CHINA NATIONAL PEOPLE’S CONGRESS All eyes on stability and...

CROSS-ASSET RESEARCH 1 March 2012

CHINA NATIONAL PEOPLE’S CONGRESS All eyes on stability and consumption

The People’s Republic of China hosts the National People’s Congress (NPC) meeting starting on 5 March. We expect the committee to approve cautious macroeconomic policy to ensure a soft landing with a focus on expanding consumption and stabilising and encouraging private capital investment into strategic industries.

Macroeconomic targets: We expect a 2012 GDP growth target of 7-7.5%, a CPI inflation target of 3.5-4% and prudent monetary policy in 2012, with M2 expected to grow by 14% and fiscal deficits targeted at 1.5% of GDP.

Strategic economic policy is expected to 1) expand domestic demand as a top policy priority; 2) focus on urbanisation; 3) promote more balanced regional development; 4) stimulate service sector growth; and 5) encourage investment stabilisation

Credit perspective: The NPC meeting is unlikely to significantly change corporate credit profiles. However, we do prefer large mass-market developers over the smaller ones, and would stay away from capital-intensive industries. We also prefer to hold shorter-dated bonds.

FX perspective: We expect policymakers to continue favouring CNY appreciation in order to achieve three key objectives: 1) rebalancing of the economy; 2) capping inflation; and 3) deflecting criticism that the CNY is undervalued. If our core scenario of a weaker USD materialises, this would imply CNY appreciation vs USD in 2012 in excess of the 3-4% consensus expectation and the 0.3% currently priced in by NDFs.

Equity perspectives: In this report, our equity research team identifies opportunities in select large-cap banks, mass-market retailing and Internet, telecom equipment/ mobility, commodities and power equipment stocks. We highlight the top equity picks in the table below.

Figure 1: Equity research stock picks

Stock picks Rating/

Sector View Price

Target Potential Upside to Price Target

China Construction Bank 1-Overweight/2-Neutral HK$7.96 23%

China Coal Energy 1-Overwieght/1-Postive HK$13.00 29%

Comba 1-Overweight/1-Positive HK$9.40 58%

Baidu 1-Overweight/1-Positive US$190 40%

Sun Art Retail 1-Overweight/2-Neutral HK$12.20 14%

Data as of 28 February 2012. Source: Barclays Capital estimates

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside theUS who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 56.FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 56. FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 57.

ECONOMICS RESEARCH Yiping Huang +852 2903 3291 [email protected]

Jian Chang +852 2903 2654 [email protected]

Lingxiu Yang +852 2903 2653 [email protected] CREDIT RESEARCH Krishna Hegde, CFA Erly Witoyo Christina Chiow, CFA Timothy Tay, CFA Jit Ming Tan, CFA FX STRATEGY RESEARCH Olivier Desbarres Hamish Pepper Nick Verdi RATES RESEARCH Ju Wang EQUITY RESEARCH Kent Chan BCSTW, Taiwan

May Yan Barclays Bank, Hong Kong Vineet Sharma, CFA Barclays Bank, Hong Kong Candy Huang Barclays Bank, Hong Kong

Phoebe Tse Barclays Bank, Hong Kong

Jason Mann, M.D., Ph.D. Barclays Bank, Hong Kong

Mark Kellock Barclays Bank, Hong Kong Alicia Yap, CFA Barclays Bank, Hong Kong Victoria Li Barclays Bank, Hong Kong

Ephrem Ravi Barclays Bank, Hong Kong

Scott Darling Barclays Bank, Hong Kong

Guo Shou, CFA Barclays Bank, Hong Kong Andrew Lawrence Barclays Bank, Hong Kong Wendy Luo Barclays Bank, Hong Kong

Kirk Yang Barclays Bank, Hong Kong Jones Ku, CFA Barclays Bank, Hong Kong

Anand Ramachandran, CFA Barclays Bank, Hong Kong

Barclays Capital | China National People's Congress

1 March 2012 2

Figure 2: Summary of opportunities across credit, macro and equity Impact Recommendation

Credit Positive Neutral Negative Overweight Underweight Analyst

Debt Markets More CNH and Offshore USD Krishna Hegde

Oil & Gas Timothy Tay

Property Country Garden14s, 15s, 17s

Road King 14s

Mass market, large players

Smaller developers

Evergrande 15s

Glorious Prop 15s

Christina Chiow

High Yield Industrials China Oriental Group 17s

× Cement, Steel, Industrial products

CITIC Pacific 21s, 49s

Jit Ming Tan

High Yield Coal Erly Witoyo

Macro Positive Neutral Negative Recommendation Analyst

Interest Rates Prefer shorter-dated bonds Hold 2s5s repo IRS steepener Ju Wang RMB Medium-term exchange rate policy of controlled RMB appreciation broadly unchanged Olivier Desbarres

Equity Positive Neutral Negative Stock picks Rating Price Target (Potential upside) Analyst

Banks √ CCB 1-OW/2-Neu HK$7.96 (+22.5%) May Yan Consumer √ Discretionary Sun Art Retail 1-OW/2-Neu HK$12.2 (+13.6%) Vineet Sharma Healthcare × Sinopharm 3-UW/3-Neg HK$16.15 (-22%) Jason Mann Insurance Mark Kellock Internet √ e-Commerce × Microblogs Baidu 1-OW/1-Pos US$190 (+40%) Alicia Yap Sina 2-EW/1-Pos US$70 (-0.1%) Alicia Yap Machinery × Sinotruk 3-UW/3-Neg HK$3.01 (-46.5%) Victoria Li

Metals & Mining + Coal China Coal Energy 1-OW/1-Pos HK$13 (+29%) Ephrem Ravi

Oil & Gas √ Upstream × Downstream CNOOC 1-OW/1-Pos HK$21 (+18%) Scott Darling Sinopec 2-EW/1-Pos HK$10 (+14%) Scott Darling Power Equipment √ Power Equipment Dongfang Elec 1-OW/1-Pos HK$35 (+66%) Guo Shou

Property √ Mass Market × Tier 1 Andrew Lawrence

Technology √ PCs Lenovo 1-OW/2-Neu HK$7.5 (+9.6%) Kirk Yang √ Telco Equipment Comba 1-OW/1-Pos HK$9.4 (+58%) Jones Ku √ IT Services Digital China 1-OW/2-Neu HK$19 (+22%) Jones Ku

Telecommunications × Telecom Operators China Unicom 3-UW/2-Neu HK$15 (7.3%) Anand Ramachandran

Notes: Data as of 28 February 2012. Stock ratings: 1-OW: 1-Overweight; 2-EW: 2-Equal Weight; 3-UW: 3-Underweight. Sector views: 1-Pos: 1-Positive; 2-Neu: 2-Neutral; 3-Neg: 3-Negative. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: Barclays Capital estimates


1 March 2012 3

INVESTMENT SUMMARY

The People’s Republic of China hosts the National People’s Congress (NPC) meeting starting on 5 March. We expect the committee to approve cautious macroeconomic policy to ensure a soft landing with a focus on expanding consumption and stabilising and encouraging private capital investment into strategic industries. In this report, we navigate through the issues and policies that the NPC is likely to focus on, examining the likely implications for the financial markets and across asset classes, and we present actionable ideas in credit, foreign exchange and Hong Kong/China equities.

Economics perspectives

We expect the NPC’s policymakers to reach agreement on a number of key policy issues:

The government will probably set a 2012 GDP growth target of 7-7.5% and a CPI inflation target at 3.5-4%, compared with the targets of 8% for growth and 4% for inflation set in 2011.

The authorities will probably continue with the combination of proactive fiscal policy and prudent monetary policy in 2012, with M2 expected to grow by 14% and fiscal deficits to be 1.5% of GDP.

Expanding domestic demand will be a top policy priority, focusing on urbanisation, more balanced regional development, service sector growth, consumption expansion and investment stabilisation.

The State Council will probably take more concrete steps to encourage entry of private sector capital into railways, municipal services, finance, energy, telecommunications, education and healthcare, among others.

The government should accelerate reforms of electricity, petroleum and water prices to better reflect market conditions, resource scarcity and environmental impacts.

The authorities may also extend experiments in value-added taxes for services, as well as resources taxes and property taxes. At the same time it may consider introducing consumption taxes for high energy consumption and high pollution products.

Credit perspectives

We expect more bond issuance but fundamentals to be largely unaffected.

The focus on private sector capital is likely to result in more offshore issuance – both in CNH and USD bond markets.

We look for the property sector to enter a consolidative phase with the renewed focus on reforms and move to property taxes helping larger/better capitalised developers.

Imposition of resource taxes/price liberalisation in petroleum is likely to have a limited impact on credit.

ECONOMICS RESEARCH Yiping Huang +852 2903 3291 [email protected] Jian Chang +852 2903 2654 [email protected] Lingxiu Yang +852 2903 2653 [email protected]

CREDIT RESEARCH Krishna Hegde, CFA +65 6308 2979 [email protected]

mailto:[email protected]�


1 March 2012 4

FX perspectives

We think that smaller current and capital account surpluses will temper the underlying pressure for the CNY nominal effective exchange rate (NEER) to appreciate over the medium term. But we expect policymakers to continue favouring CNY appreciation in order to achieve three key objectives: 1) a gradual rebalancing of the economy (long-term objective); 2) capping inflation (strategic objective); and 3) deflecting criticism that the CNY is undervalued (tactical objective). If our core scenario of a broadly weaker USD materialises, this would imply CNY appreciation vs USD in 2012 in excess of the 3-4% consensus expectation and the 0.3% currently priced in by NDFs.

Rates perspectives

China rates outlook: The significant rally in government bonds and receiving interest in the IRS market took a pause after December as the market pared back the aggressive easing expectations set up following the November RRR cut. The February RRR cut has helped to assure investors that policy remains in a neutral/easing direction – but the market will likely look for more easing measures to price in the PBoC engineering a soft-landing scenario, in our view. The coming NPC should be closely monitored for signals around such moves.

Equity perspectives

China banks – No major surprises; supportive fine-tuning policies likely to continue: We believe the government will continue to target “prudent monetary policy and proactive fiscal policy” but with an easing bias, hence it is likely to “fine-tune” policies after the NPC. Key discussions related to the financial sector are expected to focus on a few areas: 1) encouraging the financial sector to support the real economy, 2) allowing private investment into key industries, and 3) property sector adjustment. We believe bank stocks are more likely to perform in line with the market, following their outperformance over the past three months. Stock pick: CCB (1-OW/2-Neutral; PT HK$7.96).

China consumer – Prefer Discretionary over Staples: With possible policy targets taming CPI to 3.5-4% we would expect real wage inflation to help consumers upgrading and spending more on discretionary products and services. We believe the Discretionary space appears more attractive than Staples. Stock pick: Sun Art Retail (1-OW/2-Neutral; PT HK$12.20).

China healthcare – Caution as government drives costs lower: Healthcare reform is a key priority for China and we expect further political support for healthcare reform at the NPC. The priority is basic low-cost healthcare across China. This involves expanding hospital capacity and ensuring essential drugs are widely distributed and available at low cost. The net effect of government policy is positive for patients but negative for listed names. We reiterate our bearish view and urge caution in the China healthcare space this year. Stock pick: Sinopharm (3-UW/3-Negative; PT HK$16.15).

China insurance – Agricultural insurance likely on top of the priority list: While macro policies can potentially impact the insurance industry, we expect the insurance-specific comments from the NPC and the CIRC to remain consistent with previous comments, with agricultural insurance likely to be high on the list. We expect the NPC and the CIRC are likely to reiterate their goals to improve social security and insurance programmes, encourage participation in commercial medical and healthcare insurance, and establish a catastrophe reinsurance programme. We believe the developments are all incrementally positive for the

FX STRATEGY RESEARCH Olivier Desbarres +65 6308 2073 [email protected]

RATES RESEARCH Ju Wang +65 6308 2801 [email protected]

EQUITY RESEARCH May Yan +852 290 34756 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Vineet Sharma +852 290 34609 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Jason Mann, M.D., Ph.D. +852 290 34576 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Mark Kellock +852 290 32489 [email protected] Barclays Bank, Hong Kong



1 March 2012 5

industry and we reiterate our positive view on the sector. However, we do not expect the profitability or growth outlook for any of the listed insurers to be materially impacted in the short term, other than from macro policies.

China Internet – E-commerce likely to benefit from government’s consumption push: The majority of Internet companies in China were founded and are funded by the private sector, it is one of the few service sectors to embrace creativity and innovation. Therefore, we believe China’s government will continue to support technology improvements and independence of the sector; hence, we see limited “direct” impact from any potential policy changes. That said, we do expect the leadership changes later this year to affect the Internet sector in the following three areas: 1) continued strong growth for the e-commerce sector in the next few years as a result of higher domestic consumption; 2) with the government’s latest regulation limiting new entertainment TV programmes, it has encouraged traditional advertisers to shift their ad budgets from TV to online video; 3) the media and opinions will continue to be tightly controlled, which can be seen by the implementation of real name registrations for microblogs. Stock picks: Baidu (1-OW/1-Positive; PT US$190) and Sina (2-EW/1-Positive; PT US$70).

China machinery – Lower investment-driven economic growth would hit sector hard: The sector would be hit hard by slowing investment, given the government’s increasing emphasis on moderating inflation and shifting economic growth away from inefficient infrastructure investment to consumption. We estimate China’s FAI growth to decelerate to 18.2% in 2012E considering prudent macro easing vs 24% in 2011. Slowing FAI growth has an exponential impact on machinery demand; for every 1.0% change in FAI spending we expect a 2.9% change in industry revenue in 2012E. Stock pick: Sinotruk (3-UW/3-Negative; PT HK$3.01).

China metals – Reforms to address rebalancing of consumption and production: Government policy in China matters for the metals & mining sector on three levels, in our view: 1) domestic demand; domestic supply; and 3) foreign acquisitions. Among the subsectors, coal has the most balanced risk/reward profile on the various potential outcomes in our view. Steel could surprise significantly on the upside if consolidation is enforced, in our view, but often policy announcements have not been followed up with action on the ground. Smaller mining companies globally that have attractive deposits in copper and iron ore but not the capital to develop them could be interesting plays on China’s need to secure raw materials resources. Stock pick: China Coal Energy (1-OW/1-Positive; PT HK$13).

China oil & gas – Rubber stamping policies, but energy reforms may still take time: We expect the forthcoming NPC meeting to essentially confirm some of the recent energy policies that government officials or Chinese oil companies have “drip fed” into the market over the past six months. Despite these reforms, we do not prescribe to the view that China will fully liberalise its energy sector in the near term, owing to the government’s strategy to balance both economic and social needs for the country. Overall, we do not expect the meeting to alter our stock preferences within our China Oil & Gas coverage universe. We continue to prefer companies with an upstream bias, which are also oil price leveraged. Stock picks: CNOOC (1-OW/1-Positive; PT HK$21) Sinopec Corp (2-EW/1-Positive; PT HK$10).

EQUITY RESEARCH Alicia Yap, CFA +852 290 34593 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Victoria Li +852 290 33456 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Ephrem Ravi +852 290 34892 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Scott Darling +852 290 33998 [email protected] Barclays Bank, Hong Kong


1 March 2012 6

China power equipment: Power generation – electricity price reform, grid improvements, and clean energy development: We see key areas of potential reform and affirmation in policy direction in China’s power generation sector, including: 1) the disparity between high coal prices (cost for power producers) and low state-controlled electricity prices (selling price for power producers); 2) power grid improvements (still lacking in long-haul transmission); and 3) clean energy development, including nuclear, natural gas, wind, and solar power generation. Stock pick: Dongfang Electric (1-OW/1-Positive; PT: HK$35).

China property – Policy implications: Price, private and public housing: During the NPC and CPPCC, we expect property policy direction to be a major topic. Based on recent speeches by Premier Wen and Vice President Li, we believe that in 2012 the central government is aiming for: 1) reasonable price correction in tier 1 cities, and moderate price appreciation (less than GDP/income growth) in lower-tier cities; 2) long-term stable and healthy development of the private housing sector, with supply increase in ordinary commodity housing; and 3) 7mn units of new starts/5mn unit delivery of public housing.

China technology – Government to drive IT spending: We expect the China tech space will continue to benefit in the coming years from the government’s favourable policies. In particular, we believe the following three sub-sectors are to be the major beneficiaries: 1) China PCs – momentum to be sustained by policy focusing on boosting inland consumption; 2) China telecom equipment – policies encouraging more private investment should help wireless enhancement capex; 3) China IT services & distribution – likely beneficiary of macroeconomic policy to develop the services sector. Stock picks: Lenovo (1-OW/2-Neutral; PT HK$7.50), Comba (1-OW/1-Positive: PT HK$9.40) and Digital China (1-OW/2-Neutral; PT HK$19).

China telecom services – Sector trend supporting key policies: Telecom services is one of the key service-oriented industries in the China economy, and it is investment-intensive in nature. We expect China’s telecom operators to continue their tariff controls and increase capex in the next one to two years, supporting the government’s incentive of controlling inflation and increasing service sector investment. At the same time, we expect continued support from the government on the development of TD-LTE technology to drive a structural upgrade to the technology-intensive economy. We are more cautious on the Chinese telecom services group within our overall Asia ex-Japan sector universe as we believe the recent switch to higher subsidies associated with more aggressive subscriber acquisition strategies and increasing capex will raise the competitive ante and derail profit margins in 2012. Stock pick: China Unicom (3-UW/2-Neutral; PT HK$15).

EQUITY RESEARCH Guo Shou, CFA +852 290 34536 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Andrew Lawrence +852 290 33319 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH Kirk Yang +852 290 34635 [email protected] Barclays Bank, Hong Kong Jones Ku +852 290 33901 [email protected] Barclays Bank, Hong Kong

EQUITY RESEARCH

Anand Ramachandran, CFA +852 290 34360 [email protected] Barclays Bank, Hong Kong


1 March 2012 7

CONTENTS

INVESTMENT SUMMARY..................................................................................................................3

CONTENTS...........................................................................................................................................7

ECONOMICS RESEARCH: THE NPC MEETING ...............................................................................8

CREDIT RESEARCH...........................................................................................................................12

FX STRATEGY RESEARCH...............................................................................................................14

RATES RESEARCH ............................................................................................................................17

EQUITY RESEARCH: CHINA BANKS...............................................................................................18

EQUITY RESEARCH: CHINA CONSUMER......................................................................................21

EQUITY RESEARCH: CHINA HEALTHCARE ..................................................................................23

EQUITY RESEARCH: CHINA INSURANCE......................................................................................26

EQUITY RESEARCH: CHINA INTERNET.........................................................................................28

EQUITY RESEARCH: CHINA MACHINERY ....................................................................................32

EQUITY RESEARCH: CHINA METALS ............................................................................................35

EQUITY RESEARCH: CHINA OIL & GAS.........................................................................................39

EQUITY RESEARCH: CHINA POWER EQUIPMENT ......................................................................42

EQUITY RESEARCH: CHINA PROPERTY........................................................................................44

EQUITY RESEARCH: CHINA TECHNOLOGY .................................................................................48

EQUITY RESEARCH: CHINA TELECOM SERVICES.......................................................................50

BARCLAYS CAPITAL’S CHINA & HONG KONG EQUITY COVERAGE UNIVERSE ....................53


1 March 2012 8

ECONOMICS RESEARCH: THE NPC MEETING

What do we expect from the annual meeting?

We expect the upcoming National People’s Congress (NPC) meeting to approve cautious macroeconomic policy expansion to ensure a soft landing. The key policy priorities for 2012 could include expanding domestic demand by increasing consumption and stabilising investment; encouraging private capital entering some key industries; reforming resource prices; and extending experiments of value-added taxes for services, property taxes and resource taxes.

The NPC is scheduled to hold its annual meeting at the beginning of March to approve the key policy agenda for 2012. We expect the policymakers to reach agreement on a number of key policy issues:

The government will probably set a 2012 GDP growth target of 7-7.5% and a CPI inflation target at 3.5-4%, compared with the targets of 8% for growth and 4% for inflation set in 2011.

The authorities will probably continue with the combination of proactive fiscal policy and prudent monetary policy in 2012, with M2 expected to grow by 14% and fiscal deficits to be 1.5% of GDP.

Expanding domestic demand will be a top policy priority, focusing on urbanisation, more balanced regional development, service sector growth, consumption expansion and investment stabilisation.

The State Council will probably take more concrete steps to encourage entry of private sector capital into railways, municipal services, finance, energy, telecommunications, education and healthcare, among others.

The government should accelerate reforms of electricity, petroleum and water prices to better reflect market conditions, resource scarcity and environmental impacts.

The authorities may also extend experiments in value-added taxes for services, as well as resources taxes and property taxes. At the same time it may consider introducing consumption taxes for high energy consumption and high pollution products.

Policy blueprint for the Li Government As this NPC annual meeting will be the last before the leadership transition, expected to take place at the Party Congress in October 2012 and the National People’s Congress in March 2013, some investors expect policymakers to do the minimum. We think this may not be the case, although we note the authorities are likely to attach greater importance to growth and stability. The transition itself should not hold up the key reform agendas, in our view.

Premier Wen Jiabao already told his staff that this would be his last Government Work Report and he wanted to conclude on a strong footing. We think there are at least three issues on Premier Wen’s agenda: 1) stabilisation of economic growth; 2) correction of housing prices; and 3) increasing spending on education (last year, Wen promised to raise education expenditure to 4% of total budget in 2012, a target set by the NPC).

On 16 February 2012, Vice Premier Li Keqiang, who is widely expected to take over as the Premier next year, published an article “Further implementing the strategy of expanding

ECONOMICS RESEARCH Yiping Huang +852 2903 3291 [email protected] Jian Chang +852 2903 2654 [email protected] Lingxiu Yang +852 2903 2653 [email protected]



1 March 2012 9

domestic demand in the reform and opening processes”. 1 In the article, Li gave a comprehensive overview of the guidelines of economic policy, and we believe it may be viewed as an informal policy blueprint for the Li Government.

Li set the macroeconomic policy objectives in the following order: speed, structure and price. A year ago, however, price (or inflation) was the top policy priority. This shift we believe reflects Li’s assessment that stabilising economic growth has become more challenging. While inflation risks have not gone away completely, the consensus view is that inflation pressure should ease in the coming months.

Li argued that the key macroeconomic policy goal should be to boost domestic demand, through expansion of consumption and stabilisation of investment. Specifically, Li discussed needed changes in the following areas:

Urbanisation. Per capita consumption in the urban areas is about 3.6 times of that in rural areas. An increase in the urbanisation rate by 1 percentage point (pp) could create 10 million jobs in the cities and increase consumption expenditure by CNY100 billion. One critical measure to promote urbanisation is to extend the social security, housing, education, healthcare and cultural services to cover migrant workers.

Balanced regional development. One important symptom of underdeveloped regions is lagging urbanisation. The government should continue to support development of inland and Northeast provinces and, at the same time, promote industrial upgrading in the coastal area.

Development of the service sectors. The share of services in Chinese GDP was 43% in 2011. This was much lower than an average of 70% for developed economies and 53% for developing economies. Services have significant development potential in three broad areas: 1) modern logistics, e-commerce, research and innovation; 2) tourism, gyms, elderly care and household services; and 3) strategic industries.

Macroeconomic policy framework Our expectation is that the government will likely recommend targets for GDP growth of 7-7.5% (most likely 7.5%) and CPI inflation of 3.5-4% (most likely 4%) for 2012. These targets are consistent with broad expectations of a soft landing in China. Most government officials believe that GDP growth could still stay close to 8.5% this year. We believe a lower growth target would reflect the central government’s intention to reduce pressure on local governments.

The authorities will probably reiterate the macroeconomic combination of “prudent monetary policy” and “proactive fiscal policy”. These Chinese-style terms do not indicate by themselves what exactly the policymakers are going to do. For instance, the People’s Bank of China (PBoC) has been implementing “prudent monetary policy” since at least the beginning of 2011. We note that monetary policies, however, were tightened during the first three quarters but then loosened from the last quarter of the year.

Judging from the current macroeconomic momentum, we believe that the monetary policy stance is somewhere between neutral and easing. During the fourth quarter of 2011, PBoC started to add liquidity to the system, as total social financing started to expand after several quarters of decline.

1 The article was published in the Party’s official magazine “Qiu Shi”. For a Chinese version of the article, please see the following website: http://cpc.people.com.cn/GB/64093/64094/17128057.html


1 March 2012 10

However, we do not expect aggressive easing of the monetary policy, at least for now. This is mainly because, so far, growth moderation has been limited. Meanwhile, the inflation risks have not disappeared completely, especially if the Chinese and global economies weaken less than the markets expect. Domestic wage increases and global commodity price increases could also generate upside surprise to Chinese inflation this year.

During past months, the PBoC relied mainly on open market operations to manage liquidity conditions. Before the latest move in February, it had only cut the reserve requirement ratio (RRR) once in November 2011 amid capital outflows. At end-2011, the central government withdrawal of CNY1.5 trillion from the central bank added liquidity to the system. And before the Chinese New Year in mid-January, the PBoC chose to use reverse repos rather than the widely expected RRR cut to inject liquidity to meet seasonal needs.

As evidenced by the February RRR move, the PBoC is likely to stay on the easing side in order to stabilise the slowing economy, although policy actions will remain cautious, in our view. The PBoC has set to achieve around 14% M2 growth in 2012. As shadow banking businesses are likely to be weaker this year, new credit will probably be slightly greater than last year, in our opinion. But more debt issuance should partly offset shrinking shadow banking business. We note the reversal of cross-border capital flows from flight in the fourth quarter to inflows in the new year may reduce the need to add more liquidity. Previously, we had expected the PBoC to cut the RRR four times during the first half of 2012. Now it looks likely that the number of cuts will be less.

We expect the PBoC’s currency policy will be constrained by two primary factors: slowing exports and the US election. The inflation outlook could bring some surprise. Given significant narrowing of trade surpluses in recent years and expected moderation of export growth, officials’ desire to allow currency appreciation has probably declined. But the presidential election in the US probably means escalating external pressures. We expect renminbi to appreciate by a modest 2% against the dollar in 2012. If inflation does surprise on the upside, however, then we may see more appreciation.

Though still described as “proactive”, fiscal policy should continue to exit the stimulus policy introduced three years ago. We expect the planned budget deficit to be CNY800bn (with some upside) in 2012, or about 1.5% of GDP, compared with CNY900 billion planned for 2011 and the CNY520bn actual outcome. The government will likely increase spending on both education and social housing. However, if economic growth slows rapidly, the government may quickly step up spending efforts to support growth.

Some key reform areas While the leadership transition may increase political sensitivity in some areas, we don’t expect to see policy discontinuity. The bottom line, in our view, is that the key policymakers for the next government are already part of the current decision-making process. We expect the government to focus on a number of policy areas in 2012.

Electricity, petroleum and water prices. Reform gathered more momentum recently, evidenced by repeated upward adjustments of fuel prices, despite moderating economic growth and still relatively high inflation pressure. One outstanding issue is the relative price difference between coal and electricity – while coal prices are more or less determined by market conditions already, electricity prices remain tightly regulated by the government.

As we have argued repeatedly before, factor price distortion was an important cause of resource inefficiency and structural imbalances. Therefore, removal of these distortions,


1 March 2012 11

which could generate inflation pressure, should play a critical role in facilitating transition of the Chinese growth model and put Chinese growth on a more sustainable path. However, we have to wait and see how far the government can go in overcoming political resistance to reform of resource prices in the near term.

Value-added, property and resource taxes. Fiscal reform is one of the longer-term policy tasks faced by the Chinese government. The overall goal should be to improve both revenues and responsibilities of local governments. Increasing local tax revenues and developing local government bond markets are all part of that broad effort.

In the short term, however, fiscal reforms are likely to focus on several specific items. 1) The experiment of value-added taxes for services in Shanghai may be extended to other regions this year. Xinhuanet reported on 17 February 2102 that Beijing, Shenzhen, Jiangsu, Tianjing and Chongqing have already applied for the pilot. The purpose of this reform is to reduce tax burdens on service activities and encourage development of the service sector. 2) The property taxes currently being trialled in Shanghai and Chongqing may be extended to some other cities. 3) The government will probably consider extending resource taxes from oil and gas to other categories, such as coal. Both property and resource taxes should generate significant revenues for local governments.

In addition, we expect the government may also introduce consumption taxes on goods with high energy intensity and high pollution.

Private investment into key industries. In May 2010, the State Council issued a policy circular to encourage and guide private sector investment, especially into areas where the private sector was prohibited previously. These included railways, municipal services, finance, energy, telecommunications, education and healthcare, among others. So far, however, this policy has achieved very limited results.

Both Premier Wen and Vice Premier Li emphasised recently the importance of the private sector entering key industries. It isn’t clear yet what more specific steps the government will take this year to make this happen. But with somewhat tighter financing conditions, there should also be greater demand for capital outside the state sector. The widely reported financing difficulties faced by the railway industry are a good example.

Housing policy. The condition of the housing market is probably one of the most uncertain factors for the Chinese economy in 2012. Since introduction of housing purchase restrictions in April 2011, transaction volumes collapsed, prices started to decline and investment decelerated. It has already become a major drag on economic growth. But likely policy responses remain unclear at this stage. Vice Premier Li recently emphasised the importance of fulfilling the construction target for social housing – 10 million apartments in 2011 and 7 million in 2012. He also urged the central and local governments to set aside enough funds for this activity.

Local governments, however, have already started to exert mounting pressure to reverse the policy. So far, efforts by individual local governments to relax housing restrictions were stopped by the central government. And this game will likely continue. Premier Wen reiterated recently the need for some price correction. But even his position started to shift slightly – he now believes it is not necessary for everybody to own an apartment as long as he/she has a place to stay. Clearly, the restrictions will have to be reversed, sooner or later. And the policymakers’ ideal scenario is for property taxes to gradually replace administrative restrictions. But when and how this happens could have significant implications for economic growth and macroeconomic policy.


1 March 2012 12

CREDIT RESEARCH

More bond issuance; Fundamentals largely unaffected

The focus on private sector capital is likely to result in more offshore issuance – both in CNH and USD bond markets.

We look for the property sector to enter a consolidative phase with the renewed focus on reforms and move to property taxes helping larger/better capitalised developers.

Imposition of resource taxes/price liberalisation in petroleum is likely to have a limited impact on credit.

Debt markets: Expect more offshore issuance – both in CNH and USD The encouragement for private sector capital, coupled with the tightness in liquidity in the banking system, is likely to encourage more borrowing in the bond markets – both domestically and offshore. Offshore, we expect issuance to increase in the CNH and USD markets. CNH bond yields have increased in recent months even as issuance has moderated. We expect state-owned enterprises/large corporations to source more funding from the CNH market. Chinese corporates have been borrowing at an increased pace from the offshore bond markets, mainly for funding overseas investments. We look for Chinese corporates to constitute a larger proportion of the Asian corporate bond markets in coming years as issuance increases.

Petroleum price liberalisation: Medium-term positive; near-term effect limited While the gradual liberalisation of gasoline and diesel prices is positive in the medium term for Chinese refiners, we think the impact on credit profiles is limited in the near term. First, the magnitude of the increase in fuel prices in the near term is unlikely to be adequate to reverse losses at refiners given the sharp rise in crude oil prices over the past year. Furthermore, we think it is unlikely for any increase in fuel prices to be meaningful in the near term as long as domestic inflation remains elevated above 4%. Second, given aggressive targets for growing reserves and production, we believe elevated levels of capex remains the key credit driver for Chinese oil & gas companies (eg, CNPC and Sinopec) in the short term. We think any attempt to execute a large-scale debt-funded merger or acquisition will likely pressure credit metrics.

Property: Consolidative phase as government continues focus on reforms We expect the real estate sector to enter a consolidative phase of the industry lifecycle, as the government focuses on reforms in the sector. Nationwide property taxes are in focus, and property taxes could eventually be extended to more cities. However, before a more sustainable system is in place, we expect the government to have to maintain a tough stance on developers, investment and speculative demand to ensure affordability. We believe developers that focus on the mass market will do relatively better, and those that are larger and better capitalised will grow bigger and survive at the expense of the smaller players. We would overweight mass market developers such as Country Garden (Overweight 14s, 15s and 17s; Market Weight 18s), and also large developers like Evergrande (Overweight 15s). We would underweight smaller developers such as Road King (Underweight 14s) and Glorious Property (Underweight 15s).

CREDIT RESEARCH Krishna Hegde, CFA +65 6308 2979 [email protected] Erly Witoyo +65 6308 3011 [email protected] Christina Chiow, CFA +65 6308 3214 [email protected] Timothy Tay, CFA +65 6308 2192 [email protected] Jit Ming Tan, CFA +65 6308 3210 [email protected]


1 March 2012 13

HY Industrials: Stay cautious on shift away from investment; improvement in 2H12E A stabilisation in investment will likely weigh on demand for cement, steel and industrial products. This, coupled with excess capacity and elevated inventory levels, will likely keep product prices weak in the first half of 2012. We expect industry consolidation will remove some supply overhang in 1H12. A potential loosening of domestic liquidity conditions during the year could spur product demand, supporting price increases, and hence earnings, in 2H12E. For now, we remain cautious on the Chinese high-yield industrial corporates. We believe potential negative earnings surprises and a likely weak 1H12 operating outlook will continue to weigh on bond valuations in the immediate future. We would look to reassess our cautious views on the Chinese industrial corporates after the 2011 earnings season is completed. We would recommend underweighting China Oriental Group (Underweight 17s) and CITIC Pacific (Underweight 21s and 49s).

HY Coal: Resource tax has a limited impact The implementation of a resource tax on coking coal last November will have only a limited impact on the credit profile of Chinese coking coal producers, in our view. The tax increase to CNY8-20/mt from CNY3-5/mt is relatively insignificant, comprising less than 1% of the current price of coking coal. Coal producers should be able to pass on the higher cost to customers given the ongoing coking coal shortage in the domestic market. We are relatively constructive on the near-term credit outlook for the Chinese coking coal players. We expect coal prices to remain firm, especially in 2H12 when China’s economy is expected to reaccelerate. At the same time, increased production should fuel cash flow growth in 2012E.

Figure 3: USD bond issuance by China borrowers (USD bn)

Figure 4: Monthly issuance of CNH bonds (RMB bn)

0

2

4

6

8

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16

18

20

2009 2010 2011 2012 YTD

High Grade High Yield

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2011 2012

Source: Barclays Capital Source: Barclays Capital, CMU


1 March 2012 14

FX STRATEGY RESEARCH

CNY appreciation to help achieve three key strategic and tactical objectives

We think that smaller current and capital account surpluses will temper the underlying pressure for the CNY nominal effective exchange rate (NEER) to appreciate over the medium term.

But we expect policymakers to continue favouring CNY appreciation in order to achieve three key objectives: a gradual rebalancing of the economy (long-term objective), capping inflation (strategic objective) and deflecting criticism that the CNY is undervalued (tactical objective).

If our core scenario of a broadly weaker USD materialises, this would imply CNY appreciation vs USD in 2012 in excess of the 3-4% consensus expectation and the 0.3% currently priced in by NDFs.

The ongoing rebalancing of the Chinese economy will likely mean a further modest narrowing of the current account surplus this year, in our view, while gradual capital account liberalisation is likely to translate into smaller and more volatile net capital inflows. As a result, we think that the underlying balance of payments pressure for CNY to appreciate will temper in the medium to long term.

This would tie in with the goal of the People’s Bank of China (PBoC) of slowing FX reserve accumulation whilst allowing appreciation – albeit slower – in the CNY NEER, which is up about 15% since mid-2006, according to our estimates. We think that CNY NEER appreciation will help achieve three key strategic and tactical policy objectives.

Rebalancing tool: We think that PBoC policies are increasingly geared towards the rebalancing of Chinese growth away from low to high value-added exports and more broadly from exports and investment towards household consumption (China: Beyond the Miracle, Part 4 – The great wave of consumption upgrading, 9 January 2012). We argue that higher minimum wages, urbanisation, generous household credit policies, increasing focus on health and the environment and CNY appreciation are part and parcel of this rebalancing. The clearest evidence is investment’s diminishing contribution to GDP growth, the negligible contribution from net exports (Figure 5) and rapid narrowing of the current account surplus from over 10% of GDP in 2007 to our forecast 2.3% of GDP this year (Figure 6).

Disinflationary tool: While tighter interest rate policy and slowing GDP growth have contributed to a fall in Chinese CPI inflation from a three-year high above 6%, CNY appreciation has arguably also contributed to disinflation. In 2011, China was the only non-Japan Asia (NJA) economy to record NEER appreciation, despite CPI inflation being above its five-year historical average across NJA (with the exception of Indonesia and to a lesser extent Philippines), as shown in Figure 7.

Indeed, we find that the pace of year-on-year CNY NEER appreciation has historically lagged year-on-year CPI inflation by about seven months (Figure 8). The unexpected jump in CPI inflation to 4.5% y/y in January 2012 and our economists’ forecast of about 4% inflation by end-year thus point to CNY NEER appreciation of around 4% in 2012,

FX STRATEGY RESEARCH Olivier Desbarres +65 6308 2073 [email protected] Hamish Pepper +65 6308 2220 [email protected] Nick Verdi +65 6308 3093 [email protected]

Rebalancing and liberalisation likely to result in smaller balance of payments inflows, slower CNY

NEER appreciation

CNY appreciation helps fulfils rebalancing, disinflationary and

political objectives

CNY appreciation is one of many tools to rebalance economy from

exports and investment to consumption

CNY appreciation helped cap inflation in 2011

4% inflation broadly consistent with 3-4% CNY appreciation vs USD, if USD broadly stable this

year

https://live.barcap.com/go/publications/content?contentPubID=FC1779161�



1 March 2012 15

Figure 5: Consumption increasingly important relative growth driver

Figure 6: Chinese current account surplus is now modest

Contribution to GDP growth 2008 2009 2010 2011 2012F

Private consumption (pp) 3.0 3.1 2.8 3.6 3.0

% of GDP growth 31 34 27 39 37

Gross capital invest.(pp) 4.6 8.4 5.6 5.0 4.3

% of GDP growth 48 91 54 54 53

Net exports (pp) 0.8 -3.6 1.0 -0.5 -0.4

Government cons. (pp) 1.2 1.3 1.0 1.2 1.2

GDP (%) 9.6 9.2 10.4 9.2 8.1

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012(f)

2013(f)

Current account surplus, % of GDP

Source: Barclays Capital estimates Source: Barclays Capital estimates

down from about 6.5% in 2011. This would tie in with the consensus expectation that CNY appreciation vs USD will be slightly slower this year (around 3-4%) than in 2011 (4.7%), if – and this is a key assumption – China’s trading partner currencies are broadly flat vs the USD this year.

Indeed, we find that the pace of year-on-year CNY NEER appreciation has historically lagged year-on-year CPI inflation by about seven months (Figure 8). The unexpected jump in CPI inflation to 4.5% y/y in January 2012 and our economists’ forecast of about 4% inflation by end-year thus point to CNY NEER appreciation of around 4% in 2012, down from about 6.5% in 2011. This would tie in with the consensus expectation that CNY appreciation vs USD will be slightly slower this year (around 3-4%) than in 2011 (4.7%), if – and this is a key assumption – China’s trading partner currencies are broadly flat vs the USD this year.

Figure 7: China was only NJA economy in 2011 where currency was disinflationary

Figure 8: Chinese NEER appreciation tends to lag inflation

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-5

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Chi

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Indi

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aysi

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NEER, % (2011)

CPI, % y/y (Dec 2011)

Average CPI, y/y (Jan 2006-Nov 2011)

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2007 2008 2009 2010 2011 2012 2013-4

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CPI, advanced seven months (% y/y)Barcap

forecast

Note: WPI-inflation for India. Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital estimates

4% inflation broadly consistent with 3-4% CNY appreciation vs USD, if USD broadly stable this

year


1 March 2012 16

If these currencies continue to appreciate vs USD as they have done year-to-date – our core scenario – USD/CNY will have to fall by more than 3-4% this year to generate 3-4% CNY NEER appreciation. Therefore, the risk to our current 12-month USD/CNY forecast of 6.08 (3.5% below current spot) is likely biased to the downside. Certainly, current NDF pricing of 0.3% USD/CNY downside over 12 months appears far too conservative if our core scenario of a broadly weaker dollar materialises.

Geopolitical tool: CNY appreciation, while too slow in the eyes of G20 policymakers, has likely avoided more pronounced US criticism and, importantly, sanctions. In the month preceding G20 Finance Minister and Central Bank Governor meetings, G20 Leader meetings and US-China Strategic & Economic Dialogues (SED) we estimate that the CNY NEER has on average appreciated 0.6%. In the fortnight following these events, the CNY NEER has on average been broadly unchanged. The next G20 Leaders’ Summit is scheduled for 18-19 June, respectively. No date has been set for the next SED.

Downside risk to market expectations and NDF pricing of

USD/CNY

PBoC can tweak CNY to fulfil tactical geo-political goal


1 March 2012 17

RATES RESEARCH

China rates outlook: Eyeing more support for growth

Eye on NPC for further policy direction The significant rally in government bonds and receiving interest in the IRS market took a pause after December as the market pared back the aggressive easing expectations set up following the November RRR cut. The February RRR cut has helped to assure investors that policy remains in a neutral/easing direction – but the market will likely look for more easing measures to price in the PBoC engineering a soft-landing scenario, in our view. The coming NPC should be closely monitored for signals around such moves.

Two more RRR cuts needed in 1H to assure liquidity On the monetary policy front, we think more RRR cuts are needed: assuming a modest monthly FX inflow of around CNY100bn and a rebound of the money multiplier to 4x (from December’s 3.79x), then we estimate there remains a need for two to three more RRR cuts of 50bp each to achieve the PBoC’s M2 target of 14% in 2012.

We think May and August are likely months for RRR cuts given that June and September are challenging months for interbank liquidity conditions due to banks’ quarterly regulation requirements. However, we think there is also a chance of an RRR cut in April, as the favourable impact from the return of Chinese New Year liquidity is likely to finish in March, whereas we expect the impact of fiscal spending on liquidity will be negative in both April and May. Most importantly, we think there is some urgency for policymakers to ensure that loan growth rebounds in 1H to prevent growth from undershooting; hence, our expectation that RRR cuts are likely to be front loaded this year.

Figure 9: Projection of China liquidity assuming two more RRR cuts in 1H

(CNYbn) Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 Dec-11

Reverse repo -352 352 Net OMOs (excluding reverse repo) 9 122 183 244 -50 126 -174Regular RRR (including snow ball effect) 13 -250 348 -696 82 171 98Margin account deposit RRR 0 0 0 0 -110 -110 -80Fiscal Impact -93 -358 -319 87 9 -350 1159FX inflows 100 100 100 100 100 141 -100Currency in circulation 23 73 -22 333 561 -950 -300Change in Liquidity 52 -313 290 68 240 -620 603Excess reserve ratio projected (with additional 50bp RRR in April and June) 1.49% 1.46% 1.85% 1.52% 1.50% 1.23% 1.98%PBOC announced excess reserve ratio 2.00%

Source: CEIC, Barclays Capital estimates

Bonds supported by policy “fine-tuning” but swap curve likely to steepen We believe the government bond market will remain cautiously optimistic in 1H as monetary policy turns easier compared with last year. Further RRR cuts by the PBoC and a still sluggish growth trend are likely to support demand for government bonds from financial institutions. We continue to hold a steepening view on the repo IRS curve, however, as we expect leverage accounts to express a view of economic recovery in the IRS space. However, we only expect the 2s5s repo IRS slope to steepen mildly to the 40bp level (currently 22bp) as the PBoC’s easing is likely to be more measured this time around. If the NPC meeting sends a more supportive signal for growth, we see potential for this trade to perform better.

RATES RESEARCH Ju Wang +65 6308 2801 [email protected]


1 March 2012 18

EQUITY RESEARCH: CHINA BANKS

No major surprises; supportive fine-tuning policies likely to continue

We believe the government will continue to target “prudent monetary policy and proactive fiscal policy” but with an easing bias, hence it is likely to “fine-tune” policies after the NPC

Key discussions related to the financial sector are expected to focus on a few areas: 1) encouraging the financial sector to support the real economy, 2) allowing private investment into key industries, and 3) property sector adjustment

We believe bank stocks are more likely to perform in line with the market, following their outperformance over the past three months.

More “fine-tuning” of policies expected

According to the statement announced by Politburo on 21 February 2012, the government will maintain proactive fiscal policies and prudent monetary policies in 2012, and “fine-tune” macroeconomic policy, given current global and local economic uncertainties. Moreover, in the latest meeting of the State Council held in early February, Premier Wen Jiabao, said that the government would make a proper judgement as early as possible and take quick action when things happen, with fine-tuning of policies likely to begin in the current quarter. The government work report prepared by Wen will be presented in National People’s Congress (NPC) in early March (last month of 1Q), hence we expect more “fine-tuning” to be announced to support economic growth after the NPC.

Three key focuses related to the financial industry

We believe the discussion at the NPC’s financial section will likely focus on three areas: 1) encouraging the financial sector to support the real economy, 2) allowing private investment into key industries, and 3) property sector adjustment.

The government and regulators have been stressing the financial sector should support the real economy:

− In the Fourth National Financial Work Conference (NFWC) held on 6-7 January 2012 Premier Wen conveyed a key message: "financial services should closely serve the real economy"

− On 20 February 2012, CBRC’s chairman, Shang Fulin, urged banks to make sure the real economy could receive adequate credit support. In fact, regulators have implemented strict control on shadow banking activities (see our comment: China Banks: CBRC intensifies control of shadow banking activities, dated 2 February 2012). At the same time, the CBRC has issued multiple measures to encourage SME lending through lowering risk-weighting for small-business loans, excluding small-business loans from LDR calculation, as well as allowing banks to issue small enterprise financial bonds to support SMEs.

EQUITY RESEARCH Asia Ex-Japan Banks 2-NEUTRAL May Yan +852 290 34756 [email protected] Barclays Bank, Hong Kong Sean Hung, CFA +852 290 34799 [email protected] Barclays Bank, Hong Kong Shujin Chen +852 290 34885 [email protected] Barclays Bank, Hong Kong




1 March 2012 19

Meanwhile, the government could allow private investment into key industries, which will also reduce shadow banking risks.

− In the last State Council meeting, Premier Wen said the government should encourage private investment flow to fields such as financial services, energy, transport and social services

− Possible policies may include licensing loosening for private investment into micro-finance and community banks, and more investment into the equity and debt markets.

Regarding the real estate market, a goal of property policy is to 1) bring property prices back to “reasonable levels” and 2) promote long-term, stable and healthy development of the real estate market. We do not expect significant reversal of the property control measures but some adjustments to the controls may be possible. Banks may also cut mortgage rates to boost their weaker-than-expected loan growth, which would help property sales.

Positives and negatives from NPC for the bank sector

Positive impacts: Deposits flow back to banks – With more regulation on shadow banking and private

lending, we believe some funding and liquidity from the shadow banking sector could be flowing back to the banking industry as deposits, which may strengthen banks’ capacity for further loan and asset growth.

SME lending could accelerate – To support the real economy, banks are encouraged to increase their lending to SMEs, which could help banks improve their profit margin and alleviate asset quality deterioration risk.

Liquidity risk could reduce – If private investment can invest in some key sectors, liquidity and funding shortage could be alleviated.

Default risk of developers could be mitigated – In our view, any quiet loosening in the real estate market would help relieve developers’ liquidity pressure and eventually reduce banks’ NPLs.

Negative impacts: More competition – Private investment entering several sectors could create potential

competition with banks if their activities cannot be regulated.

Lower NIM – Loosening policy could reduce banks pricing power, which leads to lower mortgage and lending rates, and is negative for banks’ net interest margin.

Our view on H-share China banks

We believe our profit growth forecast of 10% for FY12 is conservative. Loan growth, judging by Jan and Feb trends, could have some downside risk from market talk of RMB8tn. NIM may be moderately under pressure as more loans will be given than in 2011 and economic slowdown could result in less loan pricing power. On the other hand, deposit competition may be slightly lower, with CBRC strengthening controls on off-balance sheet financing and


1 March 2012 20

wealth management products. In addition, asset quality could be better-than-expected with loosening liquidity bias.

Despite the significant rally in the past few months, we still see 10% upside to H-share China bank stocks, and a few positive catalysts, including strong 2011 earnings (to be reported in the second half of March). However, we believe bank stocks are more likely to perform in line with the market going forward, following their outperformance over the last three months.

Meanwhile, the performance of China stocks will depend on bank-specific catalysts too, including details of policy fine-tuning, SME growth and asset quality, equity-raising plans, new capital requirement and earnings surprises. We expect bank stocks to perform in line with the market from here, rather than outperform as they have done in the past three months, leaving us somewhat neutral on the China banks. We maintain our 1-OW ratings on CCB (PT HK$7.96), ICBC (PT HK$6.86) and Minsheng (PT HK$9.12).


1 March 2012 21

EQUITY RESEARCH: CHINA CONSUMER

Prefer Discretionary over Staples

With possible policy targets taming CPI to 3.5-4% we would expect real wage inflation to help consumers upgrading and spending more on discretionary products and services. This ties in well with our preference for Discretionary over Staples stocks in China. We believe Discretionary appears more attractive than Staples, with the Discretionary space (excluding Sportswear) trading at about 15x our earnings forecasts for 2012 versus Staples at 24x.

Urbanisation is a policy focus, which should aid new home formation and continued growth in demand for white goods and electrical appliances. Beneficiaries would include Gome (493 HK, 1-OW; PT HK$3.70), one of our top picks in the Discretionary space.

The attempt to raise taxes and electricity tariffs could result in a squeeze on disposable income and spending and these remain key risks to continued consumer spending growth, in our view.

Top picks in China Consumer include Belle (1880 HK; PT$ HK$17.80), Golden Eagle (3308 HK; PT HK$24.00), Sun Art Retail (6808 HK; PT HK$12.20), China Resource Enterprises (0291 HK; PT HK$30.50), Hengan (1044 HK; PT HK$69.00) and Mengniu (2319 HK; PT HK$28.50), all rated 1-OW. We use a GARP approach (growth at a reasonable price) in selecting our list of top picks – as evidenced by a PEG of slightly less than 1x and our strong >30% growth forecasts, according high importance to management quality.

Discretionary stocks trading at attractive levels We believe the China Discretionary stocks appear attractive at 2012E P/Es of 15x, given our forecasts of underlying earnings growth of 17%, which we view as undemanding. Staples, on the other hand, look expensive at 24x 2012E P/E, despite our forecast of 35% earnings growth in 2012. Moreover, there is a potential downside risk to our earnings growth forecasts in 2012 if commodity prices hold firm and revenue growth slows.

Top picks For Discretionary, along with Gome (supported by urbanisation, as mentioned above) we like Belle, Golden Eagle and Parkson (3368 HK; 1-OW; PT HK$13.20). We like the department stores because they are in the midst of massive new capacity adds. We believe that with the majority of incremental demand coming from third-tier cities and beyond, these operators will need to open more stores in smaller cities to stay competitive and relevant to their concessionaires.

For Staples, we keep in mind the following themes when determining our stock picks: 1) strengthening bargaining power of modern retailers vs. brands; 2) businesses that have strong revenue growth visibility, either from market share gains in a fragmented space or from strong industry growth rates or both; 3) businesses that import a large part of their raw materials, as domestic soft commodity prices are harder to predict and have poor correlation with global softening in commodity prices. Our top picks are Sun Art Retail, China Resources Enterprises, Hengan, Mengniu and Ajisen (538.HK, 1-OW)

EQUITY RESEARCH Hong Kong/China Apparel, Footwear & Textiles 2-NEUTRAL Hong Kong/China Department Stores/Broadlines 2-NEUTRAL Hong Kong/China Food, Beverages & Personal Care 2-NEUTRAL Vineet Sharma +852 290 34609 [email protected] Barclays Bank, Hong Kong Candy Huang +852 290 34883 [email protected] Barclays Bank, Hong Kong Phoebe Tse +852 290 34285 [email protected] Barclays Bank, Hong Kong


1 March 2012 22

Figure 10: Top picks HK/China Consumer

Ticker

Price (HK$)

Price target (HK$)

Pot. up / down-side

to PT % Rating Mkt Cap

(US$mn)2011E

P/E 2012E

P/E 2013E

P/EEPS CAGR

(11-13E) PEG 2011E

div yield2012E

div yield

Sun Art Retail 6808 HK 10.44 12.20 17% 1-OW/2-Neu 12,623 47.8 28.8 22.3 46.4% 1.03 0.4% 0.7%

CRE 291 HK 28.40 30.50 7% 1-OW/2-Neu 8,974 35.1 26.1 22.0 26.2% 1.34 1.1% 1.5%

Hengan 1044 HK 68.35 69.00 1% 1-OW/ 2-Neu 10,873 30.7 22.7 17.9 30.9% 0.99 2.1% 2.9%

Mengniu 2319 HK 21.15 28.50 35% 1-OW/2-Neu 4,855 19.6 16.5 13.5 20.6% 0.95 1.1% 1.4%

Belle 1880 HK 12.68 17.80 40% 1-OW/2-Neu 13,792 20.6 17.4 14.7 18.3% 1.13 1.2% 1.5%

Golden Eagle 3308 HK 18.98 24.00 26% 1-OW/2-Neu 4,750 24.5 19.8 16.5 24.5% 1.00 1.0% 1.5%

Prada 1913 HK 43.10 46.00 7% 1-OW/2-Neu 14,338 24.5 19.8 16.6 22.0% 1.11 1.2% 1.5%

Li & Fung 494 HK 17.80 22.70 28% 1-OW/2-Neu 18,825 26.5 20.2 16.2 28.1% 0.94 3.2% 4.2%

Note: Stock ratings: 1-OW: 1-Overweight; 2-EW: 2-Equal Weight; 3-UW: 3-Underweight. Sector View: 1-Pos: 1-Positive; 2-Neu: 2-Neutral; 3-Neg: 3-Negative. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Sun Art Retail, CRE, Hengan and Mengniu (covered by Vineet Sharma) are in the HK/China Food, Beverages & Personal Care subsector, which is rated 2-Neutral. Golden Eagle (covered by Candy Huang) is in the Hong Kong/China Department Stores/Broadlines subsector, which is rated 2-Neutral. Prada, Belle (both covered by Candy Huang) and Li & Fung (covered by Vineet Sharma) are in the Hong Kong/China Apparel, Footwear & Textiles subsector, which is rated 2-Neutral. Source: Bloomberg, Barclays Capital estimates


1 March 2012 23

EQUITY RESEARCH: CHINA HEALTHCARE

Caution as government drives costs lower

Healthcare reform is a key priority for China. Nearly every week new policies are released, and we expect further political support for healthcare reform at the NPC. The key priority is basic low-cost healthcare across China, and the government would like to change the perception that finding healthcare in China is difficult and expensive (kanbingnan, kanbinggui). This involves expanding hospital capacity and ensuring essential drugs are widely distributed and available at low cost.

Net effect of government policy is positive for patients but negative for listed names

Patients:

Increased access to healthcare, with more hospitals

Greater availability of essential drugs across China

Lower out-of-pocket cost due to greater government subsidies, lower drug prices, and lower hospital drug mark-ups

Listed names:

Lower ASPs, due to more centralised procurement at the provincial level

Compressed margins, due to widespread adoption across 18 provinces of “lowest price wins” drug tenders

Price cuts on higher margin hospital-based products, as the essential drug list (EDL) is expanded from 307 to 800 drugs

Reduced product demand. Reduction of hospital drug mark-ups reduces the incentive for doctors to prescribe drugs in China

Drug manufacturers will be especially hard hit as we see continued roll out of the following key policies in China:

More “lowest price wins” tenders (the Anhui model)

More drugs included in the tenders, including higher margin specialty drugs

More hospitals sourcing only from the tenders (less back-channel distribution)

0% drug mark-up at the hospital level

We expect the NPC to reinforce these trends and continue roll-out through the 18th Party Congress in 4Q12. We expect that drug quality concerns and drug shortages will drive policy rebalancing later this year. In the interim, we expect lower drug prices as the government seeks social stability (“harmonious society”) ahead of the once-in-a-decade leadership transition in 4Q12.

EQUITY RESEARCH China Healthcare & Pharmaceuticals 3-NEGATIVE Jason Mann, M.D., Ph.D. +852 290 34576 [email protected] Barclays Bank, Hong Kong


1 March 2012 24

Figure 11: Net margin change since healthcare reform began in 2009. Manufacturers have been hit harder than distributors

Source: Company reports and Barclays Capital

Stock picks We reiterate our bearish view and urge caution in the China healthcare space this year. As expected, offshore listed China healthcare names have underperformed ytd (average +11% vs. 17% for the Hang Seng Index). We anticipate March to be a negative catalyst as FY2011 results are reported, and United Labs (3-UW; PT HK$3.82) has already announced a significant profit warning. We expect negative market reaction toward Sinopharm (3-UW due to negative operating cash flow; PT HK$16.15) and the manufacturers, United Labs (3-UW; PT HK$3.82), China Shineway (Not rated) and Sino Biopharm (Not rated) on weak earnings due to the policies discussed above.

Figure 12: Shanghai Pharma provides several advantages over Sinopharm, at a cheaper valuation

2011E Sinopharm Shanghai Pharma

Revenue growth 40% 48%

Gross margin 8% 14%

Operating cash flow -4% 6%

Income growth 24% 46%

Net margin 1.5% 3.6%

Net debt/equity 4% -29%

Cash conversion cycle (days) 30 26

China market penetration ~50% ~30%

Valuation 26x 13x

Source: Company data, Barclays Capital estimates


1 March 2012 25

We expect further upside for well-priced names aligned with government policy. We reiterate our 1-OW view on Shanghai Pharma (PT HK$15.83), the second-largest national drug distributor. The firm has had a strong start in 2012 by making two acquisitions and building up its northern business coordination centre. Shanghai Pharma also benefits from growing central government support. From a valuation perspective, Shanghai Pharma is trading at roughly half of the level of rival Sinopharm, which increases our conviction on this stock. As we expected, Shanghai Pharma (14% ytd) has outperformed Sinopharm this year (8%).

We also highlight our top pick Kanghui (1-OW; PT US$19.92, up 26% ytd). Similar to Mindray 5-10 years ago, Kanghui enjoys a less crowded segment and provides a favourable value proposition. We highlight: 1) strong management, with international corporate governance standards; 2) an attractive niche (orthopaedics less price-constrained than drugs, with most payment out-of-pocket); and 3) potential M&A upside as an attractive take-out target. Kanghui is focused on the key growth segments within China (tier 2/3 cities, class 2 hospitals) and has a growing international revenue base (currently 20% from other emerging markets), which in our view reduces policy risk.


1 March 2012 26

EQUITY RESEARCH: CHINA INSURANCE

Insurance – Agricultural insurance likely on top of the priority list

Other than macro policies, which can potentially impact the insurance industry, we expect the insurance-specific comments from the NPC and the CIRC to remain consistent with previous comments.

Agricultural insurance is likely to be high on the list, while the NPC and the CIRC are likely to reiterate their goals to improve social security and insurance programmes, encourage participation in commercial medical and healthcare insurance, and establish a catastrophe reinsurance programme.

We believe the developments are all incrementally positive for the industry and we reiterate our positive view on the sector. However, we do not expect the profitability or growth outlook for any of the listed insurers to be materially impacted in the short term, other than from macro policies.

We note that Ping An (1-OW; PT HK$103.8) and CPIC (1-OW; PT HK$36.1) are well positioned to leverage on growth in both the life and P&C insurance sectors. We also note that PICC (1-OW; PT HK$15.8) may receive more media attention due to its significant presence in the agricultural insurance market.

Likely comments on the insurance industry from the NPC Other than macro policies that would potentially impact the insurance industry (e.g. tax reform, GDP growth, etc), we expect insurance-specific comments from the NPC and the CIRC to remain consistent with previous statements.

According to CIRC announcements, a robust agricultural insurance system is a key area of development going forward. The regulator has pledged support to the agricultural industry by: 1) improving the legal framework around agricultural insurance; 2) strengthening basic infrastructure development; and 3) providing premium subsidies and reinsurance coverage.

Other issues that may be raised by NPC members include:

Refine the reinsurance mechanism, with the government taking the lead to establish a cooperative catastrophe reinsurance programme.

Strongly encourage the development of commercial medical and healthcare insurance, and remove constraints for commercial insurance to participate in social protection and insurance programmes.

Improve the CTP auto insurance pricing system and support the development of the local insurance and financial industry.

Overall, we expect comments to be broadly in line with the CIRC’s stated target to improve industry competitiveness, facilitate and protect economic development, and improve risk protection and prevention, while encouraging industry reforms. We believe the regulator is still comfortable with its target for insurance penetration and density to reach 5% and RMB2,100, respectively, by the end of 2015, the end of the 12th five-year plan period.

EQUITY RESEARCH Hong Kong/China Insurance 1-POSITIVE Mark Kellock +852 290 32489 [email protected] Barclays Bank, Hong Kong Thomas Wang +852 290 33459 [email protected] Barclays Bank, Hong Kong


1 March 2012 27

In terms of (short-term) stock implications, we believe there is unlikely to be any material impact on the profitability or growth outlook for any of the listed insurers, and the sector is likely to move with comments on the macro front.

On a longer timeframe, we believe these developments are all incrementally positive for China’s insurance industry, and we reiterate our positive view of the sector. Our top picks, Ping An (1-OW; PT HK$103.8) and CPIC (1-OW; PT HK$36.1) have established operations in both the life insurance and P&C insurance markets and are well positioned to leverage on the growth of the industry as a whole, in our view. We also note that PICC (1-OW; PT HK$15.8) is also likely to receive more media attention due to its significant presence in agricultural insurance, although the immediate valuation impact is not material.


1 March 2012 28

EQUITY RESEARCH: CHINA INTERNET

E-commerce likely to benefit from government’s consumption push

Since the majority of Internet companies in China were founded and are funded by the private sector, it is one of the few service sectors to embrace creativity and innovation. Therefore, we believe China’s government will continue to support technology improvements and independence of the sector; hence, we see limited “direct” impact from any potential policy changes. That said, we do expect the leadership changes later this year to affect the Internet sector in the following three areas: 1) continued strong growth for the e-commerce sector in the next few years as a result of higher domestic consumption; 2) with the government’s latest regulation limiting new entertainment TV programmes, it has encouraged traditional advertisers to shift their ad budgets from TV to online video; 3) the media and opinions will continue to be tightly controlled, which can be seen by the implementation of real name registrations for microblogs.

Stock picks Our top picks in China Internet are Baidu (1-OW; PT US$190), Youku (1-OW; PT US$25), and NetEase (1-OW; PT US$62). We look for names that: 1) are proven category leaders with a track record of gaining market share and growing faster than peers; 2) have strong franchise and brands that allow them to retain loyal users; and 3) have management teams with proven execution track records.

Although we are positive on Sina Weibo’s social media value in China over the longer term, we recently downgraded Sina to 2-EW with a new PT of US$70 (from US$103). With a continued commitment to invest aggressively in Weibo’s eco-system, we expect overall cost to rise into 2012. In addition, given the recent enforcement of real name registration, we see uncertainty surrounding the transition and see limited catalysts in the near term. That said, Sina did announce that it expects to start monetizing Weibo in 2Q12 and expects more performance/fee-based revenues in 2H12.

We maintain 3-UW for Dangdang (PT US$6.3) because we have little visibility on margins rebounding or profitability resuming any time soon even though top-line growth is solid.

Domestic consumption drives e-commerce boom The China online retail market reached Rmb773.6bn in 2011 (up 67.8% y/y) to account for 4.3% of total retail sales and about 1.8% of China’s GDP. iResearch estimates that the online retail market will grow 53% to Rmb1.18trn in 2012 and will reach about Rmb2.55trn by 2015 for a CAGR of 35%. By 2015, iResearch estimates that online retail will account for 8.6% of total retail sales and about 3.3% of GDP.

EQUITY RESEARCH Asia ex-Japan Internet 1-POSITIVE Alicia Yap, CFA +852 290 34593 [email protected] Barclays Bank, Hong Kong William Huang +852 290 34766 [email protected] Barclays Bank, Hong Kong


1 March 2012 29

Figure 13: China – e-commerce vs total retail market size

Rmb (bn) 2008 2009 2010 2011 2012E 2013E 2014E 2015E

B2C market size 8.7 20.5 63.2 179.5 352.8 530.3 760.7 1,038.3

Total e-commerce market size 128.2 263.0 461.0 773.6 1,184.1 1,568.9 2,012.5 2,551.0

Total retail market size 11,653 13,150 15,897 17,990 22,341 24,137 26,136 29,663

C2C market size 119.5 242.5 397.8 594.1 831.2 1,038.6 1,251.8 1,512.7

C2C as % of eCom 93.2% 92.2% 86.3% 76.8% 70.2% 66.2% 62.2% 59.3%

B2C as % of eCom 6.8% 7.8% 13.7% 23.2% 29.8% 33.8% 37.8% 40.7%

e-Com as % of total retail sales 1.1% 2.0% 2.9% 4.3% 5.3% 6.5% 7.7% 8.6%

e-Com as % of GDP 0.4% 0.8% 1.2% 1.6% 2.2% 2.6% 3.0% 3.3%

YoY Growth

B2C market size (Rmb bn) 135.4% 207.9% 184.2% 96.6% 50.3% 43.5% 36.5%

e-Com market size (Rmb bn) 128.8% 105.2% 75.3% 67.8% 53.1% 32.5% 28.3% 26.8%

Total retail market size (Rmb bn) 12.8% 20.9% 13.2% 24.2% 8.0% 8.3% 13.5%

Source: iResearch, Barclays Capital estimates

Compared with developed countries, US online retail sales, for example, accounted for about 8.9% of total retail sales in 2011 and online retail sales penetration is expected to increase to 11.1% by 2015E, according to our US Internet analyst Anthony Diclemente.

As a result, we believe e-commerce growth opportunities in China are still in the early days, and with the government’s focus on growing domestic consumption in the next few years, together with rising middle class with higher disposable income, we believe the strong demand will help to support the overall growth potential of online retail sales in China.

Figure 14: China – e-commerce as % of total retail sales

Figure 15: US – e-commerce as % of total retail sales

1.1%2.0%

2.9%

4.3%5.3%

6.5%

7.7%8.6%

0%1%2%3%4%5%6%7%8%9%

10%

2008 2009 2010 2011E 2012E 2013E 2014E 2015E

7.8%8.4%

8.9%9.5%

10.1%10.6%

11.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009 2010 2011E 2012E 2013E 2014E 2015E

Source: iResearch, Barclays Capital estimates Source: Forrester Research, Barclays Capital estimates

There were about 187mn online shopper in China in 2011, up 26% y/y and accounting for about 36.5% of the total Internet population. In 2011, about 26.5% of items purchased online were related to apparel, shoes, bags & accessories, 24% related to electronics and home appliances, 4.9% cosmetics and 3% books.


1 March 2012 30

Figure 16: China – online shopping users and y/y growth

Figure 17: China – e-commerce category market share

80109

148

187227

269

314

36345.5%

36.3%

26.4%

21.4%18.5%

15.6%16.7%

35.8%

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012e 2013e 2014e 2015e0%

5%

10%15%

20%

25%

30%

35%40%

45%

50%

Users (mm) YoY growth

Appeals,

footwears & bags, 26.5%

3C & home appliances,

24.2%

Cosmetics, 4.9%

Others, 41.4%

Books & media, 3.0%

Source: iResearch, Barclays Capital estimates Source: iResearch, Barclays Capital

In the next few years, we expect more population coming online (China’s Internet penetration rate is now only 39%); larger selections and greater awareness of e-commerce channels; better logistic/delivery services; and improved payment systems will continue to fuel demand for online shopping and, hence, drive the continued fast growth of e-commerce transaction volume.

Government regulation is encouraging ad budget shift In October and November 2011, the State Administration for Radio Film and Television (SARFT) announced an updated Broadcast Television Advertising Broadcast Management Policy to regulate the offline TV advertising market and put a restriction on intermission ads during the broadcast of TV series. In addition, in late 2011, SARFT also officially announced the Limited Entertainment guideline to most of the primary TV stations to cap the total number and reduce the total length of entertainment shows on China’s satellite TV channels. Both measures have become effective at the beginning of 2012.

Given the new restriction limiting the number of ads slots available for TV, many TV stations have started to increase their rate cards to offset the loss of revenues, which has encouraged many advertisers to start seeking alternative advertising channels and allocate more of their budgets to online video to capture the growing traffic and take advantage of the inexpensive CPM.

In our view, we believe the key reason driving the government to limit entertainment programs is to ensure that the general population is exposed to more historical, cultural or educational programming rather than the new concept dating and reality shows, which is in line with government’s objective of stabilising society.

Impact on online media of enforcement of real-name registrations Given that this is a year of leadership transition, the government wanted to make sure that it is able to control any political sensitive information by ensuring no one can use the more “loosely” controlled online media platforms to stimulate any political discussion topics or share opinions on any policy changes or other issues. With the government seeing the rise of microblogging platforms, such as Sina Weibo, creating speedy, influential information dissemination platforms, it appears worried about the potential for the “uncontrollable”


1 March 2012 31

outspread of voices against government. As a result, in December 2011, authorities announced the implementation and enforcement of real name registration for microblogs. On 7 February 2012, Beijing authorities set a new deadline of 16 March 2012 for the migration and implementation of real name registration. All users who fail to complete real name registrations before the deadline will only be allowed to browse the tweets stream and will not be allowed to post any of their own tweets or forward tweets from others after 16 March 2012. According to the announcement, the government claims real name registration is important as a way to prevent harmful mistruths and rumours from circulating on popular microblog platforms.

With the deadline approaching, we believe 1) new user growth will slow for Sina Weibo; 2) user activities or postings will continue to drop in the next few months; and 3) many users who refuse to submit real name registration could reduce their usage, which would hence impact overall active logins for Sina Weibo.

Figure 18: China Internet sector – Barclays Capital’s coverage universe

Market Pot. upside P/E (x) CAGR PEG Price/sales (x) CAGR

Company Ticker Curr. cap Price Rating PT to PT (%) FY11E FY12E FY13E 11-14E FY12E FY11E FY12E FY13E 11-14E

Baidu BIDU USD $47,096 $134.89 1-OW 190.0 40.9% 45.7 30.1 20.6 44.7% 0.67 20.7 13.2 9.5 43.6%Youku YOKU USD $2,548 $22.37 1-OW 25.0 11.8% nm nm 113.4 nm nm 18.6 10.3 6.5 62.3%NetEase NTES USD $6,503 $49.99 1-OW 62.0 24.0% 13.1 12.1 10.4 14.1% 0.86 5.6 5.0 4.5 12.3%Changyou CYOU USD $1,370 $26.32 1-OW 41.0 55.8% 5.8 5.8 5.1 7.8% 0.74 2.9 2.5 2.2 11.6%Sohu SOHU USD $1,862 $48.92 1-OW 61.0 24.7% 9.9 12.2 9.3 6.6% 1.84 2.2 1.8 1.6 16.6%Sina SINA USD $4,047 $61.41 2-EW 70.0 14.0% 67.0 67.7 35.1 43.8% 1.54 8.7 7.3 5.8 21.9%Renren RENN USD $2,762 $5.24 2-EW 5.5 5.0% nm nm 377.3 nm nm 23.5 15.6 11.4 35.0%Tencent 700 HK HKD $46,527 $197.20 2-EW 193.0 -2.1% 28.3 23.5 19.1 22.4% 1.05 1.4 1.1 0.9 20.1%Dangdang DANG USD $520 $6.32 3-UW 6.3 -0.3% nm nm nm 40.5% nm 0.9 0.6 0.4 47.1%

Note: Stock ratings: 1-OW: 1-Overweight; 2-EW: 2-Equal Weight; 3-UW: 3-Underweight. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. CAGR in %, PT= Price target, prices as of close 27 Feb 2012 (HK time). Source: Bloomberg, Barclays Capital estimates


1 March 2012 32

EQUITY RESEARCH: CHINA MACHINERY

Lower investment-driven economic growth would hit sector hard

China’s machinery sector would be hit hard by slowing investment, given the government’s increasing emphasis on moderating inflation and shifting economic growth away from inefficient infrastructure investment to consumption. We estimate China’s FAI growth to decelerate to 18.2% in 2012E considering prudent macro easing vs 24% in 2011.

Slowing FAI growth has an exponential impact on machinery demand; for every 1.0% change in FAI spending we expect a 2.9% change in industry revenue in 2012E. We also expect this downturn to last three years (2011-13) compared to the relatively short downturns experienced in 2005/2008, which lasted only a year. We estimate cumulative revenue growth for our machinery stocks at just a 10% CAGR 2012-14E, down considerably from the 32% CAGR seen in 2009-11E. We expect the slower end-demand growth to cause a structural shift in industry competition, driving gross margin down and encouraging consolidation. Only the leading companies, such as Zoomlion, which has the capability to gain market share in its own product area, upgrade product quality to maintain profitability and develop its own critical components, would win in this down cycle.

In addition to slowing overall FAI growth, the composition of spending is shifting away from heavy machinery to manufacturing. This is negative for the names under our coverage, as they have exposure to heavy machinery used in property and infrastructure construction, but not manufacturing investment.

Figure 19: Variance of construction machinery sales with FAI growth

2012E infrastructure FAI growth assumption

China construction machinery sales change (%) 0% 10% 15% 20% 25%

-0.4% -27% -20% -13% -5% 2% 4.6% -21% -13% -6% 1% 8% 9.6% -14% -7% 0% 7% 14%

14.6% -8% -1% 6% 13% 21% 2012

E pr

oper

ty F

AI

grow

th a

ssum

ptio

n

19.6% -2% 5% 13% 20% 27%

Source: CEIC, Barclays Capital estimates

22.5%

27.2%25.1%

27.2%28.4%

19.4%

25.7%26.5%

14.0%

17.1%16.0%

23.9%

0%

5%

10%

15%

20%

25%

30%

Infra Property Mining Manufacturing Others Total

CAGR 2006-10CAGR 2011-15E

Property investment expected to see the largest decline

-140

-120

-100

-80

-60

-40

-20

0

20

40

Zoomlion Lonking Weichai Sinotruk Sany Int'l

2012E2013E2014E

Margins expected to decline for our entire

universe in 2012E

Source: CEIC, Barclays Capital estimates Source: Company data, Barclays Capital estimates

EQUITY RESEARCH China Machinery 3-NEGATIVE Victoria Li +852 290 33456 [email protected] Barclays Bank, Hong Kong Vicki Shen +852 290 34681 [email protected] Barclays Bank, Hong Kong

Figure 20: Investment to shift from infra & property

Figure 21: Gross profit margin to narrow in 2012-13E


1 March 2012 33

Upside risks The policy agenda for 2012 could improve machinery demand in the following ways:

Housing policy. Top government officials have only emphasised the importance of fulfilling the construction target for social housing, which is not enough to offset the slowdown of private property investment. If tightening measures on the property sector were to be eased, it would encourage additional machinery demand 6-12 months later, and give us a reason to review our 3-Negative sector view.

Urbanisation. Expanding domestic demand is likely to be a top policy priority, by increasing urbanisation. We factor for organic growth of urbanisation in our sector view. If the government were to introduce new policies to speed up urbanisation, construction machinery would benefit the most, followed by heavy duty truck and coal equipment.

Private investment. The State Council may take more concrete steps to encourage private sector investment in railways, municipal services, energy, etc, to reinforce its policy issued in May 2010, which has achieved limited results. If more attainable policies/rules are introduced and there are projects that are profitable to the private sector, it could stimulate demand for machinery one or two years later, considering reasonable time spent on policy drafting and pioneering projects.

Railway system reform. Given the Ministry of Railway’s capital shortage, introducing private sector capital into the railway system is a possibility. With one or two years needed for policy drafting and project planning, we believe the impact on demand for construction machines and heavy duty trucks would be limited. Infrastructure investment contributes to no more than 60% of these machine sales, while railway investment accounted for only 5% of infrastructure investment in 2011. For every 10% increase in railway investment, machinery industry revenue would increase by no more than 0.3%.

Stock picks

Zoomlion (1157 HK; 1-OW; PT HK$13.15) Zoomlion is our top pick because of its unique exposure to concrete machinery, which benefits from the structural shift towards higher-quality, commercial concrete in China, and potential for market-share gains. We forecast a net profit CAGR of 13% in 2012-14E, above the sector average of 6%. Should macro headwinds subside after the NPC, we expect Zoomlion to benefit given the sensitivity of its product mix.

Zoomlion forward P/E

0

2

4

6

8

10

12

14

16

18

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Average=10.7X

Concrete machinery

51%

Financial lease8%

Other machinery products

7%Earth working

machinery2%

Cranes25%

Environmental & sanitation machinery

7%

Source: Bloomberg, Barclays Capital Source: Company data, Barclays Capital estimates

Zoomlion our top pick; attractive valuation

Figure 22: Zoomlion is trading below historical average Figure 23: Zoomlion’s gross profit breakdown in 2012E


1 March 2012 34

Sinotruk (3808 HK; 3-UW; PT HK$3.01) Hurt by weak demand for HDTs and declining margins, we forecast Sinotruk’s net profit CAGR will be only 1% in 2012-14E, declining a further 23% y/y in 2012E after a 14% y/y decline in 2011E. We believe consensus estimates have not fully factored in this earnings downside and see 29% downside to consensus numbers.

Sinotruk forward P/E

0

5

10

15

20

25

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

Oct

-09

Jan-

10

Apr

-10

Jul-

10

Oct

-10

Jan-

11

Apr

-11

Jul-

11

Oct

-11

Jan-

12Averege=11.7x

Trucks94%

Engines6%

Finance0%

Source: Bloomberg, Barclays Capital Source: Company data, Barclays Capital estimates

Sinotruk our top sell: purely reliant on HDTs, and large

consensus downside

Figure 24: Consensus P/E does not fully factor in the downside

Figure 25: Sinotruk sales revenue breakdown in 2012E


1 March 2012 35

EQUITY RESEARCH: CHINA METALS

Reforms to address rebalancing of consumption and production

Government policy in China matters for the metals & mining sector on three levels, in our view.

Domestic demand: At a high level the sector (globally, not just in China) is effectively a proxy on demand growth in China (as China is 40-70% of the demand in most mined commodities and has been all of the growth over the past decade).

Domestic supply: China is the world’s largest producer of coal, steel and aluminium by far and is also the world’s largest smelter of other metals like copper, zinc, etc. Particularly in the case of steel, the push towards consolidating the industry into large, efficient enterprises is likely to gather momentum in the next five years. In other commodities, the policy thrust is to improve energy efficiency and environmental performance is likely to curtail capacity.

Foreign acquisitions: What China does not have, it buys abroad – this has been true especially in the case of critical commodities like copper and iron ore; but also alumina, nickel, PGM metals, high grade coal, etc. While there has not been an explicit policy in this regard, the presence of many different state-owned enterprises actively pursuing acquisitions of these commodities suggests an implicit drive to secure natural resources for growth.

Among the subsectors, coal has the most balanced risk/reward profile on the various potential outcomes in our view, and we highlight China Coal Energy (1-OW; PT HK$13) as our preferred pick. Steel could surprise significantly on the upside if consolidation is enforced, in our view, but often policy announcements have not been followed up with action on the ground. Smaller mining companies globally that have attractive deposits in copper and iron ore but not the capital to develop them could be interesting plays on China’s need to secure raw materials resources.

Equities and commodities already anticipate pro-growth policies in 2H If we extrapolate the apparent consumption rate for the first six weeks of the year, we are heading towards a 4% y/y decline in steel and related raw materials in China. However, commodity prices (especially iron ore) are indicating another tight market this year – implying that demand will pick up strongly from March onwards.

Key longer-term themes likely to dominate policy

Pushing the growth west Growth dynamics of China in the past 15 years have resulted in a rapid increase of consumption of industrial commodities, bringing per capita consumption close to other developed nations for almost all commodities. However, the regional disparity of the growth is particularly stark, with the Eastern seaboard and the Northern industrial heartland leapfrogging ahead, while the West, South and Centre have been left behind. This needs to be addressed in order to bring sustainable growth going forward, in our opinion.

A key policy push over the next decade is likely to be to push the benefits of growth that the Eastern seaboard of China has witnessed into the interior (West and South of the country).

EQUITY RESEARCH Asia ex-Japan Metals & Mining 1-POSITIVE Ephrem Ravi +852 290 34892 [email protected] Barclays Bank, Hong Kong


1 March 2012 36

This is important as there are concerns on per capita consumption of commodities peaking in China. The vastness of the country (with some of its provinces populous enough to be compared with other countries – eg, Guangdong, Shandong and Henan each have populations larger than Germany’s) means broad-brush comparisons can be misleading.

Per capita consumption in major coastal provinces is already at levels comparable to that of South Korea (the anomaly in steel intensity of GDP in the world, with per capita consumption of over 1200kg/capita compared to developed world average of 500-600kg/capita). One could conclude that these provinces, with populations of 12-20mn, serve the same role for the rest of the China (ie, a manufacturing and export base) as South Korea (with a population of 48mn) does for the region and the world.

The big uplift in demand consequently has to come from pushing the growth towards the interior, with per capita consumption still having some way to go before catching up with coastal provinces. This is evident when we cluster the provinces into geographic regions, with Eastern and Northern provinces already well up the consumption curve, while Western and Southern provinces still need to catch up.

Figure 26: Per capita steel consumption and per capita gross regional product

200.0

250.0

300.0

350.0

400.0

450.0

500.0

550.0

600.0

650.0

700.0

10000 15000 20000 25000 30000 35000 40000 2009 Per Capita Gross Regional Product (RMB)

Per C

apit

a St

eel C

onsu

mpt

ion

('10)

East

North

North-EastSouth-Central

South West

North WestSouth-East

REGIONS South West: Tibet, Yunnan, Guizhou, Sichuan, Chongqing North West: Xinjiang, Qinghai, Gansu, Shaanxi, Ningxia South Central: Henan, Hubei, Hunan South East: Guangdong, Fujian, Guangxi, Hainan North East: Liaoning, Jilin, Heilongjiang North: Beijing, Hebei, Inner Mongolia, Shanxi, Tianjin East: Shanghai, Zhejiang, Shandong, Jiangxi, Jiangsu, Anhui

Note: Size of the bubble corresponds to population of the region. Source: National Bureau of Statistics of China, Development & Research Centre of the State Council, Barclays Capital

Consolidation in steel Over the past decade, the rising tide of booming domestic market demand has lifted all the boats in China’s steel industry. While we believe that the tide is not yet about to recede, the overcapacity and inefficiency problems in the steel industry are becoming apparent to everyone, not least to the government, we believe.

The government’s steel policy is probably one of the most unambiguous policies, in terms of prescribing the long-term direction of the steel industry. The main thrust is clear: 1) a lot fewer and significantly larger steel enterprises; 2) most of the steel plants to be located on logistically advantaged places on the coast; and 3) more efficient production facilities with smaller blast furnaces being phased out etc.

The 12th five-year plan aims to encourage consolidation and the top-10 steelmakers to take up 60% of national capacity; however, the implementation of this policy has been very slow. The key issue, in addition to stated policy, that the Chinese government needs to address in our view is the conflict of interest between optimising the steel industry on a national scale


1 March 2012 37

and the fact that many of the smaller, inefficient steel mills are run and operated by the provincial governments, which do not want to lose any revenues or employment.

69% 66% 61% 55% 48%

24%

31% 34% 39% 45% 52%

76%

0%10%20%30%40%50%60%70%80%90%

100%

SouthAmerica

NAFTA EU 27 Asia (excl.China)

Russia/CIS China

Top 5 marketshare Others

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 21 41 61 81 101 121

Number of companies

Curr

ent m

arke

t sha

re (%

)Source: World Steel, Barclays Capital estimates Source: World Steel, Barclays Capital estimates

Energy efficiency/ closing of inefficient capacity While the quest to develop domestic capacity has served its purpose of self-sufficiency at least in processed output of metals, it has also led to development of inefficient capacity with large electricity consumption. Aluminium and steel are the two energy-intensive sectors where the country has large production capacity (over 50% of global production) and hence large inefficient capacity as well.

The slow pace of progress in closing inefficient capacity has resulted in the market being oversupplied in China. While inefficiencies result in higher costs, oversupply keeps the prices for underlying commodities in check, leaving the sector vulnerable to abnormally low profitability.

Rebalancing of consumption On a per capita consumption basis, China is coming close to the developed world average in almost all of the industrial commodities. However, electricity consumption has lagged (and is imbalanced with industrial demand constituting 70% of total power demand). As China looks to rebalance the economy, this could change dramatically as consumption-driven economic growth picks up. Using the US as an example of a large developed country, one-third of the demand should come from industrial demand and one-third each from the residential and commercial sectors.

Looking at per capita consumption by sector, China is already at roughly half the level of the US in industrial consumption of electricity, but is c8% of the level of the US in terms of residential consumption and 3% in terms of commercial consumption of electricity. Clearly, even if industrial consumption reaches close to saturation levels in a few years, there is a long way to go before peak demand levels are reached in commercial and residential consumption of electricity.

Figure 27: Market share of the top-5 steel producers by region, 2011

Figure 28: Producer concentration curve: Cumulative market shares of steel producers in China


1 March 2012 38

0

5

10

15

20

25

30

35

40

45

India China US JapanKw

h/da

y pe

r ca

pita

Ele

ctri

city

con

sum

ptio

n

0

1

2

3

4

5

6

Industry Commercial Residential Agriculture

Dai

ly K

wh/

capi

ta c

onsu

mpt

ion

India China US

Source: IEA, Barclays Capital Source: IEA, World Bank, Barclays Capital

This leaves significant upside for coal demand growth (as that is the mined energy commodity China has an abundance of). We expect the coal demand growth rate to remain strong for the foreseeable future, hence our positive view on the subsector.

Figure 29: Per capita consumption of electricity, 2011

Figure 30: Per capita consumption of electricity by sector, 2011


1 March 2012 39

EQUITY RESEARCH: CHINA OIL & GAS

Rubber stamping policies, but energy reforms may still take time

We expect the forthcoming NPC meeting to essentially confirm some of the recent energy policies that government officials or Chinese oil companies have “drip fed” into the market over the past six months. Despite these reforms, we do not prescribe to the view that China will fully liberalise its energy sector in the near term, owing to the government’s strategy to balance both economic and social needs for the country.

The recent energy reforms either formally announced or being proposed are:

Implementation of the new resource tax and adjustments to the windfall tax bands (effective 1 November 2011).

Pilot plan to link domestic (city-gate) natural gas prices to oil products (similar to Europe) in Guangdong/Guangxi (effective 27 December 2011).

Adjustments to the mechanism for domestic gasoline and diesel prices.

Potentially, further subsidies to non-conventional natural gas developments.

Stock picks Overall, we do not expect the meeting to alter our stock preferences within our China Oil & Gas coverage universe. We continue to prefer companies with an upstream bias, which are also oil price leveraged.

Preference for upstream: CNOOC (1-OW; PT HK$21) remains our top pick. We see the company as offering good value and returns, with its high-margin domestic barrels likely to drive 4% pa production growth over the medium term. Balance sheet strength provides flexibility to acquire new overseas assets or increase dividends.

Cautious on downstream: By contrast, the prospect that China’s inflation remains above the government’s 4% target this year may put reform and/or implementation of the country’s domestic fuel pricing policy at risk, in our view. While Chinese refiners’ profitability has improved following recent fuel price hikes, expectation of widespread energy policy reforms in the short term seems a more complex proposition than the market may anticipate. As such, we take a more cautious view of Sinopec Corp (2-EW; PT HK$10) where, despite the possibility of changes to China’s fuel pricing policy, we do not expect any reform to translate into a significant uplift to profitability in the near term.

Resource tax and windfall band changes China implemented a new resource tax (5-10%) for upstream producers on 1 November 2011, which replaces royalties on existing tax and royalty contracts and new production share contracts. The new resource tax essentially allows the government to capture more economic value from oil or natural gas developments rather than a royalty from output. The decision to adjust windfall tax formula (retrospectively applied from 1 November 2011) with the lower threshold increased from US$40/bl to US$55/bl partly offsets the new resource tax implemented at the same period last year. China introduced the windfall tax (or special oil levy) in 2006 on the sale of locally produced crude oil based on a series of oil price bands as shown in Figure 31. The levy is charged based on the actual volume of crude oil sold with

EQUITY RESEARCH Asia ex-Japan Oil & Gas 1-POSITIVE Scott Darling +852 290 33998 [email protected] Barclays Bank, Hong Kong Clement Chen +852 290 32498 [email protected] Barclays Bank, Hong Kong


1 March 2012 40

the levy calculated based on US$ bands and the tax paid in local currency. When the windfall tax was introduced, Brent oil prices averaged cUS$65/bl and, with the rise in oil prices over the past five years along with Rmb/US$ appreciation (c25% since the levy was introduced), the government’s decision to adjust the formula is long overdue, in our view.

Figure 31: Change in China windfall tax

Windfall tax Old oil price bands (US$/bl) New oil price bands (US$/bl)

20% 40-45 55-60

25% 45-50 60-65

30% 50-55 65-70

35% 55-60 70-75

40% >60 >75

Oil price threshold

Source: Company data, Barclays Capital

New fuel pricing mechanism, but higher inflation may put reform at risk China’s current oil product pricing mechanism allows the National Development and Reform Commission (NDRC) to make adjustments in gasoline and diesel prices based on a 4% movement in an average basket crude price over a 22 working day window. Recently there have been suggestions that the NDRC may reduce the adjustment window and change policy so that price changes will be administered by the oil companies rather than the NDRC.2 The proposed new mechanism under consideration is:

Pricing period: Window for fuel price changed from 22 to 10 working days.

Reference price: Crude basket reference price changed to include WTI in addition to Brent, Dubai and Cinta, each weighted by a quarter.

Administration: Company or third party to administer new fuel price changes.

Adjustment range: Current 4% volatility band maintained (although PetroChina suggests this may be lowered to 2%).

Refining losses may continue While the recent increase in domestic gasoline and diesel prices has partly reduced refining losses for Chinese refiners, Sinopec has guided that a further fuel price hike is required for its refining business to break even this year based on the current oil price and may require a gasoline and diesel price ceiling of cRmb9600/ton and cRmb8800/ton respectively. There is no clarity on timing to implement the above new mechanism, and we believe that the NDRC may implement a new policy based on the relative movement in oil prices relative to the country's domestic fuel price (i.e. a large fall in crude oil prices relative to domestic oil product prices may prompt a policy change rather than refining profitability determining reform). Indeed, PetroChina believes that implementation of a new pricing policy (which includes lowering the 4% pricing volatility band) may only occur should the country’s inflation fall below the government’s 4% target.

2 See China Securities Journal: Refined oil prices to be automatically adjusted, NDRC to stop issuing policy changes, 4 November 2011.

China’s inflation remaining above the government’s 4%

target reduces the likelihood of fuel price reform in the country,

in our view

No fuel price reform may extend losses for Chinese refiners this

year, with Sinopec the most exposed


1 March 2012 41

Conventional and non-conventional natural gas reform We have previously highlighted that we see a gradual increase in natural gas pricing reform and price harmonisation in China with the eventual development of a provincial natural gas grid structure (see Barclays Capital research: Initiating coverage on China Oils: value in upstream growth, 12 December 2011). Domestic natural gas production growth in China has only averaged c14% pa 2000-10. In contrast, natural gas demand growth has averaged 16% pa over the same period and a government target for 240bcm in 2015, implying 15% pa growth which looks increasingly achievable should China meet or exceed power capacity targets.3 This suggests the country’s natural gas supply/demand balance is very tight in the medium term, thus the government may incentivise natural gas investment (in both conventional and non-conventional natural gas) to manage the country’s natural gas requirements.

The NDRC announced on 27 December 2011 that well-head prices city-gate natural gas prices will be linked to imported fuel oil (60%) and LPG (40%), replacing the previous mechanism which was based on production costs. This was effective from 26 December 2011 and was applied in Guangdong province and Guangxi Autonomous Region. In addition, the NEA (National Energy Administration, a division of the NDRC) is discussing with the Ministry of Finance a plan to increase CBM production subsidy from Rmb0.2/cm to Rmb0.5/cm. Both these initiatives signal gradual natural gas pricing reform in China, in our view.

3 See Barclays Capital research, China Power Equipment, Power up for the long ride, 29 November 2011

China’s natural gas market is tight with uncertainty around new supply import projects in

the medium term




1 March 2012 42

EQUITY RESEARCH: CHINA POWER EQUIPMENT

Power generation – electricity price reform, grid improvements, and clean energy development

We see key areas of potential reform and affirmation in policy direction in China’s power generation sector, including: 1) the disparity between high coal prices (cost for power producers) and low state-controlled electricity prices (selling price for power producers); 2) power grid improvements (still lacking in long-haul transmission); and 3) clean energy development, including nuclear, natural gas, wind, and solar power generation.

While we are not optimistic on a near-term “transformational” reform in electricity pricing, we do expect incremental policy shifts towards the goal of market pricing for electricity. This will be in line with the goal of reduction in energy intensity as higher electricity prices discourage wasteful/inefficient consumption.

Grid improvement is a key component of power sector investment in the 12th FYP and we expect continued support, as the current infrastructure lacks long-distance transmission capability (ultra-high voltage) to transfer power from the resource-rich regions (coal, hydro, renewables power bases) to the resource-poor coastal demand centres. For the 12th FYP, State Grid Corp of China (SGCC) announced expansion of six additional UHV lines and increasing HV and above lines from 254,000km to over 1mn km by 2015 (investment of RMB2.55tn vs. RMB1.5tn in the 11th FYP). In September 2011, State-owned Assets Supervision and Administration Commission (SASAC) stripped assets from State Grid Corp of China (SGCC) to establish two additional SOEs PowerCorp China and China Energy Engineering Group to reform the T&D cost structure.

We expect continued commitment to clean energy in line with China’s pollution-reduction goals (-17% in CO2 by 2015 vs. 2010 and 40-45% reduction in CO2 by 2020 vs. 2005 benchmark), which includes incremental policy-directed acceleration in development programs for nuclear, natural gas, wind, and solar power generation.

We believe China’s reforms will result in more efficient development of incremental power capacity (particularly in new energy such as nuclear), and the key beneficiaries would be Shanghai Electric (2727 HK; 1-OW; PT: HK$5) and Dongfang Electric (1072 HK; 1-OW; PT: HK$35).

-20%

0%

20%

40%

60%

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100%

120%

Jan-

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3,000

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12th FYP(2011-2015)

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men

t (R

MB

bn)

Power Grid

Power Generation

+64%+72%

Note: Coal price = Qinhuangdao FOB (VAT-included) Source: China Electric Council, Sx Coal, Barclays Capital

Source: China Electric Council, NDRC

EQUITY RESEARCH China Power Equipment 1-POSITIVE

Guo Shou, CFA +852 290 34536 [email protected] Barclays Bank, Hong Kong Vicki Shen +852 290 34681 [email protected] Barclays Bank, Hong Kong

Figure 32: Industrial/residential electricity pricing structure lagging rise in coal prices in the last decade

Figure 33: Grid improvement is an essential part of 12th FYP power sector investment


1 March 2012 43

China Power Equipment sector to benefit from reforms

While the potential impact on China’s electricity sector from reforms is unclear for independent power producers, we believe structural shifts should benefit the China power equipment sector as rising electricity prices and underlying demand growth create more favourable conditions for new capacity additions. In addition, we believe China’s steadfast commitment to clean energy development (especially nuclear power) creates new markets and opportunities for the three largest players in an oligopolistic main equipment market – Shanghai Electric (2727 HK; 1-OW), Dongfang Electric (1072 HK; 1-OW), and Harbin Electric (1133 HK; 2-EW). We see Shanghai Electric and Dongfang as the primary beneficiaries in China’s nuclear expansion.

We believe China is keen on restarting its commercial nuclear development programme in 1H12 (after halting new project approvals post-Fukushima) with positive incremental newsflow to come during the NDRC/NPC meetings in March. We are bullish on commercial nuclear power in China and think its development is critical to China’s medium- to longer-term energy intensity and emissions reduction goals. We estimate domestic installed nuclear power capacity of ~40GW by 2015, 80-100GW by 2020, and as much as 200-300GW by 2030. In our view, China has little choice but to aggressively pursue nuclear power as it is the only option that: 1) has little to no air pollution; 2) provides large-scaled baseload power with high utilisation rates; 3) solves regional power shortage problems as it can be located near demand centres with little fuel transportation issues (vs. coal); and 4) can be scaled up effectively with existing grid infrastructure. We outlined our expectations on China’s nuclear restart in China’s Trillion RMB Nuclear Pie – Something for Everyone (15 February 2012).

We also see continued support for renewable energy development in China with a focus on wind and solar power. Despite our expectation of a near-term (12-24 month) slowdown in new wind capacity additions given current grid connection problems (only ~70% of installed wind capacity have been connected to the grid), we believe long-term targets are still decidedly positive. NDRC’s Energy Research Institute (ERI) in October 2011 called for 200/400/1,000 GW of wind power by 2020/30/50. In addition, 2015/20 solar installed targets have repeatedly been revised upwards over the past year from a low of 5/20GW to 15/50GW for 2015/2020, respectively.

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0

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30

40

50

60

70

80

90

2005 2010 2015E 2020E

Nuc

lear

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d C

apac

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GW)

10yr CAGR: 22.3%

6% 10%3%4%10%

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2010 2015E 2020E

Coal

Hydro

Renewables

Nuclear

Gas

Source: China Electricity Council, Barclays Capital estimates Note: mix is nameplate capacity, which differs from actual generation mix Source: China Electricity Council, NDRC, Barclays Capital estimates

“China will make nuclear energy the foundation of its power-

generation system in the next 10 to 20 years” – National Energy

Administration (NEA), Dec 2011

Wind power is the easiest “swing” generation to make up shortfalls in China’s renewable

mix/pollution reduction targets

Figure 34: Nuclear power installed capacity forecast

Figure 35: China’s power capacity mix estimates

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https://live.barcap.com/go/publications/content?contentPubID=ADH1792389�


1 March 2012 44

EQUITY RESEARCH: CHINA PROPERTY

Policy implications: Price, private and public housing

During the NPC and CPPCC, we expect property policy direction to be a major topic. Based on recent speeches by Premier Wen and Vice President Li, we believe that in 2012 the central government is aiming for: 1) reasonable price correction in tier 1 cities, and moderate price appreciation (less than GDP/income growth) in lower-tier cities; 2) long-term stable and healthy development of the private housing sector, with supply increase in ordinary commodity housing; and 3) 7mn units of new starts/5mn unit delivery of public housing.

We expect likely policy discussions as follows:

Private housing: On the demand side, there would be no broad relaxation. However, as long as the price is under control, the authorities may fine-tune the current measures to support genuine demand, mainly for the first-time home buyer, by lowering the effective mortgage rate and/or down payment ratio. Home purchase restrictions are not likely to be removed, although some adjustment may be seen. Property tax will expand to more cities as a recurring revenue source for local governments and also serve to curb investment/speculation demand. On the supply side, the authorities will continue to encourage more ordinary flat supply by development loan support. Price limits should continue as curbing CPI remains one of the three top priorities in 2012.

Public housing: We believe public housing investment will stay on track to mitigate the slowdown in private housing investment, meet low income families’ housing needs, as well as lower housing costs in the CPI basket.

Land supply: The Ministry of Land and Resources announced on 22 February that land supply in 2012 will be not less than the average of actual supply in the past five years, of which over 70% will be reserved for social properties, shanty town renovation and small to mid-sized unit commodity housing.

Figure 36: China property price and policy roadmap, 1998-2012

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1 2

3

45

67

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910

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12

13

14

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16

7

Supportive Restrictive

Source: NBS, Barclays Capital

EQUITY RESEARCH Hong Kong Property Developers 3-NEGATIVE Hong Kong Property Investors 3-NEGATIVE Wendy Luo +852 290 34673 [email protected] Barclays Bank, Hong Kong Andrew Lawrence +852 290 33319 [email protected] Barclays Bank, Hong Kong


1 March 2012 45

Figure 37: China property price and policy roadmap, 1998-2012 – supportive measures, details

Date Supportive measures Jul-98 Aim to stimulate the economy from deflation

Privatization of housing sector Ceased material housing allocationMonetize the existing public housing at cost Improve return on property investment to attract fundsIncentivize banks to extend development loans and mortgage

Oct-99 Mortgage maturity extended to 30 years

Jun-00 Encourage property investment Lower tax rate for property rental income

Feb-02 Lower housing fund mortgage rate

Dec-08 Aim to stimulate property demand, thus GDP growth and increase social properties supplyEncourage purchases with lower mortgage rate & higher LTV

May-09 Lower required equity to 20% for development of mass and economic housingBusiness tax charge are waived for transactions over 2 years.

Feb-12 Aim to promote long-term stable and healthy development of housing marketPBOC to support first time home buyers' mortgage needs, and social housing/ordinary commodity housing construction.Shanghai, Beijing, Wuhan Tianjin governments revised up the ordinary housing standards.

1

2

3

4

5

6

7

Source: Government announcements, Barclays Capital


1 March 2012 46

Figure 38: China property price and policy roadmap, 1998-2012 – restrictive measures, details

Date Restrictive measuresAim to curb overheated housing investment and excessive price growth

May-02 Land supply has to be tendered, auctioned and listed.

Apr-03 Lower 2nd home LTV and shorten its maturity to 10 yearsJul-03 Control land supply to curb housing investment *

Apr-04 Raise minimum equity requirement to 35% from 20% Cease to approve conversion from farm to construction land

Aug-04 Prohibit land hoarding

Aim to stabilize price and crack down speculationMar-05 Increase land supply to mass and economic housing

Restrict land supply to high-end housingMay-05 Control relocation demand Raise mortgage rate and down payment ratio

Charge business tax on property sales within 2 years

Sep-05 Prohibit property trust

Aim to stabilize price, increase <90sqm unit supply, and establish social properties systemMay-06 Set up low rent housing systemMay-06 Require 70% of GFA has to build <90sqm housing units Strengthen presale management

Strengthen presale managementSep-06 Prohibit foreign investment in property sector

Aim to stabilize price, solve housing needs for the poorFeb-07 LAT settlementMar-07 18mn mu farm red line

Tighten mortgage and development loans

Dec-07 Establish housing security dept under Housing Authority

Aim to stabilize priceJan-08 Crack down land hoarding with penaltiesApr-08 Raise provision tax on developers

Aim to curb investment and speculation demand, and increase supply of mass and economic housingDec-09 Charge business tax on property sales within 5 yearsJan-10 Raise down payment ratio to 40% and tax rate for 2nd home

Curb development loansSet up a 3 year target to solve 15.4mn low income families' housing needs

Mar-10 Require 78 non developer SOE exit property sectorApr-10 70% new land supply for mass and social housing

Apr-10 Aim to stabilize price and supply social housingRaise down payment ratio to 50% and mortgage rate to 1.1X for 2nd home mortgageCease to approve 3rd and non-local home mortgageTarget to start 5.8mn units social housing

Sep-10 Home purchase restrictions in 9 cities12th five year plan: 36mn social housing in 2011-2015 2011 social housing target 10mn unitsCrack down land hoarding with penalties

Jan-11 Aim to solve the housing needs of urban families and curb investment and speculation demandsSet price control target, not exceeding GDP/income growthRaise down payment ratio to 60% for 2nd home mortgage70% new land supply for mass and social housing

Jan-11 Property tax implemented in Chongqing and Shanghai Home purchase restriction expands to 11 cities

Jul-11 Home purchase restriction expands to 46 cities Curb excessive rental rise

Dec-11 Aim to correct price to reasonable level, promote property tax, increase mass and social housing supplyCentral government stance unchanged for 2012 2012 social housing target 7mn starts, 4mn delivery

1

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3

4

5

6

7

8

9

10

11

12

13

14

15

16

Source: Government announcements, Barclays Capital


1 March 2012 47

Figure 39: China developer land bank exposure by city, 1H11 La

nd b

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Yanl

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Ticker 3383 688 1109 2007 3333 817 3900 2777 1813 960 119 813 272 3377 410 Z25

Shanghai 2 2 4 - 0 29 1 0 4 3 12 3 22 1 32 19

Suzhou - 6 1 - - - 2 - 10 - 7 3 - - - 5

Nanjing 3 3 - - 1 - - - - - - 3 - - - 12

Wuxi - - 2 - - - 3 - - 3 - 4 - - - -

Hangzhou - 2 1 - - - 12 - - 3 3 4 0 6 - -

Ningbo - 1 1 - - - 0 - - 2 6 3 - - - -

Wenzhou - - - - - - 1 - - - - - - - - -

Guangzhou 15 1 - 4 1 - - 20 43 - 5 2 - - - -

Shenzhen - 2 1 - 0 3 - - 1 - 6 - - - - 14

Zhongshan 22 1 - 0 0 - - - - - - - - 10 - -

Foshan 7 5 - 4 0 - - - - - 3 - 15 - - -

Zhuhai - 2 - - - 0 - - - - - - - - - 10

Hainan 23 - 3 - 2 9 5 1 4 - 3 - - 1 0 2

Fuzhou - - 2 - - - - - - - - 1 - - - -

Xiamen - 1 1 - - - - - - - - 2 - - - -

HK& Macau - 1 - - - - - - - - - - - - - -

Beijing - 4 7 - - 31 2 7 5 6 1 0 - 16 68 -

Tianjin 2 2 3 2 2 - 3 14 11 - - 5 - 19 - 19

Qingdao - 6 2 - - 20 12 - - 3 - 9 - 1 - -

Jinan - 6 - - 3 - 7 - - - 5 - - - - -

Shenyang 4 18 8 9 3 - - 0 - 9 - 4 - 5 - -

Dalian - 1 6 - - - 0 - - 1 - 12 18 21 - -

Changchun - 7 1 - 3 - - - - - - - - 5 - -

Harbin - - 1 - 1 - - - - - 4 2 - - - -

Chengdu 3 6 13 - 7 - - 6 21 12 - 5 - 0 - 15

Chongqing 1 6 9 0 4 - - 30 - 20 0 - 31 2 - -

Hefei - 0 7 - 0 - 4 - - - - 1 - 1 - -

Taiyuan - - - - 2 - - 11 - - - - - - - -

Zhenzhou - - 1 - 2 - 3 - - - - - - - - -

Xi'an 2 5 - - 0 - - 2 - 6 - - - - - -

Wuhan - - 2 1 2 - - - - - 12 10 14 2 - -

Changsha - 4 5 2 2 - 1 - - - - 3 - - - -

Nanning - 0 - - 0 - - - - - 14 - - - - -

Others 16 8 18 78 64 8 45 9 - 31 19 23 - 10 - 5

Total 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Source: Company data, Barclays Capital


1 March 2012 48

EQUITY RESEARCH: CHINA TECHNOLOGY

Government to drive IT spending We expect the China tech space will continue to benefit in the coming years from the government’s favourable policies. In particular, we believe the following three sub-sectors are to be the major beneficiaries: 1) China PCs; 2) China telecom equipment; 3) China IT services & distribution.

China PCs – momentum sustained by policy focusing on boosting inland consumption: China’s government will likely continue to pursue balanced regional development by promoting urbanisation and supporting inland and Northeast provinces; this has been recently emphasised by Vice Premier Li Keqiang as one of the three focus areas to boost domestic consumption.

We believe that the support of the government is a positive tailwind for China PC momentum to sustain. The China PC market has been consistently outperformed the global PC market y/y in recent years. According to the latest IDC data, for 4Q11, the China PC market has remained unaffected by the global slowdown and has continued to grow at 18% y/y vs a decline of 4% for the rest of the world, mainly because of solid demand from China’s Tier 4-6 cities.

Among the brand PC companies, Lenovo (1-OW; PT HK$7.50) is our top pick. It appears best positioned in the China PC market due to aggressive share gains, profitability improvement and momentum from non-PC products, such as smartphones and smart TVs. As of 4Q11, Lenovo continued to outgrow the China market with its shipments rising 28% y/y, driven by high exposure to the faster growing Tier 4-6 cities. Lenovo’s China PC market share reached a record high 35.3%, while the nearest competitor Acer only held a 9.5% share.

Figure 40: Worldwide and China PC shipment y/y growth trend, 2Q09-4Q11

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Note: 4Q11 based on IDC preliminary data Source: IDC, Barclays Capital

China telecom equipment – policies encouraging more private investment should help wireless enhancement capex: Both Premier Wen Jiabao and Vice Premier Li Keqiang are supportive of private investment in key industries, such as telecommunications, and a relevant policy has been issued since May 2010.

EQUITY RESEARCH Asia ex-Japan IT Hardware 2-NEUTRAL Asia ex-Japan Data Networking & Wireline Equipment 1-POSITIVE Kirk Yang +852 290 34635 [email protected] Barclays Bank, Hong Kong Jones Ku +852 290 33901 [email protected] Barclays Bank, Hong Kong Richard Cheng +852 290 34582 [email protected] Barclays Bank, Hong Kong


1 March 2012 49

We believe this will be positive for the China telecom equipment industry as private investment in the telecommunications space could further drive smartphone unit growth and, thus, data ramp-up. This would in turn further drive the infrastructure build-out, especially within the wireless enhancement space in the next 1-2 years before we see massive 4G “Phase 1” capex to roll out. We expect the near-term capex cycle will mainly focus on wireless enhancement and optimisation capex, and we expect this will grow by about 18-22% in the next two years. Comba (1-OW: PT HK$9.40) remains our top pick in the space since it appears best positioned for the next 2-3 year capex cycle.

Figure 41: China telco operator capex forecasts, 2009-13E

China, RMB bn 2009 2010 2011E 2012E 2013E

China Mobile 129.4 124.3 132.4 130.4 125.5

China Mobile – parent co 65.0 45.0 32.0 22.4 15.7

China Unicom 110.0 70.2 73.8 88.1 80.7

China Telecom 38.0 43.0 50.0 55.3 49.2

China Telecom – parent co 53.0 27.0 23.0 23.0 25.0

Total 395.4 309.5 311.2 319.2 296.1

y/y growth (%) 6.91% -21.74% 0.55% 2.58% -7.26%

Note 1: 2013 capex does not factor in any major 4G/LTE capex Source: Company data, Barclays Capital estimates

Figure 42: China telco operator capex mix, 2010-13E

Capex 2010 2011E 2012E 2013E

Wireless enhancement/optimisation 25.8 32.1 39.2 46.2

Wireless others 123.7 116.1 105.0 91.9

Wireline 160.0 163.0 175.0 158.0

Total 309.5 311.2 319.2 296.1

y/y growth 2010 2011E 2012E 2013E

Wireless enhancement 24.3% 22.0% 18.0%

Wireless others -6.1% -9.5% -12.5%

Wireline 1.9% 7.4% -9.7%

Total 0.5% 2.6% -7.2%


China IT services/distribution – likely beneficiary of macroeconomic policy to develop the services sector: The Chinese government has highlighted that its key macroeconomic policy is to boost domestic consumption through the development of the service industry, among which logistic services and e-commerce are viewed by the government as sectors with significant potential. We believe this is a favourable tailwind for the China IT services and distribution industry.

In the China IT service/distribution space, we are long-term positive on Digital China (1-OW; PT HK$19) for its “Sm@rt Cities” and “Citizen Card” initiatives and believe its channel business will continue to provide stable source of cash flow for the company to invest in the IT services business. We expect the scale of its “Sm@rt Cities” and “Citizen Card” initiatives will continue to ramp up (both in the number of cities and cards and in the service scope within the existing cities) and start to monetise the previous investment in the projects.


1 March 2012 50

EQUITY RESEARCH: CHINA TELECOM SERVICES

Sector trend supporting key policies

Telecom services is one of the key service-oriented industries in the China economy, and it is investment-intensive in nature. We expect China’s telecom operators to continue their tariff controls and increase capex in the next one to two years, supporting the government’s incentive of controlling inflation and increasing service sector investment. At the same time, we expect continued support from the government on the development of TD-LTE technology to drive a structural upgrade to the technology-intensive economy.

Lower tariffs and stable ARPUs contribute to a steady pricing environment. We expect to see increasing competition within China’s telecom services sector in 2012, which should lead to lower tariffs and higher subsidies to consumers and, in turn, help control CPI.

Telecom operators will increase their investments to improve service quality, in our view, driving up infrastructure expenses and benefiting the urbanisation process. We expect to see increasing capex in 3G and the “Broadband China, Fibre City” project.

We expect domestic-developed TD-LTE technology to continue to receive government support as it is in line with the government’s intention of moving up the value chain and transforming from a labour-intensive to a technology-intensive economy. 4G licensing in China provides another buffer for infrastructure spending, although we view it as a 2013 event.

Stock picks We are more cautious on the Chinese telecom services group within our overall Asia ex-Japan sector universe as we believe the recent switch to higher subsidies associated with more aggressive subscriber acquisition strategies and increasing capex will raise the competitive ante and derail profit margins in 2012. Indeed, paying today for higher profits in 2013 and beyond has too many question marks, in our view. Our preference within the group is for China Telecom (1-OW; PT HK$5.10), followed by China Mobile (2-EW; PT HK$85) and China Unicom (3-UW; PT HK$15).

Lower tariffs and stable ARPU are helping to constrain inflation With inflation control remaining one of the key focus areas for the government into 2012, we believe telecom operators in China will continue to show tariff and ARPU declines, contributing to a steady pricing environment. China Unicom has indicated an aggressive subscriber acquisition strategy into 2012, targeting subscriber market share gains and top-line growth. This is likely to come with higher subsidy, marketing and network-related costs, which should negatively affect profitability.

We believe CU’s aggressive posture will likely drive a more competitive response from the other operators during the year. For China Telecom, we see the iPhone 4S, coming on 9 March 2012, as a positive sentiment catalyst but also a driver of higher marketing expenses and handset subsidies. For China Mobile, the lack of a comparable smartphone/product suite on TD-SCDMA is a handicap to becoming more competitive in the smartphone arena. We believe any response to increased competition has to be through a combination of lower prices (tariff cuts or promotions) and higher marketing and commission-related spending costs. We believe the lower tariff and ARPU will help keep the CPI inflation rate at the 3.5-4% level.

EQUITY RESEARCH Asia ex-Japan Telecom Services 2-NEUTRAL Anand Ramachandran, CFA +852 290 34360 [email protected] Barclays Bank, Hong Kong Joyce Zhou +852 290 32512 [email protected] Barclays Bank, Hong Kong



1 March 2012 51

Figure 43: China telcos – ARPU comparisons

Figure 44: China telcos – increasing handset subsidies

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CM CU - 2G CU - 3G CT

(RMB)

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CU (RMBbn, LHS)CT (RMBbn, LHS)CU - as % of 3G svc rev (RHS)CT - as % of mobile svc rev (RHS)

Source: Company data, Barclays Capital estimates Source: Company data, Barclays Capital estimates

Continued investment in capex As telecommunications is a key service sector in China’s economy, we believe telecom operators will continue to improve service quality through continued investment in basic infrastructure. We expect CU’s capex in 2012 to be Rmb88bn, increased from Rmb74bn in 2011 due to increasing investment in 3G coverage and capacity expansion, especially in the Tier 3 and 4 cities and villages. We also expect CT to increase overall capex in 2012 to Rmb55bn from Rmb50bn in 2011, mainly driven by increasing investment in its fibre network coverage and capacity expansion for the “Broadband China, Fibre City” project. For CM, we expect flat capex from the listed company and need to wait for more information on 3G capex from its parent company. The strong telecom infrastructure expenditure will help drive overall infrastructure expenses. It will ensure the operators provide better service to customers and benefit the overall urbanisation process in China, in our view.

Figure 45: China Telcos – operators’ capex (RMB bn)

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4350 55

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China Mobile China Mobile (parent) China Unicom

China Telecom China Telecom (parent)



1 March 2012 52

TD-LTE investment – a strategic project The domestic-developed TD-LTE technology has shown good momentum globally and helps narrow the technology gap between China and developed countries. Continued investment in this is in line with the government’s intention of moving up the value chain and transforming from a labour-intensive to a technology-intensive economy. Our base case view is that LTE licensing and service launch is a 2013 event in China. Any clearer signs of licensing should be a positive catalyst for CM as this would then provide a viable way for it to catalyse the wireless data potential within its 650mn-plus subscriber base. CM has finished Phase 1 single-mode trials on TD-LTE network in 6+1 cities and now is doing Phase 2 trials on multi-mode device performance. Expanded scale trials are expected to be launched in 2H12 (Phase 3). Early licensing and larger-scale construction of the 4G network in 2012 will help narrow the gap between TD-LTE and FDD-LTE as it will help accelerate the development of the ecosystem. At the same time, we expect this to significantly drive up infrastructure spending.

Figure 46: TD-LTE industry development

Source: China Mobile, Barclays Capital


1 March 2012 53

BARCLAYS CAPITAL’S CHINA & HONG KONG EQUITY COVERAGE UNIVERSE

Company Bloomberg Ticker Analyst

Rating/ Sector View Currency

Market Cap (mn) Price

Price Target

Potential Upside/

Downside Asia ex-Japan Banks Agricultural Bank of China Limited 1288 HK May Yan 2-EW/2-Neutral HKD 113,119 3.80 4.35 14% Bank of China (Hong Kong) Ltd. 2388 HK Sharnie Wong 2-EW/2-Neutral HKD 225,200 21.65 22.10 2% Bank of China Limited 3988 HK May Yan 2-EW/2-Neutral HKD 275,117 3.36 3.39 1% Bank of Communications Co., Ltd. 3328 HK May Yan 3-UW/2-Neutral HKD 176,810 6.33 6.26 -1% Bank of East Asia Ltd. 23 HK Sharnie Wong 3-UW/2-Neutral HKD 63,009 30.95 25.50 -18% China CITIC Bank Corporation 998 HK May Yan 1-OW/2-Neutral HKD 74,708 5.08 5.90 16% China Construction Bank Corp. 939 HK May Yan 1-OW/2-Neutral HKD 1,533,862 6.50 7.96 22% China Merchants Bank Co., Ltd. 3968 HK May Yan 1-OW/2-Neutral HKD 68,199 17.90 20.75 16% China Minsheng Banking Corp., Ltd. 1988 HK May Yan 1-OW/2-Neutral HKD 30,211 7.49 9.12 22% Chongqing Rural Commercial Bank 3618 HK May Yan 3-UW/2-Neutral HKD 11,536 4.73 4.66 -1% Dah Sing Banking Group Ltd. 2356 HK Sharnie Wong 3-UW/2-Neutral HKD 10,089 8.21 6.50 -21% Dah Sing Financial Holdings Ltd. 440 HK Sharnie Wong 3-UW/2-Neutral HKD 8,491 29.80 25.00 -16% Hang Seng Bank Ltd. 11 HK Sharnie Wong 3-UW/2-Neutral HKD 194,052 106.70 91.60 -14% HSBC Holdings PLC 5 HK Tom Quarmby 1-OW/2-Neutral HKD 1,250,364 69.15 90.00 30% Industrial & Commercial Bank of China Ltd. 1398 HK May Yan 1-OW/2-Neutral HKD 479,103 5.67 6.86 21% Standard Chartered PLC 2888 HK Tom Quarmby 1-OW/2-Neutral HKD 475,859 199.30 200.00 0% Wing Hang Bank Ltd. 302 HK Sharnie Wong 3-UW/2-Neutral HKD 22,187 74.40 60.60 -19% Asia ex-Japan Data Networking & Wireline Equipment China Communications Services 552 HK Jones Ku 3-UW/1-Positive HKD 9,518 3.98 4.25 7% Comba Telecom 2342 HK Jones Ku 1-OW/1-Positive HKD 8,684 5.93 9.40 59% ZTE Corporation 763 HK Jones Ku 2-EW/1-Positive HKD 14,638 23.15 27.00 17% Asia ex-Japan Ground Transportation Anhui Expressway Co., Ltd. 995 HK Patrick Xu 1-OW/1-Positive HKD 2,490 5.13 10.32 101% Asia ex-Japan Ground Transportation Hopewell Highway Infrastructure Ltd 737 HK Patrick Xu 3-UW/1-Positive HKD 13,209 4.51 4.02 -11% Jiangsu Expressway Co., Ltd. 177 HK Patrick Xu 2-EW/1-Positive HKD 9,507 7.80 9.22 18% Shenzhen Expressway Co., Ltd. 548 HK Patrick Xu 1-OW/1-Positive HKD 2,594 3.46 7.38 113% Sichuan Expressway Co., Ltd. 107 HK Patrick Xu 2-EW/1-Positive HKD 3,187 3.55 5.13 45% Zhejiang Expressway Co., Ltd. 576 HK Patrick Xu 2-EW/1-Positive HKD 8,359 5.84 7.10 22% Asia ex-Japan Internet Baidu, Inc. BIDU Alicia Yap 1-OW/1-Positive USD 36,542 134.54 190.00 41% Changyou.com Ltd. CYOU Alicia Yap 1-OW/1-Positive USD 256 25.50 41.00 61% E-Commerce China Dangdang Inc. DANG Alicia Yap 3-UW/1-Positive USD 334 6.28 6.30 0% NetEase.com, Inc. NTES Alicia Yap 1-OW/1-Positive USD 6,491 51.17 62.00 21% Renren Inc. RENN Alicia Yap 2-EW/1-Positive USD 2,057 5.14 5.50 7% Sina Corp. SINA Alicia Yap 2-EW/1-Positive USD 4,048 62.95 70.00 11% Sohu.com Inc. SOHU Alicia Yap 1-OW/1-Positive USD 1,862 49.04 61.00 24% Tencent Holdings Ltd. 700 HK Alicia Yap 2-EW/1-Positive HKD 362,914 200.80 193.00 -4% Youku.com Inc. YOKU Alicia Yap 1-OW/1-Positive USD 1,725 23.03 25.00 9% Asia ex-Japan IT Hardware Digital China Holdings Ltd. 861 HK Jones Ku 1-OW/2-Neutral HKD 16,996 15.54 19.00 22% Ju Teng International Co., Ltd. 3336 HK Allen Chang 3-UW/2-Neutral HKD 2,663 2.37 1.20 -49% Lenovo Group Ltd. 992 HK Kirk Yang 1-OW/2-Neutral HKD 70,438 6.84 7.50 10% Skyworth Digital Holdings Ltd. 751 HK Jones Ku 1-OW/2-Neutral HKD 11,434 4.33 5.60 29% TPV Technology Ltd. 903 HK Jones Ku 2-EW/2-Neutral HKD 5,630 2.39 2.40 0% Asia ex-Japan Marine Transportation China COSCO Holdings Co., Ltd. 1919 HK Jon Windham 3-UW/2-Neutral HKD 13,135 5.12 3.20 -37% China Merchants Holdings (International) Co., Ltd.

144 HK Jon Windham 1-OW/2-Neutral HKD 66,564 27.30 25.63 -6%

China Rongsheng Heavy Ind. 1101 HK Jon Windham 2-EW/2-Neutral HKD 19,460 2.81 3.04 8% China Shipping Container Lines Co., Ltd. 2866 HK Jon Windham 1-OW/2-Neutral HKD 9,640 2.64 2.05 -22% China Shipping Development Co., Ltd. 1138 HK Jon Windham 1-OW/2-Neutral HKD 7,413 5.83 6.90 18% COSCO Pacific Limited 1199 HK Jon Windham 1-OW/2-Neutral HKD 31,077 11.82 14.31 21% Orient Overseas (International) Ltd. 316 HK Jon Windham 1-OW/2-Neutral HKD 32,510 53.55 40.52 -24% Pacific Basin Shipping Ltd. 2343 HK Jon Windham 3-UW/2-Neutral HKD 7,940 4.08 3.80 -7% Singamas Container Holdings Ltd. 716 HK Jon Windham 1-OW/2-Neutral HKD 5,803 2.35 3.50 49% Sinotrans Shipping Ltd. 368 HK Jon Windham 2-EW/2-Neutral HKD 8,423 2.13 2.20 3% Asia ex-Japan Metals & Mining Aluminum Corporation of China Ltd. 2600 HK Ephrem Ravi 3-UW/1-Positive HKD 16,446 4.29 3.59 -16% Angang Steel Co., Ltd. 347 HK Ephrem Ravi 2-EW/1-Positive HKD 6,482 6.05 8.30 37% China Coal Energy Co., Ltd. 1898 HK Ephrem Ravi 1-OW/1-Positive HKD 40,451 10.06 13.00 29% China Hongqiao Group Ltd. 1378 HK Ephrem Ravi 1-OW/1-Positive HKD 29,660 5.05 9.92 96% China Shenhua Energy Co., Ltd. 1088 HK Ephrem Ravi 1-OW/1-Positive HKD 119,800 35.70 44.90 26% CST Mining Group Ltd. 985 HK Ephrem Ravi 1-OW/1-Positive HKD 3,135 0.12 0.18 50% Jiangxi Copper Co., Ltd. 358 Ephrem Ravi 2-EW/1-Positive HKD 29,068 21.35 25.00 17% Maanshan Iron & Steel Co., Ltd. 323 HK Ephrem Ravi 3-UW/1-Positive HKD 4,506 2.66 2.81 6% Yanzhou Coal Mining Co., Ltd. 1171 HK Ephrem Ravi 1-OW/1-Positive HKD 37,405 19.30 24.90 29%


1 March 2012 54

Barclays Capital’s China & Hong Kong equity Coverage Universe (cont’d)




Price Target

Potential Upside/

Downside Asia ex-Japan Oil & Gas China Oilfield Services (COSL) 2883 HK Scott Darling 3-UW/1-Positive HKD 20,813 13.50 13.50 0% CNOOC 883 HK Scott Darling 1-OW/1-Positive HKD 768,809 17.76 21.00 18% PetroChina 857 HK Scott Darling 1-OW/1-Positive HKD 242,637 11.78 13.50 15% Sinopec 386 HK Scott Darling 2-EW/1-Positive HKD 143,977 8.78 10.00 14% Asia ex-Japan Telecom Services China Mobile 941 HK Anand Ramachandran 2-EW/2-Neutral HKD 1,629,914 82.00 85.00 4% China Telecom 728 HK Anand Ramachandran 1-OW/2-Neutral HKD 63,975 4.67 5.10 9% China Unicom 762 HK Anand Ramachandran 3-UW/2-Neutral HKD 329,437 13.96 15.00 7% HKT Trust and HKT Limited 6823 HK Anand Ramachandran 1-OW/2-Neutral HKD 34,073 5.50 5.90 7% Hutchison Telecom Hong Kong Hlds 215 HK Anand Ramachandran 1-OW/2-Neutral HKD 16,092 3.29 3.50 6% PCCW Limited 8 HK Anand Ramachandran 1-OW/2-Neutral HKD 21,308 2.96 3.90 32% SmarTone Telecommunications Hldgs Ltd. 315 HK Anand Ramachandran 2-EW/2-Neutral HKD 16,580 16.48 16.00 -3% Asia ex-Japan Wireless Equipment & Products AAC Technologies Holdings 2018 HK Jones Ku 1-OW/1-Positive HKD 24,339 19.90 23.00 16% BYD Electronic 285 HK Jones Ku 2-EW/1-Positive HKD 6,737 3.05 2.45 -20% Foxconn International Holdings 2038 HK Dale Gai 1-OW/1-Positive HKD 39,141 5.43 6.30 16% China Healthcare & Pharmaceuticals China Kanghui Holdings Inc. KH Jason Mann 1-OW/3-Negative USD 430 18.46 19.92 8% China Medical Technologies CMED Jason Mann 1-OW/3-Negative USD 60 1.82 4.82 165% Mindray Medical International MR Jason Mann 2-EW/3-Negative USD 2,476 29.50 25.78 -13% Shandong Weigao Group Medical Polymer 1066 HK Jason Mann 2-EW/3-Negative HKD 14,467 7.44 6.72 -10% Shanghai Pharmaceuticals Holdings 2607 HK Jason Mann 1-OW/3-Negative HKD 10,983 14.30 15.83 11% Sinopharm Group Co. Ltd. 1099 HK Jason Mann 3-UW/3-Negative HKD 16,774 20.70 16.15 -22% United Laboratories International 3933 HK Jason Mann 3-UW/3-Negative HKD 7,223 5.54 3.82 -31% China Machinery International Mining Machinery Hldgs Ltd. 1683 HK Victoria Li 3-UW/3-Negative HKD 11,026 8.48 7.01 -17% Lonking Holdings Limited 3339 HK Victoria Li 2-EW/3-Negative HKD 12,712 3.05 3.17 4% Sany Heavy Equipment Int'l Hldgs Co., Ltd. 631 HK Victoria Li 2-EW/3-Negative HKD 20,698 6.72 6.15 -8% Sinotruk (Hong Kong) Limited 3808 HK Victoria Li 3-UW/3-Negative HKD 15,544 5.62 3.01 -46% Weichai Power Co., Ltd. 2338 HK Victoria Li 3-UW/3-Negative HKD 18,358 43.50 29.89 -31% Zoomlion Heavy Industry Science and Technology Co., Ltd.

1157 HK Victoria Li 1-OW/3-Negative HKD 16,874 11.86 13.15 11%

China Power Equipment China High Speed Transmission Equipment Group Co. Ltd.

658 HK Guo Shou 2-EW/1-Positive HKD 6,800 5.20 4.50 -13%

Dongfang Electric Corp. Ltd. 1072 HK Guo Shou 1-OW/1-Positive HKD 7,004 21.10 35.00 66% Harbin Electric Co. Ltd. 1133 HK Guo Shou 2-EW/1-Positive HKD 5,925 8.79 9.00 2% Shanghai Electric Group Co. Ltd. 2727 HK Guo Shou 1-OW/1-Positive HKD 12,546 4.27 5.00 17% Xinjiang Goldwind Science & Technology Co. Ltd.

2208 HK Guo Shou 3-UW/1-Positive HKD 2,585 5.15 4.00 -22%

Gaming Sands China 1928 HK Felicia R. Hendrix 1-OW/2-Neutral HKD 230,212 28.60 32.00 12% Hong Kong Property Developers Cheung Kong (Holdings) 1 HK Andrew Lawrence 1-OW/3-Negative HKD 252,462 112.60 106.46 -5% Hang Lung Group 10 HK Andrew Lawrence 3-UW/3-Negative HKD 71,939 54.05 34.05 -37% Hang Lung Properties 101 HK Andrew Lawrence 3-UW/3-Negative HKD 128,595 29.25 22.67 -22% Henderson Land Development 12 HK Andrew Lawrence 2-EW/3-Negative HKD 113,826 48.75 36.96 -24% Kerry Properties 683 HK Andrew Lawrence 3-UW/3-Negative HKD 50,919 35.50 24.62 -31% Midland Holdings 1200 HK Jonathan Hsu 3-UW/3-Negative HKD 3,386 4.79 2.55 -47% New World Development 17 HK Andrew Lawrence 2-EW/3-Negative HKD 64,438 10.70 7.12 -33% Sino Land 83 HK Andrew Lawrence 3-UW/3-Negative HKD 81,267 14.08 9.50 -33% Sun Hung Kai Properties 16 HK Andrew Lawrence 2-EW/3-Negative HKD 307,023 120.40 92.16 -23% Hong Kong Property Investors Champion REIT 2778 HK Andrew Lawrence 3-UW/3-Negative HKD 17,051 3.48 2.76 -21% Hongkong Land Holdings HKL SP Andrew Lawrence 2-EW/3-Negative USD 13,070 5.60 4.40 -21% Hysan Development 14 HK Andrew Lawrence 1-OW/3-Negative HKD 34,919 33.60 23.60 -30% Link REIT 823 HK Andrew Lawrence 3-UW/3-Negative HKD 64,817 28.60 22.70 -21% Hong Kong/China Apparel, Footwear & Textiles Anta Sports Products Ltd. 2020 HK Candy Huang 3-UW/2-Neutral HKD 21,100 8.61 5.80 -33% Belle International Holdings Ltd. 1880 HK Candy Huang 1-OW/2-Neutral HKD 106,946 12.90 17.80 38% China Dongxiang (Group) Co., Ltd. 3818 HK Candy Huang 2-EW/2-Neutral HKD 8,116 1.48 1.30 -12% Esprit Holdings Limited 330 HK Vineet Sharma 3-UW/2-Neutral HKD 22,247 17.38 13.00 -25% Li & Fung Limited 0494 HK Vineet Sharma 1-OW/2-Neutral HKD 144,346 18.12 22.70 25% Li Ning Co., Ltd. 2331 HK Candy Huang 2-EW/2-Neutral HKD 9,947 9.28 6.50 -30% PRADA S.p.A. 1913 HK Candy Huang 1-OW/2-Neutral HKD 110,285 43.00 46.00 7% Samsonite International 1910 HK Phoebe Tse 1-OW/2-Neutral HKD 19,672 28.60 32.00 12%


1 March 2012 55

Barclays Capital’s China & Hong Kong equity Coverage Universe (cont’d)




Price Target

Potential Upside/

Downside Hong Kong/China Department Stores/Broadlines Golden Eagle Retail Group Ltd. 3308 HK Candy Huang 1-OW/2-Neutral HKD 36,793 19.18 24.00 25% Gome Electrical Appliances 493 HK Candy Huang 1-OW/2-Neutral HKD 38,640 2.31 3.70 60% Lifestyle International Holdings Ltd. 1212 HK Phoebe Tse 2-EW/2-Neutral HKD 33,204 21.05 23.00 9% New World Department Store China Ltd. 825 HK Candy Huang 2-EW/2-Neutral HKD 7,992 4.95 5.30 7% Parkson Retail Group Ltd. 3368 HK Candy Huang 1-OW/2-Neutral HKD 26,334 9.51 13.20 39% Hong Kong/China Food, Beverages & Personal Care Ajisen (China) Holdings Ltd. 538 HK Phoebe Tse 1-OW/2-Neutral HKD 11,162 10.48 10.90 4% China Mengniu Dairy Co., Ltd. 2319 HK Vineet Sharma 1-OW/2-Neutral HKD 37,381 21.25 28.50 34% China Resources Enterprise, Ltd. 291 HK Vineet Sharma 1-OW/2-Neutral HKD 68,145 28.95 30.50 5% Hengan International Group Co., Ltd. 1044 HK Vineet Sharma 1-OW/2-Neutral HKD 84,003 69.70 69.00 -1% L'Occitane International 973 HK Phoebe Tse 1-OW/2-Neutral HKD 26,172 18.38 18.43 0% Sa Sa International 178 HK Phoebe Tse 2-EW/2-Neutral HKD 12,975 4.66 5.00 7% Sun Art Retail Group 6808 HK Vineet Sharma 1-OW/2-Neutral HKD 99,595 10.74 12.20 14% Tingyi Holdings Corp. 322 HK Vineet Sharma 2-EW/2-Neutral HKD 124,381 23.10 19.00 -18% Tsingtao Brewery Co., Ltd. 168 HK Vineet Sharma 3-UW/2-Neutral HKD 27,120 41.65 38.00 -9% Want Want China Holdings Ltd. 151 HK Vineet Sharma 2-EW/2-Neutral HKD 95,447 7.57 6.70 -11% Hong Kong/China Insurance AIA Group Ltd. 1299 HK Mark Kellock 2-EW/1-Positive HKD 352,889 29.55 32.00 8% China Life Insurance 2628 HK Mark Kellock 3-UW/1-Positive HKD 174,868 23.95 24.30 1% China Pacific Insurance 2601 HK Mark Kellock 1-OW/1-Positive HKD 64,541 28.50 36.10 27% China Taiping Insurance 966 HK Mark Kellock 2-EW/1-Positive HKD 30,388 17.64 16.10 -9% PICC Property & Casualty 2328 HK Mark Kellock 1-OW/1-Positive HKD 40,145 10.68 15.80 48% Ping An Insurance 2318 HK Mark Kellock 1-OW/1-Positive HKD 206,562 66.85 103.80 55%

Prices as of the market close on 28 February 2012. Stock ratings: 1-OW: 1-Overweight, 2-EW: 2-Equal Weight, 3-UW: 3-Underweight. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: Bloomberg, Barclays Capital estimates


1 March 2012 56

ANALYST(S) CERTIFICATION(S)

In relation to our respective sections, we, Kent Chan; Jian Chang; Christina Chiow, CFA; Scott Darling; Olivier Desbarres; Krishna Hegde, CFA;Candy Huang; Yiping Huang; Mark Kellock; Jones Ku, CFA; Andrew Lawrence; Victoria Li; Wendy Luo; Jason Mann; M.D, Ph.D.; Hamish Pepper; Anand Ramachandran, CFA; Ephrem Ravi; Vineet Sharma, CFA; Guo Shou, CFA; Jit Ming Tan, CFA; Timothy Tay, CFA; Phoebe Tse; Nick Verdi; JuWang; Erly Witoyo; May Yan; Kirk Yang; Lingxiu Yang; and Alicia Yap, CFA, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of ourcompensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

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Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High YieldCorporate Credit Index, as applicable.

Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.

Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High YieldCorporate Credit Index, as applicable.

Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the company's debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertainthe application of the rating system to that company.

Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.

Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.

Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.

Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply withapplicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a mergeror strategic transaction involving the company.

Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended.

Not Rated (NR): An issuer which has not been assigned a formal rating.


1 March 2012 57


EQUITY DISCLOSURES For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer tohttp://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.

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Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays Capital policy prohibits them fromaccepting payment or reimbursement by any covered company of the their travel expenses for such visits.

In order to access Barclays Capital's Statement regarding Research Dissemination Policies and Procedures, please refer tohttps://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Materially Mentioned Stocks (Ticker, Date, Price)

Ajisen (China) Holdings Ltd. (0538.HK, 28-Feb-2012, HKD 10.48), 1-Overweight/2-Neutral

Baidu, Inc. (BIDU, 28-Feb-2012, USD 138.29), 1-Overweight/1-Positive

Belle International Holdings Ltd. (1880.HK, 28-Feb-2012, HKD 12.90), 1-Overweight/2-Neutral

Changyou.com Ltd. (CYOU, 28-Feb-2012, USD 25.50), 1-Overweight/1-Positive

China Coal Energy Co., Ltd. (1898.HK, 28-Feb-2012, HKD 10.06), 1-Overweight/1-Positive

China Construction Bank Corp. (0939.HK, 28-Feb-2012, HKD 6.50), 1-Overweight/2-Neutral

China Kanghui Holdings Inc. (KH, 28-Feb-2012, USD 18.71), 1-Overweight/3-Negative

China Mengniu Dairy Co., Ltd. (2319.HK, 28-Feb-2012, HKD 21.25), 1-Overweight/2-Neutral

China Minsheng Banking Corp., Ltd. (1988.HK, 28-Feb-2012, HKD 7.49), 1-Overweight/2-Neutral

China Mobile (0941.HK, 28-Feb-2012, HKD 82.00), 2-Equal Weight/2-Neutral

China Pacific Insurance (2601.HK, 28-Feb-2012, HKD 28.50), 1-Overweight/1-Positive

China Resources Enterprise, Ltd. (0291.HK, 28-Feb-2012, HKD 28.95), 1-Overweight/2-Neutral

China Telecom (0728.HK, 28-Feb-2012, HKD 4.67), 1-Overweight/2-Neutral

China Unicom (0762.HK, 28-Feb-2012, HKD 13.96), 3-Underweight/2-Neutral

CNOOC (0883.HK, 28-Feb-2012, HKD 17.76), 1-Overweight/1-Positive

Comba Telecom (2342.HK, 28-Feb-2012, HKD 5.93), 1-Overweight/1-Positive

Digital China Holdings Ltd. (0861.HK, 28-Feb-2012, HKD 15.54), 1-Overweight/2-Neutral

Dongfang Electric Corp. Ltd. (1072.HK, 28-Feb-2012, HKD 21.10), 1-Overweight/1-Positive

E-Commerce China Dangdang Inc. (DANG, 28-Feb-2012, USD 6.84), 3-Underweight/1-Positive

Golden Eagle Retail Group Ltd. (3308.HK, 28-Feb-2012, HKD 19.18), 1-Overweight/2-Neutral

Gome Electrical Appliances (0493.HK, 28-Feb-2012, HKD 2.31), 1-Overweight/2-Neutral

Harbin Electric Co. Ltd. (1133.HK, 28-Feb-2012, HKD 8.79), 2-Equal Weight/1-Positive

Hengan International Group Co., Ltd. (1044.HK, 28-Feb-2012, HKD 69.70), 1-Overweight/2-Neutral

Industrial & Commercial Bank of China Ltd. (1398.HK, 28-Feb-2012, HKD 5.67), 1-Overweight/2-Neutral

Lenovo Group Ltd. (0992.HK, 28-Feb-2012, HKD 6.84), 1-Overweight/2-Neutral

Li & Fung Limited (0494.HK, 28-Feb-2012, HKD 18.12), 1-Overweight/2-Neutral

NetEase.com, Inc. (NTES, 28-Feb-2012, USD 53.31), 1-Overweight/1-Positive

Parkson Retail Group Ltd. (3368.HK, 28-Feb-2012, HKD 9.51), 1-Overweight/2-Neutral

PICC Property & Casualty (2328.HK, 28-Feb-2012, HKD 10.68), 1-Overweight/1-Positive

Ping An Insurance (2318.HK, 28-Feb-2012, HKD 66.85), 1-Overweight/1-Positive

PRADA S.p.A. (1913.HK, 28-Feb-2012, HKD 43.00), 1-Overweight/2-Neutral


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Renren Inc. (RENN, 28-Feb-2012, USD 5.46), 2-Equal Weight/1-Positive

Shanghai Electric Group Co. Ltd. (2727.HK, 28-Feb-2012, HKD 4.27), 1-Overweight/1-Positive

Shanghai Pharmaceuticals Holdings (2607.HK, 28-Feb-2012, HKD 14.30), 1-Overweight/3-Negative

Sina Corp. (SINA, 28-Feb-2012, USD 70.04), 2-Equal Weight/1-Positive

Sinopec (0386.HK, 28-Feb-2012, HKD 8.78), 2-Equal Weight/1-Positive

Sinopharm Group Co. Ltd. (1099.HK, 28-Feb-2012, HKD 20.70), 3-Underweight/3-Negative

Sinotruk (Hong Kong) Limited (3808.HK, 28-Feb-2012, HKD 5.62), 3-Underweight/3-Negative

Sohu.com Inc. (SOHU, 28-Feb-2012, USD 50.57), 1-Overweight/1-Positive

Sun Art Retail Group (6808.HK, 28-Feb-2012, HKD 10.74), 1-Overweight/2-Neutral

Tencent Holdings Ltd. (0700.HK, 28-Feb-2012, HKD 200.80), 2-Equal Weight/1-Positive

United Laboratories International (3933.HK, 28-Feb-2012, HKD 5.54), 3-Underweight/3-Negative

Youku.com Inc. (YOKU, 28-Feb-2012, USD 25.39), 1-Overweight/1-Positive

Zoomlion Heavy Industry Science and Technology Co., Ltd. (1157.HK, 28-Feb-2012, HKD 11.86), 1-Overweight/3-Negative

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the "sector coverage universe").

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable orto comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":

Asia ex-Japan Banks

Agricultural Bank of China Limited (1288.HK) Axis Bank (AXBK.NS) Bank Central Asia (BBCA.JK)

Bank Danamon Indonesia (BDMN.JK) Bank Mandiri (BMRI.JK) Bank Negara Indonesia (BBNI.JK)

Bank of Baroda (BOB.NS) Bank of China (Hong Kong) Ltd. (2388.HK) Bank of China Limited (3988.HK)

Bank of Communications Co., Ltd. (3328.HK) Bank of East Asia Ltd. (0023.HK) Bank Rakyat Indonesia (BBRI.JK)

Bank Tabungan Negara (BBTN.JK) BS Financial Group (138930.KS) Chang Hwa Commercial Bank (2801.TW)

China CITIC Bank Corporation (0998.HK) China Construction Bank Corp. (0939.HK) China Merchants Bank Co., Ltd. (3968.HK)

China Minsheng Banking Corp., Ltd. (1988.HK) Chinatrust Financial Holding (2891.TW) Chongqing Rural Commercial Bank (3618.HK)

Dah Sing Banking Group Ltd. (2356.HK) Dah Sing Financial Holdings Ltd. (0440.HK) DGB Financial Group (139130.KS)

First Financial Holding (2892.TW) Hana Financial Group (086790.KS) Hang Seng Bank Ltd. (0011.HK)

HDFC Bank (HDBK.NS) HSBC Holdings PLC (0005.HK) ICICI Bank (ICBK.NS)

Industrial & Commercial Bank of China Ltd. (1398.HK)

Industrial Bank of Korea (024110.KS) KB Financial Group (105560.KS)

Korea Exchange Bank (004940.KS) Mega Financial Holding (2886.TW) Punjab National Bank (PNBK.NS)


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Shinhan Financial Group (055550.KS) SinoPac Financial Holdings (2890.TW) Standard Chartered PLC (2888.HK)

State Bank of India (SBI.NS) Taishin Financial Holding (2887.TW) Wing Hang Bank Ltd. (0302.HK)

Woori Finance Holdings (053000.KS)

Asia ex-Japan Data Networking & Wireline Equipment

China Communications Services (0552.HK) Comba Telecom (2342.HK) ZTE Corporation (0763.HK)

Asia ex-Japan Internet

Baidu, Inc. (BIDU) Changyou.com Ltd. (CYOU) E-Commerce China Dangdang Inc. (DANG)

NetEase.com, Inc. (NTES) Renren Inc. (RENN) Sina Corp. (SINA)

Sohu.com Inc. (SOHU) Tencent Holdings Ltd. (0700.HK) Youku.com Inc. (YOKU)

Asia ex-Japan IT Hardware

Acer Inc. (2353.TW) Asustek Computer Inc. (2357.TW) Cheng Uei Precision Industry Co., Ltd. (2392.TW)

Chicony Electronics (2385.TW) Compal Electronics Inc. (2324.TW) Darfon Electronics (8163.TW)

Digital China Holdings Ltd. (0861.HK) Dynapack International Technology Corp. (3211.TW)

Epistar Corporation (2448.TW)

Everlight Electronics (2393.TW) Foxconn Technology Co., Ltd. (2354.TW) Hon Hai Precision Industry Co., Ltd. (2317.TW)

Inventec Inc. (2356.TW) Ju Teng International Co., Ltd. (3336.HK) Lenovo Group Ltd. (0992.HK)

Pegatron Corp. (4938.TW) Quanta Computer Inc. (2382.TW) Samsung SDI (006400.KS)

Shin Zu Shing Co., Ltd. (3376.TW) Simplo Technology Co., Ltd. (6121.TW) Skyworth Digital Holdings Ltd. (0751.HK)

Sunrex Technology (2387.TW) Synnex Technology International Corp. (2347.TW)

TPV Technology Ltd. (0903.HK)

Wistron Corporation (3231.TW)

Asia ex-Japan Metals & Mining

Aluminum Corporation of China Ltd. (2600.HK) Angang Steel Co., Ltd. (0347.HK) China Coal Energy Co., Ltd. (1898.HK)

China Hongqiao Group Ltd. (1378.HK) China Shenhua Energy Co., Ltd. (1088.HK) China Steel Corp. (2002.TW)

CST Mining Group Ltd. (0985.HK) Jiangxi Copper Co., Ltd. (0358.HK) Jindal Steel & Power (JNSP.NS)

JSW Steel (JSTL.NS) Maanshan Iron & Steel Co., Ltd. (0323.HK) NMDC Ltd. (NMDC.NS)

Sesa Goa (SESA.NS) Steel Authority of India (SAIL.NS) Tata Steel (TISC.NS)

Yanzhou Coal Mining Co., Ltd. (1171.HK)

Asia ex-Japan Oil & Gas

China Oilfield Services (COSL) (2883.HK) CNOOC (0883.HK) PetroChina (0857.HK)

Sinopec (0386.HK)

Asia ex-Japan Telecom Services

Bharti Airtel Ltd. (BRTI.NS) China Mobile (0941.HK) China Telecom (0728.HK)

China Unicom (0762.HK) Chunghwa Telecom (2412.TW) Far EasTone (4904.TW)

HKT Trust and HKT Limited (6823.HK) Hutchison Telecom Hong Kong Holdings (0215.HK)

Idea Cellular Ltd. (IDEA.NS)

M1 (MONE.SI) PCCW Limited (0008.HK) Reliance Communications Ltd. (RLCM.NS)

Singapore Telecom (STEL.SI) SmarTone Telecommunications Holdings Ltd. (0315.HK)

StarHub Limited (STAR.SI)

Taiwan Mobile (3045.TW)

China Healthcare & Pharmaceuticals

China Kanghui Holdings Inc. (KH) China Medical Technologies (CMED) Mindray Medical International (MR)

Shandong Weigao Group Medical Polymer (1066.HK)

Shanghai Pharmaceuticals Holdings (2607.HK)

Sinopharm Group Co. Ltd. (1099.HK)

United Laboratories International (3933.HK)

China Machinery

International Mining Machinery Holdings Ltd. Lonking Holdings Limited (3339.HK) Sany Heavy Equipment Int'l Holdings Co., Ltd.


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(1683.HK) (0631.HK)

Sinotruk (Hong Kong) Limited (3808.HK) Weichai Power Co., Ltd. (2338.HK) Zoomlion Heavy Industry Science and Technology Co., Ltd. (1157.HK)

China Power Equipment

China High Speed Transmission Equipment Group Co. Ltd. (0658.HK)

Dongfang Electric Corp. Ltd. (1072.HK) Harbin Electric Co. Ltd. (1133.HK)

Shanghai Electric Group Co. Ltd. (2727.HK) Xinjiang Goldwind Science & Technology Co. Ltd. (2208.HK)

Hong Kong Property Developers

Cheung Kong (Holdings) (0001.HK) Hang Lung Group (0010.HK) Hang Lung Properties (0101.HK)

Henderson Land Development (0012.HK) Kerry Properties (0683.HK) Midland Holdings (1200.HK)

New World Development (0017.HK) Sino Land (0083.HK) Sun Hung Kai Properties (0016.HK)

Hong Kong Property Investors

Champion REIT (2778.HK) Hongkong Land Holdings (HKLD.SI) Hysan Development (0014.HK)

Link REIT (0823.HK)

Hong Kong/China Apparel, Footwear & Textiles

Anta Sports Products Ltd. (2020.HK) Belle International Holdings Ltd. (1880.HK) China Dongxiang (Group) Co., Ltd. (3818.HK)

Esprit Holdings Limited (0330.HK) Li & Fung Limited (0494.HK) Li Ning Co., Ltd. (2331.HK)

PRADA S.p.A. (1913.HK) Samsonite International (1910.HK)

Hong Kong/China Department Stores/Broadlines

Golden Eagle Retail Group Ltd. (3308.HK) Gome Electrical Appliances (0493.HK) Lifestyle International Holdings Ltd. (1212.HK)

New World Department Store China Ltd. (0825.HK)

Parkson Retail Group Ltd. (3368.HK)

Hong Kong/China Food, Beverages & Personal Care

Ajisen (China) Holdings Ltd. (0538.HK) China Mengniu Dairy Co., Ltd. (2319.HK) China Resources Enterprise, Ltd. (0291.HK)

Hengan International Group Co., Ltd. (1044.HK) L'Occitane International (0973.HK) Sa Sa International (0178.HK)

Sun Art Retail Group (6808.HK) Tingyi Holdings Corp. (0322.HK) Tsingtao Brewery Co., Ltd. (0168.HK)

Want Want China Holdings Ltd. (0151.HK)

Hong Kong/China Insurance

AIA Group Ltd. (1299.HK) China Life Insurance (2628.HK) China Pacific Insurance (2601.HK)

China Taiping Insurance (966.HK) PICC Property & Casualty (2328.HK) Ping An Insurance (2318.HK)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 2223 companies under coverage.

42% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 53% of companies with this rating are investment banking clients of the Firm.

42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% ofcompanies with this rating are investment banking clients of the Firm.

13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 39% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Capital Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period.

Barclays Capital offices involved in the production of equity research:

London

Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York

Barclays Capital Inc. (BCI, New York)


1 March 2012 61


Tokyo

Barclays Capital Japan Limited (BCJL, Tokyo)

São Paulo

Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg

Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

Mexico City

Barclays Bank Mexico, S.A. (BBMX, Mexico City)

Taiwan

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)

Seoul

Barclays Capital Securities Limited (BCSL, Seoul)

Mumbai

Barclays Securities (India) Private Limited (BSIPL, Mumbai)

Singapore

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

DISCLAIMER:

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It isprovided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients ofthis report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors,partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savingsor loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject tochange, and Barclays Capital has no obligation to update its opinions or the information in this publication.

The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any otherinterests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individualfinancial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of andincome from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). Theinformation herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.

This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of theFinancial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professionalexperience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange.

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CHINA NATIONAL PEOPLE’S CONGRESS All eyes on stability and...

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