premium to non-nuclear utility peersis justified by the nuclear industry’s significant entrybarriers, and the company’s visible organic capacitygrowth (CAGR of 20% in 2015-17).

CGN Power PE chart

Sector PE

China materia ls & uti l i ties


Most F&B players reported weaker than expected 1Hoperating performance as a result of demand slowdown,fully offsetting most of the raw material benefits. Despitesofter bases in 2H, most companies, except for ChinaFoods and Uni-President, are likely to report soft results.M&A remains in full-swing. In spite of weaker operatingdata ahead, AB-InBev’s proposal to buy SABMiller haddomestic brewers rebounding temporarily. Also,Biostime's acquisition of an Australia-based vitaminbrand to expand into China also possibly reflecting amore stable demand outlook in China. Current sectorvaluation of 17.6x FY16 PE should have largely discountconcerns on earnings downturn. Our top pick is ChinaMengniu.

China F&B


0 5

10 15 20 25 30 35 40 45

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

HK F&B Sector PE HSI PE

x

10

15

20

25

30

35

Dec

-14

Jan-

15

Feb-

15

Apr

-15

May

-15

Jun-

15

Aug

-15

Sep-

15

x

Avg: 20.7x

+1SD: 23.9x

-1SD: 17.4x


Market Focus



Overweight Top BUY(S): COLI (688 HK) Least preferred: SOHO China (410 HK)Shimao (813 HK)China Jinmao (817 HK)

Lead analyst: Carol Wu, +852 2863 8841, [email protected]

Neutra l on carrie rs Top BUY(S): China Mobile (941 HK) Least preferred: Niland equipment China Unicom (762 HK)

Lead analyst: Tsz Wang Tam, +852 2971 1772, [email protected]

Discount to NAV (DBSV coverage)


Source: Companies, DBS V ickers

China property

The market started speculating on the next round ofindustry restructuring, in particular, the possible mergerbetween China Telecom and China Unicom. This reaffirmsour earlier view that China Mobile has gainedmomentum and threatening the two smaller players. TheChairmen of CT and CU swapped in late August, which ispreparatory step for the merger, in our view. We expectthat the merger will take around 2 year to take place.Meanwhile, CM will continue to benefit from the strongTD-LTE (4G) business growth, and the scale advantage interms of sub base and network coverage.

In terms of near-term outlook, operators generallyreported encouraging 1H15 results under the backdropof negative VAT. This is attributable to the initiative ofcutting down marketing cost, which will continue into2H15. While the market is concerned about thegovernment’s dictation of tariff cut, operators believethat they can maintain stable ARPU through up-sellingbandwidth or usage. On policy front, tower assetinjection from operators to the tower company is underway, with more details to be announced in Oct 2015.The potential one off gain as well as the capex and opexsavings will be positive to the sector. CU is the majorbeneficiary.

The sector is now trading at 6.5x FY15F PE, 0.6x P/BV and56% discount to NAV (vs. its historical average of9.1x/1.1x/39%). We expect continuous sales recoverydriven by new launches in the rest of the year andfavorable credit environment, while share price is notreflecting the improving fundamentals. Some stocks’valuation has been close to their historical trough PEmultiples. Thus, we believe downside for thesecompanies is limited. Our top picks are COLI, Shimao, andChina Jinmao Holdings.

No. of telecom base stations in China

China te lecom and equipment

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY09

A

FY10

A

FY11

A

FY12

A

FY13

A

FY14

F

FY15

F

FY16

F

'000

(80)

(60)

(40)

(20)

0

20

40

Oct

-06

Jul-0

8

May

-10

Feb-

12

Nov

-13

Sep-

15

%

+2SD: -7.3%

+1SD: -23.4%

Mean: -39.5%

-1SD: -55.6%

-2SD: -71.7%


Market Focus


Sector outlooks in alphabetical order (con’t) Department s tores & Food reta ile rsUnderwe ight Top BUY(S): Golden Eagle (3308.HK) Least preferred: Sun Art (6808.HK)

Lead analysts: Steve Chow, +852 2820 4611, [email protected]


Food Retailers - PE band

Operating environments for department stores and foodretailers remain challenging on the back of softconsumer sentiment, E-commerce challenge, anti-giftingcampaign, etc. Most department stores and foodretailers experienced profit declines in 1H15 due tosluggish same-store-sales growth (SSSG) and costpressures, and we expect the weak momentum to carryinto 2H15.

Despite the industry headwinds, we believe Intime couldpotentially outperform its peers thanks to its plannedasset sale program and O2O strategy. On the otherhand, Sun Art is our least preferred pick given risingchallenges from E-commerce and still demandingvaluation of about 18x forward PE.

Department Stores - PE band

40

90

140

190

240

290

340

Jan-

09

Apr

-10

Aug

-11

Nov

-12

Mar

-14

Jun-

15

26x

22x

18x

14x

11x

Total Market Cap (Rebased 1 Jan 09 = 100)

0

100

200

300

400

500

600

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

38x

31x

24x

17x

10x



Market Focus



Overweight Top BUY(S): Wasion (3393.HK) Least preferred: Tianjin Capital (1065.HK)China Everbright Int'l (257 HK)

Lead analyst: Patricia Yeung, +852 2863 8908, [email protected]

Environmenta l

Investment in treatment of environmental pollution

Source: China Statistical Yearbook on Environment

The Water Ten Plan has no doubt presented morebusiness opportunities for water companies throughhigher water treatment standards, more techicalupgrades and acceleration in market consolidation.These opportunities have also attracted more players toenter the market, leading to longer time for negotiationand higher prices for M&A. Nevertheless, the Rmbdepreication should help cool down the prices of waterassets which is positive for water stocks. In fact, mostwater listed stocks are making good progress in theirexpansion. We like China Everbright Int'l for its strongmomentum in deal flow. We continue to like Wasion forits robust growth prospect amid strong investment in thegrid by the State Grid and One Belt One Road policy.

(10)

0

10

20

30

40

50

0 100 200 300 400 500 600 700 800 900

1,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Investment in treatment of environmental pollution (LHS)

YoY growth (RHS)

RMB bn %

Neutra l Top BUY(S): DSF (440.HK) Least preferred: BEA (23.HK)HSB (11.HK)

Lead analyst: Alexander Lee, +852 2971 1930, [email protected]

Hong Kong banks

We turn more positive towards HK banks in 2H15. ROEenhancement from expected US$ interest rate hikes iscloser on the horizon and can be a strong positivecatalyst. Hong Kong banks have potential for large re-rating when US$ interest rate hikes kick off, givensubstantial ROE and earnings enhancements. We preferHang Seng Bank (11.HK) and DSF (440.HK) at thismoment. HSB is a yield play while DSF is a value play.

Source: Thomson Reuters, CEIC, DBS V ickers

Sector P/BV vs. Fed funds rate

0

1

2

3

4

5

6

7

1.0

1.5

2.0

2.5

3.0

3.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Sector PB Fed funds rate (RHS)x %


Market Focus


Summary of sector views (con’t)

Underwe ight Top BUY(S): SHKP (16 HK) Least preferred: Hang Lung Group (10.HK)

Lead analyst: Jeff Yau, +852 2820 4912, [email protected]

Neutra l Top BUY(S): Smartone(315.HK) Least preferred: Nil

Office vacancy, in Central in particular, has beenimproving, despite volatile financial market.Deteriorating economic fundamentals are expected todent the buying interest in the housing market. Realinterest rate may turn positive again in 2016 withslowing economy and potential interest rate hike. Retailmarket outlook remains challenging with slowdown ininbound tourism to drag the retail sales

CK Property - Discount to NAV


Mobile market share

Hong Kong property and REITS

Lead analyst: Tsz Wang Tam, +852 2971 1772, [email protected]

Hong Kong mobile operators started raising their mobiletariffs in 2H14 during the launch of iPhone 6. The priceincrease continued upon contract expiration in the pastfew months. However, we do not see any new round ofprice hikes (especially in the high end segment) in 3Q15during the launch of iPhone 6S, which is a slightdisappointment to some investors. Operators actuallyput more focus on removing or optimising the lower-tierplans. All in all, we expect further ARPU improvement inthe coming 1-2 years. We currently rate BUY onSmartone (315.HK), as it will be a key beneficiary of tariffhike on mobile data. On the other hand, the competitionin the residential broadband market is intensified. HKBNlaunched a more aggressive marketing strategy andoffered various discounted plans to target HKT’scustomers.

Source: Companies, DBS V ickers

Hong Kong te lecom

HKT / CSL31%

Hutchison Telecom

25%

SmarTone13%

China Mobile17%

Others14%

(50)

(45)

(40)

(35)

(30)

(25)

5-Ju

n-15

12-J

un-1

519

-Jun

-15

26-J

un-1

53-

Jul-1

510

-Jul

-15

17-J

ul-1

524

-Jul

-15

31-J

ul-1

57-

Aug

-15

14-A

ug-1

521

-Aug

-15

28-A

ug-1

54-

Sep-

1511

-Sep

-15

18-S

ep-1

525

-Sep

-15

%

Average: -36%

+1SD: -31%

-1SD: -41%

+2SD: -26%

-2SD: -46%


Market Focus



Neutra l Top BUY(S): Tencent (700.HK) Least preferred: Nil


Internet and e-commerce

Internet - PE band


Riding on its leading social media platforms in China andcollaboration with various key internet plays includingJD.com, we expect Tencent to sustain its strong positionin tapping the robustly growing internet sector thatcould post 28% CAGR in 2014-17. Specifically, anencouraging uptake of mobile commerce, together withsound performance of online advertising that offersample room for expansion could all help supporting itsoverall performance.

0

100

200

300

400

500

600

Jan-

11M

ay-1

1

Sep-

11

Jan-

12

Ma y

-12

Sep-

12

Jan-

13M

ay-1

3

Sep-

13

Jan-

14M

a y-1

4

Sep-

14

Jan-

15M

a y-1

5

Sep-

15


57x

48x

38x29x

19x


Market Focus



Underwe ight Top BUY(S): Luk Fook (590.HK) Least preferred: NilChow Sang Sang (116.HK)Samsonite (1910 HK)



Luxuries - PE band

Luxuries & cos metics

HK retail sales for Aug 2015 fell 5.4% y-o-y, down from a2.9% decline in Jul 2015. 8M15 retail sales dipped2.2%. While overall tourist consumption has remainedsluggish in HK especially given the city's strengthenedcurrency, we continue to prefer key jewellery retailers,particularly Chow Sang Sang and Luk Fook for theirrelatively better gemset performances and goodexposure in China. Selected global brands such asSamsonite should also see margin improvements in 2H15along with higher average selling prices, cost benefitsand a lower base. Meanwhile, cosmetics and luxurywatch retailers, especially for those that arepredominantly distributors rather than brand owners,could stay challenged on rising competition from bothoffline and online rivals in the region.

Cosmetics - PE band

0

200

400

600

800

1,000

1,200

1,400

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

20x

16x

12x

8x

4x


0

200

400

600

800

1,000

1,200

1,400

Jan-

09

Apr

-10

Aug

-11

Nov

-12

Mar

-14

Jun-

15

29x

24x

18x

12x

7x



Market Focus



Neutra l Top BUY(S): Sinopharm (1099.HK) Least preferred: Microport (853.HK)Yestar (2393.HK)

Lead analyst: Mark Kong, +852 2820 4919, [email protected]

Overweight Top BUY(S): CRCC (1186 HK) Least preferred: n.a.CRRC (1766 HK)

Lead analyst: Rachel Miu, +852 2863 8843, [email protected]: CEIC

Ra i l and cons truction

Pharmaceutica l and hea lthcare

Ongoing anti-corruption campaign, control on medicalinsurance spending, price cut (particularly generic drugs)resulted in slowdown of pharmaceutical sales growth in2014 (from 20% in 2013 to 13% in 2014). We believethose factors will continue to affect sector performance.However, some companies will be able to avoid industryrisk to deliver decent earnings growth. Yestar (2393 HK)is developing its in-vitro diagnosis devices businesswhich is in huge demand. Thanks to the strong growthof concentrated Chinese medicine granule business,CTCM (570 HK) and Pura (1498 HK) are able to thriveamid the downturn.


Sector average P/E

Government has accelerated the approvals on severalinfrastructure projects to speed up the investmentprocess, in its efforts to drive the economy. For the eightmonths, the government has invested some Rmb380bninto the railway sector, accounting for about half of thetotal budget set for 2015. We anticipate the governmentto focus on infrastructure spending as one of the keyeconomic stimuli. The infrastructure companies valuationhave improved recently. Train maker, CRRC (1766 HK)announced it has won several major contracts, withmultiple units accounting for a sizeable portion. We alsolike the railway constructors like CRG (390 HK) and CRCC(1186 HK).

Railway FAI

0.0

10.0

20.0

30.0

40.0

50.0

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5Se

p-15

x

Avg: 21.2x

+1SD: 28.3x

-1SD: 14.1x

020406080

100120140160180200

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov Dec

2011 2012 2013

2014 2015

RMB bn


Market Focus



Neutra l Top BUY(S): Pacific Textile (1382.HK) Least preferred: Nil

Lead analyst: Dennis Lam, +852 2971 1922, [email protected]: Thomson Reuters, DBS V ickers

Texti les

Robust US orders are the key driving force for textile andgarment companies in 2H15. In general, recentcomments amongst manufacturers have reflected astrong order book, ensuring high capacity utilization andstable margins. Stable raw material prices should offer abenign operating environment. Rmb depreciation willalso offer minor relief for Chinese manufacturers.

We believe Pacific Textile (1382 HK) offers a stable andattractive dividend yield, as well as accelerated growthoutlook due to its expansion in Vietnam.

In the long run, growth drivers such as manufacturingcapacity increase in ASEAN countries remains.

Sector P/E ratio

0

5

10

15

20

25

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

x


Market Focus


Stock profiles of our top ten BUYs Based on 9 October 2015 closing prices

China Construction Bank (Bloomberg: 939 HK | Reuters: 0939.HK) BUY

Last Traded Price: HK$5.66 (HSI : 22,459) Price Target: HK$ 8.47 (50% upside) Analyst Shujin CHEN CFA, + 852 2820 4920 [email protected] Nicole Wu +852 2820 4919 [email protected]

Price Relative

75

95

115

135

155

175

195

215

4.3

4.8

5.3

5.8

6.3

6.8

7.3

7.8

8.3

Oct-11 Oct-12 Oct-13 Oct-14 Oct-15

Relative IndexHK$

China Construction Bank (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014A 2015F 2016F Pre-prov. Profit 322,955 360,752 368,074 379,381 Pre-prov. Profit Gth (%)

11 12 2 3

Pretax Profit 279,806 299,086 299,520 308,665 Net Profit 214,657 227,830 228,160 235,127 EPS (RMB) 0.86 0.91 0.91 0.94 EPS (HK$) 1.05 1.11 1.11 1.15 EPS Gth Pre Ex (%) 11 6 0 3 PE (X) 5.4 5.1 5.1 4.9 DPS (HK$) 0.37 0.37 0.37 0.38 Div Yield (%) 6.5 6.5 6.5 6.7 BV Per Share (HK$) 5.20 6.06 6.83 7.61 P/Book Value (x) 1.1 0.9 0.8 0.7 ROAE (%) 21.4 19.7 17.3 15.9 ROAE (ex-exceptional (%) 21.4 19.7 17.3 15.9

ROA (%) 1.46 1.42 1.30 1.23 Consensus EPS (RMB) 0.92 0.96

Other Broker Recs: B: 27 S: 0 H: 2

ICB Industry: Financials ICB Sector: Hong Kong Principal Business: The largest bank in China offering a range of financial products and services to retail and corporate customers Source of all data: Company, DBSV, Thomson Reuters, HKEX

At A Glance Issued Capital - H shares (m shs) 240,417 - Non H shrs (m shs) 9,594 H shs as a % of Total 96 Total Mkt. Cap (HK$m/US$m) 1,415,062 / 182,692 Major Shareholders

Nil (%) Major H Shareholders (%)

Central Huijin (%) 59.3 Temasek (%) 6.0

H Shares-Free Float (%) 34.7 3m Avg. Daily Val. (US$m) 213.4

Profile China Construction Bank Corporation (CCB) provides a complete range of banking services and other financial services to individual and corporate customers. The bank's services include retail banking, international settlement, project finance, and credit card services. CCB operates 14,121 outlets in the mainland.

Valuation

CCB is currently trading at only 0.89x FY14 P/BV. Dilution risk is low given high provision to loan ratio and its enhanced capital position. We do not see downgrade risk for our FY14 earnings forecast as positive trend in NIM and cost efficiency offset the impact from one-off credit cost. CCB’s FY14 dividend yield is attractive at 7.5%, the highest among all H-share listed China banks.

Rationale

Strong capital positions CCB's capital position remained strong with core capital adequacy ratio standing at 11.6% at the end of Sep 14, one of the best in the sector. Better liquidity and more prudent risk profile CCB also had a better liquidity position judging from higher liquidity ratio at end of 2013. The bank is less exposed to riskier areas, such as SME loans, local government related lending and nonstandard wealth management products. New NPL formation rate was relatively low and provision to loan ratio remained high.

Risks

Cyclical, competitive pressures Slowing macroeconomic conditions, which may lead to non-performing loan increase. Increasing competition for mortgage loans. Higher-than-expected cost inflation.

Market Focus


CGN Power (Bloomberg: 1816 HK | Reuters: 1816.HK) BUY

Last Traded Price: HK$3.43 (HSI : 22,459) Price Target : HK$ 4.60 (34% upside) Analyst Addison DAI +852 2971 1931 [email protected]

Price Relative

8 9

1 0 9

1 2 9

1 4 9

1 6 9

1 8 9

2 0 9

2 .5

3 .0

3 .5

4 .0

4 .5

5 .0

5 .5

6 .0

D e c -1 4 M a r -1 5 J u n -1 5 S e p -1 5

R e la t iv e In d e xH K $

C G N P o w e r ( L H S ) R e la t iv e H S I IN D E X (R H S )

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 20,793 22,906 27,184 36,292 EBITDA 13,920 15,327 18,069 23,175 Pre-tax Profit 7,800 8,453 10,489 13,645 Net Profit 5,713 6,125 7,461 9,705 Net Pft (Pre Ex) 5,713 6,125 7,461 9,705 EPS (RMB) 0.17 0.13 0.16 0.21 EPS (HK$) 0.21 0.16 0.20 0.26 EPS Gth (%) 11.9 (21.4) 21.8 30.1 Diluted EPS (HK$) 0.21 0.16 0.20 0.26 DPS (HK$) 0.00 0.05 0.06 0.08 BV Per Share (HK$) 2.18 1.48 1.68 1.94 PE (X) 16.4 20.8 17.1 13.1 P/Cash Flow (X) 8.5 12.6 8.6 6.4 P/Free CF (X) nm nm nm nm EV/EBITDA (X) 15.0 17.4 15.8 13.0 Net Div Yield (%) 0.1 1.4 1.8 2.3 P/Book Value (X) 1.6 2.3 2.0 1.8 Net Debt/Equity (X) 1.2 1.6 1.7 1.7 ROAE (%) 13.8 10.7 12.7 14.4

Consensus EPS (RMB) 0.14 0.17 0.20 Other Broker Recs: B: 14 S: 5 H: 5

ICB Industry: Utilities ICB Sector: Electricity Principal Business: In 2014, the company operated 11 nuclear power generating units with installed capacity of 11,624MW (7 units under subsidiaries and 4 units under associates/JV) and generated 52,176GWh of power, accounting for 54% and 49% market share in China, respe Source of all data: Company, DBSV, Thomson Reuters, HKEX

Profile China’s largest nuclear power producer. CGN Power is China’s largest nuclear power producer based on 2014 installed capacity and power generation. In 2014, the company operated 11 nuclear power generating units with installed capacity of 11,624MW (incl. seven units under subsidiaries and four units under associates/JV) and generated 52,176GWh of power, accounting for 54% and 49% market shares in China respectively.

Valuation

Our 12-month new TP of HK$4.60 is equivalent to unchanged 0.75x P/NPV. This implies 28x FY15F and 23x FY16F PE. We think the implied PE target valuation premium to non-nuclear utility peers is justified by the nuclear industry’s significant entry barriers, and the company’s visible organic capacity growth (CAGR of 20% in 2015-17).

Rationale

Visible earnings growth. We project earnings to rise at 26% CAGR in FY15-17, driven by 26% CAGR in power generation and stable EBITDA margin. Besides, CGN Power is entitled to acquire nuclear projects being planned or constructed by its parent CGNPC, under the Non-competition Deed. Key beneficiary of China’s expanding nuclear power industry. Being a base-load utility, we deem Nuclear power to be the most efficient, low-carbon power source with reduced greenhouse gas emissions for China to develop. The State Council targets China’s installed nuclear capacity to reach 58 GW and those under construction to top 30 GW by 2020, implying that installed capacity to expand at 19% CAGR in FY14-20. Risks

Business risks include power tariff risks, utilisation hours risks and execution risks include nuclear power projects construction delay and capex overrun. We project Taishan Unit 1 to only start operation in 4Q16. Our sensitivity analysis shows if Taishan Unit 1 is delayed to kick off in 2017, it will impact our FY16F earnings by 5.3%.

Market Focus


China Overseas Land (Bloomberg: 688 HK | Reuters: 0688.HK) BUY

Last Traded Price: HK$24.95 (HSI : 22,459) Price Target : HK$ 38.96 (56% upside) Analyst Carol WU +852 2863 8841 [email protected] Ken HE CFA, +86 21 6888 3375 [email protected]

Danielle WANG CFA, +852 2820 4915 [email protected] Andy YEE CFA, +852 2971 1773 [email protected]

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Relative IndexHK$

China Overseas Land (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY De c (HK$ m) 2014A 2015F 2016F 2017F

Turnover 119,997 157,204 183,561 195,804EBITDA 37,797 47,912 55,742 59,658Pre-tax Profit 43,667 47,385 55,195 59,090Net Profit 27,680 28,620 32,896 36,496Core net profit 22,931 28,620 32,896 36,496EPS (HK$) 3.39 3.13 3.34 3.70EPS Gth (%) 20.1 (7.7) 6.7 10.9DPS (HK$) 0.55 0.64 0.68 0.75BV Per Share (HK$) 16.31 21.72 22.83 25.78PE (X) 7.4 8.0 7.5 6.7EV/EBITDA (X) 6.6 6.0 5.4 4.8Net Div Yield (%) 2.2 2.6 2.7 3.0P/Book Value (X) 1.5 1.1 1.1 1.0Net Debt/Equity (X) 0.3 0.3 0.2 0.1ROAE (%) 22.8 17.2 15.5 15.2

EPS Rev (%) 0.1 (0.1) nilConsensus EPS (HK$) 3.22 3.61 4.02Other Broker Recs: B: 28 S: 0 H: 4

ICB Industry: Financials ICB Sector: Real Estate (HK) Principal Business: China property development Source of all data: Company, DBSV, Thomson Reuters, HKEX

At A Glance Issued Capital (m shrs) 9,861Mkt Cap (HK$m/US$m) 246,021 / 31,745Major Shareholders (%) China Overseas Holdings 61.18 JPMorgan Chase & Co 5.61Free Float (%) 33.213m Avg. Daily Val. (US$m) 82.4

Profile China Overseas Land & Investment Limited is a PRC developer focusing on residential development in tier 1 and tier 2 cities, and is a subsidiary of China State Construction. As a leading developer in China and a state-owned red-chip, the company has a strong execution track record.

Valuation

Our valuation for COLI is based on 12.5x forward PE, which is on par with its 2012 peak level. This is justified due to its strong growth outlook amid a loosening policy environment. Rationale

Back into high growth mode Target 19% organic growth in contracted sales in 2015, faster than peers. Asset injections to further fuel up growth Better than peers profitability Gross margin in 2014 maintained at over 32% when peers saw significant compression Strong execution and track records Established brand name nationwide and good track record. Capable management team with strong access to low-cost funding.

Risks

Macroeconomic risk If China’s economy slows faster than expected and triggers a hard landing, the property sector will be substantially affected. Policy risk Unexpected sector tightening and loosening, which is likely to trigger a sector wide de-rating or re-rating, in which bottom-up research will become less important.

Market Focus


China Railway Construction (Bloomberg: 1186 HK | Reuters: 1186.HK) BUY

Last Traded Price: HK$12.18 (HSI : 22,459) Price Target : HK$ 17.00 (40% upside) Analyst Rachel MIU +852 2863 8843 [email protected]

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Relative IndexHK$

China Railway Construction (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014A 2015F 2016FTurnover 586,790 591,968 638,152 694,671 EBITDA 26,695 29,849 27,497 30,432 Pre-tax Profit 13,040 14,952 15,925 17,976 Net Profit 10,345 11,343 12,613 14,237 Net Pft (Pre Ex) 10,345 11,343 12,613 14,237 EPS (RMB) 0.84 0.92 0.97 1.04 EPS (HK$) 1.02 1.12 1.18 1.27 EPS Gth (%) 19.9 9.7 5.3 7.2 Diluted EPS (HK$) 1.02 1.12 1.18 1.27 DPS (HK$) 0.16 0.18 0.18 0.19 BV Per Share (HK$) 8.01 8.99 10.86 11.58 PE (X) 11.9 10.9 10.3 9.6 P/Cash Flow (X) nm 18.7 nm nm P/Free CF (X) nm nm nm nm EV/EBITDA (X) 6.1 6.3 7.5 7.6 Net Div Yield (%) 1.3 1.5 1.5 1.6 P/Book Value (X) 1.5 1.4 1.1 1.1 Net Debt/Equity (X) 0.5 0.5 0.5 0.6 ROAE (%) 13.5 13.2 12.2 11.6

Consensus EPS (RMB) 0.97 1.05

Other Broker Recs: B: 20 S: 0 H: 5

ICB Industry: Industrials ICB Sector: Construction & Materials Principal Business: One of the two largest railway construction companies in China Source of all data: Company, DBSV, Thomson Reuters, HKEX

At A Glance Issued Capital - H shares (m shs) 2,076 - Non H shrs (m shs) 11,503 H shs as a % of Total 15 Total Mkt. Cap (HK$m/US$m) 165,399 / 21,342 Major Shareholders

CRCC Group (%) 55.7 Major H Shareholders (%)

Society of Security Fund (%) 9.1 BlackRock, Inc. (%) 6.4 JPMorgan Chase & Co. (%) 6.4


Profile China Railway Construction Corporation Ltd (CRCC) is a full-service construction company which offers services such as construction, survey design and consulting. CRCC also has manufacturing, real estate and logistics operations. The Company specialises in railway construction.

Valuation

CRCC is one of the two railway construction companies in China. It also undertakes construction of metro and subway systems in China. We applied a sum-of-the-parts model to value CRCC to arrive at our target price, using FY15 earnings assumptions. We maintain HOLD and suggest accumulating on price weakness as there might be profit-taking after the recent rally in its share price.

Rationale

Infrastructure spending should remain healthy The Chinese government will continue to invest in basic infrastructure projects under its urbanisation programme, especially in the transportation sector. Business expansion CRCC is expanding its overseas operations to drive future earnings, especially in Africa, Southeast Asia and the Middle East. The company is expanding into build-operate-transfer projects to level out earnings volatility under a pure construction business model. Risks

Stretching balance sheet. To support its business expansion, CRCC may need to increase borrowings to fund investments with longer gestation periods. The Chinese government may cut back on infrastructure spending under the current economic reform. Margins being eroded by rising construction costs. The costs of building materials could pressure construction margins and lead to cost overruns. Aggressive price competition from other construction companies could also drive down profit margins.

Market Focus


Guangzhou Automobile Group (Bloomberg: 2238 HK | Reuters: 2238.HK) BUY Last Traded Price: HK$6.72 (HSI : 22,459) Price Target : HK$ 8.30 (24% upside) Analyst Rachel MIU +852 2863 8843 [email protected]

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Relative IndexHK$

Guangzhou Automobile Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014A 2015F 2016FTurnover 18,824 22,811 28,717 34,904 EBITDA 3,749 5,168 6,414 7,387 Pre-tax Profit 2,629 3,525 4,709 5,572 Net Profit 2,654 3,475 4,616 5,352 Net Pft (Pre Ex) 2,654 3,475 4,616 5,352 EPS (RMB) 0.41 0.54 0.72 0.83 EPS (HK$) 0.50 0.66 0.88 1.01 EPS Gth (%) 131.4 31.0 32.8 16.0 Diluted EPS (HK$) 0.50 0.66 0.88 1.01 DPS (HK$) 0.20 0.18 0.26 0.30 BV Per Share (HK$) 6.32 6.78 7.47 8.22 PE (X) 13.4 10.2 7.7 6.6 P/Cash Flow (X) 64.7 nm nm nm P/Free CF (X) nm nm nm nm EV/EBITDA (X) 8.4 6.3 5.2 4.5 Net Div Yield (%) 2.9 2.7 3.9 4.5 P/Book Value (X) 1.1 1.0 0.9 0.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.2 10.1 12.3 12.9

Consensus EPS (RMB) 0.55 0.65 Other Broker Recs: B: 13 S: 3 H: 12

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: Produces and sells passenger and commercial vehicles, under JCE with Honda and Toyota as well as self-owned brands Source of all data: Company, DBSV, Thomson Reuters, HKEX


Guangzhou Automobile (%) 57.6 Major H Shareholders (%)

Templeton Asset Management (%) 22.0 Sun Life Financial, Inc. (%) 10.8


Profile Guangzhou Automobile Group Company, Ltd. manufactures, sells, and services automobiles. The Company is also involved in automobile parts and components, and auto financing and related services for both domestic and overseas markets. It manufactures Toyota, Honda, Mitsubishi and Fiat cars under partnerships with its foreign partners. Valuation

Our target price is based on 9x FY15 earnings (PE) to factor in the initial development and funding costs on business expansion. Guangzhou Automobile has a strong self-brand, Trumpchi, which benefits from the rising demand for SUVs in China. The Japanese JVs with Honda and Toyota have several new vehicle models to drive earnings and valuation. BUY maintained. Rationale

Building strong auto brands The Honda and Toyota JVs are benefiting from sales recovery. It has entered into a production agreement with Fiat to produce the high-end Jeep in China by 2015, which should be positive on its mid-term earnings outlook when the JV ramp up production. Healthy demand for mid-end cars Consumers trading up to larger cars is driving growth of foreign auto brands.Rising disposable incomes are also boosting car sales in China. Building up a strong self brand The Company is expanding production capacity of its Trumpchi brand and rolling out new models to increase market awareness and raise volume sales. Risks

Major deceleration of economic growth.

Concerns of economic growth deceleration could affect buying sentiment on cars. A slowdown in disposable income growth and a weaker property market could also dampen sales. Industry overcapacity.

Overcapacity could drive down prices of cars, due to rising competition from other car makers. Underutilisation of production capacity may be a drag on return of investment. Anti-trust probe.

Auto makers are facing pressure to lower ASPs of spare parts, which could affect future margin performance.

Market Focus


Nexteer Automotive Group (Bloomberg: 1316 HK | Reuters: 1316.HK) BUY

Last Traded Price: HK$8.24 (HSI : 22,459) Price Target : HK$ 9.60 (17% upside) Analyst Rachel MIU +852 2863 8843 [email protected]

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Relative IndexHK$

Nexteer Automotive Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (US$ m) 2014A 2015F 2016F 2017FTurnover 2,978 3,503 4,171 4,865 EBITDA 355 452 534 594 Pre-tax Profit 215 277 342 406 Net Profit 161 210 258 307 Net Pft (Pre Ex) 161 210 258 307 EPS (US$) 0.06 0.08 0.10 0.12 EPS (HK$) 0.50 0.65 0.80 0.95 EPS Gth (%) 10.5 30.0 23.2 18.8 Diluted EPS (HK$) 0.50 0.65 0.80 0.95 DPS (HK$) 0.10 0.13 0.16 0.19 BV Per Share (HK$) 2.12 2.67 3.34 4.14 PE (X) 16.5 12.7 10.3 8.6 P/Cash Flow (X) 10.5 8.8 6.2 6.2 P/Free CF (X) 30.1 17.6 8.0 8.0 EV/EBITDA (X) 8.5 6.7 5.3 4.4 Net Div Yield (%) 1.2 1.6 1.9 2.3 P/Book Value (X) 3.9 3.1 2.5 2.0 Net Debt/Equity (X) 0.5 0.4 0.1 CASH ROAE (%) 25.8 27.2 26.7 25.5

Consensus EPS (US$) 0.08 0.10 0.12 Other Broker Recs: B: 7 S: 0 H: 0

ICB Industry: Consumer Goods ICB Sector: Automobiles & Parts Principal Business: A leading steering systems producer with international automakers as its customers Source of all data: Company, DBSV, Thomson Reuters, HKEX

At A Glance Issued Capital (m shrs) 2,498 Mkt. Cap (HK$m/US$m) 20,582 / 2,656

Major Shareholders Aviation Industry Corporation of China (%) 67.3 Mondrian Investment Partners Limited (%) 7.0

Free Float (%) 25.8 3m Avg. Daily Val. (US$m) 3.5

Profile Nexteer is the world’s leading producer of steering systems, and counts major automakers as its customers. The company's key products are electronic power steering (EPS) and hydraulic power steering (HPS) systems and driveline.

Valuation

Strong orders on hand provide delivery visibility and support earnings growth. Based on its earnings outlook and growth momentum, we arrived at our TP based on 12x forward PE.

Rationale

Strong earnings outlook North America and Europe auto market are holding well while its footprint extension in China is on target to achieve earlier plans Fuel-efficient car development Global tend towards fuel-efficient vehicles trigger shift from HPS to EPS Solid track record Its long history with General Motors gives Nexteer an advantage over other players in the supply of steering products

Risks

Product recalls.

May result in high warranty liability

Currency fluctuation.

Affects overall profitability from its overseas business

Rise in raw material costs.

Profit margin compression

Market Focus


PetroChina (Bloomberg: 857 HK | Reuters: 0857.HK) NOT RATED Last Traded Price: HK$6.30 (HSI: 22,458) Price Target: n.a. Analyst China/Hong Kong Research Team (852) 2971 1930 [email protected]

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Relative IndexHK$

PetroChina (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation F Y Dec (R M B m) 2 01 1 A 2 01 2 A 2 0 13 A 2 0 14 A

Turnov er 2,003,843 2,195,296 2,258,124 2,282,962EBITDA 323,581 326,494 351,706 350,742Pre-tax Profit 184,215 166,811 178,063 156,759Net Profit 132,961 115,326 129,599 107,172Net Pft (Pre Ex.) 132,961 115,326 129,599 107,172EPS (RMB) 0.73 0.63 0.71 0.59EPS (HK$) 0.89 0.77 0.87 0.72EPS Gth (%) (3.9) (13.7) 12.7 (16.9)Diluted EPS (HK$) 0.73 0.63 0.71 0.59DPS (HK$) 0.40 0.35 0.39 0.32BV Per Share (HK$) 6.68 7.09 7.55 7.83PE (X) 7.1 8.2 7.3 8.8P/Cash F low (X) 3.3 4.1 3.4 2.7P/F ree CF (x) n.m. n.m. n.m. n.m.EV /EBITDA (X) 4.0 4.5 4.3 4.4Net Div Yield (%) 6.3 5.5 6.2 5.1 P/Book V alue (X) 0.9 0.9 0.8 0.8Net Debt/Equity (X) 0.3 0.4 0.4 0.4ROAE (%) 13.7 11.2 11.8 9.3

ICB Industry: Oil & Gas ICB Sector: Oil & Gas Producers Principal Business: N/A Source of all data: Company, DBSV, Thomson Reuters, HKEX

At A Glance

Issued Capita l - H shares (m shs) 21,099 - Non H shrs (m shs) 161,922H shs as a % of Tota l 12Tota l Mkt Cap (HK$m/US$m) 1,153,031 / 148,780Major Shareholders (%) CNPC 86.35Major H Shareholders (%) JPMorgan Chase & Co. 7.28 Aberdeen Asset Management 6.90 BlackRock, Inc. 6.15H Shares-Free Float (%) 79.67Avg Da ily Volume (m shrs) 786.7

Profile PetroChina is the largest oil and gas company in China. It is also one of the largest oil companies in the world. PetroChina engages in wide range of activities related to oil and natural gas, including: (1) exploration, development, production and marketing of crude oil and natural gas;(2) refining, transportation, storage and marketing of crude oil and oil products; (3) production and marketing of primary petrochemical products, derivative chemicals and other chemicals; (4) transportation of natural gas, crude oil and refined oil. China National Petroleum Corporation (CNPC), an SOE owned by SASAC, is the controlling shareholder of PetroChina.

Market Focus


Sinopharm Group (Bloomberg: 1099 HK | Reuters: 1099.HK) BUY Last Traded Price: HK$29.25 (HSI : 22,459) Price Target: HK$ 34.0 (16% upside) Analyst Mark Kong +852 2820 4619 [email protected]

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Relative IndexHK$

Sinopharm Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2014A 2015F 2016F 2017FTurnover 200,131 229,150 262,377 300,422 EBITDA 8,899 10,659 12,188 13,929 Pre-tax Profit 5,935 7,612 8,819 10,169 Net Profit 2,875 3,684 4,267 4,920 Net Pft (Pre Ex) 2,875 3,685 4,269 4,923 EPS (RMB) 1.14 1.33 1.54 1.78 EPS (HK$) 1.39 1.62 1.88 2.17 EPS Gth (%) 27.8 16.9 15.8 15.3 Diluted EPS (HK$) 1.39 1.62 1.88 2.17 DPS (HK$) 0.37 0.44 0.51 0.59 BV Per Share (HK$) 13.24 13.36 14.80 16.46 PE (X) 21.0 18.0 15.5 13.5 P/Cash Flow (X) 10.9 10.7 20.0 11.2 P/Free CF (X) 63.7 14.3 34.5 14.7 EV/EBITDA (X) 8.9 8.0 7.4 6.6 Net Div Yield (%) 1.3 1.5 1.7 2.0 P/Book Value (X) 2.2 2.2 2.0 1.8 Net Debt/Equity (X) 0.3 0.2 0.2 0.2 ROAE (%) 11.7 12.8 13.4 13.9

Consensus EPS (RMB) 1.31 1.56 1.83 Other Broker Recs: B: 13 S: 0 H: 2

ICB Industry: Health Care ICB Sector: Pharmaceuticals & Biotechnolog Principal Business: The largest distributor of, and a leading provider of supply chain services for, pharmaceutical and healthcare products in China. Source of all data: Company, DBSV, Thomson Reuters, HKEX


CNPGC (%) 56.9 Major H Shareholders (%)

OppenheimerFunds, Inc (%) 10.0 JPMorgan Chase & Co. (%) 10.0 Matthews International Capital Mgmt, LLC (%) 6.0 Mirae Asset Global Inv. (HK) Ltd. (%) 5.9 BlackRock, Inc. (%) 5.7


Profile The largest pharmaceutical distributor in China

Valuation

Our TP of HK$34 is based on 17x 16F PE, representing 10% premium to healthcare sector average. It deserves a premium because 1) faster-than-industry sales growth; 2) its parent company (China National Pharmaceutical Group Corp) has been chosen by the central government to carry out reforms for major subsidiaries to strengthen its operations. Announcements of any progress can be a share price catalyst.

Rationale

Solid earnings growth Further penetration into 2nd & 3rd tiers cities to drive above-industry sales growth Market share gain from smaller distributors amid industry consolidation Better economies of scale to enhance profit margin Share price catalysts ahead State owned enterprise reform to be a major share price catalyst in 2015 Potential to co-operate with e-commerce player.

Risks

Price cut and high gearing.

This company is vulnerable to a fall in the price of its products. High gearing

Market Focus


Value Partners Group (Bloomberg: 806 HK | Reuters: 0806.HK) BUY Last Traded Price: HK$8.80 (HSI : 22,459) Price Target : HK$ 14.20 (61% upside) Analyst Alexander LEE CFA, +852 2971 1930 [email protected]

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Relative IndexHK$

Value Partners Group (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (HK$ m) 2014A 2015F 2016F 2017FTurnover 1,599 2,919 3,178 3,640 EBITDA 726 1,492 1,496 1,707 Pre-tax Profit 931 1,635 1,665 1,903 Net Profit 804 1,383 1,400 1,601 Net Pft (Pre Ex) 804 1,383 1,400 1,601 EPS (HK$) 0.45 0.75 0.76 0.87 EPS Gth (%) 107.5 65.1 1.1 14.3 Diluted EPS (HK$) 0.45 0.75 0.76 0.86 DPS (HK$) 0.22 0.45 0.45 0.51 BV Per Share (HK$) 2.07 2.59 2.91 3.32 PE (X) 19.4 11.7 11.6 10.1 P/Cash Flow (X) 44.5 17.7 13.9 13.0 P/Free CF (X) 47.1 17.8 13.9 13.1 EV/EBITDA (X) 18.8 9.3 9.2 7.9 Net Div Yield (%) 2.5 5.1 5.1 5.8 P/Book Value (X) 4.2 3.4 3.0 2.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.5 32.2 27.6 27.8

Consensus EPS (HK$) 0.62 0.74 0.89 Other Broker Recs: B: 6 S: 0 H: 0

ICB Industry: Financials ICB Sector: General Financial Principal Business: Value Partners is a Hong Kong based asset management company with an AUM of around US$14.4bn. The company's funds have a greater China focus, and derives most of its AUM from Asia. Source of all data: Company, DBSV, Thomson Reuters, HKEX


Major Shareholders Cheah Cheng Hye (%) 28.1 V-Nee YEH (%) 17.0 Affiliated Managers Group, Inc. (%) 7.5


Profile Value Partners (VP) is an asset management company with an AUM of around US$14.4bn. Fund management fees anchor VP’s income, while performance fees and seed investment gains can jump significantly in bumper years.

Valuation

We have a BUY rating for Value Partners (VP) with a dividend discount model-based target price of HK$14.2. Our TP implies a mid-FY16F P/AUM of 16.8%. The company is also increasingly cash rich; we estimate net cash and liquid investments total HK$1.97 per share by 2015 year end.

Rationale

In middle of performance fee cycle VP’s performance fees come in multi-year cycles because performance fees are structured on a high-on-high basis. When market valuations are low and VP’s funds are above watermark levels, these two factors help increase the probability for performance fees. Conversely, the performance fee cycle will end after market valuations hit very high levels when performance fees are crystalized (usually at Dec year end). This is because watermark levels will be pushed very high and will be hard to beat for subsequent years. VP spent 2011-2013 catching up to watermark levels, and is seeing another performance fee cycle that began last year. Profitability boost We forecast VP’s ROE to improve from 25% in 2014 to 28-32% in 2015-2016, thanks to performance fees. In turn, this profitability boost can help re-rate the stock on a P/AUM basis.

Risks

Market, structural challenges VP’s performance fees may be less than forecast if fund NAVs do not gain ~5% from July 27th, 2015 levels. Management concentration is also a risk.

Market Focus


Wasion Group Holdings (Bloomberg: 3393 HK | Reuters: 3393.HK) BUY

Last Traded Price: HK$8.97 (HSI : 22,459) Price Target : HK$ 12.50 (39% upside) Analyst Patricia YEUNG +852 2863 8908 [email protected]

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Relative IndexHK$

Wasion Group Holdings (LHS) Relative HSI INDEX (RHS)

Forecasts and Valuation FY Dec (RMB m) 2013A 2014A 2015F 2016FTurnover 2,412 2,812 3,654 4,360 EBITDA 567 649 818 981 Pre-tax Profit 440 542 696 852 Net Profit 401 482 624 764 Net Pft (Pre Ex) 401 482 624 764 EPS (RMB) 0.43 0.51 0.63 0.75 EPS (HK$) 0.53 0.62 0.77 0.92 EPS Gth (%) 24.0 18.5 23.7 19.3 Diluted EPS (HK$) 0.53 0.62 0.76 0.91 DPS (HK$) 0.16 0.19 0.27 0.33 BV Per Share (HK$) 3.76 4.16 5.25 5.73 PE (X) 17.1 14.4 11.6 9.8 P/Cash Flow (X) 25.5 21.7 10.9 19.5 P/Free CF (X) 28.8 57.9 15.5 233.0 EV/EBITDA (X) 12.2 11.5 8.3 7.5 Net Div Yield (%) 1.8 2.1 3.1 3.6 P/Book Value (X) 2.4 2.2 1.7 1.6 Net Debt/Equity (X) 0.0 0.1 CASH CASH ROAE (%) 14.7 15.8 16.4 16.8

Consensus EPS (RMB) 0.62 0.76 Other Broker Recs: B: 11 S: 0 H: 0

ICB Industry: Industrials ICB Sector: Electronic & Electrical Equipment Principal Business: China's leading energy metering and energy efficiency management expert Source of all data: Company, DBSV, Thomson Reuters, HKEX


Major Shareholders Ji Wei (%) 50.7


Profile Wasion is a leading energy metering and energy efficiency management expert, focusing on providing integrated solutions in efficient and effective energy management and energy saving, particularly for Advanced Metering Infrastructure and Advanced Distribution Operations. Apart from the State Grid and the Southern Grid, it also provides system solutions to various industries and local governments. Its major markets are China and emerging markets, such as Egypt, Indonesia, Thailand, Chile, Vietnam, Brazil, Valuation

We have fine-tuned our earnings estimates. Current valuation of <10x FY16 PE is attractive, given earnings growth of 20-30% for FY15 and FY16. We set our TP based on a lower 12-month rolling PE multiple of 13x (previous 15x) to reflect a weaker risk appetite from investors. TP is trimmed from HK$14.00 to HK$12.50. Maintain BUY. Rationale

Results in line Wasion reported a 25% growth in 1HFY15 net profit to Rmb254m, in line with our estimate. Turnover reached Rmb1.6bn, up 17%, also in line. However, sales growth rates of both AMI and ADO were 15% and 71% respectively, lower than expected. The shortfall was compensated by higher-than-expected sales in smart meters. Despite a 2.4ppts drop in gross margin, operating margin was up 1ppt, thanks to a drop in operating expenses. Balance sheet remained strong with <1% in net debt-equity ratio. No interim dividend was declared, same as last year. Non power grid customers boost AMI sales Total current order backlog amounts to Rmb2bn. The “Power, Water, Gas and Heat All-in-one Data Collection System” was well received by the market. The pilot orders in Beijing, Shanghai and Shandong were successful. After entering into the smart water meter solutions tender list of 34 water companies (including 4 provincial level and 14 municipal level water companies), Wasion targets to enter into at least another 30 water companies in 2H. This will be the major growth driver for AMI sales, which we estimate to grow 23% in 2H. ADO sales to double To capture the strong demand in ADO market, Wasion offers customized solutions to clients through launch of various new products and solutions, such as power distribution automation, metering automation, smart circuit breaker, etc. In addition, the establishment of Wasion Electric Industry Park, the most professional technology park in the ADO

Market Focus


industry in China, will provide a centralized and comprehensive platform for development. As Wasion is expanding ADO business into various sectors, including oil & gas, automobile, transportation, management is confident of doubling ADO sales in FY15. Strong potential in international market Management are optimistic about the growth potential of the overseas market, given its co-operation with Siemens and its leading market position in various countries, including Tanzania, Egypt, Bangladesh and Indonesia. In addition, the depreciation of Renminbi will further accelerate its expansion in more markets such as Africa and Latin America. Minimize forex risk To minimize the risk from Renminibi depreciation, Wasion will reduce the percentage of foreign debt. Some imported raw materials will also be replaced by domestic materials.

Risks

Uneven order flow from grid customers This will negatively affect utilisation of its production facilities, leading to lower gross margin Slower penetration rate of smart meters This will slow sales growth Investigation of State Grid This will be negative to sentiment and has a risk of slowing down order growth

Market Focus


Appendix: Best EPS revisions among index stocks in 3Q15

Consensus earnings revisions for Ping An (2318.HK) Consensus earnings revisions for CLP (2.HK)

2.00

2.50

3.00

3.50

4.00

4.50

Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15

FY15 FY16(HK$)

3.50

3.70

3.90

4.10

4.30

4.50

4.70

4.90


FY15 FY16(HK$)

Consensus revisions for CR Power (836.HK) Consensus earnings revisions for AIA (1299.HK)

2.00

2.20

2.40

2.60

2.80

3.00

3.20


FY15 FY16(HK$)

2.00 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80 2.90


FY15 FY16(HK$)

Consensus revisions for China Life (2628.HK) Consensus earnings revisions for PICC P&C (2328.HK)

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30


FY15 FY16(HK$)

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70


FY15 FY16(HK$)


Market Focus


Appendix: Worst EPS revisions among index stocks in 3Q15

Consensus earnings revisions for Shenhua (1088.HK) Consensus earnings revisions for China Coal (1898.HK)

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00


FY15 FY16(HK$)

(0.30)(0.20)(0.10)

-0.10 0.20 0.30 0.40 0.50 0.60


FY15 FY16(HK$)

Consensus earnings revisions for Tingyi (322.HK) Consensus earnings revisions for HKEX (388.HK)

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


FY15 FY16(HK$)

5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50


FY15 FY16(HK$)

Consensus earnings revisions for Lenovo (992.HK) Consensus revisions for Haitong Securities (6837.HK)

-0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00


FY15 FY16(HK$)

0.60

0.80

1.00

1.20

1.40

1.60

1.80


FY15 FY16(HK$)


Market Focus


Consensus revisions for Galaxy Entertainment (27.HK) Consensus revisions for Greatwall (2333.HK)

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0


FY15 FY16(HK$)

-

0.50

1.00

1.50

2.00

2.50


FY15 FY16(HK$)

Consensus earnings revisions for Jiangxi Copper (358.HK) Consensus earnings revisions for Anhui Conch (914.HK)

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30


FY15 FY16(HK$)

1.80 2.00 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80


FY15 FY16(HK$)

Consensus revisions for China Oilfield Services (2883.HK) Consensus earnings revisions for CNBM (3323.HK)

0.50

1.00

1.50

2.00

2.50

3.00


FY15 FY16(HK$)

0.50

0.70

0.90

1.10

1.30

1.50

1.70

1.90


FY15 FY16(HK$)


Market Focus


Consensus revisions for ABC (1288.HK) Consensus earnings revisions for ICBC (1398.HK)

0.60

0.65

0.70

0.75

0.80

0.85

0.90


FY15 FY16(HK$)

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25


FY15 FY16(HK$)

Consensus revisions for CCB (939.HK) Consensus earnings revisions for Wharf (4.HK)

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70


FY15 FY16(HK$)

3.5

4.0

4.5

5.0

5.5

6.0


FY15 FY16(HK$)

Consensus revisions for Cathay Pacific (293.HK) Consensus revisions for Swire (19.HK)

1.0

1.2

1.4

1.6

1.8

2.0

2.2


FY15 FY16(HK$)

6.0

6.5

7.0

7.5

8.0

8.5

9.0


FY15 FY16(HK$)


Market Focus


Appendix: HSI and news flow

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15

11

1 2

3

45-7

9

810

2019

21

24

23

22

25,26

27,28

29,30

31 34

3635

32,33

14

12-13

37

15-18

38

3940

41-43

44

45

46

47,48

49, 50

56

51,52,5354,55

5758

59

60,61

62,63,64,6569

68

67

6670, 71

# Date1 7/1/20142 7/10/20143 7/16/20144 7/24/20145 8/6/20146 8/8/20147 8/13/20148 8/21/20149 9/2/2014

10 9/4/201411 9/12/201412 9/22/201413 9/26/201414 9/30/201415 10/10/201416 10/14/201417 10/20/201418 10/21/201419 10/30/201420 10/31/201421 11/10/201422 11/21/201423 12/4/201424 12/11/201425 12/16/201426 12/17/201427 1/5/201528 1/6/201529 1/15/201530 1/16/2015

HK university students begin week-long boycott of classes for SuffragePolice fires tear gas at demonstrators on the 28th, a Sunday night

Large Chinese brokers penalized for breaching margin financing rules

CBRC sought feedback on draft rules for WMPs; allows indirect equity investments

Bank of Japan expands liquidity pumping

Russian Ruble crashes on Black Tuesday

Premier Li Keqiang said Shenzhen-HK stock connect should be nextHKEX said it would allow short selling for northbound SH-HK trades in near futureSwiss Franc abandons Euro cap

News or datapoint

Irregularities found in accounts of Portugal's biggest listed bank

Agile confirms chairman is under house custody

China 3Q GDP slowed to 7.3% but beat forecasts of 7.2%; Gov-student talks in HK

HKEX announced SH-HK stock connect will begin on 17 November

Russia imposed sanctions on Western food importsHSBC Flash PMI surprised by rising to 52China's 2Q GDP growth was slightly above estimates at 7.5%

1st batch of Chinese brokers receive approval for Southbound stock connect

Occupy Central downsizing; Big 4 banks Aug loan rebound; Ukraine ceasefireHSBC flash PMI disappointed at 50.3 vs. 51.7 in prior month and forecast of 51.5

China loosens mortgage policies by expanding pool of eligible buyers

Disappointing TSF and industrial production data

July TSF and new loan were way below estimates

Police oversee clearing of main Occupy protest site in Admiralty

PBOC said planning to inject Rmb200bn into joint stock banks

July China export was much better than forecast; US bombs Iraq targets

ECB announced fresh measures including rate cuts and buying ABS

HKMA began to defend HK$ peg with injections to meet demand

PBOC announced benchmark interest rate cuts

US 3Q GDP beat forecasts and grew 3.5%

China Securities Journal reported China may ease LDR ratio requirement


Market Focus


Appendix: HSI and news flow (con’t) # Date

31 1/22/201532 1/30/201533 2/4/201534 2/27/201535 3/13/201536 3/18/201537 3/27/201538 4/17/201539 4/20/201540 5/8/201541 5/25/201542 5/26/201543 5/28/201544 6/9/201545 6/24/201546 6/26/201547 7/1/201548 7/3/201549 7/6/201550 7/7/201551 7/9/201552 7/10/201553 7/13/201554 7/14/201555 7/15/201556 7/27/201557 8/4/201558 8/11/201559 8/12/201560 8/24/201561 8/25/201562 8/31/201563 9/2/201564 9/3/201565 9/4/201566 9/7/201567 9/17/201568 9/23/201569 9/29/201570 9/30/201571 10/1/2015

PBOC Cuts Mortgage Down payment Requirement to 25% from 30%Purchase tax on small cars (<1.6L capacity) will be halved to 5% until end of 2016

Regulators announced they will lift 75% loan to deposit ratio cap25bps symmetrical interest rate cut; conditional RRR cut for qualified lenders

Cut RRR by 100bps on Sunday, releasing an estimated Rmb1.4trn in reservesPBOC cut 1 year benchmark lending rate by 25bpsMutual fund recognition announcement over the weekendFTSE adds A-share to its EM indexHuijin trimmed stakes in ICBC, CCBMSCI review did not include A-shares in emerging market index

China cut benchmark rates by 25bpsChina's NPC ends with focus on quality growth in China's new normalFed minutes indicate a still patient approach to rate hikes

50bps RRR cut and an additional 50bps cut for qualified lendersMinsheng Bank's president resigns after corruption investigation reportsDraghi announced EUR 1trn QE for the Eurozone from Mar'15 to Sept'16

CSRC allows China mutual funds to invest in HK stocks through SH-HK stock connectChina policy makers caution on stock market frenzy; 7 measures to cool sentiment

CSRC announced a 30% transaction fee cut; flexibility given to margin callsCSRC said it will reduce IPOs; China Securities Finance capital boost from 24 to 100bn

News or datapoint

NSF reportedly asked outsourced fund managers to not sell equitiesBrokers temporarily suspended lending stocks to clients for short sellingChina Ramps Up Policy Response as Panic Grips Stock Market, CSF increase buying ofSASAC forbids SOE's to sell public shares, will monitor SOE equity holdings daily366 companies (40% of listed companies) apply to resume trading of their A-sharesChina clamps down on off-market leveraged stock trading

Janet Yellen Expects Interest Rate Increase This Year

National People's Congress voted to remove China's loan-to-deposit cap

China to introduce circuit-breaker for stock marketChina to cut dividend taxes for long-term shareholdersFederal Reserve keeps policy interest rate unchanged

CSF subscribes Rmb80bn to mutual fundsCSRC Probes Violations in Margin Trading Via Non-BrokersCaixin PMI dropped to 47.8 in July

PBOC cuts interest rate by 25bps and RRR by 50bps

Brokers allocate additional investments into CSFC account to support stocks

Largest Rmb devaluation since US$ peg removal, Rmb reference rate down 1.9%

China will allow pension funds to invest up to 30% of assets in equities

China Caixin-Markit PMI 47.0, a 6.5 year low

CFFEX steps up measures to tackle speculation in stock index future trading

PBOC intervened to prop up Rmb


Market Focus


Appendix: DBSV universe comparison table

DBSV universe comparison table

Stockcode Stock name

MktCap

(US$m)

SharePrice

(HK$)

T argetPrice

(HK$)upside

(%) RemdPE (x )

15FPE (x )

16FPB (x )

15FYld (%)

15FROE (%)

15FA uto manufacturers & dealers

1114 Brilliance China 6,978 10.76 12.60 17 B 10.6 8.3 2.1 1.2 22.01728 China ZhengTong 1,027 3.60 5.50 53 B 5.9 4.9 0.7 3.4 12.31828 Dah Chong Hong 773 3.27 3.70 13 B 8.6 7.4 0.6 3.5 7.3489 Dongfeng Motor Group 11,718 10.54 11.35 8 B 5.8 5.2 0.9 2.3 16.4175 Geely Automobile 4,497 3.96 3.30 -17 H 11.4 10.2 1.5 1.3 13.7

2333 Great Wall Motor 3,894 9.92 11.50 16 B 7.4 6.6 1.8 4.8 27.0601633 Great Wall Motor-A @@@ 13,873 35.34 49.65 40 H 10.0 8.3 2.6 1.3 28.5

2238 Guangzhou Automobile 5,580 6.72 8.30 24 B 7.6 6.5 0.9 4.0 12.3425 Minth Group 2,165 15.16 15.00 -1 B 10.9 9.4 1.5 3.7 14.5

1316 Nexteer Automotive Group 2,656 8.24 9.60 17 B 12.7 10.3 3.1 1.6 27.21148 Xinchen China Power Hldgs 324 1.95 3.30 69 B 6.7 5.1 0.7 0.0 11.8881 ZhongSheng 939 3.39 6.70 98 B 4.6 3.4 0.5 4.4 11.0

Bank ing and F inance (China-A ) @@@601288 Agricultural Bank of China-A 143,211 3.09 4.04 31 H 5.6 5.5 0.9 6.0 16.7601988 Bank of China-A 176,316 3.80 5.11 34 H 6.4 6.2 0.9 6.1 15.0601328 Bank of Comm-A 72,803 6.22 8.16 31 B 7.0 6.8 0.9 3.7 13.4601998 China CITIC Bank-A 44,319 6.01 7.26 21 S 6.9 6.5 0.9 3.9 14.6601939 China Construction Bank-A 209,633 5.32 7.39 39 H 5.8 5.7 1.0 4.4 17.3600036 China Merchants Bank-A 71,390 17.96 23.42 30 B 7.3 6.5 1.2 4.2 18.3600016 China Minsheng Bank-A 48,879 8.50 10.64 25 FV 6.2 5.7 1.0 2.4 17.9601398 ICBC-A 249,411 4.44 6.37 43 B 5.6 5.4 0.9 5.9 17.4

Bank ing and F inance (China)1288 Agricultural Bank of China 132,849 3.17 4.63 46 H 4.6 4.4 0.7 7.3 16.73988 Bank of China 138,645 3.65 5.86 61 B 4.9 4.7 0.7 6.6 15.03328 Bank of Communications 55,385 5.78 9.34 62 B 5.1 4.9 0.7 6.1 13.4998 China CITIC Bank 30,125 4.99 8.31 67 B 4.5 4.2 0.6 6.6 14.6939 China Construction Bank 182,586 5.66 8.47 50 B 4.9 4.7 0.8 6.7 17.3605 China F inancial Serv ices 279 0.56 0.92 64 B 5.7 5.0 0.7 4.4 12.5

3968 China Merchants Bank 65,733 20.20 26.82 33 B 6.5 5.7 1.1 4.7 18.31988 China Minsheng Bank 36,720 7.80 12.19 56 H 4.5 4.1 0.7 3.3 17.93618 Chongqing Rural Bank 5,640 4.70 7.50 60 B 4.6 4.3 0.7 6.0 17.11398 ICBC 229,016 4.98 7.30 47 B 5.0 4.7 0.8 6.7 17.4

Bank ing and F inance (HK)2388 Bank of China HK 34,856 25.55 26.40 3 B 10.1 9.3 1.4 3.9 14.6

23 Bank of East Asia 9,592 28.15 33.50 19 H 9.7 9.5 0.9 4.3 9.6165 China Everbright Ltd 3,931 18.08 23.84 32 B 7.0 4.4 0.9 5.7 12.6

2356 Dah Sing Banking Group 2,699 14.92 14.90 0 B 9.9 9.5 1.0 2.5 10.43360 Far East Horizon 3,278 6.43 7.92 23 B 6.8 6.3 0.9 3.4 14.1

11 Hang Seng Bank (1) 35,103 142.30 143.80 1 B 13.6 16.7 2.2 4.1 16.65 HSBC Holdings 158,141 62.65 93.70 50 B 8.6 8.5 0.8 6.7 9.4

Cement 914 Anhui Conch Cement 17,026 24.90 28.96 16 B 11.5 10.1 1.4 2.7 13.5

600585 Anhui Conch Cement-A @@@ 12,438 18.19 23.20 28 B 10.2 9.0 1.3 3.7 13.53323 China Nat'l Bldg Mat 3,546 5.09 4.45 -13 FV 6.0 6.2 0.5 2.5 8.01313 China Resources Cement 3,127 3.71 4.26 15 H 7.6 7.3 0.8 2.7 10.8

Chemicals2283 T K Group 245 2.30 3.50 52 B 9.5 8.1 2.8 4.2 33.5

Source: DBS Vickers

(1) TP and/or Rec under review

@@@ denominated in RMB

Market Focus


DBSV universe comparison table (con’t)


Mk tCap

(US$m)

SharePrice

(HK$)

TargetPrice

(HK$)upside

(%) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (%)

15FROE (%)

15FConglomerates-HK

4 Wharf Holdings # 17,776 45.45 53.00 17 B 12.2 11.1 0.5 4.2 3.620 Wheelock # 9,150 34.90 40.50 16 B 7.1 6.8 0.8 3.4 5.1

F ood and Bev erages600597 Bright Dairy & Food@@@ 2,393 15.07 19.70 31 B 26.2 21.0 3.9 2.3 15.2

506 China Foods 1,368 3.79 3.95 4 B 32.1 25.7 1.7 0.0 5.42319 China Mengniu 7,592 30.00 36.90 23 B 18.6 15.8 2.1 1.2 11.61117 China Modern Dairy 1,677 2.45 3.10 27 B 11.4 9.6 0.7 0.0 7.9322 Tingyi Holding 10,383 14.36 13.20 -8 H 26.8 22.6 3.2 1.9 12.4168 Tsingtao Brewery 6,337 36.35 31.90 -12 H 24.1 25.1 2.5 1.3 10.5

600600 Tsingtao Brewery-A @@@ 5,652 32.42 26.20 -19 FV 26.1 27.2 2.7 1.2 10.5220 Uni-President China 4,130 7.41 7.75 5 H 25.9 24.1 2.2 1.2 9.0345 Vitasoy 1,558 11.58 12.30 6 H 32.2 28.2 6.2 2.1 20.3151 Want Want China 11,009 6.51 7.00 8 H 18.5 16.9 4.5 1.5 26.6

Hardware & Equipment552 China Comm Serv ices 2,797 3.13 4.50 44 B 8.0 7.2 0.7 3.8 9.4

3777 China F iber Optic Network 304 1.10 2.90 164 B 3.7 3.1 0.5 0.0 16.22342 Comba 408 1.71 1.90 11 H 10.2 8.8 0.8 2.4 8.22618 TCL Communication 947 5.83 5.50 -6 H 6.4 6.4 1.5 5.4 25.61300 Trigiant Group 313 1.55 2.30 48 B 6.1 5.4 0.8 9.1 14.6856 VST Holdings 428 2.19 3.00 37 B 5.5 5.1 0.8 5.4 13.8303 VTech 3,073 94.80 110.00 16 B 13.0 12.2 5.1 7.6 39.7763 ZTE 9,293 17.46 24.00 37 B 16.8 14.8 2.1 1.5 13.1

000063 ZTE -A @@@ 8,612 16.18 24.00 48 H 19.4 17.1 2.4 1.3 13.1Household/Personal (China/HK)

1880 Belle Int'l 7,803 7.17 11.50 60 B 10.2 9.6 1.9 10.3 18.92111 Best Pacific Int'l Hldgs 453 3.44 4.40 28 B 11.0 9.8 1.9 2.7 18.16388 Coach @ ^^^ 821 23.00 48.10 109 H 8.2 7.5 2.9 4.9 36.7210 Daphne International 398 1.87 1.35 -28 H 714.9 21.9 0.6 0.0 0.1

1169 Haier Electronics 5,660 15.70 18.41 17 B 11.3 10.1 2.2 0.9 21.51044 Hengan 12,433 78.70 87.50 11 H 22.8 20.4 5.0 2.8 22.8494 Li & Fung 6,667 6.14 11.30 84 B 10.8 9.4 2.5 6.5 24.5

2331 Li Ning 903 3.71 4.80 29 B 204.2 17.5 1.8 0.0 1.0311 Luen Thai 160 1.20 1.80 50 B 7.9 4.8 0.4 3.8 5.2

1382 Pacific Textile 2,042 10.94 12.50 14 B 14.7 14.0 4.5 7.3 28.91913 Prada 10,896 33.00 33.18 1 H 21.4 23.6 3.2 2.9 15.8531 Samson Holding 393 1.00 1.24 24 B 15.9 14.8 0.8 12.0 5.1

1910 Samsonite Int'l ^^ 4,766 26.20 33.18 27 B 23.1 19.9 3.4 2.0 15.51023 Sitoy Group 517 4.00 4.05 1 H 9.7 9.3 1.9 5.7 20.11836 Stella International 1,935 18.88 20.80 10 H 14.5 12.8 1.9 5.0 13.72678 Texhong Textile Group 707 6.19 8.50 37 B 8.6 5.3 1.2 3.5 14.2321 Texwinca 1,195 6.70 9.00 34 B 12.0 10.1 1.5 8.4 12.8

Source: DBS Vickers

# P/NAV ; '@ denominated in USD ; @@@ denominated in RMB; ^^^ Valuation based on US-listed share; ^^ Core profit and EPS

Market Focus



St oc kc ode St oc k name

M k tCap

(US$m)

SharePric e

(HK $)

T argetPric e

(HK $)upside

(% ) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (% )

15FRO E (% )

15FIndust rials

517 Cosco International 868 4.39 5.20 18 B 19.3 17.7 0.8 2.6 4.41366 J iangnan Group 847 1.61 2.20 37 B 6.8 5.5 1.1 3.7 17.5

179 J ohnson Electric 2,892 25.45 27.20 7 H 14.2 12.9 1.6 2.3 11.52314 Lee and Man Paper 2,501 4.22 5.50 30 H 8.4 7.4 1.0 4.2 12.62689 Nine Dragons 2,914 4.84 4.25 -12 H 12.7 14.1 0.7 1.6 5.93393 Wasion Group 1,189 8.97 12.50 39 B 11.7 9.8 1.7 3.0 16.4

In f rast ruc t u re152 Shenzhen International 2,904 11.86 14.04 18 B 11.1 10.4 1.2 2.7 11.1

Inv est ment Serv ic es (Ch ina / HK )806 V alue Partners Group 2,097 8.80 14.20 61 B 11.7 11.6 3.4 5.1 32.3

M ed ia 752 Pico F ar East 298 1.89 2.98 58 B 8.2 7.3 1.3 6.4 16.6511 TV B 1,532 27.10 35.09 29 F V 6.6 10.5 1.3 7.2 20.2

Pharmac eut ic al & Healt h Care2877 China Shineway 1,069 10.02 9.50 -5 H 9.5 9.3 1.3 4.2 14.1

570 China Traditional Chinese Med 3,318 6.00 11.30 88 B 26.1 15.1 2.0 0.0 10.01681 Consun Pharmaceutical 618 4.79 6.80 42 B 14.6 11.6 2.4 0.8 17.6

000999 CR Sanjiu Medical & Pharm@@ 3,762 24.43 36.20 48 B 20.0 17.9 3.2 1.7 16.7853 Microport Scientific 594 3.23 1.95 -40 F V n.a. 73.1 1.8 0.0 -2.1

1498 PuraPharm Corporation 114 3.94 7.20 83 B 19.2 12.5 1.9 0.0 15.21066 Shandong Weigao 3,223 5.58 5.10 -9 H 18.6 16.5 1.9 1.6 10.81099 Sinopharm Group 10,444 29.25 34.00 16 B 18.2 15.7 2.2 1.5 12.8

600535 Tasly Pharmaceutical Group 5,949 35.00 32.00 -9 H 21.5 19.2 5.9 1.6 30.7300026 Tianjin Chase Sun Pharm@@@ 2,385 16.63 21.40 29 H 27.3 22.1 3.3 0.4 15.2

2393 Yestar International 786 2.80 4.27 53 B 26.2 17.4 4.2 1.8 23.6002603 Yiling Pharmaceutical 2,664 15.03 14.20 -6 H 38.0 31.1 3.4 0.5 9.4

Propert ies (Ch ina) (2 )3383 Agile Property # 2,189 4.33 3.66 -15 H 4.0 4.5 0.3 6.2 8.8

832 Central China # 463 1.47 1.89 29 B 3.9 3.6 0.2 7.6 11.11224 CC Land # 678 2.03 2.06 1 H 4.6 22.4 0.7 4.3 7.4

81 China Ov erseas Grand Oceans 742 2.52 4.30 71 B 3.5 2.4 0.3 2.0 12.5688 China Ov erseas # 31,745 24.95 38.96 56 B 8.0 7.5 1.0 2.6 17.2

1109 China Resources Land # 18,602 20.80 24.98 20 B 11.4 9.9 0.8 2.4 11.02202 China V anke 24,605 17.26 23.41 36 B 9.2 7.9 0.8 3.8 18.2

000002 China V anke-A @@@ 18,860 13.23 19.31 46 B 8.6 7.3 0.7 4.1 18.22007 Country Garden # 8,598 2.95 4.86 65 B 5.6 5.2 0.7 5.8 15.43333 Evergrande Real Estate # 8,987 4.80 5.35 11 H 9.3 6.8 0.5 2.7 5.7

fsg sp F irst Sponsor Group @@ 1 1.20 1.57 31 B 13.1 11.6 0.6 1.4 5.9817 China J inmao Holdings # 2,933 2.13 2.97 39 B 7.4 6.0 0.5 4.1 7.9813 Shimao Property # 6,040 13.48 13.50 0 B 5.1 4.9 0.5 6.6 15.2272 Shui On Land # 2,030 1.96 1.97 1 H n.a. n.a. 0.4 0.4 -1.5

3377 Sino-Ocean Land # 4,750 4.89 6.70 37 B 8.7 6.9 0.6 3.8 8.3410 Soho China # 2,388 3.56 3.60 1 F V 55.4 33.3 0.4 0.9 0.7337 Greenland (Hong Kong) # 1,217 3.80 8.28 118 B 17.3 5.6 0.6 0.0 7.7

Yllg sp Yanlord Land # @@ 1,414 1.03 1.54 50 B 10.3 7.1 0.5 1.4 4.6123 Yuexiu Property # 2,224 1.39 1.49 7 H 8.4 7.2 0.4 5.0 5.7

Source: DBS Vickers

@@ denominated in SGD; # P/NAV; @@@ denominated in RMB

(2) core net profit

Market Focus



St oc kcode St oc k name

M k tCap

(US$m)

SharePric e

(HK $)

T argetPric e

(HK $)upside

(% ) RemdPE (x )

15FPE (x )

16FPB (x )

15FY ld (% )

15FRO E (% )

15FPropert ies (HK )

1113 CK Property 28,537 57.30 69.45 21 B 13.8 12.2 0.6 2.4 6.541 Great Eagle # 2,106 24.55 28.60 16 H 10.3 10.4 0.4 3.0 3.0

101 Hang Lung Properties # ^ 10,514 18.12 25.05 38 B 14.2 13.8 0.5 4.2 4.312 Henderson Land # ^ 20,492 48.05 50.75 6 H 16.7 15.7 0.6 2.4 3.9

HKL SP Hongkong Land ^ # @ 17,081 7.26 9.32 28 B 19.0 18.7 0.7 2.6 3.214 Hy san Dev elopment # 4,581 33.45 39.40 18 B 15.4 15.1 0.5 3.8 3.4

173 K. Wah Intl # 1,266 3.50 4.00 14 B 15.4 8.0 0.4 4.3 2.6683 Kerry Properties # 4,226 22.65 28.95 28 B 8.8 8.4 0.3 3.5 4.5488 Lai Sun Dev elopment # 368 0.14 0.22 52 B 12.5 13.5 0.2 1.8 1.1

66 MTR ^ # 25,472 33.75 35.95 7 H 18.0 22.3 0.8 3.1 6.517 New World Dev # 9,194 7.92 10.21 29 B 10.3 9.4 0.5 5.3 11.316 SHK Properties # ^ 37,750 101.70 136.70 34 B 14.5 11.7 0.5 3.3 4.683 Sino Land # 9,703 12.36 13.80 12 B 14.1 14.1 0.5 4.0 4.6

1972 Swire Properties # 17,211 22.80 28.20 24 B 17.9 17.9 0.6 2.9 3.588 Tai Cheung # 497 6.24 8.46 36 B 7.0 11.1 0.3 4.8 8.2

369 Wing Tai Properties # 762 4.40 5.14 17 B 14.4 18.3 0.3 3.1 1.8Railw ay & Const ruc t ion

1800 China Comm Construction 21,914 10.50 15.80 50 B 8.8 7.9 1.1 2.6 12.6601800 China Comm Construction-A @@@ 25,567 12.25 25.30 107 H 12.8 11.6 1.5 2.2 12.6

1186 China Railway Construction 21,342 12.18 17.00 40 B 10.1 9.4 1.1 1.5 12.2601186 China Railway Construction-A @@@ 24,514 13.99 26.90 92 H 14.5 13.5 1.6 1.3 12.2

390 China Railway Group 22,108 7.50 11.45 53 B 10.7 9.6 1.2 1.4 11.9601390 China Railway Group-A@@@ 33,279 11.29 22.90 103 H 19.6 18.0 2.3 0.9 12.2

1766 CRRC Corp 35,705 10.14 18.40 81 B 16.7 13.8 2.4 1.8 15.3601766 CRRC Corp-A @@@ 46,972 13.34 33.50 151 H 27.5 22.7 3.9 1.4 15.3

3311 China State Construction 5,748 11.10 12.20 10 H 10.3 8.9 1.9 2.9 19.9Real Est at e Inv est ment T rust

2778 Champion REIT 2,890 3.88 4.78 23 B nmf nmf 0.5 5.0 2.3778 F ortune REIT 1,859 7.65 9.18 20 B nmf nmf 0.6 6.0 3.7

6139 J inmao Inv estment 1,169 4.53 5.49 21 B nmf nmf 1.0 9.9 3.9808 Prosperity REIT 518 2.80 3.06 9 B nmf nmf 0.6 6.2 3.6435 Sunlight REIT 821 3.89 4.23 9 B nmf nmf 0.5 5.7 2.9823 Link REIT 12,813 44.00 47.10 7 B nmf nmf 0.9 4.2 25.4

Rest au rant s538 Ajisen China 525 3.73 5.40 45 F V 12.5 12.0 1.2 4.8 9.9341 Caf?de Coral 1,965 26.15 28.00 7 H 25.7 24.2 4.1 3.0 15.9

Ret ailers814 Beijing J ingkelong 96 1.80 1.50 -17 F V 18.9 15.6 0.4 6.7 2.0653 Bonjour Holdings 150 0.34 0.38 12 H 2.5 11.4 1.0 3.1 53.5116 Chow Sang Sang 1,368 15.66 20.33 30 B 7.8 8.7 1.1 4.8 14.9330 Esprit Holdings 1,606 6.40 6.10 -5 F V n.a. n.a. 1.0 n.a. -25.7709 Giordano 790 3.90 4.25 9 H 13.4 12.3 2.1 7.1 15.5

3308 Golden Eagle % 2,061 9.39 8.54 -9 H 13.7 13.7 2.3 2.7 17.6493 Gome Elec Appliances % 2,977 1.36 1.26 -7 H 14.0 12.7 1.1 2.9 7.8

3389 Hengdeli 654 1.06 0.95 -10 F V 10.4 9.6 0.7 2.9 6.51833 Intime Department Store 2,415 8.55 10.00 17 B 13.2 11.5 1.4 4.2 10.9

J D US J D.com ^^@ 38,093 27.54 40.40 47 B 654.6 118.3 6.8 0.0 -4.6980 Lianhua Supermarket 548 3.79 4.14 9 H 153.7 128.9 1.0 0.0 0.7

Source: DBS Vickers

^ EPS and Net Profit exclude fair value changes on investment properties; % - Fully Diluted EPS; # P/NAV; ^^Core profit and EPS; '@ denominated in USD ; @@@ denominated in RMB

Market Focus




MktCap

(US$m)

SharePrice

(HK$)

TargetPrice

(HK$)upside

(%) RemdPE (x )

15FPE (x )

16FPB (x )

15FYld (%)

15FROE (%)

15FRetailers (cont 'd)

1212 Lifesty le 2,162 10.44 13.69 31 H 7.8 7.9 1.4 5.8 18.9590 Luk Fook 1,551 20.40 28.00 37 B 7.4 7.8 1.4 5.4 20.0825 New World Dept Stores 300 1.38 1.35 -2 H 33.4 10.0 0.4 5.7 1.1

1438 Nirvana Asia Ltd 710 2.04 3.05 50 B 13.9 12.1 2.0 3.6 15.3398 Oriental Watch 80 1.09 1.17 7 H 138.0 38.7 0.3 0.9 0.2

3368 Parkson 398 1.14 0.90 -21 FV 49.7 15.1 0.5 5.3 1.0178 Sa Sa 1,149 3.13 2.90 -7 H 10.6 13.9 3.6 7.5 35.0

1700 Springland Int'l 638 2.03 2.23 10 H 8.0 7.5 0.8 5.0 10.16808 Sun Art Retail Group 7,546 6.13 5.20 -15 FV 19.4 18.8 2.3 2.2 12.2891 Trinity Ltd 198 0.88 1.00 14 H n.a. 20.9 0.5 n.a. -0.2

1025 Wumart ^^ 543 3.27 3.57 9 H 12.0 11.9 0.8 0.0 7.0Sof tware & Computer Serv ices

268 Kingdee 1,195 3.18 3.80 19 B 32.3 24.7 2.2 0.5 8.5700 Tencent ^^ 172,130 141.90 184.00 30 B 32.5 25.3 10.3 0.4 31.8

600588 Yonyou Network Tech@@@ 6,100 26.57 17.00 -36 FV 76.2 58.5 6.7 0.8 10.1Steel, aluminium & copper

347 Angang Steel 3,323 3.56 5.73 61 B 72.2 41.5 0.4 0.3 0.6000898 Angang Steel-A @@@ 4,537 4.86 4.99 3 H 119.5 68.7 0.7 0.2 0.6600019 Baoshan Iron & Steel Co-A@@@ 14,950 5.77 9.09 58 B 23.2 15.7 0.8 3.1 3.6

1378 China Hongqiao Group 3,410 4.15 4.45 7 H 4.5 3.4 0.6 5.7 13.9323 Maanshan I & S 1,828 1.84 1.32 -28 FV nm nm 0.6 0.0 -10.0

600808 Maanshan I & S-A @@@ 3,249 3.27 1.45 -56 FV nm nm 1.2 0.0 -10.0486 United Co RUSAL PLC 6,489 3.31 5.06 53 B 6.1 10.2 1.9 0.0 37.5

Telecom Serv ices (China)941 China Mobile 242,005 91.60 129.00 41 B 13.9 13.2 1.7 3.1 12.5762 China Unicom 30,344 9.82 12.60 28 B 15.5 13.9 0.8 2.5 5.4728 China Telecom 40,101 3.84 5.00 30 B 13.5 12.0 0.8 2.4 6.4

Telecom Serv ices (HK)1883 CITIC Telecom 1,278 2.93 3.60 23 B 12.7 12.2 1.4 3.9 11.56823 HKT Trust 9,096 9.31 9.50 2 H 20.5 19.9 1.9 5.8 9.1215 Hutchison Telecom 1,934 3.11 3.70 19 H 15.1 14.4 1.3 5.0 8.7315 SmarTone 1,939 14.18 17.00 20 B 15.9 16.9 3.9 4.2 26.6

T ransportat ion - Port s & A irport s694 Beijing Capital Intl Airport 4,275 7.65 6.35 -17 B 16.3 14.8 1.4 2.5 9.1144 China Merchants Hldgs 8,362 25.05 36.60 46 B 12.2 11.3 0.9 3.1 7.6

1199 COSCO Pacific 3,805 10.03 13.00 30 B 12.6 11.8 0.8 3.2 6.3Ut it ilies

1816 CGN Power 20,115 3.43 4.60 34 B 20.9 17.2 2.3 1.4 10.7Warehouse

925 Beijing Properties 445 0.51 0.70 37 B n.a. n.a. 0.7 0.0 -1.4600340 China Fortune Land Dev@@@ 9,694 23.29 31.60 36 B 12.9 10.3 4.6 0.8 40.9

1668 China South City 2,148 2.08 2.96 42 B 4.3 7.7 0.7 6.7 16.6200053 Shenzhen Chiwan Petroleum 622 13.77 21.48 56 B 24.5 26.5 0.7 0.4 6.0

Source: DBS Vickers

@@@ denominated in RMB; ^^Core profit and EPS

Market Focus



St o c kc o de St oc k name

M k tCap

(US$m)

SharePric e

(HK $ )

T argetPric e

(HK $ )ups ide (% ) R emd

PE ( x )15F

PE ( x )16F

PB ( x )15F

Y ld (% )15F

RO E (% )1 5F

W at er In f rast ruc t u re, Env ironment al371 Beijing Enterprises Water % 6,401 5.69 6.50 14 B 21.1 17.1 2.8 1.4 14.0

1381 Canv est Env ironment Protection 862 3.34 4.00 20 B 28.8 17.8 2.6 0.0 9.5257 China Ev erbright Intl 6,769 11.70 13.80 18 B 24.8 18.9 2.9 1.2 12.3

CEWL SP China Ev erbright Water @@ 1,293 0.70 0.80 14 B 20.6 15.0 1.5 0.0 7.41363 CT Env ironmental Group 2,107 2.67 2.90 9 B 22.5 18.2 5.3 0.9 28.56136 Kangda International 616 2.31 2.60 13 B 11.9 8.6 1.2 0.0 11.0

SIIC SP SIIC Env ironment @@ 1,445 0.92 0.92 1 H 24.6 19.8 1.8 0.0 8.3967 Sound Global 7,465 7.00 10.71 53 B 11.5 9.0 1.9 0.0 18.3

1065 Tianjin Cap Env ironmental 873 4.74 3.50 -26 S 15.2 14.1 1.3 1.3 8.5600874 Tianjin Cap Env ironmental-A @@@ 1,735 9.42 7.50 -20 S 36.7 34.2 3.0 0.5 8.5

CEL SP CITIC Env irotech @@ 1,114 1.40 1.70 22 B 21.7 21.9 1.9 0.4 12.2

Source: DBS Vickers

@@ denominated in SGD; @@@ denominated in RMB; % - Fully Diluted EPS

Market Focus


DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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Market Focus


COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is

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