Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment Hang Seng forward PE (consensus) x 25 20 15 10 5 0 Average: 13.5x Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: DBS Vickers Hang Seng forward PBV (consensus) (x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1993 1995 Source: Bloomberg Strategy 1997 1999 +2SD 2001 +1SD Mean 2003 -2SD 2005 -1SD Market will remain highly volatile with lack of visibility in 4Q09. Pair trades remain our preferred strategy while long-only funds should adopt a defensive strategy. Defensive despite continuously strong liquidity. The railway construction sector will likely outperform even when the expected stock market correction and USD technical rebound present, given that RMB600bn has been earmarked for railway infrastructure development this year. Infrastructure investment is expected to peak towards end 2010 or early 2011. 1H09’s project starts should start to generate profits in 2007 2009 2H09 which should in turn lift overall GP margin. We like China Railway Group (390 HK) for this sector. Property sector The Hong Kong property sector should remain relatively resilient as any meaningful interest rate hike is unlikely in the foreseeable future. Luxury projects have been in the spotlight and local investors and speculators have been returning, boosting both prices and take-up rate. Developers should return to expansion mode soon. Office rents remain on the decline albeit on a moderating path. Capital values have rebounded while property investors are fairly priced in terms of valuation. We like MTRC (66 HK) for this sector. As for Chinese property sector, we believe the Chinese government’s real estate policy will remain favourable as it aims to increase new supply to control the pace of property price growth. The recovery of the domestic economy would support the growth of the sector going forward. Given that property prices will be on a moderate uptrend rate while sales volume will remain above the monthly average of 2007, this will pave way for decent 2010 earnings growth for majority of developers. We like CR Land (1109 HK), Shimao (813 HK) and Shui On Land (272 HK). Banking sector Most Hong Kong banks have guided for a more optimistic 2H09 and 2010, especially with opportunities for their China operations given an expected slowdown in loan growth among Chinese banks in 2H09. Resilient asset quality and more write backs on securities are expected. We believe some mild rate hikes in the US sometime next year, as per our economist’s forecast, should help improve Hong Kong banks’ NIM going forward. Our banking analyst believes Chinese banks can expect ‘moderately loose’ monetary policies to remain and only market tools rather than administrative measures to be used to fine-tune sector. Loan quota policy is unlikely and any loan decelerating in 2H09 should not be regarded as tightening of policy. Banks’ valuations will re-rate despite interest rate hikes, as rate hikes usually go along with good economic outlook and improving NIM. Chinese banks are still cheap at below midcycle valuations. We like Bank of China HK (2388 HK) and Bank of China (3988 HK). Telecoms Equipment Sector The China telecom equipment sector shows promising growth potential given the hundreds of billions of RMB in the telecom equipment market which we believe will give the sector scope for continuous re-rating. The sector has been trading at a discount in terms of valuation. Page 71
Regional Equity Strategy 4Q 2009 Country Assessment CCS (552 HK) is our sector top pick, for its attractive valuation and great long-term growth potential from the tower sharing measure in China. We also like CITIC 1616 (1883 HK) , for its steady earnings growth and low risk exposure. Comba (2342 HK) is our long-term sector pick, as we see sustainable earnings growth for the next five years. Consumer - F&B Our analyst believes current valuation premiums for China F&B are likely to remain. 1H09 F&B results were generally inline or above expectations. Besides lower material costs, improvement in product mix was also seen especially in market leaders. Rebounds in raw material prices and fuel costs were noted but their levels were still below that of last year, hence positive margin impact should sustain into 2H09. Better earnings visibility is also seen with resilient demand for most F&B products. We recommend investors to focus on those with lagging valuations such as China Yurun (1068 HK) and China Mengniu (2319 HK). Consumer - Retail For retail in China market, sales expansion of most sectors has been seen, indicating the Chinese retail environment continues to recover. As fundamental improvement sets in, current valuations of selective retailers could potentially consolidate to remerge for better share price performance in the medium term. Retail sales in Hong Kong however, remains in the doldrums. As improvement seen in the local stock and property markets has yet to translate into real benefits for the economy. Given lack of any clear catalyst, our preference remains on those with better earnings visibilities such as Café de Coral (341 HK). Toll Road Sector The PRC toll road sector is becoming more promising given its high correlation to the macro economy and in anticipation of a full-scale economic recovery from 4Q09 onward. We like Sichuan Expressway (107 HK) and Jiangsu Expressway (177 HK). Telcos Despite the tough challenges faced by China’s telcos in 2009, such as rising competition, heavy capex and growing opex, as well as the unfavourable economic conditions, we remain positive on the sector’s long-term outlook, given the low penetration of mobile and broadband users and potential ARPU expansion. We see great re-rating potential, due to its promising long-term growth outlook as well as industry deregulation. We like China Mobile (941 HK) but we are not positive on China Telecom (728 HK) and China Unicom (762 HK). Competition in the local Hong Kong telecom market has subsided somewhat since mid-2008, partly due to the limited room for further tariff cuts and clearer differentiated services and customer positioning among telcos. Hutchtel (215 HK ) might continue to gain high-end market share while earnings outlook for other telcos continue to look gloomy. Oil With possible USD technical rebound and renewed market concern over the US recovery, we believe the near-term crude price lacks fundamental catalyst to increase materially from current level in 4Q09, especially given the weak recovery from world’s oil demand in market. The government’s decision to improve the domestic product oil price flexibility and the relatively stable crude price level around US$70 should benefit Sinopec (386 HK). Pharmaceutical The strong interim results and the possible IPO of Sinopharm at high PE are the key catalysts for the market to re-rate the pharmaceutical counters. Several major counters under our coverage have already reached their historical high share price. Given the promising growth outlook, attractive value, strong balance sheet and favourable policy support, we believe the rerating of the sector has just begun and has a long road ahead. Our top picks are Sino Biopharmaceutical (1177 HK), Guangzhou Pharmaceutical (874 HK) and China Shineway (2877 HK). Shipping We expect the marine transportation sector rally upside should be capped at the mid-cycle valuation level while looking for possible second dips in the sector’s performance The high level of iron ore inventory and possible cut of domestic steel output may pressure freight rates in 2H09. We recommend to sell overvalued dry bulk shipping companies, except for Pacific Basin (2343 HK). For container shipping counters, any recovery is unlikely to be sustainable given high level of idle vessels. We maintain Sell on CSCL (2866 HK) , but recommend investors to buy OOIL (316 HK) on weakness, given its attractive hidden value from properties in China. Fertilizer The overall fertilizer sector has been stabilizing although average selling prices remain weak. Certain fertilizer prices might remain or decline from current level for the rest of the year as stocking would have completed by 3Q. Weak methanol prices are expected to recover gradually in 2H given rising demand as alternative energy application. The positive government policy to further boost the agriculture sector and better develop rural areas should provide some support for fertilizer demand. The current oversupply across different fertilizer types is unlikely to improve significantly in the nearterm but condition is expected to gradually improve. Page 72
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Left Brain Right B - the DBS Vickers Securities Equities Research

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