Global EM Equity Strategy Equity Research

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

16 May 2017Global/Asia Pacific/China

Equity ResearchInvestment Strategy

Global EM Equity Strategy STRATEGYResearch Analysts

Alexander Redman44 20 7883 6896

[email protected]

Arun Sai44 20 7883 0002

[email protected]

Chinese equities: 10 reasons to stay overweightThe liquidity and policy environment remains stimulative for equities

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Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18

China M1 - M2(yoy % chg, LHS)

China headlinePMI (RHS)

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Nominal GDP growth less policy rates (LHS)MSCI China (US$, yoy % chg, RHS)

Source: Peoples Bank of China, Markit, Thomson Reuters, MSCI, Credit Suisse research

■ In the past ten months China (H-shares) has regained relative traction against the broad MSCI EM index outperforming by 6% since end-July 2016 and by 2% year-to-date. As year-on-year performance for Chinese equities touches 30% (the swiftest pace since mid-2015) we reexamine the investment case to maintain a modest 5% above benchmark stance and recommend persevering with this contrarian call on account of ten reasons:

■ (i) The liquidity and policy environment remains stimulative for equities; (ii) Chinese exports are returning to growth as overall EM GDP accelerates; (iii) the Chinese consumer (now the main driver of GDP) remains buoyant; (iv) equities provide an inflation hedge for high savings in financial assets; (v) RMB is cheap to trend REER appreciation for the first time since 2012; (vi) the residential real estate market is cooling off in an orderly manner; (vii) positive momentum for revisions, forecast and delivered EPS growth; (viii) margins, ROE and value creation are showing evidence of stabilizing; (ix) valuations are attractive though the usual sector bifurcation remains;(x) China remains deeply under-owned by EM (and global) equity funds.

■ We view the major risk as credit and deleveraging. However, over the past year China's non-financial private sector credit to GDP deviation above trend has eroded modestly to 26% from 29% as administrative measures for curbing further leverage are implemented. In our view the likelihood of a financial crisis remains low: the savings ratio at 47% and deposit base at 190% of GDP (and rising) provides a plentiful funding source and China's high leverage is symptomatic of the under-utilization of equity financing. Moreover, we believe that the quality of China's loan book is improving as after years of decline, corporate sector cash flows and ROIC are rising.

■ We screen for value creating names offering superior earnings growth and rated Outperform by Credit Suisse. The list of 30 stocks includes Tencent Holdings, Alibaba Group, China Construction Bank, Kweichow Moutai, China Pacific Insurance, Wuliangye Yibin, Jiangsu Yanghe Brewery, Inner Mongolia Yili, Foshan Haitian Food, WH Group and Qingdao Haier.

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Global EM Equity Strategy 2

Focus chartsFigure 1: For domestic investors equities provide an attractive inflation hedge as real rates turn negative

Figure 2: Worries about further FX depreciation are allayed by the RMB no longer appearing expensive

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Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 17

MSCI China Banks div. yield (%)

China 10Y govt. bond yield (lc, %)0%

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Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 09 Jan 12 Jan 15 Jan 18

China REER (1985 =100)

23Y trend CAGR 2.0%

China: % of world exports (RHS)

Source: MSCI, FTSE, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

Figure 3: China trades on an aggregate P/E discount vs GEM (although new economy sectors are pricey)

Figure 4: Chinese equites are leading the charge across GEM in the recovery of earnings revisions

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I/B/E/S MSCI China +12m sector adjusted PER (x)I/B/E/S MSCI China/EMF +12m sector adjusted PER (x)

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Jan 00 Jan 03 Jan 06 Jan 09 Jan 12 Jan 15 Jan 18

China breadth in earnings revisions

China yoy performance (RHS)

Source: MSCI, I/B/E/S, Credit Suisse research Source: MSCI, IBES, Credit Suisse research

Figure 5: GEM equity managers are positioned at 15% average underweights versus the benchmark

Figure 6: Thus far the real estate slowdown and inventory drawdown has been extremely orderly

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Jan 02 Jan 06 Jan 10 Jan 14 Jan 18

Asset weighted GEM dedicatedfund weight in China vs MSCIbenchmark weight

Median GEM dedicated fundweight in China vs MSCIbenchmark weight

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Cumulative unsoldhousing starts as aproportion of annualisedsales (years)Housing starts / demand(sales) ratio (RHS)

Source: EPFR Global, Credit Suisse research Source: China National Bureau of Statistics, Credit Suisse research

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Why China deserves a modest overweightWe upgraded Chinese equities in a GEM portfolio on 1 December 2015 (see 2016 GEM outlook: It’s darkest just before dawn), a call which ultimately proved to be two and a half months early. However, in the past ten months China (H-shares) has regained relative traction against the broad MSCI EM index outperforming by 6% since end-July 2016. We reexamine the investment case to maintain a modest 5% above benchmark stance on Chinese equities and recommend persevering with the call on account of ten reasons:

The liquidity and policy environment remains stimulative for equities

Chinese exports are returning to growth as overall EM GDP accelerates

The Chinese consumer (now the main driver of GDP) remains bouyant

Equities provide an inflation hedge for high savings in financial assets

The RMB is cheap to trend REER appreciation for the first time since 2012

The residential real estate market is cooling off in an orderly manner

Positive momentum for revisions, forecast and delivered EPS growth

Margins, ROE and value creation are showing evidence of stabilizing

Valuations are attractive though the usual sector bifurcation remains

China remains deeply under-owned by EM (and global) equity funds

1. The liquidity and policy environment remains stimulative for equitiesThe PBoC's 2015/16 sizeable injection of liquidity (which we proxy using the M1 less M2 year-on-year growth differential) in an attempt to bolster private sector investment has been reflected by a steady grind up in the headline PMI manufacturing survey. We believe the hitherto tendency for the private sector to deploy cash either into liquid current accounts or for balance sheet repair is fading as managements' appetite for corporate spend recovers.

Indeed, policy stimulus (albeit now being pared back) has delivered an uptick in particularly nominal (less so real) growth in economic activity. Credit Suisse is forecasting 2017E real GDP growth of 6.8% for China moderating slightly to 6.5% in 2018E.

Figure 7: China M1 less M2 growth versus PMI Figure 8: China manufacturing PMI output vs GDP

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China M1 - M2(yoy % chg, LHS)

China headlinePMI (RHS)

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4%

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China real GDP growth (LHS)

China manufacturing PMI: Output (3mav, 3m lead)

Source: Peoples Bank of China, Markit, Credit Suisse research Source: Markit Economics, Credit Suisse research

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Moreover, our forecast differential between nominal GDP growth and interest rates (a proxy for the accommodativeness of monetary policy which has a strong historical association with MSCI China year-on-year US dollar performance) is indicative of a benign equity outlook.

We are forecasting the above differential at c6ppt through CY2017 on account of an acceleration in Chinese nominal GDP growth to double digit territory for the first three quarters of the year while anticipating no further easing of interest rates. In our view, the PBoC will continue to primarily focus on maintaining sufficient liquidity conditions for the banking sector with any further reductions in the reserve requirement ratio motivated by the need to manage liquidity levels for the current interest rate structure rather than being indicative of further lowering of policy rates. Typically a positive differential of more than 4ppt for nominal GDP growth over interest rates has been consistent with an environment of positive year-on-year US dollar equity market returns.

Indeed, year-on-year US dollar performance for MSCI China currently running at +30% is the strongest since June 2015 with the index outperforming MSCI EM in US dollar terms by 6% since end-July 2016 and by 2% year-to-date.

Figure 9: China nominal GDP and policy rates differential versus MSCI China year-on-year performance

Figure 10: MSCI China and MSCI EM performance (US$, rebased to 100 on 1 January 2017)

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Nominal GDP growth less policy rates (LHS)MSCI China (US$, yoy % chg, RHS)

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Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17

MSCI China

MSCI EM

Source: Thomson Reuters, MSCI, Credit Suisse estimates Source: MSCI, Credit Suisse research

2. Chinese exports returning to growth as overall EM GDP acceleratesYear-on-year Chinese export growth is on the cusp of turning positive for the first time since September 2015—Credit Suisse is forecasting a return to full year export growth of 8.9% for 2017E followed by 4.1% in 2018E having recorded a drop of 6.5% during 2016.

This sustained recovery in Chinese exports is developing within the context of rising emerging and developed world demand. The IIF monthly emerging market growth tracker (a seasonally adjusted annualized rate of three-month momentum in financial markets, business surveys and hard economic data) is running at the strongest rate (6.8%) since May 2011.

Credit Suisse estimates emerging market real GDP growth in 2017E of 4.7% accelerating further to 4.9% in 2018E following 4.1% in 2016. Moreover, we forecast developed world and global real GDP growth of 1.9% and 2.9%, respectively, for both 2017E and 2018E after 1.6% and 2.5%, respectively, in 2016.

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Figure 11: China export growth (goods and non-factor services) Figure 12: Emerging market growth tracker

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Percent Change (3m/3m SA AR)

Source: China Customs, Credit Suisse research Source: IIF, Credit Suisse research

3. The Chinese consumer (now the main driver of GDP) remains bouyantOur China economics team forecasts that growth in real private consumption will continue to outpace fixed investment by between 1.5ppt and 2ppt through 2017E and 2018E as it did in 2016. Indeed, the private consumption share of GDP in China overtook the investment share of GDP in 2016 as the primary driver of economic activity for the first time since 2004. On Credit Suisse estimates this rebalancing of the economy towards consumption will progress swiftly over the next two years—by the end of 2018E accounting for a 45% share of GDP versus 37% for investment.

Figure 13: China fixed asset investment versus real private consumption growth

Figure 14: China fixed asset investment versus private consumption (as % GDP)

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Fixed investment growth30.0%

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Private consumption (% GDP)

Fixed investment (% GDP)

Source: National Bureau of Statistics of China, Credit Suisse estimates Source: National Bureau of Statistics of China, Credit Suisse estimates

Growth in real retail sales, although towards the bottom of its 17-year range remains robust at close to double digit territory, among the strongest across emerging markets. Indeed across a dozen real sector indicators it is the consumption metrics which are

16 May 2017


typically in line with or exceeding levels from 12-months ago, while investment parameters are still tending to lag their respective levels of last year or indeed five year averages.

Figure 15: China real retail salesFigure 16: Chinese nominal GDP and real sector indicators, current versus 5Y and 10Y averages

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China real retail sales (3mma yoy % chg)

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20Nominal GDP

M2 money supply

Fixed assetinvestment

Floor space underconstr.

Total socialfinancing

Electricity output

Railway freight

Iron ore imports

Copper imports

Total imports

Retail sales

Auto sales

Latest -1 year 5Y average

Source: China National Bureau of Statistics, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

4. Equities provide an inflation hedge for high savings in financial assetsChinese households are characterized as having large pools of savings in combination with a strong investment culture. The savings ratio in China at 47% of GDP is the highest of any emerging or developed market with 47% of household wealth invested in financial assets (the fourth highest in emerging markets after South Africa, Taiwan and Chile).

Figure 17: Savings rates for emerging economies (gross national savings as a % of GDP)

Figure 18: Emerging market composition of household wealth (2016)

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Indonesia

India

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Mexico

Brazil-40

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Non-financial assets Financial assets Debts

Source: Oxford Economics, Credit Suisse research Source: Credit Suisse Research Institute Global Wealth Databook, 2016

Although thus far the transmission through to CPI inflation from the acceleration in PPI inflation has been limited (as the uptick in the latter has been concentrated in heavy industry items which have little pass-through to the former), Credit Suisse is forecasting 2017E year-end CPI inflation at 2.7%, kept in check by excess manufacturing capacity, ample food stocks, easing labour market tightness and hence slowing wage growth.

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Figure 19: China PPI inflation versus input price survey

Figure 20: China CPI inflation versus output price survey

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CPI inflation

PMI output prices

Source: National Bureau of Statistics, Markit Economics, Credit Suisse research Source: National Bureau of Statistics, Markit Economics, Credit Suisse estimates

Hence we anticipate real (CPI deflated) deposit rates dip back into negative territory through the remainder of 2017 and through 2018 after a brief respite of a couple of months being fractionally positive. The natural consequence of which will be the redirection of savings out of deposit accounts into higher yielding assets or indeed the discretionary consumption of goods and services—both of which are consistent with a relatively benign outlook for the market, either by providing sustained equity demand or boosting growth.

Figure 21: China GDP deflator (%) Figure 22: China real and nominal deposit rates (%)

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Source: Oxford Economics, Credit Suisse research Source: People's bank of China, Credit Suisse research

In our view a strong argument for households incrementally deploying into equity investments as an inflation hedge is the lack of attractive alternatives as they seek to lock in real returns:

(i) First, Chinese household exposure to equities remains relatively modest: including indirect assets invested within equity, insurance and pension funds together with wealth management products, they account for just 8% of household wealth (it peaked at 12% in 2Q2015). Furthermore, the government gave a clear signal via its interventionist policy

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through the summer of 2015 that a floor has been placed beneath the equity market, despite implicitly encouraging retail moral hazard.

(ii) Wealth management products have lost their initial luster with year-on-year growth in trust fund assets under management running at 24% having reached 71% in 2013, as a number of high profile defaults have deterred investors' enthusiasm.

Figure 23: Equity as proportion of Chinese household wealth

Figure 24: Wealth management products: Trust fund assets under management (yoy % chg, RMB)

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2008 2009 2010 2011 2012 2013 2014 2015 20160%

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Trust fund assets under management (yoy % chg, RMB)

Source: CEIC, Credit Suisse China Equity Strategy team Source: China Trustee Association, Credit Suisse research

(iii) The A-shares earnings yield to bond yield ratio is 72% in favour of owning equities on a 12-month forward ex-ante basis in preference to fixed income, having dropped as low as parity at the height of the 2015 equity market bubble. A basket of Chinese bank names now offers a dividend yield of 5.0% versus government bonds at 3.5%.

Figure 25: China (A-shares): earnings/bond yield ratio versus equities/bonds total return (CNY terms)

Figure 26: China yield plays: Banks dividend yield versus 10Y government bond yield (%)

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MSCI China Banks div. yield (%)

China 10Y govt. bond yield (lc, %)

Source: Thomson Reuters, Credit Suisse research Source: MSCI, FTSE, Credit Suisse research

(iv) Offshore has become progressively more restrictive. The acceleration in capital flight in the latter half of 2014 and throughout 2015 provoked an administrative tightening of capital controls to stave off worsening balance of payments dynamics and severe foreign

16 May 2017


exchange reserve depletion. Measures taken included increasing the scrutiny of overseas transfers (to prevent 'smurfing'), curbing the offshore supply of renminbi, restricting corporate foreign exchange purchases and the suspension of new applications for the qualified domestic institutional investor (QDII) scheme.

(v) Thus far the slowdown in the residential real estate market has been only marginal and delivered in an extremely orderly fashion (see section 6 below). However, the governmental macroprudential measures introduced throughout 2016 by the Chinese authorities aimed at cooling the property market in over a dozen larger cities across China by increasing land supply and introducing stricter regulatory supervision of purchasing, including higher deposits and restrictions on second and third homes are well understood. Thus the feverish appetite for real estate appears to have dampened now—at the extreme, the Financial Times (4 September 2016) reported a surge in divorce applications in Shanghai by supposedly happily married couples allegedly seeking to circumvent administrative curbs on multiple property speculation (for this purpose couples are treated as an individual).

(vi) The worst of the 2015 equity market excesses have been worked out of margin trading (currently 2.5% of market capitalisation, from 5.1% in early July 2015) and share trading volumes (Shanghai stock exchange average daily trading volume to market capitalisation is now at 0.8% from 3.1% in July 2015).

Figure 27: China: Broker margin financingFigure 28: China exchanges average daily trading volume (22-day rolling) relative to market cap

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China: Margin trading toMarket cap ratio (RHS)

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Shenzhen A ADTV to market cap ratio (%)

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Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

5. RMB is cheap to trend REER appreciation for the first time since 2012Prior to the 2016 depreciation of China's real effective exchange rate, the currency was 12% expensive versus its long-run trend appreciation, the greatest positive deviation recorded in more than 23 years. Not only did the renminbi appear "overvalued" on this metric, but China's global export market share also recorded a decline to 13% from 14% through 2016, a reduction which is typically associated with a weakening in the REER.

By April 2014 China's REER has depreciated sufficiently to reflect China's moderation in global export market share and is also now 1% "cheap" to the long-run REER trend appreciation for the first time since November 2012, a period of four and a half years.

Furthermore, China's 49% deviation from PPP values the currency at similar levels to December 2010 having now closed the gap to the PPP deviation for the rest of MSCI emerging markets to just 5ppt.

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Against the background of the Chinese administration's 2017 focus on stability, the Credit Suisse China economics team reduced their expectations for further FX depreciation forecasting 12-month USDRMB at 7.18 versus 7.33 previously (see Q2 2017 Emerging Market Quarterly, 23 March 2017).

Figure 29: China real effective exchange rate (1% below trend)

Figure 30: China versus EM ex China (GDP weighted average) deviation from PPP

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Source: Thomson Reuters, Credit Suisse research Source: Oxford Economics, Thomson Reuters, Credit Suisse research

The 2015/16 acceleration in Chinese capital flight (as proxied by total hot money flows and specifically the net errors and omissions component thereof) appears to have abated. Indeed net hot money outflows (on a four-quarter rolling basis) have moderated to 4.1% of GDP in 1Q2017 from a trough of 6.5% of GDP in 4Q2015. Indeed in the past three months (February through April) net hot money outflows have been more than offset by China's basic balance surplus allowing the accumulation of foreign exchange reserves for three consecutive months for the first time since 2Q2014 for a cumulative US$31bn.

Figure 31: Chinese capital flight: Net errors & omissions and total hot money flows Figure 32: China FX reserves

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Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18Hot money flows* (4q rolling, % GDP, LHS)

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*Hot money flows: net debt and equity portfolio flows, other investment (mainly bank lending), net errors and omissionsSource: Thomson Reuters, Credit Suisse research

Source: PBoC, Credit Suisse estimates

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6. The residential real estate market is cooling off in an orderly mannerCited as one of the key risks to our 2017 outlook not just for China but for the overall investment case for emerging market equities (see 2017 GEM outlook: Staying the course, 1 December 2016) we now have more confidence that the view put forward in early November 2016 by our China economics team for a managed slowdown is indeed taking shape (see China: A correction, not a collapse in the property market). They believe that the recent tightening in government policy is likely to weaken property sales in the coming quarters. However, the drop in sales volume is likely to be modest and highly differentiated across different city tiers. They project that primary housing floor space sales will moderate and fall back to just below trend by the end of 2017, implying sales contract by around 3% on a year-on-year basis for 2017.

Judging by the frequency and amplitude of the Chinese residential real estate cycle over the past decade, a turning point appeared imminent. The duration of the last five cycles in year-on-year Chinese residential real estate sales growth (by value) have been notably regular, at 24 months. If December's print of 36% is this cycle's peak, then at a 39-month interval since the previous September 2013 peak it was already overdue. Furthermore, Chinese real income growth is slowing (see Figure 41), which aggravates the unaffordability of residential property.

Importantly, however, our China economics team believes that financial stress is unlikely. They argue that housing prices are unlikely to fall aggressively given that net supply has tightened because housing new starts have lagged sales as developers have cut their inventory. Indeed, the housing starts to demand (sales) ratio at 85% has fallen to the lowest level since at least 1998 versus the two-decade average of 135%, while the inventory drawdown in this cycle has reduced the number of unsold housing starts to less than two years' worth of annualized sales (versus the April 2015 peak of 2.8 years), the lowest level since November 2011.

In addition, household balance sheets remain strong while overall monetary policy remains steady. This should serve to reduce the hazard of downward spiraling foreclosures and prices that precipitated the US housing crisis.

Figure 33: China residential property sales volume versus prices

Figure 34: China residential real estate inventory (years of unsold housing starts)

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China res. real estate sales(CNY, yoy % chg, LHS)

China (70 cities) real houseprices (yoy % chg, RHS)

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Cumulative unsoldhousing starts as aproportion of annualisedsales (years)Housing starts / demand(sales) ratio (RHS)

Source: China National Bureau of Statistics, Credit Suisse research Source: China National Bureau of Statistics, Credit Suisse research

However, this places the small and belated (owing to relatively high housing inventory levels) uptick in Chinese steel production—associated with the upswing in the current cycle of real estate development floor space sold—at risk. Moreover, this has broader

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implications for demand and pricing of commodities—particularly iron ore and copper—the former of which is a function of Chinese nominal GDP growth given the country's more than 50% share of global demand.

Figure 35: China: residential new floor space sold versus steel production

Figure 36: China nominal GDP growth versus iron ore price

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China real estate dev. floor space sold (12mmav, yoy % chg)China steel production (yoy % chg, pushed fwd by 4m)

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Iron Ore price (US$/MT, LHS)

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Source: China National Bureau of Statistics, World Steel Association, Credit Suisse research Source: Oxford Economics estimates, Metal Bulletin, Credit Suisse research

7. Positive momentum for revisions, forecast and delivered EPS growthChina is leading the charge on the recovery in emerging market earnings revisions, with only Poland and Turkey being more positive. Moreover, given the 18-year historical association between revisions and year-on-year US dollar index performance, the market appears to be currently underappreciating the extent to which China's earnings revisions have recovered. Moreover, at 15%, local currency 12-month forward earnings growth expectations for China (although subject to over-optimism for the past four years) are the strongest since June 2011 and in line with those of overall MSCI emerging markets.

Figure 37: MSCI China earnings growth: forecast versus delivered

Figure 38: China breadth in earnings revisions versus year-on-year performance

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-60%

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20%

60%

100%

-16%

-8%

0%

8%

16%


China breadth in earnings revisions

China yoy performance (RHS)

Source: MSCI, IBES, Credit Suisse research Source: MSCI, IBES, Credit Suisse research

16 May 2017


8. Margins, ROE and value creation are showing evidence of stabilizingEncouragingly, Chinese non-financial sector return on equity has stabilized at c9% for the past three quarters—having previously eroded from 15% in 2011—and in our view can slowly and steadily rebuild from here. Similarly, Credit Suisse banks analyst Sanjay Jain forecasts the reduction in Chinese banks' ROE to be arrested in 2018E at 13% (see China Banks Sector: Down, but not out (yet), 9 May 2017). In combination, we forecast an overall stabilization in Chinese total market ROE at 11% which will arrest the more than five year decline in Chinese value creation into negative territory having lost its premium to EM.

Figure 39: China return on equity versus cost of equity

Figure 40: China versus emerging and developed markets return on equity less cost of equity

8%

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12%

14%

16%

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20%


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China: COE(%)

China: ROE(%)

China Non-fin: ROE (%) -8%

-6%

-4%

-2%

0%

2%

4%

6%

8%


DM ROE less COE

China ROE less COE

EM ROE less COE

Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

Supporting stronger non-financial sector net profit margins and (hence ROE) is productivity growth turning stronger relative to real wage growth for the first time in over a decade, and secondly, the ratio of job vacancies to job seekers flattening off (indicating that the scarcity value of labour should dissipate) and a recovery in producer price inflation (factory gate product selling prices).

Figure 41: China real wages versus productivity (% chg yoy, local currency terms)

Figure 42: China PPI versus labour market vacancies versus applicants

5%

6%

7%

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9%

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11%

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China productivity growth (%, yoy)

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1.1

1.2

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-5

0

5

10

15


China PPI (yoy % chg, LHS)

China ratio between job vacanciesand job seekers (RHS)

Source: Oxford Economics, Credit Suisse research Source: China Ministry of Human Resources and Social Security, Credit Suisse research

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16 May 2017


9. Valuations are attractive though the usual sector bifurcation remainsThe headline 12-month forward consensus sector-adjusted earnings multiple for China at 11.1x (fractionally more expensive than Korea) appears cheap versus the 20-year average of 11.2x and, in relative terms against MSCI EM, the current 9% discount appears favourable versus the two-decade average marginal premium of 2%.

Importantly though, these aggregate multiples mask extremely bifurcated valuations demarcated by either new/old economy or financials/non-financials. Trading on 20.3x consensus 12-month forward earnings, the new economy sector appears richly valued (just off the recent September 2016 20.8x peak) versus the 13-year average of 17.2x. In contrast, the old economy sector trading on a multiple of 8.0x looks attractive versus the historical average of 10.1x.

Figure 43: MSCI China absolute and EM relative +12m consensus sector-adjusted PER

Figure 44: MSCI China new economy* versus MSCI China old economy^ 12 month forward PE ratio

40%

55%

70%

85%

100%

115%

130%

145%

160%

4

6

8

10

12

14

16

18

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I/B/E/S MSCI China +12m sector adjusted PER (x)I/B/E/S MSCI China/EMF +12m sector adjusted PER (x)

5

10

15

20

25

30

35


New economy*

Old economy^

Source: MSCI, I/B/E/S, Credit Suisse research *New economy: consumer discretionary and staples, healthcare, diversified financials, insurance, IT^Old economy: energy, materials, industrials, banks, real estate, telecoms, utilitiesSource: MSCI, I/B/E/S, Credit Suisse research

However, our macroeconomic regression model for MSCI China in US dollar terms suggests that the market has no upside potential to end-December 2017 based on Credit Suisse year-end forecasts of (i) US ISM new orders survey of 59—consistent with Q4/Q4 annualized US real GDP growth of 2.4%, (ii) a further acceleration in Chinese year-on-year industrial production growth to 9.5% from the current 7.6%, (iii) a modest slowdown in year-on-year property transaction growth to 13.5% from the current 14.7%, and (iv) CPI inflation picking up to 2.7%.

The caveat to this somewhat conservative outlook for Chinese equity price appreciation is that of all our emerging market country level macro models, China has by far the lowest r-squared. Indeed the r-squared between twenty years of quarterly nominal GDP growth and A-shares' local currency returns for China is a rather precise zero—to two decimal places! Thus our conclusion that equity prices are constrained from here by our macroeconomic forecasts comes with just a 56% explanatory power, the r-squared of the model.

16 May 2017


Figure 45: Multi factor regression model for MSCI China Figure 46: Predicted versus actual MSCI ChinaModel inputs Coeff. P-value Current Scenario Upside

15 May y/e 2017 from current

ISM New orders 0.73 0.001 57.5 59.0 1.5 pptChina IP, yoy % 0.87 0.000 7.6% 9.5% 190 bpsProperty transactions, yoy % 0.36 0.000 14.7% 13.5% -1.2 pptCPI, yoy % 4.51 0.000 1.2% 2.7% 155 bps

MSCI China15 May y/e 2017

Adj R square: 0.56 Current 69.9 69.9Observations: 147 Predicted 64.0 67.3Intercept 0.00 Upside % -8.5 -3.7

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Predicted MSCI China

Actual MSCI China

Source: Thomson Reuters, MSCI, Credit Suisse research Source: Thomson Reuters, MSCI, Credit Suisse research

10. China remains deeply under-owned by EM (and global) equity fundsThe strongest net equity (and fixed income) portfolio outflows from China since the global financial crisis over the course of the past six quarters is reflected in amongst the lowest exposure by dedicated emerging market portfolio managers to Chinese equities in the past decade (both the asset-weighted average and median fund positions on the market are 15% below the MSCI benchmark weight).

Thus, there is considerable room for the re-accumulation of Chinese equity assets into emerging market active funds should the above positive arguments ultimately prove sufficiently strong to alter the current negative mindset towards the market.

Figure 47: Asset-weighted and median dedicated emerging market equity fund positions on China relative to the MSCI benchmark

Figure 48: China net portfolio flows (four quarter rolling, % GDP)

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Asset weighted GEM dedicatedfund weight in China vs MSCIbenchmark weight

Median GEM dedicated fundweight in China vs MSCIbenchmark weight

-4%

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Portfolio equity

Portfolio debt

Total portfolio

Source: EPFR Global, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

16 May 2017


We view the major risk as credit and deleveragingConcerns surrounding the sustainability of China's credit fueled economic growth model (the current rate is four new units of credit per one unit of GDP generation) are well flagged and have unsettled the emerging and global investment community for years. China's private sector non-financial sector credit (including corporate bonds) to GDP of 210% is extreme within a global context (only Canada, Netherlands and Switzerland are higher) and within emerging markets only Korea at 195% is comparable (although Korea's per capita GDP is over three times greater and the credit more uniformly distributed across households and non-financial corporations).

Importantly, China's private sector non-financial sector credit deviation at 26ppt above trend (on BIS Hodrick–Prescott filter methodology) is higher than any other major global economy, has been above trend for eight years and has been in excess of the 10ppt red flag level which BIS considers as potentially precipitating a credit event since 3Q2012.

However, over the past year the deviation above trend has eroded modestly from 29% (1Q2016) as administrative measures aimed at curbing further leveraging of the economy are implemented—thus far geared towards debt for equity swaps in the SOEs (see China: Leverage and Deleveraging, 20 March 2017). The dilemma facing the Chinese administration is summarized well by Credit Suisse China economist Vincent Chan who states that "In the long run, if the government wants to keep growth around current level, credit growth will have to keep at around 14%, and it is difficult to bring down the country’s leverage with credit growth at this pace. In contrast, if credit growth slows to 7%, nominal GDP growth may fall to as slow as 2% based on historical relationship."

But in our view the likelihood of a financial crisis in China remains low: the savings ratio at 47% and China's banking sector deposit base at 190% of GDP and rising (year-on-year deposit growth running at 12% is outpacing nominal GDP growth) provides a plentiful funding source.

Moreover, Credit Suisse China banks analyst Sanjay Jain argues that the true underlying quality of China's loan book is improving as after years of decline, corporate sector cash flows and ROIC are rising, not only in energy & materials but also in other sectors (see China Banks Sector: Down, but not out (yet), 9 May 2017).

Figure 49: China: Credit to GDP versus ratio of new loans to change in GDP

Figure 50: China bank deposit growth and deposit to GDP ratio

0.0

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China: Private sector credit toGDP (LHS)China: new loans to change innominal GDP (4Q rolling, RHS)

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China: Deposits to GDP (LHS)

China: Deposit growth (yoy % chg, RHS)

Source: BIS, Oxford Economics, Credit Suisse research Source: People's bank of China, Credit Suisse research

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16 May 2017


Furthermore, in a global (developed world) context China's total (including government) economic leverage at 256% of GDP is not so extreme—although at the current rate of expansion we calculate it would reach c300% of GDP by 2020.

Figure 51: Total non-financial sector credit to GDP for emerging and developed markets

0

50

100

150

200

250

300

350

400General government Non-financial corporations Households and NPISHs

Source: BIS, Credit Suisse research

Finally, although the magnitude of private non-financial sector leverage remains a concern, the elevated level is just symptomatic of the under-utilization of equity corporate financing as illustrated by the comparably low equity book value to GDP ratio in China accompanied by the high level of corporate debt to equity ratio.

Figure 52: Equity book value to GDP ratio for China, US, Japan, Korea and Taiwan

Figure 53: China, emerging markets ex China and developed markets total debt to equity ratio (%)

0%

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China A

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China debt/equity

DM debt/equity

EM ex China debt/equity

Source: WFE, Oxford Economics, MSCI, Credit Suisse research Source: Thomson Reuters, Credit Suisse research

Ultimately, we maintain our belief that the Chinese government retains the capacity to "socialise" its domestic credit problems. The pace of ongoing debt disintermediation into the bond market and largescale debt for equity swaps needs to be increased together with steady growth in domestic financial asset demand via pension and insurance fund subscriptions to absorb the enormous scale of issuance involved.

16 May 2017


Critical to achieving this goal will be retaining strict capital controls to contain the large pool of domestic savings and the institutionalisation of the Chinese capital markets (similar to that achieved in the US through the 1970s with the introduction of 401(k) defined-contribution pension schemes) in order to dampen the boom/bust characteristics of the Chinese equity market (2007 and 2015 retail-driven bubbles).

With per capita GDP in PPP terms approaching the level where participation in financial products and planning typically begins to permeate more deeply and given that the next generation of retirees is likely to have less family support in their retirement as a result of the one-child policy, we believe that the demand side of the equation is materialising.

Chinese stock picksWe screen for liquid Chinese stocks with market capitalisation exceeding US$4bn, that offer positive value creation (their Credit Suisse HOLT® CFROI®/CFROE is greater than their discount rate), generate superior CFROI/CFROE and offer 2016/17E consensus EPS growth in excess of their GEM sector peers, and are Outperform rated by Credit Suisse sector teams.

The list of 30 names includes Tencent Holdings, Alibaba Group, China Construction Bank, Kweichow Moutai, China Pacific Insurance, Wuliangye Yibin, Jiangsu Yanghe Brewery, Inner Mongolia Yili, Foshan Haitian Food Company, WH Group and Qingdao Haier.

Figure 54: China value creating names offering superior EPS growth and rated Outperform by Credit SuisseMkt Cap

Company Name Sector US$bn

11 May

Abs Rel. EMF

Sector

Abs Rel. EMF

Sector

Abs Rel. EMF

Sector

Abs Rel. EMF Sector

(spread)

Abs Rel. Country

Rel. EMF

Sector

Abs Rel. EMF Sector

(spread)

Tencent Holdings - H Technology 310.0 37.2 244% 9.6 365% 0.3% 17% 3.0% -2.7% 41.7% 37.0% 15.2% 17.4% 8.6% 13.7% OutperformAlibaba Group Technology 296.8 28.1 184% 7.3 278% 0.0% 0% 2.8% -2.9% 54.5% 49.8% 28.0% 17.6% 8.7% 15.4% OutperformChina Construction Bank - H Financials 204.3 6.0 69% 0.8 79% 5.0% 143% n/m n/m 16.5% 11.8% 13.6% 11.7% 2.2% 0.6% OutperformKweichow Moutai - A Cons Staples 75.0 25.5 115% 5.7 164% 1.9% 85% 3.9% 0.7% 11.1% 6.4% 0.1% 19.1% 9.5% 15.7% OutperformChina Pacific Insurance - H Financials 33.3 16.6 193% 1.6 151% 2.8% 79% n/m n/m 49.9% 45.2% 47.0% 9.6% 0.2% 3.1% OutperformWuliangye Yibin - A Cons Staples 24.4 20.5 92% 3.1 90% 2.3% 102% 5.0% 1.8% 11.6% 6.9% 0.6% 11.9% 2.3% 8.9% OutperformJiangsu Yanghe Brew. - A Cons Staples 18.0 18.8 84% 4.0 115% 2.6% 118% 5.2% 2.0% 12.7% 8.0% 1.7% 20.2% 10.6% 17.4% OutperformInner Mongolia Yili - A Cons Staples 15.5 18.0 81% 4.3 124% 3.2% 146% 3.6% 0.4% 11.1% 6.4% 0.1% 18.5% 8.9% 15.6% OutperformFoshan Haitian Food Co - A Cons Staples 14.1 29.0 131% 8.7 249% 2.2% 98% 2.6% -0.6% 13.8% 9.0% 2.7% 24.8% 15.2% 22.1% OutperformWH Group Ltd - H Cons Staples 12.8 11.5 52% 2.0 57% 3.7% 166% 6.8% 3.6% 15.5% 10.8% 4.5% 11.8% 2.2% 6.8% OutperformQingdao Haier - A Cons Disc 11.7 13.2 82% 3.6 175% 2.1% 113% 7.0% 2.2% 21.4% 16.7% 6.4% 15.9% 8.3% 12.0% OutperformNew Oriental Ed & Tech Cons Disc 10.7 29.2 181% 6.1 295% 0.6% 31% 3.0% -1.8% 28.8% 24.1% 13.7% 13.5% 5.9% 11.0% OutperformGuangzhou Automobile - H Cons Disc 10.6 8.3 51% 1.7 81% 3.5% 187% 10.7% 5.8% 42.4% 37.7% 27.4% 11.8% 4.3% 6.5% OutperformTal Education Group Cons Disc 10.2 62.2 386% 15.8 762% 0.0% 0% 0.4% -4.5% 65.4% 60.7% 50.4% 14.3% 6.7% 11.6% OutperformShanghai Fosun Pharma - H Health Care 9.4 19.4 89% 2.9 94% 1.6% 126% 4.9% 0.9% 56.0% 51.3% 38.6% 12.3% 1.4% 6.8% OutperformSunny Optical Tech. - H Technology 9.3 32.5 213% 10.9 413% 0.8% 44% 1.3% -4.5% 47.6% 42.9% 21.1% 23.1% 14.3% 18.5% OutperformWanhua Chemical Grp. - A Materials 8.8 10.7 95% 2.9 209% 2.1% 59% 8.2% -0.2% 73.7% 68.9% 23.6% 13.4% 8.8% 9.3% OutperformLuxshare Precision Ind - A Industrials 8.5 30.5 220% 4.2 308% 0.4% 22% 0.7% -2.6% 28.5% 23.8% 8.6% 11.7% 6.7% 8.9% OutperformChina Gas Holdings Ltd - H Utilities 7.9 13.5 113% 3.2 294% 2.2% 63% 3.3% 3.3% 30.0% 25.3% 30.7% 13.1% 9.5% 7.8% OutperformZhejiang Dahua Tech - A Technology 7.5 21.7 142% 4.6 173% 0.7% 38% 3.7% -2.1% 28.1% 23.4% 1.6% 15.3% 6.4% 12.5% OutperformChina Resources Gas - H Utilities 7.5 15.2 127% 3.1 286% 2.0% 58% 3.5% 3.5% 15.8% 11.1% 16.5% 16.1% 12.5% 11.1% OutperformZijin Mining Group - H Materials 7.1 13.6 120% 1.6 116% 4.0% 114% 4.5% -3.9% 219.7% 215.0% 169.6% 7.1% 2.5% 1.0% OutperformBaic Motor Corp Ltd - H Cons Disc 7.0 6.8 42% 1.1 51% 5.3% 279% 17.5% 12.6% 41.6% 36.9% 26.6% 10.8% 3.2% 5.2% OutperformWeichai Power Co. - H Industrials 6.5 13.3 96% 1.3 98% 3.1% 155% 11.2% 7.9% 54.0% 49.3% 34.1% 7.6% 2.6% 1.2% OutperformEnn Energy Holdings - H Utilities 5.9 12.0 100% 2.5 231% 2.4% 71% 5.0% 5.0% 20.6% 15.9% 21.3% 11.0% 7.4% 5.5% OutperformChina Everbright Intl - H Industrials 5.8 13.1 94% 2.1 155% 2.6% 126% 7.8% 4.5% 31.0% 26.3% 11.1% 8.9% 3.9% 3.4% OutperformHangzhou Robam App - A Cons Disc 5.8 32.7 203% 7.8 377% 1.5% 81% 2.7% -2.1% 17.5% 12.8% 2.5% 27.2% 19.6% 24.9% OutperformSuofeiya Home Collectn. - A Cons Disc 5.0 36.1 224% 8.0 387% 1.3% 66% 1.6% -3.3% 38.5% 33.8% 23.4% 19.8% 12.2% 17.5% OutperformChina Lodging Group Cons Disc 4.7 31.8 197% 5.2 253% 0.9% 48% 2.8% -2.1% 48.4% 43.7% 33.4% 8.4% 0.9% 4.4% OutperformChina Medical System - H Health Care 4.5 18.5 85% 4.0 130% 2.0% 161% 5.9% 1.9% 25.3% 20.6% 7.9% 22.2% 11.4% 17.3% Outperform

Credit Suisse Rating

PER PBR DY FCF Yield Forecast 2-year (16-17E) CFROI (2017E) Value creation

(CFROI less discount

rate)

HOLT CFROIValuation (2017E) Earnings growth (%)

Source: Credit Suisse HOLT, Credit Suisse research

16 May 2017


Companies Mentioned (Price as of 15-May-2017)Alibaba Group Holding Limited (BABA.N, $121.4)BAIC Motor Corporation Limited (1958.HK, HK$7.31)China Construction Bank (0939.HK, HK$6.48)China Construction Bank (601939.SS, Rmb6.15)China Everbright International Ltd (0257.HK, HK$9.93)China Gas Holdings Ltd (0384.HK, HK$11.12)China Lodging Group Limited (HTHT.OQ, $78.4)China Medical System Holdings Ltd. (0867.HK, HK$13.96)China Pacific (2601.HK, HK$29.55)China Pacific (601601.SS, Rmb28.77)China Resources Gas (1193.HK, HK$22.15)ENN Energy Holdings Ltd (2688.HK, HK$36.5)Guangzhou Automobile Group (2238.HK, HK$12.82)Guangzhou Automobile Group (601238.SS, Rmb26.38)Haitian Flavouring & Food (603288.SS, Rmb37.93)Hangzhou Robam Appliances Co Ltd (002508.SZ, Rmb42.11)Inner Mongolia Yili Industrial Group (600887.SS, Rmb18.13)Jiangsu Yanghe Brewery Joint-stock Co., Ltd (002304.SZ, Rmb83.27)Kweichow Moutai Co., Ltd (600519.SS, Rmb419.55)Luxshare Precision Industry Co., Ltd (002475.SZ, Rmb29.0)New Oriental Education (EDU.N, $70.91)Qingdao Haier Co., Ltd. (600690.SS, Rmb13.17)Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (2196.HK, HK$30.75)Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (600196.SS, Rmb31.45)Sunny Optical Technology Group Co.Limited (2382.HK, HK$64.3)Suofeiya Home Collection Co Ltd (002572.SZ, Rmb37.2)TAL Education Group (TAL.N, $120.78)Tencent Holdings (0700.HK, HK$259.0)WH Group Limited (0288.HK, HK$6.83)Wanhua Chemical (600309.SS, Rmb27.97)Weichai Power (000338.SZ, Rmb10.78)Weichai Power (2338.HK, HK$12.62)Wuliangye Yibin Co., Ltd (000858.SZ, Rmb45.18)Zhejiang Dahua Technology Co., Ltd (002236.SZ, Rmb17.7)Zijin Mining Group Co., Ltd (2899.HK, HK$2.59)Zijin Mining Group Co., Ltd (601899.SS, Rmb3.21)

Disclosure AppendixAnalyst Certification The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

16 May 2017


Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 44% (64% banking clients)Neutral/Hold* 39% (61% banking clients)Underperform/Sell* 14% (54% banking clients)Restricted 2%*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.This material is intended for your use only and not for general distribution. This material is not intended to promote or procure a particular outcome in the UK General Election (the "Election"). 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This material does not constitute, and should not be interpreted as, a recommendation by Credit Suisse as to the merits of a particular outcome of the Election.See the Companies Mentioned section for full company names The subject company (0257.HK, 0288.HK, 0700.HK, 0939.HK, 1958.HK, 2196.HK, 2238.HK, 2601.HK, 600196.SS, 600690.SS, 601238.SS, 601601.SS, 601939.SS, BABA.N, EDU.N, TAL.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse provided investment banking services to the subject company (2196.HK, 2238.HK, 600196.SS, 601238.SS, BABA.N, EDU.N) within the past 12 months.Credit Suisse provided non-investment banking services to the subject company (0257.HK, 0700.HK, 0939.HK, 2601.HK, 601601.SS, 601939.SS, BABA.N) within the past 12 monthsCredit Suisse has managed or co-managed a public offering of securities for the subject company (2196.HK, 600196.SS) within the past 12 months.Credit Suisse has received investment banking related compensation from the subject company (2196.HK, 2238.HK, 600196.SS, 601238.SS, BABA.N, EDU.N) within the past 12 monthsCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (000338.SZ, 0257.HK, 0288.HK, 0384.HK, 0700.HK, 0939.HK, 1193.HK, 1958.HK, 2196.HK, 2238.HK, 2338.HK, 2382.HK, 2601.HK, 2688.HK, 2899.HK, 600196.SS, 600519.SS, 600690.SS, 600887.SS, 601238.SS, 601601.SS, 601899.SS, 601939.SS, BABA.N, EDU.N, TAL.N) within the next 3 months.Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0257.HK, 0700.HK, 0939.HK, 2601.HK, 601601.SS, 601939.SS, BABA.N) within the past 12 monthsAs of the date of this report, Credit Suisse makes a market in the following subject companies (0288.HK, 0700.HK, 0939.HK, 1958.HK, 2238.HK, 2382.HK, 2601.HK, 2899.HK, 601238.SS, 601601.SS, 601899.SS, 601939.SS).A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (000338.SZ, 000858.SZ, 002236.SZ, 002304.SZ, 002572.SZ, 0257.HK, 0288.HK, 0384.HK, 0700.HK, 0939.HK, 1193.HK, 1958.HK, 2196.HK, 2238.HK, 2338.HK, 2382.HK, 2601.HK, 2688.HK, 600196.SS, 600519.SS, 600690.SS, 600887.SS, 601238.SS, 601601.SS, 601939.SS, 603288.SS, BABA.N, EDU.N, TAL.N, HTHT.OQ) within the past 12 months.As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2238.HK, 2899.HK).For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=301213&v=73i6e1nrhe7jqpyqksxlrscl0 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0700.HK, 0939.HK, 2196.HK, 2238.HK, 600196.SS, 601238.SS, 601939.SS, BABA.N) within the past 3 years.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.This research report is authored by:Credit Suisse International .........................................................................................................................................Alexander Redman ; Arun SaiTo the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.Credit Suisse International .........................................................................................................................................Alexander Redman ; Arun SaiImportant MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. 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The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.Additional information about the Credit Suisse HOLT methodology is available on request.The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. 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16 May 2017


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