Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stock picks for China (Cont’d) SECTOR REMARKS STOCK SELECTION Telecoms Neutral – Telco Services Positive – Hardware and infrastructure Property Positive 2009 remains a tough year for China’s telcos, which have faced growing challenges from rising competition (especially in the 3G market), heavy capex and growing opex, as well as the unfavourable economic conditions. By companies, China Mobile (CM) is suffering from slower growth, due to increasing penetration and growing threats from China Unicom (CU) and China Telecom (CT). CT is facing threats from CU in its fixed-line and broadband business in the southern areas, while it remains a big challenge for CT to fulfil its target of 30m new CDMA subscribers this year. For CU, its huge capex and growing opex would eat into its earnings over the next couple of years. However, we remain positive on the sector’s long-term outlook, which would be driven by the low penetration of mobile and broadband users and potential ARPU expansion. Meanwhile, we see great re-rating potential, which is partly due to its promising long-term growth outlook as well as industry deregulation. CM remains our sector top pick this year, for its best earnings visibility and dominance in the 2G market which would continue into the mainstream technology in China in the next two years, in our view. However, we are not as positive on CT and CU, on concerns over low near-term earnings visibility. We remain positive on the telecom equipment sector. Due to the relatively smaller size compared to overseas peers, the sector has been trading at some discount in valuation. However, their promising growth potential underpinned by the hundreds of billions of RMB in the telecom equipment market, we believe the sector deserves continuous re-rating going forward. CCS 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, for its steady earnings growth and low risk exposure. Comba is our long-term sector pick, as we see sustainable earnings growth for the next five years. While policy remains a major overhang, we believe Chinese government’s real estate policy will remain favourable as it aims to increase new supply to control the pace of property price growth. In addition, our affordability analysis shows that there is no urgent need for a reply of austerity measures. In our analysis, housing prices in majority of cities are still affordable despite asset bubbles appearing in some cities, which often catch press attentions. We also analyzed the impact of previous tightening measures on share prices of China property stocks and concluded that the impact from austerity measures is somehow overstated. Our analysis shows that property sales performance is more related to economic growth than tightening policies. In our view, the recovery of domestic economy would support the growth of the sector going forward. We foresee slight volume growth in 4Q due to lower new supply and depletion of pent-up demand. Property prices will still be on uptrend yet at moderate rate. Having said that, we believe sales volume will remain above the monthly average of 2007 when the market was good. This shall pave way for decent 2010 earnings growth for majority of developers. After recent earnings/NAV upgrades and share price correction, the sector is now trading at 12XFY10 P/E and 16% discount to NAV. Valuations remain attractive. We like CR Land and Shimao in anticipation of more positive news flow. Their 2H sales are likely to remain decent, despite many of their peers facing potentially slower sales in the period due to the lack of new launches. We also like Shui On Land as its strategic shift to be volume focus and its prime location focus will ensure its growth potential going forward. China Mobile (941) CCS (552) CITIC 1616 (1883) China Resources Land (1109) Shimao Property (813) Shui On Land (272) Page 77
Regional Equity Strategy 4Q 2009 Country Assessment Sector recommendation and stock picks for China (Cont’d) SECTOR REMARKS STOCK SELECTION China Consumer - Food & Beverages Neutral China Consumer - Retail Neutral Industrial Transportation - Marine Cautious The 1H09 results reported by F&B players were in general in line or above expectations, especially on the margin front where margin expansion was stronger than previously forecasted. Better impact from lower material costs aside, this also indicated improvement on product mix, which has been especially notable for market leaders. Despite some rebounds in raw material prices and in fuel costs were noted in recent months, their levels are still lower than of last year and hence positive margin impact should sustain in the 2H09. This, coupled with resilient demand for most of the F&B products (hence better earnings visibilities), should likely support current valuation premiums. We recommend investors to focus on those with lagging valuations such as China Yurun and China Mengniu. Retail sales growth in China stabilised at a mid-teens y-o-y rate and grew 15.4% for Aug09 and 15.1% for 8M09. For enterprises above designated size, retail sales expansion of most sectors registered a supportive trend. They included a growth of 34.5% for automobile, 23.3% for clothing, 12.7% for grain & oil, and 10.9% for household electric appliances. All these data firmly indicate that the Chinese retail environment continues to recover. While fundamental improvement kicks in, current valuations of selective retailers could potentially consolidate to reemerge for better share price performance in the medium-term. After the disappointing 2Q09 results and the pull back of Baltic Dry Index again, we expect the sector rally upside should be capped at the mid-cycle valuation level. We are looking for the possible second dips of the sector’s performance after the technical rebound in 2Q09. Looking forward, the high level of iron ore inventory and the possible cut of domestic steel output will probably give pressure to freight rates in 2H09. We recommend investors to Sell the overvalued dry bulk shipping companies like China COSCO and China Shipping Development, but hold Pacific Basin Shipping for pair-trade given its stronger internal management. For the container shipping counters, a short-term rally may arise from the seasonal recovery of freight rates and higher season demand in 3Q09. Nevertheless, as the recovery is unlikely to be sustainable due to the high level of idle vessels. We maintain Sell on CSCL, but recommend investors to buy OOIL on weakness, given its attractive hidden value from properties in China. China Yurun (1068) China Mengniu (2319) Gome (493) OOIL (316) Industrial Transportation - Toll Road Positive We have become more confident of the sector given its high correlation to the macro economy in anticipation of a full-scale economic recovery from 4Q09 onward. Our top picks are Sichuan Expressway (BUY, TP HK$4.26) and Jiangsu Expressway (BUY, TP HK$8.07). Sichuan Expressway has good acquisition opportunities and at the same time enjoys higher traffic growth than its peers. Jiangsu Expressway has quality road assets linking metropolises Nanjing and Shanghai, which provides the Group with strong cash flow and resilient traffic growth. In addition, we upgraded Shenzhen Expressway recently (BUY, TP HK$ 4.43), in anticipation of stronger recovery of export in the Pearl River Delta. Sichuan Expressway (107) Jiangsu Expressway (177) Page 78
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Left Brain Right B - the DBS Vickers Securities Equities Research

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