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UBS Investment Research

Hong Kong & China Daily Comment

Global Equity ResearchAsia Pacific Ex. JP

Sectors in this Issue

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EconomicChina Economic Comment - Tao Wang , May Imports Surprise on the Upside

Initiation of CoverageBaoji Titanium, 600456.SS Haoxiang Lin p.5Initiate coverage: price driven by costs, bigger profitability potential12-month rating: Prior: Not Rated => Buy, FY11E Rmb0.28, FY12E Rmb0.63, PT- => Rmb33.00/US$5.10, Market cap. Rmb11.1bn/US$1.72bn

Industry UpdateAirlines Eric Lin p.10

Asia On The Ground: Asian Airline Sector - Hong Kong airport expansionMarket Comment Edwin Chen p.17

HK/China Small & Mid-Caps Corporate Day - Corporate Day takeaways

13 June 2011http://www.ubs.com/investmentresearch

Sector (See Below)Basic MaterialsConsumer, CyclicalEquity Strategy

This package has been prepared by UBS Securities Asia Limited UBSANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN AT THE END OF THE NOTESUBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may havea conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.

http://www.ubs.com/investmentresearch

UBS Investment Research China Economic Comment

May Imports Surprise on the Upside

China’s imports grew by 28.4% (y/y) in May, stronger than expected (UBSe25%, consensus 22%). May imports of crude oil, iron ore and soy beans grew stronger than in April, though imports of copper and aluminum weakenedfurther. Imports of machine tools and motor vehicles rebounded somewhatfrom April, as imports from Japan recovered somewhat – imports from Japan grew by 7.8% (y/y), up from 4.6% (y/y) in April. This suggests that theearthquake-related supply chain disruptions may have eased.

Global Economics Research

China

Hong Kong

10 June 2011

www.ubs.com/economics

Tao Wang

[email protected]

+852-2971 7525

The overall strength in imports suggests that China’s domestic demand has not slowed as much as the market may have feared. This is very much in line with our forecast of a modest slowdown in overall growth this year – we maintain our 2011 GDP forecast of 9.3%.

May exports were in line with expectations, growing by 19.4% y/y (UBSe 20%). Exports to all major markets, including the US and EU, Japan and non-Japan Asia, slowed along with global demand. Growth of processing exports, including electronics, slowed more than ordinary exports.

China registered a trade surplus of $13.1 billion in May, bringing the year-to-date surplus to $23.3 billion. While we expect both export and import growth to slow in the rest of the year, to 10-15% for exports and 15-20% for imports, we see trade surplus reaching $140-150 billion (customs basis) in 2011. Therefore, we think the RMB will continue to face appreciation pressures, even as non-FDI capital inflows slow in the remainder of the year on tighter controls. We continue to expect a 5-6% CNY/USD appreciation in 2011.

Chart 1: Imports rebounded in May Chart 2: Imports from Japan are recovering

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Source: China Customs, CEIC, UBS estimates Source: China Customs, CEIC, UBS estimates

This report has been prepared by UBS Securities Asia Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 2.

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China Economic Comment 10 June 2011

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Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


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Issuer Name China (Peoples Republic of)

Source: UBS; as of 10 Jun 2011.


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UBS Investment Research Baoji Titanium Industry

Initiate coverage: price driven by costs, bigger profitability potential

High-end demand recovers with product mix improving gradually With the noticeable recovery of demand for titanium materials for military andaviation use, we believe that, as an industry leader with 90% share in domestichigh-end titanium materials, Baoji Titanium’s product mix will improve graduallywith high-end titanium materials accounting for a larger percentage.

Ti strip capacity to be launched; seawater desalination demand reemergesThe first titanium strip production line in China, funded by the company, will belaunched shortly and capacity might exceed market expectation. With the restart of seawater desalination projects in the Middle East, we are positive on the long-term downstream demand.

Rapidly rising raw materials price may push up profitability As an industry leader, the company has strong bargaining power with customersand has c50% self-sufficiency rate of titanium sponge supply. We believe that thecompany’s profitability will benefit from the titanium sponge price surge.

Valuation: initiate with Buy rating; price target Rmb33 We derive our 12-month price target of Rmb33 using DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Weassume a WACC of 9.71%. We estimate the company’s 2011/12 EPS to beRmb0.28/0.63. Our price target implies 117.3/52.5x 2011/12E P/E and 3.83/3.61x2011/12E P/B ratios, respectively.

Highlights (Rmbm) 12/09 12/10 12/11E 12/12E 12/13ERevenues 2,315 2,564 3,266 4,751 6,944EBIT (UBS) 4 35 191 379 667Net Income (UBS) 16 3 121 272 477EPS (UBS, Rmb) 0.04 0.01 0.28 0.63 1.11Net DPS (UBS, Rmb) 0.26 0.31 0.10 0.10 0.23 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % - 1.4 5.9 8.0 9.6ROIC (EBIT) % - 0.9 4.6 8.4 12.2EV/EBITDA (core) x - >100 37.6 22.9 15.0PE (UBS) x - >100 92.2 41.0 23.3Net dividend yield % - 1.3 0.4 0.4 0.9 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rmb25.90 on 09 Jun 2011 23:38 HKT Haoxiang Lin Analyst S1460511010014 [email protected] +86-213-866 8897

Global Equity Research China

Non-Ferrous Metals

12-month rating Buy Prior: Not Rated 12m price target Rmb33.00/US$5.10 -

Price Rmb25.90/US$4.00 RIC: 600456.SS BBG: 600456 CH

10 June 2011 Trading data (local/US$) 52-wk range Rmb37.49-17.12/US$5.60-2.53Market cap. Rmb11.1bn/US$1.72bnShares o/s 430m (ORDA )Free float 47%Avg. daily volume ('000) 7,090Avg. daily value (m) Rmb209.9 Balance sheet data 12/11E Shareholders' equity Rmb3.70bnP/BV (UBS) 3.0xNet Cash (debt) (Rmb0.31bn) Forecast returns Forecast price appreciation +27.4%Forecast dividend yield 0.4%Forecast stock return +27.8%Market return assumption 8.9%Forecast excess return +18.9% EPS (UBS, Rmb) 12/11E 12/10 From To Cons. ActualQ1 - 0.01 - 0.01Q2E - 0.06 - 0.01Q3E - 0.10 - (0.01)Q4E - 0.12 - 0.0012/11E - 0.28 -12/12E - 0.63 - Performance (Rmb)

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Source: UBS www.ubssecurities.com

This report has been prepared by UBS Securities Co. Limited UBS 5SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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This is a summary of a Chinese research note published by UBS Securities Co Ltd on 10 June 2011.

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Baoji Titanium Industry 10 June 2011

UBS 6

UBS 7

Baoji Titanium Industry

Income statement (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues - 2,320 2,272 2,315 2,564 3,266 27.4 4,751 45.5 6,944 46.2 Operating expenses (ex depn) - (1,669) (1,826) (2,252) (2,459) (2,955) 20.2 (4,233) 43.2 (6,114) 44.4 EBITDA (UBS) - 651 447 64 106 310 193.7 518 66.9 829 60.2 Depreciation - (31) (81) (60) (71) (119) 68.4 (138) 16.4 (162) 17.2 Operating income (EBIT, UBS) - 620 366 4 35 191 447.3 379 98.4 667 75.9 Other income & associates - 1 16 13 2 7 190.8 6 -4.2 6 -11.0 Net interest - (16) (10) 5 (28) (45) 61.8 (52) 16.7 (95) 81.5 Abnormal items (pre-tax) - 0 0 0 0 0 - 0 - 0 - Profit before tax - 606 372 22 9 153 1529.5 333 118.0 578 73.4 Tax - (93) (62) (3) 3 (23) - (50) 118.0 (87) 73.4 Profit after tax - 512 310 19 12 130 944.4 283 118.0 491 73.4 Abnormal items (post-tax) - 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends - (3) (9) (3) (9) (9) -0.4 (11) 25.0 (13) 20.0 Net income (local GAAP) - 509 301 16 3 121 3396.8 272 124.9 477 75.6 Net Income (UBS) - 509 301 16 3 121 3396.8 272 124.9 477 75.6 Tax rate (%) - 15 17 13 0 15 - 15 0.0 15 0.0 Pre-abnormal tax rate (%) - 15 17 18 0 15 - 15 -1.8 15 -0.6 Per share (Rmb) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) - 1.25 0.70 0.04 0.01 0.28 3396.8 0.63 124.9 1.11 75.6 EPS (UBS) - 1.25 0.70 0.04 0.01 0.28 3396.8 0.63 124.9 1.11 75.6 Net DPS - 0.26 0.51 0.26 0.31 0.10 -68.2 0.10 0.3 0.23 124.9 Cash EPS - 1.33 0.89 0.18 0.17 0.56 223.6 0.95 71.1 1.49 55.9 BVPS - 5.50 8.88 8.67 8.43 8.61 2.1 9.14 6.2 10.02 9.7 Balance sheet (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets - 475 689 701 900 1,057 17.5 1,233 16.7 1,454 17.9 Net intangible fixed assets - 20 70 68 102 100 -1.5 99 -1.6 97 -1.7 Net working capital (incl. other assets) - 1,501 2,277 2,568 3,354 3,032 -9.6 3,643 20.2 4,540 24.6 Other liabilities - 0 (23) (69) (81) (81) 0.0 (81) 0.0 (81) 0.0 Operating invested capital - 1,995 3,013 3,268 4,275 4,108 -3.9 4,894 19.1 6,010 22.8 Investments - 65 85 90 85 93 8.7 98 5.3 102 5.0 Total capital employed - 2,060 3,098 3,358 4,360 4,201 -3.6 4,992 18.8 6,113 22.5 Shareholders' equity - 2,238 3,822 3,731 3,626 3,704 2.1 3,933 6.2 4,313 9.7 Minority interests - 104 113 114 173 182 5.2 193 6.1 206 6.9 Total equity - 2,342 3,935 3,845 3,799 3,886 2.3 4,126 6.2 4,520 9.5 Net debt / (cash) - (282) (837) (487) 560 315 -43.8 866 175.1 1,593 84.0 Other debt-deemed items - 0 0 0 0 0 - 0 - 0 - Total capital employed - 2,060 3,098 3,358 4,360 4,201 -3.6 4,992 18.8 6,113 22.5 Cash flow (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) - 620 366 4 35 191 447.3 379 98.4 667 75.9 Depreciation - 31 81 60 71 119 68.4 138 16.4 162 17.2 Net change in working capital - (401) (457) 0 (397) 375 - (447) - (580) 29.7 Other (operating) - 7 21 29 13 34 158.4 43 23.7 83 94.0 Operating cash flow (pre tax/interest) - 256 11 93 (278) 720 - 113 -84.3 332 193.5 Net interest received / (paid) - (16) (10) 5 (28) (45) 61.8 (52) 16.7 (95) 81.5 Dividends paid - (107) (218) (114) (135) (43) -68.2 (43) 0.3 (97) 124.9 Tax paid - (93) (62) (3) 3 (23) - (50) 118.0 (87) 73.4 Capital expenditure - (164) (613) (370) (656) (327) -50.1 (477) 45.8 (698) 46.4 Net (acquisitions) / disposals - 0 (9) (3) 0 0 - 0 - 0 - Other - - (35) 23 12 (38) - (46) 20.3 (90) 94.0 Share issues - 0 0 0 0 0 - 0 - 0 - Cash flow (inc)/dec in net debt - (119) (941) (377) (1,075) 246 - (551) - (727) 32.0 FX / non cash items - - 1,496 27 28 0 - 0 - 0 - Balance sheet (inc)/dec in net debt - - 555 (350) (1,047) 246 - (551) - (727) 32.0 Core EBITDA - 651 447 64 106 310 193.7 518 66.9 829 60.2 Maintenance capital expenditure - (33) (123) (74) 0 0 -50.4 0 46.1 0 46.6 Maintenance net working capital - (80) (91) 0 (79) 75 - (89) - (116) 29.7 Operating free cash flow, pre-tax - 538 232 (10) 26 385 1379.3 428 11.2 713 66.6

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Note: For some companies, the data represents an extract of the full company accounts.

UBS 8


Non-Ferrous Metals

12-month rating Buy 12m price target Rmb33.00

Company profile Baoji Titanium Industry, established on 21 July 1999, is a large state-owned titanium, zirconium and nickel supplier and the biggesttitanium and titanium alloy producer with the largest research base inChina. As a leading titanium company in China, it is one of thecompanies that helped set the Chinese National Standard andNational Military Standard for wrought titanium and titanium alloyproducts. It sold 16,826.7 tons of titanium products in 2010, including11,474.8 tons of titanium material and reported revenue ofRmb2.564bn.

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Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) - NM NM NM 41.0 23.3 P/E (UBS) - >100 >100 92.2 41.0 23.3 P/CEPS - NM NM 46.5 27.2 17.4 Net dividend yield (%) - 1.2 1.3 0.4 0.4 0.9 P/BV - 2.5 2.9 3.0 2.8 2.6 EV/revenue (core) - 3.7 4.2 3.6 2.5 1.8 EV/EBITDA (core) - >100 >100 37.6 22.9 15.0 EV/EBIT (core) - NM NM NM NM 18.7 EV/OpFCF (core) - NM NM NM 27.6 17.5 EV/op. invested capital - 2.7 2.8 2.8 2.6 2.3

Enterprise value (Rmbm) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 9,253 10,582 11,144 11,144 11,144 + minority interests 114 173 182 193 206 + average net debt (cash) (662) 37 438 590 1,229 + pension obligations and other 0 0 0 0 0 - non-core asset value (90) (85) (93) (98) (102) Core enterprise value 8,615 10,707 11,671 11,830 12,477 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue - 1.9 10.7 27.4 45.5 46.2 EBITDA (UBS) - -85.7 65.7 193.7 66.9 60.2 EBIT (UBS) - -98.9 NM NM 98.4 75.9 EPS (UBS) - -94.5 -79.0 NM 124.9 75.6 Cash EPS - -80.0 -2.6 NM 71.1 55.9 Net DPS - -47.6 18.7 -68.2 0.3 124.9 BVPS - -2.4 -2.8 2.1 6.2 9.7

Margins (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EEBITDA / revenue - 2.8 4.1 9.5 10.9 11.9 EBIT / revenue - 0.2 1.4 5.9 8.0 9.6 Net profit (UBS) / revenue - 0.7 0.1 3.7 5.7 6.9

Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) - 0.1 0.9 4.6 8.4 12.2 ROIC post tax - 0.1 0.9 3.9 7.1 10.4 Net ROE - 0.4 0.1 3.3 7.1 11.6

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest - - 1.2 4.4 7.3 7.1 Dividend cover (UBS EPS) - 0.1 0.0 2.8 6.3 4.9 Div. payout ratio (%, UBS EPS) - NM NM 35.6 15.9 20.3 Net debt / EBITDA - NM 5.3 1.0 1.7 1.9

Efficiency ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Revenue / op. invested capital - 0.7 0.7 0.8 1.1 1.3 Revenue / fixed assets - 3.0 2.9 3.0 3.8 4.8 Revenue / net working capital - 1.4 1.6 2.0 2.8 3.1

Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT - NM 0.7 2.0 1.1 1.1 Capex / revenue (%) - 16.0 25.6 10.0 10.0 10.1 Capex / depreciation - 6.2 9.3 2.7 3.4 4.3

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity - (13.1) 15.5 8.5 22.0 36.9 Net debt / (net debt + equity) - (15.0) 13.4 7.8 18.0 27.0 Net debt (core) / EV - (7.7) 0.3 3.7 5.0 9.9

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of Rmb25.90 on 09 Jun 2011 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Haoxiang Lin Analyst S1460511010014 [email protected] +86-213-866 8897

Baoji Titanium Industry 10 June 2011

UBS 9


Baoji Titanium Industry, established on 21 July 1999, is a large state-owned titanium, zirconium and nickel supplier and the biggest titanium and titanium alloy producer with the largest research base in China. As a leading titanium company in China, it is one of the companies that helped set the Chinese National Standard and National Military Standard for wrought titanium and titanium alloy products. It sold 16,826.7 tons of titanium products in 2010, including 11,474.8 tons of titanium material and reported revenue of Rmb2.564bn.

Statement of Risk

The company is subject to the following risks, which could exert negative influence on its future results: demand for titanium materials for military and aviation use is much lower than expected; titanium sponge price is volatile; project progress is slower than expected; income tax rate change and loss of core technology talents.

UBS Investment Research Asia On The Ground: Asian Airline Sector

Hong Kong airport expansion We visited HKIA, and spoke to aviation operators and experts

On 2 June, Airport Authority Hong Kong (AAHK) began a three-month public consultation on its 20-year development blueprint for Hong Kong InternationalAirport (HKIA). This week, we visited the exhibition at HKIA and spoke to airportoperators and aviation experts to learn more about the plan and its implications forairlines.

Current airport capacity cannot meet airlines’ planned growth We estimate HKIA’s current passenger and cargo throughput levels are over 90%of its design capacity. The runways operate at 73% of their declared limits. In ourview, the existing capacity is not sufficient to support the growth of Cathay Pacific(Cathay), which has 90 aircraft on firm order compared with its fleet of 167, andHong Kong Airlines, which has stated that it has 100 firm and optional ordersversus its fleet of 18.

Two development options with different cost and scale Option 1 modifies the existing dual runways, terminals and apron at a cost ofHK$42.5bn, according to AAHK estimates. Option 2 involves a new runway andpassenger concourses at an estimated cost of HK$136.2. Option 1 would likely reach its design capacity in 2019-22 and option 2 in 2030, based on theInternational Air Transport Association’s (IATA) demand forecast of a 3.2%CAGR in 2012-2030 passenger throughput.

Strengthens Cathay Pacific’s hub and premium positioning We believe the additional capacity would allow Cathay to strengthen its position asAsia’s premium hub carrier, which is a reason we like the stock. We have a Buyrating and HK$24.50 price target on Cathay (based on target 1.7x P/BV). Higher airport fees, based on the user pay principal, is a risk.

Global Equity Research

Asia Pacific Ex. JP

Airlines

Sector Comment

10 June 2011

www.ubs.com/investmentresearch

Eric Lin

[email protected]

+852-3712 3640

Richard Wei, CFAAnalyst

[email protected]

+86-213-866 8875

This report has been prepared by UBS Securities Asia Limited UBS 10SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]:[email protected]

Asia On The Ground: Asian Airline Sector 10 June 2011

UBS 11

Summary takeaway Following the release of a 20-year development blueprint for Hong Kong International Airport (HKIA) for a three-month public consultation, we visited the exhibition at HKIA, and spoke to airport operators and aviation experts to learn more about the plan and its implications for airlines.

We estimate HKIA’s current passenger and cargo throughput levels are over 90% of its design capacity. The runways operate at 73% of their declared limits. Cathay Pacific has 67 aircraft on firm order while Hong Kong Airlines has stated that it has 100 firm and optional orders. In our opinion, the existing capacity is not sufficient to support the growth of Hong Kong’s home-base carriers.

There are two development options: Option 1, which modifies the existing facilities at a cost of HK$42.5bn, would likely reach its design capacity in 2019-22. Option 2, which constructs a new runway and passenger concourse at a cost of HK$136.2bn, would likely reach its design capacity in 2030, based on International Air Transport Association (IATA) demand forecasts of a 3.2% CAGR in 2012-2030 passenger throughput.

We think the Hong Kong airport expansion, whether Option 1 or 2 is selected, would strengthen Cathay’s position as Asia’s premium hub carrier, which is also one of the reasons for Cathay Pacific being our preferred airline. The key risk is a potential airport fee hike based on the user pay principle.

Expansion is needed Now approaching design capacity

In 2010, HKIA handled 50.9m passengers against its design annual capacity of 55m passengers. This implies a utilisation level of 93%.

The SuperTerminal 1 of the Hong Kong Air Cargo Terminals (HACTL) and Asia Airfreight Terminal (AAT) together has a design annual capacity of 4.1m tonnes of cargo. In 2010, HKIA processed 4.1m tonnes.

HKIA’s dual runways face surrounding terrain constraints. The declared runway capacity has gradually increased from 40 movements per hour in 1999 to 61 at present, and a maximum of 68 by 2015. However, this level is still below the theoretical level of 88 per hour based on International Civil Aviation Organization (ICAO)’s recommended practises.

Midfield development fulfils immediate needs AAHK has committed to the first phase of the midfield development. It will

increase capacity to 60m passengers and 7.6m tonnes of cargo (including Cathay Pacific’s new cargo terminal). Runway capacity will remain at 68 air traffic movements per hour, or 420,000 movements per annum.

IATA Consulting forecasts HKIA will handle 57m passengers, 4.4m tonnes of cargo and 347,000 movements in 2015, based on a CAGR of 3.2% for passenger and aircraft movement, and 4.2% for cargo throughput. At these growth rates, HKIA would reach its new passenger capacity before 2020.


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Figure 1: Planned midfield development by 2015

Source: Hong Kong International Airport Master Plan 2030

Master plan 2030 Option 1—two-runway system

Option 1 involves continuous development of the midfield, existing terminals and apron towards 2030 at an estimated cost of HK$42.5bn (at money-of-the-day prices). No new runway will be built.

It would increase HKIA’s annual capacity to 74m passengers, 6m tonnes of cargo, 420,000 aircraft movement.

IATA Consulting forecasts HKIA’s throughput will reach the revised passenger and cargo handling capacity in 2019-22, based on a CAGR of 3.2% for passenger and air traffic movement, and 4.2% for cargo throughput.


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Figure 2: Airport layout plan in 2030 under Option 1


Option 2—three-runway system Option 2 involves the construction of a third runway and new passenger

concourse and apron on reclaimed land, and the midfield development, at an estimated cost of HK$136.2bn (at money-of-the-day prices).

It would increase HKIA’s annual capacity to 97m passengers, 8.9m tonnes of cargo, and 620,000 aircraft movement.

IATA Consulting forecasts HKIA’s throughput will reach the revised passenger and cargo handling capacity in 2030, based on a CAGR of 3.2% for passenger and air traffic movement, 4.2% for cargo throughput.


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Figure 3: Airport layout plan in 2030 under Option 2


Estimated expansion timetable 2011-12: Consultation, environmental impact assessment, board approval

2012-14: Detailed design

2015: Completion of phase 1 of midfield development

If option 2 is selected:

2013-17: Land reclamation

2015-18: Construction of third runway and taxiways

2018-21: Construction of third runway passenger concourse and aprons

2021: Completion

Funding assessment AAHK estimates cumulative cash funding shortfall up to 2030 of HK$25bn

under Option 1 and HK$102bn under Option 2, after accounting for the incremental debt capacity and dividend payout by AAHK.

The financing possibilities outlined by AAHK are:

— 1) user pays principle,


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— 2) equity funding from the private sector,

— 3) alternative financing instruments along the debt/equity spectrum, and

— 4) government funding support.

AAHK remains open for further studies on funding options.

Implications for Cathay Pacific Based on the fleet plans of Cathay Pacific and Hong Kong Airlines, we

estimate their combined fleet will increase at a 7% CAGR from 185 at present to over 250 by 2015, and potentially 310, assuming all optional orders are converted to firm orders and only half of them are for replacement.

Cathay Pacific (and its subsidiaries Dragonair and Air Hong Kong) has 90 firm orders compared with its current fleet size of 167 planes. Hong Kong Airlines (and its sister company Hong Kong Express) has stated that it has 100 planes on order versus its current fleet of 18.

The new passenger terminal was operating at 93% of its design capacity at the end-2010. We estimate Cathay’s fleet to airbridge-served gates ratio was 265% at end-2010 and significantly higher than Singapore Airlines. The higher ratio represents a shortage of airbridge-served gates. The problem would be alleviated by the construction of a new passenger concourse and apron.

Table 1: Airbridge-served gates versus home-base fleet

Hong Kong International Airport Singapore Changi Airport

2010 2015E Option 1 Option 2 2010 2015E

Airbridge-served gates 63 74 83 113 102 102

Home-base aircraft/ Airbridge-served gates 265% 293% 286% 210% 143% 206%

Source: HKIA, Changi Airport and UBS estimates

The extra floor space would allow airlines to expand their lounges and check-in facilities. This would enhance Cathay’s hub positioning and premium product.

We estimate Cathay’s total air traffic movement in 2010 represents 45% of the total movements at HKIA. If we factor in Cathay’s fleet growth and assume it will maintain the same share of total movements, the runway capacity at HKIA has to increase to at least 466,000 movements per annum, which can be fulfilled by the construction of the third runway.

Cathay has committed to its dedicated new cargo terminal which will begin operations in 2013. Further growth of cargo capacity is less important to Cathay compared with the need to expand passenger and runway capacity, in our view.

One of the funding possibilities is the user pays principal which would affect Cathay directly. Airport fees made up 14% of Cathay’s total costs in 2010. However, we lack clarity on the potential increase in airport fees as a result of the expansion.


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Statement of Risk

Over the long term, a diversified portfolio of airline stocks has underperformed broader market averages. Our estimates, which form the basis for our valuations and stock price targets, are subject to a very high degree of error and may be materially inaccurate. This forecast error is primarily driven by revenue volatility, a function of unpredictable business travel spending, combined with significant operating and financial leverage. Other sources of error include but are not limited to” jet fuel price volatility; labour disruptions; discount carrier growth; bankruptcy risk; and significant event risk associated primarily with terrorist actions. All of these risk factors combine to make our estimates statistically unreliable, but it is still the best we can do.

UBS Investment Research HK/China Small & Mid-Caps Corporate Day

Corporate Day takeaways Corporate Day: still well attended amid recent volatility

We hosted our second Hong Kong and China Small & Mid-Caps Corporate Day for 2011 on 9 June. 11 companies and 90 investors participated. In this report, wehighlight some of the companies’ presentations and recent developments.

Small and mid caps: volatility likely to subside in the next few months Performance of stocks in the small/mid-cap universe has been volatile year-to-date. After a sell-down in January and February, there was a recovery from March tomid-April. However, since late-April, with unfavourable global and China-related macro data (such as the end of QE2, weak US housing and employment statistics,Europe sovereign risk, China interest rate hikes and inflation risks), investors haveless risk appetite for equities, with small caps hit first. While the appetite for smallcaps is likely to be lukewarm near term, we expect volatility to subside in the nextfew months.

Identifying structural growth patterns We identified four growth patterns for companies at the Corporate Day:1) expanding current production capacity to support demand (for example, ChinaSanjiang and TCL); 2) consolidating their position in the industry (for example,Good Friend International and China Automation Group); 3) new businessendeavours (for example, Phoenix TV and Xingda); and 4) strong industry growth(for example, Lumena).

Global Equity Research

China

Equity Strategy

Market Comment

10 June 2011

www.ubs.com/investmentresearch

Edwin Chen

[email protected]

+852-2971 8007

Kevin LeungAnalyst

[email protected]+852-2971 7170

John TangStrategist


Jocelyn ChenAssociate Analyst


Company highlights

Reuters Mkt cap Price Ave daily PE (x) EPS growth Div yield (%) P/BV (x)

code Business (US$ m) (HK$) t/o (US$ m) 2010E 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E

Chigo Holding 0449.HK AirCon 921 0.85 7.5 15.0 9.8 8.7 27% 13% 2.8 3.0 1.7 1.5

China Automation 0569.HK Automation 700 5.3 0.7 17.1 12.5 10.4 25% 21% 1.7 2.0 2.3 1.9

China Sanjiang 2198.HK PetroChem 343 2.61 4.3 6.6 6.0 4.6 25% 30% 4.7 5.7 1.4 1.2

Dongyue Group 0189.HK Chemicals 2077 7.7 23.0 11.7 9.1 7.3 25% 24% 3.9 4.7 3.4 2.5

ERA Holdings * 8043.HK Machinery 511 0.7 1.0 5.7 7.6 7.0 -11% 10% 2.7 3.0 1.0 0.9

Good Friend Intl 2398.HK Machine tool 420 8.11 0.5 13.0 13.0 10.2 27% 27% NA 6.4 NA 2.4

International Taifeng HK0873 Home textile 479 3.73 2.2 6.3 4.6 3.6 45% 26% NA 9.7 NA NA

Lumena * 0067.HK New materials 2056 2.91 37.9 5.7 7.6 7.0 -11% 10% 2.7 3.0 1.0 0.9

Phoenix TV* 2008.HK Media 2085 3.25 3.5 18.1 20.6 16.2 33% 27% 1.6 2.0 5.7 4.5

TCL Communication 2618.HK Mobile & internet products 887 6.23 2.9 11.8 7.4 6.1 30% 22% 4.5 5.6 2.3 1.8

Xingda Int'L 1899.HK Tire code 1442 7.36 5.4 12.8 9.0 7.1 23% 26% 2.4 3.1 1.5 1.2

Data as of 9 June 2011. Source: Bloomberg consensus estimates, *UBS estimates

This report has been prepared by UBS Securities Asia Limited UBS 17SEE REQUIRED DISCLOSURES SECTION AT END OF NOTES. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]:[email protected]:[email protected]:[email protected]

HK/China Small & Mid-Caps Corporate Day 10 June 2011

UBS 18

Contents page

Volatility to subside in next few months 19 Covered companies 21

— Lumena New Materials.......................................................................................22 — Phoenix Satellite Television................................................................................28

Appendix (Non-covered companies) 33 — Xingda International Holdings.............................................................................34 — China Sanjiang Fine Chemicals .........................................................................37 — China Automation Group....................................................................................42 — TCL Communication Technology .......................................................................46 — Good Friend International Holdings ....................................................................49 — Chigo Holding ....................................................................................................51

Edwin Chen

[email protected]

+852-2971 8007

Kevin LeungAnalyst


John TangStrategist


Jocelyn ChenAssociate Analyst



UBS 19

Volatility likely to subside in next few months Performance of many stocks in the small/mid-cap universe has been volatile year-to-date, with the general trend consistent with that of the MSCI China Small Cap Index. After a sell-down in January and February, there was a recovery from March to early-April. However, since late-April, with the emergence of unfavourable global and China-related macro data (such as the end of QE2, weak US housing and employment statistics, Europe sovereign risk, China interest rate hikes and inflation risks), investors have less risk appetite for equities, with small caps hit first, leading to a sharp correction. While the appetite for small caps is likely to be lukewarm near term, we expect volatility to subside in the next few months.

Chart 1: YTD performance of MSCI China Small Cap Index

80

85

90

95

100

105

Jan-11 Feb-11 Mar-11 Apr-11 May -11 Jun-11

Note: 1 Jan 2011 rebased to 100. Source: Datastream

Our second Hong Kong and China Small & Mid-Caps Corporate Day for 2011 was held on 9 June 2011.

Companies that attended included Chigo Holding, China Automation Group, China Sanjiang Fine Chemical, Dongyue Group, ERA Holdings, Good Friend International, International Taifeng, Lumena New Materials, Phoenix Satellite TV, TCL Communications, and Xingda International. In this report, we highlight some of the companies’ presentations and recent developments.

Expanding current production capacity to support demand. For example, as one of the largest producers of ethylene oxide in China by production volume, China Sanjiang has expanded production capacity from 120,000MT to 180,000MT to meet demand growth. TCL Communication is also adding capacity by building a new production plant with annual production of 130m units to meet demand for its handset products in emerging markets.


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Consolidating position within its industry. China has become the world’s largest machine tool producer. Good Friend International is the leader in the industry in terms of sales. Management is confident of further growth, with the company already accounting for 10-12% of the computer numerical controlled-machine tool market in China. Similarly, China Automation Group is looking to further ride on anticipated continued FAI growth in China despite already having over a 70% market share in safety control systems in the petrochemical industry and over a 30% share of interlocking systems for the railway industry.

New business endeavours. New business is an important driver for future growth. While Phoenix TV has performed well in its core business—ie, TV broadcasting and advertising—it is aggressively leveraging its strong brand to expand into the internet (through Phoenix New Media) and outdoor media markets. Xingda, which accounts for 33% of China’s tyre cord market, also launched a new product, sawing wire, late in 2010. Management plans to expand capacity to 20k tons by 2012, which would give it 25% share of the China market share, according to management.

Strong industry growth. A company that is well positioned in an industry with strong growth should benefit from industry growth. For example, Lumena New Materials’ 2011-13E earnings growth should benefit from strong PPS demand in China (a 2007-09 CAGR of 36%), and it being the only PPS producer in China.


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Covered companies


UBS 22

ab UBS Investment Research Lumena New Materials

Business on track Lumena’s CEO and ED attended our corporate day

Lumena’s CEO, Daming Zhang, and Executive Director, Rudolf Yu, attended ourcorporate day on 9 June 2011, addressing some key questions.

Both PPS and thenardite operations appear on track According to the company, the business operations of both PPS and thenardite areon track. Lumena expects the tech renovation to release an additional 15-20% PPS capacity in H211. It has contracted out 70% of 2011 budgeted PPS output and setaside the remaining 30% for a potential high-speed railway project in H211. Giventhe strong demand, another PPS ASP hike in H211 is possible. Most of budgetedthenardite output in 2011 has been contracted out. Lumena is also confident ofrenewing its contract with P&G for another three years in July.

Addressed key questions including why margins are high Lumena explained why its gross margins for the PPS and thenardite business are sohigh, and addressed several other key questions. For the PPS business, Lumena cansell its products at similar prices to imported products and has focused on costcontrol, including raw material recycling (over 95% of solvent and 99% ofcatalysts are recycled). For thenardite, its focus on high-end products (medical and specialty thenardite) and mine quality (high thenardite content and easierprocessing required) are the major differentiators compared to peers.

Valuation: attractive We derive our price target of HK$5.36 from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool, assuminga WACC of 11.6%.

Highlights (Rmbm) 12/09 12/10 12/11E 12/12E 12/13ERevenues 1,344 1,961 4,856 5,592 7,522EBIT (UBS) 875 1,285 2,896 3,320 4,317Net Income (UBS) 533 729 1,745 1,909 2,567EPS (UBS, HK$) 0.35 0.43 0.38 0.42 0.56Net DPS (UBS, HK$) 0.00 0.09 0.08 0.09 0.12 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % - 65.5 59.6 59.4 57.4ROIC (EBIT) % - 40.4 30.6 20.8 25.6EV/EBITDA (core) x - 3.7 4.7 4.1 3.0PE (UBS) x - 5.7 7.6 7.0 5.2Net dividend yield % - 3.8 2.7 3.0 4.0 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$2.91 on 09 Jun 2011 23:38 HKT Edwin Chen Analyst [email protected] +852-2971 8007


Chemicals, Specialty

12-month rating Buy Unchanged 12m price target HK$5.36/US$0.69 Unchanged

Price HK$2.91/US$0.37 RIC: 0067.HK BBG: 67 HK

Trading data (local/US$) 52-wk range HK$4.48-1.82/US$0.58-0.23Market cap. HK$15.9bn/US$2.04bnShares o/s 5,452m (ORD)Free float 54%Avg. daily volume ('000) 81,913Avg. daily value (m) HK$293.9 Balance sheet data 12/11E Shareholders' equity Rmb13.2bnP/BV (UBS) 1.0xNet Cash (debt) (Rmb1.96bn) Forecast returns Forecast price appreciation +84.2%Forecast dividend yield 2.8%Forecast stock return +87.0%Market return assumption 9.8%Forecast excess return +77.2% EPS (UBS, HK$) 12/11E 12/10 UBS Cons. ActualH1E 0.17 - 0.21H2E 0.21 - 0.2212/11E 0.38 0.3812/12E 0.42 0.42 Performance (HK$)

04/0

8

07/0

8

10/0

8

01/0

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9

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0

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1

0.00

1.00

2.00

3.00

4.00

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6.00

0

20

40

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100

120

140

Price Target (HK$) (LHS) Stock Price (HK$) (LHS)Rel. Hang Seng (RHS)

Stock Price (HK$) Rel. Hang Seng

Source: UBS www.ubs.com/investmentresearch


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Attendees Lumena’s CEO, Daming Zhang, and Executive Director, Rudolf Yu, attended our corporate day.

Questions and answers PPS business What are PPS materials mainly used for?

PPS materials are mainly used to replace non-ferrous metals and alloys in certain tough operating environments; for instance, some high-temperature, and/or chemical corrosive environments.

Currently the largest use of PPS is in the auto parts and components market.

Five years ago, the average use of PPS in a mid/high-end sedan was 0.5kg, and it is now 2kg per car.

What is the economic advantage of using PPS materials?

It is different application by application. But in general, PPS made pieces are cheaper than metals pieces in cost. For example, the cost of a PPS made water boiler connector is one quarter of the cost using copper, for the same piece, not mentioning that PPS materials are much easier to process, casting for instance.

PPS is much more expensive than ordinary engineering plastics, but in most cases, they are not competing with each other, because if customers need PPS for its high-temperature, chemical corrosive resistant characteristics, it cannot be substituted by other ordinary engineering plastics.

But the cost performance of PPS is very competitive and, among engineering plastics, PPS is now the sixth largest.

PPS is getting more and more popular, but why is the market still small?

PPS is used in certain environments, to replace other materials. It is not in the mass plastics market like PVC/ABS. Also, in some environments, PPS cannot replace other metals given the specific characteristics.

But the use of PPS in China has been growing very rapidly. During 2007-09, the growth CAGR of PPS consumption in China was 36%, and China is the fastest growing user of PPS in the world.

Why is the production of PPS on a commercial scale so difficult?

It is very difficult to control the production process, particularly poly condensation (crystallization) and resin purification.


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How does Lumena prevent potential technology leaking of PPS?

Lumena takes a few measures to prevent leaking of our technologies:

1) separately manage the technology process;

2) separately source equipment;

3) high incentives to key engineers and technicians; and

4) patents and confidentiality agreements.

Why is the gross margin of the PPS business so high at over 60%?

Lumena’s PPS products are selling at a similar price to imported products in China but Lumena has put significant effort into control costs.

One of Lumena’s cost saving measures in PPS production is the recycling of raw materials. For example, Lumena recycles over 95% of its solvent and over 99% of its catalysts in PPS production. And solvent and catalysts accounted for 2% and 7% of PPS production costs in 2010, respectively.

What is the geographical sales breakdown of PPS products?

99% of Lumena’s PPS sales are in China with 1% for export (to South Korea).

What is the market demand and supply of PPS in H211?

The demand is very strong in China but imported supply has been disrupted. Around 10,000 tons capacity of Kureha (accounting for around 10% of global capacity) in Japan was shut down due to the earthquake and may not be able to resume production in 2011.

Given the strong demand, Lumena is likely to raise the ASP of PPS products again in H211.

How are Lumena’s sales of PPS in 2011?

The production of PPS is well on track YTD in 2011. PPS resin production was around 2,000 tons per month in January-May 2011. And Lumena plans to raise output by 15-20% in H211 via technical upgrade/renovation.

So far, Lumena has contracted out 70% of its budgeted PPS output in 2011. It has intentionally set aside 30% of planned output for the high-speed railway project (coupling parts on railway tracks) in H211.

Thenardite business What is the market size of thenardite in China and what is Lumena’s market share?

Total thenardite demand in China is around 10m tons pa, and of this, 2m tons is for specialty thenardite.

Lumena currently has around a 20-25% market share with around 2.2m tons output.

The major use of thenardite in China is in powder detergents, textiles, glass, medical and animal feed.


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How much thenardite reserve does Lumena have?

Lumena’s current total thenardite reserve is over 3bn tons, with an average content of 30-40%. Lumena’s current production capacity is around 2.2m tons pa.

Who are the major customers of Lumena for medical and specialty thenardite?

The major customers for medical thenardite are PanLongYunHai Pharmaceutical, Yunnan Baiyao, and Guangzhou Baiyunshan Pharmaceutical.

Also, Lumena has launched medical thenardite tablets as a new product, directly selling to hospitals. Lumena plans to sell 5,000 tons of tablets in 2011 and 8,000 tons in 2012.

The major customer of specialty thenardite is P&G. Lumena sells around 400,000 tons of specialty thenardite to P&G pa in China.

When will Lumena’s sales contract with P&G expire?

The current three-year contract with P&G expires in August 2011.

Lumena has almost concluded the negotiation with P&G to renew the contract for another three years. And the base volume of the new contract will remain similar to 2010’s delivery volume.

Why is the gross margin of Lumena’s thenardite business so high?

Lumena focuses on high-margin thenardite product production, i.e. medical and specialty thenardite, due to its high quality thenardite mines.

The average thenardite (sodium sulfate) content in Lumena’s mines is 30-40%, compared with average thenardite content of 24% in China.

Also, Lumena’s mines are calcium sulfate—sodium sulfate thenardite mines, where it is much easier to separate out and purify thenardite—whereas major competitors (e.g. Nan Feng) are producing thenardite from salt, and it is much harder to separate out thenardite from sodium chloride.

How are the sales of thenardite in 2011?

Most of Lumena’s budgeted thenardite output for 2011 has been contracted out already.

UBS 26

Lumena New Materials

Income statement (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues - 372 1,140 1,344 1,961 4,856 147.6 5,592 15.2 7,522 34.5 Operating expenses (ex depn) - (216) (379) (419) (594) (1,695) 185.2 (1,866) 10.0 (2,709) 45.2 EBITDA (UBS) - 156 763 928 1,382 3,184 130.4 3,750 17.8 4,837 29.0 Depreciation - (11) (43) (53) (97) (288) 198.5 (430) 49.4 (521) 21.0 Operating income (EBIT, UBS) - 145 719 875 1,285 2,896 125.3 3,320 14.7 4,317 30.0 Other income & associates - 0 0 0 0 0 - 0 - 0 - Net interest - (31) (98) (104) (233) (396) 70.0 (542) 36.8 (595) 9.9 Abnormal items (pre-tax) - 0 (8) 0 0 (29) - 0 - 0 - Profit before tax - 115 614 771 1,052 2,471 134.8 2,778 12.5 3,721 33.9 Tax - (26) (172) (227) (323) (697) 115.7 (798) 14.5 (1,047) 31.3 Profit after tax - 89 442 545 729 1,774 143.2 1,980 11.7 2,674 35.0 Abnormal items (post-tax) - 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends - (10) (12) (12) 0 (58) - (71) 23.4 (107) 50.6 Net income (local GAAP) - 79 430 533 729 1,716 135.3 1,909 11.3 2,567 34.4 Net Income (UBS) - 79 438 533 729 1,745 139.2 1,909 9.4 2,567 34.4 Tax rate (%) - 23 28 29 31 28 -8.1 29 1.8 28 -2.0 Pre-abnormal tax rate (%) - 23 28 29 31 28 -9.2 29 3.0 28 -2.0 Per share (HK$) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) - - 0.32 0.35 0.43 0.37 -20.0 0.42 6.6 0.56 34.4 EPS (UBS) - - 0.32 0.35 0.43 0.38 -11.3 0.42 9.7 0.56 34.4 Net DPS - - 0.00 0.00 0.09 0.08 -15.9 0.09 11.3 0.12 34.4 Cash EPS - - 0.36 0.38 0.49 0.44 -8.7 0.51 15.3 0.68 32.0 BVPS - 0.17 0.46 1.04 1.52 2.89 90.6 3.22 11.3 3.65 13.4 Balance sheet (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets - 612 1,116 2,010 2,425 6,744 178.1 7,960 18.0 8,502 6.8 Net intangible fixed assets - 242 488 474 489 8,038 1542.9 8,016 -0.3 8,078 0.8 Net working capital (incl. other assets) - 48 (97) 378 646 682 5.7 579 -15.2 693 19.8 Other liabilities - 0 0 (31) (31) (40) 29.7 (40) 0.0 (40) 0.0 Operating invested capital - 901 1,507 2,832 3,529 15,425 337.1 16,516 7.1 17,234 4.3 Investments - 0 0 0 0 0 - 0 - 0 - Total capital employed - 901 1,507 2,832 3,529 15,425 337.1 16,516 7.1 17,234 4.3 Shareholders' equity - 301 785 1,788 2,543 13,214 419.6 14,710 11.3 16,676 13.4 Minority interests - 28 40 0 0 247 - 314 27.0 430 37.0 Total equity - 329 826 1,788 2,543 13,461 429.3 15,024 11.6 17,106 13.9 Net debt / (cash) - 573 682 1,044 986 1,964 99.2 1,492 -24.0 127 -91.5 Other debt-deemed items - 0 0 0 0 0 - 0 - 0 - Total capital employed - 901 1,507 2,832 3,529 15,425 337.1 16,516 7.1 17,234 4.3 Cash flow (Rmbm) - 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) - 145 719 875 1,285 2,896 125.3 3,320 14.7 4,317 30.0 Depreciation - 11 43 53 97 288 198.5 430 49.4 521 21.0 Net change in working capital - 65 106 (318) (343) 41 - (75) - (238) 218.5 Other (operating) - 12 27 (16) 13 145 1050.7 55 -62.4 174 219.2 Operating cash flow (pre tax/interest) - 234 896 595 1,051 3,370 220.5 3,730 10.7 4,774 28.0 Net interest received / (paid) - (31) (98) (104) (219) (371) 69.8 (444) 19.7 (504) 13.3 Dividends paid - 0 0 0 (89) (464) 419.7 (521) 12.3 (694) 33.3 Tax paid - (26) (172) (227) (324) (710) 119.3 (798) 12.4 (1,047) 31.3 Capital expenditure - (747) (797) (937) (527) (3,355) 537.1 (1,480) -55.9 (1,149) -22.4 Net (acquisitions) / disposals - 0 0 0 0 0 - 0 - 0 - Other - - 6 (160) 184 549 199.1 (54) - 190 - Share issues - 126 55 470 69 796 1060.0 0 - 0 - Cash flow (inc)/dec in net debt - (490) (109) (362) 145 (185) - 434 - 1,570 262.0 FX / non cash items - - 0 0 (87) (793) 808.5 39 - (205) - Balance sheet (inc)/dec in net debt - - (109) (362) 58 (978) - 472 - 1,365 189.0 Core EBITDA - 156 763 928 1,382 3,184 130.4 3,750 17.8 4,837 29.0 Maintenance capital expenditure - (747) (797) (937) (527) (3,355) 537.1 (1,480) -55.9 (1,149) -22.4 Maintenance net working capital - 65 106 (318) (343) 41 - (75) - (238) 218.5 Operating free cash flow, pre-tax - (525) 72 (326) 512 (131) - 2,196 - 3,451 57.1


UBS 27


Chemicals, Specialty

12-month rating Buy 12m price target HK$5.36

Company profile China Lumena New Materials is the world's largest PPS(polyphenylene, a high performance engineering plastic) andthenardite (an important raw material for chemical and light industrialproducts) manufacturer.


12/09 12/10 12/11E 12/12E 12/13E0.0x

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Profitability

12/09 12/10 12/11(E) 12/12(E) 12/13(E)54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

15.0%

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Growth (UBS EPS)

12/09 12/10 12/11(E) 12/12(E) 12/13(E)0

1143

2286

3429

4571

5714

6857

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%


Lumena New Materials

Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) - 8.8 5.7 8.5 8.0 5.9 P/E (UBS) - 8.7 5.7 7.6 7.0 5.2 P/CEPS - 7.9 5.0 6.6 5.7 4.3 Net dividend yield (%) - 0.0 3.8 2.7 3.0 4.0 P/BV - 2.9 1.6 1.0 0.9 0.8 EV/revenue (core) - 4.5 2.6 3.1 2.7 1.9 EV/EBITDA (core) - 6.4 3.7 4.7 4.1 3.0 EV/EBIT (core) - 6.8 3.9 5.2 4.6 3.3 EV/OpFCF (core) - NM 9.9 NM 6.9 4.2 EV/op. invested capital - 2.8 1.6 1.6 1.0 0.9

Enterprise value (Rmbm) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 5,123 4,057 13,202 13,202 13,202 + minority interests 0 0 247 314 430 + average net debt (cash) 863 1,015 1,475 1,728 809 + pension obligations and other 0 0 0 0 0 - non-core asset value 0 0 0 0 0 Core enterprise value 5,986 5,072 14,924 15,244 14,442 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue - 17.9 45.9 147.6 15.2 34.5 EBITDA (UBS) - 21.7 48.9 130.4 17.8 29.0 EBIT (UBS) - 21.7 46.9 125.3 14.7 30.0 EPS (UBS) - 7.1 24.2 -11.3 9.7 34.4 Cash EPS - 7.1 27.9 -8.7 15.3 32.0 Net DPS - - - -15.9 11.3 34.4 BVPS - 124.7 45.7 90.6 11.3 13.4


Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) - 40.3 40.4 30.6 20.8 25.6 ROIC post tax - 28.5 28.0 22.0 14.8 18.4 Net ROE - 41.4 33.7 22.1 13.7 16.4

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest - 8.4 5.5 7.3 6.1 7.3 Dividend cover (UBS EPS) - - 4.6 4.8 4.8 4.8 Div. payout ratio (%, UBS EPS) - - 21.8 20.7 21.0 21.0 Net debt / EBITDA - 1.1 0.7 0.6 0.4 0.0


Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT - NM 0.4 NM 0.7 0.8 Capex / revenue (%) - NM 26.9 NM 26.5 15.3 Capex / depreciation - NM 5.5 NM 3.4 2.2

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity - 58.4 38.8 14.9 10.1 0.8 Net debt / (net debt + equity) - 36.9 27.9 12.9 9.2 0.8 Net debt (core) / EV - 14.4 20.0 9.9 11.3 5.6

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$2.91 on 09 Jun 2011 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Edwin Chen Analyst [email protected] +852-2971 8007


UBS 28

ab UBS Investment Research Phoenix Satellite Television

On the way to all media integration Phoenix’s VP and Director of Capital Markets attended our corporate day

Phoenix Satellite Television’s (Phoenix TV) Vice President, Shi Ning Ning, andDirector of Capital Markets, Grace Gao, attended our corporate day.

A beneficiary of inflation—most costs are fixed Most costs in Phoenix TV’s TV, internet and outdoor media businesses are fixed(except that the labour cost is rising), while its revenue, mainly advertisingrevenue, is inflationary. Therefore Phoenix TV, as an all media platform operator, should benefit from rising inflation. Phoenix TV targets only 4% YoY cost growthfor its TV business, while it raised its TV advertising rates 5-8% in early 2011.

Regulation changes—not likely in the near term Phoenix TV does not expect to receive more landing rights (in addition to existinglanding rights in Guangdong) in the foreseeable future, but the internet/mobile TVplatforms have helped it bypass landing right limitations, as more people arewatching TV programmes via the internet and mobile platforms. The companydoes not expect regulations on internet TV/video to tighten in the near future, andpoints out that it is not technically feasible to block internet TV/video.

Valuation: attractive at 21x 2011 PE; TV business-implied PE of 8.5x Phoenix TV is trading at 21x 2011E PE and 16x 2012E PE, which we considerattractive compared to its historical average forward PE of 25x. Based on themarket price of Phoenix New Media, Phoenix TV’s current share price implies an8.5x 2012E PE for its TV business. We derive our price target of HK$4.86 from aDCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool.

Highlights (HK$m) 12/09 12/10 12/11E 12/12E 12/13ERevenues 1,520 2,598 3,299 4,014 4,751EBIT (UBS) 325 723 1,046 1,434 1,859Net Income (UBS) 300 591 787 1,003 1,283EPS (UBS, HK$) 0.06 0.12 0.16 0.20 0.25Net DPS (UBS, HK$) 0.02 0.03 0.05 0.07 0.08 Profitability & Valuation 5-yr hist av. 12/10 12/11E 12/12E 12/13EEBIT margin % - 27.8 31.7 35.7 39.1ROIC (EBIT) % - 46.8 59.7 69.6 77.3EV/EBITDA (core) x - 11.9 12.8 9.2 6.9PE (UBS) x - 18.1 20.6 16.2 12.8Net dividend yield % - 1.5 1.6 2.0 2.6 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$3.25 on 09 Jun 2011 23:38 HKT Edwin Chen Analyst [email protected] +852-2971 8007


Broadcasting

12-month rating Buy Unchanged 12m price target HK$4.86/US$0.62 Unchanged

Price HK$3.25/US$0.42 RIC: 2008.HK BBG: 2008 HK

Trading data (local/US$) 52-wk range HK$4.62-1.75/US$0.59-0.22Market cap. HK$16.1bn/US$2.07bnShares o/s 4,956m (ORD)Free float 26%Avg. daily volume ('000) 7,284Avg. daily value (m) HK$27.5 Balance sheet data 12/11E Shareholders' equity HK$2.84bnP/BV (UBS) 5.7xNet Cash (debt) HK$1.19bn Forecast returns Forecast price appreciation +49.5%Forecast dividend yield 1.6%Forecast stock return +51.1%Market return assumption 9.8%Forecast excess return +41.3% EPS (UBS, HK$) 12/11E 12/10 UBS Cons. ActualH1E 0.07 - 0.04H2E 0.09 - 0.0812/11E 0.16 0.1612/12E 0.20 0.20 Performance (HK$)

04/0

8

07/0

8

10/0

8

01/0

9

04/0

9

07/0

9

10/0

9

01/1

0

04/1

0

07/1

0

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0

50

100150

200

250

300

350

400

Price Target (HK$) (LHS) Stock Price (HK$) (LHS)Rel. Hang Seng (RHS)

Stock Price (HK$) Rel. Hang Seng

Source: UBS www.ubs.com/investmentresearch


UBS 29

Attendees Phoenix TV’s Vice President, Shi Ning Ning, and Director of Capital Markets, Grace Gao, attended our corporate day.

Questions and answers The company

What makes Phoenix TV unique in China?

Established in 1996, Phoenix TV now has six TV channels, magazines, internet, outdoor LED boards and radios in operation, which makes it the only all media operator in China.

How does Phoenix TV carry out integration among different media platforms?

The strategy is to leverage Phoenix TV’s strong brand, expanding into the internet and outdoor media markets.

And the internet/mobile platform can help broadcast Phoenix’s TV content (bypassing landing right limitations), given that more people are watching TV through internet and mobile devices.

A statistic shows that the penetration rate of internet TV is over 40% in China.

What might Phoenix TV’s business structure be in three years?

Before 2009, over 90% of Phoenix TV’s revenue came from TV advertising revenue. By 2013, the company targets to have less than 50% of total revenue from TV advertising revenue. In 2010, TV advertising revenue was 61% of total group revenue.

By 2013, revenue from the internet business will probably be the largest revenue contributor.

What are the major revenue sources for Chinese media companies?

In China, TV and internet media (content provider) companies mostly derive revenues from advertising. And, given consumption habits in China, it is very hard to charge fees for internet/TV content.

Advertising revenue is mainly driven by the size of audience and quality of content.

TV business Is it possible for Phoenix TV to get more landing rights in China?

Currently, 31 overseas TV channels are granted limited landing rights in China, among which Phoenix TV has three channels. And the audience base of Phoenix TV’s Chinese channel is already more than all other 30 channels.

The limited landing rights for all overseas TV channels are mainly in 3-star and above hotels, foreign communities, certain office buildings and educational institutes.


UBS 30

Besides the aforementioned limited landing rights, Phoenix TV also has landing rights in Guangdong province.

Although Phoenix TV wants to expand its landing right coverage to other provinces, this will likely be difficult in the foreseeable future.

Internet business What is the competitive edge of Phoenix New Media (ifeng.com)?

Phoenix New Media positions itself as a portal operator. Although it was a late entrant to the portal internet market and is still small in this area, in the mobile internet market, everyone is starting at the same time.

Although Phoenix New Media has fewer viewers than its major peers now, it can leverage its all media platform and content.

Who are your major competitors for internet?

As an internet portal operator, major competitors are Sina.com, Sohu.com and Netease.com. Phoenix New Media is not competing with Tencent, given the different audiences.

Is it possible that the Chinese government will implement more rigorous regulations on internet TV/video?

All listed internet companies have two layers of structure: licence holders are domestically registered companies while listed vehicles are registered overseas.

In the near future, the company does not expect more regulations on internet TV/video, but it can’t be sure in the long term, when the market itself is big enough.

To block internet TV/video is very difficult by technology, but might be feasible by law/regulations.

Outdoor media How is Phoenix’s outdoor LED boards business going?

Phoenix TV currently is the largest outdoor LED board operator in China, with 45 boards under operation, mainly in Beijing, Shanghai, Guangzhou and Shenzhen.

On average, capex (construction cost) of an outdoor LED board is around Rmb19,000/sq m, with 10 years depreciation. Phoenix also usually signs 7-10-year contracts for location rentals, with no more than a 3% annual rental increase.

Depreciation, rental, electricity fees, and administration expenses are fixed costs for the outdoor LED board business and commission is the variable cost.

For 45 boards, the total fixed cost is around HK$200m pa, so as long as revenue is over HK$200m, the business is profitable.

UBS 31

Phoenix Satellite Television

Income statement (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chRevenues - 1,181 1,392 1,520 2,598 3,299 27.0 4,014 21.7 4,751 18.4 Operating expenses (ex depn) - (889) (1,054) (1,085) (1,737) (2,093) 20.4 (2,391) 14.2 (2,672) 11.8 EBITDA (UBS) - 292 338 435 861 1,206 40.1 1,623 34.6 2,080 28.1 Depreciation - (46) (58) (110) (138) (160) 16.0 (190) 18.5 (221) 16.7 Operating income (EBIT, UBS) - 246 280 325 723 1,046 44.7 1,434 37.1 1,859 29.6 Other income & associates - 58 38 52 33 (2) - (2) 0.0 (2) 0.0 Net interest - 25 15 1 (34) (7) -78.2 13 - 25 88.1 Abnormal items (pre-tax) - 0 0 0 (169) 0 - 0 - 0 - Profit before tax - 329 333 379 553 1,037 87.5 1,445 39.4 1,881 30.2 Tax - (51) (58) (77) (108) (207) 91.2 (289) 39.4 (376) 30.2 Profit after tax - 279 276 302 444 830 86.7 1,156 39.4 1,505 30.2 Abnormal items (post-tax) - 0 0 0 0 0 - 0 - 0 - Minorities / pref dividends - 0 11 (2) (23) (42) 87.5 (153) 260.7 (222) 45.4 Net income (local GAAP) - 279 287 300 422 787 86.6 1,003 27.4 1,283 27.9 Net Income (UBS) - 279 287 300 591 787 33.2 1,003 27.4 1,283 27.9 Tax rate (%) - 15 17 20 20 20 1.9 20 0.0 20 0.0 Pre-abnormal tax rate (%) - 15 17 20 15 20 33.2 20 0.0 20 0.0 Per share (HK$) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chEPS (local GAAP) - 0.06 0.06 0.06 0.08 0.16 82.8 0.20 27.4 0.25 27.9 EPS (UBS) - 0.06 0.06 0.06 0.12 0.16 33.1 0.20 27.0 0.25 27.2 Net DPS - 0.02 0.02 0.02 0.03 0.05 57.7 0.07 27.0 0.08 27.2 Cash EPS - 0.07 0.07 0.08 0.15 0.19 29.8 0.24 25.5 0.30 25.4 BVPS - 0.28 0.32 0.34 0.42 0.57 36.0 0.73 28.2 0.93 27.5 Balance sheet (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chNet tangible fixed assets - 249 591 978 1,275 1,502 17.7 1,741 15.9 1,995 14.6 Net intangible fixed assets - 153 399 265 284 345 21.2 412 19.5 490 19.0 Net working capital (incl. other assets) - 318 245 281 154 191 24.2 251 31.3 319 27.0 Other liabilities - (11) (22) (47) (100) (144) 43.4 (180) 25.0 (218) 21.4 Operating invested capital - 709 1,214 1,477 1,614 1,894 17.4 2,224 17.4 2,587 16.3 Investments - 49 41 36 47 47 0.0 47 0.0 47 0.0 Total capital employed - 758 1,255 1,513 1,661 1,941 16.9 2,272 17.0 2,634 16.0 Shareholders' equity - 1,385 1,606 1,692 2,070 2,837 37.0 3,657 28.9 4,685 28.1 Minority interests - 24 224 228 250 293 16.9 445 52.2 668 49.9 Total equity - 1,410 1,829 1,920 2,320 3,129 34.9 4,102 31.1 5,353 30.5 Net debt / (cash) - (652) (574) (406) (659) (1,188) 80.2 (1,831) 54.1 (2,719) 48.5 Other debt-deemed items - 0 0 0 0 0 - 0 - 0 - Total capital employed - 758 1,255 1,513 1,661 1,941 16.9 2,272 17.0 2,634 16.0 Cash flow (HK$m) 12/06 12/07 12/08 12/09 12/10 12/11E % ch 12/12E % ch 12/13E % chOperating income (EBIT, UBS) - 246 280 325 723 1,046 44.7 1,434 37.1 1,859 29.6 Depreciation - 46 58 110 138 160 16.0 190 18.5 221 16.7 Net change in working capital - (124) 7 (9) 41 (72) - (89) 22.9 (99) 11.2 Other (operating) - 40 42 13 46 0 - 0 - 0 - Operating cash flow (pre tax/interest) - 207 387 439 947 1,134 19.7 1,535 35.3 1,981 29.1 Net interest received / (paid) - 25 15 5 (3) (7) 169.8 13 - 25 88.1 Dividends paid - (69) (89) (94) (100) (165) 65.1 (260) 57.8 (331) 27.4 Tax paid - (50) (56) (67) (51) (129) 154.0 (224) 73.9 (307) 36.9 Capital expenditure - (276) (405) (326) (428) (446) 4.4 (496) 11.1 (554) 11.8 Net (acquisitions) / disposals - 0 0 0 0 0 - 0 - 0 - Other - - 51 12 73 (2) - (2) 0.0 (2) 0.0 Share issues - 9 4 211 19 7 -62.1 77 976.8 77 0.0 Cash flow (inc)/dec in net debt - (36) (93) 180 459 392 -14.6 642 64.0 888 38.2 FX / non cash items - - 16 (348) (206) 137 - 0 - 0 - Balance sheet (inc)/dec in net debt - - (77) (168) 253 529 109.1 642 21.5 888 38.2 Core EBITDA - 292 338 435 861 1,206 40.1 1,623 34.6 2,080 28.1 Maintenance capital expenditure - (276) (405) (326) (428) (446) 4.4 (496) 11.1 (554) 11.8 Maintenance net working capital - (124) 7 (9) 41 (72) - (89) 22.9 (99) 11.2 Operating free cash flow, pre-tax - (109) (59) 100 474 687 45.0 1,039 51.1 1,427 37.4


UBS 32


Broadcasting

12-month rating Buy 12m price target HK$4.86

Company profile Phoenix Satellite Television (Phoenix TV) is a leading Chinesetelevision programme provider, headquartered in Hong Kong butbroadcasting to over 150 countries and regions. It also operates onother media platforms, including new media (Internet), outdoor media(LED boards), and magazines and radio.


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100%


Phoenix Satellite Television

Valuation (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13EP/E (local GAAP) - 21.1 25.3 21.0 16.5 12.9 P/E (UBS) - 21.1 18.1 20.6 16.2 12.8 P/CEPS - 15.5 14.6 17.1 13.6 10.9 Net dividend yield (%) - 1.6 1.5 1.6 2.0 2.6 P/BV - 3.7 5.1 5.7 4.5 3.5 EV/revenue (core) - 4.0 4.0 4.7 3.7 3.0 EV/EBITDA (core) - 13.9 11.9 12.8 9.2 6.9 EV/EBIT (core) - 18.5 14.2 14.7 10.5 7.8 EV/OpFCF (core) - NM 21.7 22.4 14.4 10.1 EV/op. invested capital - 4.5 6.7 8.8 7.3 6.0

Enterprise value (HK$m) 12/09 12/10 12/11E 12/12E 12/13EAverage market cap 6,325 10,608 16,107 16,107 16,107 + minority interests 228 250 293 445 668 + average net debt (cash) (490) (533) (924) (1,510) (2,275) + pension obligations and other 0 0 0 0 0 - non-core asset value (36) (47) (47) (47) (47) Core enterprise value 6,025 10,278 15,429 14,996 14,453 Growth (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13ERevenue - 9.2 71.0 27.0 21.7 18.4 EBITDA (UBS) - 28.7 98.0 40.1 34.6 28.1 EBIT (UBS) - 16.1 122.4 44.7 37.1 29.6 EPS (UBS) - 4.4 96.0 33.1 27.0 27.2 Cash EPS - 18.7 77.0 29.8 25.5 25.4 Net DPS - 5.5 64.6 57.7 27.0 27.2 BVPS - 5.4 22.3 36.0 28.2 27.5


Return on capital (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT ROIC (UBS) - 24.2 46.8 59.7 69.6 NM ROIC post tax - 19.3 39.8 47.7 55.7 61.8 Net ROE - 18.2 31.4 32.1 30.9 30.8

Coverage ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E EBIT / net interest - - 22.1 NM - - Dividend cover (UBS EPS) - 3.0 3.6 3.0 3.0 3.0 Div. payout ratio (%, UBS EPS) - 33.2 27.9 33.0 33.0 33.0 Net debt / EBITDA - NM NM NM NM NM


Investment ratios (x) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E OpFCF / EBIT - 0.3 0.7 0.7 0.7 0.8 Capex / revenue (%) - 21.5 16.5 13.5 12.4 11.7 Capex / depreciation - 3.0 3.1 2.8 2.6 2.5

Capital structure (%) 5Yr Avg 12/09 12/10 12/11E 12/12E 12/13E Net debt / total equity - (24.0) (31.9) (41.9) (50.1) (58.0) Net debt / (net debt + equity) - (31.6) (46.7) (72.1) NM NM Net debt (core) / EV - (8.1) (5.2) (6.0) (10.1) (15.7)

Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of HK$3.25 on 09 Jun 2011 23:38 HKT Market cap(E) may include forecast share issues/buybacks. Edwin Chen Analyst [email protected] +852-2971 8007


UBS 33

Appendix (Non-covered companies)


UBS 34

ab UBS Investment Research Xingda International Holdings

China’s largest tyre cord producer China’s largest tyre cord producer by production volume

Xingda accounts for 33% of China’s tyre cord market. The industry is growingsteadily with expanding passenger and commercial vehicle use in China. With over300 tyre producers as customers in China, Xingda has reasonable bargaining powerand stable sales and margins, according to the company. It aims to take moremarket share and expand its business overseas. It is also looking for growth fromnew products.

Operational highlights Xingda plans to expand tyre cord capacity from 460k tons currently to 600k tonsby 2012, in line with demand growth. The company believes its advantage isproduction cost. It produces equipment and assembles production lines by itself,accordi

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